Bud's Poem Page

23-31 December 2001
We are visiting our children and grandchildren for this holiday week. We'll be back at work on December 28. Kathy will be in the office the business days we are gone. Our next post will be on 2 January 2002. New poems are posted on the poem page for your holiday reading.
22 December 2001
The stock markets closed higher on Friday, surviving triple witching. There may be a little giveback during Monday's half day session. After Christmas we expect light volume. Any large volume sellers should have been accommodated today, but because of the thinness of markets any selling pressure in individual stocks may present more trading opportunities late next week. That's why we will be manning the battle turrets on the 28th and 31st.

Yesterday we sold Exxon-Mobil at $39 for a $2 gain and placed the proceeds in EMC at $13.70, Cisco at $18.30, and Charles Schwab at $15.50. We know the purchases add up to more than $39. We had some dollars left from our sale yesterday of Merck. We made the switches because we think we will have more bang for the bucks from the volatile issues we bought. Truth be told, we are never comfortable to hold Exxon. Since it is the holiday season we will give our enlightened conservative readers a rest by not mentioning the multiple reasons for our discomfort. We added more Broadwing at $9.12 to some accounts. In our aggressive trading accounts we bought Texas Instruments at $28, and Motorola at $15. For trades only. Because of time and traveling, the Model Portfolio will be updated on January 1, 2002.

We wish all our readers and clients a peaceful Christmas. We look forward to the new year with interest. Shalom.

21 December 2001
Happy Winter Solstice. The days don't start getting longer but daylight does. The theme in the stock markets Thursday was one of selling tech and awaiting Triple Witching Hour. We added to our positions in some larger accounts in Cisco at $18.82, Sun Micro at $12.23 and Ciena at $13.92. In our aggressive trading accounts we also bought Conexant (CNXT) a company that makes chips for wireless phones at $12.85, and Macromedia which makes software for internet networking at $17.60 and $15.90 per share. Both stocks are very volatile. AT&T Wireless Dropped below $13 per share and so we bought shares in almost all accounts at $12.95 on Wednesday and $12.90 on Thursday. We have owned before off this level and made a few dollars trading AWE. We also sold our Merck at $60 for a small profit and bought AOL at $33.65 with the proceeds. Now you can enjoy Oceans11 and Harry Potterfield at the movies this Christmas as you realize you are paying yourself with your AOL ownership.

Secretary of the Treasury Paul O'Neil is not crying for Alcoa shareholders or for Argentina. He's not crying for the Alcoa shareholders because he sold his millions of Alcoa shares about 20 points higher than the present price earlier this year because of government conflict of interest regulations. Same rules helped push VP Cheney to sell Halliburton at over $50 per share (now at $13 per share). Guess sometimes those pesky old government regulations aren't so bad after all. And he's not crying for Argentina because he thinks Argentina is the IMF's problem. We think Argentina is also a problem for some US banks but then the banks have been rolling over Argentina's loans for the past 30 years so we guess they can do it one more time.

Tomorrow ends the options/futures shenanigans and since Monday is Christmas Eve we presume things will quiet down for next week. We continue to use the tax selling pressure to build positions. Final post tomorrow night before we take a week off for the holidays.

20 December 2001
The stock markets closed mixed on Wednesday with the DJIA and S&P 500 up a bit while the NASDAQ eased. Tax selling is holding back the markets, and once that passes the inclination seems to be to move higher. We added SBC to more accounts and have been buying weakness in the stocks we own. We are probably going to sell Merck today, for a minimal gain, because we would rather own BMY and SGP. For some reason every time we've owned Merck we haven't been comfortable, even though we have never lost money on the stock. Must be bad vibes.

Gap Stores finally started falling as the reality of last weeks terrible numbers sinks in and tax loss selling takes command. Moreover, The WSJ ran an article yesterday that quoted Grant's Interest Rate Observer to the effect that at the end of December GPS may be in violation of some lending covenants. Gap denied the story but investors are in a sell first, ask questions later mood. We may dip our toes for the third time if the stock drops to single digits. Not now and if we do, only for a year end trade.

