Bud's Poem Page

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30-31 March 1 April 2002

Rabbit Rabbit!

The DJIA closed the first quarter of 2002 up 3.8%, the S&P 500 was unchanged for the quarter and the NASDAQ was down 5.3%. The Model Portfolio was off 1.7%.

The New Yorker for the first week in April contained an article by Nicholas Lemann that lays out a scenario for the invasion of Iraq by US forces in the autumn of this year. The scenario suggests that VP Dick Cheney's recent trip to the Mid East was to arrange bases for US forces. The article, through the use of interviews with various officials and interested parties, then creates a plausible timetable for the events that will occur to justify the invasion. The final event is Saddam Hussein's refusal to allow the type of inspections the US requires verifying that there are no weapons of mass destruction.

What's interesting about this article, apart from the appalling possibility of a real war, is that the timetable for the buildup to war fits the events that occurred in 1990. For the present article expects the buildup of troops to commence in August 2002, which is the month that Iraq invaded Kuwait in 1990. As in 1990, we have no doubt that the US can win a war with Iraq. The US has, without question, the most powerful military force ever assembled. What isn't so certain is that the war can be won without the use of tactical nuclear weapons, unless the US is willing to lose upwards of 30000 American lives. The US lost 300 troops in 1990, but chose not to invade Iraq with one of the reasons given as the avoidance of the loss of many more US lives.

The New Yorker scenario suggests that the hawks inside the Bush White House believe that maybe the Republican guard-not the US Republicans-but the elite guard force for Saddam, will revolt when faced with overwhelming US forces. If they don't and there is no popular uprising in Iraq, then it will fall to US forces to do the dirty work. If President Bush decides not to risk American lives, the article suggests that the US may use tactical nuclear weapons. This may be the reason for the recent leaking of the top-secret report about the use of tactical nuclear weapons to eliminate weapons of mass destruction. Such leaks don't occur in the present White House without a reason.

So much for today's civics lesson. While we are personally opposed to any such military action, our purpose in presenting this scenario is to point out that in 1990, the stock markets began to stagnate in the spring and then began a rapid decline in August when the invasion occurred. Markets abhor uncertainty, and we would be surprised by anything but a sell off if the above scenario begins to play out. The invasion of Iraq to get rid of Hussein is a question of when not if in our mind. And this possibility is another reason for our caution at this time.

With first quarter earnings' season upcoming, many gurus are forecasting better than expected earnings to be reported. The earnings may be better that expected because the expectations are so low. That is not a reason to buy, at least for us. Many recent economic numbers are suggesting recovery, but most of the daily economic reports are a reason for short term trading and not long term investing. Twenty years ago, there was a monthly balance of payments report for short term bond traders to focus on. The stock markets would then trade off the bond traders' reaction. Now there are daily reports on an hourly basis for traders to use as reasons to trade. Most of these reports are just smoke and noise that obfuscate and confuse.

We remain unconvinced of any need to commit to the market on a long-term basis. We will continue to look for trading opportunities. Happy April Fools' Day.

29 March 2002

The stock and bond markets are closed today. The Treasury bond market sold off yesterday giving back all the gains of Wednesday. The stock markets meandered through the day with the NASDAQ and S&P 500 managing to close with a small gain, and the DJIA with a small loss.

We bought Ford at $16.45 in our aggressive trading accounts. Our grandchildren are at the door demanding that we go for a walk with them. We'll happily comply and have a longer post on Saturday.


28 March 2002

The DJIA closed up about 70 points while the S&P 500 gained 6 points and the NASDAQ closed up 2 points on Wednesday as the markets endured another watching paint dry day. The Treasury bond market gained.

On Wednesday, we sold our trading position in Guidant at $42.19 because the company said that the approval by the FDA of Contak, a cardiac resynchronization product, would not occur for several more weeks. The approval was supposed to come this week. Since GDT is also scheduled to announce preliminary results of its drug coated stent trials in May, we decided to take our small profit and watch from the sidelines for now. We had assumed that the Contak approval would come this week as the company had announced several weeks ago. We also had trouble trading the stock in size and so we may just go back to trading it only in our aggressive accounts if we reinitiate positions. GDT closed at a higher price than we sold it, so for yesterday, at least, we left some money on the table. But since the trade was profitable in most accounts we'll wish those who bought the stocks from us well. When stocks moved higher after he sold them, the 'old stockbroker' used to say: "I'm happy for the folks who bought the stock from me. I want them to make money too, so they'll be there to buy from me the next time I want to sell."

With the funds realized we bought the QQQs at $35.67 for an end of quarter trade. We think the QQQs have a few points in them next week since a lot of the tech stocks that comprise the QQQs have been under selling pressure all quarter. Hopefully that pressure will abate for at least next week.

Some market mavens are pointing to the closing of the spread between high yield bonds and treasuries as an indication that investors are becoming more convinced that economic recovery is at hand. Their reasoning is that bond investors are willing to bid up the prices and thus lower the yields of high yield bonds because those investors are confident that the recovering economy will raise all ships. As high yield bond prices rise, the yield moves down and thus the spread (the spread is the difference between the yield on a high yield bond and the yield on a Treasury bond of comparable maturity) is lowered.

We have a different take on this phenomenon. We believe the yield spread is narrowing because investors are chasing yield by buying high yield bond funds, and bond funds that can invest a portion of their assets in high yield bonds. As money flows into high yield bond funds these bond funds have to go into the market place to buy bonds. This past week $8.4 billion flowed into all types of bond funds. Since the bond funds with the high advertised yields usually receive the most money, bond fund managers that are allowed to buy high yield bonds seek the highest yield bonds. Demand for these bonds raises their price and thus lowers their yield. This activity is similar to the buying of preferred stocks by individuals. Preferred stocks and high yield bond funds are sold by brokers, not bought by investors. By that we mean that customers call asking for more yield than the 1.5% that their money funds are paying and the broker suggests the preferred stocks and high yield bonds. It's known in the business as giving the customer what he/she wants. And the broker makes a nice commission in the process.

