Spring is back and it is time for our quarterly missive. Our clients as well as the markets have had a positive first five months of 2003. For our clients such returns are old hat, while for the stock markets the positive returns are a new experience after three down years. Treasury Notes and Bonds are at 45 year lows in yield and the fact that both the stock markets and Treasury bond markets are moving higher in price is disconcerting. For the movement in Treasury prices suggest continuing economic melancholy while the stock markets are foreseeing revelry and salad days again.

Our take on the matter is that the Model Portfolio is up 12% for the year and we continue to believe that there is more pain ahead before the Promised Land is reached. And so we are treading lightly with a large cash position and except for our trading accounts waiting for autumn before making any big bets on the markets.

We invite all to visit our website at www.budlemley.com where we post twice daily updates on our actions in and thoughts on the stock and bond markets and often comment on the political situation with a liberal point of view, which is a novelty in today’s media market.

And now as has become our practice we offer the best of the Lemley Letter Online from the past three months.

3 February 2003

A Notice for Clients, Please Read.

In most accounts we have now have a very large cash position. We are not comfortable holding so much money in cash and so we are going to set up all our accounts to automatically sweep cash into Cash Equivalent Fund which is a large money market fund. Clients will receive a prospectus in the mail on that fund. Purchasing Cash Equivalent Fund will not increase the very low yield on cash that is currently being earned but it will add an iota of safety. All accounts that we hold are insured by SIPC to $500,000 of which $100,000 can be cash. Travelers Insurance provides unlimited excess insurance coverage on all cash and securities. Because of the way SIPC works all specifically identifiable securities and mutual funds are covered even if the amount exceeds $500,000 and that is our reason for placing the excess cash in Cash Equivalent Fund. ABN AMRO, the NYSE firm that clears our client trades and holds our clients' securities has over $1 billion in capital. That is a very large amount of capital and sufficient for any foreseeable occurrence. But we always error on the side of caution and that is why we are setting up all our accounts to be swept into Cash Equivalent Fund. We want to keep liquid assets available for trading opportunities and this is the best and safest way to do so. We are being more cautious than usual because the markets are again at an inflection point where a crash type fall could occur. We don't think it will but since markets never crash off the top and we are revisiting a support area (7200 to 7800 on the DJIA) that the markets have been testing for the past five years, we want to be ready for any eventuality.

11 February 2003 today is the beginning of the Westminster Dog Show. Today is also Revolution Day in Iran and Youth Day in Cameroon and National Foundation Day in Japan. Eid el Adha, a Muslim holiday that commemorates the willingness of Ibrahim (Abraham) to sacrifice his son to God, begins at sundown. These factoids are the result of our receiving five calendars for Christmas.

1:05pm and Treasuries are again rallying as stocks drop. We have no idea why. Rumors rule the stock markets these days. Too much media. Too much government induced insecurity. We don't mean to dismiss the terribleness and sorrow of 9/11 but even when Saddam is killed or deposed the threat of terrorist activities will exist as it always has. The mindless media babble is really assisting the terrorists. But we know the media of Joe Millionaire and The Bachelorette is not going to change and that is one of the reasons we are so sour on the markets. Victory in Iraq will create a month of patriotic media mayhem and then one little act of terrorism will destroy all the good feeling.

More importantly, the economy stinks right now and there are not enough good jobs available. There are literally millions of under/or unemployed folks who are not looking for jobs. Of those looking, many are taking any job that offers health insurance because of their fear of going without. Workers are striking over the health insurance issue and health insurance companies continue to raise premiums and drop coverage. Even hugely profitable GE is trying to increase the co-pay of its employees because it says it can't afford the insurance. And Congress dawdles and won't address the problem. Well until the Congress gets serious about the real issues affecting the economy there will be no recovery. The stocks markets going up a few per cent will not mean that the economy is better. And the end of the Iraq crisis will not end the economic crisis. Or so we believe.

As soon as the economy shows signs of recovery Treasury yields will rise as prices drop. That will be the price paid for tax cuts now. Greenspan today reiterated his belief that deficits lead to higher interest rates in a recovering economy. And so as of today we own Treasuries for a trade not a hold. And since we see no real recovery or evidence of any real recovery any time soon we are willing to assume the risk.

As they say, we have been "spot on" in our stock market analysis for the last five years and we do believe that our projections now are easier to make than at any time in the last five years. A rally in stocks is always possible and hopefully we will catch it, but only if it comes from at least a 5% lower level. But any rally now will be a rally in a bear market.

21 February 2003 12:34pm and we are avoiding the current markets because we are uncertain about the geopolitical situation. But more importantly, we do not believe the economy is on the road to recovery. None of the Bush proposals will do much for the economy and we do not think the current situation is anything like the 1990-91 Gulf War scenario. Folks are buying or waiting to buy in anticipation of the same kind of blast off that occurred in 1991 after it was obvious that the US and its allies would win the war.

