Happy New Year 2011 !

Happy new year to all my readers ! It is your feedback (as comments as well as in person) kept me going with my almost weekly blog. It helps me personally to articulate my thoughts and also make personal investment decisions - thanks to all of you !


Year 2010 is over. It's time to reflect on past year and get ready for new year.


Let's start with how my recommendations in 2010 did. If you are regular reader of my blog, along with my commentary on markets, politics, economics and occasionally on other events (like World Cup), I have made stock recommendations in almost every post with target buy prices. Assuming one does around $1000 investment in those recommendations at target buy prices, the portfolio would have returned approx. 17.77% for year 2010. Though it is not as stellar as last year's performance of 80% , it still beat S&P by 5%. Not bad considering till Nov, it was lagging S&P by couple of percentage points.


Here are top 3 winners and losers of last year's recommendations:
Winners:

1. Atlas Pipeline Holdings (AHD): Gain 170%
2. SFI Preferred (SFI-PD): Gain of 170% (including dividends)
3. Crosstex (XTEX): Gain of 63%

Losers:

1. Allied Irish Bank (AIB): Loss of 77%
2. General Maritime (GMR): Loss of 53%
3. Bank of Ireland (IRE): Loss of 42%

Overall out of 39 recommendations which I tracked as "shadow" portfolio, there were 27 with positive returns and 12 with negative returns. For every loser, there were three winners. I am satisfied with my recommendations and returns for 2010.

Now that is past - let's look at 2011.

Year 2011 is starting with lot of optimism in the air and quite a bit of momentum in economy as well as markets. There are still clouds about Europe, Japan and to some extent US growth and unemployment. However general sentiment is much better than at start of 2009 and 2010.

Here are some market predictions:

• US indexes would cross following milestones in 2011:
• DOW: 12500
• S&P: 1340
• Nasdaq: 3000
• 10-year treasury yield: 4%
• Unemployment: Below 9%
• Emerging markets would continue to do well with Shanghai index crossing 3300 and Mumbai BSE index crossing 23000
• Other major indexes
• FTSE to cross 6200
• Nikkei to cross 11000
• DAX to cross 7500
• Hongkong Index to cross 26000

Here is my first stock(s) recommendation of 2011

I am going back to my investment thesis of finding "out-of-favor" sectors and potential catalyst. At this moment, I see for-profit education sector has most upside potential of 2011. With republicans gaining control in congress, it would slow down potential regulatory impact on these companies which is not fully reflected in their stock prices. With this in mind, here are stock(s) recommendations with potential of 30% plus gains in 2011:

1. COCO at $5
2. CECO at $20
3. APOL at $39

That's all in my first blog of 2011. Once again, happy new year to all of you, your friends and families !

/Shyam

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

QEII Announced: Now what ?

Much awaited QEII announced by Fed under which Fed is planning to buy $600 Billion worth of short-term treasuries. While this is definitely essential to support recovery and overall economic, immediate impact was sudden rise in 10-year treasury yield. These yields have jumped from low of 2.33% to 2.96%. That's HUGH jump within 2 weeks. I am not surprised with this rise. What I was surprised was sudden rise.

Let's understand potential impact of QEII in next 6 months and how one can position to make investment gains:

Possible impact of QEII:

• It should achieve its intended result which is to support economy. It should grow between 2 to 3% in Q4VY2010 and closer to 3% in first half of 2011
• Unemployment should start inching downwards but not by too much. I still see it hovering between 8-9% for most of next year which is not good for US. But Fed can do only so much about it
• Housing prices should stabilize at current levels. May start to see rise of less than 1% in prices in some markets
• Stock markets should maintain their upward bias and slowly inch towards 11500-12000 for DOW
• 10-year treasury yields would start inching above 3% but not by too much. It may come down around 2.6-2.7% in short term. After May when all of QEII $600 billion buying is over, 10-year yield would be above 3% for good (unless economy slides back to recession which is unlikely)
• Emerging markets (both stock and bond) should continue to do well due to cheap US $$ and China / India demand 
• Commodities would hold up to current levels and may go up by another 10% or so. Oil would remain between $70-100 and Gold at $1300-1500.

Possible investment ideas as play on QEII:

(caution - following investment ideas are extremely risky due to 3x exposure and should be tried only if you are comfortable with such risk profile)

• DRN at around $45: Betting on recovery of REIT sector
• EDC at around $35: Betting on emerging markets
• ERX at around $42: Betting on commodity (to be specific on energy sector)
• TMV at around $36: This is slightly long-term bet that yields would eventually rise. This is inverse bet. This has direct co-relation to 10-year treasury yields (or SBND at around $22 which has direct co-relation to 25-year treasury yield)

All above investment ideas are ETFs which are most suitable if one can correctly predict macro-economic trends.  Let's see how these macro-trends turn out to be in 2011.

