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

For those clients of LY& Co and other interested persons the Quarterly Report on the routing of customer orders under SEC Rule11Ac1-6.
For Quarter Ending March 31, 2003 For Quarter Ending December 31, 2002 For Quarter Ending September 30, 2002
For Quarter Ending June 30, 2003

30 September 2003 - Evening Comment

8:01am and the NYT reports that 2.1 million folks lost medical insurance last year. There is a brouhaha in Washington over who said what about whom and when, and vice president Cheney is again at is undisclosed hidden place after venturing on TV last week and making comments that were immediately contradicted by the President in his own inimitable Bushisms. So everything is normal in Washington.

8:04am and SUN Micro is under pressure this morning with downgrades from two brokerage firms. That has placed a bit of pressure on the NASDAQ but we think this years high flyers like EBay and Yahoo and Amazon have enough following to maintain their market levels for today at least.

Chain store sales fell 0.4% for the week ended August 27 which is the third week in a row of declines. Walmart is the exception in this category. Gold is higher as the dollar is at a three week low against the euro.

8:50am and stocks are opening lower. The NASDAQ is down 1% with SUNW leading the way lower.

9:01am and Consumer Confidence was 76.8 in September versus 81.7 in August. The Chicago Purchasing Managers Index fell from 58.9 to 51.2. The DJIA is down over 100 points on that news. Treasuries are very strong with the ten year yield down 10 basis points.

10:12am and Treasuries seem to be predicting the return of recession and not tightening by the Fed and the stock markets selling off are confirming that belief, or the other way around.

The volatile action in Treasuries is a function of that investment vehicle’s ability to absorb a lot of investment dollars easily. Hedge funds and banks and large trading brokerage houses have billions of dollars to trade every day and the only markets large enough to give them the action they need are the Treasury and currency markets. The gold market is surely too small and even the stock markets including the indexes are not large enough to provide the liquidity needed.

Another anomaly of today’s Treasury strength is that foreign central banks have their dollars invested in Treasuries. But the U.S. wants a weak dollar which will erode the overall value of the foreign central banks Treasury investments. It does an investor no good to earn 4% on an investment where the means of payment – dollars – are losing 5% of value in relation to the currency of that foreign central bank’s country.

The real answer to the strength in Treasuries today may be that it is month end and there may be quite a few entities that would like to see a strong close in Treasuries for quarter end.

11:02am and the German DAX is down over 2% with the rest of Europe tagging along. The DJIA is currently off 98 points and the NASDAQ is under 1800 down 28 points at 1796. Breadth is 2/1 negative and up volume exceeds down volume by a 3/1 margin on the NYSE and NASDAQ. New highs are under 50 both places. Trading volume is moderate.

12:24pm and it looks like the travails of the dollar are what is moving the stock markets. After the Japanese Central bank intervened the dollar strengthened against the yen and so did the U.S. stock markets. Volume remains moderate. There seems to be some bottom fishing occurring among beaten down stocks.

1:42pm and the DJIA remains down 70 points. Our guess is that the big boys and girls at the mutual funds have saved their ammo for the final hour and that the major indexes and averages will close higher for the day. Breadth is improving and mark up time is approaching.

3:02pm and we aren’t as smart as the markets. There was no late session markup sell programs came in on the close. The DJIA closed down 104 points at 9276. The S&P 500 dropped 10 points to finish at 997 and the NASDAQ was off 38 points ending at 1787. Treasuries closed on their highs.

And tomorrow is another day.

30 September 2003 - Morning Comment

6:59am and stock futures are lower. Japan was a tad lower while Europe is mixed. The dollar continued its drop against the yen. Because this is the last day of the quarter we are expecting and up market at the close. In between we presume there will be the same desultory trading that has occurred over the last few weeks.

We don’t have a lot of wisdom to add to the message this morning and so rather than gasbag we’ll remind that we are mainly cash and content to watch for now.

So let the games begin.

29 September 2003 - Evening Comment

7:31am and personal income was up 0.2% and personal spending gained 0.9%. Treasuries are under pressure and profit taking is occurring from the rally in Treasury issues last week.

8:53am and stocks have opened higher with the NASDAQ leading the way. The NASDAQ is up almost 1% while the DJIA is up 33 points. IBM is back at the $90 level trying to break above. Right now the up move is nothing more than a dead cat bounce from last week but it could turn into more.

9:02am and over the past week the stock indexes and averages suffered their worst losses in over a year. Last week there was a decisive sell off with the DJIA down 3.9%, the S&P 500 off 4.2% and the NASDAQ dropping 6.4%. At Friday’s close the DJIA was up 11.7% for the year, the S&P 500 was up 13.3% and the NASDAQ was 34.2% higher. The Model Portfolio was up 12.9% and is 98% cash.

10:09am and as stocks turn lower Treasuries are rallying. The DJIA is now under 9300 and the S&P 5000 is under 1000. The drop is not panicky and trading is moderate. The absence of buyers is more predominant than the presence of committed sellers. The dollar is under pressure again today.

11:15am and breadth has turned positive but trading is lethargic. The DJIA is up 0.5% as are the S&P 500 and NASDAQ. New highs are under 100 on both NYSE and NASDAQ and up and down volume are even. There are no catalysts to move the markets today and we are of the opinion that the markets are waiting till after quarter end to move lower.

Many gurus are welcoming October and the expected, predicted, anticipated drop in prices because as the saying goes October is the month for lows. That means that although the first part of the month is painful the bottom of the correction will occur and the markets and traders can get about the business of moving stock prices up into year end. All of that seems too pat for us but we too are looking for a buying opportunity in the next month. We will await and react rather that predict and act too soon.

2:32pm and in the final hour of trading the DJIA is giving up a bit while the NASDAQ remains at its high for the day up 1%. Breadth has turned positive by 2/1on the NYSE and more on the NASDAQ and up volume exceeds down volume by a similar ratio. New highs are under 100 on the NASDAQ and under 60 on the NYSE.

3:02 pm and the DJIA rallied in the last half hour to close up 65 points at 9379. The S&P 500 gained 10 points to end at 1006 and the NASDAQ was up 32 points at 1825.

And tomorrow is another day.

29 September 2003 - Morning Comment

6:45am and how about those Cubbies?

The frost is on the pumpkin, as they say, and stock futures are higher this morning. The last two days of the quarter are a good time for the stock markets to show a positive attitude and we expect an attempt to move things higher. Global chip sales rose 4% in August and Walmart reported that sales were at the high end of predictions for the last week. Japan was down 1% and most of Asia was lower. Europe is mixed.

In our weekend reading we came across a story form Yahoo where Viceroy of Iraq L. Paul Bremer was paraphrased in the Chicago Tribune: Paul Bremer, the U.S. administrator in Baghdad, said in congressional testimony last week and in a briefing Friday that Iraq already owes $200 billion and that adding to that amount would create a burdensome debt service in the future.

We find that concern touching. We presume Viceroy Bremer is only looking out for his subjects and has forgotten that if the Iraqis don’t have to pay then our children and grandchildren will have to pay.

And with President Putin of Russia, former KGB agent, in NYC and Washington last week, the deal making over Iraq’s oil fields are beginning in earnest. No more talk of WMD is needed, now the chicken hawks and the Russians are getting down to the nitty gritty.

And yesterday Italy suffered a massive power outage. Last week Denmark and Sweden had a power outage. Two weeks earlier is was London. Is there a pattern here or is this all coincidence that these power outages our occurring at a time when electricity demand is not at its peek.

So for today we see higher early, a slight pullback but a 1% higher close for the day.

So let the games begin

26 September 2003 - Evening Comment

7:28am and the WSJ is reporting that the New York Federal Home Loan Bank has suffered a $183 million loss on soured investments in mobile home loans. The Pittsburgh Federal Home Loan bank earnings in the third quarter dropped 87% because of mortgage and interest rate mismatches. Maybe this is the tip of the iceberg we’ve been looking for. Some ones have to have lost a big chunk of change because there has been a tremendous amount of volatility in interest rates over the past few months.

7:32am and final second quarter GDP was 3.2% versus 1.4% in the first quarter. These are good GDP numbers but where are the jobs. Folks are saying that the Department of Labor statistics on jobless numbers are all wrong and that the another private survey shows 50,000 or so jobs have actually been created over the last three years while the DOL has reported a loss of 3.2 million jobs. Now that is a discrepancy and it shows that there is a statistic for every point of view. Q2 productivity grew 6.8%.

7:41am and Western New York has really suffered with the demise of Xerox, Rochester Telephone and now Eastman Kodak. EK was always one of the “old stockbrokers” favorites but it’s headed lower but maybe not as low as where Xerox trades which is single digits. EK hasn’t had the accounting problems that XRX has so with a $1 dividend it may stabilize around a 5% yield which would be $20.

7:46am and Comdisco has completed its shooting star phase by selling its two properties in the Chicago area to raise cash to distribute to interested parties and cease operations as a going concern. Quite a few lives of very nice folks were ruined by the profligacy of corporate management and the foolishness of the bubble investors. Sic transit Gloria.

9:41am and stocks are slightly lower in lethargic trading. The University of Michigan Consumer Sentiment Survey was slightly lower than expected at 87.7. That may have more to do with UM losing to the Ducks of Oregon last weekend than any view of the economy.

The thirty-year Treasury is under a 5% yield for the first time in a while and the ten-year is threatening to drop below 4%. The rally in bonds is a function of quarter end, a desultory stock market and the very short term orientation of bond traders. Deficits do matter and will eventually lead to higher interest rates no matter what the economy does.

10:47am and Jim Grant is on TV again. He has been bearish since Columbus discovered America and is pushing gold and silver as real investments. Every September/October Grant seems to rise from the depths and begins singing the same old song. We too are bearish and have been for a while but anyone who followed Grant’s investment ideas would be a lot less wealthy than our clients. He is a good writer and dissector of companies and company foibles.

The NASDAQ has now joined the DJIA in negative territory as some of the high flyers are giving ground grudgingly.

11:29am and Halliburton continues to receive more and more no bid contracts in Iraq. VP Cheney says he has no financial ties to Halliburton the company he ran before being anointed VP by the Five Supremes. Senator Lautenberg says Cheney owns un-exercised stock options and is receiving deferred income payments from Halliburton. Cheney’s spokeswoman says Cheney is going to give the after tax proceeds of the stock options to charity and that Cheney bought an insurance policy for $15,000 to guarantee the deferred payments in case Halliburton goes broke. Maybe Cheney owns a piece of the insurance company that wrote that policy How would the press and Republicans be receiving these explanations if the Clintons were the subjects? We know that’s a silly question.

1:02pm and in a switch the DJIA is up fractionally while the NASDAQ is down 1%. Breadth remains negative and new highs are under 100. Only two more days till quarter end and then the fun begins. The stocks we want to own for year end continue to come down in price and so we are content to sleep through the day. From the trading activity it looks like others feel the same way.

What is also interesting is that while many are predicting weakness in October, most of the many are suggesting it will be the “typical” October weakness followed by a rally? We remember the typical October weakness of the last three years and even many of the last twenty years being a bit more that “the usual”. It is only ‘the usual” when the folks talking are talking about OPM, other peoples money.

2:29pm and the bulls can’t get anything going today but maybe they don’t want to. There are two more days left in the quarter and maybe the mark-up boys and girls are waiting till Monday and Tuesday to work their magic.

3:02pm and the DJIA closed down 23 points at 9315. The S&P 500 lost 6 points to end at 997 and the NASDAQ dropped 9 points to finish at 1811. Europe also closed lower.

And tomorrow is another day.

26 September 2003 - Morning Comment

6:29am and yesterday’s stock action was not a happy event for the bulls. The pattern of one down day followed by sideways or up activity the next few days which has existed for the last six weeks has been broken. But then it is the time of year when folks are jittery and on the positive side the sell off the last two days have been orderly.

Moreover Amazon, EBay and Yahoo and the other tech darlings have held even as the NASDAQ has moved lower. We think this is a function of quarter end and so the real test for the bulls will come after next Wednesday.

We are almost all cash. We traded AWE with no results and lost a bit on JDSU and so we are going to lick our wounds and watch for a day at least.

This morning the futures are lower so we may have a mildly down open. Europe is lower across the board while Japan was a tad higher.

Today down early and then a failing rally as happened yesterday

25 September 2003 - Evening Comment

7:51am and the NBC offices in Baghdad have been bombed. One security person is dead and a cameraman was wounded. And the beat goes on.

Bush’s dropping ratings, while they make us happy, are not anything to get excited about. Many months and many terrorist warning are going to occur before the voting in November 2004 on Diebold touch screen voting machines that can be easily hacked. But that’s another story which if you’d like to read it you can find at the: http://www.nytimes.com or http://blackboxvoting.com/.

Our point in mentioning Bush’s numbers is that the horse race now is more interesting and it injects uncertainty into the marketplace. And as always the markets dislike uncertainty. The media thrives on it.

8:23am and Treasuries are a bit lower in price, higher in yield. Stocks are set to open higher but the gurus think selling will commence quickly and then it will be a question of whether the dip buyers are there.

8:48am and stocks are heading lower. We are trying to exit part of our trading positions in AWE and JDSU from yesterday without too much damage but haven’t been able to do so yet. We do expect a rally at some point this morning and we are hoping that will give us the opportunity. We are trying to exit because the close yesterday and action this morning suggests more downside is ahead and a snap back rally on which we were counting is not in the cards.

9:25am and stocks are beginning to head lower with more conviction. We missed our sale on the JDSU and AWE and now we are looking for another buy point for all accounts.

Home sales rose to a record 6.54 million annual rate in August. Stocks are ignoring the news.

10:08am and we sold one half our JDSU trading buy of yesterday for a 12cents per share loss. We are holding the other half because the trading accounts in which we purchased it yesterday didn’t own any JDSU.

Treasuries are stronger today and stocks continue to flounder at lower prices.

