MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY DECEMBER 11, 1997 (1)
Friday, December 12, 1997
No Relief For Bay Street
North American stocks plunged following selloffs in overseas markets amid fears that the Asian economic crisis will cut more deeply than originally thought into corporate profits
By THE FINANCIAL POST
The Toronto Stock Exchange 300 composite index tumbled 109.6 points, or 1.6%, to 6644.93, with all of the TSE's 14 stock groups ending lower. New York's Dow Jones industrial average also lost 1.6%, falling 129.8 points to 7848.99. It was the third straight loss for the TSE 300 and the fourth for the Dow.
The financial market gloom started in South Korea, where the country's currency, the won, continued to plunge after losing half its value this year. The drop triggered big losses in Korean stocks, and the selling spilt over to other major centres, with Japan's Nikkei index dropping 2.6% and Hong Kong's Hang Seng index plunging 5.5%.
Companies with direct investments in Asia were among the day's biggest losers.
"What is frightening people is that we haven't seen the end of it," said Frank Semack, vice-president at New York-based Federated Investors. "Domestic economies in the Far East will be lower than expected next year and investment in the Far East will be less than expected."
The TSE 300 was off as much as 124.5 points earlier in the day as shares of BCE Inc. and Northern Telecom Ltd. plummeted.
Nortel and Newbridge Networks Corp. extended losses that were sparked by U.S.-based software maker Oracle Corp., which said Tuesday sales in Asia and the U.S. were below expectations, while rising costs trimmed profit margins. That renewed concern that profits of Canadian manufacturers doing business abroad will also be hurt. Nortel (ntl/tse) fell $2.70 to $132 while its 52% owner, BCE (bce/tse), was off 35› at $47.05. Newbridge (nnc/tse) fell 60› to $51.70.
The TSE base metals subgroup recorded the biggest drop, falling 2.9% as Alcan Aluminium Ltd. (al/tse) lost $1.50 to $39.10. The energy and forest products sectors fell 2.7% and 2.6%, respectively.
The Asian turmoil is expected to reduce demand for commodities and boost world supply, as Asian companies increase exports in a bid to rescue their economies.
Bank stocks were hurt by a falling C$, raising concern that the Bank of Canada may have to raise interest rates to support the currency. The banking subgroup fell 1.8%, with Bank of Montreal (bmo/tse) losing $1.60 to $65.25.
TSE volume was 121.8 million shares, compared with 111.7 million on Wednesday.
Other Canadian markets closed lower. The Montreal Exchange portfolio index fell 60.94 points, or 1.8%, to 3376.82. The Vancouver Stock Exchange composite index dropped 12.06 points, or 2%, to 599.58.
On Wall Street, a heavy 630 million shares changed hands on the New York Stock Exchange, compared with 608 millionWednesday.
Investors worried about the impact that weak Asian economies will have on the earnings of U.S. corporations. Kulicke & Soffa Industries Inc. (klic/nasdaq), a supplier of semiconductor assembly equipment, said its quarterly results would fall short of analysts' estimates because of the crisis in South Korea and uncertainty among Korean customers. Its stock fell US$6 3/4 to US$18 1/8.
Technology issues plummeted as analysts issued earnings warnings. The technology heavy Nasdaq composite index tumbled 2.4% , or 38.07 points, to 1558.54.
Among techs, Compaq Computer Corp. (cpq/nyse) fell US$3 3/8 to US$56 5/8 as more than 18 million shares traded, International Business Machines Corp. (ibm/nyse) lost US$4 15/16 to US$101 9/16 and Motorola Corp. (mot/nyse) fell US$3 7/16 to US$56 5/16. Quantum Corp. (qntm/ nasdaq) dropped US$3 7/8 to US$19 15/16 and Seagate Technology Inc. (seg/nyse) sank US$2 1/8 to US$19 5/8.
Major Overseas Markets Ended Sharply Lower.
London: Nearly 17 billion pounds were wiped off the value of Britain's leading share index after the selloff in Asia. The FT-SE 100 index closed at 5035.9, down 94.8 points or 1.9%.
Frankfurt: Shares tumbled as a sharp Dow decline added to pressure. The Dax index closed at 4030.16, down 87.11 points or 2.1%.
Tokyo: Japanese stocks fell as concerns mounted over the viability of a proposed economic stimulus package and the expected fallout from a weak South Korean won on Japanese companies. The 225-share Nikkei average closed at 16,050.15, down 427.97 points.
Hong Kong: Stocks were battered for a third straight session, crushed by a rise in local interbank rates and a weakening Hong Kong dollar as the Korean won continued its slide. The Hang Seng index lost 602.19 points to 10,420.22.
Sydney: The Australian share market tumbled in the afternoon after Asian markets crumbled. The all ordinaries index closed at 2516.8, down 37.9 points or 1.5%.
