April 15, 1997

This newsletter had been expecting a correction to the stock market in North America predicated on signs of inflation in December and January. In fact in the December edition, we called for a healthy correction within a continuing bull market to pullbacks in the Dow Jones to 6100, the Standard & Poor's Index to 700 and the TSE to 5400. In the January issue, we suggested that the US Federal Reserve Board would act at the FOMC meeting on Feb 4 by increasing the discount rate by 0.25%. Since neither events ocurred we were feeling rather humble in our March 15 issue, but we nevertheless quoted certain indecies pointing out a robust economy and some inflationary pressures. Since stock markets had advanced substantially since our first warning level of December, we adjusted the corrections down to the DJII at 6500, the S&P to 730 and the TSE to 5700. Well, the FOMC came through on March 25 by increasing the discount rate by 25 basis points. Shortly after, the correction began and on Friday April 11/97 the markets closed at 6392 for the DJII,738 for the S&P 500 and 5684 for the TSE 300. The last two days have seen some recovery and this newsletter feels that the correction has taken place. Investors appear to have heeded Fed Reserve Chairman Alan Greenspan's wake up call of December 5, a bit of a delayed reaction. This newsletter does not feel the Federal reserve Board members will increse rates at the next FOMC meeting on May 20.

On the economic front over the last month, US farm payrolls for March came in at an increase of 175,000 vs estimates of 195,000. March retail sales came in at an increase of 0.2% vs an expected increase of 0.8%. The March Producer Price Index in the US was actually down 0.1%, while the key Consumers Price Index in the US was up 0.1% for March. Finally, the Commodity Research Bureau Index was 244.66 on April 14 down from 246.93 a month ago. On balance, we are back to low inflation rates and a moderatively growing economy. This is manifested in continued strength in the US dollar and is reflected in a lower price for gold.

US long term bonds ended April 14 trading at a 7.15% yield compared with 6.95% March 14. Long Canadas closed at 7.41% compared with 7.19% a month ago. Two year maturing US treasury notes yielded 6.49% vs 6.17% on March 14 while Canadian 2 year bonds narrowed the gap to yield 5.50% compared with 4.49% on March 14 and 3.97% on Feb 14, quite a deterioration.

Stock markets finally made their correction. The Dow Jones Industrials average stood at 6452 on April 14 compared with 6935 on March 14. At this level it now trades at 17.8 times trailing earnings compared with 19.2 times a month ago and yields 1.93% on cash dividends. The S&P's Composite Index at 744 compares with 793 a month ago to trade at 19.1 times earnings compared with 20.5 times on March 14. Dividend yield is 2.05% compared to 1.91% a month ago. The TSE 300 index closed at 5679 compared to 6198 a month ago to trade at 20.5 times better trailing earnings compared with 22.5 last month. Stock markets appear to be reasonably priced in terms of earnings expectations. The price of gold on April 14 at $346 is similar to that of two months ago on Feb 14 but down from the level of $370 in mid-December and continues to reflect the strong US $.

Canadian stock markets are suffering a hangover from the Bre-X fiasco regarding the quality and quantity of their gold reserves at Busang, Indonesia. This will put a damper on the junior mineral exploration sector of the stock market. Only those companies with a track record, strongly capitalized and with most likely a senior mining company as partner stand a chance of doing well in the market place over the next several months.