The Washington times. [volume] (Washington [D.C.]) 1902-1939, 1928-02-01


when the volume of trade and
Of business profits was receding,
the stock market seemingly de-
clared its independence Of the
realm of commerce and the aver.
age price Of speculative securities
climbed to new high peaks.
Since the turn Of the year, on
the other hand, the stock market
has ignored early harbingers--
from the barometric steel indus
try and elsewhere-of short
term business recovery. If the
paradox is to be- continued, better
business may conceivably mean
lower prices for speculative securt'
ties.
No Special Logic
There is no special logic In the
attempt of security SPECTATORS to
lead their own lives, uninfluenced
by basic tendencies in the outside
world OF business.
The divorce between business
and speculation, 1t may be as
stunned, win be temporary. The
two phenomena, however, cannot
move hand.and.hand again per.
haps until previous speculative
excuses have been corrected. The
recent irregular revision down.
ward Of speculative conceptions OF
stock values, therefore, must not
necessarily be interpreted as a
pessimistic forecast Of the trade
outlook.
If there was any rational basis
for the upswing late in 1927 in
security prices when business was
moving in reverse, the key to
the movement was to be found In
the money market, In order to
facilitate the shipment of Ameri-
can crops TO world markets, to
provide for the seasonal expansion
in trade, and to aid the restora-
ton of financial stability abroad,
the Federal Reserve authorities
in the second half Of the year,
through rediscount rate reduc-
tioIis and through open market
purchases Of Government securi-
ties, threw the weight Of their
influence to further ease the
money market. The Central Bank
policy exaggerated the long term
trend toward lower interest rates,
and heightened the appetite Of
investors. Moreover, the great
abundance of credit encouraged
pools and individual spectators
to carry on far.reaching cam.
paiRns on the bull side.
The recent reversal OF Federal
Reserve policy, in the light Of
changed conditions, has been the
pivotal factor in inducing the
speculative community to stop
look and listen.
Trade Revival
1t 10 still too early to Judge
how far. the trade revival will
90, but. IL the volume Of trade
and Of business profits expands
in the first half Of the year,
it. il unlikely that q major
bear market I'm stocks IN In the
immediate offIng. II the curve
OF business profits rises substan-
TALLY, investors need expect at
the worst little more than an
intermediate corrective movement
in the stock market, such as
has been previously experienced
in the last six years in which
the long-term trend has been
sharply upward.
Overextended marginal specu.
lators are in q less happy posi-
ton. II they are operating on
a shoestring. they may be UNI
able to hold out for eventualities,
however favorable.
Overexploited specialties, pre-
Vious skyrocketing Of market quo
tations has discounted q great
deal of actual prosperity. If
the affluent period develops, it
can at best do no more than
validate prices already established
in some Of the specialties.
What is true Of such issues IL
by no means applicable to tn:
market as a whole. During the
widely touted 1927 rise, approx
mately 30 per cent OF the listed
issues declined. These repre-
scented not only weaker compa'
MES, but also powerful units In
depressed industries, such as oil
nonferrous metals, and textiles
Railroad stock quotations in the
last two months have reflected a
downward trend OF traffic and
OoA AAAlSSs VhCES SIOChS AALN0
counted adversely, a resumption
of an upward trend in business
takes on a different speculative
significance. In the public utility
field. earnings have shown a far
steadier trend than the vacillating
speculative market in its se-uri
ties.
Economic Forces
With a variety of economic
forces beclouding the immediate
speculative outlook. the prudent
individual will recognize taaL the
present is a good time to be
liquid rather than overextended.
In scanning his list Of hold
ings to carry out such a policy
the investor should challenge ali
securities which capitalize eStab
Hshed earning power and actua!
assets extravagantly. Stock val
ues which cannot be justified by
such tests are likely to be the
most vulnerable to bear pressure,
It should, of course, be recog'
nized that the market capitalizes
earnings at varying rates III
different industries-and not with
out some justification. The public
has been willing Of late to pay
more than twice as much for
earning power of banks and
chain stores, for example, as for
net income of railroads.