Stockscom Report for Sunday Aug 17 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

While the power outage will surely take the honors as the biggest story of the week, there was some important economic news in the release of industrial production for July. And for the first time in many months, there was an increase of 0.5% providing more evidence of an economy on the mend. The IP numbers coupled with a small increase in capacity utilization (up 0.3%) and stable numbers in first-time claims for unemployment gave analysts reason to cheer. We prefer to wait before pronouncing an end to the degradation of the economy wishing instead, to see some sort of trend of favorable news commencing.

 

Undoubtedly there will be an increase in spending in the next couple of months as child bonus checks of $400 per child are either in the mail or in the hands of parents and this should provide the monetary fuel to ensure that consumer spending remains unusually high for at least a short period. The child bonus though is a one-time affair however, unlike the tax cut and for some families this will present an opportunity to pay down high debt levels.

 

It was interesting to note that the failed technical signal of the week before (a failed Lindahl sell signal on the weekly) held firm once more this week and probably accounted for much of the buy pressure on the Nasdaq, which incidentally, confirms our belief that a failed technical signal often leads to significant moves in the opposite direction. Technically though there is neither reason to buy the indexes nor sell them at this point with most indicators displaying a marked propensity for ambiguity.

 

One of the major reasons for this uncertainty is that institutions are being very cautious with both their statements and their actions these days. There is a sense that equities are fully valued at this point and analysts want to see that their profit forecasts are correct before proceeding further. More recently, the rising bond yields have been cause to stop and consider the upside potential of stocks in an environment where borrowing costs have increased rapidly. With producers' inability to pass along increased costs to consumers, the net result is higher costs and lower profitability. If anything could cause a meltdown in stock prices, surely it is the rise in longer-term interest rates. And it is these same mounting interest rates that could cause this nascent recovery to pack up and leave.

 

The second major reason for this recent price action is the price of energy. Many analysts appear to have ignored or forgotten the effects of higher prices for oil. Friday's explosion of an oil pipeline in northern Iraq, in operation for only two days after many weeks of repairs, was a shocking reminder of just how vulnerable the oil infrastructure is in the Middle East in general and in Iraq in particular. For years, experts have warned how impossible it is to ensure the security of supply using Saudi Arabia as an example of a state where terrorism by Muslim militants would be quite feasible and cause devastating effects on the economy of the US. At this moment, domestic inventories remain lower than normal and the effort to raise them is made more difficult by actions such as this incident of sabotage. More importantly the higher energy costs raise manufacturing costs and again, with little pricing power, manufacturers are being forced to absorb the extra costs ensuring that quarterly results will remain under pressure. In both examples, the higher costs forced upon these businesses will significantly delay their ability to hire new workers to cope with the upturn in production.

 

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.

 

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	23.40	H
08/11/03	Crystallex	KRY #	2.28	2.54	B
08/11/03	Steelcloud	SCLD	3.55	4.12	B
04/28/03	TransCanada Pipe	TRP #	15.85	18.13	H