August 22, 2010

Saturday, August 22, 1931: Dow 138.60 -3.33 (2.3%)

Assorted historical stuff:

[Note: Strangely familiar Dept.] Letter from L.G.P.: "During this period of deflation and readjustment ... when the majority of individuals ... are being subjected, willingly or not, ... to a reduced income and consequent revision of budgets, there is one outstanding ... class that in no way have offered nor have been forced to contribute their share in this liquidation. I refer to all government, state, county and municipal employees ... Probably there have been dismissals and revisions of forces, but I have yet to read or hear of any salary or wage adjustment, at least downward."

London situation rather confused. Labor govt. plans apparently don't include enough spending cuts to satisfy the Conservative and Liberal parties, but the Trade Union Council strongly objects to even the cuts already proposed; tariff is another complicating factor; meetings continue at feverish pace; rumors include: 1) imminent resignation of the govt. and Conservative takeover; 2) coalition govt.; and 3) govt. submission of plan to House of Commons to “stand or fall.” Editorial: British proposal for a 10% general tariff to help balance the budget would be a “curious anomaly” in the “great exponent of free trade for over 100 years,” [Britain] at a time when “the universal cry ... is for the lowering of tariff barriers.” However, the proposal can to some extent be excused as an emergency measure. With a national debt twice that of the US and only a third the population, “the British people are already so heavily taxed that the sources for new revenue have been a yearly problem ... The milking of wealth and capital has gone as far as even a Labor govt. dare go. A tariff would spread the additional burden over the masses and would scarcely be felt.” Recent sad spectacle of Bank of England borrowing abroad has apparently made British statesmen determined to put finances in order, even if by “temporary sacrificing of cherished national traditions.” Sterling was higher, reaching $4.86 for the first time this month; it's believed the Bank of England is supporting the currency using the $250M US-French credit though no official information is available. NY bankers are confident in Britain's future, though admitting it has “a long and hard road” ahead. Britain typically runs large trade deficits and depends on “invisible receipts” including income from overseas investments to make up the difference; these receipts have suffered due to the depression.

Pres. Hoover asks 61 outstanding business and labor leaders, charity organizers, and others to join the advisory committee of his unemployment relief organization to be headed by AT&T pres. W. Gifford.

Wickersham Law Enforcement Commission makes some interesting estimates on costs of US crime. Total cost of criminal justice to the Federal govt. $52.8M annually, of which over $34M is attributed to enforcement of Prohibition. Total costs of US criminal justice system "very considerably in excess of $350M." Total economic costs of crime impossible to ascertain, but over $1B annually is attributed to itemized costs including criminal justice, private spending for property protection, insurance against burglary and auto theft, loss of labor due to crime, losses to organized extortion and racketeering, etc. Study by Dorr & Simpson on which the commission based its report, while not mentioning Prohibition explicitly, made subtle reference to it: "It is clear, we think, that the cost of enforcing the criminal law would be less if it did not attempt to forbid and punish acts participated in by large numbers of otherwise law-abiding citizens who do not regard such prohibited acts as 'criminal' except in a technical sense."

Commerce Dept. estimates investments of US capital in Cuba, including direct industrial and agricultural investments and Cuban govt. obligations to "American citizens involved in disturbed affairs of country" at $1.139B.

Germany is taking the lead in development of vending machines. Aside from the usual machines for stamps, cigarettes and candy, there are machines for beer and liquor, one that "gives up for 7 cents a 'hot dog' with mustard and potato salad," and the latest contraption, which for 12 cents delivers an oiled paper umbrella "that will suffice for one person through one shower."

Market commentary:

Market wrap: Stocks showed firm tone in early dealings, but remained sluggish, failing to develop a sustained rally. "This brought selling from traders who were leaving for the week end." Leading stocks turned lower in the afternoon with steel shares particularly weak; selling spread across the list and reactions were quite sharp for a time, though a feeble rally came near the close. High-grade rail bonds rose, while rest of the corporate bond list fell, but more moderately than in previous sessions. German govt. bonds turned weak. Sept. corn fell to a new season low.

Conservative observers retained "waiting attitude"; also advised against adopting the short side.

Stocks turned downward after reports leading steel producers were considering wage cuts of 10%-15%. While Wall Street has looked to wage adjustments as "the final major disturbing factor" to be settled before business revival, it's also true that "wage agitations are invariably accompanied by unsettlement in general business." Tobacco shares turned firmer, reversing yesterday's reaction under leadership of American Tobacco.

Detailed historical analysis of 8 bear markets since 1900 reveals all ended some time between June and Dec. More interestingly, in all but one the bottom came when either the rail or industrial average broke slightly below its previous support level, while the other average held above it; in the one exception, 1914, both averages held slightly above the danger line, giving a particularly strong positive signal. This has prompted close attention to action of the rails, which on Aug. 10 declined to 68.78, vs. the bear market low of 66.85 established June 2, but have since shown better support, possibly repeating the 1914 pattern. Also encouraging is ability of the industrials, in advancing to 145.80 on Aug. 15, to break "above the bear trend line for the first time since ... Oct. 1929. This trend line may be mapped ... by drawing a straight line from the bull market high of 381.17 ... to the peak of 294.07" reached in the spring 1930 bear market rally.

Resumed downtrend in security loans to non-brokers (down $25M to $1.672M after increasing the previous 3 weeks) may indicate selling by better-quality investors; in the past, movement of non-brokers loans has been a relatively good predictor of future stock market movements.

