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For those folks who have accounts with us, you may now go to: www.aacesonline.com 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. NASD regulations require the aacesonline site to be secure. Thus your password must be changed every ninety days. You will be prompted to make this change when needed.

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 December 31, 2002 For Quarter Ending September 30, 2002


28 February 2003

7:31am and fourth quarter GDP was revised to up 1.4% from up 0.7%. Equipment and software spending were revised higher as were inventories and also state and local spending. Building up inventories when nothing is being sold is not helpful since it robs from this quarter's production. The state and local spending won't be there this year. The University of Michigan sentiment number is announced at 8:45am and at 9:00am The Purchasing Managers Index are the next and last numbers to trade off today.

Stock futures are positive on the GDP news.

In the useless but interesting information department that has nothing to do with stocks; "Odeint, dum metuant" is a new term entering the war talk lexicon. It comes from the old Roman Empire and refers to the safety of Roman citizens as they passed through the world being protected by the military power of Rome and means "let them hate us, as long as they fear us".

8:44am and the DJIA is 25 points higher awaiting the Univ. of Michigan survey in the next minute. The number in February was 69.9 versus January's 72.8. It could have been worse.

9:01am and the Chicago PMI was 54.9 in February versus 56 in January. The stock markets now are free to trade on this info.

12:02pm and we are putting some money to work in our accounts. We are buying stocks we have been friends with for many years. When we were writing yesterday about Mc Donald's we realized that we wanted to do some buying of stocks that are off this year that fit our trading criteria.

The first is GPS which is off $1.50 today at $13.50 on a BAC downgrade. GPS said February sales are going to be punk but February sales don't really matter in the long run. We know we swore off GPS when Mickey Drexler left, but we are allowed to change our mind if we think there is an opportunity to make money. The shares are off $1.50 today and we are looking for a trade. We are also buying AT&T Wireless for another trade at $5.80 and Pepsi at $38.40, Kraft at $29.70, Eastman Kodak at $29.95 and HPQ at $15.90.

In our most aggressive accounts we are buying First Horizon which is down 60% today at $2.07 on lousy sales news. We traded this drug stock at year end profitably and we are only looking for a quick trade here.

Finally in many accounts we are buying the SPDR Technology Trust at $14.50 because tech stocks have been the leaders in any rally the past month. We may be a bit early but our feeling is that war or no there is going to be a decent March/May rally. We are also buying the SPDR Financial Trust at $21.20 and the SPDR Utility Trust at $17.90.

2:02pm and we have been busy with our buy tickets. We have more money to commit but we don't want to go overboard anticipating a turn. Entering the final hour stocks are mixed and we have no idea how they will close. MCD, the stock that moved us to do some buying ran away from us on the upside so we will wait to see if it comes back down under $13 next week.

3:02pm and the DJIA closed up 7 points at 7890. The S&P 500 was up 4 points at 841 and the NASDAQ was up 13 points at 1337.

For the year the DJIA is down 5.3%, the S&P 500 is off 4.5% and the NASDAQ is up 0.5%. The Model Portfolio is up 7.1% at $493,432. We lost a few dollars on our trades earlier this week. As of today the Model is all cash but we have purchased about $130,000 worth of stock that will settle next week. So we are about 26% invested in stocks as of Monday. We will update the Model Portfolio on Tuesday.

And tomorrow is another day.


28 February 2003 - Morning Comment

7:04am and the stock futures are lower. Europe is slightly positive as was Asia but there is no conviction in the stock markets of the world. The early news is that Iraq will dismantle the missiles, Russia may veto in the Security Council, Chirac is in trouble in France for opposing the U.S., and Gap Stores is lower on a reduced sales outlook.

We were just thinking that people are amazing in the energy created and consumed in thinking and talking about controversial subjects. The discussions on Iraq have reached the point where folks of good faith who disagree are having a harder time being open to another point of view. We noticed that our weekly paper had a full page ad supporting young soldiers from our community who are on active duty. We do too, and by opposing war we hope they can come safely home without being placed in harms way. It was just yesterday that we mentioned that the call up of reserve units to fight in Iraq will have the effect of stifling some objections to war because of conflicting loyalties, one to conscience and the other to friendship.

Our take is that Bush is going to go ahead with the war no matter what Saddam does and that the U.S. may move sooner than later. This weekend starts the five day window of no moon and is one of the times set for attack. Also moving this week end would surprise and not allow the Iraqis the chance to prepare. Of course it would raise a hullabaloo in Europe but we think Bush doesn't really care about the war wimps overseas or in this country of which we are one.

With all the conflicting opinions the stock market should again have a 100 plus point move today as traders sort through the conflicting opinions. Until the war begins we are all experts.


27 February 2003

7:30am and Durable goods orders for January were up 3.3%, ex transportation up 2.5%, ex defense up 3.6%. The December durable goods were revised to down 0.4% from down 0.2%. Stock futures are stronger. Jobless claims rose 11,000 to 417,000.

We must say that there are a bunch of stocks that we would be interested in if they drop another 10% to 15%. That kind of drop would improve the risk/reward ratio to the point where we would put some money to work. But we aren't there yet. Among these stocks are MCD selling at one times sales, 5 times cash flow and ten times earnings for the first time since we were very young. Of course the company is having problems but that's why it is at the price it is. Since the stock is over owned by institutions our take is that there is more selling to come and that such selling is not price sensitive. Thus in any further market sell off we would expect to see MCD drift down to $10 or less per share. Others that interest us are HPQ Scholastic, Mondavi, Walgreen, Pepsi, Abbott, Schering Plough, EK, CSCO, AOL, NCR, DIS, SBC, GMH, HD, ABS, KFT, CPB, GE, F, GS, KYO, AWE, JPM, JDSU, TLAB, OATS and HAIN and the XLK and XLU and SPY and DIA.

8:32am and the DJIA is up 40 points out of the gate. L. Glenn Hubbard, Chief Economic Honcho at the White House is heading back to Columbia University. Two years is enough time to establish a name for good consulting contracts and high paying speeches at company retreats. He also is leaving in time to be able to blame the lousy economic results on his watch on the Clinton folks. He is being replaced by another first name is a letter guy N. Gregory Mankiw from Harvard. L. Glenn is not to be confused with L. Ron Hubbard the founder of the Church of Scientology.

8:41am and The Middle East News Agency in Cairo is supposedly reporting that Saddam is going to destroy his rockets which he said on Monday he wouldn't destroy. The markets are rallying tentatively on that news.

9:31am and new home sales dropped 15% to 914,000 units in January. Weather could have had a lot to do with that fall off. Existing home sales were up. The post Christmas closing season probably affected that number. One month in either direction does not a trend make.

9:52am and Fed Chairman Greenspan is again testifying before Congress. Interestingly, CNBC is not covering the testimony or showing Greenspan talking. We surmise that the Chairman's remarks about the danger of budget deficits last week which angered the Bushies have something to do with this blackout and banishment from prime time. Whatever, Greenspan is saying that he doesn't see any housing bubble on a national level. Watch out below.

10:01am and the alert level has been lowered to yellow. Hope the terrorists wherever they are don't treat the yellow warning the way motorists treat yellow lights.

12:02pm and the DJIA is up 100 points in slow trading. Our bet is that we go back to even later today, but lately we've been wrong more then we have been right on these guesses. Bush says that Saddam's concessions are not enough.

1:05pm and stocks are holding their gains with the DJIA up 82 points. Europe closed 1% to 2% higher across the board.

2:05pm and the DJIA gave up most of its gains of the day before entering the final hour. But now it is trying to rally and is up 42 points. We are out of guesses for today.

3:02pm and the DJIA closed up 62 points at 7870. The S&P 500 gained 8 points to end at 836 and the NASDAQ rose 18 points to 1322.

And tomorrow is another day.


27 February 2003 - Morning Comment

7:10am and the stock futures are suggesting a flat opening. Overseas markets in Asia and Europe were and are mixed. Saddam's appearance on CBS last night was surreal as we watched talk of war and annihilation sandwiched between commercials for everything under the sun. Broadcast news has really moved downhill from the Murrow days. Anyway, the wry smile on Saddam's face to Rather's questions suggests that he is going to do the Hitler bunker routine which is too bad for the Iraqi people and for some of our soldiers. The Defense Department continues to call up reservists which expand the number of people in the country who have a real stake in war. We know kids who have been called up and we think it is a Machiavellian technique on the part of the White House that creates reluctance in all of us to speak out. The folks who joined the National Guard did so to defend the US from aggression not to get the man who tried to kill G W's dad. Isn't it ironic that Bush was in the National Guard during the Viet Nam War but never was called to serve yet the new army includes many National Guard units in the present proposed conflict?

We expect the stock markets to be volatile again today. The Treasury markets continue to gain which may be part war and part lousy economic news. If the stock markets are to rally on good war news we would expect the opposite from Treasuries.


26 February 2003

9:31am and stocks opened lower with the DJIA down over 40 points. But then a slow volume less rally inching higher has occurred and at present the major measures are slightly to the plus side. Political news is muted and the watch and wait scenario is in full force. We'd like to catch the war rally if there is one. But the question is if there will be one. And most of the stocks we would be buying have the same short term downside as upside at this juncture so the risk/reward doesn't seem favorable. Thus we are stuck on the sidelines and may be for a long while more. Our purpose is to not fritter away our early year gains of this year like we did last year. We know we want to be out of the markets by the middle of May so our trading window is closing quickly. But patience is necessary in markets like these and we are hoping to keep control of our urge to trade.

11:39am and stocks dropped on a news item that Hans Blix said Iraq is not in full compliance. This seems to indicate that war unknowns will cause stocks to drop. So when the US starts bombing there should be a buyable drop, but who knows? We are watching.

12:52pm and oil hit a new high today over $37.75 per barrel. As we remember from 1990 the jump was from $30 to over $40 and then back down in one day. The high price of oil and natural gas and heating oil will have a big effect on economic numbers next month and also on everyone's pocketbook this month. Venezuela seems to be getting its oil production back on line much to Otto Reich's dismay. There is still time for the State Department to overthrow the Chavez government but the current crisis seems to be fading. Stocks have given back all of yesterday's gains but don't show any inclination of visiting yesterday's lows, yet.

3:02pm and stocks closed on their lows of the day. The DJIA closed down 105 points at 7806. The S&P 500 closed below the important 830 mark at 827 down 11 points. The NASDAQ dropped 25 points at 1303.

And tomorrow is another day.


26 February 2003 - Morning Comment

6:59am and in the early going the stock futures are down what they were up yesterday. Talk overnight of war crimes trials and lousy sales from Hewlett Packard injected a note of realism into what was a pretty good 200 point rally in the last few hours of yesterday's trading. The rally occurred on little volume and with the lack of follow through this morning we would expect another volatile session.


25 February 2003

6:56am and we missed the little tidbit in the morning post that North Korea had test fired a missile as the South Korean president was sworn in. Nice touch.

8:05am and Treasury bonds and notes continue to suggest war is on the horizon. Also oil is up around $37 per barrel. Funny that no one seems to be profiting from the war isn't it?

