October 9, 2002

Stock markets, in general, continue to be building a base, in concert with the slow, but steady economic recovery.  Dockworkers at US West Coast ports have gone back to work today.  The closedown over the last 2 weeks has been badly affecting stock market sentiment. The July 24, 2002 lows, in most cases, have been violated, but not seriously.  They have, indeed, been tested on several occasions, as is the case at the moment.  Since July 24, of the 8 stock indices this newsletter follows, 1 is down substantially (Frankfurt DAX by 23%), 2 are down significantly (Tokyo’s Nikkei-225 by 11% & NASDAQ Composite by 9.4%), 3 are down modestly and 2 are actually up.

The S&P/TSX composite index at 5695 is down 5% from the 5994 low of July 24 and is now down 50.1% from its all time high of 11,402 in September 2000.  The Dow Jones Industrial Index at 7286 is down 3.3% from its low of 7533 on July 24 and is now down 38% from its all-time high of 11,750 on Jan 14, 2000.  At the current level, it trades at 19.1 times earnings of $382 to yield 2.58% on cash dividends of $188.  The S&P 500 index at 777 is up 0.1% from the 776 low of July 24 and is now at 50% of its all time high of 1553 on March 23, 2000.   At the current level, it trades at 16.2 times indicated earnings of $48 to yield 2.04% on the $15.85 cash dividend.  The NASDAQ at 1114 is down 9.4% from its low of 1229 on July 24 and is now 78.3% lower than its all-time high of 5132 on March 9, 2000.   The Russell 2000 Index at 337 is down 9.9% from its low of 363 on July 24 and is now down 44.3% from its all-time high of 605 in March 2000.

Looking at some world indices, London’s FTSE 100 Index at 3742 is up 3.2% from its 3626 low of July 24, and is now down 46.5% from its all-time high of 7000 in January 2000. Frankfurt’s DAX Index at 2518 is down 23% from its low of 3268 on July 24 and is now down 68.5% from its all-time high of 8000 in February 2000.  Tokyo’s Nikkei-225 index at 8539 is down 11% from its July 24 low of 9590 and is now down 59.1% from its high of 20,900 in March 2000.

The Bond Market continued to gain favour overstocks during the last 4 weeks.  Bonds traded at prices indicating 41-year lows. 10-year Canadas closed on Oct 9 at a yield of 4.96%, virtually unchanged over the last 4 weeks, trading in a narrow band of 5.00% to 4.81% yield.  Two-year Canadian maturities were a little more volatile trading at a 3.42% yield on Oct 9, down from the 3.33% yield of Sept 6, after having traded in a band of 3.53% and 3.34% yields. US 10-year treasury bonds closed at their high with a 3.58% yield up from the 4.03% yield on Sept 6, and within a band of 4.06% and 3.58% yield during the 4-week period.  US 2-year treasury notes also closed at their best levels with a 1.68% yield up from the 2.06% yield on Sept 6 and within a range of 2.17% and 1.68% yields. As long as the economy continues to act in sluggish fashion with reduced loan demand and little inflation, bond prices should continue trading at high prices and low yields.  Having said that, bond prices are most likely at their peak.

The US Federal Reserve Board left the overnight bank-lending rate unchanged at 1.75% on Sept 24 for the seventh time this year and will most likely stand pat for the remainder of this year, at FOMC meetings scheduled for Nov 6 and Dec 10.

The Bank of Canada left its overnight lending rate unchanged at 2.75% and meets next on Oct. 16 and Dec. 3.

The University of Michigan’s Index of Consumer Sentiment fell for the fourth consecutive month in September to 86.1 from 87.6 in August, bringing it the lowest level since November’s 83.9.

The Conference Board’s Consumer Confidence Index fell in September to a 10-month low of 93.3, down from a revised 94.5 in August.

The Conference Board’s U.S. index of leading indicators dropped for a 3rd straight month to 0.2% in August compared with a revised 0.1% drop in July. The indicator is the Conference Board’s measure of the economy over the next 3 to 6 months.

