Tabell’s Market Letter – November 25, 1947

Technical Market Action The market continues to be swayed by conflicting forces and cross currents, While some issues are reaching new high t.errit.ory on news of extra dividends and increased earnings, other issues are making new lows on tax loss selling and less favorable prospects. Such action is typical of yeal'-end markets and may continue somewhat longer. Concentration on jndividu&l issues rather than the market as a whole continues to be a necessary course of procedure in this extremely selective market. With the exception of a handful of issues, most of the stocks in our recommended list continue to show excellent market nction and indicate higher levels. The few stocks showing below average action are in the rail and utility groups, Individual rail issues show extremely diverse technicnl patterns. For example, Union Pacific, one of the four rail stocks in our recommended list., recently reached a neVi high while Chicago &NorthV/estern, another recommended issue, made a new low. Illinois Central and Seaboard Airline continue to hold about midway in their recent range. Would continue to hold all but Chicago & Northwestern which may continue its lethargiC action due to further tax selling. The utility section of the list has also been hit by tax selling and changing of proposed plans of dissolution. Of the four utility issues in our recommended list, American Water Works and lectric Potier & Light have sho\'m relatively favorable action and are holding fairly close to the year's highs. Retention is adVised. On the other hand, American Power & Lie'. and Standard Gas 4 pfd. are showing relatively unfavorable action. They may be held back by further tax selling. Switching to more attractive issues in our list is recommended. Radio Corporation has been showing good techni.cal action. Af,ter reaching a high of 19 3/8 in late 1945, Radio built up a distributional pattern in early 1946 in the 19-17 area. The top indicated a decline to the 1077 area. A low of 9 was reached in October 1946 and a low of 7 1/2 in May, 1947. F'or the last fourteen months, the stock has been fluctuating in approximately the 11-8 area. A substantial base pattern has been built up that would indicate, on an upside penetration, a return to around the 1946 high of 19. Tuesday's close was 10. Advise purchase of the issue which is being added to our recommended list. Contin\le to advise purchase of previously recommended issues during periods of market irregularity. Particularly like recent market action of E.W.Bliss, Colorado Fuel & Iron, Deere & Co., Doeh18r-Jarvjs, Houston Oil, Interlake Iron, International Minerals & Chemical, Mullins Manufacturing, lIational Supply, Ohio Oil, Oliver Corp., Rayonier, Shamrock Oil, Sharon Steel, U.S.Pipe, Wheeling Steel and Youngstown Sheet & Tube. November 25, 1947 EDMUND VI. TABELL SHIELDS & COMPANY ,, – , Closings Dow–Jones Industrials Dow–Jones Rails Dow-Jones 65-Stock 181.35 48.25 63.90 Th. opinions pressed in this l.tter are the personal interpretation of cherts by .r.Mr. Edmu6d W. r.. b.1I end not presented as the opinions of Shields & Company. , / — —– —- , Technical Market Action This letter has consistently stressed tl10 points since the decline of September 1946. The first lias that the decline fron the 1946 high of 213 in the industrial average would halt in the 160-170 area and the second, that the ensuing rise, after a buildup of an accur.lulation area, would be extremely selective and would fel'.ture, in the main, the heavy industry shares. Nothing has happened in the subsequent fifteen months to alter that . opn10n. The rnarkAt reached a low of 161 both in Octoher, 1946,aud May 1947 aDd the 160-170 area has been entered on numerous occasions. A large trading range has been formed in, roughly, the 160-185 arsa which, in my opinion, is an accur.lulation base for an extended rise. This rise hus a primary objective of 210-215 to be followed by substantially higher levels. The technical action of indiVidual issues has