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Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703
Toll free phone numbers:
Bud: 312-925-5248
Kathy: 630-323-8422

31 August 2007 Daily Comments

Thoughts

Business and Stock Market Mavens are all for free markets until they aren’t.
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The Bush folks are concocting a plan to rescue sub prime mortgage folks who fall behind in their mortgage payments. On that news the market are rallying big-time since the traders who are around today perceive a rainbow at the end of the sub prime mess tunnel. Certainly the Bush Administration which has done such a good job with Iraq and Katrina will be able to fashion an excellent bail out plan.
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Asian markets were up overnight with most up 2% or more. European bourses are also strong as are U.S. stock futures. And Oil over $74 and Gold up $8 have joined the march higher.
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Bernanke speaks in an hour and as stocks rise all the good news is getting baked in. the stock markets are a discounting mechanism and so they seem to be pricing a Fed cut to save an economy that grew at 4% in the second quarter.

As we often say, the big boys and girls can change the rules and then….
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From Bill Fleckenstein: One final comment about the financial world: It's populated with rich, hypocritical whiners. Wall Street, the hedge-fund community and their lap dogs in the news media continually brag about how much they love capitalism and free markets. But when the creative-destruction component of capitalism rears its ugly head, they want the central planners to bail them out immediately, before they take any pain. And the ones clamoring the loudest are the very same folks who behaved the most irresponsibly.
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Sounds like he was short the markets this morning.
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According to unnamed Bush spokes folks: The main objective of the package, one senior official said, is not to affect the stock markets but to help low-income homeowners, many of them concentrated in certain neighborhoods in several distressed areas of the country, such as Ohio and Michigan.
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And Iraq wasn’t about oil.
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Bernanke says that the Fed isn’t there to rescue folks from bad decisions BUT the Fed does look at the broad economic consequences of those bad decisions and will act accordingly.
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And rescue the markets from bad decisions, maybe, if it gets bad enough.
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But can they?
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Bush is speaking now at 10am. He says the economy is great and can weather any turbulence. He likes the innovation is sub prime mortgages. (Does that mean he likes the 100% loans with no documents?)

But he doesn’t like adjustable rate mortgages. Folks were taken for a ride by the lenders. But the disturbances are modest in relation to the economy.

He is going to help home owners navigate. He’s gonaa help homeowners. Help the good people stay in their homes.

First off he wants FHA to lower its lending standards to let more folks get mortgages. Say what?

Next, he is gong to close the barn door after the horses have fled.

Finally, he will find and prosecute all the crooked mortgage lenders.

Problem solved.
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New highs have crossed over new lows on the NAZZ today for the first time in several weeks.
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With the DJIA up 150 points and nothing for us to do we are leaving early to enjoy the great weather and make the long weekend a tad longer. Enjoy.

The bulls won the day, the week, and the month.
*****

 

30 August 2007 Daily Comments

Thoughts

Stock futures suggest opening 80 points lower on the DJIA. The volatility of stock prices in the thin holiday trading reminds of other periods of market instability. Traders are concentrating on whether the Fed is going to cut before its September 18 meeting to rescue the economy from recession and the markets from a more severe downturn. Given that all the major measures are higher on the year we doubt that the Fed is really worried about the stock markets. And it is not their job to worry about stock markets as long as the ups and downs are relatively orderly.

But the economy is a concern for the Fed. Bernanke gives a speech on Friday and traders are very interested in what he will say. He does speak more plainly than Uncle Al did; but given that tomorrow is month end and the last day of a holiday week we doubt he is going to say anything earth shattering. That doesn’t mean that traders won’t take what he says and massage it a bit and run with it. The question is which way.
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Asian indexes gained overnight with Hong Kong up 2% and Shanghai back on track with a 1.7% increase. European bourse indexes are mixed and Gold is down $2 while oil is at $73.50. Treasuries have a bid as stocks swoon in the early going.
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Preliminary second quarter GDP was up 4%.
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The Fed added $10 billion to the banking system today in two separate actions. That is not the normal activity although recently it ahs become normal.
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A paper delivered by Bernanke is circulating in financial circles. When he was an academic in 2002 he gave a speech in which he said that the discount window should be used by the Fed to relieve financial panics and dislocations. Moving the Fed Funds rate should only be used when longer term economic impact is desired.

That would suggest that the cut in the Fed Funds rate is not coming until at least the September meeting, if then. But Bernanke might like the confusion because it keeps the markets from going down too much or up too much.
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European shares closed higher Thursday for the ninth time in ten sessions.
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Gold lost $2 to $674 and Oil closed down 16 pennies at $73.26. Treasuries closed firm with the two-year at 4.10% and the ten-year at 4.52%. Brazil and Mexico were flat.
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The DJIA lost 50 points to close at 13240. The S&P 500 dropped 6 points to 1457 and the NAZZ gained 2 points to 2565 as tech stocks held their rally.

Breadth was 3/2 negative on the NYSE and volume was light.

There were 60 new lows and 25 new highs on the NYSE.

Today was a slight win for the bears but the bulls remain ahead for the week on the back of yesterday’ strong rally.
*****

 

29 August 2007 Daily Comments

Thoughts

On the DJIA 100 points opening pop higher this morning we sold all our holdings in all accounts and went to cash. We worked hard to weather the recent downturn and play the reflex rally from the low made on August 19 and had succeeded but then we gave most of our gains of the last two weeks back Monday and yesterday. With our accounts positive 4% to 6% for the year we are going to cash and re-assess.
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Asian markets were lower overnight and even Shanghai lost 1.7%. European bourses are mixed as they dropped yesterday and are trading on the fact that in the early going the U.S. markets are higher. Gold is up $4 and Oil is up at $72.50. Treasuries again have a bid.
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Home Depot is going to keep the share buyback at 20% of the outstanding stock even though it received $2 billion less on the sale of its construction business. HD is borrowing $12 billion to buy back stock. Good luck.
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A hedge fund in Britain named Cheyne Capital is abandoning its $7 billion commercial paper program and liquidating $20 billion in structured securities. And an Australian hedge fund, Basis Yield Alpha Fund –what a great name- filed for bankruptcy in Manhattan after losing 80% of its value. We guess the alpha overcame the omega basis.
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At 11am the major measures survived the first small pull back and are now moving higher again with most up over 1% and regaining half of yesterday’s loss. It is a very thin holiday market. The bulls would like to see more volume today than yesterday. The bears of course wish for the opposite.
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Jim Cramer is suggesting on his website that the rally in the last hour is related to rumors that the Fed is going to cut the Fed funds rate tomorrow because the discount rate cut is not dong the job of stabilizing the money markets and financial institutions ability to fund their operations.
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The Fed rate cut rumor could also be a pump and dump rumor to get stocks higher for an afternoon sell off. We don’t believe the Fed would cut on a holiday week because of he thin markets. But anything is possible.
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Entering the final hour the DJIA is up 200 points. Up/down volume is the reverse of yesterday and overall volume will approach yesterdays.
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European bourses closed flat to slightly higher. Treasuries gave ground as stocks rallied with the two-year at 4.15% and the ten-year at 4.56%. Gold was up$3 to $676 with oil up $1.80 to $73.50. Mexico and Brazil regained the ground they surrendered yesterday.
*****

The DJIA closed up 250 points at 13290. The S&P 500 gained 31 points to 1463 and the NAZZ jumped 62 points to 2563.

Breadth was 6/1 positive. Volume was holiday light and on a par with the volume during yesterdays sell off. Up volume exceeded down volume by a 12/1 margin on the NYSE today.

There were 80 new lows and 20 new highs.

The bulls won the day.
*****

 

28 August 2007 Daily Comments

Thoughts

The U.S. markets are back in their cup half empty mood this morning as the trading day begins. News that credit card write-offs were 4.8% of receivables in the first half of 2007 has cast a worry on trading. A bank in Germany had to be rescued and State Street Bank is said to have $20 billion in exposure to asset backed commercial paper. Carlisle Group, of which the Bush family is an owner, has had to pump $100 million into a company that went public in Europe 2 months ago and more is needed. (From the Financial Times: Carlyle Group, the US private equity firm, has apologized to shareholders for a “lapse in communication” after extending a second $100m loan to a highly-leveraged mortgage backed securities fund it listed last month on Euro next Amsterdam.)
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Asian markets were mixed overnight with Hong Kong and Japan lower and India and of course Shanghai higher. European bourses are down about 1% at midday and after trading higher early on Oil is lower with a $71 handle and Gold is also off $1. Treasuries have a bid as stocks look weaker out of the gate.
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Consumer Confidence was 105 for August down from 112 in July and the lowest level in a year.
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The Russian Central Bank injected $10 billion into its economy last night. That is a lot of rubles for that economy. The Fed injected $2 billion today.
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We bought more GM in our larger/aggressive accounts at $29.98. This purchase is for a trade around a position. To fund this purchase we sold INTC for a scratch profit and we also sold JAVA for a gain.

