Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
October 8, 2009
BRIC
“B” for Brazil. The four primary emerging markets and economies of the world continue to thrive and gain capture more of the global stage. Eight years after the lighting of the torch to ignite the Olympic games last year in Beijing China, it will be lit in Rio de Janeiro Brazil. Beating Madrid, Tokyo and Chicago, Brazil was selected by the International Olympic Committee to host the 2016 Olympic Games. In the final run-off, Rio scored 66 votes to Madrid's 32. The choice of Brazil is fitting as that country is finally delivering on its long-promised potential as the world’s next emerging super power – after China and India. Brazil is now among the top 10 world economies and one of its key arguments was that South America’s 160 million people under 18 provided a new fan base for the Olympics. Helping Brazil’s case was its hosting of the 2014 soccer World Cup and a government budget of $14 billion, far more than any other bidding city. Most of it will be spent on improving Rio’s infrastructure. Brazil is expected expand faster than most world economies next year, with consensus estimates near 4.5% GDP growth.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
Japan said current-account surplus for August rose 10.4% from the same month last year, preliminary figures from the Ministry of Finance released today. Government data also showed that the nation's trade balance swung to a surplus of 303.7 billion yen, compared to a 141.2 billion yen deficit in the year-earlier period.
China’s reported one of its two Purchasing Managers Index rose to 54.3 in September from 54.0 in August, according to reported data Thursday from the China Federation of Logistics and Purchasing. The index has now remained above 50 for seven months in a row.
Euro-zone said its unemployment rate in the 16-nation rose to 9.6% in August, up from 9.5% the previous month and the highest since March 1999, the statistics agency Eurostat reported Thursday. The agency said 165,000 persons joined the unemployment rolls in August, bringing the total number of unemployed to 3.224 million.
Germany reported its retail sales declined in August, official data showed today, highlighting the ongoing weakness of domestic demand in Europe's biggest economy. Retail sales fell 1.5% in August from the preceding month, the Federal Statistical Office said.
Australia sees economic improvements and is steering towards curbing inflation. The Reserve Bank of Australia to become the first nation among the Group of 20 to raise interest rates, hiking by a quarter-point to 3.25%. The country also reported today its unemployment rate eased in September, surprising economists and boosting the nation's currency and stock market.
Source: Investors Business Daily, Wall St. Journal: October 1 – October 8.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Jobless claims down: The number of initial claims filed for state unemployment benefits fell by 33,000 to a seasonally adjusted 521,000 in the week ended Oct. 3, the Labor Department reported today. It's the fewest initial jobless claims since the first week of January. The four-week average of new claims fell as well, down by 9,000 to 539,750, in what also the lowest since January. Economists had been looking for first-time claims to fall to about 540,000.
Service sector activity up: The service sector activity broadened last month to its highest level since May of last year. The Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) rose to 50.9, a level that indicates there was growth in overall service sector activity. The latest level was the highest since May of last year and the figure outpaced Consensus expectations for an increase to 50.0. A level of the ISM index above 50 indicates rising overall service sector activity.
Mortgage activity up: Mortgage applications filed last week increased a seasonally adjusted 16.4% compared with the week before, as interest rates on fixed-rate mortgages fell, the Mortgage Bankers Association reported. Filings to refinance existing home loans rose 18.2% for the week ended Oct. 2, as mortgage holders moved to take advantage of the downward pressure on rates. The MBA's Refinance Index stood at its highest level since mid-May. MBA's data indicated that the average rate on 30-year fixed-rate mortgages remained below the 5% mark for a third consecutive week. Applications for mortgages to purchases home increased a seasonally adjusted 13.2% on a week-to-week basis, with the Purchase Index at its highest level since January.
Consumer debt down: U.S. consumers continued to pay down debt in August, the Federal Reserve reported. Total seasonally adjusted consumer debt fell $11.98 billion, or at a 5.8% annual rate, in August to $2.46 trillion.
Benchmark yield down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.18%, down from 3.41% last week.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call. October 1 – October 8.
WEAK INDICATORS:
Jobs down/unemployment up: The Bureau of Labor Statistics report on the job market was weaker than anticipated. Payrolls fell a more-than-expected 263,000. Hours worked fell again. The unemployment rate rose to 9.8%, the highest since 1983. All in all, they suggest that the rate of decline in the job market has slowed, but an upturn still is not evident.
Chain store sales down: During the latest week, chain store sales slipped 0.3% leaving them 0.6% below September after that month's 0.7% decline.
Oil flat: Crude for November delivery fell $1.31, or 1.8%, to $69.57 a barrel, yesterday, about the same as this time last week. The Energy Information Administration also reported a drop of 1 million barrels in crude inventories, as imports fell by 4.5%. Analysts had expected a modest increase. The EIA report showed that gasoline supplied, an implied gauge for consumption, rose 1.5% to 9.27 million barrels a day. Total petroleum demand stood at 18.73 million barrels a day, down 0.9% from a week ago.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is up 11.9% year-to-date, down from 13% last week.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: October 1 - October 8.
