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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

June 24, 2010

18th straight

The Federal Reserve Bank kept interest rates on hold at a record low near-zero on yesterday for the 18th straight month.  The Fed has kept rates near zero since December 2008, hoping to spur growth. At the end of its two-day meeting, policy makers for the Bank said they would maintain their commitment to keep "exceptionally low levels of the federal funds rate for an extended period."  While that was widely anticipated, the change in the Fed’s economic view was not.  The Fed downgraded its outlook for the economy, saying that the recovery was "proceeding" -- not strengthening as they had said in April. They referred to our financial turmoil this spring as a result of the European debt crisis. "Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," the statement said.  Combining the Fed’s rate policy and concerns over Greece and other south European countries, economists remain worried about the impact of a weak Europe on U.S. growth, but don’t think the Fed will move rates up until it is certain that the budding recovery can stand on its own after government stimulus is removed.

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Asia's rich has surpassed that of Europe for the first time.   Rebounding markets in Hong Kong, mainland China and India helped lift Asia's population of high-net-worth individuals (those with investible assets of at least $1 million) to about 3 million in 2009, matching the number in Europe for the first time, according to a recent survey.   But in terms of the wealth controlled by those affluent persons, Asia's total of $9.7 trillion, a rise of 31% from 2008 levels, edged ahead of the $9.5 trillion in Europe, the survey said.

Germany said business sentiment improved in June compared to the previous month, exceeding market expectations and signaling that euro-zone debt woes haven't dampened confidence among businesses in the continent's biggest economy.

Euro-zone said manufacturing is down.   The euro-zone flash manufacturing purchasing managers index fell a four-month low of 55.6 in June from 55.8 in May, and the services PMI dropped to a two-month low of 55.4 from 56.2 in May, according to data from Markit.

Canada will be the host of the G-20 meeting this weekend.  The G-20 sessions will discuss policies on energy, climate change and trade, as well as peace and security - - and of course, economics. The G-20 includes 19 major economies plus the European Union, and encompasses more than three-fourths of global output and two-thirds of the population.

Source: Investor’s Business Daily, Wall St. Journal:  June 17 – June 24.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:  First-time applications for state unemployment benefits fell by 19,000 last week to a seasonally adjusted 457,000, the lowest in six weeks, the Labor Department reported today. However, the total number of people collecting unemployment benefits of any kind rose by 155,000 to 9.66 million in the week ending June 5 from 9.51 million. Initial claims are down about 24% compared with the same week a year ago but are down only about 1% since the first of the year. Continuing claims are down about 30% compared with a year ago and down about 9% since the first of the year.

Mortgage activity up:  Low interest rates continue to fuel lending by mortgage bankers. For June so far, The Mortgage Bankers Association reported that applications were up modestly from May and were 13.3% higher than last year. Firm lending activity continued to reflect strong refinancings. Weekly applications for mortgage refinance fell last week. However, so far in June applications rose month-over-month and were 50% higher than last year. 

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down -8.4% year-to-dates. It is down further  from -6.8% last week.

Benchmark interest rate down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.12%, down from 3.26% last week. Rates are now at the lowest level since mid-December. 

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   June 17 – June 24.

WEAK INDICATORS:

Durable-goods orders fell:  Orders for durable-goods fell 1.1% in May, the Commerce Department reported today. A 29.6% drop in orders for civilian aircraft accounted for most of the decline. Excluding the drop in transportation orders, orders were up 0.9% in May, the third increase in the past four months.

Existing-home sales drop:  Resales of U.S. homes and condominiums fell 2.2% to a seasonally adjusted annual rate of 5.66 million in May despite the boost from a federal tax credit for home buyers, according to National Association of Realtors data.  Economists had been expecting sales to rise about 6% to an annual rate of 6.11 million units, thinking that the expiration of the tax credit at the end of June would force some buyers to act.  Sales of existing homes surged last fall with the first tax credit and are up 19% compared with a year ago. Inventories of unsold homes fell 3.4% in May to 3.89 million -- an 8.3-month supply at the May sales pace.  Further, the median sales price last month was $179,600, up 2.7% from May 2009.

New home sales down:  Sales of new single-family homes plunged 33% in May to a record-low level after a federal subsidy for home buyers expired, according to data released by the Commerce Department. Sales dropped to a seasonally adjusted annual rate of 300,000, the lowest since records began in 1963. April's sales pace was revised down to 446,000 compared with the 504,000 originally reported. March's sales were also revised lower. Sales fell sharply in all four regions, with sales down more than 50% in the West. The median sales price in May was $200,900, down 9.6% from a year earlier and the lowest since December 2003.The results were much worse than expected, and economists had expected a 20% decline to a seasonally adjusted annual rate of 405,000. Home builders continued to shed inventories in May, cutting the number of unsold homes by 0.5% to 213,000, the lowest level in 39 years. 
Oil up: Crude oil for August delivery declined $1.50, or 1.9%, to settle at $76.35 a barrel yesterday.  This is the same from $76.34 last week.  The DOE's Energy Information Administration said oil inventories increased 2 million barrels in the week ended June 18. Analysts polled by Platts expected a decline of 1.5 million barrels in crude stocks.

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  June 17 – June 24.

·          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 above it even was the major theme of the last Fed meeting statement.   As we recently noted, the markets’ second confirmed rally attempt in 3-weeks is still intact, though already under pressure.    Since the market bottom on March 6,’09 the S&P 500 is up 64%.    Year-to-date major index performance:   S & P 500 -2.1%, DJIA -1.2%,   NASDAQ   -0.7%, and the S & P 600 3.4%.     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 17:  98 new highs & 33 new lows,   June 18: 114  new highs & 28 new lows,  June 21: 185 new highs &  32 new lows, June 22: 56 new highs & 49 new lows, and June 23: 22 new highs & 66 new lows.    Industry Group analysis:  year-to-date, 126 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   June 17 – June 24.

**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.  126 of the 197 industry groups we monitor are up year-to-date, but down from last week’s 142.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.75%, down from 2.82% 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 27.7, up from 25.8 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 31.1%, down from 32.6 last week.    “Bullish” professional sentiment is 41.1%, up from 37% last week ( and down from 56% at end of April).  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 17 – June 24.

● Earnings & Company Developments:   First Quarter earnings season and were very strong.  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%.  The year-over-year earnings growth rate for the S&P 500 for Q1 2010 is 57.4%, according to Thompson Reuters.  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, earnings are expected to be up 22.5% from a year ago, according to Zacks Investment Research.  Total earnings for the S&P 500 are expected to jump 34.7% in 2010.  Companies of interest:  Research in Motion (RIMM) will report today after the market close.  The company is expected to report earnings of $1.33 a share Thursday for the first quarter of 2011, according to analysts polled by Thomson Reuters

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  June 17 – June 24.

On This Day:

June 24, 1940 -- France signed an armistice with Italy during World War II.

Source: history; about.com

Notable & Quotable:  on Summer

“In summer, the song sings itself.”

William Carlos Williams, US poet (1883 - 1963)

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.