Bud's Poem Page

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27 June 2002

No crash, stay in cash.

The pre opening indicators for the stocks markets were positive and so Treasury bonds opened weaker on the realization that the crash has been indefinitely postponed. The stock markets were up 1% in the first five minutes of trading and then pulled back. By 10 AM they had turned negative. And at that point we had to leave the office for the day. We'll comment on the remainder of today's action tomorrow.

We added Verizon to our aggressive accounts today and will be adding VZ to other accounts if it drops a bit lower. VZ yields over 4%. Hain Celestial jumped on news that it will be supplying McVeggie burgers to all the McDonalds stores in Canada. We also think there is some month end marking up going on in this stock. We'll decide tomorrow whether to trade it or hold.

Harvey Pitt SEC Chairman is "mad as hell and he's not going to take it anymore". So reports Maria Bartiroma of CNBC. Pitt says he is going to change things fast. And so we have nothing to fear in the future. The turmoil in the markets will soon be over. Not.

Larry Lindsey, National Economic Advisor to President Bush explained today that today's corporate problems are the result of lack of regulation in the 1990s. And now things will be different

All the cries of excess from Congress and the SEC and the White House are not going to hire people and create earnings. Today Motorola announced that they will meet operating earnings estimates and by the way they will be firing another 7000 people and taking a special charge of $3.5 billion. The stock rose on the news. In 2001 Motorola took a special charge of over $3 billion. In 2000 the special charge was only $500 million. Our question is when do yearly special charges become regular yearly charges and part of operating decisions?

The high yield market was crushed yesterday even as the stock market rebounded. We have never been fans of investing in high yield bonds. You may read our thoughts on the subject in the "Who we are" section of the website.

26 June 2002

We are going to jot down our thoughts through out the day since today may be more interesting than many. Hopefully it will provide a measure of our thinking process. When we walked in to the office this morning at 6:30 AM the NASDAQ futures were down 4%, THE DJIA and S&P were both down over 2%. First thought was to see if we could sell the DIS, NTRS or SBC near last night's close. No chance. Not such a worry cause they are good stocks so we go to plan two.

At what level would we buy more and begin to add to smaller accounts. $25 on SBC seems good with a 4.5 % yield. BLS looks good at $24. Verizon is cheap now with a 4% yield These telcos will survive and at these prices are cheap. Also looking at CUM and a bunch of others.

EBITDA is now thoroughly discredited, as are many of the analysts who used that measure. AOL may come under selling pressure because their balance sheet is a mess. Think DIS is OK but am going to try and sell yesterday's trading buy at $19. Bought t it yesterday cause it showed strength closing up for the day in a down market. If opens below 18 will cancel sell and look to buy more for trade. Buy at 15 plus for investment.

No chance to sell NTRS so look to buy around September low of $41.

Funny to hear all the folks at CNBC decrying the terrible excesses of the last five years. They wouldn't have a network if not for the bubble mania they helped to create.

8:31AM and the market is down 100 points. Canceled Disney sell at 19 cause opened OK at $18.85 As long as market is going down and it's holding we want to hold.

8:45AM finds markets starting to rally back. That's nuts. Gonna sell the DIS cause we can. Also of the four we own, DIS could have some accounting issues with all its debts and deals.

9:00AM has rally continuing, with DJIA only off 100 points. Makes no sense to us so we are just watching. Sold the DIS for 40 cents per share loss.

Time out for call from our daughter Kelle asking how things are going. Great we tell her. May be getting close to a buying opportunity so we may finally be able to make money for our clients. Tell her we are glad we aren't losing much if any for clients.

Call from another client asking if we are gloating. We tell them we are happy in cash but feel bad for the folks losing more money. Sad thing is we think there is a lot more downside. One thought is that if markets turn up we may get the short-term rally we've been looking for. But everyone including us will sell it.

WCOM's accounting scandal means that Arthur Andersen really did lose its way. Wonder if the other big four are in the same boat. Nice that we have an honest accountant who keeps us on the straight and narrow.

Everyone seems happy on CNBC that markets are only off 1.5%. More bad news to come. Bet we are off 3% by the end of the day.

GE back to positive. Up 50 cents. Wonders never cease.

AT&T is bouncing back from morning lows. Theory is that AT&T and Sprint (FON) will be the beneficiaries of WCOM's demise. We think BellSouth, Verizon and SBC are the winners. Think BLS may be able to buy WCOM out of bankruptcy.

Pepsi is down about 5 points in last three days. Might be a good trade. The Gatorade that Katie and Kelle are drinking training for the 500-mile Heartland Aids ride is enough to raise PEP revenues 10%. May be a trading buy. Doing nothing on it right now. If markets gets down 300 points this afternoon may look at it.

10:30 AM and the markets have settled down to await the end of the Fed meeting at 1PM. CNBC talking about capitulation. Talking heads. The end of the slide will not occur before autumn.

The economic news this AM was supposedly positive. Capital goods spending up, housing up, etc., but these numbers always get revised too, yet no one seems to remember. In fact when they don't get revised it is news.

Reuters headline just crossing the tape: Cloud of fear to overshadow Independence Day. Why can't the media find some positive stories?

Oops! Jim Grant the big bad bear is back on CNBC at 10:51AM. His theory is that bear markets restore confidence. He says watch out for bond mutual funds not pricing their bonds correctly.

From Jim Grant to President Bush on the tube to calm us all down. Deeply concerned about accounting practices. WorldCom outrageous. Will hold them accountable. Need for corporate responsibility. If Palestinians make the decisions we want them to we will take care of them. We are putting up the money so we call the shots. Interesting.

Verizon is now yielding 4%. Want to add that one for sure. VZ at 1997 low.

CNBC spent the morning chasing Jack Grubman , the Wall Street analyst who made WorldCom a $60 stock. They wanted an interview with him. He wanted to be left alone. The footage shown reminded of the OJ TV chase.

In a few accounts just sold some SBC because position is a little large. May place proceeds in Verizon. The pain of these two stocks will be rewarded in the future. Guess if SBC jumped to $35 next week we would sell, but don't see that happening, although when we bought SBC for a trade last week that's what we hoped. Just as in post Enron era the markets suffered we are now in the post WorldCom era. Qwest tanked today on accounting questions. At $1.75 per share is tempting.

