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

October 31, 2011

Model Portfolio Value As of 31 October 2011

$ 558,351


October 28, 2011

Model Portfolio Value As of 28 October 2011

$ 580,423


October 27, 2011

Model Portfolio Value As of 27 October 2011

$ 576,065

Comment on Model Portfolio activity

The European folks reached some sort of agreement which is better than the Repubs and Dems can do here. In celebration markets around the world jumped higher with the major market measures here up 2% at the open and over 3% at the close. The S&P 500 broke through the 1250 resistance and closed at 1285 which suggest a new trading range. With the pop we switched Alcoa to the same number of shares of Boston Scientific, and AK Steel for a plus scratch. We just don’t have a handle on the metals stocks. We added to Chico’s and repurchased Medtronic. We traded out of Ingersoll Rand for $4 per share profit and added Symantec to accounts as it dropped today although earnings were good. Management suggested that sales in the next quarter would only be up about 5% when analysts were expecting more. We used the GM money from yesterday for the purchase.

Preliminary 3rd Quarter GDP was up 2.5%, not so bad and a lot better than the bears had been predicting.


October 26, 2011

Model Portfolio Value As of 26 October 2011

$ 551,225

Comment on Model Portfolio activity

Ford announced inline earnings and tanked. We sold GM since if the street doesn’t like Ford they will find something wrong with GM’s report. With our large Ford holdings we have major exposure to autos. Nokia released its Lumia 800 Windows 7 based phone and the reviews were positive. We repurchased shares in accounts in which we sold XLF last Friday.

The markets opened 1% higher and then gave it all back after an hour of trading to turn negative by 11AM before rallying in the final hour with the S&P 500 moving back up to 1124 by 2PM. So it looks like 1125 is/will be major resistance on the upside and 1200 and then 1170 are the support levels on the S&P 500. Our thought is that the October 3 bottom at 1080 holds. Mutual Fund year end is appropriately on Monday—Halloween.

A Wonderful Rant by Matt Taibbi: http://www.rollingstone.com/politics/blogs/taibblog/owss-beef-wall-street-isnt-winning-its-cheating-20111025

Wall Street Isn't Winning – It's Cheating

I was at an event on the Upper East Side last Friday night when I got to talking with a salesman in the media business. The subject turned to Zucotti Park and Occupy Wall Street, and he was chuckling about something he'd heard on the news.

"I hear [Occupy Wall Street] has a CFO," he said. "I think that's funny."

"Okay, I'll bite," I said. "Why is that funny?"

"Well, I heard they're trying to decide what bank to put their money in," he said, munching on hors d'oeuvres. "It's just kind of ironic."

Oh, Christ, I thought. He’s saying the protesters are hypocrites because they’re using banks. I sighed.

"Listen," I said, "where else are you going to put three hundred thousand dollars? A shopping bag?"

"Well," he said, "it's just, they're protests are all about... You know..."

"Dude," I said. "These people aren't protesting money. They're not protesting banking. They're protesting corruption on Wall Street."

"Whatever," he said, shrugging.


These nutty criticisms of the protests are spreading like cancer. Earlier that same day, I'd taped a TV segment on CNN with Will Cain from the National Review, and we got into an argument on the air. Cain and I agreed about a lot of the problems on Wall Street, but when it came to the protesters, we disagreed on one big thing

Cain said he believed that the protesters are driven by envy of the rich.

"I find the one thing [the protesters] have in common revolves around the human emotions of envy and entitlement," he said. "What you have is more than what I have, and I'm not happy with my situation."

Cain seems like a nice enough guy, but I nearly blew my stack when I heard this. When you take into consideration all the theft and fraud and market manipulation and other evil shit Wall Street bankers have been guilty of in the last ten-fifteen years, you have to have balls like church bells to trot out a propaganda line that says the protesters are just jealous of their hard-earned money.

Think about it: there have always been rich and poor people in America, so if this is about jealousy, why the protests now? The idea that masses of people suddenly discovered a deep-seated animus/envy toward the rich – after keeping it strategically hidden for decades – is crazy.

Where was all that class hatred in the Reagan years, when openly dumping on the poor became fashionable? Where was it in the last two decades, when unions disappeared and CEO pay relative to median incomes started to triple and quadruple?

The answer is, it was never there. If anything, just the opposite has been true. Americans for the most part love the rich, even the obnoxious rich. And in recent years, the harder things got, the more we've obsessed over the wealth dream. As unemployment skyrocketed, people tuned in droves to gawk at Evrémonde-heiresses like Paris Hilton, or watch bullies like Donald Trump fire people on TV.

Moreover, the worse the economy got, the more being a millionaire or a billionaire somehow became a qualification for high office, as people flocked to voting booths to support politicians with names like Bloomberg and Rockefeller and Corzine, names that to voters symbolized success and expertise at a time when few people seemed to have answers. At last count, there were 245 millionaires in congress, including 66 in the Senate.

And we hate the rich? Come on. Success is the national religion, and almost everyone is a believer. Americans love winners.  But that's just the problem. These guys on Wall Street are not winning – they're cheating. And as much as we love the self-made success story, we hate the cheater that much more.

In this country, we cheer for people who hit their own home runs – not shortcut-chasing juicers like Bonds and McGwire, Blankfein and Dimon.

That's why it's so obnoxious when people say the protesters are just sore losers who are jealous of these smart guys in suits who beat them at the game of life. This isn't disappointment at having lost. It's anger because those other guys didn't really win. And people now want the score overturned.

All weekend I was thinking about this “jealousy” question, and I just kept coming back to all the different ways the game is rigged. People aren't jealous and they don’t want privileges. They just want a level playing field, and they want Wall Street to give up its cheat codes, things like:


FREE MONEY. Ordinary people have to borrow their money at market rates. Lloyd Blankfein and Jamie Dimon get billions of dollars for free, from the Federal Reserve. They borrow at zero and lend the same money back to the government at two or three percent, a valuable public service otherwise known as "standing in the middle and taking a gigantic cut when the government decides to lend money to itself."