been somewhat different with some groups already having formed large accumulation areas while others are still in the process of forming such base areas and a relative few still indicate slight.ly lower levels before starting the process of building an accunulation area. The most favorable patterns, broadly speaking, are to be found in the stels, oils, farm implements, building, machinery , automotive and chemical groups. The issues in the steel and iron group have formations that suggest the largest percentege price rise. kt present lvels, th steels lire selling at extremely low price to earnings ratios. A comparison of present levels and the 1937 highs is quite instructive, as noted in the table, below. The improvement iIll fiean- cl.. condition, as shovm by working capital, is also' rather illuminating. The figures below are in millions of dollars. The 1947 figure is actually that of December 31, 1946. The earnitlgs for 1947 are un estimat based on actuel earnings for the first nine months. 19 37 High Earnn'gs tal American Rollings Mills 45 Bethlehem Steel 106 Interlake Iron 28 l/ Republic Steel Sharon Steel 47 42 1/2 U.S.Steel 127 Wheeling Steel 65 Youngstown Sheet 101 7/8 2.55. 7.64 1.20 1.74 2.83 8.01 4.14 6.79 6.0 121.9 12. 8 76.5 5.0 36;!.4 33.4 57.2 Approx. Prce 34 98 14 27 35 75 45 75 1947 Earnings 6.50 15.50 2.36 5.75 10.00 12.75 14.00 13.00 8aoprE1 tal 22.1 308.1 20.0 128.4 18.2 629.0 48.3 109.8 If these issues were selling at the same price to earnings rat,1o as pre- vailed in 1937, AII'erican Rolling Mills would have sold at a 1947 high of no rather than 37 1/2, Eethleherc w01.1ld have sold at c. high of 20() rather than 101 7/0, Inter- laKe Iion WQ1;l.ld bav, f,o d at a hh. of 5'4 1'atJJer t..hP!) J. l/tt 'P.r!J'..blj ( S-'eel. wr,vlrl J ha\T sld at a higrJ. of .49 1'cttr02.t t..ho.n ;() 7/ SrH11'orl 't(el o1lJ.ld hJ.ve i.)J..d It a high of 150 rather than 40 5/8, Wheeling Steel Vlould have sold at a hi,h of 210 rather thJl 53 1/3, and Youngstown would heve sold at a high of 182 rp.ther than 83. The obvious anS\7er to this reasoninb is that the 1937 ap;raisal was grossly over-optimistic as earnings and prices fell sharply in 1938. It nay be pOSsible, however, trt 1947 sentiment is, on the other hand, orossly over-pessimistiC. Market psychology usually goes to extremes. In 1937, th expectction Viae higher prices end earnings. It proved to be wrong. In 1947, the failure of prices to follow the trend of earnings end dividends is evidently based on ,the expectation that present earnings are temporary and wili shortly be not only moderately lower, but sharply lower. This expectation may also prove to be wrong. If it is, the extremely pessimistic public sentiment could be replaced an equally extreme opti- mism, even in the face of a moderate decline in earnings. The technical pattern indicates, as it did in similar circumstances in 1942, that the market is evaluating present earnings at too Iowa price ratio. Thre aG 6 steel,issues in our recommended list. They are Colorado Fuel & Iron, Interlake Iron,Jones & Laughlin, Sharon Steel, Wheeling Steel and Younf'stown Sheet & 7ube. A seventh issue, also in our list, U.S.Pipe & Foundry, mi(ht also be included in this broad classification. Jones & Laughlin has been the least satis- factory performer in the group. le it indicates an uptrend, greater price appreciation should be obtained in the other issues in the-list. Suggest taking the few points profit available in Jones & Laughlin and sm tching into Shc.ron Steel which is selling et around the same price. These stocks were selected because their technical patterns suggested the largest possible percentage price appreCiation in a group that, as a whole, indicate considerably higher prices. The recent softness in the general mark8t has brought these issues back to a buying range. Their purchase is suggested around current levels. The opinions eXpressed in this letter 8re the mSR9lJninfP.rpremtt charb by Mr. Edmund W. label1 and are not presented aWifJ6trtfonV t)f -5y…. Company.