Evening star., 1937-01-01
IDLE FUNDS SEEN
FACTOR IN MARKET.
Initiation and Foreign Gold
Disregarded as Causes
of Price Increases.
BY ARTHUR H. NORRIS,
Cambridge Associates STAFF.

Of rising security prices. From March |
of 1885 there has been an unbroken
succession of ascending peaks and,
after each, there has been expecta-
ton of a major reaction. But after a
short breathing spell equity prices
have continued on their way upward, |
defying portents and precedent.
From mid-December. 1885, through |
the first quarter of 1885 the averages |
climbed without interruption. In late
April there was short sharp reaction
but a quick recovery followed and the
march resumed. Very slight pre-
election uncertainty was manifested
and after the balloting, stocks
snapped to fresh highs. 30 points
above the January l level. according
to the New York Times index cover
ing so stocks.
The bull market is now four and
half years old Common stock prices
are up $50 per cent from their de-
preston lows. S. E. C. officials and
other financial authorities are giving
grave consideration to methods OF
controlling a boom with the implica-
tion, of course, that if stock prices are
not already too high they promise
soon to become so.
Habits" Of Money Cited.
It may be valuable, therefore, to at
tempt to probe the secret of the mar
ket's buoyancy. 1t appears to this
writer that, as such, imitation"
foreign gold" and similar explana-
tionS of common stock values can be
dsregarded. The real basis of the
situation seems to be something more
even than business recovery, expert
enced and expected. The real clue is
given by "money"-man's creation,
perhaps. but motivated according to
arbitrary, obstinate habits OF its own.
Way back yonder in the closing
days of the New Era" when the lure
of profits enticed millions into bor-
rowing money at rates of interest to
get rich without working, the highest
grade long term corporate bonds were
selling at prices which afforded
secure interest return at the rate OF
~ per cent.
At that same time. with business
earnings at the best in the country's
history, the per share earnings of a
representative list of common stocks
were equivalent to only 3.6 per cent
on the market appraisals of those
stocks. The dividend yields were even
less.
Money Seeks Action.
Basically, money seeks action be-
cause the individuals controlling it
seek action in greater or less degree.
The range of moneys activity is wide.
But tireleSsly it seeks out the oppor-
tunities to earn more money-to get
return. Broadly, the sphere Of
moneys action is limited by the pull
ing power of two sources of return:
% Relatively riskless, fixed income,
credit instruments of high-grade bor-
roWers
~ Relatively risky, certificates of
participation in the earning power of
individual businesses.
Although many investments" give
returns which are really combinations
of interest and profit earned, the rela-
tive pulling power of these two basic
sources of return is the major con-
trolling influence over moneys action.
Unerringly. though by sometimes
slow and tortuous paths, money. like
water seeking its own level, flows
toward the source of return which
Is most attractive, risks considered.
In the accompanying chart an at
tempt has been made to present, at
several important points in the in
vestment history of the last few years.
the comparative attractiveness or
earning power of money invested in
high-grade, long-term bonds and lead
ing common stocks.
AS indicated in earlier paragraphs,
the investor had the choice in 1929 of
accepting At per cent on the best
grade of credit obligations or taking
earnings yields Of only 3.6 per cent
on common stocks in the hope that
later earnings, in which he might
share, would be at yet higher levels.
About that time Andrew Mellon
dropped his now famous remark that
bonds are a good investment" The
figures above indicated that he was
only too correct.
Yield 5.4 Per Cent Return.
The last four bars on the chart indi-
cate the condition and relationship
Of bond and equity returns today and
during the market rise in common
stocks during the last two years. The
bulwark behind the remarkably steady
and uninterrupted advance in common
stock prices since March, 1885, is de-
picted in this chart. In March, 1885,
common stock earnings afforded a
return of nearly So per cent as against
only 1853 per cent for long-term bonds.
Obviously there was a sufficient mar
gin between the two to justify an ex-
tension OF common stock holdings.
BY February, 1896, the rise in stock
prices had sufficiently outstripped
common stock earnings to reduce the
earnings return to 4.84 per cent. While
some selective reduction in common
stock holdings was therefore justified,
the margin between interest rates and
stock earnings yields still seemed to
justify retaining good position in
equities. The reaction in April, plus
continuing rise in earnings, raised
the earnings yield in May, 1896, to
$40 per cent as against 335 per cent
on high-grade bonds-suggesting the
desirability of adding to common
stock positions.
AS this is written, earnings still
afford a yield of 5.4 per cent on COM
mon stocks as against 3.24 per cent on
long-term corporate bonds. The as
sumption, Of course, is that present
stock prices still rest on fairly solid
foundation of present earning power
In relation to cost in the market and
high-grade bond yields.
1t would seem a reasonable conclu-
sion that If there is a real boom"
condition extant in the United States
today 1t is more of a boom in high
grade bonds than in business earnings
and common stock prices.
FUR GOODS INDUSTRY