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Lemley Yarling Management Co
309 W Johnson Street
Apt 544
Madison, WI 53703
Bud: 312-925-5248       Kathy: 630-323-8422

August 31, 2011

Model Portfolio Value As of 31 August 2011

$ 537,791

Comment on Model Portfolio activity

We added shares of Alcoa and Intel to accounts. We also added a few shares of Pep Boys (the auto repair folks) ahead of earnings on 9/7 to accounts. Three months ago PBY dropped 30% in price when earnings disappointed. Our guess is that it won’t occur again.

We took trading profits in Ingersoll Rand and Microsoft.

Deutsch Telekom dropped 10% on news that the Justice Department will oppose the AT&T/T-Mobile takeover. Deutsche Telekom owns T-Mobile. DT is cheap - with a 7.8% dividend there is at least a 20% plus gain potential with limited long term downside risk. If the deal doesn’t go through DT gets $3 billion from AT&T.

We are also taking a small flyer - in larger accounts - on Talbot’s common shares at $2.95 ahead of earnings--losses. A hedge fund has acquired a 9.9% ownership interest in Talbot’s. On that news in early August the share price ran up over $4. The company then adopted a poison pill to protect management. We would too if we were paying ourselves $13 million as our stock price tanked and losses mounted. We think that part of Talbot’s problem-aside from lousy greedy management- is that its demographic is just not spending money on clothes in this slow economy. If it pops on earnings/losses we may sell.


August 29, 2011

Model Portfolio Value As of 29 August 2011

$ 533,542

Comment on Model Portfolio activity

With the major market measures up strongly Monday morning we sold our Bank and Semiconductor ETFS to place a bit more cash in accounts. Strong Monday mornings have led to weak Tuesdays for the last month and we want to trade that action with a few dollars. We hope the pattern changes and we are wrong since we own a full complement of individual issues in all accounts.

This week may be volatile since it is the last week of vacation ahead of Labor Day and also the Hurricane may have some folks on the sidelines.

Want Investment Success? Now's Not the Time to Be on the Sidelines

By Jeff Saut Aug 29, 2011 10:30 am

The time to stay out of the market was months ago, not after a ~20% decline in the S&P 500 from its intraday high on May 2 to its intraday low on August 9.

“The summer wind came blowin’ in from across the sea. It lingered there to touch your hair and walk with me"

-- Frank Sinatra, lyrics by Johnny Mercer

Irene “came blowin’ in” over the weekend for the first hurricane to hit the East Coast in years. In fact, New England has not experienced a hurricane since “Bob” attacked in 1991. For over a year I have been commenting about the weird weather that was surely coming. Since then we have experienced the anticipated extremely cold wet winter, tornadoes in the Midwest of historic proportions, floods around the world, hurricanes, and droughts. Indeed, in Russia droughts destroyed 40% of the grain crop, sparking an attendant rise in grain prices. The same drought caused 30-foot-deep “cracks” to appear in the farmlands north of China’s Inner Mongolia Autonomous Region, keeping farmers out of the fields. Meanwhile, other parts of China have been experiencing floods and mudslides. In this country certain regions have seen 100-year floods, while places like Texas have had 100+ degree temperatures for months with no rain. I could go on, but you get the idea -- the weather has turned undeniably weird.

To be sure, I have commented that while to some degree the environmentalists are right about the climate change being attributable to “man,” undeniably the weather is also being compounded by a La Niña weather pattern coupled with more volcanic ash in the atmosphere than anyone can remember. That combination has allowed the Tropics to expand as the Tropic of Cancer and the Tropic of Capricorn have moved toward the Poles. Well, that’s not factually correct because the Tropics can’t really expand since they are defined as being 23° 16’ 16” above and below the equator. What has expanded is the “reach” of the Hadley cell winds, which have moved closer to the North and South Poles. Recall the Hadley cell winds dominate the Tropics carrying hot equatorial air up into the troposphere where atmospheric circulation carries that air north and south. The air eventually sinks back to Earth. Where the air rises, the atmospheric pressure is low, causing heavy rains and storms. Where it sinks, it produces high pressure areas characterized by deserts like the Australian Outback. The shift in the Hadley cell winds has played havoc with the trade winds, producing droughts in otherwise moist parts of the world and monsoons in previously dry locals. Said “shift” has allowed tropical zones, and deserts, to expand. This is not an unimportant event because the changed weather patterns have major implications for agriculture and the world’s soil bank.

To wit, much of the world’s topsoil is eroding and therefore declining in nutrient quality. According to wiseGEEK:

“Topsoil is the upper surface of the Earth's crust, and usually is no deeper than approximately eight inches. The Earth's topsoil mixes rich humus with minerals and composted material, resulting in a nutritious substrate for plants and trees. It is one of the Earth's most vital resources.”

Unfortunately, topsoil erosion is occurring much faster than nature can replace it. In addition to the weather, modern agriculture techniques have hastened the erosion, as has row crop planting (corn, soybeans, cotton, tobacco, etc.) since row crops erode soil much faster than sod crops. Regrettably, once soil is gone, you can’t get it back! Plainly, this has grave implications because as I have stated for years, “When per capita incomes rise, the first thing people want is clean water, the second is a better diet.” With per capita incomes rising rapidly in emerging countries, the burgeoning food demand has left global grain consumption exceeding production; and over the next few decades the situation is likely to get worse because food production needs to expand by some 50% just to meet the estimated demand. Ladies and gentlemen, this means an additional ~6 billion acres of land is needed to meet the upcoming food demand, but only ~2 billion acres of good land is available. Thus, farmland should be a good investment and there are select public companies that play to this theme. Also of interest are ag-centric “technology” companies that hopefully can ameliorate some of the upcoming food shortfall.

I revisit the weather, water, and agriculture themes today not only because they have been three of my long-standing themes, but to emphasize why they should continue to be viable investments going forward. Importantly, water is by far the most undervalued asset I know of, yet it is difficult to find water-centric investments. Not so with agriculture.

As for the stock market, recently the most ubiquitous question has been, “Was that the bottom?” My response has been, “I think so.” Verily, if one has been using the October 1978 and 1979 bottoming patterns as a template, the correlation, at least so far, has been pretty remarkable. If that R² continues, it suggests the “selling climax” lows occurring on August 8 and 9 should prove to be the lows. However, that does not mean we can’t spend a few more weeks in “bottoming mode.” As stated, the October 1978 bottoming sequence took six to seven weeks, while the 1979 sequence encompassed only four to five weeks.

The ideal chart pattern would be what a technical analyst terms a “wedge” formation (see chart below).

S&P 500 -- 3-Month Candlestick Chart (Courtesy of Thomson Reuters)


According to StockCharts.com:

“Wedge: A reversal chart pattern characterized by two converging trendlines that connect at an apex. The wedge is slanted either downwards or upwards demonstrating bullish or bearish behavior respectively.”

