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31 January 2005 Daily Comment

A Passing

Andrew M. Barone, M.D.

We were in Chicago on over the weekend to see clients but had to return Saturday night because Katie’s father who was in a nursing home five miles from our home in the country near Soldiers Grove died on Saturday night which was also his 97th birthday. We had celebrated his birthday a few days earlier and his passing was peaceful, basically he just went to sleep. He led a full and interesting life.


We received and email from a client who asked us if we sometimes bought stocks because our clients wanted to be in the markets even if we didn’t want to.

We replied:

“We have reached the age and comfort level that we only buy when we want to be in the market. We do not risk $80 million in client money, a good chunk of which is our family money, or any portion thereof to keep a few clients happy.

We just sent $1.2 million back to clients because we didn't think we were meeting their needs. And we have stopped accepting new monies because we are too old and too entrenched in our ways to train new clients in the manner in which we trade the markets.

We were out of the markets for two weeks recently because we had to take time to understand why we missed the trading top. The easy answer was that we didn't sell on December 30. But the real answer which we realized last Thursday was that in December we were trying to hit a home run by being fully invested instead of hitting singles by not being more than 50% in stocks which limit we have successfully used for the last six years. We were out at home plate after trying to turn a double into an inside the park home run.

Once we realized that, we also realized we were over our fascination with low priced stocks.

We purchased the stocks we did on Friday because we wanted some exposure to the markets gong into to all the events of the next few days. With the lousy market action of January we continue to expect some type of tradable rebound. Our trading last summer did not work out even though we thought we should be in the markets then. But we were in for singles and not home runs and so we didn't get hurt that badly. As we suggested in a recent post a look at the trading in the Model portfolio for 2004 at the bottom of the Model Portfolio page is interesting. It shows quarter by quarter transactions and is a good indication of how we did. Also notice that the companies we sold at a profit in the last quarter of 2004 to buy the low priced speculative stocks for our home run derby are the stocks to which we are returning at lower prices.


Today’s Outlook

The Iraq elections were less bloody than some expected. As a result the markets overseas are higher and U.S. futures indicate a higher opening. Of course as the last few weeks have shown it is the closing hour that counts.

SBC is going to acquire AT&T for $19 billion most of which will be stock. That should lead to some arbitrage weakness in the share price of SBC as the hedgies sell it and buy AT&T for the percentage difference. We will buy the weakness and add to accounts since we think it is a good deal for both.

In another transaction Citigroup is going to sell its Traveler’s Insurance unit to Met Life. That sale is of note because Traveler’s is the company that Sandy Weill bought and used as his acquisition vehicle that led to his finally buying control of Citigroup. The Circle has come full.

For this morning we would guess up early and then a test and then your guess is as good as ours. So let the games begin.


29 January 2005 Daily Comment


Our first thought on the announcement of the PG/ Gillette merger is how nice for Warren Buffet who has owned Gillette for a number of years and our second thought was how sad for the 5,000 folks who will lose their jobs so that this deal can make some financial sense. PG sells at 21 times earnings and Gillette is being acquired at 30 times earnings.

The first takes we hear are that folks are saying that the deal will not be dilutive to earnings and the only way that can occur is through attrition and even then we think it’s a stretch. But there will be special charges every year that will be listed separate from operating earnings and so that is one way the numbers can work out. Neither Gillette nor PG has been shy about using special charges to massage earnings and Wall Street has been accommodative since Wall Street owns tons of the stocks of each.

As these mergers occur we will continue to see the loss of good paying jobs that is turning the economy into shoppers and consultants.

Yesterday we spent a little time talking about buying the DIA and QQQQ and after hours on our daily walk we realized that we had spent the day worrying about what price to buy either and concentrating on short term minute by minute swings in the prices of each. And then we remembered that that was the reason we have never purchased much of either because owning index products tends to make us even shorter term oriented that even we care to be.

Currently we are buying these products for quick market exposure while we add individual stocks and any substantial buying of these products will be saved for days when there is a real collapse in the markets and we want to use index products to take advantage of what we see as market as opposed to individual stocks buying opportunity.

We are going to begin to add a few big cap stocks that we have trade before. We have survived and recovered from our consternation at surrendering the easy gains we made in December and we do think the market glass may be half full at least for the next few months because earnings have been OK and the advent of mergers ala the 1960s and 1980s may get the speculative juices moving again.

Higher interest rates may also move the folks who have been speculating in real estate these last five year to come back to stocks.

On tap for today as potential buys are JP Morgan, Schering Plough, Bristol Myers and SBC. JPM is within two points of the low of its 10 point range for the year and pays a 3.80% dividend. SGP is also near its low and below where we sold and it is going to be acquired not an acquirer when and if the consolidation in drug stocks occurs. Management has had two years to clean the place up for sale. SGP sells at a bit more than two times sales if cash including the recently repatriated $9 billion is included. That is one third less of where Merck and PFE are priced.

Bristol Myers may be either and acquirer or acquired. It is larger than a bread box but smaller than the giants in the industry. And as with the G/PG merger today size is no longer a hindrance to acquisition in any industry.

Finally we are going to buy SBC for its 5.2% dividend yield. A merger with AT&T will be good for it and we would hope that the AT&T name would survive since it is one of the most recognizable and is synonymous with phone service.

In an interview in the NYT published yesterday Bush said the following:

On whether the United States will pull its forces out of Iraq if the government being elected Sunday requests it:

I would be surprised if that were the case, because I've, you know, heard the voices of the people that presumably will be in a position of responsibility after these elections, although, you never know.

But it seems like to me, most of the leadership there understands that there will be a need for coalition troops, at least until Iraqis are able to fight. And that most of the people there in Baghdad understand that the Iraqis need not only more training and equipment, but also they need a command structure - the spine of any military capacity. And they don't have that now.

The prime minister has been - you know, hasn't picked and filled all the slots necessary for there to be command generals in place, division leaders in place. And so we've got some work to do, and I think most Iraqis understand that. But this is a sovereign government.

On whether the United States would then feel compelled to pull out if asked to do so by the sovereign government:

Yeah, absolutely. This is a sovereign government. They're on their feet. We anticipated that, by the way, on the passing of sovereignty. And had the Allawi government said, "out," we would have been required to leave.

On the other hand, again, I think there's - obviously, it's very speculative. But I believe that most of the leaders that are there understand that the coalition troops are very important to helping them provide the stability necessary for people to gain confidence in their government.

A fundamental question also that I think a lot of Iraqis understand - and I do, too - is how do we make sure the Iraqi citizens view U.S. troops as helpers, not as occupiers. And to the extent that a coalition presence is viewed as an occupying force, it enables the insurgents, the radicals, to continue to impress people that the government really is not their government, and that the government is complicit in having their country occupied.

I view that as reasonable. I also view that as pretty hopeful that there's kind of a nationalistic sentiment that says, "This is my country." I mean to me, that's a positive sign that, you know, "We want to run our own affairs, we don't need to be occupied to survive."

On the other hand, there is a certain realism amongst the leadership - at least, the ones I've talked to - that says, "Look, there's much more work to do before we're ready to move out on our own."

We think that the odds are small but growing that Alllawi will ask for withdrawal or at least enough withdrawal to make it seem like the U.S. is ending involvement. That would push the stock markets and the bond markets higher.

The risk of nothing occurring is already in prices so the upside is less included in stock prices right now.

Finally our selling of all our positions was occasioned by the fact that when the low priced stock rally failed we wanted to eliminate those positions because we only held them for a trade; clear our head; and then return to the large cap stocks that we are comfortable owning in a confusing economy. And so we are returning to our old trading favorites that have treated us well.

Yesterday’s Markets

7:32am and 4th Quarter advance GDP was up 3.1% which is less than expected. The Employment Cost Index was 0.7%, the GDP price deflator (inflation) was 2.0%. The dollar is lower, Treasuries are a bit higher and stock futures are muted. Oil is down 69 pennies at $48.15. Europe is lower and Asia was mixed.

McDonald’s earrings were in line but its forecast was a bit light.

Yesterday we reported that MSFT traded lower after earnings and it did but it then traded higher by about 50 pennies.

9:58am and stocks have been meandering between up and down in moderate trading. Oil is down $1.62 at $47.24 and Treasuries are firmer on the GDP report.

In Many accounts we bought QQQQ at $37, JPM at $36.80, New York Times at $38.65, SBC at $23.65, Bristol Myers at $24, Time Warner at $17.93 Motorola at $15.75 and Maytag at $15.50.

Maytag announced punk earnings this morning after they had warned. They said they were not going to cut the dividend. We had a nice trade off this level in the autumn and while we don’t think it will recover as quickly we think the outfit that had a 5% position in it and put out a sell when the stock was at $21 in early January may be in there buying the stock back that they sold.

JPM (3.8%), SBC (5.5%), BMY (4.7%) and MYG (4.7%) all have decent dividend yields. NYT is on its low and TWX is our favorite anchovy. The QQQQ holding gives us tech and biotech without having to pick and chose. We have room in accounts to add to that QQQQ position if the markets work lower. Its good to have some money working for us again especially since we didn’t have TO force the issue and were able to let the stocks came back to us.

10:27am and selling came into the markets. The S&P 500 is down 7 points at 1168.  The line in the sand today according the guru is 1164 which piercing on the downside would leave the bears gleeful and the bulls glum.

Mad cow disease was found in a French goat last week?

12:27pm and with the markets down and our buying finished with the purchase of SGP at $19 we are heading off to Chicago to see clients. We will have a Monday morning post and hopefully an updated Model Portfolio tomorrow.


28 January 2005 Daily Comment


Several days ago we wrote that David Faber on CNBC had suggested the combination of SBC and BellSouth. Now this morning the NYT has a story about SBC buying AT&T for $18 billion. Two more steps and the old AT&T will be halfway back together. Big is good, and investment bankers are happy too.

All the analysts on CNBC today think the merger is a dumb idea. But then they were recommending both stocks at much higher prices back in the last century.

If SBC and AT&T merge will the AT&T name disappear or will SBC become AT&T?

And will Cingular wireless which just bought AT&T Wireless and had to give up the name rename Cingular, AT&T Wireless? So many questions and so few answers.

Bristol Myers met expectations.

Durable good orders in December were up 0.6%, ex autos up 1.2% and ex transportation the orders were up 2.1%. First time claims for unemployment were up 7,000 to 325,000.

Reuters reports that North Korea appears to have bought a complete nuclear weapon from either Pakistan or a former Soviet Union state, a South Korean newspaper said on Thursday quoting a source in Washington.

On Sunday OPEC will be meeting on oil prices and production.

On Monday the world and markets will know the results of the Iraqi election. We are betting that Allawi’s slate will win. If not the markets may not like the results. The U.S. wants its own strong man in power.

Next week on Tuesday and Wednesday the Fed has a two day meeting culminating in a 1pm announcement on its next move in interest rates which traders expect to be 25 basis points higher to 2.50% on Fed funds

When we re-enter the stock markets we have been considering buyingsheets for the DIA (mirror the DJIA), QQQQ (mirror the top 100 stocks on the NAZZ), and XLK (see yesterday’s post). We haven’t pulled the trigger on re-entering the stock market through the above index products but we may sometime in the next few days. The technicals of the overall markets are teetering at an inflection point. If we decide to re-enter the markets we may want to take a position in stocks without having to pick individual stocks to participate.

