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

30 September 2009

Portfolio Update

Model Portfolio Value As of 30 September 2009

$ 573,794

29 September 2009

Portfolio Update

Model Portfolio Value As of 29 September 2009

$ 573,642

28 September 2009

Thoughts

Model Portfolio Value As of 28 September 2009

$ 573,412

We will be traveling tomorrow and Wednesday so our next post will be Thursday October 1, the month we begin receiving Social Security. Hurrah!
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Asian stock markets ended lower as Japanese exporters were hurt by the strength of the yen. The Nikkei fell 2.5%, with the U.S. dollar buying less than 90 yen after breaching that level on Friday. U.S. stocks are going to open higher and that has given a boost to European shares which were lower at midday. Oil has a $66 handle.
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Xerox has agreed to pay $6.4 billion of cash and stock for Affiliated Computer Services giving the copier giant an outsourcing and information-services company as corporate spending remains weak. Abbott Laboratories has struck a deal to acquire the pharmaceutical unit of Belgian conglomerate Solvay for roughly $7 billion.
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Wasn’t it just six months ago that the world was ending?

The WSJ had an article over the weekend bout the currency markets and the move by exchanges and brokers to make vehicles for trading currencies available to individual investors. As is mandatory in these stories the WSJ gave the example of a little guy who has gone from selling real estate to speculating in currencies and supposedly has turned $50 thousand into over $1 million. The WSJ failed to mention that one or two folks win a lottery every week while hundreds of millions of folks lose everything they spend on lottery tickets.

In a few years the WSJ will have a story about how individual investees who bought the speculative products were hoodwinked.
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Kraft is going to raise its bid for Cadbury sometime in the next few weeks and because we think markets will soon be in a corrective phase we decided to trade out and look again when the revised offer is amended. We also sold positions in US Bancorp and Dell on Friday.
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Today we reestablished our Short S&P ETF (SH) below the price at which we sold on Friday.
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European stocks staged a broad-based rally, with German utility operators some of the best performers in the wake of business-friendly election results in the continent's largest economy. Many closed better than 2% higher.
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Oil ended at $66.94 up 90 pennies and gold lost $1 to $993.
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Stocks closed 2% higher on 3/1 positive breadth and very low volume. The bulls are in control.
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25 September 2009

Portfolio Update

Model Portfolio Value As of 25 September 2009

$ 573,875

24 September 2009

Thoughts

Model Portfolio Value As of 24 September 2009

$ 574,128

Yesterday was a key reversal day for the S&P 500. A key reversal day is a sharp reversal pattern that occurs during a trend. In an uptrend, prices open above the previous day's close, make a new high and then close below the previous day's low. In a downtrend, prices open below the previous day's close, make a new low and then close higher than the previous day's high. The greater the price range and volume on the key reversal day, the more reliable the signal. Yesterday was the only key reversal day since March in which the S&P 500 closed below the previous day’s close.
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With the above in mind we traded out of Ford and Verizon. We made a dividends worth of gain in two days on VZ and more than a few pennies on Ford. Those two are more market oriented than the other stocks we own.
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23 September 2009

Thoughts

Model Portfolio Value As of 23 September 2009

$ 573,562

The Prince and Princess are here for the next five days for a neighborhood wedding and so our next post will be Monday September 28.
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Asian markets were down 1% and more while European bourses are higher at midday. Oil is a bit lower and Gold is up a tad. U.S markets look to open higher.
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Today is FOMC day and talking heads expect the Fed to keep rate at nothing to help their banking friends even though the pooh bahs have declared the recession over.

Investors Intelligence is the same as last week with 47% bulls and 24% bears.
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We have been mulling the absence of any significant correction in the move higher off the March lows. Without any proof but market action it seems that the big boys and girls have abandoned shorting. That may be because the regulators who saved them oblivion have silently requested that they look elsewhere for trading profits.

Moreover institutional investors seem to have finally realized that maybe it doesn’t make financial sense to lend stock to shorts from positions that they own for a mere percentage point of income and in the process see the share price of those shorted stocks dory 20% in value. The SEC has not addressed the uptick rule and so when the next more than 3% correction arrives we will see if the big boys and girls are willing to forego scaring the markets downward by shorting with abandon.
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The salad days are back. The WSJ reports today on trading in AIG stock. Among interesting items in the story with our comments in ( ):

A year after the government sought to avert a market meltdown by rescuing some of the country's biggest financial firms, speculative traders are feasting on these companies' remains. Shares of two government wards, mortgage giants Fannie Mae and Freddie Mac, bounced between about 60 cents and $2 in August. Shares of Lehman Brothers, left to fail by the government and currently in bankruptcy proceedings, rose from five cents to 20 cents in recent weeks.....

Dominating the recent move in AIG stock were professional day traders like those at T3. But Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. also owned AIG shares during the run-up, according to people familiar with the matter. Fund managers including AllianceBernstein LP and Davis Selected Advisers also held the shares during a portion of the run-up, according to fund documents.....

Alex Herrera, head of Soldier Capital LLC, a 26-member day-trading firm in Ramsey, N.J., has been among those buying and selling AIG. A former floor trader on the New York Stock Exchange, Mr. Herrera says he often trades blocks of 100,000 shares, using funds he borrows through the firm to make bets of as much as 15 times the size of his portfolio...... (Violating margin rules in the process)

Staring at his computer, flanked by a wall-size print of reggae singer Bob Marley, Mr. Glick shorted roughly 2,000 shares of AIG, selling borrowed shares with the intention of replacing them with cheaper shares if the stock declined. Like most day traders, he didn't hold onto his short positions overnight. He says he made about $1,000 from AIG trades in the week following the split. (Did he borrow the shares? We have read that AIG is a tough borrow.)
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As retail stocks make new highs for the year the WSJ reports that: Nearly half the nation's 25 biggest retail chains expect to hire fewer holiday workers this season than they did last year, another sign that retailers aren't counting on recession-strained shoppers to relax the tight grip on their pocketbooks this year.
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WSJ: Ivy Zelman, chief executive of Zelman & Associates, a research firm based in Cleveland, believes three million to four million foreclosed homes will be put up for sale in the next few years. The question is whether the flow of these homes onto the market will resemble "a fire hose or a garden hose or a drip," she says.

Analysts who track the shadow market have focused primarily on the gap between the number of seriously delinquent loans and the number of foreclosed homes for sale by mortgage companies. A loan is considered seriously delinquent, which typically means it is headed to foreclosure, if it is 90 days or more past due.

As of July, mortgage companies hadn't begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn't yet acquired the property. The figures don't include home-equity loans and other second mortgages

Moreover, there were 217,000 loans in July where the borrower hadn't made a payment in at least a year but the lender hadn't begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren't in foreclosure, up from 8% a year earlier.
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WSJ: Yale University, regarded as the most innovative college investor of recent decades, posted an annual investment loss of 25% in its latest fiscal year, putting an exclamation point on a period of downturns in U.S. campus fortunes. Yale blamed its losses on big bets on real estate and commodities during the wider downdraft in investments of all kinds. Yale’s strategy, favoring illiquid investments such as timber, had until this past year generated chart-topping returns. (The nice thing about real estate is that the investor can show positive returns until a serious recession hits because it is just a matter of placing a 10% increase in value on the assets every year. Who’s to argue? We would bet that there is no way Yale could sell its timber land for any where close to the value it has placed on the timberland in this years’ valuation-even though they probably marked it down from last year.)
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Our worry too:

WaPo by Steven Pearlstein http://www.washingtonpost.com/wp-dyn/content/article/2009/09/22/AR2009092203737.html?hpid=topnews

Wednesday, September 23, 2009

Less encouraging is what's happening on Wall Street. It turns out that all those bold and necessary steps by the Federal Reserve to prevent the financial system from collapsing wound up creating so much liquidity that it has now spawned another financial bubble.

Let's start with the $1.45 trillion that the Fed has committed to propping up the mortgage market -- money that, for the most part, was simply printed. Effectively, most of that has been used to buy up bonds issued by Fannie Mae and Freddie Mac from investors, who turned around and used the proceeds to buy "safer" U.S. Treasury bonds. At the same time, the Fed used an additional $300 billion to buy Treasurys directly. With all that money pouring into the market, you begin to understand why it is that Treasury prices have risen and interest rates fallen, even at a time when the government is borrowing record amounts of new money.

As it was printing all that money, the Fed was also lowering the interest rate at which banks borrow from the Fed and each other, to pretty close to zero. What didn't change was the interest rate banks charged everyone else. As a result, "spreads" between what banks pay for money and what they charge are near record highs.

So who is borrowing? By and large, it's not households and businesses, which are reluctant to borrow during a recession. Rather, it's hedge funds and other investors, who have been using the money to buy stocks, corporate bonds and commodities, driving prices to levels unsupported by the business and economic fundamentals.

