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

October 29, 2010

Model Portfolio Value As of 29 October 2010

$ 614,939


Thoughts

Asia was lower overnight as is Europe at midday. Oil has an $81 handle and Gold is down $1 as the trading day begins.
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(Bloomberg) -- The U.S. economy grew at a 2 percent annual rate in the third quarter as consumer spending climbed the most in almost four years, a sign the expansion is developing staying power. The increase in gross domestic product matched the median forecast of economists surveyed by Bloomberg News and followed a 1.7 percent gain the prior three months, Commerce Department figures showed today in Washington. Household purchases, about 70 percent of the economy, rose at a 2.6 percent pace, the best quarter of the recovery that began in June 2009.
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(WPO) The government announced Thursday that it had spent $80.1 billion on intelligence activities over the past 12 months, disclosing for the first time not only the amount spent by civilian intelligence agencies but also by the military. The so-called National Intelligence Program, run by the CIA and other agencies that report to the Director of National Intelligence, cost $53.1 billion in fiscal 2010, which ended Sept. 30, while the Military Intelligence Program cost an additional $27 billion....The disclosure Thursday that intelligence spending had risen to $80.1 billion, an increase of nearly 7 percent over the year before and a record high, led to immediate calls for fiscal restraint on Capitol Hill.
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We reduced the Ford position in trading accounts (8 pennies loss) and placed part of the funds in more QID.
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Gold gained $15 to $1357 and Oil was lower at $81.40. European bourses closed lower on the day.
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Questions:

  1. What was the average monthly private sector job growth in 2008, the final year of the Bush presidency, and what has it been so far in 2010?

  2. What was the Federal deficit for the last fiscal year of the Bush presidency, and what was it for the first full fiscal year of the Obama presidency?

  3. What was the stock market at on the last day of the Bush presidency? What is it at today?

Answers:

  1. In 2008, we lost an average of 317,250 private sector jobs per month. In 2010, we have gained an average of 95,888 private sector jobs per month. (Source) That's a difference of nearly five million jobs between Bush's last year in office and President Obama's second year.

  2. In FY2009, which began on September 1, 2008 and represents the Bush Administration's final budget, the budget deficit was $1.416 trillion. In FY2010, the first budget of the Obama Administration, the budget deficit was $1.291 trillion, a decline of $125 billion. (Source) Yes, that means President Obama has cut the deficit -- there's a long way to go, but we're in better shape now than we were under Bush and the GOP.

  3. On Bush's final day in office, the Dow, NASDAQ, and S&P 500 closed at 7,949, 1,440, and 805, respectively. Today, as of 10:15AM Pacific, they are at 11,108, 2,512, and 1,183. That means since President Obama took office, the Dow, NASDAQ, and S&P 500 have increased 40%, 74%, and 47%, respectively.

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The major stock measures closed minorly mixed to end the month. Apple toyed with the $300 level but closed above. Breadth was flat and volume light. Next week will be interesting.
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October 28, 2010

Model Portfolio Value As of 28 October 2010

$ 614,672


Thoughts

“There is always risk; if there weren’t it would be called winning not trading.” Todd Harrison
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Asia and Europe were mixed overnight. Gold is up a few dollars and Oil down a few pennies as the trading day begins. Stocks are going to open higher on the better than jobless claims report. Trading will be tempered awaiting next week’s election and Fed meeting.
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Diane Swonk, Chief Economist, Mesirow Financial
One Week Improvement in Jobless Claims Welcomed, but Not Enough
Weekly jobless claims plummeted 21,000 to 434,000 in the week ending October 23, no doubt as retailers started to hire for the coming holiday season. (Halloween is the biggest non-gift giving holiday.) The news is welcome, but not enough to assure the Fed that the economy is on firmer footing. Indeed, claims for the previous week were revised up, while continuing claims fell but not as much as many had hoped. The four week moving average on claims, in particular, is still hovering above the 450,000 threshold, a level more consistent with rising, rather than falling, unemployment. The Bottom Line: Initial claims are a highly volatile and inconsistent indicator of unemployment. Moreover, the level of claims is still too high to be reassuring for an economy that is supposed to be almost 16 months into a recovery. We should be seeing claims closer to 350,000 than 450,000 by now. As a result, today's data will have little impact on Fed Chairman Ben Bernanke's decision to further ease via large-scale asset purchases. It, along with vocal dissent within the ranks of the Fed, however, is likely to temper the size of the Fed's initial purchases. We are currently expecting the Fed to expand its balance sheet by about $200 billion by the end of the year. The Fed's asset purchases could easily top $1 trillion a year from now if the economy doesn't improve fairly dramatically between now and then.
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We traded (bought & sold) TWM (Russell 2000 double short ETF) for 36 pennies profit in accounts in which we have been trading TWM. We also repurchased the Major Bank ETF (KBE). BankAmerica (8% of KBE) is firm this morning as the markets have moved lower and with JP Morgan (8% of KBE) higher the banks seem to be exhibiting more relative strength. The weakness after the first hour is in retailers and techs.
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Our recent strategy has been to trade the TWM since it has good daily moves and hold the QID as our short hedge against our long position in some accounts. The QID represents a double short on the NAZZ 100 which is comprised of Apple and Netflix and Amazon etc. all these stocks have led the rally since September 1. If the markets roll over they have a greater percent downside risk.

We have been trading J Crew and GE and KBE and Ford but we are also comfortable holding them in any downturn and adding to positions.
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From PIMCO's Bill Gross: Run Turkey, Run

While next Wednesday’s [FOMC] announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration.
...

Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?
...

Ben Bernanke ... you are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds ...
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The ten year Treasury is trading at a 2.65% yield. If the interest rate on the ten year moves to 4.25%% in the next two years–where the interest rate was in December 2008 –folks buying that bond today will suffer a 30% loss of principal.
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Chrysler to Invest $600 Million in Illinois Plant
DETROIT—Chrysler Group LLC will spend $600 million to upgrade production at its Illinois assembly plant, bringing the auto maker's total announced U.S. investment to $2.1 billion since its exit from bankruptcy court last year.

The company will use the funds to build a body shop and install new machines at the Belvidere assembly plant to support the production of future models in 2012. The plant is home to the Jeep Compass, Jeep Patriot and Dodge Caliber.

Taxpayers saved Chrysler. The number being thrown around is that the Taxpayers lost $4 billion saving Chrysler. But that doesn’t take into account news like this and also the salaries and jobs that were saved. We know these transactions are complicate and not amenable to sound bites. But if folks took the time to figure it all out they would realize that the jobs saved and money to spent by Chrysler and Fiat in the future will more than offset the $4 billion.
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Halliburton is just one bad company.
Halliburton testing conducted before the BP Gulf of Mexico oil spill showed that cement similar to that pumped into the blown-out well would be unstable, but there is no evidence that the contractor sounded alarms to BP, according to a presidential commission investigating the disaster. The test data, shared with staff of Obama's commission on the Deepwater Horizon oil spill, run counter to Halliburton's claims that the nitrogen-cement mixture used in the Macondo well was stable.
*****

European stocks closed lower. Oil also ended higher at $82.42and Gold gained $20 to $1348.
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October 15
(AP)  Wells Fargo does not plan to halt foreclosures despite an employee's testimony that she signed up to 500 foreclosure documents daily without reading them. The employee of the San Francisco-based bank said in a deposition taken last March that she signed between 300 and 500 foreclosure documents per day, verifying only her name and title. Such practices have been called into question by attorneys general in 50 states. They have accused mortgage companies of violating state laws. Wells has not halted foreclosures and says it has discovered no problems in the legal documents used to process them. The company said earlier in the week that it would review pending foreclosures for potential defects.

