Lemley Yarling Management Co
309 W Johnson St
Madison, WI 53703
Comments on activity in client accounts
26 June 2022
Our next post will be July 8th. Hopefully all of us and the country will have a peaceful Fourth of July
Mr. Market finally provided a rally this week. The markets rallied 5% plus and our holdings gained but, because of our cash position which has protected us on the collapse, they rose less than half those amounts. The rally enabled many large accounts to eke back into positive territory while smaller recovered to down 5% and less.
We really have no idea what this week's rally means. Some gurus suggested that because oil and oil stocks dropped 10% and 15% respectively this week that maybe secret negotiations on Ukraine are close to arriving at a settlement. We do give some credence to the idea that the EU countries are anxious to settle the Ukraine imbroglio by autumn so that natural gas and heating oil can again be purchased thru regular channels at reasonable prices. The acceptance of Ukrainian entry into the EU is the carrot being held out to Zelinski. The problem is that Putin will have to be content with the accession of only the eastern provinces as a sign of victory. He may be willing to declare victory and the wait another 5 years or so to rebuild and retrench before again invading- especially if he hopes Trump, is president. That seems to have been his modus operandi vis a vis the invasion and conversion of The Crimea several years ago.
High gas prices and oil prices are the result of oil companies- not orally colluding- but probably by telepathy all seeming to refuse to raise oil production to meet demand. The companies may be waiting for Repubs to regain control of Congress this fall before magically deciding one by one to raise production. Once one large company decides to expand production the others will follow. The current talking point is that it would take the companies a year to accomplish any meaningful increase. We think that is hogwash, but even if it is true, the mere announcement of plans to do so would lower the spot price of oil.
If Repubs do regain control the oil companies will be much more likely to respond to Republican entreaties and tax breaks and drilling nirvana. We, of course, are not suggesting that the oil companies are colluding to keep oil prices high to hinder Democratic chances to hold control of Congress. That would be a raw exercise of oligopoly power which we are confident they would never consider.
Our own theory on the drop in oil issues is that with Bitcoin making new yearly lows under $20000 that speculators in it were forced by margin calls to raise cash by selling oil stocks which have been speculators best bets this year with outsized profits, until this week
During the week we again took loses in our retail package and moved to the sidelines. The sentiment on the street is that retail companies are dead money and we will wait till later in the year to consider reentry. We have kept our position in Bed Bath – which reports earnings this week. We don't expect good news but we made enough money on the stock last year to warrant our much lesser exposure.
We purchased Marathon Oil, Apache and British Petroleum this week with MRO and APA down 30% from their highs. But on Friday we decided to concentrate on a less volatile and dividend paying British Petroleum (in case the Ukraine settlement rumors are happily realized) and took a trading loss in the other two.
At weekend we owned: AMC Networks and Paramount Global, AT&T, BankAmerica, Wells Fargo, Huntington Banks and the KBWB major bank ETF. Among DJIA stocks we own Cisco, Intel, Disney and Walgreens Boots – which reports earning this week. We own two fancy stock ETFs, CLOU (cloud stocks) and ONLN for participation in Amazon which is 25% of the ETF. We also own Micron Tech and Carpenter Steel -and Cleveland Cliffs and Ford in tax free accounts awaiting expiration of the 30 day wash sale interval to repurchase both in taxable accounts.
We have no great expectations for a summer rally but will of course be happy to welcome it. And if Markets head lower, we will deal with that eventuality too.
Only in America:
On June 13, a man in a tactical vest was openly carrying a semi-automatic rifle and holstered pistol in Broken Arrow, Oklahoma. Not surprisingly, people were pretty freaked out.
Employees at the Broken Arrow Justice Center ― a government building that houses the local court and police offices ― locked their doors, and someone called 911. More people called 911 when he approached a Target.
But the police couldn't really do anything about this guy. Officers determined that his actions were completely fine based on Oklahoma's constitutional carry law, which allows people ages 21 and over to carry firearms in public without a permit or training.
And it's a preview of what's to come after the Supreme Court struck down a New York gun control law on Thursday, setting the stage for more restrictions on firearms to fall.
The Oklahoma man continued to scare people. He then walked into an AT&T store, prompting employees to "run out the back of the store."
Police were finally able to arrest the man because, during the course of this chaos, they discovered that he had a recently issued, unrelated warrant. Officers then found out that he was carrying brass knuckles ― which actually are illegal under state and city law ― and a .50 caliber semi-automatic pistol concealed in a pouch, rather than a holster, which is also illegal.
