rorces ^Vhich iSdake
Prices
By
WARREN F. HICKERNELL, Ph. D.
Director, Bureau of Business Conditions, Alexander Hamilton
Institute. Lecturer on "Panics and Depressions," School of Com-
merce, Accounts and Finance, New York University. Formerly
Mana^in^ Editor, Brookmire Economic Service. Author, "Business-
Cycles," and numerous Articles on Finance.
AMERICAN INSTITUTE OF FINANCE
BOSTON
OUR
''COMPLETE EDUCATIONAL COURSE"
IN THE SCIENCE OF
MAKING MONEY MAKE MORE MONEY
This list is arranged in the order of proper reading. The
books are accompanied by a series of test questions, key prob-
lems and analyses outlines, enabling the student to apply the
knowledge acquired to immediate stock market and investment
-conditions.
L Developing Financial Skill
2. Forces Which Make Prices
3. Manipulation and Market
Leadership
4. Handling a Brokerage Ac-
count
5. Market Information
IL Investment Securities
12. Business Cycles
13. Measuring and Forecasting
General Business Condi-
tions
14. The Technical Position of the
Market
15. Money and Credit
•6. The Essential Features of .^ -r, ■ -n £i
^ . . -^16. Business Profits
Securities
7. The Value of a Railroad
Security
8. Industrial Securities
9. Oil Securities
10. Mining Securities
17. Launching a New Enterprise
18. Securing Capital for Estab-
lished Enterprise
19. Internal Financial Manage-
ment
20. Search for Bargains
Copyright, 1922, by
American Institute of Finance
I
V
^
^
--i
TABLE OF CONTENTS
(
'^
^
,^ Chapter I. Buying and Selling Zones Page
;^ The Methods of a Seasoned Veteran 5
Times to Buy and Times to Sell 6
[v^ One-Way Pockets 7
^ United States Steel 9
I Crucible Steel 9
''b Baldwin Locomotive 9
Studebaker Corporation 10
Westinghouse Electric 10
N. Waves of Bullishness and Bearishness 10
Amounts Bought and Sold 12
Five Hundred Accounts in Steel Common 12
Eyes to the Front 13
Chapter II. Market Moves
The Swing of Prices 15
Three Types of Moves 15
Dow's Law 17
A Little Scene in the Broker's Office 18-
Perspective 19"
^ Chapter III. Price Moves from the Inside
\^ Demand and Supply 21
The Market Dynamic in Nature 21
sy\ Board Room "Rust" 22
J "The Big Interests Are Buying" 24
V Surface Effects vs. Underlying Causes 24
^ Cha{)ter IV. Twenty Years in the Slock Market
•^^ Broad View of the Market 26
V
^
The Stock Market in Profile 26
Cycle 1900-1903 28
Stock Market Influences, 1900-1902 28
Stock Market Influences, 1903 30
Cycle 1904-1908 30
Stock Market Influences, 1904, 1905, 1906 31
Stock Market Influences, 1907 32
Bull Market of 1908-1909 32
Stock Market Influences, 1908-1909 33
447462
4 T able of C ontent s
Chapter IV. Twenty Years in the Stock Market — continued p.^^,,,
Reaction in 1910 33
Stock Market Influences, 1910 34
Irregularity 1911-1914 34
Stock Market Influences, 1911 35
Stock Market Influences, 1912-1914 36
War Boom 37
Stock Market Influences, 1915-1916 37
America in the War 39
Stock Market Influences, 1917-1919 39
America after the War 40
Stock Market Influences 1920-1922 41
What Next We Consider 41
Chapter V. From Gross to Dividends
A Study in Corporation Finance .43
Shares and Their Priority Claims 44
Dividends vs. Earnings as a Market Guide 47
Chapter VI. Looking Ahead
The Sinews of Wall Street 51
Questions Which Point the Right Way 51
The Profit Maker's Point of View 52
The Commercial and Financial Mainspring 53
Jay Gould's Statement 54
What's Ahead? 55
The Next Step 57
Questions
Answers to Starred Questions
CHAPTER I
BUYING ZONES AND SELLING ZONES
The thing to do is to watch Wall Street's eddies and cur-
rents, exercise a little common sense, and in your speculations
you ivill come out all right.
— Jay Gould, Financier and Manipulator.
The Methods of a Seasoned Veteran
The attractive, but all too brief, advice given by Mr. Gould
needs to be supplemented by the suggestions of another well-
recognized authority in finance, Mr. Henry Clews, before the
problem here set for solution is clearly mapped out. How
secure profits in the market? Mr. Clews answers the question
in this way:
"The old veterans of the Street usually spend long intervals
of repose at their comfortable homes, and in times of panics,
which recur sometimes oftener than once a year, these old
fellows will be seen in Wall Street, hobbling down on their
canes to their brokers' offices.
"There they always buy good stocks to the extent of their
bank balances, which have been permitted to accumulate for
just such an emergency. The panic usually rages until enough
of these cash purchases of stock are made to aflord a big 'rake
in.' When the panic has spent its force and the skies once
more are bright, these old fellows, who have been resting ju-
diciously on their oars in expectation of the inevitable event,
which usually returns with the regularity of the seasons, quickly
realize, deposit their profits with their bankers, or the surplus
thereof after purchasing more real estate that is on an up grade,
for permanent inv^estment, and retire for another season to the
6 F 0 r ce s
quietude of their splendid homes and the bosoms of their happy
famihes.
"Those who follow this method always succeed," continues
Mr. Clews. "If the venture is made at the right time — at the
lucky moment, so to speak — and each successive venture is
fortunate, as happens often to those who use their judgment in
the best way, it is possible to realize a net gain of fifty per cent
per annum on the aggregate of the year's investments."
Times to Buy and Times to Sell
The extent to which leading stocks upon the Exchange rise
and fall in price each year will indicate, if we examine it, whether
TABLE I
Price Changes of Ten Leading Stocks
1921
1922 1923
STOCKS
High
Low
Range
High 1 Low
Range; High
Low Range
American Can
351^
23H
12
110
32M
77M
107^
73K 341^
American Woolen . . .
83 J.^
57
ley^
111
78M
32 M
109%
65 U%
Baldwin Locomotive
100^^
6214
38^
145 H
93M
51^
144^
UOK i^H
Baltimore & Ohio. . .
mi
oQ%
12
60M
33M
26%
60%
403^ 205^
Corn Prod. Refining
99M
59
40K
134M
91M
43H
160H
114%! 463^
Studebaker
93K
43^
49K
141M
791^
62%
126H
93M| 32H
The Texas Company
48
29
19
52^
42
10,14
^2%
34% 1834
Union Pacific
131K
HI
20K
1543^
125
293^
144 J^
1243^ 20%
U. S. Steel
86 H
70M
16M
nm
82
293^
1095^
851^ 243^
Woohvorth
13934
105
U%
223
137
86
290
1993^1 9Q-'i
Average
$72M |$27 $102 $45 | $112^ i$36i^
Fluctuation
37%| 44%| 32%
the opportunities to profit mentioned by Mr. Clews do actually
exist. The accompanying table shows that during the three
years examined, the ten prominent issues cited have fluctuated
annually an average of more than $36 per share. This represents a
change each year of from 32 to 44 per cent of the price of these
Buying and Selling Zones 7
stocks, a considerable range from low point to high point. Con-
firming as it does the observ^ations of Air. Clews, this table shows
that each year there are times to buy and times to sell.
\'iewing the matter now from the standpoint of the specu-
lative investor, and disregarding for the time being the trader
and the investor, let us recall from Text I how the market
undergoes from period to period changes in its price le\'cl. The
distance from the market's low points, reached during panics
and periods of depression, and its high points, touched when
prosperity is general, let us divide roughly into four zones, the
upper one in which prices are high, the bottom one in which
prices are low, and the two others in which prices are mod-
erate. When should you buy and sell? Lord Rothschild ex-
pressed the matter tersely when, upon being asked how he
had built up his fortune, he said: "Buy cheap and sell dear."
This matter-of-fact rule let us apply to these four zones. The
upper is the "sell" zone; the lower a "buy" zone; and the other
two "remain neutral" zones. Here we have mapped out m
broad outline, rules of operations which Mr. (lOuld, Mr. Clews,
Lord Rothschild, and hundreds of other successful financiers
for that matter, have proved effective.
The realness of the zones, taken in connection with ihc table
just cited and the figures presented in Chapter 1 1 : "Opportunity"
in Text I, represents a condition laden with possibilities. What
results? Faced as he is with these opportunities to profit, what
does the average person do with them?
One-Way Pockets
The accounts of half a dozen men who traded actively from
July 1, 1915 to February 29, 1916, have been studied by their
broker who in revealing in his book, "One-Way Pockets." what
he found, prefers to conceal his identity under the nom-de-plume
of Don Guyon. So closely do the findings, based upon the
purchases and sales made through his own brokerage office, tall\-
with the results of other investigations and <)bser\ations that
the facts now to be presented ha\e decided \alue.
8
F 0 r c e s
These traders, like a great majority of his firm's customers,
had been bulHsh on the munitions and standard industrial
stocks, and now that these stocks had enjoyed an advance of
from 15 to 100 points each, followed by a reaction of less than
forty per cent of this advance, the investigation could be expected
to disclose substantial profits.
POSSIBLE
PROFITS
U S
STEEL
31?8
CRU-
CIBLE
SOTs
BALD-
WIN
90';
STUDE-
BAKER
118^8
u
WESTING.
HOUSE
27'/s
AVER-
AGE
0934
ACTUAL
LOSSES
iVg,
ovs
iVfe
3?8
Figure 1: "One-Way Pockets"
The results here pictured are based upon transactions of 46,600 shares, in five stocks
actively dealt in. Note the very large possible profits, and what use these traders had actually
made of them.
