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Lemley Yarling Management Co
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Madison, WI 53703
Bud: 312-925-5248       Kathy: 630-323-8422

31 July 2009

Model Portfolio Update

Model Portfolio Value As of 31 July 2009

$ 572,461

30 July 2009

Model Portfolio Update

Model Portfolio Value As of 30 July 2009

$ 572,461

29 July 2009

Model Portfolio Update

Model Portfolio Value As of 29 July 2009

$ 572,461

28 July 2009


Model Portfolio Value As of 28 July 2009

$ 572,461

Well, for the second time in a month we lost our post for the day. Unfortunately, we will be on a mini vacation for the rest of the week and so our site visitors will have to go without our words of wisdom until August 3.

We closed out our SH (S&P 500 1x short) position for a plus or minus scratch depending.

The bulls remain in control and we won $100 with a $200 stake in Blackjack yesterday.


27 July 2009


Model Portfolio Value As of 27 July 2009

$ 572,162

We are heading to the casino at Wisconsin Dells for a day of Blackjack and visiting with a friend from long ago and so there will be no post today.


24 July 2009


Model Portfolio Value As of 24 July 2009

$ 572,247

In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed today that it was in talks to acquire the U.S. Department of the Treasury.  According to Goldman spokesperson Jonathan Hestron, the merger between Goldman and the Treasury Department is "a good fit" because "they're in the business of printing money and so are we." The Goldman spokesman said that the merger would create efficiencies for both entities: "We already have so many employees and so much money flowing back and forth, this would just streamline things." Mr. Hestron said the only challenge facing Goldman in completing the merger "is trying to figure out which parts of the Treasury Dept. we don't already own." Goldman recently celebrated record earnings by roasting a suckling pig over a bonfire of hundred-dollar bills.

Elsewhere, conspiracy theorists celebrated the 40th anniversary of NASA faking the moon landing. And in South Carolina, Gov. Mark Sanford gave his wife a new diamond ring, while his wife gave him an electronic ankle bracelet.

It’s been a long year.

And in real news:

Asian markets were higher overnight and European bourses are higher at midday. U.S. futures indicate a flat opening. Oil has a $67 handle.

American Express reported second-quarter net fell 48% to $337 million, while revenue dropped 18% to $6.09 billion. AmEx said its loan-loss provisions totaled $1.6 billion, compared with $1.8 billion, reflecting lower average card member receivables and loans.

"Given the cutbacks in discretionary spending among affluent consumers, small businesses and corporations, our overall level of billed business is performing well relative to most of the other major card issuers," said CEO Kenneth I. Chenault in a press release.

Given that they only wrote off $1.6 billion in the quarter we would guess that Chenault is in line for another $30 million payday.

Microsoft late Thursday reported fiscal fourth-quarter results that fell short of Wall Street expectations and reflected a sharp slowdown in software sales, as demand for new personal computers waned in the ongoing recession. Net income for the period ended in June fell to $3.05 billion, or 34 cents a share, from $4.3 billion or 46 cents a share in the same period a year earlier. Revenue fell 17% to $13.1 billion. Analysts had expected earnings of 36 cents a share on $14.37 billion in revenue.

Amazon.com said late Thursday that earnings for the second quarter fell 10% from the same period last year, in part due to a charge related to a recent settlement. Amazon reported net income of $142 million, or 32 cents a share, down from $158 million, or 37 cents a share, a year earlier. Revenue rose 14% to $4.65 billion, slightly short of the $4.69 billion consensus.

Schlumberger reported a 57% drop in net income to $613 million, or 51 cents a share, from $1.4 billion, or $1.16 a share, hurt by the drilling slowdown in the energy sector as it also took a 7 cents-a-share charge for severance costs. Quarterly revenue dropped to $5.53 billion from $6.75 billion. Analysts had been looking for earnings of 63 cents a share on revenue of $5.5 billion.

Ericsson reported a 56% drop in second-quarter profit, hurt by restructuring charges and losses at two half-owned ventures that make mobile phones and microchips. The group said profit fell to 831 million Swedish kronor ($111 million), while revenue rose 7% to 52.1 billion kronor.

If you have the time this is an interesting article and one on many reasons we are leery of the markets:


This computer trading allows certain firms to see orders before others and thus to exacerbate trends both to the upside and downside. These programs are the reason that the NYSE and large firms don’t want the old uptick rule since with an uptick rule the programs wouldn’t be able to front run by selling short. The development of the programs and the financial and political power of the folks who own and use them are obviously the reason the uptick rule was removed.

And another reason:


And another reason: Jim Cramer proffers this reasoning for buying stocks now:

People are way too worried that we won't see top-line growth. The great earnings numbers that we have seen are being dismissed repeatedly because -- with the exception of Apple -- they aren't being driven by sales, just margins. I say if you are waiting for top line, forget it. Not in this rally. Not going to happen. Doesn't mean a thing.

Here's the deal. Companies have fired and fired and fired people again and again and we have only seen a few months -- the last two of this quarter -- of impact in the cuts while we have seen myriad charges. Next quarter, even if there is no top-line growth, should be amazing as we see the full benefits of the firings. We could be looking at gigantic earnings per share without any growth because no one is hiring. In fact, they are still laying off.

... Don't kid yourself. Companies are going to continue to fire and continue to benefit from the stabilization.

So, forget the top-line fret. Don't use it as an excuse not to buy. Wait until a down moment, like the one everyone thought would come from Amazon.com and Microsoft and American Express, and then go in and buy the companies that have fired the most people and are saying that things have stabilized.

We think the following news is a wry complement to Cramer’s fire’em and watch your stock price rise advice:

JPMorgan’s investment bank is having a record year, with revenue in the first half of $15.7 billion. In the first six months of 2009, the unit set aside $6.01 billion for employees’ compensation, equal to 38 percent of revenue in the period.

Goldman Sachs allocated $11.4 billion, or 49 percent of revenue, and Morgan Stanley put aside $5.91 billion, or 71 percent of the half-year revenue, for employee salaries, bonuses and benefits.

Last fall the Treasury lent Goldman Sachs $10 billion at 5% interest and took back warrants to buy 12 million shares of stocks at $122. A month before the Treasury deal last fall when Goldman was trading at a higher price Warren Buffet lent Goldman $5 billion at 10% interest with a 10% repayment penalty and was given warrants to buy Goldman stock at $115 per share.

Timmy Geithner repeated the Goldman mantra that the Treasury earned a 23% annualized return this morning in testimony before Congress. money managers are not allowed to report less than 12 month returns on an annualized basis. In fact the Treasury now has the money and a year has not expired so they could not possibly earn 23% on an annual basis.

Confidence among U.S. consumers fell in July for the first time in five months as mounting unemployment and depressed wages shook households.

The Reuters/University of Michigan final index of consumer sentiment decreased to 66, in line with forecasts, from 70.8 in June. A preliminary reading was 64.6.

What is amazing is that there is a preliminary and then a final consumer confidence reading every month.

Roubini on joblessness: http://www.khaleejtimes.com/DisplayArticleNew.asp?xfile=/data/opinion/2009/July/opinion_July91.xml&section=opinion

Who is Barry Diller and why does CNBC spend so much time interviewing and commenting on his actions. He is so 1990s.

European shares ended mostly lower, breaking a nine-day rally as markets weakened amid sharp losses for Ericsson and (German) Merck.

U.S. health officials say swine flu could strike up to 40 percent of Americans over the next two years and as many as several hundred thousand could die if a vaccine campaign and other measures aren't successful.

Those estimates from the Centers for Disease Control and Prevention mean about twice the number of people who usually get sick in a normal flu season would be struck by swine flu. Officials said those projections would drop if a new vaccine is ready and widely available, as U.S. officials expect.

The U.S. may have as many as 160 million doses of swine flu vaccine available sometime in October, and U.S. tests of the new vaccine are to start shortly, federal officials said this week.

The infection estimates are based on a flu pandemic from 1957, which killed nearly 70,000 in the United States but was not as severe as the infamous Spanish flu pandemic of 1918-19. But influenza is notoriously hard to predict. The number of deaths and illnesses would drop if the pandemic peters out or if efforts to slow its spread are successful, said CDC spokesman Tom Skinner.

Oil closed at $68.01 up 85 pennies. Gold lost $3 to $951.

We switched the double short S&P 500 (SDS) for a $2 to scratch loss to the one times short S&P 500 (SH). We decided we don’t’ want the leverage.

The DJIA was up 25 at 9080. The S&P 500 gained 3 to 980 and the NAZZ dropped 8 to 1965.

Breadth was flat and volume was light.

The bulls went home happy.


23 July 2009


Model Portfolio Value As of 23 July 2009

$ 572,526

Did the markets really collapse last year? Was it all a dream? Did the Feds lend the bank system trillions of dollars because of all the bad loans the large banks made? Are folks losing jobs and homes? We ask these questions because the Washington Post reports:

Wall Street's biggest banks are setting aside billions of dollars more to pay their executives and other employees just months after these firms were rescued with a taxpayer bailout, renewing questions about compensation practices in the aftermath of the financial crisis.