By trade around we mean that we add shares to accounts that already own a stock to trade the new shares while maintaining the basic position. We do this in our large/aggressive accounts.
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From realmoney.com: Rumors are circulating that the State Street Limited Duration Bond Fund, which managed $1.4 billion for institutional clients, lost about 37% of its value during the first three weeks of August. Another fund, State Street Global Advisors, also was hit hard in the dog days of summer and has fallen 42% for the year.

The news comes as reports from Bloomberg are circulating that the bank and investment custodian has $22 billion in credit lines in asset-backed commercial paper. Such short-term debt has been hard to unload for many financial institutions of late because debt buyers are skittish about credit quality.
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According to S&P Existing home prices dropped 3.2% in the second quarter of 2007.
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A week ago the Fed suspended a rule that limited the amount of capital Citi and BankAmerica could lend to their brokerage subsidiaries while taking complicated securities as collateral for those loans. Minyanville.com suggests that the suspension had to do with the large amount of structured notes and mortgage backed securities that the subsidiaries hold. That is a much larger story than borrowing at the Fed window.
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The Fed releases their beige book minutes from the last meeting at 1pm. But since it won’t contain any discussion of the decision to cut the discount rate a week ago Friday the minutes really shouldn’t have much impact on the market. Treasuries are rallying today on the lousy stock market action.
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European shares ended a seven-session winning streak with sizeable losses Tuesday. Barclays paced a decline in the banking sector amid worries about exposure to ongoing credit-market woes.
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The Fed minutes said inflation seems to be under control, housing is a worry, and mortgage woes could increase.
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At 2pm breadth on the NYSE is over 4/1 negative and not improving. There has been no bounce and so we are selling this morning’s GM trade for a 20 pennies loss. Markets that are down all day tend to stay that way and there hasn’t been even a whiff of rally. And these markets are a lot thinner than we realized because of the holiday week.
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We are going to take some trading money off the table in our large/aggressive accounts.

Chico’s earnings come tomorrow and we bought for a pop before earnings. Most retail stocks are lower today as the credit card write-off talk has placed a damper in retailers. The tenor of the markets has changed in the last two days and with the dicey markets we don’t want to hold through earnings and so we are taking a 30 pennies loss.

And we are selling a trade around position MOT for a 50 pennies profit that we bought in our large accounts in the market drop two weeks ago. We are maintaining our core position in accounts. We are also selling our MU trade around position for a scratch profit. we are maintaining our core position.
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Oil ended down 24 pennies at $71.74.  Gold lost $2 to $674. Treasuries rallied on the stock market decline with the two-year at 4.10% and the ten-year at 4.50%. Brazil and Mexico both dropped 2%.
*****

The DJIA lost 280 points to end at 13040. The S&P 500 lost 35 points to 1432 and the NAZZ was down 60 points to 2500.

Breadth was 4/1 negative on the NYSE and 3/1 negative on the NAZZ. Volume was light.

Down volume exceeded up volume by 10/1 on the NYSE. 10/1 down and up days used to be very unusual but with the volatile hedge fund driven markets they are coming more often.

There were 65 new lows and 20 new highs on the NYSE.

The bears won the day.
*****

 

27 August 2007 Daily Comments

Thoughts

Asian markets were higher overnight with both Hong Kong and India up over 2.5%. And Shanghai was higher for the fifth straight trading day. Shanghai is up 90% this year and 270% in the last 12 months.

European bourses are mixed to higher at midday. Treasuries have a bid in the early going and Gold is off $1 while Oil is trading down with a $70 handle.

Home Depot cut the price of its sale of its construction sales unit by $1.8 billion to get the deal done. The shares are trading above $35 as the arbs are now trading around the Dutch tender offer which has a minimum tender price of $37.
*****

This week should be slow as the week before the Labor Day holiday usually is. But that doesn’t mean it can’t be volatile.
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We purchased Boston Scientific in accounts at $12.68. We have traded the stock profitably at higher prices over the past year. With a book value of $10 and recently renegotiating with their banks the terms of the debt they took on to buy Guidant last year we are buying for over year end but…..
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As we said last week the Hong Kong market is rising because the Chinese are opening that market to mainland citizens. And the fast money is moving there to get ahead of the greater fools. The Chinese bubble can go a lot longer than other bubbles because the Chinese government controls the market. But at some point….
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European shares ended higher for the seventh straight session, with almost all sectors advancing following Wall Street's solid gain Friday. London trading was closed for a public holiday.
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Gold ended down $2 at $675. Oil gained 96 pennies to $72.05. Treasuries were a tad better with the two-year at 4.23% and the ten-year at 4.58%.

Brazil and Mexico gained.
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The DJIA lost 60 points to 13320. The S&P 500 was down 12 points to 1467 and the NAZZ dropped 15 points to 2560.

Breadth was 2/1 negative and volume was holiday light.

There were 60 new lows and 35 new highs.

Today was a win for the bears.
*****

 

24 August 2007 Daily Comments

Thoughts

Asian markets were mixed overnight with Hong Kong and Japan lower and Shanghai at a new high. European bourses are slightly higher at midday. Treasuries have a bid and Oil is up to $70.50 while Gold is up $3 at $671.

Home Depot was unable to close the sale of its construction division last night even though it was willing to take $1 billion less that the original offer. According to the WSJ the banks financing the deal want better terms than originally offered as in a higher interest rate.

Countrywide Financial is off $1 today and so the euphoria over the BAC cash infusion has faded.

New Home Sales in July were up 2.8% month over month and Durable Goods Orders were up 5.9%. Ex transportation Durable Goods were up 3.7%. Those numbers will place the Fed on hold for a while on cutting the Fed Funds rate.
*****

Support /resistance/support is right around the 1460 level on the S&P 500. A pullback below 1416 would not be good but it doesn’t look like there is any danger of that today. With the low volume it is obvious that some folks have resumed their vacations although probably with a Blackberry close at hand.
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We bought Chico’s in our larger/aggressive accounts. It was down 5% today near its 12 month low while all the other specialty retailers are higher. Earnings are announced Wednesday so the position is not large and we may be gone by then.
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European shares closed the week with their sixth straight daily advance. Mexico and Brazil were both up close to 2%.
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Oil gained $1.32 to $71.15. Gold was up $9 to $677. Treasuries gave ground on the short end but were firm on the long end. The two-year finished at 4.31% and the ten-year was 4.63%.
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The DJIA gained 144 points to end at 13350. The S&P 500 rose 17 points to 1480 and the NAZZ jumped 35 points to 2576.

Breadth was better than 2/1 positive but volume was light as it has been all week during this rally.

There were 50 new lows and 30 new highs on the NYSE. New highs are taking a long time to cross over new lows in this rally.

The bulls won the day and the week.
*****

 

23 August 2007 Daily Comments

Thoughts

Asian markets rose strongly over night with Hong Kong again leading the way up 2.8%. Fast money is moving into that market ahead of the Chinese money that is sure to follow since the Chinese government is going to allow mainland Chinese folks to invest in the Hong Kong stock market for the first time in history. That bubble is going to last a while longer.

European bourse indexes are up large fractions and Oil is up 40 pennies with a $69 handle. Gold is flat and Treasuries are a bit weaker.
*****

BankAmerica is investing $2 billion in a Countrywide Financial convertible preferred stock. That pretty much saves Countrywide and takes it off the bankruptcy list. It is interesting that BAC didn’t buy the company outright.
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National City is selling a preferred stock to raise capital. These are the genius that just bought billions in shares back at $38. That action reminds of Ford spending their cash wad on Jaguar and Land Rover.
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We get e-mail:
Bud: I have a question regarding the action of Ford in the market action today.  I was watching the tape today on my TV and in an up market investors seemed to be getting out Ford as though it was a dirty shirt. Ford was down 0.0733 in an up market. Do we need a down market for Ford to go up? 

We respond:
We think the action is a result of traders buying Ford convertible bonds. The way they do that is to buy the bonds and short the stock- the thinking is that if Ford goes broke traders will make money on the shorted stock which will be worthless to offset the drop in the value of the bonds

Conversely when Ford jumped up last week when the markets were lower is was because traders that were selling the Ford bonds to raise cash had to buy the Ford stock back because they no longer were long the bonds as upside protection.
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There are reports that the Goldman Sachs hedge fund, in which GS invested $2 billion of its own money last week to rescue it, is up 12% since that time.  The DJIA is up 6% in that time period so just 2 to 1 leverage would give the same result. And we are sure they are operating on more than 2/1 leverage. And, of course, the original investors are still down 18%.
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The news that the four large banks- Citi, JP Morgan, Wachovia and BankAmerica -borrowed at the discount window was greeted as a wonderful happening by the talking heads. For the life of us we can’t figure out why. The talk was that they really don’t need to borrow but that they were doing so to encourage other banks to do so. Say what?

The only reason for their actions that makes sense is that the Fed asked them to do so to obfuscate that fact that there are banks that need to borrow at the window to fund their operations (NCC?) and the Fed doesn’t want any bank runs while the markets are so volatile.
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The major measures pushed higher in the first half hour of trading but now are pulling back and testing the mettle of the bulls. Micron Tech opened lower and we bought shares at $11.30 in accounts that own Alcatel Lucent. This is an over year end purchase unless….

