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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

November 19, 2009

HAPPY THANKSGIVING!

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Japan said its economy grew more than expected in the third quarter.  The annual rate of increase was 4.79% continuing the recovery that began in the second quarter with an annual rate of increase of 2.72%.  The annual rates of change in private consumption and fixed investment and the annual rate of difference in net exports are show in the first chart. Japan still has a long way to go to recoup the losses from the recent deep depression. 

China said Shares of China Strategic Holdings soared Wednesday after it announced plans to trade a part of its newly acquired stake in American International Group Inc.'s Taiwan unit for a wider presence in the Taiwanese financial-services sector.

UK announced retail sales volumes continued to hold up in October, rising at the fastest annual pace in 17 months, the Office for National Statistics reported today.

Source: Investors Business Daily, Wall St. Journal:  November 12 – November 19..

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims flat:   The number of people filing initial claims for state unemployment benefits was flat at a seasonally adjusted 505,000 in the week ended Nov. 14, the Labor Department reported today.  Initial claims are at the lowest level since early January, but they have hovered above 500,000 for 53 straight weeks, contributing to a 26-year high in the U.S. unemployment rate at 10.2%.  Economists expected initial claims to drop to 500,000.  The four-week average of initial claims dropped 6,500 to 514,000, the lowest since November 2008.

(Core) PPI:  Excluding volatile food and energy goods, however, the core producer price index fell last month by 0.6%, the biggest decline in three years. Total U.S. wholesale prices for October rose a seasonally adjusted 0.3% on higher food and energy costs, according to the Labor Department.

Philly Fed index up:  Manufacturing activity expanded for the fourth consecutive month in the Philadelphia region in November, the Federal Reserve Bank of Philadelphia reported today.  The Philly Fed index improved to a seasonally adjusted 16.7 from 11.5 in October. That's the highest reading since June 2007. During the depths of the recession, the Philly Fed index fell to as low as negative 41.3.  Economists expected the index to rise to 14. Any reading over zero indicates more firms reported improving conditions compared with last month than reported things were getting worse. In November, 28.5% of firms said business improved, while 11.8% said business got worse.

Retail sales up:  U.S. Retail sales rose 1.4% in October after a 2.3% September decline that was deeper than reported initially. A 0.9% October gain was the Consensus expectation. The increase improved the year-over-year change in sales to -1.7% from declines of roughly 10% earlier this year.

Baltic Dry Index up:  An indicator of world  economic condition, the measure of  shipping supply vs. demand closed  at  a 52-week high yesterday.

Benchmark down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.36%, down from 3.48%  last week.  

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   November 12  –  November 19.

WEAK INDICATORS:

Leading economic  indicators signal slow growth:  The Conference Board said Thursday that its index of leading economic indicators rose 0.3 percent last month. Economists polled by Thomson Reuters had expected a 0.5 percent gain. The index climbed 1 percent in September. However, the indicators have risen for seven straight months. The Conference Board said last month that the 5.7 growth rate in the six months through September was the strongest since 1983.

Mortgage delinquencies/foreclosures up to record high:  Americans fell further behind on their mortgage payments in the third quarter, leading to a record 14.41% of loans in foreclosure or with at least one payment past due, the Mortgage Bankers Association's chief economist said today.

Housing starts down:  New construction on housing units dropped to a seasonally adjusted annual rate of 529,000, the lowest level since April. The 10.6% drop was the biggest percentage decline for starts since January.  Both single-family homes and multifamily units declined last month. Economists were expecting a stronger report, with starts pegged to have held steady at around a 590,000 annualized rate. Further, building permits fell 4% to a seasonally adjusted annual rate of 552,000 in October. Economists had expected permits to rise by 0.9% to a rate of 580,000. Building permits are a sign of future construction, with a monthly decline hinting at a still-weak consumer going into the holiday season.
CPI up:  The consumer price index increased a seasonally adjusted 0.3% in October as energy prices increased for the fifth time in six months to offset another rare decline in rents, the Labor Department said. The core CPI rate, which excludes food and energy prices in order to get a better look at underlying inflation in the economy, rose 0.2% last month, led by higher prices for cars and trucks, due in part to the unwinding of the government's "cash-for-clunkers" incentives program. Prices for new cars rose 1.6%, the most in 28 years. Used-car prices also increased, up 3.4%, the most in 29 years. The consumer price index has fallen 0.2% in the past year. The CPI and the core CPI were each a tenth of a percentage point higher than the consensus forecast in a survey of economists. The core CPI is up 1.7% in the past year. In September, the CPI and the core CPI were up 0.2%. 

CRB Index up:  The Reuters-Jefferies Commodity Research Bureau is up 23.9% year-to-date, up from 23.2% last week.  The index is now at a new 12-month high. 

Oil up:  Crude oil for December delivery rose 44 cents, or 0.5%, to $79.58 a barrel yesterday.   Oil futures rose Wednesday for a third consecutive session, as government data showed a surprise drop in U.S. crude inventories. Crude inventories fell 900,000 barrels in the week ended Nov. 13, the Energy Information Administration reported. Analysts polled by Platts had expected a modest increase.

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  November 12 – November 19.

The Market:    Recent new confirmed rally still intact.  As has become the new norm, the last sell-off was tame and short lived.  While resilient,  the  major indexes have provided a long string of  light volume sessions.  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  66.6% since March 6th).    Year-to-date major index performance:   S & P 500 22.9%,  DJIA 18.8%, NASDAQ 39.1%, and the S & P 600 18%.     Here are the past week’s results: November 12: 287 new highs & 24 new lows,  November 13: 90 new highs & 34 new lows, November 16: 212 new highs & 30 new lows, November 17:  114 new highs &  22 new lows, and November 18:  311 new highs & 20 new lows.   Industry Group analysis:  year-to-date, 179 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   November 12 – November 19.

**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.  179 of the 197 industry groups we monitor are up year-to-date.  This is  about same as 181 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 2.62%, down from 2.67% 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 22.5, down from 22.7 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: BEARISH.  The Investors Intelligence Advisors Sentiment index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, showed a sharp reversal in sentiment week-over-week.   Bearish sentiment slid to 21.3%, up from 26.7% last week. Bullish professionals rose to 46.1, down from 44.4 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 12 – November 19.

 ● Earnings & Company Developments:    Of the 469 S&P 500 companies who have reported Q3, 80% beat estimates, 7% were in-line, and 13% were below estimates, according to  Thompson  Reuters.  The blended earnings growth rate for the S&P 500 for Q3 2009 is currently at -13.7%.  Companies of interest:   Salesforce.com (CRM) reported net income in the quarter ended in October doubled to $20.7 million, or 16 cents a share, from $10.1 million, or 8 cents a share, in the same period last year. Revenue rose 20% to $331 million.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com,   November 12 – November 19.

On This Day:

November 19, 1969 -- Apollo 12 astronauts Charles "Pete" Conrad and Alan Bean made man's second landing on the moon

Source: history; about.com

Notable & Quotable:  on Thanksgiving

A two-pound turkey and a fifty-pound cranberry;  that's Thanksgiving dinner at Three-Mile Island.

Johnny Carson, US comedian & television host (1925 - 2005)

Go Figure:

OUT OF BUSINESS - 43 of the 91 (thru 9/31/09) banks that have failed in the country YTD are in 3 states. Georgia leads with 18 failures, Illinois is 2nd with 16 and California is 3rd with 9 bank failures (source: Federal Deposit Insurance Corporation).

Valentine Capital Asset Management, Inc.   

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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.