MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 2, 1998 (3)
COMMODITIES
More Stormy Weather Ahead
David Thomas - The Financial Post
With few bright spots in an overall dismal commodity market, the consensus is that prices will have to bounce back this year; the only question remaining is when.
"I don't think it's going to turn around quickly," said Patricia Mohr, an economist and commodities specialist at Bank of Nova Scotia. "By summer, I'd hope to see some improvement."
In anticipation of the recovery, Mohr says resource stocks may pick up in the weeks ahead if the market senses a turnaround in four to six months' time.
Peter Buchanan, an economist with CIBC Wood Gundy Securities Inc., said the economic climate "points to a generally bearish backdrop for resource markets, for at least the next four to six months."
Commodities were perhaps the most highly visible casualty of the Asian flu that has afflicted global markets in waves of varying virulence since last summer.
The waning demand for raw materials in Asia hammered commodity prices in the last quarter of 1997 -- hitting copper, nickel and lumber, to name just a few. Copper reached a high of nearly US$1.25 a pound on the London Metals Exchange in June but tumbled to US77› by the end of December.
Wayne Atwell, an analyst with Morgan Stanley Dean Witter Discover & Co. is expecting the downturn in Asia to have a long-term impact. He recently cut his 1998 forecast for copper prices by US5› to US80› a pound. His 1999 forecast was cut by the same amount, to US85› a pound.
"The reduction ... relates to the escalating concern over lower copper consumption in Southeast Asia and the deflationary tone of the market," he explained.
In the case of gold, some analysts were surprised that the turmoil in Asia didn't boost bullion as a safe haven investment. Instead, gold has been hit as it falls further out of favor with central banks. The US$ has taken its place as a store of wealth during times of upheaval.
The spot price of gold has been rolling downhill since hitting US$415 in February, 1996. Its most recent low is US$282.75, reached in early December. A rally in gold stocks last month may be a sign that fund managers are betting gold may have hit bottom.
Copper and gold have plenty of company in their misery. The Goldman Sachs Commodities index closed the year with a decline of about 14%, losing much of that ground in the last few months. The index lost 9.3% in November, its largest monthly drop since January of 1991.
The Commodity Research Bureau index also took a beating. The first quarter of 1998 could see downward pressure intensify before the CRB index pulls back, says John Murphy, president of Dallas, Tex.-based research firm Murphy Morris Inc.
"I think we'll probably retest [new lows] between now and February," he predicted in mid-December, adding that a long-term bear market in commodities would be confirmed if the index dropped below the support level of 232. It dipped below that level last week.
A retest of support is likely because metals are trending lower and grains have started to weaken, Murphy said. "The strength of the US$ has added a big hit, adding to the downward pressure on prices," Mohr said.
Most commodities are priced in US$s. With some currencies tumbling 50% or more against it, the effect of their decline is compounded.
In the case of some commodities, such as pulp in Indonesia, currency devaluations will encourage industries to expand their capacity. This will allow them to compete with existing producers but will push prices down, squeezing everyone's profit margin in the process.
Base metals are clearly being hardest hit by the fallout from Asia, but the Asia factor takes a back seat to the weather when it comes to the outlook for commodities such as coffee, wheat, natural gas and corn.
Betting on the weather means trying to weigh the El Nino factor. According to commodity analysts, that has proved treacherous. Coffee, cocoa and orange juice were among the top commodity performers last year, rising in part due to uncertainty over crop yields for 1998.
As a group, oil and gas prices dropped about 12% in 1997, Mohr calculates. Crude oil prices dipped to almost US$18 a barrel in December, down about US$3 from October.
Increased production quotas for members of the Organization for Petroleum-Exporting Countries could put further downward pressure on prices in the months ahead, she says.
Mohr says newsprint and paper will be among the few bright spots in the first few months of this year.
Late last month, Montreal-based Abitibi-Consolidated Inc. said it planned to raise newsprint prices to US$640 a tonne in April.
CURRENCY
C$ Has Struggle Ahead To Get Out Of The Woods
David Thomas - The Financial Post
The C$ regularly takes a hit in December as foreigners repatriate their yearend profits. But last month the loonie was devastated, setting up an uncertain picture for this year.
