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Title: The cycles of speculation
Author: Thomas Gibson
Release date: March 22, 2025 [eBook #75687]
Language: English
Original publication: New York: The Moody Corporation, 1907
Credits: deaurider and the Online Distributed Proofreading Team at https://www.pgdp.net (This file was produced from images generously made available by The Internet Archive)
*** START OF THE PROJECT GUTENBERG EBOOK THE CYCLES OF SPECULATION ***
Transcriber’s Notes:
Underscores “_” before and after a word or phrase indicate _italics_
in the original text.
Small capitals have been converted to SOLID capitals.
Illustrations have been moved so they do not break up paragraphs.
Typographical and punctuation errors have been silently corrected.
The Cycles of
Speculation
BY
Thomas Gibson
[Illustration]
Published by
The Moody Corporation
35 Nassau Street, New York
1907
Copyright 1907, by
THE MOODY CORPORATION
All rights reserved
THE MOODY-BARTON PRESS, ELIZABETH, N. J.
CONTENTS
Part I
Chapter Page
I. Introduction 5
II. The Cycles of Speculation 21
III. The Gold Supply 37
IV. Money 59
V. Political Influences, Crops, Etc. 77
Part II
VI. Puts and Calls 89
VII. The Question of Dividends 101
Basing Railroad Values 104
Effects of Business Depression 105
Undigested Securities 108
How to Compute the Value of Rights 109
Barometer of Averages 110
Best Method of Trading 111
Indication of Crises 112
The Ordinary Swing of Prices 113
The Factor of Safety 114
Borrowing and Lending Stock 117
Scalping 120
Crop Damage 123
Selection of Securities 124
The Bank Statement 125
The Cycles of Stock Speculation 133
The Cycles of Grain Speculation 145
The Cycles of Cotton Speculation 155
Conclusion 163
Bibliography 176
The successful speculator requires four things:
1--A knowledge of values.
2--A knowledge of general conditions.
3--A knowledge of the machinery of speculation--and
4--Something besides.
I
Introduction
The first step in the education of the speculator should be to clear
away the illusions which have grown rank through ignorance, and
flourished through prejudice. We have heard, and continue to hear, a
great deal of ethical talk on this subject, most of which emanates from
people who are not authorities, and who have little real conception
of the subject. It would be pretty safe to assume that a majority of
these same instructors speculate themselves. They place an arbitrary
construction on the word however, and draw a dividing line between
stock or cereal operations, and other forms of speculation, although
the basic principle is the same in all cases, i.e.: to buy what is
cheap and re-sell at a profit. One of the most ridiculous forms which
this pedantry assumes is the warning and preaching against speculation
by very rich men who made their own money speculating and could not
possibly have acquired it in any other way. Such expressions of opinion
are born largely of an exaggerated ego.
The trouble with these critics and advisers is that they seldom
approach the subject in the right way. With a full knowledge of
the fact that speculation is an inherent part of human nature, and
that a majority of human beings are bound to indulge in it in spite
of everything, these sophists simply rail against the practice
indiscriminately instead of attempting to point out what is foolish
and fallacious. If we attack the practice in a general way little
will be accomplished. If we say, “do not speculate,” our audience
will perchance give us a respectful hearing,--and go on speculating.
If, however, we point out what is dangerous and unreasonable, confine
ourselves to attacking the evils and explaining the delusions,
some good may be done in an educational way. We may, if we show by
simple logic that the education and qualifications necessary to
success are too difficult to acquire, actually deter many people
from speculating in certain lines at all, a thing which could not
possibly be accomplished by mere blanket warnings against the practice.
One of the most serious blunders in the world is the common one of
under-estimating other people’s intelligence. People are ready and
willing to learn, and that they do learn is shown by the decreasing
crop of lambs. It is not nearly so easy for the dishonest promoters and
manipulators to market poor securities at high prices today as it was a
few years ago. And in this regard it may be pointed out that the press
has actually, although in many instances unconsciously, accomplished
a great deal on exactly the lines suggested above. Magazines and
newspapers have, in recent years, taken on an educational character.
Periodicals once devoted to fiction or history now deal largely with
business and social economics, and with the exposure of bad methods in
high places, the ruthless uncovering of false or misleading statistics,
and the simplification of questions hitherto involved; the public has
been gaining rapidly in education and understanding. The fact that much
space in leading periodicals is devoted to these subjects, is in itself
_prima facie_ evidence that the people can and will learn, for with
all due credit to the editors and publishers, it is certain that the
contents of magazines and newspapers are selected in accordance with
what the public demands and likes.
No one will attempt to deny that a majority of public speculators
lose. In a former volume, the present writer undertook to establish
by analysis of a large number of public accounts, the fact that 80%
of the participators lost money. A number of critics commented on this
statement as a body blow to speculation, asserting that the writer
had shown that there was “80% against the player.” These writers
proceeded to compare this percentage with that existing in games of
pure chance, such as roulette, faro, etc., and wound up by pointing out
the tremendous drawback to the speculator through percentage against
the player. It seems incredible that any sane man should fall into such
laughable confusion of ideas. The percentage of players who lose in any
game has nothing to do with the percentage against the player. If these
critics established anything at all, it was that speculation was not
gambling; for it requires only a moment’s reflection to see that in any
mechanical gambling game where there is _any_ percentage, no matter how
small, in favor of the game, the percentage of players who eventually
lose must be 100. This being the case, the gentlemen mentioned were at
considerable pains to prove that, as 100 per cent. of the players did
not lose, speculation was not a gambling game in the strict sense of
the word. That is to say, it could not be correctly compared with any
mechanical device where the element of skill was absent.
If we consider the matter in a gambling light, the percentage against
the speculator can be determined by the proportions of commissions,
interest, taxes, etc., to capital invested. Taking commission alone as
our basis, we will find that he who purchases a stock at $100 a share
and pays one-quarter of one per cent. commission, has a percentage
against him of one-quarter of one per cent. If the speculator trades
on limited margins the drawback increases accordingly. If we assume
that 100 shares of stock are purchased in a bucket-shop on a one point
margin, without intention or ability to “re-margin” the transaction,
the mechanical percentage is large (25%); if 10 points margin is
deposited, the mechanical percentage is reduced to 2½%, etc. In the
first instance, $25 or 25% of the $100 involved was lost when the
transaction was recorded, without any change in market price. In the
second instance, $25 was again lost or 2½% of the $1,000 involved.
There is no doubt that fluctuations in prices of securities, cereals
and staples are frequently used as a basis for mere gambling
transactions. But the most remarkable feature of the whole problem is
the fact that the percentage of loss in transactions is _greater_ than
the mechanical percentage. In the work already mentioned, the writer
undertook to establish this. In 500 accounts examined, there was a loss
of $1,245,000, and profits of $288,000, leaving a deficit of $957,000.
The commission charges and interest amounted to only $275,000. There
thus appeared a loss of $682,000 which could not be attributed to a
gambling percentage. It may be added that the period considered in the
computations was from July, 1901, to March, 1903, and that the price of
the stock considered (U. S. Steel Common) was the same at the beginning
and the end of the period.
This tends to again refute the theory of mere gambling, with a ruinous
percentage against the player, for no mechanical device could by any
possibility operate against the player to a greater extent than the
fixed percentage in favor of the machine. A gambling machine will stick
to its knitting. If, for example, we take the simplest form of gambling
device--two dice thrown from a cup,--we know that certain numbers
formed by adding the total spots which appear uppermost will show more
frequently than others. Thus the number two can be effected in but one
way, the number three in two ways, the number four in three ways, and
so on up to the number seven, which can be formed by six different
combinations, thus:
4 and 3
5 and 2
6 and 1
3 and 4
2 and 5
1 and 6
from which point the chances decrease until the number 12 can be formed
in only one way--two sixes. This proposition applies to all forms of
mechanical gambling, and is so simple in principle, and so distinct in
operation that if we make a fair number of casts, say 1,000, and do not
make more sevens than any other one number, we may be positive that the
dice are defective, or loaded.
Therefore, if percentages hold true, we must attribute the surplus loss
in speculation to mental operations. In the total results mentioned,
these mental operations were so erroneous as to cause a loss greater
than the percentage itself; but, on the other hand, a certain number of
accounts showed profits; that is to say, the percentage was overcome,
which is again an obvious impossibility in true gambling.
The conclusion is offered, therefore, that not only can poor methods
and imperfect understanding result in losses far in excess of a
demonstrated drawback, but that this drawback may be overcome by
other and more correct methods. It is difficult to understand why
the opponents of speculation are continually harping on these points
of gambling and percentage as bearing particularly on operations in
stocks or commodities. If a man buys a certain security because it is
cheap, or because he considers it cheap, and pays a certain commission
to a broker for effecting the transaction, he is no more playing a
percentage game than if he purchases a piece of real estate because it
is cheap and pays the real estate broker a commission for his services.
Marginal trading is another abomination of the anti-speculative
element, but here again the critics do not discriminate between use and
abuse. Trading on insufficient margin is one of the greatest evils in
the speculative world and when, as is frequently the case, this evil
is combined with lack of knowledge as to values and conditions, the
result is certain loss. But what is objected to here is the hazy view
and comprehensive condemnation of _all_ marginal speculation. The line
of demarcation is usually carelessly drawn. If an individual buys 100
shares of stock for cash, has it registered in his own name and later
borrows funds from his banker with these shares as collateral, he
escapes impeachment as a marginal speculator; but if he buys on margin,
and borrows from his broker the unpaid balance, he is a gambler. And
yet it would be hard to point out the difference in the two methods.
If we wish to go a little further afield, we may reduce a very large
percentage of the commercial structure to marginal trading. We may, in
short, place in this category every merchant who buys goods on credit
and every man who buys real estate on payments, if their object when
buying is to sell at a profit.
It is highly probable that these contentions will be vigorously
attacked, on the theory that more evil than good results from
speculative ventures, and that therefore the whole structure should
be razed on a “greatest good to the greatest number” basis; but aside
from the intensely unphilosophical character of this view, it is not
at all probable that any such thing can be effected unless human
nature undergoes a radical change. Tear down every stock exchange in
the United States tomorrow, and people will be speculating, a majority
of them foolishly, in another week. The cure lies not in paternalism,
but in evolution and understanding. As has been said, more has been
accomplished in recent years by the educational crusade of the press
than by all the rantings and warnings of a century. We have our
periods of reckless over-indulgence, it is true, but the evil is
dwindling. The South Sea bubble would deceive a much smaller number of
people today than it did in the days of John Law.
It is the object of the present work to point out, so far as the
abilities of the writer will permit, what essentials are required in
any form of speculation, whether on margins, or masquerading in the
guise of investment. As to this last distinction, it may be stated that
the word “speculation” is herein taken to mean the purchase of any
security or commodity because it is considered cheap, with the ultimate
intention of disposing of the property so purchased at a profit. In the
writer’s opinion this definition is correct. Speculation contemplates
a rise in price, and an accretion in principal. Investment refers to
interest returns on money.
One of the most flagrant errors in speculation is an entirely mistaken
idea as to the _possibilities_ in this field. Nine men out of ten have
a deep-rooted conviction that if any individual could be right in his
main deductions for, say one or two years, he should make millions on
a small capital. This is a great mistake, and leads to numerous minor
errors which are productive of much loss in actual operations. The
business of speculation never did, and never will result in abnormal
profits. Large returns are sometimes made, it is true, but this fact
is also true of every other line of business. Certain individuals
grow very rich in Wall Street; this again is true of every commercial
branch. We hear now and then of a million dollar coup by a Morgan or a
Rockefeller, and do not stop to consider the great capital behind it.
If an individual makes five thousand dollars in a year’s speculative
ventures on a capital of twenty thousand, he is not considered a
Napoleon of finance, but he has accomplished much more, in proportion
to his capital, than Rockefeller would have accomplished if he had made
five millions on similar operations.
In a recent conversation with a number of gentlemen who clung
tenaciously to this idea of sudden riches, the writer undertook to
establish his contention. Tapes were secured recording the fluctuations
of sugar stock during a twenty point decline. The skeptics were given a
hypothetical capital of $10,000 each, subjected to the ordinary rules
of trading as to margins, etc., informed that sugar would decline
twenty points before it again touched the first quotation established,
and invited to “get rich quick.” The result was ridiculous in the
extreme. Two of the experimenters lost their imaginary capital trying
to double up and show large returns. The third took an unfair stand,
by selling the maximum amount at the inception of the experiment and
closing it after the 20 point decline had appeared. His operations,
therefore, proved nothing. Here was a case where two traders, possessed
of an absolute fore-knowledge of what was to occur, lost everything
through the fault of over-speculation and the belief that abnormal
returns could be made if the ultimate fate of a market could be
correctly forecasted. Even if we assume that _every_ intermediate
_movement_ were known in advance, that after a ten point decline there
would be a five point advance, and that transactions were conducted to
the full possibilities of both original margin and accrued profits, the
result would not be the millions which dazzle the eyes and imagination
of the unsophisticated. But to assume any such trading is foolish. The
factor of safety would be wholly absent. No wise man will ever attempt
pyramiding, and no foolish man who does, will succeed.
In order to clear the ground for discussion or study, the first thing
to eliminate is this wholly unsupported and mistaken idea of sudden
riches. No matter how correct the forecast of the future may be,
safety disappears in inverse ratio to the increased possibilities of
abnormal returns; and with the factor of safety continually ignored,
the final results are bound to be disastrous.
It will also be necessary to dispel another illusion. If the speculator
imagines that he can operate successfully without preliminary hard
work to fit him for the business in hand he is grossly mistaken. It is
necessary to qualify in this field as well as in any other. Knowledge
of monetary conditions, values, interest rates, and in fact, of all
influences bearing directly or indirectly on the future of prices must
be acquired and thoroughly understood. Ignorance on any one point may
mean defeat. On the other hand, a study of such conditions means a
liberal education, valuable in every line of business life. It may be
further stated that the man who attempts to evade necessary labor and
research by placing his dependence on tips or charts, or the opinions
of others, cannot hope to succeed. The gambling idea must be put out of
the question entirely, and means sought whereby intelligent opinions
may be formed by both inductive and deductive reasoning.
In preparing this work the temptation to enter more extensively into
fundamental principles has been great. It would be impossible to do
more than suggest a line of procedure in a single volume, and only
the most elemental requisites are set forth. And not only do the
prescribed limits of this volume forbid any exhaustive discussion, but
such discussion is unnecessary. On every subject of importance we have
books written by men of soberness and judgment, each a specialist in
his field. A bibliography has been appended to this volume suggesting
such works as are considered helpful. In this bibliography an attempt
has been made to choose such books as are clear and simple, rather than
those which are profound.
If the task as herein outlined, appears formidable, it may be said
that it is absolutely necessary, and not so difficult as may appear.
Before the student has entered far into the subject, he will find
the matter interesting and will very quickly realize that the well
grounded contentions and discussions of men who examine and diagnose
economical questions correctly, are of more value than the combined
tips, guesses and poorly based opinions of all the professional
speculators and gamblers from one end of Wall Street to the other. This
form of basic knowledge is just as important to the active trader as
it is to the investor. If he can correctly judge of the general trend
of future prices, he may operate safely _with_ that trend instead of
floundering around helplessly in a slough of indecision, or possibly
working directly against the current. If, for example, he has good
solid reasons for expecting ultimately higher prices, he will not be
disturbed by temporary reactions and, instead of being frightened out
of his position through ignorance, he will take advantage of such
reactions to make his purchases or cheapen his holdings. Knowledge, in
this particular line as in all others, is the foundation of successful
ventures.
II
The Cycles of Speculation
The great upward and downward swings of speculative prices, herein
referred to as cycles, have invariably preceded or accompanied
periods of business inflation or depression. This fact, apparently so
elemental, is often disregarded by that very large class of speculators
which is continually looking for artificial and unpregnant explanations
of price changes. There can be no doubt as to the existence of
manipulation, and, in rare cases, movements of considerable importance
may be traced to this source alone; but manipulation consists, in
its fullest sense, of the tactics resorted to for the purpose of
liquidating shares in anticipation of a decline which the long-distance
thinkers believe to be inevitable; or, per contra, for the accumulation
of shares prior to a great recovery or readjustment. It is seldom
employed as a positive means of enhancing or depressing values. In
fact, to do either by mere manipulation would be an impossibility.
Every observer of great speculative movements knows that at the highest
point of a movement, and during the first half of a decline everything
appears roseate, while at the lowest prices, and during the first half
of an advance, the reverse is true.
There are several contributory causes which operate to produce these
false appearances. The primary cause is the curtailed perspective
and imperfect logic of the public investor or speculator. The most
difficult thing to drill into the mind of the unsophisticated is
the fact that speculation cannot possibly be successfully based on
appearances which are open and obvious. Such a process is a flat
contradiction of the word itself. It is unseen future developments
or, in some cases, hidden and submerged present truths which must be
consulted. Yet we find a great majority of the public element who
seek riches in the speculative arena, constantly harping on the large
business of certain corporations, and the excellent state of general
trade as a reason for purchasing shares. These factors have, in all
probability, been discounted in current prices. Generally speaking, the
present is of no more use than the past in forming opinions of future
price changes. It is a certainty that sales of stocks could not be made
in great volume to good advantage unless everything _did_ look rosy,
for who would purchase shares at high prices if the future appeared
threatening or unpropitious, and who would sell holdings in the face of
encouraging and inspiriting prospects.
This brings us to the second phase of the question--the _creation_
of false appearances, which is, in truth, the highest form of
manipulation. When so-called inside selling is going on, great business
is reported by railroad and producing corporations; dividends are
increased, and public expressions of confidence emanate from men of
high standing in the financial world. The effect of all this expressed
optimism is, market-wise, of a negative character. When it is most
prevalent and most decisive, prices halt or even decline. This period
and action represents selling at the only time when advantageous
selling is possible. In the main the truth only is told about existent
conditions, possibly about the near future. Nothing else is necessary;
but nevertheless the sellers are anticipating, not the events of the
next week or the next month, but of a more remote period where they see
probabilities in regard to which a discreet silence is maintained.
The constantly recurring cycles of prices, the alternate inflation and
depression, must therefore be traced to something far more important
than the grossly exaggerated potentiality of mere manipulation.
Principal Crises of the Last Century.
That crises in the financial world have occurred at more or less
regular periods is a matter of history. Since the beginning of the
nineteenth century ten of these readjustments have occurred. In 1812,
after ten years of prosperous conditions preceding the war of that
year, business fell off materially. The real panic, however, occurred
in 1814. Washington was taken by the British on August 24th, 1814, and
suspension of specie payments was general in the following two weeks.
In 1824, the protective tariff enactments were followed by general
inflation in all lines of business. Two years later, in 1826, a general
depression occurred with many failures. The depression at this period
was even greater in England than in the United States, and many writers
attribute the entire trouble to European business reverses, but it is
probable that we had been living beyond our means and that this fact,
to say the least, aggravated the disturbance.
In 1837, after six years of good times, another crisis occurred. This
depression was attributed to various causes. The great New York fire of
1835, the loss of charter by the United States Bank in 1836, and the
calling in of $37,500,000 of government deposits by President Jackson,
are all given due consideration. The actual panic, however, did not
appear until May 10, 1837. All the banks suspended specie payments,
and securities,--in fact all properties of whatever kind--fell
rapidly in value. The most plausible explanation of this crisis is
over-speculation in land. The other evils mentioned might easily have
been rectified by the recuperative powers of a growing country, had the
more serious element of wild inflation been absent.
In 1848, after a long period of prosperity, broken only by the war with
Mexico, business inflation and over-speculation again brought about the
logical and inevitable result. Europe also had been over-speculating
again and a crisis in England soon extended to the United States.
Liquidation was drastic and the depression lasted until the discovery
of gold in California began to bear fruit.
In 1857, one of the most serious, as well as the most short-lived, of
our crises occurred. Again speculation was extreme; December, 1856,
marked the high point in securities, and prices continued to sag for
some months; but it was not until August, 1857, that a panic occurred.
In 1864, came a crash in speculative prices following tremendous
inflation. Between April, 1864, and April, 1865, leading stocks
declined from $50 to $100 per share. As the inflation of this period
was caused largely by the high prices of commodities and greatly
increased railroad earnings occasioned by the events of the Civil War,
most writers on the subject do not consider it in their theoretical
discussions of crises.
In 1872, another boom was on, particularly in Iron and Steel. The
Chicago and Boston fires had not been as effective in breaking stock
prices as might have been expected. Prices of stocks began going down
materially in April, 1873, and in fact had been rather “toppy” during
the preceding years. This panic, like most of the others, was preceded
by enormous speculation and high prices. It is interesting to note that
while stocks were declining, general business was booming. The trained
minds of Wall Street were learning to discount the future at longer
range and more accurately. The iron and steel business exceeded all
former records in 1873, both in the matter of normal price and actual
production.
In January, 1884, numerous failures and suspensions produced a panic
which was in reality the culmination of a long decline. As in 1872,
this panic was preceded by enormous general business. The steel and
iron trade again broke all records in 1882, and other lines were
equally prosperous.
In 1893, the period of prosperity which followed the enactment of the
McKinley bill was rudely broken. Speculation had been rampant, as
usual. On May 4th, 1893, the National Cordage Company went into the
hands of a receiver. Only a year prior to that date, this corporation
was paying 12% in dividends and the stock was selling well above
par. There were many badly inflated stocks and many rotten spots in
the speculative stock markets. The Distillers and Cattle Feeders
shares fell from $70 to nothing, and were assessed $20 per share.
The aggregate liabilities of business failures in 1893 were almost
$350,000,000, over 20% greater than in 1892. Banks failed right and
left, and several leading railroad companies went into the hands of
receivers.
In 1903, another period of depression occurred. It is doubtful if this
period can be rightly classed with the other crises already mentioned,
for it was more in the nature of a drastic but orderly retrenchment
than a panic, and the bull stock market of 1902 was again in full swing
early in 1904.
