KORNER REPORT / Market Activity
I'll open this morning's review with an article published at the Globe & Mail. It's rather fitting in relation to market activity of yesterday.
If At First You Don't Succeed ...
Canadians are a wonderfully persistent lot. From constitutional reform to investment strategy, the approach seems to be that if something doesn't work the first time, just keep trying it until it does, regardless of the pain.
Last January, with the notable exception of energy shares, investors were elbowing each other aside to buy natural resource stocks. The Asia-induced downturn in 1997 was overdone. The stocks were cheap. Commodity prices would stabilize. Now was the time to lock and load. Gold, base metal and paper stocks topped the Toronto Stock Exchange's that month. If the goal was to book a first-class ticket on the Dead Cat Bounce Express, then the timing couldn't have been better. These stocks got crushed last year, as commodity prices swooned to generational lows.
No worries though -- the bottom-feeders are back again this year. Despite a nasty pullback in the 3- to 4-per-cent range by resource sectors yesterday, the gains so far this year still range from startling -- in the case of base metals -- to solid for the rest of the groups.
Base metals have soared 11.4 per cent this year, while gold shares have risen more than 5 per cent, oil and gas stocks are up about 4.5 per cent and forest products shares have advanced about 3 per cent.
To be sure, this year's rally has some fundamental underpinnings. Moribund base metal prices have twitched back to life in the trading pits, oil prices have improved thanks to the cold snap, the rising yen had helped gold prices before yesterday's decline. The fact that few of the current drivers of commodity prices have the legs to support a meaningful, long-term recovery doesn't seem to bother folks any. Like military flare-ups in the Middle East, a couple of weeks of chilly weather isn't going to soak up the oil glut dogging the crude market.
A stronger yen helps U.S.-dollar-priced gold by making it cheaper for Japanese consumers, but meaningful production cutbacks, an outbreak of inflation and assurances of a stop to central bank selling are the real tonic. Base metal prices may have stopped falling, but to get them moving steadily higher will require a true economic renaissance in Asia, particularly Japan. If you want to bet on that in 1999, you're a braver soul than I.
Investors got a sharp reminder yesterday of how fickle the commodity markets are these days. Gold fell $4.30 (U.S.) an ounce to $288.50 as the yen backed off recent gains while crude slipped back 55 cents a barrel to $12.89 after its sharp rise in recent weeks. With the bloom off the commodity rose, all four resource sectors booked heavy losses yesterday.
So, there's reason to be skeptical about the sustainability of any recovery in natural resource stocks right now. "Personally, I think it's a false start," says Clément Gignac, vice-chairman and head of research at BLC Securities in Montreal.
Besides the odd shard of light in the otherwise gloomy outlook for commodities, there are other factors animating the resource sector.
January creates its own, often twisted dynamic. Money managers are never braver than they are in January; if they screw up, they can always clean up the mess by quarter's end and there's a whole year ahead to play catchup. Tax loss selling, the traditional, year-end final kick in the head to the dogs of the year, prompts a spate of bargain hunting among the wreckage in January.
There are other factors at work. After 1998's roller-coaster ride, there's a fair amount of idle cash waiting to be put to work, not to mention the torrent of new money coming into the market. With investors worried generally about valuations, there's a tendency to gravitate toward cheap stuff like the rock and tree stocks.
"This is a trade, not an investment," says Craig Strachan, manager of research at TD Evergreen.
The natural resource sector will recover; the tricky question is the timing. Commodity-linked stocks will lead the recovery in commodity prices, which means that the the big money is made from getting in early, but not too early.
Mr. Gignac believes global economic growth needs to be running at 3 per cent and more to generate the kind of heat to push commodity prices solidly higher. (Economists are forecasting just lower than 2 per cent this year.) "I do not see any significant recovery in commodity prices before 2001," he says.
Until a worldwide recovery is clearly in the works, Mr. Gignac sees better prospects in domestic-oriented sectors, like financial, telecommunications and merchandising stocks. "I see no reason to sell financial and domestic shares to rush back into natural resource stocks," he says.