The stocks selected for study — United States Steel, Crucible,
Baldwin, Westinghouse, and Studebaker — had all been dealt in
actively by each of the six traders, to the total extent of 46,600
shares. The six accounts taken collectively, as though they
represented the operations of one man, and their results sum-
marized, this is the situation disclosed (see Figure 1).
Buying and Selling Zones 9
The following tables present with some detail the results
summarized in Figure 1. They present the main features with
respect to each of the five stocks and the actual price at which
purchases and sales were made by the traders.
United States Steel
Opening price, July 1, 1915 595^
Low price for period 58^
High price for period 89 J-^
Total advance 315^
Closing price, Feb. 29, 1916 825^^
Net advance 23
Customers' average buying price 81J^
Customers' average selling price 80^
Average loss, less commissions J^
Crucible Steel
Opening price, July 1, 1915 31/^
Low price for period 29
High price for period 109J^
Total advance 80J^
Closing price, Feb. 29, 1916 73i<C
Net advance -tl ^
Customers' average buying price 855'^
Customers' average selling price 79?^
Average loss, less commissions 5^^
Baldwin Locomotive
Opening price, July 1, 1915 64 ,'2
Low price for period 64
High price for period 154,V^
Total advance 90^^^
Closing price, Feb. 29, 1916 102
Net advance 3S
Customers' average buying price IHH
Customers' average selling price 104
Average loss, less commissions 7J^
10 F 0 r c e s
Studebaker Corporation
Opening price, July 1, 1915 76J^
Low price for period 763^
High price for period 195
Total advance 1 18%
Closing price, Feb. 29, 1916 136%
Net advance 59%
Customers' average buying price 138%
Customers' average selling price 135%
Average loss, less commissions 3%
Westinghouse Electric
Opening price, July 1, 1915 48%
Low price for period 47%
High price for period 74%
Total advance 27%
Closing price, Feb. 29, 1916 63%
Net advance 14%
Customers' average buying price 62%
Customers' average selling price 6134
Average loss, less commissions 1%
These tables present convincing, though no doubt some-
what surprising, evidence of what the average trader makes of
opportunities to profit.
Though large gains had been scored by these stocks during
the period and the traders had operated, for the most part, on
the long side, the average price at which each stock was purchased
was higher than the average price at which it was sold. In spite
of the exceptional opportunities presented during this period,
these traders, owing to wrong methods, had lost money.
Waves of Bullishness and Bearishness
The glaring errors disclosed b}' this study of the six trading
accounts led Guyon to keep for a year a daily record of the
total number of shares which his firm bought and sold. The
periods during which customers were either buying heavily or
selling heavily were selected for special analysis, and a table
Buying and Selling Zones
11
prepared showing the total number of shares both bought and
sold during such time. From this table we have prepared
Figure 2 which presents its results graphically. Periods in
which buying was preponderant are shown in black and selling
balances are shown in white.
115
110
„105
•^100
95
90
85
250
^200
o
u
ta
Sl50
o
1 100
3
O
M
H 50
■ Purchases Exceeded Sales
■
D Saies
Exceeded Purchases
■
Im
A
rii
l_r
>—
H
■l ■ ri
-
■
■
■
H--'
"LP Lj
'
-^
_,
-^-
1 -n d]
IW
tti
Figure 2: When the Public Buys and Sells
This diagram reveals closely the public's habit of buyinR on bulges and selling on de-
clines. The columns at the bottom show the extent of this bad buying and bad selling.
Periods when customers were loading up with slocks were
followed in each case by a lower range of prices and, with one
exception, periods when they sold were followed by higher prices.
12 F 0 r ce s
The diagram indicates this "bad" buying and "bad" selling
very clearly.
Amounts Bought and Sold
There remains another item of importance in this investiga-
tion, which is the relative amounts bought and sold at the two
price levels. From the table showing the total number of shares
bought and sold the following summary has been made:
Bought during advance 883,600 shares
Sold during advance 613,300
Excess of purchases 270,300
Sold during declines 437,000
Bought during declines 366,900
Excess of sales 70,100
Customers at high prices bought more than twice as many
shares as at low prices, in other words, they used big margins
when stocks were low and small margins when stocks were high.
Having held Steel in 200 or 300 share lots at $60 a share, they
took on lots of 400 to 600 shares around $80. Similarly with
Crucible, Baldwin, Studebaker, and Westinghouse — these
stocks grew more attractive and were held in larger quantity
as they went up. The higher the price the heavier the load,
roughly speaking, describes the situation.
The market operator in this situation is unsafe. When his
account is thus rendered top-hea\^^ a decline of ten points from
high prices wipes out whatever profits were made on a twenty
point advance from low prices.
Five Hundred Accounts in Steel Common
These results disclosed by Don Guyon are confirmed by a
study of 500 accounts in Steel common made several years ago
by Thomas Gibson. Mr. Gibson selected as his period of study
July, 1901, to March, 1903, because Steel sold at approximately
the same price at both the beginning and close of this period and
Buying and Selling Zones 13
hence from a mathematical standpoint the situation was about
50-50. Whatever was actually done, therefore, that threw the
results out of the 50-50 class would be pretty clearly an index of
the traders themselves, their mental processes and methods of
dealing in stocks. The examination of these five hundred
accounts disclosed this as the final outcome.
What the Results Were
Total deficit on losing accounts 81,245,000
Total gain on profitable accounts 288,000
Number of shares, long stock 820,000
Number of shares, short sales 292,000
Average price, long stock purchased 425^8
Average price, short sales 35 ^4
Eyes to the Front
The two studies, one made by Mr. Gibson sixteen years ago
and the other by Don Guyon in recent markets, indicate certain
errors persistently made by numbers of persons in the market.
Practically every well-informed person in Wall Street observes
day after day in market after market that such is the case.
What, then, is the problem, vital to profits, which we now face?
The realness of opportunity must be conceded. Profits
in generous amount were, are, and will be, possible.
Attempts to take advantage of these opportunities were,
and are, clumsily made. The wrong methods here dis-
closed would keep a man poor in any line ot business.
Traders in their attempt to foresee price changes evi-
dently look at the wrong things. Unlike the expert
ball player, golfer, or money maker, they do not keep
their eye on the ball.
The conclusion appears evident that what the untrained
man tends to do as a matter of course, that is, what seems to
him the obvious thing to do, does not result in a profit. Keener
14 Forces
insight, a more penetrating view of what causes price changes,
in brief a developed financial skill, are essential in securing profits.
And these qualifications the wise person will cultivate before,
rather than after, he enters the market. This is the problem
here set for solution.
In succeeding chapters and Texts the forces which make
prices are clearly analyzed, thus enabling the subscriber with
increased profit to himself, to gauge them in advance.
CHAPTER II
MARKET MO\'ES
The Swing of Prices
The reader who turns to the financial page of his newspaper
finds there a table of figures, frequently two columns wide,
which extends a full page or more in length. This table, in part
only, is here reproduced.
NEW YORK STOCK EXCHANGE
TUESDAY, DEC. 31, 1918
1918 1917 1916
Day's sales 933,594 Holiday 920,961
Year's sales 143,378,095 184,536,371 232,342,807
Closing
Bid Ask.
Sales
First High Low Last
Net
Chge.
76M
100^
7434
32
31M
44^
75
SlVs
1291^
95
41^
26
76%
100%
75
32M
31K
44^
753^
51%
129%
12,450
7,300
11,200
7,400
23,600
16,380
4,900
8,400
6,000
95^111.000
41% 11,200
26%1 10,700
Am. Smelt. & Ref. .
Am. Tel. & Tel. . . .
Baldwin Locomotive
Int. Nickel
Kennecott Copper .
Pennsylvania R. R.
Rep. Iron & Steel . .
Studebaker Co
Union Pacific
U. S. Steel
VVestingii. E. M. & d
Willys-Overland . . .
75H
99%
73H
32H
31J^
43K
74%
50
129%
94
41%
25
77
101
75^
32%
323^
44%
75%
51J^
130%
95%
41%
26%
75^
99%
731^
31%
315^
43^
74
50
1285^
93H
40%
25
761^
100
74K
32%
31%
44^
75%
51
129%
95
41%
26%
+VA
+ %
+ 1K
+ 'A
+ Vb
+1%
+1
+1%
+ %
+1M
+1%
Three Types of Moves
Those who watch the ticker realize that the four prices given
in the newspaper's table, that is, first, high, low, and last prices
16
Forces
of the day, reveal in only a limited way the exceedingly numerous
fluctuations which occur. Upon the floor of the Exchange,
market history is written in terms of eighths and quarters of a
point.
This fuller account of a stock's price changes will now be
shown on a diagram, which taken in connection with the two
JiiLuary 1,1915 by Mootba to January 1. 1917
Jauuary 1, tu KePruary l.iaiT
g¥=E
^Ld^i=Fa
86 M
%
\
H
8G
%
|«
■
Jan
uary
14
1916
'1
1
c
1
i
1
1
1
j
1
n
1
1
1 ! 1 1
1 : 1
1
Figure 3: Three Types of Moves in Steel Common
Daily fluctuations are bullish, the secondary swing is bearish,
while the primary swing is bullish.
other parts of the figure presents a matter of considerable
importance. U. S. Steel the morning of January 14, 1916,
It advanced to f , then f , then |.
opened 1600 shares at 85 1.
Market Moves 17
Figure 3 C presents every mo\'e, or change in price, which
occurred during that day.
The fluctuations themselves were part of a broader mo\'e-
ment which is termed a secondary swing (see B in Figure 3).
Steel's record for that January 14th session is indicated by the
heavier block on the second part of the diagram. Though Steel
on January 14, was going up, its move in the secondary swing
was downward.
This secondary swing, in turn, which in the present instance
covered approximately a calendar month, was part of a still
broader range of prices, termed a primary move (see A in Figure
3). Steel's secondary swing, shown in B, has in the diagram of
the primary move been indicated by a heavier block. While
Steel's position in the secondary swing was bearish, its position
in the primary swing was bullish.
Studies of other stocks could be made which would show
moves very much similar to these presented in Figure 3.
