Tabell’s Market Letter – April 15, 1988

, \, '1TIBUEIL.IL. S RIEU' 1L.1E'1T'1J1E 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 April 15, 1988 Lord Keynes (who, besIdes being a professor of economics. was a highly successful stock-market -I—- 8pecula tor )–once.. hkened-theinv-estmen-t–proce8S- to-'-bein g –one 'Of–'-8 ….panel-of–jud ges for-a-' beauty'con test. In this parhcular contest. however, the object of the exercise was not to pICk the most beauhful girl, but rather to pick the girl most of the other judges were likely to choose as most beautiful. Thursday's IOO-point fall in the Dow brought this comparIson to mind. since the universally accepted rationale for the drop was the fact that the U. S. merchandise trade deficit for February (Today's date. remember, is April 15) was 13.83 billion which, we were told. was substantially above expected levels around 11 billion. Perhaps so, but the link between the two events, at least according to most fmancial commentary, depends roughly on the following chain of reasomng 1. The trade deficit is an important indicator of the health of the economy. 2. A one-month observahon of a highly volatile series is significant in predicting the future course of that series .. 3. Chairman Greenspan and the rest of the Fed Board of Governors believe that short-term interest rates have a substantial impact on the balance-of-payments deficit, since hIgher U.S. rates tend to attract increased foreign investment. 4. These same gentlemen further believe that Federal Reserve policy, for which they are responsible, is a major determinant of interest rates. 5. They are. therefore. likely use their power to raise short-term rates, which, in turn, should produce a concomitant decline. 6. Bonds, therefore. will attract investment funds away from stocks, and, thus— 7. Stock prices will move lower. On this. we are to blame a loss of well over 100 bilhon in equity values. Now, none of the theorems postulated above are inherently implausible, but the extent to which they depend on what goes on in other people's heads is Interesting. There are, essentially, two mutually exclusive theories as to just what the Fed produces when it manipUlates the tools at its . . .-I—–,disposal- .-..!l'-hecla-ssieal–vlewsuggest-5tha-t suchmanipulahonaffects-the—economy-by-changes-'in—- -,—–.- interest rates. Thls view was standard from the birth of the Federal Reserve System and appears to be regaining stature today. There was, however. the interregnum of former Chairman Volcker during which the Fed appeared to believe that it was charged with the manlpulation of the money supply. Monetarists. who, during this perIod, were kings of the economic mountain, conceded that Fed action might have a short-term effect on interest rates but that, over the long term, expansive monetary policy. by producing a greater demand for credit, would, ultimately. cause interest rates to rise. Wall Street, it will be recalled, was never quIte converted to thIS view. Only a few years ago, everything stopped on Thursday afternoons awaiting the report on the week's money-supply data. An increase in Ml, or one of the other assorted M's. was sure to produce a decline in the stock market since psychoanalysis of Paul Volcker indicated that he would feel compelled to tighten money, thus raising interest rates, which would affect the bond market, which would affect the stock market, etc etc. Chairman Greenspan is no less immune from psychoanalysis. It is wldely felt that he will react to faster-than-average economIC expansion by tightening money for fear of a renewal of inflation. We have even, mirablle dictu. reached the stage where rising profits are used as Justification for a falling stock market. This particular paradox arises from yet another compulsion to probe the minds of others. Earnings are significant these days, not by being up or down but by being greater or less than expected. This has given rise to a new cottage industry, the compilation of earnings estimates. There has even developed a theory that investment managers should be following, not changes in earnings, but changes in estimates. Here we have Lord Keynes' beauty contest with a vengeance. There exists. of course, an opposing hypothesis of how the investor should react to the opinions of others—the theory of contrary opinion. Along with many of our fellow technicians, we are believers in this theory, but it has always. in our view, had a practical difficulty in that it is difficult to know to just what opmions one should be contrary. A recent summary of widely read market-letters contained – one' suggestion that there were far 'too many disbelievers in the – – …. ongoing- bear-market theory. and that, therefore, the market should head lower. There were 18 other market letters quoted on the same page, and, of those, 15 were bearish. There are, we think we have emphasized. a fair number of uncertainties about the current market picture. and investors should react to such uncertainties in a fashion that makes them feel most comfortable. If the market is to continue to move lower. though, it will do so in response to forces a good deal more basic and fundamental than a one-month change in a smgle isolated economic series. AWTebh Dow Jones Industrials (1200) S & P 500 (1200) Cumulative Index (4/14/88) 1995.69 256.67 3613.77 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. No statement or expression of opInion or any other matter herein contained IS, or IS to be deemed to be, dlreclly or indirectly, an offer or the soliCitation of an offer to buy or sell any security referred to or menlloned The matter IS presented merely for the convenience of the subscrtber While we believe the sources of our information to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements made herein Any action to be taken by the subscriber should be based on hiS own Investlgallon and information Delafield, Harvey, Tabelllnc, as a corporation and Its officers or employees, may now have, or may later lake, posrtlons or trades In respect to any securities mentioned In thiS or any future Issue, and such pOSition may be dlHerent trom 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 rts llweslmenl adVISOry and other customers mdependently of any statements made In thiS or In any other Issue Further information on any secUrity mentioned herein IS available on request