Stockscom Report for Sunday Jan 5 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

As we look back at the year 2002, many recurring themes are brought to mind, but the two that we found most important were the unusual occurrence of a third losing year in the markets and the march upward in the price of gold.

 

As our faithful clients know, we rarely attempt to predict where the market will head twelve months hence, but we had on occasion stated that the autumn of 2002 could be a departure point for a recovery in equity prices. Now that we have seen the autumn and we’re witnessing the winter, we are apt to believe that the basing action in markets might have begun in earnest once the markets bottomed (again) in October. The problem with that is, chronologically, we are still too close to analyze that situation properly. Judging by the charts now, we are centered in an area where the S&P and the Nasdaq lows of July and October are roughly the same and thus our first inclination is to state that markets have successfully tested these levels. Nothing however, is truly accepted until the familiar w-shaped graph is clearly outlined on the chart. The w-shaped graph is composed so far by the drop to the October low, the rally in early December, the subsequent retracement and the remaining requirement is a new rally beyond those highs set in December.

 

But is it a realistic expectation that a new bull market will form? Not at all. Nor is it likely that the highs reached in December will be surpassed in the current rally. With the massive bull market that ended in 2000, followed by the severe gut-wrenching bear market that has taken us down since that time, the market will need time to heal its wounds and that translates into some range trading where major trends don’t endure long periods of time.

 

Analysts suggest that at current prices, the S&P offers good value citing the fact that the current forward 2003 PE ratio is a svelte 16.5, which is only a bit higher than the historical average of 14 for the period from 1936-2002. However what isn’t included in these arguments is that 1) the S&P’s combined PE ratio is often closer to 7.0 at bear market lows and 2) the PE ratio was calculated using reported earnings not operating earnings. In recent times, the difference between the two has been a wide gulf camouflaging the costs of restructuring or write-downs of assets. So both these points suggest that another leg down is always a possibility that should be considered.

 

The other underlying theme of 2002 could very well continue into 2003 – gold. The year 2002, was the moment that gold bugs had awaited for at least six years. While the move had clearly begun in 2001, the first six months of the year saw an explosion in the value of gold shares with many doubling and tripling. From July until recently, a pennant formed on the chart and when it broke out to the upside, a new buy signal resulted.

 

Gold bugs often speak of central bank conspiracies holding down the price of gold but what has held back the price of gold has more likely been central bank selling at certain trigger points such as the $325/ounce level or even more recently, the $340/ounce level. Around the world central banks have for several years announced their intentions to sell gold residing in their vaults as reserves and with rising prices they have probably contracted to sell certain quantities taking advantage of the current situation. Several factors are aiding the price of gold however. The first is that naturally with the slaughter in the equity markets, investors once more searched for something tangible that would hold its value in a market piling up its losses. Second, the production/demand ratio is shifting again. When prices nose-dived, many exploration companies lost their funding needed to find new reserves and producing companies reduced their production capacity. As a consequence, there are fewer new reserves moving into producing mines and lower production capacities and therefore gold production is expected to decline over the next five years at a minimum. Third is geopolitical with the war potential rising in hot spots such as the Middle East and more recently with North Korea, nervous investors see gold as one method to conserve value in their portfolios. And the fourth factor is deflation. The Federal Reserve has officially put itself on deflation watch and has announced publicly that it will do anything in its power to prevent deflation from occurring. The implications of this announcement include the potential to flood the market with liquidity to force down the value of the US dollar thus boosting the value of other currencies and generating an inflationary kick start to the economy. An investor of gold would be compensated by the rise in price of gold, which would keep its value being priced in US$.

 

 

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
07/29/02	Amgen	AMGN	43.80	49.19	H
12/16/02	Glamis Gold	GLG #	10.40	11.50	B
12/16/02	Gold Fields	GFI	14.68	14.40	B
12/16/02	Goldcorp	GG #	12.75	13.07	B
12/16/02	Harmony Gold	HMY	16.98	17.93	B
12/16/02	Hecla Mining	HL	4.74	5.45	B
10/21/02	Petsmart	PETM	19.95	18.01	H
10/21/02	CP Ships	TEU #	12.20	13.84	H