Lemley Yarling Management Co
309 W Johnson Street
Madison, WI 53703
Comments on activity in client accounts
27 March 2020
Lord Keynes lives again!! For the fifth time in 100 years government socialism is attempting to rescue capitalism. The creative destruction of capitalism is now on hold as supply side economics https://en.wikipedia.org/wiki/Supply-side_economics again takes the back seat to government spending. Too bad the Repubs passed the trillion $ tax cut 3 years ago when the economy was fine. Now the corporations who were the beneficiaries of that give away are at the trough asking for help.
In 2001 (before 9/11) when the newly ensconced Repubs passed a tax cut that wasn't needed (and prevented the U.S. from retiring all its debt) and that tax cut used up ammo that would have helped in the 2008/09 collapse. In 2009 the Repubs lined up against the Tarp as too generous and cut the final bill from the $1.5 trillion that Obama wanted to $900 billion. This time no problems with the $2 trillion - Repub president needs to be reelected. And now the USA is on its way to $25 trillion in debt. https://usdebtclock.org/ .
The markets this week were a doozy with comparisons to the midweek rally mentioning 1932. We don't know if the taking heads knew but the rally in 1932 retraced 50% of the previous 2-year crash and lasted into 1933 when the markets rolled over and were not rescued until WW2.
Good discussion: https://can-turtles-fly.blogspot.com/2009/06/great-stock-market-crash-1929-to-1932.html
We've been readjusting the portfolio to move into issues with 100% appreciation potential over the next few years. Actually, many stocks have doubled off their panic computer caused lows of last week.
We eliminated most of our retail exposure this week for scratch losses as we decided they may drop at least another 50%. We will be swapping Bed Bath for Ford in the next rally and will keep Under Amour.
We have concentrated our oil exposure to the XOP (equal weighted domestic oil ETF) and Marathon Oil, with a small exposure to Devon Oil. We do have a sizable position in Marathon Petroleum- a refiner and transporter and gas station operator- not an oil producer/explorer.
In banks we own Fifth Third, Huntington Bank, Wells Fargo, Wintrust and Truist (the result of the merger of BB&T and Suntrust).
We own industrial stocks NCR, Carpenter Technology (specialty steel), Johnson Controls (https://www.johnsoncontrols.com/about-us/our-company ), GE, and Nucor (best steel company). All are down 50% or greater in the last month.
We also own Pfizer, ViacomCBS, Hewlett Packard Enterprises and Ford.
We have been trading Beyond Meat, Twitter, Starbucks and Walgreen Boots.
Spring has arrived in the land of milk and honey. And next week will certainly bring more surprises in the markets. Hopefully the virus graph will soon level off. Stay well.
Spring Equinox+1-day 2020
Where to begin? Worst week in the markets since 1987. Worst month in the markets since 1987. And so, it goes. We survived 1987 and 2009 and we will survive this crash.
Covid 19 numbers continue to rise. Many experts are positing that the true numbers are much higher than those reported, because of the lack of testing kits and the fact that many of the cases are mild. That actually would be a positive because it would raise the denominator which would lower the death rate.
Whatever, the closing down of the economy is proceeding with all deliberate speed. And it looks like the economy will be closed for at least the next four weeks.
The up/down daily 10% to 20% movements in individual stocks are even more violent than those in 2009 because computer trading, leverage and the interaction between the action of stocks and government bonds has been exacerbated by the huge increase in hedge fund computer trading. Also, the removal of the down tick rule in 2013 certainly isn't helping matters. It was removed to allow computer trading so that the big boys and girls could make their nickels and dimes all day long.
Our action in our accounts is that we are where we are and that the best course of action is to continue to improve the quality and diversification of our holdings with the idea that when the country emerges from this unprecedented crisis we will own companies that will be able to return to business without too much trouble.
We have been trading for small profits the unusual moves in Verizon, CVS, Walgreen Boots, and Twitter as well as larger moves in UNFI, SFM and EBIX. We are seeking diversification and quality to hold thru the turmoil.
Today we doubled our position in AT&T when it dropped 10% to a multi-year low. It pays a 7% dividend and is down today because we think a hedge fund is unloading a large portion of its oversize position to meet margin calls.
Several weeks ago, we established a position in high quality bank stocks. As those stocks have continued to drop, we have added to holdings. Banks continue to charge interest, collect fees, and expect payment on mortgages. If they defer payments, they will eventually recover them. The banks we own are Huntington, Fifth Third, Wintrust Financial, and Wells Fargo all now down over 60% from their highs. All yield 7% at present although they may suspend their dividends to maintain liquidity in these uncertain times.
