MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, NOVEMBER 25, 1997 (1)
Dow, TSE Part Company
By THE FINANCIAL POST
Bay Street ended sharply lower, weighed down by drops in the gold and banking groups. By contrast, Wall Street shook off the effects of a slumping Japanese market to close higher
The Toronto Stock Exchange 300 composite index fell 94.05 points, or 1.4%, to 6630.52. Volume on the TSE was 128.9 million shares, compared with Monday's volume of 101.5 million shares.
New York stocks fared better, with the Dow Jones industrial average rising 41.03 points, or 0.5%, to 7808.95. U.S. equity markets appear to be coping better with turmoil in Southeast Asia than their Canadian counterparts, said Fred Ketchen, senior trader with ScotiaMcLeod Inc. He said the large weighting of resources stocks is again weighing on the Toronto market. The heavily weighted gold subindex tumbled 4% to lead the decliners, while the oil and gas sector fell 1.8%. On the Comex division of the New York Mercantile Exchange, the gold price fell US$2.60 to US$301.10 an ounce.
Many gold stocks flirted with or set new 52-week lows. Barrick Gold Corp. (ABX/TSE) fell 85› to $24.20, below its previous 52-week low of $24.40. Placer Dome Inc. (PDG/TSE) dropped 35› to $17.75.
Ketchen attributed weakness in the oil and gas sector to speculation that Saudi Arabia will ship more oil. In the group, Petro-Canada (PCA/TSE) fell 75› to $27.
A drop in the heavily weighted financial services sector also contributed to the TSE 300's weakness. The banking sector shed 1.8% after the Bank of Canada raised interest rates by 25 basis points earlier in the day. The central bank raised rates to prop up a sagging C$, but observers are divided on whether the increase is sufficiently big.
Bank of Montreal (BMO/TSE) suffered more than other banks, falling $1.70 to $65 as some investors registered disappointment with its fourth-quarter earnings. The bank posted fourth-quarter net income of $1.04 a diluted share, including a 16›-a-share charge, the same as the year-earlier period. First Call Inc.'s mean estimate of analysts surveyed was $1.26 a diluted share, excluding the charge.
Newbridge Networks Corp. (NNC/TSE), which represents 1.5% of the TSE 300, fell $2.15 to $61.65 ahead of second-quarter earnings, released after the market closed. The communications equipment manufacturer said second-quarter earnings fell 7.6% to US23› a share from US26› a year earlier, matching the expectations of 19 analysts polled by IBES International.
The other major Canadian markets also closed lower. The Vancouver Stock Exchange composite index fell 16.78 points, or 2.5%, to 657.21. The Montreal Exchange market portfolio dropped 47.21 points, or 1.4%, to 3343.03.
The Dow climbed as investors bet that Japan will keep its economy from crashing under the weight of collapsing financial institutions. The benchmark index fell 113 points Monday on fears about the fallout from the failure of Japan's fourth biggest securities firm, Yamaichi Securities Co.
The Nasdaq composite index rose 2.05 points to 1589.04. The Standard & Poor's 500 composite index rose 4.15 points, or 0.4%, to 950.82.
"The market stabilized after [Monday's] losses as we put the Yamaichi failure in better perspective," said Marshall Acuff, portfolio strategist for Smith Barney Inc. The Dow opened in positive territory but swung into losses on rumors of another Japanese banking failure. It turned around in afternoon trading. Analysts said the closing gains came as investors, both foreign and domestic, sought to park their money in "safe havens" -- U.S. bonds and large-cap equities.
The taste for big, liquid stocks was especially strong for technology companies. International Business Machines Corp. (IBM/NYSE) rose US$4 3/8 to US$107 7/16 and Microsoft Corp. (MSFT/NASDAQ) rose US$3 1/2 to US$139.
All but one of the major overseas markets closed lower.
London: British stocks finished softer. The FT-SE 100 index fell 35.1 points, or 0.7%, to 4863.5.