Looks like Irish would be thankful to EU and IMF for bailing out their nation and banks next week.

Happy Thanksgiving !

/Shyam

President Obama: Who would he emulate?

Now that most exciting week of 2010 is over with some expected results, it's time to take stock of what happened during the week. Mid-term elections are over with results on expected lines. Republicans won house in big way while democrats managed to keep senate majority by thin margin. It was definitely a big defeat for Obama as he himself put, it was "shellacking".

This was not the first time President's party got big drubbing in mid-term elections in his first term and still went on winning second term. Let's look at each one of them in last few decades:

• Truman: In the 1946 US Congressional election, the Republicans regained control of both the US Senate and US House of Representatives, as a result of President Truman failing to handle the vast post-war labor strikes. However Truman went on winning 2nd term in 1948 and democrats gained back control of house 
• Reagan: The conservatives (whom Reagan backed) lost a substantial number of seats in Congress in 1982. However after recession ended in 1983, Reagan won 2nd term with landslide victory
• Clinton: With Newt Gingrich's "Contract with America", Clinton's democrats got similar drubbing as recent mid-term elections. However as economy was coming out of recession very strongly and with Clinton's "triangulation" strategy, he went on winning 2nd term

Both President Reagan and President Clinton moved to center and worked with congress and got economy moving. President Harry Truman gained from rural communities after he pledged to repeal the Taft-Hartley Act and won in big way

So question is: Who should Obama emulate ?

Should he emulate Truman to protect Health care Bill which republicans have vouched to repeal or should he emulate Clinton/Reagan to get economy moving ?

Given that 80% of voters mentioned economy and jobs are their most pressing concern, choice is simple. Here are few ideas which I think not only would help President Obama win 2nd term but also help  move America forward:

• Extend tax-cuts for all earning less than $250 K permanent and for those earning less than $ 1 Million for 2 years. GOP should be able to agree to this
• Give one-time tax holiday for repatriation of money kept outside USA provided it is tied to job creation. For example: For every job created in USA, companies can bring $ 1 Million at less than 10% tax. Companies - many of them high-tech have nearly $ 1 trillion parked outside. Even if they bring half of this money, it would create half-a-million jobs and earn about $50 Billion in taxes
• Extend advisor circle beyond Chicago natives - especially get some experts from industry like Silicon Valley
• No more major policy changes - those can wait for 2nd term
• Focus on jobs, jobs and only jobs
• Get out and focus his communication on jobs and economy only

President Obama is doing admirable job in given situation - he deserves a second term. With help from Fed and markets, economy should be well on its way to recovery. So at this time, I am betting (and supporting) President Obama to be two term President.

Markets are doing extremely well with all major indexes gaining over 3%. The momentum should continue till end of year. One should start looking at financials like PMI ($3.5), BAC ($12), MI ($5.5) for possible investments. Another turnaround candidate with potential of 50-100% return is Sunrise (SRZ at around $4).

Have a great week !

/Shyam

Awaiting Most Exciting Week of 2010 !

First week of Nov 2010 would be arguably most exciting week of this year for following reasons:

• Monday: Week would start with news from Brazil about results from runoff election for President of Brazil
• Tuesday: Mid-term elections which could set course for American Politics and possibly where America is headed for next decade
• Wednesday: Federal reserve bank meeting to decide size and timing of QEII which could decide course of American economy for at least next 2-3 years
• Wednesday: World Series Game 6 - most likely SF Giants would claim their first world series win reviving sports enthusiasm in Silicon valley after long time
• Friday: Jobs report for month of October which should give an indication if employment is stagnant or making some progress
• Friday: Happy Diwali for all Indians !
• Saturday: Obama's visit to India - crucial both for India and Obama who would like to forget democratic party losses in election and instead enjoy warm Indian hospitality

Very few times such an exciting week comes which can keep life exciting and interesting. For investors, most important days would be Tuesday and Wednesday since both election results and QEII can move markets significantly. So watch out for Wednesday when these two events would collide. I won't be surprised if we see DOW move up or down by 150-200 points on Wednesday

Technology sector is becoming very interesting in terms of potential for M&A. There are so many smaller players who are being touted as acquisition targets making them interesting plays for investment. Last week one of my past recommendation Compellent (CML) shot up by 30% due to excellent results and possible takeover target. Same would happen to another recommendation - Blue Coat (BCSI) when it announces results later in Nov. I would still recommend CML at $23-24 and BCSI at $25 as good bets both purely on their quarterly results and possibility of takeover.

That's all for now. 

Happy Diwali to all my Indian readers and have an exciting week !

/Shyam

Elections and Baseball World Series !

