Stockscom Report for Monday Apr 21 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

We are in the thick of the first quarter reporting season and this week we expect no less than fully one-third of the S&P 500 to report earnings for this, the quarter that shall always be remembered as Gulf War II. Microsoft and Intel announced better than expected earnings, but tempered that positive news with cautious tones when referring to earnings in future quarters. Meanwhile, the non-tech side weighed in with more sobering reports from the likes of Coke and 3M thus putting a lid on gains in the Dow Jones this week. It's worth noting once more that the Dow index is weighted (unfairly, some would add) by stock price and as such the largest weighting is accorded to 3M whose stock price hovers around $130. One can quickly discern that a weighting based on stock price could skew the index to unnatural extremes given a large move on the part of a high-priced stock such as 3M. Fortunately, major disappointments have been largely non-existent with 3M and the Dow index has benefited, not having fallen in percentage terms as much as either the Nasdaq or the S&P 500 from their peaks. However, if cracks start showing up in the 3M armor, the resultant slide in the Dow could trigger reactionary slides in both the Nasdaq and S&P and this, simply because one company with a high stock price hit a bad patch.

 

Earnings for the first quarter are expected to average single-digit percentage gains in the neighborhood of 7-8% effectively putting the brakes on any far-reaching rally in stock prices. If truth be told, assuming that we are to believe that 7-8% is the growth rate to be expected, then one must immediately wonder why investors are lining up to buy shares in companies with P/E ratios well in excess of the 7-8 level. The Dow index P/E ratio currently sits at 27 while the S&P 500 resides just north of 32 – both being based on the past annual earnings. So even if we add the average of 8% to the prior year's earnings, the Dow is trading at around 25 based on future earnings and the S&P is trading at 30, which needless to say, is hardly the level that constitutes a bear-market bottom.

 

Unemployment worries continue to dominate the economic picture, as there are few signs that job losses are abating. In fact, with the results of the past few weeks, there is a new anxiousness as unemployment has shown distinct signs of weakening in March and April as weekly first time claimants are stuck above the 400,000 level, a level considered deleterious to the US economy. Barring any dramatic change between now and the end of the month, we fully expect the unemployment situation released on May 2 to show yet another increase in the unemployment rate.

Despite this bearish scenario, growth and tech stocks found buyers this week as market sentiment pushed into bullish territory and ordinary investors asked themselves, why? In fact, there was a $5.7 billion shift of money into stock mutual funds this week from the money market continuing a trend that's been in place for the past few weeks and resulting in a near-stealth move of the three major indexes above their 200-day moving averages, a not insignificant move. But in order to keep things in perspective, in March of 2002, a similar move occurred which was met with the inevitable response of a sell-off in equities. Whether or not this time will be any different is debatable and certainly one could argue that companies have recovered to some extent, however as mentioned already, their stock prices have already priced in a rapidly advancing economic boom. More than likely, this rally is similar to other March/April rallies, which often fail leading into the moribund May to October period.

 

New Buy Recommendations:

 

AES – AES is the large worldwide producer of electricity that is coming back from the brink now. Like many producers, it suffered greatly when liquidity in debt markets suddenly dried up a few months ago and the consequent sale of assets to lower debt has resulted in a leaner company on the rebound. The chart formation in any timeframe – monthly, weekly or daily expresses that bullishness and, in the case of the daily, is showing signs of a loaded spring, which should give us a good opportunity for an excellent entry point.

 

LCI – We've looked at LCI many times in the past and we feel that the retracement has run its course with no damage to the chart formations. In fact, it now appears poised to break out to new highs once more.

 

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	32.20	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	30.90	B