Stockscom Report for Monday Mar 3 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

(Another Sunday, another power outage – hopefully this isn’t becoming a habit)

 

Market Synopsis

 

The market has troubled us these past few sessions with Iraq seemingly on the back burner and a selective market memory. Friday's markets took their cue from the 4^th quarter GDP revision of 1.4%, double the initial 0.7%, apparently believing that a stronger economy in the aforementioned quarter is an excellent indicator of current conditions.

 

The true picture is naturally quite different with the Conference Board’s latest figures on consumer confidence falling to 64.0 signifying the worries of the average consumer and the consequent low propensity of consumers to spend. Consumer spending figures released just this morning are showing the application of those confidence figures in the real world with a drop in January of 0.3%. This is the second time we’ve seen a drop in the past 14 months. Ultimately, what matters to most consumers is not the drop in the stock market; it’s the soaring price of gas. The average consumer hears about the stock market but pays less and less attention to it and has even grown immune to its effects if in fact, they own shares. But there is no immunity to the rising price of energy and with the cost of gas shooting up in price; the cost of filling the tank of their minivan or SUV is skyrocketing. And if the gas for their cars wasn’t enough, their wallets are being hit as well by the cost of heating their homes in this, one of the coldest winters seen in years. The price of heating oil has been rising as fast as the cost of unleaded gas and for those heating with natural gas, the pain may be even more acute given that spot gas hit $25 per MBTU temporarily last week. The consumer’s wallet has been hijacked these past few months by the need to budget for the increase in fuel costs and until these costs fall, there won’t be an easing in confidence figures. As of today, we see the price of crude and its products a little lower, however Iraq looms in the distance.

 

This morning we had the release of the ISM purchasing managers numbers (formerly NAPM) and this was 50.5%, which is much lower than expected. Expectations were for a figure around 52% and although any figure above 50% is considered to represent an expanding economy, we consider it wise to study less the actual figure and put more emphasis on the trend and the trend doesn’t look good.

 

 

What the trendline shows is a double top composed of the peaks representing June and December 2002 and, as is the case for trading on technicals, usually a signal for a move to the downside. Given the large 7% drop in car sales for February (and –19% reported by GM) and the drop of 5.7% in durable goods (January), the largest monthly drop in 13 years, it seems an almost certainty that we’ll see the follow through on this trend.

 

But Iraq is still the story of the day, hour, and minute. The world’s attention has been focused on Iraq and despite what people may believe, George W. Bush wants a war and will not be deterred from having that war. Countries don’t make it a habit to amass 200,000 troops into an offensive position without using them. There is still French, Russian, and Chinese opposition and one could easily argue that Bush has boxed himself into a corner by initiating a UN-organized plan in the first place to gather international condemnation of Iraq instead of going it alone. If he backs down now though, the US looks terribly weak and the Arab Middle East would view this as a major victory. Moreover he would kiss his chances of re-election goodbye in 2004. He’s gone too far to turn back now and some people still insist that there might not be a war.

 

When the war begins, we can expect a euphoric rally of grand proportions and much like a New Year’s Eve party, there will be the inevitable hangover afterwards when investors realize that little will change as corporations are still left with too little profits to ramp up capital spending and their stock prices no longer reflect reality.

 

Though share prices on gold shares have eased, we continue to hold onto them. Admittedly they have fallen even as equities have slid but their price patterns still demonstrate bullish strength. While war tensions have not lent any strength to the gold shares, announced central bank purchases as well as a floor on current world gold prices at around $350 per ounce have provided some support to share prices. It is a good idea to remember that the bull market in gold began in the last few months of 2001 before Iraq was headline news. Though world tensions have been used as an excuse for the rising price of gold, these are but parts of the equation with the real reason being more simple economics - the supply is falling and the demand is rising.

 

New Buy Recommendations:

 

EGN

FED

 

We wish to add a couple new recommendations this week as a dip into two areas, which we find interesting at this point. The first is in the gas utilities, Energen (EGN) and the second is in the savings and loans sector, Firstfed Financial (FED).

 

FED hit a 52-week high today and appears set to breakout with an attempt on its all-time high reached in 2001. Recent price action on the daily chart has been very solid and there’s strong support at the $29 level (today’s close was $30.35).

 

In the gas sector, EGN has also has its own breakout happening with the daily hitting a new yearly high close. Stochastics are quite high and may induce some mild selling but given that price fluctuation is relatively small, this shouldn’t deter investors from starting a position.

 

Given market risk, any position in these stocks should be relatively small to start.

 

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	10.62	H
12/16/02	Gold Fields	GFI	14.68	12.01	H
12/16/02	Goldcorp	GG #	12.75	10.96	H
12/16/02	Harmony Gold	HMY	16.98	13.45	H