Stockscom Report for Sunday Aug 26, 2001

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

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

Bear market volatility rules

Most recent data still suggests recessionary conditions

Market Synopsis

The Fed came up to bat on Tuesday and gave the audience what was expected – another quarter point cut in the interest rate. Markets immediately reacted by selling off probably out of disappointment that the Fed balked at lopping more off the rate. Some traders were evidently anticipating a half point cut. But perhaps more revealing was that described in the June meeting’s minutes, there were some governors opposed to further rate cuts. Inasmuch as the real interest rate is now hovering somewhere just below the Fed’s, monetary policy has been levered about as much as possible and now they must wait for these interest rate cuts to spur demand.

But the future doesn’t hold out much promise. Revised figures showed that durables in June fell more than previously thought and July’s figures announced this week showed more sliding. Unemployment continues to grow and for those former workers in the telecom industry, any new employment surely doesn’t pay the six-figure incomes that they were earning before, nor will they be collecting option bonuses at the end of this year. All told, people are feeling much poorer than they did when their stock portfolios were high and they could look forward to fat bonuses at the end of the year. Also, later this week, the revised figures for the second quarter GDP are due to be released and we wouldn’t be surprised to see those figures actually land in the red, meaning recession.

The end of week rally initiated by Cisco’s comment that their business appears to be bottoming and that demand has stopped declining was the catalyst required to put the markets into overdrive. This rally would hardly be surprising if it continued on Monday, however, given the volatility of recent weeks, we believe that the markets could once again reverse. One thing is certain, the bear market is not over and this volatility is contained within a major trend downward linking together a string of lower highs and lower lows. We anticipate a major bottom to occur at the October/November timeframe due in part to the massive tax-loss selling, which should occur. At this point, there should be the beginnings of a substantial rally that would be worth participating in.

As for Cisco, it’s a prime example of a stock that many investors still want to own, regardless of the fact that its better days are behind it. The final stages of a bear market are characterized by capitulation – investors simply don’t want to own anything – but Cisco continues to sell at around $18 despite the company’s projection of a few cents in profits for the year. Looking forward is no better; there will not be a fast turnaround to profit levels of years past for Cisco.

Our Stock Picks

After liquidating most of our positions last week, we have decided to add one new recommendation to our portfolio. This is a REIT called Health Care REIT and trades under the symbol HCN. In addition to its rising price, it offers a dividend yield of over 9%.

New Buy Recommendations:

HCN

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
30 percent restriction on foreign stocks held in these accounts.

·       Rolled from the March contract and price adjusted

Short Sales