8:49am and the DJIA is down 1% while the NASDAQ is off 1.5%. Gas and oil continue to spike higher as war nears and cold settles over a lot of the country. Also we presume the energy traders are having their little fun with prices as they have the past few years with no fear of any interference from Washington.

9:10am and The Conference Board measure of consumer confidence registered at 64 versus an expected 76. The DJIA is now down 130 points. Hans Blix just announced that there will be no compromise on destruction of the Iraq missiles. It's time for a little rally.

10:34am and we've rallied to down 50 points on the DJIA but just turned lower with a vengeance as Bush was on CNBC, the cable station traders watch, giving no quarter. The DJIA is now down 100 points in a few minutes and our guess is the next stop is down 200 points before we have another rally. With our ignominious trade of yesterday all our trades today will be paper trades not real ones.

One reason for that is that we noticed yesterday that when we were concentrating on the day trades we lost sight of stocks we want to buy for the "we won" rally. So we have foresworn day trading and will establish positions for the rally to come. Not yet.

Time for our daily Ashcroft briefing. Today he is bragging about how he is getting rid of corporate fraud. He's getting the barn doors closed. The Justice Department is announcing the indictment of four executives of Qwest Communications. Joe Nacchio the ex CEO is not one of them.

12:20pm and one of the reasons we are holding off buying is that we think sometime this year a very good buying opportunity may present itself. This is opposed to the trading opportunity that may occur in the next few weeks on a big sell off that we may try and take advantage of if we can muscle up the courage. Stocks like JPM and Goldman Sachs and CSCO and AXP and C and on and on are 50% or more off their highs of the last few years. But as in the 1973 - 1974 collapse cheap stocks just keep getting cheaper. At the low in 1974 stocks were selling at 5-10 times earnings. We are hoping for that type of opportunity again. We may miss an upside rally but we think the lows are going to be lower than most folks think. Currently most traders including us are trying to figure out how and when to catch the war rally. The real buying opportunity will come when there are no investors left and traders just want to think about real estate or Las Vegas.

The DJIA has inched back to down 60 points and so we were wrong on paper about our down 200 guess. Only on paper.

1:55pm and as we enter the final hour the DJIA is down about 30 points. Stocks have been hanging around this level for an hour and with the increasing volatility it will be interesting to see how the last hour plays out. We have not bets on the outcome.

2:22pm and the DJIA is now positive. So our trades of yesterday buying the DJIA down 100 points would have worked today. We happened to pick the one day out of six when that strategy didn't work. C'est la vie.

3:02pm and the DJIA closed up 50 points at 7910. The S&P 500 gained 6 points to end at 838 and the NASDAQ was rose 7 points ending at 1328.

And tomorrow is another day.


25 February 2003 - Morning Comment

6:45am and Asia was lower overnight with Japan down over 2%. Europe is also lower as are stock futures in the U. S. Nothing has happened over night to change the war soon scenario. With a down opening in the offing we would expect a bounce sometime today. Given our lousy trade yesterday we are going to wait for 800 on the S&P on a 200 point down day to try that kind of day trade again. Mostly we are in a watch and wait situation and patience is needed, especially by us.


24 February 2003

7:01am and Sunday's New York Times contained an article titled "Managed Accounts Get a Scorecard". The gist of the story which is well worth reading is that up until now there has been very little comparison available for investors who maintain managed accounts at brokerage firms. Individual managed accounts know how they did, but don't know how they did in relation to managed accounts within the firm and at other brokerage firms.

That's the great secret of the managed account business. For if investors knew that they would be just as well off in mutual funds no one would pay the 2% fees that they do to have their accounts managed. In the last year we have heard some horror stories that have saddened us and amazed us.

Our clients can easily figure their returns and compare them to our published Model Portfolio and to mutual funds. Not all our clients have the same performance because of the size of their accounts and because we manage accounts in relation to each account's risk profile and length of time under management. But all our accounts had positive returns last year, and all have had a positive total return over the last four and five year period.

In the article referred to above a point is made that one large managed fund company had a superior return because its benchmark fund only lost 12.9%. Many of the benchmarks mention had losses of over 20%.

So our 7% plus return last year was a happy circumstance for our clients. We hope to continue that positive out performance this year but we all know that past performance is not an indication of future performance.

7:53am and the US needs nine votes in the UN Security Council for its resolution. So it looks like Bulgaria, Mexico, Cameroon, Angola, Guinea, Chile and Spain have won the lottery and that billions of dollars of US aid will soon be flowing to their countries if they vote yea. On a similar note we read the other day that the US has given over $2 billion to Columbia since 2000 in the war on drugs and for the safety of Occidental Petroleum's pipeline. It looks like the $100,000 that Armand Hammer gave in 1972 to the Nixon reelection campaign continues to pay dividends thirty years later.

What's interesting is that $2 billion is the amount of money needed to secure all the US ports of entry and make them secure for the reception of containers from overseas. As of this writing, only $300 million has been made available with no provision for funds in this year's budget. But we do have duct tape.

8:06am and did anyone else find it strange that when Tyson knocked out whomever the guy he was fighting that the fellow managed to carefully remove his mouthpiece with his boxing glove in the first few seconds that he was laying on the canvas? Just a question.

9:48am and today we are trying to trade the pattern that has been established over the last week. And that pattern is that it has been profitable to buy the DJIA when it has been down over 100 points on an intra day basis. We bought the DIA at $79.10 price average. Hopefully we'll get a move back to even which has happened the last seven days before the close. We also bought the QQQ at $24.96 because the NASDAQ has been displaying the greatest strength in the half hearted rally of the past week. We bought the DIA in accounts where we sold them last month on 1/24 at $81.75. We bought the QQQ in our large/aggressive accounts.

10:19am and GE is down today even with a bullish front page article in Barron's. When a front page article in Barron's doesn't move a stock like GE at least for a few hours that's a negative. This morning there is some unwinding of Friday's double witching so the real trend for the day may not emerge till later.

11:21am and the DJIA is down 132 points and the NASDAQ us off 1%. Breadth is 2/1 negative and down volume exceeds up volume 3/1. Overall trading is light.

12:57pm and European markets closed lower. Grocery store company Ahold from the Netherlands reported today that it overstated US earnings by $500 million and its CEO and CFO resigned. The stock lost 2/3rds of its value.

1:52pm and there is no rally in the offing as the stock markets head into the final hour. CNBC is having a gabfest with the talking heads mentioning that investor confidence is at an all time low. The contrarian in us relishes that kind of talk but we are going to control our desire to go against the grain for a while longer. We still have our DIA and QQQ trades on which are giving us enough to think about for the rest of the afternoon. Hopefully we'll get the closing rally but only time will tell.

2:22pm and Saddam has challenged Bush to a debate. Since neither of them speaks English that would be an interesting debate. With no rally taking place we have sold our DIA and QQQ positions. We lost 25 cents per share on the QQQ and 25 cents per share on the DIA trade. So much for trading patterns and for our trading foray. Ugh!

On one of our news services we see a report that Iraq does not plan to destroy its missiles. If that is so, there will be a war. Treasuries close up, stocks close down. That makes sense as the US goes to war.

3:02pm and the DJIA closed down 159 points at 7860. The S&P 500 lost 15 points to end at 833 and the NASDAQ was off 27 points finishing at 1322.

And tomorrow is another day.


24 February 2003 - Morning Comment

6:45am and stock futures are slightly lower. The Asian markets were mixed overnight and Europe is down. Secretary Powell mentioned soon after March 7 as bombs away day so now the markets have a date on which to focus. Since the rallies of the past week have been ascribed to both a commencement of the war and an avoidance of the war, we have no idea what announcing a date means.

We do think that if Iraq begins destroying the missiles that the U N has told them to by the March 1 deadline that the Bush war machine is going to have a major world public relations battle on it hands if it then invades Iraq. We don't know whether the chicken hawks care but we think the March 1 destruction date is key to any war in the next month.

After the action of last week it seems that the stock markets are content to edge higher in anticipation of something. We don't think that anyone knows what the something is. But the trend is your friend and higher has been easier than lower for the past week. We don't see any break out highs and we plan on watching from the sidelines.


21 February 2003

9:23am and stocks have now turned lower after being up in the first half hour of trading. The Rhode Island night club fire coupled with the Chicago night club mess should help folks place the potential Al Qeda threat in context and remember that there are plenty of things in their every day lives that may be more threatening. Yet folks go about their lives and will continue to go to concerts and night clubs because that is what living is about. Now there is an explosion at an oil refinery in New Jersey and the ever present media cable networks are showing pictures of the conflagration. Danger is all around every day. The stock markets will eventually internalize this fact and move on. But first the Iraq issue must be settled and the Bush folks seem to have committed to war with no way out. And so that drama must play our before the stock and bond markets can deal with the issue of the economy, and recovery and deficits.

10:51am and stocks are higher now after the FBI said the refinery fire was just a fire and not a terrorist act. Breadth is now positive on the NYSE and even on the NASDAQ and up volume exceeds down volume on both markets. There isn't much news today although there is a rumor that Ford Motor bonds and commercial paper are going to be downgraded. That won't be a great surprise.

12:34pm and we are avoiding the current markets because we are uncertain about the geopolitical situation. But more importantly, we do not believe the economy is on the road to recovery. None of the Bush proposals will do much for the economy and we do not think the current situation is anything like the 1990-91 Gulf War scenario. Folks are buying or waiting to buy in anticipation of the same kind of blast off that occurred in 1991 after it was obvious that the US and its allies would win the war.

At that time stocks were selling at 10 to 15 times earnings and the economy was finally recovering from the Crash of 1987 and the banking crisis of the late 1980s. The current environment still has stocks selling at 18 to 25 times earnings. Moreover the increase in prices at the wholesale level can't yet be passed on at the retail level. That is squeezing profit margins. And many more are now being forced out of high paying jobs than were back then. The mutual fund boom of the 1990s when billions of dollars poured into mutual funds has run its course. There are not billions more to be funneled into funds to push stocks higher.

Some folks are in favor of the tax cuts especially the dividend cut because they think it will move the stock markets higher. And they believe that higher stocks markets will benefit the economy. We notice that most of the folks espousing this solution are underwater in their investments over the last few years and so are hoping for a higher stock market to rescue them from being wrong. All the tax free dividend proposal will do is benefit the Bill Gates of the world. Ma and Pa investor don't receive enough dividend income to make any difference. And if folks rush into dividend paying stocks for the dividend when they have avoided them because they weren't good investments, we think the artificial stimulus of tax free dividends to encourage the buying of stock will make a bad situation worse. Using tax strategies to stimulate market rises hasn't worked over the long haul in the past and won't work now. All it will do is create an opportunity for brokerage house charlatans to create new packages of nebulous investments for unsuspecting investors. Japan has been in the doldrums for thirteen years and there is no reason that our economy and markets can't experience a few more years of consolidation before beginning to recover.