October 27
(Reuters) Wells Fargo said on Wednesday it will re-file documents on 55,000 foreclosures, drawing immediate fire from one of the state attorneys general most critical of banks in the continuing home foreclosure crisis.... Wells Fargo found problems with foreclosure affidavits in 23 U.S. states where the final internal review or the notarization of the documents did not meet company standards. The bank plans to re-file the affidavits by mid-November.
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Today was another mixed day of trading with the NAZZ and S&P 500 higher and the DJIA slightly lower. Breadth was flat and volume light.
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October 27, 2010

Model Portfolio Value As of 27 October 2010

$ 614,083


Thoughts

Even Fortune Magazine thinks the banks are goofy:

The biggest danger to the U.S. capitalist system doesn't come from communists or community activists or left-wing academics. It comes from some of the nation's biggest financial institutions. These companies, which helped create the financial meltdown that touched off the Great Recession, have now found yet another way to undermine the public's faith in capitalism and markets: the foreclosure fiasco.

Even before the foreclosure problem appeared, the level of public distrust of our financial and political systems was approaching the pathological. It's going to get even worse when the true lesson of this episode sinks in. To wit: If you screw up big time when you deal with a giant bank, you're toast. If the giant bank screws up when it deals with you, it gets a do-over.

Sure, many - probably most - of the people whose mortgages are being foreclosed got in trouble because they overreached or lost their jobs, not because anyone cheated them. But if we're going to have rules, they ought to be binding on everyone. If I'm supposed to obey the law and pay my bills, the people I'm paying ought to have to obey the law, too.
*****

All markets were/are mildly lower this morning as all await the Fed’s pronouncement next week. (Marketwatch) Most Asian stock markets and currencies ended lower on fears that the U.S. quantitative easing program could be quite conservative, which triggered a rebound in the dollar and hurt commodities. European equities declined for a second session as software group SAP AG and brewer Heineken posted disappointing results.

The Wall Street Journal reported that the Fed is likely to unveil a new round of quantitative easing worth a few hundred billion dollars over several months in contrast to its purchases of nearly $2 trillion worth of bonds during the financial crisis.
*****

Durable goods orders were up 3.3% in September which was better than but ex transportation (airplanes) orders were down 0.8% which was worse than. Bull or Bear take your pick.
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An hour into the trading session the action is different than it has been for the past few weeks. The S&P 500 and DJIA are down 1% while Banks have a bid.
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We added GE to accounts and we repurchased the J Crew at $31.50 that we sold yesterday at $32.75. To make room for these purchases without increasing our long positions we sold KBE for a plus scratch.
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European bourses closed lower. Gold lost $14 to $1325. Oil ended at $81.97 down 57 pennies.
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A rally in the last half hour cut losses in the DJIA and S&P 500 while the NAZZ was higher. Volume was light and Breadth greater was negative but techs were firm.
*****

 

October 26, 2010

Model Portfolio Value As of 26 October 2010

$ 614,613


Thoughts

"I want to be in Kentucky when the end of the world comes, because it's always 20 years behind" - Mark Twain.
*****

Markets in Asia and Europe meandered overnight and U.S. futures suggest a slightly lower opening this morning. Gold and Oil are off a few dollars and a few pennies respectively.
*****

Ford reported record thirds quarter earnings. We are buying shares in our trading accounts.

(NYT) The Ford Motor Company said on Tuesday that it earned $1.7 billion in the third quarter and that it expected to have zero net debt by the end of December, one year ahead of forecast. It was the sixth consecutive profitable quarter and the best third quarter in more than 20 years for Ford, which has been gaining momentum because of popular new cars and crossover vehicles, even as the overall market and the economy remain relatively weak. Ford, the only one of the three Detroit automakers to avoid bankruptcy and not accept government bailout assistance, has earned about $6.4 billion so far in 2010, just two years since a $14.8 billion annual loss that was the biggest in its history.
*****

Altogether, there are some 9 million hard-working-Americans-if-they-could-find-work receiving unemployment benefits. More than 5 million of these are on extensions under Emergency Unemployment Compensation. And they are the lucky ones. Another 6 million without jobs receive no jobless benefits because they are, for various reasons, ineligible. And those hapless 6 million don't include a few million other workers who have dropped out of the labor force in despair and aren't even counted as unemployed.
*****

As the major measures opened lower we sold SDS for at 50 pennies profit and TWM for a plus scratch.
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Goldman Sachs is selling $1.3 billion of 50 year bonds with a 6% interest rate. Two years ago Goldman had to pay Warren Buffet 10% and issue warrants to purchase shares at $115 to borrow $5 billion. How times change. Thank you Uncle Sam.
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We sold J Crew for a $1.50 four day profit. We also added to our double short NAZZ 100 (QID) as a couple of the hot NAZZ stocks were showing weakness in the afternoon.
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European bourses closed lower. Oil unchanged at $82.58 and Gold unchanged at $1335.
*****

The major measures spent most of the day in negative territory and closed mixed. Breadth was flat and volume was light.
*****

 

October 25, 2010

Model Portfolio Value As of 25 October 2010

$ 613,054


Thoughts

The glass is full today as Asia and Europe were higher overnight and U.S. stocks are going to move higher at the opening. Gold is up $10 and Oil up $1 with and $83 handle.
*****

September existing home sales were up 10% month over month and down 20% from last year.
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88% of S&P 500 stocks are above their 50 day moving average.
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With the major market measures up 1% we added shares of the double short S&P 500 (SDS) to our trading accounts and also increased the TWM position by 50%
*****

From the Chicago Fed: Index shows economic activity slowed further in September

Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.58 in September from –0.49 in August.
...

The index’s three-month moving average, CFNAI-MA3, ticked down to –0.33 in September from –0.32 in August. September’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. http://www.calculatedriskblog.com/
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European bourses closed mostly higher. Gold was up $15 at $1340 and Oil gained $0.66 to $82.33.
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(Bloomberg) As the recession pushed U.S. incomes down last year, America’s highest earners -- 74 people who earned more than $50 million -- saw their pay more than quintuple on average to a record $519 million each. Those top-end Americans earned a combined $38.4 billion in 2009, up from $11.9 billion earned by 131 individuals with wages above $50 million in 2008, according to Social Security Administration data.

Nationally, the average annual wage fell by $384 to $39,269 and the median wage fell by $253 to $26,261 during the worst economic slump since the Great Depression.
*****

$38 billion could have paid a $38,000 salary to 1 million folks.
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(Bloomberg) -- The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in halting deflation.

The securities drew a yield of negative 0.55 percent, the same as the average forecast in a Bloomberg News survey of 7 of the Federal Reserve’s 18 primary dealers. The sale was a reopening of an $11 billion offering in April. Conventional Treasuries rallied amid speculation about the amount of debt the Fed may purchase to spur the economy in a strategy called quantitative easing.
*****

The major measures closed higher in desultory trading. Breadth was 2/1 positive. Our guess is that the markets this week will be quiet awaiting the Fed meeting and National elections of next week.
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October 22, 2010

Model Portfolio Value As of 22 October 2010

$ 613,033


Thoughts

We bought the double short NAZZ 100 (QID) and double short Russell 2000 (TWM) in trading accounts. We also bought J Crew in larger accounts. JCG is down 15% in the last two days at its 12 month low on a downgrade by Needham.
*****

Asia was mixed overnight and Europe is mildly lower at midday.
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Europe closed lower. Oil ended at $81.16 and Gold was up $2 at $1328.
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We sold half the QID and TWM for 20 pennies losses in each. The markets looked like they were headed lower when we purchased but instead traders were heading home.
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The major market measures closed mixed in light trading. Breadth was 2/1 to the good most of the day.
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October 21, 2010

Model Portfolio Value As of 21 October 2010

$ 614,105


Thoughts

Everything is wonderful. Asia and Europe were higher; Gold and Oil have a bid; the Repubs are on their way to taking over the world; all in Britain are happy giving up jobs and middle class tax credits are ready to cut defense spending; and Germany’s chancellor doesn’t think different nationalities can live together. China is paying more on deposits than U.S. banks; the Obamaites are going to let the banks and courts figure out the foreclosure mess; and the Yankees are still alive in the series (boo).
*****

(Reuters) New U.S. claims for unemployment benefits fell more than expected last week, government data showed on Thursday, pointing to some improvement in the labor market. Initial claims for state unemployment benefits fell 23,000 to a seasonally adjusted 452,000, the Labor Department said. Despite the drop, which also saw the unwinding of the prior week's administrative related-jump, claims remain perched above levels usually associated with a strong job market recovery, making it all but certain the Federal Reserve will ease monetary policy further next month.
*****

