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31 January 2008


Jobless claims jumped to 375,000 and Personal Spending was only up 0.2% in December versus a 0.5% rise in Personal Income and so traders are thinking recession and selling big time in pre opening trading. The major measures are going to open 1% lower on the news. This seems to be continuation of the sell the news action yesterday afternoon after the Fed lowered the Funds rate by 50 bps.

Asian markets were lower overnight and European bourse indexes are down 1% or more across the continent. Gold is up $3 in the early going, Oil is lower with a $91 handle and short Treasuries have a bid.

Yesterday’s rally took the S&P 500 and DJIA right to resistance which they failed to penetrate. That should create a retest of the lows and is necessary for any meaningful rally to continue. So get ready for a difficult ride the next few months.

The new mantra is store closings. Ann Taylor said it will close 117 struggling stores in the next three years and cut staff at its headquarters in a restructuring that aims to boost profitability during a challenging time for the retail industry.

The New York women's clothing retailer will also reduce its headquarters work force by about 13% and postpone the debut of its new concept store until 2009.

The company will close 25 Ann Taylor stores in fiscal 2008 and 14 stores in fiscal years 2009 and 2010. The company will close 39 Loft stores in each period. The company operates 921 stores in 46 states. As of Nov. 3, there were 354 Ann Taylor stores, 500 Loft stores and 67 Ann Taylor Factory stores.

The restructuring plan is expected to generate pretax savings of about $50 million by fiscal 2010, with savings of about $20 million to $25 million in fiscal 2008. Costs associated with the moves will lead to a charge of 29 cents a share in the current quarter. Excluding the costs, the company said it still is expecting fiscal 2007 earnings of $1.80 to $1.85 a share.

The DJIA opened down 150 points and after an hour of trading has halved its losses.

We sold the XLF that we bought yesterday. We scratched plus and minus in accounts. Immediately after we purchased yesterday XLF dropped $1.50. Today we think bank stocks are being marked up for month end. Since the XLF is an anchovy for us we are going to the sidelines with this trade for now.

We are also selling National City for a $1 per share profit for the same reasons as above.

We repurchased the SPDR Technology trade that we sold two days ago. The XLK gives us a play on Google and MSFT and AAPL without having to choose one of them.

We bought back part of our Sprint and Motorola sale of two days ago at below the price at which we sold. We reviewed the news that came out in the last day after we sold the stocks and decided we wanted some exposure to them in our larger accounts.

We also repurchased some Liz Claiborne in accounts that held it over year end.

We added AMD to accounts.

And we sold our Ann Taylor with a $2.50 per share profit when the shares popped on news that they are closing stores.

Retail stocks are on fire today. We had heard that hedge funds were shorting retail big time and the 50 bps cut yesterday plus the willingness of retailers to pull back from their expansionary plans may have some hedgies on the run. That doesn’t mean that the bad news is over for retail but at least it is nice to see some green in the area.

Bristol Myers is one of the first companies to fess up to losing money on their CDO investments with money for their cash position. We think there are plenty of CEOs and CFOs who are right now arguing with their auditors about the extent of the disclosure of losses they have to make in the annual reports. This is an underreported aspect of the SIV/CDO crisis that ahs still to surface.

BMY’s story from Reuters: Bristol-Myers on Thursday reported a quarterly loss as special charges, including a $275 million impairment expense tied to collateralized debt obligations, more than offset strong sales growth of its prescription drugs. BMY lost $133 million, or 7 cents per share. That loss compares with a loss from continuing operations of $170 million, or 9 cents per share, in the year-ago period when the company took charges to retire debt and finance the proposed settlement of a federal probe into its marketing practices. Excluding special items, Bristol-Meyers earned 33 cents per share. In announcing a $275 million impairment charge related to its auction rate securities, BMY is among the first companies outside the financial sector to disclose its exposure to the housing and credit crisis gripping the country. Bristol-Myers said the market value of securities tied to collateralized debt obligations supported by pools of residential and commercial mortgages or credit cards, insurance securitizations and other structured credits, fell $392 million to $419 million as of Dec. 31, 2007. The $275 million charge does not have a material impact on the company's liquidity or financial flexibility, or hinder its ability to fund the dividend, Bristol-Myers said.

BMY is lower today on that news and is near the low end of its 52 week price range with a 5% yield and we are buying a few shares in accounts that own Schering Plough.

We sold our J Crew holding on today’s retail rally at $44.40 for a nice two week $6 per share gain in many accounts. We have been selling this stock too soon for the last few years and it has been a profitable anchovy for us.

Starbucks announced 3% growth in earnings last night and said it is going to close 100 stores over the next year. With Schultz back at the helm and earnings for this quarter out of the way we are buying shares in accounts that own J Crew.

Oil ended down 73 pennies at $91.55. Gold was up $5 to $932. Treasuries maintained their gains. European stocks closed mixed and Mexico was higher with Brazil lower.

The major measures broke through overhead resistance today. The price action reminds me of October 31 of last year after which the major measures dropped 6% in a week. Sell programs hit the tape in the last five minutes of trading to trim what had been a 250 point gain to a gain of 200 points in the DJIA.

Whatever, we are reacting not predicting and have cash on hand and own good stocks so we will enjoy the rally while it lasts.

The DJIA closed up 200 points after being down 150 points in the early going. At the bell the DJIA was 12645. The S&P 500 gained 22 points to end at 1377 and the NAZZ tacked on 40 points to 2390 as Google and MSFT and APPL all turned green.

Breadth was 3/1 positive on the NYSE and volume was active exceeding 4 billion shares on the NYSE.

There were 92 new lows on the NYSE which is more than yesterday because of the morning sell off.

The bulls won the day the bears won the month.

After the bell Google announced earnings that were less than expected and sold off $50 per share in two minutes. Some traders obviously knew of the Google shortfall with five minutes to go in the trading day. Crooks are alive and well on Wall Street.


30 January 2008


Yahoo reported better than earnings and in line revenues but was negative going forward and the shares are off $2 in the early going. We are repurchasing the shares we sold yesterday. We are also going back into our XLF position to play the Fed announcement this afternoon.

Advance GDP was up 0.6% which was less than expected.

Investors Intelligence has 40% bulls and 32% bears in the latest reporting period.

Asian markets were lower overnight and European bourse indexes are lower at midday. Gold is higher and Oil has a $92 handle, Treasuries are weak.

NCR reported fourth-quarter income from continuing operations of $86 million, or $0.47 per diluted share, compared to $95 million, or $0.52 per diluted share, in the fourth quarter of 2006. Earnings from continuing operations for the fourth quarter of 2007 included $9 million, or $0.05 per diluted share, of costs from items related to NCR’s manufacturing realignment, the Fox River environmental matter and a realignment in Japan. Excluding these items, non-GAAP earnings from continuing operations (1) were $0.52 per diluted share, which compares to $0.52 per diluted share in the prior-year period.

“NCR delivered a strong performance in its first quarter following the Teradata spin off. More balanced execution in the quarter helped us maintain progress in each of our strategic focus areas: driving profitable revenue growth, increasing our productivity and using our strong balance sheet for the benefit of long-term shareholder return,” said Bill Nuti, chairman and chief executive officer of NCR. “Looking ahead, NCR enjoys an outstanding opportunity to claim leadership in an expanding addressable market for self-service solutions. To that end, we expect our product development investments in 2007 will make 2008 the biggest new product launch year since the company’s spin off from AT&T.”

RF Micro Devices is down from $9 per share to $3.15 per share in the last 12 months. RFMD makes stuff for the insides of cell phones. They have already pre-announced earnings and the shares drooped $1.50 on that news. At this level we are buying in most accounts ahead of earnings which come tomorrow night.

On the rally we sold Wachovia Bank and placed the proceeds plus additional funds in some accounts into the SPDR Financials.

The Fed cut the Funds rate by 50 bps to 3% and the Discount rate by 50 bps to 3.50%. After some initial back and forth the major measures moved higher to up 160 points on the DJIA but then sell programs in the last hour led the major measures to close lower on the day.

Europe closed lower but Mexico and Brazil were higher on the day. Gold gained $10 to $936 and Oil was up 80 pennies to $92.50. Treasuries were weaker on the long end with the two-year at 2.26% and the ten-year at 3.76%.

The DJIA lost 50 points to end at 12430. The S&P 500 traded up to resistance at 1375 and that is what the number proved to be. At the bell the S&P 500 was down 8 points to 1354. The NAZZ dropped 8 points to 2348.

Breadth was 5/4 positive and volume was moderate.

There were 70 new lows on the NYSE.

The bears carried the day.


29 January 2008


Durable Goods orders were up 5% in December which was much stronger than expected and the November number was revised to positive from negative. In the tradition of traders and the number of the day to trade around, the talk is now that the Fed will only cut 25 bps tomorrow to show that they are in control.

Asia moved higher overnight but didn’t regain all its Monday losses. European bourse indexes are 1% higher at midday. Gold is down $4 in the early going after yesterday’s large move higher and Oil has a $90 handle. Treasuries are weaker on the Durable Goods orders news.

We are going to take a few dollars off the table and lock in some profits going into the Fed meeting. We sold Motorola, Sprint and Symantec. We also traded out of the SPDR Financial and SPDR Tech.

And we sold Yahoo ahead of tonight’s earnings. All sales were for positive, some less, some more. The markets have not been kind to lousy earnings reports this month and that tendency hasn’t changed in the last few days. We thought the rally of the last week might have changed that negative earnings reaction but as of this morning it hasn’t and that is our reason for exiting YHOO.

Motorola and Sprint are in the news today and the share prices of both are higher on the news and the news is interesting but we want to improve the quality of our holdings. We bought the collapse in the share prices of these two on the lousy earnings reports last week and now the stocks have recovered 20% and we are saying goodbye. Symantec is doing well but there was a pop on it earnings report and it is pricier than some of the other tech stocks we own. We will continue to trade the XLF and XLK.

From CBS Market Watch: There is a possibility that Motorola may exit the handset business and concentrate on becoming an enterprise and government company, Richard Windsor, an analyst with Nomura International, told clients a in note published on Tuesday. He added that speculation about Chinese vendors buying the company has risen again, but said a deal is unlikely as those vendors don't have much of an idea how to fix Motorola's problems, which he believes are related to platform and software more than hardware.

From the AP there is news that: wireless Internet provider Clearwire Corp. and cellular operator Sprint Nextel Corp. have reportedly restarted talks to combine their high-speed wireless WiMax networks. Sprint and Clearwire are discussing a joint venture that would attract funding from Intel Corp., a major backer of WiMax technology, which promises faster wireless Web connection speeds for laptops and cell phones than mobile operators' third-generation networks.

