December 30, 1998

North American markets continue to react to a moderately growing economy featuring low inflation rates. Commodity prices, as measured by the CRB futures index, stands at 191, very near to its low of 189.3 of a few days ago. This compares to 225 in April. Gold at $286 is not much higher than its low of $275 in late August. Oil in recent weeks has traded at below the $10 level and trades today at $11.72.

Under these conditions, US long term bonds are trading at a 5.09 basis, after having recently traded below the 5.00 level. This compares with 5.83% in April. Long term Canadas trade at a 5.25% yield, compared with 5.55 in April. Two year maturing US treasury notes trade at a 4.66 yield compared with 5.43 % in April. Canadian 2-year bonds trade at 4.76, little changed from 4.81 % in April. The Bank of Canada rate at 5.25% is currently higher than the US discount rate of 4.75%, while in April they were both at 5%. However, on Main Street the US prime rate at 7.75% is a full one percentage point higher than Canada's prime of 6.75%.

US stock markets, after having corrected substantially in Sept-Nov, are once more trading at new highs. The Canadian stock market, with its heavy bias on resource industries relating to commodity prices, has not bounced back to the same degree. The Dow Jones Industrials average at 9320 trades at 25 times earnings to yield 1.65% on cash dividends. This compares with 8891 on April 8, 23 times earnings and the same dividend yield. The Standard & Poor's Composite Index at 1242 trades at 32 times earnings to yield 1.3% in dividends. This compares with 1102 on April8 when it traded at 27.7 times earnings to yield 1.45% in dividends. Meanwhile, the TSE 300 index at 6472 has not caught up to its 52-week 7822 high, but it nevertheless trades at a lofty 28.4 times earnings to yield 1.66% on cash dividends.

Many segments of North American stock markets appear to offer good value. However certain segments are completely overpriced. One in particular is the Internet-related stocks. Sectors that show appeal are the construction, real estate, leisure, transportation and possibly some of the commodity driven basic industries.