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31 July 2002

7:02am and we want to wish our grandson Tyler Bud a most happy birthday number 5 and many many more. Luckily for us Tyler's mom and dad spend the last week of July and the first few weeks of August at our farm in Wisconsin and so we always get to spend time with Tyler on his birthday. Today it's off to the Children's Museum and then to Chucky Cheese, a great American institution for an afternoon of fun and games.

7:16am and Verizon announces earnings basically in line with lowered expectations. At ten time this years earnings and with a 4% yield we are quite content with our Verizon shareholdings.

7:18am and we await second quarter GDP plus revisions to first quarter GDP and further revisions to already revised GDP numbers from 1999 to 2001. These revisions are predicted to show that it wasn't as good as we thought it was in 1999 which would make it better than we think it is in 2002. Hope you follow that.

We noticed we did a bit too much shopping in the stock market the last few days so we are going to lighten a bit if we can catch a further rally. The stock futures are mixed with no trend in early trading.

7:32am and second quarter GDP came in at up 1.1% which is lower than expected and the stock futures are selling off. First quarter was revised for up 6.1% to up 5%. Now it's time to listen to the talking heads. Unbelievable that folks can spend so much time talking about numbers which have been changed. We now learn that the initial three-quarters of 2001 were negative and so we really did have a recession. Is the dreaded double dip on the horizon? Sorry, can't listen to any more so off goes the volume.

These negative revisions and lousy number will provide a good test of the strength of the current rally.

8:05am and the DJIA and the S&P futures are fractionally lower while the NASDAQ is down 2% on give back in the biotech sector.

8:37am and the markets are opening better than expected. One reason is that the revisions to last year are history and demonstrate that the stock markets are better forecasters of economic events than the talking heads and government numbers. The reason the stock markets were giving ground last year was that we were in recession and that the recovery was going to be tepid. In hindsight the stock markets sell off make sense and the economic forecasters and interpreters were wrong.

9:01am and the stocks are now giving ground after attempting to rally. They never got past even to the plus side. Another hour and we'll have a better idea of how the GDP number is going to effect the day.

10:05am and we continue to watch paint dry. The stock markets continue to absorb the selling but there seems to be o great desire to buy. There are bids below that should prevent any big down draft. A talking head mentioned 885 on the S&P as a support level that can't be broken if the rally is to continue. S&P is currently at 893.

11:05am and all the politicos are on the tube explaining why the recession which at the time they said was not occurring is now over and it was all Clinton's fault anyway. David Faber on CNBC in jest suggested investigating the government number providers since they are always revising their numbers too, just like the corporations.

The stock markets can't yet manage positive territory. We bought some more Fleming around $14 to add to aggressive accounts, as well as some Footlocker at $11 for some smaller accounts. We are selling our PNC at $41.98 for a nice $3 to $4 profit per share. We traded out of BGEN at $36.01. The biotechs have been all over the board today and after owning BGEN for a trade we decided we don't want to be long the stock after a 1300 point rally in the DJIA in three days. VZ, SBC, and BLS are also moving nicely higher today in catch up action. We sold our DIS trading position for $17.50, a profit of 70 cents. That's better than breaking even, which we've done on the last to trades in Disney.

11:51am and it feels like midnight. It's tough sometimes trying to reposition 200 portfolios. The markets are trying to break to the upside and they may make it by the last hour. We think that the news that there really was a recession last year has flummoxed some folks, as well it should.

12:01pm and it looks like the retailers are finally hitting the skids. The big boys and girls read the numbers this morning and discovered that specialty retailers may have a hard time this fall. Well, duh? So ANF is down $3, URBN is off $4 and WSM is also off $3. Footlocker is already on its low but that doesn't mean it can't go lower. The difference is that Z is already selling at 10 times earnings while the other stocks will have to drop another 50% in price to get to 10 times earnings.

12:29pm and Merck announced today that it is not going to do an IPO of its Medco subsidiary. The stock markets continue to meander. Declines outnumber advances on both the NYSE and NASDAQ, but the margin on the NYSE is narrow. Volume remains moderate. We think we'll get a kick to the upside in the final hour. We thought the same thing yesterday and we were wrong, but if we keep predicting it we will be right one of these days.

12:55pm and watching the tape we see Nortel crossing at 98cents, Qwest at $1.32 and Lucent at $1.73. It's sad to think of all the money lost by good folks who believed in the tripe propounded by Wall Street analysts. It is going to take a bit more than a 1000 point rally to restore the trust.

1:40pm and we have continued buying Fleming. The volume in the stock is very large and we think Fidelity is selling its position in the company. Since they owned 3 million shares they should be about finished.

2:12pm and the markets are trying to rally.

3:02pm and the DJIA closed 56 points higher while the NASDAQ lost 1%. The S&P 500 was up 8 points. Since it was the last day of the month there was some strange trading going on at the close. We placed our three RBOC positions for sale above the market at the close and were able to sell the BLS position at $26.75. BLS closed higher but we still have exposure with SBC and VZ and we have to start raising cash as the DJIA runs out of steam. We still believe a low will be made in September/October.


30 July 2002

6:55am and as we get set for the day the futures are off a bit which is natural given yesterday's huge move. Overnight the mood seems to be euphoric with bears again relegated to the dump heap of wailing Jeremiahs. Last evening's talking heads were delighted and we ourselves like seeing the stock markets rising rather than falling since we are long some trading stocks.

But, we view this move as a rally in a bear market. We are about 20% to 30% invested in most accounts and are happy with the stocks we own. PNC financial has rebounded to the gap down opening price of several weeks ago so we expect it to run into some resistance here. We are trying to sell it at $42.50. The RBOCs are still cheap and have dollars to go before they are over priced. BMY participated in the rally in a desultory manner and we think there is more bad news to weather with this stock. AT&T Wireless remains at one times sales which is cheap, and Hain Celestial is back to our purchase price.

We would expect one more relatively strong day today, and then the advance will need to consolidate its gains. We may sell the PNC later today unless it starts slicing higher through the never-never land of the gap created.

We remain sanguine because we are going to have some kind of undeclared war with Iraq before November. Most of the major airlines are a few months from bankruptcy or bailout. The electric and gas utility industry has $500 billion of unregulated debt that can't be supported. The Federal deficit is going to exceed $200 billion for this year, and the spending creating the debt is not stimulative. Sorry to be such a Cassandra, but these were the problems we saw months ago and they still remain.

The stock markets seem to have digested the Enron and WorldCom scandals and the complicity of major banks and brokers in those scandals. That has always been business as usual and after the required caterwauling and sacrificial executive or two, business will go back to the usual.

7:13am and Morgan Stanley raises stock allocation to 70% from 68%. This is after the 1200 point move in three days. Right on.

7:22am and CNBC is reporting inflows of $64 billion into equity mutual funds in the first five months, and outflows of $40 billion in the last few months. Some redemption is supposedly being met by using credit lines rather than selling stocks. That strategy worked this week, will it work next month?

7:33am and Treasury borrowing needs for the third quarter are announced at $76 billion versus $54 billion in the third quarter of last year.

8:34am and DJIA down 80 points. We think sell off will be short lived. The bull market lives again-NOT- as greed overtakes last week's fear.

8:35am and shareholders of Neuberger Berman sell 3.8 million shares at $30.54 to the public. The high on NEU for the year is $48 and the low is $25. Are these professional money managers trying to give the public a good deal or are they making a statement about the future profitability of the money management business.

9:10am and the stock markets continue a controlled drop. All the measures are down about 1%. Since we think the rally will continue we are buying Footlocker at $11.55 in most accounts, down from $19 earlier this year and up from $10.50 a few days ago. Earnings are expected at $1.15 this year ending January 2003 and $1.30 for 2004.

9:16am and President Bush is on CNBC and the market is rallying. That's novel.

9:38am and we repurchased our trading position in Disney at $16.85. We also are accumulating a smaller position in Biogen to place in larger accounts that can stand the volatility. We are intrigued by the fact that Fidelity has established a large position in the stock at higher prices and we don't think they have sold it. BGEN is selling at 20 times earning which is reasonable in a rallying market for a trade

10:25am and stocks are back down almost 2% in desultory trading. Almost seems as if folks are waiting to see who will go first to re-ignite the buying frenzy of yesterday. We would guess that stocks would meander at lower levels till the final hour when the test of yesterday's rally will occur. We would think we have to close at least unchanged to only down fractionally for the bullish camp to remain in control. If we begin to rally earlier than that the rally may not hold. The hedge funds are in control of today's trading.

11:17am and stocks are edging higher with offerings being snapped up.

11:40am and the NY Times reported today that Philip Anschultz realized $1.5 billion and Joe Nacchio made $227 million selling Qwest shares from 1999 to 2001. We'd guess they were selling their shares for estate planning purposes and not because they were cooking the books

11:45am and stocks are off a bit but holding.

