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28 February 2007 Daily Comment

Thoughts

Yesterday’s sell off was expected. Or at least if we read today’s market commentary all the bulls are happy it occurred since it was needed to clear the air. Since the bears were also happy it occurred we should have a lot of happy folks on Wall Street today.

Markets never crash off the top. Yesterday’s sell off is the beginning of a correction. It may also be the end of a correction but only time will tell. (Back in 1987 the DJIA dropped 20% from August to October 16 before the Crash on October 19 where it lost another 20%. For the year 1987 the DJIA and S&P 500 closed up a few percentage points. No harm no foul unless you were one of the many folks who entered the markets when they were up 20% to 40% that year).

And so there is agreement that a correction was needed and it is healthy that it is occurring. But it is occurring in the context of a slowing economy. Housing sales are lower. GDP growth is slowing.

It is true that companies have been reporting record earnings. But the law of the pendulum has not been revoked. The pendulum exist in nature as areas move between drought and excess rain etc. The pendulum exists in business as companies to well for years and then need to retrench. And the pendulum certainly exists in the financial markets. As certainly as record earnings are reported less than record earnings eventually follow for most companies except true growth stocks. And true growth stocks sell at 60 times earnings in bull markets and 30 times earnings in bear markets. And so as certainly as stocks rise they will fall. The long term uptrend in the market may remain intact but that doesn’t mean that stocks go straight up. And there has not been a correction in six months and there has not been a significant (10%) correction in four years so the markets are due.

We don’t know if this is the significant correction but we do know that we aren’t yet ready to enter the marketplace. The huge down volume and number of stocks closing lower yesterday is a warning that there should be more to come on the downside before any all clear signal can be sounded. And we still don’t think stocks are cheap. The only potential purchases in today’s market are relatively valued stocks. That means that relative the overvalued markets there are some stocks that are under priced. That doesn’t make them cheap.
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Asia was lower overnight except for Sahnghai (China) which was up 4% or half of what it lost on Tuesday. And that is interesting because the reason given for yesterday’s sell off was the drop in China. But China is in the throws of a speculative mania and so it is going to be more volatile. Hong Kong and Japan were both down over 2% and India was down another 4%.

Europe is trading large fractions lower at midday and Gold is down $10 with Oil off 60 pennies but still above $60.
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Much was made in the media last night and this morning of the glitch that caused the DJIA to move from down 260 points to down 540 points in an instant at 2PM CST yesterday. At the time we thought it was a mispricing but the reality is that the components of the DJIA were moving lower all through the contra hour between 1PM and 2PM and the computers that disseminate the second by second calculation of the DJIA to the world were not able to keep up with all the trading and repricing. So the actuality is that the DJIA was moving from down 260 to down 540 in the half hour before the large jump. Thus the sudden drop-off in the market today was due to the fact that their normal computer system was lagging way behind so they switched to a backup system which was more caught up. The "sudden" decline wasn't actually so sudden, the market had been declining but nobody knew. And our guess is that had traders seen that steady move lower the DJIA would not have bounced back like it did after 2pm.
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The dollar edged up against the euro on Wednesday after Federal Reserve Chairman Ben Bernanke said he still sees moderate U.S. economic growth ahead, downplaying the impact of Tuesday's global stock market plunge.

What else could he say?
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4th Quarter GDP was revised to up 2.2%. The core Inflation gauge was revised to up 1.9% which was lower than expected. By the by, on January 31 the Commerce Department reported that gross domestic product (GDP), the broadest measure of overall economic activity in the U.S., expanded at a 3.5% annual rate during the fourth quarter of 2006. Oops, they were off by over a trillion dollars. The sharp downward turn was due to reduced inventory investment from companies, with capital expenditures taken down to -3.2% from -1.8%, and slowing (though still positive) consumer spending
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Sprint posted a higher quarterly profit on Wednesday and gave a positive outlook for subscriber growth in the second quarter. Sprint said on a conference call with analysts that it expected to post another net loss in postpaid subscribers in the first quarter, but forecast postpaid net additions in the second quarter. Sprint had said in January it added 742,000 customers on a net basis in the last quarter, including additions of 876,000 customers from wholesale providers and losses of 306,000 high-profit postpaid subscribers. Sprint ended the year with 53.1 million subscribers, up from 47.6 million at the end of 2005. The company reiterated its 2007 outlook for operating income before depreciation and amortization of $11 billion to $11.5 billion on consolidated operating revenue of $41 billion to $42 billion. The company said it was lowering its capital spending budget for the year to $8 billion from its previous target of $8.5 billion.

We are interested in Sprint around $17. It is up today on takeover rumors that were reported on CNN Money. We think any takeover will not occur until they have assimilated Nextel and are seeing growth in postpaid subscribers and the share price is at higher levels. Wall Street hates to take over stocks on their lows.
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Crude oil inventories were less than expected and distillate and gasoline inventories were down much more than expected.
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At 10am the major measures are higher after some hesitation at the opening. The DJIA is up 100 points. Breadth is flat as is up/down volume. Trading is heavy.
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Support/resistance levels to watch in the broad indices based on daily charts:
- SPX:
  1364/1430
- DJIA: 11,855/12,500

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New Home sales fell 16% in January according to the Commerce Department. The supply of homes on the market has now moved from 5.7 months supply to 6.8 months supply. Part of that upward move is the result of the lower number of homes sold.
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The Fed reported that the portion of loans on which payments were at least 30 days overdue rose to 2.11%, the highest since the fourth quarter of 2002, and a jump from 1.72% the previous three months.
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Intel broke below $20 a few minutes ago. $20 was support for Intel all though 2004 and 2005. In March of 2006 INTC broke down though $20 support and it then became resistance until October 2006 when thee share price rose above $20 where it has remained until today. We are interested in Intel but think it will break to $18 or lower in a further correction.
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The Chicago Board of Trade posted an all-time high in futures and options trading volume on Tuesday, surpassing 11 million contracts, the exchange said Wednesday.     The new CBOT volume record is 11,196,830 contracts 44% above the previous record of 7,791,833 contracts made on November 28, 2006.
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From http://www.rgemonitor.com/blog/roubini/180573

Now even mainstream media and mainstream analysts regularly speak of the sub-prime “meltdown” or “carnage” and refer to these sub-prime mortgages as “garbage” or “trash”. Since most of these sub-prime mortgages were junk that should have never been originated in the first place, now the new spin in financial markets is to minimize the nature of the problem by making two arguments: first, sub-prime loans are only a very small fraction of the housing market, specifically only 6% of it; second, sub-prime problems are a niche problem that is not affecting other parts of the mortgage market. Both arguments are utter spin without any basis. Let us see why.

Where did the Mortgage Bankers Association (MBA) get the “sub-prime is only 6%” figure that it is spinning around in every possible media? Their trick is to consider all homeowners, even the 35% of homeowners who do not have any mortgage and then argue that only 6% of homeowners are sub-prime borrowers. Why is this spin and why is the actual figure for “garbage” mortgages actually closer to 50% of the flow of new mortgages in 2005-2006 rather than the “6%” being spinned around? Several reasons.