The excess liquidity is even being used to finance a new "carry trade" in which global investors borrow at U.S. rates and buy government bonds in places like Australia, where prevailing rates are higher. Because the carry trade involves exchanging dollars for foreign currencies, it has been a major contributor to the recent decline in the dollar.
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We repurchased Dell in larger accounts. Dell is off 10% in the last few days on the news of the Perot Systems purchase. We also added Kraft to accounts. It yields 4% and off 10% in the last month on its Cadbury bid we also added US Bancorp to accounts that own Verizon. USB has repaid TARP and suggested it will raise its dividend next quarter. It is one of the better regional banks but is still well off its two year highs. We hedged today’s purchases with an additional purchase of the SH in many accounts. With these additions accounts still remain less than 15% invested with the SH hedge considered. SH is not a perfect hedge but it will serve the purpose of mitigating risk in a very overbought market. Of course we will trade the stocks we own but we have the idea of holding them and adding to them in the coming major market correction.
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http://www.thedailybeast.com/cheat-sheet/?cid=hp:cheatsheet2#cheatrow_9492

Half of Bernie Madoff's victims weren't really victims, according to prosecutors. Federal officials are claiming that at the time of Madoff's arrest last December, half his active investors didn't lose money in his elaborate Ponzi scheme because they'd already withdrawn more than they contributed to the accounts, the New York Daily News reports. The less-lucky half of investors contributed more than they were able to withdraw. However, this model doesn't take into account how much investors thought they'd made, or the money they could have made (or lost) if they'd invested their funds in a legitimate firm.
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European stocks hovered around the flat line before the Federal Reserve's interest-rate decision, with a bevy of companies hitting shareholders for cash through rights offerings which are big in Europe but no longer used in the U.S.
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Fed leaves rates unchanged while saying the economy is stabilizing. The Fed also said that to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. 
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Oil ended off $3 at $68.75. Gold was unchanged at $1015.
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Stocks rallied after the Fed announcement to up almost 1% on the day but in the final hour stocks headed south closing lower on the day. The bears see a glimmer of hope in that action but it is only a glimmer. Breadth was negative and volume was moderate. We will be watching but not writing for the next two days.
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22 September 2009

Thoughts

Model Portfolio Value As of 22 September 2009

$ 572,720

Happy Fall.
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Asian markets were mixed overnight and European bourses are higher at midday. U.S. stocks are set to open higher and Oil has gained back half of what it lost yesterday with a $71 handle in current trading. Gold is also higher.
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Lowe's said it expects 2010 earnings of $1.13 to $1.21 a share. Wall Street analysts expect earnings of $1.21 share. Conagra reported lower sales and earnings but beat estimates. Since the name of the game is beating estimates and not the actual results Conagra is higher and Lowes is lower in pre-market trading.
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Volatility hedge funds returned 0.83 percent this year through August after returning 3.2 percent in 2008, according to the Newedge Volatility Trading Index. Hedge funds gained about 14 percent this year after losing a record 19 percent last year, according to Hedge Fund Research Inc.

We didn’t know what a volatility fund is so: Volatility funds bet purely on swings in volatility. And they live for weeks like June 8-15, when the Standard & Poor's 500-stock index fell nearly 3% in three trading sessions, then gained most of it back in the next two. .. Vol traders deal mostly in options on stock indexes and the Chicago Board Options Exchange's Volatility Index, known as the VIX or the "fear index," which tallies option prices to gauge expectations of near-term volatility. They are the folks who jam the markets up/down 1% and more when bullishness/fear is ripe.
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NYT: .... Despite the uproar over the Merrill deal, Bank of America and its leader, Kenneth D. Lewis, are moving quickly disentangle the bank from the federal bailout program. The bank said that it would pay the government $425 million for unused federal guarantees against losses at Merrill.

Interestingly, BAC could have been required to pay the Treasury $5 billion for the guarantee which essentially kept them in business. But of course the Government is being a patsy with the banks on the paybacks. Unfortunately the banks are not being as kind to mortgage holders who have problems.
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Say What?

NYT: Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

The banks are only healthy because the Treasury loaned them billions and the Fed flooded the system with trillions of dollars. Now the entity that is supposed to insure against bank failure s is going to be insured by the banks that it supposedly insures. And the banks will be using the dollars that the Treasury is lending to them at 0% interest so that the banks don’t have to pay increased fees to the FDIC to cover its losses.

Nuts.
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Reuters reports that Ford and its Chinese partner will announce plans on Friday for their third car manufacturing plant in China, where sales may soon outpace its existing capacity, an industry source said on Tuesday.
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We added Verizon to accounts. It pays a 6.4% dividend and was a recently downgrade caused it to sell off and it is down 10% since mid August. We think third quarter earnings will give the stocks a pop and we will collect a dividend on October 10 while we wait.

To hedge the Kroger, Verizon, and Ford which we will probably hold for a while we initiated a small percentage holding in the one times short S&P 500 (SH) in most accounts that hold those three issues. We may trade or hold.

The coming sell off we envision will affect the higher flying stocks more. Our aim is to build holdings in less volatile and relatively more stable stocks for a longer holding period. We are guessing that Verizon and Kroger will weather a 15% sell off much better than the average S&P 500 stock. And if the markets continue to rise we think VZ and KR will offset any drop in SH. We think the big boys and girls will want to lessen risk by adding staid companies if and as market measures move higher. Even bulls know some kind of correction is in the cards.

With these purchases we will probably await 3rd quarter earnings in October/November to add more positions.

The SH purchase mitigates market exposure in most accounts to about 3% to 10% net long.
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Yahoo/finance: The worldwide personal-computer market is pulling out of its slump quickly and could defy predictions by growing this year, Intel Corp. CEO Paul Otellini said Tuesday. It is interesting that the share price is only up 10 pennies on this news.
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European stocks recovered much of what they lost in the prior session, with the broader market in a holding pattern as traders awaited news from the U.S. Federal Reserve.
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Gold gained $10 to $1015. Oil jumped $1.84 to $71.52.
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http://www.globalresearch.ca/index.php?context=va&aid=15324

A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.
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http://www.americablog.com/

It would be cheaper to give illegal immigrants a round-trip ticket to Paris, than ban them in the health care reform bill

By John Avairos

.... President Obama wants to ban illegal immigrants from benefiting from the health care reform bill. .... The only problem is that under US law hospitals still have to treat them, and are reimbursed by the government. So in fact, we're still paying, regardless. All we're doing is sending them for more expensive care. I did a little math and found out that in some cases, we could actually save money over the GOP/Obama plan by simply sending the illegal immigrants to Paris for a week.

  1. Average cost of an emergency room visit in the US (per AARP): $1,000.00
  2. Fixed cost of an emergency room visit in France: 23 Euros ($33.80)
  3. Flight, DC-Paris-DC*: $700 (with one week stay, bought one week in advance)
  4. One week in a Paris hospital: $164.50 ($23.50-a-night times 7)
  5. Grand total of sending the illegal immigrant to Paris instead of treating in a US emergency room: $898.30

*Note that if it were a true emergency, you'd have to get a same-day ticket to Paris and that would cost around $2200. But, many times, people go to the emergency room for non-emergency care (and a real emergency wouldn't permit you to fly and delay treatment). But, if it weren't an emergency, if you wait just one week, the price of a round-trip ticket to Paris drops to just under $700, provided you stay for a week. And at the absurdly cheap rate charged for a night in a French hospital, almost $24, you can afford to spend a week, and then some.
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Never hear mention of the uptick rule any more.
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Paul Krugman:

I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case — and the president is surely smart enough to know that.

All I can think is that this was another example of something we’ve seen before: Mr. Obama’s visceral reluctance to engage in anything that resembles populist rhetoric. And that’s something he needs to get over.
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Stocks closed higher with the DJIA up 50 and the S&P 500 up 7. The NAZZ is now up 68% from its March lows. Breadth was almost 3/1 positive and volume was moderate. The bulls continue their rampage.
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21 September 2009

Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.

Albert Einstein

Thoughts

Model Portfolio Value As of 21 September 2009

$ 572,198

Jim Grant, the perpetual bear has turned bullish. In the Weekend WSJ
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http://online.wsj.com/article/ James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery.

Hain Foods is up $1.80 per share (10%) on three times normal volume this morning. Jim Cramer mentioned the stock as a better buy for Kraft than Cadbury on his show Friday night.

Ron Insana, the former CNBC anchor who left in the early part of the decade to create a fund of funds firm (folks gave him money to invest in hedge funds) ahs begun buying again after going to cash in August. Insana failed as a fund of fund manager but did have the good fortune to begin a model portfolio for his newly formed management company on March 10 2009. That portfolio is up something like 50% for the year but Insana still needs to make more by jumping back into stocks. Our guess is that he has taken on a lot of money in the last few months based in his record (of six months from a historic low) that hasn’t made anything like the 50% gain  he is touting and he is feeling internal pressure to do well for his new clients.

One of the reasons Insana gave for jumping back in is that Buffet said he is buying and Bernanke said things are getting better. Insana seems to have forgotten that Buffet was buying last year at this time and Bernanke was making positive pronouncements right up to the collapse.
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Asian was mixed overnight as is Europe at midday. Oil is down $2 with a $69 handle in the early going and Gold is also lower as the trading day begins. Stocks are going to open lower.
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Dell agreed to buy information-technology service provider Perot Systems, long seen as a Dell target, for about $3.9 billion as the world's No. 2 computer seller looks to diversify away from its core personal-computer business. The acquisition broadens Dell's current services offerings, creating a company with $8 billion in services revenue, and seeks to better position Dell among its more diversified rivals like Hewlett-Packard Co.
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On the rebound in stock prices:

http://www.hussman.net/wmc/wmc090921.htm
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As the markets make new highs the new high list is contracting. That is a negative.
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Ford is off 20% from its high one month ago and we repurchased shares in accounts.
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Krugman http://www.nytimes.com/2009/09/21/opinion/21krugman.html?_r=1&hp

Among U.S. homeowners with mortgages, a record 7.58 percent were at least 30 days late on payments in August, up from 7.32 percent in July, according to the data obtained exclusively by Reuters. August marked the fourth consecutive monthly increase in delinquencies, and the report showed an accelerating pace. By comparison, 4.89 percent of mortgages were 30 days past due in August 2008, while in August 2007 the rate was 3.44 percent, Equifax data showed.
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Be Worried:

A Curious Snag In Debt-For-Equity Restructurings As Goldman And JPM Do A Stealthy Roll Up Of The Media Industry
http://www.zerohedge.com/
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Oil closed down $2.50 at %69.75. Gold lost $5 to $1005. European stocks declined as traders moved away from the resource plays that have benefited from the global economic recovery.
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The major stock measures closed on their lows for the day as the bulls didn’t have enough energy (or care) to rally stocks in the last fifteen minutes as they have so often recently. But bulls remain in control as a 50 point drop in the DJIA is small change after the 50% run up from the March lows. Breadth was 2/1 negative and volume was moderate.
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18 September 2009

Shanah Tovah to everyone celebrating the New Year.

