For those folks who have accounts with us, you may now go to:
and fill out the account information and view your accounts online. If you
have trouble filling out the form, or in getting online, call and we will
help you with the process.
30 April 2002
The stock markets opened slowly today then rallied on a benign consumer
confidence number to up over 150 points on the DJIA after two hours of
trading. The NASDAQ gained 3% and the S&P 500 was up 1.5% in the same time
period. After being down eight out of nine days, the stock markets were due
for an up tick. The fact that today is the last day of the month may have
been an influence too. In the last hour the stock markets gave up some of
their gains but the DJIA and
S&P 500 both closed up over 1% and the NASDAQ gained 2%.
The Treasury bond market strengthened today. The rally was unusual given the
rebound in the stock markets and the after hours yesterday announcement of a
$1 billion borrowing need by the Treasury for this quarter, when and $89
billion surplus had been forecast. For the last few years, the Treasury has
been retiring long term debt and will now be issuing relatively short-term
debt to finance the coming budget deficits. Lending long and borrowing short
caused the banks a lot of trouble in the 1980s. That essentially is what the
Treasury is going to be doing. The reason the Treasury is borrowing short is
that rates are lower on the short end of the yield curve and so borrowing
costs will be lower. But if the deficits continue to grow, and they will,
this strategy is going to backfire as short-term rates rise and create an
inverted yield curve.
On the tragedy of a day front, Bernie "the beleaguered" Ebbers of WorldCom
infamy quit as CEO. The share price of WCOM initially rallied a bit. No
mention was made of the $400 million Bernie owes WCOM. Can anyone say
The large company drug stocks remained weak throughout the day, probably on
Eli Lilly's news that this year's sales are not going to show any growth.
It's tough for a stock to sell at 27 times earnings with no revenue growth in
this kind of market.
The New York Times wrote an article today about the infighting that is
occurring in the Enron bankruptcy. It seems that a law firm that represented
Enron is also representing the creditors' committee. Can anyone say conflict
of interest? The law firm says it will hire another law firm to make sure it
doesn't do any work that would be conflicted. Now that's a typical lawyer
solution. More practical solution would be to use the non-conflicted law firm
for all the work. We know, that's too simple a solution.
The creditors' committee is a group of ten entities appointed by the
bankruptcy court to look out for the interests of the banks and other types
who lent money to Enron and are trying to collect what they are owed. Two of
the ten representatives on the creditors committee, appointed by the judge
overseeing the bankruptcy, are JP Morgan Chase, and Citicorp. Both those
banks loaned money to Enron. But both those organizations also helped and
were paid fees by Enron to set up the myriad partnerships that Enron used to
allegedly defraud the creditors. Other creditors say that they may have to
sue Citicorp and JP Morgan Chase to recover money, since Enron doesn't have
much. So some of the other creditors don't want C and JPM on the committee.
That too, seems like a reasonable objection.
Since many market mavens, including us, have been spouting the sell in May
and go away for vacation till October strategy, this is probably the year it
will not hold true. But in all our years watching the markets, we can't
remember a May rally that didn't eventually give way to an autumn retreat.
1986 may be the exception to this rule since we don't remember any big fall
fall. But 1986 was the middle of the big bull-run that ended in the
disastrous 1987 crash. Moreover, it is good policy to follow trends until
they change. A lot of money has been lost anticipating trend changes. And
sitting on the sidelines doesn't cost anything.
29 April 2002
Today, we are instituting a new timing for our posts. In the past we have
written our posts the evening before the post date. From now on the date on
the post will be the day we wrote the post. This new format better reflects
our philosophy of reacting to the markets rather than trying to predict them.
As a result, our writings will usually be posted during the evening of the
day, (unless younger brother is otherwise engaged), and reflect the
happenings and our reflections on that day's activity. When our crystal ball
is not cloudy, we may venture a prediction or two.
The stock markets began Monday day gingerly, with a bias toward the upside.
The Mideast situation seemed to calm over the weekend. That calm removed a
negative from the opening. But there certainly wasn't enough progress toward
resolving the crisis to give the Monday stock markets a lift. Barrons
published a bullish piece, written by old friend John Laing, on Boeing over
the weekend. That article coupled with an upgrade on Boeing to strong buy by
Merrill Lynch created some strength in Boeing and helped the DJIA at the
start. Unfortunately, DuPont, another DJIA stock, announced negative news and
some layoffs in its textile division. With that news the stock markets opened
higher but without any oomph. The short end of the Treasury bond market came
under selling pressure and yields moved slightly higher in early morning
Trading remained boring through most of the day. A big block (17 million
shares) of Tyco was crossed at $17 per share just after noon. Tyco is an
another Janus/momentum investor favorite turkey being roasted in the markets.
We never bought the stock because, luckily for us, the CEO just didn't look
honest when we saw him on television. And we never could get past the belief
that Tyco was just a modern version of the conglomerations of the late 1960s
when we started in the business. All those eventually crashed and burned.
Looks like Tyco is following in their footsteps.
Led by rumors of default on debt by WCOM, the NASDAQ turned lower in the
afternoon after being higher most of the day. MCI was a good company.
Probably still is. We have always been amazed that a local telephone guy from
Mississippi, Bernie Evers, could so wow Wall Street. In the lawsuits that are
sure to dog Citicorp, owner of Solomon Smith Barney, the home of Jack
Grubman, the analyst who never said sell on WorldCom till the share price
reached $5, and in the books to follow, we are sure we will learn the same
old story of dollars determining loyalty. In the Long Term Capital fiasco of
several years ago, the cupidity and actual stupidity of many of the leaders
of Wall Street's most influential brokerages was exposed for all to see. Few
did. And so we have had to endure Enron, and WorldCom, and AT&T, and the
dot.com bubble mania. And it isn't over yet.
On www.realmoney.com, which is an excellent and relatively inexpensive
financial news service we learned from Jim Cramer that many mutual funds use
April 30 as the date for reporting their holdings of stocks. Cramer surmises
and we agree that a few of the funds may be liquidating stocks that are down
for the year so that the funds may present a clean look to potential
shareholders. If that is the case, there may be a bounce after month end.
We'll watch rather than trying to catch the rebound. It may be to sharp for
us to handle.
