The Interim Update will generally be posted every Thursday by 4.00am NY time (4.00pm HK time).

Interim Update - 23 Feb 00

Stocks

The action during the first two trading sessions of this week does not appear to have resolved anything. In our Feb 9 Interim Update we pointed out that "a drop below the 1355-1360 area [in the March S&P] would most likely result in a filling of the Oct 28 gap in the 1320-1340 range." Well, on Tuesday we saw the S&P futures trade down into the top part of this 'gap' range (the low was 1336) and then rebound, thus leaving the majority of the gap 'unfilled'. Wednesday saw some early nervousness as Greenspan droned through the second installment of his Humphrey Hawkins Testimony. However, when the Fed Head did not utter anything especially negative a rally ensued.

It is highly unlikely that Tuesday morning's sell-off to the 1336 level in the March S&P completed the downside, but nothing is written in stone when it comes to the stock market. We'll just have to wait and see how far the current rally takes us. Our short-term outlook would become more positive if the S&P moved back down over the next week to successfully re-test support in the 1330s.

Although the recent S&P action has been indecisive and the Dow has continued to be 'heavy', the NASDAQ Composite and NASDAQ100 have once again surged to new record closing highs. Although a market that consistently makes new highs can only be regarded as bullish, the out-sized moves that continue to occur in what can best be described as 'story stocks' are a sign that we are nearing some kind of peak. Another reason for concern at the present time is that the declines in the Dow, the S&P, the Transports and the Financials have not even dented the bullish sentiment that pervades the NASDAQ. It certainly is "different this time" - it seems like only yesterday that a >10% fall in the Dow would be greeted with much consternation.

Another point worth mentioning is the huge bounce in the Internet stocks on Wednesday. Since the beginning of this year the Internet stocks have not been particularly strong, often under-performing other sectors within the technology group. In fact, TheStreet.com Internet Index is still 4% below its Jan 3rd high even after Wednesday's 7.6% rally. A move to new highs by this index in the near-term would be bullish and may indicate the start of yet another explosive tech rally, despite the already stratospheric prices.

In summary, the odds favour a failure of the current S&P rally and a drop back to at least the 1320-1340 range before a more sustainable rally-effort can be mounted. At some point the speculative high-fliers on the NASDAQ will be drubbed amidst a lack of new buying and a wave of margin selling, but with the market having just made new highs there is no evidence that such an outcome is imminent.

Gold

We would not be surprised to see the gold price pullback to the 275-285 range over the next few weeks before a substantial rally gets underway. However, as stated in the latest Weekly Update we are not interested in trying to finesse this market due to the huge upside risk that exists. An explosive rally could commence without warning. As such we continue to recommend that investors take advantage of any temporary pullbacks in the stock prices of the highest quality gold mining companies such as GOLD and HGMCY to add to their positions.

Based on our growing confidence that much higher gold prices are likely within the next few months we will make a change to the TSI Portfolio in order to increase our exposure to the spot gold price. We recently added Pacmin Mining (PML) to the Portfolio based on its excellent exploration results and prospective profit growth. However PML's existing hedge book, whilst protecting the company's future cashflow, may cause the stock to under-perform during a gold rally. We will therefore sell PML and replace it with Gabriel Resources (CDNX: GBU).

Interim Update - 16 Feb 00

Stocks

The stock market sold off during Monday morning and then recovered later in the day to settle marginally higher. On Tuesday we saw some concerted selling in the morning, driving the market below Monday's low, followed by a very strong rebound that resulted in the S&P exceeding Monday's high and posting a significant gain for the day. The type of action we saw on Tuesday is called an "outside up day" and is a very bullish development. The market then consolidated on Wednesday, unable to follow through on Tuesday's positive performance due to a lack of buying ahead of Greenspan's Humphrey Hawkins Testimony later today (Thursday).

We find it somewhat strange that both the financial news media and many stock market traders obsess over every Greenspan public appearance as though the Fed Head's words held the key to the market's future. This overwhelming focus on 'Greenspeak' continues to occur despite more than 3 years of evidence confirming that comments by the world's most revered central banker have, at most, a fleeting effect on the stock market.

