Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
February 11, 2010
Job’s Priority #1
Job creation will be job No. 1 in Washington this week, with a bipartisan meeting at the White House on tap, in addition to possible movement in the Senate on a jobs bill and a handful of congressional hearings dealing with employment and the economy. The U.S. economy will grow at a "steady but moderate" clip over the near and medium term, the White House predicted today, with jobs increasing by an average of 95,000 a month this year. In the annual Economic Report of the President, the White House estimated that gross domestic product would grow 3% in 2010, 4.3% in 2011 and 4.3% in 2012. But the report also predicted that joblessness would be stuck at 10% in 2010 and decline only modestly in 2011, to 9.2%. This comes on top of last week’s headline grabbing news on January job losses and the current US unemployment rate. Further, even today’s weekly jobless claims report from the Labor Department underscores the importance of the focus on jobs. This morning’s jobless insurance fell 43,000 to the lowest level since early-January. Last week's decline to 440,000 followed an upwardly revised increase to 483,000 during the prior week and claims remained near the lowest level since late-August, 2008. Initial claims were down from the recession peak of 674,000 hit last March. Consensus expectations had been for a lesser decline to 465,000 claims. This is all positive and necessary - - - unless one believes in a “jobless recovery”.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
China reported its bank lending and inflation is rising. The People's Bank of China said lending by the nation's banks totaled 1.39 trillion yuan ($203.5 billion) during the month, more than three times the 379.8 billion yuan extended in December. The credit boom helped support gains the housing market, with prices across the nation's 70 largest cities rising 9.5% in January from a year earlier, accelerating from a 7.8% rise in December, reports of the data said.
Germany said exports rose in December, official data show, signaling that foreign trade will likely underpin the rebound in Europe's biggest economy. Exports increased by 3.4% to 69 billion euros ($94.7 billion) in December 2009 compared with the year-earlier month, the Federal Statistical Office. This was the first time since October 2008 that exports rose year-over-year. Imports fell 6.5% to 55.5 billion euros in December from the year-earlier period.
Greece needing a need a bailout? A declaration from the European Union president that a deal has been reached to bolster Greece's troubled finances.
Source: Investors Business Daily, Wall St. Journal: February 4 – February 11.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Jobless claims down: First-time filings for state unemployment benefits dropped by their largest amount since July. For the week ended Feb. 6, initial claims fell 43,000 to 444,000. The consensus forecast of Wall Street economists surveyed was that jobless claims would drop by 15,000. The total number of people claiming benefits of any kind, not seasonally adjusted, in the week ending Jan. 23 was 11.44 million, compared with 11.53 million the previous week.
Unemployment rate drops: During January the unemployment rate fell to 9.7%, its lowest level since August. Expectations had been for a stable 10.0% unemployment rate. However, the rate still is up two percentage points from last January. Further, the unemployment rate including marginally attached workers plus those working part time for economic reasons slipped m/m to 16.5% but remained up from 14.0% last January.
JOLST up: The Bureau of Labor Statistics indicated that job market conditions changed little during December. The latest Job Openings & Labor Turnover Survey (JOLTS) indicated that though the job openings rate ticked up to 1.9%, it remained off sharply from the 3.1% rate when the current recession began. The job openings rate is the number of job openings on the last business day of the month as a percent of total employment plus job openings. Job availability rose 2.6% from November after two months of decline, and remained off 22.5% year-to-year. The series dates back to December 2000.
Small business optimism index up: The National Federation of Independent Business (NFIB) reported their January small business optimism index made up the prior two months' declines with an increase to 88.0. 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.
Chain store sales up: Weekly chain store sales improved last week although the 1.4% w/w rise left purchases up just slightly from the January average. According to the ICSC-Goldman Sachs retail chain-store sales index, according to the ICSC-Goldman Sachs retail chain-store sales index. That average had been boosted by price discounting early in the month.
Consumer credit drops: Consumers steered away from credit last year. In fact, they avoided it to a record degree as the outstanding balance fell by $102.3B, or 4.0%, by yearend from 2008. Released late on Friday, the December decline of $1.8B was the fifteenth monthly drop since summer 2008 though it was relatively small. Consumer credit outstanding as a percentage of disposable income fell to 22.0% from its 2005 high of 24.7%. Nevertheless, these rates remain up from the low near 16% in 1992. Revolving credit usage fell $8.5B in December and by a record 9.5% during the year. That was part of a pullback that began late in 2008. Finance companies lowered lending by more than one third y/y, commercial bank lending fell a record 14.1%, pools of securitized assets fell 2.6% and savings institutions pulled back lending by 6.1% y/y. Loans from credit unions offset some of these declines with a 6.3% increase.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -6.05% year-to-date. It was off -4.5% last week. The widely followed CRB index shot up 24% last year, topping the 1973 increase sparked by the oil crisis.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: February 4– February 11.
