MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING THURS., MAY 13 1998 (1)
MARKET OVERVIEW
The TSE 300 fell for a third-straight session, hurt by bank shares and oil issues
Toronto stocks closed lower on Thursday as a slumping Canadian dollar renewed fears that the Bank of Canada could be forced to raise interest rates. Canadian stocks fell as the declining C$ hurt bank shares. Gains in manufacturers like Northern Telecom Ltd. helped temper the decline.
The Canadian dollar opened Thursday at 68.97 cents US, down 0.24 of a cent, which took the loonie's decline since Wednesday morning to 0.77 cent. It later clambered back above 69 cents and closed at 69.06 cents US, down 0.15 from Wednesday's close.
The dollar's weakness is being attributed to Canadian interest rates that are lower than those in the U.S.
The Toronto Stock Exchange 300 composite index fell 29.63 points, or 0.4%, to 7677.86. About 91.8 million shares changed hands on the TSE, down from 115.1 million shares traded on Wednesday. On Wednesday the Toronto market dropped 10.29 points to 7707.49. Yesterday, trading value was worth C$1.58 billion. Advancers lagged decliners 407 to 600 with 308 issues unchanged.
Toronto's blue chip 35 index also lost ground today, falling 1.86 points or 0.44 percent to 417.97. The TSE 100 index lost 1.74 to 468.32.
The Toronto market was knocked around for much of the day by fears that the faltering Canadian dollar, which fell to $0.6911 (C$1.4470), would prompt Canada's central bank to raise interest rates.
''What people are looking at here is the Canadian dollar and they're saying it could be going further south, and if it does go further south, the bank's going to have to step in and raise rates,'' said Conor Bill, director of retail trading at ScotiaMcLeod.
Higher interest rates tend to take the steam out of equities markets.
Overall in Toronto, 11 of the TSE 300's 14 subindexes closed lower, led by a one percent drop in the metals and minerals group and a 0.7 percent dip in the heavily weighted financial services sector.
Canadian Imperial Bank of Commerce (cm/tse) lost 70› to $50.15, Toronto Dominion Bank (td/tse) slid 60› to $64 and Newcourt Credit Group Inc. (nct/tse) declined $1.20 to $66.30.
Power Financial Corp. (pwf/tse), up $1.35 to $61.30, reported its profit before a one-time gain rose to 59› a share, up from 49› a year earlier.
Only precious metals stocks showed any strength on the TSE as interest rate uncertainty, a weak Canadian dollar and Asian instability nudged investors toward gold. The gold and silver subindex peeked into positive territory by 0.11 per cent, thanks to some of the larger gold mining stocks such as Barrick, up 40 cents to $31.45. Placer Dome slipped 15 cents to $20.45.
Metals and mining matched the communications sector's 0.96 per cent decline. Cominco lost $1.20 to $21.00, Falconbridge dropped 15 cents to $18.70 and Rio Algom Ltd., which dropped C$0.85 to C$23.80. Alcan Aluminium lost 15 cents to $46.50. Nickel giant Inco edged up 10 cents to $23.20.
Oil issues fell on expectations that crude prices will fall after the Organization of Petroleum-Exporting Countries said further production cuts are not expected until July. Suncor Energy Inc. (su/tse) lost $1.35 to $53 and Talisman Energy Inc. (tlm/tse) fell 85› to $40.
TSE communications stocks showed the day's biggest loss, down 0.96 per cent, in part because of the continuing battle for WIC Western International Communications. Rival suitors Shaw Communications and CanWest Global both saw their share prices fall. Shaw slipped 15 cents to $22.75. The object of their affection, WIC's B shares, gained 25 cents at $44.50. Also leading the group decline was Thomson Corp., which lost C$0.90 to C$42.20, and CHUM Ltd., which dropped C$3.00 to C$54.00. Earlier in the week, Thomson reported a first-quarter loss of US$0.15 a share after extraordinary losses, compared with a loss of US$0.16 a share for the same period a year earlier.
Nortel (ntl/tse) rose 75› to $92.65 and computer services company CGI Group Inc.(GIBa/TSE) rose $2.35 to $48.70.
Bucking the negative trend was the gold and precious minerals sector, which rose 0.1 percent as the June price for Comex gold climbed US$0.50 to US$299.70.
Teleglobe Inc. (tgo/tse) climbed $2.85 to $69.35 after it reported its first quarter profit rose 49% to 58› a share, from 43› a share a year earlier.