Last night on the way to the movies we passed a bank advertising its' money market and passbook rates. The passbook rate was .75%. Wow! Seeing those numbers on a large sign brought home how far rates have fallen. And those rates also raised our ire at the unfairness of the Fed's policy of rescuing banks and corporations from their bad loans and unreasonable expansion. As we have said before, back in 1990 and now The Fed robbed interest income from retirees and savers so that banks could earn profits to cover losses from stupid loans and corporations could recover from lousy long term planning. Free Markets?

On a happier note, only two days till we journey to Kentucky to see the grandchildren and celebrate Christmas. And these next two days should be interesting...

19 December 2001
The Treasury bond market rallied today and the stocks markets continued to edge higher. Rite Aid was on sale again today, this time for $3.99 per share so we added shares to many accounts. We also repurchased Sun Microsystems in many larger accounts at $12.84.
18 December 2001
Bonds sank yesterday as yields jumped to six month highs on ten year and longer Treasuries. The stock markets edged higher, but tax selling continued in some of the issues we own. This coming Friday is a triple witching day on which options and futures expire so there may be some volatility the next few days. Bonds sure have been volatile and as we have cautioned, it's best to sit on cash right now and take the 1% plus return rather than extend maturities to get a few percentage points of yield.

We purchased Merck at $58.60, Bristol Myers at $50.52, and Exxon Mobil at $36.85 in many accounts today. We wanted to add some large cap stocks to portfolios. We also repurchased the Schering Plough at $37.50 (not T. D.) that we sold last month. Finally we repurchased Schwab in our trading accounts at $15.50. We are now at 50% in our Model and as much invested in most accounts as we want to be for year end. We may add a little Palm and/or Rite Aid if they sell off a bit more. The only other stock we are watching to add is Burlington Resources.

17 December 2001
This is the week the markets should stabilize, although individual stocks may continue to sell off. We are going to buy a few larger stocks to go with our techs and telecom crashes. Today will be up, unless it's down.
15 & 16 December 2001
The stock markets were neutral most of the day Friday and inched higher in the last hour of trading. The NASDAQ was off about 3% for the week and the DJIA and the S&P 500 lost over 1%. On Friday we sold our trading position in Compaq for a $1 per share loss in our aggressive accounts and a $3 plus per share loss in the trading position we established last week. No more trading in Compaq. We've been trading it from the $30 level on down and we are probably even for the experience with a lot of heartburn. It is the curse of Digital Equipment, a stock on which we lost too much money many years ago. Compaq bought Digital several years ago and they have lost a lot more on it than we did. The proposed combining of Compaq and Hewlett Packard limits upside. It was just a bad trading idea at this time. With the Compaq money we bought Cisco at $19.50 and also decided to buy more Tellabs when it dropped under $14 per share. In a few aggressive accounts we purchased more Ciena at $14.30. These three stocks are quite volatile but we have had luck trading them. Another stock with bad Karma for us has been Qwest. Since we've had good luck with EMC we decided to switch our Qwest to EMC. We sold EMC two weeks ago at $18 and we were able to repurchase it for under $15 per share today.

We are taking the weekend off so the next post with the adjusted Model Portfolio will be on Monday. Happy Shopping.

14 December 2001
Both the stock and bond markets dropped yesterday. One pundit mentioned foreign selling while most market commentators ascribed the selloff to the dismal sales and loss projections issued by Lucent and Ciena. We do think that foreigners are much more attuned to geopolitical events. The Israel/Palestine conflict seems to be intensifying. And the withdrawal from the ABM Treaty by the United States may be causing some consternation among European investors.

Whatever the reasons, the reality is that fear has reappeared in the investing equation. We ourselves had trepidation when we repurchased Ciena at $15.30 in our trading accounts, and Tellabs at $14.83, Cisco at $19.50, and EMC at $15.42 in our aggressive large trading accounts. The stocks reached our repurchase levels so we bought them. We continue to believe that the correction is running its course and may be finished tomorrow, but we aren't betting the store on that hypothesis.


