MARKET WATCH AT THE KORNER
Dive in US$ hits Wall Street
The Financial Post
The massive dive in the value of the US$ against the yen that created panic selling in foreign exchange markets Wednesday probably served up losses at many Wall Street brokerages and investment funds.
It also might have taken another bite out of hedge fund Long-Term Capital Management LP's already ailing portfolio.
The US$ plunged 7.4% Wednesday against the yen, upsetting a gamble made by many who borrow yen at low rates in Japan and convert to US$s for investment purposes.
Rumors continue to swirl that some smaller securities firms, including Lehman Brothers Inc. and BT Alex Brown, may be in difficulties. Shares of BT parent Bankers Trust Corp. were pushed to a 52-week low yesterday, amid fears an expected third-quarter loss will widen. The stock (bt/nyse) touched a low of US$45 before rallying to close at US$541 1/82, up US$51 1/82.
A spokesman at BT declined to comment, citing a quiet period leading up to the release of the firm's earnings on Oct. 22, but analyst Raphael Soifer of Brown Brothers Harriman said at this point there is no reason to believe the rumors. "Neither is having a wonderful time," he said, adding Lehman reported a profit of US$151 million in the last quarter.
A Lehman spokesman did not return calls yesterday.
What is not in doubt, however, is that trading in derivatives and high-yield debt has all but dried up, which could seriously affect both firms.
The tightening on credit by many banks could be putting such firms as Lehman in an awkward position, since it has less capital than rival banks.
A capital crunch is less of an issue for BT Alex Brown, as it is backed by the seventh-biggest U.S. bank with assets of US$170 billion at the end of last quarter.
"Bigger is definitely better in these conditions," said a trader who declined to be named.
Bankers Trust pointed to Russia and falling U.S. equities to explain a trading loss of US$350 million at Sept. 1. So far, it is the only bank expected to report a loss in the third quarter.
Meanwhile a continuation of some of the conditions that sent Long-Term to the brink have some traders wondering about the current value of the fund's assets, once valued as high as US$90 billion.
The value of the equity in the fund, acquired for US$3.625 billion by a consortium of banks worldwide just weeks ago is probably close to zero, some traders said.
Little is known about the contents of Long-Term's portfolio, but it appears it contains equity arbitrage plays and short positions on U.S. treasuries, which continue to suffer.
That could force its new managers into asset sales at precisely the "fire sale" prices the U.S. Federal Reserve had hoped the fund could avoid.
One trader said the falling US$ against the yen could have hurt Long-Term badly, if the fund was still invested. "Nobody knows if they got out when the new investors took over."
Nasdaq's Roller Coaster Ride Sends Investors Fleeing To Safety Of Bonds
The Financial Post
The big-name technology stocks took Nasdaq investors on a gut wrenching ride yesterday that at one point had the composite index on the verge of crashing and burning only to escape the session well above the day's lows.
In yet another tumultuous day in the stock markets, the Nasdaq index closed down 43.49 points, or 3%, at 1419.12 a near miraculous recovery from an intraday deficit of 119 points, or 8.1%. Nasdaq is off 9.6% this year and off almost 30% from the record closing high of 2014.25 on July 21.
The Dow Jones industrial average also recovered from a big loss to end down only narrowly and the broader Standard & Poor's 500 stock index also regained much lost ground to close with a loss of 1.2%.
But all eyes were on Nasdaq and specifically star techs Dell Computer Corp., Microsoft Corp., Intel Corp. and Cisco Systems Corp., which shed tens of billions of dollars of market capitalization on huge trading volumes, then roared back to trim losses and, in Cisco's case, end up on the day.
Nereo Piticco, president of PCJ Investment Counsel in Toronto, said the big technology names were the stocks that led the market higher on growth expectations over the past few years. With world growth projections downgraded in the face of the financial crisis, investors decided these stocks could no longer support such high prices and expectations.
"In some of these cases, [the tech stocks] are where the profits are, and people are taking the profits wherever they can find them," said Arun Kumar, senior U.S. equities strategist at Lehman Brothers Inc. in New York.
Jim Mountain, co-head of institutional equity at Scotia Capital Markets in Toronto, noted if investors had not held the big four Nasdaq techs over the past four years, they would not have matched the Nasdaq index's remarkable gains.