What do US mid-term elections and Baseball world series has in common ? Few things:

• For US adult population, both are interesting discussion topics especially as Nov comes near
• This year, World Series is almost like elections between Democrats and Republicans with SF Giants representing Democrats and Texas Ranges representing Republicans. You cannot have better distinction than these two teams to represent their state's political affiliations
• Next week would be quite interesting with elections results on Nov 2 and Game 6 (most likely decisive one) on Nov 3

I am no baseball fan or expert, but would go ahead and take  chances on predicting:

• Giants would win world-series most likely in Game 6 or Game 7 - whoever wins would be their first win as SF Giants or Texas Rangers (Giants have won in past but as New York Giants)
• Democrats would keep senate majority by slim margin (52-48) while Republicans would gain control of house by about 5 seats
• Barbara Boxer would keep California senate seat
• Meg Whitman vs Jerry Brown would be an interesting fight. I am supporting Meg Whitman for her approach of running government like business/company but recent trends are indicating that it would be tough for her to change latest trend and win governorship of California

Next week would be very interesting for investors also:

• Election results
• Fed meeting announcing start of QEII
• Earnings from few more big companies
• Start of November which is normally start of better 6 month cycle for investors (Nov to Apr)

Markets are already on upswing for last few weeks - how high can they go ? I am still sticking with my prediction of DOW going around 11500 and S&P above 1200. Recently technology companies have been announcing blockbuster earnings results. So I won't be surprised if Nasdaq touches 2600 by year-end. There are couple of companies I like in this market: Blue Coat (BCSI) at  $24 and Amedisys (AMED) at $25. Both have potential of returning 30-50% in 18-24 months !

Have an exciting week ahead !

/Shyam

Apple: Blockbuster Quarter and Stock !

By all means Apple had a blockbuster quarter with its first $20 Billion quarter. There are so many things to like about Apple's latest quarter:

• First $20 B quarter
• Over $4.6 Billion in net profits
• Beat earnings estimates by over $500 million
• Over 14 million iphone sales
• Revenue forecast for holiday quarter of over $23 Billion. I won't be surprised if holiday quarter crosses $24-25 billion in revenues for Apple

No wonder it's stock was trading at all time high near $318 and it was second most valued company in America and most valued technology company in world !

Ok - but that was about past and as we all know, investors like to know what's in future. There are some concerning trends in same report:

• ipad sales were less than expected. Many folks were expecting over 5 million units. It came in around 4.2 million units. Not bad for any other company considering this was brand new category which did not exist just few months back. However since expectations were so high (with some of my friends predicting 60 million units per year at some time in future which I don't agree), that latest quarterly sales were bit dis-appointing
• Gross margins - this was a major concern. With ipad priced to sell, gross margins came in 4-5 % lower than previous quarter. With onslaught of Andriod smart-phones and tablets, this would be under pressure in 2011
• ipod sales down by 11%. This is something Apple investors are not used to
• With market value close to $290 Billion, Apple stock is priced for perfection and as we all know, even Apple would have some hiccups along the way

So how would Apple stock behave in 2011 ?

• After market, stock is already down by $20 bringing it below $300. That may be short-term over-reaction
• Q1CY2011 would have quite a few catalysts:
• ipad 2 launch
• iphone on verizon network
• iphone 5 with possibly smaller form-factor 
• Refresh of ipod line
• New Mac line possibly with some of the ipad features 
• Potentially first $25 Billion quarter
• With so many catalysts, Apple would become most valuable company in America sometime by Summer 2011 with stock around $350-380
• However after that laws of very big numbers would catch up with Apple and only way its stock has is to go down !
• Eventually Apple would stay around $300 after relinquishing its title of most valuable company back to Exxon
• After all, many technology companies after grabbing "most valuable company" title could not hold it for too long ! I happen to work in one of such company !

/Shyam

DOW 11000 - Now What ?

Finally DOW reached and closed above 11000. I predicted this back in June. Even though my timing was off by about 3 weeks, my trend prediction was correct (which did help in my portfolio).

Now that DOW has crossed 11000 once more (it has crossed so many times in last 11 years) - what's in store for last quarter of 2010 ?

There are some interesting trends in market which are worth watching.

• Currencies: It is like race to the bottom. All countries are making all subtle and not-so-subtle efforts to make sure that their currencies are weakened so that they can grow by exporting to all other countries. This works only if one one or few countries do it. But if everyone does it, it's lose-lose situation unless we can find another planet to export to:-)
• Gold and commodities: Since all currencies are racing to the bottom, some folks are losing confidence in "fiat" money and instead putting their money in gold and other commodities essentially creating a "gold" currency. No wonder when US $ is 15 year low against yen, gold is at nearly all time high (not factoring in inflation)
• QE2:  This is like much awaited summer-time Hollywood sequel. Everybody knows when it is going to release and how it would be. Since Fed had given enough indications that it is considering QE2 - quantitative easing part II, markets have already priced it in terms of interest rates. That's why we have all-time lows on mortgage rates and yield on 10-year touched 2.33%
• Emerging Markets Equities and Bonds: These are the only countries where meaningful economic grown would be seen in 2010 and 2011 (above 5%) and these countries have learned from past mistakes. Hence many markets like India, Indonesia etc are near all time highs
• Corporate Earnings:  Going by Alcoa's earnings reports, overall corporate earnings are going to be pretty good since companies have been slow in hiring and capital expenditure due to lack of conviction in economy growing. So any revenue growth due to Emerging markets is directly reflecting in profits. So in summary earnings season should be good if not great !