In late afternoon, the Treasury announced that it would have to borrow $1
billion in this quarter because tax receipts are lower than expected. This is
the first time since 1995 that the Treasury has had to borrow money in this
quarter. The $1 billion borrowing represents a swing of over $90 billion in
expected receipts for the second quarter. Can anyone say tax cut?
In the last half-hour of trading the stock markets failed to rally and share
prices eroded into the close. The Treasury borrowing surprise coupled with
the negative action of former high flyers dampened any hopes of a rally
occurring. At the close the DJIA and the S&P 500 were both down close to 1%,
and the NASDAQ was off .5%.
In other happenings today, Anthem Inc announced today that it plans to merge
with Trigon Healthcare in a $4 billion transaction. Healthcare providers are
all the rage in the stock market, as profits increase because of the present
ability to raise premium prices at will. The healthcare companies can do this
because many corporations are passing more of the costs involved with
healthcare coverage on to their employees. As premiums increase, more sick
folks become uninsurable, leading to more profits. In our mind, that's a sick
way to make a dollar. Sort of like firing folks to improve productivity and
raise the price of the firing company's stock.
All you have to do is say you are sorry. At least that is what Merrill Lynch
hopes as MER tries to extricate itself from the claws of Elliot Spitzer, the
attorney general of NY State. It seems that analysts at Merrill Lynch who
were recommending that clients of the firm buy certain stocks, had a much
different private opinion of the stocks they were recommending. So what else
Spitzer was provided with e-mails proving the variation of private versus
CNBC presented a segment today on buying a second home as an
investment/retirement home. One of the commentators mentioned that real
estate is the only investment gaining in value these days. The other
commentator said that real estate always does gain in value. That notion
would come as news to folks who bought Texas real estate in the early 1980s
only to see values plummet when the oil boom and Texas banks collapsed in the
Penn Square scandal. The real estate boom of the 1970s ended badly for many
folks. So did the boom in California in the late 1980s. The real estate boom
in farmland as an inflation hedge collapsed in farm liquidations in the
1980s. Buying a home to live in is one thing. Buying a house to speculate on
rising prices is another. There is no sure thing.
Today we saw William Sonoma shares cross the tape at $54 per share. Wow! We
bought the stock at $17 at year-end 2000 and sold it in early 2001 at $24 per
share. At $24 the stock was selling at 24 times earnings, about our p/e limit
on retail stocks earning money. Over the last year earnings have rebounded at
WSM to $1.32 per share for the year just ended and the p/e ratio has expanded
to 48. In 1999 WSM earned $1.12 per share and in 2000 WSM earned $.99 per
share. Given the price action of the last few months, we do have a tinge of
regret that we sold too soon. But in our heart of hearts, we know we would
have sold at $28, and if not then at $32, and if not then at $35. That's
because our discipline requires us to sell stocks that exceed our parameters.
By hitting singles, we avoid strikeouts and in the long run obtain the
performance we seek.
We also employ the same thought process when we sell everything when we
perceive greater than average market risk. Certainly, there are some stocks
that rise after we sell them. Happily, very few did this year when we went to
cash. But even if we give up gains on some stocks, we also avoid losses on
the other stocks we sell that go down and that would be part of a diversified
portfolio. We all remember our winners and the ones that keep rising after we
sell them. It's important to look at the whole picture and remember the
stocks that dropped after being sold.
Only one more day to "Sell in May and go away".
28 April 2002
With snow falling all around, we are going to make this short and head for
the fireplace and a good book for the afternoon. The Model Portfolio as of
4/26 is posted. The Model is down a little over 1% for the year, the S&P 500
is down almost 7%. The DJIA is down 1% and the NASDAQ is down 14%.
Several clients e-mailed today to ask why we sold the Treasury notes. They
weren't clear why we sold them because we had spent several days last month
explaining our reason for buying. Our explanation last month was a discussion
of the value of buying two-year Treasuries rather than holding cash. The
point of the articles was to explain why we wanted to take a little risk to
earn 3% owning Treasury notes rather than earn a riskless 1.3% from holding
cash. Since writing those posts, the Treasury notes have dropped, then risen,
1% in value. We think that is enough up and down price movement to try and
capture since the risk is one of yield and not principal. If we were only
investing 5% of available funds in Treasury notes the activity would not be
worth engaging in. But, we are investing 100% of accounts in Treasury notes,
while awaiting better buying opportunities in stocks. And so that makes the
buy/sell activity worthwhile.
This past week when we sold the January Treasury notes we locked in a yield
of 2.3% on a total return basis for the period held. Thus, we did not lose
money we just earned less yield than 3%. In fact, we earned 2.3% during a
time when we would have only earned 1.3-% yield on cash. We earned about 10%
annual yield on the 3.25% December notes that we sold. We earned about 4.5%
annual yield on the 3% Treasury notes due in November for the period held. Of
course those are all annual yields and we only earned at that rate for the
period held. We are now earning 1.3% annual; yield on the cash realized from
The point of selling the Treasury notes is to buy them back at a better than
3% yield. The Treasury yields may rise next week or next month. Short-term
yields will rise if the economy actually is in recovery. If that happens we
will again buy Treasury notes. If it becomes apparent that the economy is not
in recovery, the stock markets are going a lot lower and having cash will be
comforting. We consider our current position a win, win situation.
27 April 2002
The stock markets continued drifting lower on Friday. The DJIA closed down
over 100 points and below 10000 and the NASDAQ lost over 40 points to close
below 1700. It was not a consoling day for those long most stocks. This drop
came in the face of what was considered good economic news that first quarter
GDP grew at a 5.8% rate. The GDP number was higher than expected. The GDP
number caused us to sell the January 2004 Treasury notes we still held. We
took a slight loss on the sale, but including the loss, the yield for the
three months or less that we held them was 2.32% or almost twice what cash
would have earned for the period. We think the large GDP number, coupled with
the talk of the budget deficit exceeding $100 billion that appeared in the
Washington Post on Friday, will nip the current short term Treasury rally. We
expect the yield curve to flatten with the short end rising in yield. Just
one month ago the Treasury notes we sold today were trading 1% lower.
We will have a longer post tomorrow.
