Tabell’s Market Letter – August 25, 1978

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK. STOCK EXCHANGE, INC MEMBER AMERICAN STOCK EXCHANGE ,– Butwes tWirfd I86K';'t!le-lafld-ls brignt-;— – … August 25, 1978 Arthur Hugh Clough Practical men, who believe themselves to be quite exempt from any Intellectual influences, are usually the slaves of some defunct economist John Maynard Keynes — The General Theory of Employment, Interest and Money In our ongoing discussion of the prospects for Institutional growth stocks, we touched last week for the first time on economic prospects, more particularly the prospects for continued Inflation. What we tried to suggest was that, In an ongoing inflationary enVironment, yields on fixed-Income securities which have, over the past couple of years, been sopping up massive amounts of Investment funds otherwise available for equities, might be less attractive than they would appear at first blush. This would also be true in an environment which featured continued real expansion — the sort of at- mosphere In which well-managed and well-situated companies could continue to grow and prosper. In thinking about these two phenomena — Inflation and real growth — we do not feel It Is an undue flight of fancy to consider a couple of recent political manifestations. The first of these Is the overwhelming passage last June of Proposition 13 in California. What Thirteen, and the like proposals which will proliferate on state ballots this November, seem to indicate, is an awareness, not heretofore obvious, on the part of the electorate of the magnitude of its tax burden. It was almost inevitable, given the combined effects of Inflation and a progressive tax structure, that such an awareness would one day materialize. The California vote seems to point out quite clearly that the day of raised consciousness with regard to taxes has arrived. At the same time, also out of California, we have been hearing more and more of a not-at-all- Arthur 'fu)fessor Laffer's particular contribution the alsmal science-Is the Laffer Curve, a refinement of the obvious truism that, at some point, as the rate for a given tax Increases, the total revenue from that tax tends to decrease. This revelation was promptly seized upon In certain sectors of Congress, most notably by Rep. Kemp of Buffalo who used It to justify a proposal for a massive Individual and corporate tax reduction, and by the Republican party In general which has now just about Incorporated it as official gospel. The specific Kemp-Roth proposal Is now dead for this session, but anyone who thinks we have heard the last of the Idea is, we suspect, misreading the entrails. The general proposition that taxes should be reduced without offsetting cuts in spending has produced some rather deliCious pOlitical Ironies. Democrats not known for their fealty to fiscal rectitude have accused the Republicans of offering a free lunch, and Paul Samuelson, In a recent Newsweek column, came on sounding like Herbert Hoover. Republicans, meanwhile, are regularly and reverently Invoking the name of John F. Kennedy, under whose aegis the last Similar tax cut was adapted. The Republican claim, of course, Is that a massive tax reduction would result In sharply Increased economic activity and, ultimately, little or no loss In total tax revenue. The Democratic opposition, on the other hand, has forecast massive deficits and resultant accelerating inflation. What neither side will admit Is that, given the current state of the art of economic analysis, no one Is quite sure just what the actual results of a Kemp-Roth type tax cut would, In fact, be. For our own part, we are willing to concede something to both camps. We think, In other words, cutSIn spending.,., Is a .real fact of life . We Will,., moreover, agree with both contenders in the debate. We think that such cuts would be both stimula- tive and inflationary — in proportions we would not care to forecast. What we see, in other words, is the sort of environment in which equity Investment rather than the fixed-Income Investment now embodied In the conventional wisdom of institutions might turn out to be the most rational and conservative investment policy. There Is no evidence at the moment that institutions as a class feel this way, and, indeed, the most recent figures, as we noted last week, indicate just the oppOSite. This perception, however, Is one which could well change radically as time goes on and economic prospects become clarified. Dow-Jones Industrials (1200 p.m.) 898.04 SSP Composite (1200 p.m.) 105.04 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL Cumulative Index (8/24/78) 807.47 No statement or expreulon of opinion or ony other motter herem contained IS, or IS to be deemed to be, dlrcCtly or indirectly, on offer or the SOllCltotlon of an offer to buy or sell any secuflly referred 10 or mentioned The motter IS presented merely for the converlenct of the subscriber While -He believe the sources of our Informo lion to be relloble, we In no woy represent or guarantee the accuracy thereof nor of the statements mude herein Any actIOn 10 be token by Ihe subSCriber should be bosed on hiS own Investlgallon and Informotlon Janney Montgomery Scoll, Inc, as a corporation, and lIs officers or employees, may now have, or may later toke, positions Of trodes In respect to any securities mentioned In Ihls or any future usue, and such position may be different from any views now or hereafter In this or any other Issue Janney Montgomery Scott, Inc, whICh IS registered With the SEC as on Investment adVisor, moy give adVice to Its Investment adVISOry and other cuslomers mdependently of ony olements made In thiS Of In any olher ISsue Further Information on any security mentioned herem IS available on request