As we send this letter we are on vacation with our family and will be
taking the first three weeks of August to spend with them. Weíll be in
and out of the office and Kathy and Lauren will be able to reach us if
we are needed. We expect stocks to trade in a range and/or begin
sliding lower into the September/October correction period. We donít
rule out a push by the DJIA to 10000 as the fast money moves from the
overbought momentum NASDAQ stocks to the more staid stocks of the DJIA.
But while a move to 10000 on the DJIA would be 10% higher we canít game it
enough to want to assume the risk. Moreover, we donít think the NASDAQ or
the S&P 500 will match that move since they are already outperforming the DJIA.
And the momentum stocks are what have powered the latter two measures
higher at the expense of the former.
The Model Portfolio on July 23 had a value of $519,378 was 100% cash and was up 12.8% for the year.
Very conservative accounts are up about 5%, but most accounts are up about 8% to 15% for the most
aggressive. Those returns on the back of client money being up 60% to 100% over the past five years
are our reason for not taking chances at this time. We want to build on our gains and we think the
autumn will offer the opportunity to add another 5% to 10% to performance for the year.
And our performance over the last five years - which is no guarantee of future performance as we
all know - is one of the reasons we have been slow to take on new accounts. Thatís because most
folks who are interested in switching to us have had lousy performance over the past three years
and are intent on making back the profits they surrendered. Since we did not surrender but
actually added profits to accounts we have a different approach to the current market. And that
approach is one of limiting risk until we understand the full implications of the continuing crisis in
Iraq and the potential disaster for the economy arising from misguided tax breaks that wonít
accomplish the goal desired.
So while we may engage in a little trading in our aggressive accounts, we presume that we
will be lethargic in our stock trading until after Labor Day.
††††††††††† Review of the past three months of The Lemley
And in keeping with past practice
we now share bon mots from
our website postings of the past three months. We would first like to begin
with a poem celebrating our summer vacation with our family:
August at the farm
And so it begins.
Andy Kathy Rob and Lisa
And Michael Amy and Michael
Come to the farm and Water World
Then the Powwow and a Cubs game and then
Tyler's birthday Dave and Lisa' anniversary Viterbo Reunion,
Neighbor pot luck birthday party riding Skeeter Abigail walking
Luna and Cubby and Pooper and playing house with Bernadette and Norah
Silly Seamus and Talkative Tyler riding bikes Dave and Tyler
Cleaning the spring Kelle speaking French and riding
Her bike 100 miles with Katie while Bud and Jackie sit on the porch
Then Rich and Jay and Katie and Ally and Richie and Patrick and
Number 5 plus maybe Barb and Big Rich and we all
Go to the Crawford County Fair to see the cows and sheep
And pigs and goats and corn and eat the blueberry pie and
Then pick blackberries and get mosquito bites and all wet in the creek
And then grandpa and grandma get to rest.
All these thoughts filled our mind
As we walked to the office this morning
Smelling the new mown hay.
The chicory's up and black caps turning
So yesterday we mowed the hay
The sweet smell fills the summer air
And suggests the visit of those we care
We mow the grasses late each year
To give the bobs and meadowlarks
A chance to raise their hungry brood
And not become coyote food.
For when the rake combines the rows
To dry in sun for evening bale
Coyotes from the woods arrive
To eat any chicks still alive
Gruesome as all nature seems
The food chain does its purpose serve
There is no hapless killing here
Only food to live the year
The windrows wait in ordered lines
The hay rake circling metal tines
The swallows fly above the dust
Catching bugs for babies' sust
These few days of warmth and work
Are for putting rations by
Soon grandkids whoops will fill the air
And we will know our summer's here.
We make the hay in big round bales
And row them on the road near hill
So grandkids for the rest of year
Have a playground free and near.
And we will sit upon the porch
Rocking as our kids deploy
All is well in our small world
At least for now we can enjoy
We all should steal some time for fun
So serious we've all become
Relish now our love and luck
With family in our pick up truck.
Across the fields we slowly roll
Laughter wringing out the droll
Another year of watching deer
And sharing time with those most dear.
2 June 2003 7:03am and
we said we were looking forward to an interesting week because in bear and bull
markets we always trade from the long side, never having mastered the art of
selling short. And as that "ole" bullish feeling sweeps the
marketplace trading long side opportunities should be easier.