26 April 2002
The stock markets opened lower on Thursday, and staged several rally
attempts. During the day, the DJIA broke 10000 on the downside and the NASDAQ
broke below 1700. The DJIA 10000 level is a psychological number with no
technical meaning. On the other hand the 1700 number on the NASDAQ has some
technical meaning. Treasury bond prices rallied strongly in early morning,
even though the economic news was less favorable to bonds. By the final bell,
Treasury issues had given back about half their morning gains, while the DJIA
managed to close above 10000 and the NASDAQ above 1700.
We used the Treasury rally to sell the November and December 2003 Treasury
notes we owned in client accounts at over par. We remarked last month that
the movement in less than two-year Treasury notes when they dropped 1% in
price about three weeks after purchase had surprised us. The two issues we
sold provide us with a slight profit and we will sell the January 2004 notes
if they trade at a profit over par. We will do this with the hope that we
will be able to find a lower entry point with a higher yield to re-establish
the Treasury positions. The volatility in the short end of the Treasury
market is because of the uncertainty about the economic recovery. We have
decided to try and take advantage of the volatility to enhance yield without
raising risk exposure.
A client remarked that we were becoming "old lady" traders by spending so
much time writing about less than two year Treasuries. On the contrary, since
we have a few "older women" who love to trade, we think it is important to
spend time explaining to our clients the why of the action we are taking in
their accounts. The beauty of the web site is that we are able to address and
explain our actions as they occur for those clients who are interested.
25 April 2002
After trying to rally all day yesterday, the stock markets finally gave up
the ghost in the last hour and closed lower on the day. The Treasury bond
market staged a good rally in the afternoon when $25 billion in two-year
Treasury notes were priced.
We received the following e-mail as a comment on the post on the web site
4/24. Liked it, so we decided to share.
Re: The subject of today's bud-post
Quarters and even years are arbitrary stretches. There is nothing a priori
correct about employing these periods against which to measure
accomplishment. It is a matter of convenience, convention and practicality to
employ them. (You need something!) But measures of quarterly or yearly
performance only become useful when you have long strings of data, many
quarters, multi-years. Then you take an average and on this metric make a
record. In this context, your discussion of something like regression to the
mean is valid and makes sense. The big picture.
Quarters and even years have become dangerous measures when the relationship
is flipped, that is, when quarters or years are used to define or even
mandate a period during which a certain level of success must be shown. So,
instead of matching performance against a series of time periods, now you use
each time period as the measure inside of which you must show performance.
At least two consequences of this approach: (1) Fund managers selling at
quarter end and (2) companies playing around with accounting rules to show
consistent, smooth progress quarter to quarter in order to keep the stock
price increasing. (2) Is the greater transgression, I think?
Nothing new here for you. I was just noodling around.
So our client wrote. Sometimes we are too much in the Wall Street atmosphere
to remember there is a world of different realities and time measures out
there. We were talking with another client yesterday, reminiscing about how
excited we were when his account rose from $60,000 to $180,000 in nine months
back in 1982-83. It then dropped back to $150,000 in the tech sell off of
late 1983. His account is now worth $1,300,000, with a home and wonderful
wife and four kids added also. Certainly that reality reinforces the validity
of the longer-term perspective referred to in the e-mail today.
Finally, we offer two poems. They are dark, but then there seems to be a lot
of darkness in the world today even though it's spring.
Falling towers call old men to arms
To avenge a tragic deed
Led by those who with youthful charms
Any war they did not need
We watch in fascination every day
It's like a movie scene of old
Men riding horses in the cold
Dusty arid rocky desert far away
As real folks seek to right the wrongs
What does it mean for we
Who sit in comfort and free
To win a war we fight not for
So quick to chase a nebulous foe
Through rock and sand and snow
While mourning those who died in pain
For a scoundrel's ephemeral gain.
Where is the leadership that hopes
And cares for all mankind.
Who knows today may salve a wound
That tomorrow will fester more
BL 25 April 2002
Heard John Looker died on Tuesday
Rather, that he killed himself
Thirty-five he just had turned
When he put the bullet in his head
Two days to Thanksgiving
After choring with his dad
He went home and got a gun
And ended life in a house he didn't own.
We used to run into him at Rolling Ground
The neighborhood bar and eating place
Where neighbors gather throughout the year
To euchre, visit, gossip and eat.
Ron and Bonnie run it now
Ones a Murphy, the other an O'Donnell
Nice folks, a bit older than John
And much more successful in family things
Not rich since no one born here who stays,
Gets rich. But comfortable we think
With nice kids and a good business that
They came home to run.
Before, Wolf and Brita had the store
Foreigners from Europe by way of Madison
Who bought it from Mrs. Myers after
Her husband Bill was found dead in his car,
During a beautiful winter snow.
Wolf died too young too, soon after retiring,
And Brita now is president of the school board.
They had two good kids Barbara and Brian who left
And now come back to visit but make sure to leave again.
At night I walk o'er the rolling ground
Where my friend Bill Ryan drove his tractor.
(A farmer never walks, if he can help it;
And never sits if he can squat and spit.)
Beneath a moon so clearly blue
And bright I can see the horned owl
Catch the rabbit sitting still
Oblivious that the bird can kill
All about, nature proves
Its beauty has a darker side,
That peacefulness may be a sign
Of deeper woe and deathly time.
BL 25 April 2002
24 April 2002
It's interesting that the financial industry over the past few years has been
able to convince people that they can pick a required percentage return and
then the industry though legerdemain can create the proper portfolio mix to
accomplish that purpose. We have never had that ability.
There are some years when we have the feeling that we will do well in the
markets. And there are some years like the present one, when we don't expect
to do well. Our point is that we never know what the return on a yearly basis
will be. When we started our Model Portfolio in 1983, we were hoping to be
able to post a 10% return on a yearly basis. That is still our hope and over
the years we have been able to average that return.
Unfortunately, the stock markets and we have enjoyed an extended period of
above average returns. We say unfortunately because we are great believers in
the pendulum effect or regression to the mean. While individual stocks may do
well, the stock markets as a whole are probably in for a few more years of
sub par returns. And in the current market, the stocks doing well are selling
at p/e ratios that are not to our liking. We do think that if the sell off in
SBC and BLS and the drug sector continues that there will be an excellent
buying opportunity in the fall. Also we expect another general market decline
in late summer/early fall that may give rise to an attractive trading
23 April 2002
Yesterday was our brother Jody's 49th birthday. One more to go to the big 50.
