Stockscom Report for Sunday Nov 16 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

• Japan's Nikkei breaks down through 10,000
• Consumers ready themselves for the holiday season?
• Chinese oil consumption

 

Market Synopsis

 

While we are inclined to believe that the markets' best moments of 2003 are well behind them, bull markets have a habit of dying slowly. In a similar vein, investors' enthusiasm has an odd manner of slipping gently before the tide becomes overwhelming and, naturally, these two situations are very much related. Overseas this evening in Japan, the Nikkei is down around 3% and heading for a close below 10,000 for the first time in three months. Should we ignore this situation for they are located half a world away and theirs is a market that we don't necessarily pay close attention to? The answer is an unequivocal, “no”.

 

Years ago, most world markets moved as region-dependant groups independently of other groups, but in these times of global integration through modern, fast communication links and involving large international trade relationships, strength in various economies is cross-linked with other economies and form a highly intricate web of business relationships.

 

To take the example of Japan, the drop in value of the Nikkei index appears partly related to concerns that a stronger yen currency will curtail the ability of the nation's exporters to find markets for their products and partly caused by the banking industry, which has been under pressure from non-performing loans on the books for many years. So one might logically ask themselves, how do these apparently domestic problems cause problems in markets on this side of the ocean? The reasons vary from reduction in the sourcing of materials or labor here in North America for those exporters to the forced liquidation of North American assets to solve the banks' liquidity problems. And as a direct consequence, the overnight markets trading future contracts on the S&P 500 and Nasdaq indexes are trading lower and gearing up for a lower opening on Monday.

 

Perhaps North American markets will follow the lead of Japanese markets and head lower. Already moving averages in the three major markets, the Dow Jones, Nasdaq and S&P 500 have begun to flatten and this is a necessary first stage of systemized selling. Nevertheless, markets remain strong overall and are not signaling the end of the bull rally at this moment.

 

As we've mentioned many times before, the one pillar of strength in the economy has been the consumer who hasn't ceased to purchase goods. Much of the seed to sustain the consumer this year has come through the form of tax incentives, either tax rebates or tax cuts, and the ability to refinance mortgages at highly favorable terms. Wal-Mart suggested this week however, that consumers were not as strong as Wall St-types believe. Their own research into consumer spending habits has shown that now more than ever, the timing of consumers' expenditures is centered around the reception of their paychecks and this suggests that consumers are having liquidity problems. It's quite possible that the rush to refinance mortgages camouflaged this problem earlier in the year, but with an 80% decline in this activity since the summer, it isn't likely to be ignored anymore.

 

We recommended purchasing oil equities last week and certainly the fact that the price of crude oil continues to find solid support above $28 per barrel is worthy of notice. But many analysts question how it is that US crude inventories are still in the neighborhood of 290 million barrels and haven't been over the 300 million barrel mark in over a year. And this despite the increase in oil production and exports from OPEC states even while Russia, Norway and Mexico, all non-OPEC producers, have ramped up production to take advantage of the higher prices. Still US inventories remain historically tight.

 

One reason is that the federal government has made it clear that it wishes to top up the Strategic Petroleum Reserve (SPR) to its 700 million barrel limit, which represents a supply of 370 days of imported oil. The SPR stands at just over 630 million barrels currently. Further, competition for product has come from a growing world economy – the US economy grew 7.2% in the third quarter and this naturally results in greater consumption. But perhaps the greatest increase in demand is coming from China.

 

Chinese energy production and consumption has dramatically changed in the past 45 years when coal served almost all domestic needs. At the time, coal represented 95% of energy production in China and 92% of its consumption. Last year, coal was reduced to 71% of all energy production and 66% of energy consumption. In that same period, crude oil increased from 2% of total energy production to 17% and from 4.6% of energy consumption to 23.4%. This year the changes have been even more dramatic.

 

Oil imports into China will total approximately 592 million barrels this year representing a 30% y-o-y increase and approximately one-third of all domestic oil consumption. The growth in oil imports is so large that concerns related to security of supply have surfaced in recent months and has led a drive to develop both a national strategy for energy security and to study alternative energy sources. The major reason for the increase in consumption is the rather abrupt rise in automobile sales as the consumer prospers in the accelerated development of China. Needless to say, this is one of the fastest growing energy markets in the world.

 

New Buy Recommendations:

 

None. Gold shares should benefit on a move above $400, which seems imminent. Additions to stock positions could be executed at that time.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

CTXS – It appears that Citrix's days are numbered as there is broad indications of a coming fall in the stock price. The weekly chart has been stuck below the 200-week moving average for five weeks now and the resistance is apparently quite strong. Take the money and put it into energy or gold.

 

Without recommending this evening, we would mention that we are monitoring CHU and SAPE closely as the general tech sector is suffering. Truly this is a stock pickers market and the upside at this point for the indexes and more specifically the Nasdaq seems minimal. When the likes of MSFT and IBM have charts that are effectively short sale potentials, there is little hope for the majority of tech stocks.

 

New stops have been added to the list while others have been modified. Those that have blanks, are being carried unstopped for now. Please see our complete list of stops in the table below.

 

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	Stop	Action Rating
11/13/03	ABB	ABB	6.14	6.08		B
09/29/03	AES	AES	7.50	8.92	unstopped	B
10/06/03	Align Tech	ALGN	13.46	16.88	15.50	H
08/25/03	Bema Gold	BGO #	3.08	3.73		B+
11/10/03	BP Prudhoe Bay	BPT	23.11	22.22		H **
09/29/03	China Unicom	CHU	8.18	8.97	7.60	H
10/06/03	Citrix	CTXS	24.31	25.20	23.17 *	SELL
05/12/03	Cott Corp	COT #	20.02	27.50	22.98	H
11/03/03	Ivanhoe Energy	IVAN #	4.99	5.80		H
09/08/03	Sapient	SAPE	3.72	5.59	4.75	H
04/28/03	TransCanada Pipe	TRP #	15.85	20.71	19.42	B+
11/03/03	Wheaton River	WHT #	2.36	2.52		B+

 

* Stop on a closing basis

** Buy if above entry price