The search for yield is the result of Guru Greenspan and his Fed cohorts keeping interest rates artificially low so that banks can earn enough profits to make up for the bad loans they made to Argentina, Enron, and any number of now bankrupt companies. In a quasi-capitalist economy, the individual suffers the rigors of capitalism while the "big boys" enjoy socialist style rescue. Such actions are always said to be taken for the good of the masses.

A different twist on the same subject is news that James Goodwin, former CEO of United Airlines, received a $5.4 million severance package, while the company was posting a $2 billion loss, and firing 20000 employees. Also, remember that UAL received $500 million plus in welfare payments from the federal government, or rather the US taxpayers, last year. Talk about welfare queens! Goodwin resigned under pressure after threatening to place the airline in bankruptcy if the Machinists and Aerospace Workers Union kept asking for wage increases they had been seeking for five years. They had given up wages back in the early 1990s, the last time the airlines were in trouble, to help the airline survive. Capitalism for the workers, socialism for the honchos should be the motto of corporate America.

27 March 2002

Watching carrots grow would be more interesting than watching yesterday's trading. No movement in the stock markets is a logical action given the present mixed economic data. It looks like the stock markets are going to slumber away for the rest of the week as volume dries up and the Holydays take precedence. Actually given all that has happened in the last year, praying is probably in order.

We purchased more Guidant at $41.30 on Tuesday. We are looking for a trade in the stock. The Treasury bond market rallied on a "go slow in raising rates" statement by a nonvoting member of the Fed. We continue to believe that only one 25 basis point raise in the Fed funds rate will occur before September.

The stock market rallied early Tuesday on news that consumer confidence numbers had their largest one-month jump in a long time. We think such "data" should be taken with a lot of grains of salt. The markets need new numbers every day to trade on, and most of them represent noise rather than fact. Early yesterday, the DJIA was up over 100 points. But that initial rally was followed by gradual erosion and the DJIA closed points higher for the day. The S&P 500 and NASDAQ both gained a little.

Passover begins tonight and the markets are closed Good Friday so our month end rally thesis is running out of time.

26 March 2002

The stock markets closed lower on Monday with the DJIA and S&P 500 losing almost 1.5% and the NASDAQ down 2%. The Treasury bond market was also softer on the day.

With Passover this Wednesday and the markets closed on Friday, volume should be low and price movement in some stocks may be interesting. Drug stocks and techs which have been losers this quarter should remain unloved and under selling pressure. The winners this quarter have been retailers and home building stocks and they will probably move higher into Thursday's close.

AOL Time Warner announced today that it is taking a write down of $40 to $60 billion this quarter to adjust the value of the merger two years ago. That's quite a spread. If AOL hadn't merged with Time Warner it would have lost a good chunk of its market value by now.

The Sunday New York Times had a lead article in their business section about the financial relationships that have existed between telecom equipment suppliers and end users. These financial arrangements pumped up reported sales and earnings but were merely paper transactions between companies. We wrote about these problems several years ago at the height of teletech bubble mania. We are continually amazed that analysts and the financial media are always late in recognizing momentum/mania investing excesses. Such myopia comes from the reliance of all Wall Street on each other for news and ideas and income. Momentum investing now has selected Cardinal Health as the stock to own for performance. Every growth portfolio in the country owns that stock. We don't know whether the company is worth its' current price. We do know it is becoming over owned. By over owned we mean that when growth slows down or attitudes change, there will be no one left to buy the stock. To whom will the current buyers sell? All the growth folks own too much of the stock now. We feel the same about the homebuilding stocks that are now must own issues for most growth portfolios. When folks play the earnings momentum game they better remember to get off before the music stops.

24-25 March 2002

The DJIA lost 1.7% for the week and is now up 4% for the year. The S&P 500 is unchanged for the year after losing 1.5% on the week, and the NASDAQ is down 4% since the new year began after being down 1% this past week.

The Model Portfolio is down 2.7% for the year. Last week in the Model we purchased $125M US Treasury 3.25% notes due 12/31/03 at $996 per thousand to yield 3.50% to maturity. We also purchased 500 Guidant Technology at $40.97 per share. We bought the Guidant for a trade. GDT is a maker of heart devices including stents, the devices inserted in arteries to keep them open. Guidant is the leading maker of stents. New technology is being developed that will allow stents to be coated with drugs that will prevent new clots from forming where the stents have been implanted. Johnson & Johnson is in the lead in testing this new technology and Guidant has fallen behind JNJ in the race to be first. That fact is the reason the stock has dropped recently from $50 per share. With $2 billion in revenues the stock trades at five times revenues and twenty times earnings. While we traded the stock profitably last year in a few accounts, this is a new name for most of our clients. This is an anchovy stock.

We think this coming week will see the continuation of the six week rally that took a breather last week. Since Thursday is the end of the first quarter, we think we will see mark ups in stock prices later this week. Volume has been relatively light and it won't take much additional buying to move stocks higher. After next week our crystal ball is cloudy.

While the yield on two year notes has risen from 3% to 3.60% in the last month, we continue to invest in that area of the Treasury market. By the time we are ready to lengthen the maturity on the Treasury notes we hold, those notes will be one-year maturity notes.

As we mentioned in a recent post, our Treasury notes earn 1% interest every four months. We don't see a need for most of the cash in client accounts till fall and so we are investing that cash in less than two-year maturity Treasury notes. Cash still yield only 1.3% and the difference in return over the next six months has been worth the small risk to principal. With yields now at 3.5% on our nineteen-month maturity notes, the 2% positive spread is even more compelling. We know that given the high yields in the not too distant past, 3% is not nirvana. But with the S&P 500 showing a negative 22% return over the past two years, a plus 3% isn't so bad. And interest rates are now on the rising side of the curve, which bodes well for our ability to lengthen maturity and increase coupon yield at year-end or before.

We remain of the opinion that the economy is going to roll over again, and we don't expect the Fed to tighten more than once before September. At any rate, even the bond bears don't expect Fed Funds to exceed 3% till year-end. With Fed Funds at 3%, cash will still only yield 2.5%. And with 3% Fed Funds one year maturity notes will probably yield 3.5%, which means the 3% notes due in January 2004 that we own now, will be priced at 99.50 or higher.

