Bud's Poem Page

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28 February 2002

For those clients checking their accounts today please be advised that we did not buy Qwest (Q) yesterday at $35.40. We bought the QQQs at $35.40. The mistake on my part in writing the tickets will be corrected today. As many of you know Kathy is on a well deserved vacation. She is doing her best to manage accounts from California, but sometimes we are able to overcome her best efforts to keep us error free. Thanks.

28 February 2002

The markets rallied on Wednesday morning and then gave all the gains back in the afternoon. Chairman Greenspan testified before Congress and the Senate questioned three hapless analysts who covered Enron and didn't issue sell recommendations on the stocks until it was too late. Both events were a total zero.

We continue to believe a rally is in the cards and so we added the NASDAQ 100 to larger accounts at $35.40. The QQQs are sitting on support and even though techs make up a good chunk of the QQQs, we expect them to rally right along with the rest of the markets. It's the chicken way to buy techs.

We added Coca-Cola to some larger trading accounts at $46.95.

We began repurchasing Hughes Electronics (GMH) in our more aggressive accounts at $13.85. GMH is Direct TV and is to be acquired by Echostar. The exchange value of GMH is about $17 right now. We aren't trying to play the arbitrage difference; rather we like the satellite TV business. And valuations on both GMH and DISH are about 20% of what they were in the bubble mania of two years ago. If GMH moves lower we will buy in most accounts. The merger approval is going to take a while.

We also bought Sprint PCS at $9.60 in small amounts in our aggressive accounts. We are not going to buy this stock in many accounts. PCS is the fourth largest wireless telephone company. PCS is a tracking stock, which is wholly owned by Sprint. The share price is way down but the company has a ton of debt. Very speculative.

Tomorrow is the last day of February, so we expect a mark up day by the funds.

27 February 2002

The stock markets rested most of yesterday after Monday's large jump. In the last hour of trading the averages and indexes managed to turn positive but couldn't hold the gain and closed lower for the day. That action may have set the markets up for a resumption of the rally today.

The Enron circus was back on television, and rumors of US troops in Iraq placed a damper on bullish activity for most of the day. In the retrenchment before noon, we purchased AT&T Wireless at $10.55 in many accounts to increase positions. Barring an unusual event, we are now at our limit in our ownership of AWE. We also added Gillette at $34.15 to larger accounts as a trade. On a technical basis G seems poised to break out to the upside. And, we think it is the type of stock that will participate in the rally we see coming. The stock isn't cheap but it has been basing just below this level for the past two years. If the share price breaks $35 in a general market rally there is the possibility of a good trading gain.

26 February 2002

The stock markets rallied on Monday as existing home sales for January were announced as up 16% (Can anyone say warm weather and/or real estate bubble?) and General Motors raised guidance on its first quarter earnings from $1 to $1.20 per share excluding special items. Those special items are charges to be taken for restructuring European auto operations, and to exclude losses from Hughes Electronics, which GM hasn't yet been able to sell to Echostar. We are sure a few more lobbyist contracts and astute donations will allow GM to get rid of Hughes. And who are we to say that losses for European auto operations should logically reduce operating earnings, if profits from U.S. auto operations are used to increase operating earnings. Picky, picky! And there is also the matter of $5 billion plus in under funded pension obligations that GM needs to address and finance. Another DJIA stock that led the charge today was Caterpillar. CAT is going to earn $2 per share less this year than it did in 1998. But CAT pre-announced better than expected earnings for the first quarter so the stock rallied 6% today to within 10% of its all time high.

Several clients have asked why we are not more invested in the stock market if we expect a 10% rise in the markets in the next few months. The main reason is that we don't know which stocks to own. And we also aren't sure the rally will occur. We don't want to push our luck trading the depressed but still overpriced tech stocks we traded profitably at year-end and early this year. And we have learned the hard way that the out of favor stocks we usually buy are not the type to try and trade in a 10% rally. We could buy the DJIA, but we think the same kind of lemming buying activity by funds and institutions that led to the overpricing of the NASDAQ has been occurring in DJIA stocks.

We have made a few references to Treasury Secretary O'Neill in the last few weeks. That's because we believe he has no real understanding of the problems facing the economy. In recent Senate hearings O'Neill had a go around with Senator Byrd of West Virginia concerning who had the more poignant rags to riches story. Both claimed the best poverty to wealth by hard work story. We don't know about Senator Byrd, but we would attribute O'Neill's success to the "it's not what you know, but who you know," form of business advancement coupled with the ability to go along and get along. He was a government official in the Nixon and Ford administrations. When Ford lost in 1976 O'Neill left by the revolving door of government service to private enterprise to become a vice president of something at International Paper. We would guess that that job might have had more to do with his connections in government than his vast understanding of the paper and pulp industry. In 1985 he became president of International Paper and in 1987 he was named president of Alcoa. When he assumed the presidency of Alcoa, the company earned $1.22 per share in the next year of 1988. In press releases, presumably blessed by O'Neill, we are informed that he is a proponent of technology, because technology produces high long-term growth rates. Too bad that theory didn't hold true at Alcoa. Alcoa did not again earn over $1.22 per share until 1999 when it earned $1.32 per share. During the twelve years O'Neill ran Alcoa, the share price rose from $10 to $35 while the DJIA of which Alcoa is a part rose twice as much. The rise in Alcoa's share price occurred because the p/e ratio expanded from 8x earnings to 25x earnings. The p/e ratio expanded not because of growth in earnings, but because of the general trend of investors to assign higher p/e ratios to stocks as the only game in town. In the process of leaving Alcoa, O'Neill took $50 million from selling options he had acquired over the years. In his final years at Alcoa, O'Neill was also a director of other corporations including Lucent and Eastman Kodak for which he was paid big bucks while the companies' share prices, earnings, and sales tanked.

