THE DOW’S SUDDEN PLUNGE BROUGHT WARNINGS THAT ‘THIS MARKET IS VERY, VERY FRAGILE’
A SCARY REMINDER
THE DOW’S SUDDEN PLUNGE BROUGHT WARNINGS THAT ‘THIS MARKET IS VERY, VERY FRAGILE’
Even horror novelist Stephen King could not have scripted a more chilling Friday the 13th for Wall Street. In the final hour of trading on the New York Stock Exchange, the bellwether Dow Jones industrial average crashed by more than 170 points, bringing the total loss for the day to 190.58 points, the second-worst one-day point drop in trading history. As investors dumped their stocks and analysts searched frantically for explanations, a picture gradually emerged of a market shaken specifically by the collapse of financing arrangements for the proposed purchase of the parent company of United Airlines Inc. and, in general, nervous about other debt-financed takeovers as well. On Bay Street, too, the market fell dramatically—by 141.60 points—largely in response to the New York City crash. In both cities, with the New York exchange value down 6.9 per cent and Toronto’s down by just more than half that amount, it was the worst market meltdown since Black Monday—Oct. 19, 1987.
Said Victor Sperandeo, chief trader at Rand Management Corp. in New York: “The sell-off had panic written all over it.”
The collapse came virtually without warning. Only days before, on Monday, Oct. 9, the Dow Jones had hit 2791.41, its highest level in history. Yet concern had been growing that the orgy of leveraged buy-outs and major acquisi-
tions, which had been driving up share prices for the past two years, was finally nearing an end. And last Friday’s news, that the management-led group that wants to take over UAL Corp., the parent of United Airlines, could not raise the $8 billion it needed for the massive takeover, sent investors stampeding out of the stock markets to seek shelter in bonds and in safe, interest-yielding investments. Nervous investors and Wall Street experts alike entered the weekend reminded of the nightmare of 1987, when a 108-point drop on Friday, Oct.16 preceeded a 508-point drop on the Dow Jones the following Monday. Said New York analyst Irwin Kellner: “Memories of 1987 are pretty sharp in people’s minds.”
Many economists and analysts moved quickly to try to quell the panic by stressing the differences, rather than the similarities, of two years ago, arguing that the market is in far better condition now. George Chisholm, president of Toronto-based stockbroker Hector M. Chisholm and Co. Ltd., said that stock-price
levels remain significantly lower compared with corporate earnings than they were in 1987. And he added that new market regulations prompted by the 1987 crash, such as the automatic suspension of computer-driven program selling after a 50-point drop in the Dow Jones, reduce the risk of another collapse. Other analysts said that the market cave-in provides new opportunities to buy undervalued stocks. “If you sold after the crash two years ago, you made the wrong move,” said Donald Johnson, president of Toronto brokerage house Burns Fry Ltd. He added, “The same thing applies this time.”
Last week’s collapse happened with startling speed. As news spread that the proposed $354per-share leveraged buy-out bid for United Airlines had fallen apart, the New York exchange was flooded with sell orders from arbitragers—traders who try to capitalize on takeovers. In Chicago’s options markets, worried traders began selling futures contracts, creating a whiplash effect on stock prices in New York. The damage, though, was already spreading—first among airline stocks, especially potential takeover candidates; then to other takeover candidates and to banks in-
volved in takeover financing. In Canada, meanwhile, the Toronto Stock Exchange plummeted to its fourth-worst trading day in history.
In New York, David Jones, an economist with Aubrey G. Lanston & Co. Inc., a major government-bond dealer, predicted that the U.S. Federal Reserve Board would stabilize the markets by increasing the money supply. That, he said, would put downward pressure on interest rates and make stocks more attractive. In fact, U.S. authorities declined to respond to Friday’s plunge. President George Bush, Federal Reserve Board chairman Alan
Greenspan and treasury secretary Nicholas Brady all initially had “no comment” when asked if they would intervene.
