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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

June 17, 2010 

BP makes a BD

British Petroleum will make a $20 billion bank deposit (over time to an escrow account), the company announced yesterday.  Following President Obama’s Oval Office speech the night before, BP said it will establish a $20 billion escrow fund to compensate victims of the Gulf oil disaster.   The company will deposit the account ("Independent Claims Facility") the next 4 years.  BP will initially make payments of $3 billion in the third quarter and $2 billion in the fourth quarter. After that a payment of $1.25 billion will be made per quarter until a total of $20 billion has been paid in, the company said.  Obama had said he would "make BP pay," and the company's chairman said after four hours of intense White House negotiations yesterday that BP was ready. Obama said the $20 billion is not a cap, and added that BP will pay the full costs of the cleanup including environmental damage.  BP also announced that it will suspend $7.5 billion in dividend payments this year, and will implement a "significant reduction" in its 2010 capital spending budget of $20 billion and increase planned divestments to approximately $10 billion over the next 12 months.  Wall St. welcomed the news as both BP stock and bonds rose in price.

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 its investor’s confidence index dropped.  The percentage excess of those looking for improvement over those looking for deterioration dropped to 28.7% in June from 45.8 % in May. 

UK jobs market mixed.   The number of British workers claiming jobless benefits fell more than expected last month, while the unemployment rate edged higher in the three months ending in April, the Office for National Statistics said.  The number of benefits claims fell by 30,900 in May, exceeding forecasts for a decline of 20,000.  Meanwhile, the unemployment rate rose to 7.9% in the February-to-April period, the ONS said, up from 7.8% in the previous three months.

Source: Investor’s Business Daily, Wall St. Journal:  June 10 – June 17.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Leading economic indicators up:  The index of leading economic indicators rose 0.4% in May, following no growth in April, the Conference Board said today.  Economists polled by MarketWatch had expected the index to gain 0.7%. Five of the 10 indicators that make up the index rose in May, with the largest positive contribution from the interest rate spread. The largest negative contribution came from stock prices.

Consumer sentiment up:  The University of Michigan indicated that its mid-June measure of consumer sentiment added to earlier gains and rose to 75.5, its highest level since January 2008. Since its low late in 2008 the measure has risen by more than one-third. During the last ten years there has been an 89% correlation between the level of sentiment and the year-over-year change in real consumer spending. The index of expected economic conditions led last month's advance with a 2.8% increase to 70.7. The index was up 43.7% from the 2008 low. The readings for the expected change in personal finances (-3.3% y/y) and expected five-year business conditions (1.2% y/y) both improved. Expectations for business conditions during the next year slipped (+14.5% y/y). Sentiment about current economic conditions also improved to the highest level since early-2008 and it was up 44.2% from the 2008 low.

US industrial production up:  Output of the nation's factories, mines and utilities rose 1.2% in May after a 0.7% gain in April. This beat analysts’ expectations, who were forecasting a 1% increase in output.  It was the largest increase since August. Industrial production is up 10 of the past 11 months.  With output rising 7.6% compared with a year earlier, companies are putting more of their resources to work. Capacity utilization rates climbed from 73.7% to 74.7% overall, the highest since October 2008. The utilization rate in manufacturing increased from 70.8% to 71.5%.

Philly Fed up:  Manufacturing activity increased in the Philadelphia region for the 10th straight month in June, but at a much slower pace than in May, according to a monthly survey of companies released today by the Federal Reserve Bank of Philadelphia. The Philly Fed index fell from 21.4 in May to 8.0 in June. Economists were expecting the index to strengthen to 22. Readings over zero indicate growth, with the smaller number in June indicating fewer firms were growing than in May.

Empire State index up:  The Federal Reserve Bank of New York reported that its June Empire State Factory Index of General Business Conditions increased modestly to 19.57 after a sharp May decline. Nevertheless, the June level suggests positive growth in factory sector activity. The latest reading matched Consensus expectations.

CPI down:  U.S. consumer prices decreased in May for the second straight month as gasoline prices fell, the Labor Department reported today. 

PPI down:  U.S. wholesale prices fell a seasonally adjusted 0.3% in May -- the largest decline since February -- as prices for energy and food goods declined, the Labor Department reported.  The core rate in May, which excludes volatile energy and food prices, rose 0.2%, the seventh monthly gain in a row. Economists surveyed by MarketWatch had expected overall producer prices to fall 0.6%, and for the core to gain 0.1%.  Over 12 months, overall producer prices are up 5.3%. The core is up 1.3% over 12 months, the largest gain since September.

Rates will stay down, say economists:  Economists at 14 top U.S. banks have pushed back their estimate of the first Federal Reserve interest-rate increase until the middle of next year, according to their latest forecast released by the American Bankers Association.  At the start of the year, the economists had generally expected the Fed to start tightening by December and saw a risk of higher inflation.  The Fed can afford "a wait and see attitude" because inflation is not a threat, the consensus is now.  In its forecast released this morning, the ABA's economic advisory committee said consumer price inflation will slow to nearly 1% this year and rise to just 1.8% in 2011.

