Tabell’s Market Letter – November 19, 1982

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON. NEW JERSEY OB540 DIVISION OF MEMBER NEW VORK STOCK eXCHANGE. INC MEMBER AMERICAN STOCK EXCHANGE November 19,982 -I ThFsubjecto-CtliiSletter, and, we hope, a numberof follow.on-Ietters, will be-interest rates. Now this, we realize, constitutes another one of those introductory sentences perfectly calculated to send our readers into a state of utter torpor. Those readers will have been bombarded with enough esoteric discussions of this particular subject to have reached the point of utter satiety. Yet the statement, for this publication at least, has some degree of applicability. We have not mentioned interest rates, except in passing, for some three months. We doubt that many of our brethren in the financial-punditry field are able to make a similar statement. For indeed it has been just about impossible to find any financial commentary, in the daily press or elsewhere, over the past few months, that has not explained the action of the stock market, often solely, in terms of interest rates. We hear on one day that the White House (the White House) expects a drop in the discount rate, and the market goes up. The next day the rumor is denied, and the market promptly retreats. One would indeed suspect that market analysts have forgotten everything they had previously learned and have taken up Fed-watching as a full-time occupation. Prefering to concentrate on our own area of expertise, technical analysis, we have eschewed this particular sport and tried to stick to our knitting. The last time we did mention interest rates in this space was in the final paragraph of our letter of August 20. After voicing the opinion that the Dow had reached an effective bottom the week before, we said, Pay no attention to the- excuses. The factor widely cited as the reason for the rally was lower interest rates or, more properly, forecasted lower in- terest rates. This, of course is nonsense. The market went up quite simply because for some months now, it has been in a technical position to do so. Interest rate forecasts have come and gone throughout that period with little or no effect. n In retrospect, this would appear to rank as one of the more wildly incorrect pronouncements we have made in a long career of sticking out our neck. As we all know, since we penned those particular words, the Dow-Jones Industrial Average 1–Iows-ta;gtehde90ane-adra-rye-cTorredas3u7ry advance betwe BillYiela was e 9n. August12and Nov 51, Certificates of ember 3. Deposit r e On the turned day the mJlJkeLlIllldeits 12.25, and the Dow-Jones 20-Bond Average stood at 60.18. Today T-Bill. and CD yields have declined to 8.36 and 9.10, and the Dow bonds are at 71.10. Meanwhile, as noted above, almost all extant explanations for the stock-market rise have centered upon the concomitant fall in interest rates. After all of this, we still are not sure we want to apologize too strenUOUSly for our statement of last August. We will pmnulgate herewith two rules regarding the stock market and stock-market experts. The first rule is that nobody really knows exactly why the stock market behaves as it does day-to-Eiay. The second is that everyone thinks he does — or at least finds it his professional interest to pretend that such is the case. Thus since, over the past three months, the stock market has been rising and interest rates have been falling, the world's easiest cop-out has been to relate the two phenomena. The only trouble with this, is that, for those of us with long memories, it doesn't wash. Al- though one would scarcely believe it from the breathless commentary, there have been times in the past, other than the past three months, when the stock market has risen and risen quite substantially. There has, at those times, invariably existed a conventional wisdom which has informed us, with utter certainty, as to why the rise had been taking place. Those expbmations have varied widely from bull market to . bull market, and they have often, indeed most of the time, centered on factors other than interest rates. Indeed, some of us can remember when the stock market went UP in response to such things as steel pro- duction and carloadings. But we are giving away our age. It is not our intent to claim that there exists no relationship between interest rates and stock prices. Indeed, one can be demonstrated, but, in the process of such demonstration, it becomes appar- ent that the relationship is at best limited. This is an exercise we have engaged in in the past and one which we intend to reiterate in the sequels to this letter. A more fundamental difficulty is the fact that there exists no universal agreement on the funda- mental questions ofl why interest rates go up or down and what it means when they do. In this repect economists are' subject to the- same rules cited for' slockcmarket expertsab-ove. It is possible ,- for example, to cite at least four widely respected yet contending schools of economic thought which vouchsafe entire- ly different explanations for interest-rate phenomena. Recent published explanations have tended to bor- row freely from all of these schools, citing whichever one appeared to be most helpful in supporting the point the analyst was trying to prove. We think, in other words, that there remain pitfalls in a too-facile linkage of interest rates and the stock market. We will try to provide more concrete warning against these pitfalls in subsequent issues. AWTrs ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL Dow-Jones Industrials (1200 p.m.) 1033.38 S & P Composite (12 00 p.m.) 138.34 Cumulative Index (11/18/82 1489.73 No ,Iolemen or expreS'lon of opinion or any olner mailer herein contained Is, or IS to be deemed 10 be, directly or mdHedlr,' on offer or the sollCllallon of an offel 10 buy or II anr. security referred to or mentioned lhe matter IS presented merely for Ihe convenlen of Ihe subscllber Whl e -He belIeve the sources of our mlorma- han 10 be rel1ab e, we .n no way represent or guarantee the accuracy thereof nor of Ihe Slolements mude herem Any actIon 10 be laken by the subscllber should be bosed on his own mvestlgotlon ond Informollon Jonney Montgomery Scott, Inc, as a corporatIon, and Its offIcers or employees, may now hove, or moy laler lake, poslt.ons or trades In respect 10 any seculilies menlloned In thIS or any future Issue, ond such pOSItIon may be d,fferenl from ony vIews now or hereafler expressed In thIS or any other luue Janney Montgomery Scott, Inc., whIch IS regl!tered WIth the SEC -os on Illvestmellt odvlsor, moy 9,ve adVICe to lIs Inveslment adVISOry and olhel CVlomers mdependently of any statements mode In thIS or In any olher Issue Further InformatIon on any secullty mentIOned hereIn IS available on request