In thus briefly detailing the crucial points of nineteenth century
financial affairs, there is no intention of entering an economic
discussion, and no pretence of giving anything like a comprehensive
history of the events preceding or following their recurrence. The
subject here discussed is speculation, and the object sought is to
gain knowledge that may be of value in forming opinions as to future
prices. We may gain some information of this character by analyzing the
following points:
1--Did price declines in stocks precede, accompany, or follow
panics, crises, or general business depression?
2--What are the signs which usually precede such periods?
3--What are the salient causes?
4--Can any dependence be placed in the regularity
of these recurrences?
On the first head it will be found that in all cases the top of the
stock market has been reached prior to the actual eruption in general
business. Stock speculation in 1814 and 1826 was not of great volume
nor importance, and cannot be given much consideration.
Beginning with the panic of 1837 we find that the highest prices for
stocks were made in October, 1836, while panic conditions did not occur
until May, 1837. Preceding the panic of August, 1857, highest prices
were reached in the last months of 1856. Highest figures were recorded
in April, 1872, just one year prior to the panic of 1873. The stock
market anticipated the troubles of 1884 by 17 months of declining
prices. In January, 1892, stocks began declining and continued their
downward course until the panic of 1893 cleared the atmosphere. In our
last period of depression (1903) stocks had reached their pinnacle in
September, 1902, just one year before the market turned for the better.
We find therefore that in the majority of instances, highest prices for
stocks were reached long before business troubles were openly apparent.
This action represents to a certain extent the selling of stocks by men
who were wise enough to foresee trouble.
Another interesting fact in regard to crises is that they are usually
preceded by record-breaking business in all directions. As iron and
steel may be considered the best barometer of business conditions, the
following tables are instructive:
PIG IRON PRODUCTION IN THE UNITED STATES SINCE 1860.
Year Production
Tons
1860 919,770
1861 731,544
1862 787,662
1863 947,604
1864 (Depression) 1,135,996
1865 931,582
1866 1,350,344
1867 1,461,626
1868 1,603,000
1869 1,916,641
1870 1,865,000
1871 1,911,608
1872 2,854,558
1873 (Depression) 2,560,963
1874 2,401,262
1875 2,023,733
1876 1,868,961
1877 2,066,594
1878 2,301,215
1879 2,741,853
1880 3,835,151
1881 4,144,254
1882 4,623,323
1883 4,595,510
1884 (Depression) 4,097,868
1885 4,044,526
1886 5,683,329
1887 6,417,148
1888 6,489,738
1889 7,603,642
1890 9,202,703
1891 8,279,870
1892 9,157,000
1893 (Depression) 7,124,502
1894 6,657,088
1895 9,446,308
1896 8,623,127
1897 9,652,860
1898 11,773,934
1899 13,620,703
1900 13,789,243
1901 15,878,354
1902 17,821,307
1903 (Depression) 18,009,252
1904 16,497,033
1905 22,992,380
1906 25,307,191
It will be observed that the high record of production has been reached
just prior to our greatest periods of depression, or during such
periods.
The second phase of the question, “what signs usually precede such
periods?” opens a wide field for the student of speculative changes.
Some inspiration may be gained from an examination of the two points
already considered, i.e.: priority of price movements and business
inflation; but it would be extremely difficult to use them as guides
unless many other factors were given consideration. If we eliminate
the element of periodicity, any attempt to determine the turning point
by examination of advances in prices of stocks or volume of production
and consumption of commodities is futile. Using pig iron as a barometer
we might, after production has gradually increased from 8,623,127 tons
in 1896, to 15,878,354 in 1901, argue that a considerable reaction was
due in this line, but we would be out in our calculations two years and
two million tons. Neither can we accept the simple fact of a decline,
or the beginning of a decline in iron or in any other single commodity
as indicating lower prices for stocks; for however accurate iron may
be as a barometer of general business, it is not at all a barometer
of the stock market. It is practically certain that stock prices will
move either to higher or lower prices long before any reasons for such
movements are apparent to the ordinary observer. Future stock market
movements are largely deductive, and are not founded upon ordinary
industrial statistical evidence.
There is, however, one method by which some light may be thrown upon
the subject of probable movements. A careful study of monetary
conditions and expansion of credits will frequently reveal dangers not
apparent in any other direction. It is scarcely necessary to say that
such examination must not be confined to one quarter, such as New York
City; or to one country, such as the United States. A comprehensive
view of the world’s monetary conditions will be necessary. This subject
is dealt with more fully in another chapter.
There is much difference of opinion among writers and students of
economics as to the cause of depressions. Bagehot attributes it to
the fact that, “at particular times a great many stupid people have a
great deal of stupid money.” This writer contends that occasionally
money accumulates abnormally and craves an investment outlet. To use
his own words, “This blind capital seeks for some one to devour it,
and there is plethora; it finds some one, and there is speculation; it
is devoured, and there is a panic.” Horace White attributes panics to
over-speculation. Bonamy Price says: “A vast outlay in new enterprises
involving a large consumption of food and materials, whether in the way
of pure waste or temporary unproductiveness, ought always to suggest a
feeling of danger. This excess occurs in seasons of prosperity.” John
B. Clark holds that it is due to an excess of production; or an excess
of production in one line with a deficiency in others. Leone Levi:
“The main cause for the occurrence of crises is the sudden realization
of an insufficiency of capital to meet present demands.” Thorold
Rogers says: “The cause exists in the function of exchange; in the
expectation of unreasonable profits and in incorrect calculation.” It
was the late Henry George’s theory that depressions are brought about
by higher prices of land. He held that workers thrive as they have easy
access to natural opportunities for production, and are impoverished
as they are deprived of such opportunities. All periods of speculation
and inflation end in higher land values. Landlords call for a larger
percentage of the product than workers can afford to pay, and both
labor and capital become idle until there is a readjustment. Prof. W.
S. Jevons, and a host of others, attribute crises to sun spots and
their effects on harvests. And so on through a long line of theories.
The consensus of opinion appears to favor the theory of
over-speculation, whether in realty, commodities, or the shares of
corporations, and this leads up to the question of periodicity. That
there has been a recurrence of these troubles about once in ten years
is not a debatable question. Nevertheless, many thinkers scout the
idea of this repetition at marked periods being other than fortuitous.
As prominent a student as Thorold Rogers, for example, ridicules the
theory of periodicity. Many hopeful people believe that in time we will
find means to avoid these bad spots; that the United States is a young
and enthusiastic country, and that we will gradually sober down in both
methods and effects. But against this theory lies the cold fact that
these cycles have occurred with as charming regularity in France and
England as they have in our own country, which would indicate that age
and seasoning does not produce any appreciable improvement.
It is probable that the most acceptable theory as to the causes of
periodicity is the psychological contention. Human nature is much the
same throughout the civilized world. We suffer from a panic and a
period of depression, and we grow wary and conservative. This course
results in sound methods and accumulation. The business structure rests
on a firmer foundation. Gradually the hard lessons of the past are
forgotten by the older generation, and are entirely unlearned by the
new business generation, all of whom are optimists. Again we expand
our enterprises, again fortune favors us; the appetite for gold grows
greater as wealth accumulates; men who were economical and satisfied
on modest incomes now live extravagantly, and some of them dream of
millions. Capital is spread out thinly. Story after story is erected on
one foundation, and that foundation, sound enough at first, eventually
gives way. Then we must begin our careful building once more. The ten
year periods, therefore, may represent with more or less accuracy,
the lapse of time between wisdom and folly,--the yard-stick of human
intellect and experience.
Many of the writers on this subject seem to strive for tangible reasons
for each depression. They dive into the subject for a cause and emerge
with an effect, or a handful of effects. For example, the depression
following 1893 was not caused by the failures of banks and other
business institutions, but the failures were caused by the depression.
It matters not that the failures ante-dated the bad conditions. Again,
the depression itself was produced by prior inflation. It was the
illness after over-stimulation. And so, in turn, we can ask what caused
the inflation; and the answer is “Human greed and human folly.” This
last analysis brings us around in a circle to the original theory of a
psychological cause.
It is submitted that a dependence on periodicity of any kind, either in
the ten year cycles or in year to year events is fraught with danger
and cannot be adopted by the speculator. It is chart-playing pure and
simple, and the man who disposes of his stocks for no better reason
than that a depression appeared ten years ago, is liable to find
himself in the position of the chart-enthusiast, who, after tracing
a marked uniformity in movements for a period of years, runs into
reverses and loses all.
It is not meant to say that a knowledge of the past is without value.
Inductive reasoning is almost as important as deductive reasoning,
when properly employed and applied. If we scrutinize the history of
past crises and great movements with a view to determining the salient
causes therefor, a great deal has been gained, for we may apply this
knowledge to existent elements lying parallel to those which caused
trouble in the past, and thus decide what is probable in the future.
If, on the other hand, we place dependence on mere repetition, we gain
nothing in education and stand in constant danger.
It may be contended that the active speculator has little to do with
ten year cycles or their causes, but this is not the case. A correct
understanding of the reasons for the great cycles will simplify the
study of smaller intermediate movements. Much knowledge applicable
to year to year movements will be gained. Monetary troubles, for
example, occur almost annually, and their effects on market movements
are usually, (not always), similar to those of more widely separated
periods, but, of course, in a lesser degree.
III
The Gold Supply
It may be stated without hesitation that the effect of the increasing
supply of gold upon prices of all bonds, shares, or commodities which
may be classed as speculative, is more decided and certain in its
operation than any other single factor. The process of readjustment due
to this cause would be slow and regular if the principles at issue were
universally and clearly understood. Not being generally recognized,
however, the changes wrought by what is naturally an insidious factor
are, at times, spasmodic and feverish. It is a remarkable fact that
whenever a revolution occurs in any economic or financial process
which is, by its nature, concealed or recondite, its existence and
influence are discovered by a number of students simultaneously but
independently. Important reversions or modifications may be submerged
for a long period, and suddenly light is offered from all parts of
the thinking world. It is probable that this intellectual phenomenon
extends to, or is communicated to the financial world, and that marked
and drastic changes in the affected quarters represent a belated
recognition of forces hitherto unknown, and the readjustment of
affairs by those who see first and furthest. That the operations of
this minority will be important goes without saying. The faculty to
grasp fully and quickly anything salient bearing on financial affairs
is the ground-work of riches and consequently the trained minds of
great holders of shares or commodities will respond most readily to
sound basic arguments, and the greatest holders can often make of
their knowledge a two-edged sword. For example, certain large holders
of bonds, recognizing the fact that increasing gold production means
higher interest rates, and consequently lower prices for bonds, would
be able to dispose of bonds to advantage because of the apparent
general prosperity growing out of this same production of gold. It may
be assumed that in pointing out in interviews, etc., this reign of
prosperity, the gentlemen in question would modestly omit to mention
that the same influences which were causing high prices and much
business in some quarters, were working damage in others.
Something of this kind has been going on in our bond and stock
markets of late. The inevitable influence of gold on prices has made
itself slowly felt for a long period, but it is only in the last year
that a considerable number of individuals whose operations are of
importance in the financial world have come to recognize how powerful
this influence is. Price changes in divers securities and commodities
hitherto unaccounted for, or attributed to wrong influences, have
suddenly been explained to a number of important financiers, and a
correct understanding of the problem has undoubtedly resulted in
radical readjustments in some quarters. With that pertinacity in error
which seems to distinguish the ordinary speculator, he has, however,
gone on attributing these processes of equilibration to causes which
have only a limited bearing on the case. The recent heavy decline in
bonds and stocks, for example, was popularly ascribed to political
and legislative action against railroads. Scarcity of money was given
second place in these deductions, and gold production third place, or
no place at all. If we reverse this order of importance and give gold
production first place, monetary affairs second place, and political
affairs third place, we are nearer the truth. It looks a little
ridiculous that the scope of intelligent perspective should be blocked
by three thousand miles of water, and that the unthinking majority
who ascribe our decline in bonds to local politics should have failed
to recognize so potent a fact as that the decline was world-wide;
but such is the case. The readjustment in bonds was due to excessive
over-production of gold, and it may be safely assumed that so long as
this over-production continues to increase rapidly, bonds will continue
low in price or, what amounts to the same thing, interest rates will
remain high.
As to the importance of a correct understanding on this subject of gold
supply and its influence on prices, I quote from Mr. Byron W. Holt’s
book “The Gold Supply and Prosperity,” which, I may add, is used as the
text book for this chapter. Mr. Holt says:
“This is the great problem that now confronts the
financial world and demands solution of every
investor. Not to solve it may mean great loss and
possible failure. To solve it means success and
greatly enhanced wealth for all who now have either a
fair share of this world’s goods or who have credit
and can intelligently go in debt for a large amount.”
As speculation or investment-speculation, as defined in the
introduction to this book, are the subjects under discussion it is the
intention to take up, in turn, such points as bear particularly upon
price changes of speculative shares and commodities influenced by our
increasing supply of gold. The main points to be considered are as
follows:
1--The effect upon bonds and preferred stocks having a fixed
rate of income.
2--The effect upon common stocks of railroad corporations.
3--The effect upon stocks of industrial corporations.
4--The effect upon speculative commodities--wheat, corn,
oats, cotton, etc.
For the purpose of argument it will be assumed in this discussion that
our supply of gold is rapidly increasing. We know that such has been
the case in recent years, and it is the opinion of most students that
this increase may be confidently expected to continue. To quote again
from the work already mentioned:
“Both the output and supply of gold are likely to increase for many
years.
“While the future output of gold is, of necessity, unknown and
uncertain, there is great unanimity of opinion, among mining experts,
on this point. It appears to be generally recognized that, during the
last twenty years, the industry of gold mining, or rather of gold
production, has been established on a very different and much more
certain basis than any previously existing. No longer is the output
of gold dependent mainly, or even largely, upon placer mining and the
chance finds of ‘free’ gold. The supply of gold, in rock, sand, clay,
and water, being inexhaustible, it is now possible, by machinery and
metallurgical processes, to extract gold, in paying quantities, from
many forms of these vast store-houses. To such an extent is this true
that the future supply of gold is even more secure than is that of
coal, iron, lumber, wheat or cotton.
“Even if prospecting were to stop and attention were to be devoted
only to the gold mines and bodies already discovered, and geologically
in sight, it is probable that the output of gold would continue to
increase for many years. As Mr. Selwyn-Brown, a gold mining expert,
tells us in his very interesting article, ‘as the rich surface deposits
are being worked out, improvements in mining and metallurgical
processes are enabling poorer and poorer deposits to be worked.’ That
is, improvements in ‘stamp mills,’ cyanide mills, dredging machines and
other gold extracting apparatus and processes are being made so rapidly
that it is, every year, becoming profitable to work lower and lower
grades of ore, sand and earth. As the grade declines the quantity in
sight increases rapidly. In fact there are almost literally mountains
of low grade gold ore that can even now be worked profitably. Some of
the largest, most productive and most profitable mines of today contain
ore averaging less than $3 and, in some instances, only $2 of gold per
ton.
“The supply of such ore being inexhaustible the output depends upon
the number and size of the mills employed to extract the gold. It is
reasonably certain that, for years to come, the improvements in methods
and processes of mining will more than keep pace with both the decline
in the quality of the ore and the increase in the cost of mining due to
rising prices and wages, occasioned by the depreciation of gold.
“In view of all the facts, Mr. Selwyn-Brown’s conclusion that ‘a
progressive increase each year may confidently be expected’ is
conservative. This conclusion, is almost a certainty. The uncertainty
lies in the possibility, if not probability, either of discovering
many important new mines in the practically unexplored parts of every
continent, or of making improvements that will radically reduce the
cost of extracting gold. In either case the increase in the output of
gold might be not simply arithmetically but geometrically progressive.”
Admitting that the question of gold production is debatable, it remains
for the future to develop any radical change, and it will be necessary
for the student to decide this point for himself either by the light
of facts as yet not established, or by accepting theories as yet
not convincingly erected. If a change occurs, or may reasonably be
expected, an understanding of the subject from the positive side of
the question loses none of its value. The principles involved could be
as successfully applied in reading the probable future by modifying or
reversing effects, and reconciling them to a modification or reversal
in the cause. If, for example, we accept the theory that increased gold
production means advancing commodity prices, and find reason later
to believe that gold production will cease to maintain its ratio of
increase, we may alter our views accordingly so far as this single
influence is concerned.
_1--The effect of the increasing gold production on bonds and preferred
stocks having a fixed rate of income._
In this division of the question the crux of the whole matter is
interest on money. The question might, in fact, be stated thus: “What
is the effect of increasing gold supply on money interest rates?” and
having solved that problem, the original inquiry is answered.
To reach a reasonable solution we must first examine the effect of an
unduly increasing supply of gold on commodity prices. Over-production
in any quarter inevitably leads to lower prices. Gold being a fixed
standard cannot decline in figures, but it does so in fact. That is to
say, the flexible prices of things which gold will buy rise to fill
the gap. Thus, since 1896, prices of commodities have risen 50%. The
man who loaned money ten years ago finds its purchasing power impaired
33⅓%, when it is returned to him today, for the reason that commodity
prices having advanced 50% in the interim, his dollar will now buy only
66⅔% of what it would buy in 1897. This impairment of principal will
be covered, in part at least, by interest rates. This effect, if not
recognized and arbitrary would adjust itself automatically, regardless
of whether or not investors recognize the influence of changing values
of gold, for money, finding higher returns in other quarters, would
speedily desert the long-term, fixed-interest investment field, and
prices of such securities would decline through lack of demand.
On the subject of interest rates Mr. Holt says:
“But there is another reason why interest rates
should be high when prices are rising. When money
is shrinking in value interest rates should be high
to make up, or partly make up, the losses on the
principals of loans. To illustrate: Suppose that
prices are rising 10% a year. This means that the
purchasing power of money is declining about 10% a
year. Suppose, then, that $100 were loaned for one
year at 5%. At the end of the year the lender would
have $105; but with this $105 he could buy only about
as much as he could have bought with $95, at the
beginning of the year. In reality, he has received
no interest at all but has, instead, paid $5 to the
man for holding his $100. The man with money to
loan cannot afford to do business in this way. He
is usually as wise as are his neighbors, and fully
as able to protect his own interests and to get all
his money is worth, either by buying real property,
investing in bonds and stock or by loaning on notes
or on call.”
In submitting the above contentions it must be fairly stated that
there is some diversity of opinion as to the effects of gold on
interest rates. A few writers demur to the theory; others hold that
the effect is nil, and one or two openly adopt the negative side
of the discussion, and state that more money means lower rates of
interest. The majority of recent investigators, however, appear to be
accepting the theory as given herein, and it may be added that prices
of the class of securities considered have borne out the hypothesis
faithfully, and that the minority have failed to offer convincing
explanations of this readjustment. It will not do to point to the
fact that money has been fully employed in constructive rather than
investment fields of late; for while this is true enough, it does not
explain why gilt-edged bonds such as British Consols have declined
in value, while stocks and shares which did not bear the onus of
circumscribed returns have advanced. There are, of course, contributory
causes: the Labor-Socialistic Government in England no doubt affects
the prices of consols, but this influence is specific, and loses
most of its force when we consider that not only these particular
securities, but practically all others of their class the world over
have suffered a radical decline. In other words, interest rates have
grown comprehensively higher. The theory appears sound, is borne out
by events, and mere denial does not weaken it. It may well be accepted
until its opponents succeed in giving us something more convincing in
its place.
In support of the theory, Mr. Holt reproduces the following table of
British bonds from Moody’s Magazine for October, 1906.
PRICES OF BRITISH INVESTMENT BONDS.
% 1906 1905 1904 1896
British Consols 2½ 86½ 89⅛ 88½ 113⅞[1]
Met. Consols 3½ 102 104 104½ 128¾
London County 3 88½ 94½ 93 128¾
Leeds 4 108 109 111½ 130½
Liverpool 3½ 107 109 109 144¼
Manchester 4 123 128¾ 124¾ 159
New South Wales 3½ 100½ 100 96 112¼
Queensland 3½ 99½ 99 96 111½
Canada 3 98½ 100½ 97 107¼
Cape 3½ 97 98 95 120
Lon. & N. Western 3 93 96 95 124¾
Midland 2½ 76 79 78 124¾[2]
Great Western 4 123 127 123½ 164
----- ----- ----- ----- -----
Average 3.3 100.2 101.8 100.9 128.4
[1] Then 2¾%.
[2] Then 3%.
“Thus,” comments the writer, “these 13 British bonds,
supposedly the safest and least speculative of all
securities, have declined an average of over 28
points in ten years. Considering incomes and present
prices, the unfortunate investors in these bonds have
not only received less than 1% on their investments,
during the last ten years, but, should they sell
their bonds, they would find that the proceeds have
lost 30% of the purchasing power of a similar amount
ten years ago. Altogether, they have suffered a net
loss, over incomes, of more than 20%, or over 2% a
year.”
There are other economic influences affecting interest rates through
gold supply, but the one given appears to the writer the most direct
and forcible when applied to readjustment of prices to income.
In weighing the influence of increasing gold production and its effect
upon interest rates through the advancing prices of commodities, the
student is liable to fall into one grave error. He may perhaps jump
to the conclusion that gradually advancing prices of commodities
mean gradually advancing rates of interest. This is not at all the
case. A sustained ratio of advance means sustained high rates of
interest--nothing more. In order to make this clear let us go back to
the original principle.
Increasing prices for commodities mean an impairment of the purchasing
power of money. If the purchasing power of money is impaired 2% per
annum through increasing prices of commodities, and the normal rate
of interest is 4%, we can cover the deficiency by making the interest
rate 6% _and leaving it there as long as this ratio of impairment is
maintained_. In other words the man who loans $1,000 at 6% loses $20.00
per annum in the impairment of capital and receives normal interest of
$40.00 per annum and $20 extra to cover his loss in capital. Strictly
speaking the extra 2% is not interest at all, but an amortization
payment. It matters not how high prices ultimately go, he receives each
year a bonus sufficient to cover his loss in capital, and the interest
rate remains 6%.
