Seeking Alpha by Adding Beta

Asian markets are up again. As predicted, oil is almost reaching $70. With Fed and Chinese cutting interest rates, has the tide finally turned ? With US elections almost over, I think we have seen the bottom last week with Dow reaching 8200. Markets could test that level again but there is strong support around 8000 (markets have rocketed twice from that level). As soon as elections are over and I hope Obama wins, markets would start going up. My prediction is that DOW would close above or very close to 10000 rising another 10% from current levels. I am still long on financials and recently I have become bullish on oil - especially oil service sector. Emerging markets got killed in Sept and Oct and could provide a good entry point for long-run. / Shyam

Today is biggest festival of India - Diwali: Festival of lights. On this festival, Hindus celebrate for 5 days by lighting houses, temples and get blessings from Lakhsmi : Goddess of Wealth. What better way to celebrate the festival and pray for well-being of whole world than getting confidence back in the stock markets. All the major stock markets across world shot up by 5 to 10% in one day. Let's hope (and pray) that this is turning point for the markets and worst is behind us. Since this is festival of India, here are some bargains on Indian stock market which should provide solid returns in next 2-5 years: ICICI Bank Reliance Industries, Reliance Communications (or Idea or Bharti ) Wipro , Infosys , TCS Larsen and Toubro Adlabs One who has courage to take plunge in this market would definitely reap the rewards in the long run Good luck and Happy Diwali ! / Shyam

Oil has come down by more than 50 % from high of 147 reached just three months back and has touched $62. Opec had an emergency meeting on Oct 24 and announced cut of 1.5 M barrels. So that begs the question ? Which direction oil is headed and how one can invest based on oil direction? (last time I predicted oil reaching $100 and recommended some airlines which did ok considering the overall direction of market) The way oil price overshoot in July in upward direction, this time it has overshoot in downward direction and this is all because of extreme speculation by hedge funds and index/ ETF investors like ourselves. The demand for oil has moved around 85 millions barrels per day and supply has been managed around that demand. Even with slowdown in economy, demand has come down by single digit percentage. So in rational terms, swing of 100% in oil price does not make sense. If we take basic marco -economic principle, marginal cost of producing one barrel of oil is about $70 to 80. I...

Finally the most volatile week in the history of stock market is over and we are about 4-5% up in this week. Not bad considering Vix cross 80, we had upward move in DOW by 900+ points and downward move close to 800 two days later. But this volatility must be confusing to lot of investors including seasoned ones. So what should we as common investors do ? Here are some pointers which may help: Warren Buffet is recommending buying in this market and he is buying for his personal account. I like his statement: "Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors" and he had given some historical examples of 1932, 1979 and 1999. He is my stock guru so I am following him and doing some buying for my own account (although very small amounts:-) There are so many bargains around with most technology stocks trading at PE of 10-11 and financials/energy stocks trading at single digit PEs ...

In this market turmoil, one would wonder which sector have potential to generate 50+% returns in next 12 months ? Here is my take on this. Life, Health and Property Insurance Companies: Companies in this sector got killed last week by virtue of their associations with finance related activities (and AIG disease). So many well-known companies like HIG , MET, Genworth , XL, Conseco got hair-cut of 50+%. Let's understand their basic business. These companies underwrite policies to cover property, health or life and collect regular premiums from their customers. If there are claims, they pay to claim-holders. Very simple business. Only gotcha is that these companies would need to park money they collect in some type of instruments - could be treasuries, bonds or other "safe" instruments. Some of these companies got into trouble because they parked their money in supposed to be highly rated securities (thanks to Moody's and S&P for rating junk as AAA !!!). Now that t...

