Tabell’s Market Letter – April 11, 1975

Tabell’s Market Letter – April 11, 1975

Tabell's Market Letter - April 11, 1975
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TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, 'NEW JERSEY 08540 DIVISION OF MEMeEA NEW YORI( STOCI( eXCHANGE, INC MEMBeR AMERICAN STOCK EXCHANGE April 11, 1975 . We JO , had the -.. pleasurelast week — .,.F – – oL,ttending.. — — a . m – ee – ti n g of.the – Mar …….. k- et–T-e-c.hn i c i a n' s- A-s sociatio..n… '- a professional organization composed of our fellow practitioners of market analysis and one dedicated …. to raising the standards of that profession. The theme of the meeting was the growing use of techni- cal analysis by professional investment managers and the conclusion was, indeed, that such use had been mcreasing. A secondary theme emerged, suggesting that the reason for this increasing use was that, over the past two or three years, at least, technical analysis had been right or more useful in determining portfolio policy, while fundamental analysis had been wrong or less useful. Now, obviously, as practicing technicians, we are willing to defend the use of technical analysis. but in this case we would also like,at least partially,to defend our fundamentalist brethren. To the extent that fundamental analysis has been wrong since the early part of 1973, it is not, in our view, that the principles of security analysis have been incorrect but that inept security analysis has been in- correct. Let us illustrate what we suggest by this statement. From the first quarter of 1973 through the third quarter of 1974, corporate prof,its rose steadily, earnings on the Dow, for example, increasing from just over 70 to just under 100. During precisely the same period, the stock market went through the most severe bear market it had seen since the 1930's. In the fourth quarter of 1974, earn- ings flattened out and will undoubtedly decrease rather sharply in the first quarter of 1975. That same period has seen one of the sharpest rises in the stock market during the postwar period. To the extent, therefore, that the fundamental analyst has concentrated on forecasting quarter- to-quarter earnings changes and making buy and sell recommendations based thereon, he has, in fact, been wrong. Yet precisely that error has been committed over and over again. It is quite easy to ,teJTlontrlte tha!lacYBf,thlg .ort.of appoi'chillJerJTlcs .. o,!he vrg,-..a.',ehaveone.q9I1e , .. ut , the mistake tends to be committed more often in terms of individual stocks. All too often buy and sell recommendations are made on nothing more than a projection of increasing or decreasing earnings. The now-thoroughly-discredited one-decision theory was nothing more than an extension of this fallacy, suggesting, two years ago, that the favorite growth stocks were appropriate conservative in- vestment vehicles because their earnings were continuing to increase, without regard to the price being paid for those earnings. None of this, however, is a criticism of security analysis itself. It is simply a criticism of security analysis misapplied. The suggestion that technical work, to the extent that it was able to forecast the market decline of 1973-74 and the subsequent rise in 1975,was correct and that funda- mental analysis, to the extent that it failed to anticipate these phenomena,was incorrect, raises some interesting paints about the relative roles of the people who are, or should be, involved in portfolio strategy deciSions — the security analyst, the technician and the portfolio manager. We have often suggested, not entirely facetiously, to our fundamentalist colleagues, a golden rule that the security analyst should be prohibited from ever using the words buy or sell. We are, incidentally, perfectly willing to extend the same prohibition to the technician. It is the third party, the portfolio manager, who should ultimately make the buy or sell decision. Quite obviously, inputs from the security analyst and the technician should be important to him in that decision, but they will not be the sole inputs, since he must also concern himself with the nature and objectives of the funds under management. What we are saying, in other words, is that it is the role of the security analyst to present facts about individual companies and industries. These facts include shorterand-longer-range .earnings – -projections, assessment of the factors that-ight cuse chan'ges in these projec-tiOM, anaiysis of financial condition and, not least, an assessment of the relative value offered by a given security at a given price both on an historical basis and compared with alternative investment opportunities. All of this can be done without once uttering the two no-no words above. The techniCian, equally, can concern himself with identifying the major and minor trends for an individual security and for the general market and with an assessment of the prospects for a reversal of those trends. This also can be accomplished without specific suggestions of purchase or sale. The portfolio manager, adequately supplied with the inputs mentioned above, coupling them with his own professional expertise and knowledge of the requirements of and risk aversion of the funds under management, is well-equipped to make the ultimate purchase or sale decis'ion. Dow-Jones Industrials (1200 p.m.) 783.09 S & P Compo (1200 p.m.) 83.79 ANTHONY W. TABELL DELAFIELD, HARVEY. TABELL Cumulative Index (4/10/75) 468.23 AWT/jb No statement or e)tpre10n of opU'lIon or any other matter here'n contomed IS, or IS to be deemed to be, directly or mdlrectly, on offer or the OII(;.lollon of an offer to buy or sell ony security referred to or menhoned The matter IS presented merely for the convellence of the subscriber While we beheve the sources of our information to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements mude herein Any actIOn to be token by Ihe subscfI\ler should be based on hiS own Invesllgahon and Information Jonney Montgomery Scott, Inc, as a corporation, and Its oHlcers or employees, may now hove, or may loter toe, positions or trade In respect to any securities menloned In thiS or any future ISSUe, and such position may be different from any vlev..s now or hereafter epressed In t!'us or any other Issue Jonney Montgomery Scott, tnc , which IS rllglslered With the SEC os on mveSTment adVisor, may give adVice to its Investment adVISOry and othel customers Independently of any statements mode In thiS or In any other Issue Funher mformatton on cny security menttoned heretn IS available on request

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