MARKET ACTIVITY/ TRADING NOTES FOR DAY ENDING TUESDAY JUNE 10 1998 (1)
MARKET OVERVIEW
Good morning North America. Because of the market environment and falling oil price situation, I am extending coverage today for the overview of markets. I would venture to proclaim that this is the single most comprehensive Canadian column of information regarding market coverage. Enjoy.
The Canadian market retreated on a broad front as renewed fears about Asia and a weak C$ triggered heavy selling of resource and bank stocks. Toronto stocks close down more than 100 points.
On Bay Street, the TSE's gold, energy and base metals groups each dropped more than 2%, while the forest products sector declined more than 1% as a selloff overnight in Asian equities and currencies raised concerns the region's economic situation is not improving, and that demand and pricing for commodities will continue to suffer.
Fears of higher interest rates and falling profits dragged markets back under the weather Wednesday as the Asian crisis held the Canadian dollar near historic lows. Persistent Asian fears helped push the loonie to 68.20 cents US as the TSE 300 composite index toppled 101.67 points to end the day at 7,433.76.
Slumping overseas markets, weak commodity prices and cautious inflationary comments from the U.S. Federal Reserve, shaved more than one percent of the Toronto stock market. "All in all, it's not a pretty picture right now," said Rick Hutcheon, president of Toronto-based CentrePost Mutual Funds. "People are pretty nervous and they aren't finding a whole lot of good things to hang their hats on right now."
Comments by U.S. Federal Reserve chairman Alan Greenspan had little effect on the markets already suffering from the other negative effects. Greenspan told a Joint Economic Committee of Congress today that interest rates may have to rise if the U.S. economy doesn't slow down, but he said they haven't set a date for such action.
Hutcheon, like other traders, downplayed these comments from the second most powerful man in the country. "He really didn't say anything new. It's the typical central bank double speak."
The Toronto Stock Exchange's key 300 Composite Index dived 101.67 points or 1.35 percent to 7433.76. Volume was light at 78.7 million shares worth $1.57 billion. Decliners more than doubled advancers 701 to 316 with another 284 issues unchanged. Decliners outnumbered advancers 701 to 316 with 284 unchanged in trading of 79 million shares worth $1.6 billion. The TSE 100 lost 6.70 points to 455.89.
The Toronto market has lost more than 120 points in the past two days and in the process dropped below the psychologically important 7447 point plateau -- a level reached by the TSE 300 during a correction in
May.
"There's still lingering uncertainty around Asia, which continues to really pummel almost every country around the world outside the United States," said Bank of Nova Scotia economist Aron Gampel.
"Investors are a little bit nervous that with the dollar very close to establishing an historic low, the Bank of Canada may be forced reluctantly to raise interest rates to defend the currency." Asia wreaks havoc with Canadian markets on two fronts, said Gampel: it weakens the currency, increasing upward pressure on interest rates, and pushes commodity prices lower, hammering resource-based stocks. As a result, interest-sensitive financial services stocks and gold, metals and oil and gas companies all took their lumps.
North American investors arrived at work this morning to be greeted by more bad news from overseas markets. Japan's Nikkei 225 Average fell 190.91 points or 1.2 percent to 15339.26 while Hong Kong's Hang Seng Index dropped 412.09 points or 4.9 percent to 7979.37.
"The weakness overseas has gotten a lot of people spooked," Hutcheon said.
Weak commodity markets also ganged up to push the local markets lower. Nickel dropped US$48 to US$4525 a tonne, while aluminum fell US$5.80 to US$1302 a tonne. The August price for Comex gold fell US$0.40 to US$295.10. "The commodities are performing very poorly and it's weighing very heavily on our markets," Hutcheon said. The TSE's resource-based stocks followed the commodity prices lower.
Overall, 12 of the TSE 300's 14 subindexes closed in negative territory led by a 3.3 percent swoon in the metals and minerals index.
The base metals group posted the biggest decline, falling 3.3%. Base metals giant Cominco Ltd. led the metal stocks lower dropping C$1.10 or 4.9 percent to C$21.35. Nickel producer Inco Ltd. (N/TSE) fell 65c to $20.35, and Alcan Aluminium Ltd. (AL/TSE) dropped $1.55 to $40.20.
Cameco Corp. slipped C$1.75 or 4.24 percent to C$39.50. Rio Algom Ltd. lost 80 cents to $20.40.
A $1.10 decline to $40.85 in Canadian Pacific Ltd. which ships coal to Asia, was the big reason for the 2.1% drop in the conglomerates group.
The gold and precious minerals index was third worst, falling 2.07 percent. Euro-Nevada Mining Corp. Ltd. fell C$0.75 or 3.45 percent to C$21.00. Barrick Gold Corp. lost 70 cents to $26.65, Franco-Nevada Mining slipped $0.75 to $29.40 and Placer Dome Inc. fell 30 cents to $17.60.
