Stockscom Report for Sunday Apr 6 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

 

War risk continues to dominate the economy and, for obvious reasons, the stock markets. Over the course of this week, and in particular this weekend, coalition forces have made marked gains to the detriment of forces loyal to the Iraqi leadership, especially the Republican Guard. As a consequence and despite the mixed results of Friday, the S&P and the Nasdaq are both trading much higher overnight in futures markets reflecting the optimism of an early end to the conflict. We recognized early on that the psychological lift of victory would provide the markets with a relief rally that could be quite material, however we stand firm in our conviction that this rally is best left to those traders whose perspective is very short term (i.e. days) and not those wishing to invest for longer periods.

 

Too, the month of April often includes strong rallies that end abruptly heading into the summer doldrums. Historically equities prove to be small gainers in the period from May to October while the alternative period, October to April, tends to shower investors with much greater capital gains.

 

The chances for equity rallies based on fundamentals were severely curtailed this week. Data released this past week show an economy that is suffering deeply. Both the Institute of Supply Managers (ISM) and the government employment data were on the menu this week and both wholly missed expectations. First, in the case of the ISM numbers, which came in at 46.2% wildly missing forecasts for slightly above 50%, the most notable movements were in new orders and production. Both values mirrored the composite number, but display trends that have swung sharply from solid expansionary figures (above 50%) to sudden contraction. Naturally this does not bode well for the future and has caused analysts to rethink the possibilities of a double-dip recession. Moreover, the Federal Reserve meets a month from today and all eyes will watch to see if they cut overnight rates even further to the 1% level or lower.

 

As if to confirm to any doubters of the weakness in the economy, the March unemployment figures showed initial job loss figures of 108K, however this figure will undoubtedly be revised next month much like February's was revised upward from 308K lost jobs to 357K, quite a staggering revision. Perhaps more telling was the breakdown in the unemployment numbers, which saw jobs lost in all categories except in construction where gains due to housing eased the losses. Significantly, part-time employment lost 48K jobs and this should be viewed with concern acting, as it does, like a barometer for both the economy in general and job growth. Part-time employment is an early warning signal for both recovery and slowdown in the economy since these conditions effect changes first in the marginal employment represented foremost by part-timers.

 

Much was made of the fact that the unemployment rate didn't go up but rather it remained stuck at 5.8% masking the reality that many people formerly receiving unemployment benefits have dropped out of the workforce thus lowering the participation rate. However, the key category of married males saw its unemployment rate increase from 5.6% to 5.8% and this category is probably more indicative of the real situation given that married men are the least likely to drop out of the workforce.

 

While the imminent victory in Iraq could unleash a strong rally, it is highly unlikely to have follow through and is much more likely to be retraced in the days and months that follow. So in this environment, we refrain from making any new recommendations relating to equities preferring instead to wait on the sidelines patiently. As mentioned at the beginning of this report, overnight markets in the S&P and Nasdaq are sharply higher and will lead to a rally in equities on Monday. A rally in the S&P will most certainly take it upwards through 900 and break out of the downward trend in place since 2000. On one other occasion, early in 2002, the S&P managed a similar break out but could not hold the gain. Given the conditions in the economy, the opportunity is ripe for a repeat performance.

 

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
03/04/03	Energen Corp.	EGN	30.68	32.40	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	30.85	B