MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURS., JANUARY 8, 1998 (1)
Stock Markets
Street feels the squeeze
Canadian stocks tumbled as concern mounted that slowing Asian economies will stunt corporate profit growth. U.S. stocks fell as a central bank official predicted economic slowdown
The Toronto Stock Exchange 300 composite index tumbled 99.94 points, or 1.5%, to 6490.67. About 105.8 million shares were traded, compared with 122.9 million on Wednesday.
A total of 58 stocks dropped to 52-week lows on the day, against the 23 stocks that hit 52-week highs.
Communications equipment maker Newbridge Networks Corp., which made 14% of its 1997 sales in Asia, and Inco Ltd., which generated 30% of its 1997 sales in the region, were among the hardest hit.
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People are worried about Asia and worried about earnings," said John Kinsey, a fund manager at Caldwell Securities Ltd. "You have to be cognizant of where the earnings streams for these companies are coming from. The Asian problem is not going to go away."
Newbridge's losses were compounded after TD Securities analyst David Beck cut his earnings estimates for the company. Beck retained his "buy" recommendation on the stock. Newbridge (NNC/TSE) fell $4.80 to $46.55. It has fallen 27% in the past 30 days.
"Fears of economic problems in the Asian region are causing companies with exposure there some severe problems," said Norman Duncan, a broker with C.M. Oliver & Co. "Newbridge is a classicexample, though at under $50 it is a buying opportunity; wait until it steadies."
Inco (N/TSE), a nickel-mining company and the second most heavily weighted stock on the TSE's metals and minerals subindex, dived $1.60 to $22.60. Other mining companies also fell as concern about sluggish Asian sales eclipsed modest gains in nickel, copper and aluminum prices. Noranda Inc. (NOR/TSE) fell $1.05 to $23.70, Alcan Aluminum Ltd. (AL/TSE) slipped $2.25 to $37.35 and Cameco Corp. (CCO/TSE) dropped 50› to $43.75.
Gold sat out gains by other metals as European central banks are expected to announce soon they sold hundreds of tonnes last year.
The price of bullion fell US$2.90 to US$281.10 an ounce.
Barrick Gold Corp. (ABX/TSE) fell $1.85 to $22.85 and Placer Dome Inc. (PDG/TSE) fell 85› to $16.25. It is not just exporters that are feeling the squeeze of shrinking Asian economies. "The actual amount Asia will affect profit growth has been underestimated by many people," said Philip Strathy, an investment manager at Strathy Investment Management Ltd. "It will be substantial."
Other major Canadian markets closed lower.
The Montreal Exchange portfolio fell 56.21 points, or 1.7%, to 3327.36. The Vancouver Stock Exchange index fell 9.8 points, or 1.6%, to 603.84
The Dow Jones industrial average fell 99.65 points, or 1.3%, to 7802.62. The Standard & Poor's 500 composite index slid 7.96 points, or 0.8%, to 956.04, while the Nasdaq composite index fell 6.16 points, or 0.4%, to 1555.54.
About 656.8 million shares changed hands on the New York Stock Exchange, compared with 623.7 million on Wednesday.
U.S. Federal Reserve governor Laurence Meyer said the "downdraft" from Asia's economic turmoil is likely to slow the U.S. economy, even as rising labor costs undermine profit growth.
Cyclical stocks such as Exxon Corp. and Ford Motor Co., whose earnings depend on a strong economy, declined. Exxon (XON/NYSE) fell US$1 5/16 to US$59 9/16 and Ford (F/NYSE) lost US$2 1/16 to US$45 1/16.
"Corporate profits are in question, valuations are extreme and the economic background is shaky, particularly in Asia," said Henry Van der Eb, president of Mathers & Co. in Bannockburn, Ill."We're headed for the first down January in a while."
U.S. bonds rose as investors sought a haven from turmoil in Southeast Asia and the Fed's Meyer suggested the central bank may cut interest rates if the region's crisis drags on the U.S. economy.
The major overseas markets closed mixed.
London: British stocks closed higher but off their day's peak. The FT-SE 100 index ended at 5237.1, up 13 points or 0.3%.
Frankfurt: German shares fell as Wall Street weakened. The Dax index closed at 4347.23, down 44.31 points or 1%.
Tokyo: Japanese stocks gave up their gains by the close as investors lost faith that the government would take further steps to boost the economy. The 225-share Nikkei average closed at 15,019.18, down 8.99 points.
Hong Kong: Stocks slumped on regional economic worries. The Hang Seng index closed at 9254.53, down 284.08 points or 3%.
Sydney: The Australian share market faded from modest highs to finish just firmer. The all ordinaries index closed at 2650.7, up 3.8 points.
HOT STOCKS
Barrick Gold Corp. (ABX/TSE), down $1.85 to $22.85, on volume of 2.8 million shares. Placer Dome Inc. (PDG/TSE), down 85› to $16.25, on volume of one million shares. TVX Gold Inc. (TVX/TSE), down 40› to $3.95, on volume of 420,004 shares.
