Evening star., 1932-05-15
Present Prices Declared on
0verdiscount of Earnings
and Dividend Loss.
FINAL PHASE OF SLUMP
SEEN IN CHEAPER MONEY
Abundance Of Capital in Worlds
Markets Has Forced Interest
Rates to Low Levels.
BY CHARLES F. SPEARE.

Special Dispatch to The Star.
NEW YORK, May a. - Confidence
has been growing in Washington this
week. though the index Of market prices
shows that 1t is still at low ebb in Wall
Street. The general average Of stocks
has again fallen sharply, with rail
shares. affected by reduced dividends
and operating deficits, today at level
that has not been approached since the
panic year 1898.
The investor in securities must now
look the facts of the present situation
squarely in the face and adopt either
one of two courses His faith In what
he owns or what he would be disposed
to buy if he were in funds, will be
strengthened by the present relation of
market prices to liquid assets, capital
structure, present earning capacity
equivalent, say, to that of the year 1926,
and the low ratio of price to gross earn
ings, or it will be weakeped by his ac-
ceptance of the rising tide of opinion
that worldwide collapse In credit is
inevitable, in which event present low
prices might prove to be high prices.
Whichever Judgment is the better Is
likely to be determined within the next
go or 80 days. Conditions here and
abroad must either soon improve or be-
come worse. Although the capital sys-
tenn of the world has shown wonder
full resistance to the blows that have
been struck against 1t since the Autumn
of 1929. it cannot much longer bear the
impact of progressive deflation in Sc
curities and commodities. 1t may be
a futile and unreasonable philosophy,
but this writer has believed and still
believes that. with the realities of the
world situation now understood and ac-
cepted and the penalties of further de-
lay in meeting them fully appreciated
a way out of the present depression will
be found and the charting Of safe
course will shortly follow.
Sources of Liquidation.
For every investor who, from fear, is
selling his securities at the current de-
preciated prices, there are a dozen
cessity to abondon them. 1t Is this
liquidation. proceeding from the cumu-
lative effects Of a long series of new
low levels, thai day by day gives the
market forlorn aspect and prevents
1t from responding to any constructive
developments. Wall Street Is thoroughly
iiquidated. The banks that thought
they were doing good stroke of busi-
ness when they took over loans from
brokers in 1929 are not liquidated and
are steadily feeding stocks from
emaciated loans into the market. Re
Gently there has been q considerable
amount of selling by fire Insurance
companies whose practice, In recent
years, was to build up a large portfolio
of stocks whose appreciation and the
income from which. IN the form of
dividends, enhanced the position of
their own shares. 1t is obvious that
the effect of the price collapse in securi-
ties on their capital and surplus ac-
count is somewhat similar to that on
the banks from the shrinkage in their
bonds. The fixed trusts have. also been
compelled to hquidate stocks that have
gone off a dividend basis.
When 1t is considered that public in
terest in the market and public buying
power are so small, 1t is surprising that
forced sales from these various sources
have not had an even greater effect on
prices. The mystery of who has been
selling securities for the past nine
months Is no greater than that of the
identity Of the buyers for, In the last
phase of the decline, there has been
comparatively little odd lot demand.
whereas in all of the sharp breaks from
November, 1929, to December, 1881, the
purchases in small units were on an
unprecedented scale.
Effect on Rail Values.
The investor who has confidence in
the future and believes that We are ap-
preaching a solution of our domestic
credit problems and a betterment.
though perhaps not final settlement
OF the financial and economic difficult
ties abroad may find many reasons
why he should retain his securities. The
most frightened group are those who
hold railroad common stocks and Junior
bonds. The average of railroad stocks
today is about 80 per cent lower than
1t was in September, 1929. In the past
four months the low average of jan
ua,r IS has been cut In two. Railroad
ste s are now quoted at only Is Der
cert of their average value in May,
1921.
No one who has made a study of the
railroads could honestly subscribe to
the opinion that their property value
and their potential worth. as expressed
In the market value of their common
stocks, is now only one-quarter as great
as 1t was when, in a badly battered
physical condition and with an inflated
pay roll, they came out from under
Federal control. Deduct from their
property value such amount as would
be required to bring this in line with
current costs of real property or equip
ment, subtract the effect on market
values of a $300.000,000 loss of divi-
dends already taken and admit that
there has been a permanent decline In
passenger and freight traffic, and then
consider whether the IS and $40 per
share market quotations for railroads
that are independent of outside relief
have not discounted every possible con-
tingency.
Strong Spots in Industrials.
Turning to the industrial group, we
have large body of proof that many
common stocks have overdiscounted
loss of earning power and Of dividends.
A number of studies have recently been
made of manufacturing or distributing
companies that are out of debt. For
the individual or corporation to be fres
! of debt these days is the chief guaran-
| tee of continued solvency. One list of
about rs Industrial stocks, that have
! neither bonds nor bank leans and no
preferred issues, is selling at an aver
| age price of about $3.50 q share. In
J it there are As quoted below $40 a
share A second list of 80 stocks shows
working capital per share ranging
from to 10 times their market prices
A third group is composed of nearly 200
listed stocks with no prior obligations
in the form of bonds or bank loans and
favoring which are current assets eight
times in excess of current liabilities and
net quick assets Of 10 per cent of the
market value of these stocks.
rf~a~- A-A.
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