Stockscom Report for Sunday April 22, 2001

Publisher: Colin Alexander (613-745-5593) Editor: Ken Wilson (450-691-4617)

Subscriptions and Administration: Pierre Fichaud (1 866 487-9711)

 

Big weekly reversal in stocks for this week, but not a trend reversal

Bear market rally in stocks

Oils and oil service companies look better than ever

 

Market Synopsis

 

This week's rally in the markets was far from unexpected as the Nasdaq had been heavily oversold for weeks now. Naturally, the catalyst was the Fed, which decided to bring a rate cut to the party that began the week before. Strangely, the Fed governors spent the better part of the previous week harping about how the economy didn't seem to be in the proverbial dumpster. This may certainly have been a carefully contrived tactic to increase the surprise effect. And if that is the case, then it worked marvelously.

 

Then why did the Fed lower the rate? The US economy continues to struggle with increasing unemployment, over-capacity in the industrial sector, and a consumer that is losing confidence and probably fearful of the enormous debt that they're carrying. As corporations continue to perceive lower profits in their future, they will continue to cut costs wherever possible and layoffs will remain a large part of this effort. It’s worth noting that April's announced job cuts surpassed the 100,000 mark this week and that is the fifth month in succession that announced cuts have beaten the mark.

 

Extrapolating the job loss scenario, it becomes an easy task to understand how these newly unemployed workers will react. Besides the frightening situation which they find themselves in having to find work, (which explains the down turn in consumer confidence), they must cut their own personal expenses by purchasing less and determine how best to handle the debt payments. Already mortgage delinquencies to lower-income households, as reported by the Federal Housing Administration, had increased 1.5% in the fourth quarter of 2000 to 10.5%.

 

So the bear market's over. This is similar to the fable of the emperor's new clothes. Once some wily analyst points out on CNBC that many of these corporations have no profits, investors will storm back to the exits.

 

Certainly there are more than a few analysts who have predicted during the past week that the bear market is officially over. We beg to differ. We interpret this rally as simply the very powerful rally that we predicted could occur over the near term. The trendline pointing downward remains in effect and nothing this week has changed it. If the Nasdaq 100 were to head north of the 2200 level (it's currently at 1912) and resist any movement down below this level then we might pause to reconsider. This won't happen. The Nasdaq has moved up substantially - 33% over the previous 12 sessions - a jump that simply cannot be sustained over a period of time.

We continue to believe that this downward trend won't be breached for a long time. The bear market is always a function of the bull market that preceded it. The bull market preceding this one was one of the longest in history and we suspect that the bear market will wield its force until the second half of next year. The markets will continue to drop, rally and then drop some more as corporations continue to report losses or small profits and investors ponder over these ever-increasing P/E ratios and decide that they're not worth keeping.

 

With the rally of the past few sessions, it is interesting to note that the Dow Jones, the least weak index, is still about the same place as it was 2 years ago, having really not gone up or down significantly within its broad range.

 

Telecom Commentary (continued)

 

This past week saw the much-anticipated default of Winstar Communications. Winstar, a provider of telecom services, filed for Chapter 11 bankruptcy protection proceedings and declared, among other items, a $600 million loan from Lucent Technologies. Naturally, this money was lent to Winstar so that they could purchase equipment and services from Lucent.

 

The telecom industry continues to be a powder keg and a major threat to the economy. The wide use of bonds to finance the build-out of the telecom infrastructure has come crashing home as more and more of these companies, with their feeble revenues, are unable to service the debt requirements. Most if not all of these bond issues, originally carrying yields in the range of 10% have been relegated to junk status with yields of 50 to 60%. As these companies move towards bankruptcy protection, the unraveling of the excesses means more layoffs, contraction of capital spending, and larger provisions for loan-losses by the Cisco's and Nortel's of the world. Beyond that are the effects further down the supply chain in financial services, real estate and consumer spending. Unfortunately, the effects of these companies resorting to bankruptcy protection will not be isolated. 

 

Recommended Actions

 

Despite the strong rally of these last few days, we hesitate to make new recommendations. When choosing stocks, sometimes the best ones are the ones we already own and, at this moment, we see an inordinate amount of downside risk associated to new purchases. We prefer to err on the side of caution keeping in mind that in a bear market, the winners are those who have managed to keep 100% of their investments' value.

 

This past week saw some notable upward movements in Alberta Energy, Occidental Petroleum, Ultramar, and Kinder Morgan. In fact, all four of these hit new yearly highs and could still move higher in the near term.

 

As with the current rally, there is often a temptation to cover the shorts with the mildest scent of danger and we are conscious of that wisdom. But, it is timely to repeat that shorts should be held as a portfolio of different equities and not as singular issues. The strong rebound in prices for Amazon.com and Juniper do not dissuade us from continuing to hold these equities as shorts. In the case of Amazon.com, a close at week's end below $18.50 would not breach the long downward trend and for Juniper, an equivalent value would be $70.00. You might however, consider covering a portion of your positions in these equities due to their inherent volatility.

 

New Buy 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 gotten 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 two. 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. In the case of stocks held short, the rating is S where positions should be retained. S+ and S++ indicate stocks for which there is a technical case to add to the positions with plusses adding weight similar to long positions. The maximum number of plus signs is 2.

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

Date of Entry	Name	Symbol	Entry Price	Current Price	Action Rating
02/01/01	Acm Government Income Fund	ACG	8.07	7.92	H
02/01/01	Acm Government Opportunity Fund	AOF	7.99	8.19	H
12/18/00	Alberta Energy Co.	AOG #	42.63	49.70	B
12/18/00	Kinder Morgan	KMP	50.00	68.00	B+
12/18/00	Occidental Petroleum	OXY	21.88	27.51	B+
02/01/01	Pioneer Interest Shares	MUO	11.95	11.50	H
12/18/00	Precision Drilling	PDS #	33.19	38.58	B+
12/18/00	Trans Canada Pipelines	TRP #	11.19	11.76	B
12/18/00	Ultramar Diamond Shamrock	UDS	28.38	42.35	B+
02/12/01	US Treasury 20 Year Bonds	USH	104.21	104.21	B

·        Rolled from the March contract and price adjusted

Short Sales

Date of entry	Name	Symbol	Entry Price	Current Price	Action Rating
03/21/01	Amazon.com	AMZN	10.38	15.78	S
03/21/01	Citigroup	C	44.31	49.05	S
12/18/00	Coca-Cola	KO	54.00	47.00	S
03/21/01	Juniper Networks	JNPR	53.00	65.34	S
03/21/01	McDonalds	MCD	25.60	27.09	S

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