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30 June 2004 - Evening Comment

7:22am and we are providing the website for Mesirow. The first: http://www.mesirowfinancial.com gives an explanation of who Mesirow is and the second: https://eview.mesirowfinancial.com/eview/online.html is the site you will want to bookmark or make a favorite since it is the one you will use to view your account. Do not try to view the account yet, repeat please do not try to view the account yet, since it isn’t there. We will notify you when it is.

7:10am and there are rumors around that the U.S. has discovered another possible case of mad cow disease. What is interesting is that the test that has discovered the possible disease is can give false positives and so the suspect cattle have to be shipped to Ames Iowa for further tests to confirm. But most importantly, only one in one hundred cows are tested at all. That isn’t encouraging.

By the by, for those of you who are worried about your meat supply we are happy to announce that Bud’s Better Beef has two steers ready for slaughter in the fall that have never left the farm and who’s mothers and grandmothers and fathers and grandfathers were all born on the Lemley or Flesch Farms.

7:16am and Governor Zhou of the Chinese Central Bank has informed officials that the bank will not tighten further because a soft landing is in the works. Isn’t it marvelous how our communist friends have the ability to act swiftly and control inflation and solve problems within a month? Not.

8:17am and Nortel is no longer going to manufacture the telephone equipment it sells. We have never liked this outsourcing but the stock is going to open higher on the news. Tellabs made the same decision last year. These arrangements confirm that equipment is a commodity and that no special quality is conferred by the logo. It has probably always been so but having grown up in the era of Madison Avenue advertising we have this deep down belief that there is a difference. We know there is a difference in packaged food products.

The outsourcing allows the companies to screw union workers and get out of the wage game and while it is inevitable it is still disconcerting if you are the person losing your job that you have done well for 20 years.

8:37am and out of the gate the screen is mostly green with only the oils as a group showing red. Today is mark-up day for mutual funds. Treasuries are down a bit in yield up in price with the ten-year down 3 bps to 4.66%.

On CNBC this morning one of the talking heads said that the for the Fed to be in a neutral position in relation to the economy Fed funds should be 2.5% above the inflation rate. He posited that since the inflation rate is 2% (we say much higher) the Fed Funds rate should be at 4.5%. Until the FED moves the rate to that level it will be in an accommodative position and pumping the economy according to the guru, Brian Wesbury.

9:34am and the DJIA is now negative and the NAZZ is positive in light trading. We have a 30% three week gain in NT and while we think their accounting investigation will come out OK we are inclined to take our profits and say thank you. We are hoping for a pop at the end of the day and if we get it we may say goodbye.

10:44am and we hope the Iraqis place Saddam on trial pretty soon so CNBC can get some new footage of him. Every time CNBC mentions Saddam they show the same footage of the corpsman checking him for lice and the inside of his mouth. So far this morning we have seen the footage eight times. Ugh!

Stocks are having a mid morning relapse as the DJIA is down 33 points and the NAZZ is off 2 points. Breadth is 5/3 positive on the NYSE and barely positive on the NAZZ.

12:01pm and the Chicago Purchasing Mangers Index for June was 56. May was 68 and that weak data drop has given legs to Treasuries. Adding that data to the GM and WMT news of yesterday has traders a bit worried. The reality is the Fed should not be tightening now from a standpoint of the economy but is ahs to do something because of inflation. And the stagflation monster is waiting in the glen.

1:14pm and it is ten minutes to zero hour or rather 25 bps hour. At the present time the Treasury ten-year is at a 4.62% yield and the thirty-year is at a 5.30% yield. The DJIA is of 17 points at 10396 and the NAZZ is up 4 points at 2038. The S&P 500 is down1 point at 1135. We’ll see how thing look in and hour.

1:17pm and the Fed raises the Fed Funds rate by 25 bps and Treasuries are rallying and stocks are creeping higher.

2:02pm and stocks are moving higher while bonds are unchanged from right before the Fed announcement. Volume is ultra light and should stay that way for the net few weeks with the Holiday coming up. The fact that stocks have rallied a bit is a good sign for the bulls.

2:20pm and we are going to sell our CHTR trading position for a de minimis loss. The shares are trading at $3.90 after visiting $3.65 earlier today. The share price jumped in the last half hour as James Cramer of www.realmoney.com fame recommended it and it looks like the buying occasioned by followers of Cramer caught a vacuum to the upside. We may go back to it, we may not. We aren’t selling the NT because it didn’t pop.

3:02pm and the ten-year Treasury closed at a 4.61% yield and the thirty year closed at a 5.31% yield. Europe closed mostly lower on the day. At the bell the DJIA was up 25 points at 10440. The S&P 500 gained 5 points to finish at 1141 and the NAZZ gained 15 points to end at 2050.

And tomorrow is another day.

30 June 2004 - Morning Comment

6:20am and today is the end of the quarter and the day the Fed raises interest rates for the first time in four years, or so the gurus say.

We have no game plan for today. Overnight Hong Kong was higher, Japan was slightly lower and Europe is mixed. U.S. futures are under fair value. Trading will be light ahead of the 1:15pm announcement and so will our comments.

Everything that could be said about this event has been said. We look forward to July.

To our clients we would remind that the transfer of accounts to Mesirow will take place on the evening of July 16. You will have to go the Mesirow website and set up your account info to enter and we hope to have you do that the week of July 12 if the name and address transfer goes well on July 9. Stay tuned, these are exciting times.

So let the games begin.

29 June 2004 - Evening Comment

8:02am and now it seems that Citigroup is going to by New York Community Bancorp to one up Jamie Dimon on the JPM/ONE merger.

Washington Mutual is cutting profit estimates and announcing job cuts. WAMU is a big mortgage lender and it says that rising long term interest rates are going to hurt its profits.

In light of Wal-Mart and GM’s lowered sales forecasts of yesterday the tax refund pop may have run its course? We don’t think the Federal Budget can absorb another tax cut without a spending cut also and thus a vicious not virtuous cycle may be commencing.

8:50am and stocks opened mixed with no trend. WAMU is off $3 per share on the earnings shortfall announcement.

9:18am and after lollygagging for a while stocks have now moved into plus territory with the DJIA up 40 points. Breadth has improved with it just positive in the NYSE and 2/1 positive on the NAZZ. The NAZZ needs to be the leader in the rally.

We bought JPM at $37.85 in our larger and aggressive accounts and we also bought some Q at $3.56 to spread around in our accounts that don’t own any yet. We think Q is off because of quarter end selling which will end tomorrow.

Consumer Confidence, as measured by the Conference Board, whoever they are, was announced at 101 June versus 95 in May. That is the reason for the pop in stocks. But that doesn’t square with the lower sales figures at GM and WMT.

9:44am and the SEC is supposedly investigating Capital Research & Management which manages the very popular American Funds Group. The investigation centers on the fact that Capital management directed brokerage commissions to brokerage firms that sold the funds products.

The SEC has arrived after the horses are out of the barn. American Funds have a stellar record and folks should be happy they were steered to them for whatever reason. Brokers have to make a living and those brokers who placed their clients in American Funds did their clients a favor.

In the NYT story there is no mention of the great record compiled by the fund family.

10:29am and the WSJ reports today that AT&T is further exiting the consumer telephone business. We think that is a good idea because of the costs involved and because all of America will be happy to have one less telephone company calling at night. 70% of AT&T’s business comes from business and it makes sense to direct resources towards keeping and expanding that business. Total exit from the local business would cut revenues by $10 billion over the years. But AT&T would become a much more focused company. $20 billion a year in revenues is still a good chunk of change. We think T is an end of year purchase candidate since we see no catalyst to get it moving before then and there is probably a dividend cut in the works.

1:07pm and we increased the size of our Q bet by adding to most accounts at the $3.55 level. Stocks are higher and breadth on the NYSE has been improving. CNBC has started its Fed meeting of tomorrow coverage and so we have the sound off.

Earlier the talking heads were trying to decide whether the WAMU news was company specific or applied to a squeeze going on at all mortgage originators. The consensus was that it was company specific. We ourselves are more inclined to give the benefit of the doubt to the boys and girls mixing and matching maturities and interest rates that they will be able to assume too much risk and blow up a few more outfits. Hopefully it won’t be JPM.

1:33pm and Treasuries are up today with the yield on the ten-year down 5 bps. With the slow sales numbers maybe the Fed won’t raise rates. That would be a shocker but we have no idea how stocks would react. We know some interest rate hedge funds would probably be wiped out though.

2:04am and entering the final hour of trading the DJIA is on its high up 65 points and the NAZZ is up 15 points. Breadth on the NYSE is even and 5/3 positive on the NAZZ. Volume is summer light. The last hour won’t mean much today and we would guess tomorrow will be quiet until 1:15pm and if the raise in the Fed Funds rate is 25 bps it will remain quiet, we think.

At the bell the DJIA was up 56 points at 10414. The S&P 500 was up 4 points at 1137 and the NAZZ was up 15 points at 2034.

And tomorrow is another day.

29 June 2004 - Morning Comment

7:14am and it didn’t take long for the euphoria of the turnover in Iraq to dissipate. And with 6 folks kidnapped and three soldiers killed overnight the worst part of the occupation is once again apparent.

We do think, unfortunately, that the kidnappings and daily deaths are being ignored by the population as a whole. Folks have to lead their daily lives and while all of them feel some pain for the losses they also have pain in their own lives and the need to provide and do for themselves and their families. So it is not crass indifference but more an ‘I can’t do anything about this right now anyway’ frame of reference.

For these reasons we don’t think the daily deaths are having an effect on the markets. Traders are remarkably self-centered and focused on making a dime. If a news event is not affecting that goal it has no place in their consciousness.

Individual investors are on the sidelines awaiting the next crash and mutual funds and large institutions are also treading tenderly. That is the reason we have become more aggressive in our purchasing. We are now at 40% invested in some of our larger accounts and more in our smaller aggressive accounts. Our other accounts remain at 20% or less. We have one stock we still want to purchase and we will do so before month end. That stock is JP Morgan. With the closing of the purchase of Bank One on July 1, JPM will have the size to be totally competitive with Citicorp.

Like the battle for recognition by Bush the son versus Bush the father, the JPM/ONE merger will now pit Jamie Dimon the acolyte against Sandy Weill the mentor who abandoned him. It isn’t unusual for the corporate world to have Shakespearean conflict, which is why Shakespeare is so popular. And since Weill is on the down slope and Dimon the uptake we are betting that JPM has the leadership and the size to grow by cutting. Over 10000 jobs are going to be eliminated and there will be carnage in Chicago but since the folks being fired are champions of capitalism they will understand. Not. But it will happen and write-offs will be announced and then JPM will have a free ride for a few years as it grows earnings on the clean books created by the write-offs.

Overnight all the Asian and European markets were lower. That sets the U.S. markets up for a sell off at the start today, but by the end we think stocks will be higher.

So let the games begin.

28 June 2004 - Evening Comment

7:16am and we honestly can’t see what difference the ‘transfer’ of power two days early makes. We are reading market gurus who say the move will change the equation and we are just dumbfounded. The U.S. is not pulling out any troops, has to keep training Iraqis and now has the added layer of bureaucracy to deal with when making decisions. Ah well hope springs eternal. We think Iraq is a mess that will only go away when we declare victory and leave.

7:21am and the EU has delayed a ruling on the Microsoft controversy which is being taken as a positive for MSFT. We saw several mentions of MSFT over the week end and if the big boys and girls can get MSFT through $30 on the upside that would sure help a market rally.

Barron’s had an article pooh poohing the run-up in telecom equipment stocks last week so they may open weaker this morning. We think the effect will be short-lived.

