MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY DECEMBER 12, 1997 (2)
CANADIAN EXCHANGE DOINGS
Montreal, Toronto Reach Agreement On Options
The Montreal Exchange and the Toronto Stock Exchange have settled a two-month spat over control of the stock options market.
On Friday, they agreed to remain joint owners of the Canadian Derivatives Clearing Corp. (CDCC), which provides clearing and settlement in the options market. They had earlier bought the Vancouver Stock Exchange's interest. A 14-year-old rule prevented the exchanges from listing the same options. The TSE wanted to list those offered exclusively by Montreal, but the ME feared a loss of volume. The TSE argued multiple listings were needed to improve liquidity. The ME has 43 equity-based options listed, the TSE has 52. The exchanges agreed the CDCC shareholder agreement should be clarified and trading barriers eliminated. Multiple listing of new options begins on April 30 and multiple listing of existing options starts on Jan. 1, 1999.
INSIDE THE MARKET
Don't Ever Run From A Bear - By Patrick Bloomfield
Yes, Virginia, this is a bear market. And next week could be even rougher than the week past.
Here in Canada we are close to a bear market by simple definition. Most investments pros would regard a decline of 10%-plus from the previous high as a bear cub, at least.
This past Friday the Toronto Stock Exchange's 300 stock composite index was down 8% from its high. That was after an aborted rally from the bottom of an 8.6% decline from that same high.
When markets emulate the legendary Sisyphus, eternally pushing his rock up the hill, they are generally growling like a bear.
As some consolation, the decline has been worse for the broader market than for the market leaders. The TSE 35 index was down no more than 5% Friday. What we have been seeing is a flight to quality - and, as this column noted during the week, a flight from any stock connected with commodities.
Down in the Big Apple, the numbers themselves were less disturbing, but the sentiment was no less distressing.
The worst news was the failure of the major market indices to rise on what, six months ago, would have been wonderful news - a 0.2% decline in the producer price index in November.
The best news was that the yield on the U.S. 30-year Treasury bond broke below 6% on the PPI news. That was the cushion that saved the day.
Rather than giving out a whoop of joy, Friday's tacit stock market acknowledgment of the PPI number was a sign that the first ripples of a disturbing new trend, described as deflation, have reached North American shores.
True enough, deflation is a word that needs to be treated with due respect. The prestigious British magazine The Economist recently devoted much black ink to pointing out that, disturbing though the Asian crisis may be, talk of global overcapacity looks a little premature.
The Economist has a point. What we have been seeing across the Pacific Ocean has been financial mismanagement, by governments and major corporations alike, rather than overproduction, although China appears to have had some problems in the latter regard.
That said, Wall Street did not react well to news that German Finance Minister Theo Waigel will hold crisis talks next week with U.S. President Bill Clinton and G7 finance chiefs.
It has been trendy of late among some Wall Street commentators to describe the fuss over Asian problems as having been overdone. News of the G7 meeting put an end to any such complacency.
My guess is that the week ahead will see even more worry-warting than we have noted to date. It may bring some kind of climactic resolution, at least for the short run, or we may see the bear grow some more.
The moral for investors is that bear markets are a fact of market life, generally triggered by the kind of fundamental uncertainty we are seeing today.
To expect to be an active investor without living through a succession of bears is foolish and deleterious to one's financial health.
Unless you want to be a market timer - which is one of the tougher market acts I know - the best defensive ploy in current markets is to invest defensively.
Stick to bread-and-butter stocks that trade at reasonable price earnings multiples and that pay you a half-decent dividend yield while you wait. That is precisely what the investment pros were doing this past week.
Don't be afraid to turn any holdings with more than a modest whiff of uncertainty about them into Treasury bills. Courtesy of Bank of Canada governor Gordon Thiessen, the yield on three-month T-bills has been climbing quite handily, while high-flying stock valuations have been crumbling.
Finally, don't give up on sound stocks. A reminder from Montreal-based market technician Ron Meisels is apposite.
Meisels does not dispute my thesis that another bear is here; however, he is also a student of the 40-year market cycle, and he notes that previous bear markets of 19% and more have been the precursor of some pretty terrific bull markets.
