MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, JANUARY 27, 1998 (1)
Wednesday, January 28, 1998
Bay Street stocks soared, aided by a strong performance by resource-based issues. Wall Street posted its biggest gain in a week on stronger than expected earnings reports
The Toronto Stock Exchange 300 composite index rose 138.58 points, or 2.1%, to 6721.72. ÿAlmost all 14 subindexes advanced, particularly the resource-based stocks, which hold a combined weight of 25% of the TSE 300. ÿ
The gold and precious minerals group rallied after slipping to historic lows in recent weeks. The group rose 2.7% as it gained confidence from a strengthening price of bullion. ÿBullion for February delivery rose US$3.70 to US$300.50 an ounce on the New York Mercantile Exchange's Comex division. ÿTraders said that with gold flirting around the US$300 range, the precious mineral had "bottomed out," said John Ing, president at Maison Placements Canada Inc. Ing also noted that gold was a good hedge against a weakening US$. ÿBarrick Gold Corp. (ABX/TSE) rose 95› to $29.10 and Teck Corp. (TEKb/TSE) rose 75› to $22.25. ÿThe metals and minerals subindex also showed strength, rising 3.1%, the oil and gas sector climbed 2.7% and paper and forest products subgroup jumped 2.8%. ÿ
The heavily weighted financial services sector, which makes up 2.1 % of the benchmark, rose almost 1%. ÿ
Northern Telecom Ltd. shares surged after the company said its fourth-quarter profit jumped 22% to US$390 million (US74› a share) from US$319 million (US61›) for the same period a year earlier. ÿNortel (NTL/TSE), which accounts for 2.7% of the TSE 300 index, rose $6.10 to $63.75. BCE Inc. (BCE/TSE), which holds a 51.7% stake in Nortel, rose $1.35 to $47.85. ÿ
Nova Corp. (NVA/TSE) gained 45› to $15.50 on volume of 11 million shares, making it the most active issue on the TSE. ÿTransCanada PipeLines Ltd. (TRP/TSE), up 55› to $30.85, said on Monday it will purchase Nova for $7.12 billion. ÿAbout 131.1 million shares changed hands on the TSE, compared with 137.3 million on Monday. ÿ
Other Canadian markets ended higher.
The Montreal Exchange portfolio rose 94.5 points, or 2.8%, to 3489.28.
The Vancouver Stock Exchange climbed 5.11 points, or 0.9%, to 596.13.
For a scorecard of trading activity on all Canadian Stock Exchanges, go to:
quote.yahoo.com .
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The Dow Jones industrial average rose 102.14 points, or 1.3%, to 7815.08. ÿ
The Standard & Poor's 500 index gained 12.07 points, or 1.3%, to 969.02 and the Nasdaq composite index climbed 17.44 points, or 1.1%, to 1578.9. ÿ
Advancers topped decliners on the New York Stock Exchange where about 684.7 million shares changed hands, up from 559.7 million shares traded Tuesday. ÿ
Walt Disney Co., Ford Motor Co. and Merck & Co. all beat earnings forecasts and spurred optimism that a predicted slowdown in profit growth may not happen. ÿDisney shares (DIS/NYSE) rose US$5 9/16 to US$102 15/16. Ford (F/NYSE) climbed US$1 3/4 to US$50 and Merck (MRK/NYSE) rose 1/2 to US$114 7/16. ÿ
Arthur Micheletti, chief strategist at Bailard, Biehl & Kaiser in Foster City, Calif., said earnings expectations have swung wildly in the past month as investors tried to assess the impact on earnings from the Asian economic crisis. ÿ"Analysts have revised estimates so much that you don't know whether an earnings report that topped forecasts was short of the expectations in place at the beginning of the quarter," Micheletti said. ÿ
Oil shares rallied as a conflict between Iraq and the United Nations intensified. A military strike by the U.S. in the Persian Gulf could limit oil supply and drive oil prices higher. ÿRoyal Dutch Petroleum Co. (RD/NYSE) rose US$1 5/16 to US$52 1/8, Chevron Corp. (CHV/NYSE) gained US$1 1/16 to US$76 5/8, Mobil Corp. (MOB/NYSE) climbed 5/8 to US$68 1/4 and Texaco Inc. (TX/NYSE) jumped 3/4 to US$53. ÿ
Major international stock markets ended mixed. ÿ
London: British stocks soared to a near record closing high amid a bullish combination of bid speculation, prospects for no further rise in British interest rates and an early advance on Wall Street. The FT-SE 100 index closed at 5326.3, up 89.1 points or 1.7%. ÿ
Frankfurt: German stocks put in a late surge to end the day up more than 1%. The Dax index closed at 4278.76, up 53.98 points or 1.3%. ÿ
Tokyo: Japanese stocks ended slightly weaker. The 225-share Nikkei average closed at 16,981.62, down 91.71 points or 0.5%. ÿ
Hong Kong: Stocks ended with a rally, closing sharply higher as two red chips joined the Hang Seng index. The Hang Seng index closed at 9252.36, up 278.5 points or 3.1%. ÿ
Sydney: The Australian share market ended lower in quiet trade as weaker bonds weighed on banks. The all ordinaries index closed at 2603.9, down 19.4 points or 0.7%.
