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

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Once again we begin the week with the expectation of a slide in stocks with markets in the Far East opening on a much weaker note assisted no doubt by the downdraft experienced in North America on Friday. Certainly this is an interesting juncture in a bear market with last week’s performance strongly suggesting that a tradable rebound was occurring in the market however the evidence remains inconclusive.

Similar to last week, the Fed is the key. Tuesday’s emergency cut in the overnight lending rate was like electroshock therapy for the market as it spiraled dangerously out of control. By week’s end we had an indication of one of the reasons for the abrupt drop as revealed by Societé Générale, the French bank, which was forced to cover trades made by a rogue trader who had threatened the very existence of the bank. The episode offered shades of Nick Leesom, the trader who brought down Barings Bank in 1995. By lowering their trendsetting rate to 3.5%, the Fed sent a clear message that it would not be sitting idly on the side watching the credit market freeze up. Moreover, it gave every indication that further cuts would be made when the FOMC meets during their regularly scheduled meeting this week.

One of the biggest fears of the Fed is whether the large bond insurers, AMBAC and MBIA, would be downgraded by the ratings agencies after Fitch chose to downgrade AMBAC to AA from the coveted AAA rating. If they lose their AAA status, the $2.4 trillion of municipal bonds that they have insured would have their ratings cut as well and consequently the pension funds and institutions that hold these bonds could be forced to sell them as unqualified investments. It would be quite simplistic to say that the Fed would not let this happen and given their previous interventionist actions, this is quite likely to be the case, but it could not occur without major market losses happening either.

Besides the FOMC meeting, there are several bits of economic data due to be released this week, which should give investors some signals on what to expect for the first quarter. Durable goods orders, consumer confidence, new home sales and the ISM Purchasing Managers survey will combine to paint a picture of either further deterioration in the economy or the start of a turnaround. If we are to believe the stock market, which is usually predictive of the economy, the turnaround is not nearby. At the end of the week, the December employment report will undoubtedly be the catalyst for trading in one direction or the other.

Technically Speaking

Though volumes were lower by the end of the week, the outside down days on the daily charts of the stock indexes cannot be ignored. These markets had begun Friday on a high note surging back into the downward trending envelopes from which they had fallen earlier in the week. But as the day advanced, this initial power dissipated leaving rather weary-looking charts into the close of trading.

We expect some testing of those extraordinary lows from early last week and it is certainly not unthinkable that a bear market rally could form from such depths but it is helpful to remember that any rally would be just that – a rally inside a bear market, which has further to go on the downside.

New Buy Recommendations (in order of preference):

None.

New Short Sales

Deutsche Bank (DB)

HSBC Holdings (HBC)

Canadian Imperial Bank of Commerce (CM)

Lloyds TSB Group (LYG)

Principal Financial Group (PFG)

Franklin Resources Inc. (BEN)

We recommend shorting this group of stocks – the first four are banks and the last two are asset management firms. All share certain characteristics in that their respective rebounds this week were either extremely weak or non-existent, volume on the subsequent decline Friday was remarkably strong and all have been subjected to heavy selling over the past few months.

Stock Positions to Sell/Exit:

Our remaining shorts were exited this week.

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