Bud's Poem Page

We are posting on a daily basis again.

Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703
Bud: 312-925-5248       Kathy: 630-323-8422

We will be traveling and so the next post will be on Monday February 2.

30 January 2009


Model Portfolio Value As of 30 January 2009

$ 424,640

29 January 2009


Model Portfolio Value As of 29 January 2009

$ 440,898

28 January 2009


Model Portfolio Value As of 28 January 2009

$ 471,046

The word is out that the Obamaites are going to create a good bank/bad bank entity that will purchase the unknowable stuff on the books of major banks. That rumor has the markets higher bank stocks are up on short covering. Asian markets were mildly higher overnight and European bourse indexes are up 3%. Gold is down at $888 and Oil has a $41 handle in the early going.

Wells Fargo reported a $3 billion loss. But they announced it on a day when the markets don’t’ care and the share price is higher. We will participate with our XLF holding which is 9% WFC.

By the by, we miswrote the other day about GE’s credit rating. It was S&P that left the AAA rating alone. Moody’s announced last night that it isn’t so sure and may drop the Aaa rating. And so it goes in the land of OZ.

The Fed announcement from its January meeting is at 1:15pm today. Stocks are higher out of the gate but the rise is tempered by the Fed announcement and the reality that even a good bank/bad bank is a rumor which is a long way from a functioning reality.

We placed a good chunk of money in AT&T at $25.75 and a 6% yield. It is one of the few stocks lower today as some analysts nitpick AT&T’s earnings report.

Investors’ Intelligence had 34% bulls down from 38% and 38% bears up from 37%.

The guys and gals who lost billions need to be paid bonuses to keep them form leaving?

From http://tpmmuckraker.talkingpointsmemo.com/

AIG, the insurance giant that was essentially nationalized in September, has confirmed to the Associated Press that it's paying bonuses to employees who sold credit default swaps -- the very deals that helped cause millions in losses, leading to the company's collapse.

According to news reports, the bonuses amount to $450 million -- or $1.13 million for each of the 400 staffers in the financial products unit.

In a statement, an AIG spokeswoman confirmed the bonuses, but not the dollar figure:

We adopted and disclosed this contractual retention program months before the government provided support to AIG. We did so because it was clear, given the market environment that we would need to retain employees to manage the complex issues arising in our Financial Products business, which we are now unwinding.

Banks led a rally in Europe, as nationalization fears receded and investors hoped that bad assets would be taken off the books of U.S. peers. London's FTSE closed up 2.4%.

The Fed said they will do everything in their power to help the banks and try to keep the recession from deepening. The DJIA was up 200 points when the Fed spoke and with an hour to go it is up 180 points.

Oil closed at $42.24 and Gold was down to $885.

The SKF traders tread to knock stocks down but couldn’t do it and the major measures closed on their highs of the day.

The DJIA was up 200 at 8375. The S&P 500 gained 28 to 875 and the NAZZ jumped 50 to 1555. Breadth was 4/1 positive and trading was moderately active and the biggest of the year.

The Fed and rumors gave the day to the bulls.


27 January 2009


Model Portfolio Value As of 27 January 2009

$ 439,228

Stocks opened higher as lousy earnings reports continue. But entering the second hour of trading the major measures are visiting the dark side. Volume is punk and there isn’t much conviction in the trading. Asian markets were higher overnight with Japan up 5% and India up 4%. European bourse indexes are in the red. Oil has a $46 handle and Gold is back under $900 in the early going.

We sold the SPDR Bank (KBE for a scratch profit and added 60% of the proceeds to SPDR Finance (XLF). We have significant exposure in the financials with the XLF. The XLF offers more diversification (insurance and credit cards as well as banks) and while it is not down quite a much as the KBE in the last month (-30% versus -40%) both are down 70% over the last year. We expect superior returns over the next three years from financials as they work through their problems but as we realized we are not risk/reward ready to maintain ownership of individual issues through bad news and so we have defaulted to the XLF for our financial ownership

From WSJ:

U.S. consumer confidence levels again plumbed the depths in January, as households fretted over the current and future state of the economy. The Conference Board reported Tuesday that its January consumer confidence index fell to a historic low for the survey, at a reading of 37.7, from the revised 38.6 seen in December. Economists had expected a modest rebound, and had predicted the January index would come in at 39.0.

Earlier, the S&P/Case-Shiller home-price indexes showed home-price declines accelerated in November. The indexes showed prices in 10 major metropolitan areas fell 19.1% in November from a year earlier and 2.2% from October. The drop marks the 10-city index's 14th-straight monthly report of a record decline. In 20 major metropolitan areas, home prices dropped 18.2% from the prior year, also a record.

From the AP:

The AP's review reveals one of the ironies of the bank bailout: The same executives who were at the controls as the banking system nearly collapsed are the ones the government is counting on to help save it.

Even top executives whose banks made such risky loans they imperiled the economy have been largely spared any threat to their jobs, as Washington pumped billions in taxpayer money into the companies. Less fortunate are more than 100,000 bank employees laid off during a two-year stretch when industry unemployment nearly tripled, bank stocks plummeted and credit dried up.

For the rest of the story go to: http://www.talkingpointsmemo.com/news/2009/01/ap_impact_us_bets_on_bank_execs_to_fix_this_mess.php

From Bloomberg http://www.bloomberg.com/apps/news?pid=20601087&sid=aq1MhEC7B6R8&refer=home :

Harvard is freezing salaries at the Kennedy School of Government and the Faculty of Arts and Sciences to offset endowment losses, while the Stanford Graduate School of Business fired 49 staff members, about 12 percent of its non-faculty workforce. (planning ahead?). Brandeis University, in Waltham, Massachusetts, plans to close its Rose Art Museum and sell its more than 6,000 artworks to offset endowment losses, the Journal said today.

North American college endowments lost an average of 22.5 percent on investments from July to November and the declines probably will get bigger after returns on private equity and real estate are calculated.

The funds shed $94.5 billion in asset value in the five months ended Nov. 30, according to a study released today by Commonfund and the National Association of College and University Business Officers. In the same period, the Standard & Poor’s 500 Index fell 29 percent, including reinvested dividends, while non- U.S. stocks dropped 37 percent.

Harvard University, whose $28.8 billion endowment is the biggest in higher education, and Ivy League rival Dartmouth College have yet to disclose the value of alternative investments such as buyout funds and property, which take longer to price because they aren’t traded on exchanges. These assets probably dragged down returns further, meaning less income for schools that are already cutting budgets.

European shares finished mixed, as investors weighed losses in the insurance sector against a confirmed outlook from Siemens.

Oil ended at $42 down $3.75 and Gold lost $12 to $897.

Stocks held their gains all day in desultory trading. The DJIA gained 60 to 8175. The S&P 500 was up 10 at 845 and the NAZZ gained 15 to 1505/ Volume was slight and breadth was 2/1 positive.

The bulls held on some strength in bank stocks.


26 January 2009


Model Portfolio Value As of 26 January 2009

$ 428,291

Caterpillar is going to lay off 20,000, Sprint 6,000, Starbucks will furlough another 1,000 and Home Depot is letting 7,000 folks go. With that news the market should be lower but stocks opened a bit higher although the gain is certainly tentative. We would note that all the recent dour economic news has been accompanied by the added emphasis that the news is the worst since 1982 or 1991 or 1974. Looking back at those three years we would note that all three represented market and economic troughs from which the economy and the markets eventually recovered.

To counter the bad employment news Pfizer is going to pay $60 billion for Wyeth. We don’t know if that is good or bad. Also GE’s Aaa ratings were affirmed by Moody’s. The ratings’ agencies have been so wrong it is amazing that anyone cares. And the reality is that GE can’t borrow at Aaa rates except when it uses the government guarantee.

Gold has broken above $900 for the first time in a while and Oil has a $47 handle in the early going. Asian markets were mildly lower overnight. European bourse indexes have a bid on news that Barclay’s is not going to take any Central Bank of England money and will report record revenues to offset a large write-down.

Jim Bianco notes that if you mark all the financials in the DJIA down to 0 that would represent a 300 point drop in the DJIA and still leave it above the November low.

We are not as upset as the talking and writing heads and Congress that the banks that received TARP funds are not lending money hand over fist. Wasn’t reckless lending what cause of the problem? Moreover the lack of lending probably has more to do with folks not wanting to borrow than banks not wanting to lend. The psychology has to change before the economy will.