CNBC has been running the Cantor Fitzgerald adds every hour today. Cantor is the investment firm that lost many of its folks in the 9/11 disaster. The ads are very moving and place today's events in perspective.

Selling pressure on AOL is gaining. AOL is probably going to become the center of accounting rumors, whether true or not. We had a few shares left in accounts that don't like trading -- and in our wife's account. With the WorldCom debacle calling accounting into question, we decided to take our lumps and move to the sideline. For those folks who didn't own SBC, we bought SBC shares with proceeds.

Now it is all Merrill, all Martha, all the time. Still think she is getting a raw deal. She should have had our lawyer who would have told her to keep her mouth shut. In all these cases it's not what was done, but what was said to explain what was done that gets folks like Martha in trouble. There is a reason for lawyers.

12:40PM and still holding down 1% plus.

Must be tough for fund managers who have lost 30% of their clients' money to get on TV and say everything is OK. Remember how we felt in 1987 and we had only given up gains.

1:11PM and all the talking heads are on CNBC predicting what will happen in three minutes. And we are listening to them. What does that say about us?

Fed neutral, takes no action. DJIA rallies 8 points and then heads lower.

Who does Larry Kudlow know? Why does Larry Kudlow know? Inquiring minds want to know.

Many analysts are predicting moves from WorldCom to AT&T by big users. We already have AT&T for long distance. But we had one heck of a time getting them to give us the plan they sold us. All the folks fired over the last few years are now needed by AT&T. E Michael Armstrong is on to the greener pastures of cable land.

1:20PM and the DJIA now down 185 points.

With the rally in Treasury bonds we certainly are sorry we sold them. But who knew that accountants weren't being accountants. By the by, Harvey Pitt is going to have to go as Chairman of the SEC. He is too close to the accounting industry, having represented them before assuming SEC job. Another fox fixing the chicken house. By the way, Tyco owns ADT, the home alarm company. Maybe they can make some alarms for the chicken house.

2:00PM DJIA down 125.

A Federal Court in Califorina rules Pledge of Allegiance unconstitutional because of the words "under God". Rush and G Gordon and Ollie and Bill O'Reilly not to mention Jerry Falwell and Pat Robertson and those Congressional defenders of all things holy Bob Barr and Tom DeLay and Dick Armey are all probably on their knees right now thanking God for this ruling. Just in time for the Fourth of July. They have material for 100 shows and thousands of speeches about pointy-headed liberal heathens and their responsibility for this ruling. Their ranting will fill the land till the Supremes overturn the ruling. No Martha tonight. No Gary Condit. Heck, even the WorldCom mess will be the second story on talk radio.

That ruling seemed to put a spark in the market as it rallied strongly with the NASDAQ, DJIA and S&P 500 moving to the plus side by 2:25PM. After a minor sell off in the last fifteen minutes, the markets rallied to close higher on the day.

Today's stock market action only postpones the inevitable.

Treasury bonds were strong all day.

WorldCom's market capitalization has gone from a high of $160 billion to zero.

Sic Transit Gloria.

25 June 2002

As we enter the last week of trading for the quarter, we expect some dislocations and volatility as institutional types rearrange the deck chairs on their personal Titanics. In the last two years over two trillion dollars of market value has evaporated in the meltdown. Mutual fund and institutional performance for this quarter has been abysmal, and the receipt of quarterly statements by fund shareholders is not going to be a pleasant experience. One of the reasons the S&P 500 is under performing the DJIA is that so many funds and institutional managers closet indexed the S&P 500 on the way up. Now as they abandon that strategy it's obvious that the S&P has to suffer more than the DJIA.

Like yesterday, the stock markets opened higher and moved up over 1% in the first hour and one half of trading. The NASDAQ turned negative about midday and the DJIA and S&P 500 also gave ground but stayed positive. With two hours of trading left the stock markets had all turned negative. Feeble attempts at a rally occurred for the next hour. Entering the last hour of trading the NASDAQ was down 2% and the whole market was looking as if were going to roll over. About the time that Majority leader Dick Armey said that Congress might not raise the debt ceiling by month end, the stock markets gave up the ghost with Proctor and Gamble dropping over $4 per share and Coke losing $1.50 per share. Also, maybe some folks finally realized that South America's turmoil is going to affect US companies. At the close the DJIA and S&P 500 were off another 1.5% and the NASDAQ was off over 2%. The daily one per cent drops are slow water torture of the kind we endured back in 1990. Luckily we have a lot more cash on hand.

During the day we reestablished our Disney position in aggressive accounts at $19.35. The shares are back down to last October's lows, and are in the DJIA in case there is a quarter end mark up attempt. Today it looked more like the funds that go short were marking up their portfolios by forcing prices lower. Even with only 20% at most invested in the stock markets in our most aggressive accounts these late hour collapses are no fun. That is especially true when we are looking for a rally.

This morning CNBC spent an ample amount of time making fun of Martha Stewart and the Imclone imbroglio. We are not consumers of Martha's goods, but she has done a tremendous job creating a media and fashion empire from scratch. The insider trading brouhaha is made to order for the media mavens who don't have the moxie to tackle the real issues of the causes of the tech bubble and the Enron Dynergy California energy crisis scandal. It is much easier to make fun of an attractive successful woman, who hasn't harmed anyone but maybe herself. Reminds of the media distaste for Carli Fiorina, who has done as good a job managing Hewlett Packard through the tech downturn as Chambers and Gerstner, but received much less credit.

Sun Micro is close to breaking the magic $5 per share number where stocks are no longer marginable at most stock brokers. AT&T Wireless is also approaching that level. $5 is an important level for many of the falling tech stocks.

24 June 2002

This morning the stock markets didn't bother with the head fake to the upside when the opening bell rang. They just headed lower. Maybe that was a clue to the fact that we were going to close higher for the day. After dropping all morning, around noon we had a quick midday reversal that began a low volume rally that brought the markets from down 1.5% to up 2.5% on the NASDAQ and up 1.5% on the DJIA and S&P 500 with ninety minutes of trading left. Entering the final hour of trading the stock markets were still hanging on to most of the gain and in another race to the close the averages were able to end in positive territory with the NASDAQ up 1.5% on strength in Microsoft.

