This Handy Investment Record saves unnecessary trips to your safe deposit box and quickly furnishes complete information— amounts, interest dates, maturities, prices, taxable status, etc., of your investment holdings. It is made in loose-leaf form Included is a bond interest Income Tax Data Is Readily Available when you use the convenient forms provided in this loose-leaf booklet for recording purchases and sales of securities, income derived, tax provisions, etc. Financial Department Conducted by WILLIAM LEAVITT STODDARD The Financial Department is prepared to furnish information regarding standard investment securities, but cannot undertake to advise the purchase of any specific security. It will give to inquirers facts of record or information resulting from expert investigation, and a nominal charge of one dollar per inquiry will be made for this special service. The Financial Editor regrets that he cannot undertake the discussion of more than five issues of stocks or bonds in reply to any one inquirer. All letters should be addressed to THE OUTLOOK FINANCIAL DEPARTMENT, 120 East 16th Street, New York, N. Y. A Interest Rates and Speculation FEW weeks ago a highly speculative spirit in the stock markets of the country was suddenly checked and stocks began to tumble back. What had happened was that the Boston Federal Reserve Bank had raised the rediscount rate. A tremor shot through the brokerage houses and thousands of customers sold out. Within a fortnight or so stocks had begun to climb again, and at this writing it looks as if former prices were to be equaled, if not exceeded. 1 All this is prefatory to the remark that there is a current and persistent belief that money rates have a most important effect on the prices of stocks and on stock speculation. This belief we have echoed in these pages from time to time, and for this reason we hasten to call attention to a recent study which, on the basis of an examination of over fifty years' records, shows that stock speculation is not controlled by money rates. "We have examined," say the authors, "both the statistical evidence and the theoretical foundations of the doctrine that stock prices are controlled by short-time interest rates and call-loan rates, and have found no support for the doctrine. We do not contend that there is no relationship between these markets, but we feel certain that interest rates are only one of the many factors which determine the course of prices in the stock market." This study is too long and too intricate, although simply put throughout, to analyze critically here. We shall therefore merely summarize some of its more important points. The reader should see the book itself. The first striking point is that when, for years before the establishment of the Federal Reserve System, there was a series of very definite seasons in call-money rates, the record of the New York Stock Exchange reveals no corresponding seasonal fluctuations in stock exchange prices. The call-money seasons, roughly, 1 Interest Rates and Stock Speculation. Owens and Hardy, of the Institute of Economics. The Macmillan Company, New York. were as follows: Low rates from the first of the year to the middle of February; rising rates till April or May; weakening rates to a "genuine depression" in June and July; rates rising to a peak in October during the crop-moving season, and a high level till about January. The theory which this book attacks assumes that variations in call-money rates cause variations in stock speculation. "The decline of the rate of interest is said to be the signal for increased activity on the part of speculators. These speculators, so we are told, hasten to take advantage of the cheap money by borrowing funds with which to purchase stocks." And leading economists are quoted to prove that such actually is the theory. Facts have a pleasant-or is it an unpleasant?-way of knocking theories which are not firmly based into cocked hats. Records were examined for forty-two years to see if any relationship could be found between month-to-month changes in call-loan rates and stock prices. If the theory were sound, such a relationship should appear, perhaps not in every case, but at least in a majority of cases. The results were these: In thirty-eight years the call-loan rate declined from December to January. In fourteen of these years stock prices went up, in fifteen they went down, and in nine years they showed no change. The theory demands that a fall in call money should shoot prices up. They didn't inevitably go up. Again, in thirty-three years callloan rates declined in February, but stocks, instead of going up in thirty-three years, went up in only sixteen years. These results are similar to those disclosed for all the months of the year. The authors say: "All these tests show a pronounced seasonal movement in call-loan rates, with the seasons of high and low rates the same in all periods. On the other hand, no test made for any period shows a seasonal movement of interest rates in stock prices. We conclude, therefore, In writing to the above advertiser, please mention The Outlook that seasonal movements in interest rates do not cause seasonal movements in stock prices." Similarly, a study of call-loan rates and stock prices over