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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

April 8, 2010

Ben upbeat again 

Federal Reserve Chairman Ben Bernanke was notably more upbeat Wednesday about the economic outlook than he has been at any time since the financial crisis began in the summer of 2007.  Ben Bernanke said his "best guess" was that the economic conditions would continue to improve this year, and growth would be strong enough to slowly reduce the unemployment rate. "If economic conditions improve, as I expect, we should see increased optimism among consumers and greater willingness on the part of banks to lend, which in turn should aid the recovery," Bernanke said.  Bernanke also said that the economy was far from out of the woods.  He cited two areas of concern: continued weak bank lending and no sign of a sustained recovery in the housing market. On the topic of interest rates, Bernanke did not repeat the Fed's pledge to maintain short-term interest rates at exceptionally low levels for an "extended period." He instead said that growth this year would be supported by the Fed's stimulative monetary policy.  Regarding higher price pressures, Bernanke said inflation appears to be well controlled in the near term.

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Japan said its central bank, The Bank of Japan, unanimously voted Wednesday to keep its key interest-rate target steady at 0.1%, as widely expected, as it gauges the effects of its liquidity-boosting steps on the Japanese economy.

 China said its government is preparing to announce in the coming days that it will allow its currency to strengthen slightly and vary more from day to day, a move being taken for domestic policy reasons in China but likely to please the Obama administration, people with knowledge of the emerging consensus in Beijing said today. 

Euro Zone business activity up.  The regions purchasing manager’s index rose 2.2 points in March to 55.9, the best since August 2007.

Source: Investor’s Business Daily, Wall St. Journal:  April 1 – April 8.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Payrolls jump and unemployment rate unchanged:  For starters, payrolls expanded 162,000. Though the gain was slightly less-than-expected, the increase followed a lessened decline of 14,000 in February. Also, a slight decline in January payrolls was revised to a small increase.  However, Census workers contributed just 48,000 to last month's payroll gain.  Secondly, the Bureau of Labor Statistics reported that, all-in-all, labor market conditions firmed somewhat more-than-expected last month. From the household survey, the unemployment rate held steady for the third month at an expected 9.7%.

Service sector activity strong:  The service sector clearly is on the road to recovery. The Institute for Supply Management's (ISM) Composite Index for the service & construction sectors rose in March to 55.4 from 53.0 in February. It was the third consecutive monthly indication of solid expansion and was the index's highest level since early-2006. Moreover, the series has risen considerably from a low of 37.2 late in 2008. The latest figure exceeded Consensus expectations for a reading of 54.0.

Retailers sales up (thanks to Easter):  The International Council of Shopping Centers on Tuesday raised its March sales estimate to an increase of 8% to 10%, up from a previous outlook of a gain of 3% to 3.5%. The updated growth forecast could represent the sector's biggest increase since March 1994. About six percentage points of the expected gain reflected the contribution from Easter falling this year on April 4, and thus being included as part of retailers' March reporting month, instead of April 12 last year. Good weather also helped.  March was the fifth warmest in 50 years in North America, according to weather consulting firm Planalytics.

JOLTS remain improved: The Bureau of Labor Statistics reported that the rate of improvement in job market conditions eased in February. The latest Job Openings & Labor Turnover Survey (JOLTS) indicated that the job openings rate slipped to 2.1% from an upwardly revised 2.2% in January. Nevertheless the rate was near the highest in roughly one year. The job openings rate is the number of job openings on the last business day of the month as a percent of total employment plus job openings. Job availability fell 4.6% and retraced nearly half of its upwardly revised January increase. It remained off 3.8% year-to-year. Last year’s job availability fell 17.8% following a 29.7% decline during 2008.

Pending home sales improve:  The National Association of Realtors (NAR) reported that pending sales of existing single-family homes recovered virtually the entire January decline with an 8.2% increase. The recovery left home sales up nearly one-quarter from the low in January of last year. The latest gain compares with Consensus expectations for a slight m/m decline.

Consumer debt declining:  U.S. households paid down their debts in February for the 15th time in the past 17 months, the Federal Reserve reported.  Outstanding consumer credit dropped by $11.5 billion, or a 5.6% annual rate, to $2.45 trillion in February following an upwardly revised $10.6 billion increase in January. Debts had declined for 12 straight months before January's increase and are down 5.2% from the peak in July 2008.  Additionally, the American Bankers Association said delinquencies on consumer debts owed to banks declined once again in the fourth quarter.

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:   April 1 – April 8.

WEAK INDICATORS:

Jobless claims up:   The number of people applying for unemployment benefits rose 18,000 to a seasonally adjusted 460,000 in the week ended April 3, the Labor Department reported today. Economists surveyed by MarketWatch had expected a result of 442,000.

Oil up:  May delivery fell 96 cents to $85.88 a barrel yesterday. That’s up from $83.76 last week. The U.S. Energy Information Administration said there was a larger-than-expected increase in weekly oil inventory stockpiles since last week.

Benchmark interest rate stay higher: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.85%, about the same as 3.82% last week and up from 3.64% two weeks ago.

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  April 1 – April 8.

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.   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 77.4%  since March 6th).    Year-to-date major index performance:   S & P 500 6%,  DJIA 4.5%,   NASDAQ   7.1%, and the S & P 600   11.6%.   Since December 21, new highs have been dominating new lows.  Here are the past week’s results:  April 1: 447 new highs & 16 new lows,   April 5:  695 new highs & 12 new lows, April 6: 684 new highs & 10 new lows, and April 7:  498 new highs & 10 new lows.    Industry Group analysis:  year-to-date, 181 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   April 1 - April 8.

**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.  181 of the 197 industry groups we monitor are up year-to-date, up from 178 last week.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.54%, about the same as last week’s 2.55% 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 16.1, down from 16.8 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 18.9%, down from 19.1 last week.    “Bullish”  professional sentiment is 48.9, near the same as 48.3 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. April 1 – April 8.

● Earnings & Company Developments:   With the very strong fourth quarter earnings season now fully behind us, we are starting to see a handful of firms report their first quarter results. So far 22 firms, or 4.4% have done so, according to Zacks Investment Research.    First quarter earnings are expected to be up 21.4% year over year. Revenue growth of 6.2% expected year over year.    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:  AAPL, Apple Computer, released its newest new thing.  The new iPad that went on sale over the weekend costs Apple Inc. approximately $260 to produce for the cheapest version, which retails for $499, according to a tear-down study released by iSuppli.  Apple said Monday that it sold more than 300,000 units on the first day.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  April 1 – April 8.

On This Day:

April 8, 1974 -- Hank Aaron of the Atlanta Braves hit his 715th career home run, breaking Babe Ruth's record.

Source: history; about.com

Notable & Quotable:  on Baseball

If it weren't for baseball, many kids wouldn't know what a millionaire looked like.

Phyllis Diller

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.