September 15, 1996

Again, bond and equity markets reacted in rather volatile fashion over the last month. The contrarian certainly had a field day. To begin with, on Friday, September 6, US non-farm payrolls for August were announced at plus 250,000 (as expected), July figures were revised upwards from 193,000 to 228,000, the US unemployment rate dropped to a cyclical low of 5.1%, while average hourly earnings increased by 0.5%. These figures should have spelt disaster for the bond market since they pointed to a possible increase in inflationary tendencies and hence to higher interest rates. But, lo and behold, both the bond and stock markets went up. The following Thursday, Sept. 12, the Producer Price Index came in at plus 0.3% for August, again higher than expected. Finally, on Friday, Sept.13, the announcement that the Consumer Price Index for August rose a meagre 0.1% and that retail sales were up 0.2% indicated, once more, that growth in the economy is moderate to firm, but without inflationary pressure. Historically, the major component in the inflation formula is the wage cost factor, but with continued cprporate downsizing coupled with the trend toward self-employment, America is developing a work force market that may not necessarily fit into the traditional pattern. The Commodity Research Bureau index stood at 246 on Sept.13, down from 248 on Aug. 15 and 252 on July 12.

Long trrm US treasury bonds ended Sept.13 trading at a yield of 6.95% up from 6.78% a month ago, but better than the 7.15% in early September. Long Canadas closed at 7.78%, virtually unchanged from a month ago, after trading very near to 8%, early Sept. Two year maturing US treasury notes ended the period under review trading at 6.11%, a deterioration from the 5.95% on Aug 15, but better than the 6.38% yield in early Sept. Two year Canadas ended at 5.11% yield on Sept 13, not much changed from the 5.09% a month ago, but an improvement from the 5.6% level in early Sept. The Bank of Canada cut its prime rate again, to its current level of 4.25%. Canadian chartered banks followed through so that the prime lending rate now stands at 5.75%.

Meanwhile, the stock markets continued to act well, expressing confidence that the US Fed will not increase the discount rate at their next meeting, September 24. The Dow Jones Industrials average closed at a new high on Sept 13 at 5838.52. At this level, it trades at 18.1 times trailing earnings to cash yield 2.17%. The S&P's Composite Index closed at 680.54 (near its all time high of 681.48) to trade at 19.5 times earnings with a similar cash yield of 2.17% on dividends. The TSE 300 index closed Sept 13/96 at 5243.27, very near its all time high of 5248.37, to trade at 20.3 times earnings & yield 2.04%.

As long as rates of inflation remain low, spending by governments remain curtailed and, hence, interest rates stay low, equity markets remain an attractive option, particularily if corporate earnings continue to increase.

The attached Pick chapter reviews a dozen stocks, most of which are special situations and/or speculative in nature.