While a “wedge” bottoming formation should take a few more weeks to complete, many stocks have likely already bottomed.

The call for this week: Just like the surfer interviewed over the weekend who grabbed a board and leapt into the Irene-induced waves, investors need to “grab a board” and catch a wave if they want to achieve investment success. But to do that, first you need to get into the water! The time to stand on-shore was months ago, not after a ~20% decline in the S&P 500 (SPX) from its intraday high on May 2 to its intraday low on August 9. While my firm has been pretty conservative in our stock recommendations over the past three weeks, we would become more aggressive if the SPX can break out above the recent rally-high of ~1208. And while the odds of a recession have clearly increased (to 30%), my hunch remains we will avoid it. Accordingly, I will leave you with this quip from our restaurant analyst, “Every casual dining company that has spoken to Wall Street has said they have seen no evidence of behavior change despite all the scary headlines of the past six weeks or so. If we have a recession, this would be the first one in my 25 years as an analyst that was not foreshadowed with weakness at full service (the most discretionary) restaurants.”


August 26, 2011

Model Portfolio Value As of 26 August 2011

$ 513,899


August 24, 2011

Model Portfolio Value As of 24 August 2011

$ 513,998

Comment on Model Portfolio activity

We sold KRE (the Regional Bank ETF) to buy American Eagle as it dropped 10% in price today on earnings. We sold the stock at $12.30 three weeks ago to be out when earnings were announced and we bought back today at $10.55.

AEO yields 4% – an income stock – and has $500 million in cash on hand ($4 per share) and no debt. Same store sales were flat for the quarter and earnings for the year are expected to be about 90 cents per share.

We saw this note on a website and we wish to share it since it is a concise explanation of our outlook: (author’s name not provided)

Gold reflects people’s fear perceptions and has no earnings power or value except the hope that someone else has a greater fear than you, so you can sell to them at a higher price—sound familiar? i.e. the real estate market 2002 to 2007.

The S&P 500 reflects the earnings and growth potential of the real world, not a perception of fear.


August 23, 2011

Model Portfolio Value As of 23 August 2011

$ 506,993

Comment on Model Portfolio activity

We added Ford warrants to accounts and sold BP to buy KRE and KBE.

August 22, 2011

Model Portfolio Value As of 22 August 2011

$ 491,116

Comment on Model Portfolio activity

First a story: we took a trip to Flagstaff, Arizona to deliver some furniture to our newly married daughter. On the return- we drove- we were just past Pueblo Colorado on the interstate when a grizzly bear bounded out of a ditch running straight for our car. We swerved and he did also and then ran behind us and made it across the four lanes without being hit. They run very fast. And so we avoided one bear while we were away but the second bear has been threatening ours or clients’ accounts. Hopefully we will survive this bear also.

1112 is important support and the S&P closed there a two weeks ago Tuesday and also last Friday. The S&P opened 1.2% higher this morning and then moved back down to even before rallying for a second time at noon. But by the close the major measures were flat to negative.

We couldn’t take the pain and switched GM to Nvdia and the SPDR Financial. GM is very cheap but is under selling pressure. Our guess is that there is shorting being done by hedge funds and who knows how low they will take it. We have exposure to autos through our large Ford position and the NVDA and XLF purchases will allow us to make back the GM loss plus. We also sold three of the individual bank stocks we own and add eth proceeds from those sales to our ownership of the SPDR Major Bank and SPDR Regional Bank ETFs. We added Briggs & Stratton at $13.95 to accounts that owned Northern Trust and Microsoft and Intel to some of our larger accounts.

The stocks we own are cheap. We can’t control Mr. Market but we can control what we own. We have been adjusting ownership moving from good to better as the markets have corrected and will continue to do so.


August 19, 2011

Model Portfolio Value As of 19 August 2011

$ 492,990

August 18, 2011

Model Portfolio Value As of 18 August 2011

$ 503,302

August 17, 2011

Model Portfolio Value As of 17 August 2011

$ 527,917

Comment on Model Portfolio activity

We switched Hewlett Packard to Dell today on a share for share basis. Dell’s earnings were better than but revenues weren't and Dell cut growth forecasts for the year. Part of the revenue miss was from exiting low margin businesses which is a longer term plus but the short term hindrance to price. With Dell down 10% today and HPQ down 5% and HPQ earnings due tomorrow after the close we are exiting HPQ’s unknown results for Dell’s known and lower price. Given the market’s current dislike of HPQ and the mixed market action of today we would rather be out than in for the report.

August 16, 2011

Model Portfolio Value As of 16 August 2011

$ 532,340

Comment on Model Portfolio activity

After doing some reading and thinking last night – we do both at the same time – we repurchased Nokia in accounts 30 pennies higher than the sale price. It seems the reason Google is buying Motorola is for the patents and Nokia has some important patents witness the billion dollar settlement in Nokia’s favor with Microsoft. We also added shares of The Hartford to accounts.

August 15, 2011

Model Portfolio Value As of 15 August 2011

$ 538,258

Comment on Model Portfolio activity

We sold the Internet ETF IGN for a short gain and Nokia for a scratch on the pop both had today on news that Google is acquiring Motorola. We still like Nokia but we don’t think Microsoft will acquire them – especially after Google’s action since it would look like follow the leader.

August 12, 2011

Model Portfolio Value As of 12 August 2011

$ 523,806

August 10, 2011

Model Portfolio Value As of 10 August 2011

$ 493,814

Comment on Model Portfolio activity

We couldn’t resist buying Disney down $4 per share this morning and down from $44 to $30 in the last 3 months. The share price dropped as analysts nit-picked DIS earnings report.

Disney: Zacks Equity Research, On Wednesday August 10, 2011, 11:35 am EDT


Strong performance of the Media Networks and Parks and Resorts divisions facilitated The Walt Disney Company (NYSE: DIS - News) to deliver better-than-expected third-quarter 2011 results that outshined the Zacks expectations.

The quarterly earnings of 78 cents a share came ahead of the Zacks Consensus Estimate of 73 cents and jumped 16% from 67 cents earned in the prior-year quarter. However, on a reported basis, including one-time items, quarterly earnings came in at 77 cents per share.

Total revenue in the quarter increased 7% to $10,675 million from the year-ago quarter and came ahead of the Zacks Consensus Revenue Estimate of $10,451 million. Total segment operating income increased 8% to $2,731 million.

Sequentially, Disney has made a positive comeback in the reported quarter, beating performance in the previous quarter. The company remains well positioned to drive revenue growth in the coming quarters through its strategic initiatives.

In a move to boost the performance of ESPN, the company signed 2 new agreements. ESPN was the key driver of revenues at the Media Networks division during the reported quarter. Disney gained a 12-year deal for multi-platform rights for a wide range of Pac-12 conference sports and also entered into a 12-year deal to be the exclusive U.S. broadcaster of Wimbledon.

Such moves not only fortify its position but also expand its coverage area while creating long-term opportunities.

