Tabell’s Market Letter – June 13, 1980

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YOAI( STOCK EXCHANGE INC MEMBER AMERICAN STOCK eXCHANGE – -. We live, apparently, in an era of perversity. We have been officially pronounced to be in the mIdst of a receSSlOn; each day's newspaper brings us news of rISIng unemployment. inventory glut, and other manifestatIOns thereof; in the midst of all this, the stock market continues to rise. Nor is the stock market the only institution that seems to be defying conventional WIsdom. Ever since the accession of Mr. Volcker, we have been warned of monetary restraInt being exercised by those in authority. One by-product of monetary restraint, we were all taught in school, is rising interest rates. Yet the past two months have been characterlzed by a drop in interest rates possibly unparalleled in the entire financial history of the UnIted States. YIELDS ON SELECTED SECURITIES Pf.RCf.'l1 VERAGES OF DAILY RATES ENDED FRIDAY MONEY STOCK (MIA) 2\ 0 200 -Ll ';',,,1,, I AVERAGES OF DAILY FIGURES i SEASON ADJUSTED I ' U-J.-18 0 HE '- I I 1–t- -t–t———-rlII ,., -\-4l,L–1rI- ' tI- ' WAY l ,' In. !—-t-1-4–I—–t—–II AI \ u, r\l, ' I I ! /0J . 0'i i , i /1.., \ Y \I .t i ro I, / \ ' I\ I ' C ' 'Jt,. V i -1–1—–t- i \. 11 0 , – 1-.10 – — , ,1—r\- J' ! f— , ' I i i i — f— —11—' . – t' —,, ,I! , , c' ' I! I! '1'1, W. I' J .I, ,i , ' I 'n 1 II 'ItO I) l' IS I l S 10 ., n II no P lS . , ' ' ' WOV,n r i 'LLI UL Xl w..R .I,Pft 1980 6 e.D 0 ' I IS lQ .1L' 11 10 10 ,. 1 Ie )(I ,. 18 15 U r 11 I i 1 18!J- DATA CUIIJ'!NT OATA IlElI! ,N WOV lIS 1980 150,.,.0 OF QQVRS 11 15 RElEAS API! …..y JUN JUL AUG SEP 0C1 NOV DEC JoI.N fEB IAAA .rA l'01HI 1C/80 The lefthand chart tells the interest-rate story. Prime rates plunge almost daily. CD and Commer- cial Paper yields have been cut in half since early April. The yield reduction for long-term bonds, while less pronounced, has been in the area f 200 basis points. Ths is, of course, a theoretical sign of monetary ease, not monetary restraint. Restraint is, however. quite real if one looks at the right- hand chart which is the history of MlA, the simplest monetary aggregate. We have actually seen an irregular plunge in the money supply since about mid-February. Continuance of current trends would suggest that it might develop into the sharpest money-supply contraction of the entire post-war period. Somewhere there must exist an explanation for this paradox. There s one, we think, and it arises from what seems to be a gradual shift in attitude on the part of the monetary authorities. In years past, the Fed's preoccupation was with interest rates as a gauge of the tightness of money. Today, that preoccupation is being shifted to monetary aggregates. We are coming to realize the extent to which these two phenomena are over the short term, mutually exclusive. Keeping interest-rate changes gradual, one of the FedIS major concerns in the past. led to sluggiSh changes in the behavior of money stock. Attention to money stock leads, as we are learn- Ing, to wild gyrations in interest rates. — As the recession persists, we think this dichotomy will continue. Bank loans and borrowed reserves have been plummeting. The Fed, we think, will have to take measures to moderate the money-stock decline which has been going on since February. A reduced demand for funds will mitigate against this. It may well be that despite the wild gyratlOns on the lefthand chart, that we ain't seen nothing yetI! as far as dechning short-term interest rates are concerned. Meanwhile. as yesterday's New York Times pointed out, there exists something approaching 500 billion in bank certificate accounts and money market funds whose yields are plunging and may continue to do so. The attractiveness of these investments, at least from a return point of view. is, we think. hardly likely to improve. Herein may lie a partial explanation of the stock market's behavior in the face of woeful economic news. Dow-Jones Industrials (12 00 PM) S & P Composite (12.00 PM) Cumulative Index (6112/80) AWT .sla 873.21 115.65 845.54 ANTHONY W. TABELL DELAFIELD, HARVEY, TAB ELL No statement or of opinIon or any other matter herein contained IS, or IS 10 be deemed to be. directly or ondorectly, an oHer or the 501lcltoloon 01 on oHer to buy or sell any lecuflty referred to or menhoned The moiler IS merely for Ihe COnVef'lllnCt! of the Whlle.Je believe the Ources of our Informo tlon to be rehable, we In no woy represent or guarantee the accuracy Ihereof nor of Ihe statemenls mude herem Any act,on to be taken by the subKnber should be based on hiS own ,nvestrga/ron and rnformcrhon Janney Montgomery S'ott, Inc, as cr corporatron, and rts offrcers or employees, may now have, or may laler lake. or Irade' In respect to any seCUrities mentioned In thiS or any future ISSue, and such poslt,on may be d,fferent Irom ony views now or h8reolter In thiS or any other IHue Janney Montgomery Scot. Inc, wh,ch IS reg,stered wllh the SEC on Investment adVisor, may g,ve adVICe to Its ,nvestment adVISOry and other customers Independently of any statements made In thiS or In any other Further Information on any seo.lflty mentioned here'n IS ovarlable on request