long periods or cycles failed to show the clear and definite relation which the commonly accepted theory demands. For instance, in the depressed money market from 1873 it took four years before stock prices began a major advance. In other periods of cheap money, stocks were also cheap; in some they were high. In all, taken as a continuous whole, no relationship was found. "Of the fifteen major recoveries of stock prices between 1872 and 1922, only eight were immediately preceded by periods of low call-loan rates. The lengths of these periods varied from two months to twenty months. Two recoveries began a short time before call rates became low. One began in a month of high rates following close after periods of low rates. Four were neither immediately preceded nor immediately followed by periods of low rates. In addition, it should be noted that five periods of low rates for call loans began and ended without any improvement in stock prices. Clearly low rates are not necessary for an advance in stock prices; nor are they always followed by an advance." The classic reason given for the supposed relation between cheap money and dear stocks is this: Cheap money means that people can borrow at little cost, buying with borrowed money dividendpaying stocks and making at least the difference between, say, 2 per cent and 6 per cent. Thousands of people undoubtedly "get into the market" for this reason, and thousands stay out when money rates are so high as to make the margin too small for apparent profit. This idea is carefully examined by the authors, with disastrous results: Suppose, they say, a trader buys 100 shares of stock for $100 each when call money is 2 per cent. Suppose he holds. these stocks two months. Suppose, lastly, that the market does not move, so that his only profit is the difference between the call-money rate and the dividend rate. How much does he get? The answer is not the difference between 2 and 6 per cent on $10,000 for two months. If it was, it could be found by subtracting $33.34 (call-money cost) from $100 (two months' dividends), or $66.66. There are expenses connected with buying and selling stocks which the amateur often overlooks. He must pay a broker's commission when he buys and another when he sells. In this case he will pay a total commission of $30. He HE F. H. Smith Company, founded in January 1873, has now completed 53 years of continuous service in the field of first mortgage investments without loss to any investor. This means that throughout more than half a century the men and women who have put their money into the first mortgage investments sold by this house have known but one result -perfect safety. promptly on the date due; 53 years. of freedom from worry, delay or loss to any investor. Smith Bonds, therefore, are safe bonds. They are the ideal investment for any man or woman whose first consideration is safety. NOW 7% Behind Smith Bonds there is now a record of no loss to any investor in 53 years. Smith Bonds are owned by investors in every state in the United States and in 30 countries and territories abroad. This worldwide confidence in Smith Bonds is the result of 53 years of proven safety-53 years in which every cent of principal or interest has been paid For your January funds, Smith Bonds give you this proven safety of 53 years with the liberal interest rate of 7%. You may invest any amount in $1,000, $500 or $100 denominations, and you have a choice. of maturities from two years to ten years. Our new booklet, "Fifty-three Years of Proven Safety," and the 1926 edition of our Investment Savings Plan booklet, "How to Build an Independent Income," will be mailed to you upon receipt of your name and address on the form below. For Banks, Trustees, Corporations and Individual Investors ~6%~ HE Baltimore Trust Company, after thorough investigation, Toffers and recommends for January investment overigation issues of 6% Real Estate Bonds, secured by Guaranteed First Mortgages. 1. Each issue offered by The Baltimore Trust Company is the direct obligation of some well-established Mortgage Company with adequate capital, which The Baltimore Trust Company represents as bankers. 2. Under the investment standards established by The Baltimore Trust Company, each issue is secured by first mortgages made usually for not more than one-half the value of the property and in no case for more than 60%, the valuation being determined by at least two independent appraisals. 3. Each mortgage is guaranteed as to principal and interest, except as to title by the United States Fidelity and Guaranty Company (resources over $41,000,000). 4. Each mortgage is guaranteed as to title by the New York Title & Mortgage Company (resources over $16,000,000) or by some other title company approved by The Baltimore Trust Company and the United States Fidelity and Guaranty Company. 5. Mortgages on all single-use buildings, such as hotels, theaters and apartment structures, are excluded. 6. The Baltimore Trust Company, or some other bank or trust company, approved by the United States Fidelity and Guaranty Company, is Trustee of each issue. 7. $500 and $1,000 bonds of any available issue or maturity (1, 2, 3, 4, 5 and 10 years) are sold at par and accrued interest to yield 6%. 