Thursday, September 24, 1931: Dow 115.99 +6.59 (6.0%)

[Note: Sorry for the gap in posting the past month - have been busy on some other projects. Will try and get back on a more regular schedule this month.]

British crisis update:

Markets rallied powerfully worldwide, making their best showing in many months. The London Stock Exchange reopened after a two-day shutdown while the NYSE and the Curb Exchange rescinded their ban on short selling. The NY and London Stock Exchanges led the worldwide rally; major issues opened strongly, moved up sharply through the day, and closed near their highs. Stock markets in Paris, Milan and Amsterdam also gained, although the Berlin exchange will stay closed this week and the Tokyo Exchange reopened but was quickly closed again after a break in prices. Kreuger & Toll bucked the general trend, closing down sharply in Paris trading. Bonds and commodities were broadly higher.

Sterling settled into a narrow range between $4.08 and $4.145, closing at $4.10 [note: vs. $4.85 the previous week]. However, “business under the new regime is purely tentative” and the volume of currency transactions “has been kept deliberately within the narrowest limits, with banks, both British and foreign, fully respecting the Treasury's instructions, confidential and otherwise.” Canadian dollars rallied to a 6 1/2% discount vs. US dollars from a low of 9%; Italian lire and Swedish kroner also rallied; francs continued above the gold export point from NY; silver currencies rose; Argentine pesos fell sharply.

“Confidence is expressed” that sterling will stabilize after settling to its “economic level.” “While a certain amount of inflation seems likely ... reliance is placed on British common sense to keep situation in hand.”

Some British circles hope abandonment of the gold standard will finally convince the US and France that the current combination of heavy war debt payments and high tariff walls is unsustainable. As one leading banker said, “we have tried to remain honest in a dishonest world, but can't any longer.”

British public “absolutely calm”; no danger seen of runs on banks; risk of capital flight seen as small “since immediate rosy business prospects have introduced a general optimism.” British press is presenting the abandonment of the gold standard as “an almost unmixed blessing”; security and commodity prices have been rising, while higher wholesale prices for necessities haven't yet affected retail prices; in cases where inventories are large, it may take some time for retail prices to rise, particularly if the govt. acts against price increases. British corporations seen benefitting from higher internal prices and prospect of increased foreign sales and profits; will likely attempt to keep wages at current levels. “Wholesale foreign unloading” of British bonds seen unlikely since sellers would have to recognize heavy losses when converting the proceeds into their currencies; “besides, the Treasury has instructed bankers confidentially not to facilitate such exchange operations.” Financial circles uncertain how much international financial business England will lose, but believe it will “rely greatly on its unrivalled machinery and experience” to counter the shock to sterling; “competition from Paris is not expected to be serious and NY remains handicapped by distance.”

Bank of England Gov. Montagu Norman seen likely to leave office when his term expires, to be succeeded by Sir Josiah Stamp. It's reported that “differences of opinion over abandonment of the gold standard have arisen,” though rumors that Norman would resign shortly were denied. Stanley Baldwin, speaking for the govt., told questioners in the House of Commons the govt. expected no immediate rise in retail prices. Despite govt. insistence that leaving the gold standard isn't that serious since the budget has been balanced, this balance may now be endangered by uncertain prices and the greater weight of debt owed in dollars and francs. On the other hand, improved business may increase tax revenue and decrease spending for the unemployed. With “the attention of the whole world” concentrated on British developments, the govt. is expected to make every effort to maintain the budget balance. British Conservative followers of Neville Chamberlain reportedly plan to dissolve Parliament Oct. 7 or 8; determined that general election be fought under leadership of PM MacDonald and Stanley Baldwin.

Some foreign govts. took actions to adjust to the British suspension of the gold standard. Italy restricted dealings in foreign currencies in Italian markets, and the govt. interverned to support the lira. Austrian Nat'l Bank “is filling demand for foreign currency only when legitimate requirements are proved.” Sweden raised its discount rate to 5% from 4% on Monday, and a further rise is believed inevitable. The Swedish pulp industry is facing heavy losses due to the depreciation in sterling. Denmark prohibited export of gold. Bank of Finland said it would begin quoting currency prices in US dollars. Bank of Czechoslovakia raised its discount rate to 6% from 5%. Argentine banks “took measures to prevent gambling on exchange operations.”

British importers in Brazil are reportedly underquoting US interests due to the decline in sterling.

Leading retailers and banks in Buffalo, NY ended their past custom of accepting Canadian dollars.

The recent drastic decline in foreign dollar bonds has produced some eye-opening yields; at the lows this week few foreign govt. bonds were selling to yield less than 6%, and many issues are selling at prices below their calculated yield to maturity. A striking example of the recent buyer's market in these foreign bonds is seen in Norway dollar bonds; these now yield about 6.9% on average vs. 5.24% in June, in spite of Norway's "unblemished credit record, and ability to survive currency troubles in the past."

