Stockscom Report for Sunday Feb 9 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

Between the domestic economy and geopolitical concerns, namely Venezuela, Iraq, and North Korea, the equities markets have been forced to evaluate the financial effects of these internal and external forces and they’re affirming that the economy is suffering and these foreign problems as represented by VINK are a threat to any possible recovery in 2003.

 

While much has been said about the economy and the troubles caused by a severe cyclical reduction in business investment, little has been mentioned of the potential for further problems originating from these external forces. These geopolitical situations present quite varying and material effects to the US economy.

 

Of the three countries, North Korea is perhaps the most benign for although they have the strong potential for building nuclear arms, there is virtually no chance of a North Korean-led attack against the US, either terrorist or otherwise. North Korea had been receiving food and energy aid from the US until the discovery that nuclear weapons research, thought to have been shutdown, was continuing in a clandestine manner. With dwindling supplies of both food and energy, North Korea was forced to look at filling the two deficits and in the existent nuclear structure, they found the solution to their energy needs, however the North Korean dictator is still more than a little afraid of being overthrown for the people have nothing to eat. Some UN food aid programs have been filling the gap since the US stopped sending food, however recent reports suggest that the eastern half of the country is rapidly running out of food. At some point, a military faction will serve notice that enough is enough and dictator-for-life, Kim Jong II, will be looking for a new home assuming that he survives.

 

In Venezuela, the strikes against President Chavez continue, but have been weakened considerably by the people’s need for basic human necessities, provided for through work. The damage, however, has already been wrought with the cost of oil on the world markets hitting above $35 per barrel. The potential for $35 per barrel of oil was simply not a realistic projection when corporate America made its budgets for 2003 in the fall of 2002 and while fourth quarter results demonstrated in some cases better than expected profitability, the opposite will be true for first quarter ’03 results. The shock of first quarter results will be sufficient to knock the wind out of the sails of industrial share prices when the middle of April comes around. Perhaps the worst hit will be the airlines, which are already being hit by a wave of bankruptcies and now must contend with skyrocketing fuel costs. Already on the brink, some will surely fall over the cliff.

 

Iraq has the potential to be the worse by far. In an ideal situation, Saddam Hussein would be exiled to another Arab country for which he would undoubtedly pay handsomely. In this situation, much of the cost of his removal is, in fact, borne by himself. Unfortunately, the route that seems to be the most likely is his forced departure. The problem with this is that the cost would be astronomical and with few countries prepared to step up and help pay, most of the action would be unilateral in nature.

 

To summarize some of the costs, besides the costs of armed conflict of which most is tied to the weaponry and transportation used, there is the additional potential for destruction of oilfield infrastructure, raging fires, and emergency medical care assuming the use of chemical or biological weapons. But it is the long-term costs that are even more extravagant. To occupy and rebuild Iraq and to set up some framework for democratic rule would require hundreds of billions of dollars. The human costs in lives lost would be enormous and the Iraqi side would assume most, however the occupation in and of itself would entail costs as well. Moreover the threat of policing an isolated American conclave in the middle of a mad, fanatical-Muslim world could put a damper on recruitment efforts for the US military.

 

Some traders believe that war premiums and additional fuel costs are already priced into the markets but we believe that to be highly unlikely and that more plausible is the theory that the first shot will mark the beginning of another slide in equities. The realization that the US budget deficit will grow exponentially will keep the pressure on the US dollar and support the price of gold.

 

Of course the proof is in the technicals as well with Friday’s close down on an outside day on all three major markets, there is a strong signal that more downside moves are likely and this despite the oversold stochastics. On the Nasdaq, there is a double reversal in just the past four sessions, which of itself is a signal to sell once more the index.

 

We hesitate to recommend selling shares short as we remain unconvinced that this latest move would roll on through the October lows, however we recognize the growing potential for this to happen. Our reasoning is based on the ISM supply managers’ figures, which have been optimistic of economic recovery in the past few months and continue to show signs of expansion.

 

As for gold, upward pressure will continue to mount on bullion even beyond action in Iraq as more attention is paid to its value as a store of wealth. Gold shares will accompany this rise once the current retracement finishes. Plain and simple, gold and gold shares are still in a bull market.

 

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
12/16/02	Glamis Gold	GLG #	10.40	11.99	H
12/16/02	Gold Fields	GFI	14.68	12.55	H
12/16/02	Goldcorp	GG #	12.75	12.16	H
12/16/02	Harmony Gold	HMY	16.98	14.63	H