MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, JANUARY 21, 1998 (1)
Thursday, January 22, 1998
Blue-chip stocks reeled in New York as IBM reawakened the Street's corporate
earnings fears. Profit concerns also called a halt to a three-day advance in Toronto
The Dow Jones industrial average fell 78.72 points, or 1%, to 7794.4, wiping out a big
chunk of Tuesday's 120-point gain.
The Nasdaq composite index was off 2.22 points at 1587.92. The Standard & Poor's 500
composite index fell 7.82 points, or 0.8%, to 970.78.
Declining issues beat advancers 17 to 10 on active volume of 631 million shares on the
New York Stock Exchange, compared with 644.8 million shares traded on Tuesday.
The catalyst for the decline was International Business Machines Corp. saying the Asian
currency crisis eroded its profits and could hit future earnings as well.
"The IBM story is the market in a microcosm - we are still very worried about Asia,"
said Courtney Smith, chief investment officer for Orbitex Management. "We are going to
have to get through the earnings season before we can turn around."
IBM shares (IBM/NYSE) fell US$7 5/8 to US$100 1/16 in heavy trading. The world's
largest computer maker said after Tuesday's close that its fourth-quarter earnings were
up 5% because of strong growth in North America. But the earnings were still short of
Wall Street estimates and a slowdown in Asia and pricing pressures are still working
against the company in the current quarter.
Technology stocks held up well, shored up by strength in computer chip stocks and a
strong profit report from personal computer-maker Compaq Computer Corp.
Compaq shares (CPQ/NYSE) rose US$2 3/16 to US$32 3/16 after the company posted
fourth-quarter earnings that surpassed Wall Street expectations and said it expects
strength in North America and Europe to offset any weakness in Asia over the next six
months.
Banking stocks fell and big-name drug firms slipped, giving up nearly half of Tuesday's
gains, which were triggered by news of merger talks between American Home Products
Corp. and SmithKline Beecham PLC.
American Home (AHP/NYSE) was off US$3 11/16 to US$90 9/16 and SmithKline
American depositary receipts (SBH/NYSE) fell US$2 1/4 to US$57 5/16.
The Toronto Stock Exchange 300 composite index fell 14.88 points, or 0.2% to 6494.57.
About 107.4 million shares changed hands, compared with 110.9 million shares traded on
Tuesday.
Telecommunications equipment makers and other computer-related companies fell after
IBM's results.
Northern Telecom Ltd. (NTL/TSE) lost $1.85 to $61.70 and Cognos Inc. (CSN/TSE) fell
35› to $31.25. BCE Inc. (BCE/TSE), which owns 51% of Nortel, fell 20› to $47.20.
Banks paced the decline.
Bank of Nova Scotia (BNS/TSE) fell 55› to $59.50 and Canadian Imperial Bank of
Commerce (CM/TSE) fell 40› to $37.95.
"Banks are under pressure and the blame is being laid on Southeast Asia," said Rick
Hutcheon, chief investment officer with OHA Investment Management Ltd.
Banks were also hurt by concern the Bank of Canada may raise interest rates to support
the C$, which closed at a new low of US69.2›.
"Banks can only increase profits if interest rates are steady, and with the C$ falling the
Bank of Canada may raise rates," said Jay Spissinger, a broker with C.M. Oliver & Co.
MacMillan Bloedel Ltd. (MB/TSE) rose $1.20 to $16.80 to lead forest products issues
higher after Canada's biggest forestry company said it will cut its workforce as part of
restructuring program to reduce costs and increase efficiency.
Other major Canadian markets closed mixed.
The Montreal Exchange portfolio fell 27.41 points, or 0.8%, to 3300.46.
The Vancouver Stock Exchange index edged up 0.01 of a point to 594.07.
For a scorecard of trading activity on all Canadian Stock Exchanges, go
here quote.yahoo.com .
The major overseas markets closed mostly lower.
London: Britain's leading share index ended a choppy session with small losses, spoiling a
six-day winning streak. The FT-SE 100 index closed at 5272.3, down 5.9 points.
Frankfurt: German shares extended losses as a downturn on Wall Street added to
pressure from profit-taking. The Dax index closed at 4282.84, down 25.07 points or
0.6%.
Tokyo: Japanese stocks extended gains to a sixth day as the market was once again
heartened by a senior policy-maker's hint of an additional economic package. The
225-share Nikkei average closed at 16,684.42, up 317.89 points or 1.9%.
Hong Kong: Stocks fell as investors eyed a fragile Indonesian rupiah and an uncertain
local economic outlook. The Hang Seng index closed down 186.9 points, or 2%, at
9246.8.
Sydney: Australian shares closed weaker on concerns about Asia and local exposure to
the region. The all ordinaries index closed at 2622.8, down 16.6 points or 0.6%.
