MARKET WRAP - 1 / Ending Friday 11/27/98
Bank Anxiety Drops TSE 1.4% Or 91 1/2 Points
A report that Ottawa will torpedo bank mergers sank the Toronto stock market Friday, while the prospect of a big oil-industry merger got U.S. investors moderately fired up.
The TSE 300 composite index lost 91.46 points -- 1.4 per cent -- to close at 6,468.75. Overall volume reached 98 million shares worth C$1.5 billion. Declining issues led advancers 535 to 422 and 306 ended flat.
Overall during the week, the key index fell only 54.50 points or 0.84 percent despite its roller-coaster ride, the Toronto Stock Exchange said.
In Toronto, "it was a pretty quiet day as far as trading," said president John Ing at Maison Placements Canada. "The bank stocks were down."
The market started the day soft but eased further later on, as a few investors pulled profits following recent gains.
"It was more than shooting-star type of stocks that got the attention today," Ing said.
High-flying issues included Bid.Com, which rose C$1 to C$4.56, above a 52-week high of C$3.95. "The love affair with the 'Net stocks has carried over here in Canada," Ing noted.
Another market darling was biotechnology firm Biomira Inc. which jumped C$2.70 to C$6.20, falling back after reaching a daily high of C$11. Shares in the cancer drug company spiked following a positive report in U.S.-based Business Week magazine.
An analyst said that the market for its potential vaccine, for some cancers, was large. Also, the fact that partner Chiron Corp. had a stake in its main product helped validate it.
In New York, the Dow Jones industrial average was up 18.80 to 9,333.08 in a short post-Thanksgiving session.
Investors in the U.S. were energized by confirmation that Exxon and Mobil are in merger talks. Exxon rose about $1.69 US to $74.63 while Chevron, the Dow's other oil component, jumped $5.25 US to $85.63 amid speculation that a Mobil buyout would lead to further consolidation. Mobil rose $7.63 US to $86.00 in active trading.
"Merger mania makes everybody feel good," said Alfred Goldman, director of market analysis at A.G. Edwards.
The Exxon-Mobil talks follow negotiations between Deutsche Bank and Bankers Trust and between America Online and Netscape.
"This is a good market for optimists," said Bob Dickey, a technical analyst at Dain Rauscher Wessels in Minneapolis.
"Only an optimist would come in to work (the day after U.S. Thanksgiving) ... and they're in a buying mood. The pessimists stayed away."
Not in Toronto, where investors acted on a newspaper report that the two planned bank megamergers are doomed. Only two of the 14 TSE industry groups finished the day stronger with real estate and construction was up 0.77 per cent and pipelines gained 0.40 per cent.
The financial services group, which encompasses more than one fifth of the index, fell 2.49 percent, followed by conglomerates, base metals and oils.
Canadian banking shares suffered a meltdown as investors began to contemplate the outcome of Monday's provincial election in Quebec and the certain death of the proposed bank mergers.
National Post reported that Finance Minister Paul Martin plans to quash the proposed mergers of Canadian Imperial Bank of Commerce with Toronto Dominion Bank and Royal Bank with Bank of Montreal.
Bank of Montreal lost $3.20 to $65.10 and Royal shed $1.80 to $75.90. TD was down 90 cents to $51.50 while CIBC lost $1.60 to $34.80.
Conglomerates were the second-weakest index group, falling 2.32 per cent as Canadian Pacific finished at $33.25, down $1.20. Power Corp. shed 35 cents to $34.40.
Mines and minerals slid 2.20 per cent; Alcan Aluminium lost $1.40 to $42.80, while Boliden lost a quarter to finish at $4.65.
Among oils, Elk Point Resources Inc. (ELK/TSE) was up $0.63 to $4.10, on volume of 1.5 million shares. Westminster Resources Ltd. (WML/TSE), up $0.70 to $5.80, on volume of 872,230 shares. Richland Petroleum Corp. (RLP/TSE), up $0.30 to $2.80, on volume of 2.1 million shares. Kookaburra Resources Ltd. (KOB/TSE), up $0.34 to $1.29, on volume of 1.6 million shares. Stock in companies with stakes in the Bellevue number one East Lost Hills Well were up this week after a blowout on the project on Tuesday. Investors are betting it is an indication of a major discovery at the Bakersfield, Calif. gas project. All four were among the most active issues on the Toronto Stock Exchange yesterday.
