Tabell’s Market Letter – July 01, 1988

TABELL'S MARKET LETTER 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 – July I, 1988 Well after the fact, experts are still unable to agree on an exact explanation of what happened to !the stock a,!et he fall. 187 ere exists some gagreement ta.!he i!,l'dJ'.9.uyf.J!l.arket . , haa- structul'eS to tie-al Illf'derlvatT'\te proo,!cts I'Qay have somethIng to do WitH. It. but preCIsely what, ' remains a matter of intense debate. We may. indeed. never have a full consensus. (There is even some revisionist theory circulating these days that margin debt had nothing to do with 1929—a notion comparable in its inane charm to the idea that Francis Bacon wrote Shakespeare's plays.) Returning to 1987, the cynics among us, of course, can regard it as simply another episode which could have corne out of Extraordinary Popular Delusions and the Madness of Crowds. Essentially what happened was the the market spent three years steadfastly ignoring deterIOrating fundamentals and then, for whatever reason, realized what It had been doing and. in October. suddenly recognized reality This recognition, ironically, came about at almost exactly the point at which the deterioration was complete. Date S & P 500 12-mo Earns PIE Consider the data in the table at left For the year 1984, the Standard & Poor's 500 earned 16.64, this figure representing a newall-time high At its Dec 1984 167.24 16.64 10.1 1984 close of 167.24, it was selling for a modest ten Mar 1985 180.66 16.39 11.0 times those earnings—in possible recognition of the Jun 1985 191.85 15.61 12.3 fact that the next three years would be difficult ones Sep 1985 182.08 15.23 12.0 for corporate profits. Over the next two-and-a-half Dec 1985 211.28 14.61 '14.5 years, to June, 1987, those earnings were to drop 13 Mar 1986 238.90 14.52 16.5 to 14.43, falling in seven of the ten quarters. The Jun 1986 251.81 14.71 17.1 market's response to this was to double. Sep 1986 231.32 14.85 15.6 Iromcally, the collapse in the second half of Dec 1986 242.17 14.48 16.7 1987 occurred almost immediately after earnings had hit Mar 1987 291.70 15.10 19.3 their lows in the second quarter of that year and were Jun 1987 304 00 14 43 21.1 starting to improve. Over the past year. the earmngs Sep 1987 321.83 15.86 20.3 rebound has been close to 40, and current estimates, – Dec 1987 247.08 17.50 14.1 – M or -1 9 R-8Pc8- – – 2 5'81l9'-'i-a'6 -1-I-;3 . admittedly subject these days to almost insta!!nt,,–I revision. call fOFfUrther '-increases1Jrtoi988 arid Jun 1988 273.50 20.50 13.3 1989. Given the extent of earnings recovery, the S & P 500 now finds itself, even at a post-crash high, selling for a rather modest thirteen times earnings. It has all, interestingly, happened before. The table at right shows similar quarterly figures for the period between September, 1959 and December, 1962 along with subsequent annual figures into 1965. The 343 whiCh the S & P earned for the twelve months ended September, 1959 was a new recovery high, and close to the all-time peak posted in 1955. The earnings low in June, 1961 led. by two quarters. the December high in prices, just as the June, 1987 earnings low had led the market high by four months. The 1962 break moved the pricel earnings ratio from a record 22.4 high to around the fifteen level in late 1962. Once again, the break occurred concurrently with the beginning of a substantial earnings recovery which, by the end of 1965, had been extended to 71 What may be relevant to the current instance is that the final realization—around the second half of 1962—that earnings were in an uptrend produced modest recovery in the S & P price! earnings ratio which. having fallen from 22 to 15, returned to the 17-18 level in 1963 and 1964. Whether such a recovery takes place in the Date Sep 1959 De c 1959 Mar 1960 Jun 1960 Sep 1960 Dec 1960 Mar 1961 Jun 1961 Sep 1961 Dec 1961 Mar 1962 Jun 1962 Sep 1962 Dec 1962 De c 1963 De c 1964 Dec 1965 S & P 500 12-mo.Earns PIE 56.88 59.89 55.34 56.92 53.52 59. II 65.06 64.64 66.73 71.55 69.55 54.75 56.27 63.10 75.02 84.75 92.43 3.43 16.6 3.39 17.7 3.39 16.3 3.26 17.5 3.27 16.4 3.27 18.1 3.09 21.1 3.03 21.3 3.05 21.9 3.19 22.4 3 37 20.6 3.47 15.8 3.53 15.9 3.67 17.2 4.02 18.7 4;55–18, 6 – – – 1 5.19 17.8 present instance will probably be the major determinant of how good the present rally is going to be. Current valuations of earnings, applied to an estimated 1989 S & P earnings level of 22.40, would result in a move of less than 8 from current levels On the other hand, recovery of just half the ground lost since mid-1987, to a pie of, say, 16.5, could produce a new high Whether the market's confidence can be restored to this degree is questionable. but such restoration does have some historical precedent. ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. AWTebh Dow Jones Industrials (12 00) S & P 500 (12 00) Cumulative Index (6/30/88) 2135.84 272.45 392632 No statement or expression oj Opinion or any other matler herein contained IS, or IS to be deemed to be, directly or Indirectly, an offer or the so/Icltalion. of an offer to buy or sell any security referred to or mentioned The matter IS presented merely for the convenience of the subscnber While we beheve the sources of our Informauon to be reliable, we In no way represenl or guarantee the accuracy thereot nor of the statements made herein Any acllon to be taken by the subSCriber should be based on hiS own investigation and information Delafield, Harvey, Tabelllnc, as a corporation and ItS olflcers 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 poSIi!on may be different from any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabellinc , which IS registered Wlth the SEC as an IIwestment advisor, may gIVe adVice to Its Investment adVISOry and other customers Independenlly of any statements made In thiS or In any other Issue Further information on any security mentioned herein IS available on request