Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
23 February 2018
It was another crazy week with markets moving 2% or more daily up and down. Maybe it’s our age but this kind of action gets our attention because the volatility reminds us of 1987. Back then S&P futures were the new trading vehicle and it was said that proper hedging using futures would prevent any losses. Come October 1987 that theory not only didn’t prevent losses; the use of futures exacerbated the market turmoil.
In the last 8 years many different hedging instruments and market ETFs have been created but never tested in a market downturn. Bull runs eventually need a dramatic correction and we think the movements of the last three weeks are a prelude to a 1987 type correction. As then, the economy is strong, earnings are fine but values on the stocks leading the advance are stretched. Eventually there will be a severe correction – the when is the question. And the correction will be confounded by all the supposed safe hedging strategies that have only been back tested on computers.
With the above in mind we winnowed our holdings by selling stocks recently purchased (most at small profits) to 9 issues which we think we would be comfortable holding if the roof caves in.
Our current positons are:
Merck, Walgreens, Apache Oil, Devon Oil, Hain Celestial, Deutsch Bank, General Electric, Ford and Verizon in larger accounts. We will be trading Verizon and may trade AT&T if it moves slightly lower.
Half of our gains of this year have temporarily evaporated in the price drops in our two favorite oil trading stocks- Apache and Devon. The drops in Devon and Apache- even though earnings were OK- are a mystery to us. On Wednesday and Thursday oil and most oil stocks moved higher while Devon and Apache tanked. Our guess – and it is only that – is that some hedge fund with arbitrage positions was caught the wrong way and had to sell those stocks. Or several hedge funds thought the earnings number would be better and when their trade headed south they quickly abandoned the trade. Whatever. We’ve been participating in the oil rodeo for the last four years and are going to ride out these two issues.
Spring is on the way- Hooray.
Devon Energy Corp. DVN reported fourth-quarter 2017 adjusted earnings per share of 38 cents, lagging the Zacks Consensus Estimate of 60 cents by 36.7%.
On a GAAP basis, the company reported earnings of 35 cents per share; down from the year-ago quarter's earnings of 41 cents. The difference between operating and GAAP figures in the reported quarter was due to a gain from tax reforms and restructuring, while asset impairment charges and deferred tax asset valuation allowance offset the gains.https://finance.yahoo.com/news/why-devon-energy-corp-apos-214900718.html
… While disappointing, Devon's fourth-quarter miss was largely due to issues beyond its control, and both were temporary. Meanwhile, the company's decision to remain ultraconservative by paying down more debt first isn't a bad idea, given what the industry has gone through in recent years. That's why today's sell-off looks like a potentially fantastic buying opportunity for patient investors: This oil stock has reached an inflection point, and is on pace to start creating meaningful value in the next few years as it delivers on its vision.
Apache Corp. on Thursday reported fourth-quarter net income of $456 million, after reporting a loss in the same period a year earlier.
The Houston-based company said it had net income of $1.19 per share. Earnings, adjusted for one-time gains and costs, were 33 cents per share.
The results beat Wall Street expectations. The average estimate of 10 analysts surveyed by Zacks Investment Research was for earnings of 21 cents per share.
The oil and natural gas producer posted revenue of $1.59 billion in the period, also beating Street forecasts. Six analysts surveyed by Zacks expected $1.54 billion.
For the year, the company reported net income of $1.3 billion, or $3.41 per share, swinging to a profit in the period. Revenue was reported as $6.42 billion.
16 February 2018
Markets semi stabilized by Friday at higher than the lows of the past month but lower than the highs of January.
We recommitted money as the markets calmed and now we are again mostly invested.
The correction was a tad over 10% and our view is that the violent move will allow stocks to seek higher levels into the spring. That is as far as our cloudy crystal ball allows us to guess.
At the present we own:
Merck and Celgene in the drug sector. We sold both 10% higher than their current levels and expect them to retrace these drops. Merck yields 3.5%.
Walgreens Boots was good to us in January but we were little too quick reentering the trade and currently have a loss in our position. WBA is a great company and we expect a move to $80 by May.
We are looking for a reentry to Rite Aid and may take a small position in the next few weeks.
