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Yellen to markets: what, me worry?

Also: why AltaCorp's Jeremy McCrea thinks Bellatrix is still a buy

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Jul 4, 2014

by Max Fawcett

If the now five-year long rally that stocks have been on is going to end, it won’t be because of new(ish) U.S. Federal Reserve chairman Janet Yellen. In a speech on Wednesday, she made it clear that her top priority in setting interest rate policy is the stability of the American economy rather than the effect it would have on some asset bubbles that might be starting to form. “Yes, the Yellen Fed will raise interest rates one day, (projections from the policy makers point to that day being in 2015),” the New York Times’s Neil Irwin wrote. “But they will probably do so because the United States economy is getting back on its feet, not to lean against the winds of markets.”

That sort of dovetails with what David Rosenberg, the uber-bear turned bull who appears to be on the verge of turning bearish again, wrote last week, even if he’s approaching the issue from the other side. In a piece for the Financial Post, he suggested that the Fed was risking falling behind the curve when it came to inflation, which he thinks is a growing threat and one that isn’t being properly assessed. If he’s right, he wrote, “it is difficult to believe inflation expectations at some point won’t become unhinged and send long-term bond yields substantially higher.” Indeed, he says, inflation has already crept into assets, credit and commodities, and now he thinks it’s starting to show up in consumer goods as well. Next up? Wages.

This is what the Fed wants, it seems, and it’s a contrast to previous Fed behavior that prioritized managing inflation above all other concerns. If it starts to let inflation take off, Rosenberg thinks that “the cyclicals, not to mention inflation-hedges such as energy and other industrial commodities, are really going to start to rip.” The broader market, meanwhile, should continue to set new highs. But what lies beyond that, if inflation truly gets out of control? Nothing good, as anyone who tried to run a business or invest in the stock market during the 1970s can attest to. The question is whether the Fed can – or will – act in time to prevent that from happening.

Finally, despite some bumps in the road so far this year, AltaCorp Capital’s Jeremy McCrea still has Bellatrix Exploration (TSE:BXE) as his top pick in the E&P space. The company had some scheduled and unscheduled turnarounds on its Ferrier area gas plants that cut back on its production during the first half of 2014, but with that out of the way – and the stock still seemingly discounted because of it – McCrea thinks it’s a good time for investors to step in. “We believe there is still much more upside this year, given its highly economical asset base (ability to recycle capital with well paybacks of 6-12 months thanks to its JVs), running room (20-plus years), healthy balance sheet (0.9 times debt-to-cash flow), and management’s top tier execution.” He has a $14 price target on its shares, a nearly 50 per cent premium on where they’re sitting today.

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