Or the banks borrow billions at zero and lend mortgages to us at four percent, or credit cards at twenty or twenty-five percent. This is essentially an official government license to be rich, handed out at the expense of prudent ordinary citizens, who now no longer receive much interest on their CDs or other saved income. It is virtually impossible to not make money in banking when you have unlimited access to free money, especially when the government keeps buying its own cash back from you at market rates.

Your average chimpanzee couldn't fuck up that business plan, which makes it all the more incredible that most of the too-big-to-fail banks are nonetheless still functionally insolvent, and dependent upon bailouts and phony accounting to stay above water. Where do the protesters go to sign up for their interest-free billion-dollar loans?


CREDIT AMNESTY. If you or I miss a $7 payment on a Gap card or, heaven forbid, a mortgage payment, you can forget about the great computer in the sky ever overlooking your mistake. But serial financial fuckups like Citigroup and Bank of America overextended themselves by the hundreds of billions and pumped trillions of dollars of deadly leverage into the system -- and got rewarded with things like the Temporary Liquidity Guarantee Program, an FDIC plan that allowed irresponsible banks to borrow against the government's credit rating.

This is equivalent to a trust fund teenager who trashes six consecutive off-campus apartments and gets rewarded by having Daddy co-sign his next lease. The banks needed programs like TLGP because without them, the market rightly would have started charging more to lend to these idiots. Apparently, though, we can’t trust the free market when it comes to Bank of America, Goldman, Sachs, Citigroup, etc.

In a larger sense, the TBTF banks all have the implicit guarantee of the federal government, so investors know it's relatively safe to lend to them -- which means it's now cheaper for them to borrow money than it is for, say, a responsible regional bank that didn't jack its debt-to-equity levels above 35-1 before the crash and didn't dabble in toxic mortgages. In other words, the TBTF banks got better credit for being less responsible. Click on freecreditscore.com to see if you got the same deal.


STUPIDITY INSURANCE. Defenders of the banks like to talk a lot about how we shouldn't feel sorry for people who've been foreclosed upon, because it's they're own fault for borrowing more than they can pay back, buying more house than they can afford, etc. And critics of OWS have assailed protesters for complaining about things like foreclosure by claiming these folks want “something for nothing.”

This is ironic because, as one of the Rolling Stone editors put it last week, “something for nothing is Wall Street’s official policy." In fact, getting bailed out for bad investment decisions has been de rigeur on Wall Street not just since 2008, but for decades.

Time after time, when big banks screw up and make irresponsible bets that blow up in their faces, they've scored bailouts. It doesn't matter whether it was the Mexican currency bailout of 1994 (when the state bailed out speculators who gambled on the peso) or the IMF/World Bank bailout of Russia in 1998 (a bailout of speculators in the "emerging markets") or the Long-Term Capital Management Bailout of the same year (in which the rescue of investors in a harebrained hedge-fund trading scheme was deemed a matter of international urgency by the Federal Reserve), Wall Street has long grown accustomed to getting bailed out for its mistakes.

The 2008 crash, of course, birthed a whole generation of new bailout schemes. Banks placed billions in bets with AIG and should have lost their shirts when the firm went under -- AIG went under, after all, in large part because of all the huge mortgage bets the banks laid with the firm -- but instead got the state to pony up $180 billion or so to rescue the banks from their own bad decisions.

This sort of thing seems to happen every time the banks do something dumb with their money. Just recently, the French and Belgian authorities cooked up a massive bailout of the French bank Dexia, whose biggest trading partners included, surprise, surprise, Goldman, Sachs and Morgan Stanley. Here's how the New York Times explained the bailout:

To limit damage from Dexia’s collapse, the bailout fashioned by the French and Belgian governments may make these banks and other creditors whole — that is, paid in full for potentially tens of billions of euros they are owed. This would enable Dexia’s creditors and trading partners to avoid losses they might otherwise suffer...

When was the last time the government stepped into help you "avoid losses you might otherwise suffer?" But that's the reality we live in. When Joe Homeowner bought too much house, essentially betting that home prices would go up, and losing his bet when they dropped, he was an irresponsible putz who shouldn’t whine about being put on the street.

But when banks bet billions on a firm like AIG that was heavily invested in mortgages, they were making the same bet that Joe Homeowner made, leaving themselves hugely exposed to a sudden drop in home prices. But instead of being asked to "suck it in and cope" when that bet failed, the banks instead went straight to Washington for a bailout -- and got it.


UNGRADUATED TAXES. I've already gone off on this more than once, but it bears repeating. Bankers on Wall Street pay lower tax rates than most car mechanics. When Warren Buffet released his tax information, we learned that with taxable income of $39 million, he paid $6.9 million in taxes last year, a tax rate of about 17.4%.

Most of Buffet’s income, it seems, was taxed as either "carried interest" (i.e. hedge-fund income) or long-term capital gains, both of which carry 15% tax rates, half of what many of the Zucotti park protesters will pay.  

As for the banks, as companies, we've all heard the stories. Goldman, Sachs in 2008 – this was the same year the bank reported $2.9 billion in profits, and paid out over $10 billion in compensation --  paid just $14 million in taxes, a 1% tax rate.

Bank of America last year paid not a single dollar in taxes -- in fact, it received a "tax credit" of $1 billion. There are a slew of troubled companies that will not be paying taxes for years, including Citigroup and CIT.

When GM bought the finance company AmeriCredit, it was able to marry its long-term losses to AmeriCredit's revenue stream, creating a tax windfall worth as much as $5 billion. So even though AmeriCredit is expected to post earnings of $8-$12 billion in the next decade or so, it likely won't pay any taxes during that time, because its revenue will be offset by GM's losses.

Thank God our government decided to pledge $50 billion of your tax dollars to a rescue of General Motors! You just paid for one of the world's biggest tax breaks.

And last but not least, there is:

GET OUT OF JAIL FREE. One thing we can still be proud of is that America hasn't yet managed to achieve the highest incarceration rate in history -- that honor still goes to the Soviets in the Stalin/Gulag era. But we do still have about 2.3 million people in jail in America.

Virtually all 2.3 million of those prisoners come from "the 99%." Here is the number of bankers who have gone to jail for crimes related to the financial crisis: 0.

