CANADIAN MARKET WRAP / Day Ending Monday 12/21/98
Toronto Market Rally Sag's As Resources Fizzle Once Again
Share prices in New York and Toronto closed higher Monday as technology shares extended gains and investors shrugged off U.S. President Bill Clinton's impeachment.
The Dow Jones industrial average, at one point up 175 points, closed with a gain of 85.22 at 8,988.85. That left the Dow 4.1 per cent below the record 9,374.27 reached Nov. 23, but still up 13.7 per cent from where it began 1998. The technology-rich Nasdaq composite index and the Standard & Poor's 500-stock index both climbed to new highs.
A Christmas rally lifted New York stocks on Monday but in Canada weak resources played the Grinch, forcing the key index in Toronto to give back earlier gains and close mixed. The TSE 300 composite index shot up 1.0% in morning trading -- led by bank and technology stocks -- but gave back those early gains to close 27.77 points, or 0.4% higher at 6,381.09. Decliners led advancers 551 to 488, with 297 issues unchanged. Trading was brisk on Monday with 127 million shares worth $1.9 billion changing hands. There were 25 issues reaching new highs while 59 met new lows.
Investors pushed up share values of the big banks and companies such as BCE Inc. and Northern Telecom that promise stronger profits even though the economy is slowing.
Earlier Monday, Statistics Canada reported that motor vehicle sales sputtered in October, pushing retail sales overall down 1.7 per cent from September, to $20.6 billion. Retailers registered a 2.5 per cent year-to-year increase, the lowest level since August 1996.
"Today's retail sales report points unequivocally to a slower pace of consumer spending in the fourth quarter," TD Bank economist Beata Caranci said in a report. "Even a substantial rebound in retail spending in November and December will leave retail sales little changed in the fourth quarter from this year's third-quarter report."
All but four of Toronto's 14 subindexes tracked upward, led by the merchandising sector, which added 1.8%, followed by financial services 1.5%, real estate 1.5%, utilities 1.3%, conglomerates 0.8%, consumer products 0.7%, communications/media 0.7%, transportation/environment 0.5% and pipelines 0.4%. Industrial products just managed to eek out a gain, but was basically unchanged.
The biggest losses came in the oil and gas group, which fell 2.0%, followed by the gold and precious minerals sector, down 1.7%, paper/ forest products, off 1.3% and metals/minerals down 0.4%.
"The resources weighed on Toronto again," said Rick Hutcheon, head of CentrePost Mutual Funds. "The cyclical side of the TSE just can't get going ... it's a huge millstone around the neck of the TSE."
Among active stocks, Northern Telecom Ltd., Canada's largest telecommunications equipment maker, rose 30 cents to $73.80 over investor optimism the company will profit as demand for the Internet increases. Nortel is focusing much of its research and development on high-speed Internet products.
BCE, which owns 42 per cent of Nortel, closed $1.20 higher to $55.15. Telecommunications equipment company Newbridge Networks Corp. jumped $2.55 to $44.60.
Financial services stocks also gained ground as investors bought up shares of the big banks a week after Finance Minister Paul Martin rejected the proposed mergers of four of the five biggest banks.
Royal Bank stock rose $1.65 to $74.75, Bank of Montreal gained 25 cents to $62.10, CIBC rose $1 to $38 and TD Bank 20 cents to $51.15. Scotiabank gained five cents to $34.80.
Among industrials on the TSE, Sun Media lost $0.85 to close at $20.95.
Monday's hot news was that publisher Torstar Corp. had dropped its hostile takeover bid for newspaper group but made a deal to buy four of the chain's daily papers from the Sun's victorious suitor, Quebecor Inc. Torstar's class B shares rose C$1.60 or 9.5 percent to C$18.50.
High technology issues followed their southern brethren upward. Open Text Corp. surged C$4.15, or more than 12 percent higher, to C$38. Newbridge Networks Corp. rose C$2.55 or 6 percent to C$44.60.
Meanwhile, Ballard Power Systems Inc. fell $4 to $44 after published reports that buses featuring Ballard's low-pollution fuel cells were returned by the Chicago Transit Authority after the prototypes began having technical problems.
