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31 January 2002

The stock and bond markets gained yesterday as the selling pressure seemed to climax around the time the Fed announced that it was going to leave the Fed funds rate unchanged at 1.75%. We used the sell off to add a big chunk of AT&T Wireless to accounts at $10.76. We believe AWE is an excellent value at these prices.

As January goes so goes the year, is an old saw on Wall Street. If that's the case, we need a big up day today to insure a positive result for 2002. Of course, we have the superbowl indicator yet to indicate. That indicator states that if an original NFL team wins, the stock markets will be up for the year. Since the Rams are an old NFL team we may wind up with dueling indicators. In that case the tie is broken by what the markets actually do for the year and we will have to wait eleven months for the results.

Two new J. P. Morgans were anointed yesterday. J. P. Morgan was a famous financier who organized a group of bankers to pool funds to purchase stocks during the Panic of 1907. At the height of the panic, J P walked onto the floor of the NYSE and began buying stocks. Supposedly investors took heart and the panic selling stopped. Or so the legend goes.

In early trading Wednesday, Tyco shares dropped $5 per share. On top of Tuesday's $8 per share drop, Tyco was turning into a real soap opera. The new selling pressure was caused by a morning NYTIMES report that Koslowski and Swartz had sold a million shares of stock back to the company in 2000 and 2001 without having to report those sales as they would have if they had sold in the open market. Their selling was perceived as somewhat duplicitous even when it was explained that the selling was for tax purposes and estate planning. Then, around 11 am, Dennis Koslowski, CEO of Tyco, and Mark Swartz, CFO of Tyco, announced by press release from Hamilton Bermuda, the home of Tyco (nice home), that they were each going to purchase 500,000 shares of Tyco in the open market with their own funds. That's a novel idea, a CEO and CFO using their own funds rather than company money to buy stock. In the press release from Tyco, Koslowski stated that the window was open for other executives of Tyco to purchase stock in the open market. We think that was a suggestion not a command. Anyway, their timing was superb, almost magically their announcement turned the tide of selling in Tyco, and in a wave of solidarity and short covering Tyco surged higher to close up for the day. Surely such action is a tribute to capitalism and the American way of doing business in Bermuda. J. P. Morgan would be proud.


30 January 2002

The stock markets thudded lower on Tuesday, and the Treasury bond market rallied. Enron fever swept the markets and any company with complicated financials and large institutional ownership was sold with questions to be asked later. Tyco dropped $5 per share on the opening and that created a negative tone for the stock market. Around noon bank stocks began selling off when PNC Financial reported that the Federal Reserve Board was requiring PNC to restate 2001 earnings to reflect results of three subsidiaries that PNC's auditors had told them did not have to be included in parent company earnings. This action raised the specter of other banks having to consolidate results of off balance sheet subsidiaries and/or liabilities. Since the markets are in a sell uncertainty mood, most major bank stocks sold off on the premise that they would have to restate earnings lower also. Worldcom sold off on vague rumors and made a new multi year low. It is not true that our negative mention of Worldcom on Monday was responsible for the price drop.

We are writing this post before President Bush's speech but we presume it will be upbeat and so we expect a relief rally at the start of business today. Then we expect a wait until the Fed speaks pullback or pause. Then we expect????????.

We used the sell off to add Charles Schwab to all accounts at $13.80 per share. And we are very happy to be 70% plus in cash and short term bonds. The modern stock markets have not gone down three years in a row. Yet.


29 January 2002

Yesterday was another boring day in the markets with the stock averages and indexes up a bit and bonds a tad weaker. The Fed begins a two day meeting this morning and President Bush gives his State of the Union Address tonight. We don't expect much market action today.

Ford Motor offered $5 billion of convertible preferred late last week. Morgan Stanley was one of the lead underwriters. Wonder of wonders, yesterday Morgan Stanley upped Ford to overweight from market weight.

Global Crossing filed bankruptcy yesterday. GX was one of the new breed of telecom companies that were going to change the world. One of the companies Global Crossing purchased to realize this dream was Frontier Corp. We owned Frontier Corp. before the takeover but sold it when we thought it was fully priced. Global Crossing then came along and paid twice the price per share at which we sold. We remember kicking ourselves for not obtaining the higher price, but we also remember wondering how the price paid could be justified. We do feel sorry for the folks who owned a nice dividend paying telephone stock. Now they have nothing. The analysts who loved the deal still have their jobs.

Yesterday we were talking with a client about Worldcom. He owned a chunk of stock that he transferred to us when we took over management of his account. Since we knew he had a big loss in the stock we wanted to run our decision to sell by him. We ourselves remember Doc Smith, a client of the "old stockbroker" back in the 1960s when tax rates were up at 90% on short term gains, who used to refer to losses on the sale of stock as wonderful losses. Doc Smith didn't really like taking losses, but he did realize the value of losses to offset gains. In our conversation with our client we said we wanted to sell because Worldcom has a lot of debt. The only reason to own WCOM is to hope for a takeover and we don't buy stocks for takeovers. Moreover, we don't like the fact that WCOM loaned its CEO millions of dollars, so that he could meet margin calls on Worldcom stock that he had pledged as collateral. We don't consider that a proper use of corporate funds. We wanted to place the funds in AT&T Wireless. AWE is selling for $12 per share down from $30 per share in the same period of time that Worldcom has dropped the same amount. We suggested that switching would lock in a "wonderful" tax loss and place the proceeds in a stock that we think has better potential. The client agreed and the switch was made.

We don't make investment decisions based on tax consequences. We like to pay taxes, because that means we are realizing gains. And if a stock is not meeting our expectations, we don't hold it because we have a loss in it. We sell and move on with our investment life, and realize a "wonderful" loss in the process. Nontaxable retirement accounts allow us to make pure buy/sell decisions based on investment prospects. It is true that losses have no value in retirement accounts, but it is also true that profits are not taxable.


