Stockscom Report for Monday Feb 18, 2002

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

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

Market Synopsis

Accounting concerns predominate this winter of discontent. Enron was certainly the biggest and the model against which everything is compared, but with other energy firms and complex conglomerates such as Tyco drawing auditors’ attentions for the various off-balance sheet items, the scene was bound to get crowded.

Corporations are beginning to realize that the scrutiny of the mass media is upon them and that each media outlet is in competition to be the first to uncover the next potential fraud, the next scent of impropriety – the next Enron.

IBM, which has garnered the attention of many short sellers over the past few years with its ability to magically generate profits while sales revenues continue to contract, was under the microscope in a NY Times article surrounding its disposal of an optical unit. It was alleged that the $300M raised from the sale (to JDS Uniphase) went undisclosed and furthermore, that the profit on the sale was categorized as normal operating income (not as an extraordinary item), thus boosting operating earnings for IBM.

But IBM wasn’t the only company that attracted this much unwanted attention. Qwest Communications was also on the hot seat as it attempted to roll $3.2B of its commercial paper – one part of its total $25B debt. Having no buyers on the paper and a lowered debt rating thanks to S&P, the only solution left was to draw $4B on the open lines of credit permitted by their banks in order to have the necessary liquidity in the short term. Though the company is loath to admit it, there is definitely a liquidity problem in a company this size, which must rely on lines of credit to solve its immediate cash crunch. Coincidence or not, this course of action is exactly the same one that was employed by Tyco to resolve it of its immediate cash requirements. And there are even greater implications in this since available lines of credit are not listed on the balance sheets of lending institutions. Indeed these are dreaded off-balance sheet items and banks such as Citigroup, Bank of America and JP Morgan Chase are the ones dominating this marketplace. Suddenly their own financial situation has darkened considerably as the web entangles more and more companies. Share prices of these banking institutions fell last week as fear grew surrounding this liability and Qwest’s ability to continue as a viable concern, which is by no means assured. Sprint too, could be in for similar problems in a very short time.

These growing fears played out in the stock market and especially the Nasdaq, which continues to be the weakest link in the 3 majors. Thursday’s market action ended with a closing price reversal to the downside and this ominous tone followed through on Friday as investors grow more skeptical about a strong recovery in 2002. Throughout the week, trading volumes were well below those signifying important moves in the Nasdaq market and stochastics, barely out of oversold, are heading lower once more. As for other indicators such as MACD and On-balance volume, for the most part, these confirm the downward trending markets.

Failure on the part of either Qwest or Sprint would have severe repercussions as both carry enormous debts and offer national telecom services. Ciena has particularly large risk problems pertaining to these carriers – they provide Ciena with a tremendous part of its total revenues.

Our Stock Picks

The stop losses of $7.80 on AOF and $11.20 on MUO are maintained.

The stop on ADPT the week before was prescient given the fact that last week saw its share price drop $3.00. During this week, our stop on FE was triggered at the $37 point. While we consider these stops to be extremely tight, this decision is based more on our judgment of the macro-environment, which is strongly bearish. Certainly, in retrospect, we were stopped out at the right time in the case of ADPT, but in MCL, a strong gain this week has us questioning our move. Until we see a clear case of recovery and a more bullish stance in stocks, we will continue to err on the side of caution.

The gold shares recommended several weeks ago are maintaining their positions for the most part and the price of gold in the commodities markets appears to be consolidating near the $300 per ounce level. It is very encouraging to see that this steep run up in price is only resulting in consolidation within a tight trading range.

New Buy Recommendations:

None.

New Short Sales

None, however Qwest, Sprint, Ciena and IBM could all be considered as short sales with little risk.

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