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Farrell: If You Offer It, They Will Come

Despite a seemingly endless supply of Treasury offerings, the buyers are undeterred and continue to show up. Thursday's offering of $29 billion in seven year notes was well received with a bid to cover ratio of 2.74 times (2.49 had been the average for the prior four auctions) and indirect buying - the closest way to approximate foreign buying - was a robust 61%. The end of quarter data release tells us what actual foreign buying was for the quarter, but there is no exact way to tell until then. Just this week the government raised its deficit estimates to $9 trillion for between now and 2019 but the buyers still seem to seek the safety of US debt. China is the largest foreign owner of US debt, Japan is second, the oil exporting countries own $191 billion in US debt, up $30 billion versus last year even though the price of oil is down. Even tiny Luxembourg owns over $100 billion (thanks CNBC's website for that.) I wonder if you can run out of buyers?

Economic reports were a yawn Thursday. It turned out GDP for Q2 was not revised as had been anticipated but stayed at the original estimate of -1%. Unemployment claims were in the same 550,000-600,000 range that has prevailed for some months with the exact number being 570,000. The four week average stayed in its range at 566,000 against 571,000 last week and continuing claims fell to 6.13 million from 6.25 million. State unemployment benefits run out after 26 weeks after which you can get extended Federal insurance. But the Feds don't measure the end runoff so when continuing claims go down in an environment where unemployment is still going up the fear is that people have run out of benefits, not that they found a job.

Jo-Ann Stores (JAS - last sale around $28, 52 week range $28 - $10), one of Jeff Stein's (of Soleil/Stein Research) buy recommended stocks, reported much better than expected earnings with a loss of $-.13 when estimates had been for a loss of up to $-.47. The company offers craft and fabric merchandise and is benefiting from Wal-Marts decision to exit that business. Core craft categories were strong while consumers seemed to avoid higher priced items like sewing machines - which is an interesting read on the consumer. Fabric sales were also very good. Jeff has raised his estimates for the current fiscal year to $1.40 from $1.10 and to $1.75 from $1.35 for next year. $1.40 this year would represent a 3.4% operating margin and Jeff thinks it could grow to 5-6% in a few years. The company should generate almost $69 million in free cash flow which would put the free cash flow yield at a lofty 10.7%. The company has grown its cash balances from $41 million a year ago to $80 million and shrank its long term debt to $50 million from $100 million a year ago. That is quite an achievement in the current environment. The stock has been a good performer for us but Jeff thinks it's worth $34, or 6.3 times EV/EBITDA, in line with its historical valuations. Call for his report.

No more Treasury auctions this week but expect next week to bring an announcement of a record slate of 5 year, 10 year and 30 year bonds for the following week. Friday will see the final read on the University of Michigan consumer confidence survey. The preliminary was a dismal 63.2 and is in marked contrast to the more recent Conference Boards reading. Personal income and personal spending will also be released. Income was off -1.3% last month and its hoped to be much improved for July although most still expect a slightly negative reading. Remember, personal spending does not correlate to consumer sentiment surveys, but rather to personal income.

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