Disney is in talks for cash retransmission payments for owned television stations and license fees from affiliated stations. Disney notified that its owned stations have entered into agreements with quite a few multi-channel distributors and has completed license agreements with non-owned affiliates.

Disney reported its quarterly results amid the financial turmoil following the Standard & Poor's first-ever downgrade of U.S. debt. However, the company did not change its strategies and remained focused in deploying its capital toward expanding its Parks and Resorts business and in turn, enhancing its markets and creating long-term growth opportunities.  

Further, Disney Store, the retail merchandising arm of the company, is opening interactive concept stores in more than 40 locations in 2011, thus expanding its reach to new markets.

Backed by the successful launch of the innovative design store in 2010 coupled with the huge demand from retail property owners, Disney Store is optimistic about its interactive store and plans to open 60 new concept stores in 16 major markets in North America across 8 countries by the end of 2011.

Better-than-expected results enable the company to enhance shareholders value through share repurchases and dividend payout. The company notably augmented its rate of share repurchases during the quarter and bought back 35.1 million shares for approximately $1.4 billion.

Collectively, the consequences of the above amplified the reported quarter’s earnings per share.

Media Networks revenue rose 5% year over year to $4,949 million due to revenue increase across Cable Networks (up 7%), partly offset by a decline in Broadcasting revenue (down 1%). Segment operating income rose 11% to $2,094 million.

Cable Networks’ operating income jumped 10% to $1,844 million driven by growth across ESPN and the Disney Channels. Operating income at the Broadcasting division soared 20% to $250 million, reflecting rise in advertising revenue at the ABC Television Network coupled with the fall in programming and production costs.

Parks and Resorts revenue rose 12% to $3,170 million. Segment operating income increased 9% to $519 million, reflecting higher guest spending at domestic parks and higher passenger cruise days, partly offset by lower revenue from Tokyo Disney Resort and Disneyland Paris.

Studio Entertainment revenue inched down 1% to $1,620 million compared with the year-ago quarter, while operating income plunged 60% to $49 million. The reduction reflects poor domestic and worldwide theatrical performance.

Consumer Products revenue rose 13% to $685 million and segment operating income jumped 32% to $155 million. The growth reflected increased licensing revenue from Cars merchandise and higher revenue from Marvel properties.

Interactive Media revenue for the quarter surged 27% to $251 million, but posted an operating loss of $86 million compared with an operating loss of $65 million in the prior-year quarter. The loss reflected the impact of acquisition accounting resulting from Playdom buyout.

During the quarter, Disney generated free cash flows of $1,106 million. The company ended the quarter with cash and cash equivalents of $3,519 million, net borrowings of $9,719 million and shareholders’ equity of $38,946 million, excluding a non-controlling interest of $1,976 million.

Walt Disney is one of the world's leading diversified entertainment companies. Moreover, the company commands a formidable portfolio of globally recognized brands, primarily its namesake brand Walt Disney, followed by ABC, ESPN and Marvel Entertainment. These brands offer a strong competitive edge to the company and bolster its well-established position in the market against major players like News Corporation (NasdaqGS: NWSA - News) and Time Warner Inc. (NYSE: TWX - News).


August 9, 2011

Model Portfolio Value As of 9 August 2011

$ 515,177

Comment on Model Portfolio activity

By the by, the S&P 500 was down 6.66% yesterday which we take as a good omen. Not that it was down but the 666 number- which is of course the sign of the devil- also was the intraday Day trading low on the S&P 500 back in March of 2009.

This morning on the first rally (there were many) we traded out of 1/3rd of KBE for scratch and switched it to DELL and all of XLF for a 35 pennies loss and switched half to Cisco.

We added to Cisco which is $1.25 lower than we sold last week. Cisco at $13.90 is priced below its March 2009 low trade. We traded DELL in June in the $15 range and repurchased here at $13.97.  Earnings for both come are 8/10 CSCO-8/16 DELL. We sold Cisco last week but the price drop in CSCO from the vicious sell off of the last week is compelling. We also think Dell is weak because of upcoming earnings but our guess is that these stocks are more tied to market action given the significant corrections in both. And so we bought half our usual amount.

We added AT&T with a 6% yield to large accounts and repurchased some Dell and Hewlett Packard 10% below last week’s sale and picked up a few shares of Walgreen and Ingersoll Rand for larger tax free accounts also 10% below last week’s sale price.

Our playbook of the last five days has played out as our crystal ball predicted. The HFT/Program trading boys and girls are working overtime spinning their machines. Early in the day the HFT/Program trading machines took the DJIA from up 130 at 8:45AM back to even by 8:50AM and then to up 240 and back to up 80. The DJIA dropped from up 130 to down over 200 in the blink of an eye after the Fed announcement. The DJIA then ran back to even and down 100 several times in less than 15 minutes time. In the final 30 minutes the major market measures skyrocketed with the DJIA up 429 points on the day; the S&P 500 up 53 points and the NAZZ gaining 124 points. Crazy.

We are content with our purchases and the prices at which we purchased but the volatility caused by the HFT & Program traders is more than we can take. And so we are heading to the sidelines for at least a few weeks. The correction we envisioned has occurred and we have readjusted portfolios and now have to wait and see if there is more downside and let the fear/greed equation play out.

From here –over the short term- we don’t have a clue. European banks holdings of distressed country debt (Ireland, Spain, Portugal, Greece, Italy) is the problem that needs to be solved. We think the ECB will work out an arrangement to purchase the distressed European countries’ paper held by European banks similar to the one the U.S. Treasury used when it partnered with private money and guaranteed private money against losses to buy some of  the distressed paper the Treasury had acquired from U.S. banks back in 2009. When that facility is arranged the markets should make a bottom. Sooner is obviously better than later.


Ford Motor Co. (F), which fell below $10 yesterday for the first time in 13 months, is not receiving the credit it deserves from investors, Bank of America Corp. said.

Ford shares, which dropped 41 percent this year through yesterday, are trading at 2.6 times earnings before interest, taxes, depreciation and amortization, compared with a historical average of 4 to 5 times earnings, Bank of America analyst John Murphy wrote in a note today. Murphy added Ford to the company’s US 1 list of stocks with a buy recommendation.

“Even in the downside scenario of a double-dip recession, Ford’s stalwart balance sheet is substantially healthier than in 2008,” Murphy wrote. “But we believe that the market is not giving Ford’s stock credit for the company’s balance sheet health.”

Ford had net income of $4.95 billion in the first half of the year, as fuel-efficient models like the Fiesta subcompact attracted buyers in a slowing U.S. auto market. Ford paid down debt by $2.6 billion in the second quarter, leaving it with $22 billion in automotive gross cash and $14 billion in debt.

“The recovery in U.S. demand should drive the auto stocks higher while Ford’s product cycle hits a sweet spot driving market share gains, with a ‘fortress-like’ balance sheet,” wrote Murphy, who has a price objective on Ford stock of $26. “It should also be noted that second-quarter results were solid.