In quite recent memory, for instance, the Dow Jones industrial average tumbled 35% in 1987, to about 1749. It has since been to 8000-plus.
Meisels can cite many equally cogent examples from earlier times.
The trick is to keep at least some of one's investment powder dry for when the market eventually turns.
MARKET EYE
Not A Party Animal To Be Found - By William Hanley
The elves were on a sit-down strike, protesting about cheap Asian import substitution of toys. The reindeer were balking at flying while the skies are full of dangerous deflationary downdrafts. And Santa himself just could not get a handle on who and what is naughty and nice as he surveyed the world investment landscape.
Only a week ago, the seasonal Santa Claus rally seemed in full, if early, swing. Both Wall Street and Bay Street went into last weekend boasting big gains and the conga lines were ready to form around the trading floor Christmas trees.
By Friday this week, the only party animals to be found were the bears sniffing around world stock markets, ready to break into dance at the drop of an index.
To be sure, the bulls were loose in the U.S. bond market. Yet, whereas a yield below the magic 6% on the benchmark 30-year Treasury might have been cause for celebration in the equities market just a few weeks ago, soaring bond prices are suddenly about as festive for stocks as finding someone's false teeth in the punch bowl.
On Friday, investors continued to assess the possible fallout from the Asian crisis, especially the scary situation developing in South Korea and the chances for a resolution of Japan's problems, while eyeballing new economic data suggesting the U.S. economy is already feeling the deflationary pinch.
If that were not enough, Canadians were treated to another episode of the loonie tunes being played by the Bank of Canada as it tries to catch the falling C$ before it becomes the western won. Now we have higher borrowing rates as the economy is heading directly into the deflationary headwinds out of Asia.
No wonder, then, that North American stock markets followed the world's lead and headed lower this week as concerns became fixed on what might happen to earnings next year amid a slew of warnings about fourth-quarter results. Especially hard hit were the technology issues, but the pain was felt in just about every sector.
The tech-heavy Nasdaq composite index plunged 5.8% on the week. The Dow Jones industrial average dropped 3.8%, almost wiping out the previous week's advance. And the Toronto Stock Exchange 300 composite index fared better, falling 1.2%.
The TSE 300 looked as though it was ready to duplicate the 200-plus advance of the week before when it advanced 63 points Monday on rallies in banks and oils despite a 38-point loss for the Dow.
On Tuesday, the Dow fell 60 points and Nasdaq tumbled after database software maker Oracle Corp. upset the Street with lower than expected earnings for its latest quarter. The message from this Oracle was clear: Asian demand is waning so watch out.
But the TSE fell only 20 points as defensive stocks like the banks and the utilities counterbalanced a big drop in the golds as bullion collapsed toward US$280 an ounce. (Those holding silver were to see returns of 20% since October alone.)
It was a similar story on Wednesday when the TSE lost only 12 points, with golds rebounding, while the Dow fell 70 points as Asia began to get a grip on the Wall Street psyche.
By Thursday, even Bay Street was in full retreat, fleeing the Asian contagion. The TSE tumbled 109 points and the Dow 129 points as one money manager was moved to say that "what is frightening people is that we haven't seen the end of it."
On Friday, the Bank of Canada raised the bank rate 50 basis points, the banks followed with a prime hike and Bay Street stock prices fell from the open.
It was a different story on Wall Street, where stocks initially followed a rise in bonds triggered by some benign inflation data. Traders then decided the data were too benign, and began bidding stocks lower before some buying lifted prices later in the session. The Dow closed 10 points lower and the TSE 300 ended with a loss of just three points as the golds bounced and the financials held up well against the higher interest rates.
As the markets closed for the week, some traders could see hope that Santa might get his act together after all and deliver some Christmas cheer. But there was still a lot of sentiment out there that the Street might end up with a lump of coal in its stocking.
SECTOR PEEK
B.C. Forestry, Mining Cloud Darkens
British Columbia's ailing forestry and mining sectors were dealt another blow this week by a court decision that calls into question who controls the province's resource base. "The uncertainty has intensified," said Ken Sumanik, director of environment and land
use with the Mining Association of B.C.
On Thursday, the Supreme Court of Canada overturned a lower court ruling that had dismissed native claims to ownership of a huge tract of land in northwest B.C.