8. All issues provide for the refund of any State tax up to 41⁄2 mills in any one year. FACTS FOR INVESTORS The Outlook's Financial Service Department is at The Outlook Financial Service Department must also pay a Federal and a State transfer tax, which in this case amount to $4. The total of these expenses plus interest make $67.34. As dividends for two months are $100, the net profit on the transaction is $32.66, or about 33 cents a share! Is the hope of getting such a profit the prime motive of the trader or speculator in purchasing stocks? According to the theory, it should be. According to the facts, it is not; and according to the little expense account just given, if it is, it is a very foolish and short-sighted motive. With bonds, as the authors do not point out, the situation is entirely different. Bonds do not respond to the ebb and flow of call money, but, being primarily interest obligations, they do show a close connection with interest rates. This book leaves unanswered the perhaps unanswerable question, What is the cause or what are the causes of increases and decreases in stock prices? It suggests, however, a cause to take the place of the one thus discarded. It is this: Not cheap call money with consequent small profit from the spread between call rates and dividend rates, but the hope, the belief, sometimes the conviction, that prices will materially appreciate, determines the volume of stock speculation, and hence, in a measure, the increase in stock prices. A man who borrows money to buy a stock is after a profit from the rise in the stock. If he can make a little in the event of no rise, so much to the good. But what really motivates him is the expectation of a five, ten, fifteen, or higher-point profit. He may not get it; but that is what drives him to go after it. W. L. S. From Inquiring Readers B ECAUSE this department is attempting to concentrate on standard American investments we have been unable to analyze certain European investment situations for our readers, as we would like to do. For the benefit of those who have been solicited by firms or individuals distributing Deutsche Handelsbank stock, however, we reproduce here part of a bulletin issued by the Better Business Bureau of New York City telling of a preliminary injunction by the Supreme Court against H. and B. Wolf & Co., Inc., 20 Broad Street: This company, "the business of which reached an estimated total of $1,000,000 during the year, has been barred from Pennsylvania and has also been the sub THE OUTLOOK, 120 East 16th Street, New York City ject of a warning issued by the American Chamber of Commerce in Germany. . . . In writing to the above advertisers, please mention The Outlook The business in America of H. and B. Wolf & Co., Inc., was done on a countrywide scale. It was conducted almost entirely by mail, so that the collection of evidence was slower than where published advertisements and verbal representations to investors are employed. Various German securities of uncertain value were offered, among them shares of the Deutsche Handelsbank, Frankforton-Main." This bank stock was sold to the American public at $2.50 a share as against the reported price, in Germany, of 2 cents. The profits, even assuming high costs, must have been very fair. URIOSITY, professional or otherwise, CURI is always whetted at the possibility of knowing what somebody else owns. We candidly confess that this is one of the delights in being a financial editor. Personal curiosity has nothing to do with the interest thus excited, because we never meet our inquiring readers, and they never meet us. We discuss matters on the broad and safe ground of theory and practice. Among the most interesting letters received lately is one from a gentleman, Mr. A. F. B., whose wife has inherited an estate which, at the prices prevailing at the time it came to her, September, 1924, stood as follows: American Locomotive preferred, 119, American Steel Foundries preferred, 105, American Tel. and Tel., 1272, American Tobacco preferred, 105, American Woolen preferred, 1002, Atchison, 10412, Atchison preferred, 922, Central Leather preferred, 49, Chicago and N. W. Ry., 62, Federal Mining and Smelting preferred, 50, B. F. Goodrich preferred, 80, Goodyear preferred, 58, Great Northern Ry. preferred, 662, New York Central, 108, Pennsylvania R. R., 4434, In no case is there more than 26 shares of any one stock; in none, less than three. The total is nearly 225 shares. At present prices, as the owner points out, "everything shows a profit except American Woolen preferred." Now for the problem. Evidently the Shrewd Investors Buy High Grade Southern Bonds NAME ADDRESS S interest rates continue their gradual decline investors encounter increasing difficulty in finding securities in the great financial centers which combine with a satisfactory interest the factors of safety upon which they have learned to insist. In greater numbers, farsighted investors are seeking well protected investments in sections of the country where more rapid development supports more liberal interest rates on securities whose soundness meets every test. The resulting geographical diversification is a further advantage recognized by all authorities on investment. aldwell & Company has Caldwel been