MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WED., JULY 01, 1998 (1)
MARKET OVERVIEW
CANADA
Wednesday was a holiday in Canada and all Canadian markets were closed.
Asia Sideswipes Resource Sector -- C$, Broad Spectrum Of Economy Expected To Be Hard Hit If Crisis Continues
The Financial Post
Canada's immunity to the Asian crisis is breaking down.
Tumbling commodity prices have helped pull down the currency and are now hammering corporate profits, despite the strength of sectors such as banking and retailing.
"For all intents and purposes, Asia is still a sink hole and it's taking a real swipe out of profits in Canada," said Doug Porter, senior economist at Nesbitt Burns Inc.
So far, the earnings damage is largely restricted to the resource sector, which has been hammered by the lowest commodity prices in years.
But if Asia's slump endures, the effects will take a larger toll on the Canadian economy. Porter estimates commodities and commodity-based manufacturing account for about 10% of economic output.
Operating profit, which excludes writeoffs and other one-time accounting adjustments, fell 65% in the first quarter for firms in the metals and minerals subindex of the Toronto Stock Exchange, according to Financial Post DataGroup research.
The picture was almost as bleak for oil and gas firms, which took a 56% profit hit. Overall, profit for firms on the TSE 300 composite index was down a more modest 14%.
For the second quarter ended Tuesday, Porter is expecting further profit deterioration, with resource firms once again leading the decline.
About the only sign of revival in Asia recently has been a two-day rally on Japan's stock market. That was the result of news the government plans substantial tax cuts to boost the ailing economy and will move to clean up the banking system.
More than half the growth in demand for base metals and oil in the 1990s has come from Asia. With those economies now plunging into recession, demand has dried up and excess supply is pushing down prices.
"If you take Asia out of the picture for commodities, demand is as flat as a pancake," said Lloyd Atkinson, a principal with fund managers Perigee Investment Counsel Inc.
"Take out the resource side and earnings growth continues to advance at a decent pace."
But despite strength in retail, banks and other sectors in the domestic economy, the collapse in Asian demand for commodities is weighing heavily on Canada.
"It goes a long way to explaining tumbling commodity prices, a weaker C$ and a drop in corporate profits," added Atkinson.
In the first half of 1998, copper and nickel prices lost 30%. After falling nearly 30% last year, crude oil is off another 27% this year and lumber is doing almost as poorly, with a 26% decline.
Diversified resource giant Noranda Inc. saw operating profit drop 85% in the first quarter and is looking at a 30% decline in the second quarter, according to analysts polled by First Call Corp.
The story was even worse for Inco Ltd. The world's second-largest nickel producer lost $47 million in the first quarter, after posting a profit of $22 million in the same period last year. Investors have punished Inco, whacking more than 50% off the share price in the past 52 weeks.
In May, Standard & Poor's Corp. revised its outlook on Inco's debt from "stable" to "negative." If the revision is followed with a ratings change, it would raise borrowing costs for the firm just as it faces a multibillion-dollar tab to develop the huge Voisey's Bay nickel project.
When are we going to hit bottom? Analysts are divided.
"I'm not convinced we've seen the bottom for commodity prices," said Porter, suggesting things could get much worse. Even without a further deterioration, exports to Asia are already on track to drop 30% in 1998.
On the flip side, Atkinson conceded he is "a little lonely" out on a limb with his call that commodity prices won't go much lower.
The turnaround may be gradual, but if Japan can get its economy back on track this year, the stage will be set for a quick improvement for commodities and the C$.
The C$'s value has been tracking the CRB/Bridge commodities index of prices closely (see chart) for the past decade, according to MMS International analyst Jeff Cheah.
The correlation has grown closer since the Asian crisis erupted in October. If the relationship holds, the C$ looks unlikely to post a rebound until commodity prices rally.
Any recovery in commodity prices would be good news for resource stocks and the TSE 300, said Atkinson.
