Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
31 July 2020
Don't look back:
Gross domestic product — the broadest measure of goods and services produced — fell 9.5 percent in the second quarter of the year, the Commerce Department said Thursday. On an annualized basis, the standard way of reporting quarterly economic data, G.D.P. fell at a rate of 32.9 percent.
Congratulations to Qualcomm. On Thursday the company finally regained the total market value it had on March 10 2000, the high day for the markets before the DOT.COM crash. Among the 10 other most valuable companies in the NADSDAQ on that day were:
Yahoo valued at $93 billion purchased a few years ago by Verizon for $5 billion;
Cisco valued at $466 billion in 2000, now valued at $200 billion;
Intel at $400 billion, today at $205 billion;
Oracle $232 billion now $170 billion;
Applied Materials $75 billion now $58 billion;
Sun Micro $164 billion acquired by Oracle for $6 billion in 2010:
JDS Uniphase $68 billion today split into 2 different companies worth $12 billion today;
Dell $131 billion taken private by Michael Dell at $24 billion in 2013 and reoffered to the public in 2019 and now worth $50 billion.
The only one of the 10 most valuable NASDAQ companies in 2000 worth more today is Microsoft and it took MSFT 17 years to regain its 2000 value. And the real gain in MSFT has occurred in the last 12 months crazy market in which its market value has doubled.
Our point which we keep emphasizing is that many of the companies leading the markets to new highs are good companies that will survive and prosper but their valuations are discounting years and years of earnings growth. Earnings never matter until they do.
We have also been saying that the markets remind of 2000 but recently they have been also been reminding of the Japanese Nikkei which reached 38000 in 1989 and has never been above 25000 since.
We continue our trading hopefully getting off before the next major correction AND MAINTAING A 60% TO 80% CASH POSITION DEPENDING ON THE DAY .
We currently own: Intel, AT&T, IBM, Gilead Sciences, Western Digital, Wells Fargo, Key Bank, Carpenter Tech, Trinseo (industrial plastics and other materials), Terex (heavy equipment), Albertson's Grocery stores, Tapestry (Coach & Kate Spade), and Parsley Energy (oil/gas).
Albertsons Stock Is Falling Because Strong Earnings Weren't Enough
Albertsons Cos. delivered an upbeat fiscal first-quarter report on Monday, but its stock was falling because investors may have been hoping for more from the supermarket operator, given that so many food retailers have gotten a boost during the Covid-19 pandemic.
Albertsons (ticker: ACI) said it earned $586.2 million, or $1 per share, up from 8 cents per share a year earlier. On an adjusted basis, the company earned $1.35 a share on revenue of $22.75 billion. Analysts were looking for EPS of $1.32 on revenue of $22.71 billion.
Digital sails jumped 276% in the quarter, while same-store sales climbed 26.5%. Albertsons said product demand and overall basket size (the number of items people purchase each trip) have been rising since the beginning of fiscal 2020, both in stores and online. Other grocers have also seen big sales boosts because of the pandemic.
That said, the company booked $615 million in costs related to the pandemic, including an additional $275 million for front-line workers' pay, and it also saw some store closures and lower fuel sales.
Albertsons declined to provide guidance, citing uncertainty about the coronavirus crisis. "The ongoing Covid-19 pandemic has dramatically changed the landscape of food-at-home consumption, and the company continues to prioritize the health and safety of its associates, customers, and communities," it said.
The stock initially rose following the results, but later was down 4.9% to $15.32. The S&P 500 was up 0.5%. Rival Kroger (KR) also declined after its earnings report last month.
While the company delivered a better-than-expected bottom-line result, the 3-cent beat might not have been as strong as some investors had been hoping, given how supermarkets have benefited from consumers stocking their pantries and eating at home more. In addition, revenue was a bit light, another potential concern. Analysts expectations were also high going into the report.
Moreover, some investors may have been hoping for full-year guidance to provide reassurance that the strength can continue.
24 July 2020
This week we continued trading, taking a few nice profits and small profits and losses trying to maintain a 70% cash position in most accounts while picking up a few dollars to take advantage of the bullish but overextended trading environment while limiting downside exposure and realizing overall positive results to compensate for the fact that cash/ money funds yield nothing. We are averse to placing our cash in short term bond funds because the reward is not commensurate with the risk.
