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.
28 February 2002
For those clients checking their accounts today please be advised that we did
not buy Qwest (Q) yesterday at $35.40. We bought the QQQs at $35.40. The
mistake on my part in writing the tickets will be corrected today. As many of
you know Kathy is on a well deserved vacation. She is doing her best to
manage accounts from California, but sometimes we are able to overcome her
best efforts to keep us error free. Thanks.
28 February 2002
The markets rallied on Wednesday morning and then gave all the gains back in
the afternoon. Chairman Greenspan testified before Congress and the Senate
questioned three hapless analysts who covered Enron and didn't issue sell
recommendations on the stocks until it was too late. Both events were a total
We continue to believe a rally is in the cards and so we added the NASDAQ 100
to larger accounts at $35.40. The QQQs are sitting on support and even though
techs make up a good chunk of the QQQs, we expect them to rally right along
with the rest of the markets. It's the chicken way to buy techs.
We added Coca-Cola to some larger trading accounts at $46.95.
We began repurchasing Hughes Electronics (GMH) in our more aggressive
accounts at $13.85. GMH is Direct TV and is to be acquired by Echostar. The
exchange value of GMH is about $17 right now. We aren't trying to play the
arbitrage difference; rather we like the satellite TV business. And
valuations on both GMH and DISH are about 20% of what they were in the bubble
mania of two years ago. If GMH moves lower we will buy in most accounts. The
merger approval is going to take a while.
We also bought Sprint PCS at $9.60 in small amounts in our aggressive
accounts. We are not going to buy this stock in many accounts. PCS is the
fourth largest wireless telephone company. PCS is a tracking stock, which is
wholly owned by Sprint. The share price is way down but the company has a ton
of debt. Very speculative.
Tomorrow is the last day of February, so we expect a mark up day by the funds.
27 February 2002
The stock markets rested most of yesterday after Monday's large jump. In the
last hour of trading the averages and indexes managed to turn positive but
couldn't hold the gain and closed lower for the day. That action may have set
the markets up for a resumption of the rally today.
The Enron circus was back on television, and rumors of US troops in Iraq
placed a damper on bullish activity for most of the day. In the retrenchment
before noon, we purchased AT&T Wireless at $10.55 in many accounts to
increase positions. Barring an unusual event, we are now at our limit in our
ownership of AWE. We also added Gillette at $34.15 to larger accounts as a
trade. On a technical basis G seems poised to break out to the upside. And,
we think it is the type of stock that will participate in the rally we see
coming. The stock isn't cheap but it has been basing just below this level
for the past two years. If the share price breaks $35 in a general market
rally there is the possibility of a good trading gain.
26 February 2002
The stock markets rallied on Monday as existing home sales for January were
announced as up 16% (Can anyone say warm weather and/or real estate bubble?)
and General Motors raised guidance on its first quarter earnings from $1 to
$1.20 per share excluding special items. Those special items are charges to
be taken for restructuring European auto operations, and to exclude losses
from Hughes Electronics, which GM hasn't yet been able to sell to Echostar.
We are sure a few more lobbyist contracts and astute donations will allow GM
to get rid of Hughes. And who are we to say that losses for European auto
operations should logically reduce operating earnings, if profits from U.S.
auto operations are used to increase operating earnings. Picky, picky! And
there is also the matter of $5 billion plus in under funded pension
obligations that GM needs to address and finance. Another DJIA stock that led
the charge today was Caterpillar. CAT is going to earn $2 per share less this
year than it did in 1998. But CAT pre-announced better than expected earnings
for the first quarter so the stock rallied 6% today to within 10% of its all
Several clients have asked why we are not more invested in the stock market
if we expect a 10% rise in the markets in the next few months. The main reason
is that we don't know which stocks to own. And we also aren't sure the rally
will occur. We don't want to push our luck trading the depressed but still
overpriced tech stocks we traded profitably at year-end and early this year.
And we have learned the hard way that the out of favor stocks we usually buy
are not the type to try and trade in a 10% rally. We could buy the DJIA, but
we think the same kind of lemming buying activity by funds and institutions
that led to the overpricing of the NASDAQ has been occurring in DJIA stocks.
We have made a few references to Treasury Secretary O'Neill in the last few
weeks. That's because we believe he has no real understanding of the problems
facing the economy. In recent Senate hearings O'Neill had a go around with
Senator Byrd of West Virginia concerning who had the more poignant rags to
riches story. Both claimed the best poverty to wealth by hard work story. We
don't know about Senator Byrd, but we would attribute O'Neill's success to
the "it's not what you know, but who you know," form of business advancement
coupled with the ability to go along and get along. He was a government
official in the Nixon and Ford administrations. When Ford lost in 1976
O'Neill left by the revolving door of government service to private
enterprise to become a vice president of something at International Paper. We
would guess that that job might have had more to do with his connections in
government than his vast understanding of the paper and pulp industry. In
1985 he became president of International Paper and in 1987 he was named
president of Alcoa. When he assumed the presidency of Alcoa, the company
earned $1.22 per share in the next year of 1988. In press releases,
presumably blessed by O'Neill, we are informed that he is a proponent of
technology, because technology produces high long-term growth rates. Too bad
that theory didn't hold true at Alcoa. Alcoa did not again earn over $1.22
per share until 1999 when it earned $1.32 per share. During the twelve years
O'Neill ran Alcoa, the share price rose from $10 to $35 while the DJIA of
which Alcoa is a part rose twice as much. The rise in Alcoa's share price
occurred because the p/e ratio expanded from 8x earnings to 25x earnings. The
p/e ratio expanded not because of growth in earnings, but because of the
general trend of investors to assign higher p/e ratios to stocks as the only
game in town. In the process of leaving Alcoa, O'Neill took $50 million from
selling options he had acquired over the years. In his final years at Alcoa,
O'Neill was also a director of other corporations including Lucent and
Eastman Kodak for which he was paid big bucks
while the companies' share prices, earnings, and sales tanked.
