China, Greece and American Politics - Wall of Worries ?

This week was one of those weeks when investors start paying attention to volatility and come out of their complacency which they got used to in last few months. When all major indices go down by nearly 5%, one has to wake up and pay attention. This week, every day DOW had century movements (1 up, 3 down) - last two were double-century on down-side.

There are quite a few reasons markets behaved the way it behaved. Let's look at them:

• China is putting brakes on its rampant credit growth and associated speculation to prevent economy from going out of hand. And now a days when that happens, whole world markets shiver !
• Continuing worries of Greece being on verge of default
• And as major shock, democrats losing Mass senate seat and hence putting Obama's overall policies (including health care bill) in tatters. Now that his major initiative in trouble, Obama is trying to rally his support by attacking wall street and bankers - some of it is justified and some of it is just politics - but he has to go on offensive if he wants to NOT lose both houses in Nov elections
• News about Mr Bernanke's nomination in trouble did not help markets. This is again due to politics since for many democratic senators who are facing mid-term elections, it is easy call to punish anyone even closely related to 2008 crisis. In fact if Bernanke is not confirmed, markets would go down below 10000 - hope we can sell some stocks before that happens.

So what should investors do:

• I would recommend stay put if you are already invested - get some cash out by selling covered calls on your holdings
• If you have "dry-powder (aka cash), wait for market turmoil to play out and when right opportunity comes:
• Buy preferred shares of companies which are most likely survive (IDG, DDR-PG, SFI-PD, CBC-PB)
• Invest in oil and gas MLPs (EXXI, AHD, XTXI)
• Invest in regional banks (RF, KEY, SNV)
• Watch the politics drama unfolding during this election year

Have a great weekend !

/Shyam

Preview of Nov Elections ?

GOP candidate Mr. Brown won Mass senate seat which was held by one of the most liberal democrat Ted Kennedy for last 50 years.

What a difference one year makes - last year this time Obama was on top with oath celebration of first black president. One year later, he is about to see his most important domestic policy issue - health care bill derail after so much efforts or after coming so near.

It's sad that due to this one election, health care bill and some other key policy initiatives may be dead. Is this preview of Nov elections ? This win would definitely get GOP rank and file motivated to get few more senate seats in Nov elections. So this seems to be repeat of 1994 when democrats lost elections and both houses.

Only silver lining about this is:

Stock market would love this (in fact it already predicted this with markets going up today by 116 points). It would go up even more tomorrow.

If we look back, it may be good thing for economy and stock markets. Here are two examples:

- Reagan/Republicans lost seats in 1982 election. Economy and markets went up for next few years till 1991
- Clinton/democrats lost seats in 1994 election. Economy and markets went up till 2000

So if you are investor, celebrate ! Personally I would be dis-appointed to see health care bill gets derailed. After all it took 15-16 years to come to this stage of almost getting it passed.

Mr Obama and democrats still has 10 months to work out plans to get unemployment below 8% - then they have chance in Nov elections.

/Shyam

Let the earnings season begin !

Last week earnings season started with three important earnings - AA, INTC and JPM. All three of them had decent bottomline (INTC surprised even on topline). But investors wanted a reason to sell (don't blame them since markets were becoming dizzy after 65%+ rise in 10 months). Investors focused on revenue growth. With Q-to-Q comparisons becoming difficult starting from Q2, many folks believe that this may be peak earnings for many companies. Stocks of all three companies fell after the earnings were announced.

So what can we expect as earnings season gathers steam ? I would predict that we will see last week's pattern repeating for majority of companies - most of them would surprise on upside but stocks will still fall on next day. However overall market should hold pretty well with DOW hovering between 10500 and 11000 and S&P between 1100 to 1150.

Let's take a look at couple of investment ideas:

Company: Hercules Offshore, Inc

Symbol: HERO

Buy price: $5 to $5.15

Target price in 12 months: $7.50

Background: Hercules Offshore, Inc. (Hercules Offshore) provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry in the United States, Gulf of Mexico and internationally. The Company provides these services to integrated energy companies, independent oil and natural gas operators and national oil companies. The Company operates in six business segments: Domestic Offshore, International Offshore, Inland, Domestic Liftboats, International Liftboats and Delta Towing.

