January 15, 2003

In our last edition of December 14, we offered the opinion that the stock market lows of October 9 – 10 in most of the markets and that of mid-November for the Tokyo Nikkei-225 quit likely reflected the bottoms of this particular cycle.  We also suggested that the road ahead would be bumpy.  So far this appears to be holding true.

The S&P/TSX composite index at 68026664 is up 2% over the month and up 20% from the 5678 low of October 10 and is now down 40% from its all time high of 11,402 in September 2000.  The Dow Jones Industrial Index at 87858434 is up 4% over the month and up 22% from its low of 7197 on October 10 and is now down 25% from its all-time high of 11,750 on Jan 14, 2000.  At the current level, it trades at 22.8 times earnings of $385 to yield 2.14% on cash dividends of $188.  The S&P 500 index at 927889 is up 4.3% over the last month and is now up20.5% from the 769 low of October 10 and down 40% from its all time high of 1553 on March 23, 2000.   At the current level, it trades at 19.3 times indicated earnings of $48 to yield 1.71% on the $15.90 cash dividend.  The NASDAQ at 14481362 is up 6.3% over the month and up a snappy 31% from its low of 1108 on Oct 10 and is now 71.8% lower than its all-time high of 5132 on March 9, 2000.   The Russell 2000 Index at 396388 is up 2.1% over the last month and up 21.8% from its low of 325 on Oct 10/02 and is now down 34.6% from its all-time high of 605 in March 2000.

Looking at some world indices, London’s FTSE 100 Index at 39743878 is up 2.5% over the month and up 10% from its 3610 low of late September 2002, and is now down 43% from its all-time high of 7000 in January 2000.  Frankfurt’s DAX Index at 30373077 is down 1.3% over last month but up 20% from its low of 2519 of Oct 10 and is still down 62% from its all-time high of 8000 in February 2000.  Tokyo’s Nikkei-225 index at 8470 8516 is down 0.5% over the month but up 3.3% from its 19-year low of 8197 in mid-November 2002 and is down 60% from its high of 20,900 in March 2000.

The Bond Market continued to trade over the last 4 weeks at high prices and 41-year low yields, all within a narrow band.  10-year Canadas closed on Jan 14 at a yield of 5.01%, virtually unchanged over the month trading in a narrow band of 5.02% to 4.80% yield.  Two-year Canadian maturities also remained practically unchanged to finish trading at a yield of 3.22% on Jan 14 compared with 3.29% yield on Dec 13, after having traded in a very narrow band of 3.29% and 3.09% yields. US 10-year treasury bonds also closed little changed over the month trading at a 4.08% yield on Jan 14 compared with a 4.06% yield on Dec 13, but with more volatility trading within a band of 4.18% and 3.80% yield during this period.  US 2-year treasury notes closed a little higher at a 1.75 yield compared with 1.84% on Dec 13 and within a range of 1.86% and 1.60% yields.  Central banks were quiet during the holiday period and left overnight lending rates unchanged.  This investment newsletter continues to feel that the government bond market has topped out.

The US Federal Reserve Board next meets on Jan 28-29 and the Bank of Canada on Jan 21.  Both are expected to keep the overnight lending rate at 1.75% and 2.75%, respectively.

The Conference Board’s U.S. index of leading indicators rose 0.7% in November after gaining a revised 0.1% in October. The indicator is the Conference Board’s measure of the economy over the next 3 to 6 months.

Institute for Supply Management Index ISM (purchasing & non-manufacturing) came out at 54.7 in December compared with 57.4 in November and 53.1 in October. Anything over 50 is considered positive.

US 3Q 2002 GDP grew by 4% up from the 1.3% growth in 2Q but down from the 5% growth rate of the 1Q. For the year GDP in the US is expected to grow 2.9%.  Next year could be 3.3%

US Nonfarm Payrolls dropped by 101,000 in December compared with a revised loss of 88,000 in November, up from what was originally reported as a 40,000 drop.  Most of the recent drop was in the retail sector.  Over the year, payroll employment declined by 181,000 compared with a loss of 1.4 million in 2001.  Manufacturing continued its downtrend.  There were 65,000 factory jobs lost in December bringing the total number of jobs lost in this sector to 592,000 for the year.  This compares with a drop of 1.3 million in 2001.  Employment in manufacturing has declined by 2.4 million since its most recent peak in April 1998.  Retail trade employment dropped by 104,000 in December.  This followed a decline of 40,000 in November.  In contrast, employment in the services sector rose by 73,000 in December extending the gain to 590,000 for the year.  US unemployment rate remained unchanged from November at 6.0%.   Average weekly income rose slightly to $510.82 ($14.98/hr) in December from $510.61 ($14.93/hr) in November.  The average workweek remained stable at 34.1 hours.

