April 15, 1996

Although early in the count, corporate earnings for the 1st quarter of 1996 appear to be showing healthy gains. There are signs of gains in retail sales, and commodity prices, in general, continue to increase, but not at overly accelerated rates. The US Consumer Price Index for March came in at an increase of 0.4% compared with street concensus for an increase of 0.3%. Earlier in the week, job creations of 140,000 in March compared with the revised figure of 624,000 in February, down from the initially reported 705,000. This again spooked both the bond and stock markets. The week ended on a firm note as a result of short coverings from professional investors that had bet ahead of time on these bearish sentiments. Wage restraints appear in place. Throughout this scenario, funds are pouring into equity mutual funds to such a degree that some open-ended funds are being closed. Some fund managers, particularily those managing small cap funds, are concerned about fewer stocks to choose from, in particular stocks that do have a measure of liquidity that enable them to both accumulate without driving up the price of the shares and to sell without depressing the price. This may also explain, in part, the popularity and price volatility of some IPO's, such as the latest, Internet search provider Yahoo.

The Dow Jones Industrials average at 5533 on April 12 is little changed from 5586 on March 14 and 5580 on Feb 14, and now trades at 17.6 times earnings to yield 2.2%. The Standard & Poors Composite index at 637 on April 12 is also little changed from 641 on March 14 and 656 on Feb 15, and trades at the equivalent 18.8 times earnings to yield 2.3%. The Toronto Stock Exchange 300 index at 5022 compares with 4975 a month ago and 5060 on Feb 15 and trades at 16.1 times earnings to yield 2.1% on cash dividends. This may indicate that Canadian stock markets offer somewhat better value at the moment.

Long term US treasury bonds yield 6.82% vs. 6.66% on March 14 and 6.09% on Feb 15. Long term Canada's yield 8.21% vs 8.20% vs. 7.67% over the same dates. Two year maturing US treasury notes yield 5.97% on April 12 vs. 5.70% on March 14 vs. 4.81% on Feb 15. During this same period of time, 2-year Canada bonds yield 6.23% vs. 6.22% vs 5.33%. The deterioration in the bond market appears more pronounced in the US than in Canada and is the result of fears that a stronger economy will bring on inflation. While one can now throw out the idea of a cut in the discount rate, a case might also be made that most of the near term damage has been done.

In summary, North American stock markets continue to show decent value. Investors, however, must be quite selective and also keep an eye out for any signs of an accelerated rate of inflation.