Tabell’s Market Letter – July 21, 1972

TABELL'S MARKET LETTER ; 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORI( STOCI( EXCHANGE, INC MEMBER AMERICAN STOCI( EXCHANGE July 21, 1972 We have been taken to task of late by some of our economist friends for our obvious lack of enchant- ment regarding the near-term future for stock prices. They inform us with great certitude that the economic outlook,for19 72cJs excellel).!andindeedthaJther,,ext,,ts jlstrongpro!lp!,,c,t(or,J!!rther cexpaps ion ,in 19,3,. How, then, they ask, can the course for stock prices be anything but an' upward one — , '-; '- Ironically, we have absolutely no quibble with our economist cohorts concerning the rosy business outlook, and our own economic data strongly suggest the likelihood of a relatively bright business picture. Having said this, it next needs to be noted that it is almost totally irrelevant to a forecast as to the course of common stock prices. One of the hardest-dYing myths in the financial community is the one that implies a short-term relation- ship between economic activity and stock prices. Inordinate amounts of time are wasted forecasting the economic outlook and attempting to relate this forecast to a stock price projection despite the fact that all available data indicate that the relationship is tenuous, at best. Ironically, the National Bureau of Economic Research includes the S&P 500 as one of its 12 leading economic indicators, thus using stock prices to forecast the economy rather than the other way around. Yet, Wall Street clings blithely to the delusion that stock prices cannot go down in the face of rising earnings or up in the face of declining ones, despite the fact that they have repeatedly been doing just that for years. As we have stated in this letter in the past, we prefer to regard the primary force acting on the aggregate level of stock prices as a supply/demand equation. When the supply of new common stock exceeds the demand generated by that component of national savings available for common stock purchases (in- cluding those made through financial intermediaries such as mutual funds, pension funds and insurance companies) the pressure on the aggregate level of stock prices will be downward. When the reverse 1S the case, it will be upward. This will tend to make itself felt in the average price/earnings ratio or the price actually being paid for a dollar of common stock earnings. G…NF. , C o r , p . o r a t e Eam-l,ngs P-!-E.Rat-io ,- ( Blllion) Chge Profits Chge ofG.N.P. S&P500 Chge S&P500 1950 1955 1960 1965 1967 284.8 37.7 13.9 2.69 7.6 398.0 40 46.9 24 11.8 3.65 35 12.5 503.7 27 49.9 6 9.9 3.10 -15 18.7 684.9 36 76.1 52 11.1 5.25 69 17.6 793.9 16 78.7 3 9.9 5.54 6 17.4 1968 865.0 9 85.4 8 9.9 5.92 7 17.5 1969 1970 931.4 974.1 8 5 85.8 75.4 -12 9.2 5.55 -6 7.7 5.34 -4 16.5 17.2 1971 1046.8 7 85.4 13 8.1 4.91 -8 20.7 1972-E 1160.0 11 93 8 8.0 6.25 27 16.9 The table above shows some relevant economic figures starting inl950 and going through 1972 estimates. As can be seen, G. N. P. has been increasing steadily over the period as have corporate profits. As can also be seen, those profits, as a percentage of G. N. P., have been declining steadily ever since 1950 despite a mild recovery in the early 1960's. And, indeed, corporate profits for both 1971 and 1972 should be at a percentage level not much greater than the new low reached in 1970. Earnings for the S&P 500 Stock Index which series roughly parallels corporate profits, are shown in the last column, and the final column indicates the price being paid for these eamings, 1. e., the pie ratio for the S&P 500. As should be quite obvious from the table, the bulk of the rise in s t 0 c k prices since 1950 has been due, not to increased profits, although profits have, indeed, moved up substantially, but to a dramatic in- crease in the price being paid for a dollar of profits. Indeed, this price was at.a new,high in the fourth ..,. ..,. . oI.-.- quarter of 1971, and is still not particularly low even taking into account the optimistic profits outlook for the coming year. One of the central tenets of this letter for some two years now has been that the equity supply/demand equation has been drastically altered from the one which existed throughout the 1960's. While we are willing, therefore, to share the economist's belief that earnings may continue to increase on into the early 1970's, we are less convinced of the implicit assumption that the price of those earnings (roughly 17 for one earnings dollar in terms of the S&P 500) will continue to be a viable one. The price earnings ratio for the S&P 500 was around 7 in 1950 and over 20 in 1971. The point is that neither figure is glven from on high as the permanent price at which earnings must sell. Thus, a protracted period during which earnings increase and stock prices remain stable or increase at a somewhat lesser rate 1S not to us at all unthinkable. Indeed, in the light of available evidence, such an environment may constitute the most plausible forecast. Dow-Jones Industrials (1200 p.m.) 909.69 S&P (1200 p.m.) 105.68 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL AWT'mn No stalement or expreSSion of opinIon or ony other matter herem contolned lS, or IS 10 be deemed 10 be, dIrectly or indirectly. on offer or Ihe 501'(lloon of on offer 10 buy or sell ony security referred 10 or mentIoned The moIler IS presented merely for Ihe convenience of the svbscflber While e believe Ihe sources of our Informo tlon to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements mude herein Any actIOn to be token by the subscriber should be based on I-IIS own investigation and Informallon Janney Montgomery Scott, Inc, os a corporation, and Its officers or employees, may now have, or may later toke, positions or trades In respect to any securities mentioned In thiS or any future Issue, and such pOSitIOn may be different from any views now or hereafter expressed In thiS or any other Issue. 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