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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK
May 27, 2010

All P I I G S are BEARS
Stocks across the so-called PIIGS region, the not-so-favorable acronym that refers to the five countries that makeup the troubled second tier of euro-zone members Portugal, Italy, Ireland, Greece & Spain are down more than 20% from highs reached in April, with the exception of Greece, which hit its bear market earlier. Italian, Portuguese and Irish stock markets joined Spain and Greece in bear market territory Tuesday, as markets across the Continent suffered through another heavy wave of selling pressure in moves that have become almost commonplace over the past few weeks. We now have a new “swine flu”. Portugal, the third southern Europe market to hit bear territory on Tuesday, has been a focus of bond markets on concerns that the slow-growing economy (it had its first year-on-year period of expansion in six quarters during the first quarter of 2010) will make it difficult for the country to meet debt obligations. The two largest banks in Ireland are down nearly 40% in May. Spain’s banking sector is also weak as the Spanish government seized one of its savings banks over the weekend and four Spanish savings banks unveiled a merger deal late Monday. Meanwhile, our stock market has also been weak with fear of catching the flu. Cutting through it all, though, the PIIGS countries are estimated to only have accounted for only 3% of US exports in 2009. So, the US should remain well.

GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS

The Organization for Economic Cooperation and Development said the industrial world's economy is recovering at a faster-than-expected pace but faces growing danger from woes over sovereign debt as well as the prospect of emerging economies overheating. The OECD, whose members include the world's 30 richest nations, said it now expects gross domestic product across member countries to grow by 2.7% this year and by 2.8% in 2011, up from its November projections of 1.9% and 2.5% growth, respectively.
China today said its State Administration of Foreign Exchange, the agency which manages the nation's reserves, said media reports that it is considering selling some of its holdings of bonds in the euro zone were "groundless," according to a statement published on its website.
Germany said its investor confidence has dropped. The sentiment measure took a hit this month amid rising worries over the impact of the debt crisis in Southern Europe. The Mannheim-based Center for European Economic Research said its May economic expectations index fell to 45.8 from 53.0 in April, with the decline exceeding expectations for a drop to 47.0.
Source: Investor’s Business Daily, Wall St. Journal: May 20 – May 27.

U.S. Economic Events & Analysis:

POSITIVE INDICATORS:

Jobless claims down: The number of people applying for unemployment benefits fell 14,000 to a seasonally adjusted 460,000 in the week ended May 22, the Labor Department reported today. Economists expected a result of 458,000. Altogether, 9.87 million people were collecting some type of unemployment benefits in the week ended May 8, down about 78,000 from the prior week.
New home sales up: U.S. sales of new homes jumped nearly 15% in April to the highest level since May 2008. April sales rose to a seasonally adjusted annual rate of 504,000, the Commerce Department reported. This follows an almost 30% gain in March. Sales in April were far beyond the 425,000 rate that economists had expected. Compared with April 2009, last month's sales were up 47.8%, a rate not seen since January 1992. In April, the number of unsold new homes on the market dropped 7% to 211,000, the fewest since October 1968. That represented a 5.0-month supply at the April sales pace, the leanest inventory since December 2005.
Existing home sales up: Resales of homes in the U.S. real estate market rose 7.6% during April to a seasonally adjusted annual rate of 5.77 million as buyers rushed to complete sales before the expiration of a tax credit, according to data released Monday by the National Association of Realtors. Sales came in stronger than the 5.63 million pace expected by economists. However, inventories surged 11.5% to 4.04 million last month. The inventory level represented an 8.4-month supply at the April sales pace. The median price is up 4% in the past year at $173,100, according to NAR figures.
Mortgage activity up: Lower interest rates are encouraging mortgage refinancings, but not so much new home purchases. The Mortgage Bankers Association reported that mortgage applications jumped last week and for May they've risen 11.5% from April. Mortgage refinancings jumped for the third consecutive week to the highest level since last October. Conversely, applications to purchase a home dropped sharply with the expiration of the Federal tax credit for home purchase.
Consumer confidence up: The Conference Board Consumer Confidence Index increased in May, its third consecutive monthly gain. The Index now stands at 63.3, up from 57.7 in April. The Present Situation Index increased to 30.2 from 28.2. The Expectations Index improved to 85.3 from 77.4 last month. The consumer expectation index jumped to pre-recession (August ’07) levels. The percentage of consumers expecting business conditions will improve over the next six months increased to 23.5 percent from 19.7 percent, while those expecting conditions will worsen declined to 11.5 percent from 12.4 percent. Consumers were also more confident about future job prospects. Those anticipating more jobs in the months ahead increased to 20.4 percent from 17.7 percent, while those anticipating fewer jobs declined to 17.7 percent from 19.9 percent. The proportion of consumers anticipating an increase in their incomes improved to 11.3 percent from 10.5 percent.
Durable goods orders up: New orders for U.S.-made capital goods increased a strong 2.9% in April, marking the fourth increase in the past five months, the Commerce Department reported. Orders were boosted by robust demand for civilian aircraft. But excluding the volatile transportation sector, April's orders were down 1.0%, the first drop in three months. March data on orders for durables were revised to show virtually no change, an improvement compared with a 0.6% decline previously estimated. Economists surveyed had been looking for a 2.5% gain in durable-goods orders overall for April. Durable-goods orders have been on a clear upward trend since hitting a bottom in March 2009. Indicating the U.S. economy on the mend, orders are up 16.8% on a year-on-year basis.
Chicago area business activity up: The Chicago Fed indicated that its National Activity Index (CFNAI) rose to 0.29 from an upwardly revised March level. The increase was to the highest level since 2006 and added to earlier gains from the series' low of -4.14 reached in January '09. During the last ten years there has been a 76% correlation between the index level and the q/q change in real GDP.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -7.6% year-to-date. It is down further from -7.3% last week. The CRB has had one of its worst periods this month since March of ’09. The index is now at nearly a 9-month low.
Benchmark interest rate down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.19%, down from 3.37% last week. Rates are now at the lowest level since mid-December.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: May 20 – May 27.

