MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, JANUARY 20, 1998 (1)
Wednesday, January 21, 1998
Dow buoyed by earnings
By THE FINANCIAL POST ÿWall Street powered ahead as the first wave of earnings reports dispelled fears that the Asian crisis would ravage balance sheets. Canadian stocks rose, led by oil producers and real estate issues ÿ
The Dow Jones industrial average climbed 119.57 points, or 1.5%, to 7873.12.
The Nasdaq composite index jumped 27.26 points, or 1.7%, to 1590.14.
The Standard & Poor's 500 composite index rose 17.09 points, or 1.8%, to 978.6. ÿAbout 644.8 million shares were traded on the New York Stock Exchange, compared with 672 million on Friday.
U.S. markets were closed on Monday for the Martin Luther King holiday. ÿ"Now that the reports are coming in line with expectations, if not ahead, the market has breathed a sigh of relief," said Jack Shaughnessy, chief investment strategist at Advest Inc. ÿ
Banks sapped some of the rally's strength. The profit performance from the group was mixed, amid signs that Asia's economic distress has hurt the bottom line of some. J.P. Morgan & Co. (JPM/NYSE) fell US$1 5/8 to US$105 1/4 and Citicorp (CCI/NYSE) slipped 3/4 to US$119 3/16, though Chase Manhattan Corp. (CMB/NYSE) was able to rise US$1 9/16 to US$107 1/16. ÿThe stock of American Home Products Corp. (AHP/NYSE) leapt US$13 9/16 to US$94 1/4 on news that the No. 3 American drug company is in talks with Britain's SmithKline Beecham PLC about a possible merger. ÿThe news ignited other drug stocks. Merck & Co. (MRK/NYSE) surged US$5 15/16 to US$115 11/16, Schering & Plough Corp. (SGP/NYSE) rose US$4 1/16 to US$73, and Warner Lambert (WLA/NYSE) jumped US$9 1/8 to US$138 1/4. ÿ
The Toronto Stock Exchange 300 composite index rose 33.84 points, or 0.5%, to 6509.45. About 110.9 million shares changed hands, compared with 65.2 million on Monday. ÿ
Petro-Canada (PCA/TSE) sent oil issues higher, rising 90› to $25.90 after reporting better than expected fourth-quarter profit. ÿSuncor Energy Inc. (SU/TSE) rose 80› to $46.95 and Rigel Energy Corp. (RJL/TSE) rose $1.20 to $12.60. ÿ"Even if Asian growth is less than expected, oil prices should be firmer as demand from the rest of the world is still growing at an above average pace," said Philip Strathy, a portfolio manager with Strathy Investment Management Ltd. ÿ
TrizecHahn Corp. (TZH/TSE) climbed $1.35 to $35.50 to lead real estate issues higher after it sold half its stake in Barrick Gold Corp., Canada's largest gold mining company, to focus on expanding its property holdings. ÿBarrick (ABX/TSE), also hurt by expectations that bullion prices may drop further, fell $1.35 to $25.30. ÿPlacer Dome Inc. (PDG/TSE) slipped 45› to $17.90 and Miramar Mining Corp. (MAE/TSE) fell 25› to $2.20. ÿProspects for subdued inflation in much of the industrialized world and concern that central banks will sell more of the precious metal is raising expectations that bullion will fall, analysts said. ÿ
Bank issues were mixed. Royal Bank of Canada (RY/TSE) slipped 10› to $74.90 and Bank of Nova Scotia (BNS/TSE) fell 45› to $60.05 while Bank of Montreal (BMO/TSE) rose 70› to $59.90. ÿ"Most banks are down in Canada after problems with [some bank] earnings in the U.S.," said Norman Duncan, a broker with C.M. Oliver & Co. ÿ"The general feeling is that Canadian banks will not come out [of Asia] unscathed," said Rolie Bradley, an institutional salesman with Maison Placements Canada Inc. ÿ
Other major Canadian markets closed mixed.
The Montreal Exchange portfolio rose 5.69 points, or 0.2%, to 3327.87.
The Vancouver Stock Exchange index dipped 0.83 of a point to 594.06.
For a scorecard of trading activity on all Canadian Stock Exchanges, go
here quote.yahoo.com .
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The major overseas markets closed mixed. ÿLondon: Britain's leading share index ended mixed in a market dominated by the leading pharmaceutical stocks. The FT-SE 100 index closed at 5278.2, up 4.6 points. ÿ
Frankfurt: German shares ended firmer, supported by a strong US$ and steady gains in U.S. stocks. The Dax index closed at 4307.91, up 22.97 points or 0.5%. ÿ
Tokyo: Japanese stocks edged higher, as cautiousness set into the market after recent rapid gains. The 225-share Nikkei average closed at 16,366.53, up 104.49 points or 0.6%. ÿ
Hong Kong: Stocks rose after a roller-coaster ride during which Hongkong Telecom said it had surrendered its exclusive international licence. The Hang Seng index closed at 9433.7, up 33.28 points or 0.4%. ÿ
Sydney: Australian stocks ended with modest losses as investors took profits after a two-day rally. The all ordinaries index closed at 2639.4, down 11.3 points or 0.4%.
