Investors Looking North Watch Nortel Shares Go South
Canada’s stock market had been the world’s biggest star for much of this year. But the plunge in Nortel Networks shares Wednesday showed the dark side of buying into that market.
Nortel, which late Tuesday reported slower-than-expected revenue growth in its fiber-optics business, lost nearly 30% of its market value Wednesday.
And because Nortel had accounted for just under one-third of the Toronto Stock Exchange 300 index’s total value, the plunge wreaked havoc with the Canadian market.
The Toronto index plummeted 840.26 points, or 8.1%, to 9,511.84, its biggest one-day fall since the October 1987 market crash.
What’s more, the Toronto exchange was forced to halt trading in Nortel at 11:58 a.m. EDT while it struggled to match orders. Trading didn’t resume.
By contrast, Nortel’s U.S. shares (ticker symbol: NT) traded all day. They fell $18.44 to $44.88 on volume of 95 million shares.
Before Wednesday’s decline Nortel could take much of the credit for making investing in Canada look like a smart move. The stock had risen 25% year to date through Tuesday, after almost quadrupling last year.
Nortel’s gain helped make the Toronto 300 index the best-performing major equity index this year, with a 23% gain through Tuesday.
At Wednesday’s close that gain had been cut to 13.1%.
But the Toronto exchange’s trading system is prone to seizing up when confronted with spikes in the number of shares changing hands, traders said.
The troubles aren’t new. Technical problems caused by record-breaking trading volume forced the exchange to stop trading in Bre-X Minerals Ltd. shares for an hour on May 6, 1997, the day after an audit refuted the company’s claim that it had found the world’s largest gold deposit.
“This is embarrassing,” said Peter Schendel, a money manager at Strathy Investment Management in Toronto. “It’s pathetic that we can’t trade the largest stock on our exchange and have to go to the New York Stock Exchange.”
For the Canadian economy, the risk is that Nortel’s crash will make a lot of Canadian investors feel poorer, curtailing spending.
“If it damages psychology, it could have some effects on real behavior,” said John Johnston, economist at RBC Dominion Securities in Toronto.
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Yo, Canada!
The Toronto stock market still is one of the world’s best performers year-to-date, but its gain was pared dramatically with Wednesday’s plunge.
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Weekly closes and latest for the Toronto market’s 300-share index
Wednesday: 9,511.84
Source: Bloomberg News