For the rest of the article go to http://www.rgemonitor.com/blog/roubini/180573 .
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It seems the on line trading systems didn’t work so well yesterday when volume rocketed higher and the major measures dropped. But fear not, executives at the firms involved are not discouraged. Of course they probably weren’t trying to trade on their own systems.
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As stocks have rallied today Treasuries have given back half their gains of yesterday. And at noon Gold is down $16. Oil is only down a few pennies at $61.10.
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We are interested in four stocks and they are GE, Intel, Sprint and J Crew. But we are watching.
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Gold closed down $15 at $672 in NYC trading. Oil was up 33 pennies at $61.80. Treasuries closed weaker with the two-year at 4.64% and the ten-year at 4.56%.

European stock indexes were lower.
                    PRICE          CHG      %CHG       
Belgium       4305.23      -82.14      -1.87%
U.K.             6171.50    -114.60     -1.82%
France          5516.32      -72.07      -1.29%
Germany      6715.44    -104.21     -1.53%
Netherlands    490.21     - 10.12      -2.02%
Norway          498.78        -8.52       -1.68%
Spain          14248.40    -159.90     -1.11%
Italy            41155.00    -461.00     -1.11%
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Mexico was up small and Brazil gained better than 1.5%.
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The head of the President’s Council of Economic Advisors says that yesterday’s drop appears to be an anomaly.

Unless it wasn’t.
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The DJIA closed up 50 points at 12266 after swinging many times in a 170 point daily range. The S&P 500 regained 8 points to 1407 and the NAZZ rose 9 points s to 2417.

Breadth was 3/2 positive and volume was active.

There were 140 new highs and 110 new lows.

The big boys and girls are having fun and we are too.
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27 February 2007 Daily Comment

Thoughts

Stocks are opening 1% lower this morning on a confluence of data and events. Greenspan’s dour comments over the weekend about a recession late in 2007 soured the markets mood yesterday. Then overnight the Vice Chairman of the Chinese People’s Congress mentioned a bubble in the Chinese market and the need to investigate margin purchases and new issues and Shanghai proceeded to drop 8% in value.

This morning Durable Goods came in at down 7% and ex transportation down 3.1%. Capital Spending by Business was down 6% and that was all the markets needed for Treasuries to continue their rally and stocks to open lower. After 15 minutes of trading the up/down issues were 10/1 negative.

Every other sell off in the last six months has been met with buying and so we will see how the day goes. The economic data for the last few weeks has indicated a slowing in the economy and so we think the rally on the down pieces may be muted.
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Asia was down big overnight and European bourses caught the fever and are down 1% or more across the board at midday. Gold is down $7 to $682 and Oil is off over $1.
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1445 on the S&P 500 is the trend line and the S&P 500 is at 1434 at 9am. But the day is long.
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Existing Home Sales were up 3% month over month for January which was better than expected. January was warm and the weather was good.

Consumer Confidence for February was 112 when 108 was expected and versus 110 in January.
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National City sold its sub prime lending operation to Mother Merrill last year for $1.3 billion. NCC management did good. Poor Mother.
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After being down over $1 early in today’s trading at 10:30am Oil has reversed and is now at a two month high at $61.78.
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At noon NYSE down volume / up volume is 26 to 1. We have never seen it that skewed. But then hedge funds have only been market controllers for the last five years.
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European markets closed lower:

Belgium         4387.37    -131.66     -2.91%
U.K.               6278.90     -155.80    -2.42%
France            5590.36    -172.18     -2.99%
Germany        6827.89    -199.70     -2.84%
Netherlands     500.33      -10.84      -2.12%
Norway           507.30      -18.60      -3.54%
Spain           14408.30    -447.80      -3.01%
Italy             41616.00   -1233.00     -2.88%
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As of 12:10pm trading collars were in effect on the NYSE.
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GM's February U.S. sales would likely be down 6 percent to 7 percent, GM spokesman John McDonald said adding that the company expects world retail sales to be flat for the month. Ford's U.S. sales in February would likely slide about 10 percent to 15 percent, with fleet sales accounting for the majority of the decline, George Pipas, Ford's chief sales analyst said.
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When the S&P 500 closes lower today it will be five days in a row that it was lower. And that is the first time in three years that that will have occurred.
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Today’s drop in the DJIA and NAZZ are also the largest since 2003.
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Jim Cramer is on CNBC explaining how to play this market collapse. We don’t have a clue about what is going to occur and neither does he. But we do think the fact that CNBC gives him this platform during the day and at night with his show is a symptom of the new cowboys and cowgirls in the market place. The turnover in folks who get burned by the markets used to have a ten year cycle. Then it became a five year cycle and now we think the cycle is down to 3 years. By that we mean that collective memory forgets the bad times and greed overcomes fear a lot faster than it used to.

Many folks who discovered and purchased stocks in the last three years and held on are geniuses. All the big market pullbacks of the last four years have been one or two day affairs. But today’s pullback is occurring at a much higher level of overall market valuation and individual stock valuations than the levels of a few years ago. And the hedge fund boys and girls are much more aggressive and in control than they were just a few years ago.

Finally, the performance that Cramer shows on his realmoney website must be taken with several grains of salt. He shows a 31% annualized return. What the site fails to mention is that Cramer added money at the bottom in 2003 and at another trading bottom a few years later. If no money had been added (which after all is the way most folks manage individual portfolios- they begin with a set amount of money and hope for the best) his return would probably be flat because he was down over 22% in his first year. the return he is displaying is the magic of numbers at work.
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While we were writing that piece above we went back to our stock page at 2pm and the DJIA had dropped from down 260 points when we began to down 500 points. There is a floor broker in CNBC saying that maybe a misprint caused the 200 point drop in an instant as in somebody hit the wrong button.  Or maybe there was margin selling by a hedge fund. Some hedge funds have to be in trouble.
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The folks on CNBC say not to worry this it what the smart guys have wanted to clear out the air. Sure, but not this way.
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This is called how to have a 5% correction in one day. That sure lessens the pain.
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Oil ended up 7 pennies at $61.46. Gold finished lower by $2 to $688. Treasuries closed on their highs in a flight to quality panic with the two-year at 4.64% and the ten-year at 4.53%.
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Mexico was down 4.5% and Brazil was down 7.8%
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The DJIA closed down 410 points at 12222. But that doesn’t tell the story. The S&P 500 lost 49 points to 1400 and the NAZZ dropped 95 points to 2408.

Breadth was astoundingly negative and volume was extremely active.

Down volume on the NYSE was 100 times up volume. We have never seen that type of number.

New highs collapsed to 153 and new lows expanded to 159.

Tomorrow will be interesting.
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26 February 2007 Daily Comment

Thoughts

An early spring snowstorm visited and with 15 inches of snow on the ground and three foot drifts of  ‘heart attack’ snow we had an interesting week-end. Our better half is in Iowa and she lost all power on Saturday in a devastating ice storm. Mother Nature sometimes reminds us how human we are.
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Poor Jet Blue can’t buy a break now. In the latest storm they cancelled 100 flights and CNBC is all over them for it. Talk TV is a menace to rational thought.
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Asia was mixed overnight and Europe is small fractions higher. Gold is up $1 to $688 in the early going and Oil is also 20 pennies higher at $61.40.