The recent outcry over bonuses at bailed-out firms prompted public alarm and promises of reform from financial leaders, who acknowledged that pay and bonuses should not reward risky short-term business decisions -- such as those that contributed to the meltdown -- but instead longer-term financial performance.

But Wall Street, helped by improving profits, is on track to pay employees as much as, or even more than, it did in the pre-crisis days. So far this year, the top six U.S. banks have set aside $74 billion to pay their employees, up from $60 billion in the corresponding period last year.

Asian markets were higher overnight with Hong Kong and India up 2% and European bourse indexes are mixed at midday. Oil has a $65 handle and Gold is at $954 as the trading day commences. Futures indicate a slightly higher open.

Ford earned money from accounting gimmickry but also gained larger share of the U.S. market and is 10% higher in premarket trading. Bristol Myers is going to spend $2 billion to buy a company at twice last night’s price that has $50 million in revenue last year. A bunch of stocks beat estimates while posting lower earnings including AT&T, Hershey, and 3M. UPS reported a 50% drop in profits.

An hour into the trading day the major measures are up over 1% as the bulls continue their stampede.

Dow industrials top 9,000 level for first time since Jan. 6. It was all downhill after that.

In a bull phase it is not the actual numbers but the guessed at numbers that count:

McDonald's Corp. reports second-quarter profit falls 8.1% as currency headwinds hit the top and bottom lines, even as customer traffic and operating income rise.

AT&T posts a 15% drop in second-quarter profit owing to further declines in its wire line business as well as heavy subsidies to sign up new phoned customers.

3M Co. second-quarter profit falls 17% on the back of its transportation, security and consumer electronic-related businesses, but manages to exceed Wall Street expectations.

The National Association of Realtors reports that resale of U.S. single-family homes and condos rose 3.6% in June to a seasonally adjusted annual rate of 4.89 million, the highest level since last October.

From http://www.huffingtonpost.com:

Less than two weeks after a congressional watchdog called attention to backroom deals in which the Treasury Department repurchased stock warrants from bailed-out banks at well below market value, three more such transactions have now been reported. The big loser: The U.S. taxpayer.

The Congressional Oversight Panel reported earlier last month that in 11 transactions with small banks, taxpayers walked away with about 66 percent of what they could have gotten.

At a hearing on the warrant repurchase program in the House on Wednesday, Herbert Allison Jr., a senior Treasury official, insisted that the sweet deals the banks got were needed to aid the liquidity of the smaller institutions.

But now, in three out of the four newly-reported transactions, all with much bigger institutions, the deals have only gotten worse. The transactions returned between 54 and 65 percent of what the taxpayers could have gotten on the open market, according to one estimate.

BB&T agreed to buy back its warrants for $67 million, as reported in a July 17 press release. On July 8, the Treasury sold warrants back to State Street Corporation for $60 million. On July 15, Treasury gave up warrants to U.S. Bancorp for $139 million. The latter two transactions are listed by the Treasury in its transactions report for the period ending July 17.

"We are very pleased to have completed the repurchase of the warrant, effectively concluding U.S. Bancorp's participation in the Capital Purchase Program," said Richard K. Davis, chairman, president and chief executive officer of U.S. Bancorp, when announcing the deal.

As well they should be. The warrants that USB bought from the taxpayer for $139 million had a fair market value of $260 million, says an academic who has closely tracked the bailout and the warrant repurchase program. Linus Wilson is an assistant professor of finance at the University of Louisiana at Lafayette's B. I. Moody III College of Business and he uses essentially the same methodology to calculate fair market value that the Congressional Oversight Panel used -- the Black-Scholes and Merton option pricing models.

According to Wilson's calculations, the State Street warrants, which paid the taxpayer $60 million, should have brought in $92 million at fair market value. And the value of BB&T's warrants was $114 million, meaning the Treasury left $47 million on the table.

Moreover if the Treasury held the warrants for a year or two they would be worth much more if the markets continue to recover. And the Treasury would continue to have salary leverage over the affected banks. But Timmy doesn’t want either. He is looking forward to starting his consulting firm in three years and counting.

Gold ended down $2 at $950 and Oil gained 1.71 to $67.11. European bourses closed mildly higher on the day.

We bought more single short S&P 500 (SH) and double short S&P 500 (SDS) in our larger accounts today as the Major measures reached their January highs.

The DJIA was up 186 at 9068. The S&P 500 gained 22 to 976 and the NAZZ was up 47 at 1973.

Breadth was 4/1 positive but volume was light.

The bulls are on a roll.


22 July 2009


Model Portfolio Value As of 22 July 2009

$ 573,306

Earnings reports are coming fast and furious. Apple beat to the upside, as did Wells Fargo. Morgan Stanley disappointed. The markets will tell us how traders interpret the reports. Asian markets were mixed overnight while Europe is lower at midday. Oil is down $1 with a $64 handle as the trading day begins. U.S. futures are indicating a slightly lower opening.

Investors Intelligence has bulls 36% and bears 35% for the latest week.

WSJ: The nation's two largest public pension funds suffered their worst annual performance ever, signaling poor results ahead for large pension funds and, with that, more pressure on local governments to boost pension contributions.

The California Public Employees' Retirement System, the nation's largest public pension fund, reported a preliminary decline of 23.4% for the fiscal year ending in June. The fund saw its value fall by $56 billion from the previous fiscal year to $180.9 billion.

The California State Teachers' Retirement System reported a preliminary decline of 25% for the fiscal year, with the market value of assets falling to $118.8 billion, down $43 billion.

Some of the worst performing assets for both funds were private or other "alternative" investments, which have attracted the interest of many public pensions and endowments in recent years. Calpers's real estate was its worst performer, falling an estimated 35.8%; private equity was next in line with a 31.4% decline.

The Calstrs real-estate portfolio lost 43%, and its private-equity investments were down 27.6%. Figures for these categories at both funds reflected the 12-month period ended in March.

The best performing asset at Calstrs was fixed-income, with a 4.5% gain. At Calpers, cash was up 1.4%, and the fund's global fixed-income earned 0.6%.

NYT: General Electric  said Wednesday that it has begun to exit a program that allows companies to issue debt backed by the federal government, a tool the industrial and financial conglomerate used to raise money during the credit crunch.

GE said the Federal Deposit Insurance Corporation has approved its application to begin phasing out participation in the Temporary Liquidity Guarantee Program, which enabled financial companies to issue debt with lower interest rates using the federal government's stable top credit rating. The program was designed to make it easier for banks struggling during the financial crisis to find new sources of funds.

Financials are lower in the early going but retail has a bid and defensive stocks except drugs are in play. Cyclical companies are reporting better than earnings but also reporting 20% to 40% year over year drops in revenues. These companies are achieving earnings by firing folks and that can only go on for so long.

The good news ma is that we made a lot of money, the bad news ma is that we lost a lot of money.

Bloomberg: Wells Fargo, the biggest U.S. home lender this year, said bad loans jumped in the second quarter as the recession made it harder for borrowers to keep up with payments. The shares dropped 5 percent in early trading.

Assets no longer collecting interest climbed 45 percent to $18.3 billion as of June 30 from the first quarter, the San Francisco-based bank said today in a statement. The increase was disclosed as Wells Fargo reported second-quarter net income soared 81 percent to a record $3.17 billion.

Starbucks earned money in the quarter while same store sales dropped 5%. The shares are 15% higher this morning.

Robert Reich: Obamacare Is At War With Itself Over Future Costs

Right now, Obamacare is at war with itself. Political efforts to buy off Big Pharma, private insurers, and the AMA are all pushing up long-term costs -- one reason why Douglas Elmendorf, head of the Congressional Budget Office, told Congress late last week that "the cost curve is being raised." But this is setting off alarms among Blue Dog Democrats worried about future deficits -- and their votes are critical.

Big Pharma, for example, is in line to get just what it wants. The Senate health panel’s bill protects biotech companies from generic competition for 12 years after their drugs go to market, which is guaranteed to keep prices sky high. Meanwhile, legislation expected from the Senate Finance committee won't allow cheaper drugs to be imported from Canada and won't give the federal government the right to negotiate Medicare drug prices directly with pharmaceutical companies. Last month Big Pharma agreed to what the White House touted as $80 billion in givebacks to help pay for expanded health insurance, but so far there's been no mechanism to force the industry to keep its promise. No wonder Big Pharma is now running "Harry and Louise" ads -- the same couple who fifteen years ago scared Americans into thinking the Clinton plan would take away their choice of doctor -- now supportive of Obamacare.

Private insurers, for their part, have become convinced they'll make more money with a universal mandate accompanied by generous subsidies for families with earnings up to 400 percent of poverty (in excess of $80,000 of income) than they might stand to lose. Although still strongly opposed to a public option, the insurance industry is lining up behind much of the legislation. The biggest surprise is the AMA, which has also now come out in favor -- but only after being assured that Medicare reimbursements won't be cut nearly as much as doctors first feared.

What we all have done:

Fostoria, Missouri: A local man spent Tuesday night in jail after a phone call that allegedly went too far.

Forty-three-year-old Charles Papenfus was arrested at the Fostoria Police Dept. and taken to St. Louis, Mo., on a charge that he threatened to kill a telemarketer.

The St. Louis Post-Dispatch reported that on May 18, Papenfus lost his temper on the phone with an employee from a St. Louis company. The caller was trying to get him to buy an extended warranty for a car he owned.