Therefore, if prices of commodities advanced for ten years and then
ceased to advance, but were maintained at the highest figures reached,
interest rates would fall because there would be no further impairment
of capital, and what was formerly amortization, would become usury. On
the other hand, if a new ratio of increase should occur in commodity
prices and they should advance 4% per annum, interest rates would, if
fully adjusted, reach 8%-4% for normal interest, and 4% for impairment
of capital.
_2--The effect upon Common Stocks of Railroad Corporations._
Here the effect of high interest rates is, or in time may be, offset
by returns in the form of dividends, undivided profits, improvement of
property, or the fact that income is not limited. But there is another
trouble, and a serious one, for which the gold supply is responsible.
If the increasing supply of gold is responsible for higher commodity
prices it must be at once apparent that the building, equipment
and maintenance of railway properties costs more and more as all
commodities, including labor, advance in price. This would be all
right if the selling commodity, i.e.: transportation, also advanced
proportionately in price; but it is so difficult to override popular
prejudice and widespread misunderstanding on this point, that we find
continued agitation and legislation not only against advancing rates,
but with a view to reducing those which already obtain. There must,
of course, be a limit to this thing, and if the cost of production
continues to increase, the railroads must be permitted to demand
higher prices for transportation. Otherwise a point would finally
be reached where every railroad in the country would be forced into
bankruptcy. The great danger lies in a belated assimilation of
this truth by the masses, and too much demagoguery on the part of
politicians who do understand, but, being politicians, prefer to
reflect the views of a majority of constituents, rather than to enter
a campaign of proselyting. That evils have been fostered and wrongs
committed by eminent railroad financiers is certain; but there is
considerable confusion of ideas on this head. Over-capitalization,
illegal combinations, manipulation of funds for private gain, and the
swelling of dividends for stock-jobbing purposes, when the funds so
distributed should have gone into improvements or surplus, have all
played their part in arousing the wrath and indignation of the great
majority, and they are, as a class, prone to jump to the conclusion
that any and every railroad corporation is charging unduly high rates
for its services, and making exorbitant returns on invested capital.
This has, no doubt, been more or less true in the past in certain cases
where extremely high rates were made, and the apparent returns on
money attenuated by over-capitalization; but this evil is gradually
decreasing, and the real fight is, or should be, against these abuses.
The railroads are suffering for the sins of the past, and may suffer
still further; but the time is not far distant when, unless conditions
change radically, the railroads must be allowed more latitude in the
adjustment of rates.
The prevalent opinion, that needed reforms which strike at the root
of the evils mentioned above is a bear argument, is another popular
fallacy. Such reforms intelligently conceived, and unswervingly carried
out, are all in favor of the small shareholder. If laws can be enacted
which will prevent individual interests from plundering or misusing
the funds of corporations, and which will compel these corporations to
issue reports and statements which are not so involved and complex as
to be beyond the ordinary comprehension, the small holder or investor
will have a better show. But, having cured these evils, no laws can
possibly endure which contemplate curtailing fair returns on money, and
fair profits through natural enhancement in values.
But, however fair or cheering this view may appear, the fact remains
that it will be slow in its acceptance and slower in its operation. We
may therefore summarize the situation thus. Increasing production of
gold brings about increasing cost of operation, and so long as cost of
operation is advanced with no corresponding advance in selling price of
transportation, the ratio of profits will gradually decrease until a
vanishing point is reached.
In the last analysis, a probable tardy and reluctant recognition of the
true status of the case warrants the belief that for the near future,
the railroads have a hard time ahead of them, and that so far as this
single important influence is concerned, it is decidedly a bearish
factor.
_3--The effect upon stocks of industrial corporations._
Here we have a different proposition. Rising prices for commodities
do not interfere with the earning power of corporations which produce
and sell commodities, the prices of which are not limited by law. In
fact these corporations are, in many cases, gainers by this influence
which tends to advance prices, not only of what they buy, but of what
they sell. It may be added, parenthetically, that railroad companies
which own valuable coal lands, etc., find the bad influences already
discussed partially offset by the gain from such holdings. The railroad
company, however, may be considered as pre-eminently a seller of
transportation and has been so regarded herein.
The industrial corporations whose products are subject to regulation
by law, such as gas and electric lighting companies, are subject to
practically the same influences as those which operate against the
prices of railroad stocks. Their cost of production advances easily
and inevitably, and the selling price remains fixed, or advances with
difficulty and under protest.
_4--The effect on speculative commodities--Wheat, Corn, Oats, Cotton,
etc._
This phase of the subject will be dismissed with a few words. If the
contentions already made are accepted, it is apparent that all such
commodities will gradually seek a higher level. A brief examination
of statistics will show that this readjustment has been going on for
years. The gradually ascending pivotal point, or average price, is
particularly marked in the cheaper cereals,--corn and oats, and also in
cotton. This is probably due to the fact that wages have not advanced
as rapidly as have prices of living. It is found that in periods of
hard times consumption of cheaper foodstuffs and textile fabrics
is increased, while the consumption of higher priced commodities
and luxuries are curtailed. The wage-earner, therefore, has been
in reality living in a regime of hard times, although this fact is
easily submerged by steadier employment, by a fictitious appearance
of general prosperity, and the ability to spend a larger number of
dollars, without realizing fully the loss of purchasing power in the
dollars.
It would be out of the question to attempt to enter anything like
a comprehensive study of the question of gold production and its
effects in a single chapter, or even in a single volume; neither is it
necessary to the purposes of this work, for the student who desires
a comprehensive education in this regard will find ample means and
material ready to his hand. From the standpoint of investment and
speculation alone, it is submitted that increasing production of gold
is, to use the phraseology of the street, bearish on long time bonds
and other securities yielding a limited rate of interest or income,
temporarily bearish on railroad stocks, bullish on industrial shares,
except as noted, and bullish on speculative commodities.
At the risk of indulging in undue reiteration, attention will again be
called to the fallacy of considering such subjects as the one of gold
production too remote in concrete effects, or too sluggish in operation
to be of importance to the speculator. A thorough understanding of
cause and effect bears upon the operations of today, in that it
anticipates the results of tomorrow. Through knowledge of influences of
this character, serious error may be avoided. For example, one of the
profound axioms of the speculative world is that bonds advance first
and stocks afterwards. If we understand _why_ bonds have been, and are
at present, declining we may be justified in modifying this view and
considering the axiom more or less obsolete. He who operates an engine
without a clear understanding of its motive power is likely to get into
trouble, or perhaps be blown up.
It may be pointed out also, that a too literal acceptance of the
suggested effects of this or any other great price influence is highly
dangerous. Even while gold production continues to increase rapidly,
prices, not only of shares, but of all things, will overleap themselves
and will also swing backwards to the other extreme. The cycles are
not completed, until both zenith and nadir have been touched. Changes
in gold production will not prevent declines in prices; they will,
however, interfere with the regularity of the cycles.
This chapter may be fittingly closed with the following list of
conclusions reached by Mr. Holt, in the work already mentioned. These
conclusions cover all the points herein presented, and others which are
of interest and value:
“1--That both the output and supply of gold are
likely to increase rapidly for many years.
“2--That, therefore, the value of gold will
depreciate as the quantity increases.
“3--That this depreciation will be measured by the
rise in the average price level.
“4--That a rising price level, if long continued, is
accompanied by rising or high interest rates.
“5--That high interest rates mean lower prices for
bonds and all other long-time obligations drawing
fixed rates of interest, dividends, or income.
“6--Rising prices increase the cost of materials and
of operation and tend to decrease the net profits
of all concerns, the prices of whose products or
services either cannot be advanced at all, or are not
free to advance rapidly.
“7--Rising prices tend to increase the net profits of
all concerns that own their own sources of materials
and supplies.
“8--Rising prices of commodities tend to cause
the prices of all tangible property to rise. This
includes lands, mines, forests, buildings and
improvements.
“9--Rising prices of commodities and property tend to
increase the value of the securities of corporations
holding commodities or property.
“10--Rising prices and cost of living necessitate
higher money wages, though the rise of wages will
follow, at some distance, behind the rise of prices.
“11--As rising prices do not mean increased profits
to all concerns, many employers will not concede
higher wages without strikes.
“12--Rising prices and wages, therefore, mean
dwindling profits and troublous times in many
industries, with complete ruin as the final goal.
“13--Because wages will not rise as fast or as much
as prices and the cost of living, there will be
dissatisfaction and unrest among wage and salary
earners.
“14--Rising prices of commodities and property
encourage speculation in commodities, stocks and real
estate and discourage honest industry.
“15--Thus, rising prices, by diminishing the
incomes of ‘safe’ investments in ‘gilt-edged’
bonds and stocks and by increasing the profits of
speculators encourage extravagance, recklessness and
thriftlessness.
“16--As rising prices decrease the purchasing power
of debts, and thus aid debtors at the expense of
creditors, they discourage saving and thrift.
“17--Rising prices, then, by promoting speculation
and extravagance, increase consumption, especially of
luxuries, and, therefore, stimulate production.
“18--Rising prices, then, result in what is real
prosperity for many industries; but what is for a
nation as a whole, artificial or sham prosperity--the
result of marking up prices rather than of increasing
production.
“19--With prices, wages, rates and industries always
imperfectly adjusted to the ever depreciating value
of gold, and with instability and uncertainty
throughout the financial world, there cannot but be
a great shifting around of values and of titles to
property.
“20--As this shifting is to the advantage of the
debtors--the rich--and to the disadvantage of the
creditors--the great middle class--it results in
rapidly concentrating wealth in the hands of a
comparatively few.
“21--For all of these reasons a prolonged period of
rapidly rising prices is reasonably certain to
become a period of unrest, discontent, agitation,
strikes, riots, rebellions and wars.
“22--A rapidly depreciating standard of value then,
if long continued, not only produces most important
results in the financial, industrial and commercial
world, but is likely to result in changes of great
consequence in the political, social, and religious
world.
“In view of all the facts, results and possible
consequences connected with the increasing output
and supply of gold, The Wall Street Journal was
right when, on December 4, 1906, it said that ‘No
other economic force is at present in operation in
the world of more stupendous power than that of gold
production.’”
IV
Money
From the viewpoint of the speculator, money conditions require constant
consideration. It goes without saying that no sustained bull market is
possible unless money conditions favor such a movement. We find that
at the end of a period of inflation, the credit situation is always
strained, while a general recession in business will usually cure the
evil.
The student may enter this large and important branch of the subject
as deeply as he likes. There are many excellent works dealing with the
various phases of the subject, and the question has been so long and
carefully studied by writers, that many important points have been
established so definitely as to admit of little diversity of opinion.
The bank statement which is issued weekly by the New York Clearing
House, is eagerly scanned by traders, but it is not always the case
that this scrutiny is thorough or enlightening. The statement at its
best, cannot be considered more than a barometer, and its showings are
by no means exact, as it is based on a system of daily averages. That
is to say, the banks figure their loans, deposits, etc., for each day
of the week, and report the averages to the Clearing House. This method
often leads to a false showing. Commenting on this fact, Mr. S. S.
Pratt in his book, “The Work of Wall Street,” says:
“A striking illustration of the effect of the law of averages upon
the Bank Statement was given in September, 1902. The statement of
September 20 reported a loss in cash of $7,300,000, while the actual
loss, so far as it could be estimated, was only $3,600,000. The
statement of September 27th, on the other hand, reported a gain in
cash of $1,790,000, while the apparent loss was $4,000,000. The former
statement reported a deficit in reserve; the latter a surplus.”
It is the practice of many speculators to examine the bank statement
merely as regards the changes made from week to week, without reference
to the more important totals. A decrease in reserves is considered an
evil, etc. There is something in this of course, but such methods and
deductions are incomplete and insufficient. A decrease in reserves when
the surplus is very large may be practically meaningless, while the
same amount of decrease when reserves are small may be significant. It
is a good deal like the difference between a man spending a dollar when
he has a hundred, and spending his last dollar.
The most important general information to be gained from the bank
statement, is by a comparison of loans with deposits, and specie with
loans. We may thus arrive at a fairly correct idea of the state of
trade and the expansion of credits. If we find that loans are in excess
of deposits, and the percentage of specie small, we may, with certain
qualifications, deduce inflation; while on the other hand, the extent
of liquidation may be judged in case these conditions are reversed. As
an example of this process, the following historical facts are given.
In 1890, twenty stocks listed on the New York Exchange were selling
at an average price of about $87 per share. The percentage of loans
to deposits was about 95% and the percentage of specie to loans about
20%. In November of that year, loans advanced to 102% as compared
with deposits, and specie declined to about 18% of loans. The stocks
mentioned declined to an average price of $64 per share, and later in
1901 to about $61 per share. From 1891 to 1893 there was some alternate
improvement and retrogression in money conditions, all of which was
accurately reflected in stock prices.
In 1893, the proportion of loans to deposits rose to about 109%, and
proportion of specie to loans declined to 13%. The average price of the
twenty stocks reached about $47 per share. (The panic of 1893).
In 1894, the proportion of loans to deposits fell to 80%, and specie
to loans rose to 30%. This was due to the liquidation of 1893. Stock
prices showed some betterment, rising to about $57 per share. The
severe drubbing of 1893 had made public investors nervous, and had in
many cases incapacitated them for stock market operations. That was to
come later.
In 1896, the proportion of loans to deposits rose to 102%, and specie
to loans fell to 10%. Stocks reached their lowest level in July of this
year ($42 per share for the twenty stocks mentioned).
From 1896 to 1898, a gradual improvement was apparent. Through all
this period stock prices faithfully reflected money conditions. In
July, 1898, the proportion of specie to loans rose to 30% and loans to
deposits fell to 83%. Stocks began advancing and in March, 1899, the
average price of the twenty stocks considered, was about $85 per share.
In June, 1900, the average price of the twenty stocks considered, was
about $75 per share. The proportion of specie to loans was about 22%,
and the proportion of loans to deposits was about 90%. From January,
1901, until September, 1902, money conditions did not improve, but
stocks continued to advance. There were large crops and a general wave
of expansion and prosperity swept the country. In September, 1902, the
proportion of loans to deposits was 99%, and the proportion of specie
to loans about 17%. Meanwhile stocks were high--$128 per share for
our twenty stocks. Conditions, though temporarily ignored, asserted
themselves in 1903, and in September of that year, the average price
of the twenty stocks was about $88 per share; the percentage of loans
to deposits 101% and specie to loans 19%. The money situation had not
changed materially, but the stock market was making a deferred payment.
In August, 1904, the proportion of loans to deposits had fallen to 90%
and specie to loans had risen to 25%. The stock market was steadily
advancing, and in January, 1906, stocks reached their pinnacle--$138
per share for the twenty securities considered.
It will be observed that while stock market movements do not always
immediately reflect good or bad conditions in the financial world,
the effect is ultimately felt. We are pretty safe in assuming that
whenever loans are unduly expanded and the percentage of specie is
small, these conditions must be corrected either by a halt in business
or by liquidation; and the word liquidation here means a cleaning
up in other lines, as well as in the stock market. It is sometimes
the case that after the stock market has suffered a severe decline,
there is little improvement in the monetary situation as shown in
the bank statement. In January, 1907, for example, the percentage of
loans to deposits was about 102%, and specie to loans about 17½%. The
average price of twenty active stocks at that time, was about 130. At
the present writing (June, 1907) those same shares have fallen to an
average price of about 101, and there is no appreciable change in the
relation of loans to deposits, or specie to loans. On June 8th, 1907,
the bank statement showed loans to deposits 102%, and specie to loans
a little below 19%. This state of affairs would naturally lead to the
belief that unless we are vigorously assisted by some powerful factor,
such as good crops, we now face a period where either a decided slowing
up or an actual recession in general business is imperative. On this
theory, fortified or modified by a study of extraneous effects, the
speculator or investor may gain a valuable knowledge of probable future
movements in the stock market. If he decides that the case is a bad one
and that a set-back in business will occur, he may argue that, even if
stocks are low in price, there is little hope of a material upward
movement in any quarter. It would also be evident that the industrial
shares would suffer more in price than the railroad shares; for, under
present conditions, a decline in the price of products generally helps
the railroad corporations to some extent by permitting advantageous
purchases. For instance, if finished steel and iron products decline in
price, the railroads might be enabled to carry out projected extensions
to better advantage than otherwise, while the manufacturing companies
would suffer a considerable loss of profits. It is, of course, true
that a recession in business is felt in all lines, but as the selling
rate of transportation is more fixed than prices of commodities, and as
the producing companies gain less by a recession in the prices of the
commodities they _buy_ than do the railroads, the industrial stocks are
more adversely affected. This may appear as a sort of compensation for
the fact that while rates for transportation do not advance as easily
as prices of commodities, neither do they fall as rapidly in periods of
depression.
In examining the bank statement as a barometrical showing of money
conditions, it should be remembered that an increase in deposits does
not mean an increase in cash. The bank statement may show an increase
in loans of $1,000,000 and an increase in deposits based on these
loans. That is to say, $1,000,000 may have been borrowed on commercial
paper, and the proceeds passed to the credit of the borrowers.
Commenting on this fact, Theodore Burton says:
“But in the modern development of banking the actual
money deposited is much less important in determining
the amount of deposits, because so large a share
of them represents credits obtained by loans, etc.
These credits are transferred upon orders executed by
depositors, and furnish a substitute for currency.
In proportion as payments and settlements are made
by checks, drafts, and bills of exchange, deposits
maintain an increased proportion to the amount of
currency in circulation. This class of deposits
increases prior to a crisis rather than diminishes,
because loans increase.
“In the reports of national banks, there is a
striking correspondence from year to year in the
volume of deposits and that of loans and discounts.
Deposits show more frequent fluctuations, but rise
and fall in general accord with loans and discounts.
This correspondence is easily explained. Another
distinction should be noted. Some deposits are the
result of completed transactions, and are based upon
the proceeds of sales made, amounts realized from
investments, etc. Others merely represent loans or
discounts the proceeds of which are entered to the
credit of the borrower. Before every crisis there is
an unusual proportion of deposits which are based
upon loans. If in bank statements there could be
separate columns for these two kinds of deposits, the
information afforded by their increase or decrease
would be much more valuable.”
This point shows the necessity of considering not only the proportion
of loans to deposits but of specie to loans. On this point Mr. Burton
says:
“A continuous decrease of specie attended by an
increase in outstanding discounts is always a danger
signal. The gap between the two may widen for months,
and even for years, and may fluctuate from time to
time, but a sudden change of large proportions, or
a steady decrease of the percentage of specie is an
unfailing indication of danger. The reason for this
is not hard to discover. The quantity of metallic
money in a country shows what part of its capital is
available as money for the payment of its obligations
to foreign countries, the final test of availability.
For this last named purpose credit money cannot be
used, but only money having intrinsic value--money
of the Mercantile Republic, as it is called by Adam
Smith.”
The conclusion reached therefore, is that an increase in loans and
discounts with no corresponding increase in cash or with an actual
decrease in cash, reflects a bad state of affairs, even when the
advance in loans and discounts appears to be fully offset by deposits.
There is one feature which should not be overlooked. The very worst
state of affairs may be shown in the bank statement during a period of
great commercial activity and inflation in all lines. The reverse is
also true. In 1894, following the panic of 1893, the percentage of
loans to deposits fell to 80% and the percentage of specie to loans
rose to 30%; but no bull market occurred. This was due to stagnation in
all lines of business, a period of timidity and conservatism. In 1895,
there were signs of a great improvement and the stock market started
upward. This improvement, however, proved illusory and premature. Loans
rose quickly to 95% of deposits and specie fell below 15% of loans.
Then followed, in 1896, the new record of low prices.
In studying the bank statement for its effects on speculative prices,
surplus reserves will frequently suggest danger or safety. If surplus
reserves dwindle too near the vanishing point, the possibility of
necessary retiring of call loans is apparent. (See “Bank Statement,”
page 125).
It is possible to gain valuable knowledge by a careful examination of
the bank statement. The points made above are, of course, only of a
simple and elemental character. We may go on with our examination as
far as we like and scrutinize not only totals, but the position of
individual banks. Also, in order to gain a comprehensive perspective,
it will be expedient to examine, not only the barometer of the New York
situation, but the condition of interior banks. However, it is a pretty
good idea to begin with the A, B, C’s.
High rates for call money and the calling of loans are responsible for
many sharp market movements. A large class of speculators figure that
when dividend returns are high and call money cheap and plentiful, they
have a tangible influence working in their favor while they are long
of stocks. If rates for call money are 2% and a stock returns 6% there
is, eliminating speculation, an advantage of 4% per annum in favor of
the marginal speculator. This advantage is not so great in carrying
stocks on time loans, as rates for fixed periods are materially higher.
There is always danger of a flurry in call money, however, and in
the event of a wholesale calling of loans there arises the necessity
of selling stocks, and a decline occurs. There is also present the
element of manipulation in this quarter, and it cannot be gainsaid that
many instances have occurred where funds have been suddenly withdrawn
for the purpose of “shaking out” an undesirable following or of
accumulating securities to advantage; and on the other hand, call money
has frequently been made cheap in order to encourage purchases.
There are two periods of the year when the stock market is affected
by disbursements of money in the form of interest and dividends. The
two dates at which heavy disbursements occur, are January 1st and
July 1st. It is a popular belief that just prior to each of these
dates, money will grow “tight” because of the necessary provisions
made by banks and other corporations to meet such payments. Following
the actual distribution of funds, it is the theory that a part of
this money will seek reinvestment in bonds and shares. A great many
speculators argue that this would naturally produce stringency, the
possible calling of loans, and consequently lower security prices in
the latter half of December and June and an advance early in January
and July. While this reasoning looks sound enough on its face, it is
not at all dependable. It is certain that everything is discounted in
advance of actual events in speculative circles, and the more widely
such theories as the one mentioned are disseminated, the more dangerous
and inoperative they become. Instances are not lacking in recent
years, where the technical situation growing out of this reasoning,
has not only nullified the theoretical action, but has resulted in
actual reversal, i.e.: an advance just preceding disbursements and a
decline at the time the distributed funds were presumably returning to
investment channels. Numerous shrewd people, anticipating an advance
in January and July, have attempted to take time by the fore-lock by
effecting purchases in December and June. Their buying, being of a
competitive character, not only carries prices upward prematurely, but
creates a weak speculative long interest, subject to disappointment if
funds do not reappear in the volume expected, or susceptible to attack
by great manipulators.
