MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURS., DECEMBER 4, 1997 (1)
Friday, December 5, 1997
Stock Markets
Golds Sink TSE Again
Bay Street stocks were weighed down by a leaden performance from the gold group as the price of bullion plunged. Wall Street ended mixed after relinquishing some hefty early gains.
THE FINANCIAL POST
The Toronto Stock Exchange 300 composite index fell 18.84 points, or 0.3%, to 6662.31.
Declines exceeded advances 580 to 474 and trading volume was 114.5 million shares, down from Wednesday's total of 124 million, and trading value fell to $1.55 billion from $2.14 billion.
The TSE 300 trailed the Dow Jones industrial average, which rose 18.15 points, or 0.2%, to 8050.16, after trading as high as 8113 intraday. But the broader U.S. measures declined slightly during the session.
In Toronto, weakness in the gold stocks knocked down the composite index. The TSE gold and silver subindex dropped 5.9% as the gold price on the Comex division of the New York Mercantile Exchange tumbled US$6.10 to US$286.50 an ounce.
In the group, Placer Dome Inc. (pdg/tse) tumbled $1.50 to $15.30, setting a new 52-week low for a second consecutive day. Barrick Gold Corp. (abx/tse) fell $1.40 to $22.20, also a new 52-week low. In spite of the drop, analysts say they expect to see the gold price bottoming out in the next few weeks and an upturn in the new year. Steven Porter of Elliott Wave International said that, from a technical perspective, gold is entitled to a "sharp-snap rally" in the new year. Analysts added that as the gold price has fallen, some gold mines have become uneconomical and have closed. This should
lead to a decrease in overall gold production, paving the way for a higher gold price.
David Cockfield, president of money management firm Cockfield Porretti Cunningham, said he expects the Toronto market to trade sideways in the next week or so as market players sort out their tax-loss selling. After that, he sees Toronto heading into the Christmas period with a traditional "Santa Claus" rally. Cockfield added he does not detect a lot of buying enthusiasm in the market right now, but noted that there is some stability.
In other Canadian markets, the Montreal Exchange market portfolio index lost 20.53 points, or 0.6%, to 3373.91 and the Vancouver Stock Exchange composite fell 12.21 points, or 2%, to 613.6.
On Wall Street, a few scattered winners highlighted an otherwise lacklustre session as major market averages ended with relatively modest changes from opening levels.
Banks stocks stood out, with Citicorp (cci/nyse) a big winner as its shares jumped US$5 3/4 to US$135 1/2. J.P. Morgan & Co. (jpm/nyse) gained US$2 1/2 to close at US$122 3/4, recording its first 52-week high since early October.
Meanwhile, pharmaceuticals giant Merck & Co. (mrk/nyse) added to Wednesday's rally, jumping US$6 9/16 to US$104 9/16, its highest close since July 23.
The broad market was spotty as well, a performance reflected by market averages. The Dow's gain gave it the highest finish since Oct. 21, but that was far below the day's high.
The Standard & Poor's 500 stock index posted a more dramatic turnaround intraday, ending the session with a loss of 3.67 points, or 0.4%, to 973.10. But at its high, the S&P had climbed to 983.36 -- 0.24 of a point higher than its record of 983.12 set on Oct. 12.
So what could have been a pivotal session in the market's efforts to recover from October's woes instead dwindled into a reflection of what could have been.
Major overseas markets were mostly higher.
London: Prices surged as institutional funds returned to the market to scoop up blue chips ahead of yearend portfolio reviews, dealers said. The FT-SE 100 index closed at 5082.3, up 111.6 points or 2.3%.
Frankfurt: German shares finished much stronger, buoyed by gains on Wall Street, after a muted continuation of the rally seen at the start of the week. The Dax index closed at 4139.8, up 56.91 points or 1.4%.
Tokyo: Japanese stocks finished lower, weighed down by jitters over the financial sector after a rating agency said that it might cut the ratings of some banks. The 225-share Nikkei average closed at 16,306.79, down 278.72 points or 1.7%.
Hong Kong: Prices ended higher as investors hunted for bargains before the end of the year. The Hang Seng index closed at 11474.94, up 267.36 points or 2.4%.
