Viewing Month: April 1972

Tabell’s Market Letter – April 07, 1972

Tabell’s Market Letter – April 07, 1972

Tabell's Market Letter - April 07, 1972
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r—– . I TABELL'S II MARKET LETTER I i 909 STATE ROAD, PRINCETON. NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK EXCHANGE, INC MEMBEA AMERICAN STOCK EXCHANGE April 7,1972 We noted last week the importance of the 930-946 trading range which had contained the Dow during March, suggesting that an upside penetration of that range would indicate 956-960. The dilemma was quickly resolved when, with an ll-point advance on Wednesday, the Dow broke out of the aforementioned range -and; liy arl'tThursilay -moming–m'-suggesled 'faj\get1ff 9lmhaabh–teache(j -.We'also cc5mtnemed – last week on the desirability of such a rally since it could provide a breadth confirmation which had been lacking to date. Whether this breadth confirmation will ultimately be provided is probably the most crucial question about the technical state of the stock market at the moment, andt is, therefore, probably worth discus sing in some detail. Technical market letters, this one being no exception, tend to talk glibly about breadth without defin- ing precisely what they mean. Very briefly, the term breadth is a generic one for indices based on the number of advancing and declining stocks in a given day or week on the New York Stock Exchange. These numbers are readily available in almost any newspaper and their manipulation has been a prime concern of market technicians going back to the 1920's. -The conventional way of treating advance-decline statistics is to use them to create an index. The simplest such index involves simply subtracting the number of declines from advances each day and ac- cumulating the figure. This process produces a line which can be graphed and is often referred to as the advance-decline line, more properly the advance-decline line since it makes no adjustment for the number of issues actually traded. Such an adjustment can be made by dividing the net difference of advances and declines each period by the total number of issues traded, and this more sophisticated index is perhaps the most widely used. Based on empirical observation, we have tended to favor aninde produced by dividing the net difference by the number of stocks unchanged, and it is this accumulation we use in our own daily and weekly breadth indices. Historically, the theory of breadth interpretation has held that each successive peak in the Dow-Jones .Indus trial s. s houldbeconfirmed.by.alik e. p,eak in ,breadth. The Ltheoryis.JhaJiLs.l.c.h, high. ! snot con- adva-firmed, leadership is b';oJ1ling J1lore 'concentrated in blue-chip issues;a.;;ct the nc-; in th';'a-;'age .- – is masking underlying deterioration. This method of interpretation has had a historical record of considerable success in indentifying major market tops. For example, when the market peaked in December, 1961, breadth indices had reached their highs in May of that year and had stubbornly refused to confirm new highs posted by the average. In June of 1965, the Dow reached a peak of around 945, declined to under 840 and then rallied to over 1,000 in February, 1966. Breadth failed to reach a new high on this rally, thus successfully indicating the 1966 bear market. The 1968-1969 