As the month has progressed we have been trying to improve the quality of our holdings (buying Intel, Cisco, GM, NCR) while maintaining exposure to the markets by selling the lower quality issues and replacing them with higher quality issues that are down as much percentage wise.

EMC the data storage company is down 10% today and 40% in the last two months. This morning EMC announced better than earnings and revenues, up 35% and 17% respectively.  But a high tech company VMware of which EMC owns 85% is down $26 (30% today and 50% in the last month) on less than sales. We have owned and profited on EMC in past years and its VMW holding are still worth $8 per share which places a value on EMC’s other business of $7 per shares or $16 billion. With net cash of $3 billion on hand EMC is now priced at $14 billion or 1.1 times sales.

EMC shares have been a way for the momentum folks to own VMW and all those traders have been fleeing EMC in the last few weeks as VMW’s share price has collapsed. EMC is back to less than it should be valued as its own company with a very promising subsidiary.

Obviously VMware is a high flyer and with only a billion dollars in sales and a still sky high $20 billion market cap it could drop in half or more again from its current level. EMC owns 85% of the company and only 10% of VMWARE is publicly traded and every momentum fund had to own some shares. Today many of them don’t’ want to own the shares since VMW announced that its revenue growth rate was going to drop from an 80% annual rate to 50% in the fist half of 2008 and 30% in the second half of 2008. But another 50% drop in the share value of VMWARE would still leave EMC with an $8 billion investment in VMW and a growing business of its own that would be priced at only 2 times revenue.

And so we bought some EMC with our Sprint/Motorola money. This maintains our tech exposure and improves the quality of our portfolios.

EMC engages in the development, delivery, and support of information infrastructure technologies and solutions worldwide. Its Information Storage segment offers networked information storage systems to be deployed in a storage area network, networked attached storage, content addressed storage, or direct attached storage environment. It also provides platform-based software that controls and enables functions, such as replication, optimization, and data movement; multi-platform software to store, protect, optimize, and leverage their information in complex IT environments; and consulting, assessment, implementation, integration and operations management, support, maintenance, education, and training services. The company's Content Management and Archiving segment offers content management software to optimize business processes, as well as to create, manage, deliver, and archive information from documents, discussions, email, Web pages, images, XML, reports, records, rich media, and application data. This segment also provides input management software for conversion, indexing, and processing of paper-based information to digital formats. EMC's RSA Information Security segment offers security product and service portfolio, such as enterprise identity and access management products, consumer identity and fraud protection solutions, encryption and key management software, and security knowledge and expertise; and tools to collect, monitor, analyze, and report on security event-related activity throughout the IT infrastructure. Its VMware Virtual Infrastructure segment offers virtual infrastructure solutions and services used by enterprises for server consolidation and containment, disaster recovery and business continuity, capacity planning and development, enterprise desktop hosting, test optimization, and software distribution.

VMware software allows a single computer to operate like multiple computers. its subsidiaries provide virtualization solutions worldwide. Its virtualization solutions separate the operating system and application software from the underlying hardware to achieve improvements in efficiency, availability, flexibility, and manageability. The company's solutions enable organizations to aggregate multiple servers, storage infrastructure, and networks together into shared pools of capacity that can be allocated to applications as needed. It offers a portfolio of products that spans the consumer desktop to enterprise data center, including virtualization platforms, virtual infrastructure automation, and virtual infrastructure management. The company's virtualization platforms include a hypervisor for system partitioning that provides the capability to run multiple operating systems simultaneously on the same physical machine. Its platforms include entry-level products for the desktop and server, and desktop and server platforms. The company's virtual infrastructure automation products utilize its virtualization platforms to automate system infrastructure services, such as resource management, availability, mobility, and security. These products improve the runtime availability and reliability of the virtual machines. Its virtual infrastructure management products automate the interaction between various information technology (IT) constituencies and the virtual infrastructure for a specific set of point solutions. These solutions range from capacity sizing and assessment to development lab management. VMware's suite of virtualization solutions addresses a range of complex IT problems, including infrastructure optimization, business continuity, software lifecycle management, and desktop management.

There is some question as to whether Vytorin, the joint cholesterol drug combining Merck’s Zocor and Schering Plough’s Zetia which is a drug that supposedly raises good cholesterol while Zocor lowers bad cholesterol, is any better than a generic version of Zocor which is Merck’s now patent expired cholesterol drug. Supposedly Merck and Schering Plough delayed release of a study that cast doubt on the increased efficacy of the combined drugs. There is no suggestion of new deaths etc and the FDA is going to study the matter for six months. The share prices of Merck and Schering Plough have dropped substantially with SGP down almost 50% and back to its price in the old days when we traded the stock without much luck in many accounts. Since that teem SGP has purchased a European drug company. We are taking a small position in SGP in our large/aggressive accounts on the theory that a stock of this quality down 50% in two months has most of the bad news in it and may get a nice bounce in any rally on good or neutral news.

European bourse indexes closed mostly 1% higher and Mexico and Brazil did the same. Gold lost $4 to $922 and Oil ended at $91.76. Treasuries gave ground all day and closed 5 bps lower.

The DJIA closed 95 points higher at 12478. The S&P 500 rose 8 points to 1362 and the NAZZ was only 8 points higher at 2358.

Breadth was 2/1 better on the NYSE and 5/4 on the NAZZ and volume was moderate.

There were 65 new lows on the NYSE and under 100 new lows on the NAZZ.

The bulls pulled out another one but still remain losers on the month.


28 January 2008


The Fed meets on Tuesday and Wednesday with their announcement at 1:15pm Wednesday. The January Employment Report is released Friday morning. Those are the keys to this week’s trading unless another bank or hedge fund blows up in the interim.

More info or rather gossip was printed over the week-end about the $7 billion loss by Société Générale. It seems that about $80 billion in futures contracts were involved and that the liquidation of the positions last Monday may have set off the two day cascade crash around the globe. Supposedly the Fed did not know about the problem when they decided to cut rates before the opening on Tuesday. Corrections often bottom on a large blow up like the Société Générale induced panic last Monday and Tuesday and time will tell if this is another occurrence.

Asian markets were down big-time overnight with Shanghai off 7% and Hong Kong and Japan off 4%. Goldman Sachs is suggesting that Japan may be in a recession.

European bourse indexes were 2% lower at midday except Germany which was flat. Oil has an $89 handle in the early going and Gold is up $12. Treasuries have a bid.

Verizon reported in line numbers and the share price dropped $1.25 on the opening this morning and we repurchased shares in our larger accounts at $36.65 that we sold on Friday at $38.40.  We also reentered the SPDR Financial Index and initiated a holding in Wachovia Bank in accounts that own AT&T. We are buying National City in accounts that own Boston Scientific. And we started a trading position in the SPDR Tech Index in a few of our larger accounts. Apple is down at $125 from over $200 and Google is down over $200 from its recent high and we want to trade the rebound by using the more conservative XLK.

European bourse indexes closed lower but above the worst levels of the day. Mexico and Brazil were up 1%. Oil gained 23 pennies to $90.93. Gold was higher by $16 to $927. Treasuries were flat with the two-year at 2.18% and the ten-year at 3.60%.

The big boys and girls pushed stocks higher in the last hour of trading with buy programs.

The DJIA gained 175 points to close at 12275. The S&P 500 rose 22 points to 1352 and the NAZZ was up 22 points at 2347.

Breadth was 3/1 positive on the NYSE and 2/1 on the NAZZ and volume was moderate.

There were 80 new lows on the NYSE and 110 new lows on the NAZZ.

The bulls held their own today but it will be long week.


25 January 2008


Microsoft reported blow away earnings last night and jumped $2 in after hours trading and that has placed a bid in tech stocks for this mornings opening. After that ……

Asian markets were higher overnight with Hong Kong and India up another 6% and japans a not so shabby 4% and European bourse indexes is up by 1% and more again at midday. Gold has jumped another $4.17 on top of yesterday’s almost $30 gain. Oil is higher with a $90 handle and Treasuries are firm in the early going. And it is 25 below zero in the land of frozen milk and congealed honey.

AT&T reported great wireless customer growth but the adds to internet and some business business was less than expected and that is the reason the share price dropped a dollar on the earnings report yesterday. Traders think the economic slowdown will affect the telecom companies. Of course it will but Verizon and AT&T are rapidly becoming the only game in town. Rumors have had Comcast and Google interested in Sprint for the past year. In the past year Sprint has lost half its market value. It is 50% cheaper. And to a European company it is 70% cheaper (50% price drop and 40% of 50% on the value increase of the euro versus the dollar). T has a market cap north of $200 billion with 70 million wireless subscribers, Verizon has 60 million subscribers and a market cap of better than $100 billion (Vodaphone owns half the wireless) and Sprint with 50 million subscribers has a market cap of $25 billion. Something is out of whack on the pricing.

Traders are suggesting that the Fed rate cut Tuesday morning may have been related to the $8 billion loss by Société Générale that was supposedly discovered over the week-end. The Financial Times is reporting that the original loss discovery was $1.5 billion and that it ballooned to $8 billion as the bank attempted to unwind the trades. Oops.

Unwinding (selling stock indexes) of the Société Générale trades is now the current wisdom for the collapse of European bourse stock prices on Monday and rebound on Wednesday and Thursday. The $8 billion loss is big stuff to the bank but it is a one time event and out in the open which is much different from the problems in the financial system where no one can place a dollar/euro/yen figure on what the losses are.

Stocks are higher out of the gate but Microsoft is seeing some sell the news profit taking and the bulls look tired.

We still have a trading gene in us and so we are going to sell the SPDR Financial. It is up 15% this week and the markets seem tired.

Verizon earnings are announced on Monday and given the markets reaction to AT&T we are selling VZ for a scratch to $2 profit and see what occurs on Monday. We were surprised by the markets reaction to AT&T and we think VZ will have the same kind of report of increased wireless but disappointing internet and business business.

We have been looking for a way to play AAPL and GOOG while not having to go into them directly. The SPDR Technology (XLK) offers that opportunity. Its top ten holdings which represent about 60% of the value are:

Microsoft 10%, AT&T 9% , Cisco 6%, Google 6%, Apple 6%, Intel 6%, IBM 5%, Hewlett-Packard 5%, Verizon 5%, Oracle 3%.

We aren’t buying today but it is on our screen.

European bourse indexes closed mixed.

Gold ended the week at $914, up $9 on the day. Oil was $90.58 up $1.38 and Treasuries gained as stocks sold off. The two-year ended at 2.21% and the ten-year was 3.57%.