Sydney: A lacklustre Australian market broke a week-long winning streak to end lower as miners crumbled under the weight of softer metals prices. The all ordinaries index closed at 2552.5, down 9.9 points, or 0.4%.
HOT STOCKS
Gold Producers Hammered Barrick Gold Corp. (ABX/TSE), down $1.40 to $22.20, on volume of 1.8 million shares. Placer Dome Inc. (PDG/TSE), down $1.50 to $15.30, on volume of 1.3 million shares. The two producers account for almost half the Toronto Stock Exchange gold and precious minerals subindex, which fell 5.9% yesterday. Both senior producers hit 52-week lows as the gold price fell US$6.10 to US$286.50 an ounce. Fear of more central bank selling and weakening demand from Asia are cutting the price. Argentina's statement Monday that it sold almost all its gold bullion reserves this year "is just another nail in the coffin," said Leonard Kaplan, chief bullion dealer at Monex Deposit Co. in Newport Beach, Calif. "One by one it's going to come out that other central banks have sold, and the price will fall each time. The next big level is easily US$285." Argentina was the fourth country in two years to disclose it has sold a large portion of its gold. The central bank sales "have built up bad sentiment," said David Rinehimer, an analyst at Smith Barney Inc. in New York. Now the fear of weakening Asian demand because of currency devaluations has led sellers to become aggressive, he said.
Laurentian shares (LB/ME) fell 50› yesterday to close at $27.50. CIBC (CM/TSE) was down 25› to $44.75, while National (NA/TSE) rose 5› to close at $23. The last two of Canada's big banks yesterday reported their financial results for the year ended Oct. 31, pushing the cumulative total profit for the group to $7.48 billion, 19% higher than in 1996. While the year-over-year profit gain for the six banks is spectacular, it falls short of the 21% increases the group posted in each of the past two years. In fiscal 1994, the banks earned $4.27 billion, in 1995 they made $5.18 billion, and last year total profit hit $6.26 billion. Completing the totals yesterday were Canadian Imperial Bank of Commerce, with net income of $1.55 billion ($3.51 a share), and National Bank of Canada with $342 million ($1.86). CIBC's profit was 14% higher than the year before, National's 7% higher. CIBC attributed its results to "robust financial markets" and high consumer demand for retail products. This helped boost fourth-quarter earnings to $405 million (91›), up from $341 million (75›) a year earlier and a little above analysts' average predictions. National Bank -- the smallest of Canada's six big banks both by assets and market cap -- also had a good year thanks to increases in brokerage income and securities gains. National's fourth quarter showed a 21% increase in earnings to $90 million (49›). It managed this gain despite adding $100 million to its general loan loss provisions. National's net impaired loan figure, $297 million at yearend, is higher than any of the other big banks except Bank of Nova Scotia. Tom Jarmai, analyst at Scotia Capital Markets, said one reason National's impaired loans are relatively high is that the drop in bankruptcies and business failures in Quebec is not yet reflected in the bank's portfolio. National's ROE was 14% in 1997, down from 14.5% last year. Another, smaller Quebec-based bank, Laurentian Bank of Canada, also reported its earnings yesterday. Laurentian, now a widely held Schedule 1 bank after Desjardins-Laurentian Financial Corp. sold its 57.5% stake in October, earned $60 million ($2.55) in fiscal 1997, up 11% from the year before. Most of Laurentian's revenue growth came from increased sales of mutual funds and self-directed RRSPs. Return on equity hit 12% at Laurentian, up from 11.3% the year before, but still well below that of the bigger banks. Laurentian also named a new chairman yesterday. Jeannine Wood, chairman of Guillevin InternationalInc., took the job that came vacant when Humberto Santos died in October.
CGI Group Inc. (GIBa/ME), up 80› to $46.80, on volume of 174,811 shares. The technology consulting company gained $2.95 Wednesday after beating analysts' profit estimates by 18% for the year ended Sept. 30. Yesterday it advanced on news that more than 70 Ontario credit unions have signed a five-year deal to have CGI provide client-server banking services worth $50 million in revenue.
