MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING THURS, MAY 28 1998 (1)
MARKET OVERVIEW
Don't panic -- wait out market turmoil, say stock watchers
Stock market turmoil may once again send some investors running for cover.
But don't panic, market experts say.
Stick to your financial plan and be prepared to ride out the ups and downs of the markets.
Overseas markets fell dramatically this week while North American stock indexes were up and down, under selling pressure from investors concerned about weakening corporate profits and economic turmoil in Asia.
Some analysts say the markets are overvalued, especially in the United States, and are due for a sharp fall -- a so-called correction.
That might invoke memories of Black Monday of 1987 and its much smaller sibling Grey Monday from last October when the Toronto market shed 6.17 per cent and the Dow gave up 7.18 per cent.
But no one is predicting such dramatic drops this time.
Wall Street could lose between 10 and 20 per cent of its value in the next several months, predicts Rick Egelton, deputy chief economist at Bank of Montreal.
But Canadian markets should take much less of a hit because the underlying economy here is in a stronger position.
"I would expect the Canadian stock market to outperform the U.S. stock market," says Egelton.
"But at the same time, if the U.S. undergoes a fairly significant correction, Canada wouldn't be immune to that."
A dip in market values is inevitable, say some analysts.
North American markets have become overvalued, particularly south of the border where they have been feeding off investors' expectations of bigger and better U.S. corporate profits, says Egelton.
But warnings are already going out that those profits will come in lower than investors will like.
At the same time, a slight rise in U.S. interest rates next year will boost the cost of doing business and slow economic growth.
Those concerns are compounded by lingering fears that the economic turmoil in Asia is far from over.
And adding to the woes are tight labor markets which mean rising wage costs for employers in the United States.
But the picture is brighter in Canada, suggests Egelton.
The domestic economy is expected to grow at about 3.5 per cent this year.
Slack in the Canadian labor market should hold down wage costs and short-term interest rates will rise only a small amount, perhaps half a point, to compete with the U.S. for investment dollars, says Egelton.
Stock markets in both Canada and the United States have been up and down for the last month, following steady climbs earlier in the spring.
Both the Toronto Stock Exchange and Wall Street's blue-chip Dow Jones Industrial average dropped about 150 points each on Tuesday, -- the second worst daily fall for the Dow this year -- before recovering a bit the next two days.
With so much turmoil, what's an investor to do?
Stick to your financial plan and ignore small ups and downs along the way, advises Geoffrey Waters, portfolio manager with Jones Heward in Toronto.
"The one thing you don't want to do is derail your plan for what may be a short term effect."
And enjoy the overall gains -- the TSE has already grown about 13 per cent this year, despite small drops along the way, he points out.
Many Canadians have gotten into the markets through mutual funds, saving for retirement.
That means, think long-term. Buy good blue-chip stocks and let them grow over a long period, perhaps five years.
Diversify. Ensure a mix of high and low-risk investments from various assets classes, such as stocks, bonds and money market funds.
Rebalance. If you feel too exposed, with too much risk in your portfolio, shift some assets into safer, more conservative investments.
Buy quality. Invest in funds with a proven track record.
Stocks still show the greatest returns and should be part of most portfolios, says Waters.
Nervous investors, particularly those near retirement, may decide to move holdings into safe, but low-yield, GICs and treasury bills.
But in an era of low interest rates, stock markets are the only game in town for investors seeking good, steady investment growth, says Waters.
"You don't have a lot of alternatives."
Market Watch
Whisper numbers creep into Canada
Globe & Mail
A company in your investment portfolio reports quarterly earnings higher than analysts' forecasts. Great, you think, the stock will pop up; it's only a question of how much. But wait -- it's losing ground, plummeting in fact. What happened?
You've just become the unwitting victim of the "whisper number" -- the unofficial earnings estimates that some analysts and investors in the know bandy about. They usually differ from the official estimates by only a few cents a share, but those in possession of them can use the information to make trading decisions ahead of the pack.
