Stockscom Report for Sunday Dec 9, 2001

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

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

While many analysts reading Friday's unemployment report viewed it as worse than expected, we thought it was actually in line with our read of the economy. To summarize, the economy has lost around 800,000 jobs in the last two months and, while certainly job losses might appear to be slowing down at this time of the year, the reduced job losses might have more to do with the uneasiness surrounding a Scrooge-like action at Christmastime. The inescapable fact is that soon after the new year begins, corporations will begin reporting fourth quarter financials and for those companies in questionable financial positions where sales aren’t coming through as planned, there will be the inevitable job cuts to reduce overhead costs.

The auto industry is a perfect example of this dreary scenario. For the past few months, car manufacturers have been offering zero percent financing as an enticement to consumers to buy new cars. And consumers have responded in record numbers. But these programs cannot continue indefinitely and, in fact, are slated to end on December 31. This prescription for losses has already forced Ford to admit that their financial state is precarious due to these aforementioned financing deals, quality issues (such as the Firestone tire debacle) and loan loss provisions. This latter item has Ford expecting to add ``a few hundred million'' dollars to its provisions against problem loans and vehicle repossessions. At the same time as they released this information this past week, they detailed the scheduled release of their turnaround plan in mid-January, which will outline how they will adapt to slower growth moving forward by reducing capacity through job cuts and plant closures. 

We don’t believe that Ford will be alone in announcing measures to reduce production capacity in the new year. There will be other companies stepping forward to do the same and, despite what many analysts believe, this slowdown in job losses from October to November does not signal the imminent beginnings of recovery. In the new year, job cuts will begin anew and the unemployment rate will climb beyond the 6.5% level expected by some analysts.

The Ford situation also reminds us of another characteristic of this dwindling economy: increases in loan loss provisions. Certainly banks are vulnerable to this and some have admitted to increasing their provisions. When loans become bad debt, the amount of reserves available to sustain further lending, is reduced. So not only does the corporation lose by being forced to reduce lending, some of the loans already provided are causing losses on the profit and loss statement.

The three major markets continued to rise this past week, but at these levels, caution should be exercised when buying any equities. Conditions are weak for further appreciation of stock prices inasmuch as the past two months have seen an incredible and powerful retracement, P/E ratios have gone from over-valued to insanely over-valued, stochastics are strongly overbought and there is topping action on the charts. Of course, this is the same topping action we’ve spoken of before and the powerful markets have laid waste to this theory.

Conditions right now are comparable the period in 1999 when Greenspan and company loosened the money supply and flooded the economy with cheap money just ahead of the year 2000. Here we are experiencing similar forces and with the same market reaction, which is for equities to go up. The logical question then is when will this bubble break?

Our Stock Picks

SO has stabilized for now but we continue to closely watch this stock and are not prepared to see it fall below the $22 mark As those stocks that have benefited most from the rally begin retracements, the likes of BCE and SO offering strong dividend growth should see share price increases.

New Buy Recommendations:

None.

New Short Sales

A case could be made to sell AOL short these days especially given that Bertelsmann AG will most certainly exercise their right to force AOL to purchase the part of AOL Europe that they (AOL) don’t already own. This action will cost AOL around $8.25 billion meaning that cash could be squeezed and long-term debt significantly larger.

Stock Positions to Sell/Exit:

Immunex Corp (IMNX) – many indicators point to continued weakness in this share and there is strong evidence of distribution, which may be caused by both analysts’ comments and the risk posed by a high P/E ratio.

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