7:32am and annualized (May to May) personal consumption expenditure were up 1.6% ex food and energy. The overall number was up 2%. Personal income was up 0.6% in May and personal spending was up 1.0%

7:42am and Wal-Mart has lowered its June sales forecast to 2% to 4%.

8:51am and stocks have opened higher and the buying seems to be picking up strength. The DJIA is up 70 points which is the high for the day after a 40 points higher opening and then a little pullback. The NAZZ is up 12 points. Breadth is very positive.

9:12am and Treasuries are weaker on the spending data. The ten-year is up 5 bps and the thirty-year is also up 5 bps in yield.

10:43am and we bought Time Warner for more accounts at $17.43. We want to own a cable stock and we can’t bring ourselves to buy Comcast. The TWX gives us other exposure and we have had decent luck trading the stock. Our fear level with this holding is very low. That doesn’t mean TWX may no go down but if it does we will buy more. We continue to think that AOL is an unappreciated asset not a liability.

11:34am and United Airlines is not going to get its loan from the Feds. We don’t know what this means to the ultimate emergence of UAL from bankruptcy but we are sure there is more than a bit of politics involved.

Breadth is 3/2 positive on the NYSE and flat on the NAZZ.

1:42pm and the euphoria over the transfer of power lasted five hours. The DJIA and S&P 500 have given up their gains and the NAZZ is now negative. Breadth remains slightly positive on the NYSE and is slightly negative on the NAZZ.

Microsoft can’t get going and is now lower on the day as are many tech stocks.

We think the markets will rally a bit in the last hour but the failure of this morning’s big push has to be viewed in negative terms. Now the bulls have to hope that the non event of the Fed lowering rates 25 bps on Wednesday will some how rescue stocks. If not the long holiday week end will act as a damper.

The negative article in Barron’s has finally hit Ciena and Tellabs. They are down a bit more than the drop in the NAZZ would call for but we remain committed to these stocks as speculative buys.

The ten-year closed 10 bps higher in yield, lower in price on a supposedly inflationary consumer spending number released this morning.

But where are they spending? Reuters is ascribing a comment to a top General Motors official that June car sales will be weak and coupled with Wal-Mart’s reducing its estimate of June sales the markets were not able to hold their early gain.

If WMT and GM sales are failing then the Fed should not raise rates unless inflation is really moving higher. And if inflation is moving up amid desultory sales we have…stagflation.

3:02pm and after the up and down movement the DJIA closed down 15 points at 10357. The S&P 500 lost 1 point to 1133 and the NAZZ dropped 5 points to 2020.

And tomorrow is another day.

28 June 2004 - Morning Comment

6:41am and stocks are higher around the world as the handover to the Iraq Ruling Council of control of the country occurred early this morning U.S. time. So we may be having the handover rally this morning. We’ll have to see the volume. A talking head on CNBC is positing that this is a brilliant move (probably similar to putting Guinness in bottles if you’ve seen the ad). What it does do is fool the terrorists who may have been planning attacks to mark the turn over. Now they will stage attacks to mark the day after the turnover.

It is too bad for all the cable channels that will now have to change their program leads from “Countdown to Turnover” to “It happened early folks” or “The first day of the rest of Iraq’s history”.

The supposed change in control is good from the stand point of traders because for sure they will be able to leave late Wednesday for the long Holiday since only the Fed move on Wednesday afternoon is left to affect markets in a big way this week.

We have been adding stock to our more aggressive accounts because a rally seemed in the mix and now we’ll find our how much strength the bulls can muster. We have not been adding as much to our other accounts because while the bull move may be coming if the volume doesn’t increase it will be a short lived move.

So let the gains and games begin.

25 June 2004 - Evening Comment

7:25am and according to gurus the S&P 500 need a close above 1140 today, preferably on volume to confirm a breakout. A close below 1132 today would not be good for the bull case.

7:28am and the news that AT&T’s bonds may be downgraded to junk status is a reminder of the callousness of capitalism. T now joins EK and XRX and the non existent Digital Equipment, and Bethlehem Steel and many other former blue chip must owns on the trash pile of adapt or perish. Everyone talks of capitalism in reverent tones but true unfettered capitalism has no feelings, cares not a whit for the folks who lose their jobs, and seeks only to reward the most innovative and the most efficient. That is why we see United Airlines the first major airline which was once a part of Boeing now going the way of Pan AM and TWA and other illustrious names of the 1950s and 1960s.

The only thing we mourn is the loss of jobs from the failure to innovate by managements who were and are paid way too much for the goods delivered. The little people lose their jobs while the CEOs retire to private golf establishments around the world. We do wonder whether they realize how unworthy they are of the riches they have received.

7:32am and final first quarter GDP was plus 3.9% and the GDP deflator (inflation) was 2.9%. The revision downward of GDP from last reported 4.4% growth was because of a very large increase in final numbers on imports. Also the Core Personal Consumption Rate was revised upward from 1.7% to 2%. According to some this is the Fed’s preferred measure of inflation probably because it is lower. Fed governors have been preaching recently that the Fed Funds rate should exceed the inflation rate. The GDP Deflator is also a measure of inflation.

The GDP Deflator is an inflation calculator for adjusting costs from one year to another using the Gross Domestic Product (GDP) Deflator inflation index. This inflation calculator is based on the inflation rate during the US Government Fiscal Year, which begins on October 1 and ends on September 30. This inflation calculator will compute inflation from 1940 to 2009.

7:43am and the futures have now turned lower and so a lower opening is in store for the markets.

8:46am and stocks opened lower for about 5 minutes and then moved to the plus side. Volume is moderate and breadth is positive.

Michigan Sentiment was 95.6 versus 90 last month and existing home sales rose 2.6% to a 6.8 million annual rate and the headlines will say that’s a new record. But they grew about 12% less than new home sales and we think that is all related to the financing available on new homes and the fact that new homes are more likely lower in price.

9:06pm and we are buying Nokia at $14.25 and Bristol Myers at $24.75 for our larger and more aggressive accounts. We are also trying to buy FON at $17.25 for those accounts.

The BMY purchase is our ‘if Kerry doesn’t win we won’t feel as bad stock’ because BMY will move higher. While we are waiting we receive a nice dividend.

Treasuries are lower on the GDP Deflator increase.

10:29am and stocks are pulling back from their highs for the day. Breadth is positive as are the major measures. We added more shares of CHTR to our aggressive accounts at $3.80.

10:57am and stocks are losing steam and the major averages seem headed for the lower side of even. Breadth is 6/4 positive.

11:48am and in our aggressive accounts we are buying Darden Restaurants of Red Lobster and Olive Garden fame at $20.60. A few days ago the company suggested that earnings would grow at a double digit rate in the years ahead. The company has been having troubles with its Red Lobster chain and that is the reason the shares are down from $25 at the end of March.

1:07pm and the DJIA has turned negative and is now down 20 points. The NAZZ remains in positive territory and breadth remains positive. The battle at 1140 on the S&P 500 is a crucial one for the bulls. In our readings today we see some technicians suggesting a completion of a fifth Elliott wave and they are suggesting a down turn of at least 2% to 4% with maybe more to follow. In the opposite camp are technicians who focus on other variables who see a breakout in the works.

We are buying in our aggressive accounts because we think there is a breakout to the upside coming that may be short but may also be sweet. We are taking a measured risk in these aggressive and or larger accounts. And we are leaving room to add to the stocks we are buying at lower prices. In many of our smaller or less aggressive accounts we are content with our overweighting in the speculative telecom stocks since they offer more bang for the invested dollar and allow us to keep oversized cash positions.

1:55pm and as we enter the final hour the DJIA remains lower and once again we will see who wins the battle of the bulls and bears for the hearts and minds of all traders for the weekend.

We bought the Sprint at $17.27. If the shares move lower we would like to add FON to all accounts. The equity of the company is priced at $25 billion which is less than revenues of $30 billion. The wireless component comprises half the revenue and that segment is growing while the land line side is not. But the land lines are located in areas where we think the competition from cable is not as strong as it is in the major metropolitan areas. FON does have $17 billion in debt but that is a manageable amount.

3:02pm and the DJIA closed down 30 points at 10412, the S&P 500 lost 3 points to end at 1138 and the NAZZ gained 10 points to 2027.

And tomorrow is another day.

25 June 2004 - Morning Comment

6:29am and welcome to the last day of trading for the last full week of trading for at least two weeks. Next week after the June 30 quarter end stuff with the Iraq turnover and the Fed raising rates by 25 bps we think many traders will begin their July 4th holiday early. So the next five days should be interesting and the most active of the near future. The markets anticipate and once they have certainty they then begin anticipating something else.

Asia was higher overnight but Europe is lower, neither by a great amount. U.S. futures are in positive territory. With the weekend upon us a rally of any magnitude would be unusual. Gold is lower as is oil. The final first quarter GDP number for the first quarter is announced at 7:30am and that should be a non event. Then Michigan Sentiment and existing home sales are the only two numbers for traders to react to today. They come around 9am. It will be interesting to see how existing home sales do since they don’t get the no money down incentive that many new homes do. New home sales announced yesterday were up 14% in May.

We are well satisfied with our portfolios but we have a couple of big stocks like Time Warner, Nokia, JP Morgan, Bristol Myers and the recombined Sprint that we are looking to buy. That will fill our plate and get accounts to 50% if we act.

So let the games begin.

24 June 2004 - Evening Comment

7:30am and durable goods orders were down 1.7% in May and down 0.7% ex transportation. The durable goods orders were expected to be positive. Jobless claims climbed 13,000 to 349,000. Those are not numbers that suggest recovery. But they will be dismissed today. Treasuries are rallying on the news with the thought that there is no way the Fed raises 50 bps next week. Once again we ask can anyone say stagflation.

7:32am and with the Microsoft upgrade we mentioned in the morning post we think Intel and other large cap tech stocks are going to get some action. The MSFT upgrade is interesting because BankAmerica just lowered its equity exposure in managed accounts to 60% from 65%. The fellow who runs that operation has a good reputation and so the upgrade carries weight. But it doesn’t jibe with the downgrade in equity exposure. Our guess is that there is some catch-up at work in this call.

7:42am and there has been a huge blast reported in an Istanbul residential area. There was also a blast in front of the hotel where Bush is going to stay next week. The Kurds are restless and we have mentioned the Israeli maybe connection with the Kurds. The Middle East just gets more interesting every day. Unfortunately.

7:45am and gold is above $400 on the Iraq and Turkey attacks. That news coupled with the negative economic news of this morning has the ten-year Treasury down 6 bps in yield and thus up in price.

8:45am and the major measures opened lower, but now are moving back toward even. We have been waiting to repurchase Time Warner but it hasn’t pulled bask. And so we are purchasing a few shares in our aggressive accounts at $17.30.TWX announced that its AOL division was buying Advertising.com for $435 million plus in cash. We don’t know anything about the dot com they are buying but we do like the fact that the purchase suggests management is staying with AOL. We continue to believe that the markets valuing AOL at $0 when Yahoo is valued at $40 billion is nuts.

9:12am and AT&T is down under $15 per share but it is a falling knife right now and we are going to pass till later in the month or year.

10:04am and new home sales for May were up 14% at 1.3 million units. The major measures are mixed with breadth 5/3 positive. We added more shares of JDSU to our aggressive accounts at $3.78.

10:52am and yesterday the SEC unanimously approved Regulation SHO, which restricts some short-selling practices and is designed to curtail the practice of naked short selling, in which a broker-dealer does not actually possess the stock he has borrowed in anticipation that its price will go down. The measure also eliminated the so-called uptick rule for about 1,000 stocks in a one-year trial program, making short sales easier. The change won’t take effect until January 2005.

