Lemley Yarling Management Co
309 W Johnson St
Madison, WI 53703
Comments on activity in client accounts
28 January 2023
Markets were mixed this week as they digested January's 6% plus gains. With the Fed meeting next Tuesday and Wednesday and the
January Employment report on Friday next, traders seemed content to stand pat.
We readjusted stocks and invested more funds in the 1-3 month Treasury ETFs. The ETFs should go ex-dividend their monthly payouts next week and so we'll see how much month annualized yields have increased.
We traded out of Verizon and AT&T before earnings and we were too smart. AT&T announced good earnings and plus 700,000 postpaid subscriber additions (Verizon only had 46,000) and moved higher forcing us to repurchase a smaller amount at higher than we sold prices. We were able to reenter VZ at about the same price.
We were luckier with Intel, exiting the day before a lousy report which caused the shares to drop 10%. We will reenter eventually if the price remains depressed.
We have been profitably trading Google and Amazon in larger accounts. They are anchovies for us.
We bought Southwest Air when it dropped 6% to a nearly 7 years low on a larger than loss. The Holiday cancellation mess is history and Southwest is the soundest airline. It is a perfect example of buying a quality issue when it drops on fixable problems.
We were able to purchase IBM down $6 on earnings that we thought they were good. With Verizon, AT&T and IBM plus our 3 month Treasury ETFs, we have most accounts- except the smallest -holding a combined 50% value stocks yielding 5% and Treasuries yielding over 4%.
At weekend we owned: IBM, Amazon, Stanley Black & Decker, Wells Fargo, Pfizer, Southwest Air, Verizon, AT&T, Hain Celestial, Key Banks (out and in during the week), Ford, Paramount Plus, AMC Networks, Warner Bros Discovery, Nordstrom, The Gap and Under Armour.
Musings: We look at the national debt as similar to folks' home mortgages. Most folks' mortgages are 2 or 3 X and more their yearly income. But the mortgages are backed by real estate assets. Folks who worry about the national debt don't worry about their mortgages- nor do the bankers who lent them the money,
In the same way, the national debt is backed by the government's real estate assets. What's the value of the Grand Canyon, or Yellowstone, or Yosemite? What about the value of all the government buildings or the millions of acres of land the government owns? Surely the asset side of the Government ledger exceeds the debt side by a more substantial amount than most folks home mortgage equity/debt.
21 January 2023
Markets moved lower this week as the New Year rally dissolved. The major measures were down 3% and more and our accounts also gave back some (but less than the Indexes) of their gains of the first few weeks. With accounts up 5% to 12% we continued to move to cash – and short term U.S Treasury ETFs and so the damaged was mitigated for us.
At week end we owned:
Reduced positions in Verizon and AT&T. We own them for their yields (6.5% and 5.7%) and constant earnings.
We added Cisco- which we have traded over the years- for exposure to a value internet infrastructure stock with a 3% yield.
Pfizer is down to $45 from a $60 high in March a year ago and also yield's above 3%. The Feds are no longer paying for Covid shots (Medicare does for us old folks) so revenues from that source are going to contract significantly. Pfizer has used the cash flow from the last two years of Covid profits to invest in other promising drugs Cos so hopefully those investment will bear fruit.
We continue to trade 10% moves in GM -holding our Ford position as a longer term investment (we do adjust position size on rallies) with a 4.8% dividend.
We traded out of our large bank stocks for scratch to 5% profits when they rallied on positive earnings early in the week. We added to positions in Key Bank when it fell on a less than earnings forecast and repurchased for a trade- Huntington Bank- on its report of excellent earnings. Both issues yield over 4%.
We added a bit to our Intel holdings. It is the most hated chip stock. Eventually we hope- before we die- it resurrects itself. We've been trading it for years (profitably in 2021 and not so much in 2022). This is a new year and we are guessing (hoping) that committed sellers are gone. With a 5% yield it's worth the trading risk.
We sold for gains and bot back in much smaller amounts Hain and AMCX. Hain continues to trade at an all time low as does AMC Networks and we think (we are the only ones-it seems) that both should be acquired.
Hain is a major player in organic foods. General Mills or Kraft et al should be looking.