WEAK INDICATORS:

GDP revised lower: The U.S. economy grew at a 3.0% pace in the first quarter - lower than the 3.2% previously reported - owing mainly to smaller increases in consumer spending and investment in business software, the government said today. Economists expected first-quarter growth to be revised up to 3.5%.
Home prices down: Home prices fell 0.5% in March compared with February in 20 major U.S. cities, according to the Case-Shiller home price index released. Prices fell in 13 of the 20 metropolitan areas tracked by Case-Shiller in March compared with February. However, prices have moved up 2.3% in the past year, marking the second consecutive gain. In the past year, prices were higher in 10 of 20 cities, led by a 16.2% rise in San Francisco. The largest annual decline was 12% in Las Vegas.
Oil up: Crude oil for July delivery gained $2.76 to settle at $71.51 a barrel yesterday. This is up from $69.87 last week. However, oil has lost 17%.The DOE's Energy Information Administration data showed an increase of 2.4 million barrels in the week ended May 21, whereas analysts surveyed by Platts had expected an increase of 100,000 barrels.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: May 20 – May 27.

· The Market: Volatility continues to dominate the daily market action. Hundred point swings are the norm. Market direction reversals have occurred more often as the market has opened higher and closed lower, and vice-versa. The VIX, as referenced below, has shot up sharply week-over-week, indicating the increase in the market’s volatility. While corporate and economic fundamentals have strengthened, weak European economies 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 60% since the March 6th ’09 low). Year-to-date major index performance: S & P 500 -4.2%, DJIA -4.3%, NASDAQ -3.2%, and the S & P 600 3.5%. Here are the past week’s results: May 20: 229 new highs & 14 new lows, May 21: 48 new highs & 40 new lows, May 23: 69 new highs & 70 new lows, May 25: 101 new highs & 53 new lows, and May 26: 35 new highs & 69 new lows. Industry Group analysis: year-to-date, 112 out of 197 groups we monitor are positive.
Source: Investors Business Daily. May 20 – May 27.
**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. 112 of the 197 industry groups we monitor are up year-to-date, down from last week’s 143.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.85%, up from 2.70% 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 34.3, down from 35.9 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 ’09, but has doubled from recent lows. 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: BULLISH. 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 29.2%, up from 24.7 last week. “Bullish” professional sentiment is 39.3%, down from 43.8% last week ( and down from 56% 3-weeks ago). 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 20– May 27.


● Earnings & Company Developments: Earnings for the S & P 500 have been strong. The blended earnings growth rate (estimated & reported) for the S&P 500 for Q1 2010 is 57.2%. Of the 487 (97%) S&P 500 companies who have reported Q4 results, 78% beat estimates, 8% were in-line, and 14% were below estimates, according Thomson Reuters. Zacks Investment Research data shows S&P500 earned $547.1 billion in 2009, expected to earn $760.5 billion in 2010, $895.6 billion in 2011. Current “Top Down” earnings estimates for the S&P 500 are: $79.96 for 2010, $93.28 for 2011. Companies of interest: Apple , as of yesterday, has overtaken Microsoft to claim the number two spot in the ranking of American companies as measured by market capitalization. At $222 billion, Apple only trails Exxon Mobil which has a $279 billion market cap. Microsoft’s market capitalization fell Wednesday to $219 billion
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet. May 20 – May 27.

On This Day:
May 27, 1937 -- The Golden Gate Bridge connecting San Francisco and Marin County, Calif., opened.
Source: history; about.com

Notable & Quotable: on Stubbornness
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”
John Adams, US diplomat & politician (1735 - 1826)

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.