Lemley Yarling Management Co
15624 Lemley Drive
Soldiers Grove, Wi 54655
Bud: 608-624-5777 Kathy: 630-323-8422
Comments on activity in client accounts
23 June 2017
Our partner of 40 years Kathy Cannova had an extremely negative reaction to a drug she was taking and is very sick and in intensive care. We are positive in our outlook but ask for your prayers and good thoughts.
Ford announced it is going to construct a factory in China to build its low price Focus cars. That will free up room in American factories to build the more profitable Pickups and SUVs. It is a smart business decision. Trump is not going to like it when someone tells him about the plans. If he goes after Ford we think they will cave. That would be a bad business decision. Moreover Wall Street boys and girls are in love with Tesla at any price and the chance of these mavens rotating their allegiance to Ford or General Motors in this bull market is near zero. And so we sold Ford this week to raise more cash.
We sold Verizon for a $1 loss to get more cash in the accounts. VZ and Ford were large positions and now our average accounts are over 80% cash.
Our oil stocks remain under pressure and are the main reason for our terrible performance (down 10%) this year. Retail stocks continue under selling pressure and we take some consolation from having eliminated those positions- at losses- earlier in the year.
When we are so out of touch with markets our strategy has been and is to retreat to the sidelines and regroup.
Now there are 31 year old de facto rulers in trouble spots Saudi Arabia and also in North Korea. We have nothing against 31 year olds- we were once 31 and knew everything- but the Crown Prince of Saudi Arabia and the Big Honcho in North Korea did not get there on merit- they got there by their dads giving them power. (Assad in Syria is also a successor to his father.) Even the? Year old in the White House had to win an election- which was no small feat.
Irrational exuberance continued:
Diageo DEO -1.60% is so desperate to avoid ending up the Budweiser of U.S. liquor that it could pay almost $500 a bottle for George Clooney's tequila brand. On the shelf, it costs around $50. Only supercharged tequila drinking will justify Diageo's splurge.
The London-listed group announced Wednesday that it had agreed to buy Casamigos for up to $1 billion, comprising a $700 million down payment and a further $300 million if the brand hits certain milestones. The label was only launched in 2013, but its sprinkling of Hollywood stardust--Mr. Clooney and Rande Gerber founded the company with real-estate man Mike Meldman--has taken the tequila market by storm. It is on track to ship 170,000 cases this year, Diageo said, up from 120,000 last year.
Craft beer started squeezing big brewers like Bud-maker Anheuser-Busch InBev in the 2000s, but really took off this decade. It now accounts for about a fifth of U.S. beer sales. Meanwhile, craft liquor represents just 3% of its market, reports Citi, and is only just getting into its stride.
Bitcoin is the antithesis of money. The definition of money that we old folks learned was ‘a medium of exchange, a store of value'. ‘Money' that rises and falls in value 20% in a few days is not a part of that definition; Not ever, no way, can't be, end of story.
Drug stocks are moving higher as Trump reneges on his promise to control drug costs; and the beat goes on with the drug companies ripping off taxpayers and the sick:
A major asthma drug maker has been quietly investing in coal on the side. The pharmaceutical company that just months ago was embroiled in a price-gouging scandal over its life-saving EpiPen now finds itself at the center of another potential controversy. According to Reuters' Michael Erman, Mylan N.V. has for the last six years been buying up refined coal in order to reduce its tax bill and boost its bottom line:
Since 2011, Mylan has bought 99 percent stakes in five companies across the U.S. that own plants which process coal to reduce smog-causing emissions. It then sells the coal at a loss to power plants to generate the real benefit for the drug company: credits that allow Mylan to lower its own tax bill.
These refined coal credits were approved by Congress in 2004 in order to incentivize companies to fund production of cleaner coal. They are available to any company that is willing to invest the capital, and are set to expire after 2021.
The story gets even sketchier. Mylan Chief Executive Heather Bresch, Erman notes, "is the daughter of U.S. Senator Joe Manchin of West Virginia, the second largest coal-producing state in the country." And Mylan would not explain to Erman why it adopted this particular strategy, though an anonymous source said the coal operations "have increased Mylan's net earnings by around $40 million to $50 million in each of the past two years." Mylan is apparently the only publicly traded pharmaceutical company to partake in this type of tax aversion strategy.
