Year 2009 Recommendations: Report Card

Now that 2009 year is over, it is time for report card on market predictions and stock recommendations I have been doing on my weekly posts.

Here are macro predictions and actual:

• DOW would cross 10000, it did it Oct and stayed mostly above that level for last two months.
• Oil would touch $80, it did touch $80 few weeks back and stayed very close to $70-80 range for most of last 2 months
• GDP would start growing in Q3, it did started growing - in fact it grew more than my prediction
• Financials and REIT would recover, they did as soon as stress tests were completed

In all, macro predictions were more or less came out to be accurate and that helped me pick my weekly predictions.

Here is summary of report card of weekly predictions (assuming one invests about $1000 in weekly stock recommendation at recommended stock price)

• Overall return: 80% (assuming dividend investments). By any standard this is winning performance (in comparison: S&P up by 23.5%).
• Best stock: XL with 354 % gain;DDR-PG: 296%
• Worst stock: YRCW: -79%
• Stocks with positive return: 26 (72%); negative return: 10 (286%)

Here is total report-card:

Symbol	Trade Date	Shrs	Price Paid	Holdings Value	Gain/Loss	Gain/Loss %	Price 12/31	Notes
ACAS	13-Apr-09	400	2.3	$976.00	$48.00	5.17%	2.44	Target:$3.60
BCS	7-Feb-09	200	5	$3,520.00	$2,512.00	249.21%	17.60	Target: $10
BCS-PD	7-Feb-09	100	9	$2,486.00	$1,578.00	173.79%	24.86	Target: $18
CENX	8-Jun-09	160	6.06	$2,590.40	$1,612.80	164.98%	16.19	Target: $9
CHK	8-Sep-09	50	22.22	$1,294.00	$175.00	15.64%	25.88	Target: $30
CMZ	14-Sep-09	900	1.12	$828.00	($188.00)	-18.50%	0.92	Target: $1.60
CNO	3-Aug-09	300	3.25	$1,500.00	$517.00	52.59%	5.00	Target:$4.50
DDR	6-Apr-09	400	2.51	$3,704.00	$2,692.00	266.01%	9.26	Target: $4.50
DDR-PG	6-Apr-09	200	5	$4,000.00	$2,992.00	296.83%	20.00	Target:$7.5
DPTR	26-May-09	600	1.7	$624.00	($404.00)	-39.30%	1.04	Target: $3
DRYS	25-Jan-09	100	9	$582.00	($326.00)	-35.90%	5.82	Target: $15
EROC	14-Sep-09	250	4	$1,447.50	$439.50	43.60%	5.79	Target: $6
FIG	6-Jul-09	333	3	$1,481.85	$474.85	47.15%	4.45	Target: $5
GE	22-Feb-09	125	8	$1,891.25	$883.25	87.62%	15.13	Target: $12
GNW	2-Nov-09	100	10	$1,135.00	$127.00	12.60%	11.35	Target: $15
HIG	19-Jan-09	100	12	$2,326.00	$1,118.00	92.55%	23.26	Target: $18
HUN	4-Jan-09	300	3.3	$3,387.00	$2,389.00	239.38%	11.29	Target: $6
IDG	1-Mar-09	200	5.5	$3,938.00	$2,830.00	255.42%	19.69	Target: $12
LNC	27-Jul-09	55	18.5	$1,368.40	$342.90	33.44%	24.88	Target: $30
OIL	12-Jan-09	50	21	$1,294.00	$236.00	22.31%	25.88	Target: $33
PCX	1-Jul-09	150	6.4	$2,319.00	$1,351.00	139.57%	15.46	Target: $9
PDS	20-Apr-09	300	3.33	$2,175.00	$1,168.00	115.99%	7.25	Target: $6
PEI	17-Aug-09	175	5.8	$1,480.50	$457.50	44.72%	8.46	Target: $9
PLD	30-Mar-09	200	5.5	$2,738.00	$1,630.00	147.11%	13.69	Target: $9
PMI	5-Oct-09	250	4	$630.00	($378.00)	-37.50%	2.52	Target: $6
PNX	31-Aug-09	400	2.8	$1,112.00	($16.00)	-1.42%	2.78	Target: $4.50
RF	26-May-09	250	3.8	$1,322.50	$364.50	38.05%	5.29	Target: $6
RQI	4-May-09	300	3.25	$1,821.00	$838.00	85.25%	6.07	Target: $4.50
SFI-PE	28-Sep-09	150	7.7	$1,093.48	($69.51)	-5.98%	7.29	Target: $12
SNV	-	1,000	2.03	$2,050.00	($2.00)	-0.10%	2.05	Target: $4
UNG	24-Aug-09	100	11.5	$1,008.00	($150.00)	-12.95%	10.08	Target: $16
URE	27-Apr-09	300	3.5	$2,067.00	$1,009.00	95.37%	6.89	Target: $5.25
VEIEX	16-Nov-09	40	26	$1,036.40	($3.60)	-0.35%	25.91	Target: $30
XL	15-Feb-09	250	4	$4,582.50	$3,574.50	354.61%	18.33	Target: $6
XTEX	15-Jun-09	250	3.99	$2,150.00	$1,144.50	113.82%	8.60	Target $6
YRCW	22-Sep-09	260	3.9	$218.35	($803.65)	-78.64%	0.84	Target:$6
Total				$32,019.53	$30,167.53	79.37%

