MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, NOVEMBER 24, 1997 (1)
Japan Jolts Wall Street
Wall Street closed sharply lower as it braced for Tokyo's reaction today to the collapse of Japan's Yamaichi Securities Co. Bay Street dropped as the gold and precious minerals index continued to lag
By THE FINANCIAL POST
In New York, the Dow Jones industrial average fell 113.15 points, or 1.4%, to 7767.92. Volume on the New York Stock Exchange was 519.8 million shares, down from Friday's volume of 597.9 million shares. The Nasdaq composite index sank 33.76 points, or 2.1%, to 1586.99. The Standard & Poor's 500 composite index dropped 16.42 points, or 1.7%, to 946.67.
There was concern at how Japan's financial markets would react to the collapse of Yamaichi Securities, its fourth largest brokerage house, leaving debt to the tune of US$23.6 billion. Japanese markets were closed yesterday for a holiday. "It is clear the world financial crisis is getting much deeper and much more serious," said Hugh Johnson, chief investment officer for First Albany Corp. "This is a serious financial accident and there are more to come." Analysts said Yamaichi's failure was potentially more crippling to the market than the currency turmoil in Asia because Japan is the world's second largest economy. Yamaichi, which opened its doors in 1897, said at the weekend it would close its operations, unable to manage liabilities. This marks the largest corporate failure in Japan's post-Second World War history, and dealers feared it could signal new trouble for Japan's beleaguered banking system after Japan's 10th largest bank closed its operations last Monday. "Overall, the market reaction to the Yamaichi situation is that more problems will come out of Japan," said Jeffrey Yu, senior dealer at Sanwa Bank Ltd. in New York.
The bond market also tumbled as Yamaichi's problems renewed concern that Japanese banks would be forced to unload Treasuries to raise cash.
Technology stocks were the hardest hit on Wall Street, led lower by semiconductors because they are considered to be more exposed to the Asian turmoil. Intel Corp. (INTC/NASDAQ) tumbled US$2 1/8 to US$78 1/8 on heavy volume. International Business Machines Corp. (IBM/NYSE) fell US$2 1/2 to US$103 1/16 and Microsoft Corp.(MSFT/NASDAQ) shed US$2 3/8 to US$135 1/2.
In Toronto, the Toronto Stock Exchange 300 composite index fell 49.36 points, or 0.7%, to 6724.57. Volume on the TSE was 101.5 million shares, compared with Friday's volume of 125.2 million shares.
Many buyers stayed on the sidelines, watching to see how the closure of Yamaichi will play out, said Jim Mountain, director of retail equity trading at ScotiaMcLeod Inc. The TSE 300 began the day lower and drifted down in a broad, fairly quiet retreat, said Mountain.
Investors looking for opportunities to get out of existing long positions are selling into markets that are thinly bid for the most part, which tends to put pressure on stock prices.
Toronto's biggest decliner was the gold subindex, which shed 2.4% as the gold price on the Comex division of the New York Mercantile Exchange fell US$1.80 to US$303.70 an ounce. In the group, Barrick Gold Corp. (ABX/TSE) dropped 55› to $25.05.
The transportation sector also weighed on the market, falling 1.6% as Laidlaw Inc. (LDM/TSE) dropped 40› to $18.75.
The other major Canadian markets closed lower. The Vancouver Stock Exchange composite index fell 16.78 points, or 2.4%, to 673.99. The Montreal Exchange market portfolio fell 16.49 points, or 0.5%, to 3390.24.
The major overseas markets closed mixed.
London: British stocks fell sharply after news of Yamaichi's collapse unnerved markets around the world. The FT-SE 100 index fell 87.2 points, or 1.8%, to 4898.6.
Frankfurt: German stocks remained mired at lower levels in afternoon post-market trade, after a less than inspiring opening across the Atlantic compounded downbeat sentiment in Germany. The Dax index dropped 129.06 points, or 3.3%, to 3830.63.
Tokyo: Stock markets were closed for a national holiday. On Friday, the 225-stock Nikkei average rose 413.09 points, or 2.5%, to 16,721.58.
Hong Kong: Stocks closed higher, cheered by prospects of a better real estate market but held back by uncertainties over regional currencies. The Hang Seng index rose 38.16 points, or 0.4%, to 10,586.36.