There is another objection to this theory of periodicity. If the
market is dull and stagnant, with little public interest, it behooves
the large interests which have stocks for sale to bid up prices and
create activity prior to the heavy distributions of funds. They may
accomplish two things by this process. They make not only a higher
level of prices at which to sell their wares, but create what is of
even greater importance, an appearance of activity, prosperity and a
newspaper market. It is strangely illogical, but unquestionably true,
that people who would flatly refuse to enter a market at a low level of
prices will rush in to buy ten points higher if the factors of bustle
and excitement are present. Both the doctrine of common-sense and the
calculus of probabilities would establish the fact that each advance
brings us nearer the top, and each decline brings us nearer the bottom;
but few men can train themselves away from the idea that an upturn
already established does not indicate higher prices and vice versa. It
is a sort of enthusiasm which a minority understand, however, and make
good use of. The psychological effect of mere excitement is one of the
explanations of the incontrovertible fact that the public usually buys
at high prices and sells at low prices.
The acceptance of certain periods or seasons as a guide to either
purchases or sales of stocks is, in the last analysis, merely a form
of chart-playing. It is natural to evade a studious examination
of the general business and monetary situation and to resort to a
simple, albeit a superficial diagnosis, which, being insufficient and
incomplete, is dangerous. It is suggested that while the double effects
of contraction prior to distribution should be understood and examined,
the only safe method is to go behind these temporary and periodical
changes and study the whole basic structure comprehensively. We may
find that money is in demand for the purpose of propping and sustaining
an unsound business condition, and that it will in all probability
fail to return in volume to the security markets. This occurred in
January, 1907, and the believers in a “January rise,” were badly
disappointed. Interest rates on money must also be given consideration.
If the commercial world is striving to secure funds at a higher rate
of interest than is offered on shares, money, or a good portion of it,
will go where interest returns are greatest. And in this regard it
may be said, that merely local interest rates are not always a good
indication of money affairs in the business world. Not long ago, the
writer, being suspicious of the claims of plentiful money and low rates
in New York, investigated the matter through Western bankers and found
that prime paper was being offered west of the Missouri River at much
higher rates. This was made particularly significant by the fact that
previously the borrowers had always been able to supply their needs at
home, and that the loans, being offered through brokers, really cost
about ½% more than was apparent on their face.
It is frequently interesting and instructive to examine the character
of collateral behind loans, and find out how large a percentage of this
collateral consists of stocks and like securities. Our stock market
might appear to be in a sold out condition, when, in reality, a very
bad technical condition obtained. The purely marginal speculative
account in New York City, or other important centers, is carried on
under certain flexible rules or customs as to the amount of money
loaned on certificates; but in cases where securities have been widely
purchased for cash by small holders, and, in the event of general
tightness in money or depression in business, made the basis of loans
in country banks, but we have, in fact, a very weak _marginal_ public
account. The home banker will loan more liberally to his townsmen and
will scrutinize the movements of prices or the stages of the market
less closely than the city banker, and the certificates owned by small
holders and deposited as collateral may, in the aggregate, represent
an enormous line of shares. It would be quibbling to say that this
situation represented anything less serious than a weakly margined
public line. If the market declined materially, the bankers would be
forced, in self-protection, to call for more collateral, and the result
would depend, as in all other cases, on the ability of the individual
holder to take care of himself. Such a condition existed in U. S.
Steel stocks in the depression of 1903, and was pointed out at the
time by the writer. The knowledge obtained was based barometrically on
information obtained from a number of bankers in different localities.
While interest rates for both time and call money are frequently
fictitious, or of a temporary and artificial nature, and no set rules
can be laid down as to certain conditions in money and their immediate
effects upon security values, it is not difficult to gain a general
idea of underlying conditions. We have always at hand statistics which
will reflect faithfully the fundamental basis of the entire world
structure. But in this important division, as in most other branches of
speculation, we often find that what is really important is absolutely
ignored, while matters of little moment are harped upon, or even made
the basis of operations. Thus, every habitue of brokerage offices
eagerly watches the bank statement or the rates on call money, and
knows nothing about the expansion of credits, even when such expansion
has reached a point that would make a crisis appear inevitable. No
better proof of this can be offered than the fact that our heaviest
business and greatest inflation, have frequently gone merrily forward
for a year or more under suicidal conditions. These conditions have
sometimes been so obvious, so forcible, that it would appear impossible
to view them with equanimity. In a majority of cases they were probably
not viewed at all, and the thoughtful men who pointed out the danger
have been called calamity howlers or pessimists. There is one great
check to education in this direction: great financiers who are most
conversant with actual conditions, seldom find it expedient to point
out the facts. Sometimes they, themselves, wish to dispose of their
holdings because of the obvious peril ahead and this process would not
be facilitated by gloomy predictions. On the other hand, it is too
often the case that these same gentlemen, finding it to their great
advantage to disperse sunshine until their goods are sold, point
assiduously to the excellent business of the present, and neglect
to touch on the irrepressible future, which, after all, is the most
important question to the investor or speculator.
V
Political Influences, Crops, Etc.
The possibility of legislation adverse to corporations is always
present as a market factor, and at times severe declines have been
recorded through such action. It is not always the case that such
legislation is truly a bear factor, although it is fashionable to so
interpret anything in the nature of legislative interference with
corporate affairs. It is the writer’s opinion that a great deal of
misunderstanding has recently arisen in regard to the attitude of
certain party leaders toward the heads of great railroad corporations.
The opinion has been widely fostered by opposing politicians and others
that the credit of railroad corporations was being badly impaired, and
the interests of stockholders jeopardized because investigations were
ordered as to the methods of individuals or directorates.
It does not appear that any reasonable man could, as the stockholder of
a corporation, or as a private citizen, object to having dishonest or
sharp practices on the part of the active management of the property in
question exposed and prevented. Where it is shown that an individual,
in his capacity as the head of a business, has employed his office as a
means of juggling stocks or reaping enormous personal gains, it cannot
but be to the interest of stockholders to have such practices stopped.
If the means at issue are honest and legitimate, the benefits reaped
should go to the stockholders. It is impossible to reconcile any other
plan with equity and common honesty. Let us look at the matter without
the mystery that obscures the affairs of a great corporation.
Suppose a member of a certain firm, its manager, finding the firm
in need of funds, secures money at a high rate, and at great profit
to himself--is that right? Or is it the manager’s business to work
entirely in the interest of the partners he represents? Is it possible
for him to legitimately acquire personal profit of any kind in
administering the affairs of the firm? It is not sufficient to point
out that the manager’s action in securing funds redounded to the great
benefit of the business concern, or that his capability and shrewdness
were reflected in enormous partnership profits. His associates in
business are entitled to all, not a portion, of the gains secured in
the management of its affairs.
It is submitted that much of our recent legislation which is popularly
supposed to have injured stock values has, in reality, aimed to protect
the small holder and throttle the unscrupulous men who, while actually
in their employ, were milking their business of millions. Legislation
which effects publicity and simplicity in the affairs of corporations
is an unmixed benefit to the small investors.
It is almost invariably the case that when a great decline in stock
prices occurs, the set-back is popularly attributed to some factor
which, in reality, had little to do with the reversal. In the decline
of 1907, thousands of people attributed the inability of railroads
to borrow money at low rates of interest almost entirely to hostile
legislation. Apparently these rapid-fire thinkers did not know or
realize that interest rates had risen the world over, that there was
not a free money market in the world, and that money, instead of being
withheld from 4% issues, was fully employed in other lines. Such,
however, was the case; British Consols, French Rentes,--all the choice
securities of civilized countries had kept pace with the declines in
our own bonds and stocks; but these facts seem to be unappreciated.
It is true that adverse legislation sometimes seriously impairs the
value of a security. A public utilities company, for example, which
is forced to reduce its selling rate, is unquestionably injured
from an investment point of view. Such legislation, however, may be
weighed correctly by a little calm consideration, and it may be said
that action of this nature is usually for the purpose of correcting
abuses, rather than as a revengeful and confiscatory attack on vested
interests. Measures which prevent a fair return on capital will perish
of their own iniquity. So far as measures which are formed to prevent
extortion are concerned, it is impossible to criticize them.
In order to correctly weigh the effects of legislative measures on
security values and prices, we must therefore examine fairly what
the legislation seeks to accomplish, taking care not to allow a
contemporaneous price movement which may be due to other causes, to act
as a verification of a false view. This error occurs very frequently;
in fact, one of the most remarkable things about speculation is that
the true causes of great movements are fully appreciated by the
majority _only in retrospect_.
The probable market effect of legislative and political affairs can be
correctly gauged only by examining the nature and importance of the
issue in question. This is true not only of state and municipal action,
but in regard to presidential elections. There is a popular idea
that it is dangerous to buy stocks on the eve of a new presidential
campaign, but there is not much in history to uphold the view. True, in
a majority of cases, a decline has preceded such a contest, but there
have been frequent reversals of this action, and we have had too few
elections to attempt any chart-playing on this influence. Such a guide
would be empirical.
The issues involved in a presidential contest, however, may sometimes
influence prices. Here again a careful examination of facts and
probabilities will generally uncover the truth. If the nominee of one
party stands on a dangerous platform and the outcome of the contest is
in doubt, we may well dispose of shares if for no better reason than
that the element of danger is present. Danger, whether or not it is
finally realized, is a bear factor, just as safety is a bull factor.
Tariff agitation should be accorded careful consideration by the
speculator. This is particularly true as regards the effect on
industrial corporations. A reduction of the present tariff on Iron and
Steel, for instance, would materially lower, if not destroy, the value
of many of the common stocks of steel manufacturing corporations. A
very clear and comprehensive work on this subject is mentioned in the
bibliography on page 183.
No cut and dried rules or suggestions can be offered as to the
effects of political or legislative issues on prices. Each point
must be scrutinized as it arises, and judgment formed thereon.
Sympathetic movements will sometimes occur because of apprehension or
misunderstanding, but such effects will be short-lived.
_Crops and Crop Failures._
The question of crop failures is of great importance. It is not
difficult to form a fairly correct idea as to the ultimate yield. The
estimates of the Government sometimes go wide of the mark, but it
must be remembered that they are _estimates_ and nothing more, and
that conditions may change somewhat after the figures are compiled.
The speculator is frequently confused by the conflicting opinions
of private experts. It is probably safer to disregard the various
authorities and pin one’s faith to the computations of the bureau at
Washington. These official documents have been criticized at times,
and no doubt the criticism has been warranted, but they form our most
dependable source of information and will improve as time rolls on.
A crop failure, or a short crop, invariably brings forth much
fallacious vaporing from the rooters of Wall Street. They are as bad in
their efforts to obscure the truth as are the crop-killers with their
fabrications. A crop failure is a serious thing and must be faced as
such. The contention which is always heard in lean seasons, that the
evil has been counter-acted because of the large reserves of Wheat,
Corn or Cotton in farmers’ hands is ridiculous. Farm reserves are
wealth. They have already found their place in the business structure.
In many cases the money they represent has already been spent in the
form of credits. Nor do high prices for cereals or cotton overcome the
evils of short production. Small crops mean decreased employment for
laborers; a diminution of per capita purchasing power, and increased
cost of living. They also mean smaller tonnage for the railroads, and
consequently decreased earnings.
And in examining crop prospects, we should consider the fact that each
year’s normal crop should be larger than the one preceding it. This is
distinctly shown by tracing production back for a term of years.
There will, of course, be fluctuations in this gradual increase, but
the tendency is certain. We may also consider that as railroads are
constantly extending their lines and increasing their facilities, it
follows that increased production in the commodities they transport is
necessary to their well being.
And short crops the world over in the same year have the same elements
of economic evil. The purchasing power of the world is reduced, and
even if we ourselves make fair crops and export them at high prices,
the world’s poverty is felt in lack of demand for other exportable
surplus. The civilized world is too closely knit together in its
affairs to permit of the entire localization of the effects of a
serious property loss.
A lean crop year can probably do more to temporarily injure the
actual _value_ of railroad shares than can any other single influence
bearing on prices. Tonnage is affected both ways, so is passenger
traffic. There is less grain or cotton to haul to the markets, and, as
purchasing power has been reduced in the affected localities, there is
less freight to haul back to the producers. In the last analysis, the
products of a community represent to a great extent the mere exchange
of these products for other luxuries and necessities, and the effect of
decreased production is a two-edged sword, so far as the transporting
companies are concerned.
_Accidents._
The effect of accidents on stock prices has been fully discussed
in a former work, and the contention offered that accidents could
no more be provided against, or considered, in the investment or
speculative world than in any other walk of life. It is also thought
that accidents are more frequently the _excuse_ for movements than
the _cause_ of them. If a market is in a bad technical or general
condition, the slightest adverse happening may create panic; while
if the foundation is sound, even a great calamity, such as the San
Francisco earthquake, will cause only a temporary halt. The man who
speculates correctly has little to fear from accidents.
In the following section of this work, the writer
has undertaken to touch on such features as appear
of most interest and benefit to the speculator or
investor. Some of the matter presented, such as the
question of dividend dates, will appear to many
readers so simple as to be unnecessary, but it is
true, nevertheless, that many very elementary facts
are misunderstood or unappreciated by a large class
of public participators.
VI
Puts and Calls
Puts and Calls, or “privileges,” have long been popular with a certain
trading element, either as a protection against loss in commitments
already made, or as a positive method of trading.
The theory and operation of privileges may be easily understood by
considering them in the light of insurance, the money paid for them as
a premium, and the funds received in case the privilege is exercised,
as a loss paid by the insurance company. It will be understood, that
in speaking of the _seller_ of puts or calls, the insurance company is
referred to, and that the _buyer_ represents the insured party.
The _buyer_ of a call has the right to _call_ for his shares or
commodity, at the price named in the contract at any time before its
maturity. The _seller_ of a call fixes a certain price at which he
agrees to _deliver_ stock, specifies the duration or time limit of the
contract, and receives from the buyer a certain sum or premium.
For example: United States Steel Common is selling at $40 per share;
A, the seller, offers a call on 100 shares at 43, good for ten days, at
a price of say, $100. B, the purchaser, pays the $100 and receives a
contract from A as specified above. Now suppose that at any time before
the expiration of the period named, Steel Common advances to 50. B can
call for the delivery of 100 shares of Steel at 43, and by selling it,
reaps a profit of $700, less the cost of the privilege, ($100), and
the brokerage. Used as a protective measure on short sales, the result
would be the same, as $700 would have been saved. That is to say, if A
is short of Steel at 40 and it advances to 50, his call has acted as
insurance against any loss over and above the $300 represented by the
rise from 40 to 43.
The “put” is exactly the reverse of the “call,” and is insurance
against a decline; or, in other words, an agreement to receive shares
at a specified price on or before a certain date.
Using the same illustration as before, let us assume that the price of
Steel Common is 40, and that A, the seller, offers a put at 37, good
for 10 days, at a price of $100. B, the buyer, is now insured against
any loss which may accrue through a decline below 37 in the ensuing
ten days. If he is long of the stock and it declines to 30, he may
deliver his shares to A at 37, or if he has purchased the “put” as a
speculation, he may buy 100 shares in the market at 30 and deliver to
B at 37, netting a profit of $700, less the price paid for “put” and
brokerage.
One of the favorite methods of trading in privileges is to buy or
sell against them when the price named is reached. For example, say B
holds a ten day “put” on Steel Common at 37, and the market for the
stock declines to 36 in five days. He may now buy 100 shares at 36 on
the theory that he has regained his original outlay of $100 and has
a possibility of profit through market action in the remaining five
days, while there is no possibility of loss. If the market advances
to, say 38, he may sell the one hundred shares purchased, and on
another decline to 37 or 36 may again purchase, repeating the operation
indefinitely during the life of his put. The “Call” is, of course, made
the basis of short sales on an exact reversal of this process. This
fashionable form of exercising privileges is facilitated by the fact
that “puts and calls” issued by members of the New York Stock Exchange,
are generally accepted by brokers as “margins”; B having paid A $100
for a “put,” as illustrated above, could, if Steel declined to 37 or
below that figure, buy 100 Steel and give his broker the privilege
issued by A, in lieu of a marginal deposit. The broker is satisfied,
as he gains a commission, and in the event of a further decline in the
price of Steel can call on A to receive the stock at 37 when the option
expires.
Another popular form of trading in privileges is to buy or sell half
the amount named in the privilege when it becomes “good” through market
action. If B holds a “put” on 100 Steel at 37, he may, at that price
or below, buy 50 shares. He is now in a position to profit by either
an advance or a decline. If the price advances to 40 he has three
points profit in the 50 shares purchased. If, on the other hand, the
market declines to 34, he still gains 3 points on 50 shares, for his
“put” protects him against a loss in the 50 shares purchased and he can
purchase another 50 shares at 34 and deliver to A at 37. In short, when
he makes his 50 share purchase at 37, he is both short and long of the
stock and must gain on a movement either way in the market price.
A “Straddle,” as the term is applied to privileges, is a combined “put
and call”. The purchaser gains on a movement in either direction. The
general rule is that the gain is to be represented by a market change
representing an excess of the amount paid for the “Straddle.” Thus if
A sells to B for $250, a straddle on 100 shares of Steel, when the
current market for the stock is 40, B is in a position to gain by
either an advance above 42½ or a decline below 37½.
The purchasers of privileges are sometimes perplexed by market changes
which are brought about by dividend payments. The rule is that the
dividend always goes with the stock. The simplest way to arrive at
correct figures is, to mentally lower the price of either the “put” or
“call,” by the exact amount of the dividend payment. Thus, if B holds
a “call” on Steel at 43 and a dividend of 2% is paid on the stock
during the life of his option, his “call” becomes operative at 41 as
the dividend goes to him. If he holds a “put” at 37, and 2% dividend is
paid on the stock, his “put” is not operative until 35 is reached, as
the dividend goes to the maker of the “put.”
Privileges in grain or other commodities are based on the same general
rules and principles as those on stocks. These privileges are heavily
dealt in on wheat and corn in Chicago. They are designated, however, as
“ups” and “downs” in order to evade local laws prohibiting transactions
in “puts and calls.” The “ups” are calls; the “downs” are puts. Most of
the grain privileges handled in Chicago, or based on Chicago prices,
are of a day to day character, insuring only for the next day’s price
changes. The ordinary charge is $1 per thousand bushels. For $1,
therefore, the small gambler, or speculator, may purchase, say a call
on 1,000 bushels of wheat at 90½ when the last price recorded was 90.
If wheat reaches 91½ during the next day’s session, he has a gain of
$10 less the cost of the “call” and brokerage.
The small capital required for this form of trading, the fact that
loss is limited to the original cost of the privilege, and the great
possibilities in case of extreme movements, make “puts and calls”
very popular. It may be said, however, that they are, as a rule, poor
property. The writer kept account of the transactions in “puts and
calls” handled through a large concern for almost two years and found
that only about 35% of the money paid for these privileges returned
to the purchasers. That is to say, the profit shown to purchasers of
“puts,” “calls,” and “straddles,” was only about $350 out of each
$1,000 received by the sellers. After deducting the item of commission
charges, it was found that the sellers of privileges reaped over
50% profit each year. The experiment referred to was based on grain
privileges, but would probably hold good in stocks. The _sellers_ of
these “puts and calls” are among the brightest men in the street, and
when they make prices they do so on the absolute basis that they have
the best of the bargain and the buyers are usually a public element.
In the test referred to, there were never three consecutive days when
either “puts” or “calls” were good. There was on one occasion in the
period consulted, an advance of over 20 cents a bushel in wheat in
three days, but “calls” were good only on the first day of the advance.
On this occasion the “calls” were good for about 2 cents per bushel on
the first day’s rise, but the sellers offered nothing for the second
day, except at prices far above the market, and although the market
advanced 6 cents per bushel, wheat was not “called.” On the third day,
prices for “calls” were prohibitive, ranging from ten to twenty cents
above the closing price and again wheat was not called, although the
market advanced 8½ cents.
In the accounts examined, one seller of privileges on wheat had an open
order to sell 100 puts and 100 calls every day at the ruling price. He
thus received $200 daily and invariably “took his loss” whenever the
privileges operated against him. That is to say, if wheat closed one
cent per bushel above the call price, he would be called for 100,000
bushels on his privileges, making him short that amount of wheat. This
he bought in at once and pocketed a loss of $1,000 less the $200
received. Although he accepted some severe losses now and then, his
account showed over $30,000 profit on a year’s business.
Another account was operated on a different principle by the seller of
privileges and resulted in even larger profits. This individual would
sell ten “puts” and ten “calls” on wheat each day. In the event of his
being called, i.e., short of the wheat, he would, on the next day sell
no “calls,” but 20 “puts.” In the event of a decline below the “put”
price, he had enough short wheat to protect ten of his “puts” and in
reality automatically close out his ten thousand short, frequently at
a profit. As has been stated, his profits were greater than in the
first instance quoted. There was, of course, a more highly speculative
element in his form of operating than in the other method, but the
operator was never either long or short more than 10,000 bushels,
and received about $6,000 a year or 60 cents per bushel from his
privileges, in addition to the accruing of profit or the curtailing of
loss by his mechanical method.
In the accounts examined the persistent purchasers of privileges all
finally lost money, except in a few cases where lines acquired on
“puts or calls” were carried to a successful conclusion in the course
of time. That is, a purchaser of “calls,” finding a profit in his
privilege, would call the wheat and _keep_ it. This, however, resolved
the matter into pure speculation, as the maximum benefits derived from
this form of trading can only be correctly measured by the profit shown
at the expiration of the “put” or “call.” That is to say, the seller
need suffer no greater loss than that shown when the contract he has
given matures, and consequently the profit to the buyer cannot be
greater except through speculation.