We also sold our trading position in Tellabs for a 5% gain.
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The Home Depot sale is supposed to close today. There has been no announcement as of 11:30am. If the deal closes the markets should rally. If the deal doesn’t close the markets will flounder. If the deal is called off the markets will collapse. Our guess is that the Fed is behind the scene on this one making sure it gets done.
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Countrywide was up $2 earlier this morning and it is now even on the day at 1pm.
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European bourse indexes gave back most of their gains late in the trading day as the U.S. stock markets slipped into the red. Oil ended up 67 pennies at $69.93 and Gold was unchanged. Treasuries were lower on the short end and firm on the long end with the two-year at 4.22% and the ten-year at 4.63%. Brazil and Mexico also were lower.
*****

The DJIA was up 2 points at 13235. The S&P 500 was down 2 points at 1462 and the NAZZ dropped 11 points to 2540.

Breadth was positive on the NYSE and negative on the NAZZ and volume was light.

There were 57 new lows and 23 new highs.

Today was a tie between the bulls and the bears.
*****

 

22 August 2007 Daily Comments

Thoughts

Investors Intelligence had 37% bears and 40% bulls last week. Coupled with the 1000 new lows on the NYSE it is obvious in hindsight that a rally was in the cards. Actually the day of the 1000 lows we did say a rally was due.

The DJIA is now up over 600 points from the low on Thursday as it opened 100 points higher after the first hour of trading this morning.

We noticed that at 10am the big bank stocks turned negative and so we sold our Dell and Texas Instruments holdings for a nice trading profit.
*****

Asian markets were higher overnight with Hong Kong up over 2% and India up 1.8%. Shanghai was 0.5% higher. The Chinese authorities are going to allow investment in the Hong Kong market for Chinese citizens. This is the first time the authorities have allowed investment outside of the Shanghai market. And that may be the reason the Hong Kong market has been higher the past few days. Maybe the Fed can convince the Chinese authorities to allow investment in the U.S. markets.
*****

European bourse indexes are also higher at midday and Gold is up $4 with Oil higher but still with a $69 handle.

Treasuries are giving ground as the cut in the Fed Funds rate that traders were expecting yesterday failed to occur.
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Citi borrowed $500 million at the Fed discount window this morning. JP Morgan and Wells Fargo also did so supposedly to encourage other banks to use the facility. JPM and WFC are said to have enough liquidity to borrow other places. And so then the question becomes if all the banks have liquidity why is there the need for any to borrow. And if one or two don’t have liquidity and the ability to borrow other places which of banks using the discount window are the ones in trouble?
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From realmoney.com:
More interesting than the Citi news will be the aggregate tally on the amount of discount-window borrowings made over the past week. This figure will be released as usual at 4:30 p.m. EDT Thursday. Last week's tally was $271 million (yes, with an "m"). The normal amount of discount loans outstanding on a daily basis is about $180 million, a figure that tends to rise during the summer and fall months to the levels seen recently.
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The talking heads on CNBC are saying the Fed will cut soon. The Citi borrowing is supposedly related to them passing mortgage originations on to the Fed by borrowing at the discount window and posting the new mortgages as collateral. And so the folks who hate big government want the government to finance the mortgage industry.
*****

Cheap is not always good:
Wal-Mart Stores Inc. quietly stopped selling two brands of dog treats in July, after customers voiced concerns that the Chinese products may have caused their pets to fall ill, but no recall has been announced, a company spokeswoman confirmed.

The world's largest retailer started pulling Chicken Jerky Strips from Import-Pingyang Pet Product Co. and Chicken Jerky from
Shanghai Bestro Trading on July 26, spokeswoman Deisha Galberth said late Monday.

Wal-Mart also placed a computerized block on all cash registers to prevent workers from selling the products, Galberth said.

"When we took it off shelves at the end of July, we pulled it based on the customer feedback so we could do testing prior to announcing anything publicly," Galberth said. "That's why did not make a public announcement -- it was still going through the testing process."

A few months ago we read that Wal-Mart was going to get some of the organic products they will sell from china. That should be interesting.
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Last week we mentioned Home Depot’s deal to sell its professional construction business for $10.2 billion as another shoe to drop. The deal was supposed to close last Thursday but was put off to this Thursday. HD also said that the buyers wanted to re-negotiate the terms of the deal. Since a buyback of 20% of the outstanding stock is to be re-purchased with the proceeds of the sale, the stock and bond markets are very interested in this deal.
*****

Bill Gross of PIMCO sees a 0.5% cut in the Fed funds rate to 4.75% before or at the September Fed meeting. Two months ago he saw over 6% on the Fed Funds rate in the next year and one half. The times they are a changin’.
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Lehman is shutting down its mortgage unit and 1900 folks will be out of work. Lehman is taking a $25 million charge.
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Gold closed up $3 at $669. Oil lost 30 pennies to finish at $69.25. Treasuries were lower in price/higher in yield as stocks rallied with the two-year at 4.16% and the ten-year at 4.64%.
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European bourse indexes closed up 1%and higher across the continent. Brazil was up 3% and Mexico up better than 2%.
*****

The DJIA gained 150 points to 13240. The S&P 500 rose 17 points to 1464 and the NAZZ gained 32 points to 2555.

Breadth was 4/1 positive on the NYSE and better than 2/1 positive on the NAZZ and volume was light.

There were 70 new lows and 30 new highs.

The bulls won the day.
*****

 

21 August 2007 Daily Comments

Thoughts

Asian markets were mostly higher overnight with Shanghai up 1% and up 25% in the last five weeks as markets around the world have sold off. India was down 2%. European bourse indexes are mixed and Gold is trading at the sign of the devil $666 again today. Oil has a $70 handle and Treasuries remain the place to go in these wild times.
*****

Capital One Financial closed their Greenpoint Mortgage unit and will fire 1900 folks and take an $850 million charge. The street says hooray and the share price is higher. And the executives at Capitol One are also happy because now they can throw some other expenses into the special charge and help operating earnings look better. Capitol One services the greatest number of credit cards outstanding in the U.S.
*****

The WSJ says that Warren Buffet is looking at purchasing assets from Countrywide Financial and that has perked up the share price of Countrywide.
*****

The major measures opened lower today and the stock markets may provide a reprise of yesterday’s down till the final hour action.
*****

Williams Sonoma, the Pottery Barn folks, had lousy earnings and Target was on the money and projected same store sales for August of up 5%.
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Oil now is trading at $69.05 at 10:30am. The major measures have turned positive.
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All is well in la la land as Fannie Mae moves to a yearly high on Senator Dodd’s remarks that the Treasury Department already has the authority to raise the dollar limit on mortgages above the current ceiling of $417,000.
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The Congress should address the sub prime mortgage category to help true home owners instead of the speculators but that issue is so complicated that only the banks will be bailed out by the Fed and Congress per the business as usual and too big to fail scenario.
*****

We added Sun Micro at $4.85, Dell at $26.09 and Intel at $23.97 to our large/aggressive accounts and Alcatel Lucent at $10.68 to many accounts.

We traded ALU over year end for a nice profit and are hoping to do so again. We have room to add more at lower prices.

We have been in and out of Intel all year and we are only adding to L/A accounts because we are only looking for a short term trade. We owned Dell earlier and again we are only looking for a trade. We are not adding to most accounts because we don’t like the fact that executives of the firm lied about earnings for four years and no action was taken against them by either the company or the SEC. So Dell is strictly a trade. Sun Micro was over $6 a month ago and we own for a trade.
*****

Foreclosure filings rose 9 percent from June to July and surged 93 percent over the same period last year, with Nevada, Georgia and Michigan accounting for the highest foreclosure rates nationwide, a research firm said Tuesday.

The figures are the latest measure of the ailing housing market, which has seen defaults and foreclosures soar as financially strapped borrowers have failed to make payments or find buyers.

In all, 179,599 foreclosure filings were reported during July, up from 92,845 in the year-ago month, according to Irvine-based RealtyTrac Inc. California, Florida, Michigan, Ohio and Georgia, account for over 50% of the foreclosure filings.
*****

3 month Treasury Bills were priced at auction today at 2.919% this am and ended the trading day at 3.60%...ouch.
*****

Oil ended down $1.64 at $69.50. Gold finished unchanged at $666. Treasuries finally slipped on the day with the two-year at 4.10% and the ten-year at 4.70%. European bourses closed mixed to higher and Brazil was up 1% while Mexico gained a small fraction.
*****

The DJIA closed down 30 points at 13095. The S&P 500 gained 2 points to 1448 and the NAZZ rose 12 points to 2520.

Breadth was positive on the NYSE and the NAZZ and volume was end of summer light.

There were 90 new lows and 20 new highs on the NYSE.

The bulls and bears tied today.
*****

 

20 August 2007 Daily Comments

Thoughts

While we were away we had 11 inches of rain in the land of milk and honey and Uncle Ben decide to rescue the wayward wunderkinds of Wall Street by opening the discount lending window at the Fed to all banks who wanted to monetize the underwater mortgage debt they were holding and couldn’t borrow against.

