MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY DECEMBER 23, 1997 (2)
New York Commentary (con't)
Technology Stocks
Microsoft (MSFT) stock continued to decline amid another round of volleying in its battle with the Justice Department. The stock fell 3 11/16 to 123 5/16, although the company said the Justice Department has "reversed" its position on its claim that Windows 95 can work fine without Internet Explorer. Traders said the stock's inability to hold above its 200-day moving average of 127 was psychologically damaging to the entire tech sector.
Lattice Semiconductor (LSCC) led the chip group lower, dropping 8 3/8 to 45 7/8 as Paine Webber downgraded the stock to "neutral" and CIBC Oppenheimer cut earnings estimates.
Industry leaders showed some resistance, but ended at their worst levels of the session. Intel (INTC) closed down 1 1/4 to 70 3/16, Texas Instruments (TXN) shed 1 3/4 to 44 3/8, Advance Micro Devices (AMD) fell 5/8 to 17 15/16, Applied Materials (AMAT) closed off 1 7/8 to 28 5/8, and Micron Technology (MU) slid 11/16 to 25 9/16.
Elsewhere in the chip and equipment sector, LSI Logic (LSI) fell 1 3/16 to 20 3/16; KLA-Tencor (KLAC) shed 2 13/16 to 37 1/16; Altera (ALTR) lost 2 11/16 to 33 15/16; ASM-Lithography (ASMLF) closed off 3 3/16 to 62 5/16; Adaptec (ADPT) slid 1 13/16 to 35 1/8; Asyst Technologies (ASYT) fell 1 5/16 to 21 3/4; and Novellus Systems (NVLS) closed down 1 13/16 to 31 9/16.
FSI International (FSII) dropped 2 to 11 3/16 following its disappointing earnings results, posted late Monday. The semiconductor-equipment maker reported earnings of 8 cents per share, 3 cents shy of Street expectations.
Fighting the downturn was VLSI Technology (VLSI), which closed
up 1 1/4 to 21 7/8, and Lam Research (LRCX), up 5/8 to 29 5/8.
A big focus in tech trading Tuesday was Remedy Corp. (RMDY), which fell 11 5/16 to 21 9/16 after Goldman Sachs removed the server software developer from its "recommended" list and now rates the company as a "market performer." BT Alex. Brown downgraded the stock to "buy" from "strong buy," and Hambrecht & Quist lowered its recommendation to "buy" from "strong buy." Analysts are concerned that IBM's recent purchase of rival Software Artistry portends tough times ahead for Remedy.
Among technology's other bellwether names, there was weakness as well.
Among Dow components, IBM (IBM) fell 3 11/16 to 98 7/8 and Hewlett-Packard (HWP) declined 2 1/2 to 60 5/8. Also in NYSE trading, America Online (AOL) slid 1 5/16 to 88 1/16, Motorola (MOT) lost 2 1/16 to 55 7/8, and Computer Associates (CA) closed down 3 to 49.
Bay Networks (BAY) bucked the trend, rising 15/16 to 24 1/2 after Cowen & Co. reiterated its "buy" rating on the networking firm. Others defying the downdraft included Lucent Technologies (LU), which rose 1/4 to 77 3/16, and Compaq Computer (CPQ), up 1/8 to 54 3/4.
In Nasdaq activity, Dell Computer (DELL) gave up some early gains to close off 1 1/8 to 80 1/2; Sun Microsystems (SUNW) fell 1 15/16 to 37 7/8; Cisco Systems (CSCO) declined 3 1/4 to 51 3/8; Ascend Communications (ASND) lost 1 1/4 to 24 3/8; and Oracle (ORCL) closed down 23/32 to 21 1/32 in heavy trading.
Kofax Image Products (KOFX) fell 2 to 5 1/8 after it said second quarter earnings may fall slightly shy of the 14 cents per share analysts were expecting.
MAS Technology (MASSY) shares rose 2 1/4 to 14 1/2 after agreeing to be acquired by Digital Microwave (DMIC) in a stock swap valued at $110 million. Digital Microwave shares fell 9/16 to 12 13/16.
Tadiran Telecommunications (TTELF) declined 5 1/8 to 14 after posting a warning about its fourth-quarter profits. The Israeli-based maker of telecom equipment cited weakness in Asia, particularly South Korea, for the shortfall. Parent Tadiran (TAD) fell 3 11/16 to 33 1/4 in sympathy.
International telecommunications firm Pacific Gateway Exchange (PGEX) shed 4 to 49 after being downgraded to "neutral" from "buy."
Active Issues
J.P. Morgan (JPM) led the Dow's retreat, falling 4 to 111 7/8. Other laggards included General Electric (GE), off 2 5/8 to 71 1/4; American Express (AXP), which tumbled 2 1/2 to 85 1/4; and Coca-Cola (KO), down 1 1/16 to 65.