AMCX trades at 5X and has a valuable content library that should be attractive to much larger streamers. With a market value of $2 billion including debt and revenues of $2 billion it is cheap. The content that AMCX owns is worth much more than $4 billion.
If no one is interested we hope to trade for 20% or greater gains.
We have been trading Warner Discovery and Paramount plus for the last few years (mostly losses). For the present we have reentered WBD (after a 10% profit a week ago) in smaller amounts and are stepping aside from PARA. Both are anchovies.
We have reduced our retail exposure to The Gap, Under Armour and American Eagle. The retail Christmas season was supposedly lousy and so we await results in February/March to consider reentering some of our retail trading favorites.
We have been purchasing SGOV (ISHARE 0-3 month Treasury Bond ETF), BIL (SPDR Bloomberg 1-3 month T-Bill ETF), SHY (ISHARES 1-3 Year Treasury Bond ETF) and HYG (ISHARES IBoxx $ High Yield Corp Bond ETF).
SGOV and BIL have current yields of about 3.5%. Since they are investing in the very short end of the Treasury curve which currently has the highest yield and will continue to do so as the FED raises rates to 5%, we will receive an excellent return with very little risk. As the current investments roll off, the 2 (0-3 month) Treasury ETFs will be reinvesting at 4% plus and so the yield on each should soon exceed 4% for what are basically cash investments. As we said at year end, we plan to move our money to cash substitutes over the next months as we await the Debt Ceiling contretemps of the 20 Republican Hardline No-Nothings.
SHY has a bit more risk but also reward since it invests in Treasuries with 1-3 year maturities. Before the Fed began raising rates last year the ETF traded at $85 (now at $81) for many years. We expect the return on the ETF to begin to approach 4% and then when the Fed stops raising and eventually decides to go the other way the ETF has an appreciation potential of 4%+ coupled with a 4% plus yield.
Finally, HYG buys high yield corporate bonds (commonly known as Junk bonds). It is obviously riskier than the other three bond ETFs but it currently trades at $76 and yields 5.5%. When rates were lower last year HYG traded above $85. The FED is close to ending its rate raising activity and so we think HYG is close to it low with 10% appreciation potential and 3% downside.
The 3 Treasury bond ETFs (and HYG) pay monthly dividends on about the 5th of each month. The dividends are based on the yield obtained from investments during the month and have risen from 1% to 3.5% in the last year. The dividends should continue to rise into the 4% plus range as lower yielding investments are replaced by higher yielding Treasuries.
13 Friday 2023
We finished the week with a comfortable amount of cash in accounts. During the week we traded out of our New Year's bounce stocks at nice profits and reinvested accounts in more staid value issues. We reestablished positions in several bank stocks on Friday after they reported earnings. We also reduced our retail exposure by selling Macy's at a slight loss and Under Armour at a 10% profit.
As we enter the third week of January accounts are up 6% to 10% adding to our mostly flat to positive results last year while the S&P 500 although up 4% for the year is down 15% over the 13 months. The NASDAQ is also still down over 20% for that same period while the DJIA is only down 4%.
We currently own: Verizon, AT&T, Medtronic, Glaxo (drugs), Citi, Wells Fargo, BankAmerica, Key Banks, Walgreens Boots, Intel, Hewlett Packard (HPQ-computers/printers), GM, Ford and 3 retailers- Kohl's, Nordstrom's and the Gap.
We have begun buying BIL (0-3moth T-bills ETF), SGOV (0-3 month Treasuries ETF) and HYG (High yield ETF with 8 yr. average maturity and 5.5% yield). Since accounts have gained a year's performance this month, we will be placing raised cash in these ETFs as a discipline to keep from spending the funds on stocks until next fall. That's something we should have done last year. Live and learn. Also, the yield on those BIL and SCOG ETFs last year was less than 1%. It is now close to 4% paid monthly. HYG dropped 7% last year but since the Fed is near the end of its rate raising, we feel more confident parking a bit of money there at 5.5%.
The Republican controlled House has some real goofs- enough to prevent what should be normal business. The stock markets are underestimating the nut cases abilities to cause financial trouble. Thus, we are more than usual cautious approach and want to be in solid companies into March when we may go to all cash/ T-Bill ETFs.