The newspaper cites court documents that say an agitated Papenfus told the sales rep he would, "burn down the building and kill the employees and their families."

Fostoria Police Chief John McGuire says Papenfus went to the police station on June 27 to speak to an officer and was arrested on a warrant out of St. Louis.

News 11 crime analyst Richard Murphy says authorities had to take this case seriously.

"No one can drop the ball because if they do and something does happen, there's going to be a lot of finger pointing."

We went to Papenfus' home to get reaction from his wife, who told the St. Louis newspaper that this is overkill by St. Louis police.

Goldman wins again:

Goldman Sachs settles TARP warrants with Treasury for $1.1 billion, saying it is "delighted to be paying off warrants". The company also said that the warrant payment and preferred dividends gave the government a 23% annualized return.

Goldman’s stock price has rallied 500% on an annualized basis since the March lows. The Treasury made of Gift of $13 billion to Goldman Sachs by rescuing them from AIG’s failure and they reciprocate with $1.1 billion.

Fortune Magazine July 17: The warrants are very valuable, especially with the recent sharp run-up in Goldman's stock price. The warrants carry the right (but not the obligation) to buy 12.2 million Goldman shares at $122.90 each. Goldman's closing price of $156.84 yesterday put the warrants "in the money" by a bit over $400 million. (That's the $33.94 difference between $156.84 and $122.90, multiplied by 12.2 million.) Given that the warrants still have more than nine years to run, they're clearly worth more than $400 million, because its owner has years of upside. However, because there's no existing market for such long Goldman warrants, their value is in the eye of the beholder (and the pricing modeler).

Who did better?

A further comment from Alan Sloan in Fortune: When I say that taxpayers kept Goldman alive, I'm not talking about the $10 billion of TARP money or the $12.9 billion of AIG bailout money that Goldman got. The $10 billion was nice, but not necessarily essential to Goldman's survival, and Goldman says it was holding enough assets and collateral to get all or almost all of the $12.9 billion had the government not bailed out AIG.

Rather, I'm talking about the way that U.S. and foreign governments -- in other words, taxpayers -- saved the world's financial system, saving Goldman in the process. Had many of the world's biggest institutions collapsed, which would have happened without taxpayer aid, Goldman would have been wiped out because the firms that owed it money wouldn't have been able to meet their obligations.

I'm also talking about the Federal Reserve Board moving with lightning speed last fall to allow Goldman to become a bank holding company. By giving Goldman access to vast amounts of money it was making available to bank companies, the Fed ended panicky demands from Goldman customers that the firm immediately return the cash and securities it was holding for them. That was the equivalent of a run on the bank, which no institution can survive.

Stopping it saved Goldman.

Now this is how Goldman shows its gratitude. It could have shelled out a few extra bucks and done the right thing for taxpayers (and ultimately for itself) by exercising good business judgment and looking generous. Instead, it's behaving in a way that brings to mind one of my favorite Biblical verses, Deuteronomy 32:15: "So Jeshurun waxed fat and kicked...and spurned the Rock of his salvation." In these ultra-political days, filled with economic pain for so many Americans, that's not only the wrong way to act, it's foolish. A word I never thought I'd associate with Goldman.


From talkingpointsmemeo.com: President Obama wanted his press conference on health care tonight at 9pm ET. NBC said no, it's spent weeks getting an interview with singer Susan Boyle which is airing tonight on America's Got Talent. The result: Susan Boyle trumps Obama. Obama moved the time of his conference to 8pm ET. But, Fox (not the cable news network, the other one) will skip Obama's news conference as the new time conflicts with "So You Think You can Dance."

European shares managed to eke out an eighth straight day of gains, with losses for mineral extractors and financials offset by gains for firms such as TomTom and Norsk Hydro

Oil ended at $65.38 down 32 pennies. Gold gained $4 to $952.

The DJIA closed down 36 at 8880. The S&P 500 lost 1 to 953 and the NAZZ gained 10 to 1926.

Breadth was positive and volume continued summer light.

The bulls are still in control since the minimal pullback today was just what they wanted.


21 July 2009


Model Portfolio Value As of 21 July 2009

$ 573,308

This is a less is more market. Lower revenues and earnings derived from firing folks are being greeted with 10% jumps in stocks prices as traders cover shorts and investors (?) project wonderful earnings when the economy turns. This morning Caterpillar reported better than earnings and the shares are 10% higher as shorts rush to cover. Revenues for CAT were lower than expected but the rose colored glasses group see only the earnings beat. Merck reported better than earnings and had a positive surprise in that the revenues from its two best selling drugs are dropping but at a slower pace than forecast.

The fact that CAT earnings are down 50% and revenues down 45% from last year has no meaning to traders. Traders are pricing stocks on their ability to beat the magic estimated earnings numbers. Since most revenue numbers are missing estimates to the downside traders have decided to ignore that rubric.

It does no good to argue with Mr. Market and so we will let the rally run its course.

Asian markets were mixed overnight and European bourse indexes are higher at midday. Gold is at $950 and Oil has a $65 handle as the trading day is under way.

We tried trading GE and KBE today but sold positions for a scratch loss when the markets turned negative. We also switched our Short S&P ETF to half the shares in the Double Short ETF (SDS).

Oil ended at $64.72 and Gold was $948. European bourse closed higher.

The markets rallied into the close. CAT and Merck were responsible for plus 40 points in the DJIA.

The DJIA closed up 65 at 8915. The S&P 500 was up 4 at 954 and the NAZZ gained 7 to 1916.

Breadth was slightly negative and volume was light.

The bulls remain in control.


20 July 2009


Model Portfolio Value As of 20 July 2009

$ 573,686

Asian markets were strong overnight with Hong Kong and India both up over 3% and European markets are higher by more than 1% at midday. U.S. futures are indicating a higher opening and Gold is up $15 with Oil up $1 and with a $64 handle as the bulls press their gains of 6% and more last week.

Goldman Sach’s chief strategist David Kostin raised his outlook on the S&P 500 to 1060 by year end from 940. That is fueling this morning’s rally. Of course in 2007 and early 2008 Goldman was recommending subprime mortgage CDOs to clients while shorting them for its own account.

Bloomberg: Kostin is now tied with Frankfurt-based Deutsche Bank AG’s Binky Chadha for the second-highest S&P 500 forecasts among 10 Wall Street strategists tracked by Bloomberg News. Only JPMorgan’s Thomas Lee, at 1,100, is more bullish. Barclays Plc’s Barry Knapp, who had been the most pessimistic U.S. strategist, boosted his projection a week ago following the 40 percent surge in the S&P 500 between March and June, the biggest gain since the 1930s.

This summary from James DePorre at realmoney.com is an excellent summary of where the markets are at this juncture:

Acceptance is not submission. It is acknowledgement of the facts of a situation, then deciding what you're going to do about it.

-- Kathleen Casey Theisen

The market underwent a dramatic change in character last week as it celebrated strong earnings from Goldman Sachs, Intel and IBM. The upbeat mood is continuing as we kick off a new week -- CIT has cut a deal to save itself from bankruptcy; Goldman raises its target for the S&P 500 for the end of the year to 1060 from 940; the dollar is weak, causing oil to rally; China reports strong housing demand; and analysts upgrade Cisco, Caterpillar and Texas Instruments.

The quickness and intensity of last week's reversal caught a lot of folks by surprise. We were on the brink of cracking key support when the Meredith Whitney upgrade hit last Monday, and we haven't looked back since then. What was particularly notable about the action last week was how limited the pullbacks were. On Wednesday and Thursday in particular, we barely pulled back for longer than a minute or two. A lot of folks were obviously caught unprepared for the sudden and sustained strength and were so anxious to add long exposure that they didn't let the market come in at all.

The great difficulty now is that so many stocks made such strong moves for three, four or five days that they are quite extended and do not offer favorable entry points unless you are willing to chase things that are quite technically overbought.

Nonetheless, a lot of folks are obviously feeling left out, and that means we should have some very strong underlying support. They may have missed the move last week, but the psychology now is that they won't miss the next dip.

In addition we have another flood of earnings reports coming this week, and the market has been quite pleased with what it has seen so far. Many key reports are already out, but both Apple and Microsoft report this week and will likely keep the bears on the sidelines -- especially those who were burned by Intel last week.

You always have to be a bit distrustful of strong moves on Monday morning, especially when we are already a bit extended, but there is a lot of positive news on the wires this morning and we should see some strong underlying support. Many charts badly need to consolidate some gains, but with anxious buyers under the surface, they may not do so for long.

The key this morning will be to see how quickly buyers jump on the first dip in the first hour or so of trading. I suspect they will stay aggressive and will not let this market fall too much. That means our challenge will be to find stocks that offer entry points without being too extended already, and that doesn't leave a whole lot.

In the U.S. form of capitalism only the workers lose their jobs and can’t find other work. The CEOs move on to another high playing job in the private sector or into government leadership:

WSJ: Private-equity firm Fortress Investment Group LLC is expected to name Daniel Mudd, former chief executive of Fannie Mae, as CEO, according to a person familiar with the matter. Mr. Mudd, who is on the company's board, would succeed Wesley Edens, Fortress's co-founder and largest shareholder

Mr. Mudd, who had been chief operating officer at Fannie, was installed as CEO there in December 2004 after an accounting scandal led to the ouster of Franklin Raines. He spent much of his first year apologizing for the company's past accounting misdeeds and aggressive lobbying, and instilling a more cooperative approach to dealing with critics.

