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

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

This week’s cover of The Economist says it all – a picture of a barrel of oil with the sticker price of $135. In recent history, the Economist has the rather dubious distinction of marking the peaks or troughs of a trend with its weekly cover story whether it be the US dollar, the tech sector or in this case, oil. Granted this story comes on the heels of news that this week a Senate committee would hold hearings into the rise in the price of oil and the possibility that price manipulation has played a part, however crude oil experienced a major closing reversal in price on Thursday losing more than $4 per barrel on heavy volume. For many analysts, the technical signal imparted by the slide designates a tipping point for oil – perhaps this is an important top?

As for the Senate hearings, we find it a fairly typical response for a government that prides itself on feeble solutions arrived in tardy fashion, usually exacerbating an already decaying situation. Moreover, in an election year (timing is everything), everyone needs a scapegoat and clearly we have found this year’s or month’s scapegoat. Given their track record with the mortgage crisis that brewed unabated for so long and the subsequent weak response that has proved to be quite idiotic, we eagerly await their measured response to the latest crisis to hit the American people. Considering that for so long, this country believed that what was good for GM, was good for the country, perhaps the present Administration should take inspiration from that and consider early retirement.

While increased speculation has clearly affected the future markets judging by the exponential increase in open interest in oils, the facts in this oily situation are far from convincing that speculative interest is the sole reason for the increase in prices.

Looking at inventory data for the US, the latest weekly inventory figures of crude oil from the API show a significant drop of 12.5% over the previous twelve months while the inventories of the principle products tend to be mixed with heating oil down a significant 10% and unleaded gas inventories higher by 3.5%.

Production of fossil fuels is key to guarding the supply and demand balance and while imports from Canada have increased these past few years, Saudi Arabian production, a key element in the supply equation, peaked in 2003. Matthew Simmons, investment banker/author extraordinaire is quite adamant that despite Saudi insistence that they retain the potential to increase production, the reality is far different. His research helped uncover the myths surrounding Saudi Arabian oil and particularly, the super-giant oil field, Ghawar, which has proven to be no longer a limitless pit of oil prepared for pumping.

In spite of numerous attempts to boost steady production, the best estimates convey the message that they simply cannot produce at higher rates. Saudi Aramco, the national oil company, does not disclose production data stating the need to guard competitive secrets and denies all estimates (where’s the logic?). However reliable estimates from the Dept. of Energy suggest that the peak production in Saudi Arabian oil fields was in 1980 and almost returned to that peak in 2005 when some new production fields came on line but has fallen considerably since then. It is worth noting that none of these new producing fields compares to the super-giant Ghawar oil field in future potential. Moreover, a cursory glance of the declines in production of large oil fields provides some insights into the fate of Saudi Arabia: the UK’s North Sea fields have fallen more than 40% from their peak of 6m b/d and Mexico’s Canterall field which at its peak in 2004 produced more than 2m b/day now produces little more than half that amount.

Naturally, those who deny the finiteness of oil resources will point enthusiastically to the Bakken Formation in the Dakotas as a sign of future supplies exceeding demand but we would tend to be cautious since the technology to extract this oil, though existent, is still under development and very costly. Others may look toward Brazil with their newly discovered Tupi offshore fields but there again is an example of extremely costly development. The Tupi fields require ultra-deep drilling consisting of 7,000 feet of water, 10,000 feet of rock and a further 6,600 feet of highly corrosive saltbeds until the oil is reached.

Of course all of this brings us to a golden rule for commodities: the best cure for high prices is high prices which has the effect of bringing in new supply and thus causing lower prices as supply rises or exceeds demand.

Technically Speaking

Markets sustained their positions in a quiet holiday-shortened week with all markets moving in bullish harmony. Volumes were seasonally low and despite the reversal from last week’s selling, the broader markets retained their comparative weakness with the tech sector.

The Dow Jones Industrials and the S&P 500 finished the week moving toward their respective lower boundaries of their channels, points which we expect will be met with resistance. These points could be doubly resistant considering that they approximate their respective 200-day moving averages. Bulls will view their low stochastics as helpful. The key here is that the financials sector is exerting a tremendously bearish effect on these broader markets.

The tech sector and especially the ND-100 are comparatively much stronger with the 200-day moving average having been support last week for the bounce on the ND-100 and the Nasdaq Composite broke through itself on Friday to end the week once more above its 200-day MA. Stochastics remain supportive, as they are quite neutral and certainly not overbought at this point. It is worth mentioning that the ND-100 closed at a new high since the lows touched in March and is very close to regaining its loss since the year began.

New Buy Recommendations (in order of preference):

Solarfun Power Holdings (SOLF) – This solar cell manufacturer began a climb in early May and subsequently retraced a little more than half but Friday’s move on an increase in volume and closing above the previous five days indicates a return of buyers. The $20 level, which had been resistance since being broken in January, has now become support as evidenced by the past week’s three tests. Given its fast growth curve, there is a strong likelihood of new highs overtaking the ones established at the beginning of 2008.

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.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price