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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

June 30, 2010

Model Portfolio Value As of 30 June 2010

$ 573,942

June 29, 2010

Model Portfolio Value As of 29 June 2010

$ 576,480

We sold Nokia for a loss and added shares of Barnes & Noble, NVDIA and Ford. We sold NOK because there are other issues with better percentage gain potential that we would like to buy if the sell off continues.

June 28, 2010

Model Portfolio Value As of 28 June 2010

$ 592,689


We don’t know whether to cry or laugh-or go away for a few days. We just read Krugman’s latest column (http://www.nytimes.com/2010/06/28) about the coming of the Third Depression and Maureen Dowd’s column (http://www.nytimes.com/2010/06/27/) about cell phone radiation and coupled with that the wails of Europeans and Republicans to balance budgets instead of continue stimuli we think we need a week away.

And so today will be our last post until July 7. We will of course be watching markets and acting- we hope appropriately- if that is needed.

Asian and European markets were mixed overnight and Gold is up a few dollars. Oil has a $78 handle as the trading day begins. This week and next week are holiday weeks and so the action may be more volatile with fewer players. It used to be that holiday weeks would be quiet-but that was then and this is now. At the end of the two week period the results will probably be the same- little overall movement unless there is market moving news.

NVDIA has $3 per share in cash ($10 share price) and is priced at 1.2 times revenues and 12 times earnings. We are adding shares to accounts. In January we sold at $18. We have been repurchasing at $13 down to $10.

(Yahoo/Finance) Nvidia Corporation provides visual computing technologies that generate interactive graphics on workstations, personal computers, game consoles, and mobile devices. It operates in four segments: Graphic Processing Unit (GPU), Professional Solutions Business (PSB), Media and Communications Processor (MCP), and Consumer Products Business (CPB). The GPU segment offers GeForce products that support desktop and notebook personal computers, PCs, and plus memory products. The PSB segment provides NVIDIA Quadro professional workstation products and other professional graphics products, including NVIDIA Tesla high-performance computing products used in the manufacturing, entertainment, medical, science, and aerospace industries. This segment also offers RealityServer, which streams interactive and photorealistic 3D applications to Web- connected PCs, laptops, netbooks, or smart phones; Quadro Plex SVS, a visual computing platform for professionals who interact with 3D models and analyze data; and the OptiX ray tracing engine, an application acceleration engine for software developers. The MCP segment provides ION NVIDIA motherboard GPU that addresses the integrated core logic market. The CPB segment offers Tegra mobile products that support tablets and smartbooks, smartphones, personal media players, Internet television, automotive navigation, and other devices. This segment also licenses video game consoles and other digital consumer electronics devices. The company sells its products to original equipment manufacturers, original design manufacturers, add-in-card manufacturers, and system builders operating in the entertainment and consumer, consumer electronics, professional design and visualization, computing, and mobile computing markets. Nvidia Corporation was founded in 1993 and is headquartered in Santa Clara, California.

We have also been adding Coldwater to accounts. It is the cheapest of the national women’s retailers on a share prices to sales per share ratio. It is our retail speculation. In April we sold over $8 and we have been repurchasing at $4 and under.

(Yahoo/Finance) Coldwater Creek Inc., together with its subsidiaries, operates as a multi-channel specialty retailer of women's apparel, accessories, jewelry, and gift items primarily in the United States. It operates premium retail stores and merchandise clearance outlet stores; and day spas, which offer various spa treatments, including massages, facials, body treatments, manicures, and pedicures, as well as an assortment of relevant apparel and lines of personal care products for women. The company also offers products through its e-commerce Web site, coldwatercreek.com, as well as through catalogs. As of January 30, 2010, it operated 356 premium retail stores. Coldwater Creek Inc. was founded in 1984 and is headquartered in Sandpoint, Idaho.

From a new Fitch release:

A recently completed study by Fitch shows half of all securitized non-agency mortgage loans in Florida are 60 days or more delinquent. Also among the study's more notable findings, 'Florida already ranks the worst among all states in mortgage delinquencies across all product types,' said Managing Director Roelof Slump. 'Additionally, Florida contains a disproportionate amount of non-prime loans, with 85% of loans being categorized as Alt-A or Subprime.' Such products have become associated with weaker performance in general. This is especially meaningful in Florida where severe home price declines have impacted most areas of the state.

The 60+ day delinquency rate for Florida has been heavily influenced by the significant home price declines already seen to date, along with the worsening in the rate of unemployment. On an aggregate basis, 81% of all loans in the state are 'underwater', and the average mark-to-market loan-to-value ratio of Florida loans is 138%. 'Nearly 40% of all Florida borrowers owe more than 150% of the value of their homes,' said Slump. Although half of all borrowers in the state are current on their mortgage payments, they owe 120% of their home values. Given the significant negative equity, 'further economic stress brought on by the Gulf oil spill and declines in the tourism and fishing industries would be likely to further increase default rates,' said Slump.

Florida was amongst the hardest hit states in terms of rising U.S. unemployment, with only Nevada suffering a greater increase. Following a trough of 3% in the summer of 2006, Florida's rates steadily rose to a peak of 12.3% in February 2010 before recovering to the current rate of 11.2%. While the entire state faced increases, the stress was not uniform, with MSAs such as Tallahassee and Gainesville (respective peaks of 9.1% and 9%) spared the double-digit rates seen in Cape Coral-Ft. Myers, Tampa, Orlando, and Miami (peaks of 14.2%, 13.2%, 12.6%, and 11.6%, respectively). Statewide, unemployment has shown some decline from its peak, with decreases of 1% or more seen across all MSAs.

The leading Democratic Party candidate running for governor of Wisconsin has a new TV ad in which he complains that prisoners receive better health care than hard working middle class Wisconsinites. His solution; cut prisoner health care benefits, and this from the Democratic favorite.

In this same vein a news report we saw on local TV waxed eloquent-as much as Wisconsin local TV can- about a great state of the art prison that was opening. On another program the moderator talked about all the post office and other government buildings that were built during the Great Depression by the WPA that are still in use.

That got us to thinking that the government should replace all schools in the U.S. that are over 50 years old. Such a program would be an investment in the future and would make sense in that such a program would give work to all the building trades folks who are out of work. Of course as with all things political that is to simple a solution.

Diane Swonk, Mesirow Chief Economist:
Monday, June 28, 2010 - 8:45 a.m. Central Time
Incomes Rebound, Consumers Spend Cautiously

Consumer spending edged up 0.2% in May, slightly stronger than markets were expecting. It is important to note, however, that those gains came on the heels of a downward revision to consumer spending in the first quarter.

Incomes bounced back even stronger than spending. This pushed the savings rate to its highest pace in eight months, but at 4%, it is still abysmal and less than half the pace we are going to need to see over the next five-to-ten years if we hope to put our financial houses back in order. Incomes were aided slightly by the hiring of census workers during the month. However, the gains were nothing to write home about. We are also seeing a bounce-back in hiring in the finance sector, which still pays better than other sectors and is buoying overall income growth.

Separately, the G-20 wrapped up their meetings with promises (but little confidence) that austerity measures would not snuff out the recovery in Europe, as tensions between China and the U.S. flare. It seems that China is not as eager to appreciate its currency and curb its exports as the U.S. would like, and that will no doubt lead to greater trade tensions between the two powerhouses as the elections approach in November.

The Bottom Line: Consumers continue to heal their balance sheets. However, much of the deleveraging continues to come from a high rate of defaults, particularly in the mortgage sector, rather than more prudent spending patterns. The adjustment for the U.S. consumer has just begun, and will be a long and arduous process.

Major market measures closed mildly mixed in light trading. Breadth was flat. Gold lost $12 to $1240 and Oil ended with a $78 handle.





June 25, 2010

Model Portfolio Value As of 25 June 2010

$ 593,676


The S&P 500 looks to want to test the 1040 level on the downside for a 4th time. If it breaks that level the next two levels are at 1010 and 960. With the bulls failing to punch through 1015 on the upside in the latest rally the bears are regaining control. All these are short term considerations. There needs to be at least some churning if not more downside to work off the excesses of the 13 month rally off the lows of March 2009. That is the short term technical picture

The financial system has stabilized and now it is a matter of the economy finding a way to grow. Corporate earnings are recovering and cash levels in corporations are sufficient but investor psychology remains tentative and subject to wild swings. And the HFT folks continue their discomfiting gaming of the system. It is obvious that there is not going to be any more stimulus out of Washington as the caterwauling about debt has reached a crescendo- (WSJ) Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago. The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.- The folks who were in power for ten years and created the deficit problem are doing the loudest complaining.

We are 50% or less invested in good quality stocks and will continue to trade around core holdings. The companies we own have the potential to gain 50% from current levels in any sustained market rally and we also think these same companies have double potential over the next few years if we chose to hold them. With our large cash position in most accounts- except for the smallest- we are content to watch with funds available if the markets decide to test the 950 level on the S&P 500 and provide us with an excellent opportunity to commit more cash.


(WSJ) Wall Street's $100 million man has stumbled, a potential warning sign for traders poised to bolt banks for hedge funds.

Andrew Hall, the legendary energy trader who left Citigroup Inc. last year after his lofty compensation ignited controversy about pay practices at banks receiving government support, has hit a rough patch running his own hedge fund.

His commodities fund posted a decline of more than 10% last month, its weakest month in the last two years, to put it down nearly 10% this year through May, which is behind similar hedge funds. Mr. Hall was bullish as shares of commodity producers and other energy investments declined.

"Unfortunately, we did not dodge the onslaught," Mr. Hall, 59 years old, wrote in a June 1 letter to his investors. "We did reduce risk but not fast enough. We did hedge but not well enough. And we did re-enter some markets that we had exited, prematurely, as it turned out."

As we clap with one hand financial regulation passes. With no uptick rule allowing the HFT goofs free rein don’t expect much change in market volatility. And there will be another crisis just not when everyone expects it. And the Government will have to use taxpayer money to rescue the system. Do the jokesters in Washington really believe the American people are fools?

Financial issues are all opening higher on the news and are the only industry in the green this morning.

(Bloomberg) -- JPMorgan Chase & Co. and Citigroup Inc. led bank stocks higher after congressional negotiators agreed on a financial-reform bill that stops short of banning hedge-fund and buyout-fund investing.

JPMorgan gained 93 cents, or 2.5 percent, to $38.96 in composite trading on the New York Stock Exchange at 10:10 a.m., while Citigroup gained 13 cents, or 3.4 percent. Morgan Stanley climbed 1.5 percent, and Goldman Sachs Group Inc. increased 1.6 percent. All four companies are based in New York. Bank of America Corp., based in Charlotte, North Carolina, rose 1.8 percent.

President Barack Obama’s proposed Volcker rule to ban banks from investing in hedge funds and private-equity was softened to allow them to invest as much as 3 percent of their capital. A ban on derivative-trading by commercial banks proposed by Senator Blanche Lincoln of Arkansas was amended to allow trades on interest rates and foreign-exchange swaps. Banks will have as many as two years to comply.

“The market is sort of celebrating the fact that the largest banks’ operations are largely left intact,” said Nancy Bush, founder of NAB Research LLC in Annandale, New Jersey, who covers JPMorgan, Bank of America and Wells Fargo & Co. “Most of the companies that I’ve talked to this morning have agreed with my overall assessment.”

(Bloomberg) -- Stocks in Europe and Asia fell, with the MSCI World Index extending its longest losing streak in a month, after the U.S. government said first-quarter economic growth was less than previously reported and investors speculated the Group of 20 summit will fail to address Europe’s debt crisis. The yen strengthened and copper declined.

The U.S. economy grew at a 2.7 percent annual rate in the first quarter, less than previously calculated, reflecting a smaller gain in consumer spending and a bigger trade gap.

The revised increase in gross domestic product was smaller than the median forecast of economists surveyed by Bloomberg News and compares with a 3 percent estimate issued last month, figures from the Commerce Department showed today in Washington. Corporate profits climbed more than previously projected.

The revised figures showed an economy that was more dependent on inventory restocking and less driven by demand from consumers and businesses before the European debt crisis intensified. Unemployment, combined with the turmoil in financial markets and a lack of inflation, are among reasons Federal Reserve policy makers this week reiterated a pledge to keep interest rates low.

