Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Bud: 312-925-5248 Kathy: 630-323-8422
Comments on activity in client accounts
28 August 2015
When it goes down we always own too much. When it goes up we never own enough.
One of the better explanations of the week:
What happened between Monday morning—when investors around the world were selling stocks as fast as possible—and today, when investors around the world were buying so furiously that they sent the Dow up by more than 600 points? Nothing, really. (Here, Wall Street people will recite various minor policy moves which are not the reason for these stock market swings, which happened due to arcane algorithims mixed with unbridled human fear and greed). People just changed their minds.
In conclusion, the stock market is driven mainly by bullshit. (In the short term. In the long term you should be fine until the inevitable unpredictable "black swan" event that brings this all to an end.)
Goldman Sachs speaks:
The recent selloff is, in our view, a reaction to China's market volatility and currency devaluation (amid struggles for emerging markets more generally), oil prices' drop to multi-year lows, and worries of potential Federal Reserve (Fed) interest rate increases. Regarding potential rate increases, we believe recent events may make the Fed less likely to take action in the coming weeks. We believe that none of these factors are likely to derail the long-term global economic expansion.
We did a lot of reevaluating and repositioning during the week. We did so because the markets gave us the opportunity. By Tuesday night we realized we were concentrated in too few themes/stocks (grocers and AT&T) and so we sold half our Sprouts and moved the money to Abercrombie which had reported better than on Wednesday morning. We sold and then repurchased Twitter when we accepted the fact that we had panicked a bit Tuesday afternoon and did want to own one speculative stock in the tech area. Twitter has too many subscribers to not eventually figure out how to monetize the users.
We added DuPont, Union Pacific, Proctor& Gamble and Intel to large accounts. All are down significantly from their highs and have decent dividends. We also purchased Potomac Electric (Pepco) which dropped 20% on Thursday when its merger with Exelon at $27 and change was turned down by one regulator after five others had approved. Our guess is that the merger will eventually take place and the shares pay 4.8% if not or while we wait.
We reentered Symantec, Fifth Third Bank, Deutsch Bank (German economy doing better and much of fines and bad news for DB is in the price), and General Electric which is returning to its manufacturing roots and pays 4%.
We are pretty fully invested after the 15% drop. The drop wasn't pretty and was scary on Monday when the computer jocks had their fun. There may be another test and we would hope we don't scream higher; but the Monday bottom held on Tuesday and Wednesday and so our correction scenario played out and we acted on it.
25 August 2015
Time for a mid-week report
Monday was nuts. The DJIA dropped over 1000 points in the first fifteen minutes, rallied back to down less than 100 by noon, then closed down 400 points.
Opening ranges on stocks were crazy with Ford trading at $10.40 before selling an hour later in the $13 range. GE had an opening range of $19.50 to $22. That makes no sense. Netflix traded at $84 and by noon was at $104. Back when the NYSE was a real entity such price variations would ever have occurred. Markets are now the wild, Wild West as the computer jocks wreak havoc.
CEO Cook of Apple found time Monday before the opening to email Jim Cramer and tell him all was well in China for Apple. At the time Apple was down 10% and rallied to up 2 % by an hour after the open. Didn't know CEOs could email market gurus about company events without issuing a press release. Hello SEC?
We took advantage of the down opening to add to AT&T, and Alcoa, establish a position in First Solar and buy and sell Verizon and GE for quick one dollar profits. We also sold Abercrombie for a small profit after a brokerage upgraded the stock. Earnings come Wednesday and we think we'll have a chance to reenter at lower levels. We purchased Ascena Retail, which just completed its acquisition of Ann Taylor on Friday. We repurchased Ralph Lauren in accounts in which we have been trading. it
Tuesday stocks rallied out of the gate with the major measures up 3% (400 plus points on the DJIA). That was not good. The markets needed to go down Tuesday morning continuing Monday's panic in order to create the most fear; then rally in the afternoon. Instead the DJIA closed down 200 points which should lead to more selling this week. Near the close when the market lost momentum we sold our AT&T position for a loss to raise cash (we were even in the morning but were too greedy) and also eliminated Twitter for a too big loss with the idea of placing that money in Abercrombie tomorrow if it tanks... We added to our Marathon holdings during the day with the shares at a ten year low. We also took a short profit in First Solar.
Times are getting more interesting. This too shall pass.
