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Publisher: Colin Alexander Editor: Ken Wilson (450-691-4617)
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Market Synopsis
Soft economy or not? We speculated last week that the economy had hit a soft patch in the first half of this year but seemed resolved to further growth despite the weak manufacturing data. This week there was more data to back up that theory with the Leading Economic Indicators showing a continuation of the easing witnessed since the beginning of ’05 and a good report/bad report on durable goods. The good element was the increase in durable goods amounted to 5.5% however the bad part was that airplanes and military orders were responsible for much of the increase. While the benefits and characteristics of military orders may be debatable, aircraft clearly have the capability to skew orders’ data from one month to the next owing to the enormous price tags associated to these products. When the transportation sector was removed from the calculation, durable goods orders declined 0.2%.
Arguably, the two sectors of the economy that are the strongest are energy and construction and if one peers a little closer into these industries, one recognizes that there is a not-so-subtle risk of tipping into a recession when depending on them. Case in point: construction has been dominated by the residential housing sector and housing is highly dependant on the vagaries of interest rates, which recently have seen short term rates increase while long term rates decreased. Moreover, on Wednesday of this week, the FOMC led by Alan Greenspan, will decide once more on interest rate policy and set the overnight rate. The expected and likely outcome of the meeting will be a quarter point increase in the overnight rate from 3% to 3.25%.
An observer might ask why the Federal Reserve would choose to raise interest rates when there is an obvious threat of recession. The answer lies in two parts. The Fed has been endeavoring to normalize the lending rate ever since it began raising rates from the 1.0% level in an attempt to bring the real interest rate above 0%, which it has largely succeeded in doing. Keeping the nominal interest rates low to stave off deflation caused an asset bubble in housing, which even Alan Greenspan is loath to admit, exists. The second part of the equation is inflation and despite low wage inflation, scarcity of certain commodities has been problematic and caused prices to rise quite rapidly. A good example of this is, naturally, the price of gasoline. The Fed is now attempting to gently deflate the housing bubble in order to avoid a general collapse in real estate prices.
As for energy, rising prices of gasoline represent a drain on consumers’ disposable income, income that could have been used for another purpose either consumption or savings. Additionally, the oil company that sells the finished product is typically not reinvesting the majority of the profits, a logical move considering the past erratic history of oil prices. Therefore, presuming that there’s little new investment, the higher oil prices act as a substantial negative force taxing the consumer on one hand and reducing possible capital investment on the business side.
Technically Speaking
Further attempts to break through resistance on the ND chart failed this week and when the broader indexes began sliding through support levels, this marked the end of the latest push. The end result was an explosive drop on all indexes that has yet to discover solid support. While the DJ and ND-100 both fell through their respective 200-day moving averages, the SP and ND Composite displayed more resilience in remaining above this level.
At this point we need to see that the lows from the spring hold up against this latest selling, but that is no sure bet with several chart indicators showing extreme weakness that would need to be addressed immediately if the markets are to rebound and continue their bullish rally.
One particular example of the weakness that we are studying is the Philly semiconductor index, which has reversed course slightly below the previous peak and now appears set to test the low reached this past spring. Most technicians look for tech leadership from the Philly index and when it fails, it’s a bad omen for the rest of the market.
New Buy Recommendations:
None.
New Short Sales
None.
Stock Positions to Sell/Exit:
Both AIRT and HTCH were sold this week.
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 |
16.34 |
13.64 |
SOLD |
|
|
Aleris International |
ARS |
22.65 |
22.00 |
|
H |
|
|
Canadian Nat Res. |
CNQ *** |
28.47 |
36.86 |
|
B |
|
|
Captiva Software |
CPTV |
14.03 |
14.32 |
13.00 |
H |
|
|
|
GILD |
39.58 |
41.75 |
39.50 |
H |
|
|
Humana |
HUM |
36.30 |
37.75 |
36.75 |
H |
|
|
|
HTCH |
37.00 |
38.00 |
38.00 |
SOLD |
|
|
Novatel |
NGPS |
28.09 |
24.91 |
|
H |
|
|
Orckit Comm. |
ORCT |
27.09 |
25.91 |
|
H |
|
|
Pacificare Health |
PHS |
62.60 |
69.65 |
|
B |
|
05/31/05 |
Sun Hydraulics |
SNHY |
35.88 |
36.02 |
|
B |
|
03/08/04 |
Transcanada Corp |
TRP |
21.34 |
26.42 |
23.25 |
B |
|
04/25/05 |
Verisign Inc |
VRSN |
29.24 |
30.47 |
29.50 |
B |
New stops in BOLD
* Stop on a closing basis
** Buy if above entry price
*** Split-adjusted price