EYE ON THE MARKETS - North American Focus
Gold Restrains Toronto As New York Continues To Be On Tear
The Canadian Press
Weakness in gold stocks held Canadian stocks back, but Wall Street continued to register strong gains Friday despite the best efforts of profit-takers to deflate the rally.
The TSE 300 composite index gained just 4.89 points to close at 6,417.91. In New York, the Dow Jones industrial average was up 59.99 at 8,975.46.
"We have gone from unlimited greed to unbelievable fear and back to disbelieving greed in the space of just a few short weeks," said Scott Bleier, chief investment strategist at Prime Charter Ltd.
Leading 11 of 14 sub-groups higher in Toronto was the conglomerates group, 1.53 per cent higher on the day thanks to Power Corp., up $1.55 to $32.40, and Onex Corp., which gained $1.25 to $34.50. Canadian Pacific was 15 cents higher at $36.25.
Real estate and construction stocks followed with a 1.16 per cent gain. Oxford Properties gained a quarter to $17, while TrizecHahn climbed $0.05 to $29.95.
Industrial products were third in line, 0.86 per cent higher as Northern Telecom Ltd. gained 90 cents to $67.75 and Newbridge Networks soared $1.80 to $35.40 on volume of more than one million shares.
On the week, merchandising stocks were 7.83 per cent higher, followed by conglomerates, up 4.29 per cent. Real estate stocks were 4.06 per cent higher.
Gold and silver stocks, after Thursday's mighty rally, were headed south Friday as the price of the yellow metal slipped 80 cents on the New York Mercantile Exchange.
The gold and silver sub-group dropped 3.72 per cent as Barrick Gold Corp. fell $1.25 to $33.80, while Placer Dome Inc. lost $1.70 to $25.05. Euro-Nevada Mining slipped 55 cents to $24.95.
Financial services were also weaker Friday, down 0.69 per cent as Royal Bank endured another tough day, falling $1.10 to $69.50. Merger partner Bank of Montreal was $0.25 lower at $32.00. The financial services sub-group was 0.07 per cent lower since last Friday's close.
Pipeline stocks were the third-worst group on the day, down 0.60 per cent. Pipelines were 2.14 per cent lower on the week.
In New York, the Dow finished 362 points from the all-time best close of 9,337.97 set on July 17. The Dow came within 10 points of 9,000 before backing down.
Broader stock indicators also moved toward the highest levels since before the market began its rapid retreat in late July. New York stocks have now endured eight sessions without a loss.
The Dow has jumped nearly 1,500 points since it slid below 7,500 on Oct. 8, and holds a gain of nearly 13 per cent, or about 1,000 points, for the year. About 550 of those points have come in the past eight sessions.
Analysts said the market was feeding off its own momentum as investors become confident again about taking risks after a period of volatility prompted many to park their money in Treasury bonds for safety.
In Toronto, advancers outnumbered decliners 577 to 425 with 276 unchanged in trading of 107 million shares worth $1.8 billion.
The TSE 100 lost 0.17 points to 392.51.
Among industrials, Provigo gained $0.30 to $15.40, Mitel Corp. $0.95 to $11.20; CIBC lost $0.30 to $31.60, Beamscope Canada $0.70 to $6.30.
Among mines, Rio Algom rose $0.55 to $21.80, Asia Pacific Resources $0.50 to $3.80.
Among oils, Berkley Petroleum climbed $0.25 to $11.75, Canadian Natural Resources Ltd. $0.30 to $28.70; Amber Energy slipped $0.65 to $7.40, Ranger Oil Ltd. $0.15 to $10.50.
In Vancouver, the VSE index ended the day 2.09 higher at 418.13, 18.36 higher on the week.
The Montreal Stock Exchange portfolio index ended the day Friday at 3,280.66, down 16.95 on the day and 84.02 points higher on the week.
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Canadian Dividends and Earnings
Canadian dividends
Corporate dividends declared Friday (quarterly unless otherwise indicated):
BC Gas Inc.: Common, $0.28. Payable Nov. 30. Record Nov. 18.
