April 9, 1998

This edition will cover the period between December 22/97, the date of the last newsletter, to April 8, 1998. During this period, in the face of much turmoil in Asian investment markets, the US and Canadian dollars strengthened in relation to other currencies, both long and short term bond markets remained stable with improved prices and lower yields while stock markets soared to new heights. Coincidental to factors emanating from abroad, markets may also be reflecting some changes in the fundamentals of an evolving economy.

In many respects the "new economy" makes use of factors which do not fit into the classical model adhered to in the past. A shift away from heavy industry and manufacturing has given rise to a growing service industry. Corporate downsizing and government spending restraints have reduced the number of measurable employment statistics. Mergers and acquisitions have also produced the same effects. Hence, people are employed and earn a living in a new fashion. There is more part time and self employment. These evolutions may also be manifested in spending patterns: for example renting and leasing vs purchasing. A growing elder population does not exactly lead to increased housing starts.

In the investment arena, interest rates in North America must be kept low in order to avoid attracting debt capital designed to assist the refinancing of Far East economies. On the investment market scene, a scenario consisting of low interest rates and lack of inflation has made North America equity markets attractive and popular. Low commodity prices and labour costs combined with productivity increases have contributed to increased profit margins.

The quest for increased levels of profitability combined with low borrowing costs have once more given rise to increased merger and acquisition activity. The combination of cashed-in wealth and somewhat fewer publicly-traded companies sets off a chain reaction for increasing demand for reinvestment. North American investment markets, both equity as well as bond, have become highly pooled (or institutionalized ): even more so as a result of program, hedging and index-related investing operations. Fortunately, the list of eligible investments is expanding, creating demand for new stock in companies coming to the market as well as into mid and small-cap issues. Investment markets, for the time being, appear to observe the classical rules of supply and demand. There appears to be a good supply of funds chasing after, quite often, the same investment targets.

During this period under review, US long term bonds went from a 5.90% yield level down to a 6.06 level on March 6 and back up to a 5.78 basis point level on April 6, to finish off yielding 5.83% on April 8. Long tem Canadas did not take as much of a bumpy ride, starting at a 5.97 % yield and finishing off at its best levels on April 8 yielding 5.55%. Two-year maturing US treasury notes were less volatile beginning the period trading at 5.68%, seeing its best level on Jan 15 at 5.23 to finish trading at 5.43 % yield on April 8/98. Canadian 2-year bonds traded in considerably more volatile fashion beginning at 5.22 on Dec 29, trading up to 4.51 on Jan 15 back down to 5.08 March 6, to finish off trading at a 4.81% yield on April 8. Short term Canadas were affected by the Bank of Canada's effort at strengthening the weak Cdn. $ in respect to the US $, and for that reason, and the only one at that, hiked its Bank rate 50 basis points on January 30, from 4.50% to 5.00%, now on a par with the US discount rate.

Behind these fluctuations were the following economic events:

US non-farm payroll

January figures came out at 358,000 vs an expected 238,000. February came out at 310,000 vs an expected 250,000. This gave the appearances of a fifth month in a row of over 300,000, largest sequence since 1994. However, a month later the Feb figures were revised downward to 252,000 and March figures came out as an actual decrease of 36,000 vs an expected increase of 208,000. Naturally, this made for euphoria in the bond market.

Unemployment rate and average hourly wages

US unemployment rate for January was unchanged at 4.7% and average hourly earnings were up $0.04 to $12.51. In Feb unemployment rate came in at 4.6% as expected and the average hourly wage was up 8 cents to $12.60. In March the unemployment rate rose to 4.7% contributing to the rise in bond prices along with the non-farm payroll figures.

US Producer Price and Consumer Price Indexes

US PPI for January came in at down 0.7%. On a year over year basis, this is down 1.8%, largest since Dec 1986. US CPI for January came in unchanged over the month and over the 12 month period was up 1.6%, the smallest 12 month increase since Jan 1987 when it was up 1.5%. US PPI for Feb came in down 0.1% and the CPI came in up 0.1%. March PPI extended the trend, down 0.3%, lower than the expected decline of 0.1%. Contributing to this were gas prices down 7.6%

Other stats.

US housing starts for Dec were down 0.8% to an annual figure of 1.52 million. Jan housing starts came in at an annual rate of 1.53 million. However, Feb starts were up 6.4% to 1.64 million, higher than the expected 1.57 and the highest level since 1987, ye gads! GDP for 4th Q 1997 was initially reported as up 4.3% but has subsequently been revised downward to 3.9% and now to 3.7%. US retail sales for Feb came in at up 0.5% but January was revised upward to an increase of 1.0% from 0.1%.

In stock markets, the Dow Jones Industrials average closed at 8891 on April 8, near its all time high of 9023 a few days before, and up 14.6% from the 7756 level of Dec 19/97, the beginning of the period under review. At this level, it trades at 22.9 times trailing earnings and yields 1.6% on cash dividends. The S&P's Composite Index at 1102, close to its 1123 high of a week ago, was up 16.4% from the 947 level at the beginning of this period and now trades at 27.7 times earnings to yield 1.45% on cash dividends. The TSE 300 index closed at 7571, close to its high of 7646 and up 17% from the 6535 level of Dec 19 and trades at 32.1 times earnings to yield 1.42%.

Clearly, the stock market, as a whole is trading at historically lofty levels. There appears to be better value in the US equity markets than in Canada. In order to maintain such levels, corporate earnings will have to grow at a 20% rate, no mean feat.

Commodity prices as measured by the CRB index continued at low levels, dipping down to a low of 223.72 during the period under review, to close at 225.36 on April 8. Among the various commodities, it is this newsletter's view that gold is in strong demand at these low $300 price levels and that the overhang supply, particularly from central banks, is not as abundant as many believe it to be. In fact there are now indications that European central banks may be planning on holding 20% of their reserves in gold within the context of the coming alignment of European currencies. Recommended viewing is the World Gold Council sight on the Internet at www.gold.org

This edition is featuring comments on five companies for the first time in The Pick section as well as reviewing 10 previously mentioned.