February 15, 2014 Don't Let Her Be Misunderstood

Risk/Reward Vol. 208

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

"I'm just a soul whose intentions are good
Oh,Lord, please don't let me be misunderstood."---lyrics from "Don't Let Me Be Misunderstood" sung by The Animals

"Now you're here/And I know just where I'm going
No more doubts or fears/I've found my way."---lyrics from "Just In Time" sung by Frank Sinatra

"You can have any of 'em/You can take your pick
But you need to check with me/Girl, I promise I'm legit."---lyrics from "Pick Me" sung by Justin Bieber

Many Civil War scholars attribute much of Ulysses S. Grant's success as a commander to the clarity of his dispatches and orders. Anyone who has read his Personal Memoirs must agree that his prose leaves little room for ambiguity or confusion. Testifying before Congress on Tuesday in her public debut as Federal Reserve Chair, Janet Yellen proved herself Grant's equal in this regard. I recommend her comments to your attention. ( http://www.federalreserve.gov/newsevents/testimony/yellen20140211a.htm ) One can debate whether "her intentions are good", but one need not pray "Oh, Lord, please don't let her be misunderstood." In a prepared statement that was one half the length of those routinely submitted by her predecessor, Chair Yellen advised the world, in no uncertain terms, of the following: 1) QE3 tapering will continue absent a significant change of circumstances; 2) the Fed will keep short term interest rates at or near zero well beyond the time that unemployment falls below 6.5%; 3) disruptions in the economies of other countries are not a concern to her unless they impact the United States; 4) Fed policy will stay accommodative until the rate of inflation reaches 2%. She remained firm on these points through six hours of questioning. The stock market liked what she said, rising 193 points that day.

Janet Yellen understands the difference between clarity and transparency--a distinction that was lost on Ben Bernanke. Recall the confusion last summer and fall resulting from Bernanke's very public vacillation as to if and when the tapering of QE3 would begin (read Vols. 170 through 187 www.riskrewardblog.blogspot.com ). Market stability suffers when central bankers display Hamlet-esque indecision ("To taper or not to taper?") which is how transparent decision making invariably is interpreted. If her debut testimony is prologue, the Fed will be more disciplined in its communications under Ms. Yellen's command. Hopefully, "now that she's here/ we will know just where the Fed is going. No more doubts or fears/Yellen's leading the way." Oh and could it be that being straightforward is contagious in Washington? Almost unnoticed in this week's news was the passage of a clean resolution raising the debt ceiling. Apparently, Congress has learned that engaging in brinksmanship on matters impacting the nation's economy is not only bad policy, it's bad politics.

With Fed policy clearly articulated and a possible debt ceiling crisis averted, the stock market traded on fundamentals for the remainder of the week. Like the performance of their underlying companies, some stocks did well; others not so well as 2014 is developing into a stock picker's market---a market that rewards those who can pick winners over those who passively invest in broad indices. "You can have any of 'em/You can take your pick." But, remember to do your own homework as to which are "legit." " You need not check with me" as to which ones you select, but I would appreciate learning what you buy and why. One sure winner for me has been biopharma Regeneron (REGN) which this week reported a block buster quarter driven by sales of its drug Eyelea (for macular degeneration). I own REGN through HQH, a closed end fund which holds large positions in REGN, Celgene, Amgen, Gilead and Biogen. HQH pays a 6.7%% dividend and is up 9.8% since I bought it on a dip on January 28, 2014. Another big winner for me so far has been GGN, a closed end fund comprised of gold miners and other mineral companies which pays a 11% dvidend and is up 8% year to date. Gold mining stocks were brutalized throughout 2013, but have recovered nicely so far this year as has the price of gold. HCLP, the fracking sand miner, has also done well. It is up 21% since I repurchased it in October, 2013. I bought more this week after reading the transcipt of its quarterly earnings call in which the CFO stated that 2014 will see a minimum 10% increase in its dividend.

Holy Eric Burdon, despite two down days, the Dow Jones Industrial Average closed the week up 360 points leaving it down only 2.5% year to date. Is Mr. Market back in "The House of the Rising Sun?" Or should we be pleading to him-- "Don't Bring Me Down?" Either way, maintaining a principled approach with a watchful eye on the ever important 10 Year Treasury Bond (the yield on which held at 2.75% even as QE3 tapering was made more certain) should curb any sense of over confidence or any panic-driven belief that "We Gotta Get Out of This Place."