O'Neill is a good example of the incestuous relationships that exist among
corporate boards. He also represents the revolving door method of choosing
executives with government connections to smooth the way in Washington. And
he is an example of the overpayment of corporate officers for mediocre
results. In the present economy there is no accountability or relation
between earnings results and pay and perks for most corporate officers. We
don't think this is much different from what has always been. But we
particularly resent being preached to by folks who are feeding or have fed at
the trough of corporate welfare payments. Government officials, both Democrat
and Republican, who move to private industry, are paid for the ability to
circumvent or negate government regulations, or to obtain government
contracts. Like most folks in the investment business we obtained our start
by whom we knew. But once there, it's what we did not whom we knew that has
determined our compensation. And since then, if we don't deliver for our
clients we don't keep our job.
Too bad the same rules don't apply to many of the current crop of corporate
chieftains. If there were accountability among corporate leadership, the
economy might not be in the mess it is.
24-25 February 2002
After several up and down days in the holiday-shortened week, the stock
markets closed basically unchanged on Friday. Good earnings news was less
likely to cause stocks to rise than bad earnings news was to cause stocks to
drop. For the year The Model Portfolio is up .5% while the DJIA is down .5%,
the S&P 500 is down a full 5% and the NASDAQ is down 12%.
Among individual stocks, TRW dropped midweek when it was announced that its
CEO was leaving for the greener pastures of Honeywell. That news caused
Northrop Grumman to make a $6 billion bid for TRW and TRW's share price
jumped $10 on Friday after losing $3 on Wednesday. Pity the poor analysts who
on Thursday lowered their recommendations on TRW. If the CEO who is leaving
TRW can sell the company before he leaves, he can score a double green coup.
He can collect on his TRW options and then collect new low priced options
from his Honeywell employment contract. Ain't capitalism great---for CEOs at
least? Don't think the workers at TRW who are going to lose their jobs when
the merger is completed think that way. But as Treasury Secretary Paul
O'Neill might say, "I was born in a gravel pit and capitalism made me rich.
Now all we need to do is get rid of that abomination of an income tax code
and America will be a great country."
The S&P 500 and the NASDAQ remain in bear markets and they still have not
corrected all of their bubble mania excesses. The relatively better
performance of the DJIA over the last year as it has maintained the 10000
level is our reason for believing that the two year correction is not over.
Since 12/28/95 the DJIA has doubled from 5100 to 10000. In that same time
period earnings on the DJIA have increased roughly 40% from $311 to $435. The
price/earnings ratio on the DJIA has jumped from 16X to 22X earnings. That
increase in the p/e ratio is responsible for over 60% of the move in the
DJIA. Yet DJIA earnings have been growing at only 10% for the last two years.
If markets are truly returning to the sanity of earlier times when share
prices were priced relative to earnings growth rates then the DJIA is
overpriced. Pricing the DJIA at 16 to 1 price to earnings growth ratio would
place the DJIA at 7800 based on the 2002 earning projections on the DJIA. The
7800 level also represents a 30% retracement from the DJIA's high two years
ago. 7800 was also a significant support level back in the fall of 1998. The
current 22x p/e ratio might be justified if earnings had been and were
expected to keep growing at that rate. But even with most analysts factoring
a second half recovery into their estimates, the DJIA earnings for 2002 are
projected to rise 10% to $485.
The stability of the DJIA versus the other averages over the past two years
may be a result of the fear of cash that has been foisted on the public by
the media gurus over the past five years. According to guru theory, folks who
hold cash always risk missing the next big market move. These gurus failed to
mention that folks who stay fully invested at markets tops can suffer serious
loss of capital when corrections occur. Not to mention ulcers and sleepless
Following the gurus like lemmings, folks continue to add money to stock funds
although not at the rate of three years ago. And the funds they are buying
are those that mirror the DJIA because those fund performed relatively well
last year. And even those folks who have tired of losing money in the bubble
funds like Janus are not withdrawing their money. That's because individual
investors very seldom will sell a stock or a fund at a loss. And it seems
Janus has seen the light at the end of their advertising tunnel. Janus is now
buying MO and WMT and other DJIA stocks. Fund families like Janus and
Fidelity are currently providing buying support to the DJIA and selling
pressure on the NASDAQ and S&P 500 as they liquidate the no longer tech
wonders of yesterday so that they will have funds to buy the DJIA stocks.