27-28 January 2002

We finished the week with the Model Portfolio is up less than 1% for the year and the DJIA down 2%, the S&P500 down 1% and the NASDAQ down 1%. We don't have any feel for this market and so we have reduced the portfolio to four stocks.

AT&T Wireless has a book value of $9 per share and debt equals cash of $2 per share. We are waiting for earnings this week to add to positions we currently hold. Wireless telephones are here to stay, and AWE is the third largest in the USA. The share price is one third of what is was a year ago. At current prices the company is priced at two times revenues and we think that is a fair valuation. We own this stock for the long term but we want to build a large position in accounts so we can trade part of our holding on any outsized jump in the share price.

We own SBC and Schering Plough in larger accounts and some of our more aggressive small accounts. We also have been adding Charles Schwab to accounts. The stock is selling at one third of its two year high and we expect it to participate in any market rise.

The Fed meets on Tuesday and both the bond and stock markets expect no action. If the financial effects of the Enron mess are affecting more banks than just JP Morgan Chase, we think there might be one more rate cut. In 1990-91 Greenspan rescued the banks from bad loans by driving interest rates down, and we think he has lowered rates an extra 1% for the same reason this time.


26 January 2002

The blue chips rallied and tech stocks weakened on Friday. The short end of the Treasury note market continued Thursday's selloff. The Wall Street Journal had a front page story on an additional potential $1 billion exposure by JP Morgan Chase to the Enron bankruptcy. We chose to sell our entire position in JPM because, coupled with the apparent suicide of the former Enron executive that was announced on Friday, we decided that JPM's exposure to the Enron media scandal machine has made downside risk greater than the upside trading potential. We will post the Model Portfolio as of Friday's close and further comments later today.


25 January 2002

Chairman Greenspan spoke and the stock markets rose and the bond markets sank. From this action the markets are predicting an end to the Feds lowering of interest rates and are also predicting the resumption of economic growth. Of course now the over riding questions are when will economic growth resume, and when will the Fed begin to raise interest rates? Our answer to both questions is not soon.

Greenspan also indicated that he didn't think a stimulus package was needed at this time. He thus avoided having to respond to questions about the currently proposed stimulus package. Greenspan also said that a short duration stimulus package was not needed. He's wrong, but then he has a job and a secure retirement with wonderful health benefits.

We were amused to read comments by Secretary of the Army Thomas White, and a press release by Texas Senator Phil Gramm. Both men were commenting on their relationship to Enron. Their sad tales follow.

Secretary White reportedly told folks that when he joined the US Government in June he was forced to sell his Enron stock over the next six months and was able to realize only $12 million. The AP reported that, "White who is the highest-ranking Bush administration official to come from Enron Corp., has told colleagues in the administration that he suffered "significant personal losses" as he sold his Enron stock to comply with his government ethics agreement." To better understand Mr. White's plight it is important to note that Mr. White's salary at Enron when he left was $5.5 million per year. White also received a $1 million severance payment when he left Enron and $13 million in payment for stock appreciation rights. White also owns a condo in Aspen worth over $5 million, a condo in Naples Florida worth over $5 million and a waterfront property in Georgetown worth over $5 million.

Senator Phil Gramm of Texas told reporters that he and his wife Wendy Gramm lost over $600 thousand in the collapse of Enron. Wendy Gramm, a Ph.D. in economics as is her husband, is the former head of the Commodity Futures Trading Commission which is the government organization that regulates commodity trading in the US. Ms Gramm is also a director of Enron and sat on Enron's audit committee. As a member of Enron's board Ms Gramm received stock in payment for services for a number of years. In 1998 she told Enron that she no longer thought it proper to receive stock since there was a potential conflict of interest with Senator Gramm's position in the senate sponsoring energy legislation. She sold all the Enron stock that she had received to that point and realized a $276,912 profit. After that, she received deferred compensation, which was lost, when Enron filed Bankruptcy.

Since Senator Gramm's press statements the media has been reporting and the headline has been:
                  Senator Gramm and wife lost over $600,000 in Enron collapse

We think the headline should read:
                  Senator Gramm and wife only made $276,000 before Enron collapsed

The headline for Secretary White could be:
                  Army Secretary White only made $50 million before Enron collapsed.

In order to remain bipartisan we would remind folks that Pious Joe Leiberman was happy to receive $2000 from Enron until Enron filed bankruptcy and Joe espied political gain. We think he is turning the donation over to the Enron Employees fund, which should pay for about two seconds of health insurance premiums for the thousands of Enron employees thrown out of work by the bankruptcy.


24 January 2002

The mini rally came right on schedule yesterday with the DJIA and S&P inching higher and the NASDAQ rising 2%. Chairman Greenspan testifies before Congress today and his Greenspeak is what the bond and stock markets will attempt to decipher, and react to.

We used the rise to eliminate Sun Micro at $11.08 for an overall $1.50 per share loss in most accounts. Ouch! We didn't sell SUNW when we were taking our profits in all the other techs. Why we thought SUNW would act differently from Oracle, Cisco, et al. is now a mystery to us. The markets are a tough taskmaster. We decided to sell SUNW while shaving yesterday morning. Yes, we even think about the markets while shaving. Someday we will "get a life," but till then we are doomed or blessed, depending on how our accounts are performing, to spend most of our waking hours thinking about our clients' investments. Upon reflection, we decided that with revenues of $15 billion down from $20 billion, that in a negative market environment a fair price for SUN would be about $20 billion. That works out to a price of $5 per share. So we sold.

Short interest on the NYSE fell in January. That is a bearish indicator. Short interest is the amount of shares sold short by folks who don't own the stock and are betting that the share price of the shorted stock will fall so they can buy it back at a lower price and thus make a profit. Shares sold short are considered to represent future buying support. So when the amount of shares sold short drops, buying support is theoretically removed from the markets.

