August 31, 2001

North American stock markets, sensitive to the weak economy and to poor corporate earning performances, are having a hard time finding a base, in a market that is split between the continuing correction to technology company evaluations and the lack of near-term visibility to the more basic industries. The TSE 300 index at 7418 is down 4.2% from the 7740 level of June 22, 2001 and down 35% from its 52-week high of 11,402.  It now trades beyond any earnings level to yield 1.69% on cash dividends.  This compares with 22.8 times earnings and a yield 1.28% at year-end 2000 when corporate earnings were higher. The Dow Jones Industrial Index at 9920 is down 6.5% from the 10605 level of the June22 edition and is down 15.6% from its all time high of 11,750 on January 14,2000. At its current level it trades at 25.1 times trailing earnings to yield 1.81%.  This compares with 20.5 times and 1.67% at year-end 2000.  The S&P 500 index at 1129 is down 7.8% from the 1225 level of June 22/01 and still down 27.3% from its high of 1553 on March 23, 2000 and now trades at 24.8 times earnings to yield 1.40% on cash dividends.  This compares with 1329, 24.7 times and 1.2% at the end of December.  The NASDAQ at 1792 is down 12% over the last 2 months and is up now only 7.1% from the low point of 1673 of April 3/01 and, of course, still very much down 65% from its March 9, 2000 high of 5,132.  The S&P 500 group of companies presently appear to offer better value, perhaps indicating that mid-size companies are performing better in these difficult economic times.  The TSE reflects the substantial losses incurred by Nortel.  The break-up of Canadian Pacific into 5 separate entities, each of which will be included in the index, may have a beneficial effect down the road as investment portfolios may wish to increase their dollar average representation in each of the five.

Bond markets, in the last few months, rose in reaction to lower interest rate yields.  10-year Canadas are currently trading at a 5.37% yield compared with 5.64 yield on June 22 and with 5.34% at year-end 2000, while 2-year Canada bonds trade at 4.26% compared with 4.74% in June and the 5.27% yield at the end of last year.  US 10-year bonds currently trade at a 4.77% yield compared with 4.94% yield in Late June and the 5.10% level at the end of December, while 2-year treasuries now trade at a yield of 3.64% compared with 3.96% in June and 5.16% at year-end 2000.  While there may one more cut in interest rates, the low yields make the bond market unattractive to the investor.

The US Federal Reserve Board on August 21 lowered the overnight rate a seventh time this year by a quarter of one percent (similar to the drop on June 27), bringing it to 3.5%, the lowest since 1994.  The Open Market Committee meets next in October and has given indications that there could be a further cut of a quarter of a point.  On August 30, the European Central Bank lowered its benchmark interest rate by a quarter of one percent to 4.25%.  Inflation covering their region was running at an annual rate of 2.8% in July down from a rate of 3.4% in May.  The ECB has made it their policy to react more so to inflation rather than to boost their economy as is the case in the US.  About 14% of what is produced in the ECM is exported to America and this combined with lower interest rates in the US has contributed to the drop in the value of $US vs $Euro of 8% since early July.

While manufacturing in the US is in the pits, there are still mixed signals to the economy.  For example, Leading Economic Indicators in July rose 0.3%, compared with the same rate in June and a 4% rise in May.  Construction of new homes in July rose 2.8% to an annual rate of 1.67 million, maintaining the best average since 1986, topped only by that in 1999.

US Nonfarm Payrolls were down 42,000 in July, much better than the 114,000 drop in June. The unemployment rate held steady at 4.5& for both June and July.  Average hourly earnings increased 0.3% in both months as well.

The weak economy is well reflected on the inflation side, the US Producer Price Index  fell0.9% in July (biggest drop since a 1% drop in August 1993) caused mainly by a 5.8% plunge in energy costs.  Nevertheless, this compares with a drop of 0.4% in June and a rise of 0.1% in May. The PPI, through the first 7 months of this year, has risen at an annual rate of 0.5% compared with an annual rate of 3.8% in the same period last year. The US Consumer Price Index fell 0.3% in July after a 0.2% increase in June.  So far in the first 7 months of this year, the CPI has risen at an annual rate of 2.8% compared with an annual rate of 3.9% in the same period last year.

The CRB index at 198 is down from the year-end figure of 229, indicating the effect that commodity prices are having on inflation.  Light crude oil is holding steadily at US$26.67, but down from US$29 at year-end and from its high of US$37 last year.  Natural gas, at $2.33 has plummeted from the $10 level reached in December and January, reacting to a somewhat cooler summer, but very much to the drop in industrial activity. It now appears that natural gas prices will rise only in the winter months but nowhere the price levels of last winter because of two factors: 1) increases in inventory and storage capacity, and 2) replacement by other forms of energy, back to oil and coal. Gold, currently trading at US$274, appears to have traced out a support level at $265-266, and may be prepared to make a run at $290 if it can pierce through a resistance level at $279.  Demand is strong, but is being met from supply coming from both central bank selling as well as from forward sales by gold mining companies.

The US trade deficit widened in June to $29.4 billion from $28.5 billion in May, but still down from the higher levels of $32.2 billion in April and  $33.1 billion in March.  The US Federal budget surplus fell to $2.52 billion in July, half its year-ago figure.  In June, a month when corporate tax revenues are high, the surplus was $31.9 billion compared with $55.9 billion last June.

The following section, LATEST PICKS, will review 20 companies, most of which will be oil and gas stocks, with an attempt to compare these in light of the recent substantial drop in the price of natural gas.  Also, there are comments on the companies to be split away from Canadian Pacific.

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