June 23, 2014

Jeffrey Pavlik @ Pavlik Capital Management LLC

Managing member Pavlik Capital Management LLC

As Homer Simpson once said, “I guess some people never change. Or, they quickly change and then quickly change back.” - ...

Yesterday Fed Chairwoman Janet Yellen

held a quarterly press conference following her Federal

Reserve meeting. At the conference she said made these comments: “There is uncertainty about

monetary policy.” “To the extent that low levels of volatility may induce risk taking behavior...that

is a

concern to me and to the committee.” “It is important...for market participants to recognize

that there is uncertainty about the path of interest rates. That is because there is uncertainty

about what the path of the economy will be.” “You do see a range

of disagreement among the

participants there. So by the time you get to 2016 there is a wide range of opinion...that reflects

uncertainty.” “There is some evidence of reach for yield behavior. This environment of low

volatility is very much on our radar screen and of concern to me.”

In the end we counted nine times in a 42 minute Q&A that Yellen said “uncertainty”. As well, it

was one of the first times we remember a Fed Chairman discussing low volatility levels, investor

complacency and risk premium

in a direct manner. We clearly agree and support her in being

concerned. What we found most interesting was that she openly admitted her ability to forecast

was highly uncertain (we have discussed this in the past...she is right) and that the markets lac

k of

concern regarding her inability to forecast has interestingly been to push implied volatility and

option prices to near all

-time lows and virtually all asset prices higher.

As Homer Simpson once said, “I guess some people never change. Or, they qu

ickly change and

then quickly change back.” As we stated before, it was truly refreshing to see the Fed change by

admitting their inability to forecast. Unfortunately, our concerns with Fed policy and the gospel of

Homer quickly reemerged with head

-scrat

ching contradiction as she then commented on two of

the most pressing concerns for most investors; inflation and stock prices. She said, “...continue to

see a gradual pickup over the next several years toward our 2% objective.” With the real beauty

being

, “The committee doesn’t try to gauge what is the right level of equity prices...outside of

historical norms I still don’t see that for equity prices broadly.”

Hold please. Inflation over the next SEVERAL YEARS is moving according to plan and the stock

arket is fairly valued. Are you being serious?!?!?! You just said you were uncertain about the

path of the economy and now tell us inflation is going to move gradually toward your target over

several years while equity prices are perfect right here. Gra

dually?!?!?! Fair valued?!?!? Funny...I

don’t recall her saying stocks were undervalued 40% ago...hmmm.

Jean

-Baptiste Alphonse Karr once said, “The more things change the more they stay the same.”

So while things changed a bit yesterday, in the end, Fed

policy remained effectively the same.

The only thing certain about yesterday’s press conference was that after five years of zero interest

rates and unprecedented money printing the Fed has finally admitted there is uncertainty about

their efforts. Unfor

tunately, their own over

confidence bias as it relates to inflation and stock

prices hasn’t diminished one iota. Our view is that one day they will also attempt to explain

uncertainty as it relates to equities and inflation. Karr also addressed that very

well, “Uncertainty is

the worst of all evils until the moment when reality makes us regret uncertainty.” Stay hedged.

Commentary

–

May

2014

Homer Simpson once said, “I g

uess some people never change...