Stockscom Report for Sunday Oct 1 2006

Publisher: Colin Alexander Editor: Ken Wilson (450-691-4617)

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

· Heavy week for economic data

· Housing woes

Market Synopsis

Friday marked the last trading day of the month of September and concluded the third quarter, which if history is to be any guide, dictates that we should be revisiting a remarkable low in October in this, the second year of the Presidential Cycle. But since, as brokerage firms will eagerly point out, actual performance may vary, it appears more and more likely that the low for 2006 passed us in June and July when markets of all stripes reached their respective bottoms. In fact, Friday wrapped up one of the best third quarter performances in years for the S&P 500 as it rose 5.2%, and it was followed closely behind by a 4.7% increase for the Dow Jones Industrials and a 4% gain on the Nasdaq.

Since the end of the month is upon us, we can expect to receive new economic data shortly, namely the ISM Purchasing Manager’s surveys on manufacturing and non-manufacturing businesses, factory orders and the always-important employment report due to be released on Friday morning.

Moreover, one of the more interesting numbers to be released this week is the August construction spending figures on Monday. We would expect that the August housing starts decline of 0.6% would negatively impact the construction spending for this period adding significant downward pressure to price on our short position. In the recent past, residential housing construction has represented just over half of all construction spending.

Meanwhile, the latest data on housing depicts an industry that is in ailing health. While the decline in housing starts has been progressing for the past several months and now totals 20% y-o-y, the most damaging statistic was the latest median price on existing home sales, which saw a decline for the first time in 11 years amounting to 1.7%. What this statistic hides is the pockets of extreme price cutting that have been occurring in areas where the housing bubble had its greatest impact.

Perhaps the most surprising factor is the response from government bodies overseeing the financiers who have so willingly funded the bubble these past few years. On Friday, federal regulators sent a message to banks warning them to ensure that borrowers have the means to pay back the mortgage that they are signing for and that those applying for mortgages fully understand their liabilities of future years when the current low monthly payments evolve into enormous payments several months down the road. Due to the differences between companies permitted to offer mortgages, these regulators do not even have jurisdiction over the entire spectrum of companies and can only hope that those regulators in charge of overseeing those companies not covered by federal jurisdiction repeat their guidance. The target of this message were the lenders that offer products such as interest-only mortgages and payment option ARM’s resulting in negative amortization, both of which are commonly known as the subprime market composed of borrowers with low credit ratings.

Technically Speaking

One of the key points to take from our commentary above was the extraordinary performance of large cap indexes, which thoroughly outperformed indexes comprised of small cap stocks and those of midcap equities in the third quarter. Since the lows were made in mid-2006, the rise in stock prices has been and continues to be led by these large cap companies. Abandoned in the financial wilderness for a long period of time, their comeback has begun.

Stocks exhibited weakness on Friday as the DJ fatigued by its consecutive attempts to set a new all-time high led other markets lower. Certainly the overbought stochastics ran counter to further upward progress however the charts continue to favor a bullish development over the near term. Paradoxically, the bond market is predicting greater probabilities for a recession as interest rates invert with the short-term rates exceeding long-term rates now. Thus we are left with a conundrum with the stock markets predicting a solid economic environment while the bond market is anticipating a recession.

There are two other possibilities: the first is that the stock market perceives the development of a mild slowdown in economic growth combined with an important cooling down phase of inflation that would effectively sustain profit growth in this type of environment. Evidently this scenario would represent the best possible resolution of the paradox but how realistic is this potential when it assumes a perfect soft landing for the economy? The second possibility is that China has been busy purchasing more US treasuries to add to their very extensive collection. This activity would have the additional effect of explaining the significant rise in the dollar over the past several weeks.

New Buy Recommendations (in order of preference):

NII Holdings (NIHD) – This is the former Nextel Inc providing wireless communication in a variety of countries around the world. The stock gapped up on Friday by more than 7% on news of the extension of supply agreement with Motorola. Buying has been evident in NIHD since its June low and it has successfully tested the 200-day moving average after toying with that level from the low until the end of August.

Global Payments Inc (GPN) – This electronic transaction-processing provider released its first quarter results and raised its earnings outlook for 2007 on Friday. The significant gap higher confirmed the previous gap from Sept 13 setting the stage for a move toward the all-time high. On the monthly chart, price successfully tested the 25-month moving average.

New Short Sales

None.

Stock Positions to Sell/Exit:

Brush Engineered (BW) – We were exited this week at our protective stop.

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
08/21/06	Brush Engineered	BW	26.36	24.00	24.00	SOLD
09/25/06	Citrix Systems	CTXS	35.70	36.21	34.00	B
09/25/06	Cognos Inc	COGN	35.20	36.50	33.00	B
09/18/06	Kendle Int’l Inc	KNDL	31.00	32.02	29.80	B
09/18/06	ON Semiconductor	ONNN	6.36	5.88	5.75	H
09/18/06	XM Satellite Radio	XMSR	13.60	12.90	12.50	H

Short Sales:

Date of Entry	Name	Symbol	Entry Price	Current Price	Stop	Action Rating
08/21/06	Caterpillar	CAT	68.25	65.80	67.50	S

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price