Market Conditions

As we forecast, stocks charged powerfully before the Christmas holiday. Last week completed an outside up week in the Dow Jones Industrials and a new high close. The probabilities strongly favor follow through, both in the short and intermediate term. That is to say that in all likelihood the week into New Year should deliver further gains. Once into the New Year, the immediate prospect of gains is more questionable. However, that should at worst mean no more than that there may have to be a few days or even weeks of consolidation before a further advance can get under way.

Treasury Bonds are revisiting the low made at the end of October, thereby expressing the highest yield for 1999. Our expectation is that bonds may be at or near a low for the time being and, in any case, higher interest rates are unlikely to halt the bull market in stocks.
We see a broadening out in the stock market and some tentative signs that the more speculative dot-com stocks may be vulnerable to a setback. Even stocks in some companies making money, such Cnet were not participating in the general strength in the days before the holiday. On the other hand, there are stocks such as Disney and International Paper, as well as some of the oil stocks that are starting to look good. In sum, there could be some rotation away from dot.coms and into the stocks of companies that have more substance.

It is customary when around the turn of a New Year for forecasters to attempt to divine which stocks are likely to do best for the full year ahead. We see two clear areas where we want to invest, and they are largely a continuation of our current theme. First, we want to continue to hold high tech stocks in companies engaged in Information Technology and in Bio-tech. Second, and possibly more surprisingly, we want to own oil and oil service stocks.

As far as we can tell, there may have been a major sea change in the petroleum industry. Petroleum stocks in the US have gone is the space of a few months from a record high level to a near-record low. It seems to be beyond doubt that OPEC, as well aer producers, sees the benefit of curtailing production enough to keep the price up. A reduction of, say 5 percent in production may make the difference between oil at $13 and oil at $26. So the advantages of cheating on quotas are less obvious that they used to be if the majority of producers stick with the cuts.
It is our strong view that there are two reasons for the comparatively lackluster performance of oil stocks in the face of such strong oil prices. The first is that stocks generally lag on any major trend change. Investors are slow to believe that the trend change has really occurred, remembering still the pain suffered during the preceding bear market. The second reason for the sluggish performance of the oils is that more adventurous money has been going helter-skelter into high-tech stocks. Why buy Exxon going nowhere when you can buy Yahoo! that is skyrocketing?

Stocks to Sell

None
Hard as we look, we see no stocks to sell right here. We truly wanted to find stocks to sell because we would like to make room for some stocks for which there is a compelling case to buy now. We are not totally happy with market action in Solectron, since growth might be slowing a tad. However, the stock has recovered well from the recent correction so that it now looks like no more than a blip down on the chart. It was such a blip earlier in the year that got us inadvertently out of Qualcomm. Similarly, Flextronics has set back despite the stock split. However, we have no reason to suspect that the stock will stop going up at roughly its previous rate of climb.

On the other hand, we had timely exits from such stocks as Newbridge,
Hewlett Packard, IBM and Tyco, and our other winners have done well. So we are not complaining. You have only to look at recent market action in Chiron and Novell to see how patience can be reward after all when apparent sickness in a stock turns out to be no more than a temporary hiccup and not terminal pneumonia. Similarly, we are not totally happy with recent market action in Linear Technology and LSI, but we don't see that minor irritation as reason to dump stocks that still look wonderful on the monthly chart. The temporary lackluster action is more likely to provide a buying opportunity than reason to exit, although we prefer to see at least a strong daily buy signal before repeating our recommendation for these two stocks.

Some people would sell at least some shares in Yahoo! and some of our other winners that have done exceptionally well. It is worth pointing out that however overextended these stocks may be, the big money is made in the long term by letting profits run and by cutting losses short. Yahoo! in particular has what we regard as the single best Internet franchise. Unlike many net stocks it is making money. We love its business plan and we love the stock. Although we hesitate to buy more here, we have little doubt that the stock will in due course, say within the next five years, be worth several times its current price. A growth rate in excess of 50 percent annually has to lead quite fast to a reflection of that growth in the value of the stock as well as its price.

New and renewed recommendations

Having found no stocks to sell, we still see many that are extremely attractive to buy here. There are many, many stocks to which we now attribute a double B plus buy rating. In particular, we want to single out Corning (GLW). Our understanding is this company has the unique attraction of doing business in all three of the main areas of fiber optics data transmission, comprising the fiber, the switching and the photonics. Therefore, the company could be an even better buy at current price levels than JDS Uniphase (JDSU) or Nortel, the two other stocks that we have recommended in this area.

We are re-stating with particular emphasis our recommendation to buy overseas closed end funds. We don't see improving on the ones we have selected. However, we like all the India funds as well as Taiwan, Singapore and Turkey. Sony is the best known substitute for Japan and, curiously, it is an eligible stock for Canadian RSPs, because it is listed in Toronto. This company is a powerhouse of innovation, which should in due course lead to a very much higher stock price even though the stock has come a good way since it broke out.

There are several biotech stocks that look attractive in addition to the ones already recommended. We see no point, however, in adding more stocks in this sector when we like our current recommendations as well as any others in this sector.

It is worth pointing out that among the majors Disney (DIS) looks like a buy right here, but we see stocks that we prefer, like the oils.

