Stockscom Report for Sunday Aug 3 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

Certainly one could say that July did not go quietly into the night. We surmised that the week's economic data would elicit a strong response from the market and we were not disappointed. While the ISM figures representing purchasing managers intentions rose to 51.8%, analysts' expectations were for at least 52% while whispered numbers around the Wall St-types looked for even greater numbers as evidence of a strong recovery. Undoubtedly the GDP figure of 2.4% released the day before fed the proverbial rumor mill as did the Chicago PMI report released that same day. Bulls will take solace from the breakdown of the figures, which showed that orders were increasing at a healthy rate and inventories remain low leading to the belief that companies must begin to rebuild those historically low levels.

 

But jobs were on everybody's mind. Thursday's weekly first-time claims for unemployment was a mixed offering revealing that the previous two weeks numbers were embarrassingly miles off and calls into question why the government chooses to release statistics whose margins for error are so great. Upward revisions on the order of several thousands meant an employment environment much less bullish than first reported. By Friday, this was all too apparent in the monthly jobs report, which in spite of the lower unemployment rate of 6.2%, saw monthly job losses of another 44,000 in July and perhaps more importantly, job losses in the critical manufacturing sector of 71,000. Naturally the reason for the drop in unemployment was due to the thousands who stopped searching and dropped out of the official civilian labor force.

 

As investors, we must ask ourselves what is the net effect of this mixed bag of data and how does it correlate with the technicals in the markets. From our point of view, it appears likely that the combination of almost free money courtesy of the Federal Reserve coupled with tax breaks at the federal level has greased the wheels of the economy enough to get the heavy locomotive in motion. However the duration of the party is entirely in question. Bonds are rising on inflation fears say some, but more likely simple supply and demand concepts, and the price of crude oil rose to a new high on Friday. In both cases, consumers will be discouraged from spending. In the former, there is ample evidence that mortgage refinancing, the only leg holding up the economy the past two years has been cut off at the knee as homeowners have effectively stopped looking. Moreover higher rates will almost certainly diminish the zeal for new homes that's driven the mortgage market. As for the price of oil, time and time again, we've seen the results of high oil prices. Higher consumer spending on oil products means less funds available for other lower prioritized items. Oil is a necessity here and more money spent on heating/cooling and transportation means cuts are made elsewhere in personal budgets.

 

Greenspan and company have effectively been making a bet on the American consumer. Keep long term rates low as long as possible in order to satisfy the desire for lower mortgage rates and the resultant increase in consumer spending, with money generated either in refinancing or the need to furnish a new home, will keep the economy afloat. Then at some indeterminate time in the future, business spending will once again expand and the economy will be on a firmer footing.

 

The second quarter GDP figure of 2.4% lends credence to an uptick in business spending. But suggestions that businesses will be ramping up production in great numbers in the third and fourth quarters are much less likely. To do so would represent a substantial increase in consumer spending and if higher oil prices are on the way and reduced mortgage financings, this scenario becomes highly unlikely.

 

Technically, stocks have reached a plateau and have yet to decide whether further moves on the upside are merited. The best possible outcome has been priced into the market but now the investing public is deciding whether this is a fair evaluation of the markets. On the Dow Jones and the S&P 500, the weekly charts clearly show a Lindahl sell signal has formed while on the Nasdaq, the weekly chart displays a double reversal. It's always worth remembering that the weekly charts remove much of the noise factors from charts in the short/intermediate timeframes and consequently, we believe it would be foolish to be making large scale purchases of equities at this moment. Market risk is more than a little substantial and the experience of the year 2000 is a good example of that.

 

At some point in the near future, this investment party could re-ignite driven largely by the expansionist monetary and fiscal policies and at the same time, market risk would evaporate, but always we would need to keep one eye fixed firmly on the exit.

 

Our ongoing vigil with the VIX is becoming quite interesting. VIX, of course, is the volatility indicator for the broad market as represented by the S&P 500. Last week's setting of a new low contrasts sharply with the significant rise this week especially on Friday and seems to be setting up for a charge higher. The VIX has an inverted relationship to the market indexes meaning that a higher VIX corresponds to lower markets and this dovetails nicely with the aforementioned sell signals on the indexes. 

 

New Buy Recommendations:

 

None.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

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.

 

IMAX – We want to apply a stop of 7.95 on this stock to prevent any unnecessary losses.

 

FNFG – We apply a protective stop of $14.75 on this share.

 

FED – Similarly, we put a stop of $36.00 on this small bank. These two banks were evidently caught in the wind that pushed down small banks' share prices on Friday.

 

 

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
05/12/03	Cott Corp	COT #	20.02	22.42	H
03/04/03	Firstfed Fin. Corp.	FED	30.55	37.01	H
03/05/05	First Niagara Fin G	FNFG	12.59	15.40	H
06/02/03	IMAX	IMAX #	7.74	8.30	H
04/28/03	TransCanada Pipe	TRP #	15.85	18.10	H