This Week in Paper by Joe Masters (MF Master) Charleston, SC (Feb 15, 1997) -- Hello young lovers, wherever you are. Young or old, it's hard not to love this market... unless you're a fanatic short seller. With gains of 1.94% on the Dow and 2.40% in the S&P500 this week we managed to cross the 7000 and 800 barriers, respectively. Incredible! Nearly as incredible was the 2.01% gain in our Paper/Forest index this week. Of our 20 stocks, there were 14 advancers, 4 declines and 1 unchanged. Heading up the gainers were Bowater <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BOW, up 4.01%)") else Response.Write("(NYSE:BOW, up 4.01%)") end if %>, Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KMB, gaining 3.96%)") else Response.Write("(NYSE:KMB, gaining 3.96%)") end if %>, Weyerhaeuser <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WY, adding 2.99%)") else Response.Write("(NYSE:WY, adding 2.99%)") end if %> and Westvaco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:W, up 2.60%)") else Response.Write("(NYSE:W, up 2.60%)") end if %>. Bowater's move this week is probably related to the recent merger between Abitibi-Price and Stone-Consolidated since they are all in the same segment (i.e., newsprint). The major casualty this week was Fort Howard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:FORT, dropping 7.85%)") else Response.Write("(Nasdaq:FORT, dropping 7.85%)") end if %>. No reason for this, which I could determine, other than possibly some "profit taking". Also down were Stone Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO, off 2.86%)") else Response.Write("(NYSE:STO, off 2.86%)") end if %> and James River <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JR, declining 1.95%)") else Response.Write("(NYSE:JR, declining 1.95%)") end if %>. News You Can Use: On Monday, Suomen Optioporssi, a Finnish options exchange, put the value of northern bleached softwood pulp at $549.79 per ton, down from $553.90 last week. Also Monday, Stone Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %> reported a 1996 fourth quarter loss of $86.4 million or $0.89 a share compared with profits of $79.7 million or $0.73 in the year earlier quarter. For all of 1996, Stone reported a loss of $126.2 million or $1.35 compared with a profit of $255.5 million or $2.24. In addition on Monday, Goldman Sachs downgraded Swedish forestry groups Stora (STORa.ST), MoDo (MODOb.ST) and Rottneros (RROS.ST) to "market underperformer" from "market outperformer." The bank has kept Swedish forestry group SCA (SCAb.ST) at "market outperformer." On Tuesday, Finnish forest industry group UPM-Kymmene Oy (UPM1V.HE) said it would raise prices of lightweight coated (LWC) paper by 5-8 percent during the first quarter. "The pressure for price increases is especially strong in continental Europe. In January, demand has been better than anticipated and the customer stocks are lower than ususal," the company stated. UPM-Kymmene expects the demand situation to continue like this and to further improve towards the spring. UPM-Kymmene is the world's leading manufacturer of coated magazine paper with an annual capacity of 1.8 million tons. Also Tuesday, Merrill Lynch analyst Sherman Chao on Tuesday reiterated a rating of accumulate for the intermediate term on Stone Container Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %>. His estimates are for a loss of $1.75 a share for 1997 and profit of $1.25 a share in 1998. In addition on Tuesday, Wausau Paper Mills Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:WSAU)") else Response.Write("(Nasdaq:WSAU)") end if %> signed a letter of intent to acquire Rexam Inc.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:REXMY)") else Response.Write("(Nasdaq:REXMY)") end if %> Otis Specialty Papers unit for $58 million. Otis is capable of producing up to 70,000 tons a year of technical specialty papers which would increase Wausau's technical paper capacity by more than 40%. The acquisition is expected to close within 60 days. More on Tuesday: American Pad & Paper Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AGP)") else Response.Write("(NYSE:AGP)") end if %> said it completed the acquisition of Shade-Allied Inc. of Green Bay, Wis., for $49.5 million. Shade-Allied, a machine paper maker, had sales of about $90 million in 1996. And on Tuesday, Weyerhaeuser Co <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WY)") else Response.Write("(NYSE:WY)") end if %> said it had reached an agreement to sell its Weyerhaeuser Mortgage Co subsidiary to WMC Acquisition Co., an entity formed by Apollo Management L.P. and Spring Mountain Escrow Inc. Finally on Tuesday, MacMillan Bloedel reported a loss of C$72 million ($53 million) in the fourth quarter ended Dec. 31, which included C$66 million ($49 million) in restructuring costs and asset writedowns. In the same period last year, MacMillan had a C$68 million ($50 million) net profit. Net earnings for 1996 plummeted to C$51 million ($37 million) from C$280 million ($206 million) in 1995. On Thursday, it was reported that North American and Scandinavian (Norscan) pulp stocks rose 130,000 tons in January (24,000 in U.S.), to a total of nearly 2.0 million tons. Pulp