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Stockscom Report for Sunday Aug 8 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Jobs growth virtually disappeared

Market Synopsis

The employment report and the price of oil were the predominant stories of the week with the former racking up an unimpressive 32,000 new jobs for the month of July while the latter was attaining new heights amid fears of supply squeezes due to Russia’s Prime Minister Putin overacting in the Yukos spotlight.

Here is some background to the monthly employment reports. There are two facets to the employment report: the first is the Establishment Survey, a survey of payroll records of approximately 160,000 businesses and government agencies comprising about 400,000 different work sites. The second measure is referred to as the Household Survey, a scientific sampling of approximately 60,000 households across the country, where through telephone interviews conducted, census bureau employees take the job pulse of the nation. Criticisms of both methods usually center around three notions. The first is the lack of accurate data surrounding the birth and death of businesses in the Establishment survey. The second is the impossibility of assuming that the entire American workforce could be measured by employing a survey sample of 60,000 households. And the third is the fallibility of the actual interview process involved in the Household survey.

Often the two surveys will suggest different conclusions if taken at face value. For example, the July results show an increase of 32,000 jobs and this number is derived from the Establishment survey, however if one were to analyze the data from the Household survey, one would be suitably surprised that seasonally adjusted employment in the non-agricultural civilian labor force increased by 599,000. Breaking down the numbers further, we find that of this number, the number of part-time workers increased 176,000 and the number of self-employed increased 175,000. Unfortunately the number of self-employed is historically (over the past 10 years) unreliable and truly quite erratic. And since Jan/02, there is an inexplicable sharp rise in the number of self-employed. We could reason that there is a certain group of unemployed who respond to interviewers with the answer self-employed when they cannot find full-time positions and are reduced to inconsistent work. Overall there is virtually no trend in self-employment barring a slight upward movement.

With regards to part-time employment, there are some trends worth noting. Those working part-time for economic reasons (slack work conditions or inability to find full-time work) reached a trough in July 2000. More importantly, if one graphs a 10-year period of this chart and compares it to a chart of the unemployment rate, the lines are virtually identical. Thus we can conclude that the number of part-time for economic reasons is directly related to the unemployment rate.

As for part-time workers who choose part-time but not for economic reasons, the trend is slowing moving higher. Strangely though, the past three months have seen a sudden increase in these (seasonally adjusted) numbers and again we might only guess the cause.

Overall, the record of job growth is no longer dominated by the stellar results seen in the first few months of the year and as the election campaign progresses, President Bush will be increasingly put on the defensive if mediocre job growth persists. Worse still for his chances at re-election is the fact that some of the trouble spots for job growth exist in swing states such as Ohio, Michigan and Pennsylvania.

Regarding oil, the Yukos situation had yet another twist late on Friday when the courts ruled that the Russian government could not take control of the main production subsidiary, Yuganskneftagas to pay a tax bill. Yukos represents about 2% of world oil production and 20% of Russia’s oil exports so the fight for Yukos has a material impact on global oil supplies and the fear of supply disruption is a very real and substantial threat.

Technically speaking

With the significant drop in indexes on Friday, Nasdaq’s chart probably sustained the worst damage with its drop below the lower channel boundary in which it was contained. This break sets up further potential for a decline testing the support near 1645. As for the S&P 500, the strongest support nearby would likely be reached at the 965 level – almost 100 points lower than its current price level.

New Buy Recommendations:

Pan American Silver (PAAS #). Though we were exited from this position recently, the jobs report gave a large boost to precious metals. This stock was well supported by the upward moving channel’s lower boundary and completed a Lindahl buy signal on the daily chart on Friday.

The Southern Company (SO). We have recommended holding SO at other times and once again we feel compelled to add it to our list. A sell-off in May led to price dropping to the $28 level however, it has since gathered strength and now with Lindahl buy signals on both the daily and weekly charts, it appears set to make a move.

New Short Sales

Alcoa (AA). With the general weakness in stocks and the deterioration of economic conditions, there are greater chances for slides in industrials such as Alcoa, which depend on a strengthening economy. Alcoa reached its peak in 2001 and with an eye to the monthly, the probability has increased substantially that the five-year head and shoulders pattern is to be resolved to the downside. On the weekly, the Lindahl sell signal from two weeks ago was confirmed with this week’s reversal and Friday’s close below $30 is a psychological break in support.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

Transcanada (TRP) – This energy firm is appearing much stronger and we would consider this as a possible add-to and this in spite of a current price below the original price of purchase.

Gold stocks – Our gold plays – GSS and WHT – have spent more time in the courtroom than in the field recently. We put a new stop on WHT due to the weakness in gold prices but we hold off on GSS because of the on-going deal with IAG. GSS has now been permitted to access financial data from IAG and consequently their due diligence will now go forward with a date limit of August 15. While IAG is hopeful of additional suitors, none have come forward as yet.

Citigroup (C) – Citigroup finished Friday with a Lindahl sell signal on the weekly and with that we suggest selling additional shares however there is one caveat and that is the fact that Citigroup was one of the companies named as being threatened by terrorist action and as such if one added to shorts at the open, one would be inviting the risk of selling into a pit.

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
06/28/04	Accenture	ACN	27.41	24.36		H
06/28/04	ATI Technologies	ATYT #	18.79	14.40	13.99	H
06/01/04	Capital Env’t Res (1)	CERI #	4.98	4.60		H
04/08/04	Golden Star Res.	GSS #	6.88	3.84		H
06/28/04	Microsoft	MSFT	28.60	27.14		H
03/08/04	Transcanada Corp	TRP #	21.34	20.22	19.00	H

Short sales

Date of Entry	Name	Symbol	Entry Price	Current Price	Stop	Action Rating
05/17/04	Citigroup	C	45.02	43.19		S+
05/17/04	General Motors	GM	43.55	41.49	45.00	S

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

(1) Was renamed Waste Services Inc and now uses the symbol WSII