February 2, 2013 Bubbly

Risk/Reward Vol. 155

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

"I've been awake for a while now/You've got me feelin' like a child now
Cause every time I see your bubbly face/I get the tingles in a silly place."---lyrics from "Bubbly" by Colbie Caillat

"Sha-shake with every boom/Involuntary muscle contraction
Ignoring/And drinking musical gas fueled euphoria."---lyrics from "And One" by Linkin Park

"Downtown people on the corner watching other people play
And while the people watch them play
The players watch the people/On a Wall Street kind of day."---lyrics from "Wall Street Village Day" by the Four Seasons

Talk about "Bubbly!" Having reached heights in January not attained since 2007, the Dow Jones Industrial Average (DJIA) started February "feelin' like a child now", closing Friday at 14,009 (a 149 point gain), up 6.91% year to date! That performance causes me to have "tingles in a silly place." What makes it even more special is that it occurred in the "face" of non "bubbly" news like the fact that the nation's gross domestic product actually shrunk in the last quarter of 2012 and the fact that the unemployment rate remains at 7.9%. Clearly, the market's animal spirit has "been awake for a while now." Let's hope it continues.

But will it? Or will it like "every boom" experience an "involuntary contraction" which in turn will "Sha-shake" investor confidence? I think not. At worst, I see short, shallow and expected corrections occurring periodically absent, of course, some exogenous event (i.e.Israel, Syria and Iran). The recent market "euphoria" is "fueled" by inexpensive domestic "gas" and oil, tranquility on the domestic political front, stability in Europe and growth in China---a concatenation of stabilizing events we have not experienced for quite some time. Moreover, where is an investor to go for a decent return, other than the stock market? With the above described stability prevailing and thus no reason for a flight to safety, no rational investor should accept a 2% yield from 10 year Treasuries, a fact that is confirmed by the 6.6% increase in my TBT (Treasury double short) since I purchased it on January 18th. As exuberant as the past month has been, the broad market as measured by the S&P 500 Index still is trading at only 17 times 2012 earnings, and at only 13 times projected 2013 earnings. Thus, it has more room to run before reaching its normative level of 15 times earnings. So let's keep "ignoring" the naysayers and keep on "drinking" the good news.

With the broad market (S&P 500 and DJIA) doing so well, how does one "play" "Wall Street" in its entirety? Thanks to exchange traded funds (ETF's) individual investors are no longer relegated to "watching other people play." Now they can have "other people", even those on "Wall Street" "watch them play". Many players, including yours truly, use a combination of IWB and IWM which gives exposure to the 3000 large, mid and small cap companies found on the Russell 2000 and Russell 1000 indices. I also own DIA which tracks the DJIA and QQQ which tracks the NASDAQ. The largest and oldest ETF is SPY which tracks the S&P500 index. Had you invested in these at the dawning of 2013 you would be up 6% or more YTD already.

What a difference five weeks make--from handwringing over the Fiscal Cliff to a 14,000 Dow---"sad rags into glad rags" for sure. But, Mr. Market, pray answer Frankie Valli

"Is this a lasting treasure/Or just a moment's pleasure
Can I believe the magic of your sight/Will you still love me tomorrow?"