Buy Santa Fe International (SDC) $24.78 and Suncor (SU)# $41.50.
As we mentioned above, our enthusiasm for oil stocks has come back strongly. We don't by any means think we were wrong in buying oil stocks before when we did, but rather that we were just a bit early. We are buying back into Santa Fe International. This oil service company has a wonderful balance sheet and it is already enjoying rich profit margins far better than other oil service companies such as Schlumberger and Halliburton. Also, its stock chart is really shaping up well. We also strongly recommend the oil stocks previously recommended, with most of them carrying a B++ rating. For new money we particularly recommend BP Amoco, Alberta Energy (AOG) and our new recommendation Suncor. The latter has the best handle on tar-sands technology and is a tremendous beneficiary of higher oil prices. The chart looks great. Although not specifically recommended for its chart action or what we know of its fundamentals, we strongly recommend Occidental Petroleum for its 5.15 percent dividend yield Downside risk in any of the oils appears minimal at current prices (unlike Yahoo! and the high tech stocks). Although upside potential may be less than there is in high tech, the reward to risk ratio looks superb.

Buy Research in Motion (RIMM)# $44.25

This company makes wireless equipment for receiving and transmitting email and business data (the BlackBerry). It has recently reached agreement for its products to be marketed by Dell. The stock ran up on that announcement and then settled back significantly. Although the stock is moderately speculative, we rate the reward to risk as fantastic and one that fully justifies a small holding in almost any account. Note that unlike many small high tech companies, this one is making money already.

Buy Dell Computer Corp (DELL) $52.69
We let this stock get away on us when it first started moving and we have missed the first $10 that we might have caught. Nevertheless, we see this stock getting on its way again for a hefty move. Never mind amazon.com! There is no better-established Internet marketer than Dell. And, of course, the company is profitable, albeit with relatively slim margins on its huge turnover.

Buy Level 3 Communications (LVLT) $84.56
This is a fantastic chart. The company is building the leading edge network for data transmission around the world. Although there will be no revenue, let alone profit for a couple of years, this could be the Microsoft or the Dell of worldwide data transmission. There was a big article about the company a few months ago in Barron's. The chart for Quest also looks great but we think LVLT could be the big one.

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 81.38 ADI Analog Devices
B+ 99/09/07 76.88 121.63 AMAT Applied Material
B+ 99/04/06 49.00 118.00 AMCC Applied Micro Circ (split on 99/09/10 2:1)
H 99/08/06 78.50 54.19 AMGN Amgen Co (split on 99/11/29 2:1)
H 99/06/14 30.63 31.88 AOG Alberta Energy Corp #
B++ 99/11/16 73.03 88.75 BCE BCE Inc
H 99/09/07 84.94 81.75 BGEN Biogen
H 99/06/14 109.78 59.69 BPA BP Amoco Plc
B++ 99/09/07 57.69 81.81 BVF Biovail Corp #
B++ 99/08/06 26.38 41.94 CHIR Chiron Co
B 99/05/14 40.69 54.00 CLS Celestica # (split on 99/12/21 2:1)
B++ 99/11/16 34.94 46.75 COMS 3Com Corp
B 99/05/12 117.50 104.44 CSCO Cisco (split on 99/06/21 2:1)
H 99/06/14 14.59 19.69 CXY Canadian Occidental Petroleum #
H 99/10/05 22.94 31.60 DGN Data General
(acquired by EMC on 99/10/07 .3125 to 1)
B+ 99/11/01 45.50 68.06 DT Deutsche Telekom
B+ 99/04/06 132.13 101.13 EMC EMC (split on 99/05/28 2:1)
B 99/06/14 31.13 59.94 ERICY Erickson
B+ 99/04/06 51.50 42.56 FLEX Flextronics (split on 99/12/22 2:1)
B+ 99/11/01 41.63 51.81 FS Four Seasons
B++ 99/06/14 60.14 123.06 GLW Corning
B 99/09/07 113.75 298.06 JDSU JDS Uniphase Cp #
B 99/04/06 60.83 72.20 LLTC Linear Tech Corp
B 99/04/06 32.75 64.50 LSI LSI Logic
H 99/05/12 25.06 34.31 NOVL Novell
B 99/04/06 163.19 174.00 NOK Nokia (split on 99/04/09 2:1)
H 99/04/06 65.66 98.69 NT Nortel Networks # (Buy BCE)
(split on 99/08/19 2:1)
B+ 99/10/05 46.69 106.69 ORCL Oracle System
B 99/06/14 93.56 133.06 PHG Phillips Electronics
B+ 99/05/12 106.06 145.25 PMCS PMC Sierra (split on 99/05/14 2:1)
H 99/05/12 49.88 53.25 QLTI QTLI Phototherapeutics #
(split on 99/10/12 2:1)
B++ 99/12/13 39.00 46.63 SEG Seagate Tech
B+ 99/06/14 35.97 56.38 SFA Scientific Atlanta
B 99/04/06 53.75 91.50 SLR Solectron
B+ 99/08/19 129.02 236.50 SNE Sony
B+ 99/04/06 130.94 75.75 SUNW Sun Microsystems (split on 99/04/08 2:1)
(split on 99/12/07 2:1)
H 99/08/06 31.00 26.25 TLM Talisman Energy Inc #
B 99/04/06 109.48 107.45 TXN Texas Instruments (split on 99/08/16 2:1)
B++ 99/10/05 50.27 67.38 WMT Wal-Mart Stores
B 99/09/27 186.00 402.62 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 17.95 BZF Brazil Fund
B++ 99/11/16 10.50 11.00 FAK Fidelity Adv Korea
B++ 99/04/06 8.88 15.94 IFN India Fund
B++ 99/11/09 97.06 108.69 TMX Telefonos de Mexico

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