Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
December 10, 2009
Only 5 digits…
The Bureau of Labor Statistics reported that nonfarm payrolls fell 11,000 in November. The 5 digit decline was a positive surprise and the lowest number since late 2007. Consensus expectations were for a 106,000 worker decline in employment but the range of estimates was an uncommonly wide, 50,000 to 170,000. The below-six-digit count was supported with smaller, revised declines of 111,000 and 139,000. Last month's payroll employment decline was the shallowest since the recession began in December 2007. The payroll employment decline was accompanied by a drop in the unemployment rate to 10.0% from 10.2%. Perhaps more notable was the impetus for the decline. Household sector employment increased 227,000 (-3.9% y/y) which was the first monthly gain since April and the largest since April 2008. Another signal of an improved labor market was shrinkage in the number of job losers on temporary layoff, off 189,000 or about the same as in October. The number on permanent layoff fell by 272,000 but the level remained nearly double last year. Overall, the total of unemployment plus those part-time for economic reasons fell, but just modestly to 17.2%.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
Japan said its economy just 0.3% in real terms in the July-September period from the previous quarter -- far less than the on-quarter rise of 1.2% in the preliminary data, and even slightly worse than economists' grim consensus expectations. The main culprit for the big cut was corporate capital investment, which fell 2.8% on quarter, far worse than the preliminary data's 1.6% increase. Talks of a ‘double dip’ are mounting.
China announced a decision to partially roll back a tax incentive on small car purchases in 2010, a move that helped catapult the country into its place as the world's dominant automobile market this year. The decision to increase the purchase tax on small cars with an engine capacity of up to 1.6 liters, to 7.5% from 5%, was part of a new stimulus package for 2010 announced by the Chinese government late yesterday.
Germany said its Industrial Production declined almost 2% to 95.7 (2005=100) in October, from 97.5 in September. Although expectations had been for a small rise, yesterday's sobering report on new orders should have dampened expectations.
UK reported its trade deficit widened in October as the larger sterling size of imports translated a smaller percentage gain in imports into a larger gain in sterling terms than for exports. The UK trade position has deteriorated for two months in a row following a brief drop in the deficit three months ago.
Source: Investors Business Daily, Wall St. Journal: December 3 – December 10.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
U.S. Household net-worth expanding: The financial health of U.S. households continued to improve last quarter, as indicated by the Federal Reserve's latest flow-of-funds figures. Household net worth increased $2.7 trillion to $53.4 trillion after a downwardly revised $2.3 trillion 2Q increase. Financial asset holdings improved by $2.4 trillion as the stock market moved higher after a $1.9 trillion 2Q rise. Lower interest rates raised the value of Treasury security holdings by $168 billion and tangible asset values rose by $294 billion following the $391 billion 2Q rise. These gains were helped, finally, by an improved value of real estate holdings. Despite the gains, however, the value of households' real estate holdings remained 27.9% below the late-2006 peak.
Mortgage activity up: Low interest rates continue to support the housing market. The Mortgage Bankers Association reported that mortgage applications rose 8.5% last week, the second week of firm gain that continued what has been a 50% rise since the late-June low. Applications to refinance mortgages jumped 11.1% last week. They were up 8% from November and were more than double the June low due to rate declines. Applications to purchase a home have not shared that degree of strength. They did rise for the third consecutive week and were up 9.8% from November, but were down by 21.1% from early- October.
Trade gap up: The nation's trade deficit shrank 7.6% in October to $32.9 billion from $35.7 billion in September, the Commerce Department said. The September trade gap had been reported at $36.5 billion. The narrowing of the deficit was unexpected. Analysts surveyed by MarketWatch had expected the deficit to widen to $37 billion. During this recession there has been a sharp drop in international trade that led to a substantial improvement in the U.S. trade deficit. For example, the deficit for the year now totals $304 billion, down sharply from $610.8 billion in the same period one year ago.
Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.43%, up from 3.36% 2- weeks ago.
Oil down: Crude oil has dropped to just above $70. Yesterday’s 3% decline occurred as the Energy Information Administration reported supplies rose by 1.6 billion barrels. Analysts had expected oil supply to drop by 600,000 barrels. Natural gas futures surged nearly 7% Thursday after the Energy Information Administration reported a decline in U.S. inventories that was more than expected. Natural gas stockpiles fell for the first time in nine months, down 64 billion cubic feet in the week ended Dec. 5. Analysts surveyed by Platts expected a withdrawal of 44 billion to 48 billion cubic feet. After the data, natural gas for January delivery rose 6.7% to $5.227 per million thermal units
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: December 3 – December 10.