Selection reasons:

• Energy market has come out of recession and getting ready for growth With oil hovering around $80, oil-drilling activity should pick up
• There was a major find in Gulf of Mexico by MMR and EXXI - this should create interest in more drilling activity in this area. Hero is major player in supplying drilling rigs in this area and should benefit
• Have addressed debt issues so chances of survival is very high
• News about contracting various "cold-stacked" rigs should give positive momentum to stock
• Has gone up by less than 10% in last one year - so risk-reward ratio is very good

Have a good MLK weekend and good luck investing !

/Shyam

Markets in Sweet Spot ?

Markets welcomed new year with enthusiasm with first day DOW going up by 150+ points and S&P climbing up by 2.6% in first week itself. My recommendations in first post of 2010 did even better - they were up by nearly 17% (assuming you had bought on first trading day of year). One would be excited to get such return in a year. Now that these picks have returned 17% in one week, what should one do ?

To answer that, let's look at where markets and economy is heading. I think markets have found a nice sweet spot. Here are positives which are going for markets:

• Economy is coming out of recession
• Interest rates would remain low for quite some time
• Inflation is till muted
• Companies would have top-line growth due to increased consumer demand, inventory buildout and exports
• Companies would have bottom-line growth since they have been very careful in increasing headcount or other expenses
• 60% of stimulus funds are going to be spent in 2010
• No significant profit pre-announcements before earnings season starts on Monday
• Pace of GDP growth for emerging countries seem to be picking up

So there are quite a few positive factors, let's not ignore some of the speed-bumps:

• Unemployment still at 10%
• Commercial real estate market still faces decreased valuation causing potential trouble for banks
• Once stimulus spending is done, unless private sector demand picks up, could slow down recovery
• With commodities shooting up, inflation is around the corner
• If expectations of inflation picks up, Fed would have to raise interest rates sooner than markets would like
• To burst the asset bubbles in emerging countries, governments would rein in spending and raise interest rates. We had already seen this in Australia, Israel and now China

Evaluating both +ve and -ve factors, my prediction is that markets would be trending up potentially reaching 11000 in next few weeks on positive earnings momentum. However what happens after Mar 2010 would be another story for another blog !

As far individual stock recommendations, I would still recommend 10 picks of last week. After all they cumulatively still have 30% upside left.

Good luck investing !

/Shyam

2010: Predictions and High-Beta/High-Alpha Stocks

Happy new year to all of you and your families ! Hope you had a great new year party.

Now that we are starting a new year and new decade, it's time to look forward and get ready for what's in store for 2010 and this decade. Here are some macro predictions which I assume would form basis of my investment ideas and recommendations:

For year 2010:

• At end of year 2010: DOW: 11500 to 12000; S&P: 1220 to 1250: Nasdaq: 2500-2600
• US GDP growth for 2010: 2.5 to 3.5%; Unemployment rate: 8-8.5%
• Fed interest rate: 1-2%
• Oil: $75 to $90; Natural Gas: $5 to $7
• BRIC stock indexes: Up by about 15-20% from 2009 levels with economies growing between 5% (Russia/Brazil) to 9% (China) - India would be somewhere around 8%

Now that we just had one lost decade for developing economies, new decade should bring some cheer to investors (similar to 1980s after stagnant returns of 1970s).

Here are some stocks which I think has 50% upside potential. Caution: Most of these stocks would also have 50% downside potential if things do not turn out to be as expected. So be cautious while investing and only if you can stomach the volatility which comes with these high beta stocks.

1. Sprint (S): $3.66
2. Citigroup (C): $ 3.31
3. Bank of America (BAC): $15.06
4. Allied Irish Bank (AIB): $3.51
5. Conseco (CNO): $5.00
6. Crosstex Energy (XTEX): $8.60
7. SFI-Preferred (SFI-D): $7.39
8. Fortress (FIG): $4.45
9. The PMI group (PMI): $2.52
10. Hero Offshore (HERO): $4.78

These stocks are some of the high-beta/high-alpha stocks. With proper due-diligence and right timing, one should be able to generate S&P beating returns in 2010.

If you have not seen Avatar, it's must see movie (in 3D). If you are into Hindi movies, 3 idiots is good movie (but has some awkward moments if you are planning to see it with kids)

Happy investing and have a great weekend !

/Shyam