Bud's Poem Page

30 July 2004 - Daily Comment

6:42am and we begin our vacation schedule today. For the next few weeks will have one post a day in the morning. We need some time off to cogitate and ruminate about the markets and world and enjoy our grandchildren. The accounts are mainly cash and while we wouldnít be surprised by a continuation of the feeble rally of the last three days, we believe the time of year and economic and political events occurring will act as a lid on market prices for at least the next few months.

Asia was up overnight with Japan and Hong Kong higher. It seems like Japan has been rising or falling by 1% each day and so they are experiencing the same type of volatility the U.S. markets have begun to experience in the last week.

With the Democrat Convention put to bed the next event of interest is the Olympics. If the media covers the games, and not the security, that event will have little effect on the markets.

Europe is mixed today and U.S. prices are a tad lower indicating a soft opening for stocks. Since it is the last day of the month there could be some mark ups occurring but since it is a summer weekend traders may square positions and leave early.

The low priced tech stocks stage a pretty good rally yesterday. Oil is trading over $43 per barrel and this morning the government announces preliminary GDP which is history and also the projected deficit for the year. It should be a record $400 billion plus but less than the $500 billion we forecast last year when the Bushies were suggesting $300 billion

We guess for today down early, then a rally holding small gains into the close.

So let the games begin. Next post Monday Morning.

29 July 2004 - Evening Comment

7:32am and the 2nd Quarter Employment Cost Index was up 0.9%. Jobless claims rose 4,000 to 345,000. Treasuries continue to rise in yield and drop in price in a dripping manner. The ten-year is back above a 4.62% yield after visiting the 4.45% area a few weeks ago. Treasuries seem to be saying that the economy is continuing to recover after the slip in June.

8:57am and the DJIA is up 30 points and the NAZZ is up 18 points with breadth 2/1 positive on the NYSE and 3/1 positive on the NAZZ. Volume is light. This seems like a carryover catch up ĎI missed getting in the last hour rally yesterdayí and we would guess it will run out of steam in about an hour.

There isnít much news to drive stocks and so they are reacting on an individual basis. GM is lower on a Goldman Sachs downgrade. Krispy Kreme is off 3 points on an informal SEC inquiry into book keeping. Whole Foods is off 8 Points and United Natural Foods is down 2 points even though WFMI had super sales and earnings. They just werenít good enough for the sell the news folks. Since the stocks trades at 40 times earnings it is much too rich for our blood although we like shopping at their stores.

The Help Wanted Index for June was 38 versus and expected 41. Every little bit of the puzzle helps form the picture of the economy, or so they say whoever they are.

11:02am and stocks are higher in light trading. The broken down tech stocks are getting a lot of action.

For your information from http://www.brillig.com/debt_clock/

The Outstanding Public Debt as of 29 Jul 2004 at 03:58:41 PM GMT is:


The estimated population of the United States is 293,838,605
so each citizen's share of this debt is $24,829.69.

The National Debt has continued to increase an average of
$1.69 billion per day since September 30, 2003!

11:15am and we think the markets will tail off today and tomorrow unless there is some month end mark up going on. Then our guess is that polls taken after the Democrat Convention will show very little pop for the Kerry Ticket and that will be viewed as a positive for Bush. The TV pundits are all mouthing the RNC talking points of an expected 15 point pop in the polls as the usual gain. The markets are looking for an excuse to believe Bush will win and the non pop in the polls will be the cue.

If there is a sell off today and tomorrow we will buy some QQQ for a trade. If we are wrong and the markets rally the next two days we will continue sitting on our hands.

11:21am and with todayís drop in Treasury bond prices intermediate and long term Treasuries are about unchanged on the year with the price movement lower absorbing all the income from the coupon. For the record the DJIAI is down 3%, the NAZZ is down 6% and the S&P 500 is off 1%. It looks like everyone is in the same leaky boat.

1:20pm and the DJIA is now lower but breadth remains strongly positive on the NYSE. It must be programs. Europe closed higher with Paris up over 2% and Germany up 1.9%. MSFT is lower again today.

1:48pm and when we entered the business in 1965 AT&T debt was rated triple A and was the premier corporate debt. Today Moodyís Rating Service cut AT&T debt to junk status. The break-up of AT&T in 1986 has gone full circle with the existing three RBOC becoming the survivors of the telephone wars of the past 18 years. And we havenít totaled the numbers up but we would bet that more money has been lost by investors in the bankruptcies of WCOM, Global Crossing, the demise of Qwest, et al as was made by maintaining ownership in the surviving telephone companies.

1:56pm and after drifting into the negative column in the last hour, the DJIA is positive again and the NAZZ remains higher on the day. It looks like a third positive close for the major measures is in the cards.

3:02pm and the DJIA closed up 17 points at 10135. The S&P 500 regained 1100 and managed to close over that number at 1101 up 5 points. The NAZZ gained 24 points to finish at 1882. Breadth was better than 2/1 positive at the close and up volume exceeded down volume by a greater margin. Treasuries also rallied at their close and finished higher in price lower in yield for the day.

29 July 2004 - Morning Comment

7:03am and the Crawford County Fair begins today along with numerous other events of interest for grandchildren of all ages. And so for the next week and one half until August 10 we will be in and out of the office at the farm. Phone calls will be forwarded to Kathy in Chicago for much of the period. It is our vacation time.

We will still have at least one post a day.

7:07am and jobless claims arrive at 7:30am along with a few other economic reports which will help to expand on the picture of the economy the stock markets need to decide where to go from here.

Yesterdayís action was positive for the bulls. The big boys and girls must have decided that the Yukos affair will be temporary and that the mornings sell off was a good place to begin buying. We are not so sure. Today and tomorrow and early next week will give a much better idea of how much buying power is ready to commit.

Asia was mixed overnight with Japan and Hong Kong lower and Europe is seeing green with Moscow up 3% in the early going after dropping 5% yesterday. Anyone who is still investing in Russian markets must love juggling daggers with no handles.

U.S. futures are higher. For this morning we would guess up early and then thoughts of the weekend leavening any further gains.

So let the games begin.

28 July 2004 - Evening Comment

7:45am and Oil is back over $42 per barrel which is not conducive to the economic recovery. Durable goods orders just announced show a gain of 0.7%, ex transportation the orders were down 0.6%. The forecast was for 2% growth in orders.

Overseas Asia was higher overnight with Japan up what it was down the day before and Europe is also in the green. Russia was down 3%.

Time Warner expects AOL to generate $1 billion in free cash flow this year. And the marketplace is saying that AOL is worthless. AOL has 20 million plus subscribers whose credit cards are debited $6 or more every month like clock work. Yahoo has to bill its advertisers to get its revenue. We continue to like TWX; we just think we will get it cheaper.

Another stock that we are looking at again is SBC. SBC is buying AT&T Wireless with BellSouth and the gurus have declared the RBOC the winners in the battle with MCI and T. T will eventually be acquired like CBB but with the recent failure by the Buhsies to appeal a court decision denying T and MCI access to RBOC local lines, the RBOC are in the driverís seat as to when to buy and the price to pay. We had been concentrating on the telecom suppliers of equipment but there are still too many suppliers and they remain expensive on an absolute basis. We lost a good chunk of money trading them and learning this lesson.

9:16am and stocks were lower out of the box and havenít yet traded to the upside. The DJIA is only down 36 points but the NAZZ is off 24 points and thatís not good. Breadth is 2/1 negative which is the reverse yesterday which was the reverse of the day before.

10:06am and trouble in the Russian oil market with Putinís attempted takeover of Yukos has folks worrying about supply and thus has crude at $43 per barrel, the highest ever. That in turn is affecting both the stock and bond markets negatively. The bond markets are affected from an inflation worry standpoint and the stocks markets from a consumer and business slowdown/higher cost worry. Itís always something.

1:05pm and all rallies today have been met by selling. The Yukos situation is the key to todayís sell off. There are reports that Conoco Phillips is interested in buying a portion of Yukos from the Russian Government. There are reports that the Russian Government has told Yukos to cease production. Whatever occurs in the fight, Yukos oil will eventually come to market. But in the meantime the oil price rise is benefiting the oil companies. And the markets donít know whether the sudden rise in oil prices this week has caught any large players short.

There is also a recall election coming up in Venezuela on August 15th that may not yet be fully factored into the oil price. If President Chavez is retained the U.S. is not going to be on his favoritesí list. And if Chavez loses there may be pandemonium. In fact if he wins there also may be pandemonium.

Weíll see how stocks do in the final hour. But since the oil price crisis is not going to be resolved today we doubt a rally is in the cards. European markets closed mixed.

The Fedís Beige book report was issued today and the first three paragraphs were:

Federal Reserve districts reported that economic activity continued to expand in June and early July, although several districts reported that the rate of growth moderated. The Philadelphia, Atlanta, Chicago, St. Louis, Minneapolis, and Dallas Districts characterized growth rates as ranging from modest (Minneapolis) to solid (Chicago), while New York, Cleveland, Richmond, Kansas City, and San Francisco noted that growth rates slowed somewhat in their districts. Boston cited mixed reports from its business contacts. Reports of rising prices at the producer level continued to be common, though increases in retail prices were only infrequently reported. While wage gains remained generally flat, benefits costs continued to rise.

Retail sales were widely cited as having slowed; in particular, most districts reported that auto sales were flat to down. Manufacturing activity increased across the country, though there were pockets of weakness and gains were generally more measured than in the early spring. Travel and tourism were reported to be strong in many districts. Regarding construction, the pattern of past reports continued, as residential construction was still strong across most districts, while nonresidential building remained generally weak. In the banking sector, borrowing by commercial clients rose moderately in most districts. In the consumer lending category, mortgage originations were reported to be robust, but refinancings fell further. Agricultural conditions across the country were mixed, as some areas suffered from unusually wet weather. Mining and energy enterprises saw increases in activity in recent weeks.

Cost pressures were cited for a variety of production inputs in most districts. Energy, steel, and cement prices were widely cited as high and were reported to have moved higher in most districts. Some agricultural product prices, including beef, chicken, and milk, were also cited as adding to pricing pressures. The degree to which businesses have been able to pass along these prices continued to vary, but no district reported an acceleration in general retail prices. The few reports of labor shortages were narrow in scope. Wage increases were also widely reported to be moderate. However, businesses continued to cite health care costs as a factor in significantly boosting total labor costs.

3:02pm and the bulls were able to stem the tide but whether they won the day will have to wait until tomorrow. At the bell the DJIA was up 36 points at 101200. The S&P 500 gained 1 point to end at 1095 and the NAZZ was down 10 points at 1858. Breadth was about 5/4 negative on the NAZZ but 5/4 positive on the NYSE at the close and volume for the day was summer moderate.

Rumors for the causes of the sell off today were the Presidential election, the coming full moon and the Yukos oil brouhaha and a resulting squeeze on some shorts. Rumors for the causes of the rally in the last hour were the Presidential election, the coming full moon and the Yukos brouhaha going away and the squeeze on some shorts ending.

And tomorrow is another day.

28 July 2004 - Morning Comment

6:52am and stocks are set to open slightly lower this morning after yesterdayís strong run. The few gurus that we read said it was a turnaround day. We are on the periphery of interest in the action since we have made a decision to take some time to rethink our investment posture. Weíve done this the last few years at this time of year when weíve lost our way.

