MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING MONDAY, MAY 4, 1998 (1)
MARKET WATCH
Toronto stocks close higher in quiet trading. BCE, Nortel and Newbridge lead the advance on Bay Street
After climbing more than 120 points to 7,822.25, the TSE 300 composite index retreated to close at 7,737.36, up 35.25.About 101.2 million shares changed hands on the TSE, up from 96 million shares traded on Friday. Trading was valued at C$1.62 billion. Advancers outpaced decliners 570 to 466 with 291 issues unchanged.
Overall, in Toronto 11 of the TSE 300's 14 subindexes closed in positive territory, led by a 1.2 percent jump in the conglomerates sector and a 1.4 percent jump in the utilities group. Conglomerates and pipelines both rose 0.7 percent.
Investors are flocking to the safety of blue chips as the spectre of rising interest rates is never far from the horizon. "The list is getting narrower and narrower," said David Jarvis, a liability trader at Levesque Beaubien Geoffrion. "It's harder to find good stories here. People are going after growth stories." Jarvis said uncertainty about a rate rise in the U.S. is pushing investors to migrate to the reliable and safe stocks known for their consistent performances. "People are a little nervous and rightly so," said Jarvis. "Anything that's got growth to it and is going to do it in a low inflation environment, people want."
Such seesaw days are typical with investors nervous about talk of higher interest rates and market corrections, said Pat Blandford, a senior vice-president with Midland Walwyn Capital Corp. "There are still lots of people who raise these concerns about whether the market is too high, and they can be convinced to sell a stock when it rushes up," Blandford said. Among buyers, he added, there are few signs of blind market mania. "I continue to be pleased that although the market's this high, nobody I speak with is saying 'Buy anything on the board, it's going north,' " he said. "You don't hear that kind of raucous enthusiasm."
BCE Inc., Northern Telecom Ltd. and Newbridge Networks Corp. contributed 17 points to the benchmark's advance. BCE shares (bce/tse) rose $1.25 to $62.85 while Nortel (ntl/tse), 51.7%-owned by BCE, rose 90› to $89. Newbridge shares (nnc/tse) climbed $2.70 to $44.80 amid speculation the company would announce at a press conference today it would launch a new product with AT&T Corp. Newbridge shares have gained 17.3% in the past five days.
CAE Inc. gained $0.40 to $13.65, while steel producer Ipsco Inc. was up 85 cents to $43.85. Northern Telecom gained 90 cents to $89.00.
The real estate group was third-best on the day, gaining 0.80 per cent on the strength of Oxford Properties, up 75 cents to $38.00, and TrizecHahn, which gained $0.35 to $33.25.
The TSE utilities subindex has gained 28% in the past three sessions.
"Investors have turned to utilities -- and BCE is the leader in that group -- because concern over government approval [for two proposed banking mergers] has taken the steam out of the banks in Canada," said Paul Devlin, vice president at MMA Investment Managers Ltd.
Canadian Pacific Ltd. (CP/tse) rose 30› to a record $44.20 after the rail and shipping company said on Friday its railroad unit would increase the price it would pay stockholders of Ontario & Quebec Railway Co. for the remaining shares in the firm that it does not already own.
Bombardier Inc. (BBDb/TSE) rose 40› to a record $39.15 after the Montreal-based maker of planes, trains and recreational equipment said on Friday it received a US$166 million order for eight regional jets from France's Brit Air. Bombardier has gained 9.1% in the past four sessions.
Fonorola Inc. shares (fon/tse) advanced $1.10 to $64.10 after it reached agreements to extend its network for business customers.
The groups that normally boost the market fell today. The heavily weighted financial services sector dipped 0.1 percent and metals and minerals dropped 0.6 percent. The gold and precious minerals sector fell 0.3 percent even though the June price for Comex gold rose US$1.80 to US$306.50.
Cominco slid $0.70 to $22.50 and Cameco was down 20 cents to $47.65.
The gold and silver group was down 0.26 per cent. Placer Dome lost 20 cents to $20.80. Franco-Nevada Mining gained 15 cents to $24.75.
The financial services index, which has suffered amid talk of a possible hike in interest rates, lost 0.14 per cent. Toronto Dominion Bank lost $0.75 to $64.45, while Bank of Montreal was down $0.35 to $77.70.
Other Canadian markets were mixed.
