A perilous stock market

MARK NICHOLS July 21 1986

A perilous stock market

MARK NICHOLS July 21 1986

A perilous stock market



Just one year ago shares in the financially strapped music company Ahed Corp. sold on the Toronto Stock Exchange (TSE) for only 17 cents each. But last month new controlling shareholders reorganized the company to convert Ahed into a holding company for a biotechnology firm and the stock took off. Its value soared to $32 before the TSE halted trading on June 26. After determining that no irregularities had occurred, officials allowed trading of the stock to resume last week. Ahed immediately plunged to $6 a share, before climbing back to $10.50 a share by week’s end. Some stock analysts saw the roller coaster performance of Ahed and other similar stocks as a portent. Lured by bull market fever, novice investors have ventured into the market and helped drive up the prices of highly speculative stocks—and in doing so, experts say, helped precipitate massive selling by sophisticated investors and a jarring two-day slide on North American exchanges last week.

Ahed is just one of the dozens of speculative stocks that have soared in value as little-known companies take advantage of feverish market conditions to make public share offerings that are eagerly bought up by investors. As well, there has been a proliferation of so-called “back door” entries to the stock market. Typically, the firms buy a company already listed on a stock exchange, then change that company’s line of business to suit their needs and, as a result, avoid the demands of obtaining a listing and issuing a prospectus. Some pessimistic analysts believe that the hot new entries, and the improbable heights some of them have attained, are signs of an overheated market which is likely to plunge to long-term lower levels soon. “The new issue usually generates ex-

cesses of greed at the tail end of the bull market stage,” said William Allen, president of Toronto’s Allenvest Group Ltd. “The unsophisticated investor gets sucked into this vortex,

and it finally blows itself apart.”

For a time last week, some analysts suggested that the slump was a sign of the long-awaited market “correction” they expected would wind down the four-year-old bull market. Spurred by indications of a further slowdown in the U.S. economy, prices began tumbling on the New York Stock Exchange following the July Fourth weekend, knocking 80 points off the Dow Jones industrial average in a two-day decline. By the end of the week the market posted a slight recovery of less than a full point. In Toronto the TSE composite index followed suit, declining by 94.21 points to 2,997.3 in its worst two-day slump since September, 1981, before closing the week at 3,023.3.

Market experts were divided on whether the abrupt plunge heralded the start of the bull market’s demise or was simply a burst of profit taking. “The market needed a slap,” said Joel Leff, a partner in Forstmann-Leff Associates, a New York money management firm,

“and it got it.” But others were convinced that share prices had reached unreasonable levels. The stock market jolt, predicted Allen, marked “the end of euphoria. Now, the market goes back

to levels that can be supported.”

In the meantime, there was mounting concern that unwary small investors could be seriously hurt by gambling on skyrocketing new stock issues. So far this year the traditionally speculative Vancouver Stock Exchange has registered 79 new stock issues and 100 company name changes. On the Alberta Stock Exchange, the highly speculative Edmonton resource company Audit Resources Inc., a firm that has hopes of recovering abandoned copper cables from ocean floors, soared from five cents a share in May to $7.125 last week. Even on the more conservatively run Montreal Exchange, the rage for new issues has caught on with 54 new listings approved up to the end of June, compared with just 71 in all of 1985.

On the TSE, which this year listed 54 new issues in the first six months (compared with 28 during the same period last year), spectacular performances by a handful of stocks, both



new issues and existing companies, have attracted the attention of regulators, who routinely investigate abnormal market activities. One is Cableshare Inc., a London, Ont.-based firm first listed in 1982 that is developing a home-shopping system using cable television and computers. On the strength of interest in the United States—company president Terrence Pocock said the system will be tested there next year—Cableshare’s stocks went from $6.75 a share in April to $61 in June, before settling back to the $42 range last week. “The market,” noted Ralph Shay, who supervises TSE stock listings, “is very anxious for companies that have a sexy sort of concept.”

In an effort to protect inexperienced investors, on June 6 the TSE included Cableshare in the select group of volatile stocks with special purchase requirements. By the following week Cableshare buyers were required to pay 75 per cent cash for the stock they purchased, rather than the usual 50 per cent. At the same time, the Ontario Securities Commission (OSC), which often sets the standard for securities regulation in Canada, has tightened its requirements for new listings—and is considering further changes to make company auditors more responsible for earnings forecasts.

But inevitably, some middle-income investors have lost heavily in the market frenzy. In Toronto a 32-year-old chartered accountant got into trouble in May when she tried to profit by “selling short” on Cableshare—a highly sophisticated stock market strategy that meant, in effect, she was gambling on the likelihood that Cableshare’s stock would go lower. Instead, the shares continued to trade higher, eventually producing a loss of more than $19,000. Now, she plans to sue her brokerage firm, alleging her broker gave her poor advice. Said the woman, who requested anonymity because of the pending court action: “As far as I am concerned, the money is lost. But I think it is good that people can find out these things can happen.” Brokerage firms are equally concerned. Said David Moore, vice-president and director of Toronto-based McLeod Young Weir Ltd.: “When the market is churning as it is, you have obviously got to be concerned that people are getting into things that they shouldn’t—and that they are operating from that old basic emotion, greed.” But for many inexperienced stock market players, lured by the prospect of fast-moving stocks and quick profits, danger warnings are for other people.