Are markets "Fed" up ?

One of the most anticipated talk by Fed chairman Ben Bernanke gave Friday boost to markets but still it ended in red for the week. This is 4th down week for markets and gave almost all the gains it made in July.  Now every word from Fed chairman and other members of fed are watched carefully to understand where is economy headed and how Fed would react. Bernanke's "unusual uncertainty" could be remembered similar to Greenspan's "Irrational Exuberance" comments in 1996.

Final revision of GDP for Q2 came in at 1.6 % which was better than some of the worst fears. So what's in store for Q3 and Q4 since this is what would decide if markets are breaking from trading range. Based on my observations (while back-to-school shopping for kids), retail sales seem to have picked up - at least traffic in shops like Target/Walmart has increased during this season. The all important holiday shopping season is coming soon. It should be relatively ok shopping season. I am predicting GDP growth of above 1% in Q3 and around 2-3% in Q4. IMO we are not heading towards double-dip. It would take few weeks (till just before elections) for markets to come to terms and then it would break out inching towards 11000 (for DOW).

3PAR takeover saga continues. Looking at $30 price offered for a company which was trading below $10, it looks like markets were pricing it completely wrong or HP/Dell are way overpaying it. IMO, Dell should  just match $30 price and let HP raise its bid near $32 and then abort the bill, pocket breakup fee of over $72 Million. The price has reached so high that "loser" of this takeover saga may come out as "winner" since ROI calculations do not seem to justify the price. My prediction is that HP would win the bid with price near $33.

Due to housing reports last week, regional banks got hit in a major way creating an opportunity to pick up couple of regional banks at reasonable prices. Hence this week's recommendations are: RF at $6.5 and SNV at $2. These two regional banks offer potential return of 50% in next 18 months.

Have a great week !

/Shyam

Markets: Risk-on / Risk-off ?

Summer of 2010 is almost coming to end with labor day (un-official end of summer in US). Kids are back in school. Markets are trading water around same level as start of 2010. After peaking in Apr 2010, summer was mostly about few weeks up and then few weeks down - some professionals call it as risk-on and risk-off.

Bond markets and stock markets are diverging. Yields on 2-year and 10-year T-bills (as wells as UK Gilts and German Bunds) are reaching all time lows. Few weeks back I wrote about treasuries in bubble when yield on 10-year fell to 3%. Since then it has dropped below 2.60 and heading below 2.50 very soon - looks like my short-term timing is wrong since treasuries has gone up by 7-10% since then. However I still stand by prediction about long-term that treasuries are headed for a fall (with yield going above 3% by year-end). Basically bond markets are saying that we are heading towards double-dip.

Stock markets are pricing in very modest recovery (below 2%). Hence they are still trading nearly 50% above Mar 2009 lows. The recent pullback of nearly 10-12% is due to reduced expectations of recovery. I hope stock markets are right (if bond markets are right, DOW would go below 9000).

Last week's M&A activity suggests that companies would like to deploy their cash buying new businesses instead of expanding their work-force by hiring. Notable M&A announcements were: Intel/Mcafee, BHP/Potash and Dell/3PAR. Two of three are in technology sector. Now that McAfee is gone, most likely Symantec would be play. Just on pure buyout potential, this week's recommendation is SYMC at $13.50. There could be at least 4 companies (ORCL, HPQ, MSFT, IBM) for which SYMC could be good fit especially in terms of deploying their cash-pile. However they would have to offer price closer to $20 (which means $15B plus) which could be a potential hurdle. SYMC could return about 50% in 18-24 months

Enjoy summer while it lasts !

/Shyam

PS: Normally I do not recommend stock in technology sector to avoid conflict of interest. For a change, this week, I have considered SYMC due to changing technology landscape.

"Powering" the portfolio !

Blackstone bought Dynegy with nearly 62% premium. What did Blackstone see in DYN which markets could not see for last few years since all power producers have been in rut since Enron saga ? Is it time to look at some of these independent power producers and utilities ?

The investment logic goes something like this:

• With economy eventually growing, there would be higher need for power thus increasing demand for power / energy
• Creating new power plants cost quite a bit of capital which is not easily available
• With Blackstone deal, there would be more companies / PE firms looking at these companies 
• These companies have steady cash-flow
• They are trading dirt-cheap compared to their book values

Here are couple of companies worth taking a look with potential of 20-30% return over 12-18 months:

• RRI ($3.5) or MIR ($9.80) - both these companies merging to produce a power producer with over 24000 MW. Both are trading at about 35% of book value
• NRG ($20) - With over 21000 MW capacity, it has scale similar to merged company of RRI/MIR. Trading at 65% of BV offers good value and foundation for low-risk portfolio

Last week was brutal for markets but overall trend has been one week up, one week down. Markets are clearly confused because it is not able to figure out what's in store for 2H2010. The trend would continue all the way till US elections are over in first week of Nov. Till then DOW would continue to trade between 9800 to 10800 !

For all Indian readers, Happy Independence Day !

/Shyam

What's in store for August ?

After having best month in a year, one starts wondering - what's in store for August for markets ?
There are quite a few positives for markets to keep on inching towards DOW 11000 over next 5-6 weeks. Here are some of those:

• European mess seems to be over at least for now with Euro over $1.30, I am sure Europeans would enjoy their summer holidays in August
• US GDP growth came in at 2.4 % which is lower than expected but much better than sub-par recovery (with growth of less than 1%) and puts "double-dip" fears at rest (for now)
• Company earnings came out much stronger than many have expected across the world - this bodes well for second half
• Shippers (Fedex/UPS) have raised their full year earnings guidance and these are best companies for understanding economic activity across the world
• Many emerging markets (except China) are trading near their YTD highs - good for developed markets to catch up 

So for now, except unemployment report which would be out next Friday, many signs to be positive. Hence markets keep its upward bias.

My last week's recommendation A123 systems (AONE) did very well. If you missed that, there is one more company called Erer1 (HEV) at around $3.3 which is good proxy for all the excitement which is going on with electric cars.  One should also start looking at some of the European banks like LYG ($4.3) or IRE ($4.4). Now that stress test results are out and both these banks "passed" the stress tests, they provide a good way to invest in Europe and could potentially return 30-50% or more in next 18 months

Have a great week ahead !

/Shyam