MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, FEBRUARY 20, 1998 (1)
Saturday, February 21, 1998
Wall Street staged a late-afternoon rebound, overcoming concern that slowing profit growth would end the market's rally. Canadian stocks gained on optimism that a recovering C$ will keep interest rates steady
The Dow Jones industrial average rose 38.36 points, or 0.5%, to 8413.94, as a gain in Merck & Co. helped it recover from a 57-point intraday drop.
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The Standard & Poor's 500 composite index rose 5.93 points, or 0.6%, to a record 1034.21.
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The Nasdaq composite index climbed 1.12 points to 1728.13.
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The expiration of options on common stocks and stock futures made for sudden swings in the market as investors bought or sold shares they used to hedge options positions.
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About 597.3 million shares changed hands on the New York Stock Exchange, up from 587 million shares traded on Thursday.
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For the week, the Dow rose 0.5%, the S&P 500 climbed 1.4% and the Nasdaq gained 1%.
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Merck & Co. (MRK/NYSE) rose $2 5/16 to US$1245 1/88.
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Dell Computer Corp. (DELL/Nasdaq) rose for a sixth-straight day, climbing US$3 9/16 to US$126 5/16 after reporting unexpectedly strong earnings earlier in the week.
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Intel Corp. (INTC/Nasdaq) rose US$1 1/4 to US$91 13/16.
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Delta Air Lines Corp. (DAL/NYSE) fell US$3 1/8 to US$115 3/16, US Airways Group Inc. (U/NYSE) dropped US$1 15/16 to US$64 1/16 and UAL Corp. (UAL/NYSE), parent of United Airlines, dropped US$3 1/4 to US$85 1/4. The S&P Airlines Index fell 3.5%, the biggest percentage loss for a group in the S&P 500.
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U.S. Federal Reserve chairman Alan Greenspan will deliver his semi-annual testimony to Congress on Tuesday and Wednesday, and investors want to hear what effect he expects Asia's financial crisis will have on U.S. growth and inflation.
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Canadian stocks gained, led by banking issues, as the strengthening C$ raised optimism interest rates will remain steady.
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Steady rates raise expectations corporate profits will accelerate.
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The Toronto Stock Exchange 300 composite index climbed 34.48 points, or 0.5%, to 6920.74, reversing an earlier 22-point intraday loss.
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TD Bank shares (TD/TSE) gained $1.50 to $60.20, Bank of Montreal (BMO/TSE)
climbed 85› to $74.20, Canadian Imperial Bank of Commerce (CM/TSE) rose 30› to $43.85 and Royal Bank of Canada (RY/TSE) jumped 45› to $81.70.
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Air Canada (AC/TSE) fell 10› to $13.50 on volume of 4.2 million shares, making it the most active issue on the TSE. Seagram Co. (VO/TSE) climbed $2.20 to $56.40. Cott Corp. (BCB/TSE) gained $2.15 to $13.75 after Forrest Mervine, managing director of Investment Counsellors of Bryn Mawr, a unit of Pennsylvania's Bryn Mawr Trust, said the company could be worth at least US$20 a share as a takeover target.
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Alcan Aluminium Ltd. (AL/TSE), which accounts for 1.8% of the TSE 300, gained 60› to $43.10, recovering from recent losses..
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Barrick Gold Corp. (ABX/TSE) fell 50› to $26.30, Placer Dome Inc. (PDG/TSE) slipped 60› to $16.70 and Euro-Nevada Mining Corp. (EN/TSE) fell 30› to $21.50 amid lower bullion prices.
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Bullion for April delivery fell US30› to US$298.10 an ounce on the Comex division of the New York Mercantile Exchange.
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Other Canadian markets also rose.
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The Montreal Exchange portfolio climbed 15.86 points, or 0.5%, to 3567.04.
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The Vancouver Stock Exchange rose 1.57 points, or 0.3%, to 629.71.
For a scorecard of trading activity on all Canadian Stock Exchanges, go to:
quote.yahoo.com .
REFERENCE: Canadian Market Summary
canoe2.canoe.ca
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Major overseas markets mostly closed higher.
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London: British shares rallied to a third-record close of the week. The FT-SE 100 index ended at 5,751.6, up 33.1 points, or 0.58%, a rise of 169.3 points, or 3%, on the week.
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Frankfurt: The Dax index closed at 4,602.65, up 20.25 points, or 0.44%, a rise of 100.17 points, or 2.2%, since last Friday.