Jody does the posting on the web site, and keeps all our computers in our
various locations functioning. He has been a wonderful asset to our providing
good services to our clients since the dawn of the computer age, and we hope
he's around for at least 49 more years. Moreover, he is wonderful person and
On December 31, 1999, the NASDAQ 100 closed at $91.30. It is now trading at
$33.50 down 63% from its 12/31/99 closing price and 72% from its high made in
March 2000. The DJIA closed at 11500 on 12/31/99, and traded yesterday at
10150 or 12% below its 12/31/99 closing price. The S&P 500 closed at 146 on
December 31, 1999, and traded yesterday at 111 or 23% below its 12/31/99
close. So the fact that all our accounts are at least twenty per cent and
some much higher than their 12/31/99 closing values is a source of great
pride. We manage accounts to survive downturns, but in the present three-year
downturn our accounts have not only survived but also prospered.
We mention the negative results for the markets and positive results for our
clients to reinforce our constant theme of the last few months that there are
times when a 3% assured return should be considered a satisfactory investment
return. For the past five years it has paid to go to cash in May and not buy
again till October. This may be the year that disproves that rule. That's
because as soon as a pattern becomes a rule, the markets have a nasty habit
of violating the rule. Yet, since the old "buy and hold" saw has not been
abandoned, we think that very few folks really have the courage to go to cash
in a down market. Hope springs eternal on Wall Street, and most investors
would rather ride a loser down than admit a mistake. That's because over the
long run most stocks do return to favor and solve their problems. That fact
has always been a core premise of our investment philosophy. The problem with
buying losers in midyear or trying to ride out losing positions is that over
the past few years markets and stock prices have tended to trade to extreme
levels on the downside as well as the upside. And so when the love affair is
over, stocks tend to trade down to levels where even the most committed
holders lose confidence.
Back around 1996 we realized that stocks that fell out of favor early in the
year usually stayed out of favor for the rest of the year. We then began
waiting for the autumn sell off to begin initiating positions in such stocks.
And, voila, our performance on a yearly basis began to well outperform the
markets. While past performance is no indication of future performance, we
plan on continuing our "go to cash by May so we can buy the fall in the fall"
trading philosophy, until it stops working for us. As value investors,
waiting for the usual autumn selling period has rewarded us. That's because
momentum investors are only interested in stocks that are rising. And
momentum investing has ruled the markets for the past five years.
Our micro view of the stock markets is a result of our macro view of the
international and domestic news. The international political and economic
situation seems much more complicated and risky than it has for a number of
years. The Mideast conflict is being controlled by opposing forces that seem
to believe that conflict is the only way to resolve the stalemate. At the
same time in the Americas, Argentina is broke and the IMF at US urging
refuses to cry for it. Venezuela is in political turmoil. The actions of the
IMF in refusing to intervene in Argentina without Argentina adopting
draconian economic measures is upsetting the psychology of other Latin
economies. The confused White House response to the situation in Venezuela
has upset the other democracies of the Americas. Coupled with the near
unanimous opinion between the majority in Congress and the White House that
Iraq is the center of all evil and must be punished by US military might; the
stage is set for a long hot summer of uncertainty in foreign economic and
On the domestic front, the predicted economic recovery is less certain than
it was a few months ago. Economists can't decide whether the GDP increase of
4% forecast for the first quarter of 2002 is from inventory rebuilding or
real economic demand. The next two quarters will be needed to confirm or
refute recovery. Guru Greenspan praises the increase in worker productivity.
That increase is the result of job losses. We think the loss of high paying
jobs is a long term negative. 3M is the new star of the DJIA as earnings and
sales wow Wall Street. The new CEO is from GE, and a new Jack Welch is needed
to lead the markets out of the wilderness and into the Promised Land of ever
increasing stock prices. At the same time that 3M announced the good revenue
and earnings numbers, it also announced that it will fire an additional 9000
employees. So while Greenspan and analysts see an increase in worker
productivity, we see even supposedly strong companies sacrificing workers
lives on the altar of quarterly stock performance. Unfortunately bubbles are
still being blown on Wall Street.
We continue to point out about the differences between the economic miracle
of the stock market boom of the 1980s and 1990s and the economic expansion
and bull market of the 1950s and 1960s. The earlier economic expansion and
stock market boom was fueled by the creation of high paying jobs in the US.
The later boom was fueled by the elimination of high paying jobs, first in
basic industry during the 1980s and in the 1990s by the elimination of high
paying white-collar jobs. For the last few years we have believed that
eventually the cumulative loss of high paying jobs would wreak havoc on the
US economy. The stock market and real estate boom of the late 1990s delayed
the inevitable. But we think the inevitable may have arrived. And for us in
the present uncertain environment, cash is king/queen.
20-22 April 2002
Last week, while traveling, the weather at home was beautiful with 80-degree
temperatures and no rain. And so it is with some chagrin that we look forward
to a five-inch snowfall on Sunday. Same type of unexpected happenings in the
stock and bond markets these past few weeks. For the week ended 4/19, the DJIA
gained ˝% while the S&P 500 gained 1.2% and the NASDAQ rose 2.3%. All of
those gains occurred on Tuesday last, and the markets spent the rest of the
week floundering. The Treasury bond market rallied on Guru Greenspan's
testimony on Wednesday, gave the gains back on Thursday, and then rallied
again on Friday when someone crashed a plane into a tall building in Milan.
The FBI also announced that there were terrorist threats against banks in the
northeastern US for the weekend and that reinforced the late Friday rally in
Treasury bonds. For the year the DJIA is up 2.35%, the S&P 500 is down 2%,
and the NASDAQ is down 7.8%. The Model Portfolio is down 1.4% for the year.
We remain risk averse. BMY, SBC, and BLS have all reached three-year lows
over the past few weeks. Ford remains interesting on a valuation basis. But
the time of year militates against purchase. Given the disaffection of
individual investors for the stock markets, and the punk performance of
mutual fund managers over the past few years, we don't see a near term
catalyst for much higher stock prices. GE and IBM announced lousy earnings,
GM had supposedly good earnings if investors ignore an $80 billion under
funded pension liability, and Microsoft had good or bad earnings depending on
the analyst. More earnings reports this week may move the markets on a daily
basis, but the stock markets remain range bound and without direction for now.