We are resting on our profits of the last few years and we are more interested in not loosing our capital than we are in creating more. Eventually the risk/reward ratio will swing to in favor of trading stocks again but until it does we think sitting and watching is the best course of action.

The only action that seems to have a chance of success these days is day trading and our luck with that type of trading has not been good for the past year. Three day to three month position trading has worked much better for us. We may see an opportunity to do this in the next month but we aren't going to buy in anticipation. We will await the opportunity.

3:02pm and the DJIA closed up 108 points at 8022. The S&P 500 gained 12 points to finish at 849 and the NASDAQ was up 17 points at 1347.

For the year the DJIA is down 3.8%, the S&P 500 is down 3.5% and the NASDAQ is up 1%.

The Lemley Letter Model Portfolio is up 7.3% and remains 100% cash. We made no trades in the Model Portfolio this week.

And tomorrow is another day.


21 February 2003 - Morning Comment

7:31am and the Consumer Price Index was announced as up 0.3% and ex food and energy up 0.1%. Treasuries are unchanged and the stock futures are a bit lower. The two day pause after the three day rally leaves us in a quandary as to where the markets are going.

We are a little late this morning because we had our first calf of the season. The hill down to the water in the creek is icy from the melting snow and so we had to set the water tank in the barnyard for the cows before coming to work. The March mud has come early this year but hopefully the temperature drop over this coming weekend will firm the ground.

We are in a watch and wait mode and we see no reason to change. More later.


20 February 2003

7:52 am and we received a couple of comments on our homes as investment theory of yesterday.

Email #1. You suggest that young folks are buying homes in the hope that they will appreciate in time for their retirement. I would slightly amend that. Several among my thirty-something peers have recently bought homes. In most cases the thinking in buying was much more focused on the short to medium term: they believed that, among the investments they could reasonably make with their limited funds, knowledge and connections, property had the best chance of holding value over the next five years. That is, is a home going to hold its value better than a stock, etc.? That may be faulty reasoning, but it is also somewhat different from the retirement planning motive you suggest.

Email #2. You know, people my age buy absolutely as much house as they can afford (sometimes more than they can afford). I also know many who have removed as much as 80% of the equity to finance vacations, remodels, credit card debt, etc. That works "fine" when home prices appreciate between 3 and 5 or 6 or 7% a year, but the problems begin when the market dries up and will only bear a percentage of the "appraised" value. People my age think it's a birth rite that property values always go up. You should write a book.

Our reply to Email #1 was that the reader's comment above is a better presentation of what we were trying to say. That said, we still think the premise for buying, i.e., that homes will hold their value over the next five years and that there is thus less risk for the owner may not be valid. The value of a house won't crash like stock but a 15% reduction in selling price of the house coupled with the 5% commission for selling could well wipe out the equity that folks have in the house. That's because unlike stocks most houses are bought with 20% down or less. So if a house looses 15% of its value, the house is still retains 85% of the original price but the equity is severely diminished. That is a crash in any terms for the home owner. The leverage in housing works both ways.

Our reply to Email #2 was that we have a lot of work for the sender when he comes up for trout fishing season in early April.

8:13am and stocks and bonds seem to be ignoring this morning's economic news since there are bigger fish to fry. The US is threatening to find another staging area if Turkey continues to demand more money. Bribing folks to sell them products was made illegal by Congress many years ago. Defense contractors have found a way around the prohibition by calling the money and goods they provide to foreign governments-offsets. The US government is calling the money offered to Turkey an aid package. But if the Turks need aid why would we not give it whether or not they allow the US to use their country as a base?

9:09am and the stock markets are trying to decide on a direction today. The DJIA is off fractionally while the NASDAQ is up about 0.5%. Morgan Stanley raise its opinion on semiconductors yesterday and Merrill Lynch did the same today. And semiconductor stocks is where most of the strength is today.

10:30am and President Bush is speaking and telling one and all that if the Congress passes his tax cut proposal everything will be all right. The DJIA is down 70 points and breadth is negative and down volume exceeds up volume by 2/1. Not much is occurring on the news front and so the stock markets are without conviction.

12:21pm and stocks remain lower in light trading. Treasuries continue to show strength with the 5 year at 2.80% down from 2.90% yesterday. We think the Treasury strength is an indication that the war ramp up continues. Today looks like a repeat of yesterday except that the sell off is occurring earlier. Tonight and tomorrow are options and futures expiration days so there are cross currents in the marketplace that we don't know about or understand. There are so many hedge funds using unfathomable strategies with stocks and futures and options that trading thin markets like we have been having is simply gambling.

1:16pm and Powell says there is no agreement on another UN resolution. That should send the stock markets lower. He also said the Turkey aid question will be settled today. What's $4 billion among friends? So instead of dropping the DJIA is edging higher. Go figure.

1:57pm and the Treasury market closed on its high. The economic numbers this morning were inflationary but bonds are pricing in an end to the Iraq war, which hasn't started yet, and a quick US victory with no oil disruption. This would lead to a drop in oil prices which was a large part of the PPI increase this morning. The DJIA is down 103 points entering the final hour.

2:45pm and we have to leave early to take Tubby the wonder dog to the VET. At this time the DJIA is down 78 points, the S&P 500 was off 6 points at 840 and the NASDAQ is up 1 point.

And tomorrow is another day.


20 February 2003 - Morning Comment

7:29am and we are running a little late this morning. With our cash position and disinterest in the markets we are a little slower in coming to work. The trade deficit was a record for one month $44.2 billion for December. The Producer price index was up 1.6%. Ex food and energy the PPI was up 0.9%. Jobless claims were up 21,000 to 402,000 for the week of 2/17.

The stock markets are a bit weaker on that news since it suggests pricing pressures on manufacturers and weakness in the economy. And the rise in oil prices is finally being reflected in the economic statistics. Until Iraq is settled the uncertainty will keep oil prices high with a negative effect on the economy.

The stock futures are suggesting a mixed opening with an upward bias.


19 February 2003

7:29am and as we begin today the NASDAQ begins in positive territory, and the S&P 500 and DJIA are both down about 3% for the year. The stock markets have rallied about 6% from last Thursday's lows and that's a move we are sorry we missed. But there will be other opportunities. Moreover we don't think the end of the war will be the end of US economic troubles.

Treasuries are getting some buying support. January housing starts were up 0.2% in January but that gain is the result of revision to December numbers. Housing starts continue to run at a record rate. Building permits dropped 5.6% in January. Cold and snow in the eastern US may be the culprit, or maybe folks are just not going to spend money as freely this year. The talking heads on CNBC keep mentioning that housing has been the best investment over the last three years. We have always believed that folks buy a home not a house and that if the value increases that's great, but the value as a home is important.

The current thinking among younger folks seems to be that they need to buy housing so that it will appreciate in value for their retirement years hence. We think that is tainted thinking but as with stock markets, until the bubble bursts when interest rates rise, our opinion is of little moment. Just as the stock markets were a self fulfilling prophesy of unlimited riches in the late 1990s, so housing remains a self fulfilling prophesy in the early years of the new century.

Until the economy begins to recover housing prices may remain strong on paper if not in actual sales since interest rates will remain low. But once the economy does begin to recover the deficits and demand for money by private enterprise will raise the cost of money which is another name for interest rates. We think that this year is going to mark the end of the bull market in housing prices. While we don't think the economy will recover this year we do think supply will overtake demand. The commercial real estate market has already topped out, and it is logical to assume that the home market will do the same.

8:55am and stocks are meandering lower with breadth slightly negative. The action is positive given the rally of the last few days. Volume remains light.

9:52am and Ridge is on CNBC talking about safe rooms and food storage. We can understand the folks in NYC and Washington being nervous, but even Laura Bush says that maybe the warning stuff is being overdone. DJIA is now down 51 points and NASDAQ is lower by 10 points.

NATO ended its stalemate over Turkey after the US blasted France and Belgium for not supporting Turkey. Now Turkey wants $30 billion ($10 billion cash and $20 billion loan) from the US for allowing the use of Turkish territory. The US is offering $26 billion. Washington has given Turkey 24 hours to accept. Ah, it's great to have allies committed to a cause. It is strange that we have to buy our coalition of the willing. Maybe we should call it the coalition of the bought and paid for.

11:25am and the DJIA is off 65 points. Breadth is less than 2/1 negative and down volume exceeds up volume by 3/1. It looks like the stock markets are back to the waiting for Iraq game. Some reports are suggesting any invasion will be delayed till late March

1:30pm and the European markets closed lower today as the US markets sold off. The DJIA is off about 90 points and we are approaching crunch time.

3:02pm and the DJIA rallied from down 100 points but still closed lower by 43 points for the day at 7997. The S&P 500 lost 7 points to finish at 844 and the NASDAQ lost 1% and closed down 13 points at 1334.

And tomorrow is another day.


19 February 2003 - Morning Comment

7:07am and we sound like a broken record but we don''t have any idea where the stock markets are heading in the next few weeks. The on again off again Iraq war is either the reason for or not the reason for the rally. By the way last night we said that stocks had closed up for the third day in a row. We were wrong. The DJIA has only been up the last two days. It did not close in positive territory on Thursday. But the quick 100 point plus rally in the DJIA in the last hour Thursday was the start of the current rally.

Opinions on when the war begins remain mixed. The consensus seems to be that everything will be in place by March 1. That date coincides with the new moon of March 3. So the beginning of March will be it.

Today should be interesting. The futures are indicating a slightly lower opening which would be good for the bulls in that it would set up a continuation of the rally later today.


18 February 2003

By popular demand we have ceased providing calendar tidbits.

8:45am and the stock markets are higher today. Microsoft split 2/1 and so is trading in the $25 range which should bring in some unsophisticated buying. Since there was no attack over the weekend the markets are extending Friday's rally. Treasuries are weak across the board. We continue in our watching mood. The DJIA is 125 points higher and the S&P 500 and NASDAQ are up similar percentages.

9:29am and in reading the news we learn that the arson attack in Korea was in Daegu not Seoul. The DJIA remains on its highs as buying interest continues. We haven't had the sell off to test what is not a third day of rally which we haven't had in a while.

11:10am and the stock markets remain higher. Volume is decent, given the snow storm in the East and up volume exceeds down volume by 8/1 and breadth is positive 3/1. We think this is a strong rally in the continuing bear market. War talk will begin again soon and the inevitable reaction will be a down market. We are sorry to have missed a couple of points of this nice rally but it occurred too fast and is too tenuous to risk capital.

1:06pm and we have been doing taxes and other stuff today. There are rumors swirling that Saddam is leaving, that war will start in two weeks, that the defense minister of Iraq is under house arrest and you name it. The stock markets remain higher but volume has slowed. As we write the DJIA is making a high for the day up 153 points and gives no indication of backing off. So this is either the peace rally or the war rally or the thankfully there were no terrorist attacks over the weekend rally. We think it is all of those plus a bounce from a good sell off. We are content to watch.