The number of bearish advisors is also at a three year low which is also a bearish indicator. That's because if most folks are bullish or neutral then they have probably committed their investment funds to the markets. And so buying support has been spent.

We are bearish because we don't think the stimulus package in its present form will stimulate the economy. We do think that Greenspan will try one more rate cut at the end of this month for good luck. We have thought and said for the last twelve months that the rate cuts alone will not do the job of stimulating the economy to sustainable recovery. Most investors and gurus are hoping the economy recovers. The economy will not recover without a real stimulus package. The longer the folks in Washington dither and deny the need for a real stimulus package, the feebler any recovery will be.

One final comment. We are worried about the economic turmoil in Argentina, the near war situation in India/Pakistan, the increasing hostility in Israel/Palestine, and the blackouts in Brazil. The world is a much smaller sphere than it was a few short years ago, and we think we are more connected to these events than the markets seem to reflect. The markets don't owe us a nice retirement nest egg. And hoping for good returns this year is not the same as realizing them.


23 January 2002

It does no good to wish the stock markets higher. It also is a waste of time to wish we hadn't bought a stock. Even so, we wish we hadn't bought AOL Time Warner. Yesterday we sold AOL when it broke support and took a $5 per share loss on the stock we bought several weeks ago and a $1 per share loss on the stock we bought last Friday. Why sell a stock we just bought? We sold because AOL broke support. When we bought the stock on Friday we didn't know AOL was thinking about buying Red Hat. And we also thought the markets would hold on Tuesday (yesterday), and rally later in the week. The markets still may rally, but we will rally without AOL. Over the past four years we have learned to take our lumps immediately upon a change in our perception of a stock. That discipline has allowed us to survive and prosper over the last three years.

The markets couldn't rally on Tuesday because of K Mart's filing for chapter 11 bankruptcy. Coupled with the Enron brouhaha and the uncertainty surrounding Tyco's accounting and now proposed breakup, the markets had too much heavy lifting. We continue to expect a rally this week but we now think it will be feeble and won't last. Actually, the rally in the overnight overseas markets before Tuesday's open may have been the rally.

We added Sun Micro to accounts at $10.85, and also SBC at $35.35. One way we know we are comfortable with holding a security, is when we are eager to see it trade lower so we can buy more. We think we feel that way about the remaining stocks we hold. We are especially eager to add more AT&T Wireless to accounts. AWE is selling at two times revenues, with a book value of $9 plus and over $2 a share in cash. In fact, cash almost equals long term debt.


21-22 January 2002

Remember folks, Monday is a holiday. We have no idea what the stock markets are going to do this week but our guess is that there will be at least a feeble rally lasting a few days. That occurrence will really muddy the waters as most folks won't know whether to jump on or off. With the Model Portfolio at 70% cash and most large accounts around that cash per cent and smaller accounts over 50% cash, we don't really have to make any near term decisions. After we finish earnings season in mid February we expect forward-looking investors to create upside buy pressure. That's because we are in an election year and the Republicans are going to want to at least be predicting economic recovery, with numbers to support their case. And that should help the market rally into second quarter earnings and third quarter forecasts, which will set the tone for this summer's market action. The first big indicator of future action will be how the stock and bond markets react to Federal Reserve action or inaction at the January 29 meeting. Till then we don't expect much.

We have repositioned the Model Portfolio since year end. We broke even on the trades because as we said last week we owned too many issues, and couldn't act fast enough on all of them in an orderly manner. And unfortunately one of them was Rite Aid. We don't know if Rite Aid deserved to drop 50% in value in two days but it did. Since the K Mart filing bankruptcy story is going to be around for a while, we think RAD is dead in the water, as are most highly leveraged stocks.

Whatever! We are repositioned and happy with the diversity and smaller number of stocks we own. All are near the bottom of their recent trading ranges and since we don't see any real collapse risk for the overall markets till after March earnings, we are comfortable holding them all for 20% or more upside moves.

AOL Time Warner is the diciest of our holdings. We say that because AOL has a ton of debt and analysts have turned sour on the stock. It is trading at $29-$30 which has been support over the past six months. Any serious break below this level would cause us to take our lumps. Over this weekend there have been reports that AOL is negotiating to buy Red Hat, the premier linux (a computer operating system that competes with Microsoft) company. Unfortunately Red Hat still has a market cap of over a billion dollars, which means that AOL is going to be perceived as paying too much to get into competition with Microsoft. We are neutral on such an acquisition. We just don't like paying $2 billion plus for $150 million in sales and pennies in earnings. But since, neither AOL, or Time Warner has ever earned a dime if special write-offs that occur every quarter are included, we aren't too worried about the effect on earnings. And who knows, maybe a few analysts will think this is a bold step forward. We own the stock for a trade. It is an anchovy.

Anchovies are for trading

Several new readers have asked us to explain the "anchovy" term when we use it to refer to stocks we own. Our late partner Don Yarling coined the term to refer to stocks we own for trading rather than for keeping. He told the story of a quartermaster in the army in Italy in World War II who used to order all the anchovies he could. He knew he could sell them to the local population for a nice mark up and replace them with other anchovies from other army units at a lower price since none of the soldiers wanted to eat them. Well, one day the officer in charge was taking inventory of the food the military unit had on hand. When he came to anchovies he saw that the unit had 100 cases even though he knew that anchovies were never served in the mess hall. And so he asked the quartermaster why the company was keeping so many anchovies on hand when they would never be consumed. The quartermaster replied that anchovies aren't for keeping. Anchovies are for trading.

We like AT&T Wireless as a long-term investment. Wireless phones are here to stay. Wall Street overpriced these issues last year and now is in the process of readjusting the valuations. We have initiated positions at 60% below where AWE was first priced and will add to the position if AWE moves lower. We also won't hesitate to take profits if the stock runs higher in any general market mania to the upside, since our long-term outlook remains bearish.