Dow's Law
The changes in prices just cited have been described by the
late Charles H. Dow, a founder of the Wall Street Journal and
a trader of rare insight, in a way which has since been termed
Dow's law of market movements. This is his description :
"The course of prices over a long period of time resembles
the course of a winding river which doubles on itself again and
again, so that in traveling from one point to another, distant
perhaps twenty miles in a straight line, it will actually traverse
a distance of fifty or sixty miles in making those twenty, and
will often travel for some miles in a direction opposite to that
of its ultimate or true course. Furthermore, the course is full
of eddies which keep the straws on its surface twisting and
turning back and forth all the time.
"The ultimate or true course of the river is called the primary
movement of prices and it expresses the gradual adjustment ot
prices to investment values resulting from the operations of
18 F 0 r ce s
in\estors — viz., those who buy stocks for income rather than
for speculation. By value is meant the relation of the earning
capacity and dividend yield of a company's stock to the general
value of money, so measured by interest rates. The secondary
movements or swings are likened to the river's doublings and
twistings, and are due mainly to the operations of margin specu-
lators. The surface eddies are the daily fluctuations which
reflect mainly the activities of the floor traders who operate in
the Exchange. Sometimes the surface eddy doubled on the
actual flow of the current, and sometimes the actual flow of the
current doubled on the river's true course. Traders' operations
are always intimately correlated to and interwoven with those
of the margin speculators and those of the margin speculators
with those of the investor, the whole forming the continuous
current of the river."
A Little Scene in the Broker's Office
What connection has this study of moves with the average
trader's wrong methods shown in Figure 2, and with a person's
own plans to deal profitably in securities? The answer to this
question can be presented with some little realism in the follow-
ing instance, the like of which occurs in many a broker's
office.
Assume that January 14th, when U. S. Steel was fluctuating
around 85|, Mr. Average Man had dropped into his broker's
office "just to see how the market opens." Stocks are firm.
Steel appears upon the tape— 1600: 85|, 1000: 85|, 2200: 85f.
"Steel looks good this morning," suggests the customers'
man.
"There's one thing you can depend upon," sagely observes
a graybeard seated for the day near the ticker. "Those who
sold their stocks on news of this Mexican situation will have to
climb for them in a few days. That's certain." He was com-
fortably long of stocks.
Steel appears upon the tape: 85| — a half-point up already
from last night's close. "Buy me a 100 Steel at | quick," says
Market Moves 19
Mr. Average Man. He gets it at f much to his surprise and
when a few minutes later it touches \ a chilly feeling creeps over
him. His confidence revives as Steel from that point mounts
again, and when in due time it touches 86 he leaves the office
quite satisfied with himself.
Why did he purchase Steel?
Was it for a turn of a point or two?
Or because he believed a secondary swing upward was taking
place?
Or was he thinking ahead in terms of the long pull?
The diagram shows full well the dangers ahead for the man
who merely bought, without having in mind a clear idea of why.
Perspective
The chances are fifty to one that the average man in Wall
Street under circumstances such as have been stated thinks only
"Steel is going up." No doubt at the time Steel is going up.
But what sort of a move is on? Is this the sort of move that
fits into his trading, or speculative investment, or investment
plan? These are questions which this average man ought to
think over before he puts in his order, although as a rule it is
after, if at all, that he giv^es them serious consideration. Con-
sequently he lacks perspective, buys or sells without foresight,
flounders, and commits the stupid blunders which work such
havoc with his profit and loss record. These errors are all the
more irritating because in large part so unnecessary.
The stock market with respect to its moves is a sort of wheel
within wheel affair composed of an outer rim which mo\es with
broad regularity, inner gears which upon occasion run in re\'erse
direction, and in the center a small, active balance wheel which
continuously turns this way and that. Tr\-ing to watch all
these wheels at the same time, without noticing how dilTcrent
are their respective mo\'emcnts, will likely lea\'e a person dizzy
— in prime condition to commit the errors cited in the pre-
ceding chapter. But tlu> knowledge that market mo\os consist
of three classes and that while these three ma>' pn^ceed together
20 Forces
they very commonly go in opposite directions, provides those
interested in the market a distinctly useful point of view. It
simplifies their problem and renders it more definite. With
this simplified and more definite problem in mind, you can the
better keep your eye upon the particular forces which, in what-
ever of these three kinds of moves has been selected, there
operate to make prices.
But what constitute the market forces themselves? Where
can they be located? These are also essential questions, to
whose answer several chapters will now be devoted.
CHAPTER III
PRICE MOVES FROM THE INSIDE
Demand and Supply
"Why do prices go up or down?" The question was put by
a customer to his broker, a man of long experience in whom
age evidently had bred conservatism.
"Prices of stocks go up," the broker declared after a due
pause, "when there are more buyers than sellers at a given price
level, and go down when there are more sellers than buyers."
Demand and supply, in other words, was the idea he intended
to convey by this apparently safe platitude — which incidentally^
in the way he stated it, was inaccurate.
It is true, of course, that the conditions of demand and
supply change continuously, which in turn brings about bids,
and offers at new levels, either higher or lower; but this con-
ception, while of some use, does not really explain very much.
We must get behind demand and supply merely as terms, to-
the forces, which, by creating new conditions in the minds of
buyers and sellers, make the market price.
The Market Dynamic in Nature
What we wish to convey by the above statements is that
price making is always a dynamic process, in which buyers press
for lower terms and sellers seek for higher. Consequently,
markets are in a state of i\ux, with quotations always in process
of change.
It is the tendency of human nature, however, to think in
static terms, which means nothing more than that people readily
form habits which it requires effort on their part to break and
that in consequence they are inclined to believe existing conditions
will continue as they are.
22 F o r c e s
When the market is dull and depressed, those interested in
stocks find it hard to see in such conditions the prelude to a
period of activity and higher prices. When prices are near the
top and the reports on all sides say the country was never before
so prosperous, they assume confidently that, while other booms
have not lasted, this one, due to circumstances unlike those of
preceding booms, is here to stay.
This conflict between dynamic markets and static mental
tendencies has worsted more followers of the Exchange than a few.
Board Room "Rust"
These static mental tendencies usually grip closely the person
whom those at a distance from the market are in the habit of
envying on account of what they consider his exceptional ad-
vantages, viz. the office habitue. Very commonly this daily
scanner of ticker tape and board is found seated listlessly before
the latter, a blase individual who watches the hurrying board
boy change the quotations here and there.
What do these quotations mean to him? The United States
Steel Corporation has long since shriveled into a mere bit of
cardboard, size 2x4. Its belching furnaces, ore docks, thousands
of employes, wonderful new plants, taxes, unfilled orders or net
profits do not disturb his thought because, the victim of what
has been very well termed board room "rust," his mind has
become too warped to admit them. Union Pacific with its mag-
nificent roadbeds and low costs per ton mile, Anaconda with its
chain of mines and smelters, International Mercantile Marine
with its famous liners, and Bethlehem Steel, the child of Schwab's
brain — it is all the same ; shorn of every feature of their
real selves, these great properties are to him but automa-
tons condemned for five hours daily to strut upon the market
stage.
The account of price changes which these board room
"rusters," behind clouds of smoke, pass freely among themselves
are quite in keeping.
Price Moves fro m the I u s i d e
U
S - .. M
5 3
9. '-I
■J} a
a £ ""
— 1 "5 '? ?
^ '£4^ i
(f) 5
bo
— M
ill
^23
2- S.
c; j2 .2
rt u
op . =
U < CO cd
j: -r ^ o
He--'
^ 1/ u
£i S t; -S
5 o-° .a
a" ^ -3
! i ^1
24 F o r c e s
"I hear they are going to put up Corn this time for sure."
"Can is tipped up for a rise."
"Insiders are picking up Reading on every decHne."
"Lipper bought 7,000 Steel; Pynchon is selling Crucible."
"I have it straight that the back dividends on Marine will
be cleared away at this week's meeting" — ^which being inter-
preted likely means that a good friend of his knows a man whose
father-in-law had it from the assistant to one of the directors to
"watch Marine, there's going to be something doing in it!"
"The Big Interests Are Buying"
The inexperienced trader is, in fact, hard put to it for e.x-
planations of what is taking place. When the market sells olif
on good news, advances on bad news or breaks out of its rut
into sudden strength or weakness without any cause, so far as
he can tell, he becomes pretty well tangled in his thinking.
Since an explanation he must have, he discovers a mysterious
"they" who control the m.arket; prices go off because "they"
put them down; prices advance if "they" put them up.
With increasing experience, this trader after a time has
rendered his "they" somewhat more definite in the person of
some powerful operator or operators. Years since when the
market went up, Commodore \"anderbilt was declared to be the
buyer; when it went down Daniel Drew was the seller. Later,
the name Jay Gould w^as breathed every time a market move
needed explanation. Still later it was E. H. Harriman, then
Daniel G. Reid, more recently still Charles Schwab or the Gary-
Morgan "crowd" or Jesse Livermore. In cases of doubt "the
big interests" are made to do service.
Had these operators actually put through all the transactions
with which they were credited, the Bank of England could not
have financed them nor the big Exchange room itself hold all
their securities.
Surface Effects vs. Underlying Causes
What has been said indicates pretty clearly that the majority
of persons interested in the stock market keep their eye upon the
Price M ov e s f r 0 m the Inside 25
surface effects, instead of underlying causes. They often thereby
are captivated and dazzled and bewildered — but seldom profited.
The statement of the problem indicates the method for its
correct solution. "They" as an ail-sufficient explanation, needs
to be supplemented by the willingness to search for causes;
over-worked remarks about what "the big interests" are doing
should give way to the idea of market forces. One must get
behind the quotations to the forces which make them.
