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

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

While Thursday’s drop in stock markets gave heartburn to bulls, the drop in the monthly payrolls released Friday morning was even more important despite the lack of downside follow-through in the markets. With a loss of 87K jobs in August, exceeding forecasts for 75K in losses, coupled with the revised number of job losses in the previous two months of 58K, the Labor Department sent a clear signal that the economy is in a serious downswing. While the word recession is seemingly obliterated from the government’s vocabulary, the reality is such that with monthly job losses now creeping closer to 100K, there can be no doubt that we are in a recession.

The nation’s factories were particularly hard hit in this latest report with job losses numbering 61K and there is little doubt that the automakers were responsible for the lion’s share of those losses. This week, the Big 3 posted August sales that were far below expectations, with drops in monthly sales (y-o-y) ranging from Chrysler’s 34% to GM’s 20% haircut. Asian-based manufacturers managed comparatively stronger results but those too were negative with only Nissan reporting a sales increase during August.

The drop in jobs surely had an impact on the unraveling situation in housing. The Mortgage Bankers Association reported Friday that the number of mortgages entering the foreclosure process and the percentage of mortgages at some stage in the process both touched new records in the second quarter of this year.

Undoubtedly the housing situation will be front and center on Monday as the government announced this afternoon the process by which the US Treasury will rescue the most famous government sponsored enterprises – Fannie Mae and Freddie Mac. These two companies guarantee around $5 trillion in mortgage debt or just less than half of the total $12 trillion US mortgage market. Shareholders under the plan will be effectively left with pennies on their original dollar investments and there is little doubt that a public backlash will result as investors attempt to recoup their losses. Were the two left to collapse, the repercussions would be far more severe as there is a threat that they are reputed to hold another $3 trillion in off-balance sheet investments and the fallout from the bondholders would be rather troublesome considering that they have sold around $1 trillion in bonds, which have been eagerly purchased by banks both here and abroad as a virtually guaranteed investment.

A quick analysis of the decision indicates that the bailout will result in printing presses working overtime printing shiny, new American dollars in order to fund this plan. Furthermore, with the plan to reduce their retained mortgage and mortgage-backed securities to $850 billion by the end of 2009, both entities will need to cut approximately $650 billion from their current $1.5 trillion of direct debt. The biggest losers in this plan could be Washington Mutual, Bank of America and Wachovia, all of which are large mortgage lenders. And once FNM and FRE finish cutting back to $850 billion, they will need to shed a further 10% each year until they get down to $250 billion.

Since FNM and FRE have been the instruments by which millions of Americans have been able to become homeowners, what happens with new mortgage business? The current tightness in credit markets suggests that other banks will be unable or unwilling to lend exacerbating an already dreadful situation and, without a lender of last resort, the dream of homeownership may remain just that – a dream.

Finally, it is always worth recalling statements such as the one made last summer by Treasury Secretary Henry Paulson and Fed Reserve Chairman Ben Bernanke that the subprime crisis was now over, however the latest is gem is from Ben Bernanke who stated, "(t)hese necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets."

Technically Speaking

Regardless of how negative the week was, the overnight markets are pricing in a tremendous rebound as a result of the government bailout. Logically, it appears to be counter-intuitive since the bailout could cost taxpayers dearly and handcuffs the next administration’s ability to maneuver, as it will be saddled with an enormous debt problem. The upside is the increase in dollars will drive down the US dollar’s value versus other currencies (as is happening in overnight markets) and could result in higher profits for firms that export a large proportion of their production. Inflation naturally has nowhere to go but up under this scenario.

Friday’s bounce on the broader indices meant that both the Dow Jones Industrials and the S&P 500 sported double bottoms now having first touched new lows in July. On the weekly charts, the 4+% declines occurred on higher volumes suggesting that follow-through would have been the likely consequence this coming week but all bets are off now.

The tech sector was hit harder than the broader indices with declines of 6.5% on the Nasdaq Composite and 7.7% on the Nasdaq-100. The latter index fell below its July low lining up a test of the March low. The Nasdaq Composite settled marginally higher than its July low which forms a potential baseline with its March low. Usually a stock or index that falls to a baseline for the third time tends more often than not to continue through extending the decline on a new downward leg.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

We were exited from AZZ and PRXL this week when our stops were reached. We recommended covering Ashland last week as well.

Portfolio Comments:

New stops have been added in bold 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