The conflicting trading patterns of up strongly one day after many down days does not a rally make. The markets are going to have to see some strong follow through for a few days to convince many money folks to rush back in.

A bottom may be in place but folks wonít know it for a while. We want to see some economic numbers for July and August before declaring victory in the economic wars. And by that time the markets will be in the weak September to early October period.

Time Warner announced good results today and we will be interested to see its reaction. It is below our sale price and it remains on our buy list. Cincinnati Bell had OK revenues and earnings news but it remains on our sell list. There just wasnít enough buying interest yesterday to sell all the shares which is one reason it is on our sell list.

Our desire is to revisit our trading ideas and stocks we want to own. But our main goal remains the preservation of the money we have earned in very difficult times.

For this morning we see a slight sell off at the opening then up and thenÖ..

So let the games begin.

27 July 2004 - Evening Comment

6:50am and there is talk on CNBC that S&P multiples are the lowest since 1995. That may be true, but we were thinking last night that many of the stocks holding up in this down market are selling at plus 30 times earrings which is almost double the 18 multiple on the S&P. Averages are averages and the leadership stocks that the big boys and girls have been buying are not cheap.

EBAY, SBUX, WFMI, and stocks of this nature that are showing consistent quarter over quarter growth are all selling at 35 times earnings and higher multiples. Google which will be the star of August will be priced at 100 times earnings.

In 2001 and 2002 the markets bounced off July lows to have sharp rebounds in August only to roll over into October lows. The same action may be setting up this year. Last year the markets rallied all year after the March 2003 low and so we think the action of 2001 and 2002 are more likely because the market action is similar at this point in the year.

7:15am and just below is the Headline in the NYT. Boston Scientific makes drug coated stents for propping open coronary arteries in heart patients.

After a Recall, Boston Scientific Tries to Assure Wary Investors

Shouldnít the company and the headline say Boston Scientific tries to reassure wary patients?

8:45am and stocks are opening higher this morning. Breadth is 3/2 positive at the start. This rally looks like it will hold for longer than an hour. There are folks with cash on the sidelines who want to catch the next move up. We arenít among them because the move could just as easily be down after a one or two day charge to the upside and we arenít that nimble anymore.

9:16am and Consumer Confidence was 106 in July which is a two year high and fourth straight month it has risen. New home sales fell less than 1% in June which was better than a 6% expected drop. Bad news becomes good news by the magic of expectations.

Oil is approaching $42 a barrel and Gold is under $390. Breadth is 2/1 positive and so is up over down volume which is the mirror of yesterday.

12:41pm and stocks are holding their gains with the DJIA up 61 points and the NAZZ up 15 points. Breadth is weakening a bit and new lows exceed new highs but the markets look to close up today. Volume is light.

1:25pm and Europe closed higher on the day with Germany up over 1%. The DJIA is now up 81 points and the NAZZ is up 16 as breadth is back to 2/1 positive. The final hour will be the tell again today.

We sold half our position in all accounts in CBB ahead of earnings tomorrow morning. We took a loss on the sale.

3:02pm and stocks rallied in the last hour with the DJIA closing up 122 points at 10083. The S&P 500 gained 10 points to finish at 1095 and the NAZZ rose 30 points to close at 1870. Breadth was 2/1 positive at the close but volume was punk and MSFT did not participate and closed lower on the day.

And tomorrow is another day.

27 July 2004 - Morning Comment

6:32am and Asia ws mixed overnight with Japan down 1% and Hong Kong off fractionally. Europe is higher and U.S. futures are also higher.

Yesterday the markets seemed to want to move higher but just couldnít get the oomph they needed. Maybe stocks can get going to the upside for a few days this morning. Or traders may want to wait for the end of the Democrat Convention. The only problem is that the Olympics are in August and they are going to be as much about terrorism as sports from a media standpoint and the constant harping on security will not be conducive to rallies.

Earnings have been coming in as expected but markets are forward looking and todayís earnings are old news.

CBB earnings come tomorrow and we canít decide whether to exit the stock or hold. Our instinct is to get out and start over again with Schwab as our base. Obviously our approach for most of the year while better than many has led to a negative return which is not something we value even if we are beating the benchmarks. Our measure of success is not to lose money.

There are other stocks we sold recently that we would buy before CBB and that is the real measure of our commitment...

For this morning up early and theÖ

So let the games begin.

26 July 2004 - Evening Comment

6:57am and in their earnings report last Friday MSFT said they lost $500 million in trading derivatives. That is only 1% of the cash they have on hand and they were obviously trying to increase the return on their cash as are widows in Florida and Arizona, although we hope the widows arenít being encouraged to trade derivatives. They are probably being encouraged to write calls and more dangerous put options which are the foolís game for the small investor and large hedge fund alike.

Thus MSFT desire to spend a good chunk of that cash may be understandable from the fact that they lost money trying to invest it. But the loss also is an example of how even the largest and supposedly most sophisticated companies are babes in the woods when trading with brokers on Wall Street. Someone was on the other side of MSFT losing trades and it was probably some large investment bank. Even the big guys can be taken for a ride.

8:19am and Google is going to be priced at the $105 to $128 per share range on 23 million shares to raise $3.2 billion. Existing shareholders who took salary as stock will pocket over $1 billion. Itís nice to have a 15% tax rate.

9:03am and stocks opened higher and are floating along in light trading. Existing home sales were up 2.1% in June.

Tellabs was up 50 cents out of the gate and we couldnít understand until we saw a note that Merrill upped the stock to a buy so all the Merrill brokers are dialing for dollars. www.realmoney.com is reporting UBS is suggesting that the terms of the deal between TLAB and AFCI may be changed. One reason we sold TLAB last week was that we thought the AFCI numbers were lousy and would cause some problems for TLAB going forward as they integrate facilities and folks. Also any change in the terms will cause the shorts in TLAB to have to buy in some TLAB shares unless the readjustment is to the cash portion of the offer. We continue to believe that TLAB trades lower before it moves significantly higher butÖ

9:33am and volume remains light as the major measures are flip flopping between pus and minus. Breadth is flat on the NYSE and 3/2 negative on the NAZZ. Some individual stocks are blowing up while very few are outperforming. It is a lazy summer day.

12:03pm and the major measures donít want to go down or up today. Breadth is 2/1 negative and down volume exceeds up volume by the same margin. Volume remains summer light and it is a boring day, unless you are long or short one of the catastrophes of the day.

1:13pm and Google is going to be offered on August 9. It will have a market cap of about $38 billion and earnings of about $300 million. Yahoo has a market cap of $38 billion and EBAY is $48 billion. These three companies will have a total market cap exceeding $130 billion and combined earnings of about $1.2 billion.

The problem with buying stocks that trade at 100 times earnings is that you never know when the markets will decide they are only worth 50 times or 30 times earnings.

1:29pm and 1080 is the line in the sand for todayís S&P 500 lower limit. The S&P has touched and bounced up from this number three times today. There seems to be a lot of lethargy in todayís market action so a few hedge funds could have some fun in the final hour today.

We are sitting on our hands as the DJIA is down 6 points and the NAZZ is off 12 points which is its low for the day.

Treasuries are weaker on the good existing housing sales data

3:02pm and the DJIA closed up 2 points at 9963. The S&P 500 lost 3 points to finish at 1083 and the NAZZ dropped 11 points ending at 1839. Breadth and down volume over up volume remained over 2/1 negative into the close.

And tomorrow is another day.

26 July 2004 - Morning Comment

We neglected to post the evening comment from July 23 and so we are posting it this morning. Asia was lower overnight and Europe is in the red this morning. U.S. futures are a bit higher. We have no idea what will happen today. The news front is relatively bland with the Democrat Convention hogging the news. So let the games begin.

23 July 2004 - Evening Comment

7:30am and Amazon announced record sales but earnings were a penny shy and disappointed folks trading off a couple of points last night in after hours trading. MSFT also disappointed and was down about 50 cents and $1 from where it popped to earlier in the week on the one time special dividend announcement.

Sears opened three points lower in the morning but was almost unchanged at the close yesterday. Sears has on line shopping which is not a major part of their sales but we would suggest it could be. The only problem is that many Searsí shoppers are not computer facile.

We know it isnít completely fair to compare Amazon and Sears but both are basically retailers and Sears is much more profitable. One has perpetual promise and one perpetual disappointment. Sears does grow its sales at about the same dollar rate as Amazon every year although from a much higher base than Amazon. In 2004 Sears should have sales approaching $38 billion. Sears has debt of $7 billion and covers that debt 3.1x. Sears earns about $3.80 per share and has an equity market cap of $7.5 billion.

Amazon will have sales this year of about $7 billion. It may earn $1 per share. It has debt of $2 billion and interest is covered 2.3x. Amazon has an equity market cap of $17 billion.

The stock market is all about promise and hope and fear and greed.

8:18am and John Succo at www.minyanville.com reports that the money generated by the MSFT special dividend will be equal to 16% of all money flows into stocks this year. Add the $30 billion of the buyback and the amount of money is over 30%. Will it go to stocks or to pay down debt?

8:46am and stocks have opened lower.

Maytag posted a loss for the quarter and is going to slash jobs. We traded MYG a few years ago from the teens to lower twenties and sold because we thought it was fully valued. The share price then rose to $60 in the Ďyahooí times and we looked on in wonderment. The share price is now backing to $18 and we have MYG on our screen for year end.

8:55am and to add to the Friday gloom Fed Governor Moskow is on the tape saying that the Fed stands ready to provide liquidity in the case of a terror attack.

9:26am and Doug Faneuil, the Martha Stewart stoolie received a $2000 fine and no probation on a misdemeanor count. And so the saga ends and begins. And the courts have wasted millions on a nothing case.

9:30pm and after being off 80 points in early trading the DJIA is now down 60 points. The S&P 500 is off 7 and the NAZZ is down 24 points as yesterdayís hopes become todayís non reality. Breadth which remained negative all day yesterday is 2/1 negative and down volume exceeds up volume 4/1 on both the NYSE and NAZZ. Trading is summer Friday light.

9:56am and yesterday we were remarking about the fact that the DJIA first passed 10000 in March of 1999. Again today the DJIA has crossed 10000 to the downside. We made the point that buy and hold folks have made no money over the 5.4 year period that has transpired since that time if they owned the DJIA and the same holds true for the S&P 500. Those who owned the 100 largest stocks on the NASDAQ are still down about 60%. And we pointed out that the Lemley Model Portfolio which is actively traded like our other accounts and is a real account and contains our real money had significantly outperformed the DJIA. We listed a value of $320,000 for the Model on March 1, 1999. That figure was incorrect. The correct figure was $268,372. So the Model is up 94% in the period when the DJAI and S&P 500 had no return and the QQQ lost 60% of its value.

Clients who have joined us recently have not shared in that significant out performance. One reason is that -and we told the clients this when they joined us- we are less willing to take risk now than we were six years ago because time and the markets have changed. Our first responsibility is to maintain the asset base we have under our charge and then our second obligation is to seek returns without exposing ourselves and clients to extraordinary risk.

Back in the 1960s the DJIA exceeded 1000 in 1968, then again in 1972 (when the U.S. were trying to extricate itself from a non winnable foreign adventure) and the third time it broke through for good to the upside and didnít look back was 1983. We hope we are not in the same type of time warp now. Prescient trading in 1974 and other years allowed our accounts to grow in that period but it was more difficult with more setbacks than in the roaring bull markets of the mid 1980s and late 1990s.

