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Stockscom Report for Sunday Mar 31 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

Low volumes and narrow price ranges characterized the markets on the lead up to the Easter/Passover holiday. Since the holiday arrived earlier than usual this year, there was the additional effects of end of quarter window-dressing by the funds industry as managers obliged to report holdings were more inclined to sell their losers and purchase rising shares embellishing the look of their funds’ content.

 

For the quarter, the big sector winner in the markets was no surprise at all to us – gold. As we’ve been prone to mentioning on several occasions in the past, we strongly feel that the bull market in gold is real and could extend a piece from this point into the future. Having a weekly close once more above the $300 per ounce mark establishes a more defensible line, stronger than the first attempt back in early February. Ultimately, as investors become comfortable with the new price level for gold, it naturally develops into solid support at the new level. The argument for a further rise in gold shares is based on several factors not the least being the new found interest of mutual fund companies which have begun(!) to sit up and take notice. Geographically speaking, one major player of late has been the Japanese investor unwilling to sit idle while the yen falters and investments on the Nikkei fight a losing battle with gravity. The increase in the physical demand for gold has been on the rise in Japan over the past six months, multiplying by some seven times the normal demand, but the actual quantity sold there is small compared to the overall quantity produced. Other factors to consider moving forward include the propensity of central banks to sell gold from reserves (the Bank of England being the prime example), the motivation of important consumers namely, Indians and Pakistanis, to purchase gold jewelry despite higher prices, and bullish production cuts over the past decade. Even a wild card could be added to the equation in the form of China, which has expressed an interest in increasing their foreign reserves of euros and gold and lowering the amount of US dollars held. On balance, the risks favor the retention of gold shares especially in light of the precarious position that the Middle East currently finds itself embroiled in.

 

Moving into the second quarter, sectors most likely to benefit other than gold include oil and oil service stocks and defense related issues. The price of oil has risen some 30 percent to top $26.00 per barrel from mid-January lows, in part due to concerns that the United States may seek to oust Iraqi leader Saddam Hussein and that a world economic recovery would fuel the need for more petroleum. OPEC has remained resolutely opposed to increasing production in the second quarter preferring instead to see hard evidence of the increased demand. There are two wild cards in the oil patch. The first is the tense situation in Venezuela where the army keeps an unsteady peace and the second is the consumer spending patterns in the U.S. The first is self-explanatory and the second is derived from the increase in the price of fuel over the past three months. As the price of fossil fuels rise, consumer spending adjusts to the new reality, since a greater proportion of discretionary spending is eaten away to pay for fuel. The implications for the present economic recovery are huge – the existence alone of a recovery is due in no small part to the vitality of the American consumer now seemingly threatened by the surge in oil prices. As we move forward, the recovery could slow considerably as the higher oil prices take effect and consequently the demand for oil may also rise much less than previously thought. The net effect of this would be to slow the recovery while at the same time not provide any impetus to OPEC to raise production.  

A slower recovery could benefit the bond market where a powerful economic recovery has been priced in. The yield on ten-year U.S. Treasuries is up more than a half a percentage point in the month to 5.37 percent, but a slower recovery would be more inflation friendly and yields would drop as a consequence.

Extrapolating the scenario further, another key question is whether corporations will be able to pass on their increased costs to consumers and the answer, if we believe a strong recovery is unlikely, is no. Therefore many of the earnings forecasts will prove to be too optimistic and share prices will be susceptible to downward pressure.

 

Our Stock Picks

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

 

Adaptec (ADPT) is giving signs that the retracement is finished and a significant appreciation in stock price is likely.

 

New Buy Recommendations:

 

None. We like Suncor (SU) but technically it appears likely to continue its recent retracement.

 

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.

Date of Entry	Name	Symbol	Entry Price	Current Price	Action Rating
02/01/01	Acm Government Opportunity Fund	AOF	7.99	8.59	H
03/11/02	Adaptec	ADPT	13.89	13.37	B+
10/08/01	Agnico-Eagle Mine	AEM #	10.85	13.35	B
03/11/02	Caterpillar	CAT	59.08	56.85	H
03/18/02	Dupont	DD	48.70	47.15	B
10/22/01	Glamis Gold	GLG #	3.28	5.35	B
10/08/01	Gold Fields ADR	GOLD	4.97	10.42	B
08/27/01	Health Care REIT	HCN	25.85	27.92	B
03/18/02	Johnson & Johnson	JNJ	64.70	64.95	B
10/22/01	Lihir Gold	LIHRY	10.94	16.35	B
03/11/02	Modis Prof. Srvcs	MPS	7.75	8.75	B
03/04/02	Moore Corp	MCL #	11.50	13.01	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.35	H
03/04/02	Quadramed	QMDC	9.38	8.90	H
03/11/02	United Tech	UTX	75.32	74.20	B