MARKET ACTIVITY PLUS OIL & GAS FOCUS PART 1 - SATURDAY A.M. 10/17/98
CANADA
Investors took the market to a firmer finish but failed to hold onto early excitement after a Canadian short-term interest rate cut
Toronto stocks finished slightly higher on Friday but surrendered early day strength in the aftermath of interest rate cuts by both Canadian and U.S. central banks.
The TSE 300 composite index gained 54 points in early trading after the central bank said it would lower its trend setting bank rate to 5.5 per cent from 5.75 per cent. The quarter-point reduction matched a move Thursday by the U.S. central bank. But the TSE index sank into negative territory in the afternoon before recovering to post a slight gain of 16.11 points to 5,880.10.
The Toronto Stock Exchange's 300 Composite Index closed 16.11 points or 0.27 percent higher to 5880.10 after jumping more than 50 points following the opening bell.
The Bank of Canada matched a day-earlier short-term interest rate drop by the U.S. Federal Reserve Board by shaving a quarter percentage point off its key lending rate on Friday to 5.5 percent.
''We sort of stumbled around a bit and the commodity prices weren't that bad,'' said Maison Placements Canada trader Rolie Bradley. Gold bullion rose US$2.50 to US$301.70 an ounce on Comex, buoying Toronto's sector.
On Thursday the U.S. central bank chopped its Fed Funds rate and Discount Rate a quarter-point each, spurring the New York market to its third biggest point gain ever.
At the same time Toronto's market was carried higher as investors anticipated a Canadian rate cut. It surged to its second largest one-day point gain in history.
New York extended the party on Friday, with the Dow Jones Industrial Average soaring 117.40 points or 1.41 percent to 8416.76 points.
But Toronto added only a meek cheer. ''We really didn't get the follow-though'' on Friday, Bradley added. ''We don't seem to be as proactive ... on fiscal policy and trying to overcome the effect of the Asian flu.''
Some analysts said investors were responding to reports suggesting the U.S. central bank's sudden, unexpected move was a sign the American economy is in deep trouble.
"The Street is worried," said a U.S. equities specialist who asked not to be named. "What do they know that we don't know?"
David Chapman, technical analyst at Gorinsen Capital in Toronto, said he started hearing rumours about the imminent collapse of a large U.S. banking institution shortly after the Fed cut its rates.
"The message seemed to be: ‘There's a problem out there that we don't know about.' "
Toronto action was hot and heavy as 120 million shares worth C$2.2 billion changed hands. The TSE 300 gained 16.11 points, or 0.3%, to 5880.1. Advancing issues handily outran decliners 610 to 372 while 265 traded flat.
All but three of the TSE 300's 14 subsectors racked up gains, headed by a 1.7% increase in paper and forestry products. Other winners included gold and precious minerals added 1.4%, conglomorates 1.2%, pipelines 1.1%, merchandising 1.0%, transportation and environmental group 1.0%, real estate 0.8%, cosumer products 0.6%, utilities 0.4%, industrial products 0.3% and metals and minerals 0.1%.
The biggest loser was the financial services sector, which gave up 0.61 per cent. Also creating a drag on the TSE were the communications and Media group, dropping 0.4% and the oil and gas sector, down 0.1%.
Looking at the sub-components in the oil and gas composite index, the integrated oils fell 0.8% or 58.89 to 7719.25. The oil & gas producers nudged to the downside, losing just 1.93 to 4712.42. Reversing the trend, the oil & gas service sector gained a healthy 3.3% or 43.56 to 1371.83.
Index Charts
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O&G Composite. chart.canada-stockwatch.com
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O&G Services..... chart.canada-stockwatch.com
Among other major TSE indexes, the TSE 35 gained 0.2%, TSE 100 0.1% and the TSE 200 1.0%.
Among hot stocks Northern Telecom Ltd. (TSE/NTL) fell C$1.40 to C$54.10 in hefty dealings as news filtered out that it was hit with a U.S. shareholder lawsuit. A former Bay Networks stockholder started a suit against Nortel alleging the telecommunications giant made misleading statements about its finances to make sure Bay Networks shareholders would approve a marriage between the two companies.
