Autumn 2003

Greetings:November 1, 2003

We’ve had a good year this year but so have the major indexes and averages. This is the first year in five that we are underperforming the major measures but with the Model Portfolio up over 11% and most accounts up 7% to 15%, we are satisfied with our results. As we always say in the bull phases of market moves, we usually under perform but that is our modus operandi and the result of our desire to preserve capital above all else. As is our custom, we now bring a smorgasbord from our daily postings on


5 August 2003 – Vacation Comment

7:53am and the trading range held yesterday as the early breach of the 975 level by the S&P 500 was met with enough buying to close the S&P 500 higher for the day. Until the range is broken the stock markets as a whole are going to be dull. Individual stocks on the other hand are providing good action for both bulls and bears. The difficulty as always is knowing what stocks to short and long before the bad or good news arrives.

We are in a bearish mood and because we don't short stocks our basic posture is to hold cash. Since the money fund we hold is only yielding 0.4% we have been tempted to buy the five-year Treasury with a 3% yield or to move to the 6 month T Bill with a 1% yield. But we don't plan on being in cash for more than a month or two and the move in the five year of over 2% in the last month has given us pause.

That's because we believe Treasuries have put in their lows for the twenty year move from 14% long rates and 20% short rates back in the early 1980s, and unless recession returns we don't think there is much upside price potential. Obviously Treasuries aren't going to 6% or 8% overnight but we think the trend is to higher yields and thus lower prices as long as the economy continues its lethargic positive growth. That's because the burgeoning deficit is going to force rates higher.

Our sideline sitting is also occasioned by our desire to see more economic data and getting by the September/October period before committing any major cash. Since we are bearish we tend to concentrate on the negative data. And we don't think the data that the Bushies and media have touted as positive has been.

For example the supposedly good GDP number was loaded with unusually high defense spending is a non productive use of capital. The drop in unemployment was the result of the fact that 500,000 folks stopped looking for jobs and the bond rally of the last two days was a normal rebound from a large sell off.

Our favorite company General Electric after announcing the sale of 2 insurance units for billions of dollars in the last month is now buying a commercial lender for billions of dollars. These actions perfectly fit the GE pattern of creating large financial transactions within quarters which lead to special charges and gains and obfuscate underlying earnings and sales from continuing operations. If GE didn't own NBC and CNBC, and co-own MSNBC with Microsoft and thus have a huge media influence and control of business news and publicity for talking heads, we think the business media would be taking a much harsher look at the financial jiggling that GE conducts on a quarterly basis.


7 August 2003 – Vacation Comment

7:56am and as we entered the office we were about to write "same old, same old" in relation to the markets and daily news. Then we received a phone call to tell us our oldest customer who turned 100 years of age last spring had crossed the river yesterday. Good for him. His last couple of years had been difficult. We will miss him for the confidence he had in us and the wit he shared with us. He began doing business with the "old stockbroker" back in 1960 with $25,000 and as he passes his account has $700,000 in it with the removal of well over $1.5 million over the years. He and we never really kept track because we trusted each other. Mutual trust is the cornerstone of good performance. R.I.P.


13 August 2003 - Vacation Comment

7:20am and in a new way to reduce the Federal deficit we read yesterday that the U.S. Treasury Department is planning to fine Faith Fippinger of Sarasota Florida $10,000 and maybe send her to jail for up to twenty years for acting as a "human shield" in Iraq before the war. Thankfully she wasn't injured. As misguided as we think those folks were we would suggest that there are bigger fish to fry and better places for the Treasury to find money than the social security checks of retired school teachers. But General John Ashcroft, who by the way is a card carrying member of the "too busy to serve in Vietnam although I really believed in the war as long as others fought it" Chickenhawk Brigade, has decided that no miscreant should go unpunished. We are sleeping easier with that knowledge.

7:55am and we received the following e-mail which with our response which we share today.

It's the summer doldrums and I am spending time ruminating about the near future for markets. Where to go? If long term interest rates are rising, investing in intermediate and long term bonds is a no go until rates stabilize and one can expect decent returns for limited risk on capital. Not sure the Fed can control this and not impact the Dollar. If the Fed inflates the economy that will further drive up interest rates and the inflationary cycle of the late '70s may start again. If so, buy real estate in Southern Cal. (real estate inflation will outstrip the cost of borrowing) Also, the stock market will not do well due to high borrowing costs and pressure on profits. Until then, where do you go? The market is dangerous now and the best you can do is look for opportunistic trades. You obviously can't make money on money markets and bonds until rates rise, so where does the "smart money" go? These guys aren't going to sit still for 1% return on their money. I keep thinking about gold, but have found that rather expensive to trade in the past. It also appears to be manipulated by central banks and that would be futile to chase. It is difficult to just sit around and do nothing. I'm really just looking for thoughts. Thanks.