Yesterday, Dell Computer (DELL/NASDAQ) closed off US$2 1/8 at US$48 7/16 on volume of 102.7 million shares after earlier hitting a low of US$40 3/4. Microsoft (MSFT/NASDAQ) eased US$2 15/16 to US$91 3/16 after hitting an intraday low of US$87. Intel (INTC/NASDAQ) closed off 5/8 at US$78 7/16 after being down at US$75 13/16. And Cisco Systems (CSCO/NASDAQ) finished US$2 13/16 higher at US$46 11/16, when earlier it hit US$41 1/8.
Gerald Vincent, portfolio manager at investment counsel Davis-Rea Ltd. in Toronto, saw the big comeback as a positive sign, saying the earlier decline was "exhausted selling" that showed investors had capitulated. That suggests the major selling may be over and the later comeback is a sign the market could be stabilizing.
"It was a significant battle between the bears and the bulls," he said, adding the bulls have been largely absent from the market in recent weeks.
"It shows buyers are coming in at certain price levels," and that is positive.
Mountain said the selloff in technology stocks betrayed a certain flight to the high-dividend, steady earnings issues such as Philip Morris Cos., which reached a 52-week high this week.
"Value investors are finding there's something to buy in the market."
Confidence Levels Expected To Rally Despite Clouds
The Financial Post
Business confidence took its deepest plunge ever and consumer confidence fell a second consecutive period in the third quarter, the Conference Board of Canada reported yesterday.
"Business confidence took a bath in the third quarter we've never seen anything like it," said Jim Frank, the board's chief economist.
The speed of the collapse in confidence levels was tied to the fact the surveys were conducted at the end of August when stocks were in a freefall and the C$ hit its record low, Frank said.
However, the board expects confidence to return in the fourth quarter and said there is no recession on the horizon.
"For sure, growth will slow but we will not go into recession in 1999," Frank said.
According to the board's forecast, business investment and jobs growth will be robust enough to keep Canadians spending and the economy on a strong footing.
But big black clouds are rolling in on that outlook and the same volatility that spooked businesses and consumers in late August is back in full force in October.
Global stocks were again in upheaval yesterday, with Japan at the centre of the storm. The yen continued to surge against the US$, with the two-day advance hitting nearly 10% at one point.
The yen has rallied on a number of factors, including renewed optimism the Japanese government is ready to act on its promise to introduce legislation to kickstart the economy and clean up its faltering banking system.
The yen has also gained on wild capital flows, as investors close out yen-denominated loans to cover other obligations in a global credit crunch. To close out those loans, investors have to purchase yen, which bids up the value of the currency.
The same short-term forces are behind a sharp selloff in the U.S. and Canadian bond markets, as investors take profits in North America and shift the proceeds overseas.
The C$ rode the US$ weakness to its biggest one-day gain in 10 years on Wednesday, but gave back nearly all its advance yesterday. It closed at US64.73¢, down US0.94¢.
For stocks, it was another black day for the Toronto Stock Exchange 300 index, which lost 61.74 points, or 1.1%.
The Dow Jones industrial average sank 264 points at one point but traders reversed direction and ran it back to a slim 9.78 point, or 0.13%, loss. Technology stocks were hit hardest, with the Nasdaq composite index dropping more than 8% midday before recovering to cut the loss to 3%.
Overseas, stocks were also hit, with indexes dropping 5% in Germany, 4.5% in France and 4.6% in Italy. The Financial Times-Stock Exchange 100 index fell 2.7%, the Nikkei 225 index fell 5.8%, undoing the previous day's surge.
Stock markets around the world have been in sharp declines since the end of the summer, as economic prospects and the profit outlook dim for the rest of this year and 1999.
Most forecasters, including the Conference Board, are looking for growth to slow in North America next year but say a recession is unlikely. Others, however, are taking an increasingly pessimistic perspective. Those include economists at J.P. Morgan Securities Inc. in New York, who are predicting the U.S. economy will lurch into recession in the second half of next year.
Lehman Brothers Inc. is expecting U.S. economic growth to teeter on the brink of recession next year, with gross domestic product expanding just 0.7% over 12 months.
By contrast, the Conference Board is holding out for 1.7% growth in the U.S. next year and 2.4% growth in Canada.
As part of a Conference Board presentation yesterday, Mark Zandi, chief economist with forecasters Regional Financial Associates Inc. in Pennsylvania, said the U.S. economy had a 50-50 chance of going into recession next year.
