We were in Chicago on over
the weekend to see clients but had to return
Saturday night because Katie’s father who was in a nursing home five miles from
our home in the country near Soldiers Grove died on Saturday night which was
also his 97th birthday. We had celebrated his birthday a few days earlier and
his passing was peaceful, basically he just went to sleep. He led a full and interesting
We received and email from a
client who asked us if we sometimes bought stocks because our clients wanted to
be in the markets even if we didn’t want to.
“We have reached the age and comfort level that we only buy when
we want to be in the market. We do not risk $80 million in client money, a good
chunk of which is our family money, or any portion thereof to keep a few clients
We just sent $1.2 million back to clients because we didn't think we were meeting
their needs. And we have stopped accepting new monies because we are too old
and too entrenched in our ways to train new clients in the manner in which we
trade the markets.
We were out of the markets for two weeks recently because we had to take time
to understand why we missed the trading top. The easy answer was that we didn't
sell on December 30. But the real answer which we realized last Thursday was that
in December we were trying to hit a home run by being fully invested instead of
hitting singles by not being more than 50% in stocks which limit we have
successfully used for the last six years. We were out at home plate after
trying to turn a double into an inside the park home run.
Once we realized that, we also realized we were over our
fascination with low priced stocks.
We purchased the stocks we did on Friday because we wanted
some exposure to the markets gong into to all the events of the next few days. With
the lousy market action of January we continue to expect some type of tradable
rebound. Our trading last summer did not work out even though we thought we
should be in the markets then. But we were in for singles and not home runs and
so we didn't get hurt that badly. As we suggested in a recent post a look at
the trading in the Model portfolio for 2004 at the bottom of the Model Portfolio
page is interesting. It shows quarter by quarter transactions and is a good
indication of how we did. Also notice that the companies we sold at a profit in
the last quarter of 2004 to buy the low priced speculative stocks for our home
run derby are the stocks to which we are returning at lower prices.
elections were less bloody than some expected. As a result the markets overseas
are higher and U.S.
futures indicate a higher opening. Of course as the last few weeks have shown
it is the closing hour that counts.
SBC is going to acquire AT&T
for $19 billion most of which will be stock. That should lead to some arbitrage
weakness in the share price of SBC as the hedgies sell it and buy AT&T for
the percentage difference. We will buy the weakness and add to accounts since
we think it is a good deal for both.
In another transaction Citigroup is going to sell its Traveler’s Insurance unit to Met Life. That sale is of note because Traveler’s is the company that Sandy
Weill bought and used as his acquisition vehicle that led to his finally buying
control of Citigroup. The Circle has
For this morning we would guess
up early and then a test and then your guess is as good as ours. So let the games begin.
29 January 2005 Daily Comment
Our first thought on the announcement
of the PG/ Gillette merger is how
nice for Warren Buffet who has owned Gillette for a number of years and our
second thought was how sad for the 5,000 folks who will lose their jobs so that
this deal can make some financial sense. PG sells at 21 times earnings and
Gillette is being acquired at 30 times earnings.
The first takes we hear are that
folks are saying that the deal will not be dilutive to earnings and the only
way that can occur is through attrition and even then we think it’s a stretch.
But there will be special charges every year that will be listed separate from
operating earnings and so that is one way the numbers can work out. Neither Gillette nor PG has been shy about using special charges to massage earnings and
Wall Street has been accommodative since Wall Street owns tons of the stocks of
As these mergers occur we will
continue to see the loss of good paying jobs that is turning the economy into shoppers
Yesterday we spent a little time
talking about buying the DIA and QQQQ and after hours on our daily walk we
realized that we had spent the day worrying about what price to buy either and
concentrating on short term minute by minute swings in the prices of each. And
then we remembered that that was the reason we have never purchased much of
either because owning index products tends to make us even shorter term oriented
that even we care to be.
Currently we are buying these
products for quick market exposure while we add individual stocks and any
substantial buying of these products will be saved for days when there is a
real collapse in the markets and we want to use index products to take
advantage of what we see as market as opposed to individual stocks buying
We are going to begin to add a few
big cap stocks that we have trade before. We have survived and recovered from
our consternation at surrendering the easy gains we made in December and we do
think the market glass may be half full at least for the next few months
because earnings have been OK and the advent of mergers ala the 1960s and 1980s
may get the speculative juices moving again.
Higher interest rates may also
move the folks who have been speculating in real estate these last five year to
come back to stocks.
On tap for
today as potential buys are JP Morgan, Schering
Plough, Bristol Myers and SBC. JPM is within two
points of the low of its 10 point range for the year and pays a 3.80% dividend.
SGP is also near its low and below where
we sold and it is going to be acquired not an acquirer when and if the
consolidation in drug stocks occurs. Management has had two years to clean the
place up for sale. SGP sells at a bit more than two times sales if cash
including the recently repatriated $9 billion is included. That is one third
less of where Merck and PFE are priced.
Bristol Myers may be either and
acquirer or acquired. It is larger than a bread box but smaller than the giants
in the industry. And as with the G/PG merger today size is no longer a
hindrance to acquisition in any industry.
Finally we are going to buy SBC for its 5.2% dividend yield. A
merger with AT&T will be good for it and we would hope that the AT&T name
would survive since it is one of the most recognizable and is synonymous with
In an interview in the NYT published
yesterday Bush said the following:
whether the United States will pull its forces out of Iraq if the government being elected Sunday
I would be surprised if that
were the case, because I've, you know, heard the voices of the people that
presumably will be in a position of responsibility after these elections,
although, you never know.