Another similarity between then and now is that after the high in 1972 and low in 1974 the markets took their time recovering. One impediment to this recovery is that the flow of funds into stocks was hindered by the run up in commodity prices and the resulting huge increase in the value of real estate, including homes. Real estate increased four times in value from the mid 1970s to mid 1980s. It wasnít until the real estate bubble burst that funds began to flow back into the stock markets in any meaningful way. The same scenario may be at work today.

10:19am and the Regional Bell operating companies (ROBC) are all up today on an upgrade by UBS Warburg. The thesis of the upgrade is that with AT&T announcing that it will no longer seek home phone business the regional bells have a lock on that business. We know that computer phone service (VOIP) is a threat but it is a few years off and the majority of home phone users will not be switching anytime soon. Unfortunately little Cincinnati Bell is not participating in the rally. Just you wait Charlie Brown, just you wait.

12:32pm and stocks are limping along at lower prices. Breadth remains 2/1 negative and down volume exceeds up volume by a 3/1 margin. Trading is light.

2:01pm and entering the final hour the DJIA is at its low of the day off 98 points. The NAZZ is down 38 points and trading is light. Breadth is 2/1 negative and down volume exceeds up volume by a 4/1 margin. Maybe there is too much terror talk for traders to feel comfortable. Britain closed higher but France and Germany were slightly lower on the day.

3:02pm and the DJIA closed down 88 points at 9962. The S&P 500 lost 11 points to finish at 1086 and the NAZZ dropped 40 points to 1850.

And tomorrow is another day.

23 July 2004 - Morning Comment

6:49am and Asia was mixed with Japan down and Hong Kong up while Europe is higher as we begin the day. In the U.S. futures are slightly lower with the indecision of yesterdayís action. Gold is lower and trading at $393 while oil is up to $41.54.

We raised all the cash we need yesterday. We would like to sell the CBB if we can in a house cleaning fresh start way. We obviously missed the rally which ended on June 30. We thought it would last into July. We were wrong. Sometimes indecision costs and in this case it cost us and clients about 3% to 5% of return. That is spilled milk.

The future is bright. We have plenty of cash and the market is our oyster bed in which we will continue to look for trading pearls in the months ahead. When we have initiated these purges in the past it has paid to stay on the sidelines for a while and catch our breathe and watch the action.

Our plan of action now-since within a month we will be entering what has been a dicey time for stocks the last five years-is to bide our time and plan for year end set ups. There are one or two stocks we want to own but as we said yesterday we are going to go for the three letters listed stocks rather than the four letter OTC kind. We havenít had much luck with the four letter kind when all the pluses and minuses are added and so a new approach seems warranted. But with us nothing is written in stone and from a market standpoint the one constant the last five years is that year end has been kind to us and allowed us to recapture or expand on the returns we hope to earn for clients and ourselves.

For today we expect the market to rally again after a little trepidation at the opening. The coulda woulda folks might have suggested we wait till today to liquidate and had we known there was going to be a 100 point rally we would have. The chances of a 200 point decline were just as likely yesterday and so we sold when the markets were recovering to even which seemed the prudent course. After the rally we would expect a flat close because of the week end although that scenario has not played out the last few weeks.

So let the games begin.

22 July 2004 - Evening Comment

7:05am and most stocks are coming in at estimates or a bit above which is no surprise since companies continue to massage earnings to meet expectations. EBAY reported better earnings and sales which were less than expectations and the share price is off $3 in early trading. EBAY is a Ďtellí for the internet shopping stocks.

The Justice Ministry in Russia said it will seize the production arm of Yukos for $3.2 billion in back taxes. On that news the Russian markets dropped about 3% overnight.

7:34am and Initial Claims for Unemployment dropped by 11,000 to 339,000. Oil is up 12 cents to $40.70. Continuing claims have dropped to 2.97 million as more folks leave the job market or find jobs. The only trouble no data is given as to which is which but the drop in continuing claims helps the unemployment rate to drop regardless of the reason.

8:02am and Coorís and Molson have announced plans to merge. We would bet the Justice Department gets into the fray to protect Budweiserís interests. Back in 1987 Heileman and Pabst and Schlitz wanted to combine to battle BUD. That combination would have comprised 15% of the beer market when even at that time BUD was over 50%. The Justice folks said no and all three companies and all the jobs involved disappeared.

8:10am and Caterpillar and Sears are both off $3 from the close in pre-opening trading as their earnings and sales reports disappointed.

The WSJ has a story today about hedge funds and some of the statistics they quoted are astounding and present an idea of how powerful these monsters have become. Since the end of 2000, hedge-fund assets have swelled to $845 billion from about $400 billion, according to Charles Gradante, managing principal of Hennessee Group LLC, an adviser to investors in hedge funds. Hennessee estimates that there are now 7,000 hedge funds, up from 4,800 at the start of 2001 and 1,640 a decade ago.

Wall Street has been a big force behind that growth. Hedge funds are estimated to generate more than $10 billion annually, or about 7% of total revenue, for Wall Street securities firms. Of that, roughly $7.5 billion in revenue comes from stock-trading services, says Richard Strauss, a brokerage-industry analyst at Deutsche Bank AG. Hedge-fund trading activity in bonds, commodities, currencies and options adds roughly another $2 billion to $3 billion in annual revenue, estimates Mr. Gradante.

It should be remembered that with many of these hedge funds the leverage is 10 to one or more through the use of futures and options so notionally they have more assets than the entire unmargined worth of the U.S. stock markets.

WSJ is a subscription service and the story is at: http://online.wsj.com

9:50am and stocks opened lower rallied to even and now are heading lower. Breadth is 2/1 negative on the NAZZ and NYSE and so is down versus up volume. The sell ff is of the drip variety with strength in individual stocks that we donít think will hold up.

10:33am and the DJIA is down through 10000 at 9970. The NAZZ is down 15 points. Breadth remains stinky and we are waiting for the bulls to make a stand.

12:11pm and we sold TLAB, BRCD, JDSU, and SEBL. The first was sold for a scratch profit and the balance for 20% losses. We are out of touch with the markets and down 1% for the year and our mantra is not to give anything back. We know some accounts are down 3% to 5% and one or two may be up.

We hold Schwab and Cincinnati Bell, the latter because it is too large a position to sell and we will need a rally to let it go. We will hold the Schwab. We need to regroup and rethink our strategy and we may be on the sidelines for a while. We expect a rally at some point but the markets are down the 8% were a few times in the last twenty years they have fallen off the cliff. Since our main aim is preservation of capital we have taken the safer course and may be sacrificing some gains but we have had a great run over the past five years and want to keep what we made.

12:40pm and the first time the DJIA went though 10000 was in March 1999. It was going the other way than it is today. All the long term investors who bought and held the DJIA have earned only the dividend of about 2% a year over the last 5.4 years. But they havenít had to pay short term taxes on their gains since there were none although they did have to pay regular tax rates on their dividends till the year.

On March 1 1999 the Lemley Letter Model Portfolio was valued at $321,000. Even with the punk year we have had the Lemley Letter Model Portfolio today is valued at $521,000. But our taxable accounts did have to pay short term taxes on the gains. Luckily many of our accounts are tax free accounts and even the accounts paying taxes are well ahead of holding the DJIA for 5.4 years.

1:50pm and entering the final hour of trading the DJIA is mounting a rally in tandem with the other major measures. The rally is selective though because breadth on both the NAZZ and NYSE remains 3/2 negative and down volume exceeds up volume by a 2/1 margin on the NYSE although the reverse is true on the NAZZ. The NAZZ needs to lead the markets higher and with QCOMís good numbers alt night and up action today MSFT which announces tonight may aid the cause. We no longer have any dogs in this fight and our dalliance with tech stocks and telecom suppliers is probably over for a while with the exception of TLAB at lower prices since we would guess that for the two and one half years we have been trying to trade them we are even to slightly down in the profits department.

3:02pm and into the close breadth improved on the NAZZ as shorts did a little buying to cover but breadth at the bell was still 5/4 negative on the NAZZ and 6/4 negative on the NYSE. The DJIA closed up 4 points for the day at 10050 after being down 100 points during the session and the NAZZ rose 15 points to end at 1887. The S&P 500 gained 3 points to finish at 1097. All in all it was a most interesting day and we are happy to be almost all in cash even as we dislike taking losses to get there.

And tomorrow is another day.

3:04 pm and we offer some thoughts about our daughter Christine's friend who is very sick. Sarah is everyone who is our friend.


            Elder Sarah

Eighty eight summers Sarahís shared
Sun and rain and coyotes call
An elder now but younger first
She weathered well the seasons all

Soon passing to the other side
As all of us must someday do
She leads us there with solemn fame
Rejoining earth from where we came

Sharing harvests through the years
Loving losing living to grow
Sarahís embraced natureís rules
As elders fore sheíll pass the bow

Rejoice for we have learned from her
Of wonders no one else has seen
She taught the young ones ideas true
Her charge from those now in the blue

Nature is as nature free
And travelers are but we
We share earth the Spiritís tool
And in the end She does rule

The cycle is as always been
For that we do rejoice
We have all succored Sarahís life
And in our lives Sarah lives.

                                     Bud Lemley  7/22/04

22 July 2004 - Morning Comment

6:31am and yesterdayís market action was a kick in the pants for the bulls. At times like this we can never have enough cash. We have difficulty believing that yesterday was the rally. Time will tell. Given that the weekend is approaching it will be difficult to mount a charge although the terror fear that has caused traders to lighten up has been lessening each week.

Asia gave back the previous dayís gains overnight and Europe is lower this morning as our U.S. futures. There has been technical damage and today is an important day from a short term perspective. Longer term the market will soon begin focusing on the third quarter reports and the July economic numbers.

Tonight the markets will deal with MSFT earnings. The anticipation may put a bid in stocks after a lower opening.

So let the games begin.

21 July 2004 - Evening Comment

PLEASE NOTE: We have been made aware that Bill Gates will give the $3 billion he receives from the special Microsoft dividend to his charity. We stand corrected and commend him on his largesse.

We continue to believe that the difference between the dividend and capital gain tax rate and the tax rate for folks who work for a living is unconscionable.

7:31am and Greenspan testifies before the House of Representatives this morning at 9am. He usually repeats his testimony of the day before in the Senate.

Mortgage Banker Association mortgage applications were down 4.3% versus 6.2% last week. This may be a positive negative note to start the day.

Gold is lower but over $400, and oil is also lower at $40.76. Treasuries are weaker again this morning.

7:44pm and we are really annoyed by the continuing advertising by major brokerage firms that suggests that all a person has to do is tell the firm when a person wants to retire and how much they will need and magic presto that firm will devise a program that will provide for those needs. The voice over to the pictures is always an authority male or dreamy female and all is wonderful in the land of OZ.

Our understanding is that all ads have to be approved by the NYSE or SEC or NASD and we canít understand how they allow this type of advertising. The last five years have disabused investors of this notion and it should have convinced brokerages that honesty might be a better policy.

8:14am and UPI is reporting that rockets with 3 nuclear war heads were found in Iraq this morning. The dollar is stronger on that news.

