MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY DECEMBER 16, 1997 (1)
Wednesday, December 17, 1997
Tech stocks lead charge
Wall Street stocks jumped as investors loaded up on battered technology shares. Toronto's key index could not hang onto early gains, as oil producers retreated on expectations of lower energy prices
The Dow Jones industrial average rose 53.72 points, or 0.7%, to 7976.31.
The Toronto Stock Exchange 300 composite index fell 17.27 points, or 0.3%, to 6567.43. The benchmark index had climbed as much as 29.9 points intraday before retreating. Volume on the TSE was 109.9 million shares, compared with 118.5 million shares traded on Monday.
Among oils, Talisman Energy Inc. (TLM/TSE) fell $1.65 to $42.65, Canadian Occidental Petroleum Ltd. (CXY/TSE) slipped $1.30 to $31.35 and Tri Link Resources Ltd. (TLR/TSE) fell $4.25 to $18.
Transportation stocks fell, led by Canadian National Railway Co. (CNR/TSE), which slipped $1.05 to $67.20.
Traders and analysts are not expecting the broader market to erase its recent losses.
"The sentiment in Canadian markets is appalling," said Rick Hutcheon, chief investment officer with the CentrePost Group of Mutual Funds. "The southeast Asian problem is not going away and as so much of the Canadian market is influenced by [natural] resources, our market is more sensitive to international influences than the U.S."
Newbridge Networks Corp. (NNC/TSE) rose $2.90 to $50.90, its first gain in seven days, and Northern Telecom Ltd. (NTL/TSE) gained $3.25 to $128 to temper the decline.
Other major Canadian markets closed mixed. The Montreal Exchange portfolio index rose 12.12 points, or 0.4%, to 3356.45. The Vancouver Stock Exchange index fell 1.8 points, or 0.3%, to 584.19.
NEW YORK COMMENTARY -- Since sequels are all the rage in Hollywood right now, we're calling tonight's preview "Japan II: Will They Come Clean?" We're tempted to simply reinsert all that stuff we wrote Monday night about the release of Japan's fiscal-stimulus package being the key to trading tomorrow, and just substituting "Wednesday" for "Tuesday."
But we won't. Some things have changed. Specifically, there's a smidgen of optimism on Wall Street that Japanese officials will use the extra day to add some muscle to the plan -- that maybe they need another 24 hours to finalize tough negotiations on hard core measures to revive their economy and banking system.
If that's not the case, all the gains registered on Wall Street Tuesday will be wiped out, and then some.
In fact, there were plenty of players on Wall Street who questioned the constitution of Tuesday's rally, particularly given the delay by the Japanese.
"Don't know why the delay was viewed as positive or a neutral. I thought it would be a damper to activity," said Lisa Cullen, equity strategist at Merrill Lynch. "Maybe the market was just hoping it will be more impressive than expected."
Cullen, who wryly observed that she hopes the fiscal-stimulus package is "stimulative," said even a market-friendly bailout in Japan will only provide a short-term boost to U.S. stocks.
"We still have the same overvaluation problem with staples and other defensive stocks," she said. "The consensus is for slower (economic and earnings) growth in 1998, and the Asian thing is just exacerbating the situation."
But we said there were players holding out hope that the delay would lead to more, rather than less, from the Japanese. One such optimist is Carl Bhathena, investment strategist at Everen Securities, who noted that Japanese officials have the doubly difficult task of saving their banking system while reviving the nation's flagging economy.
"It might be they're looking at longer term goals, like moving toward a consumption based economy," from its export-based system, Bhathena said. "If they're taking these things more seriously, it would be a nice stabilizing factor for financial markets."
However, the strategist noted that there are no simple or quick solutions to Japan's problems, spewing forth a litany of issues necessary for a turnaround -- things like a return of capital and confidence, economic stability and signs of strong growth in 1999.
The challenge is heightened by the fact that Japan "doesn't have a lot of monetary options available" and is "leveraged" to the rest of Asia, where "anxiety" remains high.
Bhathena's observation that "anxiety has spread here" is clearly evident by the performance of technology stocks of late. But the strategist believes the Dow is still going to new highs by year-end and "substantial" new highs in the second half of 1998, with an upside of 9,500 for the blue-chip index.
For the short term, he expects a boost as the equity market "pays more attention to what's going on in bonds." Looking out a bit, the Everen strategist says the ability of investors to "assimilate" themselves to a slower earnings picture in 1998 will lead to "higher highs" as the market looks ahead to corporate earnings for 1999.
