MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 30, 1998 (1)
Saturday, January 31, 1998
U.S. stocks fell on concern that the worst effects of the Asian economic crisis may be yet to come. Bank stocks led Bay Street lower after the Bank of Canada raised its key interest rate
The Dow Jones industrial average fell Friday for the first time in five days, losing 66.52 points, or 0.8%, to 7906.5.
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Concern that Asia will be a drag on the U.S. economy took the steam out of a rally that sent the Dow industrials up 272 points in the first four days of the week. By Friday's close, it was down 0.8% on the week.
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The Standard & Poor's 500 composite index fell 5.21 points, or 0.5%, to 980.28, but gained 2.4% on the week. The Nasdaq composite index fell 0.13 of a point to 1619.36, but gained 2.8% on the week.
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Investors were encouraged by unexpectedly strong earnings in recent days from Walt Disney Co., Microsoft Corp. and Merck & Co. Still, Microsoft warned that Asia's troubles would cloud its outlook this year, and FDX Corp. and Loral Space & Communications Ltd. disclosed that they are getting less business from Asia.
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The bad news underscored Thursday's congressional testimony by U.S. Federal Reserve chairman Alan Greenspan that Asia's slowing economies will slow U.S. growth.
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International Paper Co. and General Motors Corp., which do best when the economy is picking up, were the biggest losers. International Paper (IP/NYSE) lost US$2 to US$45 11/16, and GM (GM/NYSE) fell US$2 3/16 to US$57 15/16.
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About 613.4 million shares changed hands on the Big Board, down from 713.5 million Thursday.
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Canadian stocks fell for a second day, sent lower by Canadian Imperial Bank of Commerce after the Bank of Canada raised its key interest rate 50 basis points to 5%.
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The Toronto Stock Exchange 300 composite index fell 18.78 points, or 0.3%, to 6700.2 after paring an earlier 64.9-point loss. The benchmark index gained 3.2% this week.
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On the broader TSE, advancers outpaced decliners. About 109.3 million shares changed hands, down from 134 million Thursday.
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Oil producers slumped, snapping a four-day advance. Petro-Canada (PCA/TSE) fell 40› to $25.90, Canadian Occidental Petroleum Ltd. (CXY/TSE) slipped 50› to $31 and Talisman Energy Inc. (TLM/TSE) slid 50› to $41.
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Banks and utilities, which account for 32% of the benchmark TSE 300, were first to fall after the bank rate hike.
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"The increase in interest rates and the uncertainty in Asia are not good for the market, but without any huge surprises we should trade in a narrow range," said Fred Ketchen, senior trader with ScotiaMcLeod Inc. "There is not a great deal of excitement next week other than the FOMC meeting."
The Federal Reserve Open Market Committee meets Thursday. The Fed last raised interest rates 25 basis points on March 25.
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Bank of Montreal (BMO/TSE) fell 95› to $67.10, Bank of Nova Scotia (BNS/TSE) dropped $1.40 to $63.85, Royal Bank of Canada (RY/TSE) slipped 65› to $76.35 and Canadian Imperial Bank of Commerce (CM/TSE) slid $1 to $39.60. BCE Inc. (BCE/TSE), the parent of Bell Canada, fell 40› to $45.60.
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Biotechnology company Bio- Chem Pharma Inc. (BCH/MSE) fell $2.90 to $30.10, steel company Dofasco Inc. (DFS/TSE) fell 65› to $25 and liquor and entertainment company Seagram Co. (VO/TSE) fell 60› to $50.20.
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Newbridge Networks Corp. (NNC/TSE) fell $1.90 to $38.10 after being downgraded to "hold" from "buy" by analyst Farrokh Billimoria at Hambrecht & Quist on anticipation of lower than expected earnings because of its time division multiplexer business.
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Other Canadian markets ended higher on the week, but mixed on the day.
The Montreal Exchange portfolio fell 25.52 points, or 0.7%, to close at 3444.44, but gained 3.4% on the week.
