MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JUNE 14, 1998 (1)
MARKET OVERVIEW
Toronto Stocks Bungee Jump To Higher Close
The bounces in New York markets were also pronounced. North American stock markets staged a stunning turnaround Friday after taking a beating for most of the session. But the losses on the week remained considerable as the problems in Asia and their possible fallout continued to worry investors. The nearly week-long tumble in Toronto stocks came to a screeching halt as a last minute North American rally spurred the key index to a positive finish on Friday.
The sudden bounce-back in Toronto was triggered by computer-aided selling in New York that later spilled into the Toronto market, Ketchen said. The biggest beneficiaries were banking and oil stocks, two of the six stock groups that gained ground Friday. "Some of those areas that were beaten up rather badly (earlier in the week) made a fast turnaround," Ketchen said.
Although declining issues almost doubled advancers 653 to 375 on the Toronto Stock Exchange, the TSE 300 composite index rose 15.16 points, or 0.2%, to 7310.92. Earlier in the session it tumbled more than 115 points or 1.4 percent. It fell 197.31 points, or 2.6%, on the week. Trading volume was 102.1 million shares, up from Thursday's 88.9 million, and trading value rose to $2.02 billion from $1.88 billion.
The index's bungee jump meant that Toronto lost 245.24 points or more than 3 percent in the past four sessions.
In New York the Dow Jones Industrial Average managed to improve on Toronto's finish, rising 23.17 points or 0.26 percent to 7310.90 points. "The rally was led from the States," said Maison Placements Canada trader Dave Lawson. "We've had enough of a move that it's going to start to back off."
The concerns over the impact of Japan's woes, now officially billed as a recession, spilled over into the North American markets this week, analysts agreed. In the process both Canadian and U.S. currencies gave up ground, with Canada's dollar dropping to a new record low of C$1.4711 (US$0.6798) on Thursday.
But the spectacular turnaround on Friday was triggered by a growing feeling that the U.S. central bank could be forced to intervene with higher interest rates to prop up its ailing currency, Lawson noted.
In Toronto's case, the market received its support Friday from bargain hunters, such as Martin Anstee, a portfolio manager with London Life Management Co. Anstee said he was buying some blue-chip, liquid stocks in the resource and energy groups, encouraged by the price declines in some of these stocks, and by declining inventories of certain commodities, including zinc and copper.
Other investors seemed to be thinking along the same lines. Toronto's base metals group ended up 0.08% at 3434.22, after hitting an intraday low of 3363.8. In the group, Alcan Aluminium Ltd. (AL/TSE) ended unchanged at $39.60, and Cominco Ltd. (CLT/TSE) also ended flat at $20.25.
Oil and gas stocks ended the week 4.22 per cent lower. But the group managed to gain 0.78 per cent Friday after rebounding from a low of 5804.97.
The weak Canadian dollar is giving the oilpatch some unexpected help as it combats low oil prices, high debt and investor jitters. While energy firms are wishing for a quick return to $18 US a barrel oil (it was $12.59 US at yesterday's close), many are looking forward to a chance to attract new investors at the annual symposium for analysts and fund managers sponsored by the Canadian Association of Petroleum Producers in Calgary later this month.
More than half Canada's oil and gas output is shipped south of the border. "We definitely would be in trouble if we didn't have the U.S. market as a buyer," said Scott Inglis, an analyst with Calgary's FirstEnergy Capital Corp. "The weak C$ has had a positive impact year over year."
The first quarter saw the currency lose 3 cents from the same period a year ago, he said. If that exchange rate persists through the year, the oilpatch would get an extra $1.4 billion US for the 1.25 million barrels of Canadian oil exported daily to the U.S.
Slumping oil prices, caused by reduced demand and excess supply, will cause many producers to post poor second-quarter reports, hard on the heels of first-quarter numbers that showed lower earnings or losses. This has halved the stock prices of numerous firms from peak levels reached last fall.
Inglis said the time is right for patient investors, who can wait until 1999 or 2000 for a turnaround, to hunt for bargains. "The mood is going to be grim and that's usually the best time to be buying."
Continuing problems in Asia could depress demand for up to five years, but long-term fundamentals support a price of $17.50 US to $18 US a barrel, said Judith Dwarkin, vice-president of global energy for the Canadian Energy Research Institute.
Companies are paring back projects and capital spending, but widespread firings are not engulfing Calgary as in 1986, the last time there was a major price drop.
The Toronto Oil & Gas Composite Index finished up 0.8% or 45.94 to 5915.70. Among the sub-components, the Integrated Oil's gained 0.9% or 75.37 to 8356.20. The Oil & Gas Producers gained 0.9% or 45.13 to 5176.87 and the Oil & Gas Services index closed down 0.4% or 9.89 to 2445.40.