The extraordinary attention paid to Greenspan's comments is even more surprising when it is realised that he has, throughout his career as an economist in both the public and private sector, demonstrated a complete inability to forecast both the stock market and the economy. For example, he described the outlook as being "unqualifiedly bullish" near the top of the market and the economy in 1973 and has been openly concerned about the high stock market valuation since 1996 (whilst fostering a monetary environment that was destined to drive stock prices much higher). In fact, Greenspan once again becoming "unqualifiedly bullish" may be the event that signals the end of this great equity bull market.

Rational or otherwise, the fact is that Greenspan's testimony has created a good deal of nervousness and we are unlikely to see any significant upside in the market until it is over and done with. Adding to the overall angst we also have the PPI on Thursday and the CPI on Friday. Since the market's near-term direction will be determined by Greenspeak and the price indices, and since we do not get advance copies of Government economic reports and FRB member speeches, we won't try to forecast the action over the remainder of this week. The market could actually break in either direction depending on the 'friendliness' of the above-mentioned factors. We are quite confident, however, that by the end of this week we will know whether Tuesday's "outside-up" performance was an important reversal and a signal that we have seen the lows, or just a strong bounce within an unfolding downward correction.

Looking past the immediate-term, one positive for the stock market that may be in the process of developing is a drop in oil prices. The oil price popped its head above $30 during the first half of this week, but with Market Vane's latest bullish consensus on oil at a staggering 95% and almost everyone in the world including President Clinton expressing their concern about rising oil prices, the scene is set for a retracement. It is way too early to say this with any confidence, but we may well have just seen the highs in the oil price for the first half of this year.

Whether it is prompted by a decline in the oil price or occurs for some other reason, we expect a strong rally in the stock market to unfold during the March - May period. In preparation for this rally we will look to add a few more tech stocks to the TSI Portfolio over the next 2 weeks. In fact we will immediately add SportsLine.com (SPLN) and will use Wednesday's closing price of $39.50 for record purposes (our initial stop will be set at $29). Two other stocks we plan to add over the next few days, depending on price action, are Critical Path (CPTH - a stock that we previously sold at $90 and is now trading for around $73) and Brilliant Digital Entertainment (BDE - currently trading around $5.50).

Gold

Yesterday Normandy Mining issued a statement on hedging that said: "At present there is no need, and at the current gold price no intention, to conduct further hedging as 60% of reserves (conservatively stated) are covered. Normandy continues to deliver into existing hedge positions, although at current prices with a predominance of options this is increasingly into the spot gold market." Normandy also reiterated its confidence in the gold price and called for greater transparency in the gold market on the part of bullion banks and hedge funds. Despite having a hedge book that is almost 3 times the size of Placer Dome's, Normandy's announcement did not have any noticeable impact on the gold price.

With gold stocks still not showing many signs of life, with the bullish consensus on gold at a relatively high 50% and with commercial interests net short gold futures on COMEX, the most likely near-term direction for the gold price is down. However, with such enormous upside potential in this market we suggest the steady accumulation of gold stocks during pullbacks. The gold price may well drop back to the 275-285 range during the next few weeks, but much higher prices are likely over the coming months.

Interim Update - 9 Feb 00

Tuesday's excellent productivity numbers gave the market a lift, but were not sufficient to push the S&P futures contract (basis March) decisively above its 40 day moving average. In Wednesday's session the market was unable to surpass Tuesday's closing level at any time and finished sharply lower on the day. This action over the past 2 days may be indicating that the recent rally has run its course and the short-term trend is in the process of turning down.

It is becoming more and more difficult to talk about the 'market' since the major indices are all telling different stories. Whilst the S&P may now be entering a pullback following a strong run-up over the past seven trading sessions, the Dow has been notably weak and is now below its 200 DMA. At the same time the NASDAQ Composite and NASDAQ 100 are trading only slightly below their all-time highs and are showing no signs of weakness. Although the NASDAQ is gaining in importance and the technology sector is the area that we will continue to focus on as far as stock selections are concerned, the S&P500 is still the most widely traded index and will remain the centre of our attention as far as describing the overall market.

