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Stockscom Report for Sunday Jan 2 2005

Publisher: Colin Alexander Editor: Ken Wilson

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

• US dollar bounce ended
• Equities re-ignited to end the year

Market Synopsis

We’ve been discussing the US dollar movement in many of the missives of late and tonight shall be no exception. In the past four weeks, we watched as the euro currency carved out a pennant pattern perched on a strong upward tilting trendline. Then on Dec 23, a breakout occurred which signaled a new buy for the euro and conversely a sell on the US dollar. As overnight trading has begun, a test has occurred on the dollar/euro at the 1.34 level and we would presume at this point that it has been successfully defended.

This is very important for stock traders since one of the key stories in financial markets in 2004 was the falling dollar. At this point, most support levels for the dollar (with respect to the dollar index) have been broken and few remain. As traders we need to be concerned with its drop in value for it unfortunately draws from our capital gains and we must always contend with and presume a certain loss associated to its loss of value. As an example, a simple trade that could have been made at the beginning of 2004 was to exchange all our dollars into euros and we would have consequently profited by about 9.5% - 7.5% on the currency exchange and 2% in interest - and this is without trading anything else all year. As a quick comparison, the S&P 500 index rose 9% this past year which means that in euro terms, it lost approximately 0.5%.

The much-maligned dollar has lost many fans in 2004 especially those central banks that have publicly declared their propensity to own either gold or shift their foreign reserves to weightings that properly reflect their own trading of goods and services. Chief among these were the central banks of India, China, and Russia. Also notable, the Bundesbank, the central bank of Germany, decided recently that it would refrain from selling its annual allotment of gold as per the five-year agreement for gold sales. The obvious implication of this action is that it perceives either greater upside potential or, at the least, little downside risk to the value of gold in 2005.

Perhaps the most glaring example of the loss of confidence in dollars is its rejection by those who have historically adored it – organized crime, drug dealers and various dictatorial regimes found around the world. According to James Grant, editor of the Grant’s Interest Rate Observer, 55 – 70% of the $703 billion in US currency in circulation finds a home outside of the USA. In Russia, since the beginning of 2002, currency exchanges with the dollar have fallen from 94.1% of the transactions to 84% in August 2004. Moreover, with the euro being printed in 200 and 500 euro notes, a smaller volume of bills is needed to carry the same amount of money.

What this all means for the dollar is that it is losing favor among parties that have heretofore considered no other currency for its transactions. As growth in transactions involving euros increase, the loss of value in the dollar threatens to become entrenched, which only exacerbates its weakness.

Technically Speaking

Despite the past week’s lower prices on the DJ, both the ND and the SP were steady to strong and provide some assurance that the first week of the year should see a continuation of the bullish trend. January is normally a safe month for the stock market bulls and currently the charts support that hypothesis. Once into February, the equities market can become a little more foggy and we are prepared to be quite vigilant though to be sure, those stocks found on our recommended list tend to be there not simply out of consideration for chart technicals but also for fundamental profit reasons.

At a minimum, we would expect the DJ to surpass the 11K level and ND to test the next former peak of 2328 reached last in 2001. Beyond these levels, it would depend more on the general economic state. Indications of late show a slowing stream of durable goods orders if the volatile aircraft portion is discarded, but a steady stream of new jobs are being created. Therefore one of these elements is due for a change very soon.

New Buy Recommendations:

Immunogen (IMGN) – This small biotech firm signed a deal with JNJ a few days ago granting JNJ a license to its technology aimed at cancer treatment. While the upfront fee is small, there is potential for much in royalties when the technology is used to develop new cancer treatments. Technically, this chart pattern is quite attractive with a double bottom on the weekly in ’02 and ’03, a retracement bottoming this past summer, and now a surge to match the previous high in ’04.

Mikron Infrared (MIKR) – The chart for this maker of infrared measurement devices and thermal imaging systems is quite extraordinary for the past few sessions but with sales increasing rapidly and net income tripling (in the latest quarter) from a year ago, there is likely to be substantial upside movement in the months to come.

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	13.67	9.50	B
12/20/04	Avaya	AV	17.73	17.20		H
11/08/04	Cryptologic	CRYP #	18.58	24.95		B+
12/13/04	Electronic Arts	ERTS	55.77	61.68		B
11/19/04	Essex Corp	KEYW	17.69	20.25		B
11/08/04	F5 Networks	FFIV	42.38	48.72		B
11/08/04	Ipsco	IPS #	31.69	47.80		B+
11/08/04	MFRI Inc	MFRI	7.41	11.10		B+
08/09/04	Pan Amer Silver	PAAS #	13.40	15.98	15.00	H
09/27/04	Petro-Canada	PCZ #	50.90	51.02		H
11/05/04	Placer Dome	PDG #	22.12	18.86	18.00	H
11/08/04	Potash Corp	POT #	73.85	83.06		B
08/16/04	Suncor	SU #	28.50	35.40		B
03/08/04	Transcanada Corp	TRP #	21.34	24.87	22.00	B+
09/20/04	Vintage Petroleum	VPI	18.44	22.69		B

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price