23 March 2002

All GE, all the time, has become the modus operandi of CNBC. These people have no shame as they present folks to dispute and dispel negative comments about GE by Bill Gross of PIMCO. Where are the FCC and the SEC? The torrent of positive comment that CNBC is providing to stem the sell off in GE stock is not journalism. It is stock hype. There should be a trailer at the bottom of the television screen reminding folks that GE owns and totally controls CNBC. There will be no more ranting by me on this subject, at least until tomorrow.

The stock and bond markets both closed lower on Friday. We added Guidant to more accounts. We own GDT for a trade. This past week was a down week for the stock markets. They haven't broken interim support and so we still expect a month end mark up rally next week.

We'll have a longer post tomorrow.

22 March 2002

Only one more week and Kathy returns, hooray! It's good that she takes time off. Heaven knows she needs time away from me, although with the magic of e-mail and wireless phones she can't ignore me. But her value to the smooth running of our client accounts is never more evident than when she is gone.

The stock markets rebounded on Thursday with the NASDAQ gaining 2% and the DJIA recovering from an over 100 point loss to close down 20 points for the day. The S&P 500 gained fractionally for the day. General Electric continued its sell off of Wednesday losing another $1.25 per share. CNBC, which is owned by GE, did yeoman's work trying to pump the stock up. We would expect GE to rebound before month end, mainly because it is owned by so many institutions that would like to see a higher month end price.

We remarked last August that the retirement of Jack Welch was the end of an era, and may have marked the end of the bull market of the 1980s and 1990s. The current turmoil about the way GE reports earnings is only the tip of a very big iceberg. We continue to believe that the accounting shenanigans of past years will eventually affect more companies than Enron. Just yesterday Dial Corp announce earnings for the quarter that were 8 cents per share above analysts' estimates. They also said that yearly earnings, before special impairment charges of $43 million, would be above analysts' estimates. The special impairment charges are related to the difficulties in Argentina. For years Dial has include earnings from Argentina in operational earnings. Why shouldn't Dial include the loss when Argentina has problems?

Today we bought US Treasury 3.25% due 12/31/03 on a 3.50% yield to maturity. We aren't willing to assume more risk than that right now.

21 March 2002

There was no spring in either the stock or bond markets yesterday as bonds sold off on interest rate worries, and stocks in part because of a negative report by an important bond guru.

The Fed's switch to a neutral stance on the economy on Tuesday, coupled with strong new home sales on Wednesday, was the reason bonds fell on fears of higher interest rates.

The stock markets were down but not out till about noon. Then Bloomberg News Service reported that Bill Gross, the thinnest man on Wall Street excepting of course perpetual bear James Grant, had published a negative report on General Electric. General Electric just sold $11 billion in bonds. Gross is the largest bond manager in the world with gillions and gillions of bond money under management. The stock markets reacted to the negative GE report by dropping with the DJIA closing on its low down 1.3%, the S&P 500 down 1% and the NASDAQ down almost 3%.

Bristol Myers had contributed to the early stock market gloom by dropping 15% in price on news that a potential blockbuster drug for congestive heart disease was not any better than a drug Merck sells that just went off patent and is now available in a generic version. We would have been tempted to trade BMY, but we still have a bad taste from the implosion of the stock several weeks ago in the brouhaha over Imclone Systems supposed cancer drug. We may be tempted if BMY gets down to the mid 30s.

For now we are enjoying the spring weather before a cold blast hits tonight. Hopefully the cold weather will be the last of the season. We don't think stormy weather is over for stocks. And we are less certain about a month end rally. Since we don't own any stocks except AWE (as in ouch!) and a trading position in GDT, we won't be upset if we are wrong.

20 March 2002

Happy Spring!

The Fed moved to a neutral stance and left Fed funds unchanged at 1.75%. The stock markets yawned. Carli Fiorina claimed victory in the Hewlett Packard-Compaq merger battle. The voting was close but it looks like the merger will go through. We sold our trading position in HWP that we bought yesterday for a 78 cents per share loss. While we didn't make a trading profit, we view the combined companies as a good speculative buy. Because the merger will take a year to consolidate we think there is time to build a position in accounts and we want to wait until the dust settles before establishing a position.

We also sold our trading position in the QQQs when the markets did not rally after the FED announcement. We lost 70 cents per share on the trade.

As we've been saying, we expect to under perform the stock markets this year if they move higher since we can't find the undervalued out of favor stocks we like to buy. Consistency requires us to stay with our discipline and we don't want to buy the fully priced cyclicals or financials that the market favors. We are hopeful that year-end, or a market sell off, will provide us with the opportunity to find some values. Till then cash and now less than two year Treasuries are where our dollars stay parked.

19 March 2002

To rally, or not to rally, that is the question. Whether 'tis better to stay in cash or suffer the slings and arrows and loss of fortune by entering a market up 20% in six months. Of course if the time period is seven months, the gain in the DJIA is only 2%. But that's another story not being told on CNBC and CNN Financial, and FOX whatever. We do not have the answer to the question. Volatility is low. We always thought that was a bullish signpost. But now we have learned that low volatility is not a good sign, except when it is. Our basic position now is a big one in AT&T Wireless and a lot of cash and less than two year Treasury notes.

Since triple witching on Friday was a nonevent, we aren't surprised that Monday's trading was also sleep inducing. We think the institutional/fund folks are saving their buying power for month end. The DJIA traded all day in negative territory, as did the S&P 500 and both closed slightly lower for the trading session. The NASDAQ stayed on the plus side most of the day and closed slightly higher. In our aggressive accounts only, we purchased Guidant at $42.33, the QQQs at $37.88 and Hewlett Packard at $19.50. We bought the GDT for a "month end mark up" trade. We purchased the QQQs as a play on the catch up with the DJIA theme we have mentioned over the past few weeks. And we bought a small amount of Hewlett because we think the merger with Compaq will be voted down this week. In that case the share price should jump higher as shorts cover and folks who wanted the merger to fail buy. We plan on selling that news because we don't want to own the stock if the merger is voted down. If the merger does go through, we expect that HWP will drop in price as arbitrageurs sell HWP and buy CPQ. In that case we will buy more, all around.

We had a sugar snow last night and wrote a poem for this time of year when we are ordering seeds, planning a smaller garden than last year, and anxiously waiting for the mud to vanish into green.