The DJIA ended the week at 12207 down 170 points on the day. The S&P 500 lost 21 points today to close at 1330 and the NAZZ dropped 35 points to 2325 as Microsoft couldn’t rally the troops.

Breadth was 5/4 negative on the NYSE and NAZZ and volume was active but less than the last three days with the NYSE at 4 billion shares and only 2.5 billion on the NAZZ.

There were 80 new 52 week lows on the NYSE and 110 new 52 week lows on the NAZZ. On Tuesday last there were over 1000 on the NYSE and over 1100 on the NAZZ.

The bears won the day and the bulls survived the week.


24 January 2008


Folks in France awakened to learn that (from the NYT): The French bank Société Générale said Thursday that it had uncovered "an exceptional fraud" by a trader that would cost it €4.9 billion, or about $7.1 billion, and that it would seek new capital of about $8 billion.
The company, the second-largest listed bank in France, said in a statement that the fraud had been committed by a trader in charge of "plain vanilla" hedging on European index futures.
The trader, who was not identified, "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority," the bank said. "Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle-office, he managed to conceal these positions through a scheme of elaborate fictitious transactions."
The bank said the fraudulent positions had been closed and the trader suspended. The incident has been thoroughly investigated and found to be a case of "isolated fraud."
Oh, and while they were at it, The company also said it would write off $3 billion from its exposure to derivatives linked to the U.S. mortgage market, including $1.6 billion related to risks in residential housing and $800 million related to U.S. bond insurance companies. It said it was also setting aside $580 million in provisions against the risk that losses in those two areas would grow.

Somehow that story doesn’t make sense. It smells as much as ripe cheese.

Asian markets were lower overnight giving back some of Wednesday’s gains while European bourses played catch up to the tune of 4% to 5% gains in their indexes. Oil ahs an $88 handle and Gold has jumped $11. Treasuries are giving up a little of their recent gains.

Symantec, the internet security folks (Norton), reported better than and the shares are trading $1.50 higher in the pre-market.

The new CEO a Sprint is making changes quickly. From the company press release:

Sprint Nextel today announced changes in its senior management team. Paul Saleh, Chief Financial Officer, Tim Kelly, Chief Marketing Officer, and Mark Angelino, president, Sales and Distribution will leave the company Friday, January 25. “I want to thank each of these individual leaders for their dedication and contributions to Sprint Nextel,” said Dan Hesse, president and CEO, Sprint Nextel. “I wish them all the best in their future endeavors.”
William G. Arendt, currently senior vice president and controller of Sprint Nextel, will serve as acting Chief Financial Officer. John Garcia, currently senior vice president, Product Development and Management, will serve as acting Chief Marketing Officer. Paget Alves, currently Sprint Nextel’s regional president for sales and distribution, will serve as acting president, Sales and Distribution. All will report directly to Hesse.
“Permanent leaders will be named in conjunction with a review of overall strategy and an effort to streamline operations,” Hesse said. “I have no predetermined timeframe in filling these positions but plan to act as quickly as possible as I consider both internal and external candidates.”

Additional Background on Arendt
Arendt, age 50, was appointed senior vice president and controller at the time of the Sprint Nextel merger in August 2005. At Nextel, he served in senior finance positions from 1997 through the time of the merger.

Additional Background on Garcia
Over the course of the last 13 years Garcia, age 53, has held senior leadership positions in product development, sales and marketing.

Additional Background on Alves
Prior to his role as Sprint Nextel’s South Regional President, Alves, age 53, served in various sales and marketing leadership positions in the company, including enterprise sales, strategic markets and wholesale services.

About Sprint Nextel
Sprint Nextel offers a comprehensive range of wireless and wire line communications services bringing the freedom of mobility to consumers, businesses and government users. Sprint Nextel is widely recognized for developing, engineering and deploying innovative technologies, including two robust wireless networks serving approximately 54 million customers at the end of 2007; industry-leading mobile data services; instant national and international walkie-talkie capabilities; and a global Tier 1 Internet backbone.

We remain interested in Hershey. This latest quarter was not good. We would like to see it drop under $30 before re-purchasing. From the press release:

Hershey, the nation's largest candy maker, said Thursday its fourth-quarter profit dropped almost 65 percent as it spent heavily to close plants in North America and expand overseas and grappled with rising costs. Sales were almost flat in what The Hershey Co. said is an increasingly competitive environment, and it predicted a drop in earnings in 2008.

The results bring to a close a shaky year for Hershey in which it lost some of its prized U.S. market share to its closest competitor, Mars Inc., and chief executive Richard H. Lenny abruptly resigned. Its largest shareholder, the Hershey Trust Co., forced changes in the board in an effort to invigorate lackluster sales.

Shares fell $1.36, nearly 4 percent, to $35.03 at the open of trading.

Hershey said it earned $54 million, or 24 cents a share, for the three months ended Dec. 31. That compared with a profit of $153.6 million, or 65 cents per share, in the same period a year earlier.

Without one-time charges of $95.9 million for changes to Hershey's global supply chain, income would have been $124.1 million, or 54 cents a share in the fourth quarter, the company said. Analysts polled by Thomson Financial, on average, forecast earnings of 55 cents per share for the quarter. One-time charges are usually excluded from analysts' estimates.

Hershey's president and chief executive, David J. West, said the increasing competition and rising energy and commodity costs, such as dairy, that hurt Hershey in 2007 show no signs of abating. For 2008, he said Hershey plans to spend more on marketing to stabilize its U.S. business, expand in high-margin and overseas markets and see cost savings from streamlining its supply chains.

AT&T now has 70 million wireless subscribers to Sprint’s 54 million. Verizon announces its numbers on January 28th.

The Banks Index SPDR (KRE and KBE) we purchased two days ago have jumped 10% and we are selling them. We are going to add to our Financial Index SPDR (XLK) in those accounts to concentrate on one financial issue that gives us good diversification. The top ten holding in the SPDR Financial are: BankAmerica (8.85%), Citi (7%), JP Morgan (6.7%), AIG (6.5%), Wells Fargo (4.7%), Goldman (4%), Wachovia (3.5%), American Express (3%), US Bancorp (2.5%), and Morgan Stanley (2.4%).

We are also adding ADC Telecom and Yahoo to accounts where we are selling the KBE and KRE.

Existing-home sales fell 2.2% to a 4.89 million annual rate in December, according to the National Association of Realtors. The median home price also declined to $208,400 in December, down 6% from $221,600 in December 2006. Inventories of homes fell 7.4% at the end of last month to 3.91 million available for sale, which represented a 9.6-month supply at the current sales pace. Sales of single-family existing homes fell by 13% in 2007, the biggest drop in 25 years. Earlier Thursday, the Labor Department said the number of U.S. workers filing new claims for unemployment benefits fell last week for a fourth-straight week. The number was 301,000.

The falling home inventory number should eventually help on the price/demand side.

The stock markets are indecisive this morning. The collapse of the last four weeks will not be cured by one reversal day. The bears still are in control and it will take time and more definition of the stimulus plans and the rescue pans for the bond insurers plus additional Fed cuts for the markets to believe that the worst is under control.

Ford lost $2.8 billion or $1.30 per share in the fourth quarter, narrower than a loss of $5.6 billion, or $2.98 per share, in 2006. The full-year loss of $2.7 billion, or $1.35 per share, was better than 2006, when Ford lost $12.6 billion, or $6.72 per share.

CEO Mulally said Ford remains on track to make a profit in 2009, but is expecting another loss in 2008.

"Overall, our plan is working and we continue to show progress," Mulally said.

Ford reported revenue of $44.1 billion for the fourth quarter, up from $40.3 billion in the year-ago quarter. The company reported full-year revenue of $172.5 billion, up from $160.1 billion in 2006.

Excluding special items, Ford lost 20 cents per share for the quarter and 19 cents per share for the year, in line with Wall Street's expectations. Analysts surveyed by Thomson Financial had predicted a loss of 19 cents per share for the quarter and 17 cents per share for the year.

Special items for the year included a $705 million charge for separation programs in North America and a $208 million gain from the sale of Aston Martin.

Ford shares fell 11 cents to $6.19 in morning trading Thursday.

The company lost $3.5 billion for the year in its North American automotive operations, narrower than a loss of $6.0 billion in 2006. Ford said higher net pricing and lower costs helped offset losses from lower sales and unfavorable exchange rates. Full-year revenue for the region was $70.5 billion, up from $69.4 billion a year ago.

In the fourth quarter, Ford lost $1.6 billion in North America, compared with a loss of $2.7 billion in the year-ago quarter. Fourth-quarter revenue was $17.0 billion, up from $15.1 billion a year ago.

Ford took a hit in the U.S. in 2007 when it reduced low-profit sales to rental-car fleets by a third. In another blow to the company, Toyota outsold Ford in U.S. sales in 2007, taking the No. 2 position Ford had held for 75 years behind General Motors Corp.

Ford reported a full-year profit of $997 million in Europe, more than double its 2006 profit of $455 million. Ford said the improvement was due to continued cost reductions, higher net pricing and higher sales. Full-year European revenue was $36.5 billion, up from $30.4 billion in 2006. Ford reported a fourth-quarter profit of $223 million on revenue of $10.4 billion in Europe, up slightly from $218 million on revenue of $8.8 billion a year ago.

Earnings also more than doubled in South America, where Ford had a full-year profit of $1.2 billion, up from $551 million a year ago. Full-year revenue improved to $7.6 billion from $5.7 billion a year ago. For the quarter, Ford posted a profit of $418 million in the region, up from $114 million a year ago, and revenue of $2.4 billion, double its 2006 revenue.

Ford Chief Financial Officer Don Leclair said Ford had trouble meeting demand in South America and warned that the record profit levels there could taper off.

"This level of profitability is unlikely to be sustained," Leclair said.

Ford's Premier Automotive Group, which includes the luxury Jaguar, Land Rover and Volvo brands, posted a full-year profit of $504 million, compared with a loss of $344 million a year ago. Ford said it reduced costs across all brands and saw higher sales and higher net pricing at Land Rover. Full-year revenue for the brands was $33.2 billion, up from $30.0 billion in 2006.

Ford doesn't break out results for its luxury brands, but said Volvo incurred a loss for the year.

Ford recently decided to keep Volvo but is planning to sell Jaguar and Land Rover. Earlier this month, Ford selected Indian car maker Tata Motors Ltd. as the top bidder for the two British brands.