We think the stock markets are setting up for a pretty sharp trading rally sometime in the next two weeks. And so we have been adding a few stocks to aggressive accounts over the last week. Unfortunately at the rate the stock markets are dropping we may be trading to get even. We added more shares of Northern Trust to accounts at $44.81. We also repurchased the shares of SBC at $30.01 in smaller aggressive accounts where we traded it last week. Finally, we repurchased the Hain Celestial at $15.20 that we sold several weeks ago at higher prices.

We are only buying for a trade, not to own. But we are buying companies that will survive the downturn, in case the floor drops out before our trading hopes are realized.

We mention our "trading only" rally thesis because we are seeing many more predictions about the end to this bear market sell off. Most of these are from folks who didn't see the bear market coming and who have remained fully invested through it. Any rally that does occur in the next month will only be a prelude to a major testing of investor resolve in the fall.

One line of reasoning for the stock markets to turn higher is that interest rates are so low, 2% to 4% on Treasuries, that higher price to earning ratios are justified. We don't agree and point to Japan where interest rates are effectively zero which means that no matter what companies earn that price to earning ratio would be more attractive than 0. Unfortunately the Japanese markets have been in the doldrums since they topped in 1989, thirteen years ago.

Another reason given for buying stocks now is that earnings are going to be higher this year. That may be true foe some companies, but it is also true that the improved earnings for these companies will probably still be less than they were a few years ago.

Bear markets sap the energy of all and since we haven't had a true bear market since 1974 we doubt there are many who remember how that felt. And those of us who were around then probably don't remember much of what happened thirty years ago either.

If you've been wondering how GE is going to make this quarter earnings number, you won't have to wonder any more. Today GE sold its' B2B, as in business to business, e-commerce business to Francisco Partners for $800 million. GE will record a $500 million gain on the sale. Why is GE getting out of a technology business that a few short years ago was going to revolutionize the world? And if that business is not what it was cracked up to be, why is Francisco partners paying such a big premium over book when any number of B2B companies are selling for pennies? Could it be that this sale for undisclosed remuneration is the way for GE to make its quarterly prediction?

While watching the Hartford Golf Tournament yesterday we noticed that Dynergy is the sponsor of this year's PGA Championship in the fall. That tournament is the last of the four major golf championship tournaments. At the rate Dynergy is dropping in share price we wonder whether they will be around by the fall.

22 June 2002

The stock markets closed the week at their lowest levels since last October and/or August. The Treasury bond markets were unchanged for the week with the two-year yield around 2.8%. Cash is currently yielding about 1.2%. The cash yield is nothing to get excited about until one looks at the year to date returns on the various stock market measures.

At weekend The Model Portfolio remained all cash at $421,000, a slight improvement, since we received the monthly interest payment on our cash balance. For the year The Model is down 2.1%. The DJIA is negative 7.7%, the S&P 500 is off 13.8% and the NASDAQ is down 26.1%. Even though all accounts are outperforming the averages and indexes, we would rather be under performing those measures and earning a positive 8% or 9% return as we did in the mid 1990s.

As the stock markets continue to drop we are becoming more encouraged that we will be able to deliver a positive mid single digit return for clients by year-end. A positive return is important for our clients who withdraw cash every year to supplement living expenses. We feel the responsibility to earn such a return. But we learned a few years ago that assuming too much risk to ensure such a return is not wise. And so for the time being we are marking time and letting the markets and individual stocks come to us, rather than forcing the issue.

21 June 2002

Happy Summer Solstice. We will be out riding our bike this afternoon so we will do a wrap up post tomorrow morning. We added a few more shares of NTRS to accounts today. The stock markets continued to edge lower through midday. Nothing to do but watch. Nice to be in cash.

20 June 2002

The stock markets are in a severe funk. Good news is ignored or treated as bad news, bad news means a 20% drop in share price for the offending company. Welcome to the world of the bear market. In this world margin calls become a way of life, calling bottoms causes hallucinations and buy and hold folks stop reading the financial pages.

The stock markets opened lower today and then fluctuated between up a bit and down a bit for most of the day. The Treasury bond market gave ground as the weak dollar coupled with a US fiscal deficit of $80 billion in May overtook and reversed the flight to quality rally that has been going on for the last two weeks. The US fiscal deficit year to date is $147 billion, which is the reverse of a $137 billion surplus year to date last year. Oops, can anyone say unwise tax cut?

In the final hour of trading both the stock and Treasury bond markets collapsed. The DJIA and S&P 500 closed over 1% lower and the NASDAQ dropped 2.5%. The stock markets action in the last hour was worse than the closing averages suggest. Also, the sell off in the Treasury bonds at the close was upsetting. The lousy close almost guarantees a sell off overseas tonight, which will create a bad tone for tomorrow's opening.

On top of all the normal bad news in the markets, this afternoon CNBC decided to interview James Grant, Mr. End of the World since 1981, for his commentary on the economy. Since we were trying to make some profitable long trades this afternoon we certainly didn't appreciate this little bit of scheduling.

We added Northern Trust to some accounts holding the stock and a few other accounts at $46.33. We also bought shares of SBC in some smaller aggressive accounts today at $30.50. We were going to hold these shares for sale when we sold the shares we bought yesterday in our larger trading accounts but the last hour sell off unnerved us and we sold these shares at $31 at the close for a small profit. We bought Disney at $19.53 this morning for a trade after the shares sold off $1.50 when Merrill Lynch lowered its earnings estimate on the stock. At days end we decided to sell the position basically flat at $19.60 because of the very negative market action in the last hour.

Political troubles in Peru, coupled with money problems in Uruguay add to the woes of South American countries. The attempted coup in Venezuela and the economic problems in Argentina are not harbingers of happiness in this hemisphere. Cuba remains anathema and today S&P downgraded Brazil's debt. We would guess that soon PG and Colgate and other large multi national companies with exposure in these countries might be taking special charges so that they may continue to show better operating earnings.

