May 11, 2010

Monday, May 11, 1931: Dow 151.31 -3.10 (2.0%)

Assorted historical stuff:

Editorial by T. Woodlock regarding M. Traylor’s modest proposal to prohibit small margin accounts [see May 6]. Woodlock takes a backseat to no one in disliking stock speculation by the general public; his experience of 45 years “demonstrates with utter certainty ... that to the enormous majority ... it brings inevitable loss, and to many tragedy ... stock speculation is a most difficult and dangerous art,” requiring “unusual qualities and much hard study.” That said, prohibiting small margin accounts would just drive the “little fellow” from the brokers to “bucket shop sharks” and “brokerage speakeasies.” Speculation is an inevitable part of any free and open market; it's better that it should be done at “brokers who are themselves subjected to rigid supervision” by the exchanges.

Editorial approving stand of Amer. Bankers' Assoc. commission in favor of maintaining dual banking system [of state and national banks] and protecting state banks from being disfavored vs. national ones or forced into the national system [see May 6]. Commission favors efforts to promote state bank membership in Fed. Reserve system, “but that is as far as we go in espousing Federal Government influence in all types of banking.” State banks have a strong claim to recognition based on their market position; total deposits last June were $36.6B vs. $23.3B for national banks, and many of the largest banks are state institutions.

Editorial: Senators King and Pittman, representing silver producing states, are naturally disappointed at the vague resolution passed by the Int’l Chamber of Commerce, which went “no further than mildly favoring the world conference,” leaving many details to be determined. However this was probably the best that coiuld be expected given current confused conditions in the silver market. Producers should now attempt to get Congress or Pres. Hoover involved in calling the conference; a big potential problem is the cooperation of the British govt. on behalf of India, which may have 400M ounces to dispose of as it establishes a gold standard. Situation is not hopeless, but producers should set aside “schemes for silver market control and for silver loans to China” in favor of “open and vigorous drive to bring about a meeting” of all interested parties.

Revolutionary Argentine govt. of provisional Pres. Gen. Uriburu calls Nov. elections in attempt to solve troublesome political situation; radical party of deposed Pres. Irigoyen has been gaining strength.

Former Spanish dictator Berenguer released from jail after Supreme Council of War quashed charges regarding execution of leaders of Dec. revolt.

California voters to decide on $200M water supply bond issue to bring water from Colorado River to Los Angeles and other Southern Calif. cities.

100 years ago, the annual US death rate from tuberculosis was 400 per 100,000 population; today it’s down to 76. Tuberculosis was the leading US cause of death as late as 50 years ago; now it ranks seventh, behind cancer, pneumonia, nephritis, apoplexy, and accidents. Most pressing medical problem now is to stop TB in those between 15 and 24.

Thomas Edison predicts oil or sulfur similar to that in Texas fields will be found in Florida.

A new car-washing plant opens in Detroit; employing 40 expert workers, it has a capacity of 500 cars/day and can thoroughly clean and dry a car in 10 minutes.

Ancient inscriptions show emerald mines in upper Egypt as far back as 1650 BC; Greek miners removed many fine gems at the time of Alexander the Great, and, some time later, Cleopatra was in the habit of giving emeralds engraved with her portrait as gifts to ambassadors.

The US cigarette business is rather tightly knit, with 4 companies accounting for about 95% of the market; capital setup is also remarkably similar, and until recently all four companies had presidents with 4-letter last names (Amer. Tobacco - Hill, Lorillard - Belt, Liggett & Myers - Toms, Reynolds - Gray). Reynolds Tobacco recently elected S. Clay Williams pres., but at least his last name is a multiple of 4 letters long.

Walter Damrosch, orchestra leader, says public tastes in music has changed little in 25 years; recently a radio audience voted on top requests for a music program, producing an overwhelming majority for the same five pieces chosen by a vote in Philadelphia 25 years ago.

Week in review:

Financial developments were dominated by the Fed. Reserve’s aggressive campaign to lower rates, including another cut in buying rates on bills, cuts in the rediscount rates at Boston and Philadelphia, and culminating in the announcement late Thursday of the NY Fed rate cut to 1 1/2%, a record low for any modern central bank. Objective was seen as forcing yields on short-term investments so low that banks and individual investors will turn to longer-term markets; reopening capital markets here and abroad should speed recovery; low short-term rates should also help stop influx of funds and gold to NY. However, a potential problem is the current desire of bankers to stay liquid at all costs to meet emergencies. Bonds rose gradually through the week, and more sharply following the NY Fed rate cut; many of the highest-grade corporate issues hit 1931 highs, while demand spread from highest-grade to second-grade issues that had previously been weak; however, convertibles and more speculative issues were soft much of the week in sympathy with the stock market. US govts. issues hit some record highs; foreign were more active and generally strong, though S. American fluctuated, with a sharp fall in Argentine later in the week. Lower money rates seen reviving some new bond financing. Bank statements showed funds flowing out of NY, continued drops in brokers’ and “all other” loans while non-brokers’ loans rose. Fed. Reserve credit outstanding continued to rise but was largely “sterilized” by increased demand for currency. Call money fell to 1%; cuts in bank rates on deposits expected shortly. Foreign currency markets featured sterling settling near year’s high, francs steady; Spanish pesetas weak on inflation fears; Brazilian milreis broke to record low. Stocks fluctuated indecisively after hitting new bear market low in previous week. London stocks declined while Paris rallied after falling for the previous five weeks. Business news included continued slow decline in steel production, while US Steel hit new post-1924 low; however, automotive news was more hopeful, with April production increase of 18%-20% over March substantially better than the normal seasonal rise, and retail sales also up sharply from March; comparisons with 1930 are becoming more favorable, and the outlook for May and June is optimistic. Grain prices were irregular; cotton rose substantially from season lows hit in the previous week.

Market commentary:

Market wrap: Stocks opened strongly, continuing Friday's rally. However, market weakened after initial buying was absorbed, and considerable disturbance broke out in stocks whose dividends were questioned, including J.I. Case and Johns-Manville; Case in particular was sold in large blocks by a prominent bear just returned from his vacation in Hot Springs. Selling spread to leading industrials, and market closed the short session with a nervous tone. Bonds active and continued strong across the list; US govts. set several record highs; foreign firm; corp. trended upward with rails strong again. Commodities firm; grains up strongly, led by corn; cotton up slightly. Copper harder to obtain at 9 cents, though buyers are unwilling to go above that figure.

Market observers believe sharp reaction confirms advice to stay on sidelines; say "market itself will indicate when it is breaking out of its recent irregular range."

Dividend rumors have been circulated on many companies, including J.I. Case and Johns-Manville; the current rumors are attracting attention because so many in the past have proven to be correct. Recent strength in the bond market considered encouraging. Opinions on size of the short interest continue to differ; while the loan market indicates heavy demand for borrowing stocks, this may be due to reluctance of stockholders to loan to the bears. Market students believe the overall short position has declined somewhat over the past two weeks due to short covering by the public, while large bears have maintained their positions. Total of brokers' loans is now about 75% below the peak in Oct. 1929; many houses are now closer to a "self-financing" basis than they have been in years.

Buying by longer-term investors seems to be favoring shares of companies whose earnings are turning up, including GM, Woolworth, Kroger, Drug, etc. Coca-Cola is drawing some favorable attention from bulls expecting Q1 earnings higher than last year; co. has increased earnings over a long period of years, and should benefit from increases in sales due to high profit margins. Stock holdings are concentrated, making bear operations more difficult.

Bears now argue that a sustained rally is now unlikely since general business improvement probably won’t come until the fall, when a seasonal rise is usual. However, bulls contend the market technicals are favorable for a rally as in May 1930. It’s noticeable, however, that even optimists on stock prices only are anticipating a bear market rally. Experienced observers believe the first sign of lasting improvement will come in the bond market; this has almost always been true historically. If recent rate cuts cause a bond rally, this should translate to easier long-term credit for business and eventually help stocks.

US Steel stock has declined to new post-1927 lows in spite of sharp rise in number of shareholders and fall in “floating supply” (stock in brokers’ hands). However, this is similar to the pattern in 1918-1926, when the stock price moved in the opposite direction to number of shareholders.

NY silver circles interested in discussions at the Int'l Chamber of Commerce; opinion seems to be shifting from idea of restoring high silver price to stabilization. Silver price has been relatively steady recently at about 28 cents/ounce.

Copper price of 9 cents seen causing severe losses for high-cost producers, some of whom may be forced to shut down; even low-cost producers may have difficulty showing a fair profit margin due to curtailment. Some in the trade expect further price shading in the near future.

A number of fixed investment trust [similar to ETFs] companies say they approve of the NYSE’s new rules and will conform to them [see May 9].

With May about half over and automotive production not yet declining significantly, outlook for second-quarter profits is improved. While tapering off of production is anticipated into the summer, "the amount of the 'taper' has already been much less than normal"; production peak has previously fallen about Apr. 10. Increase in Ford's April sales seen as particularly significant since it wasn't stimulated by new models.

ICC seen likely to be skeptical on any rail request for general rate increase; they feel rails should adopt a “policy of more aggressive self-help” before asking for an increase; ICC opinion is that rails are losing millions by “voluntary granting of improvident rate reductions.” Furthermore, the ICC points out they’ve clearly been willing “to allow the railroads to help themselves” by sanctioning various rate cuts to improve competitiveness. [Note: somewhat contradictory.] Rail opinion is divided on advisability of a general increase, with many traffic divisions believed unable to stand an increase.