But we do think the major economic
problems remain and while the recently signed tax bill has positive aspects for
the markets, we don't know that it does all that much for the real economy. Maybe
the stock markets have become the economy and if that is the case then we
should be bullish.
In our readings over the weekend
we noticed that reported unemployment in Japan
is 4.5%. Now we don't know if that number is more understated than the U.S.
unemployment number which is probably 4% higher than the 6% reported figure.
But we did have the thought that even with only 4.5% unemployment Japan
remains mired in a 14 year miasma. That doesn't mean that the Japanese stock
markets haven't provided good trading opportunities during the fourteen years,
for they have. There have been many 25% moves and even a few 50% moves for
nimble traders to take advantage.
So even if our bearish scenario
for the long term outlook of the U.S.
economy occurs, we are not blind to the possibility of good long trading
possibilities. And this current move may be one. But as the markets move
further into overbought territory and the month of June the risk is increasing.
4 June 2003† 8:25am and we are now over
$521,000 in the Model Portfolio value and up 13% for the year and we want to
play defense here.
12:46pm and we read that the
Feds analyzed Martha Stewart's brokers ink to discover that he wrote "sell
at 60" with a different pen than he wrote other items on a piece of paper.
We wonder whether the Feds are using the same analyst who saw all those WMDs in Iraq.
The Martha Media Madness reminds
of the Whitewater mania of the Clinton Years. That the FBI has spent over a
year investigating this matter is ridiculous. The same thing happened with the Clintons.
Talk about misplaced priorities. No wonder the Oklahoma
City bombing and the WorldTradeCenter
bombings occurred. It's almost as if the media is running the FBI. Right now
CNBC is showing a press conference in which 5 highly paid folks are talking
about a $40,000 gain that was legal. The only argument is whether Martha got
scared when the FBI questioned her and didn't follow her lawyer's advice.
20037:07am and many technical indicators are giving readings rarely
seen. Some technicians are going back to the 1960s and 1970s to compare
performance after the positive indicators currently manifesting themselves. The
indicators are screaming that markets are overbought, but with the three year
bear market taking many stocks to extremely low price levels versus the
ridiculous levels at which they had been selling, it is not untoward to expect
an overshooting bear market rally. .
20037:25am and we wish a happy
36th birthday yesterday to the mother of the prince and princess of Taylor Mill.
and last week the State of Illinois
issued $10 billion of tax free bonds to make pension payments and to fund
unfunded future pension liabilities. These pension payments should be coming
from investments not made and tax revenues not raised. This financial
legerdemain is similar to folks refinancing their home mortgages and taking the
money out and spending it, or using the extra money to pay down credit card
debt, so they can go out and spend with the credit cards again.
June 20039:05am and had we
stayed more fully invested in the March to June rally we would be up about 25%.
But that isn't our style. We have been too quick to sell these past four years
and that action is why we have outperformed the S&P 500 by 100%. Until we
see the economy stabilizing and can understand how the economy will grow its
way out of recession we are going to remain tentative in our trading.
Airlines can't increase
passenger traffic, hotel business is down, commercial real estate construction
is dormant, manufacturing continues to shed high paying jobs as does the
financial sector, and the tax cut will not stimulate the economy. Crude oil is
back over $31 per barrel and Greenspan says natural gas prices aren't coming
and in the tradition of the U.S.
government, General Motors is going to issue $13 billion in various debt
maturities to fund pension liabilities. And so the pension liability on their
books will now become a debt liability. Hopefully the pension assets will grow
faster than the interest paid. GM will be able to deduct its interest cost as
an expense and so the U. S.
taxpayer will pick up part of the tab. And the money borrowed will also be a
deduction since it will be contributed to the pension plan and so the U.S.
taxpayer will face a double whammy.
Of course GM will eventually
have to earn an extra $13 billion to repay the loan but that's for future
management to worry about the same as the rounds of tax cuts in the last two
years are for our children and grandchildren to worry about paying, as we spend
In the good old days of
corporate management, pensions were funded from surplus earnings just as tax
cuts were funded from government surpluses. But then those were the good old
days that everyone yearns for but no one wants to reprise.
and last week we wrote a few words about GM borrowing $13 billion to fund
pension liabilities. Since 1995 GM has paid out over $10 billion in dividends.