10:32am and just as we wrote that the markets were getting weaker a rally ensued. We bought more AWE at $8.30 for our trading accounts but we will still exit a portion if stocks move higher.

12:30pm and stocks have turned lower again. In keeping with the tenor of the day, breadth is negative and new highs are under 100 on both the NASDAQ and NYSE.

We are trying to again trade out of our AWE position of yesterday and today. We’ve sold part of the stock and are hoping for an upturn in the final hour to allow us to sell the rest of our total trading holdings.

1:16pm and Eastman Kodak cut its dividend to $1 per year and also announced that it is no longer going to concentrate on the photo business but will move to concentrate on the printer and higher tech photo applications. Traders obviously don’t like what they heard and the shares are down over $4 which is the reason the DJIA is still negative while the S&P 500 and NASDAQ have again turned higher.

1:46pm and since we don’t know how the final hour is going to break we are selling our entire AWE trading position at $8.50. With the stock we purchased this morning we scratched on the trade. Sometimes two penny per share profit or loss is a trading victory and this is one of those cases.

We are uncomfortable seeing big stocks like EK and Darden Restaurants down 10% or more in an hour even if they are down because of less than positive news. The other day it was Kroger and it seems that stocks are going down in big clumps more easily in the last week and we take that as a sign of at least temporary weakness in the stocks markets.

2:12pm and on minyanville.com they reported that Nike pays Michael Jordan more money than Nike pays all the contract workers for Nike in Malaysia combined. Hooray for free trade and condolences to the 390,000 jobless Americans who filed for unemployment last week.

Walmart sold $1 billion of five year notes at 43 basis points over Treasuries of similar maturity.

3:02pm and stocks sold off in the final hour to end the day at their lows. The DJIA closed down 80 points at 9345. The S&P 500 gave up 6 points to end at 1003 and the NASDAQ dropped 25 points finishing at 1820.

And tomorrow is another day.

25 September 2003 - Morning Comment

6:40am and we are going to post after 7:30am because the reports coming out this morning are important to traders given yesterday’s lousy performance. Durable goods, and initial jobless claims will be announced.

Goldman Sachs has upgraded Disney and Morgan Stanley upgraded Tribune not because the Cubbies are going to win the World Series.

Japan was down over 1% overnight while Europe is mixed.

We think the drug companies and the White House are going to lose the battle to keep folks and states from buying drugs in Canada at lower prices. And will Medicare follow? Isn’t that what free markets are all about?

6:45am and we were musing last night about missing the rally yet still being up as much as the DJIA for the year and just a few % behind the S&P 500. We haven’t usually missed major moves of the 20% plus kind over the twenty years we have been managing money.

Upon reflection we decided we didn’t participate because when the rally began in March the markets were down about 10% for the year and we were up about 12%. Our scenario then and now is that at year end we would pick up another 10 % on the tax selling rebound effect that has occurred for the last number of years. We also decided that if the markets rallied 25%, which we didn’t expect, we would still be even on a return basis and that has been the case. And if we had been invested at the beginning of March we would have given all our gains back before the rally began. We always find it amusing that media gurus talk about the rally that began on March 13 as if everyone invested all their money on that day.

7:32am and initial jobless claims were down 19,000 to 381,000 which was lower than expected although the hurricane helped that figure since folks coudn't apply. Durable goods orders were down 0.3% ex autos, down 2.6% ex defense and down 0.9% overall. New home sales came in at 6.05 million which was in line.

So the boys and girls have their numbers on which to trade. Stock futures are suggesting a higher opening. We then expect a sell off with an attempted rally into the close.

So let the games begin.

24 September 2003 - Evening Comment

6:50am and the www.dictionary.com word of the day is deus ex machina which is certainly someone Bush could use for the present U.S. situation in Iraq and also the economic situation in the U.S. The dictionary definition for deus ex machina is: 1. in ancient Greek and Roman drama, a god introduced by means of a crane to unravel and resolve the plot. 2. Any active agent who appears unexpectedly to solve an apparently insoluble difficulty.

But more importantly the country could use such an agent. Is it possible; could it be; dare we hope that Arnold is that person? Oops, he can’t run for President cause he is foreign born.

7:07am and the NYT has a story on the strong dollar/weak dollar argument. A strong dollar makes importing goods to this country cheaper since for example the dollar will buy more yen with which to purchase products. This supposedly hurts employment in this country and does cause dollars to flow out as Central Banks buy dollars with their local currency to keep the dollar high and the local currency cheap so that exports will continue flowing to the U.S. and their citizens will be employed. Of course the problem is that all currencies are not equal and if one gets strong against the dollar there are many other countries to which production may move.

The NYT reports that Japan holds $500 billion, China $350 billion and South Korea and Taiwan $250 billion of Treasury securities. Since the U.S. needs them to continue buying debt as the deficit increases or risk much higher interest rates one would think that a strong dollar would be best. That’s because as we said above unless the dollar is weak against all currencies in the world which is impossibility, manufacturers will continue to search for the lowest cost producer which certainly isn’t going to be in the U.S.

7:22am and the WSJ reports that Richard Grasso structured his departure form the NYSE as a termination entitling him to another $57 million on top of the $139 million he is receiving. Happily for Rich Richard he never put in writing his decision to forgo $48 million in payments. Insiders say he will not take the $48 million but will take the extra $9 million according to the WSJ. Rich Richard obviously has been reading Poor Richard’s Almanac about a penny saved and other matters.

7:43am and the Gallup Poll shows a 21% drop in Bush’s approval ratings between March and September 2003. That is about equal to the rise in the DJIA over that same time period.

8:32am and the Croation kruna eased against the euro this morning in case you were interested. The kruna is now quoted at 7.56/7.57 versus the euro.

Stocks are opening mixed with Microsoft approaching the $30 level where we were going to sell it if we had had the foresight to maintain our position.

11:24am and we’ve been gone for several hours to update our drivers license and register our new used four wheel drive pick up truck. Imagine our surprise when we returned to find the DJIA down 100 points. We guess stocks had a delayed reaction to OPEC’s price hike. It’s nice to have such nice friends as the Saudis and the Kuwaitis. It’s also nice to have cash. We are buying AWE for our trading accounts since if the markets rally we think there is a nice 25cents per share trade in the stock which is $500 on 2000 shares. Obviously we are only buying in our large trading accounts.

Well on Monday the bears thought they had it going their way and on Tuesday the bulls did. Now the bears are taking heart again. We are at 1015 support on the S&P 500 which is why we are trying the AWE trade. We bought the stock at $8.57 and we are willing to hold it if it doesn’t pop since we want to build a large position. Our thinking is similar to our thinking in AWE on the way down except now we think we are on the rising side of the curve with the momentum favoring higher prices in the stock. A year and one half ago we were on the downside momentum side of the curve and were trying to catch a bottom and instead caught the sharp edge of a falling knife. We survived.

As the markets drop CNBC has devoted an hour to telling us of NBC’s plans for the future, like we care.

1:27pm and we are also repurchased the JDSU at $3.94 that we sold the other day for our large trading accounts.

Stocks continue under pressure and the final hour should be interesting. The rise in oil prices (crude is up over $1 per barrel to $28.15) is a tax increase and will also show up in the inflation numbers. The betting is on whether OPEC will observe the quota. Treasury traders seem to be saying no while stock traders are voting yes.

1:47pm and IBM is back under $90 per share. MSFT made it to $29.70 before backing off and that is close enough to our sell signal from March. Stocks remain at their lows for the day. The bulls may not show up in the last hour today.

2:11pm and to add a little perspective to what is important in life we just learned that the Giants are playing their reserves against the Astros in the all important final week of the season. With the Cubbies only one game ahead and being managed by the Great Dusty Baker who of course until this year managed the Giants we smell a rat. There ought to be a law.

Speaking of Dusty reminds of the time we were in an elevator and Sparky Anderson walked on. We made polite conversation and after he exited the elevator Katie asked who he was. We said Sparky Anderson and she again asked who he was. After we explained that he was the Hall of Fame former manager of the Cincinnati Reds her only comment was, “who names their child Sparky”?

3:02pm and there was no bounce this afternoon. The DJIA closed down 150 points at 9425. The S&P 500 lost 20 points to close at right below support at 1009. The NASDAQ dropped 58 points to end at 1844.

And tomorrow is another day.

24 September 2003 - Morning Comment

6:34am and Japan closed fractionally higher and Europe is also higher this morning. The stock futures are currently indicating a higher opening which would fit in nicely with yesterday’s positive market action.

We made our money this year before the rally began in March and since then we have been too fidgety to participate in the rally and have missed a nice move up from the lows. Nonetheless we are in very good position for the next sell off and for year end trading.

The markets look as if they will rally into month end. That’s especially true of the NASDAQ which had over 300 highs yesterday and has been by far the strongest index this year. But then the NASDAQ had fallen the most over the last three years and so the rise simply mirrors the fall. But in looking at NASDAQ stocks many seem expensive, especially the ones leading the way higher. That was the case for four years before the eventual bubble burst but we don’t think it will take that long this time.

OPEC cut production quotas by 900,000 barrels a day and oil is a bit higher on that news. The question always is whether OPEC members will abide by their quotas and the market seems to be saying that they won’t. Since the U.S. is the conqueror of Iraq we surmise that the U.S. is an indirect member of OPEC now. How the worm turns.

Today we would think up early and then flat through midday with a strong close. The end of the month is nigh.

So let the games begin.

23 September 2003 - Evening Comment

6:39am and Verizon is lowering its earnings expectations for the year. Wireless phones are taking market share. VZ is also cutting capital expenditures by $1 billion. This is one of the first big warnings and the warning should affect SBC.

6:55am and according to Bryan Reynolds at www.minyanville.com, corporate bond issuance has not suffered in the run up in Treasury yields or from the uncertainty in the stock markets. His theory is that as long as corporations can continue to roll over debt and refinance and extend maturities that any correction in stocks will be short lived.

We don’t know whether that is true but we do think that the push for yield on the part of institutional and individual investors because there are no safe alternatives in short term Treasuries or CDs will eventually end badly. For those of us who lived through the interest rate debacle of the late 1970s and early 1980s the pain and anguish suffered by individuals who had no inkling that bonds could lose half their value was a “never forget” occurrence.

So we suggest that those chasing yield right now are adopting a lot more risk than they perceive. And placing money in bond funds to increase security by spreading risk most certainly does the opposite. That’s because bond funds have no stated maturity, they only have an average maturity. And once the bond fund has an investor’s money it no longer worries about that investor, it is looking for the next investor. So the fund needs always to have the highest yield which usually is obtained by extending maturities to the limit allowed with the resulting increase in risk of loss in principal in a rising interest rate environment.

7:11am and Smith Barney has downgraded defense stocks because its polling shows that the publics’ appetite for defense spending has lessened. Whereas two years ago 71% were for increased defense spending only 37% now are in favor. We wonder why?

Lowe’s the hardware/building materials folks are predicting in line earnings.

The brokers are announcing surprisingly higher earnings. So we keep asking who is losing money in the Treasury market.

7:33am and we wonder whether Bush’s nickname for Treasury Secretary Snow is “the snowman”. Since Bush is an old blueblood college cheerleader we would guess that is the name. It’s a good one, since that certainly is what Snow is attempting to do regarding the deficit and the dollar. For a railroad executive who did nothing to increase his shareholders value on the company he ran for 13 years while increasing his own net worth by $50 million, Snow is the perfect Treasury Secretary for this Administration.

8:19am and stock futures are edging higher so there will be an up opening. Treasuries are weak again this morning back to their lowest levels of yesterday.

9:05am and stocks are modestly higher. Goldman Sachs beat expectations but the stock is down over $2 per share. Breadth is mixed and volume is light. Treasuries remain under water for the day.

9:21am and we sold the HAIN at $17.69 for a 30cents per share loss. Someone is buying HAIN and Wild Oats today and we can only sell when someone is buying. We probably won’t revisit the stock unless it drops to the low teens because of the ‘selling by appointment’ problem.

The Model Portfolio is now 98% cash and resting.

10:42am and big stocks are lower while the NASDAQ is up 1%. Breadth is positive while up and down volume are even in moderate trading. There are 100 new highs on the NYSE and 210 on the NASDAQ. Bush’s speech didn’t ring any bells and so the markets have to trade on their own devices. Since this is earnings warning season we expect some more bad news over the next week on the earnings front. Stocks don’t need to rally today; they just can’t go down big if the bull case is to hold sway.

12:46pm and stocks are acting well. Breadth is improving. It looks like the bulls are still in charge although the last hour will be the real test.

1:06pm and the California Recall will go on because the Appeals Court ruled that too much money has been spent to have it go down the drain. The Court said the plaintiffs might have a case but money trumps all in California and the U.S.

We still don’t understand how Davis can receive 49% of the vote and lose to someone who receives 48% of the vote. Oh we forgot that’s what happened in the last Presidential election. It’s called Supreme math.

2:07pm and entering the final hour of trading the DJIA is moving higher and is at its high for the day up 34 points. The NASDAQ has been up over 1% all day and is at its high. Breadth has improved and volume is moderate. The bulls are making their push and if they can keep stocks higher for the rest of the day we may have some follow through buying in the morning.

We are happy to be in cash. Interestingly, because we usually buy troubled stocks, most of the stocks we sold the last week are below our sale price with SBC back below our purchase price. The Verizon news this morning is going to keep pressure on SBC through month end and probably October unless SBC can surprise with a positive pre-announcement.

Europe closed lower on the day as the dollar continued to slide against the euro.

3:02pm and as breadth and up over down volume improved during the day the bulls win the day and the rally is intact with the DJIA closing up 40 points at 9575. The S&P 500 gained 7 points to end at 1030 and the NASDAQ rose 27 points to end at 1901.

And tomorrow is another day.