Our idea is to place up to 20% of our money in the index products and then use those positions as the foundation to add individual stocks. Obviously we won’t do this unless we think the current pullback is over. We have been thinking for a few years that we should use the index products as our re-entry vehicles because of their liquidity and diversification. We are using the DIA which ones the stocks in the DJIA because the DJIA underperformed the S&P 500 last year and this year and over the years we have noticed that the performance disparities between the two usually even out over time. As individual stocks hit buy levels we would then add them. If the markets take off to the upside we would have some participation and a move lower would give us a foundation to add to or to add individual stocks.

Yesterday’s Markets

11:02am and the markets opened lower and now have recovered with most major measures even or higher. The only reason the DJIA is not higher is that Caterpillar is down a couple of points. Breadth is strong and Treasuries are lower with the ten-year at 4.22% and the two-year at 3.30%. The strong durable good orders for December ensured a Fed rate hike next week and probably a few more. That is why the short end of the Treasury market is rising and flattening the yield curve and that is why we are holding off on buying bonds.

1:03pm and we don’t to pull the trigger on the DIA buy even though the DJIA is down 64 points and the DIA are at their lows for the day. We are also looking at JPM and SBC and SGP but we want to watch some more. When in doubt, wait, we may not make money doing that but we won’t lose any either.

Breadth is negative on the NAZZ and flat on the NYSE. Treasuries remain lower bout above their lows for the day and oil is up 32 pennies at $49.12.

1:54pm and as contra hour ends the major measures are on their lows for the day. Now we will see how much buying power the bulls can muster in the last hour. WE ARE NOT GOING TO DO ANY BUYING TODAY. The failure of the NAZZ to build on yesterday’s strong rally is disconcerting.

3:02pm and the DJIA closed down 31 points at 10467. The S&P 500 gained 1 point to end at 1174 and the NAZZ rose 1 point to 2046. Breadth was positive on the NYSE and negative on the NAZZ at the bell. Oil closed up 8 pennies at $48.84 and Treasuries closed lower with the ten-year at 4.21%, and the two-year at 3.28%.

After the bell Microsoft reported earnings of 32 pennies, a penny short of estimates on revenue of $10.8 billion which was $300 million better than expected. The stock was a bit lower in early after hours trading.

And tomorrow is today so let the games begin.


27 January 2005 Daily Comment


We were amused yesterday listening to the talking heads on CNBC near the closing bell. It seems that everyone is a technician now and so has an opinion on the internal dynamics of the day’s market action. The talking heads found the action toward the close negative while the several gurus we follow found the action relatively positive.

With the morning futures above fair value there is going to be another attempt to rally stocks today. We are agnostic at this point but do have price points on a few stocks. Our basic stance is that the emotional energy we expended getting long and gaining and then losing those gains in the relative flash of an eye has us much more cautious.

Overnight Asia was stronger and Europe was flat. Oil is off a bit and bonds are a couple of basis points higher in yield.

RFMD had punk earnings and the share price is off about 50 cents. Tellabs was upped from underweight to overweight, a big jump, by JP Morgan and its shares are trading higher but below where we sold.

We really are concentrating on the large cap stocks but we are maintaining an interest in TLAB and SEBL. SEBL earnings come tomorrow.

Among the stocks we are following are: JPM, SCH, FITB, HAIN, OATS, TRB, NYT, XEL, LU, KO, GE,UNP, NWL,  MYG, BLS, SBC, TLB,TIF, SLE, PFE, CHIR, SGP,UVN, ABS, TWX, HPQ, MOT, ANDW, TLAB, SEBL, and the XLK which is:
(MSFT 14.76%, IBM 7.05% INTEL 6.32% CISCO.01% VERIZON 5.35% DELL 4.38% SBC 3.21% QUALCOMM 3.15% ORACLE 2.88% HPQ 2.79%).

SBC announced in line earnings and job cuts of 7,000 for 2005.

The NYSE is considering extending the trading day by 2 hours.

We would like to place some funds in two year or shorter Treasuries but we are waiting for the February Fed meeting to act.

These remarks at Davos by a Chinese minister may have some effect tomorrow. Then again they may not. http://biz.yahoo.com/ap/050126/world_forum_china_5.html

Yesterday’s Markets

10:18am and stocks opened higher and have remained so. Breadth is positive and oil is now lower on higher inventories. The S&P 500 is testing the 1175 level and so far so good. Volume is  a bit above average for the last thirty days but there is no buying stampede although there is also little aggressive selling.

12:08pm and no much is happening as most traders await the final hour to see how the battle will go. Crude oil is down 64 pennies at $49 and the DJIA is up 33 with the S&P up 4 and the NAZZ up 10. Breath is almost 2/1 positive on the NYSE and 5/3 on the NAZZ.

The two-year Treasury auctioned today came at 3.245% with a bid to cover ratio of 2.01 which is the lowest bid/cover since August 2003.

By the by, we are sticking to our prediction that the real rally higher doesn’t occur until oil goes under $40.

1:02pm and entering the contra hour stocks are moving higher. Google and EBAY are up today reversing the action of the past few sessions. Crude oil is down $1.29 at $48.35.

1:52pm and entering the final hour of trading breadth has improved and we would expect a rally to pierce the 1175 on the S&P 500.

We don’t know how much traders are concentrating on Iraq and even what constitutes a good outcome to this weekend’s election but we would guess that even with a strong close today the markets will pause in the next two days to await the results and react on Monday.

3:02pm and the NAZZ was the leader today up 26 points to end at 2046. The DJIA gained 35 points to end at 10498 and the S&P 500 was up 5 points at 1174. Breadth was better than 2/1 positive at the close.

And tomorrow is today so let the games begin.


26 January 2005 Daily Comment


The failure of the major measures and breadth in the last hour yesterday was a kick in the teeth for the bulls. But according to all the gurus we read and just by observations a zillion days down in a row usually end in some type of rally even if the short term trend remains down. And everyone is looking for a rally. At year end everyone was looking for a rally also.

We mentioned last week that GM Acceptance was in danger of having its bond ratings lowered to junk grade. Such and event would cause sever disintermediation in the bond markets since many banks and trust departments and mutual funds would be forced to sell the GM bonds because they would be below investment grade. We said not to worry because the Fed would come to the rescue. Well before the Fed or maybe because of the Fed, Lehman Bros who are the keepers of the Bond Indexes that most large institutions use as the bible of investment performance decided that they would add Fitch Ratings to the mix. So now it will take a downgrade by all three ratings agencies: Moody’s, S&P, and Fitch to set off panic in the bond markets. On that news which was released yesterday afternoon, Ford and GM Acceptance debt rallied 30 basis points.

As we have mentioned a rally in one market arena usually has consequences in another area due to that overwhelming presence of trillions of dollars of fast moving hedge fund money. And so this morning stock futures are higher as the hedgies perceive a potential obstacle to higher stock prices i.e. a panic in bonds, being removed.

Moreover traders seem to be champing at the bit to participate in a rally and the desultory trading of the last week has only whetted the boys and girls appetites for some contra short term trend fun. And so this morning futures are higher in the U.S. as well as Europe although Asia except-for Hong Kong up 1% - was lower. Oil is quiet as are Treasuries.

In earnings news BellSouth announced that access lines (regular phone lines) were down 4% in the last year. So growth for BLS and SBC will need to come from Cingular the wireless phone service owned jointly by both. BellSouth reported lower earnings according to the wire services but there are so many special items that we think results were about unchanged. We’ll be happy to have the markets knock the share price lower since we are interested in buying around $25.

Schering Plough is going to repatriate over $9 billion dollars from overseas and we think that enhances their potential as an acquisition target not an acquirer. The new guy there has cleaned up their act and made SGP presentable for other larger drug companies. Because they are in cholesterol drug selling arrangements with MRK and because of Merck’s lower stock price and VIOXX sales troubles we think MRK might make a move.

Tellabs posted earnings of 9 cents excluding charges from the two mergers and also posted a combined sales increase to $380 million. We remain interested in this stock but at lower prices.

Smith Barney lowered its rating on Tribune Cos from buy to hold noting that the WB Production Unit cash flow is lower and that will eventually flow through to the parent’s financial. Under $37 we are interested.

Sara Lee announced higher second quarter earnings but warned that full year results would be about 15 pennies less than what analysts had been expecting. Analysts had expected $1.65 and SLE is now projecting $1.50.

Yesterday’s Markets

8:47am and zoom we go out of the gate with the DJIA up 100 points and the NAZZ 22 points higher. The S&P 500 is up 9 points and so the rally the trader types wanted has begun. Now we will see if there is the fire power to keep it going.

9:14am and Consumer Confidence was 103 for January verses 102 for December and an estimated 101 this time. Breadth is currently 2.5/1 positive. Oil is down 21 pennies at $48.60 and Treasuries are 2 basis points higher in yield lower in price. Existing home sales fell 3.3% in December to an annual rate of 6.7 million.

11:43am and David Faber is on CNBC suggesting that SBC will buy BellSouth in 2005. At the time he announced that BLS was trading at $26.21 down 35 pennies. We’ll see how much power CNBC has in the next hour.

The major measures are improving their gains of the first fifteen minutes with the DJIA up 123 points. There has been no give back all morning. Volume has slowed a bit but is active. Breadth is positive but failing the 2/1 opening strength and Treasuries are giving ground. Oils is now up 8 pennies. The share prices of all the stocks we sold recently remain below the price at which we sold them.

Sara Lee was off $2.20 to $22.80 in early trading but now is back to $23.25. Near $20 would interest us.

1:55pm and as the contra hour ends the major measures have backed off a bit but remain strongly higher for the day. BLS is below $26 so no one must be listening to CNBC or they aren’t chasing rumors as in the old days. Google and EBAY are still lower on the day and that is the one of the only negatives for the markets if that is a negative.

Breadth has again narrowed to 5/4 positive. Oil is almost back to $50 (yawn) closing up 83 pennies at $49.64 and Treasuries are lower in price higher in yield. There are more new lows than new highs on the NAZZ

The bulls need a good close in the final hour.

3:02pm and we’ll call it a draw. The DJIA closed up 90 points at 10461 but 50 points below its best levels of the day and down in the last hour. The S&P 500 was up 5 points at 1168 and the NAZZ gained 12 points to end at 2020. The ten-year ended at 4.20%, the five-year at 3.70 % and the ‘when issued’ two-year which is auctioned tomorrow at 3.24%.

And tomorrow is today so let the games begin.


25 January 2005 Daily Comment


At times like these perspective is always a good thing to have. We do think that a rally will occur this week because the markets have been lower for three straight weeks.

We just don’t think the rally will be tradable for any but the most nimble.

