Tabell’s Market Letter – October 19, 1984

r 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) 924-9660 . –;—. – 9ct9ber19.,1964. – – – – ofThe upside explosion WhICh fodk 'place late Thursday and eariY Frida)' was -typicaf the – – recent market environment, in which long periods of time doing nothing are interspersed with sharp moves to new price levels. As this is written, the market is testing its mid-September peako and ability to move above that peak would suggest a further test of last year's highs. Meanwhile, new highs have already been attained in a number of market sectors including. notably, utility stocks which, until Thursday, were just about the sole upside feature. We mean no disrespect to one of America's more conservative industries in mentioning the proverb about every dog having its day. However, it does appear partIcularly appropriate in the current instance of recent utility action. If one looks at the widely-followed market indicators, the past month had not been. until yesterday, a good one for the equity market. Both the Dow and the S & P attained their most recent highs just about a month ago, in mid-September. and, at lows posted 10 days ago, were down 5.04 and 4.26 respectively. Meanwhile, the Standard & Poor's utility index, which was at the 69. 92 level on the day the other averages made their nighs, closed last night at 74.46 for a 6! advance, having, in the process, moved ahead on 16 out of 23 trading days. One fact widely noted in the reports on this phenomenon was the fact that utilities were seI- ling at an 18-year high dating back to the time, as the Wall Street Journal pointed out, that ham- burger sold for 50 a pound. This is indeed true, since, to be precise, the last time the S & P utilities sold above last night's close was on January 18. 1966. It is. however, an instance of damning with faint praise. Almost all the other major market indicators achieved new alltime highs some years ago and subsequently moved well above. and. for the most part, remain well above, those previous peaks. The DowJones Industrials. for example, were, on January 18, 1966, at 994 ;20- versusoday's—–evel -of-over -1200. – —-7—–,-,…——-!—1 The furor, however, prompted us into some examination of the -record of utility' stocks over the period in question. The actual aIltime peak for the S & P Index, not yet exceeded, was on May 12, 1965 at a level of 78. 20.The most interesting sidelight to this figure is that thedividends for the index for the year 1965 was 2.49 . thus providing a yield of 3.18. To those accustomed to to- day's returns, this figure may seem almost microscopic, but it was, in fact, 70 of the yield pro- vided by AA Public Utility Bonds, which, at that time, were returning in the vicinity of 4.6. Interestingly enough, if one takes the current yield on utility stocks, around 8.9, we find that it is just about 70 of the yield available on AA Public Utility Bonds. We have, in other words, spent 19 long years in arriving back at the same place. How we got there, however, is interesting. The rationale, then as now, for the purchase of utility stocks was the fact that they were expected to provide a growing income stream, and this, indeed, they have done. Over 19 years to the third quarter of 1984, dividends on the S & P Index have increased from 2,45 to 6.48. They have. moreover. done so at an impressively steady rate working out to an annual increase of 5.25. The fact that price, for almost two decades, has done nothing in the face of steadily increasing dividends is. thus, purely and simply a function of in- creasing money rates over the two decades in question. What we find most interesting is the return to the same relationship to utility bonds that prevailed in 1965. Actually this relationship — utility commons yielding som 70 of the return available on senior securities — prevailed throughout the late 1960's. After wild swings during the early 1970's, it stabilized in the late 1970's at around 85 and has spent the 1980's coming down once more to the 70 level. Curiously, if one compute,s the 20-year discounted values of (a) a steady income stream and (b) an income stream which starts at 70 of the first one but increases at 51 annually, one finds that they are about the same. The investor in public utility commons and public utility bonds 19 years ago therefore wound up receiving about the same return. It was not a very good return, of course, but that is another story. One wonders if the prospects for the next two decades are not somewhat different. The rate of growth in utility dividends could slow of course, but, without making any forecast for long interest rates over the next 20 years. we doubt that they are going to triple, which is just about what they did over the last twenty. Under these conditions. the results for utility equity invest- ors. even with the stocks at the same level that marked their historic peak, could be improved over the dismal record for the 1965-1984 period. AWT rs ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. Dow-Jones Industrials (1200 p.m.) 1232.44 S & P Composite (1200 p.m.) 169.16 Cumulative Index (10/18.84) 2069.24 NO statement or e,,pfBSslon of opinion or any olhe' matter herein contained IS or IS to be deemed 10 be dlreclly or indirectly, an offer or the soliCitation 01 an offer to buy or sell any security reterred loor mentioned The matte/Is presented merely 101 the COfWenl(lnce of the subSCriber While we b1!lleve the sources 01 our mformahon to be reliable, we In no way represent 01 guarantee the accuracy lhoreof nor of the statements made herem Any aCIt!;m 10 be laken by the subscnber should be based on his own InvestigatiOn and mformatlon Dela/leld Harvey Tabell Inc as a corporation and Its officers or employees, may now have or may laler lake, pos/hons or trades In lespect 10 any seurllies menhonecl In thiS or any future Issue. nd such poslhon my be dlftarent from any vtews nawor he/ealler expressed In thiS or any other Issue Delatleld Harvey Tabeff tnc, which IS reglslered With the SEC as an Investment adVisor, maYQlveadvlce to ItS Investment adVISOry and Other customers Independently of any statements made m thIS or m any other Issue Further ,iormatlon on any security mentioned herem IS available on request