Millions of people have been foreclosed upon in the last three years. In most all of those foreclosures, a regional law enforcement office -- typically a sheriff's office -- was awarded fees by the court as part of the foreclosure settlement, settlements which of course were often rubber-stamped by a judge despite mountains of perjurious robosigned evidence.

That means that every single time a bank kicked someone out of his home, a local police department got a cut. Local sheriff's offices also get cuts of almost all credit card judgments, and other bank settlements. If you're wondering how it is that so many regional police departments have the money for fancy new vehicles and SWAT teams and other accoutrements, this is one of your answers.

What this amounts to is the banks having, as allies, a massive armed police force who are always on call, ready to help them evict homeowners and safeguard the repossession of property. But just see what happens when you try to call the police to prevent an improper foreclosure. Then, suddenly, the police will not get involved. It will be a "civil matter" and they won't intervene.

The point being: if you miss a few home payments, you have a very high likelihood of colliding with a police officer in the near future. But if you defraud a pair of European banks out of a billion dollars  -- that's a billion, with a b -- you will never be arrested, never see a policeman, never see the inside of a jail cell.

Your settlement will be worked out not with armed police, but with regulators in suits who used to work for your company or one like it. And you'll have, defending you, a former head of that regulator's agency. In the end, a fine will be paid to the government, but it won't come out of your pocket personally; it will be paid by your company's shareholders. And there will be no admission of criminal wrongdoing.

The Abacus case, in which Goldman helped a hedge fund guy named John Paulson beat a pair of European banks for a billion dollars, tells you everything you need to know about the difference between our two criminal justice systems. The settlement was $550 million -- just over half of the damage.

Can anyone imagine a common thief being caught by police and sentenced to pay back half of what he took? Just one low-ranking individual in that case was charged (case pending), and no individual had to reach into his pocket to help cover the fine. The settlement Goldman paid to the government was about 1/24th of what Goldman received from the government just in the AIG bailout. And that was the toughest "punishment" the government dished out to a bank in the wake of 2008.

The point being: we have a massive police force in America that outside of lower Manhattan prosecutes crime and imprisons citizens with record-setting, factory-level efficiency, eclipsing the incarceration rates of most of history's more notorious police states and communist countries.

But the bankers on Wall Street don't live in that heavily-policed country. There are maybe 1000 SEC agents policing that sector of the economy, plus a handful of FBI agents. There are nearly that many police officers stationed around the polite crowd at Zucotti park. 

These inequities are what drive the OWS protests. People don't want handouts. It's not a class uprising and they don't want civil war -- they want just the opposite. They want everyone to live in the same country, and live by the same rules. It's amazing that some people think that that's asking a lot.


October 25, 2011

Model Portfolio Value As of 25 October 2011

$ 549,121

Comment on Model Portfolio activity

It’s Tuesday so naturally stocks sold off because the trend has been higher for the last week. On a positive note a few of the former momentum high flyers are being taken to the woodshed and we suggested in earlier posts that such negative action needed to occur before a meaningful uptrend could continue. Happily the run of the mill stocks are puttering along- slightly lower today- but out of the limelight. Netflix is down 40% today and 66% in the last few months. First Solar is down 25% today and 66% in the last few months. And the list goes on.

We continue a constructive attitude towards the stocks we own. We added to Zion Bank and AKS today as they announced inline earnings but the shares sold off. DreamWorks announces after the close and tomorrow we have Ford and Sprint.

We also added Chico’s to accounts from which we sold Urban yesterday. CHS is less volatile and earnings and sales are on track to grow again after a few mixed years.


October 24, 2011

Model Portfolio Value As of 24 October 2011

$ 561,391

Comment on Model Portfolio activity

With the S&P 500 at 1250 (major resistance) and the light volume rally today we sold a few stocks to raise cash ahead of Turnaround Tuesday. We eliminated Urban for a small gain and sold Research in Motion for a scratch. We also reduced Alcoa in some accounts where we have been trading around a core position.


October 21, 2011

Model Portfolio Value As of 21 October 2011

$ 546,065

Comment on Model Portfolio activity

We added Huntington Bank to accounts when it sold off Thursday on earnings and sold XLF for a trading profit on Friday afternoon.


October 18, 2011

Model Portfolio Value As of 18 October 2011

$ 543,059

Comment on Model Portfolio activity

We sold U.S Steel at $22 for a loss in most accounts ahead of earnings on October 25 because Goldman placed a sell on the shares today with a $20 price target. When a large firm changes its rating right ahead of earnings we think it prudent – in this take no prisoners market - to move to the sidelines. Goldman also upped AK Steel to neutral ahead of earnings. AK Steel (originally Armco Steel) manufactures flat rolled steel for the auto industry. Goldman Sachs changed its rating of AK Steel to neutral. The upgrade was based on the belief that all the bad news was priced into the stock, and the current price had limited downside. We bought an equal number of shares of it at $7.70 to keep our steel exposure with fewer dollars on the line and room to add more if Goldman (Heaven forbid!!) is early on its call.

We also traded GM for a plus scratch in the accounts that held X as we changed our mind about increasing our GM exposure.

The drop in IBM today after earnings has limited the advance on the DJIA by 80 points. Apple reports tonight as does Juniper

Express Scripts, Medco Face Increased U.S. Scrutiny on Merger

(Bloomberg) A second congressional committee is planning to examine antitrust concerns raised by Express Scripts Inc. (ESRX)’s proposed purchase of competitor Medco Health Solutions Inc. (MHS), congressional aides said.

The combined company would be the largest U.S. manager of pharmacy benefits for employers, insurers and union health plans. Senator Herb Kohl, a Wisconsin Democrat who leads the Judiciary subcommittee on Antitrust, Competition Policy and Consumer Rights, plans a hearing on the acquisition in November, his spokeswoman, Lynn Becker, said in an e-mail.

Express Scripts’ $29.1 billion purchase is already under review by the Federal Trade Commission, and states have opened inquiries into the sale out of concern that the combined company will command too much market power, St. Louis-based Express Scripts has said. A House subcommittee on competitive issues held a hearing on the sale in September.

