June 22, 2001

North American stock markets, sensitive to earning performances, nevertheless appear to be creating a base over the last month. The TSE 300 index at 7740 is down 3.5% from the 8024 level of May 12, 2001 and down 32.1% from its 52-week high of 11,402.  It now trades at 26.5 times trailing earnings to yield 1.58% 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 10605 is down 2% from the 10821 level of last months edition and is down 9.8% from its all time high of 11,750 on January 14,2000. At its current level it trades at 22.7 times earnings to yield 1.57%.  This compares with 20.5 times and 1.67% at year-end 2000.  The S&P 500 index at 1225 is down 1.7% from the 1246 level of May 12/01 and still down 21.1% from its high of 1553 on March 23, 2000 and now trades at 26.8 times earnings to yield 1.30% on cash dividends.  This compares with 1329, 24.7 times and 1.2% at the end of December.  The NASDAQ at 2035 is down 3.4% over the last month but still up 21.6% from the low point of 1673 of April 3/01 and, of course, still very much down 60% from its March 9, 2000 high of 5,132.  Of interest is the fact that all 4 indexes went in tandem, with the TSE and NASDAQ somewhat poorer performers due, no doubt, to the technology sectors, still out of favour.

Bond markets, in the last month, rose in reaction to lower interest rate yields.  10-year Canadas are currently trading at a 5.64% yield compared with 5.87 yield on May 12 and with 5.34% at year-end 2000, while 2-year Canada bonds trade at 4.74% compared with 4.90% a month ago and the 5.27% yield at the end of last year.  US 10-year bonds currently trade at a 4.94% yield compared with 5.46% yield a month ago and the 5.10% level at the end of December, while 2-year treasuries now trade at a yield of 3.96% compared with 4.32% a month ago and 5.16% at year-end 2000.  While there may one more cut in interest rates, the low yields make the bond market unattractive to the investor.

The US Federal Reserve Board on May 15 lowered the overnight rate a fifth time this year, each time by one-half of 1%.  The Open Market Committee meets next on June 26-27 and while there are mixed signals in the economy, a further cut, perhaps this time a quarter of a percent could take place.  If a half-point cut is made, it may be the last in this series of aggressive moves by the Fed to stimulate the economy and employment.  At the current 4%, the overnight rate is at its lowest since the 3.75% in May 1994.

There are, indeed, mixed signals in the economy.  Over the last month, the US Producer Price Index in May rose 0.1%, after rising 0.3% in April.  The US Consumer Price Index in May rose 0.4% after a 0.3% gain in April.  US Nonfarm Payrolls for May came in much stronger than expected, falling only 19K, vs an expected drop of 50K.  The unemployment rate fell 0.1% to 4.4% vs expectations of a rise to 4.6%.  Average hourly earnings increased 0.3% (less than the expected 0.4%) to $14.26 from $14.22.  Meanwhile, US factory production in May fell 0.8% after a drop of 0.6% in April.  Industry operated at 77.4% capacity, down from 78.2% in April and is now at the lowest since August 1983.  The US trade deficit narrowed in April to $32.2 billion from $33.1 billion in March, but still high in relation to February’s $26.9 billion.  On the bright side, US home-building starts at an annual rate of 1.622 million in May was down only slightly from April’s average of 1.629 million and the average so far this year is the second best since 1986, topped only by that in 1999.  Finally, the US index of leading economic indicators rose more in May than in any month in the last 1½ years.  The Conference Board’s index increased 0.5% after rising 0.1% in April and was the largest rise since December 1999.  This means that the Federal Reserve’s five cuts so far this year may be starting to have some effect and that, combined with rebates to taxpayers starting next month, may help initiate a moderate recovery in the economy by the end of the year.

The CRB index at 205 is down from the year-end figure of 229, indicating the effect that commodity prices are having on inflation.  Light crude oil at US$26.50 is down from US$29 at year-end and from its high of US$37 last year.  Natural gas, during this mid-season period, at US$3.75 is down from the $10 level reached in December and January but should be on the rise soon when higher electricity demands pick up in high heat seasonal temperatures.  Gold, currently trading at US$273, appears to have traced out a support level at $265-266, and may be prepared to make a run at $290 for no particularly good reason, other than to make some money for some of the big banks.

The following section, LATEST PICKS, will review 16 companies, again with a certain emphasis on energy stocks, as well as some of a speculative nature.

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