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Market Eye -- A tough act to follow
By WILLIAM HANLEY -- The Financial Post
It is one of those days when the markets play out like a three-ring circus - minus the
ringmaster. In one ring the stock market, with the Dow Jones industrial average buckling
under the weight of Big Blew. In the second, the C$ - aka the western peso - performs a
swan dive to a record closing low as the Bank of Canada buys heavily. In the third ring
are the White House follies, keeping trading floors across the continent in stitches and
threatening to put the markets in traction.
Yes, it's a great day to be a member of the chatterati. All of the above add to the cloak
of uncertainty that the markets can't seem to shake off in 1998.
Anyway, it is as good a time as any to take a look at some of the sideshows
around the big top.
With the Asian crisis depressing demand, the fundamentals hardly look strong for
commodities. But the Bullish Review of Commodity Insiders newsletter, published out of
Rosemount, Minn., says it detects buy signals in a majority of the physical commodity
markets, including copper, palladium, platinum, lumber, crude oil, heating oil and and
natural gas.
The oddly titled Bullish Review is closely followed because it closely follows the behavior
of the big commercial hedgers, who tend to get it right, not the speculators. If the
newsletter is right, those speculators shorting these commodities are in for a pile of grief.
As Bob Hoye of Vancouver's Quantum Research notes: "The deflation story is
overbought and the commodities are oversold."
Bullish Review also says that though commercial traders are long the commodities, they
are net short the U.S. stock indexes, which likely means "a large number of trend
changes are imminent."
As the Street looks meaner and meaner in its view of Mr. Rogers' neighborhood, with
Rogers Communications B shares dropping 60› to a record low close of $5.05 yesterday,
it is increasingly obvious that drastic measures will be necessary.
The Rogers group of companies has debt of $5.4 billion, so there is no equity left. It
appears the most likely course is for some patient soul to get debtholders to the table to
figure out how to salvage their investments and save the group from a fate worse than
debt. Yesterday's 11% plunge in Rogers B stock (RCIb/TSE) is a sign that such a move
may be imminent.
Speaking of dire straits, the Corel Corp. (COS/TSE) saga continues to fascinate those
who cannot for the life of them figure out why the market is still willing to value the
company at $156 million - at yesterday's closing price of $2.50 a share. After all, the
Ottawa-based software company lost US$232 million last year on sales of only US$260
million. That the shares have not melted down to pennies apiece is down to the fact that
arbitrageurs are making a big bet the company will turn a profit this half. It won't have to
sell much to do that. And with a clean balance sheet, virtually no debt and $30 million in
cash on hand at the end of the fourth quarter, Corel could reward the speculators.
Labatt Brewing Co. Ltd., taken private by Interbrew SA in 1995, does not have to
publish its results. But it does, it says, to keep its employees, customers and suppliers up
with its progress. Of course, if things were going badly, it would not bother. This week's
results allowed it to taunt arch-rival Molson Breweries with an "in-your-face" claim to
the No. 1 spot in Canadian brewing.
But there could be another motive: Labatt may be keeping the capital markets abreast of
its winning ways as a prelude to Interbrew taking it public down the road when it needs
money to expand into new markets. Indeed, Michael Palmer of Loewen Ondaatje
McCutcheon Ltd. says Interbrew itself may go public one day.
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Hot Stocks
Thursday, January 22, 1998
PHILIP SERVICES CORP. (PHV/TSE), up 55› to $18.50, on volume of 564,623
shares. The Hamilton, Ont.-based scrap services and waste management firm's shares
received a boost yesterday when New York-based analyst Alan Pavese, of Goldman
Sachs & Co., initiated coverage on the stock and added it to his "recommend" list. Last
week, Credit Suisse First Boston's Michael Hoffman initiated coverage on the stock with
a "buy" rating. Hoffman said Philip "is looking to sell non-core assets which will
accelerate its return on capital."
ROGERS COMMUNICATIONS INC. (RCIb/TSE), down 60› to a 52-week low of
$5.05, on volume of 2.3 million shares. The shares have slipped 7% this week on
speculation that they will soon be removed from one or more of the Toronto Stock
Exchange's subindexes, and face a sell-off by index fund managers, said John
Henderson, analyst at Scotia Capital Markets. Index removal or inclusion is based on a
company's market capitalization, relative to the rest of the stocks in the index. Rogers'
shares are included in the TSE 300 composite index, the TSE 100 index and the TSE 35
index. A recent review of the TSE 300 and TSE 35 saw no changes to Rogers' status,
but another review is planned for the end of March.