21 August 2015
Shanghai down 6% on Tuesday.
Wednesday the DJIA dropped 250 points, rallied back to even, and then closed down 225 points.
On Thursday the DJIA dropped 330 points.
Friday was no better with the markets around the world down again and down big for the week.
The S&P 500 joined the DJIA as negative on the year 4% and 7% respectively) with the DJIA 10% below its high and the S&P 500 down 8% from its high. We've been looking for a 10% correction but more is better than less. There is concern being exhibited by the talking heads but not fear. Fear is good.
We have been expecting a selloff and have been putting cash to work in stocks that are down 30% to 50% from their yearly highs.
As we said last week we think oil will hold around the $40 dollar level. It makes no sense to us that OPEC will want prices lower. OPEC is producing 3 million to 4 million extra barrels of oil a day to push production over 30 million barrels. The world consumes about 90 million barrels a day. But the economics of selling 30 million barrels at half the price they were previously receiving for 27 million barrels doesn't make long term economic sense.
And so this week we repurchased BP 20 % below our last sale. BP has settled most of its Gulf of Mexico exposure and while Russian production remains a worry and the dividend may be cut we think the current price reflects these realities.
We added MRO at $16 well below our last sale price of $26 and added more Oil ETF (XOP) to accounts
We purchased Fresh Market and Abercrombie both 30% below our last sale prices in June.
We bit the bullet and went back into Alcoa which has been a bugaboo for us over the last few years. We have room to buy mo. the stock is cheap but then many are.
We will be selling AT&T next week to replenish cash in the reflex rally we expect by Tuesday. Even with our buying most accounts-except the smallest and a few aggressive accounts- are 30% to 50% or more cash.
In a note to clients Friday Goldman Sachs Group said high valuations, negligible earnings growth, outflows from domestic equity and moderate economic growth support the bank's thesis that the S&P 500 will end the year at 2100, 0.2% above its level of 2096 midday Monday…
"Mean reversion is a powerful force," wrote David Kostin, Goldman chief U.S. equity strategist. He highlights that the large-cap S&P index witnessed a compound annual price return of 18% during the past three years and 13% over the last five years, well above the long-term annual average of 5%.
We are blessed to live in interesting times.
14 August 2015
On Monday, Warren Buffet decided to pay $38 billion for a foundry company he could have purchased for $4 billion in 2009. Buffet also declared that markets will be significantly higher in 10 to 20 years when he will be 95 and 105 respectively. The markets missed that last part of his comment — the 10 to 20 year part- and the DJIA rallied 250 points.
Tuesday China devalued the yuan by 1.9% and the DJIA dropped 225 points.
Wednesday China devalued the yuan by another 1.9% and the DJIA dropped 250 points; then rallied to close higher on the day.
We repurchased the Oil Exploration ETF (XOP) higher than our last sale since we decided we would rather be in and have a position to trade around. We think the $40 per barrel level on oil is where the bottom is going to be.
We added to our Whole Foods and Twitter positions. WFM is at a three year low. Twitter is at its low since going public and is our only speculative holding and is only in larger accounts.
We added to AT&T (with a 5.5% yield) as it dropped even though it announced better than and also raise expectations going forward. Our guess for the poor price action is that there are a lot of Direct TV folks (the AT&T/Direct TV merger just closed) who don't want to own AT&T that they received in the merger (almost 1 billion shares) and so the stock may be under pressure for a while creating a buying opportunity that we will continue to exploit. AT&T is a large position that will get larger.
And we purchased Symantec — the Norton computer security folks — after the company announced that it was selling its storage unit for a net $6 billion. The sale will make SYMC a pure security play. The stock hit a 3 year low on the announcement.
Even with these purchases most accounts are 50% to 75% cash.
Thursday China did it again.
Tesla announced that it was selling $500 million in stock to fund some projects and the share price rose. That is not a usual occurrence.
Macy's on Tuesday and Kohl's on Thursday announced worse than results. The markets do not like retailers right now. The gurus say folks are spending their extra money on phones, food and coffee.
Till next time, keep the faith.
4 August 2015
We are taking the rest of the week off for a little rest and relaxation- thus the early post.
We repurchased the XOP (oil exploration ETF) that we traded profitably last week and also bought a small amount of Twitter. All the gurus are negative on oil and Twitter and so contrarians that we are we decide to go against the grain.
It's all about the journey.
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