Stockscom Report for Friday Aug 2 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

Economic data released this week is the real story. From consumer confidence (which we largely knew already) to GDP, from ISM purchasing managers’ numbers to unemployment, the pattern is the same and no matter how much analysts try to dissect or deny, the facts speak loudly. We are in the midst of a slowdown due to the completion of the inventory replenishment cycle.

 

After the massive reduction in inventories late in 2001, the need was to rebuild those inventories and certainly there was hope that this cycle would reach completion at the same time as recovery took hold. Now at the beginning of August, nearly one year later, the reality is a bit different. We have greatly reduced the old inventory, completed one cycle of inventory replenishment, and now we wait for the recovery to begin.

 

But the numbers this week are suggesting something other than a strong recovery. While most of this data is backwards viewing meaning that they tell us where we’ve been, the ISM numbers are a combination of both the present conditions and a forecast of future conditions. With the other figures, we look at them as a quantifiable comparison to our expectations. And the numbers are suggesting more strongly that the recovery that we saw earlier in the year was predominantly inventory replenishment. Now, with an estimated GDP of 1.1% in the 2^nd quarter, an ISM number of 50.5% for July (barely above 50 which is the division line between contraction and growth), and no job growth (only 6,000 jobs added in July), the trend is clear. We are heading for either a no growth quarter or negative growth meaning recessionary; and those analysts and economists who believed a double-dip recession could never occur will have to send their crystal balls out for a tune-up. Ironically, business leaders were much more subdued in their enthusiasm for the second half than were government spokespeople and economists. Now we have a chance to evaluate each as to their individual merit.

 

In fact, the equity markets have been predicting as much for the past few months. Certainly with the massive dip in the past two months surpassing the original drop in September 2001, the markets were forecasting on a technical basis that a double-dip recession was imminent. The question now is the same as before: where do we go from here?

 

By correctly forecasting the stock market, we should be able to gain insight to future conditions, however the stock markets are foggy right now and since we’re in the midst of a retracement off a massive V-bottom, which is more evident in the broader market such as the Dow or S&P, we must patiently wait as the indexes attempt to find a bottom either higher or lower than the previous one. To be sure, the Dow did manage to test the long-term support of 7400 when the Dow futures dipped to 7450 on July 24 and, assuming that the stock markets are truly predictive of conditions six months down the road, a successful test of this level would indicate that business growth is imminent.

 

Perhaps just as important, is the historical perspective on stock markets. The autumn period is very often the time of year when lows are put in place and rallies begin. As institutions often follow the pattern, the appearance of lows in this time of year becomes a self-fulfilling prophecy. Consequently, there is an excellent chance that from now until the end of September, there will be a bottoming process occurring and that at some point in the autumn a stronger rally will take hold.

 

Our Stock Picks

The stop losses of $7.80 on AOF and $11.20 on MUO are maintained. We also use a stop of $29.00 on SYMC seeing how there has been a floor created at that level.

 

Our cautious entries into equities has proven to be the right strategy for the moment. Until the fog lifts from the equities markets and clearer perspectives emerge, we prefer to remain mostly in cash. By preserving capital, we are better prepared to take advantage of the upside potential in stocks once the direction becomes clearer. As we mentioned above, the most likely period for more concerted action, is the autumn when stocks often reach seasonal lows.

 

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	9.11	B++
07/29/02	Amgen	AMGN	43.80	43.40	B
07/29/02	Friedman Billings Ramsey	FBR	9.30	10.00	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.70	H
07/29/02	Symantec	SYMC	32.81	31.62	B