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29 October 2004 - Daily Comment

This Morning

6:27am and Asia was lower as is Europe. Oil is up a few pennies and gold is at $427. This morning brings advance 3rd Quarter GDP which is a very exciting number. At 9am the Michigan sentiment number arrives. Our guess is that the markets today are similar to yesterday as most folks are situated as they want to be for the election.

So let the games begin.

Yesterday’s Markets

7:32am and for stocks to really break out to the upside the S&P 500 has to convincingly move to the 1150 level on good volume. We don’t see that happening till next week or later but we do expect the boys and girls to keep buying into mutual fund year end which is the end of this October month.

Jobless claims for last week were 350,000 up 20,000 from last week. Continuing claims were a bit higher to 2.82million.

China’ Central Bank has raised it base lending rates by 27 basis points to 5.58% in the hopes of cooling off its economy. That is the first interest rate raise in nine years.

Andrew Corp reported earnings of a penny per share versus a loss last year. ANDW had already warned. ANDW lowered guidance for the first quarter. We had hoped such news would have occurred on a down market day so we could reestablish our position but it doesn’t look like the markets are going to accommodate our wishes.

We plan on adding QWEST to our telephone monopoly in larger aggressive accounts. While the RBOC aren’t going to set the house on fire we think that the turmoil in the industry is settling out and that in the next year more institutions will return to these stocks as they realize that wireless is going to provide the growth and the loss of home land lines where DSL is not involved will eventually turn out to be profit enhancing.

9:22am and stocks are lower in moderate trading. ANDW is not cooperating as it is moving higher. We own a good chunk of stocks and so we are not in a rush to add issues at this time but we are looking. The markets seem to be absorbing the selling and the major measures may attempt the upside in another hour.

Breadth is 5/4 negative on the NYSE and the NAZZ. Oil remains lower but the selling in stocks is picking up a bit.

11:21am and trading is desultory with the momentum stocks getting the action. We bought Colgate back at $45.33 in larger accounts and also bought Kyocera in large accounts at $73.25, Qwest at $3.39 in accounts where we bought SBC and BLS yesterday and HAIN at $16.72 in many accounts. We bought a few more shares of TLAB at $8.05.

TLAB has been a nemesis in this rally because it has zagged as all our other stocks zigged but we remain confident that our accumulation and patience will be rewarded.

Breadth remains 5/4 negative and oil is creeping higher after reversing earlier and now trading over $52. The DJIA is down 8 points and the NAZZ is up 3 points. A day of rest would not be untoward although we doubt that will occur.

12:50pm and the DJIA has grudgingly moved to the plus side. Breadth has turned positive on the NYSE and is moving that way on the NAZZ. Volume has slowed on the profit taking. The bullish case would call for more volume if the markets rally this afternoon.

1:11pm and crude has turned lower again and so stocks are moving higher. Crude oil is down $1.01 at $51.45.

3:02pm and crude oil closed at $50.92 down $1.54. The DJIA gained 2.51 to finish at 10004. The NAZZ rose 6 point to 1975 and the S&P 500 tacked on 2 points to end at 1127. Breadth was positive on the NYSE and slightly negative on the NAZZ and volume was moderate.

And tomorrow is today.



28 October 2004 - Daily Comment

This Morning

6:05am and oil is again lower by 90 cents this morning to $51.53. Gold is $422.50 down $3. U.S. futures are indicating a flat to slightly lower opening which would be expected give the last two days. We’ll have to see whether the market absorbs the selling and moves higher later in a continuation of the strong day yesterday. Volume was good, the advance/decline numbers were good and the rotation to DJIA stocks from the NAZZ leadership of last week made sense.

But the election looms and many investment folks see a Kerry win as a negative. With the polls tightening the race to even we would expect some slowdown until the election results are somewhat clear. We say somewhat because all the talking heads are predicting gridlock and election brouhaha and a visit to the Supremes again. Since the media is always fighting the last conflict we aren’t as worried about confusion as they. We think there will be a clear cut winner. If it is Kerry the markets may sell off for a day or two but then buying will reappear. If Bush wins the markets will rally a bit, but then return to a base from which to await economic events.

The election is important as an unknown outcome for the markets. Once the winner is obvious then the markets will move on to new worries as it always does.

Overseas markets were ebullient overnight with Hong Kong up 2%, Japan up 1% and Europe up almost 1% in most countries.

So let the games begin.

Yesterday’s Markets

7:30am and Durable Goods orders were up 0.2%, ex transportation up 1.7%, Machinery up 2.9%, Computers/Electronics were up 9%. No move in stocks occurred on the news and ten-year Treasuries are at 4%.

8:56am and the stock markets are in the process of digesting yesterday’s gains. The DJIA is down 38 points and the NAZZ is off 1 point. Breadth is positive and volume is muted. The ten-year Treasury is at a 3.97% yield and the five-year is at a 3.23% yield.

We are going to buy Nokia for many accounts at $14.98. We traded Nokia off its low of $11.50 and thought it would go back down to that level. Since it didn’t and we want to own the stock we bought this morning. Nokia has $15 billion in cash and has repurchased 5 million shares recently at the current level. The total market value the company is about $70 billion with sales of $40 billion. Subtracting the cash of $15 billion gives a market cap of $55 billion or less than 2 times sales.

We are also looking to re-purchase Hain Celestial if it moves down to the $16.50 level. HAIN doesn’t report earnings till the end of November and we want to won some before the election is over.

The Hain Celestial Group, Inc. (Hain Celestial) manufactures, markets, distributes and sells natural, organic, specialty and snack food products under brand names that are sold as better-for-you products. The Company's primary natural food brands include Celestial Seasonings teas, Hain Pure Foods, Westbrae, Westsoy, Rice Dream, Soy Dream, Imagine, Walnut Acres Certified Organic, Little Bear Organic Foods, Bearitos, Arrowhead Mills, Health Valley, Breadshop's, Casbah, Garden of Eatin', Terra Chips, Harry's Premium Snacks, Boston's, Gaston's, Lima, Biomarche, Grains Noirs, Yves Veggie Cuisine, DeBoles, Earth's Best and Nile Spice. Its principal specialty product lines include Hollywood cooking oils, Estee sugar-free products, Kineret kosher foods, Boston Better Snacks and Alba Foods. On June 3, 2004, the Company acquired Jason Natural Products, Inc., a California-based manufacturer and marketer of natural health and body care products.

10:19am and crude is down $2 per barrel and stocks are ramping on that action. The DJIA is up 50 points and the NAZZ is up 10 points. Breadths is 2/1 positive. We bought the Nokia, missed the HAIN for now and we are buying more OATS at $5.90 to spread around.

11:36am and stocks remain higher with the DJIA up 55 points and the S&P 500 is up 7 at 1118 and the NAZZ is up 30 points at 1957. The S&P 500 needs to hold 1111 today for the rally to continue. We would expect a test of that level in the hour before the hour of the close also known as the contra hour.

We bought SBC Communication and BellSouth in larger/aggressive accounts now that the Cingular –which they jointly own- AT&T Wireless merger has been completed. Both have decent dividends and we may buy more in the days ahead on any pullback. Both stocks have already pulled back about 15% from their August highs when the courts ruled that the RBOCS don’t have to provide access to AT&T and MCI at favorable rates. Both stocks are near six year lows and will be the survivors.

1:05pm and the DJIA is up 90 points as buying continues. If the DJIA closes with a 100 point gain today it will be the first time since May of 2003 that that has occurred. But there is still two hours of trading left.

We were looking at Sirius Satellite which has a market cap of $5 billion and tons of debt. Its average monthly revenue per subscriber is $11. It now has 662,000 subscribers. AOL has 20 million subscribers and revenues of about $10 per subscriber per month has is given no value by the stock markets.

1:40pm and Treasuries are down with the ten-year at a 4.10% yield and the five-year at a 3.39% yield which represents a 10 basis points rise in yield today for both.

1:56pm and entering the final hour of trading the DJIA is up 105 points. Oil is down $2.71 to $52.46. The final hour is going to be interesting. Most European markets closed 1% or higher on the day.

3:02pm and the DJIA closed up 115 points at 10013. The NAZZ gained 40 points to 1968 and the S&P 500 rose 14 points to 1121. Volume was the best in a while and breadth was 2/1positive at the close.

And tomorrow is today.

The release of the Fed Beige Book minutes suggests that contrary to our prediction there will be a 25 basis point tightening in November.

The minutes for October 18, 2004 follow:

Prepared at the Federal Reserve Bank of Chicago based on information collected before October 18, 2004. This document summarizes comments received from businesses and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts generally indicated that economic activity continued to expand in September and early October. Boston, Philadelphia, Chicago, Minneapolis, and Kansas City noted continued expansion in economic activity. Richmond and Dallas said the pace had quickened, while New York, Cleveland, and San Francisco suggested that growth had moderated somewhat. St. Louis received mixed reports on economic activity, and Atlanta cited widespread hurricane-related disruptions. Many reports suggested that higher energy costs were constraining consumer and business spending.

Reports on consumer spending in September and early October were mixed by District and spending category. In contrast, business outlays appeared to pick up in most regions, with modest increases in both capital spending and hiring. Residential real estate activity remained robust in most Districts, although it slowed in some. Nonresidential activity was still relatively weak across the nation, though there were scattered signs of improvement. Manufacturing activity increased further since the last Beige Book. Household loan demand seemed to soften somewhat, but business loan demand picked up. Businesses in most Districts continued to express concern over the rising costs of energy and other inputs, although more manufacturers and business service providers were reportedly able to pass part--if not all--of these cost increases along to their customers. However, increases in wages and retail prices generally were subdued. Fall harvests were ahead of the normal pace, and yields of corn and soybeans were expected to set records in some Districts. Energy-related activities continued to increase, despite some disruptions caused by Hurricane Ivan.

Consumer spending/tourism

Consumer spending in September and early October was mixed by region and category. Many Districts indicated that retail sales were soft during the reporting period, while others noted modest improvement. Apparel sales were mixed across the nation. Unseasonably warm temperatures were blamed for weak sales of fall merchandise in the Cleveland, Chicago, and Minneapolis Districts. Hurricanes disrupted retail activity in the Atlanta District, though they did provide a boost to sales of building materials. Most retailers appeared content with inventory levels heading into the holiday shopping season. Light vehicle sales were strong in many Districts during September, although they dropped off in early October. Boston, New York, and San Francisco reported strong tourism activity, but Atlanta said that tourism "took a substantial hit because of the hurricanes." Contacts in many Districts said that high energy costs were constraining household spending, and some said the presidential election was heightening uncertainty among consumers.