O'Neill is a good example of the incestuous relationships that exist among corporate boards. He also represents the revolving door method of choosing executives with government connections to smooth the way in Washington. And he is an example of the overpayment of corporate officers for mediocre results. In the present economy there is no accountability or relation between earnings results and pay and perks for most corporate officers. We don't think this is much different from what has always been. But we particularly resent being preached to by folks who are feeding or have fed at the trough of corporate welfare payments. Government officials, both Democrat and Republican, who move to private industry, are paid for the ability to circumvent or negate government regulations, or to obtain government contracts. Like most folks in the investment business we obtained our start by whom we knew. But once there, it's what we did not whom we knew that has determined our compensation. And since then, if we don't deliver for our clients we don't keep our job. Too bad the same rules don't apply to many of the current crop of corporate chieftains. If there were accountability among corporate leadership, the economy might not be in the mess it is.

24-25 February 2002

After several up and down days in the holiday-shortened week, the stock markets closed basically unchanged on Friday. Good earnings news was less likely to cause stocks to rise than bad earnings news was to cause stocks to drop. For the year The Model Portfolio is up .5% while the DJIA is down .5%, the S&P 500 is down a full 5% and the NASDAQ is down 12%.

Among individual stocks, TRW dropped midweek when it was announced that its CEO was leaving for the greener pastures of Honeywell. That news caused Northrop Grumman to make a $6 billion bid for TRW and TRW's share price jumped $10 on Friday after losing $3 on Wednesday. Pity the poor analysts who on Thursday lowered their recommendations on TRW. If the CEO who is leaving TRW can sell the company before he leaves, he can score a double green coup. He can collect on his TRW options and then collect new low priced options from his Honeywell employment contract. Ain't capitalism great---for CEOs at least? Don't think the workers at TRW who are going to lose their jobs when the merger is completed think that way. But as Treasury Secretary Paul O'Neill might say, "I was born in a gravel pit and capitalism made me rich. Now all we need to do is get rid of that abomination of an income tax code and America will be a great country."

The S&P 500 and the NASDAQ remain in bear markets and they still have not corrected all of their bubble mania excesses. The relatively better performance of the DJIA over the last year as it has maintained the 10000 level is our reason for believing that the two year correction is not over. Since 12/28/95 the DJIA has doubled from 5100 to 10000. In that same time period earnings on the DJIA have increased roughly 40% from $311 to $435. The price/earnings ratio on the DJIA has jumped from 16X to 22X earnings. That increase in the p/e ratio is responsible for over 60% of the move in the DJIA. Yet DJIA earnings have been growing at only 10% for the last two years. If markets are truly returning to the sanity of earlier times when share prices were priced relative to earnings growth rates then the DJIA is overpriced. Pricing the DJIA at 16 to 1 price to earnings growth ratio would place the DJIA at 7800 based on the 2002 earning projections on the DJIA. The 7800 level also represents a 30% retracement from the DJIA's high two years ago. 7800 was also a significant support level back in the fall of 1998. The current 22x p/e ratio might be justified if earnings had been and were expected to keep growing at that rate. But even with most analysts factoring a second half recovery into their estimates, the DJIA earnings for 2002 are projected to rise 10% to $485.

The stability of the DJIA versus the other averages over the past two years may be a result of the fear of cash that has been foisted on the public by the media gurus over the past five years. According to guru theory, folks who hold cash always risk missing the next big market move. These gurus failed to mention that folks who stay fully invested at markets tops can suffer serious loss of capital when corrections occur. Not to mention ulcers and sleepless nights.

Following the gurus like lemmings, folks continue to add money to stock funds although not at the rate of three years ago. And the funds they are buying are those that mirror the DJIA because those fund performed relatively well last year. And even those folks who have tired of losing money in the bubble funds like Janus are not withdrawing their money. That's because individual investors very seldom will sell a stock or a fund at a loss. And it seems Janus has seen the light at the end of their advertising tunnel. Janus is now buying MO and WMT and other DJIA stocks. Fund families like Janus and Fidelity are currently providing buying support to the DJIA and selling pressure on the NASDAQ and S&P 500 as they liquidate the no longer tech wonders of yesterday so that they will have funds to buy the DJIA stocks.

