Stockscom Report for Sunday May 11 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

We continue to express extreme caution with regards to the equities markets. In fact, were we to express an opinion of the bond markets, which we rarely do, we'd certainly place those on alert as well. At this moment in time, there is a battle being waged between the bulls in the bond market and those in the stocks. Both forms of investment have risen like phoenixes since the lows reached in March and this is quite incongruous behavior given the usual inverse correlation found between these two investment groups. The rising stocks have discounted a smart recovery for the second half of the year undoubtedly based, at least partially, on the solid results just reported for Q1 2003. And the emergence of new heights in bond prices has been a result of the apparent weakening economy as report after report suggests that the economy, in general, is not going to recover in time this year. The esteemed Federal Reserve admitted as much in their communiqué issued on Tuesday where they outlined their perceived risk of deflation and the modest potential for another interest rate decrease in June. Fortunately for investors, the wait won't be long. This week, Thursday and Friday to be precise, we will learn what are the Producer Price Index and the Consumer Price Index on each respective day. These reports plus others will be watched carefully by the Fed and weigh heavily in their decision in June. Ultimately the Fed will meet any sign of economic weakness with more assertive actions on monetary policy.

 

Our usual propensity is to shout out loudly that money in bond markets is smart money and that investors should heed what the bond markets are telling them. However, the duration and stubbornness, which both sides have exhibited of late, has put both investments into overbought situations that will need to be rectified before any possible resumption of their bull-runs can take place. And that is the reason that we express caution now in either asset class.

 

Ironically, despite the rising stock and bond markets, the US dollar continues to slide inexorably lower as selling of US dollars far exceeds the buying and finance experts debate the merits of its lower value. With a current account deficit approaching 5% of GDP, there was no need for an increase in selling of American assets; all that was required was for the buying to slow down.

 

But will this aid the recovery?

 

Theoretically, with goods priced in cheaper US dollars, exports from the US should increase thus closing the current account deficit and ensuring a steady level of buying, supportive of the currency. The reality is that these trends take long periods of time to take hold and as a consequence, there is virtually no relationship between the dollar's performance and the stock market's. However, there is one particular strategy that works well for investors and that is to buy shares in companies based in countries whose currencies are rising vis-à-vis the dollar. The share prices will continue to appreciate in US dollars even while there is no change in the stock price based in the home market or the share price increases in the home market and provides an extra boost to those interlisted shares trading in the US.

 

The three major markets appear to be rounding their most recent peaks and it's altogether possible that the tops attained last week will be the high water marks. Overbought stochastics and On Balance Volume (OBV) are both signaling a return to lower values with their respective dips. In the case of the S&P 500, the level of 960 stands as the heaviest resistance, which along with charts either turning down or flat lining suggest that peaks have already formed below this point.

 

It is notable with respect to the S&P that if we measure from the March lows, it took only the first eight trading sessions to rise around 100 points while it took another six weeks to tack on an additional 35 points. All of this supposed buying and belief in a sustainable rally has only added 35 points since March 21.

 

Finally, complacency as measured by VIX, the volatility ratio, is quickly approaching the low levels reached in March 2002, near the height of the market. It is important to note that from this point onward the predominant direction in equities was down for most of the year.

 

 

New Buy Recommendations:

 

We've identified certain sectors that are likely to do better than average in the medium term of less than one year. Certainly a sector such as the energy sector and more importantly the natural gas sub-sector appear ready to take advantage of the supply/demand imbalance. And the small banks offer terrific charts and opportunities. Concerning new recommendations, we recommend caution and a “wait and see” attitude due to the belief that a retracement is in the works. However we would like to add just one new buy to the list.

 

COT – Cott Corporation, the world leader in private label soft drinks, has the advantage of the exchange rate differential mentioned earlier since this company has its head office in Canada and an investment here benefits from the rising Canadian dollar. Similar to other recommendations of late, COT, this week, broke out and reached a new high on better than expected results.

 

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	6.55	B
03/05/05	Encana	ECA #	33.66	34.26	B
03/04/03	Energen Corp.	EGN	30.68	33.64	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	33.18	B
03/05/05	First Niagara Fin G	FNFG	12.59	12.93	B
04/21/03	LCI	LCI	13.60	17.12	B
04/28/03	TransCanada Pipe	TRP #	15.85	16.41	B