Click here to go to the Stockscom website

Stockscom Report for Sunday Dec 12 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Shifting economic balance
• US dollar bouncing

Market Synopsis

The December employment report released a week ago sent a strong signal that all is not copacetic and that the economy continues to exhibit certain weaknesses, which are not common at this stage of a recovery. The unexpectedly low number of jobs created puts into doubt once again the sustainability of an economic recovery at a time when the Federal Reserve is actively pursuing a process to normalize interest rates. Tuesday this week, the FOMC meets for the last time in 2004 and decides whether another interest rate hike is warranted. Given that PPI (producer prices) were up 0.5% as reported Friday, the probability that the Fed stays the course went up appreciably so we expect that they will raise the overnight rate by another quarter percent.

Despite the apprehensions of a weakening economy from many analysts, the Fed is determined to push up interest rates and rid itself of the accusations from many corners that its extremely low interest rate policy has been instrumental in creating asset bubbles especially in housing real estate. Moreover, in an indirect way, the Fed is telling other governments, namely in Asia and Europe, that the period of heavy lifting by the American consumer in a global economy is ending. For far too long, these export-oriented economies have depended on an American consumer to purchase their goods but as interest rates increase, the likelihood of further support from a heavily indebted consumer is lower.

It is altogether too ironic that many of the same foreign governments have complained publicly that the US should get its house in order and reduce its current account deficit. Meanwhile these same governments have benefited enormously from a consumption-mad American consumer instead of boosting domestic demand. In Asia, countries such as Japan, have high savings rates and attempts to increase domestic consumer spending have often been met by failure. In Europe, badly needed structural changes to the economy are implemented at a snail’s pace if at all, effectively depriving companies of much-needed labor flexibility and reducing the economy’s dynamism or its ability to respond to changes in the environment.

Therefore the symbiotic relationship between the US and other countries is changing. Whereas before the enormous appetite of the American consumer would result in large quantities of imported goods and the dollars generated from these sales recycled back into treasuries, thus keeping a bid on the interest rate instruments, the future could see a decreasing amount of imports and less consequent support for long term rates.

Technically Speaking

The US dollar received some overdue support this past week and while a bounce is expected, the measure of the bounce is questionable. Given the slide in the dollar’s value over the past two months, we would expect there to be a significant rally perhaps lasting until the final week of December as dollar bulls rush to take advantage of this turn. Companies may be also having an effect as American multinational corporations repatriate profits from abroad in order to take advantage of the one-time opportunity where tax on repatriated income falls from 35% to just 5.25% until December 31.

Equities have been consolidating gains made since August these past couple of weeks and there are mixed signals to end the week. Both the ND and the SP ended last week with more upside momentum building on Thursday’s large outside reversals but the DJ has the appearance of a developing head and shoulders pattern which suggests that any bullish ideas be restrained by a certain amount of caution at least until this situation is resolved either with new highs on the ND or SP or a break in this development on the DJ.

Finally, precious metals haven’t resembled anything near precious in the past week as recent bullish runs came to abrupt ends especially in gold and silver. We put new stops on our trades in order to prevent profits from becoming losses or in the case of gold, to prevent too large a loss. We would expect a bounce at these levels but there are some reasons to believe that gold equities won’t be rising much further at this point. The key is that the recent surge in the price of the metal was not matched by a surge in the gold shares index. What’s more is the presence now of an ominous double top in the gold shares index, which could presage a drop in the value of gold and gold shares. Though this hardly fits the generally accepted notion of a continuing bull market in gold, it does fit the notion of a contrarian investor with gold now attracting more attention since the start of the Gold ETF a few weeks back.

New Buy Recommendations:

Electronic Arts (ERTS) – We add this to our list of recommended shares as price is making a forceful break from its range for the past fourteen months. As usual, breakout patterns such as this signify much greater gains as the stock recommences an upward climb and given that the previous climb was approximately 100% over nine months, we feel the risk return ratio as well as the timing is quite good.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

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
08/23/04	AES	AES	10.23	12.32	9.50	B
11/08/04	Cryptologic	CRYP #	18.58	22.00		B
11/19/04	Essex Corp	KEYW	17.69	17.25		H
11/08/04	F5 Networks	FFIV	42.38	46.92		B+
11/08/04	Ipsco	IPS #	31.69	36.94		B
11/08/04	MFRI Inc	MFRI	7.41	6.92		H
08/09/04	Pan Amer Silver	PAAS #	13.40	15.84	15.00	H
09/27/04	Petro-Canada	PCZ #	50.90	50.45		H
11/05/04	Placer Dome	PDG #	22.12	18.87	18.00	H
11/08/04	Potash Corp	POT #	73.85	76.40		B
08/16/04	Suncor	SU #	28.50	31.70		H
03/08/04	Transcanada Corp	TRP #	21.34	23.51	19.00	B
09/20/04	Ulticom	ULCM	13.24	17.70	14.95	B
09/20/04	Vintage Petroleum	VPI	18.44	21.98		B

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price