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Stockscom Report for Sunday Feb 27 2005

Publisher: Colin Alexander Editor: Ken Wilson

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

• Inflation or not?

Market Synopsis

Significantly the CPI released Wednesday morning showed a more benign figure of 0.1%, far more appetizing to Mr. Greenspan and the Federal Reserve than the stomach churning 0.8% measured in wholesale price inflation. While it certainly was more palatable, it confounds the critics who view inflation as a truly ominous threat and with good reason. Commodity inflation is real as market prices on everything from simple items such as coffee and orange juice to steel and unleaded gas are rising. One needs only to glance at the CRB index of commodities to realize that it’s hitting all time highs. Meanwhile, services such as medical care and insurance have increased exponentially in the past few years so much so that the employment cost index has risen faster than the rate of inflation even while actual wages have lagged the rate of inflation.

Ultimately, does it make sense then to believe that consumer or retail inflation is stagnant? For starters, China is certainly playing a role in this equation. With prices tumbling on many consumer products due to the Chinese ability to drive down wage costs to irrelevant levels, substantial savings are possible. And with consumer spending representing 70% of GDP, the potential effect of China is unarguably great.

Perhaps a greater factor is the government’s own calculation of CPI. To arrive at the 0.1% figure for the month of January, which incidentally, also signified a year-over-year value of 3.0%, the government’s crew of number crunchers need to apply rules and weightings to the various costs of living. Foremost among them is the 40.9% weighting given to housing. In 2003, housing increased in price by an average of 6.7% however the government’s calculations assumed it cost only 2.4% more because they calculate using the change in owner’s equivalent rent. Moreover, this figure doesn’t include property taxes, which have also been rising.

Another important factor is medical care, which according to the CPI is weighted 6.0% and increased in price 5.4% over the previous twelve months. But the Henry J. Kaiser Family Foundation found in 2004 that health insurance premiums increased 11.2% and in the prior four years, increases had also been in the double-digits. Obviously their claim is not actually comparing apples to apples given that not everyone has health insurance however, it remains an interesting point of contention.

With all this apparent inflation and average wage increases not matching the rate of inflation, one would presumably consider the possibility that consumers will cut back on spending for non-essential goods. So far statistics do not bear this theory out however, they do show savings rates have declined to 0.4% and credit card debt remains stubbornly high. With the Fed attempting to push negative real interest rates to the neutral level, there is potential for higher credit card rates and consequently lower spending by US consumers. Even a return to the normal trend of 67% of GDP would entail a significant drop in spending, which could develop into a recession.

****

On Friday of this coming week, the employment figures are released for February and many analysts are suggesting that the number will be far greater than what we’ve seen in recent months. They point to the fact that the weekly jobless numbers have declined to between 300-310K after being stuck in the neighborhood of 340-350K for many weeks. A good number would likely trigger a strong rally in equities while one more disappointment may result in another leg down.

* The Canadian federal government introduced its budget this week and included therein was the removal of limits on foreign equities in retirement savings accounts. This policy change is effective immediately though it is worth mentioning that if the budget does not pass into law, the proposed amendment is null and void. For now, we will assume that the bill will pass and remove the # symbol from those stocks listed that qualified previously as eligible stocks to be held in retirement accounts.

Technically Speaking

The week ended with recovery in all equity indexes after a very bearish return on Tuesday from the holiday weekend though the Nasdaq, and more specifically the tech market, has become a significant laggard. The DJ-30 and the S&P 500 both settled at new highs for 2005 and perhaps more importantly, they reside only a few points south of their best levels since 2001.

We view the Nasdaq chart with some trepidation despite the overall good feeling we have when looking at the broader markets. Essentially, notwithstanding the positive finishes driven in part by the general optimism, there appears to be a distribution occurring in tech shares, but this view could simply be skewed by the heavy weightings that belong to MSFT, CSCO, EBAY and YHOO.

New Buy Recommendations:

Energy shares have been on a tear recently and while we’ve enjoyed some benefit from owning Encana and Massey, a large number of independent oil and gas companies have had stronger percentage moves. We believe that re-initiating positions on SU and VPI would be advisable at some point but not here given their tremendous rise of late. The potential is there for the price of crude oil and its products to retrace these recent gains given that the supply of oil does not appear to be as tight as price suggests.

Perficient Inc. (PRFT) – This software firm is growing its revenues and income at exponential rates (for the final fourth quarter of 2004, revenue was up 180% and income was up 150% on a y-o-y basis) and Friday’s move on high volume indicates to us that it is indeed prepared to break out to a new high for the year. The key element in the chart’s development was its ability to surpass the close of Feb 2 thus signaling the end to its consolidation.

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.

Please take note that the following clause is being removed under the assumption that the aforementioned federal budget in Canada will be accepted into law. From the budget date forward, there are no longer restrictions on foreign stocks held in Canadian retirement accounts. Furthermore we will no longer mark stocks with # to indicate such.
[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	16.45		H
02/08/05	Applix	APLX	7.01	7.80		B
02/08/05	Ascential Software	ASCL	16.00	15.35		H
01/24/05	Checkfree Corp	CKFR	38.43	38.13		H
01/24/05	Cleveland-Cliffs	CLF	60.41	76.95		B
01/24/05	Cryptologic	CRYP	23.67	31.39		B
01/24/05	Encana	ECA	57.40	67.61		B
01/10/05	Immucor	BLUD	26.59	29.51		B
02/14/05	Ipsco	IPS	51.33	52.01		B+
01/10/05	Keryx Biopharm	KERX	15.09	12.89	12.15	SOLD
01/31/05	Massey Energy	MEE	37.00	44.20		B
02/14/05	Meridian Gold	MDG	20.12	19.79		H
03/08/04	Transcanada Corp	TRP	21.34	24.20	23.25	H
01/24/05	Trident Microsys.	TRID	18.05	18.50	16.85	H
02/14/05	Western Silver Crp	WTZ	10.50	10.63		B

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price