August 22, 2009

Saturday, August 23, 1930: Dow 232.63 +1.36 (0.6%)

Assorted historical stuff:

New book Why You Win or Lose, by F. Kelly, columnist, speculator, and “amateur psychologist.” Practical approach to psychology of stock market. An important principle is to be contrary (do opposite of what most are). Says most common mistake is vanity, leading to taking small profits and large losses. Next is greed; next is “will to believe.” Also believes it necessary for traders to be illogical, since everyone else is usually being logical. Finally, recommends being cautious.

Editorial: A bright spot in the depression is California, now in a strong financial situation by a number of measures. Bank deposits and life insurance are up; commercial and agricultural real estate is more active; securities issued are almost back up to first half 1929 level; department store sales are down, but Wells Fargo points out they're doing better than rest of the US. All in all, California “is carving out for itself a future prosperity that must in time rival that of the eastern seaboard.”

Attorney General charges price of bread in New York controlled by racketeer ring with enormous profits.

First transatlantic pay load flight by heavier-than-air craft to carry cargo of souvenir postcards and bank correspondence from New York to Paris via Bermuda and Azores in Oct.; specially designed Bellanca seaplane with Wright motor being constructed.

Fokke-Wulfe Co. of Germany constructing “fool-proof” plane able to fly and land itself.

Market commentary:

Bulls encouraged by $27M reduction in brokers' loans in spite of rising market (considered good technical indication of stocks passing to strong hands), and by resistance of major shares to some weak spots (including coppers, rails, Goodyear, Warner). Bears had some initial success in spreading declines to market leaders, but effective support came in and buying spread in afternoon; most leaders closed up. US Steel, GM, Radio, Vanadium, American Tobacco advanced strongly. Utilities strong. Investment grade bonds stronger, Dow 40-bond average at new 1930 high of 96.73; govts. steady; convertibles weaker.

Some desperation observed in bear camp: “The bulls in their most excited moments did not bring forth such absurd ideas as some of the bears are talking about.”

Market considered technically strong; bears unable to prompt widespread liquidation as in past breaks due to low margin positions, short interest still large.

Pres. Hoover, after conference with Treasury Sec. Mellon, refutes earlier report that 1% income tax cut won't be continued; while there have been some indications of reduced revenue and increased spending early in fiscal year, there's no ground for making a firm prediction yet, and help should come from a number of areas including trade rebound (temporarily depressed due to imports in advance of tariff), and expense cuts. Mellon also says hopes tax cut can be maintained.

Moody's reports “prosperity index” for July at 86.77; this level has in recent times always meant “thorough liquidation or deflation,” and all recent recoveries have started from this level. “We are, therefore, inclined to regard the present level of business activity as the approximate level from which recovery will begin.”

Conservative observers still advise staying out of market until “next important move has been demonstrated by the action of leading stocks.” Also counsel against taking short positions due to range-bound market.

Savings banks deposits have been increasing in the depression (reverse of usual seasonal pattern) due to consumers cutting spending and saving more; also some investors have transferred balances from brokers to get higher interest. This does increase the potential call on the banks' resources that may happen on short notice.

Economic news and individual company reports:

July income tax (personal and corp.) receipts were $29.699M, down $5.037M from 1929. Tobacco tax receipts $42.982M, up $2.782M. All Internal Revenue collections were $86.055M, down $3.765M.

Bradstreet's and Dun's reviews both report some improved sentiment, and slightly better manufacturing activity and buying of fall goods.

Initial weekly bank reports have not yet shown the usual seasonal increased demand for currency or commercial credit.

Movie companies reach antitrust settlement with govt. agreeing to end practice of denying films to independent exhibitors.

Companies reporting decent earnings: Kansas City Power & Light, Tide Water Assoc. Oil (sales down but cut expenses more), Pig'n Whistle (restaurants).

American Tobacco reports July sales of Lucky Strikes up 583M over 1929, best gain so far this year.

Tongue twister:

“If a Hottentot tot taught a Hottentot tot to talk ere the tot could totter, ought the Hottentot tot be taught to say aught, or naught, or what ought to be taught her?”

+ The Boring Stuff:

Editorial: Chief Justice Hughes says country's greatest current need is “improvement in the administration of justice.” This is now threatened by organized corruption. Recent scandals involving judges in New York have made Gov. Roosevelt instruct the Appellate Division to investigate further. This is a serious matter; “if our institutions are to be kept safe from the debauchment of organized and capitalized crime there must be purity and competence in official action.” The problem is partly caused by political influence; the solution to this must be practical, not academic; Justice Hughes calls for members of the bar to work toward this goal, but the public should be also included in the effort.

Republican leaders expect former Pres. Coolidge to make one of the major speeches for party's fall campaign.

Farm Board member C. Williams urges cotton growers not to sell at current prices unless they have to, says “it would be a moral crime for a creditor unnecessarily to force sale at present price levels.”

Tax Commissioner M. Graves proposes corporations should be given federal tax credits to offset local taxes, eliminating interstate competition for industry. Says corporate taxes in general are too high, would be better to use personal income and wealth as the two primary tax bases.

German Ministry of Posts approves new buildings and improvements totalling $50M, expected to provide work for 125,000.

Editorial: Pres. Hoover is considering tightening the bankruptcy code to better protect creditors. He should consider closing a loose end in present legal procedure allowing any small stockholder to bring receivership proceedings on grounds of “poor management.”

I. Nelson, holder of 300 shares of common stock, files suit to force Warner Bros. into receivership.

Commodities mixed; grains mostly slightly higher; cotton almost unchanged; cocoa down to new record low of 7 cents/pound; raw sugar down to new record low of 1.08 cents/pound; coffee down to post-1921 low of 5.45 cents/pound.

Some disappointment that expected August improvement in freight loadings hasn't yet materialized.

Trade has been declining drastically (to 1922 levels in July), while trade surplus has slightly increased. However, Commerce Dept. sees a hopeful sign in larger proportion of exported finished goods; in Q2 these were $532.6M, down 18% from 1929 but a smaller decline than any other category. While markets for agricultural goods are basically limited by population growth, potential markets for finished goods are seen much larger as foreign purchasing power grows.

Treasury may not reduce national debt as much as past year, but law does require about $400M in current year to be dedicated to “sinking fund” for this purpose.

Money markets seem to be anticipating some near-term business revival; more difficult to obtain 6 month loans at recent 3% rate.

BLS reports July building permits in 288 cities were $164.1M, up 2.4% from June.

BLS reports retail food prices July 15 were down 2.5% vs. June 15 and 9% since July 15, 1929.

Fresh vegetable exports in year ended June 30 were $12.045M, up 8% from previous year.

Japan exports to US in first half were $108.9M vs. $185.3M in 1929.

Canadian Premier Bennett reportedly will propose emergency tariff revision to assist some depressed industries next month; believed that administration wants to cut back Canadian spending in US from $900M level in 1929 to $400M within 18 months by placing high tariffs on goods producible in Canada.

Canadian bond sales in year to Aug. 16 were $446.4M vs. $386.2M in 1929 and $302.6M in 1928.

Venezuela crude oil production in July was 374,970 barrels/day vs. 378,708 in June and 348,170 in July 1929.

Guatemala grants Swedish Match 30-year monopoly on all matches in exchange for 7% $2.5M loan.

Retail radio equipment sales in Q2 were $87M vs $92M in 1929.

August 21, 2009

Friday, August 22, 1930: Dow 231.27 -1.71 (0.7%)

Assorted historical stuff:

Dr. R. Goddard to carry out experiments financed by D. Guggenheim with aim of shooting rockets 50-75 miles “into the upper air.” Goddard has been “experimenting along this line since 1912.” Thus far maximum height attained by man is 8 miles.

T. Thatcher, Solicitor General and selected by Pres. Hoover to investigate bankruptcy reform, says thousands of wage earners taking advantage of lax Bankruptcy Act to live above means, cheat creditors, and “pay their debts with postcards.” Estimated loss from bankruptcies $750M annually.