The scenario above is becoming increasingly common and actually happened last week with Dell Computer, one of the best known names in the technology industry. The company reported a 54-per-cent increase in first-quarter profit to 44 cents a share. This was slightly better than forecast, but a cent or two less than the whisper number. Since Dell's earnings came in below the unofficial forecast, the stock went into reverse. Over the next three days, the shares gave up an extraordinary $8 (U.S.).
Whisper numbers are largely an American phenomenon, but are creeping into Canada. Everyone knows they are used, but no one talks about their origin and most have no ethical problem with them. "They are just one of those things; we're in the information business," says John Kinsey, portfolio manager of Toronto's Caldwell Securities.
Whisper numbers, or at least the term, were unknown a decade ago. In the past couple of years, they have taken on a life of their own on Wall Street and to be without them means you are out of the loop. The reason: More often than not, they are more accurate than the official estimates, which are published by investor services companies, such as First Call. Academic research bears this out.
Recently, three U.S. university professors collected almost a thousand whisper estimates from news stories and Internet bulletin boards between 1995 and 1997 and compared them with the projections collected by First Call. They found that whisper forecasts tended to be more bullish than the official numbers and that, on average, they were 8 per cent closer to the actual earnings numbers than First Call's.
Whisper numbers were a U.S. invention, it appears, because of the enormous emphasis placed on earnings, as opposed to other measures of corporate performance. Wall Street's so-called momentum players adore companies that report constantly rising quarterly profits. When the trend is broken, they abandon the stock in droves, often with savage results. One Canadian analyst said: "In the U.S., there is an absolute preoccupation with quarterly numbers, especially in the tech sector. Without a whisper number, you can get destroyed."
Whisper numbers tend to land just a few days before a company reports its results. By then, there is usually too little time for the analysts to change their published forecasts. Moreover, there is little incentive to do so. If the whisper number is higher than the analyst's own forecast, as they typically are, the stock probably will rise and everyone -- the analyst, company management and shareholders -- will end up smiling. Analysts lose credibility for overestimating earnings, not the opposite.
The source of whisper numbers is hard to pinpoint, although the company itself would be a good place to start. Their accuracy implies they come from insiders. The insider might pass on a tidbit of information to a favoured analyst, who in turn may tell other analysts and fund managers. Internet investing sites pick up on the whisper and within minutes, it hits the street. "Analysts receive quiet calls from the company," says Larry Woods, editor of The Technology Review, a Toronto newsletter. "This is a game that goes on and on."
Although whisper numbers have become essential investing tools, at least on Wall Street, they are morally loathsome. By definition, they are based on information that is not immediately available to everyone. It is only natural that an analyst in possession of a whisper number will pass it on to his biggest clients, the institutions, instead of the lowly retail investors. Guess who loses out by not having the up-to-the-minute forecast? It's the old story. Big-name investors get better treatment. Any small investor who has tried to grab a piece of an initial public offering is painfully aware of this.
Will whisper numbers vanish in the interest of fairness? The U.S. Securities and Exchange Commission is putting pressure on companies and their investor relations and compliance officers to disseminate information to all investors on equal terms. But the reality is that whisper numbers benefit as many investors as they hurt. They are here to stay.
Street returns to winning ways on strength in banks and golds
Toronto's main equities index turned positive by Thursday's close but the overall market finished mixed as lackluster commodity prices weighed on investors' pocketbooks.
"People said it would tank. It didn't and you could consider that a big win," said Rolie Bradley, Maison Placements Canada trader.
''Overseas, the (London) FTSE tried to rally but quickly fell back. That's the same with the U.S. market,'' said Katherine Beatty, a technical analyst with MMS International.
''In Toronto, we didn't even try to move higher at the open,'' she added.
Beatty said she has a technical target of 7200 for the TSE 300 by the time this correction is done.
''The stock market is still the best place to invest your money but a bit of a correction is not surprising,'' she said.
Beatty said the fragile Canadian dollar and weakness in the U.S. markets were adding to the malaise.
Dealers said North American equities' late-session recovery on Wednesday, which halved losses in Toronto by the end of the day, is an excellent sign of equities' resilience.
''The market looks very fundamentally strong and the bull market's not over. This market just shows incredible resilience to be able to shake off almost everything,'' said Conor Bill, director of retail trading at ScotiaMcLeod Inc.