We read this morning that a political fund raising party last night garnered $30 million. It doesn't matter which political party had the party, but be assured it wasn't The Green Party. Among the donors were 21 drug companies that gave $250,000 each. Don't expect lower drug prices soon. Two other donors in were Delta Airlines and AT&T. AT&T is on life support but what's $250,000 for some of E. Michael Armstrong's best friends. As with the billions of dollars Armstrong lost on his ill fated diversification strategy, the political money is not coming out of his pocket. And since Delta was one of the airlines that received hundreds of millions of dollars free from Uncle Sam after 9/11, and since DAL is losing big bucks, we guess you can say that their donation came out of our pockets.

We are on this rant because we spent last evening reading the Sunday New York Times business pages. It's good we were relaxed when we started reading, because we were in a real meltdown when we finished.

Headline one: Bush Doctrine-Lock 'Em Up. The story went on to recount how The Bush Justice Department favors swift justice, not slow reform. What a pile of cow manure. Rather than reform the system, the story line is that all the government has to do is put the miscreants in jail. The example used was the swift trial and conviction of Arthur Andersen, the former accounting firm. Paul O'Neill, the Secretary of the Treasury and former CEO of the biggest air polluter in Texas, Alcoa, wants to hang corporate abusers from the highest tree. Give us a break. The accounting partner responsible in the Andersen case isn't in jail but 80,000 innocent people have had their lives turned upside down. Most of the Enron people and their Wall Street accomplices who knew of the shenanigans will never see the inside of a court room much less a jail. Lawrence Lindsey, President Bush's top economic advisor and former consultant to Enron at $50,000, thinks more regulation will not work. Harvey Pitt, current SEC Chairman and former lawyer to the accounting profession agrees. With folks like these two protecting us can Mike Milken as the next Fed Chairman be far behind?

Headline two: An Unlikely Clarion Call for Change. In this article we are led to believe that Henry Paulson, CEO of Goldman Sachs wants reform of the governance and auditing of American corporations in order to protect the individual investor. Believe that and he has some Global Crossing stock he would like to sell you at its old high of $50 per share. It's true that Goldman Sachs has made all the fees it ever will from the likes of Enron and Global Crossing and so they do need a new money making gig. Goldman Sachs is probably long senior debt of these corporations on which it will eventually make a killing. And Goldman Sachs also advised Tyco so there are still potential fees from that viper's pit. But there are surely better fee possibilities from reorganizing and advising corporations on how to evade the new rules and regulations that a totally bought and paid for by Wall Street Congress may enact.

Finally, we read today that Lou Gerstner, former CEO of IBM sold $57 million of IBM stock last November at $115 per share. IBM closed at $73 today. We're sure the explanation is "estate planning".

Beware when the foxes want to rebuild the hen house they have just wrecked.

19 June 2002

Happy 33rd birthday to our younger daughter Christine (Kelle). Old is a state of mind and if that saying is true, Kelle will never be old.

The stock markets opened broadly lower on Wednesday because of negative earnings forecasts in the tech area. Because the NASDAQ went down instead of the up we anticipated this morning, we unloaded our QQQ trading position for a 50 cents per unit loss. We used the proceeds to add to our Northern Trust trading position at $47.62 in some of the larger trading accounts that didn't already own NTRS. And we also bought SBC at $31.62 in many of those trading accounts and a few more because we expect program trading to move the DJIA higher in the next few days. And SBC is part of the DJIA. Also, SBC is at a multi year low and yielding over 3%, so it is a relatively safe long side trading stock, if there is such a thing in a bear market. Trading from the long side in a bear market is always treacherous, but NTRS is presenting at a William Blair conference next week and as with SBC the stock is at the low of its yearly trading range.

Several folks have asked why we aren't shorting stocks if we are sure this bear market is going to last a while. First, we aren't sure. Second, we have never shorted a share of stock in our 38 years of trading for longer than ten minutes. We lost so much sleep in the ten minutes that we had to cover the short by buying the stock back. Seriously, we are comfortable on the long side of the market. We have no expertise or inclination to trade the short side. Successful short side traders are few. Shorting stock involves a great deal of discipline and courage.

We aren't sure if the market blinked, but Monday's was one of the quicker rallies we have seen. Today's action has to be disappointing to the bull case. Everyone seems to be abandoning the tech stocks, and with good reason. It is the end of a quarter in the third year of a tech bear market. But there are still folks who haven't sold. Many of these companies have multi-billion shares outstanding. So they can trade at $1 and still be at two or three time sales. Reminds us of Japanese stocks in the 1960s.

More suicide bombings, Israeli reprisals and the FBI publicly preparing for terror attacks on the Fourth of July all combined to push the stock markets to close at the lows of the day with the DJIA and S&P 500 off over 1.5% and the NASDAQ down almost 3%. The Treasury market closed higher. We think there will be a rebound tomorrow or Friday because of triple witching that will give us the opportunity to successfully trade the two stocks we bought today. Water and maybe hope spring eternal in the hills of Wisconsin.

18 June 2002

We wish to clarify our last comment of yesterday concerning nebulous rumors suggesting the pre-packaged bankruptcy filings of Lucent and/or WorldCom and/or Qwest. We reiterate that we think it would be wrong for any of these companies to file bankruptcy. We think that given time, these three companies can solve their problems. And we also think it would be wrong because there are many long term MCI and Ma Bell shareholders who believed the NYSE and NASDAQ and Wall Street when those entities urged shareholders to be long term investors.

One reason for a quick bankruptcy solution would be to create fees for Wall Street investment bankers who were the ones who created the debt and revenue problems for these companies by encouraging the mergers. The investment bankers also issued fairness opinions that said the business combinations made sense, when in fact the combinations did not make long term business sense. One other reason that investment firms may be counseling bankruptcy is that their trading departments may have purchased large amounts of debt securities of these three companies and those securities would appreciate greatly in value with bankruptcy filings. Wall Street as always is interested in Wall Street and not the individual investor.

Today's stock markets opened higher on a positive housing start number which was up 11.6% although last month's number was revised downward and again no major news service reported the size of the downward revision. A tame CPI number also helped the cause. The DJIA and S&P 500 gained about one half percent while the NASDAQ gained one per cent in the first hour of trading. A negative report on IBM and the fact that Oracle announces earnings after the close placed a damper on the markets action. We decided to try and trade the rally in our large/aggressive accounts by taking a position in the QQQs at $28.53 and repurchasing Northern Trust at $47.85 in a few trading accounts.