We expect a no more than 10% rally before summer. Stock futures on individual stocks will be available for institutional trading by August. That may be just in time to cause a serious September-October meltdown. And if a meltdown occurs, we guarantee that all the regulators and congressmen will wring their hands and wonder why futures on individual stocks were allowed. And academics from the University of Chicago will prove that the meltdown was not the result of futures on individual stocks being allowed to trade. Our autumn meltdown scenario may not occur this year; in fact we hope it doesn't. But we know that futures on individual stocks are a zero sum gambling strategy that add nothing to the economy or the markets except a whole lot of event risk. When futures on individual stocks begin trading in August, the conversion of common stock investing to gambling will be complete.

For the present, we plan on maintaining our conservative posture. The risk reward ratio in our type of out of favor stocks is not favorable as the collapse of most of the stocks we recently sold demonstrates. Thankfully we were out of them before they collapsed.

23 February 2002

The DJIA rallied in the last two hours today and so did the S&P 500 and Nasdaq but not as strongly. We sold BellSouth today for a 30 cents per share profit. We also bought and sold AWE today in our large trading accounts for a 20 cent per share profit. We are trading in 3000 to 10000 share size so we are making better than pocket change on the transactions. It may seem like a lot of dollars to spend to make so little, but we obviously are hoping for larger moves. The important concept is that we are trading both stocks off strong interim support levels and we are quick to exit. We will have a longer post this weekend.

22 February 2002

Yesterday morning the DJIA continued its rally from Wednesday. The NASDAQ didn't as Cisco and Intel lost ground from the opening bell. And, in the final hour the DJIA and S&P 500 reversed to close lower on the day. BellSouth reported that earnings and revenues would grow in low single digits in 2002. This was different guidance than BLS gave a month ago when they predicted high single digit growth. As a result, the share price of BLS dropped 10% and we decided to buy a chunk at $37.82 for our large trading accounts. We are holding the stock overnight to see if we have a rebound today, but we own the stock for a trade only.

The Wall Street Journal in a lead editorial on Wednesday questioned the accounting and financial practices of Fannie Mae and Freddie Mac, the two quasi government agencies that provide affordable mortgage financing for many middle and low income American families when they purchase their homes. The WSJ editorial page invariably exhibits an extreme distaste for any government program or agency other than the U. S. Defense department and the defense industry. Along with the U. S. Armed Forces, the Post Office, the GI Bill after WWII, Social Security, Medicare, all the western dams, the interstate highway system, commercial airlines, mass transit, cure for polio, the medical education of most doctors, hospitals, TVA, flood insurance, police and fire departments, and most large universities, Freddie and Fannie are government programs that work. The fact that the WSJ chose to attack the two enterprises in an editorial and not a news column is the most telling indictment of the questionable factoids they presented. We don't own either stock attacked by the WSJ. But we know that such an attack should not take place in an editorial, without first having an exhaustive article or series of articles in the news portion of the WSJ.

Ever since the media missed the Enron story, they have been trying to be out in front of the next Enron. We have mentioned before that CNBC and the financial press and other media are creating problems for corporations and investors by reporting innuendo and fabrications in the hope of predicting the next collapse. In the process they are creating stories, not reporting them.

21 February 2002

The stock markets rallied yesterday. We don't know why. Other than buying some more AT&T Wireless, we don't have any stocks to buy on our plate at this time.

The present is a good time to demonstrate the value of taking losses rather than holding on and hoping. There is an old saying that goes, "take your losses and let your profits run." Because of increased market volatility in the last ten years we usually don't let our profits run. That's because we are content hitting singles rather than trying to hit home runs. But because we are taking profits more quickly, the "take your losses" part of the saying is even more imperative. For example, in the last few months we sold JPM for small loss at $35.30 and it traded today at $29. We sold AOL at $28.70 for a 10% loss and it traded today at $24. We sold Q at $12 and it traded today at $7.50. The same price action has also occurred with stocks we sold for profits. We sold TLAB at $17 and today it traded at $11. We sold CIEN at $16.30 and today it traded at $9. We are not implying that these stocks will not recover in price and trade at higher levels than where we sold. But we know that when we hold a portfolio of stocks where we had profits that turned to losses and losses that became bigger losses, we don't have the flexibility or objectivity to make sound judgments. It took us many years to learn this lesson. But we have. And because we have learned the lesson, and acted upon it, we now have the funds to repurchase these stocks at these lower levels, or to wait, or to buy other stocks. Taking losses is difficult. But not taking losses, in time, is disastrous in volatile markets.

20 February 2002

Yesterday and last week end were a good time to have a large cash position. So is today. There is something in the way stocks are trading that suggests an underlying uneasiness with owning stocks. The sell off in bank and brokerage stocks suggests that institutional investors know more than John Q. Public. Major financial institutions knew that Enron was a house of cards and thus were able to attempt to mitigate their risk. Or so they hoped, although in the case of JP Morgan Chase, and some other major players, it will probably take a court to decide whether the risk was eliminated. Enron had myriad derivative contracts outstanding. All the contra parties to those transactions were quick to say they were hedged against any major losses. We think the bond and stock markets are saying otherwise.

