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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

July 1, 2010

Half-Time

As the second half of 2010 begins today, the US stock market ends a weak first half.  The S & P 500 closed yesterday at its’ lowest level since last October 2. We have made specific mention of two recent confirmed rally attempts that quickly reversed.  Looking ahead to a (hopefully!) more positive 2nd half, August has in recent history provided successful rallies.  2003, 2004, 2006 and 2007 sustained rallies all started in August. 

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

China shows signs of slowing economy.   The China Federation of Logistics & Purchasing said its purchasing managers' index fell to 52.1, compared to 53.9 in May. The result missed a 53.1 consensus forecast in a Reuters poll of economists.   

Japan see’s more business optimism.  The Bank of Japan's quarterly tankan survey of business sentiment released today showed that large manufacturers' sentiment turned positive for the first time in two years, buoyed by strong exports. The index for large manufacturers improved more than expected to a positive reading of 1, beating the forecast of minus 4 predicted by economists, and rising from minus 14 in the March survey.

Ireland economy turns positive.   Ireland's gross domestic product grew by 2.7% in the first three months of 2010, government data showed, ending eight consecutive quarters of economic contraction thanks largely to the strength of the nation's export sector.

Source: Investor’s Business Daily, Wall St. Journal:  June 24  – July 1.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

More jobs (barely):  U.S. private-sector firms created a lackluster 13,000 jobs in June, according to the ADP employment report.  Economists had been expecting the ADP report to show a 65,000 increase. Economists surveyed by MarketWatch are forecasting stronger private-sector job growth of 115,000 when the Bureau of Labor Statistics reports its estimates on Friday.

Chicago area economic activity remains strong:  Manufacturing activity in the Chicago region slipped a bit in June but remained at relatively high levels, according to media reports of the purchasing managers' index for the Chicago region.  The Chicago purchasing managers index fell to 59.1% from 59.7% in May. The drop was in line with forecasts.

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down -8.8% year-to-dates. It is down further from -8.4% last week.

Benchmark interest rate down: Yesterday’s closing yield on the benchmark 10-year Treasury was 2.94%, down from 3.12% last week. Rates are now at the lowest level since April of 2009.

Oil down (slightly): Crude for August delivery declined 8 cents, or 0.1%, to $75.87 a barrel.  This is down slightly from $76.35 last week.  Oil has gained 2.6% so far this month, following losses of 14% in May and gains of 2.8% in April. For the quarter, oil has lost 9.4%, which threatens to break a string of five winning quarters. Separately, the Energy Information Administration said that crude-oil inventories dropped 2 million barrels on the week ended June 25, at the top of the range of expectations. Crude-oil futures fell 3% Tuesday as a downward revision of a leading Chinese economic indicator sparked a broad market sell-off.

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   June 24 – July 1.

WEAK INDICATORS:

Jobless claims up:  The Labor Department said the number of people filing first-time claims for unemployment benefits climbed 13,000 in the latest week to 472,000. Economists had expected initial claims to fall to 455,000.  Claims have fallen 22% from one year ago, but are up 4% since the start of 2010, according to data from the Labor Department. The four-week average of initial claims -- a better gauge of employment trends than the volatile weekly number - rose by 3,250 to 466,500, the highest level in almost three months.

Consumer confidence down:  The Conference Board said that its consumer confidence index plummeted to 52.9 in June -- the lowest level since March -- from a downwardly revised 62.7 in May. Economists had expected a June reading for consumer confidence of 62.8. Consumers' view on the present situation and their expectations deteriorated in June, with both reaching the lowest levels since March, according to the Conference Board. Their view on the present situation fell to 25.5 in June from 29.8 in May, while the expectations barometer declined to 71.2 from 84.6.  Buying plans have definitely changed: Consumers with plans to buy a home within six months fell to 1.9% in June - the lowest level since 1982 other than 1.7% in December, according to the Conference Board.

Manufacturing index down:  The Institute for Supply Management (ISM) index fell from 59.7% in May to 56.2% in June. It's the lowest since December. Economists were expecting a drop to about 59%. Readings over 50% indicate most firms are growing. The new orders index fell from 65.7% in May to 58.5% in June. The production index fell from 66.6% in May to 61.4% in June.

Pending home sales down:  New sales contracts on existing homes fell sharply in May after a federal subsidy for buyers expired at the end of April. The pending home sales index plunged 30% in May after rising 23% between January and April, the National Association of Realtors said today.

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  June 24 – July 1.

·          The Market:   The market’s second rally attempt in June reversed back into correction mode.  Both the June 1 and the June 15th confirmed rallies failed.   Underscoring how weak the Dow was in Q2, ALL 30 components were down, with the best being McDonald’s, which ONLY lost 0.4%.  Since the market bottom on March 6,’09 the S&P 500 is up 55%.    Year-to-date major index performance:   S & P 500 -7.6%, DJIA -6.3%,   NASDAQ   -7%, and the S & P 600 -1.4%.     Here are the past week’s results:  June 24:  18 new highs & 56 new lows,   June 25: 14  new highs & 102 new lows,  June 28: 11 new highs &  147 new lows, June 29: 29 new highs & 132 new lows, and June 30: 32 new highs & 215 new lows.    Industry Group analysis:  year-to-date, 75 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   June 24 – July 1.

**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 to correction mode:  BEARISH

Industry group strength broad :  BEARISH.  75 of the 197 industry groups we monitor are up year-to-date, but down from last week’s 126.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.84%, up from 2.75% 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 34.2, up from 27.7 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: NEUTRAL.  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 33.3%, up from 31.1 last week.    “Bullish” professional sentiment is 41.1%, same as 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 24 – July 1.

● Earnings & Company Developments:  

All is quiet now on the earnings front (until the flood of 2Q reports soon come in). As noted last week, 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:  No companies to report.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  June 24 – July 1.

On This Day:

July 1, 1863 -- The Civil War Battle of Gettysburg began.

Source: history; about.com

Notable & Quotable:  on Summer

“It's a sure sign of summer if the chair gets up when you do.”

Walter Winchell, US gossip columnist & broadcast journalist (1897 - 1972)

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.