Tabell’s Market Letter – October 29, 1954
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For Il of Earnings 1929 ' 540 1937 465 1946 470 For l or While quite a few Issues appear Dividends 478 352 high enough, there are an equal or larger number of issues that still indicate higher price levels. 454 The technical pattern appears to suggest an even more selective These ratios, however, ignore market than the very selective some important facts. The divi- market we have witnessed Over dend payout today is less than 50 of earnings. This is a very low ratio. A 66 payout is the past five years. Best opportunities for capital enhancement appear to be in the backward IS- much more applicable over a pe- sues that are just a shade below riod of time. They also ignore thc top quality and aTe in an upward fact that these ratIos apply only earnings trend. to the 30 stocks in the Dow-Jones Industrial Average. There are Summary many light blue chip Issues that In summary. the market shows are selling at only six to eight no signs of an important top like Urnes earnings and are YIeldmg 1929, 1937 or 1946. .. 6 to 8. This present situation is qUIte different from 1929, 1937 and 1946. In these past periods all issues were sellIng at high prIce to earnings and low dividend yields. These Hhght blue chip or secondary issucs could have a considerable price rise before thcy catch up with thc ratios that prevailed in past periOds of overvaluation. It is possible, however, that an intermediate correction could occur at any time. ThIS mtermediate correction could occur from present levels or from a somewhat higher level. If the November election turns out favorably from a Republican viewpoint, the mdustrial average may reach approxImately the 400 level Whatever reactIon occurs will Technical Viewpoint be comparatively mild There are successive support zones at 330 The last consideration is the and 315. This compares with a outlook from a technical view- 1954 low of 278. point. On a broad overall pattern, Even If such a reactIOn occurs, there IS nothing in the present it will be extremely selectIve. technical pattern that ,suggests There are many mdividual issues anything resembling 1946 or 1937 that indicate higher levels over or, even less, 1929 Very few vul- the next year regardless of nerable distributorial patterns wheth'er the averages are selling have been formed. Some stocks at 400 or 325. appear in need of a restIng or The present market IS a'much consolidation period These are more intellIgent market than mostly in the group known as those of the past. Low-prIced and growth stocks General Electric, tertiary Issues will not advance for example, has reached all up- just because the general market side obJectives and may hold in is in an uptrend Purchases must roughly the 48-38 area for a year be confined to issues with im- or two before resumll1g ItS long- provmg sales and earnings. term uptrend On the other hand, Regardless of temporary inter- there are a great many secondary ruptions, the market IS headed for issues that still mdlcate higher higher levels over the longer term levels WhIle the averages are There may be a resting period for selling at new highs, thiS does not a year or two during which the apply to the general run of stocks. industrial average may hold in a At present levels of around 360, range bounded by 400-370 on the the industrial average is now con- upSIde and 330-315 On the down- SIderably above the 1946 high of SIde Dunng this period individ- 213 and the 1952 high of 295. Yet ual issues could advance mdI- over 60 of the 1,000 most ac- vidually. The overall trend is tively traded Issues on the New toward higher levels and I doubt York Stock Exchange and the If the Dow-Jones Industrial Aver- American Stock Exchange are age sells, except momentarily, selling below the highs reached in much below 300 for the next the 1946-1952 period. decade. 4 , SENT OUT AS MARKET LETTER OF OCTOBER 29,1954 Reprinted from 17,e COMMERCIAL anef FINANCIAL CHRONICLE Thursday, Octobe.,. 