The Montreal Exchange portfolio rose 4.99 points to 3876.41. The Vancouver Stock Exchange lost 2.63 points, or 0.4%, to close at 633.2.
Wall Street stocks rose to a record close as drug companies benefited from good news of a new anti-cancer drug.
Investors stepped in to buy U.S. stocks on optimism that continued low interest rates will enable companies to expand profits.
The Dow Jones industrial average climbed 45.59 points, or 0.5%, to close at a record 9192.66. It reached an intraday high of 9261.91 before falling back. The benchmark is up 16% so far this year.
Union Carbide Corp. (uk/nyse) led the gain, rising US$3 5/16 to US$51 1/2 after a report that British Petroleum Co. prepared, then abandoned, plans to take over the U.S. chemical maker.
The Standard & Poor's 500 index rose 1.07 points to 1122.07.
About 555.9 million shares changed hands on the Big Board, down from 576.6 million shares traded on Friday.
The Nasdaq composite index rose 5.42 points, or 0.3%, to 1878.86.
EntreMed Inc. (enmd/nasdaq) soared US$39 3/4 to close at US$51 13/16 after earlier touching US$85 intraday.
The National Cancer Institute said two of the company's drugs offer the best hope for treating cancer.
Bristol-Myers Squibb Co. (bmy/nyse), which owns a stake in EntreMed and is helping develop one of the drugs, surged US$3 1/8 to US$109 5/16.
Echlin Inc. (ech/nyse) rallied US$4 to US$51 9/16 after Dana Corp. agreed to buy the autoparts company for US$4.1 billion in stock and assumed debt, topping a US$3 billion hostile bid by SPX Corp. The offer equals a price of US$55 a share. Dana shares (dcn/nyse) fell US$3 1/16 to US$56 1/8 while SPX (spw/nyse) rose US$1 1/16 to US$73 5/16.
Eastman Kodak Co. (ek/nyse), one of the 30 Dow industrials, rose US$2 9/16 to US$76 3/16 as Lehman Brothers Inc. told its clients to buy Kodak stock.
Major international markets were mixed.
London: In London, The Financial Times Index of 100 industrials was closed for the holiday May bank Monday. It will reopen today.
Frankfurt:The Dax index soared 207.22 points, or 4.1%, to 5314.66.
Tokyo:The Japanese market was closed for a national holiday. Trading will resume today.
Hong Kong: Stocks drifted to a lower close with liquidity drying up as cautious investors remained on the sidelines with little news to spur buying. The Hang Seng index fell 124.26 points, or 1.2%, to 10,439.42. On Friday, the index had gained 180.00 points.
Seoul: The key index in South Korea slumped 14.73 points or 3.6 percent to 391.80, its lowest level since early January. Traders said shares on the Seoul Stock Exchange tumbled because of worries over labor unrest amid rising unemployment. Some 20,000 workers and sympathetic students, led by the militant Korea Confederation of Trade Unions, on Friday protested massive layoffs by South Korea's large conglomerates. The protest led to a violent clash with police. Because of South Korea's financial crisis, thousands of companies have collapsed, and the number of jobless people has doubled to 1.5 million since December.
Bangkok: Thai share prices also slumped because of concerns that the Japanese economic weakness will drag down the Thai currency. Japan is a major investor, creditor and export market for Thailand. In late trading, the baht was quoted 38.55 to the U.S. dollar, up from 38.60 baht at the close Thursday. The Thai market was closed on Friday.
The governor of Thailand's central bank announced after the market closed that he has resigned following an investigation into his role in depleting the country's foreign reserves, a miscalculation that helped trigger the Asian economic crisis. The Stock Exchange of Thailand Index lost 11.42 points, or 2.8 percent, to 400.71.
Taipei: Share prices closed higher, boosted by technology stocks, amid expectations of solid April sales figures. The market's key Weighted Price Index rose 67.14 points, or 0.8 percent, to 8,360.60.
Singapore: Share prices closed lower in across-the-board selling, with banking shares badly hit. The benchmark Straits Times Industrial Index fell 17.00 points, or 1.1 percent, to 1,476.40.
Jakarta: Share prices closed lower after the government announced its plan to increase fuel and power prices starting Tuesday. The Composite Index fell 2.531 points, or 0.6 percent, to 445.994.
Kuala Lumpur: Malaysian shares closed generally lower, but the the key index rose because of the rise in several blue chip stocks. The Composite Index rose 1.46 points, or 0.2 percent, to 627.43.
