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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

February 25, 2010

What they say, not what they do.

We have long maintained the view that is what the Fed says that matters; less what they do.  Raise rates then say economic condition still warrants “near-zero” interest rates. What did they do? Last Thursday, the Fed said it was raising its discount rate from 0.5% to 0.75%.  Immediately, the futures for the S&P 500 fell. The Fed sometimes has used discount rate changes as a signal of its intentions for interest rates more broadly.  But, it may be different this time. Accompanying the move, the Fed stated flatly that's not the case this time: The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy....”  More on what they said: The U.S. economic recovery is still not yet on a sustainable path, and near-zero interest rates are still needed, Federal Reserve Board Chairman Ben Bernanke told lawmakers yesterday. The market’s reaction was a broad advance.   Bernanke noted that economic growth expanded at a 4% pace over the past two quarters of 2009, but was pushed higher by temporary factors. Whether the recovery can last depends on whether businesses and consumers resume spending. "We don't see inflation as an imminent threat," Bernanke said. Conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period." "Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to tighten monetary conditions to prevent the development of inflationary pressures”.  He stressed again that the Fed's recent increase in its emergency lending rate for banks was not a signal of monetary policy. It also would have "no effect" on consumers.  Many economists continue to see no move until next year.  When we were asked last evening at a scheduled Town Hall meeting what our rate outlook was, we cited the above. We care more about what the  Fed says.

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Japan said that exports for January rose by a larger-than-expected margin, helped by a sharp gain in shipments to China.

China said its economy could post trade deficits over the next six months, as the export recovery remains weak while the trend of strong import growth remains intact, according to reports today.
Germany said its business confidence index, which had been improving since March 2009, declined slightly in February.  On a percent balance measure, which subtracts the percentage of respondents who are negative from those who are positive, confidence among German entrepreneurs fell to -10.3% from -9.0%. 

Source: Investors Business Daily, Wall St. Journal:  February 18 – February 25.

 U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Durable goods orders up:  Orders for U.S-made durable goods soared 3% in January to a seasonally adjusted $175.7 billion on higher bookings for civilian airplanes, the Commerce Department estimated today.  The 3% gain in orders was the biggest gain since July. December's orders were revised sharply higher as well to a 1.9% increase compared with the 1% gain reported last month. Economists were looking for a 1.5% gain in total durable goods orders in January. However, civilian aircraft orders accounted for the jump in orders.  Excluding the 15.6% gain in transportation orders, orders fell 0.6% in January.

House prices show  signs  of improvement:  Ever-so-slightly, home prices are rising m/m and the annual decline has eased. The December S&P/Case Shiller Home Price Index edged up another 0.3% and they have risen 3.6% from the May low. That improvement pared the 12-month price decline to 3.1% from its worst of -19.0% last January. For 2009 as a whole, prices fell 13.3% and they have fallen 29.4% from the early-2006 peak.

CRB Index down:  The Reuters-Jefferies Commodity Research Bureau is down -3.05% year-to-date.  However, it is up from -6.5% two  weeks ago. 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 18– February 25.

WEAK INDICATORS:

Jobless claims up:   The number of people filing first-time claims for state unemployment benefits rose last week by 22,000 to a seasonally adjusted 496,000. Economists had expected initial claims would drop to 460,000 in the week ended Feb. 20. Jobless claims have risen in six of the first eight weeks of this year, according to data from the Labor Department. The four-week average of initial claims rose 6,000 to stand at 473,750, also the highest rate in three months.  Fed chairman  Bernanke said more than 40% of the unemployed have been out of work for six months or more.

Consumer confidence drops:  For February, the Conference Board reported that consumer confidence fell 18.6% from January and that brought down the level of confidence to its lowest since last April. Just a modest m/m decline had been the Consensus expectation for February. During the last ten years there has been an 83% correlation between the level of consumer confidence and the y/y change in real consumer spending.