''Overall it was a pretty sloppy day with no real action,'' said Bill.
Trading is expected to be light on Friday as traders book off early for Canada's Victoria Day long weekend.
Other Canadian markets were lower. The Montreal Exchange portfolio fell 14.43 points, or 0.4%, to 3875.87. The Vancouver Stock Exchange lost 0.04 of a point to 617.9. The Alberta Stock Exchange Combined Value Index gained 7.47 to 2331.55. 161 issues advanced, 169 declined and 132 remained unchanged.
Wall Street dipped into negative territory, bogged down by the falling fortunes of Dow heavyweight Hewlett-Packard.
Shares of Hewlett-Packard Co. led the U.S. market lower after the computer maker warned of disappointing earnings ahead.
The Dow Jones industrial average fell 39.61 points, or 0.4%, to 9172.23. If not for Hewlett-Packard's decline, the benchmark would have posted its second straight record.
The Standard & Poor's 500 composite index fell 1.49 points to 1117.37.
About 579.3 million shares changed hands on the Big Board, down from 604.7 million shares traded on Wednesday.
The Nasdaq composite index slipped 0.82 of a point to 1865.36.
The NYSE "uptick rule" was triggered twice as the Dow fell 50 points, pared the loss to less than 25 points and then slipped again in late trading. Top federal officials have asked the NYSE to eliminate or ease the 50-point collar.
Hewlett-Packard delivered a body blow to computer stocks when it warned late Wednesday that its fiscal second quarter earnings would miss expectations because of price cuts on its personal computers and Asian economic weakness.
Hewlett-Packard shares (hwp/nyse) slumped US$11 5/16 to US$70 5/16.
The outlook alarmed investors, who took out their anxiety out on other computer shares. Dell Computer Corp. (dell/nasdaq) dropped US$3 to US$95 1/4 and Compaq Computer Corp. (cpq/nyse) fell 1/4 to US$31 9/16.
After the market closed, National Semiconductor Corp. warned its fourth quarter revenue could be 20% below its year-ago period.
International Business Machines Corp. weathered the drop in computer stocks. Louis Gerstner, chief executive of the Armonk, N.Y.-based company, said he expects revenue growth to accelerate and it will cut costs further to boot profit. IBM shares (ibm/nyse) rose US$4 3/4 to US$125 13/16.
Microsoft Corp. (msft/nasdaq) rose US$2 to US$88 15/16. Last-minute negotiations between the company and U.S. government antitrust officials sparked optimism that Microsoft would be able to proceed with the release of its new flagship product, Windows '98.
Phillip Morris Cos. (mo/nyse) fell 5/8 to US$36 3/8, a 52-week low. Investors are concerned that potentially costly lawsuits and federal regulations will continue to hound cigarette makers.
Major overseas markets were broadly lower.
London: Nagging fears over the future direction of global interest rates kept British share gains in check. The FT-SE 100 index rose 24.4 points, or 0.4%, to 5948.5.
Frankfurt: The German Dax index fell 15.66 points, or 0.3%, to 5361.22.
Tokyo: A poor earnings outlook for some firms added to worries about the Japanese economy. The 225-share Nikkei average slipped 36.12 points, or 0.2%, to 15,307.69.
Hong Kong:Stocks swung back from heavy losses to finish with solid gains. The Hang Seng index ended up 122.66 points, or 1.3%, at 9591.95.
Sydney: The Australian share market fell as political instability in Asia sent the A$ lower. The all ordinaries index lost 14.3 points, or 0.5% to 2759.4.
Euro Shares Unnerved By Rate,Indonesia Worry
Trading This Morning In Europe
LONDON, May 15 - European bourses were mixed by mid-morning on Friday, disheartened by a slight overnight fall on Wall Street, concerns over interest rates and rioting in Indonesia.
London, Europe's biggest stock market, fell by 0.84 percent, while Paris lost 0.43 percent.
Dealers said they were braced for further losses on the Dow after an after hours profits warning from National Semiconductor (NSM).
''That'll put NASDAQ under pressure today and it won't help any here,'' said one London dealer.
But the mood in Frankfurt and Madrid was brighter with rises of 0.27 percent each. The two bourses were among the only European gainers on Thursday.
On the foreign exchanges, the yen was still under pressure but nerves about the meeting of the Group of Eight nations, which starts on Friday, prevented the dollar and the mark from scaling new peaks.