We should have knows it was going to occur when the bank stocks began moving the markets higher on Thursday afternoon after the DJIA had plunged 340 points in the morning. As in all casinos the house knows when it is going to change the rules and the biggest of the big boys and girls usually gets a heads up so that they can place their bets in a winning way. That’s what took place on Thursday.

The current crisis is the result of the sub prime mortgage mess and other financial jiggering. This article at salon.com is a good explanation of all the shenanigans that have created the perfect storm. http://www.salon.com
*****

Japan was down big-time on Friday before the Fed opened the discount window and the Nikkei recovered in Monday in the rally in Asia on the first trading day after the Fed acted. But the recovery was less than the fall (down 5.45, up 3%). Hong Kong was up almost 6%, Shanghai was up 5% and other Asian market indexes also rose.

European bourse indexes are higher at midday but they had time to react on Friday and so the gains are more muted. Oil is off pennies with a $71 handle as it looks like the hurricane will miss the oil area of the Gulf of Mexico. Gold is at $666.
*****

On Friday we sold into the rally and made a few dollars on our one day holdings. We continue to believe that stock markets have more to go on the downside.
*****

According to Jeff Saut of Raymond James Financial the world’s central banks have added $300 billion in liquidity to the world marketplace it the last week plus a cut in the discount rate in the largest market, the U.S.
*****

At noon Treasury Bills that mature in three months are trading under 3%. That is down from 4.5% on Friday. That yield could mean that some big boys and girls expect trouble or there are a bunch of money funds that are scared and only willing to buy T-bills.
*****

European indexes closed fractionally higher on Monday. Oil closed down 9 pennies at $70.99. Gold was up $1 at $668. Treasuries were firm with the two-year at 4.11% and the ten-year at 4.64%. Brazil was up almost 2% while Mexico was unchanged.
*****

The DJIA opened higher on the day but quickly moved negative and traded in the loss column until the final hour of trading. Program trading in the final hour saved the day for the bulls. The programs came early in the final hour and pushed the DJIA up 100 points and the major measures managed to remain in positive territory till the end of trading.

At the close the DJIA was up 40 points at 13120. The S&P 500 was unchanged at 1445 and the NAZZ rose 4 points to 2508.

Breadth was flat on the day and volume was light.

There were 90 new lows and 20 new highs on the NYSE.

Today with the final hour shenanigans the bulls won at the bell.
*****

 

16 August 2007 Daily Comments

We will be traveling tomorrow and so the next post will be Monday August 20.
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Thoughts

Asian markets were down big-time overnight with Korea off 7%, India down 4%, Hong Kong down 3%, and even Shanghai down 2.5%. Hedge funds are selling what they can in the foreign markets to unwind leverage.

At midday European bourse are also down 2% and more across the continent. Gold is down $6 and Oil is down over $2 with a $71 handle. Again this is hedge fund liquidation plus others.

Treasuries are on fire with Treasury bills down another 50 basis points as Money funds buy bills instead of commercial paper.

The Fed has added $19 billion in reserves in two passes so far today at 10am.
*****

Countrywide Financial had to draw on an $11.5 billion line of credit because money market would no longer buy its paper. Citi and JP Morgan among others are on the hook for big bucks. That is good for Countrywide because the Fed is not going to let the major money center banks wind up with a bunch of worthless paper. It is the Donald Trump principle that if you owe enough money it is the lenders self interest to keep you solvent.
*****

New housing starts were down 6% in July and Permits were down 3%. Jobless claims rose to 322,000.
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With the DJIA and S&P 500 both down 10% from their highs a month ago there should be a bounce and so we are adding some trading buys to our larger accounts: GE at $36.35, Fifth Third at $36.25, Texas Instruments at $32.55, American Eagle Outfitters at $21.97 and TLAB at $9.80. We also added GM at $29.85 and Ford at $7.60 to many accounts.
*****

Many commodities remain under pressure selling today.
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At noon breadth is 4/1 negative and there are 900 new lows and 8 new highs on the NYSE. The markets should pounce for that new low figure or…..
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Gold is now down $22 and oil is off $2.50. There certainly is liquidation occurring. The problem is in trying to figure out how much leverage ahs been removed from the system. Bear Stearns and Goldman and Merrill know since they clear hedge funds but they aren’t telling.
*****

The DJIA was down over 300 points by noon but at 12:20pm the banks are rallying and the DJIA is now down 200 points. Hang on.
*****

Gold ended down $22 at $658. Oil dropped $2.35 to $70.98. Treasuries were on fire all day and the two-year finished at 4.22 % and the ten-year at 4.66%. Treasuries gave back 10bps into the close as stocks rallied. A stock rally means no rate cut and that may catch some bond bulls the wrong way. It’s dangerous out there boys and girls.

European bourse indexes were down 3% to 4% across the continent and Brazil was down 6% and Mexico 3%.
*****

The DJIA traded 340 points lower that last nights close during the trading day. There were more than 1000 new lows on the NYSE today. That means a rally is in the cards.  With the 10% drop off the highs of a month ago a rally from the low levels of today coupled with the 1000 new lows is almost a no brainer. But it is what comes after the rally that is the great unknown. Our guess is that some point trapped longs will begin liquidating again.

The 350 points move off the lows today to close the DJIA higher is probably not all of the rally but today’s flip higher seemed more short covering than investor buying. Into the close we sold our NCC holdings for a 50 pennies loss at $28.25. Since NCC traded at $25.25 earlier in the day we took the money off the table to look at it later; and in many accounts we have the Huntington Bank position which is now profitable to the extent of the NCC loss. We held it because it acted better today.
*****

At the bell the DJIA was down 15 points at 12781. The S&P 500 gained 4 points to 1411 after being down 34 points today and the NAZZ was off 8 points to 2451.

Breadth was 3/21 negative on the NYSE and 5/41 negative on the NAZZ. Volume was too low to mark a bottom for a full correction but enough to suggest a rally before further correction. By the by, at 2pm breadth was 4/1 negative.

There were 1033 new lows on the NYSE and 10 new highs.

The bears won the day. Options expire tomorrow and Monday should be a barn burner. We’ll be watching tomorrow and back in the saddle on Monday.
*****

 

The Ides of August 2007 Comments

Thoughts

Last night we realized that the current market miasma is reminiscent of 1982. Back then the Penn Square Bank debacle (Penn Square was a phony banking operation that snookered many large banks) had placed many banks in danger of not being able to keep their funding. Bank funding came from banks selling their own commercial paper and short term C/Ds to the market place to raise money on a daily basis to have funds for their operations and loans. The money fund industry was in its infancy but even then it was a source of funding for the banks.

Continental Bank was the major bank in Chicago and had weathered the Crash of 1929 and other financial crisis over the years. But it had made participated in a lot of bad loans with Penn Square and had become dependant on selling short term commercial paper and C/Ds to raise funds to conduct its business.

A crisis of confidence swept the commercial paper market and Continental was a casualty and filed bankruptcy because its funding dried up. Back then we were younger and along with a lot of other folks we were of the opinion that a huge operation like Continental Banks couldn’t go broke. We were wrong.

And that is what may occur with Countrywide Financial in the next few weeks. Countrywide is a huge mortgage company and according to the analysts it is well run. But it relies on short term funding for its operation and the sharks are circling. This Morning Merrill went from buy to sell and CNBC is all over this story. CFC may be the next shoe to fall.

Many money funds own Countrywide Commercial paper and it is in their self interest to keep buying the paper so that they aren’t stuck with it. But if one or two large funds decide to exit the paper the trickle will become a torrent in an instant.

There are many banks that would like to own Countrywide’s mortgage operations but with the current funding crisis they may decide to wait until the Fed asks them to take it over out of bankruptcy.
*****

Asian markets were lower overnight with Japan and Hong Kong off over 2%. European markets were lower at midday. Gold is down $4 and Oil has a $73 handle as a hurricane moves maybe towards the Gulf of Mexico and the yearly hurricane game begins. Treasuries again have a good bid on the short end as the trading day begins.
*****

Home Depot has delayed the closing of the sale of its supply business from tomorrow to August 23. If that closing doesn’t take place that will be another shoe. Contrarily, if the closing does occur the markets will breathe a sigh of relief...
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U.S. consumer prices edged up 0.1% in July on falling energy prices but clothing and medical care posted sharper gains, suggesting the recent disinflation trend may have come to an end with underlying inflation near the high end of the Federal Reserve's comfort area. Core inflation, which excludes the energy and food prices, rose by just 0.2%, the same as June. A big drop in gas prices in July contributed to the smallest rise in consumer prices in eight months. Core CPI year over year was up 2.2% and CPI was up 2.4%.
*****

In the first hour of trading the DJIA was down 70 points and then up 90 points and is now back even on the day.
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European shares regained some of their early losses but most bourses still closed lower on the day. Oil ended at $73.20 and Gold was unchanged at $679. Treasuries were bid and the yield on Treasury Bills dropped 30 bps. That is a flight to quality trade. The two-year closed at 4.28% and the ten-year was at 4.70%.

