May 31, 2002

North American stock markets were on the downside over the last 6 weeks, the Canadian indexes somewhat less. The TSE 300 index at 7656 is down 1% over the last 6 weeks from the 7730 level at April 15/02 and up 15% from the 6669 level of Sept 28/01.  It is now down 33% from its high of 11,402 in early September of 2000.  At this current level, the implied cash dividend yield is 1.61%.  This compares with 22.8 times earnings and a yield of 1.28% at year-end 2000 when there were corporate earnings. The Dow Jones Industrial Index at 9925 is down 2.6% over the same 6-week time frame compared with the 10191 level of April 15/02.  At its current level it has increased 14.3% over the 8681 level of Sept 28 and is now down 15.5% from its all time high of 11,750 on January 14, 2000. At its current level it trades at 26.9 times trailing earnings of $369 to yield 1.82% on dividends of $181. This compares with 22 times and 2.07% on Sept 28 when trailing earnings and dividends were higher.   The S&P 500 index continues to lag the DJ since at 1067 it is down 4% from the 1111 level of April 15/02 and up 5% from 1019 on Sept 28.  It is now down 31.3 % from its high of 1553 on March 23, 2000.  At the current level it trades at 43 times depressed earnings of $24.69 to yield 1.50% on cash dividends of $16.04. The NASDAQ at 1616 has fared worse over the last 6 weeks, down 8% from the level of 1756 on April 15/02.  However, it is up 10.6% over the 1461 at Sept 28/01.  It is still down 68.5% from its March 9, 2000 high of 5,132. 

Bonds over the last 6 weeks have moved up in price and in the long end are currently trading at close to their highest levels.  This may be due to a current disenchantment with the stock market. 10-year Canadas are currently trading at a 5.53% yield compared with the 5.62% yield on April 15/02 and compared to the 4.87% high of Nov 10/01.  Over the last 6 weeks the rate varied between 5.47% and 5.76%.  2-year Canada bonds are trading at a 4.17% yield compared with 4.22% on April 15/02 and the high of 2.69% on Nov 10/01.  Over the last 6 weeks, they traded within a range of 3.96% and 4.35%.  Interestingly, when the Bank of Canada increased its overnight lending rate by a quarter of a point on April 16, 2-year Canadas were trading at a 4.29% yield.  The above-mentioned 3.96% yield took place on May 7.  US 10-year bonds are currently trading at a yield of 5.05%, somewhat better than the 5.16% yield on April 15. This compares with the high of 4.31% on Nov 10/01. Over the 6-week period under review, the rates varied from the low of 5.04% to a high yield of 5.29%.  US 2-year treasury notes now trade at 3.21% yield compared with 3.36% on April 15/02 and with the low of 2.45% on Nov 10/01.  During the period under review, the notes traded at prices between a high of 3.11% yield to a low of 3.38% yield.  There is the likelihood that bond markets will continue to trade at these higher levels, certainly until loan demand improves significantly, signs of inflation appear and the economy takes off.

The US Federal Reserve Board held pat on the overnight bank lending rate for the third time this year when they met on May 7/02, thus keeping the rate at the 40-year low of 1.75% after 11 cuts in 2001, the last in December. There appears little likelihood that the Fed will increase the rate at the next FOMC meeting slated for June 25-26, but, already, bets are being made that they will increase in August.

The University of Michigan’s Index of Consumer Sentiment for May increased to 96.9, compared with 93 in April and 95.7 in March.

The Conference Board’s Consumer Confidence Index rose in May to 109.8 from a revised 108.5 in April, compared with 110.7 in March.

The Conference Board’s U.S. index of leading indicators fell 0.4% in April.  It had risen 0.1% in March, was flat in February and had risen 0.6% in January, 1.3% in December and 0.8% in November.  The indicator is the Conference Board’s measure of the economy over the next 3 to 6 months. This may indicate that there is a modest recovery about to take place.

Institute for Supply Management Index ISM (purchasing) fell for the second straight month to 55.3 in April, compared with 57.3 in March and 58.7 in February.

The US Trade Deficit in March was $31.6 billion, a slight improvement with the $31.8 billion in February, but still high.

US 1Q 2002 GDP expanded at a 5.6% annual rate, compared with the 1.7% annual increase in 4Q 2001 and the 1.3% contraction in 3Q 2001.  For all of 2001, the US GDP increased 1.2%.  Canada’s GDP rose at a 6% annual rate in 1Q2002.  The Canadian dollar is at a 9-month high in relation to the US$, $0.6545US.  The Bank of Canada is expected to increase its overnight lending rate by a quarter of a point on June 4/02.

US 1Q Productivity increased at a 8.4% rate as labour costs fell at a 5.2% rate.

US Factory Orders increased 1.2% in April.  Orders have risen for five straight months.

US Nonfarm Payrolls for April grew by 43,000.  However, March figures were revised to a contraction of 21,000 as opposed to the initially reported increase of 58,000.  So far this year there has been 86,000 jobs lost compared with a one million loss in 2001.  Number of people with jobs plus those looking for work amounts to 142.6 million in April. The unemployment rate in April increased to 6% from 5.7% in March and 5.5% in February. Average weekly income rose slightly in April to $500.93 ($14.69/hr) from $501.71 ($14.67/hr) in March.

The US Consumer Price Index rose 0.5% in April compared with 0.3% in March and 0.2% in February. So far this year the CPI is running at a 3.8% annual pace.  During all of 2001, the CPI was up 1.6%.

The US Producer Price Index fell 0.2% in April, compared with a 1% gain in March and a 0.2% rise in February.

US Retail Sales rose1.2% in April compared with the 0.2% increase in March.

Housing starts fell 7.8% in March to an average 1.6 million annual starts.  This compares to 2.8% rise in February to an annual rate of 1.77 million starts.

The CRB index has increased a significant 4% to 203 from 195 six weeks ago and from the depressed lows of below 190 over the last 2 months, mainly on higher oil, natural gas and gold prices, but is still down 11.4% from 229 at 2000 year-end, reflecting the lack of inflationary forces in commodities.  Light crude oil over the last six weeks increased to a high of over $28 and has settled back somewhat to $25 as a result of higher inventories in stock. Natural gas rose to a high of $3.88/mmBTU on May 14, only to fall back to $3.22 over the last two weeks.  This is up considerably from the depressed lows of US$1.80 in January but still down a great deal from the inflated highs of $US10 in December 2000. The major banks, traders and producers decided to get together and do a number on gold driving up the price to its current high of US$328/oz, compared with a 52-week low of $264.60 and the 2-year low of $252.  Supply and demand have continued to remain in balance so that there is now a strong likelihood that gold will hold at these prices or somewhat lower.  Any further increases in the price of gold would indicate a lack of confidence in the US dollar.  Perhaps, traders will reverse their positions and make money on the way down by shorting.

In summary, the economic recovery in the US is still somewhat fragile and tenuous.  Consumer spending and fairly robust housing starts assisted by low mortgage rates appear to be the strong underpinnings of the economy.  In spite of the fact that there is very little inflation, interest rates are apt to go up as the year unfolds.  Statistically, North American equity markets are not cheap, but there are always special situations and, of course, well-managed growth companies in which to invest.  This newsletter attempts to bring some of these to the attention of the reader and by creating links to company websites encourages further evaluation.

The following section, LATEST PICKS, will 16 companies, 8 for the first time.

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