"Resilience and Headwinds"

09/16/2005 12:00 am EST

Focus:

Harry Schultz

Editor, International Harry Schultz Letter

"The response to Katrina reveals appalling open breaches in our society," says a skeptical Harry Schultz. "Indeed, the failures are ‘institutional’ and underscore our innate distrust of all governments and institutions." Here’s his assessment and top stock picks.

"Our in-house oil analyst, Gordon Frisch says: ‘Looking at the big picture of how Hurricane Katrina has impacted the oil industry, I think an even bigger impact will be felt on the US economy and will tip the US into recession. Implications are long-term. The two- and three-year yield curves inverted yesterday, another harbinger of recession. What Katrina did to US wholesale and retail oil markets was last felt this painfully during 1973’s OPEC oil embargo. This time Mother Nature imposed the squeeze instead of OPEC.' This assessment may bring forward my recession forecast for 2007-2008.

"Meanwhile, the US stock market remains outwardly resilient despite growing headwinds. Savvy NYSE specialists, who have an excellent track record, continue to embrace the market whilst the wrong way odd-lotters are shorting at record-breaking levels. Sentiment data in general is excessively bullish and whilst this data says nothing about timing, it clearly hints we in the last stage of this bear market secondary rallywhich always end with mega optimism.

"Interestingly, US investors put more money into world funds than US stock funds over the last five months. Diversification normally rewards, but signs of fatigue are now surfacing in charts of world stock markets, notably Europe. Differentiating between the end of a bear market rally and a simple pause for breath is always the hardest stage to analyze. As technical hints of major tops remain absent we favor a pause, but by nature bear markets often surprise to the downside, so placing stops (and/or tightening) is strongly recommended on all long positions.

"As for individual stocks, our top pick in the US right now is Alpha Natural Resources (ANR NYSE), which is a play on coal. We suggest buying a bit at market and/or buy if it dips to 28.85. We suggest a stop on a one-day close below 25.40. Our current top pick in Canada is a speculative play, Energy Metals (CA:EMC Toronto). The stock is a play on uranium and vanadium. Gamblers can buy a bit at the market or wait for dips to $3.30. Use a stop on a one-day close below $2.80."

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