WEAK INDICATORS:
Jobless claims down (but looking better): The number of people filing claims for state unemployment benefits rose by 17,000 to a seasonally adjusted 474,000 in the week ending Dec. 5, while the total number of people claiming benefits of any kind topped 10 million, a sign of very sluggish hiring, the Labor Department reported today. First-time claims rose for the first time in six weeks in the week after Thanksgiving. Economists surveyed had expected initial claims to fall to about 450,000. The four-week average of new filings -- which smoothes out distortions caused by one-time events such as holidays, bad weather or strikes -- fell for the 14th straight week to a seasonally adjusted 473,750, the lowest in 14 months. The number of people collecting state benefits fell by 303,000 to a seasonally adjusted 5.16 million in the week ending Nov. 28. It's the fewest continuing claims since February.
Small Business Optimism index dips: The National Federation of Independent Business (NFIB) reported their small business optimism index during November dipped 0.9% to 88.3 after two months of slight increase. During the last ten years, there has been an 85% correlation between the level of the NFIB index and the two-quarter change in real GDP. The percentage of small businesses expecting the economy to improve fell sharply to 3 from the May high of 12. The percentage which thought that now was a good time to expand the business also leveled off at 8 though it has sharply improved from this winter. The percentage of firms with one or more job openings held at just 8% during December, the lowest level since 1982.
CRB Index up: The Reuters-Jefferies Commodity Research Bureau is up 21.9% year-to-date, down from 23.2% last week. The index is still near a 12-month high, but has recently been slipping.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: December 3 – December 10.
The Market:
Recent new confirmed rally still intact. One noteworthy indication of new market leadership and pointing to higher levels is the recent advance in the Philadelphia semiconductor index (the “SOX”). It has gained over 5% since November 18. 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 64.5% since March 6th). Year-to-date major index performance: S & P 500 21.3%, DJIA 17.8%, NASDAQ 38.5%, and the S & P 600 17.5%. Here are the past week’s results: December 3: 303 new highs & 33 new lows, December 4: 391 new highs & 28 new lows, December 7: 258 new highs & 6 new lows, December 8: 149 new highs & 17 new lows, and December 9: 123 new highs & 22 new lows. Industry Group analysis: year-to-date, 181 out of 197 groups we monitor are positive.
Source: Investors Business Daily. December 3 – December 10.
**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 the same as 2- weeks ago, and up from only 9 when the March rally began.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.63%, 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) is 23.7, up 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, is now at new extreme levels. The “Bearish” sentiment slid to 16.5%, down from 26.7% 2-weeks ago, and a new 5-year low. Further, it is the lowest since June of 2003. While this contrarian stock market indicator is bearish, the NASDAQ rose 32% from June ’03 to January ’04. “Bullish” professional sentiment rose to 48.4, up from 44.4 last week. The 5-year high is 62.9.
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. December 3 – December 10.
● Earnings & Company Developments: “Less-bad” quickly turned into “better-than-expected” to describe the earnings story for the S & P 500 for Q3 2009. The third quarter was a fantastic earnings season. With almost all of the reports in, there have been 375 which have exceeded expectations while only 71 have fallen short, a ratio of 5.28. While it is true that most companies will normally try to under-promise and over-deliver, this quarter the beats are beating the misses by about twice the normal margin of 3:1. Not only did the surprises only been by a penny or two, but there have been lots of companies that simply crushed their earnings estimates. The median surprise is a very high 7.14%. Over the last five years, a median surprise of about 3.0% has been normal. Why so remarkable? Expectations. Expectations were set very low going into the earnings season. More on earnings expectations: Total earnings in the fourth quarter are expected to be more than double year-ago levels, up 119.8%. Companies of interest: No companies to report.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, December 3 – December 10.
On This Day:
December 10, 1958-- The first domestic passenger jet flight took place in the United States as a National Airlines Boeing 707 flew 111 passengers from New York City to Miami.
Source: history; about.com
Notable & Quotable: on Christmas
“At Christmas play and make good cheer, For Christmas comes but once a year.”
Thomas Tusser (1524–1580) was an English poet and farmer
Go Figure:
ONE OUT OF EVERY EIGHT DOLLARS: The average U.S. taxpayer pays an effective tax rate (i.e., federal income tax paid as a percentage of adjusted gross income earned) of 12.7% (source: Tax Foundation).
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.