Business spending/hiring

On balance, capital spending appeared to pick up modestly. Philadelphia, Chicago, and Kansas City reported that manufacturing firms increased their capital outlays, while Cleveland and St. Louis said that spending was mixed by industry segment. Chicago added that special factors, such as expiring tax incentives and changing environmental regulations, contributed to higher capital outlays. Several Districts reported strong demand for transportation services, and shipping companies were said to be purchasing equipment to keep up with rising freight volumes. With regard to other business spending, Philadelphia noted an increase in technology spending while Chicago and San Francisco reported gains in advertising.

Hiring activity varied by region and industry, but appeared to increase modestly. Nearly half of the Districts said that demand for temporary help increased since the last Beige Book, although momentum slowed in some areas. Reports of permanent hiring became more frequent, notably in manufacturing industries. Five District reports suggested a general increase in manufacturing jobs, while none indicated an outright decline. Boston noted some "sizable increases" in retail employment, and Richmond said that a broad array of service-producing firms were adding workers. Hiring reportedly improved in financial services (New York and Minneapolis) and transportation (Dallas) as well.

Some Districts continued to report isolated shortages of workers in particular occupations such as skilled manufacturing (Boston, Chicago), truck drivers (Cleveland), and upper-level finance occupations (Minneapolis). In addition, some Districts noted signs of more broad-based firming of labor markets. New York said "there are fewer people seeking (office worker) positions;" contacts in the Richmond District suggested there were "fewer qualified candidates to fill permanent positions;" Chicago noted there were "fewer applications for open positions;" and Minneapolis indicated that "labor markets have tightened for a number of industries."

Construction/real estate

Residential construction and real estate activity was robust again in September, although it appeared to soften further from the last Beige Book. New York was the only District to report a general increase in housing market activity. Boston and Kansas City said that sales of high-end homes had softened, and Cleveland reported weakness at all price points. Home prices continued to increase at a healthy pace in most areas. However, a Realtor in Minneapolis suggested some slight price reductions, and homebuilders in the Cleveland and Dallas Districts reportedly raised incentives and/or lowered prices to spur demand.

On balance, nonresidential activity remained weak in most Districts, but there were scattered signs of improvement. Chicago and Dallas noted some pickup in office markets, and Cleveland reported particular strength in the light industrial segment. The Richmond and Chicago Districts said that retail real estate activity remained robust.


District reports suggested that manufacturing activity expanded further from the previous Beige Book. Reports ranged from solid expansion in the Richmond, Chicago, and Kansas City Districts to decidedly mixed in St. Louis. Hurricanes caused some production disruptions in the Atlanta and Dallas Districts. Stronger activity was evident across a wide array of industry segments, though, on balance, producers of durable goods exhibited more strength than producers of nondurable goods. A number of Districts reported continued strength in metals production, Richmond and Dallas noted improvements in petroleum-based products (such as plastics and petrochemicals), and Chicago said that demand for heavy equipment was still very strong. Demand for high-tech goods was mixed. Boston and San Francisco noted some softening in their semiconductor industries, but Dallas said that strong orders for consumer electronics helped boost demand for semiconductors. The September surge in light vehicle sales helped bring bloated inventories down to more desirable levels. Still, Cleveland pointed out that domestic automakers had announced production cuts.


Loan demand followed a pattern similar to that reported in the last Beige Book; the household sector softened a bit while loan demand from businesses strengthened somewhat. The moderation on the household side largely reflected a decline in mortgage applications. While new originations were holding up in most Districts, refinancing activity fell off. There were no changes reported in standards and terms for household loans, and credit quality continued to improve. Many Districts indicated that business borrowing had increased; New York was the only District to note a slowdown in business lending and tighter standards on business loans. In general, business loan quality remained high and even improved in the Cleveland and Chicago Districts.

Prices/employment costs

Wage pressures generally remained stable, according to most District reports. Contacts in the Chicago District, however, said that wages continued to trend higher and, for the first time in several years, some firms had begun paying hiring and retention bonuses again. In addition, there were scattered reports of wage increases in occupations where workers were in particularly short supply, such as truck drivers and skilled tradespeople. Kansas City noted that firms in energy drilling activities had raised wages 10 percent or more to attract entry-level workers. Contacts in much of the nation continued to express concern about high benefits costs, most notably for health insurance.

Firms across the nation also expressed concern about higher input costs, particularly for energy and petroleum-based products, metals, and construction materials. Three broad industry categories were disproportionately affected by these increases: transportation, manufacturing, and construction. Six of the twelve District reports suggested that trucking firms were able to pass along most, if not all, of the cost increases to their customers. In contrast, Atlanta said that trucking firms were having a more difficult time increasing rates, and Chicago and Dallas indicated that competitive pressures were preventing airlines from passing along higher jet fuel costs. Manufacturers said that prices remained elevated for some other inputs, such as metals and plastics. While some Districts said that manufacturing firms had little success in passing along higher materials costs, one-third noted that more of their producers' customers were accepting price increases. Prices continued to rise for building materials in short supply, such as metals, concrete, and lumber. Here again, many builders had to absorb the higher input costs, but builders in the Cleveland and Kansas City Districts were able to pass along at least some of these increases to homebuyers.

Despite mounting cost pressures, most District reports suggested that retail price increases were still largely subdued. Boston was the only District to indicate that retailers were able to raise prices to the consumer in response to higher costs.

Agriculture/natural resources

Fall harvests were ahead of the normal pace in much of the country, as growing conditions improved in September and early October. Corn and soybean yields were expected to set records in some Districts. With lower current prices for corn and soybeans, more producers planned to store crops in hope of higher prices in the future. There were reports of storage and transportation constraints for corn. A record cotton harvest was expected in Texas, but both cotton and citrus crops in the Southeast experienced significant damage as a result of the hurricanes. Demand for livestock remained strong. Moreover, Kansas City and Dallas reported that pasture conditions had improved, and ranchers in the Dallas District suggested these conditions were "conducive for herd expansion."

Activity in the energy industry continued to increase, despite some disruptions in the Gulf of Mexico resulting from Hurricane Ivan. Minneapolis, Kansas City, and, to a lesser extent, Dallas reported increased drilling for oil and natural gas.



27 October 2004 - Daily Comment

This Morning

6:35am and Asian markets were mixed with Hong Kong and Taiwan lower and Japan slightly higher. Europe is higher and U.S. futures indicate a lower opening. Oil is off a dime and gold is at $428.

We will continue to add to accounts into month end. Then we will consider the lower priced stocks at year end to round off investment positions. The Model Portfolio is about 52% invested.

So let the games begin

Yesterday’s Markets

8:29am and stocks are set to open higher on oil being lower and Elliott Spitzer announcing that he won’t be bringing criminal charges. AIG is going to open $3 higher which will give a boost to the DJIA.

The completion of the AT&T Wireless merger into Cingular will free up $30 billion for reinvestment.

Tellabs’ earnings were a penny shy and the stock is lower this morning. But heavens to Betsy, revenues were up 16% and TLAB earned 11 cents per share. Rejoice and buy on the sell off which is what we plan to do. The shares are also down because AFCI will vote on the merger on November 30. Thus the spread is going to close and TLAB could be sold down to the $8 level by short sellers buying AFCI and selling TLAB. There is an arbitrage profit in buying AFCI and shorting TLAB but we don’t want to take the risk of the deal falling through. It has already been adjusted once. the selling in TLAB today is related to that arbitrageurs selling TLAB and buying AFCI. There is a lot of arbitrage money being freed up by the AWE deal closing.

RFMD reports sales in Asia are punk and the shares are off. We are interested in the stock for year end if it gets back in the $5 range. We are gong to concentrate on Nokia for our cell phone exposure because the quality is there.

10:59am and the DJIA is up 65 points and the S&P is up 7 points while the NAZZ is unchanged. The DJIA and S&P have to play catch up if the markets are to move higher.

We added HPQ to accounts at $17.75 and we are also buying additional TLAB for aggressive accounts. We initiated a position in Comcast at $28.29 in accounts where we sold Sears yesterday and we are also buying a few shares of Wild Oats at $5.90 for our aggressive accounts to begin building a holding in that speculative issue.

12:25 pm and the DJIA remains up 95 points while the NAZZ is finally higher. Breadth is 2/1 positive on the NYSE and has finally turned positive on the NAZZ.

1:35pm and Adelphia is going to let Time Warner and Comcast bid jointly for its cable properties.

1:51pm and entering the final hour of trading the DJIA is up 101 points and the S&P 500 is up 12 points but the NAZZ is only 5 points higher. Breadth is negative on the NAZZ and 2/1 positive on the NYSE. Treasuries are unchanged. Oil is also higher. This market is as confusing as any we have experienced and has been for the last year.

That’s why we are going with what has worked for us in the past in regard to investment percentages. The last five years it has paid to begin investing at this time of year.That doesn’t mean we will buy at the lowest price. It does mean that investments made now have usually have been profitable by February of the next year.

TLAB has traded 20 million shares today which is much more than would be necessary to hedge the short in the amount of AFCI traded. So there must have been folks disappointed with the TLAB numbers. We weren’t and aren’t.

3:02pm and the DJIA closed up 130 points at 9882. The S&P 500 gained 15 points to end at 1110 and the NAZZ managed to tack on 11 points to finish at 1925. Breadth remained 2/1 positive on the NYSE and turned positive right at the close on the NAZZ. Treasuries were softer into the close. Oil closed over $55.

And tomorrow is today.



26 October 2004 - Daily Comment

This Morning

7:04am and Asia and Europe was and are higher and U.S. futures also indicate a higher opening. The only trading number today is Consumer Confidence at 9am. Oil is lower. The markets are at a crossroads and need to hold present levels or a much greater sell off is in store. In the past few years the markets have managed to hold key levels as they recovered from the great sell off of 2000-2002 and we think they will do so again.

So let the games begin.

Yesterday’s Markets

8:08am and Wild Oats disappoints again. So what else is new? The shares are going to open under $7 and we may be tempted to trade this issue if the price falls under $6. We own a few shares in family and very aggressive accounts, but we avoided in most accounts with the idea that if there were bad news we would see this type of collapse, which we have seen before.

The only economic news today is Existing Home Sales after the markets open at 9am. Tuesday sees Consumer Confidence and Wednesday brings New Home Sales, the Fed’s Beige Book and Durable Goods Orders. Thursday has Jobless Claims, and Friday is a biggy with Adv 3rd Quarter GDP, the Deflator (inflation measure), Michigan Sentiment and Chicago Purchasing Mangers Index.

