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