Treasuries have a bid based on Greenspan’s weekend remarks about recession: Former Federal Reserve Chairman Alan Greenspan said the U.S. budget deficit is a ``significant concern'' and a recession is possible by the end of this year, Dow Jones reported. The report from Hong Kong said Greenspan spoke via a satellite link to a business conference. “The American budget deficit is clearly a very significant concern for all of us that are trying to evaluate both the American economy's immediate future and that of the rest of the world,'' Dow Jones quoted Greenspan as saying. Profit margins suggest the economy is in ``the later stages of a cycle,'' Greenspan said, according to the news agency. Predicting the timing of a recession is difficult, he said.
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There are reports that Daimler Benz is considering receiving a minority interest in GM in exchange for Chrysler.
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In November of 2002 Texas Utilities traded at $8 a share and all the smart guys were worried it was going bankrupt. Today the smart guys Goldman Sachs, Kohlberg Kravis, and Texas Pacific have agreed to buy the utility for $69.50 a share ($46 billion including debt). And these guys are the smart investors? We would bet they are betting with other peoples’ money.
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Oil closed up 40 pennies at $61.54 in NYC. Gold gained $2 to $689. Treasuries were well bid all day and the two-year ended at 4.76% and the ten-year was 4.63%.

European stocks closed higher.
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The DJIA closed down 15 points at 12634. The S&P 500 lost 2 points to 1450 and the NAZZ was down 10 points to 2505.

Breadth was flat on the NYSE and 3/2 negative on the NAZZ and volume was moderate.

There were 450 new highs and 60 new lows.

And there are four more fund days for the big boys and girls.
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23 February 2007 Daily Comment

Thoughts

The major stock measures are lower this morning in the early going more from a lack of buying pressure than any great selling pressure. We do think that many traders may want to go home flat for the weekend.

Asian market indexes were mixed overnight with India dropping 3%. European bourse indexes are also mixed at midday and Gold is down $2 at $681 while Oil has moved above $61 in early NYC trading. Treasuries have a bid.
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Treasuries rallied on Friday, with New York-based bond traders citing worries in the sub prime mortgage market as a factor likely to be driving a bid into Treasuries. In addition some traders cited broad central bank buying of U.S. government debt.
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The trend line on the S&P 500 is at 1445. The S&P 500 is currently at 1453.
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Oil was up 19 pennies at $61.16 in NYC at the close and Gold gained $3 to $685. Treasuries were well bid with the two-year closing at 4.79% and the ten-year at 4.67%.

European bourses closed mostly higher while Mexico and Brazil were down.
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The DJIA lost 40 points to end at 12645. The S&P 500 was down 5 points to 1451 and the NAZZ lost 10 points to 2515.

Breadth was flat and volume was a yawn.

There were 360 new highs and 60 new lows.

And we wish you a warm weekend as the land of milk and honey experiences a spring snow storm.
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22 February 2007 Daily Comment

Thoughts

Today’s merger of the day is the acquisition of Wild Oats by Whole Foods at $18.50 a share. That is a bunch more than the price at which we sold it a few weeks ago and we are humbled to have missed the deal. One salve is that all the analysts quoted said that they were surprised by the deal also. And we bought OATS for an after year end pop and when it didn’t pop after a few weeks we sold it when we sold all our other stocks.

The acquisition by Whole Foods helps to mask a difficult quarter for them and it is a good acquisition if they can change the store culture at OATS. They are paying cash and 18 times earnings while WFMI shares still trade at 30 times earnings even after the large sell off of the last year.

We have been trading OATS for at least 15 years with our first purchases and sales occurring in the $30 range. We would guess we are ahead on the trades over the years and given that the shares are being acquired at half the price at which we first traded them we are satisfied.
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Asia was higher overnight with Japan up 1% and at a seven year high. Hong Kong also gained and European bourse indexes are higher at midday. Gold is off a few dollars after its big jump yesterday and Oil is off 40 pennies in early NYC trading. Treasuries are weaker.
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Jobless claims were 332,000 which are down 27,000 from last week’s number.
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Inventories of gasoline were down 3.1 million barrels and distillates down 5 million barrels as oil refiners slowed production. Crude oil inventories rose 3.7 million barrels.
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European bourse indexes closed higher as gains in the mining sector and earnings news boosted sentiment.
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Total U.S. debt is 3.5 times GDP, a level never seen before. The second highest level was 2.9 times in 1929. Total U.S. financial debt (excludes consumer debt) is 2.1 times GDP, the highest ever and up from one times in 1987.
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Oil ended at $60.90 up 83 pennies. Gold was down a dollar at $683. Treasuries ended lower with the two-year at 4.86% and the ten-year at 4.73%.
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At the close the DJIA was down 50 points at 12685. The S&P 500 lost 2 points to 1456 and the NAZZ was up 5 points to 2523.

Breadth was negative and volume was moderate.

There were 475 new highs and 40 new lows.

And tomorrow is the last day for fund games at the big casino this week.
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21 February 2007 Daily Comment

Thoughts

Asia was mixed overnight and European bourses are the same at midday. Gold is up a few dollars after yesterday’s $11 drop and Oil is lower again early today by half a buck

January CPI was up 0.2% and ex food and energy and all the important stuff it was up 0.3%. The year over year CPI ex food and energy was up 2.7% and that has Treasuries nervous and lower because many Fed spoke folks have opined that the Fed is targeting 2% or lower inflation.

January leading indicators were up 0.1% when 0.2% was expected but December’s numbers were adjusted upward to up 0.6% from a reported 0.3%.
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We sold our last position which was Sprint for a profit and now we are all in cash. If Treasuries get above 5% on the short end we may place some of the funds in the two-year. But for now we are in the wait and watch and earn 4.3% on cash camp.
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Japan raised its benchmark interest rate to 0.5%. For many years it was 0%. Traders fear that another raise may dry up liquidity in the carry trade. The carry trade is an arbitrage strategy where speculators borrow yen in Japan, convert the yen to dollars by selling yen and buying dollars, and then buy U.S. Treasuries. Traders try and squeeze profit out of the difference in the borrowing cost in Japan and the interest rate earned in Treasuries by using money borrowed at the very low interest rate in Japan while not losing too much money on the varying relation between the value of the yen and the dollar, and the movement in the price of Treasuries. This is not for the faint hearted.
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Bloomberg has an interesting article on LBO loans at http://www.bloomberg.com
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Gold has jumped $25 today to $685. There seems to be no world news to account for this jump except that a second carrier task force is now in the Persian Gulf and Iran is conducting war game maneuvers this week in 20 of its provinces.

