MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURSDAY, JANUARY 22, 1998 (1)
Friday, January 23, 1998
Lingering doubts about corporate earnings, Asia and the latest sex scandal to hit the White House unsettled Wall Street. Canadian stocks were led lower by banks and utilities on concern about interest rates
The Dow Jones industrial average fell 63.52 points, or 0.8%, at 7730.88.
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The Nasdaq composite index was off 11.41 points, or 0.7%, at 1576.51.
The Standard & Poor's 500 composite index fell 7.77 points, or 0.8%, to 963.04.
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About 649.5 million shares changed hands on the New York Stock Exchange, compared with 631 million shares traded on Wednesday.
Traders said investors were taking a wait-and-see approach to the allegations of misconduct by President Bill Clinton. Nonetheless, the scandal added to uncertainty on the Street. "It does make you nervous, and when people are nervous, they sell stocks," said James Volk, co-director of institutional trading at Jensen Securities.
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The Asian economic situation unsettled investors further after the plunging Indonesian rupiah dragged down markets across the region.
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Oil drillers were among the hardest hit. Heavyweight Schlumberger Ltd. reported lower than expected quarterly profit and said customers' plans to increase exploration and development spending may change when the effect of Asia's economic problems on oil demand becomes more clear. Schlumberger shares (SLB/NYSE) fell US$9 15/16 to US$71 9/16.
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Oil closed US32› lower at US$16.04 a barrel on the New York Mercantile Exchange, after sliding below US$16 earlier in the day.
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Microsoft Corp. shook technology shares after warning late Wednesday that the economic weakness in Asia "clouds the outlook for calendar 1998." But the software giant's shares rebounded after the company and the U.S. Justice Department announced a partial settlement of their antitrust dispute. Microsoft shares (MSFT/Nasdaq) rose US$1 5/8 to US$138 5/8.
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The Toronto Stock Exchange 300 composite index fell 107.41 points, or 1.7%, to 6387.16. About 101.2 million shares changed hands, compared with 107.4 million shares on Wednesday.
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The C$'s slide to a close of US68.81› prompted debate that the Bank of Canada might yet attempt to prop it up by increasing interest rates. Higher rates raise the cost of borrowing, crimping profits of financial institutions.
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Royal Bank of Canada (RY/TSE) fell $2.55 to $71.85, Canadian Imperial Bank of Commerce (CM/TSE) fell $2.05 to $35.90 and Bank of Nova Scotia (BNS/TSE) dropped $3.50 to $56.
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Banks were also hurt by speculation that profit growth will be slower because of Asia's economic woes.
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Gulf Canada Resources Ltd. (GOU/TSE) fell 85› to $7.65, Petro-Canada (PCA/TSE) fell 40› to $25 and Canadian Natural Resources Ltd. (CNQ/TSE) fell $1.40 to $26.90 after crude oil plunged following an American Petroleum Institute report outlining the largest weekly rise in inventories since 1986.
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Nova Corp. (NVA/TSE), which rose 20› to $14.95, was the most actively traded stock in Toronto after it said it was holding merger talks with Trans
Canada Pipelines Ltd. TransCanada (TRP/TSE) fell 90› to $31.
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Gold stocks tempered market declines. Barrick Gold Corp. (ABX/ TSE) rose 20› to $25.80 and Euro-Nevada Mining Corp. (EN/TSE) gained 90› to $20.90 after Anglogold of South Africa - the world's largest gold producer - announced plans to slash its gold output by 17% in 1998. Anglo, which last year produced 213 tonnes of gold, or 9% of global mine supply, said it is trying to eliminate production that has been made unprofitable by a slump in bullion prices.
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Other major Canadian markets closed lower. The Montreal Exchange portfolio fell 56.74 points, or 1.7%, to 3243.72. The Vancouver Stock Exchange index fell 5.89 points, or 0.8%, to 588.18.
The major overseas markets closed lower.
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London: Shares closed lower on a mix of profit-taking, soft Asia markets and a weak opening on Wall Street. The FT-SE 100 index closed at 5253.1, down 19.2 points or 0.4%.
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Frankfurt: German stocks rebounded in late trade but still finished weaker after being dragged down by a soft US$. The Dax index closed at 4220.25, down 62.59 points or 1.5%.
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Tokyo: Japanese stocks fell as investors locked in profits in stocks of blue-chip exporters. The 225-stock Nikkei average closed at 16,405.69, down 278.73 points or 1.7%.
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Hong Kong: Stocks sank to a sharply lower close, pulled down by a crumbling Indonesian rupiah and shaken confidence in the local economy. The Hang Seng index closed at 8883.73, down 363.07 points or 3.9%.