For the week, the Oil & Gas Composite Index lost 308.56 points or 5.0%. The Integrated Oil's fell 405.42 points or 4.6%. The Oil & Gas Producers Index fell 268.50 points or 4.9%. The Oil & Gas Services Index lost 164.18 points or 6.3%.
Petromet Ressources, Renaissance Energy, Petro-Canada, Pinnacle Resources, Newport Petroleum, Tarragon Oil & Gas, Talisman Energy and Neutrino Resources were among the top 50 most active issues traded on the TSE. Canadian Fracmaster was the only service issue listed among these top 50 most actives.
Anderson Exploration gained $1.70 to $17.30, Shell Canada A $0.70 to $25.25, Imperial Oil $0.60 to $26.00, Canadian Natural Resources $0.50 to $25.00, Crestar Energy $0.50 to $19.75, Canadian Occidental Petroleum $0.50 to $30.00 and Poco Petroleums $0.50 to $14.20. Among service issues, Dreco Energy Services gained $1.35 to $45.35 and Tesco $0.50 to $16.50.
On the flipside, Seven Seas Petroleum (u) fell $0.85 to $20.50, Chieftain International $0.75 to $31.25 and Suncor Energy $0.50 to $49.80.. Among service issues, Ensign Resource Services fell $1.25 to $25.75 and Canadian Fracmaster $0.65 to $10.00.
Rumors were circulating during the session that Petro-Canada is about to make a significant transaction, analysts said. The company declined comment. Among the top picks in investment houses and oilpatch boardrooms were integrated giant Gulf Canada Resources Ltd.and Ranger Oil Ltd. Other rumors suggested the company is looking at Shell Canada Ltd.'s western producing assets or another company's North Sea assets.
Beau Canada Exploration Ltd. closed an acquisition and completed a financing on Friday, but investors reacted by sending the Calgary energy company's shares to a 52-week low. The stock (BAU/TSE) dropped 17c to $2 as the news was released. Beau completed the purchase of APL Oil & Gas Ltd. and acquired additional interests in APL's properties from Morrison Middlefield Resources Ltd. and Kepec Resources Ltd.
Total value of the buying binge was $95 million. Beau previously said APL would cost about $70 million. The combined Kepec and Morrison purchases were about half the size of the APL deal, the firm said. The entire acquisition added daily production of 29 million cubic feet of natural gas and 1,600 barrels of oil and gas liquids to Beau's production base. The deals will be financed with bank debt and a two-year, $36.6-million term equity financing from Enron Capital & Trade Resources Canada Corp., a subsidiary of Enron Corp. The agreement allows Beau to defer interest payments on the loan until maturity and it has an option to repay it by issuing common shares.
Anstee acknowledged that Asia's economic woes continue to overhang commodity prices. But any rally in demand could cause a sharp rise in prices and in the corresponding stocks, because of low inventories, he noted.
Overall, six of the TSE's 14 stock groups rose, with the financial services subindex up 1.5% after rallying 2.8% from the intraday low. The financial services sector makes up nearly one quarter of the index. Oils and conglomerates also climbed.
At one point, the financial services sector was down by about 1.5 per cent. By the close of trading, that stock group had posted a 1.46 per cent gain. Bank of Montreal gained $1.65 to $81.75, while Toronto Dominion Bank was up 95 cents to close at $65.60. Royal Bank gained 85 cents to $87.75. Canadian Imperial Bank of Commerce climbed 80 cents to end the day at $47.35. Meanwhile, brokerage Midland Walwyn traded at an all-time high of $24.85, up $1.60, amid a blizzard of takeover rumors.
"What's happening is that people are recognizing there is still some value in these things despite all of the worries that we seem to have," Ketchen said. "It calmed some nerves to see this market in Toronto reverse its losing trend and show some life." On the week, however, financial services posted a 3.06 per cent loss.
The conglomerates subgroup, the day's third best, turned in a 0.38 per cent increase.
Golds fell 1.33 percent. On the week, gold and silver fared the worst with a 10.55 per cent plunge, followed by mines and minerals, down 6.60 per cent, and paper and forest products, down 6.37 per cent.
Merchandising stocks, down 0.65 per cent, managed the smallest weekly decline as all 14 subgroups turned in losses for the week. Pipeline stocks were off 0.91 per cent, and utilities were third, down 1.49 per cent.
Crystallex International Corp. shares plunged 1.50 to 1.05 after the Venezuelan Supreme Court ruled on Thursday that the small Canadian miner has no ownership rights to the potentially rich Cristinas 4 and 6 mining concessions. Among other mines, Falconbridge rose 50 cents to $16.30.