The Exchange floor ought to be regarded simply for what it
is, the scene of incessant struggles between bulls and bears or
in other words, between forces which make for higher prices and
forces which make for lower. It may be the tussle is temporarily
a deadlock which, when broken after a time, results in a lively
day on the Exchange, a two-million or so turnover with pos-
sibly three points average advance or decline. Then a period
of quiesence may ensue, a sort of lull between storms. How-
ever long particular conditions exist, forces as they wax or wane,
make the market.
The study of these forces supplies the essential foundation
upon which success in the market, year after year, depends.
Persons interested in the market ma>' very well regard such
study as constituting the alphabet of their business; and those
who, in their present preoccupation with tips, "inside" infor-
mation, the news, etc., have not yet appreciated its value are
deceiving themselves with Wall Street's skillful camouflage.
With respect to our own operations, whether these be in\-est-
ment, speculation, speculati\e iinestment, or the tiiiancing of
enterprises, are we read>' to pierce through this surtace cam-
ouflage and act upon sound conclusions?
Every niovement in i)rices is due to certain forces.
The presence of these forces should not be denied simply
because you do not see them.
Neither tips, nor a \'ague sense of wontler. nor idle gossip
should prevent you from seeking out these torce^ which make
the market.
These forces, once recognized and the manner of their opera-
tion learned, rendi'r \<)u a real insider, one iclio knoics.
CHAPTER IV
TWENTY YEARS IN THE STOCK MARKET
Broad View of the Market
Those who want to lay a solid foundation upon which they
later can deal with success, realize the importance of gaining at
the outset a broad view of the market. This broad view enables
them to see how the market's forces operate in setting prices;
and because several years' operations upon the Exchange are
surveyed, it provides them a sound perspective. Having
acquired perspective, the average person, with whom inexperi-
ence is a serious drawback, is in a position to derive a decided
gain; while he cannot buy and sell in these markets of the past,
he can study them and, his experience in this v.'ay much ex-
panded, enter the present market with surer touch.
For this purpose, that the reader acquire market perspective
and see what forces have operated to produce price changes in
the past, we have summarized within a few pages the events of
twenty years. Needless to say, the account which follows is
much condensed; the limits of space are such that countless
details have been stripped away and only the broad outlines
presented.
The Stock Market in Profile
The broad outlines of market history let us picture first
graphically. For this purpose a considerable number of repre-
sentative stocks, both rails and industrials, have been averaged
in price and these averages in turn plotted on graph paper.
Figure 5 accordingly shows the main swings of the market.
A preliminary survey of this chart shows that stock-market
Twenty Years in the Stock Market 27
prices tend to move in cycles with minor fluctuations during the
big upswings and downturns of each cycle.
The first cycle began in 1900 and ended in 1903. The
upswing lasted two years and the decline about twelve months.
The principal irregularities were a minor reaction in 1901 during
the upward movement and a tcmporar\' ralK' in Januar\-, 1903
after the decline had set in.
1: Ul Wl IW. 1!)U.( I'.IUI VMl' I'JUU 1!)U; I'JUS I'JU'J lUlO I'Jll I'll.' l'J13 I'JH I'JlJ I'JIO I'Jl" !J13 lUl'J
Figure 5: The Stock Market in Profile
The market's broad swings since the first of January, 1900, are here shown graphically.
Dow-Jones averages were used previous to the closing of tlie Exchange in 1914, and the New
York Times averages since.
The important question for the investor is to know what
were the underlying influences causing prices to advance two
years and decline twelve months, for the big opportunities for
accumulating profits cited at the beginning of this present Text
lie in taking advantage of the long-pull moves of the cycle. Let
us then study this cycle of 1900-1903 and attempt to separate
the chaff from the wheat. B\' chaff wc mean the factors which
28
F 0 r c e s
cause only the ripples which appear on the general tide of
prices.
Cycle 1900-1903
The factors of primary importance during this cycle in de-
termining the trend of prices are grouped below, classified into
two groups — favorable or unfavorable. Let us first note that
the ad\ance during the two years 1900-1902 amounted to about
$50 in the railway shares on the average and about $20 in the
industrials. The important factors which influenced Wall
Street during these two years were as follows:
Stock Market Influences, 1900-1902
Favorable Factors
1. Large exports of Boer War.
This meant profits to American ex-
porters and easy money conditions
in Wall Street so long as Europe sent
gold in payment for American mer-
chandise.
2. The adoption of the gold
standard by Congress in 1900, defi-
nitely removing the uncertainty
which had prevailed while Mr.
Bryan was engaged in his free silver
campaigns.
3. The formation of large corpor-
ate combinations, such as the United
States Steel Corporation and also rail-
way mergers bringing vast railway
mileage under Wall Street control.
4. The rapid increase in the gold
production in the Klondike and
South Africa, which provided the
banks with abundant reserves.
5. The struggle for control of
Northern Pacific, causing the stock
to go to $1,000 per share.
6. Good crops, except a short
corn crop in 1901.
Unfavorable Factors
1. Bryan's nomination in 1900.
2. Strikes at the steel mills and
anthracite coal mines.
3. Drouth in 1901 affecting the
crops, especially corn.
4. The Galveston flood.
5. The assassination of President
McKinley.
6. The Boxer troubles in China.
7. The panic among investors
after J\Iay 9, 1901, when the North-
ern Pacific corner collapsed.
8. Disappointment regarding
earnings of industrial combinations
in 1902, causing dividend reductions.
9. Failure of attempt to peg
copper prices at end of 1901.
10. Beginning of Northern Secu-
rities suit to stop railway mergers in
1902.
11. Ending of the Boer War in
1902, meaning a loss of export trade
and necessity of exporting gold to
Europe.
Twenty Years in the Stock Market 29
The lesson to be drawn from above table of events is that
the business world is complex. The inexperienced investor is
likely to imagine that a single factor upon which he has his
eye will prove the dominating influence. He is not able to
balance all of the factors in the situation and judge correctly
which factors will prove to dominate the market. For instance,
the assassination of President McKinley or the Galveston
flood occupied so much space in the newspapers temporarily
that untrained investors in many cases doubtless forgot such
fundamental considerations as the volume of business arising
froni the export trade during the Boer War, the crops, and the
vigorous and efficient efforts of nearly one hundred millions of
people to produce profits from the internal developnient of the
United States.
Upon sober reflection, of course, it is e\ident that the wealth
destroyed by the Galveston flood could have little influence upon
the profits of a majority of business enterprises, and that the
assassination of President McKinley would not interfere with
the transportation of merchandise or the manufacture of steel.
Labor troubles, also, could not impair profits greatly unless
they resulted in a complete stoppage of business for many
months, but experience shows that the necessity of earning a
living forces capital and labor to get together in some fashion
without a long stoppage of industry.
But the question remains. "What caused prices to advance
during 1900-1902?" The fact that they did advance show^s that
the favorable factors more than offset the unfavorable influences.
The most fundamental factors were the easy money rates in
Wall Street during 1900-1901, the export demand for American
goods, and the fact, also, that selling prices generalK' adxanced
faster than wages during these years, resulting in abnornialK-
large commercial profits.
Let us now consider the events which caused the markt'd
decline in 1903.
30 Forces
Stock Market Influences, 1903
Favorable Factors Unfavorable Factors
1. Fair crops. 1. Large gold exports, causing
2. Active merchandising. tight money in Wall Street.
3. Fairly settled social condi- 2. Congestion of unsalable se-
tions. curities in Wall Street, when banking
funds were depleted.
3. Decision in Northern Securi-
ties case unfavorable to Wall Street
control of railways.
4. Receivership for shipping com-
bination.
5. Labor troubles.
6. Depression in steel industry.
The dominating factors in the dechne of 1903 were the tight
money situation arising from gold exports, which checked lend-
ing on securities, and the decision in the Northern Securities
case, which affected market sentiment and made investors lose
faith in the ability of Wall Street financiers to maintain values
created through high finance.
Cycle 1904-1908
Let us now consider the cycle 1904-1908. This cycle like
the preceding one exhibits an advance of about two years and
a decline of about twelve months. From the autumn of 1904
until the autumn of 1906 there was an advance of about $40 per
share in railroad stocks and an increase of about $55 per share in
the industrials.
The market did not advance during the first half of 1904 on
account of a poor winter wheat crop and the outbreak of the
Russo-Japanese War. Before the end of the year, however, it
was found that other crops were good and that the sale of
supplies to Japan would add to the prosperity of many corpora-
tions. By the summer of 1904, also, capital had become ex-
tremely abundant in Europe and the L^nited States.
Among the more important factors which entered into Wall
Twenty Years in the Stock Market 31
Street discussion during the two-year ad\-ance of this c\cle were
the following:
Stock Market Influences
Favorable Factors
1904
1. Government states the
Northern Security decision does not
mean that the Attorney General is
"running amuck."
2. Exportation of gold subsides;
money becomes easy.
3. Democrats nominate Alton
B. Parker; Roosevelt's election as-
sured.
4. Good corn crop.
5. Exports to Japan.
1905
6. Iron market advances.
7. Railways order equipment.
8. Rumors of combinations.
9. Dividends increased, notably
on Steel Common, Union Pacific,
Southern Pacific and Pennsylvania.
1906
10. Large crops; railway traffic
heavy.
Unfavorable Factors
1904
1. Poor winter wheat.
2. Financial uncertainty upon
outbreak of Russo-Japanese War.
3. Russia and Japan sign treaty
in autumn 1905.
4. In December, 1905, money
market tight in sympathy with
European prices; call money rates
125 per cent.
1906
5. Hepburn railway rate bill
enacted.' Congress becomes gener-
ally hostile to corporations.
6. San Francisco earthquake
causes insurance companies to sell
bonds to secure indemnity funds.
7. Capital scarce in Europe,
Bank of England rate 6 per cent.
By the end of 1906, the fiivorablc influence of large crops and
extraordinary business profits was fully offset h\- the unfa\oral)le
effect of high interest rates, reflecting an rxhaustion of cai^ilal.
