Stockscom Report for Sunday July 7 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

Market Synopsis

News item: A U.S. Senate subcommittee concluded the board of directors of Enron Corp. "knowingly allowed Enron to engage in high-risk accounting," Time magazine said on its web site Sunday. The one-time world's largest energy trader declared bankruptcy last December while embroiled in a corporate scandal with Arthur Anderson accountants in a covering-up of corporate debt.

News item: The second-largest U.S. long-distance telephone carrier (WorldCom) is involved in a scheme improperly accounting for $3.85 billion in expenses over five quarters, a debacle that could eclipse the crash of Enron Corp. which filed for the largest bankruptcy in U.S. history. The U.S. House Financial Services Committee, which probed auditor Andersen's role in the Enron collapse, will open a high-profile hearing at 1 p.m. Monday (1700 GMT), delving into how the accounting errors went undiscovered and whether more reforms will be needed for the industry.

The two remarkable elements in these news items are their use of the terms “high-risk accounting” and “accounting errors”. While we don’t wish to unduly criticize the media, whose expeditious investigation of a news story is in direct relation to the magnitude of scandal present, we would like to point out that these are by no means fairly described as accounting errors or the like, but as strident examples of unethical business behavior. Greed was what prompted these business leaders to throw caution to the wind and execute strategies destined to line their pockets to the detriment of shareholders and other stakeholders in the corporations.

Technology companies blazed a new path in the nineties with their dependence on stock options for everyone from the CEO down to the back room clerk designed to give a wide scope to sharing in the windfall that awaited everyone on IPO day. While the benefits were commendable in that all members shared them, the SEC permitted the party to go into extended hours with their lax accounting rules concerning options. Corporations need not expense off the amounts pertaining to stock options and as such, they inflate their profit and loss statements. In an era where the most immediate income statements are directly connected to the current stock price and to the level of options available to various employees, it became imperative that financial numbers met expectations.

The end result is that stock options, born out of efforts to share the wealth experience, became twisted into a new vehicle for generating unheard of sums of money for the business leaders so inclined.

Efforts are underway in Congress to change the accounting rules so that stock options are finally expensed as they should and, if successful, this would be one more step toward closing the loopholes through which financial reporting is baked. In the meantime, it would be helpful if the media began using the proper phrase, “accounting fraud” and not the current favorite, “accounting error(s)” to represent these crimes against all stakeholders.

Rally?

With July 4^th celebrations unmarred by terrorist activities, a relief rally of sorts took shape on Friday July 5^th as all major indexes rose strongly with the Nasdaq leading on a percentage basis. The momentum of this move carried price levels for the indexes close to 25-day moving averages and to previous resistance areas.

Once more the Nasdaq 100 index is being given the opportunity to pass through the 1080 level, which has proved to be a fierce level of resistance. Similarly, the S&P 500 will attempt to cross the 1000 barrier, but all indications at present suggest that these roadblocks will survive and continue to hinder development of base building at current levels. The rally in stock prices will remain just another bear market rally useful only as an opportunity to sell short either the indexes or individual stocks.

More and more it appears likely that until the Dow tests its September lows, there will be no firm rally in stocks signaling a base upon which upward momentum can be built. Inasmuch as summer is now here, there could be a rally that may lift indexes marginally, but this is also likely to fail leading to an autumn low around October before a much stronger rally begins. The shape of any future rally will depend largely on investors’ propensity to hold equities, a propensity which has been tested lately and found to be generally weak.

Our Stock Picks

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

New Buy Recommendations:

With the wealth of indicators showing the economy slowly on the mend, we turn once more to businesses that benefit as the economy picks up. One such business is moving freight either railroads or trucking firms. The US consumer has been exceptionally resilient in the face of a questionable economy and though consumer spending was down marginally in the last month, expectations are that business investment could slowly pick up over the next few months. Accordingly, we recommend positions in:

CP #

NSC

YELL

Both CP and YELL have recent price movements that show steady climbs and indicators such as OBV that suggest further gains are probable while NSC has operated more as a stepper and after a recent retracement looks ready to make a new yearly high.

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.

*Gold Fields changed their symbol to GFI from GOLD