But it seems like to me, most of
the leadership there understands that there will be a need for coalition
troops, at least until Iraqis are able to fight. And that most of the people
there in Baghdad understand that
the Iraqis need not only more training and equipment, but also they need a
command structure - the spine of any military capacity. And they don't have
The prime minister has been -
you know, hasn't picked and filled all the slots necessary for there to be
command generals in place, division leaders in place. And so we've got some
work to do, and I think most Iraqis understand that. But this is a sovereign
whether the United States would then feel compelled to pull out if
asked to do so by the sovereign government:
Yeah, absolutely. This is a
sovereign government. They're on their feet. We anticipated that, by the way,
on the passing of sovereignty. And had the Allawi government said,
"out," we would have been required to leave.
On the other hand, again, I
think there's - obviously, it's very speculative. But I believe that most of
the leaders that are there understand that the coalition troops are very
important to helping them provide the stability necessary for people to gain
confidence in their government.
A fundamental question also that
I think a lot of Iraqis understand - and I do, too - is how do we make sure the
Iraqi citizens view U.S.
troops as helpers, not as occupiers. And to the extent that a coalition
presence is viewed as an occupying force, it enables the insurgents, the
radicals, to continue to impress people that the government really is not their
government, and that the government is complicit in having their country
I view that as reasonable. I
also view that as pretty hopeful that there's kind of a nationalistic sentiment
that says, "This is my country." I mean to me, that's a positive sign
that, you know, "We want to run our own affairs, we don't need to be
occupied to survive."
On the other hand, there is a
certain realism amongst the leadership - at least, the ones I've talked to -
that says, "Look, there's much more work to do before we're ready to move
out on our own."
that the odds are small but growing that Alllawi will ask for withdrawal or
at least enough withdrawal to make it seem like the U.S.
is ending involvement. That would push the stock markets and the bond markets
The risk of nothing occurring is already in
prices so the upside is less included in stock prices right now.
Finally our selling of all our positions was
occasioned by the fact that when the low priced stock rally failed we wanted to
eliminate those positions because we only held them for a trade; clear our head;
and then return to the large cap stocks that we are comfortable owning in a
confusing economy. And so we are returning to our old trading favorites that
have treated us well.
7:32am and 4th Quarter advance GDP was up
3.1% which is less than expected. The Employment Cost Index was 0.7%, the GDP
price deflator (inflation) was 2.0%. The dollar is lower, Treasuries are a bit
higher and stock futures are muted. Oil is down 69 pennies at $48.15. Europe
is lower and Asia was mixed.
McDonald’s earrings were in line but its forecast was a bit light.
Yesterday we reported that MSFT
traded lower after earnings and it did but it then traded higher by about 50
9:58am and stocks have been meandering between up and down in moderate
trading. Oil is down $1.62 at $47.24 and Treasuries are firmer on the GDP
In Many accounts we bought QQQQ at $37, JPM at $36.80, New York Times at $38.65, SBC at $23.65, Bristol Myers at $24, Time
Warner at $17.93 Motorola at
$15.75 and Maytag at $15.50.
Maytag announced punk earnings this morning after they had warned.
They said they were not going to cut the dividend. We had a nice trade off this
level in the autumn and while we don’t think it will recover as quickly we think
the outfit that had a 5% position in it and put out a sell when the stock was
at $21 in early January may be in there buying the stock back that they sold.
JPM (3.8%), SBC (5.5%), BMY (4.7%) and MYG (4.7%) all have decent dividend yields. NYT is on its low and TWX is
our favorite anchovy. The QQQQ
holding gives us tech and biotech without having to pick and chose. We have
room in accounts to add to that QQQQ position if the markets work lower. Its good
to have some money working for us again especially since we didn’t have TO
force the issue and were able to let the stocks came back to us.
10:27am and selling came into the markets. The S&P 500 is down
7 points at 1168.The line in the sand
today according the guru is 1164 which piercing on the downside would leave the
bears gleeful and the bulls glum.
Mad cow disease was found in a
French goat last week?
12:27pm and with the markets down
and our buying finished with the purchase of SGP at $19 we are heading off to
Chicago to see clients. We will have a Monday morning post and hopefully an
updated Model Portfolio tomorrow.
28 January 2005 Daily Comment
Several days ago we wrote that David Faber on CNBC had suggested the combination of SBC and BellSouth. Now this morning the NYT has a
story about SBC buying AT&T for $18 billion. Two more steps and the old AT&T will be halfway back together. Big is good, and investment
bankers are happy too.
All the analysts on CNBC today think the merger is a dumb idea. But then they were recommending both stocks at much higher prices back in the last century.
If SBC and AT&T merge will the AT&T name disappear or will SBC become AT&T?
And will Cingular wireless which just bought AT&T Wireless and had to give up the name rename Cingular, AT&T Wireless? So many
questions and so few answers.
Bristol Myers met expectations.
Durable good orders in December were up 0.6%, ex autos up 1.2% and ex transportation the orders were up 2.1%. First time claims for
unemployment were up 7,000 to 325,000.
Reuters reports that North Korea appears to have bought a complete nuclear weapon from either Pakistan or a former Soviet Union state, a
South Korean newspaper said on Thursday quoting a source in Washington.
On Sunday OPEC will be meeting on oil prices and production.
On Monday the world and markets will know the results of the Iraqi election. We are betting that Allawi’s slate will win. If not the markets
may not like the results. The U.S. wants its own strong man in power.
