Money Makes Life Delightful

The BSE Realty index, which declined by nearly 90% over a fifteen month period from December 2007 to February 2009, has jumped by over 170% in just three months from March 2009 to May 2009. The concerns related to liquidity of the real estate companies have been key reasons for the performance of the stocks. Despite that, the companies are trying to improve their liquidity condition by selling equity and assets, raising capital through QIPs or by restructuring debt repayments.

I believe the fundamentals would remain weak. The earnings of real estate companies are expected to be subdued on weak housing demand. Though the focus on low-cost housing by real estate players has improved the volumes, but due to high gestation period, its impact in P&L will be visible only after a couple of quarters. The margins in this segment are lower. On the valuation front, the stocks seem to be running ahead of their fundamentals, particularly factoring in the high leverage.

Thus, I recommend booking profits in all real estate stocks (for reasons mentioned above) and take an entry into Mahindra Lifespace and Indiabulls Real Estate.

The highlight of the month, and in fact of the year till date, has been stunning victory of Congress-led UPA in the recently concluded elections. The victory has ended days of politics of coalition management. The win is hinting at a new era of reforms that could well unshackle the increasingly robust potential of Indian economy. The market has responded favourably as there is a distinct chance that India could benefit from its development-friendly government policies.

Did you benefit from the record rise on ‘Golden Monday’ post election results?
Popular belief is that most of the investors could not benefit from this rally as more often than not, investments are guided by feeling of greed and fear. Remember, an investor’s worst enemy is not stock market, but his own emotions. Only those investors who remained invested throughout the turbulent period or invested when market sentiment was at its ebb or continued with their Systematic Investment Plan (SIP) have eventually benefited. We reiterate, “It is not timing the market, it’s time in the market that is important”.

Why SIP is recommended?
Every individual has some financial goals to be achieved over a period of time, say 10 to 20 years. For e.g. plan for retirement, children’s education/ marriage, buying a house, etc. Do your financial goals change with fluctuations in market? If not, then how do you achieve them taking advantage of ups and downs in the market? SIP helps you avoid ‘Decision Paralyses’ associated with equity investing and reach your financial goals*. For more details on SIP, please click here.

Wealth isn’t something to admire. It is something you create. Think of each SIP payment as laying a brick. One by one, you can lay the foundation for secured financial future. Please contact your financial advisor if aforesaid is of interest to you.

Back when they were feeling flush, many well-off folks made gifts of cash or stock to their adult children without much hesitation. Now some are reluctant to give, worried that they won’t have enough left for their own retirement or that their children may become too dependent on handouts.

Some parents make loans to their children to start a business, buy a new car and pay income taxes. But they tell them, ‘I want you to get the money back.’ Even parents who might not have made gifts before are opening up a loan window to children affected by layoffs or the credit crunch. Los Angeles CPA Michael Eisenberg recently helped a father structure a $2,000- a-month loan to his out-of-work son. The expectation is that the economy will turn around and the son will get a new job; the documents require him to start paying the loan back in 2011. “Make sure everyone is clear on the terms–is it a loan or a gift?” Eisenberg says. “You’ve got to be clear which way you’re going, or it can ruin the family relationship,” he adds.

An ambiguous loan can also ruin your relationship with the Internal Revenue Service, which might argue the loan is really a gift, possibly subject to gift tax. The key to avoiding either family or tax trouble is to put things in writing and, in most cases, to charge your kids a minimum IRS-set rate of interest. The interest they pay is taxable income to you. There are exceptions: If you’ve lent a child less than $10,000 in total, you don’t have to charge interest. Plus, there are some convoluted rules that might allow you to avoid charging interest on loans between $10,000 and $100,000. But those rules don’t seem worth fooling with now, given how little interest you have to charge. In May the IRS minimum interest rate ranged from 0.8% a year for loans of three years or less to 3.6% for loans longer than nine years.

Setting this up needn’t be expensive. You can buy standard loan forms through Nolo.com. Or one of billionaire Sir Richard Branson’s latest ventures–Virgin Money–will generate the paperwork for $99. But if you’re lending a substantial amount, or for a long period, you should consult with your lawyer or accountant about the gift and estate tax angles and how any outstanding loan will be treated should you die.

