January 23,
2002
In our edition of September 28, 2001 we indicated
that the selling climax required to turnaround the continually weakening
stock market had occurred and in our edition of November 23 we reaffirmed
this. In most cases, corporate earnings in 2002 will
be weak and common shares will, again, appear to be overpriced on a
historical basis when judged by the traditional norms of price/earnings
and dividend yields. Investors
will have to look down the road to 2003 earnings and will have to compare
dividend yields to the continuing low interest rates provided in fixed
income vehicles. North American
stock markets have put on a good performance over the last 4
months, particularly when compared with the lows of September 21, 2001. The TSE 300 index at 7598 is up 2.2% over the
last 2 months compared with 7432 on Nov 23/01 and up 14% from the 6669
level of Sept 28/01. It is now
down 33.4% from its high of 11,402 in early September of 2000. It is still impossible to calculate what kind
of earnings, or lack of, that one can associate to the index, but it
yields 1.57% 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 9731 is down 2.3% from the 9960 level at Nov 23/01 and up 12.1% over
the 8681on Sept 28 and is now down only 17.2% from its all time high
of 11,750 on January 14, 2000. At its current level it trades at 26.7
times trailing earnings of $364 to yield 1.87% on dividends of $182.
This compares with 22 times and 2.07% on Sept 28.
The Dow Jones Transportation Index has bounced back nicely and
now stands at 2756 up 33% from 2069 on Sept 28.
It is now down only 12.7% from its high of 3157 of early January
2001. At current levels it trades at a yield of 1.18% to cash dividends
of $32.50. The S&P 500 index
is not doing as well as the Dow, currently at 1128 up 10.7% from 1019
on Sept 28. It is now down 27.4
% from its high of 1553 on March 23, 2000. At the current level it trades at 39.8 times earnings of $28.31
to yield 1.39% on cash dividends of $15.69.
This is up 10.7% from the level of 1019 of Sep 28/01 when it
was trading at 27.6 times then higher earnings to yield 1.54% on cash
dividends. The NASDAQ at 1922 is up 31.5% over the 1461
at Sept 28. It is still down
62.5 % from its March 9, 2000 high of 5,132.
There are a lot of incongruities to these indexes, perhaps forcing
the investor to look at sub-categories, removing, for example, high-techs
and airlines. With
the continuing cuts in discount rates by North American central banks
combined with the sluggish economy, Bond
markets, over the last two months have traded at low yield levels,
but did not test the lows encountered during the first couple of weeks
of last November. For example,
10-year Canadas are currently trading at a 5.40% yield compared with
4.87% on Nov 10 and to 5.43% at year-end 2001 and 5.34% at year-end
2000. 2-year Canada bonds are trading at 3.14% yield compared with the
low of 2.69% on Nov 10 and with 3.21% year-end 2001 and down significantly
from the 5.27% yield at year-end 2000.
US 10-year bonds are currently trading at a 5.01% yield compared
with the low of 4.31% on Nov 10 and 5.11% level at year-end 2001, which
was virtually unchanged from the 5.10% yield at year-end 2000.
2-year US Treasuries are now trading at a yield of 3.00% compared
with the low of 2.45% on Nov 10 and with 3.16% at year-end 2001 very
much down from the 5.16% yield at year-end 2000.
