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

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

Financial stocks gained traction at the end of the holiday-shortened week on news late Friday that one of the premier bond insurers, Ambac Inc., was contemplating a plan to recapitalize the company splitting the company into two separate operations. The plan would involve a number of banks injecting much needed capital in return for a portion of the bond insurer thus averting a much larger crisis that would result from a ratings downgrade by Moody’s and S&P. Fitch has already downgraded the company from its coveted AAA rating to AA and without changes in its structure, the other two agencies would likely do the same.

The problem with the bond insurers is that they have guaranteed a substantial amount of the mortgage-related securities known commonly as CDO’s (collateralized debt obligations), which are at significant risk of failing due to the sharp decline in the housing market and the rapid increase in foreclosures. This threat to their own viability might otherwise be contained from wider damage except that these same companies insure municipal bond issues, securities, which are considered quite safe and carry a triple-A rating. Despite the safety of their issues, a downgrade of the companies’ ratings would also mean a consequent downgrade of the bonds insured and that would include these municipal bonds. Without a triple-A rating, these bonds would not qualify for certain investment structures and would need to be sold thus ensuring a meltdown in the huge market for municipal bonds.

Were a breakdown to occur in the market for muni-bonds, there would be a strong likelihood of failure in the bond insurers putting immense financial strain on the banks that had purchased this insurance to protect their investments as they would be left exposed to enormous losses on the CDO products. Some analysts consider this situation to be symptomatic of the entire industry – an example of the house of cards set to collapse.

Technically Speaking

The four major market averages steadfastly refuse to show their intentions this week. Within the broader market exemplified by the S&P 500, the market has not been able to put a string of two days in the same direction for the past seven sessions. Moreover in those seven sessions there have been six reversals of various magnitude and importance. The Dow Jones Industrials has been slightly less erratic having reversed only five times over those same sessions.

The tech sector has not been immune to this market neurosis acting in a similar manner as the DJ Industrials.

The most important development that is worth watching is the progress made in the development of pennants since the 2008 lows were made in January. Normally a pennant, when completed continues in the major direction established before the pennant began its formation, which in this case is downward. We are quickly arriving at the conclusion of their development and while the broader markets are showing ambiguous signs for future direction, the tech sector appears weak and is offering indications that the break out would re-establish its downward trend.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

Lloyds TSB Group (LYG) – Covered at the open this past week.

Principal Financial (PFG) – Covered upon hitting protective stop-loss.

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