Chain stores have probably been the strongest group of stocks in recent trading; this reflects their strong earnings performance. Of 24 leading chain stores that have published earnings for the first half, all but two showed relatively favorable earnings. Total net profit of the 24 was $20.7M, up 14% over 1930. Grocery chains were especially strong, showing an earnings gain of 24%. Woolworth seen likely to increase dividend at next meeting; extra payment also likely.

Sir H. Deterding, managing dir. of Royal-Dutch Shell [AKA the Napoleon of oil], says return to bimetallism and restoration of the silver standard is "only possible remedy for our sick world today." G. Roberts, Nat'l City Bank VP and member of the Gold Delegation of the Financial Committee of the League of Nations: “I see some readjustments taking place which will gradually brink back prosperity.”

Economic news and individual company reports:

Rail observers are buzzing about the sensational "Nevada Plan" proposed by J. Shaughnessy at the ICC hearing, by which the Federal govt. would bail out the troubled rail industry by becoming a part owner and partner. The govt. would refinance existing rail bonds at rates of 4% or lower, and participate in ownership of the rails in proportion to capital put in; it would intervene in future plans for improvements to prevent overbuilding. Editorial: Current rail difficulties are likely to lead to calls for govt. aid to avoid rate increases, such as the Nevada Plan. It's important to realize any such proposal would put the camel's head in the tent, and "inevitably result sooner or later in complete governmental control and operation, no matter how limited ... the original proposal. ... There already is a strong smell of camel upon the ambient air."

Apparently conflicting reports on the Toledo banking situation. Front page says “liquidation of the four Toledo banks taken over by the Ohio State Banking Dept. on Monday is proceeding at a rate even beyond the most optimistic predictions,” while an item on page 10 says “opportunity will be given each of the four banks ... which closed last Monday, to reorganize before actual liquidation is started by the Ohio Banking Dept.” Toledo Mayor Jackson expressed confidence the Federal govt. will heed his city's appeal for help; the appeal asked for the committee to send a “special representative ... to advise ... how best to meet the situation.” Two small Ohio banks closed. US Nat'l Bank of Los Angeles closed Tuesday; deposits $6.4M. Rockaway Beach Nat'l Bank, NY closed; deposts $2.0M.

$36M increase in Fed. Reserve credit outstanding this week attributed to currency demans due to “banking difficulties in Ohio and other states.”

Some troubling signs again appearing in the German situation. Withdrawals at savings banks continue to exceed deposits; savings banks have exhausted their liquid resources and are discounting with the Reichsbank, which has already advanced over 200M marks. A potential crisis also is caused by the recent decree prohibiting further loans from the savings banks to cities, which are in urgent need of help to meet 1931 deficits estimated at 800M marks. Industrial production is falling off; cars and luxury goods are practically unsaleable, and new construction has almost stopped due to impossibility of mortgage financing. NY committee of bankers expressed “complete satisfaction” with the agreement in Basel on 6-month extension of short-term credits to Germany, though some minor details remain to be worked out. Berlin bankers optimistic on Reichsbank rate cut to 8% and reopening of stock exchange in early Sept.

French business statistics form a curious mix. Official unemployment counts are stable, and national revenues up to estimates. However, raw material imports in the first 7 months were down 30% from 1930, and manufactured exports down 29%. Industries are unable to lower wages due to the high cost of living. Wholesale and retail prices continue to diverge remarkably; on July 31, the wholesale index was 95 vs. retail index of 125.

Steel wages reportedly likely to be cut 10%-15% in “not distant future.” Announcement seen reflecting uncertain prospect of improvement in the industry this winter. All major producers have already reduced dividends.

Texas Co. raised buying prices for crude oil in Oklahoma, Kansas and Texas to as high as 70 cents/barrel vs. former maximum of 40 cents. Cushing Refining offered $1/barrel in Oklahoma City. Wholesale gasoline prices were firmer. Another large oil merger is reportedly in negotiation, between Standard Oil of NJ and Standard of California; combined market value as of Aug. 20 was $1.670B including bond debt.

G. Ellis, Nat'l Assoc. of Real Estate Boards official, reports recent improvement in real estate business; sales of homes increasing and bigger down payments reported; most evidence of improvement is in “towns that have no boom whatever, and which are not industrial centers.”

Contract signed for exchange of 25M bushels of surplus US “stabilization wheat” for 1.050M bags of Brazilian coffee.

Company reports since July 1: 165 companies reported higher earnings vs. 1930 and 519 lower; 560 dividends unchanged, 14 increased, 109 cut.

Companies reporting decent earnings: Kansas City Power & Light, Pillsbury Flour Mills.

Report from Paris:

US tourists are still abroad this summer, though in smaller numbers. However, some interesting changes are apparent. "There are fewer sightseeing buses making hurried excursions in ancient cities; crowds no longer press around the gaming tables of smart spas"; nightclubs "still draw the curious and hilarious; but competition for ringside tables is less keen." Purveyors of the standard tourist fare of "jazz and cocktails" are now "rubbing their eyes in wonderment" at the crowds flocking to more traditional summer festivals. Bayreuth, "Mecca of opera enthusiasts, is crowded; once more old hills resound with sonorous beauties of Lohengrin and Tristan." Other festivals are also attracting crowds, including a Mozart festival at Munich, a Shakespeare Festival at Stratford-on-Avon, and an elaborate open-air performance of the Passion Play in the small French city of Nancy, done by 600 French actors and singers after the manner of the play's traditional venue in Oberammergau.

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