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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK
May 13, 2010

The need for Cash Flow
We have long been on an income theme, and on this score, the equity market is starting to figure it out. Last month, 25 S&P 500 companies boosted their dividends (one initiated); a big shift from a year ago when 14 raised and 10 cut their payouts. So far this year, 105 companies have raised their dividends while only two have cut them (for 2009, 157 lifted and 78 cut). This is all good news since historically, 30-40% of the stock market total return has come from reinvested dividends. Here’s another of many reasons to like cash flow (especially from equities): VOLATILITY! First: U.S. stocks ended with steep losses Thursday after an afternoon meltdown lopped nearly 1,000 points off the Dow Jones Industrials Average -- its biggest intraday drop ever -- before a comeback of sorts (the Dow ONLY closed down about 350 points) as Europe's troubles took hold on Wall Street and talk of errant trades exacerbated the swift selloff. Then: U.S. stocks made their biggest one-day gain in 13 months Monday (jumping 404 points!), re-establishing gains for the year, after an agreement on a nearly $1 trillion rescue plan to stabilize Europe lured investors back to a badly shaken market. Cash flow from corporate investments are likely to remain steady and predictable as they have a lot of cash to pay investors or acquire other companies. Recent dividend increases and merger activity reflect that.

GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS

Japan is seeing a flight to quality also. Investors favored safe-haven assets amid continued concern about the euro zone's financial health. Japan’s benchmark 10-year yield eased 0.01 percentage point to 1.305%.
China said inflation exists. Its’ stock market in “bear” decline. The Chinese government said consumer prices rose 2.8% in April vs. a year ago, up from 2.4% in March. In April, the year to year percent change in the Producer Price Index was 6.8%, up from 5.9% in March and from -6.99% in September of last year. Home prices in 70 cities climbed 12.8% in April from a year ago, the most since records began five years ago. Bank lending jumped to $113 billion from $75 billion in March despite government efforts to curb lending. Other data showed retail sales, industrial output and investment soaring over year-ago levels. Down more than 20% from a November peak, Chinese stocks are technically in a bear market.
UK said its industrial production improved. Production rose 2% in March vs. Feb., the best monthly gain in almost 8 years, the government said, raising hopes that the economic recovery is on a sustainable path. Output was also up 2% vs. a year ago, the most since March ’04. The Office for Nat’l Statistics said the data would add 0.1 percentage point to Q1 GDP.
Source: Investor’s Business Daily, Wall St. Journal: May 6 – May 13.

U.S. Economic Events & Analysis:

POSITIVE INDICATORS:

Jobless claims down: The number of people applying for unemployment benefits essentially held steady at 444,000 in the latest week, declining 4000, the Labor Department reported today. Initial claims have fallen just 2.2% since the beginning of the year, but they are 29% lower compared with a year ago. Altogether, 10.07 million people were collecting some type of unemployment benefits in the week ended April 24, down 332,264.
JOBS: The U.S. added 290,000 jobs in April, the biggest increase since March 2006, with broad gains throughout the economy. In addition, payroll data for the prior two months was revised to show that 121,000 additional jobs were created than initially reported. Yet the unemployment rate rose. Economists surveyed by MarketWatch had predicted the economy would add 185,000 jobs for April. They also forecast no change in the jobless rate. The unemployment rate ticked up to 9.9% from 9.7% owing to a big increase in the labor force. Hiring has risen in the first four months of the year, reversing nearly two straight years of job losses after the recession that began in December 2007. About 1.66 million jobs have been created since January, the best four-month performance in 10 years, according to Labor's survey of U.S. households. THERE IS A LONG WAY TO GO, THOUGH. About 8.2 million jobs were wiped out during 2008 and 2009. One economist estimates job increases would have to average 400,000 a month to return to a 6% unemployment rate by the end of 2013.
JOLTS steady: The Bureau of Labor Statistics reported that labor market conditions remained in a state of flux during March. The latest Job Openings & Labor Turnover Survey (JOLTS) indicated that the job openings rate held steady at 2.0% with a downwardly revised February reading. 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 1.8% after the downwardly revised February decline. Nevertheless, the latest availability level was improved by 0.9% year-to-year. Last year job availability fell 17.8% following a 29.7% decline during 2008. The series dates back to December 2000.
More indication of job market improvement: U.S. job creation ramped up in March, with U.S. private-sector businesses increasing their hiring 4.8% to a seasonally adjusted 3.89 million in March, the most in 14 months, said the Labor Department. Including government agencies, the number of people hired increased 5.8% to 4.24 million, also the most since January 2009. In February and March, the number of people leaving work voluntarily exceeded the number laid off for the first time since October 2008. Since the recession began in December 2007, separations have fallen by about 19% while hiring has dropped about 16%. Quits fell 35%. Layoffs surged 43% from December 2007 to April 2009, but have now fallen to pre-recession levels. With 2.69 million job openings and 15 million people officially classified as unemployed, there were 5.6 potential applicants for each opening, about the same as in February but down sharply from the 6.2 ratio in November.
Small Business optimism up: Small business activity may finally be joining with the broader economic improvement. The National Federation of Independent Business (NFIB) reported their April small business optimism index jumped m/m to 90.6 which is the highest level since September 2008. The number of companies reporting that inventories were too low jumped to the highest level since 2005. Improvement in company earnings this quarter was not far behind, with a rise to the highest level since 2008. Most other components including expectations for the economy and credit conditions showed moderate improvement. During the last ten years there has been an 85% correlation between the level of the NFIB index and the two-quarter change in real GDP.
Retail chain store sales stay firm: After rising sharply in early-April chain store sales last week continued sideways. Nevertheless, sales remained dramatically improved and posted a 4.3% y/y gain after having been flat as recently as February
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -5.8% year-to-date. It is down further from -5.4% last week. 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 3.57%, near the 3.54% rate last week. Rates are now at the lowest level since mid-December.
Oil down: Crude for June delivery lost 72 cents, or 0.9%, to settle at $75.65 a barrel yesterday. This is down from $79.97 last week. The Energy Information Administration reported an increase of 1.95 million barrels in the nation's oil inventories, slightly above analyst expectations. In its latest revision, the International Energy Agency lowered by 220,000 barrels a day its forecast for global oil demand for 2010.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: May 6 – May 13