Kohl’s hearing “is fully warranted and would help shine a light on a number of costly middlemen practices that needlessly drive up prescription drug costs and would only grow worse should this merger be approved,” said B. Douglas Hoey, chief executive officer of the National Community Pharmacists Association, in an e-mail.

Hoey’s group and the National Association of Chain Drug Stores, an organization representing companies including Walgreen Co. (WAG), are lobbying the FTC and Congress against the combination of Express Scripts and Franklin Lakes, New Jersey-based Medco.

Express Scripts CEO George Paz told members of the House subcommittee that the acquisition would result in “safer and more affordable” drugs. A spokesman for Express Scripts, Brian Henry, declined to comment on Kohl’s plans for a hearing.

The combined company would act as an intermediary in about a third of all U.S. prescription drug sales and would control about 60 percent of the mail-order pharmacy market, according to the House Judiciary subcommittee on Intellectual Property, Competition and the Internet.


October 17, 2011

Model Portfolio Value As of 17 October 2011

$ 527,239

Comment on Model Portfolio activity

In some aggressive accounts we switched Ford common to Ford warrants on a 3 warrants for 1 common basis.

(AP) -- Shares of General Motors Co. and Ford Motor Co. could rise Monday because an analyst raised third-quarter earnings estimates for both companies.

Citi Investment Research analyst Itay Michaeli raised his earnings estimate for GM from 79 cents per share to $1.05, and he increased his Ford estimate to 46 cents per share from 44 cents. Michaeli also repeated his "Buy" rating on both stocks.

In a note to investors, Michaeli wrote that he expects GM and Ford to affirm their full-year earnings targets, albeit with a cautionary tone for the fourth quarter.

He also wrote that barring any major global macroeconomic setback, he expects both companies' stocks to get a "continued bounce" after third-quarter earnings, solid October sales and modest relief on pension obligations from the stock market and interest rates.

Michaeli called automakers' stocks "deeply discounted."

His earnings estimates are above the consensus of analysts who follow the companies. Analysts polled by FactSet expect GM's third-quarter earnings to be 94 cents per share and Ford's to be 45 cents per share. Ford is expected to announce earnings later this month, while GM's earnings are likely to be released in early November.

S&P strike out again:

Standard & Poor's on Thursday October 13 cut its outlook on Walgreen Co. to negative from stable, citing the lack of progress in the drugstore chain's negotiations with Express Script. "Contract renewal negotiations with Express Script have been unsuccessful to date and the loss of this contract could result in a meaningful revenue and profit decline in fiscal 2012," S&P said. And "the negative outlook represents our expectation of the weak credit measures that will result from the lower earnings."

Friday October 14 WSJ: Pharmacy giants Walgreen Co. and Express Scripts Inc. quietly announced Friday that they've reached a deal allowing nearly one million people in Kansas City, Mo., to continue filling their prescriptions at the nation's largest drug store after this year.

But the Kansas City deal doesn't necessarily signal that an agreement allowing Express Scripts clients nationally to keep getting their prescriptions at Walgreen is forthcoming, an Express Scripts spokesman warned.

http://finance.yahoo.com/marketupdate/inplay#wag Monday October 17: Walgreens offers price guarantee to Express Scripts (ESRX) for Department of Defense Tricare Pharmacy Program: Co said it has offered terms to Express Scripts that if accepted would allow Walgreens to continue serving the Department of Defense (DoD) Tricare pharmacy program in 2012 and produce savings for the program without disrupting beneficiaries' choice of a network pharmacy provider. Walgreens also reiterated its earlier, rejected offer to contract separately with Express Scripts for Tricare from other Express Scripts commercial business to avoid any disruption to military families and retirees. Express Scripts has ignored or rejected all previous offers made by Walgreens and continues to refuse to negotiate a separate contract for the benefit of the Tricare program and its 6 million beneficiaries.


October 14, 2011

Model Portfolio Value As of 14 October 2011

$ 545,732

Comment on Model Portfolio activity

Sprint is up 35% from its low two days ago and we are reducing the position to a more comfortable level. We also added Research in Motion (Blackberry) to accounts for a trade.

Sprint received a second analyst upgrade today.

Sprint shares are getting a boost from Credit Suisse shares Jonathan Chaplin

The carrier’s shares have been under pressure for the last week since the company held an extremely poorly received analyst meeting in New York last Friday. But he thinks the consensus has over-reacted, and that the situation is not nearly as grave as it might appear in terms of the company’s need for more capital. In particular, he thinks the economics on the Apple iPhone 4S – the phone goes on sale today for the first time at Sprint stores as well as through Verizon Wireless and AT&T – are not as bad as the Street consensus believes,

“We built a simple model that calculates the EBITDA impact of iPhone sales,” he writes. “We think the EBITDA drag will be lower than many believe it to be. This means that Sprint’s funding gap is lower than many believe it to be. Finally, our model demonstrates the value of iPhone subscribers to Sprint beyond the initial EBITDA drag.”

In short, he thinks the stock is now a bargain.

“It is time to buy Sprint again,” he concludes. “Investors reacted to inadequate information around the impact of the iPhone and Network Vision on Sprint’s cash flow over the next two years. This led to heightened liquidity concerns. Now that the dust has settled, we believe Sprint has access to the capital they need (it is just a question of whether they raise secured or unsecured debt and at what price) [and] the cash drag and funding gap is less than many feared. There are still substantial challenges ahead; however, the stock is oversold and we believe patience (and nerves of steel) will be rewarded.”

The analyst sees potential catalysts for the stock in Q3 and Q4 results, which he things will show progress on margins, and in completion of a capital raise – he expects the company to do a $1 billion to $2 billion debt offering soon after it reports Q3 results.

Chaplin puts the value of the company at $4.50 a share, including $1 for the core business and $3.50 for the Network Vision piece. He sees mote potential value in the iPhone deal and potential networking sharing contracts, but isn’t including either of those in his valuation. His new price target is down from an old estimate of $7 – but still way above yesterday’s close at $2.78.


October 13, 2011

Model Portfolio Value As of 13 October 2011

$ 534,384

Comment on Model Portfolio activity

We switched a portion of our Nvdia position to Barnes& Noble. We also bought Ford warrants equal to the shares of Nvdia we sold.