Gretchen Morgenson had an interesting column on Credit Default Swaps in the Sunday NYT:

Paul Krugman in the Monday NYT on the Stimulus Package:

“As the debate over President Obama’s economic stimulus plan gets under way, one thing is certain: many of the plan’s opponents aren’t arguing in good faith. Conservatives really, really don’t want to see a second New Deal, and they certainly don’t want to see government activism vindicated. So they are reaching for any stick they can find with which to beat proposals for increased government spending.

Some of these arguments are obvious cheap shots. John Boehner, the House minority leader, has already made headlines with one such shot: looking at an $825 billion plan to rebuild infrastructure, sustain essential services and more, he derided a minor provision that would expand Medicaid family-planning services — and called it a plan to “spend hundreds of millions of dollars on contraceptives.”

But the obvious cheap shots don’t pose as much danger to the Obama administration’s efforts to get a plan through as arguments and assertions that are equally fraudulent but can seem superficially plausible to those who don’t know their way around economic concepts and numbers. So as a public service, let me try to debunk some of the major anti-stimulus arguments that have already surfaced. Any time you hear someone reciting one of these arguments, write him or her off as a dishonest flack.

First, there’s the bogus talking point that the Obama plan will cost $275,000 per job created. Why is it bogus? Because it involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years.

It’s as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years, then divide it by the number of lunches provided in just one of those years, and assert that the program was hugely wasteful, because it cost $13 per lunch. (The actual cost of a free school lunch, by the way, is $2.57.)

The true cost per job of the Obama plan will probably be closer to $100,000 than $275,000 — and the net cost will be as little as $60,000 once you take into account the fact that a stronger economy means higher tax receipts.

Next, write off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.

Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.

The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it’s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created (see the previous fraudulent argument) — because a large fraction of any tax cut will simply be saved.

This suggests that public spending rather than tax cuts should be the core of any stimulus plan. But rather than accept that implication, conservatives take refuge in a nonsensical argument against public spending in general.

Finally, ignore anyone who tries to make something of the fact that the new administration’s chief economic adviser has in the past favored monetary policy over fiscal policy as a response to recessions.

It’s true that the normal response to recessions is interest-rate cuts from the Fed, not government spending. And that might be the best option right now, if it were available. But it isn’t, because we’re in a situation not seen since the 1930s: the interest rates the Fed controls are already effectively at zero.

That’s why we’re talking about large-scale fiscal stimulus: it’s what’s left in the policy arsenal now that the Fed has shot its bolt. Anyone who cites old arguments against fiscal stimulus without mentioning that either doesn’t know much about the subject — and therefore has no business weighing in on the debate — or is being deliberately obtuse.

These are only some of the fundamentally fraudulent anti-stimulus arguments out there. Basically, conservatives are throwing any objection they can think of against the Obama plan, hoping that something will stick.

But here’s the thing: Most Americans aren’t listening. The most encouraging thing I’ve heard lately is Mr. Obama’s reported response to Republican objections to a spending-oriented economic plan: “I won.” Indeed he did — and he should disregard the huffing and puffing of those who lost.”

The National Association of Realtors said Monday that sales of existing homes rose 6.5 percent to an annual rate of 4.74 million in December, from a downwardly revised pace of 4.45 million in November. The results were better than expected. December’s sales had been forecasted to fall to a pace of 4.4 million units, according to Thomson Reuters.

The Conference Board’s monthly forecast of economic activity increased 0.3 percent in December. Economists surveyed by Thomson Reuters had expected a 0.3 percent decline. The group’s index of leading economic indicators had fallen 0.4 percent in November and a revised 1.0 percent in October.

European bourse indexes closed up 3% and higher.

Oil ended at $45.73. Gold was $906.

Stocks were unenthusiastically higher on moderate volume. The DJIA was up 35 at 8115. The S&P 500 rose 5 to 837 and the NAZZ was up 12 to 1490. Breadth was 3/2 positive.


23 January 2009


Model Portfolio Value As of 23 January 2009

$ 429,807

The markets are in a foul mood as the Crash of 2008/2009 continues. Asian markets were lower overnight as are European bourse indexes at midday. Gold is up $15 and Oil is flat at $43.

Below is a sampling of the reports on the wire services this morning which is why the markets are lower. We don’t know why anyone is surprised by these results but with the negative psychology the bears are in their element and enjoying the no uptick rule.

Stock market futures pointed to heavy losses in the final session of the week
as investors weighed earnings from the likes of General Electric, Google and

See indications for full pre-open coverage.


European shares fell sharply Friday, with losses for the banking and insurance
sectors helping to pull the Stoxx 600 index back to 2003 levels. Asian shares
closed firmly lower, with technology stocks under pressure in Japan as they
reacted to Sony's forecast of its first annual loss in 14 years.

See Global Markets page for Europe, U.K. and Asia markets.


SunTrust Robinson Humphrey downgraded Capital One Financial Corp. (COF) to
reduce from neutral, saying revenue opportunities appear to be less than it
previously assumed.

See Upgrades/Downgrades: The Internet's most complete source for analyst

See Market Pulse for all the latest

* General Electric Co. (GE) said its fourth-quarter earnings fell 44% on heavy
declines in its financial and consumer-products businesses due to the global
economic downturn, but the conglomerate has thus far refrained from cutting its
dividend. For the latest quarter, the company said its net profit fell to $3.7
billion, or 35 cents a share, from $6.7 billion, or 66 cents a share. The most
recent results included $1.5 billion of after-tax restructuring and other
charges. Adjusted earnings came in at 37 cents a share, in line with the
consensus forecast.

* Pfizer Inc. (PFE) is negotiating to acquire rival drug maker Wyeth (WYE) in a
blockbuster deal potentially worth more than $60 billion that could alter the
global drug industry, the Wall Street Journal reported. Pfizer and Wyeth have
been in talks for months and a deal is not imminent, the Journal reported,
citing unnamed sources familiar with the matter, while the state of the economy
makes the negotiations especially fragile. Pfizer, the world's largest drug
maker by revenue, would likely use a combination of cash and stock for the
acquisition, according to the report.

* Google Inc. (GOOG) late Thursday posted a sharply lower fourth-quarter profit
that still beat analysts' estimates for a period in which it took over $1
billion in charges tied to its investments in AOL and Clearwire. The Internet
giant also demonstrated that it's keeping a close eye on costs, by hiring at a
significantly slower pace. Google said net profit fell to $382 million, or
a share, from $1.2 billion, or $3.79 a share. Excluding special items,
Google said earnings for the period were $5.10 a share, topping the $4.95
analyst consensus.

* Xerox Corp. (XRX) said its fourth-quarter net profit fell to $1 million, or
on a per-share basis, from $382 million, or 41 cents, a year
earlier. Excluding restructuring charges and an equipment write-off, earnings
were 30 cents a share, but still missed the 34 cents consensus forecast.

* Schlumberger (SLB) on Friday signaled more tough times ahead for the hard-hit
oil drilling sector as it also announced a 17% drop in net income to $1.15
billion, or 95 cents a share from $1.38 billion, or $1.12 a share. The company
said it's taking action to reduce its workforce and said it expects activity to
weaken across the board in 2009.

* Motorcycle manufacturer Harley-Davidson Inc. (HOG) said it will cut around
1,100 jobs in 2009 and 2010 as it cuts production volumes and consolidates
plants. The group also reported a 58% drop in net profit to $77.8 million, or
34 cents a share and said it will reduce shipments by 10% to 13% in 2009.


The talking heads are castigating Treasury Secretary Geithner for his negative comments on China and their conscious under valuing of the yuan. (see below) The talking heads are saying that we shouldn’t make China mad because they hold so much US debt. If they sell the US debt because they are mad in what country will they invest the proceeds? They certainly will not invest in their own country and certainly not England, Russia or the European Central Banks. The US Treasury market is the only game in the world for safety. That is why rates are at zero in US Treasury bills. Duh!

From WSJ:

In response to a question from Sen. Olympia Snowe of Maine, Mr. Geithner wrote that President Barack Obama, "backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency."

The currency issue is a touchy one with China. U.S. officials have for years urged China to move to a market-based system and has applauded steps China has taken in recent months to allow the yuan to appreciate against the U.S. dollar. At the same time, China's purchases of dollar-denominated assets help keep interest rates low in the U.S. Still, given the massive trade deficit the U.S. runs with China, many in Congress want it to move faster.

"President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices," Mr. Geithner wrote.

Yet while the yuan is an "important piece" of the economic dialogue with China, Mr. Geithner said the "immediate focus" has to be on spurring domestic demand in both China and the U.S.

"The immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home," Mr. Geithner wrote.

In fact he stressed that all of the U.S.'s trading partners would have to inject financial stimulus into their economies.

