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Stockscom Report for Monday May 27 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

The bears’ picnic is an unequivocal success assuming one is a bear. And the bears favorite time of the year, the summer, is now approaching meaning that there is unlikely to be any respite even if recovery is considered to be an inescapable occurrence. While the latest indications have productivity leaping and retail sales soaring, there is considerable historical precedent demonstrating that these figures represent normal cyclical activity as the first few tentative steps taken in recovery.

 

Unfortunately there is a confluence of ever-evolving factors that will weaken any upturn and, ironically, a good chunk of the responsibility for this lies with a supposedly conservative government in Washington.

 

Perhaps the most outwardly visible sign of this weakness is the rising price of gold. Gold is priced in US$ and today, 1 US$ is worth a few percent less than it was four weeks ago when compared to (or exchanged for) the euro or the Japanese yen. Naturally this is simply the tip of the iceberg and just as icebergs are 90% submerged, many of the other factors surrounding the downfall of the US economy are less noticeable to the average consumer.

 

With the slower economy, revenues into government coffers are running substantially below expectations. Many budget forecasters now expect the budget deficit for the fiscal year ending September 30 to be more than $100 billion, which is roughly twice the amounted forecasted by the government. The shortfall is attributed in part to lower tax revenues from capital gains and stock options transactions as the economic downturn took the bull out of the bull market.

 

The current account deficit, which for several years has been in the red, was financed by foreign investors’ voracious appetite for US equities and treasuries. Normally, a country with a current account deficit would see its currency devalue accordingly, since there is less need to buy that particular country’s currency. Through the aforementioned mechanism (the interest for US-based investments), the US dollar was propped up despite the deficit and the dollar’s strength became a self-fulfilling prophecy. Now with both types of investments performing poorly and the US$ losing value, the drop in its value becomes a self-sustaining action as these same investors are finding that their money is better invested in other places with a stronger currency or even in gold which retains its store of wealth properties. Under the Clinton administration, there was an explicit desire to retain a strong dollar, but that administration benefited from a skyrocketing stock market, which kept foreign investors happily investing in the US. Now however, the Bush administration has gotten no support from financial markets as the meltdown continues and instead Bush is courting basic manufacturing who have been quite vocal over the years in their desire to see a weaker dollar as a method to increase exports. Commentary from the administration has been non-committal insomuch as a dollar policy is concerned.

 

Part of the increasing budget deficit is due to the threat of terrorism on American soil and the primary beneficiary of the new extraordinary government spending is the defense budget. Clearly almost all people would agree that an increase in spending was necessary after the attacks in September, but by focusing attention on the Middle East and with the conflict in Israel heating up, the administration has found its singular purpose in life and neglects the economy except to initiate new policies, which raise the ire of trading partners everywhere.

 

Two looming trade wars are the direct result of the Bush administration’s efforts to win votes in traditional Democrat territory when elections for the Senate take place in the autumn. The first was the steel tariffs, which directly benefit the inefficient steel industry centered in traditional Democrat country that backed Bush in the last election. The second battle is related to the huge farm bill just signed into law. This framework for compensation to farmers is several steps backward in attempts to reduce government subsidies in farming and exacerbates the already precarious situation. The WTO is scheduled to hear an initial salvo in the European argument against the steel tariffs in the next few weeks.

 

In the end, protectionist measures such as these only serve to drive wedges between trading partners and create an environment of distrust. To consumers, the measures usually entail some degree of artificially triggered price-inflation hitting their wallet and threatens to reduce consumer spending – something that the US economy can ill-afford.

 

Technically the S&P and Nasdaq are the weakest indexes and both meet significant resistance at the 40-day moving average and much more solid resistance at their respective 200-day moving averages. Market sentiment is extremely bearish and as a contrarian indicator, this represents potential for a market rebound from these levels. In the case of the Dow, the 10,000 level is proving to be the strongest support line together with a secondary support at around 9,800.

 

While these indexes are invariably weak, there is some bottoming at work here and the potential for a rally to begin from these levels is great while the downside risk is lower. With foreign investors’ attention focused less on US markets and less participation in US equities, rallies which might have extended several sessions are now finding that there’s little follow-through.

 

Our Stock Picks

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

 

 

New Buy Recommendations:

 

None.

 

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
22/04/02	Acclaim Entertain.	AKLM	5.79	5.28	H
02/01/01	Acm Government Opportunity Fund	AOF	7.99	8.95	B
10/08/01	Agnico-Eagle Mine	AEM #	10.85	17.25	B
22/04/02	Aspect Comms.		4.92	4.70	H
03/11/02	Caterpillar	CAT	59.08	53.95	H
22/04/02	Cobalt	CBZ	15.15	18.60	B
03/18/02	Dupont	DD	48.70	46.54	H
10/22/01	Glamis Gold	GLG #	3.28	9.44	B
10/08/01	Gold Fields ADR	GOLD	4.97	15.66	B
03/18/02	Johnson & Johnson	JNJ	64.70	61.40	H
03/11/02	Modis Prof. Srvcs	MPS	7.75	7.70	H
03/04/02	Moore Corp	MCL #	11.50	14.35	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.50	H
03/11/02	United Tech	UTX	75.32	69.12	H