AT&T (T) fell 2 3/16 to 61 3/4 as traders took a less constructive view on the telecom giant's latest attempt to sell its "non-core" assets. Robert W. Baird cut its rating to "buy" from "strong buy" on word the firm agreed to sell its AT&T Solutions Customer Care to Cincinnati Bell (CSN) for approximately $625 million in cash. Cincinnati Bell rose 1 1/4 to 29 3/16.
Dow advancers were limited to The Travelers Group (TRV), up 7/16 to 52 7/16, and International Paper (IP), which rose 1/16 to 42 9/16.
Applebees International (APPB) dropped 5 to 18 3/4 following its warning that fourth quarter earnings will come in below Wall Street expectations. The family restaurant company said it expects to earn between 30 and 32 cents per share, below the First Call estimate of 38 cents per share. Franchiser Apple South (APSO) announced plans to exit its relationship with Applebees to "focus on its faster growing restaurant brands," and its stock dropped 3 3/16 to 13 7/16. BT Alex. Brown downgraded Apple South to "market perform" from "strong buy."
Ameritech (AIT) fell 2 15/16 to 82 7/8 after unveiling plans to sell its 25% stake in Telecom of New Zealand next year. Bell Atlantic (BEL), the other big shareholder in Telecom NZ, also announced a plan that could reduce its holding in the company. Shares in BellAtlantic fell 7/8 to 89 3/16.
Ocean Energy (OEI) rose 1 3/4 to 51 3/4 while United Meridian (UMC) fell 2 5/8 to 29 5/8 following their announcement to merge in an agreement that would create an oil and gas company with a market capitalization of $3.1 billion. In a sign that there might be more chapters in this transaction, Ocean Energy adopted a shareholder rights plan, and United Merdian said it would fight any third party attempt to scuttle the deal. BT Alex. Brown upgraded its rating on Ocean Energy to "strong buy" from "buy."
Lackluster same-store sales figures hit some retailing stocks hard. Among the biggest losers were Dayton Hudson (DH), which fell 3 7/8 to 61 9/16, and Pier 1 Imports (PIR), down 1 13/16 to 19 1/4.
Among big industry groups, drug shares were mixed, with Pfizer (PFE) falling 1 3/4 to 72 9/16 and Warner-Lambert (WLA) rising 2 1/16 to 124 3/4 at the extremes.
Big bank stocks were hammered by worries about Asian exposure: Citicorp (CCI) declined 4 3/16 to 123, Bankers Trust (BT) fell 7 to 112 5/8, Chase Manhattan Bank (CMB) fell 1 3/8 to 105 7/16, BankAmerica (BAC) shed 1 5/8 to 71, and Wells Fargo (WFC) closed off 3 1/4 to 329 1/2.
Oil-drilling and equipment stocks were lower as well, amid word that day rates are falling in the industry. Leading the downturn were the likes of Smith International (SII), down 2 9/16 to 53 13/16; Nabors Industries (NBR), off 1 5/8 to 26 15/16; Diamond Offshore (DO), down 2 3/8 to 42 5/8; and Halliburton (HAL), which fell 2 3/16 to 46 1/16.
Profit warnings weighed on the likes of NPC International (NPCI), off 1 7/8 to 10 1/8; Stepan (SCL), down 1 1/2 to 29 3/8; Universal Stainless Alloy Products (USAP), which fell 2 3/4 to 12 1/2; and Catalina Lighting (LTG), which closed off 1 1/8 to 4 3/8.
National RV Holdings (NRVH) fell 1 1/2 to 31 3/4 after being downgraded by CIBC Oppenheimer to "hold" from "buy," citing price.
Southdown (SDW) tumbled 1 3/8 to 56 1/4 following a downgrade by SBC Warburg Dillon Read to "outperform" from "buy."
Spirits maker Canandaigua Brands (CBRNA) rose 3 7/8 to 52 7/8 after posting third-quarter earnings of 90 cents per share, a whopping 17 cents better than expectations.
WD-40 Co. (WDFC) rose 2 to 29 7/16 after posting first quarter earnings of 34 cents per share, 2 cents better than expectations.
Olympic Steel (ZEUS) rose 1 1/2 to 15 1/4 thanks to an upgrade from Salomon Smith Barney to "buy" from "neutral."
Sinclair Broadcasting (SBGI) climbed 1 15/16 to 43 11/16 after being added to Goldman Sachs' "recommended" list.
Capital One Financial (COF) continued to benefit from the rosy profit outlook it posted Monday, rising 1 11/16 to 51 15/16. Bear, Stearns upped its rating on the financial-services company to "buy" from "attractive."
Union Corp. (UCO) shares rose 3 9/16 to 31 1/16 following its acceptance of a $31.50-per-share buyout offer from privately held Outsourcing Solutions.
