Bud's Poem Page

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31 May 2002

Looks like we win the timing of the year award. The day after we sold BMY, the company announced that it is merger talks with Glaxo Welcome. Ah well, at least we broke even and only sacrificed a buck and a half since we would have sold the opening this morning. We knew that there were rumors of talks between the two companies, but we didn't think anything would happen until the Imclone fiasco was resolved. Guess GLX likes buying a pig in the poke.

The stock markets opened higher today, and remained higher through the day. After being up over 100 points with two hours of trading to go, entering the final hour the DJIA was up less than 40 points. In the final hour it was a race to see whether the closing bell would ring before the DJIA slipped into negative territory. While the NASDAQ closed down almost 1%, the S&P 500 and the DJIA managed to close fractionally higher. The Treasury bond markets surrendered a large part of their gains for the week as today's economic numbers suggested recovery is right around the corner. Obviously, we don't agree.

We continued our cash-raising spree in advance of the weekend uncertainty and sold Northern Trust at a $1 per share loss.

When talking with a friend the other day, it occurred to us that many of the high paid folks who lost their jobs on Wall Street and in the legal and accounting professions, etc., have not placed their names on the unemployment rolls. While the numbers of such folk may be in the low hundred thousands, the reduction in buying power of that group has to be substantial. That group will also be the last to cut spending to the bone, since the lifestyle they have assumed is important to their psychic well being.

We are amazed at the rally occurring today, as the US State Department suggests that all nonessential US citizens leave India. Since Pakistan has not rejected a first strike nuclear device attack against India, one would think that the stock markets would be a little more jittery than they are. The old saw that markets climb a wall of worry seems a little trite, when talk of nuclear war in Southeast Asia is the worry. We don't remember nuclear bomb talk this serious since the Cuban missile crisis. It may be that out of sight is out of mind, but any conflagration in Southeast Asia will certainly affect the US psyche and economy severely. Take a look at the origin tags on the clothes and consumer and technical products you are buying.

Has anyone noticed that since the introduction of the Roth IRAs several years ago, the markets have only gone down? Since investors don't receive a tax deduction for contributions, but benefit from the tax-free withdrawal of any gains, one would have to say that so far this investment vehicle has been a bust for most investors. Same results probably hold true for folks who use those college savings plans to invest in growth and other aggressive mutual funds. Over the years the desire to avoid paying taxes has cost many investors dearly. If folks would just realize that the purpose of investing is to make money, not to avoid taxes, and that one of the consequences of honest profit is tax liability, a whole lot of needless anguish would be avoided. Last year our clients had a large tax liability in their taxable accounts, and they and we were delighted with this fact. So far this year our clients have no tax liability, and we are disappointed.

30 May 2002

The stock markets headed straight down today at the opening bell. At the same time the Treasury bond market continued its flight to quality rally of yesterday. The stock markets managed to edge to the upside around noon and then headed lower into the final hour, when they again attempted to rally. The NASDAQ and S&P 500 managed to close slightly higher for the day, while the DJIA closed slightly lower.

No guts no glory. The sky is falling and we want to be more in cash. We gave up today and did some selling. We left some money on the table these past two weeks, but discretion is the better part of valor and the stock markets looks sick. We have come to the opinion that any rally will be feeble and sold into by folks eager to get out. Like us. Also the new developing situation in Pakistan/India coupled with Palestine/Israel and the continuing terror warnings at home will surely send a lot of folks to the beach instead of Wall Street, until events settle down.

We sold AOL at $18.30, GE at $31.25, BMY at $29.77 and VZ at $44 for a slight gain/loss depending on the account. We sold GMH at $14.40 and Ford at $17.53 for a small gain in all accounts. All these stocks were bought as trades so we leave them without any actual loss.

29 May 2002

The stock markets opened lower without even a try at the upside this morning. That is the first time in many days there hasn't been at least a blip to the upside at the opening. The Treasury bond markets were firm, even in the face of $26 billion in new two-year Treasury notes to be sold today. Early in the morning, there was a rumor of an explosion near the Empire State Building and short paper rallied. When it was learned that the explosion was a manhole cover popping, the gains were surrendered. Later in the day bonds rallied sharply. Stock market trading was desultory all day. For the first time in a while, new lows exceeded new highs on the NASDAQ. The NASDAQ traded lower all day by over 1%, as tech stocks showed no strength at all. The DJIA was up and down twenty points all day with very low volume. In the final hour of trading the stock markets punted. They couldn't rally and closed fractionally lower for the day.

The fragility of the markets is real. The constant terror warnings of the past few weeks have had a very negative effect on the psyche of New Yorkers. And New Yorkers are the movers in the markets. Tomorrow, there is to be a ceremony commemorating those folks who died at the World Trade Center and were not found. Coupled with the India/Pakistan nuclear bomb debate, the markets remain touchy. Any untoward news moves the stock markets swiftly lower. While these warnings and predictions may eventually take on the tenor of the constant warnings of another 1929 Crash, for the present the markets cannot rally under the weight of this barrage of negative pronouncements. And with the economy still not showing signs of sustained recovery, coupled with the suggestion of lousy retail sales for May, any rally will be short lived.

The US position in the Pakistan/India conflict is difficult. The US needs Pakistan to continue the search for Taliban, while at the same time the US/India ties are long-standing. Thus the US would seem to be in a position to mediate, but at the present no high level officials are engaged. A beginning of conflict will roil the world markets. The answer is not to buy gold; the answer is to be in cash, US dollars.

We get questions.

Hi Bud--This inquiry is coming from Mary XXXXX. I met you in 1989 when I came to you to help me invest after I got divorced. Needless to say a huge, huge door opened for me when that one closed and I ended up married to a wonderful man. Sadly he died too soon after we married but he was a God sent present when we were together. My question is this. I retired at 60 and have a 401k from work that was worth 20k when I got divorced. Through careful selection, which I might add you helped teach me, and through consistent saving, over the past 13 years my portfolio has grown to be worth $220k. I need about $700 additional monies per month to live on beside my social security and a small annuity. I am curious if you think it would be wise to buy a 10yr guaranteed annuity to receive the $700 per month. The annuity would cost $66k. It would free the other money for investment in funds. Basically the Fund Company would give me my money back over ten years, with some interest. Otherwise I would have to put about $175k into an investment at a guaranteed 5% and let it just sit and draw on it. I would appreciate any input you might be willing to give me. Thank you Mary

Hi Mary

It was good to receive your e-mail, and to be able to talk with you on the phone. We are happy that events have worked for you. Some years of happiness are more than many folks have in life. You have done well in your investing and must realize that as the bible suggests, years of feast are often followed by years of famine. Hopefully the famine won't last the biblical seven years. But you were able to amass a nice nest egg and it is important you don't dissipate that nest egg seeking high yield, when that seeking involves undue risk. As in the bible, in years of famine it may be necessary to use some of the stored wealth to tide you over.

Regarding annuities in general, it is important to realize that interest rates are at an all time low. Since fixed annuity returns are based on interest rates, we don't feel it is a good time to invest in annuities. We would caution against locking your funds up at a fixed rate for any long period of time.

We would not buy an annuity that will pay you $96,000 over ten years ($700 per month for ten years), for a $66,000 present investment. At the end of the ten years you would have no principal remaining, having spent it. Basically, you would be spending your principal plus a little interest earned over ten years. Why pay someone else a fee for that privilege? You would do better buying a two-year average maturity Treasury bond and then withdrawing the extra money you need. Interest rates are not going to stay at these low levels forever and when they move back up, you could extend the maturity by buying a medium term bond, and stop spending principal.

Because your assets are at Fidelity, you told us that you can only buy Fidelity funds with your money. Fidelity doesn't have a short term US Treasury fund. But they do have a short term corporate bond fund. We would suggest investing in Fidelity Short Term Bond Fund, (FSHBX), which is a one to three year maturity high-grade corporate bond fund. It is currently yielding about 4.5%. This fund will offer you safety of principal and a decent return. When we talked with you on the phone today, you told us you invested $120,000 in a fund of some sort that was going to pay 5%. You didn't know the entire name of the fund nor what its investment objectives were. You said you bought it because Fidelity suggested it. Please, please, sell the fund even if there is a penalty attached. You have invested half your hard-earned money in something about which you know zilch. We never taught you to do that.