At this stage we expect some acceleration to the downside over the next 2 - 3 weeks, although probably nothing dramatic. A reasonable minimum objective for the decline is a re-test of the recent lows around 1360. A drop below the 1355-1360 area would most likely result in a filling of the Oct 28 gap in the 1320-1340 range.

The failure of the S&P to break-out despite the good economic numbers is one cause for concern. Another is the astounding complacency in the market. On CNBC on Wednesday one analyst captured the mood quite well when he tried to make the argument that it was difficult to pin any particular valuation on Cisco provided that its top-line growth continued to be strong. In other words, the stock was possibly a 'buy' at any price as long as it maintained its growth rate. This example of total contempt for anything approaching rational valuation techniques is unnervingly similar to the 'nifty fifty' psychology that prevailed in the early 70s. At that time a number of companies (the "nifty fifty") were thought to have such dominant market positions and wonderful growth profiles that every investor should buy them regardless of price. Unfortunately, the prices of the "nifty fifty" stocks were more than halved during the 73-74 bear market. Polaroid, one of the most popular members of the group, lost 90% of its value.

After months of lying dormant, the gold market has once again come to life. Following the surprise $20+ jump in the price last Friday, the first 3 days of this week have seen large moves in both directions.

The fundamentals for gold have improved markedly of late, with confirmation coming from a number of large producers that they will be delivering gold into their hedge books in the future and not rolling their hedges forward. As such, a large source of supply appears to be drying up. With an already existing deficit of physical gold in excess of 100 tonnes per month and now a further reduction in supply, the gold price looks set to rise to a point where privately-held bullion is attracted into the market to extinguish the deficit. Should investment demand begin to accelerate at some point as investors shift even marginally away from stocks and bonds an explosive up-move is not only possible, it is likely.

The continued under-performance of gold stocks concerns us. The so far unimpressive reaction of the gold stocks to the latest gold rally may be saying that further consolidation will occur before a major move up unfolds. However, with such enormous upside potential in this market we suggest the steady accumulation of gold stocks during pullbacks. Upside breakouts such as Friday's gold price surge tend to foretell of bigger things to come.

Interim Update - 2 Feb 00

The Fed did not surprise the market, raising both the Fed Funds Rate and the Discount Rate by 0.25%. A 0.5% increase would have been more bullish for both the stock and bond markets because it would have been perceived as removing the necessity for further rate hikes. As it stands and with the announcement on interest rates being accompanied by words that suggest a 'tightening bias', another upward adjustment in rates at the next FOMC Meeting (Mar 21) seems almost a given. Since the economy will certainly not slow markedly over the next 6 weeks, it would seem that only a large decline in the stock market would dissuade the Fed from taking further action when they next meet.

Our latest Weekly Market Update contained the following statement: "...with a lot of trepidation now in the market due to the recent sharp drops in the major indices and the upcoming FOMC Meeting, a strong rebound should occur very shortly. Whatever low point is reached on Monday or Tuesday (or Friday's 1362 level if this is not taken out during any further sell-off early in the coming week) will then provide the next line in the sand, penetration of which will probably set off another round of liquidation." The rebound we were expecting occurred following an initial drop on Monday morning to 1357 on the March S&P. If this level is penetrated during any decline over the next few weeks then we would probably see a quick drop to around 1320 (there is still an unfilled gap in the chart in the 1320-1340 area courtesy of the upside explosion that occurred on Oct 28 last year - this gap provides a minimum downside target for the next sell-off).

The greatest short-term downside risk revolves around this Friday's Employment Report. If the report shows a further tightening of the labour market, for example, a drop below 4% in the unemployment rate and a higher than expected increase in average hourly earnings, then some nervous selling would likely result. The next drop into the mid 1300s, if/when it occurs, will probably not generate the same level of buying interest that greeted last week's mini-liquidation.