With GE earnings out of the way we re-established our holding it by selling the SPDR Tech (XLK) in which we placed the funds when we sold earlier in the week. We made enough money to pay the ten cents price difference on the trade. GE is the economy and we are betting the economy will eventually recover. We didn’t want to own it through earnings.

Gold ended up $40 at $890. Oil closed the day at $46 up $2. European bourse indexes were lower on the day.

After being down over 150 points on the opening the DJIA rallied back to plus territory going into the final hour of trading. But the big boys and girls were only toying with us as they pushed their buttons and sent the major measures down for the day and the week.

We have to leave a bit early today with thirty minutes left in the trading day the DJIA is down 75 points. The S&P 500 is above 820 at 828 and the NAZZ is positive by 25 points led by Google and RIMM and AMZN. Even MSFT gained a bit.

Volume is a more active than it has been and breadth is positive.

The bears are still in control.

The last two weeks the markets tanked like they did in the last two weeks of November.  In December/early January stocks rallied for five weeks and our accounts moved back up to almost even for the year. Hope is not a tradable commodity but it doesn’t cost anything either.

From our November 21, 2008 post.


We arose with the thought that if we were buyers of stocks at 1000 on the S&P 500 and 900 that we should also be buyers at 750,. And so we have added to positions and initiated some new ones when the markets sold off this morning. Please see the Model Portfolio.

We own small amounts of a lot of securities. We could buy index funds, and we have a few; but our thoughts are that we want to own stocks that we know or for a specific purpose as in our package of retailers.

This market has been especially difficult. But we are closer to the end of this selloff now.  The end will come. We have told clients to not look at their statements until they read that the S&P 500 is back at 1000. As we said above we have enough cash in accounts for those who need it to provide for the next three years.

This too shall pass and we will reach the other side of the chasm.


22 January 2009


Model Portfolio Value As of 22 January 2009

$ 421,333

Microsoft moved up its earnings announcement to this morning and the results were less than expected. The DJIA had been higher before the news and then had moved into negative territory also before the news. The talking heads were ascribing the drop in the DJIA pre-opening to a number of reasons but when MSFT announced the actual reason for the sell off became apparent. The new SEC head might want to find out how some folks knew before others.

By our book the earnings miss of a few pennies is not significant. MSFT like all other consumer folks has to be affected by the economy but the miss is a wonderful opportunity for bearish traders to pound the stock the thus the major measures since MSFT is a significant part of the DJ average and NAZZ.

We chuckled yesterday as coke head Kudlow ranted on CNBC that Obama was now in office and he hasn’t solved the financial crisis yet. And so it goes.

Exxon Mobil has a greater market cap than the total capitalization of the 24 issues in the Banking Index (KBX) which includes Bank of America, Citigroup, JPMorgan and 21 more of the largest U.S. financial companies combined. Companies in the KBW index have lost about $1 trillion in market value since February 2007, when it climbed to a record 121.06. At yesterday's close of 29.03, the industry benchmark was 76 percent below its peak.

Our move yesterday from individual bank stocks to the SPDRs is because we are now playing defense in the bank/financial sector after our offensive moves all failed. The financial sector is oversold and eventually most of the stocks in the sector will double or triple form present levels. Eventually means a few years. In the meantime and especially over the next few months individual stocks will rally and plunge as the spirit moves the markets. By positioning ourselves in the SPDRs we are taking the more conservative approach. The losses have been painful the last moth but they will be recovered over time.

Asian markets were mildly higher as are European bourses at midday. Gold is $855 and Oil has a $40 handle early in the trading day. The S&P 500 has retreated to the 820 support level and the battle is on and hour and one half into the trading day. the S&P 500 needs to rally off this level in the next hour or two for the bulls to end the day in the green.

Microsoft plans to eliminate as many as 5,000 jobs over the next 18 months, including 1,400 jobs immediately, blaming the "deterioration of global economic conditions." Microsoft announced the cuts as it reported an 11% drop in quarterly net income as revenue edged up 2%, amid growth in server and entertainment software but weakness in the PC market.

Housing starts decreased 15.5% to a seasonally adjusted 550,000 annual rate compared to the prior month, after dropping 15.1% in November to 651,000, the Commerce Department said Thursday. Originally, Commerce reported November starts fell 18.9% to 625,000.

For 2008, starts totaled 904,300 on an unadjusted basis, falling from 1.355 million in 2007. It marked a new low, shattering the previous record of 1.014 million set in 1991. (History rhymes: 1991 was the bottom of the savings and loan crisis.)

Initial claims for jobless benefits jumped 62,000 to 589,000 after seasonal adjustments in the week ended Jan. 17, the Labor Department said in a weekly report Thursday. That matches the highest level since November 1982, when claims were above 600,000. Claims were also at 589,000 in the Dec. 20, 2008 week.

Housing Starts Plummet, Unemployment Claims Surge

            Diane Swonk, Chief Economist Mesirow Financial

Housing construction continued to plummet to record lows in December, and if builders continue to pull in, it could be close to zero by mid-year. This is not surprising given the overhang of unsold homes on the market and complete freeze in financing for new projects. This will clearly exacerbate the degree of the contraction in the fourth and first quarters.

There is a silver lining, however, and that is the faster we clear the market of unsold and empty homes, the stronger and sooner the recovery will come. Indeed, rents are now beginning to firm in some of the worst hit markets, as households are pushed from homeownership into renting.

Separately, unemployment claims surged, confirming our concerns that economic conditions will get worse before they get better. This is a particularly tough reality for the Obama administration to convey, as many are looking for silver bullets and miracles from our new president.

Bottom Line: There is a light at the end of the tunnel, but it is still a very long tunnel. 

Oil ended down pennies with at $43 handle and Gold gained $10 to $865. European bourse indexes closed lower as US stocks tanked into their close.

The DJIA was down over 200 points in morning trade and then rallied back to down 25 points before the final hour of trading when the big boys and girls pressed their buttons and sent the major measures to lower again.

Maria, the money honey, is making a habit of having bank super bear Meredith Whitney on her final hour of trading program which of course takes the winds out of the sails of any rally. When Meredith switches, and she will, the rally will be un-buyable it will be so explosive. Today, we do note a tone of neutrality at present prices in Meredith’s comments which is a change from her correct world is ending pronouncements of the last year. Maybe the loss of one trillion dollars in major bank market value has mellowed her.

The DJIA lost 106 points to close at 8120. The S&P 500 closed above 820 supports down 12 at 827. The NAZZ dropped 40 points to 1468 thanks in large part to Mr. Softee. Volume was moderate and breadth was 3/1 negative which was better than the 8/1 negative on the first hour of trading.

Google announced after the close and GE announces early in the morning. Those two stocks closed higher on the day and will set the table for trading tomorrow.

The bears won.


21 January 2009


Model Portfolio Value As of 21 January 2009

$ 431,966

There was a Crash in bank stocks yesterday. Many large money center banks including, unfortunately, the two we own, Wells Fargo and JP Morgan were among the casualties that dropped more than 20%. The action in the bank stocks over the last two weeks concluding with yesterday’s 20% drop in the Bank index yesterday was similar to that of the entire market in October 1987. The proximate cause of yesterday’s drop was the news of the Banks of England’s takeover of the Royal Bank of Scotland which announced a $60 billion loss and in the U.S. that unrealized mark-to-market losses at State Street Bank's investment portfolio more than doubled during the quarter to $6.3 billion, which State Street blamed on the ongoing market illiquidity. Royal Bank of Scotland’s share price dropped 70% and State Street’s share price lost half its value in Tuesday’s trading dropping $18 to $18.50.

In turn that caused the rest of the banking sector to be raided by the bears and these comments by Jim Cramer on his realmoney.com site sum up the action: URL: http://www.thestreet.com/p/rmoney/jimcramerblog/10458636.html

You are seeing the horrors of the short-selling morass on the financials at work. You know that because there simply is very little in common between, say, Goldman Sachs and Bank of America. There is very little in common between Visa and PNC Financial. There is nothing in common between Morgan Stanley and US Bancorp. State Street is in a class by itself, unless you consider Bank of New York, which has similar businesses.

So why do they call go down? They are all in the UltraShort Financial ProShares (SKF).

Let's take them one by one. First, Visa has no exposure to debt at all -- it is a pure transaction play. Morgan Stanley and Goldman Sachs have eliminated mortgage exposure. Goldman has become a transaction bank while Morgan Stanley is now a brokerage house. They simply don't deserve to be going down at the same time.

But they are all in this darned SKF, which is soaring.