The Vancouver Stock Exchange rose 5.45 points, or 0.9%, to close at 608.05, up 3.1% for the week.
For a scorecard of trading activity on all Canadian Stock Exchanges, go to:
quote.yahoo.com .
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Major international markets were mixed on the week.
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London: The FT-SE 100 index rose Friday to a third consecutive record closing high of 5458.5, up 36.1 points or 0.7%, and up 5.3% on the week.
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Frankfurt: The Dax index ended the week at 4440.38, up 21 points or 0.5%, a rise of 4.8% since last Friday.
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Tokyo: Stocks shed more than 2% as traders worried that a bribery scandal at Japan's finance ministry might delay parliament's long-awaited approval of economy-boosting measures. The Nikkei average closed at 16,628.47, down 386.12 points or 2.3%, a fall of 1% over the week.
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Hong Kong: The market remained closed for the Chinese New Year. On the week it was up 3.7%.
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Sydney: The Australian stock market pushed higher for the fourth day in a row, buoyed by a stronger Wall Street. The all ordinaries index closed at 2656.7, up 14 points or 0.5%, and up 1.3% on the week.
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Prepare for bumpy ride ahead -- By WILLIAM HANLEY -- The Financial Post
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First the good news: the Toronto Stock Exchange 300 composite index gained 209 points to 6700, or 3.2%, this week.
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Now the bad: the TSE 300 fell victim to the January Defect, closing out the month in negative territory for the year.
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And there is more: the index closed out the week on two consecutive losing notes. And the big gains earlier in the week were sparked by continuing action in the banks, following the announcement the previous week of the monster merger and by a burst of enthusiasm over the golds and other resource stocks.
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Oh, and there is yet more: the loonie's journey to new depths and the subsequent Bank of Canada rate rise on Friday create an uncertain backdrop for Canadian stocks. If the C$ does not continue Friday's rally, another rate rise or more rises may be needed in coming weeks.
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Had enough?
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Well, just this one more and then we will pack our little Jonah voodoo doll back in the toybox: the Dow Jones industrial average rose 206 points to 7906 over the five sessions, but also closed the week weakly despite a spot of welcome cheerleading from U.S. Federal Reserve chairman Alan Greenspan on Thursday.
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In the bout of rational exuberance following his upbeat Senate testimony, the Dow cruised over the key 8000 barrier, only to fade later. As is often the case with the market, the level of optimism Thursday morning was taken as a sign by the contrarians that too much of a good thing is too much of a good thing, so the market turned moody ahead of the weekend.
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"Three weeks ago when the Dow plunged 222 points, it looked like the world was ending," says Steven Nowack, a Toronto-based trader of U.S. stocks.
"Suddenly everybody is acting like there is no Asian crisis.
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"Everything looks too rosy," says Nowack, who believes the market could retreat 400 points.
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With the Dow still 350 points below its record high close last August, and the TSE 300 more than 500 points shy of its top in October, is the Canadian market a buying opportunity or is it a treacherous bear pit best avoided for the moment?
Taking a cool technical view, Katherine Beattie of MMS International in Toronto believes the next stop for the TSE 300 could be the intraday low of 6066 on Jan. 12 after it failed this week to top the 6756 high of Jan. 5. If it goes through 6066, the next big support level is down at 5600 - 22% below the record high of 7209.
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"If you liked the TSE at 7200, you'll love it at 5600," Beattie says.
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"We're in for a tough time, no doubt about it," she concludes, further noting that the negative return in January usually doesn't bode well for the market in the rest of the year.
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"It might make sense to switch some of your weighting to bonds," she adds.
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Not so fast, says Ron Meisels, president of P&C Holdings in Montreal and an adviser to funds.
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He says Toronto has "already had its own little bear market" that took the TSE 300 down 15%. But he's not overly confident it can make a great deal of progress from this level, even though Canada should be playing catch-up at this late stage of the bull market.