So overall 2009 was interesting year and kept me going with my blogs and recommendations. Let's see how 2010 turns out - I do have some macro predictions and some interesting recommendations for 2010. But for that you would have to wait till 2010 actually starts.

Till then, Happy New Year !

/Shyam

Copenhagen: Lost Opportunity !

Finally the much hyped UN climate summit at Copenhagen got over last week. What a dis-appointment especially when there was so much anticipation created by arrival of 100+ world leaders (or should I say politicians since no one really demonstrated any leadership to save the our only planet). The leaders failed to take forward looking decisions and no meaningful accord was reached. Going forward such summits should be limited to countries which matter when it comes to climate control - those would be G20 forum since those countries are responsible for nearly 80% emissions.

We are almost at end of 2009 - only one week remaining which would be slow week for markets since many folks have already gone on holidays. The markets are near their yearly highs and would most likely close year near these levels. DOW would likely cross 10500 next week. Since companies have not started warning pre-announcements, Q1 results should be decent. In anticipation of that, DOW would march and cross 11000 by end of Jan 2010.

Recently housing market and energy markets have started showing quite a bit of activity. Considering that, I would still consider my previous recommendations as potential buys during these slow times: SNV ($2), ING ($9.80), GNW ($11.70), EROC ($5) and XTEX ($7)

That's all for now. Happy Holidays !

/Shyam

S&P: CY 2009-2011 = CY 2003-2005

Someone has said "If you want to predict future, look into past". And when it comes to investing, studying history and psychology is more profitable than studying finance and accounting (that is also required but without understanding basic human traits, numbers can fool you)

So let's look at recent past when economy came out of last dot.com induced downturn.

• Sept 2000: S&P at 1520; Oct 2007: S&P at 1556
• Mar 2003: S&P at 829; Mar 2009: S&P at 684
• Dec 2003: S&P at 1096; Dec 2009: S&P at 1100

As you can see, the levels are so much similar - only difference is that last time markets went from high to low over the period of 30 months whereas this time it happened in 18 months.

So looking at 2004 and 2005, let's predict what could happen in markets over next couple of years:

• Mar 2004: S&P at 1156; Prediction: S&P could be 1150 to 1200 by Apr 2010
• Summer of 2004: S&P at 1050; Prediction: S&P could test 1050 by summer of 2010
• 2004 year-end: S&P at 1212; Prediction: S&P could be 1200-1230 by 2010 year-end
• 2005 year-end: S&P at 1250: Prediction S&P could be 1250 to 1300 by 2011 year-end

If these predictions came true, we are looking at gain of 5 to 10 % in one year and 12 to 18% in 2 years. Not bad if we know in advance !

So while there would be quite a bit of volatility in the markets over next 12-24 months, if you believe long-term trends are towards upward direction, just relax, invest at regular intervals and enjoy your holidays.

Cisco celebrated it's 25th Birthday - here is small video which Yash and Isha created.

Have a great week !

/Shyam

Jobs, Jobs and Jobs !

There was quite a bit of news about jobs this week. President Obama had its jobs summit this week to discuss and understand ideas on how to create jobs in USA. Here are some of my own ideas (in case President Obama is reading this blog:-)

• Start infrastructure projects to fix roads, bridges and electrical grid and offer jobs to any qualified people who are willing to work. Put a special 10 cents tax on gas to cover the expenses for this program so it does not add to deficit
• Give 1-2 year special tax-break to companies to bring back cash to USA from other countries. According to some estimates, companies have nearly $750 Billion parked outside USA. The tax-break should be given only if companies hire employees in USA
• Give "cash-for-green-projects" (on similar lines as cash-for-clunkers). e.g. give 50% subsidy for residential solar installations. I am sure lot of people who otherwise would not consider solar installation would give serious thought
• Give tax-credits for anyone who wants to get trained - more people gets enrolled in colleges to training, better it would be for long-run

I am sure readers of this blog also have quite a few ideas. Please post your comments on job creation ideas

Friday's job report brought some cheer with unemployment dipping to 10% (from 26 year high of 10.2%). It is definitely a good news if we see a declining trend. Based on forecasts, it may take 5 years to reach 5% unemployment. So how would it impact market. Here is my simple "DOW and Unemployment thumb rule"

Dow 10000, Unemployment 10% - both of these have reached an equilibrium in current economic conditions. My thumb rule is as follows:

For every 1% decline in unemployment number, DOW would go up by 1000 points.