The uptick rule was instituted in the mid 1930s to prevent bear raids of the type that contributed to many of the panics of the 19th and early 20th centuries. Removing that rule is a dangerous experiment.

12:03pm and we re-purchased CIEN in accounts at $3.58 which is a few pennies below where we sold for a loss last month. The telecom equipment stocks are moving and we are guessing that the folks from the two private companies that were acquired last month who wanted to sell shares have. If the cheap telecoms keep moving higher at some point the shorts will feel real pain and be forced to cover.

The DJIA is lower by 6 points and the NAZZ is higher by the same amount. Breadth remains positive.

1:04pm and MSFT is not moving much on the upgrade and stocks are struggling to stay positive.

1:55pm and as we approach the final hour the major measures have pulled back into negative territory. We’ll see what the final hour brings in the battle of the bulls and bears.

We added to more Q to our aggressive accounts at $3.80 for a trade

We would like to apologize for using peaked instead of piqued yesterday when we were writing about our interest being piqued.

3:02pm and breadth remained positive into the close. The DJIA lost 30 points to end at 10450. The S&P 500 dropped 4 points to finish at 1140 and the NAZZ gave up 4 points and finished at 2016.

And tomorrow is another day.

24 June 2004 - Morning Comment

6:56am and Asia was strong overnight following on the heels of yesterday’s good showing in the U.S. markets. Hong Kong gained over 2% and Japan over 1%. Europe is also higher this morning while American futures are below fair value. Gold is higher and silver is lower and Treasuries have a bid in them.

Our cheapie telecom stocks were standouts yesterday and five more days like that and we can sell and go to cash till December. Of course that isn’t going to happen. We still have a few stocks we are interested in but we didn’t want to buy them in the big up of yesterday.

The pattern of the markets has been for today to be a down or flat day following yesterday’s action. BankAmerica upgraded Microsoft and that may get some action going in the larger cap tech stocks which would be a help to keep the Major measures moving higher. AT&T announced a lowering of revenue expectation to $29 billion for the year versus the previous #31 billion. The stock will be lower. We remain interested in the stock.

Five bombings in Iraq overnight will be ignored by the markets. We would guess a lower opening for about five minutes and then a move to the upside as the big boys and girls do a little buying so they don’t get left behind.

So let the games begin.

23 June 2004 - Evening Comment

7:32am and Investors Intelligence shows a drop in bulls to 54% from 55% and a rise in bears from 17% to 18%. Not much there.

12:37am and the Department of Homeland Security has lost a soldier in the fight against evil as our dog Tubby the fearless cockapoo passed to the other side of the River Styx today. She had a good life and was a good dog having put up with all our inconsistencies for her 11 years of life.

We were with her till noon and so the lack of morning posts but it doesn’t seem that the stock markets missed us. Happily some of our cheapie telecom plays are up again today so we are feeling a bit smart but not counting our money.

Breadth is positive and volume is light and the major measures are plus or minus a little.

2:27pm and in the final hour it looks like the major measures are going to close on the plus side again today. The NAZZ is leading the way up 1% and that is a good sign for the bulls. It seems a little early to be doing month end mark-ups and volume remains light but stocks seem to want to go higher.

3:02pm and the DJIA closed up 80 points at 10475. The S&P 500 rose 10 points to end at 1144 and the NAZZ tacked on 26 points finishing at 2020.

And tomorrow is another day.

23 June 2004 - Morning Comment

6:52am and Asia was quiet overnight with Japan and Hong Kong about unchanged. Europe is higher. Gold and oil are a tad lower and U.S. futures are suggesting a slightly lower opening. And so what else is new?

Yesterday’s market was a mixed affair with a few lower priced telecom suppliers having small price but big percentage moves. The meekest were mixed but up at the close and breadth moved from negative to positive during the day.

The markets seem to be in a waiting pattern and we aren’t sure when Godot will arrive, and even if he does we don’t know whether that will make a difference. We are just watching and picking at stocks that peak our interest.

In the lead up to the Iraq war in March 2003 the markets meandered until the war began and then staged a strong if fitful rally for the next 10 months. Most market observers have tagged June 30 as a fulcrum day like the war date. We don’t know whether it will be, but we do think the stocks we own will participate on the upside. We are willing to accept the downside risk because we have cash available to buy more.

These markets are different though not less risky than the early 2000 markets and it is a matter of finding a trading style that works in them. We are feeling our way but do think we have a theme and a plan to profit. We just aren’t able to make the quick trades that worked so well in a couple of the early years of this century. But we are comfortable with our approach.

So let the games begin.

22 June 2004 - Evening Comment

7:20am and Iran is threatening to send the captured British sailors to trial. We presume that diplomats are working feverishly to settle this little sideshow.

Governor Arnold has made a deal with some of the Indian tribes that he opposed in the recall election last fall. We must admit that the guy has the press snowed and the national stories are painting him as a do no wrong governor. The headlines in the story are that he got $1 billion from the Indians. Kevin Drum at www.washingtonmothly.com has a more complete take on the story:

SMOKE AND MIRRORS....I was all ready to give Arnold some props when I read this story in the LA Times tonight:

Gov. Arnold Schwarzenegger today signed new gambling compacts with representatives of five Indian tribes, securing a $1-billion payment to the state this year, helping to close the coming year's fiscal budget gap.

A billion dollars. Not bad! That's less than he talked about during the campaign, but more than he projected in his preliminary budget in January.

But then I read this:

The $1-billion payment to the state will be financed by a bond repaid over 18 years. Upon repayment of the bond, the tribes will then make annual payments to the state until 2030, when the compact expires.

So it turns out that Arnold didn't negotiate a deal get an additional billion dollars a year from the tribes. He didn't negotiate a deal to get half a billion dollars from the tribes.

He caved in and negotiated a deal to get a lousy $60 million or so per year from the tribes, less than 5% of what he claimed he could get during the campaign. And then he blew 18 years worth of the money all at once for this year's budget.

It's just more smoke and mirrors. But the headlines will all say he got a billion dollars. Hooray for Arnold.

Kevin Drum 12:39 AM Permalink | TrackBack (3) | Comments (33)

7:45am and the major trading houses like Goldman Sachs and Morgan Stanley are announcing above consensus trading profits. One guess from whom they made the money. C U S T O M E R S.

8:48am and the DJIA opened lower as did the S&P 500 but the NAZZ as in NASDAQ is up 3 points. PalmOne beat estimates and the stock is up $8 per share to $28. That’s after a reverse split so it isn’t a big deal for long time sufferers but for folks who bought it yesterday- or shorted it yesterday- the move is meaningful.

8:53am and 10 American servicemen died in Iraq yesterday is three separate incidents and no major paper had it on its front page e-mail edition. Has Iraq become that much of a non-show?

9:52am and breadth is 5/4 negative across the board and the major measures are lower. Trading is slow. The DJIA is down 40 points and the NAZZ is off 4.

We are going to buy JDS Uniphase in accounts. We have profitably traded this stock several times in the past 15 months and it is currently at $3.35 which is 20% below where we last sold it at the beginning of the year. The lower priced stocks give us the best percentage gain potential and we are taking relatively small positions so that we can add to them in any summer sell off. JDSU has $1.3 billion net cash and meets our financial stability criteria. It is speculative because it still doesn’t have earnings. At this price the company is selling for about $3 billion net of cash. That is about 5 times last year’s revenues but 1 times revenues of four years ago. With Verizon and SBC and soon BLS announcing big optical networking capital expansion programs The Street and individual speculators should return to JDSU.

10:39am and retail sales numbers were less than expected and as a result the retailers are suffering a bit with Wal-Mart down over $1 and Target down $1.50 per share.

12:23pm and stocks are lower with no real trend. Some of telecom cheapies are up today but breadth continues on a negative note in continued light trading.

The NYT reports today that there is the possibility of a polio outbreak in Sudan and much of Africa. The World Health Organization has reduced the number of polio infections to fewer than 1000 per year and was hoping to declare the disease eradicated by 2007 but they are fearful that if they can’t continue their vaccination program in sub Saharan Africa that there may be a reemergence of the disease. W.H.O. needs $25 million to vaccinate 75 million children. Only $25 million will prevent such suffering. Hopefully The Gates Foundation will come up with the money since we are sure the U.S. Government can’t spare a dime from its $448 billion defense budget.

1:25pm and the major measures have moved to positive although breadth is still negative. Crude oil is over $38 per barrel and Treasuries are going at a lower price higher yield. The final hour may continue the malaise of today, although with the volume so low it only takes one or two of the big boys and girls with their programs to alter the scene.

2:27pm and in our more aggressive accounts we repurchased Ciena at $3.13. This is in keeping with the telecom equipment theme which seems to have gained some traction today with SBC announcing the $6 billion capital program.

3:02pm and the DJIA closed up 24 points at 10395. The S&P 500 gained 4 points to 1134 and the NAZZ led the way rising 20 points to 1995.

Fed governor Bies says rates are too low and must rise above the inflation rate. Ah there’s the rub since opinions vary on what the inflation rate really is. But even the phony core rate is going to be running at 3% by year end

And tomorrow is another day.

22 June 2004 - Morning Comment

6:39am and Japan was off slightly while Hong Kong took the day off. Europe is a tad lower and U.S. futures are at fair value. Another yawner looks to be the order of the day. The more these non trend days occur the more we think that there may be a two hour fury of trading on June 30 after the Fed OMC announce their rate hike followed by several weeks of vacation for bored traders.

In markets such as these the hardest discipline is not to over trade. We have prices in mind for the stocks we want to buy and we are trying to stick with those price points. In some cases we want to wait for next months earnings to see how the markets react before committing to a stock.

In many accounts we are 20% to 30% in stocks and that is comfortable for now. Then again any quick down action in quality stocks might draw us in for a trade. But for now we can only watch.

So let the games begin.

21 June 2004 - Evening Comment

7:18am and the NYT reports that the newly appointed-not elected-Iraq Government is considering imposing martial law including curfews and a ban on public protests. Ah democracy.

7:59am and Wal-Mart says that June sales are tracking at the low end of the 4% to 6% range that it usually provides as a forecast of monthly sales. It could be that the tax refunds are spent.

Iran has seized some British vessels and sailors. Our take is that Iraq is not on the minds of U.S. traders unless there is an occurrence in the United States. Even the kidnapping and killing of contractors is seen as a positive for the markets because supposedly such acts reinforce the determination to stay the course in Iraq.

The Bank of Japan has raised its forecast for economic growth in Japan and says the economy is performing the best it has since the end of the boom in 1989.

9:16am and stocks opened higher but now are slowly drifting back to even for the day. Breadth is flat and volume is light. Treasuries are unchanged in light trading.

10:01am and gold is down $1.19 and oil is off 25 cents but still above $38 per barrel. The major measures held at even and now are creeping higher in slowwwwwwwwww trading.

11:30am and truly nothing is happening. We are sticking around because we are hoping that boredom or quarter end selling may provide buying opportunities in a few of the stocks we own that are on their lows for the 12 months. We also have a few other issues like BellSouth and RFMD and Nokia that we would like to pick up.

But for today the trading is typical of a summer Monday when folks have other things to do.

12:42pm and we read today that the Israelis are assisting the Kurds in northern Iraq. Coupled with the seizure of the British boats by the Iranians we think that the markets should be more disturbed than they are.

The Israeli action is a slap in the face to the American goals of maintaining a united Iraq and is sure to disturb the secular Turkish government. We sympathize with the Kurds desire for independence. Our mention of it here is more a heads up that any serious attempt by the Kurds to go their own way is not going to be appreciated in Turkey. It will also serve to destabilize an already unstable situation in Iraq and suggests that the Sunnis and Shiites do their own thing too.

