Thursday, July 16, 1931: Dow 137.86 -2.99 (2.1%)

Germany special:

Reichsbank raised discount rate to 10% from 7%, and rate on security loans to 15% from 7%; also reduced minimum legal ratio for note circulation to 30%, allowing urgently needed issue of up to 1B additional marks to meet currency demand anticipated when banks reopen today. Cabinet is working on a decree to regulate banking transactions when banks reopen; withdrawals will be limited, with wages having priority. At insistence of foreign bankers, particularly US, cabinet will also decree rigid control over foreign currency sales in Germany, giving Reichsbank a monopoly. Cabinet apparently has shelved proposals for a new internal currency and a moratorium on private debts. It was officially denied that H. Schacht is being considered for position of “dictator of the currency.” “General opinion” in Germany now reportedly favors definite moratorium on foreign payments except on external bonds.

Editorial: Germany now finds itself "financially under under a species of martial law." Failure of international bankers thus far to alleviate the crisis is disappointing, but "by no means indicates that the situation is hopeless. Rather, it suggests that the French obtained about what they wanted" at the BIS meeting Monday, in that bankers will not organize a rescue alone but "the politicians must come along. ... The German govt. must submit to a foreign political tutelage as the price of financial and economic salvation." France is proceeding on the conviction it has "less to fear from a bankrupt and prostrate Germany, swinging between Hitlerism and Bolshevism, than from a Germany rescued from financial disasters"; it stands for "subordinating the success of the Hoover plan to her task of suppressing ... German nationalism." How successful the French approach will be remains to be seen; "days, and possibly weeks, must elapse before the next phase of German history begins to take definite shape."

Otto Kahn returned from 3-month trip abroad. "Speaking of the German situation, Mr. Kahn stated that while a lot could be said it is such a grave subject it could not be discussed lightly."

Commerce Dept. says investments in Germany by US citizens are $1.35B - $1.5B, second in value among all foreign countries.

Sterling broke sharply, while francs scored a sensational advance and Swiss francs rose sharply “as money sought a safe refuge”; marks and minor currencies were quoted nominally. Trading was heavy and movements most spectacular since currencies were stabilized after the war. Franc-sterling ratio is now below level of last year when French balances were being withdrawn heavily from London. Exports of gold from London expected; exports are also possible from NY to Paris. Market is discussing possible rise in the Bank of England rate tomorrow; the gold reserve position of the Bank is quite strong, though London is vulnerable to withdrawal of foreign short-term balances. Bankers in London are “meeting the situation without any alarm but are quietly making preparations to meet any eventuality.” “Reports and rumors of all sorts circulated freely, adding to the uncertainty.”

Swiss banks reportedly are refusing to pay out on German deposits because they are unable to draw on Swiss deposits in Germany. “Rumors in German newspapers that certain Dutch banks are in difficulties ... are untrue and without foundation.” Mercurbank, Austrian subsidiary of the closed German Darmstadter Bank, will reopen on limited payment basis with loan from Austrian central bank.

Berlin Stock market will remain closed until Monday. Stocks in Paris and London were weak. European bonds fell sharply.

French Fin. Min. Flandin denied rumors of 1B franc loan to Hungary.

Assorted historical stuff:

Editorial on recent decision by US Circuit Court of Appeals that officers of the law can't search a premises without a warrant. Particular case involved arrest for Prohibition violation, after which agents searched and found "a considerable amount of liquor." However, principle is general and one of the "fundamental rights which neither statute law nor officials enforcing it can violate"; such a search requires a warrant unless "fairly incident to the arrest." For several years, this principle has "been more honored in its breach than observance. ... Zeal in enforcing the law is well, but our free institutions are endangered when such zeal is so great as to deny or violate those rights. ... The Fourth Amendment stands as a bulwark against official tyranny; officials sometimes forget it but the courts do not. They preserve for the individual the rights guaranteed to him in this, our government of laws."

AFL Pres. Green says organization will oppose any general move for wage cuts with all its "might and vigor"; says social unrest and industrial discontent growing as country approaches third winter of unemployment.