Next week on Tuesday and Wednesday the Fed has a two day meeting culminating in a 1pm announcement on its next move in interest rates
which traders expect to be 25 basis points higher to 2.50% on Fed funds
When we re-enter the stock markets we have been considering buyingsheets for the DIA (mirror the DJIA), QQQQ (mirror the top 100
stocks on the NAZZ), and XLK (see yesterday’s post). We haven’t pulled the trigger on re-entering the stock market through the above
index products but we may sometime in the next few days. The technicals of the overall markets are teetering at an inflection point. If we
decide to re-enter the markets we may want to take a position in stocks without having to pick individual stocks to participate.
Our idea is to place up to 20% of our money in the index products and then use those positions as the foundation to add individual stocks.
Obviously we won’t do this unless we think the current pullback is over. We have been thinking for a few years that we should use the index
products as our re-entry vehicles because of their liquidity and diversification. We are using the DIA which ones the stocks in the DJIA because
the DJIA underperformed the S&P 500 last year and this year and over the years we have noticed that the performance disparities between the
two usually even out over time. As individual stocks hit buy levels we would then add them. If the markets take off to the upside we would have
some participation and a move lower would give us a foundation to add to or to add individual stocks.
11:02am and the markets opened lower and now have recovered with most major measures even or higher. The only reason the DJIA is not
higher is that Caterpillar is down a couple of points. Breadth is strong and Treasuries are lower with the ten-year at 4.22% and the two-year
at 3.30%. The strong durable good orders for December ensured a Fed rate hike next week and probably a few more. That is why the short
end of the Treasury market is rising and flattening the yield curve and that is why we are holding off on buying bonds.
1:03pm and we don’t to pull the trigger on the DIA buy even though the DJIA is down 64 points and the DIA are at their
lows for the day. We are
also looking at JPM and SBC and SGP but we want to watch some more. When in doubt, wait, we may not
make money doing that but we won’t
lose any either.
Breadth is negative on the NAZZ and flat on the NYSE. Treasuries remain lower bout above their lows for the day and oil is up 32 pennies at $49.12.
1:54pm and as contra hour ends the major measures are on their lows for the day. Now we will see how much buying power the bulls can muster
in the last hour. WE ARE NOT GOING TO DO ANY BUYING TODAY. The failure of the NAZZ to build on yesterday’s strong rally is disconcerting.
3:02pm and the DJIA closed down 31 points at 10467. The S&P 500 gained 1 point to end at 1174 and the NAZZ rose 1 point to 2046.
Breadth was positive on the NYSE and negative on the NAZZ at the bell. Oil closed up 8 pennies at $48.84 and Treasuries closed lower
with the ten-year at 4.21%, and the two-year at 3.28%.
After the bell Microsoft reported earnings of 32 pennies, a penny short of estimates on revenue of $10.8 billion which was $300 million
better than expected. The stock was a bit lower in early after hours trading.
And tomorrow is today so let the games begin.
27 January 2005 Daily Comment
We were amused yesterday
listening to the talking heads on CNBC near the closing bell. It seems that
everyone is a technician now and so has an opinion on the internal dynamics of
the day’s market action. The talking heads found the action toward the close
negative while the several gurus we follow found the action relatively
With the morning futures above
fair value there is going to be another attempt to rally stocks today. We are
agnostic at this point but do have price points on a few stocks. Our basic
stance is that the emotional energy we expended getting long and gaining and
then losing those gains in the relative flash of an eye has us much more
was stronger and Europe was flat. Oil is off a bit and
bonds are a couple of basis points higher in yield.
RFMD had punk earnings and the share price is off about 50 cents. Tellabs was upped from underweight to
overweight, a big jump, by JP Morgan and its shares are trading higher but below
where we sold.
We really are concentrating on
the large cap stocks but we are maintaining an interest in TLAB and SEBL. SEBL earnings
Among the stocks we are following
are: JPM, SCH, FITB, HAIN, OATS, TRB, NYT,
XEL, LU, KO, GE,UNP, NWL,MYG, BLS, SBC,
TLB,TIF, SLE, PFE, CHIR, SGP,UVN, ABS, TWX, HPQ, MOT, ANDW, TLAB, SEBL, and the
XLK which is:
(MSFT 14.76%, IBM 7.05% INTEL 6.32% CISCO.01% VERIZON 5.35%
DELL 4.38% SBC 3.21% QUALCOMM 3.15% ORACLE 2.88% HPQ 2.79%).
SBC announced in line earnings and job cuts of 7,000 for 2005.
The NYSE is considering extending
the trading day by 2 hours.
We would like to place some funds
in two year or shorter Treasuries but we are waiting for the February Fed
meeting to act.
10:18am and stocks opened higher and have remained so. Breadth is positive
and oil is now lower on higher inventories. The S&P 500 is testing the 1175
level and so far so good. Volume isa bit
above average for the last thirty days but there is no buying stampede although
there is also little aggressive selling.
and no much is
happening as most traders await the final hour to see how the battle will go. Crude
oil is down 64 pennies at $49 and the DJIA is up 33 with the S&P up 4 and
the NAZZ up 10. Breath is almost 2/1 positive on the NYSE and 5/3 on the NAZZ.
The two-year Treasury auctioned
today came at 3.245% with a bid to cover ratio of 2.01 which is the lowest
bid/cover since August 2003.
By the by, we are sticking to our
prediction that the real rally higher doesn’t occur until oil goes under $40.
and entering the
contra hour stocks are moving higher. Google and EBAY are up today reversing
the action of the past few sessions. Crude oil is down $1.29 at $48.35.
and entering the
final hour of trading breadth has improved and we would expect a rally to
pierce the 1175 on the S&P 500.