deliveries rose in January in the U.S., Europe and Asia, which meant total stocks were lower now than was normal at this time of year. Usually pulp stocks increase by 200,000 tonnes in January because most plants operate at full capacity during cold winter months. Also Thursday, Alliance Forest Products Inc. (ALP.TO) posted net earnings of $56.0 million ($3.21 per share), for the year ended December 31, 1996, compared with $81.2 million ($4.56 per share) for the previous year. Sales totalled $424.0 million in 1996, compared with $402.0 million in 1995. For the quarter ended ended December 31, 1996, Alliance Forest Products Inc. reported sales of $89.4 million and net earnings of $3.7 million ($0.21 per share), compared with sales of $117.6 million and net earnings of $24.2 million ($1.37 per share) for the corresponding 1995 quarter. The big news this week came late Friday, when Abitibi-Price <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ABY, A.TO)") else Response.Write("(NYSE:ABY, A.TO)") end if %> and Stone-Consolidated (SO.T) agreed to merge in a deal worth about $1.7 billion. The stock-swap transaction will create a new company called Abitibi-Consolidated Inc. Abitibi and Stone-Consolidated expect their merger to result in more than $74 million in savings annually, on combined revenue of $3.6 billion a year. The new company will have a total of 18 paper mills. Terms of the deal call for Abitibi shareholders to receive one share of Abitibi-Consolidated for each of their own shares. Stone-Consolidated shareholders will receive 1.0062 shares in the new company for each share they hold. Abitibi-Consolidated will have a market value of $3.1 billion, based on current prices. Abitibi-Price, already the world's leading producer of newsprint, makes paper at 10 mills in North America and sells it around the world. It is also a major distributor of office products in North America and Western Europe. Stone-Consolidated, also one of the biggest newsprint producers, is a leading supplier of paper and wood products with operations in Canada, the United States and Britain. Stone Container Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %> owns 47 percent of its stock and has agreed to vote for the merger. That would leave Stone Container with about 25 percent of the new company after the deal is complete. "Model Portfolio" Update: This week we took our cash from our "sale" of Measurex and "bought" shares of Caraustar Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:CSAR)") else Response.Write("(Nasdaq:CSAR)") end if %>. Caraustar is involved in the production of paper tubes, cores, containers and cartons made from recycled fiber, along with some other non-paper specialty products. They are a very low-cost producer in a growing market, which makes them very attractive. Caraustar has been making some great acquisitions to provide continued growth, the lastest being the recycled paperboard mills from Tenneco Packaging. Management is sound and their facilities are in great condition. 1996 was a record year for Caraustar, both in revenues and earnings. While the first part of this year might be a little slow, their goal is to achieve another record in 1997. We got in this week at $29.00 per share. As mentioned earlier, Fort Howard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:FORT)") else Response.Write("(Nasdaq:FORT)") end if %> was a major casualty for us, dropping 7.85% this week after dropping 4.72% the week before. The stock has had a nice run in the past few months, and there's nothing I can attribute the decline to other than "profit taking". Purchase: IP = $40.50, FORT = $27.69, CDP = $49.13, CSAR = $29.00 Last Trade: IP = $43.00, FORT = $27.88, CDP = $50.38, CSAR = $30.38 This Week: Year-to-Date: Model = + 0.60 % Model = + 14.99 % SP500 = + 2.40 % SP500 = + 9.14 % FSPFX = + 1.39 % FSPFX = + 2.34 % Commentary: Though pulp inventories rose a less-than-expected 130,000 tons in January (Norscan only), pulp prices are still very much under pressure. In Europe, the "bellweather" NBSK grade has dropped from $560 to $540 per metric ton. Weyerhaeuser, the world's biggest producer of market pulp, never did support the proposed increase which was supposed to occur last month and apparently is meeting the lower transaction rate. And while there was a small decrease in non-Norscan inventories, full-year 1996 levels were more than 230,000 metric tons higher than the previous year. Abitibi's merger with Stone-Consolidated reflects the continued need for the industry to consolidate, especially in areas such as newsprint where demand is projected to increase only modestly in the next few years. The impact of this merger is under assessment, and I'll try to put something together in the near future. Interesting was the rise in Bowater, the largest producer of newsprint in the U.S., this week. Investors must be figuring that further consolidation in the newsprint market is imminent. Another possibility is that the recent merger might create additional pressure upon consumers to accept the proposed hike in newsprint prices slated for next month. Keep them presses rolling !!! MF Master MF Logman

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