Tabell’s Market Letter – April 06, 1984

TABELL'S MARKET LETTER 909 STATE ROAD. PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (609) 9249660 – April 6. 1984 avin gicbeen- unableto. generate sufficientdemand toproduce-an-effective bot tom at -theI1-30- H'AO, level. the Dow moved this week to a new low. suggesting that the basing process' may. as we suspected. take some time and involve lower levels over the short term. We continue to feel. though. that tliese lows will not be all that different from the ones already posted. Interestingly. the collapse was triggered by a not-unexpected rise in the prime rate and constituted yet another manifestation of the current conventional wisdom regarding the stock market and interest rates. That now current conventional wisdom seems to run as fOllows. Bond yields are now in the vicinity of 13. The recent inflation rate is in the vicinity of 4-5. Subtracting one from the other produces an extraordinarily high real rate of return of 8-9. Since this is roughly twice the current yield on highgrade stocks. the recent rule of thumb has been that. when the bond market catches cold. the stock market gets pneumonia. Even when bonds are compared to stocks on an absolute basis the results are pretty dismal. The most recent P IE ratio for the S & P 500 was 11. 37 which translates to an earnings yield of 8.8. again. pretty paltry compared to the 13 figure above. This common perception. since it is now in the rather advanced stages of development. has had the opportunity to become a great deal more sophisticated than the simple observation of interest rates and has evolved into the well-established sport of Fed watching. The Fed. of course. has been dragged. kicking and screaming. in recent years into the perception that its major function is controlling the rate of growth of the money supply. Monetary economists. who are largely responsible for this perception. would minimize the effects. over the intermediate term. of such a policy. properly administered. on interest rates. Wall Street has not bought this perception. It has long been convinced that the Fed's res- ponse to excessive money-supply growth will be to ratchet interest rates upward. However. we are well beyond simply postulating that the market will rise when money supply falls and vice versa. The moneysupply game is now somewhat like the beauty contest suggested by Lord Keynes. where the object is not to pick the most beautiful girl but the girl whom the other judges will percieve as most beautiful. Each ,week. these days. the sages.,make a guess as to what the money sllP.plyn.g be with the market lending to move in the following week bas'ed on whether the actual change was greater or lesser than that guess. The reader may have detected the fact that we tend toward a certain skepticism as regards this entire process. Space permits only the barest outline of the reasons for such skepticism. To begin with, the concept of the real interest rate is an elusive one. one dealt with perceptively by David Ranson in Tuesday's Wall Street Journal. Mr. Ranson suggests that what we may be seeing at the moment is not high real interest rates but a high level of inflationary expectations. This seems eminently logical. In- flation rates have been falling only for a couple of years now and had been rising for a couple of decades before that. It is hard to find strong levels of conviction backing the premise that the current relative- ly low inflation rate is permanent or the even more radical premise that the drop in the inflation rate which started in the early 1980's is likely to continue. It seems to us clear that built into the current level of bond prices is a perception of renewed inflation. This perception could be correct. but like many such notions in the past. i.e . the inevitable post-war depression of the late 1940's. it could prove to be wrong. Moreover. while many analysts are pointing out that stock returns look low in relation to bonds. few of them are citing any historical evidence to suggest just what that relationship. in fact. ought to be. In fact. this relationship has varied widely over time. and. although high bond yields certainly place some sort of effective ceiling on stock prices. it is difficult to tell just where that ceiling exists. Our biggest objection to the current conventional wisdom. however. is that it is currently approach- ing total reductio ad absurdum of turning the world upside down. A continuing recovery. we are told. will produce greater loan demand. followed by upward pressure on the money supply. followed by restrictive Fed action. followed by rising interest rates. followed by lower stock prices. Ergo — and we have seen this written in so many words — a strong recovery (and better corporate profits) is bear- ish for stock prices. We are. perhaps. old-fashioned. but this seems to be a bit far out. None of the above is meant to suggest that the current preoccupation with interest rates is about to go away soon, and. indeed. it has been ingrained long enough so that it will probably die hard. It has reached the stage, however, where some real surprises could be produced when, inevitably I for whatever reason, the current theoretical house of cards collapses. AWTrs ANTHONY W. TABELL DELAFIELD. HARVEY. TABELL INC. Dow-Jones Industrials (12 00 p.m.) S & P Composite (1200 p.m.) Cumulative Index (4/5184) 1130.13 155.13 1942.70 No statemont or expressIon of opInion or any other matter herein contained IS, or Is to be deemed to be, dlrecllv or indirectly, an alter or the soliCitation of an offer 10 buy or sell any security referred loor menl10ned The malter Is preseo1ed merely for the convenience of Ihe subscnbor While we bellevelhe sources at our mformallon to be reliable, we In no way represent or guarantee the accuracy Ihereof nor of the statemenlS made herem Any action to be taken by the subscriber should be based on hiS own Iflvestlgatlon and Informallon Delafield, Harvey, Tabell Inc, as a corporatIOn and Its ofllcers or employees, may now have, or may later lake, positions or 1rades In respeclto any secuntles mentIOned mlhls or any future Issue, and such posl\lon may be dllfcrent from any views now or hereafter expressed m this or any other Issue Delafield, Harvey, Tabell Inc, which Isreglsterel With the SECas an Investment adVisor, may give advlceta Its Investment adviSOry and other customers IndependenUyol any statements made m thiS or In any other Issue Furthermformallon on any secunly mentioned herein Is avanableon request