Fed’s Dudley huffs and puffs: Will he blow the market down?

Stocks drift Friday as terminal policy confusion continues to rile traders and institutions. Plus oil once again.

Big Bad Wolf.
Like the Big Bad Wolf, the Fed's hawkish members like to huff and puff and blow stocks down. (Image via vintage fairy tale book, Library of Congress website)

WASHINGTON, February 27, 2015 – Although it seemed like a good idea at the time, former Fed Chair Ben Bernanke’s idea that the nation would be better off if Fed governors voiced their often disparate opinions in public has in many ways proved counterproductive over the year.

Whereas once the Fed confidently spoke with a unified voice and kept its members’ disagreements out of sight, the moment a Fed chair speaks these days, various dissenting governors immediately go out in the hustings to make speeches pitching their points of view and confusing the issue entirely.

Today it was New York Fed President William Dudley’s turn to shade current Fed Chair Janet Yellen’s recent Congressional testimony to accentuate the negative, pushing the notion of raising short-term interest rates sooner rather than later.

“In remarks delivered at a conference,” noted CNBC this morning “the central bank official said if low short-term rates continue even after the Fed’s Open Market Committee starts lifting its target funds rate off near-zero, then ‘it would be appropriate to choose a more aggressive path of monetary policy.’”

In other words, “Let’s get off our duffs, dudes, and jack those interest rates up.”

These Fed hawks remind us of the tale of the Three Little Pigs. At every opportunity, the Wicked Wolf terrified the little picks, threatening “I’ll huff. And I’ll puff. And I’ll blow your house down.” Which, in fact, he did with two out of three houses.

The dissident, hawkish Fed governors simply can’t resist reciting the Wicked Wolf’s stump speech again and again after each and every Fed meeting, conference, or Congressional hearing. It needlessly scares the market and worse, it makes the Fed’s policy moving forward even more unclear than it already is.

We won’t bore you with the details. But Dudley’s speech this morning has, at least as of the noon hour, tempered the bad but good news on oil prices. Thursday, the price of West Texas Intermediate (WTI) dropped precipitously and closed well short of $50 bbl., a price it’s been clinging to recently.

But today, the price is back up a buck to a shade over $49 and looks to be strengthening again: good for the price at the pump and the consumer; bad for jobs and equipment sales in the oil patch. The market likes things higher, and might be rallying now, but Dudley spoiled the fun, huffing and puffing all the way. So it goes in this thinly traded market where traders, hedgies and would-be investors are getting more confused than ever, leading to lower trading volume and higher volatility in prices.

Today’s trading tips

For the reason we’ve just mentioned, we’ll mostly stay out of the way of Fed bafflegab today, although we did double our position this morning in Kinder Morgan (KMI), by far the nation’s biggest pipeline operator. They pay a swell dividend (circa 4.4 percent) and make money by charging a toll for every drop of Texas Tea (and its equivalents) that flows through their system—a journey that’s unlikely to stop, stupid Keystone XL non-decisions notwithstanding.

Refiners haven’t been doing too badly here, either, as they can sell more of a product that’s become cheaper. No problem with that. Hence, we’ve taken a new position in one of our old favorites, Calumet (CLMT) a high-yielding (9.8 percent) refinery MLP that refines not only gasoline but also produces specialty oil products and asphalt for all those shovel ready projects that supposedly will get funded.

Both companies are already up from dismal, panic-driven lows. And both are likely to take at least one or two more nasty hits before oil prices really stabilize. But we simply plan to use those hits to average down, collecting those nice and reasonably stable yields in the meantime.

As for everything else, we’ve increasingly shifted our bets right now to average-based ETFs that track various sectors, but hold equal weights of index securities, not price-based portfolios. What this means is that when the market is smokin’ hot, these ETFs will move along, lessening your profitability somewhat.

On the other hand, when the market tanks, these ETFs will decline much more slowly as a general rule. The idea is that over the long run, you’ll do almost as well as your fast-trading friends, but you’ll also avoid the possible pitfalls of a huge, huge loss if your timing goes bad.

Right now, we’re slowly building positions in retail via RCD, and in tech via RYT and QQQE, all of which our broker lets us trade without commish.

Otherwise, stock picking in this environment is still very hazardous to your health, at least as long as those dissident Fed governors continue to bloviate.

Have a good weekend.

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