The luxury brands posted a $59 million profit for the fourth quarter, compared with a profit of $174 million in the year-ago quarter. Ford said the decline was explained by adverse currency exchange rates and product mix at Volvo, which broke even for the quarter, while Jaguar and Land Rover made a profit. Revenue for the unit was $9 billion for the quarter, up from $8.6 billion a year ago.

Ford's credit division, Ford Motor Credit Co., posted a $775 million profit for the year, down from $1.3 billion a year ago as it was hit by higher borrowing costs, higher depreciation expenses for leased vehicles and other factors.

Ford remains interesting to us; we like GM better at the moment but may re-purchase Ford at some point.

The tech guru we follow has 1346 as the close above number to keep the rally going. At noon the S&P 500 is at 1342 having traded above 1346 several times this morning. 1347 is resistance with 1275 support and below 1250 a crash.

We purchased eBay in our aggressive accounts as the shares are off $2 today to a 52 week low. We also repurchased Boston Scientific in accounts that own TWX. And we began a position in AT&T after the shares sold off $1 on their earnings today, which were good plus they added a bunch of wireless customers.

Oil gained $2.65 to close at $89.65. Gold jumped $29 to $911. Treasuries gave some back. European bourses closed on their highs with most up over 5%. Brazil was up 5% and Mexico was up 2%.

The DJIA gained 108 points to close at 12378. The S&P 500 was up 14 points to 1352 and the NAZZ gained 45 points to 2360.

Breadth was 2/1 positive on the NYSE and 5/4 on the NAZZ and volume was active with NYSE volume over 5 billion shares.

There were 78 new lows on the NYSE.

The bulls are holding their own but the bears are lurking in the background. The question for tomorrow is whether traders want to go home long or flat after the reversal of this week.


23 January 2008


Asian markets were up with Hong Kong gaining 10% and India up 5%. European bourses did not follow suit with many down another 2% at midday. Oil is down to $87 even though there is cold wave sweeping the country. And Gold is off $3 while treasuries are firm. Treasuries are again higher.

Apple had better than earnings last night but was cautious going forward and the share price dropped 10% in after hours trading. The selling is continuing this morning and other momentum stocks are being hit while banks and retailers are higher for a second day. The DJIA opened down 250 points in the first half hour rallied back to half that loss and then moved lower into midday.

Our take is that the churning at S&P 500 down 20% is a good sign. And it is good that the momentum stocks are being hit as well as the oil complex which has most issues down 10% today. Those two complexes have been the market leaders and if the markets are to regain ground leadership needs to change. The financial and retail sectors have many issues down 50% or more while the opposite is true for the momentum stocks. The parabolic moves in the momentum stocks need to be reversed to put in a good bottom on this correction.

Motorola’s earnings were worse than and the company projected a first quarter loss. On that news the shares dropped another 25 % after drooping 20% yesterday. We bought some yesterday and we bought another round of shares today at $9.77. Carl Icahn may be buying alongside us.

Verizon continues its drop (it was $45) two weeks ago and we bought shares today at $36 and will continue to buy as it drops lower. The yield is 4.5%. We also added shares of other stocks we own in The Model Portfolio to smaller accounts, doubled our position in Talbot’s and bought back the Chico’s when retail began rallying. And we bought RF Micro Devices in our larger accounts. Because we doubled our position in Motorola we sold the Ericsson we purchased yesterday for a scratch.

The DJIA rallied in the final hour to close 300 points higher at 12272. The S&P 500 rose 28 points to 1338 and the NAZZ gained 25 points to 2316.

Breadth was 2/1 positive on the NYSE and 5/4 to the good on the NAZZ and volume was active with over 6 million shares traded on the NYSE.

There were 400 new lows on the NYSE.

The bulls pulled one out. Tomorrow is key.


22 January 2008


After two days of large moves lower in Asia and Europe, the Fed panicked this morning and lowered the Fed Funds rate and the Discount Rate both by 75 basis points in an emergency measure. The full text of the Fed statement was:

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.
The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.
Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.
In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.

With 1070 new lows on the NYSE in the early going this morning and the S&P 500 down 20% from its October 9 2007 high we decided to add some stocks to the portfolios when the DJIA and S&P 500 opened down 400/80 points respectively.

We would note that the 1990/91 scenario is playing out in that the end of the down move of that market was when the U.S. began bombing Iraq on January 17, 1991. Obviously the Fed has not begun bombing but they have taken a significant action and said they plan to do more. If they don’t do more then we presume markets will head lower. If they follow through with another rate cut at the end of the month then we think the markets should stabilize at these levels.

These purchases are a direct reaction to the Fed move. We have owned all the stocks before and the Model Portfolio will reflect the purchases later tonight.

European bourse reversed their down opening on the back of the rally in the U.S. markets and several closed over 2% higher on the day.

Oil ended down $1 at  $89.57. Gold gained $2 to $895. Treasuries were strong with the two-year at 2.08% and the ten-year at 3.64%.

We traded out of the four individual bank stocks we purchased this morning for a gain. We want to own the other stocks we purchases and we are going to keep the bank and financial index SPDRs that we bought in larger accounts as a more conservative way of participating in the financial and banking industry by spreading our risk. We remain interested in some individual banks but we are not yet ready to commit.

The market recovered from the early morning collapse but the lower close on the day shows that a goodly number on non-believers remain. We still have and will maintain a large cash position in our larger accounts and a reasonable cash position in our smaller accounts.

The DJIA closed down 122 points at 11971. The S&P 500 dropped 15 points to 1310 and the NAZZ lost 48 points to 2293.

Breadth was 3/2 negative on the NYSE and 2/1 negative on the NAZZ and volume was very active with over 5 million shares on the NYSE.

There were 1091 new lows on the NYSE and 968 new lows on the NAZZ for a total of over 2000 new lows on the day. That is a positive for the bulls.

The bears won the day.


18 January 2008

The stock and bond markets are closed Monday for the Martin Luther King holiday.


Asia was higher overnight except India which was down 3%. European bourses are higher and Gold is down $5 while Oil is flat at $90.50. No rate cut yet but stocks are going to open higher.

IBM reported better earnings and was positive going forward saying overseas business would offset a drop in U.S. business. IBM’s pre-report on Monday of good earnings to come Friday was partly responsible for the DJIA rising 165 points on Monday. In a reprise the DJIA is going to open 100 points higher today on the IBM and GE earnings reports.

GE reported in line earnings up 4% in the quarter and better than revenues and nary a word about any problems with its GE Credit portfolio of loans and equity. There was a sentence in the news release that GE Credit increased it loss reserves by $400 million but that was the extant of the news.

AMD took a $3 per share ($1.8 billion) charge but said it will earn money this year.

The mo-mo stocks are moving higher in pre-opening trading.

Bobby Fischer, the chess champion, died. He was our age and we remember following his exploits when we and he were young. He was a troubled genius.

President Bush who last week thought the economy was fine announced today that he wants urgent action on a fiscal stimulus package in the amount of 1% of GDP. He wants the package to focus on tax cuts and not government spending. Ah, now there is a new idea. When someone tells Bush what 1% of GDP is this weekend he will then formulate a plan to present to Congress.

On that news the DJIA want from up 100 points at 10am to negative territory.

GDP is about $14 Trillion and so 1% would be $140 billion. What is the problem? There were about 140 million tax returns filed in 2006. Write a check for $500 to every tax filer and spouse and $250 to each dependent on those returns. End of story.

There are a group of major banks reporting on Tuesday which will make for informative price action and may mark a temporary low.

European bourses indexes gave up the ghost after the U.S. markets headed south again. Oil closed at $90.50 and Gold was up $3 at $883. Treasuries were firm.

The DJIA closed down 65 points at 12095. The S&P 500 lost 10 points to 1325 and the NAZZ dropped 7 points to 2340.

Breadth was 2/1 negative and volume was active on the NYSE with over 5 million shares traded.

There were 606 new lows and 10 new highs on the NYSE. There were over 110 new lows on the combined NYSE and NAZZ. That suggests a rally soon.

The bears won the week.


17 January 2008


This morning Mother Merrill confessed to losing $14 billion on the junk she has been peddling over the last few years. U.S. markets continue to call the bottom though as each one of the financial and brokerage behemoths announces the final write-down and so stocks will open higher.

Uncle Ben is on Capitol Hill providing words of wisdom to lawmakers who are trying to figure out how to stimulate the economy. The Repubs want to make the tax cuts permanent and the Dems want to feed the middle class and Uncle Ben and his band of merry men and women want to kill inflation.

Asian markets were higher overnight except China and European bourses are also trading higher at midday. Gold has an $890 handle and Oil is trading at the $91 level.

Jobless claims dropped 21,000 to 301,000 for the latest reporting week and Housing Starts were down 14% in December with Building Permits down 8%.

The momentum stocks broke down the last two days but are bouncing higher this morning. We do think that they have to tank before a serious bottom will be in place.

Just after we wrote the above at 9am the mo-mo stocks turned on a dime and headed lower. The Philly Fed Manufacturing Index was (– 20) for December signifying substantial contraction in business in that Fed district and that may have had something to do with the reversal.

Also a couple of bond insurers had their ratings lowered and are off 50% in price which isn’t many dollars since they were already 70% off their highs.

The Investors Intelligence readings have 45% bulls and 27% bears. Those numbers suggest more work on the downside. Also the volatility index is muted.

How bad is it getting?

The white shoe law firm Cadwalader, Wickersham & Taft LLP, which has 775 lawyers on January 10 issued the following memo:

Unexpected and persistent volatility continues to disrupt sectors of the financial markets; and is affecting the capital markets, many of our clients, and certain practices within our firm. Cadwalader, Wickersham & Taft is responding to these market developments with a number of initiatives: Targeted personnel reductions will affect 35 lawyers in our US offices. Other strategies involve continued practice diversification, practice enhancements, and strategic redeployment of certain persons. These actions affect some talented lawyers who have made significant contributions to the firm. The firm’s partners and Management Committee have put a great deal of effort into mitigating the impact of the business environment on the firm, making today’s announcement even more difficult.

Our objective is as it always has been: to provide superlative client service, and astute legal counsel. We remain committed to those goals and the long-term strength and success of our firm.

European bourses closed lower following the morning lead of U.S. markets which reversed their up opening after one half hour of trading.

Gold ended at $879 and Oil was $90.26.

We found this commentary by one analyst of Mother Merrill’s huge write off humorous. We have highlighted the humorous part in case you don’t share our ironic sense of humor.

The total write downs were $18 billion gross, with $1.3 billion going through other comprehensive income in the bank and a $1.3 billion offset on a decline in liability valuation for a debt that Merrill owes. Performance outside of the losses in fixed-income was mostly fine and in line with trends that have been seen all year.