12:41pm and we rallied to up on the stocks before slipping back into minus territory. That's good because we don't want to take off to the upside until the final hour. It may seem strange that we are rooting for a rally when we are so bearish, but we have some trades on that we want to make money on. In the last hour we bought at $28.51 Albertson's (Jewel-Osco) that we owned several years ago and also bought at $15.50 Fleming Co the food distribution folks which we have owned off and on over the years. We bought the ABS in various accounts and the FLM in our trading accounts.

1:46pm and we are approaching the final hour. A real trend is not discernible.

2:01pm and the DJIA is down over 100 points. Lots of stuff on CNBC about the fall in consumer confidence. We have never understood how they arrive at that measure so we just ignore it. We are sure that a 4000 point drop in the NASDAQ and a 2000-point drop in the DJIA would affect consumers negatively.

2:42pm and its rally time if it is going to happen today. Most of the talking heads are hoping that we don't close higher because that means consolidation for a move higher is occurring.

3:02pm and the stock markets closed mixed with the DJIA off a bit and the NASDAQ and S&P up slightly. The consolidation bulls carry the moment.

Tomorrow is another day.


29 July 2002

6:30am and we wrote a short post for the early morning readers. When we came in the DJIA futures were up over 100 points so it looks like a strong opening. CNBC is positing that the announcement of stock buybacks by companies, amounting to $43 billion by their count, is one reason for the strength last Wednesday and the more positive outlook today. We don't know.

7:05am and the news of the morning is that Qwest is restating the last three years and that new CEO will not sign off on financials yet.

7:53am and it is reported that Austin Powers and the Goldmember took in $79 million at the box office over the weekend. Guess the stock markets are not the only area in which we are out of synch.

7:55am and Europe remains strong with the German DAX up over 4%. All three major measures of US market sentiment remain up over 2% in pre-opening trading. Short term Treasuries are a tad weaker on the strength of the stock market futures.

Last Friday the NY Times had a picture of John Meriwether on the front page of the business section. The photo caption noted that he was managing over a billion dollars in hedge fund money and was up 6% for the year. Meriwether is the former head of Long Term Capital Management, the hedge fund that caused a global panic in October 1998. We can not understand why the SEC allows him to be involved in the hedge fund business.

8:39am and all we see is a sea of green on the stock screen. The stock markets have opened strongly higher. Have to think that the wonderful story on the rescue of the miners had a positive effect on folks' psyches. It did ours. Unfortunately, the media is overdoing the issue, but then what else is new.

We bought Nicor on Friday to trade but after our experience with XEL and because of GAS's exposure to some Dynergy trading chicanery we are selling for even. And we are also selling our position in Alliant Energy in trading accounts for even, if the 50-cent dividend is included. We've decided to exit the utility field till later in the autumn when more of the info on unregulated trading relationships is available and reported and discounted.

We also sold the last of our Disney trading position even at $16.60. We purchased a little more BLS at $23.75 to add to more accounts. But on the whole we are in a watching mood as the rally continues. Seems like we never are able to own the stocks we need to own to catch these rallies and so we would rather be looking for more buys to bid on in the coming sell off.

9:35am and the DJIA is up 300 points with the NASDAQ and S&P 500 both up over 3% too. All our worries so soon forgotten.

10:01am and still holding the gains. Qwest joining WorldCom in trouble land theoretically should benefit BLS, SBC, and VZ. Our only worry is that Q and WCOM will be allowed to get rid of their debt in bankruptcy and emerge on the other side with no debt and thus the ability to start a price war. That would not be fair, but who ever said capitalism is fair? We are willing to assume the risk by owning the three stocks.

10:59am and the DJIA is moving to a new daily high. All three measures are up 4%. We are watching.

12:45pm and we have placed our PNC for sale at $42.25 up $3 from last Friday's close. PNC is currently selling at $41.25 but the short covering will become panic buying in the last hour if the rally holds at it is now. Without the XEL mistake we would be in good shape to participate in this nice upswing. But even with the XEL loss we still have to continue to lighten as the markets rally.

We don't think the negative surprises are over in the banking industry. Genuity drew down over $700 million from banks before being cut loose by Verizon last week as reported by the NY Times today. The energy trading subsidiaries of all the swooning electric utilities were probably relying on bank advice and money.

12:54pm and this rally continues on relatively light volume. As the collapse got ahead of itself so is the rally but what else is new? Verizon reported excellent wireless subscriber growth today and that helped all the wireless stocks including our hapless wonder AT&T Wireless. AWE is benefiting from Verizon's good numbers. We'll gladly accept any help.

As the stock markets rally the Treasury flight to quality market is collapsing. The ten-year is down a point and the two-year Treasury yield is back to 2.38%.

1:49pm and the stock markets haven't given an inch. Looks like the shorts are going to be severely tested entering the final hour of trading. We changed our sell on the PNC to $42.50 from $42.25.

2:10pm and only two DJIA stocks are lower on the day. One of them is SBC and so we added that stock to the same accounts we ought BLS for this morning at $26.20. Don't know why it hasn't moved but with a 4% yield at 10 times earnings we will take a chance it pops if the rally continues.

3:02pm and the DJIA closed up 447 points, the S&P 500 was up 5% and so was the NASDAQ. Volume was not as large as during the sell off last week but was enough and breadth was bullish. We sold EL at $29.75 for our trading accounts for a $1.25 per share profit. We didn't get the PNC sold.

Tomorrow is another day.


29 July 2002

We missed posting last night because of the heat and travels of the weekend. The travails of last week in Excel are now history, but still painful. Another reason for the sell off in XEL is that they announced on Friday that they plan to sell $500 million in stock to raise equity capital for infusion into their NRG subsidiary. At the current share price that is close to 80 million shares of stock.

A client reminded us that we violated rule number one of our bear markets survival strategy in that we bought a stock right before an earnings report. The loss we took was an expensive reminder of the need to follow our rules when negotiating a bear market.

The Model Portfolio is now down 4.7% for the year and our aggressive accounts are down up to 7% and smaller accounts up to 10% with the XEL fiasco. The current Model has been posted. For the year the DJIA is down 17.5%, the S&P 500 is down 25.7%, and the NASDAQ is off 35.2%.


26 July 2002

The stock markets gained a bit today. Unfortunately, a stock we just purchased XEL dropped $4 per share today when they released a less than stellar earning's report and outlook. The shares opened at $8 and after waiting all day for the stock to rebound we sold the stock for a large loss at $7.50. All day long short sellers smelling blood were actively shorting the stock. since there are 323 million share outstanding there is a lot of borrowable stock. We are humbled by the experience. With this stock we have sampled what bear markets do to many investors.

We sold the stock because on the conference call following the earnings release management said they were going to sell $1.2 billion in assets in their unregulatd enegy subsidiary NRG to lower debt. Since the unregulated energy market is in free fall right now and is more a buyers market than a sellers market we don't think they will accomplish their goal. In the past year taking our loss when we first learn of unexpected news has always been our best course of action.

And so we sold the stock and it was and is a painful experience.

But tomorrow is another day with new opportunities and we have fared better than most in the turmoil of the last few years.

Happily for them and us, Katie and Kelle finish their 500 mile trek on bicycle from the Twin Cities to Chicago tomorrow. We will be back at the farm on Sunday night and will try to have a post on Sunday night.


25 July 2002

6:25am and as we turn on CNBC we see that the DJIA futures are down about % and the NASDAQ futures are off 1%. This action is to be expected given yesterday's strong rally. Only fault we found with it was that the advancing versus declining number was only about four to one on the NYSE. That number could have been better. The talking heads are reporting that the dollar has weakened and that foreign markets didn't follow through on US gains.

6:30am and there are reports that Hershey has put itself up for sale at the request of the foundation that controls a big chunk of stock. Eastman Kodak reported decent earnings but no sales growth. We would like to own that company but for some reason we don't feel compelled to buy. EK has a good dividend yield but we can't figure whether the move to digital is going to place the film business in the same category as Polaroid. That is an unusual thought because when Polaroid came along in the 1950s and 1960s it was the wonder company that was going to put EK out of business.

6:50am and we just finished rereading yesterday's post. When we said in the am that the next three days were going to be a buying opportunity we had no idea that the rally would take the markets 5% higher so quickly. Our scenario had the markets moving lower and bottoming around the 7200 level after touching 6800 thus the reason for our scale order on the DIA yesterday, none of which was filled. That truly would have been a buying opportunity. But we must work with what we are given and since we have no idea where the markets are going today we presume we will spend the next few days watching.

We are now back to our September/October low thesis, with this move if it continues being a "bear market kill the shorts" rally.

We are interested in PNC Financial because of its yield and we bought a bit more at $38.55 to place t in some of the accounts where we purchased BMY. Our current theme is ten times earnings and a 4% or better dividend. We have kept to that thesis except for AWE, which we wanted to buy at one times sales. We also bought some Estee Lauder for a trade at $28.50.