    Sugar Snow

A sugar snow fell last night
To cover March's mud from sight
And paint the trees up on the hill
One last time with winter's white

Morning's sun sparkled bright
On maples surging sap to buds
Urged by warmth from far away
To fill sugar buckets with sweet delight.

The robins Saturday returned
To pastures greening in the day
And pesky starlings have already
Begun invading every cranny.

Even on a cloudy day
There is a light in sullen skies
That brightens hopes of spring's return
As soon as winter winds away

This year we built a large new pen
For mother cows to have their young
Safely away from coyote yelps
And covered from the rain and snow.

On Friday night the first cow freshened
At midnight with a mighty bellow
Which raised us quickly from our pillow
To move the new black calf inside

To our delight at mornings light
That same black cow was standing near
With brown calf suckling, while nearby
The born black calf bawled hunger's cry

The magic mystery of motherhood
Surprise old cow you now have two
One keeper for our herds future 
One profit in the fall calf sale

After cleaning pen and yard
And dropping brome for mother's cud
It's off to Wall Street for the day
While newborns slumber in the hay.

BL 18 March 2002

17-18 March 2002

The stock and bond markets finished the week relatively unchanged from the prior week. For the year, the DJIA is up 5.8%, the S&P 500 is up 1.6% and the NASDAQ is down 4.2%. The Model Portfolio is down 1.8%. On Friday we reduced the AT&T Wireless position in all accounts and now we own just AWE and the 3% Treasuries due in November/03 and January/04. The March 14 "Thoughts" column below has a complete discussion of our strategy with the Treasury issues.

We would expect the rally in cyclical DJIA stocks to continue through month end. We think the old bubblemania tech favorites will remain under pressure through month end as big institutions and mutual funds continue to lower positions in anticipation of the end of the first quarter reporting period. As a result, we expect the S&P 500 and the NASDAQ to continue to under perform the DJIA. That's because the S&P 500 and obviously the NASDAQ have greater weightings of tech stocks than the DJIA. After April 1, if the rally continues, the NASDAQ and S&P 500 may play catch up. Even then, we don't think we will join the game. We'd rather wait till next autumn to go shopping again.

We were reviewing our trades since last fall to try and understand why we missed a good part of the rally even though we were trading stocks during the period. We found it interesting to realize that most of our trades in Cisco Oracle EMC Tellabs and Ciena and Palm were profitable. Our trades in Sun Micro, SBC, Schering Plough, BellSouth and Schwab were flat to slightly down. We lost big money in Rite Aid and AT&T Wireless, and our other telecom tragedies, Broadwing, Quest, and Lucent. Another interesting fact is that all the stocks we traded are below where we sold them or less than a point higher in the case of SGP. So our sales weren't bad. Our purchases were uninspired, to be charitable. We think part of the reason for our lack of participation in the October to March move was that we didn't feel compelled to try and make money since we well outperformed all the stock markets all last year. In fact, we are way ahead for the last three and five years. And so we were exercising caution in our trading.

Upon review, the year end stocks we bought in November and December 2001, were not the type of typical year-end purchases we feast on. Several years ago we were comfortable that Abercrombie and Williams Sonoma were undervalued. We can make the same statement of under valuation for Super Value and Kroger and Oryx. On the contrary, the tech stocks we bought at the end of 2001 were down a lot in price from their highs but they were not then and are not now undervalued even at current prices. That resulted in our quick sale of them on any rise in price. We didn't have the conviction necessary to hold them. And those quick sales were proven correct.

We are having a tough time finding stocks we really want to own. And that is why we are sitting on the sidelines. We may trade a "blowup" or two if it is in a stock, which is the type institutions quickly, forgive and forget. A "blowup" is when a stock announces bad news and drops 10% or 20% in price in the first hour of trading. Two "blow ups" this month were Merck and Guidant, but we weren't in the mood to trade them. Other than "blow up" situations, we presume we'll be sidelined in many accounts. We will be back in action in our aggressive trading accounts soon. We just think that for now we need a rest and a visit from our grandchildren followed by a trip to Florida to recharge our batteries.

We also wouldn't give short shrift to the events of 9/11 and the subsequent police action in Afghanistan as affecting our mood and investing outlook. The terrible tragedy of September has led us to reflect and cry and hope for the goodness of humankind to someday figure out that love is better than hate and that giving is better than taking. Politicians in the majority through out history have always had the same answer to every act of aggression. And that is to aggress back. In our mind, the only necessary war though out history was World War II. And that war didn't have to happen if folks had said no to prejudice and bigotry in the 1920s and 1930s. Unfortunately humankind wasn't at that level of recognition then. But wars have a way of leveling the field and in the process killing millions of people who only wanted to live and let live. We often wonder about the days before the Civil War and World War I and World War II. Did folks really know war was coming and what the consequences would be? Do we know now? Is the testosterone-induced risk worth taking in Iraq? Is Iraq any different from China? What is all this talk of tactical nuclear weapons used in battlefield situations? Just a few questions that give us pause in our investing decisions.

March of 1990 was not a good time to be investing. The Middle East conflagration and the bellicose talk about Iraq are reasons for caution. We couple those geopolitical concerns with the lack of any real stimulus package and our belief that seasonal adjustments to economic statistics for the winter that never happened are overstating the case for recovery. For us the economic glass is half-empty.

But today, at least, up here in our little corner of the world, it's a beautiful day for a promenade in the park.

16 March 2002

We bit the bullet Friday and reduced the AT&T Wireless position in all accounts. We sold the shares at $9. We still have a major investment in the stock and now we have the comfort of not concentrating on every tick. As we told a client, we've made our money over the last five years by hitting singles and avoiding big losses and we plan on continuing that discipline. Consistency is the first rule of investing.

The stock markets may have resumed their rally Friday. The DJIA gained one half per cent, as did the S&P 500, while the lagging NASDAQ managed to close higher also. From the price action of Cisco and Oracle, it looks as if the big funds and institutions are liquidating losing positions before quarter end. The money raised is piling into finance, retail and cyclical stocks. Momentum investing is alive and well, only the types of stocks purchased have changed. We continue on the sidelines because we can't find anything we want to own or trade.

As usual we'll have a longer post tomorrow.