''What we saw yesterday, particularly in the U.S., is the market looking for an excuse to sell a couple of stocks.''
Weak oil prices and continuing softness in gold bullion were likely to spell trouble for Toronto on Thursday. Bill said the weakness likely will not be as pronounced as it was on Tuesday and Wednesday.
Brent crude remained under pressure Thursday after the release of weak stocks figures.
The Toronto Stock Exchange 300 composite index climbed 36.75 points, or 0.5%, to 7579.62, in a roller coaster session where the index fell as much as 38.5 points and gained as much as 43.9 points. About 104.7 million shares changed hands on the TSE, down from 112 million shares traded on Wednesday. Declining issues beat out advances 531 to 470 and 332 closed flat. The market recovered in modest trading worth C$1.5 billion.
Nine of the 14 sub-indexes closed higher, including gold and precious minerals, pipelines, and the heavily weighted financial services. Shares in banks and other financial institutions which make up a quarter of the index rose more than one percent.
Canadian stocks rose, led by bank issues after Toronto Dominion Bank reported better than expected earnings. The financial services subindex contributed 19 points to the advance. TD shares (td/tse) gained $1.25 to $63.80 after reporting fiscal second quarter earnings which beat analysts' estimates. The nation's fifth largest bank turned in the biggest percentage gain at 28 percent in profits by any bank in the second quarter after taking a one-time expense at the same time last year. Its earnings rose to C$307 million or C$1.00 a share.
Bank of Nova Scotia (bns/tse) rose 60› to $38.85, Bank of Montreal (bmo/tse) jumped $1.25 to $81.35 and Royal Bank of Canada (ry/tse) climbed $1.05 to $87.55 to help boost the group. All three reported record earnings on Tuesday. Laurentian Bank of Canada (lb/tse) climbed 80› to $34 after it reported its fiscal second quarter earnings rose to 64› a share from 56› a share a year earlier.
However, investors punished banks that failed to meet earnings expectations. National Bank of Canada (na/tse) tumbled 55› to $30 after Canada's sixth-largest bank said its fiscal second-quarter earnings rose to just 52› a share, from 44› a share a year ago. Analysts had been expecting earnings of 53› a share.
Telecommunications related issues paced the TSE advance. Northern Telecom Ltd. (ntl/tse) rose 40› to $93.40. BCE Inc. (bce/tse) climbed 65› to $66.10, but is still down almost 2% since hitting a record high of $67.35 on Monday. Fonorola Inc. (fon/tse) pushed the utilities group higher, gaining $1.75 to $66.25. The long distance phone service provider said an unidentified non-Canadian company may bid for its shares in after its board this month urged stockholders to reject a $1.7 billion takeover offer from Call-Net Enterprises Inc.
Utilities, with a gain of 32% this year, and financial services, up 20%, are the two best performing TSE groups.
Gold shares staged a comeback. The gold group had fallen 9% in the nine previous sessions. Barrick Gold Corp. (abx/tse) gained 65› to $28.65, Placer Dome Inc. (pdg/tse) climbed 55› to $18.65 and Teck Corp. class B shares (tekb/tse) rose 50› to $18.
"We're still suffering from this commodity problem," Bradley added. Soft commodity prices pulled down some of Toronto's natural resource sectors. The weaker sectors were transportation, base metals and minerals and media.
Metal issues fell on expectations that Asia-Pacific economies will not rebound soon. Noranda Inc. (nor/tse) lost 30› to $25.65 and Alcan Aluminium Ltd. (al/tse) slid 55› to $42.25.
CGI Group Inc. class A shares (giba/tse) rose $1.05 to $30.05 after the company raised the estimated value of its 10-year computer services contract with BCE's Bell Canada unit by $1.5 billion to $4.5 billion.
Airboss of America Corp. led most actives, rising 0.10 to 0.90 on 1.3 million shares.
Other Canadian markets closed higher. The Montreal Exchange portfolio rose 32.59 points, or 0.9%, to 3875.06. The Vancouver Stock Exchange gained 2.5 points, or 0.4%, to 596.05.