The US Consumer Price Index rose 0.1% in each of October, November and December compared with 0.2% in September and 0.3% in August following a 0.1% increase in each of the previous 2 months.  For the year, the core rate excluding food & energy rose 1.9% in 2002, the smallest increase in 3 years.

The US Producer Price Index was unchanged in December after having fallen 0.4% in November. For the year, the producer price index rose at 1.2% compared with a 1.6% decline in 2001.

US Retail Sales rose 1.2% in December, led by a 5% increase in auto sales.  Ex-auto, retail sales were flat, reflecting, so far, timid holiday sales at retail chains.  However, November retail sales were revised upward to a gain of 0.9% from the 0.4% gain originally reported.

Housing starts rose 2.4% in November to an annual rate of 1.697 million. October was revised upward to 1.657 million as opposed to1.603 million as originally reported.

The CRB index closed at a recent high of 240, up 23% over the year but still a distance from the high of 264 in 2Q 1996. The largest component of this index is the Softs 23.5%, being cocoa, coffee, orange juice and sugar.  Three other components each have 17.6% weightings: Energy, Grains and Precious Metals.  Two other smaller components, each 11.8%, are Industrials (copper and cotton) and livestock (live cattle and lean hogs).  With the rise over the last year, so much for deflation.  Crude oil with the disruptions in Venezuela and the weaker dollar has been hitting recent highs, $33.65 on Dec 30 and over $30 over the last month to close at $31.65 on Jan 14, up $12, or 60% over a year.  Natural gas prices in the US continue to trade at yearly high prices due to cold weather and lower amounts of gas in storage.  Over the last month it traded as high as $5.34/million BTU and as low as $4.80, to close at $5.15 on Jan 14, a substantial increase from the depressed level of $2.30 a year ago.  Gold certainly broken through the resistance level of US$330/oz, having traded as high as $355/oz to close at $354 on Jan 14.  These are 5 ½ year highs.  The increase over a year is $67, or 23%.  Put in perspective, this compares with increases of a similar 23% for the CRB index, 60% for WTI oil, 135% for natural gas and a drop of 15% in the US$ compared with the Euro. Coffee closed at 65 cents/lb on Jan 14, virtually unchanged over the last month.  Cocoa, with continuing troubles in the Ivory Coast, continued to trade at high levels, closing at $2,160 a metric ton, an increase of $100 over the month, but some distance from its 17-year high of $2,405 attained on October 11/02.  The US dollar continues its weak trend ever since the US Federal reserve lowered thee overnight lending rate to 1.75% on November 6.  At the level 1 Euro=$1.0573 on Jan 10, it marked its weakest level since 1.0527 in November 1999.  In contrast, the Canadian dollar has been showing some strength, at least against the US$, closing at US$0.6488 on Jan 14, highest since last July and up from 0.6339 as recently as Dec 31.  The slightly stronger Canadian dollar in relation to the US dollar may be the result of the significant interest rate spread, particularly in short term maturities, 140 basis points higher in Canada.

Although it will not be a smooth road, it now appears that there will be better prospects in equities over fixed income in the months ahead.  Stocks of well-managed companies trading at 18 to 20 times earnings should be more attractive statistically and tax-wise than the currently low-yielding bonds. If President Bush’s proposal to eliminate the double taxation on corporate dividends is acted upon, many companies with extra cash may prefer hiking dividends rather than buying back stock.  That being the case, a 15% increase in the DJII dividends to $216 and retaining the current 2.2% yield, the Dow average would increase from its current 8785 level to 9820.  Likewise, with a 15% boost to S&P 500 dividends to $18.29 and retaining the same 1.75% yield would bring that index to 1045.  Finally, just think what stock markets could do if there’s no war in Iraq and the present leaders of Israel, Palestine and Iraq are, somehow, replaced in 2003.  This newsletter attempts to point out values displayed by individual companies in the section LATEST PICKS and through connecting links invites the reader to become more familiar with the entity.  This latest edition looks at 23 publicly traded situations, 7 for the first time.

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