Seeking Alpha by Adding Beta

Turnaround Candidates: 75% Club

2012-01-28T11:52:00.000-08:00

Jan month of 2012 is almost over and to stock investors, this month is turning out to be a pretty good month. This also means that 2012 overall would be a good year to be in stocks (as per statistics over decades). The markets are becoming more and more "stock pickers" markets. Forget about index investing in 2012. It's all about picking up right trends and stocks. Keeping that in mind, here is one idea of screening potential picks. I called it as "75% Club". The criteria is simple:

Identify stocks which are down by at least 75% in last 12 months (52 week high/low should be 4:1)
Research why stock is down by 75%. There can be multiple reasons for stock to go down by that much - fears of bankruptcy (EK), change in business conditions or competition (SHLD, solar sector), stupid mistakes by management (NFLX), regulatory environment (BAC), macro-economic conditions like housing downtrend (MTG)
Find out if companies identified are going to run out of money and hence may have to declare bankruptcy (AMR, EK) - avoid these companies at all cost. Since they are going towards -99%
Wait till stocks reach equilibrium. Many stocks keep going down even if they are down by 75%. They need to form a base where daily movements become small. e.g. NFLX went down by nearly 80% when it dipped below $65
Check out corrective steps taken by management, change in macro-factors, competitive landscape. When you believe that these are changing for better, start thinking of putting some money into these stocks. Start small quantifies
Let stock appreciate by about 10-15% from it's 52 week low before making further investments. It's better to invest with rising tide than catching falling knife. While you may miss first 10-15% gains, if stock as really reversed the direction, there are at least 50% more gains to have. After all to recover lost 75%, stock has to climb 300%

So which stocks meet the criteria in 2012?

NFLX (Hi: $310, Lo:$65, CMV:$122). 20% upside (Target: $150)
RIMM (Hi: $75, Lo:$13, CMV:$16.80). 20% upside (Target: $21)
RDN (Hi: $8, Lo:$2, CMV: $2.6). 30% upside (Target: $3.50)
JASO (Hi:$8, Lo:$1.21, CMV: $1.8). 30% upside (Target: $2.50)
CECO (Hi: $27, Lo:$6.30, CMV: $10.60). 20% upside (Target: $13)
AMED (Hi: $38, Lo: $9, CMV:$10). 25% upside (Target: $12.50)

This should give you enough idea of "75% club" and potential turnaround candidates. Personally I do apply this in my investments. I wish I had applied this to single best investment of last decade (and still going strong) - Apple. It went down from over $25 to around $7 in summer of 2001. That would have been $900 (considering split in 2005).

Next week would be crucial week for Presidential election since most likely Florida would seal the GOP nomination. Mitt is going to win Florida primary and Gingrich has started seeing the writing on wall. maybe that's why he wants to have an American base on Moon so that he could help make Moon as state of America! What a joke - especially when it comes from someone who had 1/3rd chance of becoming US President as recently as last week.

/Shyam

Time to sell and take a break!

2012-01-21T19:18:00.000-08:00

Markets have been on tear for first 3 weeks of 2012. I decided to create a mock portfolio based on recommendations from my first post of 2012 by mock buying these picks in first 2 weeks at or below the prices mentioned. This portfolio is up by nearly 11% assuming all picks have equal amount of investment. Highest returns are BAC with 25% and then STX with 23%. So with yearly target of above 10% returns achieved in 3 weeks what should one do?
All indexes are heading towards highs of 2011 which were reached in May and July before European mess pulled the indexes down for a flat year. European mess is no where near resolution (see debt negotiations between Greece and bondholders). These worries are again going to come to front lines in Feb/Mar. So at this time best course of action to take some gains off the table by selling some of the winners and keeping some dry powder. There would be quite a few buying opportunities when DOW would go below 12000 sometime in next 3-4 months.
If one is for long-haul and does not want to time to market, one could use following strategy to generate some income and provide some downside protection:

Enable your brokerage account with "call options" - this would need some paperwork and take 2-3 weeks to get it approved
Identify your long-term picks (say BAC)
Sell out-of-money "covered call" against your holdings for next month. e.g. BAC120218C00008000. Premium for this is around $9 for one contract representing 100 shares. So if you have 1000 shares, you can sell 10 contracts generating income of about $80 after commission.
If stock goes above $8 by 2/18, you are forced to sell your holdings at $8. But that is ok since you would have generated 14% return in one month from current price of about $7
If stock remains below $8, you keep your holdings as well as call premium you received
If stock goes below current price of $7, do nothing. Since you are in long-haul, you should not be worried about short term paper losses
One can repeat this strategy every month and generate income as well as downside protection

It is time to be careful and cautious about this stock market rally since we are not out of woods yet.

Now coming to politics, republican presidential nominee just became lot more interesting with Newt winning South Carolina. Would Gingrich become "Grinch" who stole nomination from Mitt? For that, we will have to wait for results from Florida and then Super Tuesday in March. Till then, enjoy the circus of debates and attacks on each other! I am sure President Obama's campaign is lot more excited with today's results since more it drags on, more fodder it would provide to President Obama for fall campaign.

/Shyam

Alvida 2011 and Happy New Year 2012!

2011-12-31T10:35:00.000-08:00

Bye-bye/Alvida 2011. It was a gut-wrenching year with so many Geo-political events all across the board and associated stock market moves. What started as a promising year with DOW reaching yearly high by late Apr turned out to be whimper by end of year with S&P barely moving at all. Someone who had gone into hibernation may not even notice the dramatic stock market movements (like 250 points moves on so many days). Personally my stock market returns were dismal (basically all 2010 gains were wiped out in 2011). Unfortunately my weekly/bi-weekly picks also did not do very well.

So with that dismal track-record, I ought to change my stock picking/investing strategy. Let's start with some macro predictions. 2012 being election year, first some election predictions:

Mitt Romney will wrap up Republication nomination by Mar 2012.
Democrats would lose control of senate by margin of about 2-4. Republicans would lose seats in house reducing their majority to single-digits/teens. Most of the losses would come from their tea-party candidates.
After lots of ups and downs in weekly polls leading to Nov elections, Obama would win Presidential election with slight margin.
With loss of house, President Obama would have to change his strategy to deal with republican congress.
In other major elections, Sarkozy and Putin would win elections to be Presidents of France and Russia respectively

With election predictions out of way, let's predict economic/stock market

US GDP growth would be around 2-3% for 2012
DOW would go above 13000 and S&P above 1350 sometime before summer 2012.
By year-end 2012 with elections out of way, DOW would end above 13000 and S&P close to 1350 for returns of about 6-8% for 2012
10-year treasury yield would be around 2.4% (currently it is around 1.87)

So here are 10 picks based on these macro-predictions with target buy prices in brackets. This portfolio should return about 10% in 2012 including dividend returns provided you invest equal amount in each security and hold till Dec 31, 2012.

AA ($8.64)
BAC ($5.5)
FCX ($36)
GE ($17.85)
KND ($11.77)
MET ($31)
PCX ($8.16)
RIG ($38.38)
STX ($16.16)
TMV ($66)

Please do your own due-diligence before investing since these are just my suggestions based on my risk profile.

Happy Holidays and Happy New Year!

/Shyam

2011: Arab Spring and European "Fall"!

2011-12-17T09:55:00.000-08:00

Year 2011 is coming to an end. What started as promising year both on economic front as well as Geo-political front with Arab Spring is ending with recession clouds and European "Fall". What a mess our elected politicians have made in managing affairs of their countries. Everywhere you look, politicians are failing in delivering what they were supposed to deliver.

Enough said about European circus - every few weeks they meet, make lot of promises after long meetings and then go their own ways without implementing these promises. Already 4 countries have changed their Prime Minister(s) (Ireland, Spain, Italy and Greece). Next round could be France
US is in gridlock which is likely going to be intensified in election year 2012. So nothing would happen on economic front other than political posturing. Obama started as great promise but coming up way short than what his Presidency could have been.
India is stuck in non-stop corruption/Lokpal/Anna's fast. This has started to take tool on economy with Rs touching all time low of 54 against $ and growth coming down to possibly below 5%
Chinese are preparing for their leadership change in 2012 (it happens every decade) and trying to make sure that Arab spring does not land on their shores by increasing censorship on Internet

So anywhere you look, dark clouds are looming in 2012. So what should an average investor do? My recommendation is to stay in cash for next few weeks and invest in dividend paying blue-chips. I am short-listing few names which I will publish as we start 2012. Till then enjoy your Christmas shopping (US economy needs you to do more shopping:-) and holidays!

/Shyam

Italy: Too big to fail;Too big to bail!

2011-11-13T09:02:00.000-08:00

Another week of European drama - only difference from last week that center stage moved from Athens to Rome. The economic crisis cost one more powerful prime minister his job (don't feel sorry for Silvio Berlusconi since he had 3 years to fix Italy's problems)
With crisis finally moving from PIG (Portugal, Ireland, Greece) to PIIGS (with addition of Italy and Spain), Euro has reached cross-roads. Both Italy and Spain are "too big to fail and too big to bail". This means both these countries need to fix their problems on their own with some support from ECB. Germany/France cannot bail Italy/Spain otherwise they risk getting engulfed by crisis themselves. Already France is at brink of losing its prized AAA rating. European politicians are at least taking steps by installing technocrats like Mario Monti in Italy as prime minister. Since he is short-term prime minister, he has nothing to lose. He should convert crisis into opportunity and forcefully move in freeing up Italian economy from clutches of government into free enterprise. If Mario needs any guide, he should look at how India handled situation in 1991 when Indian Government had to keep gold reserves with IMF to get $$ to fund. Then Indian prime minister PV Narasimha Rao with help from then finance minister Manmohan Singh (current prime minister) converted the crisis into opportunity and freed Indian Economy.
The outcome of experiment called Euro would be decided in 2012 and most of it would depend on how Italy and Spain handle their debt crisis.
For investors, these are exciting as well as dangerous times. So be careful navigating your investments!
/Shyam

Democracy, Drama and Tragedy: Greek Origins!

2011-11-06T09:49:00.000-08:00

Watching last weeks events in Greece, I was curious to find out origins of following three words and to my amusement all of these three words have Greek origins.

Democracy - δημοκρατία – (dēmokratía) "rule of the people
Drama - Classical Greek: δρᾶμα, drama
Tragedy - (Ancient Greek: τραγῳδία, tragōidia, "the-goat-song"^[1]) is a form of art based on human suffering that offers its audience pleasure

No wonder these three words represent what is happening in Greece in particular and in Europe in larger context. It all started when Greece joined Eurozone in 2001 by falsifying its government debts and lost control of its financial destiny. While people of Greece benefited in last 10 years by joining the Euro club, they started living lavishly without paying proper dues which comes with this membership. Finally in started catching up with them in 2009 and continue to muddle thru one crisis after another. Eurozone being motley crew of 17 nations cannot and did not move fast to take control of situation and now Greece, Europe and world is paying for this in form of uncertain times. Most of the western world had one lost decade and if things don't come under control soon, we are looking at another lost decade.

So what should an average investor do in such uncertain times. One thing is for sure - forget buy-n-hold strategy. This did not work for last decade and it won't work for this decade unless you can find gem like Apple in 2001. Since there may be 1 Apple in 1000 or 2000 companies and most likely we won't be able to find that company, it's best to make new friend called volatility! With so much drama around (wait for Super committee recommendations and drama in US congress in next few weeks), markets are going to be volatile for next few weeks. In such times, best to monitor trends/momentum and make appropriate bets using ETFs. Best vehicles for such short-term bets are ERX/ERY, DRN/DRV, EDC/EDZ, FAS/FAZ, TNA/TZA. These are extremely volatile bets so be very very careful.

If you want some steady 6-12 month horizon, check out some of the energy stocks like PCX ($12), ANR ($26), RIG ($48), ICO ($46), SD ($7). World is not falling into double-dip recession. This means world is going to need lot of energy and hence these stocks should be good best for 12 month horizon.

/Shyam

Happy Diwali! Its time to reap Dividends!

2011-10-22T09:57:00.000-07:00

Finally Qaddafi is dead! In Arabian world, 2011 would go as historic year. What started as Arab Spring movement would most likely end rule of 4-5 dictators who have been ruling various countries from 30-40 years. On economic front, European mess continues and that keeps world stock markets on roller-coaster ride. Oct is turning out to be much better than Aug/Sept but wait till European leaders miss the opportunity on this weekend again. Markets are hopeful that finally Europe would put some credible plan to resolve its mess. But most likely people are going to be dis-appointed with the news coming out on Monday and markets would sea-saw again! So be very careful with your investments. Right now its better to be in cash or cash-generating investments. This is where I would recommend considering some high-yielding mREITs. These stocks are risky investments but due to their yields, they at least provide some kind of cushion against downside. Here are some names:

AGNC: $27 Yield: 19%
CIM: $2.90 Yield: 18%
IVR: $14 Yield: 22%
CYS:$12 Yield: 18%
NCT: $4 Yield: 14%
If you don't want to risk on individual stocks, check out ETF - REM: $12 Yield: 12%

You can increase yield further by selling "covered call" options on your positions. Since Fed has almost guaranteed no interest rate hike for next 2 years, it would be safe to assume that these stocks would relatively hold their values and yields for next 6 quarters. However be careful to consider selling as soon as first interest rate hike is considered by Fed since these stocks are extremely sensitive to interest rates.

For all readers, Happy Diwali!

/Shyam

World will miss you Steve !

2011-10-05T20:38:00.000-07:00

Steve jobs passed away today morning. World lost a visionary and one of the most loved human being. Steve Jobs made America and all of us as Americans proud. Many of us (including kids) felt that he was a close and dear friend even if none of us ever met him in person. With his genius creativity, he made people happy through his products like MAC, ipod, iphone and iPad at Apple, movies like Toy Story and Finding Nemo @ Pixar. Many kids in far flung countries know and love America only because of products like iphone and ipods. He was Thomas Edison and Henry Ford of our generation !
We will miss you Steve. May your soul rest in peace !

/Shyam

What Europe Needs is Financial "Marshall" Plan !

2011-09-24T16:02:00.000-07:00

Many folks have heard about "Marshall" Plan which helped rebuild Europe after WWII which completely destroyed Europe. For a small history lesson, check out details of Marshall Plan.

Europe is on brink of financial disaster again with fears of cascading defaults if Greece is allowed to go under. And that would not only bring down Europe but potential of another great recession across world. It would be 2008/2009 all over again. So what would make Europe hold together and not bring world economy to its knee ?

That's where we can learn from post WWII history.

During the four years that the plan was operational, US $13 billion in economic and technical assistance was given to help the recovery of the European countries that had joined in the Organization for European Economic Co-operation. This $13 billion was in the context of a U.S. GDP of $258 billion in 1948, and was on top of $12 billion in American aid to Europe between the end of the war and the start of the Plan that is counted separately from the Marshall Plan. In total nearly 10% of US GDP help was provided to Europe after WWII which help these economies to grow significantly.