Other oil and gas issues among the most active listed included Ranger Oil -$0.05 to $8.20, Newport Petroleum -$0.45 to $5.80, Imperial Oil +$1.40 to $27.50, Talisman Energy +$1.05 to $29.00 and Canadian Natural Resources -$0.40 to $24.75.
Among the better net gainers, Imperial Oil gained $1.40 to $27.50, Berkley Petroleum $1.35 to $11.65, Talisman Energy $1.05 to $29.00, Elk Point Resources $0.71 to $3.47 and Petro-Canada $0.45 to $19.25.
Losing issues included Crestar Energy $0.45 to $15.25, Newport Petroleum $0.45 to $5.80, Canadian Natural Resources $0.40 to $24.75, Tri Link Resources $0.35 to $12.75 and Cabre Exploration $0.30 to $12.50.
In the oil and gas service sector, Ensign Resource Services gained $0.45 to $15.50. On the downside, Enerflex Systems fell $3.50 to $29.00, Mullen Transportation $0.60 to 16.00, IPSCO $0.35 to $28.25 and Prudential Steel $0.35 to $7.00.
Utilities slipped 0.63 per cent. Enbridge lost 20 cents to $70.40; TransCanada PipeLines gained $0.15 to $22.95.
On the week, the TSE's real estate and construction group fared best with a 1.94 per cent gain, followed by consumer products, up 1.42 per cent and industrial products, up 1.21 per cent.
Oil and gas stocks were hardest hit on the week, thanks to crude prices that are testing 12-year lows. The oil and gas group sank 7.24 per cent, followed by gold and silver stocks, off 5.71 per cent. Mines and minerals lost 5.37 per cent.
In Toronto, declines outnumbered advances 535 to 422 on Friday, with 306 unchanged in trading of 98.4 million shares worth $1.5 billion.
The TSE 100 lost 6.05 points to 398.05.
In Vancouver, the VSE index finished the week at 396.06, up 4.23 from Thursday's close but 0.18 lower on the week. In Montreal, the portfolio index was down 75.44 to close at 3,334.00, 20.95 points lower than last Friday's close.
Among industrials in Toronto, Biomira gained $2.70 to $6.20, BII Enterprises $1.00 to $4.56; Toronto 35 Index Participation Fund Unit lost $0.70 to $35.55.
Among mines, Westar Mining rose $0.70 to $5.80, Queenstake Resources $0.19 to $0.84; Placer Dome slipped $0.60 to $23.50, Barrick Gold $0.45 to $31.75.
Juniors Tipped To Rebound
Selectivity Important: Market watchers say VSE bear market is ending
The Financial Post
Are the junior markets ready to roll again? Some influential newsletter writers, who follow Vancouver Stock Exchange and other junior listings, think so.
"The bear market trough is coming to an end," John Kaiser, of the Kaiser Bottom-Fishing Report, wrote this week to clients on his e-mail distribution list.
"The VSE Composite Index has stabilized at the 400 level and ... we are now in the very early stages of the next junior market cycle."
"I feel we're looking for a 200-point move to the upside in the next 60 days," says Christopher Bunka, the author of the Bunka's Outsider's Overture, based in Bellingham, Wash.
"I think that investors should prepare to have 80% or more of their speculative capital invested by early December."
"There are some outstanding values but I am very selective," cautions the less bullish Brian Fagan, author of The Fagan Report, published from Blaine, Wash. "My basic feeling is that I don't see the general up-trend.
"Extreme selectivity is important. You have to be a stock picker, rather than a market timer."
Eric Coffin, who with brother David publishes The Hard Rock Analyst in Vancouver, says: "There is speculative buying again and there is less selling pressure."
