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

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

July 15, 2010

Climbing the wall of…

WORRY!  We have said it before (and will no doubt again).   As we have also reiterated in recent investment Workshops, the globes market participants have been consumed with F.U.D., Fear, Uncertainty & Doubt.  Yet last week, the Dow gained 512 points.  This climb clearly occurred in the face of “worry” as one measure of investor sentiment dropped sharply. The index of market timers measures their recommended exposure to the stock market.   As of the close on Friday, July 2, this average stood at minus 1.8% -- which meant that these short-term market timers on average were completely out of any long positions and allocating 1.8% of their equity portfolios to going short.  After last week’s gain, as of Friday the 9th, the same index stood at minus 6.5% or some five percentage points lower.  So, the average short-term market timer reacted to this 512-point rally by becoming even more short the market (more worried) than he was before the rally started.  After the market climb of Monday and Tuesday, the worry mounted.  The index became even more bearish to -12.7!  Not since the end of March of 2009 has bearish sentiment been so high, and we know where the market went after that….

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Japan reported Consumer confidence in Japan edged higher in June to 43.6 from 43.0, as Japan's index of industrial output also made a surprise advance. Expected income growth and employment and the willingness to buy durable goods each improved on the month.

China reported a slowdown in its GDP.  The country said today its second-quarter gross domestic product grew 10.3% over the same period a year earlier, slowing from the 11.9% annual growth recorded in the first quarter. The growth was also lower than the 10.5% expansion predicted on average by economists.  Separately, the country's consumer price index for June increased 2.9%, while its producer price index expanded 6.4% from the year-earlier month. Both measures fell below economists' expectations for rises of 3.3% and 6.8%, respectively.

UK jobless down.  The number of British workers claiming government jobless benefits declined for the fifth consecutive month in June, official data showed. The Office for National Statistics said claims fell by 20,800 to 1.46 million, the lowest level in 15 months. The figure was largely in line with economists' expectations for a 21,000 decline.

Euro-zone industrial output rose by 0.9% from April and was up 9.4% compared to May 2009, the European Union statistics agency Eurostat reported. Economists had forecast a 1.3% monthly rise and an 11.3% year-on-year gain. Although the May rise was weaker than expected, April production was revised up to show a 0.9% monthly gain and 9.6% annual rise.

U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

Jobless claims down:  The number of people submitting initial applications for state unemployment insurance benefits fell 29,000 to 429,000 last week, hitting the lowest level since August 2008, the Labor Department reported today.  Economists surveyed had expected first-time claims at a level of 445,000 for the week ended July 10. The four-week average of initial claims, a better gauge of employment trends than the volatile weekly number also fell, down 11,750 to stand at 455,250.  However, continuing claims in the week ended July 3 rose 247,000 to a total of 4.68 million.

US IP up:  U.S. industrial output rose 0.1% in June as warmer temperatures boosted utility production, offsetting a decline in manufacturing, the Federal Reserve reported today.  However, it was the weakest month for the industrial sector since February.  The increase was a modest upside surprise, as economists were expecting a 0.1% decline after a 1.3% increase in May.

JOLTS still up:  The Bureau of Labor Statistics reported that labor market conditions remained improved. The Job Openings & Labor Turnover Survey (JOLTS) indicated that the job openings rate during May slipped to 2.4% from 2.5% during April. Nevertheless, the rate remained improved from the recession low of 1.8%.  The job openings rate is the number of job openings on the last business day of the month as a percent of total employment plus job openings. Job availability also slipped from April but it was up 28.9% versus May '09. Last year job availability fell 17.8% following a 29.7% decline during 2008. The private-sector job openings rate held on to its sharp improvement in April. At 2.4% it was improved from 2.0% during all of last year. The level of job openings rose 28.9% year-over-year and reflected roughly a doubling of factory & construction sector openings as well as a 7.6% increase in leisure & hospitality. These openings translated into an elevated hires rate of 3.4% and a 13.7% increase in overall hiring.

US import prices down:  U.S. import prices in June fell 1.3%, their second consecutive monthly decline and the largest since early-last year. Moreover, the y/y gain fell to its least since November. The decline exceeded Consensus expectations for a 0.3% drop. Petroleum prices fell 4.4% and repeated their May decline while excluding petroleum import prices fell by 0.5% and reversed the May increase. Food and beverage, auto, and capital goods prices also fell. 

PPI down:  U.S. wholesale prices fell a seasonally adjusted 0.5% in June, marking their largest decline since February, led by lower food prices, the Labor Department reported today.  Food prices fell 2.2%, the largest drop since April 2002, with prices for fresh and dry vegetables down 21.8%. Energy prices fell 0.5% in June, with the gasoline index down 1.6%. The core rate, which excludes volatile energy and food prices, rose 0.1%, the eighth consecutive monthly gain. Economists surveyed had expected overall producer prices to fall 0.1% and the core to gain 0.1%.

Empire State index grows (but slows):  Manufacturing activity grew in the New York region in July, but at a much weaker pace than in June, according to the Empire state survey released today by the New York Federal Reserve Bank. The Empire state index fell to 5.1 in July from 19.6 in June. Readings over zero indicate growth, with higher numbers indicating more firms were growing.