If we have to apply same yardstick, Europe needs to build "European Stabilization Fund" equivalent of nearly $1.5 to 2 trillion and make it available to all European nations who need help in these times. Question is: Where would this money come from. It needs to come from IMF, stronger European nations and maybe even China. It is impossible to think if there is political will in USA to provide more help to Europe. So at this time US can provide only warnings and lectures (especially when whole financial crisis started in US)

If Europe is able to come to this realization and come soon, there is still chance that Europe can be saved. Otherwise - be ready for repeat of 2008/2009 ! So when it comes to investments, stay on sidelines for now.

/Shyam

9/11: Ten Years Back - America changed forever!

2011-09-04T11:48:00.000-07:00

Ten year anniversary of 9/11 is upon us. Ten years back on 9/11, America and to some extent world changed forever! For first ever time, America understood real meaning of terrorism. Till that day, it was always something which happens in Kashmir or middle-east. While that day was unfortunate, what followed with two wars (one unnecessary one in Iraq) changed America. For many, it was lost decade (and still counting). I was just looking at S&P performance over these 10 years. It has gone up by meagre 3.5% in 10 years. There goes your buy and hold strategy which all pundits recommended. 10 year is a long time for someone to hold onto their investments and in return getting only 3.5% in capital appreciation.

As we enter into 2nd decade of post 9/11 America, what should policymakers and most importantly we as American citizens do ? First and most important thing - get out of Iraq and Afghanistan by ending both wars. That should save enough money to invest in domestic infrastructure and rebuilding America. American people have done it after end of 2nd world-war when they built suburbs and highway system. It is time to invest in rebuild America again and by doing that employ millions of people to reduce unemployment. That should instill enough confidence in people to get America moving again. But are policymakers wise enough to rise to the challenge of our times ?
Given the composition of Washington, it is unlikely to happen. President Obama would propose some ideas next week which Republican party who is in-charge of Congress would immediately shot down. Then there is debate of fiscal deficit and deadline for super committee recommendations. It would be politics as usual when we enter into 2nd decade of post 9/11. Unless people react strongly and teach those congressman a lesson to shape up or go back home in 2012 elections, nothing is going to change.
Till then, forget about long-term buy-n-hold strategy and be opportunistic by selling covered calls on your stock holdings. That would surely give you some regular income against your supposedly long-term stock holdings.

Finally I salute those brave people who lost their lives on 9/11 as well as in two wars which followed 9/11.

/Shyam

Recession on horizon - Time for QE3 ?

2011-08-21T11:06:00.000-07:00

Last week there were many downgrades to US GDP growth with many economists lowering their GDP forecasts to 1% growth. With such a slow growth, there are always dangers of economy slipping back into recession. Markets being 6 months in advance are definitely hinting and to some extent pricing 40-50% chance of this happening. This summer's events and market reaction was almost exact replica of 2010 summer with some extra spice added due to debt limit drama played out in Washington DC.
This is why next week's Bernanke speech in Jackson Hole is so important. Last year, in same speech he gave an indication of QE-2 which saved markets and to some extent economy. Would he repeat his performance next week ? Given charged political atmosphere and Fed's bloated balance sheet, this is unlikely. Fed had already given promise of keeping rates low for another two years. However this did not help much at least in short term. So what medicines are left to treat sick patient (aka economy) especially when there is nothing happening on fiscal policy. Here are my suggestions:

President Obama should propose $1trillion stimulus - split 50:50 with among spending (on infrastructure, helping states etc) and tax-cuts across the board. Should also include tax-holiday to bring in cash parked overseas by companies (over $1trillion) at 10% tax rate but only if cash is used for hiring, R&D and so on
Bernanke should announce QE-3 with another $1trillion of treasury buy-back (effectively printing $1trillion greenbacks)

Only such a shock treatment would give economy a jolt it needs to avoid falling in recession. However given tea-party zealots and 2012 election climate, none of these would happen.

If USA does not do any of these major shock treatments, we risk repeating Japanese mistakes (which are in their 3rd lost decade) and 1937 when economy which was coming out of depression fell back into severe recession. And this time there is no 3rd world-war to save economy as 2nd world-war did during depression times!

/Shyam

Markets:Up or Down, Apple or Exxon - Interesting and Historic Week!

2011-08-14T12:49:00.000-07:00

Last Sunday no one would have thought that we are going to see market history in the week. This is only week where DOW moved 400+ points up or down in 4 consecutive days. Even during 2008 crisis, this did not happen. Despite such large moves, week ended with DOW down only by 1.7%. So if you were awake and cut from news, you are good since no one likes (except day-traders and option players) so much volatility. Few more notable things happened last week:

Apple became new company to claim the title of Most Valuable Company in World. It had that crown for two days and then again lost to Exxon which has this honor since 2005. In coming weeks it would be interesting to see this duel fight out. Let's see who wins - ipad or oil by end of 2011. My prediction is Apple ending year as most valuable company.
Even though S&P downgraded USA debt, debt markets mostly ignored the downgrade and instead rushed to buy USA debt at record low yields. 10 year treasury yield went down below 2.15% at one time. I think that low for the year and going forward it should start inching towards 3% again. If you want to play in that market, check out TMV at $24
Fed came to rescue with its promise of keeping record low interest rates for 2 more years. Basically they are giving blank check to invest in risky assets

Now that markets got its correction, it may be good time to start dipping again slowly. Check out some of the ETFs I suggested last week. They are extremely risky but very good for playing on direction of markets!

Back to school is next week so kids are enjoying their last summer weekend ! We saw Jindagi Na Milegi Dobara - a Bollywood movie yesterday. It was good refreshing movie - after a long time.

For all Indians, Happy Independence Day (Aug 15) !

/Shyam

US loses AAA - first time in 70 years !

2011-08-07T10:07:00.000-07:00

Finally the inevitable happened on Friday 8/5 when S&P lowered USA credit rating from AAA to AA+. This is almost history (which no one should be proud of) since it is happening first time in 70 years. Last year when folks elected bunch of tea-party members, no one imagined that tea-party would make history in wrong way. This is what we get when bunch of politicians have single minded agenda just to make president's life miserable and not letting him govern the country. They don't care of state of people or for that matter country !

Markets just have guessed that this is what something going to happen and hence they gave an indication on Thursday and early Friday when DOW almost touched 11000 - 10% correction in less than two weeks. I am sure all of us lost quite a bit of money (I did lose significant amounts). This was worst week since first week of March 2009. That says it all. We still need to watch out reaction to S&P decision of lowering credit rating next week. However last week's volatile markets may provide some good opportunities - remember whoever dared to invest in those dreadful days of Mar 2009 made over 100-200%. But one needs to have dry-powder and courage to take plunge.

Here are my potential 50% recommendations: FAS ($16), ERX ($46) and TNA ($46) and DRN ($46). All of these are extreme bets on markets recovery and could easily go up or down by 50%. So be very careful before investing in these. These are not far faint of heart !

/Shyam

USA Debt Limit Drama !

2011-07-31T19:13:00.000-07:00

It has been few weeks since I got chance to write my blog. Lot has happened since I wrote about summer blues market was going thru. I was busy taking kids around. Just came back from Alaska cruise vacation - got nice break !

Markets have gone nowhere in last few weeks. It went up due to some optimism on earnings reports and came down hard last week due to all drama in Washington. I am sure markets did not wish for kind of grid-lock they saw last week. Be careful what you wish for ! Tea-party politicians were acting all crazy not even listening to their own GOP leadership. No wonder their un-popularity has gone from 22% last year to 47% this year. GOP leadership should learn from last week's events and be careful whom they put on ballot in 2012.

After hectic back-door negotiations, finally Washington has come to an agreement on debt-limit and spending cuts. At this time, any deal is good deal since it would save AAA rating for US debt. Futures are reacting positively and we should see up day in markets tomorrow. However be careful in putting new money in markets since this drama would continue till next year.

Right now, I am looking at some of the Chinese and Indian Internet companies to find some value. Check these out for potential reward/risk: RENN ($10), DANG ($11), REDF ($9) and SIFY ($4). Almost all of these are mini-versions of some companies in USA. e.g. RENN is Chinese FB, DANG is Chinese Amazon and so on. Hopefully these companies would provide same type of returns in what Baidu did. However wait till results for their first quarter as public companies are out.

That's all for now. Have exciting week !

/Shyam

Summer Blues for Economy and Markets!

2011-06-05T09:28:00.000-07:00

Recent economic indicators have clearly shown that economy is going thru soft patch and markets are following economy. This is almost exact replica of last year when it went thru similar phase during summer months. There are various reasons for this soft patch:

Impact of disruption in supply-chain due to 3/11 Japan Earthquake
European debt problem in general and Greece's issues in particular
Continued impasse in Washington regarding how to handle US's raising of debt limit which is causing rating companies to put USA on possible downgrade path
Continued slowness in hiring - May month's employment report was much worse than expected with unemployment rate inching up to 9.1%
Upcoming end of Fed's QE II

Now the question is - are these temporary or more bad news is yet to come ? Have markets priced all bad news ? Is DOW heading below 12000 and S&P towards 1250 ?

We will have to find out answers to these questions in Jun and it would most likely depend on how corporate profits are holding up in Q2. Despite all issues mentioned above, corporate profits held up very well in Q1. If this trend continued in Q2, it may give some baseline for markets to hold up at current levels. If companies start pre-announcing earnings warnings in next 4 weeks, watch out for bottom to fall out with DOW heading towards 11500.

Finally DOE's rules for for-profit education companies are out. The rules were diluted compared to what markets were expecting and this gave a big boost to shares of these companies with COCO/EDMC/APOL to gain from 10-30%. Now that uncertainty is lifted, one would see shares of these companies gaining over next 12 months - some of them have potential to give returns of over 50%.

While Arab Spring is still continuing, recent news from India on this front is not so good especially when government is cracking down on Ramdev Baba and its supporters to break their fast (against corruption).

Every week a new republican either declares his/her intention to run for president or drop out of race. When is Republican Party going to offer some credible candidate for 2012 election ? Any of you want to run for President ? There is slot available as Republican candidate.

Have a good weekend !

/Shyam

Welcome to Internet Bubble - Part II

2011-05-22T20:00:00.000-07:00

Welcome to sequel of Internet Bubble - Part II. The way Netscape IPO created first Internet Bubble when its shares jumped from $28 (IPO price) to $75 on first day in 1995, we can see almost similar bubble time reaction to Last week's Linked IPO. The shares were issued at $45 which itself was very high given that just six months back they were at $20 in private market. On first day, it went all the way to $122 before settling down at $94 giving its valuation equal to 40 times of its last year's sales. Is this another bubble around "social networking" companies or what ?

Given this action around LNKD, I won't be surprised to see Facebook as first company having $100 Billion valuation on day of its IPO which would be sometime in 2012. Groupon may have around $15-20 Billion valuation on first day. Are these valuations sustainable. At least folks buying on first day think so since similar concerns were raised in 2004 when Google went IPO. But eventually Google not only grew to its lofty valuations but added 6 times more to it.

While I do believe this is start of new Internet Bubble, I won't bet against it at least in short run. After all first bubble went on for 5 years before it popped with AOL/TWC merger. This bubble would continue to grow. Given that lot of us have been burned by first Internet bubble, I would advise caution in participating in this bubble either on short side or long side.

My prediction about Linked shares to start gravitating towards its IPO price of $45 especially watch out when lock up period expires in Nov/Dec. If you have to buy into LNKD shares, wait till it comes down between $30-40. That's right price to get into this new puppy on the block !

Have a great week and get ready for Memorial Weekend !

/Shyam

"Tere Bin Laden" world is safer and better place !

2011-05-07T13:39:00.000-07:00

Last Sunday US Navy Seals killed Obama by going deep into Pakistan and finishing the job in 40 minutes. Since 9/11, all world was waiting for this event which took nearly 10 years and hundreds of billions of $$ if you include cost of two wars. Finally it took some good intelligence work by CIA, bravery of few good men, not trusting supposed "partner" (Pakistan) in this war on terror and most importantly decision to go forward with raid by President Obama. Well done Mr. President ! World is much safer and better place without Bin Laden.

Market reaction was usual - initial euphoria on killing of Laden news gave away with nervousness due to heights markets have reached and uncertainty going forward. The sell-off gained momentum especially on Thursday with rout it commodities market with many of them down by double-digit %. So is commodity bubble busted ? In short term, it looks like. It all depends on how US economy holds up in 2nd quarter and Chinese actions on slowing down its economy. But I feel that this sell-off may be short-lived and commodities would start rising again in next few weeks. I may consider investing in SLV at around $30 and ERX at around $66

Check out spoof on Obama Speech - I like the line about "thank you for 2 terms" which I think Obama deserves !

http://www.youtube.com/watch?v=xlOIy6QEbes

Have a great weekend !

/Shyam

Sell in May and Enjoy Summer !

2011-04-29T20:35:00.000-07:00

It has been while since I wrote my blog. Got busy ! Now that April has wrapped up and May is about to start, time to be cautious. Markets has been on a tear crossing 12800 (DOW), Nasdaq is at 10 year high.

So is it time to "Sell in May and Enjoy the gains in Summer Time ? " I think so.
Best period for stock markets (Nov to Apr) ended today. There may be another 5% upside remaining for 2011 and most likely this would come towards end of year. In between there are quite a few headwinds markets are facing. Here are few of them to list:

Noise around US debt limit. In two weeks, Congress needs to act on raising debt limit and given drama around budget, there would be quite a bit of drama before debt limit is raised. Markets don't like drama !
Talks of Greek debt restructuring ! Greek debt is trading at yields not seen even during last May when Greece was about to default.
End of QE II - while Fed had given better news than markets were expecting, QEII is ending in June. So cheap money would start going out of markets at some time in Summer
Inflation - everybody is talking about impending inflation and given oil, gold, silver prices, it is here already. It's just that housing and unemployment problems is keeping a lid on inflation for now
Valuations - With markets in multi-year highs, even though earnings are good, topline growth has started slowing down. So at least in short-term stock valuations are getting ahead of earnings momentum
Geo-political issues - Middle-east political issues, post-earthquake recovery issues in Japan

So with so many headwinds, markets would see correction and may come down closer to 12000 over summer. So why to risk the gains made in recent weeks for another 5% upside from here. So my recommendation is cash out your gains and enjoy summer (and summer movies) !

Cheers !

/Shyam

Chak De India for Winning Cricket World Cup !

2011-04-03T08:24:00.000-07:00

Apr 2, 2011 would be an historic day for for India. It comes very close to other historic days in modern India's history. After all on this day, India won Cricket World Cup 2011 after 28 years - first time they won in 1983. That win changed cricket in India as well as in cricket world.

On Apr 2 around 11 pm IST, another such historic moment came when India's captain MS Dhoni hit a big SIX and won world cup for India (against SriLanka). That was ultimate moment for 1.2 billion Indians across the world. This must be biggest sporting celebration in world EVER. Even Soccer World Cup win would not create such a celebration (till either China or India start winning it:-)

In India, Cricket is more than religion, culture or anything we can think about. It cuts across all levels of religion, state, caste, economic status, culture, where they reside (India or abroad) and binds 1.2 billion people. None other can unite Indians the way cricket does. That's why Apr 2nd win was such an important event in India's history.

