The dull stock market on Friday- New York Stock Exchange volume was well under a billion shares- might have been hiding a subtle message. Friday was the 12th or 13th day in a row of very little daily change in the averages, well less than 1.5%. That small a range has been rarely seen for days on end. When done on light volume as well, it usually indicates the market is poised to move a good bit one way or the other. Sort of like a coiled spring waiting to pop. It could well presage a higher move, but I feel otherwise. Stocks trading hands for days on end toward the higher end of a range can mean the early and smart money guys are selling to the late comers. Late in the short term sense, as I am optimistic about the economy and the market for the next few years, but modestly so. The fact that 13 out of the last 14 weeks have seen positive flows into equity funds reinforces my feeling. Retail money moving into the top of a trading range probably will be met with disappointment.
Thankfully the bond market had a good 30 year auction last Thursday and the positive karma flowed through to Friday. The 10 year bond went out Friday at a yield of 3.79% having danced with 4% earlier in the week. The 30 year had traded at 4.8% before the successful auction went at a 3.72% and finished Friday at 4.64%. With no auctions this coming week we may get the bond market to calm itself for a bit. Friday also saw gold sell off $22 to $940. The fact gold has been unable to surmount its prior high of over $1000 tells me our lack of inflation thesis at Soleil is correct. The transportation index also saw a wicked sell off of more than 1%. That would be a non confirmation of the Dow Jones Industrial Average hanging up near its high for the year.
The fundamental economic backdrop continued to offer little evidence that we are doing anything more than bottoming. Household net worth fell another $1.3 trillion in the first quarter of 2009 to $50.4 trillion. That is down a stunning $13.9 trillion since Q3 of 2007. Household debt to income did shrink to 131% from 134% in Q4 2008, but that stat has a long way to go yet. There are some who think it might need to go to 100% which would imply a pay down of some three trillion. I don't know where it will settle but I'm convinced the savings rate will go a lot higher than the current 5.7%. At almost 6% the annual savings would be about $600 billion and a lot of that money will find its way into Treasuries. Household holdings of Treasury paper soared 175% versus a year ago in Q1 to $377 billion, but that is still only 1.6% of household assets. The savings comes at a good time as some foreign buyers seem more skittish about buying our paper.
Our crack retail analyst, Jeff Stein likes Jo-Ann Stores (JAS, about $21). It's a smallish- $500 million market cap- retailer specializing in crafts and fabrics. Annual sales are running at $1.9 billion and the average ticket is about $20. This fits a "stay at home" theme that makes sense in these times. Jeff thinks the company will earn $1.05 this year and $1.35 next. While not cheap on a current p/e we think the company under new management since 2006 has earnings power of $2.50 to $3.00. It currently trades at a free cash flow yield of 11.5% and an EV/EBITDA of only 4.2 times against its historic 6.4 times. In addition, WalMart has exited the craft and fabric business and some $800 million in sales is up for competition. Jeff's target is $29.
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