Profit-Taking, Drop In Oil & Gold Hammer Stocks; Canadian Dollar Falls
Profit-takers descended with relish on the remnants of a five-day North American stock rally Tuesday while efforts to shrink Japan's swollen yen sapped the strength of the Canadian dollar.
Hardest hit in the U.S. markets were red-hot technology and Internet-based stocks, which have been carrying the tech-heavy Nasdaq stock market to a series of new record highs.
"After the enormous run we've had, with the frenetic movement in some of these technology and Internet stocks, I consider this 99.999 per cent profit-taking," said Charles Pradilla, chief investment strategist at Wall Street's Cowen & Co.
"It's a very normal pullback," he added. "A lot of portfolio managers think maybe the market is ahead of itself."
The U.S. dollar rally took a heavy toll on its Canadian counterpart, which ended the day 0.35 cent lower at 66.07 cents US.
Central bankers in Japan spent nearly $1 billion US supporting the greenback to depreciate the yen, which has gained 27 per cent in value since August, currency watchers said.
A strong yen makes Japanese exports more expensive on world markets, a dangerous phenomenon considering Japan is counting on exports to help keep its recession-plagued economy afloat.
"The export side of the economy is the only sector that's doing well in Japan right now," said Rob Palombi, an analyst at Standard & Poor's MMS in Toronto.
"Why would they want to shoot themselves in the foot (with a strong yen)?"
But the U.S. dollar, which until Tuesday had been testing its weakest levels against the yen in more than two years, isn't likely to remain strong for long, Palombi added.
Japanese investors have been taking money out of the safety of U.S. bonds and moving it back into Japanese or European bonds, and that movement shows no signs of abating, Palombi said.
"The intervention may not be enough to stall the appreciation of the yen, at least over the short-term, so we could see further volatility."
Adding to the U.S. dollar's problems is the fact that the advent of the euro, the supercurrency linking 11 countries in Europe's economic and monetary union, is considered to be a viable alternative when it comes to finding a safe place to store money.
"There is a general perception that now the financial markets have a choice," Palombi said. "It's no longer taken for granted that the U.S. markets will benefit from safe-haven flows."
Last week's stock market rally wasn't great news for new homeowners in Canada, who woke up Tuesday to higher mortgage rates after the big banks -- led by CIBC and Royal -- boosted rates by between one-fifth and one third of a percentage point.
The torrent of money flowing into stocks from bonds has made it more costly to raise money on the bond market, where banks do most of their borrowing for mortgage loans.
"I think the market was getting kind of frothy," said John Ing, president of brokerage Maison Placements Canada in Toronto. "This is just a dose of reality."
There are ominous signs in the marketplace that the North American economy doesn't have the kind of momentum required to support the market's level of excitement, he added.
"The banks have raised their mortgage rates, and rates in the U.S. have eased up a little bit," Ing said. "That's just a warning shot for the markets that all is not as rosy as the euphoria at the beginning of the year."
The market could be in for more surprises as companies -- including beleaguered oil and gas producers -- begin to report fourth quarter earnings next week, he added.
"I think we've got some choppiness ahead."
Oil prices dropped Tuesday after Iraq announced plans to increase its oil output while producers around the world are dealing with a glut of supply that's keeping prices low.
Gold fell $4.30 to $288.50 US in New York, largely the result of a sudden show of strength put on by the U.S. dollar that was orchestrated by the Bank of Japan in an effort to cool off that country's overheated currency.
In New York, investors handed the Dow Jones industrial average a loss of 1.5 percent or 145.21 to 9,474.68 just two days after a five per cent rally in the blue-chip index led to a new all-time high of 9,643.32.
Toronto sank nearly in tandem with New York. The TSE 3OO had rallied for a 5.9 per cent gain last week. A widespread selloff and a steep drop in the price of gold pushed the TSE 300 composite index down two per cent, or 141.48 points, to 6,700.83 -- losing ground for the second day running. Toronto's volume was strong at 113 million shares worth C$2.2 billion. Declining issues headed advancers 614 to 359. Another 286 closed unchanged.