CRB Index down:   The Reuters-Jefferies Commodity Research Bureau is down -7.7% year-to-dates. However, it is up from -8.9% last week.

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call:   July 8 – July 15.

WEAK INDICATORS:

Retail sales down:  Retail sales unexpectedly fell 0.5% last month. To emphasize the loss of momentum, May's decline was revised to 1.1% from 1.2% but the gain in April sales was halved to 0.3%. The drop in June sales disappointed Consensus expectations for a 0.2% decline and for 2Q as a whole, retail sales rose 4.1%, half the 1Q increase and the weakest of the last four quarters.

US trade gap up:  The U.S. trade deficit in May widened to the highest level in 18 months, government data showed. The deficit, the difference between the nation's exports and imports, reached $42.3 billion in May from $40.3 billion in April, according to the Commerce Department.  Analysts surveyed by MarketWatch had expected the May gap to narrow to $38.8 billion.  This caused analysts to sharply lower their expectations for gross domestic product in the second quarter.   Economists reduced their forecasts of a 2.2% growth rate in the second quarter, down from the prior forecast of a 2.7% increase. Yesterday, Fed officials lowered their forecast of gross domestic product to grow 3% to 3.5%, compared to previous estimates of 3.2% to 3.7%. The officials said they may consider further stimulus if the economy worsens.

Philly Fed down:  Manufacturing activity grew at a slower pace in July than in June in the Philadelphia region, according to a monthly survey of manufacturing firms released today by the Philadelphia Federal Reserve Bank. The Philly Fed index fell to 5.1 in July from 8.1 in June. Economists were expecting an increase to 10 in July. Readings over zero indicate expansion, with higher numbers indicating more firms were growing.

Small business owner’s optimism down:  Small business optimism fell last month after two months of improvement. The National Federation of Independent Business (NFIB) reported their June small business optimism index declined m/m to 89.0 from the recent high of 92.2. During the last ten years there has been an 85% correlation between the level of the NFIB index and the two-quarter change in real GDP.

Benchmark interest rate up: Back over 3%.  Yesterday’s closing yield on the benchmark 10-year Treasury was 3.04%, up from 2.98% last week.

Oil up: Crude oil for August delivery lost 14 cents, or 0.1%, to $77.04 a barrel yesterday. This is up from $74.07 last week.    Yesterday, the Energy Department's Energy Information Administration reported a larger-than-expected decline in inventories.

Sources: Economy.com, Bloomberg, MarketWatch, Haver Analytics, IBD week of:  July 8 – July 15.

·          The Market:   Yesterday marked the 7th up day in a row for the Dow.  This followed a prior string of 9 out of 10 days down. We noted above the stock market is again “climbing the wall of worry”.  The increased market volatility since late April is a major contributor to the concern.  It has now been 5 sessions since the July 7 follow-through day which confirmed the current market rally.  Since the market bottom on March 6,’09 the S&P 500 is up 64%.    Year-to-date major index performance:   S & P 500      -1.8%,  DJIA -0.6%,   NASDAQ   -0.9%, and the S & P 600 3.5%.     Here are the past week’s results:  July 8:  32 new highs & 345 new lows,   July 9: 96 new highs & 17 new lows,  July 12: 108 new highs & 48 new lows, July 13: 103 new highs & 23 new lows, and July 14:  97 new highs & 23 new lows. Industry Group analysis:  year-to-date, 118 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   July 8 – July 15.

**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.  118 of the 197 industry groups we monitor are up year-to-date, up from last week’s 84.

Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.82%, down from 2.97% 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 26.4, down from 28.8 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%, same as last week.    “Bullish” professional sentiment dropped to 32.6%, down from 37 last week ( and down from 56% at end of April).  This is the first time since April 3, 2009 that bears have outnumbered the bulls.  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 8 – July 15.

● Earnings & Company Developments:         

Q2 2010 earnings reports are being delivered fast and favorable.  Through last Friday, the total net income of those 26 firms is 37.3% higher than it was a year ago. For those firms, that actually represents acceleration from the 25.5% growth they posted in the first quarter, according to Zack’s Investment Research.   The total net income is expected to rise 21.6% from a year ago. Collectively, the 500 firms in the S&P 500 earned $544.8 billion in 2009, and that is expected to grow to $743.0 billion this year. Companies of interest:  YUM BRANDS posted a decline in second quarter earnings, to $286 million, or $0.59 per share, from $303 million, or $0.63 per share, in the same quarter last year.  The company’s 2Q earnings decline was due largely to a one-time gain in the year-ago period. Revenue rose to $2.57 billion versus $2.48 billion last year. While same-store sales were flat in the US, it increased 4% in China.   Looking ahead, the parent of Taco Bell, Pizza Hut and KFC raised its full-year profit target from $2.39 to $2.43 a share. That compares to a current Wall Street view of $2.47 a share.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, FactSet.  July 8 – July 15.

On This Day:

July 15, 1606 -- The painter Rembrandt was born in Leiden, Netherlands.

Source: history; about.com

Notable & Quotable:  on Freedom

“If you can attain repose and calm, believe that you have seized happiness.”

            Julie-Jeanne-Eleonore de Lespinasse, (1732-76)

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.