EURO-NEVADA MINING CORP. LTD. (EN/TSE), up $1.85 to $20, on volume of
841,727 shares. Franco-Nevada Mining Corp. Ltd. (FN/TSE), up $2.25 to $32, on
volume of 156,819 shares. The shares of the twin gold mining companies have been
rising
steadily in the past week. Bill Belovay, analyst at CIBC Wood Gundy Securities Inc.,
said that Euro-Nevada would soon release resource and reserve updates for the Midas
property. "That must be fuelling the stock," he said. The Midas property in Nevada is a
joint venture gold mine shared equally between the two companies.
CATERPILLAR INC. (CAT/NYSE), up US$1 11/16 to US$46 11/16, on volume
of 4.9 million shares. The Illinois-based manufacturer of heavy equipment reported
record high fourth-quarter results, calming concerns about the Asian crisis. Revenue rose
16%, net income jumped 18% and income per share was up 22% to US$1.20, US7›
higher than analysts' estimates compiled by market research firm First Call Inc.
COCA-COLA ENTERPRISES INC. (CCE/ NYSE), down US$2 3/4 to US$33 1/8, on
volume of 1.7 million shares. The world's largest soft drink bottler was downgraded this
week by a handful of U.S brokerage firms. Salomon Smith Barney Inc. analyst Jennifer
Solomon lowered her rating to "outperform" from "buy". Analysts insist the downgrades
are not an indication of changing fundamentals within the firm. "We believe that CCE is
a great way to play the Coca-Cola story without the risks associated with Asian
currency and emerging markets," said Solomon.
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Some bargains to be had in Canadian equities -- By SONITA HORVITCH
Tony Massie, vice-president of investments at Global Strategy Inc., is bullish about the
Canadian equity market and has been taking advantage of the weaker market to buy
stocks.
Vancouver-based Massie took profits in the December market run-up. He has been
buying stocks that went "on sale" in January and are now bargains.
The Global Strategy Canada Growth Fund, Global Strategy Gold Plus Fund and Global
Strategy Income Plus Fund (a balanced fund) all have just over 20% in cash, which
Massie hopes to deploy.
The Toronto Stock Exchange 300 composite index could provide a return of 10% this
year, said Massie. Most of the bad news regarding the resource sector (which has
already had a major correction) is factored into the TSE, he said.
His call is that Canada should outperform the U.S. equity market by yearend. The
reason, he said, is that there are likely to be more earnings disappointments in the U.S.
than in Canada. "The unusual strength of the US$ will affect the international earnings of
U.S. corporations."
Massie's approach to Canadian equities is fairly defensive. He has a relatively low
weighting in the resource sector but is starting to buy select steel and forest products
stocks as some of them were oversold, he said.
In the financial services sector, stocks he likes are:
Midland Walwyn Inc. (MWI/TSE), which closed recently at $16.15 and has a 52-week
trading range of $23.75 to $11.75. The Toronto-based investment dealer has a strong
retail franchise and wealth management presence.
Mutual fund manager Mackenzie Financial Corp. has a major stake in the company and
"offers good sponsorship," said Massie. "Midland's stock has been badly beaten down on
concerns about the turmoil in equity markets, but I think that these concerns have been
overdone and the stock represents good value at current levels."
Massie also likes Toronto-based Mackenzie Financial (MKF/TSE) $16.20
($21.75-$9.25), which has a large stake in the wealth management business and
"represents a good proxy for the Canadian equity market."
A firm favorite of Massie's is Toronto-based Toronto-Dominion Bank (TD/TSE) $51.85
($56.85- $34.25), "which has also carved out an important stake in wealth management
and is expanding this internationally."
Another stock he likes is Hollinger Equity Units (HLGu/TSE) $12 ($13.85-$10.50),
created last year as part of a reorganization of the Toronto-based international
newspaper company, which undertook to convert the equity units into preferred shares.
Holders of about 35.6 million equity units tendered their units under the conversion late
last year, but Massie did not. "Here my strategy was to follow the lead of the main
shareholder - Conrad Black."
As a result of the conversion transaction, Black now controls about 61% of Hollinger
Inc. - up considerably from his holding last summer. "By staying with the units
(effectively Hollinger Inc.) we get exposure to the continued growth of Hollinger
International, where most of the group's operating assets are held," Massie said.
He still likes Atco Ltd. (ACOx/TSE) $34.05 ($34.75-$23.55), his selection in this column
July 22 at $28.75. "It has a controlling stake in Canadian Utilities Ltd., a major utility
company."
He also continues to champion Manitoba Telecom Service Inc. (MBT/TSE) $18.05
($18.20-$13.15), his selection in the column Oct. 21 at $15.25. "This is a conservative,
well-run telephone utility."
But overall Massie has been reducing his weighting in the utility sector. "There were
opportunities to take profits."
The money manager has also modestly reduced his holding in two large, integrated
energy companies - Shell Canada Ltd. (SHC/TSE) $24.30 ($29.25-$17.33) and
Petro-Canada (PCA/TSE) $25.90 ($29.85-$18.90) - on concerns about the international
oil price.
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