Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
July 29, 2010
EARNINGS!
Second quarter earnings season is shaping up as a very strong one. Looking at the S & P 500, so far in the earnings season earnings growth is catching the market’s attention. The total net income of those 246 firms is 40.8% higher than it was a year ago. Of those companies who have reported Q2 results, 77% beat estimates, 9% were in-line, and 14% were below estimates. Since the traditional earnings season kick-off with Alcoa’s report, the market has applauded positive earnings developments by heading higher. Indeed, Alcoa delivered a strong season opener with stronger-than-expected earnings and sales growth. Last week, Wall Street finally started responding to higher earnings. The S&P 500 rose 3.55%. In fact, earnings were so good that Wall Street ignored some softening economic news on housing starts, new home sales, leading economic indicators and new jobless claims. The S&P 500 made a recent bottom July 1 just as second quarter earnings began to flow in and has jumped 10% since then (through yesterday). As the famous “Lone wolf on Wall Street”, Bernard Baruch said, “Earnings are the single most important determining factor of stock prices.”
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
China doesn’t see a “double dip”. Chinese authorities feel confident that the current economic slowdown won't turn into a "double dip," but they will maintain stimulus spending to support the economy, according to government statements. The People's Bank of China said that while the nation's economy is definitely slowing, it will continue to grow and its fundamentals remain strong, according to the central bank's quarterly report.
Germany reported its consumers are more confident. The balance of opinion regarding the economy increased from 5.5% in June to 26.8% in July, the highest excess of optimists over pessimists since October, 2007. A rise of similar magnitude occurred in the balance of opinion regarding personal income expectations, which rose to 29.1% from 8.2% in June.
UK economy growing. Britain reported its economy grew at its fastest pace in over four years, with a 1.1% rise in second-quarter GDP, much stronger than economists' consensus estimate of a 0.6% rise.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Jobless claims down: The number of people applying for initial state unemployment insurance benefits fell 11,000 to 457,000 in the week ended July 24, the Labor Department reported today. Economists surveyed by MarketWatch had expected an initial claims level of 460,000. The four-week average of these continuing claims fell 18,000 to 4.55 million, hitting the lowest level since late December 2008. Initial state claims are about 21% below the prior's year level. The level of continuing claims is about 26% less than in the prior year.
New home sales up: U.S. sales of new homes scored a better-than-expected rebound in June after having plumbed record lows a month earlier, government data showed. Sales rose 23.6% in June to a seasonally adjusted annual rate of 330,000, the Commerce Department reported. New-home sales for May plummeted a revised 36.7% to a record low 267,000 level after a federal subsidy for home buyers expired. This is a steeper drop than the 32.7% fall and 300,000 in annualized sales that the government initially estimated. The inventory of completed-but-unsold homes fell to 81,000, down about 37% in the past year and the lowest level since October 2003.
Home prices rise: Home prices rose 1.3% in May compared with April in 20 major U.S. cities on a seasonally unadjusted basis, according to the Case-Shiller home-price index. Prices have moved up 4.6% in the past year, the data showed. This is the highest rate since August 2006. May's increase is the index's largest monthly gain since July 2009 and the second straight increase after six months of declines. The index is at its highest level since last October. Prices rose in 19 of the 20 metropolitan areas tracked by Case-Shiller in May compared with April.
Chain-store sales up: Consumers seem willing to spend even though we've seen a souring in sentiment and confidence. Chain store sales rose 0.6% last week after the prior period's 1.4% jump. Together, these increases pulled sales for the month 1.9% above June's average following that month's very slight decline.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -6% year-to-dates. It is the same as last week.
Oil down: Crude for September delivery lost 51 cents, or 0.7%, to settle at $76.99 a barrel yesterday. This is still down near $76.65 last week. Yesterday, the Energy Information Administration reported an increase of 7.3 million barrels for the week ended July 23. Analysts surveyed by Platts had expected a decline of 2.3 million barrels in the nation's oil inventories.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: July 22 – July 29.
WEAK INDICATORS:
Beige Book shows slow growth: The tone of the latest Beige Book is decidedly less optimistic than that of the prior Beige Book report released in early June. The report on current economic conditions released by the central bank reported stalled or slower growth in mid-July. Four of the 12 Fed districts showed slowing or stalling economic growth, while all 12 showed expansion in the previous report.