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down -6.8%   year-to-date. However, the index is up  from -10.7% last week.

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   June 10 – June 17.

WEAK INDICATORS:

Jobless claims up:  First-time applications for state unemployment benefits rose by 12,000 last week to a seasonally adjusted 472,000, the Labor Department reported today.  The previous week's initial claims were revised higher by 4,000 to 460,000. The total number of people collecting unemployment benefits of any kind fell by 350,000 to 9.47 million in the week ending May 29 from 9.82 million. The number of people collecting federal benefits fell by 170,000 to 5.28 million.
US retail sales down:  Retail sales declined 1.2% last month following an upwardly revised 0.6% April rise. The drop disappointed Consensus expectations for a 0.2% increase. Nevertheless, sales have risen 5.7% since the recession's end last June.

Home construction drops:  U.S. home builders sharply reduced construction as a federal tax break for home buyers expired, according to the Commerce Department.  Housing starts fell 10% to a seasonally adjusted annual rate of 593,000 in May, the lowest level since December. The details were even worse, as starts of single-family homes plunged 17% to a seasonally adjusted rate of 468,000, the lowest in a year.  It was the largest percentage decline in single-family starts since 1991.  Housing starts were up 7.8% compared with May 2009, but are down more than 70% from the peak.

Home builders’ more pessimistic:  Pessimism among U.S. home builders grew in June after a tax break for home buyers expired, according to a monthly survey released Tuesday by the National Association of Home Builders.  The housing market index dived to 17 in June from 22 in May, the NAHB reported. The index was lower than the 21 that was expected by economists.  At 17, the index shows that roughly one-in-six builders think the housing market is good.  The index is down from a peak of 72 in 2005.

Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.26%, up from 3.18% last week. Rates are now at the lowest level since mid-December. 

Oil up: July oil lost 62 cents, or 0.8%, to $76.34 a barrel. This is up from $74.38 last week.  The Energy Information Administration reported an increase of 1.7 million barrels from the week ended June 11. Analysts surveyed by Platts expected a decrease of around 1.75 million barrels. 

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  June 10– June 17.

The Market:     The huge government debt problem among European countries continues to fuel worries over the global economy and has the stock market stuck in a trading range.  As we noted last week, the markets’ confirmed rally attempt failed, sending the US stock market is back in correction mode. Volatility continues to dominate the daily market action.  And, as the volatility would have it, the market has just as quickly turned back to a confirmed uptrend this week, as the major indices surged Tuesday on high volume.    Since the previous market rally began in March 6,’09 the S & P 500 is up 67%.    Year-to-date major index performance:            S & P 500 0%,  DJIA -0.2%,   NASDAQ   1.6%, and the S & P 600 6.7%.     One bullish trend has been re-established: the daily 52-week new high vs. new low list has turned positive with highs exceeding lows.  Here are the past week’s results:  June 10:  56 new highs & 69 new lows,   June 11:  75 new highs & 37 new lows,  June 14:  128 new highs & 28 new lows, June 15:  112 new highs & 27 new lows, and June 16: 114 new highs & 23 new lows.    Industry Group analysis:  year-to-date, 142 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   June 10 – June 17.

**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 snaps back to confirmed uptrend:  BULLISH

Industry group strength broad :  BULLISH.  142 of the 197 industry groups we monitor are up year-to-date, up from last week’s 83.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.82%, down from 2.92% 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 25.8, down from 33.5 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 32.6%, up from 31.9 last week.    “Bullish” professional sentiment is 37%, down from 38.5% 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 10 – June 17.

● Earnings & Company Developments:   The first quarter earnings season was a remarkably strong one, both relative to year-ago results, and relative to the expectations going into the quarter. There were 375 positive earnings surprises, versus only 76 disappointments, for a ratio of 4.93. The median surprise is 6.67%, which is very strong.  Historically the surprise ratio tends to be around 3.0 and the median surprise at about 3.0%.  Q1 is essentially done.  Of the 495 (99%) S&P 500 companies who have reported Q4 results, 78% beat estimates, 8% were in-line, and 14% were below estimates, according to Thomson Reuters. The blended earnings growth rate (estimated & reported) for the S&P 500 for Q1 2010 is 57.4%, while the estimated earnings growth rate is 27.4% for Q2 2010. Top line growth was also positive: Total revenues reported were 11.9% above the revenues a year ago. This extraordinary revenue growth is all the more impressive in that it is happening in a very low inflation environment. Looking forward to the second quarter, total revenues are expected to be up 6.3% from a year ago, according to Zacks Investment Research.  According to Zacks, S & P500 earned $545.5 billion in 2009; expected to earn $716.4 billion in 2010, $868.7 billion in 2011.S&P 500 earned $57.50 in 2009, $75.48 in 2010 and $92.10 in 2011 expected bottom up.Companies of interest:  No companies to report.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  June 10– June 17.

On This Day:

June 17, 1885 -- The Statue of Liberty arrived in New York City aboard the French ship Isere.

Source: history; about.com

Notable & Quotable:  on Trust

“A person who trusts no one can't be trusted.”

Jerome Blattner, author

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.