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Stockscom Report for Monday Jan 23 2005

Publisher: Colin Alexander Editor: Ken Wilson

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

• Bond traders trying to tell us something?
• Elections in Iraq et al keep equities under pressure

Market Synopsis

Since reaching a peak in early December, the 10-yr bond yield has steadily dropped from 4.42% to the current 4.14%, which under the normal circumstances of a temporarily slowing economy might seem acceptable. But this challenging environment seems hardly conducive to such behavior. Investors look to the Federal Reserve for guidance and what is immediately apparent is the Fed has embarked on a long-awaited program to normalize negative real interest rates amending them from a nominal 1% to the now current 2.25%, which incidentally is still approximately 1% below the latest headline inflation rate. Certainly the Federal Reserve is limited in its ability to force change at the long end of the yield curve and must satisfy its monetary policy needs with actions at the short end, namely the overnight rates charged to banks. In the last FOMC gathering though, the meeting’s minutes portrayed a Fed that had developed a collective fear of increasingly higher interest rates spurred on by rapid economic expansion. Nonetheless by dropping long-term yields from 4.42 to 4.14%, the market has responded with a collective yawn.

So we are left to ponder what is causing this dichotomy of views. Contrary to the opinion expressed by economic data that is generally positive and a Fed evidently wracked by fears of inflation, the yields on these bonds continue to descend. There are a few possibilities to look at as reasons for this price action. Primarily, one must consider the possibility that the old adage of bond money being smarter than money invested in equities is attempting to signal a shift in the economy. Perhaps the economy is slowing down faster than first thought and this downshift is considerably deeper. Another possibility is connected to the recent resurgence in the dollar where foreign investors have opted to buy dollars in anticipation of a rebound, they are naturally inclined to store them in an easily convertible unit.

Technically Speaking

The elections in Iraq are now only one week away and we can expect increasing violence and most probably further disruptions to oil production in the days ahead. The proximity of the approaching elections has corresponded closely to the upheaval seen in the equities markets. Since the outside down days on January 3, markets have been embroiled in a battle between bulls and bears with the bears having the upper hand up until now. Thursday’s gap lower on both the Nasdaq and the S&P 500 was most telling and despite the oversold nature of equities, there is a strong probability of further losses in what could be the beginning of the second leg down. But the election next Sunday could represent a turning point in equities – a bottom in this downward leg.

One factor that will be working against a strong rebound in equities is the expectations of compressed earnings in the current fiscal year. For many corporations, the easy comparisons have already been made, the weak dollar translations have accrued to the bottom line and their cost structures are no longer being reduced as substantially as they were in the past. Therefore their stock prices begin to look more expensive to investors relying on stock fundamentals and competent money managers will be keen to cash in profits.

New Buy Recommendations:

Given the inherent weakness in equities, we feel that any new positions should be made carefully and conservatively meaning reduced initial positions that are added to gradually.

Checkfree Corp. (CKFR) – Checkfree offers companies the opportunity for online bill payment and as their growth attests to, this company is hitting its stride in moving customers to their operations. The stock gapped higher on Friday on increasing volume, which means that an initial position might be difficult to get at a good entry price. They released quarterly results on Thursday after markets had closed causing the jump on Friday.

Cleveland-Cliffs (CLF) – This company mainly produces iron ore pellets, which are used in steel making and there is a combination of factors that makes this company an attractive buy. First, with steel production unable to keep up with demand especially from China, there is an ever-greater need for iron ore. Second this company has just purchased an Australian iron ore miner with long term contracts to supply Japan and China with iron ore. Third there is the likelihood of strong price increases in iron ore as demand pushes higher.

Cryptologic (CRYP #) – We are reinstating CRYP as a buy recommendation. The floor price of $22 appears to be quite solid and it has withstood the downdraft of the general markets.

Encana (ECA #) – The largest independent fully integrated oil and gas company is seeing its stock price turn strongly higher and it would be a good idea to hold some energy in the portfolio at a minimum. The recent drop to $52 was well supported and it has stepped higher in the past few weeks with the gap on January 12 holding quite firm.

Trident Microsystems (TRID) – This producer of integrated circuits used in LCD screens is likely to see a healthy increase in business as production and sales of these screens ramp up in 2005. Again there was a gap higher on Friday, which may impede getting a good entry price and this was due to the release of their quarterly results and guidance for the future quarters.

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
01/10/05	Immucor	BLUD	26.59	27.92		B+
01/03/05	Immunogen	IMGN	8.96	7.70	7.70	SOLD
01/10/05	Keryx Biopharm	KERX	15.09	15.15		H
03/08/04	Transcanada Corp	TRP #	21.34	24.67	23.25	B+

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price