2:06pm and entering the final hour the DJIA has given back some of its gains. This is normal and now we will see if the rally can hold. An interesting occurrence is that Treasuries closed flat to higher on the day in price and lower in yield after being the opposite most of the day. Maybe the war hedge is back. With the action in the treasuries we would expect stocks to give up most of their gains

2:42pm and as we head into the close breadth remains 2/1 positive and up versus down volume is over 4/1. Overall volume remains light and will be about 1.2 billion.

3:02pm and the DJIA closed up 130 points at 8040. The S&P 500 gained 16 points to end at 851 and the NASDAQ was up 36 points at 1346. Stocks closed well for the third day in a row. That hasn't happened for a while.

And tomorrow is another day.


18 February 2003 - Morning Comment

7:19am and we walked to work as folks in the East trudged or snow shoed to work. As we turn on the tube we learn that North Korea is seeking more attention but is being ignored by the Bushies. Foreign markets were strong Monday in catch up to the Friday rally in the US but last night markets were downers in Asia. There was a fire bombing in a Seoul subway that killed over 100 people. News reports continue to suggest that war with Iraq is right around the corner.

Today's stock market action should give an indication of the worth of Friday's rally. We have no idea what will happen but we are interested, as always.


14 February 2003

Today is Valentine Day and the birthday of anti slavery activist Frederick Douglas in 1817. A quote from Douglas "power concedes nothing without a demand. It never did and it never will". It is also Trifon Zarezan (Vine grower's celebration) in Bulgaria and Fur Rendezvous Day in Anchorage Alaska.

7:35am and business inventories in December were up 0.6%. We don't think it means much. Treasuries are a bit weaker and stocks are a bit firmer. Capacity utilization moved up to 75%. Industrial Production in January was up 0.7%.

8:32am and the NYSE is celebrating the listing of Marvel Entertainment. That is the new Marvel since the old one went broke after Ron Perlman ran it into the ground. The NYSE has had an interesting choice of stocks to celebrate the last two days. Stocks are opening higher and Treasuries are lower in early trading.

9:22am and Hans Blix is reporting to the UN. The University of Michigan sentiment Index came in at 79.2 versus a consensus guess of 82. We don't think this number means anything.

9:50am and as Blix talks the DJIA is moving 100 points higher. This seems to be a "no war now" rally which we think is wrong. Not the rally but the idea that there isn't going to be a war. But, we do detect the Bushies taking credit for the inspections being somewhat successful by remarking that the inspections wouldn't be occurring if there weren't 150,000 American troops on Iraq's borders. And they are correct. If the Bushies adopt that line and use it as their reason to let inspections and diplomacy work we'll be happy to give them credit for the show of force.

Contrary to the markets action today and given the antiwar demonstrations planned this week end around the world and the drop in Bush poll numbers, we think, unfortunately, that war is going to occur sooner than later.

10:25am and a client called today happy he was up 7% for the month of January. He said at that rate we would be up 108% for the year. Not likely was our reply. But we did point out that the S&P 500 is down 7% this month so we are outperforming by another 7% in February by being in cash and not losing money. That out performance will not continue either but we're content.

11:02am and the DJIA has slipped into negative territory for the first time today. Treasuries remain lower.

12:45pm and as the Iraq spokesman talks the DJIA is moving higher being up 75 points at this time. Breadth and up versus down volume are both 1.5 to 1 positive. Volume is moderate.

1:11pm and we have made a good deal of money over the years for ourselves and our clients. And over the years we have had only one down year and that was 1990. But that down year has always bothered us because we don't like to give back any gains and because we hate losing money that was so difficult to earn. While we show our performance versus the S&P 500 our basic aim is to earn a return of 8% to 10% each year so that clients who need to withdraw money don't have to draw on capital to live. Since the Crash of 1987 we have always maintained a large cash position. In the go-go years of the 1990s that cash position hurt our performance but let us sleep nights. And in the last five years our large cash position has allowed us to weather the storm and actually prosper from the buying opportunities provided by a volatile market and cash on hand when we needed it. We don't plan on changing the way we run money. We go for singles not home runs and always play defense.

3:02pm and the stock markets rallied in the last hour to close on their highs for the day. The DJIA moved over 350 points up and down and then up for the day so we were right about volatility and wrong about a flat close.

At the close the DJIA was up 157 points at 7906. The S&P 500 was 17 points higher at 833 and the NASDAQ rose 32 points to close at 1310.

For the year the DJIA is down 5%, the S&P 500 is down 5.2% and the NASDAQ is off 2%.

The Model Portfolio is up 7.3% after our profitable trade in the five year Treasury notes this week and is all cash with a total value of $493,872.

The stock and bond markets are closed Monday in observance of Presidents' Day. Our next post will be Tuesday morning.


14 February 2003 - Morning Comment

7:16am and as we celebrate Valentine Day we pass along our best wishes to all our special Valentines. The stock futures are indicating a mixed opening and with all the terror warnings and the Blix report and the three day Presidents' Day weekend upon us we would expect volatility today but a flat to down close.

We are saddened to report that the NKU Norse Men dropped a heart breaker last night, losing by two points in overtime at home. Bad loss. The Norse missed five free throws in the last minute of regulation any of which would have won the game since Southern Indiana needed a 3 point shot at the buzzer to tie the game and send it into overtime. Happily the Lady Norse won big time. Since NKU has two more important games in the next week we are holding our heads high and looking ahead. We can't do anything about spilled milk.

And so we'll see how today goes.


13 February 2003

Today is George Fox Day. He was one of the founders of the Quakers. And the Great Janis Joplin died on this day in 1970.

7:33am and jobless claims were down 18,000 to 377,000. Retail sales were adjusted to up 0.2% in December and ex autos sales were up 1.3%. Auto sales stunk up the joint in January. We just learned that gasoline prices are included in retail sales. We guess they belong there but we never realized they were in there. Gasoline sales were up 2.7%. That means gasoline prices were up more.

8:08am and yesterday was Greenspan day on CNBC. Today looks like it will be North Korea day as we have been treated to goose stepping North Korean soldiers every fifteen minutes this morning. Beats looking at Clinton kissing Lewinsky - or maybe not.

8:28am and thank you American Taxpayer. The WSJ is reporting that most of the $1.5 billion in penalties being paid by Wall Street investment houses will be tax deductible.

8:30am and as the NYSE opens Chiquita Banana is celebrating 100 years of listing on the NYSE and a Chiquita Banana who isn't 100 years old is on the podium. The old name of Chiquita Banana was United Fruit and the Old Stockbroker used to trade the stock. United Fruit controlled Central America politics and banana production through bribes and force. That makes it a fitting stock to celebrate in today's market environment. One former CEO of united Fruit, Eli Black, killed himself back in 1975 by jumping out of a 44th floor window of the Pan Am building in NYC because he was about to be exposed for paying a $1.2 million bribe to the president of Honduras. Those were the good old days. Poor Eli. Now disgraced CEOs hire high priced lawyers, and continue throwing parties on their yachts and building 50,000 square feet homes.

We were watching the Great Gatsby last night and we grew bored with the movie because it reminded us too much of the present.

9:29am and we decided not to be pigs and sold the Treasury notes at $100.46 that we purchased last week at $99.76 for, including commission, a $6.25 or more per note profit in five days. That works out to more interest than we will earn in a year on the same amount of cash invested in the Cash Equivalent Money market fund. We will buy them back if the opportunity presents itself. We think that war is close and that that is the reason for all the warnings by the Bush folks. And we think the odds are probably 6/1 that the war will be quick and if it is then Treasuries will tank and stocks will rise. We will either try and trade the market rally or buy the Treasuries.

We have to attend a funeral this morning so we will be back about 1pm. At this time the DJIA is down 73 points on its low for the day. The NASDAQ is faring a little better and it is only down 7 points as is the S&P 500. Breadth is 2/1 negative and volume is light with down volume exceeding up volume 3/1.

1:18pm and the DJIA is 101 points lower and there is a flight to Treasuries. From what we hear the terrorist stuff is permeating the news and scaring stock investors. We have the makings of a good trading bottom in stocks but for now we are not going to anticipate, we are going to relax.

2:12pm and there is a slow rally underway with the DJIA down only 45 points right now. We'll see if the momentum can grow over the last 45 minutes. An up close tonight will face tough going with the week end ahead after tomorrow.

2:45pm and it's hard to sustain a rally when the mayor of NYC is on CNBC talking about terrorist attacks. It seems like everyone in government is trying to out terror warn the other. We have the message guys and gals.

After rallying 110 points in 15 minutes the DJIA is again in negative territory and heading lower. It was a quick program rally. Breadth remains negative going into the close and down volume exceeds up volume but the margin on both is less than 2/1. New lows on the NYSE are over 200 which is a high for the January correction.

3:02pm and the DJIA closed down 8 points at 7750. The S&P 500 dropped 1 point to 817 and the NASDAQ also gave up 1 point to end at 1277.

And tomorrow is another day.


13 February 2003 - Morning Comment

7:11am and the stock futures are positive. Asia was negative over night and Europe is on the plus side. We are a broken record these days but until the Iraq confusion is settled the trend will remain negative. Even after it is settled we thing the major trend will be negative but we think a quick war would have a positive effect on the markets. By quick we mean less than a week and few American casualties.

Hopefully there will be a diplomatic solution although we think the rhetoric has painted all the players into corners from which their testosterone will not let them emerge.

Today may see a rally since all the Congressional testimony is through and folks and traders are tiring of the WMD/terrorist talk and the weekend is approaching.

Finally the NKU Norsemen and women begin a three game home stand today that will determine the Great Lakes Valley Conference Championship and seedings in the NCAA Division II basketball tournament. Go You Norse!!!


12 February 2003

Happy Lincoln's Birthday which is a holiday for state and city workers in Illinois, the Land of Lincoln, but you still have to feed the parking meters.

It's Union Day in Burma (1947) and the NAACP was founded in 1909 on this day.

Also on this day in 1950 Albert Einstein warned that nuclear weapons threaten world annihilation. But what did he know?

7:24am and we read yesterday about the duct tape and batteries in a comment on a website but we though it was a joke. Then this morning in reading the Chicago Sun Time we saw the following: Monday's recommendation by the Department of Homeland Security to stockpile a three-day supply of food, water and medicine and to have duct tape and plastic sheeting to seal windows and doors appeared to be taking hold across the country. All we can say is FAROUT. Republicans have warned for years that creating more cabinet departments is a waste of government money and will lead to folks trying to establish their importance by issuing rules and regulations to justify the existence of the entity. They never said anything about goofy warnings. But then if you are the department of Homeland Security it is your job to issue warnings and so here we go again.

Actually this announcement might be part of a plan to rejuvenate sales at Home Depot. We think the SEC should investigate if there was any suspicious call buying in Home Depot options or futures last Friday and on Monday before the warning was released.

Time to get back to stocks where things are mostly normal. Bank of America downgraded GM today to sell. Yesterday the chief market strategist for BAC upped his stock recommendation to 75%. Don't know how these two recommendations jibe since GM is still a big part of the job and consumption economy. Tom McManus, the chief market strategist started raising his stock allocation last June from the 50% level. He raised allocation in July and October and November all near reaction lows. He has a good track record for a bank, but we can't understand why money managers don't realize that cash is also a good place to be and may often be the most prudent place for funds in times of uncertainty.