How companies like Google and Apple avoids paying U.S. taxes although the technology they use is created in the U.S. with a net 2% tax rate or $3 billion per year not paid.
http://www.businessweek.com/magazine/content/10_44/b4201043146825.htm
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Irony:

Gail Collins (NYT) Alaska, an extremely angry state that hateshateshates all forms of government, despite the fact that 40 percent of its economy comes from government aid, and the state’s oil-revenue-sharing program gives families thousands of dollars in payments every year. “Unemployment has never been lower; there is no housing crisis; banks are solvent. We just got Permanent Fund Checks — and, boy, are we pissed off!” said Michael Carey, an Anchorage Daily News columnist.
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The DJIA was Up 100 down 40 closed up 40, just another day of HFT. The major measures were positive at the close giving up the 1% gain of earlier in the day. Volume was moderate and breadth negative at the bell after being 3/1 positive in the first hour of trading. Europe closed higher and Oil was down $2 at $80.50. Gold dropped $20 to $1325.
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Worth the read:
http://blog.cleveland.com/pdextra/2010/10/willoughby_couple_foreclosed_u.html

Eastlake couple foreclosed upon three times, despite never missing a payment

The first time Michael and Pamella Negrea were foreclosed upon in 2001, the suit was thrown out of court. They had never even made a late payment. That didn't stop GMAC Mortgage.

In 2005, two years after the case was dismissed, GMAC filed for foreclosure again. This time, the Negreas sued for breach of contract, fraud and unfair debt collection. They won more than $217,000, and the foreclosure was thrown out again. And still that didn't stop GMAC.

The mortgage company now has foreclosed again, just as GMAC sits at the heart of a national foreclosure scandal. The company has suspended foreclosures in 23 states, and is reviewing cases in all 50 states, over revelations of possibly fraudulent documents, and several other banks have followed suit.

"It's like a foreclosure machine," the Negreas' attorney, Stephen Futterer of Willoughby, said of GMAC. "It won't stop."

The Negreas' case reveals the inner workings and the depth of the troubles facing the mortgage industry, which seems to have blindly shoved through thousands of foreclosures without even reading the documents.

Michael Negrea, a Willoughby police officer for 25 years, says most people he talks with can't even comprehend their tale. "You think, 'You make your payments, and everything is fine.' You would think this couldn't possible happen."

A representative for GMAC did not return a phone call seeking comment.

The Eastlake couple's story started in 1995, when they built their modest 2,400-square-foot colonial and borrowed $200,000. They refinanced in 1998 with a local mortgage company, which sold the loan to Advanta Mortgage Corp.

The loan was sold a year later to Nation's Credit, then it was sold to Homecomings Financial, with the loan being serviced by Fairbanks Capital Corp., one of the nation's most notorious mortgage lenders. The Federal Trade Commission in 2003 sued Fairbanks for deceptive and illegal practices, including not posting customer payments, and the company agreed that year pay $40 million in damages.

Sometime while Fairbanks was in the picture for the Negreas, two payments didn't get posted.

"You'd call and talk to someone and they said they'd look into it," said Michael Negrea, 53. "When you called and asked for the person you talked to, they no longer worked for the company. You'd leave a message for a supervisor, and they'd never call you back."

A foreclosure was filed in 2001 on behalf of Homecomings, which owned the loan. Right around the same time, the servicing was transferred from Fairbanks to GMAC. Once Homecomings said the Negreas were in foreclosure, the company wouldn't accept their monthly payments. So the couple simply put the money in the bank.

When attorneys for both sides sat down in 2003, they worked out a written settlement: All penalties and interest would be wiped out and the Negreas would pay the actual payments owed. Homecomings/GMAC also would erase the foreclosure and negative information from the Negreas' credit files. (The Negreas say that still has never happened.) The Negreas started making normal payments again in early 2004.

By June, GMAC sent another default letter. The couple had copies of their canceled checks and even the return receipts from the Postal Service showing when the payments had been sent and received. All payments had been on time, and GMAC apologized in July for the mistake.

In October, they got another default letter. And they got a letter saying that GMAC thought their $500 homeowners' insurance premium hadn't been paid, so they were imposing a new policy at $3,200. In truth, their insurance hadn't lapsed. They'd had the same company since buying the home.

GMAC again sent apology letters.

After the couple sent their December payment, it wasn't cashed. The next month, in January 2005, GMAC again filed for foreclosure and wouldn't back down.

"They pretty much treated us like criminals," Michael Negrea said.

Futterer, who has been their attorney in the case since 2003, filed a counter claim for breach of contract, fraud and violating debt collection laws.

The Negreas insisted on going to trial. As the evidence unfolded, Michael Negrea said, "you could hear some of the people on the jury saying, 'Oh my gosh.' "

It turned out that GMAC had applied their payments to the bogus penalties that had been forgiven in court proceedings back in 2003, as well as to payments that had already been posted.

Futterer asked for a large enough award from GMAC to wipe out their roughly $200,000 mortgage forever. By the time they got the $217,244 settlement more than three years later -- in 2009 -- GMAC had again added on more than $50,000 worth of fees.

So why wouldn't they refinance the balance with a more reputable bank? It is because they still had two foreclosures on their credit records, along with dozens of erroneous late payments. "They screwed up our credit so bad we can't get any kind of loan," said Pamella Negrea, 57.

But GMAC wasn't done.

In 2008, the couple got a statement from GMAC demanding payment for its attorneys in the second foreclosure case -- the one in which GMAC lost the counterclaim. "How can you ask for legal fees when you paid our legal fees?" Michael Negrea asked.

During the last few years, GMAC has repeatedly accused the Negreas of not having homeowners' insurance and insisted on making monthly home inspections, charging $700 or more for each one. GMAC told them the inspections were to make sure they still lived there. Michael Negrea considered them harassment.

The couple had been making normal payments last year when GMAC again stopped cashing them, saying they owed a lump sum of nearly $310,000 plus attorneys' fees on their $208,000 mortgage.

In August 2009, GMAC/Homecomings filed for foreclosure again, this time in federal court instead of common pleas court. "We feel they're court-shopping," Futterer said. The trial is set for January. 

The Negreas are ecstatic that GMAC's practices may finally be coming to light, even though the accusations so far are limited to whether GMAC gave false information about foreclosures.

"I can't image how many people lost their houses who didn't deserve it," Michael Negrea said.

The couple is drained from years of back and forth with GMAC.

"I think a lot of people would have just given up," said Pamella Negrea, a graphic designer. "Nobody believes us. People think, 'A bank wouldn't file for foreclosure if the bank wasn't right.' "

"People ask me, 'How do you put up with this?' I have no choice," Michael Negrea said. "It has cost us a fortune. We don't make that much. But it's our home.

*****

 

October 20, 2010

Model Portfolio Value As of 20 October 2010

$ 614,055


Thoughts

Asia and Europe war mixed overnight and U.S. futures suggest a flat opening. Gold is up a few dollars and Oil a few cants after yesterday’s large sell off in both commodities.
*****

We switched BankAmerica at 90 pennies per share on day loss (ouch) to the large Bank ETF (KBE) on which we made a 35 pennies profit the day before (yea). We also eliminated the trading positions (GE 35 pennies loss and Intel 35 pennies profit Chico’s plus scratch and Dell 10 pennies loss) we established yesterday as the markets in our stocks zagged this morning while other stocks zinged. It’s that kind of market.
*****

The BankAmerica trade is particularly annoying because the stock reacted the way we thought it would after earnings yesterday morning (down-we bought- then up). But the afternoon news of the PIMCO lawsuit changed the dynamics of the trade and introduced and element of uncertainty that overnight news did not eliminate. PIMCO is a very large elephant and has a friend at Treasury and also a few at the Fed and so it will be interesting to see how the lawsuit against BAC for not selling proper MBS progresses.

Of course the folks who lost money on the MBS (mortgage backed securities) are long gone from ownership and the battle for the bucks is now between BAC and behemoth speculative investors. PIMCO has purchased much of its position in the last few months even going on margin –according to zerohedge.com- to establish a vary large holding in the Countrywide MBS that are the subject of the lawsuit.

