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Stockscom Report for Sunday June 23 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

Market indexes continue to baffle the experts as most economists maintain their predictions of a robust recovery albeit in the second half of the year. Remember that these are the same people who predicted a recovery by the end of the second quarter. Perhaps some of these astute individuals should have discussions with the likes of Microsoft or General Motors. Bill Gates has been quite candid the last few months when discussing Microsoft’s affairs, telling anyone listening that they didn’t see any strong increase in business for several months. But the economists insisted that the turnaround was just around the corner.

 

We prefer to take the numbers at face value and reject all attempts to predict when and where the recovery will take place. And the numbers are telling us that the end is not near. To reiterate, some of the numbers that we deem important are consumer confidence, unemployment, ISM purchasing managers numbers, capacity utilization, interest rates, GDP, and lately, the current account in trade, which seemed immune to weakness for many years. By taking the numbers at face value, we reject the hypothesis presented by 90% of economists that there will not be a double-dip recession. It may not occur, but there is no reason to believe that it couldn’t possibly happen at this crossroads in time.

 

The current account deficit was highlighted this week when April’s numbers were released coupled with the first quarter numbers. Both revealed what most suspected – that investors who have supported the US$ so fiercely in the past are fleeing in droves. Through many years of high-flying equity markets, foreign investors were only too happy to invest in US companies as the capital appreciation was far too great to ignore. Now with feeble stock market returns, this global capital has traveled to other lands in search of superior returns and certainly Europe and its euro currency are reaping many of the rewards. It is worth remembering that every strong economic expansion in the past has sprung from a surplus in the U.S. current account, reflecting the tremendous savings available to finance investment and consumption growth well in excess of GDP growth. With the trade deficit at its lowest point in history, we are confident that the U.S. is not positioned to embark on a consumption and investment driven economic boom anytime soon.

 

In association with the steady selling of US$, we witnessed the resurging gold price as investors strive to find a place to hang their hats… without losing them. And as a store of wealth, gold offers the investor a refuge, sheltered from further significant losses. The price of gold in the futures markets had been treading close to both its 25-day and 40-day moving averages, but by week’s end had resolved to the upside sending share prices up with it. Having tested the moving averages once more on a retracement strengthens our resolve that we truly are witnessing a bull market in gold. In this investment like any other, we are not married to this position; we simply follow the charts and allow the technicals to dictate whether or not we should remain in the trade. Naturally there are fundamental reasons to like this trade.

 

As the crippled US$ falters, more investors will dabble in gold and gold shares in order to hedge against losses in other parts of their portfolios. Since American interest for gold is generally low, a small increase could have a large effect on prices. Institutions as well may be inclined to take a second look at the shiny yellow metal, though here there is reluctance due to the opinion that many gold equities are currently overvalued based on their models for the future price of gold.

 

With the markets tumbling this past week, the S&P and Nasdaq now appear to be on the verge of testing September lows, but the Dow has managed so far to remain well above similar lows. Now the latest weakness on the Dow has endangered that sense of confidence. Friday’s trading was especially prominent for the volumes generated - almost matching the Nasdaq. If the Dow were to attempt a test of these lows, it’s difficult to predict where the slide for the S&P or Nasdaq would end.

 

Any tests of new lows might not occur right away. Measures of volatility such as VIX are rising to levels above normal and this itself may be communicating the desire of the indexes for a relief rally. Part of the increased volatility was due this week to the triple witching day on Friday where options, futures, and options on futures expire, so market watchers will be paying close attention to the action next week looking for signs confirming that rise in volatility. Another comparable barometer is the put/call ratios on the S&P 100 and the CBOE Equities, which produced signals this week of an impending rally. Both ratios were in bullish agreement.

 

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
02/01/01	Acm Government Opportunity Fund	AOF	7.99	8.72	B
10/08/01	Agnico-Eagle Mine	AEM #	10.85	16.20	B
06/17/02	Friedman Billings Ramsey	FBR	10.75	11.54	B
10/22/01	Glamis Gold	GLG #	3.28	9.82	B
10/08/01	Gold Fields ADR*	GFI	4.97	13.20	B
06/17/02	Lannett Co Inc	LCI	11.00	12.00	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.79	H

 

*Gold Fields changed their symbol to GFI from GOLD