MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY DECEMBER 29, 1997 (2)
INSIDE THE MARKET
The 1997 Christmas Stocking
Partick Bloomfield Financial Post
If that so-called Santa Claus rally, better known in academic circles as the January effect, is going to bring at least a temporary Yuletide lift in spirits, it had better come soon.
Most market watchers that I know are telling their clients there is little prospect of the double-digit stock market returns of the past three years being repeated in 1998.
One good friend of this column, broker Roland Jones of Research Capital Corp., whose client list is strongly oriented toward investment professionals, will be content if North American markets achieve a positive 1998 return in single digits, buoyed by a second-half recovery. Understandably, his Christmas list of stock picks for 1998 has a defensive tinge.
Jones has been in the habit of laying his Christmas picks on the public table for as long as I can remember -- with some success.
If you had bought all his picks for the past 14 years each December and sold them 12 months later you would have had an average annual return of 20%, compared with the Toronto Stock Exchange 300 composite index's 8% and the Dow Jones industrial average's 12.5%. Last year, his choices did 20%, outperforming the TSE 300's return of 14.3% but falling short of the Dow's 25.5%.
The latter shortfall largely reflects one prominent dog of 1997 -- Viceroy Homes Ltd. (VHL/ASE). Without it, Jones' overall score would have been 21.4%. In the real world out there, prudent investors would have been out of this stock much earlier in its decline than Jones' own terminal pricing date of Dec. 6.
His current picks for U.S. core holdings consist of five household (or near-household) names -- three of them in the health and pharmaceutical sectors, and thus less likely than others to be victims of Asian financial illness.
There is also a repeat nod for General Electric Corp., a global giant -- painstakingly assembled by chairman and chief executive John Welch, one of whose claims to fame has been his insistence that executives in each of the company's industrial and financial operations contribute, and act as a resource, to the rest.
Jones' U.S. special situations have managements with which he has kept in close touch. In one or two instances their CEOs are old friends.
His Canadian core holdings are all market leaders in their field, for the most part with relatively down-to-earth price tags in terms of the price-multiples at which they currently trade.
The exception is Newcourt Credit Group Inc., whose P/E on trailing earnings of more than 50 reflects rapid earnings growth of the recent past and recent international acquisitions in the leasing business. This is the second year the stock has been on Jones' Christmas list.
Of his Canadian special situations, Destination Resorts Inc. is developing an Albertan recreational community in a one-of-a-kind location; American Eco Corp. looks after environmental and construction projects for major North American companies; and Certicom Corp. is finding backers for its proprietary telecommunications encryption systems.
Yogen Fruz World-Wide Inc. is now the largest global franchiser of frozen yogurt. Precision Drilling Corp. is a leading contract driller in the Canadian oilpatch and its stock is included in the TSE 300's oil and gas services subindex.
MARKET EYE
Waiting for next year, again
The TSE Threatened To Catch Up To The Dow At Last, But Asia, The C$ And Weak Resource Stocks Got The Better Of It
William Hanley - Financial Post
The greatest bull market in stocks took on mythical proportions in 1997. Even though the Canadian market stuck doggedly to its underachiever role, North American stocks managed to reward both patient buy-and-hold investors and, especially later in the year, nimble traders. And all the while markets adhered to the motto "never a dull moment."
The appetite for equities, nothing short of a mania, was triggered by the overriding notion that the torrent of baby-boomer savings had nowhere else to go for good returns but the stock market.
Investors were witness to two major downturns that threatened to become bear markets. They also experienced maximum volatility that provided 100-point ups and downs at a thrilling and chilling pace, a meltdown in the price of gold and a crisis in Asia that threatened to unleash a deflationary global storm.
Throw in the Bre-X Minerals Ltd. scandal, frantic merger activity, bank stocks behaving madly, a lately swooning C$ and the result was a rich tapestry of events.
But the markets' main thread in 1997, as it has been for three record-breaking years, was the low-inflation, steady growth environment that has been the legacy of the soft landing for the North American economy. The soft-landing scenario begat the Goldilocks economy, which begat the "new paradigm" in 1997.
With just three days of trading left in the year, the Dow Jones industrial average had advanced 1211.86 points or 18.8% to 7660.13. The Standard & Poor's 500-stock index, more representative of the broader U.S. market, had gained 191.91 or 25.9% to 932.65. The technology heavy Nasdaq composite ended 208.5 or 16.1% higher at 1499.53 after blowing hot and cold on worries about the future for computer stock earnings.