"The discounting period has been extended. Investors are willing to pay for year out earnings sooner than they were a few years ago," he said. "We believe in the first quarter, investors will begin looking into 1999 and see good economic growth and benign inflation. And by mid to late 1998, the rescue packages in Asia will make it look like solutions are in place in the region, and Europe will begin taking care of its employment growth. Those are the parameters that would have to come together."
If they don't come together, the "downside" risk for the Dow is 7,000, he says.
AFTER THE BELL
Centocor (CNTO) warned that its 1997 earnings will be 20 cents per share, far below the 52 cents analysts were expecting from the developer of medical test kits.
Jabil Circuits (JBIL) reported fiscal first-quarter earnings of 49 cents per share, a penny ahead of expectations. The news from the computer manufacturer could help stem some worries about the degree of the slowdown in the PC industry.
Polaroid (PRD) said it plans to take a fourth-quarter charge of about $310 million to pay for a restructuring that will eliminate about 1500 jobs.
The Great Atlantic & Pacific Tea Co. (GAP) said it earned 29 cents per share in its third quarter, 6 cents below expectations.
Charles Schwab (SCH) said it will offer online trading at a flat rate of $29.95.
Harte Hanks Communications (HHS) increased its stock repurchase plan by 2 million shares.
TUESDAY'S MARKETS
A lack of action by both the Federal Reserve and the Bank of Japan helped send the Nasdaq up more than 16 points while the Dow rose nearly 54.
The Federal Open Market Committee's decision to leave interest rates unchanged was widely expected. The decision of Japanese officials to postpone for a day the release of their third fiscal stimulus package was not. However, traders clung to the hope that another day of waiting would result in a stronger, stricter package for the nation's beleaguered financial system and economy.
The Nasdaq Composite Index (COMP) was the Street's strongest market throughout the day. The tech-filled index opened the day higher by more than five points, then steadily climbed higher as the morning progressed. After climbing about 20 points, the index leveled off at about 11:30 a.m. and drifted in a tight range until about 2 p.m. when it began to head lower. The Nasdaq ended the day up 16.44 points at 1,553.00.
The Dow Jones Industrial Average ($INDUA) experienced a choppier session than the Nasdaq. The blue-chip proxy opened higher by nearly 50 points behind a strong move in bonds and stabilization in international markets overnight. The climb accelerated through the rest of the morning and early afternoon, topping out with a rise of nearly 100 points shortly before 1 p.m.
For much of the afternoon, however, the gains eroded -- until about 3:15 p.m., when the Dow was up only 38 points. The blue chips then regained their forward momentum, closing up 53.72 points at 7,976.31.
The S&P 500 (SPX) tracked the Dow, closing up 4.65 points to 968.04, but well off its best levels of the session. The Russell 2000 Index (RUT) ended the day up 4.58 points at 425.34.
Technology stocks were back in favor after six straight losing sessions and helped lead the advance. Some traders, however, wondered if the upturn was a function of technical factors -- like short-covering -- rather than a sustainable reversal of fortune, or the trend. An afternoon fade by the major indices seemed to support that view.
On the NYSE, 639 million shares were traded, while advancing issues beat decliners by a 17-to-12 margin. In Nasdaq activity, 790 million shares were exchanged, as advancers bested decliners by a 23-to-20 spread.
Bond prices rose 1/8 of a point after the Fed decided to leave interest rates unchanged. The yield on the benchmark 30-year Treasury bond, which moves in the opposite direction of its price, slid to 5.96%.
Also aiding bonds was the Labor Department's report that the Consumer Price Index rose 0.1% in November, both overall and in the core reading, which excludes food and energy. Economists were expecting a gain of 0.2% for both components of the most widely followed inflation index.
ECHNOLOGY STOCKS
Micron Technology (MU) embodied the resilient tech stocks on Tuesday. The chip maker rose 1 1/8 to 23 5/8 despite reporting first-quarter earnings of 4 cents per share, 3 cents shy of First Call's consensus and down from 10 cents a year ago. Micron's gain also defied a downgrade to "neutral" from "accumulate" by Merrill Lynch's influential chip analyst, Tom Kurlak.
And despite Micron's admission that downward pricing pressure remains, fellow DRAM chip maker Texas Instruments (TXN) rose 1 1/2 to 44.
Also belying recent activity in the sector, Solectron (SLR) rose 5 7/8 to 35 5/8 despite posting fiscal first-quarter earnings of 38 cents per share, 2 cents below Wall Street projections. BT Alex. Brown upped its rating on the circuits-board assembler to "strong buy" from "buy," and the firm's CEO made some positive comments on CNBC Tuesday morning, helping to lead the stock higher.