Thoughts

Model Portfolio Value As of 18 September 2009

$ 572,650

Asian markets were lower overnight. Gold is at $1015 and Oil has a $72 handle as the trading day begins.
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PG was raised to a buy at Citi and that is helping the DJIA.
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Floyd Norris, NYT: The student loan system has a lot of problems, and there have been scandals. Perhaps the worst part of it is that for-profit schools of little if any repute manage to use it to collect cash for enrolling students who they will not, in fact, educate. That leaves those unfortunate students with debt they cannot pay, and the government with losses. I hope the Obama administration will find a way to deal with that.
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We get e-mails:

Hi Bud,

A couple of items:

Received a trade conformation on a treasury bill that may have been for another account.

And what do you think about limited partnerships.

Have a great day,

 

We respond:

We bought the Treasury bill for you to get accounts under $500 M because we are going to an insured C/D money fund and there are only 2 banks names we want to own at $250 M each for now. The bills mature in December.

We don't like limited partnerships because the general partner controls what the limited partners own. Usually, as in real estate, the general partner also owns real estate aside from the partnership (same for oil) and thinks it is too much of a temptation for the general to place the best stuff in its own account.
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A J.P. Morgan analyst lifts his view on the home-builder sector to positive from negative, saying the housing market has made it through the worst of the correction.
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Discussion of Wells Fargo loans:

http://bankimplode.com/blog/2009/09/17/wells-fargo-s-commercial-portfolio-is-a-ticking-time-bomb-exclusive/
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Most European markets pulled back from recent gains, as profit-taking hit commodity-sector stocks.
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Oil closed at $71.86. Gold closed at $1010.
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Stocks closed higher on Quadruple Witching Friday with breadth almost 2/1 positive and major measures on yearly highs. Volume was active but low for a Witching day. The bears are licking their wounds which are getting more serious by the trading hour.
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Rosh Hashanah (Hebrew: ראש השנה‎, literally "head of the year," Biblical: ɾoʃ haʃːɔˈnɔh], Israeli: ʁoʃ haʃaˈna], Yiddish: [ˈrɔʃəˈʃɔnə]) is a Jewish holiday commonly referred to as the "Jewish New Year." It is observed on the first day of Tishrei, the seventh month of the Hebrew calendar,[1] as ordained in the Torah, in Leviticus 23:24. Rosh Hashanah is the first of the High Holidays or Yamim Noraim ("Days of Awe"), or Asseret Yemei Teshuva (Ten Days of Repentance) which are days specifically set aside to focus on repentance that conclude with the holiday of Yom Kippur.

Rosh Hashanah is the start of the civil year in the Hebrew calendar (one of four "new year" observances that define various legal "years" for different purposes as explained in the Mishnah and Talmud). It is the New Year for people, animals, and legal contracts. The Mishnah also sets this day aside as the New Year for calculating calendar years and sabbatical (shmita) and jubilee (yovel) years. Rosh Hashanah commemorates the creation of man whereas five days earlier, on 25 of Elul, marks the first day of creation.

The Mishnah, the core text of Judaism's oral Torah, contains the first known reference to Rosh Hashanah as the "day of judgment." In the Talmud tractate on Rosh Hashanah it states that three books of account are opened on Rosh Hashanah, wherein the fate of the wicked, the righteous, and those of an intermediate class are recorded. The names of the righteous are immediately inscribed in the book of life, and they are sealed "to live." The middle class are allowed a respite of ten days, until Yom Kippur, to repent and become righteous; the wicked are "blotted out of the book of the living." http://en.wikipedia.org/wiki/Rosh_Hashanah
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17 September 2009

Thoughts

Model Portfolio Value As of 17 September 2009

$ 572,657

Happy Anniversary

WSJ: Housing starts rose a less-than-expected 1.5% compared to the prior month, the Commerce Department reported Thursday, as single-family home construction fell and groundbreakings on new apartment buildings rebounded. Permits for new buildings climbed 2.7%. Economists had expected permits to rise by 4.6%. The number of workers filing new claims for jobless benefits fell by 12,000 last week to 545,000. Economists had expected an increase in claims. In currency markets, the dollar fell to new lows, with the euro rising as high as $1.4766. Oil had a $72 handle based on stronger equity markets and a weaker dollar against the euro, but gains were capped due to concern over mounting U.S. products inventories. Overseas, European markets were higher midday; Asian markets hit new multimonth highs, as China closed at a 13-month peak. Gold is unchanged at $1020.

AMR was up more than 24% after it said it obtained $2.9 billion in added liquidity and new aircraft-leasing financing while announcing a big retrenchment. FedEx shares slipped 0.6% after the package-delivery giant reported its first-quarter earnings slumped 53%. Last week, the company expressed optimism for the current period amid anticipation of "a continued modest recovery in the global economy."

Oracle shares were down 2.5% after the company reported that sales slipped in a typically slow Aug. 31-ending first quarter, with license sales falling 17%. Its profit rose 4%.
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European shares ended higher, with banks and aviation-linked shares rising amid optimism over a global economic rebound.
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Article on the Federal Government funding small airports to the tune of billions of dollars.

http://www.usatoday.com/travel/flights/2009-09-17-little-used-airports_N.htm
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Oil ended unchanged at $72.81 and Gold lost $3 to $1017.
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Stocks closed slightly lower on Thursday in active trading. The bulls remain in control.
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16 September 2009

Thoughts

Model Portfolio Value As of 16 September 2009

$ 573,063

At the close yesterday we bought shares of Kroger in larger accounts at $20.50 which was down $1.50 on the day. The shares were within $1 of their 52 week low. KR is a low risk trade.
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Asian markets were higher except China which was down 1%. European markets are higher at midday and U.S. markets look to open higher again. Oil is $71 and Gold is at $1020 on its way to infinity.
*****

The consumer price index was up 0.4% on a monthly basis in August, the Labor Department said Wednesday. That was in line with expectations of economists surveyed by Dow Jones Newswires. Core CPI, which excludes food and energy prices, increased 0.1%, as expected. Unrounded, CPI advanced 0.447% last month, while the core index was up 0.068%.
*****

Not kosher: Citigroup Chairman Richard Parsons is joining private-equity firm Providence Equity Partners as a senior adviser but plans to remain in his Citigroup post. What Parson’s learns on the Citi board will be of great value to the hedge fund he is part of.
*****

The new capitalism: heads the government pays, tails the government pays.

(NYT): When Congress passed an $8,000 tax credit for first-time home buyers last winter, it was intended as a dose of shock therapy during a crisis. Now the question is becoming whether the housing market can function without it.

As many as 40 percent of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February. In the view of the real estate industry and some economists, all that money is well spent. They contend the credit is doing what it was meant to do, encouraging a recovery in the housing market that is gathering steam. Analysts say the credit is directly responsible for several hundred thousand home sales.

Skeptics argue that most of the money is going to people who would have bought a home anyway. And they contend that unless it is allowed to expire on schedule in late November, the tax credit is likely to become one more expensive government program that refuses to die.

The real estate industry, including the powerful 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer. The group hopes to expand the program to $15,000 and to allow all buyers, not just those who have been out of the market for at least three years, to qualify. The price tag on that plan: $50 billion to $100 billion.
*****

The new capitalism: heads the banks win, tails the banks win.

(FT): The US government should help revive the moribund market for big mortgages by getting Fannie Mae and Freddie Mac to buy large home loans from banks, the chief executive of the lender Wells Fargo urged on Tuesday. Fannie and Freddie can currently buy or guarantee mortgages worth up to $417,000. The stimulus plan approved last year set the companies higher limits of up to $729,750 in certain high-cost areas such as California until the end of 2009. Congress has to approve any extension of those higher limits. “I would like to see Fannie and Freddie increase the size of mortgages [they buy],” Mr. Stumpf said. “It would be good for housing and good for the economy”.
*****

When Obama gets everything he said was needed for single payer he changes his mind.

“I happen to be a proponent of a single-payer, universal health care plan,” then-U.S. Senate candidate Obama said at an AFL-CIO event in 2003, using the terms that commonly refer to a government-run health insurance system. “Everybody in, nobody out, a single-payer health care plan, universal health care plan — that’s what I’d like to see,” he said. “But as all of you know, we may not get there immediately, because first we’ve got to take back the White House. And we got to take back the Senate, and we got to take back the House.” Obama has said repeatedly that he doesn’t now support a single-payer system — where the government is the sole provider of health insurance across the country. (http://www.americablog.com/)
*****

(Bloomberg) -- Warren Buffett, the billionaire investor who last year called the financial crisis an “economic Pearl Harbor,” said the U.S. economy has “hit a plateau at bottom.” “We have not bounced but we’ve quit going down,” Buffett said today in an interview on CNBC. “We’re through the worst of it in residential real estate in all probability,” adding that he doesn’t expect a “double-dip” recession.
*****

No connection?