Or then again maybe the big boys and girls caught a hedgie short gold and are having some fund games. There’s nothing like a Wednesday blow up of a hedge fund to get the juices flowing. Or maybe yesterday’s $11 drop should have been a buy instead of a sale.
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In the coulda, woulda market one that we did look at was US Steel. US Steel is up from $15 in 2003 to $90 today. The demand for steel is continuing as commercial construction around the world is on fire. In past building booms we have noticed that commercial construction is may be an indication of the top in an economic expansion. Whatever, buying X at $90 now is a leap of faith when you didn’t buy at $15 four years ago. Buy the way, US Steel sold at $100 per share in the 1960s so folks who bought it then still have a way to go to get even and a very very long way to go if dollar inflation is added to the equation.
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At 12:40pm oil is up $1.50 at $60.25. Someone is betting that something is going to occur somewhere.
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In the Good Idea Department:

Sweden's IKEA will charge U.S. customers five cents for disposable plastic shopping bags in what the international furniture giant said on Wednesday was a first step to ending their use altogether. IKEA said the decision to stop giving away free bags to customers aimed to reduce the estimated 100 billion bags thrown away by all U.S. consumers each year.
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Oil ended at $60.06 up $1.26 in NYC trading. Gold was up $23 at $681. Treasuries ended slightly lower with the two-year at 4.84% and the ten-year at 4.70%.

European bourse indexes were mostly lower while Mexico and Brazil indexes were small fractions higher.
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The DJIA lost 48 points to close at 12740. The S&P 500 was down 2 points to 1455 and the NAZZ gained 5 points to 2518.

Breadth was negative and volume was active.

New highs contracted to 490 after jumping to over 600 yesterday and new lows were 55.

And there are only two days left for fund games at the big casino.
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We found the item below on www.huffingtonpost.com and since several members of our family have been flying lately with stories to tell we though we would share the humor. But the way, Hufington post is an interesting and informative website.

Travel Trips for Airline Passengers:

With all of all the recent flight cancellations and JetBlue passengers stranded on the tarmac for ten hours here are some travel suggestions for would-be air travelers.

Check the weather forecast. If it's not 72 degrees and clear EVERYWHERE in the United States, reschedule.

Do not call the airline for a weather update. You'll learn it's cool and overcast in New Delhi.

Allow two hours before the flight, ten hours for the tarmac, two hours for the unscheduled fuel stop, and two hours to retrieve your luggage. And if you're flying from LA to San Francisco, 45 minutes for the flight itself.

If you print your ticket on one of those self-help stations realize that the chances of it working are the same as five cherries coming up on a slot machine.

Best to print your ticket at home the night before along with the flight schedules of every other airline going to your destination, airport shuttle schedules, Amtrak schedules, and the 1-800 numbers for Ramada, Holiday Inn, Hilton, Marriott, Quality Inn, Best Western, and the YMCA.

Never turn in your rental car until it's the final boarding call on your flight.

Never fly to, from, or around Chicago.

Always use skycaps. And if you choose to ever see your luggage again, tip.

Remember: "the white zones are for jerks in SUV's only".

You are allowed several little three-ounce bottles of something but not one three-and-a-half-ounce bottle of the same thing.

You might want to put that Astroglide into a non descript little bottle.

Have extra zip lock bags that you can sell to clueless travelers for ten dollars apiece. If they haven't gotten the word by now they deserve to pay ten bucks. And tell them FAA regulations are one item per bag.

You can usually tell who these nimrods are. They're the ones who booked connecting flights in the winter. And buying furniture off the Sky Mall.

Don't have children if you plan on flying anytime in the next fifteen years. Even if it's one trip.

If they announce they're overbooked and are looking for volunteers to take a later plane for free trips take it. The flight is going to be cancelled anyway. And you'll have a jump at getting reservations at the airport Hilton.

Have your laptop, ipod, cellphone, Gameboy, pager, Blackberry, camcorder, transistor radio, electric razor, hand held fan, and pacemaker fully charged. Ten hours on the tarmac is a long time.

Upgrade.

Before you get on the flight take Airbourne, water, Xanex, Oscillococcinum, Clariton, Ambien, and tequila.

Fake a limp so you can pre-board and guarantee there will be room in the overhead compartments for your stuff.

Bring your own DVD's, music selection, food, blankets, pillows, reading light, water, magazines, newspapers, coffee, toilet paper. And just to be on the safe side, your own oxygen masks and floatation devices.

But it's not a good time to catch up on the first season of LOST.

Play the drinking game. Take a swig every time you hear "we apologize for the inconvenience". Not recommended for those unwilling to get completely loaded.

Drinking game #2: "We thank you for your patience."

Don't kid yourself. EVERYONE is flying "stand by".

The scary part used to be the landing. Now it's pushing off from the gate.

Beware of free WIFI hotspots in airport terminals. Hackers use these to break into your computer. Not a joke.

It's quieter and smoother in the front of the plane. And ignore what they say, if you're in Coach and you want to use the bathroom go to the ones in First Class.

And finally, always remember: it's NEVER the airlines fault. It's the weather, air traffic controllers, mechanical problems, baggage handler strike, FAA rules, homeland security, airport restrictions, lawmakers, the billy goat curse, lunar eclipses, and most of all -- the media.
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20 February 2007 Daily Comment

Thoughts

The merger announcement of the day is XM Satellite and Sirius. There are regulatory hurdles to the merger but the companies say they need to merge to save money and be viable. Maybe if they didn’t pay $500 million to Howard Stern they would have a few more dollars in their pockets.
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The long weekend is over and it is difficult getting into the swing of the markets. It is more so because we are sitting on a pile of cash with no real urge to put it to work. We do own Sprint and would like to repurchase GE but we are holding off for now. our thought is that eventually Jeff Immelt the CEO of GE is going to figure out, with the help of helpful investment bankers, that GE is worth a lot more split into four or five companies than it is as a conglomerate.
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Asia was mixed overnight with Hong Kong and Shanghai closed for the Chinese New Year. Europe is lower at midday and Gold is down $4 at 668. Oil is off a dollar and Treasuries are a tad lower as the trading day begins.
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CPI comes tomorrow and it is the big economic number of the week.
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Home Depot reported less than earrings and is lower today while Wal-Mart’s were better than and it opened higher.
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After an hour of trading the major stock measures are lower.
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The NYT Sunday Magazine crowned Toyota as the carmaker for the world. Toyota’s culture is the culture that all carmakers need to succeed according to the NYT. We know we are perpetual cynics but our memory is probably longer than the writer of the article and we remember the crowning of Japan and their industrial might back in 1989 as the leaders of the manufacturing and economic world. That was right before their market crashed.

Now we don’t think Toyota is going to crash and burn and they have been in the forefront with hybrid cars but we have noticed that their big introduction in the Super Bowl and on commercial TV has been the Tundra which is a big ol’ gas guzzling high horsepower pick up truck. That’s because that is where the profits are.