Several clients have bemoaned the fact that we are not earning the 8% needed
for clients to take income and yet not suffer any reduction in principal.
Since we are paid to find a reasonable return for client money, we do
sympathize with their frustration with our failure to gain much headway this
year. We do remind them that the year is still young and that the past four
years have had dramatic shifts in sentiment that enabled us to profit. We did
miss last September's bottom and subsequent move higher, but that was only
because of an abundance of caution in the face of a political rather than
We have been considering adding a stock a month to portfolios with the
knowledge that no one ever picks the bottom. But for now, our types of
stocks are out of favor and will probably trend lower for a while more. And
so we are watching. We haven't been trading our trading accounts, which is a
new experience for them and for us. This is because we can't get a handle on
the Mideast situation and its ramifications for common stocks. And we don't
think the economic situation can ignore the political foreign policy
decisions that are being made and will be made over the next few months.
Until the picture is clearer for us, we feel it is most prudent to stay
The Model Portfolio as of April 19, 2002, has been posted.
19 April 2002
We have returned from our travels with the markets little changed from when
we left. The strong rally of Tuesday in the stock markets have been followed
by two desultory days of trading. The NASDAQ, led by the tech stocks, has
continued to edge higher. With Microsoft's, OK quarterly report last night,
there should be a pop from both the DJIA and NASDAQ this morning.
It will take the day to get our feet under us again and so we will provide a
more comprehensive update over the weekend. We are glad to be home again,
especially since we didn't miss any buying opportunities while we were gone.
17-18 April 2002
The stock markets moved strongly higher on Tuesday led by tech stocks and old
favorites like GM, GE and Citicorp. Tuesday’s rally erased most of last
week’s losses. The Treasury bond market moved lower in sympathy with the
strong stock rally. We are paid to invest our clients’ money prudently and it
is always difficult to sit on the sidelines when a reflex rally occurs. It
is also difficult to stay on the sidelines and accept a three per cent yield
from short term Treasuries when the markets are moving up and down that much
each week. But the reality is that all the stocks we sold this year are all
ten percent or lower than where we sold them. And we don’t see any stocks
that look like screaming buys.
We don’t think tech stocks are going to lead the markets higher over the long run,
but as sold off as they are, we wouldn’t be surprised to see techs lead a
short-term rally. Most tech stocks are still not cheap. Nor are the big blue
chips that were the leaders of Tuesday’s rally cheap.
The focus on the Mideast crisis has dissipated, and so the markets are once
again able to turn attention to economic numbers. Tuesday’s markets chose to
ignore lower housing numbers and rather chose to concentrate on capacity
utilization, which jumped back to last September’s level.
We are going to be traveling for the next two days. We will be back at our
desk Friday morning. The next two days will give us a better idea of the
strength of Tuesday’s rally. Till then we will be watching from the sidelines.
15-16 April 2002
In our Summer 2001 Lemley Letter we mentioned that the August 2001 retirement of Jack Welch,
the CEO of General Electric during the 1980s and 1990s, might signal the end of the bullmarket
of that same time period. The DJIA over those 18 years moved from 800 to 11500. In 1990 the
DJIA traded under 2500 and in 1995 the DJIA traded at 5000. Welch’s retirement ended the period
of the cult of GE. While Welch was CEO, most analysts and commentators were hesitant to
question GE’s financial reporting. Every quarter, for 18 years, GE reported double-digit
gains in earnings, along with single digit gains in revenues. GE Finance came to account for
50% of GE earnings. In the late 1990s pension fund gains were often the profits that helped
GE make its numbers.
This past week GE and IBM reported financial numbers that were greeted with skepticism by a
newly aware Wall Street Analysts’ community. It is significant that both stocks dropped
on their earnings reports. IBM’s drop was understandable since they forecast a drop in
revenues and a 20% drop in first quarter earnings. GE actually reported better revenue
and met earnings forecasts but the gurus determined that the earnings numbers were a stretch.
The re-pricing of GE and IBM, coupled with the abandonment of most drug stocks like Merck
and Bristol Myers, means that the markets need new leadership to advance. And defense
stocks, oil stocks and HMOs will not provide long-term leadership. The latter stock groups
are moving higher on purchases by momentum investors and by funds that have to be
fully invested at all times. We don’t think the markets will find new leadership.
Rather we think the markets need to re-value stocks by dropping in price to lower
P/Es to reflect the slower growth outlook for the next few years.
Moreover,the stock markets still have to take into account the potential downward price
action that real estate may experience as the building programs of the past few
years come on stream. Large shopping center and office building programs take
years to move from concept to completion, as do many large condominium/home developments.
Over the past five years investors have been able to flip new condos for quick profits.
Shopping center and office building builders have found readily available institutional
money for projects conceived and committed to in the bubble mania years but not completed
till now. An end to the building boom will further slow the economic recovery.
Rather than doom and gloom, we are excited about the possibility that this year may
provide the type of buying opportunities on which we feasted in 1990,1998, and 2000.
Those opportunities allowed us to have the extraordinary performance we experienced in
1991, 1999, and 2001. Until that situation is present, we will try to maintain our
cash and Treasury note position. Risk outweighs reward in the current market atmosphere.
Over the past ten years, we learned that it is important not to be anxious to "get invested".
The market pendulum swings more widely than it used to. And it is a lot easier to make
the decision of how much cash to commit, rather than to try and decide whether to sell a
stock at a 20% loss to buy another stock that is down 30%.
13-15 April 2002
The stock markets closed last week on a sour note, as former bull market
leaders IBM and GE disappointed Wall Street with their earnings and revenue reports.
Leadership in the present market has moved to cyclical stocks like Caterpillar,
consumer stocks like Proctor & Gamble and retailers like Wal-Mart and Williams Sonoma.
HMOs like Cardinal Health are also the favorites of momentum investors. We don’t trust
this kind of leadership since there is too much moneychasing too few shares. Caterpillar
at its present price is discounting earnings expectations several years forward.
Proctor& Gamble is not earning what it did four years ago and is improving earnings
through layoffs and belt tightening. Those are admirable actions, but PG’s P/E requires
real growth in sales. The favorite retailers are selling at 35x earnings and except
for Wal-Mart are only going to equal earnings of several years ago.