H.G. Wells revises opinion on prospects of Soviet five-year plan, saying it appears to be staggering due to lack of managers and educated men. Official Soviet press, in line with Stalin's recent stirring address acknowledging value of the “intelligentsia,” is finally “admitting ... Russian engineers and specialists are working under disheartening conditions.” Wholesale arrests of past 2 years may have been largely justified as the few cases brought showed Russia victim of extensive sabotage. However, inevitable result was to spread panic among even honest specialists; “the panic has by no means subsided though effort is now being made to assure specialists of just treatment.”

Canadian PM Bennett says govt. bought 2M bushels of wheat to supply flour to farmers in West; purchase necessary due to acute situation caused by crop failure.

NY City is using an "effective expedient" to crack down on users of “raw fuel” within the city. “Automatic cameras, concealed here, there and everywhere” take pictures every 30 seconds, showing accurately up to a 300 foot distance which industrial and private chimneys are generating too much smoke.

Canadian officials will use ingenious method to attempt control of the Larch Case Bearer, an insect parasite attacking Larch forests of Canada. 10,000 specimens of Mesoleius Tenthredinis Morley, a parasite that attacks the parasite, are being shipped to Canada from Britain, the advance guard for an army of 100,000.

Commerce Dept. reports it had 10,235 aircraft on record in the US on July 1, vs. 9,818 on Jan.1; states with most: NY - 1,190; Calif. - 1,160; Illinois - 685. Air mail transported in first 5 months was 3.717M pounds, up 13.3% from 1930; express shipments 325,000 poiunds, up over 200%.

Washington officials skeptical on supposed threat of jute shortage in upcoming year.

The Chicago City Comptroller has gone out of his way to avoid the common social embarassment of the mispronounced name. His business card carries his name, M.S. Szymczak, in normal type; underneath, in small print, is the helpful pronunciation guide M.S. Sim-chak.

The US Mint in San Francisco, because of the large amount of gold stored in its vaults and underworld rumors of an impending robbery, has barred visitors.

NY Court of Appeals rules IRT must abide by 85-year contract specifying 5-cent fare until 1985; decision was unanimous and appears to end long legal battle.

Market commentary:

Market wrap: Leading stocks fell sharply on heavier volume following continued unfavorable foreign news; US Steel led decline in industrials; rails were better supported on rate optimism, but also suffered extensive declines; AT&T and Consolidated Gas led setbacks in utilities. Selling picked up around noon on sterling weakness, catching stop-loss orders in large numbers. A good rally developed in the last hour on news of strenuous German efforts to strengthen credit position; good-sized recoveries took place in major shares, aided by short-covering. Bond trading more active, German issues plunged to record lows, though some recovery took place late. Rest of foreign list showed effects of "decimation of German bond values," with S. American and European issues generally weak and some sharp declines. US govts. steady; domestic high-grade slightly lower while setbacks in speculative issues were somewhat wider. Commodities mixed; wheat was weak most of the session, with Chicago July wheat hitting a record low for futures of 50 1/4 cents; however, a sharp late rally left wheat higher on the day while corn was up sharply; cotton ended only slightly lower after late recovery, but sentiment remained "rampantly bearish" on favorable weather. Copper remained at 7 3/4 - 8 cents with buying inactive; "owing to the European situation, the fact that copper is selling at lowest price in its history does not seem to make it any more attractive to buyers."

Conservative observers continue to recommend the sidelines; admit sudden favorable news from abroad might bring substantial recovery, but still favor postponing any buying until market has digested unfavorable earnings reports.

Disturbing foreign news included German difficulties, spread of credit troubles to Hungary and Romania, and break in sterling below gold export point.

Increased public liquidation seen in yesterday's session for the first time in the recent decline. Weakness in copper metal has been "one of the disturbing influences in the domestic situation. ... Conservative metal circles" had questioned rise in the metal right after announcement of the Hoover plan, attributing it to speculation in the London market. "One beneficial result may be further consideration of production curtailment." Gillette expected to report poor Q2 earnings; a large short interest exists in the stock. Some observers believe the company may do better in the near future due to introduction of a new type of razor.