So what should a normal investor like our self do ? Here are some predictions for us to navigate through these waters:

• DOW would close around 11500 and S&P around 1200 by year end. This means there is about 3-4% return remaining from now till year end. Not bad for 3 months !
• Sectors which are sensitive to elections would be best performing sectors. For example: energy sector, for-profit education sector, mortgage insurance sector, finance/banking sector and health care sector
• Here are two recommendations for this week: PMI at $4 and RDN at $8.20. Since housing market has stopped its slide, it's bound to recover at some point (two of my friends just bought houses after long-time) which should help these mortgage insurance companies. These could return 50% in 2 years.

That's all for now. Have a great week !

/Shyam

Wall Street to Social Network !

Two Sundays, two movies: Wall Street: Money Never Sleeps and The Social Network. Both had my interesting topics. But the movies turned out to be quite different. Wall Street was boring movie with very loose script and no-where near original Wall Street which came out in 1987. The Social Network which originally I was planning to see only on DVD but went due to one of friends insistence turned out be an excellent and very well made movie. Script by Aaron Sorkin was the key to very good movie.

I am no movie critic but I would recommend watching The Social Network and passing Wall Street !

We are in final quarter of 2010. The earnings season should start earnestly this week. What's in store for Q3 earnings and Q4 forecasts and how would markets react to those ?

Here are some of my predictions for Q4 and year end !

• Corporate earnings would be good even though forecasts would continue to be cautious. In general more companies would have upside in earnings than downside
• Q3 GDP would come around 1.5 to 2%
• DOW would most likely touch 11000 by year-end. I won't be surprised if it touches that mark before October month-end
• Un-employment should finally start coming down with holiday shopping season on its way and retailers hiring temporary workers. It should start inching towards 9.2% by end of year
• Emerging markets should continue to keep inching upwards. BSE sensex may touch 21000 (all time high) around Diwali time

Regarding this week's recommendations - I wish Facebook was public company. Even at $30 billion valuation, I would have recommended to buy it given it's user base of 500 Million users. 

RIMM finally introduced its playbook - supposedly iPAD for corporates. While tablet market is getting crowded, RIMM definitely can cut a place for itself due to its Blackberry franchise. I just wish they had it for holiday season. Anyway, at around $48-50, I would recommend it as this week's recommendation for upside potential of about 30% in 12-18 months. Another interesting stock in same price range is Monsanto - MON ($47). Given need for food for growing world population, this could be an interesting long-term play.

/Shyam

Why Microsoft should buy RIMM ?

Last week two very important earnings from technology companies were published - ORCL and RIMM. Both beat earnings handily. But while Oracle stock went up by 8%, RIMM has resumed its downward slide.

Despite having excellent products in fastest growing category of smart-phones, RIMM is at a point where it needs to seriously consider merger with bigger company fight against Apple and Google Android onslaught. Who would be best fit ? There are 2-3 companies which could fit the bill but here is one investment thesis which would address issues faced by both Microsoft and RIMM.

Here are the reasons why Microsoft should buy RIMM:

1. Both these companies are focused on enterprise market 
2. Both have common enemies - Apple and Google and both are struggling to compete against these two 
3. Both companies have complementary products with Microsoft dominating desktop/laptop market and RIMM dominating enterprise mobile market
4. Microsoft Windows Mobile is not a success when compared with iOS (from Apple) and Andriod (from Google)
5. Microsoft has to enter in fastest growing market of mobile computing devices (smart-phone and ipad equivalent devices). Blackberry and upcoming Blackpad would be a great way to buy into this market. If they don't, Microsoft runs the risk of becoming irrelevant in this market - same as search market
6. Even with 50% premium to RIMM's market price (offer at around $70), RIMM would cost about $35 Billion which is less than 2 years cashflow for Microsoft. This would be much better use of Microsoft's cash-pile than earning 1%
7. Technology M&A has just started picking up pace. As economy recovers, this could gather momentum and it may be too late in 2011

So Steve Ballmer, if you happen to come across this blog - think about it !

/Shyam

Disclosure: I am long on RIMM

Washington Gridlock - Good for Markets !