Now it is true that Chubb (CB) and Travelers (TRV) are in the index and both are actually up. However, unlike the other players, they are not defenseless.

They can -- and do -- buy back stock. They have great balance sheets. They do not have any exposure to any of the problems the banks have. In fact, if you were shrewd in your shorting of the financials, you would be banging down the banks through the SKF and going long Traveler and Chubb because those two have the ability to buy back stock and take advantage of the SKF pressure.

Now I am not excusing any of the banks from their problems. They all do deserve some pressure. But because of the weightings, or the overweighting, of JP Morgan (JPM) and Wells Fargo (WFC) and Bank of America and US Bancorp and Goldman Sachs -- they are the big ones -- they are going down huge, as they have to bear the brunt of the SKF buying.

It simply exacerbates everything and forces the banks into commodity status, which is why you see the collapse of all banks at once...

So, we are back to the old kesselschlact, the battle of encirclement, where you buy the puts, you buy the credit default swaps, you short the common and you come in blasting with the SKF, which causes a settlement price at the low. That then triggers media, which should then trigger a bank run, which then triggers a rescue, perhaps at unfavorable terms to all security holders.

Overseas, European bourse indexes were lower on Tuesday after falling on Monday afternoon also as the Bank of England was forced to rescue the Royal bank of Scotland. RBS completed the acquisition of ABN AMRO in October 2008 and that proved to be its undoing as it was forced to recognize $70 billion pounds of losses and seek help. The Bank of England now owns 70% of RBS which lost 80% of its value today.

European bourses continued to lose ground on Wednesday closing 1% lower.

Asian stocks were higher on Monday and Tuesday but followed the U.S. markets lower in Wednesday trade.

Investors’ Intelligence reported a drop in Bulls from 43% to 38% and a rise in bears from 34% to 38% in the latest reporting period.

We believe the banking system will survive but the fear in the marketplace is such that few, including us, have the ability to withstand the persistent selling in individual issues. There is no way to predict which stocks will be hit and when. We were flabbergasted by the Tuesday 25% drop in Well Fargo and JP Morgan and the two week 40% share price drop. We used the bounce today to eliminate both at too large a loss. We added more many than we sold of shares of SPDR Major Bank Index (KBE) for WFC and with the JPM money we placed some in SPDR Financial (XLF) and half in SPDR Major Bank Index (KBE). We also sold CSCO, NWL, GE and Starbucks and placed a portion of the proceeds in SPDR Techs (XLK). 

Thus we maintained most of our exposure to banks and financials but mitigated the downside risk – and potential recovery/reward - by buying a larger number of stocks through the sector ETFs.

The big boys and girls awoke this afternoon and decided to give change a chance and rallied the markets into the close with the financials that were decimated yesterday leading the way by recovering half of yesterday’s drop. Happily we maintained our exposure in the financial area while lessening the immediate risk/reward. If the banks recover we will regain our losses and profit in the long term is the name of the game. If there is another panic sell off in an individual issue we will be able to withstand it because of our diversification within the industry.

To give an idea of the volatility in banks stocks US Bank, which announced less than earnings and large than reserves, opened at $16.35 which was up $1 from yesterday’s close then dropped to $11.80 before rallying to close at $16.10. Volume was four times normal volume at 110 million shares. This is not a market it’s a casino.

Gold dropped $4 to $851. In the last few days Oil has rallied big-time and closed with a $43 handle today. European bourse indexes pared losses into the close.

According to the guru closing above 821 on the S&P 500 was important for the bulls. The S&P 500 gained 35 to 840. The DJIA was up 280 to 8230 and the NAZZ jumped 65 to 1510.

Breadth was better than 2/1 positive and volume was more than it has been but still moderate.

The bulls won the day but the bears are still prowling.


16 January 2009


Model Portfolio Value As of 16 January 2009

$ 456,775

The markets are closed Monday for Martin Luther King Day and we are taking Tuesday off to enjoy the Inauguration of President Obama. Our next post will be Wednesday January 21.

Options expire today and there may be some pinning to strike prices that occur. But from our tea leaves we detect an Obama rally beginning. Citi announced atrocious numbers, the Feds are going to give BankAmerica a ton of money, the Senate is allowing the second portion of the TARP for President Obama and stock measures bounced off the November 21 low yesterday.

Asian markets were mildly higher overnight and European bourse indexes are 3% and higher at midday. Oil is $36 and Gold $820 as the trading day commences.

Meredith Whitney and analyst from Oppenheimer who was the first and most persistent predictor of the banking crisis more than a year ago cut her estimates for JP Morgan yesterday. We wondered why the shares dropped $2 in price in the last half hour of trading and did so again this morning. Whitney has been spot on in her estimates of bank troubles but we are buying JPM and selling AT&T.

It is no secret that banks are having troubles and have large loan losses. The surprise announcement from BAC of Merrill losses is a good example of how accountants are forcing banks to fess up to problems. But JPM just reported earnings and they had earnings even with all the problems. And Whitney is suggesting that they JPM will have earnings in 2009 and 2010, just less than she had forecast.

Sometimes folks overstay their welcome and at $23 we think JPM will provide a wonderful return on investment over the longer term.

We are over weighted in JPM and WFC but they are the best of the banks and we are comfortable with our overweight.

From Daine Swonk, Chief Economist of Mesirow Financial

Falling Energy Price Boost Mitigate Loss in Income

Inflation dropped on both a month-to-month and year-over-year basis in December. The overwhelming majority of those losses were in energy. Core (non-food and non-energy) inflation dipped to zero on a month-to-month basis, and rose a reasonable 1.8% rate from a year ago.

The message inside the data is what happened to inflation-adjusted income, which ROSE on a month-to-month basis. Declines in energy prices, in particular, provided some offset to the surge in job losses and loss in employment. Those gains alone, however, were not enough to keep spending afloat in the face of a credit freeze and deteriorating confidence.

Bottom Line: Falling oil is one of the few positives for the economy today. Some estimate that the drop in oil prices has provided more than $400 billion in additional purchasing power on an annualized basis. Those "gains," however, are merely giving back something lost earlier in the year, when oil was hitting $147 per barrel.

Bank of America is Saved, with Contingency to Lend

The Fed, the Treasury, and the FDIC put together a set of loan guarantees ($118 billion) and capital infusions from the TARP ($20 billion), to cover losses that largely manifested from assets that deteriorated in their Merrill Lynch portfolio, which Bank of America acquired instead of buying a piece of Lehman back in September.

The FDIC also changed the laws regarding the length of time it guarantees loans, extending it from 3 to 10 years. This was already in the making, but reflects the depth and breadth of this crisis. What we are facing is systemic risk, which will take a long time to rid ourselves of in the financial system. The "fee" for this arrangement was a block of preferred B of A stock issued to both the Treasury and the FDIC.

The one notable "new" caveat of the deal is the contingency that B of A increases their lending capacity as a condition of the agreement. This is a nod to changes that are likely to emerge from the TARP, as Congress tries to target and increase the transparency associated with TARP deals.

Moral of the Story: Don't bet against the Fed and its balance sheet during the crisis. It WILL NOT TOLERATE bank runs, which were manifesting against B of A yesterday, or allow a major player in the market to fail. Those who do bet against the Fed will lose. B of A stock, which was plummeting yesterday, is rallying ahead of the market open this morning.

A Turn Could Be at Hand
by Dick Arms
RealMoney.com Contributor
1/16/2009 7:00 AM EST
URL: http://www.thestreet.com/p/rmoney/technicalanalysis/10458242.html

Once again, as in October and November, the markets are gripped in worry. One again, we have had a dip downward based on that fear, and once again we are seeing the fear reflected in very high Arms Index numbers.

But one thing is changing. The first low, on Oct. 10, was on immense volume, with a huge trading range. The low in November was still on heavy trading, but not as big as in October, and the trading range was still large, but smaller than its predecessor. This time, the volume is much lower, and so is the trading range. This is typical bottoming action. It begins to look like a large head-and-shoulders bottom, as indicated on the chart below.

The Arms Index numbers are saying that the selling has been overdone, both short-term and longer-term. It is difficult to not be swayed by the corrosive bearishness that is again gripping the markets. However, the technical picture continues to suggest we are in the midst of a big bottoming process. The turn could be very close.

Market commentators are reporting that the DJIA was up 120 points at the opening and is now down 100 points. The financials are leading the way lower with Wells Fargo and JP Morgan both off over 10% after being up 5% on the opening. The talking heads are ascribing the drop in these two bank stocks to a crisis in confidence.

