MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, APRIL 14, 1998 (1)
MARKET WATCH
Bay Street gained another big boost from bank merger mania as the financial services subindex soared 4.4%. Wall Street continued its winning ways, bursting through 9100 for the first time
Soaring bank stocks sent the Canadian benchmark to a new record.
The Toronto Stock Exchange 300 composite index rose 125.11 points, or 1.6%, to 7780.53 - its biggest one-day gain since Jan. 27, its first close above 7700 and the 13th record of the year.
The TSE 300 has advanced more than 16% this year and is up almost 25% since bottoming on Jan. 12.
Bank stocks were the hardest-working ponies in the market's harness yesterday. The TSE financial services index surged 4.4 per cent, bringing the year-to-date gain to 29 per cent, easily the top performing sector on the TSE. "Today was really just astronomical," said Tom Caldwell, president of Caldwell Securities Ltd. in Toronto.
The gains by the financial services sector come after stunning back-to-back years for the group, which posted returns of 55.1 per cent in 1997 and 52.6 per cent in 1996. Put another way, Bank of Nova Scotia shares, now changing hands at $42.80, could be had for the equivalent of about $15 at the beginning of 1996.
Canadian bank stocks got a leg up last week with news of the proposed $70-billion (U.S.) merger between U.S. behemoths Citicorp and Travelers Group Inc.
The heat was turned up some more on Monday with the announcement that NationsBank Corp. and BankAmerica Corp. planned their own merger, valued at about $60-billion.
These deals are widely being interpreted as favouring the chances of Ottawa giving its approval to the proposed merger between Royal Bank of Canada and Bank of Montreal in order to allow Canadian banks to bulk up in order to face increased competition, analysts said. Once that deal gets the green light, others can be expected to follow. "My guess is that we end up with three banks or thereabouts coming out of this process," Mr. Caldwell said.
Banks led all of Toronto's 14 subindexes higher except for two: gold and precious minerals and real estate. Other gaining groups were base metals, up 2.91 percent, paper and forestry products, which rose 2.81 percent, and utilities, up 2.70 percent.
Tuesday's trading totaled a hefty 132 million shares, up from 84.5 million shares traded on Monday. Trading value was worth C$2.5 billion. Advancing issues outnumbered decliners 549 to 494 and 310 issues closed unchanged.
Bank stocks reached record highs after three major U.S. bank mergers in a week boosted investors' hopes that Canadian financial institutions will also consolidate soon to increase size and cut costs.
The TSE financial services subindex rose 448.63 points, or 4.4%, to 10,726.01. It also rose 2.9%, breaking 10,000 for the first time, on Monday. Chatter swirled that two more Canadian banks would announce a merger.
Rumors circulated that Canadian Imperial Bank of Commerce , the nation's second largest, and Toronto-Dominion Bank , the fifth biggest, could make a match soon. This boosted interest among U.S. investors, Doak said.
"U.S. (arbitrageurs) are buying TD and Commerce in anticipation of an announcement this week," Doak said.
The speculation came on the heels of back-to-back U.S. mergers this weekend. BankAmerica Corp. and NationsBank Corp. said they will get together in a $60 billion stock swap deal. And Banc One Corp. agreed on a merger pact with First Chicago NBD Corp. in a deal worth $29 billion.
"It's a buying frenzy on the banks that's taken the market up," said Jim Doak, fund manager and president of Enterprise Capital Management.
"I guess people are saying bigger is better," said John Kinsey, a portfolio manager at Caldwell Securities Ltd. "Investors have been swept up by euphoria and are looking at any possible combination in Canada."
"The rumors are certainly around, fairly strongly worded rumors, that TD and Commerce have been discussing mergers and will announce it this week," said Fred Ketchen, chief equities trader for ScotiaMcLeod in Toronto.
"Now, there is no basis for that other than the rumors that have been around. But that's why they led the parade."
The latest rumors likely grow out of recent comments by TD chairman Charles Baillie, who has said he is more open to a merger since last week's massive union proposed between American giants Citicorp and Travellers Group.