Election fever is rising with elections only about 6 weeks away. It's time to check out its potential impact on markets. Tea party backed nominee winning in couple of primaries - especially Christine O'Donnell in Delaware woke up GOP. This would only make GOP to become more conservative and give a slight hope  to democrats to revive their slumping election fortunes in Nov. Here are my predictions how elections results would turn out:

• Republicans taking control of house by a slim single-digit minority
• Democrats losing fee senate seats but keeping control of senate
• Obama remains president (no elections till 2012)

This means that we will have a divided government in Washington similar to 1994. Is it good or bad when it comes to stock markets ?

I think divided government (aka Gridlock) would be good for stock markets for following reasons:

• No one side would dominate and uni-laterally push their agenda. 
• All three branches would have to work together when it comes to budget and any meaningful policy changes.
• Extreme conservative or extreme liberal agendas would be push on back-burner since there is no chance of getting it done (no chance of something like Health-care reform getting passed)
• Balance between budget cuts and tax-cuts
• Centrist politicians would get their voices heard
• In worst case, absolutely nothing would happen for next two years removing any uncertainty since "nothing" is certain than "something". As all investors know, markets don't like uncertainty and hence it would start pricing in "nothing" and go up

Since stock markets are always ahead of actual economy, they must have started pricing this as evident from upward movement in Sept (which is rare) !

Since I was studying possible election outcome, one sector caught my attention this week - this sector is my recommendation for this week - for profit education sector. This sector got punished in last few weeks due to possible new rules coming (gainful employment, loss of government aid). Here are 4 recommendations in this sector which could provide 50% returns in next 18-24 months

1. Corinthian Colleges, Inc. (COCO) - Buy around $6
2. Education Management Corp (EDMC)- Buy around $10-11
3. Lincoln Educational Services Corporation (LINC) - Buy around $12-13
4. And biggest of them Apollo (APOL) - Buy around $47-48

Even though markets are up and trading near high of recent trading range, there are quite a few

opportunities - but that's topic for next week !

Have a great weekend !

/Shyam

Let the hunt begin !

As predicted in last week's blog, 3PAR saga ended with HP winning the bid at $33. However in the race to win 3PAR at any cost, it ended up paying at least half a billion more. Only time would tell if HP was winner or loser in this race. Potash saga would continue for few more weeks - just read news that Chinese state companies (Sinochem etc) may be preparing a counter-bid for Potash. It would be interesting given price tag would be over $40 Billion

So who is next "hunted" in the hunt which has started in last few weeks. Here are some of my predictions - these companies could get "hunted" and get acquired in next 2 years (CP: Current Price, PTP: Potential takeover price)

1. Blue Coat - BCSI (CP: $21.50 ; PTP: over $30)
2. Compellent - CML (CP: $18.50 ; PTP: over $25)
3. Brocade - BRCD (CP: $5.60 ; PTP: Over $8)
4. Symantec - SYMC (CP: $14 ; PTP: Over $19)
5. Sprint Nextel - S (CP: $4 ; PTP: Over $6)
6. Regions Financial - RF (CP: $7 PTP: Over $10)
7. Synovus Financial - SNV (CP: $2.3 PTP: Over $4)
8. Huntsman Corporation - HUN (CP: $9.5 PTP: Over $15)
9. SandRidge Energy - SD (CP: $4.3 ; PTP: Over $7)

Here are couple of private equity potential targets:

1. Kodak - EK (CP: $4 ; PTP: $7) due to its patents in digital imaging area
2. RRI Energy - RRI (CP: $3.7 ; PTP: $5.5) due to its cash flow. Would be similar to DYN deal

Overall markets got some direction last week due to good news on PMI and employment front. Lot of folks are wondering why markets went up even if unemployment inched higher at 9.6%.  The key point they missed is private companies have created over 235000 in last three months. While this is just barely enough to keep a lid on unemployment, it's nonetheless positive signal. US needs about half a million jobs created every month to get real momentum. It does not look likely at least for next few months due to complete halt in Washington due to election paralysis. Mr. President really needs to get momentum going on new ways to stimulus economy and even extend Bush tax cuts by couple of years to get republicans on board.

That's all for now. Have a great week !

/Shyam

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

Where are markets headed ? Check out years 1994 and 2004 !

Markets have been really looking for direction - one week up, one week down. 3 weeks back, DOW had a great week with over 500 points gain, then it was down again and up again last week. After having this roller-coaster ride, DOW is back to where it was at start of 2010. So that begs the question - where is market really headed ?

Since I am history buff, I went back and checked recent history of DOW returns when economy was coming out of recession but not sure if recovery would be sustainable or not ?

Here are two years which I found similarities with 2010:

• 1994: DOW start (3754) end (3834) Return: 2.13%
• 2004: DOW start (10409) end (10783) Return: 3.5 % - this is after it had a major run in 2003

With this brief history lesson, most likely DOW would return about 5% in 2010 and end year between 10700 to 11000. However in next 5 months there would be significant volatility as markets inch towards year end and await for election results.