There is irrational fear in the marketplace. There is also rational fear in the marketplace, and we won't know which is which until the Enron, Global Crossing, "debt crisis" dust settles. For now we urge caution and are being cautious with our accounts. Prices on most stocks are not low enough to justify assuming more risk at this time.

17-18-19 February 2002

We were pleased to note that once again a comment from our Winter 2002 Lemley Letter was featured in this week's issue of Barron's. It was listed in the Market Watch column, which is in the Market Lab section of Barron's. Another quote from the same letter was featured in the same column three weeks ago. The comment used is especially germane now as low interest rates are forcing folks to turn to speculative long term bond funds for 7% and higher yields. We continue to stick with US Treasury Notes due in two years yielding 3%. Do not go longer in maturity. There are times to accept lower yield for safety of principle. Now is one of those times.

Market Watch
A Sampling of Advisory Opinion
From February 18 issue of Barron's

The Lemley Letter
208 S. LaSalle St. Chicago, Ill. 60604

WINTER 2002 ~ Interest rates are currently at 40-year lows, which means that prices are at all-time highs. It's no coincidence that preferred stocks are currently being marketed to individual investors. Wall Street has a way of giving investors just what they don't need. Wall Street profits from individual investors, depending on the naiveté of folks who need yield to live on but are not asking the right questions. The question to ask is: If preferred stocks yielding 7% are so great, why are banks selling their own newly issued preferred stock to me? Why aren't they going to the Fed and borrowing money at 1.75% and using that money to buy the 7% preferred stock of other companies and banks and locking in a risk-free 5% return? The answer is that these stocks are not risk-free. As long as interest rates stay low, the preferred stock being sold today will not drop in value. The odds on their increasing in value are minimal, since interest rates are as low as they can go without a Japan-style economy.

-- Ralph Lemley

We finished the week with only one stock in our Model Portfolio. That stock is AT&T Wireless. By happenstance, this week's Barron's featured wireless cell phones on its cover and the consensus of analyst opinion was that AT&T Wireless was the best of the lot. That scares us a bit, since we worry when we are on the same page as the analysts. For the year, the Model Portfolio is basically unchanged, while the S&P 500 is down 4%. With only one stock and the remainder of our funds in cash and two year Treasury notes, we are obviously signaling that we don't like the stock market. We can't find any stocks we absolutely want to own and so for now we are going to stay on the sidelines. While a rally may still be in the cards before April, the risk reward ratio that we see suggests caution.

Happy Presidents' Day

16 February 2002

Monday is a market holiday to celebrate Presidents' Day. The stock markets ran into more accounting trouble today when the NY Times published an article that said that IBM derived as much as 12 cents per share of earnings in the last quarter from the sale of a business to JDS Uniphase. The crux of the argument revolves around whether the sale should have been treated as a special item rather than including the revenue in continuing operations. We think it wasn't kosher, but then IBM and GE have been doing that stuff for years. Not to worry.

We saw a report that real estate prices rose 10% last year while the stock markets were down. We know some folks trying to sell property who wish they could just sell the property for the valuation placed on it two years ago. We have always said that real estate prices exist in a dream world of no liquidity. If the prices of every piece of property in the U S were listed and traded daily like stocks, we guarantee that real estate prices would not have been risen 10% last year.

The media reported yesterday that scientists have cloned a cat. We don't know why that's news. Wall Street has been cloning gurus for years. Gurus are the folks who tell you to buy a stock after it has risen 200% and to sell that same stock after it has dropped 75%.

AT&T Wireless completed its acquisition of Teleport yesterday by issuing 145 million shares of stock and assuming $2 billion plus of debt. AWE also issued $345 million of stock, for which they received payment, to NTT DiCoMo. NTT is Nippon Telephone, which owns 16% of AWE. We think AWE overpaid for Teleport but they made the deal in different times. And they picked up one million subscribers and 20 million plus potential subscribers. In addition to the liquidation pressure of selling by formerly highflying mutual funds, AWE share price has been under pressure from the selling of 100 million shares of AWE by mother AT&T. That selling has been completed. Now the merger completion should remove the arbitrage selling pressure. Finally, options expiration is today so the price of AWE will not be fixed on the $10 strike price. So, hopefully, all we have to deal with now is the market pressure that all telecom issues are under. All this selling has presented us with a wonderful buying opportunity. And with our large cash position we can relax and let time reward us.

Gap Stores debt was downgraded by Standard & Poor. The share price is making new lows. We haven't heard lately from our friend at Prudential, but we are sure when we do we will learn that her upgrade from sell to hold at $15 didn't mean to buy. It really meant to "hold" your funds for a better buying opportunity. We have a soft spot in our heart, but not in our head, for GPS. We think they will recover eventually but from lower prices.