CIBC has been the subject of merger rumors since January, when the Royal Bank and Bank of Montreal announced their intention to wed.
CIBC refused to comment Tuesday.
Canadian Imperial Bank of Commerce (cm/tse) rose $3.55 to a record $57.05, Bank of Nova Scotia (bns/tse) jumped $2.30 to a record $42.80 while Toronto-Dominion Bank (td/tse) rose $3.75 to $72.
Royal Bank of Canada (ry/tse) rose $2.20 to $91.30 as the U.S. mergers increased optimism the Canadian government will approve its purchase of Bank of Montreal (bmo/tse), which climbed $2.40 to $86.10
Ketchen said some of the interest in Canadian banks shares may be coming from American investors who see these stocks as bargains, especially after the spate of mergers there.
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Some analysts doubt Canadian banks can continue their record-setting pace much longer.
The gains in the bank stocks come despite weakness in the dollar, which slipped below 70 cents (U.S.) this week. That's spurred expectations in some quarters that the Bank of Canada may raise interest rates to support the currency, a prospect that normally could be expected to put interest-sensitive shares, such as bank stocks and utilities, under pressure.
"The fragile C$ is putting upward pressure on interest rates, and that is bad news for the financials," said Katherine Beattie, an analyst at Standard & Poor's MMS International.
Paper stocks surged, with the TSE's paper and forest products subindex jumping 138.42 points, or 2.8%, to a six-month high of 5069.91, after analysts at Goldman, Sachs & Co. raised their rating on the sector to "overweight" from "market weight."
Shares of Alliance Forest Products Inc. (alp/tse) climbed $2.35 to $31.70, Fletcher Challenge Canada Ltd. (FCCa/TSE) gained $1.10 to 21.70 and Domtar Inc. (dtc/tse) jumped 75› to $12.
The TSE precious metals group dropped almost two per cent on the session as the price of gold slid $2.90 to $310 US an ounce. Barrick Gold Corp. (abx/tse) lost $1 to $31.25 and Placer Dome Inc. (pdg/tse) fell 45› to $19.45 after the price of bullion slipped US$2.90 to US$307.90 an ounce on the Comex division of the New York Mercantile Exchange.
The metals and mining index, weak for months, rallied. Leading the way as Inco, up $1.05 to $27.25, while Alcan Aluminium jumped $1.70 to $45.85.
Leading growth in the utilities subindex was BCE Inc., a TSE heavyweight, which rose by $2.48 to $58.60.
"I guess when you look at this, there still seems to be a fair amount of money being thrown at the stock market, some would say wisely in some sectors and with abandon in others," said Ketchen.
Other Canadian markets were mixed. The Montreal Exchange portfolio rose 73.96 points, or 1.9%, to 3939.5. The Vancouver Stock Exchange lost 1.61 points, or 0.3%, to 636.08
After a jittery start to the year, the markets across much of the world have been in high gear for the past three months. After some trepidation around its latest milestone, the Dow cleared 9,000 last week.
"We've clearly cleared the psychological 9,000 level on the Dow and we're in uncharted territory with the TSE," said Katherine Beattie, technical analyst with Standard & Poor's MMS International. "It can't go straight up from here but we are definitely on an uptrend and I don't see what's going to derail the market."
U.S. economic reports on consumer prices and retail sales yesterday confirmed once again the stock friendly, low inflation, steady growth path of the economy. "The economic picture is wonderful -- low inflation and continued growth. That's perfect for the stock market," Ms. Beattie said.
Ron Meisels, long a bull on the equity markets, is getting a little unsettled by the surge in optimism among investors. Excessive bullishness is often viewed by analysts as a contrary indicator. "At the beginning of the year I was more bullish than just about anybody. Now I have too much company and that bothers me," said Mr. Meisels, president of P&C Holdings in Montreal.
U.S. stocks advanced as Aluminum Co. of America and International Paper Co. propelled the Dow Jones industrial average above 9100 for the first time.
Companies reported earnings that met estimates, convincing investors that bigger profits are to come.
