Yellen to the rescue...

 Janet Yellen is here to save the economy...

 

At her swearing in in Washington yesterday, former Federal Reserve Chairman Ben Bernanke's successor gave some comments that indicate she intends to stay the course with quantitative easing.

 

Yellen noted that "the economy continues to operate considerably short" of maximum employment and stable prices. "The economy is stronger and the financial system is sounder," she added. "We have come a long way, but we have farther to go."

 

Yellen also worried "too many Americans still can't find a job or are forced to work part-time."

 

 Today, we'll look at the effect the Fed's "quantitative easing" policies have had to date...

 

Coffee prices hit a new high yesterday, up 8.4%. Coffee is up 81% this year, partially due to a hot and dry summer in Brazil, which accounts for one-third of annual coffee output.

 

 Coffee is just one product that's on a tear lately. But S&A Short Report editor Jeff Clark thinks the run in agricultural commodities is on its last legs. Yesterday, he updated his real-time Direct Line blog...

 

The huge moves in agriculture commodities this year are amazing. Look at the chart of [PowerShares Deutsche Bank Agriculture Fund] (DBA) – which is up 15% in five weeks. It has recovered all of last year's losses in one month.   Coffee has been the stellar outperformer in this group – up 75% this year so far and up 100% since the low in November.   These moves are wildly extended – even parabolic – and are likely to reverse, similar to the recent reversal in natural gas. It wouldn't surprise me if half the gains were given up during a reversal.   The options in the agriculture exchange-traded funds (ETFs) – like JO for coffee – aren't liquid enough for me to recommend an official trade. But, for traders who can do a little homework on their own, there's probably a nice short trade setting up in the agriculture group.

 

Jeff wrote more about the coffee trade in today's Growth Stock Wire.

 

 Last month in Digest Premium, our friend and Texas oilman Cactus Schroeder wrote about soaring natural gas prices. Prices had recently broken $6 per British thermal unit (btu) due to the rough winter across the U.S...

 

There is an awful lot of gas being used to heat homes around the country right now. And I think you're going to see more gas used in transportation.   Besides the rough winter, some other demands are coming onboard. But you're going to see those prices shrink back pretty quickly. Where it bottoms out I don't know, but I'm going to guess somewhere in the $4-$4.25 range.

 

 Like Jeff, Cactus noticed gas prices had gone parabolic... They were up 93% from August, peaking on February 24 (the day we published Cactus' commentary) at $6.49 per btu. And as you can see from the following chart, prices quickly came back down to reality...

 

 

 The Fed's efforts have also boosted stock prices to all-time highs... Health care, energy, financials, and technology are among the sectors hitting new highs today.

 

Today, money is flowing into health care funds at the fastest pace in six years. According to Bloomberg, more than $4 billion has flowed into health care as of February 28. That's 51% of the money that has gone into U.S. sector-specific funds... And more than two-thirds of the total flows the funds saw for all of 2013.

 

Just take a look at this chart of the double-long ProShares Ultra Health Care Fund (RXL), which Steve Sjuggerud holds in his True Wealth portfolio...

 

 

 As we discussed yesterday, quantitative easing has also been a boon to private equity... These firms have raised tons of cash and sold companies at huge valuations. And the top nine executives of the four largest publicly traded U.S. funds took home a combined $2.5 billion last year.

 

True Wealth subscribers are up 167% on shares of private-equity firm Blackstone Group. And Frank Curzio's Small Stock Specialist subscribers are up 91% on Blackstone competitor Kohlberg Kravis Roberts (KKR).

 

 We're also seeing outrageous valuations on IPOs, takeovers, and stocks...

 

Social-media behemoth Facebook bought messaging service WhatsApp for $19 billion. The company had estimated 2013 revenue of $20 million. You can read more about the deal in the February 20 Digest.

 

Shares of social-networking website Twitter went public last year... They soared from $26 to $45 on the first day of trading. Today, the company is worth more than $30 billion and trades for more than 40 times sales. It also has yet to turn a profit.

 

 Seth Klarman, who heads the Baupost Group hedge fund, said in a letter to investors that Twitter may reach $50 million in "adjusted" cash earnings this year, placing its P/E ratio at 500. He wrote...

