April 3, 2001
We have most likely seen the major correction in North American stock markets so that the froth caused by over-evaluations in some of the sectors has finally been removed. The TSE 300 index at 7444 has dropped 34.7% from its Nortel-influenced high of 11,402 and now trades at 19.3 times earnings to yield 1.59% on cash dividends. This compares to 8857, 22.8 times and 1.28 % at year-end 2000. The Dow Jones Industrial Index at 9486 has fared better and is down 19.3% from its high of 11,750 on January 14,2000 and trades at 19.2 times earnings to yield 1.85%. These compare with 10803, 20.5 times and 1.67% at year-end 2000. The S&P 500 index at 1106 is down 28.8% from its high of 1553 on March 23, 2000 and now trades at 21.7 times earnings to yield 1.4% on cash dividends. This compares with 1329, 24.7 times and 1.2% at the end of December. The NASDAQ, heavily weighted by the new economy hi-techs, has taken a fierce tumble now at 1673 down 67.4% from its March 9, 2000 high of 5,132. The top 100 companies of the NASDAQ now trade at about a 35 times multiple compared with 90 times at year-end and 150 times in March, 2000. Historically, these multiples are still high but are in keeping with other type investment markets such as bonds and mortgages.
Bond markets improved during this period of lower interest rates and stock market concerns. 10-year Canadas are currently trading at a 5.40% yield compared with 5.34% at year-end 2000 while 2-year Canada bonds trade at 4.72%, better than the 5.27% yield at the end of last year. US 10-year bonds currently trade at a 4.93% yield, better than the 5.10% level at the end of December while 2-year treasuries now trade at a significantly better yield of 4.12% when compared with the rate of 5.16% at year-end before the Fed lowered rates in January.
So far this year, the US Federal Reserve Board lowered the overnight rate three times, January 3, January 31 and March 20, each time by one-half of 1%. The Open Market Committee meets next on May 15. While on the March 20 date the bias was toward lower rates, there are now signs that the economy could pick up in the last two quarters of this year. In spite of cut backs in production over the near term, it is now becoming debatable if there will be really more cuts in interest rates.
US Producer Price Index rose 0.1% in February. The Consumer Price Index rose 0.3% in February compared with the abnormally high increase of 0.6% in January, partly caused by the after effects of higher energy costs. Nevertheless, this brought the 12-month increase to 3.5%. US housing starts in February were at an annual rate of 1.6 million, better than expected because of lower mortgage rates and low unemployment. Consumer spending increased 0.3% in February, Personal Income also 0.4% on the heels of a 0.5% increase in January. The unemployment rate held at 4.2% in February. Finally, the consumer confidence index rose in March for the first time in 6 months to 117 from February'' 109.2. At that time it had fallen from a high of 144.7 in May 2000 and was the lowest since October 1996. All eyes will be open when on April 6 figures for unemployment rate, non-farm payrolls and average hourly earnings will be issued. This may provide a clue as to the direction the Fed may take.
The CRB futures index currently stands at 211 down from 229at year-end. Gold nearly tested its two-year low of $253 but has improved somewhat to $256. Lately, its price appears to be more of a function of the strength in the US dollar and also to fluctuating lease rates costs attached to gold positioning. West Texas oil recently appears to have found a new trading range of between $25 and $28, with the current price being $26.19 down from that scary high of over US$37 in 2000.
In the December 28 edition of this newsletter, indications were made that the S&P 500 index could trade down to the 1100 level and that the TSE 300 index could go down to 7900. This hasn't been far off the mark, with current levels of 1106 and 7444. It is this letter's opinion that the damage has been done and that stock market prices will rise for well-run growth companies, such as Christopher & Banks and Sketchers mentioned in the Latest Picks in this edition. It will take longer for companies like Nortel, Cisco and the Yahoos of the world to bounce back. Another favorable sector, in our opinion, continues to be the energy producers. Nine such companies are mentioned in the following section, five for the first time.
The current edition of LATEST PICKS will look at several stocks, some overlooked.