The sketchy part which Reuters did not point out is that two out of Mylan's five specialty brand-name drugs treat pulmonary problems that are exacerbated by air pollution, a lot of which comes from coal. The company makes Perforomist, an inhaler that treats symptoms of chronic obstructive pulmonary disease (COPD), as well as prevents asthma attacks and exercise-induced bronchial spasm.
Multiple studies have linked exacerbated COPD symptoms to air pollution, though those links are suggestive and not conclusive. Mylan is also in the asthma treatment market; the company makes EasiVent, which attaches to asthma inhalers to help the medicine more easily reach the lungs, and it recently failed to get regulatory approval for a generic version of the blockbuster asthma drug Advair. Peer-reviewed science has been linking coal combustion to more severe asthma since at least 1972.
The coal that Mylan is investing in is refined, which means it burns cleaner than normal coal (hence the tax credits for companies that fund it). But cleaner coal is still coal, the dirtiest fuel source on the planet. Continuing to promote coal, in any form, is shown to be bad for the environment and public health. It's good business for asthma drug makers, though.
16 June 2017
We added Rite Aid in small amounts as speculation that if the Walgreen's deal falls through (set to be at twice the price we paid) that someone else will want to acquire it for its stores and distribution of drugs.
Amazon announces it is buying Whole Foods. 38 million shares were short with the stock down $2 on Thursday. Price is $42. Ouch! Ruined a lot of short sellers weekend.
And there we go again: Does Anyone Remember How to Make a Subprime Mortgage?
In case you were wondering: If a nuclear bomb goes off, this is the most important thing you can do to survive
Several topping signs:
(1) GOLDMAN SACHS: Bitcoin is looking 'heavy'
(2) Legendary Investor Ron Baron Remains Uber-Bullish On Tesla
(3) The Snowballing Power of the VIX, Wall Street's Fear Index
Wall Street's "fear gauge" has neared all-time lows this year. That hasn't stopped retail investor Jason Miller from making a nice chunk of change betting it will go even lower.
The Boca Raton, Fla., day trader says he has made $53,000 since the start of the year by effectively shorting the CBOE Volatility Index, nicknamed the VIX. That includes a white-knuckle day on May 17, when the VIX spiked 46% following reports that President Donald Trump had pressured former FBI Director James Comey to drop an investigation into former National Security Advisor Michael Flynn.
As the 40-year-old Mr. Miller recalls, he rode out the storm, confident the market would revert to its torpid ways—which it did. "One person's fear is another person's opportunity," says Mr. Miller.
Volatility—or the lack of it—has become the central obsession of the markets as the S&P 500 trades around its all-time high. Invented 24 years ago as a way to warn investors of an imminent crash, the VIX has morphed into a giant casino of its own.
(4) Reminds of Japan in the late 1980s --http://content.time.com/time/specials/packages/article/0,28804,1902809_1902810_1905192,00.html -- when combined Tokyo real estate values exceeded the value of the entire United States.
A $664,000 Parking Spot Symbolizes Hong Kong's Property Frenzy
(5) And finally:
Enough, Happy Summer!!!
9 June 2017
Our oil stocks were hit again this week as inventories in the U.S. rose. When it rains it sometimes pours and our value investments in retail and oil have not performed for us. With accounts down 5% to 10% we are not happy campers but we are are not alone. (See article below on value investing) In the last century value investing worked even when markets were in their manic buy growth at any price phases. What is different now- and what we have a hard time judging- is that the big boys and girls love to short stocks having difficulty. And there are a lot more boys and girls with a lot more money to throw around than there were in the olden days. These pressures sorely test our patience and ability to weather the storm.
After our oil issues gained 3% on Monday and dropped 6% on Tuesday we consolidated into two issues Marathon Oil and Devon in which we have the most confidence. We sold Murphy and Apaches for scratch losses and placed half the Murphy money in additional shares of Devon.
We now own Marathon Oil, Devon, Ford, Verizon and Ascena.
Our cash positon is 60% and greater in most accounts. In accounts Verizon and Ford positions reach to 15%. With 5% yields we are losing no sleep holding them.