Still, even prompt action by the Federal Reserve may fail to halt a further stock-market fall. Pessimistic analysts say that now, as in 1987, several adverse financial and economic developments have combined to rattle investors’ confidence. For one thing, they say that the return of higher inflation makes it tougher for the Federal Reserve Board to ease interest rates. At the same time, corporate profits have been disappointing, and these analysts caution that U.S. business expansion is unlikely to continue much longer. Said Rand’s Sperandeo: “This market is very, very fragile.”
Another factor that may further cool the market is the weakness in junk bonds, which were virtually unsellable during their own parallel collapse last Friday. The bonds, which offer high rates of return to investors—but also carry high risks—went into a tailspin last month following the massive refinancing problems at Toronto-based Campeau Corp. Financier Robert Campeau had used more than $850 million worth of junk bonds to acquire his U.S.based department-store empire over the past 2V2 years, but these bonds are now worth only about one-half to one-quarter of their original value.
In fact, declining confidence in the high-risk bonds, as well as the glut of new issues, has already taken its toll. About $9.8 billion in new junk-bond issues to finance takeovers and restructurings have been filed with the U.S. Securities and. Exchange Commission, and another $7 billion in new issues is planned. And last Wednesday, a subsidiary of Ramada Inc., a hotel and casino operator based in Phoenix, Ariz., withdrew a $472-million junk-bond issue because of lack of interest from investors. The apparent failure of the United Airlines takeover attempt on Friday was yet another sign of weakness in this risky market. Concluded analyst Kellner: “The socalled junk-bond market has been in trouble for several weeks—and this is the straw that broke the camel’s back.”
Without that once seemingly limitless pool of capital, the takeover wave may have had its death rattle as of last Friday. As a result, Wall and Bay streets could be in for a fall and winter season in which stock-market bears decide not to hibernate, but instead forage among the wreckage of debt-laden U.S. corporations.
JOHN DeMONT with PATRICIA CHISHOLM and JOHN DALY in Toronto and LENNY GLYNN in New York
OTTAWA SAYS NO
The federal government has told a French company seeking to buy Connaught BioSciences Inc. of Toronto that its bid for the vaccine producer is unacceptable. Federal Industry Minister Harvie Andre said that the government wants to be sure that the proposed acquisition by Institut Mérieux SA will be a benefit to Canada. The company has 30 days to make a revised submission to Investment Canada, the federal agency that reviews all foreign takeovers.
CINEPLEX SALE IMMINENT
The board of directors of Cineplex Odeon Corp. postponed a meeting to consider takeover bids, among them a bid by founder and chairman Garth Drabinsky and vice-chairman Myron Gottlieb. Company officials have promised an imminent decision on the possible sale of the Toronto-based film distributor and international movie-theatre chain owner.
THE COST OF GAINERS
The bailout of Edmonton millionaire Peter Pocklington’s money-losing meatpacking company, Gainer’s Inc., will cost the Alberta government about $100 million, according to Alberta Treasurer Dick Johnston. According to Johnston, a buyout by employees is being considered, once the company has returned to profitability.
SALES TAX PROTESTS MOUNT
More than 3,000 people gathered in a Red Deer, Alta., auditorium to protest the proposed nine-per-cent Goods and Services Tax. Lawyer and rally organizer Donald Petersen said that the tax should be “killed for the good of Canada.”
LAYOFFS AT DOMTAR
Struggling Domtar Inc. said that it will cut 500 management jobs at its Toronto and Montreal offices. Owned by the government of Quebec, the forest products company announced last spring that it would cut costs by selling off its energy and chemicals divisions and would concentrate on pulp and paper, packaging and construction.
NEW HONG KONG AIRPORT
A massive new airport and seaport complex will be built in Hong Kong. Gov. Sir David Wilson said that the airport will be completed in 1997, the year the British colony reverts to Chinese control. Government officials said that the complex, which will cost $19 billion, is the largest civil-engineering project in modern history.
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