For five years the average return on the S&P 500 is a negative 2.6%. That means that dollars invested in the S&P 500 five year ago Friday would have dropped an average of 2% a year for the last five years, not including any withdrawals for living expenses or management fees. The real life action in the S&P 500 was a substantial and scary drop the first three years and rallies the next two years with a drop the first three weeks of this year.

Contrary to the perceived wisdom of mutual fund sales folks timing has been important and the reason for that is that the markets are now controlled by hedge funds with trillions of dollars to throw around daily trying to make pennies of profit.

Thankfully the SEC delayed the January 3, 2005 introduction of its experiment with allowing shorting of stocks on downticks or the last three weeks would have been a real disaster. Supposedly that experiment will begin in July.

Yesterday’s Markets

8:16am and Asia was mixed while Europe is lower and U.S. futures are suggesting a higher opening. The first three hours of trading will work off the overages from Friday’s expirations and then the trend for the week should begin to emerge. This morning’s earnings announcement contained good news and the futures are reflecting that fact.

Oil is up 42 pennies at $48.97 because of the snow storm in the East and Treasuries are firm.

9:58am and breadth is negative on the NAZZ and positive on the NYSE as the major measures are somnolent. Volume is moderate, Treasuries are a couple of basis points better and oil is down 43 pennies at $48.10 on the day. For earnings’ season the markets are quiet.

12:21pm and the DJIA is higher by 36 points while the NAZZ is lower as the momentum stocks continue to take gas. Breadth is negative but the markets seem to be trying to rally.

Oil remains lower and utility stocks are higher as long interest rates move lower. but the Treasury two-year at 3.18% and the three-year at 3.35% are lower in price and higher in yield on the day. European stocks closed lower on the day.

2:01pm and entering the final hour the major measures have surrendered their gains but that may just be setting up a last hour rally. Unfortunately for rally hopers, breadth has been getting progressively worse as the day wears on.

The WSJ is reporting that the long knives on the board of directors are after Carli at HPQ. That must mean that HPQ is going to miss its number this quarter. She has done a great job in difficult times. If the myopic board would just look around they might see that a few other tech companies are having problems too.

3:02pm and crude oil finished the day up 28 pennies at $48.81. The DJIA closed down 25 points at 10368. The S&P 500 lost 4 points to end at 1163 and the NAZZ lost 25 points to end at 2008. Breadth was 2/1 negative at the bell. The ten-year ended lower in yield at 4.12% while the two year rose in yield to 3.18%.

And tomorrow is today so let the games begin.


The Norse Men and Women won on Saturday. The Norse Women are in first place after a 0-5 start to the season. The men still have a way to go.





24 January 2005 Daily Comment


The DJIA is now down for the year and for the thirteen month period from 12/31/03. Over the last three years the S&P 500 is up an anemic 3% total.

We mention these facts to place in perspective the difficult nature of the markets and of earning spendable or bankable returns over the last five years. We have managed to do well with occasional missteps but our willingness to go to cash and rethink our outlook has been what has saved us from disaster.

Since we are in cash now, we have the luxury of watching events unfold and reacting to them rather than having to guess the future.

But because we are in cash does not mean we don’t have an opinion on future market happenings. As we said on Friday, we think that whatever real trend exists will re-establish itself on Tuesday after the expiration shenanigans have quieted down. Also there are a goodly number of earnings reports in the first two days of this week and the markets reaction to those reports will also be instructive.

We have stocks like JPM, and Schwab and SBC and BLS on our watch list but our idea is to buy the about ten percent below current levels.

Our guess on the S&P 500 is that it will break the 1170 level; hold serve at about 1130; and rally to 1170 before revisiting the 1080 level on the way to 1000. Those moves may give us trading opportunities but we will wait for the levels to be reached before deciding.

the rally in bond prices late last week occurred because traders are feeling that the Fed will slow down in its rate increases after one last quarter point raise in February. We would like to place some money in the two-year or less at a 3.25% yield but the rally removed that opportunity for the present.

And that is where we are. So let the games begin.


22 January 2005 Daily Comment


The last few weeks have been disappointing but they are part of professional investing where we make our best judgments and go with them and hope we are right more often than we are wrong. We have been active traders for the last five years because that is what we believed was required to survive the volatile and negative markets over this time period.

For clients with us over the entire period our returns have well outpaced the major measures with positive returns. The Model Portfolio is up over 51% in five years and three weeks while the return on the S&P 500 has been negative. As we all know past performance is not indicative of future performance.

For clients who have joined us more recently most have outperformed but some have not although all have positive returns.

It is instructive to review the recapitulation of trades in the Model Portfolio for last year (2004) at the bottom of the Model portfolio page. To save time: Model Portfolio Closed Transactions (Realized Gains and Losses) for 2004

As you will see in the first quarter we made good money trading. In the second quarter we gave a bit back, in the third quarter we were up a bit and in the fourth quarter we made money. That ebb and flow is the way our trading has gone over the years and it is unusual for us to lose money in the first quarter because we have been nimble enough to sell in time.

Also we have prospered in a down market even though we have never shorted a share of stock.

We still may break even or gain in the first quarter but only time will tell. We have a number of larger cap stocks in which we are interested but we want to see how the 1170 level on the S&P 500 plays out over the next few trading sessions. We see no need to rush back in, rather we want to take our time and let the markets come to us. We were correct to load up on the stocks we did in the last quarter of 2004, we just stayed too long at the party.

Yesterday’s markets

8:48am and Japan and Hong Kong were lower overnight while Europe is mixed in midday trading. Crude oil is down another 64 pennies at $46.90 and Treasuries are slightly weaker with four Fed folks talking their gibberish today.

The major measures are all higher in early trading on the back of GE’s good earnings report which we always take with several grains of salt. Mother Merrill also upgraded Citigroup this morning. As we write the DJIA is up 16 points, the S&P 500 is up 3 points and the NAZZ is 5 points higher.

9:07am and Michigan Consumer Sentiment was 95 versus and expected 97. Today is an expiration day so there will be crosscurrents unrelated to the trend occurring. A better reading of the trend will come next Tuesday after all the expiration noise ahs quieted.

12:18pm and Treasuries are better as oil jumps $1.64 to $48.95. We guess rising oil prices aren’t inflationary since they are excluded from core CPI calculations.

Stocks are meandering as are the major measures. GE’s good earnings haven’t been able to get the bulls buying although one guru supposes that the failure of GE to rally is because it is pegged today to the expiration of the $35 options. His take is that next week GE will begin its move to $40. We’ll see.

3:02pm and the DJIA closed down 78 points at 10393. The S&P 500 lost 8 points to finish sat 1168 below the technically important 1170 number. The NAZZ dropped 11 points to 2034. The Treasury ten-year closed at 4.14%, the five-year at 3.57 and the two-year at 3.12%. Breadth was negative by a slight margin at the bell. Oil was up $1.22 at $48.53.

And tomorrow is today and it is Saturday with six plus new inches of snow which we plan to enjoy.

There will be a post Sunday afternoon for Monday morning.

The Norse men lost to St. Joseph last night. They had beaten St. Joseph earlier in the season. They played a lousy game. Ugh! The details are here:
http://www.nku.edu/~athletics/MBasketball/2004-05/Game Stories/Saint Joseph's2.html



21 January 2005 Daily Comment


The selling occurring in the momentum stocks may be setting up a rally or it may be a precursor to a rollover to lower territory. We weren’t in the momentum stocks and our issues have all been hit before their earnings. We would have sold the stocks this month regardless of market action. And if the markets rally from here over the short term the share prices of most of the stocks we sold will only get back to where we sold them.

Upon reflection we bought too many stocks to catch the ride higher and weren’t able to sell with them with the required swiftness or liquidity. In the future when we want to catch a ride on the momentum train we are going to use the SPY which is the S&P 500 Index. We have been considering this alternative for a few years but until this year our old way of catching the year end rally worked. This year it didn’t and we couldn’t sell fast enough in January when we realized the game was over.

Our view of the markets is that from March 2000 to October 2002 the S&P 500 dropped from 1500 to 800 in round numbers. It then rallied back over 50% to 1220 by year end 2004. We thought it might make it to 1226 which would have been a Fibonacci 2/3rds retracing of the drop. It still may but with the action the last two weeks we think that possibility is more remote.

Our best guess is that the S&P 500 will eventually pull back to the 1000 mark which would be a 50% retracing of the move from 800 to 1200. The markets follow the laws of nature in their pendulum swings. We don’t think the S&P 500 will do this immediately, but that action would clear the air for a strong move towards the old highs. That’s the technical picture.

The fundamental picture is cloudier. Earnings are higher but foreword looks by companies are cloudy. The consensus is that interest rates have to go higher and that is affecting decisions. Consumer debt exceeds $2 trillion and home equity financing continues apace. More folks are souring on stocks and moving to real estate as their investment vehicle of choice with the corresponding rise in real estate prices. That rise is sustainable as long as folks keep on leveraging by investing 10% and borrowing 90%. That is how the hedge funds work. And as with the stock market the last folks off the train lose big time. There is a real estate bubble, but unlike soap bubbles speculative bubbles can last a long time. Rising interest rates can pop the bubble but Alan Greenspan is aware that the housing boom is succoring the economy and he doesn’t want it all to end badly on his watch. There would be symmetry to a bust in real estate though to complete the circle of his tenure with the bust in the stock markets that occurred soon after Greenspan became Fed Chairman 18 years ago.

Review of yesterday’s markets

6:33am and EBAY and Qualcomm disappointed even though EBAY declared a 2/1 split. In after hours trading EBAY lost 10 points and QCOM dropped 4 points. Both companies actually reported better earnings and sales but the numbers weren’t enough. Actually, we don’t know how analysts could have been surprised by EBAY guidance since they announced last week as we reported that they were going to raise fees. Companies don’t raise prices when they are hitting their numbers.

This morning Sony warned about earnings, and said its DVDs and camcorders and such are not selling as well as expected. We’ve heard this song before; we think it was last year at this time. And AT&T said it sees a drop on 2005 revenues. All the overseas markets are lower with Japan and Hong Kong losing over 1%.

Citigroup beat on earnings, was light on revenue and raised its dividend 10%. Capital One Financial the largest credit card issuer missed badly last night and this morning its ratings are being lowered.

On the plus side the dollar continues its rebound rally against the euro and oil is lower by 84 pennies to $46.71.

7:18am and Q Logic is up on good earnings and several brokerage upgrades. It is currently trading in the pre-market at $37.30 up 50 pennies from last night close of $36.80. It will be a good tell.

May Dept Stores is up another $1.50 to $35 on a story that Federated Department Stores may propose a stock merger. There couldn’t be a cash deal since both MAY and FD has debt totaling a combined $12 billion in a rising interest rate environment. And since they have been the buyers of all the department stores for sale they will have to do some creative financing and spinning off to lower that debt load. By the way, FD loaded up with stores and debt in the year before the 1987 crash.

7:37am and Leading Indicators are announced at 9am. Last night the DOE reported crude oil and heating oil and gasoline inventories all higher than expected and that is probably the reason that crude oil futures are lower by pennies this morning.