The oil and gas composite index fell 93.36 to 4611.15. Among the sub-components, the intregrated oils fell 0.9% or 62.78 to 7167.91. The oil & gas producers was down 2.4% or 100.30 to 4023.90 while the oil & gas services group fell 3.0% or 39.60 to 1293.35.
Listed among the top 50 most active traded issues were Canadian Hunter Exploration -$0.05 to $9.50, Gulf Canada Resources -$0.32 to $3.58, Remington Energy -$0.10 to $5.40, Petro-Canada -$0.20 to $16.65, Canadian Natural Resources -$0.20 to $23.00 and Ranger Oil -$0.50 to $6.45.
There weren't and oil related issues listed among the top net gainers yesterday.
However, there were many companies listed among the top net losers and they included Dreco Energy Services down $1.15 to $15.25, Renaissaqnce Energy $1.10 to $18.00, Enerflex Systems $1.00 to $27.75, Marathon Oil $1.00 to $41.00, Computalog $$0.80 to $6.15, Penn West Petroleum $0.80 to $16.05, Talisman Energy $0.80 to $26.50, Canadian Occidental Petroleum $0.70 to $17.05, Suncor $0.65 to $45.10, Barrington Petroleum $0.55 to $3.15, Denbury Resources $0.50 to $6.25, Rio Alto Exploration $0.50 to $14.50, Ranger Oil $0.50 to $6.45, Seven Seas Petroleum (U) $0.50 to $5.50 and Ensign Resource Services $0.45 to $13.10.
Among top percentage gainers were Bonus Resource Services, Plains Energy Services, Thunder Energy, Cypress Energy, Crown Joule Exploration and Place Resources.
Percentage losers included Barrington Petroleum, Lundin Oil AB, Computalog, Fracmaster, NQL Drilling, Ultra Petroleum, Courage Energy, Seven Seas Petroleum (u), Gulf Canada Resources, Ryan Energy Technologies, Gulfstream Resources, Upton Resources, Pursuit Resources, Denbury Resources, Trican Well Service, Pacalta Resources, Ranger Oil, Dreco Energy Services and Stellarton Energy.
Among mines, Kinross Gold fell $0.13 to $3.58, Barrick Gold $0.70 to $29.40, Franco-Nevada $0.40 to $30.15.
The Montreal Stock Exchange's portfolio index rose 9.79 to 3315.20 on heavy volume of 20.3 million shares valued at $240.9 million. Advancing issues outnumbered declining issues 205 to 191 with another 85 remaining unchanged. There were 17 new highs versus 20 new lows.
Gulf Canada Resources -$0.34 to $3.57 was the only oil and gas issue listed among the top 25 most active traded stocks.
There were no top net gainers. Losers included Renaissance Energy $1.00 to $18.05, Canadian Occidental Petroleum $0.60 to $17.20, Fracmaster $0.56 to $2.84, Ranger Oil $0.50 to $6.50, Talisman Energy $0.50to $26.50 and Crestar Energy $0.40 to $12.70.
The Vancouver Stock Exchange composite indicator fell 6.26 to 377.37 and the mining indicator dropped 5.52 to 283.59. Trading was deemed moderate with 21.9 million shares exchanging hands worth $9.7 million. New highs amounted to 2 and there were 36 issues meeting new lows.
Among the most active trade issues were Equatorial Energy +$0.07 to $0.46, Ultra Petroleum -$0.15 to $1.14, Adda Resources -$0.06 to $0.25, Ridgeway Petroleum +$0.11 to $1.02 and Benz Energy -$0.01 to $0.39.
Top net gainersw included Ridgeway Petroleum up $0.11 to $1.02, Big Horn Resources $0.10 to $0.70, Equatorial Energy $0.07 to $0.46 and Trimark Oil & Gas $0.06 to $0.54.
Net losers included Hilton Petroleum $0.30 to $2.30, Energas Resources $0.19 to $0.30, Ultra Petroleum $0.15 to $1.14, Maxy Oil & Gas $0.10 to $1.70 and GNP Oil & Gas $0.10 to $0.20.
The Alberta Stock Exchange's combined value index fell 21.63 to 1662.97. Declining issues outnumbered advancing stocks 204 to 117 with 171 remaining unchanged.