Beverage maker Cott Corp. saw shares rise 0.50 to 10.35 following news that it appointed a new chief executive and received new investment from U.S. buyout specialist Thomas Lee. Thomas H. Lee Co. , which made about $900-million (U.S.) on the sale of the Snapple ice tea business in 1994, will give struggling soda pop maker Cott Corp. a boost by becoming its single largest shareholder. Toronto-based Cott, which is a leading manufacturer of retailer-branded soft drinks, also said yesterday that it has hconsumer products executive Frank Weise as president and chief executive officer -- posts vacant since company founder Gerald Pencer died in February.
Among industrials, Com Dev gained $2.10 to $10.70; General Motors lost $3.25 to $100.00.
Ballard Power Systems Inc. said Friday it has accepted the resignation of Mossadiq Umedaly, the company's vice-president and chief financial officer. Umedaly said he is resigning for personal reasons. He will continue to work with Ballard on a consulting basis after he leaves next month. Treasurer Paul Lancaster will fill the position on an interim basis. News of the resignation sent Ballard shares (BLD/TSE) downward. The shares lost as much as 6% of their value before closing down $2.40 at $45.60.
Trading in Emco stock (EML/TSE) was halted late Friday afternoon Emco Ltd. has issued a quarterly earnings warning for the second time this year. The last trade was at $13.20, up $0.05. The London, Ont.-based maker of building materials and fixtures said an unexpected slowdown in orders means earnings will be lower than in the second quarter of 1997. Emco did not provide a forecast, but in the second quarter last year it earned $9.1 million (39c a share) on revenue of $324.8 million. Analysts surveyed by First Call Corp. were predicting profit per share of 43c in the second quarter of 1998. This was Emco's second earnings warning this year. In the first quarter it issued one and investors immediately lopped 85c off the stock, which was then trading at $16.
In other Canadian markets, the Montreal Exchange market portfolio index rose 23.87 points, or 0.6%, to 3765.55, for a loss of 94.73 points, or 2.5%, on the week. The Vancouver Stock Exchange composite index fell 5.21 points, or 0.9%, to 548.86 on Friday, and posted a loss of 32.89 points, or 5.7%, on the week.
The Alberta Stock Exchange's combined value index fell 24.72 to 2145.95 with 116 issues advancing, 184 declining with another 129 issues unchanged. Anvil Resources, Talon Petroleums, HEGCO Canada, First Star Energy, Wenzel Downhole, Oilexco, Prize Energy, AltaPacific Capital and Meota Resources were oil related issues listed among the top 25 most active issues.
Redco Energy gained $0.22 to $0.37, Moxie Petroleum $0.10 to $1.50 and Meota Resources $0.09 to $1.34. On the downside, Red Sea Oil fell $0.30 to $1.70, Avid Oil & Gas B $0.15 to $2.10, Golden Trend Petroleum $0.14 to $0.46, HEGCO Canada $0.13 to $2.52, Kintail Energy $0.12 to $0.75, Niko Resources $0.11 to $4.50, Corker Resources $0.10 to $0.65, Draig Energy $0.10 to $1.35 and ICE Drilling $0.10 to $0.70.
Canadian bonds ended mixed on Friday with the long end of the yield curve hurt as players took profits.
A sharp drop in North American stock prices earlier in the day, before they recovered at the close, pushed funds into fixed-income assets.
Gains in bonds were later shed, while the short end of the yield curve remained firm.
North American long bonds were trading off the record high levels seen on Thursday, when their yields hit the lowest level on record.
Despite profit-taking, the United States appears to be a magnet for capital from other troubled regions, Asia and economies close to Russia.
The market was unaffected by the higher-than-expected increase in the U.S. producer price index (PPI), which rose 0.2 percent in May in overall and core rates.
Inflation is still considered moderate in the United States and Asian concern is overwhelming domworries.
Economists on average had expected both the overall and core PPI to have risen 0.1 percent after a 0.2-percent rise in April.
Canada's benchmark 30-year bond fell C$0.30 to C$135.50 to yield 5.528 percent, compared with the record low yield of 5.510 percent on Thursday.
Its U.S. 30-year counterpart fell 4/32 to yield 5.66 percent after Thursday's record low yield of 5.65 percent. The U.S.-Canada spread was 13 basis points, compared with 14 points at the previous close here.
The Canadian dollar ended nervously firmer at C$1.4665 (US$0.6819) on Friday, licking its wounds after hitting a record low of C$1.4711 (US$0.6798) in active trade on Thursday.
Trading lacked direction and was confined in a tight band as players were unsure about how far the Bank of Canada will let the Canadian dollar fall as the U.S. dollar continues to firm against major currencies.