We understand that if markets tank the issues we own will also move lower which is why we have the large cash holding. Many times when markets are moving against us we have moved totally to cash but the five issues we hold are either as low as we think they can go (Ascena) or cheap and addable at lower levels.
Small consolation but at least we have company: From Business insider:
Buy low, sell high. It's a classic adage, and one that's helped stock investors reap consistent gains for the better part of seven decades.
Having returned 5% on average each year from 1940 through 2007, the so-called value trade has lost 2% per year over the past decade, according to Goldman Sachs data. It's down 10% this year alone, badly lagging an S&P 500 that's climbed 8.7%.
The decline of the value strategy has mirrored the rise of passive investing and quantitative trading. Total assets in performance factor-based exchange-traded funds have quadrupled in the past five years, approaching $600 billion earlier this year, while quants now manage more than $1 trillion, says Goldman.
These methods are less sensitive to valuations than traditional active management. Rather than simply loading up on the cheapest stocks and cutting the cord on expensive ones, they're more agnostic towards price, which has made it more difficult for the value strategy to function as it always has.
Another explanation offered by Goldman for the flagging value trade is that we're in the late innings of the current economic cycle, a period normally characterized by subdued gains for the strategy. They argue that as investors have gotten increasingly worried about a stagnating economy, they've been hunting for growth, not value.
Further, the narrow distribution of stock valuations at the end of the last economic cycle "helped set the stage for the exceptionally poor returns to value during the subsequent decade," says Goldman. That boosted the valuation of the strategy, capping its future upside.
So is this the end of the value trade as we know it? Goldman doesn't think so, despite its recent struggles. After all, the value strategy is highly cyclical — it's just been trapped in a particularly vicious part of that cycle for longer than usual.
"As long as humans make investment decisions, we believe value will continue to be a good long-term investment strategy," a group of Goldman equity strategists led by Ben Snider wrote in a client note. "Though returns may be harder to capture in the future than they have been in the past."
And Bloomberg interviews Bill Gross:
U.S. markets are at their highest risk levels since before the 2008 financial crisis because investors are paying a high price for the chances they're taking, according to Bill Gross, manager of the $2 billion Janus Henderson Global Unconstrained Bond Fund.
"Instead of buying low and selling high, you're buying high and crossing your fingers," Gross, 73, said Wednesday at the Bloomberg Invest New York summit.
Central bank policies for low-and negative-interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies, according to Gross.
2 June 2017
During the week we decided to shift our XOP holdings to individual domestic oil producers. Our overweighting oil stocks strategy for this year has been a failure, so far, but we believe that our commitment will be rewarded. With oil around $50 the issues we now own- Marathon, Devon, Apache and Murphy (a new purchase this week) should see a return to earnings. These four companies have restructured their operations- financially painful- and are now configured to show a profit in the $45 to $50 per barrel range. The last time their share prices were at this level oil was trading at $35 a barrel.
We reduced our Marathon Oil position to a more manageable level and we also added to our Ascena holdings.
Our accounts are down 5% to 10% for the year and we of course are not happy with these results but we continue to have a large cash positon and maintain our view that markets are overpriced and the cash will be available in any significant correction.
The following is a discussion of our view that the present markets remind of the Dot com bubble of 2000.
The NASDQ reached a high of 5000 in March 2000. It is now at 6200. The DJIA reached a high of 10,000 in 2000. It is now at 21000. It's always more fun to measure returns from lows in the markets than highs. It makes more sense to do the opposite since most folks buy high. Lows in the markets occur because folks who bought high are selling in a panic
Here is a historical view of the stock market downturn of 2002 including figures from the stock market bubble of the late 1990s:
|January 1, 1997
|January 1, 1998
|January 1, 1999
|January 1, 2000
|January 14, 2000
||The day the DJIA peaked.
|March 10, 2000
||The day the Nasdaq peaked.
|January 1, 2001
|January 20, 2001
||President Bush takes office.
|September 10, 2001
||Levels before September 11, 2001 attacks.
|September 21, 2001
||Lows after markets reopened.
|January 1, 2002
|October 9, 2002
|January 1, 2003
|January 1, 2004
Cramer's alternate take that the NADAQ is fair priced versus our view that the NASDAQ is in Never Never land:
In the article Cramer writes:
In 2000, tech giants were already running the show. Microsoft traded at 59 times earnings, Cisco at 179 times earnings, Intel at 126 times earnings and Oracle at 87 times earnings.
