MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING FRIDAY, MAY 29 1998 (1)
MARKET OVERVIEW
Toronto Stocks Edge Higher Helped by Banks, Utilities
Toronto's stock market eked out a small gain by the close of trading on Friday, fighting off Wall Street's weakness with the aid of stronger financial services and other sectors. Analysts blamed Friday's sluggishness on New York, where the Dow Jones industrial average pulled back from an early rally to close down 70.25 at 8,899.95.
The Toronto Stock Exchange 300 composite index rose 10.16 points to 7589.78, but surrendered an earlier 45.2 point gain. The benchmark index fell 31.7 points in the last 30 minutes of trading. On the week, it fell 135.37 points or 1.8% from Monday's opening. . About 102 million shares changed hands on the TSE, down from 104.7 million shares traded on Thursday. Advancing stocks topped decliners 543 to 472 with another 327 ending flat.
Investors in Canada's largest equities market saw its 14 sectors equally split between winners and losers by the finish. Toronto was helped by strength in three sectors: financial services, utilities and paper and forest products, said Fred Ketchen, ScotiaMcLeod's director of equity trading.
Utilities proved to be the Toronto market's strongest group, gaining 1.24 per cent on the day and 0.42 per cent on the week. BCE Inc. gained $1.25 to $67.35. Montreal long-distance carrier and takeover target Fonorola Inc. gained 50 cents to $66.75 after securities regulators in Ontario and Quebec upheld the company's shareholder rights plan. Hostile suitor Call-Net Enterprises lost 40 cents to $26.90. Paper and forest products ended a rough week with a 0.88 per cent gain Friday, stemming the five-day loss to 3.24 per cent. Fletcher Challenge Canada A shares gained 45 cents to $22.95, while MacMillan Bloedel climbed $0.35 to $17.65. Alliance Forest Products lost 60 cents to $27.40. Third-best in Toronto was the financial services group, gaining 0.66 per cent on the day and 0.28 per cent on the week. Banks, which make up nearly a quarter of the key index, buoyed the market with a 0.66 percent gain. But ''they didn't close as strong as they were,'' Ketchen noted. Five of the country's six largest banks reported second-quarter earnings this week that met or exceeded analysts' expectations. The remaining firm, the Canadian Imperial Bank of Commerce , will report next week.
Royal Bank of Canada (ry/tse) climbed $1.45 to $89, Toronto Dominion Bank (td/tse) gained $1.60 to $65.40 and Canadian Imperial Bank of Commerce (cm/tse) rose 45› to $49.45. Royal Bank and TD both exceeded earnings expectations this week. CIBC is the last bank to report fiscal second-quarter earnings. The country's largest bank in terms of assets will report on Thursday.
BCE Inc. (bce/tse) rose $1.25 to $67.35, while its 51.7%-owned subsidiary, Northern Telecom Ltd. (ntl/tse) fell 10› to $93.30. BCE Inc. rose after a Canadian brokerage unveiled a new way to buy the blue chip stock. It plans to cut out the value of BCE's Northern Telecom unit from the parent company by selling a new type of share which only encompass the value of BCE.
Ballard Power Systems Inc. (bld/tse) rose $4.60 to $147, its biggest one-day advance since Apr. 22, after its subsidiary, Ballard Generation Systems, completed an agreement with France's GEC Alsthom to form a joint alliance for the development and sale of fuel cells that convert fossil-based fuels or hydrogen into electricity without combustion.
The week's strongest groups were pipelines, up 0.97 per cent; utilities, up 0.42 per cent; and financial services, up 0.28 per cent.
On the opposite side of the ledger, conglomerates took a 2.03 per cent pounding Friday as Canadian Pacific dropped $1.35 to $42.20 and Power Corp. lost $1.10 to $64.00. The conglomerates index lost 3.58 per cent
on the week.
The transportation and environmental services group was hauled 1.67 per cent lower by Philip Services, off $1.20 to an all-time low of $5.60, and Canadian National Railway, which lost 95 cents to $86.30. Transportation lost 4.48 per cent for the week, the third-worst performer on the TSE behind mines and minerals, which lost 4.99 per cent thanks to sliding commodity prices. Worst of the lot was the gold and silver index, off 6.92 per cent on the week and 1.40 per cent on the day. Barrick Gold Corp. (abx/tse) fell 60› to $28.05, Franco-Nevada Mining Corp. (fn/tse) slipped 55› to $31.90 and Placer Dome Inc. (pdg/tse) fell 40› to $18.25 on expectations that bullion demand will slow as the US$ strengthens against major currencies.
