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

31 March 2009


Model Portfolio Value As of 31 March 2009

$ 460,201

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.

From http://www.talkingpointsmemo.com/

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 funds. ...

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 switchover:

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 beachfront property.

Bush was able to do for the PBGC what he tried and failed to do for Social Security.

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 be, regress.

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?

--Josh Marshall

Oil ended at $49.10 and Gold was $920.

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 lows.

The bulls reappeared but had trouble holding the gain into the close.


30 March 2009


Model Portfolio Value As of 30 March 2009

$ 459,507

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 news.

The reality is that the 30% rally of the past few weeks needs to slow and consolidate and that is what is occurring.

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.

The "go-anywhere" 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 and operations.

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.

Glory Days

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 emails.

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 and Chrysler

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.

Many, myself 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 shock.

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 driving.)

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 business.

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

Model Portfolio Value As of 27 March 2009

$ 488,349

23 March 2009


Model Portfolio Value As of 23 March 2009

$ 487,120

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 billion shares.

The bulls won the day.


20 March 2009


Model Portfolio Value As of 20 March 2009

$ 441,360

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% or more.

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


Model Portfolio Value As of 19 March 2009

$ 463,964

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

Wednesday, March 18, 2009 - 1:45 p.m.

Fed Pulls Out Big Guns!

The Fed 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.

The 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.

The move 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.

For 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.

Indeed, 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 it. Period.

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 down.

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 this morning.

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 still prowling.


18 March 2009


Model Portfolio Value As of 18 March 2009

$ 483,805

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 in depression.

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 recover.

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 losses.

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 100.

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

Model Portfolio Value As of 17 March 2009

$ 442,741

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 trading.

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 wrong.

European shares closed higher for a fourth straight session, with banks and oil producers leading a broad-based advance.

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 new lows.

The bulls held serve in the final hour today and the major measures closed 2% higher.


16 March 2009

Model Portfolio Update

Model Portfolio Value As of 16 March 2009

$ 420,583

13 March 2009

Model Portfolio Update

Model Portfolio Value As of 13 March 2009

$ 428,418

12 March 2009

Model Portfolio Update

Model Portfolio Value As of 12 March 2009

$ 424,190

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. See: http://www.nku.edu/~athletics/80%20mbb%20bell%20glvc%20daily.pdf


Model Portfolio Value As of 11 March 2009

$ 389,922

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
URL: http://www.thestreet.com/p/newsanalysis/investing/10470393.html


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 opener.

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 mirror.

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


Model Portfolio Value As of 10 March 2009

$ 381,923

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 range.

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 into receivership.

Gramley, 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 Stanford.

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 company.”

The unit had about 20 analysts in Washington who sold research to investors on what policy makers might do concerning issues such as taxes, securities regulation and interest 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 LLC.

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


Model Portfolio Value As of 9 March 2009

$ 344,244

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 many.

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 month highs.

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 Companies

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 regulations.

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 21/ negative.

Daily new lows are still half of what they were in the November 2008 swoon.

The bears are not giving up.


6 March 2009

Model Portfolio Update

Model Portfolio Value As of 6 March 2009

$ 343,628

5 March 2009

Model Portfolio Update

Model Portfolio Value As of 5 March 2009

$ 347,048

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 reporting period.

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


Model Portfolio Value As of 3 March 2009

$ 377,465

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 so...

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 again today.

The bears win.


2 March 2009


Model Portfolio Value As of 2 March 2009

$ 382,566

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 begin.

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. Until then...

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 country.

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 analysts’ figures

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.













This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

Website Information

For those folks who have accounts with us, you may now go to: https://eview.mesirowfinancial.com and fill out the account information and view your accounts online. If you have trouble filling out the form, or in getting online, call and we will help you with the process. NASD regulations require the eview site to be secure. Thus your password must be changed every ninety days. You will be prompted to make this change when needed.

For information on Mesirow SIPC and Excess SIPC protection SIPCmesirow.pdf.

For those clients of LY& Co and other interested persons the Quarterly Report on the routing of customer orders under SEC Rule11Ac1-6.
For Quarter Ending 09/30/2002 For Quarter Ending 12/31/2002 For Quarter Ending 03/31/2003
For Quarter Ending 06/30/2003 For Quarter Ending 09/30/2003 For Quarter Ending 12/31/2003
For Quarter Ending 03/31/2004

All future SEC Rule11Ac1-6 Quarterly reports may be found by visiting the diclosures at LY& Co Clearing Broker Mesirow Financial at: http://www.tta.thomson.com/reports/1-6/msro/.

Annual offer to present clients of Lemley Yarling Management Co. Under Rule 204-3 of the SEC Advisors Act, we are pleased to offer to send to you our updated Form ADV, Part II for your perusal. If any present client would like a copy, please don't hesitate to write, e-mail, or call us.

A list of all recommendations made by Lemley Yarling Management Co. for the preceding one-year period is available upon request.

Summary of Business Continuity Plan

309 W Johnson Street Apt 544, Madison, Wi 53703 312-925-5248
The factual statements herein have been taken from sources we believe to be reliable but such statements are made without any representation as to accuracy or completeness or otherwise. From time to time the Lemley Letter, or one or more of its officers or employees, may buy and sell as agent the securities referred to herein or options relating thereto, and may have a long or short position in such securities or options. This report should not be construed as a solicitation or offer of the purchase or sale of securities. Prices shown are approximate. Past performance is no indication of future performance.