February 15, 1997

Bond and equity markets continued to perform very well over the last month as what appeared, initially, in December and January to be the first glimpses of inflationary trends, all of a sudden subsided. On Friday Feb 14, the Producer Price Index in the US was announced as falling 0.3% for January, after having increased by 0.6% in December. This was the first monthly decline since March of 1991. Consensus had been for an increase of 0.3%. During the last month, retail sales also came in at a lacklustre pace. The only signs of some inflationary pressure were in average hourly wages and the wage component of the employment cost index. Commodity prices trended lower as evidenced by the Commodity Research Bureau Index reading of 239.51 on Feb 14 compared to 242.47 on Jan 16.

US long term bonds ended February 14 trading at a 6.53% yield compared with 6.82% Jan 16 and 6.46% on Nov 15. Long Canadas closed at 6.81% compared with 7.35% a month ago, quite an improvement. Two year maturing US treasury notes yielded 5.77 vs 5.97% on Jan 16 while Canadian 2 year bonds improved slightly to yield 3.97 % compared with 4.00% on Jan 16.

Stock markets continued to set new highs. The Dow Jones Industrials average stood at 6989 on Feb 14 compared with 6765 on Jan 16. At this level it now trades at 19.7 times trailing earnings compared with 19.5 times a month ago and yields 1.92% on cash dividends. The S&P's Composite Index at 808 compares with 770 a month ago to trade at 22.5 times earnings compared with 21.4 times on Jan 16. Dividend yield is 1.87% compared to 1.95% a month ago. The TSE 300 index closed at 6214 compared to 6104 a month ago to trade at 23.5 times better trailing earnings compared with 25.1 last month. Market expectations are obviously based on an expanding rate of growth in corporate earnings. The price of gold on Feb 14 recovered over the last few days to close at $346.40US compared to 353.80 on Jan 16 and to 370 in mid-December.

Until there are real and consistent signs of inflation bond markets should continue to trade at current levels. The stock market will most likely become even more preoccupied with levels of corporate earnings. With low interest rates prevailing, merger and acquisition activities could very well increase.

The following chapter The Pick will mention a few new special situation small-caps.