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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

September 24, 2009

Optimistic Fed
Federal Reserve officials, in the most optimistic FOMC statement in some time, said economic activity has picked up with the improved conditions of the market.
The message from the two-day Fed huddle was overall positive on its economic outlook and fiscal policy. The central bank said it will keep interest rates unchanged and extend its purchase of mortgage-backed securities and agency debt from December to the first quarter of 2010. Analysts had expected the move, which smoothes out the purchases. As expected, the Fed kept its target for its federal funds rate set at a range of zero to 0.25%. The Fed repeated that it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Economists expect the Fed to hold interest rates close to zero into sometime in 2010. Some see no action at all until 2011. For the first time since 2005 the Fed was able to say that "activity in the housing sector has increased." The Fed expressed confidence that inflation would remain in check. "With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time," the statement said. The Fed also removed language from its August statement expressing concern about rising prices for energy and other commodities

GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS

Japan reported a trade surplus for a seventh successive month in August, though both exports and imports continued to shrink from the impact of the global economic crisis.
China’s oil demand slid 5.4% during August. It was the first month-to-month decline in six months, as China, the world's second-largest oil consumer, reined in both oil imports and crude throughput rates at domestic refineries, according to Platts research.
Euro-zone said a monthly survey of purchasing managers in the 16-nation euro zone indicated a slow but continued rise in private-sector output in September, providing further evidence that the single-currency region's economy stabilized in the third quarter, economists said. The manufacturing PMI rose to a 15-month high of 49.0 from 48.2 in August.
Source: Investors Business Daily, Wall St. Journal: September 17 – September 24.

U.S. Economic Events & Analysis:

POSITIVE INDICATORS:

Jobless claims down: For the week ended September 19, initial claims fell 21,000 to 530,000. Economists had been expecting claims to rise slightly by 5,000 to 550,000. This is the lowest level since the week ended July 11 and the second lowest weekly reading all year. Claims have fallen in four out of the last five weeks. The four week moving average of those claims fell by 11,000 to stand at 553,500. This is the lowest level since the week ended Jan. 24.
Leading economic indicators up: The index of leading economic indicators rose 0.6% in August, according to the Commerce Department. This was the fifth straight increase. Five of the 10 leading indicators improved in August, and two others were unchanged. The leading indicators are designed to forecast economic activity about six to nine months ahead. The coincident index - designed to measure current activity -- was flat in August after an upwardly revised 0.1% gain in July, the private research organization said. The increase in July was the first since September 2008 and just the second since the recession began in December 2007. The leading indicators had fallen for 20 consecutive months before turning higher in April. According to research, six out of the past seven recessions, the coincident index has bottomed the same month as the U.S. economy.. "The recent improvement is further evidence that the recession may have ended at the close of the second quarter," said an economist with Wells Fargo Securities
Housing prices improve: The market value of U.S. homes rose by a seasonally adjusted 0.3% in July compared with June, the third monthly increase this year, the Federal Housing Finance Agency reported. Prices for the latest month fell 4.2% compared with July 2008 and were down 10.5% from the peak in April 2007, the FHFA's statistics showed. Prices in July were at the same level as March 2005. According to the FHFA, prices for July rose in five of nine regions, led by a 1.6% gain in the Pacific states -- defined as Hawaii, Alaska, Washington, Oregon and California -- where prices have fallen 9% in the past year. The Mountain states -- Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and New Mexico -- is now the region with the largest year-over-year decline, at 9.8%.
Mortgage activity up: The Mortgage Bankers Association indicated that mortgage applications overall increased 12.8% last week as lower interest rates spurred strength in refinancings. Applications to refinance jumped 17.4% last week and in September they have risen 29.3% from August. Nevertheless, since their peak this past January refinance applications have fallen by nearly two-thirds. For a 30-year mortgage the rate also fell last week to 5.19% after reaching a high of 5.79% in early-June.
Oil down: Oil futures on Wednesday fell nearly 4% to below $69 a barrel and gasoline demand tumbled to the lowest level in nearly eight months amid news of rising petroleum inventories. Crude supplies rose 2.8 million barrels in the week ended Sept. 18, the Energy Information Administration reported. Gasoline inventories gained 5.4 million barrels, and distillate stockpiles, which include diesel and heating oil, rose 3 million barrels.
Benchmark yield down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.41%, down from 3.48% last week.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call. September 17 – September 24.

WEAK INDICATORS:

Chain store sales down: During the latest week, chain store sales fell 2.0% and that was enough to pull sales for the month so far to their lowest level since June, according to the International Council of Shopping Centers. The Johnson Redbook also reported soft sales of late. General merchandise store sales so far this month increased a seasonally adjusted 0.4% from August (-2.1% y/y) following three months of sometimes sharp decline.
CRB Index up: The Reuters-Jefferies Commodity Research Bureau is up 9.4% year-to-date; however, it is down 30% year-over-year.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: September 17 – September 24.

· The Market: “Buy on expectations, sell on news”.? That time tested stock market axiom resurfaced yesterday. As economists and market analysts from sea-to-sea have been calling for recovery and further Fed support, yesterday’s central bank comments (as we discuss above) provided confirmation. The result: selling into the news. As we have discussed, September is widely known as a historically down month for the major stock indices. However, the market is up 4% for the month through yesterday. Reiterating the sharp advance since the March 6 low of 666, the S & P 500 is up nearly 60%. 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 17.5%, DJIA 11.1%, NASDAQ 35.2%, and the S & P 600 19.5%. Here are the past week’s results: September 17: 390 new highs & 5 new lows, September 18: 290 new highs & 4 new lows, September 21: 223 new highs & 3 new lows, and September 22: 334 new highs & 5 new lows, and September 23: 266 new highs & 6 new lows. Industry Group analysis: year-to-date, 183 out of 197 groups we monitor are positive.
Source: Investors Business Daily. September 17 – September 24.
**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. 183 of the 197 industry groups we monitor are up year-to-date. This is up from 178 two weeks ago, and up from only 9 when the recent rally began.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.77%, 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 23 from 28 two weeks ago. It is down from 33.7 10-weeks 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 46.7% in the past week, but still the highest since December 2007. Bearish sentiment is 24.4, 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. 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. September 17 – September 24.

● Earnings & Company Developments: 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. Nonetheless, earnings expectations are improving. According to Zack’s research, analysts continue to raise more estimates than they are cutting for both this year and next, by roughly 2:1 margins for both years. The increases are wide spread with only 3 sectors seeing cuts on balance for 2009 and only 2 seeing net cuts for 2010. Companies of interest: Research in Motion (RIMM) is scheduled to report today after the close of trading. The company has topped expectations for 3 consecutive quarters. Ahead of the company's fiscal second-quarter report, 3 analysts have raised their projections.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, September 17 – September 24.

On This Day:
September 24, 1939 -- Hurricane Rita struck eastern Texas and the Louisiana coast, causing more flooding in New Orleans.
Source: history; about.com

Quote: on Predictions
“It’s tough making predictions, especially about the future.”
Yogi Berra

Go Figure:
UP vs. DOWN - The split between “up” and “down” days for the S&P 500 over the last 50 years (1959-2008) is 53% “up” and 47% “down.” The split YTD during calendar year 2009 has been 54/46 (source: BTN Research).

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.