We don’t know how much traders
are concentrating on Iraq
and even what constitutes a good outcome to this weekend’s election but we
would guess that even with a strong close today the markets will pause in the next
two days to await the results and react on Monday.
and the NAZZ was the
leader today up 26 points to end at 2046. The DJIA gained 35 points to end at
10498 and the S&P 500 was up 5 points at 1174. Breadth was better than 2/1 positive
at the close.
And tomorrow is today so let the
26 January 2005 Daily Comment
The failure of the major measures
and breadth in the last hour yesterday was a kick in the teeth for the bulls.
But according to all the gurus we read and just by observations a zillion days
down in a row usually end in some type of rally even if the short term trend
remains down. And everyone is looking for a rally. At year end everyone was
looking for a rally also.
We mentioned last week that GM Acceptance was in danger of having
its bond ratings lowered to junk grade. Such and event would cause sever disintermediation
in the bond markets since many banks and trust departments and mutual funds
would be forced to sell the GM bonds because they would be below investment
grade. We said not to worry because the Fed would come to the rescue. Well
before the Fed or maybe because of the Fed, Lehman Bros who are the keepers of the Bond Indexes that most large
institutions use as the bible of investment performance decided that they would
add Fitch Ratings to the mix. So now it will take a downgrade by all three
ratings agencies: Moody’s, S&P,
and Fitch to set off panic in the
bond markets. On that news which was released yesterday afternoon, Ford and GM Acceptance debt rallied 30 basis points.
As we have mentioned a rally in
one market arena usually has consequences in another area due to that
overwhelming presence of trillions of dollars of fast moving hedge fund money.
And so this morning stock futures are higher as the hedgies perceive a
potential obstacle to higher stock prices i.e. a panic in bonds, being removed.
Moreover traders seem to be
champing at the bit to participate in a rally and the desultory trading of the
last week has only whetted the boys and girls appetites for some contra short
term trend fun. And so this morning futures are higher in the U.S.
as well as Europe although Asia
except-for Hong Kong up 1% - was lower. Oil is quiet as
In earnings news BellSouth announced that access lines
(regular phone lines) were down 4% in the last year. So growth for BLS and SBC
will need to come from Cingular the wireless phone service owned jointly by
both. BellSouth reported lower earnings according to the wire services but
there are so many special items that we think results were about unchanged.
We’ll be happy to have the markets knock the share price lower since we are interested
in buying around $25.
Schering Plough is going to repatriate over $9 billion dollars from
overseas and we think that enhances their potential as an acquisition target
not an acquirer. The new guy there has cleaned up their act and made SGP
presentable for other larger drug companies. Because they are in cholesterol
drug selling arrangements with MRK
and because of Merck’s lower stock price and VIOXX sales troubles we think MRK
might make a move.
Tellabs posted earnings of 9 cents excluding charges from the two
mergers and also posted a combined sales increase to $380 million. We remain
interested in this stock but at lower prices.
Smith Barney lowered its rating
on Tribune Cos from buy to hold
noting that the WB Production Unit cash flow is lower and that will eventually flow
through to the parent’s financial. Under $37 we are interested.
Sara Lee announced higher second quarter earnings but warned that
full year results would be about 15 pennies less than what analysts had been
expecting. Analysts had expected $1.65 and SLE
is now projecting $1.50.
8:47am and zoom we go out of the gate with the DJIA up 100 points
and the NAZZ 22 points higher. The S&P 500 is up 9 points and so the rally
the trader types wanted has begun. Now we will see if there is the fire power
to keep it going.
9:14am and Consumer
Confidence was 103 for January verses 102 for December and an estimated 101
this time. Breadth is currently 2.5/1 positive. Oil is down 21 pennies at
$48.60 and Treasuries are 2 basis points higher in yield lower in price.
Existing home sales fell 3.3% in December to an annual rate of 6.7 million.
11:43am and David Faber is on CNBC suggesting that SBC will buy BellSouth in 2005. At the time he announced that BLS was trading at $26.21 down 35
pennies. We’ll see how much power CNBC has in the next hour.
The major measures are improving
their gains of the first fifteen minutes with the DJIA up 123 points. There has
been no give back all morning. Volume has slowed a bit but is active. Breadth
is positive but failing the 2/1 opening strength and Treasuries are giving
ground. Oils is now up 8 pennies. The share prices of all the stocks we sold
recently remain below the price at which we sold them.
Sara Lee was off $2.20 to $22.80 in early trading but now is back
to $23.25. Near $20 would interest us.
and as the contra
hour ends the major measures have backed off a bit but remain strongly higher
for the day. BLS is below $26 so no
one must be listening to CNBC or they aren’t chasing rumors as in the old days.
Google and EBAY are still lower on the day and that is the one of the only negatives
for the markets if that is a negative.
Breadth has again narrowed to 5/4
positive. Oil is almost back to $50 (yawn) closing up 83 pennies at $49.64 and
Treasuries are lower in price higher in yield. There are more new lows than new
highs on the NAZZ
The bulls need a good close in
the final hour.
and we’ll call it a
draw. The DJIA closed up 90 points at 10461 but 50 points below its best levels
of the day and down in the last hour. The S&P 500 was up 5 points at 1168
and the NAZZ gained 12 points to end at 2020. The ten-year ended at 4.20%, the
five-year at 3.70 % and the ‘when issued’ two-year which is auctioned tomorrow
And tomorrow is today so let the
25 January 2005 Daily Comment
At times like these perspective
is always a good thing to have. We do think that a rally will occur this week
because the markets have been lower for three straight weeks.
We just don’t think the rally
will be tradable for any but the most nimble.