9:02am and stocks are lower in moderate trading. We sold our speculative Sears purchase of last week for a $2 loss this morning. We spent the weekend trying to remember anyone under the age of 60 who told us they shopped there and when we couldn’t we decide to abandon ship. Sears may be one of those companies that because we and it have been around for so long we have too much respect for. We went through this same exercise in Sears with more accounts at lower prices a few years ago. Since there are enough other stocks in which we have more interest we are saying goodbye to this one.

10:06am and lower priced tech stocks are higher and our guess is that individual speculative money is being placed in that area as the gurus talk about a year end tech rally.

12:02pm and the DJIA is down 25 points and the NAZZ is off 7 points. Volume is moderate and breadth is negative. Traders are not placing any large bets, yet.

1:05pm and entering the contra hour breadth is positive on the NYSE and NAZZ. The Major measures are positive but there is no rush to buy or sell. We are watching.

3:02pm and the DJIA closed up 8 points at 9750. The S&P 500 dropped 1 point to end at 1094 and the NAZZ lost 2 points to 1912. the Treasury ten-year finished at a 3.96% yield while the five-year went out at a 3.24% yield. Oil lost 64 cents to close at $54.54.

And tomorrow is today.



25 October 2004 - Daily Comment

This Morning

6:11am and Asia was and Europe is lower in sympathy with Friday’s dismal U.S. markets. Gold is up $4 to $420 and this morning stateside futures are indicating a continuation of Friday’s lower trading.

With one more week till election and the polls varied the uncertainty remains in the marketplace. All the doom and gloomsters are suggesting a drawn out counting process but when everyone is on one side of an idea we are comfortable taking the other side. The election will be close but there will be a winner Wednesday morning a week and the markets can then get back worrying about other matters.

We are of the school that no matter who wins the economic data will be controlling through year end. That and profit taking if there is a Kerry win and tax selling no matte who wins. Initially a Kerry win may cause a further sell off in the markets although we would guess that the last week has seen some adjustment for that possibility. A Bush win may thus lead to a temporary gain but in the end the markets will trade on earnings and outlook.

With the suggestion of growth slowing and earnings flattening six months out our guess is that the Fed doesn’t tighten although another Fed governor over the weekend suggested that short rate should exceed the inflation rate. Maybe we should say that the Fed shouldn’t tighten rather than predict what they are going to do. The yield curve is flattening and we don’t think many besides traders are served by buying the ten-year under a 4% yield.

After a lower opening this morning there may be a rally attempt and then who knows.

So let the games begin



22 October 2004 - Friday’s Markets

7:06am and Europe and Asia were both mixed overnight and this morning with more countries up than down. U.S. futures are indicating a soft opening.

K-Mart has become the darling of the real estate crowd as it sells off properties and analysts have place new values on the stock based on its real estate holdings. The bond holders controlled KMRT in bankruptcy and it is obvious that there was equity for common shareholders if any expert had cared to value the properties KMRT owned. But we would guess that the folks giving expert opinion on values were in the back pockets of the hedge fund bond holders and so goodbye common shareholder.

Anyway, the valuation on K-Mart gives us new interest in Sears. Sears carries its properties at a depreciated $8 billion which is where the entire equity of the company is priced. Having rid itself of its financing arm it has $4 billion in debt and $3 billion in net quick assets offsetting that debt. For a retailer its debt/equity ratio is in great shape. Now all they have to do is sell products. We may start picking at the stock.

Google is now priced at $40 billion in the market place on $52 million in earnings in the latest quarter. The 1990s live again.

9:11am and stocks opened higher and then moved to unchanged. Breadth is flat and since there were no numbers to trade this morning it seems the boys and girls are reacting to the companies that reported overnight. It seems slow. We bought a small position in Sears in aggressive accounts just to take a look at the stocks at this level of $33.85.

12:29pm and the DJIA is off 50 points and the NAZZ has surrendered all of yesterday’s gains and then some. Volume is moderate. Breadth remains positive on the NYSE but is 2/1 negative on the NAZZ. Amazon and Microsoft have trumped Google.

1:53pm and as we approach the final hour of trading for the day and week, stocks are on their lows for the day. We thought there might be a rally today but the DJIA is below 9800 and the S&P 500 is below 1100 and support now becomes resistance. We added a few more shares of Safeway to accounts at $17.85. The discipline now becomes to continue buying the sell off because we are committed to acquiring stocks as the markets moves lower in October into November.

With Condi Rice, the National Security Advisor, flying all over the country giving speeches we presume that the terror warnings are not going to be raised or she would be back in Washington hard at work instead of campaigning.

And so we are comfortable with our strategy.

2:34pm and there is no rally in the cards today. So we will spend some time this week end for more stocks. We are committed to participate in stocks that are under pressure and the markets are accommodating us.

3:02pm and the DJIA closed down 110 points at 9755. The S&P 500 dropped 11 points to 1095 and the NAZZ gave up 38 points to end at 1915. Oil closed at $55.17 a new high close and the ten-year Treasury ended at a 3.98% yield. Breadth needed Listerine at the close.

And tomorrow is another day.



22 October 2004 - Daily Comment

This Morning

6:30am and Microsoft has earnings 2 cents ahead of estimates but the share price is down 50 cents in early trading. Amazon disappointed and is off a couple of dollars and Google wowed folks and gained another $7 in late and now early trading. It’s nice that the boys and girls have another EBAY type stock to absorb their cash hoard.

We continue to look for stocks for year end. We are a broken record on this subject but after the election, which will not drag on, a big part of the uncertainty in the market place will be settled. And the end of the world talk will go the way of all political hyperbole and be replaced by hope and good things to come talk.

But that denouement is two weeks away and until then stocks have to get through the end of October and the first few days of November and it could be interesting and volatile.

So let the games begin

Yesterday’s Markets

7:32am and First Time Claims for Unemployment for last week were 329,000 down 25,000 from prior week. Continuing claims were 2.79 million.

We misspoke yesterday; the ten-year Treasury is at a six month low in yield/high in price not a twelve month low. It is currently at a 3.96% yield.

8:50am and where else can one work and have a deer walk up to the front door. She must have known I am not a hunter. It helps to have a corn field right outside the door.

The DJIA opened lower but now is recovering and the NAZZ is 8 points higher as gurus continue the talk about the rotation to tech by year end. Tech stocks are relatively - not absolutely - cheap and there have been so many false starts this year in relation to a tech rally that we are in the main avoiding the rush to participate this time.

We own a few larger tech stocks in HPQ and MOT and NOK and one smaller but more expensive stock in TLAB but we aren’t inclined to add any more names now. The last few years October tech rallies have turned into late November sell offs before techs finally made their bottoms in December. We have a list of low priced stocks, the usual suspects, that we have traded over the past four years but we are waiting to purchase that package until December, around the 15th, if it is still low priced. And when we sell it in January/February it will stay sold.

9:23am and Sears is off $2 to $34 as the Sears soap opera continues. This stock has been as high as $48 and low as $32 in the last twelve months and the last three years has also witnessed wild swings in the price of Sears’s shares. We have placed it on our screen but don’t know whether we have the stomach to hold so we will watch for a while. Since fiscal year end is approaching there may be quite a few boys and girls who want to eliminate this perennial pooper from their portfolios.

Happily Maytag zagged instead of zigging and so we have missed an opportunity to pick up more shares. But the rise in the share price suggests buying interest and since we already own shares in aggressive accounts we are content to watch the share price rise. Another $1 and we’ll be even.

10:04am and the Index of Leading Economic Indicators was down 0.1% in September.

11:35am and after being unchanged half an hour ago the DJIA is now down 60 points and the NAZZ is only up 3 points. It is a volatile day.

We have added Chiron at $31.95 to aggressive accounts. We also bought more TLAB for aggressive accounts at $8.75 and Safeway at $18.30 in accounts where we already own Maytag. Safeway is as depressed as Kroger. We also added Tiffany at $28.50 to many accounts.

Chiron’s price is down 80% on the flu fiasco but they are not going to be sued and the stock is cheap for a biotech. Chiron Corporation is a global pharmaceutical company focused on developing products for cancer and infectious diseases. It commercializes its products through three business units: blood testing, vaccines and biopharmaceuticals. Chiron Blood Testing develops and commercializes a range of blood safety products used by the blood banking and transfusion medicine industry. Chiron Vaccines offers more than 30 vaccines including flu, (oops) meningococcal, travel and pediatric vaccines. Chiron Biopharmaceuticals discovers, develops, manufactures and markets a range of therapeutic products. Its products include TOBI (tobramycin solution for inhalation) for pseudomonal lung infections in cystic fibrosis patients, Proleukin (aldesleukin) for cancer (metastatic melanoma and renal cell carcinoma) and Betaseron (interferon beta-1b) for multiple sclerosis.

12:19pm and breadth is 6/4 positive on the NYSE and 5/4 positive on the NAZZ. The DJIA is down 61 points as Caterpillar is down $3 and AIG is off another $1.50. Our thought is that most of the trading the last few days is window dressing for month end.

Microsoft, Google, and Amazon report earnings tonight.

3:02pm and the DJIA closed off 17 points at 9870. The S&P 500 gained 3 points ot end at 1105 and the NAZZ rose 20 points to 1953. The ten-year Treasury closed at a 4% yield and oil was up 6cents at $54.47.

And tomorrow is today.



21 October 2004 - Daily Comment

This Morning

6:31am and we are reversing the order in which we present our Daily Comment since our better half remarked that it made more sense to have This Morning occur before Yesterday’s Markets.

Asia was mixed overnight and Europe is lower but off the worst levels of the day. U.S. futures are also down and suggesting another lackluster opening. Oil is over $54 again.

Given that good earnings have not been able to set the markets on fire we presume the markets will continue to flounder until month end when the presidential picture becomes clearer and mutual fund fiscal year end house cleaning ceases.

This morning there are jobless claims and leading indicators for the boys and girls to ponder. The action of Treasuries is suggesting that some bond folks don’t think the economy is going anywhere fast.

We are of that view also but it doesn’t deter us from looking for quarter end and year end value plays. We’d like to take a pick at a few drug stocks since the action in them reminds of 1992 when Clinton won and the ultimate demise of all things drug related was feared.

We can’t place a handle on the Merck crisis and so like AIG we are going to take a pass although we think for stronger stomachs there may be some there there. But Schering Plough reports this morning and is back down in the mid teens and weak. We are guessing the selling is coming from folks who assumed there was going to be a Merck/Schering merger since they are collaborating on several drugs. But CEO Gilmartin of Merck quashed that notion the other day. It should be noted that Merck is currently searching for his successor. Of course they may hire SGP’s CEO which would not be good for SGP. Ah, decisions decisions.

So let the games begin.