We have been buying the two-year US Treasury bonds yielding a bit over 3%. We know you need 5%, but there are times when what we need is not available, without taking undo risk. Contrary to financial media advertising the markets do not owe investors a set rate of return with no risk that will allow them to live comfortably. There is a pendulum effect to the markets as in life. And as surely as interest rates are at an all time low, within a few years, if not sooner, rates will move higher and you will have a chance to lock in a higher return. The beauty of owning Treasury issues, or a truly short term bond fund, is that they can be sold at any time and the interest earned is paid to you with no penalties. Buying fixed CDs locks the buyer in for a set period and does not allow the ability to sell during the time period to take advantage of more attractive investment opportunities.

Just one year ago, two-year Treasuries were yielding almost 5% and five-year Treasuries were yielding 6%. Once the economy warms up, the FED will begin raising rates. And even if it doesn't recover, interest rates will begin to rise as the deficit does.

What an investor must remember is that all the years of superior investment returns is the reason for these last few years of lousy and negative returns. Patience is needed in investing as in many of life's activities.

So our advice is to go with the two-year Treasury now, or Fidelity's Short Term Bond Fund, with 70% to 80% of your money. Do not buy high yield or medium term bond funds. Read our reasons for not doing this on our web site at www.budlemley.com. The "who we are" section contains our philosophy of buying and owning Treasury bonds for income.

Then keep reading our web site and when we extend maturity or go back into the stock market in a big way, you may also by using Fidelity Magellan and Contra funds. Good luck.

28 May 2002

Clients should have received the letter from ABN AMRO regarding the change in account numbers. Starting on next Monday clients should access under the 612 prefix on aaieol.com rather than the 042 prefix. The complete switch will not be made until next Monday. Please direct all calls to Kathy, as we are computer illiterate here in the boondocks.

The first day after the holiday weekend started on a down note, after a very short fling with the upside right after the stock markets opened. By midday the stock markets were off over 1% in moderate trading. The Treasury bonds market traded basically flat all day, with only the short end giving up a bit in price. As on Friday, the stock markets were unable to rally and closed off 1%.

The risk of loss both in life and in the stock markets continues to restrain investors. With the summer vacation season arriving, and folks no longer interested in their investments since those investments have been doing poorly for a few years, we don't expect an end to the bear market soon. If Osama is captured or by some miracle progress occurs in the Mid-east conflict then we would expect a relief rally.

Until evidence of the economic upturn becomes more pronounced the stock markets aren't going anywhere. The lows made last September were extraneous panic lows, unrelated to the stock market sell off that was occurring at the time. For that reason we believe a panic low is needed that is more related to economic events. That the recovery in the stock markets has been stalled by the 9/11 attacks is not a given with us. In fact the almost knee jerk bounce in the fall was more a testament to American solidarity, then a recovery based on economic reasoning.

We have been telling clients for a few months that we don't expect any great profits this year. We will be happy to survive the year with only minor losses. We have made recent purchases in stocks that intrigue us, but we have no illusions of great gains being soon realized from our purchases. As the summer unfolds, we may lessen our exposure, which is not all that large now anyway, but for today at least we are inclined to assume a little risk because the mood of the markets is so grim. Hopefully this grimness will lead to one more bear market rally to suck the last money into the vise. And hopefully we aren't being too cute with our money.

27 May 2002

Summertime has arrived with Memorial Day, and as if by magic, the air has warmed and the needed rains are, at last, greening the pastures, and adding a special fragrance to the air. Would that the stock markets could be so accommodating?

The DJIA is up .9% for the year after losing 2.4% last week. The Model Portfolio is down 1.3% for the year, while the S&P 500 remains mired at minus 5.6% and the NASDAQ is off 14.8%.

Terror and auditor warnings continue to rile the markets and prevent any meaningful rally from developing. Economic numbers for manufacturing seem to be improving and the consumer continues to spend. How long can house sales and consumer spending work their magic and keep the economy from the dreaded double dip? Stayed tuned.

On this sleepy morning with the first signs that maybe warm weather has arrived for good, we have no bon mots for the market. The zeitgeist of the times has changed from one of hope to fear both in our daily lives and in the stock markets. It is going to take the summer and fall, which mainly involves the passage of time, to replace the fear of loss with the desire for gain.

On a positive note it does look as if the Iraq invasion is on hold as news last week of Pentagon objection was purposefully leaked to the press to take President Bush off the hook in case he decides not to act.

In the meantime, we await the summer rally as we awaited the spring rally that never came. We are 35% invested to take advantage of a potential tradable rally and 65% cash in case we are wrong. 2002 is a year to survive and position accounts. The markets and the Congress have not realized how large the deficits are going to be in the next few years.

But we don't believe housing by itself can sustain the economy, and we also believe the consumer will begin pulling in his/her pocketbook. But both those thoughts are opinions not facts, and we are open to any eventuality. Crunch time will probably again be the September/October period, and we are trying to keep as much powder dry till then.

Our ill-fated fling with Gap Stores last week has given us pause. Since we covered our reasoning in previous posts we won't again dwell on our bad timing.

And tomorrow is another day.

The weekly Model Portfolio update for 5/25/2002 has been posted.

24 May 2002

The stock markets drifted lower through out the day in a repeat of the last few days The Treasury bond markets closed early for the holiday weekend without any significant change. News was scarce and trading was light all day long. Entering the final hour of trading the DJIA and S&P 500 were both off over 1% and the NASDAQ was down 2%. There was no threepeat today as the attempt at a rally was feeble and failed. With all the political stuff going on, and no good reason to hop off the fence, the stock markets remain mired in a trading range. There is always next week. Trading starts again on Tuesday. We'll have a Monday evening post.

Today's warning from the FBI is to be on the alert for terrorist scuba divers. Yesterday it was trains and the day before Statue of Liberty and the Brooklyn Bridge. So if anyone sees a scuba diver with a long beard getting off a train, expressing a desire to learn how to jump into the water near the Brooklyn Bridge, but not to learn how to get out, please notify you nearest FBI office.

23 May 2002

We neglected to mention that we purchased Genentech in some larger accounts yesterday. It's down from over $100 per share to the price at which we purchased of $36.50.

Today's stock markets were boring. The number of the day was supposedly positive for stocks. Can't remember what the number was, but it doesn't matter anyway because the stock markets went down instead of up. For most of the day we exchanged e-mails with customers and watered the new seeding of grass we planted in the orchard outside our office. Beats watching paint dry or markets drop. In the final hour of trading the stock markets staged a mini-rally similar to yesterday, while the Treasury bonds market gave back all of its earlier gain, and then some.

The Treasury bond market was strong as folks stocked up on ten-year Treasury bonds and gold for the weekend terror warnings. Don't know why folks want ten-year Treasury bonds if Washington is going to be destroyed. And we can't figure out why folks want gold if New York is going to be destroyed since all the gold bought on the exchanges is stored in New York. But who ever said buying decisions have to make sense?

We're sorry, but we can't equate what's happening in the world today with W.W.II, or the Civil War. And the US survived both those conflagrations and prospered. This too shall pass although we don't think talk TV will. For residents of the US there is more danger of being killed in a car wreck (40,000 per year) or from smoking cigarettes or drinking alcohol worrying about being killed by a terrorist bomb, than there is from an actual terrorist bomb. Maybe, with the return of the unfortunate Shandra Levy murder to talk media, the terror warnings will take a break for a week or two.

On that note we are taking the Memorial Day Holiday to remember all our loved ones who have passed on, and to engage in some manual labor to rest our overworked mind. We'll have a short post tomorrow evening and then a longer one on Monday.

22 May 2002

For every stock there is a season. Over the years we have made a ton of money trading The Gap. In the last six months we have had egg plastered on us the two times we bought the stock. Two days ago we bought The Gap noting that the stock had risen on good bad news and held its rise. And so our guess was that the Street was going to remain positive on the company. The ink on the buy confirmations was hardly dry when last night Mickey Drexler, the CEO of The Gap, announced his resignation. Since in our mind Mickey is The Gap, we had no choice but to sell the stock for a two dollar per share loss this morning. There is a sad symmetry in our trade this week, since it exactly mirrors our trade of last fall. This will be our last attempt to participate in The Gap. We had a good ride with Mickey, and it is too bad it has to end on a down note, but as seasons change, so do stocks, and our luck with them. The Gap isn't going away, and we are sure that the company will survive. But, we have no confidence in the Fisher family, the folks who control The Gap. In 1984 the Fishers brought Drexler in to reorganize The Gap. And he did. And contrary to some press reports, a Fisher was running The Gap Stores division when it ran into trouble several years ago. The Gap without Drexler is like The Limited without Wexner or Lands End without Comer. That's one reason why we think Sears is nuts to buy Lands End at such a big price. Every time Comer steps down at Lands End and turns over the reins to someone else, earnings eventually plummet. Same thing happened at The Gap in the late 1990s when Drexler started to ease out. We made all our money with Mickey at the helm and so when he leaves, we do too.