Wage cuts update:

The US Steel wage cut drew mixed reviews. AFL pres. W. Green issued a strong condemnation, calling it “morally wrong” and claiming “no greater blow ... has yet been struck against the forces which have been and are now serving to bring about a return of prosperity.” Reaction from the steel industry was generally positive, with many producers announcing their intention to follow suit. The White House released a statement saying Pres. Hoover's commitment to maintaining living standards was consistent and unaltered. However, the statement was again carefully parsed for signs of a change in the White House stand against wage cuts; it was considered highly significant that the statement referred only to living standards and not wages, since today's lower cost of living allows the same living standard at lower wages. It was also considered significant that the White House has shown a general disinclination to discuss wages for the past few months. Administration officials generally refused further comment, though Labor Sec. Doak said the Labor Dept. regretted the cuts.

Opinion seemed divided on whether the US Steel wage cut would be followed by price cuts on steel products. A front-page commentary said "the decks have been cleared for a recovery in the steel industry" since the impending prospect of wage cuts had "for a long time been a factor delaying placing" of orders. However, the recovery apparently will be due to "greater effort to attract tonnage and increase operations" rather than price cuts; "it is the view among leaders steel prices should be maintained ... it has been the experience in the industry that orders are not obtained through the slashing of prices." On the other hand, an editorial said it was regrettable US Steel didn't provide more explanation of the cuts, but that "the wage reduction unquestionably means that the Steel Corporation is putting itself in a position to make whatever further price readjustment consumers may effectively demand as a condition of expanding their purchases ... at some level or another prices must prove a stimulant to consumption in this as in every other field." On the other other hand, an item in Broad Street Gossip said some believe the wage cuts will be used to lower prices, but steel makers don't plan on this, pointing out "consumers cannot be attracted ... regardless of quotations [prices], until they have prospects of new business."

The steel industry's decision to finally make wage cuts was reportedly influenced by the disappointing failure of steel operations to show seasonal post-Labor Day gains; substantial improvement had been hoped for due to the very low rate of operations this year.

Wall Street had anticipated US Steel's wage cut announcement for some time; in fact, many believed "the cut was delayed longer than justified by conditions." The Street's generally favorable reaction to the cuts reflected "the sentiment in business and industrial circles that such a program was essential to trade recovery. ... With living costs substantially lower, and the return on capital notably reduced, it was inevitable that the liquidation of labor would have to be undertaken." The Street is now turning its attention to possible wage cuts by the railroads and other industries. While it's admitted rail wage cuts might be difficult because of "various brotherhoods" [unions], it's believed that with conditions still showing little improvement rail executives will be able to convince govt. officials and labor leaders of the need to lower costs. The positive reaction to steel wage cuts is reducing nervousness over expected wage cuts in other industries. D. Willard, B.& O. RR pres., says rails may eventually be forced to make wage cuts, but believes 15% rate increase would be a better remedy; notes current procedure for rail wage cuts could involve management-labor conferences, mediation, and arbitration, which could stretch over several months.

GM's 10%-20% salary cuts were their first cut in employee compensation during the depression; GM had already made large cost savings through improved efficiency, producing a relatively strong earnings perfomance in spite of lower sales. The cuts affect only salaried employees (about a quarter of GM's workforce); hourly wage rates remain unchanged. Corn Products Refining Co. seem likely to cut employee compensation for the first time by year-end; dividend cut also likely.

Assorted historical stuff:

Report on the German situation by the committee of experts meeting in Basel suffered from a certain “sacrifice of clarity” due to serious differences regarding the gravity of Germany's condition. France considers “the patient much less seriously stricken than the patient claims to be”; Germany “would convince the world that the patient cannot live long”; while Britain is somewhere in between. Nevertheless, agreement was reached that Germany needs new long-term loans to replace some of the capital that was suddenly withdrawn earlier this year, and that this would be difficult under current conditions due to a lack of confidence, in spite of the current German trade surplus and the German govt.'s commendable determination to improve its budgetary situation through spending cuts and tax increases. To restore confidence, it was recommended that France and Germany bridge their political differences and that trade barriers be lowered; the British govt. also managed to insert a discreet reference to the need not to burden Germany too heavily by required payments, in spite of the early threat by France to leave the conference if reparations or war debts were brought up. “The governments referred their problem to the experts. The experts have refered it back to the governments.”

Japanese forces finished taking control of the South Manchuria Railroad Zone and of Chinese railheads in Manchuria; Japanese casualties in the 5-day operation estimated at 200. League of Nations calls for peace between China and Japan; asks parley to arrange withdrawal of Japanese troops from occupied area. Tokyo's decision seen depending greatly on US attitude. Japan instructs representative an Nanking to accept proposal of Nanking govt. Finance Min. Soong for appointment of joint commission to investigate troubles between China and Japan.