We expect a no more than 10% rally before summer. Stock futures on individual
stocks will be available for institutional trading by August. That may be
just in time to cause a serious September-October meltdown. And if a meltdown
occurs, we guarantee that all the regulators and congressmen will wring their
hands and wonder why futures on individual stocks were allowed. And academics
from the University of Chicago will prove that the meltdown was not the
result of futures on individual stocks being allowed to trade. Our autumn
meltdown scenario may not occur this year; in fact we hope it doesn't. But we
know that futures on individual stocks are a zero sum gambling strategy that
add nothing to the economy or the markets except a whole lot of event risk.
When futures on individual stocks begin trading in August, the conversion of
common stock investing to gambling will be complete.
For the present, we plan on maintaining our conservative posture. The risk
reward ratio in our type of out of favor stocks is not favorable as the
collapse of most of the stocks we recently sold demonstrates. Thankfully we
were out of them before they collapsed.
23 February 2002
The DJIA rallied in the last two hours today and so did the S&P 500 and Nasdaq
but not as strongly. We sold BellSouth today for a 30 cents per share profit.
We also bought and sold AWE today in our large trading accounts for a 20 cent
per share profit. We are trading in 3000 to 10000 share size so we are making
better than pocket change on the transactions. It may seem like a lot of
dollars to spend to make so little, but we obviously are hoping for larger
moves. The important concept is that we are trading both stocks off strong
interim support levels and we are quick to exit. We will have a longer post
22 February 2002
Yesterday morning the DJIA continued its rally from Wednesday. The NASDAQ
didn't as Cisco and Intel lost ground from the opening bell. And, in the
final hour the DJIA and S&P 500 reversed to close lower on the day. BellSouth
reported that earnings and revenues would grow in low single digits in 2002.
This was different guidance than BLS gave a month ago when they predicted
high single digit growth. As a result, the share price of BLS dropped 10% and we
decided to buy a chunk at $37.82 for our large trading accounts. We are
holding the stock overnight to see if we have a rebound today, but we own the
stock for a trade only.
The Wall Street Journal in a lead editorial on Wednesday questioned the
accounting and financial practices of Fannie Mae and Freddie Mac, the two
quasi government agencies that provide affordable mortgage financing for many
middle and low income American families when they purchase their homes. The
WSJ editorial page invariably exhibits an extreme distaste for any government
program or agency other than the U. S. Defense department and the defense
industry. Along with the U. S. Armed Forces, the Post Office, the GI Bill
after WWII, Social Security, Medicare, all the western dams, the interstate
highway system, commercial airlines, mass transit, cure for polio, the
medical education of most doctors, hospitals, TVA, flood insurance, police
and fire departments, and most large universities, Freddie and Fannie are
government programs that work. The fact that the WSJ chose to attack the two
enterprises in an editorial and not a news column is the most telling
indictment of the questionable factoids they presented. We don't own either
stock attacked by the WSJ. But we know that such an attack should not take
place in an editorial, without first having an exhaustive article or series
of articles in the news portion of the WSJ.
Ever since the media missed the Enron story, they have been trying to be out
in front of the next Enron. We have mentioned before that CNBC and the
financial press and other media are creating problems for corporations and
investors by reporting innuendo and fabrications in the hope of predicting
the next collapse. In the process they are creating stories, not reporting
21 February 2002
The stock markets rallied yesterday. We don't know why. Other than buying
some more AT&T Wireless, we don't have any stocks to buy on our plate at this
The present is a good time to demonstrate the value of taking losses rather
than holding on and hoping. There is an old saying that goes, "take your
losses and let your profits run." Because of increased market volatility in
the last ten years we usually don't let our profits run. That's because we
are content hitting singles rather than trying to hit home runs. But because
we are taking profits more quickly, the "take your losses" part of the saying
is even more imperative. For example, in the last few months we sold JPM for
small loss at $35.30 and it traded today at $29. We sold AOL at $28.70 for a
10% loss and it traded today at $24. We sold Q at $12 and it traded today at
$7.50. The same price action has also occurred with stocks we sold for
profits. We sold TLAB at $17 and today it traded at $11. We sold CIEN at
$16.30 and today it traded at $9. We are not implying that these stocks will
not recover in price and trade at higher levels than where we sold. But we
know that when we hold a portfolio of stocks where we had profits that turned
to losses and losses that became bigger losses, we don't have the flexibility
or objectivity to make sound judgments. It took us many years to learn this
lesson. But we have. And because we have learned the lesson, and acted upon
it, we now have the funds to repurchase these stocks at these lower levels,
or to wait, or to buy other stocks. Taking losses is difficult. But not
taking losses, in time, is disastrous in volatile markets.
20 February 2002
Yesterday and last week end were a good time to have a large cash position.
So is today. There is something in the way stocks are trading that suggests
an underlying uneasiness with owning stocks. The sell off in bank and
brokerage stocks suggests that institutional investors know more than John Q.
