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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

September 16, 2010

CASH RICH CORP’S

Corporate balance sheets look better than they have in decades, with about $1.8 trillion in cash sitting on them.  Less than enthusiastic about near record low short –term interest rates, companies are looking for potentially better returns on this liquid capital.  Increasing or initiating dividend payouts, buying back common stock, acquiring another company, increased IT spending, hiring and other actions may result in improved return on shareholder equity.  Currently 122 S&P 500 stocks yield over 2.76%.  Through the end of June, 135 companies had raised, initiated or reinstated dividends, while only two companies have cut them, according to Standard & Poor's. At the end of 2009, 363 of the S & P 500 companies paid dividends.  Through the 1st half of this year nearly 400 did. Tech bellwether Cisco Systems announced its first dividend payout in its history as a way to use part $40 billion cash hoard.  Companies, with their cash, have an urge to merge. Global merger and acquisition activity would rise as much as 35% in 2010, according to Reuters.  With cash levels high and interest rates low, stocks remain attractive.

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

China showing renewed economic expansion.  The latest economic news from China suggests that the deceleration of growth in industrial production and in retail sales evident in the first half of this year may be coming to an end. The year to year gain in industrial production, which had declined steadily from 21.3% in January to 13.6% in July, rose to 14.2% in August. Year to year growth in retail sales, which peaked at 22.1% in February of this year and declined irregularly to 17.9% in July, rose to 18.4% in August.

India raised rates.  The Reserve Bank of India increased both its lending and borrowing rates today in an aggressive move aimed at curbing inflationary pressures in the rapidly expanding economy. The country’s key rate was raised by a quarter-point to 6%.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:  The number of people who filed new claims for unemployment benefits dipped 3,000 to 450,000 in the latest week, government data showed today.  Economists polled by MarketWatch had expected initial claims to rise to 460,000 in the week ended Sept. 11. Claims for last week were revised up by 2,000 to 453,000. The four-week average sank 13,500 to 464,750. The number of people receiving extended benefits fell almost 508,000 to 4.96 million.

Retail sales improve:  Retail spending rose last month by 0.4% following a little-revised 0.3% July increase. The last was slightly greater-than-expectations for a 0.3% increase and came despite a 0.7% drop in spending on motor vehicles and parts. Less autos, retail sales rose 0.6%, an increase that was twice the Consensus expectation. So far this quarter, sales are roughly even with Q2 when sales rose at a 3.9% annual rate. 

U.S. industrial production up slightly:  U.S. industrial production slowed a bit in August from July but expanded for the 14th straight month, the Federal Reserve reported.  U.S. industrial production rose 0.2% in August, a slower pace than the downwardly revised 0.6% uptick in July.  Economists surveyed had forecast a 0.1%.  The index for business equipment rose 0.7% after a 1.0% advance.

Small business optimism index up:  Small-business owners grew slightly more optimistic about the economy in August, but most remain very cautious about plans to spend and invest, according to the National Federation of Independent Business. The optimism index edged up 0.7 of a point to 88.8. Five of the index's components fell, four rose and one was flat. Over the next three months, 8% plan to increase employment, while 13% plan to trim their workforce.

U.S. budget deficit improves:   The U.S. government's budget deficit was $91 billion in August, the Treasury Department announced.  Receipts were $164 billion in August, while outlays totaled $255 billion. The August shortfall was 13% less than recorded a year ago.   The deficit is nearly $1.3 trillion in the first 11 months of the fiscal year, the Treasury report also showed. That's $111 billion or 8% lower than the same period in fiscal 2009.

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down -1.5% year-to-date.  However, it is up from -5.3 on September 2.

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   September 2 – September 16..

WEAK INDICATORS:

Empire State Index down:  The Empire state index fell to 4.1 in September from 7.1 in August, the lowest level since July 2009. According to a report released Wednesday by the New York Federal Reserve Bank. The September reading of manufacturing in the New York was well below the high of 31.9 in April and 19.6 in June and suggests growth at a tepid pace.

Philly fed index down:  The Philadelphia Fed's manufacturing index was -0.7 in September, an improvement from the -7.7 reading in August but a figure pointing to contracting activity. Economists polled by MarketWatch expected the reading to recover to 0.0. "For the second consecutive month, firms reported a decline in both new orders and shipments”, the report said.