Editorial calling for disposing of the Farm Board's large wheat surplus by selling it to China, whose rice crop has been devastated by flood. While China has already taken 15M bushels of wheat on long-term credit, the Chinese Economic Society estimates it could easily use another 135M; "China must have wheat or rice or else starve." The "white elephant" of wheat stabilization is evidently dead; this is a golden opportunity to bury the corpse. While "China's credit is not of the highest," wheat sold there will at least not oversupply the usual markets, as recent sales by the Farm Board did.

T. Macauley, Packard Motor pres., issues statement calling for giving the unemployed an “hour of work rather than dollar of dole”; says former enriches both the giver and taker, while latter may impoverish both; hits “the slacker dollar” that is “afraid to venture forth.” Notes particularly that dollars spent on motor cars would have wide impact across the US. Statement has drawn widespread support from manufacturers, bankers, professionals, and “members of the laboring classes.”

NY Gov. Roosevelt signed three bills inaugurating his $20M unemployment relief program for NY State. Relief will be administered by a three-member independent panel with broad powers. The program will be paid for through a 50% increase in the state income tax. NY City spending on unemployment relief estimated at $40M in fiscal year ending Oct. 31.

About 34 states have officially said they will participate in the 1933 World's Fair in Chicago. Several large fair buildings have been completed or are under way, but about $25M of construction remains to be done.

The population of ancient Rome reached a maximum of 312,000 in 585 B.C. The latest census, taken in May, shows a population of 1,003,881, up 250,000 since Mussolini assumed dictatorship of Italy and 7 times the population in Caesar's time. [Note: can't vouch for the accuracy of these figures.]

[Note: Sounds like my last checkup.] "An English surgeon has come out with the statement that Shakespeare's death 'resulted from complications of fever, typhus, typhoid paralysis, epilepsy, apoplexy, arterio-sclerosis, oversmoking, chronic alcoholism, gluttony, angina pectoris, Bright's disease, pulmonary congestion, and locomotor ataxia.'"

Market commentary:

Market wrap: Stocks staged a broad and vigorous advance. Buying was widespread at the open, with US Steel a leader; the advance picked up momentum as the morning progressed; rails were a strong spot. Stocks gained further at mid-day after news of gains in European markets. Considerable profit-taking in late afternoon caused some irregularity though the selling was generally well absorbed; however, US Steel suffered a good-sized setback from the day's high and Anaconda broke to a new bear market low. Bonds also staged a strong and wide rally. British 5 1/2s due 1937 opened at 99, up 7 from the previous session's record low, and later reached par; European issues joined the rally, with many showing sharp recoveries; Japanese issues also recovered lost ground. Rail issues experienced the widest and sharpest rally of the year, particularly in recently weak lower-grade issues. Public utility bonds were in strong demand. Trading in US govts. was inactive but prices remained steady to firm. Grains generally higher on dull trading. Cotton rose sharply in spite of good weather reports. Copper remained at record low of 7 cents/pound, though buying is reportedly better. Silver rose 7/8 cent to 29 1/2. Cocoa rose sharply the day after hitting record lows.

For the first time in the past 5 sessions, and only the second time in the past 10, the Dow failed to close at a new bear market low.

Market sentiment was improved, though conservative observers advised watching the market for another session "on the theory if new liquidation is to break out it will make its appearance shortly."

Positive factors affecting sentiment included yesterday evening's announcement of 10% wage cuts in the steel industry, optimism over an early decision on the rail rate increase, firm performance of European markets, and the strong market performance after restrictions on short selling were lifted.

The NYSE removed its restrictions on short selling; this was "looked upon as indicative of confidence on the part of the banking leaders that conditions were nearer normal again." Many observers were more optimistic on the immediate market outlook, though few were willing to buy "for more than a technical turn." Short covering was heavy at times after the removal of the short-selling ban; some bears had reportedly held their positions through the ban since they were unwilling to leave the market, but were now covering "with the idea of putting out short lines again when the rally appears to be reaching its culmination."

R. Whitney, NYSE pres., issued statement saying the NYSE's ban on short-selling was “not a reversal of its long established policy” but “purely ... an emergency act” taken after British suspension of the gold standard “as a temporary expedient and has therefore been rescinded.” However, says the NYSE Governors “will continue to scrutinize short sales to ascertain the intention behind them.”

Large drop in rail car loadings for the week of Sept. 12 (down 91,796 from prev. week to 667,750, and down 30.8% from 1930), while partly accounted for by Labor Day holiday, was "greater than seasonal ... and is a continued reflection of the lessened business activity in many lines."