The elephant is the room is the ultras short SPDR (SKF) that mirrors the DJ financials index times 2. Since WFC and JPM are the two largest components representing almost 20% of the DJ Financial Index, any up movement in the SKF paces double downward pressure on those two stocks. That downward pressure then causes normal folks and even institutional investors who don’t understand the relationship to panic and pull buy orders or sell stock.

These two and three times market sector long and short ETFs are a travesty since they allow 4 to 6 time leverage either way and in effect negate margin rules. The SEC allowed these products to be created. Coupled with the removal of the short sale uptick rule the double/triple ETFS are the scourge of this market. Until something is done to eliminate them individual stocks in the underlying sectors being traded will continue to have these mammoth daily artificial movements.

For example, in the first three hours of trading the Ultra Short DJ Financial ETF (SKF) has traded 25 million shares with a 10% range. That amount of trading means there is 20 million shares of selling pressure on both JPM and Wells Fargo to account for that up move in the SKF. That volume is over 20% of the trading volume in those town stocks this morning. No individual issue can withstand that kind of selling pressure without dropping substantially which of course they have. This drop in the price is the direct result of the trading in the SKF and not of any external circumstance.

We are living with this reality and presume that as with all things this too shall pass.

Fortune Magazine http://money.cnn.com has an interesting take on the Mother Merrill/BankAmerica $45 billion Fed rescue this week:

But CEO Ken Lewis' decision to buy Merrill isn't the only thing that looks questionable now. So does the advice he and the BofA board got on the hastily arranged Merrill deal from the bank's advisers, Fox-Pitt Kelton and J.C. Flowers & Co. The financial advisers offered opinions calling the deal fair to Bank of America shareholders. But that conclusion seems to be undermined by the plunge in Bank of America's shares in the months since the deal was announced, and the bank's apparent need for another capital infusion from the government. BofA already had received $25 billion, including $10 billion as part of the Merrill Deal, from the Treasury Department via the Troubled Asset Relief Program, or TARP, before Thursday's announcement that it would be getting another $20 billion. What's more, the bank's shareholders paid the advisers $20 million for the opinions - which the firms formulated after investigating Merrill Lynch's condition over a single, hectic weekend. BofA and J.C. Flowers didn't return calls seeking comment, and Fox-Pitt Kelton declined to comment.

Oil ended with a $35 handle. European bourse indexes were higher at their close.

The DJIA was up 125 down 125 and closed up 68 at 8281. The S&P 500 gained 7 to 850 and the NAZZ was up 17 at 1530.

Breadth was almost 2/1 positive and volume was moderate.

The bulls held serve although the banks didn’t participate.


15 January 2009


Model Portfolio Value As of 15 January 2009

$ 459,495

After the close last night the WSJ reported that BankAmerica was negotiating with the treasury for another infusion of TARP funds. The news was unexpected since Ken Lewis, the CEO of BAC, had previously said that BAC did not need the first infusion of TARP funds. Also after the close Steve Jobs announced that he was taking six months off to deal with his medical problems. Apple had been denying that Jobs had any serious medical problems and so the double whammy of BAC’s request for funds and Job’s illness hit the market psyche hard.

This morning JP Morgan reported lower but better than earnings but that wasn’t enough to overcome the miasma (an influence or atmosphere that tends to deplete or corrupt) of the other news and stocks opened lower. We sold our Bank America before the opening for a loss but managed to rescue $2 more per share than we would have received after the opening .that is small comfort. We also sold Hartford Group. The sale of HIG was also disappointing and a loss. A week ago we had a 20% profit in those shares but we were too piggy to take it. We are selling HIG because they too have approached TARP for help even though they say they say they are going to earn $4 per share this year. We don’t understand that and given the BAC surprise we sold.

Because the markets are at a level where at least a bounce should occur we are reinvesting the proceeds of those two sales and the sale of Motorola, which have decided to abandon.

We bought AT&T with the HIG money. AT&T has a 6% yield from a recently raised and thus we presume secure dividend. And we reinvested the BAC money in the SPDR Financial (XLF). We want to maintain financial exposure and since we are afraid to own any individual financial stocks except JPM and Wells Fargo; the SPDR Financial (XLF) gives us the best exposure to whole sector. We know we swore off the SPDR complex last week but the reality is that we want to own financials and the XLF is the safest way to gain exposure to a very depressed sector without assuming individual issue risk.

Asian markets were down 3% to over 4% overnight and European bourse indexes are lower at midday. Gold was up a few dollars and Oil had a $37 handle in the early going.

Wells Fargo is down $3 per share today on a twelve year low and we are selling Urban Outfitters flat to place half plus funds in WFC. We own enough retailers.

We don’t think that Giethner should be confirmed as Treasury Secretary. He fibbed on his taxes, big-time. This editorial in the NYT is on the point.

http://www.nytimes.com/2009/01/15/opinion/15thu1.html?hp . Obama should pull the nomination and nominate Sheila Blair, the head of the FDIC, as Treasury Secretary. It won’t happen because the ole’ guys and gals club has decided that $40,000 is an oversight. These are the same folks who thought $20,000 and some land in Arkansas were worth spending $100 million and ten years and half the resources of the FBI investigating. Can anyone say Whitewater?

European bourse indexes closed 1% to 2% lower. Oil lost to $2 to finish with a $34 handle. It was $150 in July. Gold was up $8 at $816.

The Feds are giving BankAmerica $200 billion and $300 billion. The markets have recovered on that news.

We were tied up watching the plane crash in the Hudson. Thankfully it seems that everyone survived.

The big boys and girls did their bear thing in the last half hour to the bank stocks again and a 250 point rally from the bottom this morning almost disappeared. But the DJIA closed up 12 at 8212. The S&P 500 was up 1 at 842 and so it held 840 support. The NAZZ was up 22 at 1511.

Breadth was flat and volume was moderate.

There were 260 new lows. Today was a tie.


14 January 2009


Model Portfolio Value As of 14 January 2009

$ 466,314

Traders have decided that banks will never earn any money again nor make any loans and that the U. S. Economy will be in the doldrums for the next five years. They also now know that the stimulus is not going to work, that Obama does not know what he is doing, that the Democrats in Congress are rebelling against Obama and that the honeymoon is over before the ceremony has occurred.

And so the stocks markets are down 2% at the opening this morning and headed lower. The rally was nice for the two weeks it lasted but stocks will never again go up.

We are content to continue to refine our investments and ignore noise.  It seems the markets are range bound for now and patience is needed. With the major measures down 40% and more over the last year we think the markets are aware of the troubles in the economy. Time is needed. But with the modern media and day traders and second by second account valuations, holding stocks is difficult but we think our investments are worth holding at these levels which are 50% to 80% below where prices on the stocks we own were one year ago.

Asian markets were mildly higher overnight and European bourse indexes were mixed at midday until U.S. market opened at which time the European stocks moved lower. Deutsche Bank announced a $6 billion loss for the year overnight and banks in Europe tanked as are U.S. banks and other financials at the opening. Citi and Morgan Stanley are lower even as they announced the combining of their brokerage operations.

We sold Corning and bought CSCO and Intel with the proceeds.

Oil ended with a $37 handle. The DJIA lost 250 points to 8200 and the S&P 500 was down 30 at 842. The NAZZ dropped 56 to 1490. Breadth was over 5/1 negative and volume was light. The bears were in control today.


13 January 2009


Model Portfolio Value As of 13 January 2009

$ 491,096

The Model Portfolio was up 9% the first week of the New Year and down 11% the last week. This volatility is disconcerting but part of the process of making a bottom that will hold. We have been trading around the volatility and have today settled into positions that we hope will be comfortable for us. At the end of the year we took speculative positions that acted well the in the Santa rally but then gave it back in the pullback. Moreover we were too aggressive in our picks and have retrenched in the last few days to more conservative (i.e. leas percentage gain potential but less percentage downside also) companies.

Today we switched US Bank to Wells Fargo and Citi to BankAmerica. We presume Bank America will cut its dividend but think that Wells Fargo and JP Morgan will keep theirs. Thus after months of positioning we are down to three banks and one insurance company for our financial holdings. JPM and WFC are the best of the money center banks and BankAmerica is of lower quality but probably has the greatest percentage gain potential if CEO Ken Lewis can put all the disparate parts together into one cohesive unit.

Nvdia announced that fourth quarter revenue would be down 40% sequentially. We have been wanting to reenter Cisco and so NVDA’s announcement was an incentive to improve quality by selling NVDA and buying CSCO.

We sold The Gap and placed the money is equal shares of Liz Claiborne, Tellabs and JDS Uniphase.

With today’s switches the portfolios are well situated. The gain potential is reduced a bit but the quality is greatly increased.