Research In Motion (Blackberry) disappoints and is down 10% in the early going.

We added LIZ, IRE, ANN and BKS in small amounts to many of our accounts. We also took a larger position in Cienna with our AMAT money and added more shares of Coldwater.

(Huffington Post) SAN FRANCISCO —... farm workers are teaming up with comedian Stephen Colbert to challenge unemployed Americans: Come on, take our jobs. Farm workers are tired of being blamed by politicians and anti-immigrant activists for taking work that should go to Americans and dragging down the economy, said Arturo Rodriguez, the president of the United Farm Workers of America. So the group is encouraging the unemployed – and any Washington pundits or anti-immigrant activists who want to join them – to apply for the some of thousands of agricultural jobs being posted with state agencies as harvest season begins. According to the Labor Department, three out of four farm workers were born abroad, and more than half are illegal immigrants.

All applicants need to do is fill out an online form under the banner "I want to be a farm worker" at, and experienced field hands will train them and connect them to farms. http://www.takeourjobs.org

Europe closed lower for the U.S. markets moved higher. Oil gained $2.30 to $78.44. Gold was up $10 to 1255.

Financials helped the major market measures close positive today after the down week. But the higher close was iffy until the end and certainly didn’t engender any bullish confidence. Breadth was positive and volume was summer Friday light.




June 24, 2010

Model Portfolio Value As of 24 June 2010

$ 593,765


This is a biblical market we had seven days of up movement and now we are entering the seven days of down. Asia was mixed overnight and Europe is lower in the early going. Oil has a $75 handle and Gold is down a few dollars at $1233.

And so CNBC is running video of folks camping out all night to be in line to buy Apple iPhones. Two questions spring to mind. Do these folks work? And are these new customers or are they replacing their old Apple phone with a newer one?

Haute Couture and only in America:

(AP) -- Mike ''The Situation'' Sorrentino will soon be showing off more than just his abs: his new clothing line. Sorrentino, who stars in MTV's hit reality show ''Jersey Shore,'' has teamed up with Miami-based Dilligaf by Bohica Bill to launch a couture line. The line -- to be called Dilligaf Couture by the Sitch -- will debut in July and will consist of T-shirts, sweat shirts and accessories. The items will feature his own artwork and the brand's acronym Dilligaf.

What are accessories to T-shirts?

(MarketWatch) Jobless claims were 457,000 down from 475,000 the prior week. May Orders for U.S.-made durable goods sank in May, falling 1.1% on weaker demand for airplanes, steel and communications equipment, the Commerce Department reported. The decrease was not as severe as the expected 1.4% drop forecast by economists surveyed by MarketWatch. It is the first decline in total orders in the last six months and the largest since August 2009. The underlying report was not as weak as the headline suggests. Excluding aircraft, orders rose 0.9%. Shipments fell 0.4% in May, and were up 0.4% excluding transportation goods.

Inventories rose 0.8%.

If you watch Fox/Republican TV- which we never have- this is the new story line on the Gulf Spill—that it is the governments fault. What Murdoch’s WSJ article fails to mention is that the MMS was under the purview of Dick Cheney and his folks for the eight years when the flow predictions were made.

BP PLC and other big oil companies based their plans for responding to a big oil spill in the Gulf of Mexico on U.S. government projections that gave very low odds of oil hitting shore, even in the case of a spill much larger than the current one. The government models, which oil companies are required to use but have not been updated since 2004, assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models, prepared by the Interior Department's Mineral Management Service, wrong.

(WSJ) The U.S. Supreme Court on Thursday found fault with the federal government's high-profile convictions of Enron's Jeffrey Skilling and former media mogul Conrad Black, rejecting the government's use of a key white-collar crime law on which part of the prosecutions were based. The justices sent the cases back to two different lower courts to determine whether portions of Skilling and Black's convictions should be thrown out. In ruling for Messrs. Skilling and Black, the high court, in opinions by Justice Ruth Bader Ginsburg, found fault with a federal law that gives prosecutors the authority to bring cases against executives who deprive companies of their honest services.

(AP) -- The Supreme Court has sided with former Enron CEO Jeffrey Skilling in limiting the use of a federal fraud law that has been a favorite of white-collar crime prosecutors.

The court said Thursday that the "honest services" law could not be used in convicting Skilling for his role in the collapse of Enron. But Justice Ruth Bader Ginsburg said in her majority opinion that the ruling does not necessarily require Skilling's conviction to be overturned.

Former governor Rod Blagojevich was originally charged under the 'honest services' fraud law but was re-indicted in anticipation of the Supreme Court limiting use of the law.

During arguments on this case last December, several justices seemed inclined to limit prosecutors' use of this law, which critics have said is vague and has been used to make a crime out of mistakes and minor transgressions in the business and political world.

The court, at the same time, rejected Skilling's claim that he did not get a fair trial in Houston because of harshly critical publicity that surrounded the case in Enron's hometown.

The court in this ruling also sided with former newspaper magnate Conrad Black, setting aside a federal appeals court decision that had upheld Black's honest services fraud conviction. But as in Skilling's case, the justices left the ultimate resolution of the case to the appeals court.

We didn’t agree with the Skilling prosecution. We think the government theories in the Blago trial are also suspect. Blago only did what every politician does when making an appointment. The difference is that his conversations were recorded.

(CNBC.com) Some of the stocks most commonly held by average investors are also the ones most often used in high-frequency trading and thus subject to high levels of volatility, says an investment firm that has examined the trend. Companies such as Apple, General Electric, JPMorgan Chase and Apple are on a newly released list of stocks commonly used by computer-generated high-frequency trading (HFT) programs, according to BNY ConvergEx Group, an institutional investment advisory firm in New York. Below is a list of the stocks most commonly used in high frequency trading.


We bought shares of Ford at $10.75 for larger/aggressive accounts.

Spain closed down 3%, The FTSE and French markets were down 2% and Germany lost 1.5%. Oil was flat at $76.44 and Gold gained $11 to $1248.

It was a bad day at Black Rock and Rockefeller Center too. The major market measures were down from the gitgo with no rally attempts and all closed down 1.5% and more.  Breadth needed a large dose of Listerine. Volume was summer light as the HFT boys and girls played their games. We like it better when they play their games to the upside.


June 23, 2010

Model Portfolio Value As of 23 June 2010

$ 601,215


Europe and Asian markets continued to trade lower overnight and Oil is down over $2 with Gold also lower as traders’ perception of the world economic glass has gone from half full to half empty in the last two days.




Sales of new single-family houses in May 2010 were at a seasonally adjusted annual rate of 300,000 ... This is 32.7 percent (±9.9%) below the revised April rate of 446,000 and is 18.3 percent (±13.0%) below the May 2009 estimate of 367,000. The major market measures moved lower even though the news was expected since the tax credit expired.

(StreetInsider) Citi reiterates a 'Sell' rating on Walgreen Co (NYSE: WAG), price target $31. Citi analyst says, "WAG's F3Q10 results demonstrated worse-than-expected pressure on profits from fewer generic introductions and lower reimbursement fees. Additionally, topline trends remained weak in the quarter as WAG cycled difficult flu compares and the weak macro environment limited consumer spending on frontend merchandise. We expect these trends to continue over the next couple quarters...We are lowering our F4Q10 EPS estimate to $0.41, down from $0.46 previously, due to worse-than-expected reimbursement pressure, fewer new generic introductions, and continued weak Rx trends and Front-End SSS. We are also lowering our F2010 EPS estimate to $2.10, down from $2.20 previously."

Last year Walgreen missed in this same quarter and then beat for the rest of the year. The problems of integration and contention with CVS that the company is experiencing are the reasons the shares are priced at this level. Analyst negativity often provides opportunity.

We sold the trading position in KBE for a scratch profit.

A sour cherry tree grows outside our office window. Since we aren’t allowed cherry pie-unless we make it- the raccoons and birds get an early season fruit feast when the cherries ripen in June. The robins visit the tree and take fruit for their young as if the tree was planted just for them. The raccoon mother brings her babies at night. And the red headed woodpeckers act as if they have found gold. They fly to the tree, quickly grasp a cherry and then take off in rapid flight screaming at their good fortune.


Edith Shain, the nurse in one of the most memorable photographs from World War Two, died Sunday at the age of 91. The picture, taken in Times Square on V-J Day after the Japanese surrender, appeared in Life magazine. [Life] (http://gawker.com/)




Oil ended at $76.34 and Gold was down $7. European bourses were down 1% and more.

The major market measures fluctuated before closing mixed on the day with the DJIA higher and the S&P 500 and NAZZ and Russell 2000 lower. Breadth was flat and volume light.




June 22, 2010

Model Portfolio Value As of 22 June 2010

$ 601,692


Markets around the world are lower this morning as the 7 to 9 day winning streak comes to an end following on yesterday’s reversal in U.S. markets.

Walgreens (WAG) said Tuesday that its fiscal third-quarter profit fell to $463 million, or 47 cents a share, from $522 million, or 53 cents a share, a year earlier. Sales climbed to $17.2 billion from $16.2 billion. The most recent quarter's results included a 4-cent negative impact tied to the elimination of a tax benefit, a 2-cent charge tied to the April purchase of its smaller rival Duane Reade and a 1-cent restructuring cost. Analysts, on average, estimated Walgreens would earn 57 cents a share on sales of $17.1 billion, according to FactSet.

The shares are off this morning and we will add more if they go lower. Walgreen is a great company and its current troubles are a chance to add or initiate purchases at very attractive prices.

Britain is now ruled by conservatives and so it is going to cut spending and raise middle class taxes to attack its deficits. And it expects unemployment to drop. It is raising its value added tax from 17% to 20% and cutting tax credits for middle income folks by an average of $500 per family. But of course corporate taxes will be lowered.


From http://www.taylormarsh.com/

The U.S. military indirectly pays warlords in Afghanistan to protect its convoys: http://media.washingtonpost.com/wp-srv/world/documents/warlords.pdf

... The findings of this report range from sobering to shocking. In short, the Department of Defense designed a contract that put responsibility for the security of vital U.S. supplies on contractors and their unaccountable security providers. This arrangement has fueled a vast protection racket run by a shadowy network of warlords, strongmen, commanders, corrupt Afghan officials, and perhaps others. Not only does the system run afoul of the Department’s own rules and regulations mandated by Congress, it also appears to risk undermining the U.S. strategy for achieving its goals in Afghanistan.

... Security for the U.S. Supply Chain Is Principally Provided by Warlords

Finding: The principal private security subcontractors on the HNT contract are warlords, strongmen, commanders, and militia leaders who compete with the Afghan central government for power and authority. Providing “protection” services for the U.S. supply chain empowers these warlords with money, legitimacy, and a raison d’etre for their private armies. Although many of these warlords nominally operate under private security companies licensed by the Afghan Ministry of Interior, the warlords thrive in a vacuum of government authority and their interests are in fundamental conflict with U.S. aims to build a strong Afghan government.

Bloomberg) -- Sales of U.S. previously owned homes unexpectedly fell in May, a sign demand was probably pulled into prior months before a June tax-credit deadline.

Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

We switched DreamWorks to Ciena and added shares of Walgreen selling Yahoo in the process. We also sold trading positions in Kroger and Applied Materials since the markets look like they want to pull back and we want cash to add to our longer term positions. All of today’s sales were for scratch profits.

Utah voters have reacted enthusiastically to Sen. Orrin Hatch's legislation to drug test the unemployed and those receiving other forms of government cash assistance, the Utah Republican told the Huffington Post after introducing his measure last week. "A lot of people are saying, 'Hey, it's about time. Why do we keep giving money to people who are going to go use it on drugs instead of their families?'" Hatch said. The goal, he said, is to get users into treatment. (And Hatch wants to send undocumented workers back to Mexico only so they can get a good meal.)

Most European bourses were down almost 1%. Oil lost 50 pennies to $77.40 and Gold ended flat at $1245.

Stocks continued their pullback into the close with the major measures all down 1% and more. Breadth was of course 4/1 negative and volume was light.



June 21, 2010

Model Portfolio Value As of 21 June 2010

$ 607,445


Happy Summer Solstice!!


Asian and European markets are higher on comments by China that the government may let the yuan sort of seek its own level against the dollar. Oil has a $79 handle and gold is touching $1260. And U.S. futures suggest an up 1% and more opening.