We'll have a new post on Sunday with the Model Portfolio.

15 February 2002

As the DJIA crossed 10000 we sold our SBC position in most accounts at $37 for a $1 per share loss. The SBC sale was for the purpose of raising cash. We now hold only AT&T Wireless and cash and two year Treasuries yielding 3%. We have been trying to trade these markets for the past six months and really haven't gained anything but sleepless nights. So we are heading to the sidelines for a while. Please understand that the stocks we have been trading like Cisco and EMC have been, and remain, overpriced on sales to share price, and price to earnings ratio. We traded them because they had the volatility needed for trading purposes. But their volatility is and has been the reason for our speed in selling when new info or our gut affected our view.

We are maintaining our holdings in AWE because we believe that it is under valued at $10 per share. Our valuation call is relative to all the other stocks in the marketplace at the present time. Customers and revenues are growing, capital needs should subside after 2002, and the current price is less than two times revenues. Downside risk in a bear market is 50%, but upside over the next four years is at least 150%. So we will hold and add to if it drops.

The problem with owning many stocks is that we have no confidence in the economy. Congress and the White House are more interested in pointing fingers over Enron and Campaign Finance than in developing a prudent stimulus package. We believe that the stocks leading the markets higher are over priced and over owned. The same gurus, who were suggesting Coca-Cola and Gillette four years ago, and Cisco and Worldcom two years ago, now have a new list of suggestions. Maybe they will be right this time but we don't think so. And we have been right for the past three years. We believe this year is going to be a nonevent and so we are withdrawing to the sidelines to recharge our batteries and rethink our strategy.

Because of 9/11, the markets have also become more vulnerable to unusual events affecting investment confidence. Markets abhor uncertainty and there is plenty of uncertainty around the country, and the world. It's true that markets do best climbing a wall of worry. But that wall is usually composed of substantial earnings gains and low p/e ratios. The wall these markets are climbing is the same one they have been having trouble with for the past four years. And that is the wall of no revenue gains and overpriced stock favorites, made that way by every fund buying a few favorite issues.

Valentine's Day 2002

Happy Valentine's Day to all our sweethearts. Yesterday was a day of no guts and no glory. We sold our position in EMC at the opening on Wednesday at $14.10 for a maximum 38 cents per share loss. We sold the EMC because the Wall Street Journal carried a story about phantom sales being alleged by a former executive of EMC who was fired by the company. Since we owned EMC for a trade we decided to go to the sidelines.

The four day rally in the stock markets continued during the day and as the DJIA approached 10000 we sold our position in Cisco at $17.60 for a nominal to one dollar per share gain. We also sold our position in Schwab at $14.50 for even money in larger accounts to 80 cents per share loss in smaller accounts. We sold the SCH and CSCO because the DJIA was approaching psychological resistance. Moreover, the domestic political and international political situations are making us nervous from a standpoint of exposure to stock market risk. And when we get nervous we go to cash.

Those sales leave us with a large position in AT&T Wireless in all accounts and a good size position in SBC in many accounts

13 February 2002

The stock markets pulled back on Tuesday, after two days of nice gains. On Monday morning we bought UAL at $12.75 in aggressive accounts where we had traded it profitably twice before at the same purchase level. We were guessing that after the mechanics union approved the new contract with a raise of $10 per hour for senior mechanics that the stock would jump two or three points. Unfortunately, about an hour after our purchase, the head of the mechanics union announced that he thought his members would reject the contract and vote to strike on Tuesday. We slept on this news and yesterday decided that the upside we were looking for was two points, and the downside risk if the contract was rejected is four or five points. And so we sold for a 70 cents loss including commissions. This is an example of where breaking news changes the trading equation. When that happens we take our loss and move on.

As the DJIA approaches 10000 it seems to run into trouble. We continue to expect a rally before April but we are content with our large position in AT&T Wireless, and our trading positions in SBC, Schwab, Cisco and EMC. Any rally will be contained by the reality of the economy. Until then, 3% two year Treasuries are king.

12 February 2002

The stock markets gained today reversing last week's downward action. After so many down days a move higher is logical. We neglected to mention in our weekend roundup that we sold the Sun Micro in our aggressive accounts at $9.85 per share on Friday for a nominal gain. Since we purchased EMC and Cisco in our aggressive trading accounts, we wanted to manage our exposure to techs that we are trading.

The media seems to have tired of Enron and Tyco. With the Winter Olympics and the Westminster Dog Show this week, maybe the markets will use the news respite to stage a comeback. We have been buying small amounts of Timberland, the shoe folks, over the past few days. We have paid between $31 and $33 per share for the stock. We made a nice trade in TBL several years ago and with the stock selling at 50% of the yearly high, we are buying in our aggressive accounts. Because the stock is so volatile we are treading softly for now.