Meantime, it was business as usual on Bay Street, where the Toronto Stock Exchange 300 composite index was able to advance only 612.47 or 10.3% to 6539.50, hobbled by the resource stocks that make up about a third of the index's weighting. At certain stages of the year, the TSE 300 tantalized investors by closing the gap between it and the Dow to a few percentage points. But full closure was not to be and the familiar cry of "wait till next year" was heard on the Street.
"The Canadian market was partly handcuffed by the weakness in golds, oils and other resource issues, and later in the year by the weakness in the C$," says Katherine Beattie, technical analyst at MMS International in Toronto.
If the Canadian market disappointed both domestic and foreign investors despite a TSE 300 advance that was better than average, the U.S. stock market's continuing performance was nothing short of remarkable.
"The dynamic equities performance throughout much of the year was largely the result of the continuing benefits of corporate restructuring and the resulting impressive profit margins," says Michael Metz, chief investment strategist at CIBC Oppenheimer Inc. in
New York.
"Momentum players dominated the market," Metz adds, meaning traders bought into certain sectors and stuck with them as they rallied powerfully.
Technology issues were hot and cold momentum plays throughout the year, ending the year as a cool sector. Financial services issues were consistently strong, surprising many observers with high valuations built on a base of low interest rates.
In fact, the North American market set sail into 1997 on a troubled sea roiled in early December 1996 by remarks from the captain of the good ship American Economy, Alan Greenspan, chairman of the Federal Reserve. The normally taciturn Greenspan had worried publicly that investors were suffering from "irrational exuberance" in driving stocks to ever higher levels.
The markets had interpreted this as a warning the Fed would act against this financial asset inflation even though price inflation remained tame. And the Dow gave up several hundred points in a couple of weeks.
Even though the Fed refrained from raising interest rates at its policy meeting that December, the threat of higher rates hung in the air as the new year got under way. On the final trading day of '96, the Dow plunged 101 points to begin the year at 6448.27.
But, in a display of how quickly sentiment could change -- which was to be a trademark of 1997 -- it bounced back 101 points on Jan. 3, the second trading day of the year. The delayed and extended New Year's party had begun in earnest, the first stage culminating on Feb. 13 when the Dow closed above 7000 for the first time while the TSE bobbed along in its considerable wake.
While the stock market was taking its cue mainly from the bond market and the interest rate backdrop, the continuing earnings growth in the fourth quarter had galvanized investors, and the Street reckoned there was more to come from the Goldilocks economy -- not too hot, not too cold, just right.
But then Greenspan, largely ignored since the initial impact of his early December warning, refused to go away. He was back again on Feb. 26, warning stocks could be riding too high on a wave of "excessive optimism" while indicating that rates could be heading higher.
About a week later, though, Greenspan was doing a neat turn, saying stocks were not necessarily overvalued as long as earnings targets were met. And less than a week after that, the Dow plunged 160 points on rate fears that were buttressed by another Greenspan warning on March 20. This was finally confirmed March 26 when the Fed raised rates 25 basis points.
The Dow was gripped by a downturn that threatened to become at least a baby bear market. The index was down 10% on an intraday basis by mid-April before the inflation story and stronger earnings turned the tide with a series of spectacular rises. That cranked the Dow up to a close of 7203 on May 5 as the U.S. announced a balanced budget agreement.
On June 12, the TSE, bobbing along in the Dow's wake, closed above 6500 for the first time. Meantime, the Dow was storming ahead, hitting 7782 on June 13 after a stunning advance of almost 500 points over six days.
After marking time for almost a month, the Dow burst through 8000 on July 16, rising to the record close of 8259.31 on Aug. 6 that was to set the standard for the year.
A combination of earnings jitters and growing unease over Southeast Asia stalled the market's advance, even though the TSE broke through 7000 on Sept. 22 and closed Oct. 7 at a high of 7209.93 that was not bested again in the year.
While the S&P 500 and Nasdaq composite achieved new highs Oct. 3, the "Asian contagion" was spreading and finally hit
Wall Street and Bay Street full force on Oct. 27 -- Bloody Monday -- with the Dow's and the TSE's biggest- ever point drops, 554 and 434, respectively. But the Dow recovered the next day with a remarkable gain of 337 from a intraday low below 7000.
That resilience reassured investors, and while the collapse of Yamaichi Securities Co. unnerved the markets in November, the U.S. market regained momentum despite continuing volatility and closed above 8000 to begin December. Another record looked within reach as the S&P 500 breached new heights.
Meantime, the Canadian market suffered as the golds and other resource stocks weighed on the TSE 300, even though the financials were probing new highs.