15 March 2002

Beware the Ides of March.

That goes double for the folks at Arthur Andersen, the accounting firm. Now we have railed against Enron and other business foibles for our entire business life. But it is unfair and just plain wrong for the US Justice Dept. to single our Andersen for indictment. All the big firms "work" with their clients. That one or two partners at Andersen were rogues and maybe crooks is not sufficient reason to ruin the lives of tens of thousands of people. Congress and the White House, Republicans and Democrats were all too happy to be friends and take money when there was no scandal. 99% of the folks at Andersen were honest. Sure, fine them, send the bad apples to jail but don't ruin a fine company. The political and business establishments' lack of loyalty is truly sad.

The stock markets went nowhere on Thursday in dull trading. So today may be interesting. The bond market dropped yesterday as all the bond gurus started predicting Fed rate increases.

We get "e-mails".

A client asked a question about the fact that the Treasury notes we purchased at $1000 have closed at $990 today. He suggested we couldn't sell before maturity without losing money. It's a good question. Here's our answer

Currently, cash earns 1.5%. If we stay in cash we will earn 1.5%. At some point this year interest paid on cash is going to rise. Let's posit that in December 2002 (nine months) cash and money market accounts yield 2.75%. Averaging the return on cash over the next nine months would have cash yielding on average 2.25% or less. Thus, invested in 3% Treasury notes we are earning at least .75% more for the year. If yields on cash and money funds take more time to rise to 3%, we earn a greater return

We only plan on selling the Treasury notes to reinvest in higher yielding Treasury issues at a lower cash price than those we sell. If we sell the bonds a point lower after owning them for four months, we would lose one point. But we would earn one point in interest (one point is $100 or 1% on a $1000 Treasury note). That's because the 3% Treasury notes earn 1% every four months. If we sell after eight months and the notes are still down we would make 1% or slightly less than the 1.3% cash is currently yielding. By next December the notes will be one-year maturity paper. If Fed Funds have risen from 1.75% to 3% by year-end, cash and money funds will still be yielding only 2.50% to 2.75%. Thus we would expect our then one-year maturity 3% notes to be selling above where they are now because they have only one year to maturity.

In December 2002, our notes due in November 2003 and January 2004 will have one year or less to maturity. As a result, the dollar price of the note due in January 04 will have to start rising towards par ($1000) since in December 2002 if it continues to sell at $990 it will be yielding 4% (the coupon 3% plus discount from par 1%). Now if one-year Treasury Notes are yielding 4% then three-year Treasury notes will be yielding 5% or more. In that case, we will have the choice of selling the Nov/03 or Jan/04 3% Treasury notes we own and with the proceeds buy a two or three year note yielding 5%. Since we believe Fed Funds will be at 3% in December 2002, we would expect Treasury 3% due 1/31/04 to be selling at $99.50 or higher. With the proceeds of the sale we would have funds to purchase a 4.5% coupon note at less than par.

The end result is that this year we will earn about 1% to 1.5% more yield than we would staying in cash. And in December of this year we will have the option of extending maturity to buy a higher yielding two to three year maturity issue, without any loss of principle. In the meantime, if the market does sell off in October, we will have earned about 1.5% if we sell the notes below par to buy stocks. And usually in market turmoil the short end of the Treasury market rallies so our yield might even be greater.

We get more "e-mails", this one about AT&T Wireless:

Client: looked heavy at 9.60 or there about and would not rally with the market. Although everybody loves the stock, if you could love a stock. But here ($9) I don't know if you become a better seller or buyer at these levels. But since you own so much, I guess praying is not out of the question.

Bud: wish we had sold half at 9.50 and then we could hope we were wrong. Have to reduce the size of position. We can't win them all, If we believed God cared about what we do in the market we would pray. AWE has eroded with the market. The overall market looked heavy when AWE was up at 9.60.

Client: didn't want to cloud your thinking so I did not say anything but since you bought some cheap stock, you could have made a print on that at $9.60 and then hoped. I agree that we had our rally and it will be nip and tuck for a while. Although AWE is not a bad position, it's just too much. I know it clouded your thinking because when Treasuries become the highlight of investments than we are in deep trouble (which I don't think we are). If you sell some AWE at these levels or little higher, only sell no more than 1000 or 1500 for me if that's OK.

Bud: just looked like it was going to keep going. We're clouded on this cause we own too much, and the position size also clouds the rest of our thinking. The markets have had the 10% rally already that we were looking for. If we sell a bunch of AWE then we can hope we were wrong and the rest can go to 20 over a year. When we sell for you we would like to sell 2500. That still leaves u with 2000 or an 8% position. That's a lot. Treasuries are not clouding our mind. We just don't want to give anything back this year and the risk reward of stocks isn't good now. Selling part of the AWE position will let us win both ways. If it goes up to $15 we're glad and we made our money back plus 20% even with the loss we take on this sale. If it goes to $6 we can buy more.

Client: we'd only be even. Don't you have any stocks you like?

Bud: even is better than loss. We are not interested in any stocks. We don't believe this cyclical buying in CAT at $60 and GM at $60 is sustainable. This market run has Janus selling techs and buying cylcicals. Buying in October and selling in March has worked well the last five years. Since we are trading market moves we are probably going to do QQQ, DIA and SPY to catch market moves. Futures on individual stocks begin in August for institutions. That will be bad news for a stock, if institutions want to unload it

Client: by the way you don't have cabin fever do you?

Bud: hope not. Go for long walk every day. Just don't want to give any of our last three years back.

14 March 2002

The stock markets lost ground Wednesday with the DJIA and the S&P 500 both down 1.5% and the NASDAQ down 3%. A less than expected rise in retail sales coupled with low volume and nebulous rumors stalled the markets for most of the day. Even Treasury bonds on the long end suffered although the two-year dropped a few percentage points in yield.

The old adage, "never sell a dull market" may apply here. We expected a bit more volatility this week so we're interested to see what today brings. Two-year Treasuries remain king. The DJIA and S&P 500 and NASDAQ have all rallied over 10% from their lows of last month, even thought the DJIA is the only one in positive territory. So our prediction has been met. Funny thing, we don't think anyone feels rich yet from the action. We continue to expect a continuation of the rally into month end, but a few more days like yesterday and today might change our mind. For now we just think we are experiencing a normal pullback in the DJIA. The NASDAQ is a different story because large investors may want to show ownership of less tech stocks at quarter end. If that's the case the NASDAQ selling may pick up steam.