Now, Microsoft trades at 20 times earnings, Cisco at 13 times earnings, Intel at 17 times earnings, and Oracle at 16 times earnings.
You'll note from the table below that Microsoft market value is slightly less than it was 18 years ago. Cisco is worth $300 billion less; Intel $230 billion less; and Oracle $50 billion less.
The reality is that at some point earnings matter and concept stocks need to earn a lot of money or retreat to more reasonable P/E ratios.
Cramer pointing out the Microsoft et al are now at reasonable P/E ratios actually makes our point that many issues in the NASDAQ are overpriced on a long term basis and will eventually retreat to normal market ratios.
Top ten market value components of the NASDAQ Composite Index
March 10, 2000
Sun Micro. $164.5
Applied Materials $74.6
JDS Uniphase $68.9
June 2, 2017
in 2017 Yahoo is worth $50 billion (plus $4 billion for the part sold to Verizon); Oracle bought Sun Micro for $8 billion in 2009 (down $158 billion from 2000); Dell went private in 2013 for $24 billion (down $107 billion): Qualcomm is still around and is worth $84 billion: Applied Materials still exists and is valued at $50 billion (down only $24 billion) and JDS Uniphase now has a value of $7 billion having split into two different companies in 2014 (down $61 billion).
If an investor had purchased $100,000 in equal shares of the top ten valued stocks in the NASDAQ in March 2000, 18 years later he/she would have an investment worth approximately $50,000.
Most of the current top ten companies will exist in 20 years but what will they be worth. Eventually Amazon has to earn money and then it will regress to a reasonable P/E as have Microsoft and Cisco; Apple will have to develop another product; Google will be around but will folks still use it for advertising; Facebook may be gone the way of Myspace and Yahoo; Comcast may be made irrelevant by Verizon and AT&T and satellites; etc.
In the DOT Com year of 2000, AOL and Time Warner merged in a deal valued at $135 billion. After 2000 the value of the merged companies then called AOL (soon to return to the name Time Warner) fell from $200 billion to $20 billion.
We are reminded of that purchase as AT&T is choosing to pay $85 billion for the cable and media parts of Time warner. Time Warner spun off AOL and Verizon eventually bought AOL for $4 billion, down $96 billion from its merger valuation.
Time Warner and AT&T have been overflowing waterfalls of fee dollars for investment bankers. These two companies and their many components predecessors and spinoffs (Lucent anyone) paid billions in fees for advice and fairness opinions beginning with the 1983 breakup of AT&T and the Gulf & Western conglomeration and eventual purchase of Time Warner; and many more fees were paid subsequently, over the years, breaking up and putting back together the Humpty Dumpty telephone companies coupled with the many mergers and spin offs of Time Warner.
Among other current market favorites Tesla may be around and making electric cars in 10 years but since every other car maker will be making electric cars we would surmise that Tesla will sell at the same 8 times earnings that other carmakers do. Ford earns $4 billion a year after taxes. When Tesla is earning that much it will be worth the $50 billion that Ford is priced at in the market. Tesla is already priced at $56 billion and is consuming cash at a $500 million per quarter rate. And within the next two years the $7500 tax credit that buyers of Tesla autos are entitled to will disappear.
Theranos was a wonder stock that never went public it was going to be able to do blood work from a tiny pin prick. In its wonder phase it was worth $5 billion. Now- $0.
Uber is being priced at $80 billion through private placements and hasn't yet earned a dime. In fact it has to raise money every quarter to fund the losses it is incurring.
And on and on and on.
This Is What the Demise
of Oil Looks Like
Our thoughts on the above article: there are 253 million cars and trucks on U.S. roads; average age is 11.4 years. The average age of cars on U.S. roads is 11.4 years, IHS Automotive reports. The average age of vehicles on U.S. roads has hit a plateau of about 11.4 years, according to an annual study by IHS Automotive, an auto industry research firm.
At 20 million new sales a year, half of which are electric it would take 25 years to replace internal combustion engines. And given that the average age of cars is 11 years, the time span for replacement is probably much longer.
