Thursday, July 2, 1931: Dow 152.66 +2.48 (1.7%)

Assorted historical stuff:

France and the US continue wrangling over terms of compromise on the Hoover debt moratorium plan. Pres. Hoover warns that if negotiations fail Germany will "unquestionably" seek postponement of reparations as provided for in the Young Plan. Since France would be liable for war debt and guarantee fund payments, this would leave her worse off than under the Hoover plan by over $100M. Observers doubt that either the US or France is ready to risk a rupture over the plan. France has “received two blows to her pride” - First the much-praised decisive action of the Bank of England in stepping in to rescue Austria when “days of wrangling” for a French credit threatened an Austrian default, and now the Hoover proposal. “Painfully it is sought to save appearances by keeping a semblance of life for the Young Plan ... but the Frenchman is sore at heart. ... He begins to see that it is not all to his advantage to earn a reputation for prosperity and wealth in the middle of a suffering Europe, even though that reputation was acquired by sacrifice of four-fifths of the value of his money,” and by high taxes and hard work. “In particular he loves his neighbor across the Rhine even a little less than he did before.”

Editorial: When middle-aged men of today were boys, the popular work "Around the World in Eighty Days" seemed like extravagant fiction. The Graf Zeppelin went around the world in 22 days; now, Wiley Post and Harold Gatty have performed the feat by plane in a mere 8. When the telephone was first put into a Western Union office, it's said Jay Gould ordered it removed because "it would have no commercial value"; now Pres. Hoover uses it to talk to officials in Paris in trying to avert world crisis. When the first car came sputtering along, no man who saw it dreamed 30M of them would be in use within his lifetime. Similarly, this achievement "opens a new vista ... it gives a glimpse of what lies in the future with further development and perfection of the airplane, which even now seems to be but it in its infancy." Accord believed near between US, France, Britain, and Portugal to form group for development of first commercial seaplane route from NY to Paris and London; route would go from NY to Bermuda (740 miles), to the Azores (2,070 mi.), to Brest, France (1,250 mi.); flight time about 30 hours. Negotiations are proceeding between the major US air lines and the Railway Express Agency to reduce air express rates and expand the system nation-wide.

Justice Dept. and defendants in radio antitrust suit (including RCA, GE, Westinghouse and AT&T) are negotiating on a proposal to end the suit and create a patent pool opening use of their patents in radio and related fields to the public on reasonable terms to be fixed by independent trustees.

Pres. Hoover is embarking on campaign to cut $400M in spending for new fiscal year, in attempt to offset deficit of about $860M incurred in fiscal year just ended.

Sen. J. Davis (R, Pennsylvania) is formulating plan for rehabilitation of coal industry through consolidation of weak companies into a few strong concerns, a process similar to that in the steel industry 30 years ago; says plan would eliminate cut-throat competition causing the industry's troubles.

Treasury Dept. admitted shipment of Russian pulpwood held at NY pending investigation; labor and lumber organizations had argued shipment should be barred due to use of convict labor. Russian aviation program expected to carry about 30,000 passengers in 1931, vs. 11,700 in 1930; Russia claims can now produce own aircraft engines.

In an effort to check a growing Chinese crime wave, the Canton municipal govt. recently returned to the old system of death to all lawbreakers, or at least those with two or more previous offenses. The edict applies to "burglars, kidnappers, footpads, murderers," and other criminals; once convicted, they're "paraded to the old execution grounds, kept on public view until sundown, and then shot." This partially reverses the Western-influenced reforms of a decade ago, which treated criminals who stole less harshly than those who killed; the Western idea is still applied to first and second offenders.

A recent report to the French Parliament complained of the low quality of convict labor in the colony of French Guiana, which includes the notorious prison on Devil's Island [note: famous from the Dreyfus case and later from Papillon; closed in 1952]. It was estimated that five convicts can't do the work of one able-bodied free laborer. The colony has been unable to meet expenses in spite of rich natural resources.

The first truck just arrived in Canada's northernmost seaport, Churchill, Manitoba, near the Arctic regions. Churchill is to be officially opened in 1932; it's to be a "model city," with "central heating, fireproof public buildings and semi-fireproof residences, and boulevards, parks and squares"; there will be "wide streets for through traffic, ... and generous space for recreation such as tennis courts, football fields and golf links."

Article on the Osage hydroelectric project now nearing completion in the Ozark mountains of Missouri. Dam is a "monolithic giant of concrete and steel," standing 148 feet above bedrock and 2,543 feet long. Construction began Aug. 6, 1929; first concrete poured 8 months later; dam closed Feb. 19, 1931; first main unit of power station in operation about July 1. Lake of the Ozarks formed by the dam is largest artificial lake in US, 95 sq. mi. in area and with 1,300 mi. of shoreline. During construction, 72 cemeteries were moved to higher ground.