9:05am and the Chairman testifies before the House of Representatives today. Stocks are floating in light trading. GM is off a $1.50 on the downgrade by BAC but most DJIIA stocks are fractionally higher. There just isn't much happening.

9:31am and there are rumors on the bond floor that we are going to code red. By the by, we have a book given to us as a gift titled "101 Ways To Use Duct Tape". We are going to offer it on EBAY at a patriotic price for those folks who need advice on how to use the tape. The DJIA is down 40 points and the NASDAQ is off 4 points. Trading is muted.

10:02am and the big action today is watching Greenspan testify and counting the times the woman sitting behind him nods her head as she falls asleep. We think the Democrats hired her to sit there.

10:57am and the paint is drying slowly.

11:47am and with the sleeping lady, and Osama and Tenet, and Greenspan and Rumsfeld there is no time to think about stocks. The markets are watching and waiting to see how the chess game plays out over the next few weeks. There are stocks going up and down but we think the movements are too random to trade.

1:02pm and the fix is in. Ken Lay the former Chairman and CEO of Enron will not be indicted or tried for any malfeasance. That is our prediction.

1:40pm and as the electric utility stocks sink lower in the west we are reminded how thankful we are that we engaged a utility industry expert at year end to give us his opinion of utility stocks. His opinion allowed us to earn over $1 million for clients and move quickly to the sidelines in early January. We mention this because we notice that utility stocks are moving lower today on El Paso Corp's bad report. We do think year end 2003 will provide at least another trading opportunity in utilities but we aren't going to trade them during the year.

2:30pm and now North Korea and its one missile of mass destruction maybe has the markets in a slow motion price reduction. Breadth is 2/1 negative and volume remains light. It is almost as if investors have been lulled into inaction as the cobra does to its prey by its slow weaving motion. The panic sell off is getting closer. Folks are receiving their monthly brokerage statements this week. And today India test fired a missile capable of hitting Pakistan. Luckily they aimed it the other way.

3:02pm and the DJIA closed down 83 points at 7758. The S&P 500 lost 10 points to finish at 818 and the NASDAQ was off 16 points at 1279.

And tomorrow is another day.


12 February 2003 - Morning Comment

7:10am and this post will be short because we have to run out and buy duct tape and batteries and three days supply of canned goods before our stores run out. Europe is lower this morning. House Republicans want to place sanctions on French wines because France won't support our take on what to do with Iraq. Guess they haven't heard that China supports the French position. If these same Republicans ban imports from China all our stores will be empty. That would be a good way to get folks to save but wouldn't do much for the economy. Looks like a lower opening today for stocks.


11 February 2003

Today is the beginning of the Westminster Dog Show. Today is also Revolution Day in Iran and Youth Day in Cameroon and National Foundation Day in Japan. Eid el Adha, a Muslim holiday that commemorates the willingness of Ibrahim (Abraham) to sacrifice his son to God, begins at sundown. These factoids are the result of our receiving five calendars for Christmas.

9:55am and the Chairman is giving his testimony. The stock markets have remained higher during the appearance although trading is muted. The more interesting occurrence is the chess game being conducted by the Bush administration and "Old Europe. The OE plan to move its pawns disguised as UN troops into Iraq would check the Bush plan to begin bombing on March 3. If the Bush plan is Blitzed on Friday it would be a heart rending valentine for the President.

10:15am and Greenspan is in favor of tax free dividends but he is also in favor of controlling deficits.

10:21am and Greenspan is in favor of making the tax cuts permanent but he is also in favor of making them fit under the pay as you go concept of not running deficits.

10:25am and Greenspan is backhandedly saying that the idea of permanent tax cuts should give way to the balancing the budget. Bonds are rallying on that statement.

It is obviously pretty quiet if we are trying to interpret the Chairman's Greenspeak.

The reality is that what Greenspan thinks doesn't really matter because the Fed is out of ammo unless there is a crash.

11:03am and Treasuries are rallying and stocks dropping on a comment by Secretary of State Powell that there is a tie between Osama and Saddam as will be obvious from a tape that AL Jeezera will release later in the day. Al Jezeera says it has no such tape. And the dance goes on.

11:56 and it looks like now there is going to be an argument about whether or not there is a Bin Laden tape. The folks who have said all along that Bin laden could very well be dead are now arguing that the Bin Laden tape exists. The folks who said that the last tapes were real are now saying that they have no new tape. And the quote ascribed by Secretary Powell to Bin Laden on the non existent-existent tape is said not to be a correct reading of the quote on the tape by the folks who say there is no tape. This soap opera of who said what when, and who lives, and when he died brouhaha reminds of our halcyon days of youth when we were running for class treasurer. But that's another story.

12:05pm and the Treasury auctioned the $24 billion of 5 year notes at 3.02%. So the notes we bought on a 3.055% yield will have a 3% coupon and be due 2/15/2008. The "experts" say it was not a good auction but we are happy.

12:14pm and the mystery is resolved. The tape was not given to Al Jezeera it was given to the Al Ansaar News Agency.

12:19pm and stocks are beginning to move higher as Treasuries stabilize at lower levels. CNBC is now parading talking heads to interpret the Chairman's remarks. We have spent too much time on Greenspan today so we will pass on regurgitating the prattle we hear.

1:05pm and Treasuries are again rallying as stocks drop. We have no idea why. Rumors rule the stock markets these days. Too much media. Too much government induced insecurity. We don't mean to dismiss the terribleness and sorrow of 9/11 but even when Saddam is killed or deposed the threat of terrorist activities will exist as it always has. The mindless media babble is really assisting the terrorists. But we know the media of Joe Millionaire and The Bachlorette is not going to change and that is one of the reasons we are so sour on the markets. Victory in Iraq will create a month of patriotic media mayhem and then one little act of terrorism will destroy all the good feeling.

More importantly, the economy stinks right now and there are not enough good jobs available. There are literally millions of under/or unemployed folks who are not looking for jobs. Of those looking, many are taking any job that offers health insurance because of their fear of going without. Workers are striking over the health insurance issue and health insurance companies continue to raise premiums and drop coverage. Even hugely profitable GE is trying to increase the co-pay of its employees because it say it can't afford the insurance. And Congress dawdles and won't address the problem. Well until the Congress gets serious about the real issues affecting the economy there will be no recovery. The stocks markets going up a few per cent will not mean that the economy is better. And the end of the Iraq crisis will not end the economic crisis. Or so we believe. That's why we purchase the Treasury notes.

As soon as the economy shows signs of recovery Treasury yields will rise as prices drop. That will be the price paid for tax cuts now. Greenspan today reiterated his belief that deficits lead to higher interest rates in a recovering economy. And so we own the Treasuries for a trade not a hold. And since we see no real recovery or evidence of any real recovery any time soon we are willing to assume the risk.

As they say, we have been "spot on" in our stock market analysis for the last five years and we do believe that our projections now are easier to make than at any time in the last five years. A rally in stocks is always possible and hopefully we will catch it, but only if it comes from at least a 5% lower level. But any rally now will be a rally in a bear market.

1:33pm and crude oil popped over $35 per barrel today. The market action is suggesting that war is near.

1:55pm and these quotes are from a judicial decision affirming the right of the State of Arkansas to force a prisoner to take medicine to make him sane so he can be executed were reported in the NYT of 2/11/03.

"Singleton presents the court with a choice between involuntary medication followed by an execution and no medication followed by psychosis and imprisonment," Judge Roger L. Wollman wrote for the majority in ruling by the United States Court of Appeals for the Eighth Circuit.

Judge Wollman said the first choice was the better one, at least when the drugs were generally beneficial to the prisoner. He said courts did not need to consider the ultimate result of medicating the prisoner.

"Eligibility for execution is the only unwanted consequence of the medication," he wrote.

We think the last sentence is an example of killing someone with kindness.

2:01pm and the DJIA is down 90 points. We'll see what the last hour brings.

2:03pm and it looks like Al Jezeera has the Bin Laden tape after all and CNBC is playing the tape. Guess we can't trust Al Jezeera. Bin Laden's comments are really going to make President Bush mad.

3:02pm and the DJIA closed down 76 points at 7843. The S&P 500 lost 7 points to finish at 829 and the NASDAQ ended down 1 point at 1295. The NASDAQ continues to exhibit more strength than the NYSE.

And tomorrow is another day.


11 February 2003 - Morning Comment

7:18am and a month ago when we had a 50 degree day we were bemoaning the fact that we weren't having a real winter. Since then -- wow -- 30 days straight below freezing and most of those the highs were less than 20 degrees. All we need is more snow, which we are now receiving. That's the weather report.

The stock futures are indicating a higher opening to follow on yesterday's tepid rebound. Overseas markets are up on the glimmer of hope or wishful thinking that Saddam will cooperate.

Also Chairman Greenspan speaks this morning and folks are also hoping he will bless the Bush tax reduction package. Given all he said during the other guy's administration we find it hard to think he will, but then where there is a will there is a way. And probably if fiscally responsible Republicans, (are there any other kind?), are incurring deficits we will learn that the Chairman has no worries. And of course he will be happy because if we run deficits we cut government spending on welfare queens and undeserving poor children who made the mistake of not being born with a silver spoon etc., while at the same time we can wisely spend billions to prevent North Korea from launching the seven missiles it has with ranges of 1000 miles from attacking northern Alaska.

We shall see. Happy Tuesday.


10 February 2003

7:45am and the stock futures are indicating a higher opening. Some gurus are getting eager to participate in the coming rally but most seem to be biding their time. Treasuries are lower as the weekend news suggests a slower war drum beat.

We were reading some info on state tax burdens for the non elderly and we thought the following website http://www.itepnet.org/whopays.htm might be of interest to folks who want to know what percentage of the income various groups pay in total state taxes.

We keep wanting to own a wireless phone company but most of them have two much debt for our taste or are part of larger entities. The two stocks we have owned, Sprint PCS Wireless and AT&T Wireless have negatives that keep of from owning the stocks. We are comfortable trading them but holding them is difficult. AWE's problem is that NTT DiCoMo, a Japanese wireless company, has a put option on its shares at a price that we think is around $25 per share. And PCS is suffering the turmoil of losing the CEO who built Sprint and has run it for 20 years.

There are various reports that SBC Communications is going to make a bid for GMH, Direct TV. News Corp is also interested in the company and so there is hope that a bidding war will ensue. We would guess that SBC shares will sell off on the news but we think that GMH would be a good fit for SBC. Since AOL Time Warner sold its entire 8.4% stake in GMH two weeks ago for $800 million one would think that the SBC bid is only smoke, unless the AOL sale marks another instance of AOL receiving lousy advice from its investment bankers. Bank of America bought the shares and reofferred them at $9.90 per share. The current rumor will also allow BAC to get rid of any of the 80 million shares it still holds and allow the institutions who bought the shares to take a nice trading profit if they so desire. Funny thing is that we are seeing little mention of what would be atrocious timing – if the rumor is true – on the sale by AOL.

