Market Conditions

Run up a big yellow flag!

What another week! This is getting ridiculous, as favored stocks soar, including almost all of our selections. Some of our stocks that seemed to be laboring now appear to be back on track, including EMC and Nortel, the latter just identified this week as one of the top ten high tech stocks on the Merrill Lynch recommended list.

Despite the euphoria in the New Economy stocks and also in the oil patch, it looks to us as if stocks generally, including high tech stocks, could go sideways to lower in the near term, and possibly quite a lot lower. The NASDAQ indexes broke out decisively to new highs last week. However, the senior indexes were all down on the week and many individual Old Economy stock charts look terrible. By several criteria, many stocks, including most airlines and stocks like Coca-Cola and Sears are now in firmly entrenched bear markets. Many financial stocks look sick and as if they could get worse, as stocks like Bank One fall apart.
One of the now almost unnoticed factors that could finish off the economic expansion and the stock market boom could be a credit contraction. There has been an unprecedented increase in the debt load for both individuals and corporations and it is almost certain too that there has been a general decline in credit quality. Deteriorating credit quality leads banks to rein in credit, even to lenders previously thought to be a good risk. Much of the credit expansion includes margin debt used to buy stocks with borrowed money. So a general decline could lead to unwinding of margin debt and selling that feeds on itself.

We regard it as significant that much of the excitement last week occurred in the most speculative Internet stocks. This kind of speculative fever can end badly. Notable losers last week were Intel and Microsoft, although both down only a little. Can MSFT continue to justify a P/E multiple of 60 times 2000 earnings when its growth rate is now likely around 30 percent? Quite likely not. Therefore the stock may go sideways for some time and possibly for another year or so, as it has done before, even if it does not go far down.

Sell IDPH and BRCM

Despite the immense gains in some of our selected stocks, we need to keep an eye on the exit. The market has been unmerciful in punishing stocks that disappoint, and we got a big one this week in Idec Pharma (IDPH). The stock stands at a price approaching double what we paid for it just a few months ago. But there is no sense in hanging onto it in case it gets worse. It is worth repeating that in current market conditions a stock that tanks technically is extremely unlikely to recover fast. Therefore, there is at best an opportunity-cost and at worst a worsening loss or a give-up of all the profit. We are also selling Broadcom Corp (BRCM). This stock may be all right to hold and the case for selling is not as clear-cut as it is for IDPH. However, we don't see taking a chance on it given the way stocks so often seem to fall apart once they start acting poorly. BRCM also shows a good profit but it had a very bad week. When an individual stock's market action is markedly different from what its peers are doing, then there is a high probability of that divergence continuing. In a strong market, a stock that does not join the party has to be examined closely in case it is about to expire.

We have withdrawn our 'Buy' ratings for all our Recommended List except for the oils and overseas closed end funds. The NASDAQ index has now been up for five consecutive weeks, and it just does not happen that it goes up every single week without a correction somewhere on the way. Even our list could see a general decline of 10 percent without doing any damage to the up-trend. However, we know for certain that there are better and less good times to buy and right now we have to rate conditions, at last in the short term as less good.

There is a tendency for stocks to go up between November and May.
However, September and early October are sometimes rocky. It could well
be that there is a setback from which to rebound.

This year it has been remarkable how New Economy stocks have come to assume an even larger role in the universe of stocks. This trend is likely to continue in the long term. Nevertheless, should a real bear market begin in stocks generally, then we must expect all stocks to participate in the decline. Few stocks, however good, are likely to buck the trend.

New Recommendations

None

Action Ratings

The following is the legend for designating immediate action for our stock recommendations. The first is code B, meaning that the stock is timely to buy but the case for doing so right here is not overwhelming. Either the stock may have got ahead of itself and may be vulnerable to a retracement or else the stock has been performing disappointingly but may simply be regrouping. 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.

