MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 5, 1998 (2)
Market Eye
Greenspan brings the 'D' word into play
By WILLIAM HANLEY -- The Financial Post
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Dan Quisenberry, the Kansas Royals' ace relief pitcher of the '80s, will not be remembered as a towering phrase-maker of the 20th century. But he was definitely onto something when he declared: "I have seen the future. It looks like the present, only it's longer."
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Dan Quisenberry meet Alan Greenspan, who has likely earned himself a spot in the Economics Hall of Fame with a series of flawless pitching performances. The chairman of the U.S. Federal Reserve board has also been looking at the future and at the weekend set the tone for the markets on the first real trading day of 1998 (Friday was a low-intensity, low-volume affair) by suggesting that deflation could play a pivotal role.
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Greenspan put Wall Street on notice that the "D" word was at or near the top of his agenda for 1998 after a span of more than 50 years in which the Fed has been obsessed with inflation.
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"Some observers have begun to question whether deflation is now a possibility," he told the annual meeting of the American Economic Association (AEA). "Even if deflation is not considered a significant near-term risk for the economy, the increasing discussion of it could be clearer in defining the circumstance."
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By warning that deflation could be at least as harmful to the economy as inflation, Greenspan sent a clear message to the bond market about interest rates. The U.S. long-bond yield yesterday dropped to a 20-year low as traders decided the Fed, with deflation on its radar screen, is hardly likely to raise rates to cool the economy.
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But for stock traders, the message is far from clear. While stable or lower interest rates are good news for business, the implication is that earnings might come under pressure in a deflationary environment like that suddenly gripping Asia.
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The Dow Jones industrial average duly added 13.95 points to 7978.99 after trading in a range of more than 120 points as traders were in two minds where earnings might be six to nine months down the road, the target horizon for stock values. It was no contest on the day between stocks and bonds. The flight to quality was to fixed income, despite a good showing by the technology sector.
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Greenspan made his famous "irrational exuberance" remark about the stock market 13 months ago, triggering a selloff by investors who took it as a warning that if the market did not cool off by itself, the Fed would act.
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Market Eye believes Greenspan's latest utterance -- rapid price deflation in assets such as real estate or equities could wound the economy -- is a variation on that same theme. This time, though, the Fed does not have the weapon of higher interest rates handy to cool the market. In fact, many observers now expect the Fed's next move to be an easing of rates in the face of deflationary pressures building out of Asia.
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Market watchers are keeping a close eye on the yield curve, which is the difference between the yields on three-month Treasury bills and the 30-year bond. The difference is now less than 50 basis points, which is predicting very slow growth.
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In fact, a flat yield curve where long rates are lower than short ones is usually a strong indicator that a recession is looming. The curve is still there, but if the spread continues to narrow, the uncertainty and the stock market's volatility will grow.
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It just so happens that fourth-quarter earnings will begin to trickle in next week -- the first under the influence of the Asian contagion. If they throw the market a curve, we tend to agree with Dan Quisenberry that it could be a very long year for investors.
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VSE wobbled through 1997 -- Metal muddle tests mettle
Rod Nutt, Sun Mining reporter Vancouver Sun
The Vancouver Stock Exchange index crashed in flames in 1997, losing nearly half its value but it's no mystery why.
"What happened is not very complicated," said Odlum Brown president and chief
executive officer Tony Hepburn. "Low prices for virtually every metal, especially gold, was a major factor in depressing the market. The over-riding reason was the fallout from the Bre-X fiasco."
Although Bre-X Minerals traded on the Toronto Stock Exchange before its collapse, and was never listed on the VSE, it spectacular demise virtually killed the ability of junior VSE companies to raise money.
Whalen Beliveau & Associates analyst Dorothy Atkinson said institutions were scooping share offerings with abandon before the Bre-X collapse in March. "After March, everybody got scared," she said. "Nobody was buying."
Ellsworth Dickson of the George Cross Newsletter notes that several other assaying scandals added to fuel to the fire. Delgratia Mining Corp.'s shares plummeted when check assays showed no gold from its Josh property about 100 km south of Las Vegas, and Reward Mining Ltd. and George Resource Co. Ltd. received false assay results from
their joint-venture Corocoro property in Bolivia.