Asian markets were lower overnight with Japan down 4% in a catch down after being closed on Monday for a holiday. European bourse indexes are down 1% to 2% at midday and Oil after trading at $36 early on is up to $38. Gold also was loser at the opening but is now up $6 at 9am.

From AP: Shares of Liz Claiborne Inc. declined Tuesday, after the retailer slashed its fourth-quarter outlook below Wall Street expectations and analysts warned of continued weakness in coming months.

From Marektwatch.com: Shares of Liz Claiborne were on the rise Tuesday, gaining as much as 6% out of the open after the company said it has extended -- and reduced -- its credit line while cutting its fiscal fourth-quarter profit outlook.

From Bloomberg:

State governments from Rhode Island to California have run up estimated pension-fund losses of $865.1 billion, forcing some to cut benefits for new hires. Assets for 109 state funds declined 37 percent to $1.46 trillion over the 14 months ended Dec. 16, according to the Center for Retirement Research at Boston College. The Standard & Poor’s 500 Index of stocks fell 41 percent in the period.

Hedge funds lost $350 billion globally in 2008, the most on record, as the biggest financial crisis since the Great Depression crippled returns and caused investors to pull money out, according to an industry report. About 90 percent of the money was lost in the three months to the end of November, according to a preliminary report published today by Singapore-based data provider Eurekahedge Pte. Funds that invested in North America declined the most, posting a drop of $183 billion for the year, the report said. The hedge-fund industry shrank by about a fifth to $1.5 trillion at the end of the year from a peak of $1.9 trillion, Eurekahedge said.

Oil gained on the day to close with a $38 handle. Gold was flat at $820. European markets were 2% lower.

The DJIA ended down 35 and the S&P 500 was up 1. The NAZZ gained 6. Breadth was flat and volume was light.


12 January 2009


Model Portfolio Value As of 12 January 2009

$ 491,804

The chart below from http://www.syhardingblog.com/   demonstrates a terrible unemployment number in for December 1974 and subsequent and stock market action.



Late Friday CNBC reported that Morgan Stanley was in talks to merge its brokerage operations with the Smith Barney unit of Citi. That obviously is why the shares of MS were moving up last week in a down market. We think the large brokerage house model is a last century idea and we are selling the news as the price rises on short covering on the news. Luckily we made a small profit on this last trade also.

We added shares of Wells Fargo and US Bank to accounts in which we sold Morgan Stanley.

We sold Alcatel and Coldwater in a continuation of consolidating our lower priced specs. We are adding to shares of Health Management with some of the proceeds of the Alcatel sale and we are picking up J Crew under $10 in accounts in which we sold Coldwater.

We also added a few shares of JP Morgan and Hartford to larger accounts

The WSJ had a story this morning on the coming retail bankruptcies. The WSJ mentions Linen’s & Things, Duane Read and Claire’s Stores. The news story passes lightly over lightly the fact that these retailers were the subject of leveraged buyouts where the LBO firms assumed a ton of debt in each case so that it could pay itself an outsized dividend or put up a very small amount of equity. Retailers with too much debt do go bankrupt in times like the present. But the failure of stores is a positive for those that survive. That is the reality of capitalism.

We sold Boston Scientific for a scratch profit and bought Intel with the proceeds. INTC has a 4% yield versus 0% for BSX. We also swapped FITB for an equal dollar amount of BankAmerica.

European bourse indexes closed 1% to over 2% lower. Oil lost $3 to end with a $37 handle. Gold dropped $34 to $825.

Bank stocks are getting hit on news that Obama’s economic team want to eliminate dividend payments by banks receiving TARP funds. Needless to say that is causing pain. The financials we own are down 5% to 20% today. We don’t think any that we own will cut their dividends.

The only green stocks on our screen at the close today were GM and Ford. Strange.

The DJIA lost 125 to 8475. The S&P 500 was down 20 to 870 and the NAZZ dropped 32 to 1538.

Breadth was 3/1 negative and volume was light.

New lows exceeded 100 for the first time this year.

The bears are back.


9 January 2009


Model Portfolio Value As of 9 January 2009

$ 520,493

From the WSJ: The final employment report for 2008 closed the books on a miserable year for U.S. workers with payrolls plunging last month by more than half a million, pushing the unemployment rate to a 16-year high.

The economy lost 2.6 million jobs in 2008, government figures showed, the most since World War II ended in 1945. Nearly two million of those losses were in the last four months alone, a sign that the recession accelerated as the financial crisis intensified, and should drag on well into the New Year.

Nonfarm payrolls, which are calculated by a survey of establishments, tumbled 524,000 in December, the U.S. Labor Department said Friday, the 12th-straight decline and in line with the 525,000 drop Wall Street economists in a Dow Jones Newswires survey expected. November was revised to show an even steeper decline of 584,000, the most since 1974

We noted before and will note again that a loss of 574,000 jobs in 1974 was almost twice as bad as that number now given the much smaller work force 38 years ago. Secondly, the terrible numbers at the end of 1974 marked the end of the collapse of the stock markets and the beginning of a bull market.

Asian markets were mildly lower overnight as are European bourse indexes at midday. Oil is unchanged with a $42 handle and Gold is unchanged at $853 as the trading day begins.

Fools are born every day. A fool and his/her money are soon parted.

From the wires: Deutsche Bank AG’s co-head of global credit trading, Boaz Weinstein, is leaving Europe’s largest investment bank to set up his own hedge fund following trading losses at the end of last year. Weinstein, 35, plans to take about 15 of his colleagues with him to his new fund early in the second quarter, according to Michael Golden, a company spokesman in London. Colin Fan, who co- led global credit trading with Weinstein, will assume sole responsibility for the unit. “We wish Boaz well in his new venture and look forward to working with him,” Golden said.

Weinstein’s departure comes after the Frankfurt-based bank wound down its proprietary credit trading operations. Weinstein, who has been with Deutsche Bank for 11 years, posted about $1 billion of losses on trades involving bonds hedged with credit- default swaps after Lehman Brothers Holdings Inc.’s bankruptcy in September, two people with knowledge of the matter said Dec. 12.

We would guess the theory of folks giving him money is that he lost money last year so this year he will probably make money. Good luck.

Chevron warns of 'significantly lower' earnings due to falling energy prices

Our thought process– given that we have recovered much of our drop of last year in our accounts with the up move in the markets in the last month -is to reduce specs we own and move the money to more conservative investments. With that in mind we sold Sprint, Micron, ESLR and AMD. We added shares of Wells Fargo with the money we have raised.

We also sold Dow Chemical which we bought the other day and bought US Bank with the proceeds. Dow is a soap opera with the Rohm takeover and the failure of the Saudi petrochemical deal. The other day when we purchased the shares we were in a more speculative mood than we are now. USB was priced at $29 a month ago and we are buying shares today at $22.75 and selling DOW for a scratch while improving quality.

We are repurchasing the Morgan Stanley shares we sold yesterday since they have been up two days in a row in a down market. To have cash for the purchase we sold the SPDR Financial. Our sojourn with the SPDRs has not been profitable. We will not return to them.

European bourse indexes closed down 1% and lower.

Gold closed up $2 at $856 and Oil went out at $41.

The markets couldn’t hold the early small gains and surrendered to the programs in the last half hour of trading. The DJIA lost 144 to 8600. The S&P 500 was down 20 to 890 and the NAZZ finished down 45 at 1870.

Breadth was more than 2/1 negaitve and volume was light. New lows remained under 100.


8 January 2009


Model Portfolio Value As of 8 January 2009

$ 539,467

Wal-Mart missed and is down 10% in early trading. That cast a pall on retailers most of which reported dreadful same store sales numbers and most of which opened lower. The DJIA is down 100 points after one half hour of trading.

J Crew forecast a loss for the fourth quarter and is off 20%. And so it goes. We are content to hold are retailers and are bidding below the market for JCG.

Asian markets were down 2% to 4% overnight and European bourse indexes are modestly lower at midday. Gold is flat and Oil has a $43 handle in morning trade.

A modern day Merchant of Venice:

The pound of flesh, which I demand ......,
Is dearly bought; 'tis mine and I will have it.
If you deny me, fie upon your law!
There is no force in the decrees of Venice.
I stand for judgment: answer; shall I have it?