8:58am and the major measures all opened higher as MSFT is up over $1 on the dividend payout. In the long run we take the payout as a negative for the stock but that is just us. Stocks are beginning to retreat from their highs as folks who have wanted to sell the rally are doing so.

TLAB opened at $8.15 and is now backing to $7.88 as the arbs come back in to sell TLAB and buy AFCI. TLAB says it will close the merger in October and then the share price will be able to reflect its true value. Unfortunately we expect the markets to be in the tank in October but we plan on holding and hope to pick up more shares at lower prices.

9:27am and we have to go prepare the horses for the farrier who is coming to give them a pedicure in half an hour. Weíll be back in a few hours. Stocks are holding their gains and but breadth is flat on the NYSE and negative on the NAZZ. Volume is OK.

10:20am and breadth is now negative and the NAZZ has turned south. The DJIA remains up 50 points on the back of few stocks like MSFT, JPM and UTX but stocks are surrendering. It will not be positive to close lower today.

2:37pm and we are back from the horses in time to see the stocks roll over and head lower. The NAZZ is down 32 points and the DJIA is off 36. We would guess the close and opening tomorrow will not be pretty.

3:02pm and the DJIA closed down 100 points at 10048. The S&P 500 lost 15 points to end at 1093 and the NAZZ dropped 43 points to end at 1875. Volume increased on the sell off and today saw the heaviest volume in a while. We are glad we raised more cash recently even when it involved taking losses.

And tomorrow is another day.

21 July 2004 - Morning Comment

6:41am and last night Microsoft announced a one time special $3 dividend. That amounts to a $3 billion plus payday for Bill and Melinda Gates. With the new tax rate of 15% Bill will save about $1 billion in taxes from the special and ordinary dividends he receives this year. Maybe heíll add another wing on his 30,000 square foot house to help the local economy.

JP Morgan announced a $2 billion reserve for litigation and a huge stock buyback. Itís funny how those two announcements seem to come in tandem.

Overnight Asia was very strong with Japan up over 1.5% and Hong Kong up over 2%. Happy days are here again with Europe also wearing the green. U.S. futures are higher and the reflex rally has begun as earnings meet estimates. We havenít seen any blowout numbers. Market participants are worried about results going forward and that is what will determine market action after the initial surge this morning.

The shorts have been pressing their case and may be caught this morning. We expect a hire opening and then we have no ideas. Most of the stocks we sold recently remain below our sale prices and the low priced stocks we kept should participate in the rally.

Tellabs will be higher this morning after trading lower after the close last night. TLAB traded lower because Advance Fiber, the company is it acquiring, announced punk sales and earnings. AFCI said it wasnít able to fill all orders because of parts shortages and took some special charges including a $1 million fine for missing order deadlines with Verizon. But this morning TLAB reported better than expected numbers and all is well with TLAB as it is trading up 50 cents per share from last nights close.

So let the games begin.

20 July 2004 - Evening Comment

7:32am and June Housing starts were down 8.5% and permits were down 7%. More signs of weakness as the FED are planning on raising rates. Since these numbers are from June the markets are ignoring them and are more interested in what the July economic numbers will be to see if there is a trend.

Greenspan doesnít testify until 1:30pm and so morning trading may be slow.

7:50am and David Pottruck has resigned as CEO of Schwab and Charles Schwab has taken the reins. Thatís good if we want a sale of the company, which we do. JP Morgan is calling.

9:06am and stocks have opened mixed with the DJIA lower and the NAZZ 8 points higher. We are going to attempt to sell the HAIN and place the same number of shares in Schwab. We think Pottruck leaving is a positive for our sell out thesis.

10:36am and Helene Meisler at www.realmoney.com suggests that the S&P 500 is making the third fan of a three fan and look out below technical formation. She remarks that such a formation is described in John Murphyís book on technical analysis called ĎTechnical Analysis of the Futures Marketsí.

The fan development is one more thing to worry about. But then markets climb a wall of worry soÖ

Breadth is flat to positive and up volume exceeds down volume in light trading. The Major measures are all slightly higher on the day.

11:54am and stocks continue higher with breadth positive and volume light. We sold HAIN at $17.10 for a 3% loss. We are buying only half a position in Schwab with the HAIN money because SCH has popped to $8.80 on the CEO leaving news. Obviously other folks have the same idea as we do. We hope it settles down in a few days so we can add more shares at lower prices to all accounts. Despite the increase in Schwab's stock Tuesday, shares are still down 26% since the start of the year and are off almost 80% since March 2000.

1:23pm and ahead of Greenspan in a few minutes the major measures are on their highs with the DJIA up 40 points and the NAZZ up 20 points. Oil is down $1.20 and Gold is lower and through $400 on the downside. Treasuries remain weaker on the day.

2:01pm and everything is rosy through Greenspanís glasses and as a result Treasuries are off a bit more in price and up in yield as Alan seems to be implying that he will continue to raise rates at a measured pace. The major measures remain higher but off their best levels and the markets are not spiking higher as yet.

Breadth continues to improve and up volume exceeds down volume by 2/1 on both the NAZZ and NYSE.

European stocks closed higher on the day.

3:02pm and the DJIA closed on its high for the day up 55 points at 10150. The S&P 500 gained 7 points to finish at 1108 and the NAZZ rose 33 points to end at 1917.

And tomorrow is another day.

20 July 2004 - Morning Comment

7:12am and yesterdayís mini rally in a few of our sold out tech stocks stemmed the bleeding and led to an improvement in overall results. This morning a few tech stocks are coming in with in-line or better than expected earnings with EMC representing the former and Corning the latter.

We have reduced our holdings to a volatile group of tech related low priced stocks with the exception of HAIN and Schwab. HAIN is going on the chopping block today but we will continue to hold Schwab and add to it in the under $8 range. We think we have an understanding of Schwabís business and we expect to make good money on the other side of the maybe valley in this company.

We are holding TLAB, JDSU and CIEN for the supposed spending on fiber to the home by the RBOCs. We own Brocade because storage stocks have been under pressure for a few months and we have traded this stock successfully. And we own Cincinnati Bell because we think it will be acquired in the next few years at double the current level.

Given the 10% pullback from the highs we are happy to be survivors and while accounts are lower for the year the give back is manageable. We have been lucky for the past four years in our ability to outperform the markets and it was time for us to just match the market action. We are not out-performing because we didnít follow our own advice. That has happened before and we have been able to recover and excel and we hope to be able to do so again. Past performance is not an indication of future performance.

Asia was lower overnight with Japan playing catch down after being closed on Monday and dropping 170 points overnight. Hong Kong was off 40 points. Europe is mildly higher with an eye cast upon American markets to see how they do this morning. The U.S. futures are indicating a mildly higher opening.

This morningís earnings announcements have been mainly positive with Ford beating estimates and raising full year guidance to $1.70 to $1.80. Oil is above $41 dollars but a tad weaker as is gold at $404.60.

Treasuries are weaker ahead of the Chairmanís testimony and that event is the trading fulcrum for today.

So let the games begin.

19 July 2004 - Evening Comment

9:32am and it is blah in broker land today. The major measures are plus or minus a bit of even and volume is a very light summer light.

Japan was closed overnight and Hong Kong was higher with the rest of Asia mixed. Europe is in the red and Treasuries are a bit lower in price higher in yield.

Breadth is even on the NYSE and 7/4 negative on the NAZZ with up versus down volume about even on both.

3M announced good earnings and is down $4 per share and Kraft lowered guidance going forward and is up 30 cents per share. The price action of these two stocks gives a good idea of the randomness of recent market action. Many gurus are predicting a breakout from the 8% trading range the markets have been in for a total of 128 trading days. The only problem is that they arenít sure which way the break out will occur.

Last Friday while we were traveling the CPI was announced as up 0.3%, ex food and energy up 0.1%. We donít believe those numbers.

My lord, there is a guru on CNBC talking about back to school and our first crop hay hasnít yet been cut. Rain is wrecking havoc with the haying this year.

11:20am and we sold the Sun Micro position that we bought last week for a scratch when it popped 15% today. Basically we are trying to raise cash without doing too much damage to portfolios and with the intention of holding a few volatile stocks that can benefit from any sold out rally in the next few weeks.

Obviously our thinking has changed from a month ago and we wish we werenít in this position but we are and we have to make the best of it. We are also selling out our position in HPQ at a 10% loss for the second time this year. Once burned etc.

The DJIA is down 60 points and the NAZZ is off 1%.

1:17pm and the major measures are staging a comeback with the DJIA down 30 points and the NAZZ flat. We have reduced accounts to the 15% or less invested range and so we are going to stop selling for now.

The NAZZ has been down 9 of the last 10 days and lost 7% in value in that time period. That kind of sell off suggests a reflex rally. So why have we continued to raise cash?

Part of the reason is a hangover from the drops of 2000 to 2003 but we also are cautioned by the uncertainty of companies announcing good earnings but hedging on their on their forward outlooks. The high price of oil, the mixed election picture, and the lousy technical action also are huge negatives. We have been reading about hedge funds selling puts to earn return and that is a foolís game for all but the most seasoned professional. But some of these fools are very large players and they can fool themselves for a long while before paying the piper.

Weíve seen this picture before and three out of the four last times we saw it the ending was sad for those who didnít raise cash. Last year the major measures bottomed in March and then moved higher for the rest of the year. That was the exception.

In 2000, 2001 and 2002 the major measures made highs in the March to June period but when they began selling off they didnít bottom until October. We doní t know if that will be the case this year but we are going to take our lumps now and get some more cash under our belt.

Our mistake this year was in not listening to ourselves and failing to go to all cash in February as we said we were going to do. We have been right about the economy and wrong about our stocks picks. But all is not lost this year, in fact very little has been, and we are willing to sell our pride to save a dollar or two.

2:02pm and stocks rallied into the 2pm last hour with the DJIA getting back almost to even. It is now moving lower and the NAZZ is showing some weakness but remains positive. Weíll see how the last hour goes.

3:02pm and Greenspan delivers his Humphrey/Hawkins testimony to Congress tomorrow and Wednesday. So media financial folks are all a twitter about what he will and wonít say. Also Housing Starts for June and Redbook Retail Sales will be announced. That may give some indication of whether the slowdown is continuing.

At the bell the DJIA was down 48 points at e 10092. The S&P 500 lost 1 point to 1101 and the NAZZ was unchanged at 1883.

Breadth at the close was 5/4 positive on the NYSE and 5/4 negative on the NAZZ. Up volume and down volume were 5/4 negative on both venues. For the day volume was light. Treasuries closed slightly higher in price lower in yield. Oil closed higher and over $41 per barrel and Gold was also up on the day.

And tomorrow is another day.

19 July 2004 - Morning Comment

Client accounts have been transferred to Mesirow and you may now view them on the E-View system at: https://eview.mesirowfinancial.com/eview/online.html. You may set up your accounts yourself or call Kathy at 312-925-5248 for help in creating them. The E-View system is more complicated and complete that the AACES system so it will take all of us a while to get to be facile in its use.

6:31am and we are at our desk bright eyed and bushy tailed waiting for the week to begin that may define the summer trading range. Since June we have been expecting a summer rally. So far we have been wrong.

At the end of June we did have a one week pop or mark up in stocks that gave credence to our theory. But as soon as the quarter ended the selling began. In hindsight we should have sold half our stocks on June 30. Hindsight is great but it rarely makes money.

