Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
April 15, 2010
When is it “over”?
The Business Cycle Dating Committee at the National Bureau of Economic Research indicated that it's premature to call an end to the U.S. recession. Recessions aren’t “officially” over until the NBER says so. The NBER is the nation's leading nonprofit economic research organization. Sixteen of the 31 American Nobel Prize winners in Economics and six of the past Chairmen of the President's Council of Economic Advisers have been researchers at the NBER. The more than 1,000 professors of economics and business now teaching at colleges and universities in North America who are NBER researchers are the leading scholars in their fields. Founded in 1920, the National Bureau of Economic Research is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. Nevertheless, Haver Analytics, which maintains more than 150 economic and financial databases from over 550 government and private sources, has called it over. They have chosen June 2009 as the end date for the recession for 2 reasons: 1) The index of coincident economic indicators, which includes data covering nonfarm payrolls, industrial production, business sales and personal income, troughed in June. 2) Real GDP growth has been positive since 3Q '09 and likely was again positive last quarter. The 1Q data will be published later this month. Maybe it is over.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
China said auto sales in the country climbed 56% vs. a year earlier to 1.7 mil vehicles, spurred by tax cuts and government subsidies, the China Assoc. of Automobile Manufacturers said. That’s more than the 24% annual gain in U.S. sales in March. China last year overtook the U.S. as the world’s largest car market, with sales soaring 45% in ’09 to 13.6 mil units.
India said February industrial output grew 15.1% vs. a year earlier on strong growth in the production of capital goods and consumer durables. Analysts had forecast a bigger 16.7% gain. But the general view is that the Reserve Bank of India still will boost interest rates next week to cool inflation.
Germany reported its trade surplus jumped. The surplus in Europe’s biggest economy jumped 39% to $16.3 billion. Exports rose 5.1% to $94.9 billion, boding well for Germany’s economic recovery. Imports rose 0.2%.
UK reported increases in exports and retail sales. Exports jumped 9.5% in Feb. from Jan., the biggest increase in over 7 years, the government said. That helped narrow Britain’s trade deficit by 22% to $9.5 billion from Jan.’s 17-month high. Also, retail sales rose 4.4% in March vs. a year ago, the best gain since April ’06, helped by an earlier Easter, the British Retail Consortium said. Meanwhile, home prices fell 0.1% in Feb., the government said.
Source: Investor’s Business Daily, Wall St. Journal: April 8 – April 15.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Retail sales up: U.S. retail sales rose a better-than-expected 1.6% in March. Economists surveyed had forecast sales to climb 1.3%. The Commerce Department said sales totaled $363.2 billion - the fifth gain in six months. Excluding autos and trucks, sales climbed 0.6% to $300.5 billion. At the current pace, consumer spending is on track to grow at an annualized rate of 3% to 3.5% in the first quarter, which would be the best showing in three years. Retail sales are now 7.6% higher compared to one year ago. Sales of building materials climbed 3.1% - the biggest gain since November 2007 - to indicate a pickup in construction as the weather improves.
Industrial production up: The output of the nation's factories, mines and utilities rose 0.1% in March, the Federal Reserve said today. The increase was not as strong as expected. Economists surveyed by MarketWatch had expected a 0.8% increase. Despite the small gain in March, industrial output is up at a 7.8% rate in the first three months of the year. Factory production rose at a 6.6% rate in the first quarter. Further, capacity utilization - a gauge of slack in the economy -- rose to 73.2% in March from 73.0% in February. This is the highest level since November 2008.
Ben says: The nation's economy will continue to recover at a moderate pace in coming quarters, bolstered by a return of business and consumer spending, Federal Reserve Board Chairman Ben Bernanke said yesterday in a testimony before the Joint Economic Committee of Congress. What was widely noted was the Fed chairman didn't repeat in his prepared remarks the Fed's policy statement that exceptionally low interest rates will be required for an "extended period" to foster the recovery.
Beige Book “somewhat” positive: Overall economic activity has increased "somewhat" since mid-March, according to the latest Federal Reserve report on economic conditions released yesterday. In general, the 12 Fed districts reported increases in retail sales and car sales. Weakness persists in the predictable area: Reports from the banking sector were grim. Loan volumes and credit quality decreased.
Philly Fed up: Business conditions improved for the eighth straight month at manufacturing firms in the Philadelphia region, according to the monthly survey issued Thursday by the Federal Reserve Bank of Philadelphia. The Philly Fed index rose to 20.2 in April from 18.9 in March, slightly better than expectations of an increase to 20.0. Any reading over zero in the diffusion index indicates growth, with higher readings indicating more firms reporting better conditions.
Economic Optimism index up: Consumer confidence rebounded in April from a one-year low on hopes that an improving economy will continue to create jobs, according to the IBD/TIPP Economic Optimism Index. The gauge rose 3 points from March to 48.4. Readings below 50 signal pessimism. The six-month outlook jumped 5.5 points to 51.9, the best since last September.