New home sales drop:  Sales of new U.S. homes plunged 11.2% in January to a seasonally adjusted annual rate of 309,000, the lowest rate on record dating back to 1963, the Commerce Department said yesterday. 

Benchmark interest rate flat: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.69%, down just slightly from 3.73% last week.

Oil up:  Crude-oil futures gained more than 1% to close at $80 a barrel Wednesday after the U.S. government said gasoline demand rose in the past week. The Energy Information Administration said gasoline inventories in the week ended Feb. 19 fell about 900,000 barrels, contrasting with analysts' expectations for a rise in stockpiles of 500,000 barrels. Crude-oil stockpiles rose 3 million barrels, above the upper limit for the average range for this time of year, as well as analysts' forecasts of 1.9 million.

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  February 18 – February 25.

 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 66%  since March 6th).  It is now (as of yesterday’s close, 4% off its’ recent  highs).    For the 4th 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.  As we note above, the market rallied broadly yesterday in response to chairman Bernanke’s statements on Fed monetary policy.  Year-to-date major index performance:   S & P 500 -0.9%,  DJIA -0.5%,   NASDAQ   -1.5%, and the S & P 600   1%.   Since December 21, new highs have been dominating new lows.  Here are the past week’s results:  February 18: 223 new highs & 13 new lows, February 19: 285 new highs & 5 new lows,  February 22:  214 new highs & 9  new lows, February 23: 227 new highs & 9 new lows, and February 24:  181 new highs & 16 new lows.    Industry Group analysis:  year-to-date, 92 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   February 18 – February 25.

**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.  92  of the 197 industry groups we monitor are up year-to-date, about  same as 94 last week.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.67%, 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 20.6, down from 22.1 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 23.3%, down from 27.8 last week.    “Bullish”  professional sentiment is 41.1, up from 35.6 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. Japan’s stock market is still a fraction of its September 1989 peak near 40,000, as it is now about 10,000.

Sources: Wall St. Journal, IBD, Thompson First Call, Zacks, Stock Traders Almanac, AlphaTrends. February 18 – February 25.

● Earnings & Company Developments:   With nearly 95% of reports in, this earnings season is very strong.  Median surprise is 5.70%. Positive surprises beat disappointments by a 4.44 ratio, according to Zack’s Investment Research.  The blended earnings growth rate (estimated & reported) for the S&P 500 for Q4 2009 is 214% versus an estimated earnings growth rate of 37% for Q1 2010. As of October 1st, the earnings growth rate was at 193.3%. Of the 470 S&P 500 companies who have reported Q4 results, 73% beat estimates, 10% were in-line, and 17% were below estimates, according to Thomson Reuters.     Looking ahead, the earnings forecast by Zacks Investment Research is positive.  Strong 30.6% total net income growth expected for 2010, with 20.0% more expected for 2011, rebounding from -22.9% decline in 2008, -10.1% in 2009.   Companies of interest:   Blue Coat Systems  reported  stellar earnings growth of 76% and revenue gains  of  16% for  their recent quarter. Equally impressive, the company offered positive guidance for  the  next  quarter and  full year.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com,   February 18– February 25.

On This Day:

February 25,  1913 -- The 16th Amendment to the U.S. Constitution, giving Congress the power to levy and collect income taxes, was declared in effect.

Source: history; about.com

Notable & Quotable:  on Integrity

I believe that the essence of government lies with unceasing concern for the welfare and dignity and decency and innate integrity of life for every individual. I don’t like to say this and wish I didn’t have to add these words to make it clear but I will, regardless of color, creed, ancestry, sex or age.

Lyndon B. Johnson, (August 27, 1908 – January 22, 1973), 36th US president

Go Figure:

TOGETHER:  On those trading days YTD when the S&P 500 and the Chinese Shanghai stock index were both open, the S&P 500 mirrored the up or down movement of the Shanghai index exactly 50% of the time. This is per observations through  9/21/09 (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.