Bombardier Inc. (YTSE/BBD.A) rose C$0.50 to C$18.65. After the market closed the aerospace and transportation equipment maker said it plans to unveil a new business jet on Sunday.
Canadian Pacific Ltd. (CP/TSE) rose $1.05 to $34.45, soaring 18% in five days after tumbling to $29.15 on Oct. 8. The company's 87%-owned PanCanadian Petroleum Ltd. (PCP/TSE), which rose $1 to $19, is expected to report third-quarter earnings of 9¢ a share, compared with 23¢ in the same period last year.
Seagram Co. (VO/TSE) rose $1.30 to $48.30. On Thursday, the company said it is beginning talks about selling its Mumm and Perrier-Jouet Champagne companies to an unidentified French group.
Placer Dome Inc. (PDG/TSE) rose $1.20 to $23.10 and Barrick Gold Corp. (ABX/TSE) gained 65¢ to $32.85 as the price of bullion rose US$2.50 to US$300 an ounce on the Comex division of the New York Mercantile Exchange.
Alcan Aluminium Ltd. (AL/TSE) rose 20¢ to $40 after the world's second largest aluminum maker said its third-quarter profit before special items fell 12% to US44¢ a share, less than expected, on lower metals prices. Magna International Inc. (MGa/TSE) rose $2.30 to $91.60. CIBC Wood Gundy Securities Inc. recommended the auto-parts maker as a "top pick" in a recent release.
Canadian Imperial Bank of Commerce (CM/TSE) fell 55¢ to $28.35, helping to push the financial services index of 25 companies down for the first time in five days on reports that CIBC's investment banking arm is firing almost 500 employees, part of a move that started several weeks ago to cut costs.
Toronto-Dominion Bank (TD/TSE) lost 65¢ to $45.15 and Bank of Montreal (BMO/TSE) fell 90¢ to $60.60. CIBC, Royal Bank of Canada, Bank of Montreal, TD Bank and Bank of Nova Scotia all cut their prime lending rate by 25 basis points to 7%.
Focusing on oil & gas related issues, Amber Energy, Ranger Oil, Elk Point Resources, Shaw Industries, Petro-Canada, Northstar Energy and Berkley Petroleum were among the top 50 most active issues on the TSE.
Chieftain International gained $1.75 to $28.25, Precision Drilling $1.45 to $18.95, PanCanadian Petroleum $1.00 to $19.00 and WestCastle Energy (U) $0.90 to $7.30.
Percentage gainers included Hurricane Hydrocarbons 16.4% to $3.20, WestCastle Energy (U) 14.1% to $7.30 and Precision Drilling 8.3% to $18.95.
On the downside, Talisman Energy fell $0.80 to $32.35, Canadian Natural Resources $0.65 to $24.85, Suncor Energy $0.50 to 49.00 and Enerflex Systems $0.45 to $25.25.
Percentage losers included Tethys Energy 12.8% to $1.30, Upton Resources 8.5% to $1.51, Crown Joule Exploration 8.3% to $1.10, Ryan Energy 7.2% to $3.20, Bow Valley Energy 6.3% to $1.05, Enerchem International 6.3% to $1.50, Bonus Resource Services 5.7% to $1.65, Calahoo Petroleum 4.8% to $2.00 and K2 Energy 4.8% to $1.00.
On the week, the TSE 300 gained 7.27 per cent. The Toronto benchmark soared to its biggest weekly gain in 16 years.
The utilities sector led the way, adding 9.56 per cent; industrial products gained 9.46 per cent, and real estate added 7.76 per cent.
The only loser on the week was the gold and precious minerals sector, down 2.16 per cent.
On other markets Friday, the Montreal Exchange rose 8.95 points, or 0.3%, to 3074.72. For the week it rose 203.08 points or 7.1%.