Public. Major financial institutions knew that Enron was a house of cards and
thus were able to attempt to mitigate their risk. Or so they hoped, although
in the case of JP Morgan Chase, and some other major players, it will
probably take a court to decide whether the risk was eliminated. Enron had
myriad derivative contracts outstanding. All the contra parties to those
transactions were quick to say they were hedged against any major losses. We
think the bond and stock markets are saying otherwise.
There is irrational fear in the marketplace. There is also rational fear in
the marketplace, and we won't know which is which until the Enron, Global
Crossing, "debt crisis" dust settles. For now we urge caution and are being
cautious with our accounts. Prices on most stocks are not low enough to
justify assuming more risk at this time.
17-18-19 February 2002
We were pleased to note that once again a comment from our Winter 2002 Lemley
Letter was featured in this week's issue of Barron's. It was listed in the
Market Watch column, which is in the Market Lab section of Barron's. Another
quote from the same letter was featured in the same column three weeks ago.
The comment used is especially germane now as low interest rates are forcing
folks to turn to speculative long term bond funds for 7% and higher yields. We
continue to stick with US Treasury Notes due in two years yielding 3%. Do not
go longer in maturity. There are times to accept lower yield for safety of
principle. Now is one of those times.
A Sampling of Advisory Opinion
From February 18 issue of Barron's
The Lemley Letter
208 S. LaSalle St. Chicago, Ill. 60604
WINTER 2002 ~ Interest rates are currently at 40-year lows, which means that
prices are at all-time highs. It's no coincidence that preferred stocks are
currently being marketed to individual investors. Wall Street has a way of
giving investors just what they don't need. Wall Street profits from
individual investors, depending on the naiveté of folks who need yield to
live on but are not asking the right questions. The question to ask is: If
preferred stocks yielding 7% are so great, why are banks selling their own
newly issued preferred stock to me? Why aren't they going to the Fed and
borrowing money at 1.75% and using that money to buy the 7% preferred stock
of other companies and banks and locking in a risk-free 5% return? The answer
is that these stocks are not risk-free. As long as interest rates stay low,
the preferred stock being sold today will not drop in value. The odds on
their increasing in value are minimal, since interest rates are as low as
they can go without a Japan-style economy.
-- Ralph Lemley
We finished the week with only one stock in our Model Portfolio. That stock
is AT&T Wireless. By happenstance, this week's Barron's featured wireless
cell phones on its cover and the consensus of analyst opinion was that AT&T
Wireless was the best of the lot. That scares us a bit, since we worry when
we are on the same page as the analysts. For the year, the Model Portfolio is
basically unchanged, while the S&P 500 is down 4%. With only one stock and
the remainder of our funds in cash and two year Treasury notes, we are
obviously signaling that we don't like the stock market. We can't find any
stocks we absolutely want to own and so for now we are going to stay on the
sidelines. While a rally may still be in the cards before April, the risk
reward ratio that we see suggests caution.
Happy Presidents' Day
16 February 2002
Monday is a market holiday to celebrate Presidents' Day. The stock markets
ran into more accounting trouble today when the NY Times published an article
that said that IBM derived as much as 12 cents per share of earnings in the
last quarter from the sale of a business to JDS Uniphase. The crux of the
argument revolves around whether the sale should have been treated as a
special item rather than including the revenue in continuing operations. We
think it wasn't kosher, but then IBM and GE have been doing that stuff for
years. Not to worry.
We saw a report that real estate prices rose 10% last year while the stock
markets were down. We know some folks trying to sell property who wish they
could just sell the property for the valuation placed on it two years ago. We
have always said that real estate prices exist in a dream world of no
liquidity. If the prices of every piece of property in the U S were listed
and traded daily like stocks, we guarantee that real estate prices would not
have been risen 10% last year.
The media reported yesterday that scientists have cloned a cat. We don't know
why that's news. Wall Street has been cloning gurus for years. Gurus are the
folks who tell you to buy a stock after it has risen 200% and to sell that
same stock after it has dropped 75%.
AT&T Wireless completed its acquisition of Teleport yesterday by issuing 145
million shares of stock and assuming $2 billion plus of debt. AWE also issued
$345 million of stock, for which they received payment, to NTT DiCoMo. NTT is
Nippon Telephone, which owns 16% of AWE. We think AWE overpaid for Teleport
but they made the deal in different times. And they picked up one million
subscribers and 20 million plus potential subscribers. In addition to the
liquidation pressure of selling by formerly highflying mutual funds, AWE
share price has been under pressure from the selling of 100 million shares of
AWE by mother AT&T. That selling has been completed. Now the merger
completion should remove the arbitrage selling pressure. Finally, options
expiration is today so the price of AWE will not be fixed on the $10 strike
price. So, hopefully, all we have to deal with now is the market pressure
that all telecom issues are under. All this selling has presented us with a
wonderful buying opportunity. And with our large cash position we can relax
and let time reward us.
Gap Stores debt was downgraded by Standard & Poor. The share price is making
new lows. We haven't heard lately from our friend at Prudential, but we
are sure when we do we will learn that her upgrade from sell to hold at $15
didn't mean to buy. It really meant to "hold" your funds for a better buying
opportunity. We have a soft spot in our heart, but not in our head, for GPS.