The oil and gas sector also suffered losses greater than two percent. The price of a barrel of West Texas Intermediate light sweet crude fell 50 cents US to $13.43, taking oil related issues with it.
The Toronto Stock Exchange oil & gas composite index fell 2.1% or 126.14 to 6018.42. Among sub-components, the integrated oil's fell 1.2% or 101.57 to 8509.47. The oil & gas producers index fell 2.4% or 131.57 to 5248.71 and the oil & gas services lost 2.0% or 51.95 to 2546.28.
Pinnacle Resources, Renaissance Energy, Tarragon Oil & Gas and Petro-Canada were among the top 50 most active issues on the TSE. Service issues making the list included Enerflex Systems and Prudential Steel.
Seven Seas (u) slipped $1.75 to $20.75, PanCanadian Petroleum dropped $1.60 to $21.00, Renaissance Energy Ltd. $0.80 to $22.50, Canadian Natural Resources $1.30 to $25.00, Denbury Resources $1.00 to $22.30, Imperial Oil $0.90 to $25.60, Canadian Occidental $0.85 to $28.85 and Renaissance Energy $0.80 to $22.50.
Among service issues, Dreco Energy fell $2.10 to $49.00 and Ensign Resource Services lost $1.50 to $27.00.
Reversing the trend was Morrison Middlefield, gaining $0.70 to $8.00 and Windsor Energy $0.40 to $3.05. Among service issues, Enerflex Systems gained $1.50 to $40.00 and American ECO rose $0.40 to $11.15.
Toronto's heavily weighted bank group also was hard hit, dropping 1.9% even though U.S. Federal Reserve Chairman Alan Greenspan indicated to Congress there were no plans to raise interest rates soon. Still, Nereo Piticco, partner and fund manager at PCJ Investment Counsel in Toronto, is not surprised about the decline in bank stocks, citing lofty stock valuations for the overall market and the runup in bank stocks over the past two years. Some investors could be selling the bank stocks for cash as a precautionary move, he suggested. Piticco suggested the relatively thin trading volume indicated the selloff might have been overdone, given the apparent absence of buying interest. A lack of bids tends to force sellers to accept lower prices than they normally would. Canada's big banks took a beating. Bank of Montreal fell $1.55 to $81.20, Royal Bank dropped $1.75 to $87.25, Canadian Imperial Bank of Commerce fell $1.75 to $47.50 and Bank of Nova Scotia (BNS/TSE) $1.10 to $36.30.
Among industrials, Magna Cl A lost $2.15 to $100.45.
Only two Toronto subgroups were higher Wednesday. Reversing the negative trend, however, was the consumer products group which rose 0.13 percent and the transportation sector which climbed 0.06 percent.
Drugmaker Biochem Pharma Inc. gained $1.60 to $37.00 after announcing a deal with British pharmaceutical giant Smithkline Beecham Plc, which will distribute Biochem's influenza vaccines outside Canada.
Canadian National Railway also gained $1.60 to end the day at $85.70.
Among individual blue chips, Northern Telecom Ltd. (NTL/TSE) rose 55c at $95.25, Newbridge Networks Corp. dropped $1.85 to $35.80, BCE Inc. (BCE/TSE) fell 70c to $66.90, Laidlaw Inc. fell 25c to $18.50 and Seagram Co. Ltd. closed up 25c at $62.75.
In other Canadian markets, the Montreal Exchange portfolio tumbled 58.17 points, or 1.5%, to 3802.49 and the Vancouver Stock Exchange fell 6.92, or 1.2%, to 566.89. The Alberta Stock Exchange combined value index lost 14.26 to 2205.93. Among issues traded, 130 issues advanced, 168 declined and 148 were unchanged.
The Canadian dollar plunged to a record low close -- and flirted with its all-time trading low Wednesday -- as currency dealers dumped loonies amid another wave of bad news from Asia's battered markets.
At one point, the loonie slipped as low at 68.14 cents US, just a sliver above its all-time intra-day trading low of 68.10 cents US, reached Jan. 29.
The Bank of Canada stepped into the currency markets several times Wednesday, buying Canadian dollars to offset the selloff.
By the end of the day, the loonie made a feeble rebound on North American markets, but it closed at an all-time record low -- 68.20 cents US -- more than a third of a cent below Tuesday's closing price.
The previous record low at the close of trading, 68.25 cents US, was also set Jan. 29.
Analysts are now keeping an eye on Canada's central bank, wondering if governor Gordon Thiessen will defend the dollar by raising short-term interest rates. That would lead to a hike in the chartered banks' prime lending rate -- now 6.5 per cent -- and raise the cost of business and consumer loans and some mortgages.
