The Dubai Factor: Another House of Cards ?

The week was short but very interesting. It was only 3 working day week so everyone was looking for Thanksgiving weekend - people deserved a break from all gloomy economic news and looking forward to spend some money on Black Friday. Looking at last weekend collections of "New Moon" (teenage vampire movie) which were 3rd highest on record - it was looking all bright for shopping season. Initial readout from Black Friday sales seem to be promising and most likely this holiday season would end either flat or 1-2 % down from last year's shopping season which in general should be pretty good news (given high unemployment).

Now let's look at "Dubai Factor". IMO, it was just matter of time when over-leverage caught with another house of cards built right in the middle of desert. I think Dubai is great city with tremendous potential. The idea of diversifying from oil revenues to more sustainable industries like tourism, trade and finance should be followed by many other oil producing nations. But Dubai went too far in borrowing $80 B which is more than it's yearly GDP of $75B. And all this borrowed money was used to build man-made islands (Palm, World), tallest building in world and ski-resort - it was trying to create an oasis. Finally the leverage caught up with Dubai and they had to announce "standstill" with its debt-holders. It sent shock-waves across debt and equity markets and wiped out multi-billions.

In big picture, size of Dubai problem is very small ($80B liability compared to over $600B for Lehman). However investors got worried that Dubai may not be alone in this and ran to safety net of treasuries. Who knows - there could be more countries like Dubai (Turkey, Ireland, Iceland, European countries and if you extend this for 10 years or so - maybe USA). I just read that Abu-Dhabi banks are providing liquidity to banks which have lent to "Dubai Inc" - so markets should have positive reaction on Monday. But one should remember that tough times are not completely behind us. When it comes to weekly recommendation, I would recommend staying in cash or putting money in balanced mutual funds I recommended 2-3 weeks back

Let's see if "Sheikh manages to derail Santa Claus rally" which happens every December.

Have a great week !

/Shyam

Markets: Looking for direction

After a swoon till March and then upswing, market indices are almost at same levels where they were year ago (and 10 years ago). And given last few weeks sea-saw (one week up, one week down), market is looking for decisive direction. Let's take a look at both sides of arguments:

Optimists:

• Forecasts: DOW: Above 11000, S&P: 1200
• We just came from brink of collapse and given so much fiscal and monetary stimulus, GDP growth would pick up and hence profits and stocks should go up
• Economies of developing countries (especially BRIC) have decoupled from developed economies and should provide necessary growth to world economy
• Housing market in US seem to be stabilizing
• Banks seem to be putting their houses in order and may not need additional capital
• Risk taking is back with recent IPOs and pick up in M&A

Pessimists:

• Forecasts: DOW: Below 8000, S&P: 850
• Unemployment is rising and dangerously close to post-depression all time high (10.8 reached in 1982)
• Foreclosures are still increasing risking bank capital levels once again
• Consumer spending would be reduced during holidays (due to unemployment)
• Government stimulus would cause stagflation (no growth, high inflation) repeating 1970's scenarios (add oil price increase to that and we have dangerous situation)
• Commercial real estate is another big shoe to drop in developed countries. Big asset bubbles are building up in China which would bust in near future.
• Pessimists are expecting double-dip recession in second half of 2010

Both sides have valid arguments and hence market is not able to find decisive direction. I am more on side of optimists but would forecast DOW around 9500 to 10500 for next few months. Since it is already closer to 10500, I would be cautious in adding new money into stocks. My recommendation would be to take this opportunity and balance the portfolio by moving money into income producing investments such as preferred shares (SFI-D, DDR-G or Vanguard balanced funds) or companies with high yield (Verizon, AT&T, Merck)

I was revisiting my recent recommendation which was is not doing that well (SNV). I have personally invested in this so I know the pain of losing money. So while doing some research, I came across well-written article on SNV. I am still long on SNV and now at $1.70 it is trading 50% lower than my last recommended price. So if you are ready to take extreme risk (caution: you may lose your investment), SNV at $1.60-1.70 could provide excellent opportunity for 50-100% return in 12 months. Last year I recommended Yash (my 11 year son) to invest his pocket money to buy 100 shares of GNW at $1.41 on last year's Black Friday. At that time, GNW was on brink of collapse. It survived and now it is trading at $11

Have a great Thanksgiving Weekend !

/Shyam

BRIC: What's in store for 2010 ?

I am regular reader of Economist - normally my Saturday goes in reading Economist. It gives me good understanding about geo-political and economic issues around the world. This week, it has special coverage on "Brazil takes off". Few weeks back it had similar special coverage on China. I am hoping that they will have one for Russia and India.

Economies and stock markets of BRIC countries are on fire again even though economies of their biggest customers (US, Japan and Europe) are still in slow recovery. At one point last year, everyone thought that BRIC countries economies would bust but governments of these countries have done pretty good job in timely stimulus. Frankly, the way stimulus was handled by China and India was much better than US stimulus since it got economies going quickly. For example, India's plan of offering job to anyone who wants to work in rural India is an excellent idea in such situations. After all, that's what got US out of great depression. I wish Obama would have applied something similar in US - after all US needs scheme like this to get its infrastructure fixed and also help unemployment below 7%.