The summit is in Birmingham, England.
The dollar was at 134.17 yen by mid-morning, compared with Thursday's one-month high of 134.58 and a late European close of 134.23. Mark/yen was at 75.35, below the 18-month high of 75.62 it set on Thursday and 75.42 late on Thursday.
But civil unrest in Indonesia, and the weakness it has induced in Asian markets, has fanned pessimism about the yen's outlook and analysts expect it to extend its slide next week.
''There is an element of caution about pushing the yen too far at this stage,'' said Steve Hannah, director of research at IBJ International. ''But we are not expecting anything out of the G8, so next week the trend should be for a weaker yen.''
In bond markets, the key U.S. 30 year Treasury was up 3/32 from its New York close with some dealers in Japan reporting a flight to quality by Asian investors amid mounting concerns about Indonesia as the mob continued to rampage in Jakarta.
Fears about U.S. interest rates before next week's monetary policy meeting were also blighting the markets despite relatively benign economic data.
U.S. industrial production data and capacity utilisation figures for April are due later on Friday but are not expected to shed much light on the chances of a rate rise.
In London, dealers said the rate fears were keeping investors on the sidelines, although a slight recovery in sterling was improving sentiment. The Bank of England's trade weighted index moved up to 103.3 from 103.1.
Among the few corporate features, Stagecoach (UK & Ireland: SGC.L) gained two percent after the company welcomed a report from the UK rail regulator saying it wants rules of conduct to govern rolling stock companies.
The stock hit 1,233p before paring gains to trade 1.5 percent or 18p higher at 1,224p.
In the financial services sector Prudential (UK & Ireland: PRU.L) rose 19p or 2.4 percent to 798p on talk of a broker view on the sector while Legal & General (UK & Ireland: LGEN.L) fell 2p to 690p.
French shares were undermined by bank stocks which were labouring under the Indonesia cloud, softer bonds and a 2.25 percent fall in Elf Aquitaine (ELFP.PA) after it reported a 12 percent drop in first quarter sales.
Other oil shares were also suffering after gains earlier in the week. Total (TOTF.PA) slipped 0.38 percent to 793.
In Frankfurt, construction group Hochtief AG (HOTG.DE) led gainers, rising four marks, or five percent, to 84 marks after Hypo-Bank raised its recommendation on the stock to ''outperformer'' from ''marketperformer.''
Madrid share indices were firm in thin trade on Friday, as the market prepared for the May Ibex futures expiry later, dealers said.
But trade was dull, sapped by a local Madrid holiday.
Telefonica (TEF.MC) was up 0.14 percent to 6,960 pesetas after a big climb on Thursday which dealers attributed to renewed institutional interest after an analyst conference call.
AND AS WE SPEAK
quote.yahoo.com
Buffett Warns on Level of Stock Prices: 'Margin of Safety has Vanished'
Exclusive Interview with Adam Smith
NEW YORK, May 14 - In a far reaching, exclusive interview on ADAM SMITH'S MONEY GAME, Warren Buffett says that it takes a rosy scenario to bet on the stock market continuing to rise at current rates and that he does not bet on rosy scenarios. He also says that many acquisitions are fueled by the egos of CEOs and self-interested investment bankers. The interview will be broadcast on Saturday, May 16th on PBS at 9:30 a.m. on Channel 13/WNET in New York, and various times nationwide.
Here are excerpts from the 25 minute interview with Adam Smith.
ADAM SMITH ASKS:
"Can you really have corporate profits continue to grow at this rate?"
WARREN BUFFET REPLIES:
"You can't have American business earning 20% on equity and real GDP growing at 2 to 3 percent nominal, growing at 4 percent. If you retain equity, because obviously if you earn 20% on equity and retain it all you have to grow earnings 20% and the one thing I can promise you is that corporate profits will not become more than 100% of GDP.
"So you either have to distribute a very high percentage of the earning by either dividends or repurchases, or you get into mathematical absurdity. The other possibility is that American businesses won't just earn anything like these returns in the future. We have not seen it before.
"I don't want to bet on it continuing. But I am saying that if it does continue then stocks are not overvalued, but it takes a rosy scenario to justify these prices. That may turn out to be true, but I have not made money in the past betting on rosy scenarios.
"I don't think there is much of a margin of safety in stock prices now. No, there is not a margin of safety. It leads to caution. But it doesn't predict a bear market."
