Stockscom Report for Sunday Sep 16, 2001

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

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

Commentary

The markets are due to open on Monday and will, almost certainly, be very volatile after the horror this week. If we judge by other bourses around the world, the tendency will be to head down once again. The downtrend is by no means surprising as other past events such as the bombing of Pearl Harbor inflicted similar emotional and/or physical pain. The shocking event acted as a catalyst for an economy already showing weakness to descend further as the psychological damage caused people to re-evaluate their priorities.

While it is impossible to predict the future, we are able to infer some conclusions to this event.

In the near term, we expect that higher volatility in general will exaggerate large moves in prices for securities and could conceivably exacerbate the decline in prices. As a response to the potential for panic selling starting tomorrow, the SEC has decided to grant a temporary reprieve from the rule (law) that states that companies cannot buy their own shares to prevent them from falling drastically. Cisco and FleetBoston have already announced plans to support their stock prices in the event of strong declines. (Already on Sunday evening here in North America, we see that the Nikkei Dow has suffered a severe decline on Monday, but this is due in part to the strength of the yen and to an economy that is teetering on the brink of disaster. The events of the past few days have only reinforced the morose attitude among stock investors there.)

Airlines are going to have difficulty putting people in their seats. Midway, an airline already attempting to stave off bankruptcy, decided that the environment had changed so dramatically that any attempt to revive the airline right now, would surely be met with failure. So they laid off the last 1,700 employees and closed the doors. US Airways and Continental Airlines have also announced plans to cut services and employees to deal with the declining business expected while others such as AMR, UAL, Delta, and Northwest announced 20% cuts in service. Furthermore, there is talk of the need for the government to provide subsidies in order to ensure their survival. Share prices of airlines will most surely drop a minimum of 5-10% Monday.

A slowdown expected now in the airline industry will drive a slowdown in related industries - hotels, restaurants, bars, and entertainment. Fewer people traveling will cause lower revenues expectations in all these groups.

Insurance companies exposed to claims will see profit margins fall considerably. Latest estimates that we’ve seen predict that the payouts should total anywhere between $5 and $25 billion. Unlike natural disasters where most payouts are centered on homeowner insurance policies, the payout here will be spread between property, life and casualty. Many insurance and re-insurance companies worldwide will share the claims and thus the effects on any one of them will probably be manageable.

As for the businesses directly affected meaning that they were either located at the WTC or among any of the buildings located around the perimeter, there is a great task in front of them. These businesses have lost personnel, equipment, and records. In the lead-up to Y2K, many of these companies installed offsite disaster recovery programs, which should help considerably. However there still exist problems unique to this location. For example, Verizon had one of their major communication hubs located here and the PATH commuter train from New Jersey used the WTC as the connecting hub for the New York subway system.

By far the majority of businesses located in the WTC area were finance-related and this will cause problems with fewer market participants, fewer traders, and fewer market makers. Connected to that are the banks, which often own significant portions of these companies. Much like the airlines, these companies too will find their profit picture much cloudier now and the costs of this event will reach their bottom line on the next quarterly report.

It’s quite possible that the economy, which has been suffering already, will be pushed into recession because of this attack. While government people are exhorting the public to continue spending, mounting job losses both announced and actual continue to climb. Late last week, in the middle of the news surrounding New York, few people took notice that unemployment figures released showed another large jump in weekly claimants and a significant jump in the 4-week average numbers. As more consumers lose their jobs, the last pillar of strength in the economy weakens considerably.

The rising unemployment was reflected in the consumer sentiment readings released by the University of Michigan even before the events of last Tuesday. The lower numbers showed consumers reeling from rising unemployment and feeling more pessimistic about the future.

As for money supply and the Fed, the Fed injected $50 billion into the economy late last week in case there was panic selling. And now traders speculate that the Fed may move to cut interest rates even further on Oct 2 then the expected quarter point. Some suggest that a cut may occur even before that particular meeting.

On the positive side, in a strangely perverse way, some technology issues might benefit from the attack. When these affected companies decide to setup in another location, they will require the proper infrastructure and that includes computer equipment of all types. Some estimate that the loss of office space in New York amounts to 20%, which represents a large chunk of infrastructure needing to be replaced. In the same vein, other groups standing to benefit from this include construction companies and commercial property owners.

Lastly other groups likely to see increased values include gold companies (a hedge against a lower dollar), oil companies (the threat of reduced supplies in an extended conflict with an Arab state) and defense-related industrials (weapons manufacturers).

After the attack, the government authorized spending increases to begin the act of rebuilding and in so doing may have seeded the necessary boost in capital spending needed to start the economic recovery. Again it depends how that money is spent that we might see a rebound on the horizon, but regardless, the rebound won’t be visible for awhile yet.

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

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