The Santa Claus rally, which has seasonally lifted markets 11 out of the past 14 years, looked set to work its yearend magic. But the Asian crisis just would not go away and high profile U.S. companies began warning about fourth quarter results in what one analyst called "the negative earnings pre-announcement season."
The level of volatility continues to worry observers, who say it's a sign the stock markets are in the process of resolving issues.
So as an incident-packed 1997 drew to a close with substantial annual gains in North American markets, it was noted the Dow Jones industrial average had still not recaptured the heights of almost five months ago and the TSE 300 was still a distance below its level of early October.
'97's WINNERS, LOSERS & SCRAPPERS
NEWSMAKERS / David Walsh, Guy Turcotte, George Eaton, Veronika Hirsch and Ron Meade all had years to remember - for better or for worse.
Saturday, December 27, 1997
By Janet Mcfarland - Globe & Mail
Dozens of Canadian business people saw their world tilt on its axis in 1997. The shift was perhaps most acute for the five below: A gold emperor who had no clothes; a company builder who sold his oil business and is starting fresh; a patriarch who saw his family's name diminished; a star money manager who spent the year on the heels of controversy; and a man who fought outsiders and insiders for control of the mutual fund giant he founded .
David Walsh, former chief executive officer, Bre-X Minerals Ltd., Calgary
The Bre-X scam has earned the company's woeful team of executives the distinction of the most prominent, and most disgraced, business newsmakers of 1997.
The gold company, once worth $6- billion, is now bankrupt and its shares have been delisted from stock exchanges. And although Bre-X executives have walked away from the biggest mining fraud in world history with their personal fortunes so far intact, shareholders are pursuing multibillion-dollar lawsuits against them in Canada and the United States.
Bre-X's former executives "have probably spent more time with lawyers in the past seven or eight months than with their spouses," says shareholder activist Greg Chorny. "And that trend is not going to change soon."
The largest class-action suit could be heard in a Texas court as early as next fall.
Despite the legal problems, however, there are signs that the wheeling - dealing instincts at Bre-X are not dead.
Mr. Walsh, who made a profit of $35-million selling Bre-X shares in 1996, suggested in October that he might venture into the oil and gas business in Western Canada using Bre-X affiliate Bresea Resources Ltd.
"We believe this would be a very positive and desired business plan to follow for the company and its shareholders," says Mr. Walsh, who is the largest shareholder of Bresea.
He proposes to transform the company into a junior oil and gas company by borrowing $66-million to buy a package of resource properties. However, that plan stalled this month when the Alberta Court of Appeal ordered independent receiver Price Waterhouse Ltd. to investigate whether Bresea should also be placed into bankruptcy.
When Mr. Walsh is not working on new business schemes for Bresea, he runs a private investment company called Walco Holdings Ltd., based in the Bahamas. Among its holdings are 350,000 shares of Camberly Energy Ltd. of Calgary.
It's not all work. Mr. Walsh still has his mansion in the Bahamas, where he maintains his official residence for income tax purposes.
Life has slowed considerably for John Felderhof, Bre-X's former vice- chairman and chief geologist, who headed the ill-fated operations in Indonesia. He earned more than $42- million in 1996 trading Bre-X shares.
Mr. Felderhof, who continues to maintain his innocence in the scam, has avoided Canada since the fraud was exposed and has moved to his beach-front estate in the Cayman Islands -- complete with swimming pool, Jacuzzi, 17-foot ceilings and seven bathrooms. The Felderhofs also have another house and a condominium in the Caymans.
His lawyer says Mr. Felderhof has no business dealings in the works and is still focusing his efforts on clearing his name. In the meantime, he can amuse himself with his Lamborghini, Mercedes-Benz, Land Rover or Jeep, or perhaps take to the sea in his 13- metre power boat.
Bre-X's former chief financial officer, Rolando Francisco, meanwhile, has returned to his former company, Goldcorp Inc., as president and chief operating officer.
The Busang crew of Filipino workers, whom Bre-X's private investigator has blamed for the salting scandal, are back in the Philippines. The private investigator said the five likely conspirators in the group cleared millions of dollars trading shares of Bre-X during the salting period.
Few expect criminal charges will result from the fraud, although the RCMP are still investigating. The information trail has gone pretty cold, Mr. Chorny says.
Guy Turcotte, former chief executive officer, Chauvco Resources Ltd., Calgary
The 45-year-old CEO became a wealthy man this fall when Texas- based Pioneer Natural Resources Co. agreed to pay about $1-billion to buy most of his company's assets.
Mr. Turcotte, who founded Chauvco in Calgary in 1981, will make about $26-million personally from the sale of his shares. But long- lost cousins and hard-luck friends beware: The money is already spoken for.