The Market: The market came under pressure with a give back of 4.3% for the S & P 500 last week. While the quick and sharp decline was exacerbated by higher-than-average volume, the S & P 500 executed an impressively resilient bounce right off its’ 10-week (50-day) moving average. No doubt the major US stock indexes have gone up a lot in a short time, and many have anticipated this time off draw-down (if not more). As we noted last week, the S & P 500 has not had a pullback exceeding 7% since the market rally began in early March (the S & P 500 is up about 59% since March 6th). Year-to-date major index performance: S & P 500 17.1%, DJIA 10.8%, NASDAQ 33.8%, and the S & P 600 17.6%. Here are the past week’s results: October 1: 140 new highs & 12 new lows, October 2: 104 new highs & 21 new lows, October 5: 229 new highs & 9 new lows, October 6: 412 new highs & 10 new lows, and October 7: 300 new highs & 8 new lows. Industry Group analysis: year-to-date, 179 out of 197 groups we monitor are positive.
Source: Investors Business Daily. October 1 – October 8.
**The Standard & Poor’s 500 (S&P500) is unmanaged group of securities considered to be representative of the stock market in general.
**The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
**NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
**The Standard & Poor’s 600 (S&P600) is an unmanaged group of securities, relating to the small cap segment of the U.S. equities market, covering approximately 3% of the U.S. equities market.
***Indexes are unmanaged and cannot be invested into directly. Investing in limited sectors may increase the overall volatility of a portfolio.
Bull/Bear Barometer:
Market in confirmed uptrend: BULLISH.
Industry group strength broadens : BULLISH. 179 of the 197 industry groups we monitor are up year-to-date. This is about the same as 180 last week, and up from only 9 when the recent rally began.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.84%, down from 4.45% March 9, which was a 5-year high.
Volatility index falling: BEARISH. Also known as the ‘Fear index’, the VIX (volatility index) is 24.6, down slightly from last week. It is down from 33.7 3-months ago. Investor risk tolerance increasing. The VIX has dropped from over 50 with the recent market move higher, and has not been this low since last September. According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October, then peaked at 103.4, as panic gripped markets worldwide. This contrarian indicator is considered bearish as it reads investors become less fearful. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.
Investors Intelligence survey shows rising optimism: BEARISH. The Investors Intelligence Advisors Sentiment index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, said the portion of positive stock advisers dipped slightly to 48.9% in the past week, still the highest since December 2007. Bearish sentiment is 24.4, near the low of 20 not seen since October of 2007.
Bear Perspective: During the October of 1929 to July 1932 bear market the Dow lost 89% of its value. During that time there were 7 large rallies exceeding 27%. For example, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. Additionally, a more powerful bear market rally ensued in 1932 when an early August to late September advance exceeded 100% before another leg down. Japan’s Nikkei showed 4 huge up moves of 50% or more during its prolonged bear market, losing 74% of its value.
Sources: Wall St. Journal, IBD, Thompson First Call, Zacks, Stock Traders Almanac, AlphaTrends. October 1 – October 8.
● Earnings & Company Developments: It’s official: the Q3 earnings reporting season has begun. Earnings are looking more positive than expected. Analysts continue to raise more estimates than they are cutting. Total net income growth is in the process of turning around. The decline of 23.8% expected for the third quarter is well below the 30%+ declines we have been seeing in recent quarters, and growth should turn extremely positive in the fourth quarter. Last years earnings killer, financials, is expected to be this year’s king. The financial sector’s 2009 earnings share are expected to rise to 11.6% from -3.68% in 2008. The financials are nearly back to having the highest weight in the S & P 500 index . Companies of interest: No company to report.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, October 1 – October 8.
On This Day:
October 8, 1949 -- The Republic of East Germany was formed.
Source: history; about.com
Quote: on Attitude
“Take the attitude of a student, never be too big to ask questions, never know too much to learn something new.”
Og Mandino (1923 – 1996)
Go Figure:
WINNER BY MONTH - The best monthly performance on a total return basis for the S&P 500 over the last decade (1999-2008) has occurred in April, October or November in 9 of the 10 years. The only year that one of these 3 months did not lead the way was in calendar year 2000 when March was the best month. With still 4 months to go in 2009, April’s +9.6% gain is the frontrunner YTD (source: BTN Research).
Valentine Capital Asset Management, Inc.
6111 Bollinger Canyon Rd. Ste 100, SAN RAMON, CA 94583
www.valentinewealth.com · 925.275.0200
The opinions and forecasts expressed herein are informational in nature and may or may not come to pass. The information provided should not be considered specific recommendations or investment advice. Information contained herein is based on sources and dates believed reliable, but is not guaranteed. CA Insurance License ##0A72947.
