May 18, 2013 The Big Payback

Risk/Reward Vol. 170

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

"Now, you're pumped/You gotta get ready
For the big payback/That's where I am, the big payback."---lyrics from "The Payback" by James Brown

"Ben, the two of us need look no more
We both found what we were looking for"---lyrics from "Ben" sung by Michael Jackson

"I want a man with slow hands/I want a lover with an easy touch
I want somebody who will spend some time/Not come and go in a heated rush."---lyrics from "Slow Hands" sung by the Pointer Sisters

On Tuesday morning, billionaire hedge fund manager David Tepper advised those watching CNBC's "Squawk Box" that "you gotta get ready" for a continuation of the bull market. Tepper believes that the stock market will be "pumped" even higher by "the big payback" underway thanks to Sequestration and increased tax revenues. Those two drivers have shrunk the projected 2013 U.S. budget deficit from $850billion to $642billion which means that there will be at least $200 billion less in Treasury securities available to purchase. According to Tepper, this $200 billion can be a catalyst for continued stock investment. That money will be invested somewhere and according to Tepper there is no better alternative than U.S. equities. To put $200billion into perspective, the massive increase in the stock market in the first quarter of this year was fueled in large part by a net inflow of only $60 billion into equity mutual and exchange traded funds. Is Tepper right? It's not smart to bet against him. He has a real feel for the impact of macro economic developments on the stock market. (See discussion at Vol. 59 www.riskrewardblog.blogspot.com ) His fund has averaged a 30% return since its founding in 1993. Last year he made $2.2billion---personally.

Congratulations to "Ben" Stein and those who adhere to his belief that buying index funds such as DIA (the Dow Jones Industrial Average Exchanged Traded Fund) and SPY (the ETF for the Standard & Poor's 500 Index) is superior to buying individual stocks. And as for hiring an asset manager, according to Ben, one "need look no more." He asserts that unmanaged index funds are "what we should be looking for." He may be right. Year to date DIA and SPY are both up over 17%.

But index fund investing is not always "an easy touch". Despite their spectacular rise of late, both DIA and SPY lost half their value between March, 2008 and March, 2009, and SPY has only achieved a 5.15% compounded annual return (half of which is from reinvested dividends) over the past 5 years--- even less over the past 6 years. I, for one, have no appetite for investments that "come and go in such a heated rush," and, as loyal readers know, I will not tolerate such huge losses. Consequently, Sisters, I do not follow Ben's Pointers. Instead, I "am a man with slow hands." "I am somebody who will spend some time" locating and vetting investments that emphasize dividends and stability over capital appreciation---and shedding those that disappoint. If the market simply trades flat for the remainder of the year, I should see a total return in excess of 15%, well above my 6% benchmark (See Vol. 1 www.riskrewardblog.blogspot.com )---a benchmark I eclipsed weeks ago.

With the DJIA and the S&P 500 ending the week at record highs, perhaps David Tepper's prognostication is correct, and the bulls have more room to run. Nevertheless, I remain ever vigilant. As evidenced by Thursday's dip on the suggestion that the Federal Reserve may taper QE3 this fall, this market remains driven by monetary policy and not fundamentals. I like my year-to-date profits, and I do not intend to lose them At any confirmed sign of a significant downturn, I will make like Michael Jackson and "Beat It