April 8, 2000

North American stock markets continue to be most volatile but are now showing definite signs of correction, certainly in the high technology sector and also exhibiting, finally, rotation into other sectors in a flight for quality. The TSE 300 index at 9465 down from its all time high of 10,176 on March 27 trades at 33 times earnings to yield 1.13% on dividends. The Dow Jones Industrial Index at 11,111 has come back to trade close to its January 14 high of 11,750 and trades at 24 times improving earnings to yield 1.4%. The S&P 500 index at 1516 close to its March 23 high of 1553, trades at a 31.9 p/e to yield 1.11% on cash dividends. The NASDAQ trading at 4446 is down 13.4% from its high of 5,132 on March 9. The top 100 companies of the NASDAQ trade at 150 times earnings.

The volatility of the stock market can best be shown by examining one day’s trading. On April 4, the day after the NASDAQ lost 349 points (a correction of 7.6%), that same index at 1:15 PM was down 575 points, or 13.6%. An hour later it had recovered 452 points. It finished the day down 75 points, or 1.8% at 4149. But its total swing from top to bottom to close was a staggering 25%. Meanwhile, the Dow affected by the panic selling dropped 503 points, also at 1:15 PM. Less than a half four later it had recovered 365 points and ended the day down 57 points at 11,165. Trading volume shattered all records. NASDAQ volume to 4:00 PM was 2.79 billion shares while NYSE volume was 1.5 billion. It does not seem that long ago when a good day on the Big Board was 200 million.

The bond market acted in much more stable fashion. Because governments are buying back 30-year maturities, hence they are becoming scarce, this newsletter will now be comparing 2-year maturities with 10 year ones. US 10 year bonds over the last month traded in a yield range of 6.39& to 5.86%, the latter being on April 7. 2-year treasuries traded in a range of 6.75% to 6.38%. 10-year Canadas traded in a range of 6.15% to 5.82% while 2-year Canada bonds traded in a range of 6.03%-5.84%. In all instances, the higher bond prices (and lower yields) were on April 7, the last day of this review. Higher interest rates in the short term, at least in the US, reflect Federal Reserve action and is partly responsible for strength in the US$ as it attracts investment from abroad.

Commodity prices, as measured by the CRB futures index, stood at 210 on April 7 compared with 207 a month ago and is up 21% over a year. Gold slipped to $279.80 on April 7, down from $292 a month ago, within a 52-week range of $324.50 - 253.00. Oil is finally correcting, $25.04 on April 7 down from its 9-year high of $34.37 in the first week of March.

Gold : On March 21, 2000 the Bank of England sold at auction its 5th and last 25-tonne lot (803,600 ounces) in its 1999/2000 financial year program. Bids came to 3 times that amount and the allotment price was set at $285.25. Both of these figures were on the low side, a disappointment. Earlier in the month, the British Treasury announced their 2nd program for fiscal year 2000/2001, 6 auctions at 25 tonnes each, the first 2 taking place May 23 and July 12. Combined, these two programs amount to 275 tonnes out of the planned disposal of 415 tonnes, the goal being to reduce the UK’s reserve from 715 tonnes to 300 tonnes. On March 26, France’s Parliamentary Finance Commission suggested that the Bank of France sell gold to help finance the reinforcement of the French state pension system. The amount being mentioned is $22 billion and at current gold prices this would represent 85 million ounces. At last count, France had reserves of 97 million ounces (9% of total world reserves). Since the Bank of France is a signatory of the Washington Agreement, sales would most likely begin only in late 2004 and is therefore a long-term issue. Much of France’s gold reserve was built up in the French Indonesian banking system at the time of the Vietnam military invasion.

The US economy continues to perform very strongly. US Gross Domestic Product for the fourth quarter of 1999 was again revised upward to a rise of 7.3% from last month’s 6.9% and from the initial 5.8% annual rate. US Retail sales in February increased 1.1% on top of the 0.4% gain in January.

From an Inflation-reporting point of view, the month of March produced at first glance rather tame results. The US Consumer Price Index in February rose 0.5%. For the 12 months, CPI rose 2.1% close to the January 12 month year over year increase of 1.9% which was the smallest since 1965. The US Producer Price Index for February was up 1.0% vs expectations of a 0.6% increase. Consumer spending rose 8.2% in the 12 months through last January and the rate of personal saving continues to show a sharp decline. US non-farm payrolls for March rose 416,000 vs an expected increase of 393,000. The unemployment rate was unchanged at 4.1% and average hourly earnings rose 0.4%.

On March 21, the Fed raised the overnight bank rate by a quarter percent to 6%. It is expected that a further similar increase will take place on May 16. The Federal Reserve Board is determined to cool down the economy by lowering the rate of demand. The current account deficit in 4Q 1999 grew to $99.8 billion compared with $89.1 billion in the 3rd Q. For all of 1999 the gap grew to $338.9 billion, equal to 3.7% of GDP. The US trade deficit in January was $28 billion, up from $24.6 billion in December. The Fed is also concerned with margin debt which grew at an annualized rate of 173% in the 3 months ended February to a record $265 billion.

The underlying trend in the stock market is still up but there is also significant overvaluation and rampant speculation. The tech sector of the market is in a bubble.

The current edition of LATEST PICKS will look at several stocks, some overlooked.


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