February 15, 1996

Stock markets keep churning on an upward spiral with nary a pause. The dilemma facing investors is that fixed income yields are so low they feel a requirement for holding stock. The expectation, then, is that a 2% cash dividend yield combined with whatever growth in capital will prove to be a combination that will perform better than short term deposits and longer term bonds. Both newly generated cash flow as well as funds coming from maturing instruments are being invested on a pooled basis, i.e. managed funds. This helps explain the tremendous volume generated on the various exchanges. Furthermore, many of these funds are chasing after the same securities.

While corrections must take place, North American stock markets are still not overpriced in the light of economic conditions. The Dow Jones Industrials average at 5580 (up from 5061 0n Jan 15/96)trades at 17.6 times earnings (15.5 times on Jan 15), the Standard & Poor's Composite index at 656 (602 on Jan 15) at an 18.7 p/e ratio (17.1 on Jan 15) and the Toronto Stock Exchange 300 index at 5060 (4753 on Jan 15) at a 15.6 p/e (13.9 on Jan 15). All three indicies are at levels indicating about 2.1% yield on cash dividends. The Canadian stock market currently exhibits slightly better capital appreciation potential as viewed by the TSE index. This is particularily so if one can eliminate the natural resource sector (mines, oil&gas) whereby the price/earnings ratio would then be approximately 12 times.

Long term US treasury bonds yield 6.09% (6.12% on Jan 15) compared with Canada's 7.67% (7.70 % on Jan 15). Two year maturing US treasury notes yield 4.81% (5.18% 0n Jan 15) and Canada 2 year bonds yield 5.33% (5.70% on Jan 15). The short term area is that which concerns investors looking for a reasnonable rate of return.

Inflation rates in North America continue to be low mainly because of cuts in government spending and steady labour costs. Hence, the low short term interest rates. An eye has to be kept on commodity prices. The Commodity Research Bureau index at 246.40 is not far off last week's high of 248.95, the highest level since January 1989. Sugar, cocoa and grain prices have been stronger. However, none of the commodity markets exhibit the hyperinflation trend of 1980, when the CRB index hit a high of 337.60. A word about gold. Senior gold producers are quite content to see gold at levels of US$400-410/oz. A favourable supply/demand scenario and strength in the US $ combined with low inflation make it difficult to see gold beyond 425 over the next year.