Stockscom Report for Monday Jan 28, 2002

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

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

Market Synopsis

Markets were volatile to start the week due naturally to the earnings reports and guidance moving forward. We are beyond the halfway point of earnings season and while there have been many companies demonstrating surprises on the positive side of the ledger, many established tech companies such as JDS Uniphase and Qualcomm offered less than rosy views of the future. Visibility continues to be the keyword and these 2 fixtures are having enormous difficulty finding it.

In the case of corporations that offered positive results, one must be cautious as several had already given immensely lowered guidance. Often these cases show P/E ratios in the stratosphere and imply equally astronomical earnings growth in order for the earnings to catch up to the stock prices.

While all 3 major indexes appear to have rolled over and are in position to slide, support has been usually found in the corners. The markets have bifurcated into two parts – one with a positive slant and the other negative. The result, of course, being that we could be in for some sideways movement until we get more signs that the economy is recovering. This week promises to continue that trend of volatility as various reports from consumer confidence to NAPM numbers to a decision on interest rates at the FOMC meeting are all to be released.

While most indicators do show an upturn in economic activity and some recovery in place, stock prices generally reflect an even greater recovery. Business investment is still depressed and shows little sign of improvement thus leaving the economy to depend excessively on consumer consumption. The two pillars of last year’s economy, housing and cars, will be less prevalent in this new year as interest rates cuts are virtually finished and everyone who needed/wanted a home or car, has already purchased it.

So visibility is not just related to the JDS’s and Qualcomm’s of the world; the economic recovery also is slow to reveal itself. The end result of all this uncertainty is that the year 2002, for investors, will be marked by an ability to pick stocks. Having looked at a broad range of indexes, it is readily apparent that the only consistent winners moving forward are ones based on gold and precious metals and, surprisingly perhaps, the Sydney All Ordinaries.

Certainly the Nikkei index is not one where we’d like to be. Japan, the second largest economy in the world, is close to collapse and yet it attracts very little media focus. The next shoe to fall here is the repeal of the temporary measure to insure deposits up to $75,000.

To explain, the Japanese government decided in 1996, when banks first got into trouble (insolvency), that they would insure, to the tune of 100%, all bank deposits up to $75,000. The insurance program was a preventative measure against a run on the banks’ deposits. This measure was supposed to end in April 2000, but was extended due to the obvious dire straits that the Japanese banks were in. Now on April 1, the insurance is due to be removed from time deposits and one year later (April 1, 2003) from demand deposits and the fear is that the withdrawal of unprotected deposits could trigger a run on the banks causing the weaker ones to fail and adding pressure to those still with a pulse.

To put it into further perspective, the Japanese are notorious savers, the total amount covered by this program is close to $1.5 trillion, which is close to three times the capital of Japan’s major banks. Already the yen has dropped in recent months from 118 to 134 yen per US$ and so there’s added pressure for the Japanese people to find a safe place to put their money. More and more of them are turning to gold. People in Tokyo are lining up in the morning to purchase gold bars and coins from dealers and this represents sales increases of three to four times the amount sold 12 months ago.

Moreover, a liquidity crisis in Japan would make Argentina’s problems pale in comparison. While the Argentina crisis was more or less contained within a region, Japan’s problems become the world’s problems.

Another good reason to buy gold…

Our Stock Picks

The stop losses of $7.80 on AOF and $11.20 on MUO were not triggered. We retain these stop losses and continue to monitor closely what transpires. We can say at this point that they seem to be out of danger of triggering those stops.

We keep the protective stops on Adaptec (ADPT) at $15.50, the Southern Co (SO) at $24.50, and $35.00 for FirstEnergy (FE).

New Buy Recommendations:

We have one new recommendation – Freemarkets (FMKT). The tech wreck saw value in this stock evaporate from over $300 to the current price around $23. This company, whose B-to-B sourcing software helps companies save money by buying goods over the Web, actually reported a quarterly operating profit this week with a final net loss of $2.8 million. While the slide in stock price may have been murder for some, the consolidation of recent months, the rise of late and the very recent reversal to the upside show that there’s an accumulation occurring and is the impetus for the buy recommendation.

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

Short sells