MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 16, 1998 (2)
Inside the Market
Taking sides in the Great Market Divide - By PATRICK BLOOMFIELD
Right up to the final hour of trading Friday, the nice little bear market rally had tended to be kinder to Wall Street than Bay Street.
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Our stocks lagged their U.S. counterparts Monday. Then the Toronto Stock Exchange's 300-stock composite took off with a discernible flashing of golden wings, as bullion prices bounced off their recent lows.
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That, in turn, restored some dignity to the battered natural resource sector, though it did somewhat less for the previous stars of the market spectrum - the major banks. Come Friday's close and the TSE 300 had a somewhat better gain than the Dow.
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That whiff of fresh life in natural resource stocks tells a lot about today's Great Market Divide.
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On one side are the bears, perceiving risk on every side - understandably so. Whether one is talking about European banks or the order books of big aircraft manufacturers, the ripples of the collapse of confidence in Asia are spreading.
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Back on the North American ranch, for instance, mutual fund investors are digesting the message that double-digit returns are no longer an assured benefit of paying somebody else 2%-plus to manage one's money.
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The great wash of savings into equity mutual funds, which drove stock prices so relentlessly higher, looks to be leveling off. Money is being diverted into bonds.
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When buyers lose appetite, the stage is left open for routine sellers, who are also with us, with consequent stock price erosion. And that can have more than a mere market effect. It can affect consumer confidence, the current jewel in the crown of the Canadian and U.S. economies. Being human, we are all less inclined to throw our money around when the value of our retirement savings is shrinking rather than rising.
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On the other side of the Great Investment Divide, however, are the value players, the very people who come to every bear market's rescue. Whenever there is perceived risk, the momentum crowd and the market timers transfer it to them.
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After all, these oft-scorned value players have learned a thing or two in their time. They have learned to live with the perceived risk of buying stocks or stock sectors at fire-sale prices, when nobody else wants to look at them. Experience tells them that if you are prepared to stick with your fire-sale buys for 18 months or more, you generally qualify for handsome rewards. They make buying low and selling high come true.
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One only has to glance at natural resource stock valuations in particular to note that there is a market fire-sale on, as value investor Irwin Michael, founder and prime mover of the singularly successful ABC group of mutual funds, stresses in his latest missive to fundholders.
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Michael started 1997 believing that the Canadian economy was "all dressed up and ready to go" - and still holds to that view. His major concern is that if we Canadians fail to take full advantage of the sale, foreign investors will do it for us, making the most of the current buying power of the greenback.
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Michael notes that Canadian corporate price and balance sheet ratios are significantly lower than those of comparable companies outside our borders (hardly surprising when one looks back at the underperformance of our major market indexes).
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Michael points in particular to the oil and gas, forest, mining and steel making sectors. He is not the only value player to be sifting through these sectors. I noted recently that the wily folk at Trimark, who were smart enough to build up spare cash ahead of the price tumble, have been doing likewise.
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Michael offers another potential compensation for today's troubled times. The murkier the Asian scene, the greater potential for a massive shift of investment monies to the relative safety of this continent. If the flight to safety were to build up, then Michael can envisage Canadian and U.S. stock markets being driven to new highs.
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It's the old, old market story. Reward rises with risk, and the greatest rewards are earned when scared investors toss out the baby with the bathwater and send some stocks tumbling to levels that more than discount the risk. Which is what Michael believes is happening right now.
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Gold stocks enjoy a mini rush -- By WILLIAM HANLEY
It used to be said that an ounce of gold should buy a good suit.
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Well, don't show up at Harry Rosen brandishing $415 and demanding to see the Armanis. But gold's rise above US$290 (C$415) an ounce on Friday, with an intraday high of US$296, capped one of gold's better weeks since dressing-down Fridays came into fashion and gold doffed its image as a bespoke investment.
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Gold has a long way to go to get back even to where it was two years ago (at US$410), never mind the US$800 in 1979 that would have bought you two Armanis. But the week's action no doubt has the gold bugs dreaming of updating their threadbare wardrobes.
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The question now: is this flurry of optimism warranted or are the bugs just being measured up for yet another disappointment?
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The first part of the answer lies in why bullion advanced so rapidly this week from around US$278 on Monday.
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There are a number of reasons, beginning with the obvious one that it went up because it had been going down to oversold regions. This is known as a technical factor.