Manila: Philippine shares closed higher as investors continued to position for a possible rally after the country's presidential election next week. The Philippine Stock Exchange Index of 30 selected issues rose 26.80 points, or 1.2 percent, to 2,208.12.
Sydney: Australian shares closed higher, but poor trade data dampened sentiment. The market was supported by climbing industrial stocks, while a weak gold price saw most gold mining companies fall in value. The all ordinaries index rose 8.1 points, or 0.3%, to 2812.3.
Wellington: New Zealand share prices closed lower. The NZSE-40 Capital Index fell 15.60 points, or 0.6 percent, to 2,237.69.
INVESTMENT NEWS
Brokers catch IPO fever
String of high-profile issues planned
Globe & Mail
Canadian investment dealers are anticipating a promised revival in one of their most profitable lines of business: taking companies public for the first time.
Brokers plan to tap investors for hundreds of millions of dollars with a string of high-profile initial public offerings (IPO) in the next few weeks.
And they're hungry for more. With stock markets strong, "I'm sure most of the dealers . . . are out pitching left, right and centre," said Ron Schwarz, executive director of institutional equity research at CIBC Wood Gundy Securities Inc.
Forthcoming deals include forestry player E.B. Eddy Ltd. , which could raise more than $750-million; Danier Leather Inc. , which may bring in more than $60-million; computer maker Celestica Inc. , which will raise up to $400-million (U.S.); and Salter Street Films Ltd. , which is shooting for $15-million (Canadian).
Bay Street is pitching "high-profile, strong, brand-name-type companies," Mr. Schwarz said.
Potential buyers have plenty of cash in the wake of big takeovers such as the $3-billion-plus purchase of Norcen Energy Resources Ltd. by Union Pacific Resources Group Inc., said Irwin Michael, president of I.A. Michael Investment Counsel Ltd. in Toronto. "Clearly that money has to be reinvested."
Investors, many of whom were burned in last year's new issue market, have been doing better this year.
Of 18 newly public stocks, funds and trusts that started trading on the Toronto Stock Exchange in the first four months of 1998, 13 have increased in price.
That's better than 1997, when investors in almost half of the TSE's new stocks lost money. As of this January, 44 of last year's 99 newly listed stocks had slumped from their offering price.
Until now, new stocks have been a tough sell in 1998, with the TSE recording 24 IPO announcements in the first four months of the year, down from 28 last year. (The exchange's list includes some issues that haven't started trading yet.)
"The level of activity is not particularly high," said Roger Dent, an analyst at Yorkton Securities Inc.
In a nervous market, brokers have resorted to selling "split share" vehicles, such as Allbanc Split Corp. or Pipe NT Corp. They simply divide blue-chip bank and pipeline shares into a preferred share that pay out dividends and a capital share that holds out the allure of capital gains.
One problem has been the small size of financings, which limit the amount that fund managers and other investors can buy, Mr. Michael said.
Take computer consultant Sierra Systems Group Inc. of Vancouver, which raised $65.2-million last month. The shares have soared more than 50 per cent from their $18 issue price, the best showing by an IPO this year.
Many of last year's slumping IPOs were income and royalty trusts, which pay out the cash flow from assets ranging from oil wells to mattress manufacturing.
The market for income trusts fizzled amid oversupply that saw $4.7-billion of trusts come on the market in the fourth quarter alone. Scotia Capital Markets' index of royalty and income units returned a thin 2.2 per cent in 1997 after earning 34.9 for investors in 1996.
New IPOs for 1998
Issuer: Sierra Systems
Listing date: April 15
Size of deal ($million)**: $65.2
Offer price: $18.00
Current price: $27.50
% change from issue: +52.8%
Lead broker: CIBC Wood Gundy
Issuer: Descartes Systems Group
Listing date: January 20
Size of deal ($million)**: $57.0
Offer price: $7.00
Current price: $9.80
% change from issue: +40.0%
Lead broker: Griffiths McBurney
Issuer: Decoma International
Listing date: February 27
Size of deal ($million)**: $100.0
Offer price: $9.50
Current price: $13.30
% change from issue: +40.0%
Lead broker: Nesbitt Burns
Issuer: Informission Group
Listing date: April 15
Size of deal ($million)**: $35.0
Offer price: $10.25
Current price: $12.35
% change from issue: +20.5%
Lead broker: ScotiaMcLeod
Issuer: Northstar Drilling
Listing date: April 30
Size of deal ($million)**: $12.0
Offer price: $2.75
Current price: $3.25
% change from issue: +18.2%
Lead broker: Peters & Co.
