Stockscom Report for Monday May 31 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Inflation yet?
• But jobs are also important

Market Synopsis

Inflation or not? That is the question that Federal Reserve Chairman Greenspan must ponder each night leading up to the meetings on June 29/30. Various governors both voting members of the Federal Reserve as well as non-voting have spoken lately of the need for measured moves in the interest rate as if to restrain the apparent conviction of economists that a quarter point rise in June is an absolute certainty. Indeed the treasuries have already priced in a quarter point increase, but now we have a sense that maybe the Fed is attempting to backtrack.

Greenspan is receiving mixed signals with regards to the strengthening economy. While GDP is solid at 4.4% for the first quarter, consumer sentiment and spending has eased since the year began. And this occurred while job growth was particularly robust in the months of March and April. Now on Friday this week, we have the May monthly employment report and there is great anticipation riding on this report much the same as there’s been for each one in the past year – a normal reaction when job losses have been in the thousands. The May employment report will be one of the last significant pieces of economic data that will affect the decision to made later in June. If there are greater than 250K jobs created, there stands a good chance that an interest rate hike will result, however if the jobs report reveals that far fewer than 200K new jobs were created, a rate hike is substantially less likely.

The interest rate hike discussed will only take the overnight rate on Fed funds from a lowly 1.0% to 1.25%, which in real terms only serves to emphasize just how low the interest rates are in 2004. The much larger issue is that by raising interest rates, the Fed signals the end of the line to a stable rate and the beginning of a rising interest rate cycle. We’ve already seen some of the far-reaching effects of a rising interest rate for as the belief gathered momentum and treasuries dropped in price, the carry trade began to unwind and dollars were bought strengthening the currency. The carry trade occurs when investors borrow US dollars at the low rates available and use the funds to invest in higher risk markets and investments in emerging markets. Since the beginning of the year, assuming we take the Templeton Emerging Markets fund as a proxy for the group, the loss was 16% whereas the loss on the Dow Jones for the same period measures 2.5% and the loss on the Nasdaq Composite is less than 1%. Meanwhile during that same period the dollar index gained 2.5%. Thus one of the first casualties of a rising interest rate cycle in the US is the decline in the price of investments in emerging markets. Moreover, the funds now back in the US could conceivably be deployed in US equities causing a new leg higher for the indexes, however without news of rapidly expanding profits, there will be reluctance to use this money for that purpose.

With regards to the charts, we are approaching some critical points where we believe there to be enough resistance to prevent further upward movements and in fact, we feel that another leg downward is quite probable. There are a couple of charts suggesting otherwise however and these are the Nasdaq-100, which managed to remain above its March low even while the Nasdaq Composite was breaching this level. And second is the Dow Transports, which until now has not confirmed the move on the Dow Industrials earlier this month when it too breached its March low. Stochastics are rapidly becoming overbought and this indicator too is registering its need to readjust. Data to be released this week such as the Purchasing Managers index on Monday will set the tone for the week but all eyes will be watching for the jobs figures on Friday and it is Friday’s action, which will dictate how the week ends.

New Buy Recommendations:

Capital Environmental (CERI #) – this is a waste management company that has a terrific chart that appears to be on the verge of a breakout. Their latest quarterly report indicated that revenues had doubled y-o-y though this was due to purchases of assets more than organic growth. One other characteristic worth mentioning is the tremendous amount of insider purchases of this company’s stock over the past two months.

AES (AES) – the chart here is an almost textbook example of an inverted head and shoulders and with the push above $9.00 we consider the share to be now breaking out of its sideways movement that has been its home for the past six months.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

Consol Energy (CNX) – We believe that this share has resolved itself and is prepared to move toward higher ground now.

Transcanada (TRP) – This is another energy firm that we are paying close attention to given the weakness in all energy stocks.

Gold stocks – WHT received an unsolicited offer from Coeur d’Alene (CDE) and at the same time (coincidence? I think not!) GSS made an unsolicited offer for Iamgold (IAG). Normally this would not be very interesting except that WHT and IAG had prepared a merger that is due to be voted on, on June 8. GSS lost several cents Friday offering what many believe to be a reasonable price and indeed by settling at the top of its range, the gap may have been filled. Until this is sorted out, we would not recommend adding to these positions.

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
03/01/04	Consol Energy	CNX	27.50	30.85		B
04/08/04	Golden Star Res.	GSS #	6.88	4.97		H
05/24/04	Inco	N #	31.03	32.29		H
05/24/04	Jetblue Airways	JBLU	28.66	28.82		H
05/24/04	Pan Amer Silver	PAAS	12.78	13.49		H
03/08/04	Transcanada Corp	TRP #	21.34	20.00		H
11/03/03	Wheaton River	WHT #	2.36	2.91		H

Short sales

Date of Entry	Name	Symbol	Entry Price	Current Price	Stop	Action Rating
05/17/04	Citigroup	C	45.02	46.43		H
05/17/04	General Motors	GM	43.55	45.39		H

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price