We called a client today for whom we have traded The Gap since 1984. We have made a very lot of money over the years for her and all our clients trading the stock. She is always happy when we own the stock and sad when we don't. We had called her two days ago when we bought the stock. When we gave her the bad news this morning, she was disappointed that we had sold the stock and in a very nice way questioned our decision. She asked us why we didn't want to wait to see what happens and who replaces Drexler. Our response was that had we known two days ago that Drexler was going to retire we never would have purchased the stock. And we also said that if we hadn't owned the stock today, we still would not purchase the stock even though it is two dollars lower. Moreover, we probably won't purchase the stock when it drops under $10 per share before year-end. Our final remark was in the form of a question. We asked our client what she would do if we sold Lemley Yarling Management Company. Would she let the new owners manage her money? Her response was gratifying and frank. She said, "Of course not, I want you to manage my money". We thanked her for her confidence and told her that is the way we feel about The Gap and Mickey Drexler.

The stock markets opened sloppily lower today in part because of The Gap news, and because of the arbitrage sell off in Citicorp which is buying Golden State Bancorp. Also, the myriad terror alerts from administration leaders who seem to be engaged in a contest of who can issue the scariest warning continue to have a negative effect on investor psychology. There won't be a meaningful rally until these warnings cease for a day or two. The Treasury bond market opened higher in price as yields moved lower on the same terror alerts and the punk stock market action. After about an hour the stock markets moved lazily to the plus side. By midday, stocks were back on the minus side and on the way to three down days in a row. But, in the final half-hour of trading, a mini-rally allowed the DJIA, NASDAQ and S&P 500 to close fractionally higher for the day.

21 May 2002

Where oh where did our bear market rally go? We sold our AMAT trading position for a very slight gain. No other trades or purchases today. Given the ugliness of the last two days' stock markets, our recent purchases held their own. Our bear market rally thesis is getting a severe test. We're standing pat for now.

The stock markets opened a bit higher on Tuesday, while the Treasury bond market weakened a tad. Early in the trading session it was announced that Merrill Lynch had settled with the attorney general of New York, promising to sin no more and to pay a $100 million fine. On that news and weakness in some specialty retailers, the major averages began to grind lower in moderate trading. Entering the final hour of trading a feeble rally failed and the stock markets moved lower to close at their lows for the day. For the second day in a row, the DJIA and S&P 500 lost a little over 1% and the NASDAQ lost over 2%. Treasury bonds rallied as the stock markets moved lower.

The thought occurred to us this morning that we should explain our comments about VP Cheney's remarks on the Sunday talk shows regarding the possibility of terror attacks. We don't dismiss the true fear that exists among New Yorkers and those folks in Washington who suffered not only the trauma of losing loved ones and friends and neighbors, but also the fear of the unknown.

We have known for a long time, as the famous New Yorker cover implied, that New Yorkers think all that is important in the U S stops at the Hudson River and Washingtonians at the Potomac. We think the reality is that while the horror and caring and sorrow created by the events of 9/11 was shared by all Americans, the effects of the catastrophe no longer affect the everyday thinking of the vast majority of the population outside of New York and Washington. When Tom Ridge issues the blue, green, yellow or whatever warnings, we venture that most folks think those warnings apply to the people of New York or Washington, and not the folks who live in Keokuk, Iowa. As time passes memories mellow. For example, we're sure not many people spend their days thinking about the tragedy of Oklahoma City and worrying about another militia terrorist attack?

Our point is that the attention span of most folks is limited, because they have to go about the process of daily living. And while the warnings do suggest real risk, those warnings are affecting New York money managers and traders a lot more than investors in the rest of the country are. And so, unfortunately but realistically, until another terror attack occurs such warnings from Washington will affect market sentiment for a day or two, at most.

We read an intriguing article in the June issue of Harper's Magazine last night. It is a must read article. The title is Unmade in America and it was written by Barry Lynn. The article suggests that China is becoming the Saudi Arabia of the 21st century in relation to America's dependence on Chinese manufactured goods to run our economy. We'd like to share the theory propounded. China is a communist regime, as totalitarian and repressive as Cuba, if not more. Yet the US government and US businesses have chosen to recognize China as an important market and to normalize trade relations with China.

By trading with China and encouraging US corporations to invest in China, the US is creating the same dependent relationship with China that it has with the oil rich kingdoms of the Middle East. The United States accommodates Saudi Arabia because the western economies need their oil. During the 1990s US industry and especially tech companies closed manufacturing facilities in the US and moved to outsourcing their manufacturing needs to contractors in China and Southeast Asia. This was especially true of the computer industry led by Dell, and the telecom industry led by Cisco. Many of the tech components for American manufacturers are produced in Southeast Asia in countries that are communist or ruled by dictators. At some point in time, if not already, those governments are going to realize that they have the fate of the US economy in their control. If, for political reasons, they decide to prevent export of manufactured goods to America, the US economy could even now be forced into recession or worse. China is the major worry. Just in time inventory practices exacerbate the problem. Dell brags about having only four days inventory on hand. Should China close exports for even a week or two, or should a freedom movement erupt in China that would force the US to take sides, the economic consequences could force uncomfortable and unwanted decisions. The Harper's article presents the negative side of globalization, a side that we have not seen presented in so cogent a manner.

20 May 2002

After the big up move last week, the stock markets opened about 1% lower on Monday and traded off 1% throughout the day. The bond markets firmed in response to VP Cheney's "end of the world scenario" on the Sunday talk circuit, and a larger than expected decline in the index of leading economic indicators. In the final hour stocks couldn't rally and the DJIA and S&P 500 both closed over 1% lower with the NASDAQ giving up over 2%. If a sell off can be orderly and dull, today's sell off was.

We'd like to review the portfolio we have assembled over the last week. As we said in our last post, we remain long term bearish, but we think that we are in the midst of a tradable rally. That doesn't mean that all the stocks we purchased will rise in the next month. But we think and hope several may. We also wanted to establish positions in a few downtrodden stocks, in case our doom and gloom scenario is incorrect. The broad markets have been under selling pressure for two years, and while we think a bottom will not occur till autumn, price levels on some stocks, and the fact that we can be wrong, suggest establishing a foothold now.

AOL Time Warner is the media conglomerate that is down in price from $55 to $19. We expect this one to participate in any near term rally. Most probably we will sell if it reaches the mid-twenty dollar range in the next month. We are comfortable buying more if it moves down below $15.

AT&T Wireless share price is acting terrible. The company's business plan is doing well. We believe that it will be one of the three survivors in the wireless phone sector. At its current price it's too cheap to sell and we won't buy more until it trades under $5 per share. We hope we don't have that opportunity.

Bristol Myers Squibb is doing everything wrong and that's why the shares are selling at half the price of several years ago. If the bottom has not yet been made, it will probably occur when the FDA rejects Imclone Systems Erbitux approval application. The CEO Dolan has been blamed for some problems that were in existence before he took over last year. But he deserves the blame for blowing one billion dollars on the Imclone Systems purchase. It was a terrible deal and it wouldn't be untoward for him to lose his job for just that one mistake, because it was so colossal. We bought to own for a while but we won't pass a 25% gain up if it occurs. Takeover rumors, which we don't believe, are offering support to the share price. We'll take any help we can get.

EMC was bought for a one or two point, hopefully higher, trade. We will want to own at year-end, but consider it a trade now.

Ford Motor was purchased to own and add to on a move lower. We don't expect much from the stock in the near term.

We bought Gap Stores today. We made fun of the share price moving higher last week on a 24% same store sales drop. But since the stock didn't give up the gain, we guess the analysts are on the buy side of the stock now. GPS is a trade or a hold. We want to own at year-end, but won't pass up a trading profit.

Hughes Electronics is Direct TV, the largest satellite television provider. We've owned several times over the past few years for trading profits. We bought this time to own until the merger with Echostar, Dish TV, is completed.

