Stockscom Report for Sunday May 6, 2001

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

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

Higher oil prices lead to greater supplies - time to take some profits off the table
Market continues to trend higher over short term but remains stuck in downtrend

Market Synopsis

Another week has passed and new reports were published indicating a worsening economic situation. So what do the markets do? They celebrated. All three major market indices were up on the week with the Nasdaq climbing the most, up 5.6% and now within 12% of its level at the start of 2001.

Investor sentiment measurements now display a strong bias towards a bull market. But, generally these measures are contrarian in nature meaning that as the pendulum swings to the bullish side, conditions are ripe for a market top and conversely, when the pendulum swings to the bearish side, a market base is usually forming.

Indeed, we have bullish sentiment, investors celebrating, and worsening conditions. While it is true that in the gloomiest conditions, one can usually find a market bottom, we hesitate to describe the current conditions as the kind one uses for new investments. The principle factors associated to this newly charged exuberance was the jobless report and a report from purchasing managers, which gauges industrial activity.

The jobless report showed that through the month of April, 223,000 workers lost their jobs even while most economists were expecting to see a small gain. This number is the biggest drop since February 1991 - definitely cause for celebration?!? And coupled with the already announced, 570,000 planned job cuts through the first four months of 2001, means that there's more than enough idle people available for a small party. Up until now, consumer confidence has appeared to resist the pressures of the contracting economy, but with these new figures just announced, it will be interesting to see if those consumers will continue to behave as they have in the past.

As for the purchasing managers gauge of industrial activity, the numbers showed a slight improvement in the manufacturing sector from March's numbers, but that the economy continued to contract. The Big Three automakers could have confirmed those numbers and conveyed the same sentiment as well after witnessing their sales in April drop about 14-18% from the year ago period. More announcements about production cuts in the second quarter followed this.

With these new increases in announced job cuts and lower production coupled with CEOs who confess to an inability to envision the future six months away, we should be plunking down new money to join the party? We think not. Our advice is always based on longer-term trends and the current long-term trend continues to be downward sloping. We endeavor to find stocks with potential to appreciate based on current strong upward-trending slopes that display a resilient strength regardless of the state of the market. Obviously, in the case of issues that we hold short, we are searching for those burdened with technicals showing overbearing weakness.

Overall, the dimensions of this rebound seem to be quite ordinary and technically it appears that we are reaching the peak of the downward sloping channel that keeps the bear market designation in force. Indications that the markets are overbought in the short term support this view and we believe that we will be witnessing a crest very shortly followed by a strong movement down. Whether or not the downtrend reaches a new low remains to be seen, however it's worth noting that there really is no technical support on the Nasdaq 100 until the level of 1000. Though we are not committing ourselves to a recommendation, those investors willing to take some heat should consider shorting Nortel and Cisco at this time. Cisco is reporting their quarterly results on Tuesday and this, in fact, may prove to be the catalyst for a new breakdown on the Nasdaq. 

Oil Outlook

While many economists believe that a rebound is virtually around the corner and that the second half of the year will show strong evidence of an economy back on its rails, one of the wild cards that could alter the picture, is oil. Last week's announced inventory levels strongly exceeded expectations and refinery capacity is running at around 95%. The cost of a barrel of oil is down, but the price at the pump is higher due to squeezes in supplies of refined gasoline. Some of this increase was due to regular maintenance performed at this time of the year at the refineries.

It is said that the cure for high prices is high prices. With the higher gasoline prices, people tend to drive less lowering demand and refineries increase the price of refining making it profitable to import refined gasoline directly from the country of origin thus increasing the supply. So prices fall. We expect prices in the near term to fall for gasoline of all types and so there will be pressure on the prices of Alberta Energy, Ultramar, and Occidental Petroleum. The downside risk of holding these stocks is substantially greater than it's been in months and ultimately outweigh the possible upside benefit of continuing to hold them. We have made very nice gains on these three so we prefer to bank our profits by selling.

In the case of the pipeline shares, we will continue to hold these since we expect the flow to increase as demand increases for natural gas. Electricity shortages continue to plague various states, especially California, and other states are susceptible to the power imbalances. Even under a worse case scenario, the downside risk to holding the pipelines stocks remains favorable.

As for the service stocks such as Precision Drilling, exploration and drilling continues to expand at a brisk pace and the potential weakness in the price of oil will not deter these drilling programs from continuing. The Bush Administration has made it overtly clear that the US must do whatever is necessary to reduce its dependence on foreign oil and is actively encouraging new exploration. Thus we perceive the downside risk to this stock as comparably small and will continue to hold it.

New Buy Recommendations: None.

New Short Sales: None.
 

Stock Positions to Sell/Exit:

Alberta Energy (AOG)

Occidental Petroleum (OXY)

Ultramar Diamond Shamrock (UDS)

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.

·        Rolled from the March contract and price adjusted

Short Sales