7:30am saw durable good orders come in at down 3.8% which was worse than expected. NASDAQ is now down 2%, The DJIA down 1% and the S&P down 1%. The talking heads are now dissecting the number. The dreaded double dip recession scenario is being talked about like the Loch Ness monster we never see but always fear. The stock markets will do a better job of determining what the numbers mean.

8:05am and not much is happening. Our bet is that there is a minor down at the opening and then buying comes in. We think the hedge funds will want to press the shorts to see if they will melt from the heat. Then again, the longs have been suffering and they may overdo the upside in the first hour of trading.

8:40am and the stock markets are meandering lower. Looks like they are waiting for AOL to open. Merrill downgraded AOL and the quote is $8 to $10. We have a bid in at $8.10 for a trade.

8:45am and now down 120 points. Getting more interesting. We started buying PNC at $38.20. We are buying to trade or hold, depending.

9:32am and we lost our Internet connection so we are going to get some breakfast. The NASDAQ has been unable to rally while the DJIA is up a bit and floating. There doesn't seem to be much conviction right now. We think folks are picking their spots for buying and maybe today is a market of stocks rather than a stock market. Everyone who is buying is buying stuff they will be willing to hold in a downdraft. At least that's what they should be buying.

10:02am and breakfast has been consumed and the Internet is back. The markets have all turned slightly down. Nothing is easy with this market.

10:45am and we have lost our Internet connection again. So we are packing up and heading for Chicago to meet up with Lisa and Tyler and Abigail and get ready to welcome Don Yarling's Ya Ya Sisterhood on Saturday. We will be in the downtown office tomorrow when not sightseeing with our grandkids. Word from Katie and Kelle is that the ride goes well

We have no thoughts or expectations for today's markets

Tomorrow is another day.


24 July 2002

As we came in this morning the stock futures were down about 1%.

8:02am and the stock futures are dropping with the DJIA, S&P, and NASDAQ all down about 3%. Treasury bonds are rallying strongly as fear seems to be overcoming greed.

We won't equivocate. These next few days are going to be an opportunity to put funds to work at prices not seen for years.

Yesterday and today we bought XCEL Energy which is down from $30 to $11. Its' main business is providing electric power to the northern tier of states hence its old name Northern States Power. The share price hasn't been this low since the 1980s. XEL decided to get into the energy trading business and that business now has egg on its face from the Enron scandal. We don't think this company was crooked and so while there are losses associated with their activities we are betting it will survive. The current $1.50 dividend will probably be cut to $1 but that still is one heck of a yield.

Since today is going to be a barnburner we are going to do our during the day post to give our impressions of the flow of the markets today.

We are going to enter our DIA scale this morning starting a 7500 on down. 7200 is in sight today.

We went to place an order on Instinet, an electronic trading system and we were informed it's not working now but they hope to have it up. Shades of 1987 when none of the OTC folks would answer the phone

8:12am finds bonds continuing to fly. The talking heads are considering the safety of six-month Treasury bills. Oh how the times have changed. The talking heads are ringing the bell for us. Not to rush in, but certainly to do some risk taking.

By 9:00am the averages had recovered from an early sell off but were still down over 1%. Margin selling was met by bargain hunting and the result was a stand off to the downside. We continue to need a washout but the day is early. We know we said yesterday that bear markets end with a whimper and we agree. But bear market rallies are violent and we expect one soon to catch all the novice short sellers to scare them and separate them from their easy earnings.

Just bought some GE at $23.90 and have an order in for more at $23.10. We dislike GE the company but at these levels GE as a trading stock is becoming compelling. As long as analysts allow them their funny accounting, GE earnings will grow at 12%, which is what we are paying for forward earnings at these prices. We also bought Disney at $15.01 for those trading accounts that own it at $16.50 from last week.

By 9:35 am we were in rally mode with the DJIA up a bit and the NASDAQ closing fast. Time to go to the dump with this week's garbage. Be back in twenty minutes.

Back at 10:08am in time to see the indictment of Adelphia officers by the Justice Dept. The markets are relatively flat.

10:35am and a big time rally is underway with the DJIA up over 3% and the NASDAQ up 2%. The selling just dried up.

10:52am and with the DJIA up over 200 points we are selling the C we bought yesterday at $28.05. That's a small profit but we decided overnight that we didn't have the stomach for the publicity over the next few weeks. If the stock sells off more we may reconsider. Thankfully the rally has given us the chance to exit gracefully.

We also sold the GE we bought this am in trading accounts at $25.18 on this rally.

11:21am and we think the rally is fading. So we are trying to sell the DIS we bought this morning and half the DIS we bought last week at $15.90. That would get us out of half of last weeks trade for a scratch profit.

Old nemesis AT&T Wireless announced a lower subscriber addition rate but better cash flow numbers. And so the share price dropped under $5 and we repurchased the stock in all accounts at an average price of $4.90. We sold the stock several months ago at $7.20 and have been waiting to buy it back at an appropriate time. At this price the company is selling for one times revenues.

11:40am and two talking heads are debating the validity of the SEC requiring CEOs to sign an affirmation of company financials. Yawn!

UAL Corp is at $4.50. The mini crash in October 1989 was caused by the collapse of the buyout of UAL, which was to be sold at a price of $189 per share. It's difficult to think that the economy can recover swiftly if the major airlines enter bankruptcy. But in the new age of financial planning, bankruptcy is the hoped for solution to all problems. Oops. For got to mention that shareholders lose all their investment but since management owns only options they don't care. They can just issue new options in the new company with less debt and new shareholders. The new shareholders are the former debt holders. That's how Iridium emerged from bankruptcy. Shareholders and some original bondholders lost $10 billion on that Motorola boondoggle but the new owners are making a handsome living.

On that same note we mentioned the other day that the economy and stock market are being saved on the backs of savers. The US debt is $6 trillion. Interest rates are at least 2% lower than they would be without FED intervention. That is $120 billion per year not being added to the national debt. That number also equals the amount of tax benefits going to high bracket taxpayers on a yearly basis. So Mary Jones is earning 2% on her $50,000 life savings C/D so that Jack Welch's top tax bracket can be lowered from 39% to 35%. Is this a great country, or what?

12:13pm and the markets don't want to give up.

NASDAQ LIFFE markets are on CNBC now talking about the wonders of futures on individual stocks. Margin is going to be 20%. No down tick rule. Goodbye markets. Seriously, in a major bear market if the SEC allows the introduction of this product they are fools. FOOLS!

On the Wednesday before the final crash in 1987 the market rallied strongly. Just a thought as at 12:57pm the markets are holding their 200 point gain off the low or a rally of 400 points overall from the low this morning.

1:06pm. As the markets continue to hold their gains the question becomes will the big boys and girls want to go home long or short tonight? The last hour will be interesting. Short selling has increased greatly in the last month and a lot of first timers are short. Another 100 points up on the DJIA in this hour before the final hour and some pain might start creeping in.

The yield on the two-year Treasury note traded at 2% early this morning. That is an all time low and is symptomatic of the fear in the markets about stocks and the unknown.

1:40pm and the market continues to move higher. New lows on the NYSE hit 937 this morning and that is enough panic to create the rally were are experiencing. Looks to us like the longs are going to scare the shorts into covering in the last hour. Look out above!

1:46pm and the NASDAQ is only up 1%. There are still more issues down than up on both the NYSE and the NASDAQ. DJIA now up over 300 points and we can imagine the sweat pooling on the brows of novice bears.

2:05pm and we are in the final hour. There was a blink down in the DJIA at the turn of the hour but it looks like we are off to the races. We looked around for something to trade and bought a few shares of PNC Financial in our trading accounts at $37.25. PNC yields over 5% and sold off this week because it had to restate earnings. We also bought a bit more BMY at $20.15 to place around.

2:20pm is a wow oh wow with the DJIA up 485 points. That's 10% from the low this morning. The NASDAQ is up about 3%. Advancing issues now outnumber declining issues slightly on the NYSE and are about even on the NASDAQ. That is a negative. The shorts have been caught with their pants down and the bulls are giving them no place to hide.

Uh oh, 43 is on CNBC. Last four times he was on the market tanked. When he started talking the DJIA up 460, now up 430 points.

3pm and the DJIA closed up 7% or 488 points. America is saved. The NASDAQ was up 4.5% and the S&P500was up 5.5%. Golly gee we are back to where we were on Monday. Now for the hard part.

Tomorrow is another day.


23 July 2002

Our job is to try and earn a decent return on capital without taking too much risk for clients who entrust their money to us. We manage money for folks with the caveat that the more we are allowed to employ our thinking process without having to factor in client fears and foibles the more productive we will be. We mention this now because we have been struck by the absence of client calls of worry and we want to thank clients for their confidence. We know it helps that we have a great deal of cash on hand, and that we have well outperformed the popular measures for the last four years. But we think that client confidence in our investment approach is what allows us to stick with our philosophy in difficult times.

