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

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The late-summer early-autumn period has consistently been a period of losses in stock markets through several decades. Though it may not occur year in and year out, the overwhelming majority of years has seen a tumble into a low during the autumn season. The year 2007 will not likely disappoint.

We witnessed another sub-prime implosion this week causing an important drop in stocks after three consecutive days of gains. And much like the cockroach theory: that there is never just one cockroach, Thursday’s announcement that the largest bank in France, BNP Paribas, would cease redemptions on three funds was a wake-up call to investors. BNP’s funds were primarily invested in mortgage-backed securities and the bank balked at redemption because they said they could no longer properly value them due to the problems in the US sub-prime market. What they meant to say was they couldn’t sell the assets they were required to sell (to refund redemptions) because there simply were no buyers! No buyers meant that there were no bids to properly value these assets.

We had believed that the sub-prime and Alt-A mortgage problems would be isolated incidents and that banks would be the unfortunate ones to take hits on their balance sheets because of this mess. We realize now that the contagion has spread much further than we thought originally, all fueled by a cheapening yen currency at no cost since interest rates in Japan remain at 0.5%. Besides the widely reported problems with BNP Paribas and Bear Stearns, there have been other banks and funds with equally disturbing finances all linked to investments in the US sub-prime market. Among these are the German bank, IKB Deutsche Industriebank, which was bailed out by the Bundesbank, Germany’s central bank and several hedge funds located in the US, Europe and Australia. In each of these cases, investor redemptions were halted on account of an inability to sell mortgage-backed securities since there were no buyers.

Certainly one could argue that the firms to be most affected by the situation are very well capitalized banks so the threat of failure of a large bank is low and the distribution of losses could be quite wide, however losses here will be compounded by the associated situation related to recent leveraged buyouts.

According to Baring Asset Management, there have been 46 financing deals pulled since June 26 totaling more than $60 billion. Each deal represents a failure to find sufficient number of investors to buy bonds in support of some acquisition. As an example, Cerberus Capital agreed to buy 80% of Chrysler and to complete the deal, borrowed $12 billion for the auto business and $8 billion for the finance arm. Another $30 billion is being borrowed using asset-backed securities to refinance car loans. In recent weeks, the $12 billion of loans to support the purchase of the auto business has been delayed twice and now the banks, such as J.P. Morgan Chase and Deutsche Bank, will hold the debt themselves and attempt to sell it at a later time when market conditions are more amenable to these sales.

But this is the mere tip of the iceberg. There is approximately $250 billion of leveraged loans that will need to be issued over the coming months because of other buyouts and this is going to put substantial pressure on these banks to sell more bonds to an investment public that is uninterested in buying. Eventually they will sell these bonds but the interest rates will need to rise much further to attract enough investors.

Meanwhile the threat of the global economy seizing up was sufficiently disconcerting that central banks around the world injected a mind-boggling, $320 billion over Thursday and Friday to ensure that enough liquidity was available if needed. This extraordinary sum of money did not alter the unrelenting momentum to sell shares even as Friday drew to a close. Certainly the markets climbed back from their relative pits however this still resulted in losses on most indexes and slivers of gains on the others.

Technically Speaking

Though it rebounded from its 200-day moving average, the S&P 500 remains the leader to the downside. This week’s action appears to have been a dead-cat bounce however the jury is still out for only a violation of the last week’s low would confirm such action. Friday’s close put the S&P a sliver over its 200-day moving average and in overnight markets, the S&P has begun rebounding strongly but it has unsuccessfully tested the high from Friday. A move above Friday’s high could draw out more bulls and test more levels.

The Nasdaq Composite successfully tested its 200-day moving average again on Friday but closed with a loss. Similar in many ways to the S&P 500 chart, the Nasdaq’s apparent propensity is test the 200-day MA and given both of their overall weaknesses, our belief is that a third attempt at this average will see each of these indexes struggling to maintain a positive position vis-à-vis this vitally important moving average.

The Dow Jones Industrials tested the 13,000 level on Friday with an intraday low of 13,057 almost matching the May low of 13,041. The 200-day moving average lies much lower at 12,819 and this corresponds closely to the February peak strengthening the support located here.

The Nasdaq-100 retains the best relative chart-based position of the major indexes and this is probably due to its composition given that is has zero components from either the banking or real estate sectors, the two worst-hit sectors of the market. Interestingly, the ND-100 made a very brief foray below 1900 on Friday but even this level is well above the May low of 1857 and its 200-day moving average of 1842.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

We were exited from several positions upon hitting our stops.

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