We also have been adding quality industrial companies down 50% and more from their highs and priced at 5X to 6X earnings (they were priced at 15X to 20 X a month ago): Emerson Electric, Nucor (best steel company) Cisco, Bristol Myers, Coke, Timken (ball bearings), Johnson Controls. Carpenter Steel, Hewlett Packard Enterprises (ATMS and voting machines and grocery store stuff), GE, First Solar and ViacomCBS (ugh). Most yield 4%. We understand that this year they may show losses but all are financially strong and when the economy restarts so will their earnings and revenues.
We repurchased-at half the price we sold in December and January- retailers Abercrombie, Gap, American Eagle and Urban outfitters in small amounts. All have active on-line businesses and the prices at which they currently are valued down 70% from 2-year highs.
We have added a few speculative issues in small amounts and at half or more recent prices including Snap, Yelp, and Beyond Meat.
Finally, we continue to hold issues in the suffering oil industry. We own the XLE and XOP which give us diversification and individual issues Marathon Petroleum (no oil production just refining, transportation, and gas stations) and Marathon Oil and Devon Oil both down 80% and worth the risk.
Markets are closing on their lows today which is a quadruple witching day. Next week will again be volatile. We will be here.
The reason for correction/crashes is always different. These are uncertain times. We own companies that will survive and thrive again.
Stay well and since you have to stay home try to enjoy the daffodils and tulips and family.
13 March 2020
The Ides of March and Friday the 13th, what could go wrong? On the plus side we survived the week chastened but feeling positive. There is more contretemps to go but, now that markets are correcting, we have a plan of action.
Last fall we said we expected the markets to top in March 2020. Even though we expected this collapse- actually have been expecting it for several years - the fact that it didn't occur earlier has only made it more violent.
In January we let greed get the best of us and decided- against the advice our PhD Nurse Practioner wife – that Covad219 was no big deal. We had done so well last year that we were again masters of the universe.
Bad decision. As markets began to drop last week, we began to add issues -Wintrust, Nucor, more Fifth Third, GE, First Solar and Huntington Bank all of which lost a further 20% to 30%. This week when the market dropped 5% early on Wednesday, we added more funds thinking that a rally was in the cards because the major measures were down 20% and bouncing. Wrong. Instead of rallying the major measures closed down over 1400 points in bear market territory. On Thursday morning we sold the shares we bought on Wednesday at a loss and returned our cash position to 50%. With 50 years in the business and many similar mistakes- when we are wrong in markets like these -the best course of action is to reverse the action, and so we did.
The DJIA was down 2000 points on Monday; up 1100 points on Tuesday; down 1400 points on Wednesday; down 2350 on Thursday and up 2000 points on Friday. That's a net down for the week of 2600 points or 10% on the week and 20% plus for the last two weeks at the close of business today.
Our clients have been with us through the drop in 1982; the crash of 1987; the Gulf War collapse of September/October 1990; the Dot-Com crash of 2000; the oil, annuity, savings and loan crisis of the mid 2000s; and the calamity of 2008-2009.
The only collapse that we successfully avoided was the 2000-Dot-Com drop of 40%. The 2008-09 mess only affected our accounts by 15% to 20% while the markets dropped 40-50%. This time we have felt the full brunt of the drop even though we were 50% and more cash entering the last 2 weeks. We survived all of the prior collapses and we will so this one.
We currently own Cisco, Wintrust Financial, Fifth Third, Huntington Banks and Well Fargo. We also own Nucor, First Solar, Viacom CBS Urban, Marathon Petroleum, and Marathon Oil. We have added Caterpillar, IBM, and the Major Bank ETF -KBWB; the all bank ETF- KBE; and the major oil company ETF- XLE (with a 7% yield).
Computers are running the price action on a daily basis. The Covad 19 virus is still spreading. This is- and may become- an even better buying opportunity. We plan to add slowly on down days going forward.
And Spring is on the way!
The week before the Ides of March 2020
Et tu Mr. Market? We are now back to November 2017 on equity measures. Ouch.
With the equity markets up 4% on Monday and Wednesday; and down 3% on Tuesday and Thursday; and Friday equity markets were down 2% ending the week basically unchanged. Our psyche was not.