record is clear in retrospect although, frankly, it was ambiguous at the time. The Dow peaked in late 1968 at 985, and the subsequent rally in early 1969 carried only to approximately 970. At this pOint, the breadth index was dramatically below its former peak and it is clear that a non- confirmation existed here also. In the present case, as we all remember, the last major peak scored by the Dow had been 950.82 in April of 1971. This was followed by the sharp decline into November of last year. The former Dow high was approximately equalled on March 6 and exceeded decisively in this week's rally. For the moment at least, both daily and weekly breadth indices have failed to confirm their April, 1971 peaks. This is the first potential failure of this type in the entire history of the 1970-1972 bull market. The following table shows the Dow and the breadth index at each rally peak on the way down in the April-November decline. Opposite these figures are the date the previous Dow peak was first penetrated on the way back up in 1971-1972. As can be seen, each successive penetration was confirmed by breadth and breadth figures until the March high and Thursday's high when breadth reached 935.75 failing again to equal the -April, 1971 hgure. – – '– – – – – – – -.–,,— Date of Rally High Breadth Index Date DJIA High Equalled Breadth Index April 1971 June 1971 July 1971 Sept. 1971 950.82 923.06 903.40 920.93 946.2 930.7 924.3 929.2 3/6/72 2/28/12 1/5/72 2/10/72 940.9 936.1 926.9 935.6 Oct. 1971 901.80 921.4 1/5/72 926.9 Now the current breadth index is not all that far below its historic peak, and it would not take much in the way of extension of the rally to bring it back through the April peak figure. Such delayed confirma- tions, moreover, are not at all rare. (There was a period of almost five months in 1963-1964 when breadth failed to confirm new highs in the Dow, before finally doing so.) We will, at the moment, however, be watching breadth figures closely since a continued failure of confirmation could tum what is now a tiny cloud on the horizon into something considerably more menacing. Dow-Jones Industrial (1200 p.m.) 955.22 ANTHONYW. TABELL S&P (1200 p.m.) 109.12 DELAFIELD, HARVEY, TABELL AWTmn statement or expression of opmion or any olher motter here,n conlOlned is, or IS to be deemed to be, directly or 'rWrredly, an aHer or the solicitation of on oHer to buy or sell any secuTlty referred to or mentioned The motter IS presented merely for the converlen(E of the subSCriber While He believe the sources of our Informa 'Ion to be reliable. we In no way represent or guarantee the accuracy thereof nor of the statements mode herein Any adron to be token by the subscTlber should be based on hiS awn mVMhgallan and information Janney Montgomery Scali. Inc.. as a corporahon. and ,ts offICers or employees, may now have. or may later toke. poSlhans or trades In respect to any securities menlloned In thiS or any future Issve, and such poslhon may be different from any views now or hereafter expressed In Ihl5 or any other 15we. Janney Montgomery Scali, Inc. which IS registered With the.5EC as an Investment adVisor. may give adVice 10 ils H\Vestment adVisory and other customers Independently of any stotement5 mode In thiS or rn ony other IssUe. Further rnformollon on any senmty mentioned herein is ovo.lable on request