The Iranian action is a testing of the reaction of the U.S. and Britain and the neo-conservatives in Washington.

Both situations bear watching.

The DJIA is again in positive territory and whatever unwinding from Friday’s expiration that was going to occur probably has although liquidity is negligible and trading folks may not be able to accomplish all they wish to accomplish today.

2:33pm and stocks went began slipping about 20 minutes ago. The DJIA is now down 40 points and the NAZZ is off 10. But there are still thirty minutes of trading left. It may be that traders don’t want to go home long with the Iran interdiction hanging fire. Or the drop may be the result of a sell program into a very thin market. Breadth remains positive on the NYSE but is negative 5/3 on the NAZZ.

3:02pm and the DJIA closed down 45 points at 10370. The S&P 500 gave up 5 points to finish at 1130 and the NAZZ lost 13 points to end at 1973. At the bell breadth was negative across the board. Treasuries closed slightly higher in price lower in yield on the day.

And tomorrow is another day.

The Lemley Letter

Final Print Edition

June 1983 to June 2004

Greetings:June 21, 2004

This is the final issue of the print edition of The Lemley Letter. We began writing the letter 21 years ago this month. For a number of years it was a monthly and after our partner Don Yarling died in 1994 we eventually went to a Seasonal (four times a year) format.

With the advent of the computer and cell phone and instant communications as well as The Lemley Letter website we have reached the conclusion that now is the time to fold the snail mail edition.

The world has changed since we first began the letter and so have the markets. There are many more investment products and speculative tools. We have stayed with the tried and true, common stocks and Treasuries, and we are too old to change our investment tools now.

Nor would we want to since our investing formula has served us well. Since we began The Model Portfolio in December 1983 it has grown from a value of $50,000 to a present value exceeding $530,000. Our record speaks for itself.

Past performance is not an indication of future performance.

We plan on continuing our management of funds in the same manner as we have in the past. The world and investment alternatives may have changed but greed and fear remain the primary movers of individual stocks and overall markets. We will continue to try and profit from the inconsistencies these two emotions engender in the marketplace.

We invite you to read past letters posted on the website. And we invite you to continue to visit our website at www.lemleyletter.com to read the daily comments.


Bud Lemley and Kathy Pinto

The market value of the Model Portfolio is net of advisory fees, brokerage commissions and other related expenses.  Model Portfolio results reflect reinvestment of dividends and other earnings.  The Model Portfolio column is the overall return of the portfolio for the periods shown.  The S & P 500 is an unmanaged S & P composite of 500 stocks widely regarded as representative of the stock market in general.  Unless otherwise indicated, index results include reinvested dividends and do not reflect sales charges.

 Past performance is not indicative of future results. Other methods may produce different results for individual portfolios and for different periods and may vary depending on market conditions and the composition of an individual portfolio. Care should be used when comparing these results to those published by other investment advisors, other investment vehicles and unmanaged indices due to possible differences in calculation methods. A list of all recommendations made by Lemley, Yarling Management Co. for the preceding one-year period is available to advisory clients upon request.

21 June 2004 - Morning Comment

5:34am and this is the beginning of the week before the week with the Wednesday that will make or break some summer vacations or maybe mean nothing at all. A week from Wednesday is the Fed OMC meeting day and also the day of the turnover in Iraq. It also marks the end of the quarter of a very dull year so far. Well maybe not dull but certainly not profitable.

Overnight Japan regained the 2% it lost on Friday and other Asian countries were higher except Hong Kong which was slightly lower and no able to rebound like Japan. Europe is higher this morning and U.S. futures are above fair value.

With very little on the agenda for the week that might be market moving the comments of Fed folks and Treasury Secretary Snow will have more impact than they might. In case you missed it Secretary Snow predicts a cornucopia of jobs and wonderful economic statistics as far the eye can see. All folks need to do is quit concentrating on that little problem in Iraq and the land of milk and honey will once more belong to the American electorate.

We from Missouri are not so sure but we do perceive a market that wants to go up or at least doesn’t want to move lower. And that is a plus. Since Summer has officially commenced and the days are getting shorter again we presume that a lot of the big boys and girls are heading to the beaches and wherever they go and that already light trading will get even lighter. Most folks will be at work next week and there might be some fireworks then.

Until then we are looking for spots and stocks to add and will be attempting to stay awake.

So let the games begin.

18 June 2004 - Evening Comment

7:04am and Bloomberg is reporting that Dell is planning to begin a price war with HPQ by cutting printer prices. Since printers are a very large part of HPQ’s profits that may be the reason for weakness in the shares of HPQ yesterday which may continue over into today? We are going to keep our money on Carli and her ability to weather the storm.

7:32aman the current account deficit was a record $142 billion: Current account deficit arises from a negative net balance in the current account resulting from lower receipts than payments for merchandise and non-merchandise transactions.

7:40am and last night while walking the pooches and swatting mosquitoes we started thinking about the period of stock investing and trading from 1966 to 1983. This thought process was placed in motion by an excellent piece on www.minyanville.com about the three periods in the markets in the last 100 years when the author discerned bull and bear markets. His cogent comments initiated our train of thought about the above mentioned period which is the time period when we first began trading stocks.

The DJIA hit of high of 1000 in 1966 then didn’t revisit that number till 1972 after which the stock markets tanked making a low under 600 in late 1974. 1974 also happens to be the time period when listed options on stocks were conceived and that new way to gamble help lead the markets back from their lows.

In the late 1970s the inflation scare sent property prices and commodity prices and especially gold and silver soaring and left the stock markets stagnating. Oil price increases in the early 1970s were the shock given as the reason for the market collapse but that rise in oil prices eventually led to new industries and new methods of constructing cars and houses. Even untoward events can have positive results.

Stocks really didn’t take off until Volker tamed inflation through recession and bond yields topped out in 1983-84. At that time interest rates on the long Treasury were 14% and short term rates were 20% and never going lower.

Now the reverse situation exists. Stocks are, by historical measures, still quite high and with Treasury yields at historical lows that means that Treasury bond prices are also at historical highs. What is to prevent bond prices from dropping and stocks prices also? Reversion to the mean occurs in nature and markets and years of 15% returns on stocks may be offset by years of 2% returns on stock. Treasuries also may drop in price and rise in yield to return to the more prevalent average yields of the last forty years.

During the 1972 to 1983 period avoiding bonds and stocks and buying real estate offered the opportunity of great rewards. From 1983 to 2000 buying stocks and bonds offered the greatest reward. One caveat is that we and many clients who did quite well trading stocks during the ’72 to ‘83 time period when the major measures went nowhere.

With the advent of computers for the masses in the late 1980s index trading began to take over markets and volume and became an investing style led by John Vogle of Vanguard Index Fund fame.

Buying indexes may not be working now because of the rise of hedge funds and closet indexing by mutual funds that are afraid of under performing their benchmark indexes. The hedge funds are shorting the indexes to the mutual funds and vice versa. The 50% of the NYSE volume that comprises of program trading is these folks negating each others’ moves.

The recent trading malaise has made position trading less profitable and the risk/ reward of such trading less favorable. And that is why we are taking the approach of buying a few stocks that we think have reasonable prospects in an uncertain market. And we are maintaining a large cash position to hedge our bets.

9:19am and stocks have opened higher. Breadth is positive but we don’t think events are going to conspire to provide the bulls or bears with any benchmark breakouts today. The DJIA is currently up 50 points and the NAZZ is up 11. Breadth is 5/4 positive on both the NYSE and NAZZ.

10:15am and one of the hot stocks of the day is an old hot stock of the tech boom. Red Hat is off $2 at $20.50 after revenues and earnings failed to impress. Revenues doubled but we guess that wasn’t enough. For the last twelve months RHAT is up from $7 to $20 after visiting $28 earlier this year. At $20 RHAT has a market cap of $4 billion on growing revenues of about $200 million annualized. A bunch of brokers upped their sales and earnings estimates but didn’t raise their ratings. The stock is expensive to us but then it always has been and it is the type of stock the big boys and girls are trading because it has the action they need and they only rent it, they don’t want to own it.

12:02pm and irony of ironies, today Russian President Putin , a former head of the KGB, in answer to a question at a press conference said that immediately after 9/11 the Russian Security Service a/k/a the KGB supposedly gave info to the Bushies that Iraq was planning terrorist attacks in the U.S. and around the world. Funny how that info is just now being released but was never made public in all the arguments about the need for war. The nice thing about the Russians providing the info is that we all know they are trustworthy and are now best friends with the Bush folks. The old saying about you can judge a person by his/her friends applies here, we think.

12:31pm and yesterday we reported figures that mortgage delinquencies are down to a bit over 4%. Today we learn from the WSJ that mortgage foreclosures are up to 1.27% of all mortgages. 117,000 foreclosures were offered for sale in the first five months of this year.

The major measures are slowly surrendering their gains but our feeling is today we’ll have a positive to flatly positive to positively flat close.

1:50pm and entering the final hour of trading volume remains light, breadth is positive, and the major measures are fractionally higher. Even the financial cable stations are concentrating on the terrible news of the beheading of Paul Johnson in Saudi Arabia. While the Johnson news was expected we would expect that trading will be light through the rest of the day.

The low volume on a quarterly “witching day” is unusual and indicative of the lack of interest in stocks at the present time.

2:10pm and Treasury Secretary John Snow is on the tube saying all is fine with the economy. He is being interviewed live from Las Vegas. That’s an interesting city for him to be visiting.

The government is turning down United Airline’s loan application. Without it UAL goes under since it is trying to emerge from bankruptcy. And AMR survives for a while longer. The Texas connection obviously works.

3:02pm and the DJIA closed up 35 points at 10414. The S&P 500 gained 4 points to end at 1035 and the NAZZ rose 2 points to finish at 1985.

And tomorrow is another day.

18 June 2004 - Morning Comment

6:32am and the Japan and Hong Kong were lower by almost 2% each overnight. Europe is boring and U.S. futures are trading below fair value.

We get more mail:

What happens to the investors when the hedge fund closes down? Do they get some proportion of the proceeds? I am beginning to agree with you that most people are (they think) trying to make money on real estate. To me this is, at this time, a little like trying to buy bonds when interests rates are about to go up. However, in some places (like California) the housing supply is crimped and the cost of money is really not a significant constraint. Prices are, however, a constraint. There are signs that real estate is topping out even in Calif. Markets are markets. I remain frustrated in the yield area. Just trying to make 5 -7% seems really tough these days.

We respond;

When hedge funds close down the innovators get their percent of the pie back. The real estate market is more like the NAZZ in March of 2000. Please remember that risk less investments i.e. Treasury bills are only yielding 1.5%. A 6% return is 4 times that rate. Last year was an aberration in that the 25% return on the S&P was outsized in relation to the 1% yield on Treasury bills. But the average return on the S&P 500 since January 1, 2002 is a negative 1%.

The bull market spoiled folks. Now is the time to preserve capital.

6:50am and we added TLAB yesterday because it is selling at 2 times sales if its $1 billion cash hoard is subtracted from market cap. The company has turned profitable and their products will be used by the RBOCs when capital expenditures pick up in the next year or two. TLAB is being held down in price because it is a good arbitrage situation where arbs can lock in a 5% return by shorting TLAB and buying AFCI. We want to own TLAB and don’t want to assume any risk of the deal not going through for an extra 5%.

For today we would expect a flat opening, a move higher and then a slow fade to even as folks leaves early and traders square positions.