Among the top 25 most active traded issues were HEGCO Canada -$0.05 to $0.55, Gopher Oil & Gas -$0.01 to $0.80, First Star Energy +$0.05 to $0.32, Anvil Resources unchanged at $0.42, Cigar Oil & Gas +$0.07 to $0.33, Scarlet Exploration unchanged at $0.40, Key West Energy -$0.11 to $0.67 and Storm Energy -$0.02 to $0.43.
Top net gainers included Serval Intergrated, up $0.50 to $3.25, Doreal Energy $0.10 to $1.20, Maxwell Oil & Gas $0.10 to $0.80, Telford Resources $0.10 to $0.60, Cigar Oil & Gas $0.07 to $0.33 and Slade Energy $0.07 to $0.34.
Net losers included Belfast Petroleum $0.35 to $1.20, Hyduke Capital $0.19 to $0.70, Key West Energy $0.11 to $0.67, Kintail Energy $0.75, Proprietary Energy $0.10 to $3.30, Crispin Energy $0.09 to $0.05 and Devlan Exploration $0.09 to $0.11.
Bonds pulled lower by U.S. drop, trade thin
Canadian government bonds ended weaker in a thin pre-holiday session on Monday in line with sharp drops in U.S. treasuries.
U.S. bond prices sank fast as U.S stock prices gained sharply, prompting a fund shift to equities. Canadian stock prices maintained only mild gains.
Overnight, the U.S. dollar and bond prices came under downward pressure after weekend news that U.S. President Bill Clinton had been impeached, causing jitters that he could be removed from office after an upcoming trial in the Senate. That fear has now been alleviated to some extent.
Canada's benchmark 30-year bond due June 1, 2027 was off the day's low, falling C$0.54 to C$141.12 and pushing up the yield to 5.211 percent.
The U.S. 30-year bond fell 1-3/32 to yield 5.068 percent. The Canada-U.S. spread narrowed to 14 basis points from 17 points at the previous close, meaning the price drop (yield rise) in Canada was slower than in the U.S. market.
The International Monetary Fund urged Canada to ease monetary policy further if the economic outlook worsens, while economists are calling for fiscal measures in the form of tax cuts for households and businesses next year.
Last week, safe-haven buying of North American bonds faded quickly despite the U.S.-led bombings of Iraq. General uncertainty over global economies remains, however. Japanese leaders are pondering what new cabinet lineup will benefit which camp as old foes forge a coalition. Brazil's president will announce a new cabinet for his second term in office on Wednesday.
The money market was little changed.
Canada's three-month when-issued T-bill yielded 4.67 percent, unchanged from the previous close.
Canada's fortnightly auction of T-bills totaling C$6.2 billion on Tuesday was overhanging the market as buyers will be usually sidelined in thin year-end trading.
In 1998, The Big Got Bigger
My, how the mighty have merged. Whether it was Exxon and Mobil, Chrysler and Daimler-Benz or NationsBank and BankAmerica, 1998 will be remembered as the year the biggest of the big got even bigger.
And the mega-merger trend will continue, say experts, who cite low interest rates, strong capital markets and the new global economy as just some of the catalysts for an international, cross-industry consolidation trend that many expect to spill over into the new millennium.
"Three or four years ago, I don't think anyone would have been predicting the kind of activity we've seen over the last four years," said Grant Hughes, an associate with Crosbie & Co. Inc., a Toronto investment banking firm that specializes in mergers and acquisitions.
"As long as the financing is available, the economy is strong and these industries continue to go through strategic change, those will be the driving factors."
Canadian companies put together 1,052 merger deals worth $139 billion in the first 11 months of 1998, compared with 1,181 deals worth about $95 billion in all of 1997, the firm reports.
In 1988, the last time there was a significant merger boom, a similar number of deals were forged but the total worth was less than $30 billion.
"If we were to see another significant market (drop) and people got worried, then you'd see things slow down," said Hughes. "As it is now, we really can't predict how long this level of activity will go on for."
It was such a big year that eye-popping deals in the early going were quickly forgotten as larger and larger companies opted to join forces.
