Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703
31 March 2009
Asian markets were mixed
overnight and European bourse indexes are 1% higher at midday. Gold is at $920
and Oil is $9 as the trading day begins.
We added shares of The
Gap and the Large Bank ETF (KBE)
to accounts that didn’t own them today. We also doubled on CBS and initiated a position in Dow Chemical.
The Boston Globe has an
important piece out on how the federal Pension Benefit Guaranty Corporation decided to
shift its holdings from bonds to equities, just about the time the bottom fell
out of the stock market:
Just months before the start of last year's stock market collapse, the
federal agency that insures the retirement funds of 44 million Americans
departed from its conservative investment strategy and decided to put much of
its $64 billion insurance fund into stocks.
Switching from a heavy reliance on bonds, the Pension Benefit Guaranty
Corporation decided to pour billions of dollars into speculative investments
such as stocks in emerging foreign markets, real estate, and private equity
No statistics on the fund's subsequent performance were released.
Nonetheless, analysts expressed concern that large portions of the
trust fund might have been lost at a time when many private pension plans are suffering
major losses. The guarantee fund would be the only way to cover the plans if
their companies go into bankruptcy.
The kicker, though, comes from the Bush-era official who oversaw the
Charles E.F. Millard, the former agency director who implemented the
strategy until the Bush administration departed on Jan. 20, dismissed such
concerns. Millard, a former managing director of Lehman Brothers, said flatly
that "the new investment policy is not riskier than the old one." ...
Asked whether the strategy was a mistake, given the subsequent declines
in stocks and real estate, Millard said, "Ask me in 20 years. The question
is whether policymakers will have the fortitude to stick with it."
A finance professor who had previously advised the agency not to make
the switch away from bonds compared the move to an insurance company writing
policies to cover hurricane damage and then investing the premiums in
Bush was able to do for the PBGC what he tried and failed to do for
European shares staged a slight
rebound on the last day of the quarter; as banks took back some of the previous
session's sharp losses. The U.K. FTSE rose 4.3%.
Another interesting topic for
thinking- not making money from: http://www.talkingpointsmemo.com/
Two More Quick Comments on Books
1. First, as much as like the Kindle technology, it's worrisome that
one company -- i.e., Amazon -- could develop such a stranglehold on books. If I
buy lots of books over the next few years for Kindle and someone else devises a
better mouse trap, is my book collection held hostage to Kindle and Amazon? I'd
figure probably so. Some universal or quasi-universal standards like DVDs and
CDs would be nice.
2. My second concern is related but much more forward-looking. The
common book requires a threshold level of eyesight and literacy in the given
language. Given those two abilities in the owner, once a book comes off the
publisher's press, it takes on a life of its own. And as long as it's kept on a
shelf, relatively free of moisture and out of reach of small children, even a
cheap pulp book can easily last a hundred years. Quality bound books,
meanwhile, can last many centuries. Today, though, I can't easily access even
papers I wrote in college, which is a touch less than twenty years ago, because
they're on floppy disks that few computers can any longer read and written on
programs (remember Word Perfect?) accessible only through imperfect conversion
utilities. If big swathes of book publishing go the electronic route, how many
'books' will have only a short window of existence before they get marooned in
derelict and outmoded technology? Tomorrow's equivalent of Betamax, 8 Track and
now videotapes. Physical books, for all their other shortcomings, can still be
read today and tomorrow regardless of technology progress or, as the case may
I'm certainly not the first one to think about this. I know that
librarians and institutional archivists have given this problem a great deal of
thought. And it's actually one reason why big institutions aren't able to move
that quickly with new technologies. Because they put a lot of time into
thinking about the probable lifespan of the technology and how easily the data
will be able to be ported from one storage medium to the next. But quite a lot
of information and books and other artifacts of human intellection only see the
light of day in the go-go world of market-driven technologies and never make it
to those hallowed halls. And what will become of that stuff?
Oil ended at $49.10 and Gold was
The DJIA gained 75 to close the
day, month and quarter at 7600. The S&P 500 was up 10 at 795 and the NAZZ
gained 25 to 1525.
Breadth was 3/1 to the good but
volume was light.
There were less than 100 new
The bulls reappeared but had
trouble holding the gain into the close.
30 March 2009
Well, March is going out like a
bear. Last week the markets experienced a happy Monday and then backed and
filled all week but managed to close higher for the week due to Monday’s pop.
Today stocks are lower by 3% out
of the gate. The reasons given are the GM news of the firing of CEO Waggoner
and the G20 meeting this week in which it is postulated no country will agree
to cooperate with any other. Moreover the gurus are suggesting that earnings
reports for the first quarter are going to be bad, which of course in not news,
and that the Employment Report due Friday will be a bummer which also is not
The reality is that the 30% rally
of the past few weeks needs to slow and consolidate and that is what is
Asian markets were lower by 3% to
5% overnight and European bourse indexes are 2% lower. Oil has a $50 handle and
Gold is also lower.
We present the
following story from the WSJ to give some perspective to our performance over
the past decade.
Top Fund Manager Sees Decade Ruined
Hodges, 'Very Much Embarrassed,'
Regroups After Nearly 50% Drop in 2008
For many years, Donald Hodges ran
one of the top-rated stock-focused mutual funds in the country. He also has
lost money for his investors over the past decade.
A $10,000 investment in Hodges Fund made 10 years ago would be worth
around $9,015 today, compared with $7,720 if it was invested in the Standard
& Poor's 500-stock index. ($10,000 invested in the Lemley
Letter Model Portfolio- a real portfolio- over that same time period was worth
over $19,000 on Friday. Past Performance is no indication of future performance.)Years
of stellar performance were wiped out by a 49.5% plunge in 2008, a much steeper
fall than the S&P, and an 11% drop so far this year.
This hurts badly. "You carry
it with you every place you go because you have friends investing with
you," says Mr. Hodges, a silver-haired, 74-year-old Dallas money manager,
who also suffers because he has money in the fund. "I'm very much
embarrassed by our performance last year."
