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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK
May 6, 2010

Markets get Greeced
U.S. stocks fell for a second day Wednesday as worries that Europe's debt trouble is escalating. The ‘G’ in “P I I G S” (Greece) is leading the world markets lower. Yesterday, markets fell reacting to heightened concerns over Europe as violence erupted in Greece and a possible downgrade loomed over Portugal's debt (the ‘P’ in P I I G S). The European single currency fell to the lowest in 13 months against the dollar, yesterday. As uncertainty weighs on European markets, concerns have clearly spilled over to the U.S. The S & P 500 dropped about 3.5% in the last two sessions. Fears over Greece persist despite the provision of a 110 billion euro ($143.7 billion) bailout package for Greece provided by fellow euro-zone countries and the International Monetary Fund, which was consummated over the weekend. Global equity markets plunged Tuesday as the rescue package failed to dispel fears Greece's sovereign debt woes could spread to other indebted nations in the euro zone. The European Central Bank (ECB) president announced that the central bank would accept Greek bonds as collateral for loans to euro-zone banks even if they had been downgraded to junk status. The change of heart by the ECB (they had previously declared they would not ‘bail out’ single, troubled euro-member) implies that the ECB interpreted the freefall of the Greek bond market as creating a systematic risk for the euro zone. Sound reminiscent of the “Asian Contagion”? Yes. And we recall the summer of 1998 when the Asian financial crisis, which spread to the US market. A shortage of foreign exchange then caused the value of currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically, knocking the S & P 500 down nearly15%. Once the market re-focused on strong U.S. corporate fundamentals, the major market indices soared to new highs.

GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS


China said it’s tightening lending; again. The People’s Bank of China on Sunday raised the reserve requirement ratio, the percentage of deposits that banks must maintain at the central bank, by 50 basis points. The hike, effective May 10, brings the reserve requirement to 16.5% for China’s biggest banks and to 14.5% for others. It was the third hike this year, each for 50 basis points. As banks must set aside more cash, they are left with less funds to lend out. That’s the idea. Authorities are concerned about rising inflation and potential asset bubbles, especially in the real estate market.
Germany said retail sales fell more sharply than expected in March compared to the preceding month, continuing their downward path. Retail turnover, adjusted for calendar and seasonal variations, dropped 2.4% in real terms in March compared to February.
Source: Investor’s Business Daily, Wall St. Journal: April 29 – May 6.

U.S. Economic Events & Analysis:

POSITIVE INDICATORS:

Jobless claims down: The number of first-time applications for state unemployment benefits fell by 7,000 last week to a seasonally adjusted 444,000, the Labor Department reported today. Initial claims fell for the third straight week. Initial claims are down about 3% since the beginning of the year and are down about 26% compared with a year ago.
GDP remains in positive territory: Real GDP growth eased last quarter to 3.2% after the 5.6% jump during 4Q '09. The latest roughly matched Consensus expectations for 3.4% growth. Regardless, it was the third consecutive quarter of positive growth after the recession when GDP fell 3.7% peak-to-trough, a postwar record. Growth in domestic final demand picked up last quarter to a still-modest 2.2% after 1.4% 4Q growth. These rates compare to up to 9.0% in the early stages of earlier economic recoveries. Last quarter's improvement was due to consumer spending growth of 3.6% after 1.6% 4Q growth. Business spending was moderate, and government spending fell at a 1.8% rate as budget cutbacks caused state & local spending to fall (-0.7% y/y) for the fifth time in the last six quarters.
Productivity still solid: The productivity of U.S. nonfarm businesses slowed in the first quarter from 6.3% to a still-healthy 3.6% annual rate, the Labor Department today. Even with the slowdown in the first quarter, productivity has risen 6.3% over the past four quarters, the fastest growth in 48 years and nearly three times its average growth rate. In the first quarter, output increased 4.4% on an annualized basis, while hours worked rose 0.8%, the government estimated.
Manufacturing sector activity up: The ISM manufacturing index rose to 60.4% in April from 59.6% in March, showing factories continue to contribute most to the strength of the U.S. recovery. The gain was above economists' expectations for a rise to 60.1%. Seventeen of the 18 industries surveyed were growing in April. Readings above 50% in the ISM diffusion index mean that more firms say business is getting better than say it's getting worse. New orders improved significantly and the employment index rose for a fifth month. The new-orders index jumped to 65.7% in April from 61.5%. The employment index rose to 58.5% from 55.1% in March. "This is a very solid report that seems to indicate the economy is moving out of the recovery stage into the expansion stage," said one economist.
Service sector activity up : Recovery in the service sector continued last month. The Institute for Supply Management's (ISM) Composite Index for the service & construction sectors held steady in April at 55.4, the highest level since early-2006. Moreover, the series has risen considerably from a low of 37.2 late in 2008. The latest figure fell slightly short of Consensus expectations for a reading of 56.0. Pricing power continued to firm. At its strongest since September 2008, the index at 64.7 was up sharply from the 2008 low. Forty-two percent of respondents reported higher prices while just 2% reported them lower. At the worst, late in 2008, 41% reported lower prices. Since the series' inception in 1997 there has been a 65% correlation between the level of the composite index in the nonmanufacturing sector and the q/q change in real GDP for the services and the construction sectors. (ISM surveys more than 370 purchasing managers in more than 62 industries including law firms, hospitals, government and retailers).
Consumer sentiment improves: The University of Michigan reported that its index of consumer sentiment for the full month of April slipped from March to 72.2. That was, however, improved from the mid-month reading of 69.5 and was 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.
Consumer spending up: Real U.S. consumer spending increased 0.5% to a record high in March, at last surpassing the pre-recession peak set in November 2007, the Commerce Department estimated. However, savings are down. With spending growing much faster than incomes in March, the personal savings rate fell to 2.7%, the lowest since September 2008. For the first quarter, real consumer spending rose at a 3.6% annualized rate, the fastest rate in three years, while real disposable incomes were flat.
Jobs market improving: National Employment Report indicated that private nonfarm payroll levels rose in April by 32,000, the third consecutive month of increase. The gain roughly matched Consensus expectations. The U.S. Bureau of Labor Statistics will report April payroll employment this Friday. For comparison, the March increase of 19,000 in ADP's measure of private nonfarm payrolls was accompanied by a rise of 123,000 jobs in the BLS measure of private sector payrolls.
Layoffs declining: The outplacement firm Challenger, Grey & Christmas reported that the level of layoffs fell last month to 38,326. It was the lowest level since mid-2006 and remained well under the cycle-high of 241,748 in January of last year. The decline was led by sharply lower layoffs in the government, computer, energy, entertainment, and retail industries. An increased level of layoffs occurred in the construction, financial, health care and utility industries.
U.S. pending home sales up: The pending home sales index rose a seasonally adjusted 5.3% in March, and was up 21.1% compared with a year earlier, the National Association of Realtors said. For March, sales contracts rose 12.7% in the South, 1.9% in the West and 1.2% in the Midwest. Contracts declined 3.3% in the Northeast. The strong results in February and March likely reflect more demand before the credit expires.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -5.4% year-to-date. Down further from -3.2% 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 3.54%, still down and near the 3.76% last week. Rates are now at the lowest level since mid-December.
Oil down: Crude oil for June delivery slumped $2.77, or 3.4%, to $79.97 a barrel on the Comex division of the New York Mercantile Exchange. That is the lowest price for a most-active contract since March 15, according to FactSet Research. This is down from last week at $83.22 a barrel. The Energy Information Administration on Wednesday said crude-oil inventories rose 2.8 million barrels in the week ended April 30, which included a 1.7 million increase in inventories in Cushing, Okla., the delivery point for Nymex oil. Analysts surveyed by Platts had expected crude stocks to increase by 1.54 million barrels.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: April 29 – May 6