9/2/09: Today, Goldman, never too far behind, especially in names in which it is significantly axed in CDS and other OTC products, upgraded Textron maker from Neutral to Conviction Buy, with a price target increase from $16 to $23. 9/16/09: Textron issued $600 million in new notes with Goldman one of the folks running the books on the bond sale. (http://www.zerohedge.com/)
*****

European shares ended up 1% and higher, with miners and autos fronting the gains amid hopes for a sustained global economic recovery.
*****

Baucus introduced his health reform (?) bill and United Health, Aetna and Humana all jumped $1 in price. That says it all.
*****

Gold closed at $1018 and Oil gained 90 pennies to $71.83.
*****

Furthermore, the persistent bid for treasuries is there. As the money market guarantee is set to expire in the next few days, is this merely a last minute push by advisors telling their clients to get out of MMs and into the "safety" of any and all other asset classes? And speaking of money market accounts: we are now back to the pre-Lehman levels. All the "money on the sidelines" that moved out of equities as a result of the events since the Lehman collapse is now back in. (http://www.zerohedge.com/)
*****

A presentation of shipping vessels in use and not in use around the world using Google. Worth a gander:
http://www.zerohedge.com/article/thousands-rusting-ship-hulls-are-fitting-tribute-speculative-market-bubble
*****

Stocks closed plus 1% and higher today on increased volume and 3/1 positive breadth. There were over 500 new 52 week highs today.

The bulls are rolling in clover.
*****

 

15 September 2009

Thoughts

Model Portfolio Value As of 15 September 2009

$ 572,397

Asian markets were slightly higher overnight as are European markets at midday and U.S. markets pre-opening. Gold is flat at $1000 and Oil has a $69 handle as the trading day begins.
*****

Retail sales were better than and Kroger lowered guidance while Illinois Tool Works raise guidance. Yahoo was raised at Bernstein.
*****

WSJ: U.S. retail sales jumped in August as car dealers cashed in on "clunkers," getting a big boost from the government car rebate program, according to a report that also showed other merchants faring well in an unexpected sign of consumer resilience. Separately, U.S. producer prices rebounded sharply last month on the back of rising gasoline and other energy costs, though core prices posted only a slight gain. Retail sales last month exceeded expectations and rose 2.7%, the Commerce Department said Tuesday. Wall Street was looking for a 2.0% jump. While much of that big gain came from cars and gasoline, other sales rose 0.6%; that was the second increase in six months within the ex-car, ex-gas category. Consumer spending makes up 70% of gross domestic product, which is the broad measure of U.S. economic activity.
*****

The game these days and thus the price of the stock is dependent on the guessing game of what earnings will be versus what they eventually are. In this vein Best Buy's earnings for its fiscal second quarter fell 22% as sales continued to fall and the company's international business swung to a loss.

But the consumer-electronics retailer raised its outlook for the fiscal year because first-half revenue "modestly exceeded" expectations and customer traffic showed signs of stability and so the share price will be higher this morning.
*****

The Treasury has a $10 billion gain on the 7 billion shares of Citi it owns and is considering selling shares in blocks or dribbling it out over time. We wonder who is going to get the order to sell it.
*****

Bloomberg: Manufacturing in the New York region grew in September at the fastest pace in almost two years, a sign factories are helping pull the economy out of a recession. The Federal Reserve Bank of New York’s general economic index increased to 18.9 from 12.1 in August, the bank said today. Last month’s report was the first time since April 2008 that the reading was above zero, the dividing line between expansion and contraction for the Empire State index.
*****

The judge threw out the BankAmerica settlement with the SEC and so now the SEC has to try a case it wanted to settle.
*****

Genworth Financial is selling common stock to raise roughly $500 million in new capital. The share price is ten times higher than it was in March.
*****

Robert Reich: So will the President succeed on financial reform? I wish I could be optimistic. His milktoast list of proposed reforms is inadequate to the task, even if adopted. The Street's behavior since its bailout should be proof enough that halfway measures won't do. The basic function of commercial banking in our economic system -- linking savers to borrowers -- should never have been confused with the casino-like function of investment banking. Securitization, whereby loans are turned into securities traded around the world, has made lenders unaccountable for the risks they take on. The Glass-Steagall Act should be resurrected. Pension and 401 (k) plans, meanwhile, should never have been allowed to subject their beneficiaries to the risks that Wall Street gamblers routinely run. Put simply, the Street has been given too many opportunities to play too many games with other peoples' money.

But, like the health care industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. And with the Dow Jones Industrial Average trending upward again -- and the public’s and the media's attention focused elsewhere, especially on health care -- it will be difficult to summon the same sense of urgency financial reform commanded six months ago.
*****

The Health Care Industry has pledged to spend $150 million on advertising supporting the Gang of Six Senate Health Reform Plan (who represent about 1% of the total population of the country) which doesn’t have a public option. It will be money well spent.
*****

Strange but true: With the White House zeroing in on the insurance-industry practice of discriminating against clients based on pre-existing conditions, administration allies are calling attention to how broadly insurers interpret the term to maximize profits. It turns out that in eight states, plus the District of Columbia, getting beaten up by your spouse is a pre-existing condition. Under the cold logic of the insurance industry, it makes perfect sense: If you are in a marriage with someone who has beaten you in the past, you're more likely to get beaten again than the average person and are therefore more expensive to insure. http://www.huffingtonpost.com/2009/09/14/when-getting-beaten-by-yo_n_286029.html.
*****

Beach House story cont: Wells Fargo has fired a senior vice president after investigating reports she held lavish parties at a foreclosed beachfront Malibu house owned by the bank. The fourth-largest U.S. bank said in a statement on Monday that it had terminated one employee, senior vice president Cheronda Guyton, who it found had violated its policies.
*****

The proposed health care legislation would give additional federal money to help states pay for newly eligible Medicaid enrollees. And a higher percentage of those newly eligible would live in states that so far have made it hardest for people to qualify for Medicaid.

Alabama, for instance, sets its eligibility cutoff for parents at 11 percent of the federal poverty level. That means that a couple with two children would qualify for Medicaid only if they earn less than $2,500 per year. (If that’s all they earn the family has more problems than no health care.) A couple earning more would not be considered poor enough to qualify.

Compare that to the Medicaid cutoff in more generous states, most of them traditionally blue. Medicaid is offered to parents earning 100 percent of the poverty limit in California; 150 percent in New York; 185 percent in Illinois; 200 percent in Maine, New Jersey and Wisconsin; and 275 percent in Minnesota.

A crazy quilt of eligibility rules obtains around the nation. (In more grandiose moods, we describe this as “the laboratory of the states.” It’s an example of “American exceptionalism.”) In Alabama, a two-child couple who earn $3000 per year are too rich to qualify for Medicaid. In Minnesota, a couple can qualify if they make upwards of $50,000.

In the current debate, this matters big-time because, under proposed reform, additional federal money would only go to cover newly eligible enrollees. The states which had already been more generous would therefore get the shaft. http://www.dailyhowler.com/index.shtml
*****

High yield bond funds:

CHGO Trib: Former Chicago Bull Horace Grant won a $1.46 million arbitration award against Morgan Keegan & Co. for losses in some bond mutual funds, the largest victory against the brokerage firm to date for his Chicago-based lawyer.

The award, announced Friday, represents nearly all of the unrealized losses Grant allegedly suffered as of January 2008, said his attorney, Andrew Stoltmann.

Grant had alleged that Morgan Keegan, a Memphis-based broker, sold him four high-yield bond funds with more risk in them than he was told. He initially invested about $3 million with Morgan Keegan eight years ago, Stoltmann said. Morgan Keegan marketed the funds as conservative investments appropriate for retirees looking to protect their principal, Stoltmann said.

In 2007, the four funds plummeted by an average of 58 percent, according to Grant's complaint filed in March 2008 with the Financial Industry Regulatory Authority, or FINRA, which runs the arbitration forum for investors. Similar bond funds lost 6.9 percent that year, the complaint said.

The Morgan Keegan funds were clobbered by the meltdown in subprime residential mortgages, largely because they invested in risky debt-related securities and other mortgage-related holdings. Stoltmann claimed that Morgan Keegan failed to disclose the funds' large concentrations of such securities, an allegation that the brokerage firm had denied.

The FINRA arbitration panel did not provide any reasons for finding in favor of Grant, who did not return phone calls seeking comment. Grant, who lives in California, retired in 2004from the NBA. Morgan Keegan said in a statement that "arbitration cases turn on their individual facts and we don't agree with the outcome."

The brokerage firm, a unit of Regions Financial Corp., a bank based in Birmingham, Ala., faces a flood of arbitration claims from investors related to its high-yield bond funds. Investors in the funds reportedly lost more than $2 billion in 2007.

Stoltmann said he has about 60 cases against Morgan Keegan pending before FINRA. He lost his first few cases against Morgan Keegan, according to FINRA records, but has won his last four. His biggest previous award in a Morgan Keegan case was about $700,000, Stoltmann said.

"Grant's award is important because it shows that arbitrators can comprehend these complex investments and hit a brokerage firm hard for subprime losses," Stoltmann said.

A Morgan Keegan representative said that investor claims have been denied in about half of arbitrations cases heard to date. FINRA has so far heard 57 Morgan Keegan cases related to its high-yield mutual funds.

Last year, complaints involving mutual funds outnumbered complaints involving stocks for the first time, according to FINRA statistics. The phenomenon has continued so far this year.
*****

The U.S. Treasury Department adopted rules allowing lenders to revise commercial real estate loans without triggering tax penalties in an effort to stem a rise in defaults. What this means is that investors in commercial real estate get to keep their tax deductions and depreciation even though the terms of the original purchase and loan are lowered. Nice work if you can get it.
*****

News flash: Ben says recession over

WSJ: U.S. Federal Reserve Chairman Ben Bernanke made his most emphatic declaration yet that the recession has ended, as a separate data release Tuesday showed a rebound in retail sales. But Mr. Bernanke reiterated that tight credit conditions and a soft labor market will prove to be a challenge.