A year ago at this time, institutions were unloading junior resource stocks and individual investors were dumping their holdings to salvage capital losses to offset earlier capital gains. That tax-loss selling, Mr. Coffin says, knocked 35% from the VSE's index alone. He expects much less tax-loss selling likely this year."
"If it [the VSE index] can hang in there at this range through tax-loss selling, we've seen the worst of it," Mr. Coffin predicts.
Mr. Kaiser, a former Vancouver analyst who now writes his newsletter from San Francisco, usually publishes a list each December of 100 cheap juniors that he believes are undervalued. His picks for 1998 lost almost 60% in the later bear market but that, in his view, only has set many of them up for a bigger bounce.
"The biggest money is made from the bottom-fish when we come out of a bear market trough," he writes.
In his electronic report this week, Mr. Kaiser reviewed last December's picks. While he found that a quarter should be avoided, many of the rest continued to be recommended. Examples of his "top priority buys" include:
- Atna Resources Ltd. (ATN/TSE), a Vancouver-based junior with several well-explored polymetallic mineral properties in B.C. and the Yukon and with senior company partners. The shares have had a 52-week range of $1.65-50c and recently traded at about 75c.
- Energold Mining Ltd. (EGD/VSE), a Vancouver junior with an exploration property in the Dominican Republic. The shares have had a 52-week range of 90c-30c and recently traded at about 50c.
- Fairfield Minerals Ltd. (FFD/TSE), a Vancouver exploration company with properties in the Yukon. The shares have had a 52-week range of $1.25-40c and recently were about 60c.
- Gerle Gold Ltd. (GGL/VSE), a Vancouver firm which is involved in a Northwest Territories diamond play. The shares have had a 52-week range of 90c-20c and recently traded at about 30c.
Mr. Kaiser agrees with Mr. Fagan's caution on selectivity. "The uptrend will be selective," he writes, "for this bear market has terminally damaged over half the 1,500 listings that qualify as Canadian juniors." Mr. Bunka thinks that only 50 or 60 Vancouver juniors will participate in the rally. "They have to have a project than can produce results," Mr. Fagan says. Mr. Bunka and Mr. Coffin agree that speculators are interested only in companies that have solid projects. Bunka's example is Argentina Gold Corp. (ARP/VSE), the Vancouver company whose shares lit up this fall as it began reporting promising drill results from a gold property in Argentina. The shares, after trading as low as 35c in May, took off last month to a high of $3.66. They are currently trading at about$2.60.
"Argentina Gold showed that the market is ready to embrace good news for the first time since the spring of 1997," Mr. Bunka says.
Mr. Coffin says that investors are staying away from juniors that are sitting on cash without putting it to work and are favouring those with active programs.
Oversold Hummingbird regains some altitude
Back in Vogue
The Financial Post
Hummingbird Communications Ltd. stock is on the move -- you can make book on it.
With the company's share price dipping below book value earlier this month, one analyst has already lifted his rating on the stock to "buy", and it has been moving higher since.
"It's a company with a huge amount of cash, selling at its breakup value," said Ross Healy, chief executive officer of Strategic Analysis Corp., who lifted his Hummingbird rating on Wednesday.
"I wouldn't say it is a no brainer, [But] when you look at its balance sheet and see 70% of the book value is in cash, and its existing product stream is producing nice earnings and excellent cash flow, you have to ask yourself in a market with high values why this isn't a superb stock."
Hummingbird stock began to slide Oct. 20 when it lost 17.1% of its value after the company released fiscal fourth-quarter results that showed sales were flat, compared to the year before, and earnings had declined.
For the quarter ended Sept. 30, net income was $8.5-million (54c a share) on sales of $33.5-million, down from net income of $9.2-million (59c) on sales of of $33.4-million.
Mr. Healy says if the market loses its momentum then Hummingbird would become an attractive target because its product line is doing well.
"It's hard to imagine investors will lose too much in in the next year or so," he said.
In the past two trading sessions, Hummingbird stock has climbed from $24.95 to $29.60, a gain of more than 18%.
Mr. Healy said part of the gain was due to takeover speculation.