The world over, there were symptoms of a crisis. In Japan,
Chile, Egypt, London, New York, and, in fact, in all parts of
the world high prices had caused such an extension of bank loans
that the bankers could little afford to risk further assistance to
commercial expansion. Borrowers were making hea\y with-
drawals of gold from the banks in order to pa\ the debts con-
tracted on the basis of high prices. The bankers began to
discriminate against stock exchange borrowers in order to assist
32
F 0 r c e s
merchants to carry on their operations. The result was a slump
on the stock exchange late in 1906, which continued in 1907
until November, except for an occasional rally of a few points in
the spring and in July. Railroad stocks declined fully $50 a
share and industrials nearly as much.
At the time, a good many speculators thought the decline
was due mainly to the hostility of President Roosevelt and
Congress toward corporations, but even though this may have
dampened market sentiment, the fundamental cause was an
exhaustion of capital. Among the factors prominent as market
forces during this memorable year of 1907 were the following:
Stock Market Influences, 1907
Favorable Factors
1. Trade supported by large
crops of 1906 and good corn crop of
1907.
Unfavorable Factors
1. Abnormally high operating
expenses impair profits.
2. Commerce Commission in-
vestigates Harriman railway lines.
3. Bond syndicates unable to
sell new security issues because of
exhaustion of capital.
4. Continuation of trust prose-
cutions.
5. State authorities active in
regulating railways; clash with Fed-
eral authorities.
6. Judge Landis fines Standard
Oil §29,000,000.
7. Copper trade slumps.
8. Knickerbocker Trust Com-
pany fails.
Bull Market of 1908-1909
After the panic had passed, it was found that the properties
built up during the preceding period of prosperity were physically'
intact; that in 1908 the crops were growing as usual, and that as
a result of the crisis wages were low and materials cheap. Owing
to the general halt of business during the latter part of 1907 and
Twenty Years in the Stock Market 3>i
the early part of 1908, capital rapidly accumulated, not onl\' in
the United States but in England and on the Continent.
By the summer of 1908 conditions were ripe for an advance,
and during 1908-1909 stock price fully reco\ered the losses of
the preceding panic. Rails ad\anced S50 a share and indus-
trials nearly as much.
The following were prominent market influences:
Stock Market Influences, 1908-1909
Favorable Factors Unfavorable Factors
1. Low wages and cheap ma- 1. Railroad receiverships,
terials. 2. Anti-trust suit against Xew
2. Accumulation of capital caus- Haven road.
ing decline in money rates. 3. President Taft recommends
3. Freight rates increased. tax on corporation incomes.
4. Increase in tariff duties in 4. Harriman, leading market
1909 considered favorable. general, becomes ill.
5. Expansion in iron and steel 5. Europe begins to resell Ameri-
industrj-. can stocks bought during panic of
1907.
Reaction in 1910
At the beginning of 1910 speculators in Wall Street were
wvy much confused. Capital was still fairly plentiful in
London and Paris and the railroad promoters in the I'nited
States who were accustomed to borrow heavily in Europe had
big plans for the future. Nevertheless, the chart on page 27
shows that stocks declined about S25 a share on the a\erage
during the first seven months of 1910.
The Interstate Commerce Commission rendered a decision,
the tendency of which was to undermine confidence in railway
securities, and for \arious reasons investors in England and
Holland sold back American securities which they had pur-
chased during the panic of 1907. It is estimated that this re-
selling from Europe amounted to ;?150,000,(H)0. The reason
for such selling was partly the restrictive political acts at Wash-
ington regarding the railways and partly the fact that European
investors began to find attractive investment opportunities in
34 Forces
other parts of the world at this time. An important consider-
ation, also, was that they had bought stocks during the panic
because they were cheap and in anticipation of making a profit,
and the wild ball market in Wall Street in 1909 gave them the
expected opportunity to sell at a big profit. That is, they sold
because prices were high.
The following table summarizes the events considered im-
portant market influences during this year.
Stock Market Influences, 1910
Favorable Factors Unfavorable Factors
1. Fair crops. 1. President Taft recommends
2. President's annual message in increased powers for Commerce Corn-
December reassuring. mission.
2. Collapse of Hocking Coal and
Iron Pool.
3. Anti-Trust agitation.
4. Money situation tightens.
5. Commerce Commission makes
sweeping reductions of railway rates.
Irregularity 1911-1914
The three years following 1910 were unfavorable to the
■development of a normal stock-market cycle.
In 1911 and again in 1912 speculators courageously ad-
vanced prices, but in each year the bull movement collapsed.
In July and August, 1911, speculators were thrown into con-
fusion. They would talk about the short corn crop one day
and the prosecution of the steel trust the next day as a cause of
the market's weakness. The fact was, however, that the un-
settlement of the financial markets in Europe caused by the
Moroccan dispute was the dominating influence. The Kaiser
threatened to employ violence in dealing with France, and Lloyd
George intimated that any move against France would prejudice
British interests in Africa and that Great Britain might be ex-
pected to take a hand in any war that de\eloped. Many
Twenty Years in the Stock Market 35
bankers withdrew funds from Switzerland and Berlin, and
British speculators sold stocks heavily in Wall Street. This
fact now has come to be regarded as the dominating influence,
although at the time Wall Street actually thought other con-
siderations were more important.
The following table shows the market factors which governed
Wall Street activities during 1911:
Stock Market Influences, 1911
Favorable Factors Unfavorable Factors
1. Easy money conditions. 1. Commerce Commission sus-
2. Supreme Court announces Pends rate increases.
"rule of reason" in dissolving Stand- 2. New York Central reduces
ard Oil and American Tobacco div-idends.
trusts. 3. Standard Oil and .\mcrican
3. Orders for steel increase to- Tobacco dissolved.
ward end of the year. 4. Moroccan crisis causes panic
in Europe and dumping of .\merican
securities on New York market.
5. Attorney-General begins suit
against U. S. Steel Corporation.
In l'>12, on the basis of good crops and a rapidK' growing
demand for steel, not only for industrial purposes in the United
States but for exportation abroad, the stock market adv'anced.
As in the preceding year, howev^er, the advance was brought to
a halt by political conditions in Europe.
About the first of October the Balkan states made war
against Turke\' and there was danger that the big powers would
be drawn in. The Balkan War continued into the year 1913
and the settlement b\' the Treaty of Bucharest was so indecisi\e
that it left Austria and Germany at daggers' points with Russia
and iur allies in Western Elurope. It was only a question of
time until war would break out, and a stream of stocks flowed
steadily into W'.iil Street from the boxes of well-informed capital-
ists abroad during the first half of 1914. N'e\ertheless, Wall
Street became optimistic and looked for better things in 1914,
36
Forces
and American optimism had a strong foundation in large grain-
crops and a record cotton crop. But just as an autumn bull
market was expected to begin, the Great War broke out.
The following table reviews the events of the three years,
1912-14:
Stock Market Influences 1912-1914
Favorable Factors
1. Record corn crop in 1912.
2. Large exports of steel.
3. Large crops in 1914.
4. Congress passes Federal Re-
:serve Act.
Unfavorable Factors
1. Democratic Congress decides
on investigation of "money trust."
2. Flood in Mississippi River.
3. Balkan War in autumn of
1912 causes Europe to sell American
stock.
4. Republican party splits. Wil-
son and Democratic Congress elected,
making tariff reductions certain.
5. Union-Southern Pacific mer-
ger dissolved by Supreme Court,
December, 1912.
6. President Wilson's speeches
after election antagonistic to big
business men.
7. Revolution in Mexico early
in 1913; Taft withholds action, leav-
ing problem to Wilson.
8. Democrats in Congress at-
tack profits and wealth.
9. Poor corn crop in 1913.
10. Settlement of Balkan War
leaves Austria and Russia at daggers'
points.
11. New Haven Road suspends
dividends.
12. Commerce Com'n suspends
proposed freight increases in 1914.
13. Great War breaks out in
Europe.
14. Stock market flooded with
foreign holdings; Stock Exchange
closed.
Twenty Years in the Stock Market 37
War Boom
The Stock Exchange remained closed from the end of July
until December. During this period Wall Street bankers were
busily engaged in making remittances of gold to England to pay
the debts of certain railways and cities, including New York,
which matured during those months. Finally the debts were
largely settled and Charles M. Schwab returned from his inter-
view with Lord Kitchener with large contracts for war supplies.
About this time, also, France and England had depleted their
stocks of commodities and urgently needed war supplies of all
kinds.
Then followed two years of "war order" prosperity, industrial
stocks advancing S35 a share on the average during 1914—1916.
The rails recovered only about $20 a share from the war panic,
remaining heavy on account of continual selling from England.
The following table gives the leading events of 1915-1916:
Stock Market Influences, 191
Favorable Factors
1. Charles M. .Schwab obtains
large orders for war supplies from
England. Orders for other com-
panies follow.
2. Wages and prices low follow-
ing panic of 1914.
3. Large exports of food stufTs at
high prices.
4. Money conditions become e.\-
tremely easy, discount rates 232 to 3
per cent.
5. Large gold imports from Eu-
rope.
6. U. S. Steel wins anti-trust
suit in lower court.
7. France and England sell S500,-
000,000 .Anglo-French notes, insur-
ing further demand for war supplies.
8. Record wheat crop.
9. In 1916 exports continue large.
5-1916
Unfavorable Factors
1. Lusitania sunk in May, 1915.
2. Mexican problem continues.
3. Early in 1916 German sub-
marine activity indicates U. S. may
be drawn into the war.
4. Peace rumors and top-heavy
prices adversely affect war-order
stocks.
5. Carranza captures .American
troops.
6. German U-53 raids .Atlantic
Coast, autumn of 1916.
7. Crops in 1916 less favorable
than in 1915.
8. .Market collapses in confusion
during peace move by Germany.
9. President's Peace Note and
Lansing's "verge of war" statement
in December, 1916.
