Tabell’s Market Letter – July 21, 1950

…../…… ……… ' .. '. Walston.Hoffman (\ Goodwin SAN FRANCISCO, CALIF. NEW YORK. N. Y. PHILADELPHIA, PA. LOS ANGELES, CALIF. BAKERSFIELD BEVERLY HILLS EAST ORANGE. N. J HARTFORD, CONN LONG BEACH MODfSTO OAKLAND RIVERSIDE SACRAMENTO SAN 01 EGO SAN JOSE EUREKA FRESNO HAGERSTOWN. MD. HARRISBURG, PA. PASADENA PITISBURGH, PA. PORTlAND. ORE. SANTA ANA SEATIlE, WASH STOCKTON VALLEJO TABEll'S MARKET LEnER 35 WALL STREET. NEW YORK 5. N. Y Digby 44141 HOTEL WALDORF.ASTORIA In last week's letter we noted 'that the ability of thPeLoin96dB6u0 strial average to hold above the 195 support at 195.40 and the divergent action of the rails in failing to react below the June 27th low of 50.66 probably indicated that the market had reached its low for the intermediate phase and that the pattern suggested an attempt to reach the 205-212 area. Also we noted that a change in leadership was expected and listed a large number of issues that appeared favored in a defense or semi-war economy. This week the market staged a strong rally led by the type of issues mentioned. The rail average reached new high territory for the year on Friday at 59. 83. The industrials rallied into the 205-212 range to reach a high of 208.89. Rails, steels, oils, metals and textiles were the strong.groups. The advance has been rapid and some consolidation may be needed to strenghthen the technical pattern. Recommended issues should be bought 'during periods of market weakness. Four weeks have elapsed since the invasion of South Korea on June 25th. The confusion and emotionalism of the early days has passed. The situation and pattern is still far from clear but there are a number of things that appear to be at least probabilities if not certainties (1) The Korean happening is probably not an isolated incident. It will probably be followed, over a period of months and years, by similar incidents in various parts of the world. (2) This implies continued ,spending over a long period of time to build up not only our own defenses but those of other non-Communist nations. (3) It probably does not mean all-out war. The production of Soviet Russia and her satellites is not sufficient to cope with this country at this time. As of 1948, America produced more than half of the steel in the entire world and four times as much as Russia. We produced almost two-thirds of the petroleum and almost ten times as much as Russia. With Canada, we produced more than half the world's copper and six times as much as Russia. Even with all of Europe and Asia in the Soviet'p hands, it would take time to build up a production of these vital materials equal to ours. (4) The happenings of the past four weeks mean inflation. There never has been a deflationary war. The value of money will be downward. (5) Business will be good and remain good for a long period of time. All fears of a nearby depression can be eliminated. (6) The amount and form of taxation, controls and allocations will depend on war developments, but it does not appear that there will immediately be more than a moderate amount of curtailment of civilian production. It will be a sort of twilight period between war and peace. (7) Under such conditions, some companies will be less vulnerable than others due to past average earnings and invested capital. Furthermore, in a semi-war or defense economy, the major companies will ,have less of a competitive advantage over the secondary or marginal companies. (8) This implies a change in the leadership of the market with red chip issues in the van rather than the blue chips. (9) 1\s the initial emotional phase is replaced by more sober thinking, it appears probable that the investor will deCide that, in an inflation- ary economy, the ownership of common stocks is preferable to holding cash or high grade bonds. July 21, 1950 EDMUND W. TABEL WALSTON, HOFFMAll & GOODWIN ….. This memorandum is not h/llve lin Intorest in some to or be all construed as an offer or solicitation of of the securitiu mentioned herein. The offers to buy or leU any securities From time foregoing material has been prepared by us to as atimmaettWer aho ftonIf(H)romfaftmioann & Goodwin may only. It IS based upon rnforrn/llflon believed tenable but nof necess/llrrly complete, 11 not 9ueranteed as accurate or final, lind is not intendlld to foroclose independent Inquiry