The People's Bank of China said Saturday it would allow the yuan's exchange rate to be more flexible, a move widely seen as signaling it would let the yuan resume a gradual rise against the dollar. Beijing had essentially pegged the yuan to the U.S. currency since July 2008, as an emergency measure to help stabilize the Chinese economy amid the worsening global financial and economic crisis.

Our guess is that the Chinese are just taking advantage of the drop in the euro against the appreciation in the dollar. They will sell or not buy U.S. Treasuries and buy European Sovereign debt which yields more and is tied to the euro. It’s called hedging.

(Chicago Tribune) At least 40 people were shot over the weekend across Chicago, with seven of them slain, according to police logs. The toll covers a period from 8:43 p.m. Friday--after violent storms hit the city--to 6:39 this morning. On Sunday, Chicago Police Superintendent Jody Weis acknowledged a high number shootings over the weekend and attributed more than half of them to the work of gangs. The total from overnight Sunday into this morning was at least 18, including a 1-year-old girl who suffered a graze wound and a 44-year-old man who was shot in the head and killed.

(Bloomberg) -- Corowa Shire, home to Australia’s biggest hog farm and a three-hour drive from Melbourne, couldn’t be farther from Wall Street. That didn’t stop the local council, which represents about 11,000 people, from investing A$1 million ($878,900) in one of the most esoteric inventions cooked up by the financial industry, a constant proportion debt obligation, or CPDO, with the catchy name “Rembrandt.” The top-rated note, linked to credit-default swaps on investment-grade companies, lost 93 percent of its value in two years. “How do you have an AAA rated instrument go belly up as quickly as that one did?” asks Ian Rich, director of corporate services for the council, which is suing its financial adviser, Local Government Financial Services Pty, over the losses. “We’re very straightforward now in our investments. We’re really only investing in term deposits with major banks.”...

... Over the last decade the financial industry justified the rapid growth in products such as CPDOs, collateralized debt obligations and credit-default swaps by arguing that they were sold to qualified investors who understood the risks and were able to bear them. Their view was echoed in July 1998 Senate testimony by then-Federal Reserve Chairman Alan Greenspan, who said that “regulation of derivatives transactions that are privately negotiated by professionals is unnecessary.”

A decade later his assessment was proven wrong when some of the industry’s most sophisticated participants, including Citigroup Inc. and American International Group Inc., were bailed out of bad bets on contracts whose risks they underestimated. By using government funds and cutting interest rates, politicians and central bankers laid the cost on taxpayers, savers and people living on fixed incomes.

The damage from opaque, complex products extended to communities and schools, such as Alabama’s Jefferson County and Harvard University, which paid hundreds of millions of dollars to cancel interest-rate swaps. The early 2008 collapse of the $330 billion market for auction-rate securities, products that were touted as safe, cash-like investments, led to losses for investors including the state of Hawaii.

To read the entire article http://noir.bloomberg.com/apps/news?pid=20601109&sid=ana_DCpXgsSI&pos=10

(Reuters) - As early word of BP's Deepwater Horizon blowout began spreading, investors panicked. After closing above $60 before the April 20 disaster, the energy giant's shares plunged almost 20 percent in New York, to below $50, in just two weeks.

It is not hard to understand why. Even then, the out-of-control oil spill in the midst of rich fishing grounds and nearby resort beaches raised the specter of horrific damages and untold potential liabilities.

Yet, nearly to a person, the dozens of securities analysts who followed the British oil giant were unfazed. As BP (BP.N) (BP.L) shares continued to drop, most were screaming the same message: buy, baby, buy. Credit Suisse, which had a "buy" rating on the stock at the time, did not even mention the accident in an April 28 report. The firm upgraded earnings estimates after BP reported strong quarterly results the day before. A day later, with BP's shares then down 11 percent, Citigroup's Mark Fletcher weighed in. He argued that the decline was "disproportionate to the likely costs to the company, even assuming damages can be claimed." In the same report, he estimated BP's total share of the cleanup at just $450 million -- today, conservative guesses put the figure at $10 billion to $20 billion. Around that time, Morgan Stanley was among the chorus citing the strong rebound of Exxon (XOM.N) shares after the 1989 Valdez tanker spill in Prince William Sound, Alaska, as a reason to be bullish. "We think the sell-off presents an attractive buying opportunity for investors with medium-term investment horizons," the firm wrote.

All told, 27 of 34 analysts tracked by Thomson Reuters rated the stock "buy" or "outperform" as recently as May 11. The other seven rated the shares "hold." There was not a single rating of "sell" or "underperform" among those tracked.

And then there was the exuberant television host Jim Cramer, who insisted that Bear Stearns was fine just days before the company's stock crashed. On May 10, he told viewers of his "Mad Money" show on CNBC that he was purchasing shares of BP for his charitable trust at just under $50. "If you get any good news at all, you're at the bottom," he said. "I'd like to buy it. If he did, he didn't make out so well. As estimates of the spill grew -- and grew and grew -- and efforts to cap it failed, BP's stock sunk ever lower. It didn't hit bottom for another month, the New York-traded ADRs touching $29 in midday trading on June 9, down 52 percent from just before the Deepwater Horizon disaster. That's approaching $100 billion in shareholder wealth that has been destroyed.

How could so many analysts have gotten the call so wrong? Of course, to err is human. And Wall Street is also prone to herd-like tendencies. But some experts say the unanimity of error around the BP blow-up also has exposed -- yet again -- the conflicts and weaknesses that still bedevil the sell-side analyst community, despite a decade of much-heralded reform.

For more http://www.reuters.com/article/idUSTRE65H4A920100618

(WSJ) HONG KONG--Currency traders left the Chinese yuan party too soon. Now they are piling back in. China's weekend announcement that it would revert to its pre-crisis currency policy caught investors who had given up on their long-held yuan positions off guard. Turmoil in Europe and fears of a double-dip recession led currency traders to retreat from the idea that China would loosen its grip on the yuan.

"Over the last four weeks, more than three-quarters of clients were unwinding long-Asia positions, especially as things were blowing out in Europe," says Adam Reynolds, co-head of Asian fixed income and currencies at Societe Generale in Hong Kong. "As things stabilized last week, a couple guys put a position back on," he says, but mostly investors everyone missed the opportunity to profit on China's announcement.

Most European bourses closed 1% and more higher. Oil was up 50 pennies at $77.80 and Gold lost $22 to $1235.

Entering the last hour of trading the major measures have surrendered most of their gains for the day with the NAZZ negative. Retailers have been down all day and financials turned down in the last hour.

The major measures moved sharply lower in the final hour to reverse the gains of earlier in the day. At the bell the NAZZ was down 1% and S&P 500 down almost as much. The DJIA only showed a small loss as basic industry stocks were the only issues showing strength today. Breadth was negative and volume was light.


June 18, 2010

Model Portfolio Value As of 18 June 2010

$ 609,742


Asian and European markets were mixed overnight and U.S markets look to pen slightly lower. Oil is down $1, Gold is up another $10 and the euro is $1.23.

CVS/Caremark and Walgreen have a new deal on Pharmacy benefits. That is not a real surprise since Walgreen needs the business and CVS would have had antitrust problems if it refused to deal with Walgreen.

(NYT) Paul Krugman: That ’30s Feeling

Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.

Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.

But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.

What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.

Here’s roughly how the typical conversation goes (this is based both on my own experience and that of other American economists):

German hawk: “We must cut deficits immediately, because we have to deal with the fiscal burden of an aging population.”

Ugly American: “But that doesn’t make sense. Even if you manage to save 80 billion euros — which you won’t, because the budget cuts will hurt your economy and reduce revenues — the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity you’re pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position.”

German hawk: “I won’t try to argue the arithmetic. You have to take into account the market reaction.”

Ugly American: “But how do you know how the market will react? And anyway, why should the market be moved by policies that have almost no impact on the long-run fiscal position?”

German hawk: “You just don’t understand our situation.”

The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can’t and won’t justify their stance with actual numbers — because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.

So the real motivations for their obsession with austerity lie somewhere else.

In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.

German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, it’s about moralizing and posturing. Germans tend to think of running deficits as being morally wrong, while balancing budgets is considered virtuous, never mind the circumstances or economic logic. “The last few hours were a singular show of strength,” declared Angela Merkel, the German chancellor, after a special cabinet meeting agreed on the austerity plan. And showing strength — or what is perceived as strength — is what it’s all about.

There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europe’s troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.

But German politicians seem determined to prove their strength by imposing suffering — and politicians around the world are following their lead.

How bad will it be? Will it really be 1937 all over again? I don’t know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.

Because they did so well with the last hedge fund?? Who gives these folks the money???

(Bloomberg) -- Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said.

Citi Capital Advisors, which oversees about $14 billion, may seek $1.5 billion for private equity this year and $750 million for hedge funds, said the people, who declined to be identified because the plans aren’t public. An additional $1 billion is targeted next year for hedge funds, the people said.

In case you forgot:

Citigroup Shuts Down Old Lane, Co-Founded By Pandit by Joyce Moullakis and Josh Fineman

June 12 2008 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit plans to shut down Old Lane Partners, the hedge-fund group he co-founded and sold to the bank last year for more than $800 million. Citigroup will purchase most of Old Lane's assets, and clients can start withdrawing their investments beginning July 31, the New York-based bank said in a statement today. The wind- down is at least the fourth failure for Citigroup's hedge-fund management unit this year. ``It raises more red flags as far as the credibility of the board of directors as well as management,'' said Bill Smith, president of Smith Asset Management, which manages about $80 million and owns Citigroup shares.

Citigroup has booked more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year. Pandit, who took over as CEO in December, outlined plans last month for the company to sell $400 billion of assets. More than a dozen hedge funds have closed, needed cash infusions or been liquidated this year. Peloton Partners LLP folded in March after wrong-way bets on mortgage securities. Taking on Old Lane's holdings will increase Citigroup's assets by about $9 billion in the second quarter, the company said. Citigroup's so-called Tier 1 capital ratio, a measure of the bank's ability to absorb loan losses, would have dropped to 7.7 percent from 7.74 percent as of March 31 had those assets been included at the time, the bank said.

Recruiting Method: Citigroup Vice Chairman Lewis Kaden said in an April interview with Fortune magazine that the July 2007 Old Lane purchase was a way for the bank to recruit Pandit as well as John Havens, who was promoted in March to head investment banking, trading and hedge funds, and Brian Leach, who became chief risk officer. ``This transaction is an investment as much as it is an acquisition,'' ousted Citigroup CEO Charles Prince said of the deal in April last year, citing the 20-year track records of Pandit and Havens. Citigroup has declined more than 40 percent on the New York Stock Exchange since Pandit, 51, took over in December. The shares rose 68 cents, or 3.5 percent, to $19.89 in composite trading at 4:15 p.m. The bank took a first-quarter charge of $202 million to write down the value of its investment in Old Lane, according to a regulatory filing in May.

First-Quarter Loss: The writedown contributed to a net loss of $509 million in the hedge-fund unit during the first quarter. Overall, Citigroup reported a net loss of $5.1 billion, the second biggest in its 196-year history, because of writedowns on mortgage-related bonds and leveraged loans and an increase in consumer-debt delinquencies. All former Old Lane partners, including Pandit, will be required to maintain their investments in the Old Lane funds or other designated Citi Alternative Investments funds. The Old Lane fund produced a 2.8 percent return last year.

``All investors in the fund -- third parties, Old Lane employees, Citi senior management and Citi proprietary investments -- will be treated consistently during the unwind process,'' Ned Kelly, chief executive officer of Citi Alternative Investments, said in the statement.

Pandit, Havens and Leach all worked at Morgan Stanley, the second-biggest U.S. securities firm by market value, before they co-founded Old Lane. Pandit received $165.2 million from Citigroup last year for his stake in Old Lane, then reinvested $100.3 million, after tax, into the fund, according to a March regulatory filing.

`Legacy Assets': Pandit has said he'll get rid of ``legacy assets,'' including real-estate holdings and collateralized-debt obligations such as bonds backed by pools of mortgages. ``Closing down Old Lane is probably not something they wanted to do, but $9 billion for Citigroup, in the bigger scheme of things, is not disastrous,'' said Royal Bank of Scotland analyst Corinne Cunningham.

