MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WED DECEMBER 17, 1997 (1)
Thursday, December 18, 1997
Stock Markets
Golds Drive TSE Higher
A big surge in the price of bullion drove Bay Street stocks higher. Wall Street fell as another U.S. multinational company became the latest victim of Asian economic turmoil
The Toronto Stock Exchange 300 composite index rose 58.06 points, or 0.9%, to 6625.49, with the gold, base metal and energy sectors posting strong gains. Trading volume on the TSE was 208.3 million shares, up sharply from 109.9 million shares traded Tuesday.
The volume was inflated by more than 70 million shares of Repap Enterprises Inc. (RPP/TSE) crossed by CIBC Wood Gundy Securities Inc.
Investor interest in resource stocks helped Toronto outperform New York. Twelve of the TSE's 14 stock groups rose, with an 8.4% gain in the gold group leading the way. In the sector, Placer Dome Inc. (PDG/TSE) rose $1.55 to $17.55. On the Comex division of the New York Mercantile Exchange, bullion surged US$5.70 to US$289.10 an ounce. Observers do not believe the resurgence in the gold price is the beginning of a trend. "One day does not make a rally," said Pierre Donnini, head of equity trading at Yorkton Securities Inc.
One bullion trader said the rally is typical of the time of year, as investors cover their short positions or take profits before the yearend.
The base metal sector followed the gold group up, rising 3.3% on the strength of gains in some of the metals. Japan's plan to cut taxes to help its faltering economy spurred some investors to bet the move could stimulate demand for commodities, driving prices higher, some observers said. However, others predicted any pick-up in Japanese demand would not be enough to offset the expected demand slowdown in the rest of Asia.
Among individual blue chips, the stock of networking firm Northern Telecom Ltd. (NTL/TSE) closed down 20› at $127.80, as investors took profits on the stock's recent rally.
Newbridge Networks Corp. (NNC/TSE) was harder hit, dropping $1.05 to $49.85. The company's affiliate, CrossKeys Systems Corp. (CKYw/TSE), started trading on a "when-issued" basis, ending the day up $1.55 at $16.50.
Aluminum producer Alcan Aluminium Ltd. (AL/TSE) rose $1.35 to $39.50, buoyed by a surge in the underlying commodity price.
Other major Canadian markets closed higher. The Montreal Exchange portfolio rose 20.37 points, or 0.6%, to 3376.82. The Vancouver Stock Exchange index rose 8.89 points, or 1.5%, to 593.08.
Canada's dollar closed stronger on Wednesday, boosted by Japanese buying overnight, with the market now looking ahead to the release of key Canadian trade data on Thursday, analysts said. The currency closed stronger at C$1.4217 (US$0.7034) from C$1.4257 (US$0.7014) at the close of trading on Tuesday. "Tomorrow we're going to see the Canadian trade numbers give an outlook for what the current account is doing. We're looking for a little bit of a rise in the surplus," said Harv Kalirai, Canadian analyst with financial analysis firm I.D.E.A. "That could give some support to the currency."
HOT STOCKS
TSE golds reclaim lost ground. Placer Dome Inc. (PDG/TSE), up $1.55 to $17.55, on volume of 2.6 million shares. Barrick Gold Corp. (ABX/TSE), up $1.95 to $26.35, on volume of 3.1 million shares. Franco Nevada Mining Corp. (FN/TSE), up $1.45 to $29.95, on volume of 426,620 shares. William Resources Inc. (WIM/TSE), up 1› to 30›, on volume of 2.1 million shares. From the largest (Barrick) to the smallest (William Resources), stocks of companies in the Toronto Stock Exchange gold group advanced as the price of bullion soared US$5.70 an ounce to US$291.10 - its biggest one-day gain in almost two years. The TSE gold and precious metals index rose 480.37 points, or more than 8%, to 6226.62. Analysts cited short covering, value hunting and higher bullion demand as reasons for the recovery.
BCE Inc. (BCE/TSE), up 5› to $45.35, on volume of 1.1 million shares. Call-Net Enterprises Inc. (CN/TSE), down 90› to $22.60, on volume of 31,300 shares. BCE Mobile Communications Inc. (BCX/TSE), down $1 to $36.25, on volume of 11,313 shares. Bruncor Inc. (BRR/TSE), down 55› to $43.75, on volume of 3,565 shares. BC Telecom Inc. (BCT/TSE), up $2 to $46, on volume of 147,636 shares. NewTel Enterprises Ltd. (NEL/TSE), down $1.75 to $32.75, on volume of 8,660 shares. The
telephone business is in turmoil because of increased competition and price cutting, and investors are reacting in different ways, depending on how they read the impact on the players. On the mobile side, debt rating agencies and massive advertising campaigns are warning investors that competition is fierce. The Stentor alliance of regional telephone companies said Tuesday that it will cut long distance rates for business users by up to 25%. The move is aimed at countering Sprint, owned by Call-Net. But the prospect of reduced revenue from lower business rates is rebounding on to some of the Stentor members. Overall, however, the telephone companies have been beneficiaries of the bull market since spring.