Yesterday’s Markets

7:15pm and JP Morgan is trading lower in early trading. We will be buying more around the $37 level if it reaches there today. We didn’t buy any yesterday at $37.50 since we pulled our bid.

Maytag is probably going lower this morning as they report tomorrow and Whirlpool announced lower than expected earnings today.

In our smaller accounts under $40,000 we are about 40% invested and we will probably bring them up to 80% invested by year end.

The economy is obviously slowing and we are lonely in predicting a lowering of interest rates by Greenspan in November. At least he won’t raise any further. The rise in the price of oil is the same as a tax increase except the tax is going to other countries. With the slowdown in the rise of housing prices the housing crutch on which the economy has depended for the last three years is being sawed out from under.

We saw yesterday that 40 year mortgages are under consideration to lower monthly payments so that more folks can afford to buy $300,000 houses for $500,000. This reminds of the 100 year bonds that railroads issued in the distant past in times of wonder when folks were only interested in the yield and no one saw that any more viable means of transportation would be invented. Those bonds traded at half of face value many times in their 100 year lifetime and in fact many never paid off because the gilt edge railroad that sold the bonds went belly up in one crash or another.

The forty year mortgages to be created will be packaged and sold by Fannie Mae to myopic souls and institutions that will at some time in the future own them at one half of face value. That interest rates won’t trade at double their current level sometime in the next ten years let alone forty years is not a bet we would be willing to assume.

10:11am and the DJIA is now down 60 points. The NAZZ is off 2 points and continues to outperform the DJIA. Breadth is 2/1negative. Oil is up $1.26 to $54.25 and Treasuries are firm and at new highs for the year in price/lows in yield.

We purchased additional shares of JPM on the share price drop on earnings being off 13%. The economies from the Bank One merger are not yet apparent and this is a longer term situation for us. We added shares to accounts that own and didn’t own. Our price was $36.55 and we are happy with our holding.

We also decided to buy Motorola on the sell off this morning. It is down from $20 and off $1.50 today at $17.45. We are buying it in accounts that have Coca Cola in the same amounts.

As we thought, Maytag is back under $16 on Whirlpool’s bad results. MYG has already warned but it will probably move lower tomorrow when results are announced and we are waiting till then to add to existing accounts and to initiate positions. Whirlpool blamed results on higher steel prices. MYG also said the same earlier. With its large debt, interest costs are a big item on MYG earning’s statement and the slowdown in the economy while hurting margins is also keeping rates low. MYG will be a longer term hold unless we get a post election rally.

12:23pm and breadth is now positive on both the NYSE and NAZZ. The DJIA is down 20 points and the NAZZ is up 6 points.

3:02pm and breadth was positive at the close with the DJIA rallying to close down 10 points at 9890. The NAZZ closed with a gain for the day up 10 points at 1932 and the S&P 500 rose 1 point to finish at 1104. Oil was up $1.63 at $54.92. Treasuries were firm with the ten-year cracking 4% to close at 3.99%. Treasuries are saying the economy is not expanding.

And tomorrow is today.



20 October 2004 - Daily Comment

Happy birthday Barbara

Yesterday’s Markets

7:20am and building permits were 1.8% in September. Housing starts were down 6%. CPI was up 0.2% and core CPI was up 0.3%.

8:46am and stocks have opened higher but they seem to be coming back in as they did yesterday. Ford was up but is now lower as pension issues take the fore in the conference call. All three auto makers and the auto parts makers have large pension liabilities that are periodically addressed. That is the reason we avoid these stocks because the pension bugaboo comes up haphazardly.

The DJIA is up 45 points, the NAZZ is 12 points higher and the S&P 500 is up 4 points. Oil is at $52.76 down 91cents. Breadth is positive and Treasuries are a little weaker.

9:30am and with the good numbers from IBM and Texas Instruments and the renewed interest in the tech area we bought some shares of HPQ back at $18.45 for our larger and more aggressive accounts. HPQ doesn’t announce earnings until November and so we have some time to play with this position. We would have bought it all around had earnings been out but given the way this specific stock reacts we are content to own it now only in our larger/aggressive accounts.

The continuing turmoil in the insurance brokerage industry is going to act as a negative on rally attempts. But it is part of the October mix of news coupled with the election and the price of oil that will all be much clearer in November and into year end.

10:11am and with the drop in AIG, trader types are beginning to talk about contra-party exposure to derivative contracts. That is why the financials including Citigroup and JP Morgan Chase have turned lower today. AIG, the large insurer that is the target of Spitzer’s probe, has huge derivative exposure. If for some reason its ability to perform is compromised by the Spitzer probe the parties on the other side of the derivative contracts with AIG, or MMC or AON et al may wind up unhedged on other transactions with other parties. The derivative markets are huge and as long as everyone is solvent it’s OK. But as Long Term Capital demonstrated one party’s failure can affect the whole financial industry. Moreover, Long Term Capital was 6 years ago and the derivatives market has grown exponentially since then.

But we know Greenspan and the Fed are on top of this and so we don’t expect another LTC type collapse. Butttttttttttttt…

United Health Care and other HMOs are under pressure today since the NY Post and others have suggested that they will be the next targets of fraud investigations. Our guess is that Spitzer has his hands full with the insurance probe and that there may well be an HMO probe but not till next year at the earliest. Trader types love rumors

11:06am and breadth is now even with the DJIA up 16 points. Traders are having fun pushing stocks around with rumors but other than that it looks like investors are on the sidelines.

We have a bid in at $37.50 for more JPM if the scare mongers can push it down to that level.

2:21pm and in the last hour stocks have turned lower. Volume is moderate. Breadth is now negative. It looks like stocks are not yet through their October correction. Motorola reports earnings tonight and the fact that JPM reports in the morning maybe another reason the stock is off a bit this afternoon. We continue to believe (hope) that the wall of worry is worth climbing with quality issues.

3:02pm and the DJIA closed down 60 points at 9898. The S&P 500 dropped 10 points to end at 1103 and the NAZZ gave up 13 points to end at 1922. Treasuries were a bit firmer as stocks sold off. Oil ended at $53.29 down 38 cents.

And tomorrow is another day.

This Morning

6:12am and Asia was lower with Japan and Hong Kong both down over 1%. Europe is trading down as are stateside futures. With yesterday’s lousy action the markets are set to probe the downside this morning in hopes of finding support.

JP Morgan disappointed by managing to lose money trading bonds and Motorola has decent numbers although it was light on the revenue side. The stock is trading lower because it gave guarded guidance going forward.

The Model Portfolio is up to 33% invested and we will continue to add as the markets drift lower. We see nothing occurring that is out of the ordinary for this time of year.

So let the games begin.



19 October 2004 - Daily Comment

Yesterday’s Markets

6:56am and analysts are now making adjustments to their valuations of companies that announced earnings last week. Prudential has cut Intel’s price target to $18 from $19 citing a challenging environment

MMM sales and earnings were below consensus. Merrill has upped Rowan to neutral from sell (?) and Pepsi to buy from neutral. CSFB has downgraded the steel sector and many investment banks are suggesting the oil patch as the place to be.

Bloomberg reported that Bernard Dan, President of the CBOT, suggested that oil may peak at $75 per barrel but not to worry, the U.S. Economy is strong enough to absorb that price.

Greenspan helped stimulate the rally last Friday by saying, "The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s."

Even though Greenspan is wearing rose colored glasses we continue to predict that after the election Greenspan is going to lower rates again as he uses the increase in oil prices as an excuse. Moreover Greenspan in discussing oil used the inflation adjusted comparison to say that the price increase is only 66% of the price of oil in the 1970s. Only economists can appreciate that comparison.

8:19am and in reading www.minyanville.com (which is a pay for website) we learn that last Friday Pfizer informed doctors that its second generation Cox-2 inhibitor was associated with heart problems. Today it is reporting that its first generation Cox-2 inhibitor may aid heart problems. We reported this incorrectly in yesterday’s post. By finding another usage for the first generation Cox-2 inhibitor we think it is possible for PFE to extend the patent protection on that drug. That may be the purpose of the new study.

8:51am and stocks have opened lower with the DJIA down 45 points and the NAZZ off 1 point. Breadth is negative and volume is moderate. 3M is lower by $4 which is dragging the DJIA lower. Treasuries are basically unchanged and Oil after topping $55 is now about 10cents lower at $54.78.

Prudential has downgraded MMM from overweight to neutral citing slowing organic growth and reduced visibility. Maybe that is why the share price has dropped from $90 to $74 in the last five months.

In keeping with our buying quality stocks on bad earnings news concept, we bought 3M which is off $4 per share today for larger accounts at $73.95.

12:25pm and as Oil moves down by $1.33 the stock markets have moved higher. The NAZZ is up 18 points and the DJIA has turned positive as AIG has gained a few points ant MMM has lessened its loss. The rise in the stock measures is related to the drop in crude and there are also rumors of asset allocation from bonds to stocks.

1:41pm and Star Gas Partnerships (SGU) is suspending payments and my file bankruptcy because they aren’t hedged properly in the heating oil market. The share price has dropped from $22 to $4 today. This may be the tip of the iceberg among heating oil and gas suppliers; we know for sure it isn’t the whole iceberg.

Europe was lightly lower today. Treasuries are flat and oil remains lower but the DJIA rally ran out of steam. The collapse of MRK, AIG, and the price of oil are all very big negatives. Breadth remains positive on both the NYSE and NAZZ.

The last hour should be interesting.

2:34pm and Goldman Sachs must have purchased enough MMM stock today because they just upgraded the stock to outperform.

3:02pm and the DJIA closed up 25 points at 9958. The S&P 500 rose 6 points to finish at 1113 and the NAZZ gained 25 points to end at 1934. Oil closed down $1.26 at $53.67. Treasuries closed flat. Breadth is positive at the close.

And tomorrow is another day.

This Morning

6:30am and CPI is announced at 7:30am this morning along with building permits. Tomorrow we get JP Morgan Chase earnings as well as Maytag.

Overnight Asia was higher and Europe is also higher this morning. U.S. futures are higher on the back of positive IBM and Texas Instruments earnings reports last night.

Ford announced better than expected earnings and today will be a good test of the ability of the stocks markets to rally. Oil is lower again today.

So let the games begin



18 October 2004 - Daily Comment

6:03am and we have returned to the land of milk and honey from our trip to the big city. Our diet begins tomorrow.

European markets are mixed to lower and Asia was also. U.S. stocks are lower.

On Friday the stock markets bounced from the sell off of the previous days but really couldn't hold the gains and closed only nominally higher on decent volume. This week is a big earnings reporting week with MMM reporting this morning and IBM after the close.