In last one decade India has gained significant confidence. With Indian economy growing second just to China, this win would give even more confidence to India and give momentum to Indian economy. It bodes well for Indian stock market. After reaching high of 21000, BSE sensex has gone below 18000 and now recovered around 19400 - that is also due to wins against Australia and Pakistan. This cricket WC win would definitely help BSE Sensex and help it cross 20000 in next one month and 21000 by year end.

So this week's recommendation is to invest in INDL at around $42-44. It could reach around $60 (for 30% return) in next 12 months

Chak De India !
Congratulations to all Indians on this historic win in cricket WC and becoming Cricket World Champions !

/Shyam

Japan's "9/11" and "Katrina" Moment !

2011-03-19T11:11:00.000-07:00

For last one week Japan has been fighting with three calamities - biggest earthquake in recorded history followed by tsunami followed by nuclear plant possible meltdown. Japanese people have shown a great resolve, calm and solidarity with each other in these difficult times. We all world citizens are with Japanese people in their difficult times. While Japanese people are showing great resolve, Japanese politicians and Tokyo Electric Company are failing them by not able to get control on nuclear reactor fiasco. This is typical due to slow response to crisis by government and corporates. I hope they do not repeat the mistakes of real estate bubble crisis from which Japan is still recovering after 2 decades. Japan's government had a chance to rise to the occasion and handle their "Katrina" and "9/11" moments. The response till now seems to be below expectations.

This triple whammy along with troubles in Middle-East and European debt was too much for markets to handle and as expected we saw one of the most volatile week in markets exactly after 2 years when it reached "devil's low (S&P at 666)". Thanks to Fed's comments and co-ordinated response by G-7 countries to halt yen's rise, markets started coming back to normalcy. Q1 end is 2 weeks away and everyone would be watching Q1 results closely in Apr. So expect to continue this volatility all during Mar, Apr and May.

After second stress tests, Fed has allowed banks to start raising dividends. This means that banks are back in action and could be good stocks for next 12-24 months. Here are some recommendations:

BAC at $14
FAS at $28 (extremely aggressive so be careful)
WFC at $30
HBAN at $6.6

Cricket World Cup is entering into knockout phase. With Pakistan beating Australia, knockout phase has become interesting and most likely India would face Australia in quarter-finals. We would have preferred to face any other team but Australia in quarter-finals. But if India wants to win WC, it needs to start showing resolve that they can beat any team including Australia.

Good luck India for cricket WC knockout phase !

/Shyam

Oil $100, Gold $1440, Silver $35, Gas $4: Risk-Reward Ratio: Priceless!

2011-03-06T15:32:00.000-08:00

Almost every-thing I mentioned in subject of this blog is giving strong indications that inflation is coming. Oil has crossed $100, Gold is back above $1400, Gas is almost nearing $4 and Silver is at all-time high. Some of these are due to un-rest in Middle-east while most of it due to strong growth and demand across world. Are central banks behind the curve in raising interest rates ? They were behind the curve in cutting them in 2007 and now it looks like they may be behind the curve in raising them. I don't blame Bernanke since he would rather have little bit of inflation provided growth than fear of deflation and double-dip.

Last week, DOW had multiple moves over 100 points indicating that markets are uncertain about its direction. DOW is stuck between 12000 and 12500 and S&P between 1300 and 1350. Most likely Q1 results or something significant in Libya would help in breaking it out of this range. In all the Mid-east news, people forgot about trouble in Europe especially Portugal's debt. Remember May 2010 when Greece brought markets across the world major correction. This could happen again in May 2011.

So in this uncertain markets, here are some investment ideas - mostly focused on energy sector:

Hercules Offshore (HERO) at $5.5
Sandridge Energy (SD) at $10.50
And for most aggressive investors, ERX at $77

Just saw The Adjustment Bureau movie. It's good plot and having Matt Daemon in the movie makes it more interesting. It has some hints of Minority Report as well as Inception ! If you enjoyed those movies, you may like this also.

iPAD2 is out - plan to buy next week since I was waiting for this announcement for couple of months. As always, great launch by Steve Jobs. What is amazing is that with product like "Smartcover" which is as low -tech as it can get, Apple could potentially generate Billion $ revenue. Hats off to Steve and Apple !

/Shyam

"Irrational Exuberance" - Time to be careful !

2011-02-20T09:33:00.000-08:00

Nasdaq is at 10 year high. Almost all "pundits" on markets are way too optimistic. It's almost feel like 1995-1996 when Fed Chairman at that time Alan Greenspan famously quoted about "Irrational Exuberance" in markets. It was another matter than markets keep on drinking the "new Internet age" cool-aid for another 3 and 1/2 years before bubble burst. Greenspan was 3 years earlier in his prediction. One of the reason was his own policies at fed which caused this bubble. IMO we are seeing similar signs of "Irrational Exuberance" in markets at least for last few weeks. However it is not clear if this would go on for another month, year or week. To be frank, at this time, I cannot predict short-term move by markets. Markets can be insane longer than one think (both on upside and downside) !
Here are the reasons I feel markets are due for correction:

Geo-political risks in Middle-east which could cause oil to jump
European debt problem - two (Ireland and Greece) have been handled for short-term. Now it's Portugal's turn
Inflation rising not only in emerging countries but also in developed countries like UK. Even in US, it is inching towards 2%
China's rate increases to slow down its economy
Upcoming end of QEII (it could come earlier than currently anticipated by markets) and eventual Fed rate increases (most likely in Q3 of this year)
Stubbornly high unemployment rate in US (would be between 8-9% in 2011)
Year-over-year comparisons for earnings becoming difficult in starting in Apr earnings season

Normally "smart money" start anticipating all these events 3-6 months in advance and start positioning their bets accordingly. So what should average investor like us do ?

Here are some tips:

Follow Warren Buffet's two rules:

Never lose money
Never forget first rule

Protect your gains

Sell them and sit on cash or
Sell "in-money" covered calls
Buy downside risk protection by buying "puts"

Stop paying attention to markets so it won't bother if they down from here: If you can tolerate upcoming "volatility", then sit tight because markets would eventually end higher for 2011 (S&P around 1400)

So if markets are in "irrational exuberance", are there any stocks worth buying ? There are always "value" stocks in any market. Here are few to watch out - mostly based on demographic shifts in US

FVE ($6.7)
SRZ ($8)
AMED ($34)
SEM ($7)

Have a great President's Day Weekend !

/Shyam

2/11: Egypt and Middle-East changed Forever !

2011-02-12T19:31:00.000-08:00

There are not too many historic moments one get to see in their lifetimes. One of such moment came this week when Egyptian President Hosni Mubarak resigned after 30 years of rule ! Congratulations to all of Egyptians for this historic moment !
2/11 would have same kind of profound significance in Egyptian history as 9/11 has on American history.
I was glad to see the peaceful revolution of 18 days and final outcome. There was every possibility that outcome at Tahrir Square could have been similar to another Square starting with "T" 22 years ago. But Egyptian Military had displayed great level of maturity and sensibility in handling this revolution. We all hope that they continue to display this going forward and take this moment to make some real changes which could lead to overall reforms not only in Egypt but also in Middle-East.

Markets continue to show great level of resilience despite so much turmoil and un-certainities in Middle-East. Even though oil went above $90 in late Jan, it receded back below that level after seeing peaceful demonstrations. Emerging markets have been losing some ground in 2011 due to revolts in Middle-east and inflation worries across many countries including BRIC. Most of the emerging market indices are down in 2011 while their counterparts in developed markets have risen over 5% in less than 2 months. Money being so liquid, it is moving fast and furious between these markets. Currently best performing asset class is US small-caps which are up by 7-8% YTD.

At these heights, investors need to be careful and position their portfolios for upcoming correction. Here is one recommendation:

Covered Call Strategy:
Since DOW is already over 12250, one should start selling "in-money" covered calls. For example: If you own 500 shares of BAC (which is trading at $14.77), sell 5 Mar 15 covered calls (at 42 cents). This should create about $200. If stock remains above $15 on Mar 19, these calls would be assigned means your shares would be sold at $15. If they are below $15 on Mar 19, calls would expire and you can keep your shares and $200 you got from selling call premiums. Alternatively you can sell "in-money" calls (Mar 14) at 1.02 earning about $100 per contract. Markets are due for correction. So if it went down, you would have at least protected your long-term holdings by generating some income by selling covered calls.

Now coming to this week's stock recommendations:
Since markets are quite high, my recommendations this week are more of defensive or beaten down stocks:

GenON Energy (GEN) at $4
Sandridge Energy (SD) at $7.7
PMI at $3.20

That's all for now !

/Shyam

SuperBowl Effect

2011-02-07T22:14:00.000-08:00

Congratulations Green Bay Packers and Aaron Rodgers for winning 4th Super Bowl and 13th NFL championship. It was well deserved win over Steelers. In every aspect, Packers played a superior game and deserved to win. Congratulations to Aaron Rodgers who was major force in this win - being a Cal alum, it was a great pride that another Cal Alum has gone into history books with his performance.

I was just checking how DOW performed when Packers won Superbowl in 1967, 1968 and 1997. Each of those years, DOW was up by about 10% or more. This is good news for 2011 (if you believe in such co-relation). If we go with this co-relation, we should see DOW go up by 10 plus % in 2011. It is already up by 5% so another 5 plus % in 11 months is not that difficult.

Markets have big tail-winds behind them. Despite revolt in Egypt, markets are quite resilient and taking news coming out of Egypt in stride. In fact, Energy stocks are on rise in last two weeks giving a big boost to all indices. On similar note, I noticed a significant change in momentum in commercial real estate stocks. Commercial RE was supposed to be another shoe (after residential RE) to drop - but it never dropped. Mostly due to easy-money policy adopted by Fed, there is significant amount of money going around and finding its ways into refinancing commercial RE. This is saving lot of companies operating in this space. This sector would continue to do very well in 2011 and 2012. So here are some investment ideas in this sector:

Stocks: RAS ($3), GKK ($4.4), SFI ($8), DDR ($14), PLD ($14), SRZ ($8)
Dividend plays: AGNC ($29), SFI-PD ($19), CIM ($4.20)
Mutual funds: VGSIX ($19)
ETF: DRN ($60), URE ($50) - these are very aggressive ETFs and should be invested with extreme caution

In general, if you are adventurous and feel that US economy has recovered and would be entering in growth phase, commercial RE is sector you should definitely look into

/Shyam

State of Union, Fed and DOW 12000 !

2011-01-26T19:03:00.000-08:00

I watched President Obama's 2nd State of Union speech of members of congress. Overall it was good speech. Nothing spectacular but good confidence building speech. President tried to define this generation's "Sputnik" moment but did not get same level of excitement which he must have expected. His overall focus on jobs, clean energy, education and tax reforms was indicative of his priorities for next two years. No more big policy initiatives like health-care bill. Being pragmatist, he took voters message and changed the course of his presidency. After watching him, I am pretty confident that he would win 2nd term !

Fed as expected announced to keep QEII on and interest rates low for extended period. No surprise there. With an acknowledgment to recovery gaining momentum and commodity prices rising, it is opening the door for first interest rate hike towards end of year. If GDP growth for last quarter and next two quarters come close to 3.5%, I won't be surprised to see rate hike in Summer 2011.

Markets took both events - state of union speech and fed policy announcement positively which helped DOW cross 12000. I was expecting it to cross this milestone sometime during Spring or Summer. It did few months earlier. Is market getting ahead of itself ? I think markets are getting overvalued in short-term and it is time to take some money off the markets and keep it ready when eventually there is correction. Once all Q4 results are out, most likely markets would drift downwards with DOW heading towards 11500 in Spring and then resuming its upward march to end 2011 around 12500.

Last week some of the mortgage insurance companies took big-hit due to MGIC announcing delay in profitability. It opened up good but risky investment opportunity in the sector. Here are some of the investment ideas in insurance sector:

Mortgage Insurers: PMI ($3), RDN ($7.10), MTG ($8.80)
Life insurers: PNX ($2.6), CNO ($6.5)
Other insurance companies: AIG ($40) and MBI ($11)

All these are very risky investments but could potentially provide returns of 30% in 18 months.

For Indian readers: Happy Republic Day (26 Jan) !

/Shyam

Banks Are Back !

2011-01-15T11:04:00.000-08:00

JP Morgan started the earnings season with a big bang - it earned over $17 Billion in 2010 ($4.8 Billion in Q4 itself). This is just after 2 years when many of these banks were teetering on verge of vanishing or falling under government control. This bodes well for earnings due from other banks in next two weeks.

What are the catalysts for this earnings boost which is expected to be over 30% compared to Q42009 across banking sector ? Here are my thoughts:

Say thanks to Ben for keeping interest rates at historically low rates for extended period. When banks can borrow below 1% and give loans anywhere between 4-10%, that's big spread giving major boost to earnings. This "golden" period would continue for another 2-3 quarters since Ben (Bernanke) has promised to keep rates low till unemployment shows significant progress (read below 8%)
Banks have become very picky when issuing loans or mortgages. The amount of documentations they are requesting during refinance has swung the pendulum to extra cautiousness. This is good in long-term since overall quality of loan book should improve significantly in years ahead
Banks have built huge loss-reserves during dark days of 2008 and 2009. However defaults are coming lower than expected and hence they would start reducing these loss-reserves over next few quarters boosting earnings
Overall pickup in economic growth bodes well for banks since more economic activity means more demand for loans putting capital at work
Fees, fees and fees - while new regulations are putting screws on what banks can charge, banks are always very "innovative" when it comes to charging fees within those regulations. I won't be surprised if banks start charging fees just to keep your money in banks

So with so many catalysts to earnings boost, banks would start raising their dividends on common stock eventually reaching yield of about 2%. So as investors, one need to position for this rising tide. Here are my recommendations. There are just too many - so you can pick whatever fits your investing style:

Big banks - BAC ($15), C ($5) and JPM ($44), STD ($10.50)
US Regional banks - SNV ($2.7), HBAN ($7), RF ($7)
ETF: XLF ($16) or for most aggressive investors FAS ($29)

Most of these should return between 20-30% over next 18 months !

Have a great MLK weekend !

/Shyam

Happy New Year 2011 !

2011-01-01T12:07:00.000-08:00

Happy new year to all my readers ! It is your feedback (as comments as well as in person) kept me going with my almost weekly blog. It helps me personally to articulate my thoughts and also make personal investment decisions - thanks to all of you !

Year 2010 is over. It's time to reflect on past year and get ready for new year.

Let's start with how my recommendations in 2010 did. If you are regular reader of my blog, along with my commentary on markets, politics, economics and occasionally on other events (like World Cup), I have made stock recommendations in almost every post with target buy prices. Assuming one does around $1000 investment in those recommendations at target buy prices, the portfolio would have returned approx. 17.77% for year 2010. Though it is not as stellar as last year's performance of 80% , it still beat S&P by 5%. Not bad considering till Nov, it was lagging S&P by couple of percentage points.

