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Lemley Yarling Management Co
15624 Lemley Drive
Soldiers Grove, Wi 54655
Bud: 312-925-5248       Kathy: 630-323-8422

27 February 2009

Thoughts

Model Portfolio Value As of 27 February 2009

$ 400,770

The first hour of the last trading day of February is going to be a real downer as the Treasury has converted a part of its preferred shares in Citi into common equity giving the U.S. a 35% stake in the company at $3.25 per share. On the news Citi slumped to $1.50 and the rest of the markets sold off. Adding to the gloom Preliminary 4th quarter GDP was announced at down 6.2% which is bad in anyoneís book. Other rear view mirror statistics while we were gone had jobless claims jumping to 680,000 and new home sales down for the umpteenth month in a row.

Stocks jumped higher on Tuesday and then gave the gains back on Wednesday and Thursday and are looking at new lows on the major measures this morning.

Dell announced lower earnings but they were more positive than expected.

Many talking heads have declared Obama in trouble and his administration a failure. Sic transit Gloria. It transits a lot faster these days in the myopic minds of media mavens.
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Paul Krugman likes the priorities and openness of Obamaís first ten year budget. http://www.nytimes.com/2009/02/27/opinion/27krugman.html?_r=1
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On Tuesday we switched GE to Cisco and Intel. CSCO and INTC have less gain potential (double plus versus quadruple or more over the next few years) than GE. We didnít like the GE dividend (will they or wonít they cut) soap opera. We also worry that the short sellers are in control of the shares.

On Thursday we switched HAIN and United Foods to American Express. Both had losses that were less than the percentage drop in AXP over the same holding period.

Today we switched Disney at a loss to equal shares of Dell and SPDR Financial. Both the buys are down greater percents than the loss we have in Disney and Dellís report last night was fine with us.
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From Diane Swonk:

Friday, February 27, 2009 - 8:25 a.m.

Economy Plummeted in the Fourth Quarter

In what shouldn't have been a surprise, the government revised the drop in overall economic growth in the fourth quarter from -3.8% to -6.2%. Bigger losses than initially reported in both exports and consumer spending were the primary reasons for the downward revision. This underscored how global the weakness we are seeing today truly is.

Separately, President Obama released his budget, which includes a more realistic accounting of spending than we have seen in much of this decade, and some controversial and difficult solutions to what will be even worse deficits now that we have thrown the worst recession of the post-WW II period into the mix.

Eventually, spending will have to be cut and taxes will have to be raised. THIS WOULD HAVE BEEN THE OUTCOME REGARDLESS OF WHO WAS ELECTED PRESIDENT. Frankly, if we could have "afforded" the 2003 tax cut, and if it had accomplished what it was supposed to - trigger capital formation and investment instead of increasing second home purchases by the wealthy - we wouldn't have had to raise taxes as much today.

Some of the greatest concern has arisen from limiting the tax deductibility of million dollar mortgages. These criticisms of Obama's plans are probably the most ill thought out. Why should someone who can afford a million dollar mortgage get a tax subsidy from tax payers, when that capital could be better deployed by investing in our capital stock? Indeed, we will eventually gain more by cutting corporate tax rates and eliminating disincentives to act in our collective interests than cutting income taxes for a very small percentage of the population. In an ideal world, which doesn't exist, we would be spurring investment via lower corporate taxes instead of consumption, so that we could both regain our global competitiveness and repay our debts to the rest of the world.

Bottom Line: The reality of the economy getting worse before it gets better is worse than the expectation. We are in the thick of it now. The good news is that there is a bottom, and once we hit it, we will be able to clearly see how far we need to climb to get out of this. Wear you hiking boots; it will be a long climb.
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GE cut its dividend by 2/3rds today and will retain $9 billion annually in capital from the cut. That makes the stock interesting again because capital is what GE needs right now.
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Citi has 5 billion shares outstanding and 1.7 billion of its shares or almost 34% of the outstanding shares have traded today. We would speculate that there are a lot of speculators speculating.
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Oil ended at $44.50 down 70 pennies and Gold was down $2 at $940. European markets closed 2% lower and Asian markets were mixed.
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We sold AEO for a scratch profit/loss.
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The S&P 500 finished its worst February ever with another down day and down 11% for the month and at an 11 year low.

The DJIA closed down 115 at 7068. The S&P 500 dropped 17 to 735 and the NAZZ lost 15 to 1378. The S&P has more financials than the DJIA which is the reason for the greater drop today.

Breadth was 2/1 negative and volume was active because of the trading in the dollar stocks C and BAC.

The bears have been in control for five months and are looking to make it six in a row. Keep the faith, we are. We own good stocks and we are improving our positions with the sell off.
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26 February 2009

Model Portfolio Update

Model Portfolio Value As of 26 February 2009

$ 401,746

25 February 2009

Model Portfolio Update

Model Portfolio Value As of 25 February 2009

$ 405,943

24 February 2009

Model Portfolio Update

Model Portfolio Value As of 24 February 2009

$ 406,757

23 February 2009

Thoughts

Model Portfolio Value As of 23 February 2009

$ 378,093

We will be traveling this week and so our next post will be Friday night. The Model portfolio will be updated daily.
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Everyone is talking their book. So when you read that George Soros says the banks are bankrupt be aware that he is probably short the banks. Also Nouriel Rubini is not involved in trading stocks but in giving speeches for big bucks. Folks who want to hear that the sky is falling because they are short the market or donít like the way Obama is handling the banking crisis or whatever are willing to pay to hear someone confirm this point of views. And we are long the markets so we of course will give the bullish case. But we have the pendulum on our side on a value basis if not a timing basis.
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The major stocks markets have been down for five months in a row and with Saturday being the end of the month will be down six months in row. That is a long time without any kind of rally that lasts longer that a few days.
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Asian markets were mostly higher overnight as are European bourse indexes but no bulls are breaking out the champagne. We understand the Obama folks wanting to make policy without being manhandled by market mavens; but is it too much to ask for the SEC to restore the uptick rule. Short sellers say it doesnít matter while we think it does. But if it doesnít matter then what is the problem with restoring it?
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Stocks opened higher out of the gate but are back in negative territory after one hour of trading as the bears remain in control.
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Fed Flash
Diane Swonk, Chief Economist, Mesirow Financial
Monday, February 23, 2009 - 8:30 a.m.
 
The Government Jointly Shores Up Bank Capital

This morning, the Treasury, FDIC, OCC, OTS, and the Federal Reserve issued a joint statement announcing that, effective Wednesday, February 25, 2009, they will improve and modify existing flows of funds to shore up the quality of bank capital ratios.

The goal is to create an additional backstop against the cyclical losses that are mounting on top of the structural losses associated with poor mortgage underwriting on bank balance sheets.

The initial push will be to lure private funds into the banking system. Ultimately, however, the neediest banks will be offered the opportunity to issue preferred shares to the government. Then, if push comes to shove and the banks can't raise enough capital, they could convert those shares into common shares. This is de facto nationalization.

Separately, any bank that has already received TARP funds in a different form may convert that capital to preferred shares, if it is necessary to shore up their capital ratios now that cyclical defaults are on the upswing.

The "test" case is, of course, Citi, which is currently seeking additional capital infusions from the government, and may be the first to convert its preferred shares to common stock. That could make them wholly owned by the U.S. government.

The hope is that all of these capital infusions will not only shore up the financial system, but allow banks that are "too big to fail" to quickly restructure. This is ultimately what needs to be done, albeit a sorry state of affairs.