We end the week with positions in Intel purchased today (down 20% this week) which dropped when bullish analysts turned bearish overnight because Intel his having trouble producing 7 nanometer chips. They had similar trouble with 10 nanometer chips previously; they solved that problem and they will solve this one.
We also own IBM which rose on a better than report; Carpenter Tech (specialty steel), which we have traded profitably this year; Key Bank- ditto and Parsley Energy – not so ditto and AT&T.
We realized a nice trading profit in First Energy and Pfizer; and plus, scratches in KBWB, NCR, DON, and Lyft. We lost money in BankAmerica and Truist.
We end the week at 70% or more cash in most accounts and the value stocks we own for trades are much less volatile that the overall market.
Tesla is the Emperor without clothes of this market.
...Tesla also reported just $104 million in GAAP net income in the second quarter, but that profit includes $428 million in regulatory credit sales.... Why Does It Matter? Since Tesla receives these regulatory credits for free, they're able to sell them at 100% profit margins, which boosts the company's overall margins. Tesla's regulatory credit sales revenue in the second quarter was up nearly 200% from a year ago.
Tesla is seemingly relying heavily on these credits to turn a profit, according to GLJ Research analyst Gordon Johnson.
"In fact, given TSLA is guiding 2020 credit sales of $1.2bn vs. the current consensus EBIT estimate of $1.2bn, TSLA is effectively guiding to zero profits from actually selling cars, again, in 2020," Johnson wrote in a note.
To make matters worse, Johnson and other analysts say demand for these credits is unsustainable in the long-term as automakers around the world roll out their own EV models in coming years. Without this 100%-margin revenue boost, Johnson estimates Tesla's actual automotive gross margin was just 18.7% in the second quarter, its lowest level in a year.
Billionaire's greed knows no bounds.
Ken Griffin is known to be rather particular about the security and use of his trade secrets. And, as it turns out, those of his clients as well.
Over a two-year period until September 2014, the market-maker removed hundreds of thousands of large OTC orders from its automated trading processes, according to Finra. That rendered the orders "inactive" and so they had to be handled manually by human traders.
Citadel Securities then "traded for its own account on the same side of the market at prices that would have satisfied the orders," without immediately filling the inactive orders at the same or better prices as required by FINRA rules, the regulator said….
Nearly half of the 467 limit orders reviewed by the regulator in the six years until September 2018 were found to violate FINRA's requirements to display orders. The bulk of the violations were for failing to execute trades against existing quotations in a timely manner, FINRA said.
Whoever could have seen such a conflict of interest coming at a trading outfit owned by a hedge fund manager?
17 July 2020
This week we traded, Verizon, NCR, Lyft, Citi Group, Wisdom Tree and Walgreen Boots for a net profit of 1%; and we ended the week with positions in BankAmerica, Devon Energy, Lyft, Pfizer, And Truist Financial https://en.wikipedia.org/wiki/Truist_Financial .
We are mostly cash (80% plus) and trading value stocks because, in the midst of a pandemic as new cases surge to 80,000 per day and 25 million unemployed are about to lose $600 per week in unemployment benefits, markets are moving to new highs. (That's $15 billion of spending that is going to be removed from the economy every week)
Five stocks are the market leaders and are responsible for the major indexes and DJIA approaching all-time highs: the 5 companies that comprise 60% of the NASDAQ 100 and 25% of the S&P 500 and are responsible for a major part of the move: Amazon -160X earnings and mkt cap of $1.5 trillion up from $700 billion in January; Apple- 35x and $1.6 trillion up from $800 billion in January; Microsoft- 35X and $1.6 trillion up from $900 billion in January; Facebook 35x and $700 billion up from $400 billion in March; Google-35X and $1 billion and up from $700 billion in March.
And then there are the day trader and hedge fund favorites- Nikola -no sales, losses, priced at $20 billion; Vroom- losses, priced at $6 billion; Zoom 1500 x earnings, $90 billion; Spotify losses, $50 billion; Shopify- losses, $120 billion; Tesla 400X, $350 billion.