For five years the average return
on the S&P 500 is a negative 2.6%. That means that dollars invested in the S&P
500 five year ago Friday would have dropped an average of 2% a year for the
last five years, not including any withdrawals for living expenses or
management fees. The real life action in the S&P 500 was a substantial and
scary drop the first three years and rallies the next two years with a drop the
first three weeks of this year.
Contrary to the perceived wisdom
of mutual fund sales folks timing has been important and the reason for that is
that the markets are now controlled by hedge funds with trillions of dollars to
throw around daily trying to make pennies of profit.
Thankfully the SEC delayed the January 3, 2005 introduction of its experiment
with allowing shorting of stocks on
downticks or the last three weeks would have been a real disaster.
Supposedly that experiment will begin in July.
8:16am and Asia was mixed while Europe
is lower and U.S.
futures are suggesting a higher opening. The first three hours of trading will
work off the overages from Friday’s expirations and then the trend for the week
should begin to emerge. This morning’s earnings announcement contained good news
and the futures are reflecting that fact.
Oil is up 42 pennies at $48.97
because of the snow storm in the East and Treasuries are firm.
9:58am and breadth is negative on the NAZZ and positive on the NYSE
as the major measures are somnolent. Volume is moderate, Treasuries are a
couple of basis points better and oil is down 43 pennies at $48.10 on the day. For
earnings’ season the markets are quiet.
and the DJIA is
higher by 36 points while the NAZZ is lower as the momentum stocks continue to
take gas. Breadth is negative but the markets seem to be trying to rally.
Oil remains lower and utility
stocks are higher as long interest rates move lower. but
the Treasury two-year at 3.18% and the three-year at 3.35% are lower in price
and higher in yield on the day. European stocks closed lower on the day.
and entering the
final hour the major measures have surrendered their gains but that may just be
setting up a last hour rally. Unfortunately for rally hopers, breadth has been
getting progressively worse as the day wears on.
The WSJ is reporting that the
long knives on the board of directors are after Carli at HPQ. That must mean that HPQ is going to miss its number this
quarter. She has done a great job in difficult times. If the myopic board would
just look around they might see that a few other tech companies are having
and crude oil
finished the day up 28 pennies at $48.81. The DJIA closed down 25 points at 10368.
The S&P 500 lost 4 points to end at 1163 and the NAZZ lost 25 points to end
at 2008. Breadth was 2/1 negative at the bell. The ten-year ended lower in yield
at 4.12% while the two year rose in yield to 3.18%.
And tomorrow is today so let the
The Norse Men and Women won on Saturday. The Norse Women are in first
place after a 0-5 start to the season. The men still have a way to go.
The DJIA is now down for the year
and for the thirteen month period from 12/31/03.
Over the last three years the S&P 500 is up an anemic 3% total.
We mention these facts to place
in perspective the difficult nature of the markets and of earning spendable or
bankable returns over the last five years. We have managed to do well with
occasional missteps but our willingness to go to cash and rethink our outlook
has been what has saved us from disaster.
Since we are in cash now, we have
the luxury of watching events unfold and reacting to them rather than having to
guess the future.
But because we are in cash does
not mean we don’t have an opinion on future market happenings. As we said on
Friday, we think that whatever real trend exists will re-establish itself on Tuesday
after the expiration shenanigans have quieted down. Also there are a goodly
number of earnings reports in the first two days of this week and the markets
reaction to those reports will also be instructive.
We have stocks like JPM, and Schwab and SBC and BLS on our watch list but our idea is
to buy the about ten percent below current levels.
Our guess on the S&P 500 is
that it will break the 1170 level; hold serve at about 1130; and rally to 1170
before revisiting the 1080 level on the way to 1000. Those moves may give us
trading opportunities but we will wait for the levels to be reached before
the rally in bond prices late
last week occurred because traders are feeling that the Fed will slow down in
its rate increases after one last quarter point raise in February. We would
like to place some money in the two-year or less at a 3.25% yield but the rally
removed that opportunity for the present.
And that is where we are. So let
the games begin.
22 January 2005 Daily Comment
The last few weeks have been
disappointing but they are part of professional investing where we make our
best judgments and go with them and hope we are right more often than we are
wrong. We have been active traders for the last five years because that is what
we believed was required to survive the volatile and negative markets over this
For clients with us over the
entire period our returns have well outpaced the major measures with positive
returns. The Model Portfolio is up over 51% in five years and three weeks while
the return on the S&P 500 has been negative. As we all know past performance is not
indicative of future performance.
For clients who have joined us
more recently most have outperformed but some have not although all have
As you will see in the first
quarter we made good money trading. In the second quarter we gave a bit back,
in the third quarter we were up a bit and in the fourth quarter we made money.
That ebb and flow is the way our trading has gone over the years and it is unusual
for us to lose money in the first quarter because we have been nimble enough to
sell in time.
Also we have prospered in a down market even though we have never
shorted a share of stock.
We still may break even or gain
in the first quarter but only time will tell. We have a number of larger cap
stocks in which we are interested but we want to see how the 1170 level on the
S&P 500 plays out over the next few trading sessions. We see no need to
rush back in, rather we want to take our time and let the markets come to us. We were correct to load up on the stocks we
did in the last quarter of 2004, we just stayed too long at the party. *****
8:48am and Japan
and Hong Kong were lower overnight while Europe
is mixed in trading. Crude oil
is down another 64 pennies at $46.90 and Treasuries are slightly weaker with
four Fed folks talking their gibberish today.