Electrohome Ltd. (ELy/TSE), up 60› to $17.10, on volume of 521,000 shares. The company warned that the market's positive response to its proposed "butterfly" reorganization could kill the deal if a large investor accidentally bought more than 10% of its stock. Electrohome shares have climbed $1.85 since the announcement, which entails splitting the company into separate broadcasting and visual communications businesses. If a buyer acquires more than 10%, Revenue Canada could kill the deal. The company knows of no such buyer, said chairman and chief executive John Pollock.
Enghouse Systems Ltd. (ENGX/CDN), up 75› to $10.25, on volume of 102,150 shares. The release of the software company's yearend results drove the stock up $1.63 Wednesday on volume of more than 91,000 shares. Yesterday a large shareholder, Pinetree Capital Corp., re-released the numbers showing profit for the year ended Oct. 31 was $5.6 million (77› a share), compared with a loss of $3.8 million (57›) a year earlier.
Metronet Communications Corp. (MNC/TSE), closed at $25.25, on volume of 357,695 shares, and (METNF/Nasdaq), closed at US$17 13/16, on volume of two million shares. The company completed an initial public offering of 7.5 million class B non-voting shares at $23 each. Buyers made an instant profit when the market bid up the stock on the first day of trading. Proceeds of the $172.5-million offering will
be used to extend local telephone network services, the company said.
Spectral Diagnostics Inc. (SDI/TSE), up 85› to $7.70, on volume of 85,400 shares. The firm said the New England Journal of Medicine judged its cardiac test, to determine if patients with chest pains are having heart trouble, better than the competition.
TD Mortgage Investment Corp. (TDBm/ME), closed at $99.80, on volume of one million shares. Trading began in TD Mortgage's hybrids (higher-yielding bank-related income-derivative securities), a preferred share with a 6.46% yield that can be converted into Toronto-Dominion Bank common stock after Oct. 31, 2007. TD Mortgage is owned by TD Bank. The issue totalled $350 million.
Laidlaw Environmental shares (LLE/NYSE) closed down 1/4 to US$45/16. Shares of parent company Laidlaw Inc. (LDM/TSE) fell 40› to $18.80. Safety-Kleen shares (SK/NYSE) rose 1/16 to US$27 3/4. Philip Services shares (PHV/TSE) closed at $22.70, up 55›. Laidlaw Environmental Services Inc. scored a major courtroom victory yesterday in its battle for control of Safety-Kleen Corp. A U.S. federal court judge ordered Safety-Kleen to call a special shareholders' meeting that could let Laidlaw push ahead with its US$1.8-billion unsolicited offer for the waste management company. Kenneth Winger, president and chief executive of Laidlaw Environmental, said the ruling by the Federal District Court in Chicago "certainly moves an initial roadblock aside" for the company. Laidlaw Environmental, based in Columbia, S.C., has bid US$15 in cash and US$15 in Laidlaw Environmental shares for each Safety-Kleen share. But Safety-Kleen, of Elgin, Ill., has already agreed to a friendly offer from Philip Services Corp. and two investment partners of US$27 a share in cash. Hamilton-based Philip is one of the largest industrial services companies in North America. At stake for Laidlaw Environmental and Philip is access to Safety-Kleen's 400,000 industrial and automotive repair customers and its extensive network of waste recycling branches. At the next court hearing Jan. 6, Laidlaw Environmental will try for an injunction to prevent Safety-Kleen from proceeding with its proposed merger with Philip.
Magna International Inc. shares (MGa/TSE) closed yesterday at $93, up 55›. Magna said yesterday it will create a separate public company with annual revenue of at least $500 million out of its exterior body parts division. Canada's largest auto parts company plans to take its Decoma International Inc. division public. The new company will take with it about 7% of overall Magna sales. Magna also announced at yesterday's annual meeting in Toronto it will create a new operating unit, called Symatec, to subassemble whole vehicle systems, such as instrument panels or bumper assemblies, and manage complex delivery schedules. Magna's sales growth continued in the three months ended Oct. 31. Revenue increased 13% to $2.1 billion from $1.8 billion a year earlier. Net income, however, fell 9% to $95.1 million ($1.22 a share) from $104.8 million ($1.37).