By the by, the KBE position allows us the potential of recovering the BAC loss while not concentrating our bank holdings on just BAC. While we know the banks are in the wrong on the foreclosure stuff we also know that money is power and they sure have a lot more going for them that bankrupt home owners and small pension funds that lost fortunes on the MBS purchases.
*****

Go to
http://www.zerohedge.com/article/bank-america-complete-denial-over-foreclosureputback for stories on the banks and their foreclosure and MBS and CMO problems.
*****

Investors’ Intelligence was 45% bulls (47% last week); 22% (24%) and 32% correction (28%).
*****

Stocks closed off their best levels but still up 1% on the day. Breadth was 3/1 positive and volume moderate. Oil recovered $2 of the $3 lost yesterday to $82 and Gold rose $10 to $1345.
*****

 

October 19, 2010

Model Portfolio Value As of 19 October 2010

$ 614,063


Thoughts

Today is the anniversary of the 1987 Crash, in case anyone is interested.

China raised interest rates 0.25% on one year lending and deposits- that’s more than we get in the U.S.; the dollar strengthened and Gold dropped 3%; Apple beat but disappointed on iPad sales; IBM beat but traded lower; and Turnaround Tuesday is in full force with the major stock measures down 1.5% in the first half hour of trading.

Asia was mixed overnight and Europe was mildly higher until U.S. stocks opened lower with breadth and up/down volume both 9/1 negative as the HFT kids ply their trades.
*****

For those worried Goldman Sachs made a few dollars in the quarter and BankAmerica was profitable if one ignores the $10 billion write-down of goodwill with another $70 billion of goodwill on the books.

GS reported third-quarter net income of $1.9 billion, or $2.98 a share, down from $3.19 billion, or $5.25 a share, in the year-ago period. Wall Street analysts polled by Thomson Reuters had forecast quarterly profit of $2.32 a share, on average. Economic conditions “continue to be challenging in a number of important markets,” said Chief Executive Lloyd Blankfein in Goldman’s earnings release.

BAC posted a $10.4 billion write-down tied to new financial regulations in the third quarter as the Charlotte, N.C., company’s revenue rose and its investment bank’s fixed-income desk turned in better results than competitors. Because of the write-down, BofA’s third-quarter loss widened to $7.3 billion, or 77 cents a share, compared with a loss of $1 billion, or 26 cents a share, a year earlier. Without the noncash write-down, the bank earned $3.1 billion, or 27 cents a share, and reported much-improved credit quality. Revenue climbed 2.3% to $27 billion. Analysts polled by Thomson Reuters had recently forecast earnings of 16 cents a share on $27.2 billion in revenue.
*****

No mention of huge rate increases helping earnings. Drink the Kool Aid:

(Reuters) - UnitedHealth Group Inc (UNH.N) posted far better-than-expected third-quarter profit on Tuesday as its health plan members used fewer healthcare services. The company also raised its 2010 profit outlook, and its shares rose 3.2 percent. UnitedHealth, the largest U.S. health insurer by market value, reported strong revenue growth for its health plans for the poor and elderly.

The decline in healthcare service costs stems from lower costs from to the H1N1 flu compared with a year ago and a longer-term trend of consumers deciding to delay care as they face a higher financial burden because of medical expenses, said Wedbush Securities analyst Sarah James. "It looks like a strong quarter, and the outperformance was driven by lower-than-expected medical expenses," James said. "A longer-term trend is from the continued lower hospital utilization, which is something that we've seen across the companies every quarter this year."
*****

(Reuters) - Shares of Coldwater Creek Inc dropped as much as 33 percent Tuesday before the bell, a day after the women's apparel retailer forecast a surprise third-quarter loss saying its fall merchandise assortment did not resonate well with customers.
*****

We took profits on our short positions in SDS, QID and TWM. We also sold the balance of KBE and bought Intel, GE and BankAmerica in accounts that owned KBE. Our feeling is that while a correction is overdue, today’s pullback on Apple earnings will recharge the bulls to move stocks higher into the election. We are using INTC, GE and BAC as anchovies for the move.
*****

NY Fed President William Dudley: Regional Economy and Housing Update

[L]et's consider the slow housing recovery. Housing market activity—both new construction and sales—remains depressed. On the construction side, total housing starts are running at just 600,000 units per year (seasonally-adjusted) in recent months. This is up from 530,000 units at the trough in the first quarter of 2009 but it is still extremely low by the standards of the last 50 years. In fact, the rate of new construction is so low that there is barely any net growth in the U.S. housing stock these days.

One reason why so little housing is being built is that many existing homes stand vacant. We estimate that there are roughly 3 million vacant housing units more than usual. And more vacancies are added daily as the foreclosure process moves homes from families to mortgage lenders. This stock of vacant homes will shrink when fewer are foreclosed upon and more of these homes are sold or rented out.

On the sales side, even though low mortgage interest rates and falling home prices have together boosted housing affordability to its highest level in 40 years, the current pace of sales is quite sluggish. Impediments to home sales include tight lending standards, a weak job market and continued uncertainty regarding the future path of home prices. The large decline in home prices that occurred between 2006 and 2008 is also important. This decline reduced the amount of equity that owners have in their homes, making it difficult for people to come up with the funds needed to "trade-up" and move into better homes.

In addition, the steep decline in home prices put many families at risk of mortgage delinquency and, ultimately, losing their homes to foreclosure. With lower home prices, many families now owe more on their mortgage than their home is worth. This means that they cannot refinance or sell their homes easily if they experience a financial crisis, such as a job loss or a serious illness. Recent developments on foreclosures have been mixed. While RealtyTrac reports that foreclosure completions in the United States exceeded 100,000 for the first time in September, it is important to remember that foreclosure is a lengthy process in most states. Our data indicate that, in recent quarters, borrowers are becoming less likely to fall behind on their mortgages, so fewer households are now entering the foreclosure process. At the same time, though, major lenders have acknowledged serious problems in the processes they have used to repossess homes and announced moratoria on new foreclosures. Taken together, these developments suggest that the situation in housing remains uncertain for the foreseeable future.

The Federal Reserve actively encourages efforts to find viable alternatives to foreclosure, like loan modifications, or deeds in lieu. We also support due process and access to legal counsel for homeowners facing foreclosure, for instance through legal aid programs. At the same time, it is important that foreclosures that properly comply with state and federal law can ultimately take place, as this is a necessary part of the adjustment that will eventually return us to more normal conditions in the housing market.

At present, the extent of the documentation problem and its wider ramifications are still uncertain. In conjunction with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, the Federal Reserve is therefore seeking to establish the facts through a review of the foreclosure practices, governance and documentation at the major bank mortgage servicers. We want to ensure that the housing finance business is supported by robust back-office operations—for processing of new mortgages as well as foreclosures— so that buyers of homes and investors in mortgage securities have full confidence in the process. We are monitoring developments closely in order to evaluate any potential impact on the housing market, financial institutions and the overall economy.

http://www.calculatedriskblog.com/
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That didn’t take long:

Bank of America reopened more than 100,000 foreclosure actions, declaring that it had found no significant problems in its procedures for seizing homes. GMAC Mortgage said that it also is pushing ahead with an unspecified number of foreclosures that came under intense pressure.
*****

Does this story ring a bell?

http://www.nytimes.com/2010/10/20/business/global/20ghost.html?_r=1&hp
*****

Chico’s is down on the Coldwater news and we bought for more aggressive accounts for a trade. We also added shares of Dell to those accounts. Dell has been seeing consistent buying the past few weeks.
*****

Don Draper would be proud from:
http://gawker.com/5667618/dead-man-will-be-remembered-for-spreading-oral-cancer

Dead Man Will Be Remembered for Spreading Oral Cancer

Louis Bantle, the former marketing director and chairman of U.S. Tobacco, died earlier this month at the age of 81 from emphysema and lung cancer. Bantle was most famous for convincing millions of teenagers to dip.