Dickson agrees Bre-X was the key to the VSE's decline. "After the Bre-X scandal, all VSE-listed stocks with properties in Indonesia had a terrible time," he said. "Some companies active in Indonesia lost 90 per cent of their value, most times unfairly."
The VSE composite index lost 48 per cent of its value last year. The index had a high of 1,352 and a low of 584, closing at 618 on the last trading day of 1997.
Stockwatch editor John Woods said the VSE was probably the world's worst-performing market last year until Asia's financial problems came along and Thailand's stock market took Vancouver's place at the bottom of the heap.
"Ironically, it shows how successful Vancouver has been carving a niche and cornering the minerals -- especially gold --exploration market," he said. "When gold turns around, we will see the VSE roar back."
One senior securities executive in Vancouver, who spoke on the condition his name isn't disclosed, said he had been predicting a market correction by the end of last April, even before the Bre-X collapse.
"There had been a lot of indiscriminate buying of companies that didn't justify their value," he said. "The pendulum swung too far in both directions. The market went too high, and now it is too low."
He said there would have been a blowout even without Bre-X.
The sickly price of gold and other metals exacerbated the fall-out from Bre-X. Gold lost nearly $100 US an ounce last year and is currently hovering just over $280 US an ounce.
"The combination of these factors dragged the VSE index further down than the South Korean market," said Hepburn.
They even had an adverse impact on the Toronto Stock Exchange 300, which
only gained 13 per cent last year despite strong showings from the banks and utilities.
By contrast, the Dow Jones Industrial Average roared ahead 22.6 per cent and the Standard and Poor's 500 climbed a remarkable 31 per cent.
"I would have expected Toronto to be closer to the S&P 500, a similar market," said Hepburn. "Low metals prices and Bre-X definitely acted as a dampener, despite strong bank and utility stocks."
But Vancouver, mainly a venture-capital market for mining companies, had no chance of withstanding the events of 1997. According to exchange figures, total financings skidded 30.8 per cent to $1.46 billion compared with $2.12 billion in 1996.
However, the measure of the VSE's health is, reflected in the amount of private placements, the bread and butter of the exchange. Private placements -- ones that institutions were snaring indiscriminately before Bre-X -- slumped 30.4 per cent last year to $1.39 billion from $2.01 billion in 1996.
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NEW YORK NEWS
Welcome back. Now pass the aspirin. The tug-of-war between the
bulls and the bears that many players say will ultimately define 1998 was
in full swing on Monday, leaving many traders exhausted and reminiscing
about just-complete vacations. After two weeks of holiday-shortened and aborted activity, trading volume soared while major indices suffered through a
whipsaw session. In the end, the Dow closed up 14 points, while the tech-stuffed Nasdaq rose more than 12.
Bond prices, meanwhile, soared 1 3/8 of a point, sending the yield on the benchmark 30-year Treasury bond down to 5.74%, its lowest level since the 30-year bonds were first offered on a regular basis in 1977.
The session had a little of everything, including the stunning rally in bond prices, which helped interest rate-sensitive stocks. Some "January effect"-like buying aided downtrodden tech stocks, though a profit warning from Netscape (NSCP) hampered
Internet-related issues. Those factors were offset somewhat by more unrest in Asia's major markets, and another decline in oil prices, which punished shares of oil drilling-and-equipment stocks. And, as traders have come to expect on Mondays, there were also a few mergers, including a $4 billion deal bringing together two baby bells.
The Dow Jones Industrial Average ($INDUA) nudged its way higher at the opening bell by about 25 points, then slid into negative territory a half-hour into the session. But the index didn't stay down for long, rising through much of the morning, before
peaking out with a gain of nearly 70 points shortly before noon. The afternoon proved less ebullient as the Dow declined steadily, bottoming out more than 50 points below the break-even point shortly after 2 p.m. Heading into the last hour of trading, however, the Dow had clawed back into positive territory and finished up 13.95 points at 7,979.00.