Dear Bill:

A good question. With our published and actual investment record we happen to think that we are "smart money" and we are sitting on cash. There are times when the smart thing to do is to do nothing. We have been scalping for a while, but scalping gains from the long side right now has stopped working for us. We don't short stocks so that is not an option for us but if we did we would be seriously considering that action.

It is our belief that rates will rise faster than prognosticators predict. But rates probably won't be at a level where we want to invest in bonds for a year or so. So we accept the nothing yields currently paid by money funds and average them with the returns we have received over the past twenty years and are content. Moreover our accounts are up 8% to 15% for the year so we have a bankable return for the year without doing any more risk taking. After all as we noted yesterday the total return on the thirty-year Treasury is negative for the year and the intermediate Treasuries are up about 1% on a total return basis.

The fall period usually provides an opportunity for long side trading. If it does we will try to take advantage. We continue to believe that currently there is more risk to the downside than potential to the upside and so we are sitting for now and letting the markets tell us what to do. We can have fun predicting but the most money is made reacting to what occurs. We are obviously situated for a downside sell off because that is what we expect. If that occurs we will hopefully use DIA and SPDRs to participate in trading rallies and pick at a few stocks for individual gains.

We do not think the housing bubble has burst nor has the consumer learned any lessons. And until that occurs we don't think a bottom has been made. But we are open to being proven incorrect and if the economy by some miracle does begin to flourish and folks are again hired in droves at good jobs with decent benefits then we will swallow our pride and jump in. We just think the odds on that scenario occurring are about zero.

So that is our summer vacation thinking. Over the years in our associations with very successful investors we have learned that doing nothing is sometimes the best course. We don't want to lose the gains we have made over the past five years and the S&P 500 will have to go from 1000 to 2000 to get even with our gains over that period. We also have seen more than a few folks and money mangers become frozen in time when events and market action goes against their thinking. As any of our long time customers will attest, being frozen in time and failing to act is not something we have ever been accused of.

19 August 2003 - Continuing Vacation Comment

8:08am and we have certainly missed the stealth rally underway in stocks that blossomed into a full fledged pop higher yesterday. Blackouts, bombs in Afghanistan, and high oil prices be damned, stocks are moving higher on the back of good retail sales and higher housing starts. In fact July housing starts were the highest in 17 years at an annualized rate and June was revised to up 5.7% from up 3.5%.

So all is well in stock land and we have missed a nice move in the stock market. The DJIA made a 54 week high yesterday and the S&P 500 is making a valiant attempt to move up through 1000.

Last night we were thinking that at this time of year we usually are trying to figure out how to recover from being down for the year and hoping for a year end rally. Even with our total cash position, the DJIA which is up 12.8% is now only even with the performance of the Model Portfolio and the S&P 500, up 13.6%, is ahead of the Model Portfolios performance by less than 1% for the year. The S&P 500 is still behind the Model Portfolio by 100% for the last five years and so we are taking the current rally with some grains of salt.

We always worry that at some point we will lose our market touch, and we are constantly reevaluating our outlook but we don't have any desire to venture into stocks at this time. We are content with our performance this year and will await a more substantial correction to consider re-entering the markets.


2 September 2003 - Closing Comment

7:38am and short maturity Treasuries are under pressure with yields rising as the bond markets perceive a strengthening economy. At some point we are going to get our feet wet by purchasing short term Treasuries for trading or holding. We were tempted when the two-year Treasury yield jumped over 2% this morning. That's six times the yield we are receiving on cash. There is principal risk in a 2% yield since if two year rates moved to 3% the principal would drop to 98 and we would lose a whole years’ interest. But that won't happen overnight and the real give up would be the 0.33% yield we are now receiving for cash.

If the yield rose to 3% on the two-year within four months we would have a real loss. But then the yield on the three year would probably be about 4.5% and we could swap forward to pick up the increased yield. At some point we would then expect a technical rally that would allow us to recover principal and yet receive a higher current yield that money funds. We played this game in the early 1980s when rates were rising and we made money. But rates then were much higher, which made he reward/risk ratio more attractive. Please read our section on bond trading in our discussion of our market philosophy in “About Lemley” on the website for further discussion of this issue


17 September 2003 Comment

            6:36 am and we aren’t technical traders but for the last few years we have paid attention to these folks because they are in control of the stock markets right now.

Since March the momentum boys and girls who buy because a stock is moving higher have been trying to reestablish their eminent position in the market place that they occupied during the bubble years. They have been conducting a good imitation of the bubble the last few months.

The Feds announcement yesterday contained worry about jobs and deflation. The stock market action for the last few months has been screaming recovery and smooth sailing ahead. Either the stock markets are wrong or the Fed is wrong. The Fed has been behind the curve on the stock markets and the economy for the last five years and obviously the bulls are betting that things haven’t changed.

