December 14, 2002

In our last edition of October 9, 2002 we ventured the opinion that we were close to the bottom of the stock markets in North America.  As it turned out, the following morning October 10 appeared to be it.  We must admit that we felt that July 24 was the low point of the market but that the levels of October 9 had not seriously violated the trend.  Only the Tokyo Nikkei-225 index had to wait until mid-November to reach its low.  There will surely be just as much volatility to stock markets in the weeks and months ahead but this newsletter opines that markets have now finally seen their lows and that equities will replace low-yielding bonds as investment favour.  Much of the volatility is caused by program trading and what appears to be, once more, day trading (example Nortel stock).  This long period of consolidation has reflected the slow but improving economic climate.  Once some inflationary tendencies begin to appear and interest rates start to climb, and as long as federal banks do not tighten too quickly, the improvement in stock indices may take on a quicker pace.

The S&P/TSX composite index at 6664 is up17% from the 5678 low of October 10 and is now down 42% from its all time high of 11,402 in September 2000.  The Dow Jones Industrial Index at 8434 is up 17% from its low of 7197 on October 10 and is now down 28% from its all-time high of 11,750 on Jan 14, 2000.  At the current level, it trades at 21.9 times earnings of $385 to yield 2.21% on cash dividends of $187.  The S&P 500 index at 889 is up 15.7% from the 769 low of October 10 and is now down 43% from its all time high of 1553 on March 23, 2000.   At the current level, it trades at 18.5 times indicated earnings of $48 to yield 1.78% on the $15.87 cash dividend.  The NASDAQ at 1362 is up 22.9% from its low of 1108 on Oct 10 and is even up 10.8% over its previous low of 1229 on July 24 and is now 73.5% lower than its all-time high of 5132 on March 9, 2000.   The Russell 2000 Index at 388 is up 19.4% from its low of 325 on Oct 10/02 and up 6.9% from that previous low point of 363 on July 24 and is now down 35.9% from its all-time high of 605 in March 2000.

Looking at some world indices, London’s FTSE 100 Index at 3878 is up 7.4% from its 3610 low of late September 2002, and is now down 45% from its all-time high of 7000 in January 2000.  Frankfurt’s DAX Index at 3077 is up 22% from its low of 2519 of Oct 10 and is now down 62% from its all-time high of 8000 in February 2000.  Tokyo’s Nikkei-225 index at 8516 is up 3.9% from its 19-year low of 8197 in mid-November 2002 and is now down 59.3% from its high of 20,900 in March 2000.

The Bond Market continued to gain favour over stocks during the last 9 weeks.  Bonds traded at prices indicating 41-year low yields. 10-year Canadas closed on Dec 13 at a yield of 5.02%, virtually unchanged over the last 9 weeks, trading in a narrow band of 5.34% to 4.96% yield.  Two-year Canadian maturities were a little more volatile trading at a 3.29% yield on Dec 13, up from the 3.42% yield of Oct 9, after having traded in a band of 3.65% and 3.26% yields. US 10-year treasury bonds closed somewhat lower at a 4.06% yield on Dec 13 down from the 3.58% yield on Oct 9, and within a band of 4.27% and 3.58% yield during the 9-week period.  US 2-year treasury notes closed at a 1.84% yield on Dec 13 down from the 1.68% yield on Oct 9 and within a range of 2.21% and 1.68% yields. It is interesting to note that when the Federal Reserve lowered its overnight lending rate by a whopping 50 basis points on Nov 6, 2-year US treasury notes were trading at a 1.85% yield that day and the US 10-year treasury bonds were trading at a 4.05% yield.  In spite of this significant drop in interest rate, both maturities are trading at the same rate today as on Nov 6.  This leads this investment newsletter to observe that the bond market has had its day in the sun and that henceforth bonds will trade at lower prices and higher yields.