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Tokyo: Japanese stocks climbed. The 225-share Nikkei average closed at 16,756.24, up 139.76 points, or 0.84%, but a fall of 34.77 points, or 0.2%, since last Friday.
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Hong Kong: Stocks ended a volatile session moderately higher, with investors uncertain about direction and unwilling to take any big bets ahead of what could be an eventful week. The Hang Seng index closed at 10,599.79, up 18.52 points, or 0.18%, a gain of 325.19 points, or 3.2%, on the week.
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Sydney: The Australian share market limped to a lower close with a weaker Wall Street setting the negative tone for uninterested investors. The all ordinaries index closed at 2,645.1, down 13.7 points, or 0.5%, a fall of 7.9 points, or 0.3%, since last Friday.
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Commodity price slide tempers growth -- By JOHN GREENWOOD -- The Financial Post
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After a sustained period of robust profit growth, Canadian companies seem to be taking a breather.
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In the fourth quarter of 1997, member firms of the Toronto Stock Exchange 300 composite index posted a rise in net income of just 1% over the same period in 1996.
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This marks the fifth consecutive quarter of declining gains. In the third quarter of 1997, TSE 300 companies had growth of 12%. In the first and second quarters they cranked out increases of 24% and 23%, respectively.
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Subodh Kumar, portfolio strategist for CIBC Wood Gundy Securities Inc., blamed the weak growth on a number of temporary factors, like falling commodity prices and heavy writedowns by companies in the resources and communications sectors.
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"I think we're headed for continued growth for 1998," said Kumar. "Earnings are still under pressure because of low commodity prices, but the domestic economy is in good shape."
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The fourth-quarter results for the TSE 300 - from a survey by Financial Post DataGroup - are tabulated on the opposite page. The earnings figures represent data received to date from 157 of the 300 companies comprising the index.
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Where the letters "n.m." (not meaningful) appear in the tables, there has been a shift in earnings from positive to negative values, or vice versa.
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Kumar said lower prices for a whole basket of commodities had depressed fourth-quarter profits across the resource sector.
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"Nearly all the commodities have gone down, but it's been particularly bad for base metals and industrial commodities," Kumar said.
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For instance, on Oct. 7, crude oil for November delivery was selling at US$21.93 a barrel on the New York Mercantile Exchange. By Dec. 30, the price of crude for February delivery had slipped to US$17.62.
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Oil and gas companies, which racked up growth of a whopping 108% in the third quarter, compared with the previous year, took a tumble in the fourth quarter, slipping 10% compared with the same period in 1996.
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Other highlights for the fourth quarter included a 30% decline in net income growth in the metals and minerals sector, and a net loss of $279.5 million for the paper and forest products sector.
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Kumar attributed part of the fourth-quarter decline to an abnormally large number of companies taking writedowns, mostly in the resources and utilities sectors. They included BCE Inc., Rogers Cantel Mobile Communications Inc., Telus Corp., Moore Corp. Ltd., and Teck Corp.
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"It was very heavy for this part of the economic cycle," said Kumar, who pointed out that writedowns of this magnitude are usually taken during recessions.
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He said the writedowns among the telcos related to a change in accounting systems.
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The declines among TSE 300 companies were partly offset by a revival in the real estate sector and continued growth in transportation and financial services.
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Among the strongest performers in financial services were Trilon Financial Corp., Trimark Financial Corp. and Bank of Nova Scotia. The healthy numbers are a reflection of a thriving banking environment, said Patricia Mohr, vice-president of economics at Bank of Nova Scotia.
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"The banks did well because of strong consumer spending and growth in commercial and corporate lending," said Mohr.
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In the fourth quarter of 1997, transportation company earnings shot ahead to $219.2 million, compared with a net loss of $117 million for the same period a year earlier. Both Canadian National Railway Co. and Canadian Pacific Ltd. have benefited from a big increase in trade, she said. They are also reaping the benefits of major cost reduction programs.
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Another winner in the fourth quarter that seems likely to maintain its position is the real estate sector. "Real estate is doing way better because of a big improvement in residential construction and home sales," Mohr said.
"The commercial market is starting to turn around in Toronto, and it's tight in Calgary and Vancouver."
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For 1998, Mohr is calling for a continuation of the pattern of weak earnings growth among TSE 300 companies, at least for the first part of the year. "You're probably going to see a little more fallout from the Asian crisis, particularly on resource companies," she said. "But the picture is very mixed."
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Mohr is predicting total economic growth of about 3% for 1998, compared to last year's 3.8%.
