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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

April 1, 2010

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Japan said its quarterly tankan survey of business sentiment released Thursday showed significantly less pessimism among the nation's biggest firms.  The tankan's headline diffusion index for large manufacturers improved to minus 14, and rising from minus 25 in the December survey.

China said its manufacturing activity accelerated in March, data compiled by two competing industrial surveys showed today, adding to the case that the economy may have enough momentum for the government to withdraw its stimulus more aggressively. The data suggested China's gross domestic product expanded at more than 11% in the January-to-March period from a year earlier.

Europe sees improving economic sentiment. The Economic Sentiment Indicator (ESI) of the European Commission for the 16 countries in the Euro Area rose to 97.9 in March from 95.9 in February.  The ESI for the 27 countries in the European Union rose to 99.6 from 97.6.  Both indicators have risen substantially from their low points reached in February and March of this year and are close to their long term average of 100, but are well below their pre crisis peak. 

Germany said its jobless rate fell by a seasonally-adjusted 31,000 in March, defying expectations for a rise and raising hopes a feeble recovery by Europe's largest economy is gaining traction. Economists had forecast a March rise of 10,000.

UK said the British economy returned to growth in the final quarter at a slightly faster pace than previously estimated, with gross domestic product expanding by a revised 0.4% compared to the previous three months, the Office for National Statistics reported.

Source: Investor’s Business Daily, Wall St. Journal:  March 25 – April 1.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:   The government said the count of those filing for first-time jobless benefits fell last week.  The Labor Department said those filing claims fell 6,000 to a seasonally adjusted 439,000, while the four-week average declined by 6,750 to 447,250, the lowest level since September 2008.

GDP growth intact:  Last quarter was a strong one for the U.S. economy and the revised picture is little different from the one depicted earlier. The latest revision, however, lowered the growth rate slightly to 5.6% from 5.9%. Nevertheless, last quarter's growth remained the best since 3Q 2003 and it pushed the y/y change into (slightly) positive territory for the first time since early-2008.

Consumer confidence  up:  For March the Conference Board reported that its consumer confidence index reversed much of the prior month's slide with a 13.1% increase to 52.5. The latest figure was in the middle of the range that's been in place last spring and the rebound outpaced the Consensus expectation for a rise to 50.0. The percentage of consumers who thought business conditions were bad fell to 42.8%, off nearly ten points from its peak one year ago. During the last ten years there has been an 83% correlation between the level of consumer confidence and the y/y change in real consumer spending.

Consumer spending up:  The University of Michigan reported that its index of consumer sentiment for the full month of March held steady at 73.6 with February. That was, however, up from the mid-month reading and up considerably from the low late in 2008. The figure was slightly higher than Consensus expectations. The index reached a high of 74.4 this past January. During the last ten years there has been a 90% correlation between the level of sentiment and the y/y change in real consumer spending.

Factory orders up:  Demand for US manufactured goods rose by 0.6% in February, more than economists expected. The increase is the 10th in the past 11 months, and indicates a building momentum in manufacturing that could translate into gains for production and the broader economy.

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down   -3.5% 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:   March 25 – April 1.

WEAK INDICATORS:

ADP forecasts further jobs weakness:  U.S. private sector companies shed 23,000 jobs in March, according to the ADP employment report released yesterday, casting a pall on expectations that the labor market was healing.  The decline in ADP employment was a complete surprise. Economists had forecast a gain of 40,000 in March ADP.  The report comes two days before the Labor Department reports on nonfarm payroll growth for March and calls into question optimistic forecasts. Economists had been looking forward to Friday's unemployment report, believing that it would show the strongest job growth since the recession began in December 2007, with consensus calling for a jobs increase of 190,000. 

Personal income and spending flat:  Overall personal income was unchanged in February following a 0.3% January increase, originally reported at 0.1%. The latest reading was the weakest since July and it disappointed Consensus expectations for a 0.1% uptick. Though moderate, these gains were enough to lift yearly income growth to 2.0% after the 1.7% decline in 2009. The three-month rate of increase also improved to 2.8%. Disposable income was unchanged after January's 0.2% decline. These moderate income gains caused the savings rate to decline to 3.1%, it’s lowest since late-2008. The rate still was up, however, from the 1.0% low at the beginning of the last recession.

US home price index down(still):  Home prices in 20 major U.S. cities fell a not-seasonally adjusted 0.4% in January compared with December, according to the Case-Shiller home-price index.  The index fell for the fourth consecutive month. Prices were down 0.7% in the past year. However, this is the closest the index has been to a positive print since January 2007.

Chicago area output slows(a little):  The Institute for Supply Management-Chicago said its business barometer slipped to 58.8 in March, from a nearly five-year high of 62.6 in February. Economists expected a reading of 60.8.

Oil up:  Crude oil for May delivery closed Wednesday's floor session with a gain of $1.39, or 1.7%, at $83.76 a barrel.  Oil has gained 5.1% in March and 5.5% for the quarter, its fifth-straight quarterly increase.

Benchmark interest rate stay higher: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.82%, about the same as 3.84% last week and up from 3.64% two weeks ago.

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  March 25 – April 1.

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 75.4%  since March 6th).    Year-to-date major index performance:   S & P 500 4.9%,  DJIA 4.1%,   NASDAQ   5.7%, and the S & P 600   8.3%.   Since December 21, new highs have been dominating new lows.  Here are the past week’s results:  March 25: 524 new highs & 15 new lows, March 26: 565 new highs & 6 new lows,  March 29:  298 new highs & 17 new lows, March 30: 335 new highs & 12 new lows, and March 31:  271 new highs & 19 new lows.    Industry Group analysis:  year-to-date, 178 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   March 25 – April 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 in confirmed uptrend:  BULLISH. 

Industry group strength broad :  BULLISH.  178 of the 197 industry groups we monitor are up year-to-date, down from 183 last week.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.55%, about the same as last week’s 2.58% 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 16.8, down from 17.4 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 19.1%, down from 21.3 last week.    “Bullish”  professional sentiment is 48.3, near the same as 48.9 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 25 – April 1.

● 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, through last Friday, 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.    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:  RIMM, Research In Motion Ltd. stated that earnings jumped 37% for the fourth fiscal quarter on strong sales of the company's BlackBerry line of mobile phones. The company said revenue jumped 18% to $4.08 billion.  The company benefitted from strong international sales during the quarter. International sales accounted for 48% of total revenue for the period. However, total Smartphone shipments for the quarter were on the low side of analysts' forecasts.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  March 25– April 1.

On This Day:

April 1, 1965 -- American forces invaded Okinawa during World War II.

Source: history; about.com

Notable & Quotable:  on Tolerance

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Kahlil Gibran , Lebanese artist & poet in US (1883 - 1931)

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.