Click here to go to the Stockscom website

Stockscom Report for Sunday Feb 6 2005

Publisher: Colin Alexander Editor: Ken Wilson

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

• Recession possible in 2005?

Market Synopsis

Is there a recession around the corner? After yields on the 30-year bond reached a peak as late as June 2004 just north of 5.50% and rebounded near the end of the year to touch above 5.00% in early December, the prevailing direction has been unequivocally south culminating with Friday’s action when the yield reached 4.48%. During this same time, starting with the meeting in the final days of June, the Federal Reserve began its effort to neutralize real interest rates that were below the actual rate of inflation. The climb in rates from 1.0% to the latest increase of a quarter point brought the overnight lending rate to 2.50%. Thus the borrowing yields have narrowed quite substantially from around 4.50 to the current 1.98% - a drop of 56% (and there is no evidence or reason to believe that these yields will not narrow further).

Undoubtedly, the narrowing of yields has the Federal Reserve’s keen attention for a crossover of yields where short-term yields rise above long-term yields, usually is followed by a recession and though we haven’t arrived at that point yet, chart indications are forecasting this as a strong possibility. Moreover futures contracts are pricing in additional quarter point rises in the overnight rate for each of the next three FOMC meetings up to June/05 which would leave the rate at 3.25% a scant 41 basis points below the current yield on 5-year treasuries.

The cause of Friday’s drop in the 30-year yield was naturally the January employment report whose numbers came up short at 146K compared to the consensus expectations of 200K new jobs. Revisions were also made to reports of November and December’s employment and in both cases, the revised numbers were lower than first reported. Equity analysts are convinced that this will be instrumental in preventing the Fed from increasing interest rates at an even faster clip as they’ve suggested in their statement on monetary policy released after the meeting. So while expectations are for continued quarter point rate increases from now until the summer, there is only a 50% chance priced into futures contracts that a further quarter point rise will occur at the FOMC meeting in August.

Notwithstanding the squeeze in yields, there is no strong indication that a recession is close at hand. Using various economic measures such as GDP, ISM surveys, industrial production or consumer sentiment, none is so negative as to suggest an imminent recession. However there are signs that growth in the economy could slow down in 2005 with the lack of economic stimuli such as tax cuts, soaring house prices or a wave of mortgage refinancings coupled with a savings-short US consumer in need of some belt-tightening, there is a strong potential for GDP to be even lower than the 3.1% erroneously reported for the 4^th quarter of 2004.

Technically Speaking

The markets have bifurcated into two halves – one the tech sector and the other being the rest of the market. Glancing at all indexes, one quickly surmises that the rebound in the tech sector has been uncharacteristically weak when compared to other indexes such as large caps of the DJ or the SP500 or even an index such as the SP Midcap. While the other indexes appear to have regained their strength and are making solid attempts at re-asserting themselves, the ND remains mired in a relative hole not even demonstrating enough strength to lift itself above the January 18 highs.

Essentially, we have markets that are rewarding stocks that have handily beaten earnings estimates and hammering those that dare to slow down. On the ND, the rally beginning in late 2004 served to raise many prices to extremely high P/E levels that were clearly unsustainable. Now the piper is to be paid and for that the ND has virtually no chance of matching the rebounds made thus far on some of the other markets. But that isn’t to say that we should avoid being long ND stocks however it does mean that we must carefully determine whether the risk reward profile of any particular stock is worthy of our attention.

New Buy Recommendations:

Applix Inc (APLX) – This company, developing and selling software for business performance management, saw its stock price gap much higher on Friday morning after it reported a complete reversal of fortune from a 21 cents a share loss in the year earlier to the current 20 cent a share profit. Despite the large gap, this low-priced stock has much room to move higher and the chart is suggesting strongly that this is only the first step in a larger move.

Ascential Software Corp. (ASCL) – The second pick is another software company, this one is aimed at integrating data across the enterprise and was formerly known as Informix. Similar to Applix, its earnings were the reason for the very bullish gap on the charts. Percentage-wise the jump on Friday was not as strong as Applix however the large volume move is indicative of an imminent step higher.

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
01/31/05	Air T Inc	AIRT	17.63	17.62		H
01/24/05	Checkfree Corp	CKFR	38.43	40.05		B+
01/24/05	Cleveland-Cliffs	CLF	60.41	66.46		B+
01/24/05	Cryptologic	CRYP #	23.67	25.82		B
01/24/05	Encana	ECA #	57.40	60.75		B
01/10/05	Immucor	BLUD	26.59	31.14		B+
01/10/05	Keryx Biopharm	KERX	15.09	14.58		H
01/31/05	Massey Energy	MEE	37.00	40.00		B
03/08/04	Transcanada Corp	TRP #	21.34	24.03	23.25	H
01/24/05	Trident Microsys.	TRID	18.05	18.00		B

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price