SELL: Stocks appear to be setting up for a tumble

In our last Report we said stocks were now at the top of their recent range. For some time since then we were inclined to think that they would merely consolidate, most ;likely with an upward bias. Now, however, there are signs that the general market may be setting g up for the September/October tumble that has become something of a routine in recent years, and that it may override the traditional rally into a presidential election.

We want to sell all stocks with the exception that if you are prepared to take a longer view and to ride out a hiccup in these stocks, then retain your oil and oil service stocks. Officially we stay with these stocks although in practice we have lightened up our own holdings considerably and have gone flat in accounts that have a low tolerance for risk. The increase in oil production over the weekend is being hailed as "too little, too late." We hesitate to guess what the immediate impact on the shares of petroleum companies might be, but they are not likely to soar if other stocks are going down. In fact, it is remarkable how lazy they have been even as oil prices have been working higher. Over the intermediate to longer term, we think we see a downside risk of perhaps 10 or 20 percent but an upside potential of a double or more, and in some cases much more in the very long term.

We have long had a sense that the huge bull market might be living on borrowed time but we could never quite get a handle on why it should end. Any time stocks seemed to falter and any time there appeared a glimmer of weakness in the economy, they both came roaring back. However high the price, stocks seemed to grow into their valuations. Now, however, we see a potential reason for part of the high tech economy to unravel.

There is an economic law that profitable investment opportunities attract investment. The corollary is that they continue attracting investment until everyone's investment is made unprofitable by the ensuing overcapacity and competition. You might not think that fiberoptics could ever become unprofitable. Yet there are signs of precisely that now potentially unfolding. It turns out that a significant part of the sales reported by such companies as Lucent, Nortel, Cisco and Alcatel may have been made on credit to customers who could not raise the money to pay for the goods themselves. So their suppliers carried the sale on credit on their own books. This came to light when Lucent tried to sell some of its receivables but was unable to fund a buyer. If the purchasers of their goods couldn't raise the money to pay a conventional lender, the quality of the credit does not improve if sold second hand by a company like Lucent.

The underlying situation goes beyond this piece of evidence. The license fees paid by telecom companies such as British Telecom, Deutsche Telecom and Vodaphone have been so huge as to undermine their credit rating. Having parted with so much money just for the licensing fees, they are strapped for the money to install the infrastructure to use the licenses. Therefore they are poorly situated to pay cash for goods from the likes of the aforementioned Lucent, Nortel, Alcatel and Cisco.

This is just one main area where investment appears to be ahead of foreseeable ability to finance it. Another area is the staggering investment in carrying capacity to which the likes of Global Crossing, Level Three and MCI Worldcom. Their financing requirements are so huge that the market may have difficulty in swallowing so much. Even if it does, it is possible that there would be an upward adjustment in interest rates for corporate debt.

A further problem is the rate of expansion of wireless telephones projected by some analysts. At the present rate of expansion, it has been estimated that everyone on the planet will have one within a couple of years or so. This clearly isn't going to happen. When, not if, the slowdown in offtake occurs, there has to be corresponding backup for manufacturers like Nokia, Erickson and Motorola. This will then back up on the chip makers that provide the components.

In sum, the economic case for a slowdown in the most dynamic areas of Information Technology could be starting to fall into place. Even companies like the great JDS Uniphase and Corning would not come through unscathed in a general decline in this area of the market.

On the technical front, the monthly chart for the NASDAQ 100 appears to be setting up for a Lindahl sell signal with a very much lower high than the one in the spring. There is also a double top versus the one in July. Many individual ND stocks Rae in a confirmed bear market and several others ,look as if it is only a question of time before they start heading down. There is no case any more for owning Cisco, Dell, Intel, Microsoft, and MCI Worldcom, which along with Sun Microsystems comprise about one third of that ND 100 Index. Sun Microsystems doesn't look that bad but it's unlikely to stay up if there is a general slide. It has been stronger but its daily chart now appears to be rolling over. It could easily settle back by 25 percent or so without damaging the overall bull market in the stock.

Even among the Dow stocks, we don't se a single one right now into which we would want to put new money, and we several that are very clear sells. There is a bit of a case to own some stocks like Boeing, Citigroup, General Motors and Proctor & Gamble. However, in our view the potential reward is of the order of 5 percent while the potential risk is perhaps 15 percent, even in apparently strong and solid stocks. The thing about buying stocks in apparently safe and solid stocks is that the risk may be as great as in the stocks of technological leaders but without the corresponding prospect of reward. You can juts as easily halve your money in a stock like Proctor & Gamble or Dupont as you can in an IT leader, but you are unlikely to have your money go up by several times if you are right.

There has, of course, been immense strength in some sectors such as banks, insurance companies and utilities. Of these we dot trust the ability of financial stocks to keep on going up. As for the utilities, some of them look very good on the charts. Some of them too, like Consolidated Edison (ED), have dividend yields worth having, in ED's case 6.95 percent. The trouble is that in a general market decline, investors sell what they can sell. For all practical purposes, there are no stocks you can count on to buck the trend. Besides, if there is a general decline, the stocks you want to own become cheaper and you have the cash to buy them back at a better price.

New and Renewed Recommendations

None.

Stocks to Sell/Exit

All stocks except oil and oil service stocks. See the list below.

List of Current Stock Recommendations:

Action Ratings

The following is the legend for designating immediate action for our stock recommendations. The first is B, meaning the stock is timely to buy but the case for doing so right here is not overwhelming. Either the stock may have got ahead of itself and may be vulnerable to a retracement or else the stock has been performing disappointingly but may simply be regrouping. B+ and B++ indicate stocks for which there is a technical case to buy now, with plusses adding weight according to how many there are, up to a maximum of five. Stocks rated H are ones to hold, awaiting confirmation to buy more or to sell. SELL, of course, means what it says. It seldom pays to override this designation.

Stocks marked # are eligible for Canadian RSP funds. Otherwise there is a 20pc restriction on foreign stocks held in these accounts.

First bought Entry Last

5/15/00 Alberta Energy(AOG)# 38.63 40.13 H
8/7/00 Amgen(AMGN) 69.19 74.94 SELL
5/15/00 Apache Corp.(APA) 59.88 63.94 H
8/14/00 Applied Micro Circuits (AMCC) 158.94 185.81 SELL
8/14/00 Biomet(BMET) 33.25 32.81 SELL
5/15/00 British Petroleum Amoco(BPA) 54.44 56.75 H
5/15/00 Cdn Occidental Petroleum(CXY)# 26.13 27.81 SELL
5/15/00 Chieftain Development(CID)# 20.50 21.50 H
8/7/00 Chiron(CHIR) 49.03 50.63 SELL
8/14/00 Ciena(CIEN) 162.88 199.63 SELL
8/14/00 Corning(GLW) 281.00 304.88 SELL
8/14/00 Enron(ENE) 83.75 84.19 SELL
5/15/00 Global Marine(GLM) 26.38 32.19 H
8/14/00 Medimmune(MEDI) 73.34 78.56 SELL
8/28/00 Mitel(MLT) 23.19 23.25 SELL
8/14/00 Novavax(NOX) 8.13 8.81 SELL
8/14/00 Oracle(ORCL) 81.94 86.50 SELL
8/14/00 PMC Sierra(PMCS) 214.38 214.88 SELL
7/10/00 Suncor(SU) 23.06 23.56 H
8/7/00 Talisman(TLM) 32.25 33.88 H
5/15/00 Transocean Sedco(RIG) 51.13 61.19 H

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