JP Morgan Chase has lousy loans to Enron, and Argentina, as well as trading losses. It has been poorly run for a while. We own it for a trade and this is the third time in the last three months we have purchased it. We made money on the last two trades and expect to on this one.

SBC Communications is one the remaining Regional Bell Operating Companies (RBOC). SBC is at the lower end of its two year trading range and we have done well trading the stock. It offers the security of size and if the markets head down it usually is mentioned as a defensive play because of its consistent revenue stream.

Schering Plough is on its two year low because its' biggest drug Claritin is going off patent and because the FDA is going to render a huge fine for bad manufacturing practices. We have been trading it over the past year and made money.

Charles Schwab had a loss this last quarter for the first time ever. SCH has billions in assets under its control. Stock is cheap and we have been trading it profitably.

We own Sun Microsystems because we want to own one overpriced tech stock for trading purposes. We think SUNW is one of the least overpriced. And we trust Scott McNealy the CEO and major shareholder. SUNW reported earnings on Friday and gave decent forward-looking hope.

Next post Tuesday evening unless conditions warrant.


19-20 January 2002

The stock markets closed lower on Friday when investors decided to dislike IBM and Microsoft earnings and projections. That makes almost ten down days in a row and so we don't think we are going out on a limb predicting some kind of one or two day rally next week. Treasury bonds were down on Thursday and early Friday morning before rallying into the early close. We managed to buy ten million dollars principal of the when issued two-year Treasury note being priced on Tuesday. We purchased the note on a 3% yield and hopefully the note will be priced with a 3% coupon. We have been adding Charles Schwab and JP Morgan Chase and Sun Micro to accounts over the past two days. We also tried to day trade IBM in our large trading accounts on Friday when it opened down six points but wound up losing 50 cents per share.

The Model Portfolio as of January 19 will be posted on the site today. As we said several days ago we are concentrating on tradable large cap stocks that are near the bottoms of their recent trading ranges. We continue to dislike the longer term picture but do think there are some trading opportunities that don't entail too much short term downside risk. The Model is 71% cash and we plan on staying near this level. The Model is up 1% for the year while the DJIA and S&P 500 are both down about 2%

We are buying two year Treasury notes yielding 3% because we believe short and long term rates will be moving higher over the next year as a result of the looming and ever rising budget shortfalls. Cash money currently is being paid less than one and one half per cent. So buying the two year will double our yield. Assuming short interest rates rise to 3% later this year we will then have a one year bond yielding 3%. Our risk to capital is thus negligible and we should average at least 1% or fifty percent more than sitting on cash. By buying five year Treasuries we would receive a 4% return but a one percent point or more move higher in yield to the 5% level over the next year would result in a loss of principal of over 2%. That's not acceptable risk/reward since higher rates are assured as US budget deficits are going to be larger than forecast by a factor of two or three. The only way rates won't rise is if we remain mired in recession. And if that is the case then having a large cash position seems prudent.


18 January 2002

The stock markets rallied yesterday on positive news from the Philadelphia Federal Reserve Bank and because even dead cats bounce. Long Treasuries dropped a point on that same Fed news. Today is options expiration day and Monday all markets will be closed for the Martin Luther King Holiday. With Microsoft and IBM earnings behind us most of the big caps have reported. So maybe next week we'll get the mini rally we expect. February will bring retailers earnings. But the retailers have been trading in their own world so any damage or celebration will be to the individual stock's share price.

Speaking of retailers, it is interesting to watch the financial media destroy K Mart. CNBC has a story every day on K Mart financing and speculation on bankruptcy. We don't know or own the stock but the "Gary Condit" media mayhem that the financial media has adopted does a disservice to investors and the public. On this same point, we were telling clients and friends last February that Enron was an accident waiting to happen. So we weren't surprised by the collapse and we still expect to learn more about how they colluded with other companies to overcharge California electric users and national natural gas consumers. But, enough already, with the all Enron every hour.

We read on the newswires today that 39 year old Monroe Trout was retiring and turning over the reins of Trout Trading Company to his well seasoned 32 year old CEO. Monroe is leaving his three billion dollar hedge fund to spend more time with his family. His hedge fund has averaged a 21.5% return for the fourteen years he has managed it and had a return of 13.6% last year. We have always questioned hedge fund returns because so much leverage is involved. Heck, last year we earned 21% with no leverage. Most hedge funds operate with leverage of 3 to 1 or more. That's a lot of risk for returns that are only twice as good by the best of the hedge funds over time to plain vanilla no leverage stock investing like we do.

We mention hedge funds because we just finished reading Roger Lowenstein's book-When Genius Failed-, which is well worth the money. The book tells the story of the rise and downfall of Long Term Capital Management, which was the super large hedge fund that almost caused a meltdown in the financial markets in October 1998. The fascinating part of the story is that the mediocrity of many of the leaders who make the money decisions at most banks and brokers is exposed. The book also reinforces our belief that there is a lot more risk in the marketplace these days than twenty years ago because there are so many young guns with limited experience running huge amounts of money.


17 January 2002

Yesterday was the kind of day we wished we had only cash. The stock markets tanked and made it seven out of eight days down. And the day before yesterday was up, but just barely. All the bulls have quickly flown south. Don't know which airline they are using but with the losses the airlines are reporting most of the bulls must be using their frequent flyer miles before the airlines go broke.

We are amazed at how quickly gloom and doom has returned. Most gurus we hear are short term bearish and longer term bullish. We are the opposite. Well, not really short term bullish but we do expect a bounce from this eight day selloff.

