DOW 9000 - what's next ?

As I predicted about DOW reaching 9000 by summer end back in Apr, it did cross that milestone right in the middle of summer. So now what to expect ?

It's kind of tricky situation - on one side, DOW had its best 2-week run since 2000. But then we know what followed. On other side, it is still 30% plus down from its high of 14000 in Oct 2007. Here are some of the macro-trends I am watching:

• Emerging stock markets have started getting into bubble territory with many of them up by 70-100%. Is economic recovery justify this or is this China govt fueled bubble ?
• Natural Gas prices are still 60% below their peaks so industrial demand has not really picked up significantly
• Companies are beating analyst forecasts by cutting costs and not by increasing revenues - this cannot sustain unless revenues pick up
• Consumers have started opening their wallets but that may be cyclical effect of rising stock market wealth. If stock market tanks again, consumer demand would vanish once more
• Summer is ending and Sept - worst month in terms of stock market returns and Oct - month of major crashes are approaching.

So what should investor do ?

• If you are heavily invested in stocks, I would recommend selling "out of money covered call" options for Aug or Sept. This way you can generate 2-5% return (not bad for few weeks). If stock does go above strike price (which would be about 10-20% above current market price), your stock would be called and you would get additional gains in your stock. If stock stays below strike price, you keep the premium you got and stock won't be called. Either way, you would either make money in call premium or additional gains
• If you are still in cash, I would recommend looking into energy MLPs (PWE, XTEX, HTE) or REITs (URE, DDR, CBL).  Another interesting sector to watch out for next week would be insurance companies (HIG, LNC and GWN). These stocks got killed when markets went down. Now due to 2nd querter stock market gains, some of those losses on their bookd would be reversed and BV would increase. I would recommend LNC (Lincoln National) at $16-18 with potential of going to 30 in 12 months. These companies are either paying dividends or would pay soon and hence would reduce the losses in case stocks go down in Sept/Oct. However be careful - DOW is at its highest for the year and could pull down to 8500.

Am I ready to make year end prediction for DOW ? I think DOW would come very near 10000 or even cross it but let me provide my analysis in Aug after studying some more macro trends

Have a good weekend !

/Shyam

"Dividend-proof" your portfolio !

What a difference week makes - last week things were pretty gloomy with markets tanking over 7-8% in previous 4 weeks. With unexpected good earnings from GS, INTC, IBM and JPM, things suddenly looks promising again. In one week, S&P is up by 7% and recovered almost all losses over previous 3-4 weeks. If good earnings streak continues next week, it may cross Jun 11 high. Even Government felt compelled to ignore the "bailout" plea from CIT - hope they are not making same mistake Paulson did in Sept 08 when he rejected bailout plea from Lehman.
With summer mid-way, I am still hoping that my prediction of Dow hitting 9000 before labor day weekend would come true. However right now I have started looking past labor day weekend when dreaded months of Sept/Oct come - almost all crashes have come in these two months (except one which we saw in Mar 09). So we need to make the portfolios by adding some crash-proof strategies. One way to do is to rotate into stocks which are paying dividends even during these worst quarters (Q1 and Q2). Here are some recommendations on dividend paying stocks:

• Penn West Energy Trust (Price: $12 Yield: 11-12%)
• Harvest Energy Trust (Price: $5 Yield: 10%) - This is my stock of week recommendation. My target price in 12 months is about $7.50
• CBL & Associates Properties (Price: $5 Yield: 8%)
• Developers Diversified Realty (Price: $4.2 Yield: 15-16%)
• ProLogis (Price: $7.5, Yield: 8%)

Even though all of above stocks could go down if markets take downward turn in Sept/Oct, here are the reasons they make a sound investment choice:

• They would still continue to pay dividends due to their structure as Canadian trusts or REITs (pass-thru entities). By law, they are required to pay 90% of their taxable income to their shareholders to avoid paying taxes.
• Since they are down by nearly 70-80% from their peaks, they provide a reasonable upside potential when oil/gas and real estate recovers along with economy
• Many of them have raised equity in recent weeks to reduce their debt and increasing their chances of survival even if economy does not recover for 1-2 years.
• Stock prices are trading almost as long-term no-expiry options
• If you build reasonable quantity in these stocks, you could apply selling "covered-call" strategy to generate additional income (like another form of dividends)

As summer project, kids did a small animantion movie using digital photos. Pretty cool !

Have a great weekend !

/Shyam

Is it time to go "private" ?

It has been exactly 2 years since much hyped Blackstone IPO at $31 which marked the peak of credit bubble. I myself got carried away in the hype and in fact bought into blackstone IPO only to have significant losses - since then I have learned my lessons not to believe in hype.

So why am even writing and considering "private equity" companies again ? In last two years since BX IPO, much of the hype has been gone along with bubble time excesses. There are almost no private equity deals in last 12 months (as against at least one deal getting announced every Monday morning in 2006-2007). In a way this is good for PE industry so they can focus on their portfolio companies and make some real decisions to help them survive and thrive when economy recovers.  The flood of redemption seen 6 months back have slowed down considerably and in fact there are new funds being raised (albeit smaller in size). Many of the PE companies have significant "dry-powder" (aka cash ready to invest) and hence should be able to take advantage of depressed valuations. This was evident from Fortress deal to buy debt of around $600 million on New-York real estate development project. When the economy returns to normal state of growth, these companies would recover their valuations and start paying decent dividends for yield of about 5-10% (at current stock prices)

Here are some of the picks:

• Blackstone (BX) at around $10
• American Capital (ACAS) at around $3

Here is my stock pick of week in private equity industry:

Company: Fortress Investment Group LLC

Symbol: FIG

Recommended buy price: $3 to $ 3.3

Target price in 12 months: $5

Background: 

Fortress Investment Group LLC (Fortress) is a global alternative asset manager that raises, invests and manages private equity funds and hedge funds. Fortress earns management fees based on the size of its funds, incentive income based on the performance of the Company's funds, and investment income from its principal investments in those funds. Its offering of alternative investment products includes private equity funds and hedge funds. It has close to $26.5 B AUM

Selection criteria:

One of the pre-eminent PE group. With management fees of 1-2% for AUM, it has steady revenues of $500 M just from management fees. Recently it raised close to $200 M by issuing stock at $5 and many insiders bought during this offering. It is selling at discount of over 35% from its recent offering. Stock is down by nearly 90% from its peak of over $33 in 2007. It used to pay dividends of over 20 cents per quarter. Once company balance sheet improves and economy recovers, I am expecting it to start paying dividends in the range of 25-40 cents per year generating yield of at least 8% at current price. Finally it is "survival" theory. Since it has survived worst of credit cycle in last 9 months, it has excellent chances of surviving in whatever comes next and comes out ok. 

Have a great Independence Day Weekend and good luck !

/Shyam