BC Gas Utility Ltd.: 7.10% Cumulative Redeemable Retractable First Preference, $0.44375. Payable Dec. 31. Record Dec. 15.
Brookfield Properties Corp.: Semi-annual common, $0.36. Payable Dec. 31. Record Dec. 10.
Lassonde Industries Inc.: Class A and B common, $0.07. Payable Dec. 11. Record Nov. 27.
Canadian earnings
BC Gas Inc.: Nine months ended Sept. 30, 1998, net income $36,800,000, $0.95 a share; 1997, net income $26,500,000, $0.66 a share. Revenue: 1998, $633,900,000; 1997, $636,900,000.
Ballard Power Systems, Inc.: Three months ended Sept. 30, 1998, net loss $10,504,000, $0.13 a share; 1997, net income $10,914,000, $0.19 a share. Revenue: 1998, $4,505,000; 1997, $4,954,000.
Brookfield Properties Corp.: Three months ended Sept. 30, 1998, net income $52,000,000, $0.42 a share; 1997, net income $30,000,000, $0.30 a share. Revenue: 1998, $582,000,000; 1997, $434,000,000.
Haley Industries Ltd.: Three months ended Sept. 30, 1998, net income $430,000, $0.04 a share; 1997, net income $704,000, $0.07 a share. Revenue: 1998, $17,219,000; 1997, $13,879,000.
Lassonde Industries, Inc.: Three months ended Sept. 26, 1998, net income $1,200,000, $0.18 a share; 1997, net income $1,800,000, $0.27 a share. Revenue: 1998, $47,100,000; 1997, $39,000,000.
Radiomutuel Inc.: Year ended Aug. 30, 1998, net income $6,716,000, $0.56 a share; 1997, net income $4,989,000, $0.42 a share. Revenue: 1998, $81,900,000; 1997, $61,400,000.
Ridley Canada: Three months ended Sept. 30, 1998, net income $2,470,000, $0.19 a share; 1997, net income $2,110,000, $0.20 a share. Revenue: 1998, $99,700,000; 1997, $91,200,000.
Wajax Ltd.: Three months ended Sept. 30, 1998, net income $1,265,000, $0.08 a share; 1997, net income $5,706,000, $0.37 a share. Revenue: 1998, $252,091,000; 1997, $259,933,000.
YMG Capital Management Inc. Three months ended Sept. 30, 1998, net income $302,000, $0.02 a share; 1997, net loss $814,000, share n/a. Revenue: 1998, $3,355,000; 1997, $2,823,000.
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Bonds End Weaker On Supply, Rate Outlook
Canadian government bonds edged up from Friday's lows, but ended the week sharply weaker, depressed by technical selling and concerns over new issues.
The yield on the 30-year bond broke through key technical levels to a two-month high of 5.66 percent at one point.
"What's been written off to a large extent is a recession fear, which is pretty negative for the bond outlook," said Randall Powley, senior economist at Scotia Capital Markets.
Bonds were hit by the aftershock of comments on Thursday by Federal Reserve Chairman Alan Greenspan, which were taken as a signal that the Fed might not be in a hurry to ease credit further. Last month investors sought safe-havens in government bonds at the height of global financial market jitters.
"We did see some leverage players come in on the offer side. It seems to have started with Eurodollar interest pushing things lower," said Jeoffrey Hall, managing analyst at Thomson Global Markets in Boston. "We heard switches out of Canada into the U.S. Canada is a big underperformer on the day."
Canada's benchmark 30-year bond due June 1, 2027 trimmed some of its earlier losses, but was still down by a sharp C$1.23 at C$133.27, yielding 5.641 percent, a level unseen since early September.
The U.S. 30-year bond was also off the day's low, but finished the day down 31/32 to 98-5/32 with the yield of 5.374 percent. The spread between the bonds narrowed to 27 basis points from 34 at the opening, but was still wider than 22 points at the previous close.
"Sentiment is that expectations of further rate cuts have been cut back significantly after the Greenspan speech yesterday," said Arve Bendiksrud, vice president at fixed-income research at TD Securities Inc.