It's great to see closure on many key items such as:

• Stress test results of European Banks - only about 7 out of 91 banks failed putting overall credibility of these tress tests at risk. For now, these banks and Europe seem to have come out of its "may"hem seen during May.
• Goldman Sachs and SEC settlement - GS bought its license to print money by settling the case for $550 M
• BP well stopped leaking oil - this reassured market that BP is not going BK
• iPhone 4 antenna issues - not fixed bit Apple came up with good alternative of keeping its customers satisfied. Cost of $175 M is small compared to multi-billions Apple is going to make on iPhone 4

Overall Q2 results are coming out great - companies are in sweet spot. They are operating very lean but their top line is growing 20-40% compared to last years Q2 and almost of it is going into bottom-line. However in 2nd half, comparisons with last year would become difficult.

For this week's stock recommendation, check out A123 batteries (AONE) at around $9 for potential return of 50% in next 12-18 months. EV cars are just starting to roll off and almost everything from mobiles to cars are going to need lots of batteries. AONE is well positioned to participate in this growth and hence future looks good for this company.

Have a great weekend !

/Shyam

Congratulations Spain and Paul the Octopus!

Congratulations Spain for winning the Soccer World Cup first time and becoming 8th nation to join exclusive club of world cup winners. Congratulations Paul the Octopus for correctly predicting all results of all Germany matches and outcome of semi-finals and final. It's really amazing to see 100% record on predictions. In all, it was a great world cup and I enjoyed watching these matches with friends (even though India was not playing and US was out before quarter-finals). I was rooting for Spain for two reasons - they were really playing excellent and other reason is Spain as country needed this win to boost their confidence and along with it's confidence. Spanish economy which is 3rd biggest in Europe is important for European as well as World economy !

Now that world cup is over, I am looking forward to earnings season which should start from tomorrow with Alcoa announcing earnings on Monday after market close. Markets are at crucial juncture and looking for direction. It has come down nearly 10% from its high in Apr 2010 and up by 5% from its low reached last week. There are conflicting reports about double-dip or growth. That's why this earnings season and especially forecasts would be very important. I need to do some study about co-relation between "post-earning market reaction to Alcoa stock price" and "market direction for quarter". I have a gut-feel that they have direct co-relation. As does Alcoa stock price goes after earnings, so does the market. I don't have statistical model to prove it (yet!) but here is my "gut-feel" reasoning: Alcoa is biggest aluminum producer in world, aluminum is industrial commodity and has co-relation with growth prospects of world economy, stock market depends on growth prospects of economy. Hence when market reaction to Alcoa stock price after earnings could potentially signal how markets are going to go for next few weeks. Let's see what happens on Tuesday after Alcoa earnings ! For now, I am recommending Alcoa (AA) at $10.50 to $10.75 for potential gain of over 20-30% in next 12 months.

Have a great week ahead !

/Shyam

Soccer Would Cup and Paul the Octopus !

Looks like Soccer world cup mania is building up to such extent that we have to look to Paul The Octopus to predict what would happen in these matches. Evidently Paul, a Octopus has till now correctly predicted results of 5 matches in which Germany played (before the match:-). Now the real test would be next semi-final match between Spain and Germany. Who needs referees when you have Paul the Octopus - anyway, referees are not doing a very good job in this would cup !

It was disappointing to see both Brazil and Argentina crash out of Would Cup. But Germany was definitely a much better team on Saturday and deserved the big win ! It's good to see Spain win on Saturday just few minutes before match end. I hope Spaniards have celebrated which may help country's economy and prevent it from getting downgraded by Moody's.

Last two weeks in particular and Q2 in general was very brutal who has invested in stock markets. Not only all gains of Q1 got wiped out but Q2 also took markets down for the year. All indexes down by nearly 7-10% YTD, it's getting tough to predict which way markets are headed.

So this week, I am going to recommend looking at some mutual funds to invest using cost-average method (investing at periodic intervals). Here are some vanguard mutual funds which I particularly like.

• Vanguard REIT Index Fund Investor Shares (VGSIX)  YTD: 3.29%
• Vanguard Total International Stock Index Fund (VGTSX) YTD: -11.45%
• Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) YTD: 3.44%
• Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) YTD: -3.29%
• Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX) YTD: -6.76%
• All of these funds have excellent long-term prospects, low fund charges and provide way to invest on regular basis so that one can cost average. Now that markets are down and don't know how they will go in short-term, it's good time to get started with these mutual funds and set up automatic investments.

So for now, forget that your portfolios are down for the year and enjoy exciting semi-finals and final of Soccer World Cup !

Have a great week

/Shyam

US Treasuries in bubble ?