Dominion Bridge (DBCO/Nasdaq) shares closed yesterday up 1/16 at US$2 1/16. American Eco shares (ECX/TSE) closed unchanged at $15.25. American Eco Corp. openly declared its interest in acquiring Dominion Bridge Corp. yesterday, but it still isn't talking numbers. The Toronto-based company, whose executives work out of Houston, confirmed it has sent a "letter of interest" to the New York investment firm hired by Dominion Bridge to scout out buyers or merger partners. "Due to recent news reports, American Eco felt it was obligated to disclose its interest," the company said, referring to articles published in The Financial Post.
Royal LePage Ltd. (RLG/TSE) closed at $3.64, up 39›. Royal LePage Ltd. is expanding its western residential brokerage base by acquiring Realty World Canada of Vancouver. Realty World, established in 1975, is a privately held business with 144 independently owned franchises operating mainly west of Ontario.
JetForm Corp. (FORMF/NASDAQ) was up 1/16 at US$14 13/16 yesterday. income for the second quarter was boosted to a record level by dozens of major contracts, including its biggest sale yet, the company said yesterday. Net income was $1.9 million (11› a share) on revenue of $26.5 million for the quarter ended Oct. 31. In the year-ago quarter, net income was $1.4 million (9›) on revenue of $18.5 million, excluding the $105-million cost associated with buying Delrina from Symantec Corp. Analysts expect revenue of $110 million in fiscal 1998 and per-share earnings of 55› to 60›. In 1997, JetForm had revenue of $76.6 million and profit of $5.6 million (38›). Results came out after markets closed.
MARKET EYE
The Doughty Dozen Prove Their Worth
By WILLIAM HANLEY The Financial Post
When Market Eye unveiled the Doughty Dozen on May 27 ("Doughty Dozen to lead Canadian market higher"), we knew there was a chance critics might be able to rename them the "dozy dozen" down the road.
And the market being the market, that is always in prospect.
But just over six months later, the Doughty Dozen have proved to be just that -- a Canadian version of Wall Street's "New Nifty Fifty." With the Toronto Stock Exchange 300 composite index showing a gain of less than 3% over the period and the TSE 35 up only 2.6%, the Dozen sport an average gain of 13.9%.
The Dozen are the top-weighted stocks in the TSE 300, with a few exceptions. They have a combined weight of almost one-third of the 300 and exclude the resource sector, which has a 27% weighting and is full of volatile stocks.
As we reported six months ago when the TSE 300 had just set a record high close of 6491.15, it was tempting fate and contrarian market theory to pick stocks at or near 52-week or record highs. But we believed the blend of financial, technology and industrial issues would "perform as well or better than the market." Like the TSE 300, the Dozen in aggregate have been higher. But even when the market was hitting new highs in October, the Dozen outperformed the TSE 300.
As we said when we introduced the Dozen, these stocks offer a strong participation in Canada's economy, sensible valuations and generous dividends. They are quality businesses and investors would feel comfortable owning them. Can we say the same six months later?
Well, Market Eye has not survived this long by offering unqualified opinions. But, by and large, we still like these stocks. Though the Street keeps expecting the resource stocks to begin outperforming at this "late" stage of the economic cycle and providing the Canadian market with the leadership it needs to close the gap on its U.S. counterpart, we will stick with the Doughty Dozen.
First, they provide a strong defensive position in a market that has shown itself capable of meting out capital punishment to the unwary. For instance, Northern Telecom Ltd. and especially Newbridge Networks Corp. are vulnerable to the forces that occasionally blindside U.S. technology stocks, and both are well below their record highs of the early fall.
Though the Big Five banks are all near record highs and are trading at valuations that would have astonished the Street just a couple of years ago, they remain the cornerstone of the Doughty Dozen with their excellent dividends. It would take a big turndown in the economy, a big rise in interest rates or a global financial problem to hammer the banks.
BCE Inc., the heaviest weighted stock in the TSE 300, has risen to new highs on the news that it is buying back some of its shares. It, too, remains a favorite for its unstinting adherence to healthy dividends.
Bombardier Inc. has weathered a bad patch and looks capable of ensuring that its air and rail divisions make up for lean times in its Sea-Doo and Ski-Doo lines.
