
Tabell’s Market Letter – August 07, 1992
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-..- TABELL'S MARKET LETTER 5 VAUGHN DRIVE, eN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 August 7, 1992 A spate of profit-taking interrupted the improving technical market action which had featured the second half of July. Through -Monday,-the Slandard&l'aOrs-SOO haaextende,CiiS,iieakof newalilirile-high..–cIOs'ng at '42J.09;com(Oriiibly abovelheJanu.ry – – – level of 420 which had been Ihat indicator's prior record. The Dow reached 3395.40, a shade below its June lSi peak of 3413.21. By week's end bOlh averages had retrealed modestly from these levels. Last week we cited, along with the S & P, a number of financial statistics which were setting records. One area which we lacked the space to discuss was interest rates, especially short-to-intermediate-tenn interest rates. Such rates have been plummeting and Ihe prices of fixed-income inslrumenls correspondingly rising. An almost-hundred-basis-poml drop in Treasury-Bill yields has taken place since Apnl, bringing Ihal rale close to Ihe even-three-percent level. Placing further pressure on savers, the rate for 9O-day certificates of deposit has moved under three percent in the past couple of weeks. Relatively short government bonds have moved ahead two and three points, affording a short-term windfall to conservative investors. Meanwhile there continues to be talk of even further Fed easc. The inlerest-rale fall, Ihough, is hardly a new phenomenon. The most recenl phase of a long-Ierm plunge in rales can be daled as having begun some 40 months ago, in March-April 1989. T-Bills at Ihat lime sold 10 yield over 9 and CD rales were close 10 10. The drop since then is actually the longest-in-duration interest-rate drop in over forty years and is now approachmg being the second-longest swing an rates–either up or down–in that same forty-year period. Let us make that statement a little more specific. It IS our practice to measure swings in market statistics by the application of a percentage filter, lracing each rise and fall of a given percentage withoul a like reversal over Ihe duralion of Ihe series. It is perfectly possible 10 apply Ihis lechnique 10 interest rates, and we Ihus applied a 20 filter to Ihe monthly average of 3-monlh Treasury-Bill rales smce 1950. From Iheir April, 1989 average of 9.19, bill rales fell to an average 3.65 for July 1992, a sixly-percenl drop. The closest previous approximalion 10 Ihis decline was a 52 drop in rales, from 11.01 105.27 between September, 1984 and September, 1986. That, however, only took 24 months. There have been three largely unmterrupted upswings in rates which have equalled or exceeded the present downswing in duralton In Ihe forty monlhs between June, 1954 and Ootober, 1957, rales rose from 0.63 (really) 103.70 an almosl sixfold increase. They set an all-lime record by rising steadily from August, 1960 (2.14) 10 Oclober, 1966 (5.44), advancmg for no fewer – than -74 -months. There-also-occulTed-a39-monthupswing-from JanulI',197J. to-April ,…..1980.-which-took-billrates- from-4,42- -to- – – 14.98 All of these swings. though. can, as we have pointed out, be seen as components of a much longer-tenn pattern. 1nterest -rate cycles have been sludied and identified back 10 Ihe eighteenlh century, and the presence of cyclical swings having a length of Iwenty years or more has been recognized. In June, 1920, Moody's AAA Industrials provided a yield of 6.47, the high of a rise Ihal had occupIed Ihe enllfe early part of the 20lh century. By December, 1940, Ihat rale had been cui by Iwo Ihirds to 2.28, and long-bond rales did not move much off Ihat levellhroughoul World War II. 35-40 years laler, in October, 1981, long rales peaked just under 15. They have been falling ever since—to current levels approaching 8 . It is, in our view, important to recognize that the current swing 15 only ten years old, and, if history is any guide, the current trend toward lower interest rates could go on for at least another decade. This is not to say, of course, that the current extended rate-drop referred to above could not undergo a fairly protracted correctIOn at almost any time. The table at left attempts to illustrate Approximate Yield at Original Issue For Maturing Treasury Debt Maturity 6 Months 1 Year 3 Years 5 Years 10 Years 20 Years 1992 3.96 4.67 7.74 8.51 10.69 5.59 1993 7.66 8.93 11.58 7.11 1994 5.74 7.73 11.50 7.70 1995 7.92 9.62 8.12 a currenl phenomenon produced by falling interest rates. As older debt matures these days, It becomes difficult to invest funds received at Ihe original yield. The table shows, for debt maturing In December, 1992 to December. 2001 what the approximate yield was at the time of original issue. Thus 1996 1997 1998 1999 2000 2001 6.48 7.15 8.99 9.09 7.83 8.25 7.38 7.48 7.52 8.73 10.08 12.30 13.38 the purchaser at issue of six-month bills maturing this December had been receiving a 3.96 return on his money, the original purchaser of a 1-year note, 4.67 and so on. The subsequent rows show comparable figures for debt matunng in subsequent years. The bottom row shows the returns for Current 3.77 4.05 5.31 6.78 7.12 7.45 instruments purchased today. The table demonstrates that It is baSically Impossible for the holder of maturing debt of lengths up to ten years to remvest his proceeds at a like return. This has. of course, produced pressure on other investment media. The popularity of bond funds suggests that CD and other short-term money is actively chasmg higher yields. There IS lIkewise some evidence that investors are seeking higher returns ID the equity market. Implicitly, of course, these investors are counting on capital gains. smce stock yields by and large. do not approximate. those available, even today, on fixed-income securities. The implications of such expectations for the current technical conditIOn of the stock market are. of course, yet another topic. ANTIIONY W. TABELL, CMT Dow Jones Induslrials (1200) Siandard & Poors 500 (1200) Cumulallve Index (8/7/92) 3355.96 422.14 761506 DELAFIELD, HARVEY, TABELL No statement or expression of opinion or any other mailer herein contained IS, or IS to bedeemed to be. directly or indirectly, an oHer or the soliCitation of an oHerto buy or sell any secUfity referred to or menlloned The maner IS presented merely for the convenience of the subscflber 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 subscflber should be based on hiS own investigation and Informallon Delafield, Harvey labelllnc, as a corporation and ItS officers or employees. may now have, or may laler take, positions or trades In respeclto any secufilles mentioned In thiS or any futurE'llssue, and such position may be different from any views now or hereafter expressed In thiS or any other Issue Delafield. Harvey, labellinc ,WhiCh IS registered With the SEC as an Investment adVisor may gIVe adVice 10 Its Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further Informallon on any sec'Jrrty menlloned herein IS ava11able on request