 

In Silicon Valley, it seems that business plans – a narrative of how one intends to make money – are once again far more valuable than many actual businesses engaged in real-world commerce and whose revenues exceed expenses.

 

 Then there's online-retail giant Amazon, which trades for more than 630 times trailing 12-month earnings.

 

Don't forget electric-car manufacturer Tesla, which sports a $31 billion market cap, though it loses money every quarter. Perhaps shares are trading at a steep 15 times sales on hopes that the company's "gigafactory" – a proposed massive battery plant – will forever change our nation's power grid...

 

 Tesla went public in 2010 at $17 a share. Today, shares are around $250 – a 1,370% gain. We've never recommended Tesla. (In fact, we take every opportunity to poke fun at the company, from its outrageous valuation to its cars that catch fire.)

 

Some readers write in livid at the fact we didn't tip them off to this darling stock. Others understand the point we're making...

 

 We're encouraged that those people would probably make the same criticisms of investment legend Warren Buffett a decade ago.

 

In 1999, Buffett's Berkshire Hathaway grew its book value 0.5%. The benchmark S&P 500 stock index returned 21% that year. It was only the fourth time since 1965 that Berkshire had underperformed the market.

 

Buffett underperformed because he didn't buy hyped-up technology stocks. As he explained in the 1999 letter to shareholders...

 

[S]everal of the companies in which we have large investments had disappointing business results [in 1998]. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify.   More often, however, we can't – not at least with a high degree of conviction. This explains, by the way, why we don't own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem – which we can't solve by studying up – is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.   Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise. For instance, we bring nothing to the table when it comes to evaluating patents, manufacturing processes, or geological prospects. So we simply don't get into judgments in those fields...

 

Buffett went on to explain that predicting the future of companies that operate in fast-changing industries "is simply far beyond our perimeter"...

 

If others claim predictive skill in those industries – and seem to have their claims validated by the behavior of the stock market – we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it's almost certain there will be opportunities from time to time for Berkshire to do well within the circle we've staked out.

 

 Like Buffett, we have no idea if Twitter will continue to be the preferred way for folks to communicate through social media. And we don't know if Tesla will dominate the electric-car market (or if that market will even exist on a large scale).

 

One thing we do know is that the Fed's decision to continue to print massive amounts of money into our economy is artificially pushing prices up... and encouraging companies and investors to chase deals to higher and higher valuations.

 

Yellen appears to be hell-bent on heating the economy up even further. The craziness will likely continue... Until it all stops.

 

 

 New 52-week highs (as of 3/5/14): Activision Blizzard (ATVI), Advent Claymore Convertible Securities Fund (AVK), Brookfield Asset Management (BAM), Berkshire Hathaway (BRK-B), Blackstone Group (BX), CF Industries (CF), CVS Caremark (CVS), Diebold (DBD), Dolby Laboratories (DLB), EnerSys (ENS), Enterprise Products Partners (EPD), Express Scripts (ESRX), Energy Transfer Equity (ETE), Fission Uranium (FCU.V), Fluidigm (FLDM), Cambria Foreign Shareholder Yield Fund (FYLD), GigaMedia (GIGM), Corning (GLW), PowerShares S&P 500 BuyWrite Fund (PBP), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Technology Fund (ROM), Constellation Brands (STZ), Skyworks Solutions (SWKS), Targa Resources (TRGP), and Union Pacific (UNP).

 

 More kudos in today's mailbag. Send yours to feedback@stansberryresearch.com.

 

 "Just a short note to stroke you guy's egos. I have lost a lot of money (over 100k) before I started using your services. Since I started using your service I have much less exposure to disaster and at the same time make thousands a month. A few months ago I bought some famous guys on CNBC option trading service and promptly lost in trading fees and just plain losses another 15k. So here it is. No matter how much bad press you guys get, I make money by reading and following your directions. So thank you Amber and Doc Eifrig as I follow their suggestions and thanks to all of you as I read much of what you write. And thanks Porter for Alpha. Doc, take good care of yourself as I will be screwed without your wide ranging advice. And Porter give Amber and Doc a raise." – Paid-up subscriber Steve Smith

 

Regards,

 

Sean Goldsmith

Miami Beach, Florida

March 6, 2014