The fundamentals remain strong but there is a huge gulf between the economy today and the storm clouds on the horizon, he said. "The risks of recession seem to have appeared almost overnight."
Abby Joseph Cohen, market strategist at Goldman Sachs & Co. and Wall Street's most outspoken bull, yesterday ratcheted down her profit forecast for the Standard & Poor's 500 composite index.
However, she is still holding out for a 7% advance in profits next year and expects stocks to rally strongly in the months ahead.
Economic Forecaster Warns Of 'Mild Recession' Next Year
Gloomy prediction countered by two that call merely for slower pace of expansion
Globe & Mail
Canada is heading into a "mild recession" in 1999, according to a new economic outlook released yesterday, but two other forecasters counter that the country will avoid a recession next year, although the pace of expansion will slow.
The gloomy forecast -- from J.P. Morgan Securities Canada Inc. of Toronto -- is believed to be the first to predict that Canada will experience not just a slowdown in growth, but an outright shrinkage of gross domestic product.
At the same time, the Conference Board of Canada reported that consumer and business confidence plunged in September, after a month in which the Canadian dollar fell to a historic low of just over 63 cents (U.S.), stock markets plummeted and the Bank of Canada raised interest rates by a full percentage point.
Economist Ted Carmichael of Morgan Canada said the predicted slide into recession will drive Canada's unemployment rate up to almost 10 per cent and inflation down to 0.5 per cent. (At last count, the jobless rate was 8.3 per cent and the inflation rate 0.8 per cent.)
But he added that the Bank of Canada will try to revive the slumping economy with interest rate cuts that will amount to 1.75 percentage points over the next year. That would bring Canada's benchmark bank rate down to 4 per cent from 5.75 per cent now.
However, lower rates would not come quickly enough to prevent GDP from contracting in both the second and third quarters of 1999, meeting the conventional definition that a recession occurs when GDP falls for two consecutive quarters.
Mr. Carmichael forecast that growth would resume in the final three months of 1999, but for the year as a whole, total output would fall 0.1 per cent from its 1998 level. He said this year's growth rate will wind up at a meagre 2.5 per cent, down from the 1997 figure of 3.7 per cent.
His revised forecast follows a new assessment of the U.S. economy by his colleagues at Morgan
Canada Fund Industry Faces Redemption Fears
Canada's mutual fund industry could be hit with a wave of redemptions in the coming months as a growing number of fearful investors flee the financial markets.
Global financial market turmoil has already resulted in net redemptions for several major fund companies, meaning more money is flowing out than is coming in. Analysts noted that with global equity markets continuing to tumble, there is little reason to believe the situation will improve.
Statistics due next week may even show that more money flowed out of the entire industry than went into it in September. If so, it would be the first time the industry has experienced net redemptions since January, 1995.
"I think it's going to be close," said Peter Brewster, editor of the Canadian Mutual Fund Advisor.
"We'll probably see net redemptions of stock funds in September. But it's at least as much a factor of lack of new money coming in as a rush to the door by existing investors," he added.
At least two major Canadian fund companies have confirmed they will report net redemptions for September -- Trimark Financial Corp., Canada's third-largest mutual fund company, and Templeton Management Ltd, the fifth largest.
Templeton on Thursday said it saw net redemptions of C$19 million in September, the first time it has seen such redemptions since October, 1992. The company stressed this accounts for just a small part of its C$16.5 billion under management.
"Much of that is not the fact that redemptions are up. It's that people are nervous, and new purchases are down. Redemptions haven't changed that much, other than emerging markets, where they definitely are up," said Templeton vice-president Michael Mezei.
Analysts said that while investors are not yet bailing out of mutual funds, the industry is feeling the bite of the worst financial markets crisis of this decade.
Especially hard hit have been been Canadian equity funds, with the benchmark Toronto Stock Exchange 300 index falling more than 30 percent from its all-time closing high of 7822.25.
Statistics from the Investment Funds Institute of Canada showed that in August Canadian common equity funds saw net redemptions of C$17.1 million. While the figure is small, many fund companies worry it could be the tip of the iceberg.
The industry's group statistics for September will be released on October 15, and a debate is on whether the industry will see net redemptions when all types of funds are taken together. This last took place in early 1995 because rising rates on guaranteed investment certificates lured investors away from managed funds.
Some fund analysts said this might be prevented by investors simply shifting their capital into more conservative fixed-income money market and bond funds.
