Happy Holidays and Happy New Year !

From tomorrow, we have holiday shutdown at work. This is only way to get many folks in valley away from their work and computers. Overall this holiday season and December in particular is shaping up very well. Let's look at few factors to feel positive about new year.

Politics:
This may be one of the most productive few weeks in US congress history. President Obama after getting shellacking in Nov elections bounced quickly by taking pragmatic approach and got three key victories:

1. Tax-deal - while republicans must be happy that they got their wish of extending tax-cuts for wealthy, real winner is President and American Economy. With one swoop, economy got back-door stimulus of over $800 Billion. Who would have thought this could happen so soon
2. Repeal of "Don't ask, Don't tell" policy - this is also significant victory for Obama since this was one of his election promise and it was overdue
3. Ratification of Start Treaty - this was another major foreign policy win for President. Again getting support from 13 republican senators was a small coup in itself

So after all, split government is good for getting things done in Washington !

Economy and Markets:

Latest economic indicators are all pointing to strong Q4 finish to 2010. Q3 GDP came in at revised 2.6% - not bad considering many economists were worried about "double-dip". If recent shopping trends hold up for rest of 2010, I am predicting Q4 GDP growth to come above 3% (maybe closer to 4%). Stock markets already pricing in strong Q4 GDP growth and hence it is up over 6% in December. Most likely it would keep inching upwards for rest of 2010 and could have strongest December since 1991. That would set nice foundation for start of earnings season in Jan.

Fed's QEII is definitely helping but looks like Fed may have to evaluate how long to continue on QEII. They may not publicly announce but they may slow down overall buying. Overall DOW would cross 12000 sometime in 2011 and may even cross 12500.

So how does one position in these times. There are couple of ways:

• If you have holdings of good long-term stocks which you believe still has upside left, go for selling "covered calls" strategy. For more details, check out one of my earlier post 5 Rules of Earning Steady Return from Stocks
• Cash-out 50% from your winners so you will have some "dry-powder" in hand
• Check out some of the "out-of-favor" sector stocks. e.g. 
• For profit education sector: COCO ($4.6), CECO ($20), APOL ($38)
• Regional banks: HBAN ($6.6), RF ($6.6), SNV ($2.5)
• Dividend paying companies: AGNC ($29.75 with 19% yield), CIM ($4.2 with 16% yield)
• Energy sector: SD ($6.9), MMR ($15)

Wish you all Happy Holidays and Happy New Year !

/Shyam

Smart Move Mr. President !

President Obama made smart move last week by cutting tax-deal with republicans. It was a good compromise on multiple fronts:

• While President had to compromise in agreeing to extend tax-cuts for wealthy Americans, he got good concessions on extending unemployment benefits by 13 months and payroll tax-cuts for everyone
• Removes uncertainty which was facing economy and markets
• Adds much needed nearly $900 Billion stimulus with this compromise. This would give a good boost to economy. Already many economists are raising 2011 growth forecasts by 1/2 point to 3.5%
• Markets have welcomed the move by continuing the Santa rally last week
• With Fed's $600 Billion QEII and Obama's tax-cut extension of $900 Billion, that's significant boost to economy nearing about 10% of total economy size 
• Fears of deflation and double-dip are gone - this is clearly evident with wild rise in 10-year treasury yields from low of 2.33% in Oct to 3.33% last week. (good that I had invested on this move by buying some TMV)

Overall President has realized that he cannot stick to his ideology if he wants to win second term. This is first step in many pragmatic moves he would (should) do in next few months. This may anger democratic party members who are sticking with ideological ideas at expense of economy. Obama should follow what Clinton did after 1994 electoral losses - it's not only good for his own re-election but also good for America, economy and markets. Good call Mr. President !

So what are some of the investment ideas to bet on this change ? Check out FAS @ $25, SFI-PD @ $15.50, CECO @ $19.50 and MBI @ $10

Have a great week !

/Shyam

Santa Claus Rally !

The Santa Claus rally in stock markets began in earnest last week when all major US indexes went up by close to 3%. This is despite digesting lot of bad news coming from European debt crisis and US unemployment report. If markets can rally on bad news, imagine what can happen when good news start coming. As always stock markets are normally ahead of economy by about 6 months and it is expecting economy to pick up early next year. Retail sales on Black Friday and Cyber Monday were much better than expected. The momentum should continue for next three weeks. People are tired of "not able to enjoy" and hence they are willing to spend little more during this holiday season on themselves.

Let's look at some of the catalyst for markets to keep going:

• Europe which is fast becoming "bailout" continent puts its house in order by expanding it's stability fund over trillion euros
• Obama and republicans extend Bush tax-cuts for 2 years and also extend unemployment benefits
• BRIC countries keep their rapid growth - the momentum is tremendous
• Retail sales beat most optimistic forecasts
• M&A activity picks up - in some Internet sectors, it's almost like dotcom days. When Groupon rejects a $6 Billion buyout offer from Google, one can see why there is so much excitement in this sector again
• Oil is heading back to $100
• Treasury yields on 10-year notes are back above 3% - this means that bond markets are pricing economic growth and no fear of deflation. Normally this scenario is good for stocks

While there are still quite a few uncertainties, there are lot of things going on which could serve as positive catalysts for markets. I am sticking with my forecast of DOW around 11500 by year end.

When it comes to individual stock recommendations, take a look at SFI-PD around $15 (yielding 14%), CIM at $3.90, GEN (used to be RRI) at $3.60, SRZ at $4 and APOL at $35.

Have a great week !

/Shyam