Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
February 18, 2010
The Blame Game
Too often one party simply cannot accept responsibly and accountability for uncomfortable circumstances. Witness the current global economic condition as the world worries about some EU countries (we have noted often the P I I G S). Get ready for the rest of the world to start blaming the US for widening deficits even as the US consumer fuels recovery in Europe and beyond. The simple fact is that China, Japan and Europe, especially Germany, all want to have export-led growth. And why not? It has long been effective. But, if they do who will import? AMERICA. China and Japan have amassed huge foreign exchange reserves, an act that clearly has facilitated their currencies, remaining weaker than otherwise, enabling their strategy of export-led growth while at the same time undermining US growth and US financial health. Still others want to blame the “800 pound gorilla” in the global economy, China, for slowdown. The hike in reserve requirements in China has people worried about in growth there as well. There is a theme of growth pessimism taking hold again clobbering global stock markets. But China is a net exporter. It does not provide net domestic demand to the world. Its growth merely absorbs income from elsewhere transforming it into growth for…CHINA. In turn that helps to pressure global input prices (commodity prices). Strong growth in China is usually not beneficial to the West. The good news remains, the world financial markets usually get it right.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
Japan announced its central bank kept its key interest rate on hold at 0.1% by unanimous vote as widely expected, maintained its overall economic view, and didn't issue any new policy initiatives Thursday, though it repeated its pledge to do all it could to pull Japan out of deflation.
China reported its Bank of China announced Friday it will raise the ratio of reserves banks must set aside by 0.5 percentage points, marking the second such action this year. The central bank has been tightening monetary policy in an attempt to restrain bank lending. Its moves, however, have raised worries over a potential slowdown in China's economic growth.
Germany said the country’s investors are less optimistic. The results of the latest ZEW survey of analysts and institutional investors showed that the balance of those looking for improved conditions six months ahead in Germany over those looking for deteriorating conditions was 45.4% in February, down 1.8 points from 47.2% in January and down 12.6 points from the peak, 57.7%, in September of last year.
Source: Investors Business Daily, Wall St. Journal: February 11 – February 18.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Leading economic indicators up: Leading U.S. economic indicators rose 0.3% in January, further evidence of a continuing spring thaw in the U.S. economy, according to the Conference Board today. Leading indicators have risen 10 straight months, spurred by an improvement in U.S. financial markets and a manufacturing upturn. The index was expected to increase 0.2% based on a survey of economists. In January, five of the 10 leading indicators improved.
Industrial output up: U.S. industrial output posted its strongest monthly gain since August, gaining 0.9% in January. The run-up since the June bottom has totaled 5.3%. That compares with a 13.2% decline during the prior year which exceeded the declines during most other postwar recessions. Furthermore, capacity utilization rose further to 72.67%, its highest level since December 2008. In the factory sector alone utilization rose to 69.4% from the 2009 low of 65.2%.
Empire State index up: The Federal Reserve Bank of New York reported that its February Empire State Factory Index of General Business Conditions rose to 24.91, the highest level since October, and remained near the highest level since 2004. The latest reading compares to sharply negative levels at the recession low and suggests positive growth in factory sector activity. The latest level exceeded Consensus expectations for a reading of 18.0.
Philly Fed index up: The Philly Fed index rose to 17.6 in February from 15.2 in January, in line with expectations of economists. New orders surged in the Philadelphia region in February as manufacturing activity expanded for the sixth straight month, according to a monthly survey of manufacturing companies released today by the Federal Reserve Bank of Philadelphia. The new orders index jumped to 22.7 in February from 3.2 in January. It was the highest level since September 2004. The employment index rose to 7.4 in February from 6.1 in January.
US retail sales up: January retail sales increased 0.5% after a 0.1% decline during December which was less than reported initially. The latest figure was firmer than Consensus expectations for a 0.3% rise. As apparent in earlier figures, the trend in retail spending has improved. On a three-month basis retail sales rose at a 9.7% annual rate through January versus the 15.8% rate of decline one year ago. Less autos, spending growth also recovered on a three-month basis to 10.1% from -17.9% one year ago.