Many talking heads posit that since individual day traders are less than 2% of daily trading volume, they are having little effect on the markets. What they neglect to mention is that a lot of the day traders are employing call options (record volume for the past 5 months) to trade the high-priced stocks. Their call buying engenders magnifies the effect on underlying stocks which stimulates computer trading which creates a cycle of movement higher for many issues that has nothing to do with fundamental investing. Coupled with computers front running institutional trades to take advantage of spreads the effect on stock prices has been as bullish for the past 2 months as it was bearish in March into April.
We get questions:
What did you mean by stock melt up in last week's post?
A melt up is when a stock or stocks jump 25% in a day or week not based on underlying fundamentals; or a stock (usually with nil earnings and priced at 100 times sales) has its market values increase every day no matter what the market does because folks don't want to sell (greed), and short sellers cover to prevent further losses (): ) and momentum players hop on board for the ride with the hope they can get off before the roller coaster begins to drop. The term also applies to specific industry ETFs and to entire market indexes.
Another reason why a select group of large cap stocks can melt up is that their very large capitalization and share price allow funds to quickly invest a sizable amount of money. If a large institutional investor decides to catch a move higher it will need to invest in a select group of large cap stocks.
For example: one of the stocks we have been profitably trading this year is Carpenter Technology ($23) which trades at most 500 thousand shares ($10 million). A $10-billion fund would have to buy 10 million shares- which would take several months- to get a meaningful position.
But the fund can invest a $1-billion quickly buying that amount in S&P 500 or NASDAQ 100 futures which may then cause the underlying stocks to rise as whoever sold the futures will probably hedge the sale by buying the underlying shares if it doesn't own them. This trade can be repeated many times a day and because Just 5 companies -Microsoft, Apple, Amazon, Google and Facebook are in over 1000 ETFs (exchange traded funds) and also a major part (over 55% of the NASDAQ 100 and 25% if the S&P 500) futures and ETF buying will cause their share prices to rise for no reason related to underlying news or fundamentals.
The Tesla mania and melt up continues
Reuters, in a last Friday article discussing Tesla's possible inclusion in the S&P 500 (which caused Tesla's share price to jump 10% i.e. $30 billion – more than the total value of Ford Motor) pointed to what happened to Yahoo's stock after it was included in the S&P 500 back in 1999 (there's 1999 again), saying that shares of Yahoo! jumped "64% in five sessions between the announcement ...and its actual entry." Reuters also wrote that analysts predict high demand for shares upon Tesla's entry.
In case You were wondering:
What a surprise:
The day the debt-ridden Texas oil producer MDC Energy filed for bankruptcy eight months ago, a tank at one of its wells was furiously leaking methane, a potent greenhouse gas, into the atmosphere. As of last week, dangerous, invisible gases were still spewing into the air.
By one estimate, the company would need more than $40 million to clean up its wells if they were permanently closed. But the debts of MDC's parent company now exceed the value of its assets by more than $180 million.
In the months before its bankruptcy filing, though, the company managed to pay its chief executive $8.5 million in consulting fees, its top lender, the French investment bank Natixis, later alleged in bankruptcy court.
Worth the read:
How to wash money courtesy of the FBI.
10 July 2020
Up Monday on both value stocks and crazytech; down Tuesday for value while crazytech rose again; up Wednesday and Thursday for crazytech while value suffered; and Friday value rose while crazytech retreated slightly. For the week crazytech finished higher and value lower.
Friday's rally in value was partly the result of reports that Gilead's Remdesivir treatment for sick Covid patients might be more effective than previously mentioned. The key word is not effective as the markets seemed to hope; rather the key word is sick. Market and TV gurus keep focusing on the lower death rate which is a result of the increase of younger folks now getting the virus. Again, the focus is wrong; the sickness itself is much worse than a cold or even the flu for many including younger folks.
Whatever, it does no good to question Mr. Market. He wants to go higher as individual new traders coupled with computers and hedge funds create record volumes in call option and ETF trading which in turn creates upward movement in the underlying stocks. We don't know when the gambling will end, only that it will.