And if the automakers and the rest of corporate America ever get their acts together and convince themselves and Congress that a national healthcare program is just what the doctor ordered for the financial survival of economic America then the huge profit advantage Japanese car makers enjoy will dissipate. The profit advantage exists because Japan's health coverage is provided by government not the car companies.
*****

We don’t own the auto companies because we don’t trust that if the economy slows down and auto company sales slow more that some genius won’t decide that Chapter 11 bankruptcy is the easy way to go to restructure the auto companies the same way that geniuses in the airline industry placed a majority of those companies in bankruptcy to help solve their financial problems by disenfranchising and bankrupting shareholders.
*****

The Germans don’t want Chrysler but GM or some Asian auto company might. And we are sure investment bankers who proposed the original Chrysler buyout by Daimler Benz are hard at work convincing Daimler to sell Chrysler to another company whom other investment bankers have convinced just has to won this wonderful asset.
*****

Auto companies are like airlines in that they have flush times and flat times. The problem is that during the last flush time in the U.S. auto industry the companies spent their cash hordes on special dividends, buying other auto companies and are now shareholders are paying the price.
*****

OK folks we are watching CNBC and we learn that there is a sneaker with a chip in it that can be followed by global positioning satellites. Supposedly there are orders for 125,000 of these sneakers at mere $340 a pair. The purpose of the sneakers is for folks with Alzheimer’s or other disabilities according to the makers.
*****

Scott’s Miracle Grow is going to use its excess cash to pay a special $8 dividend instead of doing a stock buy back. The CEO owns 20 million shares of stock.
*****

Kraft has approved a $5 billion share buyback to be effective immediately after the spin off of the remaining 89% of shares owned by Philip Morris. That obviously is to absorb selling by trades who don’t want to own KFT. We are interested in the food company after it is separated from the tobacco company.
*****

Gold closed down $11 at $661 and Oil was down $1.04 at $58.35 in NYC. Treasuries were better with the two-year at 4.82% and the ten-year at 4.68%.

European bourse indexes were fractionally lower as were Mexico and Brazil.
*****

The DJIA closed 20 points higher at 12788. The S&P 500 gained 4 points to 1460 and the NAZZ rose 16 points to 2512.

Breadth was almost 2/1 positive and volume was moderate.

There were 620 new highs and 60 new lows.

And there are three days left at the casino this week.
*****

 

16 February 2007 Daily Comment

The markets are closed Monday February 19 for Presidents Day. Our next post will be on Tuesday February 20.

Thoughts

This morning the takeover rumor is AMR Corp. Business Week which has predicted 50 of the last 5 mergers is saying that Goldman and British Airways are considering a bid of around $10 billion for the airline. The share price is up 5% on the news even though the report has been denied and that is an indication of the speculative juices flowing in the marketplace.

Anything is possible but that doesn’t mean anything makes sense. And an LBO of AMR is nuts. AMR has $8 billion in debt so the total cost would be $18 billion and with oil prices at all time highs and AMR at a seven year high only a foolish investment banker would consider such a bid and only with someone else’s money.

Four years ago AMR was at $3 per share and no one was interested. But that is always the case in the markets even among the big boys and girls. Folks and even ‘intelligent’ and ‘sophisticated’ investment bankers only are interested in companies on their highs not their lows.
*****

Asian markets were mixed small fractions overnight and European markets are the same at midday.

Gold is off $1 at $670 and Oil is down a few pennies at $57.95 in early NYC trading. And Treasuries have a bid on moderate PPI numbers

The Producer Price Index was down 0.6% in January as oil dropped to $50 per barrel. Ex food and energy and all the important items PPI was up 0.2%.
*****

U.S. diesel engine maker Cummins Engines expects North American heavy-duty truck engine sales could fall as much as 50 percent in 2007, thanks to heavy buying ahead of new emissions standards, the company's top executive said on Thursday. "We are expecting sales to be down 30 percent to 40 percent," Chief Executive Officer Tim Solso said. “But if customers have stockpiled more engines than expected, the sales drop "could be as much as 50 percent."

The share price of Cummins remained at an all time high of $140 per share after this comment.
*****

Microsoft CEO Steve Ballmer said on Thursday analysts' forecasts for revenue from Windows Vista in fiscal 2008 were "overly aggressive."
*****

The preliminary University of Michigan sentiment indicator was 93 for February versus a final reading of 96 in January.
*****

At 11 am there are reports that the Automotive News is saying that GM is thinking about buying Chrysler from Daimler Benz. It is a slow Friday.
*****

Oil has spiked $1 higher to $59.09 at mid-day as the big boys and girls have some fun on a low attendance trading day when the Treasury markets are closing early and many folks are on their way to warmer climbs for the long weekend. We are going to place another log on the fire.
*****

Dell Computer hired Ron Garriques, who had been Motorola's handset chief, to be the new head of its consumer business. The move is the latest restructuring at the computer maker since founder Michael Dell returned to the company's helm. The unit Mr. Garriques will oversee will include desktop and notebook computers, as well as software and peripherals.

Motorola, meanwhile, named two company executives to serve as interim co-heads of the handset unit.

The handset unit had underperformed in the last few quarters so Dell hiring Garriques is curious.
*****

Treasuries closed firm with the two-year at 4.84% and the ten-year at 4.69%. Oil ended up $1.33 at $59.32 and Gold was up $1 at $673.

European stock indexes closed small fractions lower as did Mexico and Brazil.

The DJIA after trading slightly lower all day closed unchanged at 12765. The S&P 500 lost 1 point to 1455 and the NAZZ was unchanged at 2496.

Breadth was positive and volume was moderate.

There were 355 new highs and 55 new lows.

Enjoy the holiday.
*****

 

15 February 2007 Daily Comment

Thoughts

The takeover of the day is Budweiser. Brazilian newspaper Valor Economico reported that the world's largest brewer, Belgian brewer InBev was in merger talks with Anheuser-Busch, according to traders in Europe, where InBev shares rose more than 5 percent. There doesn’t seem to be any economic advantage in the merger since BUD already controls over 50% of the U.S. market.

Why a Brazilian paper would know what Belgians and Americans are doing is not a question since everyone especially traders accepts the fact of globalization. A week ago a European website said Bristol Myers was in talks with Sanofi and the shares ran to $30 only to back off when nothing materialized. Two days ago a London Paper said Alcoa was going to be acquired by Rio Tinto.

Today we learn that the Crawford County Independent is reporting that the Chinese government is going spend its entire dollar surplus by making a bid for the entire DJIA. Not.
*****

Asian markets caught the bullish fever overnight and were higher with Japan of 0.8%, Hong Kong up 1.6% and Shanghai up 3%. European stocks were mixed at midday and Oil is down to $57.07 with gold flat at $672. Treasuries have a bid in the early going.
*****

Jobless Claims rose to 357,000 in the latest reporting period.
*****

Hershey is going to fire 1500 folks Caterpillar is going to repurchase $7 billion of shares as soon as in completes a $6 billion repurchase in the next few months. Hooray for executive options.
*****

Carl Icahn and friends sold a large chunk of their Time Warner holdings. And so ends Carl’s interest in the long term health of TWX.
*****

Treasuries are continuing their rally. The tow-year has moved from a 4.97% yield to a 4.83% yield in the last few days after Fed Chairman’s positive testimony of yesterday.
*****

Oil ended at $57.99 down a penny after touching $57 during the day and Gold was flat. Treasuries went out on their highs with the two-year at 4.83% and the ten-year at 4.69%.

European bourse indexes closed mostly lower as were Mexico and Brazil.

The DJIA gained 25 points to close at12767. The S&P 500 rose 2 points to 1457 and the NAZZ gained 8 points to 2497.

Breadth was 3/2 positive on NYSE and slightly so on the NAZZ and volume was moderate.

