December 15, 1995

North American stock markets, in spite of a strong showing over the last two months, are still not overpriced. The Dow Jones Industrials average broke through the 5000 level, since our newsletter of November 17, with the greatest of ease, as did the Standard & Poor's 500 Composite index through the 600 level. The Toronto Stock Exchange 300 index is within 80 points of its yearly high. At respective levels of 5176.73, 616.37 and 4672.85 the indicies reflect price/earnings ratios of 15.8, 17.5 and 13.6, respectively and cash dividend yields of 2.2%, 2.3% and 2.3%. Bond markets, during this period, have also behaved well with long term US treasury bonds down to a 6.1% yield from 6.3% and long Canada's to 7.7% from 8%. Two year maturing US treasury notes yield 5.4% while Canada equivalents trade at a 6.3% basis.

Stock markets continue to be overwhelmingly dominated by institutional (pooled funds) and professional activities, as evidenced by the all time high volume recorded on the NYSE Friday, December 15. The younger turks who manage portfolios may feel somewhat more secure in their employment these days, now that performance has improved, and may take on a somewhat less aggressive investment stance in 1996. The not so younger turks, those who have not already cashed in their chips and moved to Vermont, will lead in this cautionary approach with increased hedging operations, if an increase is really possible, as was exhibited on Dec.15 over the triple bewitching hours.

Internet related stocks, such as Netscape, are going through a period of correction, since their stock prices had advanced much beyond fundamental value. This sector should continue to attract attention, nevertheless, as new IPO's come to market. Bank stocks should fare well. Their officers have avoided, this time around, bad loans to LDC's, LBO's and inflated real estate ventures, and even after rewarding themselves handsomely for these abstinences, there was enough profits to cause an adequate return on equity. Higher ROE's, a forgotten ratio lately, should prompt better P/E's to their stocks.

Finally, the Fed will in all probality ease rates before Xmas, if only to keep in step with Germany's Bundesbang drop of 0.5%, so that should get 1996 off to a good start. Profit taking in the new year, on the part of taxable investors, may not be an important factor. Have a good holiday, back on January 15, 1996.