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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

September 10, 2009

9’s
An alarm was set at 9:09AM on 9/9/09. It rang on time, but nothing out of the ordinary happened. By the close the market at 1:00pm, stocks rose again heading for the 7th weekly gain out the last 9. The S & P 500 would have had to drop 26 points (or about 2.5%) yesterday to close at 999 on 9/9/09 (we’re OK with that not happening). However, while on 9’s, a lot has happed in the U.S. stock market in the last 9 months. Since 12/9/08 (when the S&P 500 closed at 888), the major stock index has gained over 16% through last night. A look back 9 years paints a different picture: S & P 500 down 31%. The ‘9’ we discussed in last week’s notes is September. That’s the 9 we look most to get through now.

GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS

China’s said its economy is gaining strength but the recovery is still not very solid, so the government will continue its stimulative policies, according to State Councilor Ma Kai, echoing other top Chinese officials.
Germany said its industrial orders rose in July more than analysts expected, another sign that the biggest economy in Europe is emerging from the deep downturn. German industrial orders rose 3.5% in July month-on-month after increasing 3.8% in June, according to the Federal Ministry of Economics and Technology in Berlin.
UK reported its manufacturing output rose at roughly three times the expected growth rate in July as a car replacement program contributed to a rise in auto production. Figures released by the Office for National Statistics on Tuesday showed output rose 0.9% in July compared to June, comfortably ahead of the 0.3% increase expected by economists.
Euro-zone GDP is expected to grow 0.2% in ’10 vs. an earlier forecast for a 0.3% contraction, the ECB said. The 16-nation bloc will shrink 4.1% in ’09, less than the 4.6% drop predicted 3 months ago. Europe’s Big Three, Britain, France and Germany, warned that the global crisis is not over and unemployment will keep rising in the months to come. The country’s leaders say there is no alternative to keeping stimulus in place but that plans should be made for a coordinated withdrawal.
Source: Investors Business Daily, Wall St. Journal: September 3 – September 10.

U.S. Economic Events & Analysis:

POSITIVE INDICATORS:

Jobless claims down: The number of people filing for state unemployment benefits for the first time fell 26,000 to a seasonally adjusted 550,000 last week, the lowest since mid-July, the Labor Department reported. Economists had been looking for first-time claims to fall to 558,000.
Job losses drop: August as nonfarm payrolls fell by 216,000, the 20th consecutive monthly decline, the Labor Department estimated. It was the smallest decline in payrolls since August 2008. The 216,000 decline in payrolls was close to market expectations of a 233,000 drop, and was the 20th consecutive monthly decline. However, payrolls declined an upwardly revised 276,000 in July. In June and July, payroll losses were revised up by 49,000. U.S. payrolls have dropped by 6.9 million to a total of 131.2 million since the recession began in December 2007, the government data showed. In the past three months, payroll losses have averaged 318,000 per month, compared with 491,000 in the previous three-month period.
Beige Book points to more stabilization: The economy appears to be stabilizing across much of the country, led by a pickup in factory activity and a long-awaited improvement in residential real estate, according to the Federal Reserve's latest update on activity. Eleven of the 12 Fed districts showed signs of improvement in the recent report ending in August. "The majority of reports indicated that manufacturers were cautiously optimistic," the report said. Several districts reported some gains in new orders. The improved conditions in the Beige Book mirror expectations by economists. The latest Blue Chip survey of economists expects growth to recover to a 3.0% growth rate in the current July-September quarter.
Signs of manufacturing sector improvement: The U.S. manufacturing sector may finally be on the mend after its worst performance since the Great Depression, but the recovery looks to be relatively sluggish, according to a study released by Machinery and Allied Products Institute (MAPI). MAPI’s chief economist said that housing starts are on the rise, auto sales have picked up and the worst of the steep drop in existing inventories is over -- all signs that recessionary pressures have begun to ease. The council’s forecast is that manufacturing production will fall 12% this year before growing 3% in 2010 and 5% in 2011.
Trade deficit improving: One of the few bright sides of the global recession has been a steady improvement in the U.S. trade deficit. After expanding to as much as $68 billion a month in 2006, the trade gap shrank to just $27 billion in June. Imports have fallen in 10 of the past 11 months, a reflection of weak U.S. demand for foreign-made goods. Meanwhile, U.S. exports also fell, but not as rapidly as imports did. Exports rose at a 16% annual rate in the May and June, after dropping at a 60% annual rate around the first of the year.
Consumers cut credit: U.S. consumers sharply reduced their debt in July, posing another threat to the nascent recovery, the Federal Reserve reported. Total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July to $2.47 trillion, a record drop. This is the sixth straight monthly drop in consumer credit -- the longest consecutive string of declines in credit since the second half of 1991. On a year-on-year basis, credit is down 4.3%, the biggest drop since June 1944. Fed data has shown that the value of both household net assets and net worth has plunged by about $12 trillion from the peak in mid-2007.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call. September 3 – September 10.