We are struck by the fact that very few fund managers or brokerage house leaders have lost their jobs in the market crash of the last two years. Nor have many bank CEOs resigned or been fired even though they have ultimate responsibility for the bad loans on their books. We are under the impression that capitalism is a stern taskmaster, but we guess that that nostrum only applies to employees of lower rank. The mutual fund managers who were stars two years ago are now exposed as lemmings following the crowd. Bad times like this show what professionals who understand the business can do.

Today we are going to do another stream of happenings post because we expect the day to be interesting. At 7am the futures are predicting a strong opening. That fits our "today is the crash" scenario because we think the buyers will run out of steam and be overwhelmed by mutual funds which will have to sell to meet redemptions.

Kimberly Clark just posted better than expected earnings excluding special charges. Many companies continue to exclude the special charges from reported operating earnings although every year these companies have special charges.

Don't know the reason for the sell off in big oil stocks yesterday. Must be mutual funds raising cash wherever they can.

CNBC is touting the opening giving hope to the masses who dearly want the markets to stop going down.

A client e-mailed this AM and pointed out that he didn't own VZ. We misspoke in yesterday's post since not all clients owned Verizon and so they didn't suffer yesterday. If Verizon opens unchanged today we will be buying more for accounts that don't own it and then they too may begin to suffer.

Oops now at 7:30am the stock futures have lost ground which makes more sense. Our scenario for today is 200 points down on the opening, a rally back to even, then 500 points down, with a 2pm rally bringing the DJAI to close up 100. Would be quite a day if that happened and would also signal the end to the current sell off.

Oops again. At 8:06am DJIA futures are now up 1% so today will probably not be a decisive day.

Retail sales were down .3%. Don't know whether that's good or bad for the market because we had the volume off on the talking heads.

The opening was more to our liking with all the averages down within ten minutes. Hopefully we'll see the 200 point drop. Microsoft was up 75 cents pre-opening and is now down so that should lead techs lower. Bottom of market will come when MSFT hits $25

Helene Meisler, a technician on www.thestreet.com whom we like, made the point that you only have bottoms in bull markets. In bear markets you have selling exhaustion.

$12 billion loss for AT&T as they write down overpayment for cable properties for the umpteenth time in preparation for merger with Comcast. And E Michael Armstrong still has a job.

8:45am has the stock markets rallying with the DJIA up 1%.

By 9:30am the markets were finally moving lower with Citicorp and JP Morgan and the bank stocks leading the way. Citi and JPM were up to their ears in the Enron mess. But both are too big to fail so we bought some C in our larger accounts today at $27.14 down $5 from yesterday's close. We are reducing the size of our initial purchases because of the holes these stocks are dropping into.

We were busy trying to buy a little SBC, VZ, and BLS and so missed the market action for about 30 minutes. Nothing much occurred and by 10:20am all the measures were unchanged. Looks like a continuation of bear market action with every rally attempt met by selling.

It did occur to us that one of the better attributes of the bear market is that it gives us time to consider our investment decisions.

11:00am and DJIA is up 1% while the NASDAQ and S&P 500 are lower

Citicorp is being crushed today. C deserves to be censured and fined. The folks there who helped caused the Enron collapse and sold garbage to unsuspecting investors should go to jail. They won't. Back in the early 1990s the trouble with the bank stocks was systematic and Greenspan solved that by keeping interest rates low. This current trouble is because banks broke the rules. If we had broken the rules they have, we would already be out of business. But since C is larger than most countries it operates under a different set of rules.

See the Buffet magic at work in the price movement of Gillette. It is riding on an earnings report that was greeted warmly by investors. But the share price is 25 times dead in the water earnings growth. Only reason the stock is rising is that Buffet owns it. He has for many years and G is earning less than it did three years ago. But institutions can buy G because honest Warren who is back in favor owns it too.

12:30pm and the markets look like they are getting ready to crack. DJIA has turned down. We will enter orders to by DIAs on the way down in 50 point intervals starting at 7650 which is 100 points down from here.

From the floor rumors of an emergency Fed meeting this afternoon reach us. Noontime is a good time for rumors to start.

1:00pm finds the DJIA down 1/2% and the NASDAQ down 3%. Tyco posts $2.5 billion loss and the DJIA prints higher.

By 1:15pm the markets are starting lower with more determination. It's funny how the last week or so there hasn't been much talk of foreign political events. The relentless selling in the stock markets is taking on a life of its' own.

We are having a hard time holding on to our cash as we see values appear

1:28pm rally time. May be too early for the rally. DJIA up 45 points from down 75 points.

Talked to our good friend FES at the old stockbroker's stamping grounds. F mentioned XEL whose old name was Northern States Power. Stock is at $11 and change down from $30 on its' energy trading-Enron connection. Just the kind of stock the old stockbroker would have liked to take a chance on. Northern States Power is a real company that provides real power to real consumers and hopefully the folks running weren't dumb enough to lose too much money. Banc of America downgraded it today to neutral with apologies. So we bought some shares for our more aggressive accounts.

At 2:00pm the DJIA is back to even and so we cancelled our DIA scale order. We don't want to be buying a dropping DJIA in the last hour of trading. Since the DJIA is holding up we have a feeling the popular measures will close higher today because the mutual funds will not feel compelled to continue selling for overnight redemptions.

Today is the first day in a while that the DJIA has outperformed the NASDAQ. The general market is a lot weaker than the DJIA today. New lows exceed 700 on the NYSE and declining issues outnumber advancing issues 5 to 1.

Just bought some BMY at $20.34 in more aggressive accounts. BMY's CEO has done a lousy job and should be fired for the Imclone fiasco if for nothing else. The company has lots of problems but at $20.34 in moderate amounts in aggressive accounts it is worth the risk. We learned our lesson with Verizon and we are initiating new positions in smaller amounts than usual so we keep our buying power. But we do feel its time to begin investing.

At 2:30pm the NASDAQ is down 3% and the DJIA is unchanged.

Lot of worry about the August 14th sign off date for CEOs to accept their company financials as true. That's a media created bogus worry that means nothing. Would be funny if the bear market ended that day since Aug 13 marks the 20th anniversary of the beginning of the bull market that ended in March 2000.

At 2:43pm the DJIA joined the other measures and stared heading south. Guess traders didn't want to be long overnight.

The DJIA closed down 1.2%, the S&P 500 was down 2.4% and the NADAQ was down over 4%.

No crash today. No rally today. Tomorrow is another day.


22 July 2002

Katie and Kelle began their 500-mile bicycle ride from Minneapolis to Chicago in memory of Don and Alan and Jeff and Jim today. Go you girls!

Needless to say they are having a nicer time than we are watching the stock markets tank. Today the DJIA lost 234 points or 3% as did the NASDAQ and the S&P.

New lows on the NYSE exceeded 500 today. With today's market action and the phone calls we were receiving until someone cut the fiber optic cable providing long distance service to our telephone coop, we would guess that tomorrow is going to be the test of whether the DJIA can hold the 7200 level on a closing basis.

It's ironic that we lost long distance service on the day WorldCom filed bankruptcy. The picture of the lawyers entering the courtroom was special. Special because one could see the hourly cash register ringing as the boys and girls in blue suits and stern visages began the task of billing thousands of hours for legal and investment banking work over the corpse of MCI. Once again the Wall Street sharks will get their piece of the action as what remains of gullible shareholder equity is consumed by them.

Citicorp lost $3 per share as the US attorney's office in New York announced that it was looking into fraudulent actions by Citicorp's Solomon Smith Barney unit. SSB and Jack Grubman should both be placed in jail for their chicanery. A fine will be the final punishment because Citicorp is too big to be properly disciplined without threatening the financial system, or so the perceived wisdom goes.

We traded the DIA for a two-point profit in our large trading accounts. We also traded VZ for a 20 cents per share profit in those same accounts.

All our accounts were affected by the $4 per share drop in the price of Verizon. This drop occurred because BellSouth reported slowing sales and lower earnings. We aren't buying more Verizon now since we own enough. We did start purchasing BellSouth in larger accounts at $23.75 and SBC at $24.37. Merrill Lynch lowered its rating to neutral today on VZ and SBC and BLS. MER had to give the boys and girls some ideas to generate brokerage commissions. We used the opportunity to begin building positions in the SBC and BLS.

We were reading Jim Cramer's column today and he made a good point. He remarked that just as he sold too soon on the way up, he was guilty of buying too soon on the way down. Now he did buy sooner than we did, but we are of the same opinion as he that some stocks have reached the point where the short term price risk is justified by the long term potential.

The three RBOCs are at 10x earnings and over 4% yields and we are willing to assume the short-term risk of owning them. We are looking for other issues like these and will be adding them slowly in the coming days. If we get the big woosh down tomorrow all bets are off.

Tomorrow is another day. Stayed tuned.


19 July 2002

We have been suggesting for months now that the stock markets are acting like the big downturn of 1973-74 rather than the crash of 1987, the sell off of 1990 or the short term panic corrections of 1989 and 1998. We still hold to that theory and unfortunately we think there is more down side to come. We don't rule out a sharp rally at some point next week from lower levels, but that rally will be the result of the boys and girls at the myriad hedge funds getting caught pressing their shorts. The truth is that very few folks make money in bear markets. The secret is to survive.

