Hang in with strong stocks but beware of adding
Keep more cash on hand than you might think you should
Buy quality bonds
Treasury Bonds should provide capital gains as well as secure income-
Downside risk in top grade bonds is minimal
Sell Lindsay Manufacturing (LNN) and Countrywide Credit (CCR)

So we got the Fed's interest rate announcement and it came through as expected, with a half point decrease. Accompanying the news were comments saying that there is considerable downside risk in the economy, and that lower interest rates may not be enough to arrest the decline.

Separately, there were reports of a collapse in consumer confidence and in the indexes published by the National Association of Purchasing Managers, both to low levels not seen for several years. Curiously, there has also been a report showing record home sales in December. That number, however, follows an outright decline in November. Almost certainly lower mortgage rates prior to a precipitous fall in consumer confidence spurred those sales. From here it is likely to be downhill for home sales.

Under normal circumstances, declining interest rates are extremely bullish for stocks. Normal circumstances, however, do not include the very high stock valuations still prevailing for many stocks relative to earnings, and never mind the prospect that earnings could well decline much further, thereby making stock prices even more expensive by historic standards. Coming back to housing, buyers are wary of entering into major new commitments, or even minor new ones, when there is a high risk of being laid off. This is how a downward spiral can start feeding on itself, reversing the virtuous circle of rising stock prices, confidence and prosperity.

We stand by our stand at the beginning of January that there are just a very few areas where the risk of owning stocks is justified by the potential reward. For the most part, we want to have extremely strong balance sheets, strong cash flows, superior business prospects regardless of what happens to the economy and, ideally, a really good dividend. We are lightening up on two stocks, namely Countrywide Credit (CCR) and Lindsay Manufacturing (LNN). We like both companies very much and they still have pretty good charts. However, we want to raise some cash and to avoid risk. These two stocks seem to have just as much prospect of going down as up in the short term.

Most of our stock selections fit into this category and, in addition, for the most part have good stock charts. AOG is selling at a price of some five times cash flow based on natural gas prices around $4. So even if natural gas comes back to that level, the stock of this extremely well managed company is probably a steal, and at worst is unlikely to ;lead to trouble. OXY is even cheaper, selling at a P/E over 5 and a dividend yield of 4.6%. This company is selling at such a bargain basement level that it is also a potential takeover target. The dividend yield is likely to prevent much of a decline. Even if oil prices fall to the low $20 range, which may not happen, this company can go on paying its dividend forever. Realistically, there is a good prospect of dividend increases. KMP is a bargain on the basis of its dividend yield. TRP is solid as the rock of Gibraltar now it is coming out of the process of cleansing itself of earlier unrelated and subsequently unprofitable acquisitions. The dividend is some 4% but it could well increase. The company has recently applied for a 5 percent increase in rates, almost all of which should flow through to profits.

PDS and UDS are both oil and gas drillers and service companies, the latter with oil and gas interests of its own. Under the Bush presidency, oil and gas exploration is likely to be encouraged regardless of what happens, within reason, to the price of energy. In the big picture, supplies are far too tight for comfort, and the level of dependency on imports is far too high. Relatively small increases in lease rates for drill rigs almost all flow direct to the bottom line.

We own just three high tech stocks and we are prepared to carry them, at least for now. Symantech looks to have a special niche in internet security as well as an amazingly low PE. It jumped on great earnings and it looks as if it should stay up. Texas Instruments gave a profit warning and the stock is down on our entry price. Nevertheless, this is an immensely powerful company with proprietary products and technological leadership. We think this is one of those rare companies that you might, within reason, want to own through thick and thin because it will come out like gangbusters in good times. 724 Solutions is a bit of a gamble, but we like the story, wireless interface for the banking industry. The stock is acting well and we are making money. We bought it after a decline of almost 90 percent from its IPO high. Of course, it could fall, in theory, a further 90 percent. However, we don't believe the company is inherently worth any less today than it was at its high.

Buy Bonds

The big story from here is probably the immense upside potential in bonds. With the downward spiral in the economy seemingly intensifying, the only way interest rates are likely headed is down. We can envision treasury bond yields going down as low as 4 percent from about 5 percent now, and even 4 percent might not be the bottom. It could be 3 percent, which is by no means unheard of in economic history. In the event of that happening, bond prices, as well as closed end bond funds, could advance by 25 percent, or more, and all the while you get to keep the interest. Most important is that you lock in interest rates at a rate that is unlikely to be more favorable any time soon. Sure, it's tough to buy bonds yielding 5 percent when they once yielded over 10 percent, but the higher the prices goes, the harder it is to buy. If you foresee needing income, them now is the time to lock it in. Don't try and play it smart by hoping to own stocks that go up by more than you can earn in interest. The greater likelihood is for stocks to go sideways at best and, at worst, down, while bonds keep on rising. In sum, this a streetcar that you need to board now, and not think you can wait for an equally good opportunity to board later.

We retain our short position in Coca-Cola, which we regard as being one of the most overvalued stocks on the board. It sells at an absurd price relative to any reasonable sense of value or growth prospects.

New Recommendations

US Treasury 20 Year Bonds(USH) 104.02
Acm Government Opportunity Fund (AOF) $8.00
Acm Government Income Fund (ACG) $8.07
Pioneer Interest Shares (MUO) $11.99

New Short Sales None

Stock Positions to Sell/Exit

Countrywide Credit (CCR)
Lindsay Manufacturing (LNN)

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

1/4/01 724 Solutions (SVNX) 18.72 25.50 H
12/18/00 Alberta Energy Co. (AOG)# 42.63 40.60 B
1/4/01 Countrywide Credit Ind (CCR) 50.63 48.65 H
12/18/00 Kinder Morgan(KMP) 50.00 62.60 B+
1/4/01 Lindsay Manufacturing (LNN) 23.50 23.83 H
12/18/00 Occidental Petroleum(OXY) 21.88 22.35 B+
12/18/00 Precision Drilling(PDS)# 33.19 37.29 B++
1/4/01 Symantech (SYMC) 38.38 51.69 B
1/4/01 Texas Instruments (TXN) 50.19 44.73 B
12/18/00 Trans Canada Pipelines(TRP)# 11.19 11.10 B++
12/18/00 Ultramar Diamond Shamrock(UDS) 28.38 29.57 B++

Short Sales

12/18/00 Coca-Cola(KO) 54.00 57.91 Hold Short

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