"There is good potential for Canadian stocks to outperform," he said, adding his optimistic forecast: "Canadian stocks will be back on wheels in 1999."
To date, however, resource stocks are eroding total returns on the TSE 300.
Most North American stock indexes hit new highs on April 22. After a correction, the S&P 500 composite index took out its April high last week. Close behind is the Nasdaq Stock Market, which is about 17 points off its record, while the Dow Jones industrial average needs 213 points to get there.
Meanwhile, the TSE 300 sits 455.36 points, or 5.8%, off its April record. Renewed tumbles in Asian stock markets, sparked in part by financial pressures brought about by a fall in the yen, are signalling continued weakness for commodities and Toronto stocks are paying the price.
In the first two quarters, the S&P 500 was up 16.8%, while the TSE 300 gained just 9.9%.
Toronto's Achilles heel has been resource stocks, which, as measured by the TSE 100 resource index, were down 2.2% over the same period.
Toronto Stock Exchange Quarterly Snapshop
canoe2.canoe.ca
NEW YORK
Wednesday's Markets
Another day of gains in Japanese markets and subsequent gains in Europe, plus no surprises from the Fed, provided a foundation for a solid rally Wednesday. Stocks struggled early before rising dramatically in the final 90 minutes of trading. The Dow gained 97 points, the S&P 500 climbed nearly 15 to a new record, while the Nasdaq soared nearly 20 points.
A trio of economic reports Wednesday provided evidence that Asia's woes are making their way to U.S. shores. At the same time, Japan's Nikkei 225 Index ($TOKN) rose more than 3% for the second straight session, closing above 16,000 for the first time in more than two months. The recent gains have raised hopes that a bottom to that nation's fiscal crisis is beginning to form, enlivening financial markets around the globe.
Internet stocks remained the market's hottest sector, while banking stocks rallied in concert with the bond market and held on to their gains even as bonds faded. Both oil and transportation stocks were higher.
The Dow Jones Industrial Average ($INDUA) moved tentatively higher in the morning session, unable to garner much momentum. The blue-chip index topped out at 9,028.49 around 12:15 p.m. EDT, but spent the early afternoon struggling to stay in positive territory. The index dipped briefly below its opening level but recovered smartly in the last hour to finish at its high of the day, up 96.65 to 9,048.67. The close is the Dow's first above 9,000 since June 9.
Higher oil prices could not prevent the Dow transportation index ($TRAN) from rising 39.31 to 3,514.60.
The Nasdaq Composite Index (COMP) stayed in positive territory throughout the session but hit its intraday best of 1,908.06 very early in the session. The tech-heavy index closed up 19.72 at 1,914.46, just below its all-time best of 1,917.61.
The S&P 500 (SPX) set another new all-time high, finishing up 14.72 at 1,148.56. The Russell 2000 Index ($IUX) closed up 2.46 at 459.85.
In NYSE trading, 625 million shares changed hands while the breadth of the market favored advancing stocks by a 20-to-9 spread. In Nasdaq activity, 818 million shares were exchanged while gainers and declining stocks were essentially even.
Bond prices closed unchanged, with the yield on the benchmark 30-year Treasury bond at 5.62%.
Technology Stocks
The Morgan Stanley High Tech Index (MSH) rose 12.28 to 608.08 while the Nadsaq 100 (NDX) closed up 19 to 1,356.
Internet-related stocks again paced the sector's rise as the AMEX Inter@active Week Internet Index (IIX) jumped 11.80 to 395.
Leading the Internet names was @Home Corp.(ATHM), which jumped 6 3/16 to 53 1/2 after it reached agreements with 10 North American and international cable operators to deliver high-speed Internet services.
Netscape Communications (NSCP) ran up 8 5/8 to 35 11/16. On Tuesday the company unveiled its new Web site, Netcenter, and said it is pursuing a partnership with several "major" media companies.
EarthLink Network Inc. (ELNK) shares climbed 10 1/4 to 87 after the Internet service provider announced a 2-for-1 stock split.