Fed governors are advertising a series of rate increases to prepare the markets and it will be interesting to see if there is any reaction on June 30 to the first raise.

So let the games begin.

17 June 2004 - Evening Comment

7:32am and PPI was up 0.8% with core up 0.3%. Yearly PPI is plus 5% versus the previous 3.7%. Ex all the important stuff yearly PPI is 1.7% versus 1.2%. Treasuries are lower on the inflation news. Jobless claims dropped 15,000 to 336,000 and continuing claims were unchanged at 2.895 million. We offer our thanks to Elaine Chou for conducting another great job of massaging the figures.

The Ohio man who is accused by John Ashcroft of planning to blow up all the malls somewhere in the Midwest at some time in the future or the past has been sent for psychiatric evaluation. Our suggestion is that the Bushies do the same with General John and his Morning Prayer group.

Bill Gross of Pimco Group who manages over $500 billion in bond money is quoted in The Financial Times to the effect that the global outlook is unstable due to increased geopolitical risk, an increase in worldwide debt, and the existence of several bubbles.

That’s a cheery way to begin the day.

Bloomberg is reporting that Fed OMC member Broaddus is saying that the Fed needs to raise rates to keep its reputation for fighting inflation.

9:37am and stocks opened lower and have continued their downward drift. Breadth is 2/1 negative and the NAZZ is taking it on the chin down 1%. The DJIA is off 35 points. Treasuries are down a tad in price but it seems as if folks are looking for a catalyst to get things going and there isn’t any catalyst.

As we mentioned yesterday, the slack trading figures released by discount brokers suggest that the individual investor is at the race track or in Las Vegas and the big boys and girls seem to be just watching and looking forward to taking long week ends. Quarter end mark up time coincides with the Fed raising the discount rate either 25 bps or 50 bps. And so sadly the boys and girls are going to have to be working the afternoon of June 30 which is a Wednesday. The long holiday weekend of the 4th of July will begin on the Thursday following the Fed announcement. Maybe all the significant trading for the month will be crammed into the last two hours of June 30.

Crude oil is up 30 cents but remains under the magic $38 number.

10:29am and www.minyanville.com is reporting that Foreign Central Banks hold 51% of the $3.5 trillion of publicly traded U.S. debt. Japan leads the way holding $650 billion of which $100 billion was recently purchased. The U.K. holds $160 billion followed closely by China.

12:02pm and we bought more TLAB for many accounts at $7.85. This is dead money for a few months because of the proposed merger and the arb’s selling TLAB on any rally but we like the merger and the stock on a longer term basis.

The major measures are continuing in the negative column and breadth is still negative. But there is no selling or buying pressure and so it is boooooooooooooring.

2:05pm and entering the final hour of trading the markets continue to meander with no destination in mind. Happily NT and CCMP are higher. NT is up because they are retaining Deloitte as their auditors and the thinking is that if the auditors are staying the financials can’t be too screwy. Also John Chambers of Cisco made back handed comments about cooperating with NT on projects and said he doesn’t do big takeovers but …. CCMP is higher because whoever was selling yesterday has stepped away.

We remain content with our holdings and will add to them if they come down in price.

3:02pm and the DJIA closed down 2 points at 10377. The S&P 500 lost 2 points to end at 1132 and the NAZZ dropped 15 points to close at 1983.

And tomorrow is another day.

17 June 2004 - Morning Comment

6:37 am and Asia was lower overnight and Europe and the U.S. are flat. It may be that our action for the week occurred on Monday and Tuesday.

The labor Dept releases the PPI index this morning several weeks late and after CPI. The must have been able to get the numbers to come out the way they wished.

We get mail:


I had a hard time stopping laughing after I read your line about the New England legal dignitaries getting in trouble at a recent conference on physical abuse, etc. For some reason that triggered a thought of mine regarding hedge funds. Since it seems hard to make money in the market the “old fashion way”, I have been wondering why you might not think about starting a hedge fund. In the current market scenario, is it possible to make money in hedge funds (i.e. without stealing it from little old ladies and grandmothers)?
Do you have to be a major, big money player to do this? I saw a TV documentary a while ago that was showing how some famous mathematicians had somehow proved that “hedging” was mathematically sound and really could provide an edge in the market (i.e. in terms of odds or probability)

Our reply:


We had a hedge for five years back in the 1980s. It did worse than our individually managed accounts. We folded it because we realized that there was no accountability. By that we mean we could execute trades, take outsized positions, buy and sell at will and no one knew what we were doing. Now when we buy or sell the same day or next day for profit or loss the clients see the trades etc.

Moreover the way hedge funds are now constructed they usually take a fee of 2% and then 20% to 30% of profits that exceed a benchmark like the S&P 500. This encourages managers to take outsized risks. For example if the benchmark is the S&P 500 the manager could leverage the S&P 4/1. Thus if the S&P went up 10% the fund would gain 40% and the manger would get 6% to 9% of the net gain (30%) plus 2%. If the S&P drops and the fund lose money he just closes down the fund and starts another.

The crisis in the autumn of 1998 was caused by Nobel laureates at a firm called Long Term Capital Management who let their belief in numbers exceed their knowledge of markets. A great book to read is “When Genius Failed” by Allard Lowenstein. It’s in paperback and will tell you all you want to know about how hedge funds can go wrong.

We have considered creating one now because with computers we could show daily trades etc. for client perusal. We may in a few years when we want to reduce our work load but --for now- we do as good or better a job with client funds by running the individual accounts. Also by running individual accounts we can tailor risk exposure.

6:55am and today will be ruled by PPI at least for ten minutes. Then traders have to think about quintuple expiration and the week end.

So let the games begin.

16 June 2004 - Evening Comment

8:05am and Qwest was added to JP Morgan’s focus list and for that we are grateful. The rally yesterday was based on the fact that Treasuries rallied on the tame core CPI number although the overall CPI number was not good. That type of pick your favorite number to rally suggests that maybe the bulls wish to play for a while. An outfit like JP Morgan adding a $3 stock to its focus list suggests that analysts are looking hard for stocks to recommend.

Investors Intelligence shows a rise in bulls to 55% and a fall in bears to 17%.

8:16am and Industrial Production was up 1.1% in May with Capacity Utilization at 78%. Both numbers were better than expected.

Delta Airlines CEO said this morning that DAL can’t survive as it is. Back in 2001 we said the majors except Southwest were going to have to go through bankruptcy in order to reduce debt. Our only caveat was AMR Corp because of its Texas connections. US AIR was already in bankruptcy, United filed about a year later and now DAL is at the door as a bargaining ploy with its pilots.

8:35am and Basra’s oil pipeline was hit again this morning and that has placed a damper on market positives. Also Treasuries have given back a bit of their outsized gains of yesterday.

8:50am and the White House is outraged that Time Magazine revealed the location of VP Cheney’s bat cave. Supposedly it is out near Camp David with subterranean caverns and its own water supply and all that good spy stuff. We of course know the outrage is feigned since that spot is not really the secret hideout. Long time readers know where the real bat cave is.

In the “what were they thinking?” department we learn from www.boston.com quoting an AP story that the Attorney General of New Hampshire resigned because of inappropriate sexual contact with a woman. The contact occurred at a conference on preventing physical and sexual abuse. At the same conference a District Court Judge was suspended after being accused of groping several women.

10:20pm and stocks are mixed with flat breadth and down volume ahead of up volume on the NAZZ and the reverse on the NYSE. Overall volume is very light and the major measures are in negative territory by slight amounts.

12:36pm and there just isn’t a lot happening. The last two days have had pretty good action on low volume. Treasuries were the motivator yesterday for the plus market but with Treasuries lower today there isn’t any catalyst to create interest.

The low trading volume at the discount brokers suggests that the individual investor is on summer or longer vacation. As we’ve said before we think folks are speculating in real estate where the leverage is infinitely greater and owners don’t see the price of their property on the screen every day. In fact owners can make up whatever price they want and feel rich as long as they aren’t in the market to sell and they keep making their monthly payments.

The DJIA is down 6 points and the NAZZ is off 2 points.

1:28pm and the Mortgage Bankers Association is reporting that the delinquency rate on mortgages fell to 4.33% on 37.6 million mortgages in the first quarter of 2004 which is the lowest rate in two years. That means that 1.6 million mortgages in that survey are behind in payments.

We added more shares of Cabot Micro to accounts. We are doing this slowly because we presume the stock will be under pressure at least until the end of the quarter since the shares are trading at a four year low. Earnings are going to be about $1.75 per share and so at the $26 to$30 level the shares are trading at 15 to 17 times earnings. CCMP has $5 per share in cash and de minimus debt.

3:02pm and a storm is coming. Hopefully we will get our garden tilled before it comes. At the bell the DJAI was up 3 points at 100383. The S&P 500 was up 2 points at 1134 and the NAZZ was up 5 points at 2000.

And tomorrow is another day.

16 June 2004 - Morning Comment

7:32am and building permits rose 3.2% in May to 2.07 million. Housing starts dropped 0.7% to 1.9 million. Yesterday’ less than stellar close when the major measures gave up gains to limp into the finish has been forgotten this morning. Japan was up 2%, Hong Kong up 1% and Europe and the U.S. are higher.

There will be an up opening and then our crystal ball is cloudy. We will be watching.

So let the games begin.

15 June 2004 - Evening Comment

7:32am and CPI was up 0.6% with core CPI up 0.2%. The implied inflation rate (CPI) on a yearly basis in May was 3.1% with the core yearly at 1.7%. Treasuries are higher in price and lower in yield on the news with the ten-year at a 4.7% yield which is down 10 bps on the news. Business inventories were up 0.5%.

Stock futures are higher as the best of both words is in the figures released if the core rate is the test. The overall rate of up 0.6% is the highest in 40 months but bond traders are focusing on the friendlier 0.2% core rate. The glass is half full for them. For those folks who aren’t bond traders and have to live in the real world the glass is half empty because the plus 0.6% number is leaving their bank accounts half empty.

As usual, cynics like us don’t believe the figures. The Labor Department is still trying to determine PPI for the month. PPI is usually released a week before CPI.

7:45am and Boeing won a $15 billion contract to supply the Navy with submarine hunting jets. We guess the jets will be used to hunt our own submarines that we have sold to other countries. Or maybe they are for the menace created by the five French submarines plying the waters. The Russians and Chinese are our friends, aren’t they?

This contract reminds us of all the new planes we have to buy to be superior to the old planes that we have sold to foreign countries. If we just kept the old planes and equipment and didn’t provide them to other countries we wouldn’t be spending hundreds of billions over the next umpteen years to build the next generations of war stuff to defeat the perfectly good war stuff we had. We guess that is too simple an idea. Defense spending was good for the economy. But now a greater and greater portion of defense dollars are being spent overseas. The hawks in Congress haven’t figured that out yet. And the U.S. usually finances the purchase of armament sales to other countries if it doesn’t’ give it free. Crazy Daisy.

8:40am and the screen is green as the Treasury market is on fire with the tame inflation data. The thinking had been that there was a 30% chance the Fed would raise rates 50 bps at the June meeting. That feeling has now dropped to only a 12% probability. Yes folks, you can bet on anything in today’s world.

The DJIA was up a quick 60 points to 10400 which is the downtrend line and the NAZZ was up 20 points. A pullback is now in progress.

8:46am and all its competitors have been taking market share from Nokia currently trading at $14. The share price is down significantly (from $22) this year and we are interested. We are of the opinion that we can buy good quality companies under selling pressure at any time while it pays to wait for year end for the cats and dogs we sometimes trade. But we are going to wait for Nokia’s earnings next month before making any commitment.