A Silver Lining: Loans are becoming much more profitable and better priced to handle the increased risks associated with a recession. The institutions that survive this will walk away with a sizeable increase in market share and profits.
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European stocks closed lower. Gold was down and Oil lost a couple of dollars.
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The DJIA lost 250 to 7115. The S&P 500 was down 26 to 743 and the NAZZ tanked 55 to 1388. Volume was active and Breadth was 4/1 negative.

The DOW and S&P have dropped 10% over the last 6 trading session.

We reiterate what we wrote on Friday:

This market is the buying opportunity of this decade. The drop in 2002 and 2003 was more related to the tech bubble bursting and most of those stocks have never recovered. The stocks that are being decimated now will recover much as they did in prior decades. Banks are not obsolete and neither are retailers. Some will disappear but the industry will remain. The fall of 1974 was the buying opportunity of the 1970s. The summer of 1982 was the buying opportunity of the 1980s. The fall of 1990 was the buying opportunity of the 1990s and the bottom on October 9th, November 20th 2007 and the past five weeks have again presented a great buying opportunity.

Traders are predicting another 15% drop in the S&P 500. That 15% is 120 points which if measured from the top of 1500 in the S&P 500 in October 2007 would be a 7% drop. (100 divided by 1500 instead of 120 divided by 780). We donít want to shuff off the pain that such a drop would cause us and all investors. We surely wish we had waited until yesterday to begin investing but if we had we would be fully invested as we are today. This recession is painful as is the drop in the value of our accounts. the stocks we own are going to survive and prosper whenever this bloodletting is over and the accounts will return to values higher that the old highs of 2007. Of that we are sure; it is the timing that is in question.

Why are we sure? Autos are selling at a rate that would take 27 years to replace the current existing autos on the road. Many autos will need replacement in the next five years. Homes are selling at a rate that is much lower that population growth and no new apartments are being built. Retailers are going to go out of business (not ours) which will make the surviving retailers profitable and when the economy recovers much more profitable. Banks will consolidate and the surviving banks will prosper. It is not bad that banks have gone back requiring 10% down and a financial statement from borrowers before the loan is made. It is not bad that folks are saving and not spending. The profligate spending and no money down home buying is was caused the excesses that are now being painfully redressed.

We would like to end the pain but the Market has its own timetable. Moreover the Market is swinging the pendulum back from 20 years of outsized returns and that swing will take more time.

As in the past, when our stocks recover we will look back and not care whether we paid $12 or $9 for a stock that is fairly priced at $30.

We donít plan on selling our home which is worth 2/3rd of what it was a few years ago, and we donít plan on abandoning a fully invested posture. The Market is down over 50% from highs and may go down another 10% or more before the carnage is over but the Market is closer by far to its nadir than the talking heads and media mavens suggest. The stocks we own have had all the excess wrung out of them and now it is just the folk who canít stand the pain (we understand but will not join) and short sellers who are pushing the envelope and prices lower for the last few dollars of gain.
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20 February 2009

Thoughts

Model Portfolio Value As of 20 February 2009

$ 392,937

This market is the buying opportunity of this decade. The drop in 2002 and 2003 was more related to the tech bubble bursting and most of those stocks have never recovered. The stocks that are being decimated now will recover much as they did in prior decades. Banks are not obsolete and neither are retailers. Some will disappear but the industry will remain. The fall of 1974 was the buying opportunity of the 1970s. The summer of 1982 was the buying opportunity of the 1980s. The fall of 1990 was the buying opportunity of the 1990s and the bottom on October 9th , November 20th 2007 and the past five weeks have again presented a great buying opportunity.

Traders are predicting another 15% drop in the S&P 500. That 15% is 120 points which if measured from the top of 1500 in the S&P 500 in October 2007 would be a 7% drop. (100 divided by 1500 instead of 120 divided by 780). We donít want to shuff off the pain that such a drop would cause us and all investors. We surely wish we had waited until yesterday to begin investing but if we had we would be fully invested as we are today. This recession is painful as is the drop in the value of our accounts. the stocks we own are going to survive and prosper whenever this bloodletting is over and the accounts will return to values higher that the old highs of 2007. Of that we are sure; it is the timing that is in question.

Why are we sure? Autos are selling at a rate that would take 27 years to replace the current existing autos on the road. Many autos will need replacement in the next five years. Homes are selling at a rate that is much lower that population growth and no new apartments are being built. Retailers are going to go out of business (not ours) which will make the surviving retailers profitable and when the economy recovers much more profitable. Banks will consolidate and the surviving banks will prosper. It is not bad that banks have gone back requiring 10% down and a financial statement from borrowers before the loan is made. It is not bad that folks are saving and not spending. The profligate spending and no money down home buying is was caused the excesses that are now being painfully redressed.

We would like to end the pain but the Market has its own timetable. Moreover the Market is swinging the pendulum back from 20 years of outsized returns and that swing will take more time.

As in the past, when our stocks recover we will look back and not care whether we paid $12 or $9 for a stock that is fairly priced at $30.

We donít plan on selling our home which is worth 2/3rd of what it was a few years ago, and we donít plan on abandoning a fully invested posture. The Market is down over 50% from highs and may go down another 10% or more before the carnage is over but the Market is closer by far to its nadir than the talking heads and media mavens suggest. The stocks we own have had all the excess wrung out of them and now it is just the folk who canít stand the pain (we understand but will not join) and short sellers who are pushing the envelope and prices lower for the last few dollars of gain.

The price corrections with forward p/e estimates: J Crew ($50 to $10) p/e 10; GE ($50 to $9) p/e 9, JPM ($54 to $19) p/e 10; Intel ($28 to $12) p/e 12; Cisco ($35 to $15) p/e 12, SPDR Financial ( $37 to $7); Old Second Bank ($38 to $7) p/e 10, Wintrust ($50 to $10) p/e 10; Disney($36 to $18) p/e 12; Nokia ($28 to $10) p/e 10; Dell ($50 to $8)p/e 10; Ann Taylor ( $30 to $5) p/e 10, Williams Sonoma ( $40 to $8) p/e loss; Nordstrom ($58 to $12) p/e15 ;Harman( $140 to $10) p/e 10; Hain and United Foods ($36 to $14) p/e 15 ; International Paper, Goodyear and Alcoa ($40 plus to $6)p/e loss.

IP, Goodyear, and Alcoa are the only companies with significant debt and we own all three in small accounts.

In December 1974, after 18 months of pain in which the markets dropped 60%, the ĎOld stockbrokerí bought 100 shares of every stock on the NYSE selling below $5 per share. He had not owned any stocks in his own account since the Crash of 1929. Over the next three years he tripled the money he invested and left more on the table. The SPDR Financial allows us to purchase 86 decimated financial stocks in one security. 10% of the ETF is JP Morgan, which will survive plus 30 banks and 56 other financial companies in the lending, life and casualty insurance and brokers. We get diversification and the reality that even if 25% of the ETF disappears and the other 75% double over the next five years we will make money. We donít think anywhere near 25% will disappear and we think more than 50% will at least triple over the next five years. We were trade the XLF in the high $20s in September 2008.