Former Gov. Al. E. Smith says prosperity will be 1932 election issue, Democrats will take control “and will make this a happy and prosperous nation.”

Just 16 years after Germans invaded Belgium during the world war, Belgium now advertising in German magazines inviting tourists to visit.

Dr. D. Comstock, inventor of Technicolor, announces new refrigerator with no moving mechanical parts using mercury aspirator. [Note: Einstein and Szilard came up with a rival nonmechanical refrigerator; I believe neither caught on due to improvements in mechanical refrigerators.]

O. Wernicke, inventor of the sectional bookcase, dead in Florida.

Market commentary:

Leading stocks were fairly firm early, though some weak spots developed in rails (bad July earnings and further traffic decline in Aug.) and then in coppers (dividend concerns). Gillette plunged on report Auto Strop merger abandoned. Bears attempted to spread weakness into the general market, causing leading issues to give ground slowly in later trading. Limited public buying seen; movements driven by professional operations. Bond market more active, corp. up, foreign govts. firm, US govt. dull, little changed; Dow average of 40 bonds up to another new 1930 high of 96.67, best since Nov. 1928.

Editorial: Weather Bureau map for Aug 19 shows much improvement; drought has been substantially relieved across much of the country, though large sections are still affected. This should help both current crops and planting for fall. This improvement in a fundamental industry should help general business.

H. Thayer of West & Co.: “Personally, I believe we have seen the worst, both in the stock market and in business circles, and I look for substantial progress to be made in share prices and in earnings.”

While the 1920-21 depression and stock market pattern has been cited as remarkably similar, some are pointing out that whereas now credit is cheap and market valuation still relatively high, in 1920-21 opposite conditions applied.

Repeated low-volume days below 2M shares shows lack of large public buying; this, however, is typical of “a bear swing bumping along the bottom.” Public usually doesn't enter market on a large scale until there's clear evidence of business upturn.

Reports from many sections of the country of buyers' strike; “Merchants complain that their shelves are not being emptied by the ultimate consumer.” However, economists believe conditions are such that any better retail demand would be felt immediately by manufacturers.

Economic news and individual company reports:

Total first-half earnings reported by 193 representative companies were $505.4M vs. $754.3M in 1929, $582.8M in 1928, and $523.2M in 1927. This reflects a sharp profit fall in Q2, since Q1 profits were $317.8M, 5% above the 1928 level. Sectors doing best compared to 1929 were food, electrical equipment, chemicals, rail equipment (down about 10% avg). Worst were tires, mining, oils, autos (down about 45% avg).

Treasury officials say continuation of this year's 1% cut in income taxes looks unlikely; rates for next year will depend on how much depression has cut revenue.

Companies reporting decent earnings: Scott Paper, City Ice & Fuel.

Cigarette production in July was 11.859B, up 1.134B from 1929.

Wrigley spending heavily on advertising, but getting its money's worth. “There are probably no centers of population of any size in this country or Canada ... where it is possible to walk very far without being reminded in one way or another of the delights of ... Wrigley's gum.”

Testimony starts in govt. antitrust case against many major West Coast movie companies. Charges include giving preference for movie exhibitions to theaters owned by the group companies. Much of the countries most prominent legal talent involved, case will naturally be appealed to Supreme Court if govt. wins.

Upcoming movie news:

D.W. Griffith to premiere first sound film on Monday, Abraham Lincoln, starring Walter Huston in title role. Gloria Swanson's newest film, What a Widow!, to be released Sept. Eddie Cantor's Whoopee, produced entirely in Technicolor by F. Zeigfeld and S. Goldwyn, to be released shortly after. Lee Shubert (theater impresario) to produce four talking films this season.

Journalism joke:

“A budding journalist was told never to use two words when one would do. He carried out this advice in his report of a fatal accident ...
'John Jones struck a match to see if there was any gasoline in his tank. There was. Age sixty-five.'”

+ The Boring Stuff:

Editorial: J. Gerard, former ambassador to Germany, has come out with a list of 59 men he calls the true rulers of the US; their influence and power determines who rules directly, and the President and other politicians are “mere vassals to this coterie” (list is mostly prominent industrialists, some financiers and publishers). He also says they could straighten out the British empire to a high degree of prosperity in 10 years or so. This is hero worship carried to absurdity; these men's secret of success is lifelong concentration in their particular field; “to assign to them super-powers of government” is to make them into demigods who can do anything.

W. Kennedy, service manager at Saks, comes out against “glib, high-powered salesmen.” When customers take goods home and “effects of the salesmen's arguments have cooled, there is ill will toward the store and a merchandise return.”

Commerce Committee of the ABA recommends revision of Sherman antitrust law empowering the FTC to decide in advance if an agreement among businesses is in restraint of trade, thus preventing future litigation and immunizing businessmen involved from criminal prosecution.

France maintains top spot as world tourist destination in 1929; visitors spent $400M, of which $130M came from US.

French govt. and French Line contract to build 1,170 foot super-liner at cost of about $27.5M.

Treasury officials see little possibility of assessing anti-dumping duty on Russian manganese.

Chairman Legge urges farmers to substitute other feed for corn, believes this can make up shortage; believes many farmers already doing so.

Commodities mostly down; wheat down slightly, other grains up; cotton down. Hog prices continued higher.

W. Farish, Pres. Humble Oil & Refining, comments on reason for lowest gasoline prices in 2 years in spite of successful curtailment of production; price decline blamed on lack of confidence industry can maintain current “sensible scale of operations.”

Fed. Reserve member banks report brokers' loans down $27M in week ended Aug. 20 to $3.128B.

US Electric output in week ended Aug. 16 was 1,671 GWHr, down 2.8% from 1929.

Average of 8 iron and steel products holds at $45.80/ton, at low for 1930, vs. $50.61 avg. in 1929.

General wholesale price level declined in July, and in last week of July was almost 20% below 1929 level. Wholesale prices of farm products fell 10% between June 15 and July 15, to postwar low of 111% of 1913 level, and declined further to 109% in last week of July. Farm prices rebounded to 112% in early August, while non-agricultural prices continued to decline.

Volume of freight traffic handled by class 1 rails in June was 34,419B ton miles, down 15.5% from 1929; first half was 212.251B ton miles, down 11%.

New life insurance sales in July reported down 2.2% from 1929. First 7 months were up 2.3% from 1929.

Exports of electrical equipment in first half were new high of $71.150M vs. $70.315M in 1929.

Orders for fabricated structural steel in July estimated at 284,000 tons vs. 276,000 in June.

Steel scrap markets showing signs of improvement; no definite uptrend, but scattered transactions at higher prices.

Rumors continue of modification to Spanish oil monopoly.

IBM reports foreign sales growing consistently so far in 1930.

Thursday, August 21, 1930: Dow 232.98 +2.30 (1.0%)

Assorted historical stuff:

Movie business seems to be recovering after recent slump; decline in attendance attributed to heat wave (only 400 theaters in US are refrigerated), recent run of movies depending too much on “spectacle, color, and singing,” not enough on “good plots, interesting dialogue, and popular stars.” Upcoming movies include Moby Dick with John Barrymore, Common Clay, Dawn Patrol, The Big House, and Animal Crackers with the Marx Brothers. Most movie companies except Warner Bros. still expected to have good earnings for the year.

Actuarial Society of America survey reports death rate for passengers travelling on scheduled airlines is 1 in 5,000, or 200 times railroad death rate; safety increases by 63% after pilot has had 400 flight hours.

Commerce Dept. plans Southern “transcontinental airway” from Birmingham to San Diego. Airway from New York to Birmingham via Richmond already exists.

J. Richardson leading plan for comprehensive air and rail service across Canada. Canadian govt. may create Communications Dept. covering radio and aviation.

New wingless aircraft based on rotor principle being tested at Mamaroneck; backed by Walter P. Chrysler and H.E. Talbott, Jr.

London considering “fostering the acceptance of compulsory peaceful settlements of all disputes” for dominion countries.