There were two large bond issues priced last night, Lucent and Computer Associates. Both were convertible issues and the new investment theory when buying convertibles is to sell short the common stock. In the good old days one bought convertibles for the equity feature. But Wall Street always has to have new mantras to sell to the gullible institutional folks and shorting the underlying equity against the bond position is supposed to lock in superior returns on a risk/reward basis. We'll be honest and say we don't understand the theory, nor do we wish to learn it. But we do know it causes the stock of the issuing company to drop on the day the convertible bonds are priced. Also, Computer Associates has earmarked some of the money raised in their bond offering to purchase a call spread to limit dilution to existing shareholders of the shares underlying the convertible offering. More fees for the underwriters, more complexity for investors. Financial voodoo leads to balance sheet confusion, something that has plagued CA over the years.

For now, we just want to get through triple witching.

13 March 2002

The stock markets took a rally rest on Tuesday. Bad news from Lucent and questionable news from Nokia put a damper on tech stocks and the NASDAQ lost about 2% of value. The DJIA after being down 100 points in the morning spent the afternoon bouncing from minus 20 to plus 20. There continues to be buying in DJIA names outside of Microsoft and Hewlett Packard. Wall Street decided, for today at least, that IBM was being honest in their financial reports and so Big Blue rallied a couple of points. That rally offset a drop in Microsoft resulting from negative analyst comments.

The downdraft in stocks placed a floor under bond prices. We continue to buy the November 2003 and January 2004 Treasury 3% notes under par. Since we don't expect much from the stock markets after April Fools' Day we are investing our cash as yields rise in the short end of the Treasury market. The above mentioned Treasury Notes are yielding almost 2% more than cash yields and we don't think Guru Greenspan is going to raise rates quickly enough to offset the difference.

12 March 2002

The DJIA and S&P 500 both managed small gains yesterday while the NASDAQ closed unchanged. Boeing was up to over $50 per share and Cummins Engine rallied $3 per share on a Prudential upgrade. That kind of price action leaves us breathless. Well not breathless, rather astounded. Who are the folks who just have to own these stocks at 80% higher than they traded a few months ago. The piling into the cyclical stocks is becoming as mind numbing as the tech turbulence of a few years ago. This present rally is another example of money managers trying to squeeze large amounts of money into stocks as analysts anoint those stocks. The fund folks haven't yet learned their lesson. Or maybe when one is dealing with other peoples' money and trying to make a name, there is never a lesson to be learned only glory to be earned if by chance one is right for a quarter or a year.

Signs point to the rally continuing, as investors become more bullish. We still think that as it gathers steam the rally will have enough momentum to chug on through month end on March 28. Since we have no wagon to hitch a ride with we will watch with interest from the stands. Go AWE.

9-11 March 2002

The DJIA gained 2% this week and is now up 5% for the year. The S&P500 was up almost 3% this week and is now up 1.5% on the year, while the NASDAQ is unchanged for the year, having gained 7% this last week. The gain in the NASDAQ confirms our belief that the tech stocks will move higher in this rally as investors play catch up and become leery of investing in the extended cylclicals like Caterpillar. The Model Portfolio gained 2% for the week and is now down .5% for the year.

While we predicted the rally, we haven't participated in it having been waylaid by our large holding in AT&T Wireless. Happily AWE rallied 20% this week and helped move many accounts back to even. We had been expecting AWE to participate in the rally. We had not expected it to drop 20% first. Ah well, at least AWE is heading in the right direction now. As investors become less wary and as institutions buy stocks for quarter end we expect the rally to continue. We are too late to participate for if we couldn't find any stocks before it began two weeks ago, we are less likely to find any stocks we want to own now. This week ends with triple witching on Thursday and Friday and so we expect volatility and some large market moves. Which way, we don't know?

We have $10.50 in mind as the level at which we reduce the over size AWE position. We don't expect AWE to reach that level till after this week since stocks tend to trade around the nearest strike price in the week leading up to expiration. In AWE's case that would be $10. A strong rise through $10 on the upside might break that hold but we don't expect such action.

Our two-year maturity Treasuries sold off this week as Guru Greenspan confirmed the stock market bulls' belief that the economy is in recovery and out of recession. With lower unemployment and higher hourly wages, the economic poo bahs are close to declaring the slowdown over. Now talk has turned to how fast the FED will raise interest rates to slow down growth. Far out! With all the media and financial pundits declaring victory over recession, it was natural for short rates to begin rising. The two-year Treasury yield rose from 3.1% to 3.5% this week and thus the price of the two-year Treasury Note has dropped 1% since we purchased it. Every four months we earn 1% on our Treasury investments. We think the Fed will raise rates slowly and so we don't expect money market rates to reach 3% till year-end. At the time our two-year notes will be one-year notes and the price erosion will gradually return to appreciation. Also we always have the option of extending maturity if three or four-year Treasury notes reach the 6% level. We are in no rush.

Unfortunately, investors who bought longer term bonds late last year and early this year are about to find out the unfortunate fact that when interest rates rise, bond prices drop. We noted that the high yield bonds are still reporting positive results for the year. Longer term Treasuries are in negative total return territory. And the number should get worse from here. We again caution that investors should either stay in cash or bur two year or less Treasuries. There will be time to extend maturity. If the economy is really recovering, interest rates will eventually reach 5% on three-year notes and 6%-7% on ten-year Treasuries. Last year at this time three year Treasuries yielded 5%

Among stocks we follow, Schering Plough dropped three points on news that SGP was planning on selling Claritin over the counter at much reduced prices to compete with generics. Interestingly, it was reported that insurance companies will not pay for the over the counter Claritin. Go figure! Over the counter Claritin will now sell at a much lower price than prescription Claritin but insurance companies won't pay. Insurance companies will pay for prescription Clarinex that is the "improved" version of Claritin that SGP hopes will retain a big chunk of Claritin users. Can anyone say conspiracy? We had expected SGP to drop on this news which is why we sold last month. We have never had much luck with owning drug stocks. May be because we think they rip off sick folks.