Countrywide Financial is down $4 in the last hour of trading as folks who can’t sell CFC bonds and commercial paper are shorting the shares to lock in some protection. Not enough we would guess.
*****

The DJIA lost 170 points to close at 12855. The S&P 500 dropped 21 points to 1406 and the NAZZ gave up 40 points to 2460.

Breadth was over 4/1 negative on the NYSE and 2/1 negative on the NAZZ but volume was again only moderate.

There were 415 new lows and 8 new highs.

The bears won the day but since this is a Triple Witch on Friday week anything can occur the next two days.
*****

 

14 August 2007 Daily Comments

Thoughts

Asian market indexes were mixed overnight with Shanghai up 1% and India lower. European bourse indexes are also mixed at midday. Gold is off $2 and Oil is pennies higher with a $72 handle in the early going in NYC. Treasuries are flat.
*****

PPI was up 0.6% and 4% year over year. But without the essentials of living core CPI was up 0.1% and 2.3% year over year.
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UBS reported good second quarter earnings but warned that market turbulence may hurt earnings going forward. That is earnings speak for we lost a bundle last week but we hope to make it up in the months ahead.

Sanford Bernstein is out with a report that Citigroup may have lost $3 billion in trading last week.

Home Depot reported FY06 net income down 15%. For the quarter ended July 29, HD posted net income of $1.59 billion compared with $1.86 billion a year earlier.

Wal-Mart reported second quarter $0.72 EPS versus $0.76 on revs of $91.99 billion versus $92.42 billion. The company also issued downside guidance for FY '08.
*****

The WSJ discovered the shorting on downtick rule change today on the first page of their C section. We have been writing about what a bad idea it was to change the rule for two years.

From the WSJ:
Another factor some traders say is causing turmoil: an arcane rule change -- referred to as the "downtick" rule -- that kicked into effect in July that makes it easier for investors to bet on stock-price declines. Before July, investors typically had to wait until a stock was actually rising to bet on its downfall.

We say that it is no coincidence that the increase in volatility began immediately after the rule was eliminated. A talking head in CNBC commenting on the WSJ article said that the rule change may only account for 10% to 20% of the increased volatility but is not the main culprit.

Talking heads are paid to spout such gibberish. All price changes in the markets occur on the margins. By that we mean that it is the 10% that something is different from the normal that usually causes the major moves.
*****

Last week, Cisco CEO John Chambers said that this is the strongest global economy that he's ever seen.  Yesterday, he said that "recent economic turmoil was likely to subside in three to six months" and that "Cisco is not immune to economic change."
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Today we are buying Huntington Bancshares at $16.90. At that price the shares have a yield of 6.2% and a P/E of 9. HBAN is an Ohio based bank holding company. We flipped the shares last week at $17.50 when we were trading too much. We are adding to portfolios today for a longer trade.
*****

Clients who visit their accounts on the Mesirow website will notice that we are switching money funds to one that invests only in Treasury backed securities. We are doing this for the extra ounce of safety. The yield is about 20bps less but at times like these we want only the safest of money funds.
*****

European shares posted broad losses Tuesday as a warning from Swiss banking giant UBS hit shares. Market indexes across the continent closed down close to 1% and more.
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Are hedge funds that don’t hedge really hedge funds? The whole purpose of hedge funds was to hedge the markets so that the investor wouldn’t be hurt as badly in downturns. In return the investors won’t gain as much in bull markets. Last week the DJIA dropped 4% two of Goldman’s hedge fund go down 30%. Obviously they were not hedging their bets. And bets they certainly were.
*****

Gold ended down $2 at $679. Oil was up 79 pennies at $72.40. Treasuries were strong with the yield on the two-year dropping to 4.38% and the ten-year to 4.73%.
*****

The DJIA closed on its low for the day down 210 points at 13030. It is down almost 1000 points in less than a month. Sic transit gloria. The S&P 500 was down 26 points at 1426. The NAZZ dropped 43 points to 2500.

Breadth was 4/1 negative on the NYSE and volume was lighter than it has been.

There were 420 new lows and 20 new highs on the NYSE.

The bears certainly won the day.
*****

 

13 August 2007 Daily Comments

Thoughts

13 August 2007 Comments

The EU Central Bank injected $80 billion this morning. The Fed announced it is not going to make any special injections of cash today. Stocks are going to open higher.
*****

Goldman Sachs is adding $3 billion to one of its funds that is down 30% for the year. Another fund is down 27%. These are the smart guys.
*****

Asian markets were higher overnight and European bourse indexes are also higher. Oil has a $72 handle and Gold is off pennies. Treasuries are higher in yield as the global markets are stabilizing.
*****

This week is a Triple Witching week. The markets are reflecting trader optimism this morning and a rally seem to be in the cards for today. Goldman Sachs is on a conference call saying stocks are cheap and JP Morgan is telling clients to up exposure to stocks.

Our take is that August/September is a seasonally weak time of year for the stock markets. The markets rarely rally in September but they did so last year.

And anecdotally from the talking heads it seems that folks are worried about missing the next up leg. We are worried but we were last year and missed some of the move. Nevertheless we had a decent return on our investments for the year.
*****

Retail Sales for July were up 0.3% and ex autos and oil they were up 0.6%.
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In order to make a statement about their money management prowess, Goldman Sachs is adding $2 billion of the $3 billion to the North American Opportunities fund that is down 30% on the year. We often have the tendency to want to add to positions when they are lower or not behaving the way we thought they would. And then we have to remind ourselves that that we are sometimes wrong and that we don’t have all the money in the world.

Like us, Goldman is wrong sometimes. Unlike us, Goldman does have all the money in the world. And so it is bravado backed by bucks that allows them to contribute to their fund. And it isn’t just happenstance that they are doing it when the fund is down 30% in value. The OPM (others peoples’ money) is down 30% when Goldman decides to pony up its own money. Goldman has been collecting its management fee while presiding over the mess they have made. Ain’t this business great? And now you know why the brokers have the yachts and homes in the Hamptons.
*****

Zhang Shuhong, who was the head of a Chinese toy manufacturing company at the center of a huge U.S. recall, killed himself at a warehouse over the weekend, days after China announced it had temporarily banned exports by the company, the Southern Metropolis Daily said.

In the U.S. a person in the same position would retire with his $200 million golden parachute.
*****

It should be cautioning that the DJIA is up 6% for the year and is only down 5% from its all time high and yet Goldman Sachs has two funds that are down almost 30%. But the talking heads are taking this fall as a positive.
*****

This morning we learned that all the major U.S. carriers (Verizon, AT&T, and Sprint) have added the second generation Motorola Razr2 wireless phone to their fall selling campaigns. An analyst of the industry whom we have followed and respect thinks that this news is positive for MOT.

His take:
In a highly unusual development, all top five U.S. mobile operators have picked up Motorola's Razr2 for their late August/early September launch frame. Such wide U.S. carrier support this autumn could signal a third-quarter revenue turnaround for Motorola's beleaguered phone unit……Razr2 packs strong 3G support (EV-DO for Verizon, HSDPA for AT&T) into a 13-millimeter-thin phone. This is more important than it sounds. Most HSDPA-quality 3G phones out there are really thick; the Nokia N-95 is 21 millimeters. And most thin phones do not offer 3G support…..  The markets have underestimated Motorola's third-quarter bounce potential. Motorola may well surprise markets by growing units from the dismal second quarter levels and there may be average selling price upside too, since the launch of the new high-end model is so wide -- both within and outside the U.S. market. Most key rivals for Razr2 seem to be a step behind when it comes to launch schedules.

And so we are going to buy MOT at $16.90 in accounts to hold for --- with our Ford and National City.

We sold MOT at $17 last week when we were eliminating very short term trading positions. Luckily, we are re-establishing our holding at a scratch lower price.
*****

European shares closed sharply higher Monday, with financials and miners back in favor. European bourse indexes closed 1% to over 2% higher across the continent.
*****

Trading volume is much lower today than it has been for the last week. That fact makes today’s rally suspect.
*****

Gold closed down $1 at $680. Oil was up 21 pennies at $71.68 after trading above $72 in late morning. Treasuries closed higher in price/lower in yield with the two-year at 4.45% and the ten-year at 4.78%. The Treasury gain is the opposite of what would be expected with the major measures rallying. The dollar was firm today. Mexico and Brazil were both higher.
*****

The financials couldn’t get their share prices moving higher today. That in turn squashed any rally in the markets. Goldman Sachs was up over $4 in the early going on the $3 billion infusion news but closed down pennies on the day. Programs turned the major measures to the negative side in the last ten minutes of trading.

The DJIA closed down 6 points at 13235. The S&P 500 dropped 1 points to 1452 and the NAZZ lost 3 points to 2542.

Breadth was flat on the day and volume was lighter than it ahs been.

There were 207 new lows and 21 new highs.

The bears scored a slight win today.
*****

 

10 August 2007 Daily Comments

Thoughts

Not to worry are the words of the day from Wall Street. That makes us worried.