New Australian plan for balancing budget coming under criticism for bias toward tax increases (including new 2.5% sales tax) rather than cuts in expenditures.

Iraqi King Feisal rumored trying to organize new oil company to break monopoly held by Iraq Petroleum Co. controlled by US and European oil interests.

NY State industrial deaths in July were 164, down 31 from June and down 52 from July 1929.

Market commentary:

Bulls got some good economic news in Iron Age report of improvement in steel production. US Steel responded, rallying to highest levels since July top. Other major industrials including American Can and J.I. Case followed. Utilities rallied strongly. Sears, Paramount, and Loews stood out in other categories. Prices turned irregular in late afternoon; coppers and some oils weak on dividend concerns. Banks, trusts, and insurance strong. Bond market dull but broadly higher.

E. Woollen, Pres. Fletcher Savings & Trust, catalogs some of the follies recently committed by businessmen: thinking rate of business in early 1929 could last; thinking the depression was caused by the market crash (the crash came 4 months after the depression had inexorably started); thinking the depression was caused by bad psychology; thinking our economy independent of the rest of the worlds'; “mortgaging future income for luxuries.”

Baar, Cohen & Co. believe stocks headed higher, “and we think within a few days sufficient momentum will be generated on the bull side to start the advance in earnest.” Foresee general business improvement, even if only seasonal, and halt in commodity price decline.

J. Barringer, National Cash Register GM, optimistic on foreign sales, and on general business outlook in Europe. “Germany, in my belief, is recovering from the world-wide depression, and France seems to be entirely over it.” Believes US depression has hit bottom and “we are slowly but surely on the upward trend.”

Some disappointment reported by market observers and steel industry leaders that normal seasonal improvement in business hasn't developed yet.

Continued weakness in freight car loadings as of Aug. 9 is surprising, but may reflect some lag from factory openings; Aug. 16 should then show improvement.

Economic news and individual company reports:

Iron Age sees moderate improvement in steel trade, though definite turning point not yet reached. Steel ingot production at 53%, but improved in past few days; some indications of larger orders in September. Discrepancy with yesterday's report of decline explained by extra “day or so” included in Iron Age report.

Agriculture Dept. reports uneven weather conditions; much of country except West has had some relief from drought, but followup rain needed in many areas.

Bankruptcy cases pending as of June 30 were 61,430 vs. 59,113 in 1929. Liabilities in cases concluded were $948.3M vs. $883.6M in 1929.

Company reports since July 1: 137 companies reported increased earnings vs. 1929 and 341 decreased; 649 dividends unchanged, 3 increased, 41 cut.

Companies reporting decent earnings: Public Service NJ, Atlas Plywood.

Curtis Publishing (publishers of Saturday Evening Post, Ladies Home Journal) selling about 114, annual div. $6, first half earnings $5.07/share vs. $4.83 in 1929.


“Farmer's Wife (to druggist) - Now, be sure and write plain on them bottles which is for the horse and which is for my husband. I don't want nothin' to happen to that horse before the spring plowin'.”

+ The Boring Stuff:

Editorial: Some have suggested higher wages (to increase general buying power and demand) as a solution to the depression. While wages and salaries are a major part of the buying power of the US (estimated at over $50B of total $90B national income in 1928), this proposed solution would make things worse by overtaxing business, possibly leading to a relapse. Wages are the workers' cut of the cost of production, and there is currently too much production. Therefore, increasing wages would just be “piling up surplus goods at higher cost to capital.”

New Zealand PM promises bill taxing all male workers $7.50 to provide relief for unemployed.

New regulations on use of industrial alcohol seen by some as distinctly tightened, but this is denied by Dr. Doran of Bureau of Industrial Alcohol; sees new requirements as no more strict, but merely more voluminous.

NY City Health Dept. reports week ended Saturday had lowest mortality record of the year.

Commodities generally up. Grains up strongly. Cotton closed up slightly after resisting selling pressure; second up day in a row, and first day since Aug. 8 that new season lows were not reached in intraday trading. Hog prices up to new yearly high.

Conservative observers still advise caution, believe only the most nimble trader can profit in current conditions. Those inclined to buy are advised to wait for reactions to buy leading stocks gradually, and to reduce long positions on rallies.

L. Critchell of Prince & Whitely returns from 5,000 mile motor trip through Midwest and Canada, reports generally optimistic feel on business, with as many reporting business improved over last year as reporting decreases; also noted heavy tourist traffic, difficulty finding accomodations at many major hotels.

Some bears have been profitably selling stocks that issue rights (to existing shareholders to buy additional shares).

American Metal Market says drought had “unfavorable sentimental influence upon business,” but little or no long-term effect.

Treasure Sec. Mellon denies making statement on general business situation.

Mackay & Co. reports foreign govts. and corporations obtained about $750M in bond financing from the US market between Nov. 1929 and Aug. 1930; largest borrower was Canada at $230M in 22 issues.

Price of heavy melting steel scrap up $0.25 to $15.75/ton.

Chemicals used in US were mostly imported prewar; now, US is the world's largest producer of chemicals; annual production estimated at almost $7B.

August 20, 2009

Wednesday, August 20, 1930: Dow 230.68 +2.89 (1.3%)

Assorted historical stuff:

Times reports Gandhi willing to end civil disobedience campaign if British and Indian govts. adopt policy of dominion status for India and free political prisoners.

Editorial: Gandhi's reported peace terms are due to his recognition of the inevitable collapse of his campaign for complete independence. “He has accomplished nothing for India, but has caused considerable bloodshed, much suffering, and has disrupted trade with Britain which has had a direct influence upon our business.” England is pledged to help prepare India for self-governing dominion status, but India too must do its part; movements like Gandhi's set back this goal.

Port of Bombay imports of cotton in June down 44% vs. 1929; drop in cotton trade badly affecting British cotton mills.

Editorial: Labor Sec. Davis has favored higher wages for foreign workers to increase their purchasing power and prosperity. This is putting the cart before the horse. The more important way to help foreign workers is by free markets so their products can be sold here. This will enable European businessmen to raise pay.

Spanish Premier Berenguer says decline of peseta currency “entirely fictitious,” blamed on “speculation whose threads are obscure.” Finance Min. Arguelles resigns. Govt. trying to cut budget “ruthlessly” to stabilize currency, including by delay of payments to contractors on public works already constructed.

British Air Ministry promises regular air routes across Atlantic; also considers establishing seadromes 300 miles apart on one route.

Court of Appeals in Denver decides interstate transportation of stolen plane is federal offense; Dyer act was previously only applied to cars.

Market commentary:

Bulls encouraged by resistance to repeated bear efforts Saturday and Monday following explosive rise Friday; buying movement spread broadly across the market early. Major industrials strong including US Steel, GE, Westinghouse, as were major utilities and rails (Consol. Gas, New York Central). Steel news caused some irregularity, but good buying appeared on setbacks. Bond market firm; corp. and preferreds up; govts. steady; Dow 40 bond average at new yearly high of 96.61.

E. Johnson, former Pres. Victor Co. (merged with RCA), returns from trip to survey conditions in Europe; feels general US business recovery under way, will be comparatively rapid up to a certain point; thinks stock prices somewhere near bottom.

Conservative observers even more cautious than usual; believe recent rally due to oversold condition, and decline will resume when short-covering ends.

Some market students encouraged by repeated support above June lows, advise buying leading stocks if they again approach these levels.

J.H. Oliphant & Co. finds Dow action this summer technically interesting; 6 times since June, market has found strong support after declining to 215-218 level.

Bears reportedly less confident after last week's action, though short interest remains large. Public participation still seen small.

Increase in credit outstanding in first half was interpreted bullishly, but has stopped since mid-June. “This may mean that stimulus to business in the form of credit expansion induced by Federal Reserve policy has reached its effective limits ... ”

Economic news and individual company reports:

US rail freight loadings for week ended Aug. 9 were 904,157 cars, down 14,178 from previous week and 187,966 from 1929; worst decline yet vs. 1929.

