Saturday, June 20, 1931: Dow 130.31 -0.25 (0.2%)

Ahead of his time dept.:

[Note: More emphatically repeats the interesting proposal by Macauley in late 1930 - see Nov. 14 and 16. As I said then, Macauley's idea of the Fed aggressively adjusting the credit supply to smooth out the business cycle seems strangely modern, except that in my book he's actually way ahead of modern central bankers like Greenspan in that he proposed taking asset prices (including stocks and real estate) into account in measuring inflation; this system might actually prevent asset bubbles from forming as in 2000 and 2006.] Letter from T. Macauley, Sun Life of Canada pres. Depression is still with us after 20 months. At the time of the late-1929 stock crash, there didn't seem to be any serious problem with general business; inventories weren't high, and there was no commodity inflation. Why has this developed into “one of the most severe business reactions of history?” Attributes problem to general price decline, or, in other words, increase in value of the dollar; this in turn is due to undersupply of dollars in form of currency and credit. If value of dollar fluctuates unpredictably, then “business ... is built on shifting sand.” Current price decline “enriches the creditor classes and improverishes all others”; effect is particularly harsh on industrial corporations. A “proved and effective remedy” is at hand - the Fed. Reserve can buy govt. bonds, increasing amount of credit available. Fed. Reserve did in fact buy $450M in bonds when banking credit fell too far after the fall 1929 crash; this was “beneficial” but “not sufficient,” and there has unfortunately been no attempt to stabilize prices since, leaving us in a “vicious circle” of shrinking credit and falling prices. This is happening in spite of vast US gold reserves; contrary to widespread opinion, gold “has been absolutely replaced by Federal Reserve bank credit” as the basis for US currency; however the Fed. Reserve is, almost inconceivably, not using its “wonderful power.” It's said “the depression is world-wide and therefore beyond the power of any one nation to remedy. That hardly is correct. The depression certainly is world-wide, but the remedy rests with the US.”

Assorted historical stuff:

Pres. Hoover on Friday held conferences with House and Senate leaders and cabinet officials; White House officials refused comment on whether reparations were discussed. However, there were “intimations ... of greater open-mindedness on the whole matter of international obligations” and, later in the day, Pres. Hoover said the conversations were directed particularly at strengthening the German situation, though no definite plan had been arrived at. Up to now, the US govt. attitude has been clearly against revision of war debts, but now “belief prevails that this attitude has somewhat softened.”

[Note: Strangely Familiar Dept.] Letter to the editor decrying "hypocritical course" of politicians on the wage situation. "The public at large, the farmer and all people not living by some game whereby the extortions of certain classes can be adjusted in their own business, have no protection at all." A general cut in wages isn't desirable; some are still too low and some only fair. "It is extortionate wages of the union labor element that is causing the trouble ... the inflation and the unparalleled selfish extortion of the unions since the war labor shortage has demonstrated that they are more callous and greedy than the capitalistic offenders."

Worst dust storm in years reported in some areas of Canadian wheat belt.

A. Agnew, Shell Transport & Trading dir., predicts demand for petroleum products will continue to grow. Although consumption around the world is slightly lower, believes this is only a temporary result of depression; confident that before long demand will increase in every country.

Sen. James Davis urges consolidation of all US coal mines east of the Mississippi to bring complete recovery of the industry, calls its recovery vital to prosperity.

Pres. Hoover returned from trip through West "encouraged by economic conditions and reports of business leaders in that section."

GE petitions Supreme Court for rehearing of Langmuir radio patent case [see 11/13/1930 and 5/26/1931], which recently appeared to have finally been resolved after 10 years of litigation at the patent office and almost 5 in court.

Federation of German movie theater owners demands immediate withdrawal of "Hell's Angels" [Howard Hughes' World War aviation film] from world markets; threatens retaliatory moves.

