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Lemley Yarling Management Co
15624 Lemley Drive
Soldiers Grove, Wi 54655
Bud: 312-925-5248       Kathy: 630-323-8422

May 30, 2014

Model Portfolio Value As of 30 May 2014

$ 738,502


Comment on Model Portfolio activity

And the beat goes on. The major market measures continue to grind higher as economic data remains benign. We added a few shares of Hecla Mining for old timesí sake. We forgot to mention last week that we added Urban Outfitters when it dropped on disappoint numbers.† We continue to maintain a large cash position and are content to watch the grass grow.
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May 23, 2014

Model Portfolio Value As of 23 May 2014

$ 736,411


Comment on Model Portfolio activity

We spent the week watching the markets and- enjoying the weather.
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May 16, 2014

Model Portfolio Value As of 16 May 2014

$ 740,023


Comment on Model Portfolio activity

We traded Cisco this week catching a nice one day move as revenues and earnings were better than after a quarter of worse than. Isnít it amazing how large companies can find the revenue and earning they need to avoid consecutive quarters of lousy news.

We repurchased half the piston in GM warrants. CNBC has been flogging GM for the last week as a promo for a special they are presenting on Sunday. This too shall pass.

We repurchased US Steel lower than our sell price last month.

We are maintaining a large cash position.
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May 9, 2014

Model Portfolio Value As of 9 May 2014

$ 739,455


Comment on Model Portfolio activity

Even with the following purchases which were too enticing to avoid most accounts are 80% or more cash.

While we were watching, Whole Foods crashed and is now 40% from its high of a few months ago. Competition in the organic foods space is hurting margins. But in our mind- since we buy organic- actually we grow organic- there is a huge difference between Whole Foods organic and Walmart Ė grown in China- organic. The drop in price for WFM allows us to reenter at an expensive but much discounted level.

We also added Sprout Farmers Markets when it crashed in sympathy with While Foods. Spoutís revenues and sales were actually better than- but all the high flyers of which Sprouts is a member have come back from the stratus-hers. Sprouts is 50 % of its 12 month high but still expensive and so we added gingerly.

Abercrombie moved towards $40 a few weeks ago on a Jeffries upgrade but has this week moved back to the $35 level which we have used as a trading buy level and repurchased in accounts where we have traded it profitably twice this year.

We also rented GM common -gingerly. We sold the common at $38 a few months ago to move to the warrants which didnít work out when the ignition problem surfaced. We abandoned the stock a month ago to see how the bad media would affect the shares. But the negative press hasnít dampened sales and the company is moving aggressively to settle. Our guess is that the total cost is going to be a onetime $3 billion. Of that $2 billion will be credits to buy new cars for those who still own the clunkers so it should be treated as an advertising/sales incentive expense. We plan to repurchase GM warrants next week when the tax loss waiting period expires. GM has the ability to earn $7 per share when Europe recovers and at 8 times earnings that suggests a $60 price on a stock current at $35.
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From the street.com

Shares of Abercrombie & Fitch (ANF) are up 2.31% to $37.61 in pre-market trade after the company was upgraded to "buy" from "hold" by analysts at Jefferies Group (JEF) who also raised their price target to $50.

"We rate ABERCROMBIE & FITCH (ANF) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

ANF's debt-to-equity ratio is very low at 0.11 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.18, which illustrates the ability to avoid short-term cash problems.

The gross profit margin for ABERCROMBIE & FITCH is rather high; currently it is at 63.25%. Regardless of ANF's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 5.08% trails the industry average.

ABERCROMBIE & FITCH has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, ABERCROMBIE & FITCH reported lower earnings of $0.70 versus $2.92 in the prior year. This year, the market expects an improvement in earnings ($2.35 versus $0.70).

