MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURSDAY, JANUARY 15, 1998 (1)
Friday, January 16, 1998
Earnings jitters resurface - By THE FINANCIAL POST
Earnings worries and continuing nervousness about the effects of the Asian economic crisis sparked declines on Wall and Bay streets, but the gold group managed its best three-day rally in a decade
The Dow Jones industrial average fell 92.92 points, or 1.2%, to 7691.77. The Standard & Poor's 500 composite fell 7.21 points, or 0.8%, to 950.73. The Nasdaq composite index was off 1.7 points at 1547.06.
In the broader market, declining issues led advances 15 to 13 on the New York Stock Exchange.
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Volume was a moderate 573 million shares, down from 596.9 million shares traded on Wednesday.
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Analysts said the market was dragged down by jitters generated by the latest earnings reports and continued nervousness about Asia. "There are so many problems in the Pacific Basin and we don't yet know the ripple effect," said Kenneth Ducey, director of trading at Bankers Trust's BT Brokerage.
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But some technology stocks were steady, particularly large techs. Among the big movers, ADC Telecommunications Inc. (ADCT/Nasdaq) fell more than 15% after analysts downgraded the stock on concerns that the company's earnings could be hurt by a possible slowdown in spending by the Baby Bells. ADC, which makes transmission, networking and cable management products, dropped US$59 1/816 to US$307 1/816 on the Nasdaq Stock Market, where it was the most active issue.
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Canadian stocks also fell after a decline in Hong Kong equities raised concern that waning Asian demand for Canadian exports would trim corporate profits.
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Gold producers tempered the decline as the gold industry group staged its biggest three-day rally in a decade.
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The Toronto Stock Exchange 300 composite index fell 24.12 points, or 0.4%, to 6327.01 after slipping as low as 6309 earlier in the session. "People are seeing the potential for more problems in Asia and that is not going to change," said Jack Cook, a vice-president of Scotia Investment Management Ltd.
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Computer-related and telecommunications issues like Northern Telecom Ltd. and Newbridge Networks Corp., hammered in recent weeks by tumbling Asian markets and slowing economies, fell again. Newbridge shares (NNC/TSE) fell $2.10 to $42.10 and Nortel (NTL/TSE) dipped $2.70 to $61.15.
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Major banks were also weaker. Toronto-Dominion Bank (TD/TSE) fell $1.65 to $50.55 and Royal Bank of Canada (RY/TSE) dropped $1.35 to $74.75.
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Gold producers tempered market declines amid higher bullion prices. The gold subgroup has gained 12.6% in the past three days.ÿBarrick Gold Corp. (ABX/TSE) rose $1.15 to $25.90, Placer Dome Inc. (PDG/TSE) gained $1.10 to $17.70 and Franco-Nevada Mining Corp. (FN/TSE) rose $1.05 to $28.
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The price of bullion for next- month delivery rose US$4 to US$286.40 an ounce on the Comex division of the New York Mercantile Exchange on the back of greater demand for jewelry ahead of the Chinese New Year on Jan. 28, analysts said.
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Talisman Energy Inc. (TLM/TSE) rose 60› to $36.85 and Berkley Petroleum Corp. (BKP/TSE) rose 90› to $14.10 on speculation the Organization of Petroleum-Exporting Countries could meet to review its November decision to increase production by 10%. That decision has helped send oil prices 29% lower since last October.
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Other major Canadian indexes closed mixed. The Montreal Exchange market portfolio closed down 24.48 points, or 0.8%, at 3255.28. The Vancouver Stock Exchange rose 1.85 points, or 0.3%, to 584.16.
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Major international markets ended mixed.
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London: British shares rose despite sharp losses in Hong Kong overnight and an uneasy performance from New York. The FT-SE 100 index climbed 58.9 points, or 1.2%, to 5165.8 - its third consecutive rise.
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Frankfurt: German stocks finished barely changed from their previous close after spending the day trapped in a tight range with investors still wary after stock losses in Hong Kong and Indonesia. The Dax index closed at 4148.34, down 41.74 points or 1%.
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Hong Kong: Stocks tumbled sharply, triggered by worries about an increase in bad debts following a steep fall in housing prices, analysts said. The Hang Seng index closed at 8578.98, down 647.57 points or 7%.
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Tokyo: The Japanese market was closed for a holiday. On Wednesday, the 225-share Nikkei average fell 366.04 points, or 2.5%, to 15,121.98.
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Sydney: Profit-taking after two days of strong gains pushed the Australian stock market to a lower close, with the natural resources sector hardest hit. The all ordinaries index closed at 2584.5, down 20.8 points or 0.8%.
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HOT STOCKS
MAAX INC. (MXA/ME), up 30› to $12.50, on volume of 6,200 shares. The shares of the Quebec-based bathroom fixture manufacturer have risen from Monday's 52-week low of $11.75, when the company announced third-quarter numbers slightly below analysts'
expectations. Yesterday, Maax announced plans to buy Pennsylvania-based KSD Industries Inc., which makes showers. Ron Schwarz, of CIBC Wood Gundy Securities Inc., termed KSD "a good acquisition that will grow earnings." "The industry in general is buoyant with strong housing starts and low mortgage rates," said Schwarz .