Rumours circulated financial markets on Wednesday that German telecommunications giant Siemens AG may make a takeover bid for Newbridge Networks Corp. Siemens denied the rumours yesterday.
Still, Mr. Healy said all the speculation may have prompted investors to take another look at beaten-up tech stocks.
"The rise of Newbridge might have triggered people to look for high-tech stocks where an acquisition could occur," he said.
"It would only take a minute of looking at Hummingbird's balance sheet to say that if Newbridge is going to be taken over at three or four times book [value], you have to look at Hummingbird and say that's an interesting situation at one times book."
However, another Toronto-based analyst, who asked not to be named, disregarded the theory. "I don't believe it has anything to do with Newbridge, -- that's hardware and this is software," he said.
"I've taken a look at the trading and it's a large group of brokers and all small volume trades."
Securities Industry Racks Up Losses
Bleak Third Quarter
By THE FINANCIAL POST
The Canadian securities industry has posted losses for the first time since 1991.
For the three-month period ended Sept. 30, the industry's 188 firms generated a net loss of $19-million. The statistics that were released this week by the Investment Dealers Association of Canada indicate that 120 firms made profits in the third quarter, while 68 made losses. In the second quarter, the industry's 184 firms generated a net profit of $147-million.
"The industry financial statistics for the third quarter confirm the preliminary data and anecdotal evidence that the securities industry encountered rough sledding in July to September this year," said the IDA in its quarterly securities industry performance.
Operating profit for the third quarter was $35-million, a 92% drop from the second quarter's $436-million. The most recent quarter's operating profit was based on a 27% reduction in operating revenue -- to $1.497-billion from $2.037-billion -- and a 1% rise in expenses -- to $928-million from $917-million.
The bleak performance in the third quarter mean a less than stellar performance for the year to date. To Sept. 30, the industry's net profit was $300-million -- or 51% less than the $612-million profit recorded for the first nine months of last year. For the first three quarters, operating revenue was off by 7% while operating expenses were up by 14%. Operating profit was $987-million -- or 36% less than the $1.541-billion recorded for the comparable period last year. For the first nine months of the year, 120 out of 188 firms had profits, 68 had losses. In the comparable period of last year, 143 out of 182 were profitable.
While all firms are suffering, some are suffering less. Revenues were 23% lower at the integrated firms, 23% lower at the retail brokerage firms but 46% lower at institutional firms, where revenue for domestic firms was off 41% but down 52% at foreign firms.
Among revenue categories, underwriting was off by 35% in the quarter (down 18% for the first nine months) while fixed-income trading was down by 47% (13% year to date.) Equity trading generated a loss of $111-million in the third quarter (off by 86% this year) while commission was down 16% (and 1% for the year.)
The downturn in fixed income business is apparently behind yesterday's decision by TD Securities Inc. to cut about half a dozen staffers from its group. This follows cuts at other firms and at TDSI's investment banking and institutional equity areas.
Volatility hurts ratings of split-share firms
Three Downgrades: Asset coverage of issues in decline
THE FINANCIAL POST
Market volatility over recent months has affected the ratings of a select group of split-share companies.
Canadian Bond Rating Service said asset coverage protection for Pipe NT Corp. (PIP/TSE), TRP NT Corp. (TP/TSE) and Thirty Five Split Corp. (TFS/TSE) has declined to a level that warrants a downgrade in their ratings.
Split shares are manufactured from the common shares of high-yield companies.
The shares are purchased in large blocks by a third-party company and then repackaged as two separately traded issues -- common capital shares and preferred dividend shares -- backed by the underlying common shares.
The capital shares participate in the price swings of the underlying common shares on a leveraged basis, which means they are hyper-sensitive to the value of the common shares.
Preferred dividend shares are for more conservative investor seeking yield.
Investors in the preferreds are entitled to all dividends, and because the capital portion has been stripped away, they are priced at a discount to the common shares and achieve a higher yield.
After six or seven years, the split-share company is liquidated and the preferred shareholders receive their principal back in full, and the capital shareholders receive what is left.
