Weekly Wrap-Up Decemebr 3 - 6, 1996

Closing Numbers

The markets were jittery this week, as a host of numbers came out which had inflationary implications. Comments by Federal Reserve Board Chairman, Alan Greenspan, pointing to the financial markets' "irrational exuberance", referring to a potential speculative bubble in stocks, nailed the coffin closed on the weeks trading.

After a good start on Monday, markets on both sides of the border were hurt by a host of issues for the rest of the week. The bond markets early gains on inflation friendly news Tuesday, were erased later in the session as the $US lost value against the Japanese yen. Rumours around the street indicated that the major Japanese institutional accounts would not be as active in the North American debt markets as they had in the past. This combined with concerns over new supply ($CDN 3.0 Billion Gov't of Canada 2Yr Bonds coming on Wednesday, IBM $US 850 Million 100 Yr Bonds), a realization that a recession is not lurking around the corner, and the ever important Non-Farm Payrolls number being released Friday in the US, all contributed to the decline.

Technology stocks in New York, and gold stocks in Toronto lead the broader market lower. For the technical analysts, the Transport Sector of the Dow made a new high. If this occurs at a time when the DJIA has recently set a new high, then a continuing bull market is indicated.

Wednesday saw the bond markets beat up again. Weakness in the US bond market gave investors with as good a reason as any to start realizing profits for year end. The $CDN was getting hit hard, causing both overseas and US investors to book profits and exit the Canadian market. The Canadian government came to market with $CDN 3.0 Billion 2Yr bonds, dated March 1999, carrying a 4% coupon.. The issue was received with an incredibly average 2.2 times coverage. This means 2.2 bids were received for every bond available at auction.

Issues dominating the street were the Fed FOMC meeting Dec 17, and the potential reaction by the Bank of Canada. Are we in North America at the bottom of the interest rate cycle? Additionally, for the technical traders, several key technical levels were violated in the US market exacerbating the sell-off.

With concern about inflation raising again, the stock market in Toronto was buoyed by a rally in the gold market. This increases in bullion was not enough to keep the overall market above water. Many market commentators have indicated that a sell-off such as we are seeing at present is necessary and healthy for the markets, particularly after such a strong advance. Technicians point to the fact that the extreme bullish sentiment held by many traders has also contributed to the correction. When too may people think in the same manner, for example the market will continue to rally, when the sentiment changes it can change in a hurry as everyone rushes to book profits at the same time. Group-think is dangerous in any market.

Thursday saw the carnage in the bond markets continue. Both the $CDN and $US were battered on the currency markets, which precipitated the decline in the bond markets. A weaker $US/Yen helped start the slide in the US. Adding to this was traders anticipating an inflationary number from the US Non Farm Payrolls number to be released Friday. Inflationary indicators are negative to the bond markets. Inflationary concerns were raised by the release of non-farm productivity figures which showed a decline of 0.3% and real wages increased by 1.1% (the eighth consecutive quarterly rise). The Canadian market was in free fall, spurred by the US market and added to by $CDN currency problems. The Bank of Canada was in the market aggressively defending the currency. Rumours of hedge funds liquidating their positions added to the Canadian market decline. All this added to the recent increase in supply, with $1.75 Billion in corporate debt and $CDN 3.0 Billion in government debt this week and $1.1 Billion in corporate and government issues last week. The street was awash in bonds.

The DJIA managed a small gain on the oil & natural gas stocks, as a potential oil workers strike looms in France. However, the broader market retreated again. Toronto was dragged down by the bond market as the banking sector, which is interest rate sensitive, was hit hard.

After the markets closed Thursday afternoon, Alan Greenspan, Chairman of the Federal Reserve Board had a speaking engagement. With one phrase Mr. Greenspan sent traders in Tokyo and London rushing sell orders to their respective trading floors. The "irrational exuberance" which the market is experiencing, with respect to equity prices, could be considered a speculative bubble. We all learned our lesson from the real estate markets of the late 80's and early 90's, as did the Japanese with the correction their market underwent when the paper profits of the large conglomerates collapsed. Was Mr. Greenspan trying to ward off such a situation in North America? Given the activity overnight Thursday, and Friday's regular trading session, his comments certainly took some of the wind out of the markets sails.

Friday opened with a thump, as the market fell out of bed. Help me, I've fallen and I can't get up. Added to the overnight activity, coupon payments of $4.4billion made last week were reportedly not reinvested in the market, but rather repatriated. Mr. Greenspan's comments, profit taking, seasonal weakness in the $CDN, concerns that the Bank of Canada may have to raise interest rates to defend the dollar, and new supply all contributed to the weakness in the market. It is certain, with the $CDN weakening to such an extent, that the Bank of Canada will not be easing in the near future. Fundamentals demand another look at the raising of rates.

The stock markets in North America were unable to climb out from under the yoke placed on market sentiment by the bond market. The DJIA lost 2.14% and the TSE lost 3.49% on the week. Let's hope that the market can shake off some of the volatility it displayed last week.

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