One further point needs to be discussed. We are sure the media will recreate the 1987 Crash ad nauseam this weekend suggesting that Monday will be a repeat of 1987. Our take is that there may be a downdraft and rally on Monday but that this is not 1987 and the markets are not acting like they did in 1987. Until there is no one left who wants to buy a sell off; the sells off won't be over. Remember that this is not a correction in a bull market that we have been experiencing for the past two years. This is a bear market. That doesn't mean we may not trade the sell off next week. We just won't consider any sell off and rally as the all elusive bottom.

As we said yesterday, many folks are going broke trying to call the bottom in this market. A few more probably bit the dust today. We did repurchase Disney at $16.50 in the accounts we have been trading and we are holding it over the weekend.

We also purchased Alliant Energy in trading accounts at $18.05 when the stock dropped $5 per share on the announcement of special charges and lowered earnings expectations. Alliant is the result of the merger of several Midwest utilities including Wisconsin Power & Light. We would have purchased in more accounts but we are not comfortable with their Brazilian exposure and energy trading operations. LNT did say that they are going to maintain the dividend that gives the stock a yield of over 10%. Something doesn't make sense here. It may just be market noise, but we want to see more trading action next week and read more news reports before we commit investment and smaller account money to the stock. We also would be happy if they would fire all the idiot officers who decided to create a Brazilian subsidiary. We guess they did that so they could travel to Rio every year for Carnival. Maybe we should thank them because the loss they are taking on that venture is giving us the opportunity to hopefully make some trading profits.

For the year the Model Portfolio is down about 3.3% and most accounts are down at most 5%. In the broader market measures, the DJIA is down 20%, the S&P 500 is off 26% and the NASDAQ is down 33%. The DJIA is rapidly catching the other averages and is also quickly nearing our 7800 prediction of last year. Cash remains comforting. This week was tiring and we would suggest rereading some of our earlier months' posts to understand our present outlook. We will not have a post till Monday night. We have been right so far, and lucky, and we don't plan on squandering our good fortune or our clients' fortunes either.


18 July 2002

We are continually amazed at the precipitous declines in stocks that disappoint the expectations of the big boys and girls. Today's wrecks were Baxter down over 10 points, PNC Financial down 8 points and ADP down 9 points. Coupled with rumors of WorldCom filing bankruptcy next week and the Washington Post's story on AOL and phantom revenues, the stock markets had one heck of wall of worry to climb. They didn't make it.

For most of the day the stock markets meandered, even with the above mentioned negatives, but a sell program between 1pm and 2pm seemed to take the wind out of the feeble rally attempt in the DJIA. Entering the final hour of trading the DJIA and S&P 500 were down almost 1% and the NASDAQ was off over 2%. By the final bell the DJIA was down 1.6%, the S&P 500 lost 2.6% and the NASDAQ gave up 3%. Ouch.

Tomorrow the S&P 500 rids itself of foreign influence by kicking out 7 foreign companies and replacing them with seven US Companies. Don't know what that action does for our relations with foreign investors but it is going to create a lot of trading in the stock markets tomorrow.

The bull bear ratio is supposed to be bullish because the number of bulls is down around 20% while the number of bears is around 50%. But most of the CNBC talking heads seem to be bullish because the numbers are bearish so maybe one cancels the other. Our opinion is that until folks stop wondering when to get back in to make back the money they lost there will be no end to the sell off. Moreover, the 1974 debacle was a lot more painful than many commentators seem to realize.


17 July 2002

The stock markets rode another roller coaster today. Charging out of the gate the DJIA was up 240 points in the first half-hour of trading. Then as Chairman Greenspan testified and President Bush expressed confidence in the economy the stock markets headed down and by noon the popular measures were in negative territory. As quickly as they dropped, stocks again began moving higher. Entering the final hour stocks were positive and moving higher but a bomb explosion in Tel Aviv interrupted a plus 100 point move on the DJIA. At the close the DJIA and S&P 500 were up % and the NASDAQ was up over 1%. So passed another 'normal' day in the stock markets with a total swing of over 600 points.

Today we sold our trading position in Walgreen and Disney for 50 cents profits each during the morning surge. We also sold our trading position in Pepsi in all accounts for a pennies gain or loss. We like Pepsi and what they are doing, but after we purchased the stock we reevaluated our outlook. One premise we have is that the markets are revaluing stocks and that companies that are growing earnings at 10% as Pepsi is should be trading at no more that 15 times forward earnings. Pepsi jumped two points today because Coke had good earnings and the markets assume the same from Pepsi on Friday. But if the markets are in a funk on Friday Pepsi could go down three or four points on mediocre earnings. So we decided to get out of the position and wait for 15 times earnings which would be around $34.

We have one final word on GE's second quarter earnings. We were incorrect in stating that GE was using the $500 million gain from the sale of its B2B business to offset losses from WorldCom bonds of $110 million and insurance losses from Employment Re of $236 million. Those losses were actually offset by a $356 million tax benefit. But, in the third quarter GE is going to take a write down and will use the $500 million gain to offset that write down. The common thread and our objection is that extraordinary gains are being used to offset losses arising from operations.

DrKoop.com was sold yesterday for $186,000 out of bankruptcy court. At one time DrKoop.com had a market capitalization of over $1 billion. Those were the days.

We were reading a comment by a trader the other day and the comment reminded us of days gone by. The comment was, "the nice thing about buying biotech stocks is that a trader doesn't have any worries about earnings warnings or lowered guidance". That's talk from the good old days of several years ago and the interpretation of that comment is that because biotech stocks don't have earnings or the prospect of earnings they can't disappoint investors on the earnings front. Unfortunately biotech stocks have disappointed investors big time this year, just as the dot.coms and telecom began to do several years ago.

The artificially lowered interest rates are saving about $50 billion in interest payments for the Federal budget. Unfortunately that money is coming from the pockets of savers and folks who don't want the risk of owning stocks. And the lowered rates have encouraged some folks to take more risk than they should by purchasing high yield bond funds. Unfortunately the spate of telecom bankruptcies has caused losses in those funds.


16 July 2002

Happy 100th birthday to my father and namesake Ralph J. Lemley, wherever you are.

The stock markets continued their volatile action today although thankfully not as much as yesterday. Out of the gate stocks sold off about 1% and then rallied to unchanged to positive when Chairman Greenspan ended his testimony. Then in a reverse of yesterday in the last hour of trading the DJIA and S&P 500 gave ground to being down over 1.5% at the close. The NASDAQ continued to outperform although it too lost ground today

When the stock markets were down over 1% in early trading for our aggressive trading accounts we bought Disney at $17.75 and Walgreen's at $33.50. We also purchased and sold Diamonds, the index trust that represents the DJIA, in those accounts. We purchased the DIA at $84.93 and sold at $86.30.

We are tired, and don't have much to say today. Just listening to Greenspan and watching the volatile and seemingly indiscriminate move in stocks wears us out. We still are more worried about losing money than hoping to make money. We have no idea where the markets are going, and so we plan on maintaining our large cash position.


15 July 2002

The trading day began with news that Pfizer was taking over Pharmacia for $60 billion. Pfizer dropped $5 and Pharmacia rose $6. The Euro traded above par with the dollar for the first time in 2 1/2 years. This fact coupled with the falling stock markets has created selling pressure on US stocks by Europeans. That was one reason for the sell off this morning. Moreover, folks have now received their quarterly mutual fund statements and those brave enough to open them have probably been shocked. There is an old theory that as long as individuals are playing with the house's money, i.e. profits, they will hold on. But once the losses involve original investment money the individual investor usually sells.

Closet contrarians are using this "dumb" selling as a reason to start buying. We have a problem with these folks because before they were contrarians they were momentum investors. We don't know whether those buying are dumber or smarter, but we do think they are too early. We have purchased a few stocks but we are saving our powder for 7800 on the DJIA or September or October, whichever comes first.

By noon the stock markets were down about 3% with no let up to the selling in sight. At 1:35pm, with all stock markets at their low for the day and the DJIA down over 400 points the markets began rallying. And it was a big time rally. By the close the NASDAQ was in positive territory, and the DJIA and S&P 500 were both down less than %

Around noon, we sold our Home Depot in trading accounts for a $1 gain and Ford for a 60 cent per share loss. No guts no glory. The afternoon rally made the Ford sale look stupid, but you had to be there to understand. And the comeback in Verizon and Pepsi will allow us to sleep tonight. Hopefully the rally will continue into tomorrow and allow us to sell the Pepsi at a profit. We didn't expect today to be down big and that was the reason for our trading sales.

Today had too much action for us. Guess we are getting old, but 900 point moves on the DJIA like today scare us, even when they end relatively well.


