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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

April 22, 2010

Consume Boom

The revival appears to be loud and clear with consumer spending.  The renewed strength has been most noticeable since early March.  Forecasts of spending have been beat.  Earnings at retailers, both bricks and clicks, have surprised to the upside.  Restaurants have benefited from consumers.  Car sales are up.  New home sales up.  Existing home sales are up.  Last week’s Commerce Department report on overall retail sales for March was the best in a decade.  No surprise, consumer – related stocks have led the stock market rally.  The surprise IS, though, the strength of the consumer.  Unemployment is high.  Consumer confidence is low.  Sentiment of future economic condition and job security among those with jobs is at best nervous.  Once again we see the market (and the consumer) “climb the wall of worry”. 

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

The global economy's expected to grow about 4 1/4% in each of the next two years, a reversal after having shrunk 0.6% last year, as emerging markets expand much faster than laggards in the advanced world, the International Monetary Fund said. "The world economy is poised for further recovery but at varying speeds across and within regions," the international financial institution said in its World Economic Outlook, published ahead of the combined spring meetings of the IMF, the World Bank and the Group of 20 nations.

China remains hot! The country’s GDP was up  11.9% year-over-year in Q1, the fastest pace since 2007Q2 and a tad above the 11.7%  consensus .

Japan reported Consumer Confidence in the country has improved.  After reaching a low point of 26.7 in December 2008, the index rose steadily through October, 2009.  Though it declined in November and December, the index has risen in each of the past three months and is now at 41.0 in March.

Germany said investor sentiment posted a much stronger-than-expected jump in April, boosted by rising exports, the Mannheim-based Center for European Economic Research, or ZEW, reported.  The ZEW index jumped to 53.0 from 44.5 in March, exceeding expectations for a more modest rise to 46.0. The index measures expectations for the next six months. The ZEW current conditions index also improved, rising to -39.2 from -51.9. This was the first increase since September of last year and its magnitude exceeded consensus estimates of a rise.  

Euro zone sees indications of economic growth.  Private-sector activity across the 16-nation euro zone in April rose at a pace not seen in more than 21/2 years, offering further signs the region's economic recovery is gaining momentum, according to a preliminary reading of a survey of purchasing managers.

UK reported higher than expected inflation.  March consumer prices rose 3.4% vs. a year earlier, the government said, well above the Bank of England’s 2% target. Higher energy prices were behind the increase. Analysts expect inflation to ease amid weak growth. Separately, the U.K. said the number of British workers claiming jobless benefits fell more than expected last month, but the total number of unemployed continued to rise, hitting the highest level in more than 15 years

Source: Investor’s Business Daily, Wall St. Journal:  April 15 – April 22.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:   The number of people filing an initial claim for unemployment benefits declined by 24,000 last week to a seasonally adjusted 456,000, the first drop in three weeks, the Labor Department reported today. 

Leading economic indicators up:  The index of leading economic indicators rose 1.4% in March, marking 12 consecutive gains, following an upwardly revised increase of 0.4% in February, according to the Conference Board.  Analysts had expected a gain of 1.3% in March.

Housing starts improvement continues:  Starts rose 1.6% in March to a seasonally adjusted 626,000 annualized units, the Commerce Department reported.  This was stronger than the 610,000 pace expected by economists.  February starts were revised higher to a 616,000 pace from the 570,000 previously reported. This was up 1.1% from the prior month. The initial estimate had been a 5.9% drop. As a result of the revisions, starts have risen for three straight months and are now at their highest level since November 2008.

Empire State index up:  The Federal Reserve Bank of New York reported that its April Empire State Factory Index of General Business Conditions rose to its highest level in six months. As a result it was near the highest since 2004. At 31.86, the diffusion index was up from its recession low of -32.29 in March 2009. The latest level suggests positive growth in factory sector activity and it beat Consensus expectations for a reading of 24.0.

Existing home sales up:  Resales of existing homes rose 6.8% in March to a seasonally adjusted annual rate of 5.35 million from a downwardly revised 5.01 million in February, a real estate trade group reported today. Sales rose in all four regions of the country in March.  Sales were up 16.1% compared with March 2009. Inventories of unsold homes increased 1.5% in March to 3.58 million, an 8-month supply at the current sales pace. Inventories have come down from the peak, but are still above normal levels.

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.

Benchmark interest rate down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.73%, down from 3.85% last week.

Oil down:  Crude oil for June delivery finished 17 cents, or 0.2%, lower at $83.68 a barrel. Crude-oil futures finished Wednesday's floor session with a minor loss as a surprise gain in inventories overshadowed some optimism about demand for refined products.

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   April 15 – April 22.

WEAK INDICATORS:

Consumer sentiment drops:  The University of Michigan reported that its mid-April index of consumer sentiment fell to 69.5 from 73.6 and was at its lowest level since November. The figure fell well short of Consensus expectations for a reading of 75.0. Nevertheless, sentiment remained up considerably from the low late in 2008. 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.

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  April 15 – April 22.

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 retail and technology sectors.  Supporting the upward momentum has been higher volume.    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.%  since the March 6th ’09 low).    Year-to-date major index performance:   S & P 500 8.1%,  DJIA 6.7%,   NASDAQ   10.4%, and the S & P 600 16.1%.   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 16:  528 new highs & 4 new lows, April 19: 608 new highs & 9 new lows, April 20:  468 new highs & 8 new lows, and April 21:  636 new highs & 16 new lows.    Industry Group analysis:  year-to-date, 188 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   April 15  - April 22.

**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, this is the same last week.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.51%, about the same as last week’s 2.53% 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 15.4, down slightly from 15.5 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 17.4%, down from 18.9 last week.    “Bullish”  professional sentiment is 53.3, up from 51.1 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 15 – April 22.

● Earnings & Company Developments:   The 1st quarter earnings season is off to a great start.  The blended earnings growth rate (estimated & reported) for the S&P 500 for Q1 2010 is 46.4%.  As of January 4th, the earnings growth rate was at 37.2%. Of the 98 (~19%) S&P 500 companies who have reported Q41results, 85% beat estimates, 7% were in-line, and 8% were below estimates, according to Thomson Reuters.       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.  Thomson forecasts an earnings growth rate of 24.9% for Q2 2010.  Companies of interest:  Apple Computer, announced it earned $3.33 a share for the quarter that ended March 27. That’s up 86% from a year ago and 36% higher than analysts had expected. Sales surged 49% to $13.5 billion, 12% above Wall Street’s target. The company reported selling 8.75 million iPhones in its fiscal second quarter, up 131% from a year ago and better than many Wall Street forecasts. Apple said international sales accounted for 58% of the quarter’s revenue, the second straight quarter where Apple got the majority of its sales from outside the U.S. The company got 58% of its sales from overseas in the first quarter, too. Its’gross profit margin was 41.7%, up from 39.9% in the year-ago quarter. Apple’s sales guidance for the current quarter topped Wall Street’s views.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  April 15 – April 22.

On This Day:

April 22, 1864 -- Congress authorized the use of the phrase "In God We Trust" on U.S. coins.

Source: history; about.com

Notable & Quotable:  on Effort

Initiative is to success what a lighted match is to a candle.

Orlando Battista, chemist

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.