Stockscom Report for Sunday May 20, 2001

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

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

 

Markets move higher with rate cut - we remain cautious

3 New recommendations that buck the trend

 

Market Synopsis

 

Markets moved higher this week benefiting from the Fed's latest interest rate cut of half a point. This brings it from 6.5 down to 4.0%, a phenomenal decrease of 2.5% over the first five and a half months of the year. The amplitude of the drop indicates the increased worries of the Fed vis-à-vis the economy and this was expressed in its accompanying remarks that capital investment had virtually died and that the life support system keeping the patient alive, was the consumer. Many people now theorize that Greenspan is attempting to generate conditions whereby the markets will inflate, thus giving consumers the security and confidence to spend more while Corporate America resolves its current difficulties.

 

With inflation running around 3.0%, the real interest rate is closer to 1% and this could cause enormous difficulties in the near future by restricting the Fed's ability to loosen monetary policy. The obvious analogy to this situation is the Japanese economy where lending rates are near zero, recessionary conditions persist and the Japanese consumer continues to tighten her wallet.

 

It is worth remembering that the surprise element of the rate cut was significant here. A rally was to be expected considering that many analysts had begun to discount a smaller quarter point cut and so this reaction to the Fed's move mirrors in many ways the aftermath of the cuts both at the beginning of 2001 and April 18^th.

 

The Dow is zeroing in on its highs reached in April and September 2000 of 11400-11425. This could simply be a function of the easing in monetary policy or it could be a function of the surprise element of this decrease. Either way this party continues despite the fact that earnings are generally not increasing and in most cases are decreasing. Volatility is the name of the game and bear rallies can be fierce and unapologetic for those caught napping. Our interpretation continues to be one of caution; that this appears to be another step in the zigzagging sideways movement of this market.

 

With respect to the Nasdaq, our interpretation is that the current market level is hitting much technical resistance around the 2200 mark. Similar to the Dow, it appears to be hitting another peak, but in the case of this market, the next step will not be sideways, but rather an inexorably downward movement punctuated by more bear market rallies.

 

In both markets and in the S&P500, the weekly stochastics display technical overbought conditions, which in the recent past were not sustained and this, likely due to the fundamental weaknesses of the companies' financial statements. Naturally, all the companies in these indices are not weak but definitely a preponderance of them are and consequently, the market follows the direction of the leaders, most of whom have seen better days.

 

Recommended Actions

 

We continue to hold our shorts as we remain cautiously optimistic that the market may be approaching another peak in the cycle and that we are on the doorstep of another downward movement both on the Nasdaq and the Dow. The only consolation being that the latter may not suffer as crippling a fall as the former.

 

Having said that, we are making small forays into the market to pick up some cheap but solid stocks capable of great upside potential. We are making 3 new recommendations this week, which we think are capable of resisting to a large measure the potential downdraft of a falling market. They are Quaker Fabric (QFAB), Scios Inc. (SCIO), and Alliance Gaming Corp. (ALLY).

 

Quaker Fabric as the name suggests is a world leader in the design, manufacturing and marketing of woven upholstery fabrics. Technically it appears to be breaking out of a two-year period of consolidation and has the potential to double from the current price of $10. Fundamentally the stock is a solid pick in that its book value is approximately $6.50.

 

Scios Inc. is a drug company whose rising star is due to a treatment for congestive heart failure. Each year 5 million Americans are affected by this and 1 million require hospital stays entailing expenses of $21 billion. The FDA panel will be deciding shortly on whether to accept this drug (the consensus being that it will be accepted), which would result in shorter hospital stays and greater comfort for the patient. Current price is around $29.

 

Alliance Gaming sells gaming machines, gaming systems (software running the machines) and has a couple of operating casinos. They have made significant inroads selling machines into casinos operated by Native Americans over the last couple of years and will announce their first profitable year after having bought Bally in 1996. Technically, the stock had been consolidating for several years, started dropping in 1998 to hit a bottom in June 2000 and has been rebounding for the last few months. Current price is $29.

 

 

 

New Buy Recommendations:

Quaker Fabric (QFAB)

Scios Inc. (SCIO)

Alliance Gaming Corp. (ALLY)

 

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	8.29	H
02/01/01	Acm Government Opportunity Fund	AOF	7.99	8.11	H
12/18/00	Kinder Morgan	KMP	50.00	73.16	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.65	H
12/18/00	Precision Drilling	PDS #	33.19	44.05	B+
04/30/01	Skechers	SKX	36.00	36.90	B
12/18/00	Trans Canada Pipelines	TRP #	11.19	12.17	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	14.72	S
03/21/01	Citigroup	C	44.31	50.86	S
12/18/00	Coca-Cola	KO	54.00	48.10	S
03/21/01	Juniper Networks	JNPR	53.00	54.81	S
03/21/01	McDonalds	MCD	25.60	29.80	S