recognized for many years by experienced individual and institutional investors as a primary source of high grade securities underwritten in accordance with the most conservative safeguards, and distributed at liberal interest rates reflecting the demand for capital in the substantial development of the South. Caldwell & Co. INVESTMENT BANKERS Southern Municipal, Corporation and First Mortgage Bonds 1420 Union St., Nashville, Tenn. OFFICES IN PRINCIPAL CITIES owner is not dependent on these stocks for income. But he asks these questions: Are there too many rails? Is there too much rubber stock? Outside N. Y., N. H., and H. R. R., is there anything in the list really speculative? How about Federal Mining and Smelting? Would you advise buying more American Tobacco preferred, American Telephone and Telegraph, Atchison preferred, Union Pacific preferred, Illinois Central, or American Locomotive preferred? Our answer, which may interest others, was this: "We have carefully examined the list of securities submitted, and would consider them to be, on the whole, good securities and well diversified. "Federal Mining and Smelting is not a dividend-paying stock at this time and is not earning very much. "Pacific Oil and Lead we cannot get much information about. "Replying more specifically to your questions: "1. We would not consider that there are too many rails on the list in view of their quality. "2. The total amount of rubber stock in this list is not large, but it should always be remembered that this industry is subject to vagaries which make it sometimes a little disquieting to hold rubber stock. "3. As to Federal Mining and Smelting, I think it is a good principle not to hold on to something which does not pay dividends, and about which little information is available. Since you can sell it at a profit, why not do so? "4. Outside of the stocks you mention there are none which we would consider distinctly speculative. "5. Should you sell some of your stocks, we would suggest reinvesting the proceeds in something not already on your list. This will give you much wider diversification. "We would like to call your attention to the fact that at least half this list is preferred stocks, which rarely, because of the fact that they are often callable, can rise in price as much as common stocks. We would consider that changes in your list may well be made from time to time in the preferreds. "American Telephone and Telegraph we would consider a good investment stock and entirely safe. The company has such a position in this field that there is every expectation of the maintenance of dividends and of high yield." We have reported this little excursion into investment analysis at some length because it interested us exceedingly. We trust it will interest and profit others. NOTHER Stock-selling game has been stopped by the New York State. authorities, acting under the Martin Act. The Supreme Court has signed an order directing the Parker Axle and Products Company, Parker Axles, Inc., and the National Safety Brake Corporation to show cause why their stock-selling activities should not halt and alleged fraudulent practices be stopped. The New York Better Business Bureau reviews the case thus: "In 1920 the Parker Axle and Products Company was organized in New York with a capital stock of 300,000 shares preferred and 300,000 common of $10 par value. It was licensed to manufacture 'multiple disc axles' under patents said to have been obtained by Parker in 1919. Over $300,000 was realized on stock sales, the Attorney-General alleged. "After a year, in 1921, Parker Axles, Inc., a Delaware corporation, was organized. It took over the patent rights. The capitalization consisted of $3,000,000 of preferred and $9,000,000 of common stock, par value $10. Sales of stock under this incorporation are alleged to have been over $125,000. "Parker was president of both of these companies. They were followed by the National Safety Brake Corporation, of Delaware, on June 27, 1924. The inventor was engineer of this company, which authorized the issuance of 100,000 shares of no par value. He transferred the manufacturing license to it. About $50,000 of stock was sold, no commercial production was made, and again the license was withdrawn. At this point the active interest of the Attorney-General was enlisted in these operations." I N this department on November 23 we told the story of a man who, through failure to make a will, indirectly after his death involved his estate in considerable difficulty. Commenting on this paragraph, Mr. C. P. Mayfield, of the Fidelity Mutual Life Insurance Company, makes this suggestion, which we pass on as solid food for thought: "How much simpler the whole matter would have been if Mr. A and Mr. B had had an agreement drawn and deposited with the stock in a safe-deposit box. Suppose that agreement had been an absolute contract of sale, empowering the survivor to transfer that stock to his own account at the death of the other for a fixed consideration. "And then suppose those two men should have each been insured by the corporation to cover their liability for the purchase of the stock under the agreement. Each one could then by will dis In writing to the above advertiser, please mention The Outlook |