Producer prices up:  U.S. wholesale prices up a seasonally adjusted 0.4% in August, the Labor Department reported today.  Yet core producer prices, which exclude the volatile food and energy categories, edged up a scant 0.1%. Economists had predicted a 0.7% gain in overall produce prices and a 0.1% increase in the core rate. In the past 12 months, overall producer prices have risen 3.1%, while the core rate is up a much smaller 1.3%.

Foreclosures climb higher:  U.S. foreclosure filings rose 4% in August from the previous month but declined 5% from August 2009, RealtyTrac estimated in a report today.  One in every 381 housing units received a foreclosure filing in August, according to the report.

Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 2.70%, up from 2.54% September 2.

Oil up: Crude oil for October delivery settled 78 cents lower at $76.02 a barrel on the New York Mercantile Exchange. Oil is up from $74 at our last September writing.  The Energy Department's Energy Information Administration earlier reported a decrease of 2.5 million barrels of oil in the nation's crude reserves for the week ended Sept. 10, within analysts' expectations.

Sources: Economy.com, Bloomberg, MarketWatch, Haver Analytics, IBD week of:  September 2 – September 16.

·          The Market:  

The market kicked off the new month of September with a new rally.  Since the September 1 confirmation day of the current bullish advance, the broad-based S & P 500 index has gained more than 7%.  The Nasdaq has risen 9 out of the past 10 sessions for a 9% jump.  Since the market bottom on March 6,’09  the S&P 500 is up 70%.     Year-to-date major index performance:   S & P 500  0.9%,  DJIA 1.4%,   NASDAQ   1.4%, and the S & P 600 4.7%.     Here are the past week’s results:  September 9:  211 new highs & 36 new lows,   September 10: 217 new highs & 14 new lows,  September 13: 245 new highs & 24 new lows, September 14: 232 new highs & 21 new lows, and September 15:  171 new highs &  31 new lows. Industry Group analysis:  year-to-date, 141 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   September 2 – September 16.

**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.  141 of the 197 industry groups we monitor are up year-to-date, UP from 84 September 2.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.74%, down from 2.88% September 2 and down from 4.45% March 9, ‘09, which was a 5-year high.

Volatility index down: NEUTRAL.  Also known as the ‘Fear index’, the VIX (volatility index)           is 22.7, down from 25 September 2, and still down significantly from the last bear market highs. The VIX has dropped from over 50 near the market bottom in March ’09.   According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October ‘08, and then peaked at 103.4, as panic gripped markets worldwide.  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 increasing 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 taking the lead.  The “Bearish” sentiment is 31.1%, down from 37.7% last week.    “Bullish” professional sentiment is 36.7%, up from 29.1 September 2 (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. September 2 – September 16.

● Earnings & Company Developments:         

496 of the S & P 500 companies have reported 2nd quarter earnings.  The S&P’s earnings growth for Q2 10 is 38.6%.  With the second quarter earnings period behind us, the market’s focus is now squarely on 3rd quarter earnings reports.  Year-over-year growth is expected to decelerate to 17.75% growth from the 36.56% reported in the second quarter, which was in turn down from 47.61% growth in the first quarter, according to Zacks Investment Research.  That is still a very healthy level of earnings growth.  Thomson Reuters’ earnings growth estimate for the S & P 500 in Q3’10 is 24.4%.  According to Zacks Investment Research, total earnings for the S&P 500 expected to jump 41.6% in 2010, 15.0% further in 2011.    S&P 500 firms earned a total of $548.5 billion in 2009, and are expected to earn $776.8 billion in 2010.   Companies of interest:  No companies to report.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  September 2 – September 16.

On This Day:

September 16, 1908 -- General Motors was formed in Flint, Mich., by William Durant.

Source: history; about.com

Notable & Quotable:  on Faith

“Where there is hatred, let me sow love. Where there is injury, pardon. Where there is doubt, faith.”

Saint Francis of Assisi, Italian monk & saint (1181 - 1226)

By The Numbers:  The headline of the lead article in the business section of the USA Today newspaper on Thursday 9/02/10 was “Shell shocked investors quit the (stock) market.”  In the 168 trading days prior to the article’s release, the S&P 500 was down 1.80% (total return) YTD through 9/01/10.  In the 6 trading days since the article’s release, the S&P 500 has gained +2.75% (total return).  The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: BTN Research).   

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.