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Sydney: Poorly received first-quarter result from the market's star blue chip of the past year, National Australia Bank Ltd., helped drag Australian stocks lower. The all ordinaries index closed at 2599.4, down 23.4 points or 0.9%.
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C$ hits lowest ever -- By DAVID THOMAS -- Economics Reporter The Financial Post
But analysts say no supportive interest rate hikes are expected from Bank of Canada anytime soon as inflation slowed to a crawl in December
The C$ continued its fall yesterday, trading at the lowest level in history amid a growing consensus that the central bank will not raise interest rates to halt the slide.
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Statistics showing that inflation slowed to a crawl in December further convinced economists that a rate increase is not in the cards.
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The consumer price index declined 0.1% in December, the second straight month of retreating prices.
Overall, inflation fell to a year-over-year rate of 0.7% from 0.9% in November, firmly below the Bank of Canada's target range of 1% to 3%.
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With Asian turmoil expected to slow the economy in 1998, the bank is now expected to abandon its course of higher rates. "The bank is definitely on hold," said Royal Bank of Canada chief economist John McCallum.
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"Circumstances have changed materially since they said they wanted [to raise rates]." Higher rates might support the currency but would risk derailing the economy, he said.
The C$ dropped US0.39› yesterday, drifting past its previous record low of US69.13› to close at US68.81›.
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Despite the C$'s decline, bond markets rallied on the news of tame inflation. Money flowed into bonds and out of interest-sensitive stocks during a jittery session on the Toronto Stock Exchange.
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A climate of low inflation and declining interest rates is good for bonds. Bank stocks, pipelines and utilities all compete with the bond market because they pay steady dividends.
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"The economic picture is a little more cloudy, making stocks a little more risky," said Michael Gregory, an economist with Lehman Brothers Canada Inc.
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The TSE financial services index has been slumping lately as investors fear a weaker market in 1998 will translate into lower brokerage fees and profits at the banks.
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The index fell 4.16% or 326.30 points to 7508.98 yesterday and is now down 9.7% on the year.
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The TSE 300 composite index dropped 1.65% or 107.41 points to 6387.16 and is down 4.7% in 1998. ÿIn currency markets, some investors who were counting on a rate increase to bolster the C$ were selling their positions, according to traders.
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This week, Bank of Canada governor Gordon Thiessen said the "Asian flu" will slow the Canadian economy. The bank's second in command, Bernard Bonin, also hinted the bank may even change course to a policy of lower rates.
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With the threat of inflation subsiding, the weak C$ won't be a big enough threat to prompt higher rates from the bank, economists said. ÿ"I do not think the bank will respond to currency weakness," Gregory said. ÿPummelled by tumbling commodity prices and a growing current account deficit, the C$ will recover when markets turn, he predicted. ÿ"The current direction is correct. It'll trade lower until it gets cheap enough [that] it'll be a screaming buy and bounce back. ÿGregory said it would probably take a hike of 125 to 200 basis points (1.25 to two percentage points) in the bank rate to turn the C$ around. The bank has already raised the rate 100 basis points since Oct. 1.
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In Chile, Prime Minister Jean Chr‚tien echoed Canadian economists by pointing to the benefit to exports of a weaker C$. "I have not seen any exporters complaining about the Canadian dollar," Chr‚tien told Reuters.
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A voyage too far for the C$ -- By WILLIAM HANLEY The Financial Post
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Sixty-nine cents used to be the final frontier. But these are the voyages of the starship Bank of Canada. It's mission: to explore strange new whirls of policy. To boldly go where no Canadian central bankers have gone before.
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Governor Gordon Thiessen, the Captain Quirk of this starship, has been on the bridge, apparently steering the C$ at warp speed down past US71›, US70›, US69› and perhaps into the ultimate adventure of a black hole.
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Actually, the starship Bank of Canada is largely caught in the Klingon-like force field of world economic events. Captain Quirk and his crew could have avoided being snared by the field last summer by boosting interest rates to defend the C$, but, not having a Mr. Spock to point out the error of their ways, missed the chance and left the bank and the C$ exposed to the dreaded speculators.
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Anyway, having gone where no BoC has blundered before, Thiessen & Co. are basically stuck between a buck and a hard place. They will find it hard to raise rates to defend the C$ because the economy does not need any cooling off. But if they do not raise rates or if the market does not let up on the C$, the downside might be considerable.
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The US69› level was fixed in most Canadians' minds as a psychological barrier - a taboo that was not to be violated. In fact, many observers argue that as currencies go in this US$-dominated world, the C$ should be lower to help out key export industries - and damn the consequences for the snowbirds and others who see their spending power wilt in the southern sun.
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As for the markets, investments in Canadian securities when the C$ is falling are not attractive to foreign buyers. But Canadian assets are beginning to look awfully cheap and bargain-hunters will look around.