It would appear from these facts, that the purchasing of privileges
is a poor business proposition, while the selling of privileges is a
money making affair. This is true. We need only compare the kind of men
who _buy_ “puts and calls” and those who sell them to have this truth
made apparent. The late Russell Sage was a persistent writer of these
instruments and made a great deal of money by the process. The late
Edward Partridge also made a good deal of money in this manner in the
Chicago Wheat Market. He also used privileges to aid his manipulative
campaigns. On several occasions, he sold “calls” heavily through the
day, then suddenly bid wheat up just at the close of the market,
effecting a closing just above the call price. The scattered purchasers
would call the wheat and put Mr. Partridge short several millions at
a high price, which was just what he wanted. He could not have sold
as much wheat in the open market without breaking the price several
cents. On the same principle, he used sometimes to sell a great many
“puts” when he wished to cover a line of short wheat and rush the
price downward at the close, thus enabling him to purchase a great
line without disturbing the market by bidding for it. The process only
worked a few times, however. As soon as it was discovered it failed, as
the call price, when reached, met with such a wave of selling that it
was impossible to break through it, and the manipulator was “hoist with
his own petard.”
There is another drawback to the habit of buying privileges--a mental
one. They are frequently made the basis of positive trading with
disastrous results. The man who believes in an advance in certain
shares or commodities, frequently purchases privileges instead of
following out his own convictions by actual trading. Thus the man
who had good reasons for expecting an advance in wheat at the time
of the 20 cent advance mentioned above, and who used either “puts”
or “calls” or both, as a means of operating on his opinions, would
have reaped less than two cents a bushel during an advance of twenty
cents. He might, of course, have called the wheat on the first day
of the advance and remained long, but in that case he would merely
have been speculating with equal chance of loss or profit in ensuing
transactions. Aside from the initial two cent gain, he would have been
in no different position than if he had purchased and held the cereal
on margin.
It is the writer’s opinion, founded on the experience set forth above,
that it is much better to effect transactions in the ordinary manner,
than to depend on privileges. If “puts and calls” are dealt in at all,
they should be sold, not purchased. The insurance companies make more
money than is paid out in losses; so do the sellers of privileges. It
may be well to add, however, that the man who runs an insurance company
is in danger if he does not understand his business and his risks,
or if he enters the field without sufficient capital to provide for
possible initial losses. All this applies to the seller of privileges.
VII
The Question of Dividends
It is a certainty that the short seller of dividend-paying stocks
suffers a drawback from dividends, except in the rare cases where
interest is allowed on short stocks. If we sell short a 6% stock at par
and at the end of a year find the stock still selling at par, we have
lost 6% without adverse market action. This onus cannot be escaped by
short-time commitments; it is merely a matter of degree. The chronic
short seller is swimming constantly against the current.
There is one point about dividends which is widely misunderstood
by ordinary traders. It appears impossible to make a great many
individuals understand that short sales may be as intelligently made
the day before a stock sells “ex-dividend” as at any other time. Even
when good reasons for a decline exist, traders fight shy of “swallowing
the dividend,” or retire commitments just before dividend payment for
no other reason than that such distribution is to be made, which is, in
fact, no reason at all.
The disadvantage to the seller of stocks through the earning
capacity or increment is the same on the day or the week preceding
a disbursement as at any other time. The earnings of the company
are a steady day to day affair, and are, as they accrue, constantly
considered in the price of the stock. In other words, the prices of
listed shares are at all times “flat.” At a point midway between two
dividend days, the stock reflects in its current price half the amount
of the undistributed dividend, or other increment. For example, if a
certain stock sells normally at par and pays 6% per annum (3 per cent.
in January and 3 per cent. in July) the price of the stock in March,
eliminating speculative influences, would be 101½ and in July 103.
When on July 1st, the 3 per cent. is distributed, the amount is simply
taken away from the company and from the price of the stock also. It
now returns to its normal price, 100, and whether it will go up or down
from that point is a question for speculation. The factor which made
the price 103 has been eliminated and it remains for the corporation in
question to again earn 3% available for distribution before the next
dividend day.
Perhaps this point may be made clearer by assuming that a certain
stock is not handled on the “flat” basis, but is dealt in “and
interest” after the method sometimes employed in bond transactions. Let
us again eliminate speculation and take for example a stock selling
at 100 and paying 6%. Assuming that a dividend had been paid on this
stock on January 1st, the purchaser of the stock on February 1st
would pay 100 for his shares, and would also pay to the seller the
accrued dividend for one month, or ½ of 1% which is exactly the same
proposition as if the stock had been quoted flat on the Stock Exchange
at 100½. On March 1st, the purchaser would pay 100 for his shares and
1% accrued dividend or 101, etc.
It appears, therefore, that the widespread idea that it is dangerous
to sell a stock just before a dividend day is not sound. In fact, the
whole matter may be dismissed by saying that if there was any good
or logical reason for expecting a premature recovery of the price
of dividend-paying shares, or an advance founded on any reason in
connection with dividends other than the gradual accumulation from one
date of disbursement to the next, the whole problem of making profits
in Wall Street would be solved. The rule must necessarily work both
ways, and if it is dangerous to sell at certain periods, it must be,
in inverse ratio, safe to purchase. All we would need to do therefore,
would be to await the dates on which shares sold “ex-dividend” and make
purchases. Here then, is exploited a patent way of getting the best of
the market without study or effort. In truth, there is nothing whatever
in the theory any more than there would be in buying Government bonds
for a rise just after the interest had been paid on them. If good
reasons exist for sales, they may be made as confidently at one time as
another. The disadvantage of being short of dividend-paying stocks is
always present, and it cannot be escaped, but the operation is a day to
day affair not a matter of certain dates.
_Basing Railroad Values._
“The problem of railway valuation is comparatively
simple, and beyond the reach of but few. A railway is
primarily a carrier, a carter, a drayman. Obviously
then, in considering an investment, we shall ask,
What sort of a road has it? What sort of vans, and
what sort of horses? What sort of trade? A teamster
doing business on a fine level macadamized road, with
big, heavy vans, and heavy draft horse, can work at
a profit and underbid a carrier with old vans and
poor horses, working on roads of heavy grade. So,
for example, a railroad, other things being equal,
with a water grade like the New York Central, has a
tremendous advantage over an up and down grade like
that of the Erie. The Illinois Central can do
business much more cheaply than the Missouri Pacific.
A road with a magnificent equipment like the Lake
Shore can undercut a poorly equipped road like the
Nickel Plate.
“The initial facts that we wish to know of a railway
then are, What sort of a road has it, what is its
traffic, does it get good rates? When we know what
business it does, what its earnings are, then we
shall ask, how is it capitalized, what are the fixed
charges these earnings have to bear, what is there
left, and what is the amount of stock which has to
share the surplus? We shall ask if its earnings are
stable, if the maintenance is adequate, if the policy
of the road is conservative, if its management is
good or bad. When we have done all this, then we
shall go into the market, ask the prevalent rate
of money, and by a simple rule of thumb, we shall
know, in a broad way, whether the stock is cheap or
dear.”--From “American Railways as Investments,” by
Carl Snyder.
_The Effects of Business Depression on Rails and Industrials._
“There is apparently a popular belief that the general market always
moves together in a considerable swing, and that any advance in one set
of stocks would be accompanied by a corresponding advance in others. So
far as the general tone of a day’s market is concerned this is true;
but, nevertheless, individual stocks or groups of stocks can easily
and gradually change their selling basis in a brief period of time. In
1901, for example, the industrial stocks reached their high levels,
and suffered a considerable decline in 1902. Meanwhile the rails were
advancing. To illustrate and confirm this statement the highest prices
of both Rails and Industrials in July, 1901, and July, 1902, are set
forth in the following tables. There can be no unfairness in choosing
this particular period. What is to be demonstrated is that it is
possible for the groups to cross each other in price in a given time.
The ten most active stocks have been chosen in each group as fairly
representative of the entire market:
RAILROAD STOCKS.
High in High in
Stock July, 1901 July, 1902
Atchison 89⅜ 95¾
B. & O. 108¾ 112⅛
Can. Pac. 108¼ 139¾
St. Paul 177¼ 189⅜
Erie 43⅝ 39½
L. & N. 111 145⅞
Mo. Pac. 121⅞ 119½
Penna 151¾ 161¾
Reading 47 69⅞
Union Pacific 110⅞ 110⅝
------- -------
Average price 102.97 118.41
INDUSTRIAL STOCKS.
High in High in
Stock July, 1901 July, 1902
Amalgamated 124¼ 68¾
American Smelting 58 47½
American Sugar 145⅝ 134½
Anaconda 48⅞ 27
Col. Fuel & Iron. 116⅛ 102¼
National Lead 23 22¼
Tenn. Coal & Iron 72½ 69½
Rubber 21¼ 17
U. S. Steel 48⅞ 41
U. S. Steel, Pfd. 99½ 92⅛
------- -------
Average price 75.80 62.18
“These tables show that during the fiscal year used, railroad stocks
advanced an average of over 15 points, while industrials declined
almost 14 points. In other words, the spread was 29 points. The man who
bought rails and sold industrials would have made on the average 29
points. This exhibit entirely overthrows any argument that the market
moves one way or the other homogeneously.
“There was a reason for the spread illustrated above. There always is
a reason. We had big crops in 1902, which helped the railroads. The
industrials, on the other hand, were busily discounting the business
depression of 1903.
“Precedent shows that in a period of general depression Industrial
stocks suffer about 33% more than rails. That is to say, in the high
and low prices covering a long period, industrial securities should
show a distinctly greater pro-rata of decline. Let me illustrate, using
the stocks employed in the former table and covering the period of our
last great cycle, 1901-02-03. As most of the high prices in rails were
made in 1902, the highest prices of both 1901 and 1902 will be used,
and the lowest of 1903:
RAILROAD STOCKS
High in Low in
1901-1902 1903
Atchison 96⅝ 54
B. & O. 118½ 71⅝
Can. Pac. 145¼ 115⅝
St. Paul 198¾ 133¼
Erie 45½ 23
L. & N. 159½ 95
Mo. Pac. 125½ 85¾
Penna 170 110¾
Reading 78½ 37½
Union Pac. 133 65¾
------- -------
Average price 127.11 79.22
INDUSTRIAL STOCKS.
High in Low in
1901-1902 1903
Amalgamated 130 33⅝
Am. Smelter 69 36¾
Am. Sugar 153 107⅛
Anaconda 54¼ 25½
Col. F. & I. 136½ 24
Nat’l Lead 32 10½
Tenn. Coal & I. 76⅝ 25⅞
U. S. Rubber 34 7
U. S. Steel 55 10
U. S. Steel, Pfd. 101⅞ 49¾
------- -------
Average price 84.22 33.01
“It will be observed from the above table that Industrials declined
about 51 points while rails declined about 48 points. But the decline
cannot be figured in points. The higher range of railroad shares must
be considered. A decline of two points in a stock selling at 100 is
only equivalent to a decline of one point in a stock selling at 50.
Therefore, in order to get a correct view of the matter, we must reduce
the decline to percentages. On this basis, railroad stocks lost about
38% of their value, and industrial stocks lost about 60% of their
value.”--From Thomas Gibson’s Market Letter, May 4th, 1907.
_Undigested Securities._
“The new methods and the new projects are going through the test of
fire today, and some of them are being consumed. The tests which weeded
out the badly organized and incompetent of the early stock companies,
which drove to the wall the “wildcat” banks of ante-bellum days, and
which wiped out dividends and stock rights in badly managed railways,
are now being applied to the new forms of organization which have been
the growth of the past decade. But the stronger and better organized
of these new corporations are likely to meet these trials without
disaster, or to modify their methods to conform to the teachings of
experience, until there remains to the financial world a valuable
residuum of new methods for giving flexibility to capital and promoting
its transfer promptly and efficiently from the industries where it is
not needed to those where it will render its highest service.”--From
“Wall Street and the Country,” by Chas. A. Conant.
_How to Compute the Value of Rights._
“Inasmuch as the method of computing the value of rights is slightly
complicated, an illustration may be given. Let us take the instance
of St. Paul again, where the stockholders were allowed to subscribe
to 23% of their holdings to new stock at par. The common stock was at
that time selling a little below $200 per share. Let us take the round
figure, and the operation is as follows:
One hundred shares at $200 per share equals $20,000
Twenty-three shares at $100 equals 2,300
-------
Total cost of 123 shares $22,300
“Average cost, $181 per share.
“Deducting $181 from the market quotation leaves $19, the value of
the rights on each share of St. Paul stock. As a matter of fact, the
selling price was a little below $200, and the highest price of the
rights fell a little below $19 per share.
“In other words the process is simply to take the number of new shares
per hundred shares of the original holding to be subscribed for, and
add the value of these new shares at the subscription price to the cost
of one hundred shares at the market price; then divide the total cost
of both old and new shares by the total number of shares, and deduct
the average price from the market quotations. This gives the selling
value of the rights.”--From “American Railways as Investments,” by Carl
Snyder.
_Barometer of Averages._
“In order to facilitate the examination of properties and their
comparative condition, the following table has been prepared. The
figures were arrived at by averaging the operating expenses, fixed
charges, margin of safety, and dividends of principal properties for
the last fiscal year. The stock prices are based upon the closing
figures of June 6, 1907. The margin of safety shown, is the margin over
common dividends. Results were as follows:
Average operating expenses 69.01%
Average fixed charges 54.70%
Average margin of safety 5.28%
Average dividend common 6.03%
Average price of stock 1.09⅝
“As in all computations of this kind the figures are comparative
and not basic. The fact that one stock is in a much better position
than others does not necessarily mark that stock as a purchase, for
_all_stocks may be too high, and underlying conditions may not warrant
purchases in any quarter. Again, we must always consider the fact
that important elements which cannot be tabulated in figures may be
present. However, the table possesses value as a rough barometer, and
after it has been broadly applied, specific influences may be given
due consideration. If, for example, we find a common stock selling
well below 109⅝, with operating expenses below 69.01; fixed charges
below 54.70; margin of safety above 5.28 and the dividend rate above
6%, we have a remarkable combination of facts favoring the shares and
investigation will be stimulated. The figures vary widely at times in
different corporations and cannot always be considered either bullish
or bearish, as the good or bad features may be already discounted
in the current price of the shares. It may also be found that one
property is going backward gradually while another is improving its
position.--From Thomas Gibson’s Market Letter, June 8th, 1907.
_The Best Method of Trading._
“It may appear that if the market is to sway back and forth, sales
on advances, and purchases on declines would offer the maximum of
opportunity to the shrewd trader. But not so. To illustrate this,
a market movement from high to low prices as shown by a chart is
presented on the following page.
“As simple as this illustration may appear, it is
worthy of most earnest consideration. True, the
upward and downward movements show opportunities
on both sides, but if the _purchaser_ makes a
mistake, as all speculators will, he is hopelessly
involved. If he buys at the wrong point he will
never see daylight during the progress of the
movement. Look at the other side of the matter.
The _seller_ cannot make a mistake. No matter
at what point he sells a profit lies before him. A
little reflection will show what a tremendous
difference exists here.”--From Thomas Gibson’s Market
Letter, Feb. 2nd, 1907.
[Illustration]
_Indications of Crises._
“Preceding Indications.--This preceding period is characterized by
well-defined indications, some of which develop contemporaneously, but
which, so far as they are distinct in time, occur in approximately the
following order:
“1--An increase in prices, first, of special
commodities, then, in a less degree, of commodities
generally, and later of real estate, both improved
and unimproved.
“2--Increased activity of established enterprises,
and the formation of many new ones, especially those
which provide for increased production or improved
methods, such as factories and furnaces, railways
and ships, all requiring the change of circulating to
fixed capital.
“3--An active demand for loans at slightly higher
rates of interest.
“4--The general employment of labor at increasing or
well-sustained wages.
“5--Increasing extravagance in private and public
expenditure.
“6--The development of a mania for speculation,
attended by dishonest methods in business and the
gullibility of many investors.
“7--Lastly, a great expansion of discounts and loans,
and a resulting rise in the rate of interest; also
a material increase in wages, attended by frequent
strikes and by difficulty in obtaining a sufficient
number of laborers to meet the demand.”--From “Crises
and Depression,” by Theodore Burton.
_The Ordinary Swing of Prices During a Cycle of Speculation._
UPWARD SWING.
EXTREME | A long period of backing
HIGHEST. | and filling; public buying, and
100 | inside liquidation.
90 | Excitement and inflation
| 75% of general buying done here.
80 | Good buying all around.
| Public interested.
NORMAL | Opinions mixed. Public beginning
VALUE. | to buy, but professionals
65 | rather bearish.
45 | Insiders still bidding prices up.
| Professionals bearish.
30 | Insiders bidding for stocks,
| public skeptical.
20 | A dull market. Insiders
EXTREME | accept all offerings.
LOWEST. |
DOWNWARD SWING.
EXTREME | A long period of backing
HIGHEST. | and filling; public getting
100 | tired and insiders selling.
90 | Insiders selling. Much bull
| talk, dividend increases, etc.
| Some averaging by people
| who loaded up at the top.
80 | More bull talk. More averaging.
| Insiders still selling.
NORMAL | Many weak accounts forced out.
VALUE. | A temporary halt and probably
65 | a big rally.
45 | Insiders pretty well out.
| The wise speculative element
| consider this the bottom and
| load up.
30 | General blueness and pessimism.
20 | A dull market. Insiders
EXTREME | accept all offerings.
LOWEST. |
--From Thomas Gibson’s Market Letter,
May 11th, 1907.
_The Factor of Safety._
“There remains but one point to which, in view of the conditions
roughly sketched above, the writer would call especial attention.
That is, that the investor should look well, always, to the factor of
safety. Before he puts his money into any road, no matter if it be on
the recommendation of the greatest banker in the United States, let
him consider how far that company is prepared to weather a storm. Few
roads ever prospered under receivership, no matter how honest or how
able. The receivership itself is a handicap. No matter how high the
yield, no investor whose primary regard should be the safety of his
money will put it into a road whose fixed charges, after ample charges
for maintenance, consume much more than 50% of the total net income
available for interest, dividends and improvements--that is, save in
exceptional cases like the New York Central--and until he has satisfied
himself thoroughly that the property is sound.
“For the convenience of those not well acquainted, the following list
of the principal roads is given, with the percentage of total net
income consumed by fixed charges in the highly prosperous fiscal year
of 1905:
TABLE OF FIXED CHARGES.
Atch., Top. & S. Fe 42% Chi. & East. Illinois 68%
Atlantic Coast Line 57% Chi. & N’western 39%
Baltimore & Ohio 39% Chi., Bur. & Quincy 45%
Boston & Maine 78% Chicago Gt. Western 67%
Canadian Pacific 33% Chi., Mil. & St. Paul 32%
Central of Georgia 47% C., St. P., M. & O. 42%
Cen. R. R. of N. J. 50% C., C., C. & St. Louis 69%
Chesapeake & Ohio 53% Col. & Southern 55%
Chicago & Alton 73% Delaware & Hudson 40%
Del., Lack. & West 38% N. Y., Chi. & St. L. 41%
Denver & Rio Grande 52% N. Y., N. H. & H. 48%
Det., Tol. & Ironton 87% N. Y., O. & Western 53%
Du., S. S. & Atlantic 115% Norfolk & Western 37%
Erie 66% Northern Central 28%
Gr. Rap. & Indiana 76% Northern Pacific 29%
Grand Trunk 65% Pennsylvania 38%
Great Northern 26% Pitts. & Lake Erie 11%
Hocking Valley 31% P., C., C. & St. L. 54%
Illinois Central 47% Reading 45%
Iowa Central 79% Rock Island 83%
Kansas City South’n 54% Rutland 69%
L. Erie & Western 69% St. L. & S. Fran. 82%
Lehigh Valley 46% St. L. & S’western 76%
Long Island 101% Seaboard Air Line 78%
L. S. & M. S. 38% Sou. Pacific 49%
Louis. & Nash. 54% Southern 69%
Maine Central 46% Texas & Pacific 40%
Michigan Central 57% Tol., St. L. & S’w’n 61%
Minn. & St. Louis 77% Union Pacific 31%
M., St. P. & S. S. M. 44% Vandalia 54%
M., K. & T. 75% Wabash 80%
Missouri Pacific 60% Wheel. & Lake Erie 90%
N. Y. C. & H. R. 64% Wisconsin Central 69%
_Importance of Fixed Charges to the Investor._
“The high degree of stability imparted to interest payments and
dividends by a low percentage of fixed charges, and the high degree
of instability imparted by a large percentage, is so elementary that
it would seem to need no emphasis. And yet this item is habitually
disregarded by perhaps 90% of bond and stock buyers. On this account it
may be worth while to illustrate by simple comparison the effect of a
20% decline in gross or net earnings. We will compare the conditions of
two roads whose fixed charges are respectively 75% and 25% of the total
net income. The operation would be as follows:
Suppose a 20% Decline
Say Earnings $1,000,000 $800,000
Exp. (70%) 700,000 560,000
---------- --------
Net $300,000 $240,000
If F. C. 75% = 225,000 225,000
---------- --------
Surplus for div. $75,000 $15,000 (Case I)
Decrease 80%
If F. C. 25% = 75,000 75,000
---------- --------
Surplus $225,000 $165,000
Decrease 26% (Case II)
“It will be seen from the above that a 20% decline in the net earnings
would, in the first instance, mean a decrease of 80% in the surplus;
while in the second case, the same decline would mean a decrease of
only 26% in the surplus--figures which sufficiently indicate what a
high percentage of fixed charges means.
“In this connection it may be further noted that in the large holding
companies, like the Pennsylvania, the New York Central, the Union
Pacific, and others, the factor of safety and the surplus shown tends
to be relatively more stable than in companies largely or exclusively
dependent upon the earnings of their own roads. This is due to the
general custom of American Railways of paying out in dividends only a
part of the actual surplus earned. From this it results that dividends
are much more stable than earnings, and that the income of the
holding companies from this source will correspondingly show smaller
fluctuations than earnings. When, therefore, as in the case of some
of the large holding companies named, the income from investments
represents a considerable portion of the total net income shown, the
surplus, other things being equal, will be much more stable than in
other companies.
