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Stockscom Report for Sunday Oct 17 2004
Publisher: Colin Alexander Editor: Ken Wilson
Subscriptions and Administration: Pierre Fichaud (toll-free: 866-487-9711)
Market Synopsis
The surging price of oil is the final nail in the coffin of a weakening economic position. Assuming an oil price north of $50 per barrel for the rest of the year, there is little doubt that a recession would be triggered as consumers, whose two-thirds weighting on the nation’s economy, pullback spending in order to fill their minivan and SUV gas tanks and heat their homes.
Already that trend has begun with the first seven months of the year producing a 2.8% annual rise in consumer spending, which may sound sufficient, but compares unfavorably with the 3.3% rise in 2003 and the 3.1% rise in 2002. Perhaps more importantly, the portion of consumer durables has dropped from 30.5% in 2003 and 27.2% in 2002 to just 11.2% so far in 2004 on an annual basis. These numbers are significant for consumer durables are often big-ticket items demonstrating among other things a presumed ability to pay and a certain level of consumer confidence. However with the latest statistics, we could conclude that either there isn’t an ability to pay or consumers lack confidence in their economic future or some combination of both.
The decline in consumer spending might actually be the early warning sign of consumer debt problems, which would only exacerbate an already troubling situation. By the end of 2003, consumer short-term debt measured $1.98 trillion and this doesn’t include mortgage debt. On average every American adult holds eight credit cards and every household has accumulated more than $8,000 in unpaid balances on these cards. Equally disturbing is the amount of living expenses that is increasingly finding itself being charged. The credit card companies’ strategic efforts to increase business by encouraging payment for everyday items such as groceries have been hugely successful. Visa has reported that consumers charged $50.6 billion of household expenses in 2003, an increase of 27% over similar figures for 2002. These expenses include telephone bills, cable, insurance and even mortgage expenses. How many of their clients have the necessary self-discipline and the financial means to pay off these debts monthly remains unfortunately, unknown except to the companies in question.
With reduced spending in America, the global house of cards begins to tumble. Outside of the US, there has been little internal demand growth and especially lacking are the expected two other engines of economic growth, Europe and Japan. Since the last recession in 2000-2001, the American consumer has teamed up with the Asian producer (usually Chinese) to shoulder the burden of global demand and growth. This unhealthy balance whereby the Chinese produce and the Americans consume has created this enormous trade deficit whose downside is limited by the Chinese currency being pegged to the dollar. Normally a trade deficit of such enormity would be resolved by the currency of the deficit holder, deflating with respect to the other. However in this case, the normal rules of economics have been aborted as the Chinese, through government decree continued to peg their currency to the dollar and purchase US treasuries to mop up the excess dollars.
In fact for all the talk of a devaluation of the US dollar, the facts speak for themselves. The lower US dollar vis-à-vis the yen and euro has done little to rebalance the trade deficit. From its height in early 2002, the dollar index has dropped around 26% and in that same timeframe, exports on a monthly basis have risen 23% while the equivalent imports have risen 39%. By any calculation, this devaluation endorsed by the Bush administration has been an abject failure because it didn’t address the root cause of the problem, the Chinese currency peg.
The threat posed by this situation is that with a significant drop in consumer spending in the US, a drop in economic activity will be triggered in China, an economy which is perilously overheated now. Chinese inflation at the consumer level has reached the important 5% level, savings rates have declined from 20.5% in January to the current rate of 15.3%, and bad investment is rampant from building more excess industrial capacity to creating a bubble in housing: $36 billion was invested in housing for the first six months of 2004 versus $25 billion for the same period last year. If China were to suffer a hard landing, the collapse in commodity prices though temporary, would cause considerable pain, globally. Perhaps even worse, without the consequent need to buy US treasuries by the Chinese central bank, funding the US budget deficit would become costlier with higher interest rates required to find buyers for the treasuries. Higher interest rates would prick the housing bubble and adversely affect those carrying credit card balances and those with adjustable rate mortgages resulting in a much slower economy, probably recession.
The short-term direction remains pressured by the uncertainty of the election and the price of oil. Near term there is unlikely to be any thrust higher for equities unless a bullish change occurs for one of these two factors. While the bear cycle continues for the DJ and SP, the ND has stalled for the moment but given the investor sentiment, there is little chance for a rebound here either. Corporate results will dictate individual stock movements with those beating expectations more able to weather the uncertainty while those missing expectations will be prone to a severe thrashing.
New Buy Recommendations:
None.
New Short Sales
None.
Stock Positions to Sell/Exit:
None.
Portfolio Comments:
GSS – Gold stocks should benefit from a renewed look at shorting the US dollar as encouraged by the Fed President Yellen. As the price of gold rises, small cap producers with low current profit margins such as cash-rich GSS benefit as profit potential grows exponentially.
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 |
24.15 |
|
SOLD |
|
08/23/04 |
AES |
AES |
10.23 |
11.08 |
9.50 |
H |
|
09/20/04 |
Air T Inc |
AIRT |
15.48 |
29.31 |
|
B |
|
10/04/04 |
Amedisys |
AMED |
32.00 |
29.33 |
|
H |
|
04/08/04 |
Golden Star Res. |
GSS # |
6.88 |
5.20 |
|
H |
|
10/04/04 |
Hurco Companies |
HURC |
15.23 |
15.58 |
|
H |
|
06/28/04 |
Microsoft |
MSFT |
28.60 |
27.99 |
|
H |
|
10/04/04 |
Palomar Medical |
PMTI |
25.88 |
23.09 |
|
H |
|
08/09/04 |
Pan Amer Silver |
PAAS # |
13.40 |
16.43 |
|
B+ |
|
09/27/04 |
Petro-Canada |
PCZ # |
50.90 |
53.50 |
|
B |
|
08/16/04 |
Suncor |
SU # |
28.50 |
33.33 |
|
B |
|
03/08/04 |
Transcanada Corp |
TRP # |
21.34 |
22.25 |
19.00 |
B |
|
09/20/04 |
Ulticom |
ULCM |
13.24 |
15.56 |
|
B |
|
09/20/04 |
Vintage Petroleum |
VPI |
18.44 |
20.41 |
|
B |
|
09/20/04 |
Wesco Int’l |
WCC |
22.73 |
21.00 |
21.00 |
SOLD |
|
09/20/04 |
Witness Systems |
WITS |
16.42 |
16.65 |
|
B |
New stops in BOLD
* Stop on a closing basis
** Buy if above entry price