The DJIA lost 300 points to close at 12165. The S&P 500 dropped 40 points to 1333 and the NAZZ gave up 45 points to 2350.

Breadth was 4/1 negative and volume was active on the NYSE with over 5 million shares traded.

There were 425 new lows and 25 new highs on the NYSE.

Tonight and tomorrow are Triple Witching and Monday is a holiday. President Bush reveals his economic stimulus plan tomorrow and the Fed has a chance to pump the markets up by a surprise 50 bps cut. The markets didn’t rally in the last half hour as they did the evening before the last surprise (?) rate cut in September so maybe the secret is being better held.

The bears win another.


16 January 2008


We are back from our sojourn in Chicago. Oil has retreated to under $90 from $100 in the last week while Gold is $883 this morning after trading over $900 last Friday. Treasuries are firm as the markets await a Fed rate cut either interim meeting or at the end of the month.

IBM pre announced good earrings last Friday and the markets rallied. Yesterday night Intel had good earnings for the quarter and improved in many areas but the forecast going forward was muted and the shares sold off $3.

This morning the markets are higher and lower and higher on the back of yesterdays 250 point drop in the DJIA.

The S&P 500 is right at the important 1380 support number with 1364 the line in the sand. Most talking heads and gurus are calling for a rally because they say the markets are oversold and everyone is so negative. But if all the talking heads and gurus are positive do they neutralize all the peons who are negative so that the negativity may be taken as a positive.

We are in the agnostic camp. We will buy stocks gingerly that we hope are sold out and that we think have doubles or better over the next three years. We are not going to short term trade as a strategy. But that doesn’t mean we won’t trade out of a position if a better one presents itself.

While we were gone we sold Chico’s, Coldwater and Pier One and part of the Talbot’s. Our guestimate is that there will be time this spring to repurchase the shares at lower prices when the final fiscal numbers are announced in February/March. The retail foray was a costly fiasco but as issues become clearer we plan to slowly reenter that arena at lower prices.

We added GM and Dell back to accounts on Tuesday after we had sold them the prior week in the general push to cash that we made to clear the air and reduce risk. And today we switched Dell to Intel since Dell was down 50 pennies and Intel was down $3 in the overnight. We switched because the Intel numbers suggest that Dell may have more downside over the near term given that Intel is predicting a slowdown in U.S computer sales. Dell is cheap and we may be too cute but we think Intel from this level has the same upside (100%) for this level over the next three years as Dell and what we considered OK news and traders considered bad news has been at least partially factored into INTC’s price with the 30% correction over the last two weeks.

We are intent on reentering the markets slowly and will surely not soon become as invested as we were at year end unless a crash -which we don’t foresee- occurs.

We will earn back the funds we surrendered in the last three months. The timing of recovering those funds is the question not the actual recovery.

The Consumer Price Index rose 4% last year although the core CPI which governs Social Security payment increases rose only 2.4%.

Jason Goepfert at SentimenTrader.com said, "The latest readings highlight an odd calm that seems relatively pervasive despite the severe price declines. The latest survey showed a decrease in bullishness, but it was more a factor of folks switching to the 'correction' camp than the outright 'bearish' camp."

The S&P 500 closed down 7 points under 1380 at 1373. The DJIA closed 35 points lower at 12466 after being as much as 90 points higher in the afternoon. And the NAZZ lost 23 points to 2395.

Breadth was 5/4 positive and volume was active exceeding 4 billion shares on the NYSE and 3 billion on the NAZZ.

There were 380 new lows and 35 new highs on the NYSE and similar disparity on the NAZZ.

Asia closed lower big-time overnight and European bourses were also lower. Oil ended at $90.81 and Gold was $886. Treasuries gave ground but are still expensive.

The bears have been in control for a while.


9 January 2008


This is our last post until next Wednesday January 16. We are taking some time off to reflect.

We get e-mails:


You have probably heard from me more in the past 3 month than you have in 25 years. As you know I have been concerned about the market. I have also come to the conclusion that it is the market and not Bud Lemley. But that being said I am having a very difficult time seeing positive movement in the markets with all the numerous issues out there.

I would like to talk with you regarding the possibility of taking my accounts to all cash.

We sat primarily in cash for 7-8 months last year and after that things have just been going negative.

My feelings are that we are not going to see much improvement for at least the first quarter and maybe until the end of the second. I am down about 22% from our highs and still trending down. This is concerning because there is no good news.

Our business ahs been very difficult and we don't see that market improving until the first quarter of 2009. That is obviously not your problem but it is ours.

Therefore I need to be convinced as to why I should not go to the sidelines and wait for some positive movement in the market. I know there is risk in missing a move up in the short term, but the pace at which this market is moving, the improvement in performance will need to be sustained and significant to get back to where we were.

This has nothing to do with you but I am conservative and very concerned about the market and the economic outlook for the next 4-6 months.

Maybe you can give me some pearls of wisdom to make me see things differently.....

Let me know when we can discuss.


We respond:

Dave we had already moved to 95% cash this morning in all our accounts before we received the e-mail. 20% down is a stop out level for us. We had hoped their would be a rally off the 1400 level yesterday but when that level didn’t hold we resolved last night to hold our nose and sell this morning. When accounts move down 20% in three months it is an indication that the strategy being employed is not working. The swiftness of almost half the move down in 3 days last week did not give us our usual time to react.

We will talk.


Goldman Sachs’ chief economist began the trading day predicting that the country is now in a recession. The definition of a recession is two down quarters in a row of GDP. St Louis Fed president Poole was quoted on the wires as suggesting that the economy, while slowing, is doing well.

Stocks opened higher and we used that opening to our remaining positions and cut in half the last four retail stock positions. We are stopping ourselves out at down 20% from our highs on Halloween. The break down through 1400 by the S&P yesterday, plus many other technical breakdowns, suggest more work on the downside.

Against that negative scenario the fact that the NAZZ is now down for nine days in a row and the S&P 500 is down 8 of the last ten days. Such selling suggests that a rally is in the wings. How far and how strong that rally is will give new information.

We could wait for the rally to eliminate stocks but those that we are selling are probably not going to participate in a reflex rally. The momentum stocks will lead the rally.

We are now 95% cash. We will probably keep the 4 small retail positions in accounts. Since we have just suffered the loss of 20% of our money the prudent practice is to stay on the sidelines and let our head clear and decide on a course of action.

Asian markets were higher overnight and there are suggestions that money is leaving U.S. markets and heading over there. Europe is lower Treasuries are higher Oil is down $1.

This is an interesting article from the Telegraph. Don’t know whether it is true. http://www.telegraph.co.uk/

The market rallied in the final hour and the S&P 500 closed at 1409. The games continue.


8 January 2008


Last night in reviewing our sales and purchases and remaining issues we realized that the SPDR Large Bank Index (KBE) and SPDR Financial Index (XLF) allow us to buy the banks and financials down 30% from their highs last year without committing to any one bank or financial stock until the underlying problems become clearer. And so we are initiating positions today and will add to these SPDRs at lower levels to build the position we wish to own in the busted banking sector. We traded these SPDRs last fall at higher prices but we are initiating these purchases to own for the eventual recovery of the banking industry. These initial positions will be 5% of the portfolios or less which gives. BRE yields over 5% and the XLF yields over 3%. By the by, we just realized that GM yields 4% at its present price from a $1 dividend.

The SPDR Large Bank is composed of the largest money center banks. BankAmerica and Wells Fargo are 8% positions, Citi and Wachovia are 7% and JP Morgan, State Street, Bank of NY, PNC Bank, Northern Trust and SunBanks are all 4% positions with a bunch of other banks in smaller percents.

The SPDR Financial which has BankAmerica at 8%. Citi, AIG, and JP Morgan at 6%, Wells Fargo at 4% an Goldman Sachs, Wachovia, American Express in 3% position with Mother Merrill at 2% and other financials on down. XLF yields 3.5%.

We have been saying that Circuit City is either going broke or will trade at $20. None of the other beaten down stocks we own in retail is in danger of going broke. Moreover, we were chagrined by management’s decision to guarantee million dollar bonuses to key management personnel to supposedly get them to stay for the next three years to help the company through its turnaround. From a shareholder standpoint the guarantees should have been 100,000 shares of stock at $10 a share, with additional options at higher prices. We are sure those are also being cooked up too. But the cash bonuses when management owns no stock to speak of are a slap in the pocketbook of long suffering shareholders.

That was the long of it. The short of it is that we sold the stock today and are not looking back.

The NY Times reported that Countywide had fabricated some bankruptcy papers and that got the bankruptcy rumors going which cashed the initial turnaround Tuesday mooring rally to fizzle and send the DJI down 50 points after being 80 points higher in the early going. The up close in the DJIA broke the run of down days but sentiment is so negative now with Investors Intelligence bullish percent under 40% that there should be some kind of relief rally. If this morning's rally was it the markets are really sick.

About 1:30pm AT&T‘s CEO was reported to have said that broadband business was slowing. With that the share price dropped over $2 and the market measures that had been meandering between positive and negative began a steady move to the downside. At the bell the S&P 500 had dropped down through the all important 1400 level. Tomorrow should be interesting.

Maybe our travails were a harbinger of travails for the markets in general. We have restructured and reduced positions to those we want to own. Our trading positions are gone at what now look to be good prices. We are comfortably positioned although we hate to lose money as does anyone.

The DJIA lost 238 points today to 12590. The S&P 500 dropped 26 points to 1390. The NAZZ dropped 60 points to 2440.

Breadth was flat most of the day but ended 2/1 negative. Volume was active on the NYSE but still only moderate on the NAZZ.

The momentum stocks may need to crack big time before a sustainable rally can ensue. Some talking heads are making a big deal of Apple being down 25 point from its high. That is only 10% down after a parabolic 400% move. That hardly qualifies as a correction.

The bears remain in control. This market is wicked.


