Stockscom Report for Sunday Apr 27 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

The end of the week marked the passing of the 50% level in reporting companies on the S&P 500. Of the more than 300 corporations reporting results, approximately 62% have surpassed the market's expectations while another 22% were in line and the other 16% missed expectations. Additionally, the average rate of profit growth has been in the neighborhood of 12%, a few points higher than our projection of 7-8% last week. Still if one were to look at the big picture, we need to keep in mind that the 12% is an increase over very weak earnings of a year ago and therefore stock valuations continue to reside well above bear market bottoms. Even with the increase in income, corporations have been bending over backward to get the word out that they're only cautiously optimistic looking forward with the key word being “cautious”.

 

Economic performance depends on business spending and consumer spending. Businesses are still preoccupied with stemming the flow of red ink or, perhaps now we could say, avoiding red ink, that increasing expenditure remains for all intents and purposes on the backburner. The proof of this lies in the steady stream of layoff announcements, the latest being Ford and GM who are both trying to come to grips with double-digit productions cuts in the second quarter; the much-publicized capital expenditure cuts at both telecom and chip fabrication plants; and competition from offshore manufacturers, namely Chinese. The shift in corporate-think from cost-cutting mode to expansion mode is a slow process that always overshoots the target at both ends. (Naturally, the speed of this process is inversely proportional to the size of the company). Similarly, we saw the results of a slow shift from expansion mode to cost-cutting mode in 2000-2001 as businesses initially thought the slowdown would be short-lived and ratcheted down spending in increments. With overnight interest rates at a miniscule 1.25%, what further incentive is required for businesses to expand? If we assume that they aren't taking the bait nor the money, we must assume that they've decided either to finance expansion from within, an unlikely scenario if one is only increasing profits by an uneasy 12% or that they are simply not interested in that strategy. Our recommended company of last week, AES, could be a poster child for “Businesses not Spending”. Here is a company that has been selling assets to reduce high levels of debt, which became onerous due to the difficulty in finding revolving credit. Electricity companies became persona non grata after the Enron fiasco. Now the company has stabilized to a large degree and the dark cloud hanging above it is clearing out, but no one should expect this company to increase expenditure for several months as it continues to clean itself up.

Thus the consumer is expected to pick up the fumbled ball and carry it, which they have done so admirably in 2002. But this appears to be coming to an end as well. For almost 2 full months, new weekly unemployment claims have exceeded the 400K level as layoffs seem to be gathering steam. Already the unemployment rate has edged higher held back partly by the reduction in the participation rate, but on Friday this week the April monthly unemployment report will be released and there doesn't seem to be any possibility to any sane analyst that the report will be anything but bad. We are left with, on one hand, consumers with jobs that are reducing spending to save more, perhaps out of fear of losing their own jobs and on the other hand, fewer consumers.

 

While equity indexes were approaching areas of resistance, by Friday it seemed that the technicals were coming together to defeat the advancing price level. Taking the S&P 500 as a representative for the broad market, the high for the week at 919 was comparatively close to the recent high of 935 reached on January 13. It is also worth noting that the downtrend from the peak in 2000 has an upper channel boundary of approximately 960. Though price is relatively close at this point, bears will take heart that the week finished below 900 and that weekly stochastics are now well into overbought territory as are the dailies. Finally, the old adage is worth remembering at this time of the year, “Sell in May and go away” because, in fact, measured returns have shown that over long periods of time, the returns on equities in the period May to October are well below average. To take one example, Keppler Asset Management found that for the U.S. stock market, the average return for the "good" period (November to April) is 7.5 percent vs. 1.2 percent for the "bad" period. This is based on returns from 1969-2001. While we don't subscribe to the idea that all equities should be liquidated now, we do recognize that we are in the midst of a stock pickers market and caution (no pun intended) should be exercised.

 

AES began strongly and late this week announced that earnings would be better than had been expected when they're released this week. The turnaround begun several months ago is evidently successful at this point in time.

 

New Buy Recommendations:

 

TRP #. Transcanada Pipelines. In the energy sector (transportation of natural gas), we always keep our eyes on this stock and recently we've watched with renewed interest, as price appeared to be setting up for a breakout. This week we got that long-awaited breakout signal with a new high set for 2003. Actually the new high is for 2002 and 2003. By any chart format - monthly, weekly or daily – the formation tells the same story that this stock is starting to roll. The added bonus is that the stock comes with a generous dividend yield of 4.1%.

 

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
04/21/03	AES	AES	4.43	5.45	B+
03/04/03	Energen Corp.	EGN	30.68	32.48	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	31.89	B
04/21/03	LCI	LCI	13.60	14.29	B