Last week we sold J. P. Morgan Chase and Charles Schwab ahead of this weeks earnings reports from both companies. Wish we had done the same with Sun Micro. Anyway, today we repurchased JPM at $36.90 (sold at $39.50) and also bought back SCH at $15.09 (sold at $16.85) We also purchased SBC at $37.70 per share in accounts that didn't own it. That gets us to 20% to 25% invested in our larger accounts in big cap stocks, which is the level we want to be. We don't mind holding or adding to the issues we now hold:
     AOL Time Warner
     AT&T Wireless
     JP Morgan Chase
     SBC
     Schering Plough
     Schwab (Charles)
     Sun Microsystems

We will have to live through SUNW's earnings report on Friday. The stock has dropped from $14 to $12 so we think the bad news is in the price. But if the market is in a funk on Friday we would expect further selloff. Heck, all are stocks we own will continue dropping if the market does. But with 75% to 80% cash we will ride it out. There is going to be at least a retracement rally sometime in the next week. We hope.


16 January 2002

The stock and bond markets both gained yesterday. For the stock markets the slight gain reversed six down days in a row. Today's stock market action will be determined by how investors interpret the earnings news from Intel. We sold most of our position in Barnesandnoble.com at $1.60 per share. We had a small loss on the sale but the stock was up 100% from the low it made last month. We want to concentrate on big cap stocks now that the year end bounce period is over. We added Schering Plough to accounts that don't have it, and we may add SBC to accounts that don't own it over the next few days. We have a very comfortable cash position but we want to have a few dollars in the stock market in big cap stocks. Our 5% first week of the new year gain has evaporated. We had too many issues for an orderly liquidation to capture the gain. Trade and learn.


15 January 2002

The markets continued to lose ground on Monday. The only positive note for the bulls was that volume was light. We sold Oracle at $16.51 in all accounts for a $2 gain, except in those few accounts where we have been actively trading it. In those we lost 40 cents per share. We also eliminated our trading position in Texas Instruments for a 30 cents loss and our Motorola trading position for a 75 cents loss. The markets continue to act lousy and we continue to close positions and raise cash. Yesterday was the two year anniversary of the all time high in the DJIA at 11723. That reminder is courtesy of www.thestreet.com. Time flies when you're having fun.


14 January 2002

This week will be interesting because it will probably set the tone for the rest of this quarterís earnings season. Last week we raised more cash because we didnít like the stock marketís action. We sold both winners and losers with the idea of holding a few stocks that would not cause sleepless nights, but which still were volatile enough to participate in any market rally. We have been reacting, not predicting, for the past few years and will continue to do so. Thus, we wouldnít be surprised by a rally into March even though we donít expect one. We remain unimpressed by the potential for economic recovery any time soon.

When the markets failed to maintain the rally, we eliminated stocks with large debt outstanding, that we bought at yearend for trading. If companies are having trouble maintaining margins when rates are at 2%, we donít want to be holding these companies when rates move higher later this year. Rates will move higher as the economy fails to respond to the tepid attempts currently called stimulus by the Bush Administration and Congress. Eventually the folks in Washington will realize that only some serious deficit spending is going to get the economy moving ahead. Such stimulus should be in the form of FICA tax cuts applied equally to corporations and individuals. Such a move would benefit all wage earners and also corporations, with the corporations with the most employees receiving the largest tax benefit. At the same time block grants to all states to help make up for state tax receipt shortfalls should also be initiated. The beauty of these two suggestions is that precise amounts of money can be allocated with the assurance that the dollars will be spent.

The eventual adoption of a fiscal stimulus package coupled with the sure drop off in federal tax receipts means that budget deficits are coming back in a big way. And budget deficits will lead to higher interest rates and lower bond prices. For that reason we will not go longer than two years in our purchases of US Treasury notes because of the risk to principal involved. Clients should resist the temptation to buy intermediate or long tem bonds or bond funds. A 1% rise in interest rates would cause a 5% to 10% loss of principal. Interest rates are at a forty year low and that means bond prices are at a forty year high. Caveat emptor.

We are holding AOL:Time Warner for a trade. It is a large cap stock and the share price of AOL has found good support over the past five months at $30 per share. AOL should participate in any move higher by the overall market. AT&T Wireless moved up nicely at year- end but has given back those gains in the first two weeks of the year. AWE is the third largest wireless provider. Barnesandnoble.com has the perfect dot.com business model. We own as a speculation. Burlington Resources has large oil/natural gas reserves in North America. We will add to more accounts around $30 per share. We own Oracle as a software trade and Sun Micro as a computer hardware trade. Wall Street has been warming to large software companies in the past two weeks. And since Compaq announced better than expected sales results last week we are hoping that SUNW does the same on January 18. SBC and Schering Plough are two large cap stocks that we have been trading with success for the last year. We plan to continue doing so.


12-13 January 2002

Fridayís market acted punk for most of the day. Couldnít get a head of steam. Fordís announcement of 35000 job cuts was a bummer for the markets and more importantly the folks who are going to lose their jobs. Inflation numbers show none, while weekly wages are supposedly rising. The bond markets began showing strength in mid afternoon right before Greenspan spoke. When he did deliver his non-speak the stock markets took it as a sign to tumble while bonds began to rumble higher. We think both markets wanted any reason to do what they did, and Greeenspeak gave them the opportunity. Stocks had been acting poorly all week and the bond market was due for a bounce. Interest rate mavens are now looking for another 25 basis point cut at the end of January.

Because our style of trading is to react not predict we used the day to sell some winners and a big loser. Since the market has not maintained its year-end bounce like we thought it would we decided to reduce our stock holdings and raise cash. The last four months have been frustrating because we havenít been comfortable holding stocks for any length of time and our trading strategy has been hectic and non-remunerative. We have earned a bit, but the psychic work has been tiring.

On Friday we sold our remaining Cisco at $20.17 for a $1 to $2 profit. We also sold Schwab including the stock we bought this week at $16.84 for a $1 to $2 profit. We sold our Rite Aid position at $3.04 for a $2 loss. This last sale was painful because the stock seems cheap. And RAD had popped to over $5 last week giving us hope and a slight profit. The main reason for selling Rite Aid was that upon digesting their financials released on Thursday, we came to the conclusion that the recovery in RADís financial condition has backtracked and is actually deteriorating. Coupled with the bankruptcy rumors swirling around K Mart, we donít want to own a highly leveraged stock at a time when we are non-believers in an economic recovery just around the corner. We bought Rite Aid for a pop after yearend and instead we got a drop. Itís always easy to take profits and very hard to take losses. But our discipline says the stock didnít give us the year end trade we expected so get out.