13 December 2001
The markets waffled yesterday. Drug stocks sold off in sympathy with Merck's yesterday selloff. But Proctor & Gamble gained on brokerage house recommendations. Most stocks were mixed and our bet is that we are getting close to the end of the correction. Merck stabilized, tech stocks showed some strength and longer bonds rallied a bit. the holiday season is getting to be on the bulls side. We did no trading today. We were tempted by the selloff in Schering Plough to replace the stock we sold last week. Merck also seems good for a trade after yearend, but we are trying to sit on our hands for another week.

The Enron saga continues. Calpine, which sells energy, and has done a lot of energy trading with Enron in the last quarter has been under selling pressure for the last few days, but seems to be surviving. The Enron and friends bankruptcy mess is our third reason for caution. There is still a lot to be learned. Happy Thursday.

12 December 2001
We've had the Securities and Exchange Commission in our offices in Chicago for two days conducting an audit of Lemley Yarling Management Company. We are visited by the SEC and/or the NASD (National Association of Securities Dealers) almost every other year. The purpose of their visits is to determine whether or not we are obeying the law and properly safeguarding the money our clients have entrusted to us. Since all client money and stock are custodied at ABN AMRO, and since we are not allowed to do anything but invest that money or send it to our clients, one would think that after seventeen years such visits would become routine. Wrong. This years big question was whether we had or have any knowledge of The Islamic Army of Aden or any such folks. That John Ashcroft sure is a thorough guy.

During these SEC and NASD visits we take down our 1968 McCarthy (Gene) for President sign and raise our "In your hearts you know he's right!" Barry Goldwater 1994 Campaign poster that hung on our dormitory room door at Georgetown University back in 1964. For a week we understand, commiserate with, and want to join the Republican Party and get rid of all government agencies. Such biannual regulatory agency visits are good for the soul since they remind us that our Republican brothers and sisters aren't always wrong.

Ah the markets. Back to normalcy. Well, the markets were doing fine yesterday after Chairman Greenspan lowered the Fed Funds rate to 1 3/4%. Wow. Now that is low. After the rate lowering the stock markets inched higher and higher and higher until Merck came along and spoiled the fun by saying that 2002 earnings would essentially be the same as 2001 earnings. Since Wall Streets wonderful analysts had been predicting 15% earnings growth year over year for Merck, there was surprise and consternation. Not to the degree of Enron. But enough to send Merck down $6 per share to $60. The yearly high on Merck was $95. The buy and hold crowd has been having a rough time lately. With the drop in Merck the rest of the markets gave up the ghost and closed lower on the day. What today will bring we have no idea. Except that the SEC is not returning till Friday to conduct the exit interview at which they ask all the questions that will allow us to stew for a month till we receive their letter listing all the bad things we have been doing.

11 December 2001
The markets moved lower again yesterday, more from an absence of buying than any real selling pressure. In other words, there were few folks out there yesterday who absolutely wanted to own stocks and were willing to push prices higher in order to buy. And there were a few folks in stocks like Broadwing who absolutely wanted to sell. Broadwing was down $1 per share on about two million shares volume. That's not a lot of volume for this stock, but there were probably one or two institutional types with a million shares to sell and no real institutional buy interest. Thus the phrase, " more sellers than buyers." The sellers had to push the price of the stock down 10% to find willing buyers. We were one of the willing buyers and we repurchased at $9.85 per share the shares we sold 35 days ago for a tax loss. We also added shares of Compaq to our trading accounts at $10.11. We added Compaq at the same price to some of our more aggressive accounts, including 500 shares for The Model Portfolio.

We have already mentioned the looming budget deficits as one reason for our caution. We also should mention that sometime early next year the regulatory authorities are going to allow futures trading on individual stocks to begin. Thus folks will be able to speculate in futures on IBM or GE. In 1986 futures trading on stock averages and indexes started and the markets boomed till October 1987. Futures on individual stocks are a zero sum game that are basically gambling with no value added to the economy. With futures for every winner there is a loser with the house skimming its' transaction fees.

     Why we are cautious.
   Reason One: Budget Deficits
   Reason Two: Futures trading on individual stocks.
        More to follow.

