SPECIAL REPORT

BULLISH DESPITE THE CRASH

D'ARCY JENISH November 9 1987
SPECIAL REPORT

BULLISH DESPITE THE CRASH

D'ARCY JENISH November 9 1987

BULLISH DESPITE THE CRASH

SPECIAL REPORT

The agents at Jarvis Travel Ltd., Calgary’s largest independent travel agency, have a daily goal: to sell $95,000 worth of travel packages. But during the past two weeks, while the stock markets crashed and analysts worldwide weighed the possibilities of an economic downturn, the company averaged $3,000 per day above their goal. Said Jarvis vice-president Gloria Sully: “People are still booking trips to Hawaii.” Many Canadians were also spurning pessimistic forecasts as they shopped for new cars. Said Winnipeg Chrysler salesman Raymond Firman: “Last Saturday was probably the strongest day we have had in a year.” Indeed, an exclusive Maclean ’s/Decima Research Ltd. national survey of consumer intentions revealed last week that 71 per cent of Canadians had no intention of changing their spending patterns despite the gathering economic storm (page 44). “It was a surprise,” said Decima president Allan Gregg, “but for most people the stock market’s importance is more symbolic than real.”

That entrenched consumer confi-

dence seemed even more remarkable when contrasted with the turmoil that rocked the world’s financial system again last week. Share prices on major stock markets continued to gyrate wildly while the U.S. dollar skidded to new lows against West German and Japanese currencies. And three leading Toronto-based brokerage firms were among dozens worldwide that faced severe losses because the British cabinet decided to go ahead with the biggest single sale of a government property in history (page 45).

Recession: Ottawa, meanwhile, moved to shore up the financial system by shifting some of its deposits in the Bank of Canada to deposits with the major Canadian chartered banks. The federal government also attempted to stabilize the stock markets by allowing publicly traded companies more latitude to purchase their own shares. But ultimately, many economists contend, the way to avoid a major recession is for consumers to keep spending, especially during the preholiday season. “Christmas is usually a big time for retailers,” said Robert Dénommé, senior economist with the Canadian Manufacturers’ As-

sociation (CMA). “If it is not, that will be the first indication that consumer confidence really was affected by the markets.”

On the stock market front, investors were looking last week for a substantial rally, or at least stability, after Black Monday’s record-breaking losses on Oct. 19 were followed by a week of shortlived gains. Instead, they got unnerving volatility. The bellwether Dow Jones index of leading share issues on the New York Stock Exchange slumped 156 points last Monday—a loss surpassed only by the 508-point drop a week earlier. Stock indexes in Toronto, Tokyo and London also fell last Monday. But on the following day all four markets rebounded. By Wednesday the major indexes had changed only marginally, but then the U.S. dollar began to tumble, triggering new concerns about a broad economic collapse (page 46). Still, indexes for all four markets were up sharply on Friday, with the Dow Jones posting a 55point gain to close at 1993.53.

At the same time, the turbulent markets were playing havoc with Ottawa’s own privatization plans. A group of Toronto-based brokers led by Wood Gundy

Inc. and Dominion Securities Inc. agreed on Oct. 8 to buy the government’s final 7.5 million shares in the Canada Development Corp. (CDC), a holding company with interests in oil and gas, petrochemicals and hightechnology products. The shares were priced at $13.75 each, making the total issue worth close to $103 million. Under the agreement, the brokers made their final payments to the government by last Tuesday, Oct. 27. But on that day, previously issued CDC shares finished trading on the Toronto Stock Exchange (TSE) at just $9.62. That meant that the brokers, along with any investors who had agreed to purchase CDC shares from the brokers, were faced with losses totalling almost $31 million.

Over the past two weeks Finance Minister Michael Wilson’s office received detailed reports every hour from the Bank of Canada on developments in the stock and bond markets as well as exchange-rate fluctuations. The federal government’s shifting of deposits to the chartered banks, in turn, gave those banks the base on which to expand their loans, thereby placing downward pressure on interest rates and improving the climate for investment. Between

Oct. 16 and Oct. 21, at the height of the stock market upheavals, the government moved an extra $1 billion into the chartered banks.

On the other hand, Canada Savings Bonds (CSBs) went on sale last week, and amid the uncertainty in the stock markets they clearly appealed to Canadians looking for safe investments. Anticipating a stampede to buy the government bonds—offering an attractive nine-per-cent interest in a year—Wilson set the maximum purchase limit at $20,000 per individual, instead of the usual $75,000. But as Canadians lined up at banks across the country to buy bonds, Wilson announced that sales were so brisk that they would be cut off last Friday.

In another response to exceptionally hectic conditions, Consumer and Corporate Affairs Minister Harvie Andre temporarily suspended a rule requiring federally incorporated companies to give 10 days’ notice if they intend to purchase their own shares. After the traumatic share-price shocks of Black Monday, about 50 companies announced buyback plans. The rule suspension allowed them to move quickly to acquire their own stock cheaply, at the same time shoring up the share prices if the market continued to slump.

Collapse: But according to some observers, Ottawa’s efforts will not restore investor confidence in the markets. Toronto investment counsellor Andrew Sarlos said that unless Ottawa and Washington cut government spending and increase their revenues, the North American economy could slide into a long, deep recession. He

predicted that if they failed to act, the collapse of stock prices would be followed by a further weakening of the U.S. dollar. And that, he added, could result in a return to higher interest rates if the Reagan administration moved to protect the dollar. But any upward pressure on interest rates, said Sarlos, would discourage business and consumer spending.

Destroy: Still, others argued that the economy will remain healthy if North American consumers can maintain a positive, bullish outlook. But the CMA’s Dénommé said that that might be difficult. Despite initial optimism, another week of uncertainty in the markets could destroy consumer confidence, he said. That could severely affect retail sales, which in turn could mean manufacturing layoffs by January, said Dénommé. And if manufacturers start laying off, he added, “it would start a real recession rolling.”

Still, even if the Canadian economy were to go into a tailspin, most Canadian manufacturing and natural resource companies would be much better prepared than they were for the recession of 1981 and 1982, said Denommé. Indeed, senior executives of several large companies that cancelled share offerings following Black Monday said that losing the additional capital would not hurt their operations. “It will not affect our committed projects,” said Derek Speirs, a vice-president of Montreal-based Domtar Inc., which pulled back a $96-million issue of common shares. Similarly, Alan Smith, president of Calgary-based Consolidated Brinco Ltd., said that his company, an oil and gas producer, has cash reserves of about $15 million but no bank debt. The cancellation of a $40-million public offering will mean slower growth, but it will not affect current drilling programs, said Smith.

Bloodshed: But while the manufacturing and resource industries may be prepared for tough times, most observers say that they expect some bloodshed on Bay Street. “Everybody has had their turn,” said Timothy Miller, president of Toronto-based brokerage firm Walwyn Stodgell Cochran Murray Ltd. “The oil industry, farmers and bankers were hurt in various other business cycles. It looks like brokers are being hurt here.” And as consumer confidence generally remained high last week, there was still hope that fallout from the stock market collapse would not spread into the economy as a whole.

D'ARCY JENISH

MARY NEMETH

DOUG SMITH

MADELAINE DROHAN

MARC CLARK

JOHN DALY

RICHARD KELLY HEFT