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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

September 2, 2010

LESS IS MORE

GDP was revised down, less than previous forecast, but more than revision expectations. U.S. economic growth slowed to 1.6% in the second quarter, the Commerce Department said Friday, two-thirds the rate that the agency had initially projected for the April-through-June.  The good news was economists had expected lower revision of 1.4%.  The sharply downward GDP revision from the 2.4% growth initially pegged was largely expected after the release of June inventories and imports reports.  Fed chairman Bernanke said following the report that the trade balance deterioration likely reflected a number of temporary and special factors that won't be the case in coming quarters.

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Euro-zone  keeps rates low and raises outlook.   The European Central Bank raised its euro-zone growth projections for this year and next.  The ECB also maintained its key lending rate at a record-low 1%.  ECB staff now project that annual real gross-domestic-product growth will range from 1.4% to 1.8% in 2010 and from 0.5% to 2.3% in 2011. ECB's chief Trichet said a "double dip is not in the cards."

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:  The number of people applying for unemployment benefits fell by 6,000 to 472,000 in the week ended Aug. 28, but first-time claims remain at an elevated level, government data showed today.  Economists had expected initial claims to total about 473,000.  The four-week average of initial claims declined 2,500 to 485,500.  Jobless claims have risen 10% since early July.  Altogether, 9.7 million people were collecting some type of unemployment benefits in the week ended Aug. 7, compared with 10.1 million in the last week of July.

Consumer confidence improves:  The Conference Board indicated that consumer confidence rebounded moderately this month following two months of sharp decline. Their consumer confidence index rose 4.9% month-over-month to 53.5 following a 6.1% July decline that was less than reported initially. Nevertheless, the August level remained down 14.7% from the May high. Consensus expectations had been for an unchanged reading month-over-month. The August improvement was due to a rebound in consumer expectations. The expectations component of confidence rose 7.4% m/m and recovered all of its July decline. The index remained more than double the recession low. Consumers expect the inflation rate in twelve months to be 4.9%, a material decline from recent months' expectations and down from the 2008 high of 7.7%. However, consumers' assessment of the present situation remained depressed and fell a sharp 5.7% this month after a 1.5% July drop.

ISM factory index up:  The Institute for Supply Management said Wednesday that it’s closely watched index of factory activity rose to 56.3% in August from 55.5% in July. The gain in the ISM was well above the 53.2% expected by economists.  "There is no sign of double-dip in manufacturing right now," one economist said. The stock market soared on the better-than-expected news.

Layoff announcements down:  U.S. employers announced 34,768 job cuts during August, the lowest monthly total in a decade, outplacement firm Challenger, Gray & Christmas Inc. reported.  August marked the slowest month of job-cut announcements since June 2000, when employers announced only 17,241 planned layoffs.  The August total was down by 17 percent, from 41,676 in July, and by 55 percent, from 76,456 cuts announced in August 2009. For the year, announced job cuts are down by 65 percent – to less than 375,000, from 1.07 million for the first eight months of 2009.
Benchmark interest rate down: Yesterday’s closing yield on the benchmark 10-year Treasury was 2.54%, down from 2.63% last week. On Monday, benchmark 10-year Treasury yields touched an intraday low of 2.56%, the weakest since March 20, 2009. 

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down -5.2% year-to-date. 

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   August 26 – September 1.

WEAK INDICATORS:

Jobs market seen weaker:  U.S. private-sector employment fell 10,000 in August, according to the ADP employment report. This breaks a six-month run of increases. Additionally, ADP revised down the July level to a gain of 37,000 from a prior estimate of a 42,000 increase.  Tomorrow, the government is scheduled to report nonfarm payrolls for August, and economists polled by MarketWatch are looking for an overall decline of 105,000, including an expected increase of 25,000 jobs in the private sector.

US productivity revised lower:  The productivity of American businesses fell a revised 1.8% in the second quarter, the biggest drop in almost four years and twice as much as the government initially reported. Last month, the Labor Department estimated that productivity fell 0.9% to mark the first decline in five quarters. Real output grew just 1.6% in the second quarter, compared with a prior estimate of 2.6%. Output expanded at a much faster 5% rate in the first three months of 2010. Hours worked rose at a 3.5% annualized rate -- the fastest in four years.