We think they will recover eventually but from lower prices.
We'll have a new post on Sunday with the Model Portfolio.
15 February 2002
As the DJIA crossed 10000 we sold our SBC position in most accounts at $37
for a $1 per share loss. The SBC sale was for the purpose of raising cash. We
now hold only AT&T Wireless and cash and two year Treasuries yielding 3%. We
have been trying to trade these markets for the past six months and really
haven't gained anything but sleepless nights. So we are heading to the
sidelines for a while. Please understand that the stocks we have been trading
like Cisco and EMC have been, and remain, overpriced on sales to share price,
and price to earnings ratio. We traded them because they had the volatility
needed for trading purposes. But their volatility is and has been the reason
for our speed in selling when new info or our gut affected our view.
We are maintaining our holdings in AWE because we believe that it is under
valued at $10 per share. Our valuation call is relative to all the other
stocks in the marketplace at the present time. Customers and revenues are
growing, capital needs should subside after 2002, and the current price is
less than two times revenues. Downside risk in a bear market is 50%, but
upside over the next four years is at least 150%. So we will hold and add to
if it drops.
The problem with owning many stocks is that we have no confidence in the
economy. Congress and the White House are more interested in pointing fingers
over Enron and Campaign Finance than in developing a prudent stimulus
package. We believe that the stocks leading the markets higher are over
priced and over owned. The same gurus, who were suggesting Coca-Cola and
Gillette four years ago, and Cisco and Worldcom two years ago, now have a new
list of suggestions. Maybe they will be right this time but we don't think
so. And we have been right for the past three years. We believe this year is
going to be a nonevent and so we are withdrawing to the sidelines to recharge
our batteries and rethink our strategy.
Because of 9/11, the markets have also become more vulnerable to unusual
events affecting investment confidence. Markets abhor uncertainty and there
is plenty of uncertainty around the country, and the world. It's true that
markets do best climbing a wall of worry. But that wall is usually composed
of substantial earnings gains and low p/e ratios. The wall these markets are
climbing is the same one they have been having trouble with for the past four
years. And that is the wall of no revenue gains and overpriced stock
favorites, made that way by every fund buying a few favorite issues.
Valentine's Day 2002
Happy Valentine's Day to all our sweethearts. Yesterday was a day of no guts
and no glory. We sold our position in EMC at the opening on Wednesday at
$14.10 for a maximum 38 cents per share loss. We sold the EMC because the
Wall Street Journal carried a story about phantom sales being alleged by a
former executive of EMC who was fired by the company. Since we owned EMC for
a trade we decided to go to the sidelines.
The four day rally in the stock markets continued during the day and as the
DJIA approached 10000 we sold our position in Cisco at $17.60 for a nominal
to one dollar per share gain. We also sold our position in Schwab at $14.50
for even money in larger accounts to 80 cents per share loss in smaller
accounts. We sold the SCH and CSCO because the DJIA was approaching
psychological resistance. Moreover, the domestic political and international
political situations are making us nervous from a standpoint of exposure to
stock market risk. And when we get nervous we go to cash.
Those sales leave us with a large position in AT&T Wireless in all accounts
and a good size position in SBC in many accounts
13 February 2002
The stock markets pulled back on Tuesday, after two days of nice gains. On
Monday morning we bought UAL at $12.75 in aggressive accounts where we had
traded it profitably twice before at the same purchase level. We were
guessing that after the mechanics union approved the new contract with a
raise of $10 per hour for senior mechanics that the stock would jump two or
three points. Unfortunately, about an hour after our purchase, the head of
the mechanics union announced that he thought his members would reject the
contract and vote to strike on Tuesday. We slept on this news and yesterday
decided that the upside we were looking for was two points, and the downside
risk if the contract was rejected is four or five points. And so we sold for
a 70 cents loss including commissions. This is an example of where breaking
news changes the trading equation. When that happens we take our loss and
As the DJIA approaches 10000 it seems to run into trouble. We continue to
expect a rally before April but we are content with our large position in
AT&T Wireless, and our trading positions in SBC, Schwab, Cisco and EMC. Any
rally will be contained by the reality of the economy. Until then, 3% two
year Treasuries are king.
12 February 2002
The stock markets gained today reversing last week's downward action. After
so many down days a move higher is logical. We neglected to mention in our
weekend roundup that we sold the Sun Micro in our aggressive accounts at
$9.85 per share on Friday for a nominal gain. Since we purchased EMC and
Cisco in our aggressive trading accounts, we wanted to manage our exposure to
techs that we are trading.
The media seems to have tired of Enron and Tyco. With the Winter Olympics and
the Westminster Dog Show this week, maybe the markets will use the news
respite to stage a comeback. We have been buying small amounts of Timberland,
the shoe folks, over the past few days. We have paid between $31 and $33 per
share for the stock. We made a nice trade in TBL several years ago and with
the stock selling at 50% of the yearly high, we are buying in our aggressive
accounts. Because the stock is so volatile we are treading softly for now.