This article was written by Collins Stewart LLC's Chief Equity Strategist and Director of US Equity Research Tony Dwyer.


Clearly, we did not expect such a dramatic drop in prices, and at this point “levels” or sentiment are not too useful because the market is being driven by extreme emotion. To give you perspective on yesterday’s decline, according to my stats dude, declining stocks outpaced advancing stocks by 67-to-1.

To give you perspective on what the financial press is calling the “Barack-o-lypse Now” decline yesterday (due to the president's comments leading to an acceleration to the downside) -- dating back to 1940, the others that came close were:

5/13/40 (66-to-1). German tanks broke through French armies during WWII.

5/21/40 (63-to-1). Again, investors were stunned by German advances in WWII.

10/19/87 (38-to-1). The Black Monday crash.

11/3/48 (36-to-1). President Truman was re-elected. Investors didn't like that.

The markets are clearly looking forward to today’s FOMC meeting, where it is widely expected the Federal Reserve will show increased monetary accommodation through either extending maturity of Fed holdings or cutting the interest rate on reserve deposits. Those expectations were around yesterday too, but it did not help the markets as they were in a full-blown panic. Driving that was continued partisan politics in Washington following the S&P downgrade of US debt. In order to even make a temporary low, the banks need to stabilize, credit needs to regain some of yesterday’s panic, and the market needs to hold its gains in the first hour of trading.

Declines like the past 12 days are very rare and typically are followed by a violent double-digit reflex rally and then a retest of the low. There is no question it will take time to make an intermediate-term bottom similar to any other major low. For example, while the charts look like a “V” bottom in the 1998 Russian debt default and Long-Term Capital Management crisis, the market acted as follows:

SPX dropped 21% from 7/20/98-09/01/98 and was 12.6% below 200-day moving average, (SPX currently down 18% from peak and 13.2% below 200-day). To match this decline would suggest another 3% downside.

SPX rallied 13% over the next two weeks.

SPX dropped 12% and retouched the low on 10/08/98.

The recent decline really smoked confidence in our global leadership and financial system, and that confidence should take time to rebuild – but it will, in my firm's view, because the capital markets always make our governments and central banks do the right thing. And unfortunately, pain is normally the motivator, and this has been a phenomenal amount of pain. In our view, similar to the post-1998 crack, there is likely to be negative monthly Personal Consumption Expenditure reading, but ultimately the stimulative effect of lower commodity prices and interest rates should make a spending retrenchment temporary.


August 8, 2011

Model Portfolio Value As of 8 August 2011

$ 493,184

Comment on Model Portfolio activity

2 new highs and 1304 new lows on the NYSE says it all. By that we mean that the markets tanked but that the selling is overdone. Of course Mr. Market does his own thing and so it may stay oversold for a while longer.

The DJIA was down 5.5% and the S&P 500 6.6% and the NAZZ 6.9%.

S&P downgraded U.S. debt even after a $2 Trillion (yes that is trillion) figuration error on the amount of total debt incurred over 10 years was pointed out to them. As a counterpoint to all the negative talking head nonsense about the downgrade U.S two year Treasuries traded at a historically low yield (historically high price) of 0.25%. In effect folks are loaning money to the government for two years and earning no return. They want the safety of U.S Treasury securities.

With the S&P 500 at our correction target of 1115 we added shares of Merck and Newell at their yearly lows. Merck yields 4.9%. We traded Newell at $15 for a $1 profit a few weeks ago and we bought it back at $12.80 to hold. We reentered DreamWorks below our June sale price and added to Morgan Stanley and purchased Northern Trust, JP Morgan, KRE (regional center bank ETF) and KBE (money center bank ETF) all to hold. We bought XLF to trade. GE traded lower on the opening and we added to positions. We also bought British Petroleum with a 4% yield.

Three stocks in same industry:

Ford: is priced at $37 billion in the marketplace with revenue of $130 billion and $20 billion of cash on hand and operating earnings of $7 billion.

GM: is priced at $37 billion in the marketplace with revenue of $140 billion and $30 billion of cash ($20 billion net cash) and operating earnings of $7 billion.

Toyota: is priced at $240 billion in the marketplace with revenue of $225 billion and $40 billion of cash and operating earnings of $15 billion.

Ford and GM sell at 25% of sales and 6X earnings. Toyota sells at 1X sales and 16X earnings. Go figure.

Jeff Saut, Raymond James technician:

Rumors were flying while I watched last Thursday’s tumble.

The two most credible were:

A major rating agency was about to downgrade the US credit rating.

A major institution was in trouble and being forced to liquidate its portfolio.

Obviously, one was right and the other wrong, as late Friday Standard & Poor’s downgraded our nation’s debt rating to AA+. And, “There is no joy in Mudville -- mighty Geithner has struck out,” as our treasury secretary has repeatedly declared, “There is no chance the US will lose its top credit rating.” Such statements have left a bevy of cries for Secretary Geithner’s removal, fostering at least the illusion of a shakeup in the country’s financial course.

While it is doubtful Tim Geithner is even marginally responsible for our debt debacle, in politics it is all about illusions. In fact, the current national malaise reminds me a lot of President Jimmy Carter’s 1979 “Crisis of Confidence” speech. If you have five minutes, click here to watch it.

So what are the implications of Friday’s downgrade? While it will likely take weeks for that question to be answered, as of this writing the answer seems to be “not much.” That “consensus call” is based on what happened to Canada, Australia, and Japan when they lost their AAA status. The result was only a minimal economic impact in those countries. That said, we are not so certain that will be the case here given our nation’s reserve currency status and the fact there are so many other financial instruments geared to US Treasuries. As Raymond James chief economist Dr. Scott Brown writes:

It should go without saying that nobody knows precisely how things will unfold from here. One issue is that while S&P downgraded, Moody's and Fitch have not. Some have suggested that a downgrade would lead to higher borrowing costs for the US However, we haven't seen much of an increase in bond yields in other cases where sovereign debt was downgraded.

Treasuries are still considered to be the "safe" asset – so, I wouldn’t expect a big increase in Treasury yields. The bigger concern will be second- and third-round effects through the financial markets. Downgrades to agency debt (Fannie Mae, Freddie Mac), a number of states, and municipalities will follow on Monday. Money market outflows are likely to increase (as people move to insured bank deposits). The Fed is likely to move to support the money markets (as they did during the financial crisis) and may set up other liquidity facilities. In issuing guidance to banking organizations for risk-based capital purposes, the Fed indicated that risk weights for Treasuries and agencies will not change. Still, a number of banks have large holdings of agency debt and may be inclined to increase capital and tighten loans for consumers and businesses. We’ll have to wait to see how markets react and what the expectations are for US equities.

Accordingly, we wait to see the economic impact of recent events while contemplating Soren Kierkegaard’s sage words, “Life can only be understood backwards; but it must be lived forwards.”