9 & 10 December 2001
I'm doing some visiting on Sunday so won't have time to write the Monday morning comment and so today's comment is a twofer. The markets gained a bit last week and so did we in most accounts. We sold our tech stocks and kept our depressed telephone related stocks. We'd like to get back into SBC before month end. Also, we plan on repurchasing the Broadwing we sold last month for a tax loss. Monday is the first day we can buy back after the thirty-one day waiting period. We may wait a few days to see if the sharp selloff we expect occurs. We remain interested in Burlington Resources but we are waiting for a lower price to add to accounts. They are a domestic and Canada oil and natural gas company. Lucent keeps inching higher as does Palm. We bought Lucent and Palm as year end speculations. By that we mean that after year end, selling pressure should be removed from these former high flyers and hopefully there will be a relief bounce in the stock price. We plan on selling that bounce. Qwest is or is not a RBOC. RBOC stand for regional Bell operating company, one of the seven sisters spun off from the old AT&T in 1983. Q is one because it owns US West, an original RBOC. It isn't because it also has a lot of broadband stuff that is a drag on non-earnings. After loving the stock for three years Wall Street is in a tiff and now is avoiding Qwest. Hopefully in the new year, analysts will rediscover the stock and we'll be able to move on. Rite Aid, the drug store chain has a ton of debt that it has spent the last year trying to get under control. Same store sales are growing and debt is being paid down and refinanced at lower rates. We think it will survive and we own because we have always made money on depressed drug store stocks over the years. Schering Plough gained last week on rumors that they would soon receive FDA approval to reopen their closed manufacturing facilities. For the year the Model Portfolio is up 22%. The DJIA is down 7%, the S&P 500 is down 12%. The NASDAQ is down 18%. The Nasdaq 100 is down 28%.

Other thoughts

This past week we received an e-mail from a friend who used to live on the farm we currently own in Wisconsin. We call the farm, Shalom Farm, but in the country farms are usually know by the name of the family who originally lived on them and so our farm is know to all old-timers (as opposed to the new folks) as The Ryan Farm. We first saw The Ryan Farm thirty years ago and we loved it from the first day we saw it. We became friends with the Ryans and hayed together for several summers. When we moved back to the city we kept our farm and our friends in Wisconsin. In 1988 Bill Ryan decided to quit farming and since he knew how we felt about the farm he offered to sell it to us at a fair price. We jumped at the chance. In 1994 we remodeled the old house and added to it and we've been spending a lot of time at the farm these last few years. In her e-mail Dorothy Ryan wrote:

I was on my computer and happened to have the opportunity to read your poems on your Lemley Letter Online website. What a nice touch. After reading the poems I started thinking about another poet who lived up on the ridge. He wrote a poem that was published in The Kickapoo Scout (the local newspaper) in February, many years ago.

      I said I would write on farmer's thoughts as Spring and warm weather come.
      I am sorry. I can't. I can't write thoughts.
      I can't write sounds.
      The light happy sounds of Spring or the heavy sounds of tractors.
      I can't write the smell of green grass or the smell of freshly worked ground.
      I can't write faith - the faith we will get the warm rains.
      I can't write hope - the hope we will get the sunshine we need.
      I can't write charity - the love we must have for our land and our cattle.
      Nor can I write pride - the pride we have in a day's work well done and a crop well raised.
      I'm sorry but I just can't do it.
      Thank you for the chance to try.

      Author: Bill Ryan
date written: 2/14/77

The e-mail continued: Poetry must be in the air up there on St. Phillips Ridge. The poet lived in your house when he wrote this. He passed three years ago this coming Spring.

We answered: Thanks so much for the poem. It was as simple and touching as was your father Bill. We think of your dad every day as we walk the land and wonder at the trees and creek. Yesterday we were walking down the ridge road to the far field where the power lines now go through. We were thinking of Harold and your dad and how simple it used to be to get a ridge road smoothed, or a spring dug out. Up on that far field there's an oak tree that's perfect for our grandchildren Tyler and Abigail to climb in a couple of years. It must be a hundred years old and we can imagine you all climbed it when you were kids. I would say that your dad climbed it but I never saw him climb higher than a tractor seat. We know there was heartache on this farm, but we're sure there was also plenty of laughter and fun. We love the farm as much as Bill did, but in a different way. He lived the farm, we live on it.

