Stockscom Report for Sunday Sep 9, 2001

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

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

Big job losses drives down the markets

NAPM gives glimmer of hope

Market Synopsis

We got a big bang out of the unemployment figures for August. Though we expected a reaction in the market and were prepared for the possibility that the latest economic indicators might lead to a surprise of lower unemployment, the resulting figure of 4.9% was beyond expectations. The leap in this unemployment mark was primarily due to the manufacturing side where the increase has been most pronounced over the past year – from 3.5% to 5.7%. Some analysts enjoy pointing out that this is lagging indicator showing only where we’ve been, but considering the number of announced layoffs this year, it was bound to show up eventually. To top that off, we expect that moving into the fall season, the primary planning season for corporations, we’ll see more announced layoffs as companies plan their fiscal year 2002. Already 1.2 million people have lost their jobs since employment peaked in 2000 and now as the bite of layoffs becomes more intense, we are being setup for a dreadful Christmas sales season. The last bastion of the economy, the consumer, is about to surrender and with capital expenditure unlikely to recover in time, we are almost certainly heading for a recession.

We know the consumer was on the minds of traders Friday as the Dow and the S&P both plummeted after the release of the employment figures. The swift reaction was a response to the possibility that the consumer might not actually be able to sustain the economy until business investment picks up. Though the markets are oversold and have been for quite some time, the propensity to drop further runs unabated. When trading resumes this week, we may see some minor support at the March low of 9106 for the Dow, but there’s nothing to prevent it from falling further. Long-term support for the Dow remains at the 7400 level.

Despite the gloomy employment report, earlier in the week we had another economic release, the NAPM report, which describes both planned and actual industrial output. The report indicated that the economy was still getting worse albeit more slowly, but that industrial orders got a boost last month and actually increased from the month before. This could be the start of a trend but all bets are off until we see follow-through from the next month.

Shorting Dow stocks might actually be the safest strategy in this environment. Certainly most issues ended down on the week. Coke, one of our shorts managed to buck the trend and ended up being one of the shares to see appreciation. The reason for this up tick in the price is that consumer-related issues or defensive stocks as they are called, are the last to be sold in a capitulation. People look at Coke and consider that its sales should remain strong regardless of the economy, thus it gets labeled as defensive. This comparative advantage will dissipate once investors wake up to the fact that Coke trades at a P/E ratio far beyond anything reasonable. With stochastics already displaying a heavily oversold condition, we could expect Coke to succumb to the vagaries of the market much sooner than later.

Our Stock Picks

We stay with our picks and choose not to buy or sell further. The strong dividends are obviously helping keep up the values of these stocks.

New Buy Recommendations:

None

New Short Sales

None – though almost any Dow stock is a potential short except for JNJ

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

*   Split 2:1 – 09/04/01

Short Sales