"We could easily see the Dow rally to 10,000 within a few months," said Timothy Stevenson, a money manager with First Capital Group
The Dow climbed 97.9 points, or 1.1%, to 9110.2.
The Standard & Poor's 500 index jumped 6.06 points, or 0.6%, to 1115.75 and the Nasdaq composite index rose 18.08 points, or 1%, to 1843.03.
About 617.4 million shares changed hands on the Big Board, up from 569.5 million shares traded on Monday.
International Paper (ip/nyse) climbed US$3 3/8 to US$54 3/8 and Weyerhaeuser Co., another forestry company, rose (wy/nyse) US$4 1/4 to US$61 5/8.
Alcoa shares (aa/nyse) rose US$41 1/16 to US$76. after a report said its earnings could rise to US$10.50 to US$11 a share in 1999, up from US$4.62 a share last year.
Gillette Co. (g/nyse) fell US$3 7/8 to US$120 1/4 after it introduced a US$6 shaving system named Mach3. Gillette has returned 422% over the past five years, compared with 178% for the S&P 500.
Major overseas markets were mixed.
London: The FT-SE 100 index lost 1.4 points to 6104.1.
Frankfurt: The Dax index gained 57.56 points, or 1.1%, to 5374.78.
Tokyo: The 225-share Nikkei average lost 40.26 points, or 0.3%, to 16277.32.
Hong Kong: The Hang Seng index climbed 78.32 points, or 0.7%, to 11,420.34.
Sydney: Australian shares hit a new record. The all ordinaries index closed up 35.1 points, or 1.2%, at 2840.9.
STEALTH BANKER
It's only fitting to provide the following article featured in the April issue of the Globe & Mail Magazine.
They say he's quiet and a "nice guy." He certainly seems low-key. In fact, Royal Bank chairman John Cleghorn is those things - it's just that he's also extremely ambitious and about to become Canada's most powerful executive. Underestimate him at your peril
John Cleghorn is on his home field, in the meeting room near his office on the eighth floor of the Royal Bank Tower in Toronto. The word on the chairman and chief executive of the country's biggest bank is that what you see is what you get. What you see is a collegial 56-year-old businessman in shirtsleeves. No jacket. That's old school. His wire-rimmed spectacles lend a professorial air. He appears at once boyish and mature, with apple cheeks and a Kennedyesque smile. The whiff of fresh Listerine on his breath suggests a guy who likes to be prepared.
An emissary from Royal's public relations department sits by his side, his tape recorder primed like a mechanical threat. PR surveillance is part of the drill at juggernaut institutions such as the Royal - Canada's biggest bank, destined to become much bigger.
That's if Cleghorn has his way - which, as we know, is to merge with the Bank of Montreal. That would create a financial enterprise of unprecedented size in Canada - with assets of some $453 billion. In terms of market capitalization, the new bank would figure No. 10 in North America, 22 worldwide.
The proposed merger, which is expected to win government and regulatory approval, is destined to change the face of Canadian banking, even though opinion varies on just how. "Mergers never quite work out the way you think they will," points out Terry Shaunessy, bank analyst at Gordon Capital Corp.
Size does command attention, though, which explains the frenzied reaction of the media following the late January announcement. The buzz surrounding the proposed merger wasn't that it happened - Bay Street had been expecting two big banks to join forces, though later rather than sooner. It was that Cleghorn and BMO chairman Matthew Barrett - as different as chalk and cheese - set up the country's first so-called megabank without waiting for approval. There were definitely solid Y chromosomes at work here. A huge capital base, they said, was necessary to go out and "kick ass" internationally. It all seemed so refreshingly un-Canadian.
Equally unanticipated was the fact that Cleghorn, not Barrett, is leading the charge. The two banks are calling their marriage a "merger of equals," but anyone close to it knows that it's a well-crafted takeover. Cleghorn comes out on top. He'll be the chief executive and co-chairman of the new bank. Barrett will be "co-chairman in charge of strategic planning."