WEAK INDICATORS:
Payrolls fall: The Labor Department reported January nonfarm payrolls fell, disappointing those looking for a slight increase. The U.S. economy lost 20,000 nonfarm jobs in January, Economists surveyed had forecast payrolls would rise 25,000. However, over the last three months there has been a dramatic lessening in the pace of job losses compared with earlier in 2009. The Labor Department said 35,000 jobs were lost on average over the past three months. This is a much slower pace than the 103,000-per-month average in the three months ended in December.
Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.70%, same as last week, but up from 3.41% recently.
Oil up: Crude rose for the 3rd straight day yesterday, closing at $74.52, up almost $1.00. The Energy Information Agency raised its forecast for crude demand and prices. Yesterday, the EIA forecast world oil demand to rise 1.2 million barrels per day in 2010, raising its forecast by 120,000 barrels a day from a previous one. The agency also forecast that oil prices would average $81 a barrel in the second half, up 9% from current levels.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: February 4 – February 11.
The Market: 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 nearly 60% since March 6th). However, the recent market behavior indicates a correction underway, as the S & P 500 is down nearly 7% since touching 1150 on January 19. For the 3rd time since last March, the major indices are all below their key 50-day moving averages. This time is the longest consecutive days since March. Year-to-date major index performance: S & P 500 -4.2%, DJIA -3.7%, NASDAQ -5.3%, and the S & P 600 -4.7%. Since December 21, new highs have been dominating new lows. Here are the past week’s results: February 4: 72 new highs & 13 new lows, February 5:71 new highs & 22 new lows, February 8: 69 new highs & 18 new lows, February 9: 107 new highs & 24 new lows, and February 10: 97 new highs & 47new lows. Industry Group analysis: year-to-date, 69 out of 197 groups we monitor are positive.
Source: Investors Business Daily. February 4 – February 11.
**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 shifts to correction mode: BEARISH. 50 day-moving-average breached for all major stock indexes.
Industry group strength broad : BEARISH. 69 of the 197 industry groups we monitor are up year-to-date, up from 62 last week.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.77%, down from 4.45% March 9, which was a 5-year high.
Volatility index up: BULLISH. Also known as the ‘Fear index’, the VIX (volatility index) is 26.6, a sharp jump from 21.3 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, is now at new extreme levels. The “Bearish” sentiment is 26.1%, up from 23.3 last week. “Bullish” professional sentiment is 34.1, down from 39 last week. The 5-year high is 62.9. The recent swing to more pessimism/less optimism is a bullish contrarian psychological market indicator.
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, losing over 30%. 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. February 4– February 11.
● Earnings & Company Developments: Q4 earnings reports continue to impress with sharp year-over-year gains. BUT, he Market has been focused more on the plight of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) than it has on earnings reports of late. By simply looking at how the market has behaved, you would have had no idea about just how strong this earnings season has been. We have continually stated that the earnings story for the S & P 500 would have a happy ending in 2009 due to relative comparisons to the end of 2008. The blended earnings growth rate for the S&P 500 for Q4 2009, combining actual numbers for companies that have reported, and estimates for companies yet to report declined to 207% from 207.6% in the previous day. As of October 1st, the earnings growth rate was at 193.3%. Of the 371 (about 74%) S&P 500 companies who have reported Q4 results, 73% beat estimates, 9% were in-line, and 18% were below estimates, according to Thomson Reuters. Looking ahead, the earnings forecast by Zacks Investment Research is positive. S&P500 expected to earn $700.4 billion in 2010 (a 26.4% jump) and $843.8 billion in 2011 (a gain of 20.5% in earnings). Two sectors, Financial and Energy, to account for 50.2% of all incremental earnings in 2010 over 2009, and 51.7% of all incremental 2011 over 2010 earnings, although they account for just 25.2% of total market capitalization. Companies of interest: National Fuel Gas announced positive financial gains and offered positive future guidance. The Company is updating its GAAP earnings guidance range for fiscal 2010 to a range of $2.40 to $2.70 per share. The previous earnings guidance had been a range between $2.30 to $2.65 per share.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, February 4 – February 11.
On This Day:
February 11, 1975 -- Margaret Thatcher became the first woman to head a major party in Britain when she was elected leader of opposition Conservative Party.
Source: history; about.com
Notable & Quotable: on Football
“They sicken of the calm, who knew the storm.”
Dorothy Parker, US author, humorist, poet, & wit (1893 - 1967)
Go Figure:
GETTING BETTER : Nearly half of Americans surveyed (46%) believe the U.S. economy is going to improve in the upcoming 12 months, double the percentage (22%) that believe the economy will get worse (source: Harris Poll as of 8/31/09). Looks like optimistic 46% were right.
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.