8 December 2001
The markets moved lower yesterday but not in any panic. Some individual stocks were clobbered, which is not unusual at this time of year. Halliburton tumbled 8 dollars today on asbestos related news and Georgia Pacific dropped 4 dollars on similar fears. Just two days ago we were marveling as we saw Coldwater Creek, the catalogue retailer, go across on the tape at $28. We traded the stock last year between $10 and $14 per share, and the year before we traded it at the $20 level. We had not done any big positioning in the stock since we escaped several years earlier by the skin of our teeth before the stock dropped $15 in one day. So yesterday we weren't surprised when we saw CWTR crossing the tape off ten dollars per share on bad sales and earnings news. This time of year portfolio managers jump first and ask questions later because they don't want any recent losers in their portfolios at yearend.

Ten year Treasury bonds got killed on Friday with yields rising and prices dropping. Supposedly, the price drop and rising yield is predicting recovery in the economy. We think the drop is predicting a larger than anyone but us expects deficit in the US budget. Readers have asked us to resume mentioning our trading buys and sells so we will do so. We did no trading on Friday. We'll post the Model Portfolio on Sunday with our daily comment.

7 December 2001 - 2nd post
Unemployment has risen to 5.7% in November from an upwardly revised 5.4% in October. Yet on CNBC, the business channel owned by General Electric, Larry Kudlow, an economist of dubious renown who must be a personal friend of Jack Welch, can think of no better way to get folks back to work than by cutting the top tax rates. Thankfully, we and many of our clients are in that bracket, but using a cut in tax rates at the top to stimulate spending is ridiculous. The supply-siders had their chance in the 1980s and they gave us unendingly larger deficits. We sit hear listening to gurus dissing "lavish" welfare and unemployment benefits. Whom are they kidding? They state a truism that free trade which results in job loss in this country creates cheaper trade goods and these gurus imply that lower goods allow those lower paid US workers and unemployed and welfare folks to happily run to Walmart and buy cheap foreign goods with the lower pay they earn because most manufacturing jobs are moving overseas.

It is true that in 50 years the standard of living in most of the world will have been raised by companies continually seeking the lowest source of labor costs. During the fifty year period of which the last twenty-five were hopefully part, wages for many folks working in manufacturing in the US will be stagnant. That's the price they must pay to enjoy the benefits of a capitalist system. Capitalism doesn't guarantee a job or high pay. Capitalism guarantees low costs and opportunity.

But because capitalism is a tough taskmaster it is incumbent on government to mitigate the dislocations caused. In the current environment tax cut stimulus is needed. The question is whether to lower taxes for folks who spend every dime they make, or for folks who save 25% of what they already make. Which set of folks would be more likely to immediately stimulate the economy with the tax cut they receive? That's a no brainer! But it sure is causing the brains in the Bush administration, Republicans in Congress, and Larry Kudlows' of the financial world a lot of trouble. By cutting the payroll tax for both individuals and corporations the money would immediately flow to those folks and companies who would spend it the quickest. The only question is how much and how long. End of conversation.

Finally, John Ashcroft said yesterday that anyone who questioned what he and the Bush Administration were doing in relation to the "war" on terrorism was aiding the enemy. That comment was just wrong and to use the words of my few friends on the far right, Ashcroft's comment was "un-American." The use of American forces in Afghanistan to fight terrorism is warranted and is a logical continuation of the policy begun and implemented under President Clinton to use US forces to aid the folks in Haiti, Bosnia and Kosovo to maintain their freedom. President Clinton's actions were conducted with tepid support from a few Republicans not including Current President Bush or Vice President Cheney, and constant carping from John Ashcroft and the far right.

Even the folks like us who seriously question the actions of the attorney general understand the need to destroy the terrorist network that committed the horrible atrocity on September 11. It is too bad that the Bush administration has decided to stifle those who in a great American tradition disagree with their policies.

