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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

June 10, 2010

Lots of (Temporary) Jobs

The most anticipated (and disappointing) economic data released last week was the May employment report issued by the Bureau of Labor Statistics.  On the surface, the 431,000 gain in May payrolls after an unrevised 290,000 April rise looks strong but, in fact, it was not. First, the increase was raised by the one-time hiring of 411,000 Census workers. Very temporary.  Second, the gain actually fell short of Consensus expectations for a 508,000 rise in the total. The shortfall in private sector was broad-based, and reversed the increases in the prior two months.  Looking past May, though, the jobs market trend is more positive.  Over the first five months of this year, the rise in private-sector payrolls has averaged a reasonably solid 99,000 per month, well above May's performance. More reassuringly, over the past three months, it has averaged 139,000. And speaking of ‘temporary’, another positive data point exists:  employment in temporary-help services rose in May for the eighth straight month. Since last September, temp employment has grown by more than 360,000, to nearly 2.1 million, an 18-month high. An increase in temp jobs usually signals an accelerated rise in permanent employment.

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Japan said its exports powered its current account surplus to surge 88% in April from the same month a year earlier, according to government data. 

Germany said manufacturing orders surged in April rising by 2.8% on the heels of a 5.1% gain in March. As a result the three month growth rate of orders is up to 36.7% (saar). Foreign orders are roaring at a 43.3% annual rate over three months. Domestic orders are up at a nearly 30% annual rate.

European Economic and Monetary Union (EMU) EMU GDP performed slightly better than expected in 2010-Q1. GDP is now up by 0.6% Yr/Yr the first positive Yr/Yr result since the downturn began. Austria and Italy post the strongest Q/Q numbers in 2010-Q1. Germany and France show the strongest Yr/Yr growth in Q1. The best of the Euro-Area, on this score, trail the US, Japan and Switzerland.

Source: Investor’s Business Daily, Wall St. Journal:  June 3 – June 10.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:  The number of people applying for initial unemployment benefits fell 3,000 to 456,000 in the week ended June 5, the Labor Department reported today.  Economists had expected an initial claims level of 445,000. Continuing claims in the week ended May 29, the latest data available, decreased 255,000 to 4.46 million - the lowest level since December 2008.

Ben doesn’t think there’ll be double-dip:  Fed Chairman Ben Bernanke allays fears that the U.S. economy will slip back into recession, saying consumer spending and business investment seem strong enough to keep the economy growing. Bernanke said in Congressional testimony that the pace of economic recovery won't be strong enough to fix the jobs market and cut the budget deficit, but he expects the U.S. economy to grow between 3% and 4% this year as consumer spending and business investment make up for fading government stimulus.

Beige Book shows modest economic improvement:  The Federal Reserve said in its Beige Book economic activity improved nationwide last month, but worries about Europe's debt crisis dented confidence.  "Economic activity continued to improve since the last report across all 12 Federal Reserve districts, although many districts described the pace of growth as 'modest,'" the central bank said.

Small business optimism index up:  Small businesses are joining in with the broader improvement in the economy. The National Federation of Independent Business (NFIB) reported their May small business optimism index rose m/m to 92.2. It remained the highest level since September 2008. 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.

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down -10.7%   year-to-date. This is down from -6.6% last week.

Benchmark interest rate down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.18%, down from 3.35% last week. Rates are now at the lowest level since mid-December. 

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   June 3 – June 10.

WEAK INDICATORS:

Hiring weak in May (except for Census workers):  Excluding 411,000 temporary Census workers, from the 431,000 new jobs last month, payrolls rose by 20,000 in May. The payrolls growth came in weaker than the 540,000 increase expected by economists.  The nation's unemployment rate fell to a seasonally adjusted 9.7% in May from 9.9% in April.  The decline wasn't particularly good news, however, because it reflected 322,000 people dropping out of the labor force, partially reversing April's 805,000 increase. While unemployment dropped by 287,000 to 15 million for May, employment also fell, dipping 35,000 to 139.4 million.