"I was calling for some weakening in the C$, but I didn't think it would have fallen out of bed like this," said Robert Fairholm, an analyst with economic forecasting service DRI McGraw-Hill, a division of Standard & Poor's Corp.
"Then again, I didn't foresee the Asian crisis," added Fairholm, who had plenty of company in failing to see that runaway train barreling down the tracks.
Analysts say forecasting the performance of the C$ in 1998 will be a tough call, given that it's still not clear whether this has been the worst, or just the beginning, of an economic train wreck.
The consensus is the C$ could see more trouble ahead in the short term, but that fundamentals dictate a strong recovery is due at some point in the year, to the US73› to US76› range.
After the 50-basis-point -- half a percentage point -- interest rate hike on Dec. 12 failed to halt the slide of the C$, the Bank of Canada may have resigned itself to a weaker currency. More hikes could choke off growth by raising the cost of borrowing.
Later in the year the bank abandoned its aggressive defense of the C$, letting it slip below the psychologically sensitive US70› level.
It closed Dec. 31 at US69.91›, less than a cent above its record low of US69.13›.
As recently as October, Fairholm was calling for a quick turnaround for the C$ in late 1997 and for it to hit US77› by the end of this year. Now he says it will be March or April before the currency is likely to turn around.
As for forecasts, he says the loonie could be as strong as US75› or as weak as US68› in 1998, depending which scenario plays out. He is leaning to a modest recovery, in the low US70› range.
Here are some of the key factors that conspired late last year to hammer the C$ below US70› for the first time since February of 1996:
The downturn in commodity prices due to slackening demand from weakened Asian economies. Canada's economy is still highly leveraged to the export of raw materials, although international currency traders may have run the C$ down further than merited.
"It may not be justified, but the C$ is seen as a commodity play," Fairholm said. "Perception is everything in financial markets."
Australia also took a hit as a commodity play and its dollar was beaten up even more than the C$, losing about 13% of its value after the Asian turmoil boiled over.
A global flight to quality during the Asian currency crisis has investors dumping securities in smaller markets for relatively safe havens such as U.S. Treasury bills.
The ballooning current account deficit brought on by weakness in the trade balance, as growth of imports vastly outpaces that of exports.
This situation, ironically, is a result of a strong domestic economy as businesses have loaded up on business equipment to expand productivity.
Right now, the C$ is being hit on all three fronts. The timing and strength of the recovery will depend on which front shows improvement, and how much.
Fairholm and others expect the C$ to at least stabilize once everyone has a better handle on whether the upheaval in Asia is subsiding or heating up.
"I'm not ready to suggest that the worst is behind us, but we should at least have a clearer picture in the months ahead," said Bank of Montreal chief economist Tim O'Neill.
O'Neill stresses that while Asia's economic woes continue to hang over global markets, much of the weakness in the C$ is due to made-in-Canada factors.
"By far the most important issue for the C$ is the weakening of the current account," he said. O'Neill sees the current account picture improving in the next six months as business spending slows with higher interest rates and exports improve on a weaker C$.
He says Bank of Montreal continues to forecast the loonie will reach US76› by the end of the year, but uncertainty clouds the outlook.
"A US76› [C$] is more at risk now than it was a month ago. The risks are to the downside and I wouldn't be shocked to see it a few cents below that."
Two things need to happen to get the C$ back on track, according to the International Bank Credit Analyst, a Montreal-based economic forecasting group.
The group says that, first, the bank "must re-establish its credibility as a forward-looking inflation fighter."
That means the market needs to interpret interest rate hikes as directed at preventing inflation, and not as a currency defence. So far, that has not been the case.
"Secondly, commodity prices need to stabilize and the Asian crisis must be contained," the group continued.
Unfortunately there hasn't been much progress on either of these counts.
"Neither [occurrence] is imminent and the currency will remain weak in the next three to six months," the group concluded last month.
LOOKING BACK AND AHEAD - 1997
Investors Weathered Chills, Spills
Globe & Mail
NO market keeps rising without a correction, the pundits said at the beginning of 1997, warning of possible trouble to come. But subsequent events proved them wrong again.
Instead of falling, the bull market in North America roared into an eighth year. But in 1997, unlike the previous several years, there were plenty of chills and spills along the way.
