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

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

Fannie Mae and Freddie Mac didn’t disappoint us this week. We expected them to take their lumps and certainly that’s what happened with each announcing quarterly losses large enough to make their investors sweat a little more.

Both government-sponsored enterprises (GSE’s) lost heavily and will likely need some injection of capital in order to continue to be viable firms. Whether this capital infusion comes from the government in the form of a bailout or from new investors willing to ante up remains a mystery. In addition to their quarterly report cards, both saw fit to reduce their dividend payouts to a near token five cents per share from previous levels of 35 and 25 cents as a much-needed step in reducing capital outflow. Similarly, both firms increased their loss provisions substantially, but the question is whether they increased the amounts sufficiently especially after Bloomberg reported last week that foreclosure filings more than doubled in the second quarter from a year ago.

According to Bloomberg, one in every 171 households was at risk of losing their home, an increase of 121% from a year earlier and 14% from the previous quarter. An increase of this magnitude is a serious sign of collapse in the housing industry and regardless of any positive news from this sector, statistics such as this indicate clearly that the industry will not be recovering any time this year nor should we expect good things next year. PIMCO’s, Bill Gross, manager of the world’s biggest bond fund, suggested recently that 25 million homeowners were at risk of owing more than the value of their homes. A rough calculation therefore would mean that approximately $5 trillion (25 million x $200,000) of real estate would be exposed to uncertain losses as mortgages terms concluded.

Following this assumption of greater losses on mortgages means that Fannie Mae and Freddie Mac will remain under the pressure of deepening provisions for losses and banks of every stripe will see their assets bases continue to take hits as more CDO’s (primarily composed of mortgage securities) are consequently written down. Ironically, as these various entities require cash infusions due to the lack of available liquidity, the Federal Reserve will immediately step in providing the much needed capital and will do so taking the wide variety of CDO trash as collateral. But can this solution last or put another way, is the Federal Reserve’s pool of funds unlimited?

Technically Speaking

The key movements last week affecting stock prices were the price of crude oil continuing to fall as demand destruction finally takes its toll on the price of oil and secondly, the sudden rise in the dollar, which benefited from perceived weakness in other countries, namely the rapidly-slowing economy in Europe and the commodity-based economies of Canada and Australia.

Both of these movements were held in a bullish light for stock investors who couldn’t resist putting more money to work and extending the bounce begun in July. All the major stock indices rose strongly this week with the Nasdaq twins leading the parade with significant gains. The ND-100 actually succeeded in topping its 200-day moving average on Friday – a feat that only the Nasdaq Composite is close to accomplishing among the other majors.

The broader indices, the Dow Jones Industrials and the S&P 500 settled for smaller though still interesting gains however this could change rather quickly. Volumes for all four major indices showed a marked decline in the rise, which is a bearish development. Moreover, the daily charts for all majors have reached significant levels of overbought stochastics and their weekly charts showing stochastics have also moved into more neutral territory allowing selling action to return.

Resistance levels for the tech sector lie only a few points to the north of their present positions with ND-100 likely to be facing pressure around 1950 and the Composite index near 2450. On the DJ Industrials, the previous resistance and support level of 11750 is very close and should be a deterrent to much further gains while the SP will find it challenging to top the 1320 level.

All of these resistance levels could be violated given that this summer rally does indeed have legs however this remains a bear market and bullish moves should be treated with abundant caution.

New Buy Recommendations (in order of preference):

Quanta Services Inc. (PWR) – Energy infrastructure is in large demand and this company is benefiting from that. Friday’s gain on heavy volume capped a three-day move and pushed price above the resistance of $34. The price jump resulted in a new 52-week high and gave a strong indication that price will continue to march from the bottom-left of the chart to the top-right. On the weekly chart, we clearly see an inverted head and shoulders has been completed and on the daily chart, the double bottom of the beginning of July and the beginning of August signals that the stock will continue to gather momentum in the short term.

Parexel International Corp. (PRXL) – This biopharma company leaped into the weekend with a strong gap on Thursday and extended the move on Friday. With such a bold move from the last two days of the week, it is normal to expect some retracement however the break above the $30 level is a very powerful sign that this level will now become solid support for the stock. Just below this level were the split-adjusted highs reached in February and until now these highs were acting as resistance. On the monthly chart, PRXL has risen steadily since 2002.

New Short Sales

None.

Stock Positions to Sell/Exit:

We were exited from our position in YRC Worldwide at the stop.

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