DOW = 10000 + 1000 * (10% - Unemployment)

That means,

Unemployment 9% = DOW 11000

Unemployment 8% = DOW 12000 and so on

IMO, this rule would generally track well up to DOW = 15000. There is no scientific basis for this rule. But since markets are driven by people's behaviors, it is definitely based on "gut-feel"

So what stocks one should buy for Christmas - here are some past recommendations which are still "good buys": XTEX ($5.4), FIG ($3.90), SFI-D ($7.7), IRE ($10), AIB ($4.6), ING ($9.4)

Have a good weekend !

/Shyam

The Dubai Factor: Another House of Cards ?

The week was short but very interesting. It was only 3 working day week so everyone was looking for Thanksgiving weekend - people deserved a break from all gloomy economic news and looking forward to spend some money on Black Friday. Looking at last weekend collections of "New Moon" (teenage vampire movie) which were 3rd highest on record - it was looking all bright for shopping season. Initial readout from Black Friday sales seem to be promising and most likely this holiday season would end either flat or 1-2 % down from last year's shopping season which in general should be pretty good news (given high unemployment).

Now let's look at "Dubai Factor". IMO, it was just matter of time when over-leverage caught with another house of cards built right in the middle of desert. I think Dubai is great city with tremendous potential. The idea of diversifying from oil revenues to more sustainable industries like tourism, trade and finance should be followed by many other oil producing nations. But Dubai went too far in borrowing $80 B which is more than it's yearly GDP of $75B. And all this borrowed money was used to build man-made islands (Palm, World), tallest building in world and ski-resort - it was trying to create an oasis. Finally the leverage caught up with Dubai and they had to announce "standstill" with its debt-holders. It sent shock-waves across debt and equity markets and wiped out multi-billions.

In big picture, size of Dubai problem is very small ($80B liability compared to over $600B for Lehman). However investors got worried that Dubai may not be alone in this and ran to safety net of treasuries. Who knows - there could be more countries like Dubai (Turkey, Ireland, Iceland, European countries and if you extend this for 10 years or so - maybe USA). I just read that Abu-Dhabi banks are providing liquidity to banks which have lent to "Dubai Inc" - so markets should have positive reaction on Monday. But one should remember that tough times are not completely behind us. When it comes to weekly recommendation, I would recommend staying in cash or putting money in balanced mutual funds I recommended 2-3 weeks back

Let's see if "Sheikh manages to derail Santa Claus rally" which happens every December.

Have a great week !

/Shyam

Markets: Looking for direction

After a swoon till March and then upswing, market indices are almost at same levels where they were year ago (and 10 years ago). And given last few weeks sea-saw (one week up, one week down), market is looking for decisive direction. Let's take a look at both sides of arguments:

Optimists:

• Forecasts: DOW: Above 11000, S&P: 1200
• We just came from brink of collapse and given so much fiscal and monetary stimulus, GDP growth would pick up and hence profits and stocks should go up
• Economies of developing countries (especially BRIC) have decoupled from developed economies and should provide necessary growth to world economy
• Housing market in US seem to be stabilizing
• Banks seem to be putting their houses in order and may not need additional capital
• Risk taking is back with recent IPOs and pick up in M&A

Pessimists:

• Forecasts: DOW: Below 8000, S&P: 850
• Unemployment is rising and dangerously close to post-depression all time high (10.8 reached in 1982)
• Foreclosures are still increasing risking bank capital levels once again
• Consumer spending would be reduced during holidays (due to unemployment)
• Government stimulus would cause stagflation (no growth, high inflation) repeating 1970's scenarios (add oil price increase to that and we have dangerous situation)
• Commercial real estate is another big shoe to drop in developed countries. Big asset bubbles are building up in China which would bust in near future.
• Pessimists are expecting double-dip recession in second half of 2010