Here are top 3 winners and losers of last year's recommendations:
Winners:

Atlas Pipeline Holdings (AHD): Gain 170%
SFI Preferred (SFI-PD): Gain of 170% (including dividends)
Crosstex (XTEX): Gain of 63%

Losers:

Allied Irish Bank (AIB): Loss of 77%
General Maritime (GMR): Loss of 53%
Bank of Ireland (IRE): Loss of 42%

Overall out of 39 recommendations which I tracked as "shadow" portfolio, there were 27 with positive returns and 12 with negative returns. For every loser, there were three winners. I am satisfied with my recommendations and returns for 2010.

Now that is past - let's look at 2011.

Year 2011 is starting with lot of optimism in the air and quite a bit of momentum in economy as well as markets. There are still clouds about Europe, Japan and to some extent US growth and unemployment. However general sentiment is much better than at start of 2009 and 2010.

Here are some market predictions:

US indexes would cross following milestones in 2011:

DOW: 12500
S&P: 1340
Nasdaq: 3000
10-year treasury yield: 4%
Unemployment: Below 9%

Emerging markets would continue to do well with Shanghai index crossing 3300 and Mumbai BSE index crossing 23000
Other major indexes

FTSE to cross 6200
Nikkei to cross 11000
DAX to cross 7500
Hongkong Index to cross 26000

Here is my first stock(s) recommendation of 2011

I am going back to my investment thesis of finding "out-of-favor" sectors and potential catalyst. At this moment, I see for-profit education sector has most upside potential of 2011. With republicans gaining control in congress, it would slow down potential regulatory impact on these companies which is not fully reflected in their stock prices. With this in mind, here are stock(s) recommendations with potential of 30% plus gains in 2011:

COCO at $5
CECO at $20
APOL at $39

That's all in my first blog of 2011. Once again, happy new year to all of you, your friends and families !

/Shyam

Happy Holidays and Happy New Year !

2010-12-22T17:14:00.000-08:00

From tomorrow, we have holiday shutdown at work. This is only way to get many folks in valley away from their work and computers. Overall this holiday season and December in particular is shaping up very well. Let's look at few factors to feel positive about new year.

Politics:
This may be one of the most productive few weeks in US congress history. President Obama after getting shellacking in Nov elections bounced quickly by taking pragmatic approach and got three key victories:

Tax-deal - while republicans must be happy that they got their wish of extending tax-cuts for wealthy, real winner is President and American Economy. With one swoop, economy got back-door stimulus of over $800 Billion. Who would have thought this could happen so soon
Repeal of "Don't ask, Don't tell" policy - this is also significant victory for Obama since this was one of his election promise and it was overdue
Ratification of Start Treaty - this was another major foreign policy win for President. Again getting support from 13 republican senators was a small coup in itself

So after all, split government is good for getting things done in Washington !

Economy and Markets:

Latest economic indicators are all pointing to strong Q4 finish to 2010. Q3 GDP came in at revised 2.6% - not bad considering many economists were worried about "double-dip". If recent shopping trends hold up for rest of 2010, I am predicting Q4 GDP growth to come above 3% (maybe closer to 4%). Stock markets already pricing in strong Q4 GDP growth and hence it is up over 6% in December. Most likely it would keep inching upwards for rest of 2010 and could have strongest December since 1991. That would set nice foundation for start of earnings season in Jan.

Fed's QEII is definitely helping but looks like Fed may have to evaluate how long to continue on QEII. They may not publicly announce but they may slow down overall buying. Overall DOW would cross 12000 sometime in 2011 and may even cross 12500.

So how does one position in these times. There are couple of ways:

If you have holdings of good long-term stocks which you believe still has upside left, go for selling "covered calls" strategy. For more details, check out one of my earlier post 5 Rules of Earning Steady Return from Stocks
Cash-out 50% from your winners so you will have some "dry-powder" in hand
Check out some of the "out-of-favor" sector stocks. e.g.

For profit education sector: COCO ($4.6), CECO ($20), APOL ($38)
Regional banks: HBAN ($6.6), RF ($6.6), SNV ($2.5)
Dividend paying companies: AGNC ($29.75 with 19% yield), CIM ($4.2 with 16% yield)
Energy sector: SD ($6.9), MMR ($15)

Wish you all Happy Holidays and Happy New Year !

/Shyam

Smart Move Mr. President !

2010-12-12T11:51:00.000-08:00

President Obama made smart move last week by cutting tax-deal with republicans. It was a good compromise on multiple fronts:

While President had to compromise in agreeing to extend tax-cuts for wealthy Americans, he got good concessions on extending unemployment benefits by 13 months and payroll tax-cuts for everyone
Removes uncertainty which was facing economy and markets
Adds much needed nearly $900 Billion stimulus with this compromise. This would give a good boost to economy. Already many economists are raising 2011 growth forecasts by 1/2 point to 3.5%
Markets have welcomed the move by continuing the Santa rally last week
With Fed's $600 Billion QEII and Obama's tax-cut extension of $900 Billion, that's significant boost to economy nearing about 10% of total economy size
Fears of deflation and double-dip are gone - this is clearly evident with wild rise in 10-year treasury yields from low of 2.33% in Oct to 3.33% last week. (good that I had invested on this move by buying some TMV)

Overall President has realized that he cannot stick to his ideology if he wants to win second term. This is first step in many pragmatic moves he would (should) do in next few months. This may anger democratic party members who are sticking with ideological ideas at expense of economy. Obama should follow what Clinton did after 1994 electoral losses - it's not only good for his own re-election but also good for America, economy and markets. Good call Mr. President !

So what are some of the investment ideas to bet on this change ? Check out FAS @ $25, SFI-PD @ $15.50, CECO @ $19.50 and MBI @ $10

Have a great week !

/Shyam

Santa Claus Rally !

2010-12-05T18:19:00.000-08:00

The Santa Claus rally in stock markets began in earnest last week when all major US indexes went up by close to 3%. This is despite digesting lot of bad news coming from European debt crisis and US unemployment report. If markets can rally on bad news, imagine what can happen when good news start coming. As always stock markets are normally ahead of economy by about 6 months and it is expecting economy to pick up early next year. Retail sales on Black Friday and Cyber Monday were much better than expected. The momentum should continue for next three weeks. People are tired of "not able to enjoy" and hence they are willing to spend little more during this holiday season on themselves.

Let's look at some of the catalyst for markets to keep going:

Europe which is fast becoming "bailout" continent puts its house in order by expanding it's stability fund over trillion euros
Obama and republicans extend Bush tax-cuts for 2 years and also extend unemployment benefits
BRIC countries keep their rapid growth - the momentum is tremendous
Retail sales beat most optimistic forecasts
M&A activity picks up - in some Internet sectors, it's almost like dotcom days. When Groupon rejects a $6 Billion buyout offer from Google, one can see why there is so much excitement in this sector again
Oil is heading back to $100
Treasury yields on 10-year notes are back above 3% - this means that bond markets are pricing economic growth and no fear of deflation. Normally this scenario is good for stocks

While there are still quite a few uncertainties, there are lot of things going on which could serve as positive catalysts for markets. I am sticking with my forecast of DOW around 11500 by year end.

When it comes to individual stock recommendations, take a look at SFI-PD around $15 (yielding 14%), CIM at $3.90, GEN (used to be RRI) at $3.60, SRZ at $4 and APOL at $35.

Have a great week !

/Shyam

QEII Announced: Now what ?

2010-11-21T10:04:00.000-08:00

Much awaited QEII announced by Fed under which Fed is planning to buy $600 Billion worth of short-term treasuries. While this is definitely essential to support recovery and overall economic, immediate impact was sudden rise in 10-year treasury yield. These yields have jumped from low of 2.33% to 2.96%. That's HUGH jump within 2 weeks. I am not surprised with this rise. What I was surprised was sudden rise.

Let's understand potential impact of QEII in next 6 months and how one can position to make investment gains:

Possible impact of QEII:

It should achieve its intended result which is to support economy. It should grow between 2 to 3% in Q4VY2010 and closer to 3% in first half of 2011
Unemployment should start inching downwards but not by too much. I still see it hovering between 8-9% for most of next year which is not good for US. But Fed can do only so much about it
Housing prices should stabilize at current levels. May start to see rise of less than 1% in prices in some markets
Stock markets should maintain their upward bias and slowly inch towards 11500-12000 for DOW
10-year treasury yields would start inching above 3% but not by too much. It may come down around 2.6-2.7% in short term. After May when all of QEII $600 billion buying is over, 10-year yield would be above 3% for good (unless economy slides back to recession which is unlikely)
Emerging markets (both stock and bond) should continue to do well due to cheap US $$ and China / India demand
Commodities would hold up to current levels and may go up by another 10% or so. Oil would remain between $70-100 and Gold at $1300-1500.

Possible investment ideas as play on QEII:

(caution - following investment ideas are extremely risky due to 3x exposure and should be tried only if you are comfortable with such risk profile)

DRN at around $45: Betting on recovery of REIT sector
EDC at around $35: Betting on emerging markets
ERX at around $42: Betting on commodity (to be specific on energy sector)
TMV at around $36: This is slightly long-term bet that yields would eventually rise. This is inverse bet. This has direct co-relation to 10-year treasury yields (or SBND at around $22 which has direct co-relation to 25-year treasury yield)

All above investment ideas are ETFs which are most suitable if one can correctly predict macro-economic trends. Let's see how these macro-trends turn out to be in 2011.

Looks like Irish would be thankful to EU and IMF for bailing out their nation and banks next week.

Happy Thanksgiving !

/Shyam

President Obama: Who would he emulate?

2010-11-07T17:11:00.000-08:00

Now that most exciting week of 2010 is over with some expected results, it's time to take stock of what happened during the week. Mid-term elections are over with results on expected lines. Republicans won house in big way while democrats managed to keep senate majority by thin margin. It was definitely a big defeat for Obama as he himself put, it was "shellacking".

This was not the first time President's party got big drubbing in mid-term elections in his first term and still went on winning second term. Let's look at each one of them in last few decades:

Truman: In the 1946 US Congressional election, the Republicans regained control of both the US Senate and US House of Representatives, as a result of President Truman failing to handle the vast post-war labor strikes. However Truman went on winning 2nd term in 1948 and democrats gained back control of house
Reagan: The conservatives (whom Reagan backed) lost a substantial number of seats in Congress in 1982. However after recession ended in 1983, Reagan won 2nd term with landslide victory
Clinton: With Newt Gingrich's "Contract with America", Clinton's democrats got similar drubbing as recent mid-term elections. However as economy was coming out of recession very strongly and with Clinton's "triangulation" strategy, he went on winning 2nd term

Both President Reagan and President Clinton moved to center and worked with congress and got economy moving. President Harry Truman gained from rural communities after he pledged to repeal the Taft-Hartley Act and won in big way

So question is: Who should Obama emulate ?

Should he emulate Truman to protect Health care Bill which republicans have vouched to repeal or should he emulate Clinton/Reagan to get economy moving ?

Given that 80% of voters mentioned economy and jobs are their most pressing concern, choice is simple. Here are few ideas which I think not only would help President Obama win 2nd term but also help move America forward:

Extend tax-cuts for all earning less than $250 K permanent and for those earning less than $ 1 Million for 2 years. GOP should be able to agree to this
Give one-time tax holiday for repatriation of money kept outside USA provided it is tied to job creation. For example: For every job created in USA, companies can bring $ 1 Million at less than 10% tax. Companies - many of them high-tech have nearly $ 1 trillion parked outside. Even if they bring half of this money, it would create half-a-million jobs and earn about $50 Billion in taxes
Extend advisor circle beyond Chicago natives - especially get some experts from industry like Silicon Valley
No more major policy changes - those can wait for 2nd term
Focus on jobs, jobs and only jobs
Get out and focus his communication on jobs and economy only

President Obama is doing admirable job in given situation - he deserves a second term. With help from Fed and markets, economy should be well on its way to recovery. So at this time, I am betting (and supporting) President Obama to be two term President.

Markets are doing extremely well with all major indexes gaining over 3%. The momentum should continue till end of year. One should start looking at financials like PMI ($3.5), BAC ($12), MI ($5.5) for possible investments. Another turnaround candidate with potential of 50-100% return is Sunrise (SRZ at around $4).

Have a great week !

/Shyam

Awaiting Most Exciting Week of 2010 !

2010-10-31T10:17:00.000-07:00

First week of Nov 2010 would be arguably most exciting week of this year for following reasons:

Monday: Week would start with news from Brazil about results from runoff election for President of Brazil
Tuesday: Mid-term elections which could set course for American Politics and possibly where America is headed for next decade
Wednesday: Federal reserve bank meeting to decide size and timing of QEII which could decide course of American economy for at least next 2-3 years
Wednesday: World Series Game 6 - most likely SF Giants would claim their first world series win reviving sports enthusiasm in Silicon valley after long time
Friday: Jobs report for month of October which should give an indication if employment is stagnant or making some progress
Friday: Happy Diwali for all Indians !
Saturday: Obama's visit to India - crucial both for India and Obama who would like to forget democratic party losses in election and instead enjoy warm Indian hospitality

Very few times such an exciting week comes which can keep life exciting and interesting. For investors, most important days would be Tuesday and Wednesday since both election results and QEII can move markets significantly. So watch out for Wednesday when these two events would collide. I won't be surprised if we see DOW move up or down by 150-200 points on Wednesday

Technology sector is becoming very interesting in terms of potential for M&A. There are so many smaller players who are being touted as acquisition targets making them interesting plays for investment. Last week one of my past recommendation Compellent (CML) shot up by 30% due to excellent results and possible takeover target. Same would happen to another recommendation - Blue Coat (BCSI) when it announces results later in Nov. I would still recommend CML at $23-24 and BCSI at $25 as good bets both purely on their quarterly results and possibility of takeover.

That's all for now.

Happy Diwali to all my Indian readers and have an exciting week !

/Shyam

Elections and Baseball World Series !

2010-10-26T20:13:00.000-07:00

What do US mid-term elections and Baseball world series has in common ? Few things:

For US adult population, both are interesting discussion topics especially as Nov comes near
This year, World Series is almost like elections between Democrats and Republicans with SF Giants representing Democrats and Texas Ranges representing Republicans. You cannot have better distinction than these two teams to represent their state's political affiliations
Next week would be quite interesting with elections results on Nov 2 and Game 6 (most likely decisive one) on Nov 3

I am no baseball fan or expert, but would go ahead and take chances on predicting:

Giants would win world-series most likely in Game 6 or Game 7 - whoever wins would be their first win as SF Giants or Texas Rangers (Giants have won in past but as New York Giants)
Democrats would keep senate majority by slim margin (52-48) while Republicans would gain control of house by about 5 seats
Barbara Boxer would keep California senate seat
Meg Whitman vs Jerry Brown would be an interesting fight. I am supporting Meg Whitman for her approach of running government like business/company but recent trends are indicating that it would be tough for her to change latest trend and win governorship of California

Next week would be very interesting for investors also:

Election results
Fed meeting announcing start of QEII
Earnings from few more big companies
Start of November which is normally start of better 6 month cycle for investors (Nov to Apr)

Markets are already on upswing for last few weeks - how high can they go ? I am still sticking with my prediction of DOW going around 11500 and S&P above 1200. Recently technology companies have been announcing blockbuster earnings results. So I won't be surprised if Nasdaq touches 2600 by year-end. There are couple of companies I like in this market: Blue Coat (BCSI) at $24 and Amedisys (AMED) at $25. Both have potential of returning 30-50% in 18-24 months !