The uncertainly now is how much lower the Market goes before it stabilizes and for that action there is no answer. The collapse of 1973-74 occurred over 18 months and the present downturn is 16 months and counting so there may be few months more of gut wrenching erosion of value. But then again, there may not. The stocks we own are great values at current levels and that is why we own them now. We will let the smart guys/gals buy the bottom. Or rather smart guy/gal since only one person does.
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Today is a triple witching day and the talking heads and writing gurus are all predicting lower prices. Asian markets were lower overnight and European bourse indexes are lower at midday. Stocks in the U.S. are going to open lower and in truth the market does seem to want to go lower. Gold is over $1000 and Oil is down to $37.
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We continue to reposition and refine our holdings as the market is in the bottoming process and so we sold our AT&T for a $2 loss and re-purchased the same number of shares of JP Morgan and also added shares of GE to some accounts with the excess cash. Both stocks are at 12 year lows and will survive. The dividend payouts are 7% and 10% respectively and they may cut them in half in the next six months. But our guess is that the Market would cheer no jeer such a move.
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Citi is back to its 1990 low.
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European shares fell sharply, hitting lows not seen since the beginning of the Gulf War, with banks the worst performers. London's FTSE fell 3.2%. 
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The banks were all over the place today as were the major measures. The DJIA was down 200 most of the day rallied to even in the contra hour and then sold off into the close. Oil ended at $39.28 and Gold topped $1000 and closed at $995.
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The DJIA closed down 100 at 7265. The S&P 500 lost 9 to 770 and the NAZZ dropped 2 to 1440.

Breadth was 3/1 negative and new lows exceeded 1000 which is a large jump from a few days ago.

Volumes were heavier at 10 billion than it has been but today was an expiration day. And Bank America traded 800 million shares and Citi traded 600 million. That is a lot of shares but at $3 and $1 respectively, not a lot of money.

The bears continue to growl; but not for long.
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19 February 2009

Thoughts

Model Portfolio Value As of 19 February 2009

$ 397,837

The million talking heads on CNBC are upset with Obamaís stimulus plan and mortgage rescue plan as are most of the market bears. They all say the plan is a giveaway of their hard earned dollars and those reactions suggest that the plans canít be all bad.
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Last night after the close Hewlett Packard reported lower but in line earnings. The shares are trading 10% lower this morning as the CEO suggested that this year will be difficult. Sprint lost 1.3 million subscribers in the latest quarter and CBS cut itsí dividend by 75% but earnings were in line.
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Whole Foods reported 20 pennies earnings for the quarter which was 5 pennies more than analysts had predicted and the share price is up 30% in the early going. We are going to take the one day 30% move Ė WFMI made a similar move in January before backing off. We are buying an equal number of shares of the SPDR Financial (XLF) and half the number of shares in Dell which is making a 12 year low today on the Hewlett Packard slower computer sales news. We are paying $8.15 today. Dell has $4 per share in cash and sells at 5 times cash flow and 20% of sales (market value $10 billion/ sales $55 billion). Michel Dell spent $100 million in September of last year buying Dell shares at $20. We are buying ahead of earningís on the 26th so we may endure some short term pain.

WFMI jumped $3 today so Dell could drop to $2 on the shares we bought today with the WFMI sale money and we would be where we were yesterday.
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Asian markets were mildly higher overnight and European bourse indexes are mixed at midday. Gold is off $2 in the early going and Oil has a $35 handle.
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Geenspan earns million of dollars in speaking and consulting fees as business leaders seek his advice. Why?

From http://www.huffingtonpost.com

Greenspan's years of running the Federal Reserve, from August 1987 to January 2006, were a time of economic glory. On July 16, 2003, for example, when such other figures as Warren Buffett and George Soros were warning of the dangers of derivatives, Greenspan told the Senate Banking Committee, according to a transcript of the session:

"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so. Prior to the advent of derivatives on a large scale, we did not have that capability. And we often had, for example, financial institutions, like banks, taking on undue risk and running into real, serious problems....

"The vast increase in the size of the over-the-counter derivatives markets is the result of the market finding them a very useful vehicle. And the question is, should these be regulated? Well, indeed, for the United States, they are obviously regulated to the extent that banks, being the crucial creators of these derivatives, are regulated by the banking agencies, but not beyond that. And the reason why we think it would be a mistake to go beyond that degree of regulation is that these derivative transactions are transactions amongst professionals. And the institutions which are involved have very considerable what we call counterparty surveillance, where, for example, one major bank will know far more about its customer, whether it's a bank or something else, than we could conceivably know as regulators. In a sense, this counterparty surveillance has become the crucial element which has created stability in that particular system."
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Meredith Whitney, the bank analyst guru, is setting up her company in March. That guarantees that she wonít change her sell opinion on banks until after that time.
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UBS did not admit or deny guilt when it agreed to pay $870 million to settle a case brought by the Justice Department and the SEC that alleged that UBS had helped over 50,000 customers avoid at least $300 million in U.S. taxes. Now UBS says it will vigorously defend against the IRS finding out who the clients were. Why then did the SEC and Justice settle the case?By the way the case was settled for a billion less than analysts thought it would be settled. Same old same old.
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European bourse indexes closed lower. Gold was down $2 to $975 and Oil Jumped $4 to $38.79.
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This is an interesting commentary from realmoney.com. Not all technicians read the same picture in the same way.

Technical Analysis

All Eyes on the Dow

By Harry Schiller

RealMoney.com Contributor

2/19/2009 3:17 PM EST

URL: http://www.thestreet.com/p/rmoney/technicalanalysis/10464949.html

Who cares about the Dow? Well, for a change, I do -- but not for the same reasons that most investors do.

As you know, most investors have had a longtime love affair with the Dow Jones Industrials. Why? Beats me. After all, it's just 30 stocks, and it's a list that gets modified every once in a while. Typically the list gets revised to better reflect the changing economy (that's code for "go up more"). As for the looming change, I wouldn't be surprised to see them do away with all the financials (Citigroup (C) , B of A (BAC) , American Express (AXP) ) and the autos (GM (GM) ), as these market sectors are fast becoming relics of the past.

In any case, the Dow and only the Dow has recently been flirting with its November lows. For the past two sessions the Dow has managed to close just marginally above its Nov. 20 multiyear closing low. That day, Nov. 20, the Dow closed at 7552.29. Despite lower intraday lows each of the past three sessions (including today), the Dow hasn't closed below this level. On Wednesday, the Dow closed at 7552.60, just pennies above its prior low. Yesterday it was nip and tuck as the Dow was below 7552 after 4:00 p.m. EST but somehow managed a higher close by about 3 points, again avoiding the stigma of a new multiyear closing low.

Apparently, everyone is watching this important level. Of course, from my perspective, closing levels especially in the Dow mean very little, unless of course they mark the bottoms of downside gaps or the tops of upside gaps. Otherwise, I haven't found them to be of any interest or usefulness, despite the obsession the media has with them.

Instead, for me, it's all about intraday highs and lows, and the intraday low in the Dow (that even CNBC has begun to acknowledge!) is at the 7449 level. That's the level I'm watching. But unlike many of my bullish cohorts, I am hoping it breaks. Not because I am bearish; to the contrary, because I am becoming increasingly bullish, and one missing ingredient from my perspective is the break by this widely watched index of its Nov. 21 multiyear lows. If it breaks, it could be headed for its October 2002 lows at the 7200 level. Maybe that will do it for a while.

Such a break -- when it inevitably occurs -- will at least initially be accompanied by a host of momentum divergences, as the number of new lows will be nowhere near readings seen at the October or November lows, and oscillator readings likely won't be nearly as oversold. In addition, I expect to see a bunch of inter-market non-confirmations, as the Nasdaq Composite and Nasdaq 100 (NDX) and S&P (cash and futures) and Russell 2000 will be nowhere near their comparable November lows.

Speaking of the more important S&P, the SPX has now collapsed through the bottom of its triangle and in the process has finally filled its Nov. 24 gap ... and then some. The 800 level, which had been support is now resistance.

I was a buyer earlier this week as that gap was filled, just increasing my exposure up to about 50% to 60% levels. But note that the intraday low of 741 in the cash remains well below current levels. Maybe that level will hold even if the Dow has its October 2002 lows in its sights at the 7200 level.