Institute for Supply Management Index ISM (purchasing & non-manufacturing) rose to 53.9 from 50.9 in August and has been above 50 since February. Anything over 50 is considered positive.

US 2Q 2002 GDP growth was revised to 1.3% from the initial figure of 1.1% annual rate compared with the 5% rate of the 1Q.

US Nonfarm Payrolls dropped by 43,000 in September to 130.9 million compared with the revised gain of 107,000 in August, previously reported as an increase of 39,000.  The percentage of the US population holding jobs rose to 63% in September, up from 62.8% in August.  US unemployment rate fell to 5.6% in September from 5.7% in August and the 5.9% rates in July and June. The number of unemployed was 8.1 million in September.  Average weekly income rose to $510.04 ($14.87/hr) in September from $505.36 ($14.82/hr) in August.  Over the year, the average weekly earnings grew by 3.7% and hourly earnings by 3.0%.  The average workweek increased by 0.2 hour in September to 34.3 hours.

The US Consumer Price Index rose 0.3% in August following a 0.1% increase in each of the previous 2 months.  So far this year, consumer prices are running at a 2.7% annual rate during the first 8 months of the year.

In Canada, CPI in August rose 0.4% compared with the 0.5% rise in July, making for a 2.6% increase year over year.  This may give the Bank of Canada ammunition to increase the overnight lending rate currently pegged at 2.75% at its meeting of October 16.

The US Producer Price Index was unchanged in August following the 0.2% drop of July.

US Retail Sales rose 0.8% in August after a 1.2% gain in July and a 1.4% increase in June. September retail sales, to be announced on Oct 11, are expected to be down and if the West Coast dockworkers lockout continues, October will not look good.

Housing starts fell in August by 2.2% to an annual rate of 1.61 million, following drops of 2.7% in July and 3.6% in June.

The CRB index held steady over the last 4 weeks to end up at 226, virtually unchanged from the 223 of Sept 6 and seems to be heading to the recent high of 235 in 4Q 2000 but still a good distance from the high of 264 in 2Q 1996.  Crude oil prices continued to trade at stable but high prices,US$29.35/bbl virtually unchanged over that of US$29.61 on Sept 6.  During the 4 weeks under review it did trade as high as $31.39 on Sept 24. Natural gas prices in the US trended considerably higher closing at US$3.92/million BTU on October 9, compared with US$3.265 on Sept 6 and US$3 on July 26.  In a volatile market it did trade as high as US$4.20 on Oct 3.  Gold continues to be firm, closing at US$321/Oz on Oct 9, unchanged from that of Sept 6.  Coffee closed at 58.80 cents/lb, close to its high of over 60 cents a month ago and up more than 25% over the year.  Cocoa, with the troubles in the Ivory Coast, is trading at a 17-year high at US$2,317 a metric ton.  The US dollar, over the last 4 weeks, has held steady against the Euro, closing out at 1Euro=$0.9902 compared with $0.9818 on Sept 6 and $0.9880 on July 26.  The Canadian dollar, in relation to the US$, has been all over the map, closing weaker at US62.58 cents on October 9 compared with US64.14 cents on September 6 and with 62.94 cents on July 26.

Stock markets continue to be volatile and reflect investor fears for a worsening economy.  Bonds have been star performers but have now reached a price level where yields are not attractive.  So much damage has been inflicted on stocks that, in general, it is probably the time to switch from bonds to stocks.  Over the next few weeks, 3Q corporate earnings will be released enabling investors to get a better gauge on prospects.  At first glance, stocks appear to offer good value as evidenced by the S&P 500 index trading at 16 times this year’s estimated earnings of $48 and 15 times next years estimate of $52, both somewhat conservative estimates. This newsletter attempts to point out values displayed by individual companies in the section LATEST PICKS and through connecting links invites the reader to become more familiar with the entity.

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