Better Buy: Apache Corp. vs. Devon (we bought both): analysis by
Devon's performance has been among the industry's best, while Apache is forecasting growth later this year. Which oil and gas company will come out on top for investors?
Is a bird in the hand really worth two in the bush?
It's a question that comes up a lot in investing, and right now, you could ask it about oil and gas drillers Apache (NYSE:APA) and Devon Energy (NYSE:DVN). Apache has a good outlook for later in the year, but middling performance right now, while Devon has bucked the trend and is one of the top performers in the industry. Let's dive in and see which the better buy is right now.
Both Devon Energy and Apache are focusing on their Delaware Basin onshore plays. Image source: Getty Images.
Luckily, both companies are similar in size, with market caps between $18 billion and $19 billion. Both also recently announced their first-quarter earnings for 2017, which gives us a great opportunity to compare how well each is doing.
Devon had a spectacular quarter. Oil production averaged 261,000 barrels/day, a 7% increase compared to Q4 2016. That exceeded the top end of the company's guidance range by 5,000 barrels/day. Operating cash flow increased by 54% over Q4 2016. The company was also profitable, with $565 million, or $1.07 per share, in net GAAP earnings, compared to a loss of $3.06 billion, or $6.44 per share, in Q1 2016. Devon attributed some of this to cost-cutting moves. It was able to nearly halve its total operating expenses to $2.84 billion. All of this exceeded analysts' expectations and caused a stock bump.
Apache's first quarter, on the other hand, underwhelmed the market.
The company has been devoting resources to building out infrastructure in its massive Alpine High play in the Delaware Basin of West Texas. And while those efforts are ahead of schedule, they're not expected to pay off until the second half of this year. The company did finally return to profitability with GAAP earnings of $213 million, or $0.56/share, but it is predicting a soft second quarter due to the infrastructure buildout, scheduled rig maintenance, and other issues. So, even though Apache's prospects look rosy later in the year, Devon has established that it can perform well under current conditions, and thus is a better bet to replicate that performance in the future. .
While waiting for oil prices to rise, energy investors can take solace (and payouts) from a company's dividend. Luckily, both Apache and Devon pay one, but Devon's quarterly dividend was slashed in 2016, from $0.24/share to $0.06/share. Coupled with a slowly rising stock price, that means it currently yields less than 0.7%. And a dividend increase doesn't seem to be on the table. In fact, the word "dividend" wasn't even mentioned in the company's first-quarter earnings call...and believe me, I was listening for it!
Apache, on the other hand, currently yields just over 2%, which, while it doesn't compare to some of the integrated majors, is one of the best yields among exploration and production companies. With Apache devoting so many resources to Alpine High, though, further dividend increases seems unlikely.
So, although Apache may not raise its dividend this year, its current yield, coupled with the apparent lack of interest in raising the dividend over at Devon, makes it an easy winner in this category.
Like most oil and gas exploration and production companies, both Devon's and Apache's share prices have taken a hit since 2014. Naturally, if oil and gas prices recover, both stocks should pay off for investors. But many, including Apache's management, are predicting oil prices of around $50/barrel for the foreseeable future, so there's no telling when such a payoff might occur.
Because both Apache and Devon -- and, indeed, most oil and gas explorers and producers -- have been unprofitable for much of the last three years, it's tough to look at traditional earnings-based valuation metrics like PE ratios, because you can't calculate them when earnings are negative. Likewise, dividend yield -- sometimes a proxy metric -- is tough to compare when one company's dividend has been slashed and the other's hasn't. Return metrics like return on invested capital and return on capital employed show both companies working their way out of deep holes.
But let's just look at how the companies have performed relative to the industry at large over the past year:
Devon's shares have been outperforming the industry, while Apache's have underperformed by quite a bit. Currently, Apache's stock is trading at 52-week lows. That means you can now buy Apache -- with its Alpine High position -- for less than you could have last August, when nobody knew about the play's huge potential. This represents a rare chance for investors to "turn back the clock" and pick up shares on the cheap.
Despite Devon's stellar quarterly performance, Apache has a higher dividend yield and a better valuation, particularly when the company's Alpine High and other prospects for the second half of 2017 are factored in. The stock's recent beating provides investors with an excellent buying opportunity, especially if you can buy in at a price of less than $50/share. Apache wins the day.
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