The major measures are all higher
in early trading on the back of GE’s
good earnings report which we always take with several grains of salt. Mother Merrill also upgraded Citigroup this morning. As we write the
DJIA is up 16 points, the S&P 500 is up 3 points and the NAZZ is 5 points
9:07am and Michigan Consumer Sentiment was 95 versus and expected
97. Today is an expiration day so there will be crosscurrents unrelated to the
trend occurring. A better reading of the trend will come next Tuesday after all
the expiration noise ahs quieted.
and Treasuries are
better as oil jumps $1.64 to $48.95. We guess rising oil prices aren’t
inflationary since they are excluded from core CPI calculations.
Stocks are meandering as are the
major measures. GE’s good earnings
haven’t been able to get the bulls buying although one guru supposes that the
failure of GE to rally is because it is pegged today to the expiration of the
$35 options. His take is that next week GE will begin its move to $40. We’ll
3:02pm and the DJIA closed down 78 points at 10393. The S&P 500
lost 8 points to finish sat 1168 below the technically important 1170 number.
The NAZZ dropped 11 points to 2034. The Treasury ten-year closed at 4.14%, the
five-year at 3.57 and the two-year at 3.12%. Breadth was negative by a slight
margin at the bell. Oil was up $1.22 at $48.53.
And tomorrow is today and it is
Saturday with six plus new inches of snow which we plan to enjoy.
There will be a post Sunday
afternoon for Monday morning.
The selling occurring in the
momentum stocks may be setting up a rally or it may be a precursor to a
rollover to lower territory. We weren’t in the momentum stocks and our issues
have all been hit before their earnings. We would have sold the stocks this
month regardless of market action. And if the markets rally from here over the
short term the share prices of most of the stocks we sold will only get back to
where we sold them.
Upon reflection we bought too
many stocks to catch the ride higher and weren’t able to sell with them with
the required swiftness or liquidity. In the future when we want to catch a ride
on the momentum train we are going to use the SPY which is the S&P 500 Index. We have been considering this
alternative for a few years but until this year our old way of catching the
year end rally worked. This year it didn’t and we couldn’t sell fast enough in
January when we realized the game was over.
Our view of the markets is that
from March 2000 to October 2002 the S&P 500 dropped from 1500 to 800 in
round numbers. It then rallied back over 50% to 1220 by year end 2004. We
thought it might make it to 1226 which would have been a Fibonacci 2/3rds
retracing of the drop. It still may but with the action the last two weeks we
think that possibility is more remote.
Our best guess is that the
S&P 500 will eventually pull back to the 1000 mark which would be a 50%
retracing of the move from 800 to 1200. The markets follow the laws of nature
in their pendulum swings. We don’t think the S&P 500 will do this
immediately, but that action would clear the air for a strong move towards the
old highs. That’s the technical picture.
The fundamental picture is
cloudier. Earnings are higher but foreword looks by companies are cloudy. The
consensus is that interest rates have to go higher and that is affecting
decisions. Consumer debt exceeds $2 trillion and home equity financing
continues apace. More folks are souring on stocks and moving to real estate as
their investment vehicle of choice with the corresponding rise in real estate
prices. That rise is sustainable as long
as folks keep on leveraging by investing 10% and borrowing 90%. That is how the
hedge funds work. And as with the stock market the last folks off the train
lose big time. There is a real estate bubble, but unlike soap bubbles
speculative bubbles can last a long time. Rising interest rates can pop the
bubble but Alan Greenspan is aware that the housing boom is succoring the
economy and he doesn’t want it all to end badly on his watch. There would be
symmetry to a bust in real estate though to complete the circle of his tenure
with the bust in the stock markets that occurred soon after Greenspan became
Fed Chairman 18 years ago.
Review of yesterday’s markets
and EBAY and Qualcomm disappointed even though EBAY declared a 2/1 split. In
after hours trading EBAY lost 10 points and QCOM dropped 4 points. Both companies
actually reported better earnings and sales but the numbers weren’t enough. Actually,
we don’t know how analysts could have been surprised by EBAY guidance since
they announced last week as we reported that they were going to raise fees. Companies
don’t raise prices when they are hitting their numbers.
This morning Sony warned about earnings, and said its DVDs and camcorders and
such are not selling as well as expected. We’ve heard this song before; we
think it was last year at this time. And AT&T
said it sees a drop on 2005 revenues. All the overseas markets are lower with Japan
and Hong Kong losing over 1%.
Citigroup beat on earnings, was
light on revenue and raised its dividend 10%. Capital One Financial the largest
credit card issuer missed badly last night and this morning its ratings are
On the plus side the dollar continues
its rebound rally against the euro and oil is lower by 84 pennies to $46.71.
7:18am and Q Logic is up
on good earnings and several brokerage upgrades. It is currently trading in the
pre-market at $37.30 up 50 pennies from last night close of $36.80. It will be
a good tell.
May Dept Stores is up another $1.50 to $35 on a story that Federated Department Stores may propose
a stock merger. There couldn’t be a cash deal since both MAY and FD has debt
totaling a combined $12 billion in a rising interest rate environment. And
since they have been the buyers of all the department stores for sale they will
have to do some creative financing and spinning off to lower that debt load. By
the way, FD loaded up with stores
and debt in the year before the 1987 crash.
7:37am and Leading Indicators are announced at . Last night the DOE reported crude oil and heating
oil and gasoline inventories all higher than expected and that is probably the
reason that crude oil futures are lower by pennies this morning.
8:44am and stocks are lower but not off the cliff. CNBC is talking
about the repatriation of $90 billion in offshore dollars that are coming back
to American shores with the payment of a 5% income tax. That is supposed to give
a pop to the the economy. It may but not tomorrow or
the next day.