So, Mr. Hodges, who maintains a
calm aura despite all, has found himself logging extra hours soothing clients.
He has become more cautious in his new stock picks, leery about buying until he
is sure they are unlikely to blow up. He also is working out more often at home
with his treadmill and weights, trying to remain fit to tackle what lies ahead.
Mr. Hodges is emblematic of
well-regarded fund managers with good track records who have been chastened in
the short term. Of the 468 diversified U.S.
stock funds that have had the same manager for 10 years through Feb. 28, 46%
logged negative returns over this period, says fund tracker Morningstar Inc. In
the same time, the S&P index has fallen an annualized 3.4%, including
reinvested dividends. (The Lemley Letter Model Portfolio had an
average annual return for the ten years ended 2/28/08 of over 5%. Past
performance is not an indication of future performance.)
Robert Hagstrom's Legg Mason
Growth Trust was in the top quarter among peers over the 10 years ended
December 2007. But after a 60% slide in 2008, weighed down by bad bets in
financial stocks, the fund is now among the worst performers in the growth
category. Mr. Hagstrom says he expects the fund to do a "great job"
coming out of this poor period, as it has done in the past.
Neuberger Berman Partners Fund,
which lost 52% in 2008, is down an annualized 2.4% over 10 years through Feb.
28. Big stakes in energy, materials and industrial stocks fared poorly.
"Our numbers were fantastic through June, and then we fell of the cliff
massively," says manager Basu Mullick. He notes that this year, the fund
is ahead of the S&P by seven percentage points.
Hodges Fund suffered in the last
part of 2008 because of declines in the likes of offshore-drilling firm
Transocean Inc., American Airlines parent AMR Corp. and Texas Industries Inc.,
maker of industrial materials like cement.
Mr. Hodges's son Craig, 45,
joined as a co-manager 10 years ago. "Having to see him go through this in
the twilight of his career is a little bit tough," he says.
Hodges Fund -- Donald Hodges invests in both value and growth issues, and
ranges from small- to large-market capitalizations -- was founded in 1992 and
rose to $750 million in assets by early last year. But now it is one-third that
size, thanks to the brutal decline and outflows of around $31 million for the
first two months of this year.
Mr. Hodges grew up in the small
Texas ranching town of Canadian. After working for others as a broker and money
manager, he founded Hodges Capital Management Inc. in 1989, now headquartered
in the 100-year-old former official residence of a Dallas mayor that boasts of
oak and maple floors. His two other children also work with him, in marketing
Time was when Hodges Fund
routinely ranked at or near the top of its category. In 2003, the bounce-back
year from the tech-bust bear market, the fund clocked an 80% return, followed
by double-digit showings right up to 2007, when the market's downturn began and
it managed an 8.5% performance.
In three consecutive years
through the end of 2007, the Hodges Fund won awards for having the best
five-year performance in Lipper Inc.'s category of multicap core funds. Even
now, Mr. Hodges frequently appears in the media.
In the first half of 2008, even
as the broad market fell, Hodges Fund held up relatively better because it had
few financials. In the summer, Mr. Hodges took time off for an investors'
cruise to Asia. He received a daily update on the fund portfolios via faxes and
But after the collapse of Lehman
Brothers Holdings Inc. in September, several of his fund holdings were hit
hard. Mr. Hodges figured it was a buying opportunity -- a strategy that had
worked well for him coming out of the 1982 and 1987 market slumps.
He bought some cheap shares that
he thought would hold up. One was Cal-Maine Foods Inc., a large producer and
distributor of eggs. Wrong move. That stock has dropped 42% since September.
In recent months, Mr. Hodges has
been spending a lot more time on the phone with clients, at times simply
letting them vent. Recently, a client called him and repeatedly mentioned how
much money the fund had lost. Mr. Hodges didn't argue, and said instead:
"I haven't done well. I'm sorry about that."
Going for the Rebound
Mr. Hodges is fixated on turning
around his fund. He is staying with holdings he thinks will rebound, such as
oil-related stocks. "It becomes a question of proving yourself to
yourself, and to your clients," he says.
Still, he has become gun-shy
about jumping into new stocks. For weeks, he had been eyeing a small company
called Coinstar Inc., which among other things rents out movie DVDs for $1. Mr.
Hodges has owned the stock before and believed it was cheap when it was down
22% from last June's high, but only recently did he buy shares.
"A year ago, I would
probably have stepped up quicker," he says.
"You have to be somewhat
forgiving of yourself, and realize that over a period of time you've done
well," Mr. Hodges says. "And that day will return again."
Our take on the Waggoner
resignation and the threat of a forced bankruptcy is the Obama folks’ attempt
to get the bondholders and unions to make more concessions outside of
bankruptcy. Waggoner has been CEO since 2000 so the problems there can be laid
to him. Mullally at Ford and Nardelli at Chrysler are recent arrivals and
Mullally has done a good job in a terrible market.
Diane Swonk has
her own take on the subject:
Obama Plays Hardball with GM
Rick Wagoner was
"forced" to resign his position as CEO of General Motors, while the
Obama auto task force pushed both GM and Chrysler to move more aggressively on
restructuring to compete for bailout funds. Bankruptcy was not ruled out for
either company, as the government showed its disappointment over management
actions to make the two companies feasible enterprises.
The uproar over AIG bonuses and
furor over bailouts in general clearly have contributed to the government's
harsher tone with the Detroit-based automakers. It is worth noting, however,
that suppliers to the auto industry were issued loan guarantees in recent weeks
so that they could stay afloat even if the automakers went down. This is
critical, as one of the key arguments for keeping GM and Chrysler afloat was
the collateral damage their losses would mean for the whole industry. The loss
of suppliers to everyone from Ford to Toyota in the U.S. had raised concerns
that even viable automakers would be taken down if GM, in particular, failed.
