Tabell’s Market Letter – June 01, 1990

TABELL'S MARKET LETTER 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609)987-2300 June I, 1990 We suggested last week that recent market strength could be viewed as a triumph of Bent-iment-.over'momentum..Most–Surveys–ofJ.-investorshad'indicated-''fidespreadlevelof'''''-,''''''-'-s–'I- bearishness, and this bearishness was being made manifest by record high levels of institutional cash. In a market dominated by professional investors, the worst fear of the typical participant is not the loss of money (whlch is not his, anyway), but loss of his job, In these performance-conscious days. the shortest route to unemployment is failure to participate in a rising market. This particular syndrome. we think, goes a long way toward explaining market action of the past fortnight and also why market strength, over the short-term at least, is likely to continue. Given this condition, it is logical to ask Why so much bearishness. It seems to us that pessimism is a mindset easily stimulated by recalling the most-common headlines featured in the financial press over the last year or so. It is, for example, probable that- the saga which has received the most column-inches of late is the Savings-and-Loan crisis. We have, by now, become perfectly accustomed to reading each morning how many more hundreds of billions of dollars the whole sordid mess is going to cost us. It all certainly sounds like bad news, but it is probably worthwhile, as in all such cases, to take a somewhat harder look. One observation seems appropriate to begin with. The operative phrase describing the current process seems to be 8 & L BailoutT1 It makes as much sense to say that a policeman, having apprehended the mugger who has lifted my wallet is, when he returns it to me, bailing out the robber. The bailees in this case are not the 8 & Vs, but their depositors. This distinction is not trivial since it relates to the original founding of the Federal Deposit Insurance Corporation back in 1933. (Yes, we know that S & Vs are insured by a different entity, but the principle is the same.) Recall that the basic princ;le of the American banking system is that the banks do not actually have your money, despite what their monthly statements tell you. They possess, on hand, in liquid form, only a small fraction of 1-.- this sum. The system ..,……'''(iepositors-lslikEily… to wisithpdrreadwicamteunde,o,n.itth-etMprseammisee-tltmhea.t- nlofilm9-o3re3, t hwaen wa esrme allOloIfriaiicitFiboacnkioift-t1je-…………..,,,……,..,,…1 dismal collapse of that system—failures begetting failures until the so-calied Bank Holiday became necessary. It was apparent, in March 1933, that the most pervasive economic problem of the many the country faced was the collapse of confidence in the banking system, and it was reasoned that the best way to restore that confidence was to use 8 sort of government seal of approval. Thus, began Federal Deposit Insurance—all the way up to the astronomical sum of 5,000. Government programs, however, have a tendency to metastasize. If a little is good, legislators reason, more must obviously be better, and deposit insurance has grown beyond the wildest dreams of its initiators—with a 100,000 limit, the extension to S & Vs, the freeing of the S & Vs to invest in all manner of exotic pieces of paper, and a host of other differences too numerous to recount here. And it now appears, Borne 60 years later, that there are some consequences which were unforeseen in 1933. The irony, though, is that deposit insurance has worked. It has succeeded in doing precisely what it was designed to do—eliminate crises of confidence of the sort which caused the disastrous bank runs of the early 1930's. It would be absolutely inconceivable to a 1930's banker that the failure of a depository institution could be announced in the newspaper on one day and that on the next day one could saunter into the lobby and observe business going on as usual—tellers chatting with customers, machines clicking away, all as if nothing had happened. A not inconsequential social goal has been accomplished. We are now discovering that it has been accomplished at some cost. We have once again relearned that most basic of all economic precepts—that there is no such thing as a free lunch. This rule does not, however, deny that there can be such a thing as a fairly decent lunch obtainable at a modest cost. This clatterprinciple,wethink,winds .. uP ,.being JosLinmuch oC today's hand;wringing over the Savings-and-Loan situation. There are, obviously, as we now discover, to our sorrow, a great many weak links in the American monetary structure. We are just beginning to perceive some of those areas of weakness. We are learning, certainly, that deposit insurance, as it is now constituted, requires significant modification. The determination of just what sorts of modification will be required is a task worthy of serious study. That task, we think, will best be carried out in an atmosphere free of hysteria about bailouts. ANTHONY W. TAB ELL DELAFIELD, HARVEY, TABELL INC. Dow Jones Industrials (12 00) S & P 500 (12 00) Cumulative Index (5/31/90) AWTebh 2893.93 361.78 4961.62 No statement or expression of opInion or any other matter herein contained IS, or IS to be deemed to be, directly or IndlrecUy, an offer or the sollcrtallon of an offerlo buy or sell any security referred to or mentioned The matter IS presented merely for the convenience of the subscriber While we beheve 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 bylhe subscffber should be based on hiS own Investigation and Informalion Delafield, Harvey, Tabelllnc, as a corporation and Its officers or employees, may now have, or may later lake, poSIIJOflS or trades In respect to any securities mentioned In thiS or any future Issue, and such positron may be different from any vIews nowor hereafter expressed In thiS or any other Issue Delafield, Harvey, TabelJ Inc, which IS reglSlered wllh the SEC as an Investment advJsor, may give advice to ItS Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further mformatlon on any security mentioned herein IS available on request