This weekend should provide a better idea of how the Mideast situation is going
to evolve over the short term; and the coming week’s stock market action will
probably trade off that news, or lack of news. While the share prices of SBC and
others seem to be reaching attractive levels based on prices of the pastfew years,
we think that maybe a re-pricing of the entire stock market may occur this year.
Now is a time to preserve capital and hope for a once in a decade buying opportunity,
rather than trying to make a few percentage points of return on any short lived rally.
There are many stocks that interest us that are under selling pressure right now.
Because we see no catalyst to cause a buyers stampede in those stocks, we are content to
hoard our cash for the time being.
Because we are traveling this week this is a shorter weekend post than normal.
Also, we will not re-price the Model Portfolio this week. The Model Portfolio remains
down about 2% for the year. That’s about the loss in the S&P 500, while the NASDAQ is off
about 10% and the DJIA is up about 3%. Happy weekend.
12 April 2002
Too late to sell, too early to buy. Those were the words our late partner Don Yarling
used when he came into the office in late August 1990, a few weeks after Saddam Hussein
invaded Iraq. With the DJIA up 150 points on Wednesday, and down 200 points on Thursday,
those words came to mind yesterday. We are happy our client accounts are 90% plus cash
and short term Treasuries.
For now, we are tempted but not acting. The time of year, coupled with the Mideast
quagmire, continues to suggest caution. SBC, BMY, F, BLS, and a bunch of the
techs still haven’t found bottoms. We believe that the DJIA needs to revisit
the 8000 level before a true bear market bottom will be made. Until then, or
until the Mideast situation quiets down, we remain cautious.
A client sent an e-mail yesterday questioning our cautious attitude. There are
times to assume risk. Now is not one of those times. Since today is Friday we
expect the stock markets to stay down. The Treasury bond markets rallied on the
bad stock markets on Thursday. With the lousy stock markets we would guess that
the Treasury bond market should continue to rally.
10-11 April 2002
We will be traveling today, so there will not be another post until Friday
morning. Given the actions of the stock markets and our non-participation, we
are starting to sound like a broken record. But we can't stress too strongly
that markets are different now than they were twenty years ago. When Wall
Street turns sour on a stock or industry, there seems to be no let up from
the selling pressure. Just last week we were trading BellSouth and SBC and
made a few dollars on both. We had no idea of the risk we were taking to
trade those stocks. We say that because both stocks are now off 15% from
where we sold just a few days ago with no sign of a bottom. We took a quick
trading profit because we had begun to consider that maybe the Regional Bells
were about to sell off and drop in price to 1.5 times revenues or less,
instead of the 2 to 3 times revenues at which they traded the past five
years. After all, since WorldCom and other telephone and wireless stocks have
undergone such a correction, why should the big three RBOCS be immune?
We jokingly told a client yesterday that we should have been shorting the
stocks we've tried to trade over the past few months. We would have made a
ton of dollars. The collapse in the price of the stocks we were trading has
reinforced our philosophy that buy and hold no longer works. IBM, Bristol
Myers, Merck, Microsoft, and Intel are just some of the many stocks that have
collapsed in the past year after having been on every gurus buy and hold
list. The price movements of individual stocks are just too drastic to not
take profits or even losses when the stock markets look dicey.
And the stock markets are currently very dicey. For example, there were about
250 new highs versus 35 new lows on the NYSE yesterday, and more issues were
up than down even though the DJIA closed lower on the day. There was also
more down volume than up volume for the day on the NYSE. On the NASDAQ, down
volume exceeded up volume by a margin of four to one, while declining issues
exceeded advancing issues by a four to three margin, and there were over 200
new highs versus about 50 new lows. These conflicting signals are a warning
sign that the stock markets are without direction. At times like these cash
and less than two year Treasuries are king/queen.
By the way, our short term Treasuries have rallied smartly from their lows of
a week ago Monday. Both the December and November 2003 Treasury notes we own
are now over par, and the January notes are at $99.50.
9 April 2002
We sold our QQQ position in all our managed client accounts Monday at $33.80
for a $2 per unit loss. Ouch and mea culpa! So much for trying to trade a
market for which we have lost our feel. And so we will keep our reduced AT&T
Wireless position and our less than two-year Treasuries and watch from the
sidelines for at least a day or two. We obviously have lost our trading
touch, and our outlook for the markets over the next few months remains
We sold the QQQ when IBM announced lowered guidance for the first quarter and
full year. The fact that the markets shrugged off the IBM news and tried to
rally makes it obvious that we misread the markets mood yesterday. That's a
good indication of our need to step to the sidelines.
Our longer-term outlook remains unchanged. The stock markets have been
marking time for the past month, after a 20% rally from the September lows.
And after one more, "buy the bad news" rally, if yesterday was the beginning
of one, we think the reality of lousy corporate earnings, even if the
earnings beat reduced estimates, will cause a resumption of the correction
that was taking place last August.
The quick drop and quick recovery of last autumn were not sufficient to
reduce the excessive valuations of stocks created in the bubble mania of the
end of the last century. The momentum investors still left trading have
moved to restaurants, HMOs and bank stocks. They are running those stocks to
ridiculous levels and even pushing retail stocks to 35x earnings.
We regret that our recent stock trading has left our accounts down 2% to 5%
for the year
Our year-end purchases didn't work because the value stocks we like to buy at
year-end were not available. That should have alerted us to the continued
over valuation of the DJIA. And, maybe it is age, September 11, the Middle
East conflict and the collapse of the NASDAQ, but we are less able to hold
trading positions than we were a few years ago.
Moreover, even now, we don't perceive much fear of loss or risk in the
marketplace. There is some disgust, but the old "get me a good return"
attitude is still pervasive. And "buy and hold" is still the mantra of the
mutual fund salesmen. We saw an advertisement in the NY Times for buy and
hold. It was sponsored by Vanguard mutual funds. Vanguard used to tout its
S&P 500 Index fund as the place for buy and hold money. But since the S&P 500
is down 23% over the past 27 months, Vanguard has gone to mentioning other
funds it sells.
We have been accused of being perpetual bears, but since we have made money
consistently on the long side over the years, and especially the last three
years, we don't think that observation is valid. Rather, we take risk versus
reward very seriously. We just don't have any trading or investment ideas
right now. And so, rather than force the issue, we plan on sitting out a few
innings. Happily, our profits over the years give us that luxury.
