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Re-energize Your Portfolio !

Markets are at 11 month high and Lehman demise anniversary (Sept 15) approaching next week - after 6 month streak and 50% gains, markets seem to be running out of air and taking a pause waiting to figure out what lies ahead in 3rd quarter results.

So how does one re-energize the portfolio for next few months ? Here are some thoughts.

From recent reports, there are signs that major economies of the world are coming out of recession and many countries (except US and UK) have even shown surprise growth even in Q2. US and UK are most likely show a growth in Q3 picking up the pace in Q4. Consumer confidence is going up and reaching 70. Unemployment though very high seems to be stabilizing and not falling off the cliff. With holiday season approaching (Diwali in India, Christmas in western world), people are going to feel more positive than normal. So in summary there are quite a few positive events in front of us.

One sector which has direct co-relation with GDP growth is energy sector. Growing economy has higher energy needs and hence higher oil/NG prices. We have started seeing this in oil prices but not in NG prices yet (these are trading near 7 year lows). If you go back to 2002, US economy was in similar state - US being largest producer and consumer of NG, state of US economy has major impact on NG prices. So when US economy starts growing at 2-3%, NG prices should start going up and could cross $5 per (currently it is $2.96).

Related to energy sector, here are some of my picks:
  • XTEX ($3.75; Target: $6 in 12 months)
  • EROC ($3.50; Target: $5 in 12 months)
  • CMZ ($1.10; Target: $1.60 in 12 months) - this could be similar to DPTR which I recommended in Mar at around $1.70. Now it is close to $3.90
  • PETD ($15: Target: $22 in 12 months)
One more risky but most likely "survival" play is MBI. At buy price of $6, it could give more than 50% returns in next 12 months (target price: $9) just based on its survival during this crisis. However this is extremely risky stock and you should be prepared to lose 50-100% of your money.

I am waiting for Dan Brown's long-awaited novel "The Lost Symbol" which is out on 9/15. Right now, I am reading "Animal Spirits - by Akerlof and Shiller" which talks about how non-economical factors like confidence, fairness have significant impact on markets and global capitalism. If you want to understand "why markets are so irrational", I would recommend reading this book.

Have a good weekend !

/Shyam

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