Steel production industry-wide was at 54.5% last week vs. 56% previous week and 58% two weeks ago; US Steel at 62% vs. about 62.75% previous week and 64% two weeks ago. Decline was unexpected; some improvement had been rumored.

Oil curtailment still working: Gasoline in storage at refineries Aug. 16 was 41.252M barrels, down 1.477M in past week; refineries operated at 72.6%, up from 69.1%; crude oil production was 2.464M barrels/day, down 16,800 from previous week and 478,000 from 1929.

Public utility earnings generally higher year over year in each month, though declining month by month this year. June net earnings of 95 utilities were $83M vs. $79M in 1929, but lowest of year so far and down from high of $92M in Jan.

NY City budget for 1931 expected over $600M vs. $569.8M this year.

Companies reporting decent earnings: Exchange Buffet (restaurant).


“'My razor's awfully blunt, dear. I can scarcely shave with it.'
'Why, Charles, you don't mean to tell me your beard is tougher than the linoleum!'”

“A young officer at the front wrote home to his father:
'Dear Father: Kindly send me 50 pounds at once: I lost another leg in a stiff engagement and am in the hospital without means.'
The answer was: 'My Dear Son: As this is the fourth leg you have lost ...'”

+ The Boring Stuff:

Editorial: “Railroad Samaritans” seem regularly called upon to make sacrifices for the public good. Railroad security owners note that operating earnings are down 33% in first half, and rail earnings were only 3.61% of property investment vs. 5.52% in 1929. Provisions of the Transportation Act assuring a fair rate of return to railroads seem to mean little.

France reportedly has labor shortage - only 2 workers available per 3 open positions, importing mine workers.

Pres. Hoover names drought relief committee; Agriculture Sec. Hyde is chair. General rains over past 2-3 days have turned corner for current conditions, but real burden of drough expected to be felt next winter; govt. seeks to be ready to offer aid to affected areas.

Henry Morgenthau, former ambassador to Turkey, will raise funds for Gov. Roosevelt's reelection campaign [son Henry became Treasury Sec.; grandson Robert, now 90, has been New York County District Attorney since 1975].

Treasury Sec. Mellon: “I believe that just as soon as much of the products on the market at present are disposed of the business depression will better itself. The curtailments in output without a question will correct the present condition within a short time.” [Note: Mellon later denied saying this.]

Commodities fluctuated, rallied late; cotton touches new low below 10.7 cents but rallies to close up near 11 cents; grains sharply lower in afternoon but rally to end slightly lower; refined sugar down to 4.40 cents.

Radio Corp. again subject of rumors of pool operations; prominent bull operators reported involved; volume on Monday was 10% of all NYSE turnover.

Out of 1,316 NYSE-listed stocks, 81 are selling below $4 a share.

Average price for bright leaf tobacco in Georgia markets drops to record low of 9.68 cents/pound vs. 18.67 cents in 1929.

Standard Oil NJ denies report they are negotiating to obtain Spanish oil monopoly in exchange for loan.

Lawsuit to block merger of Bethlehem Steel and Youngstown Sheet & Tube seen disrupting steel industry, since almost all large steel companies except US Steel and Jones & Laughlin are at least indirectly involved. Steel industry seen benefitting from any early settlement.

Federal expenditures for July and first 15 days of August were $403.1M, up $29.1M from 1929; total receipts were $197.4M, down $54.8M; customs receipts were down over $36M.

Agriculture Dept. estimates wheat production in 20 countries at 2.261B bushels vs. 2.178B in 1929. US estimate is 820.6M vs. 806.8M in 1929.

Commercial Credit Co. (auto and industrial financing) reports larger delinquencies in first half, but improved trend recently; as of June 30, percentage over 2 months past due were 0.47% of car notes and 1.42% of industrial receivables and open accounts. Company expanding industrial financing due to lower car sales.

Total car financing in June was $141.9M on 332,852 cars vs. $179.0M on 384,520 in 1929.

Some good news on July sales and earnings from Kansas City Southern (rail - July earnings up over 1929), US Rubber Co. (high tire sales in July/August).

Chrysler introduces roadster listed at $535, lowest price ever for a Chrysler car.

A couple of weak car stocks: Stutz, down below 2, high of 34 in 1929, all-time high of 724 ten years ago. H.H. Franklin, down to 6, high of 46 in 1929.

Melville Shoe (shoe retailer - brands include Thom McAn, John Ward) selling about 36, dividend $2, earned $3.99/share in all of 1929, and $2.33 in first half.

August 18, 2009

Tuesday, August 19, 1930: Dow 227.79 -0.23 (0.1%)

Assorted historical stuff:

First billion barrels of crude oil took 40 years to produce; second took 8, third 5, fourth 3.5 [current rate is about 80M/day, or a billion barrels every 12 days].

Creation of “railway czar” position “similar to those of the moving picture industry and baseball” suggested as a way of stabilizing railroad freight rates.

C. Kai-Ngau, Bank of China GM, says China trade situation damaged by chaos, overproduction of silver. “In 1929, China actually imported from abroad food-stuffs to extent of over $200M Chinese currency. For China, known throughout its history as an agricultural country, it really is absurd ... This is a life and death problem for our people.” Recommends adoption of gold standard.

New Curtiss plane expected to develop 800hp, fly at 250-300 mph, tested at Roosevelt Field [Long Island, also used by Lindbergh for 1927 transatlantic flight].

New York State Economic Council states $10M is wasted annually in government in New York State.”

Roxy, theater manager in NY City, “every week saturates his movie house with with an elegant odor which is 'in keeping with the picture.'”

New generation of the Barrymore acting family takes to the stage; Lionel, Ethel, and John are the eighth; now Ethel's daughter, also named Ethel, is to play the part of Seraphine, daughter of title character Scarlet Sister Mary, to be played by the senior Ethel.

Market commentary:

Bears more cautious starting the week, content to “play for small technical reactions” but not following up aggressively. 1-3 point declines early in majors including US Steel, American Can, AT&T, but pressure lifted about noon; good recoveries in leading stocks and general market firmer. Majors ended at day highs, some bullish demonstrations in individual stocks including United Aircraft. Oils, utilities, and rails quiet; banks and trusts weak. Bond market dull; rails strong, preferreds weaker, govts. steady.

Seasoned common stocks” are now selling to yield about 1.5% above commercial paper rate (3%). In 33 year history of the Dow Jones averages, stocks without exception have been profitable long-term investments when average yield was 1% or more above the commercial paper rate.

R. Babson (economist, made good bearish call in fall 1929) calls drought damage overestimated, says Midwest farm and general business situation will improve markedly in final quarter. Also notes commodity production has declined about 30% vs. 10% decline in consumption; predicts shortages soon, restarting of production to supply demand. Doesn't yet recommend buying stocks, but feels “time is approaching when buying opportunities may appear.”

Still little public buying seen in stock market; activity mostly professional. Large and increasing short position, which should eventually be a buying factor.

Option market said more active, puts (bets on stock prices to decline) more difficult to buy than calls.

Harvey Firestone, Pres. Firestone Tire & Rubber, states America is on eve of greater prosperity than past 10 years. Expresses belief in Ford's statement there will soon be work for everybody. Says company has met depression by cutting overhead and lowering prices; plant now running night and day, 6 days a week.

Economic news and individual company reports:

Weather favorable over much of country, providing some relief of drought conditions.

Fed. Reserve member banks report “all other” (commercial) loans up $9M to $8.481B in week ended Aug. 13; loans on securities down $58M to $8.376M.

S.W. Straus report of building permits issued for July in 589 leading cities and towns finds volume of planned construction was $187.6M vs. $184.7M in June; reverse of usual seasonal decline, but down 36% from 1929.

Labor Dept. reports retail food prices down 2.5% in month ended July 15, and 9% in year.

Coca Cola seen taking advantage of low sugar prices by buying a year's supply in advance. Has enjoyed increased sales every year since 1922.

R.J. Reynolds selling about 49, earned $3.22/share in 1929, expected to earn more in 1930, yield 6.1% based on $3 annual div.

