Tabell’s Market Letter – September 02, 1988

U'Li\ IiHE LO. S RIEU' LIEU'''U'1E1Rl 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC 1609J 987-2300 September 2, 1988 Random thoughts in a desultory market. On-eontrary…..gpinion-0nefhe.., more- venerable 'WallS treet notIOns sug gests' t hat t he- pl'oper – – – mindset for the successful investor involves holding a contrary opinion. This admonition is based on the observed tendency of markets to carry current fads to extremes, thus producing booms followed by inevitable busts. Therefore the theory that one should attempt to cultivate an opinion opposite to that of the majorIty of market partIcipants. This hypotheSIS has often been oversimplified and transformed into the dictum that the majority is always wrong.. Indeed, preclsely the opposite is true. The majorIty is right most of the time. Garfield Drew, who used odd-lot tradIng as a proxy for uninformed majority opinion, regularly protested the misinterpretahon of his data which stated that the odd-lot trader was usually wrong. He was wrong, Drew wrote, only at turning points—SllCh as when, havIng been a heavy seller in a falling market, he continued selling after the market turned up. Market partlcipants have changed roles since Drew's heyday, and the majority of investors are now profeSSIOnals. Levels of professionally held cash are known to be high, and there are those who, 1n the name of contrary opinion, would derive encouragement from this fact. We are less optimistic. There will occur, at some stage, a major turnIng pOInt, and it will be accompanied by maXImum pessimIsm and consequent large holdings of cash. However, there is nothing to stop the current climate of skepticism from continuing for a protracted period. It is dIfficult to tell, therefore, when, and more importantly, where than turning point will be. On the Mysterious East An example of the diffIculties in antiClpatmg at just what point a trend has carried to extremes may be found in the Japanese stock market. It has been patently obvious for some years now that that market has been wildly overvalued in relation to the world in general and the United States in particular. Its response to this obvious fact has been to continue rising and becoming more overvalued. most recently by moving well above its August high early this year. In the past couple of weeks, Tokyo has moved down fairly sharply, leading to speculation as -'—4to—whet-her4h-elon-g-heraided—coHa-pse–maybe–underwOddlynou-gh7'there Rppearnolitne'—I agreement among U. S. observers as to what a Japanese bear market would mean to us. One theory holds that, since the Japanese market constitutes 40 of world market value. a Tokyo collapse would be exported to other markets as was the U.S. crash in 1929, and Japan's weakness was cited as one reason for Thursday's 29-point drop in the Dow. It has conversely been suggested that money leaving Japan might well graVItate to the U.S. market and that falling Japanese stock prices would, therefore, be bullish for Wall Street. On Shelter A market that has been rIsing even longer than Japan's, indeed for some 50 years now. is the U. S. real estate market. This fact is noted in an article in the August 22 issue of Barron's. entitled liThe Coming Collapse of Home Prices. The article is a provocative attempt to employ contrary thinking, and we would place it in the category of recommended reading. We can hardly do otherWIse since we made many of the same arguments in this space a few years ago. Following our comments at that time, housing prices promptly doubled. providmg yet another object lesson on being too early m anticipating the end of a trend. It will be interesting to see whether the present article's timing is any better. On Inflation The anti-real-estate argument suggests that it should do less well in a perIOd of relatively low inflation. However, the stock market's current worry seems to be renewed mt1ation. Another widely heard excuse for Thursday's decline was the somewhat pixilated reasoning that unemployment figures (not then released) would be down, leading the Federal Reserve to further credit tightening and, therefore, to higher interest rates. The same reasoning explained Friday's rally after unemployment actually rose, thus. presumably, eliminating the prospect of Greenspan's running amok. Our own feeling IS that the Inflationary spectre, which seems to be terrorizing market participants at the moment may be somewhat ephemeral. For example, antlcipated inflatIon, one would think. would have produced some strength in gold, the classic inflation hedge. No such tendency has been evident. The apparent bottoming of the dollar in foreign-exchange markets is. likewise, something other than a harbinger of renewed inflation. It is, indeed, arguable that the real underlying pressures on the U.S. economy may, in fact, be detlationary. This would help explain why everybody'S favorite bugaboo of the past few years, the budget Government deficit. has been accompanied by relatively stable prices rather than the rising ones classical economics would tell us to expect. If one is looking for a really contrary opinion, the economic benefits of the deficit might be a good starting point. AWTebh Dow Jones Industrials 0200) S & P 500 (1200) Cumulative Index (9/1/88) 2032.00 261.65 3782.75 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, directly or indirectly, an ofter orthe soliCitation of an ofter to buy Of sell any security referred 10 or mentioned The matter IS presenled merely for Ihe convenience of the subscnber While we believe the sources 01 our Information to be reliable, we In no way represent or guarantee the accuracy thereof nor oj the statements made herein Any action to be taken by the subSCriber should be based on hiS own investigation and information Delafield, HaNey, TabeUlnc, as a corporallOn and Its officers or employees, may now have, Or may taler take, posilions or trades In respect to any securles mentioned In thiS or any future Issue, and such poSition may be different from any views now or hereaffer expressed In thiS Or any other Issue Delafield, HaNey, Tabel1lnc , which IS registered With the SEC as an Investment adVisor, may give adVIce to (ts rnvestment adviSOry and other customers Independently of any statements made rn thiS or If! any other ISsue Further Informatron on any seCUrity mentIoned herein IS available on request