ADAM SMITH ASKS:
"We have more people in the stock market than ever before in history and more than 90 percent of the money managers have never seen a bear market. What should we think about that?"
WARREN BUFFET REPLIES:
"For people who think there is an easy way to make money year after year, you are going to have some surprises, and there are large numbers of people who accentuate the surprises. If you get a bear market rolling you can shake up a significant percent of the people because they have not been through it. Now, I don't think anyone knows for sure, but if you look at human behavior and financial markets, people have exhibited fear and greed for centuries and they will exhibit both in the future and fear is a different thing to watch than greed."
ADAM SMITH ASKS:
"What about investment bankers?"
WARREN BUFFETT SAYS:
"When a corporate CEO says to an investment banker, 'Do I need an acquisition?' I think that is a little like asking the barber do I need a haircut. I think it is dangerous to get advice from people where their compensation -- and maybe very large compensation -- depends on a specific line of advice they give you. If they give you advice to buy a company and they make $20 million; and they give you advice that is not such a good idea and they get zero, I say that is not the most unbiased source of advance."
ADAM SMITH ASKS:
"Why do smart people do dumb things?"
WARREN BUFFETT SAYS:
"That is the big question. They do it in investing. They do it in managing businesses. Money does not go to the people with the highest I.Q. There is a very poor correlation between I.Q. and investing and results.
"It is ego, it is greed, it is envy, it is fear, it is mindless imitation of other people -- there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out.
"I would say that if Charlie (Berkshire Vice Chairman Charlie Munger) and I have any advantage it is not because we are so smart it is because we are rationale and we very seldom let extraneous factors interfere with our thoughts. We don't let other peoples' opinions interfere with it; we try to get fearful when others are greedy; we try to get greedy when others are fearful; we try to avoid any kind of imitation of other people's behavior -- and those are the factors that cause smart people to get bad results,"
ADAM SMITH ASKS:
"Can you think of an example of someone really smart doing something really dumb?"
WARREN BUFFET REPLIES:
"I can think of lots of examples, both in business and investing. You see it in the corporate arena where people make very dumb acquisitions; and you saw the oil companies in the 70s all rushing after each other in their various things and actually in the past great companies like Coke and Gillette have gone into all kinds of different areas before they figured they had a pretty good business in razor blades or soft drinks."
ADAM SMITH ASKS:
"There is a huge wave of mergers going on right now, do you think some of that is the ego of the CEO?"
WARREN BUFFETT REPLIES:
"I think a lot of it is. There is a great desire -- you don't get to be a CEO by being a milk-toast -- I mean you have a certain amount of zest for action in most cases. That is how people get to the top. It is not fun if you are a CEO to look around and see your competitors or colleagues making deal after deal and being plastered all over the press and to sit there and say I don't think these deals make much sense. That is very difficult to do. And you have got other constituencies urging you on. Your own people .. in an organization where other people are expanding enormously by acquisition you find it very difficult to resist the intrigue of the people below you who say why aren't we doing something.
"So not being a lemming when all the other lemmings are running in a certain direction is a great advantage. You want to do your own running off cliffs near the right place. And that can work in reverse. When people are depressed, you know, that is a time often to be very aggressive. You simply have to insulate yourself in some way from the emotions that are running around you and that is easy to say but it is hard for people to do."
ADAM SMITH ASKS:
"What makes you sell a stock?"
WARREN BUFFETT REPLIES:
"If I need money, we will pick whatever we like the least at the present price. That is not necessarily a negative comment about the business. Everything I have ever sold has gone up subsequently and they should because they are good businesses, but I will pick the one I feel the least sure of where it is going to be 10 years from now, not necessarily the one that has the least potential."
ADAM SMITH ASKS:
"Does the use of derivatives give you any pause?"
WARREN BUFFETT REPLIES:
"It has the potential for trouble. I take the simplest derivative -- the S&P index -- that is the margin account basically, and it is a lot of margin in most cases for people who are buying. They don't put up 100% of the money and we learned in the twenties that markets with participants playing heavily on margins can be more dangerous than markets where people are dealing in cash. And for that reason the federal reserve started regulating margin requirements. The margin requirement for outright stock ownership is far higher than what speculators could achieve through futures and derivatives."
ADAM SMITH ASKS:
"Do you think derivatives ought to be regulated?"
WARREN BUFFETT REPLIES:
"It gets very tough to regulate them right now. I don't think there is any easy answer on that. No, they are here to stay and I think regulation would be almost impossible."
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