September 28, 2001

In the aftermath of the tragic events that took place on September 11, some of the comments relating to performances in the economy may not have too much bearing.Suffice to say that the terrorist attacks on the USA came at a time when economies in both America as well as in the rest of the world were very weak.Only time will tell what kind of an effect will the vast infusion of liquidity central banks are committing to address the disaster will have on the economy and hence the investment market.Historically, it takes a selling climax to turn around a continually weakening stock market.Sadly, that selling climax has occurred.Over at least the last two years North American stock markets had been trading at too high multiples to earnings and this became exacerbated when profits began to slide.While the outlook for corporate earnings over the next several quarters should continue to display poor results, the stock market has the tendency to peer down the road in order to anticipate recovery. All the major stock indices slid well below their lows of the last 2 years. The TSE 300 index at 6669 is down 10.1% over the last month after having touched a low of 6301 over the last 2 weeks and is now down 41.5% from its high of 11,402 in early September of 2000.It now trades at 18.5 times what could be overly optimistic earnings of $360 to yield 1.82% on cash dividends.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 8681 is down 12.5% over the last month after having hit a low of 8062 over the last 2 weeks and is now down 26.1% from its all time high of 11,750 on January 14,2000. At its current level it trades at 22 times trailing earnings of $394 to yield 2.07% on dividends of $180. This compares with 20.5 times and 1.67% at year-end 2000.The Dow Jones Transportation Index, badly affected by the airlines, stands at 2069, up from its low of 1942 over the last 2 weeks, and is now down 34.5% from its high of 3157 of early January 2001. The S&P 500 index at 1019, after having touched a low of 945 over the last 2 weeks, is down 9.7% over the last month and is now down 34.4% from its high of 1553 on March 23, 2000.At the current level it trades at 27.6 times earnings of $36.85 to yield 1.54% on cash dividends of $15.74.This compares with 1329, 24.7 times and 1.2% at the end of December when earnings were higher.The NASDAQ at 1461, after having touched a low of 1387 over the last 2 weeks, is down 18.5% over the last month and is now down 71.5% from its March 9, 2000 high of 5,132.The Russell 2000 index, which may be a better barometer of mid-size America, currently stands at 393 after having touched a low of 374 over the last 2 weeks. It is now down 25% from its 52-week high of 524 of June 2001,or down 35% from its all time high of 605 in March 2000.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 last month continued to rise in reaction to lower interest rate yields.10-year Canadas are currently trading at a 5.33% yield compared with 5.37 a month ago and with 5.34% at year-end 2000, while 2-year Canada bonds trade at 3.38% compared with 4.26% a month ago and 5.27% yield at the end of last year.US 10-year bonds currently trade at a 4.64% yield compared with 4.77% yield a month ago and the 5.10% level at the end of December, while 2-year treasuries now trade at a yield of 2.82% compared with 3.64% a month ago and 5.16% at year-end 2000.While there could very well be more cuts in interest rates, the low yields make the bond market unattractive to the investor, other than for defensive purposes.

In the aftermath of September 11, the US Federal Reserve Board on September 17 lowered the overnight rate an eighth time this year, by a half of one percent bringing it to 3.0%, the lowest since February 1994.This was followed by similar reductions in other countries, Canada to 3.5%, European Central Bank to 3.75% as well as in Switzerland, Sweden and Denmark.The following day, the Bank of England reduced its rat by a quarter of a point to 4.75%, followed by reductions of a half a point in Taiwan and Hong Kong.Symbolically, Japanís central bank reduced its rate to 0.1% from 0.25%. The Open Market Committee meets next on October 2 and has given indications that there could be a further cut.

The Conference Boardís Leading Economic Indicators in August finally showed a drop, of 0.3%, after showing rises of 0.3% and 0.4% in May, June and July.US Factory output fell 0.8% in August.Companiesí capacity in use fell to 76.2%, the lowest level since Feb-Dec 1960.The day before the terroristsí attacks, the University of Michiganís Index of Consumer Confidence fell to 83.6% in September from 91.5% in August, its steepest drop since October 1990.

US Nonfarm Payrolls were down 113,000 in August. Compared with drops of 42,000 in July and 114,000 in June. The unemployment rate rose to a 4-year high of 4.9% compared with 4.5% for both June and July.Average hourly earnings increased 0.3%, or 4 cents to $14.38/hr., similar to increases over the previous 2 months.

The US Consumer Price Index increased 0.1% in August compared with a drop of 0.3% in July. after a 0.2% increase in June. US Retail Sales in August rose 0.3%, reflecting, in part, the $38 billion in tax rebate cheques the US treasury started sending out in July.

The US Gross Domestic Product increased by 0.3% in the June 2nd quarter.It is now evident that the 3rd quarter will show a substantial drop.

The CRB index at 191 is down 16.6% from the year-end figure of 229, indicating the effect that commodity prices are having on inflation.On September 24, crude oil prices plunged 12% to $22.85/bbl for November delivery, again as part of the September 11 aftermath nervousness.Light crude oil currently trades at $22.74, down 14.7% over last monthís $26.67 and down 21.6% from $29 at year-end. This compares with its high of US$37 last year.Natural gas continues to plunge, now at $1.83 compared with$2.33 a month ago and from the $10 level reached in December and January, reacting very much to the drop in industrial activity. It now appears that natural gas prices will rise only in the winter months but nowhere near the price levels of last winter because of two factors: 1) increases in inventory and storage capacity, and 2) replacement by other forms of energy, back to oil and coal. Gold has made somewhat of a comeback, in these uncertain times, currently trading at US$293 up from $274 a month ago and appears to have broken through the level of resistance at $280.

The following section, LATEST PICKS, will review 17 companies, 5 for the first time.

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