9:45am and the DJIA has been up and down 35 points all day. As with last week the NASDAQ is acting better than the other averages but is still down 2 points. Volume is light. Breadth is negative and down volume exceeds up volume.

The buildup in the Gulf is helping domestic airlines since they are flying the troops over there.

In the more bad news department, heating oil prices have spiked 20% and the Energy Department is reporting that winter heating oil bills will be 50% higher this year. We use propane on the farm and our heating bill is already higher that last year with two months to go. We noticed last night that we are paying $1.86 for premium gas which is the highest we have ever paid, including in Chicago. We remember when we first moved to this area of Wisconsin in 1971 there was a price war and we were paying 15 cents per gallon with someone pumping the gas for us. Times do change.

11:59am the DJIA is up 60 points. The markets spiked because War with Iraq seems to be at least a month off since Iraq has agreed to allow U2 flights by the UN without conditions. Of course they had nothing to lose since the U2 flights have been occurring over their airspace for years. Several commentators are saying that the stock markets have priced in a US victory in the war. We don't think the markets have. A quick US victory would create the kind of patriotic fervor that might allow the Bush economic plan to sail through the Republican Congress. And the momentum and satisfaction of success would stimulate the stock markets. In the end deficits do matter but the psychology of war and peace is currently ruling in the stock markets.

1:53pm and it is fascinating to watch the chess game of "Old" Europe and the US over Iraq. North Korea and also the news that Iran is thinking of developing uranium mines has been lost in the shuffle.

We wonder how all the talking heads and columnists on both the right and left are considered experts on any subject. Because they are facile with the spoken and written word they are accorded a validity that reflection on previous pronouncements would not confer.

Chairman Greenspan testifies tomorrow. We wait with bated breath. The Treasury auctions $24 billion of five year notes on Tuesday and ahead of the auction Treasuries have weakened. If Greenspan speaks negatively of the current Bush tax cut proposals and there is a good noncompetitive bid for the notes we could see a rally in Treasuries in the afternoon. In the meantime the stock markets are currently surrendering some of their gains before the final hour begins.

3:02pm and the DJIA gained 55 points today to close at 7918. The S&P 500 rose 6 points to end at 835 and the NASDAQ was up 14 points at 1297. Volume was very light.

And tomorrow is another day.


10 February 2003 - Morning Comment

6:33am and “the markets are oversold so they can rally on any bit of good news but…” is the refrain being heard from man gurus and pundits. That opening phrase provides cover for if the markets go up or down. We believe that the stock markets are going lower until the war begins/or Saddam leaves and then stocks will rally for a few weeks before turning south again. We think that rally will take the DJIA back to 8700 or above and that it will be a tradable rally. We are hoping for 7400 as a downside buy point on the DJIA and if we get there our decision to play the rally will be a bit easier. Preferably we get there on one or two big volume down days. As we reach 7400 our five year Treasuries will be at 2.50% and we will sell them for a 2% gain and place the proceeds in the DJIA.

Or at least that's what we dreamed last night. We'll see how today goes.


7 February 2003

7:45am and we have to head off for a haircut before the opening. The stock futures have bounced on the employment news and we bought the five year when issued on a 3.055% yield to maturity basis. Since the notes wonít be sold till next week we donít know what the coupon will be but we are presuming it will be 2 7/8%. The trade will not show up in accounts until next week because it is when issued. So the trade is on and we will see.

We were in a hurry this morning when we mentioned the jobs report because the sell off in Treasuries was a perfect opportunity to buy the five year note. A more complete breakdown is as follow: Non-farm payrolls rose 143,000 in January. Retail jobs rose by 101,000, the largest gain since January 1995. We think that is an adjustment only and that those jobs were created only in the mind of the Secretary of Labor. The unemployment rate fell to 5.7% from 6.0% in December which is another dream number. The overall workweek was up 0.1 hours to 34.2 hours, and average hourly earnings were unchanged. The December numbers were adjusted downward by 56,000.

9:17am and after opening higher the DJIA has moved into negative territory. Breadth is mixed and volume is light.

Upon reflection, stock and bond traders have decided that this morningís employment numbers were not as positive as they seemed at first blush. As a result bonds have rallied from their initial sell off but still remain lower, and stocks have given up most of their gains.

11:46am and the DJIA is down 52 points. The Bopsie twins Ridge and Ashcroft are on CNBC warning of a major attack. We know they are going to be right one of these times. But every time we here the Bush folks speak of terror and fear we think of FDR who is now a Republican icon too and his famous words that “the only thing we have to fear is fear itself”.

We and all Americans know there will probably be another terrorist attack. As we have said before our country has been subject to terrorist attacks since its founding. We refer specifically to the America revolutionaries who were traitors and terrorists until they won and American Indians who were here first, and the North or the South in the Civil War. More recently the militia folks in Idaho and Michigan were viewed by some as misguided but patriotic until one of their number blew up the Federal Building in Oklahoma City. Anyway, constantly propounding the attack scenario is not healthy or productive. Itís a lousy way to run the country. We are proud to be Americans. We know that a terrorist act has and will again occur. If it happens it happens. If Ridge and Ashcroft et al do their jobs it is less likely to happen but still may. Risk of death was what the shuttle astronauts assumed. The risk of being killed by lightening is greater than being killed or injured in a terrorist attack.

We donít care what the warnings are doing to stocks but we do know they are not good for the American psyche. Leaders should lead and do their jobs and get a life to enjoy.

Red, yellow, orange, blue, baloney.

12:02 pm and on a mellower note we would like to share a poem that a friend and client sent to us. This poem has the flavor of many of our poems and we found it enchanting. It was written by a fellow who lives at Hesed Hollow in northern Illinois and is about an oak tree which shares his life there.



                        The Oak
I stood close and touched the oak today, a sunny windless day as summer wanes. I stood and touched the oak, touched the handsome blue grey bark, uneven flesh with crevices old and deep but beautiful all the same, and it goes all the way to the very top. I just put my hand upon the rugged bark, just there as to greet a friend, to greet no to comfort. Great oaks do not need to be consoled, I mused. I thought: “the oak is just as old as I,” as old as eighty some and still stands tall and strong. We are a pair and blessed. The ancient oak has stood there in the cruel cold that winter brings for long hard years, but then thatís all he had to do, just stand and hold the snow in outstretched arms like praying gratitude or asking grace as I do, or just bravely holding still against the winds that blow down from the north in January when God opens wide the winter door. The storms could never make him move and go away to some other place than just right there where he was born In the lovely forest where I live too, for now. And he has always been perfectly content to be there where he has stood these many years, stands ready to greet the spring when the grass and flowers come, or nap in summer time when the birds arrive and the squirrels run all over up and down, or slumber in the winter and hardly feel the cold. I had the hose in hand and watered long the oakís great feet. Sometimes in drought we are told to “water the oaks.” It was just a gesture, friendly I felt, and still had my hand upon the strong great giant reaching into the sky and all the rich blueness and the clouds white and billowing not moving an inch but just hanging still for me to watch. And then I started to console the oak: donít ask me why.

      JEL 9/99


1:23pm and Treasury bonds are now up for the day and the five year notes we bought have rallied 10 basis points since we purchased them this morning. The DJIA and other indexes and averages are down about 1%. Breadth is almost 2/1 negative and down volume exceeds up volume almost 3/1 on both the NYSE and NASDAQ. The terror alert has taken the wind out of the bullís sails for now. As we approach war and the timeline becomes more visible we would expect stocks to start rallying. This will occur because there are advisors who think todayís markets are and will continue to mirror the action that occurred in 1990-91. We are not as certain and we note that not a few of the folks suggesting this strategy have been wrong about the markets for the past few years. Thatís not to say we wonít try and catch a rally, but we probable will not play unless the DJIA visits the 7500 level. We sense the fear of not making money is still overwhelming the fear of losing money. As we remind ad nauseam, we are in the latter camp.

1:51pm and a bald eagle just flew over our office. Thatís the first one weíve seen on our farm and as the ancients would; we take the sighting as a sign of good luck for our purchase of the Treasury notes today. The eagle flew in front of the waxing moon which is bright in the afternoon sky even as the sun shines brilliantly on the new fallen snow. The below 0° temperatures have provided such clear clean air that we can see for miles from the top of our sledding hill. TGIF.

1:57pm and back in la la land the DJIA down 92 points. The NASDAQ is off 2% and the S&P 500 is doing no better. There is no reason for the markets to rally ahead of the weekend but since we own no stocks our interest is only academic. A couple of more days like today and we will be at a buying point. We are not there yet.

3:02pm and at the close the DJIA was down 65 points at 7864. The S&P 500 was down 8 points at 829 and the NASDAQ ended 19 points lower at 1282.

For the year the DJIA is down about 6% as is the S&P 500 and the NASDAQ is down 4%.

The Model Portfolio is up 7% with a value of $493,086. The Model owns $300,000 principle amount of the US Treasury When Issued 2 7/8% due 2/15/2008 with the balance in cash. We will not post an updated Model Portfolio this week because we do not have extended figures on the When Issued Treasury Notes we purchased today.

And tomorrow is another day.


7 February 2003 - Morning Comment

7:15am and the employment report comes in fifteen minutes and it will determine the early morning trading pattern. With Bush's no chance for Saddam to redeem himself talk last night and the new or old depending on whom you listen to terror warnings, the stock markets are going to have a tough road to hoe to close on the upside tonight.

Even so, stocks don't want to go down and seem to be looking for an excuse to rally. As we said yesterday, our strategy to buy the five year Treasury worries us a bit because everyone has a similar strategy. And the same holds true for the stock markets. All the trader types and hedge fund managers are sure the war will be over in 3 days and that they have to be a day early to catch the rally. Few are looking past the rally to what happens then. We ourselves have very little interest in stocks at this time because we are 12% ahead of them for the year. So any rally will only approach our current return of plus 7% for the year which is locked in if we stay out.

We are going to try and catch the rally in the five year treasury as the war begins, and then head back to cash to await another chance to buy the five year when it is sold to buy the war stock rally. That's because after a big rally that takes the averages and indexes back to where we sold them in early January, we think the reality of the lousy economy will reassert itself and stocks will roll over.

All these events may be far in the future but unfortunately the war is more a reality every day. There is a new moon at the beginning of March (dark) and one on April 1. April 1 would be the perfect day to start the testosterone war but we think the March 3 day will be D Day.

Non farm jobs increased 143,000 in January with a big job increase in retail employment. This is a baloney since the seasonal adjustments are skewing the meaningfulness of these numbers. Supposedly the unemployment rate has dropped to 5.7% from, 6% in December. Happily bonds are tanking and we are getting a chance to buy the five year.

In early trading the stock futures are indicating a higher opening. Our guess is higher this morning and flattening to unchanged this afternoon for stocks.


6 February 2003

7:35am and jobless claims dropped 11,000 last week to 391,000. Productivity in the fourth quarter was down 0.2% after being up 3% in the third quarter.

