Evening star., 1919-11-15
rising GCOSTSH|T
AT FIXED INCOMES
Investors Seek for Bonds
That Will Yield to Meet
Increases.
! BY JAMES. RATTERY,
! Assistant Manager Rond Department Of Guar
anty Trust.

Assistant Manager BOND Department Of Guar
anty Trust.
Rising costs bring hardships no,
only to wage earners, but to all with
fixed incomes. This is particularly
true in cases where income is derived
from interest on bonds and dividends
on preferred stocks, and as purchas-
ers of such securities will buy only al
prices. to give a yield that will off
set the increased cost of living, the
tendency is for prices Of bonds and
preferred stocks to decline as COM
modify prices rise. The reverse is
true, however, in the case of common
stocks, for higher prices increase the
value Of the coporation's assets. and
usually result in increased earnings
on account of profits being figured as
a perct itage on. the cost in dollars
and not as a certain amount on each
unit of the commodity.
increased earnings permit higher
oiVldends or greater additions to sur
plus or both, thus stimulating the de-
mand for such stocks with a conse-
quent rise in prices.
Of course. after providing for out
standing bonds and preferred stock al
par or the call price all additions to
surplus are applicable to the common
stock.
A period Of rising prices thus in
ouces speculation. but speculation is
or course, not confined to the stock
market.
High prices for agricultural com.
modities have made farms more val
uable and land speculation is preva-
lent in the west.
The cost of constructing new build
ingS mas gone up with a consequent
increase in rents, and as the rents OF
buildings put up at lower cost have
also increased, many of them are
changing hands at greatly enhanced
values. The same is true of food
that can be considered.
Not Disadvantageous to All.
If high prices were disadvantageous
to all, they would soon come down,
but they are not. SPECTATORS can
make money on account of them, and
iaborers can obtain increased wages,
leaving salaried people and those with
incomes from investment securities to
bear the brunt. When the speculative
fever is at its height the victim be-
comes unconscious of other opportu-
mites, investment securities are neg
lected and decline, as they have in
the present market, to a point where
high grade bonds can be acquired on
very attractive basis, while the COM
petition for speculative issues puts
them up to a point where the return
is not commensurate with the risk
involved.
A demand for bonds and preferred
stocks inevitably follows. with a con-
sequent appreciation in price and de-
cline in yield. When this will happen
in the present market no one knows,
but economic laws are inexorable. and
shrewd investors are availing them
selves of the present opportunity to
acquire high grade long term bonds
on an attractive basis, thus insuring
high return for many years to- come.
Taxation an influence.
Taxation has probably had a greater
influence than commodity costs on
bond prices. With rates of taxation
running as high as n per cent in
1918 and 73 per cent in 1919, an in
vestor owning taxable bonds did not
have much left after taxes, and when
we consider the deprecated purchas-
ing power represented by the balance
the only alternative in many cases
was to dispose of such securities, and
invest in those that are tax-exempt.
A demand for United States govern
ment bonds, municipal bonds and 1arm
loan bonds, totally exempt from tax
alton, developed, and these have been
acquired in large volume by wealthy
investors. Under our revenue law pre-
ferred stocks are exempt from the
normal tax. as are also liberty bonds
issued after September 1, 1917. which
makes them very attractive TO mold
ers of moderate means as the sur
tax applicable to incomes under $30,-
600 is less than the normal tax.
Tax Free Liberties.
Total tax exemption on the interest
on an aggregate principal amount OF
$16O,O00 Of the 4 per cent and 4A per
cent liberty bonds is also possible under
certain conditions, as prescribed in the
various liberty loan and victory loan
acts, and these additional exemptions,
combined with low market prices for
the bonds, have been taken advantage
of by those subject to high taxes to
ton. with $21 1,000,0 100000 Of liberty
bonds outstanding in the hands of mil
lions of holders, many Of them only
holding a small amount, trading IN suen
bonds has, of course, been the feature
of the bond market.
Sold to a great extent on patr1otlsm,
these issues naturally declined in price
and prices have been held down through
liquidation by small holders, many of
whom on account of labor troubles have
of necessity been compelled to dispose
of their holdings.
Recent statistics of loans by banks
and the federal reserve banks against
liberty bonds indicate that nearly $15,-
O00, DOC, 900 have been absorbed by the
investing public, and these are probably
held in large volume for investment,
for with the liquidation during the last
year there cannot be any large amount
in the hands of those who are likely
to dispose Of them. 1t is reasonable to
suppose that these conditions combined
with purchases by the government
should strengthen the market for the
liberty issues. It is possible that ex-
piration of the tax exemption privileges
in two and five years, after the Presi-
dent by proclamation declares the war
ended, will react on market prices, but
that may, of course. be Offset by Inn
provement in government credit.
TRADE CONDITIONS.
NEW YORK, November. 15:-Dun's
review Of the weeks trade says:
"Readjustment OF an, overextended
speculative position has made for
more wholesome conditions in the se-'
curities markets, and the resembling
Of the coal strike order has. strength
ened business prospects. No wide
spread or serious Interruption of
manufacturing or transportation has
resulted from the walkout among the
miners, and the gradual resumption
of operations in the bituminous fields
hao q 1lav annrehanSi0n of a .1enaral