09-10 February 2002
Compared to most of the stock markets we had a good week. We didn't lose any
ground with the Model Portfolio up a bit over 1% for the year while the DJIA
is down 4%, the S&P 500 is down 6%, and the NASDAQ is down 8%. We hate to do
well only by not losing. We'd rather be making money. Most of our managed
accounts are up 1% to down 1%. We survived the week's carnage by having a lot
of cash/Treasuries, and owning a few stocks that held their own,
We added more AT&T Wireless this week when it dropped below $10 per share.
Book value with goodwill taken out is still $7 per share. Revenues are
expected to grow in the low double digits. While this is a slowdown from the
30% growth of past years it is reflective of a maturing company. Moreover,
the share price is one third of what it was at its' high two years ago, while
revenues are two times what they were two years ago. AWE is not yet showing
earnings but cash flow is close to $2 per share and this company does not
have any funding problems. We think fair value in the current market is
around $16 per share or twice next years revenues. AWE is a 10% or more
position in most accounts and we will hold unless share price jumps to $16 in
the spring rally we envision.
SBC Communications is the Regional Bell Operating Company consisting of
Southwest Bell and Ameritech. Also owns 50% of Cingular Wireless with
BellSouth owning the other 50%. Cingular is the second largest wireless
company. SBC is on its low and in any rally should run to the mid forty
Charles Schwab is selling for about one third of its two year high. We have
traded twice in the past three months for small profits. We also purchased
Cisco and EMC in larger accounts where we had traded both at least twice in
the last three months for profits. All three of these stocks are anchovies.
Friday afternoon there was a court ruling on asbestos liability that will
have a negative impact on those companies with asbestos liability exposure.
Coupled with the continuing Enron soap opera, the stock markets have a pretty
tall wall of worry to climb. We continue to expect a rally of 5% to 10%
before April Fools Day. Hope we aren't one.
The Model Portfolio as of 09 February 2002 has been posted.
09 February 2002
This was a downer of a week for the stock markets. Enronitis, asbestositis,
and funnystuffitis conspired to cause analysts to reconsider their
recommendations on various stocks. Even with Friday's tepid rally the DJIA
was down 200 points and the NASDAQ was down over 100 points. Happily, our
stocks recovered most of their early week losses.
Several years ago an analyst warranted headlines for placing a "buy"
recommendations on a company's stock. Now an analyst garners headlines for
placing a "sell" recommendation on a company's stock. Yesterday we bought
CSCO in our trading accounts and today we added it to other larger accounts.
We have traded Cisco successfully over the past three months and we think an
analyst's "sell" recommendation on CSCO issued yesterday has provided another
opportunity for a trade. CSCO is definitely an anchovy.
We'll have a review post later this weekend.
08 February 2002
Enron officials donated millions of dollars over the years so they could have
face to face meetings with Congress. Then, when they have the chance, they
decline the opportunity. Go figure.
The stock markets continued to meander yesterday with no discernible trend.
We decided to buy EMC in many larger accounts yesterday because it has pulled
back to the level where we have successfully traded it twice before. We paid
$14.24 per share for the stock. We also sold the Verizon we bought yesterday
in our aggressive trading accounts at $44 for a nominal profit so that we
could buy Cisco at $17.30 per share and Sun Micro at $9.38 per share in those
same aggressive trading accounts.
All the gurus seem to have turned short term negative and long term positive
on the markets. We think the opposite. We think we are going to have a
trading rally sometime in the next month before the markets head lower.
Two year Treasury notes yielding 3% remain very attractive.
07 February 2002
Last year at this time the S&P 500 was at 1352. Yesterday it closed at 1082.
Both the Republican and Democrat stimulus bills failed in the Senate
yesterday. There seems to be general guru agreement that no stimulus package
is needed. Of course the gurus are still employed, for now.
We purchased Verizon Communications, the New York RBOC with the largest
wireless telephone service, in our aggressive trading accounts today at
$43.60. We have been thinking of adding VZ to accounts as it has dropped from
$50. We may hold or trade the stock or add it to more accounts if it
continues to drop in price. We think SBC and VZ are dropping in price because
they are salable in size by large mutual funds that are raising cash to meet
Allied Irish Banks announced yesterday that an employee in Baltimore lost or
stole $750 million dollars. Oops. And Hasty Pudding Theatricals, the Harvard
University theatrical group, which is the oldest university theatrical group
in the country, announced that two seniors embezzled $90 thousand. Maybe they
needed the funds for tuition.
Over the weekend, while reading the NYT financial pages, we learned that Ford
Motor had lost $1 billion trading in palladium. We were amazed this huge loss
had not received a bigger play at the time it was announce with year end
earnings several weeks ago. Yesterday, the WSJ had a lengthy article on the
topic. Seems Ford execs left the purchase of palladium up to the same folks
who buy the base metals for the company, and no one thought to hedge the
The proposed Hewlett Packard/Compaq merger is a hard one to figure out how to
play. We would like to own HWP because we think Carli Fiorini is getting an
unfair rap, and is actually doing a good job. But if the merger is approved
by shareholders, HWP's share price will probably drop as arbitrageurs buy CPQ
and sell HWP to lock in a profit. And if the deal doesn't go through, HWP
will rise, as those short HWP and long CPQ have to get out of their positions
by buying HWP and selling CPQ. But if the deal doesn't go through Carli will
probably lose her job and then we wouldn't want to own the stock. So we are
06 February 2002
The Tyco-Enron-Elan-wireless telecom soap opera continued today. We have no
idea when it will end. With the foul mood the markets are expressing, and the
stock markets current dislike of companies with large amounts of debt, it
will be interesting to observe the reaction to Gaps earnings due February 28.