Yet another editorial by T. Woodlock arguing that "fair return" allowed to utilities must be adjusted along with changes in prices. For example, if a plant is built for $1M with a return on investment of $50,000 or 5% when the price index is 100, and the index then rises to 200, then the return of $50,000 is worth, in goods and services, only half of what it was when the plant was built. To produce the original return, either the "fair return" would have to be raised to 10% or the plant value raised to $2M. Sees adjusting plant value based on reproduction cost as fair solution.

Indications seen that "bearish activities are being kept under careful surveillance" as a result of unsettled conditions. "Instances are reported where large scale operators have been asked by important banking interests to refrain from offering stocks in large volume while the present uncertainty continues. Stock Exchange authorities are also said to be scrutinizing transactions closely with a view to curbing raiding tactics."

C. Barney & Co. say recent pattern of lower volume on market declines normally would indicate drying up of selling pressure, but now probably doesn't signify "much more than rather general bewilderment in the face of a most unusual situation. We find it extremely difficult to decide just what the practical results would be in this country" if Germany had to face its troubles without any further outside aid. Payments on German bonds and short-term loans would stop; value of bonds would plunge, and short-term credits would be frozen. "Psychological effect" of this "might lead to a flight from securities in general," particularly from foreign bonds; this "might result temporarily in sympathetic weakness for domestic securities." However, fundamental reason behind world financial difficulties offers "an important argument for the purchase of many sound" US stocks. While outside world got into debt in 1925-29, many US companies were getting out; "these companies are going to ride through the rest of the depression with credit unimpaired" and should be in strategic position to take advantage of "the first revival of demand ... after the final phase of debt deflation."

Economic news and individual company reports:

ICC hearings on 15% rail freight rate increase opened to capacity crowds jamming the top floor of the ICC Building in Washington. Due to temperature of about 98 degrees, ICC chair. immediately announced “it would not be regarded as a breach of professional ethics for those so desiring to remove their coats.” J. Parmelee, Bureau of Rwy. Economics, was first witness for the rails; warned bonds of many railroads are in danger of losing “legal” status as savings bank investments (generally require earnings to cover interest charges 1.5 times); situation likely to have great effect on future railroad financing.

Kreuger & Toll seems reasonably secure from European troubles. Only $112.5M or 30% of total assets are in foreign bonds, many of which are secured by match monopolies from whose revenues payments are deducted before turning any balance over to the govts. Assuming an average rate of 6%, even a complete end to interest payments on the bonds would leave about $26M in earnings available to Kreuger based on 1930 net, or about $10M more than needed to cover its interest payments. A large part of Kreuger's earnings comes from holdings of leading European cos.; these have been selected with a view to stability of earnings and long-term capital appreciation rather than immediate high yield; Kreuger has also accumulated substantial undistributed earnings in associated companies.

West Palm Beach and bondholders' committee agree on debt revision; city commits to raise $1M annually in taxes, of which $400,000 can be used for operating expenses and the rest applied to defaulted bonds. City attorney says the city won't be obligated to raise taxes materially.

J. Murray, CBOT pres., says following investigation in response to Pres. Hoover's criticism of excessive commodity short selling, it was found that short selling on the Board has been below normal for a few months and “is much too small to have been an important influence on the market.”

Survey by Indiana Limestone Co. finds about $2B was spent on new construction in the US in first half 1931, vs. $2.8B in 1930 and $3.25B in 1929. Sees steady rise this year since “a substantial volume of necessary construction has piled up.”

Steel production for week ended Monday was about 31% vs. 32% before the July 4 holiday shutdown in previous week, 33 1/2% two weeks ago, 57% in 1930, and 95% in 1929. Weekly steel reviews discouraging. Widespread industrial shutdowns for vacations and inventories together with poor business conditions further restricted steel buying and production. While the steel industry believes manufacturing upturn in August will lead to moderate improvement, no sign of increased demand is yet seen. Price situation has turned irregular with concessions in some products.