Last May Liberty Media announced it was willing to pay $17 per share to acquire Barnes & Noble. Ron Burkle, a 20% owner, balked at that price. Leonard Riggio, a 30% owner of Barnes & Noble, controls the company. In August Liberty Media and Barnes & Noble announced that Liberty Media’s interest had changed and instead of buying all of Barnes & Noble Liberty Media would invest $205 million in a convertible preferred stock of Barnes & Noble paying 7.75%. The shares are convertible to common at $17 per share and the purchase gives Liberty Media a 16% stake. We have traded BKS for the past few years and bought today near the low end of its yearly range for a trade.


October 12, 2011

Comment on Model Portfolio activity

The rally today brought the S&P 500 to resistance at 1220. It backed off from there but still closed positive on the day. With options expiring next week this may be the top for a few days. But the tenor of the markets seems to have changed.

Investors’ Intelligence had 34% bulls and 47% bears in the latest week. That’s why we rallied.

Some statistics on the 47% who don’t pay Federal income taxes. Anyone want to switch with them?

(This is from a report from 2004)

The zero-tax filers will be largely low-income. Indeed, 75 percent of them will earn less than $20,000 per year and 97 percent will earn less than $40,000. Fewer than 1 percent will earn more than $75,000 per year – a group comprised largely of business owners whose tax liabilities will be erased due to business losses, carry-overs from prior year AMT payments, or foreign tax credits.

Zero-tax filers will be overwhelmingly young. Looking at the age of the primary breadwinner on these tax returns, only 22 percent are 45 years old or older. More than one-third (36 percent) are younger than age 25, and 56 percent are younger than age 35.

Interestingly, there is a large cluster of households (22.4 percent) where the principal wage earner is between the ages of 35 and 44. Most likely, these are modest-income families who are benefiting most from the increased value of the child credit to $1,000...

In general, then, those who don’t pay federal income taxes tend to be young families with children, often headed by a single mother, where the head of household has a job and is trying to make ends meet on a modest income and seniors trying to get by o their social security income.

Also among the 47% are US military personnel, military civilians, and other civilian agency personnel deployed forward including Iraq and Afghanistan. As you know if one is abroad for a year (actually a little over 11 months), the first $89k or so of income is exempt from income tax.


October 11, 2011

Model Portfolio Value As of 11 October 2011

$ 526,689

Comment on Model Portfolio activity

Today is important. It is Turnaround Tuesday and for the last two months the markets have reversed their trend on this day. That they didn’t do it today is a positive—or maybe not. If the markets can consolidate without a lot of volatility (above 1170 on the S&P 500) that will be positive for more upside as earnings season begins tonight with Alcoa on tap.

Yesterday there were six downgrades of Sprint by analysts that had initiated buys on Sprint at higher prices—but there was also one upgrade.

Tech Trader Daily
October 11, 2011, 9:47 AM ET
Sprint: FBR Makes Top Pick; Don’t Mind the Funding Gap
By Tiernan Ray

After an orgy of Sprint-Nextel (S) downgrades yesterday — six in all — today comes a kind word from FBR Capital’s David Dixon, who actually swapped AT&T (T) out of the firm’s “Top Pick” spot in favor of Sprint.

Dixon has an Outperform rating on Sprint and a $6 price target.

Dixon writes that the concerns about a “funding gap” coming out of last Friday’s investor presentation are a bit too much. Sprint had said that it might need to tap public markets in future, sending its shares crashing and leading to the downgrades yesterday.

He estimates there is $4.2 billion of capital needs not covered, based on Sprint’s need to build out its 4G network with so-called LTE infrastructure, while enduring a dilution of its profit margin as it subsidizes Apple’s (AAPL) iPhone for the first time.

Dixon thinks the $4.2 billion need can be met by refinancing that much in debt maturities, pushing them to 2013, or by using a $6 billion senior-secured debt capacity. “This is familiar territory for incoming CFO Joe Euteneuer, who successfully raised capital under tough market conditions at Qwest in 2008–09,” writes Dixon.

Dixon thinks Sprint is doing the right thing in going for a nationwide LTE network, rather than sticking with partner Clearwire (CLWR) for the majority of its 4G service:

Decoupling the company’s 4G strategic path from Clearwire will prove to be no easy task, as this is the cause of much investor consternation evidenced by a heated Q&A session at the investor day. However, we believe that the company is on the right strategic path with a well-funded business plan and we believe execution risk is mitigated. While the risk of a Clearwire bankruptcy in the short term is mitigated in our view, it is possible but we expect Sprint would likely bid for portions of Clearwire spectrum in any restructuring. Furthermore, we would expect any other potential buyer (including other buyers of alternative potentially attractive spectrum bands) to be subject to tight build-out conditions by the FCC, which should help drive a spectrum hosting partnership with Sprint on the Network Vision platform.

The iPhone subsidy brings positives and negatives.

Dixon raised his 2011 revenue estimate to $33.4 billion from $33.3 billion, to reflect the iPhone’s contribution, and raised his Q4 net additions estimate to a positive 260,000 from a prior estimate for a negative 190,000, and cut his churn estimate this quarter from 1.8% to 1.7%. He also raised his 2012 revenue estimate to $35 billion from $34.2 billion.

However, Dixon also cut his profit estimates, with this year’s EBITDA going to $4.6 billion from $5.2 billion, and cut his 2012 EBITDA estimate to $4.3 billion from $5 billion. That will lead to negative free cash flow of $183 million this year, versus a prior $786 million positive cash flow, and negative $1.8 billion next year, way down from negative $406 million expected previously.

The iPhone should start to have a positive impact on profit in 2014, he thinks.

DreamWorks Animation: At Lowest Price But Worth Highest Value

By Andrew August


l assume that like me, you don't jump to read 14 pages of potential pabulum by some random stranger you happen on through the internet, so I'll distill the key points of my DWA write up. http://www.frogskiss.com/2011/10/dreamworks-animation-write-up.html

DreamWorks Animation is a well-run company that is trading below what shareholders would receive in an orderly run-off. The company is focused on the most profitable segment of the movie industry and its content can be further monetized due to the brands created by the movie characters in ways that ordinary films cannot. The company operates in an oligopolistic industry with high barriers to entry and owner-operator management.