The WSJ chronicles Bantle's work from the 1960s through the 1990s, during which time he helped turn snuff into a billion-dollar business and tripled its use among 18-24 year-olds.

   "We must sell the use of tobacco in the mouth and appeal to young people," he said, according to the minutes of a marketing meeting in 1968. "We hope to start a fad." [...]

   "If you go to high school in Texas and you don't have a can of snuff in your pocket, you're out," Mr. Bantle told Forbes in 1980.

Your legacy will live on, Mr. Bantle.
*****

So much for the rally--The markets were trying to rally when news that NY Fed and PIMCO are suing BAC to force them to buy back $49 billion in mortgages. And this tidbit from siliconvalleyinsider on the lawsuit is interesting: There are two really weird regarding the parties who are suing Bank of America over mortgage repurchases. The first is that the New York Fed -- who would suspect would be solely focused on the health of big banks -- is one of the parties. But also suing BofA, according to Bloomberg, is BlackRock, the asset manager that's 34% owned by BofA! Bank of America, of course, acquired its stake in BlackRock when it acquired Merrill Lynch during the crisis. It was reported in August that BofA may seek to unload its stake in BlackRock.

Below is the Bloomberg report. By the way the Fed encouraged BAC to buy Countrywide. It all gets curioser and curioser.

(Bloomberg) -- Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said. The bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service the loans properly, their lawyer said yesterday in a statement that didn’t name the firms. Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group, which has since expanded. Countrywide’s servicing failures, including insufficient record keeping, may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer at Gibbs & Bruns LLP. “We now are in a position where we have to start a clock ticking,” Patrick, who is based in Houston, said today in a telephone interview. MetLife Inc., the biggest U.S. life insurer, is part of the group represented by Gibbs & Bruns, said the people, who declined to be identified because the discussions aren’t public. TCW Group Inc., the manager of $110 billion in assets, expects to join BlackRock, the world’s largest money manager, and Pimco, which runs the biggest bond fund, in the group, the people said. Countrywide also hasn’t met its contractual obligations as a servicer because it hasn’t asked for repurchases itself and is taking too long with foreclosures, either because of document or process mistakes or because it doesn’t have enough staff to evaluate borrowers for loan modifications, Patrick said. If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide in default of its contracts, she said. “The letter states a demand directed to Countrywide to cure the defaults,” said Kevin Heine, a spokesman for BNY Mellon. “It does not ask BNY Mellon to take any action. BNY Mellon will continue to perform its duties as trustee.” Charlotte, North Carolina-based Bank of America will “defend our shareholders” by disputing any unjustified demands it buy back defective mortgages, Chief Executive Officer Brian T. Moynihan said today. Most claims “don’t have the defects that people allege,” Moynihan said on Bloomberg Television, referring to so-called putbacks, in which guarantors or investors in mortgage-backed securities ask to return bad loans. “We end up restoring them, and they go back in the pools.” Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, Brian Beades, a spokesman for New York- based BlackRock, and Peter Viles, a spokesman for Los Angeles- based TCW, declined to comment. John Calagna, a spokesman for New York-based MetLife, didn’t immediately return messages seeking comments. Jeffrey V. Smith, a spokesman for the New York Fed, declined immediate comment. “We continue to review and assess the letter, and have a number of question about its content, including whether these investors have standing to bring these claims,” Bank of America Chief Financial Officer Charles H. Noski said today on a conference call with analysts. “We continue to believe the servicer is in compliance with the servicing obligations.”
*****

Wonder if PIMCO did any shorting of BAC paper or the major stock measures before the news of the lawsuit was announced. Getting the Fed to join in the suit was a coup for Bill Gross who has now assumed the head guru mantle for this Market. Just asking.

Gold ended down $40 at $1331. Olli dropped $3.47 to $79.61 and European bourses closed mildly lower.
*****

Stocks opened lower on the Apple news, IBM action and China rate increase. After three hours of trading the S&P 500 had rallied back to half the initial loss. Then news of BAC being sued hit the tape and the selloff resumed. At the closed the major measures were 2% lower. Volume was higher and Breadth was abysmal. Tomorrow will tell the short term tale. 1115.60 is the line in the sand for this selloff. The S&P 500 closed at 1116.32.
*****

 

October 18, 2010

Model Portfolio Value As of 18 October 2010

$ 612,824


Thoughts

Asia was lower overnight and Europe is slightly higher at midday. The major market measures are tentative at the beginning of trading and Gold is flat while Oil ahs an $81 handle.
*****

(Bloomberg) -- Production in the U.S. unexpectedly dropped in September for the first time in more than a year, showing the industry that led the economy out of the recession is cooling.

Output at factories, mines and utilities fell 0.2 percent, the first decline since the recession ended in June 2009, figures from the Federal Reserve showed today. Factory production also decreased 0.2 percent, reflecting declines in consumer durable goods, like appliances and furniture.

The rebuilding of stockpiles, a component of the factory rebound last year, will probably cool following eight consecutive gains in inventories, a sign assembly lines will not accelerate much more. At the same time, improving demand from overseas and a pickup in business investment on new equipment may keep benefiting American manufacturers like Alcoa Inc., helping support the world’s largest economy. “Manufacturing is beginning to see growth ratchet down as the inventory swings calm down,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said before the report. With inventory rebuilding ending, factory growth is “much more dependent on final demand, which is pretty modest.”
*****

We cut our QID (double short NAZZ 100) in half became Apple comes with earnings tonight and it comprises 20% of the ETF. We think Apple is overpriced but we want to mitigate the risk of one more pop after earnings. We added SDS (double short S&P 500) and TWM (double short Russell 2000) to accounts owning QID.
*****

(CNBC) Charles Evans, president of the Chicago Fed, said that “in my opinion, much more policy accommodation is appropriate today” because “the US economy is best described as being in a bona fide liquidity trap”, a point where ultra-low interest rates and high savings rates conspire to make monetary policy ineffective.
*****

(WSJ) European stock markets reversed early losses, boosted by a modestly upbeat session in the U.S. on the heels of strong earnings from Citigroup and a report showing increased optimism in the home-builder sector. Gold ended at $1372 and Oil at $83.06.
*****

We sold KBE in larger accounts for a scalp profit.
*****

The NAZZ has closed higher in 7 of the last 8 trading sessions. Apple and IBM report after the close and will set the tone for overnight and early morning trade.
*****

The major stock measures closed up 1% and volume was moderate. Breadth was flat. Tomorrow is Turnaround Tuesday.
*****

 

October 15, 2010

Model Portfolio Value As of 15 October 2010

$ 613,132


Thoughts

Google beat big time and the shares are 10% higher and have given a positive tone to the early market trading. GE missed on revenue but beat on earnings. Google is now the big dog influencing trader sentiment.

(Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.

“There would appear -- all else being equal -- to be a case for further action,” Bernanke said today in the text of remarks given at a Boston Fed conference. He said the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” He didn’t offer new details on how the Fed would undertake those strategies or give assurances the central bank will act at its Nov. 2-3 meeting.

Asia and Europe were mixed overnight and Oil has an $83 handle while Gold is $1380. Today is a Triple Witching day.
*****

Diane Swonk, Chief Economist Mesirow Financial

Retail sales surprised on the upside by rising 0.6% in September, after being revised up in August.  An increase in vehicle sales, which are now starting to get a lift from a resumption of subprime lending (yes, you read that correctly), accounted for a portion of that rise. Sales excluding autos rose a more moderate 0.4%, but were still respectable. Spending on electronics and online retailers accounted for much of the strength. Spending at clothing and department stores declined, as higher prices at the pump cut into some discretionary purchases. Spending at restaurants and bars also moderated, as more of us opted for fast food and take-out instead of dining out. 

What is supporting the gains in spending?

Consumers appear to have dipped into their savings, given what we already know about employment growth, which was nonexistent during the month. We are also seeing some support from extensions to unemployment insurance. Finally, there is the foreclosure crisis:  consumers who have stopped paying their mortgages have extra cash on hand, but their actions will ultimately create more pain for consumer balance sheets by limited home price gains.
*****

So extended unemployment money, money from not paying on mortgages and no saving are the given reasons for the uptick in retail sales. Whoa!!!!!!!!!!!!
*****

The Major Bank ETF (KBE) remains under pressure and we bought shares for many accounts. The Banks are not participating in this rally as traders are worried about the mortgage fiasco. The reality is that the banks will be allowed to foreclose at some point. They probably don’t have good title in some cases and probably also broke some laws but what else is new. They have the power and the money. It’s our money but they have it.