The Vancouver Stock Exchange rose 1.14 points, or 0.3%, to 384.5 but fell 0.5 points on the week.
The Aberta Stock Exchange's combined value index gained 4.43 to 1711.45. There were a total 1,693 trades involving 352 traded issues with 137 advancing, 115 declining with another 100 unchanged. Trading was active with 14.6 million shares traded at a value of $3.8 million.
HRGCO Canada, Colt Energy, ICE Drilling, Red Sea Oil, Grey Wolf Exploration, Willow Creek Exploration and Prize Energy were among the 25 most active issues on the ASE.
Invader Exploration gained $0.14 to $0.54, Red Sea Oil $0.14 to $1.14, Venator Petroleum $0.14 to $1.69, Encounter Energy $0.10 to $1.20, Hawk Oil A $0.10 to $0.70, Belair Energy $0.09 to $0.29 and Emerald Bay Energy $0.09 to $0.34.
Leading percentage gainers included Belair Energy, Invader Exploration, Willow Creek Exploration, Lexxor Energy, Emerald Bay Energy, Plexus Energy, Hawk Oil A and Red Sea Oil.
Losers included Solid Resources $0.45 to $7.30, Global Link Int'l $0.14 to $0.25, Redco Energy $0.09 to $0.05 and Parkcrest Exploration $0.08 tp $0.21.
Percentage losers included Global Link Int'l, Parkcrest Exploration, Oilexco and High Plains Energy.
Bulls gallop back as rates tumble
Canadian markets are muted compared with foreign counterparts
The Financial Post
The Bank of Canada followed the U.S. down a path of monetary easing Friday in dropping interest rates for the second time in the past three weeks.
The move came as western central bankers try to find a way to stimulate economic growth and turn back a growing credit crunch.
The bank matched Thursday's rate reduction in the U.S. with a cut of a quarter of a percentage point, to 5.5%, in its key overnight lending rate.
In response, Canada's major banks and trusts said they would pass on their lower borrowing costs by cutting their prime lending rate to 7% from 7.25%.
"This decrease in short-term interest rates ... is designed to sustain economic growth against a backdrop of increasing caution by U.S. lenders and unsettled conditions in financial markets," the central bank said.
The reaction in Canadian markets was muted Friday, in stark contrast to a massive surge in many markets around the world. The Toronto Stock Exchange 300 composite index eked out a small gain of 16.11 points, or 0.3%. On Thursday, it racked up a 4.8% advance, its biggest one-day gain in 11 years.
While Canadian investors decided to take profits after Thursday's gain, the U.S. market continued its advance in a wave of buying. The Dow Jones industrial average gained 117.40 points, or 1.4%, adding to the previous day's 330-point surge.
The U.S. Federal Reserve's surprise cut late Thursday afternoon was announced after European and Asian markets had closed, but they joined in the party at Friday's open. The mood was especially jubilant in Hong Kong, where the Hang Seng stock index soared nearly 9%.
While the rate cuts and the promise of more to come have many in the market expecting a rebound in spending, investment and profit, others are less optimistic.
Some analysts are warning the market's enthusiasm is misplaced. Rate cuts might ward off an economic recession, they argue, but a profit recession is inevitable and that's bad news for stocks.
Profit forecast: gloom ahead
The Financial Post
Economic forecasters are warning corporate executives to brace for a profit meltdown, a drop in capital spending and the possibility of a U.S. recession.
At a corporate level, that means lower earnings. First Call Corp. estimates third-quarter earnings of leading U.S. firms will drop 1%, the first year-over-year decline since the third quarter of 1991. The compiler of earnings estimates, said the profit slowdown follows 24 consecutive quarters of strong earnings growth, and will hit blue-chip issues especially hard.
The epidemic of profit decimation cuts a swath through the ranks of blue-chip companies, claiming victims as diverse as Chrysler Corp., General Motors Corp., Maytag Co., Charles Schwab & Co., AT&T Corp., Motorola Inc., Phelps Dodge Corp., Winn-Dixie Stores Inc. and Cummins Engine Corp.