WEAK INDICATORS:

Construction activity down : Construction activity remains depressed. The negligible 0.2% uptick in March after the 2.1% February collapse left it near the lowest level since 2003, according to the Census Bureau. The latest rise barely beat Consensus expectations for a 0.3% dip. Total private construction activity continued lower in March, led down by a 1.1% drop in residential building activity. The decline reflected a 6.3% drop (-58.1% y/y) in multi-family building activity. However, there is one area of strength. Single-family construction activity rose 1.6% (17.2% y/y). It has risen consecutively m/m since last June.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: April 29 – May 6.

· The Market: The US stock market quickly down shifted into correction mode since last week. Fear and uncertainty have investors in their grips. While fundamentals have strengthened, weak European economies and terrorists scares in our homeland have caused a market sell-off from recent highs. Volatility has soared with rising fears. 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% since the March 6th ’09 low). Year-to-date major index performance: S & P 500 4.6%, DJIA 4.2%, NASDAQ 5.9%, and the S & P 600 12.2%. Since December 21, new highs have been dominating new lows. Here are the past week’s results: April 29: 510 new highs & 17 new lows, April 30: 490 new highs & 21 new lows, May 3: 375 new highs & 23 new lows, May 4: 106 new highs & 67 new lows, and May 5: 95 new highs & 95 new lows. Industry Group analysis: year-to-date, 176out of 197 groups we monitor are positive.
Source: Investors Business Daily. April 29 – May 6.
**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. 176 of the 197 industry groups we monitor are up year-to-date, down from last week’s 187.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.57%, up a little from last week and down from 4.45% March 9, ‘09, which was a 5-year high.
Volatility index down: BEARISH. Also known as the ‘Fear index’, the VIX (volatility index) is 25.7, up from 21.3 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 18.6%, up from 18 last week. “Bullish” professional sentiment is 56, up from 54 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 29 – May 6.


● Earnings & Company Developments: In a word: earnings are GREAT. Words two and three: EASY COMPARISONS. The blended earnings growth rate (estimated & reported) for the S&P 500 for Q1 2010 is 55.5% versus an estimated earnings growth rate of 27.5% for Q2 2010. As of January 4th, the earnings growth rate was at 37.2%. Of the 394 (79%) S&P 500 companies who have reported Q4 results, 78% beat estimates, 7% were in-line, and 15% were below estimates. (Data provided by Thomson Reuters). Companies of interest: American Medical Systems (AMMD) soared over 22% yesterday on its report of recent financial strength. The company said its earnings gained 17% while revenues improved by over 9%.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet. April 29 – May 6.

On This Day:
May 6, 1915 -- Babe Ruth of the Boston Red Sox hit the first of his 714 major league home runs in a 4-3 loss to the New York Yankees at the Polo Grounds.
Source: history; about.com

Notable & Quotable: on Careers
"Find out what it is in life that you don't do well, and then don't do that thing."
Jonathan Goldsmith, ‘The most interesting man in the world”.

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6111 Bollinger Canyon Rd. Ste 100, SAN RAMON, CA  94583

925.275.0200

Published by Valentine Capital Asset Management
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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.