Sydney: Australian stocks ended a slow session nearly unchanged as a holiday in Japan kept many investors sidelined. The all ordinaries index dipped 0.6 of a point to 2482.1.
HOT STOCKS
Bishop Resource Inc. (BRI/ASE), up 25› to 90›, on volume of 132,500 shares. Trade in the stock was halted about 90 minutes before the close. The company expects today to report drilling results from its 10-hole program on the Scotia property near Prince Rupert, B.C., said director Andrew Schwab.
SLM Software Inc. (ESP/TSE), up 20› to $12.70, on volume of 4,100 shares. Angoss Software Corp. (ANC/ASE), unchanged at 15.5›, on volume of 262,570 shares. SLM, which is making an unwanted 12›-a-share takeover bid for Angoss, criticized the Angoss board for saying Friday that Angoss was talking of a merger with an unnamed party. The board's "unwillingness to provide full disclosure prevents Angoss shareholders from being able to evaluate the merits of this new arrangement in comparison to SLM's offer," SLM said, adding Angoss has not let it see the books "to determine if a revised offer is warranted."
Kasten Chase Applied Research Ltd. (KCA/TSE), up 17› to $1.17, on volume of 1.7 million shares. The stock hit a 52-week intraday low of 85› as big players shuffled their holdings in the networking products company. Sprott Securities Ltd. crossed two blocks totalling 732,500 shares for 90› each, Yorkton Securities Inc. crossed a block of 505,600 shares at 85› each and CIBC Wood Gundy Securities Inc. crossed a block 242,600 shares for 98› each.
Nymox Pharmaceutical Corp. (NMX/ME), up $1.20 to $10.20, on volume of 84,651 shares. The company will begin trading on Nasdaq today. Nymox develops tests and treatments for Alzheimer's disease.
Investors in Cadillac Fairview Corp.'s initial public offering were willing to buy over eight times as many shares as the firm made available, president and chief executive Bruce Duncan said yesterday. Although the company was offering about 11 million shares, orders came in for about 90 million, Duncan told a panel at Property Forum '97, a one-day real estate conference sponsored by The Financial Post. He said he was surprised by the U.S. interest level in the offering, which closed two weeks ago. He said U.S. orders amounted to about 40 million shares, with demand from Canada for about 50 million. "Personally, as we started this process, I did not believe that we were going to have that much interest in Cadillac Fairview from the United States," he said. "In Canada, I knew we'd have great interest because investors view us as the Coca-Cola of real estate in Canada."
There are about 250 public real estate companies in the U.S., said co-panelist Russell Platt, managing director for Morgan Stanley Asset Management. "We are in the midst of a major transformation," Platt said. Real estate is increasingly owned through public companies rather than held in private hands, he said. The securitization of the real estate industry was a key reason Cadillac Fairview went public, Duncan said. At 13% of the shares, "just a sliver" of the company was sold to public investors. "We wanted to have a currency out there," Duncan said. Pension funds and institutional owners of U.S. real estate are taking their direct ownership of properties and trading them for shares in public real estate companies, he noted. "We think that will happen in Canada." A second reason Cadillac Fairview opted to go public is because it expects there will be consolidation in the real estate sector, Duncan said. The third reason is to provide an exit strategy for some of its shareholders.
Prior to the IPO, just over 50% of shares were held by three major shareholders; WHCF Real Estate LP, the Ontario Teachers' Pension Plan Board and Blackstone Real Estate Advisors. The rest was held mainly by high-yield U.S. vulture funds. Cadillac Fairview shares (CDF/TSE) closed yesterday at $33.20, up 25›.
Investors Respond To The Call Of The Weird
How else to explain the unbridled passion for initial public offerings?
As Hunter S. Thompson once observed: "When the going gets weird, the weird turn pro." How else to explain the Green Bay Packers Inc.'s recent decision to offer 400,000 shares at US$200 a pop? The shares don't trade on any stock exchanges and buyers are advised not to expect to turn a profit. Nevertheless, club officials estimated last Wednesday half the issue had been snapped up. Loyal fans hankering for more were invited to pick up offering documents at a trailer outside the National Football League team's home stadium at last weekend's big game with Dallas. Perhaps hoping to duplicate Green Bay's success, soon afterward the Calgary Stampeders Football Club Inc. announced its decision to go public on the Alberta Stock Exchange at $1 a share. Investors can at least dream about capital appreciation -- even if that sounds unlikely, given the team's recent troubles.
