September 27, 2015 One Week

Risk/Reward Vol. 277

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

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”---Janet Yellen September 17, 2015

“Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change”---Janet Yellen September 24, 2015

Although my sabbatical is at an end, events this week conspired to make a full edition impossible. However, the stark difference in the two statements above, spoken only one week apart, compels a comment. During that short span of 7 days, what “further improvement in the labor market” occurred and/or what data was reported that indicated that “inflation will move back to its 2 percent objective”? The answer is clear: none. Then, how come Chair Yellen was so uncommitted on the 17th and on the 24th so definitive that a rate increase will occur in 2015? The answer is equally clear--- and disheartening. She was responding to Mr. Market’s disappointment in her performance on the 17th; a disappointment evidenced by a 3% drop in both the Dow Jones Industrial Average and the S&P 500.

C’mon, Ma’m! You and your cohorts are not to respond to trading vicissitudes. You are to set monetary policy to maximize employment and to stabilize prices, both of which you have achieved and both of which are in jeopardy should you continue your easy money policy. Start normalizing rates now so that those who rely upon conservative investments (e.g bonds, savings accounts, cd’s, etc.) can achieve a decent rate of return. Otherwise an entire generation of savers and every pension fund in the country will find themselves unable to fund their retirement obligations.

Out of the debris made of the markets this week, I did spy one gem. I bought BP at $30.05. Wow! BP has not traded this low since immediately after the Deepwater Horizon disaster in 2010. At that time, the threat to BP was existential. Today, the only threat to BP is whether it can maintain its whopping 8% dividend. All indications are that it can shoulder this $7billion annual dividend obligation given that it has settled virtually all of the claims arising from that disaster, is divesting unproductive assets and sits on $30 billion in cash. So I bought some. We will see how it does.

Once I a confident that a 2015 rate hike is fully priced into the market, I will be looking to add to interest rate sensitive positions.