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State of Union, Fed and DOW 12000 !

I watched President Obama's 2nd State of Union speech of members of congress. Overall it was good speech. Nothing spectacular but good confidence building speech. President tried to define this generation's  "Sputnik" moment but did not get same level of excitement which he must have expected. His overall focus on jobs, clean energy, education and tax reforms was indicative of his priorities for next two years. No more big policy initiatives like health-care bill. Being pragmatist, he took voters message and changed the course of his presidency. After watching him, I am pretty confident that he would win 2nd term !

Fed as expected announced to keep QEII on and interest rates low for extended period. No surprise there. With an acknowledgment to recovery gaining momentum and commodity prices rising, it is opening the door for first interest rate hike towards end of year. If GDP growth for last quarter and next two quarters come close to 3.5%, I won't be surprised to see rate hike in Summer 2011.

Markets took both events - state of union speech and fed policy announcement positively which helped DOW cross 12000. I was expecting it to cross this milestone sometime during Spring or Summer. It did few months earlier. Is market getting ahead of itself ? I think markets are getting overvalued in short-term and it is time to take some money off the markets and keep it ready when eventually there is correction. Once all Q4 results are out, most likely markets would drift downwards with DOW heading towards 11500 in Spring and then resuming its upward march to end 2011 around 12500.

Last week some of the mortgage insurance companies took big-hit due to MGIC announcing delay in profitability. It opened up good but risky investment opportunity in the sector. Here are some of the investment ideas in insurance sector:

  • Mortgage Insurers: PMI ($3), RDN ($7.10), MTG ($8.80)
  • Life insurers: PNX ($2.6), CNO ($6.5)
  • Other insurance companies: AIG ($40) and MBI ($11)
All these are very risky investments but could potentially provide returns of 30% in 18 months.

For Indian readers: Happy Republic Day (26 Jan) !

/Shyam

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