8:44am and stocks are lower but not off the cliff. CNBC is talking about the repatriation of $90 billion in offshore dollars that are coming back to American shores with the payment of a 5% income tax. That is supposed to give a pop to the the economy. It may but not tomorrow or the next day.

The down and out market action has created bottom fishers and so a snap back rally isn’t out of the question today.

Also with the expirations of tonight and tomorrow there are myriad undercurrents in the markets for the next two days.

9:38am and the bond markets are concentrating on the potential downgrade of GM paper by the rating services to less than investment grade. Our bet is that it doesn’t happen because the Fed won’t let it happen.

The Leading Economic Indictors rose 0.2% which was in line with estimates.

10:13am and the major measures remain lower but the DJIA has been trying to poke into positive territory for the last hour. We notice some limited buying in big cap blue chips that has them in the green. Breadth has improved from 3/1 negative but remains 2/1 negative. Today is the first day for a while where new lows exceed new highs.

12:28pm and we sold TLAB and also a good chunk of Wild Oats today.  The Model Portfolio and most accounts are now entirely cash. The Model Portfolio as of 1/20/05 will be posted tonight. It is down 6.1% for the year and up 2% over the last 13 months.

The major measures are moving lower after failing to mount a rally. Now the bulls need to look to the last hour for the rally to break the correction.

Crude oil is down 85 pennies at $47.70. The ten-year is at 4.16% while the two-year is at 3.17%. Treasuries have rallied on news that the Report of economic activity by the Philadelphia Fed was half the expected number. That is giving hope that maybe the Fed will slow down the rate hike agenda it has implied.

1:06pm and in the four plus years that Bush has been in office the S&P 500 has dropped 8%.

Stocks continue to meander along at lower levels but he selling pressure seems to have abated.

Disney filed a $3 billion shelf registration yesterday and JP Morgan filed for $3 billion in floaters today. The rush to sell debt that seems to be occurring implies higher interest rates in the future.

3:02pm and the DJIA closed down 68 points at 10472. The S&P 500 lost 9 points to end at 1175 and the NAZZ gave up 27 points to finish at 2046. Breadth was 2/1 negative but new highs managed to beat out new lows. Treasuries were firmer into the close. Crude oil ended at $46.91 down 64 pennies.

And tomorrow is today so let the games begin. We are going to take some time off today and will be in and out of the office. There will be a post as usual in the evening on the markets’ activities.


20 January 2005 Daily Comment

Today is Inauguration Day for President Bush. We wish America luck.

Review of Yesterday’s Markets

6:31am and relative warmth has returned to the land of milk and honey. Overseas markets are in a funk and U.S. futures are below fair value. The rally of the last two days has been less than stellar but there has been a rally and for that the bulls are grateful. The next stop for the S&P 500 is 1200 and if it can close above that number the gurus see a run to 1260 as a possibility.

Last night Motorola, IBM, and Yahoo all had decent earnings reports. YHOO and IBM traded higher in after hours trading while MOT moved lower because it lowered next quarter guidance

This morning JP Morgan missed by a few pennies but with the merger charges for Bank One involved we don’t know how the markets will react.


Our take is that the rally has been desultory and pro forma and that it wouldn’t take much to stop it in its tracks while we can’t imagine what will give it more steam. But rallies usually climb a wall of worry and so this one may continue.

Several clients have asked why we went to cash when we think a rally is in the works especially since the selling of issues involved some losses. Our response was that the volatile stocks we owned were comparable to the Russell 2000 which dropped 10% in the first two weeks of the year and we felt it necessary to “stop ourselves out” since the markets were not acting as we had thought they would and our give back had reached stop put levels.

Other clients have mentioned that they hope this detour doesn’t sour us on getting back into stocks and making the money back. Ah, if only it were that easy. We find that when we are wrong the best thing is to wait a bit and see if the markets confirm our selling even though they didn’t cooperate with our buying.

We also need time to decide on a new course of action.

Finally we need time to reflect on the good decisions we have made over the years and realize that our decision making can be wrong but not admitting it would be an even greater mistake. Preservation of capital remains our mantra and with our move to cash our accounts are at their November 1, 2004 all time highs, the highest many of the accounts we manage have ever been.

If we hadn’t played the speculative musical chairs game at the end of the year no one would be the wiser. And yet now we all are wiser in the knowledge that this last time we missed selling before the fat man stopped singing.

6:56am and Pfizer reported earnings a penny short and revenues above consensus. Morgan Stanley lowered expectations on the telecom service industry and lowered its opinion of Verizon while saying it like SBC. GM reported $1.01 versus 90 cents expected.

7:31am and first time claims for unemployment were 319,000 less than the 335,000 expected but down from the 364,000 of last week.

The Consumer Price Index for December was minus 0.1% while core CPI was up 0.2% which was in line. The rate on CPI was 3.3% year over year and 2.2% on the core CPI.

Housing Starts were up 10% to 2.004 million which was in line.  Building permits were over 2 million although down 0.3%.

The Fed Beige Book is released at 1pm and will provide more fodder for the boys and girls to trade. These numbers were released early today because of tomorrow’s festivities.

10:06am and stocks have begun today as they did yesterday with the DJIA down 40 points and the NAZZ off 13 points. We remain committed to selling our remaining three stocks (not OATS) but we are hoping for a rally to sell.

Motorola is down $1.60 and Maytag has been dropped by Best Buy as a seller of its appliances and is off over $1.50.

11:43am with MOT and NOK tanking our confidence in RFMD is also dropping and that is why we are selling. RFMD has already announced that the next quarter will be tough but the markets are selling even very good news as is evidenced from both YHOO and IBM being lower today after announcing above expectation revenues and earnings. When the market advance has to depend on Google and such it is time for us to get to cash. RFMD dropped out of bed in two days a week ago and we did buy more last week to average down hoping for a rebound on the MOT announcement  but we think that with the MOT and NOK action that is going to be a losing proposition for us. We are going to take our too large loss and move on.

We are also selling SEBL because with the failure of the rally to continue in the  New Year the only reason to hold it is for a takeover. We don’t hold stocks for takeovers.

2:18pm and then there were two. We are down to TLAB and OATS and we are holding OATS and waiting for a better price on the TLAB.

The DJIA hasn’t yet begun a final hour rally and is down about 50 points. We shall see if the bulls can rescue the day in the final hour.

3:02pm and the DJIA closed down 90 points at 10538. The NAZZ lost 32 points to finish at 2073 and the S&P 500 was off 12 points at 1183. Breadth was 2/1 negative at the close. Friday is a triple witching day. Oil closed lower as did gold and the dollar rallied to a two month high against the euro. Treasuries were firm.

There is so much money flipping around in hedge funds (one trillion dollars multiplied by whatever leverage the funds are using) that the financial markets are being discombobulated by the gunslingers that run these funds. Wall Street has become one big poker game.

And tomorrow is today so let the games begin.


19 January 2005 Daily Comment

Review of Yesterday’s Markets

7:57am and U.S. futures are lower as European bourses opened higher but now have turned lower. Oil is over $49 as the eastern U.S. is now experiencing some of the cold the Midwest has for the past week.

Earnings are coming fast and furious and most have been in line. Schwab had earned 4 pennies after charges, 12 pennies before charges. Fifth Third earnings were halved due to charges previously announced to get the bond portfolio in line with rising interest rates. In plain language they guessed wrong and had to take their losses on a bad interest rate bet.

The WSJ reports that HPQ is going to concentrate on profit from PC sales rather than the number of PCs sold. That suggests a charge is coming with this quarter’s earnings.

Raymond James upgraded BellSouth from under perform to market perform.

Scott Livengood is out as the CEO of Krispy Kreme and Krispy is going to report a loss. Sic transit gloria and a lot of money too. Scott won’t be living as good as he has been.

8:44am and stocks have opened lower as crude oil continues its climb towards $50 again. Crude is up 91 pennies at $49.29. We remain of the opinion that a lasting resumption of the rally won’t occur until crude drops under $40 per barrel and that price seem along way off for now.

10:25am and the DJIA has rallied from down 45 points to up 30 points. Breadth is now positive and the NAZZ is up 7 points at crude has moved back under $49. The Treasury ten-year is at 4.24% while the two-year is at 3.25%.

1:09pm and the major measures remain higher in active trading. Breadth is 2/1 positive and the last hour today will be important if the rally is to have legs.

We are trying to decide whether to hold any stocks. The last few times we went to cash it paid to eliminate all holdings and start over with a fresh slate. We are hoping for a decent rally to allow us to sell any or all of the last four issues we hold.

We did sell XEL for a scratch if the dividend received is included and we sold FITB at $47 when it jumped up $2.50. With the dividend included it too is a scratch.

SEBL is higher and we reduced positions in a few accounts as we did with RFMD.

Motorola earnings are tonight and if they are good we are hoping that RFMD pops tomorrow and we can get a bi more out of selling that holding.

SEBL and TLAB and OATS are also anchovies and they may be gone by the end of the week.

3:02pm and crude oil was up and down and closed unchanged at $48.38. The DJIA gained 66 points to 10625. The S&P 500 rose 11 points to 1195 and the NAZZ was up 18 points to 2105. Breadth was better than 2/1 positive at the bell. The ten-year gained to end at 4.19% while the two-year was unchanged at 4.23%.

And tomorrow is today so let the games begin.


18 January 2005 Daily Comment

Review of Yesterday’s Markets

9:27am January 17, 2005:

We don’t know what to look for this week. We hold four issues in many accounts and up to six issues in our larger accounts. We are about 20% invested in larger accounts and a bit more in our smaller accounts.

Our New Year trading scenario dissolved before our eyes and the first two weeks of January have been tough on a lot of traders. With the failure to rally we found it necessary to radically alter our investment posture and took more losses than we have been accustomed to. But that is what the program discipline requires.

Our basic question now is whether to continue to hold the remaining tech stocks or to just give up the ghost and go to cash. Both RFMD and SEBL should have good earnings and revenue announcements later this month but given the markets’ negative attitudes we don’t know if that will matter.

There is always a desire to want to regain losses quickly by switching to other issues that might do better. Over the years we have found that that action rarely works.

Or main hope is for a rally in the next week and then a decision on what to do with our remaining holdings. All we can do right now is wait and see.

So let the games begin.


15 January 2005 Daily Comment

Review of Yesterday’s Markets

7:04am and CNBC is saying that one of the reasons for the late day drop off in the markets on Thursday was a Treasury ruling for the use of the money repatriated from overseas by corporations at a 5% tax rate. Those dollars can not be used for executive bonuses, paying dividends or stock buybacks. Come on, a junior accountant can figure how to use money from the left pocket for the same purpose for which money put in the right pocket was to be used.

Remember when lottery money was to be used only for educational purposes and that was how folks were convinced to support lotteries. Well, lottery monies are used only for educational purposes; the states have just appropriated less money from their general funds for educational purposes by the exact amount of lottery receipts.

But the sell off needed an excuse and that was as good as any.

This morning the overseas the markets are higher and so are U.S. futures. We think a continuation of the sell off this morning might have driven a stake in the heart of the correction but a rally this morning while making folks feel better may not solve the problem.