We have been trading 3 oil stocks successfully for the past few months, but as with WBA we reentered our traded just before the big kahuna and now have losses in all three: Apache, Devon and Marathon Oil. The price of oil dropped 10% as did the markets and we think the drop was related to hedge fund liquidations. The Street's analysis of the drop is that production of 11 million barrels a day in the U.S. from the shale oil boom is the culprit. We disagree- a lone voice in the wilderness.
We're back in HAIN Celestial, the organic food company, after it dropped 10% and more from our recent sale price. Do these 10% drops represent a pattern?
Abercrombie(Hollister too) and Macy are our retail trades at the suggestion of our perceptive grandchildren and Deutsch Bank and newly purchased First Data (see below for description) are our investments in the financial area.
General Electric and Ford are unloved value plays. We seldom own utilities but Pacific Gas & Electric has dropped from $70 to $40 on fears that PCG will have to reimburse home owners or insurance companies over $5 billion for the fire PCG downed - by high winds- power line failures caused into the recent terrible conflagration in northern California. PCG eliminated their dividend to conserve cash and the eventual outcome is going to turn into a soap opera before a resolution is reached. We were expecting a trade to $45 to $50 sometime in the next year.
We reentered Juniper, the internet stock that we have been trading and also Newell (see story below). Finally we bought the airline ETF (symbol JETS) in the same amount as the number of shares of United airlines that we took a loss on. At $34 on JETS we are even for our UAL loss and we will be gone above that level.
In a few large accounts we bought Verizon under $50 for a trade to $55.
Newell earnings info:
Newell proxy fights- just like the good old days when we began our investing career fifty years ago:
Marathon Oil beats on earnings and revenues.
Report: Walgreens in Talks to Buy AmerisourceBergen
First Data Corp profile:
First Data earnings:
9 February 2018
With all the volatility this week CNBC- the financial channel- had a difficult time keeping its captions and commentary current. By the time the caption said the market was lower/higher and the talking head began explaining why the markets were lower/higher, markets had already reversed and were higher/lower as programs and the big boys and girls delighted in playing their computer games at the expense of the investing public.
Our scenario for the week (and the correction) had the markets dropping on Monday (to the 10% correction level) and rallying on Tuesday. When they did (hubris) we chose to commit most of our cash. And so, we were flummoxed by the reversal on Wednesday and the 1000 point drop on Thursday. Since we did not expect the Wednesday/Thursday reversal our discipline required us to raise cash going into the weekend. We hadn't planned on trading much this year but market action such as we've experienced in the last two weeks requires adjustments to portfolios. Our larger portfolios are back to even for the year (after being up 5%) but still well invested; and our smaller ones are higher since we were less aggressive in committing cash on Monday Tuesday waiting till Thursday/Friday to do so.
This market action is the result of the blowup of several fancy leveraged trading vehicles that have nothing to do with investing. But we have learned over the years that market disruptions such as what we are experiencing need to be managed both on the downside and the upside
We raised cash by selling issues we have been trading and we are now going to hopefully sit back and observe since cash has been replenished without losing too much or sacrificing investment positions. Hopefully with today's rally in the last hour after 400 points up and down and up during the trading session will allow markets to complete working through the failed hedges next week.
The tax cuts of last month and Congress passing the budget today are near term positives for the markets (and probably long term negatives). The rise in interest rates has been a handy excuse for talking heads to give for the market downturn but the rate rise rise of 15 basis points they are referring to used to occur on a regular basis back in the good old days of the early oughts and traders took no notice. Back in the 1980s markets rallied with 14% long term Treasury rates.
The unwinding of the hedges that failed is the proximate cause of the angst and world markets losing over $3 trillion of value.
The unwinding will eventually end.
Jeff Bezos' Quest to Find America's Stupidest Mayor
2 February 2018
Markets retreated this week though earnings news and economic conditions remain excellent. We added some high quality trading stocks to our larger and midsized portfolios since we believe any serious correction will not occur in the first quarter barring some Trumpster initiated cause.
As is obvious we have moved from the depressed value stocks we used to recover from last year's performance by trading the New Year unloved selling abated bounce in them but given current market highs we want to be in quality stocks the market is mildly disappointed in for trading recovery as the markets continue –with pauses- to move higher over the near term..