7 January 2008


We get e-mail:

Subject: thoughts and concerns


I understand the market has in recent months been a roller coaster.    I understand when the market goes down, so will the value of my accounts, and I have seen the value all of my investments go down, some (yours) more than others.  While I’m never happy to see them go down, I understand that is the risk I have taken in investing. But what I do not understand is why you seem to flip-flop your trading strategy overnight…. especially when the result is a rather large loss.  I have seen this occur in the past…and I have not expressed my concerns; today, I feel that I must.  On January 3, you said that you were “committed to the stocks we own” and that “we were investing in stocks that we thought would perform well over the longer term and we maintain that conviction.”   If you are “committed” to owning those stocks and “maintained that conviction” on Thursday, why sell at a loss on Friday?  Raising cash seems to be a convenient reason, maybe even plausible; if it weren’t a decision made just 24 hours later. Seeing realized losses at over 3% this early in the year indeed concerns me, but what concerns me more is what I view as a lack of commitment to your decisions.  My fear is that, although on January 4, you said you are “maintaining positions in the stocks we want to own for the longer haul”, come next week,  you will again sell off for yet more losses.  What do you consider the longer haul?   On December 18th you said "We think the stocks we own will all provide a 50% or more return over the next three years." While I have never known you to own any stock for three years....I understood that to mean that you anticipated owning those stocks for a longer than usual period of time in order to turn a profit.  If there was no “long haul” after your Dec. 18th statement….will there be one now?  No, I don’t like seeing the value of my account go down….but what I am even more concerned about is seeing what I perceive as your lack of confidence in your own decisions!!  Am I totally misinterpreting what you have said?


We Respond:

Dear Sandy:

Thanks for your e-mail. Our daily comments provide our daily thinking but I welcome the opportunity to expand on them. The markets and our thinking are continually evolving. We react to market and risk conditions. With the drop last week and especially Friday's drop the market measures have again returned to a point on a technical basis (down 10% from their July high) where they will rally or drop through support that has held 3 times this fall at 1400 on the S&P 500 and go down another 10% or….. By the way the prior two rallies from support made lower highs and that is an important negative indicator.

In order to weather what may come (the down) we raise cash. We have done this every year since 1987 when the markets reach a technically dangerous area. To raise cash we have to sell stocks that we think are values. We wouldn't have purchased them if we didn't. But to survive what may be a significant downturn we need to have sufficient cash in accounts.

And so we sell stocks that are the least attractive to our long term thoughts or are the least cheap of those we hold.

We have been active in accounts for all our years of investing and we understand that many may find this unusual. That is why we tell folks up front in all our material that we do this and it is also the reason we stopped accepting new accounts several years ago because we were no longer willing to "train" and/or disappoint new customers by our investing style. Open minded investing has served us well over the years and at times it has provided surperior returns. We are still substantially ahead of the S&P 500 on a ten year basis but that is small comfort when we realize that in the last two months account values have returned to the 2005 level effectively wiping out three years of work.

Our willingness to go with the flow and adjust our thinking (open-mindedness) on a daily basis saved us and our clients in 2000 and 2001 and 2002. When we expect a certain market behavior we state in our comments what we think it will be and why we are buying what we are. When the market don't act the way we expect we adjust our thinking. To our way of thinking investing is not ‘we are right and the markets are wrong’. The markets are always right and we are continually adjusting to market behavior. We have no interest in losing money but many of our best trades have involved taking losses.

Some examples to make our point. Today we sold National City today at $14.50 and Fifth Third at $23.25 both for losses. We bought them at year end, NCC at $16.50 and with Fifth Third at $27 because we thought they were values. National City had announced that it was writing off another $600 million and had also cut its dividend and so we thought the bad news was out. Fifth Third had raised its dividend which suggested that management was saying it had events and financials under control. We expected at least a pop higher after the year end.

That pop higher didn’t materialize. And NCC was reported to have another $500 million of questionable loans and Fifth Third was said to have home equity exposure that was unpublicized when we bought the stock. Both stocks are in the process of putting in lows but how low those lows will be is the question. When we decided to raise cash today we reasoned that NCC has about 50% downside risk as does Fifth Third. Their upside potential is not knowable yet because all their problems are not knowable. Moreover there is probably some more bad news for the banking industry in the next few months. There will also be some good news coming and so the stocks could trade higher. But we needed to raise cash and we chose to sell them now although if NCC survives we think both Fifth Third and NCC will trade at double their current prices five years out. With the many unknowns in their balance sheets and the lousy overall market action we decided to again get out of banking stocks and watch. We have traded both those stocks over the years at much higher prices when times in the banking industry were good. Those trades represented profits and losses but all occurred at much higher prices. And even though we are losing money on this trade we have not had the agony of riding NCC down from $34 where we sold last spring and FITB down from $42. The last sale in each last spring were for losses. They were good sales.

We have been in and out of Ford all year. We want to bet on the eventual recovery of the auto industry. But is so happens that GM has returned to a level that makes it cheaper than Ford. GM is much better quality. And so today we sold Ford and plan to maintain and increase our ownership of GM. GM may well move lower and if it does we will add to the position. GM has a market cap of $13 billion and sales of $187 billion. When the industry turns around they will earn $15 a share and trade at $100. GM sold the majority interest in GMAC last year while Ford still owns Ford Motor Credit.

We sold Micron even though we think Micron has a potential double from here. We need to raise cash and so we are going to concentrate on AMD and Alcatel Lucent. We sold American Eagle at $18.80 for a small loss. We think AEO can go to $25 but we also think is this type of market it can go to $13. And we own enough retailers.

Finally, our thinking is and has always been that stocks are a means to an end. The overall value of the account is the measure of our performance. We never get complaints about taking losses on individual stocks when accounts are rising in value. We mean that not as a reaction to criticism but to make the point that individual stocks are purchased and sold as component parts of a portfolio. If the overall account is down and we want to raise cash we will usually be selling losers. Actually selling losers and keeping winners is an old saw about making money in the market. Unfortunately at this time we have no winners.

These are examples of our thinking in raising cash. We have turned cautious. Losing money does that to us. Caution and taking losses have saved us over the years and it will save us now. We will regain what we have lost just not in the next week or the next month. The market never accommodates that way. But we do think that over the next five years we will succeed in replenishing and growing our capital. The important thing right now is to maintain and shepherd the capital we have.

Since you say you have other monies invested we wonder how those investments fared in the 2000 to 2003 downturn. We remembered then managers saying that they beat their market measures. When the market measures were down 40% over two years and their accounts were only down 35% we think that was small comfort.

We would again remind that the S&P 500 is down 10% from its high in 2000. The NASDAQ is still down 50% from that high. Even with the terrible drubbing of the past month our accounts are up 50% from their values in 2000.

We have been saying for the last two months that we want to own stocks for the longer term instead of for two or three week trades. We adopted the short term trading philosophy in 2000 to deal with the market conditions at those times. For five years we had excellent performance from that philosophy.

This year we decided to return to our philosophy of the 1980s and 1990s. That change was the result of our reviewing our activity since 2005 and realizing that if we employed a bit more patience and concentrated on value stocks we might improve our returns on investment.

But another part of our philosophy is to trade beaten down value stocks at year end with the hope of a rise in value at or after year end when selling pressure abates. Most years that strategy proves profitable and we then take profits and return to a more normal investment posture.

This year the confluence of those two strategies was not profitable. Not only was there no let up in the selling of beaten down stocks but value stocks in general continued to move lower. We could give many reasons in hindsight why this occurred but the reality is that it did.

To state the obvious, last week's drop in value surprised us and half that drop came on Friday. We were wrong, plain and simple. All the resolve and hope in the world won't make the markets do what we want them to.

We avoided the 2000 to 2003 downturn which saw a 35% drop in the value of the S&P 500. Unless clients were with us back in 1990 or 1987 they haven't ever experienced two down months in a row.

And so when you and other clients suffer the 10% drop in value on top of the 4% loss last year after being up 6% on October 31, 2007 we understand the concern.

When the markets befuddle us we have found it a good strategy to raise cash. That is what we are doing. We are maintaining positions in a core group of stocks that are too cheap to sell. Even with a few of those holdings we are selling a portion amount to lower exposure.

The FED may act and stocks may rally. We have no control over that and will react to market conditions accordingly.

We do know that there will always be opportunities to recover losses and make money if our capital is intact.

We will make it to the other side of the valley and prosper with the stocks we are holding and those we will add and subtract as market conditions warrant. We have had setbacks before and recovered. We will again for that is the nature of investing.

Again, we understand your concern. We have welcomed and appreciated your confidence over the years and we hope that our comments have addressed your concerns.



And more e-mail:


I was out of town last week and read you comment over the weekend on our very disappointing losses in the past weeks.

Here are some of my gut feelings on your comments. You appear to be saying that we have failed in our overall objectives for the last three years.

This move to a new buy and hold strategy seems to conflict with your response to my letter in mid-November where you wrote:

You rode out that bear market at another firm with some of your funds. Those funds were invested in a buy and hold account seeking long term gains and you would know better than we how difficult it was to hold those funds and trust the buy and hold philosophy. We had a few discussions about what should be done with the funds in 2003 and we told you at the time that if you transferred them to us we could not run the buy and hold money with the idea of making up the losses. That you eventually moved the funds from the buy and hold strategy might suggest that buying and holding in this era of volatile market action is more difficult and less rewarding than our timing approach has been.

Your statement that you were buying stocks with lousy sales and earnings in a market that appears to buy only on sales and earnings.....is concerning. With our positions in consumer driven companies having terrible years end results, to me would not reflect investments that would have shown a year end jump. In my trips to the mall to do Xmas shopping, it was obvious that thing were going to be bad. However the Apple Store had lines that required up to 45 minutes just talking to someone. The sale of Blackberry's is growing like gang busters and is expanding outside of the business customer and opening in international markets. These stocks have weathered the volatility with outstanding products.

So I do recognize that even in bad times it seems that the winners are the companies that find the way through innovation and product dominance to perform very well in the markets.

With the dynamics of today's market you comment....we are left to watch and wait..... Are there no other vehicles that operate similar to current trading programs, whether they are mutual funds, index funds, international funds, etc.? You have invested vehicles like these in the past and have seen success. i.e. QQQQ, Diamond, SPDR, etc. Have they been successful over the past three years?

My quick overview of my accounts show me that if you expect 5% annualized return on our current stocks for the next three years, We will end ahead about $43,000 after making up for the losses of these past few weeks after three years.

I know we are not alone. But I am not sure what your strategy is going into next year. Between the lines of your comments, there seems to be an uncertainty on the strategy of the future. As all investment organizations say... past results cannot be any indication of the future performance.

As we age, these swings are tougher to take and cause anxiety. When you talk in dollars instead of percentages, it is even more concerning......

I certainly don't mean to ramble, but as I read your comments I felt you were less confident in the strategy of investing in a changing market than you have ever been before......

With that said I am sure you will figure this whole thing out......


We respond:

Hi Dave:

Many of your questions/comments were addressed in the first e-mail response. But let me address two that may not have been.

