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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 27, 2014

Model Portfolio Value As of 27 June 2014

$ 751,017

Comment on Model Portfolio activity

The most important event of the week for traders was the World Cup U.S./Germany soccer match. Summer is upon us. Next week is a holiday shortened week with Quarter end on Tuesday. We remain cash and watching.



June 20, 2014

Model Portfolio Value As of 20 June 2014

$ 750,801

Comment on Model Portfolio activity

Sold the rest of our stocks this week except AT&T which has a 5% yield. Today is Quadruple Witching (we think it is Quadruple but it could be Quintuple) and with all the investigations of computer trading we doubt much is going to occur. The investigations have dampened trading and with summer upon us the markets may continue to meander as they have this month.

We think folks are reaching for yield and gains and we are more comfortable on the sidelines. We may trade a few earnings related stock moves in July but for the most part we continue to await a more impressive correction.



June 13, 2014

Model Portfolio Value As of 13 June 2014

$ 747,928

Comment on Model Portfolio activity

Priceline priced at 30 times earnings is buying OpenTable at 100 times earnings and 20 times revenues. OpenTable allows folks to make dinner reservations online.

We have been trying to catch the last move in the major measures before the inevitable correction but the recent spate of takeovers at strato prices has caused us to pull back to cash. Where were all these  take overs 5 years ago when the targets were selling at prices 80% lower than they are currently being acquired?

We took profits in Abercrombie, Alcoa, Fresh Market, GM common, Hecla and Whole Foods and sold Urban for a small loss. We did add to Spouts Farmers Markets. Looking at charts Sprouts, Whole Foods and Fresh Market have performed the same (up & down) over the past five years with Spouts offer more bang for the buck- both higher and lower.

The Middle East Mess has oil moving higher as traders are looking for anyway to make money. The realignment of the Middle East from the artificial boundaries created by the First World War has taken 100 years but is probably now occurring along religious lines.

Quarter end and Non Profit institutional year end is in a few weeks so the markets may hold up till then but we are guessing that the rest of the summer may see a gradual erosion of prices into the autumn elections.

Below we have provided Jeff Saut’s weekly comments.

Jeff Saut: Stock Market Appears To Be in Final Upside Blow-Off

At times like this I remember Bob Farrell's belief that "frustrating the majority is the market's primary goal."

Money managers are unhappy because 70% of them are lagging the S&P 500 and see the end of another quarter approaching. Economists are unhappy because they do not know what to believe: this month's forecast of a strong economy or last month's forecast of a weak economy. Technicians are unhappy because the market refuses to correct and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the US, they have missed the biggest double-play (a big currency move plus a big stock market move) in decades. The public is unhappy because they just plain missed out on the party after being scared into cash after the crash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. . . . Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise. Frustrating the majority is the market's primary goal. 

--Bob Farrell, Merrill Lynch (9/5/1989) 

I dredged up this quip from Merrill Lynch's legendary strategist from an era gone by because it is just as applicable today as it was 25 years ago. I have used Bob Farrell's writings a lot over the years because the wisdom they impart is timeless. I particularly like his "Everybody's Unhappy" piece since that seems to be the mindset near inflection points -- and I think we are near a short-term inflection point. 

Last Friday I had this to say: "While there are no current major negatives from my indicators, this does indeed feel like the end of a trading move and not the beginning of another huge leg to the upside."

What causes such inflection points is when the folks that have doubted the rally finally can't stand it any more and they throw in the towel and buy stocks. To me, this phase of the melt-up started last week punctuated by 2%+ rallies in the S&P 600 SmallCap ( NYSEARCA:SLY) (+2.79%), the Russell 2000 (INDEXRUSSELL:RUT) (+2.71%), and the S&P 400 MidCap (INDEXSP:SP400) (+2.35%). It should also again be mentioned that the near-term upside target zone, generated by the April 15, 2014 upside reversal day, was 1950 - 1975. Given Friday's closing price of 1949.44 by the S&P 500 (INDEXSP:.INX), hereto the set up is about right for a short-term trading top between now and mid-July.