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Other points to consider include:
* The US$10 intraday spurt Friday was likely triggered by panicking short-sellers rushing to cover their positions and cut possible losses. To cover, shorts must buy gold, thereby driving up the price.
* Some traders noted that as the Chinese New Year approaches, Asians are buying gold jewelry to give as New Year gifts. (We are not so sure about this one, but we are willing to give the benefit of the doubt.)
* The Commodity Research Bureau index, which tracks a basket or hard and soft commodities and is often seen as a gauge of sentiment about inflation, rose strongly this week after declining steadily for weeks. This indicates to some observers that inflationary pressures could be reignited.
* Along the same line, the feeling this week was that the worst of the Asian crisis had passed and that deflation is not as much of a threat. Figures issued Friday on U.S. industrial production in December shows a solid economy seemingly unmoved by the events in Asia.
* Meantime, a mild selloff of the US$ against the Japanese yen as Asian markets advanced strongly also gave gold a boost.
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The appetite for gold spilled over into a burst of enthusiasm for the Toronto Stock Exchange's gold stocks, which rallied 14.7% on index in the week. And even the beaten-up base metals stocks, which could really use a healthy dose of inflation (or at least a good inflation scare), took heart from the gold "rushlet".
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The rush out of gold over the past few years has been largely sparked by central bank selling. But those who believe gold has bottomed say those sales are insignificant in relation to the vast amounts held by the nations, such as the U.S., that hold the biggest reserves.
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Another card up the gold bulls' sleeve is the argument, long presented by Quantum Research's Bob Hoye, that gold has fared well in times of deflation.
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Yes, the bugs have plenty of reasons that gold should be higher. And while general investor sentiment about gold might not have completely turned, further gains in the price could build a momentum play, the reverse of the play that has put the gold industry in a straitjacket.
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Indeed, it might go up because it's going up. But don't expect the gold bugs to be out shopping for new Armanis if gold rallies. They will do what they have always done: buy more gold.
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We don't particularly like gold as an "investment", preferring the more senior gold stocks. But we don't dismiss bullion and the junior explorers as a speculation.
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Other News
First fallout from Asia financial crisis reaches Europe
BERLIN (AP) - Asia's economic crisis is being felt in Europe, where financial houses face layoffs or lower ratings, investments are being put on hold and corporate executives wait nervously to see the effect on their bottom lines.
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But experts said this week they don't expect the broader impact to be as serious in Europe as across the Atlantic.
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"European companies are probably slightly less exposed to Asian markets than their American equivalents," said Peter Dixon, senior economist at Commerzbank in Frankfurt.
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While about 30 per cent of U.S. exports go to Asia, the figure is considerably less for Europe, he noted: "So, I wouldn't expect to see the same impact from a downturn in demand."
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Yet some sectors are especially vulnerable, including banks and companies working on big infrastructure projects, such as highways, dams and power plants.
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Asian leaders are under pressure from the International Monetary Fund and other donors to close insolvent banks and rein in government spending.
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Moody's Investors Service placed French state-owned bank Credit Lyonnais S.A. under review this week for possible downgrading because of its exposure to troubled banks in South Korea, Indonesia, Thailand and Malaysia.
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Separately, Moody's noted that some big German banks also were vulnerable because of the globalization of their business. Most big German banks have exposure of between $20 billion and $30 billion each in the region, Dixon says.
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Meanwhile, British-based Schroders Securities is firing about 220 people from its Asia Pacific securities division in Hong Kong. It offered no explanation, but news reports have said the company was hit by falling profits because of Asia's financial troubles.
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Also this week, Swiss-Swedish engineering firm Asea Brown Boveri said Asia's troubles could cost the company's German power generation subsidiary up to $550 million in orders.
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Siemens spokesman Thomas Weber says none of the projects his company is involved with in Asia have been cancelled or postponed - "yet." But ask me what I expect for the next half year, . . .it's very hard to say," he said.
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Meanwhile, the Asian crisis appears to be causing some Asian companies to rethink their plans for expansion into Europe.
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South Korea's Daewoo Electronics is suspending indefinitely a planned $280 million plant in eastern France because of financial problems at home. The plant would have brought at least 700 jobs to Thionville, where unemployment is at 11 per cent.
But Japan's automobile giant Toyota has announced plans in the last month to build its second European car plant in northern France and to expand engine production at its factory in northern Wales.
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