MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, APRIL 8, 1998 (1)
GENERAL MARKET ACTIVITY
Bay Street edged lower as bank shares ended three straight days of gains. Wall Street lost ground as analysts lowered their profit estimates for drug makers.
The Toronto Stock Exchange 300 composite index slipped 8.65 points to 7571.14 as losses by utilities and banks offset gains by Newbridge Networks Inc. and Agrium Inc.
About 136.7 million shares changed hands on the TSE, up from 116.7 million shares traded on Tuesday.
"This is not a good entry point," said Martin Roberge, an analyst at L‚vesque Beaubien Geoffrion Inc.
"We'll have a better idea of what earnings growth is like by the end of next week. This could be the first time since 1992 that we have seen negative earnings growth for the Standard & Poor's 500 index."
BCE Inc. (bCE/tse), the TSE's most heavily weighted stock, fell the most, losing 40› to $56.60 and pushing the TSE utilities subindex lower for a third day.
Bank stocks ended a three-day rally. Bank of Nova Scotia (bns/tse) fell 50› to $38.40, Toronto-Dominion Bank (td/tse) lost 30› to $64.20 and Canadian Imperial Bank of Commerce (cm/tse) slipped 60› to $51.
Newbridge (nnc/tse) rose $2.25 to $37.35, recovering a portion of its 5% slide Tuesday in the wake of Motorola Inc.'s earnings downturn.
Fertilizer maker Agrium (agu/tse) jumped $1.70 to $21.80 after it said it would increase its share buyback program to 10% of those outstanding, from 5%.
Gold stocks continued their recent advance.
Barrick Gold Corp. (abx/tse) rose 85› to $32.85. Placer Dome Inc. (pdg/tse) climbed 30› to $20.35 and TVX Gold Inc. (tvx/tse) advanced 25› to $5.75.
Other Canadian markets were mixed. The Montreal Exchange portfolio lost 4.99 points to 3820.45. The Vancouver Stock Exchange gained 0.72 of a point to 638.03.
U.S. stocks fell amid concern that share prices outstripped the potential for profits. Drug and bank issues led the decline.
The Dow Jones industrial average lost 65.02 points, or 0.7%, to 8891.48.
The Nasdaq composite index rose 8.3 points, or 0.5%, to 1807.01, its first gain in three sessions.
The Standard & Poor's 500 index lost 7.9 points, or 0.7%, to 1101.65.
"You've had two great back-to-back quarters, and many people are selling stocks to lock in gains," said Philip Schettewi, chief portfolio strategist at Loomis Sayles & Co.
The Dow average rose 27% after the market rout in late October, and has gained 12% so far this year, a better return than many investors expected for all of 1998.
About 617.2 million shares changed hands on the Big Board, down from about 670.6 million shares traded on Tuesday.
Most drug stocks, which have been top performers the past year, fell after Morgan Stanley Dean Witter & Co. analyst Paul Brooke lowered profit estimates for Merck & Co. and sales estimates for three of its drugs. He also lowered estimates for Bristol-Myers Squibb Co.
Merck shares (mrk/nyse) slipped US$3 to US$127 3/4, Pfizer Inc. (pfe/nyse) fell US$1 13/16 to US$98 3/4, Schering-Plough Corp. (sgp/nyse) dropped US$1 11/16 to US$82 1/4 and Bristol-Myers (bmy/nyse) lost US$3 3/8 to US$104 1/16.
Shares of Travelers Group Inc. and Citicorp declined for a second day following their agreement to combine in the biggest merger in history.
Travelers shares (trv/nyse) fell US$1 1/16 to US$67 5/16. Citicorp (cci/ nyse) lost 1/4 to US$164 7/8.
Yahoo Inc. (yhoo/nasdaq) regained most of its losses a day earlier, climbing US$4 to US$97 1/4 , before trading was halted for the release of its first quarter results.
The No. 1 online directory fell US$5 13/16 Tuesday and US$3 3/8 Monday on concern that Internet shares have risen too far, too fast.
However, Yahoo said its first-quarter earnings rose to US8› a diluted share, from US2› a year earlier, easily beating the US4› a share average estimate of analysts surveyed by IBES International Inc.
Major overseas markets were mixed.
London: British shares were listless as investors await today's outcome of the Bank of England's rate-setting meeting. The FT-SE 100 index fell 38.8 points, or 0.6%, at 6055.2.
Frankfurt: The Dax index lost 87.59 points, or 1.6%, to 5269.46.
Tokyo: Japanese shares continued to rise on hopes the government will make moves to mend the ailing economy. The 225-share Nikkei average climbed 397.9 points, or 2.5%, to 16,376.62.
Hong Kong: The Hang Seng index closed up 265.03 points, or 2.4%, at 11,314.46.
Sydney: Australian shares closed above 2800 points for the first time, with a bullish bank sector driving the market. The all ordinaries index rose 18.7 points, or 0.7%, to 2813.5.