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As for Wall Street, Meisels says that although the Dow finished the month marginally lower, the more representative Standard & Poor's 500 index was ahead more than 1% and that was good news.
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He says he is no a longer a "super bull, but a chicken bull," who expects one more upleg in the U.S. market that will fizzle out in the spring and lead to a "nothing" market the rest of the year. That fits in with the four-year cycle view, going back to the poor markets in 1990 and 1994.
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Meisels sees 7400 on the Dow as an important level. "We better not break that," he warns.
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Okay, we hate to leave you on a down note: the TSE 300 did bounce nicely off its lows on Friday to finish just 18 points lower. Feel better?
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Ripples from Asia still to reach these shores -- By PATRICK BLOOMFIELD
On Friday, Wall Street could have written another chapter in history. But it didn't.
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For a scant few minutes it looked as if the Standard & Poor's 500 composite index might take a run at its 992.65 record high, but the benchmark index then fell back well below its Thursday closing level.
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A convincing breakthrough would have suggested that, despite what is happening on the other side of the Pacific, Wall Street still has wings.
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It would also have borne out what CIBC Wood Gundy Securities Inc. chief economist Jeffrey Rubin said in a house publication early in January, before some of the worst news from Asia broke. He suggested that a "fundamentally sound U.S. economy" could get a lift from interest rates being on a lower track than might otherwise have been the case.
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My gut tells me that a break through 1000 for the S&P 500 would have some psychological significance, but not much else. The fact of today's markets is that 1998 corporate profits are not going to be as ebullient as analysts had forecast at the end of 1997.
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The weekly numbers from Charles Hill, director of research at Boston-based First Call Corp. suggest the bottom-up crowd (analysts who follow individual companies) have already trimmed their guesstimates. On Jan. 9 they were talking of 16.7% growth in first-quarter 1998 earnings over first-quarter 1997, and of 13.8% growth for 1998 as a whole. Those growth estimates are now 13.6% and 13% respectively.
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It seems that only yesterday those same analysts were talking about 14%-plus growth for the year as a whole. Experience suggests when the rate of corporate profit growth is expected to moderate, investor enthusiasm for piling into corporate stocks moderates, too.
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That was evident Friday. On Thursday, U.S. stock prices did indeed take wing after investors noted U.S. Federal Reserve chairman Alan Greenspan's relatively euphoric comment in his Senate Banking Committee presentation that Asian difficulties would probably afford the U.S. economy some breathing space from inflationary pressures.
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But central bankers always speak in balanced tones. Not enough attention was paid to his earlier comments, that North America has so far only felt the "peripheral winds of the Asian crisis;" and that the Fed has to be equally on guard against both higher inflation, and the disinflation process being pressed "too far, too fast."
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On Friday, Greenspan also admitted there was a possibility, albeit a small one, that the Asian contagion could spread to Latin American and emerging European economies. That was a frank admission of possible danger from a central banker who had the dual task of reassuring Americans that the fire was being fought, and of reminding politicians that fire-fighting costs money.
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My own view is that U.S. markets are likely to fluctuate around present levels until first-quarter earnings season begins to loom. It is premature to expect the hard-hit Toronto Stock Exchange 300 composite index to begin working its way back to its record high of 7223.42.
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A theoretical look at past price multiples for the TSE 300 by Nick Majendie, research vice-president of C.M. Oliver & Co. Ltd., suggests that on his projection of $326 in earnings on the TSE 300 index for 1998 (somewhat lower than the pack), the index is only a little below where history suggests it should be - at approximately 6700.
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Unfortunately, we in Canada are between a rock and a hard place. About 40% of our merchandise exports are resource-related, which puts us at risk to declining commodity prices. Meanwhile, the U.S. has the option of lowering administered interest rates to keep its economy and stock market on a level footing, while we face the uncomfortable possibility of having the Bank of Canada raise interest rates to defend our buck.
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