Stockscom Report for Sunday July 6 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

The economic data released thus far in the second half of 2003 has been ostensibly a continuation of the mixed signals that we've received in recent months. The ISM figure for June came in at 49.8%, close to expansion but still lower than the expected 50.5%. The slight increase of 0.4% from May suggests that the mini-boom that began in April/May may in fact be tailing off at this time. On the positive side, the ISM non-manufacturing index, which entails services, reached a level of 60.6%, a significant rise that indicates strongly that the growth in the service sector is substantial.

 

But unemployment was the key focus by the end of the week and both weekly first-time claims as well as the monthly unemployment report were released on Thursday before the holiday. Both numbers fell far short of expectations. The month of June showed job losses of 30,000 and a new higher unemployment figure of 6.4%, but in addition, the revised May figures also showed greater job losses than first thought and this naturally contributed to the weak data. The weekly first-time claims were no better with a reversal from the string of declining numbers the past few weeks.

 

When we look at these numbers we tend to search for trends and while the trend is up for the ISM numbers, the manufacturing figures have yet to reach above 50%, a sign that the economy is expanding. Certainly the service sector is responding to the seeds of recovery planted by Greenspan and Co. but one can never be sure of the strength implied in those numbers. Manufacturing has had a much longer history and has proven its connection since a manufacturing environment implies a certain norm for capital investment, materials consumed, and wages earned/paid. The industrial capacity for May remained unchanged at 74.3% and has been mired in weakness for well over one year. Any increase in manufacturing would logically suggest that the industrial capacity should rise, if only slightly, to represent the increase in demand that occurred assuming that the supply hasn't actually increased as well, an idea that we presume to be unlikely.

 

If we shift our glance to unemployment for a moment, there the trend is clear and unmistakable. Rising unemployment could continue for several more months, as there are simply no brakes in sight for the job losses. Even if we were to look at the ISM as an indicator for future trends in employment we see that the losses attributed by the employment part of the index slowed to a degree in June but that the trend continued to hold firm.

The three major indexes have risen quite remarkably from the spring lows and as we've mentioned in the past, we have our doubts that they will persist in rising. Already the charts are signaling that the levels reached on June 16/17/18 were the peaks and this, despite the fact the Nasdaq rose to a peak 1 point higher this week on Wednesday. According to the charts that we follow, money is being pulled from the system or buyers are going into hiding, which even if prices go higher, eventually means that a pullback in stock prices is inevitable.

 

This June time period is a logical quarter-ending point at which institutions could begin to book profits from the strong run up in prices so the idea that the peak occurred around mid-June certainly makes sense. We will probably see some further evidence of investor activity during the next couple of weeks when corporations begin to unveil their second quarter earnings and have their chance to give their outlook for business for the rest of 2003. Unless businesses are exceeding all expectations, it would be difficult to parlay good earnings into further stock price increases given the moves already achieved.

 

Also technically both the Dow Jones and the S&P 500 have yet to see a monthly close above their 25-month moving averages, another step in any recovery from a bear market. The Nasdaq chart has only just managed to accomplish this feat at the close of June, 3 sessions ago.

 

New Buy Recommendations:

 

None. If markets indexes weren't so suspect, we would be tempted to buy Microsoft at this point. MSFT managed to breakout from its long pennant on Wednesday but reversed the move on Thursday. A move toward $27.25 would confirm the breakout, but we mention again that market risk is great at this point and we're not ready to move against the grain just yet.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

We applied some stops to some of our holdings in our previous report in anticipation of increased volatility.

AES – We were exited from this stock as it dropped to the $6.00 region. Lehman upgraded it this week and it jumped, but we refrain from jumping into any stock immediately after having exited.

 

LCI – This stock has proved once more to be an excellent trade as it jumped to over $25 and any threat of being stopped out at $18.74 is unlikely now.

 

TRP – We managed to stay in this trade but only by the thinnest of margins. At this point, the retracement appears to have completed its move and the share price is now recovering. We will keep the stop however at $17.40.

 

 

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	6.75	SOLD
05/12/03	Cott Corp	COT #	20.02	20.41	H
03/05/05	Encana	ECA #	33.66	38.14	B
03/04/03	Energen Corp.	EGN	30.68	33.44	H
03/04/03	Firstfed Fin. Corp.	FED	30.55	36.06	B
03/05/05	First Niagara Fin G	FNFG	12.59	14.42	B
06/02/03	IMAX	IMAX #	7.74	8.76	B
04/21/03	LCI	LCI	13.60	25.09	H
04/28/03	TransCanada Pipe	TRP #	15.85	18.05	H