If the rally continues some of the money from on fire tech overvalued tech stocks is going to rotate to bank stocks.

Apple and Google are very strong today and we think part of the tech strength in the face of financial weakness has to do with expirations. We have been and are buying more the double short NAZZ 100 (QID) in some accounts for a trade.
*****

Not all hedge funds make money. Some lose big time:

.... The New York State Common Retirement Fund is still extricating itself after telling the bank last year that it wanted to back out of a 2008 commitment to the $4.7 billion Morgan Stanley Real Estate Fund VII, part of a group that manages $43.6 billion, according to the people, who asked not to be named because the decision wasn’t made public.

The retirement fund, the third-largest in the U.S., wrote down an undisclosed amount of cash it had already contributed to Fund VII to about zero, one of the people said. Sonny Kalsi, the former head of the unit, left in 2009, and Morgan Stanley has changed the leadership three times in the past two years. Morgan Stanley’s real-estate group told investors it expects to lose $5.4 billion of an earlier $8.8 billion international fund, called Fund VI, a person familiar with the matter said in April. Performance figures for Fund VII couldn’t be obtained. ....

.... North Carolina’s Department of the State Treasurer contributed $440 million to international Fund VI and has received $5.8 million back in distributions, according to a report from the fund. The remaining stake is valued at $74.6 million as of June 30, the report said.....

http://noir.bloomberg.com/apps/news?pid=20601087&sid=at3qLReasbnI&pos=5
*****

Zero Hedge reports that Bill Gross is buying Mortgage Backed Securities (MBS) on margin in his PIMCO Total Return Fund. It s Zero Hedge’s contention- with which we agree- that Gross has a line to the Fed about their future actions that ordinary folks like us don’t have.

Who cares what Benny (that’s Bernanke) and the Inkjets blink in Morse code when you have the one and only Bill Gross. As we said last month, the best necessary and sufficient tell to decide what the Fed will do on November 3 is to keep track of the Total Return Fund's composition. Today, TRS just released its updated September holdings, and for all those hoping to see that Pimco Billy is betting the farm on QE2 - that's a bingo. Pimco has just increase d its MBS holdings to the highest since July 2009, when Gross was already dumping MBS on the tail end of QE1. The biggest tell however, is that just like before QE1 and QE Lite were announced, Bill has once again gone on margin, reducing his net cash exposure from $5 billion to ($7.6) billion. And keep in mind this is September: we are certain that once the October results come out, a few weeks after QE2 is effective, TRS will have a material margin position of more than $20 billion, and will have pumped up its MBS holdings up to $100 billion. So now that we are certain that Gross just telegraphed that QE2 is imminent, that leaves us with two questions: 1) why MBS and not USTs? Is Gross saying that Bernanke will once again be forced to come out and buy MBS in addition to USTs? or 2) did Gross just get screwed on his doubling down MBS? With fraudclosure forcing such reputable MBS managers as Gundlach to claim that it will have no impact on their business model, we are also certain that the entire Fashion Island campus is sweating bullets currently. If the entire MBS model is indeed unwound as some speculate, this could well be the end of PIMCO (and how poetic that would be). Yet these are considerations for the future. For now - anyone who may have had an ounce of doubt as to Bernanke's FOMC announcement intentions, can now put it away.
http://www.zerohedge.com/article/bill-gross-telegraphs-qe2-green-light-buys-mbs-margin
*****

Oil lost $1.40 to $81.30 and Gold closed lower after making a new high down $10 at $1367. European bourses closed lower on the day.
*****

Financial stocks closed on their lows for the day and coupled with cyclical and commodity stocks being lower they offset the strong day in the high flying internet stocks. On the day the major market measures were mixed with the DJIA down, the S&P 500 flat and the NAZZ up 2% in moderate trading. Breadth was flat.
*****

 

October 14, 2010

Model Portfolio Value As of 14 October 2010

$ 613,562


Thoughts

Did you know it is physically impossible to lick your own elbow?
*****

The ultimate insult for folks losing their homes because they lost their jobs to offshore hiring is that the people doing the paperwork to oust them were also overseas hires. The NYT has a story in today’s edition:

And even when banks did begin hiring to deal with the avalanche of defaults, they often turned to workers with minimal qualifications or work experience, employees a former JPMorgan executive characterized as the “Burger King kids.” In many cases, the banks outsourced their foreclosure operations to law firms like that of David J. Stern, of Florida, which served clients like Citigroup, GMAC and others. Mr. Stern hired outsourcing firms in Guam and the Philippines to help.

Complete story at http://www.nytimes.com/2010/10/14/business/14mortgage.html?_r=1&hp
*****

Interesting comment on the Foreclosure Mess:

http://www.cnbc.com/id/39634568
*****

Jobless claims were up 13,000 for the week to 462,000. Asia was higher overnight and Europe is mixed at midday. Gold is at $1380 and Oil has an $83 handle.
*****

But if an employee had embezzled $10,000 he/she would be going to jail.

(AP) The Swiss bank UBS said Thursday that it will not take legal action against former executives and board members for the huge losses suffered during the U.S. subprime crisis that forced a bailout of the company. Kaspar Villiger, chairman of Switzerland’s largest bank, said in a statement that the company had learned lessons from the crisis and now was focusing on the future.

“What happened should not have been allowed to happen. With our decision to refrain from legal proceedings, we do not want to gloss over the mistakes made by UBS or absolve those involved of their corporate responsibility,” Mr. Villiger said. “Today, we have laid the foundation for drawing a line under the future.”
*****

Privately held companies are borrowing money in junk bond market to pay dividends to shareholders.

http://online.wsj.com/article/SB10001424052748704763904575550522258270164.html?mod=WSJ_hps_LEFTWhatsNews
*****

The Large Bank ETF (KBE) is down 4% today as the foreclosure news is finally affecting bank stocks. The banks are a drag on the rest of the markets.

Google reports after the close tonight and its report is going to be the main focus tomorrow.

The WSJ reported that there are rumors that AOL and a few LBO firms are considering a bid for Yahoo. No word from Yahoo. AOL is one tenth the mark cap of Yahoo. Say what? It’s just like the old days.

Companies are acquiring other companies with their cash. That means fewer jobs – not more, so much for the Fed flooding the system with dollars to stimulate job growth.
*****

Who’s on first?, A foreclosure story.

http://www.huffingtonpost.com/2010/10/14/post_547_n_757979.html
*****

European bourse indexes finished lower on the day.
*****

Do you feel silly that you tried to lick your elbow?
*****

The major market measures closed lower on the day in light trading. Breadth was 2/1 negative,
*****

 

October 13, 2010

Model Portfolio Value As of 13 October 2010

$ 613,556


Thoughts

Intel beat lowered expectations last night and JP Morgan beat this morning by decreasing loan loss reserve calculations. The major market measures opened higher on the general feeling of higher markets ahead. Investors Intelligence reflected this thinking its latest numbers with 47% bulls and 24% bears. Prior week was 45% and 27%.

Asian markets were higher overnight and European bourses are also higher at midday. Gold is $1352 and Oil has an $82 handle.

With the markets up in the first half hour of trading JP Morgan and Intel are lower.
*****

The rescue of the trapped miners and the ensuing news coverage reminds of when we were kids and children used to fall down abandoned wells and the rescue or sad non rescue was a big new item for the time it took to reach them.
*****

Parasites and hypocrites: http://www.rollingstone.com/politics/matt-taibbi/blogs/TaibbiData_May2010/218982/83512
*****

Marketwatch.com had this comment about today’s action:

Stocks gain for a fourth day on results from such titans as Intel and after the Fed signals more monetary easing ahead.

