Overreacting to the Yellen ‘Tone’.

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We noted yesterday that the various stock and bond markets were reading Yellen as ‘dovish’ when it comes to an interest rate hike in September and that we disagree–vehemently.  The 10 year treasury is trading at 2.27% today which is down from near 2.40% earlier in the week–we think that rates in the 2.40 or 2.50% level are likely more correct and the optimistic viewpoint the markets are spinning will only result in additional pain later.

We think that Yellen wants to raise rates to show she is in control of interest rates and that she doesn’t march to the music of Wall Street. To us that means that if it is a close call the FED will want rates up — ASAP.  Additionally we have now begun to scrutinize the data closely–closer than we had been looking at it previously–and we will look at it continually for the next 90 days.  Now note that we have been positioning for a rate hike so likely we will not be taking much action regardless of what we see, but it will make a difference in how much cash we let build in accounts etc.  We were heading to a 20% cash position with a September hike in mind and we should be around 18% at the end of June (we count cash + our SP500 hedge).  We are mindful of going any higher as our income stream will be severely impacted.  Our train of thought now is that maybe in late July the markets will ‘decide’ that September is a likely rate hike meeting for the FED and income issues will begin to sell off some, possibly presenting some bargains for us to scoop up. Now this may not play out, but we need a ‘plan’ – we can’t just invest willy-nilly.

Now since the FED statement earlier this week we have had a number of economic reports bolstering a September hike. On Thursday coreConsumer Prices (less food and energy) year over year were announced at up 1.7%–darned close to the 2% announced target.  Jobless claims on Thursday were announced at a level much below concensus suggesting the next employment report in July will be hugely positive. The Philly FED Outlook yesterday was announced at a much higher level than anticipated (although the Empire State Mfg Index was announced very weak on Monday of this week). Thursdays Leading Indicator report blew away estimates.  So there is a partial week case for a September hike.

All of the above is written while being mindful that these are government statistics, which we are very suspicious of in terms of quality, but it what we have to work with at this point in time.

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