Valuation Comparison




Film Library



Blockbuster Franchises*






TTM Net Income



FD Shares Outstanding



Share Price



Market Cap



*Shrek, Madagascar, Kung Fu Panda, How to Train Your Dragon

1. Value – I estimate that in an orderly run-off, the business is worth more than $18/share, or the current market price. The current book value is $15/share. Every $100m the 8 films carried as inventory on the balance sheet generates in profits over the next 2-3 years is worth $1.18/share (figure ~$200m or $2.36/share). Were DreamWorks to sell the library and related intellectual property at the same revenue multiple (2.2x) as the Miramax library sale, it would generate another $321m or $3.75/share fully taxed. I believe these numbers are conservative based on historical performance of DreamWorks movies and prior content sales. In a run-off, DreamWorks shareholders would receive at least $5-$7/share in excess of $15 of book value for a vague value of $20-$22/share, or 10%-25% higher than the current price (see my full write up for discussion and why the vague value is vaguely more valuable than I posit here). This implies that future movies released will destroy value, although quite the opposite is much more likely. As a going concern, it trades at 10x earnings, but figuring out future earnings is impossible. If it trades below run-off value, you don't really have to take a punt on guessing what earnings will be over the next 5-10 years. If it resembles the past, shareholders should do fine.

2. Profitable Growth Runway – As the combined tailwinds of a growing global middle class and higher per capita revenue due to 3D take effect, revenue per film will increase, even if reception is average. Both require very little action on behalf of the company. The company has increased film output from 4 films every 2 years to 5 films, which should further capitalize on this trend. The 3D film production process adds $10-$15m in costs to each film and a rising global middle class is free. The animated film industry is oligopolistic, communicating in plain sight release dates to avoid competition over audiences. A focus on declining DVD sales neglects the increasing mediums for distribution requiring desirable content like that produced by DreamWorks. So even if the company releases the qualitatively similar movies as it has done in the past, it will actually achieve greater quantitative results.

3. Incremental Reduction in Cost of Failure – The company has never been stronger with a film catalogue that has the depth of 4 franchises – Shrek, Madagascar, Kung Fu Panda, and How To Train Your Dragon – that can be monetized through various licensing agreements from live entertainment to TV shows and toys. This creates a cash stream that requires little-to-no incremental investment and is independent of the film business. The business is debt free, which reduces fixed costs and removes any pressure from the company to enter lousy deals to meet payments. Both of these factors are abstract, but make the company very robust, a necessity in an industry with uncertain film-by-film success. This strength has allowed the company to increase its rate of film production. Every successful film released that creates a new franchise lowers the company’s reliance on creating successful films in the future to drive profits.

4. Management – The full name of the company is DreamWorks Animation SKG. The SKG stands for Spielberg, Katzenberg, and Geffen. All have a meaningful stake in the company. Katzenberg takes all his compensation in stock options. Katzenberg has a long-term track record of success in the animated film industry reaching back over 20 years. He has made mistakes like anyone else, but has been able to create numerous profitable films over his career and at DreamWorks that outweigh the failures. Most of the uncertainty surrounding the company - success of films, distribution agreements, and future of DVD - should be tempered by the presence of a qualified management team and incentivized owners among other factors. The SKG trio could have retired long ago if they were just in it for the money.

Disclosure: I am long DWA.

And you thought the SEC wasn’t cracking down on the banksters:

SEC Charges Bank Executives with Hiding Millions of Dollars in Losses During 2008 Financial Crisis

Washington, D.C., Oct. 11, 2011 – The Securities and Exchange Commission today charged former bank executives with misleading investors about mounting loan losses at San Francisco-based United Commercial Bank during the height of the financial crisis in 2008 and 2009.

Maybe the SEC will get around to the big boys and girls by the turn of the next century.


October 10, 2011

Model Portfolio Value As of 10 October 2011

$ 524,045

Comment on Model Portfolio activity

We added Walgreen. Sprint popped and dropped on Friday and this morning five analysts jumped off the cliff by lowering their recommendations on Sprint to hold from accumulates or buy. Sprint had an investor meeting on Friday that obviously didn’t go well. We are maintaining our position for now.

Current Metrics Suggest Economy Is Strengthening
By Jeff Saut Oct 10, 2011 10:50 am

Machine tool orders have soared, same-store sales for casual dining chains were up, and railcar traffic trends are strong -- all inconsistent with an economy entering recession.

“What do you mean by an undercut low?” was a question I received in numerous emails after last Tuesday’s verbal strategy comments. Well, for the past few months I have been talking about the similarities to the declines, and subsequent bottoming sequences, of October 1978 and October 1979. Yes, I know that back then the economy was better, the interest rate environment was different, politics were more settled, Europe was stable, etc., but I am referencing just the pricing action of the Dow Jones Industrials (INDU). As often stated, those aforementioned declines were just as severe, and just as quick, as what we experienced from the 7/27/11 intraday high of 12751.43 into the selling climax lows of August 8 and 9. Following those extreme oversold lows the major indices have pretty much mirrored the 1978/1979 patterns by trading in a fairly tight range, rallying a few sessions and then declining for a few to the point where participants needed Dramamine! In those late 1970s sequences the INDU violated the selling panic lows twice with an undercut low so often referenced in these letters.

An “undercut low” is when a much-watched level, like the panic low of early August (1101.54 basis the S&P 500), is violated on the downside just enough to get everyone really bearish and cause them to sell out their portfolios. Subsequently, the indices turn up and rally, “locking in” a low. And, that was my firm's bet last Tuesday when in that morning’s verbal strategy comments we recommended buying the index of your choice on the belief that we were going to experience an “undercut low.” To be specific, I said to buy the trading vehicle of your choice and if we rallied into the afternoon, hold on to that position for a trade. The quid pro quo was that if we were not rallying late in the day to sell said position and live to “play” another day. In retrospect, at least so far, the 1970s pattern continues to track. Now one particularly observant financial advisor (FA) asked last Friday if I thought last Tuesday’s low (1074.77) could be retested over the coming weeks. My response was, “Yes it could, and that would still be in keeping with the October ‘78/’79 experiences.” A number of other FAs asked if last week’s collapse below 1101.54 meant we are going into another whole new “leg” to the downside toward minor support at 1050, or major support at 1020 – 1030.