Federal budget deficit drops: The U.S. government ran a budget deficit in March of $65 billion, the Treasury Department reported. This is a dramatic difference from the year-ago number due partly to a revision of the projected cost of Washington's program to bail out banks. A year ago in March, the deficit was $192 billion. Income was $153 billion last month, 19% over the total recorded in March 2009, the Treasury said. Spending was $219 billion, down 32% year over year.
CPI stays down: Consumer price inflation remain subdued last month, according to the U.S. Bureau of Labor Statistics. It reported that the CPI during March rose all of 0.1% after having been unchanged during February. That was enough to leave the change during the last three months at 0.9% (AR), its lowest since May of last year. The latest figure matched Consensus expectations.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -1.2% year-to-date. 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: April 8 – April 15.
WEAK INDICATORS:
Jobless claims up: The number of people applying for unemployment benefits jumped 24,000. Initial claims shot up to a seasonally adjusted 484,000 in the week ended April 10, the Labor Department said today. Economists surveyed had forecast claims would drop to 430,000 in the latest week. Initial claims are down 20% from 609,000 in the same week one year ago, but they are 6% higher vs. the end of 2009. Claims have to fall to 400,000 or lower to indicate an accelerated hiring trend.
U.S. trade deficit deepens: For February, the deficit deepened to $39.7B from a little-revised $37.0B during January. The latest figure was slightly deeper than Consensus expectations for a deficit of $38.5B.
Oil stays up: Crude for May delivery added $1.79, or 2.1%, to $85.84 a barrel. This is about the same as last week, near $86. The Energy Information Administration reported an unexpected decrease in crude stockpiles. The EIA data showed supplies decreased by 2.2 million barrels in the week ended April 9. Consumption is projected to increase by 900,000 barrels a day this year, the Organization of the Petroleum Exporting Countries said in its monthly report.
Small business optimism index down: The National Federation of Independent Business (NFIB) reported their March small business optimism index fell m/m to 86.8 which the lowest level since July of last year. Weaker figures on employment led the deterioration in last month's overall reading. The percent of firms with one or more job openings fell to its lowest since November and slightly fewer firms were planning to increase employment. Expectations for overall economic improvement remained near its lowest level since March of last year as a majority of firms saw further economic deterioration. Expectations for sales in six months fell back into negative territory and the percentage thinking that now was a good time to expand the business fell sharply to its lowest since in twelve months. Expectations for an easing of credit market conditions remained near the lowest since the Fall of 2008.
Benchmark interest rate stay higher: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.85%, the same as last week and up from 3.64% 3- weeks ago.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: April 8 – April 15.
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. The NASDAQ closed at the level it was in May of 2008. The major stock indices surged to a fifth day of gains yesterday, with Wall Street staging its best performance in nearly six weeks in cheering results from industry titans in the banking and technology sectors. Supporting the upward momentum has been higher volume. Yesterday, the Nasdaq’s volume was the highest since January 29th. With the 1st quarter in the history books, the S & P 500 has advanced 4 consecutive quarters after declining 6 straight beginning in Q4 of 2007. 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 81.7% since the March 6th ’09 low). Year-to-date major index performance: S & P 500 8.6%, DJIA 6.7%, NASDAQ 10.4%, and the S & P 600 14.9%. Since December 21, new highs have been dominating new lows. Here are the past week’s results: April 8: 329 new highs & 16 new lows, April 9: 528 new highs & 4 new lows, April 12: 608 new highs & 9 new lows, April 13: 481 new highs & 9 new lows, and April 14: 947 new highs & 13 new lows. Industry Group analysis: year-to-date, 188 out of 197 groups we monitor are positive.
Source: Investors Business Daily. April 8 - April 15.
**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. 188 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 2.53%, about the same as last week’s 2.54% and down from 4.45% March 9, ‘09, which was a 5-year high.
Volatility index up: BEARISH. Also known as the ‘Fear index’, the VIX (volatility index) is 15.5, down from 16.1 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 ‘08, 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 18.9%, down from 19.1 last week. “Bullish” professional sentiment is 51.1, up from 48.9 last week. The 5-year high is 62.9. The index is considered normal at a measure of 45% bulls, 35% bears and 20% neutral.
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. April 8 – April 15.
● Earnings & Company Developments: The 1st quarter earnings season was kicked off this week. In addition to Alcoa, the “official starter” to each new earnings reporting season, 20 more S&P 500 firms will report, including such important bellwethers as CSX, GE, Intel, Google, JPMorgan and B of A. First quarter earnings are expected to be up 21.4% year over year. Revenue growth of 6.2% expected year over year. 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: YUM, Yum Brands, the company, whose brands include KFC, Pizza Hut and Taco Bell, earned 59 cents a share on a 6% revenue rise to $2.35 billion. Analysts polled by FactSet Research had expected earnings of 53 cents a share on $2.28 billion in sales. The company said its first-quarter profit increase was aided by higher margins and lower taxes.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet. April 8 – April 15.
On This Day:
April 15, 1850 -- The city of San Francisco was incorporated.
Source: history; about.com
Notable & Quotable: on Character
Character is like a tree and reputation like its shadow. The shadow is what we think of it; the tree is the real thing.
Abraham Lincoln, 16th president of US (1809 - 1865)
Valentine Capital Asset Management, Inc.
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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.