There were 475 new highs and 55 new lows.

And tomorrow’s close marks the beginning of the three day President’s Day weekend.
*****

 

14 February 2007 Daily Comment

Thoughts

We wish a Happy Valentine’s Day to all.

Asia was higher overnight with Shanghai up 2.5% and European bourses are also up at midday. Oil is off in the early going at $58.50 and Gold is up $5 at $673. Treasuries are flat awaiting Benanke’s testimony today.
*****

Chrysler will can 13,000. The markets are delighted with the Chrysler news as the share price is up $2. Who cares about good paying jobs since it is the share price that is important to executives and Wall Street.
*****

Investors Intelligence had 51% bulls versus 21% bears and 28% for a correction.
*****

Ben Bernanke expressed confidence on Wednesday in the health of the U.S. economy despite a housing slowdown, but warned of risks to the current generally benign outlook for inflation. "The U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes,” Bernanke said in remarks prepared for delivery to the Senate Banking Committee.
*****

Merrill Lynch said it raised its S&P 500 12-month target to 1,553 from a target of 1,531 last month, because of the index's advance in January.” We continue to believe that 2007 will ultimately be a year of PE expansion," it said in a statement. "Higher quality stocks have outperformed during every period of PE expansion in the past 20 years."
*****

Mexico's benchmark IPC stock index jumped to an all-time record high on Wednesday after the U.S. Federal Reserve chairman said U.S. growth should strengthen and that there were signs of easing U.S. inflation pressures.
*****

U.S. distillate supplies fell less than expected last week while gasoline and crude stocks posted surprising declines, according to a government report issued on Wednesday. Oil prices have recovered a bit on the news but remain lower on the day.
*****

Soon hedge funds will be able to bet on Hurricanes. The Chicago Mercantile Exchange said on Wednesday it would launch CME-Carvill Hurricane Index futures and options on futures contracts on March 12.
*****

Oil ended down $1.01 at $58.07. Gold gained $3.50 to $672 in NYC trading. Treasuries closed with their gains with the two-year at 4.87% and the ten-year at 4.73%.

European bourses were higher by big fractions and Brazil and Mexico up 1.5%.

The DJIA gained over 80 points for the second straight day to close up 85 points at 12740. The S&P 500 rose 10 points to 1455 and the NAZZ jumped 28 points to 2488.

Breadth was 2/1 positive on the NYSE and 3/2 better on the NAZZ and volume was moderate.

New highs expanded to 565 and new lows were 60.

And the bulls won the day and they are way ahead for the week.
*****

 

13 February 2007 Daily Comment

Thoughts

Asia was mixed with Japan up and Hong Kong down 2%. European bourses are higher at midday and Gold is up $4 to $671 and Oil is above $58 in early NYC trading.

The DJIA is going to be higher at the opening because there was a report in the London Times that there is going to be a takeover bid for Alcoa and it is trading 10% higher in the pre-market and Mother Merrill has raised GM to a buy from a sell and it is $1 higher. The Merrill analyst downgraded GM in March of 2005 when the shares were at $30. Subsequently the shares traded at $18 and now they are at $35. Mother also lowered Ford to a sell.
*****

The trade deficit in December was $61.1 billion which was greater than expected.
*****

North Korea has agreed to shut its nuclear facilities in return for economic aid. That is a positive for the world if not the markets.
*****

An hour into the trading day the DJIA is up 80 points and all the major stock measures are higher. After the three down days this bounce was needed by the bulls. Now it must be maintained for the bulls to get comfortable heading into expiration.
*****

Oil ended up $1.25 at $59.06 in NYC. Gold closed at $668 up $2. Treasuries were weaker with the two-year at 4.94% and the ten-year at 4.81%.

European shares closed higher as did Mexico and Brazil which was up 1.8%.

The DJIA closed up 100 points at 12652. The S&P 500 gained 11 points to 1444 and the NAZZ rose 9 points to 2458.

Breadth was 2/1 to the good on the NYSE and 5/4 better on the NAZZ and volume was moderate.

There were 310 new highs and 70 new lows.

And a lot of folks are going to get snowed for Valentine’s Day.
*****

 

12 February 2007 Daily Comment

Thoughts

After a week-end of exciting basketball games and client visits we are back in the land of milk and honey.

While we were away stocks drifted lower as earnings season tailed off and no other market moving news arrived.
*****

Fortress Investments, a hedge funds manger, went public in an IPO and shot up 60% in price on the first day of trading.

Fortress is paid to manage the funds and the new shareholders will only share in whatever profits fall the bottom line after the folks who run the fund take their salaries and bonuses. Hedge fund managers are not noted for taking small bonuses.

Fortress is priced at $12 billion with $30 billion in assets under management. That is nuts.
*****

Oil is off a couple of dollars today as the Saudi Arabia told Asian refiners to expect more shipments next month and the nation's oil minister said OPEC has no need to further rein in production. Saudi Arabia will ship 7 percent less-than-contracted volumes to the refiners in March compared with a cut of as much as 14 percent this month, said officials who received notices and asked not to be identified because of confidentiality agreements. Saudi Arabia's oil minister, Ali al-Naimi, said OPEC may not have to make additional output cuts, the Wall Street Journal reported.
*****

Gold is at $668 which his higher than it was when we left last Thursday morning.
*****

Bristol Myers is down $1.25 as some market moves are reporting that any talks about a takeover are off for now if there were any talks.

Blackstone Group is going to do a $1.2 billion buyout of Pinnacle Foods, the maker of Vlasic Pickles and Duncan Hines cake mix. The money Blackstone manages is certainly burning a hole in their pockets.
*****

Intel has designed a computer chip that is so fast that there is no known operating system that can use it.
*****

Treasuries were lower on Monday, extending Friday's losses, as traders guessed that Federal Chairman Bernanke might stress inflation risks when testifying before Congress this week. Bernanke reports on Wednesday and Thursday. Also Fed member William Poole said on Monday that the core inflation rate at above 2 percent was unacceptable and the central bank would have to take action if it remained at these levels.
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Size of Capital Markets 2005 ($ trillions)

 

GDP

Stocks

Debt (Public / Private / Total)

Bank Assets

U.S.

12.5

17.0

5.9 / 17.9 / 23.8

9.3

World

44.4

37.1

23.1 / 35.9 / 59.0

55.7

 
*****

Oil ended at $57.81 down $2.08 in NYC trading. Gold dropped $4 to $667. Treasuries were higher in yield with the two-year at 4.92% and the ten-year at 4.80%.

European stocks closed lower and Mexico and Brazil were also lower.
*****

The DJIA lost 25 points to close at 12555. The S&P 500 was down 5 points to 1433 and the NAZZ dropped 10 points to 2450.

Breadth was negative all day and 2/1 to the bad at the close with volume moderate.

There were 245 new highs and 80 new lows. On Wednesday last week there were over 500 new highs.

And the new week began with a yawn. This is a Triple Witching week.
*****

 

8 February 2007 Daily Comment

We will be traveling today and tomorrow and our next post will be Monday 12 February. Stay Warm.
*****

 

7 February 2007 Daily Comment

Thoughts

Cisco beat consensus estimates last night and is up $1 in the early going but that action has not had much effect on other big cap tech stocks in early trading today.