Both sides have valid arguments and hence market is not able to find decisive direction. I am more on side of optimists but would forecast DOW around 9500 to 10500 for next few months. Since it is already closer to 10500, I would be cautious in adding new money into stocks. My recommendation would be to take this opportunity and balance the portfolio by moving money into income producing investments such as preferred shares (SFI-D, DDR-G or Vanguard balanced funds) or companies with high yield (Verizon, AT&T, Merck)

I was revisiting my recent recommendation which was is not doing that well (SNV). I have personally invested in this so I know the pain of losing money. So while doing some research, I came across well-written article on SNV. I am still long on SNV and now at $1.70 it is trading 50% lower than my last recommended price. So if you are ready to take extreme risk (caution: you may lose your investment), SNV at $1.60-1.70 could provide excellent opportunity for 50-100% return in 12 months. Last year I recommended Yash (my 11 year son) to invest his pocket money to buy 100 shares of GNW at $1.41 on last year's Black Friday. At that time, GNW was on brink of collapse. It survived and now it is trading at $11

Have a great Thanksgiving Weekend !

/Shyam

BRIC: What's in store for 2010 ?

I am regular reader of Economist - normally my Saturday goes in reading Economist. It gives me good understanding about geo-political and economic issues around the world. This week, it has special coverage on "Brazil takes off". Few weeks back it had similar special coverage on China. I am hoping that they will have one for Russia and India.

Economies and stock markets of BRIC countries are on fire again even though economies of their biggest customers (US, Japan and Europe) are still in slow recovery. At one point last year, everyone thought that BRIC countries economies would bust but governments of these countries have done pretty good job in timely stimulus. Frankly, the way stimulus was handled by China and India was much better than US stimulus since it got economies going quickly. For example, India's plan of offering job to anyone who wants to work in rural India is an excellent idea in such situations. After all, that's what got US out of great depression. I wish Obama would have applied something similar in US - after all US needs scheme like this to get its infrastructure fixed and also help unemployment below 7%.

So now that BRIC countries are on solid footing, what's in store in 2010 ? Here are some macro predictions:

• GDP Growth: China: 9%, India: 7%: Brazil: 5-6% and Russia: 4-5%
• Stock market index growth by end of 2010: China: 20%, India: 15%, Brazil: 15-20%, Russia: difficult to predict but could be around 10-20%
• Generally stable governments in all 4 countries

What are the vehicles to invest in BRIC countries:

• Personally I invest in VEIEX which not only covers BRIC countries but overall emerging markets. It is up by more than 70% this year and could rise another 20% by end of 2010. Wait for markets to shake up little bit and invest at regular periods like every month or every quarter so you can cost-average. As always, Vanguard has low expense ratios which help
• There are other country specific funds like MCHFX, MINDX, FLATX but they are risky due to one country focus
• I could recommend quite a few individual stocks like IBN, SLT and so on but again they could be risky. It's better to stay with professional mutual fund managers when it comes to investing in emerging markets

Happy BRICing and have a good week !

/Shyam

Let's do some Balancing Act !

One week up, one week down. That's the market summary and it would continue for next few months with DOW hovering around 10000 (with range from 9500 to 10500). So it is ideal time to do some balancing of portfolio to protect the yearly gains and move the money into safer alternatives. All year round, most of my recommendations were in high beta stocks. Many of them did extremely well (e. XL, HIG, LNC, HUN, IDG and many others). Some of them were duds (CIT-A, DRYS). Winners outpaced losers by 3:1 margin. So now it is time to lock and protect those gains.

Here is high-level portfolio allocation recommendation - it may change based on individual age and risk tolerance and many other factors.

If your age is between 30-40:

• Bonds, CDs, cash and bond mutual funds: 25%
• Stocks, Preferred stocks and equity mutual funds: 75%

If your age is between 40-50:

• Bonds, CDs, cash and bond mutual funds: 35-40%
• Stocks, Preferred stocks and equity mutual funds: 60-65%

If your age is between 50-60:

• Bonds, CDs, cash and bond mutual funds: 50%
• Stocks, Preferred stocks and equity mutual funds: 50%

So now that markets had reached short-term equilibrium, it's time to move some of the stocks into balanced mutual funds. Here are two of my recommendations in this area:

• Vanguard Wellesley Income

  (MUTF:VWINX). The investment seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation. The fund invests approximately 60% to 65% of assets in investment-grade corporate, U.S. Treasury, and government agency bonds, as well as mortgage-backed securities. The remaining 35% to 40% of fund assets are invested in common stocks of companies that have a history of above-average dividends or expectations of increasing dividends.