7:32pm and PPI was announced at down 0.7% for December, ex food and energy up 0.1%. Gasoline prices fell 11% and heating oil was down 8%. In January oil prices are higher so is the December number may be old news. Treasuries are up on the news with the ten-year at 4.17%, the five-year at 3.55%. Stock futures are rallying as short covering takes control.

8:19am and Industrial Production for December was up more than expected at plus 0.8% and Capacity Utilization was 79.2%. Bond traders also re-thought the PPI number and quickly realized that oil is up 15% this month so what oil takes away from the PPI in December it will give to the PPI in January and phfft went the bond rally. The ten-year is at 4.25% and the five-year at 3.71%. And so goes the day.

8:25am and JNJ is recalling 300 stents. Does that mean folks have to go through another operation? The talking heads say no big deal. Maybe for them, but those going through the operation might not agree. Here is part of the press release:

The withdrawal involved 145 customers of the New Brunswick, New Jersey-based health-care products company. Mueller said the company did not know if any of the stents had been used in patients, but stressed that medical evaluation has found that the small weight difference of the six stents is not expected to affect clinical performance.

         "This should have zero impact on the image or demand for Cypher because J&J is acting proactively and apparently caught the problem before the stents reached patients," said Viren Mehta, a principal of Mehta Partners in New York. Mehta said the small manufacturing glitches are unavoidable with even the best products, and such apparently is the case with the J&J stent.

"This is part of life, all in a day's living" Mehta said. "We should not forget how wonderfully complex these technologies are."

Obviously Mehta doesn’t have one of these stents implanted.

1:57pm and we have been out for much of the day as the markets meandered in higher territory. Breadth has been positive all day and as we enter the final hour of trading the DJIA is on its high up 60 points. We added SEBL, TLAB, and RFMD to accounts.

A friend mentioned today that the elections in Iraq may mark the end of the markets’ decline and we said that if Bush announces a pullout in connection with the results then there would be a rally. But if there is no pullout announcement we wouldn’t expect much.

3:02pm and the DJIA closed up 53 points at 10560. The S&P 500 gained 7 points to end at 1184 and the NAZZ rose 18 points to finish at 2087. Breadth was 2/1 positive at the bell and the ten-year ended at 4.23%. Oil closed at $48.38 up 34 pennies. For our week-end enjoyment the Venezuelan oil minister said that OPEC might cut production at its next meeting.

And tomorrow is today and its Saturday and 15 below zero. Stay warm and remember Monday we and the stock markets are closed.

We will have a post Monday evening for Tuesday’s opening.


The Norse men’s basketball team won again last night to make it three wins in their last four games. The story is here:



14 January 2005 Daily Comment

We wish a most Happy Birthday to the love of our life. We aren’t getting any younger but you sure are getting better.

Review of Yesterday’s Markets

7:16am and Europe is mildly higher while Asia was mixed with Japan up and Hong Kong down slightly. Gold is down $2 at $425 and Oil is up 47 pennies at $46.84.  The DJIA futures are lower while the NAZZ futures are higher.

The NAZZ is up because Apple Computer blew away the numbers last night and is trading $8 higher this morning. We’ll have to see if AAPL has better vibes than INTC in helping stocks shake off their lethargy and begin to move higher again.

Technically the gurus we read seem to think a bottom is near and that a rally will occur. They differ on the how strong the rally will be and we guess we will have to wait to see what occurs. With our reduced stock exposure we are more comfortable waiting. We would mention that the four stocks we kept are solid but also volatile enough to regain a good portion of our lost dollars for the year. We aren’t going to hold a bake sale but we took a good hit and that happens infrequently but it does happen.

Our picks and full investment helped us move with the markets and even outdo the DJIA. Unfortunately our timing and greed and a bit of hubris got in the way. We basically forgot that we have survived the last five years by being traders and no long term investors. And we also bought a few dicier issues that we eventually were not comfortable with, and compounded the error by adding to a few of them after events suggested taking our losses and moving on rather than averaging down. But these actions are now all spilled milk and lessons learned and it is on to the rest of the year and century.

7:31am and retail sales were up 1.2%, ex autos sales were up 0.3%. Import prices were up 6.2% in December while export prices were down 1.3%.

Initial Jobless claims were 367,000 and we are not alone in noticing that claims are rising again after trending downward into the election. The expectation had been for claims in the 340,000 range.

CNBC has the CFO of Wal-Mart on this morning as a talking head defending his company from the slings and arrows of misguided environmentalists and assorted left wing kooks. All hail to Wal-Mart which along with EBAY is the future of America?

7:55am and in a message from our PHD candidate daughter, Kelle, we received the following this morning:

I cdnuolt blveiee taht I cluod aulaclty uesdnatnrd
waht I was rdgnieg. The phaonmneal pweor of the hmuan
Aoccdrnig to a rscheearch at Cmabrigde
Uinervtisy, it deosn't mttaer inwaht oredr the ltteers
in a wrod are, the olny iprmoatnt tihng is taht the
frist and lsat ltteer be in the rghit pclae. The rset
can be a taotl mses and you can sitll raed it wouthit
a porbelm. Tihs is bcuseae the huamn mnid deos not
raed ervey lteter by istlef, but the wrod as a wlohe.
Amzanig huh? Yaeh and I awlyas thought slpeling was

8:21am and yesterday morning Motorola announced that Mike Zafirowski its President and COO who was 51 was leaving. He had turned around their handset business but was passed over for the CEO post which was given to Edward Zaneck, a fellow from Sun Micro in December 2003. Since handsets are the business that is bringing MOT back we thought the departure was a negative although earnings this quarter will be good. Also we kept RFMD which makes chips and audio stuff for both Nokia and Motorola handsets.

10:45am and Apple has not been able to put any oomph into stocks and the major measures are all lower. Oil is up 186 pennies at $48.15 and that is not helping the situation. Through most of December there was no connection between the price of oil and the stock markets. but that disconnect is now re-connected and as oil moves higher it is placing pressure on stocks. Treasuries are firmer with the ten-year at 4.24%, the five-year at 4.67% and the two-year at 3.17%. Breadth is positive on the NYSE and negative on the NAZZ.

We added shares of RFMD to accounts that didn’t have any and some that were underinvested in relation to SEBL and TLAB.

Last night we were reading Andrew Corp’s proxy statement and saw that we owned almost as many shares of stock as the entire board of directors. Also in a year in which ANDW share price dropped from $22 to $10 the CEO earned a bonus of $1.2 million and restricted stock of almost $700,000 and $500,000 in other compensation. We wonder what he’ll earn if the company ever does well? The company is also changing its incentive plans to acquire and keep good executives by giving them a better price and greater share of the pie. The CEO comes from Lucent which was a master at incentive plans and we all know how well that company has done.

Well, the long and short of it is that we decided to sell the ANDW at $12 which is  a 15% loss and in some accounts we will redeploy the funds raised in the other three stocks we own RFMD, TLAB, and SEBL. They are all down as much as ANDW and we would rather have our money in them.

1:21pm and in the contra hour stocks look like they may be setting up for a last hour rally.

Google has a market cap of $54 billion and revenues of $ 2.5 billion. By the way, 3rd quarter revenue was lower than 2nd quarter revenue.

EBAY has a market cap of $71 billion and revenues of $2.5 billion. By the way, EBAY is raising fees. Could that be because sales growth is slowing?

Home Depot is going to begin offering appliances made by LG Electronics, a South Korean Company in addition to appliances by Maytag and GE. MYG is down in price on the news.

1:43pm and oil closed at $48.04 up 167 pennies as in the last few days it has broken though a downtrend line and closed above its December high.

Treasuries are firmer with the ten-year at 4.17%, the five-year at 3.67% and the two-year at 3.17%.

No stock rally, yet, but breadth is improving.

3:02pm and there was no rally which is why it is good we sold out yesterday since our feel is pretty bad right now.

At the bell the DJIA was down 112 points at 10502. The S&P 500 lost 11 points to end at 1176 and the NAZZ dropped 22 points to 2070. Breadth turned negative in the last thirty minutes after being positive all day on the NYSE and almost positive going into the last hour on the NAZZ.

The Producer Price Index is the trading item for this Friday morning. Also the MLK Holiday on Monday will affect traders sine they will have to be long stock for three days.

Monday is the Martin Luther King Holiday and the stock markets will be closed as will our offices.

And tomorrow is today so let the games begin.


13 January 2005 Special Note

The Model Portfolio reflecting the recent changes as of the close of business January 12, 2005, has been posted.


13 January 2005 Daily Comment

Review of Yesterday’s Markets

6:52am and Europe is lower, Asia was lower and oil is a tad higher. U.S. futures are higher than but not as high as we would expect with Intel’s positive report last night. We don’t know whether that is good or bad news for stock prices over the near term. It may suggest that the sell off of the last 10 days has sapped the strength of the bulls and given heart to the bears and in a contrary way that may be hopeful.

Goldman Sachs upgraded the telecom equipment sector this morning offering us a little hope that our telecom equipment stocks will cease their downward slope.

The trade deficit for November exceeded $60 billion.  The Treasury two-year is at 3.21%, the five-year at 5.71%, and the ten-year is at 4.27%. The Treasury is selling 15 billion five-year notes today.

8:29am and the Fed’s Gramley says that housing is not necessarily in a bubble. We are going to do some selling today to raise more cash so our posts will be light.

12:45pm and we sold Lucent, Maytag, Motorola, Schwab, Silicon Graphics and 3Com. All were sold at substantial percentage losses. We also reduced our position in TLAB in many accounts and sold Duke Power and New York Times in our larger accounts and Fifth Third in the Model Portfolio but kept FITB in our larger accounts including our own profit sharing account.

The last week our accounts have suffered the largest one week loss since October 1987. Our Model Portfolio is down 5.7% on the year. Last sleepless night we decided to go back to square one and one half and sell enough issues so that we can survive any further downturn without losing all the money we made last year. In effect our portfolios are back to where they were on November 1, 2004 and that was a high for most of them. Our fully invested posture into year end enabled us to perform with the S&P and outperform the DJIA but it also led to our difficult times in the last ten days.

We dislike taking losses but we are unsure of the markets at this juncture and we think heading to the sidelines with 80% of our investment funds in cash is prudent. We are maintaining holdings in Andrew, Tellabs, RF Micro, Seibel, and Wild Oats and Fifth Third and Xcel Energy in our larger accounts.

2:01pm and entering the final hour the markets are trying to rally. Time will tell. We thought it would be good to explain why we kept the stocks we did.

Andrew is selling at one times sales and we think part of the recent drop has to do with the fact that ANDW has $200 million in convertible bonds that they issued last year. The conversion price in around $13.25 and in the new world of investing the folks who hold the convertible bonds sell stock when the share price drops below the conversion price and buy when it goes above. There are very complicated ratios that we are too old to want to understand but we think that is one reason for the pressure on the stock. We will reduce the position in any rally but will maintain at a holding since the telecom equipment area is one of the few areas we believe will experience growth.

