Tabell’s Market Letter – January 30, 1970

Walston &Co. t nc Members New York Stock Exchange and Other Prine, pal Stock and Commodity Exchange. OVER 100 OFFICES COAST TO COAST ANO OVERSEAS lABEll'S MARKET LETTER January 30, 1970 The short-term action of the stock market continues to be, in a word, abysmal. The Dow-Jones Industrial Average continued its sltde which began a week ago, declining sharply on all five days of the week and reaching an intra-day bottom of 739. 11 on Friday. A number of analysts are at the moment trying to pinpoint a downside target for the Dow, and the most common figure being hea.rd is the 1966 low of 735.74. We think tha.t trying to set targets in a market which has developed the downside momentum of the present one is an exercise in futility. The market, it is true, is deeply oversold, but i n downswings oLihi stype therna vicious. portionof.the, declineusually the stage when the market is in a deep oversold position. There is, therefore, no evidence to expect any sort of a turn near-term unttl clearcut reversal symptoms manifest them- selves. We do, however, continue to feel, for the reasons outlined in our last few letters, that the turn when it comes could well constitute one of the most important buying opportu- nities of recent years, and for long-term investors our basic policy would be one of adding stocks on weakness. Many reasons have been advanced for the current drop — some persuasive, some verging on the fanciful. One argument centers on the record high bond yields now available. Sure, stocks are cheap, the argument runs, but with good 20-year bonds yielding 90/0, fixed income securities make a better investment for the long term holder. As a matter of fact we think that, at the moment, there are persuasive reasons for including bonds in a portfolio. However, we also feel term, as constrast ed to the immediate future, bonds, even at 90/0, are going a be I ndtl inferior to equities for all types of investors. The reason is, of a b ga mflation. Let us take a look at what inflation does to a nd. ill assume for a moment a long-term inflation rate of 2 1/20/0, which t verage for the past 23 years. .. what . – .r to retur2,l ' ment First of all, taxes get at it r ,-if is reauced to 4.50. Tlien inflatlOn (not tax deductible first year return of 4. 50 after taxes is reduced to 4. 39. th 10th e ft&St-;;-x return is only 3.49 in constant dollars, and in the 20th year it is he average over a 20-year period is Just under 3,50 or 3 1/20/0 n w The payoff in 20 years will be in depreciated dollars so that the bondhold re e, in 1970 dollars, only 60. 20. He has paid, in effect, a premium of 39. 80 for hi nd and this premium should properly be amortized at the rate of 1. 99 per year. T' rings the first year's return down to 2.40, the 10th year return to 1. 51, and the 20th year return to It all averages out to the fact that the after-tax, constant-dollar return on a 20-year 90/0 bond is 1 1/2. Suppose inflation slows down Even at a 1 rate of inflation the return figured as above is only 3.15. At around 5 of inflation, the return actually becomes negative. By contrast, what do we need to equal a l l / 2 net real dollar rate of return in the stock market First of all, we need to find stocks that are yielding in excess of 3' — not difficult today. Next, we need the reasonable expectation that dividend income from these stocks over the long term will grow at a rate in excess of 2 1/2 annually — not terribly diffIcult either since every stock in the Dow-Jones Utility Average, for example, has com- fortably exceeded this rate of dividends over the past ten years. Lastly, we'need the expectation that the stock portfolio will grow in value at a bit over 3, allowing for capital gains taxes at the 250/0 rate. Obviously, none of the above constitutes unreasonable expectations for the long-term equity investor. Thus, despite apparently astronomical high interest rates at the moment, the long- term expected return on fixed income securities remains decidedly inferior to that offered by common stocks. For better or worse, the investor wishing adequate return on his capita must seek it in the equity market. Dow-Jones Ind. 744.06 Dow-Jones Trans.163. 72 ANTHONY W. TABELL WALSTON & CO. INC. AWTamb ThiS market letter 15 published (or )our ConVenlLn((' tlm\ IIIforTnnlton and h not ,In off.., to sell or ,\ 'lOhl'ltntlOn to hu) dill secuntl('s dIscussed The 111- IormntJOn obtamed from rourceI we Il1'h('\'(' to 11' Tf'llflhk', hut we do not gmlrRntee Its IIccurcy, \\'nIRton F.. Co Inc and Its affieell. dlrcetor'! or rna) have an interest III or '.U1('hn…e 1wd sell thc n,rcl\,'i to hefLin. WN.sol