By midday the stock markets had slipped into negative territory. Treasury bonds were also a tad weaker, although the cancellation of this week's auction of two-year notes because of the failure of the Congress to raise the debt ceiling had the short end remaining firm because of lack of new supply.

Entering the final hour of trading the stock markets were essentially flat. That there had been no sell off from yesterday's large gain was viewed as positive. In the final hour the markets vacillated with the DJIA and S&P 500 and the NASDAQ closing basically unchanged. Closing unchanged is a small, very small victory for the bulls. Don't blink.

17 June 2002

The stock markets opened strongly today and moved higher with what looked to be real buying. Treasury bonds gave back more of last week's gains as the stocks did better. Many gurus are saying that last Friday's collapse and rebound was at least an interim bottom, and from the looks of today's trading they may be correct. From their early Friday lows the DJIA and the S&P 500 have jumped about 5%. Of course, if you owned stocks before last week you are just making back some of the money you lost. The rally held in the final hour, and at the close the DJIA and S&P 500 were both up over 2% while the NASDAQ was up 3%. Tomorrow will tell whether this bear market rally has legs.

We remain committed to cash at this juncture. We are uncertain about the direction of the stock markets over the next few weeks, but we remain convinced that any real bottoming process will not occur until fall. The economic recovery, if there is one occurring, seems fragile. Our reading suggests that commercial construction has slowed and that the boom in condo construction has run its course for the time being. Mortgage refinancing may be adding a few dollars to folk's pockets, but the retail-spending boom is slowing. Some stores are doing well while others aren't. Dollars being spent at Wal-Mart are not being spent at the local grocery store that closed last week. Dollars not being spent at the Gap are being spent at the Limited.

We are in the midst of a news lull now. The India/Pakistan and Israel/Palestine conflicts are moving to page two and three. The recent arrests and announcements of further reorganization of the FBI/CIA have quieted the terror warning fiasco of several weeks ago. Coupled with the lethargy of summer we may be in for an ambling up and down time in the markets. A rest at this level while events and valuations are sorted would be a positive.

Since triple witching takes place this week, there may be some volatility. Also the new rumor is that the Fed will ease sometime this fall. Given that the trader talk a few months ago was that the Fed would tighten by May or June, it is apparent there has been a significant adjustment in the interest rate outlook. But the scenario of ease by the Fed does not jibe with a strong stock market. And so we chose to error on the side of caution, and avoid stocks while maintaining a cash position. If stocks strengthen, bonds will weaken and we will reestablish our two-year Treasury trading position.

We have seen talk in the media of companies like Lucent and Qwest and WorldCom filing prepackaged bankruptcy to solve their financial problems. The trouble with that scenario which may take place is that the common shareholder will be wiped out. And so such an occurrence would be another arrow in the heart of investor confidence. Certainly, Wall Street and the big boys and girls won't be hurt, but all the folks in Keokuk and Kalamazoo who had faith in the shareholding of America will be left by the wayside. Guess that isn't too surprising seeing how government is being run these days. But it is sad. And it also gives the lie to buying good quality stocks and putting them away for life.

14 June 2002

The stock markets opened broadly lower today on news of an attack on the American consulate in Pakistan, the announcement by Sprint PCS that wireless subscriber additions were below plan and a general carry over of the negative mood of yesterday. The stock markets sell off in the first hour was helped along by a larger than expected drop in the University of Michigan consumer sentiment index. The DJIA lost over 250 points to 9200 where a reflex rally occurred. The DJIA then staged a rally to down only 50 points by the two-hour mark. The DJIA spent the next few hours between down 50 to down 150 points before moving to down 35 as the stock markets entered the last hour of trading The NASDAQ, after being down over 50 points early in the session was back to even entering the final hour. In the final hour, the stock markets stabilized as traders evened positions not wanting to be long over the weekend.

Treasury bonds opened higher and gained strongly as the stock markets continued to fall after the opening bell. We used the spike to sell the US 3.375% notes due in 2004 at 101. We made 1.2% return on these bonds in exactly one month. That's what we will earn on our cash reserves for the entire year. We know we aren't going to get rich trading two-year notes, but we also aren't going to lose our shirts.

The 9200 level on the DJIA is where the market bounced higher in February and it was also the high point on September 17, 2001 when the markets reopened for trading after 9/11. That level corresponds to the 1000 level on the S&P 500 and the 1500 level on the NASDAQ. All three are at those levels now, which are logical support points. But as we said yesterday, we think the 9200 level has to be broken on the downside, followed by several days of panic selling before a real buying opportunity occurs. We don't see that occurring. Rather, our scenario is that the markets will resume the grinding downtrend that was in place last September, and is in place now, and slink lower for the summer to the 7800 area on the DJIA and 1000 on the NASDAQ. Then the excesses of 1998 and 1999 may finally be wrung out of the stock markets. If we are wrong, we still don't think we will miss a major move to the upside by waiting to see how the normally down September-October period plays out.

As we approach quarter end, selling may continue in the drug stocks and wireless and other underperforming sectors. We would guess that fund managers are hoping to survive the next two weeks without too much more downside. We may not see the month end mark ups that we normally do in a bull market because fund managers will be concentrating in getting out of this quarter's big losers. Many highly rated funds are down over 10% this year on top of lousy performance the last two years.

Many folks are trying to call and buy the bottom as in the old bull market days. Since this is a bear market, we don't think that strategy is going to work. But the drop today may mark a short term low. We aren't going to trade it.

The Model Portfolio is all cash, with a market value of $420,700. The Model is down 2.1% for the year, The DJIA is down 5.5%, the S&P 500 is down 12.5% and the NASDAQ is down 23%. This weekend is June Dairy Days in Soldiers Grove so we will be out watching the horse and tractor pulls and eating Lions Club brats. Happy Fathers' Day!