What a week with worst weekly losses ever for Dow and S&P. Both indexes lost 18% in one week. I thought these indexes are supposed to be less volatile unlike Nasdaq . But last week, all bets were off. Almost all stocks were having weekly fluctuations of 50%. What would next week bring ? There are couple of important trends to watch out to predict what would happen next week ? Would MUFJ close Morgan Stanley investment of $9B for 20% at $25 per stock ? (MS closed below 10 on 10/10). I am predicting that this deal would get closed on Tuesday though MS may give it discount and bring down the price just below $20. That would still much better than MUFJ just walking away. If that would happen, it would be repeat of Lehman story. But this time Paulson cannot afford to play "moral hazard experiment" he did with Lehman. If MS goes down, that would be end of American finance as we know it. But that won't happen. So in summary, MS would survive US gov taking stakes in banks:...

As expected 6 major central banks including US Fed did a co-ordinated rate cut of 50 basis points. Since it was expected move, markets have already discounted this move. British came up with its own rescue plan with nearly trillion dollars in supports/guarentees of one form or other. I think overall it was good plan especially providing guarantee for interbank lending. Due to British rescue plan, RBS common and mainly preferred shares jumped while overall market was down. I think RBS preferred (RBS-M, RBS-P, RBS-L) do provide good value as long as bank does not get nationalized completely. They offer about 6-7% interest with face-value of $25. However since they are trading at 5-8 ranges, effective yield would be north of 20% as long as RBS does not cancel dividends. It would also provide an upside when values start climbing towards face-value in due time - again if RBS survives and in this market conditions, that's big IF. However if regulators have learned anything from letting L...

Last week was very interesting week with one up and so many downs. Let's start with Wachovia . Week started badly for Wachovia - 4 th largest bank got sold forcefully to Citibank at $1 and by the end of week there were two suitors for the same bank - Wells Fargo and Citibank. Citibank Deal: Offers $1 to Wachovia holding company for all banking assets - this is a robbery IMO: Shareholders not happy Taxpayers on hook for billions of losses: Taxpayers not happy Company gets broken and remaining Wachovia remains with only securities and AG Edwards.: Employees not happy Wells Fargo Deal: Offers about $ 7 for whole company. Much better than broken company and only $1 for banking assets: Shareholders happy No taxpayer money on hook: Taxpayers happy Company remains as whole and become part of stronger bank: Employees happy So it looks very obvious that Wells Fargo should win the deal. But hold on - there are regulators in Washington who wants to force this shotgun marriages and let sel...

For past few weeks I have been watching shipping companies like DRYS, EXM , NM and found that they have been going down almost every day. In fact some of these companies are down by 50% in last 3 months. There are various reasons for this downturn: Worldwide economy slowing down reducing need for shipping Commodities demand slowing down Credit becoming tight and these shipping companies depend on credit to fund their major purchases and operations Some of these companies have debt repayments coming up in 2009 Baltic Exchange Dry Index ( BDI ) has come down from 11700+ to nearly 4000 Let's look at how these factors would change in next 12-18 months Now that bailout package is near approval, World Economy should start turning around (or at least stop going down) Credit markets should start working again enabling shipping companies to refinance their debts Speculation in commodities would go down and they would start trading at their true economic value. China and India are still grow...

Finally the first presidential election debate happened and yes McCain did show up after many flip-flops. The debate went as expected - McCain showing his true colors and Obama feeling little agitated due to McCain's constant hammering "you don't get it". In all Obama held pretty well on a subject which was supposed to be McCain's strength. McCain did nothing but drop names of some international leaders (that also he was wrong on saying Pakistan's new President). Obama was crisp in defining his stance on bailout plan. McCain was just saying we need to do this without explaining what is his stance and plans of getting us out of this mess. Overall poll results do show Obama winning the debate and increasing his margin slightly. I would recommend Obama stop saying "John was right" - he said it 8 times during the debate. He should go in offensive mode and keep on saying that we need to stop failed policies of Bush supported by McCain. If he jus...

