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

Comments on activity in client accounts

28 July 2017

During the week we added small amounts of Chico's (Abby, our granddaughter, bought two cute dresses at Black & White last weekend and would have purchased more if her Mother had let her); Deutsch Bank (we don't like not owning it since it the cheapest international bank stock by a long shot); QUALCOMM (Apple lawsuit still hangs over); American Eagle (cheap); and General Electric when it dropped on earnings. We bought Occidental at 5% yield. The Saudis have finally realized that pumping oodles of oil is not smart. Astra Zeneca dropped 15% on a failed cancer drug test and with a 5% yield we bought.

Even with these purchases larger accounts remain 60% or more cash.

GDP grew at 2.6% in the second quarter- the best number in a while.

We remain cautious given the President's tendencies and continue to expect a substantial correction caused by some unforeseen event. The stocks we bought are value plays and we have been trading them with mixed results. Their prices are at levels where we want to own for a while and the quantities are small enough to encourage us not to trade them.


Analysts say Bezos of Amazon has earned the right to spend investor money and not earn anything because of the growth of the share price over the last few years. But if Amazon never earns any money because it sells products at a loss when do the big boys and girls call for earnings? Just asking.

Amazon (AMZN) this afternoon reported Q2 revenue that topped analysts' expectations, but missed by a country mile in its earnings per share number. Its revenue outlook this quarter is above consensus. Shares sold off in late trading.

Revenue in the three months ended in June rose 25% year over year to $38 billion which resulted in earnings per share of 40 cents (on a $1000 per share price).

Analysts had been modeling $37.2 billion and $1.41 per share in earnings. (Off by 300% on earnings)

For the current quarter, the company sees revenue of $39.25 billion to $41.75 billion, and operating income of negative $400 million to positive $300 million. That compares to consensus for $39.98 billion in revenue and $950 million in operating income.

Amazon's AWS cloud computing unit saw sales rise 42%, to $4.1 billion, cooling from 58% a year earlier and 43% in the Q1 report. Operating profit for the unit was $916 million, which was shy of consensus of about $1 billion. (Wonder if the cloud service profits include the expenses of the servers because the servers are available because of extra capacity that exists from the on line shopping business which loses money and always has.)


A Billionaire cautions:

Billionaire Howard Marks has no problem with being cautious.

Marks' investment firm, Oaktree Capital, is considered one of the leading investors in distressed debt, essentially riskier debt.

He counts Warren Buffett as a friend and a fan. "When I see memos from Howard Marks in my mail, they're the first thing I open and read," Buffett once said.

In a memo out to clients, Marks outlined his concern that the markets are entering "too bullish territory" and that a bubble could be forming.

Marks said some might say his warning is premature, but that doesn't bother him.

"I think it's better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late after the downslide has begun, making it hard to trim risk, achieve exits and cut losses," Marks wrote.

In the memo, Marks outlines the 9 ingredients that can make up both a boom and a bubble. They are as follows:

Read more: http://www.businessinsider.com/howard-marks-favorite-with-warren-buffett-talks-bubble-2017-7

Wisconsin is going to give a company $3 billion to build a plant in the state. Say what!

Wisconsin can't even find money to fix its roads.

President Trump celebrated and took credit for Foxconn's pledge to build a major LCD plant in Wisconsin during a White House ceremony on Wednesday.

With Gov. Scott Walker (R), House Speaker Paul Ryan (R-WI), and Sen. Ron Johnson (R-WI) by his side, Trump said that "if I didn't get elected, [Foxconn Chairman Terry Gao] would not be spending $10 billion."

"His great company has seen our — you know, you see exactly what I'm saying — our administration's work to remove job-killing regulations — he's been watching — to institute Buy American and Hire American, and all of those policies, and to pursue the steps necessary to revitalize American industry, including repealing and replacing Obamacare — we better get that done, fellas, please," Trump said, according to the White House's website.

While the plant will create about 3,000 jobs, Trump and Walker claim that when construction work is factored in, the project could create as many as 13,000. But those jobs come at a huge price. Before plans for the plant move forward, Wisconsin lawmakers will have to approve a public subsidy package of up to $3 billion.

Bloomberg reports that "[a]t $519 per citizen, it would have been cheaper to buy an iPhone for every man, woman and child in the Midwestern state… Wisconsin is paying as much as $1 million per job, which will carry an average salary of $54,000."

The Milwaukee Journal-Sentinel notes that the subsidy package is nearly 50 times larger than any other offered in state history, and "would total more than the combined yearly state funding used to operate the University of Wisconsin System and the state's prison system."