A bankruptcy the size of GM would
still have major consequences for the economy, particularly that of the
Midwest, which provides the bulk of the financial services that GM uses and has
outsourced in recent decades. If the rise in default rates and unemployment
claims in March are any indication of things to come, however, the collateral
damage of a GM bankruptcy would still be monumental.
On net, I wouldn't be surprised
if some sort of more agreeable/aggressive restructuring deal for the government
was reached with GM. Chrysler's fate is less certain as it is already working
with Fiat on a partial merger - this may force Fiat's hand to take a bigger
stake in Chrysler and put the burden of Chrysler's bailout more in the hands of
the government of Italy than the U.S.
included, believe that all of this was inevitable. Except for a brief period in
the late 60s when my father first started at GM's tech center and innovation
was all that he did, GM seems to have made one mistake after another. As
someone who is deeply concerned about the insult to injury that such a
bankruptcy would cause to an already unstable financial system, the broader
economy, and Michigan - which is already languishing with a 12% unemployment
rate - I wish it could occur at a time when we were better able to absorb the
I must admit that my personal
loyalties to Detroit waned a long time ago when my father insisted that GM
needed to be protected from Ford as well as the Japanese producers. (I still
thank the Japanese for forcing GM to make a car I could be pleased with
On net, I still hope that GM can
avoid bankruptcy, because the costs to the economy would be even greater than
the benefits, given the ripple effects such a bankruptcy could have across
sectors. Apparently, Wall Street is on the same side of the debate, given the
drop that futures endured on the news of GM's potential failure. Funny what
strange bedfellows recessions make.
There is much angst in the guru
community and talking head media about the fact that Germany and France et al
are not rushing to the rescue of the financial institutions in their countries
and by inference their economies. But it is important to note that most
European countries have a social safety net of free health care and
unemployment and pension payments that cushions the impact on ordinary folks.
Those social payments give the governments more room to jawbone private
After an hour of trading the DJIA
is down 275 points and the S&P 500 is off 3.4%. Volume seems light to us.
We shoulda sold SPDR Financial on Friday. We
didn’t and we sold XLF today at $8.47 which is still up 40% from the $5.90 low
of March 6. The sale raises cash and eliminates the most volatile sector of
our portfolios. We are taking a much smaller profit than we hoped on this sale
but at least it is a profit.
Oil lost $3.90 to end at $48.49.
Gold dropped $5 to $915. European bourse indexes closed 3% lower.
The DJIA dropped 250 to 7520. The
S&P 500 lost 30 to 790 and the NAZZ was down 40 at 1505.
Breadth was 7/1 negative and volume was light. New lows were about 100.
The small new low and light
volume number give hope that Friday and today are pullbacks and not resumption
of the downtrend.
The bears are back for now. And Timmy ought to
practice not saying anything that will move markets before he goes on the
Sunday Talk Show Circuit again.
27 March 2009
Model Portfolio Update
23 March 2009
Our webmaster, who is also our brother, is taking the
rest of the week off and so this is the first and last post of the week. Our
next post will be on Monday March 30. There will be no Model Portfolio updates.
Markets around the world are
higher as Obama and Geithner have released the plan to save the world economy.
At least for now-the last 5 hours- the markets are positive on the plan. “Just you wait Henry Higgins, just you wait.”
Asian markets closed up 3% and
more and European bourse indexes are 1% to the good. Oil has a $52 handle and
Gold is down $3 at $953.
The S&P 500 is up 32 points
at 800 at 10 AM as the market rally on the Treasury plan. 805 is a resistance
point that repelled the rally last week.
We added shares of the Tech ETF to many accounts and we bought Urban Outfitters in our larger accounts.
Gold was down $18 at $940. Oil
closed at $53.80. European bourse indexes finished 2% higher.
The DJIA rose 498 to 7770. The
S&P 500 closed above 805 resistances at 824 up 54 points. The NAZZ jumped
100 to 1555.
Breadth was 8/1 positive and Volume
picked up in the last hour as the markets marched higher to end with over 8
The bulls won the day.
20 March 2009
Asian markets were lower
overnight as are European markets at midday. Gold is flat and Oil has a $50
handle as the trading day begins.
For the last two weeks we enjoyed the market rise.
Yesterday we pushed the envelope by adding more GE and SPDR Financial on the
morning pullback. We know the markets are extended but we thought the rally
would run into month end. It still may. But yesterday afternoon’s and this
morning’s action in the financials suggests that we pull in our horns and move
to more conservative holdings and a larger cash position.
To mitigate our risk we switched GE into the SPDR Industrial. The XLI has 12% invested in GE but the other 88% is
invested in other companies such as 3M,
United Technologies and Emerson Electric. With the GE sale we
left some money on the table but did make a few dollars on this latest venture
into the soap opera known as GE.
We switched Dell
to the SPDR Tech and we also sold roughly half of our SPDR Financial, both were profits, although
smaller than we would like.
With these moves cash in most accounts approximates 20%
The rally is extended and yesterday’s abrupt halt suggests
that at least some backing and filling will occur. By switching to the ETFs we
maintain market participation while not being exposed the risks of owning an
individual security. We want to participate in the upside when it occurs and
not miss it with overly large exposure in one issue. GE has taught us that lesson. We are maintaining our oversized J Crew holding because we have
confidence in the company and our expected return justifies the risk.
The bonus tax passed by the House
of Representatives is stupid and counterproductive. AIG government appointed
CEO Liddy explained in his testimony that the money paid out was to the traders
who unwound the toxic trades to the tune of $1 trillion with another $1.7
trillion to go. Our diatribe of the other day was out of line since we didn’t
have all the facts. Of course Liddy may be lying but if $1 trillion has been
unwound then $165 million is money well spent. To unwind the rest for another
$200 million would be a bargain.
Too bad the House couldn’t pass a
bill to reinstate the uptick rule as quickly. That would have saved investors
billions of dollars as the shorts reestablished their short positions by
selling the financials on downticks yesterday and continue to do so today.
Gold closed down $16 at $952and Oil
was $51.06 at the bell. European markets closed lower.
