Tabell’s Market Letter – February 22, 1980

Tabell’s Market Letter – February 22, 1980

Tabell's Market Letter - February 22, 1980
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TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW 'tOAK,STOCK eXCHANGE, INC MEMBER AMERICAN STOCI( eXCHANGE February 22, 1980 – —;, – …..,-……….— – ;z ,nA ' -Thursday's sharp' 18-point drop in the Dow-Jones' Industrial Average signalized, in .all probability, the end of the initial phase of the advance which began in early January and the beginning of the first corrective phase of 1980. Based on the present pattern, it is difficult to envision this correction turn- ing into anything of more than minor proportions. In the case of the Dow, a distributional pattern, which has been building through most of February, indeed exists, and suggests, at worst, a testing of the level from which the advance started, around 830-820. The pattern on more broadly based aver- ages is more difficult to read, but if anything, the downside implications in most of these indices are somewhat less serious than those of the Dow. Further vulnerability may emerge if distributional pat- terns broaden on the expected correction, but downside risk at the moment does not appear great. As readers are aware, overall stock market action at least until two weeks ago, has been positive ever since last fall. This firmness has been in sharp contrast to the action of the long-term bond market where trading has been described, not inappropriately, with words like disaster. At the beg- inning of last September, when most stock averages first attained highs which have since been comfortably exceeded, the Dow-Jones 4Q-Bond Average was at a level around 85. It closed Thursday at 66.63 for a decline well in excess of 20. u. S. Government Bonds are supposedly the safest of all investments. In the same period, Treasury 8!'s of 1994-99 have declined from 94 to just over 68. We have witnessed, in other words, a rather ,unique six-month period in which stocks have provided capital protection and long-term bonds have produced major portfolio losses. At current levels, yields on long-term taxable bonds are approaching the 15 figure. There is a reason for all of this which centers around the single word, Inflation, and we have gone through the rather dreary mathematics in this space before. Let us once more go through the motions of calculating the 'true return on a 15, 25-year bond to an investor in the 50 tax bracket. One needs to begin with the rather shocking reminder that, at continued 13 inflation, one hundred for this is to recognize that a bond selling at par today is, in effect, at a 97-point premium over its maturity value, and this premium must be recouped by a charge against income. That annual charge is 3.88 in 1980 dollars. A hypothetical investor, therefore, can anticipate a stream of 15 annual income increments for each 100 invested, out of which the government takes its tax bite, leaving him with 7.50. The value of this 7.50 continually erodes as inflation increases. It is 6.53 in the first year, 1. 86 in the tenth year, and 0.23 in the final year. With the 3.88. constant-dollar, annual charee against it, the income stream actually turns negative after five years and becomes increasingly negative for the subsequent twenty. The total calculated loss at the end of 15 years in constant 1980 dollars is 38.84, producing a real dollar return of zero and a capital shrinkage of 1.95 per year. Even for the tax-exempt investor who can buy a hypothetical 15 bond without a tax liability, the overall return is, in fact, slightly negative. In other words, if such an investor holds a 15 bond to maturity and inflatjon remains at 13, he will have earned no return in real dollars and wind up just about breaking even. To alter this dreary projection, one of two variables would have to change. The first possible al- teration, a consumation devoutely to be wished, would be a decline in the inflation rate. It would, however, be necessary for the inflation rate to drop to 6! to produce a simple break-even return on a 15, 25-year bond to an investor in the 50 tax bracket. It is also possible, of course, that if anticipated inflation remains at the 13 level, available long-term yields might increase. For our hypotheti- cal investor to reach the break-even point at a 13 inflation level, however, an annual yield of 31 would be required. In light of these figures, it seems to us, the sharp decline in bond prices over the last six months has been not at all irrational nor, in our view, has been the recently improved performance of comnion stocks. Current yields on equities may now be from a third t() a half that offered by bonds, but at least dividends offer the prospect of an improvement which may keep pace with inflation, and indeed studies which have appeared in the space have documented the fact that the recent history of stock dividends has tended to achieve this target. The recent rush of new funds to the stock market has come, it seems to us, as sort of a last resort, a realization that, for all the historic vicissitudes of the stock market, there may not be a better place to be. This is a new sort of justification for the purchase of common stocks, but it may well be a valid one. Dow-Jones Industrials (12 00 PM) 868.68 S & P Composite (12 00 PM) 115.11 Cumulative Index (2/21180) 824.18 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL AWT sla No stotement or expression of opinion or any other molter here'n contolned IS, or IS 10 be deemed to be, directly or mdnec11y, on offer or the OI'Cllollon of 07 offer to buy or sell any secunty referred fo Or mentioned The moiler '5 presented merely far Ihe of the svbsc(lbe' While one believe the sovrces of our In,ormo- lion to be rellClble, we In no woy represent or guarantee the accuracy thereof nor ot Ihe statements mude herem Any act,on to be taien by the subscriber should be based on hiS own inVestigation and Information Janney Montgomery Scott, Inc, as a corporation, and Its afflcers or employees, may now hove, or may later loke, poslhons or trades In respect 10 any sewrltles mentioned m thiS or any lutvre Issue, and svch pOSition may be different from ony views now or hereafter e.pressed In '''tiS or any other Issue Janney Montgomery 5c01l, Inc, which IS registered With the SEC 05 on Investme'1t adVisor, may give adVice 10 Its Investment adv1sory and othel cuslomors Independently of any statements mode on thiS or on any other Issue Further mformatlon on any security me'1tlaned herein IS available on request

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