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Stockscom Report for Sunday Apr 21 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

Seasonal adjustment has come back to haunt us. Around January and February in the middle of what is normally called winter, temperatures were routinely higher (in the NE) than normal and this fueled an unusual boom in housing at a time of the year when most of the population attempts to find creative ways to stay warm. In March, housing starts fell 7.8 percent to a 1.65 million annually, which was less than the 1.68 million rate that had been projected. The slower March numbers followed the second-highest housing starts number on record in February. March new building permits, meanwhile, dropped 10 percent to a 1.60 million pace. As with all these numbers in economic press releases, all these figures are seasonally adjusted. In fact the actual numbers are probably far different, however the vast store of statistical data has permitted them the ability to state what a normal level of activity is for any time period of the year. Housing is not only object of seasonal adjustment – other notable statistics include unemployment and retail sales. What we are about to see is a certain slowing down in economic activity due to the timing issue brought on by seasonal adjustment. Purchases made earlier in the year will probably supplant to a significant degree those that would have been made later in the year.

 

Friday this coming week will mark the release of the initial first quarter GDP results and while the expectation is of the order of 4.8%, part of the reason for this incredible performance will be owed to the non-wintry weather, which encouraged consumers to move up their purchases to an earlier time. The other major reason for this boost in GDP is the large build up for inventories, which had been depleted over the past six months at a steady rate. With inventories down sharply, the time had come for replenishment. Nevertheless, second quarter GDP will most certainly not be equal to the task and already, predictions have been made for a GDP in the range of 2.5-3.0%.

 

In spite of what we know about the GDP figures, their release on Friday could very well trigger a rally in share prices as investors crack open the champagne to celebrate the good numbers. Naturally, drinking too much champagne gives one a hangover and that could be the end result of this rally. It pays to remember that the May to October period is usually the weakest period of the year for stock markets – it may not be seasonal adjustment, but it is seasonality.

 

On of the biggest drags on the second quarter, could be the increase in the price of oil and the consequent rise in the price of gas used to feed the behemoths that we drive. While inflation is subdued in most price sectors, the one threat to this stability remains the price of oil. In the Middle East, the threat of further fighting in Israel is subsiding now though a peace process for the region is hardly being contemplated and so the threat remains of further conflict in the region. Military action in Venezuela was also causing oil shortage scares and arguably this was a more valid menace due to the heavier US dependence on Venezuelan oil.

 

On the earnings front this week, most quarterly results are exceeding expectations, however, the companies reporting, that were missing their marks, were major household names such as IBM, Microsoft, and Boeing. Hobbled by pessimism these three became poster children for the bears. On the plus side, there was Coke, GM, Texas Instruments and Intel that shared certain optimism for the next few quarters down the road.

 

Most charts of the indexes still have nothing concrete going for them. Each time a bottom seems to be place, a nosedive in price action takes it out and the building of a bottom begins anew. Nasdaq and the S&P appear to be the weakest and this despite Lindahl buy signals for both on the weekly charts. Looking at MACD on monthly charts of the Dow, we see a definite crossing of fast MACD over slow following a 24-month period where the downward trend was unrelenting. Of course this is on a monthly chart so price action may not be so obvious moving forward, but undoubtedly this should represent a climb in the index over the next several months.

 

 

Our Stock Picks

The stop losses of $7.80 on AOF and $11.20 on MUO are maintained. We add a stop loss on HCN (subjected to a downgrade by a brokerage firm this week) of $27.50 at the close.

 

 

New Buy Recommendations:

 

The Russell small cap index and the S&P MidCap index have been pillars of relative strength in the period following the events of 9/11. There are three issues, members of the Russell index, which we are recommending this week. They are as follows in order of preference:

AKLM – Acclaim Entertainment is in the business of computer games and recently released stellar second quarter results. More importantly from a chart point of view, the price made a new high for 2002 and is poised to reach a new 52-week high set last November.

ASPT – Aspect Communications develops and sells software for customer communications and internal management. After hours on Thursday, they announced a lucrative contract with the IRS worth a potential $150 million and price jumped as a consequence on Friday marking a new high for 2002. Even before the contract was announced, price had been moving up steadily on this company for the past few months and with price now moving above the 40-week moving average, it has the strength to increase substantially.

CBZ – Cobalt is Wisconsin's largest health insurer and has gone to the unusual step of putting itself up for sale. Last week they raised their estimates for first quarter results and full year 2002. The stock has risen significantly in the past two weeks and could suffer some retracement of recent gains but appears to be building strength so any retracement should be temporary at best.

 

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	8.47	H
03/11/02	Adaptec	ADPT	13.89	14.68	B+
10/08/01	Agnico-Eagle Mine	AEM #	10.85	14.23	B
03/11/02	Caterpillar	CAT	59.08	55.04	H
03/18/02	Dupont	DD	48.70	47.36	B
10/22/01	Glamis Gold	GLG #	3.28	6.00	B
10/08/01	Gold Fields ADR	GOLD	4.97	11.15	B
08/27/01	Health Care REIT	HCN	25.85	28.29	B
03/18/02	Johnson & Johnson	JNJ	64.70	64.49	B
10/22/01	Lihir Gold	LIHRY	10.94	12.65	SOLD
03/11/02	Modis Prof. Srvcs	MPS	7.75	9.42	B
03/04/02	Moore Corp	MCL #	11.50	13.50	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.40	H
03/04/02	Quadramed	QMDC	9.38	9.62	B
03/11/02	United Tech	UTX	75.32	68.95	H