Some Canadian companies are fighting the trend. Fertilizer giant Potash Corp. of Saskatchewan, for instance, is expected to report third-quarter earnings of US$1.29 compared with earlier estimates of US96¢. Finning Inc., the world's largest Caterpillar distributor, will likely report earnings of 87¢ a share, compared with 72¢.
The profit shortfall has been linked to economic turbulence in Asia and Latin America, leading analysts to cut earnings estimates for the Standard & Poor's 500 companies from a gain of 10.2% in July to a more recent drop of 3.5%.
While no sector is immune, the earnings collapse is particularly acute among financial and technology companies. Declining trading volumes and lower fees from merger and acquisition activity have sliced third-quarter profit estimates at Merrill Lynch & Co. to US28¢ from US$1.24. Bear Stearns & Co. will report US40¢, rather than US$1.11. BankAmerica Corp., which announced a US$372-million writeoff this week on a high-risk trading operation, is expected to report just US50¢, half of the projected US99¢.
High-tech stocks have taken a beating led by chip makers Intel Corp. (down to US76¢ from US89¢) and National Semiconductor Corp. (US63¢, down from US38¢), U.S. No. 1 computer maker Compaq Computer Corp. (down to US7¢ from US36¢) and data networking firm 3Com Corp. (US50¢ from US99¢).
Even the mainstays in Warren Buffett's Berkshire Hathaway Inc. portfolio are now expected to turn in disappointing results: Coca-Cola Co., Walt Disney Co. and Gillette Co. have all fallen short of earlier forecasts.
The poor earnings outlook is a reflection of a wider malaise as the U.S. manufacturing sector slips into recession. According to forecasters Ed Yardeni and Debbie Johnson at New York's Deutsche Bank Securities Inc., factory output fell in the last quarter for the first time since the early 1990s, and capacity utilization rates are retreating to cyclical lows.
Analysts at Lévesque Beaubien Geoffrion Inc. also point to a likely decline capital in capital spending, citing 'the mounting evidence of a slowdown," which may presage a recession south of the border since "buoyant business investment has been the main growth engine of the U.S. economy."
Lévesque's forecasters expect economic conditions to worsen before they improve as "the Asian contagion is spreading, signalling a slowdown in industrial production. Given the excess capacities now prevailing on a worldwide basis, a generalized slowdown in the industrialized countries is inevitable."
Be very, very careful out there
The bulls may have sent markets soaring on the back of the Fed's rate cut, but there are still bears in the woods
The Financial Post
Judging by the reaction in stock markets, Alan Greenspan's surprise interest rate cut on Thursday was just the panacea the North American economy needed to ward off the Asian flu bug.
So is it time for the bulls to start running again and for the bears to head back into hibernation?
Not yet, analysts caution. They say lower interest rates may stave off a deep recession, but they won't reverse the accelerating fall in earnings. When that hard reality sinks in, it's going to knock the bulls flat on their behinds, they say.
"Profits are going to decline next year," says a blunt Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. "I don't think that the easing can prevent a pretty severe slowdown in the economy -- for both the U.S. and Canada."
The stimulation of lower interest rates won't be felt until "late next year," he argues. And, in any case, profits are headed down with so much force it will take a while to turn them around.
The third quarter will likely deliver the first quarterly drop in U.S. corporate profits in seven years. Nearly 30% of the firms on the bellwether Standard & Poors 500 composite index have reported and the tally to date shows profits down 7.1% from the third quarter of 1997, according to First Call Corp.
The final tally is expected to be a little stronger, but still negative, and Steinberg predicts the drought will extend through next year.
The forecast has gone from blue skies to storm clouds almost overnight. Back in August, Steinberg forecast an 8% gain in operating earnings for S&P 500 companies next year.
When the prospects for global economic growth started to tank last month, he cut his expectations in half, then to zero. This week, he lowered his call dramatically to forecast a 5% contraction.