"It was nervousness. The market had a good run and (yesterday was) the first day it had some corrective forces," said Josef Schachter, head of Schachter Asset Management.
"We got out of the gate nicely" at year's start, Schachter said. But yesterday the forces "sent you a little cold shower to remind you the market can be nasty."
The recently installed S&P/TSE 60 index of blue chip companies in Toronto fell 9.31 points to 388.04 points.
An equities trader agreed. "Let's be realistic: nothing goes straight up."
"There's way too much excess in this. Especially in the Internet stocks," he added. North American cyberspace-related issues, which screamed higher in recent days, suffered from the setback as well.
Overall in Canada's largest market, all of the 14 sub-indexes turned severely negative, led by the gold and precious minerals group which closed 3.8 percent off. Bullion prices failed to provide any reassurance.
Oil and gas, and paper and forestry products also lost more than 3 percent each.
Six more indexes, including banks and base metals, dropped more than 2 percent each.
In individual stocks, Internet auction house Bid.Com International Inc. was the most active, slipping C$0.35 to C$7.25 on turnover of more than 16.6 million shares as 'Net issues lost their luster. It rose as high as C$9.90, beating its old 52-week high of C$7.70, before falling back.
Canadian miner Cameco Corp. , the world's largest uranium producer, rose in step with an improved outlook for metals prices. It jumped C$3.50 or 11 percent to C$35.
Speculation that one marriage in the computer networking and telecommunications world may beget another sent shares of Newbridge Networks Corp. to their highest level in 12 months. Newbridge rose C$2.85 to close at C$52.60 but not before touching C$53.20. Its old high was C$52.80. Sources said Lucent Technologies Inc., the world's largest telecommunications equipment maker, and Ascend Communications Inc., a huge manufacturer of computer networking gear, were considering Lucent's possible acquisition of Ascend. A deal would leave Newbridge as one of the few independents in the world of asynchronous transfer mode (ATM) technology, which allows the rapid movement of voice, video and data across networks.
Oil & Gas Analysts Join First Marathon Securities Limited
Wednesday, January 13, 1999
David M. Beatty
John Lloyd-Price
Scott Riddell
G. F. Kym Anthony, Executive Vice-President and Chief Operating Officer of First Marathon Securities Limited, and Peter L. Jones, Executive Vice-President, Corporate Finance, are pleased to announce the appointment of three new members of the First Marathon team.
David M. Beatty joins First Marathon Securities Limited as Vice-President and Director in the Investment Banking Department, focusing on mining and other commodity-oriented companies. Most recently Mr. Beatty was an Executive Vice-President at Yorkton Securities and previously a Partner and Director of Gordon Capital Corporation and head of Gordon's Mining Group. Mr. Beatty graduated with a B. Comm. (Queen's) in 1982, M. Phil. in International Affairs (Cambridge) in 1985 and an MBA (Harvard) in 1987.
John Lloyd-Price has been appointed Vice-President and Director to focus on the oil and gas industry and is responsible for managing the Calgary Investment Banking Group. Most recently Mr. Lloyd-Price was a Senior Vice-President and Director of Merrill Lynch Canada Inc. and previously a Senior Partner and Director of Gordon Capital Corporation.
Scott Riddell joins First Marathon Securities Limited's Calgary Investment Banking Group as Vice-President and Director. His primary focus is oil and gas exploration and production corporate finance. Most recently Mr. Riddell worked at Merrill Lynch (Midland Walwyn), Gordon Capital and Richardson Greenshields. Mr. Riddell holds a Bachelor of Commerce (Finance) degree from the University of Alberta.
First Marathon Securities Limited, a leading, independent Canadian investment dealer, is a subsidiary of First Marathon Inc., which through its subsidiaries has offices in Canada and Europe. First Marathon's businesses include securities underwriting, distribution and trading; merger and acquisition and other advisory services; investing as principal; securities and mortgage banking; and securities execution, clearing, and custodial services for third parties.
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