But Mr. Mudd and other top Fannie executives were worried about the loss of market share to Wall Street firms, which were taking a bigger role in buying mortgages and packaging them into securities. They bought more high-risk loans, which started to sour rapidly in 2007 as housing prices slid, depleting capital and causing the share price to collapse.

Mr. Mudd worked hard last summer to persuade the Treasury to allow Fannie's management to try to work its way out of those problems. But federal regulators instead chose to seize management control of Fannie and sister company Freddie Mac. That move included the ouster of Mr. Mudd and other executives.

WSJ: New problems are flaring up in Citigroup's private-investments division, this time involving two funds overseen by an executive who left this year to join the Obama administration.

Clients of a private-equity fund that amassed $3.4 billion to invest in airports, roads and other infrastructure projects last month voted to bar it from making new investments after its co-head quit and several high-profile deals collapsed, according to people familiar with the matter. A second, smaller fund geared toward sustainable development projects failed to attract clients and was shelved late last year.

The funds were the progeny of Michael Froman, former operations chief of Citigroup Alternative Investments, who left in January to become a senior White House aide focused jointly on national security and international economic affairs. Mr. Froman started the infrastructure fund, and its two co-heads -- one of whom recently left -- reported to him before Mr. Froman left. Mr. Froman's departure generated a high-level internal debate over how his stake in the infrastructure fund should be valued.

We hope AIG isn’t taking the opposite side of Credit Default Swaps of Chinese banks. They wouldn’t would they?

WP: China’s top banking regulator on Sunday warned of the risks from surging bank lending, singling out the dangers of unhealthy growth in the property market.

“(We) must control the risk of real estate loans,” said Liu Mingkang, the head of the China Banking Regulatory Commission, adding that measures must be taken to better evaluate the creditworthiness of borrowers.

Liu said bank lending had helped stabilize the economy so far but made one of his strongest calls yet to banks to guard against taking excessive risks.

Short squeezes on earnings reports are pushing stocks higher as the bulls exact their revenge on the short side of the street in small payback for last fall’s carnage.

Bloomberg: The index of U.S. leading indicators rose in June for a third consecutive month, reinforcing signs the economy may be emerging from the worst recession in five decades.

The Conference Board’s gauge of the economic outlook for the next three to six months increased 0.7 percent, more than forecast, after a revised 1.3 percent gain in May, the New York- based research group said today. It is the first time the index has climbed for three months in a row since 2004.

Smaller job losses, rising stock prices and stabilization in homebuilding and manufacturing are evidence that government efforts to stem the financial crisis and lower borrowing costs may pay off. A jobless rate that is forecast to reach 10 percent and falling home values are a reminder that any expansion will be muted as consumers rein in spending and boost savings.

These are the morning comments of Jim Cramer who is one of the biggest bulls on the Street:

I don't know about you, but I get nervous when I see all of these upgrades and early-morning buying after the Nasdaq has been up for eight straight days and we had a monster short-covering rally last week. I understand Goldman's desire to put a big number on the S&P 500 for the end of the year because many companies have boosted the bottom line by firing people. But the best comments I have seen so far this quarter come from companies like PPG Industries, which said that things are mildly better. Maybe Bank of America sees the same thing happening for Caterpillar tomorrow, so it is worth upgrading? I guess. I know that Eaton is perceived as beating earnings and that the dividend is safe, and Johnson Controls, another morning reporter, took share and did well by dominating the interior share of the auto build. I don't know if Caterpillar has that kind of momentum, and I don't know how safe the dividend is. Second-half strength? Given what I keep reading about ahead with commercial and residential construction, I don't know how you get to stronger numbers. Cisco? I have been betting that John Chambers puts on a better spin than he has, so I get that upgrade, particularly because of the big orders coming from Asia. The media stories out of Morgan Stanley? Sure, the business is cyclical, but if we are going to see improvement in Disney and CBS I would rather buy Google, which will take more than its fair share and reported a quarter that simply wasn't as bad as the market took it.

I come back with all of these and say, wait a second. We just rallied 700 Dow points? Wasn't the time to be bullish then, when there were far fewer bulls and rates were lower? Something leaves me cold on all of these upgrades. I am not a seller, but I am sure not a buyer on any of these moves.

Eaton, the car equipment supplier, is up $4 today on short covering after better than earnings. Cramer refers to it in the comments we printed above and Time Melvin comments more extensively on realmoney.com on its latest report and the implications:

The real story in Eaton (ETN) is how bad the report really is if you read the whole thing. Profits fell 92% year over year, and revenue was down 32%. The company lowered annual guidance for the third time this year. The CEO commented that the outlook for the year was far weaker than anticipated, saying that end-markets would decrease by 26%. The story, as with so many other companies, was cost-cutting. This is like bleeding the patient and shaving off a limb or two to restore health.

The stock is trading at 25 times the high end of the new forecast. Would you pay that multiple to buy into this business? I would not, and neither would any rational businessman I have ever known. This "less bad is good" is starting to remind me of the Internet bubble pricing.

From theleftcoaster.com:

Obama and the Economic Critics on the Left

by Mary

Newsweek has a piece about Joseph Stiglitz, one of the world's preeminent Nobel Prize economists who doesn't believe Obama has done enough. Stiglitz was one of the early critics that the size of the economic stimulus package was too small and now days it is apparent that he and Krugman were more than right. Another major criticism is that the Obama has not sufficiently restrained the too-big-to-fail financial institutions which most leftward leaning economists believe as well.

A senior White House official, responding to this critique, says that the Obama administration is most often criticized these days for intervening too much in the economy, not too little.

So, the administration is still using the "both sides are complaining" excuse which is completely brain-dead when all the evidence shows one side was right and the other wrong. After all, the stimulus package was way too small to fill the hole in which the economy has fallen and Stiglitz was right about this. And those critics that complain the administration is interfering too much? They are the same ones that helped create the financial debacle by deregulating everything in sight. They are the people who think it's okay to let Goldman Sachs suck up all the world's wealth because that's how they gain status and make their bucks off the ill-begotten gains of the ultra wealthy.

So who has more credibility? The guys who wrecked the economy or the guys who warned about the excesses? Why does the administration play this game?

Today is hay day (the day to get the hay in for the horses for winter) at the farm and so we are ending early with the major measures almost 1% higher in light trading. Tomorrow is turnaround Tuesday and so however the markets end today - which we think will be up - we would expect the opposite tommorrow.


17 July 2009


Model Portfolio Value As of 17 July 2009

$ 574,458

June building permits were up 8.7% over May. The markets like this news but we wonder why any but a few need to build a house when there are so many cheap ones for sale.

Asian markets were higher overnight with India up 3% and European bourses are mostly higher at midday. Gold and Oil are unchanged as Triple Witching Friday trading begins.

Nouriel Roubini and Meredith Whitney, both of whom forecast the financial collapse, are the most closely watched of the current bears. One reason given for yesterday’s rally was that Roubini had turned neutral to positive and that, coupled with Whitney’s Monday pronouncement of a buy on Goldman Sachs (after it had tripled from its low), suggested that the worst was over.

Roubini issued an e-mail in the late afternoon:  http://mindovermarket.blogspot.com

We initiated trading positions on Monday because of Whitney’s change of heart and took our measured profits in Wednesday morning’s rally. Near yesterday’s close we initiated small short in the S&P 500 in a few of our larger trading accounts. With the rally expanding to five trading days and now above 930 on the S&P 500 we think a pullback is in the cards as the S&P approaches the top end of its 875 to 950 trading range.

it is unconscionable that the Treasury is allowing Goldman Sachs to pay the bonuses it plans and we are also dismayed by the power over daily trading that GS  through the use of program trades. This summer program trading ahs comprised almost half of daily trading. That means that half the volume on the NYSE has nothing to do with investing. And that is why we are maintaining our cash position. We are leery of the control the major players have over daily action and we are content to try and scrounge a few crumbs of profit from trading the range.

The artificially low interest rates that the Fed is maintaining are a major reason Goldman and JP Morgan and BankAmerica are profiting at the expense of individual savers who used to depend on CD income for living. The low interest rates are forcing folks to take on more risky long term bond funds for income. When interest rates rise, which they will whine the economy eventually recovers, the savers who move funds to bond funds will suffer again.

Paul Krugman on Goldman Sachs http://www.nytimes.com

And http://www.dailykos.com has a discussion of Goldman’s program trading:

The percentage of stocks above their ten day moving averages has moved from 10% on July 9 to 97 % on July 16.

From http://dealbreaker.com

Lloyd Blankfein (CEO Goldman Sachs) and Jamie Dimon (CEO JP Morgan) save CIT over a Lovely Dinner

The duo dined together last night at Barbone, presumably choosing the East Village location to avoid attention and/or because of its proximity to Superdive, which Big D had been dying to check out (keg service? Yes please). Goldman Sachs declined to comment. Supposedly the meal was one of pleasure and not business. No word on who paid, or if anyone got lucky, though we do know that a couple of bottles of wine were consumed, upping the odds of something happening. At the very least we're guessing a copping of feel in the cab.