We purchased the paper NY Times yesterday while in Madison and were intrigued by the stories in the business section.

  1. AIG adds $3.8 billion to reserves. Hank Greenberg, the almost as venerable as Jack Welch CEO of AIG, blames tort lawyers for the need for increased reserves. Oh those terrible tort lawyers, if only they wouldn't bring those frivolous law suits for injustices committed by corporate officers, doctors, and investment bankers, AIG wouldn't have to pay our the large settlements for which they now have to take reserves and raise rates.
  2. One headline reads "Nothing like Big Deficits to Hearten Bond Traders". The story says that there were traders who actually believed former Treasury Secretary O'Neill and Fed Pooh Bah Greenspan last year that there was a chance Treasuries would disappear because of the looming surpluses forecast by the Bush folks early in their administration would obviate the need for the Treasury to issue bonds as the national debt was paid off. Now that the surpluses as far as the eye can see have turned to deficits as far as the eye can see we are informed by Mitch Daniels, the White House Budget Director, that deficits will not have a negative effect on interest rates. In other words interest rates won't rise because of government deficits. We agree that as long as the economy remains in the tank and companies keep firing folks and selling production facilities and paying down debt there will be no rise in interest rates. That's what has been happening in Japan for the last 14 years. Does the Bush White House really want that type of economy? That is the unsaid caveat in Daniels no higher interest rate mantra. For if the economy turns around and companies start expanding and borrowing money interest rates will rise. The "larger deficits don't mean higher interest rates" mantra ranks right along side the "cutting taxes increase government revenues" mantra of silly political sloganeering. Of course if the economy recovers, a big if, when interest rates do rise as the deficits reach $500 billion next fiscal year Daniels will blame all on Clinton.
  3. Another headline was "Dividend Plan Drops Penalty for Borrowers Who Buy Stock". In the never-ending drama of the search for tax equity, folks who borrow money to buy dividend paying stocks will be able to deduct the interest they pay for borrowing. As we said in an earlier post the folks who package product to sell to investors at 5% markups are rubbing their hands with delight as the tax free dividend piŮata just gets stuffed with more and more complicated but profitable goodies for the investment industry to foist on the public. Speaking of tax equity one egregious tax inequity that could be corrected and would be stimulative would be to end the imposition of federal and state income taxes on the FICA tax that all workers pay and that two worker households pay twice.
  4. Tyco plans to hold its corporate meeting in Bermuda while at the same time proclaiming its commitment to corporate governance. Tyco is, as we all remember, one of those America First Companies who are located in Bermuda so Tyco doesn't have to pay US taxes. So all you folks as you pay your ADT home security bills rest easy knowing that Tyco, which owns ADT, won't have to pay taxes on the dollars you are sending every month.
  5. The news that major law firms that concentrated on dot.com companies are breaking up brought tears to our eyes. It seems it's tough to make a million dollars a year as partner in one of these firms since the dot.coms don't have the cash to pay their bills.
  6. A second Enron Trader pleaded guilty to manipulating the California Power Market and lying to investigators. There is a remarkable paragraph in this story which must have been written by Dick Cheney. It states: "Such trading tactics however, did not create the energy debacle that hobbled California in 2000 and 2001. Rather, they worsened an already bad situation, with Enron traders devising ways to take advantage of the chaos in the market and pump up revenue. Oh, we forgot, the chaos was caused by Bill Clinton.
  7. Salant Corporation, a name from the 1970s is being acquired by Perry Ellis for about $9.37 in cash and stock. Salant was a favorite trading stock of the old stockbroker and as we remember we used to trade the shares between $3 and $6. The shares were trading at $5 when the acquisition was announced. We are glad we were never long term investors in the stock.
  8. Layoffs in Boston have created a glut of office space. 22% of office space was available for lease at the end of 2002 versus 5.5% at end of 2000. The commercial real estate market isn't doing well.
  9. Some trades in S&P futures mini contracts that occurred on the Chicago Mercantile Exchange were cancelled on February 4. The dollar values of the trades were $170 million and occurred after the regular 4 pm close. The exchange determined that a sudden spike that sent prices up 12% in 43 seconds had occurred for no good reason and trades for 4000 contracts were cancelled. Say what? Isn't that true of all futures trades which are basically gambling?

8:57am and the stock markets are lower in light trading. Retailers are getting a bid after Gap Stores announced better than expected sales and earnings.

10:26am and as the stock markets continue to meander we have finally resolved how to invest a portion of our cash position in Treasuries. We have wanted to place a portion of our cash horde in Treasuries for the past few weeks. We have been leaning towards using Treasury Bills. But that seems too dull and we would like to buy a bit more coupon and assume more risk and thus potential reward without going overboard. We have not been able to decide on the maturity we want to trade until today. It is our belief, a belief in which we have a lot of company, that Treasury yields are not going to rise at least until after the Iraq situation is resolved. With that in mind we plan to initiate a trading position in the five year Treasury at higher than a 3% yield to maturity basis. A 25 basis point move in the five year is worth 1%. It is our belief that as the war begins the five year will rally (the yield will drop) at least 25 basis points and we will be able to make a 1% profit or more from that rise. While we are waiting we will be earning 5 times what we are earning in cash. Because there is risk we are not committing all our funds or funds in small accounts.

Our rally on war scenario may seem to pat, but we also believe that the economy can not recover until the war situation is settled. So we think our risk is about 2% to the down side which is two thirds of a year income with a 3% coupon. We don't plan on holding the bonds but we will be trading them. We are hoping for an entry point above 3% in the next two weeks.

12:06pm and we present a different point of view from our libertarian brother who is also our computer Guru.

"Going to war without France is like going deer hunting without an accordion -- you'll leave a lot of loud, aggravating noise behind."

Ken Adelman
former UN ambassador

12:15pm and the stock markets are rallying back to even after being down for most of the day. Retailers remain strong on good January numbers, or rather better than last January numbers. It is wrong to go long retailers in February.

12:36pm and Pepsi announced earnings last night that were up 21% over last year. The stock is down 4%. Good news is bad news in bear markets. Pepsi is also joining the crowd by announcing it will no longer make quarterly an annual earnings forecasts. That's OK with us.

1:29pm and stocks are stable at lower prices. Bonds are higher/yields lower which is a given since this morning we decided to buy the Treasury five year. Happily though, we have no need to rush and on a trade like this where you buy is as important as if you buy. We are bidding 3.10% right now for next week's when issued.

2:35pm and the DJIA is heading lower and is down 85 points. The NASDAQ is holding but is also off 2 points. By the by, the Bank of England lowered rates by 25 basis points to 3.75%. That might help the dollar since lower rates in England are less competition for US rates.

3:02pm and stocks rebounded a bit maybe on news that President Bush is open to a second UN resolution. At the bell the DJIA was down 53 points at 7932. The S&P 500 lost 5 points to finish at 838 and the NASDAQ was unchanged at 1301.

A notice for Clients

In most accounts we have now have a very large cash position. We are not comfortable holding so much money in cash and so we have set up all our accounts to automatically sweep cash into Cash Equivalent Fund which is a large money market fund. Clients will receive a prospectus in the mail on that fund. Purchasing Cash Equivalent Fund will not increase the low yield on cash that is currently being earned but it will add an iota of safety. All accounts that we hold are insured by SIPC to $500,000 of which $100,000 can be cash. ABN AMRO has contracted with Travelers Insurance Co. to provide unlimited excess insurance coverage on all cash and securities. Because of the way SIPC works all specifically identifiable securities and mutual funds are covered even if the amount exceeds $500,000 and that is our reason for placing the excess cash in Cash Equivalent Fund. ABN AMRO, the NYSE firm that clears our client trades and holds our clients' securities has over $1 billion in capital. That is a very large amount of capital and sufficient for any foreseeable occurrence. But we always error on the side of caution and that is why we are setting up all our accounts to be swept into Cash Equivalent Fund. We want to keep liquid assets available for trading opportunities and this is the best and safest way to do so. As with the credit balances in Lemley Yarling & Co. accounts, ABN AMRO and Lemley Yarling & Co. have an agreement whereby ABN AMRO rebates a portion of the fee it earns for placing funds in Cash Equivalent Money Market Fund to Lemley Yarling & Co. No adjustment in the fee paid by clients to Lemley Yarling & Co. for management services is made because of this rebate.

We are being more cautious than usual because the markets are again at an inflection point where a crash type fall could occur. We don't think it will but since markets never crash off the top and we are revisiting a support area (7200 to 7800 on the DJIA) that the markets have been testing for the past five years, we want to be ready for any eventuality.

In the better late than never department we have posted the Autumn 2002 Lemley Letter. And in a more timely matter we have posted the Winter 2003 Lemley Letter which is excellent reading. We have also posted the realized gains and losses for The Model Portfolio for 2002 on the Model Portfolio page. If you are interested in any of these you may click thru.

And tomorrow is another day.


6 February 2003 - Morning Comment

7:15am and yesterday we read a column by Jim Cramer about how the Iraq War would be a smart war and easily won. While we know he was referring to the use of so called "smart" weapons we felt compelled to write the following note.

Dear Jim:
There is nothing smart about this war. This war will be one of the dumbest wars the US has ever engaged in. And from your references to your children and your past, I have the feeling that if your daughter, if she were old enough, were about to be drafted to fight in an Iraq War you might think that containment and talk would be a better alternative.

Slow down a bit, take a couple of days off and think about what you are wishing for and what the result will be. The talking heads are making fun of France and Germany as wimps. 90% of the talking heads avoided service when they had the chance as are their children and grandchildren.

France and Germany fought with each other for 500 years and killed millions of each others citizens. Now they have formed an economic union in the hopes of living in peace. This fact gives their perspective on the futility of this war validity.

Sincerely,
Bud Lemley

In his comment on the website www.realmoney.com Cramer also makes the point that a portfolio manager he knows believes that if the smart weapons work the upside is 30%. Cramer is excited about an upside potential of 30% if our weapons work and kill a bunch of Iraqi citizens. Not only that, if the weapons work the US will get control of the Iraq oil fields and begin pumping oil using the proceeds from the oil to pay for the rebuilding of the buildings and infrastructure that US smart bombs destroy. And if in pumping more oil, the price of oil drops to the benefit of the US economy, well so much the better.

7:15am and we were thinking while driving yesterday that one of the reasons we are bearish now is that it is not normal market action to be testing five year lows in January/February. The normal time for such testing is September/October. We are looking for a bottom to the bear market in July of this year.

The major market measures were higher till the last hour yesterday and then gave back all the gain to close lower for the day. Secretary Powell's remarks were well received in the US yesterday and we would guess that support for military action even without UN resolutions is back up to 60%. Thus we think war is inevitable unless the Saudis and others can convince Saddam to take a hike. That would be the best solution for everyone. We aren't holding our breath.