13 June 2002

The stock markets continued to drift lower today with movement of 1% to the upside and downside during the day for the DJIA. At the close the DJIA was down 110 points, the S&P 500 closed just above 1000, and the NASDAQ lost 22 points to close below 1500. That's a long way from 5000. If the DJIA breaks 9200 in the next week we may get some climactic selling. But, we don't think that will happen and so we expect the stock markets to slowly give ground for the summer. All the longs want a rally, but every move higher is met by selling by folks and institutions that want to raise cash.

With weak retail sales numbers and bad news from Lucent, the Treasury bond markets continued to rally. Now the gurus don't expect the Fed to tighten until the fall. That's as in autumn, not as in crash. Of course we said that back in the early spring. The US 3.375% note due in April 2004 has rallied almost 1% in the month we've owned it. We are close to taking our profit and awaiting some positive economic data to send bond yields higher and prices lower. If we have a punk day tomorrow we may get our chance to sell. Coupled with the coupon yield, we have earned over 1% in the last month. With cash rates at just over 1% for a whole year, we are tempted to trade back to cash.

We wish we had more to say, but the market doldrums and our cash position have left us content and risk averse. We have a list of stocks we are watching, but only watching for now.

12 June 2002

Proctor & Gamble and Maytag both announced increased earnings and sales forecasts for the present quarter. Both companies also inserted the caveat: excluding restructuring (PG) or special (MYG) charges. One of these days a company will come along and just announce higher sales and earnings, no if ands or buts. Until that time, all earnings and sales forecasts are suspect.

Early morning negative news began with the announcement that the ex CEO of Imclone Systems, Sam Waksal, was arrested and charged with perjury and insider trading. That event was unfortunate for him and for the markets and Bristol Myers. Also, Monsanto lowered expectations, Omnicom crashed $20 on accounting questions, Safeway said earnings would be lower and Goldman Sachs lowered its rating on Deere.

As a result the stock markets opened mixed and the Treasury bond market opened higher in price. Interest rates are never going to be raised, there is no inflation, Alan Greenspan is a genius, and the economic recovery will eliminate the projected budget deficits. Not! But Treasury bond prices are predicting nirvana.

Around noon the stock markets staged a rally from down 60 points on the DJIA to up 60 points. Improving prices in tech stocks seemed to be the catalyst with semi conductor companies and Microsoft up over $2 leading the way. As we entered the last hour and one half of trading, the rally had faded with The DJIA at unchanged. The bulls carried the day, or maybe it was the bears covering their shorts. Whatever, the DJIA finished strongly closing over 1% higher, the S&P 500 up .75% and the NASDAQ finished up over 1.5%.

11 June 2002

The stock markets opened higher on Tuesday and by 11am the DJIA and S&P 500 were both up over 1%. In the next hour stocks lost ground and by noon stocks were even on the day. The Treasury bond market strengthened as the stock markets eased. In the final hour the stock markets gave up the ghost and the DJIA collapsed to close over 1% lower, the S&P 500 lost 1.5% and the NASDAQ dropped 2.5%. As long as folks keep doubting that we are still in a bear market, we will have one or two-day rallies followed by more severe declines.

Food and retail stocks have been strong lately as the folks who manage money that have to be fully invested move to more defensive issues. Since drug company shares have not been a safe haven from the downturn, more dollars continue to be pushed into food and retailers raising share prices to "priced to perfection" valuations. Restaurant stocks and non-drug health care companies have also been under accumulation. Managed health care stocks (HMOs) have become another safe haven in this bear market, but on a long term basis Congress will have to address the problem of cherry picking and procedure denial by HMOs. Old folks are the most reliable voters. Share prices of drug companies are dropping because of pressure to reduce drug prices by seniors' groups. It's only a matter of time until the same groups bring pressure on HMOs, especially if HMOs continue to report record profits.

Clients have been receiving two sets of statements this month. The statement that arrived in an envelope with green on the front was for the 612 office to which all client accounts are being transferred this month. That statement's account number is in the upper right hand corner on the first page of the statement. The 612 statement shows a 0 balance and some pending trades. The 042 statement that clients receive in a white envelope will show the positions and account value as of the end of May. At the end of June clients will again receive two statements. The 612 account in the green marked envelope will contain the assets and market value and the 042 statement in the all white envelope will show a zero balance. ABN AMRO remains the clearing broker for our accounts and all SIPC and excess insurance remains in force. ABN is merely consolidating all accounts to New York. Of course, our office remains in Chicago, as do the folks that we deal with at ABN AMRO. Please call us at 1-800-654-9865 if you have any questions.

10 June 2002

The terror warning of the day, by satellite from Moscow, featuring Attorney General John Ashcroft, placed but a momentary damper on the nascent stock market rally that began last Friday. The stock markets had been climbing higher with the DJIA 60 points higher when Big John appeared on the nations' cable sites about an hour after the stock markets opened to announce that a Chicago street gang member was the latest known Al Qaida member. The DJIA immediately fell to unchanged on the day.

When stock traders learned that the man had been arrested a month ago, the stock markets yawned and resumed their advance. After a brief flight to safety rally in the Treasury bond market, bond prices stabilized and traded at unchanged on the short end to higher on the long end by day's end. After being up over 100 points in early afternoon the DJIA gave some back and closed about 50 points higher for the day.

The rally was not exuberant, but it looked like the kind of stealth rally that could make a trader a few dollars if that trader were in the right stocks. Our stock trading ability has been suspect lately and so we don't think we are missing anything by not being part of this bear market rally. Sentiment numbers are supposedly very negative, so a rally is expected. And the fact that a rally is expected leads us to question the sentiment numbers. Whatever!

We have no bright ideas except to wait out the summer ennui. Until we are convinced that this time it is different and that deficits don't matter, we are going to await the fall sell off sale.

7 June 2002

Happy 35th birthday on June 8 and much love to our daughter Lisa.

The stock markets opened sharply lower on Friday, after Intel forecast less than anticipated results late Thursday. A few minutes after the opening the DJIA and S&P 500 were both down over 1.5% and the NASDAQ was off 2%. After about an hour of trading the stock markets began clawing their way back toward even. The Treasury bond market was weak all day, which was unusual given the weakness in the stock markets. The employment numbers were good or bad, depending on the commentators market outlook. April's gain in employment was adjusted from up 48,000 to up 6,000. May's gain in employment was set at up 41,000, which is the difference in last month's reported and revised number. Is there a pattern here?