Frankfurt: German shares ended firmer as the upbeat opening on Wall Street and a stronger US$ helped the market shrug off the drop in Tokyo. The Dax index rose 18.6 points, or 0.5%, to 3849.23.
Tokyo: The stock market's benchmark tumbled more than 5%, a day after Yamaichi failed. The 225-stock Nikkei average dived 854.03 points, or 5.1%, to close at 15,867.53.
Hong Kong:Stocks tumbled to a sharply lower close after a slide in Tokyo spurred a regional drop. The Hang Seng index dropped 260.8 points, or 2.5%, to 10,325.56.
Sydney: The market came off intraday lows but still ended lower. The all ordinaries index fell 27.7 points, or 1.1%, to 2454.4.
HOT STOCKS
Rogers Communications Inc. (RCIb/ME), down 95› to $6.85, on volume of 2.9 million shares. The cable company's shares hit an intraday low of $6.75 yesterday following the sale of a 2.5-million-share block. It was the lowest price since December 1990, when the stock traded at $5.25. Rogers knew of no reason for the drop, a spokesman said. TAL Investment Counsel Ltd. was rumored to be the seller, but officials of the Montreal-based money manager either declined comment or did not return telephone calls. TAL was Rogers' single largest institutional shareholder with 7.3 million, or 3%, of its class B shares as of December 1996. A new portfolio manager has recently taken over one of the TAL portfolios that holds the stock. With many portfolios showing strong gains for the year, managers have an added incentive to sell poorly performing stocks for capital losses which can be applied against gains, said a portfolio manager with another firm. The Caisse de d‚p“t et placements du Qu‚bec, Rogers' second largest investor, is said to have been among several buyers of the stock yesterday.
Westmin Resources Ltd. (WMI/TSE), down 15› to $5.90, on volume of 7.2 million shares. Boliden Ltd.(BOLir/TSE), down 80› to $4.05, on volume of 73,379 receipts. Investors are scrambling for position after Westmin put itself in play following a unwelcome $5.40-a-share takeover bid from Boliden. Almost 20 million Westmin shares traded Monday and Tuesday.
Cambior Inc. (CBJ/ME), down $1 to $8.25, on volume of 1.4 million shares. As well as the general weakness in the gold stocks, which saw the Toronto Stock Exchange's gold index fall almost 4%, Cambior shares fell as broker Newcrest Capital Inc. sold tiny amounts of the stock before crossing a 1.2-million-share block at $8.25 each, a 52-week low.
Battery Technologies Inc. (BTI/TSE), up 7› to 30›, on volume of 78,664 shares. President Bruce Pope today is to meet a dissident shareholder group headed by founder and ex-president Wayne Hartford, who represents about eight million of the company's 30 million shares outstanding. Last week, Hartford wrote to Battery Technologies seeking a shareholders' meeting to vote on removing the directors. But yesterday he said he will withdraw the proposal if he decides to support the company's ideas communicated at the meeting. The company reported a loss of $1.2 million (4› a share) for the third quarter ended Sept. 30, compared with a loss of $5.4 million (18›) in the same period a year earlier.
Re-Con Building Products Inc. (REC/TSE), down 11› to 11›, on volume of 200,400 shares. The company said Royal Bank of Canada intended to call its loans. Deloitte & Touche Inc. will act as trustee under the Bankruptcy nd Insolvency Act proposal filed by the cement-fibre roofing materials manufacturer.
Trego Energy Inc. (TEI/ASE), up 19› to $1.24, on volume of 199,500 shares. Calibre Energy Inc. (CBW/TSE), up 4› to 79›, on volume of 56,349 shares. Calibre will offer $1.30 and one-fifth of a Calibre share for each Trego share. Owners of more than 40% of Trego stock have supported the offer.
Schneider Corp. (SCD/TSE), up 50› to $23.50, on volume of 1,380 shares, and (SCDa/TSE), up 75› to $21.75, on volume of 11,220 shares. Investors appear to be betting a firm offer acceptable to the controlling Schneider family will top an unsolicited $19-a-share, $129-million bid for the hog processor by rival Maple Leaf Foods Inc.
