Market Conditions

The bull market continues to roar, with many amazing advances just from our last report on November 25.

It now looks as if last week had enough of a shakedown for the standard rally into the year's end to get under way. However, with so many stocks having come so far, there could be violent turbulence any time, although we rate it unlikely there will bmuch of a correction until we pass into 2000. This is one of the most favorable times of year both for sentiment as well as for inflows of hard cash into stocks. Sentiment as measured by Market Vane and the positioning of the large speculators still shows a remarkable degree of skepticism about this move. Tops generally occur when there is unrelieved optimism, not when there is a high degree of skepticism. In particular, we note that the large speculators, largely the big hedge funds, have been heavily net short stock index futures while the commercials have been net long. Hedge funds can take only so much heat before they have to cover, driving prices ever higher in the process.

As a result of the runaway market, we have had to downgrade severely some of our best stocks, not because we love them any the less but because they are so overextended that there is so much risk of s setback is buying right here. Recent experience has been that the best stocks to buy have been exactly those running fastest, like JDS-Uniphase and Yahoo! However, when buying a stock on the run without a signal such as a strong daily upside reversal, you must buy a small enough position that you can live with a setback of as much as 30 percent without getting upset. In the meantime, there may be some opportunities at an earlier stage of development where the stock can be bought with just as much potential and a much lower downside risk. Notable examples of recent purchases in this category include Corning (GLW), Four Seasons (FS) and Wal-Mart (WMT).

There continues to be a case to dump the petroleum stocks, with the possible exception of BP Amoco, and to reallocate the money elsewhere. We hang in, with the expectation that patience will eventually be rewarded in responses to increased profits induced by higher oil prices.
There has been a fairly significant broadening out of the market, which suggests that the high flyers might not be as vulnerable as one might think.

It is worth noting that many airline stocks are starting to shape up, with UAL taking the lead. It is a low-risk buy right here but we still thing it better to buy stocks already in motion. When comparing UAL with WMT, for example, there is no contest. We want to own Wal-Mart. It may seem that the IPO market has become so crazy that it cannot but end badly. With this view we concur, but only for the IPO market and for dot-com stocks that have no visible means of support. Even if many of these stocks crash and burn, we don't necessarily see abandonment of stocks in companies that have sound business prospects, and especially ones that are making money. The Information Technology boom overall is soundly based, although naturally it is vulnerable to major fluctuations, as well as major rotation from one group to another within the sector.

There has been considerable controversy about the future trend in interest rates. Some say that the economic exuberance in the US and the economic recovery overseas must lead to increasing inflation and higher interest rates. Technically, the bond market is starting to suggest that its long bear market may be ending. That is not to say that they are likely to start a major new bull market for that would require very substantial economic slowing. However, a relatively stable interest rate environment, with bonds going more or less sideways, would create a relatively benign environment for stocks, and would likely avert a dramatic sell-off. Looking farther ahead to the early months of 2000, we foresee the possibility of high tech stocks having to correct. However, we doubt that a correction of any consequence will start before the first week of January at the earliest, and possibly not until the March-May timeframe.

Stocks to Sell

None
See the comment above on oil stocks.

New and renewed recommendations

The B++ list for this week includes just four stocks: Biovail (BVF), Chiron (CHIR), 3Com (COMS) and Wal-Mart (WMT). Chiron is notable for the fact that we appear to have successfully lived through a nasty correction that has amounted in the end to no more than a substantial correction on the long-term chart. The daily chart now looks a bit like the one for Four Seasons when we recommended it. It is curious that Amgen has been acting poorly compared with come other pharmaceutical stocks. It seems to move in surges, in both directions, and the monthly chart still looks great. It is worth noting that there is a strong case to buy Home Depot, one of the new Dow stocks, but we like WMT even better. We still love the concept of the Internet, but find it hard to recommend putting new money right here into YHOO, our number one favorite. There is a great case to buy Exodus (EXDS), but we are holding off from a formal recommendation for now.

Closed-end funds in developing countries continue to be star buys. In addition to those officially on our list, we love Singapore, Taiwan and Turkey. We do not love Thailand, Indonesia or Malaysia, and especially not Russia where the risk is totally unmanageable even though the technicals are improving solidly.

