Stockscom Report for Monday Jan 19 2004

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

• Rising equity markets early on in 2004
• New stimulus to come from where?

 

 

Market Synopsis

 

Market indexes continued their progression higher this week in this first month of the year. Certainly the fact that this is an election year strongly favors a solid move in stocks, but according to the Stock Trader’s Almanac, the year before the election is the prime beneficiary of government policy designed to improve the business climate and consequently the stock market. Since 1900, the Dow Jones has gained an average of 12.5% in the year prior to an election while the actual election year saw average gains of 9.3%. But what has caught our attention in this early going has been the near-parabolic move upward of late, a move which began back at the beginning of December. Since the first day of trading in December, the Dow Jones has gained an eye-popping, 8.3%. Clearly this move is unsustainable and for that reason alone, we would be reluctant to add much new money to our investments until a substantial retracement occurred in order to bring some semblance of health to these overextended markets. It goes without saying that we recognize nevertheless that markets, which are overbought (like this one) or oversold, can remain overbought or oversold long after logic dictated that they should change direction.

 

Economic news released this week included industrial production figures for December showing a meager 0.1% rise. One should be mindful when regarding such figures, that looking at one month in isolation is oftentimes a grave mistake. In this particular case, we must take into account that November’s figure now revised of 1.0%, obviously stole some of December’s gain. Also retail sales were lower than expected in December during the all-important holiday season and inflation figures were released showing inflation at both the producer level and the consumer level to be benign. Perhaps more importantly, the fact that inflation continues to be extraordinarily low while the value of the dollar continues to crumble reveals much of the very real threat of deflation as described by the Fed governor, Dr. Ben Bernanke. With the rapid depreciation in the dollar, one would think that the normal reactionary process of rising inflation would take root; the fact that it hasn’t speaks volumes of the threat of deflation.

 

This year, 2004, will be a watershed year for if the supply-side economists are correct, then the 2003 tax cuts will provoke new capital spending and engender new stimulus to replace that, which will no longer be available. The two primary sources of stimuli in the past year were the funds freed up by tax cuts and rebates and the monies collected upon refinancing of mortgages as many homeowners used the occasion to take equity out of their homes. Refinancing of mortgages is now reduced by 70% from a year ago and though new tax cuts will kick in shortly, the vast majority of cuts are already made and the effects felt by new cuts will be markedly reduced. The theory of supply-side economics is that massive tax cuts can cause economic growth and this, without concern for government spending, for entrepreneurs unhindered by the binds of high taxes will risk larger sums of investment capital. In other words, tax cuts are of primary importance and whether they are accompanied by government spending cuts, is irrelevant. Ironically, presidential hopeful, George Bush Sr. in 1980 called supply-side economics, “voodoo economics”, stemming from the widely held belief that tax cuts without customary government spending cuts is a recipe for disaster.

 

Much more likely is that 2004 will be known as the year of the stock-picker. Already we are seeing evidence of shares that have risen inexorably over the past nine to twelve months, commencing a fall and retracement from such gains will be painful for those believing in a buy and hold philosophy of stock investment. Conversely, a stock such as GE, on Friday signaled its intention of starting a new leg higher and one would be hard-pressed to find any kinks in its “technical” armor. Part of the reason for the above-average gain in earnings for these winning corporations is and will be the ongoing depreciation of the US dollar. It is important to realize that the US dollar has not lost so much of its value in comparison to a basket of currencies but has lost considerably against the European currency, the euro. Thus if a US corporation derives a large part of its revenues from Europe without a related portion of its expenses, then it stands to gain handsomely from the fall in value of the US dollar.

 

New Buy Recommendations:

 

None.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

We sold our position in BPT at the stop.

 

Portfolio Comments:

 

CHU – each passing week this stock appears stronger – the gap on Jan 8 is the key to its strength.

 

ABB – the selling has appeared to have stopped and it’s now much stronger technically than it’s been in awhile.

 

TRP – there are signs that investment money is being drawn away from TRP much like BPT, which was sold this week. Price has not really followed this money away and it surprises us that it has remained strong.

 

SCLD – this share has struggled and while we have considered on many occasions to close the position, there is evidently some investment money coming in and as a consequence, we keep it for now.

 

BGO, WHT – the retracement in the price of gold was inevitable as it’s moved in inverse relation to the US dollar for a very long time now. The dollar was vastly oversold and last week saw its first significant rebound in a few weeks, a move that was needed to bring some health back into the market.

 

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	6.09		H
09/29/03	AES	AES	7.50	9.98	9.00	B+
08/25/03	Bema Gold	BGO #	3.08	3.20		H
12/08/03	BHP	BHP	17.18	17.56		H
11/10/03	BP Prudhoe Bay	BPT	23.11	29.85	27.00	SOLD
01/12/04	Beta Oil and Gas	BETA	3.25	3.05		B++
01/12/04	Cepheid	CPHD	13.02	12.12		B
09/29/03	China Unicom	CHU	8.18	11.23	10.00	B+
12/08/03	Consol Energy	CNX	22.75	25.88		H
05/12/03	Cott Corp	COT #	20.02	28.27	26.00	H
12/08/03	Inco	N #	35.70	37.99		B
12/08/03	Nanophase Tech.	NANX	7.64	13.60		H
01/12/04	ON Semiconductor	ONNN	7.59	8.10		B++
12/15/03	Overstock.com	OSTK	20.35	18.12		H
01/12/04	Red Hat Inc	RHAT	21.10	20.49		B
01/12/04	Sierra Wireless	SWIR #	21.95	23.44		B+
12/01/03	Steelcloud	SCLD	5.05	3.98		H
04/28/03	TransCanada Pipe	TRP #	15.85	20.76	20.65	H
11/03/03	Wheaton River	WHT #	2.36	2.70		H

 

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price