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Publisher: Colin Alexander Editor: Ken Wilson (450-691-4617)
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Market Synopsis
October is probably the most ignominious months for stocks with a history replete with examples of stock markets gone awry. The crash of 1929 and the fall in 1987 are just two of the more infamous drops in stock market values that occurred in October. And even when the markets don’t crash, there still is an annual tendency of the players to pursue opportunities to sell stocks and book profits and losses during this month in order to complete the business before the year ends.
Analyzing these key periods over many stock cycles, researchers will point to certain factors, which precipitated the falls in equities. Often these factors will take the form of broad economic conditions such as rising interest rates or reduced consumer spending. For 2005, future analyses will probably point to the rising inflation, which prompted the Federal Reserve to raise interest rates and resulted in a deflation of the housing bubble.
That the housing bubble is currently deflating
may come as a shock to some investors who have relied heavily on the real
estate sector these past five years. And though there are several pockets of
strength remaining in housing, there is little doubt that in most major centers
in the
For technical analysts, the canary in the coalmine has been the stock prices of both the mortgage companies such as Fannie Mae and Countrywide Financial as well as those of the homebuilders such as Toll Brothers and Hovnanian Enterprises. All of these stocks have been on a slippery downward slope since at least the summer and all present short opportunities though none at this very moment due to the likelihood of weak rebound. Of all these companies, we consider Fannie Mae to be the most important due to the investigations surrounding the various business affairs of this company.
Fannie Mae (FNM) and its sister organization Freddie Mac are government-sponsored enterprises (GSE’s) that buy mortgages from banks and repackage them as mortgage-backed securities for investors, which frees up the original lending banks to make more loans available. FNM has been in the news for using illegal means to manage their financial reporting whereby they smoothed quarterly results in order to attract investors. Later after investigation, it was revealed that losses may be more than first thought and with restatement of quarterly earnings expected for 2001 to mid-2004, the total amount is thought to be in the neighborhood of $10.8 billion.
Perhaps the most dangerous part of this whole affair is the potential for an entire collapse since a drop in housing prices entails a revision to the total value of packaged mortgages being sold to investors. Assuming that their ability to sell mortgages is impaired, then what happens to the vast apparatus in place whose sole purpose is to buy mortgages and repackage them? If this organization were small, its effects would not be felt over such a wide area but that is not the case for Fannie Mae, which is the largest source of money for home loans in the entire country.
Technically Speaking
Technically, as our Alert mentioned in mid-week, the severe drop in equities signaled certain, uncommon weakness, which will not simply be reversed over a week or two. This drop was both substantial and significant having bottomed below previous lows after peaking at lower levels. The near term trend has become negative and we therefore take a very defensive approach to the market. Many of our trades were exited amid tight stops and we’ll continue to play those accordingly allowing our cash position to build up in preparation for probable short plays.
As mentioned above, the housing sector, both mortgages as well as new housing, provides good candidates for short action but with the rally in these stocks late in the week, we refrain from taking positions at this moment.
New Buy Recommendations:
Viasat Inc. (VSAT) – Notwithstanding our obvious reluctance to go long, this stock came to our attention and despite inherent market risk, we believe that the power that it is displaying, especially with the gap higher on Friday, is difficult to ignore. Longer term, VSAT is very close to breaking out of an almost two-year consolidation, which would signal the beginning of another leg 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.
N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.
|
Date of Entry |
Name |
Symbol |
Entry Price |
Current Price |
Stop |
Action Rating |
|
|
Akamai Tech |
AKAM |
15.96 |
16.05 |
15.00 |
B
|
|
|
Am Sci & Eng Inc |
ASEI |
49.25 |
65.00 |
65.00 |
SOLD |
|
|
Autodesk Inc. |
ADSK |
40.22 |
44.00 |
44.00 |
SOLD
|
|
|
Cardiome Pharma |
CRME |
8.97 |
8.94 |
8.00 |
B
|
|
|
Gasco Energy |
GSX |
6.95 |
6.25 |
6.25 |
SOLD
|
|
|
Humana |
HUM |
36.30 |
44.70 |
|
SOLD |
|
|
Nvidia |
NVDA |
30.05 |
33.06 |
31.00 |
B
|
|
|
Pacificare Health |
PHS |
62.60 |
80.34 |
79.00 |
B |
|
|
Precision Drilling |
PDS |
41.50 |
46.00 |
46.00 |
SOLD
|
|
|
Qualcomm |
QCOM |
42.48 |
44.00 |
44.00 |
SOLD |
|
03/08/04 |
Transcanada Corp |
TRP |
21.34 |
30.41 |
27.50 |
B |
|
08/15/05 |
Websidestory |
WSSI |
16.74 |
16.72 |
|
SOLD |
New stops in BOLD
* Stop on a closing basis
** Buy if above entry price
*** Split-adjusted price