While there could be another quarter of a point drop on the US
overnight rate on January 30, chances are that bond markets are trading
close to its lows and that we will most likely see higher yields and
lower bond prices later on in the year. The
US Federal Reserve Board
on December 11 once more cut the overnight lending rate for the 11th
time during 2001, this time by a quarter of a point, to 1.75%, its lowest
level in 40 years. On January 15, 2002, the Bank of Canada lowered its
key overnight lending rate by a quarter of a point to 2% which prompted
the major Canadian banks to lower their prime lending rate to 3.75%
from 4%. There is a good chance that the Fed will cut
once more on January 30, 2002 by a quarter of a point to 1.5%. Although there are very few signs of inflation,
there are indications that the economy may be picking up, perhaps as
early as in 2Q of 2002 and that this cut in interest rate may be the
last. Any increase may not be forthcoming until early
2003. The
University of Michigan’s Index
of Consumer Sentiment continues to produce high results, registering
94.2% in January, 88.2% in December and 83.9% in November. The
U.S. index of leading indicators
rose 1.2% in December, on top of increases of 0.8% in November and 0.1%
in October. The indicator is
the Conference Board’s measure of the economy over the next 3 to 6 months. This is a positive development. The
manufacturing index of the Institute
for Supply Management (formerly known as the National Association
of Purchasing Management, NAPM)
increased to 48.2 in December, the 2nd straight monthly rise;
(2001 monthly average was 43.9). The
US Trade Deficit narrowed
in November to $27.89 billion from $29.33 billion in October, but still
ranks high. Furthermore, both
exports and imports were weaker and the only reason why the deficit
was less was because exports were weaker by nearly 15% and imports were
down by more then 15%. 3Q
GDP contracted at a 1.3% rate, poorest
performance since a drop of 2% in 1Q 1991. US
Nonfarm Payrolls declined by 124,000
in December, after falling by 371,000 (revised) in November and 448,000
(revised) in October. The total
of 943,000 for the 3 months is, indeed, a depressing figure. The unemployment rate in December rose
to a 6-year high of 5.8 %, up from 5.6% in November and 5.4% in October.
This rate will continue to rise over the next couple of months.
This is still lower than the 7.8% rate in the 1990-91 recession. Average
weekly income in December rose 0.5% to $499.66 from $495.81
in November, or 7 cents/hr to $14.61/hr. The
US Producer Price Index declined
0.7% in December, after falling 0.6% in November and 1.6% in October. For the year 2001, the price index fell 1.8%
after rising 3.6% in 2000. The
US Consumer Price Index eased
0.2% in December, after being flat in November and falling 0.3% in October. During all of 2001, the CPI was up 1.6%. US Retail Sales in December appear to have
come out flat after having declined 3.7% in November and having increased
a record 6.4% in October (due to discounts on automobiles). Housing starts continues to be a positive
element of the economy in the US. Preliminary
starts in December were at an annual rate of 1.57 million, compared
with 1.62 million (revised) in November and 1.52 million in October.
This was primarily the result of warmer temperatures and lower mortgage
rates. The
CRB index at 190,
unchanged over the last 2 months, is down 17% from 229 at 2000 year-end,
reflecting the lack of inflationary forces.
Light crude oil is currently trading at $18.00, down 38% from
the $29 level at 2000 year-end. OPEC producers appear to be happy if
the price could maintain $20 over the next year.
Gold at $284.70 is up 3.5% from the $275/oz level of 2 months
ago. While certain vocal groups would like to see a much higher price,
a forecasted range of $270 to $295 for 2002 made by Gold Fields Mineral
Services Ltd. may be bang on. When
interest rates increase, central banks will find it again to be profitable
to lend out gold to the hedge market, once more satisfying gold producers
intent on generating cash flow through forward sales.
In any event, since gold is measured in US currency, one can
make a strong case that the US$ will remain firm when the economy picks
up. In
summary, corporate activity should improve over the year as inventory
destocking ends, combined with a slight improvement in demand. Reported earnings might increase due to a change
in accounting practice regarding reduced amortizations. Some analysts have been predicting earnings
of $50 in 2002 for the S&P 500, which now appears to be too high. If this does realize, but in 2003, and a 25
times multiple is assigned, it would imply a 1250 level, 11% higher
than current levels. North American
stock markets, traditionally, required a breakout through its 40-week
moving average, i.e.1100 on the S7P 500 and 1900 for the NASDAQ. This has recently occurred, but only time will tell if the penetration
will hold up. Fortunately, there
are always well-run companies capable of outperforming trends and this
newsletter attempts to point out some of these as well as some overlooked
small caps. The
following section, LATEST
PICKS, will list some high-yielding Canadian investments,
mainly trust units, as well as review 21 companies, 5 for the first
time. |