Stockscom Report for Sunday Feb 03, 2002

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

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

Market Synopsis

Earnings season has mostly passed at this point – over two-thirds of the S&P has reported while fully 90% of the Dow has done their fiscal duty. But all we’ve learned is that there is a wealth of wonderful creativity in corporate communications at the hearts of these organizations. The ability to put a generous positive spin on downright catastrophic earnings is a rare talent indeed. Average earnings in the quarter were off by over 20% for the S&P 500, which is a fairly good barometer for the rest of the market.

True, recovery is being talked about in most corners of the land and the latest reports give credence to an up tick in demand. The Institute for Supply Management (ISM – formerly called the National Association of Purchasing Managers or NAPM – do you think the acronym had anything to do with the name change?) released their numbers for January and the final overall figure was 49.9% (below 50% represents a contracting economy and above 50% represents an expanding economy), meaning that the economy is now on the brink of the slightest of all possible expansions. To be sure, the very existence of an expansion will permit the media to expound this detail in every news item and thereby generate greater consumer confidence, which will then pull us out of this entrenched economic slump that we find ourselves in. Or will it fail?

The psychology of the market is almost as important as the reality and naturally the psychology is based on perceptions. In the middle of January, the Univ. of Michigan’s survey of consumer confidence showed a strong growing sentiment building but by the end of the month, confidence had waned considerably. While still better than December, January’s numbers could be indicating some leveling off in consumer confidence, which may in fact be an omen for the future. With household debt at around $8,000 on average and with friends and family members losing jobs or threatened with job loss, a tapped-out worried consumer may be the last place anyone should look for a way out of this mess. 

So perhaps the corporate world, those pillars of our communities, might be in a position to bail us out. Unfortunately corporate debt has risen from $2.4 trillion (at 12/31/89) to $4.9 trillion as of 9/30/01. This 100%+ increase in debt surpassed the 80% increase in GDP during the same period. To add insult to injury, corporate debt is being downgraded at an alarming rate. During 2001, there were three times as many credit downgrades of corporate-credit ratings as upgrades and this means interest rates are increasing even when they don’t appear to be. Take GM for example – GM sold top-quality low-interest bonds before they were downgraded. Now they’re forced to sell commercial paper at a premium interest rate, which incurs higher interest costs and this for a company with record sales in 2001. We’ve succeeded in ignoring this level of debt for years and many analysts will argue that the carrying costs of this debt are so low that they don’t impinge on the financial performance of the company, but unfortunately a day of reckoning has to occur sometime in the future. 

Thus while recovery may indeed be happening, the support that it will get from consumers and businesses will be undoubtedly weak and this restraint will continue for several months yet. GDP figures which showed a positive 0.2% rise in the fourth quarter of 2001 will probably remain low for the next two quarters, at a minimum.

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 and $35.00 for FirstEnergy (FE). We note that the FE stop almost got triggered but fortunately wasn’t as the last two days of the week saw a dramatic rise in the price.

New Buy Recommendations:

None. Charts appear quite bearish at this time and especially for the Nasdaq, which finished the week with a Lindahl sell signal on the daily. We expect that Sunday’s comments from Bill Gates (no economic recovery this year) will also put overbearing pressure on prices. Cisco could be the wildcard as its mid-week release of earnings might generate additional volatility in the indexes. It is worth mentioning that despite the terrific rise in gold share prices, we still consider the ones marked B+ to be offering excellent investment opportunities.

New Short Sales

None.

Stock Positions to Sell/Exit:

We were stopped out of The Southern Co. (SO) as expected at our stop of $25.50. Price action on this is trending downward so we feel that this is the right move.

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