12 July 2002

The stock markets survived our afternoon off yesterday and staged a short covering rally that gave some hope to beleaguered bulls. We came in this morning expecting the rally to continue. Instead, the drop in the University of Michigan consumer confidence number placed a damper on the move higher. It's interesting that the NASDAQ has been outperforming the DJIA for the past three days. On Wednesday it was down the same per cent as the DJIA and yesterday and today the NASDAQ has been higher as the DJIA has dropped. We don't think that means OTC tech stocks are buys now. Rather we surmise that mutual funds can raise more cash more easily by selling blue chips.

As the stock markets approached the final hour the DJIA was subjected to a series of sell programs that knocked it down over 200 points. As noted below, we used today to set up positions in trading accounts for a Monday rally; as well as to complete the purchase of two stocks for all our accounts. But, catching dropping knives is becoming more dangerous, especially on Fridays. In bear markets, Fridays are the days no trader wants to go home long and today's stock markets proved that truism with emphasis. At the close the DJIA recovered a bit but was down 1.3%, the S&P 500 was down %, and the NASDAQ lost a tad.

For the year the Model Portfolio is down about 2.5% while the DJIA is down 13% the S&P 500 is down 20% and the NASDAQ is down 30%

General Electric announced earnings higher by 14%, as expected. We think that number includes the propitious sale of GE's B-B Internet business for a net profit of $500 million during the quarter. That $500 million number is almost the dollar amount of the 14% increase in earnings and helped offset losses on WorldCom bonds that GE held Guess some companies are allowed a pass when it comes to including special items in operating earnings.

A reader informed us that we spelled al Qaida incorrectly in our post on Wednesday. We just learned that that al Qaida is an organization and not Al Queda, the half brother of Osama. Bad joke but it is Friday.

From the less is more file, the White House informed citizens today that without the tax cut last year that reduced tax revenues this year by $150 billion, the projected Federal deficit of $165 billion (soon to be over $200 billion) would have been even larger. Say what?

We completed the purchase of Pepsi at $42.75 and Verizon at $35.85 in the rest of our accounts. We want to own these two stocks in most accounts except our smallest. We made trade or hold them depending on market conditions. Both are of the highest quality.

We purchased Ford at $12.88, and Home Depot at $28.75 in some of our large aggressive trading accounts. With the collapse of the stock markets over the past few weeks we would expect more than a one day rally next week. By trading in a few larger accounts we are able to act on the precipitous price drops that are occurring on a daily basis without committing funds from most of our accounts. We are determined to wait for the blow off in September/October before moving back to a 30% to 50% equity investment exposure in most accounts. By September we should also have a better idea of whether and how the economy is recovering.

Since this weekend is to be the best of the summer we won't have another post till Monday.


11 July 2002

We have finally realized that Clinton was involved in the collapse of WorldCom. Clinton Mississippi that is, for that is the world headquarters of WorldCom.

Given the way the stock markets are acting maybe we shouldn't be making jokes. But being mainly in cash helps our disposition. Our problem right now is keeping our powder dry. For that reason we are taking some time off this afternoon to take a drive, fix a bicycle and eat some Sushi.

The stock markets opened down on Thursday but many folks were looking for a bounce after the drubbing stocks have taken over the past few days. There was a quick bounce from down over 100 points on the DJIA to up 50 points early in the session. Then the sellers returned with a vengeance and the DJIA dropped to down 200 points. As we leave at 12:45pm, the market is again rallying and is down only 50 points which is 550 points of up and down movement since the opening.

Since today is 7/11 we thought we'd take a chance on Pepsi at $42.45 for a trade in many accounts. PEP shares have dropped 10 points in the last two weeks and we think the drop is part of the process of mutual funds selling what they can, rather than what they should. We've wanted to own Pepsi since the Quaker Oats acquisition. At this time we are buying for a trade, but if we get stuck in it we are comfortable adding at lower prices.

We also traded VZ for a one-dollar gain in some of our large aggressive trading accounts. We still plan on buying more VZ, if it moves lower.

Tomorrow is another day and we'll be at our desk bright and early. Shalom.


10 July 2002

Of course, it's all Bill's fault.

Before the opening bell Merrill upgraded Cisco and the stock rose a point. Merrill is placing a 30x earnings price on a stock whose earnings are going nowhere. That p/e doesn't make sense. Maybe Merrill is just trying to give its retail brokers a stock to push.

The WSJ reported that VoiceStream and AT&T Wireless are in preliminary merger discussions with VoiceStream to be the controlling merger partner. That doesn't make sense since AWE has four times as many subscribers as VoiceStream. The suggested merger is interesting but we will wait to see the terms before passing judgment.

For the third time Merck postponed its proposed IPO of 20% of Medco. Seems the best price they could obtain was $17, which was 25% below the $22 to $24 Merck had expected.

We read the other day on The Library of Congress web site that the stock markets' bottom during the Great Depression sell off was on July 8, 1932. We don't remember that bottom. Interestingly, the beginning of the end of the 17-year inability of the DJIA to rise above 1000 after making that high in 1966 began on Friday, August 13, 1982. We have always considered August 13, 1982, the beginning of the bull market of the 1980s and 1990s. In the back of our minds we have a hunch that September 13, 2002, will mark the end of the first phase of the bear market sell off, and present a decent trading buy opportunity.

On July 19 Standard & Poor's is throwing out 7 foreign companies including natural resource companies Royal Dutch Shell, Inco, and Placer Dome and replacing them with US Companies. So out goes Nortel at $1 per share and in its place Electronic Art at its all time high and 80 times earnings. Also EBAY at 45 times earnings. Once again an unmanaged index becomes a managed index.

With Northern Trust set to announce earnings next week we decided to take our lumps on our trading position and sold the balance of the stock we own this morning in all but our don't short term trade accounts at $41.29. In our more aggressive accounts our net loss is $5 per share on our reduced share holdings. We took this action because good news is bad news in the current market, and bad news is a catastrophe. We don't expect any surprises from NTRS, but since it is an OTC stock we would rather be on the sidelines for the earnings announcement.

Qwest was today's telecom criminal probe announcement. The stock dropped to $1.50 per share on the news. That's a total price of $1.50. Sad, very sad that all the long, long term Ma Bell holders have seen twenty and more years of investment evaporate in the relative blink of an eye. We traded Qwest at year-end 2001 and took a $100 loss on 1000 shares in the Model, basically buying at $12 at the end of November and selling at $12 in mid-December when we perceived no rebound coming in the stock after year-end. Our quick trading has saved us from many catastrophes over the past year and has more than compensated for the years when we sold to soon when taking profits.

AT&T shareholders approved a one for five reverse split after the Comcast AT&T cable property merger. We've never seen a reverse split that worked to keep the share price up. This reverse split in the AT&T stock representing the long distance company is another nail in the coffin created by CEO C. Michael Armstrong. We can't remember the name of the fellow from RR Donnelley who was CEO of AT&T for a few months until Wall Street analyst myopia encouraged AT&T's directors to let him go and hire C. Michael. Talk about mistakes, this one should become a Harvard Business School case. C. Michael will continue to collect a fat paycheck as Chairman of the Board of Comcast, while shareholders of AT&T line up in the bread line. And, C. Michael did nothing crooked. He just made a horrendous number of horrendous decisions. Where is the accountability for this type of failure? How can the Board of Directors of Comcast and AT&T allow Armstrong to remain in any capacity? Oh yes, the board owes their own sizable yearly stipend to Armstrong. Reform? Who is kidding whom?

By the way, we hope our readers will rest easier and stand down from yellow alert knowing that the NASD and the SEC are on the job tracking down miscreants and ne'er do wells. Lemley Yarling Management Company and its two employee owners are currently undergoing a routine SEC audit; while at the same time Lemley Yarling & Co, our broker-dealer subsidiary and its same two employee owners are undergoing an NASD audit. Our knowledge of the Patriot Act, money laundering, Al Qweda, and sundry surreptitious subjects are being extirpated though the thorough scrutiny of these over worked underpaid watchdogs.

Fidelity Investments has filed that they own an 11% stake in Biogen. Could they have been the folks who ran the stock from $38 to $50 in one hour's trading when Biogen announced that a regulatory board had backed approval of Biogen's, MS? If so, they now have a 25% loss. How the mighty have fallen. Rather than piggy backing on Fidelity and Janus purchases as in the old days, the still surviving traders and hedge funds that are left continue to bet against these two used to be able to do no wrong giants by shorting the stocks they buy.

By the way, the DJIA lost 3%, the S&P 500 lost 3% and the NASDAQ lost 2.5% today. Down volume exceeded up volume by over three to one on both the NASDAQ and NYSE. That type of volume difference is not climactic. As the NASDAQ approaches 1000 its rate of decline is slowing as the decline in the DJIA accelerates. That's because mutual funds are liquidating stocks to raise cash and the only stocks they can sell are blue chips. The DJIA is still overpriced and needs to revisit the 7800 area.

Trading in futures on individual stocks is only 21 days away. Can anyone say, "shorting on down ticks?"


