This Week in Paper by Joe Masters (TMF Master) Charleston, SC (June 13, 1997) -- Stunning, ain't it? The largest, weekly point-size gain in the Dow's history resulted from additional indicators of tame inflationary pressures and continued economic growth. And while the Dow moved upward by 4.66% and the S&P500 tacked on 4.11%, our Paper/Forest group was no slouch either, as shown by its 4.43% rise for the week. In fact, if I recall correctly, we are now one of the top five best-performing sectors of the market so far this year. Interestingly, nearly all of the gains in the group have come only in the past nine (yes, nine) weeks. Quite a turnaround, I would say. Leading the sector higher this week were FORT HOWARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORT)") else Response.Write("(Nasdaq: FORT)") end if %>, gaining 11.48%, JAMES RIVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JR)") else Response.Write("(NYSE: JR)") end if %>, up 9.54%, JEFFERSON SMURFIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JJSC)") else Response.Write("(Nasdaq: JJSC)") end if %>, advancing 7.75%, CHAMPION INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHA)") else Response.Write("(NYSE: CHA)") end if %>, up 7.36%, and WEYERHAEUSER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %>, gaining 7.21%. There were only two losers in our group of 20: GAYLORD CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %>, down 1.52%, and BOWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOW)") else Response.Write("(NYSE: BOW)") end if %>, off 1.04%. Of particular interest, the following seven stocks set new all-time record highs this week: Fort Howard, INTERNATIONAL PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>, MEAD CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEA)") else Response.Write("(NYSE: MEA)") end if %>, TEMPLE INLAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IN)") else Response.Write("(NYSE: IN)") end if %>, WESTVACO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: W)") else Response.Write("(NYSE: W)") end if %>, Weyerhauser and WILLAMETTE INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLL)") else Response.Write("(NYSE: WLL)") end if %>. All the News that Fits the Print: On Monday, Suomen Optioporssi, a Finnish options exchange, put the value of northern bleached softwood pulp at $554.90 per ton, up from $549.56 last week. And Monday, James River announced that the U.S. Department of Justice has issued a request for additional information in connection with its review of the proposed merger between James River and Fort Howard. Also Monday, ROCK-TENN CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RKT)") else Response.Write("(NYSE: RKT)") end if %> completed its acquisition of Rite Paper Products Inc. (which manufactures laminated paperboard; annual sales of approximately $20 million) for an undisclosed amount of cash. And Monday, FLETCHER CHALLENGE CANADA LTD. (FCC.TO) said it is considering ''strategic alternatives'' for Blandin Paper Co., its lightweight coated paper operation in Minnesota, so as to better focus upon its newsprint and groundwood specialty core business. Rumors are that they might be considering an asset swap with Weyerhauser for their Northern Pacific Paper division. In addition on Monday, Statistics Canada reported utilizations rates for the paper industry climbed to 93.1% in the first quarter compared to 91.7% in the fourth quarter. Logging and forestry utilization dropped to 75.6% from 80.0% during the same period. On Tuesday, UPM-KYMMENE CORP. (UPM1V.HE) said it is in negotiations to buy the Release Paper & Consumer Products business of U.S. silicon-coated paper producer Daubert Coated Products Inc. Also Tuesday, Standard & Poor's said it will replace Production Operators Corp. in the S&P SmallCap 600 Index with SCHWEITZER-MAUDUIT INTERNATIONAL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWM)") else Response.Write("(NYSE: SWM)") end if %> after Friday, June 13, 1997. On Wednesday, Morgan Stanley said it has raised its earnings estimates for ARACRUZ CELULOSE SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARA)") else Response.Write("(NYSE: ARA)") end if %> to $0.72 per ADR from $0.45 for 1997, and to $1.78 from $1.65 for 1998. Also Wednesday, International Paper raised prices on certain grades of pulp by $50 per metric ton (from $580 to $630) effective immediately. Weyerhauser, Stone Container and Champion International followed suit with similar increases effective July 1. UNION CAMP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCC)") else Response.Write("(NYSE: UCC)") end if %> said that it has raised the price of uncoated cut-sized by $40 a ton effective immediately. On Thursday, Sweden's Sodra said that North American and Scandinavian (NorScan) pulp stocks fell by 103,000 tons in May to a total of approximately 1.6 million tons. In Sweden pulp stocks rose by 25,000 tons and in Norway they climbed by 7,000 tons, while they fell by 11,000 tons in Finland, 45,000 tons in Canada and 79,000 tons in the U.S. Sodra said it has no immediate plans to increase pulp prices. And Thursday, HARNISCHFEGER INDUSTRIES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPH)") else Response.Write("(NYSE: HPH)") end if %> said it may drop its $19 a share hostile bid for Giddings & Lewis Inc in light of a competiting $21 per share bid for Giddings from Thyssen AG of Germany. Also Thursday, Bear Stearns upgraded James River to "attractive" from "neutral", and UBS Securities upgraded Champion International