Market commentary:

Market wrap: Stocks fluctuated along with reported progress of US-French negotiations; Leading stocks opened weakly on news of continued difficulties. However, shares were well supported on the initial setback and bullish operations continued in Woolworth and J.I. Case. A sharp general rally started at mid-day after the French Premier's statement that US govt. wanted to continue discussions. Some hesitation came after news negotiations had been adjourned until Thursday night, but buying reappeared in the last hour and stocks closed at the day's highs. Bond trading active; prices rallied after early weakness; US govts. steady to firm; German govts. lower but other Europeans steady; S. American very irregular but mostly higher; rails slightly irregular; many strong spots in the industrial list. Commodities mixed; grains plunged on relief of hot weather and failure of the Farm Board to reach a satisfactory decision on selling policy; cotton closed substantially higher after recovering from early dip. Copper offered at 8 1/2 cents with buying sluggish; larger producers holding at 9 cents.

Conservative observers more cautious; advise using stop-loss orders, but urge against going short; some recommend customers be prepared to take most of profits during rally likely to follow announcement of debt agreement.

Some of the big bears who "caused many of the sharp declines in the market earlier in the year" are still holding out; "it is their intention to continue to fight the advance"; they contend the market can't rise much further without substantial business improvement. Traders active in the recent advance reportedly were actively taking profits late last week on concerns the advance was much more rapid than anticipated. "The profit-taking was widely distributed and well concealed."

GE continues to sell at a relatively high earnings multiple; earnings declined in 1930 and so far in 1931, but the company remains in a strong position in its field, and "accounting policies of the management are recognized as highly conservative." Hershey Chocolate seen benefitting from 30% increase in cocoa prices since the May low, since they bought a good quantity at lower levels. Vanadium is reportedly subject of a new bull pool operation, but "as far as can be learned, the group does not include interests close to the company" and leading brokers have been keeping customers out of the stock.

Reaction that developed at start of the week came at the expected point for a technical setback, as industrials had regained 48% of the losses on the previous decline from Feb. 24 - June 2. Bulls have been encouraged by good support during the reaction; ability of leading shares to push into new high ground would now be a strong bullish signal, while failure would suggest need to find a lower base.

Apart from the Hoover plan, an important factor in market's June rally has been expected improvement in Q2 earnings (compared to Q1) at some major companies including GM, Chrysler, Johns-Manville, Wrigley, Westinghouse, and Montgomery-Ward.

Investment trust [similar to mutual funds and ETF's] first-half statements should be materially helped by recent rally. Net asset values of investment trusts are gaining thanks to the rally, but many continue to trade at large discounts, as opposed to premiums two years ago. However, executives are confident that with continuation of the advance investor interest will spread to trust shares.

Despite small increase from prev. week, rail freight loading report was disappointing to those hoping for indications of a definite upturn.

Editorial: It's high time Eastern rail executives complete the unification plan supposedly all but agreed on 6 months ago. While ICC action on the plan will likely take close to a year, it's important for the rails to tell the ICC and public exactly how they propose to end "eight years of civil war over mileage control in the East." Rate increases are "only a palliative"; it's essential they be followed up by greater efficiency, technical improvements, and curbing of wasteful competition.

Sudden deterioration of Reichsbank position from one believed strong before the Creditanstalt crash, and still sustainable on May 31, attributed to two unexpected developments. First was heavy withdrawal of foreign credits and liquidation of foreign holdings of German securities; this was "entirely unexpected because it was not foreseen that the Vienna crash would cause a feeling of uneasiness about Germany as well as Austria"; bankers also believed reopening the reparations question wouldn't cause restriction of foreign credit "except possibly French." Second, June brought capital flight due to political uncertainty after the severe emergency tax measures.

Economic news and individual company reports:

Reichsbank successfully passed June 30, day of highest seasonal demand for credit and currency; use of $100M central bank credit enabled it to stay above the 40% minimum reserve requirement. Observers say situation was serious, but deny reports Reichsbank was within 48 hours of collapse before announcement of Hoover plan, pointing out it had emergency options including temporarily lowering reserve requirements and unused $50M credit from Gold Discount Bank; now believe Reichsbank has "weathered the most severe strain it will be likely to meet for some time." However, long term outlook remains serious; will depend on settlement of reparations question and political uncertainty. Continued German capital flight (15M marks Tuesday) is causing uneasiness. Reichsbank is "beginning to discriminate severely on paper offered for rediscount by private banks and contemplates a rationing of credit"; daily money in Berlin is 8 1/2% - 11% and monthly 7 1/2% - 8 3/4%. Situation will crimp economic activity already at a low level. "The BIS campaign for a levelling of interest rates and getting money from where it is cheap and superfluous to where it is dear and scarce has become ineffective."