Looks like McCain is chickening out from facing American public, Obama and debate moderator. Otherwise why would be pull his typical maverick style trick to postpone the debate where he has chance to explain his plan on how he as president would get us out of this mess - he does not have a plan and everyone knows that his party and Wall Street got us into this mess. So on the premise of economic crisis, he is cancelling his participation in debate. Obama should go ahead with his appearance in the debate and take this opportunity to explain his policies including how to get USA out of this mess created by current administration and Wall Street. I hope Obama go on attack mode and really gain momentum and seal the victory in next couple of weeks FRE , FNM continue to climb and make another 30% gains (third in a row). Would this continue - don't know. Now only these stocks are trading at about 20% of what they were trading before Government took over 80% of stake. So technically t...

Finally Warren Buffet have started scooping the market for bargains. He spent $10B in one week picking up Constellation Energy at about 26% of all time high and Goldman Sachs at about 40% of its all time high. Does it indicate that finally US markets are bottoming out. I have been calling out bottom for some time and I am a follower of Buffet. It's good that I picked some FRE , FNM and MS even before Buffet took stake in GS (but I did some silly mistakes also which I am sure Buffet avoided). Now that Buffet owns major chunks of Wells Fargo and Goldman Sachs and GS is becoming commercial bank and need to expand into branches etc, I won't be surprised if there is merger/takeover of Wells Fargo and GS in next few years. Now coming to $700B bailout package. I think Paulson thought that he can get away by rushing this bailout package through and bail Wall Street over weekend (similar to what he did with all the weekend dramas over Bear, Lehman and FRE / FNM ). He did not know that...

With stocks of once high-flying companies trading less than $ 1 for Freddie/Fannie and around $3-4 for AIG reminded me about technology stocks in 2002. I remember stocks like Sonus , Rediff and many other technology companies trading for less than 50 cents. As soon as technology market recovered, stocks of these companies jumped ten-fold in 2-3 years. Of course many technology companies also went bust with no value left for shareholders. Do we have similar opportunity in some of these stalwarts. Here are my three simple questions which may help understand this: Would Freddie /Fannie/ AIG survive (means no BK or receivership) Would government (which owns 80%) would let these companies run like any for-profit companies (unlike ones run in socialist countries) and eventually get out of business of running these companies Is there any value left for common shareholders If answers to all three questions is YES, then I would say it is worth buying stocks of these companies which are sel...

With potential demise of Morgan Stanley and Goldman Sachs (let me remind you that Hank Paulson used to work in Goldman), finally regulators have woken up and banned "naked" short selling and potential may ban short selling altogether in few financial stocks. With concerted efforts to prevent short selling making wall-street into casinos, the steps taken by pension funds, FHA and SEC (finally - what was Cox doing when Lehman and AIG were going down), shorts are going to lose big-time if they don't cover their bets. Poor Lehman, AIG shareholders and employees - the actions came late for them. BKPIX which is mutual funds concentrated in banks (and which I recommended in my previous posts) shot up by 22% in one day. Too much volatility to call it as mutual fund. So where does markets go from here ? I have been too quick to call bottom for this extremely volatile markets. So I hesitate to call this as bottom, I would say we are very close to it. We may see another round of...

First Bear Sterns, then Freddie and Fannie, now Lehman - who's next: Merrill Lynch maybe. Wall-street and US banks used to pride themselves as most well-run banks and world used to envy US financial system similar to the way world envy Silicon Valley... But current credit-crisis really shaken this confidence and now that US government (thanks to Bush and Paulson ) are nationalizing and bailing out various banks, why not nationalize the wall-street similar to what Venezuela's Chavez did with oil companies... I know I am writing this with a sarcasm but I never imagined that things would turn down so quickly (I was so wrong in recommending LEH in my recent posts). I am sure we are somewhere near the bottom but not sure what other shoes are going to fall before things calm down again. I remember the week when markets opened post 9/11 attacks - it was brutal market but it was expected due to unexpected shocks caused due to 9/11 attacks on WTC . The recent crisis in stock markets is...