“It is needless to add that this stability is still further heightened
when, as in the case of the Pennsylvania, Union Pacific and some other
roads, the percentage of fixed charges is at the same time low.”--From
“American Railways as Investments,” by Carl Snyder.
_Borrowing and Lending Stocks._
“When a speculator sells stock which he does not possess (when he sells
it short) he (or what is the same thing, the broker who acts for him)
has to borrow the stock to make delivery to the purchaser. The one who
possesses stock (who is long of it) is, in ordinary circumstances,
as anxious to lend it as the one who has sold it short is anxious to
borrow it.
“The lender of stock receives from the borrower the market value of it
in money, but except when the stock is lending flat (without interest)
or at a premium, the lender of the stock pays to the borrower of it
interest on the money paid for the stock by the borrower. The rate of
interest is determined by bid and offer.
“On the New York Stock Exchange, brokers who have stocks to borrow and
brokers who have stocks to lend assemble immediately after the close
of business on the exchange and those who need stocks borrow amounts
necessary to make deliveries the next day. Those who neglect to borrow
at this time must do so the next morning, or some time in the day
before the delivery hour, 2.15 p. m. There is no loan crowd in the
morning, but borrowers seek lenders at the posts on the floor of the
exchange around which the particular stocks that they require are dealt
in.
“The same rules govern the receipt and delivery of stocks borrowed and
loaned as govern stocks bought and sold. In returning borrowed stock
the borrower must notify the lender before 1 o’clock on the day of
delivery; the lender in calling or demanding the return of stock must
do likewise.
“When a stock is loaned flat, the owner is relieved from the cost of
carrying the stock. If loaned at a premium he is still better off, for
the premium is so much gain. When a stock is loaned at a premium, the
premium applies in the absence of a renewal of the loan only to the day
on which the stock is loaned.
“If a stock that has been borrowed advances in market price the lender
may require the borrower to pay to him the difference between the
price at which the stock was loaned and the new higher price. On the
other hand, if the stock declines in price the borrower may require
the lender of the stock to return to him the difference between the
price at which the stock was borrowed and the new lower price. These
differences are called market differences.
“When a corner is being worked up in a stock it is the practice of
those engineering it freely to loan the stock in order to encourage the
creation of a short interest in it. When this short interest has become
large enough, or in other words, when the stock has become sufficiently
oversold, a demand for the return of the stock brings the corner to a
culmination.
“An apparent borrowing demand for stocks is sometimes created by the
efforts of money lenders to obtain higher interest on their money than
is obtainable in lending it in the money market. If the lending rate
for a particular stock is, say, 6 per cent. when money is lending at 4½
per cent. in the money market the money lenders will borrow the stock
in order to obtain the extra interest.
“When a seller of long stock (stock actually owned) desires to create
the impression that he is selling short stock (stock not owned or
possessed) he has his broker borrow stock for delivery to purchasers.
Then when he has completed his sales he delivers his own stock to the
ones from whom his broker borrowed.
“Also, when a seller of stock desires to conceal his identity, he has
his stock transferred or made out in the name of his broker, or a
clerk, or some other person previous to its delivery to purchasers.
“Arbitrage dealers often sell stock held abroad which will not be
received for some time. They borrow for delivery to purchasers and when
their own stock arrives they make returns to the ones from whom they
borrowed.
“Corporations intending to issue new stock have been known to sell
the stock in advance of its issuance and to borrow to make delivery
to purchasers. Then when the new stock was issued it was used to make
return to the ones from whom stock had been borrowed.”--From Smith’s
Financial Dictionary, by Howard Irving Smith.
_Scalping._
“There are many different methods and degrees of scalping. The word is
supposed to express all the forms of trading between the “Chaser of
eighths” and the man who operates for a profit of several points.
“Scalping operations are more common than any other form of trading.
There are several reasons for this. Many people consider the market a
machine, and base operations on pictures of the past, i.e., charts.
These misused and mischievous instruments show so many opportunities
of profit in movements both ways, that the unsophisticated trader sees
what was _possible_, while the _probable_ is overlooked.
“Again, the desire to scalp is helped by impatience and greed. The
small trader will grow disgusted if there is the slightest delay.
Dullness is unbearable to him. Also, he will frequently close good
commitments merely for the sake of ‘seeing the money.’ I have seen many
traders ‘clean up,’ receive a check which was of absolutely no present
use to them, gloat over it for a while, and pay another commission to
replace the trades. Ridiculous, but true.
“I may say, as a general principle, that I consider scalping the
poorest form of trading. It involves the continued multiplication of
commissions, and constant personal attention. I know of but two men who
have made any considerable amount of money by scalping methods. They
are exceptionally fitted for this form of trading, and have the ability
to take a small loss quickly. This is a trait which is very rare among
public traders. A man will usually accept a small profit for no other
reason than that it _is_ a profit, and will sit stubbornly on a loss
for no other reason than that it is a loss.
“The man who has reason to believe that a stock will advance or decline
ten points, will, in nine cases out of ten, realize more profit by
merely making his trade in the stock and going about his business until
he considers it wise to terminate the contract. I will say decidedly
that more traders will do better, make more money, and suffer less loss
of time, and less annoyance by abandoning scalping tactics altogether.
“This view will no doubt cause my friends in the brokerage business
much wrath and indignation. They naturally prefer to have ten
commissions rather than one, and I fear that in many cases they
recommend scalping tactics for no better reason than the one mentioned.
“That constant and repeated operations are disastrous, is pretty well
shown by the remark of a successful ‘Bucket-Shop’ man: ‘I don’t care
what they do, or what the market does, if I can only keep them coming
up to the order windows every few hours,’ said this gentleman. And he
was right; for the ordinary scalper is no more than a gambler, basing
his operations on possible variations, and paying a great percentage.
“But if one will insist on scalping, it may be well to examine the
subject from the other side and see how the least of the evils may be
chosen. Without recommending the practice, or qualifying the views
expressed above, I will therefore give my idea of the safest methods of
scalping.
“The man who attempts to operate on both sides of the market during the
same period, is the most deluded individual in the speculative world. I
have already stated, that I have only seen two traders out of thousands
I have observed, who could do this with any degree of success. These
hybrid Bull-bears are certainly not working on any definitely formed
opinion of the future. They are worse off than even the traders who are
unchangeably and constitutionally wedded to one side of the market the
year round. These latter prejudiced and inflexible individuals will
occasionally have a turn in their direction, whatever their position
may be, but the Bull-bear will go from one month to another, never
seeing anything more than a temporary gain.
“It is important, therefore, that the active trader should form his
ideas, base his views on something, and, if he wishes to entertain
himself with repeated operations, map out a plan of campaign which
shall be, at least, intelligent in its original conception.
“Just how successfully the plan suggested will result, depends largely
upon the alertness and understanding of the individual who engineers
it. If the active participant is easily moved from his position by
changes of a point or two against him; if he is easily frightened by
wild rumors and inspired talk; if he expects to gain thousands in a
few days by venturing hundreds; or if he believes that he can operate
in stocks so shrewdly as to guess high or low points within a dollar
or two a share, he will meet with disappointment and loss. If he can
overcome these drawbacks, he may do very well as an active trader, but
I wish to reiterate my views that the man who takes a position on the
market and retains it, will make more money than the scalper.
“As a test question, let me put this inquiry to the active traders who
read this letter:
“When you have been correct on a certain movement of say ten points,
and have made repeated operations, did you make any more money, or as
much, as you would have realized on a single trade showing a ten point
profit?”--From Thomas Gibson’s Market Letter, February 14th, 1907.
_Crop Damage._
As to the crops, we find many over-optimistic people trying to belittle
positive crop damage. It cannot be belittled. It is dangerous and
foolish to evade an issue instead of facing it. The argument that our
surplus from last year will carry us through a shortage is puerile.
That surplus has already been considered. Wheat in the bin is money;
some of that money has already been spent and all of it has been given
due consideration in the basing of our wealth. A number of writers
attempt to make a probable crop of 2,500,000,000 bushels of corn a
“bumper crop.” Their methods of arriving at this conclusion are not
sound. It is certain that we should, in the natural course of events,
raise more and more wheat and corn each year as the population of the
world, and the uses of the cereals increase. To compare one year with
another will not do. Particularly in Corn and Cotton must we steadily
increase in acreage and production, for we supply the world with those
commodities. To illustrate this point, let us go back a few years and
see what has occurred.
COTTON AND CORN PRODUCTION OF THE UNITED STATES FOR TWENTY-FIVE YEARS.
Bushels Bales
Year Corn Cotton
1880 1,717,434,543 5,789,329
1885 1,936,176,000 6,550,215
1890 1,568,874,000 8,655,000
1895 2,151,139,000 7,157,340
1900 2,105,102,516 10,383,422
1905 2,707,993,542 11,345,988
1906 2,927,416,091 13,000,000
The time is very near at hand, when anything less than 3,000,000,000
bushels of corn will be a crop failure; and high prices cannot be
considered a great compensation in lean years. Short crops mean
decreased demand for labor and loss of purchasing power by the common
people, who are after all the best spenders.--From Thomas Gibson’s
Market Letter, July 13th, 1907.
_The Selection of Securities._
When so many seductive baits are offered, so many nets and traps
contrived and constructed by clever brains and cunning fingers are
spread for the capture of those having money, is it surprising that
the careless and credulous are victimized, and even that the sagacious
and prudent should sometimes be taken in? Nevertheless, for the losses
they have sustained, investors, as a rule, have themselves chiefly
to blame. The mistakes made, in nine cases out of ten, have been the
purchase of “cheap” securities. The hope of realizing a little more
than ordinary interest, by buying paper at a discount, has proved to
be the rock on which unnumbered capitalists have split. In addition to
their money’s worth, they have endeavored to get something for nothing,
with the result of most generally getting nothing for something. It
is remarkable how blind are people, ordinarily sagacious enough to
make money, to the fact that property cannot pay a revenue beyond its
producing capacity. For instance, how can a trolley company, whose line
is wholly or mainly built from the proceeds of mortgage bonds, sell
them at a heavy discount, besides allowing large commissions for the
selling, and then pay both this interest and dividends on a large issue
of watered stocks? Or how can a poor agriculturist, occupying a half
improved farm out on the frontier, with a family to support and grain
selling barely above the cost of production, pay ten or twelve per
cent. upon the capital with which he does business?--From “The Art of
Wall Street Investing,” by John Moody.
_The Bank Statement._
“A statement or exhibit of the condition of banks.
“In New York the Bank Statement is issued from the clearing house
on Saturday. The consolidated statement (or as it is officially
designated, the “summary of the weekly statement of the associated
banks”) is the collective showing by the banks belonging to the
clearing house--the showing when the returns of the individual banks
have been consolidated (put together).
“The consolidated bank statement shows the average deposits, loans,
specie, legal tenders, circulation, reserve and surplus reserve of the
banks for the week ending with and including Friday.
“The term deposits includes the net deposits (credit balances) of
persons and concerns (designated as individual deposits), balances
to the credit of other banks and all money and credits subject to
withdrawal. Loans include money loaned and likewise paper (promissory
notes, drafts, etc.) bought. Specie includes not only gold and silver
coins, but also gold certificates, which are redeemable in gold or
silver, as the case may be. Legal tenders as the term is used in the
bank statement, means, United States notes (greenbacks) and Treasury
notes (notes issued for silver bullion purchased under the so-called
Sherman act).
“Note.--As defined by the statutes, legal tenders include United States
notes, Treasury notes, gold and silver coins and minor coins, but not
gold certificates, nor silver certificates.
“Circulation means the notes issued by national banks, to secure the
redemption of which Government bonds have to be purchased by the banks
and deposited with the Treasurer of the United States. A bank cannot
count circulation in its reserve; whether it is its own circulation or
the circulation of some other bank, makes no difference. Reserve means
the total amount of specie and legal tenders held. Surplus reserve
means the total amount held in excess of legal requirement. A national
bank (in New York City) must, by law, maintain a reserve equal to
25 per cent. of its deposits; a state bank must, by law, maintain a
reserve of 15 per cent. In compiling the bank statement a reserve of
25 per cent. is allowed or figured for state banks as well as for
national banks.
“The consolidated statement formerly was issued from the clearing house
in the following form, the changes (increases and decreases) resulting
from comparison with the preceding statement (the statement issued the
week before):
Loans $874,647,900 $2,344,000 Increase
Specie 152,338,200 1,068,300 Increase
Legal Tenders 67,274,300 1,319,000 Decrease
Deposits 872,340,600 164,600 Increase
Circulation 36,072,500 411,600 Increase
Decrease of reserve, $291,850
“The (final) item reserve in the statement as issued from the clearing
house, meant surplus reserve, although not specifically so stated.
“In the newspapers the statement appeared as follows; being elucidated
so as to show the reserve held (that is, specie and legal tenders which
are generally referred to as cash holdings), the reserve required and
the surplus reserve with the changes in these items:
Current Preceding
Week Week Changes
Loans $874,647,900 $872,303,700 In. $2,344,200
Deposits 872,340,600 872,176,000 In. 164,600
Circulation 36,072,500 35,660,900 In. 411,400
Legal Tends. 67,274,300 68,593,300 De. 1,319,000
Specie 152,338,200 151,269,900 In. 1,068,300
--------------------------------------------
Reserve held $219,612,500 $219,863,200 De. $250,700
Res. req’r’d 218,085,150 218,044,000 In. 41,150
--------------------------------------------
Surplus $1,527,350 $1,819,200 De. $291,850
“In 1902 the Secretary of the Treasury (Leslie M. Shaw) suspended the
requirement to keep a reserve against government funds on deposit in
national banks upon the ground that these funds were special deposits
which were fully secured by pledge of bonds with the Treasurer of the
United States. This action by the Secretary of the Treasury caused a
change in the make-up of the bank statement by the addition to it of
figures showing the average amount of government funds on deposit. The
consolidated statement was thereafter issued from the clearing house in
the following form:
Loans $874,647,900 $2,344,200 Increase
Specie 152,338,200 1,068,300 Increase
Legal Tenders 67,274,300 1,319,000 Decrease
[3]Deposits 872,340,600 164,600 Increase
Circulation 36,072,500 411,600 Increase
Reserve on all deposits 291,850 Decrease
Reserve on all deposits
other than United States 325,825 Decrease
[3] United States deposits included, $40,633,400.
“In the newspapers the statement was made up in both the old and the
new forms as follows:
Current Preceding
Week Week Changes
Loans $874,674,900 $872,303,700 In. $2,344,200
Deposits 872,340,600 872,176,000 In. 164,600
Circulation 36,072,500 35,660,900 In. 411,400
Legal Tends. 67,274,300 68,593,300 De. 1,319,000
Specie 152,338,200 151,269,900 In. 1,068,300
-------------------------------------------
Reserve held $219,612,500 $219,863,200 De. $250,700
Res. req’r’d 218,085,150 218,044,000 In. 41,150
-------------------------------------------
Surplus $1,527,350 $1,819,200 De. $291,850
Deducting the United States deposits held by the banks from the
aggregate deposits the bank statement compares as follows:
Current Preceding
Week Week Changes
Tot. deposits $872,340,600 $872,176,000 In. $164,600
U.S. deposits 40,633,400 40,769,300 De. 135,900
----------------------------------------
Dep’s 25% $831,707,200 $831,406,700 In. $300,500
Reserve held 219,612,500 219,863,200 De. 250,700
Res. req’r’d 207,926,800 207,851,675 In. 75,125
----------------------------------------
Surplus $11,685,700 $12,011,525 De. $325,825
“The detailed bank statement, which is issued simultaneously with the
consolidated statement, contains first the number of each bank (each
bank has a number by which it is known at the clearing house) and then
the name of the bank, after which follow the amounts of its capital,
net profits (surplus and undivided profits), specie, legal tenders,
deposits and circulation.
“The bank statement is said to have been made up on rising averages
when the items in it have been increasing in amount during the week, or
the statement is said to have been made up on falling averages when the
items in it have been decreasing in amount during the week.
“Generally speaking, the bank statement is favorable or good when it
shows that the position of the banks has been strengthened, as by an
increase in the surplus reserve through, or by means of an increase in
their cash holdings rather than by a decrease in their deposits, which
often is effected by the calling of loans--by demanding and obtaining
the payment of money loaned on call. As money loaned is credited to
borrowers on their deposit accounts and increases the total deposits
of the bank, so the payment of loans by borrowers takes from and
decreases deposits. As will be seen, the calling and consequent payment
of loans does not increase cash holdings but merely changes balances
in individual accounts. A reduction in deposits reduces the amount
of cash required to be held as a legal reserve and correspondingly
expands (increases) the surplus reserve. Generally speaking, also, the
bank statement is unfavorable or, if particularly unfavorable, is bad
when the position of the banks has been weakened, as by a decrease in
the surplus reserve through a decrease in their cash holdings rather
than by an increase in their deposits, which often is effected by an
expansion in (increase in amount of) their loans, which correspondingly
expands (increases) their deposits and correspondingly increases the
amount of cash required to be held as a legal reserve. This additional
amount is deducted from and correspondingly reduces the surplus reserve.
“The bank statement may be said to be favorable or good, however, if
an increase in loans is reported when the banks are surfeited with
money: also the bank statement may be said to be unfavorable or rather
not good (but hardly bad) when it shows that money is accumulating in
idleness in the banks--when deposits are increasing, not as a result of
increasing loans, but in the absence of a borrowing demand for money.
“There are other circumstances which make the bank statement favorable
or unfavorable as disclosed in the circumstances themselves.
“There is also a non-member bank statement, which is a statement of the
conditions of banks which are not members of the clearing house but
clear through members. This statement is issued from the clearing house
on Monday and shows the average condition of the banks for the week
ending with and including the preceding Friday.
“The non-member bank statement contains the name of each bank, followed
by its capital, net profits, average amount of loans and discounts and
investments, average amount of specie, average amount of legal tender
notes and (national) bank notes, average amount on deposit with its
clearing house agent (the bank through which it clears at the clearing
house), average amount on deposit with other New York City banks and
trust companies, average amount of net deposits and average amount of
circulation.”--From Smith’s Financial Dictionary.
_The Cycles of Stock Speculation._[4]
All speculators, and most investors, possess a general idea of the
range and trend of prices for a considerable period. This knowledge is
more frequently based upon impressions gained during their own years
of activity in the speculative world than upon research. The knowledge
gained by active participation is certainly the most forcible and
lasting, but is frequently productive of erroneous ideas, as will be
set forth hereafter.
[4] Reprinted from MOODY’S MAGAZINE of August 1906.
For the purpose of giving a clear idea of the movements in stocks
during recent years, the accompanying chart has been arranged. The
use of circles in lieu of the customary straight lines was hit upon
as presenting more clearly to the eye the comparative extent of each
year’s movement, and more plainly distinguishing one year from another.
These advantages are gained without obscuring from view the general
trend of prices for the period considered.
For the purpose of establishing a single hypothetical stock whose
movements should be representative of the course of all other active
securities, the fluctuations of twenty stocks were welded together.
That is to say, the high points of these stocks for the year 1896
were added and divided by 20. The same course was followed with the
low points, and each year considered was treated in like manner. By
drawing a circle upon a numbered chart with the upper rim resting
upon the figures representing the high point, and the lower rim upon
those representing the low point, an average price for the year is
necessarily established at the axis.
The size of the circles shows the actual and comparative extent of the
movements, and the position of consecutive years on the diagram shows
the general trend of prices.
In selecting the twenty stocks to be used in forming a composite
security, care was taken to eliminate the shares of such corporations
as have undergone radical changes during the period considered, 1896
to 1905, inclusive. The Rock Island Company, for example, is in itself
an important system, but owing to the conversion of $75,000,000 Common
stock into $200,000,000 of mixed securities in 1902, the tracing
of its subsequent movements would involve unnecessary computations
and explanations. It may be added that experimental tests show that
the hypothetical stock, call it “Composite Common” for the sake of
convenient reference, was faithfully representative of almost all
movements from 1896 to 1906, and that the selection of other stocks
would have made only insignificant variations in the general result.
The original intention was to extend the investigation for a longer
period than ten years, but so many readjustments, assessments, and
other changes occurred in listed securities prior to 1896 as to make a
clear showing difficult.
Common stocks of railroads only were considered. Few Industrials have
reached their tenth birthday, and aside from this, their introduction
would make a false showing by increasing the dividend rate with no
corresponding increase in the selling price of the stock.
The twenty stocks chosen for amalgamation were as follows:
Atchison, Topeka & Santa Fe, Baltimore and Ohio, Canadian Pacific,
Canada Southern, Chesapeake & Ohio, Chicago & Great Western, Chicago,
Milwaukee & St. Paul, Chicago & Northwestern, Chicago, St. Paul,
Minneapolis & Omaha, Erie, Illinois Central, Louisville & Nashville,
Missouri Pacific, New York Central & Hudson River RR., Pennsylvania,
Reading, Southern Pacific, Southern Railway, Union Pacific, and Wabash
RR.
PRICES OF COMPOSITE BY YEARS FROM 1896 TO 1906, INCLUSIVE.
Year High Average Low Fluctuation
1896 44 37½ 31 13
1897 53¼ 43⅞ 34½ 18¾
1898 62½ 53¼ 44 18½
1899 72½ 64¼ 56 16½
1900 80½ 70½ 60⅜ 20⅛
1901 106½ 89⅞ 73¼ 33¼
1902 119¼ 105½ 91⅝ 27⅝
1903 106½ 89⅞ 73¼ 33¼
1904 105½ 91 76½ 29
1905 122¾ 109⅝ 96½ 26¼
1906 125¾ 111⅞ 98⅛ 27⅝
Fractions were necessarily omitted from the totals employed in charting
the movements. They are, however, unimportant. Dividends on Composite
Common were as follows:
1896 1⅖ %
1897 1½ %
1898 1⅝ %
1899 1⁹/₁₀ %
1900 2½ %
1901 3 %
1902 3½ %
1903 3⅜ %
1904 3⁷/₁₀ %
1905 3⅞ %
1906 4¾ %
[Illustration: FLUCTUATIONS OF STOCKS FOR TEN YEARS.
