Tabell’s Market Letter – September 03, 1971

————————————————————————– Vr– TABELL'S MARKET LETTER I, I .————————– 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK EXCHANGE. INC MEMBER AMERICAN STOCK EXCHANGE – September 3, 1971 The dust has now settled a bit in the three weeks that have elapsed since PresIdent Nixon's economic message, and the state of the stock market has changed from one of frenzy to one of come–. nOr!llality, ollowing,c;;ppside,geetration of 840-900 ar, th..!mc;! of last week reacting and testing the upper part of tnat-a-rea. In'tile peoce'ss, most snort term maicat-o'rs–,.-I- have returned to moderately oversold territory, and the normal expectation, after further digestion, would be for the advance to resume, first penetrahng last week's peak at 910 and later making an as- sault on the April 28 high of 950. Of course, forecasting an improved market climate is one thing, and determining proper invest- ment behavior should the forecast materialize is yet another. Recent readers of this letter will no doubt , have noted a tendency toward increasing skepticism as prices advanced for some time and which we enun- ciated as long ago as last December in issuing our forecast for 1971. In that forecast we suggested that the Dow might well attain a new high — moderately above 1000 — in early 1972, and indeed the current picture makes it possible, at least, that this forecast will be attained. However, in making the forecast, we said It must be noted that this is in sharp contrast with the sort of upswing typical of the period between World War II and the mid 1960's. At that time, advances tended to last three to four years and involve rises of around 100. Our forecast environment is more similar to the 1966- 1968 upswing in which a 32 advance covered a 26-month period. It is also worthy of note that, if our forecast is correct, the Dow at the end of the year will have remained in a trading range between 600 and 1000 for a seven-year period — action qUlte dissimilar from the post-war experience' Another way of looking at the same phenomenon is to observe that, five times in the past six years, the DJIA has penetrated the 950 area on the upside. In each one of the five cases, the penetration has been followed shortly by a decline of 100 points or more, the most recent instance, of course, being April-August 1971. Why should this be One's answer to the question will depend on his view of what, fundamentally, \ – –ot!term–rnllS'th'gejr1 al-l'tivel''i''stc-C-k–prlc;s. Wlllrmll'owrltech''rilcian's'llias, ofC01ltse, we are prone to point to supply-and-demand factors rather than the conventional factors of earnings and economics. We think this is particularly true when talking about the general level of stock prices. We think that earning projections, in other words, may go a long way toward explaining the prices of different stocks relative to each other. We think they have precious little to do with the prices of all stocks taken collectively. This price level, it seems obvious to us, will derive ultimately from the upside or downside pres- sure placed on the stock market by the net inflow of new funds available for stock market investment. This will derive, m turn, from the rate of personal and corporate savmgs. The portlOn of these savings directed to common stocks will depend in great degree on investor attitudes toward stocks vis-a-ViS other investment media. From the resultant amount of money available for stock mvestment, one must deduct the number of new stock issues which will absorb this demand. The residual will then be the factor which tends to move prices up or down. Now it is a fact that for the past six or seven years there has apparently been very little upward pressure on the general level of stock prices, and, it is very difficult to see, in presently available statistics, anything that would cause such upward pressure to resume. The level of new stock issues is approaching all-time peaks, and senior securities at current levels present the highest return rela- tive to equities available m years. And there is, moreover, abundant eVIdence that the level of demand for equities characteristic of the 1950's and 1960's may no longer exist. Two commonly cited pieces of evidence are the sluggish rise in debit balances from last summer's lows — despite the reduction in margin requirements — and, of course, the swing of the last three months to net redemptlOns of mutual .fund shares,. The,impact.oLthis ,cancbe demonstratedTbYTGil-lngTthe fact,thahthroughoutl'968andI'969– net new purchases of stock by the mutual fund mdustry frequently exceeded an annual rate of 2.5 bil- lion. Yet, for the past 12 months, the net new money available to the industry has been less than 1 billion. All of the above, it should be noted, IS not a bearish forecast. Indeed, we purposely led off this letter with a discusslOn of the market's Improved intermediate-term techmcal health. The reason we have been repeatedly ralsmg the issue of the apparent change in the long term market pattern is that we think the eVidence calls for a radical change in investment strategy and investor behavior. The entire hIstory of the 1960's has been one of increasmg acceptance of stocks as permanent growth vehicles and of the concomitant theory that one could achIeve investment success by Simply buying and holding the conventional growth favontes and Ignoring stock market swings. This IS a theory which will have to be altered radically if the pattern established in the latter part of the 1960's IS in fact a per- manent one. ANTHONY W. TABELL Dow-Jones Industrial (1l00 am) 903.48 DELAFIELD, HARVIY,TABELL S & P (ll' 00 am) 99.64 AW'fNoSsetallt.ement or expression of opInion or any other motter herein contCllned 15, or IS 10 be deemed 10 be, directly or mdlrectly, on a ffer or t he soIICltotlon a f on aff er to buy or sell any security referred to or mentIoned The mattcr IS presented merely for the converlenC6 of the subscrober. While 'lie believe the sources of our Informa tlon to be rehable, we m no way represent or guarantee the accuracy thereof nor of the statements mude herem Any action to be taken by the subSCriber should be bosed on hiS own InvestIgatiOn and Information Janney Montgomery Scott, Inc, as a corporahon, and ItS offIcers or e'T1ployees, may now have, or may later lake, positions or trades m respect 10 any seCUrities mentioned In Ihls or any future Issue, ond such position moy be different from any views now or hereofter expressed In thiS or any other Issue Janney Montgomery Scali, Inc, which IS registered With the SEC os on Investment adVisor, may give adVice to lIs ,vestment adVisory and other customers Independently of any statements mode In thiS or In any olher Issue Further Information on any security mentIoned herem IS aVailable on request