Have an exciting week ahead !

/Shyam

Apple: Blockbuster Quarter and Stock !

2010-10-18T21:31:00.000-07:00

By all means Apple had a blockbuster quarter with its first $20 Billion quarter. There are so many things to like about Apple's latest quarter:

First $20 B quarter
Over $4.6 Billion in net profits
Beat earnings estimates by over $500 million
Over 14 million iphone sales
Revenue forecast for holiday quarter of over $23 Billion. I won't be surprised if holiday quarter crosses $24-25 billion in revenues for Apple

No wonder it's stock was trading at all time high near $318 and it was second most valued company in America and most valued technology company in world !

Ok - but that was about past and as we all know, investors like to know what's in future. There are some concerning trends in same report:

ipad sales were less than expected. Many folks were expecting over 5 million units. It came in around 4.2 million units. Not bad for any other company considering this was brand new category which did not exist just few months back. However since expectations were so high (with some of my friends predicting 60 million units per year at some time in future which I don't agree), that latest quarterly sales were bit dis-appointing
Gross margins - this was a major concern. With ipad priced to sell, gross margins came in 4-5 % lower than previous quarter. With onslaught of Andriod smart-phones and tablets, this would be under pressure in 2011
ipod sales down by 11%. This is something Apple investors are not used to
With market value close to $290 Billion, Apple stock is priced for perfection and as we all know, even Apple would have some hiccups along the way

So how would Apple stock behave in 2011 ?

After market, stock is already down by $20 bringing it below $300. That may be short-term over-reaction
Q1CY2011 would have quite a few catalysts:

ipad 2 launch
iphone on verizon network
iphone 5 with possibly smaller form-factor
Refresh of ipod line
New Mac line possibly with some of the ipad features
Potentially first $25 Billion quarter

With so many catalysts, Apple would become most valuable company in America sometime by Summer 2011 with stock around $350-380
However after that laws of very big numbers would catch up with Apple and only way its stock has is to go down !
Eventually Apple would stay around $300 after relinquishing its title of most valuable company back to Exxon
After all, many technology companies after grabbing "most valuable company" title could not hold it for too long ! I happen to work in one of such company !

/Shyam

DOW 11000 - Now What ?

2010-10-10T19:29:00.000-07:00

Finally DOW reached and closed above 11000. I predicted this back in June. Even though my timing was off by about 3 weeks, my trend prediction was correct (which did help in my portfolio).

Now that DOW has crossed 11000 once more (it has crossed so many times in last 11 years) - what's in store for last quarter of 2010 ?

There are some interesting trends in market which are worth watching.

Currencies: It is like race to the bottom. All countries are making all subtle and not-so-subtle efforts to make sure that their currencies are weakened so that they can grow by exporting to all other countries. This works only if one one or few countries do it. But if everyone does it, it's lose-lose situation unless we can find another planet to export to:-)
Gold and commodities: Since all currencies are racing to the bottom, some folks are losing confidence in "fiat" money and instead putting their money in gold and other commodities essentially creating a "gold" currency. No wonder when US $ is 15 year low against yen, gold is at nearly all time high (not factoring in inflation)
QE2: This is like much awaited summer-time Hollywood sequel. Everybody knows when it is going to release and how it would be. Since Fed had given enough indications that it is considering QE2 - quantitative easing part II, markets have already priced it in terms of interest rates. That's why we have all-time lows on mortgage rates and yield on 10-year touched 2.33%
Emerging Markets Equities and Bonds: These are the only countries where meaningful economic grown would be seen in 2010 and 2011 (above 5%) and these countries have learned from past mistakes. Hence many markets like India, Indonesia etc are near all time highs
Corporate Earnings: Going by Alcoa's earnings reports, overall corporate earnings are going to be pretty good since companies have been slow in hiring and capital expenditure due to lack of conviction in economy growing. So any revenue growth due to Emerging markets is directly reflecting in profits. So in summary earnings season should be good if not great !

So what should a normal investor like our self do ? Here are some predictions for us to navigate through these waters:

DOW would close around 11500 and S&P around 1200 by year end. This means there is about 3-4% return remaining from now till year end. Not bad for 3 months !
Sectors which are sensitive to elections would be best performing sectors. For example: energy sector, for-profit education sector, mortgage insurance sector, finance/banking sector and health care sector
Here are two recommendations for this week: PMI at $4 and RDN at $8.20. Since housing market has stopped its slide, it's bound to recover at some point (two of my friends just bought houses after long-time) which should help these mortgage insurance companies. These could return 50% in 2 years.

That's all for now. Have a great week !

/Shyam

Wall Street to Social Network !

2010-10-03T20:58:00.000-07:00

Two Sundays, two movies: Wall Street: Money Never Sleeps and The Social Network. Both had my interesting topics. But the movies turned out to be quite different. Wall Street was boring movie with very loose script and no-where near original Wall Street which came out in 1987. The Social Network which originally I was planning to see only on DVD but went due to one of friends insistence turned out be an excellent and very well made movie. Script by Aaron Sorkin was the key to very good movie.

I am no movie critic but I would recommend watching The Social Network and passing Wall Street !

We are in final quarter of 2010. The earnings season should start earnestly this week. What's in store for Q3 earnings and Q4 forecasts and how would markets react to those ?

Here are some of my predictions for Q4 and year end !

Corporate earnings would be good even though forecasts would continue to be cautious. In general more companies would have upside in earnings than downside
Q3 GDP would come around 1.5 to 2%
DOW would most likely touch 11000 by year-end. I won't be surprised if it touches that mark before October month-end
Un-employment should finally start coming down with holiday shopping season on its way and retailers hiring temporary workers. It should start inching towards 9.2% by end of year
Emerging markets should continue to keep inching upwards. BSE sensex may touch 21000 (all time high) around Diwali time

Regarding this week's recommendations - I wish Facebook was public company. Even at $30 billion valuation, I would have recommended to buy it given it's user base of 500 Million users.

RIMM finally introduced its playbook - supposedly iPAD for corporates. While tablet market is getting crowded, RIMM definitely can cut a place for itself due to its Blackberry franchise. I just wish they had it for holiday season. Anyway, at around $48-50, I would recommend it as this week's recommendation for upside potential of about 30% in 12-18 months. Another interesting stock in same price range is Monsanto - MON ($47). Given need for food for growing world population, this could be an interesting long-term play.

/Shyam

Why Microsoft should buy RIMM ?

2010-09-20T19:56:00.000-07:00

Last week two very important earnings from technology companies were published - ORCL and RIMM. Both beat earnings handily. But while Oracle stock went up by 8%, RIMM has resumed its downward slide.

Despite having excellent products in fastest growing category of smart-phones, RIMM is at a point where it needs to seriously consider merger with bigger company fight against Apple and Google Android onslaught. Who would be best fit ? There are 2-3 companies which could fit the bill but here is one investment thesis which would address issues faced by both Microsoft and RIMM.

Here are the reasons why Microsoft should buy RIMM:

Both these companies are focused on enterprise market
Both have common enemies - Apple and Google and both are struggling to compete against these two
Both companies have complementary products with Microsoft dominating desktop/laptop market and RIMM dominating enterprise mobile market
Microsoft Windows Mobile is not a success when compared with iOS (from Apple) and Andriod (from Google)
Microsoft has to enter in fastest growing market of mobile computing devices (smart-phone and ipad equivalent devices). Blackberry and upcoming Blackpad would be a great way to buy into this market. If they don't, Microsoft runs the risk of becoming irrelevant in this market - same as search market
Even with 50% premium to RIMM's market price (offer at around $70), RIMM would cost about $35 Billion which is less than 2 years cashflow for Microsoft. This would be much better use of Microsoft's cash-pile than earning 1%
Technology M&A has just started picking up pace. As economy recovers, this could gather momentum and it may be too late in 2011

So Steve Ballmer, if you happen to come across this blog - think about it !

/Shyam

Disclosure: I am long on RIMM

Washington Gridlock - Good for Markets !

2010-09-18T10:39:00.000-07:00

Election fever is rising with elections only about 6 weeks away. It's time to check out its potential impact on markets. Tea party backed nominee winning in couple of primaries - especially Christine O'Donnell in Delaware woke up GOP. This would only make GOP to become more conservative and give a slight hope to democrats to revive their slumping election fortunes in Nov. Here are my predictions how elections results would turn out:

Republicans taking control of house by a slim single-digit minority
Democrats losing fee senate seats but keeping control of senate
Obama remains president (no elections till 2012)

This means that we will have a divided government in Washington similar to 1994. Is it good or bad when it comes to stock markets ?

I think divided government (aka Gridlock) would be good for stock markets for following reasons:

No one side would dominate and uni-laterally push their agenda.
All three branches would have to work together when it comes to budget and any meaningful policy changes.
Extreme conservative or extreme liberal agendas would be push on back-burner since there is no chance of getting it done (no chance of something like Health-care reform getting passed)
Balance between budget cuts and tax-cuts
Centrist politicians would get their voices heard
In worst case, absolutely nothing would happen for next two years removing any uncertainty since "nothing" is certain than "something". As all investors know, markets don't like uncertainty and hence it would start pricing in "nothing" and go up

Since stock markets are always ahead of actual economy, they must have started pricing this as evident from upward movement in Sept (which is rare) !

Since I was studying possible election outcome, one sector caught my attention this week - this sector is my recommendation for this week - for profit education sector. This sector got punished in last few weeks due to possible new rules coming (gainful employment, loss of government aid). Here are 4 recommendations in this sector which could provide 50% returns in next 18-24 months

Corinthian Colleges, Inc. (COCO) - Buy around $6
Education Management Corp (EDMC)- Buy around $10-11
Lincoln Educational Services Corporation (LINC) - Buy around $12-13
And biggest of them Apollo (APOL) - Buy around $47-48

Even though markets are up and trading near high of recent trading range, there are quite a few

opportunities - but that's topic for next week !

Have a great weekend !

/Shyam

Let the hunt begin !

2010-09-06T08:51:00.000-07:00

As predicted in last week's blog, 3PAR saga ended with HP winning the bid at $33. However in the race to win 3PAR at any cost, it ended up paying at least half a billion more. Only time would tell if HP was winner or loser in this race. Potash saga would continue for few more weeks - just read news that Chinese state companies (Sinochem etc) may be preparing a counter-bid for Potash. It would be interesting given price tag would be over $40 Billion

So who is next "hunted" in the hunt which has started in last few weeks. Here are some of my predictions - these companies could get "hunted" and get acquired in next 2 years (CP: Current Price, PTP: Potential takeover price)

Blue Coat - BCSI (CP: $21.50 ; PTP: over $30)
Compellent - CML (CP: $18.50 ; PTP: over $25)
Brocade - BRCD (CP: $5.60 ; PTP: Over $8)
Symantec - SYMC (CP: $14 ; PTP: Over $19)
Sprint Nextel - S (CP: $4 ; PTP: Over $6)
Regions Financial - RF (CP: $7 PTP: Over $10)
Synovus Financial - SNV (CP: $2.3 PTP: Over $4)
Huntsman Corporation - HUN (CP: $9.5 PTP: Over $15)
SandRidge Energy - SD (CP: $4.3 ; PTP: Over $7)

Here are couple of private equity potential targets:

Kodak - EK (CP: $4 ; PTP: $7) due to its patents in digital imaging area
RRI Energy - RRI (CP: $3.7 ; PTP: $5.5) due to its cash flow. Would be similar to DYN deal

Overall markets got some direction last week due to good news on PMI and employment front. Lot of folks are wondering why markets went up even if unemployment inched higher at 9.6%. The key point they missed is private companies have created over 235000 in last three months. While this is just barely enough to keep a lid on unemployment, it's nonetheless positive signal. US needs about half a million jobs created every month to get real momentum. It does not look likely at least for next few months due to complete halt in Washington due to election paralysis. Mr. President really needs to get momentum going on new ways to stimulus economy and even extend Bush tax cuts by couple of years to get republicans on board.

That's all for now. Have a great week !

/Shyam

Are markets "Fed" up ?

2010-08-29T18:01:00.000-07:00

One of the most anticipated talk by Fed chairman Ben Bernanke gave Friday boost to markets but still it ended in red for the week. This is 4th down week for markets and gave almost all the gains it made in July. Now every word from Fed chairman and other members of fed are watched carefully to understand where is economy headed and how Fed would react. Bernanke's "unusual uncertainty" could be remembered similar to Greenspan's "Irrational Exuberance" comments in 1996.

Final revision of GDP for Q2 came in at 1.6 % which was better than some of the worst fears. So what's in store for Q3 and Q4 since this is what would decide if markets are breaking from trading range. Based on my observations (while back-to-school shopping for kids), retail sales seem to have picked up - at least traffic in shops like Target/Walmart has increased during this season. The all important holiday shopping season is coming soon. It should be relatively ok shopping season. I am predicting GDP growth of above 1% in Q3 and around 2-3% in Q4. IMO we are not heading towards double-dip. It would take few weeks (till just before elections) for markets to come to terms and then it would break out inching towards 11000 (for DOW).

3PAR takeover saga continues. Looking at $30 price offered for a company which was trading below $10, it looks like markets were pricing it completely wrong or HP/Dell are way overpaying it. IMO, Dell should just match $30 price and let HP raise its bid near $32 and then abort the bill, pocket breakup fee of over $72 Million. The price has reached so high that "loser" of this takeover saga may come out as "winner" since ROI calculations do not seem to justify the price. My prediction is that HP would win the bid with price near $33.

Due to housing reports last week, regional banks got hit in a major way creating an opportunity to pick up couple of regional banks at reasonable prices. Hence this week's recommendations are: RF at $6.5 and SNV at $2. These two regional banks offer potential return of 50% in next 18 months.

Have a great week !

/Shyam

Markets: Risk-on / Risk-off ?

2010-08-22T17:25:00.000-07:00

Summer of 2010 is almost coming to end with labor day (un-official end of summer in US). Kids are back in school. Markets are trading water around same level as start of 2010. After peaking in Apr 2010, summer was mostly about few weeks up and then few weeks down - some professionals call it as risk-on and risk-off.

Bond markets and stock markets are diverging. Yields on 2-year and 10-year T-bills (as wells as UK Gilts and German Bunds) are reaching all time lows. Few weeks back I wrote about treasuries in bubble when yield on 10-year fell to 3%. Since then it has dropped below 2.60 and heading below 2.50 very soon - looks like my short-term timing is wrong since treasuries has gone up by 7-10% since then. However I still stand by prediction about long-term that treasuries are headed for a fall (with yield going above 3% by year-end). Basically bond markets are saying that we are heading towards double-dip.