Bank of Canada officials have made it clear in recent months that their main preoccupation is with controlling inflation, not propping up the dollar by raising interest rates.
Still, with the currency sinking to new lows, the pressure to do something might prove overwhelming.
"At this point, it's a matter of 'when,' not 'if,' " said David Rosenberg, senior economist at Nesbitt Burns in Toronto.
"Thiessen stated he was not going to be in a big hurry to raise interest rates. But he didn't say he was not going to raise interest rates if his back was pushed against the wall, and I think the currency is doing that."
The loonie's sudden weight loss Wednesday was surprising considering the world's most powerful banker had good news for the currency earlier in the day.
Market watchers had feared Alan Greenspan, chairman of the U.S. Federal Reserve Board, would hint at raising U.S. rates, prompting traders to sell Canadian dollars in favor of more valuable U.S. greenbacks.
Instead, Greenspan said rates would remain steady because U.S. inflation remained low despite rapid economic growth and low unemployment.
But the good news did nothing for the loonie.
"It was a day where very little could have been done to help the currency," said Steven Butler, associate director of foreign exchange trading at Scotiabank in Toronto.
The main problem, like a bad cold that won't go away, was Asia.
Indeed, the dollar opened Wednesday at 68.37 cents US, down almost a fifth of a U.S. cent, after many of Asia's stock markets reported big losses in overnight trading.
"We've got renewed volatility in Asia and there's been a lot of speculation about devaluations in some of the Asian currencies," said Robert Palombi, fixed income analyst at Standard and Poor's MMS in Toronto.
"Devaluations tend to bring on slower economic activity in the short term."
As long as the Asian economies continue to lose steam, world prices will remain depressed for important Canadian commodities, such as gold, coal, lumber and base metals. Those low prices translate into added pressure for the currency because shrinking demand for Canadian goods leads to shrinking demand for Canadian dollars.
As a result, Canada's oil and gas companies have been the biggest losers on the Toronto stock market so far this year, having lost more than seven per cent of their stock value.
Butler said the overnight slide in Asia surprised North American traders and it triggered some computer-aided selling, which took a big chunk out of the loonie.
"When the market gets caught offside, (traders) don't really care, they just want to get out."
The bad news from Asia was enough to overshadow the good news from Greenspan, who described U.S. economic conditions as the best he's seen in his 50-year career.
"The current economic performance, with its combination of strong growth and low inflation, is as impressive as any I have witnessed in my near half-century of daily observation of the American economy," he said.
He noted that even with U.S. unemployment falling to 4.3 per cent, the lowest level in 28 years, and growth racing ahead at a rate of 4.8 per cent in the first quarter, U.S. inflation had actually declined this year.
U.S. MARKETS
Searching for direction, markets need a compass
NEW YORK -- A day ago in this space we predicted that a negative market reaction to Fed Chief Alan Greenspan's congressional testimony might be viewed as a "buying opportunity" by some investors. If indeed there are fund managers who are sitting on hoards of cash, waiting for an excuse to buy, Wednesday's action gives them a juicy opportunity to jump back into the fray Thursday.
The problem is that Greenspan didn't really say much to roil markets. His comments should have been welcomed by anyone worried about the prospect for a Fed tightening anytime soon. Bond traders clearly got that message, sending yields on the benchmark 30-year bond to the lowest level since the long bond was reintroduced in 1997.
Equity markets, however, experienced a far different reaction. Basically, any excitement over Greenspan's speech was overshadowed by a tribe of profit warnings and the subsequent unraveling of the tech sector.
Which brings us to Thursday. Beyond the retail-sales figures for May, which are expected to be strong, and after-the-bell earnings from National Semiconductor (NSM), there's not much on the schedule to point to as a linchpin for trading. Clearly, activities overseas -- namely in Asia -- have resurfaced as a major focal point for stock and bond trading. The action overnight in the currency and foreign equity markets will have a large say in the tone of trading Thursday.
If that sounds like a cop-out, so be it.
A day ago we also argued that the stock market has "turned a corner" after a month or so of corrective activity, and seems poised to make a run back into record territory. Wednesday's action certainly didn't cast that prediction in a positive light, but it doesn't mean we've given up the ghost quite yet.
Neither, it seems, has Stuart Freeman, chief equity strategist at A.G. Edwards, one of the Street's more bullish prognosticators for some time.
Thursday's action notwithstanding, Freeman believes the upward drift of the prior few days is the "front end" of a summer rally that will take the Dow back to its old high and up further, in range of 9,300 to 9,400 "between here and late August."
Thereafter, the strategist sees the market getting "choppier" in the final stanza of the year, with the Dow ending 1998 near 9,700. Looking further ahead, he foresees the Dow hitting 10,500 to 11,000 sometime in 1999.