The US Federal Reserve Board surprised most people on Nov 6 by lowering the overnight bank-lending rate by 50 basis points to 1.25%.  Their decision to do a dramatic, almost pre-emptive, move such as this may have been caused by a fear that consumer spending was faltering.  At the next meeting on Dec 10, the FOMC kept the rate unchanged at this level.  Consensus thinking is that they might hold rates at these levels for some time, unless, of course, inflation rears its ugly head.

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

The University of Michigan’s Index of Consumer Sentiment for December (preliminary) rose to its highest in 4 months to 87 from 84.2 in November and 80.6 in October and 86.1 in September.

The Conference Board’s Consumer Confidence Index fell in October to 79.4 from September’s level of 93.7 and from a revised 94.5 in August.

The Conference Board’s U.S. index of leading indicators dropped for a 4^th straight month by 0.2% in September to 111.6 (base year 1996 was 100) similar to the August drop and the 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 57.4 in November, highest since May, and compares with 53.1 in October. Anything over 50 is considered positive.

US 3Q 2002 GDP grew by 3.1% up from the 1.3% growth in 2Q but down from the 5% growth rate of the 1Q.

US Nonfarm Payrolls dropped by 40,000 in November compared with an increase of 6,000 in October and a drop of 13,000 in September to 130.9 million.  Each month these figures appear to be revised to improvements. This was the 3^rd straight month in which payroll employment remained relatively flat.  Payroll employment had increased by 233,000 from April to August after falling by 1.8 million from March 2001 to April 2002.   US unemployment rate rose to 6.0% in November from 5.7% in October.  But again, these rates appear improved a month later.  Average weekly income rose slightly to $510.61 ($14.93/hr) in November from $509.24 ($14.89/hr) in October.    The average workweek remained stable at 34.2 hours.

The US Consumer Price Index rose 0.3% in October compared with 0.2% in September and 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 10 months of the year compared with a 2.1%ùpace in the same period in 2001é

The US Producer Price Index fell 0.4% in November. In the first 11 months of this year, the producer price index rose at a 1.3% annual rate compared with a 1.5% rate of decrease in the same period of 2001.

US Retail Sales rose 0.4% in November compared with a 0.7% rise in October.  Some of these increases may be the result of consumers refinancing their houses at prevailing lower mortgage rates and committing to spending.

Housing starts fell 11.4% in October to an annual rate of 1.603 million from September’s rate of 1.810 million.  But, again, these figures sometimes appear revised upward a month later.

The CRB index closed at its 52-week high at 235 attaining its recent high of 235 in 4Q 2000 but still a good distance from the high of 264 in 2Q 1996.  Crude oil closed at $28.44 on Dec 13/02, and appears to be headed toward the highs of September when it traded as high as $31.39 on Sept 24. The higher prices may be adjusting for the weaker US dollar as well as delivery halts in Venezuela.  Natural gas prices in the US have increased substantially over the last 9 weeks as cold weather sets in.  It closed on Dec 13 at its 52-week high of US$5.28/million BTU compared with US$3.92 on Sept 6 and US$3 on July 26.  Gold appears to have finally broken through a resistance level of US$330/oz, closing at $US333.20 on Dec 13, its 52-week high.  Coffee closed at 60.10 cents/lb on Dec 13 after having traded as high as 73.8 cents/lb on Dec 2, a 2-year high.  Cocoa, with continuing troubles in the Ivory Coast, closed at US$2,060 a metric ton after having traded as high as US$2,405 on Oct 11, a 17-year high.  The US dollar has finally weakened against many currencies as a result of the US Federal Reserve lowering the interest rate on Nov 6 and its continuing high trade deficit.  On December 13, the US$ reached a 5-month low against the Euro, 1 Euro=$1.0227.  The Canadian dollar, in relation to the US$, has been inching up a bit closing at US$0.6409 on Dec 13 compared withUS$0.6258 cents on October 9. 

Although it will not be a smooth road, it now appears that there will be better prospects in equities over fixed income in the months ahead.  Stocks of well managed companies trading at 18 to 20 times earnings should be more attractive statistically and tax-wise that the currently low-yielding bonds. 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.  This latest edition looks at 20 publicly traded situations, two for the first time.

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