Hain Celestial, is the largest provider of packaged natural and organic foods. We bought to own for a while, since HAIN needs time to regain earnings growth momentum.

Hewlett Packard is a trade/own depending on circumstances. We will buy more if it trades lower.

Northern Trust has been purchased for a 25% move over the next year, and the same goes for Verizon.

Wild Oats is owned for the longer term, unless the share price is gunned to $20 or above when OATS decides to sell a couple of million shares to raise money.

WorldCom is a speculation. Will sell if it moves up a couple of points in the next month, but would like to own at year-end, if it isn't bankrupt. If it goes bankrupt, we hope we've sold for a profit before then.

That's our portfolio for now. We don't own all the HAIN or OATS that we want to, but the shares of each are hard to buy. That's a good sign.

We still have our eye on Guidant. We bought AMR today in our trading accounts and still own Delta and Applied Materials as trades.

18-19 May 2002

The Stock markets finished a strong week on a positive note. For the year the Model Portfolio is down .6%, the S&P 500 is down 3.6%, the NASDAQ is off 10.7% and the DJIA is up 3.3%. Treasury bonds finished the week flat, with talk of a rate increase creeping back into trading conversations.

We did some buying this week in stocks. Those purchases are now reflected in the posting of the Model Portfolio as of 5/18/02. We continue to believe the stock markets are in a bear phase, but the action of last week and early this week have increased the likelihood that we are in the midst of a tradable rally. While we like all the stocks we purchased, we are not married to any. Since we continue to expect a sell off on the autumn we will take trading profits if presented. And we don't plan on adding too many more stocks since we'd like to stay under 30% invested in large accounts, and under 50% invested in smaller accounts.

The situation in Israel, the fall Congressional elections, and the political turmoil surrounding 9/11, has lessened the chance of any Iraq adventure until next year at the earliest. That is a positive for the possibility of a continuing spring/summer rally. We know that this is a change in our attitude from one month ago. But, the market action has changed and is much more positive. If we get a 5% move on the S&P 500 back to 1160, we think a few of the stocks we purchased like GE and AOL will move 20% to 30%.

It's time to go work in the garden. Have a nice weekend. We'll review our purchases of last week in our Monday afternoon post.

17 May 2002

We found the down 8.1% in March 2002 figure for housing starts in the WSJ this morning. Even there, the WSJ made no mention that the March figure had originally been reported as up 1%. Coupled with the 5.4% drop in April, the two-month trend in housing starts suggests that maybe the housing sector bubble is beginning to deflate. Folks on CNBC were much more interested in Dell Computer's earnings this morning and the bounce that the tech bell-weather gave to the NASDAQ at the opening of trading. The DJIA and S&P 500 also opened Friday to the plus side. When the University of Michigan consumer sentiment number was a bullish 96 versus last month's 93, short term Treasury note yields spiked higher with a corresponding drop in price. By midday stocks were stuck at even, while bonds prices had recovered slightly from their sharp sell off. Since today was an options expiration day, the lack of direction in stocks was not unexpected. In the final hour of trading stocks rallied and the DJIA, S&P 500 and NASDAQ managed to close higher. For the week the NASDAQ was the big winner gaining 9%, but still remains over 10% lower for the year.

Schering Plough announced today that it has agreed to pay a $500 million fine to settle FDA complaints against its manufacturing plants in Puerto Rico and New Jersey. Just two days ago, SGP announced that it is the target of a criminal inquiry concerning their Puerto Rico plant. SGP provided no more specifics. SGP has been under selling pressure all spring, and while it rallied $1 this morning from a five year low made yesterday, we would expect it to resume its downtrend soon. The new inquiry will place a ceiling on the stock. SGP ran to $40 per share early this year on takeover rumors. We don't think a takeover is in the cards till this second investigation is settled. We are watching, since Schering Plough's price action and product portfolio remind us of Syntex which was eventually acquired by PG when it's pain medication went off patent in the early 1990s. PG now markets that Syntex medication as ALEVE, and makes big bucks over the counter. We envision the same thing happening with Claritin.

We'll have a longer post tomorrow and discuss our recent purchases and provide an updated Model Portfolio.

16 May 2002

Unemployment was up slightly in April. Housing starts dropped 5.4% in April. The March housing numbers were also adjusted downward. Funny though, we couldn't find the percentage adjustment number anywhere on AP or Reuters or the WSJ or NY Times. A client told us that the March numbers were adjusted from up 8% to down 1%. One would think that size adjustment would merit some attention. But in the world of new numbers every day, even this morning's figures were out of mind by afternoon.

The weak housing numbers were announced at 7:30 AM Central Time and caused the Treasury bond market to firm and the stock market futures to weaken. Trading in the stock markets was mixed all day, although all the major averages managed to show small gains for the day.

We've wanted to add Hughes Electronics, GMH, the Direct TV folks, to portfolios for a while, and when the share price dropped under $14 today we added shares to any accounts. GMH is to be purchased by DISH Network with Justice department and FCC approval. We also purchased Northern Trust at $52.60 and Verizon at $43.50 in small amounts in some of our larger accounts. Except for adding Wild Oats and Hain to accounts if they come off in price, we are as fully invested as we plan to get. Some of the smaller aggressive accounts are up to 40% invested, but most accounts are 20% to 30% in stocks.

The political news about 9/11 and who knew what when has not affected the markets yet. But the continuing disclosure about wash trades by CMS Energy and Reliant Energy to pump up trading volume are going to cause a further loss of confidence in corporate financials. It is also now apparent that K Mart was issuing phony cash flow numbers. There will be continuing disclosures as journalists keep working to earn next year's Pulitzer prizes, and these disclosures are surely a negative for investor confidence.

Imclone Systems announced that the German Company Merck KGaA would not widen its study of Erbitux from the 300 patients to 500 that BMY and IMCL wanted. Thus the Merck KGaA data will not be available for use with the US application to the FDA for the drug. The way we read the news it seems that Merck KGaA which has European marketing rights want to get the drug to market and the 300 patient study will do that. But for BMY and IMCL it would have been better to have a wider study for the FDA. The announcement coupled with the announcement of a larger quarterly loss caused IMCL share price to drop $3 to $12. Bristol held steady, as takeover speculation seems to have placed a temporary floor under the stock. All the drug stocks are under selling pressure and we imagine they will remain under pressure for the quarter and possibly the year. As they drop in price, our investment interest increases.

15 May 2002

The markets opened lower on profit taking and the Treasury bond market steadied as the stock markets dropped. The CPI was up a larger than expected %, which works out to an unacceptable to the FED annual rate of 6%. Nevertheless, there was no great reaction to the number. We take that as a sign that the stock markets are feeling bullish. During midday, gasoline and natural gas spot prices dropped and the stock markets firmed. At the beginning of the final hour of trading the DJIA and S&P 500 were down less than 1% while the NASDAQ, which had been up all day was still higher by 1%. And that is where the stock markets closed.

Yesterday's rally was fueled by the announcement that retail sales had jumped 1.2% in April. At the same time, Walmart announced that quarterly earnings would be up 20%. These two announcements go hand in glove but they have a different meaning to us than to most seers. Guess we are just stubborn but we can't rid our mind of the notion that seasonal adjustments are skewing many of the economic numbers being released and making the economy seem stronger than it is. Easter was in March this year and not April as last year. And we think WMT's sales and earnings are still being gained at the expense of small mom and pop retailers. As a result, while WMT may be doing well, the net effect on the economy and jobs is a wash.

But we don't fight a trend, and we think the trend for the next several weeks is up, and that it is tradable. That belief is based on the stock market action of the last week. And so, we bought a few more stocks today to bring accounts to 20% to 35% invested and give us more to watch than AT&T Wireless.

In for a dime, in for a dollar as the old saying goes. Just can't resist buying WorldCom in aggressive accounts. We paid $1.30 per share. It's like a perpetual call on the stock. Of course, if WCOM goes broke we will lose all our money, just like with calls that expire worthless. In those same accounts we purchased EMC at $7.90 for a trade. In many accounts we added some Ford at $16.60 and Hewlett Packard at $19.38. We know HPQ and F have problems, but we have wanted to own them for a while. We are taking relatively small positions in them to have room to buy more if they move lower In trading accounts we bought Delta at $26.80, and Applied Materials, AMAT, at $26.48. Finally, we added Hain Celestial Group to accounts that have Wild Oats. We are going to continue buying HAIN in other accounts if the price stays down. HAIN is selling for one times sales and twenty times depressed earnings. HAIN is a leader in the natural and organic packaged foods industry and the provider of Celestial Seasonings tea. It's a good daily double with OATS.