Asian stocks were higher overnight with Shanghai up 1.5% and European bourse indexes are mixed at midday. Gold is flat and Oil is over $59 as the trading begins in NYC. Treasuries are also flat with a ten-year auction today and a thirty-year auction tomorrow. Yesterday’s three-year auction was well bid and was the reason for the Treasury rally into the close.
*****

Crude oil inventories were lower than expected for the latest week but gasoline and heating oil inventories were higher. Oil remains a few pennies higher several hours into the trading day.
*****

Today is the fourth day in a row of volume lighter than the fifty day average and the fourth day in a row of at least a fifty day high in price for the DJIA. According to minyanville.com the only other time in modern market history that has occurred was March 24, 2000.
*****

As we read of all the deals between Google and you name it or the wonder of myspace.com and all the social websites and how much money they are going to generate and look at the valuations that talk and dreaming is engendering we think of the dot.com boom of the late 1990s. We aren’t saying that companies won’t advertise on the dot.coms we are just of the opinion that the pot of gold will not be a great as the market values of some of these companies would suggest.
*****

The reality is that one never knows till afterwards that prices on stocks were unreasonable.
*****

Oil reversed course late in the day to close down $1.17 to $57.71. The hedge fund boys and girls are having fun with our heating and gasoline bills. What is different today than yesterday or two weeks ago when the price of oil was $50?
*****

Gold was up $2 to $660 and Treasuries were better at the close with the two-year at 4.87% and the ten-year at 4.76%.

European bourse indexes closed higher on the day with Spain up 1% and Mexico up while Brazil was lower by over 1%.
*****

The DJIA was up 40 then down 30 and unchanged at 12666. The S&P 500 gained 2 points to 1450 and the NAZZ gained 18 points to 2490.

Breadth as 5/4 positive and volume was moderate.

There were 615 new highs and 50 new lows.

And it is still cold here in the land of milk and honey.
*****

 

6 February 2007 Daily Comment

Thoughts

Asian markets were higher overnight with Shanghai up 2% and European stocks are also higher. Treasuries are weaker and Gold is up $3 with oil up $1 at $59.74 in the early going in NYC

Cisco earnings come tonight and that is the focus of the day as earnings season winds down. The cold weather and hedge fund activity has placed a bid in oil. The markets don’t want to go lower but positive catalysts to move stocks quickly higher are absent from the mix- or so it seems.
*****

We moved some hay for the horses and wrote some notes but haven’t been much interested in the markets. We have cast our lot with cash for now and will await a correction before we decide to revisit stocks again. Our great thoughts are few and far between these days and that is the reason for the sparse comments.
*****

The results of the three year note auction announced at 1pm were strong and that has placed a bid in treasuries with all maturities higher in price and lower in yield.
*****

Hedge fund management companies are now being offered to the public as holding companies with freely traded shares of stock where the ordinary investors can share in the profits of the managers of the funds. The first to be offered in an IPO is Fortress Investments. As we understand it the share purchaser will share in the fees the manager earns, not in the gross profits of the funds it manages. When Wall Street decides to let the little fellow in it may be time to run for the hills.
*****

European stocks were mixed at their close and Mexico and Brazil were fractionally higher.

Oil ended the day in NYC up 14 pennies at $58.88 after being over $1 higher during the days trading. Gold gained $3 to close at $659. Treasuries were better with the two-year at 4.90% and the ten-year at 4.78%.

The DJIA gained 3 points to 12665. The S&P 500 was up 1 point to 1448 and the NAZZ gained 1 to 2471.

Breadth was positive all day and volume was moderate.

There were 495 new highs and 60 new lows.

And there are three more fund days at the casino this week.
*****

 

5 February 2007 Daily Comment

Thoughts

The Bears lost the Super Bowl and the bears are losing on Wall Street. And winter has arrived with a vengeance in the land of frozen milk and solid honey.
*****

Asia was lower overnight with Japan down over 1% and European bourses are mostly lower at midday. Gold is unchanged and oil is down a few pennies in early NYC trading. And Treasuries are flat.

Michael Dell is going to fire some folks and has cancelled 2006 bonuses in the hope of shaking Dell Computer back to a growth story.
*****

The markets are meandering this morning with breadth negative and volume moderate.
*****

The cold weather and Super Bowl have sapped our thinking power for today.
*****

Gold ended at $656 up $4 and Oil was lower by 28 pennies to $58.74. Treasuries caught a bid with the two-year at 4.92% and the ten-year at 4.81%.

European bourse indexes closed mixed to higher and Mexico and Brazil were up small fractions.
*****

The DJIA gained 8 points to close at 12660. The S&P 500 was down 2 points at 1445 and the NAZZ dropped 5 points to 2470.

Breadth was 5/4 negative and volume was moderate.

There were 470 new highs and 55 new lows.

Stay warm.
*****

 

2 February 2007 Daily Comment

Thoughts

The Employment Report this morning reported 110,000 jobs gain versus the 150,000 expected number. But December’s number was revised upward by 40,000 so the net net was a wash. The other economic numbers were benign and so Treasuries now have a bid and are a few ticks higher in price while the stock markets are mellow.

Asian markets were higher overnight except for Shanghai which was down 4% and is down 12% since Tuesday. European bourses are higher and Gold is flat and oil is up 21 pennies at $57.50 in early NYC trading.
*****

University of Michigan confidence Index was 96.9 versus 97.8 expected.
*****

We moved some hay today for the horses and have been watching the markets with one eye waiting for 3pm.
*****

Oil closed up $1.72 at $59.04 in NYC. Gold was down $11 at $651. Treasuries were firm with the two-year at 4.93% and the ten-year at 4.83%.

European bourse indexes closed mostly small fractions higher as did Brazil and Mexico.
*****

The DJIA lost 20 points to end at 12653. The S&P 500 gained 2 points to 1448 and the NAZZ was up 8 points at 2475.

Breadth was 5/4 positive on the NYSE and flat on the NAZZ and volume was moderate.

There were 525 new highs and 50 new lows.

And the casino is closed for the week-end as all the gambling actions turns to Miami.
*****

 

1 February 2007 Daily Comment

Thoughts

Jobless claims dropped 20,000 to 305,000 in the latest period. Core inflation is under control and treasuries are firm on this morning’s economic news. Gold is up $2 in early NYC trading and Oil is off a few pennies.

Asian markets caught up to yesterday’s rally in the U.S. by rising overnight and at midday European bourse indexes are mostly higher.
*****

Stock Market Strategy

Our portfolio management follows an investment philosophy that buys good quality stocks when they are out of favor. This investment philosophy infers that all companies, no matter how smart the people in charge, eventually have problems with earnings or sales - either because of incorrect internal business decisions or because of external market forces. When this bad news hits the marketplace, selling occurs and the price of the stock drops. After a period of time, those who run the company usually solve the problem, earnings start to improve, institutions become more aggressive buyers on the good news, and the price of the stock goes up. Just because a stock is down is not a reason to buy. Rather, it is a reason to begin looking at the company's fundamentals. We stress book value, cash flow, low debt, insider ownership, previous market performance, and patience. Because of the volatility of the stock markets that we have experienced over the years during many market phases, we usually dedicate at very large percentage of a portfolio to short term U.S. Treasury notes or cash equivalents.