From a technical perspective, the "recession is very likely over at this point," Mr. Bernanke said in a question-and-answer session at the Brookings Institution. But he added that even if recovery is under way, the economy will still seem weak because credit conditions remain tight and any decline in the unemployment rate will probably happen gradually. He noted that one risk is that the economy will grow in the second half of 2009, but not enough to trigger a rapid recovery in employment.
*****

The way capitalism used to work is that a company that couldn’t refinance would file bankruptcy and the bondholders would divide what’s left. The new way exacerbates the problems that are then never solved.

WSJ: One year, two CEOs, and $82 billion since the government rescue of American International Group, monsters are still rattling in the closet. You wouldn't know it from the outside, with new CEO Robert Benmosche exuding confidence from his Croatian villa and AIG shares up nearly 70% during the past four weeks. But inside the offices of AIG and its government minders, there is a push to rescue one of AIG's most important units. It is the largest airplane-finance company in the world, known as International Lease Finance Corp., and like much of this country, it can't pay its coming debts. AIG needs to save ILFC without hurting a core insurance business that has equity in the unit. And it must do so without raising the ire of taxpayers and Congress. In other words, AIG must figure out how to feed the beast without being consumed by it. Whether there is the political will, the financial acumen, and the dumb luck to pull off all these objectives is an unknown. But taxpayers should tune in because a likely scenario is that they will end up paying for much of this smaller rescue, too. Already, there is a consensus that the current ILFC doesn't make financial sense. The business, whose $47 billion balance sheet holds some 1,000 aircraft, used to piggyback off AIG's sterling credit rating. That meant it could issue debt at a low cost of just 4% to 5%, buy aircraft and lease them at higher rates. The business was so solid that AIG invested some surplus capital of one insurance subsidiary -- used to back policies -- directly into ILFC. The credit crisis pushed ILFC's borrowing costs up by nearly three times, according to a recent report by CreditSights. And there is a wave of debt coming due. The figure is about $18 billion over the next three years, and $30 billion overall. The problem is that bond investors aren't willing to re-up. Though ILFC still produces a large chunk of annual cash flow -- and has the explicit backing of AIG for 11 more months -- the company is in a clear liquidity crisis, with a shortfall of around $5 billion to $6 billion, according to people familiar with the matter. Bankruptcy would be the normal course for companies in this bind. But neither AIG nor the government has given up on ILFC, as both hope to extract some value from the company once considered AIG's crown jewel.
*****

Market volume is low and 80% of volume is select financials. Overall volume is 70% of the August rally volume which was low. The old saying was that volume precedes price, i.e. high volume means higher prices, low volume means lower prices. In the computer age that old saying may not have any value, or maybe it does.
*****

European markets ended higher, as better-than-expected U.S. retail sales fuelled hopes of a sustainable recovery in the global economy.
*****

LAT: Southern California median home price climbs 2.6% in August. The price is still 45.5% below the 2007 peak and 16.7% lower than a year earlier. Sales are limited because fewer foreclosed homes are on the market.
*****

Gold closed at $110 and Oil was up $2 at $71.08.
*****

Barclays Plc President Robert Diamond said “there isn’t any banking without risk” and that anyone who can’t take chances should leave the industry.

“We need banks that are confident and banks that are willing to take risks,” to “get the economy going again,” Diamond told the British Broadcasting Corporation’s Radio 4 today. Anyone unwilling to take risks should “get out of banking,” he added. ... There isn’t a banker that didn’t make mistakes in the past couple of years,” Diamond said. “I certainly know I learnt some valuable lessons.”

Diamond is the fellow who bought Lehman’s trading division for Barclays at the height of the crisis. There is risk and there is risk. And there is hubris.
*****

Stocks continued their inexorable shimmy higher in light trading with breadth 2/1 positive on the NYSE. The bulls remain in control. This is an expiration week so one counter-trend day should be expected.
*****

 

14 September 2009

Thoughts

Model Portfolio Value As of 14 September 2009

$ 572,451

Stocks look to open lower after the evil Obama’s minions are being accused of starting a trade war with China by imposing a tariff on Chinese tires. Asian markets were lower overnight except China which was up 1%. Europe is lower, Gold is at $999 and Oil has a $68 handle as Quadruple Witching week begins.
*****

Eli Lilly plans to cut about 5,500 jobs, or about 14%, by 2011, lowering its global work force to 35,000 in a bid to slash costs by $1 billion and speed up development of new medicines.
*****

Strange but true. The DJIA closed on 9/10/01 at 9605. And it closed on 9/11/09 at 9605.
*****

We sure do like certain anniversaries in this country. Friday was 9/11 and today is the anniversary of Lehman collapse last year. Obama goes to Wall Street to speak about reform? Yet we never hear of the Oklahoma City bombing or commemorate its anniversary with presidential visits. Nor were the families of its victims compensated with million dollar settlements. http://www.apfn.net/Messageboard/04-17-05/discussion.cgi.5.html
*****

http://www.huffingtonpost.com/2009/09/13/risktaking-is-back-for-ba_n_285069.html

http://www.huffingtonpost.com/robert-reich/the-continuing-disaster-o_b_285578.html
*****

Most European shares fell for the first time in eight sessions, with miners under pressure as investors pulled back from riskier trades in light of a possible trade war between the U.S. and China.
*****

Gold ended at $999 and Oil closed at $68.85 down 44 pennies. One reason proffered for it being lower was concern that the CME might begin enforcing position limit rules.
*****

Stocks closed a bit higher in desultory trading. The bulls remain in control until further notice.
*****

 

11 September 2009

Thoughts

Model Portfolio Value As of 11 September 2009

$ 572,451

The news this morning is that John Mack is out as CEO of Morgan Stanley. The talking heads are making a big deal of the fact that Morgan Stanley’s earnings were not up to the level of Goldman because Mack didn’t take as much risk and leverage Morgan as much as Goldman was leveraged. And so maybe the takeaway is that leverage will keep your job, as long as you are leaning the right way. And that is the same old same old.
*****

Gold is back over $1000 and Oil has a $72 handle in the early going. Asian shares ended mostly higher, getting a boost from a batch of upbeat Chinese economic data, but Japan stocks fell 0.4%, weighed by the strong yen and slower growth. Chinese stocks climbed over 2% after a raft of data from the country, including a 15% increase in retail sales and a 12% rise in industrial output. Money Supply was up 28%. Can anyone say inflation? Europe stocks were up at midday for a seventh day in succession.
*****

Not all suffer from foreclosures: http://www.huffingtonpost.com/2009/09/11/wells-fargo-exec-in-charg_n_283031.html

A Wells Fargo & Co. executive who oversees foreclosed properties hosted parties and spent long summer weekends in a $12 million Malibu beach house, moving into the home just after it had been surrendered to Wells Fargo to satisfy debts, neighbors said.

The previous owners of the beachfront home in Malibu Colony, a densely built stretch of luxury homes that has been a favorite of celebrities over the years, were financially devastated in Bernard Madoff's massive fraud scheme, real estate agent Irene Dazzan-Palmer said.

The couple signed the property over to Wells Fargo last spring, and the bank subsequently denied requests to show the house to prospective buyers, Dazzan-Palmer said.

Residents in the gated community told the Los Angeles Times that a woman they believe was Cheronda Guyton took up occupancy at the home in May. Residents said they obtained Guyton's name from the community's guards, who had issued her a homeowner's parking pass.

Residents also wrote down the license plate number of a 2007 Volvo sport-utility vehicle they say was parked in the home's garage. A check of state motor vehicle license plates by the Times found the vehicle was registered to Guyton.

Guyton is a Wells Fargo senior vice president responsible for foreclosed commercial properties, resident Phillip Roman said.
*****

The total value of Harvard's endowment plunged nearly 30 percent in the last fiscal year as the Ivy League institution's portfolio was battered by the worldwide recession, the university's management company said. The endowment stood at $26 billion on June 30, after distributions and donations, the university said Thursday. It stood at $36.9 billion 12 months earlier, at the close of the previous fiscal year.
*****

http://digbysblog.blogspot.com/ : The U.S. Census Bureau has just announced that the poverty rate for 2008 was 13.2%. This means the number of people in poverty has increased by about 2.5 million, to 39.8 million. To give you some perspective, 2.5 million is more than the number of people who live in Detroit and San Francisco combined. The Census data does not take into account that the numbers come before the job loss in the first 8 months of this year. In addition to the uptick in the poverty rate, real median household income fell 3.6%, the biggest drop in 40 years. The richest tenth of one percent saw their incomes rise by 35% over the last 10 years while median incomes stayed flat; and the number of Americans lacking health insurance increased by about 700,000 to at least 46.3 million, which does not account for the under-insured.
*****

Michael Pollan, NYT: http://www.nytimes.com/2009/09/10/opinion/10pollan.html?_r=2&ref=opinion : There’s lots of money to be made selling fast food and then treating the diseases that fast food causes. One of the leading products of the American food industry has become patients for the American health care industry.
*****

http://finance.yahoo.com/marketupdate: Preliminary consumer sentiment survey from the University of Michigan. The survey hit 70.2, which is better than the 67.5 that was expected and up from the 65.7 that was registered in August. Separately, wholesale inventories for July fell 1.4%, which is a bit steeper than the 1.0% decline that was widely expected. However, July's figure wasn't as bad as the downwardly revised 2.1% decline that was registered in June.
*****

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks. http://www.nytimes.com/2009/09/06/business/06insurance.html Wall Street is developing a new use for the securitization process — bundling life insurance policies and selling them as bonds to investors who would be betting, in essence, on when the policyholders will die. http://trueslant.com/matttaibbi/: What’s very amusing about this New York Times article is that, while describing this, there is no passage that reads anything like, “This utterly insane plan, which will condemn all those involved with it to an eternity of elaborate torment in the afterlife, is ironically being promoted by the very institutions that only just recently tried to destroy the world by creating similar casino-like gambits based on home ownership.”....