Excite (XCIT) enjoyed a third day of gains from its stock split announcement, rising 6 7/8 to 100 3/8.
Doubleclick (DCLK) soared 14 1/2 to 64 3/16 after announcing it had the third largest Internet advertising audience reach in April, trailing only America Online (AOL) and Yahoo! (YHOO). The news didn't deter investors from the two top players, however. AOL rose 5 to 111 and Yahoo gained 12 3/8 to 169 7/8.
Elsewhere in the sector, Amazon.com (AMZN) jumped 14 3/8 to 114 1/8, Lycos (LCOS) closed up 6 5/8 to 82 and MindSpring Enterprises (MSPG) rose 5 3/8 to 108 1/4.
Outside of the Internet realm, tech indices were aided by Cisco Systems (CSCO), up 2 1/2 to 94 9/16, Intel (INTC), higher by 1 1/16 to 75 3/16, and Dow member IBM (IBM), which rose 2 to 116 13/16.
Microchip Technology (MCHP) rose 4 1/8 to 30 1/4 after saying its fiscal first quarter results will be better than expectations of 27 cents per share.
Projections of higher-than-expected earnings also sent shares of Powerhouse Technologies (PWRH) climbing by 11/16 to 10 1/2.
Great Plains Software Inc. (GPSI) produced fiscal fourth-quarter earnings of 20 cents per share, two cents higher than expectations. The stock closed up 5 1/2 to 39 3/8.
Lehman Brothers unveiled its list of "uncommon values" it believes will outperform the market for the next 12 months. Tech names on the list included Applied Materials (AMAT), up 15/16 to 30 1/4; Comverse Technology (CMVT), which rose 3 1/8 to 55; and WorldCom Inc. (WCOM), which closed up 1 5/16 to 49 3/4.
On the downside, Dow component Hewlett-Packard (HWP) slid 1 11/16 to 58 3/16 following an earnings estimate downgrade from Salomon Smith Barney, while Ascend Communications (ASND) lost 1 5/16 to 48 1/4.
Additionally, profit warnings hit a number of individual tech names, including some shocking percentage losses.
Advanced Fibre Communications Inc. (AFCI) tumbled 20 15/16 to 19 1/8 after the maker of equipment used in phone networks said second-quarter earnings will fall well shy of expectations. Merrill Lynch downgraded the stock to near-term "neutral" from "accumulate" and long-term "accumulate" from "buy."
Medrisk (MDMD) shed 13 15/16 to 6 5/16 following its profit warning late Tuesday.
Checkpoint Systems Inc. (CKP) warned that it expects second-quarter earnings of 9 cents to 11 cents per share, well below estimates. The stock fell 1 5/16 to 12 13/16.
Semiconductor-equipment maker ATMI Inc. (ATMI) said second- and third quarter earnings will be about 50% below the year-earlier periods' earnings and its shares fell 1 13/16 to 13 3/16.
Active Issues
DuPont (DD) led the Dow's rise, climbing 2 3/8 to 77 while recent laggards Walt Disney (DIS) and General Motors (GM) both rose more than a point. GM reported a 23% rise in sales of light trucks and cars in June.
Aircraft maker Boeing Co. (BA) said it delivered 139 jetliners in the second quarter, just three less than its target of 142. The stock was up 2 7/8 to 47 7/16.
J.P. Morgan (JPM) rose 1 3/8 to 118 1/2 while Republic New York Corp. (RNB) closed up 1 5/8 to 64 9/16, thanks to speculation in The Wall Street Journal that New York based banks will enjoy strong earnings results.
The Dow's other financial components were mixed with Travelers Group (TRV) rising 2 1/2 to 63 1/8 while American Express (AXP) slid 2 to 112.
Other financial stocks were higher in near unanimity Wednesday, sending the Philadelphia KBW Banking Index (BKX) up 21.96 to 875.54. Citicorp (CCI) jumped 6 1/2 to 155 3/4, BankAmerica (BAC) closed up 3 5/8 to 90 1/16, and NationsBank (NB) rose 3 1/12 to 80.