From 2000 to early 2005 we altered our investment strategy because of the extreme volatility in stock prices that resulted from the tech bubble and its aftermath. As a result, we were very quick to take profits and losses and turnover in the accounts increased greatly. We maintained an unusually large cash position at times when we believed there was above average market uncertainty and risk. This rapid trading was not our preferred method of managing money since it places stress on us and on our clients. But we believed the stock and bond markets had become more of a casino than a place to invest for the long haul, and as long as the controlling interests in the stock markets are hedge funds and traders we were compelled to adjust our style. As a result we generated mostly short term profits. This fact has no effect on tax free accounts but it does affect taxable accounts. Our philosophy is that any gain is better than a loss and our rapid trading enabled us to enjoy great success over the 12/31/1998 to 12/31/2003 years. The Model Portfolio more than doubled in value while the S&P 500 was basically unchanged during that time period. Even many of our most conservative accounts rose over 50% during that time period. But times have once again changed.

We were taken aback by the swift downturn of our portfolios in 2004 and early 2005 and so reexamined our trading philosophy. Times change and so do markets. Upon review, we noticed that our portfolio gains in January 2004 and in November/ December 2004 were in the low priced speculative stocks like those that had provided outsized returns the previous three years. But it was obvious that we were not quick enough in our selling to lock in those gains in 2004 and 2005 before the roof fell in. That’s because the markets have become a casino where day to day trading is controlled by hedge funds. Thus we decided it was prudent to adjust our trading vehicles.

And so that is why the portfolios - when we are in a trading mode - contain mostly big cap companies.  We are neither prescient nor brave enough to catch by trendy stocks nor do we usually want to trade stocks making new highs or backing off new highs. We think that buying out of favor big caps is a more prudent trading approach. We continue to attempt to time the markets as we have for the last eight years; the difference is the quality of stocks we are using for this endeavor.

Managing a portfolio requires a balancing act between client hopes and market risk. The Lemley Letter Model Portfolio stock selections usually perform as well as or better than the popular averages. But sometimes, most often when the markets are in a speculative phase, our total portfolio under performs the popular averages. So too with the performance of our managed accounts. That is because for the last 20 years since the 1987 crash we have always maintained a large cash/short term bond position in accounts. Portfolios that we construct for clients are meant to: participate in stock market rallies (stock portion); survive stock market collapses (cash, stock and bond portion); and allow the client to sleep nights.

Our investing method differs from money managers who are given funds and told to seek the highest return by being fully invested in common stocks at all times. Those managers have a different objective than we, for they are trying to outperform the markets, period. Thus, if the markets are up 30% and the mutual fund is up 35%, that manager is a success. Correspondingly, if the markets are down 30%, and the mutual fund is down 25%, that manager is also successful. We, on the other hand, manage client funds with the intention of earning a satisfactory return on a risk-reward basis while hopefully mitigating the pitfalls of serious market declines.

It's important to understand that the spectacular returns of hedge funds that are mentioned in the media may have been derived by taking spectacular risks, and/or because the time period shown encompasses a market low to market high. For example, the advertised 30% + annualized returns on "hedge funds" are obtained by being highly leveraged (investing with borrowed money). Leverage in these funds sometimes exceeds 10 to 1 ($10 borrowed for every $1 invested).

In an investment account that contains all a client’s available investment monies, an annualized return over 10% for any long period of time (five years or more) is a goal to strive for rather than a result to be expected. Again, the time period shown in advertising usually involves a market low to market high. Such a return is attained by being fully invested in common stocks in a roaring bull market. We take a much more conservative approach for most accounts that we manage that need monthly income checks, college tuition or are retired. Also the money in our managed accounts is treated as all the investment money that a client has to invest. We do not attempt to match the performance of aggressive capital appreciation funds, since we would have to be fully invested in common stocks that do not meet the requirements of our investment criteria during speculative market phases. We take a risk avoidance approach to investing rather than trying to "beat the market."

Investing involves assuming risk. We tend to be cautious traders. In reviewing our conduct and willingness to assume exposure to market risk, it is obvious that we were more willing to assume risk for clients when we and they were younger than we are now. We raise cash whenever we perceive excess volatility and speculation entering the markets.

Back in December, 1983, we added a Model Portfolio to the Lemley Letter. Unlike many stock market writers, we actually buy and sell and charge commissions and fees in our "Model Portfolios", rather than use the S & P Index as a proxy for stocks. We do this because our clients and most investors don't and shouldn't use futures, options, etc. Because all portfolios are "living" investments, they reflect the time period in which they were started and subsequent changes. Thus, when we open a new account we do not construct the new portfolio exactly as the Model because of various factors including, but not limited to: 1) A portfolio up 12 times in value over time and under our management can psychologically accept more risk than a new one now coming under management. 2) A long time client is more accustomed to our trading strategy than a new client. 3) No money is ever removed from the model portfolio while most of our clients have monthly, semi-annual, or annual income needs and 4) risk tolerances vary among clients.

We use the Model Portfolio to show the performance of our investment advice. The Model Portfolio is an actual account funded with our own money. The Model is usually more aggressively managed than most of our client portfolios. When a client asked us why the Model Portfolio always seems to be more fully invested than his account, our answer was that the Model Portfolio never calls and asks for money, or why we bought or sold something. The Model Portfolio always loves us, appreciates everything we do, and understands that we can't always be right. PAST PERFORMANCE IS NO INDICATOR OF FUTURE PERFORMANCE.
*****

Housing numbers were strong today and manufacturing numbers were weak. Housing trumps manufacturing when it comes to the Fed and so Treasuries are having a hard time continuing their rally.
*****

After opening higher on 3/1 breadth the major measures are pulling back after ninety minutes of trading but remain positive with breadth now 2/1 positive.
*****

What is never mentioned in the Enron mess is that the folks who worked for Enron and lost their life savings when the share price of Enron in their 401Ks collapsed wouldn’t have had nearly so much money to lose if the executives who ran Enron hadn’t committed fraud to pump up the share price.
*****

20% of the population of the U.S. owns 85% of the private assets of the United States.
*****

Oil closed down 84 pennies at $57.30. Gold gained $5 to finish at $663 in NYC. Treasuries gave ground late in the day with the two-year at 4.96% and the ten-year at 4.84%.

European bourse indexes closed higher with many up over 1%. Brazil was fractionally higher and Mexico gained 1%.
*****

The DJIA gained 50 points to 12672. The S&P 500 rose 8 points to 1445 and the NAZZ jumped 4 points to 2468.

Breadth was better than 2/1 positive on the NYSE and 3/2 on the NAZZ and volume was brisk.

There were 600 new highs and 60 new lows.

And there is one more hedge fund day at the casino before the big boys and girls turn to gaming the Super Bowl on Sunday.
*****

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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For Quarter Ending 09/30/2002 For Quarter Ending 12/31/2002 For Quarter Ending 03/31/2003
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Summary of Business Continuity Plan

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.