In the very short term, the S&P futures still seem to be directing the action, as this morning's sharp rebound off yesterday's new multi-month closing low of 779.50 was apparently the target for the midday pullback, which so far has bottomed a fraction of a point above that gap at 780.30.

The futures have now bounced off that level, leaving a gap of a fraction of a point from 779.50 to 780.30 -- the only downside gap going back over the past 10 years.

The action in the relatively stronger NASDAQ indices is even more encouraging, as the NDX still hasn't come close to filling its Jan. 21 gap at the 1137 level.

Then there are the indicators, which are also beginning to line up on the bullish side of the ledger. Yesterday's fully oversold reading in the McClellan Oscillator at -220 is what I look for when I want to add to bullish positions.

And now, with all the hand-wringing about the (already apparently failed) stimulus programs and the miserable economy, it looks like many recent bulls have begun to shun the market. Put/call ratios have heated up, and the VIX has rebounded a bit. All of this is encouraging from my contrarian perspective.

I like the market here and am already holding long positions, but I'm a buyer of the Dow at new lows and will be adding further to my positions in the S&P, the NDX and even the financials once I see the non-confirmations at new Dow lows that I am expecting.
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Money honey Maria had Maudlin Meredith on her closing hour show on CNBC again today and Meredith repeated her death knell for banks mantra which we are sure encouraged a few more traders to short financials and send the markets lower into the close. We may as well get the bottoming process over and these last hour drops are pushing the markets there.

At the bell the DJIA was down 90 at 7466. The S&P 500 drooped 10 to 780 and the NAZZ lost 25 to 1440.

Breadth was 2/1 negative at the close and volume was moderate.

The bears are on a roll.
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18 February 2009

Thoughts

Model Portfolio Value As of 18 February 2009

$ 404,194

Asian markets we mixed overnight as are European bourse indexes at midday. Gold is off $10 and Oil has a $35 handle. U.S. futures suggest a flat to slightly better opening.
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GM says it needs another $2 billion to hopefully survive.
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We donít have the courage to stay with BankAmerica and so we sold it at a loss and bought the SPDR Financial (XLF) down about the same percentage since we bought our last BAC tranche. The SPDR Financial spreads our risk while sacrificing the huge gain on the upside that we would get if BAC survives. But XLFís upside is assured over time.
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We also eliminated Schwab for a scratch loss.
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Cramer ahs a mortgage plan that is similar to ours except that we would set the interest rate at 6% and make the term 50 years. Geithner and his friends are bureaucrats that donít understand how the real world works.

My Mortgage Plan

By Jim Cramer

RealMoney Columnist

2/18/2009 10:52 AM EST

URL: http://www.thestreet.com/p/rmoney/jimcramerblog/10464534.html

$75 billion for mortgages? Hysterical. Solves nothing. You want a plan? I have one, courtesy of my friend Matt Horween, who works closely with me every day and keeps me honest. Here goes:

First, we have to cut the principal of the mortgage. It is a hopeless issue without that, and an interest rate modification is a pure loser. The new mortgage should be given for 80% of the appraised value; the government can hire an army of appraisers, as we need to put people to work anyway. That's the level where most people would be able to stay in their homes. That's the virtuous circle with a drying up of new and old supply.

Second, the government has to offer 4% mortgages to everyone, so there is no moral hazard and so people can stay in their homes, which must happen if we are going to have house price appreciation. This 4% mortgage should be fixed for 40 years. Anyone who is in an owner-occupied home should be able to refinance at that rate, too.

Third, the servicers for the mortgage bonds, the CDOs, who are holding the whole system hostage, must modify the principal, too. They have fought this tooth and nail. Their resistance is stupid. Why?, because they aren't going to get paid without modification of principal for any of the 2005-2007 vintages, and they are clogging the system.

Fourth, banks that modify mortgages must be given a chance to make the money back. You do that with an override certificate. That would allow the banks to recover the full price of the old mortgage for any time in the next 50 years. Anything over the original mortgage goes to the homeowner. No home equity or second mortgage can be placed on the property without first paying off the override certificate.

Fifth, construct the override certificate as an asset in full value. That means they will not be dinged by the regulators for the potential loss that comes from changing the principal of the loan. This would save all of the banks from insolvency. The CDO holders get the same override certificate.

This plan has NO SPONSORSHIP whatsoever, but it will work. It is the only one I have heard that has a real solution, and it has little immediate cash outlay and does not forgive debt permanently, so it will fly with Congress. Even with the Republicans. No one who has an existing mortgage -- 90% of which are current -- would fight this plan. The banks would be able to get through this without nationalization. The housing supply pool would be reduced dramatically. The foreclosures would drop dramatically. There would be no points, and closing costs would be normal.

I have been ahead of the game on this housing issue for some time, right back to when I said in August 2007 that if the Fed didn't cut rates, buy mortgage paper and lower rates we would have a dramatic decrease in what I saw was a huge surge of foreclosures.

That didn't happen in time.

Now we have come to this modification of principal. It offers more to the banks and the mortgage servicers while keeping the homeowners in their homes and not breaking the Treasury bank. It is the best I could come up with and it makes much more sense than the nonsense I see Obama offering.

I will stay on this case and campaign for this plan endlessly, including behind the scenes with the FDIC.

It can work.

Heaven knows, we need solutions. This one's mine and my friend Matt's, and it will have the support of all involved.
*****

We have been hitting our heads against the wall trying to own bank stocks in this market. We know they have value but... That but is so large and unknowable that we are surrendering. We are selling the Large Bank ETF (KBE) we bought yesterday for a 40 pennies loss (the NCR we sold yesterday to buy the KBE is down 40 pennies) and placing the funds in Cisco. We have wanted to repurchase Cisco and the switch improves quality. Cisco is a survivor and will lead in the next bull run - whenever - and is priced at 12 times earnings which is historically a great buy point.

Our sale of the Bank ETF leaves us with a very large diversified financial holding in the Financial ETF (XLF). We will rely on it to eventually recover al the losses we have sustained in the last few months trying to own bank stocks.
*****

Meredith (death to all banks) Whitney is leaving Oppenheimer to start her own firm. Whitney is the analyst who has correctly predicted the decimation of the banks stocks. Beware hubris.
*****

Oil ended at $34.54 and Gold gained to $980 after begin lower in morning trading. European bourse indexes closed mixed small.
*****

The DJIA gained 3 to 7555. The S&P 500 was down 1 at 788 and the NAZZ dropped 3 to 1468.

Breadth was 2/1 negative and volume was moderate.

The bears remain in control.
*****

 

17 February 2009

Thoughts

Model Portfolio Value As of 17 February 2009

$ 406,688

Stocks are down around the world by 2% and more as the global credit crisis has traders negative. With $4 trillion sitting in money market funds we presume that most investors are on the sidelines or fully invested as we are. Asian and European markets were down on Monday and are 2% lower in Tuesday trading.

Major market measures are down 2% in the first hour of trading in the U.S. Our guru suggests that if the S&P 500 doesnít recapture 800 by nightfall Ėit is at 795 currently- that a break in a triangle formation projects to a downside of 670. That is not a pleasant thought but we own good stocks and have decided that we arenít nimble enough and the markets are too volatile to try and trade around the inevitable bottom forming.