Seibel has already announced that their sales and earnings are going to be above expectations and the drop in the share price is a function of the market malaise. Also a bunch of folks bought the stock for a trade when SEBL announced the news last Tuesday and ran the share price to $10.30 and we think there is selling related to those folks getting out. If it runs a bit higher we may reduce some positions to the 5% level.

Tellabs has visited the $8 level a couple of times in the last 12 months but as with SEBL, TLAB large cash position is a positive and at current prices the shares are priced at less than 2 times sales. We reduced our position in many accounts today  to under 5% but we want to maintain a holding in the stock.

We own a small holding in Wild Oats at a good price and would buy more if it revisited the $6 level on bad news. It too is a stock we have owned successfully over the years.

We own –in our larger accounts- Fifth Third because it is on its low for the last few years and interests us and we own XEL for the dividend.

3:02pm and the DJIA closed up 65 points at 10620. The S&P 500 gained 5 points to end at 1188 and the NAZZ rose 14 point to 2094. Oil closed up 69 pennies at $46.37. The ten-year ended at 4.24%, the five-year at 3.71% and the two-year at 3.20%.

And tomorrow is today so let the games begin.


The Norse men’s basketball team won last night on Dave Bezold Bobblehead Night. For the full story go to:
http://www.nku.edu/ Uc-Clermont.html .


12 January 2005 Daily Comment

Review of Yesterday’s Markets

7:03am and Asia was mostly higher overnight while Europe and the U.S. futures are lower. The ten-year is at 4.28% while the five-year is at 3.74%. Oil is down 16 pennies at $45.17 while gold is up $2 at $422.

BankAmerica has placed a sell on Chiron because of lower sales of some drug. It may also be that it is one of the few stocks higher this year.

This morning the Model Portfolio had a value of $542,000 which means that in ten short days we have surrendered all the money we gained from November 1, 2004 to December 31, 2004. That’s the bad news. The good news is that the stocks remaining in our Model Portfolio have great potential and we only have two left to sell, Newell and Silicon Graphics. Once we are through selling we will be looking to add to our remaining positions as prices warrant. And most accounts are now a more comfortable and still bullish -for us- 40% to over 50% cash.

CNBC is nice enough in the seventh day of a sell off to have the very bearish Doug Kass on as its Talking Head for the Day. He actually is a very erudite fellow and has been more right than wrong over the past five years.

Morgan Stanley downgraded Hewlett Packard, and Nokia announced some layoffs and hiring.

8:38am and stocks are opening lower out of the gate. This is better action than a higher open then fade the rest of the day. A big down this morning would be a positive but we would guess we need a few days where the averages drop substantially to scare folks more before any meaningful rally will occur.

11:08am and the major measures have settled into trading down about 0.5% with very little movement in the last hour. Breadth was 3/1 negative at the start but has improved to 2/1 negative. We sold the last of our NWL at $23.40 for a scratch gain.

3:02pm and the DJIA closed down 65 points at 10556. The S&P 500 lost 7 points to end at 1183 and the NAZZ dropped 17 points to 2080. Breadth was 2/1 negative at the close. The ten-year ended at 4.25% and the five-year fished at 3.71%. Oil closed up 35 pennies at $45.68. The markets had no traction because they were awaiting Intel’s earnings.

After the bell Intel announced earnings that were 2 cents better, revenue $200 million better and inventories down $500 million. In initial after hours trading INTC gained and the record sales and earnings may help the tech area tomorrow. Goodness knows the tech area needs help.

And tomorrow is today so let the games begin.


11 January 2005 Daily Comment

Yesterday’s Markets

7:16am and last week was the worst opening week performance for the S&P 500 since 1991. In case you have forgotten early 1991 was the lead up to the first Gulf War. At least now we know why the action last week took us by surprise since it had been fourteen years since there had been similar action. By the way 1991 turned out to be a bang up year for our accounts and the markets overall with the Model up 34% that year. We would don’t expect the same results this year.

CFSB maintains Motorola as a top pick for 2005 and predicts that Motorola’s shift to high end hand sets will expand margins.

BankAmerica lowered its rating on JP Morgan and Fifth Third Bancorp.

Polaroid Holdings, the remains of Polaroid Corporation which was the wonder stock of the 1960s is being sold for $425 million. At its height PRD had a market cap of billions     and that is in 1960s dollars. Sometimes buy and hold doesn’t work.

JP Morgan downgraded RFMD to neutral from overweight due to the lack of near term catalysts. In a research note, analyst Christopher Danely said that though he sees the company gaining share in 2005, a buildup of handsets and seasonal weakness in wireless component order rates could keep the stock range-bound for one to two quarters. At least we now know why the stock fell out of bed over the last three days and are more comfortable buying a bit more down here. By the way, a range of $5 to $8 is quite a range. We bought a few shares for some accounts at $5.645.

10:51am and stocks are a bit higher in moderate trading. Rite Aid jumped 33cents this morning and we took the opportunity to sell our position at $3.76 for a scratch profit. Nokia also jumped today and we sold our position in NOK a $15.48 for another scratch profit. We own enough cell phone related issues (MOT and RFMD and ANDW) and we think MOT is a bit cheaper and may have more on the upside since it has been in tank for quite a time. We also sold part of our Schwab holdings in accounts where the position was oversized. Finally we took a loss on JSDU selling at $2.92. The loss on the JDSU is balanced out by the small gains in NOK and RAD.

Last week a client asked how we decided when and what to sell. We e-mailed the following answer to him today:

You asked last week how we decided when and which stocks to sell. Let us first say that we were surprised by the sell off last week (last weeks drop was the largest for a first week in January since 1991) and when the markets act contrary to our expectations we usually reduce positions. This was especially true last week since we were fully invested.

It is important to remember that if we hadn’t been fully invested we wouldn’t have had the increase in the value of the accounts that we had at year end 2004. Part of the give back last week is just going back to where stock prices were in mid-December. But rather that cry in our beer with the negative market action we felt we had to reduce our exposure while still trying to maintain a holding in stocks that would benefit from a rally which we continue to expect.

The Model Portfolio value on 12/31 was $570,000. We are hoping to get back above $560,000 in any overall rally or in rallies in individual holdings we sell and then we will decide what further actions to take.

We have the closing prices from 12/3/04 for all the stocks we owned. We are trying to sell at or above those prices. For example selling CHIR gave us a good gain over the 12/31 closing price and offset some of the loss in CIEN.

This morning Nokia opened higher as did Rite Aid and so we sold them and took our loss on JDSU at the same time.  The RAD was above the 12/31 close by the same amount JDSU was under.

We also sold part of our Schwab holdings to lock in a profit and reduce what was a very large position in many accounts. That’s because we bought additional shares at year end on the speculation that SCH was going to continuing moving to the upside towards its twelve month high of $14. Instead it broke down though its moving average and so we eliminated part. SCH may still recover and move higher in a rally and that’s why we have kept stock in all accounts.

Last week both TLAB and SEBL jumped 15% in price and in retrospect we could have sold and repurchased this week for a very neat trade. But we weren’t ‘cute’ enough to trade our position in either because we didn’t know the markets were going to spend the whole week tanking and also because we like both stocks for more than a $1 per share gain.

Hope the above explanation helps.

3:02pm and the DJIA closed up 17 points at 10619. The S&P 500 gained 4 points to finish at 1190 and the NAZZ rose 9 points to 2096. The ten-year ended at 4.29% and oil finished the day 10 pennies at $45.33. Breadth was almost 2/1 positive on the NYSE but gave up the ghost on the NAZZ and finished flat.

And tomorrow is today so let the games begin.


Norse Basketball Results: We lost in overtime against a ranked team. Bobblehead Night is Tuesday.

http://www.nku.edu/ /usi1.html


10 January 2005 Daily Comment

6:18am and last week was a week in the markets we would have liked to have avoided The Model Portfolio was down 4.3% and we haven’t had a monthly loss let alone weekly loss like that for a while.

Of course we made that 4% in the last two weeks of December so there is some symmetry to the loss although we weren’t looking for symmetry. And if we hadn’t been fully invested we wouldn’t have been up 8% last year. But that doesn’t make the rapid loss any less painful.

We are gong to stay with most of the stocks we have remaining in the portfolio since they have moved back to their lows of the last few months and if there is to be a rally they should participate as they did.

Overnight the overseas markets were lower while U.S. futures are indicating a higher opening. Oil is up 54 pennies to $45.98 and gold is up $2.60 to $422.10.

We will no longer predict a rebound. Rather we will watch and adjust as conditions warrant.

Keep the faith, we lost a bit o’ money last week, but it was money we had just made and can make again given the right conditions. The balancing act now is to reduce exposure without infringing on the potential gains when the markets rally. We won’t make it all back but hopefully we’ll get a good chunk back and then decide whether to head to the sidelines based on the then market action.

So let the games begin.


8 January 2005 Daily Comment

Yesterday’s Markets

7:14am and the monthly employment report is on the docket in 16 minutes for the boys and girls to chew up and spit out and trade their fool heads off. Overnight Asia was lower with Hong Kong down 1% and Japan down half that amount. Europe is higher and the dollar is a bit weaker against the yen and euro. Oil is off 35 pennies and gold is up a dollar. U.S. futures are static awaiting the report.

Good news on the home front as the Norse men and women (Coach Nancy Winstel’s 501st win) won last night in St Louis and both teams are 6-6 and now it is on to Evansville, Indiana to face rival Southern Indiana which has a much better team than ours on Saturday afternoon. But the coach has the men ready for bear and hopefully as with the markets, right and justice will prevail.

Several clients have called to commiserate on how fast part of last years profits disappeared. Our response is that last years profits didn’t disappear; this year’s performance is negative. In our mind we lock up performance on 12/31 and a new year and new performance battle begins on January 1. That’s because each year is a new adventure with pitfalls and successes along the way.

Our adult lifetime of investing and our experiences over the years through triumphs and real bummers reinforces our conviction that 35 years experience is sufficient to help us weather any short or long storm. Markets very seldom crash in January and we think this year will be no exception. If it were March we would be worried; in January we are enjoying the new snow, last night’s Norse victory, adding to a few positions in selective accounts and looking forward to a week-end of snow shoeing before the snow melts on a predicted Tuesday warm up.

7:32am and employment was up 157,000 in December 2004 and the November 2004 numbers were adjusted plus 25,000 more. Those numbers were as Goldilocks said just right for bonds and stocks and there is a mini-rally in both. How long and how strong is the question for the rallies and it will take a few hours to know?

12:06pm and oil is down 11 pennies and the major measures are higher. Breadth was 2/1 negative this morning but is moving towards positive at this time.

We sold our Qwest position at $4.48 for a scratch profit and also sold the rest of our HAIN holding at $20.56 for a nice $4 per share gain. These sales are in keeping with our cash raising mantra while at the same time holding stocks that have the volatility to gain back and more what we have surrendered this week, since the stocks we are holding are the ones that have surrendered the gains they made in the last two weeks in December.