Denmark offers an interesting case study in an intermediate form of Prohibition; local districts have the option of controlling the liquor trade, and drinks are heavily taxed at $2.25/liter vs. 10 cents in 1905. Membership in the temperance movement has dwindled, but consumption of alcohol has also decreased, and 226 districts now forbid saloons.

Ravenna, Ohio, resourcefully avoided a recent interruption in their gas supply due to changing of pipelines by temporarily storing gas for the town in two giant balloons; Goodyear collaborated in the successful experiment.

[Note: I believe the Beatles ripped this one off ...] Interesting story on the Nautilus submarine that is to attempt a trip under the North Pole ice cap; it's painted yellow-orange for best visibility in greatest variety of weather. Also digresses to historical discussion, including claim Alexander the Great was first known submarine experimenter, being lowered to bottom of the sea in a barrel and reporting huge four-footed monsters walking the ocean floor (source: two 15th Cent. tapestries).

E. McKinley of Kansas recently dug up $12,000 in bonds that he buried in the ground for safekeeping, only to find that ants "had done a little coupon clipping of their own." His faith in the safety of a hole in the ground compared to a bank vault was somewhat reduced, but it turns out the bonds are still redeemable.

A newspaper clipping bureau was victimized by Charles Lindbergh, who paid them $35 in advance before embarking on his first transatlantic flight. In the ensuing four years, the bureau has sent 227,132 clippings to his mother. However, the bureau is now getting thousands of dollars worth of free publicity by suing Lindbergh.

Market commentary:

Market wrap: Leading stocks continued to move lower on moderately higher volume for most of the session; leading rails were weak again, while oils bucked the general downtrend on news of Standard of California price hikes. Prices worked steadily lower toward noon; nervousness attributed to suspension of Amstelbank, Dutch subsidiary of the Creditanstalt. Market developed better tone in the final hour, with general recoveries from earlier lows; prices closed little changed. Bond trading more active, prices irregular; US govts. steady; highest-grade corp. in demand, with record highs in many issues; NY City traction issues strong; second-grade issues irregularly lower; speculative and convertible bonds fell in sympathy with stocks; foreign list featured weakness in Australian and Chilean govts. and late reaction in German issues. Commodities mixed; wheat closed somewhat lower after rallying off new season lows; corn firm; cotton up sharply. Copper remained at 8 cents with buying small; need seen for drastic curtailment to improve situation.

Conservative observers have turned very cautious; say market near levels where good resistance should develop if further sharp declines are to be avoided. Advise clients to stay on sidelines and use stop-loss orders to protect current long positions.

Market action has "admittedly ... been most disappointing to those interests who had been operating for higher prices"; expectation their activities would attract a public following hasn't been fulfilled, "thereby halting the bull operations in a number of shares ... the market will need some new incentive to start it in either direction for more than merely a technical move."

Speculation rising on possible cut in Pennsylvania RR dividend. Du Pont is said undergoing accumulation; earnings have shown steady better-than-seasonal increase since Dec. Cellophane is outstanding bright spot, with new outlets constantly being developed. Borg-Warner (auto parts) Q2 earnings expected to be much improved from Q1; co. seen benefitting from Norge electric refrigerator division. Diamond Match [Kreuger-associated] has been relatively well supported in the past few weeks; company seen benefitting from diversification.

Recent NYSE session in which volume dipped below 1M for the first time since late Oct. 1926 prompts interesting look back at the intervening period. Between then and June 16 of this year, stocks traded an average of about 2.8M shares daily, including the 2-hour Saturday sessions. Total market value on June 1 was $42.5B vs. $36.3B on Nov. 1, 1926; however, number of shares listed rose 133% (figures include common and preferred stocks).

Plunge of $71M, or 4.76%, in brokers' loans (by NY City banks) in most recent report was larger than expected, particularly since it coincided with 2 1/2 point increase in the Dow industrial avg.; in fact, brokers' loans have declined $120M or 8% since the stock market low on June 2. “The tendency for loans to move against the market following a definite turn of trend has been noted before.” Latest total of $1.419B set a new low record for the 7th consecutive week.