44746ii
St. Paul's Daily News
Figure 6: From Cause to Effect
Metropolitan
When business expands to enormous proixjrtions or when severe contraction ensues, the Stock Exchange becomes
prominent since these commercial and financial conditions there focus. Wall Street, the mobilizer of capital, flourishes
or languishes as its countless borrowers and lenders flourish or languish.
Twenty Years in the Stock Market 39
America in the War
The period of participation in the war by the United States
was marked by a decline of $35 on the average when the war
broke out and irregularity until the armistice was signed.
Despite large profits, federal taxes prejudiced the position of
the stockholder. Moreover, speculative demonstrations were
frowned upon during war time. After the armistice was signed.
however, the directors of most American corporations found
themselves possessed with large "undiscounted" profits, which
had accumulated during 1918, and as the Allies and the American
government gradually settled the claims of these corporations
for work done, numerous plans were proposed to capitalize the
war profits by issuing stock dividends, or declaring distributions
in cash or Liberty Bonds. The recovery from the low levels of
the war period until the summer of 1919 amounted to about
$35 a share in the industrial stocks. The rails reco\'ered only
$15 on account of uncertainty as to how Congress would dispose
of the railway problem.
The following table summarizes thee\'entsof the years 1917-
1919:
Stock Market Influences, 1917-1919
Favorable Factors Unfavorable Factors
1. Entrance into war by U. S. 1. Unrestricted submarine war-
means large demand for war supplies. fare by Germany causes disaster to
2. Decline in rails halted by shipping and confuses market senti-
Government guarantee of income on mcnt.
December 26, 1917. 2. Federal war taxes cause un-
3. Guarantee of minimum price certainty regarding earnings.
for wheat promises large crops and 3. Russian Imperial Govern-
therefore heavj' volume of trade. ment overthrown March, 1917.
4. Weakening of German morale, 4. Federal price fixing initiated
August, 1918, causes optimism. summer, 1917.
5. Following Armistice, Nov. 11, 5. (Operating expenses increased,
1918, corporation officials find them- railroads in sad plight.
selves possessors of large undis-
tributed surpluses; certainty of ex-
tra dividends or stock dividends cause
price advances, March to July, 1919.
40 Forces
Stock Market Influences, 1917-1919 (continued)
Favorable Factors Unfavorable Factors
6. War savings flow into the 6. Italian army suffers disaster.
stock market during spring and sum- 7. Bolsheviks overthrow Keren-
mer, 1919. sky government.
7. President Wilson refuses de- 8. Collapse of foreign exchanges
mand to increase railway wages; indicates check to exports.
Judge Gary refuses to confer with 9. Demands of railway employes
radical labor agitators. and strike in steel industry dampens
speculative enthusiasm.
America After the War
Immediately after the signing of the Armistice came the
natural reaction from the speculative furore of the War. In
early 1919, however, the pent-up demand for goods made itself
felt and we entered into a period of inflation. This culminated
in the Fall and early months of 1920. Then followed one of the
most drastic readjustments that the country has ever experi-
enced.
The first industries to liquidate were the Silk, Textile, Woolen
and Leather. These were directly followed by others until by
the Fall of 1920 most industries were well into a period of liqui-
dation. Raw producers were most adversely effected, particu-
larly the farmer. Liquidation of food products continued until
Wheat sold below $1.00 against a fixed price of $2.70 during
the War, while Corn and Oats went below 50 cents. As the
farmer afford-s 35% to 40% of the total purchasing power of
the country this brought a most severe depression. Such de-
pression continued through late 1920 and through 1921.
In the year 1921 this resulted in a marked easing in money
conditions due to the fact that the loans of the war period were
being paid up and that business did not demand much new
capital. The natural result of these increased funds was,
first, the largest upward movement in bond prices in years,
second, the use of funds in speculation.
The stock market, discounting the natural improvement in
business, following such a deflation, rose an average of 2>5 points
from the lows of June-August, 1921, without any reaction of
Twenty Years i7i the Stock Market 41
importance. Due to the varying effects of the deflation^
ho\ve\er, the advance was very uneven, equipment, construc-
tion, food, and chain store stocks rising greatly, while tire and
rubber, fertilizer, copper, oil and iron and steel stocks, due tO'
the over-expansion of the war in these various industries, lagged
perceptibly.
Stock Market Influences 1920-1922
Favorable Factors
1. Good crops.
2. Improving money conditions.
3. Ending of the period of
inflation which had brought such
extravagance.
4. Republican President elected
which was supposed to be favorable
to business.
5. Export trade continued good
in spite of readjustment.
6. Investment securities ad-
vance rapidly in price.
7. Savings bank deposits in-
crease.
8. Reserve in Federal Reserve
Banks increase rapidly.
9. Loans and re-discounts in
Federal Reserve Banks decline radi-
cally.
10. Continuance of large gold im-
ports.
11. Full tni|)l()yment at high
wages toward end of 1922.
Unfavorable Factors
1. Unparalleled decline in
commodity prices.
2. Heavy inventory losses by
most industrial companies.
3. Many industrial companies
operating at large deficit.
4. Continued declines in foreign
exchanges.
5. The failure of labor to liqui-
date and to decline in price in propor-
tion to commodity prices.
6. General unrest.
7. Continued high taxation.
8. Hands of Republican admin-
istration tied by Congress.
9. Position of the Farmers
becomes the worst in thirty years.
10. Purchasing power of nation
declines rapidly.
11. Railroads fail to earn amount
outlined for them in War legislation.
12. Failures are the greatest in
years.
13. Unwise tariff legislation.
14. Great unemployment.
15. Unequal declines in various
commodity prices lead to much
uncertainty and dissatisfaction.
What Next We Consider
Thinking over the foregoing tables leads a man to iIr- essen-
tial viewpoint, that prices arc made by forces, and that in
seeking out these forces he works from cause to effect.
42 F 0 r c e s
There is another conclusion which he will draw, which is
scarcely less valuable. These tables containing briefly summa-
rized forces which have made prices, are composed of two
columns, favorable and unfavorable. No situation has ever been
so favorable that certain adverse factors did not at the same time
exist, and never is a bearish situation without some bullish
factors. What takes place with respect to prices depends upon
which set of factors exerts stronger influence. The favorable
factors decidedly in the ascendant, prices mount; the unfavor-
able factors predominant, prices fall. The exchange floor at all
times represents a tussle between forces which make for higher
prices and forces which make for lower.
This broad survey of forces which make prices will now be
followed by a closer examination of how the process works.
The first phases of this examination, called "From Gross to
Dividends," takes us into the financial structure of the cor-
poration itself.
CHAPTER V
FROM GROSS TO DnTDEXDS
A Study in Corporation Finance
The paragraphs in the preceding chapter contain a sound
summary of items which were the principal forces setting prices
during the past twenty years, and it is safe to say some of them
will still be in harness making markets when the \-oungest
subscriber has grown gray in financial wisdom.
Let us now study further, in the attempt to see more clearly
how these forces exert their influence in the market. This next
step takes us into corporation finance.
It will be a study of the gross income of corporations whose
stocks are popularly known as "market leaders." The purpose
is to show how the movements of these stocks are intimately
related to fluctuations in that narrow slice of gross income known
as the "balance available for dividends."
The following eleven stocks during the year 1917 were
traded into the extent of 80,000,000 shares. The transactions
in them, in fact, comprised about four out of every ten shares
bought and sold on the Exchange:
Anaconda Oopper Alining Company
Baldwin Locomoti\c Works
Bethlehem Steel Corporation
Central Leather Company
Mexican Petroleum Company
Republic Iron and Steel Company
The Studebakcr (Corporation
L'nited Fruit
U. S. Rubber
U. S. Steel
Utah Copper
44 Forces
This list contains representives of the steels, motors, cop-
pers, equipments, oils, and leathers. Hence in addition to its
liigh turnover compared with the Exchange's total volume of
business, it represents with fair accuracy Wall Street's diversified
industrial interests.
Let us now sketch the course of these eleven corporations'
income from gross to dividends. We say sketch, because the
•disposal of corporate income is to be considered fully in the
texts studying The Financing of Enterprises, and our interest
here is simply to get at market forces.
Shares and Their Priority Claims
These eleven companies in 1917 reported gross earnings of
-over two billion five hundred million dollars ($2,500,000,000).
Various persons lay claim to these gross earnings. Labor
wants its pay envelope, the suppliers of raw materials submit
their bills, and numerous other expense items must be satisfied.
Most of the heavy demands of these persons and items are backed
up by priorities, and very nearly 85 per cent of gross must be
•disbursed to satisfy them.
The bondholders comprise another group with a priority
claim on gross income. Their claim — interest — is an impor-
tant fixed charge against railway income, but, be it noted, in
the case of those corporations here considered, interest removes
but a narrow strip from gross income. Most industrial com-
panies avoid issuing bonds, if possible.
Next after the bond owners the preferred stockholders have
a priority, although one less urgent in nature. Their slice
equals 3 per cent, or more, of gross.
The directors now, with approximately 88 per cent of the
original gross no longer available for distribution, face the
common stockholders. They do not vote the remaining 12 per
cent of gross as common dividends, howe\-er. With conserva-
tive intent, they set aside as "surplus" a fairly generous portion
— and the thin stream of what still remains of gross dribbles
into the common stockholder's purse.
Fr om G r 0 s s to Dividends 45
The relative magnitude of dividends on common stocks as
compared with wages and other prior claims against gross
income is suggested in the table below:
Distribution of Gross Income
Wages and materials ....
Allowance for depreciation
Interest and pfd. dividends
Improvements, etc., out of surplus
Dividends on common stocks
$2,000,000,000 80.0%
125,000,000 5.0
75,000,000 3.0
200,000,000 8.0
100,000,000 4.0
Total gross income .... $2,500,000,000 100.0%
Consider the corporation's gross income as flowing toward
the common stockholder. Then note the process of distribu-
tion, how the large proportion of the gross earnings consumed
by expenses for wages and materials, and how small is the
margin of dividends actually paid.
Having presented the relation of gross to dividends in its
general aspects, let us now study individual cases.