Buy and hold also includes some trading. What we meant was that we planned on buying beaten down value stocks to hold for the longer term instead of being totally short term oriented. But over the years we have also made money as beaten down stocks popped after selling pressure abated. Late 2000 and 2002 are prime recent examples. Even our down year in 2005 wouldn’t have occurred if we had sold the Christmas rally December 31, 2004 when we were up 9% basically on year end buying instead of waiting greedily for more in the new year. Instead the rally quickly dissipated in 2005 and left us down 8% and it took the whole year to get back to a negative 3% for the year. Even in 2007 (this just past year) we were up 8% on October 31 by buying beaten down stocks in September and October. We wanted to be up 10%.

Secondly, Apple at 44 times earnings and RIMM at 53 times earnings are now cult stocks. Their parabolic charts are caution causing. They really are consumer stocks too. In 2000 we bought Gymboree at $8 and sold it at $5 when we feared they would go bankrupt. It is now trading at $30. We have had good luck trading beaten down retailers when they are out of favor such as The Gap and The Limited in the 1980s and Abercrombie in the 1990s. We have had a small success trading J Crew recently but its P/E gives us pause. We have always made our money buying out of favor stocks. We looked at Apple and missed an opportunity when it was $6 in 2002. But we are sure we would have sold at $20 or $30. Steve Jobs did. Then he got himself some options at unfair prices to replace that stock. Apple and RIMM have good products but we never have purchased stocks at those P/Es.  A few times we have been lucky enough to own such stocks before they became cult issues but then we always sold too soon.

Our strategy over the next year and two and three is to survive and make money. The 5% per year figure is much less than we expect to earn. But unlike some of the talking heads we are forbidden by the SEC from making predictions on our performance in the future. We hope it will be satisfactory though since we, ourselves, are living on the money we make in the markets with our invested funds. And we sure got off to a bad start this year.



We found this nice essay on two stocks we own and present it for our clients’ information. By the way the above comments were written last month when CWTR was at $8 and CHS was at $11.

From Morningstar.com

Two Off-the-Rack 5-Star Stocks Wednesday December 19, 7:00 am ET

By Michelle Chang

In this challenging retail environment, retailers have been luring customers into stores with heavy promotions and markdowns. This is happening particularly in women's apparel, which has been hit not only by macro headwinds facing consumers, but also by a lack of compelling merchandise. These recent events have driven some retailers' stock prices down, creating what we see as a great buying opportunity for two specialty retailers: Coldwater Creek and Chico’s. Put simply, we think the market is overlooking Coldwater Creek's future growth prospects and Chico's loyal customer base.

The macro issues--like declining housing prices, rising energy costs, and tightening credit conditions--are largely out of retailers' control. However, merchandising missteps have compounded the problems for apparel retailers that target baby boomer women. On its analyst day in November, Coldwater Creek described a lack of fresh designs in women's apparel. Other specialty retailers have echoed similar sentiments, taking full responsibility for missing fashion trends. Our view is that Coldwater Creek and Chico's will reconnect with their consumer in the long run. While we don't expect this to happen overnight, we do believe that the retailers' long-term prospects remain bright.

Coldwater Creek Still Has Room to Grow

Let's first take a look at Coldwater Creek. To justify the current stock price, we'd have to make a number of pessimistic assumptions in our discounted cash-flow analysis. For example, we would need to assume that the store base stays at around 300 locations, with same-store sales growth in the low single digits over the next 10 years, as compared with the mid-single-digit growth we've seen over the past 10 quarters. We'd also have to project average long-term operating margins just below the 8% the company delivered from 2004 to 2006.

We believe this is an unlikely scenario, and we're convinced that Coldwater Creek has plenty of room to grow. Thanks to the company's catalogs, which have been around for more than 20 years, we think that brand familiarity and loyalty still exist. Its store base of 300 locations is only half-built, in our opinion. Not only do we like the growth prospects, but we also like the opportunities for margin improvement as the store base expands and matures. Management has targeted mid-teens operating margins in the long run, and while this isn't immediately achievable, we believe that the company can reach this goal in five years through a combination of gross margin improvement and operating leverage. We think the firm can expand gross margins by increasing the amount of merchandise that is directly sourced. Additionally, Coldwater Creek can gain operating leverage by spreading fixed costs over a larger sales base as the chain grows.

Devoted Customers Boost Chico's Long-Term Prospects

Although we think that the market is overlooking Coldwater Creek's growth prospects, we also believe that the market is ignoring Chico's presence among its loyal fan base. We have faith in this established retailer's ability to lure its customers back into stores. To reach the current share price, we'd have to assume in our discounted cash-flow analysis that the company slowed its average annual square footage growth to the low single digits over the next 10 years, and that the Soma brand shut down completely. Additionally, we'd have to project that the company's operating margin remained in the low double digits over that same time frame, down from its historic levels north of 20%.

We don't think this is a likely scenario. We recognize the company is maturing and its high-growth days are probably over. However, we believe it can still achieve modest growth. We think Chico's can increase its annual square footage in the mid single digits over the next 10 years, down from around 20% over the past three years. In our opinion, Chico's namesake chain can support an additional 100 stores on top of around 640 current locations. Also, we think its two newer chains, White House | Black Market and Soma, are viable concepts with ample room for growth. We expect the number of White House | Black Market stores to double over the next 10 years, and we think Soma will nearly triple its store base over that same time period. While the promotional environment and merchandising mishaps will weigh on Chico's performance this year, we don't think these issues will persist indefinitely. We believe that same-store sales will return to positive levels, helping to restore operating margins to the mid-teens in the next five years.

Because both Coldwater Creek and Chico's have strong balance sheets with no debt, we believe that they can weather the current storm. Additionally, we remain confident in the favorable long-term demographic trends in the baby boomer segment. Although the next few quarters may be rough, we think the market will more accurately reflect these companies' future prospects when conditions improve and shoppers return.

And that is the end of our comments for the day. We raised cash on the early morning pop in the markets and the U.S. markets closed higher with a tepid rally in the last half hour. Asia and Europe had closed down mostly over 1%. And tomorrow is another day not guaranteed to anyone but to be savored when it arrives.


4 January 2008


Don’s words from 1990-91 “it’s too late to sell, we have to buy” keep running through our minds. With accounts down 15% from the top on October 31 we understand clients are worried. Such down moves have not occurred in our accounts in recent years although they were the norm back in the pre-computer era. But at that time portfolios were priced on a yearly basis and so there was room to let up/down movements occur without folks feeling that their life savings were going up in smoke the only folks who knew the daily values of their hand figured accounts were margin traders receiving margin calls.

All through the 1980s and 1990s were content and profited from that investing approach. In 2000 we changed our investment style because we thought the market s were ridiculously overpriced and went to cash. By lucky in and out trading for the next three years we not only avoided the calamitous sell off but profited handsomely. We continued in and out trading for the next five years but this fall we decided to return to buying and holding out of favor stocks for eventual recovery.

As we mentioned last month we decided in the fall that we wanted to again try to make money as opposed to avoid losing money. We know this mostly invested approach is a change from the way we have handled moneys for the past seven years, but the reality is that for the last three years our market timing approach has failed to provide the returns we want to earn. And so we returned to the way we ran money until 2000.

In September and early October we loaded up on depressed value stocks and our accounts were up 8% on October 31.

Then the bottom fell out of our value stocks and we scrambled to make sense of what was occurring. We realized that we were reacting to the daily pricing of our accounts rather than trying to buy to make money and so we resumed our purchase of value stocks into year end with the thought of a late December and/or early January move higher that would allow us to profit and take a little off the table.

There was no pop at year end or in the first week of this year and given the action in the markets this week there is the potential for a more than 10% correction. And so we have reluctantly taken losses to replenish our cash hoard by reducing our stock holdings today while maintaining positions in the stocks we want to own for the longer haul.

To make money involves risk and initiating positions in broken down stocks is the risk part of the cycle. Only one person ever buys at the bottom- or sells at the top.

We believe that the stocks we own will provide a much more than 5% annualized return to accounts over the next three years or less. And all our accounts have enough money in them for the usual client withdrawals while allowing us to maintain substantial stock holdings in the value stocks we usually own for recovery.

The ability to see the value of the accounts on a daily basis makes value investing in a down market a difficult proposition. Many clients are seeing value movements in their accounts of several hundred thousand dollars which is more than they originally invested with us many years ago. When the $100,000 move was to the upside in October and previous years that was OK because that is what we, as money managers, are supposed to do. But since then the moves have been to the downside and that is hard to take. We understand that. It is hard for us to take in our own accounts. But we think the return potential over the next three years will justify the present pain.

While we did not expect the more than the markets drop in account values early this year, we think we understand the rapid decline in the stocks we own to fire sale valuations and we think it is temporary (of six months or less duration). It has to do with lousy sales and earnings at these companies which keep institutional buyers from wanting to own them and only value investors (a dying breed) interested in owning them. At some point even value investors have to stop buying to not exceed reasonable investment parameters. Enter short sellers and panicked longs and the free fall ensues.

In the olden days before the up tick rule was removed and before the hedge funds ruled the markets, traders would short stocks that they thought were in danger of bankruptcy. That is no longer the case. Hedge funds that smell blood and momentum traders short out favor stocks with abandon and push them down to ridiculously undervalued levels not because they think the companies are going broke but because they want to profit from the short term down moves they help to create by their huge selling. And we are left to watch and wait for the eventual recovery.

The economy is currently in trouble. At some point several or many months out the markets will decide that the future is brighter than the past and a rally in our stocks will occur. Until that time we are going to maintain our exposure while adjusting the individual stocks we own as their prices ebb and flow in the market place.

We did some adjusting today selling Amgen at a loss but buying Intel down a greater percentage, selling GE at a loss and buying the SPDR Financials down more and which are on a new low and yield 5%, selling Xlinx for a loss and buying Dell down more, selling ERIC for a loss and buying Motorola down more and selling NYT for a gain and buying American Eagle Outfitters. We also eliminated Palm for a small profit/loss and bought Intel with the proceeds to improve quality.

The Employment Report was a bummer with only 18,000 jobs supposedly created. The number is meaningless because in an economy of over 100 million jobs there is no way anyone can come up with a reasonable number without a margin of error of at least 1%. That margin of error would be 1 million jobs.

Asian markets were mostly higher overnight except Japan which was down 4% after opening for trading after a one week holiday.

The dollar is lower on the Employment Report, bonds are higher, Gold was lower but revised to a gain on the number and Oil is trading with a $98 handle.

European bourses closed 2% and more lower on Friday as did Mexico and Brazil.