This feels like financial innovation as practiced by Josef Mengele meets the Zucker Brothers; not just evil, but wacky evil. I don’t even want to think about what happens when Goldman Sachs suddenly has a large financial stake in the premature deaths of a bunch of old people. Where are the crazy police? Where is the crack federal crazy squad with the big butterfly net? I don’t know about betting on anyone’s life expectancy, but I think I’d like to bet on whether or not this idea ends well.
*****

Oil closed at $69.29 down $2.65. Gold finished the week in NYC at $1007 up $10 on the day.
*****

Here is an interesting article on Barclay’s taking over Lehman in September 2008: http://www.esquire.com/features/barclays-deal-of-the-century-1009
*****

This is what investing has come to:

Structured Products Online is reporting that JPMorgan has launched a new product that uses ETFs to gain exposure to real estate and banking stocks. The new "accelerated growth note" will feature 200% exposure to each of the following ETFs: Financial Select SPDR (XLF - commentary - Trade Now), iShares Dow Jones U.S. Real Estate Index (IYR - commentary - Trade Now) and SPDR S&P Homebuilders (XHB - commentary - Trade Now).

The duration of the new note will be two years, with upside performance capped at 48.5% and downside performance buffered at 15%. This accelerated growth note combines debt and equity structure along with leveraged returns. With leveraged ETFs under the gun, this product finds a way to leverage ETFs through a different structure. Perhaps the most notable aspect of this new note is the bullishness of its bet, but sophisticated investors can avoid the risk of the note by using margin or leveraged ETFs along with stops to create a position with limited downside risk and even greater upside potential.
*****

No, we don’t know what the above post means.
*****

Stocks closed slightly lower in slow trading. Breadth was flat.

The bulls held serve.
*****

 

10 September 2009

Thoughts

Model Portfolio Value As of 10 September 2009

$ 572,451

Asian markets ended mostly higher, with Japan's benchmark index gaining as bargain hunters snapped up banks and technology stocks after recent declines. Texas Instruments, PG, and General Mills all raised guidance while Monsanto cut.

The number of people filing for state unemployment benefits for the first time fell 26,000 to a seasonally adjusted 550,000 last week, the lowest since mid-July, the U.S. Labor Department reported. Initial claims have been in a fairly narrow range for the past eight weeks. The number of people collecting regular state benefits fell by 159,000 in the week ending Aug. 29 to a seasonally adjusted 6.09 million, the lowest number since April.

The reason the continuing number is falling is that benefits are expiring, not that the folks got work.
*****

Home foreclosures in August jumped 18 percent from a year ago, but decreased 0.47 from the previous month, according to a new report by RealtyTrac, an online marketplace for foreclosure properties. In all, 358,471 properties in the United States received foreclosure fillings in August, just slightly below July's record level of 360,149 properties.
*****

Robert Marcin, realmoney.com: ...another couple trillion to go? One of the most egregious yet low key programs in the Fed's attempt to rebubble the economy hit a milestone last week. Officially, the Fed has purchased over $1 trillion of government debt, agency debt, and rmbs since the Infinite Intervention began. And Bernanke says with a straight face that they are not monetizing debt.

I guess there is little commentary on Bubblevision because every loves a good rally. And in credit, thanks to the Fed trillion dollar buying spree, that's just what we have. The consequences are when not if.
*****

WSJ: Banks have been silent partners in the meteoric rise of the Federal Housing Administration. In the past year, the nation's financial institutions have snapped up securities backed by Ginnie Mae, a government-owned agency that guarantees payments on mortgages backed by the FHA. That helped drive demand for Ginnie securities and created an outlet for billions of dollars of FHA-backed loans made to borrowers who in many cases couldn't afford big down payments. As of June 30, the roughly 8,500 federally insured banks and thrifts were holding $113.5 billion of Ginnie securities, compared with just $41 billion a year earlier.....

Holding Ginnie bonds help banks look better because federal bank-capital guidelines give the Ginnie securities a "risk weighting" of 0%. That means banks don't have to hold any cash in reserve to protect against losses. By contrast, securities backed by Fannie Mae and Freddie Mac, the two mortgage giants seized by the government, carry a 20% risk weighting, meaning some cash needs to be set aside to hold them, even though most banks and investors think there is scant risk of Fannie or Freddie securities defaulting. Privately issued mortgage-backed securities can receive risk weightings of 50%, while many other types of debt carry 100%.
*****

The banks are essentially borrowing short and lending long. For now that is great because the Fed is throwing money at them at 0% interest and allowing them to invest it to earn 4%. As we have been writing we savers are rescuing the banks from their folly.

But borrowing short and lending long is the way banks have historically gotten into trouble. When interest rates rise the value of the Ginnie Mae securities will fall. It ain’t rocket science. If the economy recovers interest rates will rise.
*****

Humana is up $1 which is the best indication of whether the markets think the public option will pass.
*****

The number of people lacking health insurance rose to 46.3 million in 2008, the Census Bureau said, while the poverty rate rose to 13.2%, an 11-year high.
*****

The Difficulty of Doing Nothing

By Tim Melvin

RealMoney.com Contributor

9/10/2009 1:00 PM EDT

URL: http://www.thestreet.com/p/rmoney/investing/10596502.html

The one question I am asked the most these days is, what should I do now? Everywhere I go, it is the same thing. Should I jump into the market now? Should I buy Citigroup (C) or Bank of America (BAC) ? Is it worth making a bet on Fannie (FNM) or Freddie (FRE) , since they are so cheap?

Everyone wants to be in and enjoy the easy money that appears to be being made. My advice is the same every time: Do nothing. If you are not already in to some degree, you missed this rally. I know I missed a lot of it, but that does not keep me awake at night.

This rally has been led by the low-price stocks, particularly financials, being bid up furiously since the March lows. It has all been psychology and liquidity driven, and the current prices are not even vaguely reflective of economic or corporate reality. The mantras of the rally have been "green shoots" and "it is not as bad as the analysts thought." Given that Wall Street analysts are notoriously inaccurate, the fact that they are wrong is not news, and it is certainly not a reason for stock prices to rise.

The green shoots have been anything but. The two factors that need to be watched are real estate and unemployment, and neither of them is getting better. Sales in some real estate markets have ticked up, but prices are still dropping. Unemployment is rising rather steadily in spite of all the stimulus money thrown at the economy. Rising unemployment in an economy that depends on consumer spending does not bode well for future profits.

At times, the most difficult trade or investment is to do nothing. I am just as guilty as everyone else. I want to get in the game in a big way. I am very aware of the themes I see developing in the market. There are certain segments of the stock market that I think are going to be powerful sources of profits over the next five to 10 years. I have learned over the years that I have to wait, no matter how difficult the waiting becomes. Eventually those stocks and sectors I want to own will come down to prices that offer a margin of safety and represent a true bargain. Until they do, I have to wait.

There will be occasional opportunities to put a little money to work. The institutional and activist buying in shares of Tesoro (TSO) caught my eye, and I am going to start selling a few puts below the market to try to back into the position. I am wildly bullish on energy for the next 10 years, and the stock is cheap enough at the strike price that I will be thrilled to have a few shares put to me. The reality is that no matter how much we talk about green alternatives, oil and gas will remain the chief energy sources for the planet for many years to come. We will need to find and extract a lot more of the stuff, and this company benefits from that.

I also have bids in on several microcap stocks. The bids are at the price I want to pay for the stock, and I am not going to move them up or down to attempt to time the market or force the trade. If one of them moves up too far for my bid, I will cancel it. I know the price I want to pay for these stocks, and I force myself to be disciplined about it. Chasing them upward has been proven to be a losing proposition.

I clearly remember feeling the same frustration at doing nothing back in 1999 and early 2000. Everywhere I went, people were chattering about how much money they were making buying various tech and telecom stocks. The returns some of them were earning were absurd, while I just plodded along with a few book-value bargains in my portfolio and what appeared to me very average returns compared with those of the tech traders. Two years later, most of them were broke, and I was buying with abandon at prices that pretty much guaranteed huge profits with almost no real risk. The current move, especially in select financials, reminds me of the time period.

I will get my chance to invest with abandon again. I am human. I get twitchy when I hear all the stories of buying XYZ Bank and watching it run to the moon in spite of being technically insolvent. Time and money lost in the past have taught me that I have to relax and focus on the search for values. The prices and valuation will tell me when it is time to buy aggressively. This is not that time.
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Last year at this time we were in the same cash position and felt the same as we do now, scared but sorry to be missing the boat ride. We were too anxious to get in at the first correction in October. This year we hope to be more patient. We don’t foresee a financial disaster as last year but we do think stocks are fully priced and even if we are in a new bull market a correction is needed. That doesn’t mean they won’t go higher, just that we don’t want to be part of the game right now.
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WSJ: The Bank of England decided Thursday to leave its benchmark interest rate at a record low of 0.5 percent, amid signs that the country’s economy is recovering more slowly than in many other parts of Europe.
*****

European shares ended mixed, as gains for technology firms were offset by losses in financial and chemical stocks.
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Who names a company Clairvoyant Energy, or Xtreme Power for that matter?