1:42pm and in the contra hour the markets are trying to hold. We don’t know whether this action is setting up for a last hour collapse or rally. But we haven’t been enchanted with the market action this week and that is an understatement.  When our stomach begins to churn we raise cash. And so we are doing some more selling. We sold SBC at $25.30 for a scratch, BellSouth at $27.59 for a 50cents per share loss and Pfizer at $26.38 for a 65cents per share loss.

We have a few other stocks we would like to sell but we are waiting for the last hour or next week. We have raised a good deal of cash in the last two days in keeping with our philosophy of acting if the markets don’t perform as we envisioned. We have kept some of our more volatile positions in the hope that the January rally will still arrive.

3:02pm and the DJIA closed down 19 points at 10603. The S&P 500 dropped 2 points to end at 1183 and the NAZZ lost 2 points to end at 2088. The ten-year ended at 4.27%, the five-year at 3.71% and oil lost 13 pennies to finish at $45.43. Breadth improved toward day’s end but was negative at the close.

We sold some Schwab in larger accounts to reduce position size to around 5% and we will sell in more accounts next week as possible. The Model Portfolio lost 3% this week in value as the S&P 500 dropped 2.4%. The Model is now a more comfortable 35% cash 65% invested as we raised cash when the markets didn’t perform as we expected.

And tomorrow is today and it is the week-end. Enjoy. We will have a short post Monday morning January 10.


Norse Results: http://www.nku.edu/ /UMSL.html


7 January 2005 Daily Comment

Yesterday’s Markets

12:18pm and we’ve been busy shoveling snow and writing a letter to the NY Times on the Social Security Reform Plan that hasn’t been proposed but has been leaked so the kinks can be worked out before the Plan is actually submitted. Our letter is at the end of this Comment.

Stocks are trading higher and it would seem that the markets need to wash out a bit more if the rally is to resume with any strength. But we have been wrong so far this year so we are not certain our crystal ball is working.

We expected a continuation of the year end recovery in our sold out stocks and instead they headed back down in the New Year. Since we had confidence in them in December we aren’t yet ready to abandon them in January.

We have sold a few issues to raise a bit of cash since we were fully invested in the Model Portfolio and many other accounts. But we plan to hold the majority of the stocks we purchased for at least a while longer to see how events play out.

Today the jobless claims rose 43,000 to 364,000 new claims for unemployment benefits. The number of net new jobs added to the economy is announced tomorrow. Asia was mixed overnight and Europe is higher. Oil is up 196 pennies at $45.35 and Treasuries are firm and relatively unchanged.

We sold our Ciena position this morning at $3.04 for a loss in larger accounts and a smaller loss or a scratch in many accounts. It was the diciest stock we own next to Silicon Graphics which we are going to hold a few more days. We also sold our remaining Talbot’s at $28 and have had our fill of retailers for a while. Without our partner Don, we just don’t have the feel or success for retailing that we enjoyed when he was with us.

3:02pm and the DJIA closed up 24 points at 10622. The S&P 500 gained 4 points to end at 1189 and the NAZZ lost 1 point to 2090. Breadth was positive at the close and oil finished up 217 pennies at $45.56. It must be cold in New York.

And tomorrow is today so let the games begin

Letter to the NYT on Social Security Reform:


Many of the stories and editorial comments on the Social Security Reform Plan of President Bush do not offer any projection of how much principal will be available to retirees in 40 years if the Bush proposals in their present form are adopted. 

According to reports in your paper, workers would be able to divert (none of the stuff we read says whether this is voluntary or mandatory) 66% of the 7.2% of wages that they pay into Social Security every year to a maximum $1000 or maybe $1300 dollars.

We have been in the investment business for 35 years. We have managed money for only individual investors since 1986.  We began our financial career in 1965 and became a stock broker in 1967 and thus have some knowledge of how small money investors act.  

Our question is what does the worker do with $1000? What is a good case scenario on investment return and what does that good case return promise the worker in actual dollars? Assume the money is invested in a balanced fund and earns an average 7.2% for 40 years. By the way there is no conservative investment vehicle today that guarantees to earn that amount.

At that rate the money invested (a total of $40,000) would double every ten years. At the end of the 40 years assuming $1000 invested each year at that 7.2% and compounding at that rate every year and the worker would have approximately $225,000.

Since most financial advisers tell folks to reduce risk at retirement lets assume that 75% of the money is placed in two year Treasuries when the worker retires. Two-year Treasuries currently yield 3% (they yielded 1.5% last year so tough luck if you retired then). The amount of money devoted to Treasuries $168,000 times 3% would return $5062 for the entire year. If the rest of the money $57,000 continues earning 7.2% that money would earn $4100. And so the retired worker in a very good case scenario would have total spendable money funds of $9162 or $763 per month.

And the assumptions on averaging a 7.2% return assumes the worker doesn't retire in a period like the 1972 to 1980 period, the 1987-90 period or the 2000-2003 period.

The S&P over the last 3 years has had an average return of only 1% per year and for the last five years ending 12/31/04 the S&P 500 had a negative return of over (2%) per year. And our example above assumes a rate of return two times the rate earned by the DJIA last year and seven times the return on the S&P for the last three years. For the last five years the workers investment in the S&P 500 would have lost money.

For a recent example let’s assume that the worker retired at year end 12/31/1999 and decided to withdraw 5% of his funds to live on or $11250 per year. The worker did not change his investment strategy and his investments dropped at only one half the rates of the S&P 500 over the next three years. In that case the worker would have had only $149,000 in principal available for income production on 12/31/02. He would have lost $42,160 of principal. In investment terms he is a goner because if that happens the worker has to reduce his withdrawal rate to 5% of $149,000. And given human nature and the way we have seen investors react over 40 years in the business we know that by the end of the third year of losing principal many investors would have exited the stock mutual funds and even the balanced funds that lost money and placed their money in cash yielding 1% or less. In 2004 if the worker's total investment principal were in cash money market instruments it would have provided a total of only $1490 per year rising to $2980 this year.

We have been conservative with our estimates of investment loss and generous with our estimates of investment return.

Any way you slice it the best outcome is that with the Bush Plan folks may receive in 40 years (if you add the $1000 per month SS figure available to retirees in 40 years the Bush proposal contains) the same amount of money the top retirees are now paid by Social Security.

All that needs to be done to make SS whole is to reduce the rate of growth of the top payouts is to freeze the inflation adjustment for the top 25% of SS recipient for some period of years and the system problems are cured.


Bud Lemley


6 January 2005 Daily Comment

Yesterday’s Markets

7:39am and Seibel sees 4th quarter results above average. SEBL is guiding to 8 cents versus 7 cents and revenues to $390 million versus consensus of $350 million and margins of 16%. Unfortunately the good news comes at a time when no news is good news so there won’t be much of a pop in the price of the stock.

 8:41am and the markets often don’t listen to us and this is one time. The DJIA has opened higher and that only means it will sell off later. But we will enjoy the positive atmosphere for as long as it lasts.

10:11am and the DJIA is higher while the NAZZ remains under pressure. Oil is down 43 pennies at $43.45 but that really isn’t helping stocks. Breadth is 2/1 negative.

We are selling HPQ at $21.04 which is a scratch profit for most accounts except a few small ones where it is a large percentage holding and is being sold at a scratch loss. We also are going to try and exit our CIEN position at a scratch for many accounts and 15 cents per share loss for our larger aggressive accounts. CIEN is the diciest of our holdings and seem to have broken down after running strongly into year end.

10:49am and this week we have re-learned again why unrealized gains are called unrealized.

We get e-mails:

1) What's the reason for needing to raise cash--especially if you think the S&P will be at 1260 by the end of the month?  2) What's the discipline to selling--sell a loser for every gainer?  Clear out the losers below -7%, gainers up by same?

We respond:

We think the S&P will get to 1260 we don’t know that. We are trying to sell the diciest stuff like Ciena. We sold the Chiron because TLAB jumped two days ago on an upgrade and gave a lot back the next day. Also as we said in the post this morning Chiron did this once before and then backed under $30. Also it was a large position with a profit and while we think we think it may see $40 some day it may not and the markets are not doing what we thought they would be doing.

We are not matching gainers with losers we are just selling the most speculative of the low priced stocks.

We sold HPQ today because we have MOT and NOK and we don't need another commodity tech stock and we want to raise cash.

We are selling and hoping we are wrong.

3:02pm and there was no rally in the cards today. We didn’t sell the CIEN holdings and we’ll just have to wait the ‘whatever this is’ out. At the close breadth was 2/1 negative and volume was brisk. The DJIA closed down 30 points 1060. The S&P 500 lost 4 points to end at 1184 and the NAZZ dropped another 16 points to end at 2092. It looks like the usual October collapse is occurring in January. Treasuries were firmer with the ten-year at 4.28% and the five-year at 3.71%. Oil closed 52 pennies lower at $43.39.

On a positive note the S&P closed above the 1180 level but there is little room left.

And tomorrow is today so let the games begin.


5 January 2005 Special Comment

6:46am and yesterday’s zag lower elicited e-mails from friends and clients. So our genius lasted a week-end and now it is back to the grind. The NAZZ had its largest drop in 5 months. The Fed minutes were the catalyst for the late day pullback when they suggested inflation and slowdown and lower productivity.

Well folks we have been saying that for months. When companies run out of people to lay off and actually start hiring, productivity numbers will take a hit. We’ve had inflation in everything that matters for years and $45 oil can’t be ignored forever. More tax cuts and $2 trillion in borrowing to “save (destroy)” Social Security finally awakened the bond boys and girls to the possibility of higher rates that are market not Fed imposed.

But not to fear, Alan is still in charge and he’ll make some obfuscated comment soon that the tea leave readers will take as a sign of good things ahead.

The reality is that there couldn’t have been a healthy push higher in the markets without a pullback and some fear since the momentum of the uptrend was running out of steam. Whether we need a few more days of collapse is open to question. Our guess is that buyers will arrive forthwith and that the climb to 1260 on the S&P by the end of January will occur.

By the by, 1178 on the S&P is the 50 day moving average and a move down and a bounce off that number would be the perfect set up for a resumption of the rally. A move below 1173 would not be good since that would be a break below the December 2004 lows. Also a move higher this morning without a test of the 1180 moving average would not be good.

Finally there were a lot of different hedges set up at year end and the dollar rally and bond sell off coupled with profit taking and folks selling stocks because of dollar or bond losses may have been the reasons for yesterday’s large volume sell off. The markets look to open lower this morning and then we will see.

So if you have no hopes then keep the faith. We are.

5 January 2005 Daily Comment

Yesterday’s Markets

7:22am and stock futures are slightly higher. Overnight Asia was mixed with Japan up a bit and Hong Kong down over 1%. Gold and the base metals are taking it on the chin and the dollar is rallying. Oil is up 13 pennies. Treasuries are firm.

Rite Aid announced that same stores sales were down 2.8% in December including pharmacy sales down 3% on a same store sales basis. These are not good numbers especially compared with Walgreen’s bang up numbers yesterday and even though RAD had warned of this the markets will take this stock lower today. These lousy numbers are why RAD including debt is priced at 1/5th the price of WAG on sales to valuation basis.