We bought more AT&T Wireless yesterday with the funds realized from the sale
of Schering Plough two days ago. We paid $9.45 per share and bought the same
number of shares of AWE as we had of SGP, except for our two grandchildren
for whom we bought and extra 50 shares each. When the markets recover from
this correction/collapse, we think AWE will perform as well for us as Oryx
did three years ago, or Abercrombie & Fitch did two years ago.
We are content to watch the markets. It is not the right time of year to make
any large bets. If this were late September or late December we might be
tempted. We think a large part of the selling is coming from mutual fund
families like Janus and Fidelity where folks are finally giving up and
cashing out. Actually, part of the selling pressure in AT&T Wireless is
probably coming from these two fund families which owned 75 million shares
between them last year. We are not buying AWE for a quick pop. We are buying
it to own over the next few years. Mutual funds are selling Tyco and Elan
also but the fundamentals of those stocks don't appeal to us. We don't think
it is proper to lump AWE in with debt laden telecoms like Nextel and Global
Crossing and so we are happy to keep nibbling as AWE's price erodes.
Two year Treasuries yielding 3% are King.
05 February 2002
The way the stock and bond markets acted yesterday leads us to believe there
may be a hedge fund or bank or investment bank in financial difficulty. Also
there must be liquidation taking place at some of the poorer performing large
mutual fund groups. We could try to be heroes and buy stocks at these levels.
But we think we will take a pass this time and remain observers till we have
a better feel or understanding of what is occurring.
Many commentators have noted that the stock averages and indexes are all up
20% or so from the September 17 low. What few have mentioned is that the DJIA
and the S&P 500 are both at their September 10 closing levels. They reached
those levels after a slow, persistent summer sell off. We continue to believe
that a true bottom will not be made until more pain is felt by large cap Dow
We sold Schering Plough yesterday at $32.69. A client asked why we sold,
especially at a loss? Everyone hates taking losses including us. We sold
because we think SGP is going lower. All the other stocks we sold recently
that we thought were going lower did go lower after we sold them. Of course
all the stocks we held have also gone lower. So that's not a good answer. A
better answer is that at certain times we lose confidence in a stock, because
of news or price action or the overall market. Or we see another stock that
is more attractive. Or we just want more cash in the account. We think all
three of these reasons apply here. The "Street" seems to be selling drug
stocks. Most drug stocks didn't rally after year end or after first quarter
earnings. And so, we think drug stocks will be under selling pressure
throughout the first quarter of 2002 as institutions liquidate them. And a
stock we really want to keep acquiring, AT&T Wireless, moved under $10 today
and we may buy more if Awe drops lower. Finally, we also don't mind having
We neglected to mention that last Wednesday we traded Bank One in our
aggressive trading accounts. Bank One had dropped three dollars in two hours
during a sell off in bank stocks. We didn't want to carry the position
overnight since we bought it for a "pop" into the close so we sold and lost
fifty cents per share. On Friday we bought Coca-Cola at $43.80 in those same
accounts for a trade, and sold the stock today for an 80 cents per share
Arthur Andersen has hired Paul Volker to save its reputation and its business
from the Enron scandal. It's always interesting to see how the power
structure and players remain the same no matter whether the Dems or the
Repubs are in power.
Cash is king.
04 February 2002
The Patriots won the super bowl in an exciting game. Bad news for the markets
since the Pats are an original AFL team. A down January for the major
averages and indexes and an AFL team winning are a double whammy for crystal
ball gazers. More relevant factors might be the fact that earnings, while
beating estimates, are still well below levels of last year for many
companies. And any improvement this year will still leave earnings short of
two year ago levels. The new budget emphasizes defense spending, but with the
Dems controlling the Senate we would guess that the domestic program cuts are
going to be mitigated. That means larger deficits and higher long term
interest rates. Tyco and Enron and now Williams Companies are going to
continue to be big stories this week. That means more negativity. It's only a
matter of time till GE joins the accounting brouhaha. With Jack Welch gone,
we don't think CEO Jeff Immelt has the stature to dismiss rumors that the
short sellers may start. And so we think institutions will migrate to the old
faithful stocks where there is some visibility on sales growth and no
accounting confusion. SBC and AT&T Wireless will show growth and have
relatively straightforward accounting. Schering has problems with Claritin
going off patent but that's why it is selling at the price it is. Schwab is
interesting because of the assets it controls. And cash remains king, as it
has the last three years.
02-03-04 February 2002
Looks like Punxsutawney Phil saw his shadow today so six more weeks of winter
are on the way. With the way winter has been going in our parts, six more
weeks won't be bad at all. We are expecting a 5%-10% rally after earnings
season finally ends in a week or two. But we remain cautious on the outlook
for this year. Low interest rates alone will not bring the markets back. If
low interest rates would be able to do that the Japanese markets would be
triple their current level.
