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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

March 25, 2010

Fueling the Economic Engine

As we identified in our most recent Workshop meeting, corporations are spending again.  We know this to, in part, have the potential to be the right octane fuel our economy needs.  Higher business spending and output will typically lead to hiring and spark the profits of other companies, which would reduce unemployment further AND in turn create further consumer spending.  What we noted in our Workshop was that corporate America’s capital expenditures (cap ex) for information technology (IT) is tracking the most since 2004.  Since last Thursday evening’s event, our observations include additional evidence of fuel the US economic engine should benefit from.  Federal Express, Boeing, Exxon Mobil, Potash, Pepsi, Ethan Allen, UAL and many other corporations have recently announced an increase in their capital spending budget for 2010.  These are distinctly different industries.  They all cite improving fundamentals and demand in their markets.  This expression of confidence is loudly heard from mining and construction companies. And it is global.  Brazil’s Vale, a major mining and mineral exploration heavyweight,  reported expanding cap ex and is showing pricing power as it announced huge hikes to iron ore of between 90% to 114%.  This is all positive with positive results.  Fedex said it has reinstated employee compensation programs which had been sidelined during the downturn.  Ethan Allen reported they are now (in one plant) at full operations for six days a week with “lots of overtime”.

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Japan said its February trade surplus ballooned 819% from a year earlier, as exports continued to recover, according to data released Wednesday by the Ministry of Finance. Exports rose 45.3% from a year earlier, on top of January's 40.9% year-on-year gains.

China is facing twin risks, according to the World Bank.  They are a property bubble and strained local government finances.

Germany said business confidence hit a nearly two-year high while private-sector activity across the 16-nation euro zone accelerated at a faster-than-expected pace in March as the pace of exports rose, according to closely watched surveys released yesterday. The Munich-based Ifo Institute's business-climate index surged to 98.1 in March from 95.2 in February, exceeding forecasts of a rise to 95.9.

UK said British retail sales volumes rose 2.1% in February, the biggest monthly rise since May 2008, boosted by rising receipts for household goods and fuel, the Office for National Statistics reported today.

Ireland said its economy contracted an annualized 5.1% during the fourth quarter as the one-time Celtic tiger continued to reel from a housing market downturn.

Source: Investor’s Business Daily, Wall St. Journal:  March 18 – March 25.

 U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:   The number of people applying for unemployment benefits dropped for the third time in four weeks, reflecting a weak but slowly recovering job market. Initial claims fell 14,000 to a seasonally adjusted 442,000 in the week ended March 20, the Labor Department said today. The four-week average, a better gauge of employment trends than the volatile weekly number, declined 11,000 to 453,750.

Durable goods orders up:  Demand for U.S.-made durable goods rose a seasonally adjusted 0.5% to $178.1 billion in February, the third straight increase in the key forward-looking economic indicator, according to Commerce Department data.  Orders for core capital goods excluding aircraft and defense increased 1.1%, a sign of rising capital spending by businesses. Compared with the first two months of 2009, orders are up 11.4%. Shipments are up 1.8%.

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down   -4.9% year-to-date, down  from -2.5%  last  week.  The widely followed CRB index shot up 24% last year, topping the 1973 increase sparked by the oil crisis.

Oil down:  Crude for April delivery fell $1.30 to $80.61 a barrel yesterday. This is down from $83 last week.

 Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   March 18 – March 25.

WEAK INDICATORS:

Existing home sales down:  Resales of U.S. homes and condominiums fell 0.6% in February to a seasonally adjusted annual rate of 5.02 million, the lowest level in eight months, the National Association of Realtors reported. However, economists had been expecting a larger decline in February, to about 4.93 million on an annualized basis.  Sales of existing homes have thus fallen three consecutive months, after having risen steadily through the fall in response to a federal subsidy for first-time home buyers. Sales are up 7% compared with a year ago, the NAR's data showed. 