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On balance, a lower C$ and what may have to be done to stop its fall are not good news for our markets.
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It is of little comfort to note that the loonie has fared better against the greenback than just about all other currencies. Of even less comfort is the fact that it probably could have fared even better were it not for a couple of missteps by Thiessen and his team.
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For now, though, Captain Quirk is at the helm, and the course has been set, with the eventual landing site for the C$ unknown.
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As the Toronto market sank yesterday, partly under the weight of the falling C$, it was difficult to counsel calm. But it is probably best if the bank makes no sudden, hasty moves.
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Someone somewhere in the U.S. is probably even now turning out a bumper sticker reading: "Honk if you haven't had sex with Bill Clinton."
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The story of the president's possible sexual indiscretion is a source of wicked scatological humor in trading rooms across the continent.
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But it would be a mistake to ascribe much of the markets' turmoil the past couple of days to Willygate. Sure, the markets do not like the idea of the political instability in prospect. But the talk of a debt moratorium by the Indonesian government and the continuing earnings warnings are what traders are focusing on this week.
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The circus atmosphere building in Washington might begin to rekindle memories of Watergate and the agonizing fall of President Richard Nixon in August 1984. The instability and tenor of the times likely inflicted some damage on the markets back then. But the Mideast war of 1973 and later oil shock to the economy were largely responsible for dragging the Dow Jones industrial average down almost 50% over the two years to the end of 1974. ÿMichael Metz, chief strategist at CIBC Oppenheimer Corp. in New York, concedes that Willygate might make it easier for some people to sell rather than buy.
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"The fact is, though, that less government is best for Wall Street and that's what we've been getting from this administration," Metz says. "And we can expect a passive, ineffective administration for the next three years whatever happens."
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JDS FITEL INC. (JDS/TSE), down $9.25 to $84, on volume of 109,402 shares. ÿThe fibre optic component manufacturer reported double-digit growth in revenue and earnings for the six months ended Nov. 30, but "investors looking for momentum might be taking a walk," said Gurinder Parhar, of Canaccord Capital Corp. "There is some concern about pricing pressure and falling gross margins, but we still maintain our
'buy' recommendation." ÿJDS's gross margins in fiscal 1998 fell to 51.7% from 52.9% a year earlier. Parhar said there would be a real concern if they dipped
below 50%. ÿ"[But] if you bought the stock at $12 a year and a half ago and now it is at $90, you might think it was time to take some profits," he said.
CANADIAN IMPERIAL BANK OF COMMERCE (CM/TSE), down $2.05 to $35.90, on volume of 4.3 million shares. Bank of Montreal (BMO/TSE), down $2.65 to $57.25, on volume of 837,036 shares. Royal Bank of Canada (RY/TSE), down $2.55 to $71.85, on volume of 1.2 million shares. ÿBanking stocks plunged, reflected in the 4.16% drop in the Toronto Stock Exchange financial services subindex. It fell 326.3 points to 7508.98 on concern that the C$'s drop to a record low may force the Bank of Canada to raise interest rates.
ALCAN ALUMINUM LTD. (AL/TSE), up $1.35 to $41.10, on volume of 1.1 million shares. Prudential Securities Inc. analyst Clarence Morrison lifted his rating on the company's shares and four other major aluminum producers to "buy" from "hold", but declined to elaborate on his reasons. "Alcan reported fourth-quarter earnings above the general consensus, which should put some warmth in the price of the stock," said Stephen Bonnyman, analyst at CIBC Wood Gundy Securities Inc. Other base metal analysts said aluminum producers have benefited from strong aluminum prices which have been affected only mildly by the Asian crisis. Aluminum stockpiles at the London Metal Exchange fell 1,425 tonnes to 605,125 tonnes. The three-month forward aluminum price on the LME rose as much as US$22 to US$1,527 a tonne before closing at US$1,526.
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EPIC DATA INTERNATIONAL INC. (EKD/TSE), up $1.10 to $8.10, on volume of 71,900 shares. Shares of the Richmond, B.C-based manufacturer of data collection and analysis systems jumped on news the company made a first-quarter profit. ÿ"Epic lost money last year and they came through with revenue growth and a profit which is worth a premium to the existing stock price," said Adam Adamou, partner at Taurus Capital Markets in Toronto.
ALLIANCE FOREST (ALP/TSE), down 10› to $25, on volume of 325,035 shares. ÿThe shares rose 90› in intraday trading to $26 on heavy volume. ÿThe Montreal-based owner and operator of paper and sawmills in Eastern Canada will benefit from strong newsprint consumption in the U.S., said Herve Carreau at CIBC Wood Gundy Securities Inc. "But I don't think the market is bullish enough on the industry to make the stock move that much." ÿIn December North American and Scandinavian pulp inventories fell
4,000 tonnes from November levels to 1.75 million tonnes.