... Dr Richard Batista, from Ronkonkoma, New York, who is being divorced by his wife Dawnell, has asked she include the kidney he donated to her for transplant in the divorce settlement. Batista puts the value of the organ at $1.5 million, a court in Mineola, New York, has heard. There is little chance he will get his way. Asked how likely it would be for the doctor to either get his kidney back or get money for it, Arthur Caplan at the Centre for Bioethics, the University of Pennsylvania, said it was "somewhere between impossible and completely impossible." Robert Veatch, a medical ethicist at Georgetown University's Kennedy Institute of Ethics, agrees. "It's illegal for an organ to be exchanged for anything of value" because organs may not be bought or sold, he said. And as the donation of an organ is considered a gift, legally "when you give something, you can't get it back." "It's her kidney now and ... taking the kidney out would mean she would have to go on dialysis or it would kill her," Veatch said.

How much does a liver weigh?


Therefore prepare thee to cut off the flesh.
Shed thou no blood, nor cut thou less nor more
But just a pound of flesh: if thou cut'st more
Or less than a just pound, be it but so much
As makes it light or heavy in the substance,
Or the division of the twentieth part
Of one poor scruple, nay, if the scale do turn
But in the estimation of a hair,
Thou diest and all thy goods are confiscate.


We want to reenter Nordstrom which is lower this morning. We are going to sell Marvell Tech for a plus scratch. We also added a few shares of J Crew and Urban Outfitters (only a -1% same store sales drop for quarter) to accounts when the retailers sold off this morning.

The Bank of England cut the benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain’s recession. The bank rate was reduced a half-point to 1.5 percent, bringing policy makers closer to the point at which they will run out of options to fight the financial crisis with conventional tools. The pound rose against the euro and the dollar because some investors had bet on a larger reduction.

We took a nice profit in Morgan Stanley and placed the funds in JP Morgan which is down another $1 per share today.

RFMD popped 50% in price today. We bought as a spec and we are taking the profit and moving the funds to JDSU which is a much sounder spec.

European bourse indexes closed mildly lower. Gold jumped $15 and Oil was flat at $42.20.

In a regulatory filing Thursday, Yucaipa Companies LLC, controlled by Ron Burkle, who made a fortune investing in supermarkets, said it owned 9.8 million shares, or 7% of Whole Foods' outstanding common stock. Yucaipa's investment funds have been aggressive buyers of Whole Foods shares since Nov. 24, spending a net $98 million to amass the stake. The shares were "undervalued by the market at the time they were acquired," Yucaipa said. "There are substantial opportunities for the company to improve operations and its pricing image while maintaining its high-quality product offering," according to the filing.

Burkle is the fellow who sold Wild Oats to WFMI.

Stocks were lower all day but the bears couldn’t break them and in the final minutes the major measures slinked toward even.

At the bell the DJIA was down 27 and the S&P 500 was up 3 at 910. Breadth was positive. New lows were 84 and new highs were 22.

The monthly Employment Report at 7:30am tomorrow will move the markets.


7 January 2009


Model Portfolio Value As of 7 January 2009

$ 530,967

Stocks opened lower and after an hour of trading the DJIA is down 2%. Asian markets were mixed with India down 7% (Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock markets and throwing the industry into turmoil) and Japan up 1%. European bourse indexes are also mixed and Gold is down with Oil having a $48 handle.

With the Employment report tomorrow, a rally today is going to be hard.

Asian markets were mixed overnight with India down 7% and Japan up 1%. European bourses are also mixed a midday. Oil has a $48 handle and Gold is lower.

We added GE, CIEN, URBN and DOW to accounts in which we sold stock yesterday. We also switched Alcoa to Citi after Alcoa announced a restructuring. We made money on the AA trade.

Oil is ticking at $44 down $ today as talking head traders on CNBC predict $200 a barrel oil in the future. That is called talking your book.

Investors’ Intelligence has 41% bulls versus 38% last reporting period. Bears were at 34% versus 38% last time. As markets rise more bears convert. We will consider pulling in our horns when bulls exceed 55%.

Intel said Wednesday that it would miss its revenue projection by about $500 million, a sign that PC makers and buyers are being more tightfisted than it seemed only two months ago. INTC now says revenue was $8.2 billion for the last three months of 2008, a 23 percent decline from the year-ago period. Analysts surveyed by Thomson Reuters were expecting $8.7 billion, which was at the low end of the range Intel provided in November of $8.7 billion to $9.3 billion. Intel’s expects its gross profit margin to be at the bottom of its previous guidance, which was for 53 to 57 percent of revenue.

JP Morgan dropped to a 5.4% yield at $28.80 and we sold KBE for a slight loss to repurchase JPM.

The big boys and girls are paying their games in the oil market at Oil settled at $42.60 down over $5 on the day. Gold lost $26 to $840 and European bourses closed down 1% and lower on the day.

It was nice to be almost back to even for a day. Ah well, corrections are part of investing and are healthy for the longer term. The DJIA lost 250 points and the SP 500 closed at 907, four points above the year end close, so it is still up for the year. Breadth was 3/1 negative but volume was less than yesterday which was positive. New lows were 85 with 20 new highs. The markets are going to be under pressure till after the Employment report Friday. Tomorrow we get individual retail sales for December.



6 January 2009


Model Portfolio Value As of 6 January 2009

$ 559,417

Asian markets were mixed small overnight and European bourse indexes are up 1% and more at midday. Gold is down another $14 at $850 and Oil is approaching $50.

US futures suggest a higher opening but with volume low anything can happen today. Until traders return the markets’ action on the upside will be suspect.

Stocks opened 1% higher out of the gate but the S&P 500 stalled at 940 resistances and backed off. After an hour of trading stocks are mildly higher.

Factory orders (-4.6% versus -2.3% expected) and Pending home sales (-4.0% versus -1.0% expected) were down but Dec ISM non manufacturing numbers (40.6 versus 36.5 expected) were up...

For some reason traders are puking the supposedly good banks and buying other financials. And so we are cutting and running on the JPM and USB we bought yesterday. We are placing the JPM funds in the Major Bank SPDR (KBE) which includes bad banks and in Boston Scientific. We are placing the USB funds in GE and Citi. GE is trading as a financial and Citi is certainly a bad bank, although a probable survivor.

Barclay’s analyst Jeffrey Kavaal told investors in a research note that Ciena is set to make gains against struggling competitors with a new generation of gear for ethernet and Internet network providers. Kavaal said long-standing products like Ciena's CoreDirector, an optical switch used in ethernet networks, have also performed well, generating sales of more than $270 million in 2008. That's up from just under $80 million in 2006, Kavaal said.

He upgraded shares to "Overweight" from "Equal Weight," and moved his price target to $10 from $7.

Federal Reserve policy makers saw "substantial" risks to the slumping economy last month even as they cut the benchmark interest rate to a record low and pledged to expand emergency loans if necessary. Central bank officials believed "the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial," according to the minutes of the Dec. 15-16 Federal Open Market Committee meeting released today in Washington. Some officials saw "the distinct possibility of a prolonged contraction" stemming partly from stresses in financial markets.

European bourse indexes closed higher across the continent to continue their New Year winning streak.

Hartford Insurance is higher today by 10% because of the following:

The main proposal in President-Elect Obama's potential business tax plan being considered is the ability to carry back losses for five years rather than three. That means that for companies that have huge current losses, there will be a windfall rebate as they are able to receive a refund of taxes paid years ago. This is the main thing that is driving some of the insurers today. That kind of provision will also help financials like Morgan Stanley and Goldman and even GE.

Our guru thinks 944 is resistance that will force a pullback in the final hour as the S&P 500 touches that level again with one hour of trading remaining. We are going to sell a few positions in our larger accounts. After the run of the last two weeks a pullback is expected and we want to have a bit of cash in those accounts. We hope we are wrong. We sold HAIN, Johnson Controls, Ingersoll Rand, Harman, and Manitowoc.

The CEO of BankAmerica wants no bonus for 2008. Ken Lewis said he wants to forgo his bonus. What a great guy. His bank lost 800 million gazillion dollars and was given $25 billion from the Treasury. The guy should be fired.

The Employment Report on Friday is going to be a downer and the markets can’t move higher until that report is dealt with by traders.

Stocks backed off in the final hour but then rallied into the close. The DJIA ended up 60 points at the S&P 500 closed at 935. Breadth was 3/1 positive and volume was better than it has been for two weeks but still only 7 billion. New lows were 90 and new highs were 50.