Volatility at times was extreme and investors had to be nimble to capitalize on the opportunities presented by the markets on both sides of the border.
There were downward dips, but no serious, long-lasting declines. And there were impressive rebounds, as investors used opportunities presented by declines to buy into tarnished stars.
"Given the turmoil we have endured, I think it is fabulous that we have made the terrific gains we have," said Pat Blandford, senior vice-president of Midland Walwyn Capital Inc., especially considering how important commodity prices, particularly gold's, are to the Toronto market.
"The price of gold was $400 [U.S.] at the start of 1996 and $350 at the beginning of 1997." It is now around $289.
A year ago, money managers were urging investors to temper their expectations for the market, "yet we got a bonus year," he said.
Over the year, almost everybody fared well if they stayed fully invested: That is, unless they were deeply into junior mining stocks -- the undisputed dogs of the year. Those who played the Canadian penny stocks or gold shares got clobbered.
But those Canadian investors who ignored the advice of some experts and stayed put in the interest rate sensitive issues were laughing all the way to the bank.
The factors that contributed to the happy state of affairs in the major equities markets in North America last year included the following:
Despite the various hiccups during the year, the Dow Jones industrial average still climbed 1,459.98 points or 22.6 per cent to 7,908.25. That followed on gains of 33.5 per cent and 26 per cent in 1995 and 1996 respectively. The Standard & Poor's 500-stock index -- a much broader measure of the New York market -- advanced 229.69 points or 31 per cent to 970.43. The Nasdaq composite, which includes many of the big names in the high-technology area, increased 21.6 per cent to 1,570.35.
Players on the Toronto Stock Exchange paid close attention to events south of the border, but still maintained a degree of independence. Despite weakness in the resource sector, the TSE 300-stock composite index rose 772.41 points or 13 per cent to 6,699.44. That compares with 11.9 per cent and 25.7 per cent in the preceding two years.
Throw in reinvested dividends and the gains rise still further. In the case of the S&P 500, the return climbed to 33.4 per cent, making 1997 the third consecutive year in which the return had increased more than 20 per cent. That is far in excess of the average annual return of10.7 per cent from 1926 to 1996.
Both markets ran into significant turbulence as the year drew to a close and all the major indexes remain well off their highs. The Dow has yet to overtake its record close of 8,259.31 set on Aug. 6 and the TSE 300 is still below its Oct. 7 record of 7,209.93.
The Oct. 7 high for the TSE 300 was the 41st of the year for the composite. That is down from 64 in 1996.
Contrary to conventional wisdom at the beginning of 1997, interest rates stayed low and inflation remained missing in action.
The U.S. economy rolled along at a good clip, with the unemployment rate falling to just 4.6 per cent, a 24-year low; yet wage and benefit costs stayed contained.
Merger activity continued at a high level. In the United States, scrappy WorldCom Inc. said it would spend a stunning $37-billion (U.S.) for MCI Communications Corp. This side of the border, Abitibi-Price Inc. united with Stone-Consolidated Corp. to create Abitibi-Consolidated Inc. in a $4-billion-plus (Canadian) deal. And Great-West Lifeco Inc. engineered a $2.94-billion takeover of London Insurance Group Inc.
Money flooded into mutual funds on both sides of the border, as investors remained convinced that stocks are the place to be. Net flows into all types of Canadian funds to the end of November were $48-billion, up from $37-billion in the corresponding period of 1996.
Because of that, volumes and values on both the New York Stock Exchange and the TSE were uncommonly high. For example, total value on the TSE in 1997 was around $423-billion. The previous record for value was 1996's $301.3-billion, but the exchange crashed through that by late September.
On Dec. 17, more than 208 million shares were traded through the TSE, the largest one-day total yet. That superseded the previous high set in September. In fact, the top seven trading days occurred during 1997.
Initial public offerings (IPOs) were still very much in vogue. Toward the end of November, there were 91 IPOs on the TSE, up from 61 a year earlier. Since then, about eight additional IPOs have been done. Looking back over the year, who can forget the high excitement of Grey Monday -- Oct. 27 -- when the New York market awoke with a start to the troubles in Asia and the Dow sank 554 points or 7.2 per cent. In a single session, about $600-billion (U.S.) was wiped off U.S. stock values.