An enlarged photograph would work just as well.

The University of Illinois has nixed plans for a nearly $100,000 sculpture of President Stanley Ikenberry after the Tribune asked questions about the work. The sculpture, which was to hang in the dining hall in the new Ikenberry Commons opening this fall, was to be paid for with student housing fees. While no contract had been signed, U. of I. officials filed required paperwork with the state last month to justify the no-bid purchase, saying the university "intends to award" the contract to Urbana-based sculptor Peter Fagan. The $98,000 work, requested by the board of trustees and "created to honor President and Mrs. Ikenberry," was to be installed by Oct. 1, according to a notice in the Higher Education Procurement Bulletin.

Europe closed flat and Gold was up at $1258 while Crude finished at $77.39.

The major market measures closed mildly higher in desultory summer Friday expiration trading. Breadth was positive and volume was active because of witching.



June 17, 2010

Model Portfolio Value As of 17 June 2010

$ 609,440


Asian markets were mixed and European bourses were a bit higher overnight. Spain successfully sold some bonds and that gave markets around the world a firmer tone- according to the talking heads. Oil and Gold are flat as the trading day begins.

BP suspended its dividend and will fund the $20 billion commitment from cash flow.

Jobless claims rose 12,000 to 472,000 and the major market measures gave back their gains of the day on the news.

In some larger accounts we switched Kroger (bought yesterday afternoon) which popped $1 and change (5%) on a good earnings report today to DreamWorks which is down from the mid $40 per share range to $27  in the last month after the movie Shrek 3 disappointed.

(AP) -- It looks like investors have had enough of "Shrek," as DreamWorks Animation SKG Inc. shares fell in morning trading. Goldman Sachs analyst Ingrid Chung cut DreamWorks to "Neutral" from "Buy," citing a week performance from "Shrek Forever After," the fourth movie in the popular franchise. "Shrek" has brought in more than $200 million in domestic ticket sales, but has been disappointing relative to previous sequels. In a client note, Chung said the movie demonstrates that DreamWorks has a tough balance to strike between trying to pump as much money from each franchise it owns and being careful it isn't "over-saturating" the market. She lowered her estimate for "Shrek" domestic box office sales to $250 million from $325 million.

And given the smaller return on "Shrek," she lowered her earnings per share estimate for the year to $1.57 from $2.50. On average, analysts surveyed by Thomson Reuters expected $2.10.

So when the stock was trading in the $40s it was a buy and now that it is under $29 it is a sell. OK. OK.

European stocks inched higher, unable to sustain earlier strength after data from the U.S poured cold water on the strength of the recovery of the world's largest economy. The Stoxx 600 index rose for the seventh consecutive session, matching a September 2009 streak. Oil closed with a $76 handle and Gold gained $20 to $1250.

Major stock measures were down most of the day and but moved higher in the last fifteen minutes to close on the positive side. Today is the first part of Quintuple Witching which may have affected the action. Breadth was 3/2 negative and Volume was summer light.



June 16, 2010

Model Portfolio Value As of 16 June 2010

$ 608,270


Overseas markets were mixed overnight with China closed for holiday and U.S markets are going to give back one quarter of yesterday’s gain on the opening. Oil has a $76 number and Gold is flat as the trading day begins.

Thursday and Friday are Quadruple/Quintuple Expirations plus Quarter end is upon us and also yearend for most nonprofit organizations at the end of June

Nokia preannounced negative and the shares are down 10%. There were rumors of the preannouncement last week and the shares sold off but rebounded yesterday. Now they are back at a more than 5 year low. On a positive note the yield on the shares is now 5% and may that offer support. We held our nose and added more shares. With cell phones, when the analysts like them the love than and when they don’t......

(Bloomberg) -- Nokia Oyj, the world’s biggest maker of mobile phones, cut its second-quarter and full-year forecasts, citing a lack of high-end devices and a weaker euro.

Second-quarter handset revenue and margins will be “at the lower end of or slightly below” the range forecast, the Espoo, Finland-based company said in a statement today.

Nokia has struggled to come out with a touch screen model that meets user expectations raised by Apple Inc.’s iPhone. The company is losing high-end customers to the iPhone, Research in Motion Ltd.’s BlackBerry, and phones running Google Inc.’s Android software, while increasing sales of cheaper smartphones with smaller profits.

Nokia fell as much as 55 cents, or 7 percent, to 7.37 euros, the most in more than a month. It was trading down 6.6 percent at 7.40 euros as of 3:07 p.m. in Helsinki.

Sales in the devices and services division may fall below 6.7 billion euros ($8.2 billion) as the company’s product mix shifted toward less-profitable midrange and low end phones, Nokia said.

The adjusted operating margin in handsets may fall below 9 percent in the second quarter and 11 percent for the year, it said. The company lowered its devices margins forecasts on April 22 to 9 to 12 percent for the quarter and 11 to 13 percent for the year.

From the Fed: Industrial production and Capacity Utilization

Industrial production advanced 1.2 percent in May after having risen 0.7 percent in April. Manufacturing output climbed 0.9 percent last month, its third consecutive monthly gain of about 1 percent, and was 7.9 percent above its year-earlier level. Outside of manufacturing, the output of mines edged down 0.2 percent, and the output of utilities increased 4.8 percent. The jump in utilities reflected unseasonably warm temperatures that boosted air conditioning usage in May after uncharacteristically temperate weather in April reduced heating demand. ... The capacity utilization rate for total industry rose 1.0 percentage point to 74.7 percent, a rate 6.2 percentage points above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009. http://www.calculatedriskblog.com/


Sometimes the rich don’t get richer (although Fortress still collects its fee):

(NYT) It seems that, relatively speaking, the private equity industry hasn’t been all that kind to the Fortress Investment Group in the last five years. The hedge fund and private equity giant has booked $5 billion in unrealized losses from private-equity funds started since 2005, when the buyout boom took off, Bloomberg News reported. That figure, the news service said, is more than Fortress’s largest New York rivals combined. Blackstone Group LP, the biggest private-equity firm, had an unrealized loss of $861 million in the period and KKR & Co.’s buyout funds are down $708 million, according to regulatory filings in the past six weeks. Funds at Leon Black’s Apollo Global Management LLC posted a profit.

Investors’ Intelligence reported 37% Bulls and 33% Bears down and up 1% respectively from the week before.

(Bloomberg) -- Builders broke ground on fewer U.S. homes in May than anticipated after the expiration of a government incentive. Housing starts fell 10 percent, the biggest decline since March 2009, to a 593,000 annual rate, from a revised 659,000 pace in April that was less than previously estimated, Commerce Department figures showed today in Washington. Building permits, a sign of future construction, unexpectedly fell to a one-year low. Single-family starts suffered the largest drop since 1991. Builders focused less on starting new projects and more on completing houses for those seeking to qualify for the tax credit, which required contracts be signed by April 30 and closed by the end of this month. Growth in sales and construction will now depend more on job gains and a drop in foreclosures, which have pushed down prices and created competition for builders.

(LaCrosse Tribune) PULASKI, Wis. - Sales of yachts has improved, causing two northeastern Wisconsin companies to recall 350 employees from layoff. Carver Yacht Group of Pulaski is calling back 250 employees and another 100 workers will be back on the jobs at KCS International in Oconto. Company executives tell the Journal Sentinel that orders for sport-fishing yachts and similar vessels have rebounded, especially in the Pacific Rim and Eastern Europe.


Global Macro Hedge Funds Net Short Equities http://www.marketfolly.com/2010/06/global-macro-hedge-funds-net-short.html

Bank of America Merrill Lynch is out with their latest hedge fund monitor report and so we'll check in on the most recent exposure levels from hedgies. Overall, managers continued to sell equities and added to shorts in 10 year treasuries. A few weeks ago, we highlighted that hedgies had very low net long exposure and this trend continues. Also, we pointed out that long/short equity was the worst performing strategy. This trend also continues as equity funds continue to feel the sting. You can see how badly some of the top dogs fared in our May hedge fund performances update (it's not pretty).

Based on CFTC data, it is estimated that global macro hedge funds are actually net short US equities as of last week. This isn't the first time we've seen this stance as of late because back in early May, it appeared that global macro funds were net short equities then as well. Additionally, these funds are in crowded longs of the US dollar and are short commodities as well. This trade seems to be the complete opposite of what many put on during the financial crisis (short dollar, long commodities). It looks as if macro funds are pressing their bets and playing catch up. After all, we previously highlighted how these funds were struggling earlier in the year.

As of last week, long/short equity hedge funds were 22% net long. Again, this is well below historical averages of around 35-40%. These fund managers continue to favor high quality and growth stocks and we've highlighted this trend numerous times on the site before. However, last week they were slightly reducing high quality exposure.

Market neutral funds also reduced exposure to the stock market. However, they are still net long and have above average exposure. They seem to prefer value and small cap names.

(AP) -- Senior administration officials tell The Associated Press that BP has agreed to finance a $20 billion fund to pay the claims of people whose jobs and way of life have been damaged by the devastating Gulf Coast oil spill. The independent fund will be led by lawyer Kenneth Feinberg, who oversaw payments to families of victims of the Sept. 11, 2001, terrorist attacks.

We added Kroger to accounts that own Applied Materials. It is on a multi year low.




Good Luck Carl:

(Bloomberg) -- U.S. corporations that gave stock options to executives claimed tax deductions in 2008 that were $52 billion higher than the costs they reported to shareholders, a U.S. senator said. Michigan Senator Carl Levin, who has been trying to pass legislation to limit tax deductions for stock options since 1997, said the difference between the deductions and expenses increased by $4 billion from 2007. He said the numbers were released by the Internal Revenue Service. “Current stock option accounting and tax rules are out of kilter,” Levin said in a statement. He said companies “benefited from an outdated and overly generous stock option tax rule that produces tax deductions that often far exceed companies’ reported expenses. It’s a stock option tax break we can no longer afford and ought to end.”

European bourses closed higher. Oil closed at $77.67 and Gold was flat at $1233.

The markets opened lower, absorbed the selling and moved to the upside then pulled back in the last hour to close slightly lower. Breadth was 3/2 negative and volume was summer light. Consolidating the gains of Tuesday was positive.


June 15, 2010

Model Portfolio Value As of 15 June 2010

$ 612,701


There used to be very large statue of Jesus in front of a church that could be seen from Interstate 75 just north of Cincinnati, Ohio. The statue was called Touchdown Jesus because of the way its arms were raise. The statue was destroyed by lightning a few days ago. Some may think that God was mad at someone in the church but our guess is that God didn’t like Nebraska joining the Big Ten.

Touchdown Jesus Statue Destroyed By Act Of God http://deadspin.com/5563844/touchdown-jesus-statue-destroyed-by-act-of-god

Asia was mixed small overnight and Europe is small positive this morning. U.S. futures indicate a higher opening but not much enthusiasm. Oil is touching $76 and Gold is flat. The Obama man speaks to the nation tonight on the Gulf Oil Mess and up on Capitol Hill today the Oil honchos are going to be interrogated by the folks who love them when they need money for campaigns but can’t show that love to the public.

We added shares of BankAmerica, Coldwater, and Nvdia to accounts.

European bourses closed higher and Gold rose $8 to $1233 while Oil gained to $77.

The major market measures opened higher and climbed all day in light trading. At the close Breadth was 6/1 positive and the major measures were up 2% and more. Up volume was again 20 times down volume. Those breadth and volumes ratios are confusing technicians because HFT has made many of the old measures as these two meaningless.


June 14, 2010 Flag Day

Model Portfolio Value As of 14 June 2010

$ 604,799


Asian and European markets were higher and U.S. futures indicate a higher opening. Oil has a $76 handle and Gold is down $5. The euro is better at $1.22.


The Bank for International Settlements (BIS) put out the BIS Quarterly Review, June 2010 yesterday. As part of the review, the BIS estimated the exposures of banks by nationality to the residents of Greece, Ireland, Portugal and Spain:

As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).

French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.

French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector.

(NYT) The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.

And so now Afghanistan is the realm of untold mineral wealth. Our guess is that the trillion in minerals is buried gold we gave to tribal leaders so that they wouldn’t help the Taliban kill our solders.