There is little economic data coming today for the boys and girls to trade off so they will have to content themselves with interpreting earnings. Tomorrow building permits and CPI will be announced.

Pfizer says it is going to test Celebrex as an aid to some heart patients. In effect PFE is saying that they think their Cox 2 inhibitor may aid heart patients as opposed to Merck’s Vioxx which has demonstrated negative effects. The announcement this morning comes after Friday news that reported some negative heart effects from Celebrex. We think this morning’s announcement is a public relations gimmick.

Our plan remains to continue looking for stocks to add to the portfolio and to add to existing positions after earnings for the third quarter in the individual issues are announced.

So let the games begin

15 October 2004 - Daily Comment

Yesterday’s Markets

7:09am and GM is going to lay off 12,000 folks in Europe and of course take a charge. GM sees $6 to $6.50 earnings for the year which is lower than previously expected. Apple Computer had great earnings and the stock is trading $3 higher this morning.

7:30pm and jobless claims were 350,000 and continuing claims were 2.8 million. The trade deficit for August was $54 billion versus and expected $51 billion. Same old same old. Where are the good paying jobs?

9:02am and the DJIA is down 30 points on the back of GM dropping over $2 in early trading. The NAZZ is 8 points lower. Breadth is negative.

10:39am and crude oil inventories rose 4.2 million barrels last month. That gave a little pop to the markets but stocks have begun retreating again.

This is the October sell off where we believe we should be adding stocks. In that vein we bought Fifth Third Bank back in some larger/aggressive accounts at $49.35 after they reported good earnings this morning. We are also initiating a position in Tiffany which is down from $47 to $29.75. We are buying only a small position in larger/aggressive accounts to begin.

The DJIA is down 70 points and the NAZZ is off 12 points. Breadth is positive on the NYSE and negative on the NAZZ.

12:02pm and stocks continue their sell off. There may be some hedge funds in trouble because of yesterday’s collapse in commodity prices and today’s talk of a downgrade in GM debt by S&P. Modern day hedge funds do a lot of esoteric interest rate versus commodity hedging as well as playing the supposed disparities in yields among variously rated bonds. We mention this because some stocks like JPM are down $1 with no news. Usually when hedge funds get in trouble they sell their stock positions first because they are the easiest to liquidate.

Hopefully the market malaise will beget more selling and create better buying opportunities. We do believe the possibility of a Kerry victory is currently being priced into the markets. Since the Republicans will retain Congress the market will eventually realize that a Kerry victory may create gridlock which markets usually like.

The DJIA is at 9913 and the NAZZ is at 1906 and the S&P is approaching 1100.

Periodically folks talk about GM’s unfunded pension liabilities which are about $25 billion. That is one reason way we don’t own auto stocks although they will eventually figure out how to lay those liabilities off on the government which has trillions in unfunded liabilities.

As we stated above this is October and markets go down in October. In fact they sometimes crash in October. We don’t think a crash is in the cards but we are not rushing to buy. We are using a cautious approach with our buying. But we do think that this downdraft as opposed the summer corrections is a buying chance. Remember that the end of October is the end of the fiscal year for many mutual funds and so losers will keep losing as funds make tax decisions as well as cosmetic decisions to sell stocks that are on their lows.

2:02pm and entering the final hour the major measures are on their lows for the day. The DJIA is under 9900, the NAZZ is about to go under 1900, and the S&P 500 is at 1103. The markets look sick.

Crude oil closed at an all time high of $54.76. Treasuries are stronger with a 4.02% yield on the ten-year.

3:02pm and the DJIA lost 105 points to 9895. The S&P 500 dropped 11 points to end at 1102 and the NAZZ lost 18 points to end at 1905. Breadth was 2/1 negative on the NAZZ and 5/4 negative on the NYSE at the close.

And tomorrow is another day.

This Morning

6:30am and we are heading down to Chicago to meet with some clients over the week-end. We’ll be traveling but in touch through the magic of cell phones.

This morning Asia was mixed, Europe is lower as are U.S. futures. AIG and insurance brokers like Marsh & McLennan are the subject of Elliot Sptizer’s wrath and both stocks were hit hard yesterday. We think the end result will be some mid-level folks taking the heat and big fines for settlements. But the big boys and girls may want to get out before the end of October. These companies aren’t going away.

Oil is down 8 cents and bonds are firm.

At 7:30am we get PPI for September, Retail Sales for September, Business Inventories, Capacity Utilization and Industrial Production for September. That’s a lot of stuff for the boys and girls to trade on today and today is also an options expiration day.

Finally, the NKU Norse Men's Basketball Team begins practice for the 2004-2005 Season today. We congratulate our son-in-law Dave Bezold for assuming the responsibility of Head Coach after 14 long years as Assistant Coach. Since Dave's Northern Kentucky University Team plays its first three games beginning November 3 as exhibitions against the University of Kentucky, the Ohio State University, and the University of Cincinnati we wish them all the luck they will need.

So let the games begin.



14 October 2004 - Daily Comment

Yesterday’s Markets

7:02am and we get e-mails:

Hi Bud:

I have been looking at the bond market again. Not sure what the Fed is up to, but I can see they may hold short term rates level. That would be good for bonds. I currently hold a small amount in high yield corporate bonds which don’t exactly track the Treasuries. In fact I have made little money on anything else except these bonds. I must admit, however, I really don’t fully understand all that affects corporate bonds. Do you have any insight in these? I am getting skittish on equities because of the impact of oil. I saw an article indicating that if oil rises more than 5% in a month and doesn’t recede in price that this is very bearish for stocks. This has in fact happened, and I am concerned the normal year end rally may be in jeopardy???

Our reply:

Hi Bill:

We are buying individual stocks that are missing their earnings forecasts. We’ve gone back to our late 1970s early 1980s investment formula of looking for value. Maytag is down from $40 to $17. They are having earnings problems and have a ton of debt. Their debt sells a bit above junk and we would rather own the equity than the debt for the total return. The savior of high yield bonds has been the bull market in bonds over the last many years. You could be wrong but the drop in yields would save you.

We don't see that in the further except for a temporary drop in rates after election. We have never bought high yield because we think if we are going to risk principal we want to own equities. High yield bonds are subject to both a rise in rates and/or collapse of underlying company (MCI/WorldCom/Enron) and involve more homework than we want to do. Also the markets in high yield bonds are less than efficient. You can always sell them in bond bull markets when interest rates are dropping. In rising interest rate environments or interest rate panics there is no bid.

Oil is trading in its own world of hedge funds and international oil companies. The only folks making real money are our friends in the Middle East. As the Fed keeps saying there is no inflation except in food and oil and gas and home prices.

We are not believers in the no inflation mantra and so we think eventually higher rates are on the way.

8:02am and McDonalds boosted guidance on the third quarter numbers. Coupled with an upgrade of Disney and Time Warner and the good Intel and Yahoo news a higher opening should be in the cards. The measure of market sentiment will be how the rally unfolds.

8:38am and stocks have opened higher in a sea of green as the DJIA jumps 50 points on the opening. The keys today will be to watch INTC and YHOO to see if they can hold their early trading plus $1 gains from yesterday’s close. So far so good.

10:02 am and stocks are giving back their early gains. Breadth on the NYSE is negative while still positive on the NAZZ. The DJIA is down 15 points and the S&P 500 has dropped through its 200 day moving average at 1120. The NAZZ is 8 points higher and crude is lower by 75cents.

More e-mail:

Thanks for discussion Bud;

I am still a little confused about high yield stuff. I agree we are at a near high in the bond rally. But everybody is saying that and bonds are still holding. For me it is a short term play. I understand what you are doing in terms of value stocks. I have done some of that, but am having trouble with the required patience to hold them while they just keep going down. Unless the Iraq/terrorist situation clears, I have trouble seeing when oil will not be a depressive effect on markets. If oil plays a major role the next 6 mos., it will be hard to time the markets. How can you play the random external events that effect oil which in turn affects the market?

More response:
Since you are only using 25% of your money for stocks we think you should ignore the potential of random external events because by definition they are random and you have no control over them. From a trading standpoint the fourth quarter is the time to buy depressed value with the first quarter, early in the first quarter the time to sell. In a range bound market we think the depressed value stocks offer the best opportunity for reasonable gains versus risk. Some are falling knives and so it is important to buy gingerly and over time.

There is also a difference between a Coke and a Maytag. In a large portfolio the former can be a 5% initial position under $40 while the MYG should be a less than 2%.

We would guess that by the time you decide to sell your high yield stuff the spread between the bids and ask and the rise in yields will eat up a good portion of the extra yield you are receiving for holding them in a rising interest rate environment.

11:05 and commodity type stocks are selling off as commodities get hit. One guru is suggesting that the Shanghai Exchange raising margin requirement from 6% to 7% began the sell off in physical commodities. There is also speculation that China is going to revalue the yuan versus the dollar. Steel and oil stocks are lower and drug stocks aren’t doing well either.

The DJIA is down 40 points and the S&P 500 is down 5 points. The NAZZ remains higher. Breadth on the NYSE is 2/1 negative while it has just turned negative on the NAZZ.

1:07pm and oil has turned higher with the DJIA now down 110 points and under its September low. The NAZZ is doing relatively better but is still off 8 points and the S&P 500 is at 1110 off 10 points. Breadth is bad and Treasuries are a bit better on the stocks downturn.

3:02pm and the DJIA recovered a bit to close down 77 points at 10000. The S&P 500 lost 8 points to end at 1113 and the NAZZ was off 5 points at 1920. Breadth was 2/1 negative on the NYSE and 5/3 negative on the NAZZ. Oil finished at $53.64 up $1.13 and Treasuries were a bit firmer with the ten-year closing at a 4.06% yield and the five-year at 3.30%. Intel and Yahoo both closed up but at half their early morning gain.

And tomorrow is another day.

This Morning

6:30am and this morning brings first time claims for unemployment and trade deficit. Citigroup announced in line revenues and earnings. Nokia sales and earnings were as bad as predicted but the company predicted a pick up in fourth quarter sales.

The debates are now over and the bets are being placed. With yesterday’s market action today is important for the bulls. 10,000 on the DJIA has been support and it would not be bullish for the DJIA to stray too far below that psychological marker.

The Nikkei and Hang Seng were both off over 100 points. Europe is lower and U.S. futures are indicating a tepid opening.

Today will be interesting.

So let the games begin



13 October 2004 - Daily Comment

Yesterday’s Markets

8:06am and when it pours it rains. A Nigerian pipeline is on fire, a pipeline in the Gulf of Mexico will be out of commission all winter and Yukos owes another $1.5 billion on top of the $6.5 billion already billed. Those Russians learn capitalism quickly.