Housing starts up: Housing starts increased a modest 2.8% last month to 591,000 (AR) units following a slightly revised decline to 575,000 during December. The small gain was only enough; however, to lift starts back to the level reached last summer. In fact, the 21.1% twelve-month increase from near the recession low pales in comparison to the 50%-90% increases following downturns since the 1970s. Since their peak in January of 2006, starts remain down by three-quarters. January's figure slightly beat Consensus expectations for 580,000 starts. Last month, starts of single-family homes ticked up just 1.5% to 484,000 after December's 3.0% decline. Year-to-year starts have risen by one-third but they're up just 1.5% from the 4Q average.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -3.37% year-to-date. However, it is up from -6.5% 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 11– February 18.
WEAK INDICATORS:
Jobless claims up: The number of people filing initial claims for state unemployment benefits rose by 31,000 to a seasonally adjusted 473,000 last week, the Labor Department reported today. Economists surveyed by MarketWatch expected initial claims to rise to about 447,000. The four-week average of initial claims fell by 1,500 to 467,500, about 20,000 more than at the first of the year. State jobless claims have risen in five of the seven weeks so far in 2010. All told, in raw numbers not seasonally adjusted, 11.8 million people were collecting some type of unemployment benefits in the week of Jan. 30, up 281,000 from the previous week's 11.5 million.
Consumer sentiment down: The Reuters/University of Michigan Index of Consumer Sentiment for mid-February fell modestly to 73.7 from is two-year high of to 74.4 reached last month. The latest figure fell short of Consensus expectations for a higher reading of 75.0; however, it compares favorably to the low of 55.3 in November 2008.
PPI up: U.S. wholesale prices rose a seasonally adjusted 1.4% in January on double-digit increases in gasoline and home heating oil, the Labor Department estimated today. Core prices of finished goods, which exclude food and energy goods, rose 0.3% in January, led by higher prices for light trucks and other capital goods. The 1.4% increase in the producer price index was higher than the 0.9% gain expected by economists surveyed by MarketWatch. The core rate of 0.3% was also higher than the 0.1% gain expected. The increases in the PPI and the core PPI were the largest since November, the Bureau of Labor Statistics said. The PPI report shows significant inflationary pressures from higher commodity prices. Crude materials prices rose 9.6% in January, including a 16.8% rise in crude energy goods. Natural gas prices rose 25.5%.
Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.73%.
Oil up: March oil futures closed up 32 cents a barrel, or 0.4%, at $77.33 a barrel yesterday. This is up from $74 last week.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: February 11 – February 18.
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 65.2% 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 -1.4%, DJIA -1.1%, NASDAQ -1.9%, and the S & P 600 -0.5%. Since December 21, new highs have been dominating new lows. Here are the past week’s results: February 11: 178 new highs & 43 new lows, February 12: 181 new highs & 22 new lows, February 16: 202 new highs & 11 new lows, and February 17: 227 new highs & 9 new lows. Industry Group analysis: year-to-date, 94 out of 197 groups we monitor are positive.
Source: Investors Business Daily. February 11 – February 18.
**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 correction mode(BUT redirecting): BULLISH.
Industry group strength broad : BEARISH. 94 of the 197 industry groups we monitor are up year-to-date, up from 69 last week.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.74%, down from 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 22.1, down from 26.6 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 27.8%, up from 26.1 last week. “Bullish” professional sentiment is 35.6, up from 34.1 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 11– February 18.
● Earnings & Company Developments: With 374, or 74.8% of S&P 500 reports in (through 2/16), earnings season is very strong. Median Surprise 5.54%. Positive surprises beat disappointments by a 4.10 ratio, according to Zack’s Investment Research. 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 increased to 212.3% from 211.4% in the previous day. As of October 1st, the earnings growth rate was at 193.3%. Of the 414 (~83%) S&P 500 companies who have reported Q4 results, 72% beat estimates, 10% 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: Chesapeake Energy reported late Wednesday fourth-quarter net loss of $530 million, or 84 cents a share, compared with a loss of $1 billion, or $1.74 a share in the same period last year. Adjusted fourth-quarter income was $490 million, or 77 cents a share. Revenue for the quarter ended Dec. 31 fell to $2.22 billion from $2.98 billion a year ago. Analysts polled by FactSet Research were looking for adjusted earnings of 68 cents a share on $1.86 billion in revenue.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, February 11– February 18.
On This Day:
February 18, 1960 -- The eighth Winter Olympic Games opened in Squaw Valley, Calif.
Source: history; about.com
Notable & Quotable: on Listening
No one is as deaf as the man who will not listen.
Yiddish proverb
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).
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