December 28, 2000

North American stock markets have had, over the last six months, quite a selective correction. The TSE 300 index at 8857 has dropped 22.5% from its Nortel-influenced high of 11,402 and now trades at 22.8 times earnings to yield 1.28% on cash dividends. This compares to 11,111, 31.9 times and 1.13% at the end of March. The Dow Jones Industrial Index at 10,803 has fared better and is down 8.1% from its high of 11,750 on January 14 and trades at 20.5 times earnings to yield 1.67%. These compare with 11,111, 24 times and 1.4% at the end of March. The S&P 500 index at 1329 is down 14.4% from its high of 1553 on March 23 and now trades at 24.7 times earnings to yield 1.2% on cash dividends. This compares with 1516, 31.9 times and 1.1% at the end of March. The NASDAQ has taken the largest tumble now at 2539 down 50.5% from its March 9 high of 5,132. The top 100 companies of the NASDAQ still trade at a lofty multiple of over 90 times improving earnings compared with 150 times in March.

Bond markets reacted well during this era of stable interest rates. 10-year Canadas are currently trading at a 5.34% yield compared with 5.82% in early April while 2-year Canada bonds trade at 5.27%, better than the 5.84% yield in April. US 10-year bonds currently trade at a 5.10% yield, better than the 5.86% level of early April while 2-year treasuries now trade at a significantly better yield of 5.16% when compared with the rate of 6.38% when the Fed was still increasing short term interest rates.

The CRB futures index currently stands at 229, not far off from its recent high of 233, this compared with 210 in early April. Gold has tended to trade in a narrow range over the last 9 months, as measured in a strong US$, now at US$275 compared with 280 in early April. West Texas oil popped up to US$37.20, recently corrected and now appears to be rising at $26, compared with a temporarily corrected $25 in early April.

The Federal Reserve Open Market Committee has held the overnight bank lending rate at 6.5% since May 16 when it had raised the rate by a whopping 0.5%. It is now leaning toward a possible drop at its next meeting in January, concerned about the weakness in the economy more so than a threat of inflation.

A lower rate of growth in the US may force investors to value stock markets at a lower multiple to earnings. For example, the S&P 500 index could trade closer to 20 times earnings, placing it at 1100, compared with its current level of 1329. The NASDAQ continues to be vulnerable to more downside risk. If the TSE were to trade at 20 times earnings, it would place the level at 7900, down from its current 8857. It is this newsletter's opinion that most of the damage has been done, certainly with respect to the over evaluation of the new economy participants. However, the next 6 months could be interesting ones for investors seeking performance in companies that have a proven growth record.

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

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