Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

November 12, 2009

Un- & Under-Employed
Last week’s jobs report was worse than expected. The Labor Department said the U.S. unemployment rate rose above 10% for the first time in 26 years, hitting 10.2% in October. That’s “unemployment”. “Under-employment” picture is much worse. The alternative measure of the jobs market weakness rose to 17.5%, the highest on record dating to 1995. This group includes discouraged workers and those forced to work part-time. Those working part-time “for economic reasons” jumped 105,000 or at a 15% annual rate in October. With unemployment remaining elevated and no sign of job growth, the Federal Reserve could be expected to keep its interest rate target at virtually zero, economists say.

GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS

China said manufacturing accelerated at its fastest pace in 18 months in October, according to HSBC's China Purchasing Manager's Index, echoing a bullish picture painted by earlier official data. The PMI came in at 55.4, up from 55.0 in September.
EU economy showing more improvement. The services index is above the 50 mark for the second month running. The services PMI is on a tear as it is surging up at least as fast as it had dropped in the recession. So far so good. Still it has not restored the pre-recession level of the services index.
Spain said its GDP fell 0.3%, which was an improvement on the 1.1% drop reported in the second quarter. A better performance, or rather less negative contribution, of domestic demand and some help by the foreign sector were cited as reasons for the improvement, according to the statistical agency.
Source: Investors Business Daily, Wall St. Journal: November 5 – November 12.

U.S. Economic Events & Analysis:

POSITIVE INDICATORS:

Jobless claims down: The number of people filing initial claims for state unemployment benefits fell by 12,000 to a seasonally adjusted 502,000 in the week ended Nov. 7, the Labor Department reported today. That's the fewest initial claims since early January. Initial jobless claims have hovered above 500,000 for 52 straight weeks. Economists expected initial claims to drop to about 510,000. The four-week average of initial claims dropped 4,500 to 519,750, the lowest since November 2008.
Consumer debt declining: The Federal Reserve reported late Friday that consumer credit outstanding fell for the eighth consecutive month during September. It also was the 12th monthly decline since summer, 2008. The $14.9B drop from August followed declines during the prior two months which were revised shallower, but the y/y change amounted to a record 4.8% drop. With these declines, consumers have reduced credit outstanding as a percentage of disposable income to 22.6% from its 2005 high of 24.4%. This compares to the low near 16% in the early-1990s.
Benchmark down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.48%, down from 3.53% last week.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: November 5 – November 12.

WEAK INDICATORS:

Payroll declines persist: The Labor Department said nonfarm payrolls fell by 190,000 in October. This brings the total number of jobs lost in the recession to 7.3 million, the Labor Department reported Friday. It was the 22nd straight monthly decline in payrolls. The jobs report was worse than expected. Economists surveyed were forecasting a rise of 150,000 lost payroll jobs. An upward revision to August and September payrolls cushioned some of the disappointment, however. Payrolls were revised up by 91,000 over the previous two months.
Unemployment rate up: The Labor Department said the U.S. unemployment rate rose above 10% for the first time in 26 years, hitting 10.2% in October. Economists surveyed were forecasting a rise in the unemployment rate to 10%. The seasonally adjusted unemployment rate of 10.2% was the highest since April 1983. Unemployment rose by 558,000 to 15.7 million, the government said. Of those, 5.6 million had been out of work longer than six months, representing a record 35.6% of the unemployed.
CRB Index up: The Reuters-Jefferies Commodity Research Bureau is up 23.2% year-to-date, up from 22.1% last week. The index is now at a new 12-month high.
Oil up: Crude for December delivery rose above $80 a barrel yesterday. It is about the same as last week. Crude inventories rose by 1.8 million barrels in the week ended Nov. 6, the Energy Information Administration reported. Analysts polled by Platts had expected an increase, but of just 1 million barrels.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: November 5 – November 12.

The Market:

Another confirmed rally underway. The big surprise came Friday, as the major market indices eked out a small gain in the face of what could have been received as bad economic news (JOBS). The explosive stock market rally that kicked-off March 6 came under selling pressure that began with a 4% drop week-over-week ending October. Volatility has spiked with the recent downside bias. The VIX index has jumped, as we note below. However, the sell-off was tame and short lived. The U.S. stock market is now building on a new rally sparked last week. As we have noted, 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 65% since March 6th). Year-to-date major index performance: S & P 500 21.6%, DJIA 17.3%, NASDAQ 37.4%, and the S & P 600 17%. Here are the past week’s results: November 5: 287 new highs & 24 new lows, November 6: 90 new highs & 34 new lows, November 9: 212 new highs & 30 new lows, November 10: 114 new highs & 22 new lows, and November 11: 311 new highs & 20 new lows. Industry Group analysis: year-to-date, 181 out of 197 groups we monitor are positive.
Source: Investors Business Daily. November 5 – November 12.
**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:
New confirmed uptrend underway: BULLISH
Industry group strength broad : BULLISH. 181 of the 197 industry groups we monitor are up year-to-date. This is up from 171 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 2.67%, down from 2.79% last week and 4.45% March 9, which was a 5-year high.
Volatility index up: BEARISH. Also known as the ‘Fear index’, the VIX (volatility index) fell to 22.7, down from 27 last week. The VIX has dropped from over 50 near the market bottom in March. 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: BULLISH. The Investors Intelligence Advisors Sentiment index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, now shows the fewest bulls and the most bears since July 24. Bearish sentiment rose to 26.7%, up from 23.1% last week. Bullish professionals fell to 44.4, down from 48.3 last week.
Bear Perspective: Bull market or Bear market rally?? Both provide impressive gains, especially over the short-term. 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. November 5 – November 12.


● Earnings & Company Developments: The near quarter-end good, bad & ugly earnings report: First the good, U.S. companies are beating their Q3 earnings estimates by a record pace thus far (at least in the past 15 years). Fully 80% of the universe is beating their targets. What is normal is that companies “beat” their estimates, on average, by 1.9%, but with 440 of the S&P 500 reporting, the “beat” has averaged 14.9%, which is unprecedented. As for the bad, cost-cutting and productivity enhancements are still dominating the trend — only 58% have managed to surpass revenue expectations. The Ugly? Earnings are down 15.1% from last year’s third quarter. The optimistic view is that the string of quarterly YoY declines will be broken in Q4, but that says more about last year’s fourth quarter when the S&P 500's aggregate loss per share was an epic $23.25, on an as-reported basis. Not only was last year’s fourth quarter the first time these big companies as a whole lost money, they lost more in those three months than they ever made in any other quarter. Companies of interest: Jamba Juice (JMBA) reported financial results for the fiscal third quarter ended October 6, 2009. Net income for 3Q09 of $2.8 million showed significant improvement when compared to a net loss for 3Q08 of $(12.4) million. Company-owned comparable store sales for 3Q09 declined 5.3%, but reflected an 800 basis point sequential improvement over 2Q09 comparable store sales. "We continued to make solid progress throughout the quarter in several strategically important areas, including food, franchise development, brand licensing, cost management and operating efficiency”, said the company’s CEO James White.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, November 5 – November 12.


On This Day:
November 12, 1954 -- Ellis Island closed after processing more than 20 million immigrants since opening in New York Harbor in 1892.
Source: history; about.com

Notable & Quotable: on Thanksgiving
“I awoke this morning with devout thanksgiving for my friends, the old and the new.”
Ralph Waldo Emerson, US essayist & poet (1803 - 1882)

Go Figure:
COUNT ME IN: Only 13% of the American workers that have access to an employer-sponsored retirement plan decline to participate (source: Congressional Research Service, Current Population Survey).

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.