We are much more worried about interest rates and the effects of the deficit on the economy. We think that worry will become widespread before year end and become a drag on stocks and cause a continuation of the sell off in bonds. And we think interest rates can rise even if the economy rolls over in the fourth quarter and next year.

18 September 2003 - Evening Comment

1:32pm and several weeks ago we had to “put down” a horse that we had owned since birth. We don’t mourn for Smokey; he had a good life of 22 years. He was only ridden about five times in his life. We kept him because we just like horses. His mother Julie was a tremendous children's horse, and Smokey might have been too but those were the years when we spent most of our time in the city and didn't have the time to calm him. This short melancholy poem came to our mind today. Our other poems may be found by clicking on the Bud's Poem Page on the top right of the home page at .


Every morning as we watch
the horses graze where Smokey lays
a smile comes to our face
as horses moving through the haze
remind us of the sunny days.
We put Smokey down this year
and buried him on a crest.
No mourning as his friends move past
where he rests in fulsome grass
feeding freely without strife
those he traveled with in life.
How happy would we parents be
to so well nourish our progeny
as Smokey does so easily.
Of course we do but seldom know
because we let our children go.


3 October 2003 - Evening Comment

11:37am and a client just called bemoaning the fact that he hadn’t invested his money last March and that he was out $25,000 in lost profits. We commiserated because we too have missed the six month move and don’t like it when we don’t participate. We know the “gurus” say that market timing doesn’t work but it has worked for us over the past five years. And even with the 25% move in the S&P 500 which now is up 17% for the year, the Model Portfolio is up 12.6%.

Markets change and one of the reasons we have been hesitating to put our money to work and at risk is that we are thinking more long range than we have the past four years. It was obvious to us back then that the markets were due for a large correction and we benefited from the drop. Now the markets at best are slightly over valued.

If the economy is truly recovering there will be time to get invested. One employment report does not an economic recovery make. Just remember that if one missed the move in the markets from 1983 to 1987 there was still an opportunity in late 1987 and 1988 to get on for the ride. The S&P 500 hit 1500 in 2000 it’s now only 1030. The NASDAQ hit 5000 and its now 1900.

In that same conversation we happened to mention that a mutual friend’s father had $400,000 in Treasuries mature and he had called to ask what we would suggest the father do. We said buy Treasury bills yielding 1%. The friend said his father needed $40,000 a year in income and that investment counselors in Florida were suggesting one half in equity mutual funds and one half in corporate bond funds. We demurred saying the corporate bond funds will lose much more in value that they will earn in interest over the next five years if interest rates rise as the economy recovers. And if the economy doesn’t recover the equity mutual funds will drop back to lower levels. His father will have to choose one of the two poisons, buying both will not work.

It is interesting to note that three years ago a risk averse investor could have earned $60,000 by investing $1 million in two-year Treasuries. Now that same investment will return only $16,000 per year. That may be one reason why the economy is not recovering as fast as folks think it should. Low interest rates help companies that aren’t hiring, but they hurt savers who don’t have the interest earnings to spend.

20 October 2003 - Evening Comment

11:33am and our ability to hold year end trades has been affected by our desire not to give up gains. We are torn by the desire to make money for our clients and ourselves and on the other side of the coin by our deep seated bearishness. There are times when situations change and trading patterns emerge, but for the last few months as we try to take on trading positions an inner sense of disquiet causes us to not be able to hold many for any significant period of time.

We are hoping that the economy recovers and good times roll but we are right now a prisoner of our intellect which tells us that the folks in charge of the economy don’t have any more of a clue about the future than they ever have. The journey of the last four years has been turbulent and we don’t see it getting easier soon. And so we first of all protect our gains and secondly try every now and then to add to them. We agree with ‘the down in November’ theory that a few gurus are propounding because it makes senses to us after such a big run. And we have a few stocks we want to hold but most as usual have again become anchovies.

1 November 2003 - Comment

9:02am and as we enter the last two months of the year we are continuing to invest in a few stocks for superior returns. We expect a year end or early next year rally no matter what the economy does. We are positioned to hold or trade the stocks we own as conditions warrant. We have had a good five year run and we are thankful for the continued confidence of our clients.

Happy Holiday Season and May there be Peace on Earth in our grand childrens’ lifetime.

Lemley Letter Model Portfolio



Market Value

Pct. Assets

Cur. Yield


A T&T Wireless

$  17,544.00




JDS Uniphase










Schering Plough





Sprint PCS





Time Warner






$  72,216.00














Total Portfolio





Lemley Letter Model Portfolio Performance

Date Ending

Market Value

Model Portfolio

S & P 500



% Return

% Return




+ 6%








( 9%)













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.

Autumn 2003
Summer 2003
Spring 2003
Winter 2003
Autumn 2002
Summer 2002
Spring 2002
Winter 2002
Autumn 2001
Summer 2001
Spring 2001
Winter 2001
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.