In a speech, Greenspan said safe-haven capital flows into U.S. Treasury securities seen at the height of fears of global financial system breakdown may dissipate and "yield spreads and liquidity premiums will soon fall into more normal ranges."
Economists are guessing whether the Federal Open Market Committee, which sets U.S. monetary policy, will cut rates again at the next meeting on November 17. The Bank of Canada is widely expected to follow any Fed cut quickly in its own process of fully unwinding the credit tightening it conducted in August in defense of the Canadian dollar.
"Fundamentally I don't know that much has changed unless you consider that the Fed is now completely out of the picture until perhaps January and beyond in terms of the way the market is pricing. Nothing this morning precipitated that," Hall said.
Canada's job growth came in stronger than expected at 57,200 in October after a 72,800 gain in September. The jobless rate fell sharply to 8.1 percent, the lowest level since July 1990, from 8.3 percent in September.
Economists on average had expected employment growth to have slowed to 20,000 to 25,000 (one forecasting 5,000) in October and the jobless rate to remain at 8.3 percent.
"A strong employment report in Canada certainly doesn't help the bond market," TD Securities' Bendiksrud said.
For Canada, renewed safe-haven buying prompted by an inadvertent early release of the weaker-than-expected October U.S. employment data on Thursday was short-lived.
The market endured a week of new government issues in North America, and analysts said it was not out of the woods yet. The Inter-American Development Bank, for instance, is planning to launch a ten-year U.S. dollar global bond next week.
"There are still supply concerns and there are still liquidity concerns in the market," Hall said. "This is perhaps just a bear run in (an) otherwise consolidating market."
The US$38-billion U.S. Treasury quarterly refunding, which had dampened sentiment, finished with Thursday's 30-year note sale. Canada sold C$2.3 billion 10-year notes on Wednesday.
In the short end, Canada's three-month when-issued T-bill weakened off further, yielding 4.87 percent versus 4.80 percent at the previous close.
"The market already began this week to factor out the possibility of a rate cutin November. It seems to be accelerating the pace now. The bond market is catching on," said Walter Posiewko, money market trader at Royal Bank Investment Management Inc.
The market has yet to price in a rate cut by the Bank of Canada aimed at supporting the economy, Mario Angastiniotis, senior economist at Standard & Poor's MMS, told Reuters Television.
"We think that the front end of the curve is going to outperform for the next couple of weeks. The market is still looking for a rate cut. Even if we don't get one in November, we are still looking for the Fed to go again, and the implication is that the Bank of Canada will follow," he said.
The Canadian yield curve is likely to steepen as rekindling of fears of Quebec separation during the election campaign ahead of the November 30 vote in Quebec could trigger selling in long bonds, he said.
On the medium-term outlook, Mark Chandler, senior economist at Goldman Sachs Canada, said: "I think in the end it (Canada's employment report) should be thought as reasonably positive for the Canadian bond market if the currency does actually strengthen on this, which I think it will."
The Canadian dollar, after opening firmer on Friday, weakened to around C$1.5320 on stop-loss selling. Market players see it as a technical move as the U.S. dollar bounced back against key currencies. It failed to break through key support of C$1.5180/85 at Thursday's close here.
In Canada's employment data, the jobless rate in the French-speaking province of Quebec fell relatively sharply by 0.5 percentage point to 9.7 percent.
"The Quebec numbers were pretty impressive. The downside of the report is that it'll help the PQ," said Douglas Porter, senior economist at Nesbitt Burns Inc.
Voters in French-speaking Quebec will choose on November 30 between the incumbent separatists led by Parti Quebecois leader and Premier Lucien Bouchard and federalists led by Quebec Liberal Party leader Jean Charest.
"Bouchard might jump on it and say it's a sign that his policy is working, but the provincial stats are obviously much smaller and much more volatile than national numbers," said Harvinder Kalirai, economist at I.D.E.A. in New York.
From Doom To Near Boom
S&P 500 Index Poised To Test New High-Water Mark
The Financial Post
Welcome to Wall Street's reborn bull market. It was butting higher at a distinctly reduced pace yesterday. But a reborn bull it is.