The Nasdaq Composite Index (COMP) experienced a day with fewer gyrations
than its blue-chip counterpart. The tech-laden index also rose early on, then dipped, but in a much less dramatic fashion than the Dow. After pushing higher by more than 15 points in the morning, the Nasdaq slid lower in the afternoon along with the Dow, but never declined into negative territory. In the last hour of trading, the index rallied back toward its morning highs, closing up 12.59 points at 1,594.12.
The S&P 500 (SPX) ended the day up 2.04 points at 977.08, while the small-cap Russell 2000 Index (RUT) rose 0.54 points to 437.06.
"We managed to scrape out a relatively minor gain across the board, with the noticeable exception of the Dow Utility Average, said Bill Meehan, chief investment strategist at Cantor Fitzgerald. The Dow Utility Average -- which usually tracks the bond market -- fell 2.87 points to 268.65, leading some to worry that an economic slowdown is in the offing.
"I thought we'd see divergence again (between stocks and bonds) because of the simple fact that a very flat yield curve tells us something that's not going to be good news for stocks," Meehan said. "I think the bond market is telling us something the stock marke will soon find out -- lower interest rates don't always mean higher stock prices."
Noting the somewhat tenuous state of investor confidence, Meehan suggested the stock market will decline "at least" 20% in 1998. The "big risk" he sees is the dependency of markets in developed nations on "politicians having to execute perfectly" in a year when congressional elections in the U.S. and local elections in Germany are scheduled.
"Since last week, I've been recommending that those who have the ability to do short-term trading speculate on end-of-year tendencies and get aggressive on large-cap tech stocks," the strategist said. "Those not adroit should use strength to lighten up (equity holdings). I wouldn't get too aggressive in the bond market at these levels either. Cash looks good to me."
On Monday's NYSE, a robust 645 million shares were traded, while advancingissues bested decliners by an 8-to-7 margin. On the Nasdaq, a healthy 681 million shares were traded, while advancing issues outpaced decliners by a 25-to-19 spread.
Further instability in Asian markets helped the bond market's historic advance, as did market-friendly comments from Federal Reserve Vice Chair Alice Rivlin, an unexpected drop in construction spending in December, and a big rally overnight by the U.S. dollar versus the Japanese yen. But the enthusiasm was really generated by comments from Fed Chairman Alan Greenspan.
In a weekend speech at the annual meeting of the American Economic Association, the central banker spoke about deflation -- an indication to some that the Fed is considering an easing of monetary policy.
"Given the progress that has been made in reducing inflation, and the very solid economic performance that this low-inflation environment has helped to promote, a new set of issues is now emerging on the policy agenda," Greenspan said. "Inflation has become so low that policymakers need to consider at what point effective price stability has been reached."
The chairman also reiterated statements made previously that the consumer price
index overstates inflation, further emboldening bond bulls. But some observers said the reaction of fixed-income traders was overzealous, and overlooked the fact that Greenspan was discussing the potential for asset-price deflation (as in stocks and bonds) rather than a true deflationary reduction in the price of goods and services.
"Greenspan's comments reflected a departure from the traditional thinking of the Fed, which is usually full of warnings about inflation, which provided additional fuel to a rally that was already under way," said Anthony Karydakis, senior financial economist at First Chicago Capital Markets. "But if you take a step back, I think they have overreacted."
Karydakis said Greenspan's comments and the dollar's rally versus the yen only helped exacerbate a bullish move that "feels like it's unstoppable" at this point.
"I think we may be spending a whole lot of time below 6%," he said.
Overseas, Hong Kong's Hang Seng Index slid 3.5% and Japan's Nikkei 225 lost almost 2% as the dollar soared to 5 1/2 year highs against the Japanese yen. However, South Korea's Composite Index jumped 2.8% after billionaire financier George Soros said
he was considering a "quite substantial" investment in the nation.
TECHNOLOGY STOCKS
Nestcape Communications (NSCP) was a highlight on Wall Street Monday, falling 4 13/16 to 18 9/16 after posting a warning about its fourth quarter results. Citing competitive pressures from Microsoft (MSFT) and a slowdown in Asia, the Internet-browser developer said it will lose as much as 19 cents per share in the quarter (excluding charges), versus expectations that it would gain 14 cents per share. Morgan Stanley Dean Witter downgraded its rating on Netscape to "outperform" from "strong buy."