Two alternative energy companies are looking to buy a closed Ford Motor plant and turn it into a renewable energy park. People close to the deal say Xtreme Power of Texas and Clairvoyant Energy of California are interested in the Wixom Assembly Plant in Michigan, and are waiting on approval from state tax incentives and federal loans. Officials say that the park would overtake the 50-year-old Ford plant, which closed in 2007, and that the new park could employ at least 2,800 workers within five years. Details of the $725 million project aren't being made public until legislative hearings later today.

The term Clairvoyance (from 17th century French with clair meaning "clear" and voyance meaning "vision") is used to refer to the ability to gain information about an object, person, location or physical event through means other than the known human senses, a form of extra-sensory perception. A person said to have the ability of clairvoyance is referred to as a clairvoyant ("one who sees clearly").
*****

There were no 52 week lows on the NYSE today.
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U.S. stocks gained for a fifth day, the longest streak for the Standard & Poor’s 500 Index since November, 2008. At the bell the DJIA was up 80, the NAZZ gained 24 and the S&P 500 was up 10. Volume was light.

Gold was unchanged and Oil closed at $72.50.

The bulls are stampeding.
*****

 

 

Lemley Letter Comments from 8 September 2008

 

Thoughts

Paulson speaks, Fannie and Freddie are now Government entities, the markets are saved, house prices will rise and all is well in La La land. Or...

Asian markets and European bourse indexes all are up 2% and more as are U.S. futures pre-opening in NYC. INTERSTINGLY China bucked the trend dropping 2%.  Financials are on fire as shorts are covering. Oil is also up $2 and Gold is up $2 and Treasuries are lower as traders sell Treasuries to move to the now safe GSEs.

Today should be interesting.
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Our take on the bailout is that it will eventually be profitable for the government. The GSE borrowing costs come down and so the spread becomes more profitable.
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The DJIA opened 350 points higher. That is a pretty good gap opening which eventually will have to be filled. Moreover the question now is where we go from here. Financials are the big gainers up 10% and more while other stocks are up 2%.
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Machinists are striking Boeing. We think the company wants the strike as an excuse to further delay the delivery of the new 777 which it has had problems producing and certifying.
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We are selling some issues into the gap opening today in case this rally doesn’t have legs. Already this morning’s pop has retraced 50% of the opening push and the trading is lethargic at the noon hour. We took scratches in recent buys of Cisco and Intel and are taking scratch profit in Briggs & Stratton and scratch P/L in Williams Sonoma.
*****

Oil closed up a few pennies and Gold was up $2. Treasuries gave ground. European bourse indexes closed higher with most up over 3%.
*****

The DJIA closed up 295 points at 11515. The S&P 500 gained 25 to 1267 and the NAZZ was up 15 to 2270.

Breadth was 2/1 positive and volume was active on the NYSE at 8 billion shares with Fannie and Freddie trading a billion shares between them.

There were about 280 combined new lows and 130 combined new highs.

The bulls won the day.
*****

 

9 September 2009

Thoughts

Model Portfolio Value As of 9 September 2009

$ 572,454

Asia was mixed small overnight as is Europe at midday. Gold has retreated from $1000 and Oil is up 60 pennies in the early going. McDonald’s same store sales for August were up 2.2% instead of the 2.7% expected and that placed a damper on U.S. stocks going into the opening.
*****

CNBC has James Chanos, a perpetual bear, on as its market expert this morning.
*****

Investors Intelligence has 48% bulls and 23% bears.
*****

A blog duller than ours: http://www.dullestblog.com/
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Short article about the Fed and its control of economists and the economy and how wrong it has been.
http://www.huffingtonpost.com
*****

Swine flu news from http://www.dailykos.com/

A new study eases fears that the pandemic H1N1 influenza virus will recombine with seasonal flu to mutate into a more lethal form. The study, reported in the online journal PLoS Currents, shows that the pandemic virus, commonly known as swine flu, grows much faster than seasonal flu viruses and is thus less likely to exchange genetic material with them....

.....Health officials are heavily promoting the inoculations. So far this year, fewer than 600 deaths have been attributed to H1N1 in the U.S., and swine flu was less lethal than feared during the southern hemisphere's recent winter months. But federal officials say that up to 40 percent of the U.S. population could develop symptoms during the coming winter flu season, and tens of thousands of deaths could result. “This is one of those times that we should expect the worst and hope for the best," said Kenneth Alexander, a pediatric infectious disease specialist at the University of Chicago Hospitals. "We could be called alarmists, but I would rather be called an alarmist than be called a fool for being underprepared." ....

.... The U.S. is bracing for as many as 1.8 million hospital admissions for flu as students return to school and cases surge to unprecedented levels, Centers for Disease Control and Prevention Director Thomas Frieden said.....

.....In one of the largest outbreaks of swine flu on a college campus, at least 2,000 students at Washington State University, in Pullman, Wash., have reported symptoms of the virus, according to reports in The New York Times, the Spokane Spokesman-Review, and other newspapers. The outbreak began around August 21, during the fraternity and sorority rush season, several days before classes began. Sally Redman, a nurse at the student health center, told the Times that the pace seemed to be slowing, with calls or visits to report flu symptoms down to about 140 a day, from as many as 200......

.....In the southern hemisphere, 15 to 33 per cent of hospitalized cases went to ICU in the past two months. "That's very high for flu," says Richard Wenzel of Virginia Commonwealth University in Richmond. "When this flu is bad, it's very bad."......
*****

WSJ: China's $300 billion sovereign-wealth fund is eyeing big investments in distressed U.S. real estate, according to people familiar with the matter. To finance some of the deals, China may rely on an old trading partner: the U.S. government.

In recent weeks, officials from China Investment Corp. have held talks with U.S. private-equity fund managers, including BlackRock Inc., Invesco Ltd. and Lone Star Funds, about potential investments in beaten-down property assets, namely mortgage securities backed by office buildings, hotels, strip malls and other commercial property. CIC also is considering buying ownership interests in buildings, according to the people with knowledge
*****

European shares rose for the fifth straight session and hit a new 11-month high, with auto makers a standout sector after brokers offered positive comments on likely demand.
*****

Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion

http://www.bloomberg.com
*****

Oil closed at 471.39 in NYC. Gold was down $8 at $992.
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We bought Treasury Bills in our large accounts due in December. The yield is .10%. Thank you Ben. We are going to move all our accounts from the Prime Reserve Money fund to one that invest only in C/Ds in amounts of $250,000 or less. The individual C/Ds will show up in accounts but will act like a money fund on redemptions and check writing. The Prime Reserve fund has no yield and the advantage of the FDIC Bank C/D fund is that the money is insured by the FDIC. The yield on the new fund is .15% but the reason for the move is an extra layer of safety. Please call if there are any questions once the fund shows up in accounts in the next few days.
*****

Stocks trade higher most of the day moved back to even at 2pm and then rallied to close higher on the day. The DJIA was up 50, the NAZZ gained 22 and the S&P 500 rose 8. Breadth was 2/1 to the good.

The bulls are in control.
*****

 

8 September 2009

Thoughts

Model Portfolio Value As of 8 September 2009

$ 572,461

Gold is trading over $1000 and Kraft made a $16 billion bid for Cadbury. That last bit of news has stocks higher as the after Labor Day markets get set to roll.

Asia was higher overnight with China up 1.6% and European bourse indexes are higher at midday. Oil is up $2 with a $70 handle.
*****

European shares rose for a fourth straight session, with miners getting a lift from stronger gold prices and deal making also helping the latest advance in equities.
*****

Oil ended up $3.30 at $73.25. Gold finished at $1001.
*****

The markets were as boring as this post.
*****

Stocks were higher with the DJIA up 55 and the NAZZ up 18 while the S&P 500 rose 9. Breadth was 2/1 to the good on the NYSE and there were 170 new highs and only 1 new low on the NYSE. The bulls are in control.
*****

 

4 September 2009

While we were away 2

Thoughts

Model Portfolio Value As of 4 September 2009

$ 572,461

3 September 2009

Asian markets were up with china regaining 4%. European markets were up after three losing days.
*****

570,000 folks lost jobs in the latest week. Since December 2007 seven million folks have been fired.
*****

European markets ended mostly lower, as losses in the pharmaceutical and food sectors offset gains for miners. Gold closed at $995 And Oil just under $68.
*****

Our worries are over:

The Securities and Exchange Commission may create a "fraud college" to train staff in detecting market abuses after the agency failed to stop Bernard Madoff's $65 billion Ponzi scheme, Chairman Mary Schapiro said.

"The fraud college concept is a great one," Schapiro said today at a joint meeting with the Commodity Futures Trading Commission in Washington. Coordinating fraud-detection training with the CFTC "would be particularly valuable," she said.
*****

Stocks closed higher and breadth was 3/1 to the good.
*****

4 September 2009

The monthly unemployment report said 216,000 folks lost jobs versus an expected 230,000. But the July report was adjusted to show a loss of 30,000 more jobs than originally reported (10%) and that makes the August number a wash.
*****

Asian and European market were higher overnight and Oil is $68 while Gold is down $5 after its $25 jump higher yesterday.
*****

http://www.zerohedge.com/

As markets digest the worse, yet somehow better, than expected 9.7% unemployment, the real state of the labor market is much worse, as indicated by the U-6 number, which has hit a recent record of 16.8% on a seasonally adjusted basis. As a reminder, the "U-6 represents total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers." In other words, in reality the U.S. labor market is likely about as bad as Spain in terms of undoctored jobless data.
*****

Nobel laureate economist Joseph Stiglitz on Thursday gave a gloomy assessment of a rebound in the U.S. economy, saying he does not see a resurgence in the strong consumer spending that has been a key driver of growth.

