Portfolio Checkup and Facebook Musings

It’s February and the weather in Southern California is reminiscent of spring.  Birds are singing, the ocean is glassy, and the sky is blue – it’s a nice feeling.  This is appropriate given the spring awakening stocks enjoyed so far in 2012.  Luckily there remain many negative headlines and bearish doubters out there, so we may have some room to run with this rally before an inevitable correction a.k.a gut check. 

My timing isn’t always great, so if you’re just now diving into stocks, it may be wise to hold off for a meaningful correction.  The fears that caused me to reduce equity exposure last fall perfectly coincided with the bottom in global equities so I still feel a little pain from that error.  But I followed my gut that if things didn’t play out as I expected by the end of 2011, I had to admit error and return to a more bullish positioning.  Now 2011’s tiny gain in the S&P 500 Index is followed up so far year-to-date with a 7% pop , but beaten-down European shares are up a few extra percentage points over US stocks, the tech-heavy Nasdaq 100 is up 11% along with small cap US stocks (Russell 2000 Index), and risky emerging markets are up over 15% (MSCI Emerging Markets Index).  Gold is mostly keeping up with the broad stock indices much to my chagrin.

The news is chalk full of headlines about individual investors sitting on the sidelines, waiting.  I love that.  If you wait for your neighbor to tell you how great his portfolio is doing, you missed the boat or at least part of it.  I also enjoy reading about how February is a bad month for stocks over 50% of the time.  Pay no mind – this is no different than the sucker bet on black in a game of roulette after three or four red bets pay off.  Summer of 2011 is starting to fade into history much like the summer of 2010’s 20% drop.  That one took six months to fade from memory and make new highs.  This time shouldn’t be much different from the smell of it. 
 
Is a Eurozone financial panic and debt default still a risk?  Sure and it’s enough to keep my nose mostly out of their stock market.  But the economic picture is getting brighter in the US with steadily rising output and employment.  A slowdown in corporate earnings may well be in effect, but the powerful leverage achieved via massive layoffs during the recession can only last so long. 
 
Stay the course with your equity investments.  When meaningful pullbacks occur, I use leveraged ETFs (exchange traded funds) to add a little pop to the portfolio.  I like TQQQ (3x leveraged daily Nasdaq 100) and EDC (3x leveraged daily Emerging Markets).  These 3x ETFs should not be used as the basis of a portfolio, but rather to add some juice to returns after a 4-5%+ pullback occurs at any given time.  When this happens you can swap out a 10-15% position in a boring index fund like SPY or IWM for one of these little rockets and see how you do.  Don’t hold them over 30-60 days as leverage can be very painful when the index moves in the opposite direction of where you need it to go.  These ETFs even have inverse brethren so you can profit when markets slide.  I am a terrible short seller and I avoid these like the plague.  Use them at your own risk.
 
Republican primary coverage is constantly on television.  Obama was smiling during the debates, but now has reason to giggle a little.  The financial wizards at the Fed are helping make sure he wins a fresh 48 months in the White House.  The Fed is helping Europe push off implosion to never or at least 2013 with quasi-QE3.  Don’t worry about what that means, just know they are pumping tons of liquidity to European banks.  Employment and GDP numbers smell like roses and Bernanke promised Wall Street near-zero interest rates through 2014.  Love or hate Newt and Mitt, their whining about the economy may start to sound like a broken record in a little bit.  Is all this action artificially inflating stock prices?  Let’s not worry about that and enjoy the ride.  We can revisit this issue at year-end. 
 
Obama’s dinner buddy Mark Zuckerberg (Facebook CEO worth $20+ billion) is about to make thousands of new millionaires via their IPO.  They will buy toys, homes and pay taxes on their very public earnings.  That’s great.  Should you buy the stock when it finally trades?  Sure, why not, just don’t go crazy with the actual amount of stock you buy relative to your net worth.  A more interesting play is to figure out what public firms Facebook will buy after it gets that multi-billion-dollar cash infusion. Zynga is an obvious choice and its stock is already shooting higher.  I like LinkedIn (LNKD) as a takeover idea.  I’m not crazy about the site and its business model, but I have an account and I don’t belong to the cult of Facebook.  Mark will have to buy me and my ilk to earn our eye balls and dollars.  And I think he will do just that.