Last week was a downbeat week for stock markets when major world stock indices fell by more than 3% in one week. At same time, treasury market was going up with yield on 10 year US treasuries touching 3.08 at one point. There are multiple factors in play on why investors are willing to buy treasuries when everyone knows that US deficits are unsustainable and if not for US $ as "reserve currency", US case is worse than Greece. So why treasuries keep going up (and yield going down) ? Here are some factors:

• Flight to safety - investors have to park their money. With Euro and Yen in trouble and no other alternative (except Gold), governments as well as big investors have to park their money and at this moment there is only one alternative which is US treasury
• US $ status us world reserve currency
• AAA rating of US government - US has never defaulted in recent history
• When stocks are going down, 3% assured return is not bad
• Despite stocks going down in recent weeks, investors are still up by about 50% from lows of March 2009 and they are taking profits out and parking in safe place which is US treasury
• Most importantly, inflation is nowhere on horizon and hence US fed to going keep interest rates low

Despite all these valid factors, IMO, US treasury bull run is over. When yield on 10-year treasury touches below 3%, it's time to take out money out of treasury (or related mutual funds) since yields are going back above 3.5% in next few months (that means value of treasury would go down). Here is why I think why:

• US fed is going to raise rates in next 12 months - that means smart investors would start taking money out of treasuries in 6 months causing it to fall
• US economic recovery is going to gain some speed by end of this year
• Euro problems would be behind us means investors across world would start looking at Euro as alternate "reserve currency" again
• US deficits are going up with wars, stimulus and other spending. At some point investors would realize that in 10 years or so, US would have same problems as Europe demanding higher yields on treasuries

Finally wall-street reform is almost over. Most likely President Obama would get final bill to sign before 4th of July weekend giving him another victory which I am sure he needs it for Nov elections.

As far as stock recommendations for this week goes, check out SD ($6.3), RDN ($8.8) and PNX ($2.25)

Have a great week

/Shyam

DOW 11000 by Summer End !

I returned to USA last week and coming back to my normal life. Tomorrow is official start of Summer and good time to make forward looking predictions for market direction. Last 2-3 weeks, markets have been consolidating between 10K and 10.5 K and almost looking confused about its direction. But now that Euro crisis seems to be understood (but not solved), markets can find some footing and start looking forward to Q2 results.

Now that we are past dreadful May month, there is upward bias in markets and my prediction is that DOW would cross 11000 before summer ends on Sept 21. Here are the reasons for my prediction:

• Debt crisis of Europe in general and PIIGS in particular seems to be coming under control and doubts of viability of Euro have subsided. This is visible from Euro almost touching $1.24 after touching 4 year lows of $1.18
• Growth story of emerging countries - in particular of China and India is very much intact. I have personally seen all the excitement in Indian economy during my 4 week stay. India is booming with all new shiny homes getting built. I am sure same is true even more for China. China yielding little-bit on currency would also help
• US economy is growing albeit lower than what we can call as "robust" recovery - it would grow between 2-3%
• European growth is still a problem but it could come up with about 1% growth
• Interest rates across world are remaining low for all of 2010 helping provide boost to risk-taking

So for investments, I am recommending at new REITs like CIM ($3.8), NLY ($18) for their 15-17% yield and RIG ($50), HERO ($3) for potential upside of 50% once BP oil spill saga goes on back-burner.

Have a great Summer !

/Shyam

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

India's answer to Superbowl !

Finally IPL mania is over with IPL final played between Mumbai Indians and Chennai Super Kings. Considering IPL is only in its 3rd season, the level of excitement it has created both due to exciting cricket and off-the-field politics, corruption and celebrity involvement, I won't be surprised if it takes similar level as Superbowl in USA. We had few friends at our place to watch IPL final - most of them from Maharashtra were supporting Mumbai Indians. So it was little dis-appointing that Mumbai lost to Chennai - but looking at today's game, Chennai deserved to win today's game. Overall it was great IPL season. By rough estimates, IPL with its 60 matches create economic activity of close to $1.5 to 2 billion per year ! Good for Indian economy.

Last week of 8th week when DOW had positive week. I was surprised at the strength and positive momentum markets had especially on Friday last week despite upcoming financial reforms and GS/SEC saga. Regional banks were very strong on Friday with some smaller banks with assets less than $10B had 50% returns (in one DAY). So should one put more money in financials or energy. IMO, the positive momentum would continue for another couple of weeks. But market is getting ahead of underlying strength of economy. In couple of weeks, we will get key reports such as Q1 preliminary GDP report and unemployment report. GDP should show growth of about 3-4% and unemployment should dip below 9.5%. Next few months, DOW could touch 11500 and then go side-ways before resuming its march towards 12000 by year-end. So if you are fully invested, it is wise to take some money out. One strategy is to sell "out-of-money" near term call options. So if markets go up, you can still participate. If they go down, you can keep "call option" premium. However one has to be careful since call option works with most volatile stocks like PMI/MBI/SFI/FAS/ERX/DRN.