The DJIA lost 122 to end the week
at 7278. The S&P 500 was down 15 at 768 and the NAZZ dropped 25 to 1458.
Breadth was negative and volume
was light for Quadruple Witching at 12 billion on the NYSE. The lighter volume on yesterday’s
today’s pullbacks and combined new lows of fewer than 100 on each of the last
two days are positives.
The bears are back for the weekend at least.
19 March 2009
Asian markets were
higher overnight as are European markets at midday. U.S. futes will open higher
as Oracle had a good report and is up 10%. Gold has jumped $45 on the Fed
flooding the markets with cash and Oil has a $49 handle. The dollar is back
down to $1.35 to the euro. Two weeks ago it was $1.25.
Bloomberg has an interesting article on short selling: http://www.bloomberg.com
From Diane Swonk, Chief Economist at Mesirow Financial
March 18, 2009 - 1:45 p.m.
Pulls Out Big Guns!
concluded its two-day meeting today by announcing a major increase in its
balance sheet to help ease the pain in the credit markets. The Fed plans to
increase asset purchases in three major categories: mortgage-backed securities
($750 billion in addition to $500 billion already committed); agency debt ($200
billion in addition to $100 billion already committed to Fannie Mae and Freddie
Mac); and a surprise increase of $300 billion in purchases of Treasury bonds.
This brings the Fed's total balance sheet to about $3 trillion.
result of the announcement was an almost instantaneous drop in long-term (10-year)
Treasury yields and mortgage rates, and a rally in the broader stock indices.
The Fed would like to see a mortgage rate of 4% or lower before the start of
the spring selling season in April. This will not only increase refinancing
activity, but could actually bring some of the fence-sitters (who currently
outnumber actual buyers) back into the housing market.
to buy Treasuries is clearly an attempt by the Fed to monetize the debt issued
by the U.S. government, and re-inflate the broader economy. This marks a sharp
departure from the Fed's behavior during the Great Depression, and should help
to prevent a repeat of the depth of pain felt during the 1930s.
those concerned that the Fed's most recent moves could result in inflation,
your fears are justified, but some perspective is needed. Inflation could
return to the 3% range by 2012-2013. That is still low relative to history.
Moreover, the Fed can reverse course almost instantaneously. Much of the assets
on its balance sheet are short-term and can be discontinued overnight.
in all the years I have worked with them, I have never seen the Fed be so
thoughtful about both its efforts to bolster growth, and to rein in its
stimulus once inflation returns. Also, the Fed can do what needs to be done
without the interference of Congress-no earmarks, no pet projects, no waste.
They are just targeting the part of the economy that is not working, and fixing
We bought the SPDR Financial down 10% this morning with the American Eagle Outfitters money raised
the other day. We also put the rest of
the SPDR Industrial sale to work in Dell. We have been in and out of Dell
for only losses for the last year, although the losses are much less than the
drop in the share price over that time period.
We don’t have any tech stocks we are adding Dell to fill that role. And we switched Whole Foods with a $2 per share
profit to GE which is down 4% on the day.
This is our thinking
on the XLF purchase this morning from Jeff Bagley at realmoney.com
Financials: Lack of Short Covering Bid Creates Air Pocket
3/19/2009 12:03 PM EDT
I noted yesterday that
we were seeing a whole lot of short covering in the financials. That led to a
vicious rally, which was then exacerbated by the news from the Fed.
What we are witnessing
now, according to folks I'm talking to, is the end of the short covering. The
short cover bid disappeared this morning, creating an air pocket. Sensing this,
traders have reloaded the SKFs and other weapons. The result is a huge whoosh
We've let some long
exposure go yesterday in our client accounts, while keeping a great deal of
financial sector exposure since we are long-term oriented investors.
For my personal
account, however, I'm trying to take advantage of the financials air pocket by
buying the dip. I believe the financials might have overshot to the downside
Gold closed up $70 at $959 and Oil was up $3 at $51.
European bourse indexes closed higher on the day.
Financials were hit hard today but the overall markets were
more neutral. Volume was active.
At the close the DJIA was down 90 at 7395. The S&P 500
lost 11 to 783 and the NAZZ dropped 7 to 1483.
Volume reached 10 billion and breadth was positive on the
NYSE and negative on the NAZZ.
Combined new lows were less than 75. An up day tomorrow and
new highs will cross over new lows for the first time in months.
The bears are
18 March 2009
IBM is in talks to buy Sun Micro. That makes sense and is another
indication that at least some companies are thinking about the long term and
not the next three months. There are values in the marketplace and if stocks
prices remain at or below these levels more takeovers will occur.
Asian markets were mildly higher
overnight and European bourse indexes are mixed at midday. Gold is down another
$6 in morning trade and Oil has a $48 handle.
Investors’ Intelligence had 28%
bulls up from 26% and 44% bears down from 47%.
Darden Restaurants which owns Olive
Garden and Red Lobster came in
with better than numbers. This
weekend as we were traveling we noticed that Bob Evans and Cracker Barrel
parking lots were packed. Anecdotal views are often misleading but the waiting
lines at Red Lobster in Finlay Ohio last Friday suggest that the economy is not
With our sales yesterday we raised a bit more cash than
we wanted to have in accounts. And so
this morning we bought an equal number of shares of SPDR Financial at half
the price to replace the SPDR Industrial that we sold yesterday.
The SPDR is now 50% or more of portfolios but remember
that the ETF is comprised of over 86 different bank, insurance and brokerage
companies. Unless and until the financials stabilize that the economy cannot
European shares closed higher for a fourth straight session, with banks
and oil producers leading a broad-based advance.
The FOMC left rates unchanged at
nothing and said they plan to leave rates there for the foreseeable future. The
Fed also announced that it is going to begin buying long term Treasuries and
mortgages which will place $1 trillion more into the system. Banks borrowing
money at 0% and lending it at 5% to 18% will go a long way towards absorbing
Gold finished up $2 at $939 and
Oil was unchanged at $49 after trading $2 lower in the morning session.