At that time stocks were selling at 10 to 15 times earnings and the economy was finally recovering from the Crash of 1987 and the banking crisis of the late 1980s. The current environment still has stocks selling at 18 to 25 times earnings. Moreover the increase in prices at the wholesale level can't yet be passed on at the retail level. That is squeezing profit margins. And many more are now being forced out of high paying jobs than were back then. The mutual fund boom of the 1990s when billions of dollars poured into mutual funds has run its course. There are not billions more to be funneled into funds to push stocks higher.     

Some folks are in favor of the tax cuts especially the dividend cut because they think it will move the stock markets higher. And they believe that higher stocks markets will benefit the economy. We notice that most of the folks espousing this solution are underwater in their investments over the last few years and so are hoping for a higher stock market to rescue them from being wrong. All the tax free dividend proposal will do is benefit the Bill Gates of the world. Ma and Pa investor don't receive enough dividend income to make any difference. And if folks rush into dividend paying stocks for the dividend when they have avoided them because they weren't good investments, we think the artificial stimulus of tax free dividends to encourage the buying of stock will make a bad situation worse. Using tax strategies to stimulate market rises hasn't worked over the long haul in the past and won't work now. All it will do is create an opportunity for brokerage house charlatans to create new packages of nebulous investments for unsuspecting investors. Japan has been in the doldrums for thirteen years and there is no reason that our economy and markets can't experience a few more years of consolidation before beginning to recover.

We are resting on our profits of the last few years and we are more interested in not loosing our capital than we are in creating more. Eventually the risk/reward ratio will swing to in favor of trading stocks again but until it does we think sitting and watching is the best course of action.

The only action that seems to have a chance of success these days is day trading and our luck with that type of trading has not been good for the past year. Three day to three month position trading has worked much better for us. We may see an opportunity                                             

to do this in the next month but we aren’t going to buy in anticipation. We will await the opportunity.

30 April 2003  6:58am and this morning a client emailed with a question of why we didn't wait until today to exit our Sony position since the Japanese market rallied 3% this morning. Our reply was that had we known that The Bank of Japan was going to pump money into the economy and cause a 3% rally in the Japanese markets we would have. Unfortunately our crystal ball only speaks to us in English, which is why we should probably stay with American companies. Furthermore over the years we have learned that exiting losing situations clears our minds to focus on making money by looking for other investment opportunities. We have a very difficult time riding losers unless we expect them to be difficult stocks when we buy them. For example, when we bought Sara Lee the other day down $3 from the previous close we knew we might have a difficult ride for a while. That's why we have continued to buy SLE as it has moved lower. But at 11 times earnings, with an asset disposal program in the works and a 3.5% yield, we think there are enough catalysts to turn things around.

When we purchased Sony we did not expect the terrible earnings report and forward earnings negativity that were announced the day after we purchased it. We expected the stock to rally on the earnings report. And so when the price action went against us we at first were stubborn and added more shares. But then upon reflection over the weekend and having searched the web for discussions of the Sony earnings report we decided to cut our losses and move on to more positive investments.

9:31am and we have added the following brief biographies to the About Lemley portion of the Lemley Letter Online.

Sharon Minetti has been associated with Lemley Yarling Management Co. for 20 years. She joined the Group from Wayne Hummer & Co back in the mid 1980s and has worked for them and other investment firms since that time. Sharon is now a homemaker but spends one day a week in the office assisting Kathy.

Lauren Slavik joined Lemley Yarling Management Co. in April 2003 as a graduate of Johns Hopkins University with a Bachelor of Arts in Public Health. Lauren is an assistant to Kathy Pinto Cannova. Prior to joining Lemley Yarling Management Co. Lauren was employed by Johns Hopkins Bloomberg School of Public Health in the area of financial management related to personal, national, and global health. Lauren plans to pursue a MBA in marketing.

6 May 2003 7:21 am and the Fed meets today with not much expected to occur on the interest rate front. Cisco's earnings come after the close and analysts are looking for 14 cents per share.

In the last week we have become more invested but the risk is justified at this time. Only a terrorist attack is going to derail this rally and the odds on an attack are not great. Remember it was six years between terrorist attacks in the U.S. and they were preceded by attacks overseas.

In order for the rally to turn into a new bull market there is going to have to be a lot more work. The S&P 500 needs to get through 950, move to 1100 come back down and test 950 and then move up through 1100. That will take time and so we wouldn't spend the profits just yet.

The real question is whether traders are buying the last war and as we learned in Iraq, time can change the situation more than we imagine. The stock markets have been in a downtrend for almost four years and at some point this year they seem bound to turn up. Even only a strong bear market rally can retrace 50% of a down move and who is to say that this isn't that rally. 50% up on the S&P from its high to low is a move to 1160 and over 10000 on the DJIA.

Also the analysts and talking heads are pushing stocks higher with the same kind of blather talk of the bubble days. For downtrodden bull traders and investors that talk is manna. So we are going to try and stay at the party a bit longer this month since we think if we are wrong, the strength of this last bear or early bull rally will save us.

All the buy projections are being made on the come by which we mean there is no real economic data supporting the buy recommendations, only the hope that the "era of good feeling" engendered by the war will carry over into the economy. And since psychology is the only improving event in the U.S. right now the analysts have to hang their hats on it. And that may be all these broken down stocks need to tack on an additional 10% to 20%.