• Vanguard STAR

  (MUTF:VGSTX): The investment seeks long-term capital appreciation and income. The fund invests in a diversified group of other Vanguard mutual funds, rather than in individual securities. The Fund follows a balanced investment approach by placing 60% to 70% of its assets in common stocks through eight stock funds; 20% to 30% of its assets in bonds through two bond funds

For a change, these are low beta, stable recommendations. With vanguard, one does not have to worry about costs since both these have very low expense ratios and long history. Use your own due-diligence and do portfolio balancing based on your criteria.

Have a good week !

/Shyam

Markets: "trick" or "treat" ?

Last week was a pivotal week for markets and left investors wondering - was it a scary "trick" or opportunity "treat" ?

As expected and predicted GDP grew by 3.5%. At surface investors celebrated the news on Thursday with nearly 200% point gain. But on Friday, they had second thoughts after parsing the numbers and realizing that actual GDP growth excluding "cash for clunkers sales" and "inventory buildup", was below 1%. Now that these are one time events over, investors are looking forward and wondering from where growth would come ? Hence the Friday sell-off. Despite last 2 week sell-off, markets are still up by more than 50%. So there is still some time to cash-out gains and wait for opportunity in another sell-off which may take markets below 9500. However I am still sticking with my prediction of DOW near or above 10000 by year end.

Let's look at stock recommendation for the week:

Company: Genworth Financial

Symbol: GNW

Buy price: $10 to $10.50

Target price in 12 months: $ 15

Company background:

Genworth Financial, Inc. (Genworth) is a financial security company dedicated to providing insurance, investment and financial solutions to approximately 15 million customers, with a presence in approximately 25 countries.

Reasons for selection:

• Annual revenues: $10 B
• Market Cap: < $5 B
• Book Value: $25. Trading at 40% of BV. Normally insurance companies trade 1 times book value
• Recently raised $600 M at $11.70 per share. It is trading below that
• Worst is behind it as seen from Q3 results where it beat estimates handily
• This stock could rise similar to LNC and HIG. I won't be surprised if it goes closer to $20 in 2010

Hope all of you had good "trick or treat".

Have a great week ahead !

/Shyam

OIl:$80, DOW:10000: What's next ?

As predicted exactly 2 months ago oil has reached $80 and DOW has crossed 10000. So what is next prediction over next 3 to 6 months ?Also as 2009 is coming to end, it is time to make some year end macro predictions and then identify if any investments worth considering at this point:

So here are some macro predictions for next 3-6 months:

• Oil would continue to trade around $65 to $90 with more bias towards $90 due to upcoming world GDP growth prospects. I won't be surprised if oil crosses $90 at least once in 2009. Natural gas also doubled since it reached 7 and 1/2 year low of $2.50. NG could also cross $6 in next 3 months
• DOW would continue trading waters around 10000 and S&P around 1100. Once investors digest all Q3 results, they would be looking forward to how all important shopping season shapes up. Companies would have to start showing top-line revenue growth in Q42009 and Q12010. If Q4 also turns out to be as good as Q3, we could see DOW touching 11000 in next 6 months. If not, be ready to wild ride back to 9000 or even below 9000
• Tech companies keep on surprising market with excellent results from Amazon, Microsoft. They should benefit from long-pending upgrade cycle and holiday shopping season
• Energy and commodity sector would continue its upward trend due to BRIC growth alone. Looking at some of deals in last week (HTE getting acquired - this was one of my weekly recommendation)
• Now that most of the world stock indices have gone up by 60-100% in last 7 month, it is time to move some of the gains in fixed income mutual funds. e.g total bond index ETF from Vanguard (BND) could offer good way to protect gains and earn some income along the way
• Regional banks - they get hammered due to heavy exposure to real estate loans especially in Atlanta and Florida areas. Is it good time to bet against the market and make some "survival" investments. I think YES. My this week's recommendation is one such regional bank:

Company: Synovus Financial Corp (SNV)

Buy Price: $2.60 to 2.80

Target price in 12 months: $ 4 (50% return)

Background: Check Google Finance for all financial details

It got 20% hair-cut on Friday due to its loss in Q3. Management has been very aggressive in writing down value of its

loans which should be good in future if company survives. It recently raised $600 M at $4 per share. People who

invested $600 M must have done their due diligence about survival of company in long-run. I see this as almost

repeat of Regions Financial (RF) which also raised capital at $4 per share and now it is near $6. I won't be surprised if

we hear news that someone like John Paulson (hedge fund manager) starts looking at this

Disclosure: I have investment in SNV

Last week I could not post weekly blog due to Diwali festival. We had party at our place with fire-works and all.

Have a great weekend !

