Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
January 28, 2010
iPhone, iMac, iTunes, iPod, iPad…iWant
Apple Inc. ended months of speculation on Wednesday by unwrapping the iPad, a new touch-screen tablet computer that Chief Executive Steve Jobs said would revolutionize how people access their digital content and change the future of personal computing. As Apple undoubtedly changed the way the world uses computers, buys and listens to music and the application of cell phones, the company promises to create global demand for its latest high-tech device. The iPad is being targeted at media uses such as listening to music, watching movies and playing video games. The device is also geared heavily toward readers, with newspaper publishers in partnerships with Apple to market their content on the device. Mr. Jobs made no secret about the direction in which Apple is heading. At the start of his presentation, Jobs noted Apple's recently quarterly revenue of $15.6 billion, and that the company's annual sales are now above $50 billion. Like Apple’s iTunes online music store to support its iPod, Apple has launched an online bookstore called iBookstore, for the iPad. Apple just sold its 350 millionth iPod last week. How many iPads will the world want? Based on the success of Amazon’s Kindle e-reader, the iPad could become a global iWant.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
China said Chinese legal experts are proposing a ban on eating dogs and cats in a contentious move to end a culinary tradition dating back thousands of years. The recommendation will be submitted to higher authorities in April as part of a draft bill to tackle animal abuse.
Germany said its economy will expand 1.4% this year, raising previous expectations of a 1.2% gain.
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%.
Source: Investors Business Daily, Wall St. Journal: January 21 – January 28.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Jobless claims down: The Labor Department said today that first-time jobless claims dropped by 8,000 to a seasonally adjusted 470,000. However, analysts had expected a steeper drop to 450,000, according to Thomson Reuters. The four week average, which smooths out volatility, rose for the second straight week to 456,250. The average had fallen for 19 straight weeks before starting to rise.
Consumer confidence up: The consumer confidence index rose to 55.9 in January from an upwardly revised 53.6 in December, according to the Commerce Department. It's the highest reading since September 2008, when the financial crisis intensified. It was the third straight increase. The index came in better than expected by economists surveyed by MarketWatch, who were looking for an increase to 53.5 from the previously reported December level of 52.9. However, consumer confidence remains very weak, far below the average level of 95. The index has been in a narrow range between 46 and 56 since May. It bottomed at a record-low 25.3 last February.
Durable goods orders up: Demand for U.S.-made durable goods rose in December for the first time since September, led by strong orders for metals, machinery and capital equipment, the Commerce Department estimated today. Orders for durable goods increased 0.3% in December to $167.9 billion after a revised 0.4% decline in November that was initially reported as a 0.2% gain. However, economists were looking for a much-stronger 1.7% gain in orders in December, based on company reports showing rising orders for airplanes, which actually dropped.
FOMC keeps rates low, no change: The central bank repeated its pledge on yesterday that rates will stay at ultra-low levels for an "extended" period of time, culminating the latest meeting of the Federal Open Market Committee. When will the Fed change this monetary policy? Consider this: “The Federal Reserve will tighten U.S. monetary policy in June. No, it will be September. Wait, it won't be until after the November election. Check that, not until 2011. How about 2012?”, as one economist summed it up.
Global CEO’s more optimistic: The survey of 1,198 CEOs from 52 countries by PricewaterhouseCoopers in the fourth quarter of last year found 81% of top executives were confident of their prospects in the next 12 months, while 18% said they were pessimistic. Last year, 64% were confident, while 35% were pessimistic.
Retail sales outlook improves: The National Retail Federation projected industry sales may rise 2.5% this year, after a drop of the same amount last year.
Oil down: Oil fell $2 a barrel yesterday to $72.65. This is down from $77.65 last week. Yesterday’s close is the lowest since December 21.
Benchmark interest rate down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.65%, the same as last week.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -5.16% year-to-date. It was down -1.6% for the year last week. 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 21 – January 28.
WEAK INDICATORS:
New home sales down: sales of new U.S. homes fell sharply in December for the second month in a row after a popular tax credit for buyers was set to expire, the Commerce Department estimated. New home sales fell to a seasonally adjusted annual rate of 342,000 in December after falling 9.3% in November to 370,000. It was the lowest seasonally adjusted sales pace since March and just 4% above the all-time low of 329,000 reached last January. Economists surveyed were looking for a small gain in December to about 365,000. November's estimate was revised higher to 370,000 from 355,000 previously reported. For all of 2009, sales of new homes fell 8.6% to a record-low level of 374,000, down about 23% from 2008's 485,000. The records date back to 1963. Home builders continued to slash their inventories of unsold homes. The number of unsold homes dropped 1.7% to 231,000, the lowest in 38 years. The number of homes for sale that are under construction fell to a record low. At the December sales pace, it would take 8.1 months to sell the inventory, up from 7.6 months in November. The median sales price of a new home sold in December was $221,300, down 3.6% compared with a year earlier.
Federal budget deficit climbing: The U.S. government will in 2010 record its second-biggest budget deficit since World War II, the Congressional Budget Office estimated. The deficit will hit $1.35 trillion in 2010, CBO said in its annual budget outlook.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: January 21 – January 28.
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. Year-to-date major index performance: S & P 500 -1.6%, DJIA -1.85%, NASDAQ -2.1%, and the S & P 600 -0.8%. Since December 21, new highs have been dominating new lows by a massive margin. New highs have averaged 400, while new lows about 10 - a bullish ratio. Here are the past week’s results: January 21: 210 new highs & 13 new lows, January 22: 101 new highs & 20 new lows, January 25: 79 new highs & 13 new lows, January 26: 98 new highs & 25 new lows, and January 27: 78 new highs & 29 new lows. Industry Group analysis: year-to-date, 63 out of 197 groups we monitor are positive.
Source: Investors Business Daily. January 21 – January 28.
**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. 63 of the 197 industry groups we monitor are up year-to-date, down sharply from 157 last week.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.56%, 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 25.1, a straight shot up from 18.6 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: 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 22.3%, up from 18.9% last week. While this contrarian stock market indicator is bearish, the NASDAQ rose 32% from June ’03 to January ’04. “Bullish” professional sentiment is 40, down from 52.2 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 21– January 28.
● 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. In fact, earnings of reported firms are up 167.7% year over year, according to Zacks Investment Research. However, the rest of the new earnings strength is not simply due to easy comps. 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: General Electric posted fourth-quarter earnings of 28 cents a share, down from a profit of 36 cents a share in the year-ago quarter but better than the Thomson Reuters average estimate of 26 cents a share. Revenue was also from a year ago, falling to $41.4 billion, although that was also better than consensus. GE also backed a recent outlook for a flat performance in 2010, with CEO and Chairman Jeffrey Immelt saying: "We believe this is quite achievable and sets us up for solid growth in 2011 and beyond."
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, January 21 – January 28.
On This Day:
January 28, 1915 -- The Coast Guard was created by an act of Congress.
Source: history; about.com
Notable & Quotable: on Resolutions
“I don’t really do New Year’s resolutions because I don’t think you should have to wait until December to start working on how to change yourself. I think if you’ve got a problem, you need to fix it now. ”
Clay Aiken
Go Figure:
WINNER BY MONTH: The best monthly performance on a total return basis for the S&P 500 over the last decade (1999-2008) has occurred in April, October or November in 9 of the 10 years. The only year that one of these 3 months did not lead the way was in calendar year 2000 when March was the best month. (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.