Editorial: "Dame Nature is somewhat freakish this year"; weather conditions are favorable for winter wheat, corn and cotton, but highly unfavorable for spring wheat and Western pastures. Poor crop outlook for spring wheat should be bullish, but must face "that great bear represented by the Farm Board holdings"; Board's persistent refusal to give information on sale of its holdings lessens hope of better prices. Demand for winter wheat and corn should be good; cotton not so much.

William Danforth, longtime bear operator who recently turned bullish [see May 26], remains confident "that the next worth-while speculative play in the market will be on the upside"; has privately said leading industrials may go slightly below previous lows, but such dips will provide good buying opportunities. Another "prominent capitalist, who has been extremely pessimistic on economic conditions over the last 18 months," also feels market is in the process of turning, and that sound stocks should be bought on dips; sees similarity to last 4 months of 1921, when stocks steadily advance although business situation continued depressed.

Harvey S. Firestone confident in early return to normal business conditions: "The trend is upward, and if everybody works and does not get scared things will go along all right."

E.F. Hutton dismisses idea stocks have become “undesired” due to the “unpleasant experiences of the past two years” as “just plain nonsense.” Stocks have always depended on business for their major moves; when business improves, “this ... will make the securities markets popular enough with the public once again.”

Economic news and individual company reports:

Editorial approving Ohio Supreme Court decision that a county must honor bonds issued under dubious circumstances. Bonds in question were to provide sewers in farmlands without apparent public necessity, increasing value of land; county commissioners were paid extra for allowing the improvements. While the bond issue was "'a flagrant violation of the trust and confidence' of the people," this is "beside the point"; "the taxpayers' recourse is not to wait until bonds have been marketed and then seek to repudiate them. ... Taxpayers are responsible for the conduct of their chosen agents." Florida Supreme Court reversed circuit court decision and declared bonds of Southwest Tampa drainage district valid. Suit for $2.5M filed in circuit court against St. Petersburg, Fl. in effort to collect past-due principal on some municipal bonds. Chicago situation remains grim; Board of Education has almost no cash on hand and will be $15.5M in arrears on payroll and current bills by end of month. Municipal bond buying was slower this week; largest issue of the week, $23M New Jersey 3 1/2% loan, failed to attract sufficient bids; coupon rate may need to be raised. A large number of railroad bonds are likely to be dropped from the “legal” (for savings banks to buy) list due to poor earnings, though banks aren't required to liquidate bonds that they previously bought when this happens.

Bank of US trial went to the jury at 2:56 pm Friday. Judge Donnellon, in charge to the jury, stated a crime does not cease to be a crime because it was committed on the advice of counsel, responding to defendants' claim they approved disputed transaction on advice of bank counsel I. Kresel.

Amstelbank, Dutch subsidiary of the Creditanstalt, suspended payments; due to connection to Creditanstalt, “difficulties were foreseen days ago.” German stocks declined; rumors circulated regarding Chancellor Breuning's health. Alleged “wholesale withdrawal of American credits” from Germany is drawing sharp criticism.

Bank of France granted 300M franc credit to Spain secured by Spanish gold in London. Credit believed necessary for defense of currency; pesetas down sharply.

Standard Oil of Calif. raised buying prices for crude and selling price for gasoline; rise in crude price only for oil produced in compliance with proration (production curtailment program). Several other companies match the price hikes. H. Gallagher, Shell Oil VP, praised end of price war as “most constructive” but warned “sound prices cannot be maintained” if marketing companies resort to “unethical or price cutting methods.” Appeal made to all operators in the East Texas oil district to voluntarily curtail production to 300 barrels/day per 20-acre unit.

