Stockscom Report for Sunday May 13, 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 - What Timing!

Market continues to trend lower

Market Synopsis

Reality can be hurtful. We've just completed a losing week, which as we mentioned last week, really was in the cards. Investor sentiment was displaying a strong bias towards being bullish. By Friday the Dow Jones was down 1.2%, the S&P was down 1.7% and the Nasdaq dropped 3.9%. Granted these weren't large percentage drops, but the current markets are showing no direction at all and remain confined to a downward bias for the longer-term trend.

This action appears to give credence to the saying "Sell in May and go away". Historically, the price action of stocks is much more powerful from the period of October/November until April of the following year. And we see this in the volumes being traded; the Nasdaq in particular saw a large volume drop and there wasn't even a holiday to justify the weakness.

Going forward, this price action continues to favor our stocks held short. Most financial firms are giving indications of lower profit levels due to the lack of underwriting and, with the aforementioned lower trading volumes, it's only reasonable to assume that their brokerage commissions will suffer considerably. Juniper continues to sport a high P/E ratio in an area in which customers are MIA. This coupled with a report that Cisco now has competing products should dampen investors' enthusiasm for this tech darling. Coca-Cola continues to gravitate toward reality and a lower stock price. And Amazon.com appears to have failed on its move higher and now is trending downward.

The Fed is meeting this week to decide on interest rates with the announcement due out Tuesday afternoon. Until the last week, most pundits were betting on a half-point rate cut, but new indications that were published last week have cast a cloud of doubt on that assumption. The possibility is now that we will see a quarter point cut followed by a period of study to analyze the effects of the significant cut in lending rates since the beginning of the year.

The wild card in all this is inflation. With unit labor costs rising at an annual rate of 5.2% in the first quarter of 2001 (the highest since the fourth quarter of 1997) and productivity falling 0.1% in the same period, we could be witnessing the start of a period of stagflation. This is a situation characterized by slow growth and rising inflation. And perhaps more importantly for our interests, the performance of stock prices tends to be weak.

With the current interest rate of 4.5% and an inflation rate of 3%, the real interest rate is reduced to 1.5% leaving little leeway for the Fed to make further cuts of the amplitude that we've seen.

Overall we believe that the downtrend in the market indices will continue unabated. The Nasdaq and the S&P appeared to have reached peaks last week and we saw them turning down this week. The Dow Jones rallied up - stopping just short of the 11,000 mark and then rolled over thus continuing the trading range that has been its home for many months. As the realization settles in that the interest rate cuts won't have the immediate desired effects and that corporate profits are weak or non-existent, investors will either sell or stop buying.

Oil Outlook

It is often said that when Time and Newsweek bemoan the bear market, it is often the time to start buying (this year being the exception to the rule). In a similar vein, when the popular press begins to announce future spikes in the price of fuel, it may be the time to start selling. We advised selling our shares in Alberta Energy, Occidental Petroleum and Ultramar last week and we had the good fortune to be on the right side of the announced offer to buy Ultramar - it opened the week at $50.50. Despite that offer and other news items relating to the threat of high gas prices in the summer, the fact remains that inventories in the States are rising and the price of a barrel of oil has stabilized. The current futures cash price of Unleaded fuel (over $1) is analogous to natural gas at the $10 mcf level. These are quite simply levels that are not sustained over time.

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.

·        Rolled from the March contract and price adjusted

Short Sales