AT&T ($16) said it is going to quit providing local service in areas served by RBOCs because T doesn’t want to be dependent on the good will of the RBOCs to keep rates low and allow them (AT&T) a fair rate of return. This is a strategy to place pressure on the Bushies and the FCC since the purpose of the telecom act was to increase local competition. The RBOCs have promised not to raise rates until after year end. It just so happens that here is a big election near year end.

8:53am and the University of Michigan Confidence number was 95 versus an expectation of 90.

9:11am and there was an explosion in Basra that has halted all crude oil experts from that port which is supposed to begin shipping 1 million barrels per day. Oil is higher but still below $38 per barrel which seems to be the line in the sand.

9:20am and the major measures have regained their highs for the day probably playing off the bullish action in the Treasury markets and breadth is over 3/1 positive. By the way, new lows exceeded new highs yesterday for the first time since the down period in mid May.

11:10am and as the Oracle of the Fed speaks before the Senate Committee the major measures are inching higher and Treasuries continue their short covering rally with the ten-year now down 15 bps.

It looks to us like Liddy Dole has been taking some botox treatments. That goes right along with Bob’s Viagra stint.

12:06pm and there has been no pullback yet. Breadth is 4/1 positive on the NYSE and 2/1 positive on the NAZZ. Up volume versus down volume displays similar strengths respectively. Since this is expiration week the volatility should be expected. Moreover the major measures are merely reversing yesterday’s action.

1:07pm and the second sunny day in a row with temperatures in the 70s is beckoning. We’ve had 15 inches of rain in the last two weeks and so the sun and temperature are a welcome respite. The only reason to stay around is to see if the major measures hold their gains through the last hour. Our guess is that they don’t but if they do we will be happily surprised. Volume remains light and so we continue to expect random action until closer to the end of the month when the big boys and girls begin to mark up stocks for quarter end.

Presently the DJIA is up 70 points, the S&P 500 is up 10 points and the NAZZ is up 34.

And tomorrow is another day.

15 June 2004 - Morning Comment

6:36am and we are back from the horse business and ready to watch the markets do their thing. Yesterday was a downer with the NAZZ and S&P 500 taking it on the chin. The DJIA lost less but the tone was negative all day and breadth was stinky.

Today is a new day with CPI at 7:30pm and that will set the tone. The guesses are 0.5% for overall with a core rate of plus 0.2%. The core rate is CPI less all the essentials that everyday folks use like gas and food.

The Fed governors who have been talking have been suggesting recovery and thus higher interest rates. The big Pooh-bah Chairman Greenspan speaks today and his obfuscations will be sent to the tea leave readers to determine if he has offered any words of wisdom.

Our stocks were hit yesterday but they haven’t dropped to an add level and so we are watching and waiting. We have a few more accounts to which we want to add Cabot Micro and if we get any further drop in HPQ we are going to add it to our smaller accounts.

Asia was lower overnight Europe is mixed, and the U.S. futures are slightly higher. Our considered opinion which is worth its weight in feathers is that one of the next two days will have as much or more up movement as yesterday was down.

For this morning we suggest down early and then a rally that fails in the last hour.

So let the games begin.

14 June 2004 - Evening Comment

7:32am and we read that Steve Mulunovich at Mother Merrill has suggested that HPQ split itself into separate components so that the value of the company can be realized. His view is that as long as the computer and fax/printer assets are commingled the intrinsic value of the company will be hidden.

What is that all about? He was able to recognize that the entities if divided would currently trade at $30. Are there no other analysts on earth who are capable of making that call? Leave the company alone. Last week we said that the stock was undervalued and we are willing to wait on investors rediscovering HPQ as they do every few years. One doesn’t need to go through a lot of mumbo jumbo breakup talk to arrive at a $30 worth for HPQ. Just multiply compounded 20% year yearly earnings growth over the next three years times the earnings per share and you get a price of $28 sometime this year, $35 next year and $40 the year after. We think Carli will deliver.

7:40am and Advanced Retail Sales for May were 1.2% versus consensus 1%, less autos they were 0.7% versus consensus 0.6%. The Trade Deficit for April of imports over exports was a negative $48 billion versus the expected negative $45 billion.

Treasuries are lower in price and higher in yield as the bond markets are pricing in the 25 bps rate and maybe 50 bps.

8:01am and from www.minyanville.com which gives credit to the Economic Observer we learn that the reason for the 2% drop in Hong Kong is the renewal of rumors that the Chinese Central Bank is poised to raise interest rates in China to slow their economy.

Program trading i.e. hedge funds and the big boy and girl traders on the NYSE for the week ended June 4.2004 was over 54% of volume. Investing anyone?

8:32am and Bank of America drops its equity weighting for managed accounts to by 5% to 60%. Stocks are opening lower as have Treasuries.

9:11am and we are sorry but there won’t be any more posts today. Yehudi, our horse that we raised from a colt and is now 22 years old is going to be euthanized today and we need to spend some time with him. He has founder which is an inflammation of the hoof where the sole of the foot continues to grow and the outside wall of the hoof doesn’t. Eventually the bone that supports the leg punches through the sole. The horse is in terrible pain with the condition. We have been able to manage the founder for the past six years but it is at the point where he can’t stand up. This is one of the non joys of having animals.

We’ll have a new post in the morning.

Postscript to Evening Comment

1:54pm and happily in consultation with the veterinarian we decided not to euthanize Yehudi. We are going for a bike ride to relieve the tension. The markets are lower today and the NAZZ has broken a support level. We may add to positions tomorrow if the sell off continues.

14 June 2004 - Morning Comment

6:23am and we wish a happy Flag Day to all. Hong Kong was down over 2% while Japan lost a bit and Europe is in the red by 1% in many countries. U.S. futures are also lower.

Last week’s market action while dull was also positive and the underlying tone suggested that the big boys and girls want to play and that the shorts are a tad jumpy.

We think the supposed worry about the 6/30 turnover in Iraq is overstated. We don’t think folks here care as long as American troops are not being killed. The media has managed to obfuscate the American deaths and injuries and there seems to be a don’t ask don’t tell policy about U.S. casualties. The media does play up the kidnappings on contract workers but we sense that those isolated occurrences aren’t what ail the markets.

Rather, time and some pullback have been necessary to consolidate the gains from March 2003 to February 2004. And we are guessing that the big boys and girls are getting ready to play. The low volume is made for quarter end mark ups.

Enough Fed governors have signaled a higher Fed Funds rate and so that occurrence at month end may be an anti climax to the months of waiting.

This is a quintuple expiration week and lately the volatility caused by squaring positions has occurred early in the week and the last day has been a sleeper. We shall see.

Most clients should have received our letter about the move to Mesirow Financial for our clearing operations and we need the W9s returned as soon as possible to keep Uncle Sam happy. Thanks.

So let the games begin.

10 June 2004 - Evening Comment

The markets are closed on Friday in honor of President Reagan. Our next post will be Monday morning.

7:25am and Target sold Marshal Field for $3.4 billion to May Department Stores. That’s a big price and we hope May Department Stores brings back Frango Mints and the MF green shopping bags.

The NYT is playing yesterday’s decision by the Bushies not to pursue access lines as a big win for the RBOCs and suggests that there is a phone rate increase in most folks future, but not till after the election. We would guess that cell phones will mitigate the cost to consumers but things do look bleak for AT&T. A takeover is in its future and if it gets cheap enough we will be interested.

This decision smells like the decision of the Federal Energy Regulatory Commission (FERC) a few years ago when no one in the Bush government could detect any shenanigans in the run up in California energy prices that ultimately cost American consumers inside and outside California billions of dollar. In this case the supposed champions of free and open markets punt again. The RBOCs obtained their monopoly on local service through government fiat and subsidy.

The decision will also be a big win for Republican campaign coffers. Where is Elliot Spitzer when we need him?

7:30am and import prices were up 1.3% (ex petroleum 0.4%) in May. Export prices were up 0.3%. Jobless claims rose 12,000 to 352,000 while continuing claims dropped as many folks benefits ran out.

9:01am and stocks are opening higher with good breadth and lousy volume. We think the access line settlement we mentioned above makes Qwest interesting again. They have monopoly local line service in seventeen western states and while as Barron’s noted in a negative article last week end Q has a bunch of debt and no owned wireless service.

But the access line question might allow them to work out a deal with Sprint and we think Qwest being acquired by Sprint would make sense. Also the stock didn’t really sell off on the negative article which suggests to us that it is at least at a trading low. It really is selling for what would be considered an expensive option price and the company has weathered its immediate financial crisis. Rising interest rates aren’t going to help but then at $3.70 the risk is defined. We bought some shares in our aggressive accounts.

We think it is a more interesting albeit most dicey RBOC to play.

9:52am and we are also purchasing HPQ for accounts. Our theme in our recent purchases has been to add a few stocks that we follow which have made positive comments such as TLAB and HPQ or because of external occurrences, i.e. Qwest.

11:17am and we bought more HPQ at $21.70 for many accounts. Oil is moving up though $38 and the markets have stayed positive all day although breadth is moving toward even in light trading. We assume trading will tail off this afternoon and then any big boy or girl will be able to move the markets. Thus up or down today will be a non event.

Total U.S.non financial debt grew at an 8% rate in the first quarter while GDP grew at a 4% rate. Land and houses are never going down in value and the moon is made of blue cheese.

1:15pm and the Treasury ten-year auction went well with almost a 3/1 bid to cover ratio and the price was set at a tad over 4.82%. Whoever bought those bonds to own is going to have a large loss in them of at least twice the coupon within two years.

3:02pm and at the close breadth was positive on the NYSE and flat on the NAZZ. The DJIA closed up 42 points at 10410. The S&P 500 gained 5 points to end at 1136 and the NAZZ rose 9 points to finish at 2000.

And tomorrow is another day.

10 June 2004 - Morning Comment

6:22am and Asia was higher overnight and Europe is also. U.S. futures indicate a higher opening. Jobless claims come at 7:30am and then folks go back to sleep for the day.

We expect today to be one of the lowest volume trading days of the year with the unexpected three day week end suggesting that folks will follow their usual lightening up before the week-end plan.

We want to reestablish our holdings in HPQ. We have traded it several times this year but we now want to buy it to hold. Carli seems to have the company on track and it is the cheapest of the large tech stocks with its price at 80% of sales and selling at 15 times this year’s earnings while 20% year over year earnings growth over the next three years was forecast by CEO Carli Fiorini. We think HPQ suffers from the prevalent Wall Street anti-female attitude toward CEOs even though she has done a better job than most of the other tech managers over the tumultuous retrenching in the industry the past five years.

We are about even in our trading HPQ this year and just recently took a loss but the thirty day period has passed and with the new information in hand we are going to make a major longer term commitment.

Our guess is the markets will be up early and then fade to the close.

So let the games begin.

9 June 2004 - Evening Comment

7:35am and the Institutional Investor sentiment survey for this week shows 49% bulls up from 45% and 20% bears down from 24%.

As oil prices drop the analysts are dropping their recommendations on the big oil stocks. Today, Mother Merrill goes to neutral on British Petroleum from a buy.

MBA mortgage applications fell 8% in the period ending 6/4 which is the fifth weekly decline in a row.

Oil continues to falter this morning.

The ECB is expected to raise interest rates 25 bps tomorrow to 4.5%.

Also PPI comes tomorrow instead of Friday because of the funeral/holiday. Since PPI will be released at 2pm the bond trading at the CBOE will remain open and extra one half hour.

8:45am and stocks have opened lower and Treasuries are also a tad lower in price higher in yield. We are bidding for some more HPQ for more accounts as well as trying to reenter Cabot Micro around the $30.50 level for our larger accounts.