Bethlehem Steel in 1918 had a gross income of $44S, ()()(), 000,
yet the earnings on the common shares were only $11,000,000,
or 2.5 per cent of gross, while the dividends actually paid to the
common stockholders were only $4,458,000, or one per cent of
gross. The United States Steel Corporation did a little better,
showing earnings for Steel common equal to 6.42 per cent of
gross, and dividends for the stock equivalent to 4.07 per cent
of gross income.
In view of the importance of the earnings of Slecl common
to the man of independent judgment as a basis for his personal
study of investment conditions, we are printing a table here
showing a statistical history of the income and dividends on
this stock since 1902. This table shows how the "balance for
common" dropped from 554,000.000 in 1902 to $5,000,000 in
1904; rose to $79,000,000 in 1907, only to fall to $20,000,000
the next year; fell below zero in 1914, and rose to $246,000,000
two years later. Then, most extraordinary of all, ii"'f 'In-
46
F 0 r c e s
rapid decline from 1916, to only $10,000,000 in 1921. Surely
this is a feast and famine record which suggests that there will
always be opportunities for profitable speculation in following
the trend of the steel business.
U. S. Steel (000 omitted)
Gross Income
Bal. for
Com.
Com. Div. Pd.
Year
Amt.
% of Gross
Amt.
% of Gross
1903
$536,573
$25,013
4.66%
$12,708
2.36%
1904
444,405
5,048
1.12
000
.00
1905
585,332
43,365
7.35
000
.00
1906
696,757
72,909
10.47
10,166
1.46
1907
757,015
79,346
10.43
10,166
1.34
1908
482,308
20,509
4.25
10,166
2.11
1909
646,382
53,854
8.35
20,332
3.14
1910
703,961
62,187
8.80
25,415
3.60
1911
615,149
30,080
4.87
25,415
4.13
1912
745,506
29,020
3.89
25,415
3.40
1913
796,894
55,997
7.03
25,415
3.18
1914
558,415
(Def.) 1,723
—.30
*15,249
2.72
1915
726,684
50,614
6.96
6,354
0.86
1916
1,231,474
246,312
19.98
44,476
3.61
1917
1,683,963
198,999
11.81
91,494
5.43
1918
1,744,312
112,312
6.42
71,162
4.07
1919
1,448,557
51,380
3.54
25,415
1.75
1920
1,755,477
83,842
4.78
25,415
1.45
1921
986,750
10,311
1.04
25,415
2.57
1922
1,092,697
13,514
1.24
25,415
2.32
$17,706,425
81,283,961
7.25%
av.
8490,511
2.77%
av.
♦Paid out of surplus.
Eliminating Bethlehem and U. S. Steel from the list of
eleven companies grouped above, we find that the di\'idend&
on the remaining nine will average about 5.5 per cent of gross
and the total "balance for common" about 15 per cent. This
is evidence that dividends average onlv one-third of the income
1915
1918
$380,500,000
$779,600,000
55,250,000
100,450,000
17.1^:^
13%
820,700,000
$42,900,000
5.4%
5.5%
F r 0 m G r 0 s s t 0 D i V i d e n d s 47
actually earned by common shares. Note this point in the
following table:
Earnings, Nine Companies
Gross income
Earned on common shares .
Earned, per cent of gross
Dividends paid on common shares.
Dividends paid, per cent of gross .
The important suggestions derived from a study of the
above tables are:
1. That dividends take a \er\' small proportion from the
gross earnings of industrial enterprises, generally from
3 to 5 per cent of gross income.
2. That a very small increase in wages tends to wipe out
dividends unless the gross income increases in pro-
portion. And,
3. That, conversely, dividends can easily double or treble
with a very slight gain in gross income, if the outlay
for wages and materials does not gain in proportion.
Dividends VS. Earnings as a Market Guide
We have stated that the amount of earnings put back into
the property for improvements by most industrial companies
is more than double the amount paid as dixidcnds. Stock-
holders must sacrifice present enjoyment of income for the
purpose of expanding operating facilities. The income to which
they are actualK' entitled is largely paid to workmen employed
in increasing equipment. On the average, industrial companies
pay dixidends of SI. 00 out of every three earned by common
shares, the other S2.00 being spent for betterments or put aside
to swell "surplus." The stockholders, of course, retain owner-
ship of the income put back in the property, and the jirice of
48 Forces
the stock usually reflects such investment in equipment. This
is especially brought out by showing the fluctuations in the price
of Steel common as compared with dividends and earnings per
share.
Whenever earnings are large, the stock rises in anticipation
of heavy dividends. If the earnings double or treble, it is
expected that dividends may double or treble, and the price of
the stock leaps upward. But when the directors vote to appro-
priate two-thirds of the earnings on the common stock to the
improvement of plant, and distribute only one-third of the
profits to the stockholders as dividends, the speculators are
perplexed as to whether the stock should sell on the basis of
book value of the plant, or in relation to the amount of cash
dividends actually distributed.
Investors know that an increase in profits means either
larger dividends or an increased equity in the company's plant,
and while the money market is calm, the stock rises. But when
a panic comes and there is a premium on cash, investors begin
to appraise property in terms of cash dividends, ignoring book
values. The stock during a panic therefore falls to a close rela-
tion with the cash dividends. The book value of "equity" in
plant is largely ignored. After the panic has passed, however,
it is once again recalled that large amounts of money have been
invested in property, and the stock rises in anticipation of
future earnings on this increased property.
In the long run, the average price during a period of eight
or ten \'ears bears a close relation to cash dividends paid. In
the swings of the stock-market cycle, however, due considera-
tion is given to the amount of earnings invested in capital equip-
ment. Thus the stock market reflects a see-saw movement of
prices, at one time rising in anticipation of the future income
yield, but later falling to a level which gauges the actual cash
dividends paid.
Since the biggest possibilities in making money lie in buying
during periods of depression and selling during periods of
prosperity, it is more profitable to give greater attention to fluctu-
ations in earnings on the stock than to the yield from actual
From Gross to Dividends
49
dividends paid. This is demonstrated in the following chart,
which shows how the price of Steel common has fluctuated with
the percentage earned per share since 1902. Price movements,
it is noted, precede dividend changes to a conspicuous extent.
The question arises,
how shall we forecast
when the earnings are
going to increase or de-
crease? In answering
this question there are
two classes of factors to
consider. First, the steel
industr>''s internal ba-
rometers, such as the
"new orders booked"
and the changes in the
selling prices of steel
products. Second, those
fundamental factors
which determine the big
swings in orders and
1902-1921. Key— Graph ".A."— Prices Steel Common. mCtal priCCS. 1 nCV are
Grapli"B" — Earnings per share. Graph "C" — Dividends, piainlv CrOpS politics
and money conditions. Just how these fundamental factors in-
fluence the l)u>ing policy of consumers and the selling policy of
the steel companies will be analyzed later in the text on
"Business C\-cles." At this point we will merely exhibit a
chart which affords graphic evidence of the close relation of
''orders booked'' and money rates to the price of Steel common
in the stock market.
It will he noted that when unfilled orders increased in 1905,
1909, 1912, and 1915, there was a rapid increase in the price of
the stock. When the otlicials of the corporation and keen
observers in Wall Street noticed that orders were falling off
in 1907, 1910, 191.^ and 191S. however, the price rapidly
fell.
m \fA \r.o
I?;? i?ii i?i3 1715 m w m Kj
\m m m \% m m m
Figure 7: Steel Common
Quarterly dividends, earnings and price fluctuations.
50
Forces
This close relation of orders to prices was continued after the
armistice in November, 1918. For a few months orders were
low and prices heavy, but when orders increased in the spring
of 1918, investors again became confident and Steel common
advanced.
1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914' 1915 I91fe 1917 1918 1919
1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919
2400
2J300
1600
1200
600
400
0
Figure 7: Stock Prices and Fundamentals
The dose relation between money rates, orders booked by the Steel Corporation, and
'the price of Steel common here is graphically presented.
CHAPTER VI
LOOKING AHEAD
The Sinews of Wall Street
What the sinews of Wall Street really are begins to become
more clear. While board room "rust" often obscures these
sinews and while under skilful camouflage effects frequently are
mistaken for causes, the preceding study has revealed the under-
lying forces in a way which will prove useful. This in itself
represents no small achievement, since market perspective and
a knowledge of the real price-making forces very often are not
gained in several years' experience. Meanwhile, the would-be
financier bumps along, with a few ups and many downs, wonder-
ing why it is he does not strike things better.
Winning golfers like Travers and champion sluggers like Ty
Cobb state their rule of success in this way: Keep >'Our eye on
the ball. This rule also has a fruitful application in Wall Street.
Questions Which Point the Right Way
The common stockholder, standing expectantly at (he end
of the liiu', ui)()ii surveying the sources of his income ii.ituralK-
feels concerned in the various intermediate steps of this process
from gross to dividends. Those steps affect his money re-
ceipts; hence in concentrating up^m tluin he practices the
Travers-Cobb achice to keep his eye on the ball.
These intermediate steps, since they comprise everything
which has to do with tlu' iiicoiiK--])ro(lucing capacity of a stock
and the rates for mone\-, are necessaril\- \aried in nature. The
summaries in the preceding chajiter present the most important
of I lu-ni :
How are the crops?
Are the factories busy?
.52 Forces
Do the mines operate at capacity?
Are railroads well supplied with traffic?
What is the value of exports? of imports? the excess of exports over
imports?
What is the attitude of labor? the extent of unemployment? the brand
of philosophy preached by agitators?
Are politicians favorable to business? What is doing in Congress, the
State Legislature and the courts on economic matters?
Are money rates high or low? What is the condition of the New
York banks? of the London and continental money markets?
Which way is gold moving, and in what volume?
What in general is the condition of business? Is it good or bad? Are
business men buoyant or depressed? Do they favor a policy of
expansion or of curtailment?