The down and out market action
has created bottom fishers and so a snap back rally isn’t out of the question
Also with the expirations of
tonight and tomorrow there are myriad undercurrents in the markets for the next
9:38am and the bond markets are concentrating on the potential
downgrade of GM paper by the rating services to less than investment grade. Our
bet is that it doesn’t happen because the Fed won’t let it happen.
The Leading Economic Indictors
rose 0.2% which was in line with estimates.
10:13am and the major measures remain lower but the DJIA has been trying
to poke into positive territory for the last hour. We notice some limited
buying in big cap blue chips that has them in the green. Breadth has improved
from 3/1 negative but remains 2/1 negative. Today is the first day for a while
where new lows exceed new highs.
and we sold TLAB and also a good chunk of Wild Oats today. The
Model Portfolio and most accounts are now entirely cash. The Model
Portfolio as of 1/20/05
will be posted tonight. It is down 6.1%
for the year and up 2% over the last 13 months.
The major measures are moving
lower after failing to mount a rally. Now the bulls need to look to the last
hour for the rally to break the correction.
Crude oil is down 85 pennies at
$47.70. The ten-year is at 4.16% while the two-year is at 3.17%. Treasuries
have rallied on news that the Report of economic activity by the Philadelphia Fed
was half the expected number. That is giving hope that maybe the Fed will slow
down the rate hike agenda it has implied.
1:06pm and in the four plus years that Bush has been in office the
S&P 500 has dropped 8%.
Stocks continue to meander along
at lower levels but he selling pressure seems to have abated.
Disney filed a $3 billion shelf registration yesterday and JP Morgan filed for $3 billion in
floaters today. The rush to sell debt that seems to be occurring implies higher
interest rates in the future.
and the DJIA closed
down 68 points at 10472. The S&P 500 lost 9 points to end at 1175 and the
NAZZ gave up 27 points to finish at 2046. Breadth was 2/1 negative but new
highs managed to beat out new lows. Treasuries were firmer into the close.
Crude oil ended at $46.91 down 64 pennies.
And tomorrow is today so let the
games begin. We are going to take some time off today and will be in and out of
the office. There will be a post as usual in the evening on the markets’
20 January 2005 Daily Comment
Today is Inauguration Day for President Bush. We wish America luck.
Review of Yesterday’s Markets
6:31am and relative warmth has returned to the land of milk and
honey. Overseas markets are in a funk and U.S.
futures are below fair value. The rally of the last two days has been less than
stellar but there has been a rally and for that the bulls are grateful. The
next stop for the S&P 500 is 1200 and if it can close above that number the
gurus see a run to 1260 as a possibility.
Last night Motorola, IBM, and Yahoo all had decent earnings reports. YHOO and IBM traded higher in after hours trading while MOT moved lower because it lowered next quarter guidance
This morning JP Morgan missed by a few pennies but with the merger charges for Bank
One involved we don’t know how the markets will react.
Our take is that the rally has
been desultory and pro forma and that it wouldn’t take much to stop it in its
tracks while we can’t imagine what will give it more steam. But rallies usually
climb a wall of worry and so this one may continue.
Several clients have asked why we
went to cash when we think a rally is in the works especially since the selling
of issues involved some losses. Our response was that the volatile stocks we
owned were comparable to the Russell 2000 which dropped 10% in the first two
weeks of the year and we felt it necessary to “stop ourselves out” since the markets
were not acting as we had thought they would and our give back had reached stop
Other clients have mentioned that
they hope this detour doesn’t sour us on getting back into stocks and making
the money back. Ah, if only it were that easy. We find that when we are wrong
the best thing is to wait a bit and see if the markets confirm our selling even
though they didn’t cooperate with our buying.
We also need time to decide on a
new course of action.
Finally we need time to reflect
on the good decisions we have made over the years and realize that our decision
making can be wrong but not admitting it would be an even greater mistake.
Preservation of capital remains our mantra and with our move to cash our
accounts are at their November 1, 2004
all time highs, the highest many of the accounts we manage have ever been.
If we hadn’t played the
speculative musical chairs game at the end of the year no one would be the
wiser. And yet now we all are wiser in the knowledge that this last time we
missed selling before the fat man stopped singing.
6:56am and Pfizer
reported earnings a penny short and revenues above consensus. Morgan Stanley
lowered expectations on the telecom service industry and lowered its opinion of
Verizon while saying it like SBC. GM reported $1.01 versus 90 cents
and first time claims
for unemployment were 319,000 less than
the 335,000 expected but down from the 364,000 of last week.
The Consumer Price Index for
December was minus 0.1% while core
CPI was up 0.2% which was in line.
The rate on CPI was 3.3% year over year and 2.2% on the core CPI.
Housing Starts were up 10% to 2.004 million which was in line. Building permits were over 2 million although
The Fed Beige Book is released at
and will provide more fodder for
the boys and girls to trade. These numbers were released early today because of
10:06am and stocks have begun today as
they did yesterday with the DJIA down 40 points and the NAZZ off 13 points. We
remain committed to selling our remaining three stocks (not OATS) but we are hoping for a rally to
Motorola is down $1.60 and Maytag
has been dropped by Best Buy as a seller of its appliances and is off over
with MOT and NOK tanking our confidence in RFMD
is also dropping and that is why we are selling. RFMD has already announced that the next quarter will be tough but
the markets are selling even very good news as is evidenced from both YHOO and IBM being lower today after announcing above expectation revenues
and earnings. When the market advance has to depend on Google and such it is time for us to get to cash. RFMD dropped out of bed in two days a
week ago and we did buy more last week to average down hoping for a rebound on
the MOT announcement but we think that
with the MOT and NOK action that is going to be a losing
proposition for us. We are going to take our too large loss and move on.