Earlier this year, Allied Irish Banks announced that a rogue trader had managed to lose $691 million for the bank over a period of years, with no one noticing. Today the WSJ reported that a consortium of banks including Fleet Boston, JP Morgan Chase and others have lost between $600 million and $1 billion on phony metals trades. According to current reports JPM has only lost $2 million and Fleet a mere $70 million. Stay tuned.

We read the other day that The California Retirement Fund is investing $100 million in vineyards in California. Now there is a new idea. Not! For the life of us, we have never been able to understand why plain vanilla stocks and bonds aren't good enough for these big pension funds.

14 May 2002

Sorry there was no post yesterday. Our intentions were good, but we made the mistake of driving through Chicago on our way home from Kentucky to see our mother and wish her Happy Mother's Day and Happy Birthday. While there, we managed to spend four hours in traffic tie-ups and closed roads with the result that we didn't arrive home till after 10pm. Now we remember why we moved to the boondocks.

The stock markets have gained back this week what they lost last Thursday and Friday and so we are back to the 300 point gain in the DJIA of last Wednesday. While volume was punk yesterday and not so hot today, the rally seems to have regained its legs. Correspondingly, the bond market has dropped, especially the short end.

And so to take advantage of these two occurrences, we began buying US Treasury 3.375% due 4/30/2004 at par ($1000 per bond) in our larger accounts today. We've picked up 10% in yield since our last foray and we are entering the markets a little more slowly than last time. But, the spread between cash and the yield on the two-year requires that at least in our larger accounts we start putting money to work again.

Also, because we think this rally has legs, we purchased GE at $31.18, AOL at $18 and Bristol Myers at $29.55 in small amounts in many accounts. These stocks are not the retailers and health network and building stocks that have been in favor. Rather they are fallen former leaders. But if the market rally broadens, we think GE and AOL will participate. Bristol Myers is in a world of its' own. But it is cheap in relation to the overall market, and takeover rumors have begun to surface so we think it's worth a dabble. And if the rally fades, we won't mind holding these three stocks.

Speaking of takeovers, the buyout of Lands End by Sears at $62 per share in cash was announced yesterday. Gary Comer, who founded and runs Lands End, is a neighbor of ours up here in the boonies. We've never met him on the road since he flies in and out on his Lear jet, but we hear he's a nice person. He also obviously got a good deal and Sears is going to look like a sucker on this one in a few years. Seems like every time Sears gets on a roll, they have to go spend a bunch of money buying companies, rather than holding on to the cash or investing in the company. The fact that Comer is taking cash and paying the taxes is telling. Moreover, in the past, Lands End has only done well when Comer was running the company.

The collapse of WorldCom's share price is amazing. The company is earning money and paying the interest on its bonds. But the media, the shorts and now Standard and Poor's have ganged up on the company. Certainly, the board of directors deserves censure and more for allowing Bernie Ebbers to borrow $400 million so he wouldn't have to sell his stock. But the final straw came today when S&P announced that WorldCom is being kicked out of the S&P 500 and replaced by some stock we never heard of. All the folks who mirror the S&P 500 now have a reason to sell. At a dollar a share, we are tempted, but we have had such bad luck lately with dollar stocks going to a dime that we are holding off for now.

We can't help but comment on the recent price action of The Gap. Last week GPS announced that same store sales were down 24%. The stock proceeded to rally 20% on that news. It seems Wall Street was expecting a decline of 30% in same store sales. We are bemused, amused, and befuddled by the share price action on that report. That's why we are staying away from clothing retailers.

09 10 11 12 May 2002

We are on an important trip to Kentucky to celebrate Princess Abigail's 2nd birthday on May 12. May we suggest visiting or revisiting Bud's Poems page?

08 May 2002

Last night Cisco announced flat sales, but 2 cents better than expected earnings and rejoicing was heard through out tech-land. In after hours trading yesterday, Cisco and Intel and many tech stocks rose 10% or more in price. And this morning all the stock markets jumped sharply higher at the opening. Treasury bond prices weakened because of this strength in the stock markets. After about ten minutes of trading the DJIA was up 160 points at the 9996 level, the NASDAQ was up 5% and the S&P 500 was up 2%. After two hours of trading the rally had grown stronger, with the DJIA through 10100 and up almost 3%. The NASDAQ was up 6% and the S&P 500 3%. The stock markets finished the day strongly higher with the NASDAQ, DJIA, and S&P 500 back to where they were a week ago. It was a heck of a rally with the DJIA closing over 300 points higher, the NASDAQ up over 100 points, and the S&P 500 up 40 points. Imagine if Cisco had actually shown sales growth and said the future was bright. It was the tech stocks that fed the rally today, with many up 20% or more. But since most are still down 60% to 80% from their highs, only the folks who bought yesterday, or shorted any day before last week, have much of a profit.

Rallies in bear markets are often sharp and short. They result from scaredy bears covering at the first sign of good news. In long-term bear markets, folks who aren't making money on the long side often cross over to the short side of the market. The problem with switching is that the psychology needed to short stocks is unusual and not possessed by many. But folks don't learn that until they are short and a trade starts to go against them. Then they realize that they can lose all the money in the world, plus commissions. And greed turns to fear and they cover and we have days like today. Rallies are necessary in bear markets to give hope and pull in sidelined money to rallies that eventually fail.

We have been receiving calls from clients regarding litigation over Ann Taylor's allegedly dastardly deeds of several years ago. When it comes to most companies being sued because their stock prices drop, we usually take a hands off approach. We have no problem with tobacco company law suits, and suing brokers for telling clients to buy when the brokers were of the opinion that the recommended stock was garbage. But, the securities' lawsuit bar tends to focus on companies whose share price has dropped. Because of the price drop the lawyers allege that the company must have lied when it announced good news six months ago etc. Invariably, the cases are settled for legal fees and usually what amounts to pennies per share. In many lawsuits in which we are asked to participate, we made money while owning the stock, and in almost all cases we think the lawsuits are nuisances that amount to lawyers seeking fees. We understand that there is risk in owning stocks and that nothing is certain. We have often wondered why there aren't any lawsuits when the price of the stock goes up, since folks who are short the stock lose money. And many stocks rise on hype, especially over the last few years. Guess there is no justice or love for those who sell short.

We are heading to Kentucky early tomorrow to be with our granddaughter Abigail as she celebrates her 2nd birthday on Saturday. Also, brother Jody, who does our posting, is going to be out of his house for the next few days as his new oak floors are being varnished. Thus there will be no posts until next Monday night. Our counsel remains cash is king/queen.

07 May 2002

Non farm productivity was up 8% as reported today. Best rise in 19 years according to CNBC. Can anyone say layoffs? Unit labor costs were down 5%. Can anyone say layoffs? These were the numbers the markets were given to trade on, before the FOMC meeting this morning. As a result the Stock markets opened weakly higher as bargain hunters stepped in as they have every morning only to get slammed by afternoon. Only today, the markets managed to hold on to their gains through midday with the DJIA up close to 100 points. The Fed voted to leave Fed funds unchanged at 1.75%. Treasury bonds rallied a bit on the news. In the final hour of trading, the S&P 500 and NASDAQ gave up their gains to close off for the day. It was a race to the close with the DJIA, as it gave up most of its gains, but still managed to close 28 points higher on the day.

The Wall Street Journal reported yesterday that the SEC is investigating the relationship between KPMG, Xerox's auditors, and Xerox. The horses are out of the barn and now the SEC is trying to catch them. The government is only allowed to kill one big firm per financial blowup and since the Justice Department has already destroyed Anderson and cost 85,000 people their jobs because of a few hundred miscreants, we don't think KPMG has much worry. A fine and a promise to be good will be the result. After all, Xerox is still standing, if just barely.