09-10 February 2002

Compared to most of the stock markets we had a good week. We didn't lose any ground with the Model Portfolio up a bit over 1% for the year while the DJIA is down 4%, the S&P 500 is down 6%, and the NASDAQ is down 8%. We hate to do well only by not losing. We'd rather be making money. Most of our managed accounts are up 1% to down 1%. We survived the week's carnage by having a lot of cash/Treasuries, and owning a few stocks that held their own,

We added more AT&T Wireless this week when it dropped below $10 per share. Book value with goodwill taken out is still $7 per share. Revenues are expected to grow in the low double digits. While this is a slowdown from the 30% growth of past years it is reflective of a maturing company. Moreover, the share price is one third of what it was at its' high two years ago, while revenues are two times what they were two years ago. AWE is not yet showing earnings but cash flow is close to $2 per share and this company does not have any funding problems. We think fair value in the current market is around $16 per share or twice next years revenues. AWE is a 10% or more position in most accounts and we will hold unless share price jumps to $16 in the spring rally we envision.

SBC Communications is the Regional Bell Operating Company consisting of Southwest Bell and Ameritech. Also owns 50% of Cingular Wireless with BellSouth owning the other 50%. Cingular is the second largest wireless company. SBC is on its low and in any rally should run to the mid forty dollar range.

Charles Schwab is selling for about one third of its two year high. We have traded twice in the past three months for small profits. We also purchased Cisco and EMC in larger accounts where we had traded both at least twice in the last three months for profits. All three of these stocks are anchovies.

Friday afternoon there was a court ruling on asbestos liability that will have a negative impact on those companies with asbestos liability exposure. Coupled with the continuing Enron soap opera, the stock markets have a pretty tall wall of worry to climb. We continue to expect a rally of 5% to 10% before April Fools Day. Hope we aren't one.

The Model Portfolio as of 09 February 2002 has been posted.

09 February 2002

This was a downer of a week for the stock markets. Enronitis, asbestositis, and funnystuffitis conspired to cause analysts to reconsider their recommendations on various stocks. Even with Friday's tepid rally the DJIA was down 200 points and the NASDAQ was down over 100 points. Happily, our stocks recovered most of their early week losses.

Several years ago an analyst warranted headlines for placing a "buy" recommendations on a company's stock. Now an analyst garners headlines for placing a "sell" recommendation on a company's stock. Yesterday we bought CSCO in our trading accounts and today we added it to other larger accounts. We have traded Cisco successfully over the past three months and we think an analyst's "sell" recommendation on CSCO issued yesterday has provided another opportunity for a trade. CSCO is definitely an anchovy.

We'll have a review post later this weekend.

08 February 2002

Enron officials donated millions of dollars over the years so they could have face to face meetings with Congress. Then, when they have the chance, they decline the opportunity. Go figure.

The stock markets continued to meander yesterday with no discernible trend. We decided to buy EMC in many larger accounts yesterday because it has pulled back to the level where we have successfully traded it twice before. We paid $14.24 per share for the stock. We also sold the Verizon we bought yesterday in our aggressive trading accounts at $44 for a nominal profit so that we could buy Cisco at $17.30 per share and Sun Micro at $9.38 per share in those same aggressive trading accounts.

All the gurus seem to have turned short term negative and long term positive on the markets. We think the opposite. We think we are going to have a trading rally sometime in the next month before the markets head lower.

Two year Treasury notes yielding 3% remain very attractive.

07 February 2002

Last year at this time the S&P 500 was at 1352. Yesterday it closed at 1082. Both the Republican and Democrat stimulus bills failed in the Senate yesterday. There seems to be general guru agreement that no stimulus package is needed. Of course the gurus are still employed, for now.

We purchased Verizon Communications, the New York RBOC with the largest wireless telephone service, in our aggressive trading accounts today at $43.60. We have been thinking of adding VZ to accounts as it has dropped from $50. We may hold or trade the stock or add it to more accounts if it continues to drop in price. We think SBC and VZ are dropping in price because they are salable in size by large mutual funds that are raising cash to meet redemptions.

Allied Irish Banks announced yesterday that an employee in Baltimore lost or stole $750 million dollars. Oops. And Hasty Pudding Theatricals, the Harvard University theatrical group, which is the oldest university theatrical group in the country, announced that two seniors embezzled $90 thousand. Maybe they needed the funds for tuition.

Over the weekend, while reading the NYT financial pages, we learned that Ford Motor had lost $1 billion trading in palladium. We were amazed this huge loss had not received a bigger play at the time it was announce with year end earnings several weeks ago. Yesterday, the WSJ had a lengthy article on the topic. Seems Ford execs left the purchase of palladium up to the same folks who buy the base metals for the company, and no one thought to hedge the contracts. Wow.

The proposed Hewlett Packard/Compaq merger is a hard one to figure out how to play. We would like to own HWP because we think Carli Fiorini is getting an unfair rap, and is actually doing a good job. But if the merger is approved by shareholders, HWP's share price will probably drop as arbitrageurs buy CPQ and sell HWP to lock in a profit. And if the deal doesn't go through, HWP will rise, as those short HWP and long CPQ have to get out of their positions by buying HWP and selling CPQ. But if the deal doesn't go through Carli will probably lose her job and then we wouldn't want to own the stock. So we are doing nothing.