Finally Uncle Sam has woken up and taking over Fannie and Freddie by end of Sunday - it took PIMCO's Bill Grass to give the final push saying that we won't be buying any more stuff from these GSEs till US is in with us. Chinese and Russians not buying also helped tilt the odds - unfortunate for some shareholders (including myself) that they would lose lot of money on Monday - these stocks have already lost over 90% in last one year so there is nothing much to lose from here. What good thing would come out of this bailout ? Here are my thoughts: The uncertainty about these GSEs would be gone - at least for now and they would be able to raise money from all over the world (including Russians and Chinese) Mortgage rates would come down little bit - they have been going up even though Uncle Ben was reducing Fed rate all the way down to 2%. So that should help struggling homeowners with refinances Financials would get another boost especially mortgage insurance companies. I thi...

I selected these two sectors for this post for one main reason - both sectors are at crossroads and most important sectors of the economy at least in 2008. Let's take a look at both of them at macro level: Financials: Consists of banks, mortgage companies, insurance companies, investment houses Is down more than 50% - some of the stocks have been down more than 70% (check out ABK , MBI , LEH ) In recent weeks, stocks in this sector have bounced back - some of them have jumped nearly 500% from their lows (check out ABK , RDN ) No one is sure if we have seen the worst in this sector and hence don't know if we have reached bottom Oil: Consists of oil majors, oil servicing companies, natural gas companies Only major sector which is still in positive column when almost all sectors are down by 10 or more % Has come down by 25-30% from recent high Oil has come down from 147 to 109 and going to $100 So where should one invest ? Here is my prediction and recommendation: Financials have ...

Obama gave an exceptional acceptance speech which would make even skeptics vote for him. Democratic party made an excellent choice as their presidential candidate and I fully support Obama for President. America needs change and who is better than Obama ? Now coming to main topic - I have been calling market bottom for some weeks. With today's GDP report, I can confidently say that market have reached bottom few weeks back and it is on its way towards 12500 by end of year. Most promising part of today's market move was that financials have come back in a big way. I was glad that my call on mortgage insurers was so on the mark with 4 of my recommendations up by 20-50% in last few days. Since these stocks are still down by 80% from their peaks, I would recommend staying invested in these stocks or making positions when they come down little-bit (check out my recommended entry points in previous post). I see scenario playing out exactly like 1992. Even though I was not in USA, fr...

Since I have been writing about mortgage and financial insurers, here is another interesting post which I came across on seeking alpha which provides even more detail analysis on ABK , MBI and RDN . Risk/Reward Analysis Makes Financial Insurers a Buy Looks like more folks have started noticing recent run-up in these companies. Even today when Dow was down nearly 250 points, ABK and RDN made a nice upward move. While I am cautiously optimistic on these companies, one may want to wait for some time to take positions in these companies. My recommended price to take positions in these companies is ABK less than 6, MBI less than 10-11, RDN at 3 and PMI at 3. At these entry points, these companies have potential to give returns of 50-100% in next 18-24 months Good luck and good night ! / Shyam

What a see-saw in crude price last week. With Goldman predicting oil to reach at $149 by year-end, I am taking opposite stance and predicting that oil would touch $100 before it touches $149. It would be interesting to watch how it plays out. And I am betting on my prediction with by taking some positions in airline companies like US Airways ( LCC ) and United ( UAUA ). If oil touches $100, these stocks would be up by about 50% from Aug 21 lows. If it goes above $140, these stocks would be down by 50% (and provide another buying opportunity). Recently my investing has been on macro-level - would a company survive or go BK. If my analysis shows that despite all dark clouds, company would survive and eventually prosper, I would recommend (and possibly invest if I have cash). This thesis proved to be quite correct In July-Aug while I was on vacation. Two sectors which provide ample examples to try out my thesis are - financials (including insurance sector) and airlines. Here is this week...