In large accounts we now own:
Proctor and Gamble; United Airlines; Walgreens Boots (added this week after it dropped $4 back to our original sale price of a few weeks ago on news of the Amazon/Berkshire/JP Morgan propose hookup for insurance(?)- see below); Starbucks; Apache and Devon in oil; Hain Celestial $4 below our sale in early January; and Merck $2 below our sale a few weeks ago which [pulled back on the Trumpster's continuing idle threat of challenging drug prices.
We also own GE and Ford as investments in all accounts- the unloved of the current market. GE has its problem but Ford has record earnings great cash and a 5% yield but Tesla - can't build cars but can promise them - continues to wow Wall Street.
Happy Super Bowl. Ground Hogs here gives us 6 more weeks of winter.
What's going on with Amazon-Berkshire-JPMorgan?
By David Anderson
Right now it is mostly a press release. I don't have enough information to really have a strong opinion. My first professional thoughts though are the following:
Healthcare is hard
Big data is already being run hard in healthcare by incumbents (Optum), start-ups (Oscar, Clover) and tech companies (Google/Verily)
What are they planning to do differently than previous private sector consortiums?
What are they planning to do differently than CalPers and other large pension pools?
What are they planning to do differently than large insurers with significant fully insured pools?
What are the planning to do differently than large integrated delivery networks that also self-insure?
1+ million covered lives is a good pool for experimentation and beta testing but not a representative sample for the nation
Healthcare is hard
We have good ideas on how to reduce costs. They mainly involve a variety of ways of saying "No" or at least saying "No, not at this price" as well as care design. I could see a strong play for reference pricing, centers of excellence and value based insurance design. Bringing that all in-house could make some sense on some level. But I am really scratching my head on the so-what unless they really think that they have a special sauce that can accurately and effectively intervene so far upstream of preventable costs at pennies on the dollars. If that is the case, great but so far no one has found that special sauce.
My unprofessional thoughts: Have fun storming the castle!
The Bloody Nose suggested approach to North Korea http://english.hani.co.kr/arti/english_edition/e_editorial/830615.html reminded us of this poem by Roberts Southey (Robert Southey (12 August 1774 – 21 March 1843) was an English poet of the Romantic school, one of the so-called "Lake Poets, and Poet Laureate for 30 years from 1813 until his death in 1843.)
As the saying goes: the more things change the more they stay the same.
The Battle of Blenheim
By Robert Southey
It was a summer evening,
Old Kaspar's work was done,
And he before his cottage door
Was sitting in the sun,
And by him sported on the green
His little grandchild Wilhelmine.
She saw her brother Peterkin
Roll something large and round,
Which he beside the rivulet
In playing there had found;
He came to ask what he had found,
That was so large, and smooth, and round.
Old Kaspar took it from the boy,
Who stood expectant by;
And then the old man shook his head,
And, with a natural sigh,
"'Tis some poor fellow's skull," said he,
"Who fell in the great victory.
"I find them in the garden,
For there's many here about;
And often when I go to plough,
The ploughshare turns them out!
For many thousand men," said he,
"Were slain in that great victory."
"Now tell us what 'twas all about,"
Young Peterkin, he cries;
And little Wilhelmine looks up
With wonder-waiting eyes;
"Now tell us all about the war,
And what they fought each other for."
"It was the English," Kaspar cried,
"Who put the French to rout;
But what they fought each other for,
I could not well make out;
But everybody said," quoth he,
"That 'twas a famous victory.
"My father lived at Blenheim then,
Yon little stream hard by;
They burnt his dwelling to the ground,
And he was forced to fly;
So with his wife and child he fled,
Nor had he where to rest his head.
"With fire and sword the country round
Was wasted far and wide,
And many a childing mother then,
And new-born baby died;
But things like that, you know, must be
At every famous victory.
"They say it was a shocking sight
After the field was won;
For many thousand bodies here
Lay rotting in the sun;
But things like that, you know, must be
After a famous victory.
"Great praise the Duke of Marlbro' won,
And our good Prince Eugene."
"Why, 'twas a very wicked thing!"
Said little Wilhelmine.
"Nay... nay... my little girl," quoth he,
"It was a famous victory.
"And everybody praised the Duke
Who this great fight did win."
"But what good came of it at last?"
Quoth little Peterkin.
"Why that I cannot tell," said he,
"But 'twas a famous victory."
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