PHILIP SERVICES CORP. (PHV/TSE), up $1.35 to $16.50, on volume of 501,151 shares. Michael Hoffman, analyst at Credit Suisse First Boston, started coverage of the Hamilton, Ont.-based scrap services and waste management firm with a "buy" recommendation. "The concerns about acquisitions and metal exposure anxiety are overblown," said Hoffman. The company makes most of its revenue from towing metals as opposed to the spread in metal prices, and at this price it is very attractive, he said.
MOSAID TECHNOLOGIES INC. (MSD/TSE), up 80› to $9.90, on volume of 11,975 shares. The stock of the semiconductor manufacturer regained some ground after touching a low of $8.25 when the company said Tuesday its third- and fourth-quarter earnings will be below expectations. "There is no indication that the company is losing market share but that customers just aren't buying," said Brian Piccioni of Marleau
Lemire Securities Inc. If the Asian situation and semiconductor market regain strength within two years Mosaid could go back to the $20 to $30 level, said Piccioni. "This is not a stock issue but an issue of whether Mosaid will return to its original rates of growth."
PRIME RESOURCE GROUP INC. (PRU/TSE), up 90› to $10.15, on volume of 56,300 shares. "The short-term catalyst is a rally in silver [prices] because one-third of the company's revenue is from their Eskay Creek silver deposit," said Douglas Cohen at Morgan Stanley Dean Witter Discover & Co. Eskay Creek, in British Columbia, is also an attractive gold exploration story which came into operation in early 1995, said Cohen. "Prime is one of the hidden jewels in the sector and is an attractive long-term play."
BIOVAIL CORP. INTERNATIONAL (BVF/TSE), down $2.25 to $47.75, on volume of 23,730 shares. The company's chairman, Eugene Melnyk, bought 937,000 shares in the company last year to bring his total holdings to 6.7 million, or 25.2% of the shares outstanding. "For investment purposes, I believe Biovail is undervalued," said Melnyk, who expects Biovail to win U.S Food and Drug Administration approval for a number of its products in 1998.
GUYANOR RESOURCES S.A. (GRLb/TSE), up 50› to $2.10, on volume of 25,890 shares. The mineral exploration company, which is 68% owned by Golden Star Resources Ltd. (GSC/TSE), announced positive results from drilling in French Guiana. "We are talking about a massive sulfide deposit where you get attractive grades of gold, silver, copper and zinc," said Richard Winters, vice-president of corporate development for Golden Star. "An interesting discovery like this has interest even in a bad environment."
INCO LTD. (N/TSE), down 10› to $21.85, on volume of 653,557 shares. The shares of Canada's nickel giant dipped as the price of the metal fell to a four-year low. Three-month forward contracts for nickel on the London Metal Exchange fell as much as US$175, or 3%, to US$5,550 a tonne. It later recovered to close off US$120 at $5,605 a tonne. The drop in the commodity's price is blamed on a surge of exports from Russia, coupled with slower economic growth from Asia where nickel demand is the highest int he world.
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Street's shining star Intel burns a little dimmer -- By WILLIAM HANLEY
It used to be said with some accuracy that the stock market would have an up year if the National Football Conference team won the Super Bowl.
Since the NFC has won the game with depressing regularity and stocks have produced blowouts the past three years, the saying has been tailored to fit the times: the stock market will have an up year if either the NFC or American Football Conference wins.
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With the Stupor Bore and another NFC blowout looming on Jan. 25, it is interesting to note that semiconductor leader Intel Corp., which has been technology's equivalent of a consistent championship team, is getting into the act with a concept that is oh so '90s. It has created a first-of-a-kind commercial where erstwhile couch potatoes select the ending by casting votes on the Internet, perhaps providing the only suspense for tens of millions of viewers.
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Viewers will be asked to log on to Intel's Web site to solve a mystery. The characters are the "familiar Intel BunnyPeople characters," the company says. "A Pentium(R) II processor is missing from the clean room, and the detective (with the voice of comedian Steve Martin) needs the help of the TV/Web audience to solve the mystery."
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As intriguing as this news might have been in some quarters yesterday, Wall Street was otherwise engaged trying to figure out an Intel mystery of its own in the most interactive way it knows: is the stock a "buy" or a "sell" on the evidence presented this week?
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Intel is a wonderful company. With Microsoft Corp., it has burned the brightest in the technology firmament of the '90s and its legendary chairman and chief executive officer, Andrew Grove, has just been rewarded with Time magazine's Man of the Year award.
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Unfortunately, the fourth-quarter results announced after the market closed on Tuesday were a block off the old chip. They confirm that Intel is no longer a growth company in the classic market sense. And that has some observers wondering what that might mean for the sector - indeed, the market - if one of the best and brightest tech starts has begun to dim.