He is jumping into the pipeline game.
The Pioneer deal was part of a three-step process to reorganize Chauvco. The second step is to issue shares on the Toronto Stock Exchange for the international operations, which have oil properties in Gabon and the Middle East. Chauvco Resources International Ltd., based in Bermuda, will be run by oil patch veteran Bernard Isautier.
And the third step in the restructuring is to spin off Chauvco Resources Ltd.'s 20-per-cent stake in the proposed Alliance natural gas pipeline through a rights offering.
For Mr. Turcotte, the future is tied to all three ventures, but especially to the pipeline.
His stake in Chauvco's Canadian and Argentine assets has been transformed into shares of Pioneer through a share swap, while his stake in the international operations has been transformed into shares of the new Chauvco Resources company. He will sit on the boards of both Pioneer and the new Chauvco.
The gains from both will be transformed into new investments, says Glen Russell, former president of Chauvco Resources Ltd.
For full-time diversion, Mr. Turcotte will be chairman and chief executive officer of Fort Chicago Energy Partners LP, a new company he helped form to hold an interest in the $3.7-billion Alliance project.
"Pipelines aren't the love of my life," Mr. Turcotte explains. "We're involved in Alliance because we think it's a very good financial opportunity."
He says it's important to him that his new career will involve less travelling. "I've got three young children under five, and I'd like to be spending a little bit more time at home with my family and this will allow me to do that."
As a first step in October, Mr. Turcotte, as well as Trimac Corp. and Gendis Inc. -- the three largest shareholders of Chauvco -- paid $130-million for a 47-per-cent stake in Fort Chicago, which will own Chauvco's 20-per-cent interest in the Alliance project.
Beau Canada Exploration Ltd. and Summit Resources Ltd. later agreed to also roll their stakes in Alliance into Fort Chicago, giving it control of 27 per cent of the project. After the deal is completed, Mr. Turcotte, Gendis and Trimac will together own about 40 per cent of Fort Chicago.
The financing is lined up, but the consortium needs approval from the National Energy Board, which is conducting hearings to consider the project.
On another front, Mr. Turcotte says Chauvco Resources International is waiting to see whether the United Nations lifts sanctions against Iraq to allow the company to develop an oil field there.
"The deals in Iraq will be all subject to sanctions coming off. We're working on specific projects, and we hope to be able to conclude those probably next year," Mr. Turcotte says. George Eaton, former chairman, T. Eaton Co. Ltd., Toronto
Canada's once-venerable Eaton family has spent the past year in the public spotlight after Eaton's filed for bankruptcy protection in February. But members of the clan will be farther from public view in 1998.
Mr. Eaton, a great-grandson of founder Timothy Eaton, began the year as president, chief executive officer and chairman of the family owned department store chain. He ends the year with none of those titles.
Although the Eaton family has retained its ownership stake in the 127- year-old company, it has given up day-to-day control to outside managers. They include new CEO George Kosich, formerly head of Hudson's Bay Co., and new chairman Brent Ballantyne, who left Beatrice Foods Inc. after the company was purchased this year.
Mr. Eaton, 52, made it clear from the beginning of the court protection process that he planned to reduce his role with the company and bring in outside help to turn it around.
When he stepped down as chairman this month, the company said he will remain on the board of Eaton's and will be actively involved in the overall direction of the company.
In 1996, the Financial Post Magazine ranked the Eatons as Canada's fourth wealthiest family, with a worth of $1.7-billion.
The Eaton sons -- John Craig, Frederick, Thor and George -- have said over the years that their father taught them to work for a living despite growing up with money.
But George Eaton, a former Formula 1 race-car driver, has no obvious full- time job these days.
And he is not discussing his plans for the future, company spokesman John David Eaton says.
"His further plans are up to him, and he doesn't feel the need to discuss publicly exactly what he's going to be doing," Mr. Eaton says. "He's very active on the board and will continue to be."
In any case, George Eaton's retail role with the department store chain may continue to diminish.
The company is expected to go public, possibly within the next year, giving the family an opportunity to sell at least part of its ownership interest and further reducing its ties to the retail empire.
There are opportunities elsewhere. Observers say Mr. Eaton's interest has always been closer to the broadcast side of the family empire than to the department stores.
The Eaton family is the controlling shareholder of Baton Broadcasting Inc., majority owner of the CTV Television Network. Mr. Eaton sits on the board of Baton. Veronika Hirsch, fund manager, Hirsch Asset Management Corp., Toronto
Veronika Hirsch has faced a lot of changes in the transition from being the star money manager at giant Fidelity Investments Canada Ltd. to running her own tiny $14-million investment fund.