Today's Wall Street Journal reported on another potential problem just discovered by the SEC, the hedge fund industry. Hedge funds are now a $500 billion industry. Last year the WSJ reports the average hedge fund rose 4% versus a loss of 13% by the S&P 500. Our Model Portfolio rose 20%. We have always been of the opinion that hedge funds should triple the returns of the popular averages and indexes because hedge funds use four or five times the leverage to obtain those gains. Hedge fund usually take a fee of 1% to 3% just for managing the fund and then have a performance fee of up to 20% of the profits on a yearly basis. The hedge funds don't usually share 20% of the losses. Nice work if you can get it. We think hedge funds are over rated because of the leverage used to obtain returns. And with the growth of assets in hedge funds they represent a real threat to market stability.

That threat to market stability is especially true with the advent of futures trading on individual stocks that will begin this August. That trading is going to take us back to the 1920s when bear raiders could short stocks on down ticks and there was no requirement to be able to borrow stock, when shorting. The requirement of being able to borrow and deliver stock has acted as a curb on unfettered downturns in stocks caused by short selling. Imagine, just yesterday, what could have happened to IBM which at one point was down 5 points, if hedge funds could have shorted the stock on down ticks without the need to do a borrow. That's what happens in futures trading where one can short on down ticks and not have to deliver stock. Futures' trading is a zero sum game. For every winner there is an equal loser. The advent of large scale trading in futures on stock indexes back in 1986-87 was a major reason for the crash. That's because supposedly sophisticated investors (a bunch of thirtysomethings with five years of experience in the markets) panicked when their supposedly safe investment theories didn't work in the reality of real market time. Same thing happened in 1998 when the Long Term Capital hedge fund blew up. And the beginning of trading of futures on individual stocks by institutional investors only will occur just in time for the fall fall.

Seattle Slew died today 25 years to the day after he won the Kentucky Derby. A wonderful circle of life completed. We should all be so lucky. Out here in the boonies we have three horses and a pony, and none of them would ever be confused with a Kentucky Derby winner. But we appreciate their independence and the beauty of their movements in the pasture. We haven't ridden them for a few years because we are at the age where watching them is pleasure enough. Our grandson has begun riding the 24 year-old mare Sylvia, who is wonderfully trained and very gentle. Even our two years old on Saturday granddaughter sat on Sylvia's back at Easter--- once. Horses are interesting and independent animals who allow the intrusion of human beings into their world. Our four animals have their own society, with a rigidly defined pecking order that is never violated and is always accepted. When a new animal is introduced, the pecking order is redefined with a minimum of turmoil. Once defined, the new order remains until one member departs. Too bad humans aren't as smart.

06 May 2002

London and Tokyo were closed on Monday. The stock markets opened slightly higher, but then weakened almost immediately. At midday, the DJIA was down about 70 points while the NASDAQ and S&P 500 were about the same percentage lower. The Treasury bond market was soft all day. The Treasury is auctioning $80 billion in debt this week and the Fed is also meeting. No one expects the Fed to take any action, but the large scheduled debt issuance placed a brake on the rally of last week. In the final hour of trading, led by the oil stocks, stocks lost ground rapidly and the DJIA, NASDAQ, and S&P 500 all closed almost 2% lower for the trading day.

We began purchasing Wild Oats in our more aggressive accounts today at $12.40. The share price then popped over $13 when the conference call ended; and we decided to hold off on purchasing any more shares. Hopefully in the next few weeks OATS share price will retrace some of today's gain of $3. If so, we will add shares to more accounts. OATS jumped because the company announced a surprise three cents in earnings for the quarter when a loss had been expected. We have had an interest in the company for a number of years. Our initial forays in the stock were profitable, but our last experience was trying. We are buying the stock over $12, which is significantly higher than it has been trading the last year. But, we wanted to make sure the turn around was real. We first started buying OATS back in 1997. We traded it profitably in 1997, 1998 and 2000. We then lost money on some trades in the fall of 2000. In other accounts; we averaged down through year-end 2000 and sold even or for a small profit in 2001.

We have learned over the past few years, that when buying out of favor stocks, it is best to wait until a company shows signs of a turnaround before purchasing. In the old days, we would buy on the way down and hold for recovery. These days, the sell on bad news folks usually so decimate a stock that our resolve to hold wavers. That was the mistake we made in the spring of 2000 with OATS. We purchased the stock at that time, when it dropped from $20 to $14 as OATS ran into financial difficulty because of a too aggressive store expansion program. Unfortunately, the share price kept declining for the rest of the year. Luckily we took small losses or were able to average down and get out even or ahead a bit in early 2001. At the time we sold we weren't sure OATS would survive, without first going through bankruptcy, because of debt and management problems.

That's why we have waited to repurchase OATS. The company has been totally reorganized and the folks who made the bad decisions are gone. Same store sales have now risen for five consecutive quarters. OATS has to raise cash for new store openings by selling new shares, and the return to earnings will make that task easier. OATS sales will approach $1 billion this year. OATS has a market cap of about $250 million and debt of $100 million. In contrast, Whole Foods, the leader in the natural foods/organic market category, has sales of $2.5 billion and a market cap of $2.5 billion dollars with $200 million in debt. At one time sales, the market cap for Wild Oats would be $40 per share. Obviously, Whole Foods had been managed much better, and OATS has a long way to go in its return to profitability. The first quarter's earnings are a good step in that direction. We are buying to own, not to trade, unless the institutional boys and girls run the share price to $20 in the next few weeks.

For those who found the weekend poems too dark, we offer one to brighten the day.

    Wondrous Spring

Farmers round have turned the ground
And let us know by plowing soil
We should move our thoughts from toil
And welcome spring's smell and sound.

The bobolink has now returned 
To join the meadowlarks sweet song
While down below in beavers' marsh
The frogs sing lustily all night long.

Happily we welcome warmth
And dandelions painting gold
The land that but a week ago
Was covered with a cloud of snow. 

Our little dog jumps to the sky
When after work her daily walk
Takes us to the valley creek
And up the hill where turkeys lie.

As little boys are wont to do
We tarry by the wondrous spring
That gifts us water all the day
And where our grandkids love to play.

Poppies too linger there
To clear the watercress that grows,
For water playing boys to care
And wet themselves from foot to hair.

For no matter what the age
A male can never water pass
Without some act that causes him
To tempt the fate of falling in.

After soaking our feet a while 
We walk the valley to find the cows
And count the calves that now are six
And up to playing calf like tricks.

They jump and bellow with delight
As the dogs chase them round
No harm meant but just to see
How far they'll run before we sound.

No need to rush for springtime bright
Has now begun and stopped the night
From hastening walk and air delight
'Cause winter's darkness has turned to light.

                    BL 06 May 2002

05 May 2002

We have another beautiful day here in God's country and we still have tilling and weeding to do in the garden. There has been no earth shattering news this weekend. More economic thoughts Monday.


Bittersweet the memory
Of dear friends discovering
That love in life does not mean
That joy is ever flowering.

Warm feelings ever flowing 
Within a deeper mind
Remembering a freeing love
Releasing love in kind.

They never really planned at all
Is seems they just enjoyed
And the love still in their hearts
Fills the painful void.

What they sought wasn't found
For time did not allow
And now they hold forevermore
Sweet thoughts of when and how. 

                    BL 05 May 2002

    The Bower School

There ain't no gentlemen in Crowcross County
There ain't no gentlewomen too
Cause they've been raised from birth to hew
To their menfolk and be true.

Yea, there ain't no gentlemen in Crowcross County
But it hasn't always been so
Or that's what the old folks tell us
Yet old age softens truth, ya know.

A man's word has always been taken
To be true and just and firm
Yet yesterday and the week before
There was a new truth to learn

For they sold the school on the quiet
Or rather gave it away
And accused the folks who complained
Of not knowing the legal way.

Yet a man he stood and mourned
In words of another day
That what is legal is not always right
And morality should have a say.

And the lawyer and the chairman
They knew where justice lay
But friendship or cupidity
Caused them to say nay.

Yea, there ain't no gentleman in Crowcross County
There ain't no gentlewomen too
But then in truth there never were
So there's no reason to be blue.