WEAK INDICATORS:

US trade deficit widens : The U.S. foreign trade deficit broke from its range and deepened in March. The deficit of $40.4 billion compared to a little-revised $39.4 billion during February. The latest figure roughly matched Consensus expectations for a deficit of $40.0 billion. Nevertheless, the latest deficit was the deepest since December of 2008.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: May 6 – May 13.

· The Market: The US stock market quickly down shifted into correction mode since last week. Fear and uncertainty have investors in their grips. After losing nearly 1,000 points (the largest fall ever) intra-day last Thursday, the market’s volatility has soared. While corporate and economic -fundamentals have strengthened, weak European economies and terrorists scares in our homeland have caused a market sell-off from recent highs. As we have noted, the S & P 500 has not had a pullback exceeding 10% since the market rally began in early March (the S & P 500 is up 76% since the March 6th ’09 low). Year-to-date major index performance: S & P 500 5.1%, DJIA 4.5%, NASDAQ 6.9%, and the S & P 600 15%. Since December 21, new highs have been dominating new lows. Here are the past week’s results: May 6: 102 new highs & 301 new lows, May 7: 30 new highs & 119 new lows, May 10: 84 new highs & 8 new lows, May 11: 118 new highs & 30 new lows, and May 12: 237 new highs & 23 new lows. Industry Group analysis: year-to-date, 182 out of 197 groups we monitor are positive.
Source: Investors Business Daily. May 6 – May 13.
**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 SHIFTS TO CORRECTION MODE: BEARISH
Industry group strength broad : BULLISH. 182 of the 197 industry groups we monitor are up year-to-date, down from last week’s 176.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.66%, up from 2.57% last week and down from 4.45% March 9, ‘09, which was a 5-year high.
Volatility index down: BULLISH. Also known as the ‘Fear index’, the VIX (volatility index) is 25.4, about the same as 25.7 last week, but still down significantly from the last bear market highs. 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 24.7%, up from 18.6% last week. “Bullish” professional sentiment is 47.2%, down from 56% 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%. 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. May 6 – May 13.


● Earnings & Company Developments: Of the 446 (89%) S&P 500 companies who have reported Q4 results, 77% beat estimates, 7% were in-line, and 16% were below estimates, according to Thomson Reuters. While the S&P 500 earned $57.55 in 2009, $80.01 in 2010 and $93.60 in 2011 are expected by Zacks Investment Research. S&P 500 reported revenues up 13.1% year over year in 1Q, up from over 6.9% revenue increase the same firms showed in the 4Q. Companies of interest: No companies to report.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet. May 6 – May 13.

On This Day:
May 13, 1940 -- Winston Churchill told the British House of Commons in his first speech as prime minister, "I have nothing to offer but blood, toil, tears and sweat."
Source: history; about.com

Notable & Quotable: on Tolerance
“Think for yourselves and let others enjoy the privilege to do so too.”
Voltaire, French author (1694 - 1778)

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.