Stockscom Report for Sunday July 1, 2001

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

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

Quarter point cut in Fed rate has little effect on markets

Slightly better economic indicators released this week

Holiday-shortened week

Market Synopsis

The Fed moved this week and opted for a quarter point cut this time instead of the expected half point cut, which had become almost a ritual in the last few months. With inflation running around 3%, the Fed is apparently fearful of running out of bullets in its economic starter’s pistol. At the beginning of the year, the Fed funds rate was 6.5% and now six months later, we have a rate of 3.75%. Normally the effects of rate cuts are felt 6 to 12 months in the future and we have early indications that there have been some positive changes in the economy.

This past week, three indicators in particular gave rise to renewed optimism. The first was that the initial unemployment claims dropped under the 400,000 barrier for the first time in several weeks, the second is that consumer confidence rose slightly and the third was the report from the Chicago Purchasing Managers showing less contraction in the economy than in the previous month. So do we think it’s time to buy equities? The answer is a resounding “No”.

Profits continue to suffer for the general corporate world and recovery looks certain to be delayed until sometime in 2002 for many of these firms. We continue to look at a summer that may or may not produce a rally of sorts, but that the real bottom will be touched sometime in the fall of this year. Similarly, around the world, major free-market economies such as Japan and Western Europe are also experiencing problems as this is truly a global slowdown. Recovery for them could be delayed even further due to the rigidity of their economic systems – the inflexibility of their workforces and the amount of regulation and state-involvement in their economies.

When the time comes that profits appear once more on the radar screens, investors will need to be extra vigilant due to the percentage increases in profitability that will make corporate performance look phenomenal due to the comparison with weak results from this year. While these results may gave credence to a V-shaped recovery, the reality of the situation is that any recovery will be a long process shaped more like an elongated U unlike those seen in the last 17 years.

In the case of the telecom sector, the recovery could be even longer. The lack of visibility continues as capital investment by businesses for telecom-related equipment has nearly dried up and telecom suppliers anxiously wait for new orders while cutting costs to stem the rate of cash burned.

In the markets this week, we saw the Nasdaq Composite move up 125 points and the Dow Jones drop 102 points (a move which we had predicted two weeks ago). The S&P 500 remained virtually the same. While much of the activity was due to window dressing by the mutual fund managers in response to the end of the quarter, there were two interesting developments: the first was the strong downside reversal on Friday afternoon in the Dow giving us a strong signal of increased weakness in the index and the second was the positive breadth of the NYSE which will continue to be monitored.

This week the markets will be closed early on Tuesday and reopen Thursday so we can expect a quiet week as many traders will take vacation.

Our Stocks

There was little movement in our stocks this past week and certainly with the rebalancing of portfolios in the mutual fund industry, price action tends to unpredictable. As such we prefer to remain on the sidelines waiting for more concrete indicators of movements.

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