MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY JUNE 23, 1998 (1)
MARKET OVERVIEW
Toronto Stocks Close Higher, Erase Monday's Loss
Toronto stocks closed higher on Tuesday, erasing Monday's losses by a strong showing in high technology, gold and oil.
''The sharp recovery of the high technology sector is the real story in Toronto,'' said Rolie Bradley of Maison Placements Canada Inc. ''There was a 38 point gain on NASDAQ and that's the high tech sector.''
The Toronto Stock Exchange 300 composite index rose 37.71 points, or 0.5%, to 7175.23. About 97.8 million shares changed hands on the TSE, down from 101.8 million shares traded on Monday. Trading value was worth C$1.93 billion. Decliners outpaced advancers 516 to 465 with another 311 issues unchanged.
Canadian stocks rose, led by BCE Inc. and other telecommunications and computer-related issues. Oil companies added to the advance on the back of the higher crude prices.
BCE Inc. (BCE/TSE) rose C$1.50 to C$61.15 in volume of 2.99 million shares and Newbridge Networks Corp. (NNC/TSE), which has lost 26% since its three-month high on May 28, gained $2.20 to $34.90.
Brent crude oil to be delivered in August rose $0.68 to close at $13.92 US a barrel on London's International Petroleum Exchangeand light sweet crude for August delivery rose 87 cents to $14.52 a barrel on the New York Mercantile Exchange in anticipation of possible output cuts stemming from this week's OPEC meeting in Vienna.
Crude oil made its single biggest one-day rise in 12 years on Monday. ''If oil prices tend to firm up after the OPEC meeting, oil will be where you want to go,'' said Bob Boaz, manager of University Avenue
Funds.
The TSE Oil & Gas Composite Index gained 0.8% or 48.73 to 5959.99. Among sub-components, the Integrated Oil's gained 0.5% or 38.41 to 8247.41. The Oil & Gas Producers gained 1.1% or 55.77 to 5280.37 and the Oil & Gas Services edged up 0.1% or 2.66 to 2398.93.
Ranger Oil, Gulf Canada Resources, Renaissance Energy, Torrington Resources, Canadian 88 Energy, Newport Petroleum, K-2 Energy and Alberta Energy were among the top 50 most active issues on the TSE. Service issues were not represented.
Chieftain International gained $1.50 to $32.00, Canadian Occidental Petroleum $1.20 to $31.20, Alberta Energy $1.10 to $31.85 and Pioneer Natural Resources $0.70 to $33.00. Among service issues, Dreco Energy Services rose $2.05 to $42.55, Precision Drilling $1.00 to $28.50 and Ensign Resource Services $0.90 to $24.70.
On the downside, Denbury Resources fell $0.75 to $18.50, Amber Energy $0.50 to $13.50, Paramount Resources $0.50 to $11.75 and TriLink Resources $0.50 to $13.25. Among service issues, Shaw Industries A fell $2.00 to $16.00, Enertec Resource Services $0.75 to $8.75, American ECO $0.60 to $9.85, Computalog $0.50 to $16.00 and Mullen Transportation $0.50 to $20.00.
Midland Walwyn Inc. was the most active issue, with 3.6 million shares changing hands, compared with a three-month daily average of 297,600 shares. Midland shares (MWI/TSE) rose $1.75 to $31.80 after earlier touching a record intraday high of $31.95. Merrill Lynch & Co. said Monday it would buy the independent brokerage for $31.89 a share in stock.
Gold producers rose, even though the price of bullion fell US60› to US$294.80 an ounce on the Comex division of the New York Mercantile Exchange. Barrick Gold Corp. (ABX/TSE) edged up 55› to $26.95 and Placer Dome Inc. (PDG/TSE) gained 40› to $16.75.
Overall in Toronto 11 of the TSE 300's 14 subindexes were trading in positive territory led by a 1.08 percent hike in the gold subgroup and 0.82 percent rise in the oil and gas sector.
Barrick Gold Corp. (ABX/TSE posted a C$0.55 gain to C$26.95 as 2.7 million shares traded while Ranger Oil Ltd. (RGO/TSE) was up C$0.15 to C$10.80 in volume of 1.3 million shares.