to "strong buy" from "hold". And Thursday, the Canada Mortgage and Housing Corporation estimated that housing starts in major Canadian markets should increase by approximately 15% in 1997, similar to the gain experienced in 1996 but double what previously estimated for the period. In addition on Thursday, industry representatives in Canada said they did not expect immediate shortages of raw timber due to the hundreds of forest fires occurring across the north-central portion of the country. However, timber harvesting operations have been halted in certain areas due to prevailing conditions. Depending upon the duration, of course, supplies could become tight as it is estimated that most producers have between one and four weeks of stock. On Friday, WAUSAU PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSAU)") else Response.Write("(Nasdaq: WSAU)") end if %> reported third-quarter earnings of $0.40 per share on revenues of $143.6 million, compared to $0.38 per share on revenues of $139.4 million for the same period in 1996. It appears as though after what seems to be a successful implementation of a price hike for corrugating medium, producers are now more confident they can push through an increase for linerboard. GEORGIA-PACIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GP)") else Response.Write("(NYSE: GP)") end if %>, International Paper and Union Camp have joined others who will be attempting to attain a $40-50 per ton increase over the next two months. In addition, word is some manufacturers are considering a second increase for corrugating medium at the same time. "Model Portfolio" Update: No particular news on any of our "model" stocks this week. As mentioned earlier, IP hit a new all-time high price for its stock the other day. How schweet! We hope that all those who had the foresight to invest in the Foolish Four or the Beating the Dow strategies while IP was in the "double up" or "PPP" slot are enjoying this remarkable performance. Cheers! Purchase: IP = $40.50, CDP = $49.13, CSAR = $29.00, TFT = $10.75 Last Trade: IP = $51.00, CDP = $55.75, CSAR = $31.38, TFT = $10.44 This Week: Year-to-Date: Model = + 4.32 % Model = + 35.55 % SP500 = + 4.11 % SP500 = + 20.59 % FSPFX = + 4.04 % FSPFX = + 12.17 % Commentary: Returning from Europe, I'm am pleased to report that the U.S. media accounts regarding the current conditions of the Paper/Forest industry in that region appear to be accurate. In general, economic growth is improving, though at a slow pace. The industry is operating at reasonable rates and orders are increasing. The European sector appears to be slightly behind-the-curve compared to North America. Paper and pulp prices are generally around 5-10% lower there, primarily due to a slower recovery from the early-90s recession. However, conditions are expected to improve through 1997. It appears the main difference between the two regions is in the coated paper segment, where upcoming capacity increases in Europe seems to be hindering the implementation of price increases for these grades. Overall, I find it noteworthy that this industry is truly a global one, with synchronisity being quite evident. Will paper companies shoot themselves in the foot once again? Several weeks back, one of our readers posed a question regarding upcoming price increases and the potential for over-exuberance in this area. As exhibited in 1994 and 1995, paper prices rose dramatically due to a favorable demand/supply ratio. Unfortunately, it appears as through the manufacturers went a bit too fast and a bit too fast for their own good and the good of many an investor. In order to offset losses incurred during the early portion of the decade, paper companies increased prices at an exceptional rate. This created an abnormal amount of buying as a hedge against any further hikes. Inventories expanded as the supply greatly exceeded the demand. Subsequently, orders declined as buyers chose to utilize the stock in their congested warehouses, and paper prices (and stock prices) understandably plummeted. It is interesting to note the analogy to the current situation. Paper companies have suffered through a number of quarters of reduced revenues and earnings (though not nearly as bad as the early 90s). Investors were quite discouraged to see the severe underperformance of their money relative to the broader market. Now it appears announcements of price increases are occurring monthly in what seems to be an attempt to make as quick a recovery as possible to appease investors on a quarter-to-quarter basis. Hedge-buying appears to be on the rise, but this has not yet surfaced at the warehouse level due to a strong national and a strengthening global economy. What happens, though, if the economy slows, as predicted? Retail sales, which utilizes about half of total U.S. carton output, have shown a dramatic decline over the past few months. While the future is uncertain, inventory levels bear watching to insure excesses do not create a similar scenario with falling prices as occurred during the later portion of 1995 and throughout 1996. And it is the opinion of this writer that paper companies would be more responsible and would better serve the community by attempting to not focus merely upon the ensuing quarterly report, as seems to be the case with all too many U.S. industries, as this invariably leads to excessive and unnecessary fluctuations in paper prices and investor returns. Keep them presses rolling !!! TMF Master

© Copyright 1995-2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us