23 September 2003 - Morning Comment

6:02am and as we begin our day we learn that Treasury Secretary Snow has predicted that the Bush administration will cut the deficit in half within five years. Does that mean that the deficit is going to be $1 trillion next year? And what ever happened to surpluses as far as the eye can see and the worry of how not to spend them on foolish schools and medical care and securing social security for all?

Wal-Mart said yesterday that spending in its stores seems to mirror the two week pay cycle. We were thinking of that comment while listening to Rick Sanitarium the Republican Senator from Pennsylvania on C-SPAN last night talk about Social Security. His theory is that folks want to do away with paying for retirees while they themselves are working. He thinks they would rather have a pension plan where they could invest and spend their own money. When a good chunk of the population in the U.S. lives from paycheck to paycheck we wonder from where the money for their pension investments will come.

6:11am and Europe is lower this morning while U.S. stock futures are slightly positive. The big event today is Bush at the U.N. this morning. We don’t know whether that appearance will affect the markets but it surely will be interesting. This is one speech to which we are going to listen.

Yesterday we reduced our stock positions to three and we will sell the Hain if we have a chance today to get down to less than 5% stock in the Model Portfolio. The new Model has been posted.

Our trading the last few weeks missed the sweet spot by about ten cents which is the amount of difference between the price we were trying to sell Newell on Wednesday last and the high for the day. But that is the couldda market and it consistently reminds us of the maxims of our trade. Our partner Don had a favorite maxim, “Buy at a limit price but sell ‘at the market’ which was never truer than last week. Not following that ‘old saw’ cost us dearly. But life and the markets are learning experiences and happily accounts are still positive for our three week catching the end of the rainbow trading foray. We now will await a correction before reentering the trading arena.

This morning we expect up a bit early, and then slow trading to listen to Bush and then our crystal ball is cloudy.

So let the games begin.

22 September 2003 - Evening Comment

7:45am and Chris Galvin, the grandson of the founder is out at Motorola. In the press he is receiving all the blame for the floundering of a once great name but the two fellows before him deserve a good deal of that blame. Galvin tried to pick up the pieces. One of the former CEOs is running Eastman Kodak and the other is running Tyco. The stock is up a tad on the news but still of no interest to us at this juncture.

Treasuries are down on the currency troubles since the thinking goes that the dollars that were being acquired by the Japanese Central Bank and other central banks and placed in Treasuries to the tune of $60 billion in the last quarter will now no longer be available to purchase Treasuries.

CNBC is reporting that The Shadow Council of Economic Advisors is predicting 3rd Quarter GDP at 7%.

The WSJ is saying that Isabel, the hurricane, will cost insurers $1 billion and ordinary folk another big chunk of time and money.

8:03am and Condi Rice’s put-up or risk irrelevance talk about the U.N., coupled with Bush’s speech tomorrow demanding help but granting nothing will go over like a lead balloon

8:50am and as expected stocks opened lower and are now trying to rally. We sold the Newell on the opening at $22 for a $2.50 per share loss. The Newell is a bitter loss because the price drop came out of the blue on Friday. Well, actually it came out of the gray since it was raining.

We also are selling GPS for a $1.25 loss. And Gap popped right after we sold it. Bah humbug. Our thinking on selling today is that over the years we have seen big moves both ways with the stock and so when GPS is floating just below a high and we expect a market correction and the stock price didn’t get the bounce from the $4 per share one day sell off that we expected we would rather error on the side of experience than hope for a white knight riding a retail rally to save us.

It’s fun to take gains and necessary to take losses.

Our theory is that if the stocks we have aren’t acting the way we want when the markets are bullish they won’t act well in a bearish phase either. An important part of trading is too take losses. The losses we are taking today pretty well negate most of the profits we made last week. It is unfortunate but reality that we often go though trading periods where we don’t make money even though at the outset when we initiated holdings conditions seemed ripe for a profit realization.

10:31am and stocks are holding steady down about 1%. There have been some feeble rally attempts but breadth remains 3.5/1 negative and down volume exceeds up volume by a 4/1 margin. Volume is moderate. This afternoon and tomorrow will tell the story.

We are letting some HAIN go at $17.55 for a 30 cents per share loss. Hain trades in its own world and we want to lighten the position in our large trading accounts.

We also sold JDSU in our large trading accounts for a scratch. We are holding in our smaller accounts because the position is nominal.

11:07am and the Fed is adding $5 billion in cash through overnight re-pos to the system to help soften the sell off in Treasuries today. This is very short term help since the re-pos mature tomorrow but it is one way the Fed intervenes in the financial markets.

11:32am and gurus on CNBC are now remarking that traders are worried that if central banks aren’t going to be buying dollars to support their currencies ( a result of the G-7 meetings last week-end ) then they won’t be buying and supporting the U.S. Treasury markets. We remarked on this after the auction two weeks ago.

12:26pm and Ask Jeeves Inc, the internet company, is back to $1 billion market cap after being given up for dead a year ago. The speculative juices are alive and well.

1:35pm and it’s a good thing that the oil folks have friends in high places so that control of the Iraqi oil can stay under U.S. auspices to wit: A former executive vice president of exploration and production for ConocoPhillips, Robert McKee, has been named as the U.S. adviser to the Iraqi Oil Ministry, U.S. officials said. McKee will replace outgoing adviser Philip Carroll, a former Royal Dutch/Shell executive.

As of Sunday, Sept. 21, 304 U.S. service members have died since the beginning of military operations in Iraq, according to U.S. Central Command . . . Since the start of military operations, 1,275 U.S. service members have been wounded as a result of hostile action, according to U.S. Central Command. Non-hostile injured numbered 319.

1:50pm and coming into the final hour the DJIA is down 130 points and the NASDAQ is off 38 points. Treasuries have rallied a bit from their worst levels of the day as stocks have moved lower. The bulls need a rally in the last hour to save the day.

2:36pm and a small rally seems to have fizzled. As we watch currencies move by 1% and Treasuries by $10 a bond today we again wonder who is losing and who is making money. We think there are some time bombs out there lurking in the trading markets.

3:02pm and the DJIA managed to close down only 110 points at 9535. The S&P 500 lost 14 points to finish at 1022 and the NASDAQ dropped 32 points to 1875. In the last six months most of these one day sell offs have fizzled and the bulls have reasserted themselves. So the bulls are placing their hopes on that fact.

And tomorrow is another day.

22 September 2003 - Morning Comment

6:15am and welcome to the fall, if not the markets at least the time of year. For the last many years mutual funds which have come to dominate trading have used the next thirty days as the time period when they reposition portfolios and take tax losses preparing for mutual fund year end which is October 31 for many funds. This early year end has created two distinct weak periods, the first being the month of October, and the next occurring from late November to the middle or end of December.

During this time period there has sometimes been a two tier market where stocks that are up for the year continue to do well and stocks that are down for the year undergo serious tax and elimination selling. For years we have used these two periods as buying opportunities and we plan on doing the same this year.

In the immediate time the only stock we hold that should face tax selling pressure is Newell because it is down 50% in price since the spring. JDSU, Gap, and AT&T Wireless are all substantially higher for the year and so should trade with the overall market.

We are hoping NWL offers us a chance to exit without too much of a loss in the next few days. We will be interested in repurchasing the stock. The sell off on Friday caught us unaware and so we are trying to decide on a strategy. At its current price NWL is fairly valued but we would like to avoid the possible sell down on tax loss elimination by mutual finds. When mutual funds sell they care not about price because most mutual fund positions are 1% or less of overall portfolios. NWL is basically an institutional stock and so is more subject than most to selling pressure.

7:15am and the dollar is at its lowest value versus the yen in three years. Tokyo was down 4% overnight, Europe is lower and the stock futures are down about 1%.

We’ be down to start then a rally will have to ensue or everyone will be talking about the much needed correction and the autumn swoon

So let the games begin.

19 September 2003 - Evening Comment

7:32am and with no big economic numbers coming today the boys and girls are going to be on their own when deciding what to do. Treasuries are strong again this morning and stock futures have turned positive. We had been looking for a strong opening but it looks now like the opening will be mildly higher.

8:45am and stocks are marginally higher in moderate trading. Today the ebb and flow of everyday trading is being affected by expirations. Trading stocks can be a very complicated matter with so many hedge funds and large institutions throwing money around on a daily basis. Moreover hedges have become so complicated that we have no idea what folks are doing many times. We have heard and read strategies that make our eyes glaze over.

We just try and keep it simple by buying stocks and Treasuries. It has worked for us.

9:29am and some accounts were charged a $25 or more per share commission on the buy of AT&T Wireless yesterday. The commission should have been cents per share not dollars per share. We are correcting the trades but it will have diminished total equity by a large amount today. The accounts should reflect the correct equity by tomorrow.

9:49am and some buying is creeping into stocks. Breadth is even. Since Treasuries have recovered about one half their losses since June maybe retail stocks will begin to rally again.

11:04am and Newell companies canceled an analyst meeting and the stock is tanking. The reason given for canceling the meeting was to concentrate on refocusing on the business. Since the stock is off $2 per share we presume the analysts think there is more to the story. We are bidding for stock but want to buy gingerly here because we have seen this happen before to this stock and it hasn’t been pretty. It will work out in the long run but the short run can be painful.

1:14pm and the DJIA is off 45 points. Based on today’s action the buying seems to have been exhausted yesterday and now it is a matter of limping into the close without too much damage. Volume is low for the “witching Friday” but there should be some large prints at the close. We are biding our time and thankful we did some selling yesterday.

3:02pm and the DJIA tried but didn’t quite make it to the plus side for the close finishing down 15 points at 9644. The S&P 500 was off 3 points at 1036 and the NASDAQ dropped 4 points to finish at 1905.

And tomorrow is another day.

19 September 2003 - Morning Comment

6:39am and autumn has arrived on the wings of a refreshing rain and wind. And as the dark clouds pass overhead we are happy to have raised cash yesterday.

We aren’t making as much money on the September trading foray as we hoped but we are positive in our trading and ownership of stocks this month courtesy of a strong market upsurge. We have left money on the table, but then we always do.

As we were walking to the office we thought about risk/reward and whether we have been too quick on the trigger. Our thoughts keep focusing on the trillion dollar plus budget deficit over the next two years with no relief in sight and we wonder when the stock markets are going to begin considering the hard fact of debt crowding out investment.

The arguments that the deficits are only 4% of GDP are a sham in our opinion. A $500 billion deficit is 16% of the U.S. budget and that is a percentage worth worrying about out where we live.

But the markets operate on their own timetable and we are happy to have the 13% plus return in the Model for the year. We are also happy for those folks who have recouped some of their losses over the past few years. We still have a few positions for the sprint to month end and we will be looking for exit points on all of them.

This morning Japan closed a bit lower and Europe is also off a bit. The bulls would like to see two back to back big up days and with today being the last day of quadruple witching anything is possible. The bears are in hiding and we don’t think we’ll be seeing them before month end at the earliest.

So let the games begin.

18 September 2003 - Evening Comment

7:38am and as we read the morning NYT we find an article that Merrill Lynch has agreed to settle with U.S. prosecutors over its flim flamming of investors in the Enron matter. They promise not to do it again. It seems that prosecutors have become worried because criminal charges against Merrill Lynch which would shut the firm down the same as happened to Arthur Andersen, the accounting firm. And the Bushies don’t want more jobless folks on the street.

The NYT quotes anonymous folks saying that this will really cause Merrill and other large firms to mend their ways and walk the straight and narrow. And we laugh in our coffee. More money for the Bush reelection campaign.

Ok, don’t shut Merrill down but how about sending more than a few executives to jail. Three were indicted. We think there were quite a few more involved, and at higher levels than these three.

9:06am and stocks are higher and crude oil is down under $27 per share. SBC is higher today on news that it received approval from regulators to offer long distance in Michigan. We may sell.

9:38am and because of our golf game we missed the fact that IBM moved through $90 yesterday and today it is nearing a pattern breakout at $92.

10:04am and we don’t like the stock market action and so we are trying to reduce our trading positions today and that is the reason for the paucity of posts.

10:31am and the TV pictures of the reporters standing in the hurricane are ridiculous. The wind is blowing and the waves are high and there are gusts of wind. Big news. We wonder how much is being spent reporting on an event that every one knows is happening and the only pictures that can be shown are waves and rain and blowing reporters.

10:33am and we sold SBC for a $1 plus gain, NCC for a 50 cents per share gain and AOL for a scratch. We sold AOL because we think it is up on news it is dropping the AOL name from its logo and we presume its stock symbol will change. We also expect the company to spin off the AOL subsidiary and there will probably be some more big charges coming. Moreover we have had lousy luck trading the stock.

We aren’t making big money on these trades but we will be more comfortable with cash. The markets are encountering resistance and the S&P 500 needs a big volume breakout day to enter new trading territory and from the market internals we don’t see that happening. We have been wrong before but we want to protect our profits for the year.

10:47am and IBM is at $92.40 which is a breakout for it and so we are going to quit selling for now and see how the markets react to IBM’s leadership.

Most Asian markets closed lower for the day but Tokyo did manage a gain to extend its winning streak.

11:17am and the Philly Fed index of business conditions was 14.6 in August versus 24.3 in July. These numbers are fodder for traders but have little real meaning beyond that purpose.

12:49pm and the DJIA is now up over 100 points but IBM is back at $91.50. MSFT has inched over $29 and stocks are moving higher. Breadth is 2/1 positive and up volume exceeds down volume by 3/1. New highs are under 300 on both the NYSE and NASDAQ.

AWE is off 20cents per share today and we added more shares to accounts. We are comfortable with the stock right now although it is expensive.

It’s easy to sell winners and hard to sell losers. GPS has not bounced back from its sell off two weeks ago and so we are selling our trading position in the stock for an 80cents per share loss. We are maintaining our initial purchase in accounts.

1:58pm and entering the final hour the DJIA is up over 100 points and breadth remains strong. Banks are leading the way. We are letting HPQ go for a 50cents per share profit.