Update: CIT is the one that got lucky? What we'd thought was an intimate dinner for two sans shop talk seems like it was apparently an emergency Save CIT meal, based on the fact that Reuters is now reporting that JPM and GS are in talks for financing of $2-3 billion, and that Richard Cashin, JPM executive committee member and managing partner at One Equity Partners LLC, which "manages multi-billion dollar investments and commitments in direct private equity transactions for JP Morgan," was there as well.

Goldman and JPMorgan -- The Two Winners When The Rest of America is Losing

Robert Reich | Jul 17, 2009

Besides Goldman Sachs, the Street's other surviving behemoth is JPMorgan. Today it posted second-quarter earnings up a stunning 36 percent from the first quarter, to $2.7 billion.

The resurgence of JPMorgan and Goldman Sachs gives both banks more financial clout than any other players on the Street -- allowing both firms to lure talent from everywhere else on the Street with multi-million pay packages, giving both firms enough economic power to charge clients whopping fees, and bestowing on both firms even more political heft in Washington.

Where are the antitrusters when we need them? Alternatively, why isn't the government charging Goldman and JPMorgan a large insurance fee for classifying both firms as "too big to fail" and therefore automatically bailed out if the risks they take turn sour? Instead, we've ended up with two giants that now have most of the casino to themselves, are playing with poker chips backed by taxpayers, and have a big say in what the rules of the game are to be.

When JP Morgan repaid its federal bailout of $25 billion last month it was, like Goldman, freed from stricter government oversight. The freedom has also allowed JP, like Goldman, to take tougher and more vocal stands in Washington against proposed financial regulations they dislike.

JP is mounting a furious lobbying campaign against regulations that would funnel derivatives trading through exchanges where regulators can monitor them, and thereby crimp JP's profits. Now the Street's biggest derivatives player, JP has generated billions helping clients navigate these contracts and assuming counter-party risk in such transactions. Its derivatives contracts were valued at roughly $81 trillion at the end of the first quarter, representing 40 percent of the derivatives held by all banks, according to the Office of the Comptroller of the Currency. JP has played down its potential risk exposure from these derivatives contracts, of course, but anyone who's been paying attention over the last ten months knows that unregulated derivatives have been at the center of the storm.

The tumult on the Street has also given both firms extraordinary market power. That's where much of the current profits are coming from. JP used the crisis to snap up Bear Stearns in March and Washington Mutual last fall, with the amiable assistance of the Treasury. The deals have boosted JP's dominance in retail banking and prime brokerage, enabling it to charge its corporate clients heftier fees for lending and other financial services, and to corner more of the market in fixed-income and equities. JP also bolstered its earnings by helping other financial companies raise capital following the stress test results in May.

Antitrust law was designed to prevent just this sort of market power and political heft. The Justice Department or the Federal Trade Commission should investigate the new-found dominance of Goldman and JP -- and, if warranted, break them up. Alternatively, Congress should impose a surtax on the newly-exclusive group of Wall Street firms, most notably Goldman and JPMorgan, which are now backed by implicit government bailout insurance guaranteeing that, should they get into trouble, taxpayers will keep them afloat. The surtax would approximate the economic benefit to these firms of such government largesse, which I'd estimate to be at least 50 percent of their profits from here on.

Gold ended flat at $925 and Oil was $63.31 up $1.40. European bourse closed higher on the day.

The major market measures meandered most of the day.

At the bell the DJIA was up 32 at 8745. The S&P 500 dropped to 939 and the NAZZ gained 1 to 1885.

Breadth was flat with most financials lower and volume was summer light.

The bulls won by not losing.


16 July 2009


Model Portfolio Value As of 16 July 2009

$ 574,183

JP Morgan beat estimates by a wide margin but markets are mixed in pre-opening trading since CIT is on the ropes and may have to declare bankruptcy. The Treasury isn’t going to rescue them and so the fate of the many businesses CIT finances is in limbo. Again markets were mixed overnight and European bourses are mixed at midday. Gold is a bit lower and Oil is flat with a $61 handle as the trading day begins.

The question for traders today is whether the positive news from JP Morgan outweighs the uncertainty of CIT.

Jobless claims were down 47,000 to 522,000.

European shares rose, with gains for pharmaceuticals and banks offsetting losses in the technology sector as investors eyed a slew of earnings results.

Meredith Whitney converted from bear to neutral/positive on Monday and now Roubini has converted from bear today. Well maybe he has depending on how one interprets the following comments.

From Bloomberg: U.S. stocks rose for a fourth day as economist Nouriel Roubini said the worst of the financial crisis is over and the recession will end this year, while takeover speculation lifted commodity shares.

From Reuters: The United States may need a second fiscal stimulus worth $200-250 billion around the end of the year, but the worst of the economic and the financial crisis is already behind us, leading economist Nouriel Roubini of RGE Global Monitor said on Thursday.

Roubini, one of the few economists who foretold much of the current financial turmoil, said a second stimulus would be necessary to boost a deteriorating labor market. The stimulus "can not be too small, but it can not be too large," Roubini said, or financial markets will become too worried about the sustainability of the U.S. debt.

From WSJ: In afternoon remarks, New York University professor Nouriel Roubini, who has been credited with predicting parts of the financial crisis, said the economy would emerge from the recession toward the end of 2009. In the wake of Roubini's comments, industrial and materials stocks rallied broadly. Roubini, who is known as Dr. Doom for predicting the 2006 global economic crisis, earlier this year said recovery would have to wait until 2010.

On that news in a few trading accounts we took a 5% short position in the S&P 500 by buying the one times short S&P 500 ETF (SH). The S&P 500 is within 1% of its high for the year.

Oil ended a $62.02 up 52 pennies. Gold lost $2 to 937.

The DJIA gained 95 to 8711. The S&P 50 rose 8 to 940 and the NAZZ jumped 22 to 1885.

Breadth was 2/1 to the good and volume was light.

The bulls remain in control.


15 July 2009


Model Portfolio Value As of 15 July 2009

$ 574,056

Intel beat last night and forecast higher margins and revenues and the share price jumped 10% in overnight trading. That news has added a positive tone to pre-opening trading. Asian markets were higher overnight as are European bourses at midday. Oil has a $60 handle and Gold is better.

Stocks are higher out of the gate and we are closing out our holdings in our large accounts for a trading profit. We will keep Hain because it is too thin to sell easily. We were in for a trade and all the closed positions are profits except Dell which is a scratch loss for some. We noticed that our midsized accounts didn’t gain as much and that is the result of the not having the Intel and CSX.

Investors Intelligence reported a drop in bulls to 35% last week from 40% the prior week. Bears gained to 35% from 30%. Those numbers suggest the rally of the last three days.

Jon Stewart is definitely not a member of the Jim Cramer fan club:

La Crosse man cited for killing rabbit with blowgun

By Tribune staff

A La Crosse man was cited Saturday for using a blowgun to kill a rabbit with a dart. Homeowners on the 400 block of North Ninth Street reported seeing Bryant Joy kill the rabbit, La Crosse police said. Police found a dead rabbit in a driveway, with a dart still attached, reports stated.

Joy, 19, of 908 Badger St., admitted shooting the rabbit but said “he did not know why he did it,” according to reports.

He is due in La Crosse Municipal Court on Aug. 12 for his $164 citation. Joy was cited under a municipal ordinance that bans city residents from discharging an air, spring or gas cartridge gun of any description without having written permission from the police chief. Municipal Prosecutor Peter Kisken declined to comment on the case until he sees the report.

The FED sees the recession ending and sees growth in the economy next year while unemployment continues to grow according to minutes of the June meeting released today.

European shares staged a broad-based rally, with technology stocks driving the gains as investors welcomed Intel's upbeat outlook. Oil gained to $61.52 up $2 and Gold rose $16 to $939.

The DJIA closed on its high and we left some money on the table but that’s trading and.... we made a profit on the trades.

At the bell the DJIA was up 270 at 8625. The S&P 500 gained 28 to 933 and the NAZZ jumped 60 to 1860.

Breadth was 6/1 positive and volume was light.

Advancing volume was 20/1 declining volume on the NYSE and 10/1 on the NAZZ

The bulls were on a rampage today but Intel closed at the same price it was trading pre-opening.

From dailykos.com:

Senate saves world from Manimals

By DarkSyde

Wed Jul 15, 2009 at 07:02:03 AM PDT

Via Keith Olbermann we're alerted that a number of Senators are boldly saving the nation from Dr. Moreau's infamous island of manimals and rogue mermaids the world over with the Brownback-Landrieu hybrid cloning ban. Proud sponsors and cosigners include Senators Jim Bunning (R-KY), Tom Coburn (R-OK), John Cornyn (R-TX), John Ensign (R-NV), Lindsey Graham (R-SC), James Inhofe (R-OK), John McCain (R-AZ), and David Vitter (R-LA) among others. What do you suppose the odds are one of those politicians happens to be diabetic?