The IPO of investment bank Friedman Billings Ramsey Group
(FBG) was the NYSE's most active issue, but the stock rose just 1/2 to 20 1/2.
MARKET EYE
Inside the Market
Santa Has Yet To Materialize
Patrick Bloomfield Financial Post
I would like to be able to suggest stock markets can still come up with a Yuletide surprise. But what with everything going on in South Korea and Japan, not to mention U.S. shopping malls, that is a risky call.
After all, the new man in charge in South Korea has admitted his country has run out of money (even if does have great industrial strength), the Korean stock market has been going down the tubes and investors have been discernibly underwhelmed by the Japanese government's latest stimulation package. Meanwhile, U.S. shoppers have been less than enticed by what they see in shop windows.
No surprise, then, that it was a down day for Wall and Bay Streets.
Why should markets choose this outwardly joyful time of year to spring their own happy surprises?
The original explanation lay in a phenomenon academics have long noted - the "January effect," the propensity of markets in North America and elsewhere to do better in January than in other months.
Recently, the January effect has been supplanted by the populist phenomenon labelled the "Santa Claus rally."
In my lexicon, the two are one and the same. With the increased speed of market happenings, those same investment pros who once were content to lay down their first market bets in the early days of January have more recently been plonking hard cash down even as the rest of us finish our Christmas shopping.
Quite a few Canadian researchers have documented the numbers, but it was George Athanassakos of the Wilfred Laurier School of Business Economics who hypothesized (and demonstrated) a sound explanation for it in an award-winning paper some years back.
His thesis confirmed what I had long suspected. The investment pros handling the big pension fund accounts know pretty well by the end of the year how much new money will likely be flowing into their portfolios in the year ahead.
So they invest some of it at the very time it will have the longest time to work for them - a whole 12 months before their next yearend performance measurement.
The sad reality of this beneficial tendency is that they do not do it every year. Athanassakos demonstrated a distinct correlation between strong markets in January and the economic expectations of the day. The investment pros handling the big pension and endowment fund accounts are happy enough to lay their bets early if the outlook is good.
But if it is not, they don't - and Santa is noticeably absent from yearend and early-year markets.
Or maybe he visits only some sectors of the market - precisely what appears to be happening now.
At yesterday's close one could say that North American markets were split down the middle.
In New York, Santa was scattering some goodies, at least, on utilities, financials and consumer staples. other less fortunate sectors such as technology were feeling the pinch.
In Toronto, there was a different split. While U.S. interest-sensitive stocks were responding to expectations of stable, or even declining, interest rates, in Canada the need to defend the C$ kept Santa out of most interest sensitive stocks.
He kept his goodies for precious metals - whose strength helped the Toronto Stock Exchange 300 composite index have a less bad day than New York - and, interestingly enough, paper and forest stocks.
Insider Trading
Randvest Reduces Stake In Rand A Technology
Financial Post
Randvest Inc., which holds more than 10% of Rand A Technology Corp., sold 350,000 shares for $22.25 each in July, the Ontario Securities Commission insider trading report shows.
After the sale, Randvest held almost 2.6 million shares.
Rand A chief executive Brian Semkiw sold 100,000 shares in October for $22.50 each to hold just over 600,000 indirectly.
Other transactions, after September unless noted, include:
Canadian Natural Resources Ltd. - Allan Markin, director, exercised 100,000 options for $5.38 to $11.25 each and sold 100,000 shares for $43.05 each to hold almost 2.5 million.
Coho Energy Inc. - Kenneth Lambert, director, sold 200,000 shares privately for US$10.50 each to hold more than 370,000 directly and indirectly.
Corel Corp. - the company bought more than 775,000 of its own shares in between Nov. 3 and Nov. 14 for prices between $3.95 and $4.50 each.
Etruscan Resources Inc. - Bayview Holdings Inc., which holds more than 10%, bought 1.2 million shares for US$4.23 each to hold almost six million indirectly.
Euro-Nevada Mining Corp. Inc. - Craig Haase, officer and director, sold 100,000 shares for $25.50 to $25.70 each to hold more than 290,000.
Linamar Corp. - Larry Pearson, officer and director, sold 95,000 shares for $79.45 each to hold more than 53,000 directly and indirectly.
Mackenzie Financial Corp. - Alexander Christ, chairman, sold 100,000 shares for $20.67 each to hold 1.2 million.
MacMillan Bloedel Ltd. - TMI-FW Inc. bought 128,900 shares for $12.20 each to hold 12.1 million.
Poco Petroleums Ltd. - Edward Galvin, director, sold 215,000 shares privately for $14.40 each to hold more than 700,000 directly and indirectly.
Volatility Marks 1997 As Turbulent Year For Stocks
It was the year the bull market stumbled under the weight of its own global girth. It started with a slight limp in the summer as speculators chipped away at overvalued currencies in Asia. Before long, the so-called Hong Kong flu had spread to the West.