Hambrecht & Quist Group (HQ) missed out, however, falling 2 5/16 to 34 as speculation faded that the investment bank will be acquired by CS First Boston.
Oil stocks were higher, with Chevron (CHV) rising 1 7/8 to 84 15/16 and Exxon (XON) gaining 1 5/8 to 72 15/16. The AMEX Oil Index (XOI) climbed 11.73 to 479.49.
Gains in the oil patch did not deter the transportation sector, however, as the AMEX Airline Index (XAL) rose 8.04 to 392. UAL Corp. (UAL) rose 3 5/16 to 81 5/16 and Delta Air Lines (DAL) gained 1 5/16 to 131 3/16.
Drug makers were a modest positive influence on major indices as the AMEX Pharmaceutical Index (DRG) closed up 2.44 to 673.66.
Volvo AB (VOLVY) rose 4 1/8 to 33 11/16 after Volkswagen AG, Europe's largest car maker, approached the Swedish car maker to discuss a possible merger or joint venture.
Meanwhile, an earnings warning from Northrop Grumman Corp. (NOC) sent its shares down 2 1/8 to 101.
Case Corp. (CSE) shares slid 11/16 to 47 9/16 after the farm-machinery maker said second-quarter earnings will be below the year-earlier period and below analysts' expectations. Undeterred by Case's warning, Caterpillar (CAT) rose 1 1/16 to 53 15/16.
ConAgra Inc. (CAG) shares slumped 3 1/8 to 28 9/16. The food company reported net income for its fiscal fourth quarter ended May 31 of 36 cents a diluted share, five cents shy of expectations.
Herman Miller (MLHR) whipped estimates by six cents, producing fisca fourth quarter earnings of 42 cents per share; its stock rose 3 3/16 to 27 1/2.
Nike Inc. (NKE) beat the Street by a penny, reporting second-quarter earnings of 4 cents per share, excluding one-time items. Shares of the athletic apparel maker rose 3 3/8 to 52 1/16.
Juno Lighting Inc. (JUNO) beat estimates by 6 cents, reporting second quarter results of 37 cents per share. But its shares closed off 1 5/8 to 22.
After The Bell
The second quarter officially ended yesterday but that hasn't stopped the flow of profit warnings.
Parametric Technology (PMTC) said earnings for both its fiscal third- and fourth quarter results will not meet expectations.
Ikos Systems (IKOS) said it expects to post a loss in its fiscal third quarter. Analysts were looking for profits of four cents per share from the maker of hardware and software systems.
KLA Tencor (KLAC) said its fiscal third-quarter results will not meet expectations, while fellow semiconductor equipment manufacturer Electroglas (EGLS) said its second quarter loss will be wider than the 19 cent shortfall analysts were already expecting.
Among lesser-known tech names, profit warnings were posted by Insignia Solutions (INSGY), Gensym (GNSM), Indus International (IINT) and Mosaix (MOSX).
On the earnings front, SpeedFam International (SFAM) fell a penny shy of estimates, posting a fiscal fourth-quarter loss of 7 cents per share. A year ago, the company earned 46 cents per share.
As if the chip industry needed more bad news, the Semiconductor Industry Association said worldwide chip sales fell 3.9% in May. The decrease snapped a two-month string of gains and suggests the industry will witness a 1.8% sales decline by year's end, SIA said.
Red Brick Systems (REDB) said its CFO Margaret Brauns has resigned.
Outside of tech, the red flag was being waved by TSI (TSII), US Industries (USI), ChemFirst (CEM), Schlotzky's (BUNZ), Jones Pharma (JMED), and Barringer Technologies (BARR), a bomb-detection concern.
Morrison Health Care (MHI) produced fiscal fourth-quarter earnings of 25 cents per share, in line with expectations.
Browning-Ferris (BF) said it will buy back up to $750 million of its stock.
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