Market Conditions

Signs of an important low for stocks

We said that a 10 percent decline in stocks looked likely and, as represented by the Dow Industrials, it has now happened. It was our view that it would be almost impossible to sell out our recommended stocks and buy back at a better price. In the event that more or less proved wrong. Some of our stocks have been hammered quite hard. Nevertheless, most of them are likely to come back strongly. There is not a single one among them that has sustained enough damage to warrant selling, although our oil and oil service stocks have fared surprisingly poorly.

What now, having completed that forecast 10 percent correction? It looks to us as if last Thursday's selling may well have completed a selling climax. There have been several really heavy selling days in the past couple of months but last Thursday's was the heaviest since the one that occurred with the intermediate low last January. When there's such a scramble for the exit, the chances are very high that those that panic and those that scramble to put on new short positions will be doing exactly the wrong thing. Pessimistic sentiment is so think you could cut it with a knife. Yes, it's true that there is an apparent head and shoulders to in the S&P. However, stochastics have reached extreme oversold levels. While the price of the S&P 500 index has declined below its 40 week moving average, the average itself has not rolled over. The experience of recent times has been that the conjunction of price and the 40-week moving average has been a superb time to buy stocks, not to throw the towel in let alone to go short.

We are now approaching the time of year when a seasonal advance generally gets under way. Our interpretation of the technical indicators suggests that we shall not be disappointed this year. Despite the recent setback, there is still in force a powerful Lindahl buy signal on the weekly chart for the NASDAQ indexes. There is an enormous constituency that predicts a major bear market for US stocks. Our answer to that is "Where have you been since April 1998?" We have already had a bear market in many sectors for 18 months now, as represented by the Russell 2000 index and, arguably, even the Dow Transports. The high this summer for that index was no more than a bull trap. Following on from our observation that we have been in a rolling bear market for many stocks, it continues to be our view that many stocks will keep on going down. Among those likely to continue their bear market are many of the most wonderful stocks of the past 15 years. They are, however, ones that have now gone out of the sun. We see a very long list of stocks like
Berkshire Hathaway, Coca-Cola, Gillette and Sears that could halve from current price levels, although in the near term they should rally. But we still see New Economy stocks going higher. For a stock to go higher, it must truly have a wonderful franchise. It must have steadily increasing profits. And, most important, it must be supported by the buying pressure of new money coming into the market. We have to make the reservation that it is hard to find these stocks and the additional one that the market does not tolerate bad news. However, we think we can make money over time with a portfolio of stocks that are acting well on all these fronts. We expect to find enough stocks that double to make up for the ones that halve. Even among those that set back severely, the probabilities often favor being patient, as we have seen with EMC and Flextronics. We make the further reservation that we sense the possibility that 2000 may not be such a great year to own any stocks, even ones representing the New Economy. If we are right in expecting an advance from now until early in the New Year, then it is possible that even the best high tech stocks become so overpriced that the line of least resistance is down. We do not believe we are now there for stocks on our recommended list.

New Recommendations

Buy Yahoo! (YHOO) $183.31
We have been wary of buying pure Internet plays and we still are. It has seemed much better to buy stocks in companies that are suppliers to the Net. However, recent action in YHOO has been so impressive that we want to establish a position now when it is coming rapidly out of a savage correction. It is our view that YHOO towers over the competition to such an extent that its survival and eventual prosperity seem reasonably certain. When stocks generally were selling off last week, YHOO was strong, closing the week at the top. This is the kind of stock you want to buy after a sell-off. Strong stocks become even stronger when the general market turns up, while those that have been beaten up take time to recover, if they ever do.

Correction

A subscriber has pointed out that last week we inadvertently multiplied the reported annual profit for Solectron by four and thereby divided its P/E ratio by four. In fact it sells for a P/E of about 60. However, the growth rate for its sales is in the 50 percent range, so that its market action seems fully justifiable.

Action Ratings

The following is the legend for designating immediate action for our stock recommendations. The first code is 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. 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 five. 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.

B 99/05/12 39.75 56.31 ADI Analog Devices
B+ 99/09/07 76.88 78.88 AMAT Applied Material
B+ 99/04/06 49.00 59.81 AMCC Applied Micro Circ (split on 99/09/10 2:1)
H 99/08/06 78.50 77.88 AMGN Amgen Co
H 99/06/14 30.63 28.25 AOG Alberta Energy Corp #
H 99/06/14 38.28 39.80 APA Apache
H 99/04/06 92.13 106.76 ASCND Ascend Communications
(acquired by Lucent 1.65 shares to 1)
H 99/09/07 84.94 79.94 BGEN Biogen
H 99/06/14 109.78 107.66 BPA BP Amoco Plc
H 99/09/07 57.69 49.75 BVF Biovail Corp
H 99/08/06 26.38 31.81 CHIR Chiron Co
B++ 99/05/14 40.69 47.69 CLS Celestica #
B 99/05/12 117.50 69.00 CSCO Cisco (split on 99/06/21 2:1)
B 99/06/14 14.59 18.42 CXY Canadian Occidental Petroleum #
H 99/05/12 54.61 53.70 EDS Electronic Data System
B 99/04/06 132.13 69.06 EMC EMC (split on 99/05/28 2:1)
H 99/08/09 86.31 39.69 ENE Enron Corp (split on 99/08/13 2:1)
H 99/06/14 31.13 31.00 ERICY Erickson
B+ 99/04/06 51.50 60.06 FLEX Flextronics
H 99/09/07 60.19 50.50 GENZ Genzyme
H 99/06/14 60.14 63.69 GLW Corning
H 99/08/09 48.75 40.56 HAL Halliburton Co
H 99/05/14 84.52 96.45 HWP Hewlett-Packard
B+ 99/05/12 220.77 124.75 IBM IBM (split on 99/05/26 2:1)
H 99/08/19 77.44 75.61 INTC Intel Corp
B+ 99/09/07 113.75 108.75 JDSU JDS Uniphase Cp
H 99/04/06 60.83 63.61 LLTC Linear Tech Corp
H 99/04/06 32.75 52.69 LSI LSI Logic
H 99/05/12 25.06 20.56 NOVL Novell
B 99/04/06 163.19 88.31 NOK Nokia (split on 99/04/09 2:1)
B 99/04/06 65.66 46.89 NT Nortel Networks # (split on 99/08/19 2:1)
H 99/06/14 93.56 97.94 PHG Phillips Electronics
B+ 99/05/12 106.06 89.38 PMCS PMC Sierra (split on 99/05/14 2:1)
B+ 99/05/12 49.88 81.56 QLTI QTLI Phototherapeutics #
H 99/06/14 21.39 22.30 SDC Santa Fe International
H 99/06/14 35.97 48.86 SFA Scientific Atlanta
B 99/04/06 53.75 68.00 SLR Solectron
B 99/08/19 129.02 148.70 SNE Sony
B+ 99/04/06 130.94 90.19 SUNW Sun Microsystems (split on 99/04/08 2:1)
H 99/08/06 31.00 30.25 TLM Talisman Energy Inc #
H 99/04/06 109.48 83.78 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

H 99/04/06 6.63 9.25 FAK Fidelity Adv Korea
B+ 99/04/06 8.88 11.63 IFN India Fund
H 99/04/06 8.05 11.98 JOF Japan OTC Equity Fund
H 99/04/06 11.00 13.31 KF Korea Fund

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