"People may be chasing money market funds, and therefore putting a lot of money into the mutual fund industry. But I think there's no question about it, investors at the margin are nervous and are redeeming some of the worst performing categories of equity funds," said Duff Young, president of mutual fund research firm FundMonitor.com.
"Excluding money market funds the number will be quite weak," he predicted.
The mutual fund arms of Canada's major banks are expected to be among the hardest hit by redemptions. Analysts said this is partly because investors who buy funds from banks tend to be more trend-orientated investors who so not receive as much individual counseling.
"The banks do really well when the going gets easy. They're not heavy into customer service, individual counseling, the way brokers and financial planners are. So when hand holding is the word of the day the banks aren't good at it," said Brewster.
Stock Market Activities
Canada
Stocks Finish Down As Global Economies Effect Corporate Growth
In Toronto, stocks fell for the first time in three days, sent lower by lenders, as slowing economies erode corporate expansion and earnings growth.
"We're not that far from a major global recession," said Bill Kovalchuk, president of Montreal based Claret Asset Management Corp., which specializes in derivatives products. Kovalchuk expects the TSE 300 to fall further and he holds put options on the index.
A late-day rally saw the Toronto Stock Market regain almost half the ground lost earlier in the day, but was not enough to pull the market out of its funk. In the opening minutes of trading in Toronto, the TSE 300 fell more than two percent and hovered around that level for most of the day, before staging the late day rally on the back of the Dow's rally.
But Toronto's rally paled in comparison to an impressive charge staged by the blue-chip heavy Dow Jones Industrial Average. The New York Index, which at its lowest point was down 264 points, raced back late in the day to close down only 9.78 points, or 0.13 percent, to 7731.91.
North American markets took a beating off the opening bell this morning after traders awoke to word that Japan's influential Nikkei Index had suffered significant losses overnight. The Japanese index of 225 stocks fell 799.55 points, or 5.8 percent, to 13026.06 as the irrational exuberance over proposed reforms of the Japanese economy wore off.
Investors were also scared by a 20-yen decline in the U.S. dollar over the past two days. The U.S. dollar was harmed by comments from Federal Reserve Chairman Alan Greenspan who hinted that a U.S. economic slowdown is more likely.
The yen, which came to life on optimism that a reform and aid package will help the country's ailing banks, opened nearly 4 percent higher against the U.S. dollar. After gaining over 20 yen in two days, there were rumors that the U.S. would intervene to put the brakes on the dollar's fall.
Despite today's late-day rally by the New York market, Rolie Bradley, institutional salesman, at Maison Placements Canada, said investors should not read too much into the New York market's activity. Bradley argues that with only 30 stocks represented, the Dow does not tell the full market story. "The problem is the Dow is not a representative index. You've got to look at individual stocks and you really can't talk intelligently about where the market is going by reading the Dow," he said.
On Bay Street, The Toronto Stock Exchange 300 composite index fell 61.74 points, or 1.1%, to 5401.64. The index recovered from a 111-point loss in the final 25 minutes of trading. The TSE 300 took out its August low earlier this week and is now 30.9% off its April record high. More than 109.6 million shares changed hands on the TSE, down from 113.4 million shares traded on Wednesday. Trading value was worth C$1.84 billion. Decliners were more than triple advancers at 756 to 255, with 263 issues unchanged.
Overall in Toronto, 13 of the TSE 300's 14 subindexes closed in negative territory led by a 3.0 percent dip in the conglomerates group, 2.5 percent in real estate, a 2.3 percent drop in the gold and precious minerals group and a 1.6 percent drop in the financial services group.
In the conglomerates group, Canadian Pacific Ltd. (CP/TSE) fell $1.40 to $29.15, leading the TSE 300 lower. Power Corp of Canada was off C$0.10 to C$23.25.
Gold stocks dropped despite a rise in the price of gold. In London gold was fixed at $300.25 an ounce, up $2.25. Gold miner Barrick Gold Corp. dropped C$0.70 to C$34.35 and Placer Dome fell $0.25 to $25.10.
These two issues were the most active on the TSE.
Canadian Imperial Bank of Commerce (CM/TSE) slipped 90¢ to $25.10 after it fired 25 people from its investment banking arm in Toronto as North America's seventh largest bank took steps to cut costs and alleviate slowing profit growth. Royal Bank of Canada (RY/TSE) dipped 80¢ to $61.70, Bank of Nova Scotia (BNS/TSE) fell 70¢ to $23.60 and Bank of Montreal (BMO/TSE) lost 95¢ to $53.95.