Specifics of the deal aside, it's unclear whether Trump should even be taking credit for it. At far back as late 2013, Foxconn was planning to open a manufacturing plant in the U.S. The company, which has a poor record on workers' rights issues, struck a tentative a deal with the state of Pennsylvania to build a plant there in November of that year, but plans fell through. Talks with Pennsylvania continued until early this year.

But Trump — who hasn't shepherded a single major piece of legislation through Congress yet and is hungry for wins — touted the deal anyway.


Apple's new headquarters of 3 million square feet cost $5 billion and will house 12,000 employees. Office buildings are much more expensive than factories. Walker doesn't say Foxconn will have to spend $10 billion on its plant.



21 July 2017

Reentering the markets after three very sad weeks we decided to add small amounts of Kroger (killed when Amazon announced the Whole Foods buy); AT&T (down on takeover hedging of the Time Warner deal); Verizon (down because last quarter cell phone adds were disappointing); and The Gap (because grandma took the grandkids shopping and the kids bought most of their stuff there). We did add a small amount of Chipotle when it dropped on a food scare. Food scares at Chipotle are becoming old hat but with it occurring at one restaurant out of over 2000 and without it being connected to the food, we think it will be a nonevent in a month or two. As recently as May CMG was trading at $500 a share and we purchased CMG Tuesday at $365.

Here are some stories of illnesses at McDonald's restaurants. Very little major press coverage—are advertising dollars the reason?


At Red Lobster/Olive Garden: https://www.fda.gov/Food/RecallsOutbreaksEmergencies/Outbreaks/ucm361637.htm

At Burger King: https://www.local10.com/news/restaurant-reports/state-orders-burger-king-shut-over-roach-issues and http://www.hepatitisblog.com/hepatitis-a-watch/burger-king-linked-to-hepatitis-a-positive-employee-again/


The markets continue their relentless snails pace higher as no reason exists for a correction; and with prices at all time highs only the brave and program traders are in the markets right now.

The ‘coulda, shoulda, woulda' investors lament not buying Netflix at $20 or Amazon at $200 or Tesla at $50. We wonder who is buying the shares at their current levels. Those intrepid buyers can't really be expecting the same kind of return at the c/s/w buyers dream off, can they?

Cash remains our friend; and hope our companion; as our oil and two cheap speculations dawdle in negative territory.


More on the Saudi Prince and the royal machinations- a modern Arabian Night's story https://en.wikipedia.org/wiki/One_Thousand_and_One_Nights

(Also could be the story at any large American corporation.):



A $30 billion hedge fund identified a potential trigger for 'the next' financial crisis:



Bastille Day 2017

We have returned from burying Kathy and the business will continue with Katie and me in charge. Learning the back office stuff that Kathy knew after 40 years is a daunting task but our years in the business have given us a step up. In the first two weeks of doing the business part we have been reminded just how detail oriented and efficient Kathy was. Our initial fumbling and mistakes have reinforced our appreciation of all Kathy did for clients and for us.


During the week we watched markets meander higher and took no action. Oil seems content to flounder in the mid $40s and we await earnings in August to consider whether adding to positions. Our Rite Aid and Ascena positions are moribund. With Rite Aid the price action is related to professional and amateur arbitrageurs licking their wounds and abandoning their $6 and higher positions to move on to other games.

We remain 70% or more cash in most accounts. The first story below illustrates one danger in today's markets. The philosophy of risk free investing when adopted by many is what caused the crash of 1987. Back then it was the advent of hedging with S&P futures; today it is Index ETFs- easy in easy out. That's because most index ETF holders think they can protect themselves from any correction by merely selling their holding. But if $2 trillion of ETFs decide to do so in the same week or month there will be no one to buy.


ETFs, which simply track an index, have hoovered up assets at a high rate over the past decade. US-listed ETFs saw $283 billion in net inflows during 2016, taking aggregate assets under management to $2.5 trillion, according to Citigroup. Passive investors now own more than one-third of the US stock market, and fundamental stock investors only make up a small fraction of total trading each day.



What Rite Aid Will Do Now to Survive

Rite Aid will remain an independent company following the termination of its merger with Walgreens. Here are the steps the company will take to win in this competitive industry.


Could Buying Rite Aid Stock Now Make You a Big Winner Later?

Here are two scenarios where buying beaten-down Rite Aid stock just might pay off.



3 July, 2017

There will be no post this week, we will resume our regular postings July 17


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