Fed. Reserve of NY monthly review says money market conditions and volume of bank credit showed little effect from large gold influx in June. This is partly due to unseasonal increase of $100M in demand for currency, likely due to banking disturbances; however, the main NY banks held more excess reserves in June than in any month in recent years. Bank and trust condition statements as of June 30 generally showed substantially lower earnings in the first half compared to 1930; this had been expected due to low money rates and yields on high-grade securities.

Pres. Hoover's Emergency Employment Committee reports general improvement in business and employment conditions in the past week in regions across the US, including New England, NY City, Philadelphia, Chicago, Minneapolis, Kansas City, and Memphis; definite signs of improvement also reported in S. America.

Steel production for week ended Monday was 33 1/2% vs. 35% prev. week, 38% two weeks ago, 63 1/2% in 1930, and 93 1/2% in 1929; production this week will be lower due to Independence Day holiday. Weekly steel reviews report sentiment in the industry still improving. Seasonal production decline has continued and output has fallen below last Dec.; at least another month of very low operations is likely. However, improvement in general business sentiment due to Hoover plan has resulted in “sufficient revival of buying interest” to suggest adoption of the plan “might well mark the end of the long decline and possibly ... at least a moderate turn for the better.” Buying interest hasn't yet translated to improved orders but a number of projects are being revived and may lead to future demand.

US electric output for week ended June 27 was 1,593 GWHr, down 3.9% from 1930, vs. a 4.6% decline prev. week and 4.9% two weeks ago.

Views and figures on the East Texas situation presented to the Texas Railroad Commission varied so widely that the method of curtailment to be adopted by the Commission remains uncertain. Almost all interests now agree on need for a new law enabling the commission to enforce strict limits on production. Unconfirmed rumors have been heard of sales of oil at 5 cents/barrel in East Texas; current official price is 20 cents. Standard Oil of NY cuts wholesale and service station prices of gasoline throughout NY. Chicago wholesale gasoline prices up 1/8 cent to 2 1/2 - 2 3/4 cents/gallon.

Bank of England expected to lower discount rate today (was cut 1/2% to 2 1/2% May 14); in better position to lower thanks to recent buildup of gold reserves.

Prices in fall catalogs of large mail-order houses will be 3 1/2% - 5% lower than in the spring and 12 1/2% - 15% lower than last fall; however, officials of both Montgomery Ward and Sears Roebuck believe bottom prices have been reached.

Mastick Commission for Revision of Tax Laws in NY State recommends cutting over $200M annually from real estate taxes by spreading that sum over taxes on a number of luxury items including cigarettes, lipstick and rouge.

Rails in both the US and Europe are offering the best bargains to summer travelers in many years.

Amer. Radiator & Standard Sanitary Corp. conducting "build now" campaign urging taking advantage of current low construction costs and mortgage rates; C. Woolley, company chair. and Fed. Reserve of NY dir., notes "increased residential construction has led the country out of almost every business depression."

Int'l Shoe expects significantly better earnings in second half; continues to be lowest cost producer in the country.

Bristol Manufacturing of New Bedford, Mass. declared additional liquidating dividend of $2, bringing total paid to $41 since Jerome A. Newman and his interests took control of plant for $39/share. [Note: Newman's partner was Benjamin Graham, who later became mentor to Warren Buffett and many other investors. This transaction sounds like one of the "net-net" plays typical of Graham and of Buffett's early career, which are still occasionally to be found today.]

New books:

A fair crop of new investing books, including: "Arbitrage In Securities," by M. Weinstein, "Keane's Manual of Investment Trusts" by C. Keane, and "Twenty-Five Hand-Picked, Low-Priced Speculative Stocks," by J. Frederick.

Theatre:

The Pirates of Penzance - revival by the Civic Light Opera Company, at Erlanger's Theatre. The renewed fashion for Gilbert & Sullivan is like nothing that has happened in recent times. "It signifies something as to the popular taste. Last winter many producers of musical plays appeared to have decided that theatre-goers would not only prefer salaciousness, but demanded it." Instead, audiences are having a "thoroughly good time" at the G&S revivals.

Jokes:

Comedy Writer - This joke ought to be good, I've had it in my head for ten years. Editor - Ah, aged in the wood ...

Patient - Can you do anything about my snoring? Doctor - Does it disturb your wife? Patient - My wife? Why, it disturbs the whole congregation.