The major stock measures jumped up 3% after the Fed
announcement but couldn’t hold those gains in the final hour as sell programs
pushed stocks lower. The bulls managed to hold the close though and stocks were
higher on the day.
At the bell the DJIA was up 90 at
7486. The S&P 500 gained 15 to 795 and the NAZZ was up 30 at 1491.
Breadth was 2/1 to the good and
volume was active at 10 billion shares.
Combined new lows were just over
The bulls managed to hold the gain but tomorrow and Friday
are Quadruple Witching, so anything
can and will occur.
17 March 2009
St. Patrick’s Day Thoughts
We returned to the land of milk
and honey early since our team was knocked out of the Division II NCAA
Basketball Regional by losing a game in double overtime in the first round. NKU
finished the year with a 25/7 record and the regular season and playoff Conference
Championship and so we will not shed any tears. And there is always next year.
The four day market rally ran out
of steam yesterday as the bears knocked the markets lower on the day in the
last two hours of trading after the major market measures were up 2% in morning
Asian markets were mostly higher
overnight while European bourse indexes are mildly lower at midday. Oil has a
$47 handle and Gold is at $915 as the trading day begins.
Stocks futures were mildly lower
until February housing starts and building permits were released and they
showed gains over January’s numbers. These positive statistics, the first in
many months, brought the futures back to even.
With the S&P 500 up 100 points (15%) from its low of
10 days ago and The Model up 28% from that low we decided to raise some cash by
selling American Eagle
and SPDR Industrial. We hope we are
European shares closed higher for
a fourth straight session, with banks and oil producers leading a broad-based
Gold ended down $6 at $916 and
Oil jumped almost $2 to $49.
The DJIA was up 150 to 7365. The
S&P 500 gained 20 to 775 and the NAZZ jumped 50 to 1454.
Breadth was better than 2/1
positive but volume was light.
There were just over 100 combined
The bulls held serve in the final hour today and the major
measures closed 2% higher.
16 March 2009
Model Portfolio Update
13 March 2009
Model Portfolio Update
12 March 2009
Model Portfolio Update
11 March 2009
We will be travelling again this
weekend for basketball games and the next post will be on Thursday March 19.
The portfolio will be updated daily.
A few more days like yesterday
and all will be well. Stocks opened higher but selling entered the market
almost immediately and the major measures turned negative. That is a positive.
J Crew’s earnings report, which was a loss, was better than and projections for the
first quarter were also better than.
Asian markets were mostly higher
as are European markets at midday. Gold is back up to $900 and Oil has a $43
handle early on.
Investors Intelligence had 26% bulls and 47% in the latest
reporting period which ended before yesterday’s large jump.
Gold ended at $912 and Oil was $42.24. European bourses closed mostly
higher but off best levels.
The stock markets churned all day in active trading. In the final hour some shorts covered early and
long traders sold late. That is a departure from action over the last few
months when shorts were more inclined to try and push the market lower. The
bulls are not out of the woods by any means and the bears are still prowling
but the action the last two days has been positive. A large up day today would
have meant that short covering was leading us higher. Short covering was
certainly a part of yesterdays’ rally and today’s positive close. And short
selling and covering will continue have an inordinate effect on the markets
until the uptick rule is reinstated. But
all that doesn’t negate that these last two days have been technically
encouraging for the bullish case. But, we need buyers who are feeling left out
to take us higher.
The DJIA closed up 3 at 6930. The
S&P 500 was up 2 at 722 with 740 the next resistance/ support level and the
NAZZ gained 15 to 1372. Breadth was 3/2 positive on the NYSE and flat on the
NAZZ with large cap tech stocks acting well on the NAZZ. Volume was a
respectably active 9 billion in NYSE stocks.
The bulls held serve today.
We leave you for
the next week with these very positive thoughts with which we agree:
Kass: Printing an Important Market Bottom
By Doug Kass
RealMoney Silver Contributor
3/11/2009 11:59 AM EDT
This blog post originally appeared on RealMoney Silver on March 11 at 7:06 a.m. EDT.
Last night I not only re-emphasized my 2009 market
bottom call on "The Kudlow Report," I also suggested the possibility that
a generational low is being put in place.
Yes, I said that.
In terms of substance, I essentially summarized yesterday's
My main point is that we live in a Land of Johnny-Come-Lately Chicken Littles,
most of whom failed to identify the credit and economic risks 1½ years ago but
who today hold with alacrity and great confidence a belief in a continued dire
outcome for equities, as they all too often see the world from a rear view
By contrast, as I related in yesterday's opener, the sky is not
falling, and Mr. Market has dropped a ton of value on our investing
doorstep -- dinner is now being served.
What I found particularly interesting is that the most vociferous bull
on our "Kudlow Report" segment, a nice fella from Beantown who has been
bullish most of the way down, got weak in the knees because of the magnitude of
yesterday's market ramp! He actually said investors are getting too optimistic
in only one day!
My response was that considering that the hedge fund industry is at its
lowest net long position in years and since individual investors have recently
accelerated their account liquidations and redeemed their mutual funds, they
are not even thinking about getting back in. There is plenty of buying power
sitting on the sidelines to fuel a sustained market advance.
But both institutional and individual investors will get involved again
-- if the market can post several days/weeks of strength. And there remains a
huge asset allocation trade back into equities from cash-rich pension plans
whose portfolios are now materially skewed toward fixed income.
Most will miss the rally -- it's not surprising since the pain has been
so extreme in recent months.
The purists will point out to a bunch of indicators that have yet to
fall into place -- like a low put/call ratio. But my response is that most buy
puts to protect longs, so with most investors being light on equities there is
less of a need to buy protection in puts. So it is not surprising if the
put/call ratio stays historically low, as long positions are historically low
and cash positions are historically high.
My best guess is that we'll rapidly move back up toward the typical
bear-market trough valuation -- 12 times normalized or trend-line S&P
earnings of about $67 a share, or about 805 on the S&P 500 Index. In the
fullness of time I expect the S&P index to test its 200-day moving average,
which is currently about 30% above yesterday's close.