/Shyam

DOW 10000 and Lost Decade

Finally the momentum with little bit boost from Intel and JP Morgan carried DOW above 10000 2 months ahead of my prediction. I am happy about it since many of my recommendations did pretty good. However it is also a sombre reminder that DOW crossed 10000 first time in 1999 - so for buy-n-hold believers, this is really a lost decade

1999 to 2009: 10 years 0% return on stocks

So where are markets headed after reaching this milestone. Looking at positive earnings surprises, momentum would continue and may gather pace since lot of investors are still on side-lines and may be compelled to jump into market to catch remaining ride. For those who rode the markets all the way down and did not sell, must be feeling pretty good. My recommendation for those folks would be to take out some of the profits in this momentum ride. It is likely that DOW may touch 10500 before year's end and then start coming down.

Looks like there is some similarity in my recommended picks and famous hedge fund manager John Paulson (examples: BAC, RF and now CNO).

Since this is special post to celebrate DOW 10000 mark, no particular stock recommendations.

Happy Diwali !

/Shyam

Nobel Laureate President Obama !

I was pleasantly surprised to hear that Obama won Peace Nobel Prize. My first reaction was "so soon" ? It has been just 9 months since he has become President and has not done anything significant when it comes to peace except changing the course of American foreign policy from "go it alone" to "engagement" and some olive branches to Iran, Korea and in general to Muslims. Looks like previous administration was so much dis-liked by world that any small change in policy seems to deserve Nobel Peace prize. In my opinion, this award is more for "hope of peace" than actual "achievement". This would put burden (for good) on Obama to:

• Finish the two wars America is fighting and get out of Iraq and Afghanistan
• Bring Iran and North Korea to discussions table and have meaningful dialogue about nuclear disarmament
• Finally reach Israel-Palestinian peace (which started in 1990s) and create two nations living side-by-side

If he can achieve these in next 8 years, he can rightfully claim this peace award. He definitely has intentions, drive and charisma to achieve these.

Markets seem to be in good mood and other than first week of Oct, do not seem to have any October blues. With economies showing some life (confirmed by first rate hike by Australians) and first DOW company (Alcoa) showing surprise profits, all signs are pointing to DOW crossing 10000 before Thanksgiving. I would not be surprised if it crosses in Oct itself. However question is whether it can stay above 10000 for sustained period. There would be lot of upside surprises in the results since analysts are expecting S&P companies to have profits which are 25% below Q3CY08. However come Jan 10, analysts are expecting 35% rise in profits compared to year ago. That would be difficult to beat unless revenues rise significantly - means economy has to grow over 4% in Q4 and unemployment starts coming down.

So my advice is enjoy the ride up in next 3 months during this holiday season but be careful in early part of next year. Coming to stock recommendation of the week: Stay in cash. I am looking at istar financial (SFI) at around $2.50 to 2.60. Going by its preferred shares (SFI-D, SFI-E), there are good chances that this company would survive. In that case SFI should go above $4 in 12 months.

Have a good weekend !

/Shyam

October Blues ?

As usual, market is having October blues. Last week was one of those weeks when investors were reminded that 6 month rally can stop and markets can in fact go down. Some of the macro readings like unemployment report, manufacturing activity in Sept are coming below expectations. This could be cause for concern as it can dent consumer confidence which is so critical for all important holiday shopping season. Q3 results would start coming in from next week. CIT is on brink of bankruptcy (I hope you folks did not follow my speculative recommendation of CIT-A - that was a bad call). So next couple of weeks, be careful and stay on sidelines. Once major companies like Alcoa, Intel etc announce results and give some guidance, at that time, one can take a look at which way markets are heading.

Till that time, I would recommend staying in cash and sell "covered calls" for stocks which you hold to generate some extra return.

Over next couple of weeks, I will be watching couple of insurance plays - Genworth (GNW at around $10-$11) and PMI (at around $3.50 to $4). Both these companies sell at nearly 40% discount to their book values and could offer good 50% returns over next 12 months.

Today's Ekal 5K/10K walk was pretty good - it gave me some motivation to do more such walk(s) and maybe even consider half-marathon next year.

Have a great week !

/Shyam

Let's look at preferred once more!

Markets are looking for direction and its good thing. After multiple weeks of ascent, markets finally took a pause and little slide as happened last week is good for health of rally. With Q3 results starting in 2 weeks, markets would trade in range between 9300 to 9800. So this is good time to identify some picks with great risk/reward ratios. With that in mind, let's look at preferred securities once more. Check out my previous blog on this topic which I wrote when DOW was at 7000.

Here are some preferred which could offer great upside and quarterly returns in terms of dividend.

