Stockscom Report for Sunday June 03, 2001

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

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

Markets continue to move lower - we remain cautious

Warnings season is now officially open

Market Synopsis

Most indications remained bearish this week as we predicted. On Friday, the unemployment report showed a surprising down tick in the rate, which was due more to the sharp reduction in the labor force than a strong rise in the number of people finding work.  The NAPM report, which sounds out the opinion of purchasing managers showed evidence of the contraction continuing in industrial activity. Furthermore, on the tech side, Sun Microsystems kicked off a new warnings season by guiding profit estimates downward due to slack European demand. In fact, there was already slower demand back home, which was priced into the share, but the surprise of not selling more Sun systems abroad drove the share price south.

This warning about Europe may signal repercussions in other companies, namely the legless telecom sector. In all probability, while the US economy headed for the dumpster in the fourth quarter and Europe stood firm demonstrating its ability to grow without the aid of the US market, telecom firms looked across the Atlantic in search of markets for their products. Now with the recent announcements that GDP in France and Germany has slowed considerably, the prediction is that Eurozone GDP should be 2.0% in 2001 with Germany falling well below that mark. Telecom companies have few places left to turn.

As for the particular indices, the Dow Jones is crippled by its inability to pass through resistance at the 11,425 level and there appears to be mild near-term support proffered by the 10,650 level which represents the 200-day moving average. Long term, the DJ continues to be range bound as it has been for over 2 years now and it would take a bolt of action above the 11,700 mark to break out of this prison. More likely than not, the on-coming freight train of warnings will put the Dow into a tailspin perhaps testing the depths of the previous low late in March.

The Nasdaq market has been caught in a slightly rising range since the middle of April. Near-term support is at the 2075 level on the Nasdaq Composite and similar to the Dow's near-term support, this level doesn't have much strength. Long term it completed a small downside closing reversal on the monthly chart, which indicates bearishness in the future. For statistics buffs and market watchers, it is worth mentioning that the Nasdaq hasn't had two up days without a third since mid-March and the last two days of the past week were up. Overall, with the approaching earnings season, the downside risk on the market is substantially great while any upside potential is severely limited.

Over the next few months, the easing in monetary policy and enactment of the tax cut should bolster the economy and add impetus to consumers to spend more. The big question is this - when will capital expenditure recover? For those companies in the tech sector, where business investment soared high as an eagle before dropping off a cliff, visibility of future earnings remains in a fog. When the final tally is made and companies announce their results, more than likely we will see a continuation of the profits recession. There is a considerable risk that investors will wake up one day and decide that the P/E ratios of these companies are out of touch with reality and cease to hold them.

Recommended Actions

Our shorts performed well this past week and show signs of further breakdown. We continue to hold them all as a broad-based basket of stocks that show evidence of the downward zigzagging inherent in a bear market. None has shown an ability to sustain any movement in the opposite direction though at times, they have managed to retrace a large part of their downward progress.

The bank sector and Citigroup in particular, have mostly escaped the carnage of the slowing economy until now. We see this situation being rectified over the next few months as unemployment rates climb and the onerous debt that the American consumer is carrying becomes more noteworthy due to personal bankruptcies.

SCIO continues to work itself in the wrong direction. The advisory panel approved the drug and now expectations are that the FDA will give it the green light in July. It has retraced about 25% of its price at which we recommended it and at first glance this appears to be acceptable (though unsavory) behavior. The reaction this week is due in part to the company announcing the sale of 5 million new shares in a secondary offering. Under this dilution, the number of shares outstanding increases to around 45 million. Given its chart behavior, we would recommend selling it if it closes below $21.

We are making one recommendation this week, Amgen (AMGN), one of the premier biotech companies. Its share price appears to be building momentum in an attempt to break out of the long 18-month consolidation in which it finds itself. Financially, Amgen is arguably the strongest of all biotechs due to its $2.2 billion position in cash and profitable operations. As a bonus, on Saturday, they announced that two Phase III trials of a drug to reduce the growth of prostate cancer cells, had demonstrated very encouraging results exceeding those of the standard treatment used today.

New Buy Recommendations:

Amgen (AMGN)

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