Speaking to that question, we have always said a “decisive” break below 1101.54 was needed on a closing basis to constitute the raising of even more cash than we already have. By decisive we have repeatedly stated 5-10 points on the S&P 500 (SPX) was what was meant by “decisive.” Moreover, it has to be on a closing basis to be valid. Therefore, last Monday’s close of 1099.23 wasn’t enough; and, Tuesday’s intraday low of 1074.77 didn’t count because that day’s closing level was 1123.95. Yet another FA wanted to know if last week represented another Dow Theory “sell signal.” Asked and answered I replied, “By my pencil a Dow Theory ‘sell signal’ was recorded on 8/4/11 when the INDU broke below its March 16, 2011 reaction low, thus confirming a similar break by the D-J Transportation Average below its March reaction low.” At the time we wrote about the signal and have spoken of it numerous times since then. To get another Dow Theory “sell signal” would require a close below the July 2010 reaction lows of 9686.48 for the Industrials and 3906.23 for the Transports, at least by our method of interpreting Dow Theory. Regrettably, to get a Dow Theory “buy signal” under my methodology would require a close above the May 6, 2011 high of 12807.36 by the Industrials with a similar close from the Trannies above their July 7, 2011 high of 5618.25. Of course, some Dow Theorists would suggest a close above the August 2011 closing highs of 11613.53 and 4683.96 would do the trick, and I certainly hope they are right.

Whoever is correct, we have been pretty cautious over the past two months, except for last Tuesday’s bullish trading “call,” believing that if we are going to err it is going to be by being too cautious. That’s why we have made very few trading recommendations and why we have concentrated on dividend-paying stocks with strong fundamentals that have favorable ratings from our analysts. All but two of those stocks hopefully made their respective “panic lows” back in early August. The two exceptions are LINN Energy (LINE) and The Williams Companies (WMB), both of which made new reaction lows early last week before recovering late in the week. Again this week we offer these names for your consideration. One of the reasons for the “painful ups and downs,” and new reaction lows referenced in last week’s letter, is that analysts are whacking forward earnings estimates. For example, according to our friends at Bespoke Investment Group:

“Over the last four weeks, analysts have raised forecasts for 276 companies in the S&P 1500 and lowered forecasts for 780. This works out to a net of -504, or -33.6% of the index, and represents the lowest level since April 2009.”


October 7, 2011

Model Portfolio Value As of 7 October 2011

$ 514,120

Comment on Model Portfolio activity

With the markets up for the fourth day in a row this morning we took a bit of money off the table by selling a chunk of Ford warrants and all our Disney, Applied Materials, Nokia, Huntington Bank, Briggs & Stratton, and SPDR Financials. We also sold the Ford, GM Hewlett Packard, and Hartford Financial that we bought on Monday. We sold and bought back the Sprint we bought on Monday for a 50 pennies profit.


October 4, 2011

Model Portfolio Value As of 4 October 2011

$ 489,760

Comment on Model Portfolio activity

The S&P 500 was down 2% at the opening; rallied back to even; dropped 2%; rallied to down 1% then back to down 2% and in the last half hour jumped 3.5% to close up 1.5% on the day. Thank you – rather no thanks HFT for the combined 12% move. We suggested yesterday that the market measures would rally today. We continue to think that another 4% to the downside is in the cards to 1004 on the S&P 500 before the correction is fulfilled. We are set in the stocks we want to own into year end. See yesterday’s review.<

We added Google to a few large accounts and bought shares of Ford, GM, HPQ, S, HIG and ALU in this morning’s 2% sell off.

Jeff Cooper remarks that October 10 is the anniversary of the market correction low in 2002 and of the all-time high in 2007. It is also the day after our birthday which will be #68 for us.

Auto sales- we continue to believe folks will buy cars since they won’t buy houses. Financing is available at the most attractive levels ever.

(Reuters) - U.S. auto sales rose almost 10 percent in September, allaying concerns of a double-dip recession as major automakers forecast stronger sales through the remainder of the year. Among the Detroit automakers, General Motors Co sales rose 20 percent, while those at Ford Motor Co and Chrysler group were up 9 percent and 27 percent, respectively. Still battling to rebound from the effects of the March earthquake in Japan, Toyota Motor Corp (Tokyo:7203.T - News) and Honda Motor Co (Tokyo:7267.T - News) posted sales declines of almost 18 percent and 8 percent.

History doesn’t repeat – or does it?

It is literally 2008 again in a sense.

The S&P closed yesterday (October 3, 2011) at 1099.23.

On October 3, 2008, it closed at 1099.23.

Read more:

History rhyming:

Yesterday, Deutsche Bank Economist Jim Ma and his team came up with a report, turning somewhat more bearish on China after the Hong Kong/Chinese markets got really killed.

They are now expecting GDP growth to slow to or below 7%, and are worried about the exports picture (and among other things).

On the real estate market, Jun Ma and associates told an interesting story on the latest development.

In recent weeks, the number of phone calls received by an author of this report from China-based property agents has increased several fold, indicating a significant rise in the urgency for developers to raise cash from selling properties. A property consultant told us that he recently received requests to help raise RMB10bn for cash-strapped small and medium-sized property developers – this amount is a huge multiple of what he is used to dealing with. In the offshore market, where many Chinese developers seek foreign currency funding due to lack of access to domestic funds (the domestic stock, bond and trust loan markets are closed to them due to policy tightening, and banks are also very stringent), their USD bond yields have surged to 20-25% in past weeks from around 10% before August. This means that even the offshore markets are now largely closed to Chinese developers (see Figure 4).

All these suggest that many developers are now under greater pressure to sell their properties at a bigger discount in order to avoid a liquidity crisis. An emerging consensus from potential buyers and some developers is that a 10% drop in prices in the coming two quarters would be justified.

A further decline in physical property prices will likely reduce the incentive for developers to start new projects, and thus implying a deceleration in real estate FAI. Note that real estate FAI by developers account for about 16% of total FAI, and about 25% of the demand for steel, coking coal, and cement.