Magna International Inc. just failed to meet expectations with its first-quarter results yesterday, but the stock gained on news it was spinning off Decoma International Inc. as a separate company.
Canadian Pacific Ltd. is a company whose fortunes largely reflect those of the economy, though not to the degree of times past.
Seagram Co. Ltd. was the only loser. The Street is a little confused about its direction and leery of its "going Hollywood." Yet it remains a solid performer and could retest its highs of earlier this year.
If the stock market goes into (or already is in) a deep retreat or if the economy does the same, then the Doughty Dozen will almost certainly mirror those declines. But these companies are in solid shape, with uniformly excellent balance sheets.
We will look forward to giving another update six months from now.
Daily Morning Market Update for Fri., Dec 05, 1997
Moved to this Web site at: 05/12/97 at 09:30:01 EST
TODAY'S EXPECTATIONS
Canadian dollar - Weaker, 1.4200 - 1.4230
Canadian money market - Weaker, flattening bias remains
Canadian bond market - Weaker
US bond market - Weaker but moving off early lows
Canada - US spreads - Canada underperforming
TODAY'S MARKETS
Bond Market: US Treasuries have sold off sharply on this morning's unexpectedly strong payrolls data. However we believe the worst of the day may already have been seen as there is still no expectation of a Fed rate move, and the wage gains remain in line with productivity gains. The Canadian payroll data has not clarified the timing of a possible Bank of Canada rate move. Canadas are likely to continue their slight underperformance.
Money Market: The Canadian Money market is expected to drift weaker today. The interest seen in longer maturities that appeared last night is unlikely to spark much follow-through buying in North America. The Canadian data had little impact on investor expectations regarding the Bank of Canada, but the strong US data has likely increased the odds that the Bank will move next week. Flat tone in the currency will provide little in the way of support during the session.
Foreign Exchange: The flat market tone for the Canadian dollar that prevailed in overnight trading is unlikely to change significantly today. The release of "at expectations" employment data had little effect but the US data has driven the currency to the weak side of its recent ranges. Short-term technicals suggest little at this juncture and the market is unlikely to push hard in either direction.
OVERNIGHT ACTIVITY:
US Treasuries were little changed in overnight trading as the markets awaited the payrolls data. The US dollar was stable near its recent highs against the Yen. The Canadian dollar traded in a range of 1.4200 - 1.4229, with the pending Canadian employment report and uncertainty over a possible Bank of Canada rate hike stalling any major moves. There was some buying interest for both longer dated Canadian money market product and the belly of the bond curve overnight.
YESTERDAY:
The US bond market gave ground in advance of Friday's Nonfarm Payrolls report for November. Long Treasury yields closed the day back at 6.05%, after nudging briefly through 6.00% in earlier coupon pass driven trade. The Canadian market underperformed in all but the long end amid continued weakness in the dollar. Further details of next Wednesday's auction were provided with the announcement of a new $3.5 billion 2 year with a March 15, 2000 maturity. The Canadian dollar
closed at 1.4225, while T-Bill yields rose 4-5 basis points out from the 3 month term.
Friday Morning's World Markets All Higher
HONG KONG (AP) - Asian stock markets closed mostly higher Friday, with stocks rising moderately in Tokyo after a three-day decline, boosted by reports that a group of financial institutions will support a troubled Japanese trust bank. The benchmark 225-issue Nikkei Stock Average rose 117.69 points, or 0.72 percent, to 16,424.48 points. Before Friday's rebound, the Nikkei has fallen a total of 700.8 points, including a 278.72-point fall, or 1.68 percent, on Thursday. Traders said investors were cheered by reports in the Asahi newspaper Friday that Fuji Bank Ltd., Yasuda Fire and Marine Insurance Co. and Yasuda Mutual Life Insurance Co. would extend aid to financially troubled Yasuda Trust and Banking Co. Yasuda, Japan's fourth largest trust bank, has been struggling to write off a heap of bad debts incurred through the collapse of the speculative "bubble economy" of late 1980s. Many investors were worried about the health of Japan's banking system, especially in the wake of the failures of major companies, including Yamaichi Securities Co., one of Japan's largest brokerages, in the last month.