Since we didn't give anything back the last five years another 5% to 10% to the upside would satisfy our greed just fine.

May 12 2003   7:02 am we sold Honeywell at $24, Intel at $19.25, and SBC at $23.40 on Friday. All sales realized scratch profits. We have become concerned about the strength of the rally and so we decided to take more money off the table. We have two tech stocks left which can give us some bang for our buck if the NASDAQ continues to charge higher.

We just don't see the recovery that the stock markets rise is predicting and plan on selling the rest of our stock when the misguided tax plan passes or earlier. We continue to believe we are in a trading bear market and that dreams of recovery in the economy are just that.

13 May 2003 10:55 am and the markets continue to meander at lower levels. We are trying to sell at $4.25 the SUNW that we purchased yesterday at $3.89. We also have some Tellabs to sell at $7.25.

Last night we were visualizing Tellabs at $20 and SUNW at $10 when we realized we were falling into last Tuesday's trap of becoming long term investors in what we continue to believe is a tradable rally in a bear market setting.

The bombings in Saudi Arabia and SARS recurring in the U.S. during the fall flu season are two potential market movers that the markets are currently choosing to ignore.

We said the other day that terrorist attacks are much more likely overseas than here. But a series of them will eventually reach the psyche of Americans and resurrect the possibility of terrorist attacks in the U.S.

Alan Abelson made the point in his Monday column in Barron's that there is the possibility of SARS recurring this autumn flu season in the U.S. The effect on the economy could be withering because regular flu symptoms and SARS symptoms are not that different. The flooding of emergency rooms and doctors offices in a media induced panic is a distinct probability.

Since future terrorist attacks are unknowable and the flu season is six months away, the stock markets are blissfully ignoring these potential negatives. We are getting into our sell in May and go away frame of mind. The Model Portfolio is up 12% and that's a good first five months' work. And so we hope to use the rally this week to head to the sidelines with more of our money.

With the running of the cheap tech stocks today we are selling our entire SUNW position at $4.25 for a nice 35 cents to $1 short term profit. We are also selling our entire JDSU holding for a scratch to 30 cents per share profit. We were a little overenthusiastic last Tuesday when we purchased the large JDSU holding and we are using today's low priced tech buying interest to extricate ourselves from a very large holding that was several hundred thousand dollars underwater last Friday. When trading, we can only sell when others want to buy. We also are going to try and sell our TLAB holdings but the demand for the stock does not equal our supply so it may take a bull run this afternoon or later this week in the overall market to allow us to sell all of our holding. We are hoping to sell above $7.20 per share which would give us a nice 25% plus $1.25 cents per share profit on a very large position.

2:04pm and we sold one half our Tellabs holdings in most accounts at $ 7.11 for a very nice locked in gain. And we sold Bank One at $37.90 in our smaller accounts and a partial amount in our larger accounts.

May 15 2003 – Morning Comment 6:55 am and we wish a happy 90th birthday to our mother Odella. We are who we are because of you.

We read in the news where China has the ultimate solution to the SARS epidemic. The Chinese have stated that they will kill anyone with SARS who knowingly spreads the virus by breaking quarantine. That's an inscrutable solution for an inscrutable country and we hope John Ashcroft doesn't hear about it.

We see a summer doldrums developing and while we still think the DJIA and S&P have the potential to break through upside resistance and rally another 5% to 10%, we also think they will give back those rally gains this summer.

We have survived the last five years by not being greedy and choosing our spots and so as the saying goes it is May and we are going away with our money.

Lemley Letter Model Portfolio

Lemley Letter Model Portfolio Performance

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

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

Frosty's Sauna

The mud has come again in March
as it does every year
to remind of green and warmth and light
soon to fill us all with cheer.
Last week with new born calf frozen
upon the snow/mud cattle pen
zero winds had done their work
and we were frantic to get her in.

This time of year is touch and go
for mothers dropping calves and lambs
we race the rain and mud and snow
to born them live and healthy.
It may seem strange we bear the stress
and feel triumphant when we win
since eventually most will go
to slaughterhouse and retail bin.

But our job is right now
to get them born and on a teat
and when the night the calf survives
there is no greater farming treat.
Back to our story of frozen calf
a bright idea we soon did have
we dragged the nearly lifeless form
to sauna floor to help her warm.

Carnation milk from baking shelf
heated in a warming boat
was soon forced down an anxious throat
but yet recovery seemed remote.
Wondrous strength in babies lies
for soon our frosty calf was warm
and looking round the sauna room
a place more strange than mother's womb.

Now still the mud does ooze and slurp
in every step we take
but Frosty frolics unaware
her life was saved with lucky break.
A small triumph in farming life
smalls combined help us feel fine
the cycle lengthened with our care
still will triumph in its time.

Yes the redwings have returned
and sparrows busily prepare
their nests in every cranny found
while plovers rock upon the ground.
and drabness soon will pass to sun
the season muddily marches on
man controls so little ground
It's good to have nature 'round.

BL 3/03