We are holding our GPS and NWL positions at a loss since stocks are strong today and there is a possibility of further upside tomorrow on today’s move. We’d like to cut positions back to the speculative JDSU and AWE. But we will wait to see what tomorrow brings.

3:02pm and the DJIA closed up113 points at 9658. The S&P 500 ended in new recovery high territory at 1040 up 14 points and the NASDAQ gained 25 points to finish at 1910.

And tomorrow is another day.

18 September 2003 - Morning Comment

7:22am and the indispensable Dick Grasso is gone from the NYSE with his $140 million and many company directorships in his future. One more bubble excess bites the dust.

Stock futures are lower this morning and bonds have a bid. Yesterday’s stock market action was not inspiring and the markets must be stretched if they can’t put back to back plus days together. There was no follow through to Tuesday’s strength and the must be today or tomorrow for the bull case.

Quadruple witching begins tonight and the jobless report is in the wings. Those are going to have the most immediate affect on today’s action.

7:32am and jobless claims came in at 399,000 down 28,000 while continuing claims rose 39,000 to 3,683,000. Treasuries have moved a bit lower and stock futures are a bit better.

So let the games begin.

17 September 2003 - Evening Comment

7:25am and what does CNBC have against Richard Grasso. Poor Richard, he can’t even count on the Business station which is owned by Jack Welch’s GE to provide him with some cover. Maybe Welch is mad because Richard never asked him to join the board of the NYSE. Or maybe it’s because Welch didn’t wind up with as nice a farewell package as Grasso although Welch is a billionaire with his GE stock acquired through options over the years.

While we are on conundrums, we have to wonder about Colin Powell placing a wreath on the mass grave of Kurds gassed by Saddam in 1988. The audacity of shedding crocodile tears over an atrocity that occurred while Bush I was in charge is remarkable. As we remember the event only liberal bleeding hearts protested the atrocity when it occurred and the Bush One folks dismissed it as an internal matter. The liberals didn’t want to go to war over the mass murder but they did want the Bush folks to exert some control over Saddam since at that time he was our good friend and ally.

7:32am and housing starts were down 3.8% in August. July housing start were revised to up 2.1% from up 1.6%. Treasuries are doing better with the ten-year under 4.25%. Equity futures are still higher.

8:42am and stocks are opening tentatively but we don’t think it will be long before they make a run to breakout levels on the S&P 500. Then the real games will begin.

7:01pm and we are back from a day of golf and a breather from market concerns. During the day we did sell the HPQ position in trading accounts we put on two days ago for a 50 cents per share profit.

We just read that Richard Grasso resigned. Rich Richard is not poor.

The stock markets also seemed to take a day of rest while bonds zoomed higher. No important lines were crossed and so we’ll have to see what Thursday’s child brings.

And tomorrow is another day.

17 September 2003 - Morning Comment

6:36am and with the stock markets closing on their highs yesterday we would expect a continuation of the rally today. Any decent up move is going to place the S&P 500 above 1030 resistance and in breakout territory with the need for the S&P to close the trading session above last nights close of 1029. Failure to do so would be a negative sign for technical traders.

We aren’t technical traders but for the last few years we have paid attention to these folks because they are in control of the stock markets right now.

Since March the momentum boys and girls who buy because a stock is moving higher have been trying to reestablish heir eminent position in the market place that they occupied during the bubble years. They have been conducting a good imitation of the bubble the last few months.

The Feds announcement yesterday contained worry about jobs and deflation. The stock market action for the last few months has been screaming recovery and smooth sailing ahead. Either the stock markets are wrong or the Fed is wrong. The Fed has been behind the curve on the stock markets and the economy for the last five years and obviously the bulls are betting that things haven’t changed.

We are much more worried about interest rates and the effects of the deficit on the economy. We think that worry will become widespread before year end and become a drag on stocks and cause a continuation of the sell off in bonds. And we think interest rates can rise even if the economy rolls over in the fourth quarter and next year.

CNBC just had a little piece on the discrepancy in the jobs data provided the government on which the markets trade on a daily basis. One survey has the economy creating 160 thousand jobs since 2001 while another survey, the weekly jobs report, has the economy losing 2.1 million jobs in that same time period. The difference reminds us of the difference in the projected budget surplus and the reality of an equally large budget deficit.

Japan was up 1% overnight and Europe is fractionally higher on most bourses awaiting the opening in New York.

Today is a golf day for us and so we our evening post will be abbreviated and posted after 6pm.

Our guess is up another 100 points by the end of the day. We will be keeping in touch from the golf course because we want to sell any big up move today. We know that technically that would be a breakout but quadruple witching, the hurricane and our qualms about the rally are suggesting caution. Our intent on catching this recent leg of the rally was to make a 1% to 2% return and then head back to cash and we haven’t changed that aim.

So let the games begin

16 September 2003 - Evening Comment

7:32am and CPI was up 0.3% and the Core rate was up 0.1%. That was a bit less than expected. Treasuries are off a bit. The dollar is stronger against the euro but the yen is stronger against the dollar.

CPI energy prices were up 2.7%. Real average weekly earnings fell 0.3% in August. And those are enough numbers for the boys and girls to trade on today.

7:36am and the sell the trading position in AOL at $15.78 did not show up on this mornings AACES report of client accounts. The trade will be entered “as/of” today.

8:18am and if we are going to catch the month end rally we think the safe way to play it is to trade the SPDR techs. Safe does not mean any risk of loss; rather it means that we will be buying a package of tech instead of having to concentrate on one or two. We continue to hold to our thesis of a month end rally and it may begin after the FOMC meeting today.

8:26am and yesterday we read that the hurricane Isabel was going to hurt retail and the economy in the third quarter if it sweeps up the East Coast. Today we read that Isabel will be good for the economy in the third quarter because it will destroy a lot of property that will have to be rebuilt. That’s a concept similar to the war is good for the economy concept. As with the war the hurricane damage will destroy family homes and memories and cause undue hardship. There have to be better ways for an economy to recover, like giving tax breaks to folks who will spend the money and creating government building projects for our dilapidated schools.

8:56am and stocks are higher while Treasuries are lower in price, higher in yield. We think the FED statement this afternoon is going to intimate that they are less worried about deflation and that the economy is on course for recovery. That will help stocks and should over time push Treasury yields higher since there are few folks except fossil supply siders left from the Reagan years who believe a better economy will increase tax revenues to any substantial degree.

9:17am and yesterday’s AOL seller is gone or laying low. C’est la vie. What a difference a day makes. We sold our entire holding in SGP at $16.23 for a plus $1 per share profit.

As our stocks move up we hope to continue taking a few dollars here and there off the table. As we said yesterday, our 10% return in most accounts is something we want to maintain through year end. We are trading a six month old rally and we think month end is a good time to be mainly cash again.

Stocks remain higher and breadth is good. New highs are not expanding as they should if the rally is going to broaden. In fact new highs suggest a narrowing and tiredness to the rally.

11:18am and stocks remain higher for the day as traders await the tea leaves from the Fed that arrive at 1:15pm. Then gurus and ordinary folks will attempt to read the leaves and see if the Chairman and friends have offered any between the lines words of encouragement for either bull or bear. Until then the markets are marking time.

Breadth is 2/1positive and up volume exceeds down volume by a 3/1 margin. New highs are over 100 on the NYSE and 200 on the NASDAQ.

12:06pm and Elliot Spitzer, the NYS Attorney General is on CNBC talking about the hedge fund/mutual fund company scandals. We again are bemused by the fact that the billionaire walks free with a penny ante for him $30 million fine while the not poor but not billionaire stockbroker who assisted the billionaire gets charged with a felony and faces jail time.

1:07pm and excitement builds as we approach the minute of the day when the all important Fed announcement is released. Traders pause, mothers shudder, politicians poll and most folks just go about their daily business. But the casino needs fresh dice, a new deck, a stronger spin and the Fed announcement will give the players a reason to go long or short for the last hour and three quarters of trading.

On another topic, mindless media is certainly not letting any grass grow under the Grasso controversy.

1:17pm and “thud’ was the response to the Fed decision to do nothing. The Fed contuse to worry about deflation over inflation and says it will do so for the foreseeable future. That statement implies that they don’t see a roaring recovery. Treasuries are rallying slowly back to even for the day while the stock markets haven’t yet decided whether the pronouncement is good or bad news.

1:53pm and entering the final hour of trading Treasuries are back down to the levels before the Fed announcement, and stocks have moved a bit higher. This action suggests that the initial reaction to the Fed is a belief that this may be the last Fed non tightening bias meeting and that the Fed believes the economy is recovering. We are reaching that opinion not from the tea leaves but from the stock and Treasury markets action. In its statement the Fed did express worry about the labor market. We think that is a reflection of Al and George’s luncheon meeting after Labor Day.

The final hour will be a good tell of this thesis. We sold our trading position in NWL established two days ago for a 40cents per share profit to neutralize somewhat the AOL trading loss of yesterday.

3:02pm and the DJIA closed up 116 points at 9565. The S&P 500 rose 15 points to end at 1029 (resistance) and the NASDAQ tacked on 40 points to end at 1885. European stocks closed about 1% higher across the board. We didn’t buy any SPDR tech. By the by our up 100 points prediction in the Morning Comment came true. The coin flip worked.

And tomorrow is another day.

16 September 2003 - Morning Comment

6:46am and in response to a new poll we are reinstituting the morning comment. So as they say please disregard our post of yesterday.

U.S. stock futures are higher this morning. Overseas, Europe is higher and Japan closed up over 1%.

Our trading in AOL was not productive the past few days. There is an old maxim, never sell a dull market. There is another maxim, trading a dull market can be frustrating. AOL has been “heavy” the last few days which means there seems to be a committed seller of a large amount of stock.

Also, since the current stocks market activity has taken on the aura of the bubble days, the trading money is flowing to the momentum stocks. As a result we should be trading the stocks moving up not down at this juncture. Since we have no interest in those stocks we are going to retire our trading shoes for watching glasses.

7:02am and CPI is announced in half an hour and should set the trading tone for the day. The Fed is also meeting today but no market moving news from the oracles of Washington is expected.

We don’t have any more “bon mots” before the bell and so we will suggest a higher opening and then a continuation higher during the day with the DJIA up over 100 points.

So let the games begin

15 September 2003 Comment

7:30am and the Current Account Deficit for the second Quarter was a negative $138 billion. The current account deficit is the difference between the amounts of U.S. dollars flowing into the country versus the amounts flowing out of the country for the quarter.

Sweden voted no to the Euro. The Euro and the Yen are continuing strong against the dollar.

Business inventories were down 0.1% in July.

7:57am and the tech gurus are concentrating on the 1010-1015 area of the S&P 500 as support since it acted as resistance for several months. We breeched that area to the downside last Wednesday and it is important from a technical standpoint for this area to hold. It does no good to anticipate a break of support because the whole point of technical trading is to let the stocks tell the action.

If support is broken there is always another support area for stocks to stop at so we wouldn’t expect a waterfall effect. Our plan is to give stocks room and hope for the best. We are about 15% to 20% invested in most accounts, with smaller accounts up to 50% invested and our aggressive large accounts up to 40% invested. But our finger as always is on the sell trigger.

8:16pm and Capacity Utilization was 76% and Industrial production was up 0.1% in august. Those numbers were as expected.

8:26am and Wal-Mart sees September sales near the high edge of the 3% to 5% range. UBS raised its recommendation on IBM. So will today’s upgrade overcome last week’s downgrade? Inquiring minds want to know and will find out in a few hours.

8:53am and Smith Barney removed HPQ from its recommended list. The stocks still remains on LYMC’s recommended list. We’ll see which call has more power.

Stocks have see-sawed for the first half hour of trading and Treasury prices are lower.

There isn’t much conviction in the marketplace and it will be interesting to see how much effect Isabel the Hurricane heading for NYC has on trading this week.

9:10am and Japan was closed on Monday for Respect for the Aged Day but Hong Kong was up 1%. European markets are fractionally better on the day. Bonds remain under pressure. There will be volatility this week. Our guess is that the fall weather and dark mornings have slowed folks down and with the levels where stocks are, traders are trying to decipher future movement from wilting summer tea leaves.

10:06am and we bought additional AOL at $15.85 in some accounts to use to trade around our original position. We also are adding AT&T Wireless to accounts at $8.60 to reestablish a holding in the stock. We have been trading AWE for the last two years from $30 down to $3 and up from there. We think we finally reached a profit position on the trading with our last set of trades earlier in the year and we hope our winning string continues with this purchase.

12:03pm and stocks are trading like it is a summer Monday. Volume is moderate and breadth is even. New highs are under 100 and the last hour is going to give direction for the next few days. The FOMC meets tomorrow but Chairman Greenspan and friends are not expected to say anything that will roil the markets. Treasuries have rallied a bit from their early morning drop but still are price negative for the day.

Sears is buying the Structure brand from Limited. Structure was supposed to be the men’s fashion offering of Limited. Sears bought Lands End for top dollar last year with the idea of making LE its national clothing brand. If Leslie Wexner, the founder of Limited is selling Structure we wouldn’t want to be buying. We admit we were blindsided by Sears earlier this year and we are amazed at its move to the mid $40s but we will reiterate our belief that like the Lands End purchase the Structure purchase is money down the drain.

1:36pm and Treasuries have rallied to positive as the stock markets continue to float along. We are hoping to sell a part of our AOL trading positions that we put on last week and earlier today because upon reflection we realize the position for this market at this time. Sometimes we have to own it to know it.

2:53pm and we sold the AOL trading position at $15.79 for a 10cents to 20 cents per share trading loss.

3:02pm and the DJIA closed down 20 points at 9452. The S&P500 lost 4 points to end at 1014 and the NASDAQ dropped 10 points to finish at 1844.

And tomorrow is another day.

