Stockscom Report for Sunday May 18 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

The risk of Japanese-style deflation was thrust into the spotlight once more this week with the release of the latest economic data. It was just under two weeks ago that the Federal Reserve met for one of their policy meetings and trotted out a communiqué that revealed how much the Fed considered deflation to be a viable threat to our economic health. This week, the reality of economic data drove home the actual proximity that we find ourselves in.

 

From retail sales down 0.1% - saved from further damage by the sales of cars - to import price deflation of 2.7%; from weak exports generating another dismal trade deficit to a drop in industrial production of 0.5%. All signs, except for the increase in consumer confidence, are suggesting that the current disinflationary environment could quickly evolve into deflation. The actual PPI wholesale inflation rate stood at –1.9% for the month of April while the CPI rate was 1.5% after stripping out the volatile food and energy segments. More important, though, is the trend in the inflation figures. From a near steady range of 2.2% to 2.8% through October 2002, the trend has now changed and since that time, there has been a steady decrease leading into 2003 where the rate has tumbled now to the current 1.5%.

 

The Fed has made it clear that it doesn't believe that deflation will pose as serious a threat as it does to the Japanese where deflation has become systemic, but if it does, the Fed would be more than willing to use whatever tools are at its disposal to generate inflation including, but not limited to, an increase in the money supply.

 

The situation whereby consumers save their money and wait patiently to make purchases has already begun though. Perhaps the prices haven't fallen such as in a true deflationary environment, but nevertheless, consumers have closed their wallets in recent months and depressed retail sales figures and increased savings rates bear witness to that process. There may be some respite in the next few months as another wave of refinancing hits the mortgage industry as residential lending rates are once again dipping lower. The consequent lower payment structures could induce some temporary consumer spending, but what is needed of course, is a recovery in business investment, which has been sadly lacking for several quarters.

 

Ironically it is the recently announced first quarter profits that has driven this rally to irrational heights as investors bet on a recovery in capital spending to be the engine of growth in the economy. The realization might take a bit longer, but soon the investing public will recognize that these companies starting to make profits again will not be swiftly arranging deals to begin large spending programs. The recovery in profits has perhaps begun but the recovery in business spending won't begin for a while yet.

 

Looking at the charts, the beginning of May marked a shift in the daily on balance volume chart of the S&P. It ceased making new highs yet prices have continued to climb higher even while the number of down days exceeded the number of up days. As prices dropped, there was always a floor supported by willing buyers. However its days could be numbered now. Similarly the Nasdaq and the Dow Jones have daily OBV charts that concur and with both the S&P and Dow Jones approaching significant horizontal resistance levels, the likelihood of a retracement is high. In order to achieve new highs, there is a need for buyers, but investors are becoming more reluctant about putting new money to work in a market that has already moved significantly the past few weeks.

 

 

New Buy Recommendations:

 

None. We recommend holding our current positions and additions to positions should be done only on a small scale at this point.

 

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	7.39	B
05/12/03	Cott Corp	COT	20.02	19.93	B
03/05/05	Encana	ECA #	33.66	34.84	B
03/04/03	Energen Corp.	EGN	30.68	32.05	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	32.25	B
03/05/05	First Niagara Fin G	FNFG	12.59	13.38	B
04/21/03	LCI	LCI	13.60	16.87	B
04/28/03	TransCanada Pipe	TRP #	15.85	17.30	B