06 February 2002

The Tyco-Enron-Elan-wireless telecom soap opera continued today. We have no idea when it will end. With the foul mood the markets are expressing, and the stock markets current dislike of companies with large amounts of debt, it will be interesting to observe the reaction to Gaps earnings due February 28.

We bought more AT&T Wireless yesterday with the funds realized from the sale of Schering Plough two days ago. We paid $9.45 per share and bought the same number of shares of AWE as we had of SGP, except for our two grandchildren for whom we bought and extra 50 shares each. When the markets recover from this correction/collapse, we think AWE will perform as well for us as Oryx did three years ago, or Abercrombie & Fitch did two years ago.

We are content to watch the markets. It is not the right time of year to make any large bets. If this were late September or late December we might be tempted. We think a large part of the selling is coming from mutual fund families like Janus and Fidelity where folks are finally giving up and cashing out. Actually, part of the selling pressure in AT&T Wireless is probably coming from these two fund families which owned 75 million shares between them last year. We are not buying AWE for a quick pop. We are buying it to own over the next few years. Mutual funds are selling Tyco and Elan also but the fundamentals of those stocks don't appeal to us. We don't think it is proper to lump AWE in with debt laden telecoms like Nextel and Global Crossing and so we are happy to keep nibbling as AWE's price erodes.

Two year Treasuries yielding 3% are King.

05 February 2002

The way the stock and bond markets acted yesterday leads us to believe there may be a hedge fund or bank or investment bank in financial difficulty. Also there must be liquidation taking place at some of the poorer performing large mutual fund groups. We could try to be heroes and buy stocks at these levels. But we think we will take a pass this time and remain observers till we have a better feel or understanding of what is occurring.

Many commentators have noted that the stock averages and indexes are all up 20% or so from the September 17 low. What few have mentioned is that the DJIA and the S&P 500 are both at their September 10 closing levels. They reached those levels after a slow, persistent summer sell off. We continue to believe that a true bottom will not be made until more pain is felt by large cap Dow stocks.

We sold Schering Plough yesterday at $32.69. A client asked why we sold, especially at a loss? Everyone hates taking losses including us. We sold because we think SGP is going lower. All the other stocks we sold recently that we thought were going lower did go lower after we sold them. Of course all the stocks we held have also gone lower. So that's not a good answer. A better answer is that at certain times we lose confidence in a stock, because of news or price action or the overall market. Or we see another stock that is more attractive. Or we just want more cash in the account. We think all three of these reasons apply here. The "Street" seems to be selling drug stocks. Most drug stocks didn't rally after year end or after first quarter earnings. And so, we think drug stocks will be under selling pressure throughout the first quarter of 2002 as institutions liquidate them. And a stock we really want to keep acquiring, AT&T Wireless, moved under $10 today and we may buy more if Awe drops lower. Finally, we also don't mind having more cash.

We neglected to mention that last Wednesday we traded Bank One in our aggressive trading accounts. Bank One had dropped three dollars in two hours during a sell off in bank stocks. We didn't want to carry the position overnight since we bought it for a "pop" into the close so we sold and lost fifty cents per share. On Friday we bought Coca-Cola at $43.80 in those same accounts for a trade, and sold the stock today for an 80 cents per share profit.

Arthur Andersen has hired Paul Volker to save its reputation and its business from the Enron scandal. It's always interesting to see how the power structure and players remain the same no matter whether the Dems or the Repubs are in power.

Cash is king.

04 February 2002

The Patriots won the super bowl in an exciting game. Bad news for the markets since the Pats are an original AFL team. A down January for the major averages and indexes and an AFL team winning are a double whammy for crystal ball gazers. More relevant factors might be the fact that earnings, while beating estimates, are still well below levels of last year for many companies. And any improvement this year will still leave earnings short of two year ago levels. The new budget emphasizes defense spending, but with the Dems controlling the Senate we would guess that the domestic program cuts are going to be mitigated. That means larger deficits and higher long term interest rates. Tyco and Enron and now Williams Companies are going to continue to be big stories this week. That means more negativity. It's only a matter of time till GE joins the accounting brouhaha. With Jack Welch gone, we don't think CEO Jeff Immelt has the stature to dismiss rumors that the short sellers may start. And so we think institutions will migrate to the old faithful stocks where there is some visibility on sales growth and no accounting confusion. SBC and AT&T Wireless will show growth and have relatively straightforward accounting. Schering has problems with Claritin going off patent but that's why it is selling at the price it is. Schwab is interesting because of the assets it controls. And cash remains king, as it has the last three years.

02-03-04 February 2002

Looks like Punxsutawney Phil saw his shadow today so six more weeks of winter are on the way. With the way winter has been going in our parts, six more weeks won't be bad at all. We are expecting a 5%-10% rally after earnings season finally ends in a week or two. But we remain cautious on the outlook for this year. Low interest rates alone will not bring the markets back. If low interest rates would be able to do that the Japanese markets would be triple their current level.