Stock markets are pricing in very modest recovery (below 2%). Hence they are still trading nearly 50% above Mar 2009 lows. The recent pullback of nearly 10-12% is due to reduced expectations of recovery. I hope stock markets are right (if bond markets are right, DOW would go below 9000).

Last week's M&A activity suggests that companies would like to deploy their cash buying new businesses instead of expanding their work-force by hiring. Notable M&A announcements were: Intel/Mcafee, BHP/Potash and Dell/3PAR. Two of three are in technology sector. Now that McAfee is gone, most likely Symantec would be play. Just on pure buyout potential, this week's recommendation is SYMC at $13.50. There could be at least 4 companies (ORCL, HPQ, MSFT, IBM) for which SYMC could be good fit especially in terms of deploying their cash-pile. However they would have to offer price closer to $20 (which means $15B plus) which could be a potential hurdle. SYMC could return about 50% in 18-24 months

Enjoy summer while it lasts !

/Shyam

PS: Normally I do not recommend stock in technology sector to avoid conflict of interest. For a change, this week, I have considered SYMC due to changing technology landscape.

"Powering" the portfolio !

2010-08-15T20:02:00.000-07:00

Blackstone bought Dynegy with nearly 62% premium. What did Blackstone see in DYN which markets could not see for last few years since all power producers have been in rut since Enron saga ? Is it time to look at some of these independent power producers and utilities ?

The investment logic goes something like this:

With economy eventually growing, there would be higher need for power thus increasing demand for power / energy
Creating new power plants cost quite a bit of capital which is not easily available
With Blackstone deal, there would be more companies / PE firms looking at these companies
These companies have steady cash-flow
They are trading dirt-cheap compared to their book values

Here are couple of companies worth taking a look with potential of 20-30% return over 12-18 months:

RRI ($3.5) or MIR ($9.80) - both these companies merging to produce a power producer with over 24000 MW. Both are trading at about 35% of book value
NRG ($20) - With over 21000 MW capacity, it has scale similar to merged company of RRI/MIR. Trading at 65% of BV offers good value and foundation for low-risk portfolio

Last week was brutal for markets but overall trend has been one week up, one week down. Markets are clearly confused because it is not able to figure out what's in store for 2H2010. The trend would continue all the way till US elections are over in first week of Nov. Till then DOW would continue to trade between 9800 to 10800 !

For all Indian readers, Happy Independence Day !

/Shyam

What's in store for August ?

2010-08-01T20:15:00.000-07:00

After having best month in a year, one starts wondering - what's in store for August for markets ?
There are quite a few positives for markets to keep on inching towards DOW 11000 over next 5-6 weeks. Here are some of those:

European mess seems to be over at least for now with Euro over $1.30, I am sure Europeans would enjoy their summer holidays in August
US GDP growth came in at 2.4 % which is lower than expected but much better than sub-par recovery (with growth of less than 1%) and puts "double-dip" fears at rest (for now)
Company earnings came out much stronger than many have expected across the world - this bodes well for second half
Shippers (Fedex/UPS) have raised their full year earnings guidance and these are best companies for understanding economic activity across the world
Many emerging markets (except China) are trading near their YTD highs - good for developed markets to catch up

So for now, except unemployment report which would be out next Friday, many signs to be positive. Hence markets keep its upward bias.

My last week's recommendation A123 systems (AONE) did very well. If you missed that, there is one more company called Erer1 (HEV) at around $3.3 which is good proxy for all the excitement which is going on with electric cars. One should also start looking at some of the European banks like LYG ($4.3) or IRE ($4.4). Now that stress test results are out and both these banks "passed" the stress tests, they provide a good way to invest in Europe and could potentially return 30-50% or more in next 18 months

Have a great week ahead !

/Shyam

Where are markets headed ? Check out years 1994 and 2004 !

2010-07-24T18:59:00.000-07:00

Markets have been really looking for direction - one week up, one week down. 3 weeks back, DOW had a great week with over 500 points gain, then it was down again and up again last week. After having this roller-coaster ride, DOW is back to where it was at start of 2010. So that begs the question - where is market really headed ?

Since I am history buff, I went back and checked recent history of DOW returns when economy was coming out of recession but not sure if recovery would be sustainable or not ?

Here are two years which I found similarities with 2010:

1994: DOW start (3754) end (3834) Return: 2.13%
2004: DOW start (10409) end (10783) Return: 3.5 % - this is after it had a major run in 2003

With this brief history lesson, most likely DOW would return about 5% in 2010 and end year between 10700 to 11000. However in next 5 months there would be significant volatility as markets inch towards year end and await for election results.

It's great to see closure on many key items such as:

Stress test results of European Banks - only about 7 out of 91 banks failed putting overall credibility of these tress tests at risk. For now, these banks and Europe seem to have come out of its "may"hem seen during May.
Goldman Sachs and SEC settlement - GS bought its license to print money by settling the case for $550 M
BP well stopped leaking oil - this reassured market that BP is not going BK
iPhone 4 antenna issues - not fixed bit Apple came up with good alternative of keeping its customers satisfied. Cost of $175 M is small compared to multi-billions Apple is going to make on iPhone 4

Overall Q2 results are coming out great - companies are in sweet spot. They are operating very lean but their top line is growing 20-40% compared to last years Q2 and almost of it is going into bottom-line. However in 2nd half, comparisons with last year would become difficult.

For this week's stock recommendation, check out A123 batteries (AONE) at around $9 for potential return of 50% in next 12-18 months. EV cars are just starting to roll off and almost everything from mobiles to cars are going to need lots of batteries. AONE is well positioned to participate in this growth and hence future looks good for this company.

Have a great weekend !

/Shyam

Congratulations Spain and Paul the Octopus!

2010-07-11T18:28:00.000-07:00

Congratulations Spain for winning the Soccer World Cup first time and becoming 8th nation to join exclusive club of world cup winners. Congratulations Paul the Octopus for correctly predicting all results of all Germany matches and outcome of semi-finals and final. It's really amazing to see 100% record on predictions. In all, it was a great world cup and I enjoyed watching these matches with friends (even though India was not playing and US was out before quarter-finals). I was rooting for Spain for two reasons - they were really playing excellent and other reason is Spain as country needed this win to boost their confidence and along with it's confidence. Spanish economy which is 3rd biggest in Europe is important for European as well as World economy !

Now that world cup is over, I am looking forward to earnings season which should start from tomorrow with Alcoa announcing earnings on Monday after market close. Markets are at crucial juncture and looking for direction. It has come down nearly 10% from its high in Apr 2010 and up by 5% from its low reached last week. There are conflicting reports about double-dip or growth. That's why this earnings season and especially forecasts would be very important. I need to do some study about co-relation between "post-earning market reaction to Alcoa stock price" and "market direction for quarter". I have a gut-feel that they have direct co-relation. As does Alcoa stock price goes after earnings, so does the market. I don't have statistical model to prove it (yet!) but here is my "gut-feel" reasoning: Alcoa is biggest aluminum producer in world, aluminum is industrial commodity and has co-relation with growth prospects of world economy, stock market depends on growth prospects of economy. Hence when market reaction to Alcoa stock price after earnings could potentially signal how markets are going to go for next few weeks. Let's see what happens on Tuesday after Alcoa earnings ! For now, I am recommending Alcoa (AA) at $10.50 to $10.75 for potential gain of over 20-30% in next 12 months.

Have a great week ahead !

/Shyam

Soccer Would Cup and Paul the Octopus !

2010-07-05T11:09:00.000-07:00

Looks like Soccer world cup mania is building up to such extent that we have to look to Paul The Octopus to predict what would happen in these matches. Evidently Paul, a Octopus has till now correctly predicted results of 5 matches in which Germany played (before the match:-). Now the real test would be next semi-final match between Spain and Germany. Who needs referees when you have Paul the Octopus - anyway, referees are not doing a very good job in this would cup !

It was disappointing to see both Brazil and Argentina crash out of Would Cup. But Germany was definitely a much better team on Saturday and deserved the big win ! It's good to see Spain win on Saturday just few minutes before match end. I hope Spaniards have celebrated which may help country's economy and prevent it from getting downgraded by Moody's.

Last two weeks in particular and Q2 in general was very brutal who has invested in stock markets. Not only all gains of Q1 got wiped out but Q2 also took markets down for the year. All indexes down by nearly 7-10% YTD, it's getting tough to predict which way markets are headed.

So this week, I am going to recommend looking at some mutual funds to invest using cost-average method (investing at periodic intervals). Here are some vanguard mutual funds which I particularly like.

Vanguard REIT Index Fund Investor Shares (VGSIX) YTD: 3.29%
Vanguard Total International Stock Index Fund (VGTSX) YTD: -11.45%
Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) YTD: 3.44%
Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) YTD: -3.29%
Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX) YTD: -6.76%
All of these funds have excellent long-term prospects, low fund charges and provide way to invest on regular basis so that one can cost average. Now that markets are down and don't know how they will go in short-term, it's good time to get started with these mutual funds and set up automatic investments.

So for now, forget that your portfolios are down for the year and enjoy exciting semi-finals and final of Soccer World Cup !

Have a great week

/Shyam

US Treasuries in bubble ?

2010-06-27T18:28:00.000-07:00

Last week was a downbeat week for stock markets when major world stock indices fell by more than 3% in one week. At same time, treasury market was going up with yield on 10 year US treasuries touching 3.08 at one point. There are multiple factors in play on why investors are willing to buy treasuries when everyone knows that US deficits are unsustainable and if not for US $ as "reserve currency", US case is worse than Greece. So why treasuries keep going up (and yield going down) ? Here are some factors:

Flight to safety - investors have to park their money. With Euro and Yen in trouble and no other alternative (except Gold), governments as well as big investors have to park their money and at this moment there is only one alternative which is US treasury
US $ status us world reserve currency
AAA rating of US government - US has never defaulted in recent history
When stocks are going down, 3% assured return is not bad
Despite stocks going down in recent weeks, investors are still up by about 50% from lows of March 2009 and they are taking profits out and parking in safe place which is US treasury
Most importantly, inflation is nowhere on horizon and hence US fed to going keep interest rates low

Despite all these valid factors, IMO, US treasury bull run is over. When yield on 10-year treasury touches below 3%, it's time to take out money out of treasury (or related mutual funds) since yields are going back above 3.5% in next few months (that means value of treasury would go down). Here is why I think why:

US fed is going to raise rates in next 12 months - that means smart investors would start taking money out of treasuries in 6 months causing it to fall
US economic recovery is going to gain some speed by end of this year
Euro problems would be behind us means investors across world would start looking at Euro as alternate "reserve currency" again
US deficits are going up with wars, stimulus and other spending. At some point investors would realize that in 10 years or so, US would have same problems as Europe demanding higher yields on treasuries

Finally wall-street reform is almost over. Most likely President Obama would get final bill to sign before 4th of July weekend giving him another victory which I am sure he needs it for Nov elections.

As far as stock recommendations for this week goes, check out SD ($6.3), RDN ($8.8) and PNX ($2.25)

Have a great week

/Shyam

DOW 11000 by Summer End !

2010-06-20T19:05:00.000-07:00

I returned to USA last week and coming back to my normal life. Tomorrow is official start of Summer and good time to make forward looking predictions for market direction. Last 2-3 weeks, markets have been consolidating between 10K and 10.5 K and almost looking confused about its direction. But now that Euro crisis seems to be understood (but not solved), markets can find some footing and start looking forward to Q2 results.

Now that we are past dreadful May month, there is upward bias in markets and my prediction is that DOW would cross 11000 before summer ends on Sept 21. Here are the reasons for my prediction:

Debt crisis of Europe in general and PIIGS in particular seems to be coming under control and doubts of viability of Euro have subsided. This is visible from Euro almost touching $1.24 after touching 4 year lows of $1.18
Growth story of emerging countries - in particular of China and India is very much intact. I have personally seen all the excitement in Indian economy during my 4 week stay. India is booming with all new shiny homes getting built. I am sure same is true even more for China. China yielding little-bit on currency would also help
US economy is growing albeit lower than what we can call as "robust" recovery - it would grow between 2-3%
European growth is still a problem but it could come up with about 1% growth
Interest rates across world are remaining low for all of 2010 helping provide boost to risk-taking

So for investments, I am recommending at new REITs like CIM ($3.8), NLY ($18) for their 15-17% yield and RIG ($50), HERO ($3) for potential upside of 50% once BP oil spill saga goes on back-burner.

Have a great Summer !

/Shyam

Return to normal in June !

2010-05-29T22:59:00.000-07:00

I am glad that May is over. It is one of the most terrible month personally for me. My dear father passed away at age 69 due to post-surgery complications on May 16. If you are around Pune and had to go to hospital, AVOID Ruby Hall at all cost. It is one of the worst hospital in terms on post-operative care. I wish someone had warned me about this before my father's bypass surgery.

Please spread the word about avoiding Ruby Hall, Pune at all costs for any treatment !

It has been 2 weeks since my father passed away - myself and my family are coming to terms and returning to our normal lives. Life would never be same when you lose someone dear to your heart and has been an inspiring figure all your life. But life must go on !

I am so looking forward to forgetting this dreadful month of May 2010. Coincidentally it is worst May month since 1940 with 8% monthly loss. I never thought my prediction about "Sell in May and walk away" would be so right on target. I wish it did not !

Looking forward, I am expecting markets to return to normal in June to get ready for second quarter results. Now that Dow has dipped below 10000 twice, it has got much needed correction. It sets a good stage for recovery rally and on its upward march towards 11000. Markets should recover 2-4% in month of Jun which would take DOW above 10500.

By year end, DOW would end above 11000 and possibly closer to 11500 which would be about 10% from current levels. In this correction, there are so many stocks below my recommended price and could offer 50% return in next 9-12 months. Here are some recommendations:

PMI ($4), RDN ($10), MBI ($7)
SFI ($6), SFI-PD ($15)
KEY ($8), SNV ($3), RF ($7.5)
XTXI ($7), AHD ($4.4), MMR ($10)
FAS ($22), DRN ($38), TYH ($28), ERX ($27)
CNO ($5.5), PNX ($2.6)

The price in bracket is recommended buy price. You should consider buying around recommended price and sell after 50% return in next 9-12 months. Till you sell, you can cash out on volatility by selling call options every month.

/Shyam

"May"hem in Markets !

2010-05-08T08:47:00.000-07:00

Market action in first week of May gives new meaning to English word "mayhem". Dictionary meaning of this word is: needless or willful damage or violence. The afternoon action in stock markets on Thursday May 6 was so true to this dictionary definition. It was indeed needless/willful damage to the confidence which was just getting started to build up. Many folks are still searching for answers what exactly happened at 2.45 pm EST on May 6 when DOW had its biggest intra-day points loss in its history !

I was amused that my previous post about selling in May would be so much on target - unfortunately when it comes to selling, I don't follow my own advise !

