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Lemley Yarling Management Co
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Comments on activity in client accounts

5 February 2016

Monday was down 170 at the worst and then closed down 20 on the DJIA; pretty good action with oil down on the day. Groundhog Day saw the DJIA down 250 in the first 15 minutes; down 350 at 2pm and closed down 295. Ugh! We are in a real Groundhog market.** Goldman Sachs down $8 ; Boeing down $4; and Chevron down $4 were 150 points of the drop. Wednesday DJIA was up 80 to begin and down 180 by the second hour; then up 115; then down 50; then up a down 50 till 1:30 when the average rallied to up 200 and closed up 183. Thursday was up 140; down 100; then up 100; flat at 1pm and closed up 80. Friday it was down 100 to begin the day after the Employment report said the unemployment rate had dropped to 4.9% with 151,000 jobs added. The DJIA continued lower hitting down 200 at 10:30am and staying lower for the rest of the day closing down 200 points and off 1% for the week.


During the week we traded Gap and Urban (losses) for BankAmerica and more Morgan Stanley. Bank stocks are down on the world is ending news and from watching earnings reactions in retail we don't think meeting expectations will be rewarded. We also sold Symantec for a plus scratch to buy BankAmerica. We sold 1/2 of Alcoa which was up 20% this week but still at a loss and eliminated Caterpillar flat and Union Pacific for a small profit.


A client asked us to comment on the relationship of the dollar, oil and the euro. Our response is yes there is a relationship- at least the big boys and girls who have programmed their computers to do something with that relationship tell us so. Supposedly lower dollar/stronger euro is good for commodities. That is the depth of our knowledge on this subject. Next question.


GM's profit for 2015 rose to $9.7 billion, or $5.91 a share, from $2.8 billion or $1.65 a share, in 2014. Adjusted earnings per share was $5.02 for 2015, up 65% from $3.05 in 2014.

Total revenue for the year was $152.4 billion, down from $155.9 billion in 2014. GM said the revenue decline was primarily due to a foreign currency exchange impact of $9.3 billion.

GM reaffirmed its recent guidance for 2016 that adjusted earnings per share would be between $5.25 and $5.75. GM's eligible U.S. hourly workers will receive profit-sharing checks of $11,000 on February 26, the company said.

GM was off 4% to a new 12 month low on the news. Nuts!


Marathon Oil (NYSE: MRO) has fallen to negative earnings along with most of the energy space but has the means to survive the drop in prices and emerge stronger. The company has $2.4 billion in balance sheet cash, nearly 44% of its market cap, and no debt maturities until October 2017. The company has reduced drilling time by half and lowered well costs 30% over the last several years in its Eagle Ford wells. When oil prices stabilize and start to rebound, these efficiency gains will translate to big profits for the E&P major. The company also stands to benefit on the new ability to export its U.S. crude production after Congress lifted the 30-year ban on oil exports.


Marathon Oil Corp. Corporate Credit Rating Lowered to BBB-/Stable/A-3 (lower medium grade). The downgrade reflects our expectation that in the context of lower oil and gas prices, Marathon's credit measures will be consistently below our expectations for the 'BBB' rating. Marathon enters 2016 with ample liquidity, including $1.2 billion in cash and has substantially reduced capital spending and dividends. We estimate that the company will outspend generated cash flow to fund capital spending and dividends this year and that cash flow coverage of debt has declined meaningfully. The stable outlook reflects our projections that credit measures will improve over the next two years. We note that proceeds from assets sales or other external sources of funding could provide an opportunity to improve the company's balance sheet.


Alcoa Inc. On Monday said it would expand its board by three members, gaining the support of activist investor Elliott Management Corp. as the aluminum maker prepares to spin off its aerospace- and automotive-focused unit.


Prices for raw aluminum have fallen sharply since 2011, a decline that was partly behind Alcoa's announcement in late September that it would spin off its more profitable and diverse parts-making units. Meanwhile, its sprawling mining and smelting operation has struggled amid raw aluminum prices that have dropped to six-year lows because of weaker demand and Chinese exports. The company's stock fell almost 40% last year, leading some fund managers to argue the company was undervalued.

Elliott disclosed a 6.4% stake in the company in November, which it bumped up to around 7.4% last week. The fund has supported Alcoa's split under the belief that the various businesses are worth far more apart than together, possibly as much as double the current stock price, according to people familiar with the matter.

Elliott has focused on Alcoa's need to improve margins. One of the new directors, Mr. Schmidt, was until last month on the board of rival Precision Castparts Corp., which had higher margins than Alcoa. While Elliott likes Alcoa's aggressive research and development spending, which it believes helps take market share from Precision Castparts, the activist investor still sees room to cut costs and was encouraged by Alcoa's announcement of comprehensive review on cost structures, the people said.

"As we prepare to separate into two strong companies, we have been actively working to ensure each has a world-class board of directors focused on creating shareholder value," Alcoa Chief Executive Klaus Kleinfeld said in a news release. He said the new directors—which bring the board to 15 directors—will add "valuable skills highly relevant to the markets we serve, including aerospace and automotive."



The real problem with high-frequency trading

There are few complaints about HFT when computers push share markets up, but in the ebbing tide of today's markets, it's blamed both for exaggerating the share market dive as well as for the heightened volatility.

The logic behind the fears is this: algorithms and software do not muse about global economic events; they merely chase mechanical patterns that they are programmed to find, such as movements in trend or momentum. They do not make decisions based on real-world eventualities, such as political events.

Can the algorithms express a view on Chinese consumer confidence? The economic impacts of Middle-Eastern sectarian conflicts? These real world factors aren't taken into account in the programming of algorithms.

Yet the computers hold substantial sway and can execute a barrage of trades that create unprecedented volatility at a rate that human reactions simply cannot match.

What is truly problematic is that the algorithms are not cognizant of when to stop or change a trade and thus can continue to pile money and exaggerate a trade well beyond what the market would consider a correct response. The computers do not have the "affirmative obligation" to keep the markets orderly.

Read more http://www.businessinsider.com/the-real-problem-with-high-frequency-trading-2016-1

**Groundhog Market reminds of the movie Groundhog Day:

When he wakes up the next morning, it's Groundhog Day. Again. Same conditions, same people, same ritual. So it goes the morning after, and the morning after that, and on and on ad (apparently) infinitum. Phil is in a loop, a temporal locked groove. He's stuck.



Italian cheese firm sells Parmesan-backed bond (Reuters)

An Italian dairy cooperative has sold bonds backed by Parmesan cheese, the company said on Tuesday, a rare example of one of the country's plethora of small firms raising funding on capital markets. Three years of recession have choked bank lending and Prime Minister Matteo Renzi's government is trying to encourage firms to raise money elsewhere and take advantage of a tentative economic recovery. Cheese-maker 4 Madonne Caseificio dell'Emilia has done just that, raising 6 million euros ($6.55 million) in mini-bonds guaranteed by wheels of Parmesan. 4 Madonne's chairman said it would use the money raised in the bond issue to improve its facilities and promote the thick-rinded cheese it makes in Italy's northern gastronomic heartland Emilia Romagna.



If Marco Rubio was the winner in Iowa for coming in third; why wasn't Martin O'Malley the winner on the Democratic side for coming in third?





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