So what do we think we know about “living forwards?” Well, while I didn’t believe it was going to happen, the Dow Jones Industrial Average (DJIA) confirmed the Dow Jones Transportation Average (TRAN) last week when both of those indices broke below their respective March 16, 2011, closing reaction “lows,” thus rendering a Dow Theory “sell signal.” It was the first such “sell signal” since November 21, 2007.

Unlike the November 2007 “sell signal,” this one came at much lower valuation levels and following a nearly 11% decline since the selling stampede began on July 8, 2011. Recall, however, that selling stampedes typically last 17 to 25 sessions, with only one- to three-session pauses/corrections before they exhaust themselves. Last Friday was the 21st session in the selling skein, making this decline long of tooth. Also of note is the Dow’s dive has left the NYSE McClellan Oscillator more oversold than it has been in years; likewise, the percentage of stocks above their 10-day moving averages dropped to 0.79%, the lowest reading (most oversold) since 1991. As InvesTech Research’s astute James Stack writes:

On today’s close (August 4), our short-term Pressure Factor hit an extraordinary oversold -169 (normally, -80 is an ‘extreme’ oversold reading). There were only six occasions in the past 60 years when the Pressure Factor has dropped below -160 ... None of those instances saw the S&P even 1% lower one week later. Only one instance saw the market negative one month later -- last summer, which marked the correction bottom. And interestingly -- perhaps coincidentally -- five of the six saw the market up over 19% twelve months later. Such oversold extremes typically do not mark the beginning of a bear market.

While I certainly hope Mr. Stack is correct, I must admit the Dow Theory “sell signal” concerns me. Still, the bone-crushing decline since early July has used up so much energy (read: extremely oversold) that it's reasonable to expect a “throwback rally” from some sort of stock market low.

Indeed, just like you can only press down on a spring so far before you get a “boing” bounce-back, the same is true in the equity markets. Moreover, I think the recent rout is more about the aforementioned “Crisis of Confidence” environment than the fundamentals. To be sure, as of yet there is no economic evidence the country is sliding into recession -- slow growth, yes; recession, no. That view is reinforced by the Yield Curve, which has been one of the most reliable predictors of recessions. To wit, every recession for the past 50 years has been preceded by an inverted Yield Curve (short-term interest rates above long-term interest rates). Currently, the Yield Curve is very steeply sloped, as can be seen in the chart at the end of this article, from our friends at the Bespoke Group. In fact, the US has the steepest-sloped Yield Curve of any I can find.

Meanwhile, we are wasting a terrific earnings season with 61% of companies reporting beating estimates, while 68% beat revenue estimates. The result has left the S&P 500’s (SPX) earnings estimates for this year nestled around $100 and pushing toward $114 for 2012. If those estimates prove correct, at last week’s intraday low (1168.09), the SPX was trading at a PE multiple of 10.3x next year’s earnings, with an Earnings Yield of ~9.8% ($114 / 1168), leaving the Equity Risk Premium for stocks at ~7.4% (Earnings Yield – 10 year T-note yield of 2.4%) for the highest ERP in a generation.

This implies either earnings estimates are too high (I don’t believe it), the country will slide into recession (I don’t believe it), or stocks are undervalued (my position). Hence, if you did not raise some cash last February to March as recommended, I think it is a mistake to do so here since we should get some kind of rally either off of last week’s low, or a low early this week. In that rally, it will be important to monitor the market’s internal metrics with an eye toward pruning underperforming stocks from investment accounts. While my hunch is last week’s Dow Theory “sell signal” will prove false, like the one that occurred during May 6, 2010’s “Flash Crash,” I would still tread carefully “living forwards.”

The call for this week: For weeks I have stated that a credit rating downgrade was a fait accompli and possibly already discounted by the markets; this morning that doesn’t seem to be the case, with the pre-opening futures down around 30 points. Whatever the various markets’ near-term reaction, the fact is that everyone is merely offering their intelligent guesses as to the outcome of this historic “downgrade” event. One thing I do believe is what I wrote last week, which is likely a catalyst for the downgrade (as paraphrased):

While I don’t embrace the Tea Party, their ‘sea change’ is palpable. Nowhere is this more apparent than the current debt ceiling debate. The Tea Party seems to have surfaced our nation’s "political corruption," which hinders the proliferation of prosperity. Interestingly they are not the first, for such thoughts were first scribed by Adam Smith in his book The Wealth of Nations (1776). Whether you like, or hate, the Tea Party, there is definitely a palpable change afoot that over the long term could be extremely bullish for the economy, the stock market, and our country.

In conclusion, I leave with these thoughts from legendary investor Jim Rogers:

When asked how he made his money, Mr. Rogers answered, “I sell euphoria and buy panic.” The way he determines that is to wait until prices are “gapping” in the charts. Gapping on the upside is “euphoria,” while gapping on the downside is “panic.” Currently, gold and Treasuries are gapping on the upside; and, stocks are gapping on the downside. The implication, even though I believe gold is in a secular bull market, suggests partial positions should be sold in precious metals and the freed-up cash should be used to buy fundamentally sound stocks with decent dividend yields. Obviously, the weeks ahead will determine if this is the correct strategy. All said, in my opinion it is too late to panic. The time to panic, and raise cash, was months ago (we did). Now it is time to selectively redeploy that cash into select equities.


August 5, 2011

Model Portfolio Value As of 5 August 2011

$ 518,835

Comment on Model Portfolio activity

No one said it would be easy. The Employment Report was much better than expected with 154,000 private sector jobs (and the last three months revised higher) added and the major market measures rallied 1.5% at the opening. Then the spoilsports arrived and the measure moved down 1% for a 2.5% reversal. Trading then ranged between up on 1% and down 1% all morning. In the afternoon news that Europe was going to take action (buying bonds/saving humanity?) sent the major measures up 1% and then the measures see sawed in positive territory entering the final hour with the NAZZ lower but the DJIA and S&P 500 up 0.5%.

In the final hour the markets traded either side of flat as traders decided they had enough risk/reward for the week. At the close the DJIA and S&P 500 were grudgingly higher while the NAZZ was down 1%. Our ‘guess’, Monday down; Tuesday the relief rally begins.

Our basic fear remains that the Congress and President Obama and the leaders in Europe are focusing on deficits when they should be spending money hand over fist. There are myriad infrastructure projects in this country from extending and improving the internet and the electrical distribution system; increasing wind and solar energy production, building schools; and repairing roads. These projects would be productive for 10/20/50 years and should not be looked at as current expenses but as long term capital improvements. Anyone who buys a house and puts 50% down is considered too conservative. We are sure most of the lawmakers carping about Government debt have 80% or more mortgages on their homes and those mortgages surely represent two or three times their year net income. Yet when it comes to government spending they are nickel and diming the country to recessional well we can’t change it so we have to trade around it.

