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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


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