Gillette dropped a point on news that G was restating sales for 2001 and 2000 to a lower figure. Reported earnings remained as first stated. GE also fessed up to a mere $1 billion correction about how GE accounted for an accounting item. Looks like companies are finding accounting religion, at least for this year.

8 March 2002

Our trip to Chicago was short and is happily over. We are back in the land of milk and honey where we think much more clearly. During drive time we were thinking about the statistics released this week that demonstrate that productivity has increased in this country during the economic pullback. We have to admit that we have no idea how the productivity figures are derived. But it did seem to us that if productivity has been increasing, intuition suggests that the increase in productivity must have a direct relationship to layoffs of workers. And if that is true, it seems a little perverse for the stock markets to celebrate such a fact. For carried to extreme, if there were only one paid worker in this country, even if commerce dropped by 90%, productivity would be at an all time high. Oh well, that was just a thought while driving. We're sure there is a sound reason for celebrating productivity derived from worker layoffs, unless you are one of the workers.

The stock markets retrenched yesterday, but if the rally is to continue, we would think that today will be a big up day. We hope so, since the rally is returning AWE to the level where we can reduce the position without much pain.

Happy Friday.

6-7 March 2002

We are taking a trip to the big city today and tomorrow and so this post will have to suffice till midday Friday at the earliest. Given that we only own one stock now, there isn't a lot of action to report anyway. The down action on Tuesday was to be expected after two big up days. The fact that the DJIA didn't rally at all today may not be positive for market bulls. The DJIA closed on its low for the day although the NASDAQ did manage to stay in positive territory. The rest of the week will give a better picture of how this rally is going. AT&T Wireless seems to be stabilizing at this level, for which we are grateful.

Back in the 1970s when we were publishing a weekly newspaper and milking cows, we met a man named Sam Johnson. All the kids called him Sam the honey man because he always had sweet treats for them when they would walk through our woods to his house to visit him. Every March of his life, Sam would head to the woods to make maple syrup. In these parts, March is a temperamental weather month, and in 1975 we had a lot of snow and rain and Sam, who was up in years-caught pneumonia and passed on. We published the following obituary for him in our paper. It's our pleasure to share our remembrance of Sam with you.

Sam the Honey Man

Sam Johnson died last Saturday night
   and all who knew him shed a tear.
We learned of his death on Easter Sunday,
   a beautiful glorious day, one that Sam would
   have enjoyed, especially after the cold winter.

Sam died with little. His material estate
   will be small
The bees that he loved and cared for 
   didn't belong to him.
The hickory trees that gave him his "crackin" nuts
   didn't belong to him.
The maple trees that gave him the sap to make
   the syrup to give as gifts to many of us,
   didn't belong to him.
And yet---
   all the lands were Sam's

We will miss his "Ho Ho" at Christmas as 
   he delivered his gifts of candy and apples.
We will miss the sight of him, 
   driving by the house, surrounded by children.
We will miss a person, who in his simplicity,
   and love and knowledge of nature represented
    much of what we so called "new people"
   find inspiring in the locals who live here.

We are sure Sam suffered in life
   but he also enjoyed it well.
And, this year and every year, as we pick the wild asparagus 
   and find the morels, as we marvel at the sugar snow, 
   and the return of the red winged blackbirds, 
   we'll think of Sam 
   and thank God that we were able to know him.

May Sam the honey man rest in peace, 
   he earned it.

BL 14 April 1977

5 March 2002

Well, the rally we predicted is occurring. Unfortunately we are not participating in the fun. Mondays rallies involved cyclical and finance stocks and many of the defensive names like Proctor & Gamble, Merck and Coca-Cola were lower for the day. Gillette sold off and since it was a trading position and failed to breach the $34.50 level on the upside, we decided to eliminate the stock.

We are not participating in this rally. We thought AWE was going to be our vehicle for participation. Boy and Girl were we wrong. The truth is that the defensive stocks we were going to trade haven't participated yet, and we don't have any interest in the stocks that are moving higher. Don't know whether our age is showing or whether it's a combination of age and lack of confidence in the economic recovery that the DJIA is rapidly discounting. The QQQs have jumped since we sold them and we do think they will move higher, but after we bought them last week, we realized we just don't have the stomach for risk. Hopefully the selling will dissipate in AWE and a little buying will come in before month end to move it up to the $10 level. If that happens we will lighten up. We aren't going to do much selling at this level except for clients who have expressed discomfort. We sold a few shares today for a couple of those accounts. We understand those feelings and will accommodate any requests of that nature. For all our other accounts we are going to maintain our position because we do believe that AWE is a wonderful long-term investment, especially at its current price.

3-4 March 2002 - second post

We received an email yesterday from an old and valued customer. He is a true conservative and W.W.II veteran and he has been kind enough to endure our liberal leanings over the years and provide us with many interesting observations. He questioned the size of the AT&T Wireless position in his account. We emailed him with our remember ANF and Oryx comments similar to our post earlier today. But our response has been bothering us and we think know why. We wrote our client the following email earlier today:

3 March 2002

We've been thinking about your question to us on the amount of AWE we own in accounts. We weren't being flip with our answer reminding you of our ultimate success with ANF and Oryx . Moreover we do think there is real value in the stock at these levels. Unfortunately Mr. Market doesn't agree with us at this time. But even if AWE is a screaming buy your question made us realize that we have violated a rule of having too much in one stock even if it is the only stock we own. We want to be smarter than the market and because we've done well the last three years we think we have become a little full of ourselves. And so next week we are going to reduce AT&T Wireless positions in large accounts to 5% and to 10% or less in small accounts under $100,000 based on a $9 per share price. And we won't be adding more stock if AWE goes lower. We will still make money over time on AWE, but thanks to you we will be sticking to our tried and true risk parameters. Thanks for asking the question and thanks also for your continued confidence and we are sorry we are going to be taking a loss. Hopefully the stock will rally from these levels and the remaining stock will make up for our mistake.


