Stockscom Report for Sunday Apr 4 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Jobs report pushes up major indexes
• Higher interest rates will put a damper on spending

Market Synopsis

Who is right then? On one hand we have the stock investors pouring investment money into equities on Friday while on the other, bond investors were busy taking their money out of fixed income instruments and it must be added that with regards to equities, investors were keen to dump anything that had a slight odor belonging to home building.

On the surface then, it appears as a normal shift of investment money toward that vehicle, which will reward the investor, the greatest return over a certain indeterminate period of time. However, there is something quite illogical about this extreme behavior. Generally speaking, the widely held belief is that the consumer represents some two-thirds of total GDP. Since the last recession that began in 2000, consumer spending has remained remarkably consistent and there have been two factors involved which account for the lion’s share of this loose change in consumers’ pockets – tax cuts and refinancing mortgages. But consumer spending will have to be generated from another source if it is to continue (and by consequence support a recovery in share prices).

Tax cuts and rebates are winding down in 2004 and unless Congress makes these permanent, an unlikely scenario given the proximity to the election, the decision will fall to the next administration to occupy the White House. This leaves mortgage refinancing as the number one source of money to fund further increases in consumer spending. But an increase in lending rates will not be the catalyst for new refinancing and that is exactly what we witnessed on Friday when bond prices tanked. Certainly one could argue that the jobs report was a harbinger of good employment reports to follow however this must be balanced with the fact that more than 2 million jobs have been lost in the past three years and consequently it would take at least seven straight months of similar job growth to replace those lost jobs.

One special consideration has to be given to trusting the resiliency of the US consumer. Time and time again the US consumer has managed to carry the uneven load and spend enough to avoid contraction. The downside of this activity is the enormous credit card debt that has been piled up, which, measured by the Federal Reserve at $760 billion at the end of January 2004, represents more than $2,500 per capita. Given that average household size in the US is 2.5 persons, the credit card debt per household is therefore upwards of $6,250.

And herein lies the crunch: the increase in interest rates will be felt immediately in areas such as credit card debt and mortgage debt. Credit cards now have their virtual cousins in the mortgage debt market with the advent and explosion of adjustable rate mortgages. According to Washington Mutual, 40% of their customers now choose adjustable rate mortgages, which include a bonus – debtors are allowed to pay interest only and make no amortization payment if they so desire. This program might become quite handy as those whose mortgage rates rise are forced to spend more to cover the interest. Undoubtedly there will be some homeowners who suddenly feel compelled to sell their costly home and this could invariably cause house values to topple.

So while stock investors tested the waters on Friday and found them to their liking, bond investors were expressing massive fear of higher interest rates and given the composition of GDP, this doesn’t seem to convey confidence in the future.

While the chart elements now the most noticeable are the large gaps higher from Friday, the indexes have fallen significantly outside of the channel ranges that had characterized their rise. Certainly the chances favor follow-through action from Friday into this week but technically the climb back into the corresponding channels typically fails. What is left then is simply one more lower high and reinforcement of the technical sell condition.

New Buy Recommendations:

There are some good stock charts that could be buys including CTXS and ATYT in the tech sector but we prefer not to take any new positions in tech at these levels given that the trend is still ambiguous at best and topping at worst.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

BGO – this stock may have gone as far as it can for awhile. Their annual results were less than stellar leaving many to question whether they can focus on managing profits. We’d be inclined to exit if further weakness develops.

WHT – we’ve considered this to be a strong gold stock to own however this week’s announcement of a merger with IAG may be a stumbling block to further appreciation. The deal is structured to give WHT shareholders 0.55 of a share of IAG but IAG’s share price has been under pressure given the perception that they paid too much for WHT. We’ll be watching this one closely.

Those wishing to remain invested in gold might want to consider selling their holdings in BGO and WHT and reinvesting in GLG instead. The chart for GLG has come together lately and is demonstrating very good strength.

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
08/25/03	Bema Gold	BGO #	3.08	3.60		H
12/08/03	BHP	BHP	17.18	19.38	17.25	B
01/12/04	Beta Oil and Gas	BETA	3.25	3.15	2.90	H
03/01/04	Consol Energy	CNX	27.50	27.87		H
01/12/04	Sierra Wireless	SWIR #	21.95	40.96	33.00	H
03/01/04	Suncor	SU #	26.25	27.37		B
03/08/04	Transcanada Corp	TRP #	21.34	21.80		B+
23/02/04	Wal-Mart	WMT	59.44	58.60		H
11/03/03	Wheaton River	WHT #	2.36	3.22		H

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price