The Gitksan and Wet'suwet'en First Nations are expected to begin a new legal fight for their right to 58,000 square kilometres.
They originally launched their legal battle in 1987, arguing they retained rights to the land because they never signed treaties relinquishing those claims. They lost four years later, but appealed to the Supreme Court, which ruled in a unanimous decision by six judges that the case should be retried, or - preferably - Ottawa and the province should negotiate a settlement.
The decision also applies to other native peoples without negotiated treaties, so the ownership rights to much of B.C. could be in play.
The news was greeted grimly in mining and forestry circles. Potential investment will be "put on the back burner," predicted forestry analyst Charles Widman. "It throws into question who is the landlord. It casts another shadow over the B.C. forest industry that is already on the edge of a very serious recession."
The province's forestry giants have been hit hard with losses and layoffs this year, he said. It's estimated up to half B.C.'s 30,000 sawmill workers will be laid off in the next few weeks because of the collapse of the Japanese lumber market - and a drop in U.S. lumber prices to well below production costs.
Doubt about future land ownership means "another impediment to forestry's recovery," Widman said.
Forecasts are equally dismal for B.C.'s mining sector. In response to strong environmental pressures, the province has increased land-use regulations in recent years. This year, the collapse of metals prices has created a bear market for mining juniors. Exploration investment has tumbled from $230 million in 1988 to an estimated $75 million this year.
"We aren't spending the $200 million necessary on exploration," said Sumanik. Added land ownership uncertainty has created an "awful" situation and "serious problems down the road."
Sorry State Of Mining Stocks
If lower precious metal prices wasn't enough to discourage investors this year, the added stories of scandal, stock manipulation and just plain rumor trading tactics continue.
A mining consultant provided more evidence Thursday that Delgratia Mining Corp.'s Josh gold property in Nevada is nothing more than an elaborate salting job.
Delgratia shares (DGRTF/NASDAQ), which traded as high as US$34 3/4 this year, collapsed in June when consultant Brian Mountford & Morris Beattie, reached a similar conclusion.
Earlier estimates had indicated Josh contained up to five million ounces of gold. On Friday, when the Vancouver company tabled results of a new report by its own consultant, Behre Dolbear & Co. Inc., the stock fell 1/4 to 1/8. The comany said soil samples that were fire-assayed by Actlabs-Skyline Laboratory in Tucson, Ariz., contained no significant amounts of gold. "Our investigation indicates that geologically, the area is not one in which gold deposits derived from volcanic, magmatic or chemical sources would occur."
Earlier this year, Delgratia was hit with several shareholder class action suits after it was revealed salting had taken place. On Friday, Delgratia said the Behre Dolbear results support the company's previous decision to suspend all work at Josh.
A week's worth of frantic, rumor-driven stock trading in three junior mining companies ended in a major meltdown Friday as Donner Minerals Ltd. announced poorer than expected assay results from its drilling in Labrador.
The dramatic late-day selloff cut 43% from Donner's share price and sliced in half the stock of Northern Abitibi Mining Corp., its 50% partner in exploration about 80 kilometres southwest of the vast Inco Ltd. nickel deposit at Voisey's Bay.
"The market was looking for higher-grade nickel," said Graeme Currie, a mining analyst at Vancouver-based Canaccord Capital Corp. "The average grade of nickel at Voisey's Bay is double the nickel grade reported today [Friday]."
Both Donner and Northern ended about where they were a week earlier, before the Alberta and Vancouver stock exchanges halted trading on Dec. 5 after their shares jumped suddenly on heavy volume.
On Monday, Donner - which is operator of the drilling program - announced its last hole of the season "intersected 15.7 metres of massive sulphide mineralization," a visual description of the core, but not actual assay results.
Donner stock jumped to about $2.60 after that news, then fell back just as steeply in furious trading through the week.
The stocks were halted again Friday on news of the assay results from the same hole, news that sent the shares into freefall when they resumed trading midafternoon. Donner stock (DML/VSE) fell 73› to 98› on volume of 2.2 million shares.
Northern Abitibi (NAI/ASE) dropped 71› to 67› on volume of two million shares.