Other lenders fell as the C$ slipped to US64.73¢. Newcourt Credit Group Inc. (NCT/TSE) lost $1.40 to $32.20 and Power Financial Corp. (PWF/TSE) dipped 45¢ to $23.55. Newcourt was cut to "buy" from "strong buy" by analysts at RBC Dominion Securities Inc.
BCE Inc. (BCE/TSE) edged down 60¢ to $41.75 and its 42%-owned Northern Telecom Ltd. (NTL/TSE) unit fell 75¢ to $43.95. Nortel, which also trades in New York, was dragged down with U.S. computer and software companies.
Crude oil fell US64¢ to US$14.42 a barrel on the New York Mercantile Exchange, on reduced estimates of world oil demand. The TSE oil & gas composite index closed down 0.9% or 43.57 to 5046.04. The sub-components were mixed with the integrated oil's finishing up 0.5% or 39.99 to 7602.04. The oil & gas producers index fell 1.3% or 58.71 to 4500.98 and the oil & gas services fell 3.4% or 45.47 to 1301.96.
Talisman Energy, Ranger Oil, Bonavista Petroleum, Petro-Canada, Gulf Canada Resources and Shaw Industries were among the top 50 most active issues on the TSE.
Alberta Energy gained $0.70 to $33.00, Chieftain International $0.65 to $27.00, Talisman Energy $$0.40 to $30.00, Alberta Energy R $0.35 to $31.90, Petro-Canada $0.35 to $19.60 and Seven Seas Petroleum (u) $0.25 to $8.25.
Trican Well Service was the only oil related issue to appear among the top net gainers.
On the downside, Dreco Energy Services fell $1.50 to $15.00 and Denbury Resources $1.10 to $6.50.
Percentage losers included K2 Energy, Hurricane Hydrocarbons, Summit Resources, Denbury Resources, Newstar Resources, Lundin Oil AB, Stellarton Energy and Tetonka Drilling.
Gulf Canada Resources Ltd. (GOU/TSE) fell 40¢ to $5.30, Canadian Occidental Petroleum Ltd. (CXY/TSE) slipped 75¢ to $24 and Ranger Oil Ltd. (RGO/TSE) lost 45¢ to $9.90.
Shares of Hyal Pharmaceutical Corp., which fell to penny stock status earlier this year, lost almost half of their value on Thursday after a U.S.-based pharmaceutical company withdrew from negotiations on a worldwide licensing agreement for Hyal's skin cancer treatment. Shares of Hyal dropped C$0.36 to C$0.53 in heavy volume of 531,000 shares. The stock has traded in a 52-week range of C$4.60 to C$0.17.
Bucking the negative trend was the consumer products sector that rose 2.7 percent, helped largely by a jump by Seagram Co. Ltd. The beverage and entertainment company, which holds a 2.5 percent weighting in the group, rose C$2.95 to C$43.20.
The Alberta Stock Exchange combined value index fell 17.68 to 1711.01 on volume of 7.3 million shares valued at $3.0 million. Of the total active issues, 93 advanced, 160 declined with another 133 remaining unchanged.
Colt Energy, HEGCO Canada, First Star Energy, Gopher Oil & Gas, Talon Petroleum, Oilexco, Granger Energy B, Red Sea Oil, Bearcat Exploration and Prize Energy and were among the top 25 most active issues on the ASE.
Among the top gainers, Progress Energy B gained $0.50 to $2.50, Draig Energy $0.25 to $1.20, Endless Energy $0.15 to $0.70, High Plains Energy $0.15 to $0.30, Tuscany Energy $0.10 to $0.15, Cigar Oil & Gas $0.08 to $0.30, First Star Energy $0.07 to $0.40 and Red Sea Oil $0.06 to $0.98.
On the downside, Solid Resources fell $0.20 to $5.60, Edge Energy $0.10 to $0.29, Hawk Oil A $0.10 to $0.60 and Ionic Energy $0.10 to $1.50.
In other Canadian markets, the Montreal Exchange market portfolio index fell 13.34 points, or 0.5%, to 2833.92. The Vancouver Stock Exchange composite fell 7.9 points, or 2%, to 384.35. |