On Oct. 27, 1997, North America's beefy financial markets were upended amid a panic-driven selloff that led to the biggest point losses in history on Wall Street and Toronto markets.
Contamination from the Asian contagion continues to weaken markets around the world, dimming the prospects for stronger growth in 1998. Unless calm returns to that region, economists say, Canada will continue to suffer because of shrinking demand for commodities like coal, lumber and gold.
"Charcoal Monday was a very strong reminder that we live in a global economy," said Patricia Croft, portfolio manager at Sceptre Investment Counsel in Toronto.
The big losses in October, which wiped out billions of dollars in share value, hit just about anybody who owns stock directly or through RRSPs, mutual funds and company pension plans.
However, the international turmoil in the latter half of 1997 was just a sideshow compared with the strong gains made earlier in the year, said Josh Mendelsohn, chief economist at CIBC.
"It took a bit of the froth off the top, but it didn't change things in the overall context."
John Bart, head of the Canadian Shareowners Association, agreed. "It was one of the most wonderful years in a 15-year bull market," said Bart, whose group represents 12,000 investors.
In New York, the Dow Jones industrial average - pumped up by hefty corporate profits - charged ahead for the third consecutive year, gaining 21.26 per cent so far in 1997.
That's about five percentage points behind the blistering pace set in 1996. And the Dow remains more than 400 points below its all-time closing high of 8,259.31, reached Aug. 6.
The Toronto Stock Exchange, which accounts for more than 80 per cent of all stock trading in Canada, also put in a strong performance in 1997.
However, slumping commodity prices later in the year - particularly for gold - slowed the advance. The TSE 300 stock index has added 11.28 per cent in value so far this year, compared with a robust 26 per cent gain in 1996.
The TSE closed at 6,595.53 Monday, more than 600 points below its record high - 7,223.42 - reached Oct. 8. "If we could get rid of the natural resources side and concentrate on the other sectors we'd be all right," said Fred Ketchen, chief equities trader at ScotiaMcLeod in Toronto.
Still, a 10 per cent gain isn't bad considering the TSE 300 gained 12 per cent in 1995, lost 2.5 per cent in 1994 and traditionally adds about eight per cent a year.
For the second consecutive year, the financial services sector led the TSE's 14 stock groups in growth, gaining more than 50.3 per cent in value so far. Pipelines and utilities also did well.
"The environment could hardly be any better for banks with very low interest rates and booming financial markets," said Sceptre's Croft. "That did wonders for the bottom line in that sector." Last month, the Big Five banks reported a fourth consecutive year of record profits - $7.5 billion combined, an increase of 18 per cent over 1996.
Canadian interest rates, which sank to 30-year lows earlier in the year, were a real blessing for the banks as businesses were more eager to get loans to expand and more consumers took out car loans and mortgages.
"Consumers came back in droves this year," said CIBC's Mendelsohn. "We've seen a much stronger housing market. We've seen retail sales go up. Auto sales have gone up."
The banks and their brokerage divisions also raked in cash from the stock market through huge increases in underwriting, brokerage fees and the sale of equity mutual funds.
Indeed, the mutual fund market continued to expand at a dizzying rate. In 1994, there were about 500 mutual funds to chose from in Canada. Now, there's more than 1,500. By the end of November of this year, Canadians had poured $119.1 billion into mutual funds, compared with $85.1 billion in the same 1996 period.
"You put all those things together and you've got a sector that is really quite phenomenal," said Ketchen.
But the Bank of Canada's decision to raise interest rates four times this year created a bit of a drag for banking and other interest sensitive stocks.
And the Canadian dollar sank to its lowest levels in 12 years this month as currency speculators dared the central bank to raise rates higher.
"Ultimately, it was October's Asian currency crisis that unsettled markets completely," said Craig Strachan, research manager at TD Bank's Evergreen Wealth Management.
"It appears likely that demand for some of Canada's exports, particularly our commodities, will be lower than expected." As a result, the year's biggest losers were the gold, base metals and forestry industries.
The gold and precious metals group has lost 45.6 per cent of its value this year, mainly because the price of bullion has plunged to its lowest levels in 18 years amid bullion selloffs by the world's central banks.
"There's been a fundamental shift in the way cetral bankers look at gold as a backing for paper money," said Ketchen. "We're getting out of that."
The absense of inflation worldwide, falling demand from Asia and the Bre-X Minerals fraud also helped depress gold stocks.
Meanwhile, paper and forest products stocks were down 24 per cent in the fourth quarter. Base metal shares lost 23 per cent and oils 14 per cent.
"For investors, it was a very emotional year," said Croft. "They were rocked by Grey Monday, Bre-X, Asia and gold falling through the floor.
They didn't panic, but they had their hand on the button."
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