If you’re so inclined, you can convert the loan into a gift over time, using the annual gift tax exclusion to forgive some principal each year. Each individual can give $13,000 a year to anyone else without gift tax consequences– meaning a couple could forgive up to $26,000 a year in principal lent to a child. Alternatively, you can leave the borrower assets in your will with which to pay off the loan. Just don’t put into your will that the loan is forgiven at your death, warns Boston lawyer Louis Katz. That could turn a nontaxable inheritance left to your child into taxable “debt forgiveness” income.

If the IRS ever scrutinizes the loan, you should be ready to show that the child had a realistic chance of repaying the money and that you were ready to collect in the case of a default.

While Apple Inc. (AAPL) was far from first on the scene in the smartphone market, the arrival of the company’s industry-defining iPhone, complete with a slick touch-screen user interface and an award-winning digital music player, quickly placed the firm at the top of the heap. Even industry leader Research In Motion Limited followed Apple’s lead and created a touch-screen version of its extremely popular BlackBerry line of smartphones. Furthermore, Apple changed the game once again, beating smartphone makers to the punch by including 3G support in its second iteration of the iPhone.

But, smartphones are not cheap, and prospects for slackening consumer demand due to tightening budgets prompted selling pressure to sweep across the sector in late 2008. Apple shares, once trading near $200, plunged more than 54% in 2008. And, while the shares eventually hit bottom in November 2008, the chilling effect of the recession has held the equity in check during the ensuing months, with Apple trending sideways between support at the 80 level and resistance near the century mark.

Then, in early March, evidence that the economic downturn was slowing provided a much-needed boost for Apple. The stock vaulted higher, logging a year-to-date gain of more than 51%, versus the S&P 500 Index’s gain of roughly 0.5%. What’s more, Apple has enjoyed the support of its 10-day and 20-day moving averages since March. But the equity now faces another technical test before it can continue its recent turn of good fortune. Apple was recently rejected by long-term resistance at the 135 level - a region that capped the equity in February and March 2008. Additionally, the stock’s 20-month moving average is descending into the area, and could complicate matters further.

According to the International Securities Exchange and the Chicago Board Options Exchange, approximately 1.7 calls have been bought to open for every put purchased during the prior two weeks. This ratio ranks above 67% of all those taken in the past year, pointing toward rising expectations. On the other hand, short interest has jumped 13% since February, rising nearly 2% during the most recent reporting period. However, the short trade is far from crowded, as only 2.35% of Apple’s float is sold short. Should these bearish investors gain confidence following the stock’s recent rejection at the 135 level, it could increase selling pressure on the shares.

Finally, expectations are running high on Wall Street. Currently, 16 of the 25 analysts following Apple rate the shares a “buy” or better, with only one “sell” rating to be found. Furthermore, Thomson Reuters reports that the average 12-month price target for Apple rests at $145.29 per share - a nearly 13% premium to the stock’s current trading range below $130 per share. Any downgrades or price-target cuts could provide additional downward pressure for Apple. To take advantage of potential weakness in the stock, traders should consider an in-the-money (135-strike) put option - the July put (premium is 9% of the stock price) or October put (premium is 13.1% of the stock price).

As the manufacturer of the infamous “CrackBerry,” Research In Motion Limited (RIMM) once enjoyed near-total dominance over the smartphone market. That is, until Apple’s iPhone threatened to break RIMM’s hold on the sector. The BlackBerry is still arguably the top dog, but the sniper hits from Apple and the global economic recession have taken quite a toll on RIMM shares. In fact, RIMM plummeted more than 51% in 2008.

The security has made quite a comeback this year, soaring more than 81% so far in 2009. But RIMM is facing technical issues very similar to upstart smartphone maker AAPL. The stock was recently rejected by resistance at the 78 level, site of its post-plunge peak set on Sept. 26, 2008. Furthermore, the equity is staring up at potential round-number resistance at the 80 level, as well as its declining 50-week moving average. The combined weight of these technical hurdles has forced RIMM to retreat nearly 8% during the prior three trading sessions.