• SFI-D ($7.70), SFI-E ($7.5) and SFI-G ($7). All these are preferred of istar financial (SFI). Most probably istar would survive this downturn in which case these preferred should trade near their face value ($25). Even in these times, board has not cancelled dividends on these preferred. The yield on these preferred are about 25%
• IDG ($17), IGK ($18). These are preferred of dutch financial giant ING Group. Much safer than SFI preferred but offers yield of about 11-12% and upside of about 25%
• RNP ($9 to 9.50) - this is mutual fund which invests in preferred securities. It is selling at 16% discount to its NAV and offers yield of over 8%
• For those of us with most tolerance to risk, CIT-A ($3.90). This is purely speculative play on survival of CIT. If CIT restructures its debt out of bankruptcy court, this preferred could easily double or triple (similar to preferred of many banks). CIT needs to present its restructuring plans by Oct 1. Based on recent movements of prices of its bonds and equities, market is betting that it may be able to skip BK. Let's see what happens. Caution: This is extreme risk/reward and you could lose all your investment in CIT-A. So invest with extreme caution!

Indian festival season has started with Navaratri, Vijayadashmi and Diwali. We were also polishing our Garba and Dandiya skills to get ready.

Have a great weekend !

/Shyam

Gold or S&P: 1200 ?

Last couple of weeks both Gold and S&P crossed crucial 1000 mark with Gold at 1020 and S&P over 1060. Normally these two indicators go in opposite directions. People worried about inflation and economic turmoil rush to gold while people more optimistic about future rush invest in S&P. So it is kind of odd that both these are moving in same direction. So which would touch 1200 first and offers better opportunity over next 12 months.

In my opinion, investing in gold is like not investing at all. You should buy gold only to make things you (or your other half) want to wear - rings, necklaces and so on. Gold as investment may be good hedge against inflation over short-run but over long-run it does not pay off. It does not pay any dividends and upside potential is very limited.

S&P has lot of volatility but since it covers America's biggest 500 companies, offers lot of potential and 1-2% yield over long-run. So If you are looking for which one would touch 1200 first, I would bet on S&P (and forget about gold as investment)

Sept 2009 turning out to be quite different than expected. Many people (including myself) were thinking that long-pending correction would come in Sept. But exactly opposite is happening. Sept is turning out to be one of best month in this 6 month rally. Last week major indexes went up by 2.5% bringing my year-end target for DOW 10000 within striking distance. I won't be surprised if DOW crosses 10000 in next 4 weeks. Question is what after that ? It all depends on Q3 results which should start coming out in 3 weeks. Till now pre-announcements about warnings are not there. Technology sector should get another boost with upcoming Window 7 release on 10.22 and upcoming holiday shopping season. So till new year, coast seems to be clear for indexes to keep on going up.

My favorite sectors are still Energy (see last week's picks which did very well), REIT, Private Equity and Banks (especially regional banks like RF, KEY).

Recently I have started studying some other sectors and this week's pick is in transportation.

Company: YRC Worldwide Inc

Symbol: YRCW

Buy price: $3.90

Target in 12 months: $6

Company info:

YRC Worldwide, a Fortune 500 company and the #1 company in industry in the Fortune "America's Most Admired Companies" list, is one of the largest transportation service providers in the world. YRC Worldwide Inc. (YRC Worldwide) is a holding company, through its wholly owned operating subsidiaries offers the customers a range of transportation services. The Company's operating subsidiaries includes YRC National Transportation (National Transportation), YRC Regional Transportation (Regional Transportation), YRC Logistics, and YRC Truckload (Truckload).

Selection criteria:

• Recently had a union pact which would save over $1B over next few years
• Revenues of over $7B
• Enterprise Value: $1.5 B Market Cap < $ 250 M.
• 52-week Hi/low: $19/$.89
• Company has upcoming debt negotiation of $150 M coming.
• Once that debt gets negotiated, chances of staying out of bankruptcy would increase substantially
• Once economy picks up, demand for services offered by company would increase
• As investment, it provides good risk/reward potential
• Caution: Be ready to lose all your money since this is "survival" play

Have a good weekend !

/Shyam

Re-energize Your Portfolio !

Markets are at 11 month high and Lehman demise anniversary (Sept 15) approaching next week - after 6 month streak and 50% gains, markets seem to be running out of air and taking a pause waiting to figure out what lies ahead in 3rd quarter results.

So how does one re-energize the portfolio for next few months ? Here are some thoughts.

From recent reports, there are signs that major economies of the world are coming out of recession and many countries (except US and UK) have even shown surprise growth even in Q2. US and UK are most likely show a growth in Q3 picking up the pace in Q4. Consumer confidence is going up and reaching 70. Unemployment though very high seems to be stabilizing and not falling off the cliff. With holiday season approaching (Diwali in India, Christmas in western world), people are going to feel more positive than normal. So in summary there are quite a few positive events in front of us.