J. Williams, Weirton Steel pres., argues forcefully against wage cuts; would impair buying power of 1M workers and delay return to normal conditions; 10% wage cut would reduce steel prices less than $1/ton, unlikely to stimulate demand considering prices have already declined 17% in past two years.

Economic news and individual company reports:

Fed. Reserve reports April retail sales substantially improved; seasonally adjusted index of sales at 563 department stores was 9% above March in spite of most Easter buying falling in March this year. Compared to a year ago, sales were down 9%, but only 2% taking the Easter shift into account.

US Steel unfilled orders as of April 30 were 3.898M tons, down 97,601 during Apr.; decline was in line with forecasts. An important factor in reduced production in recent months has been lower rail demand. Youngstown district steel output to remain unchanged at 42% this week.

Fisher's wholesale commodity index decline appeared to speed up, again hitting a postwar low of 72.0 vs. 73.1 prev. week, 74.0 two weeks ago, 74.6 three weeks ago, and 89.0 a year ago.

Low world wheat prices seen forcing drastic cuts in planting; cuts have already been forecast for major producers including Argentina, Australia, and the US; Soviet spring planting is also reportedly lower. Wheat prices have declined almost steadily for the past 10 years, and are now only about a sixth of their high of $3.50 in 1920-21; planting increased from 200M acres to 250M in that time (excluding Russia and China); most producers are now unprofitable.

W.C. Teagle, Standard Oil of NJ pres., says gasoline production unprofitable at present prices. Gasoline falls below 3 cents/gallon in Chicago wholesale market.

American-Russian Chamber of Commerce reports Soviet large-scale industrial production in 1930 fiscal year was up 24.6% from previous year and almost double the prewar volume; 1930 grain production was 87.4M metric tons, up 15.5M from 1929 and up 7.3M from 1913; national income was 33B rubles, up 53% from 1913, adjusted for inflation. Russia ran $330M trade surplus with Britain in past 10 years, but $448M deficit with US in past 7 years.

Yugoslavian and French bankers signed loan of 950M francs for stabilization of the dinar.

German unemployment declined about 240,000 in last two weeks of April; total unemployed at end of April 4.389M

Most important copper mine in Austria closed due to low prices, all miners dismissed.

French govt. restricts fertilizer imports to protect local nitrogen industry.

A number of efforts have begun in Switzerland this year to stabilize mortgage rates in Europe, including issuing of long-term “lettres de gage” bonds by the Swiss Mortgage Banks to provide funds for mortgage lending, and formation of the Int'l Mortgage Bank.

Chile central bank increases rediscount rates to 9%-10%.

Bank of Ecuador suspended temporarily by superintendent pending investigation of accounts.

Chadbourne world sugar plan signed by representatives of major producers after 18 months of negotiations, overcoming “formidable obstacles.” Permanent commission set up to regulate price, marketing, and production according to world demand; countries will segregate current unsold surplus and sell it over 5 years.

Texas Legislature enacts "drastic laws" regulating trucks using state highways; owners of truck lines say the laws will practically drive them out of business; "regarded as signal victory for the railroads." F.J. Lisman says executives of railroads operating about 100,000 miles of routes have expressed support for his plan for a railroad "umpire" to preside over competitive waste.

Frigidaire reports April retail sales 77% above Mar. and 23% above Apr. 1930.

Grand Union sales for 4 weeks ended May 2 were $2.680M, down 5.9% from 1930.

Gillette has called special meeting of stockholders to approve compensation plan for new president G. Lambert. He will receive no pay until net income reaches $5/share, and then receive 20,000 shares of stock, with up to 40,000 more shares to follow depending on performance.

Companies reporting decent earnings: Continental Gas & Electric, Philip Morris, Ltd.


Indiscreet - After 7 long years, Gloria Swanson and Ben Lyon reunite in this humorous farce “which now and then threatens to slump into heavy drama, but is always saved in the nick of time.” Picture is enlivened by very funny slapstick episodes and by two songs capably sung by Swanson; “the star’s singing voice is much more euphonious than her speaking voice.” Film opens with “Jerry” (Swanson) dismissing her caddish lover Jim. Two years later, she falls in love with “congenial playboy” Tony, author of the book “Obey That Impulse!” Complications ensue when Jerry’s younger sister returns from Europe, having fallen in love with and intending to marry the aforementioned Jim. Ending is happy and “fittingly comic.”


First Chorus Girl - Did you tell anybody of your secret marriage? Second Ditto - No, I’m waiting for my husband to sober up - I want him to be the first to know.

1 comment:

  1. Sounds a bit like the world financial system:

    humorous farce “which now and then threatens to slump into heavy drama, but is always saved in the nick of time.”