January 23, 2002

In our edition of September 28, 2001 we indicated that the selling climax required to turnaround the continually weakening stock market had occurred and in our edition of November 23 we reaffirmed this.In most cases, corporate earnings in 2002 will be weak and common shares will, again, appear to be overpriced on a historical basis when judged by the traditional norms of price/earnings and dividend yields.Investors will have to look down the road to 2003 earnings and will have to compare dividend yields to the continuing low interest rates provided in fixed income vehicles.

North American stock markets have put on a good performance over the last 4 months, particularly when compared with the lows of September 21, 2001.The TSE 300 index at 7598 is up 2.2% over the last 2 months compared with 7432 on Nov 23/01 and up 14% from the 6669 level of Sept 28/01.It is now down 33.4% from its high of 11,402 in early September of 2000.It is still impossible to calculate what kind of earnings, or lack of, that one can associate to the index, but it yields 1.57% 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 9731 is down 2.3% from the 9960 level at Nov 23/01 and up 12.1% over the 8681on Sept 28 and is now down only 17.2% from its all time high of 11,750 on January 14, 2000. At its current level it trades at 26.7 times trailing earnings of $364 to yield 1.87% on dividends of $182. This compares with 22 times and 2.07% on Sept 28.The Dow Jones Transportation Index has bounced back nicely and now stands at 2756 up 33% from 2069 on Sept 28.It is now down only 12.7% from its high of 3157 of early January 2001. At current levels it trades at a yield of 1.18% to cash dividends of $32.50.The S&P 500 index is not doing as well as the Dow, currently at 1128 up 10.7% from 1019 on Sept 28.It is now down 27.4 % from its high of 1553 on March 23, 2000.At the current level it trades at 39.8 times earnings of $28.31 to yield 1.39% on cash dividends of $15.69.This is up 10.7% from the level of 1019 of Sep 28/01 when it was trading at 27.6 times then higher earnings to yield 1.54% on cash dividends.The NASDAQ at 1922 is up 31.5% over the 1461 at Sept 28.It is still down 62.5 % from its March 9, 2000 high of 5,132.There are a lot of incongruities to these indexes, perhaps forcing the investor to look at sub-categories, removing, for example, high-techs and airlines.

With the continuing cuts in discount rates by North American central banks combined with the sluggish economy, Bond markets, over the last two months have traded at low yield levels, but did not test the lows encountered during the first couple of weeks of last November.For example, 10-year Canadas are currently trading at a 5.40% yield compared with 4.87% on Nov 10 and to 5.43% at year-end 2001 and 5.34% at year-end 2000.2-year Canada bonds are trading at 3.14% 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.US 10-year bonds are currently trading at a 5.01% yield compared with the low of 4.31% on Nov 10 and 5.11% level at year-end 2001, which was virtually unchanged from the 5.10% yield at year-end 2000.2-year US Treasuries are now trading at a yield of 3.00% compared with the low of 2.45% on Nov 10 and with 3.16% at year-end 2001 very much down from the 5.16% yield at year-end 2000.While there could be another quarter of a point drop on the US overnight rate on January 30, chances are that bond markets are trading close to its lows and that we will most likely see higher yields and lower bond prices later on in the year.

The US Federal Reserve Board on December 11 once more cut the overnight lending rate for the 11th time during 2001, this time by a quarter of a point, to 1.75%, its lowest level in 40 years. On January 15, 2002, the Bank of Canada lowered its key overnight lending rate by a quarter of a point to 2% which prompted the major Canadian banks to lower their prime lending rate to 3.75% from 4%.There is a good chance that the Fed will cut once more on January 30, 2002 by a quarter of a point to 1.5%.Although there are very few signs of inflation, there are indications that the economy may be picking up, perhaps as early as in 2Q of 2002 and that this cut in interest rate may be the last.Any increase may not be forthcoming until early 2003.

The University of Michiganís Index of Consumer Sentiment continues to produce high results, registering 94.2% in January, 88.2% in December and 83.9% in November.

The U.S. index of leading indicators rose 1.2% in December, 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 manufacturing index of the Institute for Supply Management (formerly known as the National Association of Purchasing Management, NAPM) increased to 48.2 in December, the 2nd straight monthly rise; (2001 monthly average was 43.9).

The US Trade Deficit narrowed in November to $27.89 billion from $29.33 billion in October, but still ranks high.Furthermore, both exports and imports were weaker and the only reason why the deficit was less was because exports were weaker by nearly 15% and imports were down by more then 15%.

3Q GDP contracted at a 1.3% rate, poorest performance since a drop of 2% in 1Q 1991.

US Nonfarm Payrolls declined by 124,000 in December, after falling by 371,000 (revised) in November and 448,000 (revised) in October.The total of 943,000 for the 3 months is, indeed, a depressing figure. The unemployment rate in December rose to a 6-year high of 5.8 %, up from 5.6% in November and 5.4% in October.This rate will continue to rise over the next couple of months.This is still lower than the 7.8% rate in the 1990-91 recession.Average weekly income in December rose 0.5% to $499.66 from $495.81 in November, or 7 cents/hr to $14.61/hr.

The US Producer Price Index declined 0.7% in December, after falling 0.6% in November and 1.6% in October.For the year 2001, the price index fell 1.8% after rising 3.6% in 2000.

The US Consumer Price Index eased 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%.

US Retail Sales in December appear to have come out flat after having declined 3.7% in November and having increased a record 6.4% in October (due to discounts on automobiles).

Housing starts continues to be a positive element of the economy in the US.Preliminary starts in December were at an annual rate of 1.57 million, compared with 1.62 million (revised) in November and 1.52 million in October. This was primarily the result of warmer temperatures and lower mortgage rates.

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 is currently trading at $18.00, down 38% 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 at $284.70 is up 3.5% from the $275/oz level of 2 months ago.While certain vocal groups would like to see a much higher price, a forecasted range of $270 to $295 for 2002 made by Gold Fields Mineral Services Ltd. may be bang on.When interest rates increase, central banks will find it again to be profitable to lend out gold to the hedge market, once more satisfying gold producers intent on generating cash flow through forward sales.In any event, since gold is measured in US currency, one can make a strong case that the US$ will remain firm when the economy picks up.

In summary, corporate activity should improve over the year as inventory destocking ends, combined with a slight improvement in demand.Reported earnings might increase due 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 too high.If this does realize, but in 2003, and a 25 times multiple is assigned, it would imply a 1250 level, 11% higher than current levels.North American stock markets, traditionally, required a breakout through its 40-week moving average, i.e.1100 on the S7P 500 and 1900 for the NASDAQ.This has recently occurred, but only time will tell if the penetration will hold up.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 list some high-yielding Canadian investments, mainly trust units, as well as review 21 companies, 5 for the first time.

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