Overnight Asian indexes were down with Hong Kong and Japan down over 2%. Even Shanghai moved a small fraction lower. European bourses are lower (the EU Central Bank added another 60 billion euros to the system) and Treasuries continue to have a bid. Gold has bounced $3 higher and Oil has a $70 handle. The stock futures are indicating a down opening in the U.S.

The Fed added and extra $19 billion in reserves to the banking system this morning and the talking heads are saying that this means the Fed is signaling that it is aware of the turmoil. Duh.

The Fed statement from WSJ newswires:
The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets and will provide enough money into credit markets to keep the Fed's target for the federal funds interest rate at 5.25%. U.S. federal-funds futures early Friday priced in about a 100% chance that the Federal Reserve will reduce its key lending rate by a half-percentage point to 4.75% by the next policy meeting on Sept. 18.
*****

Countrywide Financial (the largest U.S. mortgage lender) and Washington Mutual (the largest Savings and Loan) said in filings with the SEC that the credit crunch is affecting their operations.
*****

The Fed released a statement that the discount window is open and that some banks may be experiencing unusual funding needs. This statement was released before the stock markets opened.
*****

In the first half hour of trading the DJIA was down 150 points but is now recovering as bargain hunters come. We are using the mini-rally to unload TLAB for a plus scratch and SYMC for a 50 pennies loss. We bought them in the sell off after the Fed announcement on Tuesday for a trade. We made money on the TWX, MOT, JPM, and TLAB and lost on the SYMC. In this market we want to have the funds available for higher quality issues that have sold off or these same issues all of which may get cheaper over the next week.
*****

The Fed added ($17 billion) reserves to the banking system for the second time today at 10am.

Donald Trump was just on CNBC calling for 1% Fed rate cut to save the little guy. The Donald is all heart.
*****

All the doom and gloom from the talking heads is occurring while the DJiA is up 6% for the year and the S&P 500 is up 2% and both are just weeks from all time highs. We guess the new mantra is the Fed must prevent the stock markets from ever trading in negative territory. And most of the talking heads are saying they don’t want to save the fat cat hedge fund managers and investment banks and their own portfolios. No, they are interested in taking care of the little guy and gal in Peoria. Of course they have been laughing at the lace of sophistication and investment knowledge of the little guys and gals for years they have always been happy to use the little guys and gals as an excuse to fatten their wallets. But the fat cats’ minions control the Casino games and set the rules. And as in the futures markets when the House says the limits to moves are such and such that is the law.
*****

With all angst in the marketplace please note that the S&P 500 at 11am is up almost 1% from last Friday’s close at 1433.
*****

At 11:20am the S&P 500 turned positive for the day and the DJIA will soon follow. The world is once again safe for the little guy and gal thanks to the largesse of Uncle Ben.
*****

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness...  Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic... The final outcome of the credit expansion is general impoverishment... Some people may have increased their wealth... but the immense majority must foot the bill for the malinvestments and the overconsumption of the boom episode.
Economist Ludwig von Mises

*****

The spread of the sub prime mess to France on Wednesday and Germany and Japan on Thursday - as banks and funds fessed to owning and mis-pricing some the hot stuff - suggests that the weekend is not a time to be a hero.

Following the old maxim sell when you can not when you have to we are eliminating more of our trades from Tuesday.

We stayed an hour too long on the trades we initiated on Tuesday afternoon. When we sold the JPM on Wednesday morning we should have sold the rest. But of course that is the coulda, shoulda, woulda market where everyone is always correct.

We exited our AEO position for a scratch, the HBAN holdings that we bought yesterday for a 15 pennies loss, and the speculative SHLD holding for a $4 loss to get back to owning only NCC and Ford.
*****

The Fed did a third pass into the financial markets today adding $3 billion more to the system.
*****

Gold jumped $9 today to $679. It was down $12 yesterday. Oil ended the day down 12 pennies at $71.47. Treasuries were flat on day except the 30 year which moved under 5.03 from 5.15% yesterday.

European bourse indexes were down over 2% across the continent. Mexico and Brazil also ended sharply lower.
*****

The DJIA closed down 35 points at 13230. The S&P 500 was flat at 1453. The NAZZ was down 12 points at 2543.

Breadth ended 2/1 negative and volume was very heavy.

There were 445 new lows and 30 new highs on the NYSE.

The Casino won the day and the bears and bulls tied for the week.
*****

 

9 August 2007 Daily Comments

Thoughts

Asian markets were higher overnight but European bourse indexes are down over 1% at midday. Gold is down $12 and Oil has a $71 handle. Treasuries are on fire.
*****

Last night as we rode through the land of mild and honey on our bike we thought about the trading day. We realized that volatility is back big time. And that may create some trading opportunities as well as quite a bit of risk. The DJIA really looked like some kind of Casino game yesterday. The moves in individual big cap financial stocks were as random and violent as the moves in the major measures.

The DJIA jumped 153 points in the last 10 minutes of trading. In the last half hour of trading it was up and down 100 points twice. Yesterday’s action was the result of the big boys and girls punching buy and sell programs into their computers and watching the green and red on their screens pop up.
*****

This morning looks to be more of the same. The DJIA futures are down 183 points pre-market trading which effectively negates the move of the last ten minutes yesterday.

BNP Paribus, France’s largest bank halted redemptions from three of its funds because it said it couldn’t determine the value of the CDOs in the funds. IKB Deutsche Bundesbank also announced that they are holding a meeting today to discuss their sub-prime holdings. That caused somewhat of a panic in Europe and a rush to quality and the EU central Bank added 95 billion euros in a one day tender at 4% to calm the markets.

In the U.S. Home Depot lowered the terms (tender price it will consider) of its $20 billion Dutch tender and said it was renegotiating the sale of its construction supply business. That news added to the market jitters.

Gold is down $12 which is the opposite of what would be expected in a panic. But the drop suggests that hedge funds are liquidating positions they can sell which is why the stock futures are suggesting a much lower opening. Those funds that own CDOs can’t sell them at reasonable prices and so to raise cash they need to sell liquid stocks and commodities.

Obviously, Treasuries are rallying and the speculators in the bond pits are betting that the Fed will cut the discount rate in September or earlier to avert crises. The odds of the cut are now 100% plus according to the speculators who can buy futures to bet on that thesis.

Hold on, it’s going to be wild today.
*****

The DJIA was down 240 points five minutes into the trading day but is rallying back as bargain speculators jump in.
*****

When Bush came on TV at 9:30am to speak to calm the markets the DJIA had recovered to down 100 points. The DJIA is down 150 points ten minutes into his speaking.
*****

The bank of Canada issued a statement today that everything is fine and that they will assure the continuity of the Canadian financial system. Coupled with Bush saying all is well, the Fed adding $24 billion in reserves to the banking system today, and the governments of France England and Germany plus the European Central bank saying everything is OK -- our question is “do these folks know something that we don’t?”.
*****

Bank of Canada statement:

In light of current market conditions, the Bank of Canada would like to assure financial market participants and the public that it will provide liquidity to support the stability of the Canadian financial system and the continued functioning of financial markets. These activities are part of the Bank's normal operational duties relating to the stability and efficient function of Canada's financial system. The Bank is closely monitoring developments, and will deal with issues as they arise."
*****

From today’s WSJ:

Global Alpha, Goldman's widely known internal hedge fund, is now down about 16% for the year after a choppy July, when its performance fell about 8%, according to people briefed on the matter. The fund, based in New York, manages about $9 billion……

Campbell & Co., an $11 billion hedge fund that trades in the futures market as well as in stocks and bonds and is completely driven by such computer programs, was down 10% to 12% by the end of July. Quant funds -- "quant" stands for quantitative -- generally operate by building computer models of market behavior and then allowing the computer programs to dictate trading. A recurring characteristic of the recent trouble in financial markets is that many lenders, funds and brokerages were following statistical models that grossly underestimated how risky the market environment had become. "Our risk models failed to pick up the fact that we were due for a correction," says Keith Campbell, founder of Campbell & Co. "We were highly diversified. It was the perfect negative storm."
*****

We bought shares of American Eagle Outfitters in our large/aggressive accounts for a trade as the share price opened down $1 at $22.92. AEO reported same store sales for July down 6%. The shares are down from $35 this year and at a price level where they should bounce. This is an aggressive trade.

As the markets sold off toward 1pm we eliminated our Motorola holdings for a 50 penny profit. Our guess is that many of the beaten down and high growth stocks that are moving higher today are doing so because of short covering activity.

Ford jumped 60 pennies higher yesterday (it is off that much today) and that was probably because a hedge fund was selling Ford convertible bonds they owned and had to cover the short position they had in the common stock of Ford.
*****

Huntington Bancshares, an Ohio bank holding company, hit a 4 year low today and is at a 6% yield and we bought a starter position in our larger/aggressive accounts.
*****

Oil ended down 50 pennies at $71.65. Gold dropped $13 to $672. Other commodities tanked. Treasuries rallied on the down stock markets and financial meltdown rumors with the two-year closing at 4.48% and the ten-year at 4.79%.