Adding to the political stew our good friends the Pakistanis have launched a missile that can reach India’s largest cities with a nuclear warhead, not to mention Baghdad in the other direction.

8:16am and JNJ announced positive earnings. Motorola has been upgraded, Hain Celestial is introducing Veggie burgers at a NY City McDonalds, and NCR has announced much better earnings and sales and Yahoo and Intel earnings will be released after the close. Stocks are going to open lower and then we’ll see what happens.

Semi-conductor chip equipment sales were down 29% in August with sales to China dropping over 50%.

9:26am and stocks are lower with the DJIA down 50 points although it was lower earlier. The ten-year Treasury is at 4.08% which is close to unchanged. Breath is 3/1 negative and a few stocks have blown up. One of them is State Street Bank which is off $3.50 at $40.50 after announcing special charges, 300 layoffs and a restructuring. We have added it to our watch list.

10:30am and delinquent accounts at Capital One the big credit card company are up to 4.4% of the portfolio.

Crude oil has turned lower on profit taking and is now trading at $52.45 after trading above $54 earlier today. the major measures are crawling back from their big down opening and the DJIA is now down 33 points and the NAZZ is off 10 points. Breadth remains 2/1 negative which is better than earlier.

1:33pm and the DJIA is staging a rally and is now down only 1 point. the NAZZ is down 6 points and breadth is slightly less than 2/1 negative.

3:02pm and the DJIA closed down 5 points at 10078. The S&P 500 lost 3 points to 1120 and the NAZZ dropped 4 points to end at 1925. Oil finished at $52.51 down $1.13 and Treasuries were a tad weaker. Breadth at the close was 5/4 negative.

And tomorrow is another day.

This Morning

6:36am and Intel and Yahoo delivered acceptable numbers and are both trading about 50 cents per share higher. Asia was weaker overnight by fractions and Europe is ahead by fractions. The relatively positive news from INTC and YHOO has put a bid in the stateside futures which indicate a higher opening. It may be a don’t blink opening though.

We are content to watch and wait for earnings on the stocks we own to see if we’ll have a chance to add to our positions

So let the games begin.



12 October 2004 - Daily Comment

Yesterday’s Markets

8:04am and oil is trading at $53.59 as our ally and good friend Kuwait for whom we waged Gulf War I said they would increase production as long as oil prices remained high.

8:21am and our scenario on the next month is that no matter who wins the election it is time to focus on individual stocks. We do think the drug companies are interesting and Michael Metz of Oppenheimer whom we like very much was just on CNBC and suggested the Pharmaceutical HOLDRS Trust as a way to buy pharmaceuticals without picking just one. Merck represents 10% of that trust with Pfizer being the largest component at 25%. We have it PPH on our radar screen but are not in a hurry to buy.

Our outlook is that after the election Greenspan will lower interest rates because with the elections over he will finally be able to suggest that the economy needs more juice and time to get moving. We believe Wall Street will find positives in either candidate winning and will be contented to have some political certainty after a year of turmoil. We see range trading until the economy does begin a meaningful recovery and so buying individual depressed value stocks is going to again be one way to make money. Index buying will continue to require timing that even many pros have found difficult the last few years.

Back in the 1970s the major measures topped in early 1973 and then dropped for two years making a bottom in December 1974. After that there was a 50% recovery and then for six years the major levels floated in a 25% range. During that time real estate and precious metals were the hot items and the stocks did not being to take off until 1983 as real estate prices eased and after gold had collapsed in late 1979.

While periods in the stock market don’t exactly repeat, we think that the late 1970s early 1980s have similarities to the present. The main difference is that back then there was runaway inflation. Now inflation is calculated differently and supposedly there is none although we differ with the guru’s on that fact. And back then interest rates were moving to record highs when now the exact opposite applies. So the times are similar in some ways and much different in others.

But we do think that until real estate prices begin to ease substantially that the stock markets will be range bound by the mere fact of all the investment money that has poured into real estate as the stock markets have floundered. Money goes where it is treated best.

And that is our reason for stressing individual out of favor stocks because that is the type of stock investment that worked best in the former time period. Our guess is that it will work that way again. But buying individual out of favor stocks requires intestinal fortitude and stop loss selling.

10:23am and the DJIA is up 32 points while the NAZZ is up 4 points. This morning there were several downgrades of Texas Instruments and with the lousy action of the NAZZ over the last few days we are going to trade out of our Intel holdings that we acquired last week. We are losing $1 per share but with earnings coming tomorrow night we think it is 50/50 whether the stock rises or falls on the news. And any rise may be muted given the action of the markets over the last few days. We own the stock in many accounts and would rather be out since the price action in techs after the failure to make new highs on the S&P 500 has not been positive.

11:38am and we don’t have the stomach for tech that we thought we did. When the S&P failed again at 1140 and the NAZZ rolled over also the writing on the wall suggests that cheap tech stocks may get cheaper. After a weekend of reflection we are also selling AMAT for a 50cents loss and we are selling Disney which obviously isn’t a tech stock for a 40 cents gain. We are letting the Disney go because we bought it for the push through 1140 on the S&P 500 which has been put off until another day or month or two.

As we often say our real feelings about a stock aren’t known until their prices go the wrong way. And we have outperformed the markets for four of the last five years by following out instincts.

The DJIA is up 25 points and the NAZZ is 5 points higher. Breadth is positive and volume is holiday light.

2:05pm and entering the final hour the boys and girls are marking stocks up. The NAZZ is up 10 points and the DJIA is up 38 points. Breadth is positive.

3:02pm and at the bell the DJIA was up 25 points at 10080. The S&P 500 gained 2 points to end at 1124 and the NAZZ rose 6 points to finish at 1926. Crude oil closed at $53.64. With today’s sales the Model Portfolio is back to a 25% invested posture.

And tomorrow is another day.

This Morning

7:01am and Oil is through $54, Europe is lower, Asia closed lower and U.S. futures are indicating a lower opening. The dollar is higher overnight against foreign currencies as traders expect demand for dollars to rise since the new corporate tax bill that Bush is going to sign creates a one year window for companies to bring profits home at a 5% instead of a 35% tax rate.

With earnings season beginning in earnest it will take a few days for the markets to sort issues. Intel announces earnings after the close

So let the games begin.



11 October 2004 - Daily Comment

6:39am and waking this morning to learn that Christopher Reeve had died brought tears to our eyes. There was a man who had it all, lost it in an instant and then recovered to become more famous and respected than before his accident. And his fame had nothing to do with money except that he had a health care plan that allowed him to live for nine years instead of die in one month.

6:42am and Japan was closed overnight with Hong Kong up a little while the rest of Asia was mixed. Europe is mixed to lower and U.S. futures are flat.

We have no bright ideas for the movement of the markets this week. We will be spectators and react accordingly. The S&P 500 obviously failed to break out at 1140 and now seems to be heading lower to test various support levels.

We are concentrating on individual stocks doing our autumn shopping and year end planning. We are staying with big caps with the bias towards tech but an open mind to any interesting blow-ups in the next few weeks as earnings season comes into full bloom.

So let the games begin.



9 October 2004 - Daily Comment

Friday’s Markets

7:32am and Nonfarm Payrolls were up 96,000. August payrolls were revised downwards by 20,000 jobs. Oops! Sorry GWB. The Labor Department is going to adjust up 250,000 jobs from last year. The Average Workweek for September was 36.7 hours. Hourly Earnings for September were up 0.2%. The Unemployment Rate for September was 5.4% and Wholesale Inventories for August were 0.9%.

The Labor Department's household survey showed 8 million people were unemployed, down 19,000. Employment fell by 201,000 to 139.5 million. So there is no help this month from the household survey.

Treasuries are higher in price higher in yield on the news. Stock futures are muted.

AT&T is laying off 7,000 poor souls or 25% of its work force.

7:56am and after swallowing the report stocks are going to open lower and Treasuries are higher in price lower in yield. The ten-year Treasury is 10 basis points lower at 4.15% as traders are guessing that the Fed will be able to be honest after the election and stop raising interest rates since the economy is in a slow and not healthy recovery.

8:04am and the retail analyst at Wells Fargo just upped Abercrombie& Fitch from a Sell to a Hold based on good numbers. Say what? So if you have been selling it all the way from $25 to $35 you should now hold it. Why not just say “I was wrong, I missed the boat and your guess is probably better than mine.” Or just say nothing and drop coverage.

Several clients have asked about our Kyocera purchase. We have traded the stock before. It is the premier company making ceramics for the chip industry plus being involved in all things computer and digital and chip related. Kyocera Corporation is engaged in various high-technology fields, including fine ceramics, electronics, telecommunications, automotive components, medical and dental implants, solar energy and information technology (IT) solution services and networks. As of March 31, 2003, it had 123 subsidiaries and nine affiliates outside Japan and 22 subsidiaries and seven affiliates in Japan. The Company's business is highly diversified, with its operations classified into four operating segments: Fine Ceramics, Electronic Devices, Equipment and Others.

KYO has sales over $10 billion and net of cash the company is currently priced at $12 billion. Its ADRs are thin traders and that is why we are buying over time. The company has $3 billion in cash and $1.5 billion in debt. KYO will earn about $4 per share this year. The price range for the 12 months is $90 high and a low of $57 last October.

8:45am and stocks have opened lower in heavy trading. Breadth is negative but the selling is being met by buying.

9:32am and the DJIA is in positive territory as traders buy defensive stocks and sell drugs and tech. The NAZZ is lower and needs to reverse today and close higher or technically speaking it will not be positive.

We are buying more Applied Materials at $16.60 today. It has made its yearly low in October for the past four years and we’ll take the bet again. AMAT has $4 per share in cash and is selling at about 3 times revenues and 18 times earnings. The company has a cash hoard of $6 billion and is priced at $22 billion net of cash on $7 billion in sales with a free cash flow of over $1.2 billion. Applied Materials, Inc. develops, manufactures, markets and services integrated circuit fabrication equipment for the worldwide semiconductor industry. Applied manufactures systems that perform most of the primary steps in the chip fabrication process, including atomic layer deposition, chemical vapor deposition (CVD), physical vapor deposition, electrochemical plating, etch, ion implantation, rapid thermal processing, chemical mechanical polishing, metrology and wafer inspection. The Company's subsidiary, AKT, Inc., manufactures CVD systems and array testers for making flat panel displays used in notebook computers, desktop monitors, televisions and other applications. Its subsidiary, Etec Systems, Inc., manufactures systems that generate, etch, measure and inspect circuit patterns on masks used in the photolithography process. Applied also provides products and services to enhance manufacturing yields.

