Saturday, September 5, 2009

After the relief rally ... June 1930

Monday, June 2, 1930
National City Bank of New York anticipates an early recovery. Admits that so far recovery hasn't been marked, but “business has been on the down-grade for nearly a year and in the past 30 years depressions have rarely lasted for a longer period”. Says the danger now is excessive pessimism as opposed to a year ago when it was optimism. Admits serious problems including the worldwide business downturn and fall in commodity prices, but the country has repeatedly demonstrated ability to recover in the past. For the last 30 years, with the possible exception of 1914 (WWI), when business has begun a depression in one year it's always at least started the recovery before end of next year. True that if we look back further there have been some more prolonged depressions (panics of 1873, 1884, 1893). But U.S. business was much less diversified then, and “lacked the recuperative power demonstrated in more recent years”. Also, money markets were uncertain then, as opposed to current easy money conditions. With credit conditions this favorable and the past record of recoveries, predicts a recovery starting slowly in the summer and apparent by fall.

Wednesday, June 4, 1930
Trade has been down for about nine months – bullish since we're nine months closer to returning to normal.

Thursday, June 5, 1930
Brokers and financiers “seem to think the business depression has touched bottom, and the next turn will be for the better.”
A usually bearish market observer “currently sees nothing but bullish signals through studying fundamentals, current movements, and technical indications.”

Monday, June 9, 1930
Much pessimism about business conditions, but bear markets have never started when trade was at low levels and money cheap. Large investors who sold stocks last summer have been increasingly buying, feeling that business is near its low and “an upturn is not many weeks away.”

Wednesday, June 11, 1930
Japan is suffering a severe economic slump. “Early in May leading shares of the Tokyo Stock exchange ... hit the lowest level since May 1908."

Thursday, June 12, 1930
Lower Manhattan development is going great guns. “In the downtown financial district a dozen or more skyscrapers are in the process of construction, several have been recently completed, and numerous others are contemplated.”
Easy money should help stocks. Brokers are reporting buying by corporations and financiers with surplus cash. Most income is now generated from stocks and bonds; last year most was generated from money markets.
“An increasing number of executives are expressing the opinion that the worst has been seen and that business is now bumping along the bottom ...

Friday, June 13, 1930
Business is not improving as predicted, which is lowering market sentiment. Business volume is holding fairly steady week-to-week, but prices are lower, which should lead to lower earnings. Wages aren't going down as fast as earnings, but fewer people are employed.

Monday June 16, 1930
Market students have been encouraged by the general gloom for the past two weeks. This contrasts with the “new era” thinking of last summer when no end was seen to the rise in stock prices and margin debt was hitting a record every week. History says the current gloom is just as mistaken as last summer's unjustified optimism. Historically there has been no case in this country since 1900 when business failed to turn upward the year following a depression.

Tuesday, June 17, 1930
Harvard Economics Society says the recent market weakness reflects pessimism and uncertainty, but sees no change in the fundamentals, forecasts “an early improvement in business.”

Wednesday June 18, 1930
The rally ending in April was probably overly optimistic, hoping for a revival of business at midyear; buyers then are probably selling in disgust now. If two or three of the averages break down below the November level, this may be a warning that the bear market begun last fall isn't over, “though it might nevertheless be near its end.”
Economists feel the current situation in commodity markets is starting to look like a bottom; a combination of underproduction and easy credit at low rates should work as usual to correct conditions.
Reported earnings comparisons will soon be with the end of 1929 and the first half of 1930, which should be more favorable.

Thursday, june 19, 1930
Thomas J. Watson, president of IBM, reports business is doing well and expects full 1930 results may be another record.

Friday June 20, 1930
The time to have been pessimistic was last fall rather than now. “In the past we have always emerged from a period of depression with industry on a better basis because of efficiency and economy made necessary when business was bad.”

Saturday June 21, 1930
Front page above the fold editorial: “A Turn of the Tide Near” - gives some convincing calculations showing that current conditions don't indicate a long depression. Exports for the past few months are 20% under 1929; if this continues for the year total effect on US production would only be around 2%. Total installment credit is only $3 billion, or about 3 1/2 percent of national income. Even if unemployment hit a high level of 10%, remaining 90% should still make installment payments. Other indicators show the country's wealth and purchasing power hasn't been substantially hurt: department store sales for the first four months of 1930 are only 3 1/2 percent below 1929; bank deposits at 30 banks in New York district were at record levels in April; total corporate profits for the first quarter, while down from 1929, were up 5% from 1928. Commodity price decline is serious, but it's very unlikely that this decline will continue since current industrial production is below consumption, and corporations are rich in cash and low on inventory. “It cannot be imagined that the wholesale failures and interest defaults characteristic of earlier depressions will now be repeated. Confidence in our banking system wholly precludes the money panics of former eras.”

Monday June 23, 1930
Col. Ayres, VP Cleveland Trust, predicts an abrupt recovery in stock and commodity prices by Labor Day due to current consumption exceeding production. Distinguishes between two types of depression, “V”-shaped and “U”-shaped.

Tuesday June 24, 1930
J. Westerfield of the NY Stock Exchange lectures civics clubs of Yonkers on the causes of the current business recession. Says the effort to attribute it to any single cause is superficial; criticizes sanguine statements of “new era” economists that “the vast amount of reliable statistical information had practically abolished the old-time evils of large inventories and overproduction.” Concludes that an illusion grew popular that “paper profits in ... quoted values for real estate, commodities, securities, and other forms of property increased fortunes and thereby spending power."
Current speculative sentiment is bearish, but the conditions are there for a strong bull market in the future. While commodity price decline is serious, many are selling for record lows or below cost of production, which can't continue forever. Inventories are low. Wages have not gone down with deflation, leaving workers with more buying power. Businesses generally have good balance sheets and are operating efficiently; those that need to borrow can do so cheaply.

Wednesday June 25, 1930
One broker's opinion: “When this economic and market readjustment has been completed, it will merely be represented by a small curve downward in our steadily mounting curve of prosperity, consumption, production and efficiency ...”

Thursday, June 26, 1930
Washington officials will be looking carefully at whether the record-low 2.5% discount rate will revive business. So far easy money hasn't affected the credit picture much, with demand for commercial credit continuing down. However, the lower rates and longer duration now in effect should give a fairer test. Also hoped that easy credit together with lower commodity prices will encourage businesses to restock.
Old-Timer says he's not sure if stocks will go up or down from here, but anyone buying good stocks at this level will do well in the long run. “We get few opportunities like the present to buy things below intrinsic worth.”

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