US electric output for week ended July 11 was 1,655 GWHr, up 0.3% from 1930, vs. a 2.8% decline prev. week and 3.9% two weeks ago. This was the first year-over-year increase in more than 12 months, but may have been due to July 4 holiday influence.

Southwest farmers ask debt moratorium for 30 days or more so wheat need not be sold at current prices as low as 25 cents/bushel to pay creditors. Cash prices for wheat are reported as low as 18 cents/bushel in Colorado and 20 cents in some parts of Kansas. Price of 20 cents is about $6.60/ton, whereas July bran at St. Louis is quoted at $10.50/ton. Kansas City Star asks govt. to spend $60M to hold back its surplus wheat. Arkansas Gov. Parnell says crop prospects best in many years, unemployment reduced to normal proportions. US Cotton crop estimated at 13M bushels vs. 13.9M last season; carryover is 9M and estimated consumption 11M, making surplus likely to grow in spite of the smaller crop.

France negotiating for trade pact with Russia; considering providing 2 to 4 year credits in return for orders of $66M in manufactured products.

Italian unemployed June 30 totaled 573,000, a drop of 62,000 from May 31.

Lloyd's Register reports world shipbuilding now lower than any time since prewar days; bulk of decline accounted for by Britain and Ireland.

Better Business Bureau reports short-sellers victimized out of town branches of several NYSE firms by sending out fake telegrams attributed to Magazine of Wall Street, successfully driving down stock of Savage Arms.

Walgreen reports strong sales increase of 11.5% in June sales vs. 1930; no special sales were held and number of stores was only up 5%. [Note: I'm not saying this was definitely the reason, but liquor was a prescription item then ... ]

7M copies of Sears new fall and winter catalog now being mailed; contains 1,192 pages or about 24 more than last year; prices "show a much smaller rate of decrease from spring and summer catalogue prices than in either 1929 or 1930" indicating decline in commodity prices "has been, to a large extent, checked."

Earnings reports: Paramount Publix Q2 $.70/share vs. $1.21; half $1.82 vs. $2.98. Underwood Elliot Fisher Q2 $.50/share vs. $1.33; half $1.44 vs. $3.22. Scott Paper Q2 $1.02/share vs. $1.10; half $2.65 vs. $2.64. Kimberly Clark Q2 $1.01/share vs. $1.66; half $1.97 vs. $3.05. Canada Dry Ginger Ale Q2 $1.02/share vs. $1.10; half $2.65 vs. $2.64. United Biscuit Q2 $.95/share vs. $.98; half $1.68 vs. $1.92. Zonite Q2 $.25/share vs. $.30; half $.65 vs. $.65. Arthur G. McKee half $4.21/share vs. $3.47. Emil Klein half $1.29/share vs. $1.22.

Companies reporting decent earnings: Scott Paper, American Home Products, Zonite (antiseptic and household drugs), Arthur G. McKee & Co. (contracting engineers), Emil Klein (cigars).

Movie industry report:

Despite generally depressed business conditions, Hollywood movie producers "continue to announce production plans of no mean proportions." Upcoming Universal productions include Frankenstein, adapted from the play now running in England, starring Bela Lugosi; Strictly Dishonorable, adapted from the popular local play; and The Spirit of Notre Dame, starring Lou Ayres and the "Four Horsemen" of Knute Rockne's famous team. Columbia Pictures is working on Arizona, starring Laura La Plante and John Wayne. MGM will release Susan Lenox, Her Fall and Rise starring Greta Garbo; This Modern Age starring Joan Crawford; And Sidewalks of New York with Buster Keaton. Howard Hughes, following up his success with Hell's Angels, which has already returned over $4M in revenue, is planning two more aviation films, Sky Devils and Cock of the Air; both will be comedies. Scarface, the underworld expose on which Mr. Hughes has been working for several months, has just gone into production.

Joke:

Old Lady - Why don't you work? Hard work never killed anyone. Tramp - You're wrong, lady. I lost both of my wives that way.