                    BL 05 May 2002

04 May 2002

This is the first Saturday in three weeks that is hasn't snowed, so this post is going to be short. The Model Portfolio finished the week unchanged from last week and down 1.3% for the year. The other averages and indexes for the year were:

    Model Port      ( 1.3%) 
    DJIA                0%
    S&P             ( 6.5%)
    NASDAQ          (17.3%)
    NYSE Comp       ( 2.0%)
    NASDAQ 100      (24.5%) 

From the markets action it is still not a good time to be in tech stocks. AT&T Wireless, with is reasonably good first quarter report, seems to have stabilized around the $9 per share level. Other stocks we are watching include at their present prices:

    Bristol Myers       $29
    SBC Corp            $31
    Ford Motor          $16 
    AOL Time            $18
    GMH                 $14
    Guidant             $38
    Hewllet             $17
    Genentech           $35
    Gap Stores          $14
    Delta Air           $27
    Schwab              $11
    General Electric    $31
    Goldman Sachs       $78
    Northern Trust      $51
    Schering Plough     $27

And we are also considering a package of tech stocks that would include Cisco, EMC, Oracle, Sun Micro, Ciena, and Tellabs. Another package would be telecom stocks and include Broadwing, Lucent, Northern Telecom, and WorldCom. We do not want to buy any stocks at this time, even though all listed are significantly lower than five-year and/or yearly highs. We think this is a once in a decade market correction/bear market and that all these stocks can be purchased at least 20% lower than present prices. Happy weekend, cash is king/queen.

03 May 2002

We have $20 across on War Emblem, and $10-$10-$15 across on Castle Gondolfa in the Derby tomorrow. Past performance is not an indication of future performance both in the horses' performance and our betting prowess.

The stock markets opened lower today and sold off till mid-afternoon. The stock markets then staged a feeble rally that took an hour to recoup about one half their losses. Finally in the last 45 minutes of trading stocks again slipped lower. For the day the DJIA and S&P 500 both lost about 1% while the NASDAQ lost 2%. Treasury bond prices rose as stocks sank and Treasuries closed on their highs for the session. The dollar was week against the euro all day, which is not a good sign for the stock markets.

While we are basically all cash at this point, that posture does not mean that we are ignoring stocks. Rather, we are looking for stocks that we can buy at prices where we can comfortably hold them rather than trade them. Of course, with the way the big boys and girls have become lemmings in their investment behavior, the move from industry to industry, and stock fad to stock fad, has become more manic and desperate as money mangers and fund managers lose their jobs.

Several commentators have cautioned that holding cash is not smart, because of the risk of missing the next big up move in the market. Funny, these same folks never mention how being all cash helps avoid big down moves in the stock markets. Ordinarily, we would agree that being all cash is not a good investment posture. But, the last time we were this bearish was 1987. Back then, we tried to stay invested and moved money to convertible bonds and more conservative stocks. We managed to gain all summer and were up 33% for the year on Sept 30, 1987. One month later we were down 5% for the year. We think this year is going to be more difficult than 1987. We mentioned 1974 the other day. That year did not see a bottom till the last day of the year, when most nifty fifty stocks had been reduced to ashes.

Guru Greenspan has finally joined the treating stock options as an expense on income statements camp. It is better late than never to have the powerful Fed Chairman join the camp. Under present accounting standards, companies can grant stock options instead of cash wage payments. When the options are exercised the companies receive a tax deduction as if wages had been paid, but do not have to report a charge to earnings. Folks like us have been saying for years that not deducting options from earnings creates phony profits. Post Enron, WorldCom Global Crossing et al, the Chairman has now become a crowd of one to join the expense side.

You read it here first. Laszlo Birinyi, a well-known Wall Street Guru and manager of billions of dollars through his own advisory firm, was featured on CNBC today. Laszlo reported on a 1000 page study that he has published that shows, among other data, that "buy and hold" no longer works. It worked in the 1960s because stocks took longer to top out. According to the study, in the 1990s, industry groups tended to top out more than twice as fast as in the 1960s. While we didn't have the empirical data, our personal experience over the past five years made us aware of this fact several years ago. The change probably is the result of the boy and girl gunslingers running billions of dollars, for whom the action is as important as the result.

Just heard Art Cashin of Paine Webber mention M1 and M2. Those were the numbers we watched every week in the 1980s. The balance of payments was a monthly number from the 1960s.

Today the Labor Dept. said that the unemployment rate had climbed to 6%. Larry Kudlow, a CNBC economist, who has a job because of who he knows not what he knows, remarked that the unemployment rate is a lagging indicator. He also said that slowing wage growth is not a problem since inflation is at zero. Inflation is at zero only if you aren't buying gasoline or milk or a place to live.

We agree that ivory towers are actually down in price since those folks have had to vacate them because their predictions on the budget surplus/deficit have been so wrong. The budget surplus is now projected to be a $100 billion deficit. Last year we said the budget deficit for this year would be over $200 billion. We are sticking with that figure. Budget deficits mean higher interest rates eventually.

At midday the White House announced that it sees strong signs that the US economy is poised to grow. The myopia exhibited by the Congress and White House reminds us of similar remarks and inaction back in the 1980s as the deficits began to balloon.

CBOT traders who just a month ago were predicting a Fed Funds rate increase at the May or June meeting, now don't see one until September at the earliest. Again, we remind that we said that in print two months ago.

02 May 2002

The Spring 2002 Lemley Letter has been posted. Several folks have asked for a summary of the May Day post since they said they didn't have the time to read a book. Ouch! And so for those folks a summary of the May Day 2002 post follows.

  1. The stock markets dropped then rallied on good auto sales from GM.
  2. The Hewlett Packard-Compaq merger will be completed on May 3.
  3. We may start buying individual stocks as long-term investments.
  4. Junk bonds are equity type investments, not fixed income investments.
  5. Consolidation in the oil industry is not good for consumers.
  6. Newell Rubbermaid fudges earnings' numbers.
  7. Small cap stocks are the next bubble mania.
  8. Argentina's economic woes will affect other Latin countries.
  9. The failed Venezuelan coup was a black eye for the US.
  10. The current sell off reminds of 1990.
  11. The current sell off may be as bad as 1973-74.
  12. More news means less understanding, and more time needed to comprehend.
We now present today's post.

The stock markets opened weaker on Thursday, as did the bond markets. The weakness in the stock markets was not unexpected because of the gains of the last two days. Within the hour the stocks were to the plus side. The stock markets spent the midday hours treading water with no discernible direction and no market moving news. In the final hour the NASDAQ turned lower and dragged the S&P 500 into negative territory. The DJIA popped higher by 30 points on "buy on close" orders. Treasury bonds closed near their lows. There was some bargain hunting in depressed telecom bonds at the same time as telecom equities continued to drop.

The early morning CNBC program provided the perceived wisdom of Jack Welch. Some folks have a hard time retiring. Welch did a great job pumping up the stock price of GE. Unfortunately in the last year of his reign, GE's share price lost 50% of its value. We think there will be a trade in the stock, but since it was owned by every institution in the land, we are waiting for it to bounce off its September 2002 low of $25 and change. Welch popularized the notion of firing folks to increase productivity and increase earnings. Welch also created the concept of managing earnings on a quarterly basis by using the credit arm of GE. GE is a beneficiary of military welfare capitalism. That's a term that refers to the huge government cost plus contracts that GE receives from the government. GE also receives tax breaks from the government. We think the concept of firing folks to raise productivity is a long term negative for the economy.

Today in the stock markets, the retailers and restaurant chains were strong. These stocks are all selling at 30 times earnings, which is nosebleed territory for us. Tech and telecom stocks remained under selling pressure. The downgrade of Xerox debt by Moody's was cited as one reason for the weakness in tech. Another reason is that a lot of folks and institutions seem to be throwing in the towel. If this were year-end, we'd be very interested. Since it is May, we are waiting a bit more. The tech selling may continue through the end of the June quarter.

May Day 2002

The stock markets opened weakly and sold off through midday. The stock markets action was almost a reverse image of yesterday's action through noon. At one point the DJIA was down over 100 points and the NASDAQ, with Sun Micro Oracle and Microsoft leading the way lower was down over 40 points. Around noon a rally ensued that reversed the downtrend in the DJIA and S&P 500 and by 1pm the DJIA was up above 10000 again. In late afternoon GM announced good truck sales and the DJIA and S&P 500 both pushed higher to close over 1% higher on the day. Today's stock market action contained a very nice reversal and a sign that maybe the rally that started yesterday will have some legs. Even the NASDAQ managed to claw its way back to close to even for the day. The Treasury bond market was strong in the morning when the stock markets were weak, and weakened in the afternoon as the stock markets gained strength. We remained on the sidelines because we still don't have a yen to trade, although we do have the dollars and the puns.

