Tabell’s Market Letter – October 22, 1971

————————————-.., TABELL'S MARKET LETTER t, – . .J 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISIO OF MEMBER NEW YORK STOCK eXCHANGE. INC MEMBER AMERICAN STOCK eXCHANGE – October 22, 1971 About a year and a half ago. the Institutional Investor magazine emblazoned its cover with the 1–l'lealthles5 rP'''hr,a,,s,e ;,,'This-isn'-t-'a 'bear'marketr—Thisis'the 'way things-are'going to -be fFomn0w0n.''– – The line tended to evoke nervous chuckles. At the time, the monetary squeeze was exerting its full pressure, the economy was halfway into a receSSion, the end of which was not clearly visible, and earnings comparisons were proving, to say the least, disappointing. Underthe circumstances, a plunge in equity prices was a logical expectation, and plunge they did, with the sickening thud typical of a bear market. Time passed. Prices bottomed in May, and by August, the obvious signs of a bull market were manifest. The warning, implicit in the magazine cover, was forgotten, as the recession ended, money flowed into the economy, and earnings projections began to improve. As we progressed to the Fall of 1971, the universal expectation was for an improving economic picture for 1972. Yet, in this totally different environment, stock prices were behaving in a manner much reminiscent of the Spring of 1970. We suggested in last week's letter that such behavior was totally consistent with our concep- tion of supply/demand forces affecting the equity market, and we discussed some of these forces in detail in our letter of September 3. It is worth reiterating them here, however, because it seems important to us to understand Just why the market has behaved as it has in the face of a quite obviously improved fundamental outlook. It is arguable, in other words, that this the way things are going to be from now on. To begin with, we have to disabuse ourselves of the notion that earnings have anything — ;11,, — .to do with the te.lool.oLstock Driro l\Tn L .. tho . 10. sentence brings the collective wrath of the fil .,,1 analyst community down on our head, we suggest that it be re-read — with particular emphasis on the phrase aggregate level. Earnings, of course, have a great deal to do with the prices of stocks relative to each other. The price of all stocks taken together is something else again. It is obviously possible for this figure to rise when, and only when, demand for stocks exceeds supply, and to fall when, and only when, the reverse is the case. The demand for all investment media, stocks included, derives ultimately from the rate of cor- porate and personal savings. This annual savings increment must be divided, in some way, bet1illEBn stocks and other forms of investment. Just how this division takes place cannot, of course, be documented, but it obviously must depend to some degree on prospective rates of return offered by other investments vs. those offered by equities. The division having been made, net demand for equities can be arrived at by subtracting from potential demand the total number of new common stock offerings. The residual figure is what will ultimately exert the upward or downward push on the stock market. Thus, in simplest terms, if stocks offer high rates vis-a-vis bonds and new offerings of common stock are low, it is potentially bullish for stock prices. If the relative rate offered by bonds (and other investments) is high, and new offerings of equities are at high levels, the im- plications are negative. This is precisely the case at the present time. Bond yields are well abo\e stock yields and have obviously been attracting fairly substantial amounts of individual and institutional money. Meanwhile, 'new offerings of equities-have been'at-recordor'near-'record levls- since June. Net result — the stock market posted a high last April and has not been near that high ever since. Now, as sugges ted above, this exercise is intended as an explanation rather than a forecast. As we noted in last week's letter, we do not see, in the present picture, the plethora of broad dis- tributional patterns which would suggest a bear market of the 1969-l970 scale. The most plausible downside objective, as we suggested last week, is 85G-835, the upper part of which range was touched during last week's trading. Also, on the plus side is the fact that a speculative binge, which normally has to be liquidated in a bear market, never really got off the ground this Spring. Under these circumstances, we think it probable that a near-term bottom may be at hand. None- theless, the factors mentioned above will remain with us and should be taken into account in stock market decisions. We think, in other words, that capital protection, as well as capital en- hancement, should be a major factor in investment decisions in the months ahead. Dow-Jones Industrial (1100 a. m.) 859.08 ANTHONY W. TABELL S&P (1100 a.m.) 96.29 AWTmn DELAFIELD, HARVEY, TABELL No statement Of expreUlon of opmlon or any Ofher motter herein contolned 1, or Il to be deemed to be. directly or indirectly, an offer or Ihe sollcilolton of an offer to buy or sell ony sect,rnty referred to Or mentioned The matter IS presented merely for the converlenCE of the subscnber While -c believe the sources of our informa- tion to be relioble, we In no way represent or guorontee the Clccuroty thereof nor of the stolements mude herein Any odlOn to be token by the subSCriber should be bosed on hiS own IrlVeshgollon and Informallon Janney Montgomery Scott, Inc. os 0 corporollon, and Its officers or employees, moy now have, or may loler lake, paS/fians or trodes In respect loony .secuTltles mentioned In fIIS OT any fulure JUue, ond sum poJlJon may be d,fferent from any views now or hereafter expressed Irl Ih,s or any other Issue Janney Monrgomery Scott, Inc, whICh ,s registered wl,h the SEC CIS on Investment adVISor, moy give adVice 10 Its Invelmenl advisory ond othel customen Independently of ony statements mode In thiS or In any olher ISsue Ft,rrther II'lformatlon on any secunty mentioned herem IS ovollable on request