But the drop -- which was felt disproportionately in the high technology stocks that had been market darlings -- was transitory. The next day, the Dow briefly dropped below 7,000 points, a level it first cracked in October, 1996, but then rebounded with a vengeance as investors took advantage of what they saw as bargains, particularly in the high-tech area. The Dow gained 337 points on the Tuesday, the biggest single-point gain in history.
The TSE 300's moves were less dramatic over the same two days. Falling 434 points, or 6.2 per cent, on the Monday, it rallied 137 points the next day.
Who also could forget the gut-wrenching collapse of Bre-X Minerals Ltd., the tiny Calgary-based company that, as the original story line went, had made the gold mining discovery of the century.
Too bad for many investors that it was all so much pie in the sky. Billions in market value vanished over a matter of a couple of months. One Report on Business reader wrote: "I understand the appearance of comets, such as Hale-Bopp, has always presaged disasters; the shareholders of Bre-X must subscribe to this theory."
Even individual stocks, apart from Bre-X, were subject to a high degree of volatility. There were lucky souls who rode the Ballard Power Systems Inc. rocket up $29.10 to $84 in a single week, confident that an analyst's report that the stock would climb to $200 within 10 years would come true. There were also those who watched Northern Telecom Ltd. fall $12.40 to $117.50 on Grey Monday.
It was also a year in which every comment by U.S. Federal Reserve Board chairman Alan Greenspan was carefully analyzed. In February, for example, Mr. Greenspan followed up his famous "irrational exuberance" comment of December with another warning that the stock markets may have raced ahead of themselves. He said the rise of the previous two years raised "questions of sustainability" of the rally.
Another outstanding event was the meltdown of the junior resource sector. The Vancouver Stock Exchange composite indicator, which several years earlier had set one of the hottest paces of any market index worldwide, had a horrible period following the first indications that the Bre-X gold discovery was not what it was cracked up to be. It topped out at 1,352 in March and then plummeted to 618 by year-end.
It was a year in which the much-trumpeted Goldilocks scenario was accepted wholeheartedly by most investors. They were only too willing to embrace the idea that the U.S. economy is expanding in a manner that was not too hot, not too cold, but just right to keep inflation under wraps.
Ross Healy, president of Strategic Analysis Corp., sees the year's events on the TSE somewhat differently than Mr. Blandford. He said "the TSE has performed rather more poorly than we thought.
"We were bullish on the banks and bearish on the golds all year." But like others, he found the performance of the mines and metals stocks disappointing. "They started out the year promising more than they delivered."
Mining issues on the TSE declined 27.6 per cent, which was second only to the golds' 43.6-per-cent pummelling and only slightly better than the 12.8-per-cent pasting the paper and forest issues took.
In betting on the banks, Mr. Healy was right on the money. The financial services group, which includes money managers, insurance companies as well as banks, surged 51.5 per cent.
Because of the weakness in all the resource sectors, the TSE 300 underperformed the Dow and the S&P 500.
But even those paled against the 209.1-per-cent surge in return from Russia's ASP General index. Next up was Turkey's stock market gain of 85.3 per cent. Exchanges in Milan, Panama, Switzerland, Hungary, Mexico, Lisbon and Frankfurt all posted increases of between 47 and 65 per cent -- again well ahead of the Dow and S&P. (The comparison is based on U.S. dollars.)
But the two U.S. indexes stack up well against others throughout the world. The worst performing markets, as one might expect, included theThai stock exchange's index, the Jakarta composite index, the Philippines composite index the Kuala Lumpur composite index. All declined by at least 52 per cent. By comparison, the Nikkei 225-stock index in Tokyo got off lightly. It was off 30.3 per cent.
"I think we are all very surprised that the [New York] market has shown such resilience," said Trude Latimer, a Charlottesville, Va. based market strategist. But then, many retail investors have never known a major downturn in the market, so they are quite ready to think that markets can roll along forever, she said.
Even in the buoyant U.S. markets, it was possible to lose money if you bought the wrong stocks. Those who bet their shirt on shares of New York-based Bernard Chaus Inc., which markets apparel under names including Nautica, were somewhat chilled by the experience. At year-end, the shares, which are listed on the New York Stock Exchange, were trading at $2.25 (U.S.) and that was after a one-for-10 share consolidation.