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Inside the Market -- Great expectations revised --By PATRICK BLOOMFIELD
The most definitive thing one can say about markets at this time is that the Great Mutual Fund Mania is either stalled or over.
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I checked out the Internet sites of both the Investment Company Institute in the U.S. and the Investment Funds Institute of Canada. In each case, the December story suggested a flattening of equity mutual fund inflows.
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In the U.S. that trend has been apparent for three months.
The Canadian numbers suggest mutual fund investors committed little more new money (excluding reinvested dividends) to equity funds last month than they did in December 1996.
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Now we await the crucial tax-deferred season numbers from both sides of the border. The way they go will have more than a little bearing on the ebullience of stock markets (which were brimming with new-found optimism yesterday).
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All we know is that mutual fund investors in the U.S. were shooting for the moon last fall.
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A quarterly survey of 750 U.S. mutual fund investors by Montgomery Asset Management in October showed that they then expected a return in excess of 20% in 1998 and annual returns of more than 30% over the next 10 years.
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By contrast, a survey of 52 U.S. investment management associations done six months earlier by KPMG Peat Marwick indicated an expectation of 8 1/2% annually for the five years ahead for large-cap U.S. stocks, and 10.8% for small caps.
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One could only conclude that either some folks were being overoptimistic or others were being too gloomy - and one could hardly accuse the mutual fund holders of the latter sin.
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What is a realistic estimate of longer-term stock market growth? One has to make a choice between three of those things called paradigms. Two are illustrated in a study from which I culled the above comparisons.
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It is a well-reasoned attempt in the fall of 1997 to formulate a five-year horizon for prospective returns on financial assets. The study was done by the well-regarded Boston investment counselling firm of Standish, Ayer & Wood, Inc. and passed on to me by Robert Stewart, a principal of Twenty-First Century Investments Inc., which represents the Boston firm in Canada.
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In the study, Standish, Ayer distinguished between the then "new paradigm" and the "old." In a nutshell, the advocates of the new variety had taken the stance that there had to be growth in U.S. productivity that official numbers were concealing. If not, how could corporations be generating spectacular corporate profits, and how could unemployment rates linger at historic lows, without reawakening the dragon of inflation?
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Put simply, the new paradigm people argued that it was "different this time," while older hands responded that the old relationships might just take a little longer to work out than previously.
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I am not going to get into that argument other than to note that Standish, Ayer found the new paradigm argument "plausible but improbable," and that I have been in the same camp.
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My point is that even if the new paradigm was found to come true, Standish, Ayer projected annual returns for 1997-2001 at no more than 9.6% for large caps and 11.6% for small caps.
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If the old paradigm of overhasty growth leading to inflation and higher administered interest rates were to be the real outcome, then the annual return for large caps was projected at 3.3% and for small caps at 5.3%.
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The latter numbers are a heck of a way below any of the expectations set out above.
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And we are not through yet. Both the old and the new paradigms have been outdated by what I will call the Asia paradigm.
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It is now generally accepted that competitive pressures from those battered economies on the other side of the Pacific will remove any inflationary heat from the U.S. economy, but could also bring some problems of their own.
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Specifically, the new paradigm of growth without inflation was distinguished by the apparent lack of corporate pricing power in the U.S.
Now there is the threat that Asian companies will use their lower currencies not only to remove any vestige of pricing power that North American companies still have, but to force them to eat any rise in their costs and narrow their profit margins.
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This development was only in the making when Standish, Ayer did its study. It seems to me that its effect will be to make us all look at this matter of expectations again. This is no time to rely on market generosity of recent years persisting.
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INTERNATIONAL BUSINESS MACHINES CORP.(IBM/NYSE), up US$2 5/8 to US$107 11/16, on volume of 4.1 million shares. The computer giant's shares rose on anticipation that its fourth-quarter earnings would exceed estimates, despite recent [IBM] turmoil in Asia. After the market closed, IBM said its net income for the period rose 10% from US$2 billion (US$1.97 a share) on revenue of US$23.1 billion in 1996, to US$2.1 billion (US$2.16) on revenue of US$23.7 billion last year. The earnings came in slightly above the US$2.15 a share expected by Wall Street analysts, according to research tracking firm First Call Inc.
JDS FITEL INC. (JDS/TSE), up $3 to $92, on volume of 100,402 shares. Lucent Technologies Inc. (LU/NYSE), up US$5 5/8 to US$81 15/16, on volume of 5.7 million shares. The shares of Canadian fibre optic component manufacturer JDS have been rising on speculation that overall sector sales are coming in strong, despite Asian woes, said Gurinder Parhar of Canaccord Capital Corp. Lucent, a telecommunications bellwether stock, reported a 31% increase in first-quarter profit yesterday due to strong component sales, Parhar said . "From a sector play perspective there is no letdown in demand for the type of components JDS manufactures," Parhar said.