Hong Kong stocks rose on sustained institutional buying, but traders said looming U.S. economic data due later Friday acted as a dampener on sentiment. The blue-chip Hang Seng index added 52.66 points, or 0.5 percent, to 11,527.60. It had soared 267.36 points Thursday. Despite the latest gains, which leave the index 10 percent higher than its close the previous Friday, traders said the recent trend of rises isn't altogether convincing. "The market's all over the place right now," said Gordon Crosbie-Walsh, vice president, sales, with Salomon Smith Barney. While there's still some buying by funds who were previously sitting on cash, the buying is being partly offset by some selling by other funds, Crosbie-Walsh said. Traders said the market was cautious ahead of November U.S.employment data due out at 1330 GMT Friday.
Singaporean shares rose mostly, boosted by foreign institutional buying and asset allocation, dealers said. The Straits Times Industrials Index jumped 13.54 points to 1,713.77. Blue-chip stocks headed the price gainers' list, dominated by the foreign tranches of the Big Four banks, indicating the bout of foreign institutional buying which started last week, dealers said.
In Manila, the main index closed up on one of its biggest single-day gains, boosted by a long-awaited technical rebound. Investors focused on blue chips.
The Philippine Stock Exchange index of 30 selected stocks advanced 93.15 points to 1,900.06.
Malaysian stocks rose in a stunning comeback with a flood of buying support from local funds after the key index fell in the afternoon session. The Composite Index, which tracks prices of 100 key stocks, increased 31.51 points to 607.4.
Indonesian share prices rose on selective buying in some defensive big capitalization issues as markets across the region improved on news of the IMF-South Korea reform package. The JSX index added 12.85 points to 414.78.
The markets were closed in Bangkok.
Elsewhere in Asia:
WELLINGTON: Share prices rose on thin trading, despite a dip in the morning session. The NZSE-40 Index edged up 2.01 points to 2,394.29.
TAIPEI: Share prices rose for the fourth straight day as investors bet the worst of the Asian financial crisis was over and that an easing of regulations will bring more money into the market. The Weighted Index surged 116.7 points to 8,166.87.
SEOUL: Share prices rose on announcement by both the South Korean government and the International Monetary Fund that foreigners will be able to buy more local shares this year. The Korean Composite Index gained 28.31 points, 7 percent, 434.12.
SYDNEY: Australian share prices closed steady, despite weakening resource stocks, as investors snapped up bank stocks. The All Ordinaries Index climbed 4.7 points to 2,557.2.
In LONDON Share prices on the London Stock Exchange were higher at midday Friday. At noon, the Financial Times-Stock Exchange 100-share index was up 58.8 points at 5,141.1
The U.S. dollar rose against most other major currencies in early European trading Friday. Gold prices fell.
Friday, December 5, 1997
Stockbroker Revenue On Record-Setting Pace
THE FINANCIAL POST
A 44% jump in underwriting revenue in the first three quarters this year will enable stockbrokers to match or better the record profit set in 1996, the Investment Dealers Association says. Despite market volatility, results for the first nine months ended Sept. 30 -- when profit was slightly ahead of 1996 -- and preliminary data for the fourth quarter suggest the securities industry will come close to the $2-billion operating profit reported last year.
The industry uses operating profit to track its performance because it reflects market conditions, said Ian Russell, the IDA's senior vice-president of capital markets.
Operating profit for the nine months was $1.5 billion, including $532 million in the third quarter, the association reported yesterday. Total revenue for 182 firms was $6.2 billion, up from $5.3 billion reported by 180 firms. Underwriting contributed $1.6 billion of the total, up from $1.1 billion. And the pace appears to be accelerating, as third-quarter underwriting revenue of $590 million was up 18% from the second quarter. The IDA estimates the total could pass $2 billion this year, up from $1.7 billion in 1996.
Commissions, the single biggest source of revenue, totalled $3 billion for the nine months, up from $2.6 billion. Fixed income trading revenue rose 4% to $603 million, while equity trading revenue gained 19% to $309 million.
Despite the small increase in fixed-income trading revenue, underwriting revenue from products such as bonds and structured notes has been very strong, Russell said.
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