Our philosophy has never been buy and hold. We moved in and out of cash for the past three years as conditions warranted. We were nervous about the markets and said so many times. But at the October and November lows we decided to buy stocks. For the last three months we have been purchasing stocks and refining positions. We own these stocks at 60% to 80 % discounts from their highs of the last five years and near or at their lows of the last ten years. We donít think it is possible to try and trade in and out of these positions as the markets bottom here or 15% lower. We donít like having surrendered 25% to 30% of our hard earned gains with more to come on a temporary basis but we know that when the markets begin to recover the stocks we own will perform with a much higher upside beta than the markets as a whole.
*****

Trump Entertainment is in bankruptcy for the third time in fifteen years. Of course The Donald resigned as CEO before the filing and stands willing to help.
http://norris.blogs.nytimes.com/2009/02/17/chapter-33-is-here/?hp
*****

The Major Bank ETF made a new all time low this morning and is down 20% in the last week. We switched NCR at a 7% loss in that same time period to the KBE (Major Bank ETF).
*****

GMís possible bankruptcy, lousy economic news, a greater slowdown than expected in Japan and credit problems for banks worldwide are all reasons given for todayís ugly action.
*****

Of the 26 companies that reported earnings this morning 85% (22) reported positive earnings for the quarter. It is that way every day and yet the market and traders are acting as if 85% of them were reporting losses for the quarter.
*****

European bourse indexes closed 2% and more lower. Gold was up $28 at $970 while Oil lost over $2 to close at $35.
*****

The DJIA lost 300 to close at 7550. The S&P 500 was down 38 at 790 and the NAZZ dropped 60 to 1470.

Breadth was 10/1 negative as was down versus up volume on the NYSE and volume was active.

The bears remain in control.
*****

 

13 February 2009

The markets are closed Monday to honor all our great and less than great presidents.

Thoughts

Happy Friday the 13th.

Model Portfolio Value As of 13 February 2009

$ 431,488

On Friday August 13, 1982 the DJIA bottomed and on the next Monday the recovery bull market of the mid 1980s began. We profited from that bear market and the ones in 1974, 1990, and 2002 and we will this one too.
*****

Asian markets were up 2% and European bourse indexes are better by 1% at midday. Oil has a $34 handle and Gold is down at $940.
*****

We placed the money we raised form yesterdayís sales into Nokia which is yielding over 4% and is down more than 50% from its 12 month high and selling at the lowest level in 15 years. NOK has $30 billion in cash on hand.
*****

We switched CBS at a loss ahead of earnings next week to the SPDR Financial (XLF) in a 1 for 2 exchanges. Our theme continues to be to stay fully invested but to move to cash rich companies with little or no debt. We think CBS has great potential but so does the XLF and we donít know what Sumner Redstone will wind up doing with CBS which he controls. He is past the age at which he should be controlling it and he has problems with other companies he controls that are having trouble meeting their debt service.
*****

We are opening a new position in Schwab (SCHW) and selling shares in NCR for the cash where needed. We would like to add to the SCHW position as conditions warrant. We traded- too quickly- the stock profitably a few years ago and it is has returned to and investable level again.
*****

Oil ended at $38.20 up over $4 on storage issues for the front month contract. Gold was down $7 at $940. European bourse indexes closed higher.
*****

The DJIA dropped 80 in the last three minutes to end at 7850. The S&P 500 dropped 6 at 828 and the NAZZ was off 5 at 1536.

Breadth was 5/4 negative and volume was moderate.

The bears won the week.
*****

 

12 February 2009

Today is Lincolnís birthday, tomorrow is Friday the 13th and Monday is Presidentís Day and the markets are closed as is this website.

Thoughts

Model Portfolio Value As of 12 February 2009

$ 439,305

Now that the Stimulus Bill is ready to be passed the talking heads have declared it too little and not targeted. And so it goes. Markets remain in a funk and not even positive retail sales of up1% were enough to turn U.S. futures.

Asian markets were lower by 2% overnight and European bourse indexes are doing no better at midday. The NYT had a no big surprise story on the bursting of the oil bubble building boom in Dubai and this morning Oil has a $35 handle while Gold is down a few dollars in the early going after yesterdayís $20 jump higher.
*****

From WSJ: Retail sales unexpectedly rose 1% in January from the previous month. However, the solid increase seemed to be a correction for plunges during the holidays rather than the start of a recovery in consumer spending. Retail sales were 9.7% below year-earlier levels.

Separately, jobless claims fell in the latest week, but remained near quarter-century highs above 600,000. Meanwhile, total jobless claims lasting more than one week hit a fresh record, inching closer to the five-million mark.
*****

An analyst at Piper Jaffrey upped Ann Taylor today with the shares at $6 to a buy from hold. Since that same analyst dropped it from add buy to a hold back in April of 2008 when the shares were at $23 the renewed buy recommendation ahs generated interest on a down day for the markets. One at a time.
*****

Oil closed at $33.87 down over $2. Gold was up $5 at $950. European bourse indexes closed down 2%.
*****

We sold Chicoís and Talbots for small profits. We are reducing our Retailers to one in each category and we are going with ANN in the womenís retail area. We sold Ford, Fifth Third and Health Management for losses to get rid of junk stocks. Our psyche wonít handle any bankruptcies and by the time these three stocks move we will have no regrets since our other issues will have moved higher.
*****

The big boys and girls sure had fun today. For us, not so much. Programs and short selling pushed the DJIA down 200 in the first two hours of trading and then buying cut the drop in half before more programs at midday again pushed the DJIA down 200 going into the final hour. Rumors of mortgage relief and buy programs and short covering then pulled the DJIA back up to only down 7 on the day.

At the close the DJIA was 7931, the S&P 500 was up 1 at 835 and the NAZZ was up 11 at 1541. The S&P 500 had been down over 24 pints (3%) during the day.

Breadth was 2/1 negative on the NYSE and 5/4 bad on the NAZZ at the close and volume was active.

Confusion won the day as both bulls and bears probably suffered losses.
*****

 

11 February 2009

Thoughts

Model Portfolio Value As of 11 February 2009

$ 439,085

Asian markets were lower over night as are European markets at midday. US futures are flat pre-opening and Oil has a $37 handle while Gold is up $12.
*****

Geithnerís speech was universally panned as being skimpy on detail but some influential gurus are talking up the basics of the plan this morning and saying the broad outline makes sense. Time will tell.
*****

Chinaís exports were down 17% in January.
*****

European markets finished mixed, though strength in drug-company shares helped offset sharp declines in bank stocks.
*****

Stock traders were expecting specifics from Geithnerís speech yesterday and didnít get them. That gave bears who had covered last week in anticipation of the speech the opportunity to use leveraged short selling to panic long traders and what few investors who are left into pulling buy orders. The flow of selling orders pushed stocks lower and fed on itself.

The good news is that the bad news is probably all out there. Expectations have been crushed and so when the new TARP details are finally announced the markets may be able to rally.
*****

Oil ended at $36.23 down $1.26 on increased inventory news. Gold was $942 up $28.
*****

The big boys and girls must be tired from yesterdayís games because there were no programs in the last hour of trading today. At the bell the DJIA was up 50 at 7940. The S&P 500 gained 6 to 833 and the NAZZ was up 5 at 1530.

Breadth was flat and volume was moderate.

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

 

10 February 2009

Thoughts

Model Portfolio Value As of 10 February 2009

$ 434,435

Asian markets were higher overnight and European bourse indexes are mixed at midday. US futures are lower ahead of Geithnerís 10am speech that will reveal all to an anxious trading community that immediately after the speech will begin worrying about some other future event.
*****

Banks are down ahead of the speech and we switched The Gap with a $1 profit to BankAmerica. We sold BAC at $9.50 for a loss in January and purchased shares at $6.75 before and then $5.75 after Geithner disappointed the markets.
*****

The markets did not like Geithnerís speech. Neither did we. Geithner was not able to convey that he and his folks have figured out how to handle the problems. We donít like the guy; didnít before he was nominated; and didnít more so after we learned of his tax evading Ďmistakesí.Geithner has been a bureaucrat all his life and spoke like one today.The economy will muddle through and the Obamaites are probably throwing enough money into the system with the stimulus and the trillions of dollars to the banks that the economy will recover.
*****

The DJIA is down 300 at noon.
*****

Shares of oil producers led sharp declines in Europe, as investors panned the U.S. government's financial-sector rescue plan. London's FTSE lost 2.2%.
*****

Oil closed at $37.70 down over $1.50. Gold gained 425 to $915.
*****

The DJIA lost 382 to 7888. The S&P lost 42 to 827 and the NAZZ dropped 66 to 1524.