PRECISION DRILLING CORP. (PD/TSE), down $2.50 to $25.20, on volume of 435,164 shares. Schlumberger Ltd. (SLB/NYSE), down US$915 1/816 to US$719 1/816 on volume of 6.7 million shares. ÿThe oil services sector took a hit after the leading service company in the U.S. said Asian financial woes may affect its customers' exploration and production spending in 1998. ÿ"Crude oil prices have declined to four-year lows and Schlumberger put out weaker fourth-quarter earnings and a gloomy forecast," said
Marcel Brichon at Global Securities Inc. in Vancouver. ÿThe Toronto Stock Exchange oil and gas subindex fell 143.4 points, of
2.3%, to 6031.85.
MICROFORM INC. (MCF/TSE), up 5› to $3.05, on volume of 100,000 shares. The Toronto-based multimedia content designer said it intends to acquire a group of private companies with combined revenue of $21 million a year.
Biovail Corp. (BVF/TSE), up $2.35 to $52, on volume of 18,722 shares. ÿThe Toronto pharmaceutical company has submitted an Abbreviated New Drug Application for its generic version of Adalat CC, a drug capable of treating hypertension. ÿBiovail said this "represents a $340-million generic opportunity in the U.S."
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Opportunities emerge in the resource sectors -- By SONITA HORVITCH
Rolie Bradley, institutional salesman at Toronto-based Maison Placements Canada Inc., is finding buying opportunities in three beaten down resource sectors - oil and gas, base metals and gold.
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The energy sector is down about 30% from its high in October 1997, base metals have lost about 41% since March 1997 and the gold sector is down 55% since February 1996.
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"These sectors contain some good stocks which are cheap and should be able to produce a good performance in what is otherwise a negative market," he said. Bradley is avoiding the paper and forest products sector because of its exposure to Asia.
The North American equity market has been volatile since the Octobe peak, said Bradley, "as investors try to assess the impact of events in Asia on North American corporate earnings." Since then, the Canadian market has underperformed its U.S. counterpart because of the Toronto Stock Exchange's high resource component.
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The weakness in the C$, because of uncertainty as to the government's approach to deficit reduction and the rising current account deficit, is a two-edged sword, he said. It does not bode well for interest-sensitive stocks but it is beneficial to companies whose products or businesses are priced in US$s.
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Bradley's resource stock picks are:
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* Alcan Aluminium Ltd. (AL/TSE), which closed recently at $39.75 and has a 52-week trading range of $55.70 to $35.10. The integrated producer of aluminum and aluminum products is based in Montreal. Maison's earnings per share estimates are US$2.50 for 1998 and US$3.10 for 1999. "The price of the commodity should improve over the next two years," said Bradley.
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In the energy sector, he likes:
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* Talisman Energy Inc. (TLM/TSE) $39.30 ($55.25-$35). The Calgary-based company is engaged in oil and gas development in Canada and abroad. "It has a significant exposure to North Sea oil, which is a positive." His cash flow per share estimates are $7.87 for 1998 and $9.46 for 1999. The stock "is cheap for a quality senior producer."
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* Petro-Canada (PCA/TSE) $25.40 ($29.85-$18.90). Bradley favors the Calgary-based integrated oil and gas company particularly for its interests in the Hibernia project, offshore Newfoundland. Maison's cash flow per share estimate is $4.69 for 1998 and $4.99 for 1999.
Bradley is bullish on gold bullion. The firm expects the dominance of the US$ as a storehouse of value will erode with a stronger Japanese yen and the euro's emergence. He chooses companies with good ore bodies, substantial cash on their balance sheets and low cash operating costs (about US$200 an ounce). Of the seniors, he likes
Toronto-based Barrick Gold Corp. (ABX/TSE) $25.60 ($38.80- $21.50). His mid-cap picks are Toronto-based Agnico Eagle Mines Ltd. (AGE/TSE) $8.55 ($20.25-$6.20) and Goldcorp Inc. (G/TSE) $5.60 ($12.30- $3.75), with mines in Canada and the U.S.; and Vancouver-based Prime Resources Group Inc. (Pru/TSE) $10.75 ($12.50-$6.85).
Bradley is a seller of major Canadian banks. "The stocks have had an excellent performance over the past two to three years and it would be prudent to lock in some gains." The full impact on the banks of events in Asia and the weak C$ has yet to be felt.
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He is cautious about the real estate sector. "There is a lot of hype about these stocks," Bradley said. His concern is that there has to be a significant increase in rental incomes to justify further improvements in the stocks. Also, real estate companies have been using the strength in their stocks to issue more shares and a lot of paper has come onto the market.
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