Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
February 4, 2010
P I I G S
How long have we heard (on KNOW), on Wall St., “ “bulls” make money, “bears” make money, but “pigs” always lose.” Beyond Wall St, now there’s a new “pig” in the global investment arena. Portugal, Italy, Ireland, Greece & Spain have been assigned the porky animal moniker. These Euro Zone economic weaklings now represent financially troubled countries sparking world –wide market concerns. Unlike the “BRIC” countries made up by Brazil, Russia , India & China, these “PIIGS” are laden with debt and suffering credit ratings of “negative”, causing fears of default. Their sovereign debt securities now dominate global capital market concerns, as the risk of default on these government securities (especially Greece) rise. More bailouts? Rumors of other EU nations bailing out some of these countries are gaining credibility. The global markets new focus is on “country too big to fail”, from “company too big to fail”.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
China is a possible source of funds for the PIIGS. Greece is expected to seek a $25 billion loan facility from the China sovereign wealth fund.
Germany said its Industrial orders are still rising Yr/Yr but they took a steep fall in December dropping by 2.3%. Foreign orders led the way lower falling by 3.2% with domestic-sourced orders off by just 1.4% Overall MFG sales also fell in December dropping at a 2% month-to-month pace.
UK said its economy squeaked back into growth in the fourth quarter of 2009 following the country's worst recession in more than 50 years, though the expansion was much smaller than economists expected. Gross domestic product edged up 0.1% compared with the previous quarter and was down 3.2% from a year earlier, according to figures from the U.K.'s Office for National Statistics. Expectations were for an increase of 0.4%.
Russia announced today that real GDP declined 7.9% in 2009, somewhat less than the 8.5% the government had estimated earlier, but still the deepest decline among the BRIC countries--Brazil, Russia, India and China.
Source: Investors Business Daily, Wall St. Journal: January 28 – February 4.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
GDP UP!: The current economic recovery picked up momentum last quarter. Constant dollar GDP rose 5.7% (AR), more-than double the 3Q growth rate and the quickest increase since 3Q 2003. Consensus expectations had been for a lesser 4.6% rise. The principle lift to last quarter's growth was inventories. The 3.4 percentage point contribution from inventory accumulation was necessitated by vigorous de-cumulation dating back to 2005. It had reduced desired inventory levels too far below demand even though sales were then declining.
Consumer sentiment up: Building on gains earlier in the month consumer sentiment for all of January rose to its highest level since January of 2008. The Reuters/University of Michigan Index of Consumer Sentiment for all of January rose to 74.4 from 72.5 in December. The latest figure beat Consensus expectations for a reading of 73.0 and it was up sharply from the low of 55.3 in November 2008. During the last ten years there has been a two-thirds correlation between the level of sentiment and the three-month change real consumer spending. Sentiment about current economic conditions increased another 4.0% after its 13.4% jump from November. The latest was the highest level since March of 2008. Assessments of current financial conditions improved m/m to the highest since September of 2008. Buying conditions for large household goods, including furniture, refrigerators, stoves & televisions, also moved up 3.9% to the highest level since January 2008.
Service Sector index up: The ISM nonmanufacturing index rose to 50.5% from 49.8% in December. The service sector of the United States' economy moved back into growth territory, according to a survey of companies released by the Institute for Supply Management. Still, economists surveyed predicted the ISM nonmanufacturing index would rise to 51%. Only four industries reported growth, while 11 reported contraction. The ISM service sector employment measure rose to 44.6% in January from 43.6% in December. The employment index has been below 50 since December 2007. It hit a low of 31.1 in November 2008.
Manufacturing index up: The National Association of Purchasing Management reported that its January composite index showed unexpected strength, for the second consecutive month, rising to 58.4 from 54.9 during December. The latest figure was the highest since August 2004 and was up from the low of 32.9 reached in December '08. The latest jump exceeded Consensus expectations for a reading of 55.2. (Any figure above the break-even point of 50 suggests rising activity.) The employment index also posted a strong increase to 53.3 which indicated positive growth in factory sector payrolls for three out of the last four months. It's up from a low reading of 25.9 last February. Fifteen percent of respondents indicated higher payrolls versus only five percent last January.