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Good time to review portfolios -- By PATRICK BLOOMFIELD
I left the annual outlook presentation to holders of GBC Asset management funds yesterday with four implicit messages.
* If you think the Asian crisis has already been contained, think again. As Bank Credit Analyst editor in chief Anthony Boeckh put it: "The point is that you simply cannot quantify the risks out there."
* The resulting slowdown in U.S., Canadian (and global) economic growth, exacerbated by the likelihood of a leadership vacuum in Washington, can only be bullish for North American bondholders.
* This is, therefore, an appropriate time for mutual fund investors to take a hard and cool look at the balance of stocks, bonds and cash in their portfolios.
* And, while the people on the platform never said it in so many words, any investor with a low propensity for risk -- or likely to need cash in the next year or two -- should think hard about keeping more than usual in bonds and less than usual in stocks.
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I can convey these thoughts best by saying who the GBC people are, and snipping some facts and figures from Boeckh's address -- it being his task to give the bad economic news on which bond markets thrive.
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The GBC group is one of the exceptions in the mutual fund business in that it remains small by choice, and, in a figurative sense, privately held. New investors are required to start with a minimum of $100,000 a family. Its managers also happen to be well regarded by fellow pros.
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One of Boeckh's initial points was the magnitude and speed of Asia's downfall. He put up a chart of the decline of Asian stock markets relative to the decline and fall of the Dow Jones industrial average between the market peak in 1929 and the trough in 1932. In dollar terms, the Asian markets have now fallen 75%. By contrast the decline in the Dow in the early years of the Great Depression was 80%.
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But the Dow took almost four years to effect its fall. The Asian stock markets have managed almost as much in some six to eight months.
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As for the extent of the damage, Boeckh noted estimates suggesting that the wealthiest 500 families in Asia have shed as much as 90% of their riches in the past six months.
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That is something in itself. Then there is the Asian debt burden, a more crucial issue. Boeckh explained that Asian corporations had been drastically overborrowed in foreign currencies (mainly the US$) on the assumption that their own currencies were either stable relative to the US$ or pegged to that currency. Many of these overweening borrowers were big, unwieldy conglomerates using high debt leverage.
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Boeckh cited estimates suggesting the average South Korean conglomerate was operating at about a four-to-one debt ratio before the mayhem spread. (In Canada we are taught that a one-to-one debt ratio is a reasonable limit of investment respectability.) With the decline in their currencies, those Korean conglomerates are now looking at average ratios nearer eight-to-one.
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And, since those conglomerates on the other side of the Pacific typically rely on higher volumes for their profits, and run razor-thin profit margins, their profitability has been trashed.
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Boeckh suggested that Chinese gross domestic product growth will likely fall to 4%-5% from the recent 8%-9%, and that growth of countries that had been growing in the 4%-6% range will decline to zero -- or maybe worse.
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This might be less disturbing if the Asian economies were little ponds in the world economic pool. But they are not. Going by Boeckh's numbers, Asia, excluding Japan, represents about 25% of the global economy and has contributed 50% of world growth over the past several years, not to mention 35% of world trade.
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The problem that Boeckh sees coming next is the sheer overcapacity of those parts. Because of the nature of their high-volume, low-margin operations, and the dire social consequences of downsizing, those corporations are not going to cut back. Instead, he suggested, they are going to export their excess supply and their price deflation to the west.
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Space precludes me from dwelling on Japan Inc.'s exacerbation of Asian problems. Rather, let us turn to the effect on the rest of the world, which Boeckh believes to be "very, very deflationary," the only point at issue being the downside for prices in the world economy at large.
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Boeckh's "base case" of the most likely outcome is that GDP growth in the U.S, and Canada will be cut to about 2% from 4% and price inflation will become a thing of the past.
And that is only his base case, though his most likely outcome. If the crisis in the White House is as bad as it looks, then the risks become unquantifiable.
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All of which suggests that the months, and maybe years, ahead, might well be a good time to be a consumer with cash in the bank, and a very good time to be bondholder.
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If you are looking for a repeat of the stock market growth of recent years, forget it. I will have more on the GBC view of that side of the investment spectrum in a coming column.