But again, walking around with the semi-automatic rifle was completely fine. Rogers County Sheriff Scott Walton told Tulsa World that "nobody needs to be walking down the street with a rifle. "But I don't make the laws; we just try to live by them and do a very difficult job in a world that's got those people in it," he added.
Thursday's Supreme Court decision will likely put police ― and everyone else ― in more of these difficult and dangerous situations.
17 June 2022
Oil futures are down 10% this week. Wonder whether gas prices will drop 10%. They seem to rise in concert with price rises in futures but do not correspondingly drop at the same rate.
The DJIA was down 860 on Monday, down 150 on Tuesday, up 300 On Wednesday as markets and all the talking heads and gurus were content that Fed Chairman Powell had listened to them and raised 75 basis points. Then, Thursday down 750 because Powell had listened to all the talking heads and raised 75 basis points but were upset that he had not promised to raise 75 basis points next time. Being Fed Chairman is like being a sports coach where every person knows your job better than you do. Finally Fickle Friday was up and down ending off 40 points. These roller coaster weeks are not good for the soul but do keep us awake. Negative opinions permeate the video and streaming worlds with visons of recession and worse coupled with BitCoin selling and hedge fund and individual margin blowups leading to a 4% plus collapse in the major market measures this week.
We decided to get almost fully invested this week as our kind of stocks reached levels on P/E and pullback from highs levels that warranted purchase. We have mitigated single stock risk purchasing smaller lots of more issues because we want to be in the markets without over-concentration in a small number of issues.
Most accounts remain plus or minus 2% for the year while our smaller accounts that do better than in up markets also do worse than in down markets and are now off 4% to 8%. Those results still compare favorably to the NASDAQ down 34%, S&P down 23% and DJIA down 19% from their highs.
Among quality 3% and greater dividend payers priced at 12X or less and 30% off highs we own: Cisco, Intel, Dow, Toll Bros (premium homes), Merck, Pfizer, Energizer, Verizon, AT&T, Hewlett Packard Enterprises, Ralph Lauren, Best Buy, Foot Locker, Macy's, BP and The Gap.
We own other quality stocks, many with 2%+ dividends and also down 30% or more: QUALCOMM, Disney, KBWB (Major Bank ETF), Wells Fargo, BankAmerica, GM, Hain Celestial, AMC Networks, Carpenter Tech, Apache Oil, U.S Steel, Cleveland Cliffs, Abercrombie, Under Armour and Bed Bath.
A problem at the moment is the conflation of "increases in the Consumer Price Index" with "inflation" and they aren't precisely the same thing. At least, the theoretical concept of "inflation" which economists think about when they are lost in their models is not identical to this, especially over the not-very-long-term.
Supply chains bottlenecks, energy price spikes, and various monopoly power pricing are not "inflation" as imagined by economists. If it isn't essentially "too much money sloshing around" then "less money sloshing around" is not the solution.
Inflation as currently experienced by consumers is not the "inflation" that is solved by jacking up interest rates and driving people out of work, and in fact this solution is likely to exacerbate the problem in addition to creating additional economic misery.
The time is out of joint; O cursed spite,
That ever I was born to set it right!
The bard https://biography.yourdictionary.com/articles/why-is-shakespeare-called-the-bard.html
11 June 2022
Well, this week sure was a 'Downer'. We were content on Monday, concerned on Wednesday and confounded on Friday. The fear of a bad inflation number to be announced on Friday was given as the reason for the markets caution on Wednesday, downward move Thursday and then. When the actual number was announced on Friday, for the collapse into the close.
According to the gurus and talking heads inflation (wage and gas and food) are presaging famine, pestilence and the death of the bull and the epiphany of the bear. If only Biden would wave his magic wand gas prices would drop, food prices retreat and The Fed do the right thing. Actually, if he could wave his magic wand and get rid of Republican obstructionism those events might occur.
This is the third time in the last two months that the S&P 500 has touched down 20%. Going down more from here would ‘officially' enter bear market territory. The last two times the Index has recovered so next week will be an important test. Given that many stocks have retreated 50% and greater from their highs, if the bear does take control-it already has in the NASDAQ 100, - more pain is ahead.
With that in mind we raised cash by eliminating -for a plus scratch- Amazon before it dropped another 10% - and 20% from its Monday high. We sold Cisco, AT&T and Energizer for scratches to have funds available for higher beta (more volatile) stocks if the bear arrives. We also sold half of Bed Bath, all of The Container Store and all of American Eagle Outfitters to reduce retail exposure.