In 1978, scientists at the Biotechnology Company Genentech cloned the gene for Human Insulin ...  After the human insulin gene was isolated from human tissue, it was chemically joined or 'spliced' to into a small bacterial chromosome called a plasmid. Once joined to this plasmid DNA, it essentially became just another piece of DNA in the bacterial chromosome. Every time the bacterial cell divides, it replicates its DNA, including replicating the human insulin gene ... The result: tons of bacteria making tons of human insulin!

Have any of these clowns ever even owned a science book? Geez, Coburn's an obstetrician, you'd think he'd have had to at least crack open and leaf through an anatomy and physiology text at some point. I guess technically E. coli is a bacterium, not an animal, and that would give the millions of diabetic constituents some leeway between using the unholy Humulin® union everyday to stay alive and becoming serial felons, but humanized insulin is just one notable example in a growing list of bioengineered drugs. And something tells me that Linnaean taxonomy or phylogeny weren't exactly determining factors for this histrionic crew.


Bastille Day 2009


Model Portfolio Value As of 14 July 2009

$ 572,495

Goldman Sachs beat estimates and earned over $3 billion in the quarter. Actually they just continued converting the $13 billion we taxpayers gave them to so called profit. With $3 billion this quarter and $2 billion last quarter in reported profits they still have $9 billion of SIG money to use as profits. In reality they should have reported a $15 billion loss in the first quarter.

Johnson & Johnson reported slightly lower profits for the quarter and Dell warned that profit margins have narrowed but thinks the bottom in computer sales has been reached.

Our buy actions yesterday were the result of Meredith Whitney turning neutral on many financials and actually recommending Goldman Sachs. Since she had been the loudest bear on the financials for the past year we decided to trade the capitulation. The central word is trade.

CSX earnings were lower but better than.

From WSJ: Retail sales increased 0.6% in June, the second consecutive monthly gain, mostly on purchases of gasoline and automobiles. Excluding autos and gas, all other retail sales fell for a fourth straight month, according to a Commerce Department report.

A separate release from the Labor Department showed U.S. wholesale prices jumped 1.8% last month compared with May on broad-based gains in everything from gas to vegetables. Still the data don't necessarily presage a rise in consumer inflation, given the difficulty businesses might have in passing higher costs along to consumers.

Dell said Tuesday that weak demand from large enterprises and small-and-medium businesses is among the reasons why the computer giant expects to report a decline in its second-quarter gross margins. Speaking at Dell's analyst meeting, Chief Financial Officer Brian Gladden said that such segments of Dell's business, "are not deteriorating, but not getting much better." On Monday, Dell warned that its second-quarter gross margins would decline, while its sales should increase slightly over its first-quarter results.

Our tech guru who is a numbers freak, naturally, points out that S&P 910 is the equal to the two year S&P range between the high of 1576 and low of 666.

We sold CSX for $1.80 one day profit and bought equal Dell and BankAmerica. We added AT&T to more accounts.

Dell is down $1 and we added to more accounts. Entering the contra hour (the hour of trading before the final hour) the major measures continue to meander. We think the meandering is positive for bullish trading after the large up move yesterday and are content to give our trades room to work.

Playing both sides and collecting a fee: from WSJ

Fortress Investment Group LLC is deep in discussions with lenders to refinance a critical $1.6 billion loan on real-estate and railroads company Florida East Coast Industries, according to people familiar with the talks. There is only one wrinkle: One of those lenders happens to be Fortress Investment Group. New York-based Fortress, a private-equity and hedge-fund firm with $26.5 billion in assets under management, has until July 27 to work out a plan, when the loan matures and Florida East Coast must pay back the amount. People involved in the negotiations say that the company wants to extend the loan, and that it is expected to reach an accord that will delay the maturity and increase its interest rate.

But the people involved in the discussions say the talks have been complicated because Fortress sits on both sides of the negotiating table: The company already has a $2 billion equity investment, made when it spent $3.6 billion to purchase Florida East Coast at the height of the credit bubble in 2007. But since then, separate investment funds managed by Fortress have been buying up large chunks of the company's debt. They are now the company's largest lender, holding a $600 million position.

Fortress's situation shows some of the risks for private-equity firms that are keen to move into the world of distressed-debt investing. With little money available to borrow and make equity investments, these firms are instead buying up corporate debt, often attracted to companies in which they already have significant ownership stakes.

Buyout firms Apollo Management and TPG own debt in Harrah's Entertainment Inc., the casino operator it acquired last year. At KKR Financial Holdings LLC, the debt-investing arm of Kohlberg Kravis Roberts & Co., six of its seven largest corporate-debt holdings are KKR companies, including hospital chain HCA Inc. and First Data Corp.

Private-equity firms say that they manage these conflicts by, in some cases, recusing themselves from one side of the negotiating table. That was the case in Masonite, the KKR-owned door maker that filed for bankruptcy earlier this year. KKR owned a portion of the debt, but removed itself from restructuring talks.

European markets ended higher, with bank shares leading the gains after better-than-expected earnings from Goldman Sachs. Gold gained $1 to $924 and Oil was unchanged at $59.50.

The DJIA gained 30 to 8360. The S&P 500 rose 5 to 906 and the NAZZ was up 6 to 1800.

Breadth was 2/1 to the good and volume was light.

Intel announces after the close and will set the tone for tomorrow’s trading.

The bulls held serve.


13 July 2009


Model Portfolio Value As of 13 July 2009

$ 572,493

We accidentally deleted our words of wisdom today and don’t know how to find the backup if there is one. We need to leave early and so we will just say that we bought AT&T, Intel, Verizon, CSX, BankAmerica in our large trading accounts and KBE and Chico’s in accounts in which we have been trading those issues. More tomorrow.

10 July 2009

Model Portfolio Update

Model Portfolio Value As of 10 July 2009

$ 570,861

9 July 2009

Model Portfolio Update

Model Portfolio Value As of 9 July 2009

$ 570,861

8 July 2009


Model Portfolio Value As of 8 July 2009

$ 569,915

Tomorrow is our 43rd Wedding Anniversary and so we are taking Thursday and Friday off to celebrate. Our next post will be Monday July 13.

Asian markets were lower overnight and European bourses are lower at midday. Oil has a $61 handle and Gold is under $920. U.S. stocks opened higher but are having second thoughts after an hour of trading although the major measures are still positive.

Google is going to offer an operating system in late 2010 or later to challenge Microsoft on low end computers.

At 12:34pm and 56 seconds today it was 123456789.

It’s good to know some lawyers and accountants will be able to continue to afford homes in the Hamptons:

From Bloomberg: Lehman Brothers Holdings Inc., the investment bank liquidating in bankruptcy, paid its advisers $262.6 million for nine months of work, according to a filing with the U.S. Securities and Exchange Commission.

The best-paid firm through June was New York-based restructuring adviser Alvarez & Marsal LLC, which has taken $115 million in fees since Lehman declared bankruptcy in September, according to papers filed today. Lehman’s primary law firm, Weil Gotshal & Manges LLP of New York, received $63.7 million through June for a team headed by partner Harvey Miller.

A&M’s Bryan Marsal, who is Lehman’s chief executive officer, and Miller didn’t immediately respond to e-mails seeking comment.

Milbank Tweed Hadley & McCloy LLP, which advises Lehman’s creditors, has received $17.2 million from the investment bank.

Lynn LoPucki, who teaches bankruptcy law at the University of California, Los Angeles, and maintains a database to calculate fees, has estimated that Weil Gotshal could see as much as $209 million in fees from the Lehman case. Overall, the bankers, accountants and lawyers in the case may reap record judge-approved charges of $906 million, LoPucki has said.

John Meriwether the fellow whose highly leveraged hedge fund was the precipitator of the Long Term Capital Crisis in 1998 has closed a hedge fund he started a year after that disaster.

Tim Melvin at realmoney.com writes:

Meriwether Fund Closing

7/8/2009 3:25 PM EDT

I see with some amusement that John Meriwether is closing down yet another hedge fund. It has been about a decade since he and his Noble Prize winning economists almost wrecked the global financial system and it seem this melt down has been no kinder. The fund has dropped from a peak of $2.7 billion under management to just $481 million. I am told the fund was down more than 40% last year and was near breakeven so far in 2009. He had been trying to convince investors to stay with the Relative Opportunity Value II fund but too many investors just wanted their cash back.

When funds lose that much money it is more profitable for the fund manager - but not the limited partners who lost- for the general partner to close the fund and start a new fund so that the general partner (fund manager) can begin collecting the 2% plus 20% share of the profits that would have to be foregone in the closed fund until it had earned back the 44% loss.

Maybe the third time will be the charm.

CNBC is interviewing American Express CEO Chennault who earned the sum of $30 million last year while his company lost billions and half its market value. The interview is taking place at Sun Valley Idaho where there is an investment conference that of course American Express shareholders are paying for. And American taxpayers loaned American Express money from the TARP program. Nothing has changed.

Oil closed at $60.14 down $2.79. Gold lost $10 to $918. Europeans indexes closed lower on the day.