By the start of the last hour and one half of trading the DJIA was back to even for the day and the NASDAQ had trimmed its loss to single digits. In the last ninety minutes of trading the stock markets weakened and closed lower on the day in very heavy trading. All in all, this was just another day in the bear market. The lack of washout panic selling and the languid all day long recovery are not the mark of any bottom. More likely, today's trading was a return to the wishful buying days of two or three years ago.

This morning it was reported that Adelphia Communications had overstated its cable subscribers by 400,000. With all the revisionism in corporate reporting, we have been worried for some time that maybe the subscriber numbers reported by the wireless operators are also being fudged. While we think the chance is remote that major wireless operators are overstating their subscriber numbers, that possibility does exist. Since the markets are in a state of sell first, we decided to accept kismet and sell AT&T Wireless, the only stock we still owned in most accounts. We may revisit the stock in the fall or later. We sold the shares at $7.19. We dislike taking losses, but we don't think AWE is the most attractive stock in the universe, and if we didn't own it today we don't think we would be buying it. That's our best reason not to hold it. Including newly assumed and acquired debt of $7 billion; AWE has raised its total market cap back to $30 billion, even as its share price has dropped 50%. Moreover, NTT DoKoMo has a put option on the shares of AWE it owns that also causes us some worry. Finally, we would not be selling if we did not think the shares were going substantially lower. At $3 the company would be priced at one times sales.

We also sold Hain Celestial, more as a market call than out of any dislike of the stock. The stock has rebounded slightly from its low where we bought it. A Business Week article published yesterday said that Heinz might be considering acquiring the 82% of HAIN it doesn't own. Business Week has predicted 1000 of the last 30 corporate takeovers. We do think a takeover is possible, but not immediately probable. Since HAIN trades over the counter, and has at least one more bad earnings report coming, we think continued weakness in the overall OTC market will affect all OTC stocks. And so we are selling to buy back later at a lower price. We may be too cute, but as we said yesterday, we have done better scalping than holding over the last three years.

We own no stocks in the Model Portfolio. This is the first time since we began the Model Portfolio in December 1983 that we haven't owned any stocks. We have $319,300 in cash and $100,000 in two-year Treasury notes yielding 3.375% at cost. With a value of $419.900 the Model portfolio is down 2.3% for the year. The DJIA at today's close was down 4%, the S&P 500 was down 10% and the NASDAQ was down 20%. We won't have another post till Monday evening. Happy summer weekend, cash is king.

6 June 2002

The stock markets opened in a desultory fashion this morning while the Treasury bond market weakened on relatively good employment numbers. About an hour into the trading day, the stock markets began a swift sell off that took the DJIA down 100 points, while the NASDAQ dropped 2%, surrendering its last hour gain of yesterday. As the stock markets dropped, Treasury bonds firmed and closed on their highs. In the last hour there was no rally and the DJIA and S&P 500 closed down 2%, while the NASDAQ lost 2.5%.

Tech stocks led yesterday's last hour rally, and as we said then, tech stocks are not going to lead this market out of the doldrums. If Intel gives positive guidance tonight, any rally tomorrow will fade

The stock markets are suffering from an extreme case of disinterest by the investing public. And the institutional boys and girls have no idea what stocks will work for them. So there is a lot of floundering from industry to industry by the folks who have to stay fully invested in stocks as they look for a formula that will work some magic. Unfortunately, the Enron, Tyco, et al. have exposed the emperor with no clothes and no place to hide. And the folks who believed his stories of untold riches are too embarrassed to leave the party. Until they do, the slow tortuous slide will continue with intermittent flurries higher which fail.

With almost all tech stocks lower and EMC higher, we used the opportunity to sell our trading position in EMC for a 50 cents per share loss. We didn't do a good job with our trading this past few weeks. Almost all our positions had ten per cent or more gains at some time after we established them. But we were looking for more and so rather than scalping as we did all last year, we were too greedy. Isn't hindsight wonderful?

5 June 2002

In reading other commentaries of yesterday's stock market action, we were made aware of the fact that there was some volatile action up and down during the midday hours. Unfortunately, we were dozing at the time and so missed the activity. Sorry about that, but for us this market has taken on the character of watching a carrot grow. Maybe if we were long more stock we would remain more awake during the day. But then we would have a hard time sleeping at night.

The stock markets opened fractionally higher this morning and built on that gain throughout the day. In the final hour the DJIA maintained its gain and closed a bit over 1% higher for the day. The S&P 500 finished fractionally higher. The NASDAQ closed over 1% higher on a strong move by Oracle and other tech stocks in the last hour of trading. Leadership by tech stocks is not what this market needs. Treasury bonds weakened slightly on the stock markets strength.

Last evening during our daily walk we were considering our current outlook on the stock markets. We have been reading a lot of bullish analysis from folks who have good track records over the years. Barton Biggs, whose ideas we appreciate, has turned bullish. Jim Cramer is always bullish, but he is very bullish now. So why are we bearish and ignoring folks we respect? We think it is because many of the gurus, excluding Biggs, who are bullish, have only been managing money for ten or fifteen years and have no institutional memory of the 1960s and 1970s. Moreover, their business requires them to be invested in stocks while ours doesn't.

We have made a great deal of money over the years being cautious and because of that fact, we have the luxury of being able to go to cash when we are worried. Folks talk about cash as a non-investment, as if holding cash is a dishonorable investment posture. After all, we are charging a fee for our management, so why shouldn't we be in the market? Well, we don't consider investing other folks' money a contest, and we tell our investors up front that when we are unsure we will sit on cash rather than buy "defensive" stocks".

The mantra that if one is not invested in stocks he/she will miss the next market move works both ways. Folks usually are referring to the up moves in the market. We also are cognizant of the down moves. The current bear market in many tech stocks is a phenomenon not seen by over 90% of professional investment managers, because they are too young. And so they have no point of reference in how to react. Maybe they are correct and the stock markets will zoom higher in the next few months. More power and money to them. We don't think we are risking missing the next bull market by maintaining a large cash position.