Amid the positive tenor, technology's bellwether names were rallying.
Among the Dow's technology components, Hewlett-Packard (HWP) rose 2 1/8 to 63 3/8, and IBM (IBM) closed up 2 11/16 to 103 9/16.
Also on the NYSE, Compaq Computer (CPQ) climbed 2 7/8 to 57 3/8, Computer Associates (CA) rose 1 1/2 to 50 1/2, and Nokia (NOK/A) closed up 2 1/8 to 69 7/8. Lucent Technologies (LU) gained 2 9/16 to 75 1/2 thanks to an upgrade by SBC Warburg Dillon Read to "buy" from "neutral."
Notably missing out on the tech rally were Motorola (MOT), down 1 11/16 to 56 1/4, and Digital Equipment (DEC), which slid 1 1/4 to 37 3/4.
In Nasdaq activity, Dell Computer (DELL) rose 3 9/16 to 87, Microsoft (MSFT) climbed 2 15/16 to 139 1/16, and Cisco Systems (CSCO) closed up 2 5/8 to 80 1/8 ahead of a 3-2 stock split slated to take effect before Wednesday's trading session.
Intel (INTC) fell 15/16 to 71 3/16, while Sun Microsystems (SUNW) climbed 1 5/8 to 36 13/16, following a report in the Wall Street Journal that the two companies are expected to announce a broad alliance anchored on Intel's forthcoming Merced microprocessor.
Elsewhere, Adaptec (ADPT) rose 5 1/16 to 40, PeopleSoft (PSFT) climbed 1 9/16 to 34 1/2 and Powerwave Technologies (PWAV) closed up 4 3/32 to 21 1/32. On the NYSE, Newbridge Networks (NN) rose 1 15/16 to 35 5/8, Cypress Semiconductor (CY) jumped 1 1/8 to 8 7/8, and EMC Corp. (EMC) finished up 1 7/16 to 27 5/16.
Despite a profit warning from Veeco (VECO) and more sell-side analyst downgrades, most semiconductor equipment makers ended higher, or with only fractional declines. Veeco itself rose 11/8 to 20 5/16 while KLA-Tencor (KLAC) rose 2 11/16 to 37 1/16, and Teradyne (TER) gained 2 1/4 to 30 1/2.
Among Internet-related stocks, Yahoo! (YHOO) rose 2 5/16 to 60 5/16, and Earthlink Network (ELNK) climbed 1 to 24 thanks to a new "outperform" rating from Everen Securities. America Online (AOL), however, dipped 9/16 to 84 5/16 and Amazon.com (AMZN) fell 1 1/2 to 53 1/2.
Vishay Intertechnology (VSH) climbed 3 5/16 to 22 1/8 following its acquisition of Daimler-Benz's semiconductor unit for $500 million. Vishay executives said the acquisition will accrete to its 1998 earnings.
With some jaded players suggesting the recent rash of downgrades signals a bottom -- particularly in semiconductor-equipment stocks -- a slew of upgrades from brokerage analysts hit tech stocks, and several names responded.
Citrix Systems (CTXS) climbed 4 5/32 to 68 29/32 behind an upgrade by BT Alex Brown to "strong buy" from "buy."
Electronic Data Systems (EDS) closed up 3 15/16 to 43 1/2 after UBS Securities raised its rating on the stock to "buy" from "hold."
Excel Switching (XLSW) rose 1 3/16 to 18 7/16 thanks to an upgrade from Morgan Stanley Dean Witter to "strong buy" from "outperform."
Xylan (XYLN) benefited from an upgrade at Van Kasper to "strong buy" from "buy," rising 1 3/4 to 16 13/16.
An upgrade from Piper Jaffray to "strong buy" from "buy" helped send shares of Natural Microsystems (NMSS) up 2 3/16 to 44 5/16.
Lehman Brother helped move shares of International Networks Services (INSS), which rose 1 15/16 to 18 7/8 after an upgrade to "buy" from "outperform."
ACTIVE ISSUES
In addition to its technology components, the Dow's gains were spurred by Procter & Gamble (PG), which rose 2 5/8 to 83 3/8, and Merck (MRK), which climbed 1 3/16 to 106 11/16.
Boeing (BA) climbed 1 1/2 to 50 7/16 amid positive reaction to the firm's restructuring plans and an upgrade from CS First Boston to "buy" from "hold."