History rhymes:

Tuesday January 6, 2009: German billionaire Adolf Merckle, whose investment company was renegotiating its bank debt, died after he was hit by a train and may have committed suicide, Die Welt reported. Merckle was struck near his hometown of Blaubeuren, southeast of Stuttgart, yesterday evening, the German newspaper said on its Web site today. Police said he may have killed himself, the newspaper said. Merckle had lost money from a series of wrong-way bets on Volkswagen AG, (he was short VW stock when the share price skyrocketed and he lost $500 million), a drop in the value of his HeidelbergCement AG stake and increasing debt. The 74-year-old, whose estimated $9.2 billion fortune put him 94th on Forbes’s list of the world’s richest people, was negotiating with banks on a bridge loan to rescue his investment company VEM Vermoegensverwaltung GmbH.

Ivar Kreuger (March 2, 1880 – March 12, 1932) was a Swedish civil engineer, financier, entrepreneur and industrialist. Between the two world wars, he was one of the most powerful businessmen of Europe. Negotiating match monopolies with European and Central and South American governments, he finally controlled two thirds of the worldwide match production, and became known as the "Match King"[1]. Kreuger did not limit himself to matches, but gained control of most of the forestry industry in northern Sweden and planned to become head of a cellulose cartel.

At the peak of his career, the Kreuger fortune was thought to be worth 30bn Swedish kronor, equivalent to approximately US$100bn USD in 2000, comprising more than 200 companies.

By mid 1931, rumors spread that Kreuger & Toll and other companies in Kreuger’s empire were financially unstable. In February 1932 Kreuger turned to Sveriges Riksbank for the second time in his life to support him in raising a large increase in his loans. At this time his total loans in Swedish banks was estimated to about half of the Swedish reserve currency that had started to give negative effects on the value of the Swedish currency in the international financial market. In order to grant him more loans, the government required that a complete statement of accounts of Krueger’s entire company group was presented, as the bank's (Sveriges Riksbank) own calculations showed that Kreuger & Toll finances were far too weak to give him more loans.

On March 12 he was found dead in bed in his Paris apartment at Avenue Victor Emanuel III. French police that made the investigation of his death came to the conclusion that he has shot himself. He left a sealed envelope behind in the room addressed to Krister Littorin, he wrote:

I have made such a mess of things that I believe this to be the most satisfactory solution for everybody concerned. Please, take care of these two letters also see that two letters which were sent a couple of days ago by Jordahl to me at 5, Avenue Victor Emanuel are returned to Jordahl. The letters were sent by Majestic - Goodbye now and thanks. I K


5 January 2009


Model Portfolio Value As of 5 January 2009

$ 533,413

Asian markets were higher by 2% to over 3% last night and European bourses are higher at midday. Gold is down 416 with an $860 handle and Oil is trading at $47.

Today will be a better measure of the tone and trend than Friday. Stocks look to open lower.

Steve Jobs has written a letter to the Apple community (and thus the world) in which he says that his weight loss is caused by an hormonal imbalance that robs him of proteins.  Maybe we could borrow that problem for a while. He says the doctors have figured it out and he will regain weight.

Anyway, the world is now safe and Jobs will not die and the markets can rally.

Polaroid bankrupt and now Wedgwood, what is the world we knew coming to?

Waterford Wedgwood PLC, the maker of classic china and crystal, filed for bankruptcy protection on Monday after attempts to restructure the struggling business or find a buyer failed. Waterford Wedgwood, which employs around 7,700 worldwide, is the latest in a burgeoning list of iconic British companies to succumb to the global economic slowdown and credit squeeze.

Department store veteran Woolworths, the queen's tailor Hardy Amies, tea and coffee merchant Whittard of Chelsea and fellow ceramics stalwart Royal Worcester and Spode have all filed for bankruptcy protection in recent months.

Wedgwood has been an iconic name in British pottery for 250 years, after its founder Josiah Wedgwood opened the first factory in Stoke-on-Trent, central England, in 1759. It began making bone china in the 19th century.

Waterford Crystal traces its lineage to a factory opened in Waterford, southeast Ireland in 1783, although that business failed in the 1850s. The brand was revived by Czech immigrant Miroslav Havel in 1947.

Waterford acquired Wedgwood in 1986 to form the present company, listing on the stock exchange and expanding overseas in the 1990s before buying fellow Stoke-on-Trent ceramics maker Royal Doulton in 2005.

Barnes & Noble popped on news that Ron Burkle owns 8% of the company. We sold and placed the funds in Dow Chemical and the small profit in Lear Corp at $1.50.

DOW is down from $45 in August to $15 (a 20 year low) on its announcement that it will buy Rohm & Haas for $15 billion. It was going to use $9 billion it received from a joint venture with Kuwait on a chemical plant but that deal feel through last week. Analysts think Dow is paying to too much for ROH and that the debt will be burdensome. If the deals falls through the shares will jump and if the deal goes through the shares are priced for that eventuality. It is a decent spec on lower oil prices and economic recovery. DOW yields 10% at these price levels. Buffet bought $3 billion of DOW convertible preferred in August when the shares were at $45.

Lear is a spec on the auto industry making it. The shares are down from $35 when Carl Icahn was trying to acquire. Debt is burdensome but then that is why it is at $1.55.

Renaissance cuts fees on one of three funds it runs:

Renaissance Funds’ manager James Simons recently told investors in his year-old futures fund, Renaissance Institutional Futures, that he was waiving the 1% fixed management fee this year following poor performance in 2008.

Mr. Simons’ larger, older Renaissance Institutional Equities Fund, though, won't bestow a management-fee cut this year despite its 16% decline in 2008. RIEF is marketed as aiming to beat the S&P by 4%-6%, which it did last year.

So did Renaissance's big Medallion fund. The high-frequency-trading fund notched an 80% return in 2008, but, unfortunately for outside clients, Medallion almost exclusively holds Renaissance employees' money.

It is interesting that the fund run for management and employees was up 80% while the fund run for institutional investors was down 16% and the futures fund was down 12%.

GM December sales were down 31%, Ford down 33%, Toyota down 36% and Chrysler down 51%.

We sold Nordstrom for a $4 per share profit and placed the funds in JP Morgan. We also sold a bunch of XLF and bought US Bank. Both are for trades.

Oil ended up $2 at $48. Gold lost $21 to $858. Europe closed higher across the continent.

Stocks closed lower but above their worst levels of the day. Breadth was postive and new lows were less than 100 but still greater than new highs.

Volume was slight. After Friday’s bounce today’s action was positive.


2 January 2009


Model Portfolio Value As of 2 January 2009

$ 534,869

The final numbers for 2008 had the Model Portfolio down 13.4% with the S&P 500 down 37%. The NAZZ was down 41% and the DJIA was down 32%. Many of our larger accounts were down 10% while smaller accounts of under $100,000 were down 20% to 25%. They of course will also outperform on the upside when it comes.

We are satisfied with our outperformance again in down markets and feel our accounts are situated well for the year ahead. We are fully invested for the first time in a long time with the idea of holding for longer than our usual period.

Today will be a slow one since it falls in the middle of the New Year’s Holiday.

Asia and Europe were higher overnight and Oil is down $2 with Gold down $10 in desultory trading.

Talk about ruining your year and the ultimate bad luck:

The trustee in charge of Bernard Madoff’s investment firm was sued for the return of $10 million deposited for investment with the company, which collapsed after its founder was charged with securities fraud.

Rosenman Family LLC yesterday sued Irving Picard, the trustee appointed to supervise the unwinding of Bernard L. Madoff Investment Securities LLC, seeking a ruling that Picard has no claim to the funds.

Martin Rosenman, managing member of Rosenman Family LLC, spoke by phone with Madoff Dec. 3 about investing and Madoff told him the fund would be closed until Jan. 1, though he may wire the money earlier, according to the complaint filed in U.S. Bankruptcy Court in Manhattan. Rosenman, also the president of Bronx, New York-based Stuyvesant Fuel Service Corp., placed $10 million in a Madoff account at JPMorgan Chase Bank on Dec. 5, according to the filing.

Madoff’s firm “never obtained legal or equitable title to the money Family deposited in the Chase account” and the money “remains there to this day,” according to the lawsuit.

Picard said the money is property of the firm’s estate, according to court papers.

George Stamboulidis, an attorney at Baker & Hostetler which represents Picard, didn’t immediately return a call seeking comment.

Rosenman Family LLC is seeking an order from U.S. Bankruptcy Judge Burton Lifland requiring JPMorgan to turn over the funds.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

The S&P 500 is up 25 points at 925 at 1:30pm. 925 on the S&P 500 is an important level. The markets are strong today on no volume and so we will have to wait until next week to know whether the rally is for real.

The DJIA closed up 3% and the S&P 500 was up 27 at 930. Only twenty more days like today and most folks will be back to even. We will be way ahead. We aren’t holding our breath but we will enjoy the pop for the weekend at least.

We’ll be back Monday when.....












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