Shorts Beware; Insure your portfolio !

Markets continued their summer ascend for one more week but it is becoming more frothy in short term. Most of the rally in last one week was due to major short squeeze in few zombie companies like AIG, FRE, FNM. Markets are due for a correction and could anytime take a dip of few hundred points. And that would be a great opportunity to revisit your "wish list of stocks" so keep some cash handy for our shopping list. It is almost given that DOW would close above 10000 by year-end but before that we have to cross months of Sept and Oct.

Now let's visit to insurance sector which had been pretty good overall.

Insurance companies have been on fire lately (and I am not counting AIG in that list which is pure speculative play and I won't touch it or recommend it). In my previous posts, I have mentioned and recommended XL capital, HIG, LNC, GNW, CNO - almost of of them have given multi-fold returns in last 6 months. Once you understand business model of insurance companies, one can understand why they were trading as if world is coming to an end and why they were one of best group for out-sized returns during this rally. Here is my understanding of the insurance company model:

• Sell policies (life, health, home, auto and so on) and collect regular premiums
• Invest the money in high-grade securities (bonds, treasuries, stocks) and collect regular investment income
• When policies mature (or events like death happens), pay policy-holder maturity value. For this companies need to keep part of their investments in most liquid assets

Simple model - but here is what happened in Q4CY08 and Q1CY09

• Markets froze and all supposed high-grade securities which these insurance companies were holding became worth much less and ill-liquid causing these companies to scramble for cash
• BV of many of these companies collapsed. To preserve cash, most of the companies cancelled their dividends and raised cash either via TARP or from markets
• They had to register losses on their investments (in the same way our portfolios went down by 50% or so) even if securities are held for long-term. These losses reduced BV

Here is why these companies have returned multi-fold returns:

• These companies are almost like levered play on S&P due to their investments. Since S&P has gone up by 50%, due to levered play, most of these companies are up by more than 100% (in case of GNW, CNO - they are up by 1000% from their lows)
• The survival fear has gone. These companies WOULD survive
• Book Value is increasing due to market gains

There are still significant opportunities in this sector. My this week's recommendation is one of them:

Company: The Phoenix Companies, Inc.

Symbol: PNX

Buy price: $2.5 to $2.75

Target price in 12 months: $4 to $4.5

Background:

The Phoenix Companies, Inc. helps its customers find straightforward solutions to often highly complex personal financial and business planning needs through life insurance and annuities. Phoenix’s products are available through a wide variety of third-party financial professionals and intermediaries, supported by the company’s wholesalers and financial planning specialists. With a history dating to 1851, Phoenix is publicly traded on the New York Stock Exchange under the symbol PNX

Selection Criteria:

• Long history for the company
• Book Value: Close to $8
• Revenues: Over $1B. Market Cap: < $350 M
• Used to pay dividends of 16 cents - would resume once markets completely recovered
• 52 week hi: $14 52-week low: 20 cents
• Now that this company would most likely survive, it would start trading like normal insurance company which trade closer to their book value.
• Disclosure: Normally I invest in companies which I recommend.

Ganapati Bappa Moraya and have a good weekend !

/Shyam

Coming soon: DOW 10000, Oil $80

The sizzling summer rally continues for another week with all indexes reaching 10 month high. The rally gathered momentum this week due to surprise GDP growth numbers coming from German, Japan and France and even Bernanke mentioning that US economy will grow soon (but slowly). So that puts all stock markets at cross-roads. The recent rally has taken markets to yearly high in anticipation of GDP growth. However at same time, it is priced almost for perfection for Q3 results. Everyone was expecting worst results during Q2 but majority of companies gave positive surprises due to heavy cost-cutting. However consumers are still stretched and unless there is significant job growth, recovery cannot be sustainable. In recent weeks, good news is coming out for home sales, car sales (thanks to cash-for-clunkers program) but news on job front is not so rosy yet. So watch out for market sell-off in Sept. DOW is more likely to touch 9000 before it touches 10000 !

In anticipation of GDP growth and continued china play, oil is also reaching 10 month high and most likely would touch $80 soon. What is surprising is in this mini commodity boom, Natural Gas has hit 7 year low. This is almost as ridiculous as oil at $150. This is where efficient market theory fails since there is definite opportunity of arbitrage. So taking a contrarian and defensive view, my this week's recommendation is following:

Symbol: UNG

Name: US Natural Gas ETF

Buy price: $10-50 to $11

Recommended price in 12 months: $16

Background:

he investment objective of USNG is for the changes in percentage terms of its net asset value to reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the price of the futures contract on natural gas as traded on the New York Mercantile Exchange (the NYMEX)

Once some rationality returns in oil/gas prices, this would recover. And since NG is already at 7 year low, even if stock markets go down in Sept/Oct, this should provide good hedge against downside risk.

Another high-risk/high-return play is SFI preferred shares (SFI-D, SFI-E). iStar financials has already declared dividends on these preferred. At around $7, SFI-D pays annual dividend of $2 for over 28% yield. It's just that there is some chance of SFI going BK and hence preferred investors losing all their money. But without risk, no one pays double-digit returns. Be extremely careful while investing in SFI or SFI preferred.

So get ready for DOW 10000 by year end !

Have a good weekend

/Shyam

Calm before the Storm ?