The coming week marks the end of the crash in 2009 and also the day when Shakespeare killed Caesar. What it has in store for market participants is unknown.
At the bottom of this missive we add a few articles that offer -in our view - some perspective on the pandemic that is roiling the markets encouraged by cable TV. Not many folks in our part of the land of milk and honey seem to be concerned but then in the land of milk and honey sickness and health are part of life.
Cable TV is all about eyes to sell ads and their 3 themes right now are Bernie vs Joe vs The Trumpster, The Trumpster and his tweets, and the Virus. Jim Cramer the CNBC TV guru (CNBC is must see in all financial trading offices) has been ranting every morning about the dangers of the new virus.
We expect many folks to get the new virus and most (99.8%+) to survive the illness as with the yearly flu viruses. When tests finally show that the death rate is similar to the usual yearly flu viruses (some of which are more dangerous than others) the equity markets should settle down and eventually recover.
This week the Fed surprised with a 50-basis point interest rate cut on Tuesday and equities dropped. Joe won and equities rose 4% on Wednesday; Thursday equities dropped 4%, just because; and Friday equities ended the day down 2% but surprisingly the equity market measures were basically unchanged for the week before.
Oil dropped 10% Friday and 15% on the week when OPEC couldn't reach a reduction agreement.
And the beat goes on. Banks are getting crushed because of low interest rates. Banks especially and all stocks are also getting crushed across the board because the big boys and girls - and their super-fast computers controlled by esoteric logarithms that tell the computers what to do - are arbing the fluctuations among the dollar, interest rates, high and low yield bonds and the myriad of ETFs,
We had a large cash position entering the week and even though our accounts are suffering, we have been adding to owned positions all week and our small accounts are now 10% to 20% cash while our large accounts are 30% to 50% cash.
During the week we added Abercrombie (good earnings but on a new low); Urban Outfitters (disappointing earnings also at a new low); regional banks Fifth Third, Huntington Banks and Wintrust Financial all with 4.5% plus yield down 50% from two year highs and on three year lows; GM and Ford on 7 and 10 year lows and priced together at half the price of Tesla); and First Solar. We did realize trading profits in AT&T, Verizon, British Petroleum, Devon and Pfizer. We bought the drop Monday; sold on the rise Tuesday; and bought the drops on Thursday and Friday.
Accounts own very high-quality stocks at depressed prices most of which have 4% to 7% yields. The stocks we have purchased will recover. The question is when. Markets hate the unknowns and anticipate the worse. In less than a month we should know and have better numbers on the severity of this virus. Mayors and governors and health experts are erring on the side of caution because for their political/professional survival it's better to be too safe than sorry. We are content to let the virus scare play out.
We have all become Wikipedia epidemiologists.
Cable news is reporting that there are now 100,000 cases in the world. The world has 8 billion people.
For perspective: While the impact of flu varies, it places a substantial burden on the health of people in the United States each year. CDC estimates that every year influenza results in between 9 million – 45 million illnesses, between 140,000 – 810,000 hospitalizations and between 12,000 – 61,000 deaths annually since 2010.
A Report from Singapore
By Josh Marshall
March 5, 2020 11:53 a.m.
Here's a very interesting report from TPM Reader TR in Singapore. Singapore has been in this for weeks. They have what seems to be a semi-contained outbreak – 117 cases as of today but no dramatic growth in the last week or so. TR describes a period of pretty intense public panic followed by a new equilibrium of acceptance of on-going risk but people returning to something like normal, along with all of the social distancing procedures we're hearing about.
I found the updates on the perspectives, risks and the "Eerie Silence" from Covid19 to be very interesting to follow. As a TPM prime subscriber of an American living in Singapore I thought I could share a few perspectives of how we have been dealing being a top 5 Covid19 country for the past month. Singapore is a small city state that on a per capita basis has been at the top of the list of countries dealing with Covid19. In early February, I think the fear around Covid19 was really sinking in. Flights from China were cancelled, grocery stores were emptied by people stocking up for the apocalypse, shopping malls were empty, restaurants were empty and companies were implementing travel bans and splitting up working teams. By the end of February, the Covid19 outbreak continues – we still get new cases every day. But the fear has subsided. I think everyone is still afraid of it, but it is perceived a bit more as a flu plus. It has become one of those risks in life we just have to live with. Grocery stores are back to normal, shopping malls are full, restaurants are full again. Another anecdote – on the MRT (our Subway), at the start of Feb, it was typical to see the train cars only half full and more than 50% of those people were wearing face mask. Now, even though we get new cases every day, I look around and in a full train car of 100s of people, I only see 2 or 3 masks.