The two largest railroad companies both weighed on the benchmark index. Canadian Pacific Ltd. (cp/tse), which owns Canadian Pacific Railway Co., fell $1.35 to $42.20 and Canadian National Railway Co. (cn/tse) slipped 95› to $86.20.
Among active stocks on Friday, waste management firm Philip Services Corp. dropped 1.20 or nearly 18 percent to 5.60, a new 52-week low.
Other Canadian markets were mixed.
The Montreal Exchange portfolio lost 1.52 points to 3873.54. For the week, it lost 58.36 points or 1.5%. The Vancouver Stock Exchange rose six points, or 1%, to 602.5, but fell 8.82 points, or 1.4%, since last Friday. The Alberta Stock Exchange Combined Value Index rose 22.66 to 2,268.06. 187 issues advanced and 135 declined with 128 unchanged.
New York
U.S. stocks fell as Dell Computer Corp. and other computer shares dragged down markets.
The Dow Jones industrial average fell for a fifth time in six days, losing 70.25 points, or 0.8%, to 8899.95. For the week, the key index lost 214.49 points or 2.4%.
The Standard & Poor's 500 composite index lost 6.77 points, or 0.6%, to 1090.82, for a loss of 19.65 points, or 1.8%, since last Friday.
About 557.9 million shares changed hands on the Big Board, down from 588.2 million shares traded on Thursday.
The tech-heavy Nasdaq composite index dropped 15.75 points, or 0.9%, to 1778.87, a decline of 26.13 points, or 1.4%, on the week.
Computer companies like Dell (dell/nasdaq), down US$2 7/32 to US$82 13/32, were among the biggest decliners.
"Technology has driven the market for the past seven years and my sense is it won't lead this year," said John Rutledge, an analyst with Keystone Investment Management Co. "Clearly, the economic problems in Asia aren't over yet, and all of Asia accounts for about 25% of end-demand for technology products."
Semiconductor stocks also lost ground, with Intel Corp. (intc/nasdaq) tumbling US$2 1/16 to US$71 7/16, Applied Materials Inc. (amat/nasdaq) sliding US$1 3/4 to US$32, Linear Technology Corp. (lltc/nasdaq) falling US$1 1/2 to US$69 15/16 and
Advanced Micro Devices Inc. (amd/nyse) closing with a loss of 5/8 at US$19 1/2.
Among other computer names, Compaq Computer Corp. (cpq/nyse) slipped 7/16 to US$27 5/16. Dow components Hewlett-Packard Co. (hwp/nyse), which fell US$1 9/16 to US$62 1/8, and International Business Machines Corp. (ibm/nyse), which lost US$2 11/16 to US$117 3/8, helped send the benchmark lower.
Most of that loss came in the closing minutes of trading, as institutional investors, closing out some positions in the last trading session of May, pumped through a wave of block sales. As the sales swept across the blue-chip group, the benchmark eroded.
Among the bigger blue-chip decliners, DuPont Co. (dd/nyse) lost US$2 7/16 to US$77, General Electric Co. (ge/nyse) fell US$1 to US$83 3/8, and General Motors Corp. (gm/nyse) dropped US$1 1/4 to US$71 15/16.
Market watchers discounted the significance of the moves, saying that the month-ending block activity reflected the interest of individual portfolio managers, not the broader market.
International Stocks
Russian markets take another hit after IMF decision
LONDON -- Russian stocks were pushed lower Friday as the International Monetary Fund said it was not planning a bailout and Moody's Investors Service downgraded Russia's foreign currency debt rating by one notch to non-investment-grade B1, citing political instability and an increased risk of default.
Without IMF help, the Russian government, which must repay maturing Treasury debt totalling 32.6 billion rubles (US$5.29 billion) by the end of June, has few financing alternatives. The central bank has raised interest rates to 150% and next Wednesday's debt auction will be crucial in determining whether investors will return to government debt markets. Russia needs to raise 8.4 billion rubles next week to repay maturing Treasury debt.
Russia's benchmark RTS stock index fell 3.75% to 191.29 -- a 17-month low -- and bonds yields were steady above 60% on concern of increased risk of default as the country's deficit grows.
The IMF said Russia should wait until financial markets stabilize before seeking financing from private lenders to restructure its debt portfolio in favor of longer-term debt.
London: British shares closed higher for the first time in three sessions, helped by a solid showing across global markets and as bargain hunters snapped up cheap stocks. The FT-SE 100 index climbed 8.4 points to 5870.7. For the week, it was down 84.9 points or 1.4%.