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BC TELECOM INC. (BCT/TSE), down 10› to $43.40, on volume of 55,459 shares.ÿThe telecommunication utility's shares dipped after CS First Boston downgraded its rating to "sell" from "hold". BC Telecom declared a dividend of 34› yesterday.
BARRICK GOLD CORP. (ABX/TSE), up 95› to $29.10, on volume of 1.3 million shares. Placer Dome Inc. (PDG/TSE), up 35› to $20.30, on volume of 1.2 million shares.ÿBarrick's rating was lowered to "neutral" from "outperform" by Morgan Stanley's Douglas Cohen, who said the company is a premium quality producer at an ultra-premium price. ÿPlacer gained strength after saying on Monday it will take a US$247-million writedown in the fourth quarter. The writedown comes as no surprise to analysts as bullion prices have been at 18 1/2-year lows.
ROYAL BANK OF CANADA (RY/TSE), up 30› to $78.30, on volume of 1.8 million shares. Bank of Montreal (BMO/TSE), down 25› to $69.95, on volume of three million shares. Canadian Imperial Bank of Commerce (CM/TSE), up $1.05 to $41.80, on volume of 3.2 million shares. Bank of Nova Scotia (BNS/TSE), up $1.35 to $67, on volume of 2.2 million shares. Toronto-Dominion Bank (TD/TSE), up 15› to $57.40, on volume of 1.3 million shares. ÿThe TSE financial services subindex continued to rally, gaining another 1%. The group is up 8% since Thursday, the day before the Bank of Montreal and Royal announced their intent to merge. ÿIn related news, CIBC and TD have agreed to sell their payroll business to U.S-based Ceridian Corp. Ceridian is eager to enter the Canadian market and face its largest competitor, New Jersey-based Automatic Data Processing.
EXTENDICARE INC. (EXEa/TSE), down $1.35 to $16.50, on volume of 175,672 shares. ÿThe Markham, Ont.-based nursing home operator said it will record a pre-tax charge of $23.5 million in the fourth quarter of 1997. The charge is a result of the refinancing of Extendicare and Arbor Health Care Co. due to the recent acquisition of Arbor. ÿThe company also said 1998 earnings could drop by about 15› a share because of decreased service fees in the U.S, higher startup costs for new facilities and higher than expected financing costs.
MICROSOFT CORP. (MSFT/NASDAQ), up US$3 7/16 to US$145 3/16, on volume of 12.2 million shares. ÿChairman Bill Gates said the company is on track to release a new test version of Windows NT 5.0 software for networks in the first half of 1998. The NT version is one of the company's biggest revenue generators. ÿAlso expected to be released on time is Windows 98 and a new version of Microsoft Office business software.
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Insider Trading -- By DAN WESTELL -- The Financial Post
Noranda Inc. bought 2.2 million shares of Falconbridge Ltd. for $17.50 or $17.75 each in December to hold almost 84.1 million shares, the Ontario Securities Commission insider trading report shows.
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Other transactions, after October unless noted, include:
* Co-Steel Inc. -- Ontario Teachers' Pension Plan Board, which holds more than 10%, bought one million shares and sold 19,400 for $18.05 to $21 each to hold 3.8 million
* Dylex Ltd. -- Jeffrey Sarfin, officer, exercised 83,000 options for $1.11 each and sold 83,000 shares for $6 to $6.35 each to hold 10,000 shares.
* First Marathon Inc. -- Robert Disbrow, director, sold 43,300 class A shares for $20.78 to $23.75 each to hold more than 239,000.
* Imax Corp. -- Richard Gelfond, vice-chairman, and Bradley Weschler, chairman, each sold 100,000 shares for US$24.95 apiece to each hold more than 750,000.
* Inco Ltd. -- Edward Mercaldo, director, sold 100,000 shares for $25.04 each to hold 408,036.
* Monarch Development Corp. -- Standard Life Assurance Co., which holds more than 10%, sold 500,000 shares for $11 each to hold more than nine million indirectly.
* Mortice Kern Systems Inc. -- Ruth Songhurst, officer, director and holder of more than 10%, disposed of 1.1 million shares for $7.50 each to hold 156,000 indirectly.
* National Bank of Canada -- Emanuele Saputo, director, sold almost 115,000 shares for $23.80 or $25 each to hold 200,000 indirectly.
* Power Corp of Canada -- Paul Desmarais Jr., officer and director, sold 60,000 subordinate shares for $48 to $48.64 each to hold 2,096 indirectly. Michel Plessis-Belair, officer and director, exercised 50,000 options for $18.31 or $20.88 each and sold 50,000 subordinate shares for $47.51 each to hold 7,900 shares.
* Timberwest Timber Trust -- Southeastern Asset Management Inc., which holds more than 10%, bought more than 7.1 million trust units for US$6.33 or US$9.60 each to hold 13.8 million indirectly.
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