August 20, 1997

Over the last month, the economic news from the US front was good : moderate growth with little inflation. The month did begin on a rocky tone. On July 31, US real Gross Domestic Product for the 2nd quarter came in at an increase of 2.2%, higher than the expected 1.9%. The next day, on August 1, US non-farm payrolls for July were reported up 316,000 vs expectations of an increase of 200,000. The US unemployment rate for July was reported at 4.8%, down from June's 5.0%. US factory orders increased 1.2% in July, slightly above expectations of a 1.1% increase. These stats spooked both the bond and equity markets. Long US bonds came tumbling down to yield 6.67% from its high of 6.24% and long Canada's to 6.61% from 6.29%. From then on, the news got better. On August 13, the Producer Price Index came in down 0.1% vs an expected increase of 0.1%, the seventh consequetive monthly drop. The next test was retail sales and these were announced the same day as being up 0.5% vs. the expected increase of 0.7%. On August 14, the US Consumer Price Index for July came in at an increase of 0.2%, as expected. On a year over year basis, the CPI rose 2.2%. Markets took the news positively. The stock market, as measured by the big caps in the DJII which had corrected by 7% from its all time highs, bounced back. The bond rally brought US long terms to 6.54% and long Canada's to 6.53%.

US long term bonds ended August 19 trading at a 6.54% yield little changed from 6.52% on July 18. Long Canadas closed at 6.55% compared with 6.54% on July 18. Two year maturing US treasury notes yielded 5.82% vs 5.89% on July 18, while Canadian 2 year bonds reversed the gap with the US by yielding 4.16% on Aug 19 compared with 4.58% on July 18.

Stock markets took off at the begining of the month to trade at all time highs, then corrected rather dramatically and now, once more, appear to be on the rise again. The Dow Jones Industrials average stood at 7918 on Aug 19, up slightly from 7890 on July 18, but still down from its monthly and all time high of 8259. At this level it now trades at 21.2 times trailing earnings virtually unchanged over the month and yields 1.64% on cash dividends, same as a month ago. The S&P's Composite Index at 926, down from the month's high of 964 is higher than the 915 a month ago to trade at 23.0 times earnings compared with 22.7 a month ago. Dividend yield is 1.67% compared to 1.69% a month ago. The TSE 300 index closed at 6716 compared to 6738 a month ago, after trading as high as 6964 during the month to trade at 24.0 times trailing earnings compared with 23.3 last month. Dividend yield is 1.59%. Stock markets appear to be still reasonably priced in terms of earnings expectations and the absence of inflation. Dividend yields are low but this may be a result of corporations deciding to plow back profits into the business combined with some companies buying back stock in order to enhance shareholder value. The other major dilemmas are the low prevailing interest rates in short-term money market instruments, the consequent switching out of money market funds into equity funds and the resulting build-up of cash available to invest in equities. The price of gold on Aug 19 at $323 compares with $329 a month ago and is up from its 12 year of $315 in July but still down considerably from the level of $370 in mid-December. Gold mining stocks continue to be laggards.

There is no question that while North American equity markets appear to be reasonably priced in terms of inflation and growth in corporate earnings, they have, nevertheless, become volatile. The FOMC on Aug 19 held its steady course and chances are that interest rates will remain at the same level at the next meeting on Sept 20.

This months section, The Pick, will mention three companies for thr first time.