Stockscom Report for Sunday June 24, 2001

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

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

More mentions of the dreaded “R” word.

What will Greenspan do this week?

Market Synopsis

More warnings issued this week by several corporations did nothing to alleviate the concern over profits that predominates the markets these days. Nasdaq was slightly higher based primarily on, we suspect, the psychology of having companies announce losses only in the millions of dollars instead of $19 billion. Certainly many traders were busy placing their bets in the face of an imminent rate deduction by the Federal Reserve. Their policy-setting meeting on Tuesday and Wednesday is expected to end with a quarter point rate cut at a minimum and possibly a half point cut. By the end of the week, more and more industry people were predicting the larger rate cut. Inasmuch as Greenspan prefers to surprise the market to get the full benefit of shock therapy, we predict he will announce a half point cut in the rate down to the 3.5% level. Thus the Fed rate, which began the year at 6.5%, will now be down to about the level of inflation meaning that the real rate is extremely close to zero. So we can now look at the economic performance that should be credited to this incredible drop in rates – nothing. We believe that the Fed has not run out of excuses to cut rates inexorably further.

Why do we think we’ll be seeing more cuts than originally anticipated? Quite simply the economy has shown no sign of recovery, no sign that cuts in the Fed lending rate from January 3^rd to this day have had any noticeable effect. While the inventory glut that existed at the beginning of the year has markedly diminished, there remains no indication that industrial activity is increasing. Moreover, business investment is virtually nil, sales and profits have joined David Copperfield’s show and the end result is that the economy is resting precariously on the shoulders of the consumer.

And what is happening to the consumer? Only 400,000+ new claims for unemployment are being filed each week and each takes an average of more than 12 weeks to find new work. These continuing claims now number in the neighborhood of 3 million people according to the latest weekly statistics. To see comparable figures, one must go back to 1992 when the last recession was ending. The net effect is that consumers looking for work have a propensity to spend less on large ticket items (surprised?) and concentrate their savings on the most important needs of themselves and their families. Yet here we have an economy that for the most part is resting on their shoulders. Hence the sign on the road reads “Bumpy road ahead” and the risk of this house of cards toppling is enormous.

As for the markets, we prefer to look at the big picture. Many investors are attempting to pick the bottom at this moment thinking that conditions cannot get worse, but history has shown many times that there is no price, which is too low. The latest indications are that the economy’s slide may have ceased for now, but despite the huge cuts in the lending rate, business activity has not displayed any sort of rebound. Without a new phase of business investment, the economy is doomed to continue in a slow grind relying on a fragile consumer to stoke the fire.

And the threat of recession has not gone away. The National Bureau of Economic Research announced Friday that there is a chance that we are in a recession right now. Unfortunately, they don’t actually determine whether there is a recession until 6 months has passed, so we are forced to wait and see.

Our Stocks

The shorts continue to perform as expected with the exception of Citigroup. This week Morgan-Stanley announced earnings that exceeded Wall Street’s lowered expectations and Lehman Brothers came in with results that were also better than expected. The stock price of Citigroup jumped as did other financial services companies in unison. As such, we feel that there is continued risk of it consolidating at this higher level and that its propensity to move lower has decreased. We recommend covering this short.

As we mentioned last week, we watched TRP and PDS and while TRP began a nice rebound as we expected, Precision Drilling sunk deeper and closed closer to our original purchase price. It appears to have been caught up in the energy stock slide and this retracement shows no sign of abating. Fundamentally, there is little reason to give up on this stock since their business is rolling strongly and has good prospects for future growth. Added to that is the possibility of being taken over in the great oil rush, but unfortunately, we see the chart weakening further and have decided to recommend selling.

New Buy Recommendations:

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

Citigroup (C)

Precision Drilling (PDS)

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