May 15, 1997

Over the last month, the economic news was biased to the positive side and, hence, both the bond and stock markets in North America behaved well. The stock market continued its trend upward after having retracted the 8-10% correction in March-April as outlined in last month's newsletter and in keeping with the predictions set forth over previous newletter editions.

On April 29, US durable goods orders were reported down 3.0% for March vs an expected increase of 0.2%. The employment cost index was up 0.6% for the '97 1Q vs an expected rise of 0.9%. These were positive elements. On April 30, it was announced that the US GDP for the 1Q of'97 was up 5.6%, the largest increase since 4Q of 1987, as opposed to expectations of a 4.0% increase. This was negative for bond markets. US personal income was reported up 0.6% in March. The big figure for the month was reported on May 2: US non-farm payrolls for April were reported +122k vs expected +209k. US unemployment for April was reported at 4.9% vs 5.2% in March. In Canada, the employment rate rose to 9.6% in April, up from 9.4% in March. In the US, wholesale sales were down 0.9% in March. On May 8, Greenspan commented that an agressive cycle of rate hikes is not likely to be warranted in 1997 as was the case in 1994. The next important set of stats were reported on May 14-15: US retail sales were down 0.3% vs an expected drop of 0.4%. US Producer Price Index fell 0.6% vs an expected increase of 0.1%. The US Consumer Price Index came in as expected, up 0.1%. US April capacity utilization was reported at 83.4%, down 0.3% from March's. All told, then, the economy exhibited growth with not too much inflation. It is this newsletter's belief that there will not be an interest rate hike at the FOMC meeting of May 20.

Markets took the news positively. US long term bonds ended May 14 trading at a 6.91% yield compared with 7.15% April 14. Long Canadas closed at 7.08% compared with 7.41% a month ago. Two year maturing US treasury notes yielded 6.25% vs 6.49% on April 14 while Canadian 2 year bonds regained somewhat the gap to yield 5.04% compared with 5.50% on April 14 and 3.97% on Feb 14.

Stock markets bounced back and some. The Dow Jones Industrials average stood at 7286 on May 14 compared with 6452 on April 14. At this level it now trades at 19.3 times trailing earnings compared with 17.8 times a month ago and 19.2 times on March 14 and yields 1.69% on cash dividends compared with 1.93% a month ago. The S&P's Composite Index at 836 compares with 744 a month ago to trade at 21.6 times earnings compared with 19.1 times on April 14. Dividend yield is 1.83% compared to 2.05% a month ago and 1.91% on March 14. This also indicates that the broader market is catching up somewhat to the 30 Dow Jones stocks. The TSE 300 index closed at 6248 compared to 5679 a month ago and 6198 on March 14 to trade at 21.8 times better trailing earnings compared with 20.5 last month. Stock markets appear to be reasonably priced in terms of earnings expectations. The price of gold on May 14 at $347 is similar to that of the last three months but still down from the level of $370 in mid-December and continues to reflect the strong US $. Canadian mining stocks continue to suffer from the Bre-X fiasco, although there are signs that understanding is setting in and that more reasonable stock price levels, particularily for well managed, well financed juniors with good properties and possibly strong joint venture partners will wind its way upward to reflect value. The emphasis may well shift away from exploration in Indonesia to the South American counties of Peru, Chile and Argentina and to those in West Africa. In Canada, one hot spot now is northern Alberta for diamond exploration and this summer will see a great deal of activity in the Timmins gold area, the northwestern Ontario areas of Mishibishu, Mink Lake and Thunder Bay and in Quebec, Barry and Urban townships, as well as in Abitibi, straddling the Quebec and Ontario borders.

Canada is having its national elections on June 2 and early indications are that the Progressive Conservative party may be making a comeback and cut into the Liberal lead. If so, this could be kind to financial markets in Canada.