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Fed Leans To Move As Markets Sleep!

"History doesn't repeat itself, but it does rhyme."

Mark Twain

If a participant in a time machine was looking back in history and comparing the events of financial markets from 2016 to 2015, they probably would not be able to tell one from another, especially if they were comparing the actions of the Federal Reserve. If you might recall way back when, about 12 months prior, our inflation, oops, deflation fighting heroes (nobody knows which one these days), were debating on when they should raise interest rates. Should lift off take place in September, or December? Fast forward one year, during a policy speech in late August at posh Jackson Hole, Wyoming, Mrs. Yellen and her deputy, Vice Chair of the Federal Reseve Stanley Fischer, commented the case for additional tightening was strengthening. It seems on the proportional scale of importance of the dual mandate, improved employment totals the last two months have more significance than piddling inflation figures. Fed fund futures show a quarter point raise moving to over 40% in September and over 60% for December. A key difference between last year and this year is, in case you forgot, this little event called an election. We all know the Fed never takes into account politics when it makes its policy decisions. Of course it doesn't, why would anyone think such a thing

In any event, markets continue to slumber on after the policy speech. Participants make the comparison between allocating capital to the United States, which saw second quarter GDP come in at a slow 1.1%, or other parts of the globe, where negative nominal interest rates are the central banks prescription to fight the commodity bust and slack demand. Very much like the similarity with Fed policy, in the markets, Carl Icahn and Bill Ackman picked up their disagreement about who is doing what with Herbalife, just like a few years ago. Bill says Carl will sell, Carl says Bill is wrong, he loves his position (even bought more yesterday). In other news related to specific companies, Signet and Tiffany's reported quarterly results. Signet lulled while Tiffany's shined, primarily because expectations were so low for Tiffany's and the Signet management told us people were not getting married because of the comments of our fabulous presidential contenders.

In the health care space, the big news came from Mylan, where it decided to raise the price of its Epipen product. The public outrage was palpable, as the price increase has gone from 50 bucks to now nearly $600 a year over a ten year time frame. Anecdotally, my daughter had a classmate with the nut allergy that Epipen is the cure for, and for others with similar kinds of extreme allergies, this is the only product offered to cure these life threatening events. Ever the morally upstanding person, Hillary Clinton brought attention to the whole industry with her comments about greedy pharmaceutical companies taking advantage of taxpayer funded research with the outrageous price increases. Naturally, the whole health care sector, or close to it, sold off some.

The issue is complex as drug companies have to spend nearly a billion dollars or more to bring a drug to market and go through the three trial phases to get approval by the FDA. As a public company, most research for promising drugs does not prove commercially viable and the capital outlays show minimal return. So, when a drug makes it through the process, the company now has a product to help compensate for those which fail. Drugs with no competitors, or those in the orphan classification, yield staggering prices, and Epipen is a primary example. The pharmaceutical sector in the United States remains the global leader and I see very little changing this for the foreseeable future, although the political football surrounding pricing is going to have a high profile with both candidates.

Speaking of the loving feeling which is the presidential campaign, Hillary signed her tweet about Epipen with an H. Based on the recent revelations of thousands of more deleted emails, apparently using the highly regarded software Bleachbit, it might be more appropriate for Mrs. Clinton to sign the tweet with an F, for Felon. On the other side of the aisle, the duck that is Donald changed his mind about immigration, which was his signature policy to help him navigate the Republican primaries. His quackiness even figured out to reach out to minority leaders in an effort to have broader appeal to the electorate. The duck also quacked, quite loudly, about democratic policy failures related to minority economic development and crime. Very much like the election in 2012, this years contest seems similar in that Mrs. Clinton has spent a whole lot of money on television trying to define Mr. Trump, just as President zero did with Mitt Romney. So far, it seems to be working pretty well, for H, oops F. Anyway, it seems the accuracy of Mark Twain's now famous quote is still very much applicable in modern society.

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Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

Disclosure: I am/we are long TIF.