Several cigar stocks selling at yields over 9%, including General Cigar (9.3%), Congress Cigar (16%), Consolidated Cigar (13.8%).

Companies reporting decent earnings: Drug Inc., General American Tank Car, Fox Film, Fifth Avenue Bus Corp, International Salt.

Nostalgia department:

“It wasn't so many years ago when: Automobilists wore linen dusters ... No one had appendicitis ... Milk was delivered in tin cans ... There were livery stables everywhere ... Girls sometimes wore cotton stockings and high-laced boots (you were not supposed to know it) ... People generally kept their tonsils ... It seemed necessary to control hatpins by legislation ... Everybody in the audience was scared when the express train came rushing head-on in the motion picture.”

+ The Boring Stuff:

Editorial: Now that drought emergency has largely lifted, we can approach issue of relief in a calmer way. Outside of an extreme emergency calling for charity, for which the Red Cross is best suited, the role of government in direct relief should be limited; “the initiative for help must come from the local communities themselves.” The banking system can help by providing credit to tide the affected people over; the Federal Intermediate Credit Bank system helps to do this for agriculture, and local banks should cooperate by reducing rates; this would put “relief measures on a business basis.”

Western Union moving to new offices at 60 Hudson St skyscraper. Currently handles about 85% of US telegraph business, has 1.896M miles of wire, 30,707 nautical miles of ocean cable, and 25,061 offices.

Commodities break sharply. Cotton down sharply to new season lows under 11 cents. Grain prices down sharply on more favorable weather, concern over competition between nations holding grain surpluses. Silver market firmer over past few weeks, price now over 36 cents/ounce.

Bears have been citing some stocks selling at high price-earnings ratios and low yields; however, these stocks have historically sold at high valuations, and “almost invariably have justified” this by later growth in earnings power.

Harvard Economic Society says business declined further in first half of July but then steadied; concerned about decline in construction, which recovery depends on significantly, but sees increase in future months due to easy credit; sees drought moderating but maybe not delaying recovery if crop damage not too bad.

Swiss trade down in first half; imports 1.287B francs, down 21M; exports 924M, down 90M. Production of Swiss watches down 30%.

German trade improved in July vs. June; imports and exports both higher, surplus of 41M marks.

Youngstown district steel operations to remain unchanged this week at 56.5% of capacity.

July freight cars ordered were 1,306 vs. 794 in June and 242 in July 1929; orders for 7 months were 31,749 vs. 59,371.

US aircraft and parts manufactured in 1929 was $61.973M vs. $21.162M in 1927.

New construction contracts in NY metropolitan area for week ended Aug. 16 were $3.103M/day vs. $2.649M in July and $2.803M in 1929.

NY State receipts from all sources in first 7 months were $255.9M; expenditures were $261.6M.

US shoe production in June was down 4.295M pairs, or 15.2%, from 1929; first half was down 14.118M pairs, or 8.2%.

Fairchild Analytical Bureau reports textile prices down 48% from peak in July 1928.

US Steel wages in 1929 amounted to 39.34 cents/dollar of revenue vs. 41.68 cents in 1928; net earnings were 18.51 cents/dollar vs. 11.50 cents in 1928.

IRT subway division revenues from advertising for 11 months ended May 31 were $1.776M, up 15.9% from 1929.

Fox Film first half net $2.84/share vs. $2.03 in 1929; Pres. H. Clarke says company doesn't anticipate any dividend cut. Stock down sharply early on rumors of bad movie attendance July and August, but decline was checked by earnings report.

Walter P. Chrysler says company improving competitive position in depression though sales and earnings down. First half sales were 65% of 1929 level vs. 57% for industry excluding Ford. First half profit $0.77/share vs. $4.06 in 1929. Management policy seen aimed at gaining share at expense of profits, also keeping strong balance sheet by cutting expenses and keeping inventory low. This should give company stronger position when depression ends.

August 17, 2009

Monday, August 18, 1930: Dow 228.01 -0.53 (0.2%)

Assorted historical stuff:

Editorial: Adversity of the depression has its benefits, including a return of the virtue of thrift. “With unemployment and destitution in evidence” people are more inclined to provide for the future of themselves and their children; in boom times this is easily forgotten. This trend is seen in savings deposits - they gained $273.8M in the first half vs. a decline of $82.7M in second half of 1929; July has shown a further gain for the first time in six years (normally people withdraw money to pay for vacations, etc). Life insurance also shows the trend, with new policies in the first 7 months up 1.5% over 1929.

Pres. Hoover directs $125M of federal roadbuilding funds, with matching state funds, to be made available Sept. 1 instead of Jan. 1.

Former French Pres. Poincare warns Germany that France will not stand for any revision of Versailles treaty, saying German idea of revision is “immediate or progressive remaking of the map of Europe at the pleasure of the Reich.”

Canadian govt. bars most immigration except farmers; policy considered temporary due to unemployment.

Martinez De Hoz, Pres. Argentine Rural Society, says world overproduction in agriculture due to protective tariffs, will exist for years, perhaps decades.

NY City mass transit lines carried about 834.287M passengers in Q1, up 12.326M from 1929. Revenues were $40.314M, up $532,000.

NY City testing new subway cars with doors that just stop when something gets in the way instead of completely reopening.

Movie companies still deciding how to make foreign sound films; possibilities include dubbing foreign voices onto US actors, filming with foreign actors in US, or filming abroad. Paramount filming in Paris using foreign actors in 10 different languages. J. Lasky, Paramount production VP, says this isn't as expensive as it sounds; also notes not much demand yet for color or widescreen films; will test three-dimensional film process.

Dept. of Agriculture testing 58-year old sample of honey at regular intervals. “Like liquor, honey does not deteriorate with age but mellows, the mellowing being manifested in a gradual darkening of the sweet syrup.” Sample is white clover honey; but now resembles blackstrap molasses, “tastes not unlike buckwheat honey.”

Market commentary:

Bears attacked early, hoping market had been weakened technically by extensive forced short-covering Friday; forced early declines in US Steel, American Can, Vanadium, Radio, and other trading favorites. Attempts to extend initial losses met strong buying; urgent short covering resumed in last hour, giving vigorous rebounds in US Steel, Vanadium, J.I. Case, and other trading favorites. Bond market quiet, govts. and high grade corp. firm, convertibles higher.

Financiers and economists “somewhat befuddled” by current business situation; economy has descended from “the heights of the greatest business prosperity the world has seen,” and it's difficult to “get their bearings in the new scheme of things.” Most are “watching and waiting rather than predicting.” Of course, things will eventually turn around, “and when the upturn does come it will be based on the most solid foundations in many years.” In the meantime, the market is marking time.

Level around 215 seen as double bottom, having brought out strong buying support both in late June and past week.

Short interest seen still large in spite of forced covering in past few sessions.

Earnings reports since July 1: higher earnings reported by 120 companies, lower by 307, dividends unchanged by 594, increased by 3, cut by 39.

Economic news and individual company reports:

Some rains in drought-affected areas, improving crop conditions, though further rains would help. Stocks of railroads in affected areas stronger.

External trade of foreign countries generally declines vs. 1929; Canada July trade down about 25%; Argentina exports first 7 months down 35.4%; France first half trade down about 10%, Italy July trade down about 30%,

BLS reports July wholesale prices down 3.4% from June and 14% from July 1929.

Bureau of Securities (prosecute securities fraud) took 124 actions against 444 individuals and companies in first 7 months, vs. 104 against 342 in all of 1929. Increase in prosecutions of “bucket-shop operators and other fraudulent stock manipulators.” Total customer losses $37M.

Companies reporting decent earnings: Jewel Tea, Virginia-Carolina Chemical, Republic Stamping & Enameling.


Howard Hughes presents Hell's Angels. “More spectacular scenes of fighting in the air probably have never been photographed, but the story around which these scenes are built is stupidly improbable. ... views of the huge Zeppelin plowing through the clouds toward London have been photographed with striking beauty. ... to escape the pursuing British planes, the captain of the airship ... commands about a dozen members of the crew to step off into the void - without parachutes - 'for Kaiser and for Fatherland.' Then ... the big Zeppelin is finally set aflame by a British plane ... [that] dives directly down upon it, crashing it in twain.”