7 December 2001
Well, we learned again yesterday how tough this business can be on the psyche. Gap came out with horrendous same store sales numbers, with Old Navy down over 30% and The Gap division down over 25%. Those are really bad numbers and we really owe an apology to the analyst we castigated last week. She was right, we were wrong. We bought the stock believing that while November's same store sales numbers would be down, they might be better than the 17% drop analysts were predicting. Wrong! So for the second time in three months we sold Gap for a loss. We hate taking losses, especially in The Gap, and this may be the bottom in the stock, but those sales numbers are just horrendous. Mickey Drexler, Gap's CEO has his work cut out for him. Well, after we sold at $13 the stock rallied to $14.25. Ugh! We don't understand the rally in the stock, but greater minds than we must know something we don't. With accounts at or near their yearly highs, we are compelled to sell stocks when our expectations aren't met. While in a few cases this year we have been wrong for a day or two when following our instincts, in most cases our instincts have proved correct. We promise, no more retailers for a while. We have lost our touch. We sold The Gap in all accounts for a two point loss.

The markets were mixed yesterday while Treasury bonds continued their two day selloff with the ten year yield jumping over 5%. With more people joining our camp in predicting a correction, "Ms. Market" will probably show her independence by moving higher. We will stick with our prediction of a quick, scary selloff before the yearend rally.

6 December 2001
Wow! Haven't seen a day like yesterday for quite a while. We used the rally to sell our tech stocks. We have been nervous about the Middle East for the last week. With the overbought condition of the market getting more pronounced we decided to take another chunk of money off the table. We sold Oracle at $15.10 for a small loss after having a large loss in it since the day we bought it for a trade. We sold EMC for another nice profit at $18 per share. We also closed all our trading positions including Tellabs at $16.70. ( Left RM with 1000 shares.) We bought a small amount of Burlington Resources at $36.95 per share in a few larger accounts. We want to have a domestic energy stock or two in our portfolio given our worries about Israel/Palestine.

We have decided not to mention individual stock names that we are trading in our aggressive trading accounts because mentioning them has caused confusion among some customers. In the future we will only mention stocks that we have added to, or sold from, the Model Portfolio. That's because we don't aggressively trade the Model, and so our actions in the Model are more representative of what we do in most large accounts.

The further we run on this rally the greater the eventual pullback. The correction may be sharp but it will probably be short. Hopefully the "dogs" that we still own will give us a nice bounce after yearend no matter what happens. Ford continued to fall yesterday, so if we are lucky we may be able to buy it back before yearend.

5 December 2001
Up one day, down the next. Unfortunately, that's the way the markets may act for the next few weeks. We decided to sell Ford yesterday in all accounts. We broke even on the trade. Sometimes our emotions get the best of us and we were annoyed with Ford's plan to start making retirees pay some of their medical premiums. We have a "thing" about health care costs and the unwillingness of corporations to confront reality. Anyway, we remain nervous about the the conflict in Israel/Palestine and so a bit more cash in the coffers will help us sleep better at night.

Speculation is coming back. Witness the doubling of Enron's share price yesterday on news that Enron received bankruptcy financing. Happily, many of our stocks moved higher also. One day at a time.

4 December 2001
The turmoil in Israel roiled the markets yesterday. Coupled with some downbeat news from Ford, and Enron actually filing bankruptcy, the markets had nowhere to go but down. Jim Cramer at RealMoney.com made a good point that everyone is measuring from the reaction low of September 22 when deciding whether stocks have moved too far too fast. He thinks that point in time is a bad place to start. We agree, especially with tech stocks. September 11 caused panic selling and an absence of buyers which caused some gap down trading and unbuyable lows that wouldn't have occurred in a normal correction. A lot of the unusual trading occurred in tech stocks.

Tech stocks trade on potential not reality. The techs we have purchased will rebound after year end. Same holds true for the telephone related stocks we own. Both types of stocks were over owned and by the end of this month will finally be fairly owned. Then it will be a matter of when improvement is hinted at for these to move. The Gap and Ford and Rite Aid et al. we own are having problems and may move lower this month. If we knew when this month's bottom will occur we would sell and buy then. But since we don't and because we have a lot of cash, we are resigned to suffering a bit for the rally we expect which will quickly erase our losses and provide a nice gain. Then we will have the real problem of how much profit is enough. That will be a nice problem.

