Weekly Wrap-Up December 6-10, 1999

The North American bond markets experienced their first winning week in a month. Tame US economic data combined with interest rate friendly comments by the Bank of Canada Governor Gordon Thiessen pushed bond yields lower. The equity markets continue to roll on, as the technology and internet freight train keeps on steaming. It has been said that you should never stand in front of a freight train and this is clearly on of those times.

The North American bond markets experienced their first winning week in a month. Tame US economic data combined with interest rate friendly comments by the Bank of Canada Governor Gordon Thiessen pushed bond yields lower.

Elsewhere in the world, the Dutch Central Bank did little to put the shine back on gold. Holland's central bankers decided to reduce the stock of gold reserves by 300 tonnes. The sale of Dutch gold will take place over the next five years. This sale announcement adds to the supply of bullion exiting the vaults of central banks, particularly in Europe. Gold lost $US 2.80, or 1%, to close at 279.50.

Japanese GDP fell 1.0% in the third quarter. While many analysts doubt that this contraction is the re-emergence of a trend, it does highlight the economy's dependence on the government sector for support. Public sector spending on infrastructure programs contracted 8.5% during the quarter, and consumer spending slumped 3.2%.

The European Union's economic health had a shot in the arm this week. Factory orders in Germany, the largest economy in the EU, rose 3.2% in November. This is the fourth increase in the last five months, and may be an indication that the German economy is beginning to pull itself out of the doldrums.

Economic data in Canada and the US released this week continues to indicate strong economic growth, with low, stable inflation. In Canada, housing starts rose 5.1% month-over-month in November. In the US, productivity in the third quarter was revised higher to 4.9% from 4.2%, representing the largest increase since the fourth quarter of 1992; unit labour costs declined 0.2% in the third quarter; producer prices index (PPI) rose 0.2%, with the core rate unchanged on a month-over-month basis, while year-to-date figures showed PPI up 2.9% with the core rate up 0.8%

The productivity and unit labour cost figures for the third quarter, in the US, indicate that capital investment is adding to productivity. This corporate capital investment is mitigating the effects of inflation. Although, it is widely expected that the labour cost index will increase over the holiday season, as retailers bid for scare labour resources. With seasonal retail help earning approximately $9/hour, and unskilled construction labour earning approximately $18/hour, it is more likely that a hammer will get swung, rather than helping someone find yet another pair of cargo pants.

The first winning week in a month was witnessed by bond market participants. The Canadian bond market benefitted from interest rate friendly comments made early in the week by Bank of Canada Governor Thiessen. Productivity numbers and the inflation friendly PPI report helped the US bond market to post lower yields over the week.

In Canada, the Government of Canada 30 year long bond shed 9 basis points over the week to close yielding 6.06%. The US Treasury 30 year long bond finished the week 10 basis points to the good, yielding 6.12%. The Canada/US 30 year spread has narrowed to -6 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets continue to roll on, as the technology and internet freight train keeps on steaming. It has been said that you should never stand in front of a freight train and this is clearly on of those times.

The TSE surged to a record close this week as the Linux craze drove any company associated with the 'new' operating system to 'irrational' levels. Corel software was pushed to lofty levels, on speculation that its Linux developed software would make it a takeover target, before shedding some of it's shine on profit taking. Nortel and BCE rallied to record highs on rumours that Nortel was in talks to buy a fibre optics development company, with no cash flows, no sales, and no tested and market ready product, for $US 3.5 billion.

One commentator has indicated that this rally has driven internet, telecom and technology companies to record heights due to the herd mentality. Stocks that are doing well continue to do well because fund managers who do not own the companies shares buy in an effort to make the portfolio look good at month-end or quarter-end. Appearance is more important than substance for many money managers, as investor cash flows chase the 'hot' stocks.

The TSE added 154.87 points, or 2.05%, to close at a record high 7954.60. This pushes the TSE up 22.64% so far this year. The DJIA finished marginally lower on the week, down 0.54%, to 11,224.70. The S&P500 was down 1.13% at 1417.04, while the Nasdaq added 2.83% to close at a record 3620.33. The Nasdaq is now up 65.10% year-to-date. Is this a sustainable valuation?

Next week brings us closer to the Christmas holiday season, and thinner markets. Liquidity will continue to dry up as we close in on the holidays. This will mean that large orders on either side of the market can influence the week one way or the other. Investor tax loss selling will continue for those stocks which have been underperformers, while the sexy securities in the technology sector will continue to benefit from any investment inflows. US CPI figures will be important to the market this week. Good trading.

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