European bourse indexes closed down almost 2% or more across the continent and Mexico and Brazil were also down big time.
*****

We sold Time Warner for a plus scratch.
*****

The DJIA closed down 380 points at 13250. The S&P 500 lost 43 points to 1453 and the NAZZ dropped 56 points to 2556.

Breadth was 3/1 negative and volume was heavy.

There were 310 new lows and 80 new highs.

Everyone is trading blind in that they don’t know whether the rumors they hear are true. Again we would say that the casino won the day.
*****

 

8 August 2007 Daily Comments

Thoughts

Treasuries are under selling pressure as traders cogitated on the Fed Speak overnight and decided that the Fed is more worried about China selling its $400 billion in Treasuries and $600 billion in other dollar denominated debt than it is about Aunt Millie losing her home because she can’t make the payments on the sub-prime mortgage. Priorities According to the British newspaper The Daily Telegraph: The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Asian markets were strong overnight with Hong Kong and India both up over 2%. Shanghai was only small fractions higher.

European bourse indexes are also up and Gold is $3 higher while oil is unchanged with a $72 handle in early NYC trading.
*****

Cisco had an excellent earnings report and said business is gang busters and that ahs given a positive tone to the markets in the early going.

The DJIA was up 90 points after the first hour of trading on big volume and 3/1 positive breadth.
*****

We have decided to trade the volatility and so we sold the JPM that we owned for 12 hours for an almost $2 per share profit.
*****

Investors Intelligence for the last week had 43% bulls versus 47% bulls the week before. Bears were 31% versus 26%. As a contrary indicator it suggested and we saw the rally that occurred the last two days.
*****

Results of the Treasury's $13 billion auction of 10-year notes were weaker than expected. The auction yield of 4.855% was more than a basis point higher than expected and the bid/cover ratio was, at 2.30, below normal levels of around 2.50. These results occurred despite the 10-year's yield having increased about 20 basis points from its recent low.
*****

From minyanville.com:

And Sen. Christopher Dodd, chairman of the Senate Banking Committee, said in a statement, "It may be appropriate, consistent with safe and sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie's mortgage portfolio."
Naturally, Fannie Mae and Freddie Mac have long been opposed to portfolio limits, and easing the limits could directly increase their profitability.
And rather conveniently it could also bail out any number of Wall Street firms by providing them a place to unload mortgage-backed securities that are being marked to their real value.

Hmm, this sounds almost like a case of government sponsored enterprises bailing out those who perhaps overleveraged in ill-conceived investments, doesn't it?
*****

Entering the contra hour the major measures are up almost 1% with the DJIA up 132 points and the S&P 500 touching 1500. What sell off?
*****

European bourse indexes closed 1% to 2% higher on Wednesday. Mexico and Brazil were also higher.

Gold gained $4 to $686 and Oil was down 22 pennies to $72.20. Treasuries lost ground in a big drop with the two-year at 4.63% and the ten-year at 4.85%.
*****

With forty five minutes of trading remaining the major measures are higher but have surrendered half their gains. This is the time for a bear raid to close the markets down on the day and dash bull hopes.
*****

At 2:30pm the DJIA is now down on the day.
*****

And so ends a strange trading day that tops all the other strange trading days of the last two weeks. The DJIA closed up 145 points at 13648 after several visits to the dark side in the last half hour and a 130 point pop higher in the last five minutes.

If you were watching the last hour of trading today you know that stocks trading is now a casino where the big boys and girls make the rules.

The S&P 500 rose 20 points to 1497 and the NAZZ jumped 51 points to 2612.

Breadth was 2/1 positive on the day and volume was heavy.

There were 436 new lows and 150 new highs on the NYSE.

Today the casino won.
*****

 

7 August 2007 Daily Comments

Thoughts

Asian market indexes were mixed overnight and European bourse indexes are all up over 1% as they recover yesterday’s losses on the back of the strong market performance in the U.S. yesterday after their markets closed.

Gold is down $3 and oil is up a few pennies with a $72 handle in early NYC trading. Treasuries are flat ahead of the Fed announcement at 1:15pm.
*****

Productivity, a gauge of employee efficiency, advanced at an annual rate of 1.8 percent after a revised 0.7 percent gain in the previous three months, the Labor Department said today in Washington. A measure of wages and benefits increased at a 2.1 percent pace, more than anticipated and climbed 4.5 percent in the 12 months ended in June.

That gain was the largest year-over-year gain since the third quarter of 2000. Unit labor costs have advanced at an annual pace of 1.6% over the past 15 years.
*****

Your broker is your friend until the going gets tough. From Bloomberg:

Bear Stearns Cos.' decision to liquidate two bankrupt hedge funds in the Cayman Islands instead of New York may limit creditors' and investors' ability to get their money back.

While most of their assets are in New York, the funds filed for bankruptcy protection July 31 in a court in the Caymans, where they are incorporated. The bank also used a 2005 bankruptcy law to ask a U.S. judge in Manhattan to block all lawsuits against the funds and protect their U.S. assets during the Caymans proceedings.

The Bear Stearns cases may establish a precedent that would let other failed hedge funds liquidate in the Caymans, where judges have a track record of favoring management. The local monetary authority estimates that three out of four hedge funds globally are incorporated in the islands.
*****

Six weeks ago when the Fed met the DJIA was at 13400. So it is this time.
*****

Ahead of the Fed meeting we are buying a few stocks. We bought National City at $28.85 in accounts where we sold it at $32.15 on July 11. We also bought Symantec (the folks who make Norton computer security) at $18.05 sold in January at $21, Time Warner at $18.47(sold in January at $22) and Motorola at $16.35 (sold in May at $18.15).

Last year at this time the markets bottomed on this kind of action. And so we are doing a very little buying just in case. The drop has been swift but there is still a lot of room to go lower by our estimation. But we thought that last year and it didn’t occur.
*****

We are buying TLAB at $9.99. We have had luck buying the shares under $10 in the past and we think the share price is down on fund liquidation. There was takeover talk in the share price and the 25% drop in the last month has removed the premium.

In our larger/aggressive accounts we are buying Sears Holding at $134.50. The share price is down from $195. SHLD is the combination of Sears and Kmart and is run by Eddie Lampert who the financial press ahs dubbed the next Warren Buffet. At $134.50 the share price is unchanged on the year and since a good portion of Eddie’s pay is determined by the price of the shares we are betting that the share price will move back up into year end. Lampert controls 45% of the shares and is buying back shares on a regular basis.
*****

The Fed said there are concerns but... The statement is here:
http://www.federalreserve.gov/
Stocks sold off.
*****

We bought JP Morgan at $44.62 in accounts. The shares are down from $53 last month and yield 3.2%. We traded this stock several years ago and then it got away from us. We are glad to have the chance to repurchase it on the sell of in financials and will buy more lower.
*****

The DJIA is down 120 points at 1:30pm. We guess the big boys and girls are having some fun. . Oops it is only down 80 points, they are having some fun.
*****

Finally we are hopping back into Ford at $8.20 in accounts where we sold at $8.25 a few weeks ago.
*****

At 2pm the DJIA is up 80 points and so the wheel spins.
*****

Gold ended unchanged at $683. Oil was up35 pennies at $72.41 and Treasuries gave a bit of ground with the two-year at 4.60% and the ten-year at 4.77%.

European bourse indexes closed over 1% higher and Brazil and Mexico also gained.
*****

The DJIA closed up 30 points at 13500.  The S&P 500 rose 9 points to 1476 and the NAZZ jumped 15 to 2563.

Breadth was 5/4 positive and volume was active.

There were 515 new lows and 62 new highs on the NYSE,

The bulls eked out a win.
*****

 

6 August 2007 Daily Comments

Thoughts

Oil is down $2 at $63 level and Bears Stearns is still in business. The Fed meets tomorrow and traders are speculating on whether any comment about the sub-prime stuff will be positive for the markets. Like everyone else we have no idea what the Fed will say and what the markets will do on what the Fed says or doesn’t say.

Asian indexes were lower by 1% or more overnight except China which goes its merry way making new highs. European bourse indexes are fractionally lower and Gold is up $1 in the early going in NYC.

The major measures have opened to the plus side in NYC.
*****

There has been speculation as to whether LEND will go broke. LEND is a company named Accredited Home Lenders and they are the Lending Tree folks you see on every website you go to.  LEND is scheduled to be acquired at $15 per share. The shares are currently trading at $7.

Realmoney.com says the deal will close unless the acquirer, Lone Star Funds, is insolvent.

That last statement is a comment on present market conditions.
*****

Robert Nardelli will become CEO and chairman of Chrysler. Nardelli is the ex CEO of Home Depot who received a going away package of $250 million when he was fired. Actually, Nardelli doubled Home Depot’s sales and earnings while he was there but the share price fell and that is the only thing that counts on Wall Street. Since Chrysler is private the value will rise each year as the LBO firm that owns it marks the price up to collect its 3% performance fee.
*****

1370 on the S&P 500 is the trendline up from the 2002 low. 1400 on the S&P 500 is 10% down from the high in July.
*****

The Penn Square debacle it the early 1980s, the Savings and Loan scandal in the late 1980s, and the telecom/dot.com bust of 2001 were all the result of Wall Street selling the latest free lunch to the unsuspecting. The CDO, CLO, LBO binge that is currently under correction is of the same stripe.
*****

After two and one half hours of up/down trading the major measures have moved firmly to the plus side. Breadth remains 2/1 negative and volume is active.
*****

Fannie Mae and Freddie Mac are both up 8% today. Oil issues are down as is Oil. Bank stocks have a bid. There may be another hedge fund going belly up.
*****

Oil ended down $3.42 at $72.06 after trading at $71.60. The last time oil dropped this much in a day a hedge fund was going belly up. Gold was down $1 at $683. Treasuries were a little weaker with the two-year at 4.52% and the ten-year at 4.75%.

