Tabell’s Market Letter – June 29, 1956

Walston &- Co, Inc. Memben New York Stock Exchange NEW YORK PHILADELPHIA LOS ANGELES SAN FRANCISCO BASLE (Swihed.,dl OffiCES COAST TO COAST CONNECTED BY DIRECT PRIVATE WIRE SYSTEM TAB Ell'S MARKET lEnER June 29, 1956 In a slow, leisurely fashion the market has moved ahead rather nicely since the May 28th low of 463.85. In a month, the industrial average has rallied over 30 pOints to Thursday's high of 494.34. The market has now recovered approximately half of the sixty-point decline from the April high of 524.37. The sixty-point April-May decline was accomplished in two months. The market may have enough momentum to carry somewhat higher, but there is heavy overhead supply at 500-520 and I vlould not expect this supply to be penetrated on the first attempt. I continue to look for a selective trading market for a long time to ,c.ome I ,!lave peit.era ted-constant-ly ,,,;r continue -to-loek-for ding area very similar to that witnessed in 1951-1953 for possibly six months or a year longer. The upper limit will be around the 525 level of April. The lower limit will depend on the state of President Eisenhower's health, but I would not expect it to be below the October low of 433.19, with a good chance that the January and May lows of around 460 may again hold on any subsequent decline. During this period, individual stocks will move in patterns of their own as dictated by earnings, dividends and outlook. It will be a period of neither wide advance nor broad decline in the general market, but a period in which individual stocks may fluctuate widely. It will be a period in which the more informed investor or speculator may fare rather nicely but in which the uninformed participant may not do so well. In 1951-1953, it will be remembered that almost all the blue chip growth stocks rested and consolidated for a period of about two years. This was because the advance from the 1949 lows was rather rapid and a resting period was needed to allow earnings and dividends to catch up with prices and, from a technical viewpoint, for the stocks to build up a new accumulation base prior to the few illustrations are given below. 1949 Low 1951-53 Range Time In Months 1955-56 High .A.luminum-GoTG-f. Corning Glass Dow Chemical DuPont Minn.-Honeywell Minnesota Mining National Lead Scott Paper Union Carbide – 8 14 1/4 43 1/2 10 7/8 8 1/4 8 1/2 11 1/2 33 3/4 35–25 10 2-80 3J-3 27-20 33-26 29-24 72-55 .. 29 22 28 26 28 26 22 28 87 1/2 77 1/2 249 3/4 78 3/4 75 1/2 105 75 1/2 131 I believe this performance will be repeated over the next six months or a year. Timing will be different on each individual issue, of course. For example, duPont has already held in a trading area between 249 and 198 for twelve months. This 20 trading is about the same as the 102-80 trading area of 1951-1953 of twenty-eight months. DuPont has already formed a size- able base with an upside potential of 350. This pattern may, of course, be broadened for six months or a year with a correspondingly higher indication. Some issues have just started to form this pattern, so their eventual upside emergence may be later. It is difficult to pick out groups and discuss their stage of develop- ment because quite often individual issues in each group have diverse pat- terns. The oil group is a good example. Some issues have reached their upside obj ec tive and need restandConsolldaion .– Others still indicate some- what higher levels and still others have just started to move and still in- dicate a very good appreciation potential. All oil stocks have one thing in common, however. They have little downside risk and should be patiently held for further long term appreciation. ' Broadly speaking, the following groups have already formed good bases which may, of course, broaden. They are air-conditioning, airlines, food chains, retail stores, steels, drugs, tobaccos, natural gas. A prolonged trading area for a year or so relieved only by upward moves in a few special issues may appear to be a dull prospect.That is one vlay of looking at it. I prefer to say that the next six months or a year will be the last opportunity to buy the market at this level before a move to.a higher plateau. –''—-h herem Thei;;o;',;.!This market letter IS not, and under no circumstances IS to e eons ru…… as, an 0 or 0 se J'jTi't!''-Iii/IliMrtiJ.N.f-'-toUUu.i;,;h.a.nty\i);t.lNmtoheconstotruednsareprIensfeonrlmaatJtioonn cunt!\lrled herelll IS not guarnlltced as to aCcuracy or completeness and the thewo I ti'l! n or Stockholder thereof rray Ithee and not ns II complete nnUlyblb AdditIOnal mformatlOn with rebpcct to nny sc.urltles referred to herem will be urJll!! commcntn on dclY to (ny upon rcques II , -2- Furthermore, the proven reserves figures tell only a part of the story. Panhandle recently added one-half trillion cubic feet to its reserves through an ingenious program of tapping deeper strata below already exploited fields. Currently, some 370,000 additional acres still await this deeper drilling test. A gigantic amount of additional gas could well be proven through this program alone. Some question arises as to the future treatment of these large oil re- serves. Until April, 1954, it was required that the value of reserves be treated as part of the rate base so that Panhandle was able to earn only a limited, regulated rate on gas produced. At that time, the Federal Power .. – Commission handed down its famous Fair Field rice' decision, -panhancn 'I'hlS'd'eds-ion-;–in which-shea.d. , parated the transmission and producing properties and allowed Panhandle to take the average field price of its gas as a cost ,for rate-making purposes on the transmission business. In December, however, the U.S. Court of Appeals remanded the decision back to the FF'C. Panhandle, of course, appealed to the Supreme Court which has, as yet, taken no action. At this point, the problem could be solved in one of two ways. First of all, the Supreme Court could hand down a favorable decision.Secondly, some form of the Harris-Fulbright bill, vetoed this year by President Eisenhower, could be passed next year. This bill provided for allowance of the fair field price. Either legislative or judicial action seems likely since the old system obviously penelizes Panhandle's gas business to the advantage of straight producers. If such action were not forthcoming it is possible that some form of separation of the producing and transmitting properties would have to occur. With the question of permitted rates still somewhat up in the air, Fanhandle, on January 1, 1955, raised its gas rate under bond and,during last year, so collected some 7.250,000. During March of this year Panhandle was ordered to refund to its customers a prior collected-underbond increase, but only a fraction of 8.6 million so refunded represented tax-savings ,contingency reserves, and reduction in gas contract prices. In the unfortunate event that the company was forced to refund the second increase, a large part could probably be taken care of in the same manner. In addition to production and transmission, anhandle has still another important property, a 40 interest in National Petro-Chemicals Corporation, a major producer of polyethylene plastic, ethyl alcohol and liquefied petroleum gases. Currently earnings from this source – which are, of course, not consolidated – are understood to be running at the rate of about 50 cents per Panhandle share and increasing profitability is foreseen for 1957. The remaining 60 of National Petro-Chemicals is owned by National Distillers which has outstanding some 8,500,000 common shares as compared with Panhandle's 3,500,000. 'I'hus, as earnings improve, a large part of the increase will accrue to Panhandle. In summary, it is felt that 'anhandle common is distinctly undervalued for three reasons 1. Its extensive holdings of natural gas reserves. 2. Its highly profitable gas transmission business. 3. Its growing stake in the petro-chemical field. — This favorable outlook is reinforced by an outstanding technical position. Balanced against these favorable factors is the uncertainty with respect to treatment of reserves by government regulatory agencies. It 1s felt that this uncertainty will be resolved in.cne way or another within the not-too-distant future. At that time, we feel the stock has an excellent chance of selling at a much higher price which will adequately reflect the factorsmentioned above. EDMUND VI. TABELL HAlSTON & CO. INC. awtamb