Intel is lower today.
*****

It used to be that folks bought Gold when the world was ending. Now they buy Gold for? Anyway, Gold is up $25 today to $1370. Oil ended at $83.20. European bourses closed up 1% and more.
*****

The major measures gained 1% today as markets await the Fed’s move to stimulate the economy by flooding the system with another trillion plus dollars. When they make the move -if not before- the bloom will be off the rose. Volume was light and Breadth 3/1 positive.
*****

 

October 12, 2010

Model Portfolio Value As of 12 October 2010

$ 613,556


Thoughts

No guts, no glory. We sold the single short ETFs Monday.
*****

The major market measures are slightly higher than when we left. The S&P 500 has remained above 1150 support and has been trying to get to the next resistance level of 1200. Intel earnings come tonight and INTC has already warned so our guess is that a positive reaction is possible. With earnings season in full force the next three weeks the markets may be one of individual stocks while the major measures meander. But that is only a surmise not a prediction.
*****

Asia was mostly lower mixed Monday night as is Europe at midday. U.S. market measures are going to open slightly lower. Oil has an $82 handle and Gold is $1351 as the trading day begins.
*****

We know you were wondering:

(WSJ) Pay on Wall Street is on pace to break a record high for a second consecutive year, according to a study conducted by The Wall Street Journal. About three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year, a 4% increase from the $139 billion paid out in 2009, according to the survey. Compensation was expected to rise at 26 of the 35 firms.
*****

In case you were also wondering:

The government is expected to announce this week that more than 58 million Social Security recipients will go through a second straight year without an increase in monthly benefits. This year was the first without an increase since automatic adjustments for inflation started in 1975.....

More than 58.7 million people rely on Social Security checks that average $1,072 monthly. It was the primary source of income for 64 percent of retirees who got benefits in 2008; one-third relied on Social Security for at least 90 percent of their income.
*****

And remember retired folks who keep their funds in safe bank C/Ds are receiving no income on those C/Ds because the Fed ahs artificially lowered interest rates to 0% to save those same investment banks that are paying record bonuses.
*****

While we were away the NYT published an article on Sam Zell and the destruction of the Chicago Tribune.

http://www.nytimes.com/2010/10/06/business/media/06tribune.html?pagewanted=1&_r=1&adxnnlx=1286895601-Scq/DpV5XYg5inY9b155ag
*****

(http://www.theleftcoaster.com/) MIT Professor of Economics Peter Diamond won the Nobel Prize for Economics today, for his work and that of two others on the difficulties in matching supply and demand in the labor market. It so happens that Diamond was an Obama nominee for the Federal Reserve, whose nomination had been sent back to the White House by GOP senators in August. And why did Richard Shelby and other GOP senators reject Diamond’s nomination at the time?

Because they thought he was unqualified to set monetary policy, as if the Fed itself has demonstrated a good grasp on that subject over the last two decades under GOP appointees.
*****

A good explanation of QE 2 (Quantitative Easing round 2), the supposed Fed action in November that will save the economy:

http://www.rollingstone.com/politics/matt-taibbi/blogs/TaibbiData_May2010/217520/83512
*****

Diane Swonk, Chief Economist at Mesirow Financial:

The Bottom Line: The Fed will ease again, and do so in a very big way, starting in November. Moreover, they will keep rates low for a very long time, maybe into 2012. That said, asset price bubbles will not be tolerated as they were in the past, which means that the Fed may have to raise short-term rates more aggressively if bubbles appear to be emerging, once the economy is on stronger footing.
*****

(http://www.zerohedge.com/ )Alarm bells are ringing everywhere as Goldman (which joins UniCredit in boosting its gold price target) may have just picked the short-term top in gold, after it revised its 12 month target from $1,365 to $1,650. And while David Greely's track record is nowhere near as atrocious as that of Goldman's FX team which manages to top tick the EURUSD every single time, the fact that Goldman is now opening Long Gold recommendations (to go with its current trading recommendations of long Corn, Copper, Platinum and WTI) is reason for big worry. Recall which bank was getting its clients to go all in in crude 2008 when oil was $140+. We would be very cautious when Goldman is on "your" side of the trade. Nonetheless, the firm is pretty much spot on "We believe that a return to quantitative easing will act as a strong catalyst to carry gold prices to even higher levels."
*****

(WSJ) Natural-resources stocks dragged broader European measures lower, amid concerns that China's latest effort to tighten lending rules could dent global growth.
*****

The major stock measures closed higher in light trading. Breadth was 5/4 positive.
*****

 

October 11, 2010

Model Portfolio Value As of 11 October 2010

$ 613,556


October 8, 2010

Model Portfolio Value As of 8 October 2010

$ 613,806


October 7, 2010

Model Portfolio Value As of 7 October 2010

$ 614,346


Thoughts

We closed out the SDS and QID positions yesterday for a loss because the double short exposure was not warranted when the S&P 500 closed above 1150 resistance that had held for the past 5 months. Today we bought SH and PSQ which are the single short S&P 500 and NAZZ 100 ETFs respectively. We continue to want exposure to the downside but with the September Employment report being announced before the opening tomorrow morning we don’t want a double risk exposure if the number extends the rally for a few more days. With the single short ETFs if the rally extends we will have room to add to the market short position.
*****

 

October 6, 2010

Model Portfolio Value As of 6 October 2010

$ 614,550

Happy Birthday Bette!

October 5, 2010

Model Portfolio Value As of 5 October 2010

$ 614,475


October 4, 2010

Model Portfolio Value As of 4 October 2010

$ 618,375


Thoughts

We are taking the next week off to celebrate (?) our 67th birthday on October 9. We will return Tuesday October 12.
*****

POLITICS IS STUPID! But the STUPIDEST politics is blaming the voter.
*****

Asia was higher overnight and Europe is mildly lower at midday. U.S. futures are pointing to a slight lower opening.
*****

Paul Krugman: http://www.nytimes.com/2010/10/04/
*****

Matt Taibbi on the carried interest tax break for billionaires:

Once again a key piece of news has passed virtually without comment.

While the entire nation argues over nonsense like the WTC Mosque, Rick Sanchez, and, yes, blue-red culture war stuff like the Tea Party, congress yesterday quietly took a knee on the “carried interest” tax question. In doing so they decided not to take a vote on changes already approved by both houses that would scale back perhaps the most preposterous tax break in the entire federal code, one that leaves hedge-fund gazillionaires like Stevie Cohen and John Paulson paying less than half the top tax rate paid by most middle and upper-middle class Americans.

The carried interest tax break is a classic example of how in America constituencies with the means and the bureaucratic endurance to get what they want slowly hack away at the government over time, carving out exemptions to their civic responsibilities while ordinary people suck the proverbial egg. A 100% or 200% tax break for hedge fund and private equity billionaires is not the sort of thing that one passes instantly, by standing up in front of big campaign crowds and urging on a mob; it takes a long time and a lot of behind-the-scenes baby steps....

.... There is absolutely no logical or ideological justification – not even the wildest, craziest reed-end of a hint of a justification – for a hedge fund manager paying half the tax rate of a trucker or a teacher or a doctor. The only thing the carried interest tax break accomplished was that it provided an incentive for people to work as hedge fund managers. This was purely and absolutely a handout to big campaign contributors. It’s so preposterous and indefensible that it’s not uncommon to see even Wall Street people admitting that it goes too far (see here for example)

Complete article: http://www.rollingstone.com/politics/matt-taibbi/blogs
*****

We sold QID and SDS for a total 80 pennies (30 pennies and 50 pennies respectively) profit.
*****

(Barron’s) Shares of Ford are up 52 cents, or 4%, at $12.78, after Morgan Stanley analyst Adam Jonas initiated coverage of the stock with an “Overweight” rating and a $20 price target, writing that investors are underestimating the revenue potential at a transformed Ford. Improved credit ability is going to produce auto industry volume much higher than people think, Jonas asserts: he sees industry units in North America of 14 million next year and 15 million in 2012, which is well above the 12 million or so auto analysts have been predicting for next year. Jonas sees Ford staging a dramatic balance sheet turnaround, going from $5.4 billion of net debt this year to $1 billion in net cash at the end of next year and $9 billion in net cash by 2013.As a consequence, his estimates for Ford’s sales are dramatically different than Street consensus: $115 billion this year, versus $120 billion Street, but $129 billion next year, versus $125 billion on the Street. Jonas values Ford at 7.2 times its normalized earnings per shares, which would be about $2.60 per share, well above the $1.83 the Street expects the company to make next year. He also throws in 74 cents per share for its net operating loss carry-forwards.<
*****