One sector which has direct co-relation with GDP growth is energy sector. Growing economy has higher energy needs and hence higher oil/NG prices. We have started seeing this in oil prices but not in NG prices yet (these are trading near 7 year lows). If you go back to 2002, US economy was in similar state - US being largest producer and consumer of NG, state of US economy has major impact on NG prices. So when US economy starts growing at 2-3%, NG prices should start going up and could cross $5 per (currently it is $2.96).

Related to energy sector, here are some of my picks:

• XTEX ($3.75; Target: $6 in 12 months)
• EROC ($3.50; Target: $5 in 12 months)
• CMZ ($1.10; Target: $1.60 in 12 months) - this could be similar to DPTR which I recommended in Mar at around $1.70. Now it is close to $3.90
• PETD ($15: Target: $22 in 12 months)

One more risky but most likely "survival" play is MBI. At buy price of $6, it could give more than 50% returns in next 12 months (target price: $9) just based on its survival during this crisis. However this is extremely risky stock and you should be prepared to lose 50-100% of your money.

I am waiting for Dan Brown's long-awaited novel "The Lost Symbol" which is out on 9/15. Right now, I am reading "Animal Spirits - by Akerlof and Shiller" which talks about how non-economical factors like confidence, fairness have significant impact on markets and global capitalism. If you want to understand "why markets are so irrational", I would recommend reading this book.

Have a good weekend !

/Shyam

Sept 2008 "Panic" Anniversary !

Tomorrow when America would be celebrating late labor day weekend, there is another anniversary financial world would be watching - Government takeover of Freddie and Fannie which started the events which we can call as "Panic of 2008"

Let's review some of the highlights:

• Vanishing acts by many financials stalwarts like Lehman, Merril, Wachovia and so on
• Major government stakes in many other stalwarts like Citibank, Bank of America, RBS, Wells Fargo and so on
• Generational low on S&P of 666 and an opportunity for generational long-term investment - I don't think we will see such a low again for another 5-10 years
• One of the best 6 month return on S&P since 1938
• Return of financials with generational returns on big banks like C (from 1 to 5), BAC (from 3 to 18), GS (from 50 to 170), AXP (from 9 to 30) and so on

What lies ahead ?

• Mar 2009 could be like 1982 which started a secular bull market. It is possible that we could see another bull market started in Mar 2009 potentially taking DOW and S&P past their all time highs in next 5-10 years - that means DOW crossing 15000 by 2015. When Obama took oath, DOW was hovering around 8000. It is possible that by end of Obama first term, DOW could be around 12000 and by end of second term, it would have crossed 15000 !
• Financials would return to "new normal" - boring world of banking without much of excesses seen during 2003-2007. This could be good for economy as banks would be on much better footing and provide steady returns. Forget about the kind of returns we saw on these companies in last 6 months. It would take 6 years to even match those returns !
• China and India would continue to grow at 6-10% over next few years doubling their economies in 5-10 years and providing growth to world economy.
• Real estate would come back to life with long-term returns of 1-2% on real estate prices. However REITs investing in these real estate would provide a steady return of 6-8% over next few years
• Oil would hover around $50-80 over long run and Natural Gas (which is my current favorite commodity) would hover around $2.50 to $6. Investing in oil and gas would be good long-term investment no matter what.

Let's look at this week's pick:

Company: Chesapeake Energy Corporation

Symbol: CHK

Recommended Buy price: $ 20

Target price in 12 months: $ 30

Background:

Chesapeake Energy Corporation is a producer of natural gas in the United States. The Company own interests in approximately 41,200 producing natural gas and oil wells that are producing approximately 2.3 billion cubic feet equivalent (bcfe) per day, 92% of which is natural gas

Selection Criteria:

• # 1 natural gas producer in America
• Most of the NG production is hedged at higher NG prices than current market prices
• No immediate debt maturity
• When NG prices recover (and they would), stock prices of NG producers would recover.
• Pure play on energy
• NG is cleaner fuel and with Obama administration focus on energy policy, it would gain more prominence.
• In long-run, this could be a potential acquisition play for major oil players like Exxon/BP/Chevron

• Trade at a substantial discount to estimated NAV and closer to BV ($18)

  
  

So while this "Sept 2008 panic anniversary" is no reason to celebrate - look at this as "glass half full" since

it offered so many opportunities to invest in great companies at dirt-cheap prices.

Have a good labor day weekend !

/Shyam