Return to normal in June !

I am glad that May is over. It is one of the most terrible month personally for me. My dear father passed away at age 69 due to post-surgery complications on May 16. If you are around Pune and had to go to hospital, AVOID Ruby Hall at all cost. It is one of the worst hospital in terms on post-operative care. I wish someone had warned me about this before my father's bypass surgery.

Please spread the word about avoiding Ruby Hall, Pune at all costs for any treatment !

It has been 2 weeks since my father passed away - myself and my family are coming to terms and returning to our normal lives. Life would never be same when you lose someone dear to your heart and has been an inspiring figure all your life. But life must go on !

I am so looking forward to forgetting this dreadful month of May 2010. Coincidentally it is worst May month since 1940 with 8% monthly loss. I never thought my prediction about "Sell in May and walk away" would be so right on target. I wish it did not !

Looking forward, I am expecting markets to return to normal in June to get ready for second quarter results. Now that Dow has dipped below 10000 twice, it has got much needed correction. It sets a good stage for recovery rally and on its upward march towards 11000. Markets should recover 2-4% in month of Jun which would take DOW above 10500.

By year end, DOW would end above 11000 and possibly closer to 11500 which would be about 10% from current levels. In this correction, there are so many stocks below my recommended price and could offer 50% return in next 9-12 months. Here are some recommendations:

• PMI ($4), RDN ($10), MBI ($7)
• SFI ($6), SFI-PD ($15)
• KEY ($8), SNV ($3), RF ($7.5)
• XTXI ($7), AHD ($4.4), MMR ($10)
• FAS ($22), DRN ($38), TYH ($28), ERX ($27)
• CNO ($5.5), PNX ($2.6)

The price in bracket is recommended buy price. You should consider buying around recommended price and sell after 50% return in next 9-12 months. Till you sell, you can cash out on volatility by selling call options every month.

/Shyam

"May"hem in Markets !

Market action in first week of May gives new meaning to English word "mayhem". Dictionary meaning of this word is: needless or willful damage or violence. The afternoon action in stock markets on Thursday May 6 was so true to this dictionary definition. It was indeed needless/willful damage to the confidence which was just getting started to build up. Many folks are still searching for answers what exactly happened at 2.45 pm EST on May 6 when DOW had its biggest intra-day points loss in its history !

I was amused that my previous post about selling in May would be so much on target - unfortunately when it comes to selling, I don't follow my own advise !

Storms were building for this fateful day for last few months with slow and erratic European response to Greek debt mess. Now the problem has become much bigger since contagion virus has spread to other European nations and may cross to other nations outside Europe. Unless Europe acts decisively over this weekend and next couple of weeks, we may be heading towards repeat of Sept 2008. So here are some suggestions for European policy-makers:

• Guarantee sovereign debt of EU members for next 3-5 years and let governments work debt reduction over these 3-5 years
• Tighten monitoring of members finances so nations like Greek cannot lie on their finances
• Be ready to kick members out of EU if major violations are found
• ECB should buy sovereign debt at 1-2% interest immediately - this would be equivalent of Fed buying mortgage bonds and treasuries which helped during this credit crisis
• Create a "TARP" fund of over 500 billion Euros to help EU member nations

It is possible that Germany may be happy with this European problem since weak Euro is good for country like Germany which is second biggest exporter in the world but those short-term benefits may vanish if Euro falls apart - so Ms Merkel needs to tread carefully about how far she can stretch this issue without breaking Euro.

Job report on Friday was good but market ignored it due to all the volatility but its good to know that US economy has started creating over quarter million jobs per month. Given all these factors, how do one invests ?

My prediction is that volatility would continue to be higher over next few weeks and it is likely that DOW may see 10,000 before climbing back above 11,000. Under such conditions, I would recommend to stay on sidelines, prepare your list of stocks to buy (you can check some of old posts on this site for few ideas) and start nibbling at them when DOW reaches just below 10000. Long term market fundamentals still look good provided Europe fixes its issues quickly.

That's all for now - heading for IRON2MAN - first summer movie of 2010 !

Have a great weekend !

/Shyam

G-Forces: Greece, Goldman and Google !

Looks like there are various G-forces holding down the market from taking off beyond 11000. First of all, blame it on PGS (Portugal, Greece and Spain) of "PIIGS" club for bringing down markets due to rating cut. But let's look at these G-forces which are in work:

• Greece: It has been in news for last 4-5 months and due to structure of EU, there is no quick closure on this. Now that it has only 2 weeks left, Europe better hurry up to help Greece avoid default which may lead to end of Euro as we know it. If Greece defaults, contagion would very quickly spread to other nations in PIIGS and many other nations outside Europe. This could be repeat of 2008 with difference that this time it would be nations defaulting (instead of corporates). Europe needs to have its own TARP for it's member nations and that too very quickly !
• Goldman: Since SEC filed civil suit of fraud 2 weeks back, Goldman cannot catch a break. After senate hearings, now there are talks of criminal suit. With stock down nearly 20%, it has lost close to $20 billion in market cap. Someone in Goldman got carried away in their arrogance and decided not to settle with SEC when they received "Wells" notice last July. It's not a coincidence that GS stock is at it's July 2009 level and going down possibly below 140 unless it starts discussing settlement
• Google: Google is in G-club not due to fraud or debt overload. But because of it's business decision of pulling out of China. While it was a great moral and ethical decision, it was a wrong business decision giving away largest Internet market to Baidu. Due to this decision, GOOG is down by 15% YTD while BIDU is up by 67% YTD. Google's other problem is it still does not have any money-making product other than "search" gold-mine. Now that big numbers are catching up, unless Google gets another blockbuster product which can compensate for it's loss of business in China and also keep up with growth, GOOG stock would be stuck below $600

So overall there are quite a few forces working against markets taking off for another run to DOW 12000. Volatility has definitely increased with VIX going up and down by 10-30%. It's good for selling "call options" against your existing holdings. Last week was great for some of the commercial holding companies. One of my recommendation iStar Financial (SFI, SFI-D) did pretty good. Now that it's losses has come down, most likely it would reach break-even by end of year and resume it's dividends in 2011. With that in mind, at $6.50, it offers potential upside of 50% in next 12-18 months.

Have a great weekend !

/Shyam