We bought our Monopoly railroad trade in our larger accounts where we have been trading small amounts. There are four main railroads left in the U.S. They are Burlington Northern, Union Pacific, Norfolk Southern (Pennsylvania RR), and Chessie System (B&O). With the price of oil dropping and the markets down 5% in the last three trading days we think there is going to be a rally. These stocks are volatile and thin on the upside and downside and all are down substantially from their highs. We have been trading them at higher prices for a few accounts over the last month with some luck. We also bought a relatively small amount of the large bank ETF (KBE) for these same accounts.

We do think the markets are going lower, but not in a straight line.

The DJIA gained 16 to end at 8180. He S&P 500 treaded under 875 but managed to close at 879 down 2. The NAZZ gained 1 to 1747.

Breadth was 3/1 negative and volume light.

The bears held serve.


7 July 2009


Model Portfolio Value As of 7 July 2009

$ 569,421

Asia closed mildly lower overnight and Europe is higher at midday. Oil ahs a $64 handle and Gold is $925 as the trading day begins.

After we left yesterday the S&P 500 held above the 875 level to close up 2 on the day. And so nothing has been settled. DJIA earnings begin tomorrow with Alcoa the leadoff.

What goes around.... the Justice Department broke AT&T into 7 different parts in 1983 because the old AT&T was restraining competition. And then over last 15 years the Justice Department let the Baby Bells recombine. Moreover the Baby Bells absorbed most of the large independent telephone companies that had been competition such as the remains of MCI and also General Telephone. According to the Wall Street Journal, "The Department of Justice has begun an initial review to determine whether large U.S. telecom companies such as AT&T Inc. and Verizon Communications Inc. have abused the market power they've amassed in recent years." The investigation is in its early stages and isn’t targeting any specific company yes. One potential benefit of the investigation? It could free the iPhone from AT&T: "Among the areas the Justice Department could explore is whether wireless carriers are hurting smaller competitors by locking up popular phones through exclusive agreements with handset makers, according to the people."

The lawyers are happy though.

This won’t brighten your day but:

Dr. David Bronner, CEO of the Alabama Retirement Systems, the 43rd largest investment fund in America:

1)      Next month (July) California hits the wall financially, that will send a ripple effect across the US economy, AND over the next two years one state after the other will fall to it's knees financially as the federal government stimulus package ends by 2011. It has helped various states at different levels comparative to their economic condition. He says the stimulus package is what's been keeping the states alive for now...except for California which was in such terrible shape the stimulus package wasn't enough to really help them. "They go first" he said. Alabama would hit the wall in February of 2011, late in the game as Alabama is in better shape than other states. Bronner says Alabama might dodge the bullet if the economy revives enough by then. But, he doesn't really think things will improve enough by then to avoid a crisis. "It will be the largest economic crisis in the history of the State of Alabama." Bronner says Alabama will experience such significant shortfalls by 2011 that taxes will have to be raised substantially to avoid collapse...probably on property. And that practically all states will face a similar fate.

2)      Within 120 to 150 days from now the commercial real estate market nationally begins to collapse as stores, malls, and shopping strips, and industrial plant have enough closures (store and plant) and loss of rental revenue to make them unable to pay their mortgages. They will start going into foreclosure unable to pay their mortgages in a significant way at that time creating a second wave of economic disaster starting three to four months from now.

3)      Unless oil stays above $70 a barrel Russian and Mexican economics will begin to unravel as countries ("socio-economic collapse) economies require that much from oil to have an adequate revenue stream to feed their people and economies. AND, the only other big revenue stream for Mexico is illegal drugs sold in the US...so their economy will intensify their focus on selling drugs in America as a result in order to survive if oil doesn't stay above $70...he said $90 would be better for them.

4)      The US economy (according to Bronner) is today like a patient in the emergency room in the process of having a heart attack. He said people tend to think of it as being in the hospital for cancer or chronic disease. Without the huge Bush stimulus, and then the huge Obama stimulus, the economy would have already flat lined...(i.e. we'd be experiencing a Great Depression style economic collapse heading toward 25% unemployment or so as the tumble would have continued and intensified at an increasing rate, with the stock market hitting around 2,000) Bronner said the depth of the crisis was greater than ANYONE realized and agrees today, after learning the extent of the crisis, that the federal government simply had to start "shoveling" money at it to prevent a true and complete collapse of our economy. He said he, at first, was mad at this shoveling of money until he learned the truth about the amount of money necessary to prevent a total collapse which he believes would have happened.

5)      Inflation will not arrive for 3 to 5 years as the economy is in a deflationary stage due to the economic plummet...and will not experience inflation until people start "buying things" again, and that's going to take while! He also believes 3 to 5 years is probably the term until true economic recovery establishes in the US and world economy.

6)      China must start selling their products to people in their own country and paying their workers enough to buy them. This would increase their products prices, reducing their exports (and "besides they will lose interest in having more US dollars anyway") and enabling other countries (US) to compete with them.)

7)      The greatest threat to the US economy is one of around 9 world events that could heap misery on top of misfortune at exactly the wrong time. A nuclear incident with N Korea, a plague, Israel attacking Iran (oil shock), or such could still throw the US economy into a Great Depression style situation. He said the greatest risk of this is anytime from now until the world economy gets somewhat back on it's feet...in 3 to 5 years.

From http://www.dailykos.com/


Advocacy Groups? Shut Up. Lobbyists? Have A Seat.

by BarbinMD

Mon Jul 06, 2009 at 01:18:04 PM PDT

So, do you want to get involved in politics and help advance meaningful health care legislation? Maybe raise a little money to run ads that target specific lawmakers, organize petitions, or send out emails to like-minded people, urging them to contact their representative? Well, sit down and shut up:

President Obama, strategizing yesterday with congressional leaders about health-care reform, complained that liberal advocacy groups ought to drop their attacks on Democratic lawmakers and devote their energy to promoting passage of comprehensive legislation.

But if you have more than a million dollars a day to spend, have a vested interest in stopping real health care reform, and better yet, if you have a past, personal relationship with key lawmakers, pull up a chair:

The nation's largest insurers, hospitals and medical groups have hired more than 350 former government staff members and retired members of Congress in hopes of influencing their old bosses and colleagues, according to an analysis of lobbying disclosures and other records.

Nearly half of the insiders previously worked for the key committees and lawmakers, including  Sens. Max Baucus (D-Mont.) and  Charles E. Grassley (R-Iowa), debating whether to adopt a public insurance option opposed by major industry groups ...

A June 10 meeting between aides to Baucus, chairman of the Senate Finance Committee, and health-care lobbyists included two former Baucus chiefs of staff: David Castagnetti, whose clients include PhRMA and America's Health Insurance Plans, and Jeffrey A. Forbes, who represents PhRMA, Amgen, Genentech, Merck and others. Castagnetti did not return a telephone call; Forbes declined to comment.

That goes a long way in explaining why Baucus, one of 60 Democratic Senators, has been fighting so hard against a public option. You know, the one that more than 70% of all Americans support. But Baucus aides "bristle" at the idea that lobbyists are getting any special access or treatment:

The senator and his staff meet daily with individuals, nonprofits and interests from across the health-care spectrum, and are proud that all interests are treated equally and that no one receives special treatment of any kind.

And I'm sure that Baucus would say the same thing if you show up in Washington for a little one-on-one time - of course that's assuming you have his personal phone number.

Commodities regulators are going to reregulate. But not too much:

U.S. commodities regulators, in an effort to crack down on excessive speculation, plan to propose sweeping trading limits on oil, natural gas and possibly other commodities.

U.S. Commodity Futures Trading Commission Chairman Gary Gensler said Tuesday the agency will hold hearings this summer to consider imposing position limits for "all commodities of finite supply." The agency will also review whether swap dealers, index traders and exchange-traded fund managers should be allowed to get around those limits through special hedge exemptions.

Comment by Howard Simon at realmoney.com on the position limit news:

Let me say it one more time: Commodity futures-based ETFs are an irretrievably bad idea. I hesitate to quote General Sherman, as I was taken to task once by someone who wondered why I was "honoring a war criminal," but as he said, "War is cruelty, and you cannot refine it..."

Commodity futures exist for the purposes of price discovery, risk transfer and commerce facilitation. They do not exist to be bought, held and rolled en masse. Keep using the donkey-end of a screwdriver as a hammer and you'll get the results you deserve. All these ETFs do is lead to massive distortion both in the price and in the forward curve of the futures. They render the futures useless for the purposes for which they were designed.

Worse, they make me mad.

The commercial position limit exemption was designed with bona fide makers and takers of delivery in mind. As these index funds and ETFs never intend to make or take delivery, they should not receive the position limit exemption. End of story. That would solve the problem in a heartbeat.

At 11:15am the S&P 500 is back at the magic 888 number.

A fellow form Goldman Sachs stole part of their computer trading program and has been arrested. In the story about the arrest was this:

About 28 percent of the shares traded in the U.S. during the fourth quarter were handled by automated brokerages using algorithms to generate rapid-fire trading strategies, according to estimates from NYSE Euronext, the world’s largest operator of stock exchanges. That’s up from 17 percent a year earlier, and almost three times larger than the portion of volume generated by individual investors, according to NYSE Euronext.

We think that currently program trading comprises an even larger percent. These programs game the markets and have nothing to do with investing.

European markets ended lower, as losses for utility firms offset gains for metal firms and banks.