Greenspan has lowered rates more than is warranted because he is trying to
rescue the banks from bad loans. The Fed is concerned with the big picture;
not how its actions affect tired and retired folks. We said this back in the
early 1990s and we will say it again now. Greenspan is rescuing the banks by
taking interest income from the pockets of savers and retirees. Politicians
are always telling folks to save more money for their retirement years. Then
the politicians through there appointees take the potential earnings from
them. The banks do need to be saved from their bad loans, but unfortunately
accountability is not part of the rescue plan. Where are the fired bank
leaders without the golden parachutes? The term free enterprise does not
apply when the good of the business elite is concerned. Soak the savers, save
All the ranting in the world is not going to change the Fed's attitude. So
our expectation is that the Fed will keep Fed funds under 2.5% for the year.
That's why we have been buying 21-24 month maturity US Treasury notes. We'll
receive 3% for the first 12 months while short term interest rates begin
their gradual rise from the current 1.25-%. The interest we receive from the
notes now, is more than double the present short term rate on cash held for
reinvestment or in money market funds. When interest do reach 3% we expect to
be holding a note with a maturity of less than a year. We do see much higher
rates down the road, but because there will be no stimulus package soon we
don't think the Fed will need to raise rates aggressively. In fact our
scenario has the stock market stagnating and the long end of the bond market
rising because of the increased supply arising from the large deficits the
Federal Government will soon begin incurring. With rates rising, the yield
curve will steepen, with the short end being kept artificially low by the
Fed. At some point we will probably lengthen maturity, but not now.
We offer a winter poem we imagined on our walk today. Yesterday's snow has
certainly brightened our landscape and our feelings.
Now winter lays upon the land
The blanket sprayed is nature's hand
That shields the earth from too much cold
So fragile folks may venture bold
The chickadees cluster close
Beneath the elder tree below
Hung with seeds and suet fat
The field mice too, soon join the show
It's time to strap the snowshoes on
And call our little dog to heal
We'll head out to our favorite path
And wend our way to wonderland
Hoarfrost clings to tinseled trees
And milkweed wears a shiny glow
Hungry hawks circling high
Look for creatures in the snow
The coyote tracks are everywhere
Where squirrels and rabbits make their mark
That big ole buck they missed last year
Has made a meal of cedar bark
The suns so bright it hurts our eyes
As trunching over land we go
Our fortunes here for us to know
The pure white joy of winter's glow
BL Feb 2002
1 February 2002
We've posted The Model Portfolio as of the close of January. For the month
the Model was up 1.0 %, while the S&P 500 was down 1.5%, the DJIA was down
1%, and the NASDAQ was also down 1%. Guess that means we will be up for the
year while the popular averages and indexes will be down. That's if the, "as
January goes so goes the year," holds. Institutions marked stocks up
yesterday into month end so we would expect a bit of a pullback this morning.
But we wouldn't be surprised to see the rally resume. Retail stock earnings
come the next two weeks but the markets don't expect much from them so we
wouldn't expect any individual disasters to affect the overall markets.
1 February 2002
Rabbit! Rabbit! We spent yesterday enjoying the first real snow of the
season. Since we left the office early to play hooky we'll comment on the
markets in our weekend post. Several folks have commented that many of our
poems are about death. Since death is our next great adventure, we are
intrigued by it. Also, living in the country, raising and selling animals and
watching both animal and human hunters we are exposed to death on a daily
basis. For what it's worth, we present one of our favorite poems.
Owen Flynn's Burial
They buried Owen Flynn today
On a snowy February sway back hill,
And not a tear for him was shed
Cause all his folks 'cept two were dead.
The church set there like a Christmas card.
The folks were dressed against the hard cold.
The graveyard seemed from a Dickens book
With sand and snow and a slushy look.
At least by appearances you'd have to say
The years had been hard on the people there,
The young ones gaunt and lean and old
And the old folks lookin' of stories to be told.
And yet any sorrow was strangely lacking
And missing also was love,
For there's an age you reach in life
When people say enough.
Perhaps that judgment is too harsh
For Owen had surely lived past his years
And when you've buried sons and daughters first,
For an old single man it's hard to find tears.
Then who was this man? And why were they there?
Since no one was his peer.
Well, out in the country they bury their dead
And in death everyone is dear.
The service was over and lunch would be served
As soon as Owen was in the ground
The women save one to the kitchen repaired
While the men folk moved on to the ground prepared.
The folks trudged slowly up the sand snow hill
With talk of tractors and cows and hay
The hearse, incongruous, shiny and new
Led the mournless way.
All of sudden a scream let out
Owens tombstone came crashing down
A leg was broken, a man in the grave
And Owen still waited above ground.
The man climbed out; the ambulance came
And Owen was quickly disposed of.
For that's the problem when you live past your day,
Your either forgotten, or in the way.
BL Feb 1974
February 2002 Thoughts
January 2002 Thoughts
December 2001 Thoughts
November 2001 Thoughts
October 2001 Thoughts