SMITHKLINE BEECHAM PLC American depositary receipts (SBH/NYSE), up US$2 7/16 to US$59 9/16, on volume of 2.7 million receipts. Drug shares led the U.S market's advance after merger talks between Beecham and American Home Products Corp. raised speculation that other deals may follow. "Even though drug companies are quite large in size, they are not immune to takeover bids," said Alfred Kugel, senior investment strategist at Stein Roe & Farnham Inc.
CANADIAN FRACMASTER LTD. (CFC/TSE), up $1.60 to $18, on volume of 54,000 shares. The Calgary-based oil services company's shares have gained 13% this week as institutional investors retake positions, said Marcel Brichon of Global Securities Corp. "[Fracmaster] has international exposure with dealings in China and Russia so their products will always be in demand," Brichon said. He maintains his 12-month target price of $21 and rates the stock a "buy".
METRONET COMMUNICATIONS (MNCb/TSE), up $2.50 to $28.85, on volume of 13,082 shares. The fibre optic telecommunication service provider's shares have gained 41% since slipping to a 52-week low of $20.50 Dec. 23. Canadian analysts have been surprised by the move but pointed to coverage initiation by U.S analyst Jack Grubman, of Saloman Brothers Inc., who rates the shares a "buy" with a $31 price target.
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M.K. Wong & Associates' Buy & Sell -- Firms geared to North America favored
By SONITA HORVITCH -- The Financial Post
Greg Bay, vice-president of Vancouver-based M.K. Wong & Associates, is maintaining his defensive stance on the Canadian equity market.
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"There is likely to be a slowdown in world economic growth and this could impact corporate earnings and maintain the downward pressure on commodity prices," he said. The Canadian equity market has been under pressure because of its sensitivity to gold and base metal prices.
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M.K.Wong & Associates, a subsidiary of Hongkong Bank of Canada, has for some time been underweight the oil and gas sector, golds and base metals. Of the resources, only the oil and gas sector is starting to look attractive - particularly companies with a natural gas exposure. This ties in with Bay's theme of emphasizing companies geared to North America.
In his equity portfolios, Bay has held about 20% in cash for the past two months in anticipation of a difficult market. The firm's asset mix in its balanced portfolios continues to emphasize bonds, he said.
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For his equity portfolios, Bay likes:
* Jannock Ltd. (JN/TSE), which closed recently at $18.25 and has a 52-week trading range of $23.30 to $16. The stock currently trades at a low price-earnings ratio and is at the low end of its 52-week range, said Bay. The Toronto-based company is a major producer of clay brick and vinyl siding for buildings. It will benefit from the improving Ontario housing market, said Bay. Its challenge is to rationalize its vinyl siding business, which has not been producing a strong performance. His earnings per share estimates are $1.70 for 1997 and $1.90 for 1998.
* Prudential Steel Ltd. (PTS/TSE) $13.10 ($26.63-$7.33). The Calgary-based company produces carbon steel tubular products used in the energy sector. Bay said it has a good balance sheet with no debt and a strong cash position. The common shares were split three-for-one in late 1997. Bay's earnings per share estimates are $1.30 for 1997 and $1.50 for 1998. "The stock is cheap," he said.
* Leitch Technology Corp. (LTV/TSE) $31.90 ($45-$25). The Toronto-based company designs and makes electronic equipment used to distribute, process and switch the high-quality video and audio signals required by television broadcast companies. "The stock has been under pressure and is starting to look more attractive," Bay said. Leitch could increase its earnings by 30% a year over the next three to four years in the light of the move by broadcasters to change from analogue to digital systems, he said. "In the U.S., this switch has been made mandatory and there is a huge and growing market for these products." Bay's earnings per share forecast is $1.05 for fiscal 1998, ending April, and $1.40-$1.45 for fiscal 1999.
* YBM Magnex International Inc. (YBM/TSE) $15.75 ($18.75- $8.10). Based in Newtown, Pa., the metallurgical company's core business is the manufacture of high-energy permanent magnets and related products. Bay said it is a steady grower or earnings. His earnings per share estimates are 60› for 1997 and 75› for 1998. ÿBay continues to champion the Canadian real estate sector. His favorite is H&R Real Estate Investment Trust (HR/TSE) $11.55 ($11.70-$10.50), with "its portfolio of high-quality properties and its ability to retain a portion of its cash flow for future growth." The Canadian REIT market should differentiate between passive and growth REITs and assign the latter a higher multiple, he said.
Bay would sell U.S. disc drive manufacturer Seagate Technology Inc. (SEG/NYSE) US$18 1/2 (US$56 1/4- US$17 3/4). It continues to face pricing pressure and weak demand.
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