When the S&P 500 looked to be breaking major support last week we bit the bullet and sold some large cap stocks that were the least volatile of those we owned and which raised a good amount of cash for out aggressive accounts. The last five years have taught us that we can always repurchase stocks and that the less we own the clearer our thinking when the markets go against what we had presumed was going to happen.

We have maintained our holdings in the low priced telecom and software stocks because we think they will give us the most bang when and if a rally resumes. Unfortunately they also tend to drop the most on a percentage basis when stocks are tanking. No risk, no pain, no gain.

We have no idea which way the markets will break and for that reason we have a large cash holding and positions in volatile stocks. We are trying to catch part of the rebound/rally if it occurs but are uncertain of the when and so want cash on hand for potential buying opportunities as the markets continue to drift lower.

So let the games begin.

16 July 2004 - Daily Comment

Today marks the 100th birthday of our father and namesake Ralph J Lemley. He died when we were 9 and we have missed him all the days of our life.

We are having computer problems so this will be a short post. Hopefully we will have time over the weekend to expand on the thoughts behind our actions this week.

Yesterday we sold JPM and TWX and CCMP. With the way Nokia acted after announcing punk earnings we didnít want to own CCMP through their earnings announcement next week. We sold the other two as cash raising measure when the S&P 500 broke the 1111 support.

IBM announced good numbers last night and that has given some life to stocks early today and it will be interesting to see how long it lasts.

We will try and post some comments tomorrow morning.

So let the games begin.

15 July 2004 - Daily Comment

6:34am and we are heading to Kentucky a little later this morning to round up our grandchildren and bring them to the farm for a month. So there will be a post this morning and then one tomorrow morning. We will update the Model Portfolio this morning and on Saturday morning.

Please call Kathy at 312-925-5248 to change over to Mesirow E-View to view your accounts on a real time basis. The securities will be moved over the week-end but there have been some sales in accounts which can be viewed on E-View. If you want to venture yourself go to: https://eview.mesirowfinancial.com/eview/online.html.

6:52am and Asia was mixed and so is Europe. U.S. Futures are lower. Citicorp beat estimates by 5 cents and that may help the finance stocks for about ten minutes in early trading. The major sentiment numbers have not turned negative and of course that is a contrary indicator. But there are so many polls and opinion makers now that the action of the markets is becoming the only true measure of the mood. And the markets are in a punk mood.

Earnings from major corporations are actually quite good and even Intelís earnings yesterday were the best 2nd quarter earnings Intel has had for six years. In fact Intelís earnings are recovering towards their 2000 level when the shares sold at $80. The estimate for this year is $1.60 so the company is now priced at less than the market multiple.

With the good earnings of mainstream companies like Citicorp and P&G we are guessing that these companies will continue to cut costs by buying improved computer and communication equipment which is faster and more efficient.

7:32am and jobless claims in the latest week rose 40,000 which reversed a drop last week of the same magnitude. The drop and rise has to do with auto industry layoffs for re-tooling. PPI for June was down 0.3%; ex food and energy up 0.2% in June. Business inventories were up 0.4%. The DJIA is up on the tame PPI which is the Producer Price Index.

We have sold a few stocks to raise cash in our more aggressive accounts. We would like to buy more JPM but our price there is lower. We own enough HPQ and we are waiting to add to the SEBL and SUNW and TLAB and SCH. In any rally we are likely to raise more cash and in any severe drop will add shares. The markets seem to want to expand their trading range but it does look that for this morning the 1111 on the S&P 500 will hold. That number is the halfway point in the rally from May 2003 to March 2004 and that is why it has importance.

We are now off to Kentucky and will post tomorrow morning.

So let the games begin.

14 July 2004 Evening Bastille Day Comment

7:35am and Retail sales were a negative 1.1%, ex autos they were a down 0.2% in June. Treasuries remain higher in price on the day and stocks lower. Retail Sales for May were revised to up 1.4% versus the originally reported up 1.2%. Quarterly growth fro Retail Sales was up about 2% which suggests moderating consumer spending.

We have propounded that the tax cut runoff is responsible for slowdown in sales. The talking heads still expect a 25 basis point raise in August.

7:46am and Joseph Nacchio the fellow who ruined Qwest and caused billion of dollars in losses for Qwest shareholders is advising Leucadia National in its bid for a majority interest in MCI. The guy should be in jail.

8:13am and Treasuries were higher in price but now are giving ground and are negative on the day in price higher in yield.

10:39am and stocks opened lower but the major measures are now higher. Breadth is actually positive on the NAZZ now for the first time in days. The NYSE has positive breadth also but the buying is being met by selling.

Analysts by the dozens have downgraded Intel with it trading at $24 after they upgraded it at $34 late last year. So goes Wall Street.

We are reducing our position in CIEN in larger trading accounts because when the share price dropped the last few days we were not comfortable with the position size in our larger accounts. We owned too much.

12:25pm and with the rally looking like it is going to fade away we sold our FON position for a big change gain and Nokia for a scratch loss. We sold the NOK ahead of earnings because the markets have not been treating disappointing earnings kindly and we think analysts will find something wrong with Nokia. We would sell the HAIN also but the stock is thin and we are going to ride and add with this stock. We like FON but we are guessing that we can repurchase at a lower price and we didnít get it spread around to as many accounts as we wanted. The accounts that own it can use a bit more cash if the markets are selling off.

1:52pm and entering the final hour the major measures are slightly lower. The S&P 500 has held the 1111 level since regaining it this morning and the final hour will be interesting. If the S&P canít hold then the markets may sell off strongly tomorrow. If the markets gain in the last hour the bulls will still have a breath of life left.

3:02pm and the bulls are hanging on the skin of their chinny chin chin. At the bell the DJIA was down 41 points at 10205. The S&P 500 was off 4 points to end at the all important 1111 and the NAZZ dropped 17 points to 1915.

And tomorrow is another day.

14 July 2004 - Morning Comment

6:39am and we wish all our Francophile friends a Happy Bastille Day.

Intel had good bad news or rather bad good news last night and the stock is down $2 in early trading. Revenues were a bit shy, inventories were a bit high, margins are going to drop by 2% and so is the share price except by more.

Texas Instruments was upgraded on a value/price basis, a new concept for Wall Street and McDonalds is predicting better numbers. Nevertheless Japan and Hong Kong tanked, Europe is in the red and so are U.S. futures.

But not to worry, retail sales come in half an hour and if they are truly ugly we may get the washout going.

We are going to be standing with a pat hand as the transition from ABN AMRO/Chicago Corp to Mesirow Financial has begun. Weíve been at TCC for 21 years so there is a tinge of sadness in leaving. But we had to since the business was sold and we are happy with our Mesirow decision and we think it will be good for clients.

This morning the markets will be down early and maybe later or maybe not. We do think there may be a few more days of sell off and the best action would be to have a good 5% down day to clear the air. That usually doesnít happen.

For now we presume we will continue to experience the water torture drips lower to continue.

So let the games begin.

13 July 2004 - Evening Comment

7:40am and the Trade Deficit was $46 billion in May versus $48 billion in April. Thatís a lot of money that has to be financed. Retail sales come tomorrow.

Leucadia National has indicated it wishes to buy a controlling interest in MCI. This continuing turmoil may have been why CBB and T and FON rose yesterday.

Verizon has signed a $5 billion contract with Lucent for upgrade equipment. This replaces a pact signed in 2001.

Intel is the big news today. An analyst from Goldman Sachs Andrew Root is on CNBC with some cautious comments and suggest weakness and maybe some growth. Thatís helpful. Not.

8:44am and stocks have opened a bit higher. All the major measures are up, even the NAZZ. Trading is summer light.

12:56pm and we had to take a few hours off. In the meantime not much is happening. All the green on our screen is gone and our tech stocks remain under pressure. Soon some of them will be selling for the cash in the company. We added shares of Sun Micro to larger accounts today at $3.92. We traded profitably from this level at year end. SUNW announces earnings on 7/20. The company is selling at one times sales and has cash of over $1 per share. We consider it a good speculation.

3:02pm and the DJIA closed up 10 points at 10250. The S&P 500 gained 1 point to end at 1115 and the NAZZ lost 4 points finishing at 1932. Breadth at the close was barley positive on the NYSE and slightly negative on the NAZZ. Up volume exceeded down volume on the NYSE and was 2/1 negative on the NAZZ. Treasuries closed lower in price and higher in yield. Europe closed higher.

And tomorrow is another day.

13 July 2004 - Morning Comment

6:37am and AACES has not updated and so the view seen when logging in is from 7/9/04. Our stocks were lower yesterday so account values were also.

IBM was upgraded this morning, Qualcom is splitting and U.S. futures are higher. What more could one want. Europe is fractionally higher and Asia was mixed and Japan surrendered some of Mondayís gain and Hong Kong was off over 1%. Gold is down about $5 an ounce at support at $405 and oil is off 40 cents but remains above $39 per barrel.

Yesterday trading decided nothing and so weíll have to see if todayís trading can reverse the downward trend. If not, watch out below. The Model Portfolio is about 32% invested and unchanged for the year.

So let the games begin.

12 July 2004 - Evening Comment

7:26am and Gretchen Morgenson had a scary article in the NYT yesterday about the High Tech balloon going fizz. She quoted a fellow named Fred Hickey who must be short tech stocks. Hickey was remarking on the growth of inventory levels at some big cap tech companies as evidence of the slowdown in tech spending. The gist of the story is that inventories are climbing just as they were in March of 2000 and so folks had better look out below.

We admit there is downside risk and the stock mentioned in the article with the largest increase in inventory is Dell which is perpetually overpriced on a value basis. But stock prices are in some cases 90% lower for most tech stocks since March of 2000 and so while they still could go down 50% from present levels we really donít think that as many are as overpriced as the story suggests.

We are being contrarians in this regard and we long ago learned not to fight the Merrill and Bear Stearns of the world when they turn on a stock or industry but we do find it interesting that all the analysts now seem more comfortable issuing sells then buys. Can they be as wrong this time as they were the last?

7:36am and last week the WSJ carried two stories which fit in nicely with a story in the NYT on Sunday.

The first WSJ story had to do with hedge funds being alerted by large brokerages about equity offerings by public companies with shares already outstanding. When a company with shares outstanding issues new shares the price of the stock usually drops until those new shares are absorbed by the marketplace. By alerting hedge funds of the coming offerings before the public is notified the hedge funds are given a chance to short stock with the hope of buying it back when the price of the stop drops on the public offering.

Such action by brokerages is a breech of their fiduciary relationship with the companies whose stock they are offering and also a no-no according to SEC rules.

The second WSJ story concerned Knight Securities and their practice a few years ago of trading ahead of customer orders. It seems that when Knight received a large order from a customer the trading desk before beginning to execute the order would accumulate or sell the securities of the company involved in the order depending on whether the order was a buy or sell. They would then begin to fill the customer order and in the process of running up the stock price sell the stock they had purchased. That practice is called front running.

Knight settled the inquiry for $69 million and promised never to do it again. Had that been our firm doing the front running we would have put out of business.

The story in the NYT on Sunday discussed the fact that folks who manage mutual funds at some of the large investment management companies also run hedge funds for the same firms. In effect the portfolio managers are serving two masters one of whom pays them 1% a year and the other who pays them 1% plus 20% of the profits.

