November 23, 2001

It must be near the bottom of the market, judging from what Merrill Lynch is up to.† They have the tendency to make moves at strange times, me thinks.† At least in Canada, eh?† It was some odd 30 years ago they bought Royal Securities at the height of a good market.† A few years later they cleared out of the retail market in Canada completely, at the bottom of a market, natch.† A couple of years ago at the high of another market (Nortel was trading at what?), they bought Midland Walwyn for big bucks.† Now they are clearing out of the Canadian retail market again.† Bye, Bye! Or is it Buy, Buy!.

North American stock markets have put on a good performance over the last 2 months.† Itís beginning to look like September 21, 2001 was the bottom of the market. The TSE 300 index at 7432 is up 11.4% since Sept 28, a little less than 2 months.† It is now down 34.8% from its high of 11,402 in early September of 2000.† It is impossible to calculate what kind of earnings, or lack of, that one can associate to the index, but it yields 1.59% on cash dividends, compared with 1.82% 2 months ago.† 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 9960 is up 14.7% over the 8681on Sept 28 and is now down only 15.2% from its all time high of 11,750 on January 14, 2000. At its current level it trades at 27.5 times trailing earnings of $362 to yield 1.81% on dividends of $180. This compares with 22 times and 2.07% on Sept 28.† The Dow Jones Transportation Index has bounced back nicely and now stands at 2535 up 22.5% from 2069 on Sept 28.† It is now down 19.7% from its high of 3157 of early January 2001. The S&P 500 index at 1150 is up 12.8% from 1019 on Sept 28.† It is now down 26 % from its high of 1553 on March 23, 2000.† At the current level it trades at 31.3 times earnings of $36.79 to yield 1.36% on cash dividends of $15.64.† This compares with 1329, 27.6 times and 1.54% on Sept 28.† The NASDAQ at 1903 is up 30.2% over the 1461 at Sept 28.† It is still down 63 % from its March 9, 2000 high of 5,132.† At first glance, many of these indices, from an historical point of view, still appear to be trading at high multiples to earnings.† Perhaps one should take comfort in comparing these, and in particular dividend yields, to interest rates available in bond and short term investment markets.

Bond markets, over the two weeks have shown lower prices and higher yields with money going into stocks.† For example, 10-year Canadas are currently trading at a 5.46 yield traded at 4.87% on Nov 10, compared with 5.34% at year-end 2000, while 2-year Canada bonds trading at 3.42% traded at 2.69% on Nov 10, compared with 5.27% yield at the end of last year.† US 10-year bonds currently trading at a 4.96% yield traded at 4.31% on Nov 10, compared with the 5.10% level at the end of December, while 2-year treasuries now trading at a yield of 3.08% traded at 2.45% on Nov 10, compared with† 5.16% at year-end 2000.† While there will be more cuts in interest rates, the low yields make the treasury bond market somewhat unattractive to the investor, other than for defensive purposes. Better to look at 10-year A-rated industrial bonds trading at 6%, even though the yield has come down 2 percentage points over the last 18 months.

The US Federal Reserve Board on November 6 once more cut the overnight lending rate for the 10th time this year, this time by half a point, to 2.0%, its lowest level in 40 years. This was followed by similar reductions in other countries, Canada now down to 2.75%.† Interestingly enough, the prime lending rate at commercial banks in Canada is still lower than in the US, 4.5% vs. 5.0%.† The Fedís aggressive push to lower rates in order to help stimulate the US economy has still a way to go, with possible quarter-point cuts to come on December 11 and next January 30.† Some believe that the rate could eventually go to 0%.

The Conference Boardís Leading Economic Indicators rose unexpectedly 0.3% in October after falling 0.5% in September and 0.3% in August. US Factory output fell 1.6% in October after a 1.1% drop in September and 0.8% in August.† This marks the 13th straight month of decreases.† Industry operated at 74.8% of capacity, lower than the 75.7% rate in September and the lowest since June 1983.† The University of Michiganís Index of Consumer Sentiment rose unexpectedly in November to 83.9%, compared with 85.4% in October and 83.6% in September, but still shy of the 91.5% in August.

In a negative vein, US Nonfarm Payrolls were down 415,000 in October as opposed to an expected drop of 300,000. The unemployment rate rose to a 4-year high of 5.4 %.† This is still lower than the 7.8% rate in the 1990-91 recession.† Average weekly income in October declined by 77 cents to $491.98.

The US Consumer Price Index fell 0.3% in October, helped by a 6.3% decline in energy prices.† Excluding food and energy, the CPI rose 0.2%.† With the CPI up 2.1% in the last 12 months & the core rate up 2.6%, inflation is not a worry.† The CPI had risen 0.4% in September, 0.2% excluding food and energy.† US Retail Sales in October rose 7.1% over September, most of which was in car sales, up 26%.† Without automobiles (which were often sold at no interest cost), retail sales rose only 1%.† US retail sales had fallen 2.4% in September.

The US Trade Deficit shrank in September to $18.7 billion from the $27.1 billion deficit in August.† Much of this drop was the result of imports falling 14%, since exports also fell, but by 8.5%.

The CRB index at 190 is down 17% from 229 at 2000 year-end, reflecting the lack of inflationary forces.† Light crude oil is currently trading at $18.96, down 34.6% from the $29 level at year-end.† Natural gas has recovered a bit, but at $1.91/Mcf is still way down from its $10 highs of last December and January.† Gold at $275/oz does not appear to be going anywhere and is unchanged from 2000 year-end.

The section LATEST PICKS, will review 21 companies, 7 for the first time.

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