We don’t think there will be a Crash (20% one day drop) because the Employment Report was positive. But the High Frequency traders will continue to roil the markets. Long before the selloff began two weeks ago we wrote that we thought (but didn’t expect) that the S&P 500 might drop to 1150 if the correction got out of hand. Last year we went from 1250 S&P to 1040 from May to September 1 down 16%. This year we have gone from 1360 to 1180 today down 13%. 1150 (down 15%) should be the bottom on Monday unless…..The S&P 500 is at 1180 as we write at 11 AM. Since it is within 2% of our target and with the 15% down swoosh over the last two weeks – plus having refocused our portfolios- we are placing a bit more capital at risk.

We traded EWG (Germany ETF) -flat, KBE-down 20 pennies and XLF plus 15 pennies today. We bought them to hold but lost our nerve. It’s that kind of market.

We did add to our GM and GE positions as we did to Ford yesterday at the close because we plan to stick with them for the duration. Ford and GM are both at 5 times earnings and GE is at 10X and is our closet financial/market stock.

We added the ETF - IGN which is a networking index ETF that has Cisco, Research in Motion, and Juniper among its holdings. It gives exposure to the internet space without the risk of owning individual stocks. 

 The iShares S&P North American Technology-Multimedia Networking Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of U.S.-traded multimedia networking stocks as represented by the S&P North American Technology-Multimedia Networking Index™.

Top Daily Holdings* as of 8/4/2011

View all holdings
























And in our larger accounts we added a few shares of NVDA ahead of earnings; Molex which is a fine small company based in Illinois; and Morgan Stanley on its low.

8/1 MarketWatch:

UBS analyst Uche Orji pointed to Mercury Research data showing Nvidia gaining share in the overall graphics-chip market and the notebook graphics-chip market.

“Nvidia gained 8.9 points of notebook discrete [graphics-chip] share to 50.6%,” he wrote. “Overall, Nvidia gained 3.8 points of share to 54.6%.”

The gains came at the expense of Advanced Micro Devices Inc. AMD +0.85% , which has focused more sharply on the graphics-chip sector following its 2006 acquisition of ATI Technologies. AMD did gain share in desktop graphics chips, Orji noted.

MOLX priced at 1 X sales. Insiders own 40 % of company. Earnings estimated at $2 for this year (10X). Dividend yield 4%.

Molex Incorporated http://finance.yahoo.com/q/pr?s=MOLX+Profile manufactures and sells electronic components worldwide. The company offers micro-miniature connectors, SIM card sockets, keypads, electromechanical subassemblies, and internal antennas and subsystems for telecommunications market; and power, optical, and signal connectors and cables for end-to-end data transfer, linking disk drives, controllers, servers, switches, and storage enclosures for data products market. It also designs and manufactures connectors for home and portable audio, digital still and video cameras, DVD players, and recorders, as well as devices that combine multiple functions in the consumer market, as well as devices that combine multiple functions. In addition, the company manufactures cables, backplanes, power connectors, and integrated products that are found in various products, such as electronic weighing stations, and industrial microscopes and vision systems; interface cards, software for industrial networks, and connectivity solutions; and compact robotic connectors and I/O connectors for servo motors, as well as a range of products for automotive market. Further, it provides connectors and custom integrated systems for diagnostic and therapeutic equipment used in hospitals, including x-ray, magnetic resonance imaging, and dialysis machines. Additionally, the company provides manufacturing services to integrate specific components into a customer’s product. It sells its products to original equipment manufacturers, contract manufacturers, and distributors. Molex Incorporated was founded in 1938 and is based in Lisle, Illinois.

Morgan Stanley http://www.thestreet.com/_yahoo/story/11210610/1/morgan-stanley-ceo-sends-buy-signal.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA  executives have seized the market plunge to buy more of the company's stock. CEO James Gorman disclosed on Thursday that he had bought 100,000 shares of the investment bank for a total sum of $2 million, according to a regulatory filing with the Securities and Exchange Commission. The latest purchase increases his holdings in the company to 955,370 shares, valued at $20 million. Morgan Stanley is trading at its lowest level in more than two years at $20.39. Shares were bought at an average price of $20.62 each. Chief Financial Officer Ruth Porat bought 25,000 shares at an average price of $20.50, increasing her holdings to 665,169. Paul Taubman, co-president, international securities, snapped up 50,000 shares at a weighted average price of $20.38, raising his holdings to 1.1 million shares.


August 4, 2011

Model Portfolio Value As of 4 August 2011

$ 517,927

Comment on Model Portfolio activity

GM beat big time overnight and the shares are lower after 10 minutes of trading.  Dendreon, the company with the prostate cancer drug, is off 66% today from $36 to $11. The markets are becoming a take no hostage situation. The action reminds of 2009 when the HFT kids kept piling on the selling and the hedge fund boys and girls seem to have rediscovered the wonder of shorting stocks and scaring the pants off retail investors.

Today’s action is setting up for a rally tomorrow on the Employment number after a morning drop- or a Monday disaster. As we said yesterday we are leaning toward a Monday disaster and so we sold the opening today raising more cash. Our first sales were Cisco, Hewlett Packard and American Eagle. All three still have to report earnings in the next few weeks and with the current market mood – even if their numbers are good- we have no confidence the stocks will hold current levels.

Aéropostale is down $4 per share today on a warning and so the AEO is also vulnerable if the numbers are bad. AEO has the cash to survive and is a buyout candidate but no one does buyouts when markets crash. The ‘smart’ guys wait until stocks have recovered and then pay top dollar.

We sold our individual bank stocks and traded XLF and KBE for the day but eliminated both on front of tomorrow’s Employment Report.  We sold Alcoa because it was a market trade and Yahoo because a catalyst for a move higher is not present and it will fade lower if the markets do.

Finally we eliminated Walgreen and Ingersoll Rand, not because they are lousy stocks but because in 2009 they sold at half the level at which they currently trade. Ingersoll Rand is especially susceptible to bear shorting raids and so reluctantly we are going to the side on these two.

We added Ford to accounts at its yearly low with the idea of selling the Warrants on a rebound rally. The warrants have a $1.20 time premium in them at the respective prices and we want to capture it.

The headlines tomorrow will be the Market Crash and juxtapositioned against these headlines will be pictures on Obama’s 50th birthday party bash and super fundraiser. That is what is known as bad timing

One catalyst for a rally that we can envision is a ban on naked shorting of Country Specific Credit Default Swaps. The Congress is on vacation and the Republicans want Obama to fail. After the cut spending brouhaha of the last few months there is no chance of a meaningful second stimulus and the Fed floating money isn’t going to do much good since corporations are flush with cash. Batten the hatches.


August 3, 2011

Model Portfolio Value As of 3 August 2011

$ 532,058

Comment on Model Portfolio activity

We have raised cash over the past few days since the markets are not acting as we expected. 1250 on the S&P 500 was strong support and the markets slipped through that level to the downside very easily this morning. The markets then rallied back to 1250 and turned lower again. That is not the kind of action one sees when a rally is in the cards. (On the other side of the coin the markets are down 8/9 days in a row and so a Thursday rally would make sense to at least clear the oversold condition.)