Consumer debt up:  U.S. consumers took on $1 billion more in debts in April, even as credit-card balances declined for the 19th straight month, the Federal Reserve reported. U.S. consumer credit (excluding real-estate loans) rose by $1 billion to $2.44 trillion in April, a 0.5% annualized growth rate. It was only the second increase in outstanding debt in the past 14 months.  Outstanding debts are down about 5.5% since peaking in July 2008.

Mortgage activity down:  The Mortgage Bankers Association reported that mortgage applications fell sharply last week reflecting a collapse in purchase applications. Overall, applications fell 12.2% in early June from the week earlier.

Oil up:   Oil futures for July delivery advanced $2.39, or 3.3%, to settle at $74.38 a barrel, yesterday.  This is up from $73 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:  June 3 – June 10.

The Market:     As we noted last week, the market had offered a confirmed rally attempt. That failed.  As of yesterday, the US stock market is back in correction mode. Volatility continues to dominate the daily market action.  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 in recent weeks, 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.   Since the previous market rally began in March 6,’09 the S & P 500 is up 58%.    Year-to-date major index performance:            S & P 500 -5.3%,  DJIA -5.1%,   NASDAQ   -4.9%, and the S & P 600 -0.3%.     Here are the past week’s results:  June 3:  94 new highs & 22 new lows,   June 4:  27  new highs & 113 new lows,  June 7:  27 new highs & 208 new lows, June 8:  24 new highs & 278 new lows, and June 9: 34 new highs & 135 new lows.    Industry Group analysis:  year-to-date, 83 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   June 3 – June 10.

**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 falls back into correction mode:  BEARISH

Industry group strength broad :  BEARISH.  83 of the 197 industry groups we monitor are up year-to-date, down from last week’s 136.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.92%, up from 2.83% 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 33.5, down from 34.1 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 declining 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 31.9%, up from 29.2 last week.    “Bullish” professional sentiment is 38.5%, down from 39.8% last week ( and down from 56% a month 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. June 3 – June 10.

● Earnings & Company Developments:   First quarter 2010 earnings were strong.  The blended earnings growth rate (estimated & reported) for the S&P 500 for Q1 2010 is 57.4% versus an estimated earnings growth rate of 27.6% for Q2 2010. As of January 4th, the earnings growth rate was at 37.2%. Of the 492 (98%) S&P 500 companies who have reported Q4 results, 78% beat estimates, 8% were in-line, and 14% were below estimates.   According to Zacks Investment Research, all sectors have more positive than negative surprises. The total net income of firms that have reported so far is 49.7% above what they reported in the first quarter of 2009. These same firms reported year-over-year growth of 104.0% in the fourth quarter, according to Zacks.  The top line improved too, as S&P 500 reported revenues up 12.3% year over year in 1Q, up from over 6.3% revenue increase the same firms showed in the 4Q.   For full year 2010, Zacks expects S & P 500 earnings growth of 35.1%.  Current “Top Down” earnings estimates for the S&P 500 are: $79.96 for 2010, $93.28 for 2011.  Companies of interest:  G-III reported Q1 results.  G-III reported that net sales increased by 43% to $154.3 million from $107.6 million in the year-ago period. The Company's net loss for the quarter was $1.4 million, or $0.07 per share, compared to $6.8 million, or $0.41 per share, in the prior comparable period.  The company offered positive guidance going forward for both sales and earnings for its next fiscal quarter.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  June 3 – June 10.

On This Day:

June 10, 1940 -- Italy declared war on France and Britain; Canada declared war on Italy.

Source: history; about.com

Notable & Quotable:  on Future

“If you're afraid of the future, then get out of the way, stand aside. The people of this country are ready to move again.”

Ronald Reagan, 40th president of US (1911 - 2004)

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.