Storms were building for this fateful day for last few months with slow and erratic European response to Greek debt mess. Now the problem has become much bigger since contagion virus has spread to other European nations and may cross to other nations outside Europe. Unless Europe acts decisively over this weekend and next couple of weeks, we may be heading towards repeat of Sept 2008. So here are some suggestions for European policy-makers:

Guarantee sovereign debt of EU members for next 3-5 years and let governments work debt reduction over these 3-5 years
Tighten monitoring of members finances so nations like Greek cannot lie on their finances
Be ready to kick members out of EU if major violations are found
ECB should buy sovereign debt at 1-2% interest immediately - this would be equivalent of Fed buying mortgage bonds and treasuries which helped during this credit crisis
Create a "TARP" fund of over 500 billion Euros to help EU member nations

It is possible that Germany may be happy with this European problem since weak Euro is good for country like Germany which is second biggest exporter in the world but those short-term benefits may vanish if Euro falls apart - so Ms Merkel needs to tread carefully about how far she can stretch this issue without breaking Euro.

Job report on Friday was good but market ignored it due to all the volatility but its good to know that US economy has started creating over quarter million jobs per month. Given all these factors, how do one invests ?

My prediction is that volatility would continue to be higher over next few weeks and it is likely that DOW may see 10,000 before climbing back above 11,000. Under such conditions, I would recommend to stay on sidelines, prepare your list of stocks to buy (you can check some of old posts on this site for few ideas) and start nibbling at them when DOW reaches just below 10000. Long term market fundamentals still look good provided Europe fixes its issues quickly.

That's all for now - heading for IRON2MAN - first summer movie of 2010 !

Have a great weekend !

/Shyam

G-Forces: Greece, Goldman and Google !

2010-05-01T11:25:00.000-07:00

Looks like there are various G-forces holding down the market from taking off beyond 11000. First of all, blame it on PGS (Portugal, Greece and Spain) of "PIIGS" club for bringing down markets due to rating cut. But let's look at these G-forces which are in work:

Greece: It has been in news for last 4-5 months and due to structure of EU, there is no quick closure on this. Now that it has only 2 weeks left, Europe better hurry up to help Greece avoid default which may lead to end of Euro as we know it. If Greece defaults, contagion would very quickly spread to other nations in PIIGS and many other nations outside Europe. This could be repeat of 2008 with difference that this time it would be nations defaulting (instead of corporates). Europe needs to have its own TARP for it's member nations and that too very quickly !
Goldman: Since SEC filed civil suit of fraud 2 weeks back, Goldman cannot catch a break. After senate hearings, now there are talks of criminal suit. With stock down nearly 20%, it has lost close to $20 billion in market cap. Someone in Goldman got carried away in their arrogance and decided not to settle with SEC when they received "Wells" notice last July. It's not a coincidence that GS stock is at it's July 2009 level and going down possibly below 140 unless it starts discussing settlement
Google: Google is in G-club not due to fraud or debt overload. But because of it's business decision of pulling out of China. While it was a great moral and ethical decision, it was a wrong business decision giving away largest Internet market to Baidu. Due to this decision, GOOG is down by 15% YTD while BIDU is up by 67% YTD. Google's other problem is it still does not have any money-making product other than "search" gold-mine. Now that big numbers are catching up, unless Google gets another blockbuster product which can compensate for it's loss of business in China and also keep up with growth, GOOG stock would be stuck below $600

So overall there are quite a few forces working against markets taking off for another run to DOW 12000. Volatility has definitely increased with VIX going up and down by 10-30%. It's good for selling "call options" against your existing holdings. Last week was great for some of the commercial holding companies. One of my recommendation iStar Financial (SFI, SFI-D) did pretty good. Now that it's losses has come down, most likely it would reach break-even by end of year and resume it's dividends in 2011. With that in mind, at $6.50, it offers potential upside of 50% in next 12-18 months.

Have a great weekend !

/Shyam

India's answer to Superbowl !

2010-04-25T18:31:00.000-07:00

Finally IPL mania is over with IPL final played between Mumbai Indians and Chennai Super Kings. Considering IPL is only in its 3rd season, the level of excitement it has created both due to exciting cricket and off-the-field politics, corruption and celebrity involvement, I won't be surprised if it takes similar level as Superbowl in USA. We had few friends at our place to watch IPL final - most of them from Maharashtra were supporting Mumbai Indians. So it was little dis-appointing that Mumbai lost to Chennai - but looking at today's game, Chennai deserved to win today's game. Overall it was great IPL season. By rough estimates, IPL with its 60 matches create economic activity of close to $1.5 to 2 billion per year ! Good for Indian economy.

Last week of 8th week when DOW had positive week. I was surprised at the strength and positive momentum markets had especially on Friday last week despite upcoming financial reforms and GS/SEC saga. Regional banks were very strong on Friday with some smaller banks with assets less than $10B had 50% returns (in one DAY). So should one put more money in financials or energy. IMO, the positive momentum would continue for another couple of weeks. But market is getting ahead of underlying strength of economy. In couple of weeks, we will get key reports such as Q1 preliminary GDP report and unemployment report. GDP should show growth of about 3-4% and unemployment should dip below 9.5%. Next few months, DOW could touch 11500 and then go side-ways before resuming its march towards 12000 by year-end. So if you are fully invested, it is wise to take some money out. One strategy is to sell "out-of-money" near term call options. So if markets go up, you can still participate. If they go down, you can keep "call option" premium. However one has to be careful since call option works with most volatile stocks like PMI/MBI/SFI/FAS/ERX/DRN.

SandRidge Energy (SD) is good buy at around $7.5 to $7.7. Due to its pending merger with Arena Resources, stock got punished. However once merger is completed, it could cross $10 in 12 months. Downside risk should also be less compared to other high-flying stocks.

Have a great week ahead !

/Shyam

Sell in May and Walk Away !

2010-04-18T15:35:00.000-07:00

Looks like old wall-street saying about "Sell in May and Walk Away" could be more applicable this year considering following factors:

Markets have seen best rally in 7 decades with all major indexes up by over 70% in one year
Major indexes have crossed key psychological levels of DOW 11000, S&P 1200 and Nasdaq 2500. Many investors must have kept these as key levels where they were thinking of selling
Financials could be in trouble again with all the "sins" catching up with them - Goldman Sachs fraud case could be first of many to come. This could shatter confidence once again in wall-street and banks
While corporate earnings till now have been excellent, economy is still in delicate stage. It is possible that these earnings could be one-two quarter phenomenon before comparisons with 2H2009 would start kicking in
Unemployment still over 9.5%

SEC case against Goldman Sachs was interesting in many ways - but most importantly it highlighted that regulators have finally woken up from their hibernation of 8 years during Bush administration. This case would surely add lot of momentum to Obama's financial reforms and that would be good for America in long-run.

So how does one invest in these times - it's best to stay with "Sell in May and Walk Away" rule of wall-street and stay on sidelines for next few weeks. Keep lot of dry-powder (aka cash in hand) in case DOW comes below 10500 !

Have a great week !

/Shyam

Welcome to DOW 11000 and S&P 1200 !

2010-04-11T19:29:00.000-07:00

Finally I got my MINI Cooper S - check out my new car and sold my beloved Toyota Camry which I used for 12 years without any major problems.

We had fun ride to Livermore Temple and now I can drive it on regular basis.

Next week seems to be exciting week for markets - my prediction is that finally DOW would cross and close about 11000 tomorrow and S&P would cross 1200 sometime this week.

Now that Europe has come to terms and helped set up emergency fund of $40B for Greece, markets should be assured that Greece won't default and Euro is here to stay. This is big positive for markets.

Earnings should be very good with Alcoa announcing tomorrow and major banks in next 4 days. Last year was the season of write-downs - I won't be surprised if banks start announcing "write-ups" (if there is term like that). This should not only help reduce banks losses but also help improve their capital positions. Most of the big banks (BAC, C, JPM, GS) and their regional brothers (RF, KEY, FITB) would do pretty good. In fact their smaller and more problematic cousins (SNV, CBC) would also start reporting improved conditions.

So if you have invested in my last recommended 4 sectors - financials, real estate, energy and insurance, my recommendation would be stay put and enjoy the ride above 11000 for DOW.

Have a great week investing !

/Shyam

Energy Politics - Smart Move !

2010-04-04T10:13:00.000-07:00

Mr President was on roll for second week - he made some more key moves in the game of politics for to push some of his key domestic initiatives (for good of country I must say). Now that health care is out of way, he puts his focus on Energy Policy. This is as important to America as health care. America imports nearly $500 B worth of energy from outside and any dent in this bill would help address trade imbalances. Here are key steps Obama took to start addressing energy issue America is facing:

Opened up vast areas to start drilling again - by sharing revenues with states, state governments who are in desperate need of additional revenues would be more open to this
Increase CAFE standards for higher mileage for cars from 2016
Additional focus on clean coal, nuclear energy
Changing vast fleet of government vehicles to hybrid, Eco-fuel equipped

These are small steps towards a very big policy initiative of "cap-n-trade". If congress can pass even minor version of "cap-n-trade" this year, it would make a big difference in America's energy problem and would be good for Mother Earth !

With so much focus on energy, let's talk about what happening in oil/commodity market and are there any good opportunities for investment.

Oil crossed $85 due to recovery gaining momentum all across the world. I am predicting that oil would cross $90 in summer of 2010 and may even touch $100 if speculation is not controlled. Is this repeat of 2008 ? I hope SEC and other government regulators pay close attention to speculation in commodity market otherwise rising oil price could choke economic recovery.

Now coming to investments - I would refer to my post about 2 months back on energy sector. I would still recommend some of the stocks in that post. In particular following ones:

XTEX ($11), AHD ($6) and ERX ($38)
You should also look at CHK ($23) and BBEP ($15)
HERO ($4.2), MMR ($15) and EXXI ($18) also offer excellent exposure to increased activity in oil sector

All major indices are up by about 5% which is their best first quarterly performance since late 90's. Does this mean stock market is on ascent similar to 1998-1999 or is it heading towards some rough waters as in 2000. More about that in next few weeks !

Myself and my son went to Apple store to check out "iPAD". Both of us really loved it - I would wait for few more weeks to buy one for myself. Apple has another winning product on its hands - kudos to Steve Jobs and all creative minds at Apple !

Have a great weekend and good week investing !

/Shyam

Congratulations Mr President !

2010-03-27T08:58:00.000-07:00

Congratulations Mr. President on enacting health care law which America needed and was in works for last 6 decades ! After setback of Mass senate elections in Jan, everyone had almost given up on health care reforms for few more decades. But Obama took charge of overall game-plan and led from front to get health care reforms done. This week was the the best week in Obama's presidency with following key achievements !

Health care reforms done - this goal eluded for all previous presidents and Obama would be remembered for this in same way as FDR for enacting Social Security and Lyndon Johnson for enacting Medicare for elderly !
Major arms reduction treaty with Russia
Some tough talking to Israel's prime minister about settlements in Jerusalem
Proposal of using some TARP money to help struggling home-owners
Financial Reform bill getting momentum and has potential to get it done in next 2-3 months

Lot can be done when Obama leads from front and Congress gets a taste of win ! Hopefully this momentum can continue.

Now that Washington has finally started working, we hope that they pay more attention towards job growth. Economy has started showing quite a bit of momentum but real truth would be in next week's employment report. Economists are expecting job growth of about 150,000. That much of job growth is needed just to maintain unemployment rate of 9.7. We need much higher job growth to bring down unemployment below 9%. This is absolutely important to keep stock market momentum and for democrats to keep control of both houses.

Dow is within spitting distance of 11000. As I predicted few weeks back, it may touch 11000 next week. Where it is headed after that ? Most likely DOW would trade in between 10500 and 11500 till summer end. If companies continue the good results for first two quarters and continue to forecast robust growth in last two quarters, DOW could start its upward journey in Nov/Dec with potential of touching 12000 by end of 2010. With this macro forecast, here are some sectors one should invest:

Financials: banks, insurance companies (SNV, KEY, RF, FAS, UNG and some European banks like AIB, ING and NBG)
Real estate - commercial and shopping mall REITs (SFI, GGP, DDR, PLD)
Energy Sector - look at master limited partnerships (AHD, XTXI, ERX, CHK)
Private equity sector - finally M&A and IPO activity has picked up. So private equity companies can cash out their past investments (ACAS, FIG, BX)

So once again, Congratulations and Thank you Mr. President on job well done !

Have a great weekend !

/Shyam

It's time to "insure" !

2010-03-13T03:34:00.000-08:00

IPL (Indian Premier League - cricket's equivalent of NFL) started its third season with a bang. It's fun watching cricket in India. I would be able to see couple of IPL matches on TV. I am rooting for Mumbai Indians - Sachin Tendulkar being in top form should help it get into Semi-finals.

Markets are holding onto gains made in last couple of weeks with each of last three sectors I recommended (Energy, REIT and Banking) making significant gains. Now onto my next sector recommendation:

Insurance Sector:

This sector is kind of proxy for asset valuations since companies in this sector invest policy premiums in various kind of assets ranging from bands from banks, REITs and government bonds. Many companies in this sector were on verge of bankruptcy in 2008-2009 - AIG being the biggest and well known company. Now that asset valuations have stabilized and many companies have fixed their valuations, there are many stocks in this sector which could return 50% in next 18-21 months (by end of 2011). Here are some of the recommendations:

Small cap: PNX ($2.80), CNO ($5.80)
Mid-cap: GNW ($15), HIG ($25), LNC ($25)
Large-cap: MET ($40) and PUK ($16)

Once economy fully recovers, these companies would resume their dividends with yields in 4-6%.

Finally there is some momentum in health-care bill. It would be leadership test for President Obama if he can get it through political quagmire ! Good luck President !

/Shyam

"Banking" on Recovery !

2010-03-11T02:42:00.000-08:00

I am in India due to some personal matter hence could not post my blog for last couple of weeks. Indian economy is very hot - I can feel it given the traffic conditions when I was coming out of Mumbai or going to Pune. Roads are improving but still has long way to go before infrastructure could handle onslaught of new cars and two-wheelers. Today only I was reading that nearly 2 million cars and 10 million two wheelers are sold in India every year. Not sure where is space to drive all those new cars !

Now coming to today's topic - last couple of posts I am been recommending sectors and some few picks in those sectors. Both energy and real estate picks did very well since I recommended (see my last two posts). This week's theme is "banking".

Overall banking sector has been doing very well and would continue to do well. Most of the bad news is out, economy is recovering, unemployment is stabilizing and banks are in the process of repairing their balance sheets. So unless complete world falls apart, this sector provides excellent opportunities to provide market beating returns. Here are some of the picks:

US regional banks: Key ($7.35), RF ($7), SNV ($2.80) and for risky investors CBC-PB ($3). These banks provide direct exposure to recovery in US real estate
European banks: ING ($9.9), AIB ($3.70) and NBG ($4.20). These banks provide direct exposure to recovery in Europe and European leaders fixing PIIGS issue once for all
Leveraged ETF: FAS (below $70) - this is most risky which provides 3x exposure (up or down) to banking sector. This is recommended for those who can bear extreme risk and volatility. This provides leveraged exposure to big banks like GS, JPM, BAC recovering. If sector recovers as I am predicting, FAS could reach $120

Overall markets seem to have found its footing after more than 5% correction and looking forward to Q1CY10 results.