Shares in Golden Rule Resources Ltd. (GNU/TSE), the parent of Northern, fell 30› to 62›.
The Alberta Stock Exchange is seeking the people whose trading started the mysterious run-up in Northern shares on Friday, Dec. 5. That stock jump just after 3 p.m. EST came two minutes after Donner chief executive David Patterson says he got a call telling him of the "massive sulphides" core. Tim Daly, the ASE's vice-president of market surveillance, said his exchange discourages the kind of incomplete disclosure used by the companies in this case.
"The ASE would rather see firms not announce visuals, but the market demands news," he said.
"We had the same problem last year with Cartaway [Resources Corp.]," a mining junior whose stock soared on visual news and later collapsed after assay results came in.
The VSE is also reviewing trading in Donner stock on Dec. 5. But Angela Huxham, the exchange's director of surveillance, said Friday she was satisfied with the company's disclosure on the assay results. "People [investors] who don't understand the risks - maybe they shouldn't be speculating."
Patterson and Donner's new president Harvey Keats say they have no idea what might have sparked rumors about the drilling results.
Bre-X Fraud Spurs Move For Greater Disclosure
The Bre-X Minerals Ltd. scandal has prompted the Toronto Stock Exchange to beef up its disclosure rules and require mining companies to provide more information about their exploration projects.
The TSE announced yesterday that mining companies that want to list their shares on the exchange will have to provide information on their drilling methods, sampling procedures, assay laboratories and analytical methods.
"One thing we'd really like to do is be able to raise any red flags earlier and higher if they exist, and more expansive disclosure and availability of information would obviously assist that," John Carson, the TSE's senior vice-president of market regulation, said in an interview.
Many mining companies already provide some or all of this information in their technical reports, he said. But under the new regime, such information will be mandatory.
Bre-X became infamous for the poor disclosure it provided to the public as it was telling the world it had made a massive gold discovery in Indonesia.
Investors watched the company's market value, which peaked at $6-billion in the fall of 1996, evaporate this year when the gold find was revealed to be a hoax. Calgary based Bre-X badly tarnished Canada's reputation as a world leader in raising capital for mining companies. International investors saw the country as some kind of regulatory Wild West where frauds can flourish.
As well, Canada's premier exchange came under fire for its lax disclosure rules and not requiring more information from exploration companies that graduate to it from junior markets. Bre-X moved to the TSE in April, 1996, from the Alberta Stock Exchange, where it got its start as a penny stock in 1989.
Mr. Carson declined to say whether the new disclosure requirements would have lessened the magnitude of losses associated with Bre-X, one of the biggest mining frauds of all time.
But investment industry players said it will be more difficult for mining companies to execute a fraud because investors will be able to use the additional information to better evaluate companies' exploration methods.
"The added disclosure is a step in the right direction," said William Riedl, president of Toronto brokerage Fairvest Securities Corp.
Graham Farquharson, president of Strathcona Mineral Services Ltd., the engineering company that concluded Bre-X's Busang site in Indonesia contained no gold and that a massive fraud had been committed, has said the tampering could have been detected earlier if Bre-X had been required to do a technical audit of its samples.
Mr. Carson said the new rules arose out of the TSE's internal review of its listing requirements. They are being implemented before a task force set up in the wake of the Bre-X fraud unveils its report, expected in early 1998.
"There are some things we believe should be implemented immediately, as opposed to waiting for the task force to report," he said.
The TSE and the Ontario Securities Commission set up the task force to look at what information investors need to help them understand and evaluate what an exploration company says it has found.
The Mining Standards Task Force, co- chaired by Mr. Carson and OSC vice- chairman Morley Carscallen, is looking at assaying procedures and how companies conduct their drilling and report their results.
But Canadian securities regulators and TSE officials have said no stock exchange could have been expected to prevent a fraud of such magnitude and sophistication as Bre-X's faked gold discovery.
The heads of Canada's four largest securities regulators concluded in May that the Bre-X fraud was not the result of any systematic flaw in this country's regulatory regime.
The regulators and stock market officials have been defending their handling of Bre-X as investors have been suing virtually everybody involved. The TSE and brokerage firms have been named in class-action lawsuits from Bre-X shareholders who lost a total of $3 billion when the company's shares crashed after the fraud was detected. Their shares are now virtually worthless.