European markets closed before the mid day rally in the U.S. and were lower at the close. Brazil was higher and Mexico closed lower.
*****

The DJIA closed up 286 points at 13466. The S&P 500 gained 34 points to 1467 and the NAZZ was up 35 points to 2546.

Breadth recovered in the last hour to close 5/4 negative on the day after being almost 2/1 negative for most of the day. Volume was heavy.

There were 628 new lows and 36 new highs on the NYSE. That is the high number for new lows on this latest move down over the last week.

The bulls won the day. There was no real sell off today which is unusual and makes this rally suspect after the collapse Friday. Or maybe it makes the collapse on Friday an anomaly. Nothing is as it used to be. The financials led the markets higher. The Fed speaks at 1pm tomorrow.
*****

 

3 August 2007 Daily Comments

Thoughts

Here we go again.

The monthly Employment Report said 92,000 jobs were created in July when 135,000 new jobs were expected. The unemployment rate rose to 4.6% from 4.5%.

The report cast a negative influence on the opening and rumors about Countrywide Financial and a credit outlook downgrade from neutral to negative of Bear Stearns by Standard & Poor’s sent the DJIA down 100 points after half an hour of trading. It is going to be one of those days. Round and round the little ball goes where it ends nobody knows. The Wheel of Fortune is spinning.
*****

Oil is touching $77 and gold is unchanged while Treasuries have a strong bid on the back of the Employment Report.

Asian markets were higher overnight with Shanghai at new highs up 3.5%. European indexes are lower at midday.
*****

Unhappy Friday: American Home Mortgage Investment Corp. plans to close most operations on Friday and said nearly 7,000 employees will lose their jobs as the lender becomes one of the biggest casualties of the U.S. housing downturn.
*****

Daimler Benz announced the closing to the sale of Chrysler to Cerebus with no change in conditions. That announcement a few minutes ago at 10:30am helped stocks to rally a bit. Daimler lost over $30 billion on the buy and sale and operating losses but the share price is at a multi year high because that is old news and the glass in now half full instead of half empty.

Oil is down under $76 in NYC trading and Gold is up $4.
*****

Best headline of the day:
Ron Paul remains longshot for GOP nom
*****

The Fed meets on interest rates next Tuesday.
*****

Gold ended up $0 at $686. Oil was down $1.74 to $75.12. Treasuries were higher in price with the two-year at 4.44% and ten-year at 4.69%.

European bourse indexes closed over 1% lower across the continent and Brazil and Mexico indexes were both over 1% lower.
*****

The DJIA was down 100 points after an hour of trading. The DJIA then rallied back to even on the day about 1pm and is again down 150 points at 2:05pm. That is a move of over 300 points down and up and down today and we haven’t yet visited what has become the wild time of the day.

One reason for the rally to even on the DJIA at 1pm was that Bear Stearns held a conference call and said they were profitable and in good financial condition. But later in the conference call the CFO said that the mortgage market was the worst they had seen in 22 years and that they would not use capital to buy back stock since they needed the $11 billion in cash on hand for their business. Since the stock is down from $180 a few months ago to $110 today, traders took that as a negative and a 150 points drop in the DJIA ensued. But there are still 50 minutes of trading left in the day so anything can occur.
*****

At 2:15pm the S&P 500 is down 22 points at the 200 day moving average of 1450 and needs to close above that number today for the bulls to be technically content.
*****

On Wednesday the S&P 500 bounced off the 1440 level at 2:30pm and rallied 2% to Thursday night. Today at 2:45 pm and the S&P 500 is at 1440. That was a quick round trip.
*****

The DJIA closed down 285 points at 13178. The S&P 500 was down 40 points at 1432 and the NAZZ dropped 65 points to 2511.

Breadth was over 4/1 negative and volume was active.

There were 325 new lows on the NYSE and 50 new highs.

The bears won today and the week.
*****

 

2 August 2007 Daily Comments

Thoughts

The markets continued their volatile action while we were away. On Tuesday the DJIA was up about 50 points entering the last half hour of trading. (It had been see-sawing all day having been up as much as 150 points early in the day). Suddenly the bottom fell out and the DJIA closed 150 points lower on the day. Then on Wednesday the mirror of Tuesday’s action occurred. The DJIA was down 70 points going into the last half hour of trading and is suddenly rallied to up 160 points by the close.

Such market action isn’t for the fainthearted and we were content to be on the sidelines. Overseas markets reacted down on Wednesday to Tuesday’s decline in the U.S. and overnight last night the overseas markets gained in reaction to the higher close in the U.S.

After touching $78 yesterday oil dipped under $76 this morning but is now trading at $77 and hour into the session. Gold is up $2 at $678 and Treasuries are giving ground. Treasuries are moving up and down 10 bps a day and those are big moves in relation to recent trading history.
*****

The increase in volatility the last few weeks can be ascribed to the sub-prime mess and the reaction of the markets to individual stock stories that occur throughout the day. We also think that the abolition of the short tick rule has contributed. That’s because day traders can now short at will. But if they get caught in an updraft like they were yesterday at 2:30pm they have to cover by the close.
*****

GM reported sales down 22% in June while Ford sales were down 17% and even Toyota sales were down 7%. Since there was one less selling day this year than last the numbers aren’t quite as bad as they seem but they were still bad. Toyota’s adjusted sales were down 4% and the negative number is the first for Toyota in a long while.
*****

Jobless claims were 307,000.
*****

The stock markets for the last two weeks have been like NBA games. With NBA games you only have to pay attention to the last five minutes of the game. With the present stocks markets you only have to pay attention to the last thirty minutes of the day.
*****

European stock indexes closed large fractions higher. Mexico and Brazil were 1% higher at the bell.
*****

Gold was up $1 to $676. Oil gained 33 pennies to $67.87. Treasuries were higher in price lower in yield into the close ahead of the monthly employment report tomorrow morning. The two-year ended at 4.58% and the ten-year was 4.76%.
*****

The DJIA closed up 99 points to 13460. A two minute spike in the DJIA right on time at 80 points higher to up 130 points at 2:30pm managed to hold most of the gain into the close. The S&P 500 was up 6 points to 1472 and the NAZZ was up 22 points to 2553.

Breadth was 5/4 positive and volume was active.

There were 216 new lows on the NYSE and 45 new highs.

The bulls won the day.
*****

 

1 August 2007 Daily Comments

Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703

Dear Clients   August 1, 2007

After 25 years at 208 S LaSalle in Chicago, we are moving our downtown office to 42 South Washington Street in Hinsdale, Illinois.

We must take this action because the folks who now own 208 La Salle are converting the first 12 floors to hotel rooms and office space our size is unavailable.

In the future, all checks for deposit to accounts will need to be sent directly to Mesirow Financial, the folks who hold your accounts. We have envelopes to facilitate this activity and will be happy to supply them or the address.

Mesirow Financial
350 North Clark Street
Attention: Cash Management
Chicago, Illinois 60610

Two of our toll free phone numbers will remain the same:

Bud: 312-925-5248

Kathy: 630-323-8422

Our local 312 numbers will disappear as will the 800-654-9865 number and so we ask you to use the toll free numbers above in the future.

The move will be made early in August. Therefore, beginning on August 1st, please mail all communications to the Hinsdale address.

There will be no interruption of service and you may use our toll free numbers to reach us. Our branch office at the farm in Wisconsin will remain.

Since we communicate mostly by phone, e-mail “and snail mail”, we hope this move will be seamless for our clients.

Please call if you have any questions.

 

Bud Lemley

Kathy Cannova

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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For those clients of LY& Co and other interested persons the Quarterly Report on the routing of customer orders under SEC Rule11Ac1-6.
For Quarter Ending 09/30/2002 For Quarter Ending 12/31/2002 For Quarter Ending 03/31/2003
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Annual offer to present clients of Lemley Yarling Management Co. Under Rule 204-3 of the SEC Advisors 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.


Summary of Business Continuity Plan

309 W Johnson Street Apt 544, Madison, Wi 53703 312-925-5248
The factual statements herein have been taken from sources we believe to be reliable but such statements are made without any representation as to accuracy or completeness or otherwise. From time to time the Lemley Letter, or one or more of its officers or employees, may buy and sell as agent the securities referred to herein or options relating thereto, and may have a long or short position in such securities or options. This report should not be construed as a solicitation or offer of the purchase or sale of securities. Prices shown are approximate. Past performance is no indication of future performance.