The U.S. dollar, although faced with some profit-taking, stayed afloat, quoted around 144 yen and 1.8050 marks in late North American trade.
It was a week of safe-haven buying of U.S. dollars and bonds as the global market was increasingly concerned about economic and financial difficulties confronting Asia and Russia.
The latest data confirmed Japan was deep in recession. Its gross domestic product contracted at an annual rate of 5.3 percent in the first quarter after a revised annualized drop of 1.5 percent in the previous quarter.
The U.S. dollar has gained sharply also comments by U.S. Treasury Secretary Robert Rubin on Thursday. Rubin urged Japan to deregulate and open markets, which he said is the key to correcting the yen's weakness.
On Friday, he said Washington was "very concerned""about the weak yen, but repeated that Tokyo should deal with its financial sector problems.
Meanwhile, the U.S. economy appears to be growing steadily without causing serious fears of inflation.
This week's data showed that retail sales rose 0.9 percent in May, stronger than expected, and producer price index came at a higher-than-expected rise of 0.2 percent in May, which was still considered moderate.
In cross trading, the Canadian unit edged up to 1.2311 marks from 1.2304 marks at the previous close here, and to 98.35 yen from 98.01 yen.
"We are getting pessimistic with respect to the commodities prices, and the currency could remain around this level throughout this year, C$1.4600 (US$0.6849) to C$1.4700 (US$0.6803)," said Paul Ferley, assistant chief economist, macro economics at Bank of Montreal.
He expects commodities prices to stay depressed for now as the gloomy outlook for Japan's economic turnaround will remain a drag on other Asian economies.
Without sound domestic economic fundamentals -- low inflation and government's effort to balance the federal budget this year -- the Canadian unit could have fallen more quickly.
"There are positives out there, but in the near term they are just limiting the marked depreciation of the Canadian dollar, Ferley said.
On the central bank's policy, he said: "The weakness we've seen in the Canadian dollar reflects more of a pessimistic outlook for commodities prices... and they should stay on the sidelines and accept a sort of a weaker currency, rather than by countering it by raising interest rates."
Mark Chandler, senior economist at Goldman Sachs Canada, also urged the central bank to hold off on raising rates just to defend the dollar.
And he predicts the Canadian dollar should recover to the C$1.4200 (US$0.7042) level in three to six months if commodities prices recover, noting that forward contracts for crude oil are pointing to an upward move.
There was no indication of the Bank of Canada intervening in the market to support the local dollar on Thursday and Friday.
"I think it (the Bank of Canada) might let it (the Canadian dollar) go a little bit more," said Harvinder Kalirai, economist at I.D.E.A. in New York.
He said the central bank would raise its key lending rate if the Canadian unit weakened to around C$1.4825 (US$0.6745), which would push the monetary conditions index (MCI) down to what is seen as a crucial level of -6.0.
The bank said the MCI fell to -5.61 on Friday from -5.42 a week ago.
Although central bank officials say there's no absolute target range for the MCI, economists expect the bank to see -6.0 on the MCI's scale, record low levels, as too stimulative for the economy.
Kalirai compares the recent decline in the Canadian dollar with the situation in January.
"The comment by Bonin was quite interesting that monetary conditions were broadly appropriate. The similarity to January was quite remarkable," he said.
Bank of Canada Senior Deputy Governor Bernard Bonin on Thursday said Canada's monetary policy should remain on hold for the next five months, barring any blows to the economy.
"We continue to believe that, between now and the publication of the next Monetary Policy Report, due in November, the appropriate course would be to keep monetary conditions within their recent range, provided there are no new shocks," the bank executive said.
The MCI was at -5.71 on January 21, when Bonin suggested that the bank might be shifting to less tightening in light of the Asian crisis, while the index was at -5.70 on Thursday, when Bonin indicated that there would be no immediate rate increase, Kalirai said.
Bonin's comments in January sent the Canadian dollar sharply down, resulting in a rate hike by the bank on January 30 aimed at staving off a panic sell-off of the currency.
On Friday, the Canadian dollar was slowly recovering from the record low of C$1.4711 (US$0.6798) hit on Thursday, but it still faces downward pressure if commodities prices fall.
Canada has come under pressure from soft commodities prices, which have also hit the Australian and New Zealand dollars. Canada's Asian exposure is more limited, but it is vulnerable to volatility in such currencies because of a perception it shares a similar dependency on commodities.
The Canadian dollar is not benefiting much from the recent declining trend in its current account deficit. Canada has a better record of trimming the negative gap, which shows capital outflows, than the Australian and New Zealand economies.
The Australian dollar was quoted around US$0.5885, and the New Zealand dollar around US$0.5003 in North American trade. Both had fallen to 12-year lows this week.
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