Volker says he doesn’t think banks should be forced to spin off their swaps desks. That section of the Financial Regulation bill is what is holding the major bank stocks back in this rally. Should it be dropped the financials should begin to participate. An added benefit to dropping the provision is that Citi shares will rally on the news because major banks will be able to continue ripping off their customers for profit and the share price of Citi will rise and enable the government sell the rest of its Citi stock at a larger profit.

Krugman writes: Does Fiscal Austerity Reassure Markets?

Here’s a thought I should have had earlier about the debate over whether now is a good time to start fiscal austerity.

For the most part, this debate has been between those like me and Brad DeLong, who assert that budget-cutting should be postponed until we’re no longer in a liquidity trap, and those who insist that we must cut immediately, even though it would inflict economic damage and do little to improve the long-run budget position, because immediate cuts are necessary to achieve credibility with the markets.

My response, and Brad’s, has been to say that right now there’s no hint in the data that the United States (or the UK) has a problem with the markets, and to question why the deficit hawks are so sure about what the market will want in the future, even though it doesn’t want it now.

But I suddenly realized this morning that there’s yet another question for the deficit hawks: what evidence do you have that fiscal austerity of the kind you’re demanding would reassure markets, even if they did lose confidence?

Consider, if you will, the comparative cases of Ireland and Spain.

Both countries appeared, on the surface, to be fiscally responsible until the crisis hit, with balanced budgets and relatively low debt. Both discovered that this was an illusion: revenues were buoyed by immense real estate bubbles, and when the bubbles burst they plunged into deficit — and found themselves potentially on the hook for large bank losses.

The countries responded differently, however. Ireland quickly embraced harsh austerity; Spain has had to be dragged into austerity, and still faces major political unrest.

So, how’s it going? This article is typical of what you read: it describes the Irish as doing what has to be done, while the Spaniards dither. And it has good things to say about how the Irish response is working:

Much bitterness but also stoicism; markets impressed by Irish resolve to bite the austerity bullet.

Well, I guess that’s right — if by “markets impressed” you mean a CDS spread of 226 basis points, compared with 206 points for Spain; not to mention a 10-year bond rate of 5.11 percent, compared with 4.46 percent for Spain.

So, I’m glad to hear that Ireland’s stoic acceptance of austerity is reassuring markets; it must be true, because that’s what everyone says. Because if I didn’t know that, I might look at the data and conclude that markets actually have less confidence in Ireland than they do in Spain, and that austerity in the face of a deeply depressed economy doesn’t actually reassure markets at all.

But hey, what are you going to believe: what everyone knows, or your own lying eyes? http://krugman.blogs.nytimes.com/2010/06/13/does-fiscal-austerity-reassure-markets/

http://digbysblog.blogspot.com/ So Arizona is going to introduce a bill to pressure Israel to deport the children and grandchildren of European Jews to Poland and Germany (and the kids of illegal Polish immigrants in Chicago and the descendants of illegal Irish immigrants in NYC and the heirs of illegal Italian immigrants in Buffalo.) You'd think there would be some kind of outcry, wouldn't you?

Oh, wait. They just want to revoke the citizenship of the children of Mexicans so they can be deported to Mexico (and other countries "down there.") Not a problem.

Wall Street Trumps Main Street – Asymmetric Information in Derivatives


There has been a vigorous debate on the portions of Financial Regulation concerning Derivatives.   This article by Jane D’Arista highlights why Derivative reform is an essential part of reducing systemic risk and bailout risk.  However, financial reform is not only about reducing these risks.  It is also about restoring balance, fairness and integrity to financial services, moderating corporate power and regulatory capture in Washington, and allocating resources in the economy in a way that provides more for job creating industries and less for the outsized financial sector. To take one quote from the article which addresses my focus today:

Buying and selling OTC derivatives contracts is a zero sum game. Unlike portfolio lending that links the fortunes of borrowers and lenders, one party to a derivatives transaction wins while the counterparty loses.

So let me pull back the curtain on how derivatives work in one particular area on Main Street. What is generally considered to be the most plain vanilla derivative product in the Interest Rate Swap. In simplified terms, what an Interest Rate Swap does is allow one party (generally a borrower of funds) to pay interest to a bank at a variable rate but to “synthetically fix” the rate through a swap. Another party takes the other side of the trade. The borrower will generally assume that party is the bank, but if the bank wanted to take and be paid for the rate risk it could just have made a fixed rate loan in the first place at a higher interest rate. There is another party (counterparty) that takes the interest rate risk in return for being paid a monthly payment.

So as a simple example, the borrower may have a $3 million loan. It might pay 3.5% per annum in variable rate interest to the bank. It may pay a payment equal to another 2.5% on the interest rate swap for an “all in” rate of 5.5%. The Counter Party gets the 2.5% (less the market maker’s fee), in order to assume the risk that rates will rise. The borrower is supposedly protected from a rise in interest rates.

On the surface, this seems pretty simple and a borrower might feel well prepared to make a good decision on the transaction.

Here are the problems as I see them:

  • The borrower has no way to know if the rate swap is a good deal. In other words, they buy something that seems simple but is in fact quite complex. Look at it this way, the borrower paid 5.5% instead of 3.5%. That is a 57% increase in the cost of credit. The borrower has paid a large sum of money and has few ways to ascertain if it is a good deal. You can rest assured that the counter party on the swap is much more sophisticated regarding the mathematics behind the transaction. They are financiers deliberately taking interest rate risk for a fee.

  • The bank may have limited the borrower’s pricing options in order to induce him or her to enter into the interest rate swap. The bank could have offered a fixed rate loan. Banks do this all the time, except when they don’t. Often a bank will not offer a fixed rate loan at all and will present the swap as the only way for the borrower to hedge interest rate risk.

  • The borrower may not have any other place to go to get the interest rate swap. Generally the swap is cross collateralized with the actual loan. Unless the borrower is shopping the loan and the swap at the same time, they have no competitive information available. Since 90% of swaps are done by 5 banks, if the borrower is shopping a big bank against a local or regional bank, the best swap pricing is not going to be available to the smaller bank anyway. So the big bank has a competitive advantage.

  • Swaps have risks to the borrower that are not necessarily apparent and may not be properly disclosed when the swap is sold. These include the very real chance that the swap can actually be “underwater” if terminated early. The amount it is “underwater” is based on complex mathematical formulas involving changes in interest rate curves from the time the swap was initiated until terminated. Further, the rate that is “hedged” is the “index” rate, not necessarily the borrower’s loan rate.

  • The economic value of either side of a swap’s position is a function of several factors including the rate curve and discount rates. It is not a function of the index rate. The borrower will often not understand this. Effectively this means that the net position on the swap may not be correlated well with changes in the “index”. It is somewhat analogous to the problems with pricing on some ETFs that are based on futures contracts. The ETF is intended to track a certain commodity price but since it actually owns futures contracts rather than the commodity itself, the value of the ETF does not correlate well with the intended benchmark.

  • The borrower’s loan can be declared in default for a variety of reasons including failing to maintain certain financial ratios, credit ratings, etc., even if there is no payment default. A loan default will generally trigger a default on the swap, which may become due and payable in full. The borrower may find that in addition to whatever other difficulties it is encountering, now a large unexpected payment is due on the swap contract. In this case, the contract failed to deliver the protection the borrower purchased. The borrower would have to read and understand all the fine print to understand these risks.

  • Swaps are very profitable for banks and are generally sold by a commissioned sales force. The individual incentives earned can be substantial enough to create a moral hazard at the individual banker level. Their personal interest may not align with the interest of the client. This is not disclosed. The incentives differ at every bank.

  • The front line bankers themselves rarely have a full understanding of an interest rate swap transaction. The figures come from a wizard behind a curtain known as the “money desk” or “swap desk” or “derivatives platform”. Even if the banker wanted to explain the exact economics to the client, they would generally not have the information or expertise to do so.

Please note that these comments relate to only the most simple form of derivative contracts. I would expect all the shortcomings I’ve identified to be magnified in more complex transactions.

R.I.P. Jimmy Dean: The Sausage King's Grossest Meals








European stocks rose, as stronger-than-expected euro-zone production data fed hopes of economic recovery, boosting basic materials stocks, commodities and the euro. Oil gained to $75.12 and Gold was flat at $1225.

Bank stocks opened lower and placed a damper on the first hour rally. Banks then caught a bid and the rally revived only to be followed by an afternoon bank swoon with the major stock measures following bank stocks lower. In the final hour the HFT boys’ and girls’ computers decided down was easier than up and the DJIA and NAZZ dropped below even to close lower on the day. The S&P 500 was insignificantly higher. Breadth was flat and volume moderate.


June 11, 2010

Model Portfolio Value As of 11 June 2010

$ 605,098


After the big up day yesterday futures are flat ahead of the opening. A follow through day to the upside is needed before the bears will begin to worry. Overseas markets were higher as they played catch-up to the U.S. markets of yesterday. Oil is back under $75 and Gold is flat as the trading day begins.

Retail sales were down 1.2% in May and that number has placed a damper on the futures suggesting a down opening. A pullback this morning may set up a snap back this afternoon. If not then the markets are back to no person’s land.

Drugstore chain Walgreen was cut to market weight from overweight at Thomas Weisel Partners, which said its downgrade was based on a tepid sales outlook and the potential discontinuation of the group's relationship with CVS Caremark. The broker said CVS' decision to drop Walgreen from its network in 30 days is much faster than Walgreen had originally proposed and estimated the lost CVS sales would equate to roughly $4.6 billion in annual revenue. It added that the lost revenue estimate doesn't include front-store purchases that will no longer be made by consumers filling prescriptions. (This is why the shares are down 60% from their 2007 high and 30% in the last few months.)

The market action this morning is positive even though the major measures opened lower. We added Applied Materials and more Major Bank ETF (KBE) to accounts.

Consumers Lose Momentum in May (Diane Swonk—Mesirow Chief Economist)

Total retail sales dropped 1.2% from April to May - more than a percent below market expectations - while sales, excluding autos, dropped 1.1%. Sales for April were revised up slightly, which helps to dampen the blow, but doesn't change the reality of the data, which is not terrific.

Declines were broad-based with a drop in everything from vehicle sales - which is contrary to the unit sales figures released for the month - to clothing, department stores, building materials and garden equipment. Few are willing to invest in beautifying their yard when they are still worried about paying their mortgage.

Not all news was dismal. After falling off a cliff during the recession, discretionary spending on food and drinking places posted another month of increases. We also saw modest gains in spending on furniture, appliances and electronics, which no doubt reflects the residual spurt to spending created by an increase in home sales, as homebuyer tax credits expired at the end of April.

Revisions to the data offer another sliver of hope, which are likely to be upward given reports by retailers that spending will pick up slightly in the second half of the month after the initial survey was taken.

The Bottom Line: The recovery continues on its rocky and fragile path. This report only confirms that, but it would be nice to get a bigger slice of optimism. Foreigners, hoping that the U.S. consumer will play Atlas and buy all of their exports to keep their economies going, will be particularly disappointed as we continue along a path of deleveraging and rebalancing.

So the geeks will program their computers to not take the share price of an individual stock down over 10% in five minutes. 6 minutes will be fine.

SEC Approves ‘Circuit Breaker’ (WSJ)
The New York Stock Exchange said it will begin a phased rollout on Friday. BATS Global Markets and Direct Edge also have said they expect to begin implementation Friday. The rule will be in effect on a pilot basis for six months. All exchanges will halt trading for five minutes in an individual stock when its price moves 10% or more, up or down, in the previous five minutes. The pause is designed to give traders time to catch their breath and assess whether a stock’s price change stems from a real shift in value or an unrelated market hiccup.

European markets closed higher and Oil ended with $74 handle and Gold was flat. The euro closed the week at $1.20.

It was easier for the HFT boys and girls to close the market measures higher after a mostly slightly down day of trading. Breadth was 2/1 positive as banks and financials rallied to the plus side in the last hour of trading and volume was summer Friday light. The games begin again on Monday. The trading today was positive for the rally continuing folks.


June 10, 2010

Model Portfolio Value As of 10 June 2010

$ 602,831


For whatever reason - and we don’t know why - U.S. futures are 1% higher in the pre-market. The reason given is good economic news in Asia. Asian and European markets were higher overnight. Oil has a $75 handle and Gold is lower.

