Stockscom Report for Sunday Nov 19 2006

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

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

·        Housing starts data presages an economic slowdown?

·        Inflation slows dramatically

Market Synopsis

“There's no such thing as a free lunch” was the famous quote from Milton Friedman who died this past week at 94 years. His monetarist philosophies were the bread and butter essentials for Presidents Nixon and Reagan for whom he worked as part of the government service aspect of his career. He believed strongly that there was a stable link between inflation and money supply, which meant that the supply of money in the system injected by the Federal Reserve had a direct relationship with the presence or absence of inflation. And he believed that the role of government and of fiscal policy in the economy be limited as much as possible.

Perhaps then it is fitting that inflation figures were released this week and served to generate some controversy. While the PPI, composed of inflation data within production streams, fell 1.6% in October matching a record low from October 2001, the more important CPI measuring consumer inflation dropped 0.5%. Together, the two measures of inflation opened John Q Public’s eyes to the strong potential for a decline in inflationary forces that have impacted the economy so far in 2006. Federal Reserve presidents were quick to dispel ideas that the next meeting in December would entail a cut in interest rates preferring to comment on the simmering potential for wage inflation. Ironically, a quick look at data provided by the Federal Reserve demonstrates that M2 has more than quadrupled in the past 25 years giving monetarists such as Friedman, food for thought.

Meanwhile, a surprising dive in housing starts of 14.6% further concentrated analysts’ attention on the probability of an economic slowdown. The housing market has turned very quickly and the fallout will mean fewer jobs for real estate, a slowdown in the entire construction sector, and lower retail spending on durable goods such as furniture and appliances. Moreover this situation makes no estimates of the fallout from those homeowners who are subjected to foreclosure - especially vulnerable would be those sub-prime borrowers buying in the previous 24 months or those speculators who have lost thousands of dollars after hanging on too long as selling prices of current real estate drop precipitously.

Technically Speaking

Despite the large sell off on Thursday of the previous week and the potential for further losses that we discussed in last week’s missive, markets continue to display uncommon strength and as a result, the Lindahl buy signals on the weekly charts were the dominant characteristics indicating the market’s future direction. This week is a holiday shortened week with most investors taking a very long weekend and while we don’t expect much to happen, we do expect that markets will rise into the holiday simply because they historically do.

The equity indexes have remained well placed in their upward sloping channels since the market bottomed in July and at this point the charts do not display weak points warning us of impending disasters, breaks or of economic slowdowns. In short, they are in a veritable sweet spot and should be ridden until further developments change that view.

New Buy Recommendations (in order of preference):

None.

We advised last week to buy more gold and MNG was our preferred avenue but the announcement of their sale of flow through shares and the weakness of gold as a commodity worked to the detriment of this trade and we were exited from this trade. For now we advise waiting however if gold were to clear $630 an ounce as we believe it will, a move back into MNG or Yamana Gold (AUY) would be warranted as they clearly have the strongest charts and sufficient liquidity in the gold sector that we cover.

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.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price