Meanwhile, sentiment is far from flattering for bullish investors. RIMM’s SOIR currently resides at an extremely complacent 0.84, in the 54th percentile of its annual range. Elsewhere, call buyers are swamping the ISE and the CBOE, as the duo’s 10-day call/put ratio of 1.78 reveals that nearly two calls have been bought to open for every put on these exchanges. This ratio also ranks above 73% of all those taken in the prior 52 weeks, underscoring rising bullish expectations despite weak short-term price action in RIMM shares.

There is also evidence that the stock’s recent spurt higher might have been related to short-covering activity. During the most recent reporting period, the number of RIMM shares sold short plunged by more than 19%. That said, there is very little fuel left in the tank, as less than 4% of RIMM’s float remains sold short. In fact, we could see these bearish investors return to the security, emboldened by the stock’s failure to overcome technical resistance.

Downgrades could also be a concern for the equity. RIMM has garnered 18 “strong buys” and six “buys,” versus 10 “holds” and just one “sell.” Any downgrades from this bullish bunch could send the security sharply lower.

Once the king of the handheld device market, Palm Inc. has had to fight an uphill battle against both RIMM and AAPL to regain a foothold in the smartphone market. But, as the saying goes, “if you can’t beat them, join them.” Palm is slated to release its own entry into the touch-screen market later this year, along with a slick new mobile operating system. The move has prompted questions of legal action from Apple, as the new Palm Pre, with webOS, performs remarkably similar to Apple’s iPhone. Still, the Pre revelation has inspired PALM investors, and the shares are making a comeback.

Technically speaking, PALM has rocketed more than 255% higher in 2009, enjoying near flawless support from its rising 10-week moving average. Furthermore, the equity has not closed a session below its 10-day and 20-day moving averages since March 9. The stock met with a spot of technical resistance near the 12 level on May 7, but the pullback was halted by support at PALM’s rising 10-day moving average. Additional support lies just below the shares at the 10.50 level - an area that recently provided short-term resistance. A rebound from this solid support should help propel PALM steadily higher.

Options traders have capitalized on PALM’s strong price action, sending the stock’s SOIR to a reading of 0.85, in the 40th percentile of its annual range. What’s more, the ISE/CBOE 10-day call/put ratio has swelled to a hefty 5.71, as calls bought to open more than quintupled puts purchased during the prior two weeks. From a contrarian perspective, this wealth of bullish sentiment is par for the course for this outperforming equity.

Not everyone is quite so optimistic toward PALM, however. Short interest still accounts for a whopping 34% of the stock’s total float, despite an 8.8% decline in the number of PALM shares sold short during the most recent reporting period. As the shares continue to defy gravity, more of these bears could be forced into buying back their positions, thus prolonging the stock’s rally. Finally, Wall Street analysts have yet to jump on the PALM bandwagon. According to Zacks, 13 of the 17 brokerage firms following the shares rate them a “hold” or worse. Any upgrades from this bearish bunch could provide additional buying support for the security.

In this new series, I would be presenting list of selected few stocks which promise to be great money spinners. Remember, these recommendations are based on my analysis and I would request all my readers to apply their own judgement before taking any call…

In Cash segment:

Scrip name: Hindalco | BUY
Entry: Rs 67 | Stop loss: Rs 65.5 | Exit: Rs 71
Profit: Rs 4

Scrip name: Havells India | BUY
Entry: Rs 237 | Stop loss: Rs 233.9 | Exit: Rs 256
Profit: Rs 19

Scrip name: Union Bank | SELL
Entry: Rs 168 | Stop loss: Rs 171 | Exit: Rs 161
Profit: Rs 7

In Futures segment:

Scrip name: ACC
Entry: Rs 645 | Stop loss: Rs 645 | Exit: Rs 636 / 632
Profit: Rs 7,520

Scrip name: NIFTY
Entry: Rs 3,680 | Stop loss: Rs 645 | Exit: Rs 3,630
Profit: Rs 6,000