"Spectacular" recent US acquisition of gold, amounting to $90M in the past week, "not having any noticeable effects upon the credit structure. ... In fact, bank credit has been contracting"; NY City banks loans and investments fell $162M in the past week. "Nor has money turned appreciably easier. Apparently the gold is being absorbed in non-productive ways" such as increased currency circulation due to "withdrawals where there is fear of the banking situation." Also, NY banks "appear to have built up their reserve deposits considerably above requirements," and the Fed. Reserve sold $20M in bankers' acceptances. US gain in gold so far in 1931 is $286.1M vs. $213.0M in first half 1930. Swiss gold reserve has reached a record high of 730M Swiss francs vs. 642M on Apr. 30.

IT&T has acquired an interest in L.M. Ericsson, controlled by Kruger & Toll; Ivar Kreuger will be elected to board of directors of IT&T, and also become a on member of the executive committee. With the transaction, IT&T's worldwide system passes the 1M telephone mark. Terms of transaction not disclosed, but expected to be in form of partnership since Swedish law prohibits control of domestic corporation with foreign capital.

Bradstreet's reports retail trade resumed seasonal downtrend last week; rainy weather in some sections reduced trade; most of retail business is in moderate and low-priced merchandise; "stores find it necessary to continue resorting to 'sales' ... and this method is not always meeting with entire satisfaction"; tourist travel unusually light in most centers. Dun's more optimistic on retail, with good demand for women's wear. Both note some improvement in wholesale.

M. Harrison, Security Owners Assoc. pres., calls for joint action of railroad labor, owners of rail securities, and managements to revitalize the industry, in particular by supporting the proposed 15% freight rate increase.

BLS reports retail food prices in 51 US cities on May 15 down 2 1/2% from Apr. 15 and 19 1/3% from 1930. Wholesale price index of 550 commodities fell 2 3/4% during May, and was 20% below 1930. May building permits in cities of over 25,000 were down 19.5% from Apr. and 27.6% from May 1930.

New bond offerings in the past week were $87.3M, up sharply from $7.2M in prev. week and vs. $133.0M a year ago; most were utilities and municipals.

Canadian exports in May were $59.8M vs. $77.3M in 1930; imports $73.5M vs. $101.5M.

Russia has been exporting larger quantities of oil to Britain, Italy, France and Germany this year; markets in S. America and Asia recently established.

Shoe output remained high in May at about 29M pairs vs. 24.5M in 1930; highest May total ever except 1923 and 1929.

Western Growers' Assoc. fears labor shortage this summer in Calif. fruit district due to repatriation of 60,000-75,000 Mexicans from Southern California this year.

Three NYSE seats sold for $200,000 - $212,000.

L. Smith of the Real Estate Bd. of NY reports vacancies in Manhattan office buildings not abnormal. Average rate in 6 leading districts as of May 1 was 15.6%; however, excluding 28 newly opened buildings, vacancies in 301 representative buildings were 12.1% vs. “normally rented” level of 10%.

Company reports since Apr. 1: 219 companies reported higher earnings vs. 1930 and 779 lower; 1,046 dividends unchanged, 18 increased, 245 cut.

Movie:

Smart Money - at the Winter Garden. A fine cast features Edward G. Robinson in a showy but convincing performance as Nick, small-town barber turned big-city gambler and James Cagney in a supporting role. However, writing is artificial and "in a stereotyped mold," leaving the film a class below these two actors' impressive previous outings, Little Caesar and The Public Enemy. Nick is undone by his weakness for blondes; a series of them cause him trouble, culminating in one who causes his arrest "when the 'D.A.,' as all district attorneys are called in crime movies," forces her to produce evidence against him.

Jokes:

A boxer was about to fight the heavyweight champion. He nervously hung back before entering the ring. "It's all right," said his trainer. "Just say to yourself, 'I'm going to beat him,' and you'll win." "That's no good," replied the boxer. "I know what a liar I am."

"Astronomer - The light of the star I am going to show you takes four hours to reach the earth. Visitor - Very interesting, but I'm afraid I can't stay that long."