The Toronto Stock Exchange's gold & precious metals subindex fell 318.02 points, or 5.3%, to 5661.8, tracking a decline in the price of gold bullion, which fell US$2.90 to US$281.10 an ounce.
Inco Ltd. (N/TSE), down $1.60 to $22.60, on volume of 1.4 million shares. Falconbridge Ltd. (FL/TSE), down 95› to $16.50, on volume of 584,047 shares.
Slumping Asian equity markets and depressed base metal prices sent stocks in Canada's largest nickel and copper producers lower.
The spot price for nickel closed at US$2.59 a pound on the London Metal Exchange. Copper also slipped to US75.4› a pound.
In related news, Trimark Investment Management Inc. announced an increased holding of Inco common shares. It now holds about 18.3 million, or 11%, of the shares outstanding.
Onex Corp. (OCX/TSE), down $1 to $26.20, on volume of 708,563 shares Kaan Oran, analyst at First Marathon Securities in Toronto, said the company's Celestica division may be hurting the share price. "Onex is trading in sympathy with Asia which has seen comparables to Celestica come off highs," Oran said. But Oran said most of Celestica's 1996 revenue of between $5 billion and $6 billion came from North America and Europe, not Asia. As of Wednesday, Onex began trading ex-dividend.
Gennum Corp. (GND/TSE), down $1.25 to $30, on volume of 5,560 shares. The company makes components used in video broadcasting and hearing aids and still has strong end-market demand, said Brian Antonen, analyst at Research Capital Corp. Although the company does a great deal of business with Japan, Antonen said the Asian crisis should have little effect on the company's revenue. Antonen maintains a "hold" recommendation on the thinly traded stock.
Hudson's Bay Co. (HBC/TSE), down 80› to $28.70, on volume of 791,605 shares. Shares in the largest Canadian retailer continued to slide after analysts lowered their earnings estimates, while maintaining their estimates for rival Sears Canada Inc. (SCC/TSE). David Brodie, analyst at CIBC Wood Gundy Securities Inc., said he lowered his estimates for Hudson's Bay because of lower profit from extra promotions and discounting. He also lowered his rating on the stock to "hold" from "buy"
Tenke Mining Corp. (TNK/TSE), down 15› to $1.80, on volume of 456,000 shares. The shares continue to fall because of a presumed connection to the Congo government's termination of contract relations with American Mineral Fields Inc., said David Kellar, analyst at Griffiths McBurney Partners in Toronto. "This deal [Tenke's] is as good as you can get in the Congo," said Kellar, "... and it is different from AMF's because Tenke's deal is totally ratified." Tenke plans to mine the Tenke-Fungrume copper-cobalt deposit in the Congo.
AGF Management Ltd. (AGFb/TSE), down $4 to $49, on volume of 114,094 shares.
Trimark Investment Management Inc. (TMF/TSE), down $3.50 to $53, on volume of 234,319 shares. Mackenzie Financial Corp. (MKF/TSE), down 90› to $16.75, on volume of 869,555 shares. James Dancy, analyst at C.M. Oliver & Co. Ltd., says the fund companies have been trading off their 52-week highs since October. The backdrop of negative equity markets and a dramatic decline in Trimark's share price over the past few days was a catalyst for the selloff, Dancy said.
Market Eye
Gold's time is bound to come -- some day
The gold bugs have again been splattered all over the windshield of the 18-wheeler deflation juggernaut rolling down the highways of the world's financial markets.
The price of gold yesterday fell through US$280 an ounce to its lowest level in more than 18 years as traders reacted to a "surprising" 0.2% tumble in the U.S. producer price index for December, which further confirmed that inflation is up on blocks back at the garage.
Things are looking so bleak for the gold bugs that the only good news is that the news is so bad.
In the oft-contrarian world of the marketplace, overwhelmingly bearish sentiment can be taken as a strong signal to start buying. The theory, which often works in practice, is that the time to buy is when everyone else is desperate to sell.
The Market Vane newsletter bullish consensus report, which each week measures the depth of sentiment among newsletter writers and other commentators regarding various commodities, saysbullish sentiment on gold has sunk to 18% from 21% last week. So, only 18% of those in the survey would buy gold -- the lowest reading since 1985. This contrasts starkly and tellingly with the bullish sentiment for the US$, which the world seems to regard as gold's replacement as the ultimate safe-haven store of value.
As of Tuesday, an eye-popping 97% were bullish on the greenback, up from just 77% the previous week.
The US$ has lost some ground this week against the yen, but that has been of little comfort to the gold bugs. What they might find encouraging in the Market Vane report is that the consensus on energy, especially gasoline, fell precipitously as temperatures rose in eastern North America.
Oil and gold prices most often move in tandem, and a rise in oil stocks on the New York Stock Exchange on Wednesday gave bullion and gold stocks a temporary lift even though the underlying oil price did not rise.
There was no such help from oil stocks yesterday, but the gold price did manage to move back above US$280 in the afternoon.
