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Friday’s employment report contained a mixed bag of information with payrolls data showing the economy added 94K new jobs – a number better than expected though still relatively low. Also payroll data for September and October were revised lower by a combined 48K adding to the negativity surrounding the data. On the positive side however was the household survey, which indicated that almost 700K more people found work in the month of November. Though the two surveys have their partisans, markets tend to trade off the payroll data more than the latter.

The FOMC meets this week for the year’s last meeting to decide the key overnight interest rate. Analysts are predicting a quarter point cut though the half point rate cut is getting a surprising number of votes. The major problem that the Fed must deal with is how to balance the rising inflation figures with the slowing economy and the on-going crisis in housing.

A cut in overnight interest rates will be of absolutely no assistance however to the millions of households, which have become delinquent in paying their mortgages nor will this help those whose sub-prime mortgages are due to be reset in the coming months. The latter group is the obvious target for the Bush Administration’s "This is not a bailout" Bailout. The key element of the plan is to freeze the interest rates for five years on certain sub-prime mortgages thereby preserving the teaser rates that initially tempted the homebuyers into purchasing. According to the government’s own statistics, approximately 1.8 million mortgages would be reset over the next two years and this plan would help about two-thirds of these households.

To qualify for acceptance, the mortgage would need to have been originated between January 2005 and July 2007 and scheduled to be reset between January 2008 and July 2010, and the homeowners would need to show that they have been able to handle their current payments but that their ability to pay the higher interest rate once the mortgage is reset would cause undue hardship to their personal finances.

It is quickly obvious that abuse in this program will be rampant as homeowners capable of paying the higher premiums after the mortgage resets and concerned that their requests for acceptance would be denied, will immerse themselves in debt in order to qualify under the terms of the proposal.

Strangely, the Administration considers this a market-based solution to the housing crisis despite all indications that it is instead, at its most basic level, an illegal government initiative tampering with fundamental contract law that itself has existed for hundreds of years.

Furthermore, institutions holding these mortgages can now expect to receive far less money for these loans than their actuaries had forecasted which is altogether balanced by the fact that their actuaries had not planned for these homes to lose a large chunk of their value due to a slump in housing and the foreclosure process. Normally, a foreclosure results in a 25-30% discount to market prices. The bottom line for these companies is that their profit margins get squeezed but they retain a certain pool of clients that they might not normally have retained. Essentially, these able-borrowers would sustain payments on the mortgage-backed securities that would prevent these same large financial institutions from having to announce market-rattling writedowns of their mortgage assets extending the day of reckoning by five years.

Finally, the effects on the mortgage market are likely to be far-reaching as investors reject mortgage-backed securities as viable investments or at the very least, demand to be paid a healthy insurance premium to accept them implying that all mortgages will end up being significantly more costly. Higher costs for mortgages means that the housing industry remains in severe recession far longer than anticipated and continues to be a drag on the economy for the foreseeable future.

Technically Speaking

Two weeks of short covering may be drawing to conclusion, as market indexes appear to have run out of steam. The broader markets, the Dow Jones Industrials and the S&P 500, have peaked near their respective highs of November 6 but remain well below their peaks of July. We consider the July peaks critical, as these could be the left shoulders of head and shoulders formations that are developing.

Trading volumes have declined remarkably on this brief swing higher and are well below average volume on days where there has been market declines. Price action such as this results in charts displaying a marked distribution of stock, which is a bearish sign.

The Nasdaq twins in the tech sector support this conclusion though the ND-100 has topped its July peak but this is hardly surprising with no financial sector stocks in its composition. Interestingly, the Nasdaq Composite index closed Friday just below its July peak and more closely resembles the broader market indexes.

New Buy Recommendations (in order of preference):

OM Group (OMG) – A sharp move on heavy volume Friday to break through resistance near the $58 level was the key element in this recommendation. Most interesting is price’s approach toward the 2007 high near $64 and the reverse head and shoulders best seen forming on the weekly chart. Their specialty is cobalt, which is used in a variety of rechargeable batteries, as well as lubricants and magnetic media and the price of cobalt has risen approximately 60% in the past year leading the company to higher profits.

Tsakos Energy Navigation (TNP) – Going back once again to a previous recommendation, TNP’s chart had developed a lateral formation since June but Friday’s move on heavy volume to break away from this consolidation is the reason for recommending it today. The break above $38 paves the way for a new leg higher to begin.

China Sunergy Co. (CSUN) – This solar cell manufacturer is part of a very bullish sector of the markets currently. On the daily chart, Friday’s performance completed a Lindahl buy signal and there are indications of a significant accumulation taking place that leads us to believe that the upside potential is quite substantial. On the weekly chart, there are signs that the stock is about to embark on another leg higher similar to action that took place beginning in late-September judging by the jump in trading volumes this week.

Evergreen Solar Inc. (ESLR) – We were prematurely exited from this stock on a sharp whipsawing price action but we believe, given its strong rebound from that action, that there is still tremendous potential for gains. Earlier this week, price action generated a Lindahl buy signal on the daily chart and the gap higher on Friday confirmed the upward bias.

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.

¹ Peabody Energy spun off its coal assets into Patriot Coal on Oct 31 at a ratio of 1 share of PCX for every 10 shares of BTU held.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price