Earlier in the week we sold Intel for a $1 loss because of a negative report before it dropped another $3. Unfortunately, we bought Western Digital with the proceeds to take advantage of positive news for the company and a bullish report on chip stocks. As the old saying goes, the reaction to the news is more important than the news. And the reaction of Western Digital and all chip stocks was lower and lower and lower. On Friday we sold half of Western Digital for a too large loss and bought an equal amount of Marvell Technology to spread the risk and improve recovery potential.
We currently own:
The large domestic bank ETF (KBWB). We have had difficulty deciding which banks to own and KBWB moves pretty much in concert, has a 2% + yield and is not affected by negative news on any one bank. In addition, we continue to trade Huntington Bank shares for 5% and greater gains. With a 4.5% yield we have been able to trade profitably between $12 and $15.
Western Digital has been a trading favorite for the past several years and we are overall ahead- but less so after this week. We also own and have traded Marvell Technology. We want to own chip stocks since they are the future and also for their volatility. Both WDC and MRVL are down 35% from their highs-as are many chip stocks.
We are keeping Walgreens because every time we have traded out of it the past few years it has rallied 15% and more. With a 4%+ yield -and our thinking that they may sell Boots- we will hold and add.
We continue to trade/hold GM and we await the 30 day wash sell period to repurchase our Ford position. We repurchased AMC Networks after the 31 day period and will do so with Paramount Plus on Monday. We have traded Disney and are currently out after two plus trades earlier and a minus trade this week that flattened our profits. AMCX is in our belief a takeover for content candidate. PARA has been difficult for us but has value that we feel warrants ownership.
We repurchased Cleveland Cliffs integrated steel under $20 on Friday. That has been a profitable entry point for us. We continue to trade Hewlett Packard profitably buying below $14.5 and selling over $15 and higher.
Our retail Holdings are now Abercrombie, The Gap, Under Armour, and Bed Bath. We have been trading Macy's and are awaiting a good reentry point.
Next week may be too interesting. But it is summer, accounts are still (fingers crossed) positive and all events eventually pass.
Gas prices are high here and in the rest of the world
From a traveler in France:
I stopped to refill my rental car with fuel in the west of France. Here are the current prices. You see, the lowest grade of unleaded, 95 octanes, is 1,932€/l. That's pretty cheap, right? No, that's quite wrong. Why? Well, the currency conversion is $1.07 USD to €, first of all. Secondly, there are 3.785 liters in a gallon. What does that mean?
1.932€/l multiplied by 1.07 USD/EUR multiplied by 3.785 l/gal equals $7.825/gal.
It's $7.83 per gallon of gas here. You know what else is different? They don't have those stupid little stickers on every pump of Joe Biden pointing to the price saying "I did that" because the USA president is not in control of gas prices in Europe, or the world nevertheless. A small consortium of oil companies is in control of the prices. That means an even smaller number of powerful people control the prices around the world for how much we pay to transport ourselves and our goods.
3 June 2022
We managed to maintain our gains for the year as markets vacillated during the week closing down 1% and more on Friday. One day talking heads are bullish, the next day bearish. We continue to trade and adjust. Those actions have benefited us this year.
We added Amazon which splits 20 for 1 on Monday and also reentered the equal weight NASDAQ 100 (QQQE) after trading the QQQM for another nice profit. We profited in HPE when it dropped 10% on Thursday and rose 5% into Friday. We let Citi go for a loss to reenter KBWB the major bank ETF which has been kinder to us this year. We took scratch profits in Intel and Cisco and GM and a loss in Ford while also realizing a nice profit in Macy's and Container Store and a flat trade in Urban Outfitters. We added Best Buy to accounts and repurchased Under Armour Thursday after selling on Monday to complete our retail portfolio: Abercrombie, American Eagle, The Gap, Under Armour and Bed Bath. If we are going to be in volatile stocks, we are more comfortable with those than the Snaps and Rokus et al. We were in and out of Verizon and AT&T for scratches as we decided we would rather have the cash available with no market risk. Our cash position is 50% and greater in most accounts.
Tesla has been super selling cars surprising us and other old foggy doubters. Even with the recent 25% pullback the share price is overpriced by magnitudes versus Ford and GM and Toyota and Volkswagen. General Motors (7 million vehicles) and Ford (4 million vehicles) together sell over 10 million vehicles a year and earn bottom line over $16 billion ($8 billion each). They each are currently equity valued at $50 billion. Tesla will sell 1 million cars this year earn $8 billion and has a market value $800 billion (15 times either GM or F). Eventually TSLA's valuation will approach that of the other car makers by TSLA retreating to a reasonable P/E of 10X or the other makers going from 5X to 10X.
