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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

June 3, 2010

Dis MAY ed

The just-ended May was the worst May in the US stock market since 1940, when the Dow fell 22% at the outbreak of Hitler's invasion of Western Europe.  The S & P 500 dropped 8.2%.  The average domestic equity mutual fund lost 7.2%, while the average global stock fund fell over 10% in May.  European stock funds fared the worst, losing 12%.  It was the worst month for stock funds since February 2009.  As stocks fell in May, bonds rose.  Bond funds climbed to top of the performance list in May, as the largest bond index fund gained 0.87% for the month.  The good news is that history shows positive market moves following big down May’s.  As noted below, the US stock market is in a new confirmed uptrend.  We will soon see if it holds.

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

OECD maintains view of global economic improvement.  The Organization for Economic Cooperation and Development’s 35 members agreed to cut their deficits over the medium term without hurting economic growth. The OECD said the global economy will grow 4.6% this year after shrinking 0.9% in ’09, but warned of risks from aging populations, high European debt levels and a possible overheating in emerging economies.

China economic growth may be slowing.  Two key gauges of Chinese factory activity released this week both showed a slowdown in growth, suggesting that the government's steps to cool the economy could be having an effect. The official China Federation of Logistics and Purchasing managers index fell to 53.9 from 55.7 in April, and the HSBC China Manufacturing Purchasing Managers Index fell to 52.7 in May from a revised 55.2 in April.

Euro zone producer prices rose 0.9% in April as energy prices climbed, the government said. Prices were up 2.8% vs. last year.

UK manufacturing is strong.  The Markit/Chartered Institute of Purchasing and Supply’s manufacturing index was unchanged at 58, a 15-year high. The index has been above 50, indicating growth, for 11 straight months. The new orders gauge also held near April’s 6-year high and export orders rose.  

Spain said its unemployment fell 1.8% in May, the biggest drop in 5 years, to 4.06 million. Consumer confidence plunged 13.1 points in May to 65.1 amid a continued gloomy outlook for jobs and the economy, the Nat’l Credit Institute said. Spain’s jobless rate stood at 20% in Q1.

Source: Investor’s Business Daily, Wall St. Journal:  May 27 – June 3.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:   The number of people applying for state unemployment benefits fell by 10,000 to 453,000 in the latest week, the Labor Department reported today.  Economists expected a result of 455,000. While initial claims are 26% lower compared to 12 months ago, they would have to fall below 400,000 to indicate significantly improved hiring trends, economists say. Claims have basically hovered in the 450,000 range through the first five months of 2010.

ISM service sector activity up: Services industries in the US were growing for the fifth straight month in May, the Institute for Supply Management reported today.  The ISM non-manufacturing index was 55.4% in May.  The index is at its highest seasonally adjusted level since May 2006. It fell as far as 37.2% in the depths of the recession in 2008.

Consumer sentiment up:  The University of Michigan reported that its May reading of consumer sentiment rose to 73.6 from 72.2 during April. The slight m/m increase characterizes sentiment's performance during 2010. The figure has moved sideways following sharp improvement during 2009. The latest figure was as expected. Consumers’ sentiments regarding current and future economic conditions were about the same from last month.  During the last ten years there has been an 89% correlation between the level of sentiment and the y/y change in real consumer spending.

Layoffs down: According to the outplacement firm of Challenger, Grey & Christmas the level of layoffs rose slightly month-over-month during May to 38,810. Nevertheless, the figure was off by roughly two-thirds from last year and just slightly above the lowest level since 2000. Planned layoffs announced during the first five months of 2010 totaled 258,319, down 68.6% from the 822,282 announced during early-2009. In virtually all industries except entertainment/leisure and pharmaceutical layoffs were down last month versus May 2009.

US construction spending up:  Construction activity rebounded a sharp 2.7% during April after a 0.4% March uptick. The latest increase vastly exceeded Consensus expectations for a 0.1% uptick. The cause for the April rise was a 2.9% jump in private sector building off the March low. Nevertheless, private sector building was off 13.5 year-over-year and 41.2% from the early-2006 high.

Pay may increase:  A quarter of some 800 employers surveyed expect salaries for new employees to rise this year as the economy improves, up from 10% who said the same 6 months ago, according to Dice Holdings, which operates Web sites for finance, technology and health care professionals. About half said salaries would be unchanged vs. last year. A majority said they would boost hiring in the 2nd half of the year with about 10% planning a significant increase.

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down   -6.6% year-to-date. 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.    It is down 3% from a year ago.

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   May 27 – June 3.

WEAK INDICATORS:

ISM manufacturing index down slightly:  The Institute for Supply Management indicated that their May composite index of factory sector activity slipped to 59.7 from 60.4 in April. While May's figure was higher than Consensus expectations for a decline to 59.0, recent levels have been historically hard to sustain. Still, the latest figure is up from the low of 32.5 reached in December '08. A slower rate of inventory accumulation was the main source of the composite index's May weakness. The new

orders, production and vendor performance components were roughly unchanged. Notable, however, was the slight gain in the employment index to 59.8. It was the highest level since early-2004.

Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.35%, down from 3.19% last week. Rates are now at the lowest level since mid-December. 

Oil up:   Crude oil for July delivery is back up to $73 as of this morning’s trade. This is up from $71.51 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 27 – June 3.

The Market:     Volatility continues to dominate the daily market action.  Hundred point swings are the norm, as 19 of the last 26 sessions have seen triple digit moves.  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.   HOWEVER, yesterday’s positive market action resulted in a follow-through to a new rally attempt started last week.  This follow-through day qualifies as a new uptrend, which if it doesn’t fail, is a new bull rally.  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 65%  since the March 6th ’09 low).    Year-to-date major index performance:        S & P 500 -1.5%,  DJIA -1.7%,   NASDAQ   0.5%, and the S & P 600 6%.     Here are the past week’s results:  May 27:  45 new highs & 24 new lows,   May 28:  47  new highs & 62 new lows,  June 1:  56 new highs & 89 new lows, and June 2:  51 new highs & 78 new lows.    Industry Group analysis:  year-to-date, 136 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   May 27 – June 3.

**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 turns to new possible uptrend:  BULLISH

Industry group strength broad :  BULLISH.  136 of the 197 industry groups we monitor are up year-to-date, up from last week’s 112.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.83%, 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 34.1, about the same as 34.3 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 ’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 39.8%, about the same as 39.3% 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. May 27 – June 3.

● 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 492 companies in the index that have reported first-quarter earnings, 78% have exceeded analysts' expectations.   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:  No companies to report.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  May 27 – June 3.

On This Day:

June 3, 1965 -- On June 3, 1965, astronaut Edward White became the first American to ``walk'' in space, during the flight of Gemini 4.

Source: history; about.com

Notable & Quotable:  on Self

“No price is too high to pay for the privilege of owning yourself.”

Friedrich Nietzsche, German philosopher (1844 - 1900)

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.