ECONOMY
Sharp Bank Rate Hike Rescues C$ - For Now
Bank of Canada ups rate 50 basis points, but economists predict more hikes needed
By David Thomas - Economics Reporter / The Financial Post
The Bank of Canada came to the rescue of the battered C$ Friday with its largest interest rate hike in more than two years.
The aggressive move sparked a minor rally in the C$, but had economists predicting more hikes in the months ahead and a weaker performance in 1998 from the Canadian economy.
The increase of 50 basis points, or half a percentage point, was overdue medicine for the ailing currency but the prescription could have a nasty side effect, cautioned Avery Shenfeld, senior economist at CIBC Wood Gundy Securities Inc.
"The next patient may be the Canadian economy itself."
The hike lifted the key overnight bank rate to 4.5%. It was the fourth increase this year after the benchmark rate was whittled down to 3.25% in 1996. The last move was a 25-basis-point hike on Nov. 25.
The major banks immediately passed on the increase to their customers, raising their prime lending rates by half a point to 6%, effective Dec. 15. Several banks raised mortgage rates on Thursday.
It was the first time the bank had moved by more than 25 basis points since it began to set rates directly in February 1996.Previously, the rate was tied to the yield on the weekly auction of three-month Treasury bills.
The C$ responded by rallying to US70.77› but slid back, prompting another round of open-market intervention by the central bank to stabilize the market.
"The C$ was revived for a mere hour or so before sinking back into its sick bed," said Shenfeld.
It closed at US70.43›, up from Thursday's 11 1/2-year low of US70.08›.
Bank of Canada governor Gordon Thiessen may now face a choice between a renewed slide in the C$ or further hikes to lift rates to within 50 basis points of the comparable Fed funds rate in the U.S., Shenfeld said.
Either way, the trend points to slower growth next year. Growth in gross domestic product will likely be about 3.25% next year, down from CIBC Wood Gundy's earlier forecast of 3.5%, he said.
The U.S. Federal Reserve has not moved since raising that rate 25 basis points to 5.5% in March. "I think you're probably looking at another 50 basis points [in Canada] in the next four to five months."
Shenfeld's concerns were echoed by other economists.
"I'm worried that the bank will be forced to go again and that it'll raise rates enough to really snap domestic demand," said Andrew Spence, chief economist with Deutsche Morgan Grenfell Canada Inc.
Nesbitt Burns Inc. senior economist David Rosenberg agreed with Shenfeld's forecast for another 50 basis-point hike to close the gap with U.S. rates. He also predicted the economy would take a hit.
"We are in the process of taking our forecast down for 1998 from 4% to roughly 3.5% [GDP growth]."
On the bright side, he said a strengthening C$ and low inflation rates still point to historically cheap borrowing rates.
Although bond prices usually decline on rate hikes, the 30-year bond gained Friday, buoyed by an investment climate that signals slower growth ahead and even less of a chance of rising inflation.
The long bond closed at $127.60, up $1.86 at a yield of 5.99% for its largest one-day gain in six weeks. Low long-term borrowing costs should eventually bring mortgage costs back down, Shenfeld said.
In a statement, the central bank said its move was designed to settle domestic markets that have been rattled by "volatility in international markets."
Earlier this month, Thiessen said the bank was continuing to forecast 4% GDP growth next year.
The C$ has been languishing near its record closing low of US69.13› due to a ballooning current account deficit and a dismal outlook for commodity prices.
The C$ has slumped steadily in 1997 since hitting this year's high of US74.83› in January. But the slide accelerated in October when economic turmoil in Southeast Asia spilled over into Hong Kong and then North American markets.
Rate hikes on Oct. 1 and Nov. 25 only whetted the currency market's appetite for more increases, analysts said.
Economists are more bullish on the C$'s longer-term prospects but say weaker Asian markets will continue to deflate commodity markets and volatile global investment flows will continue to shun Canada.
"We remain unconvinced that today's hike will be enough to turn the C$ around," said Mario Angastiniotis, an analyst with MMS International, a division of Standard & Poor's Corp.
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