Oil up: Crude oil for October delivery ended floor trading up $1.99, or 2.8%, to $73.91 a barrel yesterday, the biggest one-day rise for the most actively traded contract since August 2, according to FactSet Research. Oil is up from $72.52 last week.  The Energy Information Administration said crude-oil inventories for the week ended Aug. 27 increased 3.4 million barrels, less than a trade group estimated late Tuesday but more than the 1.9 million addition expected by analysts polled by Platts.

Sources: Economy.com, Bloomberg, MarketWatch, Haver Analytics, IBD week of:  August 26 – September 1.

·          The Market:  

Perhaps the understatement of the year:  the stock market was weak last month.  In fact, it was the worst August for the market since 2001.   The Dow shed 4.3% last month, its first down August in five years.  The S&P 500 and the Nasdaq also posted their worst August performance since 2001, down 4.7% and 6.2% respectively.   Small-capitalization stocks, seen as leading indicator of the economy, have taken an even bigger hit this month. The Russell 2000 index of small-cap stocks posted its worst August performance in 12 years.  AND, now it’s September - - one of the worst months of the year in recent history.  Four times in the past decade alone, the S&P 500 shed at least 5 percent in September. The average September decline since 1950 is 0.6 percent, according to the Stock Trader's Almanac.   However, yesterday was a strong kick-off to this September.  Since the market bottom on March 6,’09  the S&P 500 is up 62%.     Year-to-date major index performance:   S & P 500  -3.1%,  DJIA -1.5%,   NASDAQ   -4.1%, and the S & P 600 0.5%.    Here are the past week’s results:  August 26:  61 new highs & 272 new lows,   August 27: 117 new highs & 149 new lows,  August 30: 121 new highs & 182 new lows, August 31: 116 new highs & 217 new lows, and September 1:  219 new highs &  46 new lows. Industry Group analysis:  year-to-date, 84 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   August 26 – September 1.

**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 signals possible new rally:   BULLISH

Industry group strength broad :  BEARISH.  84 of the 197 industry groups we monitor are up year-to-date, down from last week’s 91.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.88%, up from 2.84% last week 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 25, down from 28.8 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.   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 decreasing 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 bears taking the lead.  The “Bearish” sentiment is 37.7%, up from 33.3% last week.    “Bullish” professional sentiment is 29.1%, down from 31.1 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. August 26  – September 1.

● Earnings & Company Developments:         

Second quarter earnings season are shaping up as a very strong one. Of the 493 (99%) S&P 500 companies who have reported Q2 results, 75% beat estimates, 9% were in-line, and 16% were below estimates, according to Thomson Reuters.  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. The S&P 500 is selling for 18.6x 2009 earnings, but just 13.1x 2010, which, by historical standards, that is quite cheap. Normally, when interest rates and inflation are low, P/E ratios are higher than average.    As we note above, we currently have some of the lowest rates of inflation in decades and interest rates are at or near record lows. In addition to “bottom-line” earnings, “top-line” sales are also strong.  The S&P 500 reported revenues up 11.0% year over year in 2Q, down from 12.0% revenue increase the same firms showed in the 1Q. This is a very healthy level of revenue growth. Companies of interest:  G-III Apparel reported that, for the three months ended July 31, 2010, net sales increased by 39% to $189.0 million from $135.9 million in the second quarter last year. This increase was stronger than expected.  Net income for the second quarter of fiscal 2011 improved to $3.0 million, or $0.15 per diluted share, compared to a net loss of $2.8 million, or $0.17 per share, in the year-ago quarter. This shift to profitability was driven by the increase in sales and improved margins in the Company’s wholesale and retail businesses. G-III revised its expectations upward for its fiscal year ending January 31, 2011. Both earnings and sales guidance were raised.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  August 26 – September 1.

On This Day:

September 2, 1969 -- The first automatic teller machine to use magnetic-striped cards opened to the public at Chemical Bank in Rockville Centre, New York.

Source: history; about.com

Notable & Quotable:  on Labor Day

“If all the cars in the United States were placed end to end, it would probably be Labor Day Weekend.”

Doug Larson

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.