Current Recommendations:
(Entry Date, Entry Price, Last Close, Code, Name)

Stocks marked # are eligible for Canadian RSP funds. Otherwise there is a 20pc restriction on foreign stocks held in these accounts.

H 99/05/12 39.75 56.25 ADI Analog Devices
H 99/09/07 76.88 78.75 AMAT Applied Material
H 99/04/06 49.00 54.31 AMCC Applied Mic Circ (split on 99/09/10 2:1)
H 99/08/06 78.50 87.56 AMGN Amgen Co
B+ 99/06/14 30.63 32.13 AOG Alberta Energy Corp #
B+ 99/06/14 38.28 48.80 APA Apache
H 99/04/06 92.13 111.20 ASCND Ascend Communications
(acquired by Lucent 1.65 shares to 1)
H 99/09/07 84.94 89.00 BGEN Biogen
B+ 99/06/14 109.78 115.53 BPA BP Amoco Plc
SELL 99/05/12 94.38 119.00 BRCM Broadcom
H 99/09/07 57.69 59.00 BVF Biovail Corp
H 99/08/06 26.38 34.78 CHIR Chiron Co
H 99/05/14 40.69 45.63 CLS Celestica #
H 99/05/12 117.50 70.75 CSCO Cisco (split on 99/06/21 2:1)
B+ 99/06/14 14.59 19.48 CXY Canadian Occidental Petroleum #
H 99/05/12 54.61 60.02 EDS Electronic Data System
H 99/04/06 132.13 68.13 EMC EMC (split on 99/05/28 2:1)
B+ 99/08/09 86.31 42.69 ENE Enron Corp (split on 99/08/13 2:1)
H 99/06/14 31.13 31.75 ERICY Erickson
H 99/04/06 51.50 63.75 FLEX Flextronics
H 99/09/07 60.19 60.63 GENZ Genzyme
H 99/06/14 60.14 70.88 GLW Corning
H 99/08/09 48.75 51.31 HAL Halliburton Co
H 99/05/14 84.52 111.92 HWP Hewlett-Packard
H 99/05/12 220.77 134.75 IBM IBM (split on 99/05/26 2:1)
SELL 99/05/14 58.13 105.44 IDPH Idec Pharma
B 99/08/19 77.44 87.31 INTC Intel Corp
H 99/09/07 113.75 112.00 JDSU JDS Uniphase Cp
H 99/04/06 60.83 64.89 LLTC Linear Tech Corp
H 99/04/06 32.75 58.75 LSI LSI Logic
H 99/05/12 25.06 24.06 NOVL Novell
H 99/04/06 163.19 89.13 NOK Nokia (split on 99/04/09 2:1)
H 99/04/06 65.66 44.83 NT Nortel Networks # (split on 99/08/19 2:1)
H 99/06/14 93.56 108.44 PHG Phillips Electronics
B+ 99/05/12 106.06 109.25 PMCS PMC Sierra (split on 99/05/14 2:1)
H 99/05/12 49.88 82.06 QLTI QTLI Phototherapeutics #
B+ 99/06/14 21.39 25.86 SDC Santa Fe International
H 99/06/14 35.97 55.67 SFA Scientific Atlanta
H 99/04/06 53.75 77.50 SLR Solectron
H 99/08/19 129.02 132.08 SNE Sony
H 99/04/06 130.94 85.69 SUNW Sun Microsystems (split on 99/04/06 2:1)
B+ 99/08/06 31.00 33.31 TLM Talisman Energy Inc
H 99/04/06 109.48 90.53 TXN Texas Instruments (split on 99/08/16 2:1)

In addition we recommend the following Closed End Funds, based on the assumption that Third World economic downturns are not going to last forever and that their stocks are now showing superb technical strength

B+ 99/04/06 6.63 9.88 FAK Fidelity Adv Korea
B+ 99/04/06 8.88 11.50 IFN India Fund
B+ 99/04/06 8.05 13.86 JOF Japan OTC Equity Fund
B+ 99/04/06 11.00 14.44 KF Korea Fund

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