Pipe NT, which holds a common stock portfolio of IPL Energy Inc., TransCanada PipeLines Ltd. and WestCoast Energy Inc., had its rating lowered to P-3 (High) from P-2 (Low) by CBRS.
The same rating downgrade was applied to TRP NT, which holds the common shares of TransCanada.
Ron Neysmith, senior analyst at CBRS, said "following the volatility in the market most of the ratings here are based on asset protection, and some of them have come off highs and [the price of] initial issuance."
Asset coverage for Pipe NT's preferred shares have declined from 36.7% to 10% since issuance, while the coverage on TRP NT has fallen to 24.9% from 40%, said Mr. Neysmith.
That means the common stock on which the capital shares are based have declined in value and there is now a reduced cushion of safety to insure the preferred shareholders of the return of their principal when the split share companies are wound up.
Thirty Five Split, a hybrid of the Toronto Stock Exchange 35 portfolio, was downgraded to P-2 (Low) from P-2. Asset coverage for Thirty Five has fallen from 35% at issuance to 24.7%.
CBRS said its assessments of split-share companies looked at asset coverage as well as the remaining time to maturity of each issue, the portfolio composition in relation to the diversity of individual companies and the volatility experienced during the current market turmoil.
Although investors are generally only receptive to split-shares coming to market with at least a P-2 rating, already issued split share preferreds at P-3 are still investment grade, but will probably be sold for less to provide an investor with a higher yield, said Mr. Neysmith.
Over the past 18-months, a dozen companies have repackaged about $1.2-billion worth of shares.
This compares with the last wave of split-share offerings in the late 1980s and early 1990s, when a similar number of companies repackaged about $2-billion worth of shares.
Canada Bonds Close Higher Ahead Of Quebec Election
Canadian government bonds closed firmer in thin trade on Friday, with a sharply higher price and lower yield for the long bond flattening the yield curve further.
Trading was light and clients were sidelined as the U.S. bond market finished early at 1400 EST/1900 GMT, wrapping up the Thanksgiving holiday week. An early close was not recommended in Canada.
"The U.S. is up by a fair chunk today. Canada is outperforming, except in the two-year area," said Jeoffrey Hall, managing analyst at Thomson Global Markets in Boston. "There's some idea that we are making room for some supply (of more corporate bond issues) in the five-year area in Canada, maybe a shorter term than that, because the flattening out of twos is more aggressive than the flattening out of fives."
"We are looking for a handful of issues in the corporate sector, some of them are going to be in the five-year. If we continue to have a firm treasury bid, then I think we'll see them come next week. If not, they can wait," he said.
U.S. bonds were propped up by a firmer tone in the U.S. dollar, around 123 yen and 1.71 marks, and confirmation in the latest data that Japan's economy remains weak, following the U.S. Thanksgiving market holiday on Thursday.
Canada's benchmark 30-year bond due June 1, 2027 rallied C$0.88 to C$137.37, yielding 5.413 percent.
The U.S. 30-year bond maintained most gains, up by 11/32 to yield 5.163 percent. The Canada-U.S. spread narrowed to 25 basis points from 27 points at the previous close here.
Focus remains on an election in the Canadian province of Quebec on Monday.
Investors were largely discounting the risk of any resurgence of Quebec separatism. They figure that even if the ruling Parti Quebecois wins this election, as polls suggest, it is unlikely to call a referendum on separation quickly.
The market is also awaiting release of U.S and Canadian economic data next week.
The Chicago Purchasing Managers index for November is due out on Monday. Economists on average forecast 48.9 after 48.1 in October.
Also on Monday, Canada's third-quarter gross domestic product (GDP) and current account balance data will be released. An expected improvement in those numbers should benefit the Canadian dollar and the short end of bonds and bills.
Economists expect the real GDP to have grown 0.2 to 0.7 percent in July-September after a 0.4-percent rise in April-June, and the current account deficit to have shrunk to C$3.00 billion to C$3.80 billion from C$4.23 billion.
U.S. and Canadian jobs data for November will be released on Friday, December 4. The U.S. non-farm payrolls, followed closely by the markets, are forecast to rise by 158,000 after a gain of 116,000 in October. The jobless rate is seen unchanged at 4.6 percent.