15 September 2003 - Morning Comment

Please Note: this will be our last morning quote. We took an exhaustive survey of our readership and determined that most folks visit our website once a day. Moreover our guesses about how the markets will act for the day have a predictability quotient of 0.50 and so we would suggest flipping a coin in the morning if you miss our morning predictions. From now on there will be only a daily comment posted after 3:00pm on most days.

6:15am and some Republican and Democrat Senators are calling for China to devalue its currency which goes by the acronym RMB or face a 27 ½ % tariff on all goods imported form China. Al this is being done in the name of creating jobs in America. Some E.U. finance ministers have now joined in this call. Can anyone say Smoot Hawley? The Smoot Hawley tariff legislation passed after the Crash of 1929 was supposed to be the solution to the US jobs problem. Instead history suggests it exacerbated the problem. Free Trade is Free Trade and either you are for it or against it. When folks try and manage the freeness of the trade then economies worldwide get in trouble.

6:16am and did you know : Aoccdrnig to a rscheearch at an Elingsh uinervtisy, it deosn't mttaer in waht oredr the ltteers in a wrod are, the olny iprmoetnt tihng is taht frist and lsat ltteer is at the rghit pclae. The rset can be a toatl mses and you can sitll raed it wouthit porbelm. Tihs is bcuseae we do not raed ervey lteter by it slef but the wrod as a wlohe.

6:22am and on Sunday the AP reported that the vice premier of Israel has said that the killing of Chairman Arafat as a way of getting rid of him has been considered as an option. Israeli leaders are becoming the same as those they profess to detest.

6:25am and the Wall Street Journal reports that cyclical stocks are up a whopping 40% since March. We know it makes a good story but most folks owned the cyclicals and the NASDAQ and the S&P 500 stocks before March and so while they are appreciative of the gain since then many are still under water in their investments. A stock, and there are more than a few, that went from $100 per share to $8 over the last three years and was selling at $10 per share in March and is now selling at $14 is up 40%. We don’t think that is too big a deal to a person who bought the stock at $40 or $50 or $60.

That relative performance does show that stocks have a long way to go if the mania of the 1990s returns. If not, then maybe $14 is a fair price based on sales and earnings which are never mentioned in these “Wow are stocks up since March” stories.

6:30am and in only seven of the last twenty years has the Model Portfolio had a return greater than the current 13% return it has this year. There were two other years with a 13% return. In contrast the S&P 500 has had ten years with above 13% returns. But it has also had four years of negative returns versus only one for the Model Portfolio.

7:05am and stock futures are indicating a muted opening. We are hoping for a bounce higher but really have no idea how the day will go. This week is quadruple witching on Thursday and Friday and quarter end is also approaching. So at least the trading should be interesting. We notice more large deficit stories and Treasuries gave back a goodly portion of early Friday’s gains in the afternoon. On the interest rate front we continue to expect higher rates.

So let the games begin.

12 September 2003 - Evening Comment

8:15am and stocks are heading lower and Treasuries higher as a result of the disappointing retail sales numbers and because traders seem to be in a selling mood this morning.

Interestingly the Producer Price Index showed a 0.4% increase with food and energy leading the way and demonstrated that inflation is alive and well and in your neighborhood today. But in the convoluted world in which we live, inflation and looming gigantic deficits do not scare Treasury buyers, at least in the present.

8:16am and in the unbelievable but true category we read in the St. Petersburg Times this morning that if a serviceman is wounded or becomes sick in Iraq and winds up in a hospital in Germany he is billed $8.10 daily, for food.

8:32am and Microsoft doubled its annual dividend to 16 cents from 8 cents. Guess Bill needed a raise. That’s $70 million additional tax free in his pockets. No need to sell stock when the tax rate on dividends had been lowered for 36% to 15% for friend Bill by friend George. Time for another donation to the Republican PAC.

Stocks are opening lower and awaiting the U of M number in a few minutes to decide on how to trade this morning. Oracle is off $1 and other techs are lower in sympathy. The NASDAQ has had a huge run this year and trepidation at this level is natural.

We read this morning that the last two weeks of September are usually the diciest of the year. But we remember in the Crash year of 1987 that stocks which had been hot all year spent September moving higher until the first week in October. Even though we are macro-bearish, whatever that means, we are in the camp that there is a bit of life left in the rally.

8:58am and the University of Michigan confidence number was 88.2. So the boys and girls can have fun trading on the lower than expected number for the next few hours.

10:06am and bonds continue to be strong while stocks have settled at lower levels. Breadth is negative and new highs are under 100. Tech stocks remain under pressure. HPQ has bounced off the $20 level several times in the past few days and so we are buying a few shares for our trading accounts at $19.99.

1:11pm and we have been having such a beautiful much needed gentle rain today that we have been lulled into apathy in our posting. Stocks are trading quietly at lower levels and it seems as if traders are waiting till the final hour to make their moves. Given that the S&P is in danger of breaking support the final hour today will be interesting. There is not much news that will affect the markets.

Treasury traders are concentrating on day to day action and ignoring the longer term. We left some money on the table with our two-year trade last week but we are sure we will have another chance to buy the two-year at par before the end of November. If we don’t our stock holdings will have provided the return the two-year Treasury would take a whole year to give.

3:02pm and we’ll call it a draw. The DJIA closed up 12 points at 9472. The S&P 500 gained 2 points to end at 1018 and the NASDAQ tacked on 9 points to end at 1855.

And tomorrow is another day.

12 September 2003 - Morning Comment

6:58am and in the early going this morning stock futures are higher and bonds are unchanged. European markets are mixed and Japan was higher overnight.

The volume yesterday was punk so the rebound in the NASDAQ is suspect. The S&P is trading right around support/resistance. Equity inflows into mutual funds have slowed to a trickle.

We think today is important because of the levels. Stocks have had a big move since March and this is a good time for a rest. We have our toes wet but haven’t jumped in because of the time of year and our bearish sentiment.

We are agnostic on today’s action and will be interested in the outcome. Retail sales in a few minutes and the University of Michigan sentiment survey at 9am will set the tone.

7:32pm and retail sales were up 0.6%, ex autos 0.7% which is less than expected and Treasuries are up a few ticks and stocks unchanged.

So let the games begin.

11 September 2003 - Evening Comment

7:54am and CNBC had an interesting graphic showing that since 9/11/01 the S&P 500 and the DJIA are both down about 1%. We would have thought the down was more. In that same time period The Model Portfolio is up 22% in that same time period.

8:36am and stocks are opening higher and Treasuries are lower. Go figure.

9:55am and contrary to our morning post stocks opened higher and bonds are now lower. The DJIA is nominally higher and breadth is mixed in moderate trading. The IBM downgrade by Solly is a drag on stocks because traders were hoping that IBM would push through 90 to the upside and take stocks along with it.

Treasuries are looking ahead to larger deficits or better retail sales and not back at the jobless numbers and there is also some flight from quality since no buildings blew up in NYC today. It is a strange world in which we all now share.

12:01pm and we’ve been busy watering our newly planted trees because of the drought we have been having. We want them to go to sleep for the winter with a good drink of water in their roots.

The DJIA is moving higher as techs rebound but our stocks are dragging. The DJIA is up 63 points and the NASDAQ is up 20. treasuries continue to drift lower in light trading. The media continues its obsession with 9/11 and as a result there is not much economic news being broadcast today.

1:19pm and the ten-year Treasury came at a 4.34% yield with a 2.32 bid to cover ratio. That means that there were over twice as many bonds bid for as were awarded. But the bonds that weren’t awarded were bid at higher yields than the price (yield) at which the bonds were sold.

Breadth has improved but new highs are skimpy given the move up.

1:32pm and several weeks ago we had to “put down” a horse that we had owned since birth. We don’t mourn for Smokey; he had a good life of 22 years. He was only ridden about five times in his life. We kept him because we just like horses. His mother Julie was a tremendous children's horse, and Smokey might have been too but those were the years when we spent most of our time in the city and didn't have the time to calm him. This short melancholy poem came to our mind today. Our other poems may be found by clicking on the Bud's Poem Page on the top right of the home page.


Every morning as we watch
the horses graze where Smokey lays
a smile comes to our face
as horses moving through the haze
remind us of the sunny days.

We put Smokey down this year
and buried him on a crest.
No mourning as his friends move past
where he rests in fulsome grass
feeding freely without strife
those he traveled with in life.

How happy would we parents be
to so well nourish our progeny
as Smokey does so easily.
Of course we do but seldom know
because we let our children go.

2:09pm and breadth is 2/1 positive, up volume exceeds down volume 3/1 but new highs are under 100 and volume is moderate. The DJIA is up 70 points and we’ll see how the last hour goes. We may get back to even in the opposite of what we predicted in the Morning Comment. It's the end that matters.

2:43pm and as the DJIA moves back toward even we have to run to an appointment. With all the remembrances today we believe the real test of the markets will come tomorrow and Monday.

We bought a few more share of NCC at $30.04 for our trading accounts.

And tomorrow is another day.

11 September 2003 - Morning Comment

7:10am and reading remembrances on the websites we visit every morning from the folks in New York City who lost friends and family and saw people they didn’t know jumping from windows to escape the flames reignites the images of two years ago. Living out here in the boonies there was and is a disconnect from those occurrences and the continuing grief and loss that folks around the World Trade Center must deal with on a daily basis for the rest of their lives.

And so for those who lost their lives and their loved ones and friends and for the strangers who lived while they watched others die we have sympathy and concern. As with all the daily tragedies we observe the reality of life and death is never far from our minds.

7:15am and the stock markets were sick puppies yesterday. With the memorials and ceremonies today among the movers and shakers on Wall Street we think there may not be any continued sell off or rally. We think that action may have to wait until tomorrow. But we also don’t underestimate the desire to make money and so whatever happens won’t be a surprise.

Every time an Osama tape surfaces traders use that as an excuse for a collapse. IBM had its rating cut and it is off about 3% in early pre-opening trading and so there goes the above $90 hope for the markets for the present at least.

Asia was lower overnight with Japan down 2% and Europe is also lower. Treasuries are weak.

7:32am and initial Jobless claims were 423,000 with continuing claims 3.63 million and both were higher than expected. As a result bonds are catching a bid and stock futures are moving lower.

And so our guess is open lower, and then flounder for the day with a rally to unchanged at the close.

So let the games begin.

10 September 2003 - Evening Comment

7:45am and Japan’s economy grew 1% in the second quarter which is the best number in the last two years. Argentina missed a large IMF interest payment. It seems like Argentina has been borrowing to meet its interest payments since the late 1970s.

After the 9/11 remembrances have passed mutual fund and institutional folks may begin focusing on quarter end. Performance anxiety is high and folks are worried about how they compare to their competitors in the performance game. We expect to see some robust buying since higher seems to be easier then lower at the present time. We are hoping for a resumption of the rally to give us our extra 2% by the end of September and then we will probably go back to cash. We say hope, and that is all it is.

7:48am and the SEC has fined Schering Plough $1 million and SGP has promised that in the future it will not to release inside information to selected mutual funds and institutional shareholders ahead of releasing the info to other shareholders. This action all stems from last fall when the SGP’s share price dropped five points in two days on no public news. Actually there was news but former CEO Kogan decided to tell only a few large institutions about the news that earnings would stink. And on that info the funds sold their positions to an unsuspecting public, us. Those funds and institutions all say they were going to sell anyway and they don’t think they were acting on inside information.

Well, our guess is that the plaintiff lawyers that the Bushies and Repubs dislike so much will have a field day with this one. We don’t usually participate in the plaintiff lawyer cases but in this on we and our clients lost some big bucks and so we will participate. And if the Repubs and Bush don’t want plaintiff lawyers then they ought to get an SEC that goes after the folks who act on inside information. We know they go after the little guys and spend their time on Martha, but in this case those fund families knew they had inside info and acted on it.

7:52am and The Dick Grasso Soap Opera was sob inducing non prime time TV last night. Dick magnanimously agreed to give up $48 million in benefits that hadn’t been revealed until he agreed to forego them, while keeping $139 million. We say if he was entitled to the benefits he should have kept them. That he didn’t is telling.

The NYT today reported that from 1999 thru 2002 Grasso had total compensation excluding benefits of $80million. But he also accumulated $80 million of retirement benefits during the same period but is forgoing $21 million of those benefits. In 2001 Grasso was paid $30 million while the NYSE itself earned $31 million.

Of course it does look a bit strange that Dick was receiving $200 million the best earnings year the NYSE ever had was $31 million. Grasso’s answer to that question was the seat prices rose substantially during his tenure and that is what he was paid for.

The head of the Compensation Committee of the NYSE that created Grasso’s pay package was also a founder of Home Depot on whose board Grasso served.

Grasso was simply overpaid but that is what happened at all companies during the bubble and continues in the buddy-buddy world of corporate America.

8:01am and The Boston Globe reported on September 8th that L Paul Bremer, the Viceroy of Iraq and his folks plan to buy electricity from Iran and Syria for their Iraqi constituents. So the U.S. is trading with an Axis of Evil Member and with a junior Axis of Evil country. War has always made strange bedfellows.

9/11 is also the 30th anniversary of the assassination of Salvador Allende, the democratically elected President of Chile, by elements of the right wing in Chile aided and funded by the CIA at the direction of then National Security Advisor Henry Kissinger. So we can remember two tragedies for democracy and freedom on the same day. So sad.

9:17am and stocks opened lower, rallied back to even, and now be floundering at lower levels. There is no panic selling, just more limited buying interest.

9:59am and IBM can’t crack the $90 barrier and MSFT can’t get thru $28.50. Banks are weak while retail has stopped moving lower. Drug stocks got a bid yesterday and the nibbling is continuing today.

Breadth is 2/1 negative, down volume exceeds up volume 3/1 and new highs are under 50 on both the NYSE and NASDAQ. It feels like it won’t take much to scare the buyers away.