Issuer: Allbanc Split (Capital)
Listing date: February 24
Size of deal ($million)**: $192.0
Offer price: $38.15
Current price: $43.00
% change from issue: +12.7%
Lead broker: ScotiaMcLeod
Issuer: Clarke Inc. *
Listing date: March 17
Size of deal ($million)**: $46.9
Offer price: $7.00
Current price: $7.85
% change from issue: +12.1%
Lead broker: First Marathon
Issuer: Sherritt Power
Listing date: March 5
Size of deal ($million)**: $35.5
Offer price: $4.41
Current price: $4.80
% change from issue: +8.8%
Lead broker: Griffiths McBurney
Issuer: Allbanc Split (Preferred)
Listing date: February 24
Size of deal ($million)**: $126.0
Offer price: $25.00
Current price: $26.50
% change from issue: +6.0%
Lead broker: ScotiaMcLeod
Issuer: Residential Equities REIT
Listing date: February 13
Size of deal ($million)**: $138.0
Offer price: $6.00
Current price: $6.35
% change from issue: 5.8%
Lead broker: RBC Dominion
Issuer: Pipe NT (Preferred)
Listing date: February 20
Size of deal ($million)**: $121.3
Offer price: $25.00
Current price: $25.45
% change from issue: +1.8%
Lead broker: Nesbitt Burns
Issuer: Oceanex Income Fund*
Listing date: January 5
Size of deal ($million)**: $52.4
Offer price: $6.00
Current price: $6.10
% change from issue: +1.7%
Lead broker: First Marathon
Issuer: MCM Split Share (Preferred)
Listing date: February 24
Size of deal ($million)**: $71.3
Offer price: $15.00
Current price: $15.15
% change from issue: +1.0
Lead broker: RBC Dominion
Issuer: Mackenzie Income Trust
Listing date: April 6
Size of deal ($million)**: $120.0
Offer price: $15.00
Current price: $14.90
% change from issue: -0.7%
Lead broker: Levesque Beaubien
Issuer: Pipe NT (Capital)
Listing date: February 20
Size of deal ($million)**: $79.0
Offer price: $16.28
Current price: $16.00
% change from issue: -1.7%
Lead broker: Nesbitt Burns
Issuer: MCM Split Share cl A
Listing date: February 24
Size of deal ($million)**: $71.3
Offer price: $15.00
Current price: $14.95
% change from issue: -0.3%
Lead broker: RBC Dominion
Issuer: TransAlta Power LP*
Listing date: April 3
Size of deal ($million)**: $178.0
Offer price: $6.00
Current price: $5.50
% change from issue: -8.3%
Lead broker: CIBC Wood Gundy
Issuer: Anthem Properties
Listing date: March 18
Size of deal ($million)**: $36.0
Offer price: $9.00
Current price: $7.95
% change from issue: -11.7
Lead broker: Goepel Shields
- * Oceanex, Residential Equities and TransAlta Power were sold as instalment receipts with $6 due immediately and $4 payable in a year. Clarke was sold as a receipt priced at $7 immediately and $6.75 a year later. Mackenzie Income Trust was priced at $15 upfront with another $10 due in November.
- ** Size of deal reflects only the first payment.
Source: TSE, Globe Information Services and Bloomberg Financial Services
Tense Times At TSE As Leadership Is Questioned
The brokerages that own the Toronto Stock Exchange have a message for president Rowland Fleming: 'He doesn't own the country club. He's been hired to manage it.'
Globe & Mail
AT a Toronto Stock Exchange board of governors meeting on April 20, there was only one item on the agenda -- TSE president and chief executive officer Rowland Fleming.
Exchange members had said they were becoming increasingly unhappy with Mr. Fleming's stewardship. So the governors decided the time had come for the board to exercise more control and put Mr. Fleming on a shorter leash.
Mr. Fleming was not invited to that session. A source close to the situation said that at a meeting the next day with Barbara Stymiest, chairwoman of the TSE's board of governors, and Daniel Sullivan, its vice-chairman, he was reminded just who is in charge. He was told that all significant decisions are made by the board and various exchange committees, and the CEO's responsibility is to implement those decisions.
Most of the exchange's governors are executives from its member brokerage firms.