The most bullish near-term scenario we envisage for the market would be a drop to around 1320 some time during the next 2 weeks, followed by some consolidation in the 1290-1360 range for two or three weeks, followed by a strong rally to new all-time highs by the end of May. This is also our most likely scenario. Lower probability and more bearish scenarios would see the market either surge straight upwards from current levels, thus magnifying Fed action and the subsequent correction, or drop hard and then fail to find support around the 1290 area.

T-Bonds continue to rally with yields having plummeted from 6.75% to 6.28% over the past 2 weeks. Although there is probably some further upside in bond prices (downside in yields), the best part of the anticipated rally is most likely now behind us.

Regarding gold, our views remain unchanged from our latest Weekly Update. Although we do not think a gold rally will occur in the immediate-term (the next few weeks), we are always cognisant of the risks posed by a huge short position in physical gold and an inherently unstable monetary system. This is why we maintain a core holding in the stocks of some well-managed, financially-sound gold mining companies that are highly leveraged to the spot gold price.

Franco Nevada, one of our favourite gold stocks, was sold off heavily on Wed due to a small downgrade in the reserves and resources at its Ken Snyder mine. Despite our near-term bearishness on the gold price we will carefully assess the price action in FN over the next 2 days and may add it to the Portfolio if we see signs that it has bottomed.

Interim Update - 26 Jan 00

The major stock market indices have sold off so far this week, with most selling occurring in the tech sector. In our latest Weekly Update we mentioned that 1390 on the March S&P was a critical level and that any decisive break of this level may lead to panic selling. On Tue the March S&P dipped as low as 1398 before recovering. We do not consider this to be a test of the 1390 level - that is yet to come.

On Friday we get the US Employment Cost Index (ECI) for the period Oct-Dec '99. The consensus expectation is for a 0.8% increase - anything significantly higher than this would put further downside pressure on the market ahead of next week's FOMC meeting. Nervousness ahead of the FOMC and an earnings warning from DELL after the close on Wed probably mean the market will have trouble mounting any sort of rally over the next 3 sessions, even if the ECI comes in at or below expectations. However, increasing tension and a bit more downside action over the next few days will provide the potential for quite a strong relief rally after the FOMC meeting, irrespective of what the Fed does with official interest rates.

As advised in the last Weekly Update bonds looked extremely over-sold, setting the scene for a near-term rally. This rally appears to have begun. Bonds will get a boost if the Fed are seen to be taking firm action to rein in the excesses that are now becoming obvious to even the 'New Paradigm' crowd.

Gold still looks weak short-term, with the XAU closing below 60 on Wed. We will know we are getting close to a bottom in gold and gold stocks when we see the following:
1. The XAU rising or holding its ground in the face of a declining gold price
2. Market Vane's bullish consensus on gold dropping below 30%

Here is an update on some of the gold stocks we follow based on recently-released quarterly reports:

1. Durban Deep
From an operational perspective DRD's results for the Dec quarter were good, with a substantial rise in production and a decline in costs. Some shine was taken from the results by a US$6.4M charge for restructuring of the hedge book. This charge resulted from the purchase of 500,000 oz of put options to close-out the put options sold during the previous quarter (these were sold to finance the simultaneous purchase of 500,000 oz of call options), the purchase of an additional 185,000 oz of put options, and losses on buying back forward sold gold (not related to the Dec quarter). The company has also entered into some lease rate swaps on a portion of its forward sold ounces. The arrangement appears quite complex and seems to expose DRD to additional costs should gold lease rates increase beyond 1.5%. However, the company has confirmed that they have locked-in their lease rate until Sep 2000 and will not be entering into any further lease rate swaps in the future.

DRD's hedge book does not significantly limit their participation in any gold rally during the current year since forward sales are largely offset by the 500,000 oz of gold call options purchased during the Sep quarter. They have also now secured formal agreements with their banks that all hedging facilities are "unmargined". We have some concern that almost half their forecast production for the year 2001 has been committed at an average price of around US$285 and hope that weakness in the gold price over the short term will be used by the company to close out these commitments at a profit.