Launched at the end of September, Hirsch Asset Management ran headfirst into a snarling stock market in October and November, which left most Canadian equity funds with losses for the period.
It was a stressful time to stage a comeback, she says. "It would be nice if I'd gotten a six-month break, if I'd just bought things and they'd just gone up in price," she sighs. "That's a great booster of confidence."
Bad timing is just another disappointment in a difficult year. Ms. Hirsch left Fidelity in February on the heels of a controversy about falsifying a securities trading report last year.
The controversy stemmed around her purchase of warrants in Vancouver-based Oliver Gold Corp. in January, 1996, which were available only for sale to residents of British Columbia. Although living in Toronto, she used her broker's home address in British Columbia. As well, she later bought Oliver Gold shares for an AGF fund she managed.
To make matters worse, the issue came to light just two months after Fidelity had hired Ms. Hirsch to run its True North mutual fund, luring her away from AGF Management Ltd., where she had managed more than $1-billion and starred in advertising campaigns.
Ms. Hirsch agreed in November to a $140,000 settlement with securities commissions in Ontario and British Columbia. She says the Oliver Gold purchase was a "thoughtless" oversight and that she signed the paperwork without looking at the details.
With the case settled, Ms. Hirsch is now free to concentrate on building her fledgling business, which is being financed by Toronto based merchant banking firm Koloshuk Farrugia Corp., run by Victor Koloshuk.
Her new company has one mutual fund, the Hirsch Canadian Growth Fund, and two pooled funds for larger investors, Hirsch Aggressive Equity Fund and Hirsch Growth and Dividend Fund. Together, the funds contain $14-million.
The mutual fund posted returns of 1.8 per cent in October, compared with a loss of 2.1 per cent for the average Canadian equity fund. In November, the fund lost 3 per cent compared with an average loss of 8.3 per cent for Canadian equity funds.
The fund has an aggressive mandate, but in this difficult market Ms. Hirsch is sticking to medium sized and larger companies and maintaining a large cash position.
The change from managing $1-billion to managing $14-million has been an adjustment, she says. For example, a single trade of several thousand shares fills your order in a small fund, and there is no opportunity to average the price down by doing more trading in subsequent days.
"That's your one trade. It requires discipline. You have to pick a point where you really want to buy a stock," she says.
The easiest fund to manage would be between $100-million and $250-million, Ms. Hirsch says. That is her goal for Hirsch Asset Management. "I hope I get to that $100-million real quick, and then it will be easy. One hundred million is a nice number." Ron Meade, former CEO, Altamira Management Ltd., Toronto
Ron Meade spent most of 1997 battling his fund managers at Altamira and fending off what he considered a low-ball takeover bid by Manufacturers Life Insurance Co. Ltd.
He won the fight with Manulife this fall, but it was a partial victory at best. Mr. Meade had to leave the mutual fund company he founded in 1969 and is now turning his attention to other business ventures.
The dispute had simmered for years. Manulife owned 30.5 per cent of Altamira, and Manulife CEO Dominic D'Alessandro had long expressed frustration at Mr. Meade's management.
It boiled over in 1996 when Manulife made its $660-million takeover bid. The battle lines were drawn when all of Altamira's fund managers, including superstar Frank Mersch, backed Manulife while another group of Altamira shareholders backed Mr. Meade.
After a long court case, the saga ended this fall when Manulife dropped its bid after TA Associates Inc. of Boston orchestrated a $784-million ownership deal.
As part of the deal, Mr. Meade agreed to step down as chief executive officer.
But he's still a director of the company and -- much to the disgruntlement of his detractors inside -- is part of the search committee that's looking for a new CEO. That decision is expected to be made in January.
Mr. Meade is also still a major shareholder of Altamira. And he received $10.5-million of a $181-million payment made to Altamira's managers as part of the TA deal. Mr. Mersch pocketed about $33-million.
Despite the ownership stake and his role on the board, Mr. Meade is no longer involved in the day-to-day operations.
Sources at Altamira say there has been some attempt to patch up differences between the managers and Mr. Meade, but it's unlikely he'll ever play much of a role at the company.
Instead, Mr. Meade is now spending most of his time overseeing Almiria Capital Corp., a Montreal-based venture capital company he helped start in 1984. Almiria has about $164-million worth of holdings in a variety of mid-sized companies. They include Biomira Inc. of Edmonton, a drug company that specializes in cancer treatment, and Alta Genetics Inc. of Calgary, which helps genetically alter cattle to increase their meat and milk production. |