Durable goods orders down: Orders for new U.S.-made durable goods down by 1.0% in June, the second straight monthly decline and the biggest drop in 10 months, the Commerce Department reported. Excluding a 2.4% decrease in transportation goods, orders fell 0.6%, the second decline in the past three months. Economists surveyed by MarketWatch had been looking for 1.0% growth in durable-goods orders last month.
Consumer confidence down: July's consumer confidence index fell to 50.4, the lowest level since February, from an upwardly revised 54.3 in June. July's confidence reading should be closer to 90 than 50, given how long the economy has been recovering, according to one economist’s view. The present-situation index fell to 26.1 in July, the lowest level since March, and down from 26.8 in June. Those saying present business conditions are "bad" rose to 43.6% in July from 41% in June, while those saying jobs are "hard to get" rose to 45.8% from 43.5%.
Budget deficit projections raised: The White House raised its forecast Friday for the fiscal 2011 federal budget deficit to $1.4 trillion, or about 9.2% of GDP, up from its previous projection of $1.267 trillion. Not only are the federal budget deficits for 2009, 2010 and 2011 well above $1 trillion, but the White House is projecting $8.5 trillion of additional debt over the next decade.
Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.00%, up from 2.88% last week.
Sources: Economy.com, Bloomberg, MarketWatch, Haver Analytics, IBD week of: July 22 – July 29.
· The Market:
As we noted above, the market has regained strength since July 1, coinciding with the Q2 earnings season. Since the market bottom on March 6,’09 the S&P 500 is up 66%. Year-to-date major index performance: S & P 500 -0.8%, DJIA 0.7%, NASDAQ -0.2%, and the S & P 600 5%. Here are the past week’s results: July 22: 164 new highs & 38 new lows, July 23: 201 new highs & 39 new lows, July 26: 305 new highs & 36 new lows, July 27: 280 new highs & 37 new lows, and July 28: 103 new highs & 38 new lows. Industry Group analysis: year-to-date, 136 out of 197 groups we monitor are positive.
Source: Investors Business Daily. July 22 – July 29.
**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 rally mode (again): BULLISH
Industry group strength broad : BULLISH. 136 of the 197 industry groups we monitor are up year-to-date, UP from last week’s 90.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.74%, down from 2.84% last week and down from 4.45% March 9, ‘09, which was a 5-year high.
Volatility index down: BULLISH. Also known as the ‘Fear index’, the VIX (volatility index) is 23.4, down from 26.6 last week, and still down significantly from the last bear market highs. The VIX has dropped from over 50 near the market bottom in March ’09, but has doubled from recent lows. 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 declining optimism: BULLISH. The Investors Intelligence Advisors Sentiment index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, now shows the bulls slightly in the lead. The “Bearish” sentiment is 34.9%, down from 35.6 last week. “Bullish” professional sentiment is 38.2%, up from 35.6 last week ( and down from 56% at end of April). 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%. The Dow gained 15% in one day! 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. July 22 – July 29.
● Earnings & Company Developments:
We opened this week’s comments with EARNINGS! While that focus was on the current quarter, earnings gains for all of 2010 are also on track to be positively impressive. For the full year, earnings are expected to grow 34.0% in 2010, with further growth of 19.2% in 2011, according to Zack’s Investment Research. Collectively, the 500 firms in the S&P 500 earned $544.8 billion in 2009, and that is expected to grow to $743.0 billion this year. Companies of interest: Chevron is expected to announce quarterly results tomorrow. The company may report earnings of $4.9 billion, or $2.41 a share. This would be more than double it’s year-ago profit of $1.75 billion, or 87 cents a share. Chevron signaled health in its refining business on July 13, when it said margins in its key U.S. Gulf Coast market averaged $21.65 a barrel in the second quarter, up 61% from $13.36 a year ago.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet. July 22 – July 29.
On This Day:
July 29, 1914 -- Transcontinental telephone service began with the first phone conversation between New York and San Francisco.
Source: history; about.com
Notable & Quotable: on Genuine
“Genuine goodness is threatening to those at the opposite end of the moral spectrum.”
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.