DRD continues to be one of the best stocks to own for investors wanting exposure to a rally in the gold price. However, any meaningful upside in the stock price is unlikely in the absence of such a rally.

2. Lihir Gold
Previously one of our preferred gold stocks due to its leverage to the spot gold price and large high quality resource, the Dec Quarterly Report issued by LHG last week was a disappointment. Production in the quarter was lower than anticipated and the company has shelved plans to expand its production to the 1M oz per annum level (Y2000 production is now likely to be around 600,000 oz). On the positive side, cash costs have been reduced and should remain under US$200 per ounce in the future. Production during the next few months will be adversely affected by maintenance work on the third autoclave.

Despite the poor results just issued, LHG owns one of the world's best gold resources. It could thus become a takeover target. In the absence of a takeover or a strong rally in the gold price the stock will probably continue to under-perform.

3. Normandy Mining
We have recommended that investors steer clear of NDY due to this company's expressed intention to continue to forward sell its future production irrespective of the gold price. However, having reviewed the latest quarterly report we believe NDY represents a reasonable, low risk investment at around A$1 per share for the following reasons:
a) Cash costs have been brought down to around A$300 per oz
b) Although the level of forward sales is still excessive, the company is tending to place more emphasis on hedging via uncommitted put options
c) In addition to being a 2M oz per year gold producer, NDY is also a large zinc producer and may soon be a large producer of magnesium. It thus provides exposure to other commodities that will benefit from the coming inflation. In particular, its results for the current FY will get a boost from higher zinc prices.

Interim Update - 19 Jan 00

On Wed 19 Jan the NASDAQ Composite achieved a new closing high. The closing level of the S&P500, however, remains 1% below its all-time high achieved on 31 Dec 99. After the bell positive earnings announcements from AOL, IBM and Apple will likely give the market a boost on Thurs.

The rotation out of tech stocks and into cyclical stocks that was apparent during the first 2 weeks of this year has now reversed, with investment interest switching back to technology. If the market is going to have one final surge over the next week, something that we believe may be on the cards, tech stocks are likely to continue their very recent out-performance during this up-swing. However, significant upside from current levels is by no means assured and market risk remains extreme. We expect the next correction, whether it begins immediately or after another week or so of rallying efforts, to be severe. Anyone who is heavily exposed to highly-speculative tech stocks will get badly burned.

Tomorrow we get the Trade Report for November. Another record deficit is anticipated and will probably put further pressure on bonds. However, with sentiment in the bond market at a bearish extreme a rally in bond prices (lower long-term interest rates) should commence quite soon.

Despite the rebound in the gold price over the past 2 weeks (following the initial Y2K sell-off), the XAU has failed to respond and is unchanged from its levels of 2 weeks ago. This confirms our forecast that gold prices will move lower before a sustainable rally gets underway. For a few weeks prior to a genuine up-move in the gold price we should see gold stock prices out-performing the bullion price.

On 18 January we took a small profit on Pacific Internet due to the overall market risk. We like the stock and will look to re-purchase it during a general market decline over the next 2 months. On 19 January we added Pacific Rim Mining (PFG.TO) to the Portfolio. PFG has achieved excellent exploration results at its wholly-owned Luicho Project in Peru over the past few months. Results to date indicate the potential for a 10M oz resource. The stock is in a strong up-trend and may become a target for a major producer.

Interim Update - 15 Dec 99

The 0.6% drop in the Value Line Index on 14 Dec caused the Momentum Indicator component of our Stock Market Model to drop to 0, thus confirming a SELL signal. This is the first SELL signal since the Model switched to a BUY signal on 29 Oct 99 and probably indicates that we have either already seen the top for the stock market or we are within a few weeks of a top. We are still expecting one final speculative surge to occur by mid January and will therefore not be selling at the moment. However, the extreme risk in the current market means we will be keeping tight stops on our Internet stocks and will be doing no further buying until the market's risk/reward ratio improves substantially.