The bullish consensus report and other measures of sentiment can be useful tools for traders trying to buy near the bottom and sell near the top. They are hardly foolproof.
Gold does look oversold by these and other measures. The problem is that gold has looked cheap for the past year. The gold bugs, scraping themselves off yet another windshield, will be right one of these days, or months, or years.
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You might have expected Steven Nowack to wake up yesterday feeling considerably chastened. After all, the Toronto-based trader of U.S. stocks told Market Eye only on Wednesday that Seagate Technology Inc. was his focus stock -- his best buy.
Later Wednesday, the disk-drive maker warned the markets it would report a substantial operating loss for the fiscal second quarter ended Jan. 2 and would take a US$250-million restructuring charge in the quarter. Not surprisingly, Seagate shares (seg/nyse) fell US$2 1/16 to a 52-week low of US$18 1/2 at the open yesterday.
But Nowack, who was in transit to Los Angeles when Seagate made its announcement, remains resolute in his view of the stock. In fact, the action yesterday reinforces his view that Seagate is at or near the bottom after tumbling from US$56 in 1997.
Seagate bounced back during yesterday's session to close at US$19 1/4. Considering the savage treatment afforded other tech companies issuing earnings warnings, Seagate hardly budged in a down market.
The company has been squeezed by falling demand and falling prices. And while its stock was downgraded by several brokerages yesterday, market conditions exacerbated by the Asian crisis, not the company itself, were cited.
The bounce on big volume yesterday indicates some traders, like Nowack, believe it is looking cheap.
We will keep our Eye on Seagate while noting, just in case you forgot, that the people quoted here and elsewhere in these pages may have positions in the securities discussed.
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And finally, we don't like to wander too far off our Eye patch. But the Alan Eagleson case makes us worry that it could begin to give lawyers a bad name.
Inside the Market
Stock market chickens coming home to roost
In years gone by, this was the time of year that an investment columnist could simply murmur "January effect" and be proved prescient once again.
This year, pontificating about market direction is a little more difficult. Yes, there was the usual burst of new money coming into North American markets as 1997 gave over the stage to 1998.
But this time around, there was as big a volume of selling by the investment pros as there was buying -- proving once more that some of these oft-labeled experts can indeed spot a nasty global scene when one is thrust before their faces.
This spread of opinion is precisely why the major market indicators in Wall and Bay streets were all doing passable imitations of a spider trying to climb out of a polished bathtub.
Now that these indicators have failed to break above their previous highs for a third and crucial time, the stock markets' chickens have been coming home to roost.
The past reality, of course, is that there never was the market momentum for new highs. Instead, the tanking of the economically sensitive side of the markets was being cushioned by falling bond rates.
As the likelihood of the U.S. Federal Reserve's next interest-rate move swung 180 degrees from upward to downward, and talk of inflation turned to nervous talk of deflation, interest rate-sensitive stock sectors became a lifebuoy.
But that was no longer the case yesterday. It needed but one major Wall Street brokerage firm to say some unkind things about bank stocks and the damage began.
The case against the banking sector is somewhat technical. It rests mainly on the thought that declining bond yields are not always an automatic benefit for all financial institutions, particularly the U.S. thrifts.
If long rates fall faster than short rates, which is what had been happening, then the spreads responsible for making money for bankers can be affected. There is also the additional spectre of mortgage refinancing.
That was not all.
In the manner that often happens, mumbles of nervousness over the supply balance in the world oil business turned to open fear and downgradings.
Quite apart from Iraq's special dispensation to sell some of its oil, member nations of the Organization of Petroleum-Exporting Countries recently agreed to abandon their fantasy world in which all members were adhering to their quota levels, and raised quotas across the board.
Will world supplies increase at the time that demand from limping Asian economies declines? The mere question proved enough to send stocks of producers stumbling.
The most significant development yesterday, however, was none of these, but the disturbing evidence that the bond and stock markets were going in opposite directions.
For many moons now, bond market prices and the major stock indexes have moved in tandem, stock investors taking comfort from the thought that declining returns in the credit markets can do good things to the interest-rate factor used in stock valuations.
Yesterday, however, a late rally drove 30-year treasury bonds to new heights, dropping their yield to a new low. But, instead of their usual whoop of joy at the news, investors allowed stock prices to remain lower.
The divergence means that investors are now paying more attention to the prospect of lower corporate profits in the months ahead than to the going level of interest rates and bond rates.
To mix my metaphors with gay abandon, that parting of the ways could be one of the final nails in the bull's coffin.
So is there a safe harbor? To answer that one, I compared yesterday's Toronto Stock Exchange sectoral subindexes with their levels in mid-November, when the main index was only about 100 points above yesterday's level.
The clear winners look to be the other two major interest-rate sensitive sectors -- pipelines and utilities.
Both were still well up on their mid-November levels (13% and 8% respectively), while the TSE's utility and communication subindexes were both bright spots amid yesterday's gloom.
In weeks past, the TSE's publishing and food store groups have also held up well, while the software side of the technology sector has been a better place to be than the hardware side.
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