· Mixed economic signals
 

Market Synopsis

Signs of economic recovery were mixed as the first quarter ended on Friday. While overall construction spending increased by a surprising 0.3% in Feb due to private non-residential construction spending, there was no surprise that private residential construction declined by 1.0% as homebuilders continue to struggle with high inventories of unsold homes. This excess inventory could take many months to liquidate and as such will continue to depress economic growth through 2007. Furthermore, the potential for more problems caused by the sub-prime and prime mortgage industry hangs like a noose over the economy.

Despite this glum outlook for housing and mortgages, there was a glimmer of hope as the Chicago PMI leaped from 47.9% in Feb to 61.7% suggesting that the economy is truly rebounding from its slump of the past few months. The nearly 14% monthly rise is the largest gain ever recorded in the 39 years of this index and was consequently the source of doubt as some analysts viewed the number as an error in calculation. Nevertheless, tomorrow’s release of the national ISM’s survey results will give investors a reliable, second opinion.

The Chicago PMI survey largely contradicted the durable goods orders released earlier in the week. Goods orders ex-transportation dropped 0.1% in Feb causing concern that the US economy is weaker than first thought. Most analysts had expected to see a rebound in durables after the sharp 9.3% decline in Jan.

Finally, it is worth noting that the personal consumption price index, an index weighted heavily by the Fed as an indicator of inflation, rose 0.3% in Feb causing concern that inflation is above the Fed’s approximate target zone and prompting analysts to reconsider their views of an imminent cut in interest rates. Though many analysts perceived a certain softness by the Fed with respect to inflation in the previous week’s FOMC decision on interest rates, we saw no indication of a change in the Fed’s philosophy and this latest statistic bears us out. Adding to the woes of inflation were data on consumer spending which showed that inflation-adjusted spending rose only 0.2% in Feb, a sign that consumers are tightening their collective belts.

Technically Speaking

The major stock indexes are being buffeted by both bearish and bullish winds. This week’s primarily successful tests of the early March highs offered hope to the bulls but in order to place any confidence in these support levels, there must be movements above the March highs. The simple basics of a bull market are one where each successive high and low is higher than the previous series.

We found it interesting from a bullish point of view that investors were willing buyers at the lows of Thu and Fri giving indexes a substantial boost and showing tentative signs of bullish behavior. Moreover, the retracement that has followed last week’s strong upward moves has uncovered support at the indexes’ respective 40-day moving averages. If the lows touched this past week fail to support prices this week, then the likelihood of a test and failure of the March lows becomes a distinct possibility.


New Buy Recommendations (in order of preference):

None.

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.