The 30-year Treasuryauction Thursday was met with strong response as the bid-to-cover ratio was a strong 2.68 to 1. The past few auctions were covered 2.21 on average. The yield was a big surprise, as we went in at around a 4.8 percent and the auction was done at a 4.72 percent yield to maturity.
Subsequent trading was all over the place, and it looks like it settled at a 4.7 percent yield. Foreign buying was very strong as "indirect" bids were 49 percent of the total. Lurching from auction to auction is no way to build a strong market, but it was a good auction with good follow-on trading.
Initial unemployment claims were 601,000 down 21,000 from last week. The four-week moving average was also better at 621,000, off 12,000 from the prior week. These are "good" numbers as they show the pace of layoffs is slowing.
- Import Prices Jump 1.3% in May, Boosted By Oil Gains
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There is no sign yet of a pick-up in hiring. Retail sales looked OK at +0.5 percent, but when you consider that 0.3% of that was from an increase in gas sales, the better tone you would hope for goes away. Business inventories were down about 1%. Wholesale inventories were off a few days ago, and the inventory decline could be seen as a tightened spring ready to snap back if there is any pick-up in final demand.
I wonder if part of the reason for the strength in oil lies in the belief that industrial production has to come back and oil is leading it. I do think the price of oil is way overdone. Worldwide inventories are at 62.5 days of usage, and usually anything over 55 days has tended to depress the price.
I don't know if we can count on China to continue to fund our deficit even if they wanted to. There was a very good article in Wednesday's WSJ concerning the cost of the Chinese stimulus package. The surface numbers look very good as far as the stress the package has put on the government's balance sheet.
- China Industry Output Beats Forecasts, Sales Up
But since the local governments have had to borrow most of their share as taxes go straight to Beijing, the ultimate burden is the Central government's. The end burden is going to be far more costly than the heads of state are talking about. Also, their trade surplus narrowed 24% in May to $13 billion as export markets remained weak. They won't have the cash flow to buy bonds.
A couple of stocks I like are followed by Soleil's regional bank analyst, Gary Tenner. BB&T (which I think was Branch Banking & Trust) (BBT-rated Buy by Soleil/Tenner Investment Res). It was one of the ten banks to pay back the TARP. They have a diversified loan portfolio and, unlike many banks, will earn money this year.
Gary figures $1.51 this year and $2.33 next. The company gets 40% of its revenues from fee-based businesses, with 30% of that from a healthy insurance business. The stock is around the $22.65 area, and our price target is $29 (or two times tangible book value, which we figure is warranted since our target ROE is better than 15 percent).
The other name is Comerica (CMA-rated Buy by Soleil/Tenner Investment Res). A Michigan-based bank, they have greatly reduced their exposure to the auto industry. With $67 billion in assets, their exposure to GM (GMGMQ.PK-rated Hold by Soleil/Ward Transportation Res) and Chrysler is a well-reserved $100 million. Additionally, they have very small exposure to the troubled construction industry.
At around $23, the stock is about 70 percent of tangible book value, and our price target is $28.50, still a discount to TBV. The company earned a 13.5 percent ROE in 2007 and that is the target, but it probably will be more like 2011 before that is a realistic goal.