Another lesson we take from our yearend trading to be applied to next year is that we were lucky with Palm, even with Lucent and lost on Rite Aid. Next year we are going to avoid the big debt or no business cheap stocks. They cause a lot of anguish with lousy odds for reward.

For the year The Model Portfolio is now up 2%, but many less aggressive accounts are flat for the year. Hate giving back gains but that is the nature of the current market. For the record, the DJIA and the S&P 500 are flat for the year and the NASDAQ is up 4%.

The Winter 2002 issue of The Lemley Letter is posted. Also a new poem has been posted.


11 January 2002

The markets meandered on Thursday with no discernible trend. There seems to be an underlying tone of "pullback" in the trading tape though. Rite Aid announce a larger loss than expected and dropped $1 per share. Ugh! Well, the good news is that it can only go down $3 more since it closed at $3 per share. Volume in RAD was heavy with over fifty-million shares changing hands. We are standing pat for now. We sold our Lucent position in most accounts because we decided we only wanted one problem stock with a lot of debt in our portfolio. We broke even in many accounts to losing up to $1 per share. We also Reduced our position in Cisco in many accounts, realizing a $1 to $2 profit per share. In many accounts we had an outsized position (over 10%) and we wanted our Cisco holdings down to a more reasonable size. We repurchased the Sun Micro position we sold last week. We paid 30 cents more per share. We now have 5% or under positions in the big three of Cisco, Oracle and Sun Micro in our larger accounts. We reestablished our trading position in Texas Instruments at $27.85, and we added Schwab to accounts at $16.81 where we had sold JPM earlier in the week.

Gap has been a source of consternation and while we don't own GPS now we always follow the stock. GPS rose $1.50 today when they announced the expectation of a lower loss for the fourth quarter. Faithful readers will remember that we slammed an analyst named Stacey Pak from Prudential when she placed a sell on the stock in late November. We then retracted that slam and apologized in early December when GPS reported horrendous numbers. Well, today we would like to unretract our retraction and reinstate our slam. The following e-mail to Jim Cramer of "thestreet.com" explains our change of heart.

Hi Jim,
In early December I wrote to you and apologized for an e-mail I had sent to you in late November denigrating Stacey Pak's sell recommendation on Gap on 11/28. I had felt that Gap was in the process of turning but when I saw the December same store sales numbers I hit the exit button too. Lost a couple of points but was able to concentrate on more profitable trades at year's end. I must admit I missed Stacy's change from sell to hold on December 21. But in my understanding of Wall Street language, hold is not buy. By the way, Gap was at $13 and change both days. I also went back and saw that on February 9, 2001, Stacey or at least Prudential went from accumulate to strong buy on Gap. The stock opened at $31.50 that day and closed at $27 so I don't know what price to assign to that recommendation except that it was higher than when Prudential went to a hold on August 17 , 2001, when Gap closed at $21. Since Stacey made such a big deal of placing a sell on the stock on 11/28 and was all over CNBC saying "sell," I presume she meant hold in August. But then if that hold in August meant sell how do we know that the hold in December meant buy and not sell. My guesses on Gap haven't been that wrong. Come on Jim, you have been very good on the stock and because it jumped 2 points today is not a reason to back off. Gap has a lot of work to do. I've made a ton of money on Gap over the years but I agree there are better places for money right now. And I don't think a buy $31 then sell at $13 merits kudos.


10 January 2002

We did some more selling yesterday in our trading accounts as the markets failed to hold their morning gains and closed lower on the day. In the trading accounts, we sold HWP for a $2.50 per share gain, TXN for a $1.25 per share gain, RNWK for a $1.60 per share gain and WFC for a 25 cents per share loss. We also sold ORCL in our very aggressive trading accounts for a $2.50 per share gain to offset the $1.75 per share day trading loss in Imclone Systems we took in those same accounts. We made a $1 per share gain in those accounts yesterday in IMCL but we pushed our luck today, and lost. We violated rule number one: don't be a pig. Yesterday's selloff took some wind out of the bullish camp's sails and now those folks are saying a correction will be healthy. We know it will be less worrisome for us, because we have raised a lot of cash. Also, Cisco and Oracle and Sun Micro, the three tech stocks we still own in many accounts, have been acting well when the markets rally and holding their own in the sell off. The sell off in Rite Aid the past few days is because earnings come today and because we think the folks who bought millions of shares of stock at year end under $4 per share marked the price per share up at year end. Lucent is acting well. AT&T Wireless sold off on a Merrill Lynch downgrade of wireless stocks. Under $10 per share we will buy more.Family picture posted for those interested.


9 January 2002

DJIA down, NASDAQ up yesterday. Still no trend. AOL says it will write of $60 billion and Wall Street yawns. Well, it's only funny money anyway. We are holding our position. When a stock doesn't move lower on bad news it usually means all the committed sellers are out of it. We are looking at Eastman Kodak again for trading accounts. Didn't do anything yesterday since we were traveling. Hope to get a better feel for the near term trend soon.


8 January 2002

Off to Madison today to get the car fixed and pick up Katie as she returns from a short week in Florida with our daughters and grandchildren. The stock markets sold off yesterday as most folks returned to work from the holidays. We took the opportunity to sell J P Morgan Chase at $39.50, for a nice $3 gain. We also bought a bit more Charles Schwab at $17.25 in some accounts that sold JPM. We have raised our cash levels so we are content to give the rest of our stocks some time to work.