Insurrection Day 2023
The contretemps in the House of Representatives has encouraged the markets that nothing will happen for the next two years on Congress. Hopefully the Dems and a few moderate Republicans- if there are any left- will be able to approve a debt ceiling raise sometime around June. We plan to be mostly out of the market by then.
The trading year opened Tuesday with a modest up then immediately turned lower and ended on a down; then Wednesday was an up day; Thursday a 1% plus down day and Friday a 1.5% up day. We used the volatility to raise cash (we had been fully invested at year end) and lock in some gains.
The Friday Employment report on wages was welcomed as a positive by the markets and that led to the rally. The hope for soft landing scenario was even mentioned by the talking heads.
We currently own: Verizon, AT&T, Stanley Black& Decker, Dow, Walgreens, Intel, GM, Ford, Key Bank, Portillo Hot Dogs, Newell, Paramount plus, AMC Networks (streaming not movie theatres), Warner Bros Discovery, Macy's, Hain Celestial, Nordstrom, The Gap, Under Armour, Google, Amazon and Medtronic.
Monthly CPI is set to be reported on January 12 and that should be the next market mover. Hopefully it will be positive and we can raise more cash.
1 Janaury 2023
We ended the year on a down note. Two weeks ago, we were feeling very smart when the markets rallied 3% on the good CPI data; this week not so much!
The S&P finished 2022 down about 19%, the NASDAQ 100 off 33% and the DJIA down 8%.
In 2022 our most accounts were down 3% to up 5%. As we often say, we tend to underperform up markets and out perform down markets. We remained fully invested at year end.
Last year we were up over 10% in most accounts when we moved to cash in February/March and we plan to do the same this year. We choose this approach because our investment philosophy causes us to buy out of favor stocks that are usually subject to tax loss selling at year end (now called tax harvesting because that sounds better).
After year-end those pressured issues tend to rally 10% or greater as selling pressure abates and we then take select profits and move the realized cash to the sidelines. Our misstep last year was to underestimate the depth of the correction and we reentered our favored stocks too early and then spent the rest of the year trying to mitigate the down moves in our retail contingent and even quality issues like Verizon and Walgreens. And, we managed to outperform the major measures. But that was small comfort since had we remained in cash till October, which had been our plan……..., we know, Spilled Milk.
We ended the year owning:
Verizon and AT&T: both of which are severely undervalued each yielding 6%;
KBWB (bank ETF), Citigroup and Key Banks: all 3 down 30% from highs and each yielding 4% +;
Walgreens Boots: yielding 5% and back in the favor of many analysts;
Intel: yielding 5.5% and hated by all;
Hain Celestial: organic foods company at all time low;
Newell Brands: over 100 brands including Rubbermaid yielding 7%;
GM and Ford: underpriced compared to Tesla, Ford 5% yld GM 1% yld;
Portillo Hot Dogs: Chicago favorite came public last year;
QQQM (Nasdaq 100 ETF): down 33% and a trade in the new year:
Alphabet (Google) & Amazon: seem reasonable at current levels each down 40% in the last year;
ARK Innovation: for a trade (down 70% in last year);
SNAP: we traded with middling results at much higher levels last year, still has 350 million daily users including Abby;
Sentinel One: cloud tech down from $50 to $13, held its own at year end at these levels, traded profitably in December, plan to again
Disney: (in the hate phase of the love/hate attitudes of analysts);
Paramount +: Showtime, CBS, MTV, Paramount Pictures, Miramax, huge film library and hated by all with a 5.6% yld;
AMC Networks: not the movie chain, AMC, WE tv, BBC AMERICA, IFC, and Sundance and Acorn priced at 2 times earnings on all time low;
Warner Bros Disc: HBO, movies, film library, TV stations - another hated media company - a lot of debt. down from $25 at time of AT&T spinoff/merger to $10. Year-end trade;
Macy's 3% yld, Nordstrom 4.7%yld, The Gap 5.3%yld, Under Armour, Abercrombie, Best Buy 4.3%yld, The Container Store (3XPE) and American Eagle
VF Corp 7% yld (Brands- North Face, Timberland, Smartwool, Icebreaker, Altra, Vans, Supreme, Kipling, Napapijri, Eastpak, JanSport, Dickies, and Timberland PRO).
Our hope in the New Year is for peace in Ukraine.
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