6-8 April 2002
For the year the DJIA is up 2.5%, the S&P 500 is down 2.2% and the NASDAQ is
down 9.0%. The Model Portfolio is down 1.8%.
The stock markets last week didn't want to go up, or down. The Mideast
imbroglio seemed to freeze decision-making. Meanwhile the Treasury bond
market put in new lows on Monday and then staged a rally for the rest of the
week as unfolding economic numbers suggested that the need for a Fed
tightening was not present, yet.
And so, our two-year Treasuries rallied 25 basis points. On Friday, the jobs
report showed a gain of 58,000 non-farm jobs. But February's data was revised
from a gain of 66,000 non-farm jobs to a loss of 2000 jobs. February's report
had occasioned a drop in bond prices, as folks figured that the Fed would
begin tightening in May. March's data, released on Friday created the exactly
opposite reaction. So much for trading on daily data released by various
agencies of the private and public sector. We have always believed that Wall
Street traders need the data for their daily trading fix, and that that is
the only value of the data.
During the week just past, AOL time Warner borrowed $6 billion. The entire
value of the ballyhooed merger has evaporated over the last year and one
half. We think AOL's need to borrow $6 billion is a further reminder of the
over valuation of this media conglomerate. It is true that AOL has 30 million
subscribers paying $20 per month. But the cost of maintaining and servicing
that database is enormous. And the advertising that AOL used to receive from
various dot.coms has vanished. In fact, since the SEC is making such a big
deal of phantom revenues, we would suggest that they peruse AOL's past income
statements for the same time of "scratching each others backs" type of
revenues. At some point AOL does become a buy and it may be getting close to
being a trading buy when the general market seems to be in a rally mood.
Under $20 we may trade it. At around $15 we would be forced to consider the
stock as an investment.
Bristol Myers was in the news because of the collapse of its stock price. BMY
was always a favorite of our late partner Don Yarling, and also of the "old
stockbroker." And Bristol Myers is a poster example of our philosophy of
buying out of favorite stocks that run into trouble. But management has made
some terrible decisions lately. And so, we want to wait to let the dust
settle before committing funds. We also have stated that we may be in a
period like 1993 where events force a revaluation of drug stocks by lowering
the p/e ratios on the industry in general.
During the week, Dell raised guidance on revenues and sales. The share price
of Dell went nowhere. In the bubble mania days of yore, such an announcement
would have caused Dell's share price to jump 20%. The lack of any follow
through on the favorable news is an indication of the punk mood the present
market exhibits. We also think that maybe Wall Street is coming to its
senses-perish the thought- and realizes that Dell is rather fully valued
Most analysts were pleased with Dell's pronouncement of future sales growth
and earnings enhancement. We were struck by the means Dell plans to use to
obtain such results. Dell is going to move manufacturing out of the US to
places with cheaper labor. Thus, increasing profits for Dell will mean fewer
jobs for Americans. Under the capitalist manifesto, Dell's actions are
understandable and even commendable. And eventually in 100 years, when wages
have risen around the world, jobs may start returning to America. But in
relation to the present economic miasma, the loss of future jobs will do
nothing to improve the situation.
The rally this week in the Treasury bond market has improved the prices by
lowering the yields on the less than two-year maturity notes that we own in
our client accounts. Now that bond traders have revised their prediction of a
Fed tightening in May, many gurus are coming around to our many times stated
conviction that there will be only one 25 basis point tightening between now
and September. We say welcome.
Several folks have asked why we aren't trading the QQQs in their accounts.
Our aggressive trading accounts are accounts that we have managed for many
years. They are large accounts that can handle the thousand share positions
we place in them for a 50 cents or less move. We don't believe that such
activity would be suitable for many of our accounts.
Since winter finally seem to be loosening its grip on our fields and woods,
we wish all a happy weekend as we spend some time exploring our little piece
of earth with our grandchildren.
6 April 2002
Offer to present clients of Lemley Yarling Management Co.
Under Rule 204-3 of the SEC Advisers Act we are pleased to offer to send to
you our updated Form ADV, Part II for your perusal. If any present client
would like a copy please don't hesitate to write, e-mail, or call us.
5 April 2002
The stock markets went nowhere most of the day Thursday, marking time and
waiting for the Mideast turmoil to die down. Then, in the final half-hour of
trading, The DJIA, Nasdaq and S&P 500 staged a feeble rally to close
fractionally higher for the day. The short end of the Treasury bond market
gave up a few basis points, but most Treasury issues held their gains of the
past few days.
The big news of the day was the 20% drop in the price of Bristol Myers. BMY
management reported Wednesday night that earnings will be 20% lower for the
year. This is a new six-year low on the stock. We did say a few days ago that
we would be interested under $35 per share. We are interested but we did no
buying. Bristol shares opened at $29.90 and closed over $32. During the day,
an analyst appeared on CNBC and opined that BMY in the low $30s was a
takeover candidate. That and the old habit of buying drug stocks on a sell
off helped BMY find a bid. Because of our outlook for the markets, we decided
to pass on purchase at this time. Earnings estimates for BMY have been
reduced to the $1.60 range. As we said two days ago, we think drug stocks are
headed for 15x p/e ratios. This would make BMY a buy around $25. Bristol may
not trade that low, but we also don't think it will run away from us on the
upside. Two-year Treasuries remain our preferred place to park our cash.
The NASDAQ continues to trade around support and we are looking for a rally
when and if the Israeli/Palestinian situation calms down. Other than the QQQs
we bought last week we don't care to trade the rally for most accounts. We
did buy some more QQQs today near the close at $34.40 in our large aggressive
trading accounts to carry overnight.
4 April 2002
The Mideast conflagration continues to occupy the stock markets attention.
The NASDAQ is trading around a key support level, although even if that level
fails we don't think such an event will have much effect on the DJIA. Various
economic numbers are providing a conflicting picture of the economy and this
is adding to the stock markets uncertainty. The Treasury bond market gained
on Wednesday, both on the short and long end. For the day, the stock markets
were weak. In the last hour and one half of trading the markets sold off with
a vengeance. It's getting scary trying to trade these markets from the long
side. But a reflex rally is due, and if we ever have a day of quiet in the
Mideast the rally may ensue. Till then, it's watch out below. The DJIA closed
off about 1.3%, the NASDAQ was down 1.5% and the S&P 500 was down 1.3%.
