Tabell’s Market Letter – June 26, 1981

,..-, …. '-lo TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK eXCHANGE, INC MEMBER AMERICAN STOCK eXCHANGE June 26, 1981 '–Veteran-observers are well aware-that the-stocKmarket, at variOUS poiritslntime,–tenas tobecome obsessed with one particular area of the financial scene. It is obvious, at the moment, that the market's current obsession is with interest rates and the money supply, and almost every move, up or down, tends to be explained, not entirely without justification, by developments on this front. It is interesting that the market has chosen almost totally to ignore the basic fiscal policy changes being proposed by the Reagan Administration and now in various stages of progress through Congress. It is, in our view, at least an arguable premise that the final form taken by these changes will have a considerably more far-reaching effect on corporate earning power and thus on corporate market value than will the day-to-day fluctuations of interest rates which are the market's current major concern. There is .. for example, the entire approach which has become embodied in the catch-all phrase, supplyside economics. The basic supply-side claims, it seems to us, have profound implications for the stock market. The controversial assertion that supply-side tax cuts will ultimately result in increased tax revenues and thus reduced fiscal pressure is justified on the premise that the proper application of tax reduction will stimulate capital investment and thus productivity. This can only work, it would appear, through increasing corporate cash flows in many areas, thus producing a fairly profound effect on capital values. This is an area that should, at least, be of direct interest to the stock market. These supply-side claims are opposedby two equally vocal but totally different groups, one on the political left, the other on the right. The first group is comprised of the aging neo-Keynesians who dominated fiscal policy thinking for so many years and whose economic models are totally at variance with the concept of supply-side stimulus. The second group consists of balance-the-budget-beforeanything-else conservatives who are unwilling to assume the inflationary risks implicit in supply-side tax cuts, which might not perform as advertised. What is lacking in all three participants in the debate, the two above plus the supply-side proponents, is any noticeable sense of humility. One would -suppose-t-ht-economisthose-past-forecastin-record,–hkehat-of-market-analysts-,-falls-comliderllblr— short of perfection, would be aware that they practice an inexact science. and it is an unfortunate fact that no one knows, with any degree of certainty, what the effects of supply-side tax reduction will be, including those, pro and con, who are most vocal in expressing their opinions. It is this element of uncertainty, in our view, which may constitute an important barrier to the stock market's upside progress. Meanwhile, various sub-elements of the proposed tax changes seem to be of basic importance as far as the stock market is concerned. One, OfcoUllse, isapossible reduced level of capital-gains taxes, a possibility raising all manner of theoretical questions which space prevents discussing in a single issue of this letter. Another change of significant importance entails revised depreciation allowances, centering around what was originally 3-5-10 and what has now, apparently, become 3-5-15. We cannot avoid interjecting our own view that it is in this area that the administration's tax proposals find themselves on the shakiest ground. Depreciation, it should be remembered, is a provision involving recovery of the cost of an asset over the useful life of that asset. We fail to understand how an administration basically committed to an inherent skepticism regarding the beneficient powers of government can believe that the useful life of an asset can be determined by government fiat. It certainly cannot be gainsaid that present depreciation provisions fail to provide for recovery of a long-term asset's cost in an inflationary environment. The problem with monkeying around with governmentdecreed useful lives, it seems to us, is nothing more than an attempt to introduce a countervailing unreality as an antidote to another unreality. More fundamental cures for the disease exist. One such has been proposed by a pair of Harvard academics who propose replacing depreciation taken over a period of years with a one-shot allowance for an asset's cost appropriately discounted over its useful life. Arcane as this proposal may sound, a moment's thought will convince one that it has the undoubted merit of adjusting for future inflation ,regardless of amount, since the entire depreciation allowance is made available in the same dollars used to purchase the original asset. Another proposal which would work equally as well would be provision for allowing the mark-up of existing assets at various intervals to replacement value less accumulated depreciation and re-adjustment of depreciation schedules to recover that amount over the asset's remaining useful life. Despite these quibbles, however, there exists in this quarter basically very little quarrel with the administration's tax packages. It is our view, based, we freely admit, as much on hope and optimism as on analysis, that the ultimate results of supply-side tax reduction could be pleasantly surprising, not only to the recipients of the tax cuts, but to the economy as a whole. This pleasant surprise, in turn, could result in a surprisingly good equity market. Dow-Jones Industrials (12 00 PM) 994.67 S & P Composite (12 00 PM) 132.80 ANTHONY W. TAB ELL DELAFIELD, HARVEY. TAB ELL AWTsla No statement or cxpreSllon of opinion or any alher moffer herein conta,ned is, or 15 to be deemed to be. directly or indireCTly, on offer or the 10l\clloloon of on offer to buy or sell any security referred to or mentioned The motter IS presented merely for the converlence of Ihe suhscrlber While oNe believe the sources of our mformatlon to be rehoble, we In no way represent or guaran'ee the accuracy thereof nor of the statements mude herein Any action 10 be taen by the subscriber should be based on his own Investigation and Information Janney!t0ntgomery Scotl, Inc, as a corporation, and liS officers or employees, may now have, or may later lake POSitions or trades In respect to any securities mentioned In thls–or any future Issue, and such POSition may be d,fferenl from any views now or hereaher expressed In thl or any other Issue Janney Montgomery Scott, Inc, which IS r;;glstercd With the SEC as an Investment adVisor, may give adVice to Its Investmen' odvlso'Y al'lrl olhel customers Il'Idependently of ol'ly statements mode In thiS or In any other luue Further information on any security mentIOned herein IS availablE' on request