3 December 2001
Eleven months down and one to go in 2001. This is a year a lot of investors will want to forget. Fortunately, we will remember our investment returns fondly. We hope. On a personal level a lot of nice things happened to our families.

But, on a national and world level, the year has been a sad and sorrowful reminder of how the struggle to be and remain human never ends. Yesterday's suicide bombings in Israel, coupled with the continual calamitous events in Afghanistan are a reminder of how far we humans have progressed in our understanding of natural forces; yet, they are a more certain reminder that we as a species are capable of unspeakable inhumanity.

We certainly don't have the answer, only the hope and the prayer that somehow, sometime the power struggles will end and folks will just be folks. There are times when the stone age, with all its suffering and tribulations seems more advanced than these days of nail bombs and smallpox and anthrax and nuclear threats. Sort of interesting that if some folks get their way those who survive will be back in the stone age -- without the hope that stone age folks had.

After those thoughts, talking of the markets with all its trivial uncertainties is a pleasure. We are entering the four week never never land of holiday trading. As we said last week, there isn't a whole lot of reason to sell or to buy. And so we expect the markets to vacillate this month. There may be buyable selloffs in a few stocks we are watching as tax selling runs its course. And a year end rally also may be in the cards as investment managers and mutual funds try to mitigate a bad year.

A client e-mailed over the weekend asking about our more than usual active trading of the last few months. We have been relatively volatile in our trading decisions recently, especially in contrast to a lethargic summer of sitting on cash, but then we would suggest that so has the world around us. We are not immune to the tug and pull of breaking news, and in periods of either market forming bottoms or bear market rallies, we aren't sure which we are in, we tend to act quickly. Our basic aim these past few months has been to add a few percentage points of return to accounts without risking the excellent 20% to 40% outperformance of the S&P 500 that we have established this year.

With cash yields at less than two per cent and bond yields at forty year lows we have no desire to risk capital by buying ten year maturity bonds to pick up 3% in yield over a time period of a year. The risk of capital loss is extreme in buying medium term bonds and bond funds since we believe the bond markets are in the process of establishing a top in prices and a corresponding bottom in yields. A one percent move higher (from 4.5% to 5.5%) in ten year bond yields results in an over ten percent loss in principal.

As a result we have tried to use our stock trading to enhance return and thus we have been quick to sell. These past two weeks we pushed too hard for return, but rather than risking loss, we admitted our excess optimism and retreated by selling quickly. Most small accounts are no more than 40% invested, and larger accounts are 30% or less. That investment posture represents a change from our 90% plus cash position before September 11. And that more invested posture has added a few percentage points of return since September in many accounts. And we hope that investment posture will be enough to add five percent or more return soon after year end in any decent new year rally. The stocks we own have bounced off their lows and are in the process of retesting them. Successfully, we hope.

1 December 2001
Rabbit! Rabbit! The markets closed mixed on Friday with the DJIA up slightly and the NASDAQ down a bit. We are at that point in time and market cycle where there isn't much reason to buy and not a lot of reason to sell. The rebound from September 11 has been substantial and now it seems the markets are going to mark time until evidence or better hope emerges that the economy might be rebounding. The trading stocks we sold yesterday all rose today. That tells us to stop trading for a few days and see if we can get back in touch with the markets' mood. We added a little Rite Aid to some accounts today. We are going to take the weekend off and recharge our batteries and post the Model Portfolio change on Monday. Happy weekend.
Current Thoughts
The factual statements herein have been taken from sources we believe to be reliable but such statements are made without any representation as to accuracy or completeness or otherwise. From time to time the Lemley Letter, or one or more of its officers or employees, may buy and sell as agent the securities referred to herein or options relating thereto, and may have a long or short position in such securities or options. This report should not be construed as a solicitation or offer of the purchase or sale of securities. Prices shown are approximate. Past performance is no indication of future performance.