10:52am and Greg Succo on www.minyanville.com, which is a very good pay for (but not much) financial website reported on a Fed release called the Z1 showing non-financial debt grew at an annualized rate of 24% of 2nd Quarter GDP and an annualized rate of 12% of 1st Quarter GDP.

This is the fastest growth of non-financial debt in 17 years and Uncle Sam represented 24% of the figure. Current non-financial debt stands at $21 trillion or 2 times annual GDP. That’s a lot of debt and future pressure on interest rates.

12:08pm and stocks are inching higher attempting to reach positive territory. We have added a few more shares of AOL at $16.05 and NWL at $23.95 to our trading accounts. We also repurchased JDSU at $3.99 in the trading accounts where we sold yesterday at $4.24. And we bought National City Corp, the Cleveland based bank, at $30.52. NCC is off $1.25 per share today on its announcement that earnings will be $3 per share and not $3.10. NCC has a dividend yield of 4.2% and was selling over $32 per share yesterday.

We purchased 500 NCC in the Model Portfolio and also repurchased the 2000 JDSU we sold yesterday in the Model. Yesterday we also sold 500 DUK in the Model. We will post and updated Model Portfolio tomorrow morning. The Model is 18% invested in stocks and 82% cash.

1:20pm and right on schedule the selling has arrived. The SJIA is down 70 points while Treasuries are stronger. We need to see how the last hour goes.

Ben Glisan, former Treasurer of Enron, pled guilty today to a single count of conspiracy and was sentenced to five years in prison under a plea agreement. But prosecutors secured no agreement for cooperation from Glisan. And so the cover-up goes on and Kenny Boy Lay is still in the clear.

3:02pm and the bears won the day with the DJIA finishing down 89 points at 9420. The S&P 500 lost 12 points to end at 1010 which is below the support level of 1015, which had been resistance and the NASDAQ dropped 50 points to 1822. Treasuries rallied. The bears need another big down day tomorrow to reassert their trend. And with tomorrow being 9/11 we think the real test may not come till Friday.

And tomorrow is not just another day for many folks.

10 September 2003 - Morning Comment

7:21 am and the stocks markets had a day of rest yesterday. With the 9/11 remembrances coming today and tomorrow on mindless media, we would presume a more somber tone will be introduced to the marketplace.

Asia was down overnight with Hong Kong off another 2% on SARs. As we said last spring, when flu season arrives in the U.S. we expect some scares here that will affect the markets. Europe is also lower and U.S. stock futures are down about 1%.

We have to hop now to get this post on before the guru goes to the dentist.

Today we expect down early, a rally then a moderately lower close.

So let the games begin.

9 September 2003 - Evening Comment

7:25am and IBM is back at $90 per share which is the breakout resistance level for the last year. If IBM can make it to $92 we think the whole market would rejoice with a 100 point rally.

Crude oil remains close to $30 per barrel. Treasuries have a bid right no but the auctions of five and tens the next two days will end badly. Supply, supply, supply, if you don’t get the price you want this week wait till next week. Monthly auctions will soon be weekly with all the deficit financing needed to be accomplished.

The Pentagon is extending the tours of duty of National Guard folks and the Army Reserves to twelve months. That is a political decision and it is atrocious to ask these folks to sacrifice any more while the rest of us in America go on our merry way. The National Guard folks joined to guard the United States, not to spend a lifetime in Iraq. The regular Army is a different story but even their regular rotations are important and needed. The fact that the political decision makers were chicken hawks and blue bloods is the reason that the soldiers on duty in Iraq are being treated as pawns instead of people.

Gold is up $5 to $380 in early trading. We don’t consider gold a good tell about anything except that speculation is rampant again. We are not averse to speculation; in fact we are doing it with the stocks we recently purchased. We don’t own then to hold we own them as a trade and so we are joining the crowd. The difference is that we continue to view the rally in the context of a bear market and we will get off the train before other do, we hope.

Well today Goldman downgrades retail so there are no large brokers left to rain on our Gap parade. According to Goldman valuations are at five year high. We know that isn’t rue of Gap since it is going to earn $1.10 which is the lowest P/E and price to sales ration in the last seven years. The broad brush ignores the reality of individual stocks. Nevertheless, Gap will probably continue week because the momentum guys own stocks not companies and if ones sells all must sell.

8:29am and a client called in relation to our morning anecdote about plywood. He wanted to know if folks trade plywood. We said that since we know folks trade husbands and wives we are sure plywood is traded somewhere. Another reason for the plywood cost increase is the hurricane season where Home Depot and Lowes and Walmart buy up plywood to have on hand and the small lumber years in the Midwest just suffer. And as with gasoline before Labor Day sometimes price increases are price gouging.

That leads us to another rant about the oligopoly nature of the U.S. economy. All our industries except retail are becoming oligopolies to the detriment of society in general. For the fewer choices and lower prices for now one has less freedom. For now the supposedly low prices at WMT and HD are the carrot for ignoring the reduction of choices but eventually as with the deficit our children or grandchildren will pay the price.

8:37am and the DJIA is down 40 points out of the gate while Treasuries are a few ticks higher. Sideways action in stocks for a few days would be healthy since parabolic moves higher usually end badly.

9:12am and stocks have stabilized at lower prices in moderate trading. We think the bulls are just reloading.

We sold our JDSU trading position at $4.21 that we bought at $3.67 for a 15% five day profit. We are maintaining the smaller positions that we bought for most accounts a bit higher.

We are also bidding on some more GPS. It is trading at $17.70 which is 15% below it high last Wednesday. Volume on the sell off has tailed off.

10:09am and at a conference Washington Mutual is reporting that mortgage applications were down 40% in July. The stock markets don’t seem to have the oomph of yesterday.

GM and GMAC filed shelf registrations of $30 billion in bonds by years end. More companies are coming to market to borrow and that is going to be competition for Treasuries.

11:00am and DUK is before the rate commission in South Carolina seeking to use a novel way of calculating return on costs to get a rate increase. Moreover since we bought DUK, the CEO refused to confirm the dividend at its present level. If DUK doesn’t receive the rate increase it is seeking we might see a dividend cut. While “the street” usually likes a dividend cut, such a cut might occur in a dicey period when folks don’t want to own stocks when the dividend is cut. That happened to SGP a month ago when it cut its dividend and the stock markets were not in the mood for such a move. Since we want to take some money off the table we are going to sell that position at $17.50 for a scratch loss.

We are also selling Alliant Energy at $21.60 in our trading accounts for the purpose of taking more off the table. We had purchased the utility stocks last week at the same time we established a long trading position in bonds but having a sold the Treasuries we are using the utility stocks as a good place to raise cash.

11:30am and the WSJ reports the 2004 deficit is now guessed at $500 billion. We made that guess over a month ago:

15 July 2003 - Closing Comment

10:32am and the White house just posted a projected deficit of $450 billion this year and $475 billion next year. Want to bet the two years add up to $1 trillion before the election. What happened to the trillion dollar surplus?

We currently believe that there will be a $750 billion deficit for 2005 fiscal year.

12:43pm and the DJIA can’t get any traction today. Breadth is negative 3/5 and down volume exceeds up volume on the NYSE while the reverse is true on the NASDAQ even though the NASDAQ is down 8 points. New highs are under 200.

3:02pm and stocks gave up the ghost in the last hour. As we type the final notes today we are listening to Richard Grasso and Carl McCall explain why he was entitled to $140 million compensation. We now learn he is entitled to an additional $48 million. In true puritan fashion, Grasso has agreed to forego the $48 million.

At the closing bell the DJIA was down 79 points at 9507. The S&P 500 surrendered 9 points to end at 1023 and the NASDAQ dropped 15 points to finish at 1873.

And tomorrow is another day.

9 September 2003 - Morning Comment

7:35am and a friend e-mailed the following anecdote:

Here's a pricing tidbit, has it hit the WSJ yet? I went to Harris for plywood, the 1/2" cdx has doubled in price in the last week, $12 to $24, but that's not all, they don't have any, no osx either. Order now, you can have some maybe in October. It's going by the carload to Iraq, the Government (or probably a subsidiary of Halliburton) is buying it all. What's this price gouging/shortage going to do to the housing boom?

The stock markets made a good showing yesterday with the DJIA up over 85 points and the NASDAQ even stronger. Breadth was 2/1 positive an up volume was over 3/1 positive on the NYSE and NASDAQ. NASDAQ total volume was over 2 billion. The only fly in the ointment was that new highs were about 325 on both markets and that is narrower than last weeks 435 and June’s 550 plus. Retail was the only area lower as we explained yesterday.

Bonds weakened after we left yesterday. Overseas the Nikkei was up 2% on U.S. brokerage house recommendations of the Japanese markets while Hong Kong was lower on a SARs scare. Europe is lower. This morning the U.S. futures are also lower. McDonald’s reported a 10% gain in sales in August. Those folks have done a good job turning things around and MCD is one of the one’s we were too smart on last March.

The stocks we bought last week are higher with the exception of the Gap and we will be holding for a while longer. The bulls seem to be in control and the bears are hoping for an external event to derail the move higher. Cisco is being upgraded again today so we presume most analysts are on board. The bullish sentiment among big investment houses is remarkable and we haven’t seen such a consensus for a few years. Or rather we haven’t seen the recommendations being followed and stocks moving higher when the recommendation are made for a few years.

Today we would guess down early and then a move higher for stocks with continued weakness in Treasuries.

So let the games begin.

8 September 2003 - Evening Comment

8:32am and the DJIA has opened higher as has the NASDAQ while Treasuries are lower.

9:07am and Treasuries are in rally mode again while stocks are also continuing to move higher. There is a rumor, the umpteenth that allied forces are closing in on Osama and that has put a bid in both markets.

Bush and Greenspan have lunch on Tuesday and on Thursday two Fed governors make soothing remarks about interest rates. What a coincidence.

The rally in Treasuries will eventually reverse as the realities a deficit financing come to the fore over the next few years. We are playing the short term right now and so we are glad to see bonds markets rally, but we don’t plan on staying till the end of the party.

Analysts are continuing to put sell recommendations on retail stocks, the most prominent being Wal-Mart. Our Gap holding is suffering as a result and we didn’t get the rebound we were hoping for. We are hoping that at some point GPS rejoins the rally so that may reduce our trading position and make a decision on the rest of our holding.

The “sell retail” calls are based on a self fulfilling technical/historical pattern that at certain points in an interest rate cycle certain industry groupings should be owned and certain shouldn’t. At this point in the interest rate cycle retail should be sold. Tech can be bought at any point in the cycle because that is where the action is. We have never followed these patterns and sometimes that has been a plus and sometimes a negative. One thing the drop in retail stocks these past few days does prove is that momentum trading is alive and well and investing for the long term is still absent.

With today’s announcement of the next auction, the Treasury is playing the yield game by auctioning fewer five-year and ten-year notes than expected and more bills so that the budget will have the current advantage of lower financing costs. This is another example of the Bushies putting off reality till the out years when someone else has to deal with it. With the lowest rates in 20 years we think that sound budget management would suggest lengthening maturities while rates are low. After all, isn’t that what the refinancing of mortgages boom was all about?

10:45am and we are off to Madison for a “sushi lunch”. So the stock markets will have to get along without us this afternoon.

As we leave the DJIA is up 85 points, the S&P 500 is higher by 10 points and is trading right at near term resistance of 1030 and the NASDAQ is up 28 points. A close above 1030 would give the rally more oomph.

And tomorrow is another day.

8 September 2003 - Morning Comment

7:12am and the stock futures are higher by a tad as we begin the first full week of trading after the end of meteorological summer.

Europe is higher as was Asia. Bush’s speech last night which we fortunately missed placed a price tag of $87 billion on Iraq for the next year. Not $85 billion or $90 billion but $87 billion. We can just imagine the speechwriters market testing that number to see which was the least likely to scare. Of course the actual number will be over $100 billion but that comes later and with excuses.

Growing the deficit by spending on goods and services that don’t have any productive yield in the U.S. is not healthy for the economy. Our take is that separating spending on Iraq from the rest of the deficit is the first step in preparing folks for a $750 billion deficit in fiscal year 2005. Those numbers are gong to be released during the heat of the presidential campaign next year and last night was the first step in adjusting expectations to reality and placing a patriotic spin on the deficit.

Bush’s speech was flashback to Johnson’s speeches during the Vietnam War. Thankfully 100 soldiers a day are not dying as they were then. But one death a day for the next year is not going to be acceptable. And so the Bushies are looking for an exit strategy. But if the U.S. has to finance that exit strategy the resulting deficit is going to wreck havoc on Treasury rates and the economy. Dick Cheney’s Halliburton and Bechtel will do well.

For now though we think in the short term the rally will resume and stock prices will move higher. Bonds also may rally a bit more but our take is that interest rates move higher and then ?.

For today up a bit then lower with a rally into the close.

So let the games begin.

5 September 2003 - Evening Comment

6:31am and we are early to work because we were early to bed as we managed to slice our underground satellite cable connection while doing some patio work. Think ahead.

Actually we didn’t miss the football game or the 55th time watching Hitler fall on the History Channel. And since we know the weather is going to be cool and dry for the next week the Weather Channel wasn’t needed either. We managed to read for an hour before nodding off. Enough.

The stock markets are going for 9 in a row today. The last few up days have been less than stellar and we would class them as neutral rather than strong. The sideways movement is needed to consolidate the move since March. The stock markets have had a few resting points since then but the desire to be in the market seems stronger than the fear of losing more money. Even we have succumbed to some degree as, in the last week, we have moved from a 0% equity position to 16% equities in the Model Portfolio and up to 30% in our aggressive and some smaller accounts. By no means do we consider that level to be speculative but we are aware of the tendencies of this time of year and that is why we haven’t become more fully invested.

Our longer term outlook is bearish but the action of the last few weeks has taken out a very thick resistance level on the S&P 500 and we are never so myopic as to believe that we hold the truth in relation to market activity. As we have remarked the past few days we personally don’t have the same fear of owning stocks entering the September/October period as we did the last few years.