Bank Of Montreal (BMO/TSE) fell $1.70 to close at $65. The bank reported record net income of $1.31 billion ($4.69 a share) for the year ended Oct. 31 and indicated it doesn't expect the economic problems in Asia to dent future profit. B of M's 1997 profit would have been higher, except for a $75-million charge taken in the fourth quarter to accelerate depreciation on high-tech equipment and costs associated with changing the credit processes. Taking the writedown into account, fourth-quarter earnings hit $297 million ($1.05), up slightly from $291 million ($1.06) a year ago, but down sharply from the record $372 million ($1.34) profit in the third quarter of 1997. Without the charge, the bank would have declared profit in the quarter of $1.20 a share, below analysts' average estimates of $1.26.
Star Choice Communications Inc (STC/VSE) closed at $3.50 yesterday, up 25›. Star Choice has bought on undisclosed terms the video uplink business of Rogers Network Services. For Star Choice, whose direct to home satellite television service competes with Rogers Cablesystems Ltd., which owns RNS, the acquisition will provide immediate cash flow and add 15 video channels to its DTH service in Eastern and Western Canada. Star Choice, which is controlled by Shaw Communications Inc., had already acquired Shaw's three uplink centres and business. As a result of that business, Star Choice had a modest profit of $597,000 in the year ended Aug. 31.
George Weston Ltd. (WN/TSE) closed at $109 yesterday, down $1. The company reported third-quarter earnings rose 31% over the same period a year ago. For the quarter ended Sept. 30, the company racked up net income of $71 million ($1.58 a share) on sales of $4.1 billion. For the same period last year, it reported net earnings of $54 million ($1.21) on sales of $3.8 billion. Operating income rose 11% to $165 million from $148 million. Toronto-based Weston is a conglomerate with interests in food, fisheries and forest products. It's best known for Loblaw Cos., the largest food retailer in Canada, in which it owns a controlling interest. Loblaw had third-quarter operating income of $112 million on sales of $3.4 billion. In the same period last year it reported operating income of $98 million on sales of $3.1 billion. Sales from Loblaw accounted for about 82% of third quarter sales at Weston.
Bombardier Inc. shares (BBDa/ME) closed yesterday down 70› at $28.40. Bombardier Inc., on the heels of a record round of aircraft orders, yesterday posted a 7% rise in third-quarter net income and a 9% gain in revenue. The strength came from bigger contributions from aerospace and financial services, Bombardier chairman Laurent Beaudoin said. This offset weakness in other sectors, including consumer products. The backlog in orders at Oct. 31 was $14.7 billion, up from $12.5 billion at July 31, mainly because of surging aerospace business. Net income for the quarter ended Oct. 31 was $98.3 million (27› a share) against $91.8 million (27› on fewer shares) a year earlier. Revenue was $2.13 billion against $1.95 billion. Income before taxes was $146.8 million against $137 million. Nine-month profit was $269.6 million (75›) against $258.9 million (75›) a year earlier. Revenue was $5.75 billion against $5.47 billion. Average number of shares outstanding was 338 million against 335.7 million.
Totally Hip (THW/ASE) closed down $0.08 at $0.53 on volume of 100,800 shares. The company has sold a package of Internet software tools to a tax fund for $10 million. Under the terms of the agreement with Vancouver's Columbia Diversified Software Fund Ltd. Partnership, Totally Hip will receive $3 million over the next 10 months and will carry a $7-million promissory note bearing annual interest of 4%. In addition, the multimedia software developer will retain rights to develop, market and resell the Internet products. The funds received will finance product development and marketing, the company said.