We obviously have been wrong on the markets and we don’t like seeing account values drop precipitously. But that is now spilled milk and we have to deal with the markets as they are.

Value investing is taking it on the chin and with 75% of trading volume controlled by the HFT boys and girls we are going to have to ride out the storm. And our guess is that 1150 - 10% lower- is where the correction will stabilize.

This week is setting up like the October 1987 week that led to a Monday Crash. A rally tomorrow (which should occur even if the markets are going lower) and then a reversal lower Friday would confirm the similarity. Markets never crash off the top and the 10% correction in the S&P 500 over the past few weeks as created the 1987 Crash set up. And since the HFT folks have free rein and downtick shorting is again coming to the fore we would rather prepare for the worst while hoping we are wrong.

For that reason we have moved our larger accounts to 30% to 50% cash. There are plenty of value stocks going begging for buyers but we seem to be the only ones buying them. Rather the smart money is more comfortable trading Gold and Green Mountain Coffee at 100 times earnings. Not much we can do about this market but sit and watch.

And for a more positive view: http://www.minyanville.com/businessmarkets/articles/US-Treasuries-market-weakening-equity-market/8/3/2011/id/36110
Tony Dwyer:

The only thing hotter than Dallas right now is the emotion brought on by the confidence crisis in Europe and Washington. Following yesterday’s whoosh lower in equities and surge in flight into U.S. Treasuries, there is evidence the market could weaken further given the obvious short-term breakdown in price support. It is important to note, however, that the equity market is rapidly becoming oversold enough to suggest that any further weakness – even if nasty – should be made up in a sharp bounce, especially over the intermediate-term:

Earlier this week, I highlighted the equity market performance following a drop below the S&P 500’s (SPX) 200-day moving average that found since the 2002 market low, when the long-term moving average is in an uptrend and is breached, the SPX has dropped an additional 2% on average with a worst case drop of 3.4% prior to an oversold rally on average of 10%. A worst case drop in the current correction would be roughly 1240 that should be followed up by new highs later in the year.

The percentage of Lowry’s stocks above the 10-day moving average dropped to 4% and is now below 10% for two consecutive days. Similar to the above stat, there could be additional weakness. But when the selling is this intense over a short period of time, it surrounds at least a temporary turning point.

The ratio of the SPX/10-year U.S. Treasury has reached a minus-3 standard deviation. My pal Jason Goepfert from www.sentimentrader.com points out this is a rare level of so quickly shedding stocks in favor of bonds. Since 1962, this level has only been seen 17 times. On average it took two more days to see a one-month low and the average gain one month out was +3%. Two of the four negative occurrences a month later were in the heart of recessions.

Yesterday’s weakness brought the 50-day moving average of the TRIN Index to 1.38. That level has been seen five other times since 1996 -- 6/2002, 10/2002, 3/2003,11/2008, and 6/2010. The past two occurrences led to a temporary bounce and then renewed selling that represented very important turning points in the market (chart below). The 2002 and 2003 instances were at or within a couple days of a major intermediate-term low.

While there has been deterioration in the various technical metrics, it is important to point out that just eight days ago, the NYSE and S&P 500 cumulative advance/decline lines hit new all-time highs and the Lowry Selling Pressure Index hit a new cycle low. Those two intermediate-term indicators don’t suggest there can’t be corrections, but rather point to a pretty healthy market environment coming into the current correction.

In my firm's Down, But Not Out report, we highlighted that the economy doesn’t face a money problem, but instead has a “using it” problem. There is a crisis of confidence given the shenanigans in Europe and Washington that appears to be accelerating rather than being resolved. The Europeans decided to buy PIIGS debt to solve the crisis, but not for a few more months. Meanwhile there was a deficit agreement in Washington, but the ultimate decisions have been postponed pending a panel being set up to decide where we get spending cuts. We have yet to hear a single leader suggest they think the legislation is good. Basically, the global leadership is totally failing to convinced investors they have a solution to the confidence problem, and the longer it lasts the longer the very slow-growth environment will persist.

Based on the monetary backdrop, C&I Loan demand and other stimulative metrics, earlier this year we believed the Fed would raise rates sooner rather than later. The pause in the economy due to the lack of confidence has made that view wrong. If current policy were based on just the availability of money, history suggests the Fed would have already raised rates. Unfortunately, the combination of ObamaCare, Dodd-Frank and the deficit-reduction debate has kept both business expansion plans and consumer spending at bay. That is the bad news. The good news is that the ability to spend or access funds for growth is there (as opposed to early 2008 when it was not), so unlocking it will be the key. Again, we go back to the notion that the economy doesn’t have a money problem, but a desire-to-use-it problem.

For the time being, to date – believe it or not – the various indicators we look at for stress in the system are nowhere near where they were last summer, the middle of the last cycle, or in the mid-1990s. As an example, the U.S. Dollar 2-Year Swap Spread is currently at 25 basis points. Last summer it went above 50, and in 2004 and early 1995 it reached the upper 40s. The same can be said of the other interbank spreads in addition to other non-gov’t paper such as high yield debt. High Yield Spreads to the 10-yr U.S. Treasury Bond have begun to tick up but remain below the historic mean and are widening more because of the drop in the 10-yr yield rather than aggressive selling in the corporate paper. Confirming this is the lack of volatility in the various High Yield Debt CDS Indices.

There is no question the domestic economy is decelerating due to a slower China, very weak eurozone and a discouraging domestic political environment, but this is not unique. By 1995, the Chinese economy slowed from 14% annualized GDP to under 10%, Latin America was a mess, Germany and France were in recession, U.S. GDP showed just 0.8% annualized growth in Q1 & Q2 1995, the debt ceiling limit was hit and parts of government were shut down, the U.S. debt was on “credit watch negative” and as reported at the time – wages and salaries were at a historic low as a percent of GDP. Again, recessions happen when there is a need for money and limited or no access to it. We simply have enough money, but just don’t want to use it due to the various macroeconomic and confidence issues. It was very different prior to the last two major bear markets when access to money from banks, credit investors and earnings were very limited and we had the various macroeconomic issues of the time.

If my firm's view was based on politics in Europe and Washington, we would have a different opinion. We have tried to be very consistent to point out that the market correlates to the direction of EPS, and until there is limited or no access to capital that takes place when credit investors are sellers, banks are unwilling to lend, and earnings are in decline, the economy should stay positive and we should maintain our bullish view. It is important to note that the financial markets and various credit metrics were more problematic last summer and seemed to be “telling us something"; they were telling us that there was a confidence-driven nastier-than-expected correction taking place, but that it was a temporary situation that resolved with new highs later in the year. At this point, we view the current correction as the same. Although further European debt dislocation and weak economic numbers in the U.S. over the near-term may pressure equities further, we believe many of the potential negative influences have already been discounted as recession fears mount.