+ The Boring Stuff:

Editorial: Russia is being charged with “dumping” manganese (used in steel production). This matter is difficult to investigate properly considering we don't have diplomatic relations, but we shouldn't block Russian imports until we have definite evidence of dumping. Even if we get this evidence, it's the steel industry and consumers that would suffer from any additional tariff; Russia supplies about half of manganese imports, and local production and is only about 5% of requirements.

NY City has 665,829 motor vehicles, up 31,346 this year.

Market seen mostly professional, little public buying. Public also not seen liquidating on declines due to stronger margin position than last fall. Public not expected to enter market on large scale until business fundamentals show improvement; when this happens, stocks should “move ahead decisively.”

Friday's rout of bears provided “electric spark” needed to revive bull spirits. Fundamentals considered positive for business and market, including easy credit, low inventories, and low brokers' loans; however, “it took considerable fortitude to withstand the pessimism which saturated the speculative community during the first two weeks of August.” Some fear that drought had postponed business revival to spring, but drought scares regularly break out in August; bulls held to positive view and accumulated stocks as they were sold by bears, reducing available supply of stocks and resulting in lower volume and narrower price swings. Friday's action “served dramatic notice that stocks were no longer for sale in sizable quantities on price recessions.” This makes the bear position dangerous.

Commodities mostly down. Cotton down sharply to lowest level since 1919-20 depression; Oct. contract at 11.36 cents. Grains generally lower.

Irving Fisher's wholesale index of 200 commodities for week ended Aug.15 was 83.8 vs. 83.1 previous week.

July retail sales generally down. July sales for 48 chain (low-priced) store systems were $221.8M, down 5.8% from 1929; first 7 months sales were up 1.6%. Sales for 519 department stores were down 9% in July and 5% for first 7 months. Mail order, grocery, and general merchandise store sales also mostly down.

New NY Stock Exchange listings in July were $1.113B vs. $783.8M in June and $944.6M in July 1929; of that total bonds were $300.1M vs. $122.2M and $64.9M; stocks were $812.4M vs. $661.6M and $879.8M. Most of July's total was a $621.2M stock issue for Transamerica Corp. Listings for first 7 months were $6.544B vs. $9.001B in 1929.

US exports of grain and grain products were $246.4M in year ended June 30 vs. $330.9M previous year.

World copper production in July was 143,613 short tons vs. 174,507 in 1929.

International Cotton Congress to be held in July 1931, to examine causes of depression in cotton industry and possible remedies.

Little forced marketing of livestock due to drought seen to date. Receipts of cattle at all public markets in July were down 13% from 1929.

Canadian rail loadings in week ended Aug. 9 were 61,272 cars, down 6.4% from 1929 but up 5.5% from previous week. Year-to-date decline was 11.1%.

GM sales to domestic and foreign dealers in July were 70,716 cars and trucks vs. 87,595 in June and 157,111 in July 1929. Dealer sales for first 7 months were 844,195 vs. 1,361,296 in 1929. Brands include Chevrolet, Pontiac, Olds, Marquette, Oakland, Viking, Buick, La Salle, and Cadillac.

United Aircraft [later became Boeing, United Technologies, and United Airlines] continues to operate profitably in 1930 as most aviation companies are losing money, although sales and profits are far below last year. Net income for 1930 estimated at $2.10/share vs. $4.52 in 1929.

The Irregular Blather August 17, 1930 - The Madoff Files

August 17, 1930 was a Sunday with no Journal, so again a little editorial commentary.

Today I'm going to do something a bit off-topic, but I think important and not totally irrelevant. Lest we forget, there was a guy named Bernie Madoff who was involved in a huge financial scandal that came to light late last year that also revealed an incomprehensible failure of regulation by the SEC. Revelations of such scandals are in fact pretty characteristic of severe busts (as Buffett put it, you don't see who's been swimming naked until the tide goes out). A disturbingly high proportion of my friends seem to have some misconceptions about the Madoff affair, so I thought a little editorializing was in order. I'm not sure how much impact my own blathering would make, but fortunately there is a great resource for informing yourself on the scandal available here. This is a link to the video and transcribed Congressional testimony of the guy who probably knows more about the whole affair than anyone, and spent about 10 years trying to get the SEC to do their job: Harry Markopolos. If you have a few spare hours I would highly recommend watching the whole thing - for those with strong stomachs, I'd even recommend the nauseating performance of the regulators that follows HM's testimony. However, for those of you who don't have the time, I'm including some informative excerpts here.

[Opening statement - full cost of the SEC's failure.]

First, I would like to extend my deepest sympathy to the many thousands of victims of this scheme. We know that many victims have lost their retirement savings and are too old to start over. We also know that others have lost medical services, community services, and scholarships provided by charities that were wiped out by the Madoff fraud. This pains me greatly and I will do my best to inform you, the victims, about my repeated and detailed warnings to the SEC. You, above all others, deserve to know the truth about this Agency’s failings, and I will do my best to explain them to you today. ...

As today’s testimony will reveal, my team and I tried our best to get the SEC to investigate and shut down the Madoff Ponzi scheme with repeated and credible warnings to the SEC that started in May 2000 when the Madoff Ponzi scheme was only a $3- to $7 billion fraud. We knew then that we had provided enough red flags and mathematical proofs to the SEC for them where they should have been able to shut him down right then and there at under $7 billion. ... In October 2001, when Madoff was still in a $12- to $20 billion range, again we felt confident that we had provided even more evidence to the SEC such that he should have been stopped at well under $20 billion. And again in November 2005, when Mr. Madoff was at $30 billion, 29 red flags were handed to the SEC. And yet again, they failed to properly investigate and shut down Mr. Madoff’s operation.

Unfortunately, as they didn’t respond to my written submissions in 2000, 2001, 2005, 2007, and 2008, here we are today. A fraud that should have been stopped at under $7 billion in 2000 has now grown to $50 billion. I know that you want to know why there was over $40 billion in additional damages, and I hope to be able to provide some of those answers to you today.

[Were individual investors who lost money to Madoff greedy and stupid?]

Mr. ACKERMAN. ... The final question, I represent a large number of people who invested with Mr. Madoff ... The question that we get asked, all of us all the time, is, why didn’t people do due diligence? ... Could anybody have figured it out?

Mr. MARKOPOLOS. If you did not have a derivatives and quantitative finance background, it would have been very difficult to figure this out on your own as an individual investor.

Mr. ACKERMAN. The people who are blaming the victims for being stupid and not doing due diligence are off the mark?

Mr. MARKOPOLOS. A lot of the victims thought they were getting highly diversified portfolios. This is the beauty of Mr. Madoff’s scheme. He was purporting to own 30 to 35 of the bluest chip stocks, the largest companies in America, and they would see that on their statement, and they felt very comfortable owning those companies and they considered it a very diversified basket because it really was a very diversified basket.

Mr. ACKERMAN. But there was nothing they could do to check it out, that he didn’t actually buy it.

Mr. MARKOPOLOS. ... As an individual investor, you could not. But as a feeder fund, you should have been able to go to the New York Stock Exchange and see that those volumes of stock did not trade on that day at that price. They could have gone to the option price reporting authority that the Chicago Board Options Exchange offers, and you would have seen that no OEX index options traded at those prices that day. That is what you could have done and no one did that.

Mr. ACKERMAN. And the SEC could have done that, too?

Mr. MARKOPOLOS. If they knew how to do it, they could have done it. And if they had the willingness to do it, they could have done it. But they did not.

Mr. ACKERMAN. Thank you very much.

Chairman KANJORSKI. If they knew how to do it. Are you suggesting they do not know to do that?

Mr. MARKOPOLOS. I am suggesting that if you flew the entire SEC staff to Boston and sat them in Fenway Park for an afternoon, that they would not be able to find first base.