I think you received some blowback when you published some statistics to put things in perspective. It's a tricky balance, but I think those perspectives are realistic and will sink in over time. It is not that Covid19 isn't dangerous – it is a terrible development. But the flu data is pretty astounding if you really wanted to focus on it. Every year 300k to 600k people around the world die of the seasonal flu. The US CDC reports that there are over 20mn cases of flue this season alone (season starts in October) with 19 thousand deaths. I just read on the CDC website that 20 infants died last week from the seasonal flu. If Covid19 killed 20 babies last week we would all be horrified, but there are some risks in life we just get used to. I'm sure if we looked up traffic accidents and other stats that it would be pretty obvious that even if the Covid19 outbreak becomes as large as what happened in China, the average American is still more at risk of dying from driving home from work than from Covid19. If Singapore is anything to go by, the acceptance happened surprisingly quickly and within a month we are getting back to normal even though the outbreak continues.
Some facts on the yearly flu viruses:
June 12, 2019 — A new CDC co-authored study published in the journal Open Forum Infectious Diseases (OFIDexternal icon) reports that people 85 years and older are much more likely to be hospitalized and die from flu than adults 65 to 74 years old and confirmed that H3N2 flu viruses are particularly dangerous to older people. Researchers also found that the frequency of fever and several other typical symptoms of influenza decreased with age beyond 65 years, while the frequency of altered mental status increased with age. The OFID study adds to a growing body of evidence that supports the importance of vaccination in older adults and their contacts against influenza and Streptococcus pneumonia, and for the use of antiviral therapy as currently recommended by CDC.
While flu seasons can vary in severity, during most seasons, people 65 years and older bear the greatest burden of severe flu disease. Approximately 90% of influenza-related deaths and 50-70% of influenza-related hospitalizations occur among people in this age group. Because of their increased risk, older adults are a priority group for vaccination. However, adults aged 65 years and older include a large and diverse group of approximately 46 million people in the United States. The prevalence of chronic diseases changes as age increases beyond 65 years, as does frailty and functional status. By evaluating age related differences, researchers hope to better inform surveillance, prevention and treatment efforts for adults aged 65 years and older.
The study looked at age-related differences in influenza-associated hospitalization rates, clinical presentation of illness, and clinical outcomes among nearly 20,000 people older than 65 years who were hospitalized with laboratory-confirmed flu at 14 FluSurv-NET sites during the 2011-12 through 2014-15 influenza seasons, using 10-year age groups. Study results showed that:
Hospitalization rates among adults aged 85 years and older were 2-6 times greater than rates for adults aged 65-74 years.
The highest hospitalization rates occurred during H3N2 predominant seasons.
Patients aged 85 years and older had an increased risk of developing pneumonia and in-hospital death or transfer to hospice compared to hospitalized patients aged 65-74 years.
The frequency of fever and several other typical symptoms of influenza decreased in frequency with age beyond 65 years, underscoring importance of flu testing and clinical discretion in rapid treatment in older adults.
Newer high-dose and adjuvanted influenza vaccines available for persons aged 65 years and older may provide additional protection among people in this age group. Flu vaccination has been shown to reduce flu illnesses and more serious flu outcomes including hospitalization or even death in older people.
Based on the findings from this study, CDC has begun presenting FluSurv-Net hospitalization data in finer age strata in older age groups (65-74 years, 75-84 years, 85 years and older) to better inform public health prevention and response efforts. FluSurv-Net is an influenza hospitalization surveillance network that covers approximately 9% of the U.S. population, or about 27 million people, to estimate the burden of flu hospitalizations in the United States. Public health epidemiologists should consider reporting and analyzing influenza surveillance data using additional age strata for older adults to demonstrate increasing vulnerability of the aging population and to identify opportunities to improve preventive care.
The study is available online from the Open Forum Infectious Diseases websiteexternal icon.
Having just reached 76 and after 30 wonderful years owning the prettiest farm in America, we have decided that a move to a Madison, Wisconsin apartment while maintaining a small cabin in the area is the proper way to begin the next chapter of our lives.
Of course, we plan on continuing Lemley Yarling Management Company- Old traders (52 years and counting) never quit until ----.
With that in mind we have listed our farm for sale.
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