Then, there is this:

Recall, the SPX broke out to new highs in May 2013, and got some participants excited, but that breakout was followed by a 6.7% pullback into late June. Again in August of last year the same thing happened with a breakout to new highs followed by a 4.8% pullback. Once again that sequence played with a breakout to new highs in September 2013 with a 4.8% drawdown into mid-October. Even this year the pattern repeated with new highs in January and a subsequent 6.2% decline into the first week of February (see chart below). So we did get the anticipated 5% - 7% decline in the first three months of the year that the historical odds called for and now we will see if some kind of trading top will lead to the 10% - 12% pullback history calls for some time this year. It should be noted, however, all of these potential trading finesse moves are occurring within the construct of a secular bull market that has years left to run. 

The call for this week: If the equity markets don't experience a sell-off this week, we can probably assume the SPX is in its final upside "blow-off" stage on a trading basis. In such a stage the markets make it seem unbearable to be in too much cash, or worse, totally out of the market. Blow-offs usually end with a parabolic peak and often with a buying climax. If you want to see what a buying climax looks like, go look at the selling climax at the March 2009 lows and turn the chart upside down. Longer term, I continue to hold the belief we are in a secular bull market, but in the short run, things are getting pretty stretched.




June 6, 2014

Model Portfolio Value As of 6 June 2014

$ 747,923

Comment on Model Portfolio activity

We added the Fresh Markets, IBM and AT&T to accounts. The markets are grinding higher and we have added stocks that are 10% to 25% off their highs this year while continuing to maintain a lot of cash.

If the markets are to move higher our guess is that there will be rotation to decent quality laggards of which group the stocks we own are part. AT&T is yielding 5% and if they do get Direct TV –which the press says they are considering buying- we think that is a positive. The Fresh Markets sold off in sympathy with Whole Foods but rallied a bit when the founder of the company revealed that he had purchased $13 million in shares. Of course he sold $140 million in shares at the same price he repurchased when the company went public last year but who’s counting? This market is truly living in the present and future and is not looking at past patterns.

We added Jeff Saut’s comments for the week below.


Jeff Saut: The Suprisingly Good News That the Stock Market Understands but the Media Doesn't

Here's why the second quarter looks strong. Plus: Do Americans realize that we're buidling a 'Qatar on the Bayou'?

I generally do not get too surprised, but this year has been the exception.  I have been surprised by the stunning drop in the yield on the 10-year Treasury note, which has fallen from roughly 3% at year's end to a low of 2.4% last week.  I have been surprised, given my call to avoid utility stocks, that the Dow Jones Utility Average (INDEXDJX:DJU) has been the best-performing major index year-to-date at +11.09%.  Last week I got surprised again.  I have been telling people that I thought the 1Q14 advance GDP report of +0.1% would get revised upward.  Surprisingly, that GDP figure was indeed revised, but revised lower to a headlining -1.0%.  The equity markets, however, did not seem too surprised as they shook off said report and rallied.  My firm's Chief Economist Scott Brown, Ph.D. had the following insight regarding the revised GDP number.  Commentary like this from Dr. Brown and other economists likely explains why the markets were not too surprised:

The GDP revision may cause some confusion.  While the headline figure was weaker than expected, most of that was due to slower inventory growth -- which bodes well for future growth.  Thus, while the 1Q14 growth estimate was revised down, the forecast for 2Q14 ought to be revised higher.  Leaner inventories pave the way for better growth in production (all else equal).  Otherwise, the story didn't change much.  Consumer spending was revised slightly higher; but remember, a good chunk of that was higher energy consumption related to the colder-than-normal winter (which will reverse in 2Q14).  Personal income growth was respectable, but profits weakened (not surprising, given the bad weather).  We may see a knee-jerk reaction in the markets to the headline GDP figure (-1.0%), but the details are more positive (leaner inventories).  Note that personal income and spending figures for April (released tomorrow) will help to gauge the strength of the consumer into early 2014.