The Chrysler-Daimler deal, worth $51.5 billion Cdn and completed in November, was soon dwarfed by ever-larger alliances, most notably the granddaddy of them all: petroleum titans Mobil and Exxon weighed in at a whopping $124 billion.
The ever-changing telecommunications industry morphed in 1998 as well: there was AT & T Corp. and Tele-Communications Inc. ($69.1 billion), WorldCom Inc. and MCI Communications ($69.6 billion) and Bell Atlantic and GTE ($119.3 billion).
"Businesses are now genetically engineering gorillas," said Doug McDonald, a partner and acquisitions specialist in Deloitte & Touche's corporate finance department.
"Being a small niche operation is not what people want to be anymore. They want to be big; they want to be meaningful."
Telecommunications companies also raised eyebrows in Canada, although the deals paled in comparison to U.S. blockbusters. Northern Telecom Ltd. bought California-based Bay Networks for $9.9 billion while Alberta phone company and former Bell Canada ally Telus Corp. went after its British Columbia counterpart B.C. Telecom for $4.6 billion.
Then there were the deals that didn't happen: Royal Bank and Bank of Montreal proposed a $40-billion union touted as the future of financial services in Canada; rivals Toronto-Dominion and CIBC followed suit in April with a deal worth $30 billion.
But Finance Minister Paul Martin -- reportedly still miffed at the banks for announcing deals requiring Ottawa's blessing without telling him first -- rejected the planned mergers on the grounds they were anti-competitive.
Companies are beginning to hit their heads on the ceiling when it comes to continued growth, said Michael Badham, McDonald's partner at Deloitte & Touche and also national director of corporate finance.
Mergers and acquisitions are the best way -- especially when stocks are strong and borrowing money is cheap -- to move into new growth patterns, Badham said.
"When you get to the top of an economic cycle, the prospects for good growth are lower," he said. "You soon find yourself saying, 'Gee, how are we going to get growth?'
"Well, If the pie's not going to get any bigger, then you need to get more of the pie."
It's also worth noting that while banks in the U.S. are merging at a blistering pace, they are doing so in a country that has only recently lifted restrictions on interstate banking, Badham said.
While Canada has had five large, national banks for years, the notion of a coast-to-coast bank in the U.S. was until just recently a foreign one.
"There are a lot of transactions happening in U.S. banks, but that's because there were thousands and thousands of little state banks, and they're all being gobbled up to become big players."
Some deals, are designed to rebuild value; AT & T, the former U.S. telephone monopoly, has lost half its share of the long-distance market since it was broken up by the U.S. government in 1984.
Others, like virtually every deal in the last 12 months in the oil and gas industry, are key to survival. Crude oil prices are floating at 12-year lows and aren't expected to recover for a while, leaving companies desperate to cut costs and squeeze money out of ever-thinner profit margins.
Indeed, the Mobil-Exxon deal, which will link two of the world's largest oil companies, brings together the two largest chunks of the Standard Oil trust broken apart more than 90 years ago by U.S. President Teddy Roosevelt.
But the playing field Roosevelt was trying so desperately to level was a far different one than the global arena that houses the corporate world's new gorillas, say analysts.
Despite their size, companies have much smaller chunks of the new global market than they did 20 or 30 years ago. And in a market that big, size matters.
Says McDonald: "Nobody wants to be a $10-million business anymore."
Securities watchdogs join forces to study Internet scams
Boiler-room stock hucksters and bar-room shills have moved into cyberspace to exploit the Internet's growing importance as an investment tool.
Results of an international survey released Monday by the U.S. Federal Trade Commission indicates the Internet is a wide-open arena for scam artists who prey on unsophisticated, often greedy investors looking to get rich quick.
"It is a perfect vehicle for touting stock," said Brian Butler of the Ontario Securities Commission enforcement unit.
The volume of Internet investing is growing. While there are no figures, it's estimated some 80 million people now are on-line worldwide. A private study estimated that by 2002, there would be 14 million Internet trading accounts worth $700 billion US.
"I've been advised that after pornography, investor advice is the second largest area of interest on the Internet," Butler said in a telephone interview from Toronto.
