March 15, 1996

News that non-farm payrolls in the US were up 705,000 sent both the stock and bond markets in a tailspin on Friday March 8. Continuing the volatility both markets rebounded during the week of March 11 as some of the other leading indicators were positive. On Thursday March 14 the US Producer Price Index for February came in at down 0.2% versus expectations of up 0.2% and the following day, March 15, the US Cosumer Price Index for Feb. was announced as up 0.2% while that of Canada was up only 0.1% (1.3% year over year). While the economy is showing signs of strength, inflationary factors led by wage restraint are, for the time being, absent. The US Conference Board stated that the US GDP would grow by an average of 2.6% in 1996 and that long term bonds would hit 7%-7.5%, the latter a sentiment shared by few for the moment. The notion that the US Fed would lower short term rates can now be forgotten. The yield curve between short & long term is becoming flat and approaching normal levels. Many forecasters continue to believe that long term bonds will once more inch back down to the 6% yield area. If this happens and bearing in mind that election years are favorable to markets, North American stocks should continue to perform well.

The Dow Jones Industrials average at 5586 on March 14 (virtually unchanged from 5580 on Feb 15) trades at 17.6 times earnings, the Standard % Poors Composite index at 641 (656 on Feb 15) at an 18.7 p/e ratio and the Toronto Stock Exchange 300 index at 4975 (5060 on Feb 15) at a 15.7 p/e. All thre indicies yield about 2.2% on cash dividends.

Long term US treasury bonds yield 6.66% (6.09% on Feb 15) compared with Canada's 8.20% (7.67% on Feb 15). Two year maturing US treasury notes yield 5.70% (4.81% on Feb 15) and Canada 2 year bonds yield 6.22% (5.33% on Feb 15). The deterioration in bond markets over the last month now provides investors looking for income the opportunity to obtain reasonably good yields. This may attract new funds without necessarily prompting a switch out of stocks (where fundamentals still appear favorable) into bonds. There appears to be still plenty of money available for investment into North American markets, whether generated locally or coming from abroad.