An example of retrenchment is the drastic reduction of Netflix's value to $90 billion from a Covid high $500 billion (currently $190 per share). Before this quarter's earnings report Netflix had already lost half (to $350) its sky high Covid era valuation ($700 per share). The report that subscriptions had actually dropped caused a further pullback. Now priced at 17 times earnings NFLX has left the world of fancy stocks and entered the world of large cap value stocks.
The drop in the value of fancy stocks over the last 6 months has decimated individual investors and traders, institutional investors who don't know how to pull the sell lever, and several overly aggressive highly leveraged many billion-dollar hedge funds run by folks who believed their own hype and who weren't running other peoples' money (thus the willingness to assume excessive risk-for the 30% take of the profits) in the 2000 to 2005 Dot Com bust. Sometimes history does repeat, the actors are just different. Now the current crop of masters of the universe knows how those long-ago wunderkinds felt. (We felt that way in October 1987 and changed our investment style going forward.) (Russia and Ukraine is another example.)
Microsoft and Qualcomm etc. were the wonder stocks of the Dot Com boom era and took years to recover after the Dot Com bust of 2000. It took time for earning growth to support price recovery. Because there is so much indexing-and closet indexing- the recovery in fallen large cap fancy stocks may occur more rapidly. But if the recovery exceeds earnings growth these issues will remain subject to more than usual volatility in any run of the mill 10% corrections.
Of course, the fancy stocks even now priced at 30 times sales with no or negative earnings trade in a world of their own and will continue to be sources of wonderment as they soar and collapse 30% or more on any positive or negative comments. These stocks live in the fantasy world of hedge funds, computer folks, short sellers and get rich quick meme followers.
More thought provoking articles:
In a strange, animated video, Cryptoland paints itself as the ultimate utopia, featuring luxurious villas, a casino and a private club, all located on a pristine island in Fiji. Built by and for cryptocurrency enthusiasts, it was looking for investors.
To Molly White, the project wasn't just cringeworthy bluster, it was promotional material for yet another potential scam — one that was targeting the money of real people. Digging into Cryptoland's organizing documents, she found a business plan full of contradictions and other red flags, like an address in the Seychelles islands, a tax haven which has hosted previous high-profile crypto scams.
'Lots of companies are going to get vaporized': The tech titans of Silicon Valley are in serious trouble — and they're going to take the rest of the stock market down with them'
The brightest minds in America have gone West over the past 20 or so years to prospect for ideas in Silicon Valley. Not to gain riches, we were told, but to solve urgent problems and make things we could use. All we needed to do was get enough seed money to the right minds to develop the right technology, and we could solve everything from mobility to climate change to inequality. This idealistic gold rush minted new billionaires, tech titans who captivated investors and entranced the public with promises of a better tomorrow.
But now these vaunted tech geniuses are watching their empires crumble in the face of changing economic winds. Interest rates are rising from historic lows, and it's become clear that a wide array of tech companies — from the most lionized to the most ridiculous — cannot survive without easy money. Silicon Valley's inability to weather this inevitable shift is both a disappointment and a wonder. We've seen a tech bubble expand and pop before, bridging the end of the 1990s and the start of the 2000s, but what makes this time so different is the sheer scale of the destruction this will leave in its wake.
Jim Chanos, founder of Kynikos Associates, made a name for his short-selling firm by calling out the excesses of the last tech boom, earning him a forever spot in the Wall Street pantheon of "people who saw it coming." This time around, he told me, the companies that could crumble are even bigger — and they make up a bigger slice of the economy.
"Our typical short in early 2000 was a $2 billion to $3 billion company that was going away. This go-round it's a $20 billion to $30 billion company. That's why we call this the dot-com era on steroids," Chanos said. "I think lots of companies are going to get vaporized. A lot of them are going to go to zero."
For the past couple decades, Silicon Valley's luminaries told us that money was just fuel for their innovation. What the market is showing us now — as once seemingly stable businesses degenerate — is that money was also the engine, the captain, and the destination. In the next few years, many of the hottest tech innovations of this market cycle will simply disappear. Consider this an extinction-level event.
Read more: https://www.businessinsider.com/twilight-of-tech-gods-recession-stock-market-crash-silicon-valley-2022-5
And one more comment on the Muskman:
Despite Musk's "super bad feeling" about the economy, the richest man in the world wrote last week that a recession would be a "good thing" because "it has been raining money on fools
Twitter users were quick to point out that Musk himself has received massive tax breaks ($64 million from Texas alone), and that his companies have ultimately benefited from some $5 billion in government support.
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