Sounds pretty good, right? But the question of how we get there when earnings growth is slowing and the economy seems to be cooling does go begging.
Freeman agrees that economic growth will slow overall but will wind up "somewhere in the 6% to 7% range" for 1998, which is "not a problem if you don't have inflation."
Indeed, the lack of inflation overall is a cornerstone of Freeman's optimistic outlook.
"This is not a bearish environment for equities," he said. "The real bearish environment typically is one with an escalation of earnings growth and an economy growing out of control. Then the Fed comes in to raise rates to ease concern over capacity utilization tightening up."
The strategist believes that not only will the Fed refuse to raise rates anytime this year, but an easing still is a possibility. Furthermore, what's been happening lately in the markets suggests that we're at an "inflection point" for the economy, and investor sentiment, he said.
"We're in a transition phase, going from great fear of over-expansion early in the year to, eventually, [believing] the real course is we're in a slowing economy, [and] eventually investors thinking the Fed may even drop rates in the last half of the year," the strategist continued. "The psychology is changing."
As sentiment comes around to this view, the bond market will advance, sparking subsequent gains for the financial stocks, which Freeman expects to lead the market's second-half upswing. So-called defensive growth stocks like drug makers and supermarket chains, as well as retailers and trucking concerns, will gain favor as the "transition period" evolves, he said.
The strategist would "underweight" basic industries as continued softness in the Asian economies and a moderation of our own system both continue to weigh on commodity prices.
Wither technology in this scenario? Freeman said it is not an area A.G. Edwards is going to be "most concentrated in." But he foresees some bargains in the group, albeit after more pain for shareholders.
"I think we're going to see a little more weakness as the earnings come through. There will be some tough comparisons in a lot of sectors in technology. That's going to be tough on those stocks," he said. "But at some point in the next month, they'll be compelling again on a valuation basis."
An absence of bellwether profit warnings after the bell Wednesday may lead to some bounce Thursday for the tech sector, but that "some point" Freeman referred to isn't here just yet.
After the bell
Sawtek (SAWS) said weakness in Asian markets and the strong U.S. dollar will cause weakness in the third quarter, although it forecast strong results for the current stanza.
Semiconductor equipment maker Aetrium (ATRM) said it expected second-quarter earnings to fall "significantly below" analysts' expectations.
Allmerica Financial (AFC) warned that its second-quarter earnings will not meet expectations.
Excel Industries (EXC) also raised the red flag about second-quarter results, as did Enamelon (ENML).
ABR Information Services (ABRX) beat the Street by a penny, reporting fiscal third-quarter earnings of 16 cents per share.
Alpine Group (AGI) posted fourth-quarter earnings of 26 cents per share, a penny higher than expectations.
Wednesday's markets
Alan Greenspan spoke softly, while the big stick of economic events overseas drove bond prices skyward Wednesday. But weakness in technology stocks and shares of other industries exposed to Asian markets faltered, as did tobacco makers. The Dow closed off 78, the S&P 500 slid 6, and the Nasdaq tumbled 27.50.
While acknowledging the actual and potential impact of economic turmoil in Asia in his testimony before Congress' Joint Economic Committee, Greenspan concluded that the U.S. economy remains strong and inflation low. The Fed chief dubbed the environment a "virtuous cycle."
Further aided by renewed gains for the dollar versus the yen and the "safe haven" effect, fixed-income markets rejoiced. Bond prices closed up over 1 1/4 points, sending the yield on the benchmark 30-year Treasury bond tumbling down to 5.70%.
Enthusiasm about Greenspan's speech helped the Dow Jones Industrial Average ($INDUA) reverse an early loss of nearly 50 points, rising to its best levels of the session at 9,095.75 near 2 p.m. EDT. But persistent weakness in the tech sector and a late-day reversal in the tobacco sector sent the blue-chip proxy tumbling lower soon thereafter. The Dow bottomed out at 8,952.77 and used a push higher in the last half-hour of trading to close with a loss of 78.22 at 8,971.70.
The Dow Transportation Average ($TRAN) rose to as high as 3,503.19, but closed off 21.37 at 3,440.34.
The Nasdaq Composite Index (COMP) could not match the Dow's enthusiasm. A spate of profit warnings and profit-taking after recent gains weighted on the tech sector that so heavily influences the Nasdaq. The index spent the entire day down and ended at its low, down 27.51 at 1,773.25.
The S&P 500 (SPX) shed 6.14 to 1,112.28, while the Russell 2000 Index ($IUX) dropped 5.66 to 451.08.
In NYSE trading, 611 million shares changed hands, while advancing issues trailed declining stocks by a 20-to-9 spread. In Nasdaq activity, 724 million shares were exchanged, while the breadth of the market favored losers by a 29-to-14 margin.
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