Newbridge Networks Corp (NNC/TSE) dipped $2.15 to $61.65. In the wake of more disappointing financial results, Newbridge Networks Corp. will overhaul part of its operations. Newbridge said yesterday that sales to local area network users were poor enough to warrant a new plan of action. Newbridge's net income for the second quarter ended Nov. 2 was $58 million (33› a share) on revenue of $432.1 million. That's down from net income of $62.8 million (37›) on revenue of $316.1 million last year. The earnings were issued after the close of financial markets yesterday. In Toronto, shares
Schneider Corp. (SCD/TSE) closed Tuesday at a record high of $23.50, up 50 cents a share, while its non-voting shares closed up 75 cents at $21.75. One of Western Canada's larger hog packers is showing a "friendly" interest in Schneider Corp. after the Kitchener company indicated it will consider other offers. Fletcher's Fine Foods based in Vancouver, has joined a list of potential bidders for the meat processing company after Schneider flatly rejected a bid from Maple Leaf Foods. Since Maple Leaf announced its bid of $19.00 Nov. 5, Schneider shares climbed sharply from about $13 to above $19 after the bid was announced.
Canadian Markets Sideswiped By Rate Increase
By WILLIAM HANLEY
Most markets in North America and Europe held up well yesterday after Japanese stocks fell "only" 5%, but Canadian markets were sideswiped by the Bank of Canada's decision to raise interest rates and the resulting poor performance of the C$. The Toronto Stock Exchange 300 composite index dropped 94.05 points, or 1.4%, to 6630.52 even though the Dow Jones industrial average added 41.03 points, or 0.5%, to close at 7808.95.
The major indexes in Europe also performed better than expected as investors breathed a sigh of relief that the Nikkei 225 average contained its losses on the first day of trading after the news Yamaichi Securities Co. Ltd. was going out of business. Japan's markets were closed for a national holiday on Monday.
"The [U.S. market] seems to be largely ignoring the Asian crisis," said Michael Metz, chief investment strategist at CIBC Oppenheimer Corp. in New York. "The market shows amazing resilience. Some might call it complacency." The U.S. market also got some help from a modest rally in bonds. But Canada had no such luck as domestic bond prices lost ground when investors decided the Bank of Canada's move was probably too little, too late, and there will have to be another 25-basis-point rise in the bank rate to 4% to satisfy markets.
Meantime, the C$ failed to hold some of the gains made after the bank's announcement. Katherine Beattie of MMS International in Toronto said the rate rise, the Asian crisis and the outlook for natural resource stocks have put the TSE 300 in danger of retesting the lows hit in August. "The TSE will remain vulnerable even though it's usually the best time of year for the market," she said, adding the situation will be helped if the C$ firms up.
Yet Canada was a sideshow to the main events in Asia, where the collapse of Yamaichi, Japan's fourth largest brokerage, triggered fears the crisis would tip the powerhouse Japanese economy into recession.
Pacific Rim leaders attending the Asia-Pacific Economic Co-operation conference in Vancouver formed a solid front to argue the crisis in Asia had been contained and the International Monetary Fund's latest rescue -- South Korea -- would help stabilize the situation. But the Yamaichi news put the world's financial markets on edge.
Traders in Europe and North America spent a restless night waiting to see how Tokyo would hold up and were encouraged the drop was held to 854 points, closing at 15,867. The fear in Tokyo was that slumping stock prices could threaten even the strongest of financial firms, which traditionally invest heavily in the domestic stock market.
Many financial stocks opened the day with no bids, only offers to sell. Bank stocks were hit particularly hard. Shares in the other Big Four brokerages, Nomura Securities Co. Ltd., Daiwa Securities Co. Ltd. and Nikko Securities Co. Ltd., also sagged. Tokuyo City Bank, a small regional bank weighed down by bad loans and mounting losses, conceded failure yesterday, becoming the fourth Japanese financial company to go under this month. In New York, rumors swirled that Nippon Credit would be the next to seek relief from Japan's Finance Ministry. "There was a great deal of concern that, if Japan really floundered, it would reverberate into Europe and New York," said Larry Wachtel, an analyst for Prudential Securities.
But some observers are not convinced the U.S. market has been able to absorb the Yamaichi shock.