21, 1954 ,. Higher Market Ahead Over the Long Ternt By EDMUND W. TABELL Partner. Walston & Co., New York City Members New York Stock Exchange Market analyst' sees black-and-wbite contrast between 1929', and today's market, citing interVening inflation population increase, national output rises, and growth in leading com panies' earnings and dividends. Maintains possible imminent Democratic election vdory would Dot entail long-term economic harm. Concludes while intermediate correction could ocCur at any time, market shows DO sign of major top, with D-J Average rise to 600 by 1958-1960 a 'distinct possibility ' The stock mal kct. .15 measured today's market and that of 1929 by the Dow-Jones L II d 1I S t l' i a 1 is almost as great as the differ- Average IS now Wlltllll shoottng ence between black and white dIstance of the tamed 1929 high Concern over the fact that an of 386 Not so average is approaching the 1929 many yea rs high ignores the t rem end 0 u s ago thIS goaI was conSIdered 'almost im- changes that have occurred in the past 25 years It ignores the ' \ change in the -purchasmg power possible ot of the dollar. In 'terms of a con- achievem e 11 i. stant 1929 dollar, the '–present, Now It Iooits market is seUmg around 230 as as though the compared WIth 386 in 1929 It high of 25 ignores the cUlTent replacement years ago will value of a company's plant. It easily be passed – possibly In 1954 Ignores the fact that population has increased 40 million since 1929. It. ignores the fact that the na- -undoubtedly tion's total output (in real terms inthenext -not just in dollars) IS more than year Or two. dOUble what it was In 1929 It It appears Edmund W. Tabell ignores the fact that personal in- that my 1948 predIctIon that the come (after taxes) has increased Dow – Jon e s Industrials would 236, that industrial capacity has reach 450 by the late 1930's may doubled, as has the output per have been quite conservatIve. A worker. It ignores the changes level of 600 by 1958-1960 now in Individual companies. General seems a distinct possibility. Electric at the 1954 high of 481,6 QUIte a few people are begin- sold about 45 above the 1929 ning to think that the stock mar- high of 33Sh-but sales have in- ket is dangerously hIgh, and that creased 290 since 1929. Earn- the possibility of another 1929 ings have increased 200 and div- market crash is increasing. In my idends have increased 220 in OpInIOn, the dIfference between the past 25 years . ,, Difference in Technical 'dustrial Average In a little over a Conditions year Such superficlal thinking also 19nores the dlfference in tcchmcal stock market conditions from 25 years ago Speculative trading was rlfe in 1929 and the volume of trading greatly exceeded that of today, despite the fact that there are a much larger number of shares presently listed In 1929, brokers' loans were about seven times present levels and accounted for 9 of the value of New York Stock Exchange stocks. Today, brokers' loans are less than 1 of the value of New York Stock Exchange stock pflces. OutrIght gamblIng was a large part of 1929's volume. Today It has dIsappeared almo.t entIrely and we 'havc an investment market to a large degree wit h a relabvely small amount of speculatIon on a high margin basis. To compare the present 25tImes-earnmgs and less than 3 yield on some growth issues to a sIInilar condltion III 1929 also ignores some very important dIfferences., Today only a handful of growth issues are selhng at very hlgh price-to-earmngs rahos and low YIelds. They comprise a small segment of the entire market This Possibly If we revjew some of the reasons why the market started Its advance 13 months ago and then evaluate the changes that have occurred since that time, we might arrIve at some concIuslOn of how vulnerable the market is at present price leels. In the first place, the advance' has taken place wIthout any nse in general business. The Federal Reserve Board index of production was 133 m September, 1953. It is around 125 today Over the next SIX months, the general expectation is for no great change, but any change that occurs WIll most lIkely be toward slightly higher levels Thus, the business pattern should not be a depressant factor on stock prices, The main factors that brought about the 30 advance from the September; 1953 lows were roughly. (1) The long-term factors of the increase in consumptlOn demand brought about by not only the increase in consumer Income but by a more eqUltable distrIbution of such Income, the population growth and the tremendous increase In money supply condItion applied to almost every (2) The more favorable mvest- stock in 1929. Such a comparison ment climate brought about by also ignores the motivation of the the Eisenhower Administration. buyer Today, these growth issues (3) An easy money market. -such as Minnesota MIllmg, Dow ('4) Stock prices were under- Chemical and others-are largely valued on the basis of hlstoncal being bought for cash, not for any Immediate rIse in price and divi- pnce-to-earnmgs rahos, yields and the spread between stock and dends-but for long-term growth bond prices over the next 10 or 15 years. A drop In price would not disturb the buyer, who, in most cases, (5) Technical market consideratIOns. would' welcome such a develop- As far as the fundamental fac- ment to add to holdings. In 1929, tors enumerated in the first catestocks were bought