10:03am and breadth is almost 2/1 positive on the NYSE and the reverse on the NAZZ. The DJIA is now down 23 points and the NAZZ is of 13 points with the S&P 500 down 3 points. Trading is active.

We repurchased Nokia at $14.26 with room to buy more stock at lower prices. We are selling Cabellas for a scratch profit over the next few days because it is not a seasoned stock and we bought it to trade while we were waiting to begin making our year end purchases.

12:58pm and Oil is at $53 and the DJIA is down 46 points while the NAZZ is off 18 points. Volume is brisk. Breadth remains positive on the NYSE and negative on the NAZZ. Treasuries are down in yield up in price on the jobs data with traders guessing that the Fed will not tighten any more and may have to think about easing.

2:43pm and the break down of the NAZZ today may or may not be significant. We’ll know next week. We are leaving a bit early today and currently the DJIA is down 80 points, the NAZZ is down 30 points and the S&P 500 is down 10 points at 1121.

We are comfortable with the stocks we bought yesterday and today and will be buying more stocks next week if the markets continue to sell off. Many of the stocks we are buying are down 50% or more from their 12 month highs and are about 10% above their 12 month lows.

The next comment will be Monday morning.


8 October 2004 - Daily Comment

Yesterday’s Markets

7:32am and First Time Claims for Unemployment for the latest week were 335,000 a drop of 37,000 from last week and better than expected. Continuing Claims were 2.86 million down a bit from last week also.

Corning is going to take another $2.9 billion charge. Costco had better than forecast earnings in contrast to WMT forecast of lower end earnings.

Genentech is priced at $52 billion with $4 billion in sales which is 55 times earnings. Starbucks and Whole Foods sell at 40 plus times earnings and other stocks on the buy lists of the momentum folks are in the same P/E category. These are not companies having problems that are affecting earnings. These are companies reporting record earnings each quarter. That folks is our problem. All are good companies but they are priced to perfection and as long as the momentum guys and gals like them they will rise. We are too old to play that game.

Merck has a potential $30 billion liability from the Vioxx fiasco. We get that number by multiplying 30,000 incidents by $1 million. That may seem high but heart attacks are not cheap and we presume that insurance companies are going to want to recover their costs for paying for the heart attack treatment. Our presumption for the insurance companies is at least $100,000 per incident on average. Then there is the pain and suffering and actual out of pocket costs for the victims. Another problem is that there were another 15,000 heart attack victims outside the 27,000 caused by Vioxx and there is no way to determine which were in the causal chain. So Merck may be a diamond in the rough but we see no need to rush to buy and would guess that voluntary Chapter 11 is being seriously considered to head off the lawsuits at the pass.

Gap and Limited both had lousy September sales and so they have both authorized share repurchase programs.

8:11am and tomorrow’s Payroll Employment Report will have a benchmark revision to correct the differences between the Payroll Employment Report and the Household Employment Report. The Payroll Report comes from numbers reported by business and the Household Report comes from small sample surveys asking folks if they are working. These two reports have been at odds for the last few years. Those who are considered working by selling on EBAY would be a job on the Household report but not included in the Payroll report. Once a year the Labor Dept folks try and balance the two. Tomorrow is the day and it is why we expect a 300,000 plus number. The debate tomorrow night and near election are the other reasons.

BankAmerica is going to fire 4500 more folks as a result of the Fleet merger and of course BAC will be taking a large charge and throwing in the kitchen sink so that it may smooth earnings ala Fannie May in the future.

8:48am and we have decided to put some more money to work. We are buying stocks where we think any untoward earnings surprises will be ignored and we are staying with quality. In our larger accounts we bought JP Morgan Chase at $39.45 and Disney at $24.46. For most of our accounts we bought Time Warner at $16.73, Schwab at $8.94 and Intel at $21.23.

We would purchase more Disney but we are uncertain about how the markets will view the reduction of earnings due to the hurricanes and how large the other garbage charges DIS will throw in this quarter.

We are buying shares of Kyocera at $74.50 for our larger accounts. It will take a few days to initiate a holding in KYO.

We are also purchasing Talbot’s at $26 down from $40 and Maytag at $17.80 down from $40 in larger/aggressive accounts at $17.75. We are a bit leery of taking too large a position ahead of earnings in MYG and so until the lousy earnings announcement on October 21 we are only buying in aggressive accounts.

With these purchases we have again brought the Model Portfolio up to a 35% invested position. We bought last year at this time and with the move above 1140 resistance on the S&P 500 we feel that a more invested posture is warranted.

We bought these stocks to own for a while and not as trades.

9:31am and yesterday Verizon announced it was upping its capital spending next year to $13 billion form $12 billion. That announcement put a little life in the telecom equipment stocks and TLAB would have benefited except that it is subject to arbitrage selling as the merger with AFCI nears and the spread narrows. Eventually we think it will play catch up. TLAB announces earnings on October 28 and we hope the markets are in a good mood that day.

9:36am and the major measures are lower with breadth even. Volume is brisk. Treasuries are a bit weaker with the looming employment report making bond traders nervous. A large number would scare bonds and might affect stocks. A low number would encourage bonds and scare stocks. A just right number would be just right.

The DJIA is currently down 32 points and the NAZZ is down 3 points. The S&P 500 is off 4 points and below 1141 which matters on a closing basis only.

9:48am and www.minyanville.com is reporting that the Lisio Report is saying the employment report will show only 80,000 new jobs. If so there are some fellows in Washington that may also be looking for new jobs.

12:39pm and it looks like the NAZZ is going to end its streak at 7 unless there is a 9th or 12th inning BoSox/Yankee rally.

Breadth is the reverse of the last few days with a 2/1 negative reading. Treasuries remain lower with the ten-year up about 5 basis points in yield. After moving above $53 Oil is back under that level but up for the day.

1:44pm and we added a few shares of Applied Materials to aggressive accounts at $17.30. We traded this stock back in July at the $19 level and lost a little money. This time we are buying less with the idea of buying more before year end.

3:02pm and the DJIA gave up the ghost in the last hour to close down 115 points at 10125. The S&P 500 couldn’t stand prosperity and failed at the 1140 level once again dropping 12 points to finish at 1129. The NAZZ surrendered 22 points ending at 1948. Oil closed at $52.67 and the ten-year Treasury ended at a 4.25% yield.

This Morning

6:01am and Fed Governor McTeer is on the wires saying that the current account U.S. current account deficit will lead to an inevitable decline in the dollar's value. “The world seems very happy to keep investing funds in the United States to finance the current account deficit,” McTeer said yesterday at an event hosted by Market News International in New York. “Theoretically, some day that process will come to an end, the flows will turn against us and, there will be crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar that will be very disruptive.”

On that happy news we begin the day on which GWB’s employment report is going to place him right back in the thick of things. The Treasury is going to say that 400,000 more jobs were created in the year ended March 31, 2004 than have been reported and then the employment report for September is going to show an increase of – we are guessing 300,000 jobs - although the consensus is 150,000. Even with consensus the additional 400,000 jobs will go a long way to helping Bush in the debate tonight if he can say it right.

GE announced in line earnings on better revenues and says it will grow EPS by 10% to 15% in 2005. GE also says 2004 earnings will be a couple of pennies higher that forecast.

Overseas markets are mixed, U.S. futures are higher and Oil is at $52.80. Treasuries are unchanged ahead of the big report at 7:30am.

We put a chunk of money to work yesterday in good quality names and so we’ll see how thing go today. We now have some dogs in the hunt.

We usually buy at this time of year as our birthday gift (October 9 (61)) to ourselves and our clients. For the last few years purchases made on these days have worked out well. Our hope is that this year the same will apply. Keep hope alive.

So let the games begin.


7 October 2004 - Daily Comment

Yesterday’s Markets

7:08am and the WSJ is reporting that the FDA is suggesting that Vioxx usage may have resulted in 27,000 heart attacks. Double that number and you have the class suing for heart attacks.

Time Warner will bid alone for Adelphia if it and Comcast are not allowed to bid together, according to a WSJ story. This bid confusion plus coming earnings is one reason we are not back in TWX yet.

8:52am and stocks opened slightly lower is moderate trading. Our guess is that stocks will head to the upside pretty soon for another assault on the 1140 level on the S&P 500.

9:17am and breadth is positive on the NYSE and negative on the NAZZ. There isn’t much news for traders to act on.

1:20pm and we took a few hours off on a very nice day. Upon our return the DJIA is currently up 10 points and the NAZZ is up 1 point. Oil is trading at $52 per barrel and Treasuries are a few basis points higher in yield. Volume is relatively active.

2:05pm and among useless facts to know, the NAZZ has been up 6 days in a row. If the NAZZ closes higher today, according to CNBC, it will be the first time since 1986 that the NAZZ has closed higher seven days in a row.

3:02pm and the DJIA closed up 65 points at 10240. The S&P 500 gained 7 points to end at 1141 above the 1140 resistance level. And the NAZZ rose 15 points to finish at 1971. Breadth was positive at the close. Oil finished at $52.02 and Treasuries were a tad weaker in price higher in yield.

This Morning

6:21am and this morning individual company retail sales numbers are annonced plus weekly first time claims for unemployment. Tomorrow is the all important employment report for September which will come just in time for the debate and will be the final one before the election. Consensus has that number being plus 150,000 jobs created. Our guess is that the number will be plus 300,000. It can always be adjusted down next month.

Overnight Japan was off on profit taking after a nice run and Hong Kong was higher. Europe is mixed and U.S. futures are lower. Today may be the big test for the S&P 500, and then again it may not.

We are on the sidelines awaiting a better buying opportunity. It is difficult watching stocks move higher with a large cash position but we are maintaining this posture for now at least.

So let the games begin.


6 October 2004 - Daily Comment

Yesterday’s Markets

12:15pm and we are back in the peace and quiet of Wisconsin. This morning crude oil exceeded $51, and the British authorities suspended Chiron’s flu vaccine which means that half of the U.S. flu vaccine for this year is not available. From an economic standpoint that is a tremendous potential cost to the economy in lost lives and more than the usual amount of sickness. Our presumption is that the elderly and those in greatest need will receive it and that the healthy part of the population will not be able to obtain it. That is not good news. Total economic costs of the flu are estimated at $22 billion. With half the vaccine pulled from the marketplace those costs will be at least 50% higher this year. We have never understood why the government doesn’t require more than two manufacturers of vaccine and why it doesn’t have a vaccine program. And the two manufacturers of the flu vaccine are not American companies. But then ….

This is the second drug company to be slammed by bad news and adverse market reactions in the last week. Merck has stabilized at the $34 level and Chiron is now trading down at $35 also. Both are potential buy on bad news purchases but as we get a bit older our stomach for troubled stocks is becoming less tolerant.