CNBC reported today that state government income tax payments are down 28% from last year. That means layoffs and spending cutbacks during a time when the economy needs those dollars that won't be spent. Coupled with the billowing US government deficit, rising interest rates are right around the corner.

4 June 2002

The stock markets opened lower today and sold off through midday. Around 1pm, a rally ensued that brought the stock market averages and indexes to positive territory. The rally was led by the beaten down tech stocks and so was suspect. In the final hour of trading stocks gave up their gains and the DJIA and S&P 500 closed fractionally lower, while the NASDAQ gained a fraction. New lows exceeded new highs on the NYSE and NASDAQ for the second day in a row.

We sold our last trading stocks today, taking a $2 loss on both Genentech and Delta Air. We also sold our Worldcom for a minimal gain. That leaves us owning AT&T Wireless and EMC and Hain Natural Foods in the Model Portfolio. Not all accounts have EMC or Hain. After all our trading, we are back to where we were on the 15th of May, less a few dollars. One of these times our timing will work.

Right now the market internals are so negative that as contrarians we should be bullish. But the stocks holding up the DJIA and the stocks the momentum guys and gals are trading are overpriced just the same as the techs were a few years ago. Restaurant stocks selling at 30x earnings are speculatively priced. House building stocks selling at 20x record earnings are speculatively priced. And eventually Washington is going to crack down on the market leading HMO stocks that are increasing earnings by cherry picking only healthy folks for their services.

We remain bearish.

3 June 2002

The sadness of this time in the markets is emphasized by the apparent suicide of another company officer over the energy trading scandal. While we feel for his family, we also understand the losses suffered by all the folks who were employees and honest investors in the companies that are now going belly up or suffering severe share price loss and job reductions. We are sure there have been as much depression, divorce, and suicide among those folks also.

As if is to reiterate this point the following news item ran this morning. "Dennis Kozlowski, reportedly under criminal investigation for suspected tax evasion, quit as chairman and chief executive of Tyco International Ltd., citing 'personal reasons." We have mentioned several times over the past year that we never trusted that fellow. Seems the authorities are after him for tax evasion. Koslowski moved Tyco to the Bermuda to avoid paying US taxes, even though Tyco earns most of its money in the US. Such avoidance is a travesty that the US Congress allows. Last week we wrote of the money which has been lost by folks trying to avoid taxes, and now it looks like Koslowski is going to lose his freedom, also.

The stock markets opened lower and continued to slide downward throughout the day. The suicide of the El Paso executive and Kolowski's troubles, coupled with strange trading in the shares of NITE before the opening, caused by a computer glitch, all cast a pall over somnolent summer Monday trading. By midday the DJIA was down 100 points. By the final bell the DJIA was down over 200 points and the S&P 500 was also down over 2% with the NASDAQ down over 3%. The Treasury market strengthened as the stocks markets weakened. All the technicians are hoping for a panic washout, but one of the problems with real bear markets is that they seldom give folks what they want. Grinding lower with periodic rallies is much more the type of action to be expected in a bear market. Few trading today have experienced a long term bear market.

Bristol Myers gave back all of its gains of Friday and closed at the price we sold it on Thursday. Such action is an example of the washout of speculative players in this market and should be considered a bullish sign. But there are so many bearish macro signs abounding that we have again retreated to the sidelines. Today we sold HPQ at $19 for a fractional loss and we sold OATS for flat to down pennies to up a couple of points. We also closed our trading position in AMR for a loss of pennies. Markets are so thin that it is difficult to buy or sell anything in the size we trade. Imagine the difficulty the big institutional folks are have buying/selling stocks?

2 June 2002

The DJIA is now down 1% for the year, the S&P 500 is down 7%, the NASDAQ is down 17% and the Model Portfolio is down 1.5%. Last week we sold most of our trading positions established earlier this month. We have become more wary of the geopolitical situation in India/Pakistan that wasn't as dire when we established those positions. We hope it isn't too obscene to be worried about our investments when two countries are talking about starting a conflagration that could kill millions of humans. Because of the weapons the two countries have, and their geographic and economic importance to the world economy, we are taking the belligerence very seriously. It is certainly abominable and regrettable when genocide occurs in Rwanda or Cambodia. But the sad fact is that such homicidal behavior has little immediate impact on the world at large except to confirm that we are not all one world, and that some lives are still less valuable than others.

Since our vocation involves shepherding the financial resources of clients who have placed their confidence in us and their hard-earned dollars with us, we take very seriously the need to conserve assets before trying to expand assets. And so we have moved swiftly to cash as the world situation has deteriorated. While guru types are seeing the beginnings of economic recovery in US business, for some reason we don't think the daily economic statistics on which these pronouncements are based are meaningful enough at this time to warrant assuming trading or investment risk. We have been quick on the trigger for a number of years and have profited from our alacrity in reversing course when the situation has seemed to warrant such behavior. We'll continue in that vein till circumstances or markets change.

The media concentration on the so called War on Terror, coupled with the myriad White House pronouncements of potential terror attacks have created an atmosphere of risk aversion in folks personal lives that has reached over into the investment arena. We are among the few who think the warnings have been overdone, even if they are true, because in almost all cases there is little that an individual can do to avoid whatever actions may occur. The actions by leadership in the Congress and the White House remind us of folks who have to share the burden of their responsibility in order to carry out that burden of responsibility or the burden of their guilt in order to process that guilt.

As soon as the India/Pakistan belligerency dies down, and the terror warnings slow down, the potential for a rally exists if second quarter earnings exceed expectations. We will wait and see and don't expect to try and catch that train. We have been flailing in our trading for the past nine months. We aren't alone in that frustration, and since the S&P 500 is down 10% over the last year we are also not disappointed to be basically unchanged.

We do worry about clients who need current income from their managed accounts and that is one reason why we are so quick to raise cash when our trading feel suggests a return to caution. For we know how difficult it is to recover from a hole the markets sometimes dig for investors. This is a time to employ caution and continue to await a firm panic bottom.

There will be no update of the Model Portfolio till Wednesday, because of the account number switch from the 042 field to the 612 field, which will be accomplished Monday night, we hope, by ABN AMRO.

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.