February 23, 2002

North American stock markets marked time over the last month with weaknesses appearing mainly in the high-tech oriented NASDAQ market, the Nortel-influenced TSE and to a lesser degree the S&P 500.The blue chip DJII went merrily up on its own voyage.The TSE 300 index at 7427 is down2.3% over the lastmonth compared with 7598 on Jan 23/02, but up 11.3% from the 6669 level of Sept 28/01.It is now down 34.9% from its high of 11,402 in early September of 2000.Because of certain company components running significant losses, the index still doesnít have earnings, but nevertheless trades at a level to yield 1.65% on cash dividends.This compares with 22.8 times earnings and a yield 1.28% at year-end 2000 when corporate earnings were higher. The Dow Jones Industrial Index at 9968 is actually up 2.4% over the month from the 9731 level at Jan 23/02 and up 14.8% over the 8681on Sept 28 and is now down only 15.2% from its all time high of 11,750 on January 14, 2000. At its current level it trades at 27.1 times trailing earnings of $368 to yield 1.83% on dividends of $182. This compares with 22 times and 2.07% on Sept 28.†† The S&P 500 index is not doing as well as the Dow, currently at 1090 down 3.4% over the last month from 1128 on Jan 23/02, but up 7% from 1019 on Sept 28.It is now down 29.8 % from its high of 1553 on March 23, 2000.At the current level it trades at 28.1 times earnings of $38.72 to yield 1.45% on cash dividends of $15.80.††† The NASDAQ at 1724 is down 10.3% over the last month from 1922 on Jan 23/02 and is now up 18% over the 1461 at Sept 28/01.It is still down 66.4 % from its March 9, 2000 high of 5,132.

With the Fed, after initiating 11 cuts to the overnight lending rate in 2001, keeping the rate unchanged at the FOMC meetings Jan 29-30, Bonds have traded in a narrow range over the last month.For example, 10-year Canadas are currently trading at the month low 5.27% yield compared with the 4.87% low of Nov 10/01, the 5.43% at year-end 2001 and 5.34% at year-end 2000.Over the last month the rate varied between 5.27% and 5.45%.2-year Canada bonds are trading at a 3.26% yield compared with the low of 2.69% on Nov 10 and with 3.21% year-end 2001 and down significantly from the 5.27% yield at year-end 2000.Over the last month, they traded within a range of 3.14% and 3.38%.US 10-year bonds are currently trading at the month low 4.83% yield compared with the low of 4.31% on Nov 10/01 and 5.11% level at year-end 2001, which was virtually unchanged from the 5.10% yield at year-end 2000.Over the last month they traded between 4.83% and 5.09%.†† 2-year US Treasuries are now trading at the month low yield of 2.92% compared with the low of 2.45% on Nov 10/01 and with 3.16% at year-end 2001 very much down from the 5.16% yield at year-end 2000.There is a good chance that bonds will continue to trade at these low yields for the better part of the year, certainly until the economy shows signs of strengthening, forcing the Fed to start thinking of increasing overnight rates.

The US Federal Reserve Boardheld pat on the overnight bank lending rate when they met on January 30/02., thus keeping the rate at the 40-year low of 1.75% after 11 cuts in 2001.

The University of Michiganís Index of Consumer Sentiment fell to 90.9% for February compared with 94.2% in January, 88.2% in December and 83.9% in November. These are still high.

The Conference Boardís gauge of Consumer Confidence dropped to 94.1% after having risen to a revised figure of 97.8% in January.

The Conference Boardís U.S. index of leading indicators rose for a 4th strait month, this time for 0.6% in January, compared with Decemberís rise of 1.3%, this on top of increases of 0.8% in November and 0.1% in October.The indicator is the Conference Boardís measure of the economy over the next 3 to 6 months.This is a positive development.

The US Trade Deficit narrowed in December to $25.3 billion compared with Novemberís $27.89 billion and $29.33 billion in October, but still ranks high.Furthermore, both exports and imports were weaker, the difference for the improvement being lower prices for imported petroleum and fewer car imports.

The initial reading of the 4Q GDP is that it expanded by 0.2%.3Q GDP contracted at a 1.3% rate, poorest performance since a drop of 2% in 1Q 1991.

US Nonfarm Payrolls declined by 89,000 in January after falling 130,000 in December, 371,000 in November and 448,000 in October.The total of 1,038,000 for the 4 months is, indeed, a depressing figure. The unemployment rate in January fell to 5.6% from the 6-year high of 5.8 % in December.This is still lower than the 7.8% rate in the 1990-91 recession.Average weekly income in January of $496.08 compares with $499.66 in December.Hourly income held at $14.59 compared with $14.61/hr in December.

The US Consumer Price Index rose 0.2% in January month over month bringing the year over year inflation rate down to 1.1% and core inflation rate down to 2.6% YoY.This compares with a drop of 0.2% in December after being flat in November and falling 0.3% in October.During all of 2001, the CPI was up 1.6%.

The US Producer Price Index rose 0.1% in January compared with declines of 0.6% in December, 0.5% in November and 1.6% in October.For the year 2001, the price index fell 1.7% after rising 3.6% in 2000.

US Retail Sales in January, excluding auto and parts, increased a larger than expected 1.2%.Including cars retail sales were down 0.2%.

Housing starts continues to be a positive element of the economy in the US. Preliminary starts in January were at an annual rate of 1.678 million, compared with the revised 1.579 million in December,1.62 in November and 1.52 million in October. This was primarily the result of warmer temperatures and lower mortgage rates.

US Factory orders rose 1.2% in December reclaiming a portion of the 4.3% drop in November.Inventories fell again, 0.6% in December, extending the consecutive drops to 11 months.

The CRB index at 190, unchanged over the last 2 months, is down 17% from 229 at 2000 year-end, reflecting the lack of inflationary forces.Light crude oil over the last month has made a nice rebound to its current level of $20.50, up from $18 a month ago, but still down 29% from the $29 level at 2000 year-end. OPEC producers appear to be happy if the price could maintain $20 over the next year.Gold made a dramatic move over the last month at one time hitting $305 only to trade down to its current level of $293.This is still up2.9% over the month from $284.70 and up 6.5% from the $275/oz level of 3 months ago.It is still difficult to see gold at much higher prices as long as interest rates and inflation remain low, the US dollar continue strong and countries keen on selling gold into a hard currency.This is in spite of gold producers deciding to sell less gold in the futures market.

In summary, corporate activity should improve over the year as inventory destocking ends, combined with a slight improvement in demand.Reported earnings will eventually increase due, among other things, to a change in accounting practice regarding reduced amortizations.Some analysts have been predicting earnings of $50 in 2002 for the S&P 500, which now appears to be far too high.If this does realize, but in 2003, and a 25 times multiple is assigned, it would imply a 1250 level, 14.7% higher than current level of 1090.North American stock markets, traditionally, required a breakout through its 40-week moving average, i.e.1100 on the S&P 500 and 1900 for the NASDAQ.This occurred briefly in January, but both indexes have backtracked over the last month.The S&P 500 does show some bottoming promise at 1080 but some resistance at 1130.The NASDAQ is less promising, now showing overhead resistance at both the 1900 and 2000 levels.Fortunately, there are always well-run companies capable of outperforming trends and this newsletter attempts to point out some of these as well as some overlooked small caps.

The following section, LATEST PICKS, will review 27 companies, 11 for the first time.

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