(The rims of the circles touch the average high and low points of 20
railroad stocks, each year for 10 years.)
Reproduced, by permission, from MOODY’S MAGAZINE of August, 1906.]
It has been the frequent contention of the writer that a chart as a
basis for speculative ventures is ridiculous, but a diagram framed for
the purpose of pointing out certain facts, or inciting the student of
speculative affairs to investigation of causes is a different matter.
No interested person can look at the accompanying chart without being
struck at once with the decline of 1903 following the steady advance
of the preceding years. If this observation incites intelligent
investigations as to the reasons for the reversal, much good may
result. On the other hand, the fallacy of operating on mere mechanical
records of the past is shown by the same diagram. If the chart had
been handed to one of the mechanical traders in 1902 he would have
argued that the average price of each year marked the approximate low
point of each succeeding year. It certainly does look convincing,
but what follows? The infallible system not only fails to work, but
reverses itself, and the average price of 1902 becomes the approximate
high price of 1903 and 1904. At about the time the system player has
gathered enough figures to go on, a change occurs. No intrinsic merit
attaches to any kind of diagram, they being merely convenient forms for
tabulating history.
Some interesting coincidences occur in the chart; most remarkable is
the exactly similar size and position of the circles representing the
years 1901 and 1903. In no instance did the high or low points of any
integral stock correspond in these years, but the total footings were
identical in each case.
The speculator may extract some value from the diagram by observing
that opportunities for profits of forty or fifty points did not
occur during the entire period. The extreme possibilities in any one
year were 33 points, and much less on the average. If the trader had
purchased or sold Composite at an average price, his possibilities of
profit would have been limited to about 15 points in any one year. This
does not accord with accepted theories. The ordinary speculator who
pursues his operations for ten or fifteen points successfully is almost
certain to believe that much more profit lies before him, that he is
only getting started. There is a reason for this; the public trader
takes for his barometer some security which has been conspicuous for
its extended fluctuations; he naturally notices and remembers it to the
exclusion of the rank and file of stocks. For example, every active
participant in speculative affairs knows that Copper had a range of
75 points in a single year, 1901. He bases possibilities too much on
this sort of knowledge without reflecting that Copper was a cardinal
exception, and that in order to participate in such movements he must
throw caution to the winds, and deal in stocks which offer no degree of
safety.
Another point established is the lapse of time required in a
readjustment of values. It took Composite Common seven years to
advance from an average price of 37 to an average price of 105, 68
points. This again falls short of the speculator’s ideas. He expects
to buy a stock at 50 today, and sell it at par six months hence, an
operation which is shown by the movements of a representative stock to
require a period of six years. Again his expectations are founded on
exceptions. The same line of reasoning applies to one case as to the
other. The speculator unconsciously magnifies everything connected with
speculation.
In reviewing the movements of prices from 1896 to 1905, the most
important question is, what caused the reversal of form in 1903? A
complete answer to this question would be highly educational. There
was no panic, nothing faintly resembling one; business suffered some
stagnation, it is true; there was a falling off in the iron and steel
business, but crops were good, and wheat, corn, oats, and cotton
brought good prices in both 1903 and 1904. Serious business depression
was more in anticipation than in realization, but 1904 witnessed no
material recovery in prices. These causes do not fully explain so
radical a change. If conditions had been such as to cause a reduction
of dividends, or a scarcity of money in 1903, the decline would
be explained, but money was plentiful enough, and dividends were
unchanged. The ratio of dividends as compared with prices was also
fairly maintained from 1896 to 1902, and it would appear that prices
should merely stop advancing when dividends became stationary; but
prices did not merely stand still, they went materially backward.
Without pretending to enter into a full discussion of the causes for
the change, one or two points may assist in forming a conclusion. The
steady advance in prices from 1896 to 1902 represented two things--a
recovery from the great depression of 1893, and the natural advances
of property values in a prosperous and growing country. The latter
point is the more important, and as there has been no cessation of the
growth of population or prosperity, other causes for the reversion
must be sought. It is not sufficient to merely say that the recovery
over-leaped itself, for such an event would have plainly mirrored
itself in a reduction in the rate of dividend returns.
Capitalization of railroads in 1903 increased about 14% as compared
with an average increase of 6% in the preceding seven years. Add to
this the tremendous increase in the capitalization of industrial
corporations, and an over-supply of stocks appears as one of the
contributary causes--undigested securities.
Dividend rates were maintained, but were not increased. This
particularly affects the simon pure speculator. Nothing will drive him
into a panic quicker than a decreased dividend, and nothing makes him
so sanguine of higher prices as an increase in the rate of payment. He
is always basing his operations on rumors of higher dividends, and when
one of these rumors fails of verification, it is almost as bad as a
decrease.
And dividends did decrease in one important quarter; United States
Steel, the speculative favorite, capitalized more heavily than a
dozen ordinary corporations, cut its rate from 4 to 3½%, with every
promise of a further reduction. This had a far reaching effect, both on
speculators and small investors.
It is certain that fundamental conditions have more to do in shaping
prices than has speculation, but the speculator helps, and in 1903
he was particularly potent because of the excesses engendered by the
unusual speculative advances of 1901 and 1902. He helped to make the
prices and he helped to break them, so he may be considered a factor in
the reversal.
The small investor helped. He, too, is a dividend man; he seldom looks
at earnings, improvements, or extensions--he wants dividends. United
States Steel was a body blow to him; it not only affected his purse,
but it frightened him.
And it is probable that an army of small investors sold their holdings
for another reason--they discovered that they could make a higher rate
of income in other channels. So long as both dividends and prices
advanced they were satisfied. They were speculating, not investing, but
you cannot convince the ordinary man that buying a stock outright, in
the hope of an advance in price, is speculation pure and simple.
Much of the money diverted from the stock market in 1903 by the class
last mentioned, has never returned to Wall Street. This bears out
the theory that higher rates of interest are being found elsewhere.
Never before has the public refused to enter the stock market during
a period of great prosperity. They are absent now, and furthermore,
they show no intention of returning. Possibly they are wrong. The same
influences which are operating to give them better returns may be
operating to greatly enhance the value of the shares they ignore,--but
the small investors want dividends. Their failure to enter the stock
market would seem to be strong evidence that they are finding other
investment-speculations more attractive than listed shares. If this
is the case, the influences leading to higher interest rates are
already at work, although not clearly discernible. Diversification of
investments would tend to obscure the truth for a time.
But whatever the causes for the stock market relapse of 1903 may have
been, the recovery has been complete. The average prices of 1906 were
the highest on record.
_Cycles of Grain Speculation._[5]
In examining the price movements of wheat and corn for the last ten
years, a gradually advancing trend is apparent. That such would be
the case was a foregone conclusion; we naturally expect to find wheat
and corn in the foremost ranks of a universal movement towards higher
prices. The underlying causes for this general appreciation have
already been extensively and clearly discussed in Moody’s Magazine.
[5] Reprinted from MOODY’S MAGAZINE of May, 1906.
_All Prices Advancing._
The price appreciation of wheat and corn is merely confirmatory of
the theory that all prices are advancing, and that they will continue
to advance until the balance between gold and other commodities is
readjusted.
But there is something else written between the lines of the statistics
of price changes in wheat and corn. The _relative_ advance of the two
cereals is all out of proportion.
This fact leads us to seek for some specific cause operating either to
depress one cereal or enhance the other, irrespective of the influence
already named.
The figures for the last ten years are as follows:
WHEAT.
Year High Average Low
1896 94⅜ 73¹¹/₁₆ 53
1897 109 86⁹/₁₆ 64⅛
1898 185 123½ 62
1899 79½ 71¾ 64
1900 87½ 74½ 61½
1901 79½ 71⁵/₁₆ 63⅛
1902 95 81¼ 67½
1903 93 81¾ 70¼
1904 122 101¹⁰/₁₆ 81¼
1905 124 100¹⁵/₁₆ 77⅞
1906 94¾ 81⅞ 69⅛
CORN.
Year High Average Low
1896 30⅝ 25¹/₁₆ 19½
1897 32⅝ 27³/₁₆ 21¾
1898 38 32 26
1899 38⅛ 34¹/₁₆ 30
1900 49½ 40 30½
1901 67½ 51¾ 36
1902 88 65⅞ 43¾
1903 53 47 41
1904 58⅛ 50⁷/₁₆ 42¾
1905 64½ 53¼ 42
1906 54¾ 46¾ 39
The average price of wheat in the first year (1896) was 73 ¹¹/₁₆ in
standard format, in the two following years very high prices were
established, and the average may be considered abnormal, as the years
1897 and 1898 cover the rise and fall of Joseph Leiter.
[Illustration: FLUCTUATIONS OF WHEAT PRICES FOR TEN YEARS.
(The rims of the circles touch the high and low prices of wheat each
year for 10 years.)
Reproduced, by permission, from MOODY’S MAGAZINE of August, 1906.]
To digress for a moment, it may be interesting to note that efforts
to carry prices beyond reasonable limits almost invariably result in
disaster to the promoters, no matter how far they may be successful
in establishing black-board quotations. With the exception of “Old
Hutch” wheat corner in 1888, all the numerous attempts to speculate
successfully on wholly artificial prices in commodities, have failed.
The Sully cotton campaign, the Leiter wheat deal, the Phillips corn
deal, the Coster-Martin corn deal, all ended in ruin for their sponsors.
From 1899 to 1901 inclusive, the average price of wheat was a little
above 70 cents, in 1902 and 1903 it rose to 80 cents, and in 1904 and
1905 to $1.00.
In the latter years, allowance must again be made for unusual
influences, the Russo-Japanese war naturally helping wheat prices;
making due allowance for this, it may be fairly considered that wheat
has in the last ten years increased its average selling price from
about 70 cents to 90 cents, or approximately 30%.
_Why Corn Has Risen More Than Wheat._
Corn prices in the same period have advanced 100%; the comparatively
large number of uses to which corn is put may partly account for the
disproportionate enhancement of its price, but the discrepancy is too
great to be entirely explained away on this account. It is necessary to
seek some additional and more powerful reason.
[Illustration: FLUCTUATIONS OF CORN PRICES FOR TEN YEARS.
(The rims of the circles touch the high and low prices of corn each
year for 10 years.)
Reproduced, by permission, from MOODY’S MAGAZINE of May, 1906.]
The following statistical facts will make it clear that corn and wheat
are in wholly different positions.
The United States raised, in 1905, 693,000,000 bushels of wheat.
The world’s wheat crop in the same year was 3,275,200,000 bushels.
Therefore, we raised approximately 21% of the world’s wheat crop. The
year 1905 is fairly indicative of the proportions for the last ten
years.
The acreage of wheat in the United States in 1896 was 43,618,646; in
1905 it was 47,854,079, an increase of 38%.
The world’s wheat acreage as indicated by production, is increasing at
about the same rate as is the acreage of the United States.
The United States raised, in 1905, 2,708,000,000 bushels of corn. The
world’s corn crop was 3,396,800,000; therefore, we raised 80% of the
world’s corn.
The corn acreage of the United States in 1896 was 81,027,156; in 1905
it was 94,011,369, an increase of 16%. The world’s corn acreage, as
shown by production, did not keep pace with our own ratio of increase,
but remained almost stationary.
These figures show that the world is depending on the United States
for only 21% of its wheat, and that wheat acreage the world over has
increased about 38% in ten years; but the world is depending on the
United States for 80% of its corn, and the world’s corn acreage has
increased less than 16%.
In order to grasp the full significance of these figures, our practical
monopoly of corn production must be appreciated. Even if we admit an
equal ratio of increase in corn acreage the world over, it remains for
the United States to provide 80% of the increase.
_Corn Area Limited._
The probability of any considerable area of new corn land being
exploited, either at home or abroad, is very small. A recent circular
letter by a man prominent in the cash corn trade, states that there is
not an uncultivated acre of available corn land in the United States.
This is a radical statement, and does not allow for the fact that with
a sufficient price stimulus, considerable wheat, or even cotton land,
would be diverted to corn. But whatever allowances are made for an
increased corn production, it must be admitted that the possibilities
are largely confined to the United States.
Wheat acreage is not thus circumscribed; in fact, the case is
practically reversed; almost 80% of the natural increase in wheat
production will come from outside our boundaries. Of the principal
wheat producing countries,--France, Germany, Russia, Poland and
Caucasus, Italy, Hungary, Spain, Roumania and Argentine Republic--the
two first named alone fail to keep pace with the United States in ratio
of increased production, and others have made up the deficit of these
two laggards.
In a nutshell, the difference between the relative positions of wheat
and corn is this: The world’s supply of wheat will be furnished by the
world, while the world’s supply of corn must be furnished by the United
States.
It appears, therefore, that while wheat and corn may both be expected
to gradually seek a higher average price in sympathy with the general
upward trend, corn is affected by a specific influence, the effects of
which must be added to the homogeneous advance.
It is not possible that the supply of corn should increase as rapidly
as the demand, under the circumscribed conditions herein set forth. As
has already been suggested, the price of corn may become attractive
enough to cause the diversion of wheat and cotton lands to corn
growing. The possibilities of such a course, however, are not only
limited by nature, but such action would stop itself at a certain
point by decreasing the supply of wheat or cotton, and again restoring
them to favor with the planter.
The speculator may, therefore, reasonably believe that corn is
destined, eventually, to reach much higher prices. He must, of course,
allow for the temporary influences of large and small crops, and the
numerous other actual and technical conditions which cause intermediate
fluctuations, and must furthermore bear steadily in mind the fact that
there is a limit beyond which the price of corn can never be sustained.
When a given commodity goes beyond a price where it can be replaced by
another commodity, it has gone too far; and when necessities become
luxuries, they take their places as such, and demand slackens.
[Illustration: FLUCTUATIONS OF COTTON PRICES FOR TEN YEARS.
(The rims of the circles touch the average high and low price of cotton
each year for 10 years.)
Reproduced, by permission, from MOODY’S MAGAZINE of June, 1906.]
_Cycles of Cotton Speculation._[6]
The accompanying chart, formed on the same plan as the diagram
illustrating the movements of stocks in Moody’s Magazine for May,
develops some interesting features in the movements of Cotton for the
last ten years.
[6] Reprinted from MOODY’S MAGAZINE of June, 1906.
For the benefit of those readers who did not follow the stock chart, it
may be said that each circle represents the fluctuations for a single
year. The bottom rim of the circle rests on the lowest price during the
period, and the top rim on the highest price. The average price is, of
course, established at the axis.
The chart illustrates speculative extremes in cotton, the figures on
which it is based are not the prices of Spot cotton, but extreme high
or low prices for all options. The result, however, would have been
only slightly changed had Spot cotton prices been employed.
The diagram is based on fluctuations of 25 points, or ¼ cent per
pound; the prices shown, therefore, are not exact, but they serve to
illustrate comparative movements with sufficient accuracy. The high
and low figures are not those of a calendar year, but of a fiscal, or
crop year, ending August 31 of the years named; thus the prices for
1896 represent the fluctuations of the season 1896-1897. As production
is necessarily a vital factor in making prices, this method was adopted
to prevent confusion in examining the price effects of lean or abundant
production. The range of prices for the period considered (1896 to 1906
inclusive), was as follows:
Season High Average Low Fluctuation
1896-97 8.50 7.59 6.69 1.81
1897-98 7.50 6.50 5.62 1.88
1898-99 6.73 5.84 4.96 1.77
1899-00 10.00 8.38 6.76 3.24
1900-01 10.60 8.80 7.01 3.59
1901-02 9.67 8.51 7.35 2.32
1902-03 13.75 10.81 7.87 5.88
1903-04 17.46 13.23 9.01 8.45
1904-05 11.15 8.77 6.39 4.76
1905-06 12.54 10.93 9.32 3.22
1906-07 11.30 9.95 8.60 2.70
In the first three years considered we find low prices, and naturally
restricted speculation. The speculative price range for the entire
three year period is only a shade more than 3½ cents per pound. This
was occasioned by two things; first, the general depression following
the panic of 1893, and second, over-production. An examination of the
prices of staples shows that unusually low figures prevailed in 1898
and 1899. Corn, for example, averaged 27 cents in 1897, and 31½ cents
in 1898. Wheat shows high average prices, but the showing is a result
of fictitious speculative figures established by the Leiter deal, and
cannot be considered a fair criterion. It may be added, however, that
wheat sold as low as 64 cents in 1897, and 62 cents in 1898.
The question of over-production will be made apparent by reference to
the following table:
Season Crops in Bales
1896-97 8,714,000
1897-98 11,180,000
1898-99 11,235,000
1899-00 9,439,000
1900-01 10,425,000
1901-02 10,701,000
1902-03 10,758,000
1903-04 10,123,000
1904-05 13,556,000
1905-06 10,697,000
1906-07 13,000,000
Prior to 1897 no crop of over 10,000,000 bales had ever been made;
the two bumper crops, 1897-98 and 1898-99 coming together, naturally
brought about very low prices, particularly as they occurred in a
period of general depression.
In the season next following, 1899-1900, there is a marked falling off
in production, which is again reflected in a higher average price. But
from that time on, we do not find prices and production in such perfect
accord.
It is generally considered now that 10,500,000 bales is a fair crop. In
the four seasons from 1900-01 to 1903-04 inclusive, we raised normal
crops, while prices advanced. It would be manifestly unfair to consider
the year 1903-04 as reflecting with any degree of accuracy the normal
price of cotton, for in that period occurred the disastrous Sully
campaign. Making due allowance for this, however, it may be assumed
that prices would have advanced if no such deal had occurred. This
statement is supported by the fact that the bursting of the bubble did
not put prices below 9 cents at any time.
Now the most important part of the period is reached, the seasons of
1904-05 and 1905-06.
In 1904-05, in the face of an unprecedented crop of 13,600,000 bales,
and in spite of the depressing influence of a speculative debauch in
the previous year, the average price of cotton was 8¾ cents.
Still later, in 1905-06, a crop only a little below normal was raised
and sold at an average price of 10.93.
Eliminating speculative extremes, and the temporary effects of large or
small crops, it appears that the price of cotton is steadily advancing.
This is the principal fact for the speculator to consider.
No one pretends to dispute the fact that the prices of all staple-food
stuffs, metals and other commodities, as well as labor, have advanced
materially in the last ten years. Yet the ordinary speculator ignores
this broad general principle, and seeks specific causes for the
readjustment in cotton prices. And even this research is seldom
conducted intelligently. The investigator attempts to explain higher
cotton prices by pointing to reduction of acreage, diversification of
crops and organizations formed for the purpose of withholding supplies
from the market. He disregards the fact that while these influences
play some small part in the matter, cotton is also seeking a higher
level in common with every commodity that is bought and sold.
The contention is frequently heard that 10,500,000 bales, or even
11,000,000 bales of cotton can no longer be considered an average crop;
that the supply should steadily increase in order to keep pace with
consumptive demand, and that the crop of 1904-05 was therefore small,
and the crop of 1903-04 not so large as it would appear. As this is the
most common of the numerous explanations offered as to the recent high
prices of cotton, it will be briefly discussed.
In order to arrive at a clear view of the ratio of increase in
production, a considerable period must be consulted. The statistics of
crops from year to year, or even from two or three years, will not do.
Let us cover a long period, jumping ten years at a time.
Season Crops in Bales
1860-61 3,849,469
1870-71 4,352,317
1880-81 6,605,750
1890-91 8,652,597
1900-01 10,383,432
This exhibit shows that if a sufficiently long period is consulted,
a steady increase in production is shown; the average production is
also well maintained in the five years from 1901-02 to 1905-06, if the
bumper crop of 1904-05 is distributed over the entire period.
The contention is all right, but its formulators do not take the pains
to ascertain that what they claim _should_ occur, is exactly what _has_
occurred.
The gist of the whole matter is this: regardless of all temporary or
artificial influences, some powerful force, not related to supply and
demand, is shouldering prices steadily upward.
To the speculator this fact recognized, analyzed, and properly applied
should be of incalculable benefit. If he understands _why_ prices
have been advancing, he will be able to determine with facility how
long the influence will probably endure. Instead of being misled, or
rendered over-cautious by obsolete records of the past, he will be able
to calculate from these obsolete records the reasonable expectations
of the future. Temporary changes will, of course, be brought about by
temporary causes. Fundamental values will still be influenced by supply
and demand, but if an independent and submerged force is also at work,
due allowance must be made for its operation.
That such a force _is_ at work is written large between the lines of
compiled statistics; to ignore its existence is an error rank with
mischief. The speculator who does not consult this influence may easily
make the mistake of selling at low prices because they are high by
comparison with prices which obtained a few years ago.
On the other hand, a clear understanding of the matter will enable the
trader to decide with more or less accuracy what now constitutes a low
price for cotton, and what will be the probable price for the future.
_Conclusion._
The questions most frequently asked by inexperienced people are as
follows:
1--What margins are necessary to reasonable safety?
2--Is it better to study the entire list or make a
specialty of one stock?
3--What class of securities is the safest?
4--What may be considered a fair rally or reaction in
stock prices under ordinary circumstances?
5--What is the best general method of trading?
Some of these questions have been answered in the preceding chapters,
but they will be taken up here in turn and the writer’s views submitted
on each head.
1--What margins are necessary to reasonable safety?
There is no unqualified answer to this question. The price of the
shares operated in must be considered. All other things being equal, a
stock selling at $50 would require only half the margin employed in
operating in a security selling at $100. If the $50 stock declines
25 points, it has suffered a quoted loss of half its value. The $100
stock, however, must decline 50 points to suffer an equal loss. This
percentage of advance or decline is established with remarkable
fidelity in every considerable movement.