SandRidge Energy (SD) is good buy at around $7.5 to $7.7. Due to its pending merger with Arena Resources, stock got punished. However once merger is completed, it could cross $10 in 12 months. Downside risk should also be less compared to other high-flying stocks.

Have a great week ahead !

/Shyam

Sell in May and Walk Away !

Looks like old wall-street saying about "Sell in May and Walk Away" could be more applicable this year considering following factors:

• Markets have seen best rally in 7 decades with all major indexes up by over 70% in one year
• Major indexes have crossed key psychological levels of DOW 11000, S&P 1200 and Nasdaq 2500. Many investors must have kept these as key levels where they were thinking of selling
• Financials could be in trouble again with all the "sins" catching up with them - Goldman Sachs fraud case could be first of many to come. This could shatter confidence once again in wall-street and banks
• While corporate earnings till now have been excellent, economy is still in delicate stage. It is possible that these earnings could be one-two quarter phenomenon before comparisons with 2H2009 would start kicking in
• Unemployment still over 9.5%

SEC case against Goldman Sachs was interesting in many ways - but most importantly it highlighted that regulators have finally woken up from their hibernation of 8 years during Bush administration. This case would surely add lot of momentum to Obama's financial reforms and that would be good for America in long-run.

So how does one invest in these times - it's best to stay with "Sell in May and Walk Away" rule of wall-street and stay on sidelines for next few weeks. Keep lot of dry-powder (aka cash in hand) in case DOW comes below 10500 !

Have a great week !

/Shyam

Welcome to DOW 11000 and S&P 1200 !

Finally I got my MINI Cooper S - check out my new car and sold my beloved Toyota Camry which I used for 12 years without any major problems.

We had fun ride to Livermore Temple and now I can drive it on regular basis.

Next week seems to be exciting week for markets - my prediction is that finally DOW would cross and close about 11000 tomorrow and S&P would cross 1200 sometime this week.

Now that Europe has come to terms and helped set up emergency fund of $40B for Greece, markets should be assured that Greece won't default and Euro is here to stay. This is big positive for markets.

Earnings should be very good with Alcoa announcing tomorrow and major banks in next 4 days. Last year was the season of write-downs - I won't be surprised if banks start announcing "write-ups" (if there is term like that). This should not only help reduce banks losses but also help improve their capital positions. Most of the big banks (BAC, C, JPM, GS) and their regional brothers (RF, KEY, FITB) would do pretty good. In fact their smaller and more problematic cousins (SNV, CBC) would also start reporting improved conditions.

So if you have invested in my last recommended 4 sectors - financials, real estate, energy and insurance, my recommendation would be stay put and enjoy the ride above 11000 for DOW.

Have a great week investing !

/Shyam

Energy Politics - Smart Move !

Mr President was on roll for second week - he made some more key moves in the game of politics for to push some of his key domestic initiatives (for good of country I must say). Now that health care is out of way, he puts his focus on Energy Policy. This is as important to America as health care. America imports nearly $500 B worth of energy from outside and any dent in this bill would help address trade imbalances. Here are key steps Obama took to start addressing energy issue America is facing:

• Opened up vast areas to start drilling again - by sharing revenues with states, state governments who are in desperate need of additional revenues would be more open to this
• Increase CAFE standards for higher mileage for cars from 2016
• Additional focus on clean coal, nuclear energy
• Changing vast fleet of government vehicles to hybrid, Eco-fuel equipped

These are small steps towards a very big policy initiative of "cap-n-trade". If congress can pass even minor version of "cap-n-trade" this year, it would make a big difference in America's energy problem and would be good for Mother Earth !

With so much focus on energy, let's talk about what happening in oil/commodity market and are there any good opportunities for investment.

Oil crossed $85 due to recovery gaining momentum all across the world. I am predicting that oil would cross $90 in summer of 2010 and may even touch $100 if speculation is not controlled. Is this repeat of 2008 ? I hope SEC and other government regulators pay close attention to speculation in commodity market otherwise rising oil price could choke economic recovery.

Now coming to investments - I would refer to my post about 2 months back on energy sector. I would still recommend some of the stocks in that post. In particular following ones:

• XTEX ($11), AHD ($6) and ERX ($38)
• You should also look at CHK ($23) and BBEP ($15)
• HERO ($4.2), MMR ($15) and EXXI ($18) also offer excellent exposure to increased activity in oil sector

All major indices are up by about 5% which is their best first quarterly performance since late 90's. Does this mean stock market is on ascent similar to 1998-1999 or is it heading towards some rough waters as in 2000. More about that in next few weeks !

Myself and my son went to Apple store to check out "iPAD". Both of us really loved it - I would wait for few more weeks to buy one for myself. Apple has another winning product on its hands - kudos to Steve Jobs and all creative minds at Apple !

Have a great weekend and good week investing !

/Shyam