We also don’t perceive that fear in others. This may be the perfect bear trap for us and others who have been absolute bears for the past four years, but even in those years we were able to take advantage of trading opportunities to lock in some nice returns and handily beat the S&P 500. We have no psychological need to beat the averages this year, but we always are interested in making money for clients and ourselves. And since we take the same positions as the same time as our clients and since the Model Portfolio is our money our recent activity is making a statement that says that we think the current rally even with a needed pullback has some life in it.

That it may all end in a downturn sometime in the next six months is a real possibility but we just don’t think that a serious downturn is around the corner. The momentum created by this rally is the momentum to keep it going.

7:04am and Japan was down overnight and U.S. stock futures are opening off slightly. The big number this morning is continuing employment which is expected to be up for the first time in seven months. The bulls and Bush dearly need this number to be positive to maintain their theory of economic recovery. Intel made positive comments last night after the close and in after hours trading many tech stocks were fractionally higher.

For the health of this rally a good sell off this morning would be welcomed as long as it is followed by and equally strong rebound next week. Since it is Friday it would not be untoward for traders to locks in some profits and go home for the week end with money in their pockets instead of on their books.

100,000 people attended the pre-opening NFL Concert. That is far out as we used to say. But it fits in with our theme of our perception that more now that ever folks are living one day at a time and looking for ways to enjoy life and avoid the unpleasantness that has been the constant theme of cable and radio mindless media. We think the stock rally is a continuation of this theme and that it will also for a while but is doomed to fail because reality will once intervene. But till then we and others hoe to enjoy the ride and get out the day before.

The fact that technology has been the leader of this rally is the best indication of its eventual relapse. Technology has and will continue to change our lives but the valuations currently on tech stocks are only acceptable because techs sold at ridiculous prices in the late 1990s.

We bought JDS Uniphase for a trade yesterday at $3.65 which gives the overall company a market cap of over $5 billion. JDSU has less than $1 billion in sales this year. But folks think it is cheap because JDSU sold at $120 per share back in Bubble mania. That was a value of $170 billion on a company with sales of $2 billion. So JDSU is cheap relative to where it was pieced but it isn’t a cheap stock now. it is a low priced stock because of its many splits and so mom and pop inventors can buy 5000 shares and feel like they are taking a big ride and that it was is happening with all the low priced tech stocks. That’s not to say that institutions are feeling their Oats by buying w! Million shares when in the old days they were trading 50 thousand. The guys and gals that run big money are the same as mom and pop when both are trying to grab the end of the rainbow.

Mindless Larry Kudlow, economist to the stars and Jack Welch which is why he is on TV, is on CNBC suggesting more tax cuts and more deregulation. Who worries about deficits and the poor, certainly not Larry the lip? Deregulation and no regulation by Bush’s FERC commissioners is why Californian are having a recall election.

7:32 and August non farm payrolls declined by 91,000 jobs when economists were expecting a 12,000 gain. The unemployment rate fell to 6.1% as more folks stopped looking for jobs. That isn’t the way to solve the jobs problem So it is now 8 months is a row with overall job loss in the Bushies jobless recovery. Goodbye stock rally. Guru Kudlow is suggesting that folks are now working at home and that those folks are being properly measured. Folks who are working at home as consultants are only doing that because there are no full time jobs available.

The strength in consumer spending is a result of the $13 billion child tax credit and the cut in the marginal tax rates for the few. Jobless recovery.

The lousy employment number will be a good excuse for a sell off in stocks in the early going and then we should get a good idea of the money on the sidelines.

8:45am and stocks did indeed open lower and Treasuries are on fire. We are bidding on some more JDSU and also HAIN. This sell off is shallow and we expect a move to the upside where the real test will come this afternoon.

9:27am and we are selling the Treasury two-year bonds that we bought on Tuesday. They are up 37 basis points in two days which is a whole year’s money market interest. Bush announced yesterday that he wants to make all the tax cuts permanent and unless some Republican and a few Democrat Senators get some gumption the country is looking at 750 billion plus deficits on a yearly basis. Those kind of deficits will bankrupt the dollar. That’s why we have been accepting the low money market yields since we believe that Treasury rates have to move higher over the next few years. We like the two-year for the reasons stated earlier this week, but a 37 basis point move is too much to pass up.

The Treasury’s have moved up on Bernacke’s statement yesterday that the Fed is still considering lowering rates and on the surprise payroll in August announced this morning. We’ll see how it plays out but we are convinced we are correct about interest rates and so we have acted on that conviction.

11:07am and stocks continue to meander at lower levels. Breadth is finally positive and up volume exceeds down volume by a 2/1 margin. New highs are under 200 on both the NYSE and NASDAQ but new lows are under 10 both places. Treasuries have given up a bit of their early strong gains but still remain substantially higher for the day. Retailers are lower on the back of a downgrade of WalMart by BankAmerica.

11:22am and we just learned that the NFL extravaganza we mentioned above occurred on The Mall in Washington. Why is the government allowing its property to be used by a commercial enterprise? Visitors to Washington were not allowed to see the Mall as it should be seen and in fact it was closed to ordinary traffic. That’s OK for official events but to close The Mall for an advertisement for the NFL is nuts.

12:49pm and the DJIA is now down 100 points and testing the bulls and bears respective resolve. Treasuries have resumed their rally and are recouping several weeks’ losses in one day. As we have said before we would guess that some hedge funds and large banks are not enjoying the volatility in the bond movement. The NASDAQ has finally turned negative for the day.

1:59pm and the hour of decision has arrived. If the DJIA which is currently down 107 points rallies back to down 10 points for the day that will break the string of up days but still give heart to the bulls and heartburn to the bears. And it will also set stocks up for a resumption of the move up next week. On the other hand a 100 point down day will probably be viewed as a draw. And if the DJIA continues its sell off to close down 200 points the bears will claim victory. So we shall see.

2:23pm and we read on the wires that beginning Monday the Pacific Stock Exchange is going to start trading options on JDSU. JDSU is a $4 stock. Well it’s cheaper than driving to Las Vegas.

3:02pm and the winner is? The DJIA closed down 85 points at 9502. The S&P 500 dropped 7 points to end at 1022 (1015 is the breakout/support level now) and the NASDAQ gave up 11 points to end at 1858.

And tomorrow is another day.

4 September 2003 - Evening Comment

8:45am and the stock markets opened lower while bonds are rallying a bit.

And we offer a reminder to clients to please remember that the bonds recently purchased had accrued interest. That is especially true of the Treasury 3% due 11/15/07. Each $100,000 bond carried a bit over $750 accrued interest which buyers will receive on November 15. So please factor that into your account's value.

Maria the Mouth is on CNBC saying that analysts are blown away by the auto sales in the month of August which came in at a 19 million annual rate. So I guess we will hang up our auto analyst cloak since we thought the sales were lousy. We remain of the opinion that giving rebates and financing below cost is not the way to make big money, but what do we know?

8:50am and we are selling the four-year Treasuries that we bought two days ago for a scratch gain. After spending the last two days and one sleepless night thinking about the purchase we don't think the 1% larger coupon (versus the 2% two-year) justifies the extra principal risk. We are willing to risk principal on stocks but since we think bond yields are moving higher over the next few years we want to leave our trading to stocks and use the short Treasuries as cash substitutes. With that in mind we will redeploy the money raised on this sale in the two-year Treasury (if it moves back to a 2% yield) with which we are very comfortable.

9:14am and Gap Stores announced same store sales up 5% which was a disappointment given the easy comparisons with last year. We guess Madonna is not doing her thing. Yet. With the share price off $1.80 we are buying for accounts at $18.30. Gap is a name that institutions reach for when they want to buy a retailer and the August number will be forgotten in a few days. We also are adding JDSU which we have traded before to accounts at $3.65 to give us a tech speculation in our trading accounts.

10:19am and in reading the NYT article on Canary Hedge Fund and its managing partner Edward Stern we can't understand why the fellow isn't in jail. That he is not may have something to do with the $2 billion net worth of his family.

Also the named mutual funds of Janus and Strong and Bank One's and BankAmerica’s fund business should be forced to merge with other funds and the folks who ran the funds should be barred from the industry. And again we ask where were the SEC and Justice Department and the NYSE and the NASD regulatory folks?

11:21am and surprise, Bush wants to make the tax cuts permanent. Can anyone say one trillion dollar per year deficit? It's either war or tax cuts as the way to solve the country's problems. And that's why we remain bearish and why we are happy to have sold the four-year Treasury.

Fed member Bernacke is saying there is no reason to raise interest rates. He is saying today that the Fed may have to ease instead of tighten. Treasuries are rallying on that speech.

11:56am and factory orders were up 1.7% to the highest level in 2 years. The August ISM Non manufacturing index was at a record 65.1. Second Quarter Productivity was revised to up 6.8% to a six year high. That's logical since millions of jobs have disappeared in the last three years.

Bush is speaking about the economy and he is tearing up as he talks about frivolous lawsuits against doctors and hospitals. Funny what make people tear up. Of course by definition a frivolous lawsuit will be dismissed because it is frivolous. The Republican fear mongers like that word. It must have been tested in group sessions.

12:22pm and the Justice Department and the SEC have to try and play catch up to Elliot Spitzer and so they are currently holding a press conference announcing the indictment of former Goldman Sachs executives on insider trading charges. We don't think the charges will result in a conviction because we don't think what was done was insider trading. Goldman settled because $9 million is not worth the hassle to them.

There is a forest and there are trees in the forest and then there are also little bushes. The SEC is going after the little bushes, while Spitzer is taking on the forest and making the big Bushies at the Justice Department and SEC look like they are behind the curve.

1:10PM and it is true that we are late to this rally. But the 25% rally in the S&P 500 from March to now only caught up to our performance for the year while we were on vacation. That's because the S&P 500 was down 10% in March while the Model Portfolio was up 12% and safely in cash.

We are trading now because the S&P 500 broke out of its trading range when it moved through 1015 which was the June high. While the S&P only corrected about 6% from that June high the breakout has to be respected. And during the bull market of the late 1990s 5% to 7% corrections were the norm before stocks resumed their upward momentum. Moreover we aren't going whole hog since The Model Portfolio is about 17% invested and even our aggressive accounts are less than 30% in stocks. Eliminating the four year 3% Treasury also lowered our overall risk profile.

We are going to review the stocks we own even though we have owned all of them before.

We purchased The Gap today for the umpteenth time. We have been trading the stock since 1984 and have almost always made money. The share price dropped $2 today because same store sales were up 5% and “the Street” expected more. Analysts are projecting earnings of $1.13 for the year and we think GPS will beat that number. September is a bigger month for GPS than August and the Christmas buying season is bigger still in terms of earnings and we think the sell off offers opportunity for a trade.

AOL Time Warner has had nothing but bad news but we think the AOL division is worth more than zero which is where the stock market is pricing it. AOL tends to move with the overall market at this point and so we bought for the rally.

Schering Plough is a turnaround situation. Drug stocks are in an unloved period and we think there is a decent chance of a move to the low $20s in a sustained rally

Newell is Rubbermaid and a bunch of household products and is off 20% in the last month. The institutions have always loved this stock and will reach for it if they need to add a name. It may be under selling pressure through October.

SBC, one of the four remaining Baby Bells is yielding 5% at the price we bought it and is another name funds will reach for to get invested.

We have been trading HPQ for many years and we made it our tech holding for this rally.

Duke Power was let off the hook by FERC in the California price gouging investigation and now it only has to deal with too much debt and a troubled nuclear power plant. But that's why it is selling at this ten year low price.

Hain Celestial is another of our trading stocks. Heinz owns 20% and there is always the possibility of them buying the rest if HAIN gets its act together.

JDS Uniphase is a low priced former high flyer with no debt and a large cash position. We have traded it profitably for the past year.

2:02pm and entering the final hour stocks are mixed with the averages just holding on. The final hour action may give us an indication of how tired the bulls are.

2:31pm and GPS continues to sell off. Our first day loss reminds us of the first time we bought The Gap back in 1984. Then it was called Gap Stores and no one had heard of it except our partner Don who was extremely bullish on the stock. We paid $30 per share (there were 20 million shares outstanding at the time) and the stock sold off to $22 in a month and we heard from a few customers. It then rallied to $36 and we sold our entire position. Our partner Don was not in favor of selling and a few days after a few intense discussions we bought the shares back at the higher price of $37 per share. We heard from a few more customers. That was the last time the shares sold at that price as over the next years Gaps share price went to a split adjusted $120 per share. And we held it a good part of the move. And we didn't hear from any more customers. So maybe it is lucky that we are holding at a loss after our first day.

3:02pm and The DJIA closed up 20 points at 9588. The S&P 500 rose 2 points to 1027 and the NASDAQ was up 16 points to 1868.

And tomorrow is another day. There will be no Morning Comment tomorrow due to a previous commitment.

4 September 2003 - Morning Comment

7:12am and the stock futures are lower this morning which is a good thing given the run the stock markets have had over the past six trading days. We think a few sideways days are called for but remembering the good old days of five years ago we wonder if the correction will only last a few more hours. We have observed a few more bears like us throwing in the towel and bearish sentiment is now down to 18% and the put/call ratio is a very bearish 0.35 which is indicative of bears switching to bulls. Remember, a lot of bulls is a bearish indicator since who is left to buy. This time may be different for a while because of so much sideline cash.

There is still room and time and cash to fuel a run higher and if this morning's jobless number due in 15 minutes is under 380,000 the bulls will begin a stampede. The expected number is 393,000. There is no need to speculate since we will still be writing when the number is released.

The mutual fund/hedge fund investigation by Spitzer is another black eye for the industry but we don't think it means much in relation to the stock markets or mutual funds since it is a complicated topic that many folks who were affected don't understand. Also BankAmerica is so large that whatever the fine it will be peanuts.