11:07am and the major measures have been lower all day in tired trading. Breadth is over 2/1 negative.

We had been looking to buy BellSouth when all of a sudden the stock popped $1 per share. The Injustice Department is not going to appeal a decision that lets the FCC ruling expire that requires the RBOCS to allow long distance carriers like AT&T and MCI to access local carrier equipment expire.

We are sure this conflict has not been permanently resolved but it does give the RBOCs a leg up in their negotiations.

Brocade is lower so we presume their “show and tell” today did not wow the assembled analysts.

11:55am and we saw a chart of the S&P 500 this morning that showed that the lat three day run-up looks a lot like the run-up to the high in late April which was followed by the pullback into mid-May. A few stocks like AMAT may continue to sell off as the big boys and girls may not want to show holding it a quarter end. But most of the stocks we own are down so far that we think the sellers are through. In thin markets there may be more selling and if there is we are going to add. HPQ had good news so it may move higher into month end.

12:08pm and the auction of five-year Treasury notes had strong bid and the yield was 4.01%. The ten-year is at a 4.81% yield. There is a ten-year auction tomorrow.

1:38pm and DJ is reporting that the Labor Dept has postponed the release of the May PPI. Maybe they need to massage the figures a bit.

The major measures are rallying a bit off their lows but volume is weak and breadth remains negative.

We pulled our HPQ bid as stocks rolled over at resistance. We are filing a bit of our CCMP but we don’t want to chase it and it is not doing much volume.

1:43pm and Reuters is reporting that the PPI is being held back because of trouble with index calculations. We call that massaging the numbers.

3:02pm and today stocks rolled over at resistance on slightly higher but by no means convincing volume. At the bell the DJIA was down 70 points at 10366. The S&P 500 lost 11 points to finish at 1030 and the NAZZ dropped 35 points to end at 1990. Treasuries closed lower in price higher in yield with the ten-year going out at 4.81%. Breadth was over 3/1 negative at the close.

And tomorrow is another day.

9 June 2004 - Morning Comment

6:44am and speculation is alive and well in the stock markets. The difference is that this time it is mainly institutional and fund managers who are participating. Since these folks run large amounts of money they can have an outsized effect on stocks.

For example, yesterday we were trying to understand why Sears was up 2 points. Sears same store sales have been punk and we could think of no reason except that some retailers were showing strength.

This morning we learned from CNBC of an investment guru named Eddie Lambert (sp?) who has taken control of K-Mart as it emerged from bankruptcy because his hedge fund owned a big chunk of K-Mart bonds when the company went into bankruptcy. He may also be interested in buying Sears since his investment fund controls over 10% of Sears.

Supposedly he owns both these companies for the real estate and cash in them. Normally the cash both companies hold would be used for inventory but the rumor is that Eddie wants to do a “Buffet” and take K-Mart private and use it as an investment vehicle to acquire other companies. Goodbye more American jobs.

We don’t really know the truth of the story but we do know that there are a lot of folks short K-Mart because of its lousy sales numbers which haven’t improved and those folks are suffering as the stock has quadrupled since emerging from bankruptcy. And discussing these rumors and ideas is how the big boys and girls stay awake in boring markets.

6:57am and Asia was lower while Europe is higher today. U.S. futures are lower and so we will probably continue to trade around the 10400 on the DJIA and 1140 on the S&P 500 and 2020 on the NJAZZ for the rest of the week. The last time we made a no movement prediction the markets jumped over 1% but we think the holiday weekend and lack of volume are negatives for action higher this week.

So let the games begin.

8 June 2004 - Evening Comment

7:23am and the Texas Instruments mid quarter update was a non event last night. The stock lost a bit from its closing price. Today HPQ has an analysts meeting.

Greenspan speaks today somewhere about something. The Feds measured approach to combating inflation suggests that there will be a one quarter point rise in the Fed funds rate at the June meeting followed by a series of quarter point raises. We have held off on buying two-year Treasury paper because of these coming raises. We gave up about 1% in yield over the past year because we thought the raises would come sooner than they have.

We remain interested in trying to reestablish a Treasury curve strategy but we want to see how the markets react to the first raise. The Fed folks keep propounding that inflation is under control. We have felt for a while that inflation numbers are understated by at least 3%. It is in the government’s interest to keep the reported inflation figures low because so many payouts and interest rates depend on the Fed Funds rate and the official inflation number. But in the end, reality always trumps pretend and the longer the obfuscation occurs the stronger the reaction to the eventual realization of the truth.

7:52am and the Chicago Tribune citing slower than anticipated advertising growth is going to cut 200 jobs. From all we’ve been reading advertising growth is supposed to be great.

9:27am and stocks opened lower as did Treasuries with the yield on the ten-year at 4.8%. The DJIA is down about 20 points and it seems to be profit taking but there are not any buyers rushing in to get the money down. With the thin trading volume though, committed buyers/or sellers are going to be able to move the markets. Breadth is negative but is improving as we write.

Tribune is off $2.50 on the lousy advertising news and Nokia is also lower on old news reiteration of loss of cell phone market share.

11:11am and the major measures are now even in very light trading. Breadth remains negative and the action suggests that this whole week is gong to be holiday light.

Greenspan supposedly suggested in his comments this morning that rising oil prices might cause the Fed to be a little more proactive and a little less measured in their anti inflation fighting. Actually rising oil prices are a drag on the economies of the world and so the raising of interest rates coupled with high oil prices may stagflate the economy rather than just nipping inflation in the bud.

1:05pm and the major measures are again flirting with resistance/breaking out. With the low volume the big boys and girls are going to be able to push stocks higher if they wish. The shorts are definitely feeling the heat while we are suffering from the humidity.

One of the drawbacks to the kinds of markets we have been experiencing for the last year is that we can’t work up the courage to get more than 30% to 50% invested. And even that exposure at year end felt very risky to us.

Just watching CNBC and Tony Blair has landed in Georgia for the G8 Conference. It’s interesting that he flies on a British Airways plane with no special PM label or designation like British Airways 1. We guess that is the Queen’s prerogative.

Crude oil has broken below $38 and is now down $1.41 at $37.25.

1:54pm and we bought Applied Materials, the large integrated circuit equipment manufacturer, at $19.13 in our large accounts as the major measures continue to trade above resistance. The share price of AMAT is down form $26 late last year and we think there is a trade in it if the markets break out.

We also repurchased HPQ at $21.95 in larger accounts after Carli predicted 20% per year earnings growth for the next three years at today’s analyst’s meeting.

We just read on the tape that Walgreen’s pays its employees called up to active duty in the military their same salary less military pay for up to 24 months. The employees also have the option of continuing medical and dental care. That’s a great example of corporate citizenship.

3:02pm and in the last hour of trading stocks pulled back a bit and then traders gunned the DJIA into the close. At the bell the DJIA was up 40 points at 10430. The S&P 500 gained 2 points to finish at 1041 and the NAZZ rose 2 points to 2022. Volume was very light and breadth was 5/3 negative at the close and down volume exceeded up volume by the same margin.

With volume light and breadth poor we’ll call today a tie between the bulls and bears.

And tomorrow is another day.

8 June 2004 - Morning Comment

7:02am and we wish a happy 37th birthday to our oldest daughter Lisa. She is a wonderful person and mother and the glue that holds her extended world together.

7:04am and Asia and Europe were slightly higher overnight and U.S. futures are indicating a slightly lower opening. That is as it should be if the rally is to break out to the upside. Traders will be watching to see how long it takes for the bulls to assume control this morning.

The Reagan rally could very well continue for a while because the shortened week is going to offer a three day week end to folks in the investment business and if trading tails off on Wednesday that three day may become a four day.

The main negative in the rallies and the sell offs has been the lack of volume which most gurus think is needed to establish a real trend. But with the remembrances of Reagan dominating the news this week all the ugly stuff has been placed aside and the mellifluous memories coupled with the reminders of Reagan’s “can do” political persona has added some vigor to the markets.

Our guess for today is a short sell off then a move up through resistance by the major measures followed by a pullback to close right at resistance.

So let the games begin.

7 June 2004 - Evening Comment

7:35am and according to the Boston Globe, Kelly Services, the temporary work folk, estimate that 25% of the American work force are employed on a temporary arrangement and Kelly projects that that percent could reach 40% by 2014. According to Kelly more than half of temporary workers enjoy the flexibility.

Temporary workers are obviously more efficient for business but we doubt they are good for the long term health of the economy.

7:43am and the ten-year Treasury is trading at 4.80% which is a two year high. Wal-Mart same stores sales are on track for 4% to 6% growth this month.

8:48am and the screen is green. The stock markets are higher with great breadth. The DJIA is up 60 points and the NAZZ is 15 points higher. Volume is summer light and we wonder whether the week will take on a holiday atmosphere with all the commemorations and media coverage for the various Reagan testimonials. The powers that be haven’t been able to decide whether to close the NYSE and NAZZ on Friday for the national funeral. Duh!

9:57am and stocks remain higher with good breadth. Volume has slowed and so we are going to go for our bike ride exercise and we’ll be back around noon for the afternoon swoon or sway.

12:31pm and as we return the major measures are on their highs with the DJIA up 90 points, the S&P 500 up 11 points and the NAZZ up twenty points. Breadth is 3/1 positive and volume remains light. We are obviously underinvested for the current rally but since all the stocks we were looking to buy are up about 15% from their recent lows we are not inclined to chase. We were looking for one more down day several weeks ago.

The prevailing wisdom is that the economy is in great shape and good times are ahead. We think the psychology of Reagan’s death and the media concentration on his optimistic outlook is scaring some shorts into covering. Also quarter end is approaching and as the major measures move higher the pressure will increase on the institutional folks and the mutual funds to at least perform as well.

And so there is pressure to join the “church of what’s happening now” and that happening is investing in cyclical stocks.

Treasuries remain higher in yield and lower in price on the day but have improved over their opening prices.

In our driving to and from Chicago we marveled at the new building we saw. Every neighborhood in Chicago has new housing rising from vacant and torn down lots and the building outside Madison and Milwaukee has almost connected those two cities which are 60 miles apart. The same goes for the space between Chicago and Milwaukee. It is obvious that housing and commercial building have been the engines sustaining the economy during the manufacturing downturn and layoffs.

But we still can’t envision how part time work and no growth in hourly earnings will usher in the nirvana that the stocks markets want to predict. One of our problems has always been our birth in Missouri but that doubting cynicism has helped us survive the last five years. We think that if the new era of prosperity is here that there will be time to catch a good part of the move. We still are looking for corrective move down in the S&P 500 to the 980 area although we are also willing to concede being wrong. We just aren’t inclined to do that yet.

2:08pm and Treasuries rallied to close unchanged to slightly lower in yield for the day. Entering the final hour of trading the major measures are on their highs for the day with the DJIA up 120 points at 10363. Resistance is 10400. The last few weeks the rallies have faded in the last hour so today’s close will be interesting especially because both the S&P 500 at 1137 and DJIA are approaching resistance.

Consumer credit grew by $3.9 billion in April which was less than the $6 billion expected. But March credit was adjusted upward to $9 billion from $5 billion so the net gain over the two months was about as expected.

3:02pm and the major measures decided to wait till tomorrow to try and pierce resistance. At the bell the DJIA was up 148 points at 10393. The S&P 500 was up 18 points at 1140 and the NAZZ gained 40 points to 2020.

Texas Instruments has a mid quarter update after the bell tonight which may set the tone for techs tomorrow. And on Tuesday HPQ has an analysts meeting. Today Mother Merrill suggested splitting up HPQ. Maybe they could divide it into the Compaq and Hewlett Packard components.