HOT STOCKS
Shares of Cross Lake Minerals Ltd. tumbled yesterday after the widely watched junior miner tabled uneconomic drill results from a Timmins, Ont., base metal discovery. The stock (CRN/VSE) dropped $1.70 to $2.07 on volume of more than four million shares after the company released metal values in six new holes from its Sheraton-Timmins property. Analysts attribute the decline to Cross Lake's inability to match impressive results released in October, which sent sharessoaring above $6. Cross Lake, which has about $4 million in cash and 30 million shares outstanding, is drilling for base metals on what is known as a volcanogenic massive sulphide system.
Sources close to Schneider Corp., the object of a $129-million hostile bid from Maple Leaf Foods Inc., say negotiations are under way that could result in a friendly takeover worth as much as $170 million, or $25 a share. Schneider has asked interested parties to submit bids for it by today and hopes to hammer out a friendly deal by 12:01 a.m.
Tuesday when Maple Leaf's $19-a-share offer expires, sources said. But some observers are skeptical a buyer can be found to pay such a hefty premium to Maple Leaf's bid, and suggest rival offers are being solicited only to drive the existing offer higher. The shares (SCDa/TSE), which have traded as high as $23 since Maple Leaf's Nov. 5 offer, closed yesterday at $22, up 50›.
A federal government decision to build a $30-million blank coin plant in Winnipeg was based on the knowledge a private sector supplier was getting out of the business, Public Works Minister Alfonso Gagliano said yesterday. Gagliano was defending a decision to expand the Royal Canadian Mint, potentially squeezing out Alberta-based Westaim Corp. as a supplier of blank coins. But a Westaim executive said the company didn't send that message. Instead, it assured the Mint it was determined to stay in the coin plating business. Westaim shares (WED/TSE) closed at $7.65 yesterday, down 65›.
The U.S. Food & Drug Administration has approved Montreal-based Axcan Pharma Inc.'s treatment for liver disease. "This is just the fourth new drug out of Canada to get FDA approval," said analyst Cameron Groome of First Marathon Securities Ltd. Previously, only BioChem Pharma Inc., QLT Phototherapeutics Inc., and Biovail Corp. International had won U.S. approval for new pharmaceuticals. The decision, which was widely expected, comes one year after Axcan signed a marketing deal for the drug with Schwarz Pharma Inc. of Mequon, Wis. Axcan shares (AXP/TSE) closed yesterday at $14, up $1.15, or 9%, on the news.
GTC Transcontinental Group Ltd. said yesterday its cash pile is increasing and acquisition deals are in the pipeline after a major deal was temporarily sidelined. "We're now sitting on $165 million cash, so we're definitely looking for acquisitions," Luc Sicotte, chief financial officer, said. In late October, GTC, the second-largest commercial printer in Canada after Quebecor Printing Inc., said it was negotiating "an important publishing acquisition." That deal "was not canned," Sicotte said yesterday, "but it's been put on the sidelines. "Basically, the seller said: 'Let me wait,' and we do not want to be either too eager or too quick. Sometimes it takes a while, but there are others [deals] in the pipeline that might materialize in the first or the second quarter [of next year]." GTC has $375 million of equity and $100.3 million of debt following a year of belt-tightening, turnarounds at four of its plants, management streamlining and the recent exercise of $21 million worthof warrants into shares. It just completed a $100-million financing that will show up in the first quarter of 1998. GTC (GRTb/TSE) closed up 20› at $13.30 yesterday.
Barrick Gold Corp. (ABX/TSE), down 10› to $22.80, on volume of 974,984 shares. Tumbling gold prices have knocked down share prices for a swath of gold producers, including Barrick, North America's biggest. In a bid to prop up the value of its shares, Barrick said Wednesday that it planned to buy back as much as 10% of its stock, or about 31 million common shares. The company's shares have fallen almost 50% since last December. However, Barrick chief executive Peter Munk said it was unlikely that the company would buy back the full 10%.
Pan American Silver Corp. (PAA/TSE), up 45› to $15.45, on volume of 108,826 shares. The price of silver slipped US6.5› to US$5.87 an ounce yesterday, but the metal is still up 21% since the end of October. A falling rupee sparked fears that India may be forced to scale back its silver purchases. India is one of the world's largest silver buyers.
Newbridge Networks Corp. (NCC/TSE), down 60› to $51.70 on volume of 1.6 million shares. The Siemens AG-Newbridge alliance said it is close to winning a $16.5-million order from British Telecom. Earlier this month the two companies acquired Radnet Ltd., an Israeli telephone switch maker, for $75 million. Newbridge will control 49.9% of the company and its German partner the rest.
Geac Computer Corp. (GAC/TSE), up $1.60 to $40, on volume of 419,223 shares. The Toronto-based software company will report its second-quarter results on Tuesday. It seems investors are hoping it will be a repeat performance of the first quarter, when the company came out with numbers well above expectations. Meanwhile, rumors are circulating that the company is about to make another acquisition. Geac has acquired a reputation for snapping up poorly performing software companies and making them pay.