The interesting point of this article is that the investment management companies and portfolio managers just couldnít understand how anyone could think there was a conflict of interest in their actions.

The one answer given for the practice was that it was necessary to allow portfolio managers this opportunity if the management companies wanted to keep good managers. Thatís akin to letting bank officers dip in the till in order to encourage them to stay.

Vanguard, which has a reputation for being squeaky clean, from the way the article was written, seemed not to understand the implications of serving two masters

And Fidelity was pointedly excluded from the group because the author said Fidelity doesnít run hedge funds, except that they had until last year run one for the Johnson Family who of course owns Fidelity. But as we have said before, Fidelity is such a big media advertiser that no large financial media company is willing to seriously question them or their practices.

The more times change the more they stay the same.

8:02am and we get mail:

Bud: I appreciate your candor in your recent daily "crying towel" comments in your daily letters. The fact that current market forces do not favor your trading practices of the past is unfortunate. Current performance seems to support that fact. From 5/3 to 7/2, my account shows 13 trades resulting in 11 losses and 2 minor gains. The current portfolio contains 11 stocks of which 10 show losses and 1 shows a reasonable gain. The combination of realized and unrealized losses for the period 5/3 to 7/8 presents a fairly dismal picture. I am pleased that the bulk of my investment funds are in cash. However, recent results as stated above seem to indicate that your statement in today's letter "no one ever said making a buck in the market was going to be easy" leaves something to be desired in regard to an investment strategy designed to overcome the negative aspects of current market forces.

Respectfully, Ed

Dear Ed: it is true that recent results have been punk although not worth Ďcryingí over. We should have sold everything on January 15, waited until May 18 and purchased SPY and QQQ with all our money and sold those on June 30. Our accounts would then be up 10% for the year. Unfortunately we werenít quick enough on the trigger.

We have spent many daily posts explaining that we think the nature of market trading has changed and that if we are to earn a return for clients our practices of the past few years which were very successful need to be adjusted. We are not adjusting our practices because they were successful, we are adjusting them because we think that the tactics we used in the past need to change if we are to earn reasonable returns.

Our year end trading should continue to work, but our intra-year trading needs to allow more time to catch trends and in some case look forward more that a few months to try and obtain reasonable returns.

Hedge funds and large institutional traders are currently in control of the markets. That is exhibited by the fact that 60% to 70% of the trading on the NYSE in recent weeks has been program trading which only the big boys and girls do. We do not have the capital, ability, or inclination to trade with these folks. And so we have returned to our old philosophy of looking for reasonably priced stocks based on their relative industry position. Hopefully all of the stocks we purchase will rise in price after we buy them but that is not usually the case.

Actually had you written on June 30 we think the number of stocks showing losses would have been one or two instead of ten? The same may be true in another month. We are constantly seeking the best bang for the buck with the least risk and we have over the years been able to adjust our trading to obtain positive results. We are again doing the same and are comfortable with our holdings on a risk reward basis. Time is a great equalizer and we donít foresee a 2000 to 2003 type crash mainly because stocks are so much below the levels that existed then.

It is true that for the past five years our portfolios have steadily increased while all around other folkís portfolios were losing round. But our out performance began to change last year when the S&P rose 23% and we were up 14%. Our performance was good but we think it could have been improved. We had the right stocks. We missed some gains by being too quick on the trigger and selling before realizing the full potential of the purchase. There is never any wrong in taking a profit but it is important to understand when markets change. And last year the tone and tenor of the markets changed and we were late to realize that fact.

For sure, the markets may be changing again but we think we are on the right course. As always we appreciate your interest and we remind you that our long term record is not an indication for future performance but it does give a little hint that maybe we know what we are doing.

Finally, we would note that your account is still in the plus column for the year which in itself is no small victory.

8:49am and stocks are opening mixed in slow summer trading. Treasuries are slightly better in price and oil and gold are both off a bit. 1100 on the S&P 500 is the next support level and the S&P 500 is now at 1110.

Long ago we picked 980 on the S&P 500 as the final dropping to point this year. We hope we arenít right but it is looking more like that point may be reached within the next few months. If we decide that the final 10% drop is going to occur we will of course raise a bit of cash if circumstances allow. Happily we have a good cash position in all accounts.

10:06am and the DJIA is down 30 points with the NAZZ down 20 points and the S&P sitting on 1110. Breadth is 2/1 negative and down volume exceeds up volume by a 3/1 margin.

We sold Darden in our trading accounts for a scratch profit. DRI is one of the least volatile stocks we own and we want volatility, preferably to the upside. And so we sold to raise cash. We are looking for a rally but rally potential is touch and go right now.

12:28pm and the name and address account transfer has been completed to Mesirow. Accounts are still showing on the AACES screen at ABN AMRO and will until Friday evening.

If you would like help setting up your Mesirow E-View account:


You may call Kathy at 312-925-5248 and she will help you. Do not call Bud since he is a babe in the woods as far as this stuff is concerned. If he tries to help you his expressions of frustration with the computers will put VP Cheney in a good light.

1:28pm and we sold XEL in trading accounts for a scratch. We sold BMY for a loss to continue raising cash from the less volatile of the stocks we own in our trading accounts.

Stocks have staged a low volume rally and the major measures except the tech ones are positive but we are holding our breath.

3:02pma n the DJIA closed up 25 points at 10238. The S&P 500 gained 1 point to finish at 1114 and the NAZZ dropped 10 points to 1936. Europe closed lower and Treasuries closed higher.

And tomorrow is another day.

12 July 2004 - Morning Comment

7:03am and Merrill downgrades the chip stocks to under perform with no upside potential at all. That of course means more down tech today.

The erectile dysfunction wars heat up as Lilly allows users to comparison shop. Ainít America a great country?

Japan was up 1% while Hong Kong was lower overnight and Europe is down as is the U.S.

We expect a rally today but then weíve been wrong for about three weeks so donít bet the store. After being to Chicago over the week end we are happy to report that there seems to be no slowdown in spending in the areas we visited. We donít know if that means anything but the few gurus who ventured that the June sales slowdowns may have been the result of the one week Reagan mourning period may have a point. We and the markets will find out soon enough.

Our investment plate is full and so we are again in a watching mode. This too shall pass.

So let the games begin.

9 July 2004 - Evening Comment

9:27am and stocks have opened higher on GEís positive earnings news. Moreover SAP, the large software company, has announced good news and so some of the other software stocks are popping which is giving a lift to the NAZZ.

May wholesale inventories came in at up 1.2 % versus consensus plus 0.5% and that number gives credence to the slowdown school and so is adding some leavening to the good GE and SAP news.

The DJIA is up 50 points and the NAZZ is up 15 points. It is Friday and so we would not expect a spectacular upside day no matter what news comes other than the capture of OSAMA. Even then traders would probably see the glass as half full and expect retaliatory terrorist attacks. For the last week the markets have reacted to all news as bad news. Today is the first day with the GE and SAP news that good news is good news. And the day is still young.

9:46am and Yukos, the big oil company in Russia, is nearing bankruptcy. The Russian government is seeking $4 billion in back taxes and has jailed the fellow who controls 44% of Yukos. As a result some Russian banks are close to failing and that may precipitate a banking and financial crisis in Russia. Other world markets donít seem worried since they have seen it all before in 1998 when the U.S. markets crashed with Russia. That 1998 reaction was because Long Term Capital Management and other American hedge funds had large asset exposure to Russia.

The current crisis is a political one in which President Putin seems to be after the head of Yukos for supporting some rivals to his Presidency. So much for democracy in Russia. The Russian events may or may not be important but we think the markets should be paying more attention. We are.

11:38am and we initiated a small position in Sun Micro in our under $50,000 IRA accounts today. SUNW sells at about 1X revenues if cash on hand is considered and we will be adding it to our larger accounts in the future. We are also going to begin a position in Seibel Systems if it backs off today from the $8.30 level where it is trading on the SAP news. Seibel has $4 per share in cash in the company and if that cash is considered SEBL is priced at about 2X revenues.

2:27pm and we bought SEBL at $8.17 for many accounts. Itís going to rain so we are heading out to catch the train.

It does look like the markets will close up for the day and we think with the sell off of the last 10 trading days that a knee jerk rally may occur next Monday. We want to own volatile tech stocks with our invested funds and we like the switch from NT to SEBL because we are improving quality.

And tomorrow is another day.

9 July 2004 - Morning Comment

6:11am and the jobless claims yesterday were down 40,000 to 310,000 but the number is no good because auto workers werenít layed off until this week so next weekís number will be higher. We donít listen to any of the stuff anyway but that is why the markets ignored the report yesterday.

Same store sales at apparel retailers are lower than expected. Call it a tapped out consumer.

We sold the NT at $4.50 yesterday for a 10% profit. We donít want to own it during its accounting announcements if the markets are tanking. And if the markets do rally we think the other tech stocks we own will do better.

We also sold AMAT for our aggressive accounts for 80 cents per share loss because when it traded lower yesterday we didnít want to add it to other accounts at a price 15% below our original purchase. That told us it was and anchovy and so we traded out this morning on the price improvement. It is a big cap tech and we bought it for a trade that didnít pan out. We remain interested in the stock but at lower levels.

We are having problems working our Chicago computer so this will be short.

For the first time this year the Portfolio is lower. For the first time in a while the markets are reacting to fear. We are content with the stocks we own and after yesterday's sales we are looking for stocks to buy in this sell off.

We'll have a another post this afternoon.

So let the games begin

8 July 2004 - Morning Comment

7:11am and we are off to Chicago today to meet with clients and see a few movies.

There will be no post tonight but weíll try to have one tomorrow morning and after the close.

Tech stocks are in the tank this morning as a whole passel of software companies warned. This news also has the DJIA lower and since we are approaching the weekend we would guess that this week is going to wind up as another downer.

Our accounts held their own yesterday but the onslaught today is probably going to place many of them in negative territory. We donít think the world is ending and we will give the sell off some time to play out but we think some selective buying will be rewarded over the next year or so.

Gold is up, oil is approaching $40, Europe is lower and Hong Kong and Japan were both off big time, and Ken Lay is in federal custody and handcuffs which seems a bit much butÖ

This too shall pass and at least the sun is out. We have plenty of cash on hand and no one ever said making a buck in the market was going to be easy.

So let the games begin.

7 July 2004 - Evening Comment

8:02am and Asian markets closed fractionally mixed. Europe is also mixed and U.S. futures are indicating a flat opening.

PeopleSoft pre-announced last night and blamed its shortfall in sales on its continuing battle against takeover by Oracle. The markets are selling software stocks first and asking questions later and with this news the tech panic may continue today.

The volatility of the last week in tech is why owning those stocks is so rewarding and so terrifying. The stocks we own all have large cash positions and have survived the turmoil of the last four years. While not on their lows they are relatively cheap, unless markets are going to return to the doom and gloom of 2001-2002. That of course is a possibility but our experience has been that after a shock folks tend to anticipate many more shocks that never occur. It is when folks forget the shocks that surprises usually arrive unexpectedly.

The markets are in the grasp of external events as well as internal events and it is our thought that folks are going to have to work through the terrorist conundrum, and the election hoopla, plus the home buying bubble before stocks will move to the fore again.

The great battle of minds is being waged as to whether stocks are in a bull trend in a bear market or a bear market in a bull trend.