This will be a four day week with the exchanges finally deciding to close on Friday in honor of President Reagan’s memory and funeral.

7 June 2004 - Morning Comment

6:46am and with Reagan’s passing the media will be engaged in an orgy of remembrances all week long. Most other news unless it is horrid is going to take a back seat.

Overnight, Japan and Hong Kong were up over 2.5%, Europe is up 1% across the aboard and U.S. futures are also indicating a strong opening. Oil is down 50 cents a barrel to under $39.

The markets held above support and retreated as they approached on Friday so today should be interesting. there isn’t a whole lot of news on hand this week and so traders will be on their own.

So let the games begin.

4 June 2004 - Daily Comment

12:43PM and the jobs created number was just right for the stock markets. The DJIA is currently up 90 points and the NAZZ is up 30 points so both have recovered much of yesterday’ losses. The only problem is that the week end is next and traders have shown a tendency to want to be flat at 3pm on Friday afternoon. We’ll see whether today is different.

Treasuries have dropped a bit in price with the yield on the ten-year rising to 4.75% in the expectation of at least a 25 bps rise in the FED Funds rate at the June 30 meeting of the FED.

But stock market performance is and has always been a matter of perception and expectations and time will tell how investors perceive these numbers.

1:16pm and according to the talking heads the 1 million jobs created have solved the problems of the economy and it is clear sailing from now on. We don’t know. Our take is that there were no weapons of mass destruction and we don’t believe that the numbers being provided are a true measure of the economy. We didn’t find out that the WMD were figments of someone’s overactive imagination till 2 years later and we would guess that the same applies now to the job recovery.

We remain in the Missouri camp and are not all that excited about 750,000 service jobs being created in the last three months some of which were part time jobs. We seriously doubt the new jobs are on a par with the ones being lost on a weekly basis.

But whatever the reality of the numbers, the stocks markets will move up if they anticipate good times six months ahead. The reason for the stock markets’ move higher over the last 12 months is because of the numbers that we are now getting.

Over the last four years over 90% of folks have remained employed and the new employment only affects economic activity on the margin. To keep the economy going during the bad times folks have been borrowing at an unprecedented rate. And so unless real wages begin to rise- which will affect corporate profits negatively- the consumer is going to tap out. Maybe corporations will take up the spending slack but we don’t think so.

1:39pm and when we are at the farm we tend to only read the WSJ online. So today we were reading the print edition when we came upon a prominent story in the Money & Investing section. The story was about Vega Asset Management which is, as the WSJ tells it, a “hot” hedge fund group. They are turning away money because they have reached $11 billion in assets. In the course of the story we learned that their “global/macro” fund that invests in bonds and currencies has had an average annual return of 9.35% since 1997 and is up 1.58% from January to May of this year.

For the record the Lemley Letter Model Portfolio has a 15 % return since 1997 and is up 1.3% as of today for the current year. And we have been over 60% cash that entire time period as opposed to 2/1 or more leveraged.

We mention this to toot our horn but also because the hedge fund mania has led to a huge influx of money into them. And money run by hedge funds is so great that currently over 50% of the volume on the NYSE is related to program trading which is the type of trading hedge funds do. Trading in the great casino is controlled more by hedge funds every day which increases the risk for all. In 1998 one hedge fund nearly killed the markets by itself. Today there is much more money being controlled by hedge funds than then, and the overall value of all stocks is less than it was then. So the risks are greater. But don’t look for any major news organizations or governmental body to discover the dangers till well after the cows are out of the barn and the chickens have flown the coop.

3:02pm and after being up over 100 points in early trading the DJIA closed up 49 points at 2045. The S&P 500 gained 6 points to end at 1122 and the NAZZ was up 19 points at 1978.

And tomorrow is another day.

3 June 2004 - Morning Comment

6:43am and Japan and Hong Kong were down 1.5% and over 2% respectively overnight on talk of a rate increase by the Chinese Central Bank. Europe is also lower and the U.S. futures are following suit.

Stocks are in a holding pattern for good reason. There is little desire to commit money to markets that are range bound and which are waiting for news that is hard to game. For months the markets expected better employment numbers than they received and right when the markets had given up hope of good numbers those numbers started appearing.

But now with 300,000 expected on Friday as the whisper number anything less is going to be a disappointment. And 300,000 plus will lead traders to expect a rate increase and then the uncertainty is whether it will be 50 bps to begin or four 25 bps at the next four Fed meetings. And will Alan want to do anything to harm Shrub’s reelection chances.

So much to worry about and so much time to worry. We also think a lot of the speculative trading money has migrated to the grain pits where beans and corn are having a gay old time with all the rain and stormy weather in the Midwest. And individuals’ investment money has found a home in real estate where property values are rising faster on a monthly basis than the stock markets have in the entire last five years.

All of these variances are in the stew that makes the market and with the election and Iraq hanging overhead it’s a tough hill to climb. We have purchased a few speculative stocks but we can’t find the catalyst that suggests we take more than a nominal stand and so we keep watching and waiting. As always our desire is to preserve capital first and make money second.

We are off the Chicago this morning. There will be a post tomorrow afternoon.

So let the games begin.

2 June 2004 - Evening Comment

8:04am and Treasuries are about 5 bps weaker as the markets prepare for Friday’s employment number. We are sorry to keep talking about one number but that is the only game in town this week and so all the traders are concentrating on it.

NT released information this morning indicating it is going to be a long while and many dollars to accountants before they resolve their financial statements. They have numbers but the accountants have to go over each and every one and assure that they are correct. This imbroglio arises from the former CEO manipulating earnings. The company asserted this morning that business is improving and that the unaudited cash balance on 3/31/04 was $3.9 billion and those are the two most important items we care about. We bought NT for a trade and we think the potential for the trade still offers a 50% or more upside by year end.

9:20am and stocks opened higher with 2/1 positive breadth on the NYSE and 3/2 positive breadth on the NAZZ. That rally has faded and now stocks have returned to yesterday’s malaise and waiting game. The NAZZ is 10 points lower and the DJIA is even on the day. Summer volume is the rule these days and it is boriiiiiiiiiiiiiiing.

11:53am and tomorrow we are heading off to Chicago to visit with the folks at Mesirow Financial who will become the clearing broker for Lemley Yarling & Co accounts in mid July. As a result there will be a morning post tomorrow and then a Friday afternoon post.

Stocks continue to float along with breadth OK and the major measures plus or minus unchanged. Intel has a mid quarter update tomorrow night and then the jobs report comes Friday and so those two events may be the catalyst to get stocks moving. The question is which way. Moreover Fridays have been difficult days to move the markets higher as traders want to be flat over the week ends.

2:37pm and as we awoke from our mid day doze we realized the DJIA was up 82 points and the NAZZ had moved into positive territory. The oil minister of Kuwait said that OPEC will raise production by 2 million barrels and cause the price of oil to drop $8 in the next few weeks. On that news the price of oil dropped $2 and it closed below $40. That message is what gave the kick start to stock prices.

Earlier we bought more NT at $3.88 which is down 20 cents from yesterday’s close. NT is trading in its own market because of the financial reporting problems that we think will be solved. NT is an important Canadian company which is why it will survive without bankruptcy.

3:02pm and the DJIA closed up 60 points at 10263. The S&P 500 gained 4 points to end at 1125 and the NAZZ closed lower by 2 points at 1988. This market needs the NAZZ to lead it higher.

And tomorrow is another day.

2 June 2004 - Morning Comment

6:52am and European markets are higher. Hong Kong was up over night with Japan lower which is the reverse of Monday’s action. U.S. futures are higher. Oil has backed off and there were no untoward incidents overnight to warn off stock traders this morning. Investor’s Intelligence numbers show a 3 point gain in bulls to 45% with a corresponding 3 point drop in bears to 24%. Neither is at extremes.

With the new Iraqi government in place as much as it is ever going to be the markets of the world seem to have decided to give it a chance to calm things down. The unsaid words in commentary that we listened to yesterday seemed to indicate that U.S. forces may pull back a bit from solving all the crisis in Iraq and let the Iraqi police under the new governments direction try that gambit. If that works that would be great and maybe the troops would get home sooner.

With earnings season over the employment number on Friday and the Fed rate raise or non raise at the end of the month are the two focus areas. The end of the month action depends on Friday’s number. A number over 300,000 assures a rate increase.

We are biding our time looking for a few more good stocks but none have popped onto our radar screen. June in an election year is supposedly a good month for the markets, or so the gurus tell us. Time will prove the value of that wisdom.

So let the games begin.

1 June 2004 - Evening Comment

7:32am and oil is up $1.50 at $41.25 and gold is also a couple of dollars higher. The turmoil in the Middle East while becoming commonplace is also having a negative effect on the stock markets of the world. We view that as realistic and we are glad to see the trepidation. We have been confused the last few weeks by the disconnect between the bad stuff happening over there and the seeming rose colored glasses with which traders and a few investors were treating U.S. stocks.

Friday’s payroll announcement on new jobs added is the number of the week. The current consensus guess is about 228,000 with estimates ranging between 150,000 and 350,000 jobs added.

9:28am and the major measures are slightly lower in light trading. Breadth is positive. Tech stocks seem under a bit of pressure and oil stocks are higher but the trading is summer light and so it is tough to get a handle on any trend.

10:30am and oil is at $42 per barrel as Bush speaks on TV about the Iraqi Government. That turnover day is on June 30. Bush is doing his best to say that the UN is responsible for these new picks so there is no blowback on him if stuff happens.

The ISM index was 62.8. The NAZZ is leading the way lower down 10 points. Breadth is now negative.

11:12am and stocks continue to trend lower.

Treasuries are also lower on the day with the ten-year up nine basis points to 4.75%.

The ISM number this morning indicates an increase of 100,000 jobs in the manufacturing sector in Friday’s report according to CNBC.

Commodities are higher. Our guess is that grains should be higher with all the rain in the farm belt the last few weeks. That’s because there is too much wetness as opposed to not enough wetness. We don’t trade grains so ours is just a guess.

1:56pm and entering the final hour of trading the major measures remain lower. The DJIA is off 42 points and the NAZZ is down 15 points. Breadth is now 5/3 negative and volume remains very light. The final hour will be a test for the bulls.

3:02pm and Treasuries closed off their lows for the day but the ten-year was down 5 bps at 4.70%. The DJIA made it back to plus territory to finish up 15 points at 10203. The S&P 500 gained 1 point to 1120 and the NAZZ also closed on the positive side up 4 points at 1990. We’ll call today a tie and boring given the very light volume.

And tomorrow is another day.

1 June 2004 - Morning Comment

6:54am and we wish all a Rabbit Rabbit. It looks like the trouble in Saudi Arabia over the holiday weekend has affected stocks. Japan was higher but the rest of the world is lower as we begin a new month and metrological summer.

Many of the technical indicators have moved from extremely oversold in mid May to overbought and so a pullback is expected by the gurus in the know. We are agnostic and just along for the ride.

The stocks we are buying are outside of program trading interest, but if the markets move lower we presume our stocks will also. For today we just want to watch the action and get our bearings as the fog lifts.

So let the games begin.

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For those clients of LY& Co and other interested persons the Quarterly Report on the routing of customer orders under SEC Rule11Ac1-6.
For Quarter Ending March 31, 2004
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Annual offer to present clients of Lemley Yarling Management Co. Under Rule 204-3 of the SEC Advisors Act, we are pleased to offer to send to you our updated Form ADV, Part II for your perusal. If any present client would like a copy, please don't hesitate to write, e-mail, or call us.

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.