in hope of a gory are concerned, there IS no resale at a -profit in a very short change in the favorable. longperiod of tIme. They were bought term patterns Consumer mcome on a low margin and a drop in has reached new hIgh levels and prices -eIther scared or forced the lS expected to continue a slow up- holder out of the market. trend. This should result 10 lDcreased demand. Gross natwnal Some Correction Ahead . product in the second quarter is While it Is evident that the up slightly from the fIrst quarter present market is in no way com- despIte a decline in government parable to 1929 as far as vulner- spending. Consumer spendmg and ability is concerned, would it not capital spending are showing signs be logical to expect some correc- of improvement All of this spend- tion of the unprecedented nse of mg is motivated by the huge over 30 in the Dow-Jones In- money supply pumped into our 2 (I \, I ( I economy in war and prewar years 1954 election could cause a short- At the present time, our gross national product amounts to about term decline. a Republican VOIncttohrey-ootrheervehnannd 2.82 for every dollar of active loss in the Senate or House- money. This is up from about 2 could result in a further advance at the end of 1945, but still sub- above the 1929 highs. stantially below the 3 60 ratio The easy money market should which was cstablished during the contmue regardless of whether 1910s and 1920s. A return to this there is Republican Or Democratic fIgure over the next five to eight control of Congress. This is an years would drive business for- important factor in stock prices, ward to much greater volum'c because of the spread between than we have yet enjoyed. The YIelds in bonds and stocks The population growth contmues to average yield on the stocks in the exceed estimates despIte the fact Dow-Jones IndustrIal Average IS that the bIrth rate for the next now 158 above the YIeld on few years may flatten out because high grade bonds This is down the young men and women reach- only sllghtly from 180 a year 109 marrIagcable age today are ago, despite the fact that stock the depression babies of 20 years yields have dropped rather sharp- .. ago There are. a much smaller ly A contInued firm or slightly number of them However, the higher bond market will be a sus- excess of bJrths over deaths In taining influence on stock prices. the first six months of 1954 IS an Here again there is nothing m the amazing 10 greater than last bond market picture that could year's all-time previous record. result in sharply lower stock The enormous crop of postwar prices. bables is growing up Today they are concentrated in the 6-14-year Invulnerability age group. From 1955 to 1960, The fourth factor of undervalua- they will be in the 11-19-year age tIon has been partially corrected group. After that they WIll be grown up and ready to marry and by the 30 rise in prices over the past year and some stocks that an accentuated crease wIll start populabon InIn the 30-year have advanced sharply could be subJect to a correctIonary or rest- stretch from 1945 to 1975, the ing perIod. Nevertheless, the im- number of people will expand by mediat,e pattern IS not particu- 65 to 75 millJon, We are only a larly vulnerable. The table below thIrd of the way through this 30- shows how much you paid for 1 year period of enormOus population growth These long-term fac- of earnings and 1 of dividends in the three periods of stock market, tors have Improved since a year hIghs in the last '25 years as com- ago. pared with prices a year ago and today' . Possible Election Repercussion There could be a temporarily. unfavorable change in the second factor The forthcoming national For!U or Earning!! 1929 19.30 1937 1660 For ;1 or Dividend!! 2990 22.00 election could result m Demo- 1946 1680 28.40 cratic control of the House and 1953 pOSSIbly the Senate This might result in a delay of the EIsen- . Today hower constructIve program and 'Septlmber 900 1310 1625 2262 cause a temporary market decline Today's figures are apPlOxIma- Over the longer term, it WOuld tions, but there is no doubt that cause no great harm. A trend the present prIces have gone a such as that which elected Eisen- long way toward discountmg the hower so spectacularly in 1952 undervaluation that eXIsted a year does not end in two years 1954 ago – but they have not yet results WIll be dommated by local reached the overvaluations of past lssues, The Democrats may show stock market highs The table be- some gains in hne with usual off- low shows where the Dow-Jones year national elections The 10ng- industnals would be today if 1929, term, trend still remams favor- 1937 and 1946 ratIOS prevaIled to- able for 1956 and 1960, but the day 3