Greenspan has lowered rates more than is warranted because he is trying to rescue the banks from bad loans. The Fed is concerned with the big picture; not how its actions affect tired and retired folks. We said this back in the early 1990s and we will say it again now. Greenspan is rescuing the banks by taking interest income from the pockets of savers and retirees. Politicians are always telling folks to save more money for their retirement years. Then the politicians through there appointees take the potential earnings from them. The banks do need to be saved from their bad loans, but unfortunately accountability is not part of the rescue plan. Where are the fired bank leaders without the golden parachutes? The term free enterprise does not apply when the good of the business elite is concerned. Soak the savers, save the soakers.

All the ranting in the world is not going to change the Fed's attitude. So our expectation is that the Fed will keep Fed funds under 2.5% for the year. That's why we have been buying 21-24 month maturity US Treasury notes. We'll receive 3% for the first 12 months while short term interest rates begin their gradual rise from the current 1.25-%. The interest we receive from the notes now, is more than double the present short term rate on cash held for reinvestment or in money market funds. When interest do reach 3% we expect to be holding a note with a maturity of less than a year. We do see much higher rates down the road, but because there will be no stimulus package soon we don't think the Fed will need to raise rates aggressively. In fact our scenario has the stock market stagnating and the long end of the bond market rising because of the increased supply arising from the large deficits the Federal Government will soon begin incurring. With rates rising, the yield curve will steepen, with the short end being kept artificially low by the Fed. At some point we will probably lengthen maturity, but not now.

We offer a winter poem we imagined on our walk today. Yesterday's snow has certainly brightened our landscape and our feelings.


Now winter lays upon the land
The blanket sprayed is nature's hand
That shields the earth from too much cold
So fragile folks may venture bold

The chickadees cluster close
Beneath the elder tree below
Hung with seeds and suet fat
The field mice too, soon join the show

It's time to strap the snowshoes on
And call our little dog to heal
We'll head out to our favorite path
And wend our way to wonderland

Hoarfrost clings to tinseled trees
And milkweed wears a shiny glow
Hungry hawks circling high
Look for creatures in the snow

The coyote tracks are everywhere
Where squirrels and rabbits make their mark
That big ole buck they missed last year
Has made a meal of cedar bark

The suns so bright it hurts our eyes
As trunching over land we go
Our fortunes here for us to know
The pure white joy of winter's glow

BL Feb 2002

1 February 2002

We've posted The Model Portfolio as of the close of January. For the month the Model was up 1.0 %, while the S&P 500 was down 1.5%, the DJIA was down 1%, and the NASDAQ was also down 1%. Guess that means we will be up for the year while the popular averages and indexes will be down. That's if the, "as January goes so goes the year," holds. Institutions marked stocks up yesterday into month end so we would expect a bit of a pullback this morning. But we wouldn't be surprised to see the rally resume. Retail stock earnings come the next two weeks but the markets don't expect much from them so we wouldn't expect any individual disasters to affect the overall markets.

1 February 2002

Rabbit! Rabbit! We spent yesterday enjoying the first real snow of the season. Since we left the office early to play hooky we'll comment on the markets in our weekend post. Several folks have commented that many of our poems are about death. Since death is our next great adventure, we are intrigued by it. Also, living in the country, raising and selling animals and watching both animal and human hunters we are exposed to death on a daily basis. For what it's worth, we present one of our favorite poems.

         Owen Flynn's Burial

They buried Owen Flynn today
On a snowy February sway back hill,
And not a tear for him was shed
Cause all his folks 'cept two were dead.

The church set there like a Christmas card.
The folks were dressed against the hard cold.
The graveyard seemed from a Dickens book
With sand and snow and a slushy look.

At least by appearances you'd have to say
The years had been hard on the people there,
The young ones gaunt and lean and old
And the old folks lookin' of stories to be told.

And yet any sorrow was strangely lacking
And missing also was love,
For there's an age you reach in life
When people say enough.

Perhaps that judgment is too harsh
For Owen had surely lived past his years
And when you've buried sons and daughters first,
For an old single man it's hard to find tears.

Then who was this man? And why were they there?
Since no one was his peer.
Well, out in the country they bury their dead
And in death everyone is dear.

The service was over and lunch would be served
As soon as Owen was in the ground
The women save one to the kitchen repaired
While the men folk moved on to the ground prepared.

The folks trudged slowly up the sand snow hill
With talk of tractors and cows and hay
The hearse, incongruous, shiny and new
Led the mournless way.

All of sudden a scream let out
Owens tombstone came crashing down
A leg was broken, a man in the grave
And Owen still waited above ground.

The man climbed out; the ambulance came
And Owen was quickly disposed of.
For that's the problem when you live past your day,
Your either forgotten, or in the way.

BL Feb 1974

February 2002 Thoughts

January 2002 Thoughts

December 2001 Thoughts

November 2001 Thoughts

October 2001 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.