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CIBC Wood Gundy's Kumar is more bullish, calling for an improved global economy and higher commodity prices for the final quarter of 1998 and 1999, which he says will stimulate the Canadian economy as a whole.
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Strong retail sales lift C$ -- By ALAN TOULIN -- Ottawa Bureau Chief The Financial Post
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A strong performance by the retail sector in December, adding to a string of encouraging growth indicators released over the past weeks, helped boost the C$ again Friday.
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The C$ closed at US70.44›, up from Thursday's close of US70.37›.
Retail sales took their biggest jump in nearly a decade, with annual figures hitting a record $232.7 billion, Statistics Canada reported.
As well, the monthly retail figures caught markets by surprise. Retail sales rose 2.4% in December, nearly double earlier forecasts. The [Loonie] positive report had an immediate effect on the C$ as investors jumped into the market.
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"I think we have had a whole week of better numbers that has got speculators interested in the C$ again," said Avery Shenfeld, senior economist with CIBC Wood Gundy. "We've had a string of strong numbers for December that the market liked and the last of those was the retail sales numbers."
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The C$ rose to US70.60› on the release of the StatsCan data, its highest level in more than three months. A rising C$ may mean higher interest rates in the future, but the signs of stronger economic growth are encouraging to the markets.
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"As the C$ appreciates, that would imply a less stimulative monetary stance and if you see stronger economic numbers it leaves the market more comfortable thinking that the economy can withstand a stronger currency," Shenfeld said.
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Retail sales for 1997 were 7.3% higher than the $217 billion spent in 1996, as customers bought more autos, furniture and clothing.
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The booming retail sales come on the heels of moderate annual economic growth of 2.6% in 1996 and a 2.3% rise in 1995. StatsCan noted that Canadians were financing the purchases by increasing debt rather than through rising income.
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"From the third quarter of 1997, disposable income rose 0.8%," StatsCan said. "Over the same period, the level of consumer debt rose 7.2%."
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A strong performance by the auto sector helped push overall December retail sales to $20.1 billion, up 2.7% from November. That sector was buoyed by strong sales and leases of recreational vehicles, in addition to autos and auto parts.
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Auto sales were $88.3 billion during the year, up 9.4%. StatsCan said low interest rates helped fuel the increase in sales.
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But the furniture sector was even stronger as furniture, furnishings and appliances recorded a 9.8% increase to $11.7 billion. General merchandise stores also fared well, posting a 9.3% increase to $25.9 billion.
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Other retail sectors had more modest increases. Sales by food stores advanced 5.4% to $56.3 billion. Clothing stores had $12.6 billion in sales in 1997, up 1.7%.
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Canadian mergers expected to be plentiful in 1998
TORONTO, Feb 20 (Reuters) - When Canadian miner Kinross Gold Corp said last week it planned to merge with U.S.-based AMAX Gold Inc in a C$1.43 billion (US$1 billion) deal, it was just one of many marriages proposed over the past few weeks.
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And market watchers say the flurry of mergers and acquisitions (M&A) during the first six weeks of this year is just the tip of the iceberg.
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"My sense is that 1998 is going to be the year of the M&A. It's already started," said Irwin Michael at Toronto-based I.A. Michael Investment Counsel. "You're going to see much more merger activity going on."
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Statistics released by Crosbie & Co Inc, a Toronto-based merchant bank that specializes in M&A data, show 77 mergers and acquisitions announced in January this year worth C$20.4 billion ($14.36 billion), compared with the 120 deals completed worth C$10 billion ($7.04 billion) for the same month last year.
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And the January numbers do not include the proposed C$38 billion ($26.2 billion) mega-merger of Canadian banking heavyweights Royal Bank of Canada and Bank of Montreal . That deal awaits regulatory and government blessing, which is by no means assured.
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For all of 1997, Crosbie said, 1,275 transactions were completed worth C$100.9 billion ($71.06 billion).
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"The pace of mergers and acquisitions in 1998 continues to be as high as those in 1997," said Paul Spafford, vice-chairman at CIBC Wood Gundy Securities.
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"That doesn't mean that it's a much more aggressive M&A market, but the conditions continue this year as they did last year."
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Favorable economic conditions including low interest rates and a strengthening stock market are making the climate ideal for mergers. With stock valuations of the acquiring companies at high levels, acquiring companies can issue shares without too much dilution.
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Expansion-minded companies often find it easier to acquire companies through takeovers than to build from scratch.