Then there's Royal Leather Goods Ltd., a Toronto-based retailer better known as Danier Leather. If everything goes as planned, it will be the first leather store listed on the Toronto Stock Exchange. Issuers seem to believe you can't go wrong with an initial public offering. And judging from today's frothy stock market, they're right.
Everybody, it appears, is trying to tap the latest Eldorado -- just look at the burgeoning list of new IPOs. The range of companies is extreme, running from well-known corporate entities to obscure high-tech start-ups to a slew of ventures that defy description. Less problematic -- but still risky -- is the rash of increasingly imaginative possibilities, such as real estate investment trusts, which along with other investment trusts are garnering much attention.
Now more than ever, investors should be wary. "There's a lot of dubious stuff out there on the market," says Wayne Deans, a partner in Vancouver-based Deans Knight Capital Management Ltd. There are also plenty of opportunities for investors who know what they're buying, he says. "But it's important to recognize that what's right for others may not be the right thing for you."
There's no question that for companies seeking to raise money by going public, 1997 is turning out to be a banner year. By the end of October, 303 Canadian companies had gone public, with proceeds totalling a record $12.5 billion. And the pace shows no sign of letting up. Of the 10 biggest issues, four were launched in October, the most recent month for which figures are available. At last count there were 101 IPOs still in the pipeline. In 1996, by comparison, 259 companies went public, raising $5.5 billion.
Why is the market so hot on IPOs?
One reason is the reward for getting it right can be substantial, as anyone who got in on the ground floor with a Canadian National Railway Co., a Newcourt Credit Group Inc., or a JDS Fitel Inc. can tell you.
The other reason has to do with the growing tendency of Canadian consumers to stash their savings away in the stock market. "All you have to do is look at the money flowing into mutual funds," says Deans. "[Fund managers] have to put the money somewhere. They're paid to buy stuff, not to sit on cash. So there's a lot of demand for new product."
It doesn't help that, over the past couple of years, the supply of "new product" has been considerably depleted by a rash of mergers, acquisitions and stock buy-backs. The result is a market tilted in favor of virtually anyone with something for sale. "What you find is that investors are willing to look at companies that are, perhaps, in an earlier stage than they would have been a few years ago,'' says one investment banker who asked not to be identified. Whether some of these firms should have listed in the first place is a question he'd rather not answer.
In any case, looking at the list of recent IPOs, one has to wonder if some of today's hot commodities would merit a second look in calmer times. But maybe the real mystery is why investors are so hungry for IPOs. "People tend to point to the winners when you ask them why they decided to buy an IPO," says John Friedlan, a professor at York University's Schulich school of business. "But generally speaking, IPOs tend to be terrible investments. It's worse than going to the casino." That, essentially, is the conclusion of a study by Friedlan, fellow York professor Elizabeth Maynes, and Savita Verma, a senior financial engineer at the Toronto-based consulting firm Algorithmics Inc. The study, which has yet to be made public, tracked 111 companies that went public on the Toronto Stock Exchange between 1984 and 1986, and followed their performance for six years. It has produced some alarming findings:
Nearly a third, or 34 of the companies, were no longer listed on the TSE at the end of the 72-month period. Of the 34 delisted companies, nine were removed because of financial distress. Most of the remainder were acquired or amalgamated.
On average, the surviving IPOs fared poorly in the medium term. In fact, says Friedlan, most underperformed the TSE 300 for the duration of the study. The good news is that, after the six lean years, the IPOs were delivering superior returns.
The lesson in all this is buyer beware. There's a lot of risk in the IPO market today -- more than some investors realize. But for shrewd players, there are plenty of opportunities. The first point for prospective buyers is to take the time to read the prospectus carefully. Take a look at the company's earnings record and pay attention to the section that describes what will happen to the proceeds of the stock sale. As Deans cautions: "We have noticed an increasing number of IPOs where the principals are stripping their money out and replacing it with new shareholder money." He cites recent IPOs by Saputo Group Inc. and Office Specialty as cases in point. In some cases, he suggests, this can point to a lack of confidence by the principals in the future performance of the company.
