Tabell’s Market Letter – March 22, 1991

TABELL'S MARKET LETTER 600 ALEXANDER ROAD. eN 5209, PRINCETON, NEW JERSEY 085435209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 – March 22, 1991 The week's major stock market event can be said to possess, at the very least, a fair amount of symbolic significance. On Tuesday morning, it transpired that IBM was holding,a telephone. -' '—conference-with'-securities-analysls 'whofollowed-the company.- Those a'n-alists, representing- some of the highest powered research departments in the financial community, had been estimating earnings in the first quarter (which, remember, ends next week) in the range of 1.60 to 1.80 per share. The purpose oC the conference was to let these worthies know that actual earnings would be something on the order oC half oC that. Ceasar had been knocked off his pedestal. The Dow was down 30 points before IBM opened and, by the end of the day, with Big Blue's 12 3/4-point loss, had been trimmed by 62 points. At the week's low, America's largest company was selling over 20 below its high of 139 3/4, achieved barely over a month ago. Since this was a loss of 1.64 billion of market value, the significance was perhaps more than symbolic. A few comments may be appropriate at this point. Since this is a technical market letter, it should first be noted that, based on purely technical factors, IBM appears attractive at around its current price. The correction has returned it to strong support in the upper part of a three-year base in the 90-120 area, and we continue to feel that this premier company represents solid long-term-value. Secondly, at this morning's prices, the Dow is down a bit over 4 from its high reached early this month. Traditionally, a move of this magnitude is considered to be of little more than trading interest. We have stUl, it seems, not accustomed ourselves to a Dow level of 3000, where a 100-point move is just over 3, and a lI8-point move in each of the 30 components produces a change in the average of 7 1/2 points. The reason that the IBM disappointment produced so much nervousness, we suspect, is that it raised the question of whether the stock market might be wrong. There exists, it seems clear to us, a conventional wisdom regarding what the market has been doing since mid-January. It had been only a month before. that, in the throes of a disasterous Christmas selling season, that the fjnl!lial pgs–.ggQ.nto-,.lnform….usthtwewer.e.. tainly-J nA.reces.qion .Fol1Qwing…. Operation– —– Desert -Storm, there occurred what ranks, by many measurements, as one of the more dynamic short-term upswings in modern stock -market history. Within a couple of weeks we began to be told, without any precise explanation as to what the connection was, that the sucess of the Middle East War somehow indicated an early end to that recession. Were the IBM earnings casting some doubt on that forecast We are inclined to doubt it. While we were away on a fortnighrs vacation, our colleagues Bob Simpkins and Ken Tower were noting in this space that strength of the magnitude of January-March 1991 has, in the past, with a fair degree of reliability, tended to presage higher prices, at least over the intermediate term. The breadth of the rise to date signifies, in other words, the sort of supply-demand situation which indicates an extension of that rise. It had been suggested in a number of quarters that evidence of the markers excessive anticipation can be deduced from the relatively high level of current stock prices vis-a -vis fundamental factors. The S P 500 finds itself selling for 2 1/2 times book, with a yield now falling close to 3 percent. It is priced at 17.6 times the 21 it is expected to earn for the 12 months ending in March. These are not bargain levels. However, we do not find ourselves, for the time being at least, all that distressed at these relatively high levels of valuation. It can be noted, first of all, that as far as profits are concerned, the recession has been going on for some time now. since, to be exact, the second quarter of 1989, when SloP results were about 17 above current levels. Under these conditions, the expectation of a recovery starting. say. in the third quarter, does not seem unreasonable. There will be earnings shocks, such as the one provided by IBM, but we have some confidence in the market's ability to survive them. There are, moreover, a number of historical parallels for recent market action. By the final quarter of 1957. for example, S P earnings had declined 9 over the past year, They were to continue declining. for another year, drepping-14 1/2 frem tIle third' quarter of 1957 to the third quarter of 1958. In that 12 -month period, however, the market advanced some 30. We have mentioned in the past that the late Fiorello H. LaGuardia once said, I don't make many mistakes, but when I make one. it's a beaut. He could have been talking about the stock market. It is indeed possible that the markers admittedly sanguine view of the present economic scene may turn out to be mistaken. If this is true, however, it would be a historically unusual event, and we would prefer to await more evidence before pronouncing that such is the oase. Dow Jones Industrials (12 00) SloP 500 (1200) Cumulative Index (3/21/91) AWTjb 2847,77 366.60 5798.77 ANTHONY W. TABELL DELAFIELD, HARVEY, TA-BELL INC. No statement or expression ofop1n1on or any other matter herein contamed IS, or IS to be deemed to be, directly or Indirectly, an offer or the solICitatIOn of an offerlo buy or sell any secunty referred to Of mentioned The matler IS presented merely for the convenience 01 the subscnber While we believe the sources of our mformatton to be rehable, we In no way represent or guarantee the aCcuracy thereof nor althe statements made herem Any action to be taken by the subscriber should be based on hiS own Investtgatlon and 1I1formallOn Delafield, Harvey, Taben Inc, as a corporation and lis officers or employees, may now have, or may later take, positions 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 hereafter epressed .n thiS or any otner Issue Delafield, Harvey, Tabellinc , which IS registered With the SEC as an uwestment adVisor, may give adVice to lis Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further Inlormabon on any secunty mentioned herein IS available on request