Stockscom Report for Sunday June 6 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Job recovery continues
• Interest rate rise on the horizon

Market Synopsis

On Friday, the May employment report was released and analysts were pleased to find that there was a robust gain of 248K new jobs spread across all facets of the economy and comprising both service and manufacturing(!) sectors. In an added boost to the job recovery angle, both March and April’s job growth totals were revised higher as an additional 74K positions were accounted for. But tempering everyone’s enthusiasm was the fact that the participation rate remained stubbornly low at 65.9% and the workweek was only steady at 33.8 hours. The latter two numbers only serve to remind us of the slack in employment data, which contributes to lower inflationary expectations. Still the data couldn’t have come at a better time as the Bush Administration struggles to prove that the course it’s chosen to sail is the right one amid the on-going election campaign.

With better than expected numbers in this report, it becomes a near certainty that the Federal Reserve will choose to raise rates on June 29 thus ending an unusually long period of abnormally low interest rates. Current predictions assume a quarter point rise in the overnight rate bringing the rate to 1.25%. Regardless of the increase, real interest rates will remain negative as inflation exceeds the rate and continue to encourage overloaded borrowers to assume even more debt. With household debt equal to 85% of GDP, a level never before seen, the consumer’s ability to service their debt becomes widely suspect. Worse still is that in the rush to refinance mortgages, consumers have increasingly opted for the ARM. Last month the proportion of ARM mortgages reached a full 50%, which contrasts sharply with the period of 2001-mid 2003 where the proportion was around 20%. Thus consumers have become enamored with adjustable rates just in time to experience first-hand a shift in central bank policy to that of rising interest rates. Timing is everything.

To add insult to injury, rising interest rates will likely spurn potential homebuyers. As the number of buyers dwindles, the pressure on house prices will ease and if values drop substantially, the incentive to walk away from a home whose value is exceeded only by its mortgage, becomes greater.

With the May employment report finally released, we unexpectedly watched as the US dollar spiked then fell back quite heavily on Friday. Conversely, the price of gold rose and completed a strong outside day as did the euro currency silencing those who considered a glowing job report would benefit the dollar and send gold far lower.

Markets, we had thought, were preparing themselves for an intense trading day on Friday in anticipation of job news and indeed during the days leading up to this day, volumes had been mediocre at best, but on Friday volumes were shockingly low as the markets gave the news, a big collective yawn. This nervousness or disinterest is puzzling but for all the indicators and formulae in the market, the number one indication in good times and bad, is simply price. And looking at price, we recognize a downward trend in the market leader, Nasdaq. This week, price range came very close to touching the upper boundary of the trendline and if this line were to remain unbroken, resistance is strengthened along it. Perhaps more telling is the Philadelphia Semiconductor index which continues to lead the way on the downside and this, despite the favorable news from Intel this week with regards to their future earnings forecast.

New Buy Recommendations:

None.

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 – The outlook for our gold stocks continues to be muddled. Monday morning GSS were granted a hearing for a judgment on whether their offer to purchase IAG may go forward. The merger date between IAG and WHT was slated to be Tuesday and this may now be delayed. Moreover on the weekend, the Ontario Teachers Pension Plan came out in favor of Coeur d’Alene in its battle to takeover WHT. Interestingly the OTPP has positions in all four of the players involved in this strange battle.

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
06/01/04	AES	AES	9.24	9.27		B+
06/01/04	Capital Env’t Res	CERI #	4.98	5.19		B+
03/01/04	Consol Energy	CNX	27.50	30.68		B
04/08/04	Golden Star Res.	GSS #	6.88	4.82		H
05/24/04	Inco	N #	31.03	32.51		H
05/24/04	Jetblue Airways	JBLU	28.66	28.12		H
05/24/04	Pan Amer Silver	PAAS	12.78	13.26		H
03/08/04	Transcanada Corp	TRP #	21.34	19.84		H
11/03/03	Wheaton River	WHT #	2.36	2.99		B

Short sales

Date of Entry	Name	Symbol	Entry Price	Current Price	Stop	Action Rating
05/17/04	Citigroup	C	45.02	46.55		H
05/17/04	General Motors	GM	43.55	46.22		H

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price