Jobless claims were 456,000 for last week.

CVS Caremark speeds up termination of prescription drug deal with Walgreen

By JASON ROBERSON / The Dallas Morning News

In 29 days, CVS Caremark Corp. will kick Walgreen Co. out of its pharmacy benefit network because of a dispute over reimbursement rates. But CVS Caremark said Wednesday that customers won't miss much. CVS Caremark is known for operating a drugstore chain, but it also manages a prescription drug program for 2,200 corporate clients who represent 53 million people. As a pharmacy benefit manager, CVS Caremark is responsible for processing and paying prescription drug claims and negotiating reimbursement rates with pharmacies. Many of them are also competitors, like Walgreen. However, Walgreen is not happy with what CVS Caremark is paying. On Monday, Walgreen said it would not participate in any new or renewed CVS pharmacy benefit plans. In response, CVS Caremark sped up the separation to be effective in 29 days, which includes existing benefit plans involving Walgreen. "We are disappointed but not surprised that CVS Caremark has taken this action," Kermit Crawford, executive vice president of pharmacy at Walgreen, said in a written statement. "Their patent disregard for patient choice and broad access reflected in today's decision reinforces our conviction that it would not have been in the best interests of our patients, pharmacists or shareholders to grow our business with CVS Caremark."  CVS Caremark would not pinpoint its number of corporate Texas clients. Prescription drug users will not be affected if their employer does not use CVS Caremark as its pharmacy benefit manager. Even if it does, CVS Caremark says that of its 64,000 pharmacy participants, only 7,000 are Walgreen stores. CVS Caremark said 85.9 percent of its members have access to a network pharmacy within a 3-mile radius of where they live. When Walgreen is excluded from the network, the number changes to 85.7 percent. Tom Ryan, chairman and chief executive of CVS Caremark, said he regrets any inconvenience the change may have for members who use Walgreen.

Walgreen is under more selling pressure today and we are adding shares under $29 with room to buy more.

Because we reentered women’s retailer Coldwater yesterday and the day before, we sold Chico’s today and are placing a good chunk of the proceeds in Nokia on its all time low.

From: http://www.thestreet.com/3-stocks-george-soros-is-betting-on-in-2010.html

With economic concerns continuing to weigh on the market, it's no surprise that some of Wall Street's most-storied investors are increasing their cash positions right now. Take George Soros, for example: The billionaire investor's firm sold off $182 million in stocks last quarter, closing out holdings in more than 140 companies. But as bleak as that snapshot may look, more important are the stocks Soros is adding to his fund.

Here's an analytical look at (one) stock Soros Fund Management is buying right now. Just as overseas stocks arguably made Soros' fortune, his fund continues to take big positions in overseas companies.

Take Nokia(NOK), for instance. The Finnish mobile device company was one of a handful of new positions opened by Soros Fund Management in the last quarter. Nokia has long been a key player in the highly competitive cellular phone market, having captured roughly a third of the global cellular handset market. The company has done that effectively by putting tremendous efforts into both its low-cost entry-level phone offerings, which are extremely popular in emerging-market economies where cellular phones are still seeing steady growth, and its next-generation smart phone products. The next step for the handset manufacturer is transactional and service-based revenues. Taking a page from Apple's playbook, Nokia's Ovi platform offers the company's handset users a mobile media store that could spur significant top-line growth in the coming quarters.

A tumbling Euro is actually panning out well for the Finnish firm. Because Nokia's Euro-denominated business is so big worldwide, the company should recognize material currency conversion gains. And while that's a scenario that's less attractive for the company's 9 billion euros in the bank, at least any devaluation is offset by a devaluation of Nokia's already-manageable debt load. Soros Fund Management thinks the situation will be favorable in 2010; the group picked up $16.9 million worth of Nokia shares to open its position.

With $3 per share in cash Nokia is priced at 2/3rds of revenues. Even with all the hoopla about the iphone Nokia controls 36% of the smart phone market to Apple’s 15%. Apple is obviously gaining on Nokia but the shares price of $9.40 is discounting a lot of bad news.

(Bloomberg) -- The U.S. Securities and Exchange Commission approved rules that will halt trading in Standard & Poor’s 500 Index stocks during periods of volatility, a response to the May 6 plunge that wiped out $862 billion in 20 minutes.

The circuit-breaker test, scheduled to last through Dec. 10, will pause trading for five minutes when a company rises or falls 10 percent in five minutes or less. The New York Stock Exchange said it will begin implementing the curbs tomorrow. The regulator delayed the start of the pilot program last week.

European stocks gained sharply Thursday, lifted by strong Chinese export data, a successful Spanish bond auction and some reassuring words from the ECB. The European Central Bank left its key interest rate unchanged at 1% and raised its forecast for growth in the euro zone this year, but lowered its forecast for 2011. Gold was down $8 to $1222 and Oil gained $1 to $75.47.

The major market measures opened up 1%, were up all day, and closed on their highs up 2% and more. Breadth was green and volume was lousy- as it has been on all rally days recently –not good. We’ll find out if this was another one day wonder tomorrow.


June 9, 2010

Model Portfolio Value As of 9 June 2010

$ 595,032


Asian and European markets are higher this morning as are U.S. futures. Follow through from yesterday is important for the bulls. Oil has a $72 handle and Gold is flat.

Investors’ Intelligence had 38% bulls and 32% bears in its latest weekly report. When we left on vacation in late April and the markets were 15% higher the numbers were 53% bulls and 18% bears. Buy’em higher sell’em lower is the mantra of the momentum traders and the HFT boys and girls.

(Bloomberg) -- China’s stocks rose the most in more than two weeks after Reuters reported a surge in the nation’s exports and higher-than-estimated new loans in May, signaling Europe’s debt crisis hasn’t derailed the economy.

Sarkozy and Merkel called for the EU to get its rules in place especially on banning naked shorting of credit default swaps on sovereign debt. We don’t remember Sarkozy being on board on this item when German banned the practice a few weeks ago. The SEC should join in but of course they will probably have to study the issue for several years.

(Bloomberg) -- France and Germany called on the European Union to speed up curbs on financial speculation, saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.”

In a joint two-page letter, French President Nicolas Sarkozy and German Chancellor Angela Merkel sought proposals from European Commission President Jose Manuel Barroso on a ban on so-called naked short sales of “certain” stock and bonds, as well as on naked credit-default swaps on sovereign bonds. They call for proposals to be ready by the middle of next month rather than October as had been planned.

The letter shapes a common position between the leaders of Europe’s two largest economies after Merkel last month caught other EU leaders off guard when she unilaterally banned naked sovereign credit-default-swaps within Germany. She argued the actions of “speculators” exacerbated the European debt crisis that has rattled markets and driven the euro to a four-year low.

Proposals to regulate short selling and credit-default- swaps will be brought forward and come “during the summer,” Commission Spokeswoman Pia Ahrenkilde-Hansen told journalists in Brussels today. She didn’t specify whether they would be ready by July as requested by Merkel and Sarkozy in their letter.

“The return of strong volatility in the markets makes it necessary to question certain financial methods and certain products such as naked short-selling and credit default swaps,” the leaders said in the letter, e-mailed by their respective offices in Paris and Berlin today.

Walgreen and CVS are battling which is pushing the share price of Walgreen down to attractive levels.

(WSJ) The customer battle between CVS Caremark Corp. and Walgreen Co. heated up on Wednesday, with CVS saying it plans to eliminate the rival from its pharmacy-benefit manager network. CVS Caremark— which is both a drugstore chain and pharmacy-benefit manager, administering drug plans for employers and insurers— said that although it has "worked diligently to come to terms" with Walgreen, it "has no choice" but to terminate the drugstore giant's participation in retail pharmacy networks in 30 days. The company also said it will terminate Walgreen's participation in its Medicare Part D retail pharmacy networks effective Jan. 1. On Monday, Walgreen had announced it was dropping out of CVS Caremark's drug-benefits network, citing CVS's promotion of prescription plans that require patients with chronic conditions to use either CVS stores or the Caremark mail-order pharmacy. "Walgreens' most recent actions have violated the terms of its existing agreements and ... Walgreens has failed to respond to efforts by CVS Caremark to continue business negotiations," CVS Caremark said in a news release.

GM’s Treasury-Led IPO May Hand Bankers Lowest Fees Since 1999

(Bloomberg) -- Wall Street bankers may be pushed to charge the lowest fees in at least a decade to arrange the Treasury’s sale of General Motors Co. in what could be the second-largest initial public offering in U.S. history. Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley are vying to lead the automaker’s share sale, which may raise as much as $12 billion, an estimate by Independent International Investment Research Plc showed. The U.S. government may seek underwriting fees of as low as 2 percent, according to finance professors at Cornell University and Georgetown University. That’s less than any U.S. IPO over $5 billion since 1999, Bloomberg data show.

The Treasury, which owns a 61 percent stake in GM, will pressure the banks to accept fees that may be less than half the 5.5 percent average for all IPOs in the past decade after spending $150 billion in taxpayer money on the same financial firms during the credit crisis, the professors said. The underwriters would make as much as $360 million in an initial offering of GM based on the average 3 percent fee for past deals over $5 billion, data compiled by Bloomberg show. “The last thing they need is the government putting hundreds of millions into the banks’ pockets,” said Roni Michaely, a finance professor at the Johnson Graduate School of Management at Cornell in Ithaca, New York. “Especially with the public scrutiny and anger over Wall Street.”

Michaely, who studies IPOs, said the banks may make fees of as low as 2 percent from underwriting GM’s share sale.

Best story of last night’s election:

Alvin Greene spent no money and didn’t campaign and he won:

(AP) Alvin Greene is an unemployed veteran who has never held political office. After filing for the Democratic primary in the Senate race from South Carolina, his campaign seemed to stop. There is no Alvin Greene web site, no Alvin Greene bumper stickers, no Alvin Greene yard signs. There's not even an Alvin Greene FEC filing.

Nonetheless, Greene won last night's Democratic primary, beating Vic Rawl, a judge who served in the South Carolina legislature for four terms. A judge who had gathered $186,000 for the campaign.

"I wasn't surprised, but not really. I mean, just a little, but not much," Greene told Mother Jones.

Greene, on the other hand, didn't raise a dime. In March, he walked into the state Dem headquarters and handed over a personal check for $10,400, the filing fee to run in the Senate race. The chairwoman, Carol Fowler, was taken aback and told Greene he needed to start a campaign account and write the check from there. A few hours later he came back with a proper check, according to the Free-Times, and filed.

After that, nothing. Fowler says Greene didn't show up at political events, including the convention. Rawl has never seen him.

But somehow, Greene took 59% of the vote last night and will face Sen. Jim DeMint (R-SC) in the fall. There was, by conventional wisdom, little chance Rawl could beat DeMint, who has millions of dollars to spend on a campaign and is popular in South Carolina.

Fowler speculated to the AP that Democratic voters unfamiliar with both Rawl and Greene chose Greene because he appeared first on the ballot.

(Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank will act as needed to aid financial stability and economic growth after restarting emergency currency-swaps to help contain Europe’s debt crisis. “Our ongoing international cooperation sends an important signal to global financial markets that we will take the actions necessary to ensure stability and continued economic recovery,” Bernanke said today in testimony to a House Budget Committee hearing. The impact of the crisis on U.S. growth is “likely to be modest” if financial markets “continue to stabilize,” he said. He reiterated that the U.S. recovery is being restrained by the housing and commercial real-estate markets and repeated his call for lawmakers to come up with a long-term deficit- reduction plan. Bernanke and most of his fellow policy makers have given little indication they will soon back off from the central bank’s pledge to keep interest rates at a record low for an “extended period,” given high unemployment and low inflation. Two days ago, Bernanke said that while the Fed will raise rates before the economy reaches “full employment,” growth isn’t fast enough to reduce joblessness quickly.

We repurchased BankAmerica and added/added to Coldwater, Yahoo, Boston Scientific and Ford. The only other stocks we are interested in right now are St. Jude add Walgreen but we are giving them a bit more room to the downside.

(WSJ)European stocks rose, extending gains late in the session, boosted by strong U.S. stocks and some cautiously optimistic comments by Federal Reserve Chairman Ben Bernanke. Oil gained $2 to $$74 and Gold was $1230 down $16.

