The Guest Blog

Farrell: It Feels Good, But...

Go figure. The Treasury auctionsthis week were only fair to poor, and it looked like Thursday's auction of 7-year bonds would follow the same troubled path set by the 2-year and 5-year offerings. But buyers came out of the woodwork and the deal went well, with a 2.63 bid-to-cover ratio, and, more importantly, indirect buying for 62% of the auction. One never knows, but it sure looks and feels good for the moment.

Initial unemployment claimsregistered a gain of 30,000 to 584,000. Only in this crazy environment could we say that such a number was not bad news. But staying below 600,000 is the acid test of the moment. The four-week moving average fell 8,000 to 559,000 and the continuing claims number fell to 6.197 million. That is the third week in a row the continuing claims number has declined. That is not necessarily a cause for cheer since it could be people are falling off the back of the wagon as their benefits expire.

I have always loved the value side of the investment equation.

Deep value has been my fatal attraction since deep value can often stay that way. A catalyst is needed to unlock the value and make it worthwhile to invest in. And value plays take time to unfold, so don't look for immediate gratification. Two names we follow at Soleil look to me to offer an opportunity. But you need to sit back and take a longer-term time horizon. We feel the rewards will come to you. Both ideas are timber plays, and the catalyst down the road would be the eventual recovery in the housing market. That probably won't happen anytime soon but that is what creates the value. Plum Creek Timber ($31.60 last; $104-$23 52-week range; market cap of about $5.1 billion) and Deltic Timber ($46 last; $75-$27 52 week range; about a $570-million market cap) follow the same story line.

Housing starts will eventually recover. Our Anna Torma feels she is conservative in hoping for starts to return to 1 million or so in 2012. That would drive demand for lumber. The catalyst is that about 1/3 of US lumber needs have historically come from Canada and half of that comes from British Columbia where there is a terrible infestation of Mountain Pine Beetles. Significant capacity has been closed in Canada, and this infestation will affect the harvest for decades. Plum Creek and Deltic are US-based. Using conservative prices for an acre of timber, Anna feels Deltic's net asset value per share is $105 and Plum Creek's is $65. Both companies' stocks are trading at less than 50% of NAV, and in good times timber stocks have traded at 80% of NAV. We have more modest price targets of $55 for DEL and $45 for PCL. For what it's worth, I think these stocks have limited downside risk and, over the next two years, could show more-than-acceptable appreciation with any sort of US economic recovery. One additional fillup would be if biofuels (wood pellets in this case) were to be more enthusiastically embraced.

You have to be impressed with the market's ability to not go down.

On Wednesday, when the Chinese market was off 7% at one point, the contagion could easily have spread, but the market shrugged it off. It looks like the shorts are crying uncle and covering even though it seems improbable the market can stay up day after day. I still feel we're a bit over our skis and that a correction is overdue, but I am loving the upside even though the volume stinks.

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Vince Farrell