[Can the market regulate itself?]

Mr. ARCURI. ... Does the market itself, do they look at, you know, competitors who are out there, who are doing jobs that are too good to be true and say, hey, something must be wrong here; somebody needs to look into this?

Mr. MARKOPOLOS. Well, I am afraid not. They missed subprime. They missed the collateralized debt obligations, the collateralized loan obligations. They missed so much it is hard to just trust in the professionals. You need competent regulators as well, and you also need common sense.

Mr. ARCURI. My concern is this, if I am an investor and I am looking at the two prospective groups to invest my money in and one is doing everything legally and they are giving, let’s say, 5 or 6 percent, and then you are looking at a Madoff who is giving a return of, say, 10 or 12 percent, the person who is giving the 5 or 6 percent has to be looking at Madoff and saying, something has to be wrong here, someone needs to look at that. Isn’t there more pressure from the actual private sector itself to look into these?

Mr. MARKOPOLOS. I am afraid the private sector would look at the Madoff returns and say, he is getting more return, taking less units of risk, therefore I love Mr. Madoff better and I want to invest with him more. So greed often overrules common sense.

[Needed changes in the SEC and in regulation.]

The incoming SEC Chairwoman needs to come in and clean house with a wide broom. The SEC needs new senior staff because the current staff has led our Nation’s financial system to the brink of collapse. They ignored the rating agency scandals. They allowed the investment banks to engage and package and sell toxic subprime securities to investors. They ignored auction-rate securities and allowed these toxic securities to be sold to investors. They ignored mutual fund market timing until embarrassed by State regulators into acting, and they ignored the Madoff Ponzi scheme. They haven’t earned their paychecks and they need to be replaced. ...

I would urge the Congress to consider the fine examples set by the New York attorney general’s office and the Massachusetts Securities Division. They give great regulation on the big cases that are nationwide fraud cases, and they get full restitution to the victims. They are aggressive. But they are small. They don’t do a lot of examinations. All they do is take in whistleblower tips and act upon them and act vigorously. They are pit bulls against financial fraudsters. And here we have a pip-squeak of a flea in the SEC. So it is not the size of the dog, it is the size of the fight in the dog. And that is why I commend those two State regulators. They are very aggressive.

And if the SEC does not reform itself, you have an option. Just disband the SEC, zero out their budget, put all 3,500 of those people on the streets, because they are not protecting us right now; and just fund the New York attorney general’s office and the Massachusetts Securities Division. ...

Mr. CAPUANO. ... I would argue that some of those things may require us to have a little bit more complicated regulatory scheme. Is that something you have considered or not?

Mr. MARKOPOLOS. I wouldn’t say more complicated. I would say more simplified, more streamlined because remember, American business wants as few regulators as possible. They are paying for the regulation. They want a value-added proposition. For every dollar they spend toward regulation, they want to receive that value back because right now without proper regulation, there is no trust in our capital markets, which raises the cost of capital or makes it unavailable to American businesses. ...

Mrs. BIGGERT. ... should we be looking at the regulations and the laws on the books and trying to decide whether they are adequate enough to address this issue, or is this more a failure, really, of enforcement? ...

Mr. MARKOPOLOS. It is both, Congresswoman. It is, we need a few more regulations; we can leave no more dark spots unregulated and unguarded for financial predators to congregate in. ... And the second part is, we need better people in the enforcement agencies. They really need to replace a lot of their staffs, especially at the senior levels.

+ The Boring Stuff:

[Summary of SEC's recent effectiveness.]

The SEC says it lives for the big cases, but the evidence shows that the only financial regulators bringing the big cases in the 21st Century are the New York Attorney General’s Office and the Massachusetts Security Division. New York and Massachusetts brought the big cases against the market timing scandals and the auction rates securities scandals, while the SEC watched quietly from the sidelines. Even today after Merrill Lynch paid out $6 billion in bonuses after losing untold tens of billions of dollars and is being propped up by government bailout money, only the New York Attorney General is investigating. The SEC continues to roar like a mouse and bite like a flea.

... We have also heard senior SEC officials bemoan the lack of both staff and resources while telling us that they receive thousands of tips each year and that they have to conduct triage and can only respond to the highest priority matters. I gift-wrapped and delivered the largest Ponzi scheme in history to them, and somehow they couldn’t be bothered to conduct a thorough and proper investigation because they were too busy on matters of higher priority. If a $50 billion Ponzi scheme doesn’t make the SEC’s priority list, then I want to know who sets their priorities. ...

The American public deserves answers from the SEC about its refusal to tackle the big cases and why all five major Wall Street investment banks under SEC supervision either failed, were forced by the government to merge with commercial banks, or became bank holding companies propped up by the Federal Reserve and the U.S. Treasury. When an entire industry that you were supposed to be regulating disappears due to unregulated unchecked greed, then you are both a captive regulator and a failed regulator. You have no excuses. But you darn well have a lot of explaining to do to the American taxpayers and you darn well better be apologizing to the Madoff victims.

[Relative merits of SEC and other US financial regulatory bodies.]

Mr. SHERMAN. ... Did you have a chance to bring your accusations to FINRA or the NASD?

Mr. MARKOPOLOS. I would have never taken them to the NASD or FINRA. I had a lot of bad experiences as an over-the-counter trader in the late 1980’s with the NASD. What I found them to be was a very corrupt, self-regulatory organization, that if you took a fraud to them, they would ignore it as soon as they received it. They were there to assist industry by avoiding stricter regulation from the SEC. ...

Mr. CASTLE. ... Do you put FINRA and the NASD in the same camp of being ineffective because they are basically part of the entity that Madoff and others have come from? Or do you separate the two of them?

Mr. MARKOPOLOS. I would separate them. I would say that the FINRA is even less competent than the SEC. And I never thought that the SEC was corrupt. In fact, I am living proof here today that they are not. But FINRA definitely is in bed with industry.

Mr. CASTLE. And the NASD you sort of condemned in your previous answer. I assume that hasn’t changed.

Mr. MARKOPOLOS. They are more like RICO. ...

Chairman KANJORSKI. Now if I remember some of your earlier responses to some of the other members, you indicated that you felt that the FINRA you felt was corrupt but the SEC was just incompetent. That is correct?

Mr. MARKOPOLOS. That is correct.

Chairman KANJORSKI. Which is better, to be incompetent or to be corrupt?

Mr. MARKOPOLOS. I would say I would give an A-plus to the SEC for incompetence and I would give the same grade to FINRA for corruption. And fortunately, the SEC was not corrupt as far as I could determine in this case. I think I am living proof of that.

Chairman KANJORSKI. In what way? They saved your life in some way?

Mr. MARKOPOLOS. I am still standing. I don’t think I would have been if they had taken money to look the other way and told Mr. Madoff my identity and, by the way, these are the SEC’s submissions he has been giving us over the years. I don’t think I would be here today.

[Effectiveness of pursuing whistleblower tips.]

Mr. MARKOPOLOS. ... I brought with me the Association of Certified Fraud Examiners 2008 Report to the Nation, and it lists in here that the best way to find fraud; 54 percent of the frauds get discovered by tips, whistleblower tips; only 4 percent by external auditors which—the SEC is an external auditor. Therefore, whistleblower tips are 13 times more effective than external auditing. So why wouldn’t we want the SEC to be 13 times more effective? Lord knows, this Agency needs to be more effective. ...

Mr. ARCURI. ... you make references to the New York Attorney General, to the—I think it was the Massachusetts.

Mr. MARKOPOLOS. Securities Division.

Mr. ARCURI. Securities, thank you. And yet they don’t have that type of people in their office. They have small, lean offices. How do they do it and the SEC is not able to do it?

Mr. MARKOPOLOS. It is easy. They rely on whistleblowers to come in with tips which they vigorously pursue. When the SEC gets a tip, it vigorously ignores it.

[How the SEC does audits, and how they should do them.]

Mr. WILSON. My second question has to do with auditing, which I would think is one of the things the primary would focus when there are wrong things being done. Could it be a random assigned auditor rather than the same old same old that they have every time?