Congratulations to our favorite business hero, Carli Fiorina, who finally won her battle for Hewlett Packard to take over Compaq. Our late partner Don Yarling always had great luck trading HWP and so we have always had an interest in the stock. The only problem with purchase at this time is that Compaq contains the remnants of Digital Equipment, a stock on which we never earned a dime and which caused us many sleepless nights. So we have to decide whether the curse of Digital Equipment trumps the luck of Hewlett Packard. Under $15 we may have to get our feet wet.

We have been reviewing our all or nothing approach to the current market. We are aware that the trader approach that we have employed and which has served us well over the past few years has also caused us to miss a few worthwhile long term buys. One would be PG, which we briefly owned several years ago and got out even. In the current market, Bristol Myers, a favorite of both "the old stockbroker" and Don, has broken to its lowest level in 5 years. BMY has problems with drugs going off patent and a not so promising drug pipeline. But if that were all, our philosophy of buying good companies that have fallen on bad times would be pushing us to buy the stock right now. That's because such info would make BMY a classic buy on bad news candidate. But, we can't get our arms around BMY's infatuation with Imclone Systems, the drug company with the supposed wonder cancer drug. The FDA turned down the application for approval of the wonder drug and requested resubmission of corrected data. This rejection by the FDA caused Bristol's stock to sell off sharply. That's because BMY had committed $1 billion to IMCL by purchasing 20% of the common stock and agreed to provide another $1 billion for marketing when the drug received FDA approval. Risking $1 billion by investing in Imclone wouldn't bother us, that is the cost these days of taking a look at a promising drug. Rather we are very disturbed by the fact that the $1 billion went to inside shareholders who sold their stock to BMY at the all time high and put that money in the bank. Why didn't they want BMY stock? Why did they want to pay a 20% tax on the cash when they could have received stock in BMY and enjoyed further appreciation when the cancer drug was approved and was successful? And more importantly, why didn't BMY insist that the money be invested in the company by purchasing treasury stock? These are the imponderables that make investing so much fun. At the present time we are taking a wait and see approach. If BMY drops a few more points we may begin taking a position in the stock. The Imclone drug will either be approved or not. That decision is to be made soon. This is our ultimate reason for holding off on purchase since in the deep recesses of our mind (that's way back in) we think the data was fudged.

CNBC had a segment today on Junk Bond funds. Our take on junk bonds and junk bond funds is and always has been that folks who buy them must understand that they are basically making equity investments. Folks should not count the junk bond portion of their holdings in the bond portion of their asset allocation.

We have been having a hard time understanding how the major oil companies could be reporting such lousy earnings in the first quarter without those reports having a negative effect on their share prices. Then yesterday, when the congressional hearings were held we realized that the recent consolidation in the oil industry rivals the consolidation that has occurred in the media industry. And more consolidation is to come. Welcome back to the days of the Robber Barons and Media Moguls. If you wait long enough history does repeat itself, in war and economics and human stupidity. With oil stocks, the big three or four now control the provision of oil and gas in the US and Europe. And they can move their earnings around the world now to pay the lowest tax rates. The analysts understand this fact, and now so do we. And, of course, oil execs never talk with each other about pricing or supplies of oil and gas when they get together for hunting or fishing or golf. They only talk about baseball and Tiger Woods at those gatherings. And so, as with electricity pricing in California in 2001 and the nicotine content in cigarettes, there never has and never will be collusion on pricing or supplies. That would be un-American.

Here we go again. Maybe because we owned Newell Rubbermaid below $20 and sold for a small profit on a bad earnings report, our judgment is clouded. The shares of NWL now trade over $31. It seems that every other year, NWL reports better than expected earnings, if special charges are excluded. In 1999 NWL earned $1.65 excluding special charges of $1.31. In 2001 NWL earned $1.20. For this year NWL expects to earn $1.50 excluding a special charge of $1.74. Newell's earnings reports are textbook cases on how to manage earnings reports. For investors, the difficulty lies in knowing when the "big boys" are going to decide that special charges are just ways of managing earnings ala GE. We've always like Newell's products. Their basic problem is that a majority of their sales are to Walmart and Home Depot et al. who have more control over how much they pay suppliers like Newell than mom and pop hardware stores; and so Newell's profit margins are always being squeezed. In fact, in the first quarter of 2002, Newell's total sales dropped. This is a real emperor's clothes stock and that is why we don't own it. We do wish we had held for more of the ride, though.

Since small cap stocks are all the rage, some of these tech stocks that are heading south my soon reach the small cap territory. What is small cap, you ask? And why should you be buying it? The answer to the first question is any company with a market cap under some number. At present we think that number is a market cap under $1 billion. We guess we show our age because we remember when the market cap had to be under $50 million to be small cap. And that time was only 15 years ago. The rush of institutional and mutual fund money to small cap stocks has a lemming quality about it. We aren't inclined to follow this latest fad over the cliff. There is a huge amount of money beginning to chase what are, by the definition of small cap, too few goods. We just hope the trend continues so we may get some dollars invested in some of the large cap stocks being thrown out with the bath water in the rush to small cap by the big boys and girls. Another bubble is being created, and more quickly than the last one.

Argentina's economic crisis seems to have had its 15 minutes of fame in the US media even though it seems to be deepening. Same goes for the US sponsored coup attempt in Venezuela. Columbia continues to experience political assassinations on a regular basis. Brazil has had its debt ratings lowered by Merrill Lynch and Morgan Stanley because the Workers Party candidate is leading in the polls. In other words, all is not happy in South America on the economic and political front. And the US Congress and The White House don't seem very interested. Look for more special write-downs by companies doing business in South America.

In a further note on the Argentine, Carl Quintinilla on CNBC reported that US companies like McDonald's were paying their Argentine workers in pesos when the peso was one to one with the dollar. Now that the peso has been devalued to three to one to the dollar, the workers salaries remain the same in pesos as before the devaluation. Carl didn't mention whether Big Macs are still at the old peso price. We'll bet they aren't.

We are of the opinion that the current market retreat is not a typical sell off that can be profitably traded. We have compared this year to 1990 and the beginnings of Iraq War I led by President Bush the First. We said that this 2002 market might be reflecting the beginning of Iraq War II led by President Bush the Second. Since perceived wisdom now is that the start of Iraq War II will not be till 2003, it's not untoward to assume that the current market miasma may continue longer than the last quarter of this year.

Another possibility is that we are in a 1973-1974 meltdown to correct the excesses of the 20-year bull market. In other words we may be in a long-term bear market. The reason we hadn't considered this before is that we, like most market observers, have become used to quick corrections followed by strong rallies to new highs. We had come to think that the dissemination of economic news is now so swift and so widespread that opinions and decisions can be formed and acted upon more quickly than in the "old days". But, what we are learning from clients and general observation, is that the plethora of information has created a cornucopia of information and an actual increase in the amount of time needed to distill useful information in order to be able to make informed decisions. Only twenty years ago there were one or two gurus to listen to, Dr Doom, Henry Kaufman of Salomon Bros., and Mr. Gloom, Albert Winjolower (sp?), of Goldman Sachs come to mind. Before that, for those of us in Chicago, it was Elliott Janeway. Very few investors outside of New York read the Wall Street Journal. There was only one economic number per month, the balance of payments, to worry about. There were a few hundred mutual funds. Bank trust departments, who were long term investors, controlled the markets.

None of those conditions apply today. There is a new guru every hour. We are one of thousands if not millions of gurus on the Internet providing info and ideas and opinions. Economic data that is said to be important is released every hour of the day and night. Traders dominate the markets and swing for the fences on every trade. Banks lose billions on trades and say oops. Merrill Lynch will be considered fortunate if they only have to pay $2 billion in fines for the chicanery of their analysts. Merrill Lynch stock will rally on that news and the SEC will go back to sleep until after the next crisis. The new "all the news, all the time" atmosphere has enervated investors and made investment news more difficult to comprehend and investment decisions more difficult to make. The bursting of the tech bubble has done great damage to investor psyches. All of a sudden, investing is no longer a risk free game where real money is treated as monopoly money. The all too real losses that many folks have suffered, even if it has only been of profits evaporating, has created worry and destroyed the wonder of the "fun" of investing in sure thing common stocks. And so, bear markets may take longer to run their course, and may be more volatile and severe.

May 2002 Thoughts

April 2002 Thoughts

March 2002 Thoughts

February 2002 Thoughts

January 2002 Thoughts

December 2001 Thoughts

November 2001 Thoughts

October 2001 Thoughts
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.