So now that BRIC countries are on solid footing, what's in store in 2010 ? Here are some macro predictions:

• GDP Growth: China: 9%, India: 7%: Brazil: 5-6% and Russia: 4-5%
• Stock market index growth by end of 2010: China: 20%, India: 15%, Brazil: 15-20%, Russia: difficult to predict but could be around 10-20%
• Generally stable governments in all 4 countries

What are the vehicles to invest in BRIC countries:

• Personally I invest in VEIEX which not only covers BRIC countries but overall emerging markets. It is up by more than 70% this year and could rise another 20% by end of 2010. Wait for markets to shake up little bit and invest at regular periods like every month or every quarter so you can cost-average. As always, Vanguard has low expense ratios which help
• There are other country specific funds like MCHFX, MINDX, FLATX but they are risky due to one country focus
• I could recommend quite a few individual stocks like IBN, SLT and so on but again they could be risky. It's better to stay with professional mutual fund managers when it comes to investing in emerging markets

Happy BRICing and have a good week !

/Shyam

Let's do some Balancing Act !

One week up, one week down. That's the market summary and it would continue for next few months with DOW hovering around 10000 (with range from 9500 to 10500). So it is ideal time to do some balancing of portfolio to protect the yearly gains and move the money into safer alternatives. All year round, most of my recommendations were in high beta stocks. Many of them did extremely well (e. XL, HIG, LNC, HUN, IDG and many others). Some of them were duds (CIT-A, DRYS). Winners outpaced losers by 3:1 margin. So now it is time to lock and protect those gains.

Here is high-level portfolio allocation recommendation - it may change based on individual age and risk tolerance and many other factors.

If your age is between 30-40:

• Bonds, CDs, cash and bond mutual funds: 25%
• Stocks, Preferred stocks and equity mutual funds: 75%

If your age is between 40-50:

• Bonds, CDs, cash and bond mutual funds: 35-40%
• Stocks, Preferred stocks and equity mutual funds: 60-65%

If your age is between 50-60:

• Bonds, CDs, cash and bond mutual funds: 50%
• Stocks, Preferred stocks and equity mutual funds: 50%

So now that markets had reached short-term equilibrium, it's time to move some of the stocks into balanced mutual funds. Here are two of my recommendations in this area:

• Vanguard Wellesley Income

  (MUTF:VWINX). The investment seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation. The fund invests approximately 60% to 65% of assets in investment-grade corporate, U.S. Treasury, and government agency bonds, as well as mortgage-backed securities. The remaining 35% to 40% of fund assets are invested in common stocks of companies that have a history of above-average dividends or expectations of increasing dividends.

• Vanguard STAR

  (MUTF:VGSTX): The investment seeks long-term capital appreciation and income. The fund invests in a diversified group of other Vanguard mutual funds, rather than in individual securities. The Fund follows a balanced investment approach by placing 60% to 70% of its assets in common stocks through eight stock funds; 20% to 30% of its assets in bonds through two bond funds

For a change, these are low beta, stable recommendations. With vanguard, one does not have to worry about costs since both these have very low expense ratios and long history. Use your own due-diligence and do portfolio balancing based on your criteria.

Have a good week !

/Shyam

Markets: "trick" or "treat" ?

Last week was a pivotal week for markets and left investors wondering - was it a scary "trick" or opportunity "treat" ?

As expected and predicted GDP grew by 3.5%. At surface investors celebrated the news on Thursday with nearly 200% point gain. But on Friday, they had second thoughts after parsing the numbers and realizing that actual GDP growth excluding "cash for clunkers sales" and "inventory buildup", was below 1%. Now that these are one time events over, investors are looking forward and wondering from where growth would come ? Hence the Friday sell-off. Despite last 2 week sell-off, markets are still up by more than 50%. So there is still some time to cash-out gains and wait for opportunity in another sell-off which may take markets below 9500. However I am still sticking with my prediction of DOW near or above 10000 by year end.

Let's look at stock recommendation for the week:

Company: Genworth Financial

Symbol: GNW

Buy price: $10 to $10.50

Target price in 12 months: $ 15

Company background:

Genworth Financial, Inc. (Genworth) is a financial security company dedicated to providing insurance, investment and financial solutions to approximately 15 million customers, with a presence in approximately 25 countries.

Reasons for selection:

• Annual revenues: $10 B
• Market Cap: < $5 B
• Book Value: $25. Trading at 40% of BV. Normally insurance companies trade 1 times book value
• Recently raised $600 M at $11.70 per share. It is trading below that
• Worst is behind it as seen from Q3 results where it beat estimates handily
• This stock could rise similar to LNC and HIG. I won't be surprised if it goes closer to $20 in 2010

Hope all of you had good "trick or treat".

Have a great week ahead !

/Shyam