Volume was brisk and breadth was 4/1 negative.

The bears are back in control.
*****

 

9 February 2009

Thoughts

Model Portfolio Value As of 9 February 2009

$ 464,890

This week the markets are concentrating on the Stimulus Plan and the Bank Bailout Plan. Geithner has put off the Bank Plan till Tuesday so that the Stimulus Plan in the Senate can receive all the attention. The markets donít seem too upset by the delay.
*****

Asian markets were higher overnight and European bourse indexes are mixed at midday. Oil has a $40 handle and Gold is back down to $900 in the early going.
*****

883 on the S&P 500 is the next major resistance level and 854 is support. At 9am the S&P 500 is at 868.
*****

The Stimulus Plan is too small. Worrying about $300 billion when we threw away $1 trillion in Iraq is ridiculous. Krugman in Mondayís NYT: http://www.nytimes.com/:

February 9, 2009

Op-Ed Columnist

The Destructive Center

By PAUL KRUGMAN

What do you call someone who eliminates hundreds of thousands of American jobs, deprives millions of adequate health care and nutrition, undermines schools, but offers a $15,000 bonus to affluent people who flip their houses?

A proud centrist. For that is what the senators who ended up calling the tune on the stimulus bill just accomplished.

Even if the original Obama plan ó around $800 billion in stimulus, with a substantial fraction of that total given over to ineffective tax cuts ó had been enacted, it wouldnít have been enough to fill the looming hole in the U.S. economy, which the Congressional Budget Office estimates will amount to $2.9 trillion over the next three years.

Yet the centrists did their best to make the plan weaker and worse.

One of the best features of the original plan was aid to cash-strapped state governments, which would have provided a quick boost to the economy while preserving essential services. But the centrists insisted on a $40 billion cut in that spending.

The original plan also included badly needed spending on school construction; $16 billion of that spending was cut. It included aid to the unemployed, especially help in maintaining health care ó cut. Food stamps ó cut. All in all, more than $80 billion was cut from the plan, with the great bulk of those cuts falling on precisely the measures that would do the most to reduce the depth and pain of this slump.

On the other hand, the centrists were apparently just fine with one of the worst provisions in the Senate bill, a tax credit for home buyers. Dean Baker of the Center for Economic Policy Research calls this the ďflip your house to your brotherĒ provision: it will cost a lot of money while doing nothing to help the economy.

All in all, the centristsí insistence on comforting the comfortable while afflicting the afflicted will, if reflected in the final bill, lead to substantially lower employment and substantially more suffering.

But how did this happen? I blame President Obamaís belief that he can transcend the partisan divide ó a belief that warped his economic strategy.

After all, many people expected Mr. Obama to come out with a really strong stimulus plan, reflecting both the economyís dire straits and his own electoral mandate.

Instead, however, he offered a plan that was clearly both too small and too heavily reliant on tax cuts. Why? Because he wanted the plan to have broad bipartisan support, and believed that it would. Not long ago administration strategists were talking about getting 80 or more votes in the Senate.

Mr. Obamaís post partisan yearnings may also explain why he didnít do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate, waiting until late last week before finally saying what needed to be said ó that increasing spending is the whole point of the plan.

And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan, which was, by the way, better focused than the original administration proposal.

In the Senate, Republicans inveighed against ďporkĒ ó although the wasteful spending they claimed to have identified (much of it was fully justified) was a trivial share of the billís total. And they decried the billís cost ó even as 36 out of 41 Republican senators voted to replace the Obama plan with $3 trillion, thatís right, $3 trillion in tax cuts over 10 years.

So Mr. Obama was reduced to bargaining for the votes of those centrists. And the centrists, predictably, extracted a pound of flesh ó not, as far as anyone can tell, based on any coherent economic argument, but simply to demonstrate their centrist mojo. They probably would have demanded that $100 billion or so be cut from anything Mr. Obama proposed; by coming in with such a low initial bid, the president guaranteed that the final deal would be much too small.

Such are the perils of negotiating with yourself.

Now, House and Senate negotiators have to reconcile their versions of the stimulus, and itís possible that the final bill will undo the centristsí worst. And Mr. Obama may be able to come back for a second round. But this was his best chance to get decisive action, and it fell short.

So has Mr. Obama learned from this experience? Early indications arenít good.

For rather than acknowledge the failure of his political strategy and the damage to his economic strategy, the president tried to put a post partisan happy face on the whole thing. ďDemocrats and Republicans came together in the Senate and responded appropriately to the urgency this moment demands,Ē he declared on Saturday, and ďthe scale and scope of this plan is right.Ē

No, they didnít, and no, it isnít.
*****

We took a small profit in Johnson Controls since we own enough auto exposures with Ford and Goodyear and Harman. We placed the proceeds in BankAmerica.
*****

On Friday GE dropped on news that they may cut the dividend. This morning:

Shares of General Electric Co. jumped Monday as investors cheered the possibility the conglomerate may eventually cut its dividend, adding billions of dollars to its balance sheet, two analysts said.
*****

European shares posted modest gains, led by financials, as investors awaited details on the U.S. stimulus package. London's FTSE rose 0.4%.
*****

Oil ended at $39.70 and Gold was $896.
*****

The DJIA lost 10 to close at 8270. The S&P 500 was up 1 at 870 and the NAZZ gained 1 to 1593.

Volume was punk and breadth was positive.

The markets spent the day Ďwaiting for Geithnerí.
*****

 

6 February 2009

Thoughts

Model Portfolio Value As of 6 February 2009

$ 456,846

598,000 folks lost jobs in January. That was within the range of expectations and now traders are focusing on the stimulus plan to be passed today or Sunday and the bank rescue plan to be announced Monday. Already the economic talking heads on CNBC have declared the stimulus plan a failure and we are certain that no one will like the bank plan either, so many opinions, so little power.
*****

Asian markets were 2% and higher overnight and European bourse indexes are mildly higher at midday. Oil has a $40 handle and Gold is $915.
*****

Toyota is going to lose $5 billion this year. While that loss is dwarfed by the losses at the US big three or - now little three- it does suggest that the folks at GM and Ford arenít as stupid as the bright folks on Wall Street- who have lost more money than they- make them out to be. Itís the economy, stupid.
*****

Diane Swonk, Chief Economist Mesirow Financial

Friday, February 6, 2009 - 7:45 a.m.

Cutting to the Bone

Payroll employment plummeted another 598,000 in January, in what was one of the worst months for job loss during the recession. Losses were widespread, which shouldn't be a surprise given the sheer magnitude of layoff announcements last month. On one bloody Monday in mid-January alone, some 70,000 layoffs were announced.

Moreover, benchmark revisions, which tend to capture what is going on in small and mid-sized firms, suggest the losses in 2008 were even greater than initially reported. Half of the more than 3.6 million jobs lost since the peak of the cycle in December of 2007, occurred in the last three months of 2008 alone. This also shouldn't be a surprise to anyone who looks in the windows of the shops on their way to work. "For Lease" signs have replaced the "50-80%" off signs we saw in the weeks leading up to Christmas.

