Tabell’s Market Letter – October 26, 1984

Tabell’s Market Letter – October 26, 1984

Tabell's Market Letter - October 26, 1984
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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 October 26, 1984 .– . We devoteLt)us leterlast week to adiscussion of the recent short-term strength in utility stocks and explored th-e flliTdain(iilf1iJlhitOri(trelationshlp tfinCh';s. seeme'dto7xjstbetweenthe-;YielQs ,n'those . stocks and the yields on the long-term bonds issued by the same utilities. Due to space iimitations, we' did not have the opportumty to discuss in any detail the current technical patterns for utility issues, a subject that is not. Ilt the moment. without interesting implications, both for the stocks themselves and for what the patterns appear to suggest regarding current market expectations — especially expectations In the nrea of interest rates. As we noted last week. most electric -utility issues reached their alltime highs sometime around 1965, highs which most lssues have yet to exceed. Following thelr achievement of tlrse highs, they essentially sat out two major bull markets, 1966-1968 and 1970-1973. This did not, however, prevent them from being full-dress participants in the 1973-1974 debacle. and, at the culmination of that downswing, most posted 20-year lows. A fairly sharp recovery from an extreme oversold position took place between 1974 and 1976,and the general pattern was one of a fair degree of resistence to the 1976-1978 bear market. After secondary lows in 1980. a strong recovery set in, and downside resistence to the 1981-1982 bear market was also demonstrated. At varymg times within recent years,most stocks have managed to move well ahead of highs scored in 1976. Most laggard issues that had not moved above their 1976 highs earlier have been able to do so on the recent strength. It lS not necessary to be an expert technician to realize that what we are talking about here are extensive bases, bases which, in the typical pattern, extend from 1973 to 1981, an eight-year period. During those eight years the price fluctuations have been extensive, and it is those price fluctuations which build up patterns suggesting the ultimate upside objectives of the bases. Those upside objectives are. to say the least, impressive. It is not uncommon to find utility stocks with long-term objectives (and here the qualifier, long term, must be emphasized) double and triple their current prices. About half of all utility lssues — here it is necessary to be selective — have penetrated most or all of the -overhead 'Supply-tnat-'exists fromothe 'originabtops-of-the-late-lc9601nd-ea..ly-le-pointed-out. last week that a relationship. however variable, has existed between utility yields and long-term interest rates. It is therefore hard to visualize utilities possessing the sorts of price patterns they now display without deducing therefrom market expectations, not only for lower, but for significantly lower, interest rates. This expectation would appear to be confirmed by the technical patterns for stocks in other interest-sensitive areas. There exists a fair number of bond-market experts who are currently presenting an eloquent case. on a fundamental basis, for what appears to be the market expectation. That is their field, not ours, and we happily leave It to them. We cannot. however, resist the observation that often consensus expert opinions are correct on the direction of a trend but conservative on that trend's extent. We would not be surprised if this were the current case. It is, of course, possible to base an argument for lower interest rates on the familiar 1!real-inter- est-rate theory. The September CPI report, released this week, carne up with its usual indication of inflation running around a 4 rate, and it is difficult at the moment to visualize any immediate change in this trend. Recent wage settlements seem well in line with potential productivity increases. and we are currently watching OPEC slowly come apart at the seams in a scenario that could have been lifted from t any first-year economics text. While a simpleminded relationship between inflation and interest rates has. in our view, been thoroughly dlscredited, it is certainly hard to see inflationary expectations providing any upward stimulus for money rates. One can base the expectation of lower rates on nothing more than observation of long-term history. Interest rates have historically moved in long cycles, and those cycles have peaked at levels at or below the rates that have prevailed for the past four or five years. To one who has observed interest rates long enough, figures signiflcantly lower than current ones are hardly unthinkable. We walked into this industry as a callow youth 30 years ago and found a yield curve running from it to 3.. which everyone seemed to consider- perfectly ,normal. From this perspective. we find nothing unusual a!tu!. rates a 4 great deal lower than those currently prevailing. Quite obvlously, if the market expectation (and our reading of it) is correct, the financial environment will be greatly changed. As one example, interest payment constitutes some 70 of the current federal deficit, about which everyone, in this preelection period, appears to be concerned. Although the precise nature of the relationship can be questioned J we are certainly willing to accept some portion of the conventional wisdom regarding lower lnterest rates being bullish for stock prices. In any case. based on the apparent current market picture. we must count ourselves in the bullish camp as far as the long- term interest-rate outlook is concerned. AWT rs ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. Dow-Jones Industrials (1200 p.m.) S & P Composlte (12.00 p.m.) Cumulative Index (10/25/84) 1207.16 165.26 2070.22 No statement or expression of opinion or any other matter herem contained Is, or 1 to be deemed to be, directly or Indirectly, an oHer or the sollcltallon of an oHerto buyer sell any secunty referred to or mentioned The mattor Is presented merely for Ihe convenience olthe subSCriber While we believe the sources of ourmlormallon to be reliable, we In no way represenl or guaranteelhe accuracy thereol nor 01 the statements made herem Any acllon to be taken by the subSCriber should be based on hiS own mvestlgahon and mformatlOn Delafield Harvey laben tnc as a corporafion and Its otllcers or employees, may now haye, or may later take, pOSItions or trades In respect to any securities mentlonea m thiS or any future Issue nd such position my be dlflerent hom any Ylews now or hereafter expressed In this or any other Issue Delafield, Harvey, labell Inc, which IS registered Wllh Ihe SEC as an InVell\ment adlsor, may glyeadYlce to Its Investment ad..lsory and other customers Independently 01 any statements made In thiS or In any other Issue FUher mformatlon on any security mentioned herem IS a..allab\e on request

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