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Farrell: In Defense of Clunkers

I think it was 1971 when my wife and I took the then considerable sum of $85 and bought a yellow Ford Falcon station wagon. It had about a million miles on it. We drove it for a few years and our beloved car died a noble death when the left front wheel fell off - literally. If only the clunker program had been around then. It does look like the idea had its desired effect. Showroom traffic was up 25% and last check for every 100 cars sold under the program, about 40 other cars were bought as well. Maybe this only moved future sales forward but the environment does feel a lot better than just a short time ago. Give the consumer a bargain and sales usually follow.

Consumer confidence as measured by The Conference Board's monthly survey took a big jump last month to 54.1 from 46.6 with guesstimates being around the 48 level. The "expectations index" segment of the report soared to 73.5 from 63.4. Expectations seem to be influenced greatly by current news items and that makes the number more understandable. The news has been pretty good, not all good, but ok on balance. The biggest news as it relates to this survey could well be the stock market's recent strength. The "present situation" sub index had a much more modest rise to 24.9, up 1.6 from the prior month. Confidence surveys don't correlate to consumer spending — personal income does — and we get that number Friday. The consumer might be more optimistic about things, but with the "present situation" segment muted and income growth modest, I wouldn't expect a surge in consumer spending. Also keep in mind the longer term average for this consumer confidence survey is around 95, and it was registering in the low 60's just before Lehman failed.

The Case Shiller Index continued its string of more encouraging reports regarding the housing market. While prices were down 15.4% from a year ago (and off 32% from the peak), this was the fifth month in a row of smaller declines. Prices were actually up 1.4% for the quarter and that is the first such rise in three years.

A cautious consumer looking for bargains may have contributed to Big Lots (BIG, last sale around $25.40, 52 week range $35-$13) having a better than expected quarter. Our Jeff Stein (Soleil/Stein Research) raised his earnings estimates to $2.00 for the fiscal year ending January, and to $2.20 for the following year. This $1.9 market cap company has 1350 stores and offers a value proposition to its customers. It has no debt, $98 million in cash, and should generate about $157 million in free cash flow this fiscal year. That would give the stock a free cash flow yield of 7.4%. Jeff thinks the company is worth $32, or 16 times his $2.00 estimate. The company has historically traded around 17.5 times.

Jake Fuller (Soleil/Travel Wise Research) has noticed in his periodic surveys that on line travel bookings are improving. This could be a sign of a more confident consumer. His two favorites in this arena are Expedia (EXPE, last sale around $22.85, 52 week range $23.35- $6) and Orbitz Worldwide (OWW, last sale around $6, 52 week range $7.63-$1.10.) Call for the reports.

The two year Treasury auction was fair. The bid to cover ratio was 2.68 and the last few had been a bit better at an average of 2.89. Indirect buying was a firm 49% having been 36% in recent auctions. The indirect is measured differently now, but 49% is strong. Wednesday will see an auction of $39 billion of 5 year notes. Also, the durable goods report will come out in the morning. With the success of the cash for clunkers program and with Boeing apparently getting some orders, the consensus estimate has moved up and most are now looking for a gain of 3% or more.

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