They are now expecting to see about 10% correction in the real estate market for the next 4-6 months.  However, 10% is all they are expecting, because…

Readers may ask why we are not projecting a 30% drop in property prices. Those who understand China’s political economy should know that a 15% decline in average property prices in 35 cities within a few months must be accompanied by a range of economic and social consequences. These will include a sharp decline in real estate transactions, a visible deceleration in real estate investments, rising unemployment in the property construction and agency sectors, a further decline in construction material prices, demand destruction due to inventory destocking, and finally a worrying decline in GDP growth and the resulting concern of social stability. In other words, the government will most likely not tolerate a 30% drop, and probably not even 15% in our view. We expect real estate policies will likely be relaxed way before a 30% price decline is observed.

This article originally appeared here: China Real Estate: Some Anecdotes As Told By Deutsche Bank

Also sprach Analyst - World & China Economy, Global Finance, Real Estate

Read more:


October 3, 2011

Model Portfolio Value As of 3 October 2011

$ 467,338

Comment on Model Portfolio activity

Well folks, the S&P 500 broke support today and the next support is at 1004.  We do think there may be a Turnaround Tuesday rally tomorrow but most probably 1004 has to be tested to make the market gods content.

We arrived in this morning after a weekend of stewing about which stocks we really didn’t want to own in a break of support and JDSU and Ciena and Aéropostale surface. And so we sold them. We don’t want to be out of the market since when the turn comes it is going to be as volatile to the upside and so we placed the JDSU money in Ford, we placed the Ciena money in XLF (SPDR financials) and the Aéropostale money in Applied Materials. We also added Alcatel Lucent to some large accounts and sold Briggs & Stratton in smaller accounts.

Comments on the stocks we own:

Where have investors gone Joe DiMaggio??

Where have you gone, Joe DiMaggio,
Our nation turns it's lonely eyes to you.
What's that you say, Mrs. Robinson.
Jolting Joe has left and gone away,
Hey hey hey.

Alcatel Lucent is trading at 8 times earnings and book value. Has $2.50 per share in cash—that is what we paid for the shares we bought today.  ALU sells at 25% of sales.

Alcoa currently at $9 is trading at less than 8 times earnings, and at 40% of sales and 4 times cash flow. In the good old days those were buy territory numbers- not sell territory numbers.

(Reuters) - Alcoa shares fell over 6 percent to a 52-week low on Monday after Deutsche Bank downgraded the biggest U.S. aluminum producer amid concerns about recent metal price declines. The bank cut Alcoa's investment rating to "hold" from "buy" and lowered its stock price target to $14 from $20, saying it believes industrial metals will be hurt by the European debt crisis and a slowdown in emerging markets.

Deutsche Bank raised Alcoa to a buy on January 3, 2011 when the shares were trading at $16.50.

American Eagle yields 3.8%. The shares trade at 12 times depressed earnings. The CEO just bought 1 million shares at the current price.

Applied Materials yields 3.1% and is priced at 7 times earnings--- This is a tech stock— as a net $3 per share in cash and is priced at $10.

Briggs & Stratton yields 3.4% and is priced at 210 times depressed earnings and is priced at its March 2009 low.

Disney is Disney and is down 35% from is high in May.

DreamWorks is selling at its all-time low and just above book value. DWA has a movie Puss & Boots coming out November 4 and box office for it will determine near term market action. The shares are priced at 12 times earnings and are down 60% from the high this year.

Ford is priced at $15 billion (netting cash and automotive debt) with $130 billion in sales. Automotive debt is $9 billion and cash on hand is $21 billion. GM is priced at priced at $10 billion (netting cash and automotive debt) with $145 billion in sales and debt of $12 billion with $35 billion in cash. Both stocks sell at less than 5 times earnings. In the good old days auto stocks sold at 5 times earnings when boom times reigned. In recession they were priced at 10 times earnings.

Toyota is priced at one times sales and ten times earnings by the markets.

GE is cheap, cheap, and cheap with at 3.9% yield.

Hartford Financial trades at 4X earnings with a 2.5% yield. Book value is stated at $45 with the share price at $16.

Hewlett Packard is at 4 X earnings; 2.2% yield with a $20 book value and the share price is $22.

Huntington Bancshares are at 10X earnings with a 3.4% yield.

Juniper Networks is at $18 down from $45 earlier this year. At the current price the shares are at 13X forward earnings and there is $6 per share in cash in the company which prices JNPR at 1.3 times revenues.

Nvdia has $4 per share in cash, growing earnings (12X) and a new chip.

Nokia’s fate depends on how we’ll its Microsoft operating system works and attracts buyer to its new smartphones. $5.50 share priced is backed by $3 per share in cash and $60 billion in sales for a company priced at $15 billion.

Northern Trust is a quality Banks priced below its 2008- 2009 low with a 3.3% yield and 40% below this year high.

XLF gives us exposure to the beaten down and abandoned financials.

Sprint is the #3 M wireless phone provider with 50 million subscribers. We think Verizon will make a bid for them if it looks like the AT&T/ T Mobile deal will go through. At its current price the shares are undervalued by at least 100% versus its two larger rivals.

U S Steel is an enigma but is priced at the low end of its range for the last ten years.

Urban Outfitters is a teen young adult cutting edge retailer with a share price down 50% from the yearly high because it missed a quarter. Management will correct the problems and then the momentum money will return.

Walgreen is a great company at an attractive price.




We plan on being in business for at least the next twenty years and with this in mind we are changing the frequency and content of our internet posts. We will maintain our concentration on market activity while we simplify our business day. We have been writing about the markets for 27 years - on a daily basis for 12 years - and giving investment advice for 45 years. Our guess is that while we haven’t seen and said it all we are pretty close to having exhausted any new words of wisdom we might wish to convey. Markets don’t repeat but they do rhyme. By not posting dally we will be freed up to do some summer/winter activities such as gardening/snowshoeing, riding our horses, walking the dogs and spending a bit more time with the prince and princess when they visit. And so we are going to end our lengthy daily comments but we will continue to post periodically when market events warrant and/or when there is activity in the Model Portfolio.




















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