Talbot’s announced today an exit from its Kids and Men’s concept shops as well as lower-than-expected sales for its namesake and J. Jill chains. The closures will result in the loss of 78 stores and 5% of its total work force by September and is a part of a strategic business review announced in October that is expected to end in the first quarter of this year. TLB said that while it expects total revenue to drop $100 million on an annualized basis due to the cutbacks, the move should boost earnings by $13 million to $15 million or 15 cents to 18 cents a share, on an annualized basis. Quarter-to-date sales, the company said they were "trending below" expectations at its Talbot’s and J. Jill brands.

The lousy sales number plus aggressive shorts is why the shares are at $10. A Japanese retailer owns 50% of TLB. When the company turns things around it will have a $30 share price. It sold at that price a year ago.

At noon down volume is ten times up volume for the day but breadth is only 4/1 negative so there is still some selling to go on this down leg.

It is 1pm on Friday and there has been no comment from the Fed and also there has been no rally attempt. This is the third time down for the markets to these levels since August and given the seven days down out of the last eight we are leery of Monday’s opening. And so we are selling some shares to have cash in accounts in case the 10% down on the major measures from the July high is breeched next week. We think that is the prudent thing to do. All these sales represent losses of about 10% to 15% on the companies. We sold Walgreen, Starbucks, Whole Foods, Sallie Mae, Crocs, and Liz Claiborne and Williams Sonoma. These sales reduce our retail exposure while still allowing us to hold the stocks with the greatest percentage upside potential.

Oil ended down $1.42 at $97.76. Gold finally finished lower down $6 at $860. Treasuries gained with the two-year at 2.73% and the ten-year at 3.86%.

The DJIA lost 256 points to close at 12800. The S&P 500 dropped 35 points to 1411 and the NAZZ was off 100 points at 2502.

Breadth was almost 4/1 negative on the NYSE and NAZZ and volume was active on the NYSE and moderate on the NAZZ.

There were a combined 1000 new lows on the NAZZ and NYSE.

The bears won the day and the week.


3 January 2008


Asian markets were lower overnight as is Europe at midday. Treasuries have a bid, Oil is just under $100 and Gold is up another $10.

Our accounts continue to take it on the chin and it isn’t fun to watch. We remain committed to the stocks we own. The present market is not favorable to out of favor value stocks and our concentration in tech and retail is problematic over the short term. We have accounts fully invested and so the moves down in the markets are being reflected more so in the higher beta stocks we own.

We take comfort from the fact that if we had stayed in cash from August 31 until mid December and then sold it and purchased the package of stocks we now own we would still be out the same amount of money. The only difference is that accounts wouldn’t have been up 7% to 10% on October 31.

We have replayed our actions and the markets’ actions of the last few months in our minds more than a few times in the last weeks and we still find ourselves doing the same thing. Obviously over the short term those actions have cost us money. At the time we said we compared our buying to catching falling knives. But we also said that we were investing in stocks that we thought would perform well over the longer term and we maintain that conviction.

This action is a change from our actions of the last seven years and is a return to our 1980s investing style. We think market conditions warrant the change in approach and we expect time to reward us for our pain if we have patience. It is not pleasant for us to see the accounts drop in value. The last time this occurred was in 1990 and the dollars involved were about 20% of what they are now. But investing involves risk- at least over the short term. There are one or two stocks in portfolios that represent some very small survival risk but other than those which are less than 5% of portfolios the companies we hold have been around for a long time and will survive any recession.

Markets are more volatile now and that is a fact of life we have to live with. Also, we basically avoided the 2000 to 2003 meltdown and so have no institutionalized memory to help us deal with the markets going against us. There is value in the stocks we own and that value will eventually well reward our immediate pain.

Shares of Crocs rose on Wednesday, after an analyst said the company is a "top pick" for 2008 based on strong sales and new style introductions. Piper Jaffray analyst Jeffrey P. Klinefelter said in a note to investors on Wednesday that channel checks indicate Croc's "Mammoth" fleece-lined brand was sold out across retail channels.” Our sales checks across multiple domestic and international markets suggest sales of Crocs branded footwear remain solid," he wrote. However, Klinefelter said inventory should remain high as the company ramps up overseas sales. "Based on significant capacity increases in Europe, sales growth forecasts, new door additions, and new style introductions, we anticipate (year-end) inventory to be up in excess of 200 percent to the prior year and similar to the third-quarter level," he wrote. "We think a more robust infrastructure to cater to in-season demand across multiple styles as well as further variation in deliveries by channel create the need for ready back stock of classic items." He said Crocs was a top pick in 2008 and said estimates appear appropriately conservative. "We favor Crocs shares for potential price appreciation during 2008," he wrote. He reiterated a "Buy" rating and $82 (we sure hope so) price target.

We bought a few shares of Walgreen when WAG dropped $2 per share on less than December sales. In a normal market-whatever that is- the drop would have been 50 cents but this market is exacerbating reactions.

We also switched our Hershey holdings at a scratch to Intel which is down $3 in the last two weeks to the $24 range.

We are reducing our retail exposure slightly since there was no new year pop in that sector by selling Cabela’s for a scratch 30 pennies profit and Home Depot for a $1 loss. We also sold Pfizer for a scratch to get a bit more cash in accounts. We are not selling to buy anything. Pfizer was a play on a New Year’s rally that didn’t. Hopefully we are wrong and the rally arrives since we own enough volatile shares to participate in a broad rally.

Jobless claims were down 21,000 to 336,000 in the latest reporting week. Mortgage applications were down 11% in the latest month.

Oil ended at $99.10 down 52 pennies. Gold gained $5 to $865. Treasuries were slightly better on the day.

European bourse indexes closed mostly lower and while Mexico and Brazil indexes were slightly higher.

General Motors December U.S. auto sales dropped 5%, compared to the expected drop of 5.6%. Ford reported sales dropped 9% compared to the expected drop of 7.8%. Chrysler sales dropped 3% and Toyota's sales were down 1.7%.

The DJIA gained 15 points to 13060. The S&P 500 was unchanged at 1447 and the NAZZ lost 10 points to 2600.

Breadth was 5/4 positive on the NYSE and 2/1 negative on the NAZZ and volume was light.

There were 300 new lows and 60 new highs on the NYSE.

The bears won the day and tomorrow morning brings the monthly Employment Report which will provide the trading news for the day.


2 January 2008


Asia was mixed overnight and Europe is also. Gold is $10 higher approaching $850 in the early going and Oil has a $97 handle. Treasuries are firm.

National City said on Wednesday it will cut its common stock dividend 49 percent and eliminate 900 jobs as it stops offering mortgages through brokers. The company also said it plans to raise more capital to help it cope with deteriorating credit markets, and hired Goldman Sachs & Co as an adviser. Chief Executive Peter Raskind said in a statement National City needed to take "aggressive steps" to cope with disruptions in the mortgage, housing and credit markets.

These are the dopes that spent $1 billion repurchasing shares at $38 in the spring of 2007. But that is old news and new problems are being addresses. They fessed up to the big write-down last month and the dividend cut has the rate at 5% with $16 price. The shares are trading below $16 this morning as more short sellers pile on and maybe a few pop over the New Year traders are abandoning ship. Anyone who didn’t know this was coming shouldn’t own stock. We are holding. The problems are known and maybe Goldman will figure a way to sell NCC to Wells Fargo.

The Model Portfolio and most accounts finished the year down 4% while the S&P 500 was up 5% with dividends. We would like to have had a better return but the market was extremely negative on our type of value stocks. We would guess this kind of action goes with the territory now but we aren’t discouraged and expect most of the companies we own to treat us well over the next 24 to 36 months. We are going to need patience to let the stories develop.

Stocks slumped on the first trading day of the new year after a government report showed manufacturing heading into a contraction.

Major indexes opened unchanged but swung to the negative side on the manufacturing data. The Institute for Supply Management said its index of national factory activity fell to 47.7 in December from 50.8 in November, below economists' median forecast for a reading of 50.4.

A reading below 50 indicates contraction, and today's results represented a four-year low for the ISM reading. Investors sent the Dow to triple-digit losses on the manufacturing news.

Meanwhile, a government report on construction spending showed an unexpected gain of 0.1 percent in November despite ongoing housing market woes that pushed private home building down 2.5 percent.

$100 Oil and there are no lines and no shortages. The DJIA is down 200 points at 11:15am.

BankAmerica downgraded Intel, AMD and Texas Instruments. Bear Stearns downgraded Starbucks.

Gold gained $21 to $860. Oil closed up $3.60 at $99.58. Treasuries were strong with the two-year back down to 2.86% and the ten-year at 3.89%. European bourses closed 1% to over 2% lower as did Mexico and Brazil.

The DJIA lost 220 points to close at 13050. The S&P 500 dropped 20 points to 1448 and the NAZZ was down 42 points at 2609.

Breadth was 5/4 negative on the NYSE and 2/1 negative on the NAZZ and volume was light.

There were 230 new lows and 60 new highs.

The bears remain in control in the New Year.




























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For those folks who have accounts with us, you may now go to: https://eview.mesirowfinancial.com and fill out the account information and view your accounts online. If you have trouble filling out the form, or in getting online, call and we will help you with the process. NASD regulations require the eview site to be secure. Thus your password must be changed every ninety days. You will be prompted to make this change when needed.

For information on Mesirow SIPC and Excess SIPC protection SIPCmesirow.pdf.

For those clients of LY& Co and other interested persons the Quarterly Report on the routing of customer orders under SEC Rule11Ac1-6.
For Quarter Ending 09/30/2002 For Quarter Ending 12/31/2002 For Quarter Ending 03/31/2003
For Quarter Ending 06/30/2003 For Quarter Ending 09/30/2003 For Quarter Ending 12/31/2003
For Quarter Ending 03/31/2004

All future SEC Rule11Ac1-6 Quarterly reports may be found by visiting the diclosures at LY& Co Clearing Broker Mesirow Financial at: http://www.marketsystems.com/reports/1-6/msro/.

Annual offer to present clients of Lemley Yarling Management Co. Under Rule 204-3 of the SEC Advisors Act, we are pleased to offer to send to you our updated Form ADV, Part II for your perusal. If any present client would like a copy, please don't hesitate to write, e-mail, or call us.

Summary of Business Continuity Plan

309 W Johnson Street Apt 544, Madison, Wi 53703 312-925-5248
The factual statements herein have been taken from sources we believe to be reliable but such statements are made without any representation as to accuracy or completeness or otherwise. From time to time the Lemley Letter, or one or more of its officers or employees, may buy and sell as agent the securities referred to herein or options relating thereto, and may have a long or short position in such securities or options. This report should not be construed as a solicitation or offer of the purchase or sale of securities. Prices shown are approximate. Past performance is no indication of future performance.