We sold half of our position in AT&T Wireless. We now have reduced the
position to less than 5% in all but the smallest accounts. As we have written
several times before, we erred in allowing the position to become so large in
accounts. We now have corrected that situation.
On Wednesday we sold our trading position in SBC for a one-point gain, and
sold our trading position in BellSouth for a small gain or loss depending on
cost. With the money raised on those sales we bought the QQQs which at the
time were down one point from their high for the day. Unfortunately we wound
up losing 15 cents per unit on the trade, but we didn't want to carry the
position overnight. All three of those trades were in our aggressive trading
3 April 2002
The Treasury bond market put in new lows in price in the morning on Tuesday
and then rallied strongly. High oil prices, which are not considered
inflationary by Guru Greenspan, suggested to traders that interest rates
might not be raised in May. Greenspan has said that higher oil prices act as
a drag on the economy and thus can substitute for raising interest rates.
Auto sales of the big three were lower in March. The stocks markets were
lower all day, with the NASDAQ giving back all of its gains of yesterday, and
then some. The DJIA tried to rally late in the day but failed and the DJIA
and S&P 500 closed off 0.5% for the day.
We are now in the midst of earnings warning season. It is also the time that
analysts adjust their earnings estimates, usually after talking with
management. So it isn't unusual to have a weak market at this time given the
lousy earnings of the past few years. Weakness in drug stocks across the
board added to the dreary mood on Tuesday. Bristol Myers and Schering Plough
are at five-year lows. In a normal market we would be buying these issues.
But, we are sensing that the sell off in drug stocks may be similar to the
sell off in 1993 after President Clinton was elected and investors were
worried about drug pricing. This time the worry revolves around a lot of
drugs going off patent, and the corresponding threat to earnings. Since it is
early in the year, we may see a readjustment in the p/e ratio that Wall
Street is willing to place on drug stocks. Back in 1993 the p/e ratio on drug
stocks went to the 10x-15x range.
With the increasingly belligerent war with Iraq talk emanating from
Washington we plan to keep on the sidelines. And, we are getting ready to
again reduce our position in AT&T Wireless because the stock is acting so
poorly. We are not going to sell any more AWE for those clients who are more
venturesome than we are, and who have asked to keep their present position
sizes, RB, TD, RM.
2 April 2002
The DJIA lost ground on Monday while the S&P 500 and the NASDAQ managed small
gains. The Treasury bond market closed mixed. We sold our trading position in
Ford for a 90 cents per share loss. That's the third time we've traded Ford
in the last six months, all for losses. So we think we'll leave that stock
alone until we are ready to buy it for a long-term holding. We added more
BellSouth to our trading accounts when it dropped under $36 and we also
bought SBC for a trade at $35.50 in our aggressive trading accounts.
We remain sidelined in most accounts. The situation in the Mid East is not
getting better, and with the price of oil spiking the markets may have seen
the best of the rally from the September lows. Our plan now is to react to
events, not to predict.
1 April 2002
The DJIA closed the first quarter of 2002 up 3.8%, the S&P 500 was unchanged
for the quarter and the NASDAQ was down 5.3%. The Model Portfolio was off
The New Yorker for the first week in April contained an article by Nicholas
Lemann that lays out a scenario for the invasion of Iraq by US forces in the
autumn of this year. The scenario suggests that VP Dick Cheney's recent trip
to the Mid East was to arrange bases for US forces. The article, through the
use of interviews with various officials and interested parties, then creates
a plausible timetable for the events that will occur to justify the invasion.
The final event is Saddam Hussein's refusal to allow the type of inspections
the US requires verifying that there are no weapons of mass destruction.
What's interesting about this article, apart from the appalling possibility
of a real war, is that the timetable for the buildup to war fits the events
that occurred in 1990. For the present article expects the buildup of troops
to commence in August 2002, which is the month that Iraq invaded Kuwait in
1990. As in 1990, we have no doubt that the US can win a war with Iraq. The
US has, without question, the most powerful military force ever assembled.
What isn't so certain is that the war can be won without the use of tactical
nuclear weapons, unless the US is willing to lose upwards of 30000 American
lives. The US lost 300 troops in 1990, but chose not to invade Iraq with one
of the reasons given as the avoidance of the loss of many more US lives.
The New Yorker scenario suggests that the hawks inside the Bush White House
believe that maybe the Republican guard-not the US Republicans-but the elite
guard force for Saddam, will revolt when faced with overwhelming US forces.
If they don't and there is no popular uprising in Iraq, then it will fall to
US forces to do the dirty work. If President Bush decides not to risk
American lives, the article suggests that the US may use tactical nuclear
weapons. This may be the reason for the recent leaking of the top-secret
report about the use of tactical nuclear weapons to eliminate weapons of mass
destruction. Such leaks don't occur in the present White House without a
So much for today's civics lesson. While we are personally opposed to any
such military action, our purpose in presenting this scenario is to point out
that in 1990, the stock markets began to stagnate in the spring and then
began a rapid decline in August when the invasion occurred. Markets abhor
uncertainty, and we would be surprised by anything but a sell off if the
above scenario begins to play out. The invasion of Iraq to get rid of Hussein
is a question of when not if in our mind. And this possibility is another
reason for our caution at this time.
With first quarter earnings' season upcoming, many gurus are forecasting
better than expected earnings to be reported. The earnings may be better that
expected because the expectations are so low. That is not a reason to buy, at
least for us. Many recent economic numbers are suggesting recovery, but most
of the daily economic reports are a reason for short term trading and not
long term investing. Twenty years ago, there was a monthly balance of
payments report for short term bond traders to focus on. The stock markets
would then trade off the bond traders' reaction. Now there are daily reports
on an hourly basis for traders to use as reasons to trade. Most of these
reports are just smoke and noise that obfuscate and confuse.
We remain unconvinced of any need to commit to the market on a long-term
basis. We will continue to look for trading opportunities. Happy April Fools'
April 2002 Thoughts
March 2002 Thoughts
February 2002 Thoughts
January 2002 Thoughts
December 2001 Thoughts
November 2001 Thoughts
October 2001 Thoughts