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Much was made of the fact that Intel beat analysts' expectations with the fourth-quarter profit. Yet profit was down 9% on the year and, perhaps more ominously, revenue was stagnant and gross margins were down and expected to go lower still.
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Predictably, the investment community initially reacted favorably, even though Intel had groomed the market expertly to expect less than was delivered. But the less is more ploy did not hold up for long and Intel stock (intc/nasdaq) dropped US$1 1/2 to US$757 1/816 Wednesday on massive volume while other tech stocks enjoyed a positive session. It lost ground again yesterday, closing down 1/8 at US$755 1/816. Intel hit a high of US$102 last year, but now is just slightly above where it was a year ago, mirroring the stagnation in revenue.
And Intel's action yesterday more or less mirrored that of the general U.S. market, which acted confused and tired after three straight advances. The questions hanging over Intel are about the same as those looming over most of the market: whither earnings in light of the Asian crisis and increased competition?
Highlighting the relative importance that Intel has in the U.S. market, Moody's Investor Services notes that the 8.7% of prospective fourth-quarter earnings announced up to Wednesday were up only 4.7% over year-earlier levels when including Intel, but are up 10.7% when excluding Intel.
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"The year-to-year decline in net profit reported by Intel and Intel's expectation that first-quarter revenues will be flat compared to fourth-quarter revenues portend slower core earnings growth for U.S. corporations in early 1998," Moody's concludes.
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Oh well, pass the chips and bring on the BunnyPeople.
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Just what Asian flu means is not yet clear -- By PATRICK BLOOMFIELD
What is Asian flu? That may sound like a naive question, but I ask it in all seriousness, because it has been coined as a nice phrase that says everything about the symptoms of Asian woes (mammoth currency and stock price declines) but nothing about the disease.
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The overused phrase also fits conveniently into headlines, introductory paragraphs and news bytes.
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The fact that few of the writers and broadcasters who use it have the slightest inkling of what it is really is a minor consideration.
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And who can blame them?
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For some years I bluffed myself that my meetings with Hong Kong-based money managers, together with my various readings, told me something about what was going on in those tiger economies across the Pacific.
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I now find that I knew nothing, other than the justifiable suspicion that, by the time Canadian mutual fund companies were trumpeting the virtues of investing in those parts some years ago, it was probably time to get out.
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What has now become apparent is that too many of those hot stock markets were being warmed by the imprudent use of a flood of foreign investment monies and were, at the same time, being muddied by overambitious mega projects, nepotism and corruption.
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It needed only one such high spender to be identified by the foreign exchange markets (it turned out to be Malaysia) for Pandora's box to be opened.
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So what is this flu? The answer is gradually enfolding and looks to be a complex one.
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The first fears that swept North American stock markets were the obvious ones that the precipitous declines of the currencies of various Asian nations would depress Asian demand for North American exports and precipitate a flood of cheap goods into our markets.
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Some of those twin effects are already happening, as Canadian west coast forest companies and base metal producers will attest. Schaumberg, Ill.-based Motorola Inc. reported Monday that its cellular phone sales had fallen in Asia and that major orders for cellphone systems had dropped significantly. According to the Wall Street Journal yesterday, Asian chemical companies have been dumping their inventories (and some product prices with them) just to raise cash.
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That, in turn, is disturbing. What is now happening in countries like South Korea is not so much that dreaded watchword deflation as a cash crisis and a drastic loss of wealth. In an interview with the Globe and Mail yesterday, Harvard economist Jeffrey Sachs talked of profitable South Korean auto manufacturers running short of parts because suppliers could no longer raise the working capital to make them.
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As anybody who has had the pleasure of funding a payroll will attest, this kind of thing happens when banks get into, or are ordered into, a credit crunch. Good customers get their lines of credit pulled along with the bad.
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Move on from that and consider the latest disclosure from Japan's ministry of finance that suggests of all problem bank loans about $236 billion could turn bad. Of that estimate, $25 billion is already considered bad and $108 billion has a high risk of becoming so.
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This is a horrible destruction of wealth, which the ministry quantified only in the hope of getting through legislation to bring public monies to the rescue. It also raises questions about global liquidity, which is a significant bond market consideration.
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The disclosure has a cynical silver lining - at least when viewed from the North American business perspective. If competitors across the Pacific face a cash crunch, which some of them undoubtedly do, the threat to North America profit margins could be ameliorated. In addition, the acquisitive boardrooms of North America's global players are already eyeing opportunities to pick up cheap assets.
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That has to be a harsh Darwinian view. The human truth is that rising unemployment and growing political tensions in some of the worst affected developing nations almost certainly lie ahead. And we have yet to get an inkling of the eventual fallout in China, which is going through a crucial period of transition and where growth is already expected to slow drastically.
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Putting it all together, I get the feeling that we could be moving into a period of financial market hiatus, with money moving back and forward between the bond and stock markets according to the news and sentiment of the day - until the economic road ahead can be viewed with more certainty.
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We could even see some short-run stock price rallies, as bargain hunters sift through some of the disaster areas.
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