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Publisher: Colin Alexander Editor: Ken Wilson (450-691-4617)
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Market Synopsis
The Federal Reserve met on Tuesday of this week to decide on interest rates. This is the second meeting of 2005 and they will meet two more times before the summer months arrive. At the end of the obligatory discussions, they chose to increase the overnight interest rate once more by the same quarter of one percent that has been the pattern for the past six meetings culminating in a rise to 2.75%. While the number is necessary, their oft-watched commentary though is infinitely more important than the rate hike since the Fed successfully telegraphs their intentions well before the meeting actually takes place. In the futures markets, the quarter point rise was priced in as an absolute certainty for many days prior.
What stood out in the latest statement was the comment, “Though longer-term inflationary expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident.” Unexpectedly, the Fed chose to underline the rising threat of inflation.
Now the average person who fills the family’s SUV tank with gas before going grocery shopping has probably discovered this inflation phenomenon already, long before the Fed suddenly caught wind of it. Indeed producer price inflation has been on an inexorable rise for many months and with the latest word on CPI, consumer inflation, rising to 3%, there is all the more reason to believe that despite the falling prices of Chinese-produced goods, the overall balance is being tipped toward faster increases in prices. (In actual fact the core rate of inflation was up 2.4% y-o-y, however we believe that excluding the increased cost of food and energy over an entire year is tantamount to a statistical lie.)
Perhaps the real, silent threat lies with
variable rate mortgages though. Of the approximately 73 million households in
the
At a minimum, consumer spending must adjust to the new reality. According to the Federal Deposit Insurance Corp (FDIC), homeowners liquidated some $211 billion from refinancing their mortgages in 2003 and extracted another $101 billion in home equity lines of credit giving a total of $312 billion. This total almost matches the $332 billion increase in after-tax income serving to fuel the consumer-spending boom of 2004. Now with tax cuts a thing of the past and rising mortgage rates severely reducing the number of refinancing deals, the logical question is, where will the fuel come from?
Undoubtedly the fuel won’t come from loosening credit and it might even be choked off by faster rising rates. At some point soon, the Fed will need to consider raising interest rates by more than a quarter point. When the Fed began raising rates, their stated goal was to normalize interest rates, which correctly inferred that real interest rates were either zero or negative. At the beginning of 2004, the core CPI measured 1.1% y-o-y and the overnight interest rate was 1.0%. Now the core CPI measures 2.4% and the interest rate is 2.75% meaning that 74% of a supposed tightening of credit cycle has been accounted for as simply inflation. Clearly the increase in interest rates seen thus far has been insufficient in controlling inflation and stemming the rise in the money supply.
Technically Speaking
The selling on all indexes continued for another week and the DJ now finds itself only 66 points above its 200-day moving average. Likewise for the SP, the difference between the current level and its 200-day MA is approximately 21 points. Meanwhile there are other notable levels of support that have come into play at the current price level. For example, the January lows for both indexes lie nearby: with the SP, the difference is a mere 8 points while on the DJ, the difference is approximately 74 points. And finally, the upward moving channel that has been in command since late 2003 would appear to be faltering at current levels with price hugging the bottom boundary of this channel and threatening to drop below.
In the case of the Nasdaq, Wednesday and Thursday both saw closes below the 200-day MA and the upward channel measured from late 2003 is on the border of being violated. As we have mentioned often over the course of the past few weeks, the Nasdaq is weak and getting weaker and importantly, its rebounds since the end of 2004 have been patently weaker than rebounds seen on the broader indexes as represented by DJ and SP.
Despite this overt bearishness, there is a strong likelihood of some relief for the first part of the week at the least. Stochastics are very deep into oversold territory – a situation that normally calls for some reaction, however Friday brings the release of March employment data, which this will naturally impart significant volatility to the indexes.
Looking at the indexes longer term, we can say unequivocally that Nasdaq still has some ways to go before its bottom is reached but the SP and DJ are cases that remain borderline meaning that they could recover at this point or slip further. A violation of support on these indexes could prove to be quite significant.
New Buy Recommendations:
Intellisync Corp. (SYNC) – This small cap stock in the wireless area has a very striking chart pattern in that it is closing in rapidly on its previous high reached in June 2004. Since mid-February when it crossed the 200-day MA, price has been in an upward tilt and Thursday’s trading completed a Lindahl buy signal on the daily leaving behind some consolidation between 2.80 and 3.00. Since the move began in February, the volume on up days far outstrips the volume on down days – an indication of strong buying.
Paincare Holdings Inc. (PRZ) – Similar in size to SYNC, this profitable healthcare service provider specializing in pain relief is growing at phenomenal rates measured both by sales and net income. The break on Tuesday above 4.25 and subsequent confirmation on Thursday gives a strong indication of the upward trend in progress.
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
[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 |
|
|
Air T Inc |
AIRT |
17.63 |
17.86 |
|
H |
|
|
Applix |
APLX |
7.01 |
6.19 |
|
H |
|
|
Ascential Software |
ASCL |
16.00 |
18.35 |
|
SOLD |
|
|
Checkfree Corp |
CKFR |
38.43 |
40.15 |
|
H |
|
|
Cleveland-Cliffs |
CLF |
60.41 |
77.25 |
|
B |
|
|
Cryptologic |
CRYP |
23.67 |
30.88 |
29.50 |
B |
|
|
Immucor |
BLUD |
26.59 |
29.72 |
28.00 |
B |
|
|
Ipsco |
IPS |
51.33 |
55.45 |
51.41 |
B |
|
|
Meridian Gold |
MDG |
20.12 |
16.53 |
17.00 |
SOLD |
|
|
Transcanada Corp |
TRP |
21.34 |
24.24 |
23.25 |
B |
|
|
Western Silver Crp |
WTZ |
10.50 |
8.81 |
8.65 |
H |
New stops in BOLD
* Stop on a closing basis
** Buy if above entry price