The Canadian yield curve was flattening, with the two- to 30-year spread narrowing to 55 basis points from around 64 points a week ago.
Canadian bonds have been steady in the last month and Canada's yield spreads over U.S. bonds have narrowed in recent trade, showing confidence in the Canadian market.
The 10-year spread has narrowed to around 35 basis points from 52 points before the start of the Quebec election campaign about a month ago.
Canada's 10-year bond rose C$0.52 to C$106.71 to yield 5.100 percent, while the U.S. 10-year rose 6/32 to yield 4.810 percent. The spread narrowed to 29 basis points from 34.
The money market was steady as market participants have factored in a victory for the ruling Parti Quebecois.
The Bank of Canada said on Friday it will auction C$2.5 billion of 37-day treasury bills on Monday, November 30. The bills will be delivered on December 1
Canada's three-month when-issued T-bill yielded 4.76 percent after 4.75 percent at the previous close.
"There's not much to go on here with the U.S. now being open but not with normal volume levels," a money trader said. "The (Canadian) currency has been on a bit of a ride, and I think that's going to drive our market."
The Canadian dollar rallied on Wednesday and Thursday morning, then gave up some gains. It has been moving in a range of C$1.52-1.56 to the U.S. dollar in the past month, escaping a sell-off during the Quebec provincial election, which has dampened sentiment in the past.
The market will assess the risks of holding Canadian assets after seeing the results of the Quebec election on Monday and hearing policy speeches by separatist leaders. The polls open at 1000 EST/1500 GMT and close at 2000 EST/0100 GMT. The first results will be available about half an hour after the closer, a greater volume of results are expected around 2100 EST/0200 GMT.
Voters in the French-speaking province will choose between the incumbent separatist Parti Quebecois and the federalist Liberal Party.
Canadian Dollar Ends Firmer Ahead Of Quebec Poll
The Canadian dollar ended firmer at C$1.5345 ($0.6517) on Friday in choppy, quiet trade ahead of what looks like an eventful week.
Trading was light as U.S. markets closed early as some players were leaving for a long weekend following the U.S. Thanksgiving holiday on Thursday.
Investors were largely discounting the risk of any resurgence of the Quebec separatism. They figured that even if the ruling separatist Parti Quebecois (PQ) wins Monday's Quebec provincial election, as polls suggest, it is unlikely to call a referendum on separation from Canada quickly.
Focus is on how big the margin of an expected PQ win will be and how it affects the chances of another referendum in the future.
The Canadian dollar rallied on both Wednesday and Thursday mornings, then gave up some gains. It has been moving in a range of C$1.52-1.56 to the U.S. dollar in the past month, escaping a sell-off during the Quebec provincial election, which has dampened sentiment in the past.
The market is also awaiting release of U.S. and Canadian economic data next week.
The Chicago Purchasing Managers index for November is due out on Monday. Economists on average forecast 48.9 after 48.1 in October.
Also on Monday, Canada's third-quarter gross domestic product (GDP) and current account balance data will be release. They are likely to be positive for the Canadian dollar.
Economists expect the real GDP to have grown 0.2 to 0.7 percent in July-September after a 0.4-percent rise in April-June, and the current account deficit to have shrunk to C$3.00 billion to C$3.80 billion from C$4.23 billion.
U.S. and Canadian jobs data for November will be released on Friday, December 4. The U.S. non-farm payrolls, followed closely by the markets, are forecast to rise by 158,000 after a gain of 116,000 in October. The jobless rate is seen unchanged at 4.6 percent.
On the crosses, Canada's dollar extended gains. It ticked higher against the Japanese currency to 80.14 yen from 79.31 yen. The dollar was firmer against the German unit at 1.1158 marks from 1.1055 marks.
The yen fell on news that Japanese Finance Minister Kiichi Miyazawa is expected resign this year and also step down as the head of his own faction within the ruling party. The market thought his resignation could delay enactment of Japan's economic stimulus package.
|