The Standard & Poor's 500-stock composite ended the week little more than 50 points, or 4%, below its previous record close of 1190.58.
Indeed, this benchmark of professional investing could be testing that high-water mark quite soon.
If it does, that would imply a Dow Jones industrial average level of about 9300 to 9400 -- and the prospect of a further stab at that much-heralded 10,000 mark.
As for Canadian investors, where Wall Street leads, our markets generally follow.
But are you finding all this rediscovered optimism a little tough to live with?
If so, bend an ear to Stephen Roach, of Morgan Stanley Dean Witter & Co. He argues simply that the trend in interest rates around the developed nations is going to be downward over the next six months, and that trend already has investors betting heavily on equities.
That said, there are as many paradoxes as certainties today.
One is that third-quarter earnings by the companies in the S&P 500 will almost certainly be lower than third-quarter 1997 (maybe by as much as 3%). But that slowdown has not deterred financial analysts who follow one or more of those companies from looking collectively for better than 18% growth in 1999.
Charles Hill, research director of First Call Corp., one of the companies that collates these estimates, notes that there had been some trimming of earnings estimates for the first and second quarters of next year, but not for the year as a whole.
Consider, too, that Wall Street's market strategists are far less sanguine than the analysts. They are calling for 1999 growth of S&P 500 profits of no more than 4.5%.
As Mr. Hill notes, the gap between the two expectations is far, far wider than usual. So, who is right, and how realistic are current investor expectations?
The Web site maintained by Deutsche Bank Securities economist Ed Yardeni shows the extent that Wall Street's super-sensitive investors have swung from doom to something near boom.
Yardeni uses a model suggested by none other than U.S. Federal Reserve chairman Alan Green-span, which assumes that the S&P 500 is at fair value when its expected earnings over the next 12 months would generate the same investment return as 10-year U.S. treasury bonds.
As recently as the end of October, this model suggested the S&P was quite significantly undervalued. Now the S&P could already be marginally overvalued, or quite significantly so, depending on whether you use the earnings estimates of the strategists or the analysts.
Note that in the week past, even that dean of the bulls, Abby Cohen, of Goldman Sachs & Co., was projecting 1200 to 1250 for the S&P 500 over the next 12 months, indicating a 12-month potential gain of no more than 5% to 10%. That would certainly be better than another bear kick in the pants, but does such a prospect really justify Wall Street bounding upward like a young lamb?
This is where Mr. Roach comes in. In an excellent piece in the Morgan Stanley Web pages, he argues that the central bankers of the industrialized nations are uniting to save the world from a potentially vicious credit crunch. They have swung from fighting
inflation to promoting growth.
He forecasts that "the bias to official short-term interest rates over at least the next six months remains decidedly on the downside -- it is just a question of which central banks ease the most and how far the process goes." That prospect, in turn, has investors again heading where they hope to get the biggest bang -- equities.
Mr. Roach suggests forgetting about the fundamentals of earnings or currency risks for now. The money flows will tell the tale. That, in turn, raises the spectre of another more ominous paradox. Are we headed for a further bout of what Mr. Greenspan so charmingly termed "irrational exuberance?" If so, such a trade-off would be naught for investors' longer-haul comfort.
So, enjoy the party. But do remember to leave in good time. Patrick Bloomfield, a regular Financial Post contributor, invests in securities and may hold issues mentioned here.
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U.S. Markets
moneycentral.msn.com
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The Coming Week: Test The Highs, Beware of Trap Doors
Elections, Alan Greenspan, a Labor Department goof, third-quarter earnings and, well, October. And the Dow got through that and is testing 9000 again. The equity markets got over a speed bump the size of Krakatoa, and now there's room for a little coasting into the Nov. 17 Federal Open Market Committee meeting.
The elections this week cheered the market, if only because President Clinton's position is no longer viewed as untenable. Impeachment certainly would have spooked the financial markets; without that threat, the market had a rally to enjoy.