Meanwhile, the market seems to be taking a more positive view, and Steinberg and others worry its recent rally could be a big fakeout, setting the stage for another stumble and new lows.
Bill Meehan, chief market strategist at Wall Street's Cantor Fitzgerald, says the market's change in sentiment will backfire because it is not based on a change in fundamentals.
Ironically, until stocks rocketed higher on Thursday's rate cut in the U.S. -- a move that was matched Friday by the Bank of Canada -- Meehan suspected the correction was largely completed.
However, he now figures the market's gravity-defying gains have hit sufficient heights that a heavy fall is in store. The Dow Jones industrial average soared nearly 300 points in 45 minutes on Thursday after the rate cut was announced.
The S&P 500 bottomed out at 957.28 points on the last day of August when Russia's debt meltdown had investors in a panic. At that point, it was 19% below its mid-July record high. It is now only 10.9% off that level.
Meehan had figured the S&P would dip below that level again before hitting new highs, but wouldn't slip below 900 points.
But with the index heading back above 1050 points on Friday, he now fears a bigger tumble -- all the way to 770 points -- for a correction of 35%.
In Canada, stocks have taken a bigger drubbing than their U.S. counterparts. Until recently, analysts had been looking for the Toronto Stock Exchange 300 composite index to bounce back harder in the months ahead. The index's correction peaked at 32% earlier this month. It is now 25% below the record high it reached in April. But expectations of gains based on an imminent rebound in profit are starting to dim.
Martin Roberge, portfolio strategist at Lévesque Beaubien Geoffrion Inc. in Montreal, is looking for operating earnings per share to come in at $255 at an annual rate over the next 12 months -- a 10% drop -- for TSE 300 firms.
Earlier in the year, profits were coming in at an annual rate of $305 per share. Today, that pace has dropped to about $280, which is 26% below consensus estimates at the start of the year, he notes.
To guide his forecast, Roberge regularly turns to a chart that plots TSE 300 earnings against the price level of raw materials as measured by the Commodity Research Bureau. If the past is any guide, commodities are pointing the way to a profit decline of between 10% and 15% next year.
What's more, while they have stabilized above their five-year lows in August, commodity prices are likely facing new lows in the months ahead, he adds.
Ben Joyce, equity strategist at Nesbitt Burns Inc. in Toronto, isn't much more enthusiastic.
Instead of seeing the resource export sector leading a rebound for profit growth in the rest of the market, Joyce expects the malaise to spread.
"Although the resource sector was the major culprit in forecast reductions earlier this year, the damage initially inflicted on this sector is now spilling over into the domestic arena," he wrote in a report to clients this week.
He sees TSE 300 earnings dropping 13% this year and even a projected rebound of 8.5% next year would leave profits nearly 6% below 1997 levels.
Even if the Canadian market has already taken its hit, the prospect of a turnaround will depend on the same global forces that sank Asia and are rapidly washing up on U.S. shores.
A year after global markets shivered from the initial stages of the Asian flu, North America is finally coming down with a fever.
Asia's financial crisis was complicated by over-investment, which created a glut in supply capacity. That, combined with currency devaluations, has effectively exported Asia's problems to the rest of the world.
Further complicating matters, the implosion of Asia's economies has dried up demand for exports from the rest of the world. In many sectors, pricing power has all but disappeared but labor costs are still rising and that is squeezing profit margins.
As analysts at the Bank Credit Analyst Research Group in Montreal point out, profits in the major economies are highly correlated with global economic growth, and growth is turning down sharply. While individual firms and sectors may hold their own, the overall trend is inescapably down.
Stephen Poloz, managing editor of the International Bank Credit Analyst, says equity analysts are grossly misguided to expect a quick rebound in profit growth -- either this year or next. He expects a contraction in profit for this year and 1999 and sees trouble ahead for stocks.
"Profit expectations that underpin current stock market valuations will be cut back drastically in the months ahead and the duration of the period of weak profits will be much longer than the consensus has even begun to contemplate," he says.