Unemployment, which is derived from a survey of households instead of large firms and, as a result, more accurately captures what is really going on in the economy, surged to 7.6% - its highest level since the 1980s.

What does it all mean? Conditions are getting worse and are unlikely to improve anytime soon, especially if Congress sits much longer on the stimulus package.

The good news is that approval of a revised and better version of the package appears to be closer to passing in the Senate. The new package will provide some tax relief for middle-income families via payroll tax cuts, which will go into effect almost immediately. The package also has some tax incentives to buy homes and autos, which could spur some demand in our hardest-hit industries. Tax cuts for businesses should help mitigate the magnitude of job losses in the second quarter.

There is little anyone can do at this stage of the game, however, to stop unemployment from approaching 9% in 2009. The outlook for 2010 and 2011 is better, with the payoffs to infrastructure investments finally kicking in and the housing market starting to emerge from its multi-year slump.

The current environment bears an eerie resemblance to that of my youth, growing up in Detroit, when unemployment in some areas surged above 20%. This isn't as bad, but that knowledge provides little consolation for those who are already unemployed, or are experiencing a downturn of this magnitude for the first time (which is most of us).

All I can say is that we survived it then, and we will survive this. It will change us, however, and at least for a while, we might focus more on the intangible rather than tangible gifts we possess. Sitting around the kitchen table playing Monopoly with my children has never been both so instructive and so rewarding. As my daughter recently wrote in a poem for class, "Hope may be disguised and hidden by our tears and grief, but it never really dies."
*****

We added shares of NCR and Dell to larger accounts.
*****

Oil closed down $1 at $40.10 and Gold was off $2 at $912. European bourse indexes finished 2% to over 3% higher.
*****

Banks stocks led the rally as the DJIA gained 215 to 8280. The S&P 500 was up 22 to 868 and the NAZZ jumped 45 to 1592.

Breadth was over 3/1 to the good on the NYSE and volume was moderate.

The bulls won the week but the bears may only be hibernating till Monday.
*****

 

5 February 2009

Thoughts

Model Portfolio Value As of 5 February 2009

$ 431,757

Traders are trying to break Wells Fargo to the downside today as rumors swirl that WFCís commons shares will be wiped out. That ainít gonna happen since Warren Buffet owns gazillions of shares of the bank.

Retailers are higher in the early going even with lousy same store sales numbers. Cisco announced earnings last night that were a bit better than expected but suggested lower sales in the present quarter and is pennies lower so there are a few positive signs in the marketplace.
*****

Asian markets were lower overnight and European bourse indexes are 25 lower at midday. Gold is up $15 and Oil has a $40 handle in the early going.
*****

In our larger accounts we traded KBE for a $1 profit and established small dollar positions in seven stocks for the longer term. Those were Harman, Johnson Controls, International Paper, NCR, Goodyear, Alcoa and Eastman Kodak. All are on decade and more lows.
*****

Oil closed at $40.91 up 59 pennies. Gold was up $20 at $920.
*****

European shares ended mixed, as investors weighed bearish earnings results against an interest-rate cut from the Bank of England. Germany rose 0.4% while London's FTSE ended flat.
*****

And we end the day with the news that Treasury Secretary Geithner will unveil the 'comprehensive' bank-rescue plan Monday.
*****

The major measures opened slightly lower and then reversed higher a few hours into the session and maintained their gains into the close.

The DJIA closed up 105 at 8060. The S&P 500 gained 14 to 845 and the NAZZ jumped 30 to 1545.

Breadth was 2/1 positive and volume was moderate.

The bulls are holding 8000 on the DJIA for now.
*****

 

4 February 2009

Thoughts

Model Portfolio Value As of 4 February 2009

$ 420,010

Obamaís executive compensation cap for banks borrowing from the government isnít onerous since it applies to only the top five executives and allows them to receive options on shares of stock in lieu of cash. The executives canít sell the shares they receive until Uncle Sam is paid back. And golden parachutes are gone. All those provisions are fair. Our only regret is that they arenít requiring the replacement the CEOs and Boards of Directors who were in charge when the banks made their dumb decisions.
*****

Asian markets were higher overnight as are European bourse indexes at midday. Oil has a $41 handle and Gold is $899 in the early going.
*****

With the unknowns of the bank bailout we have decided to not hold such a large position in financials. We acquired the XLF when the JPM and WFC trades blew up. Over the last week realized that we are trying to make back money lost on an incorrect decision by reinvesting in the same area. That is a no, no.

We sold 2/3rds of our XLF holding and placed one half of the sale proceeds in the Semiconductor ETF (SMH). It is trading at $18 down from $40. 25% of the ETF is Intel, 15% in Texas Instruments and 10% is Applied Materials. Semiconductors run all the new gadgets and there will be more not less gadgets in the future.

We also sold the Bank ETF and bought Disney down $1 on the day and 50% from its yearly high as it announced a punk quarter last night.

In keeping with our improving quality theme we switched Ciena to The Gap. The Gap is on its 10 year low priced at Ĺ revenues and with $2 billion in cash on hand and a 3% yield.
*****

Gold gained $15 to $907 and Oil closed at $40.35. European bourse indexes were 1% to 2% and higher on the day.
*****

The DJIA dropped 125 to 7960. The S&P 500 lost 7 to 833 and the NAZZ lost 1 to 1515.

Breadth was 5/4 negative and volume was moderate.

The bears reasserted themselves.
*****

 

3 February 2009

Thoughts

Model Portfolio Value As of 3 February 2009

$ 425,051

We get mail:

Bud,

Even though our business has slowed, Iím going to attempt to keep making 401k and profit sharing contributions to the max again this year.  However, it is certainly demoralizing to budget and save for the contributions, only to see the money disappear in this market.

Iíd like you to do this for me, if only for my peace of mind.  Any monies that I contribute for 2009 (and perhaps thereafter, as determined by events), please park in cash.  Iíd rather not invest these reserves until you are absolutely sure that the bull market has started, even if we miss the absolute bottom.  Then go for it.  Good luck for both of us.

Thanks,

XXXXX

We respond:

Dear XXXX

We will do as you request.

We know how you feel. Since you check the accounts regularly you know that three weeks ago they had almost recovered to being flat for the last thirteen months. Now they are down 30% for the thirteen months. It is that kind of market.

A relative who is a director of a foundation that we don't manage called the other day to ask our opinion on the distribution of his foundations assets.

The stock portion of the foundation assets were down 45% last year and the overall portfolio was down 25%. The foundation directors wanted to go from a 60% stock/ 40% bond investment distribution to a 40% stock / 60% bond.

He wanted to know if we agreed with that idea.

Our comment was that when the DJIA was at 14000 and bonds were yielding 5% the foundation was comfortable at 60/40. Now that bonds yield 2% and stocks are half of what they were the foundation wanted to go 40/60.

That sure didn't make sense to me.

We were lucky and smart enough to avoid the 2000 to 2003 pain in the markets and so this current pain is new to us.

Over the years we have endured similar wrenching market drops in 1990, 1987 and 1982 and 1974. In those years computers were not pricing portfolios on a minute by minute or even daily or monthly basis. And so holding stocks was like owing your home is now. You know the value of your home is down over the past few years after being higher in the housing bubble. But since you don't see a daily price and plan on staying in it for a few more years you aren't worried.

You should deal with the stock portfolio in the same way.

We were fully in cash in September 2008 back when we were smart. As share prices dropped to levels we found attractive we began to invest funds. We werenít calling a bottom we were reacting to prices of companies that we follow that we thought had fallen to attractive prices.