Others fared very poorly as well with their NYSE picks. Take those who played Jumbosports Inc., a Tampa Fla.-based retailer of name brand sporting equipment, and recorded a 78.7-per-cent loss as the shares tumbled to $1.44.
Even U.S. high-tech stocks were not necessarily a good pick. Take Chatsworth, Calif.-based Trikon Technologies Inc., which ended up 1997 some 91 per cent below its year-earlier level on the Nasdaq Stock Market. And teal may be a nice colour, but not a profitable stock symbol for those who opted for Triteal Corp., a software company also based in Chatsworth.
Salt Lake City's Ion Laser Technology Inc. and Boston-based companies Property Capital Trust and Air & Water Technologies Corp. all proved unfortunate choices for some American Stock Exchange investors.
This side of the border, the dogs included Corriente Resources Inc. and International Curator Resources Ltd., both of Vancouver, and Memotec Communications Inc. of Montreal, on the TSE. Corriente dropped 89.4 per cent to $1.71 (Canadian) at year-end; International Curator skidded down 89.2 per cent to $1.30. Memotec lost 84.7 per cent to close at $1.12.
(The Globe survey excludes those stocks whose price had fallen below $1 at year-end.)
Same of the biggest losers on the TSE were also among the largest disappointments on the Montreal Exchange. On the ME, Semi-Tech Corp.of Markham, Ont., tumbled 79 per cent to $1.05 -- a decline surpassed only by Memotec. Mississauga-based Teklogix International Inc. sank 78.5 per cent to $3.60. Long forgotten was the 52-week high of almost $22.
Glenmore Highlands Inc. of Vancouver made it to the top of the Alberta Stock Exchange's biggest losers list. Shares of the mining exploration and development company closed 1997 at $2, which was 81 per cent below their year-earlier level. Not far behind was Calgary-based Capco Resources Ltd., which shed 80.6 per cent.
Even in a bad year, some stocks do markedly worse than others, and so it was on the Vancouver Stock Exchange that Vancouver-based Vantage Enterprises Corp., Cepeda Minerals Inc. of Calgary and Valerie Gold Resources Ltd. of Vancouver were singled out for special attention.
But of course, there were big winners on both sides of the border as well. For the purpose of the Globe survey, shares trading at less than $2 on Dec. 31, 1997, are excluded from the list of largest gainers.
Heading the gainers list for the TSE is information systems consulting company CGI Group Inc. of Montreal. Its A shares surged 728.4 per cent to $23.30. Next up was -- surprise of all surprises -- a junior miner, Ashton Mining of Canada Inc. Shares of Vancouver-based Ashton, a diamond play, rocketed 522.2 per cent to $5.60. And of course, since markets were hot again in 1997, shares of money management companies reflected the heat. Mackenzie Investment Management Inc. of Boca Raton, Fla., soared 366.7 per cent to $23.10.
On the ME, Leader Industries Inc. of Boucherville, Que., Asbestos Corp. Ltd. of Thetford Mines, Que., and Toronto-based NAR Resources Ltd. made it into the big winners' circle. Each rose at least 300 per cent.
But those increases pale against the 657-per-cent and 571-per-cent advances posted by Vancouver-based ITN Technologies Inc. and Anorak Capital Corp. of Calgary on the Alberta exchange or the 636-per-cent gain of Neary Resources Corp. of Vancouver on the VSE. Next best there was Vancouver-based Intrinsyc Software Inc., which rallied 340 per cent.
In New York, Musicland Stores Corp. of Minnetonka, Minn., was sweet sounds in many an investor's ear, thanks to its 387-per-cent surge. EA Industries Inc. of West Long Branch, N.J., was another of the NYSE's stand-out performers.
On Nasdaq, Jackson Hewitt Inc. of Virginia Beach, Va., and Skylands Park Management Inc. topped the charts. Skylands is now Millennium Sports Management Inc. of Augusta, N.J. Gains on both those stocks were in excess of 1,000 per cent. The biggest gainers on the American Stock Exchange also rung up eye-catching advances -- 448 per cent in the case of Cognitronics Corp. of Danbury, Conn., and 418 per cent for VSI Holdings Inc. of Smyrna, Ga.
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