Time for a near-term low, or better
(Stocks bottom when things look worst and top when there are no clouds in sight)
Hold Stocks in strong companies selling at reasonable value
Keep more cash than you think you should
It's a bear market, but not a universal one impacting all stocks
You can nibble at a few great stocks now, especially oil services and and SYMC
Hold bonds, but beware buying more, or too many

What we have been doing

Given the ferocity of the recent downdraft in many stocks and especially high tech, we have a remarkable list of recommended stocks, with almost all of them ahead and some of them significantly. We have one serious loser, Texas Instruments, and one less so, 724 Solutions.

When we bought TXN, we said we might be early in this sector, as indeed we certainly were, but we said we loved the story for this company and we thought its technicals would shape up. The company has redesigned itself as a niche player on the cutting edge of semiconductor technology. As such, it can maintain good profit margins, unlike the producers of semiconductors as a commodity. The company is also cash-rich, which is a quality likely to be recognized in the stock price when investors start sorting wheat from chaff in the high tech arena. We were, of course, seriously wrong about the technicals shaping up, as they have deteriorated abysmally. The question now is: What do we do with it? Should we sell it, hold it or buy more? Were it not for extraneous market factors, the technicals call for an exit, particularly if this stock is one of a larger portfolio of high tech stocks. Better, one might say, to take the loss and wait for a better opportunity. More, however, about the general market in a moment.

We said at the outset that SVNX was an outright speculation, but that we liked both the story as we understood it, as well as the technicals. We urged our readers to buy only a small position in recognition of the speculative nature of the stock. Not too bad advice, given the relatively small loss that we now carry, although obviously not great advice either. The stock is, of course, under water for us, having gone to a significant profit and now to a loss. If you have a hundred shares or so, it's still a speculative hold. When we identify a speculative stock, you should recognize that in the extreme the stock might go to zero. That is the risk you have to consider when buying a stock which might be in the early stages of becoming a Research in Motion (RIMM), a stock with which we think this company might be compared.

Offsetting our unfortunate timing for TXN is our superb purchase of Symantec, our only other significant holding in the clobbered high tech area. Here we were evidently right to fall in love with the story, its apparently very cheap price in terms of price to earnings, and its excellent technicals. We like the story even better now that we have come through some good results as well as its evident ability to hold up so well when all about it were crashing hard. It's worth remembering that if you buy two stocks of which one doubles and one halves, you make money on balance. We see TXN down by something approaching half while SYMC is up only 29 percent. Nevertheless, we expect to make money on balance from, holding these two stocks, and possible tons of it.

TransCanada Pipelines and Kinder Morgan may seem like boring stocks but there's nothing wrong with the combination of a low upward winching in price while receiving a decent dividend. KMP looks a bit ambiguous in the very near term but TRP still looks like a very strong buy. The company is coming out of the doghouse after disposing of misplaced and unprofitable acquisitions. It has recently obtained a rate increase to add to already growing profits and, as we said before, it pays a decent dividend with room for increases.

The market's prospects now

February was tough and the next few months will likely be difficult for investors. As we said in our last newsletter, in times like these you need to keep plenty of cash on hand, and more than you expect to have to. It was, of course, tough as blazes living through the past week if you owned much in the way of high tech and, of course, our holdings in TXN and SVNX. In hindsight, we should have let those stocks go a week ago. We thought, wrongly as it turns out, that the worst was already over even for high tech by last weekend. We did not foresee this last bludgeoning of the market, although we have to admit that the technicals were there to see if we had not been blinded. Remember, in fairness, that our overall result has been quite acceptable. Remember too that it is absolutely one hundred impossible not to make mistaken calls. Successful investing over the long term is just as much about making mistakes as it is about being successful. It is the nature of the challenge that you cannot have rewards without taking some risks, and that the greatest risk may in fact be in trying to hard to avoid it.

By all normal criteria, stocks overall are in a major bear market. The monthly price lines for the major indexes as well as for many, many stocks are carving out downward zigzags. On the other hand, many prominent stocks are already down so much that they may have washed out enough. We know that there is no price so low that it cannot decline still further and, possibly to zero. There are some previously go-go stocks which are starting to show up as value plays, some of them with good prospects and plenty of money in the bank.

We were expecting the NASDAQ 100 Index to hold above the January low but, of course, it has not done so. This is not altogether surprising, given that we knew we detested the idea of owning some of the ND leaders, like Cisco and, although not a ND stock, Nortel. We have long been saying that suppliers to the Telecom industry were in very big trouble which was likely to intensify. We merely underestimated just how serious that trouble was. Otherwise, we would have been heavily short. As it is, we still don't want to buy those stocks however badly beaten up they are. Nor do we want to buy the fiber optics and broadband stocks. We think that financial position of these sectors stinks and that with overcapacity looming they will go on stinking for some time. At best the likes of Cisco and Nortel will stop going down and start going sideways. The rule is that the winners of the next bull market are very seldom the winners of the last one, and we don't see that rule changing. We do, however, have some considerable difficulty in guessing in which sector we shall find the new big winners. Tentatively, we think we shall find them among companies that develop some kind of proprietary niche, as we still think TXN and SVNX may.

It looks very much as if the overall market may have put in at least some kind of near-term low on Friday. There are anecdotal reports of investors "puking out high tech stocks." Technically, we saw last week the put/call ratio and VIX go to extremely oversold levels out of which powerful rallies usually develop. What happens is that panic sellers simply finish "puking out", as our anecdotal report so crudely but still so graphically conveys what happens. When selling eases, the line of least resistance is upward.

