Stockscom Report for Sunday July 28 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

Perhaps the general media is the best indication for when to buy or sell stocks. Last week’s newsletter alluded to stories in the popular press about the horrible bear market that we’d found ourselves in. And so this week in response, the markets stormed back although Nasdaq continued to suffer from slippery feet by the end of the week.

 

So the question on everyone’s mind is whether this really is the big rebound that we’ve been waiting for. The markets have been massively oversold for several weeks and consequently a relief rally would be expected. However, with $7 trillion in wealth destroyed since the height of stock market madness in 2000 and with investors pulling some $13.8 billion out of stock mutual funds in June and approximately $30 billion more out in July, the scarcity of buyers puts into doubt the sustainability of a strong rally. Perhaps more importantly is to question how many people have permanently given up on the stock market as a viable method to increase capital.

 

The long-term effects of this colossal destruction of capital will be felt for years to come. With $7 trillion lost, retirement accounts are but a fraction of the values they were and as a result, these workers will now be continuing to work long after they thought they’d be able to retire. Those who are currently living off retirement funds, but weighted their investments too heavily in the stock market may also feel pressured to look for part-time work now as worries mount that the nest egg is no longer sufficiently funded.

 

Investors who have lost large sums of money will be more reluctant in the future to buy equities and will look for other types of investment such as real estate to satisfy their need to prepare a retirement. With fewer investors, the liquidity in the equity markets will suffer – this will cause the additional effect of massive layoffs in the Wall St investment industry – and returns on investments will be significantly reduced. Taking the argument one step further, with less capital invested and fewer investors willing to risk what they have left, the cost of capital will increase. Companies will be stymied in their efforts to raise capital and those not successful will simply have to cut their costs, which probably includes cutting staff. Thus the threat of a double-dip recession becomes even more real as the economy suffers from both reduced consumer spending and an increase in unemployment.

 

With a reduced expectation for retirement, retired consumers can be expected to spend less than was previously forecasted due to the severe thump that their accounts have taken. Until recently, statistics had shown that the current class of retirees was among the wealthiest in history, but that has changed with the changing fortunes of the stock market. Fewer luxury goods would be sold than thought previously thus one could reasonably expect that the large expensive automobiles favored by some retired people may become a footnote of the past. Retail chains such as Wal-Mart could benefit to the detriment of upscale stores. In fact, there’s evidence already of the changes in consumer buying habits as Wal-Mart mentioned during the release of their latest earnings that the biggest increase in sales came from the food section of the store. Certainly this bit of news didn’t go unnoticed in the grocery industry, which will suffer the consequences of a Wal-Mart encroaching on their territory. Consumers may buy additional clothes to wear but they rarely buy extra food so food bought at one place (Wal-Mart) replaces food that would have been bought elsewhere.

 

The government is not immune either to the destruction of capital. The budget deficit, already surprising by its size, will increase as tax revenue from capital gains dries up. To make the situation worse, current allowances for capital losses is set at $3,000 per year so the future tax revenues will also be limited (even in the case of a rebound in the markets) as investors claim losses several years into the future.

 

Our Stock Picks

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

 

 

New Buy Recommendations:

 

AMGN

FBR

SYMC

We make some purchases in light of the hesitant rally in the markets. Any investments at this point should deploy no more than one third of available investment capital. In the case of FBR, we repurchase the shares as the retracement has clearly passed and stock has been taken from weak hands and put into stronger ones. All indicators remain positive with moving averages and OBV leading the way. The other two stocks have proven to be quite resilient to market risk especially SYMC, which has a very natural stop loss at the $29 level. As for Amgen, the powerful breakout on Thursday should have the necessary strength to follow through this week.

 

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	9.20	B+
07/08/02	CP #	CP	24.58	20.00	SOLD
06/17/02	Friedman Billings Ramsey	FBR	10.75	8.09	SOLD
07/08/02	Norfolk Southern	NSC	23.70	17.40	SOLD
02/01/01	Pioneer Interest Shares	MUO	11.95	11.70	H
07/08/02	Yellow Corp	YELL	30.41	24.37	SOLD