WEAK INDICATORS:

Unemployment rate up: The U.S. unemployment rate jumped to a 26-year high of 9.7%. The unemployment rate rose higher than the 9.5% expected by economists. Although payroll losses have moderated, the loss rate in the past three months is as bad as it was at the worst of the 1980 and 1982 recessions. Many economists think the unemployment rate will top out near 10%, late this year or early next year. An alternative measure of unemployment that includes discouraged workers and those forced to resort to part-time work rose to 16.8% from 16.3%, marking the highest on record dating back to 1995. Unemployment has increased by 7.4 million during the recession to stand at 14.9 million since the recession began in December ’07.
More job market weakness - - job openings down: The number of open jobs fell 50% over the past two years to a seasonally adjusted 2.4 million in July, the lowest in the history of the data, the Labor Department reported. The job opening rate fell to a record-low 1.8% in July. In July, there were 6.05 unemployed people for every job opening, according to the most recent data on labor turnover. Bottom line: job demand up, job supply down. In December 2007, when the recession began, there were 1.72 unemployed people for every job opening.
(More signs) Job market weak: A gauge of U.S. labor markets fell to 88.1 from July’s 88.2, pointing to flat employment for the rest of 2009. It’s another sign of a weak recovery, the Conference Board said. The index is 18.5% below a year earlier. Meanwhile, U.S. employers plan to hire fewer workers in Q4 vs. Q3, bad news for hopes of a consumer-led recovery, according to Manpower’s survey of 28,000 firms. The sharpest declines were in construction, leisure and business services, but education and health services were more positive.
CRB Index up: The Reuters-Jefferies Commodity Research Bureau is up 10.4% year-to-date, up from 1.04% two weeks ago.
Oil up: Crude for October closed at $71.33 a barrel yesterday, up from over $68.05 last week.
Benchmark yield up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.48%, up from 3.29% last week.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: September 3 – September 10.

The Market: The stock market rally remains intact from its March 6 intraday lows. As we have discussed, September is widely known as a historically down month for the major stock indices. However, the market is up four straight sessions since September 2. Reiterating the sharp advance since the March 6 low of 666, the S & P 500 is up over 55%. For the most part, technical and fundamental market indicators are healthy, providing support for a bullish trend. Year-to-date major index performance: S & P 500 14.4%, DJIA 8.8%, NASDAQ 30.7%, and the S & P 600 14.7%. Here are the past week’s results: September 3: 104 new highs & 4 new lows, September 4: 140 new highs & 6 new lows, September 8: 250 new highs & 2 new lows, and September 9: 250 new highs & 6 new lows. Industry Group analysis: year-to-date, 178 out of 197 groups we monitor are positive.
Source: Investors Business Daily. September 3 – September 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:
Market in confirmed uptrend: BULLISH.
Industry group strength broadens : BULLISH. 178 of the 197 industry groups we monitor are up year-to-date. This is up from 171 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 2.87%, up slightly from last week though down from 4.45% March 9, which was a 5-year high.
Volatility index falling: NEUTRAL. Also known as the ‘Fear index’, the VIX (volatility index) fell to 24.7 from 28.5 last week. It is down from 33.7 two months ago. Investor risk tolerance increasing. The VIX has dropped from over 50 with the recent market move higher, and has not been this low since last September. According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October, peaking 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, said the portion of positive stock advisers dipped slightly to 48.3% in the past week, but still the highest since December 2007. Bearish sentiment is 23.6, near the low of 20 not seen since October of 2007.
Bear Perspective: 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.
Sources: Wall St. Journal, IBD, Thompson First Call, Zacks, Stock Traders Almanac, AlphaTrends. September 3 – September 10.

● Earnings & Company Developments: The second-quarter earnings season is over. It is time now to turn our attention to the third quarter and take a first peak at what to expect from the fourth quarter. By and large, the third quarter should be pretty much a repeat of the second quarter. Third quarter expected to decline 22.9% year-over-year. The real earnings story of the year-over-year growth rates being more about a year ago than this year the most extreme in the fourth quarter. An explosive 131.6% growth in Total income expected in 4th Quarter is expected due to easy comparisons to the horrific Q4’08 earnings results, according to Zach’s. To be more specific, the total net income expected is $149.7 billion in the fourth quarter of 2009 versus a total net income of just $71.1 billion in the fourth quarter of 2008 (remember in the dark days of last year, the Financial sector lost a staggering $63.2 billion (with AIG alone responsible for $37 billion).
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, September 3 – September 10.

On This Day:
September 10, 1939 -- Canada declared war on Germany during World War II.
Source: history; about.com

Quote: on Consistency
“Passionate leadership won’t succeed if contradictory signals are sent out.”
Bill Gates, Microsoft founder

Go Figure:
1 YEAR EQUALS 197 YEARS - The nation’s anticipated deficit for fiscal year 2009 (i.e., the 12 months that end 9/30/09) is $1.58 trillion. The nation’s actual deficit for its first 197 years of recorded financial data (i.e., 1789-1985) was $1.54 trillion (source: Office of Management and Budget).

Valentine Capital Asset Management, Inc.   

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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.