The development challenges the conventional wisdom that had Barrett as the most aggressive bank CEO of the bunch. The BMO chief had mesmerized the press since 1990, when he was named chairman. There was his slightly louche, 1940s matinee-idol demeanour and his witty, silver tongued charm. There was also the mileage provided by his quixotic Irish heritage. Not a story could be written about him without mention of the fact that his father was a band leader. It was deliciously unbankerly. Cleghorn's dad was once a bursar. It's harder to work with that.
If Barrett is the country's most charismatic banker, Cleghorn is the most pragmatic; where Barrett is personality, Cleghorn is character. Of the two, Cleghorn is decidedly the more stealthily ambitious; he's been working toward a deal of these dimensions for a decade. Now, the CEO has emerged as the Clark Kent of Canadian banking, even though he seems like the kind of guy who would exit the phone booth as Clark Kent too.
Cleghorn, not Barrett, has become the hot interview. It's attention that the career banker never sought. Up to now, he has kept a low public profile. He's not out giving speeches on national unity issues, as Barrett does. He is using the new press attention to deliver his well-honed script on big being better, the call for open competition and the importance of banks as a strategic asset to Canada, all of it laced with statistics and well-trod metaphors - sports, battle, history, ships on the ocean.
Through it all, Cleghorn's delivery is straight, occasionally running to dry. He avoids adjectives and superlatives, although the occasional aphorism can slip in. "I like to try to anticipate the blowtorch rather than backing into it," he's known to say. Nor is he one to flash his intellect, which those close to him say is estimable.
Of course, this merger is all about power, not personality. And postmerger, Cleghorn will, arguably, have as much financial clout internationally as the prime minister, certainly more than the finance minister.
Those who know Cleghorn well say that such enhanced power couldn't fall to a more decent guy, that it will be channelled for forces of good, not evil.
"He's an individual of great depth and character," says Lorna Marsden, the president of York University, who met Cleghorn in the late 1980s at a Governor-General study conference. "It's almost in spite of the job he has."
In fact, Canadians' legendary dislike of big banks - and bankers - is Cleghorn's biggest liability as he tries to sell the merger to the public. He knows the terrain. In the early 1990s, when he was bank president, he was called a liar when defending interest rates charged on credit cards, before a parliamentary inquiry.
If Barrett is the country's most charismatic banker, Cleghorn is the most pragmatic; where Barrett is personality, Cleghorn is character. Of the two men, John Cleghorn is decidedly the more ambitious
Tom Jarmai, bank analyst at Scotia Capital Markets, is one of the few who is sympathetic to the loneliness of the belittled bank chairman. "Why would anybody want to be a bank chairman in Canada?" Jarmai asks. "It's incredibly difficult. Banking is a business, and the man elected to run it is judged by how efficient and profitable it is. Then he's hated when it makes big profits. Run it inefficiently, and the public's happy. The analogy would be opening a bar and giving all the beer away."
Cleghorn has the business part down pat: Royal is currently the most profitable company in the country, with 1997 profits of $1.68 billion. (Bank of Montreal's 1997 profits were $1.31 billion.) "Royal is a strong ship," says Jarmai. "And John is a smart banker."
It can be - and has been - argued that running a bank is much like steering an ocean liner, that Cleghorn's success was somewhat assured, given the strong franchise that he inherited with the Royal. That you don't need a genius IQ to pull in at least 15% ROE. (Royal's 1997 ROE was 19.3%, BMO's 17.1%.) Nigel Dally, bank analyst for Morgan Stanley Dean Witter in New York, says there's more to it than that. "The Royal is one of the best-managed banks in North America," he says. Cleghorn is credited with building Royal's brand name. He also improved Royal's weak position on the credit side after a slew of bad real estate and oil-patch loans.
But one doesn't become bank chairman because of credit analysis skills. Cleghorn is also a shrewd diplomat. "If anyone can convince the government, it's him," says Alex Paterson, a lawyer with McMaster Meighen in Montreal and a long-time Cleghorn friend. "He's a great guy." Indeed, everyone who knows Cleghorn says that - that he's a great guy. Everyone is happy to return a phone call when John Cleghorn is the subject. And they all say the same thing: that he takes what he does seriously, but doesn't take himself too seriously; that he's generous, patriotic and community-minded.
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