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Tabell’s Market Letter – April 14, 1972

Tabell’s Market Letter – April 14, 1972

Tabell's Market Letter - April 14, 1972
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TABELL'S MARKET LETTER — –.——–' 909 STATE ROAD. PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK eXCHANGE, INC MEMBER AMERICAN STOCI( ExCHANGE – ., .' . . -… . , . 0 ;'''c .. -.. ,. …….. —. .' .pril l! 19'!. George J. W. Goodman, in an early novel prior to his incarnation as 'Adam Smith', had oile of nis dha1'- acters utter an immortal piece of stock market advice. To his offspring who had been bragging about his cleverness in amassing a stock-market fortune, a wise old father rejoined, Son, never confuse brains with bull markets There is, unfortunately, a tendency in many segments of the financial community, not only to equate investment sagacity with the normal bull market process, but also to confuse a number of sacred cows such as earnings growth with that process. A hypothetical example will illustrate. Suppose an investor, on June 30, 1970, had decided to construct himself a portfolio consisting of six of the widely-recognized growth stocks, Avon Products, Eastman Kodak, IBM, Polaroid, Sears Roebuck and Xerox. He would have every reason to be pleased with his investment results to date. His portfolio value would be up 96 , the first three columns of the table below showing the details. Price 6/30/70 Current Price Advance Earnings 6/30/70 Earnings 12/31/71 Change AVP 70 124 77 1. 55 1. 89 22 EK 64 120 88 2.50 2.60 4 IBM 250 398 60 8.51 9.38 10 S 56 115 105 2.85 3.56 25 PRD 53 133 151 2.10 1.86 -11 XRX 73 145 99 2.26 2.71 20 The crucial questions is Why, and, unfortunately, most investors with similar portfolios would tend to utter pious declamations about the merits of growth stocks. As the table indicates, however, market gains ranging from 60 to 151 were achieved on earnings gains ranging from -11 to 25. The bulk of the;P0rtf0Ho-gain wasachieved, not-through .earningsgrowh,..but,through .theormal,buJI;mar-e!-cproces s . of marking up the price paid for a dollar of earnings. That this process has advanced to a fairly mature stage is suggested by the table below which com- pares the current p/e ratio of each stock to its peak p/e ratio for the 1968-1969 period. As can be seen, three of the six stocks are above that peak and the others are close. Current Price Earnings 1971 Peak P/E 1968-1969 AVP 124 1. 89 66 63 EK 120 2.60 46 40 IBM 398 9.38 42 47 S 115 3.56 32 26 PRD 133 1. 86 72 76 XRX 145 2.71 54 56 The implication, of course, is that further gains based on the market's willingness to pay a higher price for earnings may be limited. The following table takes 1972 estimated earnings for each of the six stocks, applies the highest multiple from the above table and indicates the price at which each stock would sell based on that multiple. As can be seen, the percentage advances from current levels on this basis are limited. Current Price AVP 124 EK 120 IBM 398 S 115 PRD 133 XRX 145 Est. 1972 Earnings Peak P/E 2.10 66 3.00 46 10.50 47 3.90 32 1. 75 76 3 . 1 0 – 56 Potential Price Change 139 12 138 15 494 24 125 9 133 – . — -174c ,,.– … -20 Now it should be made clear what the above study is not intended to do. Most importantly, it is not intended to make any judgment, pro or con, as to the current investment merits of the six companies. It is also not meant to suggest that the target prices mentioned in the last table posses any practical value for investment purposes. It is meant, rather, to reiterate a fact of which we should all remind ourselves as the market makes new highs in a two-year-old bull move, i. e., that the purpose of bull markets is to .-Jiscount rosy futures. It is also meant to suggest that, in the case of such easily-selectable issues as the ones above, the process of discounting may be reasonably well-advanced. The investor's dilemma at this pOint is that further substantial multiple plays can probably be found only by recourse to less convention- al stocks. Such recourse, quite obviously, entails the acceptance of a higher degree of risk. Dow-Jones Industrial (1200 p.m.) 965.98 SSP (1200 p.m.) 109.88 AWTmn ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL No statement or elCpre55ion of opinion or ony other matter herein contained IS. OT IS to be deemed to be, directly or Ind'fedly. an offer or the soliCitation of on offer to buy or sell ony secUrity referred 10 or menllOf'led The moiler IS prenlcd merely for the convef'ienre of the subscriber Wh,le..e belreve the sources of our information to be rehable, we m no way represent or guarantee the occuracy thereof nor of the statements mode herem Any action fo be token by the subSCriber should be based on hiS own Investigation and informatIon Janney Montgomery Seoll, Inc, as a corporollon, and lis officers or employees, moy now have, or may later lake, posilions or trade In respect to any K'Curllles mentIoned In Ihls or any future ISsue, and such poSlhon may be d,fferent from ally ViewS now or hereafter epressed In this or any other ,ssue Janney Montgomery Seolt, Inc, wh,ch 's registered w,th the SEC 0 on ,nvestment adVisor, moy gIVe adVIce to Its mvestmenl odv,sory and other antamers mdependently af any siotements mode m thIS or in any other ISSue Further mformotlon on any seCUTIty mentioned h-erem 's available on request

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Tabell’s Market Letter – April 21, 1972

