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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

July 8, 2010

Dog Days of Summer

The hottest, most sultry days of summer are often referred to as (and perhaps not too fondly if one has been on the east coast lately) as the “Dog days of summer”.   Historically, though, the stock market is not very hot this time of year.  It is typical for volume to slow from Memorial Day until Labor Day. The slow summer months are believed to come about because traders go on vacation and the traditional stereotype is that most of Wall Street is playing on the beaches in the Hamptons.  The old adage on Wall Street that says you should “sell in May and go away” was based on the summer months being boring.  Since 1945, the Standard & Poor’s 500 has returned an average of just 1.4% from May 1st to October 31st, versus 6.7% from November 1st to April 30th. More preferably, the heat wave will weaken, and the stock market will heat up.  Yesterday’s market rally certainly got the market’s temperature up a notch. 

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

The global economy will continue to recover this year and next, despite the turbulence from Europe and worries about sovereign debt, the International Monetary Fund said yesterday.  In its World Economic Outlook the IMF said "there is little evidence of negative spillovers to real activity at the global level." In an update to its global forecast, the IMF said global growth in 2010 would come in at 4.6%, slightly stronger than the 4.2% projected in its last forecast in April, largely because of strong growth in Asia early in the year. Growth in 2011 was projected to be 4.3%, unchanged from the April WEO. The IMF forecasts US inflation will remain very low while the unemployment rate will remain above 9%.

World Economic Outlook

Source: International Monetary Fund

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:  The Labor Department said the number of people filing first-time claims for unemployment benefits sank 21,000 in the latest week to a still-high 454,000 today.  The latest weekly claims data matches the number of filings in the last week of December 2009. Economists had expected initial claims to fall to 458,000. The four-week average of initial claims, a better gauge of employment trends than the volatile weekly number, fell 1,250 to 466,000.

Chain store sales up:  Weekly chain stores improved another 1.0% last week to the highest level in two-months after the 2.1% gain during the prior week, according to the ICSC-Goldman Sachs retail chain-store sales index.  The gain lifted sales 2.2% above the depressed June average.

Mortgage activity up:  The Mortgage Bankers Association reported that mortgage applications jumped another 6.7% last week. The increase raised the level 14.6% versus June and by nearly one-half from July '09. Firm lending activity continued to reflect strong refinancings. Weekly applications for mortgage refinance jumped for the second consecutive week to the highest level since May of last year. Applications to purchase a home remained weak and fell to near the lowest level since early-1997. 

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down -8.9% year-to-date. It is down about the same as -8.8% last week.

Benchmark interest rate down: Still under 3%.  Yesterday’s closing yield on the benchmark 10-year Treasury was 2.98%, up from 2.94% last week. Rates are now at the lowest level since April of 2009.

Oil down (but up yesterday): Crude oil for August delivery gained $2.09, or 2.9%, to $74.07 a barrel yesterday. This is down slightly from $75.87 last week.  Oil futures rose for the first time in seven sessions yesterday as the U.S. Energy Information Administration revised up its global oil demand forecast.   The EIA said it still expects global oil demand to rise by 1.5 million barrels a day in 2010 and 2011, but that it had originally underestimated oil consumption for 2009. As a consequence, the U.S. agency's demand forecast for 2010 and 2011 is higher than in last month's outlook.

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   July 1 – July 8.

WEAK INDICATORS:

Payrolls drop while unemployment dips:  According to the Bureau of Labor Statistics, as the 2010 Census ended, 225,000 census jobs were lost. That accounted for most of last month's 125,000 decline in nonfarm payrolls. The overall June decline was larger than the 110,000 drop expected. The unemployment rate unexpectedly fell to 9.5% which was the lowest level since July. An increase to 9.8% had been expected. However, the decline occurred as 652,000 individuals (-0.7% y/y) left the labor force.

Service sector index down:  The June Composite Index for the service and construction sectors from the Institute for Supply Management (ISM) slipped during June to 53.8 after three months at 55.4. Nevertheless, the level was nearly the highest since early-2007 and has risen considerably from a low of 37.2 late in 2008. The latest figure fell short of Consensus expectations for a reading of 55.0

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  July 1 – July 8.

·          The Market:   While concerns over European sovereign debt and a slowdown in China have contributed to the Dow's weakness since April, the Dow's recent slide seems more the result of increased worries about the U.S. economy and the rising risk of deflation.  As we noted last week, the market’s second rally attempt in June reversed back into correction mode.  Both the June 1 and the June 15th confirmed rallies failed.   Perhaps the third time is the charm.  Yesterday’s impressive stock market advance confirmed the third rally of the summer.  Since the market bottom on March 6,’09 the S&P 500 is up 59%.    Year-to-date major index performance:   S & P 500      -4.9%, DJIA -3.9%,   NASDAQ   -4.8%, and the S & P 600 -1%.     Here are the past week’s results:  July 1:  32 new highs & 345 new lows,   July 2: 36 new highs & 165 new lows,  July 6: 60 new highs & 231 new lows, and July 7: 55 new highs & 155 new lows.    Industry Group analysis:  year-to-date, 84 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   July 1 – July 8.

**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 in confirmed rally mode (again):  BULLISH

Industry group strength broad :  BEARISH.  84 of the 197 industry groups we monitor are up year-to-date, up from last week’s 75.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.97%, up from 2.84% 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 28.8, down from 34.2 last week, and 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: 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 34.8%, up from 33.3 last week.    “Bullish” professional sentiment is 37%, down from 41.1 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. July 1 – July 8.

● Earnings & Company Developments:         

All is quiet now on the earnings front (until the flood of 2Q reports soon come in beginning with the traditional kick-off report from Alcoa). The first quarter was a great earnings season both relative to expectations and to the year ago earnings levels, even somewhat better than the very strong fourth quarter on balance. 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 was 46.5%, according to Zacks Investment Research.  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, year over year growth of 7.3% is expected for total net income, which is down dramatically from the 24.3% growth expected just a few weeks ago, according to Zacks.  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.  July 1 – July 8.

On This Day:

July 8, 1889 -- The Wall Street Journal was first published.

Source: history; about.com

Notable & Quotable:  on Freedom

“You can't separate peace from freedom because no one can be at peace unless he has his freedom.”

Malcolm X, US Black Nationalist leader (1925 - 1965)

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.