We are also selling SEBL because with the failure of the
rally to continue in the New Year the only reason to hold it is
for a takeover. We don’t hold stocks for takeovers.
and then there were
two. We are down to TLAB and OATS
and we are holding OATS and waiting
for a better price on the TLAB.
The DJIA hasn’t yet begun a final
hour rally and is down about 50 points. We shall see if the bulls can rescue
the day in the final hour.
and the DJIA closed
down 90 points at 10538. The NAZZ lost 32 points to finish at 2073 and the
S&P 500 was off 12 points at 1183. Breadth was 2/1 negative at the close.
Friday is a triple witching day. Oil closed lower as did gold and the dollar
rallied to a two month high against the euro. Treasuries were firm.
There is so much money flipping
around in hedge funds (one trillion dollars multiplied by whatever leverage the
funds are using) that the financial markets are being discombobulated by the
gunslingers that run these funds. Wall Street has become one big poker game.
And tomorrow is today so let the
19 January 2005 Daily Comment
Review of Yesterday’s Markets
7:57am and U.S.
futures are lower as European bourses opened higher but now have turned lower.
Oil is over $49 as the eastern U.S.
is now experiencing some of the cold the Midwest has for
the past week.
Earnings are coming fast and
furious and most have been in line. Schwab
had earned 4 pennies after charges, 12 pennies before charges. Fifth Third earnings were halved due to
charges previously announced to get the bond portfolio in line with rising
interest rates. In plain language they guessed wrong and had to take their
losses on a bad interest rate bet.
The WSJ reports that HPQ is going to concentrate on profit
from PC sales rather than the number of PCs sold. That suggests a charge is
coming with this quarter’s earnings.
Raymond James upgraded BellSouth from under perform to market
Scott Livengood is out as the CEO
of Krispy Kreme and Krispy is going
to report a loss. Sic transit gloria and a lot of money too. Scott won’t be
living as good as he has been.
8:44am and stocks have opened lower as crude oil continues its
climb towards $50 again. Crude is up 91 pennies at $49.29. We remain of the
opinion that a lasting resumption of the rally won’t occur until crude drops
under $40 per barrel and that price seem along way off for now.
10:25am and the DJIA has rallied from down 45 points to up 30
points. Breadth is now positive and the NAZZ is up 7 points at crude has moved
back under $49. The Treasury ten-year is at 4.24% while the two-year is at
and the major measures remain higher in active trading. Breadth is 2/1 positive
and the last hour today will be important if the rally is to have legs.
We are trying to decide whether
to hold any stocks. The last few times we went to cash it paid to eliminate all
holdings and start over with a fresh slate. We are hoping for a decent rally to
allow us to sell any or all of the last four issues we hold.
We did sell XEL for a scratch if the dividend received is included and we sold FITB at $47 when it jumped up $2.50.
With the dividend included it too is a scratch.
SEBL is higher and we reduced positions in a few accounts as we did
Motorola earnings are tonight and if they are good we are hoping
that RFMD pops tomorrow and we can get
a bi more out of selling that holding.
SEBL and TLAB and OATS are also anchovies and they may be
gone by the end of the week. *****
and crude oil was up
and down and closed unchanged at $48.38. The DJIA gained 66 points to 10625. The
S&P 500 rose 11 points to 1195 and the NAZZ was up 18 points to 2105. Breadth
was better than 2/1 positive at the bell. The ten-year gained to end at 4.19% while
the two-year was unchanged at 4.23%.
And tomorrow is today so let the
18 January 2005 Daily Comment
Review of Yesterday’s Markets
9:27amJanuary 17, 2005:
We don’t know what to look for
this week. We hold four issues in many accounts and up to six issues in our larger
accounts. We are about 20% invested in larger accounts and a bit more in our
Our New Year trading scenario
dissolved before our eyes and the first two weeks of January have been tough on
a lot of traders. With the failure to rally we found it necessary to radically
alter our investment posture and took more losses than we have been accustomed
to. But that is what the program discipline requires.
Our basic question now is whether
to continue to hold the remaining tech stocks or to just give up the ghost and
go to cash. Both RFMD and SEBL should have good earnings and revenue
announcements later this month but given the markets’ negative attitudes we
don’t know if that will matter.
There is always a desire to want
to regain losses quickly by switching to other issues that might do better.
Over the years we have found that that action rarely works.
Or main hope is for a rally in
the next week and then a decision on what to do with our remaining holdings.
All we can do right now is wait and see.
So let the games begin.
15 January 2005 Daily Comment
Review of Yesterday’s Markets
7:04am and CNBC
is saying that one of the reasons for the late day drop off in the markets on
Thursday was a Treasury ruling for the use of the money repatriated from
overseas by corporations at a 5% tax rate. Those dollars can not be used for executive
bonuses, paying dividends or stock buybacks. Come on, a junior accountant can
figure how to use money from the left pocket for the same purpose for which money
put in the right pocket was to be used.
Remember when lottery money was to be used only for
educational purposes and that was how folks were convinced to support
lotteries. Well, lottery monies are used only for educational purposes; the states
have just appropriated less money from their general funds for educational purposes
by the exact amount of lottery receipts.
But the sell off needed an excuse and that was as good as any.
This morning the overseas the markets are higher and so are U.S.
futures. We think a continuation of the sell off this morning might have driven
a stake in the heart of the correction but a rally this morning while making
folks feel better may not solve the problem.
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.