Spar Aerospace Ltd. (SPZ/TSE), up 25› to $8.75, on volume of 14,650 shares. CAE Inc. (CAE/TSE), unchanged at $11.85, on volume of 197,670 shares. Spar said it will acquire CAE Aviation Ltd., a wholly owned subsidiary of CAE Inc., for $62 million. The company said CAE Aviation will be an excellent fit with its aviation services division. CAE Aviation has annual sales of about $70 million. Its main business is providing aircraft maintenance. CAE Inc. said it decided to sell the division because Edmonton-based CAE Aviation was no longer part of its strategic direction.
Cameco Corp. (CCO/TSE), down $3.25 to $46.50 on volume of 138,469 shares. Russia's ministry of atomic energy said it planned to cancel a 10-year contract that involved selling uranium from disassembled warheads through the U.S. A beneficiary of the nixed agreement was Saskatchewan-based Cameco, one of the world's largest integrated uranium producers. Russia says that it will instead sell its uranium directly to world buyers. Russia said the move would allow it to collect an additional $300 million to $500 million in revenues from uranium sales.
MARKET EYE
Is The Christmas Goose Cooked?
By WILLIAM HANLEY - The Financial Post
South Korea's bond and currency market are open for all of four minutes before the won loses another 10% and the authorities roll down the shutters for the day as the economic and currency crisis deepens.
Other Asian markets recoil, with Hong Kong off 5.5% and Tokyo down 2.6%. European bourses see stock prices knocked over by the domino effect from Asia.
North American stocks feel the effects, especially among the tech stocks where the disk-drive makers warn of earnings slips.
The loonie does a swan dive through US70›, a 12-year low, while the Bank of Canada fidgets on the sidelines.
Canadian mortgage rates rise across the board as lenders see the need to tighten against riskier loans.
Got your attention yet?
Yes, as David Thomas's front-page story outlines in more detail, things are getting a little too interesting. A colleague put it succinctly around midday yesterday when he returned from our bank of wire service machines: "It's starting to happen."
"It" last week was the Santa Claus rally. "It" this week is looking like the Christmas goose -- cooked, of course.
All this will be of little immediate concern to the buy-and-hold brigade. They have their eyes firmly fixed on Christmases future. And even those who like to do a little market-timing with their portfolios are looking beyond Christmas present.
This is a traders' market, especially now that we are in "the negative earnings pre-announcement season" -- as one analyst so felicitously put it.
So let's talk to a trader, our old friend Steven Nowack, who trades U.S. stocks out of Toronto and is not backward about being forward with his views. And it must be said that Nowack has called the market more accurately recently after a lengthy inconsistent run.
First, Nowack insists on going on the record with his view that there is "absolutely no probability" of a new high in the Dow Jones industrial average this year. The Dow fell 129.8 points at 7848.99 yesterday, and the Aug. 6 record high of 8259.41 is looking distant once again. He reckons there is a short-term risk the Dow could hit 7500 and the upside potential is around 8100.
Second, Nowack believes the full impact of the Asian crisis will not be felt on the U.S. economy until well into the new year.
"It took a collapse of the world's 11th biggest economy to get Wall Street's attention, such was the complacency in the markets," he says.
Third, the resources sector, especially selected golds and forestry stocks, will provide great opportunities to those with "strong
stomachs, deep pockets and a long horizon."
Nowack notes that International Paper Co. (ip/nyse), a Dow stock, rose to US$42 15/16 yesterday in a down market, after being as low as US$41 5/8 on Wednesday.
He is also looking for big things from his "tech troika" of Seagate Technologies Inc., Silicon Graphics Inc. and Micron Technology Inc., all of which he believes present excellent value.
***
Independent technology analyst Larry Woods would agree with Nowack that the market is in for a struggle. But he reckons Micron (mu/nyse) is in for even more of a drubbing. And it all comes back to Korea.
Woods believes Samsung Electronics, the world's biggest maker of memory chips and Micron's biggest competitor, will not only be able to sell chips at bargain prices because of the won's devaluation, but will have to flood the market with massive inventories because it will need the money simply to survive. Indeed, Samsung may have to sell chip fabrication plants at firesale prices just to cover short-term debts, Woods says.
He believes all this shakeout may put Micron in a good position about two years from now. Until then, it's going to be tough.
Woods, who conducts much of his research right at the retail shop floor level, is getting the impression that personal computer Christmas sales are going to be a mixed Santa's bag. The industry might do reasonable business in this crucial selling season, but the prospect of a bleak new year -- with mountains of inventory to be disposed of at low prices -- beckons.
***
Enough already, you're saying. Give us some Christmas cheer.
Well, the U.S. bond market was up, presumably on the flight to quality in the greenback. (The loonie's plight scuppered Canadian bond prices, with the 30-year yield going negative against the U.S. counterpart.)
And with bullion adrift in the goldrums, it now appears the US$ is indeed the almighty dollar, looked upon as the new ultimate store of value, replacing gold.
Come to think of it, there's not a lot of good news about.
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