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Stockscom Report for Sunday Sept 19 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Higher interest rates on the horizon
• Rising economic problems

Market Synopsis

Hurricanes Charley, Frances and Ivan have provided us with a grand example of the economic destruction inherent in natural disasters. Initial cost estimates put the combined value of insured losses at some $14 to 20 billion while uninsured losses are estimated at $30 billion for Florida alone. The resultant increase in GDP could represent something in the neighborhood of 0.25%, and while some analysts view this rebuilding phase as a benefit to the economy, the reality is that this couldn’t be further from the truth.

A natural disaster such as a hurricane starts costing the economy even before its arrival. As a hurricane approaches, people along the projected path of the hurricane as well as those on the periphery will begin preparations, which may include boarding up windows to prevent broken glass and digging trenches or sandbagging to prevent flooding. Immediately these steps have cost the economy through the purchase of materials that are arguably not adding to the capital stock or improving the home as an investment while putting demand pressure on available supplies thus potentially administering upward pressure on inflation as scarcity of supply induces higher prices. Additionally, the time spent by the people preparing for a hurricane often translates into fewer hours of productive work as they have rightfully decided to remain at home preparing.

Once the storm reaches shore, the destructive power of wind and water is unleashed causing the billions of dollars in damage. This unusual series of three hurricanes is already estimated to have cost $14 –20 billion yet this counts only insured losses. In Florida, flooding not winds caused much of the damage and many homeowners don’t have flood insurance anymore due to costs being prohibitively high. Even those that do will find that it’s difficult to collect meaning that much of the losses incurred will be out of pocket or from disaster relief funds.

Add to this damage the concomitant loss of business in the retail sector as customers resort to buying essentials for recovery and repair, the lost productive time as employees stay home, and the time and effort involved in making available basic necessities of life such as food and water. And this doesn’t include the round the clock efforts to reconnect broken communication lines and breaks in the power grid, the cleanup of debris left over from the storms nor does it speak of the scarcity of supplies causing widespread price inflation.

All these examples have involved the homes and properties of individuals but the same can be said of businesses. And it is worth mentioning here that the construction business in particular was already booming in Florida before the arrival of these storms.

Finally when calculating the true economic costs, one should take into account the alternative use of resources or the opportunity cost and the future costs not yet known. In the case of the former, money that was spent on rebuilding could have been deployed as investment. Even if that money resided in savings accounts, there is the loss of interest income, which had represented an alternative use. As for the latter, the principle future cost would be inflation in certain commodities. Lumber is an excellent example as demonstrated by an academic study in 2000, which showed that 1989’s Hurricane Hugo caused prices of timber in South Carolina to increase 10 – 30% over the long term.

Technically speaking

Markets have rebounded from their August lows to post new rally highs in the past few sessions. The SP finished Friday with a new high for September but both the DJ and the Nasdaq remain below their respective highs for the month. The notable formation is the current top in the broader markets (DJ and SP), which corresponds to the upper boundary of the downward moving channel and it is this formation that has piqued our attention. Presuming the channel to be in control we would expect that some easing in prices should occur as September draws to a close. The Nasdaq is far below its corresponding channel line and could rally much further before being challenged by similar pressures.

All three indexes have overbought stochastics and this requires some resolution before a climb can resume. The economic data of late has not been supportive of a continuation of the rally but it’s helpful to remember that stocks have a habit of correctly predicting the future growth prospects of companies.

New Buy Recommendations:

ULCM – Ulticom is a wireless communications company that has broken out from a 17-month consolidation period and is now rising forcefully.

WITS – similarly this security software company, Witness Systems, has begun a new leg higher after a 7 months of trading within the price range of $10-14.

VPI – Vintage Petroleum, an independent oil producer, has steadily risen in 2004 and we believe that pressure on oil prices will sustain all oil producers for the rest of this year at a minimum.

WBSN – companies are limiting their investments in software to those that they can derive an immediate benefit and Websense answers this call. The software controls and limits internet access within a corporation in order to guard against both wasted time and as a corporate responsibility to prevent accessing websites that would not be in the interests of the company. Price has steadily climbed this year and shows no sign of weakening.

WCC – Wesco Int’l is an electrical supplier has seen its share price steadily climb on the back of excellent corporate results through 2004.

AIRT – Air T is a freight delivery service operating on the east coast of N America. Profits are rising and have sent the share price soaring since June. Friday’s trade signaled a new move higher was beginning.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

Transcanada (TRP) and Southern Company (SO) – These energy firms are high yielding stocks, which have experienced very good capital gains of late. Though marked as add-to’s, these should only be added to on price weakness

GSS – Gold stocks should benefit from a renewed look at shorting the US dollar as encouraged by the Fed President Yellen. With inflation as measured by the PPI effectively non-existent, the dollar advances will be contained and a favorable environment for precious metal stocks should take its place.

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	26.68		H
08/23/04	AES	AES	10.23	10.37		H
04/08/04	Golden Star Res.	GSS #	6.88	4.44		H
06/28/04	Microsoft	MSFT	28.60	27.51		H
08/09/04	Pan Amer Silver	PAAS #	13.40	14.35		H
08/09/04	Southern Co.	SO	29.83	30.43		B
08/16/04	Suncor	SU #	28.50	29.26		H
03/08/04	Transcanada Corp	TRP #	21.34	21.55	19.00	B

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price