7 January 2002

Last Friday a friend called and asked us to speak to one of his clients who was retiring. His client had created a portfolio of growth mutual funds and preferred stocks yielding 7% and felt that the portfolio he had created would serve him well for he next twenty-five years. These calls are always difficult because folks who have spent a lot of time and thought preparing for retirement are in the mood to have their plan confirmed, not questioned.

On the other hand, since we are not involved emotionally or financially we can give an objective opinion The retiree we were talking with expects a return of 6% a year from his investment and has enough capital to generate $ 90,000 per year at that rate.

Our first question was what the rate of return was for 2001. He told us it was a negative 6%, but that for the preceding four years it had been over 10% annualized. Our response was that the preceding four years during the dot.com/tech boom were the most vibrant and rewarding investing years in our thirty-five years in the business. Even our staid old stock trading and large cash position and not kept us form realizing excellent returns.

Since the retiree had not taken any disbursements in 2001 his capital had only dropped 6% and he saw no reason to worry. We suggested that if he had been retired and in 2001 had taken the 6% he was planning, his capital would be down 12%. He agreed but opined that 2001 was an unusual year and the second down year in a row. We agreed that two down years in succession had not occurred since 1974-75 so one wouldnít expect a third.

But we felt compelled to point out that his investments this year, assuming he had drawn money in 2001 would have to grow by 18% to get his principal back to where it was at year-end 2000. (6% down in 2001 plus two 6% withdrawals in 2001 and 2002). We have always assumed an 8% withdrawal over time for retirees whose funds we manage, but we have never locked our investments into preferred stocks to obtain that return. And we certainly donít rule out another down year in the near future,

Our reason for disliking preferred stocks goes back to the interest rate rise in the early 1980s when short term rates went to 20% and preferred stocks dropped in value by 50% to 75% depending on the quality of the issuing corporation. And that drop occurred even though at that time there was a built in demand for preferred stocks by corporations with excess cash who could avoid 85% tax on preferred stock dividends. That exemption no longer exists for most preferred and with it the demand by corporations is gone.

With Treasury bonds, even long term Treasury bonds, an investor can be assured that he/she will eventually get the invested principal back at maturity. We prefer Treasury bonds because we donít have to worry about the credit quality of the issuing corporation or country.

With preferred stocks there is no maturity and so no guarantee of eventual return of principal. In attractive interest rate environments like now, this worry about return of principal may seem overdone. But remember our retiree plans on holding these stocks for twenty-five years. Just think of the market turmoil that has occurred over the last twenty-five years.

Interest rates are currently at forty-year lows, which mean that prices are at all times highs. It is no coincidence that preferred stocks are currently being marketed to individual investors. Wall Street has a way of giving the investor just what she/he doesnít need. Wall Street profits form individual investors depends on the naivete of folks who need yield to live on but are not asking the right questions. The question to ask is: If preferred stocks yielding 7% are so great why are banks selling their own newly issued preferred stock to me? Why arenít they going to the Fed and borrowing money at 1.75% and using that money to buy the 7% preferred stock of other companies and banks and locking in a risk free 5% return? The answer is that these stocks are not risk free. As long as interest rates stay low, the preferred stocks being sold today will not drop in value. The odds on their increasing in value are minimal since interest rates are as low as they can go without a Japan style economy. If that happens our retireeís growth stock mutual funds are going to continue to lose value to a greater degree than the yield from the preferred stock can replace.

Our answer to the retireeís question is that there is no way to lock in a strategy for the next twenty-five years. Investing has become hard work and investments need constant reevaluation. And preferred stocks are Wall Streets latest fad/rip off of the ordinary investor. Preferred stocks yielding 7% when two-year Treasuries yield 3% tell you there is risk in the preferred stocks. Our suggestion was to sit on cash for a while or to place part of the funds in the two-year Treasuries at 3% and wait for interest rates to get back to the 5% level on the two year over the next few years. We expect yields to rise as the budget deficits balloon, and the worry of the disappearance of the Treasury Bond Market for lack of new bond sales becomes a fond memory of those crazy Clinton years, when the FBI spent its time looking for unmentionables in the Oval Office rather than terrorists in caves in Afghanistan.


5-6 January 2002

We did a bunch more selling yesterday of year end purchases that had gained 15% to 30%. For nice short term profits we sold Ciena at $16.30, Tellabs at $17.05, and Palm at $4.35. We also sold Broadwing at $10.02 for a loss in most accounts and reduced our Lucent position in accounts to a level where we can wait for recovery if we don't continue to get the new year bounce. We sold the Broadwing, which is up 12% from year end, because we have been taking profits and our discipline is to sell a loser or two at the same time we are taking profits. That way we don't wind up with a portfolio of losers at year end. The telecom industry is in great flux and because we have had three years of outstanding performance we are taking a more cautious approach and bunting for singles rather than hitting away. We are aiming for a ten percent return in accounts this year and the move this week has most up 3% to 5% so we are off to a good start. As always we are loathe to give anything back. We've had fun and profit trading Tellabs and Ciena but since we are in a new year we will avoid them till next fall. Cisco gives us a bit more quality (in Wall Street eyes) as does Oracle. Both are ridiculously over priced, but we are trading anchovies now and so we want to own five star anchovies rather than three star ones.

This week in the Model Portfolio we sold Broadwing, Ciena, EMC, Palm, and Tellabs. We reduced our position in Lucent and Schering Plough. For the week the Model Portfolio was up 4.6%. The DJIA was up 2.3%, the S&P 500 was up 2.1% and the NASDAQ was up 5.6%. We are back to a more comfortable 54% cash position.