At times like these it is best to focus on individual issues and buy what makes sense as an investment. We are buying stocks that should have increasing sales and earnings and we are just going to have to ride though the difficult period with them. We are doing this because the two day to two week trading opportunities that formerly existed are much too random to take advantage.

We do feel the need to generate returns on our investments but we donít think we are assuming undue risk to do so. It is always difficult to discern when the panic stage of a sell off has dissipated but we are of the opinion that the four year bear is at least resting.

9:24am and stocks are slightly higher in an anemic- so far- rally. We are just watching.

Microsoft sent a letter to employees saying it needs to cut costs by $1 billion per year. This company has $54 billion in cash. If interest rates rise 2% thereís the $1 billion. Instead MSFT will probably hire more contract workers to whom it offers no benefits and ask employees to absorb more of their health care costs. It is also going to reduce prescription drug benefits for employees. They should just fire workers who have the temerity to get sick.

11:26am and stocks are going nowhere fast. At least they arenít off much.

After running to $8.50 last week TLAB is back under $8 per share. The FTC has given the go ahead to the TLAB/AFCI merger and we think the arbs are back in play since they now know the deal will settle in October and they can determine their return on shorting TLAB and buying AFCI with more certainty. We want to add more shares but since we own stock at these levels we are going to wait and see how the markets and the individual stocks do. The merger date in October may place a cap on the share price till then unless tech stocks as a whole take off.

12:25pm and breadth is positive on the NYSE and almost even on the NAZZ. Volume is light but the major measures are all higher.

2:02pm and European markets closed lower on the day. Entering the final hour the DJIA is up 40 points and the NAZZ is up 10 points. Weíll see how the last hour goes.

3:27pm and the DJIA closed up 20 points at 10240. The S&P 500 gained 2 points to end at 1118 and the NAZZ rose 3 points to 1966.

And tomorrow is another day.

7 July 2004 - Morning Comment

6:46am and all the work of the year has evaporated as the Model Portfolio is now even. And the way things are going it looks like we will visit the downside for a while before we make it back to positive territory. It wasnít supposed to be this way but it is.

So what to do? We are doing nothing. That is a departure from our practice from the last five years where we might have raised some cash for comfort. But most accounts are under 50% in the markets and we donít think a 20 % correction is in the cards although 10% more could be there. That would wash out a lot of laundry and set up a nice rebound. We like the stocks we own and knew before we bought them that we would hold most and rotate some as conditions warrant. We obviously didnít know they were going to trade lower but we were open to that possibility. We always like it when a stock we purchase doubles in the next month after purchase but that rarely happens. Usually we have to earn our profits by absorbing some pain.

The disappointing jobs number last Friday, the $40 price of oil, lowered sales at GM and Target and Wal-Mart all have taken their toll on bullish sentiment. And it is a fact apparent from the volume that many investment dollars are occupied elsewhere. Until those dollars come back to stocks the markets are going to be at the mercy of the program traders.

With everything so bad why own stocks. Our answer would be that most of the bad news is in the mix. The rally of the last year has gone now where for six months and every attempt to move higher meets resistance. But every attempt to move lower also meets resistance and time can work off excesses as well as drops in value. Right now the time factor may be working out some of the drop that might be needed. The fall off in prices since June 30 is also creating some discomfort although maybe not enough yet to call a bottom.

Today we expect more of the same although a rally should occur today or tomorrow. Unfortunately that rally will be sold. But we need a few failed rallies to set the stage for a real rebound and move higher. Time is a great equalizer and July may just be a bummer as the equalizing takes its course.

But we are as always guessing and to help we are also shining our crystal ball for another day of trading and watching.

So let the games begin

6 July 2004 - Evening Comment

8:45am and stocks have opened lower. Oil is trading over $39 per barrel because of the terrorist break of a major north/south pipeline in Iraq and other turmoil in Russia and rumors that our good friends the Saudis may not be increasing production as promised.

Overseas Asia closed mixed on Tuesday with Taiwan up over 1% and Hong Kong slightly higher and Japan slightly lower.

Oil and drug stocks are seeing a little buying, retailers are mixed and the rest of the stock markets are in the red. Breadth is negative on the NYSE and NAZZ as we start the shortened week.

We are trying to buy FON, NOK and a bit more NT for accounts.

9:57am and we bought a few shares of FON at $17.28 and NOK at $14.25 in accounts that didnít own any. Nokia comes with earnings on July 15 but this morning Reuters had a preview and we think the disappointments may already be baked in the cake. We want to own Sprint in all accounts and we are picking away at the stock and today buying for larger accounts that didnít own it. We also picked up some NT at $4.30 on the theory that if we didnít sell it at $5.08 we ought to be adding stock on the pullback. It is better to buy in down markets when items are on sale than in rising markets when stocks are being marked up. Unless the down market is going downer. But we only know that afterwards.

10:15am and the economy is not peaches and cream. The gurus are saying that Wall Street wants Bush to win but we think Wall Street really wants a better idea of how the economy is going.

This next month will give a better idea as earnings are announced and guidance is given. We think the markets are now a market of stocks. The hedge funds and big boys and girls have been program trading the markets to the detriment of all and with the lack of a trend many of them canít be making money. Hopefully they will go on vacation and a bit of investing will reappear.

Some clients may be wondering why we are getting more invested when our modus operandi for the past five years has to keep big chunks of cash and buy at year end while trading volatility during the year.

Our take is that there has been a change in the nature of market dynamics. Folks arenít afraid of stocks right now, they are afraid of extraneous events like the elections and terrorist attacks and their effect on stocks. The excesses of the late 1990s havenít completely disappeared but stocks in relation to other assets like real estate are relatively cheap. And as long as every one is avoiding stocks as can be seen by the volume and the lack of inflows into equity mutual funds we are comfortable assuming a bit more risk and buying stocks that we think have 50% gain potential over the next few years. We will be holding stocks longer unless they move more quickly but that is the nature of the current markets.

All our opinions are subject to change without notice and past performance is not an indication of future performance.

10:20am and real hourly wages adjusted for inflation were $15.61 in May which is where they were in November 2001. So is the S&P 500 and that may be the reason why.

Household debt represents 115% of disposable income as of May.

10:41am and the NAZZ is down 2% as a couple of tech companies have blown up and folks obviously are getting out of the way of falling knives. There is low volume and so we presume disinterest and no buyers around. Veritas is the big loser of the day down 33% because of warnings, but they had accounting reporting irregularities earlier in the year and so this may be a reaction to those problems also.

The DJIA is down 70 points and the NAZZ is down 41 points. The S&P is down 10 points and through support.

11:02am and Treasuries are weaker as the stock markets have sold down. That is unusual as we would expect Treasuries to strengthen on stock weakness.

The NAZZ broke support and now the May low 1880 level becomes the next support level.

12:02pm and breadth is 4/1 negative on the NAZZ with down volume exceeding up volume by 9/1. The NYSE is about half that negative in both cases.

The only good point is that volume is light but losing money in light or heavy volume is not fun. But if we are going to play we have to pay.

12:52pm and according to the Yahoo Finance website only 2 analysts follow Goodyear Tire. Goodyear has sales of $16 billion and a market capitalization of $2 billion.

Europe closed lower on the day with Germany off over 1% and the others down fractionally.

1:59pm and entering the final hour the NAZZ is mired in the muck while the DJIA is attempting a feeble rally. Breadth remains 3/1 negative on the NAZZ and down volume exceeds up volume by 10/1. This is what the whole markets are going to look like next year when the bear raids start as the up tick rule is removed.

The NYSE is 2/1 negative in breadth and volume is 3/1 negative. We shudda stayed in bed. Thereís nothing to do but wait the sell off out and pick up bargains in the process.

3:02pm and the DJIA closed down 60 points at 10225. The S&P 500 lost 9 points to finish at 1015 and the NAZZ dropped 40 points to 1965.

And tomorrow is another day.

6 July 2004 - Morning Comment

7:11am and Kerry picks Edwards who would not have been our choice but in a day it wonít matter anyway. Stock futures are lower but we expect or maybe hope is the proper word that last weeks ugly days reverse today and that we close higher.

Our review posted over the week-end is below and gives our take on the markets and our stocks and we suggest perusing it at your leisure.

For today down early and then up into the close.

So let the games begin

4 July 2004 - Weekend Comment

Happy Birthday America.

Stocks finished the week on another downer as the employment report was half the expected number of jobs created. The reality for now seems to be that the economy is not recovering as fast as economists and the Fed thought it might.

We were not in that camp and to us the question is whether the economy will roll over since the Fed and the present administration are out of magic bullets. It may be that June is an anomaly and that growth will return in July but our take is that the tax cuts stimulus from the child care rebates and refunds of excess taxes collected in 2003 and refunded in 2004 has run its course.

Treasuries rallied on Friday because it seems obvious on the most recent numbers that the Fed wonít have to raise rates in August. That may give a little more life to zero financing for autos and another round of refinancing but we think that the refinancing boon that fueled the economy for the past few years may have tapped out most of the free equity folks had in their homes.

We guess that home prices could continue to increase but then again we donít think that the housing bubble has far to go before is pops or at least starts to lose some air. Extending the tax cuts enacted really will have no immediate effect and will only increase the deficit. Another round of child or just plain cutting checks to the entire population is the only way to stimulate and again that will have the negative effect of increasing the deficit.

But all is not lost and the markets need time to see the July and August economic numbers before giving up the ghost. Based on the Consumer confidence numbers consuming may pick up again and June may turn out to be a blip instead of the start of a trend.


Our up 3% for the Model Portfolio gain evaporated quickly. It seems that the mark up folks were content to go on vacation after June 30 and leave the playground to the Hedge fund boys and girls. The technicals of the last few days placed some fear in our hearts and should have placed fear in the hearts of folks who were watching. Based on the volume numbers that may not have been very many.

For the last reported week program trading represented 71% of the trading volume on the NYSE and that is a good indication of the lack of true investment interest in common stocks. In a negative way that may be a positive.

We have structured the Model Portfolio to have half the money invested in larger cap more mundane stocks and half in speculative issues. The smaller and more conservative accounts have most of their money in speculative stocks but those accounts also have much more cash on hand.


Itís a good time to review what we own.

First off, we sold the Qwest after only a few days because we had purchased it with the idea that the June Employment Report was going to be positive and that the markets would rally at the beginning of July. When it became obvious that there was going to be a pull back before any rise we eliminated the two diceist stocks we owned, Q and CHT.

Applied Materials is a big cap tech stock that makes equipment for the chip makers and we will add to more accounts if it sells off into the mid teens. We believe that big cap techs will participate in any rally and because they are volatile we own the AMAT only in aggressive or large accounts right now.

Brocade sold off on Thursday in sympathy with other storage stocks. It is volatile and we traded it at year end for a nice gain and hope to do so again.

Bristol Myers has a nice dividend and some day they may get their act together again. We donít want to go overboard on drug stocks but we though we should own one in our larger accounts.

Ciena has been a dog for us and we took our lumps a month ago waited the 31 days and decided to repurchase when the telecom equipment stocks began to move. It tends to run to $7 in bullish markets and it has enough cash to survive until we get to that number. The sell off in the last few months may also have entailed some liquidation by folks who received 100 million shares of stock for the two companies CIEN just bought.