Here is long but very interesting article on the implosion at AIG:


At five minutes and six seconds past 4am on July eighth the time and date will be 04:05:06 07/08/09. That won’t occur again until the year 3009, if there is a year 3009. Thanks to minyanville.com for that info.

The markets have been lower all day but the banks have been higher. That anomaly will determine the action in the final hour of trading. Will the banks lead a rebound or will the banks give in to the pervasive gloom. The glass has gone from being half full in May to being half empty in early July.

Gold gained $5 to 930 and Oil lost $114 to $62.25 in Tuesday’s NYC trading.

Stocks closed on their lows with the DJIA down 165 to 8100. The S&P 500 closed at 880 down 18 and the NAZZ dropped 42 to 1745.

Breadth was 4/1 negative and volume was summer light.

The bears were in control today.

With the election protests in Iran last week and the traffic death of woman demonstrator Neda and the subsequent idealistic stories in the world press about her death (http://www.nydailynews.com ) we reprint again a poem we read many years ago:


a poem by Adam Hanft
It is always the same way,
that after the armies have
settled into their homes and
the borders are shifted their
one lame mile
that talking rises that they
have found the little girl.
It is so, they have found her in a
tongue-tied corner of the woods,
and they have learned from
the palsied woman who lives with
her son by the bridge how in a
tantrum of strength she rose
to the window and saw
when the soldiers came they
killed the Mayor's little girl.
And so it starts, how the child
was gathering sunshine in her
rainbow creased dress when she
or how,
in another town, by another bridge
the girl was sleeping in the grass
when they came and that her
smile stuck to her lips while the sky
clanged and beat around her.
And now all the schoolchildren, so
scrubbed and solemn in rows are
standing as the Mayor, with
his one good arm,
drapes a few flowers on the brick and
wooded monument that stands next to
the bridge and a
Hundred years from the window of the
old woman who first saw the
glinting helmets and heard the
halfhearted scream roll
into the grass.

NYT July 7, 2009

Op-Ed Columnist

After the War Was Over


Robert McNamara, Lyndon Johnson’s icy-veined, cold-visaged and rigidly intellectual point man for a war that sent thousands upon thousands of people (most of them young) to their utterly pointless deaths, has died at the ripe old age of 93.

Long after the horror of Vietnam was over, McNamara would concede, in remarks that were like salt in the still festering wounds of the loved ones of those who had died, that he had been “wrong, terribly wrong” about the war. I felt nothing but utter contempt for his concession.

I remember getting my draft notice in the mid-1960s as Johnson’s military buildup for the war was in full swing. I’m not sure what I expected. Probably that the other recruits would be a tough bunch, that they would all look like John Wayne. I was staggered on the first day of basic training at Fort Dix, N.J., to be part of a motley gathering of mostly scared and skinny kids who looked like the guys I’d gone to high school with. Who looked, basically, pun intended, like me.

That’s who was shipped off to Vietnam in droves — youngsters 18, 19, 20 and 21. Many, of course, would die there, and many others would come back forever scarred.

Johnson and McNamara should have been looking out for those kids, who knew nothing about geopolitics, or why they were being turned into trained killers who, we were told, could cold-bloodedly smoke the enemy — “Good shot!” — and then kick back and smoke a Marlboro. Many would end up weeping on the battlefield, crying for their moms with their dying breaths. Or trembling uncontrollably as they watched buddies, covered in filth, bleed to death before their eyes — sometimes in their arms.

I was lucky. The Army sent me to Korea, which was no walk in the park, but it wasn’t Vietnam. I served in the intelligence office of an engineer battalion. But no one could truly escape the war. I would get letters from home that would make my heart sink, letters telling me that this buddy had been killed, that that buddy had been killed, that a kid that I had played football or softball with — or had gone to the rifle range with — had been killed.

For what?

McNamara didn’t know. My sister’s boyfriend got shot. A very close friend of mine came back from Vietnam so messed up psychologically that he killed his wife and himself.

The hardest lesson for people in power to accept is that wars are unrelentingly hideous enterprises, that they butcher people without mercy and therefore should be undertaken only when absolutely necessary.

Kids who are sent off to war are forced to grow up too fast. They soon learn what real toughness is, and it has nothing to do with lousy bureaucrats and armchair warriors sacrificing the lives of the young for political considerations and hollow, flag-waving, risk-free expressions of patriotic fervor.

McNamara, it turns out, had realized early on that Vietnam was a lost cause, but he kept that crucial information close to his chest, like a gambler trying to bluff his way through a bad hand, as America continued to send tens of thousands to their doom. How in God’s name did he ever look at himself in a mirror?

Lessons learned from Vietnam? None.

As The Times’s Tim Weiner pointed out in McNamara’s obituary, Congress authorized the war after President Johnson contended that American warships had been attacked by North Vietnamese patrol boats in the Gulf of Tonkin in August 1964. The attack never happened. As Mr. Weiner wrote, “The American ships had been firing at their own sonar shadows on a dark night.”

But McNamara, relying on intelligence reports, told Johnson that evidence of the attack was ironclad. Does this remind anyone of the “slam dunk” evidence of Saddam Hussein’s weapons of mass destruction?

More than 58,000 Americans died in Vietnam and some 2 million to 3 million Vietnamese. More than 4,000 Americans have died in Iraq, and no one knows how many hundreds of thousands of Iraqis. Even as I was writing this, reports were coming in of seven more American G.I.’s killed in Afghanistan — a war that made sense in the immediate aftermath of the Sept. 11 attacks, but makes very little sense now.

None of these wars had clearly articulated goals or endgames. None were pursued with the kind of intensity and sense of common purpose and shared sacrifice that marked World War II. Wars are now mostly background noise, distant events overshadowed by celebrity deaths and the antics of Sarah Palin, Mark Sanford and the like.

The obscenity of war is lost on most Americans, and that drains the death of Robert McNamara of any real significance.


6 July 2009


Model Portfolio Value As of 6 July 2009

$ 570,851

Asian and European markets were both lower on Friday and were and are lower today. U.S. markets are going to open lower. The news about the California and other states fiscal crisis and layoffs of teachers and health care workers is adding a somber tone to trading. Gold is down $10 at $920 and Oil is heading south with a current handle of $64 which it still too high.

Krugman has the real deal on Health Care in today’ NYT column. Too bad Obama didn’t listen to him on the stimulus. Joe Biden said yesterday that everyone (?) underestimated the severity of the economic downturn. Say it ain’t so Joe.

The Natural Gas ETF has been acting strangely and is more complicated that our simple mind can understand. We wanted an investment that would allow us to participate in what we think will be the eventual long term rise in the price of natural gas. But in our reading in trying to understand what we thought was a simple investment we have learned of contango and limited availability and front month distortion and realize that the action of this ETF is in the hands of speculators and hedgers. We are taking out loss and moving on.

The S&P 500 traded at its 200 dma at 875 in the early going and held and is now at 890 where it bounced a few weeks ago. Nevertheless we sold Whole Foods to return to cash in all accounts.

Last Tuesday Oil spiked $3 when a trader in London bought million of barrels of oil on margin to push prices higher. Yes, that is correct a trader spent forced the price of Oil $3 higher. The trades were unauthorized and closed out at a $10 million loss to the firm for which the trades were made. But as we have always said, it is ridiculous that such one trader can control the daily price of millions of barrels of oil.

With markets mildly lower at noon we are taking off for some afternoon bike riding. We don’t want to be tempted to trade a down market today.


2 July 2009

Model Portfolio Update

Model Portfolio Value As of 2 July 2009

$ 572,312

1 July 2009


Model Portfolio Value As of 1 July 2009

$ 572,890

We are taking the rest of the week off. The next posting will be Monday July 6.

Why change is difficult in Washington:

The financial industry cut spending on lobbying and campaign contributions this year, even as the Obama administration drafted a sweeping plan to tighten federal control over its players.

In the first three months of 2009, the financial sector spent $104.7 million to lobby Congress and the administration, down 8% from the same period last year, according to a Wall Street Journal analysis of the most recent data collected by the Center for Responsive Politics, a nonpartisan group that tracks the lobbying business. In each of the previous five years, the industry's spending had risen.

The health-care industry -- which three years ago surpassed finance as the top lobbying spender and faces a major overhaul initiative in Washington -- increased outlays in the first quarter by 12% to $127.1 million. Lobbying spending across all business sectors was flat in the period, after rising 15% from 2007 to 2008.

The story is from the Wall Street Journal. The headline says: Wall Street Cut Lobbying at Key Time. An 8% cut by folks who received billions of dollars from the government is not a lot of money. On the other hand it is amazing that lobbyists can get so much return on their dollars spent in Washington. Congress folk sell their souls for less than pennies on the dollars that they disperse.

We sold Biogen.

Citigroup has increased interest rates on up to 15 million U.S. credit card accounts just months before curbs on such rises come into effect, the Financial Times reported citing people close to the situation.

Citigroup had upped rates on 13 million to 15 million credit cards it co-brands with retailers such as Sears, the paper said.

Oil dropped 70 pennies to $69.18 and Gold rose $14 to $940. Most European bourses closed up 2% and higher.

We are leaving 15 minutes early with the major socks measures higher. Breadth is better than 2/1 positive and volume is light.

The bulls won the day.






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