Stockscom Report for Sunday Nov 25, 2001

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

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

Market Synopsis

Again this week, we witnessed the overpowering strength of the current rally in equities, which are now performing similarly to the market action that preceded the immense bubble. We have a situation where investors are buying in the explicit hope of getting in at the bottom. Their enthusiasm for equities continues unabated in spite of the massive losses incurred over the past 18 months. Essentially, the psychology of the situation becomes one not dissimilar to that found in a casino whereby the gambler senses that their next move will be the one that hits the jackpot. Ironically, institutions often lead in unwinding positions when issues have reached target prices and as a consequence, small investors always have ample time with which to follow the lead of institutions and avoid the destruction of a falling share price. But the reality is that while many people know how to buy shares, fewer know how to sell shares and as a consequence, these investors hold onto their shares long after they should have been sold.

It is worth remembering that despite the bullish market action, there continue to be as many negatives as before for the long-term stock market outlook. There might be enough of a head of steam to carry forward into the New Year, but this rally has to be regarded as living on borrowed time, much as one would regard any ever-expanding bubble. Here are a few random bits of info that one could use as guidance for future actions:

1. S&P 500 valuations are 31 for P/E, greater than 5 times book value and 1.5 times
sales, all unheard of numbers for market bottoms.

2. Credit card debt has expanded from an average $3,000 in 1990 to $8,000 today and inflation alone can’t explain this.

3. GDP apparently down 0.4% in Q3 is really down 2.6% once you factor out
the statistical distortion caused by the balance of imports to exports where imports experienced a major drop during the period. Moreover, the final month of the quarter is always estimated and in the case of Q3, that month is September. Further revisions will show that estimates were erroneous and that the GDP fell much more than first believed.

4. Debt as a percentage of personal income is close to an all-time peak, at 21%
compared with 16% at previous recession bottoms

5. Layoffs, salary reductions and bonus cutting are all real, and especially at the high end, such as the obviously bloated investment industry sector, where the number of people employed almost doubled in the 1990s and some individual pay checks came in at the tens and even hundreds of million dollar level. These are people who have been spending the really big money.

6. Much of the apparently high consumer sales figures coming in recently are attributable to price-cutting, and notably zero percent financing for auto sales. These sales will tend to be less profitable and, in the case of cars, will mean that current sales take away from future sales. All in all this is not a formula for the profits required to sustain high stock prices. (We’ll be watching the retail sales figures for indications of economic strength – these will undoubtedly be affected by patriotism and current low oil prices)

7. Investment advisors are as bullish as at the Sept 2000 peak

Here is an example of market complacency. In a newsletter sent to clients of the Craig & Taylor mutual funds sales company in Ottawa ON dated Autumn 2000, the company urged their clients not even to think about selling any investments: "FORGETABOUTIT! Why? Because [buying low and selling high] can't be done. No one has ever been, and no one will ever be, able to consistently call market tops and bottoms."

Of course, the Craig & Taylor newsletter sets up a straw man of a question. Many people such as the renowned, George Soros and this newsletter identify trend changes. The point is that a true market timer, as also the successful futures trader, aims only to take a piece out of the middle, buying only once a trend has become established and selling only when market action violates the criteria for continued ownership. That's how we caught the market top in September 2000, and kept repeating over the next few months that it was
still not too late to sell.

Our Stock Picks

We continue to hold AEM despite the drop in share price. There is support at this current level, but of course, if that were to fail, we would exit our position.

We also continue to hold ADPT, which fell considerably but again is supported by the moving average and will probably begin another ascent. Both shares, AEM and ADPT, were also ripe for some retracement after having advanced several notches since the September low.

New Buy Recommendations:

Certainly there are charts identifying prime buy candidates, but we hesitate to expand our selection of recommended stocks given the perceived risk at these levels.

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 as Canadian content in Canadian RSP funds. Otherwise there is a 30 percent restriction on foreign stocks held in these accounts.

*    FE purchased GPU – prices reflect share exchange of 1.2318 shares of FE for each GPU share

**  Split 2:1 – 09/04/01