Last few weeks have been pretty calm with many folks enjoying their 50% gains with summer vacations just before the school starts. It is almost exact replica of last year's August. But then dreaded Sept 08 came when the whole financial (and along with that real) world around us turned upside-down starting with Fannie/Freddie takeover and Lehman BK. I am not predicting that coming Sept would be anywhere close to last year's events but it is very likely that volatility is going to increase significantly. Currently VIX index (also called as wall street fear gauge) is hovering around 25 which is very close to its yearly low. I call it as "Calm before the Storm". Most likely it would touch 40s sometime in Sept/Oct. So how do one makes some money from this volatility ? There are few ways:

• Just stay away from market and cash in the gains you may have made in last 5 months since not losing money is equivalent to making money:-)
• Sell "out-of-money" covered calls for Sept/Oct so you could make some money in form of premium (when market goes down) or gains when these calls become "in-money" in case market goes up
• But dividend paying preferred shares of companies which you know are going to survive - there is much less volatility in preferred shares and you would get your dividends in Sept/Oct
• Buy VIX ETF (VXX) at around $58. When VIX shoots up, this ETF would gain. Be cautious about this ETF since this is not a long-term investment. When ETF reaches above $80 or so, you should cash out the gains
• Buy dividend paying REIT such as Pennsylvania REIT (PEI). This is my stock of week recommendation at $5.80 to $6. This is REIT in retail/mall sector and has unbroken record of paying dividends for last 129 quarters. At 60 cents per year dividend, it has yield of about 10%.

So one has multiple options to face this potential upcoming storm - choose wisely depending on your risk tolerance.

Now coming to my year-end forecast for DOW - it would close above 9500 and most likely would cross 10000.

Have a good weekend !

/Shyam

"Fall" is coming: Be Careful !

Last week was another up week for markets with all indexes reaching 10 month high. The positive mood was reinforced by better than expected unemployment report with unemployment dipping to 9.4%. Looks like investors are becoming ready for GDP growth and willing to pay next year's prices now. In last 4 weeks, markets have gone up significantly. While this momentum could continue, it is better to take some profits and keep cash in hand because famous "Fall" months of Sept/Oct are nearby and if history is any guide, these months do bring some excellent opportunities if you have dome dry-powder ready. Here are few steps you can take:

• If you are up by more than 50% or so, take some profits and keep those profits in cash
• If you do not want to sell your long-term holdings (for tax reasons), sell "out of money" covered call against these stocks. So even if stocks went down, you would keep the premium. If stocks went up, you would get additional 10-20% upside.
• Keep a list of quality stocks you want to buy and target prices and there would be an opportunity in next 3 months where you would be able to pick up these stocks at prices mentioned.
• Here is my list (taken from my previous recommendations): DDR: $6, CBL: $5.5, FIG: $4.5, BAC: $14, GE: $12, PLD: $9, CENX: $8, PCX: $7, HIG: $16, LNC: $18, RF: $4.40, XTEX: $3.40, PDS: $5, KEY: $6 and so on
• My this week's recommendation would be to stay in CASH or buy some dividend paying preferred shares

Have a good weekend !

/Shyam

Get Ready for GDP Growth !

Last week capped the good news which was coming over last few weeks with GDP contraction at 1% which was better than expected. Here are some of the snippets of good news:

• GDP contraction slowing considerably and coming at 1%
• Housing showing some life at last with prices in some areas increasing in 3 years
• Inventories down significantly
• More than half the companies which have reported beating profit expectations
• Durable sales increasing
• Consumer confidence holding steady
• Car sales increasing (thanks to Cash-for-clunkers)
• China/India still showing enviable growth
• Stock markets across the world showing significant increases with S&P having its best 5 month run since 1938

All these factors are indications that we are on our way to slow and gradual recovery. I won't be surprised if economy/GDP shows a growth of about 0 to 0.5% in Q3CY09 and 1-2% or more in Q4CY09

Last week was pretty good for many of my earlier recommendations especially FIG, ACAS, PCX, CENX, HIG and LNC. I expect this positive momentum to continue for another one to two weeks before people become cautious for Sept/Oct.

Here is my this week's recommendations:

Company: Conseco

Symbol: CNO

Buy price: $2.80 to $ 3

Target price in 12 months: $4.50

Company Information:

Conseco, Inc. (CNO) is the holding company for a group of insurance companies operating throughout the United States that develops, markets and administers supplemental health insurance, annuity, individual life insurance and other insurance products. The Company focuses on serving the senior and middle-income markets. CNO sells its products through three distribution channels: career agents, professional independent producers (some of whom sell one or more of its product lines) and direct marketing. The Company manages its business through three primary business segments: Bankers Life, Colonial Penn and Conseco Insurance Group.

Reasons for Recommendation:

Company has pre-announaced that it would be making profit when it reports earnings next week.

This is second consecutive quarter it would be making profits thus significantly reducing survival fears. The stock has jumped more than 50% due to this profit announcement. However on it is still down by more than 60% and has significant potential. With revenues of over $4B (annual), its market cap is still around $500 M. Just check out the trajectory of GNW over last 6 months. My prediction is CNO would have similar trajectory over next 6-12 months and hence this is my weekly stock recommendation.

Kids are very excited that finally they got their own pet - bunny names Stella. They are busy playing with her leaving me alone to do some blogging.

Have a great weekend !

/Shyam