Tabell’s Market Letter – October 30, 1987

Tabell’s Market Letter – October 30, 1987

Tabell's Market Letter - October 30, 1987
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11&\ISHEL L S Rl IEII LIETII IE R 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 October 30. 1987 Last week's market action can truthfully be defined as routine. This, of course, IS not true in any historical–sense…—Howev.er …..considecing the extraordinarynatur9C thewek wbich ppeceded them. of -the past five days, with their still wide. but less extreme, swings, lie well within th– range – — normal expectation. We noted, 8 week ago, that a test of the lows following an identifiable selling climax was 8 normal feature of climactIc bottoms. We stated further that there exists no hard-snd-fast rule to determine whether or not such a test need involve new lows below the climax bottoms. That particular dilemma still faces us. The Dow had a closing low this Monday at 1793.93 compared with a week earlier close of 1738.74. Wednesday's intra-day bottom of 1767.74 this week was well above the October 20 intra-day nadir of 1616.21. Whether this can be considered a successful test remains moot. We continue to feel that 8 new low remains 8 possibility. although Thursdays and Friday's strength, especially in the light of unfavorable news from abroad, must be acknowledged 8S impressive. Last week. in discussing market action for fall. 1987. we compared it with that of 1929. pointing out that most measures of recent trading exceeded records which had been set 58 years ago. It has been suggested by many analysts, notably Irving Kristal in Wednesdays Wall Street Journal, that a 1961-1962 comparison would be more apt. A case for such 8 comparison can certamly be made. The 1961-1962 bear market was one of the few that has taken place totally without any associated business recession. It occurred simply because with the Dow at 24 times earnings, the market had reached an excessive valuation level. Simllar conditions, of course, have prevailed recently. At this summer's peak above 2700, pIe ratios and yields were in the same general area of overvaluation that they had attained in 1961. If current forecasts are to be believed (and are not subject to later revision) a 1988 recession is it would seem, unlikely. From a technical point of view, 1929, 1962, and 1987 all possess typical selling-climax characteristics. The same point can of course, be made regarding dozens of other climax lows. We prefer, however, to equate 1987 with 1929 for one very simple reason. They were bigger. Equating the recent drop with any collapse other than 1929 is like comparing a housecat to a lion because they – —- –arflboth-oatsS.——————————————————– The recent drop and 1929-1930 are addItionally alike, in our view, in that they can both be associated with internal market structures which became untenable. In 1929 we learned, by way of 20/20 hindsight. that the villain was excessive stock market credit. Our hypothesis at the moment is that the same case could be made for this year although a more convoluted situation currently exists. The new factor which has entered the 1987 market equation has, of course, been the widespread use of futures contracts. Such contracts require as little or less margin than stocks required in 1929. At least two sets of participants in futures markets can, it seems to us, contribute to market volatility. One such set comprises floor traders, whose time horizon can be measured in minutes. The second such class consists of portfolio insurers, who, by definition, tend to sell on drops and buy on rallies. Futures markets, of course, are linked with stock markets via arbitrage (we use the word in its original sense) transactions carried out by program traders. In our view such traders have been unfairly blamed for the late crash, since they act simply as a conduit between the stock and futures markets. In simply taking advantage of intra-market spreads, they are no more culpable than the pedestrian who, perceiving a 100 bill lying on the sidewalk bends over to pick it up. The above is, of course, only a hypothesis. Autumn, 1987 will it is safe to say, be examined as no other market has been examined before. We will, at some time in the future, know a great deal more about who, in those tumultuous days, was doing what to whom. It may be that such a study will suggest relatively simple changes in trading mechanisms which could eliminate the apparently destabilizing force engendered by futures trading. One thinks, in this connection, of the now-almost-forgotten triple witching hours, which have effectively dIsappeared with the change from closing to opening settlements. There is here—we have said it before and will be saying it again—no suggestion that the similarity of the past fortnight's technical action to that of October-November 1929 necessarily indicates an aftermath similar to 1930-1932, which was, of course, when the real damage was done. It is devoutly to be wished that the lessons of 1929 have been adequately learned. We must admit our confidence in this regard has been slightly damaged by what seems to be total absence of questioning of current conventional wisdom which rails against the evils of the budget deficit and preaches the necessity of its immediate elimination. We were encouraged to learn. via the front page of Wednesday's New York Times, that a fair number of economists share our skepticism in this direction. However, the thought that deficit reduction which would indeed have been a proper policy in the early 1980's, might not be the correct prescription for 1987-1988 has, apparently. not crossed the minds of any of our 100 senators and 435 representatives. This is a subject we intend to discuss further in future issues. ANTHONY W. TABELL DELAFIELD. HARVEY. TABELL INC. AWTebh Dow Jones Industrials (12 00) 2002.82 S & P 500 (1200) 252.32 Cumulative Index (10129187) 2938.94 No statemenl or expression 01 opInion or any olher matter herein contained IS, or IS to be deemed to be, directly or Indirectly, an offer or lhe soliCitation of an offer to buy or sell any secUrity referred to or menlloned The matter IS presented merely for the convenience of the subSCriber While we believe the sources of our Information to be reliable, we In no way represent or guarantee the accuracy thereof norof the statements made herein Any actIOn to be taken by the subscnber should be based on hiS own Investigation and informatIOn Delafield, Harvey, Tabelllnc, as a corporallon and ItS officers or employees, may now have, or may later take, posItIOns or trades In respect to any secuntles mentioned In thiS or any future Issue, and such pOSitIon may be dlHerent from any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabellinc , which IS registered With the SEC as an Investment adVisor, may give adVIce to Its Investment adVISOry and other customers Independently 01 any statements made In thiS or In any other Issue Further InformatIOn on any securrty mentioned herein IS available on request

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