The new mantra posits that sales growth not earnings is all the matters. That is really not a new mantra; it is the mantra that analysts and mavens adopt when the usual measures of stock valuations can't be applied. Analysts raise price targets because share prices have exceeded their previous targets and they lemming like need to stay in the game. For example, Tesla is up 50% in the last month, Amazon up 30%. By any measure such price action would usually suggest caution and at least a hold if not a sell recommendation. In today's market such calls are anathema.
And so, we remain 95% and more cash. As we mentioned, we may trade earnings misses over the next few months. We did take a trading position in Walgreen Boots after it announced less than continuing earning; and a $2 billion write down in its Boots drugstores in England. WBA did announce sales up 1.3% and a dividend increase while predicting earnings for the year of $4.20 per share. On the news the share price dropped 10% to $38, a level from which we have traded it profitably all year. Traders would rather buy Shopify at 2000 X earnings and no dividend than Walgreen Boots at 9X earnings with a 4.7% dividend yield.
Mr. Market wants to party like it's 1999 and we can't do anything about that. But we were there in 1999 and we have never liked to party. It may have something to do with stories from the old stockbroker who at the age of 25 founded his brokerage firm in January 1929; was a millionaire by July; and not a millionaire by December.
As the markets march higher the bankruptcy list grows, this list- it's just the beginning- doesn't include the probably hundreds of thousands of small and medium business i.e. restaurants and other retailers and manufacturers who will be closing their doors.
Brooks Brothers joins a parade of U.S. retailers seeking relief in bankruptcy court since March, including Neiman Marcus Group Inc., J.Crew Group Inc. and J.C. Penney Co. Economic fallout from Covid-19 has also pushed high-profile companies in other industries into bankruptcy, including Hertz Global Holdings Inc. and Chesapeake Energy Corp.
Someone's been reading our stuff:
Veteran strategist Ed Yardeni, president of Yardeni research, said stocks are starting to "look like 1999 all over again," during a CNBC interview this week.
He said actions by the Fed, including purchasing corporate bonds, have prompted a move out of bonds into equities, causing the latter to be in "the mother of all melt-ups."…. markets tanked in March, but strategist Ed Yardeni has shied away from calling it a market crash, and believes actions by the Fed are in fact causing stocks to explode into the "mother of all melt ups."
… He referred to soaring equity valuations that preceded the 2000 dot-com bubble burst.
Yardeni said: "Remember that Prince song about partying like it is 1999. The market certainly has that potential."
"I think the bull market is still intact, I don't view the sell-off we had in February and March as a bear market," Yardeni said.
Markets tanked on March 23 when countries had just starting placing their economies under lockdowns due to COVID-19.
The S&P 500 had touched a low of 2237.40 on March 23.
But Yardeni doesn't think it was a true sell-off and thinks "the tail end of this bull market" may end up "with a melt up."
He thinks the US economy is more likely to face a "swoosh recovery" rather than a V-shaped one that market players are hoping for.
Even Yardeni is afraid to say sell
His final advice to investors is to wait for the market to consolidate.
"At this point if you are in the equity market, I would stay with it," he said.
Yardeni added: "Along the way I may very well recommend that they use their profits, but we will see. It is still early in the game."
Who gets to be reckless?
Robinhood Has Lured Young Traders, Sometimes with Devastating Results
An example of 1999 mania is predicting current valuation based on 2030 sales estimates. Yes, that's 10 years from now.
Tesla shares have risen 45% in the past six days.
"Our revised bull case of $2,070 is based on 6 million units of volume by 2030 as well as an EBITDA margin of 20%," wrote Jonas. The scenario "would place the company among the very best luxury car manufacturers to give them greater credit for mix and/or greater volumes of high margin software revenue."
There are 128 million households in the U.S. 30% of those households earn less than $100,000 a year That's about 48 million households. $10,000 to 48 million tax filers under $100,000 a year ($480 billion) would have had much more effect than the billions given to law firms and private equity firms.
There is a special place somewhere folks who rail against government giveaways to the poor but line up at the giveaway trough.
Independence Day Weekend 2020
Independence Day Weekend 2020
All cash- up 3% to down 3% in accounts and we have
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