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"It's cheaper to drill for oil on Bay Street than it is in Alberta or Saskatchewan," said Michael.
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The current low value of the Canadian dollar in relation to its U.S. counterpart also makes companies here attractive.
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"We believe that Canada is on sale and we are sitting ducks ready to be plucked by opportunistic foreign investors paying with relatively expensive American dollars," said Michael.
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But a recent KPMG Corporate Finance survey suggests that Canadian companies were just as active as U.S. firms in cross-border acquisitions.
The report said Canadian companies last year closed 359 mergers in the United States with a value of US$21.3 billion.
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Glenn Bowman, a partner at Crosbie & Co, said competitive pressure is also pushing companies to look for mergers as companies are being pushed into making acquisitions to avoid being targetted themselves.
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"I think you're getting to a situation where many companies may feel that if they do not get into motion they either get big or they get eaten and they don't have a choice who they're eaten by," said Bowman.
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Although most say mergers will occur across the board, areas that will see increased activity include natural resources, oil and gas, financial services and high tech, the market watchers say.
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"The sectors that lend themselves more to a strategic consolidation are those industries where the cost structure in the industries that are consolidating are high in terms of fixed costs," said Bowman.
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But if there is a dark cloud looming, it is the uncertainty over the effect that the Asian financial crisis will have on the earnings potential of North American companies, said Harold Bridge, a senior partner in the corporate finance group at Deloitte & Touche. This uncertainty could temper the rise in M&A activity this year, he said.
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Research factions vie for new money -- By ALAN TOULIN-- Ottawa Bureau Chief The Financial Post
Scientific community finds out Tuesday if budget favors pure knowledge or
commercial development
Alarms bells are sounding in the federal cabinet after a stream of reports and studies that all indicate Canada is crawling toward the knowledge-based economy.
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The federal government's reaction is to increase spending on science and technology programs in Tuesday's budget, a move that has two camps of researchers scrambling for the extra funds. It's not yet clear whether
Finance Minister Paul Martin likes his science pure or applied.
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His cabinet colleague, Industry Minister John Manley, wants more money for Technology Partnerships Canada, a $200-million program that helps companies translate research and development into commercial products. It helped develop Bombardier Inc.'s regional jet program and Ballard Power Systems Inc.'s auto fuel cell. But last year it hadn't enough money for all the projects it deemed worthy.
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"We had 40 or so investment-quality projects sitting in the queue that we couldn't fund," said Manley in a recent interview. "Just to meet the current demand, we need [another] $100 million a year." His allies in high-tech industrial sectors have echoed his message to MPs and cabinet ministers.
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At the same time, advocates of basic research have been pressing Ottawa to devote more resources to the kind of science that expands knowledge but doesn't necessarily bring commercial opportunities.
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In the last budget, Martin set aside $800 million for the Canada Foundation for Innovation, which is starting to upgrade research infrastructure by improving labs and equipment in universities, teaching hospitals and scientific institutes.
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But the three national granting councils that fund the actual research that will utilize this upgraded infrastructure have all said worthy projects go unfunded.
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The Medical Research Council (MRC), the Natural Sciences & Engineering Research Council (NSERC) and the Social Sciences & Humanities Research Council are all dealing with declining budgets in the wake of the deficit cutting Martin began in 1995.
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In a letter to his members, NSERC president Tom Brzustowski said his council would fight for a $160-million increase - it received $449 million in this fiscal year - as its share of any post-deficit dividend.
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"I believe some new investments will be made," he wrote, "and therefore I want to ensure the needs of the research community supported by NSERC are so well known and understood in government that NSERC will be an obvious target for some of the new money as soon as it becomes available."
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NSERC, for example, has contributed to the Canadian Genome Project, a concerted effort to catalogue all human genes. The council says its work with universities has spun off 82 companies - prime examples are BioChem Pharma Inc. and MacDonald Dettwiler & Associates Ltd. - which generate $400 million to $600 million in revenue and employ 4,000 people.
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This is indicative of the jostling for position within the basic research community. The Medical Research Council stresses that spending in its field leads to more direct job creation. "We've been arguing to sustain a vibrant basic research sector you need to fund researchers to an internationally competitive level," said Marcel Chartrand, the MRC communications director.
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"We've been basing our argument on the investments made by other Group of Seven countries, where you have seen increases in their budgets up to 40% to 60%. [The U.S. National Institutes of Health], for example, will have its budget increased by 50% or by US$1 billion in the next fiscal year."