The yield on the Cash Equivalent money market fund that we are now using for cash balances in client accounts is about the same as what we were earning on the actual cash balances, that is less than 0.7%. We are not in cash equivalent to earn money we are in cash to conserve capital. We are going to place some money that we won't need for trading into 3 month Treasury Bills where the yield is better but still a meager 1.15%. We don't want to extend maturities to three years to earn 2% because we believe that if the economy starts to recover and the stock markets rally that the principal risk in three year bonds is more than the interest we can earn in nine months. The reality is that we are not earning much on our cash balances because the stock markets are so dicey. And that is why we have a cash position. And because the stock markets are so dicey, Treasuries have a low yield because Treasuries are serving as a safe haven. There are times when just sitting is best. Now is one of those times. Moreover we have earned more than twice what we would earn over an entire 12 months by owning three year bonds by the trading in the first two weeks of this year.

Stock futures are indicating a slightly higher opening.


5 February 2003 - Morning and All Day Comment

6:47am and we are traveling to Madison today on a Sushi Run and so this will be our only post. The stock futures are slightly lower but give no direction as to today's market action.

Cisco announced record earnings last night but warned on the second quarter. Cisco's profit margin is up around 70% which is the result of job and cost cutting. It's probably also the result of reclaiming and selling some of the huge inventory that the company wrote down to zero some quarters ago. With sales of $17 billion a year and a market cap of $50 billion, if cash of $22 billion is subtracted, Cisco still sells at 3.5 times flat sales. That's not hugely expensive for a growth stock but it is still overpriced for a cyclical stock which is what Cisco is now considered.

The WSJ has a lead story that the Chairman and CEO of Sprint William Esrey was forced to resign because of the use of an aggressive tax shelter that is under IRS scrutiny. William Esrey made Sprint and his resignation under these circumstances is a terrible loss. Someone will buy Sprint. The only problem is that we think it may be a take under not a takeover. By that we mean the price paid will not be much of a premium.

Goodyear Tire cut its dividend to conserve cash. We sold the stock when it didn't bounce after year end and our discipline was rewarded even though we took a loss at $7 per share. The stock is now at $4.50.

AMR is seeking $4 billion more in cost cuts to become profitable. Can bankruptcy be far away?

Finally in the better late than never department we have posted the Autumn 2002 Lemley Letter. And in a more timely matter we have posted the Winter 2003 Lemley Letter which is excellent reading. We have also posted the realized gains and losses for The Model Portfolio for 2002 on the Model Portfolio page. If you are interested in any of these you may click thru.

And tomorrow is another day and will be the time of our next post.


4 February 2003

8:32am and the stock markets are opening lower. CNBC had Ralph Block, the head tech guru at Raymond James on at 8am and he was bearish and talking about 7200 on the DJIA. According to Ralph if the DJIA gets there you don't have to worry because the A/D Line will still be positive.

European bourses are lower today. The DJIA is dropping faster today than it rose yesterday and is now down 90 points at 8:37am. We are watching.

9:45am and new factory orders were up about 0.4%. That news did nothing for stocks. The DJIA is down 152 points and breadth is 2/1 negative. Volume is light. Down early may mean up late, but with Powell scheduled to lay it all out at the UN on Wednesday we doubt there will be much of a rally today.

10:16am and as stocks trend lower there are comments that one reason for the sell off is that AIG the giant insurance company is taking a $1.8 billion special charge to increase reserves. It seems that AIG under reserved in times past. That is called managing earnings? GE was the master who taught other companies the wonders of stable earnings growth. Now these companies are being forced to recognize their massaging of earnings by concealing expenses.

1:04pm and the DJIA bounced to being down less than 100 points but it is off 115 points now. We have no idea what will happen this afternoon but we know it will be nothing that makes us want to buy stocks. We have an early meeting tonight so we are going to take off early to do chores and we'll have our morning comment tomorrow. As we leave the DJIA is down over 1% as is the S&P 500 and the NASDAQ.

And tomorrow is another day.


4 February 2003 - Morning Comment

7:18am and it looks like another day of nothing happening. Stock futures are lower as is Europe and there is no catalyst to move the markets higher. There is continued talk of North Korea acquiring nuclear material and that would seem to be a negative, but with the way the media is yawning about Korea while fawning over Iraq we don't think the recent spate of news will get juices flowing.

Cisco's earnings are announced after the close and that and the memorial service for the astronauts at noon will be the focus of today. We don't expect much volatility.


3 February 2003

A Notice for Clients, Please Read.

In most accounts we have now have a very large cash position. We are not comfortable holding so much money in cash and so we are going to set up all our accounts to automatically sweep cash into Cash Equivalent Fund which is a large money market fund. Clients will receive a prospectus in the mail on that fund. Purchasing Cash Equivalent Fund will not increase the very low yield on cash that is currently being earned but it will add an iota of safety. All accounts that we hold are insured by SIPC to $500,000 of which $100,000 can be cash. Travelers Insurance provides unlimited excess insurance coverage on all cash and securities. Because of the way SIPC works all specifically identifiable securities and mutual funds are covered even if the amount exceeds $500,000 and that is our reason for placing the excess cash in Cash Equivalent Fund. ABN AMRO, the NYSE firm that clears our client trades and holds our clients' securities has over $1 billion in capital. That is a very large amount of capital and sufficient for any foreseeable occurrence. But we always error on the side of caution and that is why we are setting up all our accounts to be swept into Cash Equivalent Fund. We want to keep liquid assets available for trading opportunities and this is the best and safest way to do so. We are being more cautious than usual because the markets are again at an inflection point where a crash type fall could occur. We don't think it will but since markets never crash off the top and we are revisiting a support area (7200 to 7800 on the DJIA) that the markets have been testing for the past five years, we want to be ready for any eventuality.

7:30am and the WSJ has an article today on AMR Corp the holding company for Am erican Airlines. The shares sell under $3 and the Journal's story posits that AMR is either the buy of the century or is a candidate for bankruptcy. That the shares are selling under $3 suggests the latter. Months ago we opined that when USAir filed bankruptcy it would require UAL and AMR to do the same. Since in today's world of non responsible capitalism when a company files bankruptcy the executives of that company continue to receive salaries and get repriced options when the company emerges from bankruptcy there is little incentive for executives not to choose bankruptcy. Of course shareholders are wiped out and employees lose big time but that is of little consideration in a business world that blames unions for financial problems and exonerates management.

The Bush folks are going to present a $2.3 trillion budget to Congress. Back in 1966 or 1967 we remember the push to keep the total budget under $100 billion.

8:05am and we were amused by Chicago Tribune columnist Steve Chapman's reference to the writing of several conservative commentators concerning their impressions of George Bush as he delivered the State of the Union address:

"The president was able to show his resolve, his sober determination, his moral vision," exulted David Brooks in The Weekly Standard. The Wall Street Journal's editorial writers got a thrill from "the look in his eyes" as he "seethed with determination." Peggy Noonan, a speechwriter for President Reagan and the first President Bush, wrote in perfect seriousness, "For a moment I thought of earnest Clark Kent moving, at the moment of maximum danger, to shed his suit, tear open his shirt and reveal the big `S' on his chest."

Well, there is no accounting for what goes through Peggy Noonan's mind in the presence of a Republican politician.

If you'd like to read the whole column: Steve Chapman's Thoroughly bogus case for war February 2, 2003 - Chicago Tribune

You will have to register free with the Tribune to read the column.

8:30am and trading begins on the NYSE with the listing of Kinross Gold Corporation (KGC), a gold mining stock. Are the powers that be trying to tell us something?

9:02am and the ISM number which is today's trading number came in at 53.9 in January versus a revised 55.2 for December. The stock markets are reacting positively to the news.

10:00 am and the NYSE is observing two minutes of silence for the Columbia Crew. The following poem has been sweeping the internet today and was used in part by President Reagan after the Challenger disaster and according to the info we have was written by a young man who died in The Battle over Britain in the early stages of WWII.


High Flight
Oh! I have slipped the surly bonds of Earth And danced the skies on laughter-silvered wings; Sunward I've climbed, and joined the tumbling mirth Of sun-split clouds, and done a hundred things You have not dreamed of. Wheeled and soared and swung High in the sunlit silence. Hov'ring there, I've chased the shouting wind along, and flung My eager craft through footless halls of air. . . . Up, up the long, delirious burning blue I've topped the wind-swept heights with easy grace Where never lark, or ever eagle flew? And, while with silent, lifting mind I've trod The high untresspassed sanctity of space, Put out my hand, and touched the face of God. John Gillespie Magee Jr.

11:02am and the stock markets are muted at slightly higher levels. There isn't much push to move stocks higher. According to reports, British Insurance Companies were sellers of large amounts of US stocks last week and that was the reason for the pressure on the US stock markets. That selling has abated and so there is an upward bias being demonstrated today.

1:24pm and stocks are taking heart from GM US sales up 1.2% and Ford sales up 9%. The DJIA looks like it wants to crack up 100 before the hour is over. The final hour will tell the tale.

2:22pm and stocks are giving up their gains. Breadth is positive on the NYSE and negative on the NASDAQ.

3:02pm and the DJIA closed up 55 points at 8108. The S&P 500 gained 4 points to finish at 860 and the NASDAQ rose 3 points to end at 1323.

And tomorrow is another day.


3 February 2003 - Morning Comment

7:15am and in reading Barron's over the weekend we came across Alan Abelson remarking on a statement by Henry Blodget, the former Merrill Lynch Internet analyst: "Does anything better symbolize those perfervid days -- or is anything more likely to make you hopelessly nostalgic for them -- than the notion that the real 'risk' is not losing money, but missing the upside?

The stock futures are indicating an up opening. Europe is higher and it looks like the markets are going to get a bounce from last weeks selling. Don't know if the rise will mean anything but it may have to do with the fact that the Columbia tragedy has removed Iraq from media coverage. Until after the memorial service on Tuesday the focus will be on Saturday's explosion.

We are watching.


1 February 2003

Rabbit Rabbit!!

9:08am and as we begin writing our comment on the week we have learned that the shuttle Columbia has disintegrated while returning to earth. Those folks who fly those things are the bravest of the brave and it is very sad. This crash is not going to be positive for the national psyche.

The stock markets finished the week on an up note for the DJIA but the NASDAQ was down even Friday. Bush and Blair are meeting at Camp David and there are reports that Blair is pushing for another Security Council Resolution before any attack takes place. If that is true any action will be delayed and the delay will be more than weeks. And the delay will be a negative for the markets.

We have been thinking that there will be a big whoosh down of over 300 points one of these days and if it occurs on big volume we plan to trade that break. The 7200-7500 area on the DJIA has been tradable support in the past. If there is a war, at the beginning the reports will be positive and there will be a rally which we will sell. Our readers know our antiwar feelings but it is our responsibility to make money for our clients and so if this scenario unfolds we will try to take advantage of it.

If the scenario unfolds a different way we will continue watching. The economy is in bad shape which is not new news. But we don't see any signs that events are occurring which will cause improvement in the mediate term. Companies are still laying off people or firing people in high wage areas and moving jobs to low wage no benefits areas. That's no way to create a recovery.

Since we had a four inch snow last night we are going to snap on our snow shoes and work off some stress and sadness.


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.