ANF, with its decline in revenue, slightly underperformed the industry average of 5.9%. Since the same quarter one year prior, revenues fell by 11.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

The share price of ABERCROMBIE & FITCH has not done very well: it is down 19.99% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. Despite the stock's decline during the last year, it is still somewhat more expensive (in proportion to its earnings over the last year) than most other stocks in its industry. We feel, however, that other strengths this company displays offset this slight
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Whole Foods reported disappointing earnings yesterday, and shares are collapsing

CEO John Mackey blames mounting competition from other retailers selling organic groceries, and suggested that the company would lower its prices to draw in more customers. 

But his explanations were not enough for Wall Street analysts, who ripped into the company on the earnings conference call

"Iíve got to be honest. Iím not really hearing anything thatís suggesting management is taking this situation as seriously as some investors want you to,"

Ken Goldman at JPMorgan said. "Thereís a lot of talk about whatís going, not a lot to talk about what it takes to win the change market."

He also suggested that the company has failed to change its strategy. 

"Iím really just curious: What are you doing differently versus a year ago other than taking your cost down, which I think the marketís telling you may not be enough anymore?" he implored. 

When Mackey stressed that the company was lowering prices, Goldman became impatient. 

" Youíve been doing that for years. Youíve been taking price down for years. I mean, itís hard to understand," he said. 

Analysts also questioned why, despite slowing sales, the company is stocking more merchandise than ever. 

Charles Grom at Sterne Agee asked management why it hasn't advertised lower prices to customers. 

"Youíre lowering prices, but you havenít been really advertising them within the stores or doing it in some of the promotions that you do to get the message out there." he said. "Is it safe to say that thatís still to come or itís not part of the strategy at all ó youíre just going to lower the prices and hope that the customer starts to recognize that over time?" 

Whole Foods Vice President David Lannon said that the company has made some attempts to advertise in California. 

Mackey acknowledged that the call was awkward. 

" I can tell by some of the questions on the call that people may not agree with our strategy and of course, people are free to make their own decisions about whether this is a good strategy or not," he said. " But we want to be as transparent and as honest and as open with our shareholders as we possibly can be."

This call reminds of a call several years ago when analysts berated Mickey Drexler at J Crew for missing numbers. Mackey founded Whole Foods and while we donít agree with his politics we know he knows what he is doing.
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Minyanville founder Todd Harrison:

http://www.minyanville.com/special-features/random-thoughts/articles/Janet-Yellen-Bank-Stocks-Smart-Money/5/7/2014/id/54863

I recently came across a terrific article that addressed 12 cognitive biases that prevent human beings from behaving rationally. As perception is reality in the financial markets, I thought it might be useful to address those issues through the lens of a trader.

 

1. Confirmation Bias

This is a fatal flaw of trading. We tend to surround ourselves with information that validates our own point of view and dismiss input that conflicts with our reasoning (also known as cognitive dissonance). This is the primary reason why we always strive to see "both sides of every trade," as the residual grist between variant views is where education -- and profitability -- resides.

2. In-Group Bias

This is a manifestation of confirmation bias, or the tendency to surround ourselves with those who share similar takes on the tape. This could pertain to our physical environment or a virtual experience, such as Twitter. Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious -- or angry -- with outsiders who dare to question how we feel. (See also: The Gold Scold.)

3. Gambler's Fallacy

One of the most famous disclaimers in finance is that past performance is no guarantee of future results. This bias is often referred to as a "glitch" in our thinking in that it extrapolates what happened in the past to construct an idea of what will happen in the future. How many of you have played roulette at a casino under the premise that a string of red increases the likelihood of a black outcome? That's flawed thinking; the odds of red (or black, for that matter) are 48% on each independent spin.

4. Post-Purchase Rationalization

One of our Ten Trading Commandments is that the definition of an investment should never be a trade gone awry. Nobody initiates market exposure expecting to lose money, but we should never post-rationalize our risk (such as ignoring stop-losses or throwing good money after bad). We would be wise to remember that good traders know how to make money, but great traders know how to take a loss.