Other Canadian markets were mixed. The Montreal Exchange portfolio rose 15.16 points, or 0.4%, to 3634.25. The Vancouver Stock Exchange lost 3.37 points, or 0.6%, to 532.44.
The Alberta Stock Exchange combined value index fell 7.82 to 2091.86. Declining issues outnumbered advancing issues 155 to 132 while 107 issues were unchanged.
Anvil Resources, Lexxor Energy, Wolverine Energy, Raptor Capital, First Star Energy, Canop Worldwide, Red Sea Oil, Proprietory Energy, ICE Drilling, Green River Petroleum, Oilexco and BXL Energy were among the top 25 most active issues on the ASE.
Belfast Petroleum climbed $0.45 to $2.50, Edge Energy $0.20 to $4.00, Red Sea Oil $0.20 to $1.70, AltaQuest Energy $0.15 to $2.75, Corker Resources $0.14 to $0.65 and Lexxor Energy $0.10 to $0.46.
On the flipside, Niko Resources fell $0.25 to $4.15, Draig Energy $0.19 to $1.75, Canadian Talon Resources $0.17 to $0.38, BW Technologies $0.15 to $3.65 and Petro-Reef Resources $0.14 to $0.36.
The common shares of AltaCanada Energy Corp. (ANG/ASE) were posted on the ASE for trading at the opening of business Tuesday. AltaCanada reported the signing of a Purchase and Sale Agreement with Constellation Oil & Gas Ltd., a junior public company, and PacWest Resources Ltd., a private company, to acquire selected oil and natural gas properties (primarily natural gas) in the Viking-Kinsella, Rivercourse and Provost areas of East-Central Alberta for an aggregate price of $1,068,000. The purchase will be financed through the combination of bank debt and cash to be acquired through the acquisition of another private company. It is intended that the private company will complete a private placement which will provide the balance of the funds required to complete the Major Transaction.
Canadian bonds ended weaker on Tuesday despite gains in U.S. treasuries and a slight recovery in the Canadian dollar.
The Canadian dollar ended a bit firmer around C$1.4705 (US$0.6800) on the back of higher North American stocks and crude oil prices.
U.S. sweet crude on the futures market jumped above US$14 a barrel on news that OPEC members are considering deeper cuts in output to prop up prices.
The bond market, however, stayed negative with little price action.
"The market is waiting for some kind of signal from the Bank of Canada here," said Jim Webber, director of fixed-income research at TD Securities Inc.
The central bank has so far defended the Canadian dollar from selling pressure through periodic currency intervention, but has held back from raising its key lending rate, which in theory would attract investors to higher returns on Canadian assets.
"If the bank would raise rates, that would actually be fairly positive for most of our bond market. It might not initially be positive for the short end, but definitely positive for the rest of the curve," Webber said.
A lack of certainty over what Canada's central bank will do in the coming weeks or months is overhanging both the currency and bond markets here, he said.
Market players are uncertain about how far the bank will let the local dollar weaken and overall monetary conditions ease, he said..
Canada's benchmark 30-year bond fell C$0.17 to C$135.73 to yield 5.514 percent.
Its U.S. 30-year counterpart rose 8/32 to yield 5.65 percent. The U.S.-Canada spread was 14 basis points after 15 points at the previous close here.
The market is judging the strength of the Canadian economy, looking at the release of April retail sales figures on Thursday and the impact of strikes at General Motors plants in North America.
Economists on average forecast a rise of 0.6 percent in retail sales after a 1.0-percent rise in March.
Stronger-than-forecast sales numbers, combined with a recent rise in the inflation rate, could prompt speculation that Canada's central bank would have a freer hand in raising interest rates to defend the currency if faced with massive speculative selling.
The money market, after firming slightly in morning trade on the firmer Canadian dollar, was a bit weaker after the T-bill auction.
"The Canadian dollar is a driving force here. We don't have anything in the way of numbers to give us any direction this week. So we are all closely focused on the currency," said Walter Posiewko, money market trader at Royal Bank Investment Management Inc.
"I think the improved dollar would give people more confidence... the improved dollar would give clients an impetus to step in and buy products," another trader said.