09 July 2002

Happy anniversary to Katie Lemley on our 36th wedding anniversary. Thanks for staying through the thick and the thin. It's never been dull, always been interesting, sometimes even fun and getting better as the years go by. And luckily we have two wonderful daughters and a wonderful son-in-law, fantastic above average grandchildren, and many ex boyfriends who have also become part of the family.

The stock markets opened slightly higher on Tuesday but after the first hour the major measures moved to neutral awaiting President Bush's major speech on the current accounting scandal brouhaha. After the President's speech the stock markets lost ground. In his speech the President called for jail time and a bunch of other stuff that has nothing to do with why the markets are collapsing. The stock markets are collapsing because they were too high. The stock markets are collapsing because people bought concepts not companies. The stock markets are collapsing because folks didn't do their homework. And the stock markets' collapsing is the best and surest remedy to prevent such foolishness from occurring, until another generation of pie in the sky investors' come along. Everyone wants the pain to end. Everyone wants his/her account to go back up and take away the pain. That's not the way markets work.

When news of the rejection of a contract offer by the UAL machinists hit the tape at midday the stock markets began to drift lower. What the stock markets don't need right now is another bankruptcy. And an UAL bankruptcy would be a business caused bankruptcy not a fraud caused one. Just two years ago UAL sold at $90 per share and now it languishes at $9. Back in 1989 when the UAL buyout at $180 per share fell apart the market tanked big time. It would be ironic if a UAL bankruptcy set off another collapse. Coupled with Wyeth Labs losing twenty-five per cent of its value in four hours, a downgrade of Pepsi, and a couple of more tech tragedies the weight of bad news added pressure to the afternoon sell off. It seemed as if the big boys and girls were selling the liquid blue chip stocks to raise cash. Verizon dropped over a point on only 2 million shares and Pepsi with the downgrade was down $3 on only 5 million shares. At 1:40pm PG announced it was increasing its dividend from $1.52 a year to $1.64. The stock was trading at $88.50 down $1.80 on the day. Ten minutes later PG's share price was at $88.30. That's a bear market reaction to good news.

Entering the final hour of trading the DJIA was off 1%, the S&P 500 was down 1.6% and the NASDAQ was down 4%. At the close the DJIA was down 2% and the S&P 500 was off 2.5% for the day. The NASDAQ bumped higher in the last hour and closed 2% lower. All of Friday's gains have now been surrendered. Down volume outpaced up volume four to one on both the NYSE and the NASDAQ.

In our post yesterday we mentioned that one of the reasons the stock markets sold off was the story in the WSJ about Merck reporting phantom revenue at its Medco unit. It seems that Merck has reported $12 billion in revenue for Medco that was actually co-payment income to the pharmacies that provided Medco products to consumers. It was reported that Merck also deducted the $12 billion as an expense so earnings were not affected. Merck's response to the story was that since the two amounts netted out there was no overstatement of income, and that such reporting was in accordance with generally accepted accounting standards. Baloney. Merck has been one of the stars of the 18-year bull market. It has been puffed up as the premier drug company, above reproach, and that is why the revenue scam is disconcerting.

Merck was pumping up Medco's revenue numbers since many folks look at market value versus sales as a measure when deciding to buy or hold a stock. According to the WSJ the co-payment bookings in 2001 would have amounted to $4 billion or 10% of Merck's overall revenues. This is just an intolerable accounting trick that Wall Street has sloughed off as business as usual. Such a reaction by analysts and fund managers shows that the import of financial shenanigans has not sunk in. Of course most of these folks own or are recommending Merck. So their reluctance to be alarmed at this news, coupled with the fact that most if not all of them didn't know such revenue recognition was occurring, is further proof of the seat of the pants, good old boy/girl networking that passes for analysis on Wall Street

We are amazed at the temerity of institutional investors who are blaming losses in their portfolios on the financial finagling of Enron and WorldCom et al. When are these folks and fund managers going to accept responsibility for their own misguided outlooks on the stock markets and the individual stocks they freely purchased? These folks, many of whom never saw and may never have read about bear markets, refuse to accept the fact that they made lousy investment decisions. They won't recognize their own responsibility in losing their clients money. We are aware that the blame stops at our door and that if we lose client dollars we expect to lose the client, no excuses accepted. That's what managing money is all about.

CNBC in a promo today announced that Larry Lindsey, White House Chief Economic Advisor will be interviewed tonight by Larry Kudlow, CNBC commentator and self proclaimed economic expert, about corporate responsibility. The two Larry's have some expertise in this area since both took $50,000 fees from Enron in the past for consulting work. Not that there's anything wrong with that!


08 July 2002

The stock markets opened lower today on profit taking from Friday's jump. A negative story on Merck didn't help. But the markets rallied from down over 1% to down % at midday. As the House hearings on WorldCom commenced the markets began to lose ground. By the final hour of trading the DJIA was moving lower. At the close the DJIA was off 1.1%, the S&P 500 was down 1.3%, and the NASDAQ was down 3%. Declining issues outnumbered advancing issues by a small margin, but volume figures showed more than twice the down volume as up volume on the NYSE and on the NASDAQ down volume exceeded up volume by a factor of four to one.

Has Warren Buffett really called the low in the telecom stocks? Buffett's Berkshire Hathaway in conjunction with a partnership invested $500 million ($100 million Berkshire money) in Level 3 Communications an Omaha based telecom company which has cost many Nebraska investors their life savings. Level 3 plans to use the money to buy other failing telecom companies. By the way Level 3 has $9 billion in debt. On the news the stock doubled in price. But Buffett didn't buy common stock, he bought 9% convertible bonds that will place him above common stock in any bankruptcy. And he invested $100 million, which is like $100 for most of us. We also remember Buffett's investments in Solomon preferred stock in the summer of 1987 and a USAir preferred issue. He purchased Solomon to save the company from the clutches of a raider in 1987 and sweated out the Crash and the Treasury bond scandal a few years later before getting out essentially even with dividend income. He bought USAir preferred which we think he sold at a loss. Our point is that it's fun to bottom fish when you have a $10 billion dollar fortune. If not, caveat emptor.

This week in order to present a more complete picture, we will begin reviewing weekly transactions in the Model Portfolio as we present our new posting. On June 28 we purchased 400 Verizon at $37.63. On July 1 we charged the Model its quarterly fee of of 1% of assets under management which equaled $1050. We also sold 400 SBC at $31.33 for a profit of $425. On July 3 we purchased 300 shares of Northern Trust at $38.78. On July 5 we sold 400 shares of Northern Trust at $41.76 for a profit of $501. That leaves us with 300 shares of NTRS at a cost of $44.97 as we try to work our way out of the trade that blew up on us. On July 5 the Model Portfolio value was $421,783. For the year the Model was down 1.9%. The DJIA was down 6.4%, the S&P 500 was down 13.8% and the NASDAQ was down 25.7%.

Net (new loans minus loan payoffs) commercial loan origination by banks this year is expected to be $12 to $15 billion, down from an average of $300 billion per year in the late 1990s. Those numbers don't sound like economic growth to us.


05 July 2002

The rally we have been predicting for the last 1000 points down on the DJIA may have started today. On Monday we will know whether it ended today. The stock markets were strong right out of the gate and never looked back. Either the sellers are on vacation today, or exhausted, or both. The DJIA closed up over 3%, the S&P 500 was also up over 3% and the NASDAQ was up 4%. While volume was light, up volume exceeded down volume by the magic twenty to one figure on both the NYSE and the NASDAQ. Up issues exceeded down issues by a less magic but very good four to one. If today's rally doesn't continue next week then look out below.

In accounts that had a position in NTRS at higher prices before Wednesday, we sold the stock we purchased at $38.90 on Wednesday with some shares of higher priced stock. We sold at $41.76 early in the trading session on Friday. Averaging some of the higher priced purchases with the cheaper stock gave most accounts a small profit. In Wednesday's post we noted that we are trying to work out of a trading position that turned sour too fast for us to sell.

We also used the jump in NTRS to sell positions we initiated on Wednesday. As we've said, we are only trying to scalp profits in these quick rallies. We sold those shares at $42.35 late in the trading session. We made a nice one-day profit and since we have no confidence in holiday rallies in a bear market we decided to lock in the profit.

Here we go again. The big economic number released today was new job creation. For the previous three months the job numbers reported have been corrected with the next month's release. In fact, the March and April numbers have been adjusted lower twice so that rather than showing growth the numbers were actually negative. As long as the powers that be are investigating stuff, why don't they take a look to see why these numbers can be wrong four months in a row? We are making a point of this erroneous reporting because the positive spin on the numbers has offered temporary support to the markets, when in fact no job growth was occurring. As it stand now, this year there have been two months of positive job growth, May and June. Since the other four months of this year were subsequently revised lower, we would expect these last two months to also be revised lower. In June the gain came from the addition of 34,000 hospital jobs. We don't think so. Job growth is a lagging indicator, meaning that the economy turns higher before job growth. But with job growth lagging this badly and the numbers reported so unreliable, we don't see the recovery all the gurus do.