Tabell’s Market Letter – April 21, 1972

Tabell's Market Letter - April 21, 1972
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—-. -. -. -. TABELL'S MARKET L..I LETTER 909 STATE ROAD, I'RINCETON. NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER AMERICAN STOCK EXCHANGE April 21, 1972 As the market fell prey to a slight sinking spell last Wednesday, we were informed by the New York T , rm-ersco-o-ontoT h–ur sd,ay–m orning –… th a t on..-e r ea – son … was t he debate among money '- – . – . . -…. managers whether to continue chasing glamour issues with high-price earnings ratios- or to -concentrate -on orfierarea1; -irr'the stock market. There may be some doubt as to whether this is a precise explanation for the market's decline, but the eXIstence of such a debate IS undoubtedly a fact of life in the financial community at the moment. It will be recalled that we contributed our own two-cents-worth to the controversy in last week's letter, in which we studied the recent market and earnings history of six leading growth stocks. The conclusions reached were roughly as follows 1) The bulk of the rise from the 1970 lows was due to a markup in mul- tiples rather than earnings growth. 2) This process had brought those multiples to or close to historic peaks. 3) Therefore, further appreciation opportunities in these issues based on the market's willingness to pay more for earnings might be limited. The further conclusion, of course, was that the aggressive investor was forced, at this stage, to seek above-average upside potential in a more volatile and risky clas s of securities. A response to the dilemma on the part of some analysts has been to take another look at cyclical securities. The following table shows the price/earnings ratios, based on 1971 and 1972 estimated earn- ings, for four typical such issues. Stock C-lrrelt Price Earnings 1971 Earnings 1972-E P/1971 EarnIngs P/l972 Earninas Alum. Co. of America 55 2.45 2.75 22 20 Bethlehem Steel 32 3.14 4.00 10 8 International Paper 39 1. 55 2.25 25 17 Phelps Dodge 44 3.62 3.80 12 11 As can be seen, in two cases, at least, the multiples are modest by any standards. International -Paper.!.s-mu!tipl e .i snot.high-ba s ed ,0n-the…earningsimprmL8mentanticipaJei.f.Qr.l9).i!.Ild..theJe!atil1.1y. high prIce being paid for Alcoa can be explained by the fact that the substantial earnings improvement is not expected before the second half of this year. In any case, the multiples are considerably lower than those of the growth issues discussed last week. It is at least plausible to reason, therefore, the econ- omy being in the early stages of a cyclical recovery, that substantial earnings gains in is sues of this sort may result in considerably higher prices. Plausible but not necessarily probable. The last major cyclical recovery the economy has enjoyed ran from 1961 through 1966. The following table shows the earnings of the four issues for the 12 months ended June, 1961 and the 12 months ended' December, 1966. As can be seen, the gains were substan- tia!. The percentage increases in earnings for the period compare favorably with the increases for the same period In such growth stocks as IBM (114), Eastman Kodak (171) and Sears Roebuck (72). Stock Earnings 6/30/61 Earnings 12/31/66 Increase Alu I. CO. of America 1. 70 4.83 184 Bethlehem Steel 1. 50 3.72 148 International Paper 1.52 2.40 57 Phelps Dodge 2.00 4.05 102 Unfortunately, for the same period, market gains in the stocks were either nominal or non-existent. The follOWIng table shows the prices of the four issues in June, 1961 and in December, 1966, together with the price/earnings ratios at the time. The obvious rationality of the market's treatment of cyclical issues IS apparent. While it is willing to place a premium multiple on cyclically-depressed earnings, it tends to place a much lower multiple on peak earnings. Thus, the investor who buys cyclical stocks —at this point must convince himself, not only that earnings are going to improve,-but, that; after-the– appropriate multiple markdown, there will be room left for price appreCiation. Stock PrIG! 6/30/61 PiE Ratio Price 12/31/66 PiE Ratio Price Chanqc Alum. Co. of America 72 42 90 19 25 Bethlehem Steel 42 28 36 10 -14 International Paper 31 20 29 12 -6 Phelps Dodge 30 15 38 9 26 Like last week's study, the above is intended to be only a generalization. Quite obviously, we think a number of investment current opportunities can be found in industries whIch might fall 1 n tot '. cyclical classification. We do not thInk, however, that, If most growth stocks are fully-prIced, It is necessarily a corollary that most cyclical issues are relative bargains. Dow-Jones Industrial (1200 p.m.) 969.97 S&P (1200 p.m.) 109.29 AWTmn ANTHONY W. TIIBLLL DELAFILLD, HARVey, TABLLL No statement or exprCUlon of opInion or any other matter herein contained 1, or IS 10 be deemed to be, dlreClly or Indirectly, on offer or the sollcltallon of on offer to buy or sell any security referred to or mentioned The moiler IS presented merely for Ihe convef'lena of the subscriber While we believe Ihe sources of ovr mforma- tion to be rel.able, we In no way represent or guarantee the accuracy thereof nor of the stalements mude herein Any ochon to be laken by the ubscflber should be based on hl own investigation and Information Janney Montgomery Scott, Inc, as 0 corporat.on, and .ts officers or employees, may now have, or may later toke, pOllhons or trades In respect to any seCUrities ment.oned In thiS or any future Issue, and such poslhon may be different from any views now or hereafter expressed In thiS or any other Issue Janney Montgomery Scott, Inc, which IS registered with the SEC as on Investment adVisor, may give adVice to Its Investment odv.so!), and other customen Independently of any statements made In Ihls or In any other Issue Further Information on any security mentioned herein IS aVailable on request —-

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Tabell’s Market Letter – April 28, 1972