The Bank of Canada said on Tuesday the average yield at this week's auction of C$3.2 billion of 98-day Government of Canada treasury bills due October 1 was 4.882 percent, up from 4.675 percent at the last auction.
The average yield on C$1.5 billion of 181-day T-bills due December 23, was 5.069 percent, up from 4.931 percent previously, and on C$1.3 billion of 363-day T-bills due June 23, 1999 was 5.243 percent, up from 5.153 percent.
Canada's three-month when issued T-bill traded with a yield of 4.92 percent, compared with 4.88 percent at the previous close here.
The Canadian dollar ended a bit firmer around C$1.4705 (US$0.6800) on Tuesday in relatively quiet trade after testing its topside against the U.S. dollar.
Canada bulls were upbeat on strong North American stock prices, while bears were looking at the risk of the yen plunging again versus the U.S. dollar.
The commodity-price sensitive Canadian unit received underlying support from higher crude oil prices. For the currency to firm, it needs a sustained recovery in commodities prices, the key to boosting the nation's exports and thus trimming the current account deficit.
NYMEX crude prices jumped above US$14 a barrel on news that OPEC members are considering deeper cuts in output to prop up prices.
The U.S. dollar hit a day's high of 139.40 yen on renewed concern over Japan and 1.8047 marks on Germany's exposure to the financial crisis in Russia. "I think Canada is not following the yen point to point as it did last week," said Reid Farrill, executive director, foreign exchange, at CIBC Wood Gundy Securities. "Canada and the yen are trading a little bit more independently of one another. There still is a close connection, but not as close as last week."
The next targets for U.S. dollar bulls are the intra-day low of C$1.4754 (US$0.6778) hit Monday, and the overseas trading low of C$1.4767 (US$0.6872) marked June 16.
In cross trading, the Canadian unit continued to rise to 94.61 yen from 93.79 yen at the previous close here, and to 1.2250 marks after 1.2187 marks.
There was still some nervousness ahead of the 0900 EDT/1300 GMT daily money market operation window for the Bank of Canada, when it may opt to change its key lending rate. The market is looking at the strength in the Canadian economy, including the release of April retail sales on Thursday.
Economists on average forecast a rise of 0.6 percent in retail sales after a 1.0-percent rise in March.
Russian President Boris Yeltsin told a joint meeting of the government and parliament on Tuesday that the country's financial crisis could lead to political and social instability and radical steps are needed to restore order to the economy.
Germany's exposure to Russia's market triggered some mark selling against the U.S. dollar.
In New York, Federal Reserve Bank of New York President William McDonough, returning from his visit to Tokyo, told reporters on Tuesday that China would not benefit from devaluating its currency, the yuan.
He repeated Washington's view that Japan's economic growth should be based on domestic demand, not exports. Japan can follow the United States by removing non-performing loans from commercial banks' balance sheets, he said.
Foreign investors sell in April
Foreign investors pulled $4.7 billion out of Canadian securities in April, selling $6.7 billion in bonds, but buying about $1 billion each of stocks and money-market paper, Statistics Canada said Tuesday.
Canadians, meanwhile, continued to look overseas, buying $2.2 billion in foreign stocks and $600 million in bonds, while selling $1.3 billion of U.S. bonds, for total purchases of $1.5 billion.
"This brought to $6.7 billion their investment in the first four months of 1998 and easily surpassed the $4.5 billion investment for all of 1997," the agency said. The stock purchases were the largest in 16 months.
Most of the selling by foreigners was in existing federal bonds - $5.9 billion being sold by American, European and Asian investors.
Investment dealer Nesbitt Burns said the "huge selloff probably played a big role in driving the Canadian dollar back below 70 cents US in the month."
The bottom line is that "Canadians have plowed $5 into foreign equity and fixed-income markets this year for every dollar that has come into Canada from abroad," economist Sherry Cooper said in a statement.
On a positive note, foreign investment of a further $1.2 billion in Canadian stocks in April brought their purchases since April of last year to almost $13 billion.
Nesbitt Burns noted that foreign investors have shaved their holdings of Canadian bonds by $3.4 billion so far this year.
Investment industry gets another black eye from Bre-X
That brokerage houses did not react quick enough to obvious signs will have lasting effect on perceptions. Vancouver Sun
The Bre-X scandal just became much uglier for the investment industry.