Hyal Pharmaceutical Corp. shares (HPC/TSE) closed at $2.20, down 12›, and (HYALF/Nasdaq) at US$1 5/8, down 1/16. Eighteen months ago, the stock was trading at $17.50. Hyal is giving shareholders every biotechnology investor's worst nightmare: failure in a Phase 3 clinical trial. "This is a disaster for the industry," said one analyst, who asked not to be named. "This looks really bad for Canada, coming after a series of disappointments from other companies in the sector."
In a brief statement yesterday, Toronto-based Hyal said long-awaited results of its Phase 3 trial of Hyanalgese-D, a treatment for osteoarthritis, showed the drug did not provide pain relief that was "statistically significant over [a] placebo." The company is abandoning the product and intends to focus on secondary products. It's the second time Hyal has disappointed investors with a Phase 3 failure for the drug. In August 1996, its shares dropped 25% in one day after it revealed Hyanalgese-D did not provide overnight pain relief that was better than a placebo. The company restaged the trial, seeking only short-term pain relief.
Ballard Power Systems Inc. (BLD/TSE), up $13.10 to $115, on volume of 132,375 shares. The company said Monday that Ford will invest $600 million to develop its fuel cell technology. The jet-powered stock has climbed $27 this week on twice its usual volume.
Trojan Technologies Inc. (TUV/TSE), up $1.55 to $26.05, on volume of 9,229 shares. The company has signed a deal to buy all of its British agent Sunwater Ltd. for an undisclosed price. Over the past 10 years, Sunwater has helped Trojan become a leader in the British wastewater disinfection business, the company said.
Cognos Corp.(CSN/TSE, COGNF/NASDAQ) closed down $1.05 at $28.25 in Toronto and down 5/8 at US$20 on Nasdaq. Cognos Corp. earned just US$783,000 after writedowns in its third quarter, despite a 21% jump in revenue, the company said yesterday. The software maker had warned analysts to expect a 20% increase in sales during its third quarter ended Nov. 30, down from the traditional 30% growth rate. Net income including two one-time charges was US$783,000 (US2› a share) on revenue of US$62 million. Excluding the charges, net income was US$13.8 million (US30›). It wrote off research and development costs associated with its purchase of Interweave Software Inc. of Santa Clara, Calif., in September for US$16 million in cash and assumed debt. Cognos's expected income tax charges were also reduced by US$2.1 million in the quarter.
In the second quarter, Cognos earned US$10.8 million (US23›) on revenue of US$51.3 million. Analysts expect earnings of US34› to US35› a share in the fourth quarter, ending Feb. 28. Cognos makes business intelligence software, which allows companies to track inventory and sales, and do their own market research.
Sutton Resources Ltd. (STT/VSE), up 50› to $9.75, on volume of 170,100 shares. The company said its Reef 1 resource on the Bulyanhulu property in northern Tanzania "is expected to support a mining scheme that will be capable of producing about 300,000 ounces of gold (plus by-products) annually, at a low cost per ounce." Moreover, there are "good prospects for additional gold resources" along the Reef 1 and Reef 2 structures on the property.
Repap Enterprises Inc. (RPP/TSE), up 3.5› to 14›, on volume of 78.2 million shares. CIBC Wood Gundy Securities Inc. dominated trading in the TSE's most active issue, buying almost 74 million shares and selling about 76 million. It crossed eight blocks totalling 70 million shares at 10› each in two minutes beginning at11:24 a.m., and had several million-share trades before and after the flurry. Dow Jones reported that River Road (Canada) LLC and Silverton International Fund Ltd., two U.S. hedge funds that together control 29% of Repap, were not the sellers. Bruce MacGowan, chairman of Templeton Management Ltd., which reported a 17% holding in Repap in August, told Dow Jones he could not confirm whether or not Templeton funds were involved in the trades.
Sgares of Comac Food Group Inc. (CFxb/ASE) were halted yesterday at 76›, up 12›. Comac Food Group Inc. announced yesterday it will buy Pizza Delight Corp. in a stock swap valued at $16 million. In its biggest purchase ever, Comac will buy all Pizza Delight's shares by issuing 32 million shares. Pizza Delight, headquartered in Moncton, N.B., operates 145 franchise and corporate stores such as Pizza Delight, Pizza Expert, Pizza Patio, le Coq-Roti and Marie Antoinette in Atlantic Canada, Quebec and Ontario, areas targeted for growth by Comac.
