Mea culpa, mea culpa, mea maxima culpa
My fellow former altar boy and pal Art Cashinwill translate the Latin (and I can't believe it's not taught anymore) but generally it means I'm sorry this rally caught me flatfooted.
Thursday's continued string of better than expected earnings reports plus a better number on existing home sales encouraged the bulls and scared the shorts. 3M , Qualcomm , Bristol Meyers , Ford and McDonald's all did better than expected and they represent quite a cross section of industries. But I am still troubled by the fact that revenue growth is lacking and the better earnings are coming from cost cutting which can only go on for so long.
I remain cautious.
While the housing number marks the third month in a row of better data, many of the sales are foreclosures and we are still 70% below the sales peak hit in 2005. The better number does, however, indicate to me the bottom in housing is at hand.
Initial unemployment claims were up 30,000 but still below the 600,000 mark at 554,000. The four week moving average was down 19,000 to 566,000 and continuing claims fell to 6.22 million. That latter number is probably not a cause for celebration since it's more likely people have run out of benefits rather than have found a job.
The Treasury announced a huge slate of bond offerings for next week and if you exclude the $63 billion in three and six month bills, a total of $142 billion in debt will be auctioned off. That will be quite a test of the market.
A few stock updates are in order. Jacques Rosseau of Soleil/ Back Bay Research updated us on the depressed refinery industry. Demand is weak and inventories are high. This is a highly volatile industry but there is a name we would keep an eye on. Holly Corp is likely to report a profit when they announce earnings in August and that would be their 22nd consecutive profitable quarter, an unusual accomplishment.
If you make an adjustment for unconsolidated debt from the pipeline sub, the stock trades at 4 times EBITDA, and that is at the low end of historical valuations and compares to the group trading at better than 5 times. Part of the reason for the discount could be Holly is a smaller capitalization and doesn't offer the liquidity of some other names. Management is fiscally conservative and we would look for an entry point after earnings are reported. Jacques has an estimate of $2 this year, $4 next and a longer term price target of $38.
Holly is trading in the low $20 are now.
Our auto analyst, Mike Ward, has been very accurate in his analysis of Ford. The company reported much better numbers on Thursday. Cash burn was down, gross cash was $21 billion implying sufficient near term liquidity and the company is looking forward to some new model intros especially the Taurus. Mike thinks the stock could climb to $13 in the next two years versus its roughly $7 current price tag. Be aware that the company might do an equity offering by the end of the year to insure they have enough capital.
I would be cautious on Wells Fargo . The company was able to take a $1 billion gain on the write up of mortgage servicing rights. Without that, earnings would not have looked so good.
I worry about the apparent credit deterioration and with the stock trading at better than two times tangible book value, as confirmed by our Carole Berger, I think there are better opportunities.