U.S. Debt Still Gets the Love

• ByVincent Farrell Jr.,
• On 9:00 am EDT, Friday August 28, 2009

Despite a seemingly endless supply of Treasury offerings, the buyers are undeterred and continue to show up.

The offering Thursday of $29 billion in seven-year notes was received well with a bid to cover ratio of 2.74 times (2.49 had been the average for the prior four auctions) and indirect buying -- the closest way to approximate foreign buying -- was a robust 61%. The end-of-quarter data release tells us what actual foreign buying was, but there's no exact way to tell until then.

Just this week, the U.S. government raised its deficit estimates to $9 trillion for between now and 2019 but the buyers still seem to seek the safety of U.S. debt. China is the largest foreign owner of U.S. debt, while Japan is second. The oil-exporting countries own $191 billion in U.S. debt, up $30 billion vs. last year even though the price of oil is down. Even tiny Luxembourg owns more than $100 billion, according to CNBC.com. I wonder if you can run out of buyers.

Economic reports were a yawn Thursday. It turned out gross domestic product for the second quarter wasn't revised as had been anticipated but stayed at the original estimate of down 1%. Unemployment claims were in the same 550,000 to 600,000 range that has prevailed for some months with the exact number being 570,000. The four-week average stayed in its range at 566,000 against 571,000 last week and continuing claims fell to 6.13 million from 6.25 million.

State unemployment benefits run out after 26 weeks after which you can get extended federal insurance. But the feds don't measure the end runoff, so when continuing claims go down in an environment in which unemployment is still going up the fear is that people have run out of benefits, not that they have found a job.

No more Treasury auctions this week, but expect next week to bring an announcement of a record slate of five-year, 10-year and 30-year bonds for the following week. Friday will see the final read on the University of Michigan consumer confidence survey. The preliminary was a dismal 63.2 and is in marked contrast to the more recent Conference Board readings.

Personal income and personal spending data also will be released. Income was off 1.3% last month and it's hoped to be much improved for July although most still expect a slightly negative reading. Remember, personal spending doesn't correlate to consumer sentiment surveys, but rather to personal income.

Jo-Ann Stores , a stock that Soleil's Jeff Stein recommends as a "buy," reported a loss of 13 cents a share, much better that the estimates of a loss of up to 47 cents. The company offers craft and fabric merchandise and is benefiting from Wal-Mart's decision to exit that business. Core craft categories were strong while consumers seemed to avoid higher-priced items like sewing machines, which is an interesting read on the consumer. Fabric sales also were very good. Stein has raised his estimates for the current fiscal year to $1.40 a share from $1.10, and to $1.75 a share from $1.35 for next year.

Earnings of $1.40 a share this year would represent a 3.4% operating margin and Stein thinks it could grow 5% to 6% in a few years. The company should generate almost $69 million in free cash flow which would put the free cash flow yield at a lofty 10.7%. The company has grown its cash balances to $80 million from $41 million a year ago and shrank its long-term debt to $50 million from $100 million a year ago. That is quite an achievement in the current environment. The stock has been a good performer for us, but Stein thinks it's worth $34, or 6.3 times enterprise value/earnings before interest, taxes, depreciation and amortization, in line with its historical valuations.

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Know What You Own: Farrell mentioned retailer Jo-Ann Stores. Related companies are Bed Bath & Beyond, A.C. Moore, Williams-Sonoma, Pier 1 Imports and Hancock Fabrics.

Buzz up!