Entering the final hour the major measures have given back most of their gains as British Petroleum dropped $4 per share in the contra hour. That drop will affect the FTSE tomorrow since BP is the largest stock on it. An analyst in London said there is a 50/50 chance that BP will cut its dividend and that seems to have set off the further selling and placed a blanket on the markets good action. The final hour will be the tell since the markets need to close higher or they are going to roll over.

The S&P 500 gave back most of yesterday’s gains on last hour selling. The DJIA gave back one third. Breadth was negative and volume was active. The rally failed which means there is probably more painful work on the downside ahead. The stocks we own are at attractive levels, all at/or on/near their yearly and in some cases multi year lows and we are in them for more than a few points higher from here. And we have cash in all accounts for lower levels. Because of the failed rally the next buy level is 1010 or 4% lower from here and 19% lower from the high.


June 8, 2010

Model Portfolio Value As of 8 June 2010

$ 597,584


Corrections to be effective have to instill fear of loss in investors. The current correction may be beginning to do this. Overnight Asia was mixed and European bourses are mildly lower at midday. Gold is at a record of $1250 and Oil has a $71 handle. BP says it is capturing oil at a rate of 15,000 barrels per day which may represent a good chunk of the spewing oil.

Stocks look to open higher on Turnaround Tuesday. A swoosh lower this morning (The S&P 500 closed at 1050 and the support level is 1040) might have cleared the way for a good rally –since markets are at the level they collapsed to on the May 6th Computer? Crash- and it would be technically positive to bounce off 1040 before moving higher (of course it needs to hold 1040 or it is Katie bar the door time). If the S&P 500 drops through the 1040 level the next support at 1010. As we learned last year, patience is needed as we recommit funds. Stocks that we thought were cheap 20% higher in price than now can and may get much cheaper. We made the mistake of remaining investors in 2008 and 2009 not realizing the power of the no uptick rule and High Frequency Trading to wreak havoc on the downside. Investing is much more art than science and we now have to learn how to live with the new “no rules” atmosphere and take our time. The HFT folks are trend followers and with the trend now down they are exacerbating the trend in that direction. But upon reflection the HFT folks were probably the reason for the extended run to the upside over the 12 months ending April 2010.

We wrote of this last week, too bad we won’t get any of their fees. Hopefully Congress will intervene before the company is split to remove assets from legal claims.


(NYT) It seems unthinkable, even now, that the disastrous oil spill in the Gulf of Mexico could bring down the mighty BP. But investment bankers get paid to think the unthinkable — and that is just what they are doing. The idea that BP might one day file for bankruptcy, particularly as part of a merger that would enable it to cordon off its liabilities from the spill, is starting to percolate on Wall Street. Bankers and lawyers are already sizing up potential deals (and counting their potential fees). Given the plunge in BP’s share price — the company has lost more than a third of its value since Deepwater Horizon blew — some bankers and analysts say BP is starting to look like takeover bait. The question is who would buy BP, given its enormous potential liabilities? Shell and Exxon Mobil are both said to be licking their chops. And already, flinty legal minds are dreaming up scenarios in which BP would file a prepackaged bankruptcy and separate the costs of the cleanup — and potentially billions of dollars in legal claims — into a separate corporate entity.

The rich get richer as they game the system that Congress provides them:

(Bloomberg) -- Billionaire Edward Lampert may have found a way to shield himself from millions of dollars in taxes under legislation that would raise levies on profits at private- equity firms.

ESL Partners LP, the Greenwich, Connecticut, hedge fund Lampert started more than 20 years ago, and affiliates distributed about $829 million of stock in Sears Holdings Corp., AutoNation Inc. and AutoZone Inc. to him on June 2, according to regulatory filings. The fund is scheduled to transfer more shares in the retailers to Lampert by the end of July.

By taking direct ownership of the shares, Lampert would be taxed at the capital-gains rate of 15 percent when the stock is sold, rather than the ordinary income rate of 39.6 percent that his fund would have to pay under the bill, according to Robert Willens, whose New York-based firm analyzes tax and accounting rules for Wall Street clients. Lampert is ranked 316th on the Forbes list of world’s richest people, with an estimated net worth of $3 billion.

“It’s totally an astute thing to do,” Willens said in a telephone interview. “It doesn’t take a fortune teller to predict that we are going to see a lot of this activity between now and the end of the year.”

While the legislation is aimed at reducing a tax break for buyout firms, Lampert’s hedge fund often holds investments for more than a year, making it eligible for the lower rate applied to private equity under the current law.

10:30AM and the S&P 500 is touching 1040.

On the bounce off 1040 we repurchased shares of GE, Symantec and Dell lower than the prices at which we sold last week. We are at a level where a bit more exposure is warranted. We are doing this reluctantly- since the correction is getting to us- but the level (S&P 500 down 15% from the top a month ago) calls for committing more dollars. All three stocks are on the yearly and actually nine month lows and are of very good quality. We also added shares of the Bank ETF KBE to accounts that own it and a new position in Yahoo.

Europe closed lower. Oil ended at $71.98 up 54 pennies and Gold was $1238 down $3. The euro was $1.19.

The major market measures closed mixed without much conviction. The DJIA and S&P 500 were up 1% on programs and the NAZZ was down small as was the Russell 2000. Breadth was flat and volume moderate. Support held today and the markets with some hesitancy rallied right off the number they were supposed to. The results were maybe too pat but we will take any crumbs.



June 7, 2010

Model Portfolio Value As of 7 June 2010

$ 596,406


Asian markets were 2% down and more overnight playing catch-up with the drop in the U.S. on Friday. European bourses were mildly lower at midday and U.S. futures indicate a flat to slightly positive opening. BP‘s latest try is capturing a good deal of the oil and that may add a bit more positive tone to events.

Justice delayed,...? Are these folks still alive?  We know the victims aren’t.

(WSJ) All eight of the Indian officials charged in connection with the Bhopal gas leak more than 25 years ago have been found guilty by a district court in Bhopal, Indian news channels reported Monday.

June 7, 2010, 3:33 am

Madmen In Authority

Rereading my post on the folly of the G20, it seems to me that I didn’t fully convey just how crazy the demand for fiscal austerity now now now really is.

The key thing you need to realize is that eliminating stimulus spending, while it would inflict severe economic harm, would do almost nothing to reduce future debt problems. Here’s the IMF’s estimate of sources of the growth in debt over the next few years:

And even this figure conveys a misleading impression of the importance of stimulus spending. First, since cutting stimulus would weaken the economy, it would reduce revenues — that is, a substantial part of the debt growth the IMF attributes to stimulus would have happened even without stimulus, through lower revenue. Second, for the US at least the core reason for long-run budget concern is rising health care costs — in fact, health cost control is the sine qua non of long-run solvency — which has nothing whatever to do with how much we spend on job creation now.

So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?

The answer is, to reassure the markets — because the markets supposedly won’t believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now. To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.

And the basis for this belief that this is what markets demand is … well, actually there’s no sign that markets are demanding any such thing. There’s Greece — but the Greek situation is very different from that of the US or the UK. And at the moment everyone except the overvalued euro-periphery nations is able to borrow at very low interest rates.

So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets — demands that economies suffer pointless pain to show their determination, demands that markets aren’t actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.



We took a small loss on Symantec to switch some accounts to a new/or increased position in the Major Bank ETF (KBE) and/or to get a more cash in accounts.

The easiest path continues to be down as the major measures lost 1% and more today, most of it in the last hour. Breadth was all negative and volume was active.


June 4, 2010

Model Portfolio Value As of 4 June 2010

$ 600,700


Markets around the world are lower as the cup of positive thoughts is emptied by the negative drumbeat of news. Markets are 90% psychology and the psychology today is decidedly downbeat. U.S. markets are going to open 2% lower.

The Employment Report for May was up 431,000 but since hiring census workers accounted for 411,000 (temporary) and birth/death adjustments (called hedonics- statistical adjustments that are made to reflect changes in the population) accounted for an additional 211,000. The markets moved lower on the surface positive but in reality negative news. Private payrolls added only 24,000 jobs.

Europe is lower because Hungary is in trouble and may go the way of Greece. Hungary?? And so we now have to worry about Hungary’s currency- the forint- when of course 99% of investors around the world have never hear of it. Hungary has a population of 10 million. http://en.wikipedia.org/wiki/Hungary

(Bloomberg) -- Hungary’s forint dropped to the weakest level in a year, while government bonds and stocks plunged after a spokesman for Prime Minister Viktor Orban said the economy is in a “very grave situation.”  The forint depreciated 2.2 percent to 288.11 per euro at 1:53 p.m. in Budapest, the weakest level since June 2009. The extra yield investors demand to own Hungary’s debt over U.S. Treasuries rose 41 basis points, the most since June 2009, to 3.60 percentage points, according to JPMorgan Chase & Co.’s EMBI Global Index. The BUX Index of equities tumbled 3.3 percent. Hungary’s economy is in a “very grave situation” because the previous government manipulated figures and lied about the state of the economy, Orban’s spokesman Peter Szijjarto said at a press conference in Budapest today. Talk of a default is “not an exaggeration,” Szijjarto said. European equities and U.S. stock-index futures fell after the comments.

The new chant on cable news is that by suspending offshore drilling Obama is going to tank the economy by causing job losses. In the Canadian arctic oil companies are required to drill a relief well at the same time as they drill the intended operating well so that if something goes wrong the relief well can be immediately activated to stop the oil flow. That makes sense to us. Obama should allow drilling if two wells are drilled at the same time. That would double the number of jobs and the oil companies would have to pay. Since offshore wells are a small portion of all the oil produced in the world the increased cost would not cause an increase in the price of oil but would just lessen the obscene profits of the oil companies by a very small amount.

It is getting painful for folks who remember last year and don’t want to go through that kind of mess again. That could lead to a whoosh down next week after investors have the weekend to lick their wounds. We don’t like seeing our own account values drop but thankfully we have a large chunk of cash and hopefully learned from last year to take our time. We said a correction was needed and it is important that the correction be painful.

15/1 down issues to up on the NYSE as trading begins. And our guess is that the up issues trading are all short biased ETFs.

At 11AM the major measures are down 2% or where they were Tuesday night. Volume is active as the big boys and girls have fun with their computers. Investors, including us, are on the sidelines waiting to see what the HFT geeks do this afternoon.

Reuters says China is buying euro based assets at $1.20 to stabilize the euro.

We sold Dell in all accounts for a scratch loss and bought a beginning position in the Bank ETF (KBE) in our larger accounts. We also repurchased shares of Coldwater-down 25% from the price we sold last week and 50% from its yearly high- in small amounts in large accounts to place our toes back n the water.

We agree with this market commentator - Sean Udall- observations http://www.minyanville.com/gazette/buzzbanter/print.php

I do find it curious that folks are saying all the gains this week are from the "anticipation" of a great jobs number.  I guess all those other bountiful economic reports just don't matter, or these valuations akin to the 1970's lows (we may be lower now on a Treasury yield adjusted basis) don't matter. Or how about the massive oversold readings heading into this week?

Heck it just doesn't matter. Hungary is insolvent! I guess it doesn't matter that many other countries have had to "restructure" in the past. If memory serves Spain defaulted something like 5 times in the past. The market went higher.

Pretty much all of Latin American defaulted in the late 1990's. The market went higher. In fact, how did the market then go to massive bubble heights?

A huge economy the then Soviet Union nearly collapsed (or did they?). I think we had a 9-12% correction on that one -- if that. Then the market went higher.

Oh yeah, those post crash 1970's valuations -- wasn't that a terrible time to buy stocks? A guy named Buffet turned a couple hundred grand into billions in less than 2 decades off of those lows.

Don't get me wrong. In all those periods mentioned above, we had an uptick rule. We had circuit breakers and we didn't have the CDS specter. But that is exactly why we are approaching and have 1970's type valuations.

Stocks crash women shriek and Monday is just three days away when all the fun begins again. The S&P 500 was down 3.5% with the DJIA down 330 points at 9933. Breadth was 10/1 negative with volume 20/1 negative and what more need we say except we have lots of cash. No uptick rule and the HFT boys and girls say thank you very much to the SEC.