There was reportedly a “rather widely held theory that a period of inflation for commodities is getting under way.”

Rise in silver prices seen benefiting mining cos. whose ores have silver content, particularly copper miners.

American Woolen and International Shoe are reportedly experiencing heavy demand and operating at high capacity.

M. Sloan, NY Edison pres., predicted a repeat in the next two decades of the electric industry's remarkable growth in the past 18 years; while growth from new customers is slowing, a large potential for growth remains in new uses for electricity and increased usage by customers.

An abundant supply of low-cost meat is predicted for next winter and spring. With wheat and corn at extremely low prices, many farmers are interested in buying thin livestock believing they can do better by using their grain as animal feed; drought conditions in the Northwest have also stimulated sales of "unfinished" livestock.

Economic news and individual company reports:

Steel production for week ended Monday was about 29% vs. slightly over 30% the previous week, 28 1/2% two weeks ago, 60% in 1930, and 83% in 1929.

Weekly steel reviews report steel demand has slipped back to the August level; demand in public construction is still promising, but automotive outlook, instead of showing expected improvement, has become "increasingly obscure." Rail inquiries are very weak, and may be delayed until the wage question is settled in that industry. However, the steel trade believes "abandonment of the gold standard in England and a reduction in steel wage rates here have helped to clear the atmosphere," and "prices are holding surprisingly well, though not subject to severe tests." Machine tool market "very uneven," with increases in some sections offset by "continued dullness elsewhere."

The President's organization for unemployment relief reports that 10 of 42 locations showed improvement in some lines of business over the past week; generally, little change is reported from week to week.

Report from Wilkes-Barre: Dime Bank Title & Trust closed, deposits $2.7M; Heights Deposit Bank, taken over by state, deposits $1.7M; Wilkes-Barre Clearing House Assoc. announces local depositors will be required to give 60 days notice before withdrawals; several million dollars in currency received from Philadephia Fed. Reserve Bank for local banks; officials of the clearing house say situation here “satisfactory.”

Fed. Reserve Sept. Bulletin stresses strong position of Fed. Reserve system, notes gold held by Reserve banks is now $2B in excess of the requirement of 40% against notes and 35% against deposits; this is about $400M larger than two years ago. US monetary gold stock reached $5B in early Sept., the highest in history. Reserve bank holdings of govt. securities at end of Aug. were $728M, close to a record.

Report by the experts committee in Basel puts total German foreign debt at 25.5B marks in Dec., vs. 23B in July.

Agriculture Dept. reports official estimates for wheat production in 31 countries for 1931 totals 2.720B bushels, down from 2.861B in 1930. However, prices worldwide have continued to be depressed by large carryovers from last year, by large crops in countries with early harvests, and by heavy Russian shipments.

Texas Gov. Sterling signed cotton acreage reduction bill, asked Governors of nine other cotton states to enact similar laws; opponents expected to challenge Constitutionality of the law.

The ICC heard arguments against the proposed 15% rail freight rate increase from Sen. Brookhart (R., Ia.), representing farmers, and from shipping, coal and lumber interests.

Cicero R. Murray, “generalissimo of military forces enforcing the shutdown of Oklahoma oil fields,” denied reports Gov. Murray had agreed to reopen the fields Wednesday, but said an effort was being made to reach a solution to the shutdown. Gov. Murray had previously threatened to keep wells closed until oil reached $1 a barrel. Texas Railroad Commission's order cutting allowable production per East Texas oil well to 185 barrels/day from 225 has had a beneficial effect, reducing total East Texas production to 366,000 barrels/day from 425,000. However, spot gasoline in the Chicago market was lower as reports of possible reopening of Oklahoma production "is causing some disquietude."

US electric output for week ended Sept. 19 was 1,663 GWHr, down 3.4% from 1930.

US shoe output in Aug. was about 31.3M pairs, up over 9% from 1930; first 8 months 219.1M, up 3.8%.

Announcement by Transamerica Corp. that it intends to divest its bank affiliates has created considerable local speculation on the fate of Bank of America, N.A.; there have been reports from time to time that this bank might be merged with a local (NY) one.

An old Court of Claims decision is seen as a bar to plan of M. Steuer for $30M lawsuit by Bank of US depositors against NY State.

Companies reporting decent earnings: Southern Calif. Edison, Perfect Circle (automotive piston rings).

Joke:

The railroad examiner was giving a candidate for engine driver his final examination. "You're driving an engine down a steep hill and your speed becomes excessive. What do you do?" "Apply the brakes." "They aren't effective." "Put brake handle into emergency position." "Doesn't slow you down enough." "Reverse the engine and turn on steam." "The wheels fail to grip the metals." "Pour sand on metals." "Sand is damp and won't pass through the pipes. Now what do you do?" "Why, let her rip. We must be back on the straightaway by now."