Waters & Meredith

Serving Niagara..

Client Information Newsletter: 3rd Quarter 2001

CONTENTS

  • The Economy
  • World Economic Outlook
  • Economic Cycle
  • Looking Back
  • Looking Ahead
  • The Stock Markets and Investing
    		•

    THE ECONOMY

    1. In May 2001, the U.S. industrial sector sank into its deepest slump since 1983, while underlying inflation barely increased.


    2. Statistics Canada reported 84.1% of production capacity was used in the first three (3) months of 2001.


    3. Canadian capacity utilization bottomed out at 77.9% in the 1990-1991 recession and 71.6% in the 1982 recession.


    4. Canadian collective wage settlements reached in April provided base-rate wage increases of 2.7% annually over the contract term. In 2000, they averaged 2.5%.


    5. The Consumer Price Index, which measures a basket of goods and services, rose to an annual rate of 3.9% in May, the biggest increase since November 1991.


    6. The core inflation rate, which excludes energy and food prices, stood at 2.1% in May, unchanged from April, and well within the Government's stated objectives of 1% to 3%.
    Comment: This is good news if you do not buy food or gasoline.

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    WORLD ECONOMIC OUTLOOK

    1. 1. A major Canadian bank has forecasted the following % change in real GDP (gross domestic product) (2000 is actual):
    2000
    %    		 2001
    %    		 2002
    %
    World 4.6 3.0 3.8
    North America 5.1 1.9 3.4
    United States 5.0 1.8 3.3
    Canada 4.4 2.3 3.3
    European Union 3.4 2.3 2.6
    Asia 5.9 4.4 5.0
    Japan 1.7 0.7 1.5
    Comment: The forecast is for things to gradually improve over the next year. However, the balance of 2001 could be bumpy.

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    ECONOMIC CYCLE

    1. The economic cycle seems to run about 18 years from one high to the next high, or one low to the next low.


    2. With U.S. industrial production being at the lowest since 1983, hopefully 2001 will be the low and a base from which to go forward.


    3. Although no one can be sure of the low point in the cycle, the recent cutbacks in the automotive and hi-tech sectors indicate the manufacturers are cutting inventories and staff to return to profitability for 2002.
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    LOOKING BACK

    1. There was a bubble in the price of oil and gas in the early 1980's. The prices dropped. The stock markets declined. There were concerns over whether the banks would fail. Interest rates were high.


    2. In the late 1980's and early 1990's, we had a bubble in the price of real estate. In Toronto particularly, people were buying condominiums in huge numbers, for speculation. The market in real estate crashed. The stock markets had a huge decline. There were concerns about the banks.


    3. In 2000, there was a bubble in the price of hi-tech stocks. In 2001, another bubble has burst. The stock markets have declined. There has been concern about the financial viability of many hi-tech companies and what may happen with the large loans outstanding with the banks.
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    LOOKING AHEAD

    1. Based on job losses and financial losses, the North American economy will be difficult over the next year.


    2. Based on forecasts, 2002 will show an economic improvement and growth. It should be better than 2001, but not like 2000.


    3. This should improve the employment situation, keep inflation reasonably low, and keep interest rates reasonably low. No one knows when the current situation will improve.

    THE STOCK MARKETS AND INVESTING

    1. Most of us have investments, whether we invest directly in stocks, bonds or mutual funds.


    2. We are also investors through RRSP's and our Canada Pension Plan.


    3. The basic rule of investing and financial planning is diversification.


    4. Anyone who had a large portion of their investments in hi-tech stocks could have lost significantly in the past year.


    5. Investment comparisons:

      Federal Government bonds for 10 years pay about 5 1/2%

      Ontario Government bonds for 10 years pay about 6%

      Corporate bonds for 10 years pay about 6 1/4%

      Banks have a capital growth potential and pay dividends under 3%


    6. We have read many articles both for and against mutual fund investing.


    7. Many mutual funds have not fared well for the year ending May 2001. Some examples of returns to the end of May 2001 are:
      8. 1 yr
      %      		 3 yrs
      %      		 5 yrs
      %      		 10 yrs
      %
      Cdn Equity Funds 1.3 4.8 9.6 10.3
      Cdn Large Cap Fund -0.5 4.8 10.2 10.0
      Cdn Dividend Funds 14.8 5.4 12.6 11.6
      Global Equity Funds -9.1 5.4 8.9 11.2
      Int'l Equity Funds -13.8 2.8 7.0 9.3
      US Equity Funds -9.6 4.7 12.4 13.1
    8. The equity funds are affected by interest rates and the strength of the Canadian dollar. Lower interest rates have increased the value of the dividend funds. A lower Canadian dollar results in non-Canadian funds showing a higher return.

    We welcome comments you may have on this newsletter as well as suggestions for future topics.

    The information herein is provided for your general information and action should not be taken on the basis of this newsletter, but only on the advice of your own individual advisor, applying this advice to your individual situation. Please call if you have any questions.

    Waters & Meredith
    Chartered Accountants
    Telephone: 905-356-4324
    Fax: 905-356-0964
    E-mail: wm@watersmeredith.com

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