Tabell’s Market Letter – August 11, 1978

r—– – TABELL'S I,' MARKET LETTER L- – – ——– l 909 STATE ROA.D, PRINCETON. NEW JERSEY 08540 DIVISION OF MEMBEA NEW STOCK EXCHANGE. INC MEMBER AMERICAN STOCK E)(CNANGE August 11, 1978 ' , A!; rE!aders ,wlll,Je 1Lwl're,'Yehaye been considerillgJn ,this space for the past two weeks the w.;history and prospects Qi-instituiIOilCl1g;owth lssues- twoweeKs -ago fhatthe – of these issues over the past six years had been less than spectacular, since, on average, they had lost almost 2/3 of their value between 1972 and 1974, and, through year-end 1977, their recovery had been modest indeed. In the course of this washout, the price being paid for a dollar of earnings on Our average of 12 of these issues declined from 2.8 times the multiple for the S & P 500 in 1972 to 1.5 times last year, despite the fact that earnings, by and large, had continued to rise. Last week we analyzed the technical pattern which had been produced by this price action, suggesting that the sharp decline, followed by four years of lateral trading, had produced the potential for impressively higher prices. We noted, however, that the realization of that potential would re- quire fundamental alteration of recent supply/demand patterns. It is thos e supply/demand patterns that we want to discuss this week. In other words, having covered where growth stocks appear to be at the present time in the marketplace, it is perhaps useful to examine just how they got that way. We think the answer is available in a study of recent institutional trading tendencies. The key word here is institutional. The stocks we are discussing are, by and large, among the largest institutional holdings and have, in the past (occasionally to excess), been among their largest purchases. It is, ultimately, institutional buying patterns which will determine the course of prices for thes e stocks. It is appropriate for purposes of this study to use pension fund activity as a proxy for all institutional activity. Private, non-insured pension funds are the largest single category of insti- tutional investors (181 billion of assets), the fastest growing (They have more than doubled their as!;etsJn ten yeara.),and relatively the most flexible in terms of percentage of common stocks —h-'eld IUs demonstrable that SWings-ill common -stock activitYbytn-ese-funds can, oy their ……- I – massiveness, have profound effects on the equity market. Indeed, the sharp rise in institutional growth issues to 1972 can largely be explained in terms of pension fund actiVity. In 1963, pension funds had 38 of their assets at book value in equities. In 1973, the peak year, that number had reached a peak of 64. This stage, of course, could be reached only in one way, by a substantial infusion of pension fund cash flow into the equity market. That cash flow, representing largely contributions by companies and employees, is huge and has been grOWing. In 1977, it reached the record figure of 21 billion, a new source of investment funds equivalent to 2.7 of the total market value of all NYSE-listed stocks and 11.59 of the total market value of all 1977 trading. As we noted, it was necessary, in order to build up equity holdings, for funds to inject large portions of this increase in book value into the stock market, and this indeed they did during the early 1970's. In 1971, the largest year of such activity, 8.9 billion, or 95 of pension cash flow, entered the equity market. Subsequent years saw a sharp dropoff in common stock purchases. In 1974. the year of the market low, they had dropped to2.4 bUlion. They recovered in 1976 to 7.2 billion but dropped off again sharply in 1977 to 4.5 bUlion. Most of this decline took place in the second half, and, in the first quarter of 1978, (incidentally, the quarter in which the year's lows were made) pension funds were net sellers of equities for the first time since the figures have been compiled. In terms of cash flow, this drop off is even more substantial. In 1977, only 21 of book-value increase went into the equity market, and for 1978 the figure will probably be less. At current rates of cash fl!,, a a!most 'w money — a figure 9.5 billion above the level of 1977. Under the pressure of this sharply'reduced level of equity purchases, the percentage of pension fund assets invested in common stocks had declined, by last year, to 1969-1970 levels. The key question for the intermediate term is whether the funds' relative aversion to equities will continue or whether it will reverse itself in the near future. This is a prospect which we intend to treat next week. ANTHONY W TABELL DELAFIELD, HARVEY, TABELL Dow-Jones Industrials (1200 p. m.) S & P Composite (1200 p.m.) Cumulative Index (8/3/78) 886.00 103.63 790.86 No statement or eXpreSSion of opinion or any other matter herefl'l confaned IS, or IS 10 be deemed 10 be, dIrectly or mdlrectly, an offer or the ,o/fcrtotron of on offer to bvy or sell Clny security referred 10 or mentioned The molter IS presen1ed merely for the conve!len'e of the subscrIber While we believe Ihe sources of our Informotlon to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements mude here,n Any octlon 10 bl!! token by Ihe subSCriber should be bosed on hiS own mveshgolu;n and Informotlon Jenney Montgomery Scott, Inc, os a corporetlon, and Its officers or employees, may now hove, or may later toke. POSitiOns or trodes In respect 10 any seCUrities mentioned In Ihls or any future Issue, and such pOSlhon moy be dlfferen! from any Views now or hereafter exprened In thu or any other Inue Janney Montgomery Scott, Inc, which IS registered With the SEC as on Investment adVisor, may give adVice to lIS Investment adVisory and othe. t1Jslomers Independently of any statements mode In thiS or In any other Isue Further Informotlon on any security mentioned herein IS ovollable on request