Reviewing the stocks we own: AOL Time Warner is out of favor now. We own for the January bounce and will not own by March. Wireless phones are here to stay and while AT&T Wireless is not considered the best of the wireless stocks, it has the least debt. It's a worry free way to participate. Barnes&Noble.com is a pure dot.com play and they have a simple business plan. BNBN sell books and discs. Burlington Resources has oil and natural gas reserves in North America. Down from $52, may get a pop on any Middle East war scare since it has a lot of North American reserves. Cisco , Oracle, and Sun Micro are our remaining year end tech plays. We own Hewlett Packard cause we like Carli, and because our late partner Don Yarling always liked it. But we own it for a trade this time. We switched Bristol Myers to J P Morgan Chase at year end and the switch has given us a ten percent gain so far. Looking for better news to keep us in the stock. Lucent is either a long term recovery situation or a sell at $10 per share in the next month. Everyone loves Walgeens and hates Rite Aid, and with good reason. But Rite Aid is entering its second year under new management and same store sales are rising. RAD has a ton of debt and isn't out of the woods but we like it as a speculation. If it runs to $7 we'll sell half or more.SBC is one of the four remaining RBOCs and we own it for a boring trade to the mid $40s. We have been trading Schering Plough for the last year. In the "shoulda coulda woulda market ," we shoulda sold SGP when it popped to $40 in December, and then we coulda bought it back now at $34. We woulda made a nice trade. Not. Charles Schwab has been acting well and "the street" has hopped on the buy Schwab wagon, so we'll be pigs and hold for more.

We received the following e-mail. Don't really think Harvard Business School wants credit, but since that's who it is ascribed to we credit them.

Harvard Business School just published a list of terms for their encyclopedia:

Momentum Investing:
the fine art of buying high and selling low.
Value Investing:
the art of buying low and selling lower.
Broker:
poorer than you were in 1999.
Standard & Poor:
your life in a nut shell.
Stock Analyst:
idiot who downgraded your stock.
Bull Market:
a random market movement causing an investor to mistake himself for a financial genius.
Market Correction:
the day after you invest all your money.
Profit:
religious guy who talks to God.
Bill Gates:
where God goes for a loan.

Happy weekend. Model Portfolio is posted as of 01/05/2002.
Past performance is no indication of future performance. Please click here for further disclaimers.


4 January 2002

Love the January effect. True to our discipline we sold EMC yesterday at $16.25. This is our third profitable trade in the stock in three months. We also sold Sun Micro at $13.35 in our aggressive accounts for a tiny profit. Many of our aggressive accounts are too heavily invested and so we want to keep raising cash as the market rises. We know we will leave some profits on the table. Schering Plough has been dropping and we may buy more since it has become a contra trend stock. By that we mean that when techs are dropping stocks like Schering Plough are rising as money seeks a less volatile haven. New poems posted for those interested.


3 January 2002

We have posted all the closed transactions (realized gains and losses) for the Model Portfolio for the year 2001 on the website. Click here to see them. All transactions in the Model Portfolio include charges for the same commissions we charge clients and also include deduction of a 1% management fee. For the three year period ended December 31, 2001, the Model outperformed the S&P 500 by 78%. Past performance is no indication of future performance. Please click here for further disclaimers.


3 January 2002

Yesterday was the kind of day that demonstrates the end of tax selling for losses and the beginning of tax selling for profits. Many of the stocks that crashed last year rose, while last years winners were sold and dropped in price on the first trading day of the new year. The stock markets closed higher as the Treasury bond market sold off. That action suggests a rally and that is what we expect. Since we are over invested we will be selling into the rally. We don't buy the everything is OK in 2002 scenario.

We sold 1000 shares of Schering Plough in the Model but not in other accounts. We don't want any stock to be 12% of our portfolio and when we didn't get an end of year bounce in SGP we sold back to a more normal position. We didn't sell any in other accounts. We also took trading profits in Macromedia at $19 for a $2 to $3 per share gain, and sold Conexant for a $1.38 per share profit. These were in our aggressive trading accounts for a few days over year end.

Hopefully today will continue the "lack of sellers in depressed stock new year" rally.


2 January 2002

After some readjustments today, the stock markets should begin to reflect economic thinking minus the tax implications of year end. We are neutral on the markets but expect the stocks we purchased to edge higher over the next month since selling pressure for tax reasons will have abated. Of course, bad quarterly news will hurt, but our guess is current prices give or take 5% already reflect negative news. Since this still is a vacation week trading should be subdued, as will we.


1 January 2002

We've listed The Model Portfolio as of 12/31/2001 on the site. For the year the Model was up 21% while other benchmarks were: S&P 500 (13.04%), DJIA (7.10%), NASDAQ (21.05%), NASDAQ 100 (32.65%), and Wilshire 5000 (12.06%). For the three and five year periods ending 12/31/2001 our Model portfolio has substantially outperformed the S&P 500 and many mutual funds.

Five Year Comparison          
          On 12/31/96 The Model Portfolio had a value of $200,666.
          On 12/31/01 The Model Portfolio was valued at $429,804.
          If in S&P 500 for same time would value would be $327,378.
          That's a difference of $102,426. That's 50% on original amount.

Three Year Comparison          
          On 12/31/98 The Model Portfolio had a value of $245,951.
          On 12/31/01 The Model Portfolio had a value of $429,804.
          If in S&P 500 for same time period value would be $237,557.
          That's a difference of $192,247. That's a lot of money.

          Past Performance is no indication of future performance.
Please read futher disclaimers regarding performance on Model Portfolio page.

1 January 2002

We closed the year with the markets selling off. It was a fitting end to a dreadful year for many folks. On New Year's Eve we switched Bristol Myers to JP Morgan Chase and Oracle. We realized a small profit on the BMY which we sold when Imclone Systems announce a delay in approval of their supposedly blockbuster cancer drug. BMY recently purchased 20% of IMCL for one billion dollars. Such news may be a damper for a while on BMY, and both ORCL and JPM are also depressed with rebound possibilities. We know we own more tech stocks than normal. Normal is usually zero tech stocks. But we have to shop where the rebound potential exists and we don't plan to overstay any welcome.

Since today is football and family day we will add a post tomorrow during the day with our final yearly Model portfolio performance numbers.


December 2001 Thoughts

November 2001 Thoughts

October 2001 Thoughts
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.