Throughout the summer, the market's concern was external; the focus was how our markets and economy would respond to the debt crises and recession across Asia and in parts of Latin America. But now the markets are looking internally, and with economic data light next week, the markets are being viewed not in context of how they are affected by Asia, but how they are affecting themselves.
"Ordinarily we get a clue from the Asian markets or statements from Alan Greenspan or from the U.S. economic numbers," said Hugh Johnson, chief investment officer at First Albany. But "I don't think any of those things are going to be quite as important as what happens in the market itself."
The Dow and S&P figure to test the resistance levels around 9000 and 1155, according to Kenneth Gehl, senior vice president in manager equity markets at Everen Securities. The Dow is 12.5% above its close Oct. 15, the day the Fed cut lending rates. But all major indices are flexing their muscles lately; the best performer since the rate cut is the small-cap Russell 2000, up 21%, while the Nasdaq Composite Index is up 19%.
"The relief is coming across the board vs. just for index fund managers," Gehl said. "My impression is that we're now in that 'train pulling away from the platform' market."
As opposed to the rally that has people biting their nails, waiting for another worldwide disaster. But this week saw legislative activity in Japan and Brazil that should ward off further currency devaluation and economic strife. Wide-ranging interest-rate cuts were enacted in Europe, and most foreign indices rallied.
All that has Johnson thinking that next week might be the week for profit-taking. "This market has come very far, very fast," he said. "Some profit-taking is overdue, and I think that's what we're going to be watching for."
Curiously, the narrow focus in the stock markets ignores the activity in the bond market, where credit spreads are still lagging Treasuries, even as corporate debt is being sold. The only corporate spreads that have rallied in a similar fashion as stocks are very low-rated junk bonds (triple-C or less) because their fortunes are viewed as being similar to equities'.
Meanwhile, investment-grade corporate bonds are still at very wide spreads in comparison to Treasury bonds. The A-rated bonds of Merrill Lynch (MER:NYSE) were recently yielding 125 basis points, or 1.25%, more than the 30-year Treasury bond. The narrowing of the spread has been more a result of rising Treasury yields, not falling corporate spreads.
"For stocks to re-establish the bull market without evidence that other markets have done that is a dicey proposition, and I think they're setting themselves up for another fall," said Jim Bianco, president of Bianco Research.
Corporate bond issuers, while being able to attract financing, are giving concessions to investors just to get those deals done. The Associates First (AFS:NYSE) $4.8 billion deal was priced in comparison to an off-the-run Treasury bond, which has a higher yield than an active Treasury bond.
But today's announcement that Barnes & Noble (BKS:NYSE) was planning on purchasing Ingram Book Group continues the robust merger/acquisition activity that returned in October. Sprint (FON:NYSE) is expected to sell $2 billion to $3 billion in bonds, and investors are furiously dumping the $38 billion in Treasury bonds sold this week. Even if issuers have to make concessions, the well-regarded names are attracting financing.
The U.S. rally confirms another line of thinking: If the global markets don't do anything bad, the markets will ignore them. All is not wonderful in this world. Japan's government bonds are currently yielding less than zero, and Brazil still has a huge deficit to overcome -- and they've only passed one bill to alleviate those constraints.
And for all the talk that a kinder, gentler Republican leadership will emerge, that party still controls both houses of Congress. They're not thrilled with the IMF, especially not Texas Senator Phil Gramm, the new head of the Senate Banking Committee. A $500 billion omnibus finance bill passed by the House and Senate restored $18 billion in funds to the fund two weeks ago (Gramm voted against the bill).
Funding the IMF was one of the president's key concerns, and the prospect of this agency looking over its shoulder at a grumbling American Congress next year is not a pretty one. The emerging economies have by no means regained stability, and even those with committed reform measures (Brazil) are going to require the IMF's assistance.
An erosion of that support from Congress next year for reasons good (throwing the money down a Russia-sized hole) or ill-conceived (handcuffing the money to Congress' social agenda) could threaten the stability that markets have accepted over the last month.
Markets in France and the U.S. will be closed Wednesday for Veterans Day and France's Armistice Day.
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