August 2, 2011

Model Portfolio Value As of 2 August 2011

$ 530,797

Comment on Model Portfolio activity

No Turnaround Tuesday

We sold AT&T and Intel for scratch losses to raise cash and to be able to comfortably hold more volatile issues. We bought both for a trade on the debt increase. That trade didn’t’ work out- drop instead of rally. As we said yesterday hope is not an investment option and we would rather have the cash on hand.

This is the eighth (for the DJIA) and seventh (for the S&P 500) down day in a row so at least a relief bounce is closer than it was. There is no reason for the markets to go higher but then that is usually when the rallies come. One guru suggested that when S&P and Moody’s either do or don’t downgrade U.S debt that the rally will occur

We added to Fifth Third under $12 and did add a few shares of Ingersoll Rand to some accounts that own.


August 1, 2011

Model Portfolio Value As of 1 August 2011

$ 543,187

Comment on Model Portfolio activity

Thankfully a painful July is over but August is not beginning on a good note. The reaction to the news is more important than the news and the debt deal agreement initiated a plus 1% opening in the major market measures followed by a reversal; after on half hour of trading to down 1% when the ISM manufacturing index came in at 50 when 55 was expected. Also a sell the news mood was evident in the early morning guru talk.

That’s the way it is in corrections and with the Employment report due on Friday the markets are seeing the glass as half or more empty. But tomorrow is turnaround Tuesday and also D Day for the debt deal so hope springs if not eternal at least it springs.

We wrote the above at 11AM.  At 2:30PM Boehner announced that he and the Republicans had saved the Republic for -another month at least -and the DJIA turned positive for the blink of an eyelash. The other market measures remained mired in negative territory and the DJIA moved back to negative by the time the leadership had finished speaking.

The S&P 500 closed at 1286 - just above the 200 day moving average.

We sold XLF, and KBE to raise cash when the rally failed. We have been trading the financial and bank ETFs all year and were planning on selling them into the rally. When the rally quickly failed we waited a few hours but decided discipline over hope. We also switched Juniper to Cisco and added shares of Fifth Third to some accounts. Finally we sold Nvdia. Nvdia’s earnings come on 8/10- the same day a Cisco- but it is more volatile and the secondary tech stocks have been taking it on the chin with even the slightest disappointment

By the by, we think it is nuts to cut spending in a recession but we also cynically believe that the announced cuts over the next few years are probably smoke and mirrors.

See: http://fivethirtyeight.blogs.nytimes.com/2011/08/01/the-fine-print-on-the-debt-deal/?hp

Diane Swonk, Chief economist Mesirow Financial; Manufacturing Slows, Construction Edges Higher

The Institute for Supply Management (ISM) index for manufacturing activity slipped to 50.9 in July, off from 55.3 in June, which suggests that the pace of growth in manufacturing continued to moderate during the month. Disruptions created by the earthquake in Japan persist, but given the backdrop of weaker-than-expected growth in the second quarter and sharp downward revisions to the first quarter, the concern is that recent weakness may be more pervasive. Most manufacturers that I talk to still seem relatively bullish on their prospects for the second half, though "relative" is a dangerous word in an economy that is so anemic in growth.

Separately, construction spending edged up 0.2% in June, following a downward revision for May. The gain, driven by increases in non-residential activity, pushed construction spending to the highest level in six months

We own both: http://www.thestreet.com/_yahoo/story/11205130/1/hp-increasing-pressure-on-cisco.html

(TheStreet) – Hewlett Packard is turning up the heat on networking rival Cisco, in the cash-strapped public sector, according to the latest research from analyst firm Robert W. Baird. Recent Baird survey of almost 100 Cisco resellers, who account for around 12% of the networker's annual sales, found that HP is gaining ground thanks to its aggressive pricing strategy. "HP Networking [is] showing more progress," said Jayson Noland, an analyst at Robert W. Baird, in a note released Monday. "We saw incrementally more participants cite HP Networking as 'influencing deal terms' or 'winning' over Cisco."

The results run counter to recent comments from Cisco that it is fending off HP in the U.S. market and highlight the price tension in the public sector, which makes up around 20% of the beleaguered networker's business.

The survey found that a lot of HP's wins are in state and local government, a market that's particularly sensitive to price at the moment. With Washington struggling to resolve the U.S. debt crisis, a host of tech companies, including IBM have cited weakness in public sector spending. Last week, Cisco networking rival Juniper warned of reduced government spending in the second half of the year, which could impact IT budgets.

This upgrade by Goldman was ahead of August 10 earnings. http://www.cnbc.com/id/43926665?__source=yahoo|headline|quote|text|&par=yahoo

Goldman Sachs raised its 12-month price target on Cisco Systems by 34 percent to $21 Thursday, and upgraded the company to "buy" from "neutral" based on the analysts' expectations of higher earnings in coming quarters. Goldman's target is based on a price/earnings ratio of 11 times Cisco's calendar-year non-GAAP earnings estimate of $1.90 a share.

"Cisco is not a 'broken' franchise," the analysts said, based on conversations with customers. The analysts also said that "leading surveys suggest that Cisco’s customer franchise is still solid. Moreover, the structural issues it faces are largely contained to the switching business, which drives just one-third of sales."

Goldman sees Cisco earnings rising over several quarters after "four consecutive guide-downs and 43 percent under-performance" against the S&P 500 over the last 12 months.

Goldman expects fiscal 2012 earnings of $1.80 and 2013 earnings at $1.96, both higher than Wall Street expectations.

Goldman's analysts said the Street has been "under-modeling" Cisco’s cost-cutting actions, which they believe can add 5 percent to 10 percent to fiscal 2012 estimates.  The company said last week it would will cut 9 percent of its workforce, or 6,500 jobs, in an effort to boost profits.

The Goldman analysts think Cisco’s sales growth will hit bottom in the current quarter and "re-expand toward what we consider its normalized longer-term growth rate" of 5 percent to 7 percent year on year into fiscal 2012, "even assuming a declining switching business, as we estimate the growth rate of its remaining portfolio at 8 percent to 9 percent."




We plan on being in business for at least the next twenty years and with this in mind we are changing the frequency and content of our internet posts. We will maintain our concentration on market activity while we simplify our business day. We have been writing about the markets for 27 years - on a daily basis for 12 years - and giving investment advice for 45 years. Our guess is that while we haven’t seen and said it all we are pretty close to having exhausted any new words of wisdom we might wish to convey. Markets don’t repeat but they do rhyme. By not posting dally we will be freed up to do some summer/winter activities such as gardening/snowshoeing, riding our horses, walking the dogs and spending a bit more time with the prince and princess when they visit. And so we are going to end our lengthy daily comments but we will continue to post periodically when market events warrant and/or when there is activity in the Model Portfolio.




















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