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New York
U.S. stocks climbed, led by Goodyear Tire & Rubber Co., which accounts for more than 3% of the benchmark Dow Jones industrial average.
The Dow gained 33.63 points, or 0.4%, to 8970.2 after losing 235 points in the previous four sessions.
About 588.2 million shares changed hands on the Big Board, down from 687.5 million shares traded on Wednesday.
The Standard & Poor's 500 composite index rose 5.36 points, or 0.5%, to 1097.59.
The Nasdaq composite index rose 13.52 points, or 0.8%, to 1794.62.
Goodyear shares (gt/nyse) rose US$1 13/16 to US$68 7/8.
The company's earnings are expected to rise 41% this year, according to the average estimate from analysts surveyed by IBES International Inc.
WorldCom Inc. (wcom/nasdaq) rose 15/16 to US$45 5/8 and MCI Communications Corp. (mcic/nasdaq) gained US$1 13/32 to US$53 15/16, leading the Nasdaq Stock Market higher.
MCI agreed to sell its wholesale Internet business to British phone company Cable & Wireless PLC, in a bid to win approval for WorldCom's US$41.8 billion purchase of MCI.
Intel Corp. (intc/nasdaq) fell 13/16 to US$73 1/2 on news the U.S. Federal Trade Commission will soon recommend an antitrust lawsuit accusing the world's largest chipmaker of abusing its monopolistic power.
Home Depot Inc. (hd/tse), a retailer of building materials and home improvement products, rose US$3 3/8 to US$77 1/4 after announcing a two-for-one stock split Wednesday.
International Stocks
Early confidence evaporates
LONDON -- A less than inspiring open on Wall Street, and a reluctance by investors to risk overnight volatility in Asia, saw European shares limp to a mixed close yesterday.
Activity was jumpy throughout the day. Most European markets opened stronger on the back of a late rally in U.S. shares Wednesday and a modest recovery in the Japanese market. But the early confidence disappeared with news that Pakistan had conducted nuclear tests.
"Everyone just stepped away, lost confidence and started selling again," said Hans-Peter Bruehwiler, director of European trading at Instinet. Bruehwiler said events in Asia remain the prime concern of most investors. "There's still a lot of money around that needs to be invested but Asia is a very big concern."
There was less international concern about Russia after the Moscow stock market stabilized. The benchmark Russian RTS stock index climbed 6.1%, a recovery of half of Wednesday's losses. And in response to the bank's tripling of interest rates to 150% Wednesday, the rouble firmed to 6.149 to the US$ from 6.175.
At the same time, however, Standard & Poor's put Russia's sovereign credit rating on CreditWatch, warning of the country's deteriorating debt service and fiscal situation.
London: British shares finished flat, having spent most of the session tracking movements on Wall Street. The FT-SE 100 index closed at 5862.3, down 7.9 points.
Frankfurt: German stocks clawed back after the previous day's heavy losses. The Dax index closed at 5481.26, down 9.38 points or 0.2%. In later screen-based trade, the Xetra Dax ended at 5507.36, up 40.48 points or 0.7%.
Tokyo: Japanese shares finished higher on arbitrage buying as funds chased futures prices higher. Banks fell. Bank of Tokyo-Mitsubishi lost 40 yen to 1,415 yen and Industrial Bank of Japan tumbled 18 yen to 854 yen. The 225-share Nikkei average rose 132.26 points, or 0.8%, to 15,796.55.
Hong Kong: Shares extended their losses for a fifth consecutive session. HSBC Holdings fell HK$2.50 to HK$186 while Cheung Kong Holdings shed HK$1.10 to HK$41.40. The Hang Seng index dropped 105.49 points, or 1.2%, to 8877.94.
Sydney: Australian share prices closed higher after bargain hunters, encouraged by strength on the Japanese market, went on a late buying spree. Woolworths Ltd. rose A17›, or 3.2%, to A$5.51, Telstra Corp. gained A7›, or 1.8%, to A$3.80, and News Corp. rose A28›, or 2.9%,to A$9.89. The all ordinaries index climbed 27.6 points, or 1%, to 2714.6.
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