While attention was focused on the
GDP number, I was again surprised nobody picked up on a positive story in The Wall Street Journal that incorporates many of the themes Rich Bernstein and I discussed at Raymond James' recent national conference.  The story's title is, "Are We Underestimating America's Fracking Boom?"  The byline reads, "Check Out Sasol's Energy Complex in Lake Charles, La."  Having followed Sasol (NYSE:SSL) in a past life, I was intrigued.  Sasol was formerly a South African state company that had developed the ability to "crack" natural gas into diesel fuel and other liquids.  Now the company is going to build a plant in Louisiana to do the same thing.  At $21 billion this would be the largest foreign investment project in US history.  The 3,000-acre complex will tap into America's cheap natural gas and convert it into high-quality diesel fuel, ethylene (used in plastics, paints, packaging, etc.), and other liquids.  The article goes on to note the following:

This is engineering on a scale so large that it requires closing 26 public roads, buying out 883 public-property lots, and hiring 7,000 workers at peak construction.  Some 100 additional trucks will be on the road each day once the complex is completed.  Entrepreneurs have already begun construction of a "man camp" to house 4,000 temporary workers streaming into Lake Charles for this and other projects.  In that way, Sasol is a metaphor for what we don't yet understand about America's gas boom.  Most know what fracking has meant for oil and gas prices.  But because much of the work hasn't started yet, few appreciate the true extent of the industrialization that's about to begin.  So let's put it this way, we are building a Qatar on the Bayou.  From whole cloth, companies are laying new cities of fertilizer plants, boron manufacturers, methanol terminals, polymer plants, ammonia factories and paper-finishing facilities.  In computer renderings, the Sasol site looks like a fearsome, steel-fitted Angkor Wat.

According to the Greater
Baton Rouge Alliance, when completed some 66 industrial projects will be breaking ground over the next five years, worth about $90 billion.  Currently, Louisiana's entire GDP is $250 billion, so we are talking about a 36% increase in the state's GDP . . . can you spell BOOM?!

The implications of projects like this are "transformational," a word often used by Joel Kurtzman in his book, "Unleashing the Second American Century."  This is exactly what I have been talking about for the past few years: Energy
Independence, the American Industrial Renaissance, better jobs, etc.  Joel believes the four forces for America's economic dominance are: soaring levels of creativity; massive new energy reserves; gigantic amounts of capital; and unrivaled manufacturing depth.  As Joel states, "It's like taking America's industrial strength and layering in Saudi Arabia's energy on top."  While most of the media is ignoring this, the stock market seems to be getting it.

Last week the markets "got it," leaving the many of the indices at new all-time highs.  While a 38% retracement could carry the
S&P 500 (INDEXSP:.INX) down to 1903, I do not think this is in the cards.  Verily, the most surprising move by the SPX from here would be a rally into the aforementioned 1950 - 1975 level before a pullback is due.  As the astute Lowry's organization writes:

While there is still little evidence a major market top is imminent, investors should recognize that the bull market is showing signs of age, calling for more selective buying and for adjusting portfolios to account for changing market conditions.  For example, while mid- and small-cap stocks were among the strongest performers during much of this bull market, the recent plunge in the mid and, especially, small cap indexes, suggest investor enthusiasm for these stocks has largely disappeared.  Thus, while wholesale dumping of small cap stocks appears unjustified, portfolios should be regularly reviewed to identify underperforming stocks.  Funds should then be repositioned into the strongest stocks, primarily among the big caps -- currently the strongest market segment.

While I tend to agree with the good folks at the Lowry's organization about the large cap complex, I would like to highlight two intriguing ideas from Raymond James' research coverage that are not large caps.  The covering fundamental analysts have laid out the bullish case for Satellite & Space company
Iridium Communications (NASDAQ:IRDM) and E&P company Goodrich Petroleum (NYSE:GDP), both of which have convertible preferreds with decent yields.  For further details, please see our analysts' recent company comments.

The call for this week: The most surprising thing that could happen here is for the SPX to continue to rally into the 1950 - 1975 level that was targeted when the SPX recorded its bullish outside-day reversal to the upside back on April 15, 2014.  Indeed, in secular bull markets all the surprises tend to come on the upside.
































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