Tabell’s Market Letter – April 28, 1972

Tabell's Market Letter - April 28, 1972
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TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK EXCHANGE INC MEMBER AMERICAN STOCK EXCHANGE April 28, 1972 — – pasf a Moderage weakness has, for a chC!nge, bE!en the dominant factor in equity markets over the coupfe -ciJ week;;-'A1rattaii11ri(i new'lJuYG;;;arJethigh, closing at 968. 92 oApdf the Dow-Jones Industrial Average slid to a level of 946.49 on Tuesday, before recovering mildly at the end of the week's trading. Declines of similar magnitude were posted in the broader-based indices. To date, the drop appears to fit squarely into the context of the intermediate-term uptrend which began at the 800 level last November and which has carried the Dow up some 170 points in a five-month period. There have, in those exciting five months, been only three corrections worthy of the name. A 3.06 decline lasting six days took place in mid-January, a 2.26 decline lasting five days occurred in early March, and the recent drop, lasting for five days, was 2.31. At its recent low, the Dow had reached the downside objective of the small distributional top built up during mid-April and was reposing in a strong support zone at 950-930. Moreover, even were the above support not to hold (and the logical expectation is that it should), immediate downside risks do not appear to be Sizeable. A possible downside target for the Dow would lie in the 900-894 area, and the comparable objective for the S&P 500 would be 105-102. Neither of these figures represents a substantial risk from current levels. We do think, however, that there may be more reason for concern at this stage than there wasaLprevious lnterruptionsof-theadNance,,,,Thereare.anumberofreasons-for-thtsc.F-ir-st- is the desultory breadth action which we discussed at length three weeks ago. The deterioration noted at that time has continued. Secondly, at its mid-April high, the Dow was at a historic resistance level of considerable magnitude. Finally, the basically unhealthy supplydemand situation which has been overhanging the market for a year now continues to be negated only by the persistent willingness of the margin buyer to increase his borrowings. As we have suggested in past issues of this letter, this willingness is likely to continue at least over the intermediate term. It is, however, not the most substantial support on which a bull market could re st. On the favorable side, of course, is the absence of any eVidence of the sort of speculative phase which would signal a classic termination of a major upside move. It still seems to us probable, especially considering the character of recent buying, that such a phase should emerge at some stage of the game, and it could produce dynamic moves in individual is sues. Actually, secondary and tertiary issues appear to constitute the major area with considerable room still existing on the upside. As we tried to suggest in our last two letters, both conventional growth and conventional cyclical issues appear to be, at least, fairly well exploited on a fundamental basis. – There are those who, on reading-the'above,-wiH'accuse usof'indulging'in-;the-classic forecaster's refuge of hedging. We do not intend it thus. The behavior of the investor at this stage must, it seems to us, depend in large degree on his own inclinations. In view of the risks and rewards being offered at this stage, it would be perfectly plausible in our view for the conservative investor to assume a reasonably defensive position. Whether he should do this depends on whether he can accept with equanimity the possibility of a fairly dynamic speculative upsurge in which he would not be a participant. The aggressive investor, of course, can opt to continue to seek substantial capital gains opportunities in unexploited areas of the market. He, however, must realize that he is accepting a somewhat higher degree of risk than has prevailed in the past. Dow-Jones Industrial (1200 p.m.) 951.38 S&P (1200 p.m.) 107.50 ANTHONYW. TAB ELL AWTmn DELAFIELD, HARVEY, TABELL No !clement or expreuion of opinion or ony other motter here'n contolned IS, or 15 10 be deemed 10 be, directly or indirectly, on offer or the hCltotlon of on offer 10 buy 01 '!.till any !.etUflty fe(erred to or mentIoned The matter IS presel'lled merely for the c.onver'lenoo of thc subscrIber WhIle we belIeve Ihe sources of our Informa tlon to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements mude here, Any action to be token by the subSCriber should be based an hIS own invcUlgahon ond Informotlon Janney Montgomery coil, Inc, as 0 corporotlon, and Its offIcers or employees, may now have, or may later toke, posihons or Irodes In respect to any secUritIes mentIoned m thl5 or any future Issue, and such poslhon may be dIfferent from any vles now or hereafter expressed In thIS or any other Issue Janney Montgomery Scoll, Inc, whICh IS regIstered wllh the SEC as on Investment adVisor, may gIve adVICe to It mvestment adVISOry ond alhel customers Independently of any statements made In thIS or In ony other Issue FUr/her mformatlOn on ony seOJnly mentIoned herem IS available on request \

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