5. Neglecting Probability

History is littered with stretches where in hindsight we're reminded not to confuse brains with a bull market. This bias limits our ability to properly assess risk, whether it's overstating an unlikely event (such as buying a stock for a takeover) or understating an unlikely event (such as Y2K, the fiscal cliff, or a terrorist attack). Tail events do happen, of course, but betting on an outlier is a long shot by its very definition.

6. Observational Selection Bias

This is when we suddenly notice something we haven't noticed before and wrongly assume the frequency has increased (when it hasn't). Let's say I bought cannabis stocks as a way to play (what I perceive to be) the legalization of marijuana. All of a sudden, everywhere I look, there are more and more signs that support my thesis; the topic is featured on 60 Minutes, it's a hot-button issue during the election, it gains momentum in the mainstream media. While some of that may prove true, I'm on the lookout for news, whether it's conscious or not.

7. Status-Quo Bias

Most of us are creatures of habit in our own way. We use the same toothpaste or align with a particular smartphone device. That routine often extends to our investments in the marketplace: We're comfortable with the stocks (or indices) we often trade and often miss opportunities outside of that comfort zone for fear of the unknown. Change isn't only positive -- it's inevitable.

8. Negativity Bias

Let's face it: We live in a sensationalist society where scare tactics and negative headlines garner the most attention. If you doubt this for a minute, turn on your local news tonight. Scientists theorize that we perceive negative news to be more important than positive news. The risk -- for the bears and for humans as a whole -- is the tendency to dwell on bad news rather than embrace good news, and there's the added twist that the stock market is widely considered to be a leading indicator.

9. Bandwagon Effect

How prevalent is this when it comes to the financial markets? They teach it in college as a stylistic approach (momentum investing)! Nobody in our business, or in the media, wants to miss a move in the stock market, and history is littered with bubbles and busts that demonstrate this bias in kind. In life, this is driven by our innate desire to "fit in and conform"; in the markets, it's driven by two factors: fear and greed.

10. Projection Bias

This is predicated on projecting our thoughts and beliefs onto others and assuming that others are wired the same way (they're not). This can lead to "false consensus bias," which not only assumes that other people think like we do, but that they reach the same conclusions. In short, this creates a false consensus, or sense of confidence, when in fact one doesn't, or shouldn't, exist.

11. The Current-Moment Bias

This is a direct descendant of the immediate gratification mindset that dominated society for many years -- and some will argue that the government is currently operating in this mode, mortgaging our children's standard of living to achieve short-term fixes. In short, we want to live as well as possible and pay for it at a later date (as evidenced by the level of debt and our growing deficit). The housing crisis was rooted in this bias, as is the basic concept of leverage.

12. Anchoring Effect

This tendency, also known as the relativity trap, compares a situation to a limited subset of information; it's when we focus on a number or value and extrapolate it to a current situation. This often manifests in the marketplace through the fundamental metric, when we observe that a stock is "cheap" relative to its peers or a historical precedent (also known as a "value trap").

R.P.
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May 2, 2014

Model Portfolio Value As of 2 May 2014

$ 740,086


Comment on Model Portfolio activity

We remain all cash. We donít like being all cash but we really canít find anything in which we have confidence for the shorter term. There are stocks that have value for the longer term but they are out of favor and the big boys and girls have been selling them as the markets rise. Since we expect a correction it should be noted that out of favor stocks are hurt as much as the high flying darlings in any over 10% market correction that occurs. We are willing to sacrifice the possibility of profits to have the comfort of not seeing account values recede 15% and more when corrections occur.

As always our market stance is subject to change if news or circumstances in individual stocks present compelling reasons. But at this time the markets need to rest either by dropping significantly or stalling for an extended period. The downside risk over the next few months exceeds upside potential for the markets as a whole and the undervalued stocks we are following.

Till then we will wait and watch.
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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.