Frankfurt:German stocks made modest gains ahead of a holiday weekend, with takeover speculation in the chemical sector and positive corporate earnings. The Dax index rose 87.82 points, or 1.6%, to 5569.08, up 4.87 points on the week. In later screen-based trade, the Xetra Dax index ended at 5556.99, up 49.63 points or 0.9%.
Tokyo:Japanese stocks ended weaker in reaction to the US$'s rise after Pakistan conducted nuclear tests and Japan posted a series of poor economic indicators. The 225-stock Nikkei average tumbled 125.77 points, or 0.8%, to 15,670.78. On the week, it was down 130.87 points or 0.8%.
Hong Kong:The Hang Seng index closed with a gain of 56.62 points, or 0.6%, at 8934.56, down 621.42 points, or 6.5%, on the week.
Sydney: Australian stocks ended flat, ignoring mayhem among its regional neighbors. The all ordinaries index rose 1.1 points to 2715.7, but was down 10.2 points, or 0.4%, on the week.
Bay Street Beat the Roaring Twenties Reborn?
In the 1920s, it was Al Jolson, flapper dresses and the Charleston. Now it's the Spice Girls, retro-sixties garb and the Macarena.
But while the two eras share little in the way of social trends, some, but not all, market strategists believe there are eerie economic parallels.
Interest rates have been on a long-term downtrend. Corporate profits are high and moving higher, pushing up return on equity. Government and consumer debt are monumental. These are all trends unseen together since the 1920s. Stocks are soaring, also as they were in the 1920s. Equities are at their highest price-to-book-value levels in 70 years.
The ''Roaring Twenties'' was a decade where the extreme optimism of North America was mirrored in booming stock prices. But 1929 brought with it a bitter dose of reality -- a stock market crash unlike any reversal before or since and a severe depression which left many jobless, homeless and joyless.
Peter Gibson, chief strategist with ScotiaMcLeod Inc., thinks there are many similarities between 1998 and 1928.
In the third quarter of 1927, the four-year trailing total return on the Dow Jones Industrial Average had risen 124 percent. In the third quarter of 1997, the climb was identical.
In the fourth quarter of 1927, the rise was 110.1 percent. In the fourth quarter of last year, it was 110.66 percent.
Gibson believes the risks of a significant stock market reversal and economic decline are ''great'' -- just as they were in the late 1920s. But he does not see the 1990s market bull falling to its knees yet. The recent volatility in North American stocks will likely be short-lived and markets should resume an upward trend in a few weeks, he said.
''(The markets) will show resilience as long as U.S. corporate profitability holds together and/or interest rates are falling,'' Gibson said.
''If the stock market continues to rise until return on equity starts to fall and interest rates can't fall, then you're in trouble. If you are ending the equity cycle because the relationship between interest rates and ROE breaks down, then there's no telling how far the market might fall.
''For the time being, I'm prepared to say that (the Federal Reserve) could probably keep the cycle alive for another three years. But because we are playing the proverbial game of musical chairs, and because there is so much at stake, I'd like to go out one year at a time,'' he said.
Gibson thinks the Fed will use the benefit of hindsight and not force the same sort of cut in short-term interest rates it did in 1928. That cut perversely forced rates higher because of bond traders' fears about inflation.
Analysts believe even with careful and considered action by the Fed, North American markets may still be treacherous.
''We've had, as I read it, a huge bubble in financial instruments in North America and to a certain degree in Europe. And it has kind of overextended just as it did in Japan and then the risk, of course, becomes implosion,'' said Tony Beale, a vice president at Toronto-based Moss Lawson & Co.
''I think that (the Fed) is walking a tightrope. My guess is that they're not going to overbalance yet.''
There seem to be three major risks, Gibson said. A fall in the stock market or a run on mutual funds, for any reason, could feed on itself because neophyte investors, who have rushed into equities in droves the past few years, may panic. A stock market crash would trigger a recession, which would result in deflation and then depression.
A sustained recovery in foundering commodity prices would have its own
disastrous effects. Because real wages are already rising, a climb in commodities would instantly send inflation soaring, which would push bond yields higher and draw return-hungry investors out of equities.
Deflation is as dangerous. If consumers postpone buying on the assumption that they can pick up the car, the computer, the house cheaper next year, they will create a depression because sales and corporate profits will fall, large companies will lay off and fewer consumers will be in the market to spend.
Canada's comparatively high tax rate and low rate of personal income growth mean that it is actually more vulnerable to economic shocks than the United States.
If the Federal Reserve acts wisely, the cycle could last one to three years more. But this period is fraught with peril and, if the cycle does end, Gibson believes the western world could see a genuine depression.
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