If the scale order is employed as a method of accumulating shares,
extraordinary marginal provisions must be made, for even as the line
acquired increases, the original margin dwindles. The scale order
is, or should be, based on the assumption that a temporary decline
below the first purchase price is desirable and is necessary to the
best results. This fact, however, should never be contorted in such a
manner as to instigate purchases at high prices. If the operator who
employs the scale order will try to make the first purchase at what
he considers a bargain price, or in other words at what he calculates
to be the very bottom of a movement, he will surely find that in nine
cases out of ten, his own errors or the velocity which frequently
carries prices to ridiculously low or high points will enable him to
accumulate his line to advantage. The scale order should never be used
on its mechanical merits alone, but merely as a method of averaging.
It goes without saying that marginal necessities will be principally
gauged by the correctness of the speculator’s general views. It is the
writer’s opinion, that if care and intelligence is used in judging
values, conditions, and the stages of the market, a margin of 20% will
be sufficient in almost all cases. That is to say, 20 points on a
stock selling at par and 10 points on a stock selling at 50. It must
be distinctly understood, however, that this opinion contemplates
purchases at low prices after a decline has occurred; and when both the
technical and general conditions warrant purchases.
The late Charles H. Dow fixed the sum of $2,500 as the minimum amount
necessary to safe operating in ten share lots, but this sum, or any
other for that matter, is an arbitrary estimate. Mr. Dow’s figure was
founded on the necessity of averaging and also upon a most laudable
caution and conservatism which, however, might at times result in
unnecessary restriction of operations at a most favorable period.
There are times when $500 might be safely made the basis of trading in
certain stocks; there are other times and other stocks where $2,500
would be wholly insufficient.
While no rule of thumb is possible in this regard, it is the writer’s
opinion that there is no necessity for being out in calculations more
than 20%, provided always that due care has been exercised in basing
such calculations.
2--Is it better to study the entire list or make a specialty of one
security?
It is better to examine the conditions and prices of all the leading
securities. This is the only method by which _comparative_ values
may be arrived at. It is frequently the case, particularly after
a comprehensive decline or a panic, that certain excellent shares
have suffered almost as much as the more questionable securities.
At such times, what we want is not only a good bargain but the best
bargain obtainable, and this may be secured more readily by a careful
comparison of prices, values and income return than by any other method.
Again, in an upward movement stocks generally advance, not
homogeneously, but one at a time or in closely related groups. Certain
shares may have a reasonable advance while others hang fire. If we have
good reason to believe we are on the eve of a great bull movement, the
best results may be attained by a process of rotation in trading.
3--What class of securities is the safest?
Railroad stocks are the soundest securities. The danger of competition
is not so great; the assets are more tangible and when once the
specific influences which are now working against them have been cured
or eliminated, as they certainly will be in time, these shares will
show a steady improvement both in value and price. At times the very
best stock will suffer severely and much pessimistic talk will be
heard of receiverships, etc. That is the time to buy. Lord Rothschild
once advised a friend to buy French rentes. “But the streets of Paris
are running with blood,” replied the recipient of the advice. “That,”
responded Rothschild, “is the reason you can buy rentes so cheaply.”
The man who purchases the shares of railroads when they are greatly
depressed may rest serenely in the consciousness that the future of
American railroads is assured and that measures seeking to obstruct
progress or prevent fair returns on investments, either in the way of
income on money or the natural accretion of values cannot possibly
endure.
4--What may be considered a fair rally or reaction in stock prices?
Here again the question of ruling prices of a certain stock are to be
considered. Low-priced stocks always move in a narrower range than do
higher priced ones. The extent of a probable comparative movement may
be gauged by percentages with a fair degree of accuracy. This method of
measuring a comparative advance or decline, however, will be frequently
disturbed by specific influences bearing on a certain stock or group of
stocks.
It is useless to undertake to establish even a rough rule for ordinary
movements by a system of averages culled from history. We find that in
the course of ten years the rallies and reactions which appeared were
so varied in character both as to the extent in points and the duration
in days, that a barometrical average founded on such investigation
would be empirical. However, the results of this inductive reasoning
will be given for what they are worth.
The principal movements for ten years have been as follows:
_1.--The Bull Market of 1897 to 1899._
This advance began in April, 1897, and terminated in April, 1899--two
years of advancing prices. The average advance in Industrial shares was
38.79 points, or about 100%. Railroads advanced 38.92 points, or about
80%.
The intermediate reactions were as follows:
Extent in Extent in
Industrials Rails Duration
Date of Reaction Points Points Days
Sept. 10 to Nov. 8, ’97 10.17 9.78 59
Jan. 7 to Mar. 25, ’98 8.67 10.43 78
Jun. 10 to Jun. 16, ’98 2.84 2.93 7
Aug. 26 to Oct. 19, ’98 9.41 4.41 54
Jan. 30 to Feb. 7, ’99 3.07 3.38 8
_2.--The Bear Market of 1899-1900._
This decline began May 1st, 1899, and culminated Sept. 24, 1900--17
months. The average gross decline in Industrial shares was 24.32
points, or about 32%, and in Rails, 13.27 points, or about 18%.
Intermediate rallies were as follows:
Extent in Extent in
Industrials Rails Duration
Date of Rally Points Points Days
May 31 to Sep. 5, ’99 10.10 8.17 97
Dec. 18, ’99, to Jan. 2, ’00 9.86 6.38 16
Jan. 11 to Feb. 5, ’00 5.09 4.56 26
Mar. 9 to Apr. 6, ’00 5.04 5.22 29
May 15 to June 1, ’00 2.76 3.42 17
June 23 to July 23, ’00 5.34 4.56 31
July 31 to Aug. 15 2.10 2.31 16
_3.--The Bull Market of 1901._
The advance began Oct. 1, 1900, and culminated Aug. 26, 1901, 11
months. The average advance in Industrial shares was 20.87 points, or
about 39%. The average advance in Rails was 37.92 points, or about 51%.
Intermediate reactions were as follows:
Extent in Extent in
Industrials Rails Duration
Date of Reaction Points Points Days
Nov. 20 to Dec. 8, ’00 5.09 1.67 19
Dec. 27, ’00, to Jan. 19, ’01 6.29 4.39 24
May 1 to May 9 7.55 14.49 9
June 17 to July 15 8.80 11.30 29
July 29 to Aug 6 3.89 6.64 9
_4.--The Movement of 1902._
The year 1902 is particularly interesting, as it shows what occurred in
the market the year prior to a period of industrial relaxation. This
year cannot be called either a bull or bear year, as while railroad
stocks advanced and closed the year with net gains, the Industrial
stocks suffered material declines. As the declines in Industrial stocks
was greater than the advance in Rails, we will arbitrarily designate
the year as a bear period and examine the homogeneous movement for
rallies, instead of reactions.
From Dec. 12, 1901, to Dec. 15, 1902, Industrial shares declined 5.74
points and rails advanced 3 points.
Intermediate rallies were as follows:
Extent in Extent in
Industrials Rails Duration
Date of Rally Points Points Days
Feb. 20 to Mar. 21, ’02 2.84 3.45 30
Apr. 10 to Apr. 24 2.49 4.91 15
May 19 to May 24 2.09 3.99 6
June 24 to July 28 3.61 7.44 35
Aug. 21 to Sept. 19 2.44 4.05 30
Sept. 29 to Oct. 3 2.51 4.37 5
Oct. 11 to Oct. 17 2.73 4.96 7
Nov. 14 to Nov. 21 2.32 4.80 8
_5.--The Bear Market of 1903._
This decline began Jan. 8, 1903, and culminated Nov. 9th, of the year,
10 months. The average gross decline in Industrial shares was 24.18
points, or about 36½%. The decline in Rails was 32.48 points, or about
27%.
The intermediate rallies were as follows:
Extent in Extent in
Industrials Rails Duration
Date of Rally Points Points Days
Jan. 20 to Feb. 16, ’03 3.51 1.38 28
Mar. 10 to Mar. 20 1.85 3.11 11
Apr. 13 to Apr. 30 3.77 5.07 9
June 10 to June 12 2.60 4.48 3
Aug. 8 to Aug. 17 6.50 8.14 10
_6.--The Bull Market of 1904 and 1905._
The advance began Jan. 6, 1904, and culminated Jan. 22, 1906--a little
over two years. The average advance in Industrial shares was 55.93
points, or about 119%. The average advance in Rails was 49.56 points,
or about 55%.
The intermediate reactions were as follows:
Extent in Extent in
Industrials Rails Duration
Date of Reaction Points Points Days
Jan. 27 to Feb. 24, ’04 3.79 4.17 29
Apr. 7 to May 18 2.55 4.03 42
Dec. 5 to Dec. 12 7.46 5.93 8
Apr. 14, ’05, to May 8, ’05 9.23 9.81 25
May 12 to May 22 6.68 5.50 11
Aug. 23 to Sept. 7 4.22 4.82 16
Nov. 1 to Nov. 13 3.31 4.74 13
The year 1906 was a neutral year. Prices for Industrials declined
only slightly during the year and average prices of railroad stocks
were the same in December as in January. Money could have been made
throughout the period, either by sales on rallies, or purchases on
declines. As a consideration of a neutral year would add little to this
exhibit, it will be omitted.
5.--What is the best general method of trading?
The writer’s reply to this question consists principally of a summing
up of points already covered in other portions of this work. It is
necessary to study and understand the subject thoroughly, to know
values, general conditions, the technical position of shares, and
above all things to consult future probabilities rather than past
performances. Study of the past has its educational value and this is
also true of the present, but the future is the all-important thing.
Retrospective speculation is one of the commonest and most flagrant
of the numerous errors made by public participators. Get whatever of
experience and information you can from history, but _speculate_ on the
_future_.
The man who enters the market with insufficient capital, who expects
to get rich quick or who allows success to lead him into excesses and
over-speculation will lose. It is as certain as death. He may succeed
for a time but not for long.
Operations based on “tips” or “charts” will lead to final disaster.
This thing of trying to attribute habits to a market is, in the
writer’s opinion, ridiculous. The movements of prices are caused
by events. We know that in periods of financial stringency or
business depression prices fall, and in periods of inflation and
good times prices rise. It is possible to formulate a system founded
on repetitions applicable to every game of chance, and laid out on
paper, that system will appear infallible. You can find the exponents
of machine-made riches in every pool-room and gambling house in the
country. They all eventually lose and there is nothing to show that
the advocates of charts as a basis for stock trading ever fared any
better. Imagine James R. Keene, or J. P. Morgan poring over a chart and
operating thereon. Even if the market did have habits, as soon as these
habits were recognized and followed by a sufficient number of people,
the technical position would be rendered so rotten that the charts
would fail from that influence alone. Charts, employed as a convenient
method of picturing the past, may have a certain value, but used as
a basis for trading they are an evidence of laziness or incapacity,
or both. It requires hard work to be successful in any line. Thinking
is hard work, study is hard work, research is hard work; and it is
infinitely easier to bet on repetitions all nicely laid out in crooked
lines on a sheet of paper than to laboriously erect sound deductions;
but the difference in the two methods is that one will succeed and the
other will fail.
We may also resort to the ultimatum employed by those eminent
citizens who punch each other’s noses in a prize-ring, i.e., tell the
chart-players to “go and get a reputation.” When they can show even one
instance of a fortune accumulated by this method their cause will be
greatly strengthened.
In the exception taken to Mr. Dow’s theory of $2,500 being the minimum
amount necessary for operations in small lots, nothing could be further
from the present writer’s intentions than to recommend transactions on
insufficient margin. What is sought is merely the truth. The contention
that it is wise to stimulate extreme conservatism will not hold. If the
naming of a certain sum far in excess of real needs is praiseworthy, we
may expand the matter indefinitely and name $5,000 or even $10,000, as
the limit.
But on the other hand, errors on the side of prudence are vastly
preferable to errors on the side of rashness. In this as in all other
things, the golden mean is the really desirable factor.
As to the best side of the market for operations, it is thought that
the long side offers the greatest opportunities. The long side is
healthier, it is constructive, and almost all the great fortunes made
in the market have been founded on discreet and well-timed purchases.
To adhere to this plan, however, frequently requires long periods of
non-participation, and speculators are not, as a class, very patient.
The man who can so school himself as to await opportunities to purchase
good securities at low prices has by far the best of the bargain. Few
men can do it.
It is fully realized that a work which defends stock speculation in
any degree, will meet with much criticism. Nevertheless, people _will_
speculate and if you are one of those who will--do it right.
It is submitted in concluding this work that if the advice here given
is heeded, i.e., to know _what_ you are buying and _why_; to buy only
_good_ properties when prices are depressed; to exercise patience and
provide sufficient capital; to eliminate first and forever the idea
that correct deductions mean sudden riches; to use brains instead
of charts, and common-sense instead of tips; in short, to apply
to speculative ventures the same degree of business foresight and
understanding as would be employed in any other business, the evils and
losses which have always been a part of speculative history, would be
diminished if not eliminated.
BIBLIOGRAPHY.
The books named on the following pages have been chosen as the nucleus
of a reference library particularly adapted to the needs of the
speculator. These works have been selected because of their clearness,
soundness and simplicity. There are many other excellent works bearing
directly or indirectly on the subject but these latter will be
suggested as the student progresses and it has been thought best not to
name a large number of books, which might result in confusion as to the
character of the subject matter. The possessor of the works named will
find that he has a very compact, comprehensive and inexpensive little
library, both from an informative and statistical standpoint.
A B C Series. (The Wall Street Library.)
This collection of six small volumes will be found useful to the
student. The subjects are arranged as follows:
Vol. 1--A B C of Wall Street. By S. A. Nelson.
Vol. 2--Anatomy of a Railroad Report. By Thomas F. Woodlock.
Vol. 3--A B C of Banks and Banking. By Geo. M. Coffin.
Vol. 4--A B C of Stock Speculation. By S. A. Nelson.
Vol. 5--A B C of Options and Arbitrages. By S. A. Nelson.
Vol. 6--Theory of Stock Exchange Speculation.
The volumes can be procured singly at $1.00 per volume ($1.10
delivered) or in set of six at $5.00 per set. Volume five is not so
necessary to the speculator as the other five named.
THE INVESTORS’ LIBRARY.
This series of five practical handbooks will be found to cover the
several fields of stock, bond and security investments. The books are
arranged as follows:
Art of Wall Street Investing. By John Moody.
Mr. Moody possesses the gift of saying things with
clearness and directness, and while this work is
addressed rather to investors than speculators, the
two branches are so closely allied that what is of
educational value to the investor cannot but assist
the speculator. The book is No. 1 of the Investors’
Library but is sold separately at $1.00; delivered,
$1.10.
The Pitfalls of Speculation. By Thomas Gibson.
Price, $1.00; delivered, $1.10.
The Investors’ Primer. By John Moody.
A thoroughly practical description and explanation of
the methods and rules followed by bankers and brokers
in judging and dealing in securities. Price, $1.50;
delivered, $1.62.
Mining Investments and How to Judge Them. By Francis C. Nicholas.
This book is No. 5 of the Investors’ Library and is
an essential to the investor in mining shares. The
price is $1.00; delivered, $1.10.
These four books, with The Cycles of Speculation, constituting the
Investors’ Library are supplied in a box and sent to any address in the
United States, Canada or Mexico for $5.00, delivered.
American Railways as Investments. By Carl Snyder.
This is the simplest and most accurate book of its
kind. It is recommended to the student of values
as indispensable. The matter contained is not only
comprehensive in scope but is stripped of the
technicalities and involved verbiage which confuses
us in most works of this character. The price is
$3.20; delivered, $3.52.
Copper Handbook. Compiled by Horace J. Stevens.
This volume is indispensable to the operator who
handles Copper stocks, either listed or unlisted. It
contains a history and frank expression of opinion of
even the very small corporations. The book also gives
a practical and scientific history of production,
manufacture and distribution of the metal. It is the
best work of its kind. The price is $5.00 in cloth;
$7.50 in full morocco, delivered.
Corporation Finance. By Thomas L. Greene.
This work deals with the methods employed by
Corporations in managing their finances. It is
clearly and simply written. The price is $1.25;
delivered, $1.35.
Cotton. By Charles A. Burkett and Clarence H. Poe.
This is about the only work which covers in a
practical way the cultivation, marketing and
manufacture of cotton. Price, $2.00; delivered, $2.20.
Earning Power of Railroads. By Floyd W. Mundy.
This little volume is published annually and is a
handy guide to Earnings, Capitalization, Mileage,
etc. Price, $2.00; delivered, $2.12.
Essays in Finance. By Robert Giffen.
This work is clear and readable. It presents in a
colloquial style many valuable facts and suggestions.
Price, $3.50; delivered, $3.73.
Financial Crises. By Theodore E. Burton.
This is a very valuable and necessary work to the
student of price changes. It should be in every
speculator’s library. Price, $1.40; delivered, $1.52.
Gold Supply and Prosperity. By Byron W. Holt.
A correct understanding of the effects of gold on
prices of shares and commodities is of primary
importance to either the investor or speculator.
The book contains papers by Horace White, Maurice
L. Muhleman, Ellis H. Roberts and others of high
standing in the commercial world and Mr. Holt’s own
theories and conclusions are clearly expressed.
Price, $1.00; delivered, $1.10.
How Money is Made in Security Investments. By Henry Hall.
This work contains much that is of value to the
speculator. Price, $1.50; delivered, $1.65.
Manual of Statistics.
This book is very useful to the speculator. It
contains tables of past prices of stocks, cereals,
cotton, etc., a brief history of all leading
corporations and much other valuable statistical
matter. The price is $5.00 delivered.
Money and Currency. By Prof. Joseph French Johnson.
This work is mentioned because of its intelligible
nature. No one can fail to understand the subject as
treated by the writer. Price, $1.75; delivered, $1.93.
Moody’s Classified Investments.
This book is extremely valuable to the investor. It
classifies securities according to their ownership
and we may thus form a quick judgment of the merits
of certain bonds or shares. Price, $10.00 delivered.
Moody’s Magazine. Edited by Byron W. Holt.
A national financial monthly. Studies the underlying
causes of market movements in the broad light of
world-wide developments, its finance and economics.
Subscription $3.00 per year.
Moody’s Manual of Railroads and Corporation Securities.
This work stands alone in its class and is the
accepted standard for both investors and speculators.
It is a library in itself and should be the basic
volume of the student’s collection. Price, $10.00 in
cloth; $12 in full Russia leather, delivered.
Smith’s Financial Dictionary. By Howard Irving Smith.
This is another work which should be in every
library. All the knotty points and technicalities
which perplex the speculator at times are clearly and
fully explained. Price, $4.50; delivered, $4.75.
Speculation, a Science. By George McLean Irwin.
A small volume containing some interesting points.
Price, 30 cents; by mail, 34 cents.
Story of Wall Street. (In preparation). By John Moody.
A most interesting history of Wall Street from
its inception to the present day. Price, $3.00;
delivered, $3.20.
The Tariff and the Trusts. By Franklin Pierce.
This is a review of tariff history in various
countries with especial reference to its operation
in the United States to protect trusts and special
interests. Price, $1.50; delivered, $1.62.
The Truth About the Trusts. By John Moody.
A description and analysis of the American trust
movement. No other work on this subject has attracted
the widespread attention which has been given Mr.
Moody’s description of all the phenomena which go
under the general name of “the trust movement.”
Price, $5.00; delivered, $5.27.
Wall Street and the Country. By Charles A. Conant.
This book deals with the higher phases of Wall Street
ethics and affairs, Undigested Securities, etc.
Price, $1.25; delivered, $1.37.
Work of Wall Street. By Sereno S. Pratt,
Editor The Wall Street Journal.
One of the very best books on the subject. The matter
is clearly and intelligently discussed by a man of
soberness and judgment. Price, $1.25; delivered,
$1.37.
ANNOUNCEMENT
Any of the books enumerated
in this Bibliography
will be supplied
for the price indicated.
THE MOODY CORPORATION,
35 Nassau Street, N. Y. City.
INDEX
Page
Accidents: effect of on stock prices, 84
Averages: Barometer of, 110
Bank Statement, 59, 125
British investment bonds: Prices of, 45
Business Depression: Effects of on rails and industrials, 105
“Calls,” explained, 89
Charts: “Composite Common”, 137
corn prices, 149
cotton prices, 154
wheat prices, 147
“Composite common”: range of, 133
Corn: Area limited, 151
chart, 149
prices, 146
risen more than wheat, 148
Cotton: Chart, 154
crops in bales, 157
cycles of speculation in, 155
prices, 156
Credits: Expansion of ignored, 75
Crises: Indications of, 112
principal in last century, 24
Crops and Crop Failures:
damage issue not to be ignored, 123
importance of, 82
Dividends: adverse effect on the short seller, 101
Dow, Charles H.:
rule as to margins necessary, 165
Fixed Charges: As factor of safety, 114
important to investor, 116
percentage of in various railroads, 115
Gambling transactions: Percentage against the speculator, 9
Gold production:
effect in speculative commodities, 53
effect on common stocks of railroads, 49
effect on securities having a fixed rate of income, 43
effect on stocks of industrials, 52
influence of on prices, 39
Grain: Cycles of speculation in, 145
Legislation: As a market factor, 77
Manipulation: By creation of false appearances, 22
Margins: Necessary to reasonable safety, 163
required by scale order operations, 164
use and abuse of, 12
Market Movements: principal for ten years, 168
Money conditions: as a factor of speculation, 59
Periodicity: unreliable as basis of speculation, 35, 69
Pig Iron: Production in U. S., 29
Prices:
“Composite” stock, 136
corn, 146
cotton, 156
ordinary swing of in speculative cycle, 113
wheat, 146
Presidential contest: Influence on prices, 81
Privileges, 89
“Puts,” explained, 90
Railroad: Basic values of, 104
Rights: How to compute value of, 109
Securities: Entire list should be studied, 166
railroad stocks the soundest, 166
selection of, 124
undigested, 108
Speculation: Cycles of, 21
possibilities of, 14
preliminary hard work needed, 17
Stocks: Borrowing and lending, 117
cycles of Speculation in, 133
“Straddles,” explained, 92
Tariff agitation: effect on speculation, 81
“Tips”: Operations based on them disastrous, 172
Trading: Best method of, 111, 172
hypothetical, 15
scalping, 120
Wheat: Chart, 147
prices, 146
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