Yellen continues to be (kinda, sorta) ‘patient,’ stocks yawn upward

Fed Chair Janet Yellen’s Senate testimony Tuesday morning thus far indicates continuing caution on raising interest rates. Target now September?

Caricature of Janet Yellen.
Caricature of Fed Chair Janet Yellen. (

WASHINGTON, February 24, 2015 – In still ongoing testimony Tuesday morning before the Senate Banking Committee, Federal Reserve Chair Janet Yellen seemed to indicate continuing caution with regard to the magic date the Nation’s central bank will begin nudging interest rates up.

“‘The FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings,’ she said, reading from prepared remarks.

“‘It continues to be the FOMC’s assessment that even after employment and inflation are near levels consistent with our dual mandate, economic conditions may, for some time, warrant keeping the federal funds rate below levels the committee views as normal in the longer run,’ she explained.”

Yellen’s Q&A this morning may give us further insight into the Fed’s intent. Right now, Wall Street is nudging stocks up a bit on the news, with the Dow and the S&P 500 up modestly while the tech-heavy NASDAQ is struggling to stay above the flatline. The later is not exactly troubling, however, as the NAZZ had a nice trading day on Monday.

Read Also: Friday’s stock market mildly positive on continued media cheerleading

If you parse Yellen’s prepared remarks more closely, it would seem that the bulls are still modestly in control of Tuesday’s markets. Her forward estimates of the much-dreaded day when interest rates start to get more real again—at least for the fat cats who’ve been enjoying free money all these years—have not really changed.

If the Fed sticks to the term “patient” for the next two months—which is generally what Wall Street has been expecting—this observation is nothing new. This gives the central bank the opportunity to remove that magic word in May (after two months’ worth of meetings have elapsed), leaving room open for the expected June increase.

Yellen’s intentional ambiguity, however, seems to have given at least some bulls in the punditocracy the notion that the Fed may hold off increasing rates until September or perhaps even later.

As it stands right now, a date occurring in Q3 of 2015 might make more sense than it would in Q2—i.e., June—simply because there’s little if any evidence of inflation. However, expecting anything in Washington to be rational these days qualifies as foolish optimism, so we’ll just have to wait and see, which is essentially what a very confused Fed is likely to do as well. It seems that we’re not the only ones who find the tea leaves swimming in pretty murky fluid lately.

UPDATING at 11:30 a.m. EST. Markets seem to be a little happier now with Yellen’s Q&A. The DJIA is up around 90 points, the S&P 500 is up a modest 5.74 points and the NASDAQ is even happier now, up 5.54 and getting close to that elusive 5,000 all-time high it scored during the 1999-2000 dot-bomb run up and debacle. Fifteen years is a long time.

Today’s trading tips

It’s very hard to find any sense of direction in this market. While we’ve again made new highs, we also sense exhaustion in both the markets and the charts. Each new high seems more feeble and less convincing than the last.

Things really do feel as if we may be able to find a few more trades in the next month or so. But it also feels as if the old “sell in May” adage might become fully operational in 2015 in a way that has rarely occurred over the past two-year bull run.

Read Also: Wall Street waits for Greece, Yellen and Godot as oil falls

With Greece temporarily off the shelf due to a last-minute temporary agreement last night, the Eurozone seems a bit safer now, at least until Czar Vladimir I looks to add another swatch of another country to his slowly re-growing empire. (Think trouble in Moldova next.)

So perhaps it’s time for us to look at increasing our position in the hedged Euro-stock ETF whose symbol is, conveniently, HEDJ. We’re ahead on this already and generally hate to average up. But U.S. stocks seem to be peaking, while Europe is, at last, pursuing a flavor of stock-boosting QE magic, and maybe it’s best to go to a market where the central bank goosing action has just begun rather than staying on this side of the Atlantic where it’s coming to a close.

HEDJ has the advantage of hedging its portfolio against currency fluctuations, a very good idea for us Yanks who find that an appreciating dollar negates at least some of the positive effects of Euro-stock happiness.

We also launched a small position yesterday in another hedged ETF, symbol HEZU. This one’s a little more complicated as it’s apparently based more closely on the Eurozone’s currency (i.e., the Euro) than HEDJ, so let’s just re-post this newer ETF’s self description here:

“The investment seeks to track the investment results of the MSCI EMU 100% Hedged to USD Index. The underlying index has been developed by MSCI Inc. as an equity benchmark for the European Monetary Union countries with the currency risk of the securities included in the underlying index hedged against the U.S. dollar on a monthly. The fund generally invests at least 80% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index, including foreign currency forward contracts designed to hedge against non-U.S. currency fluctuations. It is non-diversified.”

In other words, when you compare HEDJ to HEZU, they’re the same only different. Thus far, HEZU seems a little less responsive to weird market swings than HEDJ, and it’s cheaper per share. But the jury’s still out on this one for us, at least for now, so we’ll hold our small position for now and let you know how it’s doing when we have anything to report.

One Eurozone stock we’ve had nice luck with lately has been the Irish company formerly known as Babcock & Brown, after the famous aviators. Apparently few investors had a clue as to the illusion, since no one reads history anymore. So a few years back as we recollect, the company decided to re-name itself Fly Leasing Ltd., adopting the convenient trading symbol FLY.

No, that name doesn’t refer to the common housefly. It refers instead to the company’s Babcock & Brown-style business: buying and leasing jetliners. It does a pretty impressive business in this regard and has one major advantage over better known U.S.-based competitors: it pays an extraordinarily impressive dividend, currently around 6.7 percent.

Better yet, priced at just $14.83 per ADR (American Depository Receipt, the apparently simple but quite complicated way that Americans generally buy foreign stocks), you can accumulate a nice position in FLY for notta lotta money.

That said, we’ve been in and out of this stock for years because it tends to fly in a narrow range, and it’s nearing the top of that range right now. In recent years, the stock has resisted dropping much below $10 per ADR. But when it’s in an up-channel, it tends to resist going above $16. With a price today (as of this writing) of $14.83, it’s getting a little close to that top figure, although there’s no reason FLY shares, with a PE (price-earnings ratio) of only 11.5, couldn’t exceed that range.

Nonetheless, we trade it with that range in mind. For that reason, we’ll stick with it as long as it stays within range and continues to pay that swell dividend and perhaps add slightly to the position, as the ADRs seem to be somewhat resistant to the currency translation issue, probably because they’re ADRs.

BTW, if you happen to put dividend-paying foreign stocks and/or ADRs into your portfolio, just be aware that nearly all of their home-countries will steal a bit of your dividend before you get it, as Eurozone companies love to extract taxes even more than our own current U.S. administration. So your yield will be slightly lower than advertised.

Some of these stocks also extract a penny or three “ADR fee” when you sell. That said, though, if you pick a winner, this is chump change. Plus, that tax bite on the dividend? You’ll break even on it when you file your tax return. Due to reciprocity, you can deduct any foreign tax you ended up paying on dividends from companies like FLY from your final tax bill on Form 1040 as a “Foreign Tax Credit.” Yeah, more paperwork, but at least you eventually break even on that tax.

As usual, the Maven tells you what he’s up to or what he’s contemplating in this column. Since he’s no longer a registered investment advisor or representative, you’re traveling on your own. We’re on your side, to be sure. But sometimes the things we do here don’t work for us, either. In today’s markets, there’s always another shoe to drop, so do your research.

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