Tabell’s Market Letter – November 18, 1983

r——————————————————————————————————————, . TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE, INC, MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 924,9660 November 18, 1983 — – It.is aasic..p.ur.poseof.,this-lettmmen t,onc,ul'l'!,ntdev.elopments,in…seitiesmarkets, and, judging by the column inches of newsprint'devoted tothe subject,' there' has been no recent such development of any importance other than the forthcoming breakup of the American Telephone & Telegraph Company. For the benefit of those who have spent the last two years in the Sahara desert. that company will, in mid-February, distribute to its shareholders shares of seven new operating companies, one-tenth of a share of each company for each Telephone share now held. Trading on a when-issued basis in the seven new companies, plus the new AT&T, will begin on Monday. The paper work that has been generated by all this and the number of people that will be affected by it both probably set records. Telephone has 938 million shares outstanding, held by some 3.1 million separate shareholders, at a current market value of some 60 billion. This size has lead to a mini-growth-industry engaged in assessing the individual values of the new compon- ents, an industry that will undoubtedly burgeon now that dividend rates and projected operating figures for the new companies were released on Wednesday. In this respect, the appropriate func- tion of this letter is a bit different. We are technicians, and we would not presume to quibble with our fundamentalist colleagues in respect to their analysis of relative values of the entitites involved. It is, however J our function to comment on numbers, and, since the issue at hand involves some rather large ones, we will assay such a comment. Among the numbers that have been floating around are some rather astronomical estimates of the projected increase in New York Stock Exchange trading volume as a result of the breakup. These projections run as high as 15. It is difficult for us to justify these figures. For the year ended this Wednesday, the average volume k AT&T common has been 1,192 million shares daily, some 1. 43 of total NYSE volume. The breakup will increase shares outstanding by 70. A 70 increase in Telephone's ,historic trading volume.would.l'roduce 834,000 shares of additional trading. This is an increase of almost exactly 1. Even on Telephone's most active'recen't day, October 19, -. I— it accounted only for 5! of total NYSE volume. Increasing this by 70 would produce a total volume rise of somewhere in the 3 range. . . Let us put it another way. Total trading volume in AT &T over the past year has been some 304 million shares. A 70 increase would produce an additional 212 million. Let us assume (unreal- istically) that, in addition to this increase, every single holder of newly-distributed shares decided to sell them in the next 12 months. This would produce 656 million more shares of volume for a total of 868 million shares. That number is a bit over 4 of total NYSE volume over the past year. There is, moreover, some real evidence that much of the anticipated volume increase in Telephone may already have taken place. The breakup has, of course ,been essentially a fait accompli since January, 1982. In the past 12 months Telephone has traded 2.66 per month of its total shares outstanding. This number is 62 of the NYSE average of 4.3. For the 1980-1982 period, Telephone's turnover ratio as a percentage of the NYSE turnover ratio averaged between 41 and 45. For prior years it was considerably lower. This would suggest that some portion of the portfolio adjustments to be made as a result of the breakup have already transpired. A number of other factors mitigate agalnst a sharp increase in volume. One is the profile of the typical Telephone shareholder. As noted above, there are 3.1 million such. producing an average holding of 298 shares with a market value of 18,774. This is in contrast with, for example, IBM, where the average holding of an individual shareholder is worth over 100,000. These are, in other words, individuals who have demonstrated an ongoing loyalty to the company, and large numbers may elect simply to hold their shares or, alter,natively, invest in Humpty-Dumpty funds. Neither course of action will produce any volume increase. Shareholders may also adjust their holdings by an option offered through the company, and, since it is necessary to hold 1000 shares of the present Telephone in order to receive round lots of the new stocks, many will make such .. adjustments via the odd-lot market. These latter two instances will, of course, produce some in- crease in round-lot trading but, to a great extent, activity in those cases will be netted out internally. There will, of course, be a short-term increase in the level of trading by professionals as the market performs the necessary process of sorting out the relative values of the new enterprises. Such trading may produce some falrly significant short-term bulges in the week ahead. It would nonetheless seem to us that, despite the magnitude of the breakup, the financial community will adjust to it without a great deal of alteration in business as usual' and without the sort of in- crease in trading activity that seem to be widely anticipated. AWTrs Dow-Jones Industrials (12 00 p. m. ) 1250.10 S & P Composite (1200 p.m.) 165.53 Cumulative Index (11117/83) 2008.78 ANTHONY W. TAB ELL DELAFIELD, HARVEY, TABELL INC. No statement or expressIon of opinIon or any other matter herem contained Is, or Is to be deemed to be directly or mdlrectly, an oHer orthe soliCItation of an ofter to buyor sell any security referred to or mentIOned The maner IS presented merely lor the convenience of the subscriber While we believe the sources of our information to be reliable, we In no way represent or guarantee the accuracy thereof nor 01 the statements made herem Any action to be taken by the subscnber should be based on hiS own Investlgallon and Information Delafield, Harvey, laben Inc, as a corporatIOn and liS oilicers or employees may now have or may laler take, positions or trades In respect 10 any securities mentioned In this or any future Issue, and such posllfon may be dllferentlrom any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabell Inc, which IS registered WIth the SEC as an Investment adVisor, mayglYe adVIce to lIs Invostment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further Inlormatlon on any secuflly mentioned herein Is available on request