Stockscom Report for Sunday June 8 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

Rising on bad news is generally an indication of the strength of a bullish rally in equities and the rise this week is no exception. The principle data releases were the unemployment figures for May and the orders numbers for April. Unemployment edged up to 6.1% with the loss of a less than expected 17,000 jobs and April durable goods orders were down a very disconcerting 2.4%, but markets chose to ignore these facts and powered higher in the belief that six months from now, the economy will be in much better shape.

 

The markets are now pricing in a strong recovery through the end of the year, which could very well happen, but there are several road hazards on this highway before we arrive at that point.

 

Case in point is cars. The auto industry is often an excellent barometer of the general health of the economy yet Ford and GM announced cuts in production for the third quarter this week citing the waning interest in incentive packages offered by the two manufacturers. With an average of more than $3000 in incentives per vehicle sold, profits are being squeezed and most are disappearing altogether. Some people ask why is the industry in such bad shape and the answer lies somewhere in the fact that in the past five years, the Big 3 have sold an unprecedented 85 million new vehicles in the US. The generous incentive programs have been used to engineer high sales numbers in the hope that losses would be manageable until economic recovery kicks in and allows the development of more profitable sales. Probably the one major reason for this strategy is the rising health benefit costs and pension underfunding at GM and Ford that have caused them to look at ways to defer these problems to some point in the future.

 

Capacity utilization is another sticking point in the recovery and the Federal Reserve has made mention of this many times leading one to conclude that this characteristic ranks high in importance with the Fed. At around 75% and with no significant upward movement yet, it's difficult to see where the economic recovery might come from. Until such time, manufacturing will continue to suffer from a serious lack of pricing power (Ford and GM are good examples). Herein lies one of the reasons that manufacturing employment continues to slip even as a supposed recovery begins.

 

In an environment where pricing power is weak and production falling, where larger price incentives are ineffective and imports from China get cheaper and cheaper, it becomes natural to look at deflation as a serious potential problem on the road to recovery. Already the Fed has developed and published strategies to deal with this problem so while they downplay the threat at every moment and in every speech made by a Fed governor, the fact remains that there is heightened concern about deflation and the threat posed by the recent Japanese economic experience. 

 

Where does that leave equity prices? Individually, the rise in equity prices represents a growth premium for each company but it's very difficult to believe that those growth rates are feasible. In other words, the quarterly results due in July will likely cause a revaluation in stock prices as investors grow wary of the amount of recovery priced into shares. In the near term, we are probably very close to a top as the new highs have been set and markets have endured a long period in overbought territory.

 

We also keep a watchful eye on the VIX volatility indicator and it's telling us that it is now set to rise, perhaps even breakout of its recent slump, which is often an indication that markets are heading significantly lower.

 

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
04/21/03	AES	AES	4.43	7.83	B
05/12/03	Cott Corp	COT #	20.02	20.35	B
03/05/05	Encana	ECA #	33.66	37.61	B
03/04/03	Energen Corp.	EGN	30.68	33.00	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	34.40	B
03/05/05	First Niagara Fin G	FNFG	12.59	13.38	B
06/02/03	IMAX	IMAX #	7.74	7.44	B
04/21/03	LCI	LCI	13.60	20.05	B
04/28/03	TransCanada Pipe	TRP #	15.85	18.21	B