Stockscom Report for Sunday Sep 7 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

The first week of September gave bulls a reason to smile as the inordinate amount of monetary and fiscal stimulus in the system has at least accomplished its mission – a boost in production with the ISM index foretelling of more increases further down the road. But as Federal Reserve governor Bernanke has suggested, the rise in productivity combined with the mounting job losses threaten to undermine the recovery and may prompt the Fed into considering a further interest rate cut from the now trivial 1% for overnight lending. When one considers for a moment the extent that liquidity has been poured into the system for approximately two years, it is surprising that production is only gaining traction now. The Fed quite rightly recognizes this fact and it's for that reason that they will not be raising rates until well into 2004.

 

But all this stimulus begs the question – what happens when the taps are shut off? If we examine fiscal policy for a minute, we understand that producing budget deficits, even extraordinarily large ones, has the effect of encouraging consumer spending and increasing production. However, this policy is supposed to plan for an increase in government revenue at some point in the future. Certainly the better than 20% increase in S&P corporate profits will see money returned to government coffers but without a rise in the number of working taxpayers and without wage inflation to increase the nominal taxes due by those working, the return on “investment” will be low. Another difference between taxes collected a few years ago and now is the enormous government windfall from capital gains taxes. Even counting the recent rally in stock prices, the gains will be limited for government and the promise of money flowing from stock options is substantially reduced.

 

When we speak of fiscal policy we refer to the federal government, but in fact, some of the worst bleeding is occurring at the states level where a combined $100 billion in budget deficits this year is a distinct possibility. The two cases that dominate the scene are New York and California. California, the largest state economy in the nation, could easily sit at the G8 conferences if size of economy were the only thing that mattered. It is now grappling with a $35 billion deficit after coming to terms with the reduction in income tax revenues over the past three years. In the fiscal year 2001, the state earned $17 billion in state income tax revenue. One year later, that same tax revenue dwindled to $7 billion. At some point, these two states (New York's deficit is “only” $12 billion) will be forced to make drastic budget cuts and/or increase taxes, both of which will counteract the federal government-initiated stimulus and delay the economic recovery.

 

For now we will continue to pick stocks which demonstrate unusual promise given their technical chart action. We would like to point out that we've adjusted our table below giving added weight this week to the gold shares, KRY and BGO, as well as PFSW, which bounced off its 25-day moving average this week having found sufficient support and now appears poised to make a new 2003 high.

 

New Buy Recommendations:

 

Sapient (SAPE) – Sapient is in the software business and is one of those innumerable shares that have fallen from lofty peaks reached in the year 2000. Currently it is having a resurgence of sorts culminating in a new high for 2003 on Friday. We see this as a breakout signal for the previous high was reached on July 14^th and the time since has been spent consolidating that rise. Technical indications such as OBV are signaling the arrival of fresh new investment funds and coupled with the new high, the risk of buying here is relatively low. An initial stop-loss of $3.15 (it closed at $3.80 on Friday) should be sufficient.

 

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.

 

If the share price moves above 18.60, we would be inclined to add to our position. (It has and we would recommend buying more shares at this level).

 

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
08/25/03	ABB	ABB	5.43	5.74	B
08/25/03	Bema Gold	BGO #	2.15	2.27	B+
08/25/03	China Unicom	CHU	7.63	7.35	H
05/12/03	Cott Corp	COT #	20.02	23.16	H
08/11/03	Crystallex	KRY #	2.28	3.08	B+
08/25/03	PFSweb Inc	PFSW	1.64	1.54	B
08/11/03	Steelcloud	SCLD	3.55	4.99	B
04/28/03	TransCanada Pipe	TRP #	15.85	18.61	B+