Deutsche Bank raised its rating on Chiron to buy from hold.

In a reverse of Baird’s action yesterday Lehman lowered its rating on Tellabs to equal weight from over weight on valuation.

The economic data for the boys and girls to trade today is meager with Factory Orders at 9am and Truck and Auto sales at 11am.

Several years ago CNBC spent copious air time extolling the virtues of Krispy Kreme donuts and were a big help is hyping the stock. What CNBC gives is also takes away and now the talking heads can’t say enough bad things about the company.

The lesson is that the talking heads are just that and an investor or trader who follows their touting does so at her/his own risk. CNBC delighted in aiding in the supposed destruction of Martha Stewart and her company but they will be just as happy to tout her and make nice if it will help their ratings.

The poker craze that is all the rage will burn out as fast as The Millionaire and all the reality shows. At least we hope so because there is enough gambling in our markets and if folks start playing poker instead of trading cheap stocks we will have a tougher time.

And this is how our accountant spends his time preparing our taxes:


8:54am and the major measures are mixed in moderate trading. Sanford Bernstein downgraded Seibel and it opened down almost 50cents but is now moving back to even.

We still have selling HAIN on our radar for today.

10:42am and while we had a rally in TLAB yesterday and we are getting one in CHIR today the rest of our stocks are headed south. The rally must be caught somewhere in an ice or rain or snow storm. The NAZZ is suffering with Amazon and Dell both lower on negative analyst comments while the DJIA is a bit higher. Oil is up 33 pennies at $42.45 and breadth is 2/1 negative on the NAZZ and5/4 negative on the NYSE.

We guess we will have to wait out the selling storm.

Longbow Research downgraded Maytag to sell saying that targeted price increases were not holding and that Hoover Vacuum was continuing to lose market share. Maytag is off 75 pennies.

2:37pm and you ask, “what rally?” that’s a fair question given today’s action. At least we enjoyed the week-end. It would have been nice to have the one holiday day on Monday so we could have enjoyed our investment genius for at least three days.

We sold our Chiron holdings today at $34.50 for a nice $1.50 to $2.50 per share gain. The sale also raises a good chunk of cash. CHIR popped to this level right after we bought it in November and then revisited the $29 area before year end. It may not do that again and even if it does we may avoid. But it was nice to take a trading profit on such a dreary day.

The DJIA down 85 points joined the NAZZ down 40 points on the severe downside in the contra hour after holding in positive territory for much of the day. It looked like there was rotation from the momentum stocks of last year to the big caps occurring but then the floor fell in and everything sold off.

Also the Fed Minutes from December 14 were released and several Fed members expressed concern about the weak dollar, high oil prices, decreasing productivity, the possibility of rising inflation and expressed the thought that maybe a more aggressive stance would be needed.

Breadth is over 3/1 negative and down volume exceeds up volume almost 8 to 1. Volume is very active. The technicals present a sorry picture for those of us expecting a rally. Time will tell.

Our thought is that this sell off will set up a nice rebound rally. That is also our hope.

3:02pm and the DJIA closed down 99 points at 10630. The S&P 500 lost 12 points to end at 1190 and the NAZZ dropped 42 points to finish at 2109. The Treasury ten-year ended down at 4.28%, the five-year at 3.72% and the two-year drooped to 3.20%. Oil was up 179 pennies at $43.91.

And tomorrow is today so let the ice melt and the games begin.


4 January 2005 Daily Comment

Please note that beginning this year, unless there is unusual activity, we are only going to update the Model Portfolio once a week on Saturday.

Yesterday’s Markets

7:08am and stock futures are higher. Wal-Mart announced same store sales of up 3% for December which was at the high end of expectations. That has put a bid in the stock and the DJIA. Merck looks lower on new death statistics for VIOXX of up to 100,000 souls.

Oil is down 98 pennies at $42.48 and gold is off a couple of dollars. The markets are going to begin the day higher and then we will se if the new money can sustain a rally that looked pretty tired last week.

The economic numbers for today are the Institute of Supply Management Index for December and Construction Spending for November. Both of these statistics are far down the line of important market moving figures but on a cold Monday in January traders will trade snowballs if that’s all they have.

8:37am and stocks have opened higher. Friedman Billings lowered its opinion on Schwab to under perform from market perform.

9:08am and after opening strongly higher the major measures are giving ground as delayed profit taking has begun. All the folks who were waiting till this year to take profits have begun selling and the question now is whether the profit takers will overwhelm those who have new money to invest.

We are piecing out our HAIN holdings in the hopes of selling it over the next few days. It is a thin trader and we need to sell it as it rises. We have sold HAIN too early the last four times we have taken profits in the stock. There is the possibility that Heinz may decide to acquire the 80% it doesn’t own, but if HNZ doesn’t and doesn’t sell its position to someone else we consider HAIN a range trader and we want use the position to begin to build our cash. We have a nice 20% profit in the stock.

10:02am and the ISM Index was 58.6 which was in line while Construction Spending for November was down 0.4% when it was expected up by that amount.

10:29am and the major measures are visiting negative territory as the momentum stocks suffer a sever case of profit taking. Well, it is a new tax year and it is logical that some folks who wanted to defer taxes would take profits now. Also, what was momentum last year may not be momentum this year.

Oil is down 200 pennies at $41.25, the ten-year has rallied to 4.21% and the five-year to 3.61% and breadth is 2/1 negative.

Tellabs is up a chunk at $9.06 on an upgrade by Baird to outperform with a new price target of $11. Baird say that earnings and revenues should be better than expected and that the Vinci acquisition announced at year end is a positive.

10:41am and we sold Time Warner at $19.50 for $1 plus anchovy gain. We sold part or all of the HAIN in larger accounts at $20.78 for a nice $4 per share two month gain. We will be selling more tomorrow if the price is right. We sold the TWX in the Model Portfolio but did not sell the HAIN.

11:30am and CNBC is running a story now about a fellow in LA who bought a $480,000 home that would sell for $70,000 in Soldiers Grove ( and be overpriced ) by borrowing the whole 100% in two mortgages. It’s called creative financing. CNBC also said there are mortgages that allow folks to miss up to 10 monthly payments without penalty. The payments are just added to the mortgage. The whole story was too scary for us with our fully invested stock position. But we are going to be selling into the rally so we will bide our time but maintain our resolve. 100% mortgages on overpriced housing are not bullish.

3:02pm and the boys and girls decided they would rather sell them than own them. At the close the DJIA was down 56 points at 10726. The S&P 500 lost 11 points to end at 1202 and the NAZZ dropped 24 points to finish at 2151. Breadth was over 2/1 negative at the bell and volume was moderate. The Treasury ten-year ended at 4.22% and the five-year at 3.62% and the two-year at 3.09%. Oil was off 133 pennies at $42.12. European markets closed mostly higher while gold and silver were under selling pressure with gold off $8 to $430.

Same store retail sales come Thursday and the Employment Report is Friday so the rest of the week will be interesting.

And tomorrow is today so let the games begin.


3 January 2005 Daily Comment

Sunday Afternoon

4:37pm and we are once again alone in the land of milk and honey as the prince and princess have returned to Kentucky. They just beat the ice storm than socked us last night and has left our fields with an inch or two of ice.

We finished the year with the Model Portfolio up 8.6% and most accounts up between 5% and 10%. The more conservative accounts and the larger accounts where we usually maintain a large cash holding were the 5% performers while some very aggressive accounts and some of the smaller accounts did better than the Model. There were also some smaller accounts that were only up 1% but we think they will make up the shortfall in the January recovery of the low priced speculations that they own.

For the record the DJIA finished the year up 3.15%, the NAZZ was up 8.6% and the S&P 500 gained 8.99%.

The Lehman Intermediate Treasury Index returned 2.68% and the Long Term Index had a return of 7.34%.

And now the game begins again.We hope to see some recovery in our low priced speculations and also some of or larger cap stocks. Since this week end missed the holiday we usually have for the New Year some folks may be missing from the trading arena for the week and so we may not get a real picture of the markets’ trends till next week.

Whatever, it’s 2005 so let the games begin.


1 January 2005 Happy New Year

Yesterday’s Markets

7:31am and there are no economic numbers for the boys and girls to trade on today. Overnight Asia was mixed and Europe is also.

Everything is normal in America as corporate welfare continues to grow even as individual welfare is eliminated and the Bushies propose a paltry $35 million for the folks in Southeast Asia who suffered from the tsunami. Bush said $35 billion when he delivered his speech and we wonder whether anyone has told him it is only $35 million.

HEALTHSOUTH settled with the Feds for a $325 million fine for ripping off Medicare for many dollars more.

The Pension Guarantee Board is trying to take over United Airlines Pilots’ Pension Plan which is under funded by billions of dollars. The PGB has done this in the steel industry and with others and is the PGB itself is now under funded to the tune of $20 billion plus. Not to worry though, we taxpayers will make sure the pensions are paid. Do these takeover and taxpayer assumption actions suggest anything about the Social Insecurity Plan currently being proposed?

8:58am and the major measures are slightly higher. GE is going to sell part of a division to a LBO firm for $500 million. GE is also reaffirming earnings as it announces this sale. We have always been bemused by the way Wall Street accords such wonderful praise upon a company that makes its numbers by selling part of itself and then buying other parts back. GE is a very large bank without the strict reporting requirements of banks.

9:07am and Pfizer received approval for the drug Lyrica that treats pain from diabetic neuropathy and neuralgia but the FDA did not approve the drug for the treatment of seizure disorders.

JP Morgan continued its underweight rating on Tellabs when commenting on the $53 million acquisition we mentioned yesterday.

9:24am and as we count our blessings and complain about our problems Reuters just had a story on the wires about an entire village of 1700 people in Indonesia that was destroyed and almost all of the people killed. Having visited the Philippines when our daughter was in the Peace Corps and slept in a raised hut on the beaches of the beautiful Island of Boracay we still can’t imagine the terror that those folks suffered before they died. For everything there is a reason but sometimes the reason is unfathomable and this is one of those times.

1:24pm and Treasuries finished the year almost unchanged. The ten-year began the year at 4.25% and ended at 4.22%. The five-year went out at 3.61% and the two-year ended at 3.07%.

Someone must have told Bush the tsunami pledge was only $35 million because this afternoon the State Department in now saying that the U.S. is now pledging $350 million. Of course pledging the money does not mean it will be forthcoming as many disaster areas around the world including New York and Turkey and Iraq have ruefully discovered.


3:02pm and there were no mark ups today as the  DJIA finished the year at 10783 down 17 points on the day and up about 3.2% for the year. The S&P ended down 1 point at 1212 and up about 9% for the year. The NAZZ ended down 3 points at 2175 and up 8.6% for the year.

The Model Portfolio finished the year up about 8.6%.

We’ll have the final numbers in our post on Monday January 3, 2005

And tomorrow is today and the first day of the New Year.

Norse News

Unfortunately our boys dropped another tough game on the 30th. We were in it till the last few minutes but we couldn’t turn the corner. Hopefully the New Year will bring better luck and better shooting.
http://www.nku.edu/ MichiganTech2.html




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