Factory orders up: Factory shipments surged for the fourth straight month during December. The 1.9% increase followed an upwardly revised 1.6% November gain and it was the fourth straight month of strong increase.
U.S. pending home sales improve: Home sales recovered during December after falling sharply in November with the (since-extended) expiration of an $8,000 first-time home buyers tax credit. The National Association of Realtors (NAR) reported that December pending home sales rose 1.0% from November. Home sales remained up 20.1% from the January low and the latest increase matched Consensus expectations.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -4.52% year-to-date. The widely followed CRB index shot up 24% last year, topping the 1973 increase sparked by the oil crisis. Copper, one of the 19 index components soared 140%, while sugar more than doubled and oil ran up about 80%.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: January 28 – February 4.
WEAK INDICATORS:
Jobless claims up: For the week ended Jan. 30, initial claims rose 8,000 to stand at 480,000, according to the Labor Department. First-time filings for state unemployment benefits climbed back to their highest level since mid-December last week, defying the forecasts of economists who had expected a sharp downturn, government data showed.
Productivity grows but slows: Productivity in the nonfarm business sector increased at a 6.2% annualized rate, down from a 7.2% rate in the third quarter. Economists surveyed had expected productivity to increase at a 7.3% annual rate. However, U.S. firms expanded their employees' working hours in the fourth quarter for the first time since the recession began in 2007. For all of 2009, productivity expanded at a 2.9% pace, the fastest since 2003.
Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.70%, up from 3.65% last week.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: January 28 – February 4.
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% since March 6th). However, the recent market behavior indicates a correction underway, as the S & P 500 is down nearly 6% 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 -1.6%, DJIA -1.5%, NASDAQ -3.4%, and the S & P 600 -2.5%. Since December 21, new highs have been dominating new lows by a massive margin. Here are the past week’s results: January 28: 82 new highs & 23 new lows, January 29: 89 new highs & 20 new lows, February 1: 79 new highs & 13 new lows, February 2: 107 new highs & 14 new lows, and February 3: 107 new highs & 17new lows. Industry Group analysis: year-to-date, 62 out of 197 groups we monitor are positive.
Source: Investors Business Daily. January 28 – February 4.
**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 : BULLISH. 62 of the 197 industry groups we monitor are up year-to-date, about the same as 63 last week.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.70%, 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 21.3, a decline from 25 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 is 22.2%, up same as last week. While this contrarian stock market indicator is bearish, the NASDAQ rose 32% from June ’03 to January ’04. “Bullish” professional sentiment is 38.9, down from 40 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, 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. January 28– February 4.
● Earnings & Company Developments: Strength in the arena of earnings is evident. 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 increased to 206.5%. As of October 1st, the earnings growth rate was at 193.3%. Of the 314 (~63%) S&P 500 companies who have reported Q4 results, 74% beat estimates, 9% were in-line, and 17% were below estimates, according to Thomson Reuters. Strong 26.7% total net income growth expected for 2010, with 20.4% more expected for 2011. Looking ahead, the earnings forecast by Zacks Investment Research is positive. S&P500 expected to earn $554.4 billion in 2009, $700.4 billion in 2010 (a 26.4% jump), $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: Cincinnati Financial Corp posted Fourth-quarter 2009 net income of $245 million, or $1.50 per share, compared with $161 million, or 99 cents per share, in the fourth quarter of 2008; operating income of $86 million, or 53 cents per share, compared with $92 million, or 57 cents per share.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, January 28 – February 4.
On This Day:
February 4, 1945 -- President Franklin D. Roosevelt, British Prime Minister Winston Churchill and Soviet leader Josef Stalin began a wartime conference at Yalta.
Source: history; about.com
Notable & Quotable: on Football
“Some people think football is a matter of life and death. I don't like that attitude. I can assure them it is much more serious than that”
Bill Shankly, In Sunday Times (UK) Oct. 4 1981
Go Figure:
SAVING FOR THE FUTURE : The Treasury Department released a proposal on Saturday 9/05/09 that would allow a terminating employee that is due pay to him/her for unused vacation time to deposit those funds into the employee’s pre-tax 401(k) retirement plan (source: Treasury Department).
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.
