July 26, 2002

Stock markets around the world have taken a big hit, with many of the market indexes reaching levels lower than those obtained in the days following September 11, 2001.  Investors became wary.  Much of this was caused by mistrust in various levels of corporate leadership and a developing lack of confidence in the financial market place.  Damage has been done and it will take some time for many investors to feel comfortable once more in committing funds to the publicly traded equity market.  It is this newsletter’s opinion that the major stock markets saw its near-term lows, at least in this broader cycle, on early Wednesday morning, July 24, 2002.  In fact, some of the stronger stocks that have performed well over the last 9 months may very well have bottomed out on July 22.  This applies to some stocks that this newsletter has mentioned with admiration: Christopher & Banks, Kohl’s, Beazer Homes, etc.  What this severe stock market correction may have killed is undue speculation on growth situations based on evolving technology and the method in which anticipated profitability is discounted back to present day value.  In other words, investors may now become hard nosed and concentrate on established growth trends, p/e ratios and dividend yields.

The S&P/TSX composite index at 6310 has recovered 5% from the 5994 low of July 24 and is down 10.3% in 3 weeks from the 7030 level of July 4.  It is now 5.4% lower than the 6669 level of Sept 28/01.  At its current level it is down 44.7% from its all-time high of 11,402 in September 2000 and is 3.6% lower than it was 5 years ago.  The Dow Jones Industrial Index at 8264 has recovered 9.7% from its low of 7533 on July 24 and is down 8.7% over the last 3 weeks from the 9055 level of July 3.  At its current level, it is 4.8% lower over the 8681 level of Sept 28/01 and is now down 29.7% from its all-time high of 11,750 on Jan 14, 2000 and is actually up 7% from where it was 5 years ago.  At the current level, it trades at 21.3 times earnings of $387 to yield 2.25% on cash dividends of $186.  The S&P 500 index at 853 has recovered 9.9% from the 776 low of July 24 and is down 10.6% in the 3-week period from the 954 level of July 3.  At its current level it is 16.3% lower than the then depressed level of 1019 on Sept 28/01 and is now 45.1% lower than its all time high of 1553 on March 23, 2000.  It is down 4% from the level of 5 years ago.  At the current level, the S&P 500 index trades at 34.5 times indicated earnings of$24.70 to yield 1.89% on the $16.11 dividend.  The NASDAQ at 1262 has risen a bit (2.7%) from its low of 1229 on July 24 and is down 8.6% over the 3 weeks from its level of 1380 on July 3.  It is now 13.6% lower than the Sep 28/01 level of 1461 and 75.4% lower than its all-time high of 5132 on March 9, 2000.  In fact, the NASDAQ is currently 12.25% lower than what it was 5 years ago.  The Russell 2000 Index at 382 has risen a bit (5.2%) from its low of 363 on July 24 and is now actually up 2% from the Sept 28/01 level of 374 and down 36.4% from its all-time high of 605 in March 2000.  Even this index is down from where it was 5 years ago by 3%.

Looking at some world indices, London’s FTSE 100 Index at 4017 recovered 10.7% from the 3626 level of July 24 but is down 10% from its September 2001 lows and is off 25% from its year high. Frankfurt’s DAX Index at 3579 has recovered 9.5% from the July 24 low, yet is down almost 9% from the September 2001 low and is off 35% from its year high.  Tokyo’s Nikkei-225 at 9591 has now triple bottomed (Sept, Feb & July) and is down 25% from its year high.

If stock markets required a significant correction, it appears that it certainly has had it.  A great deal of volatility is being manifested as is evidenced by the 400 point swing in the DJII on July 15 and now more recently the significant bounce back in only 2 days from July 24.  The turn around from July 24 resembles that of August 11, 1982.  The sentiment is the same even if the circumstances are quite different.

Bonds over the last 3 weeks moved up in price  from levels that were already quite high, the result of funds exiting equity markets.  In the 2-year maturities, Canadas moved from a 3.99% yield to end up at 3.21% on July 26, close to its best levels.  Meanwhile, the US 2-year notes went from a 2.89% yield to close out at its best levels on July 26 at a 2.21% mark.  In the 10-year maturity, Canadas went from a 5.48% yield to close at 5.16% on July 26 vs. a best lest of 5.10% on July 23.  10-year US treasury notes did close at its best levels on July 26 to yield 4.38% up from the 4.86$ yield on July 5.  Bonds will continue to trade at these high levels and low yields as long as there is lack of confidence in investing in the stock market, or until the economy really strengthens producing loan demand or until there are real signs of inflation causing central banks to increase prime lending rates.

The University of Michigan’s Index of Consumer Sentiment for July was at 88.1, down from June’s 92.4.

The Conference Board’s U.S. index of leading indicators was flat in June after having risen 0.6% in May.  The indicator is the Conference Board’s measure of the economy over the next 3 to 6 months.

The US Trade Deficit in May was $37.6 billion, up from April’s $36.1 billion  These are worrisome high figures.

The US Consumer Price Index in June increased by 0.1% after no increase in May, a sign of no inflation.

The US Producer Price Index rose 0.1% in June, the first increase in 3 months.

US Retail Sales rose 1.1% in June after a revised drop of 1.1% in May.

Housing starts fell 3.6% in June to an annual pace of 1.67 million units, still a good figure.

The CRB index at 210 was down slightly from the 211 of 3 weeks ago.  This compares with 190, 4 months ago and 229 at year-end 2000.  Over the last 3 weeks, light crude oil traded as high as US$27.50 but ended up virtually unchanged at $26.58.  Natural gas prices trended lower down to US$2.79 MBTU on July 12, but closing at $3 on July 26, down from $3.14 3 weeks ago on July 3.  Gold, as predicted somewhat in this newsletter over the last 2 months, slipped some more over the last 3 weeks to close at US$303/oz, down from $311, 3 weeks ago. The US dollar against the Euro weakened over the last 3 weeks, at one time the Euro trading at $1.0142, but has now closed on April 26 at $0.9880.  This compares with $0.9745, 3 weeks ago on July 3.  The Canadian dollar has lost most of its recent gain, closing at 62.94 cents to the US$ on July 26, a significant drop in one month from 66.30 on June 26.  The weakness has taken place in spite of the Bank of Canada’s decision to increase the overnight lending rate for a third time since April, again by a quarter of a point, to 2.75%, a full percentage point higher than the US Fed rate.  The Canadian chartered banks are happy to be able to increase their spreads and, who knows, maybe the labor movement will see this as a sign that there is inflation & therefore ask for more.

In summary, the economic recovery in the US is still somewhat fragile and tenuous but is aiming in the right direction.  Consumer spending and fairly robust housing starts assisted by low mortgage rates continue to be underpinnings of the economy.  In spite of the fact that there is very little inflation, interest rates are apt to go up as the year unfolds.  Statistically, North American equity markets are still not cheap based on p/e ratios but earnings are bound to increase over the coming year.  Accompanied by a tremendous amount of volatility, stock markets have taken a real hit and, consequently, have undressed many individual stocks, exposing good value.  This newsletter attempts to bring some of these to the attention of the reader and, by creating links to company websites, encourages the reader to pursue further evaluation.

The LATEST PICKS edition this time around will mention only 9 companies, 1 for the first time, to be followed by a more extensive edition on August 23.

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