Microsoft shares fell 3/4 to 130 3/8 amid concern that Netscape's results could tilt the Justice Department's investigation on competition in the browser market in Netscape's favor. There was also weakness in software makers in general amid several warnings from different players in the group: PeopleSoft (PSFT) shed 1 7/8 to 36 and Computer Associates (CA) closed off 1 5/8 to 52 15/16.
Netscape's warning was cited in declines of other Internet-related stocks, including Yahoo! (YHOO), down 3 5/16 to 62 15/16; Lycos (LCOS), which fell 4 1/16 to 35 7/8; and Amazon.com (AMZN), which shed 2 1/2 to 57.
However, America Online (AOL) rose 1 1/2 to 91 1/8 and E*Trade Group (EGRP) climbed 2 3/8 to 25 5/16 after the online trading firm posted fiscal first-quarter earnings of 16 cents per share, 2 cents better than expectations.
Elsewhere in technology, it was mainly a positive session as investors sought to find bargains in many of the industry's leaders that had been roughed up in the fourth quarter. Semiconductor and disk-drive stocks -- two sectors hit particularly hard by worries about Asia -- were back in favor Monday. As evidence of the trend, the Philadelphia Semiconductor Index (SOX) rose 4.05 points to 279.08, outperforming the broader Morgan Stanley High Tech Index (MSH), which gained 2.42 points to 459.54.
In Nasdaq trading, Dell Computer (DELL) gained 2 1/2 to 88 1/4, Intel (INTC) gained 1 7/8 to 74 1/2, and positive comments in the current issue of Barron's helped send shares of Sun Microsystems (SUNW) up 1 3/4 to 43 1/4.
In the semiconductor and equipment group, Applied Materials (AMAT) rose 2 1/8 to 33 1/8, and Novellus Systems (NVLS) gained 1 5/8 to 34 9/16, Adaptec (ADPT) climbed 1 3/4 to 39 1/16, Asyst Technologies (ASYT) closed up 1 3/4 to 22 7/8, Altera (ALTR) gained 2 1/2 to 38 1/8, and KLA-Tencor (KLAC) jumped 2 1/4 to 42 3/4.
On the NYSE, Compaq Computer (CPQ) rose 1 5/8 to 61 1/4, Seagate Technology (SEG) climbed 1 11/16 to 22 5/16, Texas Instruments (TXN) gained 1/2 to 48 5/16, and Lucent Technology (LU) closed up 2 11/16 to 82 1/2.
As with the Nasdaq, there was no unanimity in the tech sector on the Big Board.
Dow components were mixed, with IBM (IBM) overcoming early weakness to rise 13/16 to 106 7/16 while Hewlett-Packard (HWP) dipped 7/16 to 64 1/8. Meanwhile, National Semiconductor (NSM) shed 1 3/16 to 25 13/16, while Motorola (MOT) jumped 1 3/8 to 59 1/2.
Nextlevel Systems (NLV) jumped 1 1/2 to 19 11/16 on word that electronics giant Sony (SNE) has paid $188 million to take a 5% stake in the maker of digital TV set-top devices. Sony shares rose 9/16 to 90 5/8.
ACTIVES
In big industry groups, oil drilling and equipment stocks tumbled along with their Dow brethren, sending the Philadelphia Oil Service Index (OSX) down 6.54 points to 106.01. Leading the downturn were the likes of Smith International (SII), down 2 15/16 to 57 3/16; Schlumberger (SLB), which slid 3 1/16 to 77 5/8; and Halliburton (HAL), which shed 3 1/4 to 47 7/8. Also hit hard were Noble Drilling (NE), down 2 5/16 to 27 1/2; Transocean Offshore (RIG), which fell 2 5/8 to 44 15/16; and Falcon Drilling (FLC), which closed off 2 5/8 to 31 15/16.
Following J.P. Morgan's lead, financial stocks were mainly higher, led by Chase Manhattan (CMB), up 1 13/16 to 112 7/16, Bankers Trust (BT), which rose 2 5/16 to 115 1/4, Merrill Lynch (MER), up 2 3/16 to 73 11/16, and NationsBank (NB), which closed up 1 11/16 to 62 7/16.
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