We said after the Fed's first half point easing of interest rates: Don't fight the Fed! For the overall market we were early and most likely we are still early. We still don't like the valuations or the technicals for most stocks. We still think the valuations of stocks like Coca-Cola are absurd and, finally, the market is starting to develop a technical pattern for that view which reconfirms our view. Why pay 59 times earnings for a no-growth stock? Sure, it has a worldwide franchise and it has grown in the past. However, it's not growing now. Worse, it seems to be trying to get into new business lines which may not work. Even under the best of circumstances, this was a company that was seeming to increase its profits much faster than its sales were growing. It goes without saying that profits can never reach 100 percent of sales. When the product, in the final analysis, is no more than fizzy water, our interpretation of common sense suggests that it might be vulnerable to competition. In fact, we rather like the speculative case for buying Cott Corporation (COTT), the world's largest bottler of proprietary brand fizzy water.

We have a sense that there is a real business slowdown under way, but that it is not likely to be as severe as many previous recessions. Retail sales have been holding up rather well even as consumer confidence has been plummeting. So have home sales. It seems possible that auto sales may not suffer as badly as some of the doomsayers, including ourselves, once thought like.

You have to know and also to believe that stocks make their lows when all is most depressing. Market lows occur with depression somewhat equal and opposite to the euphoria you get at market tops, when there is nary a cloud in sight. Market bottoms occur well before a recession ends, and sometimes even before it really begins. On the positive side, we have real interest rate cuts, with the likelihood of more to come. We also have huge tax cuts coming down the pike. The first place money goes is into stocks, and then into the economy. Similarly, the first place money leaves is the stock market, before people stop spending.

Frankly, we are not very brave about putting new money into many stocks now but we could certainly put in some. We hesitate to add to our list of recommended stocks because we think we may see even better buys later on. It is worth noting, of course, how many analysts on Wall Street are only now downgrading stocks which they previously recommended at two or four times their current price! This is the kind of contrary indicator we love. But we still like to buy stocks which are show, by going up, that they can go up. We are also extremely wart of buying even the best stocks in a certified bear market, such as the one in which is now in force.

The prospect for oil stocks

The upside of our tardiness in dumping TXN and SVNX has its upside in our holding off from dumping our oils and oil service stocks. When looking at action in the petroleum futures markets, we were for a time starting to think both that there might be a substantial and long-lasting top in place for energy prices. The corollary of that might mean a substantial and long-lasting top in stocks in this sector. When we bought the stocks, we said they still represented amazing value in the event of $25 per barrel crude oil and $4 natural gas. We still hold that view.

We were nervous, as we were saying, about the possibility of crude oil declining toward the $25 level, and then perhaps on lower. Two thoughts held us back from arbitrarily picking a top in the market for oil stocks. The first is that the Bush administration is committed to greater oil self-sufficiency. This should mean good times for oil service companies regardless of what the price is, within reason, for crude oil and natural gas. Related to this thought is concern for what might happen with Iraq and supplies from the middle east. If the political situation heats up, it can do nothing but strengthen oil prices and, of course, reinforce our first point, the need to beef up exploration outside the middle east.

Oil and oil stocks held up rather well when oil and gas prices retraced and sew now rate them a buy, not a sell. Almost whatever happens, we believe their cash flows will be huge and that prosperity will last longer than many people expect. The best scenario is that we are in the early stages of the kind of bull market that could double or triple stock in this sector from here. The worse case scenario most likely comprises a downside risk of perhaps 10 or 20 percent. In sum, the reward to risk in this area could hardly be better. Except, don't buy Schlumberger, which seems to be going the wrong way by branching out into high tech rather than sticking to its primary business.

Although the upside potential might be less than for some of the market leaders, for conservative money we see almost no risk in Occidental Petroleum. You get stock in a powerful company with a P/E under 6 and a dividend yield over 4 percent. Besides, the company is a logical takeover target at a price some 50 percent above its current price.

Interest Rates

We have turned neutral on interest rates. We still hang in with our long bond futures positions as a surrogate for Treasurys, and with our closed end bond funds. Further interest rate declines look to be almost a certainty within the next couple of months. However, it may be that we cannot have both major tax reductions and major interest rate reductions. Despite the apparently slowing economy, there are signs of inflation out there, and the Fed doesn't like inflation. It doesn't like a collapsing stock market and a severe recession but it will not intentionally fuel a surge in inflation. So it is likely to lower interest rates less aggressively than we previously expected.

New Recommendations: None

New Short Sales None

Stock Positions to Sell/Exit: None

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 15.00 H
2/1/01 Acm Government Opportunity Fund (AOF) 7.99 7.84 H
2/1/01 Acm Government Income Fund (ACG) 8.07 8.10 H
12/18/00 Alberta Energy Co. (AOG)# 42.63 40.60 B
12/18/00 Kinder Morgan(KMP) 50.00 62.60 B
12/18/00 Occidental Petroleum(OXY) 21.88 22.35 B++
2/1/01 Pioneer Interest Shares (MUO) 11.95 11.75 H
12/18/00 Precision Drilling(PDS)# 33.19 41.55 H
1/4/01 Symantech (SYMC) 38.38 49.63 B+
1/4/01 Texas Instruments (TXN) 50.19 30.15 H
12/18/00 Trans Canada Pipelines(TRP)# 11.19 11.65 B++
12/18/00 Ultramar Diamond Shamrock(UDS) 28.38 36.02 B+

02/12/01 US Treasury 20 Year Bonds(USH) 104.21 103.21

Short Sales

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

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