"Thus, any relief rally in stocks due to easier monetary policy is likely to be short-lived."
Investors may be looking to past cycles of monetary easing in the U.S. for comfort but an optimistic spin on today's would be mistaken, argues Roberge.
When the market crashed in October of 1987, the Federal Reserve took the lead in cutting back interest rates and the recovery in profit growth and stock prices was dramatic. But earnings growth was weak in the period leading up to the crash and the easing simply accelerated the recovery.
"The earnings situation is different today," according to Roberge. Not only has profit growth been above average for a few years but the pressure on profit margins is much higher this time around.
If the market's current struggle were due to rising interest rates, then lower rates might be a good cure, but that's not the case, he stresses.
"The current retreat of the market is due to a softening of profits, not a rise in interest rates. An easing might stabilize stock prices but would hardly guarantee an end to the market's correction."
So which way are we headed in the stock market according to Roberge? "Past experience suggests that further tests to previous lows are very likely."
For a bankable return to healthy profit growth, analysts say the solution lies with turning Japan around and navigating through the extreme credit strains that have turned the global financial system into a minefield.
For now, investors are betting lower interest rates can bring back profits by keeping consumers spending and the economy humming.
But with western banks reporting huge writedowns and hedge funds facing default due to a growing credit crunch, the next explosion could cut this rally off at the knees.
It's dangerous out there, notes Meehan of Cantor Fitzgerald. "God only knows what kind of toxic waste is still lurking around."
Canada bonds end flat after rate cut
Canadian government bonds ended flat to slightly firmer on Friday after moving in a tight range and reacting calmly to an interest rate cut by Canada's central bank in the morning.
The Bank of Canada cut its official bank rate by 0.25 percentage point to 5.5 percent just before 0900 EDT/1300 GMT, a move that was widely anticipated, and which followed U.S. rate cuts by the Federal Reserve on Thursday.
"We are looking for the Fed to cut again before the year-end, potentially in November and December. We can easily see another 25 or 50 basis points from the Fed," which will be quickly matched by the Bank of Canada, said Mario Angastiniotis, senior economist at Standard & Poor's MMS.
The bond market has seen profit-taking this week, first in the long end of the yield after a recent rally, and then in the short end, which had claimed safe-haven status in light of growing jitters over more U.S. hedge fund losses and volatile equities.
The market is looking for new factors to trade on next week as the short end has already discounted another 25-basis point cut by the U.S. and Canadian central banks, Angastiniotis said.
"I don't think data is going to be much of an issue either side of the border. I think policy intentions are quite clear from the Fed," he said.
Canada's benchmark 30-year bond due June 1, 2027, after swinging between mild losses and gains, rose C$0.14 to C$139.62 to yield 5.295 percent.
The U.S. 30-year bond was up US$0.04 at US$108.08, yielding 4.966 percent.
Canada's spread over the U.S. long bond was 33 points after 32 points at the previous close.
In the money market, Canada's three-month when-issued T-bill remained firmer, yielding 4.42 percent after 4.55 percent at the previous close.
Economists expect the Bank of Canada to unwind fully the full percentage point credit tightening it undertook on August 27 in defense of the then-plunging Canadian dollar. It has already reversed it by half through rate cuts today and on September 29.
Canada's central bank is likely to follow the lead of its U.S. counterpart step by step in further credit easing in a bid to minimize any adverse impact on the local currency. The Federal Open Market Committee is scheduled to meet on November 17 and December 22.
The bank is sending a message to the market: "Listen, the Fed's doing it, so we're doing it. We are not going to change the spread," said Michael Gregory, strategist at Lehman Brothers in New York.
He expects two more rate cuts by Canada to fully reverse the August tightening by the end of the year.
"Looking forward, the economy looks increasingly fragile. The risks are clearly building of an outright recession," Gregory said.
"Volatility will be there, and I think the safe haven appeal of bonds generally, and more specifically U.S. treasuries, will continue until things get settled down, until investors are confident that the worst is over. We are probably three to six months away from that," he said.
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