10 March 2009
Bernanke is speaking this morning
and answering questions and the major market measures are 1% higher as the
trading day begins. Asian markets were higher overnight and European bourse
indexes are 1% to 2% higher. Gold is down another $7 and Oil is in the $47
Rohm & Haas and Dow
Chemical have agreed to merge at the original $78 price with a few new
entities converting common shares in Rohm and Haas common to Dow preferred
stock in the amount of $3 billion to help with the financing.
The mergers and
buyouts announced in the last few days are an indication that the market are
beginning to function again. The merger action suggests that companies have
dropped to values where other companies find them attractive.
This is an
important read on the uptick rule: http://www.thestreet.com
The major market
measures were up 3% after two hours of trading when Barney Frank said that he
expected the uptick rule to be reinstated within a short time. Of course a
short time to a Congressman may extend to six months but that comment and a
leaked confirmation that the SEC is considering the rule change led to a
furthering of the rally into the noon hour as the S&P 500 moved up 5%.
But the markets still
have the afternoon bear raid by the programs to contend with add so we will
save the one day champagne toast until the close.
European bourse indexes closed 4%
to 5% higher. Oil dropped to $45.25 and Gold lost $20 to $898.
As for the experts:
(Bloomberg) -- Lyle Gramley and Greg Valliere get paid to anticipate noteworthy
Washington developments. They missed the one where their company was thrown
the former Federal Reserve governor, was a senior economic adviser for Stanford
Washington Research Group. Valliere was a founder of
the 35-year-old firm, which in 2005 joined the Stanford Group Co., headed by one R. Allen
On Feb. 17, the Securities and
Exchange Commission accused Allen Stanford of running a “massive, ongoing
fraud” in the sale of $8 billion in certificates of deposit. Valliere promptly quit. The next week, a lawyer for the receiver
escorted employees from the Washington office and locked the doors.
“This came as a complete surprise,”
said the 82-year-old Gramley, a Fed governor from
1980 to 1985 who worked as a contractor for Stanford. “I feel bad about the
had about 20 analysts in Washington who sold research to investors on what
policy makers might do concerning issues such as taxes, securities regulation
rates. There are a handful of such firms in Washington, and Stanford
Washington has been one of the best, said Andrew Parmentier, managing partner of rival Height Analytics
Money Honey Maria had Meredith (death to all financials) Whitney as a
guest on the final hour of CNBC and the markets moved to new highs so maybe the
rally will survive the day.
Maybe the S&P 500
bounce off the 666 sign of the devil
last Friday will be enough to negate Friday the 13th. And the Ides
of March may be the death knell of the bears who have ruled like Caesar for the
last 18 months.
The DJIA closed up 380 at 6926.
The S&P 500 jumped 43 to 720 and the NAZZ climbed 90 to 1358.
Breadth was 8/1 to the good at
the close and volume was the most in a few months at 10 billion shares.
One day at a time for the bulls. We’ll enjoy the evening.
9 March 2009
From now on this is going to be
the good news portal since every other media outlet in the world is intent on
bringing the bad news to you. We by no means mean to slight those folks losing
their jobs or suffering calamities but then we all are to some degree. We just
have determined to focus on the positive aspects of life of which there are
For example, this weekend both
the men and women NKU Norse won the Basketball Championships of the Great Lakes
Valley Conference. For the men it was the first time in six years. Since the
NCAA Division II men’s basketball team is coached by our son in law it means
that his job is secure for a few more years which in coaching and in today’
market is comforting. The team also qualified for the NCAA Division II National
tournament which begins this weekend.
On the economic front
there are some companies that see value at present prices as opposed to
companies and buyout firms that saw value at double today’s prices a few years
ago. Merck is buying Schering Plough for $41 billion and Rohm & Haas and
Dow Chemical are going to work out their differences and agree to merge at what
we assume is a lower but more realistic price. And Roche raised its offer for
Genentech in another multi billion deal.
Moreover 92% of the
folks in America arose and went to work this morning. While 4% of folks have
lost jobs in the last 6 months (the 8% number is bogus since 4% is considered
full employment) there are millions of folks working off the tax rolls who are
not counted in any survey and don’t want to be.
Finally what is
occurring now is not the Great Depression. Social Security, Medicare, pensions
and various other safety nets that have been established over the last many
years will prevent anywhere near the suffering that our parents and
grandparents endured and survived.
Stocks are 60% cheaper
than they were last year at this time. It is time to be invested. Last year was
the time to be in cash.
On Friday the S&P 500 traded down to and bounced off the
666 level which of course is the sign of the devil.
Asian markets were lower
overnight as are European markets at midday. Oil has a $46 handle (up from $40
when last we wrote) and Gold is at down as the trading day begins.
Stocks look to open 1% lower.
After one half hour of trading
the major measures are higher after down drafting in the first fifteen minutes.
Last week we sold Ann Taylor for a small profit ahead of
earnings and when a larger than expected loss the next morning was announced
the share price dropped 40%. That occurrence caused us to adjust our thinking.
The stock market has dropped to a level from which we don’t want to miss the
eventual up move by depending on any one stock. The major measures are down 60%
from their highs with the financials down over 75%. Rather than place our hopes
in any one stock we have migrated 80% of our holdings to owning areas of the
market that are more depressed that the overall markets. That is why we own the
SPDR Industrials and SPDR Financials which are down over 80% from their 12
And so this morning we sold CSCO and INTC and placed the
funds in the SPDR Technology ETF. XLK’s has 4% positions in Intel (4.5%) and Cisco (6.3%) plus Microsoft
(9%), Google (5%) and Apple (5%), Hewlett Packard (4%), IBM
(8%), Oracle (4%), Verizon (5.1%) and AT&T (10.9%).
We will maintain J
Crew and GE because both are
eventual grand slams. And we look to reestablish smaller positions in Starbucks and Whole Foods.