Currently the DJIA is down 10 points and the NAZZ is up 10. Breadth is flat and volume is moderate. After five up days the markets seem to be taking a breather.

JP Morgan cut its rating on HPQ this morning.

12:57pm and U.S. planned job cuts soared to an eight-month high in September while new hiring rose only slightly, a report said Tuesday. Challenger Gray & Christmas said employers announced over 107,000 layoffs in September. Third quarter job cuts were 251,000.

1:50pm and Wal-Mart says that earnings for the third quarter will be at the low end of the range. On top of oil piercing $51 the DJIA is not taking the WMT news well and is down 50 points. The NAZZ has also turned negative. Pulte Homes announced negative news yesterday and that they would miss third quarter numbers. The share price is down $4. Pulte builds in the Las Vegas market and it is having trouble with its pricing.

3:02pm and the DJIA closed down 38 points at 10177. The S&P lost 1 point to end at 1134 and the NAZZ rose 4 points to 1956. Oil closed at $51.09. Breadth was negative at the close.

This Morning

6:25am and there was no knockout in the debate last night although we thought Cheney got the best of Edwards by a comfortable margin.

Overseas Hong Kong was lower and Japan higher overnight. Since Japan’s fiscal year end September 30 the Nikkei has jumped over 10%. Europe is lower today and U.S. futures are indicating a down opening. Oil is a dipstick higher.

With yesterdays down day it is incumbent on the bulls to get the trend higher going. It is not healthy for the markets to fail at resistance. Our plan is to wait for earnings season and to see the markets reaction to earnings before making any more large commitments.

So let the games begin.


5 October 2004 - Daily Comment

Yesterday’s Markets

8:53am and stocks opened higher in a carryover of Friday’s strong markets. Oil remains under $50 but is still historically high. There is a battle between underinvested funds and over invested short sellers occurring. We are on the sidelines and are not tempted to try and participate. We have a few stocks we wish to buy but we are willing to wait.

The NAZZ is leading higher and software stocks are leading the NAZZ with surprise better than sales numbers from SEBL and Hutchinson. Japan was up 2% and Hong Kong 4% which started the markets move higher overnight. Europe is up over 1%.

10:33am and stocks are retreating a bit from their highs for the day. The DJIA is up 48 points and the NAZZ is up 12 points. Breadth was strongly positive at the opening and is now about 2/1 positive. Volume is brisk.

We have seen a few gurus opine that the Kerry/Bush race and the possibility of a Kerry victory are in the markets. That seems a little strange since only one and one half trading days have passed since the first debate. Our guess is that the Tuesday VP debate and the Friday town hall debate need to occur before any reasonable prediction about a Kerry victory/loss being factored into the markets can be assumed.

The expectations bar has now been raised for Kerry and lowered for Bush and the markets know that. The outcome in Samara of the fighting over the weekend is being treated as a positive and supposedly that has calmed the markets.

Our take is that there is a bunch of money waiting to go into the markets in October/November and that some folks are jumping the gun. We would like to see Friday’s employment number and some earnings reports over the next few weeks plus the forecasts accompanying the earnings before we place more year end bets.

1:34pm and in the contra hour the markets continue to maintain about half of their early trading gains. Our guess is that there will be a flurry of buying in the last hour as the bulls try to scare the bears out of their shorts.

3:02 pm and the battle of the longs and shorts was a draw today with the markets closing well off their highs but up for the day. At the bell the DJIA was up 25 points at 10216. The S&P 500 couldn’t make it through resistance at 1140 and closed up 4 points at 1135 and the NAZZ gained 11 points to finish at 1952. Breadth remained almost 2/1/positive at the close.

This Morning

We are traveling so our next comments will be tomorrow morning


2 October 2004 - Daily Comment

7:09am and Dick Arms on www.realmoney.com makes the point that the Merck debacle yesterday masked a rally that relieved the oversold condition in the markets. He looks for a further pullback.

Bear Stearns and Raymond James upgrade Merck as an income play because of the dividend. The question of how long the dividend will be is not addressed in the reports we saw.

8:42am and with two major upgrades for Merck the shares are up 25cents. That is not positive for Merck shareholders.

The major measures have opened higher on better than 2/1 positive breadth. Maybe it is just a relief rally that the first debate is over and the election is one day closer. Also the new quarter has begun.

The ten-year Treasury is at a 4.20% yield. Three days ago it was at a 3.99% yield. This is the year when no one will make money in the markets.

In a taking care of Number 1 first moment, the CEO of Northwest Airlines is leaving to become CEO of a United Health Care. Thanks for the bonuses and salary folks but when the going gets tough some folks get going.

11:38am and stocks are higher with the DJIA up 100 points and the NAZZ up 38 points. The autumn rally has begun on the first day of the quarter and at the rate it is going it will be over by next Friday. We are just watching. Breadth is very strong and very few issues are lower. The S&P 500 is up 1.5%. Oil is $49.50.

12:27pm and so far Friday morning’s comment about a tempered rally demonstrates that we are on a different page than everyone else.

We are leaving early today to go to Chicago for client meetings and so we take our leave with the DJIA up 88 points, the NAZZ up 38 points and the S&P 500 up 14 points. The final hours will have to get along without us.

There will be another post on Monday evening October 4.


1 October 2004 - Daily Comment

Yesterday’s Markets

7:32 and Personal Income was up 0.4%, Personal Spending was unchanged, and the PCE Deflator was 2.1% (inflation). Jobless claims were up 18,000 to 369,000. That’s a few weeks in a row that jobless claims have risen and was more than expected. Talking heads blame it on the hurricanes but...

Merck is doing a worldwide recall of Vioxx, a $2.5 billion per year seller and the WSJ reports that Fannie Mae is the subject of a criminal investigation. Both stocks are trading down about 15% this morning.

With Merck down the DJIA is heading south this morning.

Lehman is negotiating to buy a large British hedge fund. As these purchases occur the final vestiges of Glass Steagall are being overthrown and the financial markets have returned to the conglomeration of the 1920s and before. With the removal of the prohibition of shorting on downticks on January 1, 2005 that dismantling will be completed. And the financial markets are not a better place because of it.

One example is Enron and its connection with many major banks and investment banks who were allowed to walk away from liability for the nonsense in which they participated by paying what for them are nominal fines. The Mutual Fund Companies also got off with slaps on the wrist and promises to be good boys and girls in the future. Just this morning the accounting at Fannie Mae is coming under criminal scrutiny. The trillions of dollars in hedges relating to FNM securities are not considered threatened for now, but who really knows. With a trillion plus dollars in hedge funds the financial markets are becoming one big Las Vegas.

8:18am and we are tempted to play Merck since it is the last day of the quarter and Merck is so over owned by institutions that may not want the shares in portfolios at quarter end. But our new rule is to wait till the next day after news breaks so we will see what tomorrow brings.

The problem with buying Merck is there is no estimate of the folks who had heart problems and died of stroke or infarct from taking Vioxx. But everyone who took Vioxx and did have a stroke or infarct is going to be able to sue. That’s a lot of bucks.

9:30am and the DJIA is down 60 points because Merck is off $11 per share. The NAZZ is higher and breadth is 5/3 positive on both the NAZZ and NYSE.

12:02 and MRK drop today is worth about 85 DJIA points. Currently the DJIA is off 94 points and the NAZZ has also turned negative.

Since it is quarter end we want to buy a couple big caps that are near their quarter lows. We have raised our bid for Coke to $40 which is an eight year low on the stock. We are also bidding $15.55 for Kroger (six year low) and $16 for Time Warner which we’ve been trading. Tiffany ran away to the upside on us but we are interested in it at under $30 per share. That’s our refined shopping list for quarter end of stocks we would like to own for a while.

For the quarter the DJIA is down 3%, the S&P 500 is off 2.5% and the NAZZ is down 7%.

Treasuries are weaker with the ten-year at 4.15%. One customer, probably a central bank sold $5billion of the five-year this morning.

1:24pm and the NAZZ has moved to positive while breadth on the NAZZ remains slightly negative. The DJIA is negative because of Merck but breadth is positive on the NYSE.

We bought Kroger for most accounts at $15.55. We’ve made money in this stock before from this level and buying it is the beginning of our fourth quarter purchase program. We are not in a rush and will be buying individual stocks that we come upon. We are buying the Kroger today because it is down for the quarter and is surely the subject of quarter end selling. That doesn’t mean it won’t drop further but at this level which is 13X this years earnings we are comfortable owning.

Citigroup owns 45 million shares of Merck. Goodbye $500 million. Barclays Bank owns 110 million shares (goodbye $1.3 billion) and Fidelity Management owns 75 million shares (goodbye $900 million).

2:13pm and we purchased KO at $40.03 for accounts that owned CL. We just missed buying lower but we do want to own the stock at quarter end and so we completed today.

3:02pm and the DJIA closed down 55 points at 10080. The S&P 500 lost 1 point to end at 1115 and the NAZZ gained 2 points to finish at 1895. Breadth was positive at the close. The Treasury ten-year finished at a 4.12% yield, the five-year at a 3.37% yield, crude oil at $49.63. Merck lost $27 billion in market value today.

Merck and Coke were the two stocks to own in the late 1990s. How times change. Coke has lost as much in market value as Merck it just did it over a longer time. We must say that even for folks like us who have been in the business since 1965 a drop like we saw in Merck today is jarring. In fact it may only affect folks like us since the younger gunslingers have seen plenty of stocks they own drop faster and further in the last few years. And we have real sympathy for the “buy and hold” folks. This was a stock that in the 1990s many of the gurus said it didn’t matter what you paid for Merck or Coke all it mattered was that you owned them if you wanted to participate in the growth of the markets.

This Morning

Rabbit, Rabbit!

6:39am and Kerry did fine in the debates and so there will have to be a reassessment on Wall Street about the inevitability of a Bush election. This may temper any rally that was going to develop.

The quarter end selling pressure is over for now and it will be interesting to see how the market deals with the Merck collapse. The fear of lawsuits is what put the stocks down plus the loss of billions of dollars of annual business. We think the conservative course is to watch which is what we plan to do. We are much more comfortable with Coke.

Gold is at $420. Europe is higher. The Nikkei entered its new fiscal year today with a 160 point gain and Hong Kong also gained big. U.S. futures are slightly higher.

Last year the market made its fall reaction bottom on October 8 and rallied into November at which time it rolled over for a few weeks and then late in the year rallied again. We continue to look for stocks we would like to own over year end at least. Coke and Kroger were two of them.

So let the games begin


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