"Be cautious," warned Steven Nowack, a Toronto-based trader of U.S. stocks. "I'm puzzled that the Asian crisis just seems to be having only a fleeting effect."
INSIDE THE MARKET
The Bear Appears To Have Been Unleashed
By PATRICK BLOOMFIELD
There are, indeed, such things as bear markets -- and the odds are that we are looking at one right now.
Maybe we should say what we mean. The best definition of a bear market is simply one that is heading south, as distinct from north. After all, there are many more ways of being caught carrying the bag than the precipitous drop on Oct. 19, 1987.
One such way is to hold stocks that do not pay dividends, or pay only nominal dividends, for many years without capital gain. That was essentially what the long bear market of the 1970s was all about, though it was also punctuated by a particularly savage stock-price tumble in the middle.
That brings us to our first point. Even as the mighty Dow Jones industrial average struggles to regain lost ground, as it was doing yesterday, can one really expect it to go on rising in the manner of past months and years? Maybe it will test its previous highs -- but higher yet?
Across the Pacific, Japan is turning an uncomfortable corner. There was a time when foreign lenders could rest assured that country's financial system would paper over any cracks arising from poor business practices or outright malpractice.
That is not the case any longer. The ordinary Japanese public has now developed such a distaste for the country's financial institutions that bailing out any one of them exposes the ruling Liberal Democratic Party to public odium.
From what we hear, the ordinary Japanese investor in Main Street has had enough of old boys' clubs to last him or her a lifetime. So when others follow the path of Yamaichi Securities, as they probably will, all the chickens will come home to roost.
Meanwhile, here in the financial heart of North America, we have a bunch of government attorneys telling us that the Mob has been active in lesser-known Nasdaq stocks. That is hardly a confidence booster, either.
The irony is that all this is hitting the screens in living rooms at a time ordinary Americans are feeling better about their economy than they have for decades -- as indicated by the latest University of Michigan and U.S. Conference Board indexes.
Which brings us to our second point: Have we, who labor in the two first-world economies that have led the economic dance in past years, yet come to grips with the enormity of what is going on around us?
Japan is a first-world economy, and its banks and financial institutions are in deep trouble. Because it is their practice to book paper profits and losses at yearend, the Nikkei index has only to fall another 5% or so, and they are going to be booking stock-market losses, not profits -- not to mention their dud or ill-performing loans.
Meanwhile, the banks and corporations of another world-class economy, South Korea, the 11th largest in the world, are up to their ears in hock to foreign lenders -- and the rescue package now being put together will probably need to be somewhat larger than now contemplated.
It could be that the ordinary American's vote of confidence makes sense. South Korea will be kept afloat, while the Japanese will use their strong trade balance and currency reserves to keep soldiering on.
But then we come to the longer haul. The flip side of the troubles of those Asian nations is that they are being forced to step back from past excesses and to retreat to the platform of thrift and hard work that got them going in the first instance. That will take time.
From now onward, their manufacturers are going to have the double benefit of relatively cheap costs and relatively bargain-based currencies.
In time, this is going to show up in increased import competition for American and Canadian manufacturers, and tougher export markets -- both of which will have to have some effect of margins.
Obviously, the shock waves will take time to arrive. What we are probably looking at is not a one-day, 1987-style crash. It is more likely to be a protracted economic process, showing up first, maybe, in banking circles, then in some manufacturing sectors.
What it will mean is that many public corporations will not only lack the pricing power to protect their profit margins, which is the case already, but will have to remain competitive by cutting their margins.
The exceptions will be those companies (most of them in electronics, but also others in apparel and footwear) that have major manufacturing operations (or tame suppliers) in Asia. Their costs will be effectively devalued.
If all the above turns out roughly as suggested, this could be one of those bear markets that gradually rotate themselves downward. The plums will go to investors with the wit to spot the corporate exceptions that can use their superior technology or offshore connections to stay competitive.
It is very unlikely to be as good a time as it has been in the recent past to sit back and ride the indexes.
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