Tabell’s Market Letter – August 19, 1966

Walston &Co. INVESTMENT BANKERS MUTUAL FUNDS MUNICIPAL BONDS Members New York Stock Exchange and Other Principal Stock and Commodity Exchanges OFFICES COAST TO COAST AND OVERSEAS TABELL'S MARKET LETTER August 19, 1966 In our market letter of December 23, 1965, with the Dow selling at 966, we attempted to assess the ouUook for the coming year. We started out by saying – (The) ouUook for 1966 corporate profits is almost uniformally roseate.. We are inclined to believe that the cor- porate profits ouUook for 1966 is quite adequately reflected in the prices that are being paid for stocks today. We are, therefore, less impressed by the generally good profits ouUook than we are by the number of potential psychological factors which could disturb market librium at some time during the year, i. e., tight money, balance of payments problems, Viet nam, etc. It is a market, we think, where psychological factors will predoininate more and more. – – -. . Following an assessment of the technical picture as it appeared at that time, w'e c'on' cluded with the thought that – It is very difficult at the moment to find arguments for a sus- tained rise in stock prices from these levels and it is equally difficult to find cogent reasons why a decline of serious magnitude should take place. The logical forecast, therefore, seems to be tqat there will be very little change in the popular averages from their recent levels. The 1965 range on the Dow-Jones Industrials was 974. 16 high and 832.74 low. It seems prob- able that 1966 figures will be fairly close to these. So far both limits have been exceeded by modest amounts. We do not, however, cite the above figures as part of an attempt to win first pJ;'ize in a uessing game. We do cite it as evidence of the extent to which the wheel has come full cycle in a relatively short period of time. It was incorrect to become wildly bullish in early 1966 ased on corporate profits for one very simple reason. Jilfofits picture was al- ready reflected in the price of most common stocks. It is n f to become quite loomy about the future course of stock prices due st r ,Vietnam, and fears f inflation followed by a recession. The point is that f thes ngs constitute not so uch a reason for stock prices to move an 'on of why stock prices are hereyey If were .e f e mic uncertainty eguities would not be available at their e. . Now we are as reminded ad nauseam. We do n n to economic uncertainties of which we are how or whether all of these difficulties will be resolved and one else does either. Rather than engage in a frui less attempt to pre t i e, it seems to us much more important to try to gauge the investment odds Jj ffer ya stock market with the Dow-JOnes IrldustFial Average hovering around the 800 Ie Future prices e determined by two factors, – the then current level of earnings and the price earnings ratio which the market at that time is willing to apply to those earning It is certainly too early at this point to say what 1967 earnings may be, so in the table below we are providing four different earnings estimates ranging from a 100/0 improvement over es- timated 1966 figures to a 250/0 decline — equivalent to the severest profit decline in the post- war period. These earnings are capitalized at four different levels – the 1951-53 'average of 10.7, the current one of 14.2, the 1954-58 average of 16.2, and the more'recent 1958-1965 average of 19.2. Thus, we arrive at the prices shown and their percentage difference from current levels. 1951-53 Aver. Current 1954-58 Aver. 1958-1965 Aver. 10.7 14,2 16.2 19.2, 66.00 (1966 plus 10) 706 (-120/0) 937 (16) 1069 (32) 1267 (570/0) 60.00 (same as 1966) 642 -200/0 852 ( 60/0) 972 200/0 1152 (430/0) 54.00,(1966 less 100/0) 577 (-290/0) 767 (- 5) 875 ( 8) 1037 (280/0) 45.00 (1966 less 250/0) 450 (-440/0) 639 (-21) 729 -10 864 ( 7) All that the table shows, is that, if one is to predict a sizable decline, in stock prices from their present levels, one must also be willing to predict either a decline in corporate earnings of record proportions and/or a return to valuation standards which have not existed for thirteen years. Any investor who sincerely believes that either of these events will come to pass should certainly divest himself of common stocks. We prefer to think that the recent stock price weakness has brought more stocks close to attractive long-term purchase levels than has great number of years. Dow-Jones Ind. 804. 62 Dow-Jones Rails 202.55 AWTamb ANTHONY W. TABELL WALSTON & CO. INC. This market letter is published for your convenience and infonnatlon and lS not an offer to sen or solicitation to buy An,. IleetJJities The in- formation WAS obtained from Bmnees we btlleve to be rehable. but we do not guArantee ita aCcuracy WAlston & Co Inc. And Its ofl'lcers. dlrectorB or cmpiOJees may have an mterest in or purchASe and sell the securities referred to herem. WN.801