Dow laggards were led by Caterpillar (CAT), down 1 7/8 to 48 13/16; Sears (S), which shed 15/16 to 44 1/4; and Goodyear Tire & Rubber (GT), off 3/4 at 65 7/16.
Tied to Wall Street's whipping post on Tuesday was Danka Business Systems (DANKY). The stock fell 17 15/16 to 13 1/16 as the company revised its earnings expectations for its third quarter. The distributor of office equipment led all stocks in volume after saying it expects third quarter results of 21 to 24 cents per share, far below the 42 cents analysts were expecting. Prudential Securities cut its rating on the firm to "hold" from "buy."
Also slammed by profit warnings -- released late Monday -- were shares of Famous Dave's of America (DAVE), down 7 7/16 to 9 5/8, and Suburban Lodges of America (SLAM), which closed off 6 5/32 to 13. Ladenburg Thalmann lowered its rating on Famous Dave's to "hold" from "buy." Bear, Stearns lowered its rating on Suburban to "neutral" from "attractive" while Raymond James downgraded the hotel company to "accumulate" from "buy."
Liz Claiborne (LIZ) fell 4 15/16 to 44 5/16 after saying its business looks "spotty" and a day after it acquired the licensing rights to Donna Karan International's (DK) activewear line. Donna Karan shares rose 9/16 to 14 1/4.
Among major industry groups, drug stocks were strong Tuesday, led by Eli Lilly (LLY), which rose 2 to 66 7/8.
Bank stocks were weak, however, as evidenced by Bankers Trust(BT), which fell 5 3/4 to 124 9/16. Citicorp (CCI) fell 2 5/8 to 129 1/2, and Chase Manhattan Bank (CMB) dipped 1 3/8 to 110 7/8.
O'Sullivan Industries Holdings (OSU) slid 1 1/4 to 11 1/8 following its warning that second Quarter earnings will fall 20% to 30% from its earnings of 27 cents a year ago. Analysts were looking for results of a penny higher from the furniture manufacturer.
Urologix (ULGX) slid 1 1/8 to 17 3/8 on its warnings that slower sales in Europe will hamper its results in 1998 and 1999. Vector Securities downgraded its rating on the developer of treatments for urological diseases to "attractive" from "buy."
Shares in Spine-Tech (SPYN) leapt 6 to 51 1/2 on word that the company has agreed to be acquired by Sulzer Medica, a Swiss based medical device company, for $595 million in cash. The deal values each share of Spine-Tech at $52.
Pepsico (PEP) fell 5/8 to 35 7/16 in heavy trading after being downgraded by Donaldson Lufkin & Jenrette to "market perform" from the firm's "recommended" list. US Office Products (OFIS) shed 1 7/16 to 15 1/2 in heavier-than-usual activity.
RJR Nabisco Holdings (RN) was heavily traded as well after it announced a restructuring of its tobacco unit, but the stock didn't move too far, closing off 1/8 at 36 1/4.
Fifth Third Bancorp (FITB) fell 2 3/4 to 79 7/8 after A.G. Edwards downgraded the stock to "maintain" from "accumulate."
A downgrade from Salomon Smith Barney to "neutral" from "outperform" helped send shares of American Freightways (AFWY) down 4 9/16 to 10 1/16.
Federal Mogul (FMO) gained 2 1/16 to 40 5/16 thanks to a new "buy" rating from BT Alex. Brown.
Primark (PMK) shares climbed 4 to 41 5/8 on rumors the firm's financial information unit was going to be bought by Reuters Holdings (RTRSY). U.K.-based Reuters ended the day up 1 5/8 to 65.
Carolina Power & Light (CPL) rose 1 7/16 to 39 1/2 thanks to an upgrade from Merrill Lynch to near-term "accumulate" from "neutral" and long-term "buy" from "neutral."
Most major overseas markets closed higher.
London: Britain's FT-SE 100 index rose for a third day, setting its highest close in two months as banks and insurers attracted yearend buying. The index closed at 5203.4, up 81.6 points or 1.6%.
London: German shares, helped by the stronger US$, surged. The Dax index closed at 4083.97, up 23.93 points or 0.6%.
Tokyo: Japanese stocks closed slightly higher, as most participants retreated to the sidelines ahead of the release of the ruling party's third batch of economic stimulus measures. The 225-share Nikkei average closed at 15,985.21, up 75.82 points or 0.5%.
Hong Kong: Hong Kong stocks slumped to a weak close. The Hang Seng index closed at 10,346.38, down 88.77 points or 0.9%.
Sydney: The Australian share market ended off its highs. The all ordinaries index closed at 2514.1, up 13.2 points or 0.5%.
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