From Diane Swonk, Chief Economist at Mesirow Financial
Monday, March 9, 2009 - 5:40 a.m.
Bank Nationalization: Not an Option for Bank Holding
Last week, some disturbing but clarifying news emerged
regarding a loophole in the regulations of banks. The bank holding companies,
which include the 19 or 20 largest banks in the country (depending on the day),
cannot be "nationalized" or taken into receivership by the U.S.
government. This is at least one reason why Fed Chairman Ben Bernanke has been
so reluctant to nationalize the largest financial institutions.
This means that the only true way to restructure the system
and get the largest banks lending again (without the collateral damage and
cascading costs of bankruptcy) is for the government to put a floor on the
value of assets on bank balance sheets. This, of course, represents a taxpayer-sponsored
bailout, which is not politically popular, but will ultimately be cheaper than
continuing to throw good money after bad with current bank capitalization
efforts. It would also result in the Fed having more influence over bank senior
management and bank structure in the near-term, which could allow the
restructuring necessary to move forward (e.g., the Fed is likely to force a
major downsizing of some of the largest institutions).
Last, but perhaps most important, such a bailout/restructuring
could trigger a rally in financials, which would go a long way toward restoring
confidence in the broader financial market and the economy.
There are no silver bullets and the solutions to our
current crisis are not easy. Many of them include rewarding some of the very
institutions that got us into this mess in the first place. But, they will also
come with a fairly substantial price to current management, however, as a deal
can't be struck without it, and could force significant restructuring via increased
The Fed is about to embark on its largest land grab for
regulations in its history. If you are big enough to pose a systemic risk to
the financial system, you will answer to the Fed. If you are small and want to
make more risky investments funded by "grown up" (informed)
investors, then you may escape Fed oversight, but you will still have to
increase transparency and stay small enough to prevent getting on the Fed's
"too big to fail" radar.
A GE story worth reading from Bloomberg: http://www.bloomberg.com
European bourse indexes closed
lower. Gold was down $22 at $920 and Oil closed with a $47 number.
The big boys and girls waited
till the last hour and then the selling programs took over to move stocks lower
on the day.
The DJIA lost 75 to close at
6550. The S&P 500 was down 7 at 675. The NAZZ dropped 23 to 1270.
Volume was active and breadth was
Daily new lows are still half of
what they were in the November 2008 swoon.
The bears are not giving
6 March 2009
Model Portfolio Update
5 March 2009
Model Portfolio Update
4 March 2009
We are heading off for
a weekend of basketball and so our next post will be Monday March 9. As of the
close of business our accounts are invested in issues in which we have great
confidence. We own value stocks at attractive value levels. The six month
protracted market Crash has been difficult for us and our clients but the
temporary pain will be rewarded. We have been able to take advantage of the
sell off to build portfolios. We were in
cash at the top and we plan on
remaining fully invested at the bottom whenever that occurs.
For the first time
in a month we didn’t sleep last night as our position in GE kept us tossing and
turning. GE is
going to survive but the Credit Default
buying / Short Selling speculators are trying to push the shares down to
$2. We sold our position this morning and placed the proceeds in SPDR Financials, Large Bank ETF (KBE) and Bank
America which are down as much as GE in the last year (about 75%). KBE and
XLF keep us in the depressed financials while spreading the risk. Last year at
this time we were trading both GE and KBE in the mid $30s. The rumor boys and girls
seem to have exhausted their fun and games with BAC.
Asian markets were higher
overnight with China up 6% on hopes that the Chinese government will announce a
follow on stimulus package to the one they announced last month. European
bourse indexes are also higher and Gold is down $5 with Oil at $44 as the
trading day begins.
Investors’ Intelligence had 30% bulls and 44% bears in the latest
With Intel and
Microsoft we have enough exposure to
computers and so we sold Dell and
invested the proceeds in the SPDR Industrial (XLI) which owns 65 companies and
the ten largest petitions are GE, MMM, Boeing, Emerson Electric,
Honeywell, Lockheed Martin, Union
Pacific, Caterpillar United Technology and UPS. The shares are down 30% this year
and 55% in the last twelve months. Since 10% of XLI is invested in GE we are able to maintain ownership of
GE cushioned by 90% in other issues and we don’t have to watch the daily price
movement of GE shares.
The earth hasn’t missed the
stocks market crashes this year but it did miss: An asteroid about the size of
one that blasted Siberia a century ago just buzzed by Earth. NASA's Jet Propulsion Laboratory reported that the asteroid zoomed
past Monday morning. The asteroid named 2009 DD45 was about 48,800 miles from
Earth. That is just twice the height of some telecommunications satellites and
about a fifth of the distance to the Moon. The space ball measured between 69
feet and 154 feet in diameter. The Planetary Society said that made it the same
size as an asteroid that exploded over Siberia in 1908 and leveled more than
800 square miles of forest. Most people probably didn't notice the cosmic close
call. The asteroid was only spotted two days ago and at its closest point
passed over the Pacific Ocean near Tahiti.
European shares swung higher; with companies exposed to China
performing particularly well after economic data raised hopes for a recovery in
activity in that country.
Gold ended down $7 at $906. Oil
was up $3.50 to $45.15.
The major measures were up 4%
with one half hour of trading to go but then the bank short sellers caught
their breath and pushed bank stocks lower. Oh upticks
rule where are you?
The DJIA gained 150 to 6875. The
S&P 500 rose 15 to 710 and the NAZZ jumped 30 to 1340.
Breadth was 3/1 positive and
volume was active.
The bulls stemmed the sell off but... The monthly
employment report is Friday and the markets will have to negotiate that horrid
number. The Model Portfolio will be posted on Thursday and Friday.
3 March 2009
Today is Turnaround Tuesday and
the futures are suggesting a higher opening. Geithner is going to begin
testifying before Congress at 11:30am and he has become death to the markets
There has been no turnaround
overnight in Asian or Europe. Even Gold is in a funk down $15 this morning
although Oil is pennies higher with a $40 handle as the trading day begins.