Since 1995 GM has spent over $10 billion repurchasing stock outstanding. Now GM
is going to the marketplace to borrow money to fund its pension liabilities
after having spent $20 billion plus in earnings on other items. Moreover on the
stock GM bought back it is showing a loss of at least 25%. With the help of
investment bankers who are earning the fees selling the bonds and will earn
continual fees managing the assets GM thinks that by playing the stock market
with borrowed money it can earn enough to offset the interest expense and grow
the pension assets to reduce future funding needs. In this case we hope past
performance is not an indication of future performance.
and we were watching Charlie Rose last night and he had Floyd Norris of the NYT
and Jim Glassman, chief economist at JP Morgan as his guests. The discussion
was about the economy and the Fed rate cut. Norris opined that he thought the
economy was showing nascent signs of recovery and Glassman is predicting 3% to
4% GDP growth by the 4th Quarter. They also talked about the housing boom and
that discussion tweaked our brain a bit.
The latest figures showed a 6%
gain in the sale of new housing and a 1.7% gain in the sale of existing
housing. It is a given that housing has been the savior of the economy for the
past two years, keeping it from rolling back into recession. We surmise that
the difference in the sales figures is that existing housing is more expensive
and that new housing usually has much better purchase terms. We have seen some
new housing advertised with 5% down. The only difference between that type of
purchase and a credit card purchase is the amount of money and interest rate.
Both are very highly leveraged transactions and involve a degree of faith on
the part of the lender. Any kind of slowdown in housing sales could easily wipe
out the buyers equity.
Unlike the stock market though,
as long as the homeowner continues to pay the ďvigorishĒ
he keeps the home. With stock folks are required to put up more money or they
have their stock sold out from under them.
Another point the panelists made
is that the rising stock market is foretelling an economic rebound since the
stock market anticipates economic activity 6 months in advance. As Don Rumsfeld
might say that is true when it is true and false when it is false and one does
not know whether it is true or false until 6 months and many dollars plus or
20038:08am and the WSJ has a
front page article on retirees who are trying to live on income from C/Ds now
that interest rates are at all time lows. This is the story of savers who did
what they were supposed to and refused to take risks and now they are paying
the price of saving the economy. Many of them bought variable annuities at the
banks they visited and those have been variable as the underlying equity mutual
funds have tanked. They could have purchased ten-year Treasuries with a 6% or
better yield but those didn't pay as much of a commission to the bankers who
sold the annuities.
Our clients have averaged a 15%
return over the last five years even with our usual large cash position and so
they have been able to spend 6% to 8% of their money and still build up their
principal. Past performance is not an indication of future performance.
We usually under perform roaring
bull markets or bull spikes in long term bear markets because we maintain large
cash or short term bond positions. But then we don't give much back in the bear
8 July 2003 7:46am and the WSJ is
reporting that the Treasury Department is going to change the pension rules to
allow companies for a two year period to use the rate of return on 20 to 30
year corporate bonds to figure their pension requirement. The current
requirement is that companies use the return on U.S. Treasuries but since the
yields on Treasuries are so low the companies are required to put in twice the
amount of money for pensions that they would have to if they used the corporate
rate. This is called the Alice in
Wonderland solution to lower interest rates.
On the one hand the Feds want
lower interest rates to keep the house building growing and the interest
expense on the national debt low. But by keeping interest rates artificially
low they cause companies to under fund pensions, not to mention forcing savers
to go to riskier reinvestments to attempt to obtain a higher return.
2003† and today is the 37th wedding anniversary
of yours truly and the wonderful Katie. We've known each other since our
college days back at Georgetown in
1961. The journey has not always been smooth but it has always been
interesting. And we have two wonderful children and two fantastic grandchildren
and what more can we ask from life.
14 July 2003 and recently several of our
clients have gone to banks for loans. Since many of our clients live on the
monies we generate they show trading profits as income. Not a few of the bankers
have asked for confirmation from us regarding the gains over the past five
years because of all the horror stories about stock market experiences. We
presume some of the bankers own portfolios may have suffered. Following is a
letter we wrote for a client today:
Most of Ms. Ö.. income from the accounts managed by us comes from trading
profits as the gains in the accounts for the last 5 years show. Below the gains
Ö.. regular account had a value of $850,000 on December
In December 2001, $335,000 was withdrawn. Other money has been withdrawn for
various purposes over the years including $92,000 this year and as of July
the regular account had a value of $755,166. For your information, on December
the combined IRA accounts were worth $269,464. As of July
they had a value of $564,155. No monies were added.
Letter Model Portfolio Performance
S & P 500
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 period 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
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