I was shocked when I read the comments of Colin Jones, who was the top geologist in Indonesia for Freeport McMoRan Copper and Gold, the first geologist to carry out independent tests on Bre-X's Busang find.
Jones, with several members of the Freeport team assigned to assess the find, recently released a paper in Australia detailing the damning results.
"There were all sorts of things we as geologists recognized," said Jones. "We knew there were things wrong with the project immediately."
The report goes on at length about some of the obvious problems with the previous testing, and the Freeport geologists conclude the data used by Kilborn Engineering to verify the find were deeply flawed.
The most damaging conclusion for the investment analysts and geologists who visited the site to do their own due diligence is Jones' assessment that "it's mind-bogglingly amazing to me no one had spotted any of this before."
If the problems were immediately apparent to Freeport's team, why didn't the investment analysts who christened this find one of the biggest in the world show even an inkling of disbelief? Were certain members of the investment industry so enamoured of the huge commissions or the underwriting fees generated by Bre-X that they couldn't be objective in their research?
The whole process of due diligence for the investment industry is coming into question with the spate of recent analytical problems related to companies such as Bre-X and Philips Services.
Philips Services, if you're not aware of it, is a giant waste-disposal firm that also received glowing brokerage recommendations, only to reveal later the financial results had to be dramatically restated downward. Many are now suggesting the Philips story had huge holes in it that sufficient due diligence would have discovered.
The Wall Street Journal, among others, suggests the problem lies with the fact that too often, the desire of investment firms to do public offerings gets in the way of objective research.
Investment-banking influences have rendered the term "objective analysis" obsolete, in the view of Loew's Corp. chair Laurence Tisch.
With the advent of discount commissions, the importance of investment banking to the firm's profitability has increased significantly.
There is no shortage of reports that suggest an investment firm is put under tremendous pressure to give a favourable rating to a stock for which it is trying to secure public financing.
The pressure remains to maintain that positive rating once the stock issue is sold.
The Journal concludes there is less useful research the public can rely on. First Call Corp., a Boston-based research firm, has estimated that of the 6,000 stocks it tracks, analysts currently have "strong buy" or "buy" recommendations on 66 per cent of them. Only one per cent have "sell" recommendations; the rest are "holds."
At very least, there is a perceived conflict of interest between the desire of investment dealers to generate hundreds of millions in underwriting fees, and their promise of objective and thorough research.
Comments like those of Colin Jones about how readily apparent the problems were with Bre-X do nothing to undermine that perception.
MORNING UPDATE
Toronto Stocks Seen Edging higher
Toronto stocks were expected to open on the upside on Wednesday in a follow-through from Tuesday's technology-led rally.
''It's going up,'' said Maison Placements Canada Inc. trader David Lawson. ''There are still some problems out there but I would suggest that in the next couple of weeks, the Canadian markets will move forward,'' he added.
The U.S. market was expected to open steady after posting solid gains on Tuesday. A planned blockbuster merger in the telecommunications sector and an OPEC meeting on possible production cuts in Vienna were seen as positives.
But a soft Japanese yen could partly offset these.
AT&T (T/NYSE) and Tele-Communications Inc. (TCOMA/NASDAQ) said they plan to unite in a US$48 billion merger.
On Tuesday, the Toronto stock market's key 300 composite index rose 37.71 points or 0.53 percent to 7175.23.
Brent crude firmed a further US$0.43 to US$14.35 after rising US$0.68 on Tuesday. All eyes in the energy market were turned to Vienna and to possible output cuts stemming from this week's OPEC meeting there. Crude oil made its single biggest one-day rise in 12 years on Monday.
London gold fixed at US$293.90 versus a previous fix of US$294.45 per ounce.
* Three powerful investors, including Conrad Black's Southam Inc. (STM/TSE), bought stakes in Livent Inc. (LIV/TSE, the theatre production company announced on Tuesday.
* Molson Cos Ltd. (MOLa/TSE) could see some action. The holding company bought the rest of Molson Breweries from Australian beer maker Foster's Brewing Group (FSB/TSE) in a C$1 billion cash and debt transaction.
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