Mr. MARKOPOLOS. I would rotate the teams personally. You want a fresh set of eyes looking at the books and they want a fresh set of trained eyes. Right now those eyes are not trained. They are also not trained in human intelligence gathering. When they come in to inspect a firm, they are led to a conference room. They meet the compliance staff and they are fed controlled pieces of paper. That is what they do. They inspect pieces of paper because they are too untrained to realize what to look for on the financial end. All they are looking for is pieces of paper. If they see the pieces of paper, you are going to get a fine audit report back from the SEC.

What they need to be doing is talking to the portfolio managers, to the traders, to the marketing people, to the client service officers, the information technology people. And they need to be interacting with them and saying, is there any fraud here? Is there anything illegal or unethical happening here? And if you get a ‘‘no’’ answer, say fine, thank you. Is there any fraud anywhere else in any other organization that your firm deals with or that you know about? And then you hand them your business card. And you say if there is, if you ever discover a fraud, please let me know. And hand them the card. I think if you do that, you will increase audit effectiveness.

[I suggest the chilling Christopher Plummer for Madoff.]

Mr. MAFFEI. Okay. Thank you. And I guess my last question is, who do you want to play you in the movie?

Mr. MARKOPOLOS. Well, it had better be someone who is a Red Sox fan. That is all I ask. ...

Chairman KANJORSKI. Do you want somebody with hair?

Mr. MARKOPOLOS. Not necessarily. Michael Chiklis is Greek and from Massachusetts, so I think he would be perfect.

August 16, 2009

Favorites of the week August 11-August 16, 1930

No Journal was published Sunday, August 17, 1930. Once again, a collection of my favorite items of the week. These aren't a representative selection but just the ones that made me smile or take notice.

August 16:

[Note: Insull was a pretty amazing compilation of the highs and lows of US capitalism. Among other things, he was: Thomas Edison's personal secretary; one of the founders of the company that became GE; reputedly one of the models for Citizen Kane; and, at this time, controller of a large number of utilities through a highly leveraged holding company that eventually collapsed, wiping out many people's savings.] S. Insull, Pres. Chicago Civic Opera Co., reports 1929 loss of $558,528 due to “constantly increasing cost of producing grand opera.”

[Note: Huh???] Leading economists say improvement in business will come through cuts in output eventually reducing inventories. However, output cuts do in turn cause further cut in consumption due to reduced purchasing power, and “the vicious circle continues until the point of minimum consumption is reached.” This then causes recovery as production is increased. Low production this year has been “working toward an ultimate cure of the overproduction situation.”

“It reminds us of the old wheeze about the American who was explaining to a British visitor the construction of an electric sign his concern was about to place on Broadway, New York. 'It will contain,' he said, '20,000 red lights, 17,000 blue lights, 10,000 white lights, and a central sunburst of orange and purple.' The Englishman was impressed. 'Most extraordinary,' he said. 'But don't you think, old chap, that it will be just a bit conspicuous?'

August 15:

[Note: What happened to the frickin' sharks with frickin' laser beams strapped to their heads? - Dr. Evil] Exterior of 50-story Irving Trust building at 1 Wall Street completed; required 288 rail cars of Indiana limestone. Vault extends 70 feet below building, protected by 6-foot building walls, outer layer of steel, thick layer of infusite (copper-iron alloy with “high torch-resisting qualities”), and layer of solid chemical “which, under the heat of a cracksman's torch, would give off paralyzing fumes.”

[Note: Strangely familiar dept.] Col. L. Ayres of Cleveland Trust sees almost certain economic improvement from July to August and September; based on historical patterns and comparisons to earlier depressions (1907-08, 1920-21). However, recovery does “not promise to be emphatic,” and some possibility of “attack of gloom” in business sentiment before the improvement becomes apparent.

[Note: Strangely familiar in reverse dept.] Detroit population April 1 was 1,573,985, increase of 580,307 since 1920.

[Note: Being a businessman was more civilized then dept.] Curtiss-Wright air shuttle to Saratoga races a great success. Flight leaves NY City at noon, returning after the last race in time for dinner. Business men “state this is the most ideal way to take in the races without losing an entire day's work.”

August 14:

[Note: Strangely familiar dept.] Editorial: J. Lonsdale, Pres. of bankers' association, says banking system held “firm, sound, and unmoved” during the market crash. The system did hold up well to the crisis, helping in many ways. Now, it may have a different duty. Bankers are naturally cautious and prefer “no” to “yes” - this was more than justified last year, but now some “yes”es may be called for; “If they feel that conditions are fundamentally sound, as they say they are, they have a duty to perform ... By constructive advice and concrete assistance they can do more to start wheels in motion and end unemployment than any arbitrary measures can do.”

[Note: That just might work dept.] Chile President approves prohibition law under which 6-time violaters will have pay docked 50% by employer and turned over to wife or family.

August 13:

[Note: This one is significant IMO. I had thought of the US dominance of world production and consumption as a consequence of WW2 destruction, but this would indicate it came much earlier. I also believe one of the more hopeful things now vs. 1930 is that there's more potential demand from the rest of the world.] US has 7% of world population, but consumes 69% of crude oil, 47% of copper, 56% of rubber, 48% of coffee [!], 21% of sugar, 35% of electric power. Produces 70% of oil, 60% of wheat and cotton, 50% of copper, 40% of coal. Holds about 50% of world's monetary gold, 2/3 of “total banking resources.”

Movement is growing to ban animal acts in France on grounds of cruelty; Jack London Club has already succeeded in banning then from British stage. French trainers reply that “animal training in France is achieved by kindness, and not, as in certain other continental countries, by brutalizing methods.” Regardless, animal acts have already declined in popularity from golden age 50 years ago, when they headlined many circus and vaudeville seasons. Great acts included Van Amburg, who literally made lion lie down with lamb; G.K. Bailey's hippopotamus in wheeled tank, advertised as “the blood-sweating Behemoth of holy writ”; two rival fake white elephants shown by Barnum and Forepaugh; and Bill the vaudeville bicycle-riding chimpanzee, who died last year just before his circus debut.

[Note: T'was ever thus dept.]Markets may come and go, up and down, but the crop of market letters remains as large as ever.”

[Note: Always keep your eye on the freight car loadings dept.] Rail car loadings for week ended Aug. 2 were 918,335 cars, down 1,014 from previous week, down 16.9% from 1929, and 12.4% from 1928.

August 12:

US oil production has been fortunate for whales; since a mature whale produces about 50 barrels of oil, 1929 US production of about 1B barrels would have consumed 20M whales. Whales should now be more secure barring return to fashion of the corset, with consequent demand for whalebone.

August 11:

Most sought after entertainers in Europe are black American musicians, particularly jazz. Fashion started during World War, after which many musicians stayed abroad, particularly in France and Germany. “The tourist may sigh for the stringed orchestras which once seemed an integral part of the gayety of Paris; but the proprietors of night clubs, restaurants, and music halls have heard the clink of coin that, like the ticking of a metronome, keeps time to the nimble feet of jazz.” German musicians have been so affected by the competition that the conservatory in Frankfort is now teaching jazz, though Berlin and Munich are still opposed. Paul Robeson appeared last winter in “staidest concert hall in Paris.” Theatre de la Porte Saint Martin, former home to Sarah Bernhardt, now playing black musical.

[Note: Strangely familiar dept.] E.B. Reeser, Pres. American Petroleum Inst., “adduces statistics to show that profits to oil companies have not been exorbitant.” Points to high level of investment required, says return on net worth for 1913-1925 only averaged 11.5%.

[Note: New economic index dept.] Production of women's stockings to decline about 4M dozen pairs from record output of 24M dozen in 1929; first decline since 1923. Production of knitted outerwear estimated down 15% in first half.

[Note: Buy some stocks that go up ... if they don't go up don't buy 'em dept.] Conservative observers continue to advise remaining on sidelines “until there is something definite to indicate that a decided change for the better has come.”