3-4 March 2002

The Model Portfolio finished the week down 2% for the year That's because of the 20% drop in AT&T Wireless on news that revenues will grow in low double digits rather than the mid double digits the company had previously forecast. Most accounts are down 2% to 5% for the year. This is the first time our accounts have been down on a yearly basis for four years and we don't like it. But there isn't much we can do about the fact but wait for AWE to recover. The present situation reminds us of two years ago when we established a large position in Abercrombie and Fitch at mid year. We started buying the stock at $15 and bought it all the way down to $7 per share. Six months later we sold the stock from $18 to $22 per share and higher.

When a stock we are buying as a long-term investment drops in price and analysts begin to lose faith, we revisit our reasons for buying the stock to see if anything has changed. When we bought AWE we expected double digit growth in revenues this year. We expect wireless phones to become indispensable. We knew and know that there is pricing competition. But we also know that AWE is well capitalized and will be a survivor. The lemmings who had to own AWE at $30 per share are now throwing their shares over the cliff at $9. We are there to catch them.

When we have a sizable investment come under selling pressure we usually sell our trading positions so we have a cash cushion to help us weather the storm. Even though we have been investing in out of favor stocks since 1965, we still have sleepless nights when selling stampedes affect a stock we own. Cash helps us weather the storm. That's why we sold are trading positions in Coke and the QQQs. We are holding on to the Gillette position for now in hopes that the rally underway will spread to G.

We are having a beautiful snowstorm here in southwest Wisconsin and so we are about to clamp on our snowshoes and head out to our quiet wonderland before the snowmobiles arrive later today. Both our daughters and many of our clients are teachers so we offer the following in recognition of the great work that we know teachers do.

Have you heard about the next planned Survivor show?

Three businessmen and three businesswomen will be dropped into an elementary school classroom for 6 weeks.

Each businessperson will be provided with a copy of his/her school district's curriculum, and a class of 28 students. Each class will have five learning-disabled children, three with A.D.D., one gifted child, and two who speak limited English. Three will be labeled as severe behavior problems.

Each businessperson must complete lesson plans at least 3 days in advance with annotations for curriculum objectives and modify, organize, or create materials accordingly. They will be required to teach students, handle misconduct, implement technology, document attendance, write referrals, correct homework, make bulletin boards, compute grades, complete report cards, document benchmarks, communicate with parents, and arrange parent conferences.

They must also supervise recess and monitor the hallways. In addition, they will complete drills for fire, tornadoes, and shooting attacks. They must attend workshops, (100 hours), faculty meetings, union meetings, and curriculum development meetings. They must also tutor those students who are behind and strive to get their 2 non-English speaking children proficient enough to take the Terra Nova and EPA tests.

If they are sick or having a bad day they must not let it show. Each day they must incorporate reading, writing, math, science, and social studies into the program. They must maintain discipline and provide an educationally stimulating environment at all times.

The business people will only have access to the golf course on the weekends, but on their new salary they will not be able to afford it anyway. There will be no access to vendors who want to take them out to lunch, and lunch will be limited to 30 minutes. On days when they do not have recess duty, the business people will be permitted to use the staff restroom as long as another survival candidate is supervising their class.

They will be provided with two 40-minute planning periods per week, while their students are at specials. If the copier is operable, they may make copies of necessary materials at this time. The businesspeople must continually advance their education on their own time and pay for this advanced training themselves. This can be accomplished by moonlighting at a second job or marrying someone with money.

The winner will be allowed to return to his or her job.

2 March 2002

The stocks markets zoomed higher on the first day of the month as new money was put to work. We used the opportunity to sell Coke for a $1 gain, GMH for a $1 gain, Timberland for a $2 gain and we sold our Sprint PCS for a nominal gain. We also sold our QQQs at $34.95 for a 60 cents per share loss. We were raising cash because we wanted to place more money in AT&T Wireless without expanding our market exposure.

Unfortunately, and fortunately, AT&T Wireless dropped 15% in price on Friday as AWE announced that first half 2002 operating EBITDA was going to be less than previously forecast. We say unfortunately because we hate to see our accounts lose value on a day when the DJIA and S&P 500 and even the NASDAQ are up big time. Since, besides Gillette, AWE is the only stock we own, and we own it in size, we suffer when it drops. But the price drop offered us an opportunity to buy more shares at a sizable discount to our last purchases at $10.50. We are making a large bet on AWE, but we believe that bet is warranted. If the economy is going to improve and the markets with it, we think AWE will also recover strongly. And at these current levels AWE is discounting a lot of bad news. The entire company, including debt, is selling for 2x revenues. The company predicts double digit revenue growth for this year. After this year's capital expenditure of $5 billion, they expect that capital needs should decline dramatically. Talk of price wars among cell phone companies will benefit those in strong financial condition like AWE.

We'll have another post on Sunday, including the Model Portfolio as of month end.

1 March 2002

Rabbit Rabbit!!

The stock markets closed February on a downer. For the month the DJIA and the S&P 500 gained over 1% while the NASDAQ lost ground. The DJIA is now up 1% for the year while the Model Portfolio lost ground during the month and is unchanged for the year. Most client accounts are unchanged to down 2% for the year. The S&P 500 and the NASDAQ are both lower for the year.

There was bad news all around today as the Northern Kentucky Norsemen lost in the first round of their conference tournament. That loss ended any chance of a NCAA Division II tournament bid and so they ended their season at 19 wins and 8 losses. Happily, the NKU Norsewomen will be in the NCAA Division II tournament and hopefully they will go all the way to become National Champions as they did two years ago.

Back in the trenches, the rally we have been forecasting has not occurred. We will give it another week and if nothing happens we may have to revisit our thesis. We own the Gillette and QQQs as trades on our prediction of a rally but for now we are going to sit tight.

March 2002 Thoughts

February 2002 Thoughts

January 2002 Thoughts

December 2001 Thoughts

November 2001 Thoughts

October 2001 Thoughts
The factual statements herein have been taken from sources we believe to be reliable but such statements are made without any representation as to accuracy or completeness or otherwise. From time to time the Lemley Letter, or one or more of its officers or employees, may buy and sell as agent the securities referred to herein or options relating thereto, and may have a long or short position in such securities or options. This report should not be construed as a solicitation or offer of the purchase or sale of securities. Prices shown are approximate. Past performance is no indication of future performance.