June 20, 1997

Over the last month, the economic news began with a mixed tone. On June 6, US non-farm payrolls for May were reported up 138,000 vs expectations of an increase of 235,000. That's bullish. However, the April figures were adjusted upward to 323,000 from that previously reported as an increse of 142,000. That's bearish. The US unemployment rate for May was reported at 4.8% down from 4.9%. May hourly wages rose 0.3%. However, from that point on all the news was good with respect to inflation. Retail sales came in down 0.1% as opposed to expectations of a 0.4% increase. The much watched for Producer Price Index came in at down 0.3% vs an expected increase of 0.1%. This is the fifth consecutive drop for the PPI, first time since 1952. US consumer prices increased by 0.1% as expected. US housing starts came in weaker than expected, down 4.8% to an annual basis of 1.37 million from 1.47 million. With inflation in check, there is very little likelihood for an interest rate increase by the Federal Reserve Boards at the next FOMC meetings slated for July 1 & 2.

Markets took the news very positively. US long term bonds ended June 18 trading at a 6.67% yield compared with 6.91 % on May 14 and 7.15% on April 14. Long Canadas closed at 6.74% compared with 7.08% on May 14 and 7.41% on April 14. Two year maturing US treasury notes yielded 5.99% vs 6.25% on May 14 and 6.49% on April 14, while Canadian 2 year bonds once more extended the gap with the US by yielding 4.32% on June 18 compared with 5.04% on May 14 and 3.97% on Feb 14.

Stock markets took off and are now trading at all time highs. The Dow Jones Industrials average stood at 7719 on June 18 compared with 7286 on May 14 and 6452 on April 14. At this level it now trades at 20.4 times trailing earnings compared with 19.3 times a month ago and 17.8 times on April 14 and yields 1.65% on cash dividends little changed from 1.69% a month ago. The S&P's Composite Index at 889 compares with 836 a month ago and 744 on April 14 to trade at 22.1 times earnings compared with 21.6 a month ago and 19.1 times on April 14. Dividend yield is 1.73% compared to 1.83 a month ago and 2.05% on April 14 a month ago. The TSE 300 index closed at 6498 compared to 6248 a month ago and 5679 on April 14 to trade at 22.2 times better trailing earnings compared with 21.8 last month and 20.5 times on April 14. The Canadian stock market over the last month lagged behind the US. Stock markets appear to be still reasonably priced in terms of earnings expectations and the absence of inflation. Dividend yields are low but this may be a result of corporations deciding to plow back profits into the business combined with some companies buying back stock in order to enhance shareholder value. The price of gold on June 18 at $340 compares with $347 a month ago and still down from the level of $370 in mid-December. Gold mining stocks continue to be laggards.

Canada held its national elections on June 2 and the Liberal Party once more won a majority of seats, but on a reduced scale, mainly on the strength of a dominant showing in the heartland province of Ontario. The country as a whole was rather divided by voting differently on a regional basis. The outcome appears to have had little effect on investment markets.

The PICK section this month is composed of the semi-annual report, covering the various stocks mentioned in this newsletter since August 1995.