"The prospects of a robust recovery are very, very weak," Stiglitz, a Columbia University professor and winner of the Nobel Prize for Economics in 2001, told reporters at a roundtable held at Columbia.

Some of the more recent U.S. economic data has been surprisingly upbeat, especially on the housing, services and jobs front.

But Stiglitz said the U.S. economy faces the possibility of low economic growth over a long-term period or the possibility of a "double-dip" recession whereby a recovery is not sustained.

"It is not possible to predict whether we have a malaise or a W (shaped growth pattern). But there is a significant chance of a W," he said.
*****

Oil ended up at $68.45. Gold dropped to $993.
*****

Stocks closed higher on good breadth and light volume.
*****

 

2 September 2009

While we are away...

Thoughts

Model Portfolio Value As of 2 September 2009

$ 572,461

2 September 2009

We went for a short excursion over the weekend and while we were away Shanghai tanked some more and U.S. stocks decided to drop 2% yesterday. Today will be a test of the bulls staying power although the real test will be next week when folks return form late summer vacations.

The August Employment report is Friday and today ADP said that 298,000 folks lost jobs in August. That was more than expected but the ADP numbers have not been good predicators of the Government numbers so they really only serve as a trading crutch for today. Quarter 2 productivity gained 6.6% and Costs were down 5.9%. That is what occurs when companies fire a lot of folks.

European markets played catch up overnight dropping 2% while Asian was mixed after a large down day on Tuesday.
*****

Ford sales during the August clunker program were up 17% while GM dropped 20% and Chrysler dropped 17%. All the numbers were less than expected.
*****

From realmoney.com:

The issue now is whether this is the first significant crack that will end the uptrend that has been in place since March or just some healthy profit-taking that will shake out some excess and eventually set us up for further upside.

In the bigger scheme of things, the selling is still extremely mild. The S&P 500 is off just 3% or so from its recent highs, and the uptrend line from the March low has not been breached. We have a long way to fall before we even test that trend line or the 50-day moving average, which is around 965 on the S&P 500.
*****

British Petroleum said it has made a "giant" oil discovery in a deep well drilled in U.S. waters in the Gulf of Mexico.
*****

U.S. factory orders rose a less-than-forecast 1.3% in July.
*****

No shame club: http://www.washingtonpost.com/wp-dyn/content/article/2009/09/01/AR2009090103847.html?hpid=topnews

So You Just Squandered Billions . . . Take Another Whack at It

            By Steven Pearlstein, Washington Post

You've probably never heard of Jay Levine, Chris Ricciardi, John Costas or Stanford Kurland, but they are charter members of Wall Street's Mulligan Club.

Back during the heyday of the credit bubble, they were the financiers who earned huge bonuses for creating, trading and investing other people's money in those complex securities that resulted in trillions of dollars in losses and brought global financial markets to their knees. And now they're out there again hustling for investors and hoping to make another score buying and trading the same securities.

Like golfers who treat themselves to a second drive after hooking the first one deep into the woods, these guys play on without apology or penalty. The maddening thing is that they're getting away with it and nobody seems to care.

Consider the case of Jay Levine, once the co-chief-executive of RBS Greenwich Capital, the American investment banking arm of the Royal Bank of Scotland. Under Levine's direction, RBS Greenwich went from the bottom of the "league tables" in terms of issuance of asset-backed securities to a perch near the top -- right up there, one industry publication wrote at the time, with Bear Stearns and Lehman Brothers as one of the "best mortgage-backed houses" in the business.

At the height of the mortgage frenzy, Levine's group generated more than $350 million in profit annually for RBS and Levine was reportedly RBS's highest paid employee, earning more than $60 million during the three years before his departure at the end of 2007.

Now, two years later, RBS is a financial ward of the British government, which has had to put in more than $30 billion to keep it from collapsing. RBS's biggest mistake was an ill-timed and overpriced purchase of a Dutch bank, but there were also tens of billions of dollars in U.S. credit losses, many of them attributable to RBS Greenwich.

Levine, meanwhile, left RBS at the end of 2007 to take the top job at Capmark Financial Group, a spin off of GMAC that had become one of the country's biggest commercial real estate lenders. Since then, of course, things have only gone from bad to worse in the world of commercial real estate finance, forcing Capmark to post more than $2 billion in operating losses before it stopped filing public reports this spring. Its biggest shareholder, the buyout firm KKR, has now written off its entire investment in the company. Levine volunteered to reduce his base salary from $5 million to $4 million.

But don't shed too many tears for Jay. Even while remaining at Capmark, he's reassembled some of the old team from RBS Greenwich at a new firm, CRT Capital Group, a small trading house in Stamford, Conn., that he bought in July with former RBS Greenwich co-chief-executive Ben Carpenter and Ron Kripalani, who once headed the capital markets group at none other than Countrywide Financial. In a statement announcing the purchase, the new managers suggested that with so much of Wall Street operating under government-imposed pay caps, it was a perfect time to lure away the industry's "best producers."

Then there is Chris Ricciardi. In the world of finance, nothing has proven more toxic than collateralized debt obligations, or CDOs, and no one did more to expand their reach than Ricciardi. He pioneered them at Credit Suisse First Boston, then was lured away to Merrill Lynch, where he expanded the CDO business from less than $4 billion in new issues underwritten in 2003 to $28 billion in just the first half of 2007. That's when the music stopped and the venerable brokerage house found itself with $41 billion in CDOs and nobody to buy them.

By then, however, Ricciardi had already left Merrill and an $8 million-a-year pay package for what looked to be even better opportunities at Cohen & Co., a big Merrill client. Under Ricciardi as chief executive, it became a big CDO issuer in its own right, pumping out $25 billion of the stuff before the market collapsed.

Cohen & Co. is still limping along, but the publicly traded real estate investment trust that it manages -- and with which it merged -- now trades as a penny stock after its holdings lost more than $5 billion in value. Last month, its auditors cited material weaknesses in the company's internal controls.

There was a time when Swiss banks were known as much for their conservative investment strategy as for their secrecy and discretion. But that was before John Costas showed UBS how to turn its small American investment bank into one of the five biggest on Wall Street, and the source of nearly half of its profits.

Then, UBS asked Costas to open a hedge fund with $3 billion of the bank's capital, $1.1 billion raised from the outside and lots of borrowed funds. And, indeed, over the next two years, the hedge fund, Dillon Read Capital Management, bragged of gains of $2.5 billion, even after paying generous bonuses to Costas and his team. But when the market turned in the spring of 2007, UBS found itself hip-deep in soured U.S. real estate investments. UBS rushed to close Dillon Read and took its assets onto its own books. But when the dust finally settled, UBS was forced to recognize $37 billion in credit losses and write-downs, including $3 billion directly attributed to Dillon Read.

Costas, however, seems to have landed on his feet at 623 Fifth Ave., where he and a few partners used their bubble earnings to open the PrinceRidge Group, which provides trading and investment banking services to institutional investors. Company officials say their aim is to fill the vacuum left by the disappearances of Lehman, Bear Stearns and Merrill.

And then there is Stanford Kurland, who helped turn Countrywide Financial into the biggest mortgage lender in the United States, rising to chief operating officer and heir apparent to founder Angelo Mozilo. Kurland helped to create the growth-oriented culture at Countrywide and oversaw the introduction of new loan products that would later land the company in trouble. In late 2006, Kurland was forced out, reportedly in a dispute with Mozilo over succession and declining lending standards.

Not long after a failed Countrywide was forced into the arms of Bank of America, however, Kurland was back in action. Starting with some of the $140 million he had earned from Countrywide stock sales, he earlier this year put together a $600 million war chest and began buying up mortgages and securities backed by mortgages that were just like the ones he used to write back at Countrywide. And at the end of July, Kurland raised an additional $300 million from an initial public offering for his PennyMac Mortgage Investment Trust.

I contacted Kurland, Costas, Ricciardi and Levine, along with a number of other, less prominent members of the Mulligan Club, to talk about their attempts to cash in on the crisis they helped to cause. Some declined to talk, while others spoke only on the condition that they wouldn't be quoted. The message that came through in those conversations, and in comments made to other news outlets, was remarkably consistent:

The bad stuff happened after I left. . . . The losses that occurred on my watch were more than offset by our profits during the boom. . . . I saw it coming and sold off most of it before the crash. . . . Our securities performed better than most.

There is probably some truth to these excuses, but taken as a whole, they are really nothing more than a cop-out. It's hard to believe that large organizations could really go from being smart and honest one day to being stupid and deceitful a year later. Nor is it credible that the money they earned during the good years was the result of individual brilliance while the money lost in the bad years was the result of uncontrollable market forces. It is also a peculiar moral code that says it is okay to traffic in crappy securities, just as long as you don't get stuck with them in your own portfolio when the market finally craters.

What's most curious, however, is why anyone would want to invest new money with people whose record is so tarnished. And then the answer hits you right between the eyes: The money isn't coming from savvy outsiders; it's coming from other members of the Mulligan Club -- members who are lucky enough to still have money to manage, and clever enough to know that some day they, too, might be looking for a second swing at the ball.
*****

European shares closed down for a third straight session, with financials among the worst performers, as investors booked profits.
*****

Gold gained $25 to $980 and Oil was unchanged at $68 and change.
*****

Stocks finished mildly lower. We’ll post Friday afternoon.
*****

 

 

 

 

 

 



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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.