We thought the market bottomed on October 10, 2008. Then we called the market bottom again on November 22, 2008 by committing the rest of our cash. Our accounts actually rallied 35% from the November 21 lows to the January 8, 2009 high. But then the bottom fell out over the next three weeks.

Market bottoms are only knowable in the rear view mirror. Buying good stocks at good prices is not that difficult. Riding out the volatility is the difficult part. We own good stocks at good prices. And plan to ride out the volatility.

This too shall pass but probably not without more short term pain. You aren't planning on spending the money in the next two years and now is the time to take a longer term view.

Bud
*****

Asian markets were mixed overnight and European bourse indexes are higher at midday. Gold and oil are both flat as the trading day begins.
*****

Nancy Killefer withdrew her candidacy to be the first chief performance officer for the federal government on Tuesday, saying she didn't want her bungling of payroll taxes on her household help to become a distraction for the Obama administration. When Killefer's selection was announced by Obama on Jan. 7, The Associated Press disclosed that in 2005 the District of Columbia government had filed a $946.69 tax lien on her home for failure to pay unemployment compensation tax on household help. Since then, administration officials have refused to answer questions about the tax error, which she resolved five months after the lien was filed.

Geithner didnít pay $35,000 in taxes and penalties and Daschle didnít pay $124,000 in taxes and penalties and the woman withdraws for waiting 5 months to pay less than $1000. Are we missing something here?
*****

Breaking news, Daschle withdraws. Good.
*****

E-mail continued:

Bud,

I appreciate your response and your thoughts.  Iím looking at cutting back my dental schedule within a year or so, and phasing out over the next few years after that.  Looking at the loss of $700000 since the top in Oct 07 has me a little spooked.  I do have the ability to not tap into retirement savings for the next few years, so hopefully the financial gods will be kind to us.  Thanks.

XXXX

Response continued:

Dear XXXX

You want to be an aggressive investor and this type action comes with the territory. Even if you retire in two years and take $100 M a year it doesn't make sense to be fully invested at the top - which we weren't- but not be fully invested 50% lower.

At year end 2006 your account was $1,300,000. Assuming you put in $125,000 the next two years (we don't have the exact amount) that makes $1,425,000. Today after a 35% drop in the markets from January 2007 and 50% from the top in October 2008 your account is valued at $1,100,000. That is a 23% drop from January 2007 which is 50% less than the drop in the S&P 500 from January 2007.

This market drop is a once in a generation buying opportunity.

No pain no gain. We will have a gain.


Bud

*****

Not to worry: ďin the six years in which the Steelers were in the Super Bowl, the S&P 500 returned 25% on average.Ē  Capital IQ
*****

We sold JDSU and TLAB (low priced specs) and in larger accounts placed the funds in the Bank ETF (KBE) as major banks sold off..
*****

Auto makers posted sharply lower U.S. sales for January, putting more pressure on struggling Detroit companies. GM's light-vehicle sales dropped 49%, while Ford was down 40%. Toyota fared slightly better, with light-vehicle sales down 32%. Chrysler was down 55%.
*****

Ben Stein has an interesting comment on gurus:

http://finance.yahoo.com/print/expert/article/yourlife/138279
*****

European shares ended higher, as Vodafone's strong earnings report sparked gains in telecommunications shares. London's FTSE rose 2.1%.
*****

Oil closed at $40.87 and Gold was down $7 and $900.
*****

Stocks rallied for no reason except they have been down for five straight days but banks issues remained under pressure. At the close the DJIA was up 140 at 8078. The S&P 500 rose 14 to $839 and the NAZZ jumped 21 to 1516.

Breadth was positive and volume was punk.

The bulls staunched the pain for a day at least.
*****

 

2 February 2009

Thoughts

Model Portfolio Value As of 2 February 2009

$ 424,438

Our trip was positive but the markets were not. January was a real downer and we are glad it is over. February is beginning as a continuation of January with overseas markets down about 2% overnight and at midday and US stocks are also 1% lower in early trading. Gold is at $912 and Oil has a $40 handle.

Everyone in now an expert on how to restart the economy and save the banks and most are sure that Obama and his folks donít know what they are doing. None of the talking head experts ran for president. And most of the talking heads didnít see the crisis coming. But facts have never stopped the media from prognosticating and opinionating.

For our part the Super Bowl was super for the second year in a row and over the weekend we visited clients and enjoyed two good basketball games (we won).

During our driving time we reflected on recent market events. We are not happy with our performance last year even though it bested the markets by over 20%. Our mantra is always not to lose money and we did that in accounts last year and the year before.

Lowered revenues and earnings are decimating the share prices of good quality companies but we are sure that most if not all of the companies we own will emerge from the current miasma intact and profitable. And with cash earning nothing and long term Treasuries yielding 3% it would take 6 years to earn back the capital we have lost in the last few months by being early in our purchasing. The major market measures are down 50% from their highs and that is a good level at which to won stocks. While we werenít comfortable owning stocks over the past three years, when prices began bottoming in October and November of last year we decided to invest our funds. It now is obvious that we were early but many of the stocks we own yield 4% and more and the price/earnings ratios and dividend yields remind us of 1982. And that was a good time to be buying stoics.

And so we will muddle through. Two years from now we will look like geniuses; until then, not so sure.
*****

The markets are awaiting a bank rescue plan and when it didnít come over the weekend traders sold the opening. It is going to take time and neither the media nor traders have any time to spare. We do.
*****

From Yahoo Finance:

The Russian ruble fell 2.6 percent versus the dollar in one day Jan. 29, making its overall drop this week 6.8 percent. The freefall has pushed the currency to its lowest point since the January 1998 ruble crash. Russiaís Central Bank announced on Jan. 22 that it was done defending the ruble and set a lower floor for the currency's fluctuation band of 41 rubles against the basket -- 55 percent of which is dollars and 45 percent of which is Euros -- that the Central Bank uses to guide its currency moves. But this limit may soon be breached, in which case the government may once again widen its trading band given that the currency has been draining between $6-12 billion a week from Russiaís currency reserves until this week.
*****

The savings rate is up to 3.2% and banks are not making bad loans. The markets are saying thatís bad? We would rather see the recovery take longer and be on firm legs.

Robert Marcin at realmoney says it well:

The problem with the economy is too much debt. Let me write that again: too much debt. We don't solve the problem with more debt. We don't need banks to lend to overleveraged households to solve the problem. We don't need them to lend for auto purchases or vacations or condos.

Consumption is too big a part of the economy. It must shrink. Consumers must repay or have written down trillions in debt. Banks shouldn't lend to most of the consumers. We don't need a stimulus plan to create consumption where none demand exists.

We should let the deflation occur, invest in long term infra projects to temper the recession, and reinforce the government safety net.

We canít fuel a recovery with debt when we need to de-lever. This is all about managing the down cycle, not trying to borrow and spend our way out of it. Why don't the pols and talking heads get that?
*****

We took a $1 per share profit in YHOO and switched it to GE.
*****

We sold three speculative retailers with oversized debt- Pier One, LIZ, and Pep Boys. Lear, Ford and Health Management have too much debt also, but we are going to hold them.
*****

Oil ended at $40.51 and Gold was $908. European bourse indexes ended 2% lower.
*****

Stocks acted like they wanted to go higher late in the day but couldnít quite find the buying power to do so. At the bell the DJIA was down 65 at 7940. The S&P 500 lost 1 to 825 and the NAZZ jumped 19 to 1495.

Breadth was 5/4 negative on the NYSE and flat on the NAZZ and volume was punk.

The bears remain in control.
*****

 

 

 

 

 

 

 

 

 

 



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