The Ontario commission and its B.C. counterpart were the two Canadian participants in Surf Day, a one-day survey of dubious financial Web sites and Usenet discussion groups on Nov. 12.
The unusual effort -- it's only been done once before -- also involved securities regulators from 30 states, two U.S. federal agencies and two U.S. associations of securities dealers.
Investigators logged on to the Net and typed in favoured phrases such as "guaranteed return," and "government approved." They found more than 400 questionable sites, marking many of them for further review.
B.C. and Ontario regulators looked into sites touting precious metals or gemstones, the latter a favourite among telemarketing fraud artists but now moving onto the Internet.
In a linked survey, the North American Securities Administrators Association analysed 1,000 unsolicited e-mail messages passed on by suspicious investors.
An analysis of eight of the stocks promoted in the e-mail found none had reached predicted price levels and six were trading below their recommended purchase prices.
Projections were so bullish, the association found, that stock prices would have had to quadruple to meet price targets. The stocks fluctuated more than 20 per cent in a single day.
Gloomy Outlook For Forest Industry
Profit Squeeze: Overcapacity to continue to hurt producers
By GARRY MARR - The Financial Post
Profitability for pulp and paper producers is likely to be squeezed into the next century, according to a report by accounting firm PricewaterhouseCoopers.
"Further profitability gains in 1999 and beyond are likely to be constrained by a slowing North American economy and enduring excess production capacity," the report says.
In its first complete review of the forestry industry, Pricewaterhouse looked at the performance of the world's 100 largest publicly traded forest and paper companies in fiscal 1997.
"With G7 nations posting average economic growth of 2.7% last year, 1997 should have been a year of recovery for the forest and paper product sector," said Mike MacCallum of Pricewaterhouse.
But a combination of excess capacity and the collapse of Asian markets in the fourth quarter led to "one of the industry's worst performances in recent history."
The Toronto Stock Exchange paper and forest products subindex has tumbled more than 14% so far this year, compared with a loss of 4% by the benchmark Toronto Stock Exchange 300 composite index.
The forest products subgroup fell 46.7 points, or 1.3%, to close at 3437.89 yesterday.
The report blamed most of the slide on low commodity prices because of overcapacity.
While worldwide demand for most forest and paper products increased, languishing prices led to a decline in total sales of the top 100 firms -- from $284-billion (all figures in U.S. dollars) in 1996 to $277-billion in 1997.
Net income dropped a staggering 60% from $10-billion to $4-billion.
More than 20 of the world's top 100 forestry companies reported net losses, compared with 13 in 1996.
Reid Carter, a Vancouver-based analyst at First Marathon Securities Ltd., said the gloomy picture painted by Pricewaterhouse is an "objective view" of the depressed state of the worldwide forest industry.
However, he said some analysts were "encouraged by the lack of new capacity coming on line in 1998 through probably 2000 or 2001," which could help lift prices.
The Pricewaterhouse report said new capacity in Asia is being delayed by economic crisis in the region, which has halted many expansion projects by an average of two years.
Still, Mr. Carter does not believe the report will have a significant impact on the depressed stocks in the forestry sector.
"It's hard to garner investor enthusiasm in the sector already," he said.
"I think the pessimism is fully built into the stocks."
Morning Update
Toronto stocks open higher in mixed trading
Toronto stocks were set to open flat to slightly firmer on Tuesday, mirroring New York's performance.
"I guess I think we will probably do a little better today," said Rick Hutcheon, president and chief investment officer of CentrePost Mutual Funds.
The policy-making Federal Open Market Committee meeting that starts at 0900 EST/1400 GMT was expected to leave U.S. interest rates untouched.
North American markets also appear entirely indifferent to the plight of U.S. President Clinton and the possibility of his impeachment trial in the Senate.
Oil prices recovered slightly but stayed soft and gold was slightly weaker.
On Monday, the Toronto Stock Exchange's bellwether 300 Composite Index gained 27.77 or 0.4 percent to 6381.09 points. But declining issues topped advancing ones 551 to 488, creating mixed results. Another 297 finished unchanged.
The Dow Jones Industrial Average rose 85.22 points or nearly 1 percent to 8988.85.
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