New home sales down:  February saw a 2.2% month-to-month drop in new home sales led by a 20% drop in the wintry NE and a minus 18% result in the snow-covered Midwest, compared to a -4.6% drop in the South and a 20.8% gain in the West.  However, overall prices rose.  The turn up in prices shows median price gains year/year for the first time since October of last year and only the third year/year rise for median prices in 27 months. Average prices are up for three-months running; the last three-month rise in prices ended in June of 2007.

Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.84%, up from 3.64% last week.

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

The Market:     The stock market remains in a confirmed uptrend from a rally that began February 16.  All the major indices are at levels not seen since summer of 2008.   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 75%  since March 6th).    Year-to-date major index performance:   S & P 500 4.7%,  DJIA 3.9%,   NASDAQ   5.7%, and the S & P 600   9.4%.   Since December 21, new highs have been dominating new lows.  Here are the past week’s results:  March 18: 517 new highs & 16 new lows, March 19: 565 new highs & 6 new lows,  March 22:  371 new highs & 22 new lows, March 23: 530 new highs & 19 new lows, and March 24:  350 new highs & 10 new lows.    Industry Group analysis:  year-to-date, 183 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   March 18 – March 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 confirmed uptrend:  BULLISH. 

Industry group strength broad :  BULLISH.  183 of the 197 industry groups we monitor are up year-to-date, up from 181 last week.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.58%, about the same as last week’s 2.62%  and 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 17.4, near 16.9 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 20.5%, down from 21.3 last week.    “Bullish”  professional sentiment is 48.9, up from 46.1 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. March 18 – March 25.

● Earnings & Company Developments:   The blended earnings growth rate (estimated & reported) for the S&P 500 for Q4 2009 is 205.8% versus an estimated earnings growth rate of 36.6% for Q1 2010. Of the 497 (~99%) S&P 500 companies who have reported Q4 results, 72% beat estimates, 10% were in-line, and 18% were below estimates, according to Thomson Reuters.  The increase in profits for the basket of 500 exceeded expectations of 109%.  The outstanding Q4’09 earnings showing compares to the same period a year earlier which was the worst in America’s history.  Equally impressive, for the first time since Q3’08, top line year-over-year sales growth was positive (+5%) for Q4, as 7 of 10 sectors experienced revenue growth.   Earnings Season is winding down, but that does not mean it is over. Actually, it is about to start up again. Next week will bring 70 earnings reports, including 14 members of the S&P 500. 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.  According to Zacks, the biggest impact on Q1’10 total earnings will come from the Tech sector where earnings are expected to soar 55.1% over year-ago levels.  Companies of interest:  JAMBA announced The Five Fruit Frenzy as its latest initiative to come out of the ongoing relationship between Jamba Juice and National PTA and was designed to help boost the health and wellness of the nation's students by providing them with a healthier beverage option.

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

On This Day:

March 25, 1965 -- the Rev. Martin Luther King Jr. led 25,000 marchers to the state capitol in Montgomery, Ala., to protest the denial of voting rights to blacks.

Source: history; about.com

Notable & Quotable:  on Attitude

I am determined to be cheerful and happy in whatever situation I may find myself.  For I have learned that the greater part of our misery or unhappiness is determined not by our circumstance but by our disposition.

Martha Washington, First Lady

Valentine Capital Asset Management, Inc.   

6111 Bollinger Canyon Rd. Ste 100, SAN RAMON, CA  94583

925.275.0200

Published by Valentine Capital Asset Management
Copyright © 2010 Genevieve Valentine Enterprises. All rights reserved.
All rights reserved. Valentine Capital Asset Management 6111 Bollinger Canyon Road #100 San Ramon, CA 94583 (925) 275-0200 Valentine Capital Asset Management is an SEC Registered Investment Advisory firm doing business in the State of California. John Valentine, Founder & President. Securities offered through Purshe Kaplan Sterling Investments, member FINRA/SIPC, Headquartered at 18 Corporate Woods Blvd, Albany, NY 12211 NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL. NOT INSURED BY ANY STATE OR FEDERAL AGENCY.