Cabot Micro makes slurries for washing chips and has broken to a new six year low. We think the stock is a quality but volatile speculation. Earnings come around 7/22 and if the stock pops before then we may sell to repurchase on a pull back. We are content to take near term lumps if that doesnít occur for the longer term potential.

Cincinnati Bell Telephone is as it name implies. Itís the only Telephone company left in the country with Alexander Graham Bellís name. We continue to believe it will sell at our be acquired around $7 per share.

Darden Restaurants is Olive Garden which is doing well and Red Lobster which has had some problems. It is a good neutral economy stock.

Hain Celestial is near the low end of its trading range. Heinz owns 20% of the common and we think that consumption of the types of food products Hain provides are going to grow. It too a slow economy stock. We own it for a trade to $22.

Hewlett Packard is our large cap tech stock in many accounts. We like the job Carli is doing and it is the cheapest large cap tech on a price to sales basis.

JDS Uniphase is a play on the RBOC optical build out where SBC and Verizon have committed to spend billions. JDSU is a main player in the optical area.

JP Morgan Chase just completed the purchase of Bank One and is now in the too big too fail category if it wasnít already. It has a nice dividend and with the slow down in rate increases JPM has a chance to make some nice bucks on the spread and in trading for customers.

Nortel Networks is one of the largest telecom communication equipment providers. Has accounting problems. We own for a trade and tried to sell on June 30 for a 30% gain but missed by a few pennies.

Nokia is the largest wireless phone and equipment maker. Motorola and Erickson and Kyocera and others are cutting its market share and the stock is down significantly. Has a big cash holding and we like as a speculation. We are waiting for earnings in mid month to add more if stocks sell off.

Schwab has cut rates to compete with the discounters which it how it began. But now it is an asset gatherer and Wall Street is concentrating too much on its brokerage revenues and not enough on the $800 billion in assets it has in house. Asset control is the name of the game going forward and SCH is a leader. Stock is cheap and my get cheaper but if it does Schwab may just sell out again at a higher price.

Sprint is the most interesting of the remaining telephone companies. It has local and owns its own wireless network. The equity of the company is priced at $25 billion with $30 billion in revenues. BellSouth and SBC are paying $30 billion for the equity of AT&T Wireless which has the same wireless sales ($15 billion) as FON though $7 billion more debt. One reason we sold Q is to place more money in FON if it sells off in a general market sell off.

Time Warner is our cable play because we think AOL is an unappreciated asset. AOL is valued at close to zero at TWX current value. We have trade the stock for a couple of years and are very comfortable owning it. In fact we are more comfortable when we own than when we donít.

Tellabs is the cheapest of the speculative telecom build out plays on a price to sales less cash on hand basis. We have traded for the past few years and will again.

Xcel Energy is a Wisconsin/Minnesota/Iowa electric utility that we took a loss on last year and have traded a bit this year. XEL has its house in order and is now a dividend play and a slow growing economy play. Utilities in general sold off in June as gurus expected a rapid rise in interest rates to negate the high tax free dividends payout. The Friday numbers seem to sugget that there is a trading play here. Thatís why we own.


We would guess that the beginning of the week may see a snap back from the lousy action on Thursday and Friday but the coming week will be slow because folks will still be away. Even with computers itís hard to trade if you arenít at your normal trading desk watching the action. At least that is the way it has been for us.

We are heading for Chicago on Thursday for business meetings on Friday and a weekend of relaxation. But before then we would guess there will be some interesting action in the markets.

And tomorrow is another day.

2 July 2004 - Additional Daily Comment

CIBC dropped its rating on Nortel to neutral because of accounting issues which we though were already in the stew.

Qwest is selling its wireless network to Verizon for $400 million and change. Q already has a deal with Sprint to offer Sprint Wireless to its customers. The sale raises a bi of cash for Q but still leaves them with a ton of debt which is why the share price is under $4.

Non farm payrolls rose by only 112,000 when 250,000 were expected. And last months numbers were adjusted downward. This report is bad news for stocks good news for bears and bonds.

The market will be down today.

2 July 2004 - Daily Comment

6:46am and this post is going to be our comment for the day. We lost electric power to the homestead last night. It was a wild pizza party. Most of the day is going to be spent with the electrician deciding what happened.

The big news today is the lousy way the markets began July. Obviously they sagged when we expected a zing. And so what else is new? Yesterdayís action was horrid and the only redeeming feature was that stocks actually rallied a small bit in the last hour and volume was light. But technical damage has been done that must be repaired by a bit more of a pull back.

This morning the employment report i.e. the number of folks who got jobs is being reported at 7:30am. The consensus is 250,000 jobs created which has been the consensus for each monthly report for the past five months. Above that number may cause a rebound in the markets which will be sold because the weeks end approaches. Below that number is going to continue the negative vibes created by the lousy sales figures from GM and Target and Ford and Wal-Mart.

Today is the beginning of the Holiday and so folks will be leaving early and that too may leave the markets open for some fun and games by the big boys and girls. We are taking all the action with several grains of salt. The stocks we own give us a nice cross section of what we think will do well if the markets rise. And in most accounts we have enough cash to buy in any sell off. We await the July rally with bated breathe.

We will have a post tomorrow morning to review the week.

So let the games begin.

1 July 2004 - Evening Comment

Our post of a few days ago may have created some confusion. Clients can still access their accounts on AACES until July 19. Thatís when the account transfer take place.

7:32am and jobless claims rose to 351,000 and continuing claims were 2,966,000. The yen has risen to a new three week high against the dollar. Treasuries are a bit better on the news while stock futures are a bit softer.

The gurus are not paying attention to the jobless claims number anymore. To their peril we think.

7:44am and for the first half of the year the Model Portfolio was up 3%, the DJIA was down 0.2%, the S&P 500 was up 2.6% and the NAZZ was up 2.2%. The total return (price gain or loss plus coupon income) on the Lehman Intermediate Treasury Index was 0.5% and the total return on the Lehman Long Term Treasury Index was 0.1%.

8:29am and the WSJ is reporting that Time Warner is in preliminary negotiations to buy MGM. Sony has also been in negotiations to buy MGM and the number being used in the Sony talks is $5 billion which includes $1.3 billion in debt.

MGM fits with TWX and supposedly TWX is offering major holder Kirk Kerkorian letter stock (tax free exchange) and the public shareholders would receive cash. Cash is important to prevent the arbs from pushing the share price down by arbing the two stocks.

8:43am and DeutscheBank raised its rating on Nokia to buy. CIBC raised its price target and earnings estimates on TWX. The new price target is $22.

8:58am and breadth is positive on the NYSE and flat on the NAZZ and the DJIA is slightly lower with the NAZZ off 12 points. Mark up time is over, the quarter and half year are over and vacation time is upon the markets. Volume is a yawn.

9:02am and the last tradable items for the day had the ISM manufacturing index was 61 for June versus 62 in May. Any number above 50 reflects expansion of manufacturing. The ISM prices paid number was 81. Construction spending rose 0.3% in May. All three numbers were slightly weaker than expected.

9:37am and there goes our idea that stocks would move slowly upward today. The DJIA is down 20 points and the NAZZ is down 17 points. Breadth is 5/4 negative on the NYSE and 2/1 negative on the NAZZ. Maybe traders are squaring positions for the weekend today rather than waiting for tomorrow.

10:02am and we stepped out for a few minutes and when we returned the DJIA was off 88 points and 30 points on the NAZZ. The pre-announcements of earnings shortfalls are having an effect on stocks. And with the vacuum of any buying interest ahead of the weekend it looks like lower we go for a while at least.

11:26am and the JPM/ONE merger was completed today. It will take a few days for arb situation to settle down and then the tocks should trade on its own merits.

Fordís sales were down 8% in June. GMís were down 15%. Maybe the Fed better reverse that raise in the Fed Funds rate. Daimler Chryslerís sales were up 5%

12:22pm and we get mail:

Bud: I am unable to understand two of your comments in this morningís letter. First, "We have a feeling that at least a few are going to the beach". Second, "we don't see any thing fancy just a gradual improvement". Are these metaphors, analogies, or just plain Lemley assumptions? Ed

And we respond:

Since the market is down 110 points the latter had to be an assumption. The former is a guess. Happy Fourth.

Crazy days are with us again. Reuters reports that:

A dollop of mud scooped up during last weekend's Glastonbury music festival in Britain has sold for 490 pounds ($890) on the Internet auction site EBay.

12:53pm and ouch! The DJIA is down 150 points the NAZZ is down 40 points and the S&P 500 has broken support and is down 15 points. Volume remains light and there sure are more committee sellers than committed buyers.

Todayís action brings to mind next January when everyone including the ever aggressive hedge funds will be able to short stocks on down ticks. Heck they do it now through artificial means (futures, options and stock) but in January theyíll be able to do it legally and much more efficiently. On a day like today when the psychology is neutral to negative with no buyers around theyíll be able to push the markets down multiple hundreds of points. But that is next year.

As for today we are at a loss and losing all the gains for the year we had as of the close of business yesterday. But there is always tomorrow.

1:17pm and European markets closed lower. Crude is up $1.65 to $38.68. Oil stocks are not following crude higher.

1:58pm and as the final hour approaches there is a feeble rally underway. Ah well rather than watch the markets drop we took some time to write a little ditty about the swallows who visit us every summer.


Swallows I sit and watch the swallows work To feed their growing brood And take a minute now and then From searching skies for food They rest upon the rocker that Sits at my office door Looking down and all around For cats on the porch floor. For two months every summer They work for calling chicks The heat of day slows them not As babies chirp for ticks Mother brings from the blue A white feather in her beak She takes it to the bulging nest Why I have no clue Soon when the five do fly The dogs and cats Iíll spy So all the work these two have done Will not be lost for our petsí fun. The birds will still fear hawks and crows And coyotes in the grass Flying they are safe from harm May first flight not be last. We cut the hay late in July So bobí o links and red wings And other ground nest birds Can raise their broods in peace. And now the mother looks at me As if to say she knows Iím writing of her visiting And wonderful mothering.

2:05pm and we donít think stocks will close any worse then they were an hour ago. We have to go get ready for the pizza birthday party and we happily bid adieu to todayís markets. As we leave the DJIA is down 115 points, the S&P 500 has broke support and is down 12 points and the NAZZ is off 30 points. The only saving grace is that volume is summer light.

And tomorrow is another day.

1 July 2004 - Morning Comment

6:57am and Asia was higher overnight and so is Europe with Germany up over 1%. U.S. futures are flat.

More money flowed out of equity mutual finds in May than in and so individuals seem to be voting with their feet. On a contrary basis that is bullish. The sideways movement of the markets is going to end at some time and the longer the market move sideways the sharper the reaction up or down should be when the break up/down occurs. When is the question?

We awoke this morning wondering what there was to worry about now that the Oracle has spoken till August when once again he climbs the mountain. Fear not folks, the jobless report comes this morning and tomorrow we have the monthly employment report so the boys and girls do have some data coming on which to focus. As we said earlier in the week since this is the start of a new quarter we have a feeling that at least a few are going to be focusing on the beach.

For us, there is a pizza party tonight at the homestead for all the neighbors with June birthdays. Thatís about half the population of Rolling Ground.

For the market we expect an easy move up throughout the day. We donít see any thing fancy just a gradual improvement.

So let the games begin.

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