Yesterday, as we relaxed on our porch, talk turned to a comparison of the Japanese stock markets of the 1980s with the US markets of the 1990s. In the 1980s Japanese savers who had kept funds in low interest savings accounts discovered the wonders of a bull market. Japanese citizens and others poured billions of yen into stocks, running share prices to extraordinary P/E ratios and making tons of money. The Nikkei moved from 10000 to 50000 and in the corresponding real estate boom the land in downtown Tokyo was valued at more than all the real estate in the entire United States. That insane valuation occurred at the top of the Japanese stock market bubble. Japanese Corporations engaged in the same shenanigans that we are now discovering in some US corporations. And then the bubble burst. Japanese investors lost billions of yen, their market dropped from 50000 to 10000 in two years and there it has remained, with a few side trips towards 20000 for the past 13 years. History does repeat lessons not learned.

The next post will be Monday with the revised Model Portfolio.


03 July 2002

We had another down day today. Volume started to trail off in the afternoon as the Treasury bond market closed early. Friday will be a half-day in stocks and bonds. The stock markets were down most of the day. Beginning the last hour of trading the averages and indexes moved into positive territory. Trading dried up in the last hour and the averages and indexes closed basically unchanged for the day. Nevertheless, there were twice as many issues down as up on both the NYSE and the NASDAQ.

In early trading we added new positions in Northern Trust at $40.20 and Verizon at $36.90 to some smaller aggressive accounts. When NTRS dropped later in the day we bought more shares at $38.85 to add to small accounts and to accounts that hold NTRS at much higher prices. We began buying shares in NTRS at $48 several weeks ago and what was a trade has now turned into a work out situation. While we don't like losing money in a stock, we knew NTRS was volatile going in. The share price has been dropping on very little volume and part of the wide swings in the share price can be attributed to the fact that it is traded over the counter. In falling markets OTC market makers don't support stock prices the way specialists on the NYSE are required to. Hopefully the reflex rally that we keep expecting will rescue this position. The same volatility will apply to upside moves in any rally.

We are out of wise saying at the present. WorldCom and Martha Stewart remain the cynosure of the investment media. Martha is really a non-story and an example envy of her self made success. WorldCom is a symptom of a much larger problem that is going to take months to unfold. In the meantime we hope for a rally next week. It may begin on Friday. We have been down so many days in a row that even as bearish as we are, we believe a rally will occur soon.

Have a happy Fourth of July weekend. We will have a post on Friday afternoon.


02 July 2002

The holiday weekend can't get here fast enough. The stock markets are sick. Selling pressure continues. Upon reflection last night, yesterday was a very scary day. And we don't own much stock. But the selling was indiscriminate and in some cases relentless. The stock markets today began to fall from the opening bell. By midday the DJIA was down 2% and the NASDAQ was down 4%. A rally then occurred that carried the DJIA back to up 24 points before reversing. In the final hour the stock markets again started to head down. At the bell the DJIA was off 1% the S&P 500 was down 2% and the NASDAQ had lost another 3%.

One thought we have is that the thirty some things running stock funds and hedge funds are seeing market conditions they may have read about but have never experienced while managing money. And some of these folks are running billions of dollars. When the panic was on the upside several years ago all money managers were smart. Now is the true test, and many are failing.

It is a shame that so many long term holders of MCI, and AT&T, and US West, and Cincinnati Bell and Rochester Telephone have to lose most if not all of their investments because Wall Street was so greedy for fee income. Welcome to capitalism, the suffering side of capitalism.

Harvey Pitt is part of the problem and he wants to be the solution. The bills being considered by Congress to clean up the accounting profession are like the tax laws Congress passes. These bills are found money for lawyers and accountants to provide solutions-at a price-for evading the new laws' mandates.

Let's all get real. Mutual funds and individuals lost money because they didn't do their homework. Fidelity and Dreyfus and Janus and Strong are all asset managers that owned WorldCom. They advertise that their analysts kick the tires and smell the coffee before their fund managers buy a company's stock. Yet it took a junior auditor only one day to find the foolishness in WorldCom's financial statements. Where were all the fund company analysts?

A prepackaged bankruptcy filing for WorldCom would be a travesty because the bankers and brokers who encouraged and profited from the profligate management of WorldCom and in effect caused its present problems would be the very folks who profit from a bankruptcy.

Yellow terror warning, yellow terror warning. Throughout the world, Americans are to avoid clubs, restaurants, sporting events, parades, concerts and any places where large numbers of people may gather. Thanks a lot, guess everyone will be coming to our farm for the Fourth.

Steve Fossett circumnavigated the globe solo in a balloon. This was his sixth attempt. Why does this not excite us?

The CFTC approved trading in futures on individual stocks. SEC approval is pending. The first trading in these gambling tools is to begin in August and be limited to institutional investors. Supposedly they are capable of understanding the risks involved. Look out below.


01 July 2002

Sorry we missed a post on the 28th of June. We were traveling and having a good time and the markets were singing the same old tune. Glad to know that so many folks missed our words of wisdom. The DJIA on Friday was up over 100 points before failing in the last hour of trading to close lower on the day. Nevertheless, because it was mark up day at the end of the quarter, there were many more advancing issues than declining issues. That factoid reversed today.

The Model Portfolio finished the first half of the year down 1.5%. For that same period the DJIA was down 7.7%, the S&P 500 was off 13.8% and the NASDAQ was down 25%. Intermediate US treasuries gained 3.31%. The June 28 Model Portfolio has been posted.

In the last quarter we are pleased to have avoided the continued erosion in the stock markets, and to have maintained almost all the gains we made over the past four years. Some smaller portfolios under $50,000 that we have managed from the time they were $2000 IRAs suffered losses of up to 10%. But those portfolios also well outperformed the markets and the Model Portfolio on the upside over the past four years. By their nature, smaller portfolios are more volatile, which is why we no longer accept them for management.

The stock markets meandered aimlessly most of the day. This is a holiday week and except for unwinding quarter end positions from Friday not much action was expected. Unfortunately, after 2PM selling pressure increased and the DJIA dropped over 1% into the close, while the S&P 500 lost 2% and the NASDAQ crashed 4%. Is 1000 the next stop on the NASDAQ? A late day sell program hit the markets at the close. Today was a very bad day for the bulls.

We used an early morning jump in SBC to eliminate the trading position at $31.33 for a small profit or loss. We tried to sell the HAIN position at $18.50 both at the close Friday and on the opening today but didn't have any luck so we'll hold for a while. We also spent most of the day trying to lock in $2 per share profit in VZ but we were out of luck there too.

The ethical drug companies were under heavy selling today as the new quarter began. Guess the big boys and girls don't want to own them because of the pricing pressure these companies are under from Congress in an election year. As we wrote several months ago, elderly folks are the most reliable voters, and they don't like high drug prices. Since the present White House is led by the polls as much as the last, we expect the drug companies' pricing policies to remain under pressure.

The media went wild over the weekend about the lack of confidence in corporate management. Looks like Martha Stewart is the new Gary Condit. The chicanery in the brokerage business is nothing new. And the overpayment and lousy performance of CEOs is also nothing new. In the old days though, if shareholders didn't like the job a CEO was doing, they could mount a proxy battle and vote the charlatan out. These days, no amount of money or divine afflatus can provide the means to win in a proxy battle. The cupidity of current CEOs is matched only by the ability of lecherous law firms to secure the sinecure of perfidious leaders.

WorldCom will be delisted Friday, in a sad climax for long term MCI shareholders and a fitting demise for the reputation of the NASDAQ. With that one time high-flying index down over 70% in three years our only comment is that it couldn't happen to a more deserving entity. Having done battle with the regulatory arm of NASDAQ over the years we have always been amazed at the ability of these so called self regulators to allow the big boys to steal the candy jar and the store.

The wonder stock of today was 3M. It reported that earnings for the quarter would be better than expected coming in at $1.33 versus a street estimate of $1.23. Of course those numbers are before special charges et al which will reduce earnings to $1.13. MMM also didn't mention how total revenues would compare to last year. The share price rose $5 on the news. On a $120 stock that's like a $12 stock having its share price rise to $12.50. But big numbers wow the media who have already forgotten to ask about special charges which have been a way of life with 3M for the past few years.

The dog stock of today was IBM down over $4 per share. EDS lost $6.75 per share. Any stocks with accounting questions such as IBM and EDS were under selling pressure all day.

The US is threatening to pull out of the Bosnia unless its demands to be exempt from World Court jurisdiction are met. Even if the demands are met to exclude US servicemen from the new war crimes court, the win will be a Pyrrhic victory. The world political situation has not been this tenuous for a long time. In other confounding news it is reported that the US is moving closer to again supporting the repressive military regime in Indonesia. World events do matter to the stock markets.


July 2002 Thoughts

June 2002 Thoughts

May 2002 Thoughts

April 2002 Thoughts

March 2002 Thoughts

February 2002 Thoughts

January 2002 Thoughts

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.