Buy Seagate Tech (SEG) $38.81
This is an asset play like the case for buying BCE rather than Nortel. The underlying asset that we want to own is its holding in Veritas, which alone is worth more than the current stock price. So you get cash as well as the hard drive business for nothing. More important for us is that the monthly chart is coming on side with a buy signal. The hard drive business generally has been under pressure but Seagate's makes money and could make a ton when this sector stabilizes. Recently it has paid not to buy the holding company rather than the high flyer, but here we find the combined fundamental and technical case compelling. The wild card is that Veritas might take a major hit but we don't see that happening.

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. There are several stocks at conspicuous buy points that warrant noting now.
Yahoo! looks ready to explode upward. This is the one pure Internet play that we think will hang in for the long term. Four Seasons has a conspicuously low-risk entry point here.

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 66.81 ADI Analog Devices
B+ 99/09/07 76.88 109.44AMAT Applied Material
B+ 99/04/06 49.00 96.69 AMCC Applied Micro Circ (split on 99/09/10 2:1)
H 99/08/06 78.50 44.75 AMGN Amgen Co (split on 99/11/19 2:1)
H 99/06/14 30.63 29.19 AOG Alberta Energy Corp #
B++ 99/11/16 73.03 76.28 BCE BCE Inc
H 99/09/07 84.94 72.81 BGEN Biogen
H 99/06/14 109.78 60.63 BPA BP Amoco Plc
B++ 99/09/07 57.69 74.94 BVF Biovail Corp #
B++ 99/08/06 26.38 33.94 CHIR Chiron Co
B 99/05/14 40.69 86.75 CLS Celestica #
B++ 99/11/16 34.94 43.06 COMS 3Com Corp
B 99/05/12 117.50 99.81 CSCO Cisco (split on 99/06/21 2:1)
H 99/06/14 14.59 18.56 CXY Canadian Occidental Petroleum #
H 99/10/05 22.94 29.51 DGN Data General
(acquired by EMC on 99/10/07 .3125 to 1)
B+ 99/11/01 45.50 60.00 DT Deutsche Telekom
B+ 99/04/06 132.13 94.44 EMC EMC (split on 99/05/28 2:1)
B 99/06/14 31.13 59.81 ERICY Erickson
B+ 99/04/06 51.50 90.00 FLEX Flextronics
B+ 99/11/01 41.63 52.69 FS Four Seasons
B++ 99/06/14 60.14 117.00 GLW Corning
B 99/09/07 113.75 244.25 JDSU JDS Uniphase Cp #
B 99/04/06 60.83 73.02 LLTC Linear Tech Corp
B 99/04/06 32.75 60.25 LSI LSI Logic
H 99/05/12 25.06 20.94 NOVL Novell
B 99/04/06 163.19 168.00 NOK Nokia (split on 99/04/09 2:1)
H 99/04/06 65.66 88.25 NT Nortel Networks # (Buy BCE)
(split on 99/08/19 2:1)
B+ 99/10/05 46.69 84.63 ORCL Oracle System
B 99/06/14 93.56 132.38 PHG Phillips Electronics
B+ 99/05/12 106.06 118.13 PMCS PMC Sierra (split on 99/05/14 2:1)
H 99/05/12 49.88 41.50 QLTI QTLI Phototherapeutics #
(split on 99/10/12 2:1)
B+ 99/06/14 35.97 59.69 SFA Scientific Atlanta
B 99/04/06 53.75 91.00 SLR Solectron
B+ 99/08/19 129.02 187.31 SNE Sony
B+ 99/04/06 130.94 81.88 SUNW Sun Microsystems (split on 99/04/08 2:1)
(split on 99/12/07 2:1)
H 99/08/06 31.00 23.81 TLM Talisman Energy Inc #
B 99/04/06 109.48 116.83 TXN Texas Instruments (split on 99/08/16 2:1)
B++ 99/10/05 50.27 63.20 WMT Wal-Mart Stores
B 99/09/27 186.00 353.50 YHOO Yahoo!

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++ 99/11/09 15.14 16.77 BZF Brazil Fund
B++ 99/11/16 10.50 11.44 FAK Fidelity Adv Korea
B++ 99/04/06 8.88 14.75 IFN India Fund
B++ 99/11/09 97.06 109.69 TMX Telefonos de Mexico

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