The prevailing view among industry members is that Mr. Fleming has failed to grasp that he runs Canada's premier exchange on behalf of the brokerage firms that own it. "He doesn't own the country club. He's been hired to manage it," a trader said.
In public, Mr. Fleming and exchange members are doing their utmost to put aside their differences. Ms. Stymiest and Mr. Sullivan issued a statement to members last week, endorsing the CEO's leadership. And Mr. Fleming, widely criticized for not consulting enough with industry members, is making more of an effort to talk with them.
Behind the scenes, sources close to the situation say, tensions remain. Mr. Fleming does not want to talk on the record about his relationship with the board.
But sources say he is already feeling ground down over the slow pace of change at the exchange. Now that the board intends to get more actively involved, the sources doubt whether he will adjust to having his authority curtailed. They say he has neither the temperament nor the background to lead by consensus.
Had Mr. Fleming spent his career on Bay Street, he would have understood intuitively how the exchange operates. But before joining the TSE in 1995, he had spent his entire career in corporate management, including a stint as president of National Trust Co.
Any role a corporate board plays in setting strategy is usually done in response to the vision the CEO puts forward, said J. Richard Finlay, head of the Toronto-based Centre for Corporate and Public Governance.
At the exchange, Mr. Fleming is being asked to do the reverse -- respond to strategy set by the board and TSE committees.
"There's obviously a bad fit between his talents and abilities and the requirements of the job," said Donald Thain, a corporate governance expert and professor emeritus at the Richard Ivey School of Business in London, Ont.
The sources also say friction between Mr. Fleming and the brokerage industry raises questions about the lack of effective leadership and governance at the venerable institution at a time when it is grappling to define its place in a fast-changing world.
The advent of electronic trading systems and other alternatives, including mini-exchanges operated out of the big brokerage firm's offices, all threaten to supplant the TSE in its role as Canada's central auction market.
"It's a very serious problem because the TSE is too important to the public interest to be managed in the narrow-minded, backward way that it's managed," Mr. Thain said. Mr. Fleming acknowledged in a speech in January that the TSE has become "marginalized" because it has failed to respond to new competitors.
What has prompted so much industry grumbling about the exchange these days is its technology problem. The TSE is behind schedule in introducing a state-of-the-art electronic trading system, leaving traders to make do with an aging system that is slow and unreliable.
That became a lightning rod for a host of other complaints and acted as a wake-up call for the board to get more involved.
"Technology is by far and away the biggest issue for the exchange today," Mr. Sullivan, the TSE vice-chairman and deputy chairman of Scotia Capital Markets, said in an interview. "Systems have to work or people are out of business.
"We have had a lot of discussion recently between the board and management, and I can say equivocally that the board and management are working together in dealing with these challenging technology issues."
But industry critics have their doubts about the co-operative style of management that the board wants to impose. They say such a system works only when an organization has a monopoly in a fairly static environment.
In the competitive environment confronting the exchange, "it's too slow, too inefficient, too cumbersome and too unfocused," said a source close to the TSE. "The decisions take so long to get made that staff get fatigued, management gets fatigued and eventually you get ground down by it to the point where inertia sets in."
This source also said decisions are made not in the best interests of the exchange itself but to accommodate the vested interests of its owners. As the industry becomes consolidated in fewer hands, the TSE is increasingly representing the views of only a handful of its 103 member firms, he said.
The 10 biggest brokerage firms account for 80 to 90 per cent of stock trading on the exchange. Five of those 10 have seats on the 14-member board of governors.
The source close to the TSE said two bank-owned brokerage firms will become even more dominant if Ottawa approves the proposed mergers between Royal Bank of Canada and Bank of Montreal and Canadian Imperial Bank of Commerce and Toronto-Dominion Bank.
"The model here is not going to work for the future, particularly if two organizations represent more than 50 per cent of the business. They might as well start their own exchange."
In an interview, Mr. Fleming agreed that a co-operative such as the TSE faces significant challenges. "The issues of ownership and governance of an exchange in a competitive environment have been the subject of much discussion by our counterparts around the world and a variety of new approaches are either being discussed or being implemented," he said. "I'm not persuaded that the perfect model has yet been discovered."
Mr. Thain, the corporate governance expert, acknowledges that the exchange is a difficult place to manage because there are so many vested interests. "It's a bit like herding cats," he said. "But cats all want to eat and if you put enough milk out in the right places you can herd cats."
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