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

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The auto industry came to Washington this week begging for a bailout but left empty-handed aboard their private jets. We may not have learned much about the Big 3 automakers on their trip to Washington but we discovered a least two things: not one of the company leaders was prepared to pledge that a $25 billion bailout would suffice for all present and future needs and that all arrived and departed from the meeting in private company jets. In an ironic footnote to that spectacle, GM announced after the meeting that they would be returning two of their leased jets in an effort to cut costs. Having already returned two of the jets, GM now will make do with just three of the original seven leased jets.

It’s interesting to keep in mind that AIG was bailed out for an ever-adjusting amount currently standing at $150 billion. One would think that a mere $25 billion would be eminently more palatable to Congress and that they would find the wherewithal to approve it immediately. Where the difference lies is in the details. If the automakers went bankrupt, a painful and much-needed restructuring would occur. The direct impact would be felt in jobs and taxes while spin-off effects would imply a wave of bankruptcies involving both direct suppliers as well as businesses servicing the needs of those directly affected. In the case of AIG, the problem lies in the web of credit default insurance deals engineered by AIG to offer potential profit opportunities to unrelated companies. AIG was quick to sell insurance but neglected to put aside collateral leaving substantial risk on their books. The financial web was so convoluted that the US government felt it was imperative that AIG be saved in order to wind down these toxic derivatives in an orderly manner rather than have an entire banking industry implode. A cynic might perceive this as helping their friends on Wall St.

One of the major benefactors of the market’s decline is ironically the US dollar. The massive shift in funds as investors disposed of their holdings in emerging markets and sought security in both US dollars and US Treasuries put pressure on the prices of commodities especially gold. But gold prices reached a bottom approximately one month ago and have traded in a sideways range of $700-750 an ounce for most of the time since. In futures markets, gold trades always in contango meaning that the premium to be paid for gold futures is correlated to the delivery date of the futures contract sometime in the future. Around midweek, gold futures had done the unthinkable; they had moved to backwardation where spot gold was trading higher than gold for delivery in the future. This price structure was significant and indicated that something was about to occur, which it did on Friday when gold exploded to the upside closing above $790 after briefly trading above the key $800 level.

Technically Speaking

All of the major stock indices tumbled on the week with percentage falls ranging from 5.3% to 8.7% with much of the damage occurring on Wednesday and Thursday. Friday’s rebound helped cut the weekly losses in half.

While the tech sector was not comparatively stronger or weaker this week, there was however an odd difference found in the Dow Jones Industrials versus the S&P 500 whose indices are considered to be approximately representative of the same broader market. The DJ finished the week at –5.3% while the S&P closed down 8.4%. This significant difference is probably due to the Dow Transports, which lost 10.6% over the week.

Though the DJ Industrials regained the 8000 level at the close on Friday, the broken pennant is likely pointing to further losses now, as the current level becomes a resistance area. The other three indices had already plunged to new lows and their former lows have developed into resistance levels. For the S&P, this means the area of 820 to 840, for ND-100, the area of 1125 to 1150 and for the Nasdaq Composite, the area of 1475 to 1500.

Stochastics are oversold on the daily charts offering some upside pressure but the weekly charts suggest that there is more room on the downside possible given that their stochastics are not excessively oversold.

New Buy Recommendations (in order of preference):

Barrick Gold (ABX)

Goldcorp (GG)

Kinross Gold (KGC)

These three gold producers saw their prices bottom at the end of October and have strengthened in the weeks since. All have moved progressively higher and capped off this recent performance with very strong gaps higher on Friday with large increases in volume. Gold has apparently found its feet and once the price jump on Friday is digested, a move higher is expected.

New Short Sales

None.

Stock Positions to Sell/Exit:

Gap Inc. (GPS) experienced a strong bounce on Friday after its quarterly results beat expectations. The price move on strong volume indicates that further upside is likely.

We were exited from our longs on their respective stops this week.

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