We switched our
JPM holding with a $2 per share profit (hooray) to the SPDR Financial and Large
Bank ETF. Both
issues have 10% of their assets in JPM and offer diversification and more
exposure to some the more beaten down banks and insurance companies without
forcing us to pick one or two.
And so we sold
the Semiconductor ETF and bought half the amount of shares sold
in each of Microsoft, General Electric and the SPDR Financial. This is an aggressive
yet conservative switch and pretty much completes our consolidation of accounts
to issue that we believe are true values with above average appreciation
potential over the next few years if not sooner.
Oil gained $1.47 to $41.62. Gold
ended at $915 down $25. European bourse indexes closed lower and the Euro is
now down to $1.25.
The DJIA lost 38 to 6726. The
S&P 500 dropped 5 to 696 and the NAZZ was off 2 to 1320.
Breadth was 3/1 negative and
volume was active.
There were over 1500 new lows
The bears win.
2 March 2009
Positive thoughts in a time of pain.
The market correction/
drop/ crash/ is now 18 months and counting. The S&P 500 is down over 50%
from the high on our birthday in 2007 (October 9 and little did we suspect). Much
of the pain has occurred and also much of the time of correction has occurred.
The rallies in this bear market have been minimal. But nothing lasts forever
and the economic numbers are so bad now we would guess that nine out of ten
times the current period would mark the nadir of the economy. But even if this
in the one time in ten, we own good stocks at fair prices and a 20% move down to
600 on the S&P 500 (and a further 20% loss in the value of our accounts to
a drop from the high of 40%) would set our accounts up for a triple or more
over the following five year period. The markets are a buy to own.
March is coming in like a lion on
the east coast and like a bear on the stock exchanges of the world. Asian
markets were down 3% overnight and European bourse indexes are worse down 4%
and more. Gold is at $950 and Oil has a $44 handle as the trading day and month
Joe Nocera of the NYT wrote and
excellent article last week explain the AIG mess. It s worth the read: http://www.nytimes.com/2009/02/28/business/28nocera.html?ref=business
Supposedly both Mary Schapiro, the new head of the SEC and Bernanke have said
the elimination of the uptick rule should be revisited. If the uptick rule is
reinstated the bears raids on individual stocks will end. Period.
January personal spending
increased 0.6%, which exceeds the 0.4% increase that was widely expected. The
prior reading shows decline of 0.2%. Personal income for January was up
0.4%. Economists were calling for a 0.2% decline. The prior reading showed a
decline of 1.0%. The savings rate climbed to 5%.
The personal income and spending
news which was positive, although who knows why, has stemmed the early morning
pre-market opening sell off in the futures but not induced a rally.
Bloomberg on Treasury Secretary Geithner: http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aLhs5Byln00k#
. Huffington Post has another take on Geithner: http://www.huffingtonpost.com/robert-kuttner/geithners-folly_b_170928.html
The economy in larger than Geithner
and, while we don’t like the guy and think he was a lousy choice, in the long run
the economy and American enterprise has to solve the economic problems of this
We bought an equal
amount of shares of GE this morning with the
money we raised from the AEO sale on
Friday. We sold GE $1.15 higher last Monday (including the dividend we will
receive) than our repurchase price today at $7.98. GE announced a dividend cut
last week which was a positive since GE can use the money for capital needs. GE
Credit is the problem but we think the reward of a home run or more is worth the
short term pain. The shorting boys and girls are having fun with these shares
but GE is selling at one half revenues and has $50 billion in cash on hand
versus $500 billion in debt in GE Credit. Even those negative on GE say that
the $9 billion a year in dividends not paid will go to capital retention.
Implicit in those comments is the fact that GE will have to earn $1 after taxes
which is 8 times earnings.
We use the remaining
funds from the AEO sale to buy BankAmerica. We believe that BAC will survive. The talking heads castigate BAC for paying
$54 billion for Merrill Lynch. But that $54 billion was in stock valued at $27.
With BAC shares now at $3.50 that works out to a cost of less than $9 billion
for Mother Merrill for folks buying BAC shares at its current price. The upside
is worth the downside risk.
And we switched
our small Harman holdings to the Large Bank ETF (KBE).
Finally, we sold
Nokia to buy more SPDR Financials. Both are down the same percent this year
and the XLF gives greater percentage gain potential when the markets turn.
We are not alone:
“Berkshire Hathaway Reports Worst Year Ever” – 4Q net income fell 96% to
$76/shr from $1,904 in the same period a year earlier..
book value per share (a measure Buffett
always highlights in his yearly letter) dropped 9.6% in ’08, its largest
decline since Buffett took over the co in 1965 and
only the second time in over forty years that the metric saw a decline..
Liabilities on derivatives linked to world equity markets widened by 49% to
$10B at year end (up from $6.7B at the end of 3Q), a figure inline w/ some
Eastman Kodak net of cash/debt is priced at $15 million. Yes $15
million. Revenues last year exceeded $9 billion and free cash flow was $150
million. EK has $2 billion in cash and $1.3 billion is debt. The company has
net $7 per share in cash and is trading at $2.50. The photography business may
be dead but $8 billion in revenues for this year with no net debt demands –in a
sane market- more than $15 million in net market value.
Oil dropped $4 a barrel to close
just above $40. Gold lost $15 to $926. European bourse indexes saw no rally and
closed on their lows with most down over 4%.
The DJIA was down 300 to 6760. The
S&P 500 lost 34 to 700 and the NAZZ dropped 55 to 1320. At today’s rate the
S&P and DJIA will be at 600 and 6000 respectively by Thursday night. Since
that is the level where the tech boys and girls say the major measures have to
trade before they’ll buy for at least a trade we may as well get it over with.
Or tomorrow may be Turnaround Tuesday.
Breadth was 11/1 negative on the
NYSE and volume was active.
New lows exceeded 1500 which is
only 40% of new lows at the November low for the major measures which was broken last week.
The bears remain in control.
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Summary of Business Continuity Plan