He also advises finding out what kind of shares are being offered. If they're subordinated voting shares, warning bells should go off. "There's nothing wrong with them, but if you're buying them, you have to be aware that you are delegating your voting power to someone else."
Clearly, there's no formula for picking the winners. But perhaps the best way to sum up the available advice is this: Know what you're buying.
Davis-Rea's Buy & Sell
Setting Store By Stocks With Good Dividend Yields
Toronto-based investment manager Davis-Rea Ltd. expects the North American equity market to trade in a narrow range for a protracted period and to produce lower than average total returns in 1998, said Gerald Vincent, vice-president and portfolio manager. "The market could make new highs in 1998 and thereafter be characterized by a lot of corrective action."
While interest rates are likely to be lower or stable, earnings growth should slow to below the double-digit level, said Vincent.
The problems in Asia will affect economic growth in that region but are unlikely to affect the Canadian and U.S. economies significantly. "The North American business cycle is still relatively strong and the export sensitivity of the two economies to that part of the world has been overblown."
Also, the threat of deflation has been "greatly exaggerated," said Vincent. Given concerns about the 1998 outlook for the stock market, Vincent and colleague Andrew Martyn, also vice-president and portfolio manager at the firm, are emphasizing stocks with good dividend yields, with a preference for the interest-sensitive sector -- banks, pipelines and utilities. "The market will set higher store by those stocks with good dividend yields," said Martyn. His top stock picks are:
IPL Energy Inc. (IPL/TSE), which closed recently at $59.25 and has a 52-week trading range of $60 to $38.30 and a dividend yield of 3.7%. Based in Calgary, the company is engaged in the transportation of liquid hydrocarbons and the distribution of natural gas. It recently acquired a 32%-stake in Noverco Inc., which opens the door to a strategic alliance with Hydro-Quebec (which owns 41% of Noverco) to deliver gas to Quebec, the Maritimes and the New England States. IPL is stressing the retail marketing side of business, said Martyn, with wholly owned subsidiary Consumers' Gas Energy Inc. a key element of the strategy. IPL has also doubled to 23% its stake in the proposed $3.6-billion Alliance pipeline project. Martyn is looking for the company to earn $3.15 a share in 1997 and $3.43 a share in 1998.
TransCanada PipeLines Ltd. (TRP/TSE) $29.25 ($29.25-$22.50) with a dividend yield of 4%. The Calgary-based company is engaged in natural gas and energy transmission, power generation and energy marketing. It is pushing more into deregulated areas like power plants and natural gas liquid extraction plants. Earnings per share estimates are $1.94 for this year and $2.15 for 1998.
Toronto Dominion Bank (TD/TSE) $54.40 ($54.90-$31.25). TD is Canada's fifth largest bank, dominating the discount brokerage business. The banks are likely to be among the beneficiaries of the present flight to quality in the equity market. TD recently reported earnings for fiscal 1997, ended Oct. 31, of $3.54 a share. Martyn's forecast is $3.85 a share in fiscal 1998.
MDS Inc. (MHG/TSE) $33 ($36-$20.75). The Toronto-based diversified health and life sciences firm's services include the development and distribution of medical supplies and equipment and diagnostic testing. "The health-care segment is defensive," Martyn said. Earnings per share estimates are $1.12 for fiscal 1997, ended October, and $1.26 for the following fiscal year. Given the decline in the bullion price and the resultant problems for gold mining companies,
Martyn has sold holdings of royalty company Euro-Nevada Mining Co. Ltd. (EN/TSE) $18.75 ($27.25-$16.83). It is one of the best positioned companies in the sector, he said, but the sector is under tremendous pressure. "There will be a significant downward revision in these companies' high price-earnings multiples as their earnings per share growth slows." In light of this, the money manager has also sold holdings of Denver-based major gold producer Newmont Mining Corp. (NEM/NYSE) $31 7/8 ($50 1/2-$29 5/8).
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