First Quarter Stock Market Report
Despite initial concerns surrounding the Asian economic crisis, North American stock markets advanced steadily from mid-January, with the TSE 300 posting a strong 13.25 percent return this quarter. Unlike with past crises, equity market investors quickly rationalized that North American and European earnings were still fundamentally sound.
The Russell 300 index, which measures the performance of Canadian value stocks, returned 13.85 percent this quarter, beating out the Russell 300 Growth index by 1.3 percentage points. The continued positive performance of Banks helped pull the value index ahead this quarter, while the positive performance of the Industrial sector largely offset the poor performance of the Oil and Gas segment for the Russell 300 Growth index.
The strong returns of Industrial Products stocks helped pull the performance of the Russell 100 Growth index. Returns for the indexes were 13.97 percent and 13.35 percent, respectively.
The largest value/growth spread occurred on the smaller cap end with the Russell 200 Value index beating the Russell 200 Growth index by over four percentage points. Canadian equity managers, who typically underweight utilities stocks, got a surprise this quarter as Utilities returned 24.5 percent. The strong performance of Utilities aided the smaller cap value segment while the Russell 200 Growth index - which returned 9.28 percent for the quarter - was hard hit by the poor performance of the Oil and Gas sector.
"The slide in the Oil and Gas sector was instrumental in the Russell 300 Growth index lagging the TSE 300 by 0.73 percent this quarter, while Utilities helped propel the Russell 300 Value indices ahead by 0.60 percent," said Tom Lappalainen, senior research analyst in Frank Russell Company's Toronto office.
"The domestic economic environment has been one of strong consumer spending and housing starts,"noted Lappalainen, "Given current market levels, interest rates may be a key determinant to the direction of the equity market over the coming quarter"
Caisse braces for possible 10% market correction
The Financial Post
The $64-billion Caisse de d‚p“t et placement du Qu‚bec is tailoring its 1998 investment strategy for a possible 10% correction in North American equity markets, chairman Jean-Claude Scraire said yesterday.
"We're being very prudent and recent rates of return cannot be maintained, " he said after releasing the Quebec Pension Plan manager's 1997 annual report. "We see relatively stable interest rates and bond prices."
At present market levels, pension fund managers may want to take some profit, "but the trick is finding other investments that will maintain return and provide safety. We see a very active trading year."
The caisse sees opportunities in European stocks and is looking carefully at selected Asian markets as well, including privateplacements.
It ended 1997 with about 43% of its assets invested in domestic and international equities, and this may rise further.
Last year the pension plan manager lost more than $70 million on Bre-X Minerals Ltd. shares and its resource stock portfolio performed weakly.
In 1998, the property portfolio is expected to be strong again with the recovery in Quebec real estate. Through subsidiaries, the caisse is the province's biggest property owner.
Bonds, valued at $32.7 billion at the end of 1997, will continue to make up almost half its total investment portfolio.
Its 1997, assets of $64 billion were up from $57 billion in 1996. Investment operations generated $7.3 billion of income, less $864 million of net depositor withdrawals.
Overall return was 13%, compared with 15.6% in 1996. Average return was 15.6% over three years, 12.5% over five years and 11.1% over 10 years.
Bonds showed an 11.2% return in 1997, higher than many Canadian funds; Canadian shares returned 15.5%, U.S. shares almost 30%; other foreign shares 11.2%; mortgages 5.7%; property 20.4%; and short-term investments 3.9%.
Some Canadian funds exceeded the caisse's domestic and international equity returns.
Other pension fund managers have similar strategies.
"We believe the equity bubble has to burst some time," said Stephen Jarislowsky, chairman of Montreal-based Jarislowsky Fraser & Co.
"The quandary is when to get out ... we're being cautious, keeping strong cash reserves, upgrading quality and avoiding speculative growth stocks."
B.C. Men Accused Of Stock Manipulation
A Massachusetts man and three majority shareholders of a Canadian gas and oil company were indicted Wednesday in an alleged scheme to manipulate stock prices and mislead investors.
Leonard Fiessel, 62, Robert Shull, 41, and Terry Shull, 36, all of British Columbia, and Patrick Collins, 46, of Massachusetts are named in the 45-count federal indictment.
The Canadians are accused of inflating the price of stock in Fairmont Resources Inc. from 30 cents a share - in Canadian dollars - to 10 times that amount.
U.S. Attorney Donald Stern said the men "cross-traded," or traded shares between accounts they controlled, to make it appear the stock was active and, therefore, a better investment than it was.
Stern said the men then took the fraudulent practice to the United States by offering about $540,000 in kickbacks to brokers who, in return, would sell the inflated stocks to clients. Collins is accused of helping recruit local brokers for the kickback scheme.
The brokers are believed to have sold about 1.25 million shares of the inflated Fairmont stock.
Two brokers from Boston and one from Arizona have pleaded guilty to charges they accepted kickbacks from the Canadian shareholders, said Amy Rindskopf, a spokeswoman for Stern.
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