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MRC, with a current budget of $237 million, is still falling from its high of $265 million in 1994-95. "We have two more fiscal years to cope with and the worst is still to come in 1998-99, when our budget is scheduled to go down to $220 million," Chartrand said. "In the last competition [for research funding], there were 350 projects we couldn't touch, and they were excellent research projects.
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"If you look at all the sectors in the economy, the growth sector is health sciences. It is creating more jobs than any other sector by miles, in the biotechnology field specifically, and it is poised to take off like telecommunications did in the 1970s."
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Reports by the Organization for Economic Co-operation & Development and Industry Canada have warned we are falling behind the U.S., in particular in terms of adapting technical innovation.
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"The policy implications are quite clear," says a working paper by Industry Canada on the knowledge-based economy. "The best contribution government can make is to invest in knowledge by producing, distributing and using knowledge and information."
Martin believes government has a key role in developing science and technology. "We've got to bring research and development out of the closet," he said in a recent interview. "It is a major tool of industrial development ... in my view, what the megaprojects were 20 years ago" as an economic generator.
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What's Right -- David Frum - The Financial Post
Currency depreciation has played same role for Canada since 1990 that
inflation played in the '70s. A declining exchange rate impoverishes everyone
By hiking interest rates, the Bank of Canada has managed to halt the decline in the Canadian dollar. Huzzah: instead of a miserable US68› Hudson Bay peso, we now enjoy a magnificent US70› currency.
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The only thing more pitiful than our bank's monetary policy are the excuses for it that we read in the financial press. By letting our currency dwindle, the quote-meisters tell us, we will create more jobs. A car made in Canada out of US70› steel by US70› laborers will cost less than a car made in the U.S. or Japan, and will therefore sell better, boosting exports and stimulating employment.
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Sound good? Well then, why not do this: why don't we give away our exports absolutely free? Think how eager the Americans would be to take them then! Think how many new jobs there would be!
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It's always possible to stimulate employment by cutting wages. We could almost certainly create many jobs by cutting the minimum wage. But Canadians - especially the liberal-minded Canadians who typically favor loose monetary policy and a cheap dollar - say they want higher minimum wages, decent wages. That's what they say. But what is our Liberal government really doing?
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Back in 1990, the minimum wage in Ontario was $5.40. The Bob Rae government considered that inadequate, and ordered it raised by stages to its present level, $6.85. That's a raise of more than 25%. Or is it?
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Look again. When the New Democratic Party was elected in the summer of 1990, a Canadian dollar was worth US89›, which meant the minimum wage in Ontario was US$4.80 an hour. At US70›, Ontario's minimum wage is US$4.80 - no raise at all.
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Defenders of the cheap dollar will say workers' pay has not been cut so long as they buy made-in-Canada goods. The devaluers will argue that a cheap currency raises only the cost of Florida vacations and other fripperies of the rich. But we live in a northern country that derives one-third of its income from foreign trade. A declining exchange rate impoverishes everyone by raising the price of almost all goods.
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It inflates the price of the orange juice our children drink and the vegetables they eat in winter time. It inflates the price of the gasoline used by the bus that takes workers to the office and of the sneakers worn by the mother at home. It cuts into employers' profit - and thus their ability to hire employees and pay them properly - by adding to the cost of buying computers, tools and other capital equipment.
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Currency depreciation has played the same role for Canada since 1990 that inflation played in the 1970s. Inflation was essentially a way of disguising economic problems. Workers were given the illusion of a rising standard of living, in the form of ever-higher wages, even as reality smacked them in the head in the form of ever-higher prices. Currency devaluation works the same way: workers are given the illusion of a stable standard of living, in the form of unchanging wages, while in fact they are becoming poorer because their dollars are worth less and less on world markets.
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The trouble with devaluation is that you have to keep doing it to obtain the same benefit. Over the past quarter century, we have permitted - even encouraged - our dollar to drop from US$1.10 to US$1, to US90›, to US86›, to US83›, to US77›, to US71› and now finally to US70›. If we don't repair the fundamental defects in our economy - if we don't cut taxes, deregulate, and settle our Quebec problem - we will live to see a dollar at US65› and then at US59›.
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A currency devaluation is a cut in the value of every wage, every house, every stock, every bond in the country. All of us, from the minimum-wage worker to the gigantic pension funds, are poorer than we were three weeks ago. Attempting to accelerate the economy by letting the currency rot is equivalent to trying to drink yourself sober. The Bank of Canada has failed the country. Its political masters should be held accountable.
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