June 3, 2010

Model Portfolio Value As of 3 June 2010

$ 609,234


(MarketWatch) European shares jumped on Thursday, with commodity-sector firms and auto companies leading broad-based gains for the region. Asian stock markets closed higher, with Japan's Nikkei 225 Average marking its biggest gain of the year up 3% as exporters cheered a falling yen. Oil has a $73 handle and the euro is at $1.22 as the treading day begins.

We would be forced out of business by the SEC if we were guilty of this. Different strokes...

(Bloomberg) -- JPMorgan Chase & Co.’s London unit was fined a record 33.3 million pounds ($48.9 million) by Britain’s financial regulator for not properly separating client money from the firm’s accounts. An average of $8.6 billion wasn’t properly segregated by JPMorgan Securities Ltd. in an error that went undetected for seven years, the Financial Services Authority said in a statement today. Client money held by the bank’s futures and options business wasn’t put in a separate overnight customer account, the FSA said.

(Yahoo Finance) The latest ADP Employment Change report indicated that private payrolls increased by 55,000 in May. However, that was actually weaker than the 70,000 increase that had been widely expected. It also marked a pullback from the upwardly revised addition of 65,000 jobs in April. The latest in weekly jobless claims was just released. Initial claims for the week ended May 29 totaled 453,000, which is down 10,000 week-over-week and generally in stride with the 455,000 initial claims that many had come to expect. Continuing jobless claims increased 31,000 week-over-week to 4.67 million, which is more than the 4.61 million that had been expected. The final reading on first quarter nonfarm productivity showed an increase of 2.8%, which is a pullback from the previously reported 3.6% increase. It is also less than the expected 3.3% increase. Unit labor costs for the first quarter fell 1.3%, which is a softer decline than the 1.6% drop that had been widely expected after a 1.6% decline had been previously reported.

Tuesday was a 90% down Day. Wednesday was a 90% up day. (refers to volume of issues traded and means 90% of volume of issues traded were either up or down for the day)

Stocks were higher on the opening and for the first two hours but at 12:30pm are lower in quiet trading. We have to leave early today but will be here bright eyed and bushy tailed tomorrow.



June 2, 2010

Model Portfolio Value As of 2 June 2010

$ 607,952


Asia and Europe were lower overnight but U.S futures indicate a higher opening today. How long it will last is the question. A down opening would set up a turnaround but that doesn’t look like it will happen.

It was only a matter of time:

(WSJ) AT&T is lowering prices on some of its wireless-calling plans for a second time in six months and moving to a model of charging users based on the amount of Internet surfing they do and email traffic they generate on devices like the iPhone.

The move, while it lowers the cost of entry-level plans, means heavy data consumers will have to pay more for service unless they cut back their usage. It kicks in June 7, when Apple Inc. is expected to announce its latest iPhone.

AT&T's $30 unlimited-data plan for smartphones will be eliminated for new users. Starting next week, it will be replaced by new plans costing $15 a month for 200 megabytes of data traffic or $25 a month for 2 gigabytes. AT&T says 98% of its customers use less than those amounts. Users who exceed 2 gigabytes of usage will pay $10 a month for each additional gigabyte.

On this morning’s higher opening we halved our positions in Ford, American Eagle, Chico’s and Nvdia. The markets failed to hold gains yesterday and rolled over in the last hour of trading. That was lousy action and so we decided to lower our exposure and see what occurs. We don’t like surrendering hard earned gains but our holdings in the ten companies we own are sufficient to allow us to participate when a rally occurs but not so great as to destroy us if the correction expands.

Ford May sales were up 23%, GM up 16% and Chrysler up 32%.

European bourses ended flat. Oil gained pennies to $72.85 and gold dropped $3 to $1222.

What was that about the euro becoming the world currency?

(Reuters) - The Iranian central bank has announced that it will sell 45 billion euros from its foreign exchange reserves to buy dollars and gold, China's official Xinhua news agency reported on Wednesday, citing unspecified Iranian media reports. Xinhua said that the sales would be conducted in three stages and that the first had already begun, citing unnamed sources.

It also said that other Gulf states had also started cutting their euro holdings.

You think it is maybe because he owns shares?

(Bloomberg) -- Warren Buffett, whose Berkshire Hathaway Inc. is the largest shareholder in Moody’s Corp., said the ratings firm’s chief executive officer shouldn’t be singled out for blame over credit grades on mortgage-related assets that proved to be wrong.

“I’m much more inclined to come down hard on the CEOs of institutions” that needed to be bailed out by taxpayers, Buffett said today at a hearing of the Financial Crisis Inquiry Commission in New York. Managers at Moody’s “made a mistake that 300 million other Americans made,” he said. Raymond McDaniel, the CEO of Moody’s, sat beside Buffett at the hearing.

OOPS!!! The saw is stuck.






We raise cash and the major market measures close 2% higher. What else is new? Volume was punk as the only negative. Breadth was mostly positive on our screen with the banks all green as were the large tech stocks. Retailers were lower until the last hour HFT mark up session. Retailers report same store sales for May in the morning. Today’s action suggests something is going to be announced in Europe overnight unless it is just the big boys and girls playing games in which case the markets should roll over tomorrow or Friday.


June 1, 2010

Model Portfolio Value As of 1 June 2010

$ 604,679


The stock market correction is now in full swing with Gold higher at $1222, Oil lower by $2 with a $72 handle and Asian and European markets down 2% and more. The euro is at a four year low this morning at 1.2174 dollars. U.S. futures indicate a down 1.5% opening on the S&P 500. And how was your Memorial Day weekend?




BP didn’t stop the oil leak. An interesting statistic that we gleaned over the weekend is that the Mississippi river empties 3.3 million gallons of water into the Gulf of Mexico every second. Thus in a minute the river empties twice as much water into the Gulf as BP has leaked oil spill in the last 60 days. The amount of oil is a problem but where it is going is a much greater problem.

CNBC leads off its day with a fellow from some think tank called Citizens for Affordable Energy. By the way the guest Richard Hoffmeister a former executive at Shell Oil, the folks who have made a mess of the Nigerian Delta continual oil spills from their drilling operations. http://en.wikipedia.org/wiki/Ken_Saro-Wiwa Back in 2008 Hoffmeister was also on CNBC congratulating Bush for opening up the outer continental shelf to oil drilling. http://www.cnbc.com/id/25685730/Top_Oil_Executive_Quit_Rhetoric_On_Energy_Policy


ISLAMABAD (The Borowitz Report) - The US confirmed today that it has killed al-Qaeda's number three for the nine thousandth time, setting a new world's record for killing the number three man in a terrorist organization.

"No matter how many times you do it, it's always a special feeling when you nail their number three," a US military official said today. "I'm sure I'll feel this way when we do it for the 9001st time."

The termination of al-Qaeda's number three sets up a power vacuum within al-Qaeda, with candidates to replace the fallen Mustafa Abu al-Yazid scrambling to remove themselves from consideration. According to one candidate within the terror group, "The words no al-Qaeda member ever wants to hear are, 'Congratulations - you're our new number three.'"

Hewlett plays its game again of firing folks and taking a $1 billion special charge so that it can manage earnings going forward.

(WSJ) Hewlett-Packard said it plans to spend $1 billion through automating data centers and other functions, resulting in the shedding of 9,000 jobs over several years. H-P expects to take a $1 billion charge during a multiyear period. It anticipates the restructuring will generate the same amount in annual savings, or $500 million to $700 million in net savings after reinvestment. The company plans to replace approximately 6,000 of those positions to increase its global sales and delivery resources.


From Eurostat: Euro area unemployment rate at 10.1%. The euro area1 (EA16) seasonally-adjusted unemployment rate was 10.1% in April 2010, compared with 10.0% in March. It was 9.2% in April 2009. The EU271 unemployment rate was 9.7% in April 2010, unchanged compared with March. It was 8.7% in April 2009. Eurostat estimates that 23.311 million men and women in the EU27, of whom 15.860 million were in the euro area, were unemployed in April 2010.

Among the Member States, the lowest unemployment rates were recorded in the Netherlands (4.1%) and Austria (4.9%), and the highest rates in Latvia (22.5%), Spain (19.7%) and Estonia (19.0% in the first quarter of 2010). Compared with a year ago, one Member State recorded a fall in the unemployment rate and twenty-six an increase. The fall was observed in Germany (7.6% to 7.1%), and the smallest increases in Luxembourg (5.3% to 5.4%) and Malta (6.9% to 7.0%). The highest increases were registered in Estonia (11.0% to 19.0% between the first quarters of 2009 and 2010), Latvia (15.4% to 22.5%) and Lithuania (11.2% to 17.4% between the first quarters of 2009 and 2010).

The DJIA has had only 5 up days since May 4.

The major measures were down at the opening but recovered to the plus side after an hour of trading and we used the pop to sell Verizon for a scratch and also sold Walgreen for a scratch profit and GE for a 10% loss. We sold BankAmerica for a scratch and Huntington Bank and Fifth Third for a loss which leaves us room to buy the Major Bank Index (KBE) on a further sell off. We have spent dollars buying and adding to NVDIA, American Engle, Symantec and Chico’s plus Boston Scientific and they give us more percentage volatile upside (and downside) than the issues sold. We think the correction we predicted is running its course but we also want to have a bit more cash for comfort and to have to place in our more aggressive holdings if we are wrong and the markets continue to head south.

From Bloomberg: http://www.businessweek.com/news/2010-06-01/commodities-biggest-drop-since-lehman-bear-signal-update2-.html

The Journal of Commerce commodity index that includes steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth.

A few minutes ago CNBC had the first mention of bankruptcy protection for BP that we have heard. The talk will become more general in the days ahead as BP’s costs of cleanup mount. BP has to eliminate its dividend for PR purposes and we are cautioning clients who ask to take their time getting involved. We’ve seen this game before with Union Carbide and the India catastrophe, the asbestos claims, and Texaco/Pennzoil judgment bankruptcy in 1987. There is no rush.

Michael Lewis: Shorting Reform (NYT)

To: Wall Street chief executives
From: Your man in Washington
Re: Embracing the status quo:

Heavy rains from tropical storm Agatha caused an enormous sinkhole to open up in Guatemala City, swallowing a three-story building and a house, and killing one. At least 115 people in three countries died in the storm. [CNN; pic via] This aerial photo was distributed by the Guatemalan government.

(Bloomberg) -- Manufacturing in the U.S. expanded in May for a 10th month as factories boosted payrolls to keep up with rising global sales. The Institute for Supply Management’s manufacturing gauge fell less than forecast to 59.7 from 60.4 in April, which was the highest level in almost six years. Readings greater than 50 point to expansion. The group’s export index climbed to the highest level in two decades.

A report from the Commerce Department showed construction spending rose 2.7 percent in April, the most since 2000, as demand related to the end of a tax credit spurred builders to break ground on more houses. Economists projected no change for April, according to the median forecast in a Bloomberg News survey.

Manufacturing growth from China to the euro region weakened in May. The Purchasing Managers’ Index for China fell to 53.9 in May from 55.7 in the previous month, the Federation of Logistics and Purchasing said.

A separate index released by HSBC Holdings Plc and Markit Economics fell to the lowest level in a year. A gauge of manufacturing in the 16-member euro region declined to 55.8 from 57.6 the previous month, London-based Markit Economics said. That’s below an initial estimate of 55.9 released on May 21.

The ISM’s production index eased to 66.6 from 66.9, the highest since January 2004. The new orders measure was unchanged at 65.7.

The employment gauge climbed to 59.8, the highest level since May 2004. The measure of export orders increased to 62, the highest since December 1988.

The measure of orders waiting to be filled rose to 59.5 from 57.5. The index of prices paid fell to 77.5 from 78.

The inventory index decreased to 45.6 from 49.4 in April. A figure lower than 50 means manufacturers are cutting stockpiles.

European stocks ended flat, staging a late recovery as gains on Wall Street following some better-than-expected U.S. economic data propelled regional indexes higher, offsetting earlier losses. Oil ended at $73.25 and Gold at 1225.

Matt Taibbi on the passing of the Financial Regulation Bill in the Senate:

The major measures remained higher most of the day but programs in the last hour pushed the S&P 500 down 1.5%. Volume was active and Breadth all negative on our screen and 4/1 negative on the NYSE at the close.















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