Ford and General Motors came in with desultory car and truck sales given the run both stocks have experienced. Walmart announced August sales were up 6% which we think is a result of the child tax credit checks. As we said yesterday, the tax checks almost guarantee a good third quarter GDP number.

If the Bushies are able to get the rest of the world to help out in Iraq, after practically spitting in the face of France and Germany at the start of the war, then practical economics will triumph over principle as always. We think the European countries now realize that unless they get a piece of the rebuilding pie-and who will pay for that piece-there isn't much reason for them to participate. But if Secretary Powell can carry the day that will be a real plus for stocks and more importantly our soldiers in Iraq over the short term. The negative vibes from Iraq are the one real drag on the stock markets since we don’t think most folks and gurus are yet ready to begin worrying about the looming record deficits.

We have come around to the opinion that the crash has been delayed for ? months and recent market action suggests that the risk/reward ratio favors some attempt to ride the tide. And so we have placed about 15% of the assets in The Model Portfolio to work in equities and may go as high as 25% and we also have become more aggressive with our cash reserves in larger accounts by investing them in two and four year Treasuries. Our reasoning on the Treasury purchases is contained in our 2 September and 3 September comments.

7:30am and jobless claims were 413,000 which isn't good. Treasuries are higher and stocks are lower. But this number will be a good test of the bullish sentiment. But it is dangerous out there and so we aren't going to place more money to work.

We would expect a down this morning then a rurally and finally a lower close but down less that 1%.

So let the games begin.

Just for  fun we have transcribed below an eye test that we found interesting.


Quick Eye Exam... 



Just do it - don't cheat!!!!!!!!!!!! 




Try this its actually quite good. 


But don't cheat! 


Count the number of F's in the following text: 




Managed it? 
Scroll down only after you have counted them! 

How many? 
Wrong, there are six - no joke! 
Read again! 
The reasoning is further down... 
The brain cannot process the word "OF." 
Incredible or what? 
Anyone who counts all six F's on the first go is a genius 

Three is normal. 

3 September 2003 - Daily Comment

8:48am and as we said last night we missed our morning comment because our computer guru is on a mission of mercy this morning to complete the repair of a much needed computer.

Stocks are opening higher and even Treasuries have a bid in them. With the breakout yesterday on the S&P 500 a new trading level will need to be established and unless the whole jamboree falls apart this afternoon we would presume that the momentum guys and gals are going to take stocks higher over the near term.

We are nothing if not pliant, and we won't fight the tape even when the tape resembles the bubble years of times past. We maintain our bearish attitude but we are going to trade this rally if we can.

We are avoiding the very volatile stocks and stocks making new highs and we are sticking with “value” plays, although the value is only relative not absolute.

We were watching CNBC this morning with the sound off as usual when we saw the talking heads discussing Head tennis racquets. They mentioned the stock which had closed at $2.20 per share and traded all of 500 shares yesterday. In the first fifteen minutes today HED has traded 80,000 shares and is up 60 cents per share. Ah, the salad days are back. We have also noticed some folks on www.realmoney.com mentioning stocks in which they have just taken a position. The subsequent action after posting in many of the stocks confers an immediate profit for the writer. This is the same kind of stuff that was happening five years ago and is indicative that either new traders or some of the old momentum traders are back.

The question of course becomes how far this rally can go. We have no idea and we aren't going to buy many more stocks but we will play with the exposure we have to hopefully pick up another 2% or return before year end. That of course presumes that our bond positions don't tank on us.

On that point we would like to expand on our reasoning for buying the two year Treasury with a 2% yield yesterday. Money markets are yielding 0.3 to 0.5%. If we hold the two year for a year we will make 2%. Even if yields on the two year move to 3% over that period we won't lose as much principal as we will gain in yield because our two year Treasury will be a one year treasury. And if two year Treasuries a year from now are yielding 3%, we would surmise that one year Treasuries will be yielding 2% which would keep our principal intact.

We know that 2% is not a lot of money when looking at a 40% year to date return on the NASDAQ, but that same NASDAQ remains 60% below its all time high. Risk and reward are relative concepts. The 2% bond money is a cash substitute for us on which we are hoping to earn 3 times the average return we would on holding a money fund for the next year.

The four year bonds are owned as a more aggressive cash substitute but we will trade for a profit if we can.

9:01am and construction spending rose 0.2% in July. That doesn't seem to be thrilling the markets.

9:28am and stocks continue to consolidate their gains of yesterday at higher levels. HAIN is off two points today and we are picking up a few shares in our trading accounts. We are also buying Schering Plough at $15.50 and AOL Time Warner at $16.50 in our small accounts.

11:24am and thank goodness for Elliott Spitzer. The Hedge Fund/Mutual Fund mutual fund trading scam that he revealed today is a disgusting example of the lax controls and cupidity of some folks in our business. BankAmerica and Janus ought to be taking it on the chin. The story in tomorrow's NYT and WSJ will be well worth the read. And where were the SEC and the Justice Department? And where is Ken Lay and why do the Feds want to wait till after next year's election to indict Lay and Ebbers?

11:32am and spreads between Junk bonds and Treasuries have narrowed by 600 basis points in the last year. The spread is now only 500 basis points or 5 percentage points. We think the narrowing is the result of folks chasing yield and the back up in Treasury rates and it is only a matter of time before the yield spread widens with the resulting carnage in high yield fund prices.

Watching Seibel and Tellabs jump 5% and more on upgrades or catch up buying reminds a lot of the good old days. We would like to ride that train but age and nerves have taken their toll. And so in trying to participate in this final leg of the bear market rally we are sticking with big cap names that won't give us 5% daily moves but do offer the comfort of earnings and dividends in case the market decides to end the foolishness on a dime turn.

11:53am and in keeping with our “not too much” theme we sold our JNJ trading holding for a scratch profit because we are adding more NWL to those same accounts.

1:08pm and we read on www.minyanville.com that since June 17 when the S&P 500 ticked at 1017 the S&P is only 1% higher. Stocks need a strong close today and then they can mull around for a few days. Breadth is positive but new highs are under 500 on both the NYSE and NASDAQ. Since this is the sixth day of rally we are of the opinion that the new high level of June of 575 won't be breached on this attempt. That's a negative.

By the by, Head has now traded 392,000 shares. Speculation is alive and well again. The action is the HED reminds of the heady days of yore when a mention of any stock on radio or TV by Dan Dorfman was good for 5 points up or down depending on his story.

1:33pm and back in the spring when the rally began we bought MSFT and said the rally wouldn't be over till MSFT reached $30 per share. We didn't keep the MSFT but the last few days MSFT has begun moving and is up over $1 per share today at $28.50 today. So we may be right after all although we won't profit from our call.

2:32pm and we are selling our PNC trade for a scratch because we added Hain Celestial at $17.95 to accounts. We sold our trading position in NWL from yesterday for a scratch since in our bullishness on the stock this morning we bought more stock than we want to hold in our trading accounts.

With today's action stocks look like they want to rest with a few days of sideways movement to consolidate the recent gains. NASDAQ volume exceeded 2.2 billion shares which is an indication of the speculative juices that are now flowing. Thus we think any pullback will be met this month by buying. The continued weakness in Treasuries should be a worry for stocks.

3:02pm and the DJIA closed up 47 points at 9570. The S&P 500 gained 4 points to end at 1025 and the NASDAQ rose 11 points to 1852.

And tomorrow is another day.

2 September 2003 - Closing Comment

7:38am and short maturity Treasuries are under pressure with yields rising as the bond markets perceive a strengthening economy. At some point we are going to get our feet wet by purchasing short term Treasuries for trading or holding. We were tempted when the two-year Treasury yield jumped over 2% this morning. That's six times the yield we are receiving on cash. There is principal risk in a 2% yield since if two year rates moved to 3% the principal would drop to 98 and we would lose a whole years’ interest. But that won't happen overnight and the real give up would be the 0.33% yield we are now receiving for cash.

If the yield rose to 3% on the two-year within four months we would have a real loss. But then the yield on the three year would probably be about 4.5% and we could swap forward to pick up the increased yield. At some point we would then expect a technical rally that would allow us to recover principal and yet receive a higher current yield that money funds. We played this game in the early 1980s when rates were rising and we made money. But rates then were much higher. Please read our section on bond trading in our discussion of our market philosophy in “About Lemley” on the website for further discussion of this issue.

8:41am and we purchased $20 million of the Treasury 2% of 8/31/05 on a 2% yield and $20 million of the Treasury 3% of 11/15/07 at a 3.24% yield for our larger accounts. We purchased equal amounts of each in accounts to hold or trade as the spirit and prices dictate.

We are also bidding on Duke Power which filed a shelf registration to sell $2 billion in bonds and stock. That should place a bit of pressure on the stock but having learned from our recent adventure with Alliant Energy we aren’t going to be too cute. We also may buy more Alliant (LNT) Energy because we are of the opinion that defensive stocks may get some action from chicken bulls before the month is out.

We bought Hewlett Packard (HPQ) at $20.32 for tech exposure in many accounts and we were able to pick up some Newell Company stock at $24.15 for our larger trading accounts. Newell produces Rubbermaid products plus a host of other household items and we have traded it in the past. Last month the stock was selling at $30 per share.

We want to purchase Newell in more accounts but it got away from us this morning on the upside. NWL should come under renewed selling pressure for the next month because it is an institutional stock. We are suggesting that it will be under pressure because mutual funds will be selling stocks in which they have losses through the mutual fund year end of October 31 to set up losses to offset gains.

We bought Duke at $17.50.

9:02am and the ISM number came in at 54.7 versus 50.3. That report has Treasuries weaker and stocks firm.

9:23am and traders must have been looking for a better ISM number because stocks have weakened. Treasuries remain lower.

11:04am and we are attempting to reestablish a trading position in AOL since it is the type of stock that should move on any general up move in the stock markets.

Stocks are meandering with breadth positive and up volume ahead of down volume. But conviction is lacking and there is no great push higher or lower at this time. The last five days of trading in August this type of morning action was followed by a push to the upside in the afternoon.

12:03pm and we are sensing that the public is exhausted with being fearful. The Bushies have cried “wolf” once too often and folks are tired of being afraid. People are tired of fearing loss of jobs and they don't want to think about terrorists or health care costs or Iraq and they are spending their child tax rebate checks. In the same manner that the war pumped up GDP in the second quarter, the rebate checks will pump up GDP in the third quarter. With the markets moving higher the good feeling engendered may carry into the fourth quarter and the holiday season.

We don't sense the same fear of a market collapse that we sensed the last three years as we entered September. And so that is the reason we are adjusting our thinking to the possibility that the markets may not move lower this fall. We have put some money to work today in stocks with these thoughts in mind. But we also have a sizable Cash holding in smaller accounts and cash/short term Treasury holding in larger accounts.

And if interest rates keep moving higher, a 1987 type scenario will be setting up only the timing will be moved back to February/March of 2004.

The delay of the day of reckoning is the reason for our timid toe tipping into stocks today. We bought the AOL at $16.40 in many accounts. We also purchased Johnson& Johnson which is on its low for the year at $49.90, PNC Banks at $47.95 and Alliant Energy at $21.20 for our larger aggressive accounts.

The bonds we bought will hedge the stocks we purchased. Interest rates moving higher suggest a recovering economy, but much more of a move higher in rates will create the fear that the rate rise will choke off any recovery and lead to a market correction or drop.

2:31pm and stocks are higher while bonds closed on their lows of the day. Breadth is 2/1 positve and new highs may exceed 400 on both the NYSE and NASD today. To confirm a breakout and a higher trading range we would think that new highs need to approach 600 tomorrow.

Today we bought 500 DUK, 500 AOL, 500 NWL, 500 HPQ and $150M two-year and $150M 3% of November 2007 in the Model Portfolio.

3:02pm and in the final minutes the DJIA gave up some of its gains but still closed up 109 points at 9525. The S&P 500 gained 14 points to finish at 1022 and the NASDAQ tacked on 30 points to end at 1840.

The computer guru is making a house call in the morning so there will be no morning post. The stock markets need to follow through on today's robust beginning to the month to give validity to today's breakout rally and bonds need to stop sinking like rocks. We shall see.

And tomorrow is another day.

2 September 2003 - Morning Comment

6:15am and we are officially back from vacation. At Jackson Hole, Wyoming on Friday Greenspan continued his defense of Fed policy of fighting deflation at the risk of inflation by keeping short term interest rates low. He didn't mention that by keeping rates artificially low he was also breaking an implicit compact with savers that if they saved their money for retirement years they would be able to enjoy a decent living without assuming much risk. With interest rates at 0.5% on money funds no saver can even enjoy an occasional dinner out.

We purchased SBC at $22.60 with a 5% yield on Friday in many accounts. We mentioned last week that we were contemplating this purchase. SBC is 20% below its July high even as the stock markets have rallied. This drop is the result of the Justice Dept. putting the kibosh on SBC offering long distance services in the old Illinois Bell territory. There is a final decision to be issued in October and we think that Justice Department decision will be overruled.

We continue to look for a few more stocks to own in the off chance that our sell off in September scenario does not occur this year. We are concentrating on stable companies and are buying with the idea of adding if the stocks go lower and holding into the New Year at least.

It is amazing to us how the continued chaos in Iraq is being ignored by the markets. They are they, and we are we and as long as the mess is 5000 miles from Wall Street all is well. We don't think that is how the world works and we would suggest that ignoring the Middle East is folly of the highest order.

The overseas markets have been higher for the last two days and we expect a resumption of the run higher in our stock markets this morning. As we said above we are less certain of our pullback scenario but we are maintaining our cautious stance for now.

As of this morning's opening the DJIA is up 12.8%, the S&P500 is up 14.6% and the NASDAQ is up a whopping 35.6% for the year. The Model Portfolio is up 12.7% and is 96% cash.

So let the games begin.

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