Tabell’s Market Letter – February 25, 1977

r—————————————————————————————————- TABELL'S MARKET LETTER 909 STATE ROAD. PRINCETON. NEW JERSEY 08540 DIVI910N OF MEMBER NEW YORK STOCK eXCHANGE, INC MEMBER AMERICAN STOCK eXCHANGe February 25, 1977 Random thoughts in a desultory market. Ofdihv'I's Stock Purcha–seOffer-'The anfiotincem-ent'bytheccountry's -largest (in total'mar- ket value) corporation that It plans to offer to buy 4 million shares of Its own stock came as a sur- prise to the financial community and, thus, produced copious copy In the financial press. If one can get over being awed by the sheer magnitude of the numbers (1.12 blll1on), the decision, on the face of It, appears to be an eminently rational one. IBM's balance sh eet currently shows cash and marketable securities In excess of 6 billion, and In recent years, the company's cash flow has been running well ahead of capital expenditure needs. There are actually few alternatives open to It. An attempt to purchase another company would probably Incur the wrath of the Justice De- partment, despite the fact that, for the 1.12 bllllon Involved, IBM could have purchased anyone of 399 of the 500 companies In the S & P 500. A dividend Increase had already taken place, and, It Is Interesting to note, the company's payout ratio, based on tralling 12 months earnings, Is up to 63. This Is rather at variance with the classic growth-company concept of a low payout ratio necessitated by heavy demand for expansion capital. Thus, the purchase offer appears to be a logical one. The high payout ratio and the historically high current yield for the stock raise Interesting questions of valuation. Quite obviously, at a 3.6 current return, the stock Is unattractive on an income basis vis-a-vis fixed-Income securities. But we are dealing here with a stream of In- come which presumably will continue to grow. The task of valuing such a growing Income stream Is a fascinating problem to tax the most sophisticated of IBM's own computers. On Natural Gas — We must confess our complete fallure to understand why anybody should – b-e in the least surprlse'd by-the-naturalg–asshOrtageOfieleamslnEconorniC1n tfiatwh-en-flfe –' ….,.. price of a commodity Is artificially held below what the market would normally command, shortages result. Yet, Incredibly, there are stlll those who do not see that the overriding reason for the shortage Is Inept regulation and whose solution thereto involves more regulation. What disturbs us about the whole thing Is the effect on the quality of life. In our own office, the thermostat, In compliance with State regulations, Is set at 65 0 In a word, we are cold. True, the discomfort Is not serious, and we will undoubtedly survive. However, multiplying our own discomfort by that of tens of mllllons of others results In a discomfort quotient that is fairly staggering. America has characteristically prided herself on an economic system able to provide the elementary necessities of life In abundance. The sad thing Is that that system apparently Is no longer able to do so. On Polar Bears — Discussion of the gas shortage reminds us of the fact that It has, In- deed, been a cold winter. Argus Research has dubbed those analysts who are now predicting dire consequences for the economy based on that cold as polar bears. Along with Argus, we find ourselves unimpressed by their argument. Increased energy expenditures Simply Involve a transfer of purchasing power. Under these conditions, some companies wlll do well, others less well. The stock market has been apparently reflecting this fact for over a year, if one looks at the per- formance of most energy-related stocks. The winter cold may, indeed, produce Its share of dis- comfort, rut the effect on the economy as a whole, we think, is likely to prove to be negl1gible. On Timing — We have commented in the past that the recent infatuation of many money managers with market.tIming as a royal road to riches was likely to prove ill-found,ed even though we, ourselves, as technicians, -obviously spend a greatdeaI'of effort in just that area. On look- Ing back, it appears that the bull market which began in 1974 has provided just the sort of environ- ment to make attempts at market timing difficult. The bulk of the rise came In two short bursts, one, In 1975, six months long, the other, in 1976, barely two months In duration. The rest of the time was spent in relatively flat trading ranges for the averages during which there was ample opportunity to pick above-average performing stocks. It is a typical quality of the stock market that,at a time when interest in timing is at Its greatest, an environment is forthcoming when stock selection rather than timing, turns out to be the major Ingredient of investment' success. Dow-Jones Industrials (1200 p.m.) 929.85 ANTHONYW. TABELL S & P Composite (1200 p.m.) 99.30 DELAFIELD, HARVEY, TABELL Cumulative Index (2/23/77) 654.21 AWT/Jb No slolemenl or eprcss!on of OplTlIOn or any other moiler herem ton/olned IS, or IS 10 be deemed to be dHectly or indirectly, on offer or Ihe sollcltollon of on offer to buy or sell any security referred to or mentioned The moiler I presented merely for the converlenCG of the subSCriber While oNe believe the sources of our Informa' tlon to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements mude herem Any action 10 be taken by the subSCriber should be based on hiS own Investlgallon ond Information Janney Montgomery 5alt, Inc, as a corporation, and Its officers or employees, may now have, or may later take, POSi!IOns or trades in respect 10 any securities mentioned In thiS or any future Issue, and such position may be different from any views now or hereafter expessed In thll or ony ather Issue Janney Montgomery Scott, Inc. which IS registered With the SEC as an mvestmenl adVisor, may give adVice to lIs Investment odvlsory and othel customers .ndependently of any statements mode In thIS or In any other Issue. Further mformO'lOn on any security mentioned herem IS ovorloble on request