Good luck !

/Shyam

Markets Wanted: "Exceptionally Low" and "Extended"

2010-02-28T09:06:00.000-08:00

Last week markets wanted to hear three most important words which were worth billions of $$ and they got what they wanted to hear. In his semi-annual update to Congress, Bernanke did say that Fed Interest rates would stay "exceptionally low" for "extended" period of time !

And what a difference these three words made - on that particular day, markets went up by 100 points which is worth many billions of $. As investor, low rates are very crucial particularly at this juncture since economy is just coming out of ICU and unemployment is still near double-digits. So low interest rates are serving as "oxygen" for economy. "Extended" means Fed won't start raising interest rates for at least 6 months. So road is clear for investors for at least six months except for "European" mess !

Now coming to "Greek" problem: Last week Greek and Europe were playing game of chicken and finally Europe is coming to terms of helping Greek by potentially buying its new issued bonds. At this time, Europe has more to lose if out of desperation, Greeks decide to leave EU and abandon Euro since that would mean end of Euro as we know it. We hope that Europeans realize it and address this mess soon before it's too late.

In last post, I recommended energy sector which is looking good. This time, my recommendation is to look at REIT sector (Disclosure: I personally invest in many of my own recommendations). With multiple bidders for General Growth (which declared BK last year), REIT sector started seeing some action. So here are my recommendations:

iStar Financial (SFI: $3.6, SFI-D: $14) - this is kind of betting on recovery of commercial real estate and survival of this company. It has BV of $15 and if it survives should reward its investors tremendously. By the way, it's preferred shares (SFI-D) have given dividends of $.50 throughout 2008-2009. It's pretty good yield (17-18%) if you can tolerate the risk
Diversified developers (DDR: $10.50) and Pennsylvania R.E.I.T (PEI: $10) - both are shopping mall REIT and could benefit from consolidation in shopping mall sector. Both of them have been paying dividends and could soon increase dividends
Direxion Daily Real Estate 3x (DRN: below $115) - this is for those who can tolerate most risk with potential of most rewards. This is bet for overall real estate sector recovering in 2010-2011. Since it has leverage of 3 times, DRN sees extreme volatility and hence has good potential of selling covered calls against your position. If real estate really recovers as predicted, DRN could cross 200 by end of 2011

Finally let's pray for Chileans who have been hit by one of the strongest earthquake Chile has seen.

/Shyam

Time to Re-energize Portfolio !

2010-02-14T12:52:00.000-08:00

Earnings season is almost over and majority of companies beat earnings - what is relief especially since markets has built up so much expectations. Last week finally DOW broke its 4 week losing streak but still very much hovering around 10000 range. I was predicting it to touch 11000 based on momentum and earnings surprises. If not from Greek and overall Europe problem, it might have come very close to 11000 - instead Europe problems brought it down below 10000. One way it was a good break since non-stop ascent was not sustainable. Now that it has taken some breather and assuming Europe resolves its issues about PIIGS deficit by standing firmly behind Greek debt, markets would resume its upward journey. I am predicting DOW to cross 10500 by Mar 31. Only major risk is Greek problem - if Europe is not able to give clear direction about Greek, there is risk that DOW may fall near 9500.

Last Sunday's Superbowl match was great - while my prediction did not come true, I was happy with Saints first-ever win. They played excellent football and deserved to win. It's great boost for City of New Orleans also.

As individual investor, this is good time to take some positions especially in energy sector. I particularly like Oil MLP sector. Many companies in MLP sector stopped their distributions for conserving cash which was right call. Now that they are in the process of completing their non-core asset disposals and refinancing their debt, they would resume the distributions in 2010. Here are some picks (which I have recommended in my earlier posts also)

XTEX ($9) and/or XTXI ($7) - this company is very close to refinancing its debt after which it will resume its distributions. So I am expecting about 50% return in 12-18 months
AHD ($5.5) and/or APL ($11) - very similar to XTEX/XTXI. AHD in particular has come down and provide a good entry point for similar 50% return in 12-19 months
ERX ($33) - If you want to aggressively play energy sector, this 3x ETF provides a good way to play it. However this is extremely volatile and one should invest only if he has stomach to live with volatility. Given that world economy is recovering, energy demand is going to go up and would benefit all energy companies and hence ERX could return over 50% from now till 18 months

Have a great Valentine's and President's weekend and Happy Chinese New Year !

/Shyam

"PIGS" derailing Recovery ?

2010-02-06T10:40:00.000-08:00

Debt troubles in "PIGS" countries - Portugal, Ireland, Greece and Spain seem to be threatening nascent worldwide recovery. It is reflected in losses in stock markets over last 4 weeks - some of these losses approaching 10% which would qualify for a technical correction. So are troubles facing these countries similar to what happened to financial companies in 2008 resulting in Bear, Lehman, AIG and many other fiasco ? Governments used to be last stop which bailed out these banks. Who will bail out these countries ?

Fortunately (or unfortunately as some may think) these countries are part of EU with Euro as single currency. EU and Euro is too important for all Europe and then big European nations like Germany and France won't let Greece or Portugal derail complete EU. So my prediction is that these countries would be bailed out by either EU or IMF but they would have to pay price by making sure that their budget deficits are brought under control in next 2-5 years.

Now coming to DOW going below 10000 - this was kind of expected but no-one predicted that it would happen so soon and with so much volatility. Looking back, this looks very similar to July 2009 when DOW went down from 8800 to 8000 before starting its ascent again. Even in Oct 2009, it came down 400 points in few days. So after every earnings season, investors want to cash out their gains bringing markets to reasonable levels.

Is this time to buy ? I think recent pull-down offers very good opportunities for stock-pickers. Here are 3 stocks I am watching and may take some positions:

Eastman Kodak (EK) - around $5.5 to $5.8. Considering Kodak is finally getting some licensing fees on their 1000+ patents, this would be interesting play. They are suing APPLE/RIMM for patent violation. This could be equivalent of Rambus of digital photo technology
General Maritime (GMR) - around $6 to $6.5. This is dividend paying oil shipping company. Once world-wide economy recovers, demand for oil shipping would improve. One risk is suspension of dividend. However as long as they resume dividends again in 2011, this is good company for great yield
Hercules Offshore (HERO) - Around $3.6. I recommended this company around $5 - that was before market pull down. At $3.6, this is even better buy and could offer quick 50% return when stock recovers over $5

So if you are willing to take risks, there are quite a few stock picking opportunities similar to Mar 2009. At that time who thought Bank of America would be $15 in 10 months (it was selling below $3 in Mar 2009).

Have a great SuperBowl weekend. I am predicting COLTS win.

/Shyam

China, Greece and American Politics - Wall of Worries ?

2010-01-23T17:38:00.000-08:00

This week was one of those weeks when investors start paying attention to volatility and come out of their complacency which they got used to in last few months. When all major indices go down by nearly 5%, one has to wake up and pay attention. This week, every day DOW had century movements (1 up, 3 down) - last two were double-century on down-side.

There are quite a few reasons markets behaved the way it behaved. Let's look at them:

China is putting brakes on its rampant credit growth and associated speculation to prevent economy from going out of hand. And now a days when that happens, whole world markets shiver !
Continuing worries of Greece being on verge of default
And as major shock, democrats losing Mass senate seat and hence putting Obama's overall policies (including health care bill) in tatters. Now that his major initiative in trouble, Obama is trying to rally his support by attacking wall street and bankers - some of it is justified and some of it is just politics - but he has to go on offensive if he wants to NOT lose both houses in Nov elections
News about Mr Bernanke's nomination in trouble did not help markets. This is again due to politics since for many democratic senators who are facing mid-term elections, it is easy call to punish anyone even closely related to 2008 crisis. In fact if Bernanke is not confirmed, markets would go down below 10000 - hope we can sell some stocks before that happens.

So what should investors do:

I would recommend stay put if you are already invested - get some cash out by selling covered calls on your holdings
If you have "dry-powder (aka cash), wait for market turmoil to play out and when right opportunity comes:
Buy preferred shares of companies which are most likely survive (IDG, DDR-PG, SFI-PD, CBC-PB)
Invest in oil and gas MLPs (EXXI, AHD, XTXI)
Invest in regional banks (RF, KEY, SNV)
Watch the politics drama unfolding during this election year

Have a great weekend !

/Shyam

Preview of Nov Elections ?

2010-01-19T19:58:00.000-08:00

GOP candidate Mr. Brown won Mass senate seat which was held by one of the most liberal democrat Ted Kennedy for last 50 years.

What a difference one year makes - last year this time Obama was on top with oath celebration of first black president. One year later, he is about to see his most important domestic policy issue - health care bill derail after so much efforts or after coming so near.

It's sad that due to this one election, health care bill and some other key policy initiatives may be dead. Is this preview of Nov elections ? This win would definitely get GOP rank and file motivated to get few more senate seats in Nov elections. So this seems to be repeat of 1994 when democrats lost elections and both houses.

Only silver lining about this is:

Stock market would love this (in fact it already predicted this with markets going up today by 116 points). It would go up even more tomorrow.

If we look back, it may be good thing for economy and stock markets. Here are two examples:

- Reagan/Republicans lost seats in 1982 election. Economy and markets went up for next few years till 1991
- Clinton/democrats lost seats in 1994 election. Economy and markets went up till 2000

So if you are investor, celebrate ! Personally I would be dis-appointed to see health care bill gets derailed. After all it took 15-16 years to come to this stage of almost getting it passed.

Mr Obama and democrats still has 10 months to work out plans to get unemployment below 8% - then they have chance in Nov elections.

/Shyam

Let the earnings season begin !

2010-01-18T09:23:00.000-08:00

Last week earnings season started with three important earnings - AA, INTC and JPM. All three of them had decent bottomline (INTC surprised even on topline). But investors wanted a reason to sell (don't blame them since markets were becoming dizzy after 65%+ rise in 10 months). Investors focused on revenue growth. With Q-to-Q comparisons becoming difficult starting from Q2, many folks believe that this may be peak earnings for many companies. Stocks of all three companies fell after the earnings were announced.

So what can we expect as earnings season gathers steam ? I would predict that we will see last week's pattern repeating for majority of companies - most of them would surprise on upside but stocks will still fall on next day. However overall market should hold pretty well with DOW hovering between 10500 and 11000 and S&P between 1100 to 1150.

Let's take a look at couple of investment ideas:

Company: Hercules Offshore, Inc

Symbol: HERO

Buy price: $5 to $5.15

Target price in 12 months: $7.50

Background: Hercules Offshore, Inc. (Hercules Offshore) provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry in the United States, Gulf of Mexico and internationally. The Company provides these services to integrated energy companies, independent oil and natural gas operators and national oil companies. The Company operates in six business segments: Domestic Offshore, International Offshore, Inland, Domestic Liftboats, International Liftboats and Delta Towing.

Selection reasons:

Energy market has come out of recession and getting ready for growth With oil hovering around $80, oil-drilling activity should pick up
There was a major find in Gulf of Mexico by MMR and EXXI - this should create interest in more drilling activity in this area. Hero is major player in supplying drilling rigs in this area and should benefit
Have addressed debt issues so chances of survival is very high
News about contracting various "cold-stacked" rigs should give positive momentum to stock
Has gone up by less than 10% in last one year - so risk-reward ratio is very good

Have a good MLK weekend and good luck investing !

/Shyam

Markets in Sweet Spot ?

2010-01-10T17:14:00.000-08:00

Markets welcomed new year with enthusiasm with first day DOW going up by 150+ points and S&P climbing up by 2.6% in first week itself. My recommendations in first post of 2010 did even better - they were up by nearly 17% (assuming you had bought on first trading day of year). One would be excited to get such return in a year. Now that these picks have returned 17% in one week, what should one do ?

To answer that, let's look at where markets and economy is heading. I think markets have found a nice sweet spot. Here are positives which are going for markets:

Economy is coming out of recession
Interest rates would remain low for quite some time
Inflation is till muted
Companies would have top-line growth due to increased consumer demand, inventory buildout and exports
Companies would have bottom-line growth since they have been very careful in increasing headcount or other expenses
60% of stimulus funds are going to be spent in 2010
No significant profit pre-announcements before earnings season starts on Monday
Pace of GDP growth for emerging countries seem to be picking up

So there are quite a few positive factors, let's not ignore some of the speed-bumps:

Unemployment still at 10%
Commercial real estate market still faces decreased valuation causing potential trouble for banks
Once stimulus spending is done, unless private sector demand picks up, could slow down recovery
With commodities shooting up, inflation is around the corner
If expectations of inflation picks up, Fed would have to raise interest rates sooner than markets would like
To burst the asset bubbles in emerging countries, governments would rein in spending and raise interest rates. We had already seen this in Australia, Israel and now China

Evaluating both +ve and -ve factors, my prediction is that markets would be trending up potentially reaching 11000 in next few weeks on positive earnings momentum. However what happens after Mar 2010 would be another story for another blog !

As far individual stock recommendations, I would still recommend 10 picks of last week. After all they cumulatively still have 30% upside left.

Good luck investing !

/Shyam

2010: Predictions and High-Beta/High-Alpha Stocks

2010-01-01T12:40:00.000-08:00

Happy new year to all of you and your families ! Hope you had a great new year party.

Now that we are starting a new year and new decade, it's time to look forward and get ready for what's in store for 2010 and this decade. Here are some macro predictions which I assume would form basis of my investment ideas and recommendations:

For year 2010:

At end of year 2010: DOW: 11500 to 12000; S&P: 1220 to 1250: Nasdaq: 2500-2600
US GDP growth for 2010: 2.5 to 3.5%; Unemployment rate: 8-8.5%
Fed interest rate: 1-2%
Oil: $75 to $90; Natural Gas: $5 to $7
BRIC stock indexes: Up by about 15-20% from 2009 levels with economies growing between 5% (Russia/Brazil) to 9% (China) - India would be somewhere around 8%

Now that we just had one lost decade for developing economies, new decade should bring some cheer to investors (similar to 1980s after stagnant returns of 1970s).

Here are some stocks which I think has 50% upside potential. Caution: Most of these stocks would also have 50% downside potential if things do not turn out to be as expected. So be cautious while investing and only if you can stomach the volatility which comes with these high beta stocks.

Sprint (S): $3.66
Citigroup (C): $ 3.31
Bank of America (BAC): $15.06
Allied Irish Bank (AIB): $3.51
Conseco (CNO): $5.00
Crosstex Energy (XTEX): $8.60
SFI-Preferred (SFI-D): $7.39
Fortress (FIG): $4.45
The PMI group (PMI): $2.52
Hero Offshore (HERO): $4.78

These stocks are some of the high-beta/high-alpha stocks. With proper due-diligence and right timing, one should be able to generate S&P beating returns in 2010.

If you have not seen Avatar, it's must see movie (in 3D). If you are into Hindi movies, 3 idiots is good movie (but has some awkward moments if you are planning to see it with kids)

Happy investing and have a great weekend !

/Shyam