(WSJ) European stocks fell, with worries about regional economic growth prospects remaining at the fore ahead of the earnings season that begins later this week. Oil was unchanged at $81.03 and Gold was unchanged at $1317.
*****

The major market measures were lower all day and closed down 1% in light trading. Breadth was 3/1 negative.Be back in a week but as usual will be watching the markets. If we make any trades we will post them along with the daily Model Portfolio values.
*****

 

October 1, 2010

Model Portfolio Value As of 1 October 2010

$ 616,732


Thoughts

The new mantra is that government is attacking business. Ignored is the fact that had the Treasury and Fed not intervened in the autumn of 2008 and the Spring of 2009 there would be no business since the financial system would have collapsed. But it it’s the election season ad since the Russian are now trading partners and not enemies and Republicans can use a few Latino votes so immigration has disappeared from the radar screen and the evils of big government are now the whipping boy. What brought this to mind was CNBC‘s interview of the CEO of a golf course company this morning in which he blamed government for the companies lousy performance. It couldn’t have been recession and the fact that there are too many golf courses. No it was government. And the beat goes on. By the by, how many over 65 folks who rail against government spending have refused Social Security and Medicare?
*****

Asian was higher overnight and Europe is up at midday with U.S. futures also higher as the new quarter and new month begin.
*****

Hewlett Packard named as CEO a fellow from SAP, the European software giant. He left SAP under strained circumstances in earlier this year. The shares of HPQ are lower by 5% on the news. (WSJ) Mr. Apotheker is a native German who spent more than 20 years at SAP, a business-software maker. He was named co-CEO in April 2008 and then sole CEO a year later. His tenure alone at the top of SAP was marked by controversy, such as raising the rate the company charged for product support amid a weak economy. SAP eventually backtracked after customers protested the higher fees. Mr. Apotheker resigned abruptly from SAP in February.

Read more:
http://online.wsj.com/article/SB10001424052748704483004575524312496250830
*****

U.S. personal income rose 0.5% in August and real consumer spending edged up 0.2%, the Commerce Department said. Wall Street economists had expected a 0.3% increase in income and a 0.4% gain in spending. The personal consumption expenditure price index rose 0.2% in August compared with July. Inflation is up 1.5% in the past year, the same pace as July.
*****

(WSJ) The Irish government said Thursday that the total cost of fixing its banks, battered by an epic housing bust, could in the worst case total as much as €50 billion ($68 billion), or about a third of the country’s economic output last year. That’s much higher than the government’s previous commitment of a total of €33 billion for the bailout. As a result of its bank rescues, Ireland’s budget deficit will rise to 32% of its economic output this year—roughly 10 times the European Union limit and the biggest in the euro zone’s 11-year history. http://dealbreaker.com/
*****

Also from http://dealbreaker.com/

Nassim Taleb: Don’t Listen to Geithner or Krugman (The Atlantic) http://www.theatlantic.com
Taleb explained his simple metric for judging whose economic opinions are worth his time: “Did someone predict the crisis before it happened? … If the answer is no, I don’t want to hear what the person says. If the person saw the crisis coming, then I want to hear what they have to say.” Other unlucky economic figures who failed Taleb’s test included writers Paul Krugman and Thomas Friedman.

We guess this means we must be listened to by the powers that be.
*****

Diane Swonk, Chief economist Mesirow Financial

The University of Michigan Index of Consumer Sentiment, which tends to be more stable and reliable than the one produced by the Conference Board, fell from 68.9 in August to 68.2 in September. The good news is that this is less than many expected and showed some improvement over readings mid-month. The bad news is that confidence in the economy is still low and moving in the wrong direction. Personal incomes surged at a faster than expected 0.5% pace in August. However, a large jump in transfer payments - largely extensions to unemployment insurance - accounted for much of that gain. Indeed, many government workers lost pay during the month, as they were forced to take unpaid furlough.

Consumer spending increased at a 0.4% pace, which was also an upward surprise. Back to school shopping and increased spending on necessities helped buoy expenditures in August. Services also helped, as unusually hot summer weather prompted many of us to turn on our air conditioners.

Separately, tax revenues fell, probably because of the large role that non-taxable transfer payments played in determining the increase in income. The saving rate edged up slightly.

The Bottom Line: The consumer is still struggling, and growing ever more dependent on transfer payments, to keep spending going. Even high-income households have moved down the food chain to take-out restaurants in recent months, which is a sign of caution and stress on consumer balance sheets. There is faint hope that the recent spurt in mortgage refinancing will spur a little more spending as we move into the holiday season. As one person who recently refinanced told me, "I was so shocked when I saw my appraisal, and how much equity I had lost in my home in recent years, I decided to save instead of spend the extra money I was getting each month from mortgage restructuring."

Cash hoarding (used to be called saving) is exactly what the Fed is trying to combat and one of the most compelling reasons for them to expand their balance sheet. The hope is that the returns to saving will drop so low that investors and lenders will start to make more prudently risky and productive loans and investments. (also known as the punish savers to save banks action)
*****

(Bloomberg) -- Manufacturing expanded in September at the slowest pace in 10 months, underscoring the Federal Reserve’s forecast of “modest” U.S. growth in coming months.

The Institute for Supply Management’s factory index dropped to 54.4 from 56.3 in August, the Tempe, Arizona-based group said today. Readings greater than 50 signal growth and economists forecast a decline to 54.5, according to the median estimate in a Bloomberg News survey. Measures of orders and production fell to the lowest level since June 2009.
*****

Rotation to financials and banks the last two days has kept the major measures from moving lower. When that rotation rends the rally will fail. The S&P 500 continues to try and move above 1150 without much luck. We repurchased the SDS double short S&P ETFs and the QID double short NAZZ 100 this morning in the same accounts as yesterday for trades.
*****

According to the IRS the median (equal number of taxpayers above and below this income level) taxpayer in 2008 had an income of $34,140 and paid $2790 in Federal Income taxes and $2610 to FICA and Medicare.

Go here to see table (worth the time):
http://content.thirdway.org/publications/335/Third_Way_Idea_Brief_-_A_Taxpayer_Receipt.pdf

What You Paid For 2009 tax receipt for a taxpayer earning $34,140 and paying $5,400 in federal income tax and FICA (selected items)
Social Security$1,040.70
Medicare$625.51
Medicaid$385.28
Interest on the National Debt$287.03
Combat Operations in Iraq and Afghanistan$229.17
Military Personnel$192.79
Veteran’s Benefits$74.65
Federal Highways$63.89
Health care research (NIH)$46.54
Foreign Aid$46.08
Education Funding for Low Income K-12 Students$38.17
Military Retirement Benefits$32.60
Pell Grants for Low Income College Students$29.75
NASA Space Program$28.09
Internal Revenue Service$17.69
Environmental Clean Up (EPA)$11.67
The FBI$11.21
Head Start$10.91
Public Housing$10.50
National Parks$ 4.27
Drug Enforcement Agency$3.14
Amtrak$2.23
Smithsonian Museum$1.12
Funding for the Arts$0.24
Salaries and benefits for members of Congress$0.19

*****

Zero Hedge’s take on the SEC release of the reasons for the May 6 flash crash:

http://www.zerohedge.com/article/sec-releases-final-flash-crash-report-waddell-and-reed-blamed-selling-catalyst
*****

(WSJ) European stocks started the month on a mildly negative note as investors absorbed a wave of U.S. economic data, although shares in London eked out a gain. Oil ended the day and week at $81.46 up $1.50 and Gold was $1317.
*****

The major stock measures closed up what they lost yesterday. Breadth was flat and volume light.
*****

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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Summary of Business Continuity Plan

15624 Lemley Drive, Soldiers Grove, Wi 54655 312-925-5248
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.