Comac franchises 300 stores, including Domino's Pizza, Grabbajabba, Pastel's and Company's Coming Bakery Cafe. With the merger, scheduled to close in March, it is expected to have 450 stores and system-wide sales of $180 million.
CrossKeys Systems Corp.(CKYw/TSE), up $1.55 to $16.50, on volume of 237,175 shares. The telecommunications management software maker began trading on a "when-issued" basis after its initial public offering of 2.9 million shares at $14.95 each.
New York Commentary
The profit warning and subsequent stock plunge by 3M (MMM) dominated market action on Wednesday. Many players say the repercussions will still be felt tomorrow as the focus shifts from overseas events to earnings, with reports from several high-profile firms expected.
In fact, some players suggest the market's relatively muted response to 3M's red flag could mask deeper disappointments that will spoil the much-heralded "Santa Claus" rally.
3M shed 9 to 84 7/8 on Wednesday, taking 35 points off the Dow, following its admission that its fourth-quarter earnings will be flat from levels recorded a year ago due to weak Asian markets and the deleterious effect of the strong dollar. 3M officials also cited weakness in Brazil and less-than-robust demand in the U.S. for the sluggish fourth quarter.
"3M's pre-announcement today was one you had to take notice of. I'm surprised there was not more of a negative reaction," said Richard Cripps, chief market strategist at Legg Mason. "My view is this pre-announcement period we're in is going to prevent stock prices from having a traditionally strong year-end rally. I would not be surprised to see prices lower than now at the turn of the year."
Peering out into 1998, Cripps said investors should watch the performance of banks as a leading indicator of the direction of stocks.
"Banks have become more mixed in the last five or six weeks. If we were to see them underperform as we get through the first quarter, that would be a negative for the market," he said. "Bankshave always been a good leading indicator in a mature phase of bull market."
Why banks, versus say, technology? Cripps says it's because banks have been driven by the same themes that have aided the broader market: low interest rates, strong profits, and merger and acquisition activity.
"If they start to falter due to concerns about profitability, it's a good proxy for the overall market. If it's because of credit-quality problems, that means the economic cycle is switching," he said. "It's a key group to watch in determining your overall exposure to the equity market."
On the earnings front Thursday are the likes of 3Com (COMS), Adobe Systems (ADBE), Manugistics (MANU) and Nike (NKE).
With all the frayed nerves on Wall Street these days, merely the hint of a slowdown due to Asian exposure will be enough to knock any of the particulars for a loop. And the tech sector as a whole remains vulnerable to a big sell-off if 3Com or Adobe drops a bomb.
3Com has already warned that its second-quarter results would be "slight" at best. To recap, 3Com helped send tech stocks tumbling on Dec. 3 when it said efforts to cut its inventory would weigh heavily on its earnings. 3Com is expected to post earnings of 5 cents per share when it reports after the bell. On Wednesday, 3Com fell 3/4 to 34 1/2 after being removed from Goldman Sachs' "recommended" list.
And Wall Street isn't expecting gangbuster results from Nike (NKE), either, which suffered last week when rival Reebok (RBK) warned about its profitability. Analysts are expecting Nike to earn 56 cents per share in its second quarter. Nike dropped 1 7/16 to 43 5/16 ahead of its earnings report.
Adobe is expected to earn 55 cents per share in its fourth quarter, while Wall Street is looking for Manugistics to earn 13 cents per share in its third quarter.
So, perversely, the "good news" for Thursday is that expectations are low, sentiment is shaky, and more and more players are lamenting that the year-end rally has been postponed, or has already passed. Thus, the prospects for a "positive" surprise are heightened.
Although domestic earnings will be at the forefront of the market's consciousness Thursday, there's still the little matter of the presidential elections in South Korea. Since all three major candidates pledged to adhere to the guidelines already agreed upon with the International Monetary Fund, Wall Street is fairly sanguine about the elections. Then again, you can't be too sure about anything in Asia these days.
"The worst case may be if you get a coalition, or a weak victory by one of the candidates," said Michael Scarlatos, international economist at Bankers Trust. "There might be a tendency to come out and say, 'Maybe we don't have the strength to push the package through.'"
However, Scarlatos said he's not overly concerned that Korea will seek to renegotiate the IMF bailout: "I would trade on IMF reforms as fact. They have no choice."
The economist also dismissed concerns raised last weekend that Korea was on the verge of defaulting on its debt.
"Korea wouldn't have access to private capital for 10 years at least if it were to default," he said. "Markets have a hard time assessing the level of determination of policy makers to avoid such a catastrophe."
In addition to the elections in Korea, market players will also be closely watching for signs of additional fallout from Japan's fiscal bailout package. Specifically, the bond market will be keenly aware of additional weakness of the dollar versus the yen if Japan's central bank continues to intervene and sell greenbacks to support its currency.
|
