Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

 

High risk is the defining characteristic of the markets now that war has become reality. While risk is everywhere around us and present in all things we do, we attempt to measure the risk and assure ourselves that the risk elements are within our comfort zone. Investment decisions are based on accepting certain levels of risk in return for corresponding rewards. However, in the current situation, the investing public seems to be more concerned by the threat of missing the bottom of the bear market than the assumption of risks far greater than average in the normal ebb and flow of stock markets.

 

Strictly speaking, if one were to look at the charts, there are strong reasons to be overtly bullish and while they are overextended on the upside with stochastics topping out, the general direction favors buying stock in virtually anything. But two factors remain to undermine that confidence. The first is the psychology due to war and the second is the economic fundamentals and both harbor risks that are not being fully discounted in this market.

 

Already today we have reports arriving that describe both POW's and casualties in Iraq. Until Friday, there were none of these reports as confidence abounded during the first days of the bombing, but the psychology of seeing body bags is real and forces people to confront their fears. Often in the media, there are comments about the “CNN effect”, which is the desire of people to stay home and watch the world event(s) live on television and, naturally, retailers abhor this situation because of the significant drop in consumption. If war becomes fierce and there is no quick end to hostilities, the CNN effect will alter consumer spending habits putting additional risk on the likelihood of a recovery. To all intents and purposes, the worst possible scenario would be an urban guerilla-type warfare played out in the streets of Baghdad and sadly there have already been instances of this in Basra. While no one truly expects much resistance from ill-equipped, badly trained troops in the periphery, the well-equipped Revolutionary Guard, represent a large question mark. How loyal are they to the Iraqi leadership?

 

It's worth noting that the risk factors are so great at this time that even the esteemed Federal Reserve meeting earlier this week, shocked observers with its communiqué stating that essentially they didn't know what lies ahead due to the uncertainty inherent in this environment.

Focusing on economic fundamentals seems no better as a forecasting tool. With unemployment continuing to show grave weakness, the Philadelphia and NY Federal Reserve Banks' surveys released this week decidedly negative and displaying signs of declines, expectations now are for a March ISM purchasing managers report that confirms a drop below the important 50% level signifying a contraction in economic activity.

 

Besides the uncertainty conceded by the Federal Reserve, there was no cut in interest rates for the moment. Surely one must ask themselves how much more propensity will corporations have to borrow for capital expenditure given overnight interest rates already situated at 1.25%? Once interest rates reached these depths the incremental value of further rate cuts is diminished and little empirical research is available to give clues as to the outcome. In recent times, we have only Japan as an example, but here the economy was hindered largely by a lengthy denial period by both the government of Japan and the Bank of Japan. Subsequent to the acceptance, remedial actions have been weak or non-existent and have led to the severe problems now affecting Japan. In contrast, the Federal Reserve has been uncommonly blunt about their concerns of Japanese-style deflation arriving on US shores and has committed itself to fighting it with every means at their disposal even to the point of running the printing presses all day and night.

 

Comparing the S&P 500 index to similar bear market periods, we note that new bull markets began with a P/E ratio closer to 10 than the current 28 (previous year's earnings) and the equity market capitalization as a percentage of GDP usually hovers around 50% not the current 90% at the beginning of new bull markets. What we are seeing is likely more base-building but sustainable gains are unlikely at this moment in time. Perhaps Richard Bernstein, the chief US strategist for Merrill Lynch, said it best when he stated, “Bull markets only begin when everybody is hiding under their desks in the fetal position and professing an undying hatred of stocks."

 

Specifically in the markets, we see that the Nasdaq Composite chart is now within shooting distance of the December peak of 1521 being currently 100 below that mark. Undoubtedly this market is the only one that has developed a (small) base and provides some measure of confidence having now handily crossed over the 200-day moving average. As for the Dow and the S&P 500, Friday's action lifted both markets just above their 200-day moving averages, but with the rally counting eight straight days and stochastics hitting the roof, there is more downside risk than further upside. As a caveat though, this depends on whether Saddam Hussein lives. If he were to be killed, the resultant rally would extend much further. In comparison with the Nasdaq market, the Dow would need an additional 500+ points to reach its December highs and likewise, it would take 60 points on the S&P 500.

 

We've been holding gold shares for some time now, but with the sudden drop on Friday below the support level of $330 per ounce and the surprising failure to find support at the 200-day moving average, we feel that to continue owning gold shares will only make matters worse. These failures on the charts are severe and must be acted upon. As such, we recommend exiting gold positions at the open for the downside risk is too great to continue holding them. Overnight action in gold futures markets has it gapping up to open but it remains at only +$3.00 per ounce, which given the fear factor provided by both the formidable resistance of the Iraqi army and the potential for new conflict in the disputed Kashmir territory between India and Pakistan (owing to the terrorist action this evening) seems strangely lacking confirming our ideas about exiting.

 

New Buy Recommendations:

 

None.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

All gold shares.

 

GFI

GG

GLG

HMY

 

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
03/04/03	Energen Corp.	EGN	30.68	31.98	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	30.70	B
12/16/02	Glamis Gold	GLG #	10.40	9.14	SELL
12/16/02	Gold Fields	GFI	14.68	9.65	SELL
12/16/02	Goldcorp	GG #	12.75	9.96	SELL
12/16/02	Harmony Gold	HMY	16.98	11.49	SELL