How is this particular corporation affected by the preceding condi-
tions? What are its earnings, gross and net? How high are its
fixed charges? its preferred dividends? When distributing surplus,
are the directors conservative or prodigal?
The common stockholder, therefore, as he stands at the end
•of the Hne, has in addition to his expectancy an inquiring mind
and numerous questions.
The Profit Maker's Point of View
A certain point of view upon this common stockholder's part
is here so essential, yet so generally disregarded, that we preface
our discussion of it with a little story of two big profit makers.
In the days when Andrew Carnegie was still "King of the
Steel Makers" his lieutenant was one Charles M. Schwab.
Carrying out certain constructive notions which shaped them-
selves in his mind, Schwab planned the Homestead Steel Works,
to cost $10,000,000, an enormous undertaking for that period.
The first that Carnegie heard of it was when he arrived in Pitts-
burgh from Scotland one morning and Schw'ab laid the plans
before him.
"Charlie," he gasped, "where would we ever sell the entire
•output of such a plant?"
"Look here, Mr. Carnegie, at these statistics showing the
Looking Ahead 53
i»
annual consumption of steel in this country, see in how few
years the demand doubles."
"Never in the world could we sell such an oul|)ut," responded
Mr. Carnegie. "Charlie, put those plans right in your drawer
and keep them there. Don't show them to anybod\-."
The great general is first a great soldier, and Schwab was
Carnegie's most loyal soldier. Without a word those plans
were laid away and soon forgotten. Within two >'ears the cable
came from Scotland: "I have borrowed the monc\- here. Build
the Homestead."
It took all the organization ability of Schwab to rush those
works to completion in time to meet the rising American tlcmand
for steel. In a few years the Homestead was but a small part
of the Carnegie works, whose total annual net earnings were
four times the construction cost of the Homestead. Today
the entire Carnegie works arc but a minority in the United
States Steel Corporation, while Schwab himself with char-
acteristic vision has pushed Bethlehem Steel into a remarkable
position second only to this great billion-dollar concern.
Schwab and Carnegie looked ahead. Their plans were laid
for future conditions and their rewards were due to foresight.
"Keeping a little ahead of conditions," declares Schwab,
"is one of the secrets of successful business; the trailer seklom
goes very far."
The Commercial and Financial Mainspring
This incident of Carnegie and Schwai) introduces us to a
matter of basic importance, whose e\er\-da>' realness is not
usually appreciated.
When a manufacturer conmiences to set the marki-tiug pi ice
for his commodity, which cost to produce is fundamental —
past cost, present cost, or costs which he aulicipatcs later will
prevail? While it is true that in the case of staple articles
which are continually being reproduced and whose costs do not
vary a great deal from time to time, the figure o\'er which he
ponders will be practicalK' the same if not identical with fxist
54 F 0 r ce s
records, it is even in this case and markedly so in other cases a
new figure, the cost expected to prevail in the future rather than
the cost experienced in the past, which acts upon the manufac-
turer as a controlling motive when he comes to set his selling
price. The future is his real touchstone.
Should he consider the securing of additional capital, its
present value to him is the discounted value of the expected
income — again a calculation based upon things anticipated.
This principle, however, is widely applicable. Upon what
does the value of all economic goods depend? Upon the satis-
factions which they atTord, that is, the agreeable sensations
derived from them or the disagreeable sensations which their
use enables us to avoid. These satisfactions are matters of the
future. In purchasing a pair of shoes, a house, a motor car or
an aeroplane, we bank upon this future, with all its chances and
risks; and the price now paid equals the discounted value of the
article's expected benefits. These expectations may be sur-
passed later when the commodity is consumed or the benefits
possibly will fall short of the estimate, but in either case it is
expectation and not realization which gives these economic goods
their current value.
Calculations of the future are the mainspring of commerce
and finance, the real basis of everyday buying and selling.
Jay Gould's Statement
Finance is the most highly flexible and elastic portion of the
whole production process, and with it calculations of the future
have an unusual currency. Present worth of its wares, or
securities, depend upon calculations of the benefits later to be
derived in the form of interest pa^^ments and dividends; and
calculations of the rate of interest by means of which these
future values may be translated into present values through
the process of discounting. Here, as elsewhere, the practical
realness of the future again appears.
The testimony of Jay Gould affords in this connection an
interesting sidelight, in that it reveals the bent of the financier's
Looking Ahead 5S
mind. Mr. Gould was on the witness stand, under cross-
examination concerning certain past events with respect to
Union Pacific.
"I consider the future of a road more important than its past."
Q. "Yes, but what I want . . ."
"The past was no criterion as to the Union Pacific Road."
Q. "But don't you think that General Dodge and Mr.
Humphreys . . . ?"
"All my life," replied Mr. Gould, warming up, "all my life
I have been dealing in railroads — that is, since I have been of
age, and I have always considered their future and not their past.
"That is the way I have made my money," he continued.
"The ver>' first railroad I ever bought had a most deplorable
past, but its future was fair. I paid ten cents on the dollar
for its bonds, and finally sold the stock for $125. It was the
future of the Union Pacific that drew me into it. I went into it
to make money."
The common stockholder, we may conclude, if he is to secure
profits there at the end of the line from gross to dividends, con-
cerns himself primarily with anticipated earnings of the cor-
poration and anticipated money rates. With a fine disdain of
the obvious, he mounts into some favored post of observation,
armed with telescope, and faces fonvard.
What's Ahead?
Wall Street's leading money makers all keep an e>e upon
coming events. When the outlook, as they see it, fa\ors a period
of depression, they distribute stocks in anticipation of curtailed
orders, factories running on half time, unemployment, poor
earnings, and reduced dividends. When these latter conditions
in due time become obvious, these same persons very likely are
then accumulating stocks upon the prospect of business im-
provement.
Wall Street discounts coming events, and translates i(s forecasts
of the future into actual concrete prices for securities.
56
F 0 r c e s
The "mystery" of why the stock market acts so and so, very
commonly has here its explanation. The market moves upon
prospects as far ahead as the best informed people can see, and
its present prices are based upon estimates of future conditions.
ticvP'
lateA"
,;V^^^*^
\pa'
,tei'
, M^*^^
VcvP^
ted'
, .v»f^<^
\pate4*
"Melons"
Dividends
"Lemons"
/j{/c,
'^afed.
Unfilled Orders
Net Earnings
Manipulation
Money Rates
Tariffs
Business Sentiment
Crops
Gross Earnings
Mn
f'c/pa
fecf.
Wages
Business Failures
'Ant,
'"'Pat
ed.
Politics
Strikes
Wars
■•^""■^'■Pated^
Taxes
Figure 9: The Right Viewpoint
The person who deals in securities raises continuously such questions as "Buy or sell, or
hold my position? Which' stock?" Their correct answer calls for foresight, a looking ahead.
A person cannot speculate upon the obvious.
The so-called "insider" differs from the great majority of
investors and traders in that he bases his commitments upon
calculations of future economic conditions while the attention of
the majority almost exclusively centers in prevailing conditions.
"Why does the market not respond?" the outsider inquires in
disgust when his stock sluggishly moves off the very day its
statement of excellent earnings had appeared in all the news-
papers. "It already has," thinks the insider; "what's ahead?"
While all events cannot be discounted and many either are
overdiscounted or underdiscounted (as will be considered later)
the fact that in general, stock prices move ahead of present con-
ditions and the certainty that they will discount everything
obvious, is the most important, the simplest and the most
disregarded of all speculative features. Riddance of this fault
alone, under the methods outlined from Text to Text, will
Look i n g A h c a d 5 7
possess you of a changed viewpoint which not onl\- wins profits
in Wall Street but an^'^vhere in business.
The Next Step
Future business conditions, in the form of items wiiich
affect the income-producing capacity of corporations and the
cost of money, bear upon present stock prices through the
medium of minds engaged in the attempt to forecast. The
beliefs of persons with funds and their hopes and fears con-
cerning the future are in the end what rule upon the Exchange
floor, and, since values wax and wane as these beliefs change, it
is essential to know the methods with which Wall Street manipu-
lators play upon the mind.
The subject opened up in Text III, "Manipulation and
Market Leadership," is a very interesting one; and our survey
of forces which make the market cannot be at all complete
until we have delved into it.
Garden City Press, Inc.
Neivton, Mass.
TEST QUESTIONS
"FORCES WHICH MAKE PRICES"
The Test Questions which are unstarred can be answered
directly from the Text discussion. Vou will lind them helpful
for purposes of review.
The questions which are starred call for original thought,
the ability to apply the knowledge gained from the Text to the
solution of new problems.
1. What opportunies for profit does the stock market
afford? Discuss the methods of a seasoned veteran outlined by
Mr. Clews.
*2. When inexpt-riencid and poorly informed persons were
buying, as indicated on the chart. Page 11, WHO supplied the
stocks? When they sold, WHO took over their stocks? What
conclusion, which will increase your profits, do you draw from
this?
*3. Mention three specific errors revealed in the investi-
gations made by Guyon and Gibson of brokerage accounts.
How are you to avoid these errors?
4. Into what three types can you classify market moves?
What is Dow's Law?
5. Describe what has been the course of the market during
the past twenty years. Name specific forcc^ which ha\e operated
to produce this course.
*6. "The industrials have been booming. Isn't it about
time for the rails to have their turn?" Note the diagram on
Page 27. Do the rails necessarily mo\-e with the industrials?
7. Sketch clearly the course of corporation's revenue from
gross to dividends. Which of those who share this income
have priority claims?
*8. 'This discussion of inflation, exchange rates, crops,
etc.," writes a subscriber, "which I read in the jjapers impresses
me as a mass of generalities. Why does the editor not confine
himself to individual stocks? That is his real business." Is
it, or is it not? What conclusions upon this point do you draw
from the chart on Page 49, for instance?
*9. Do Stocks go up or down at the time of j^residential
elections? During wars?
10. "The annual statement issued, by the Steel Corporation
seems to me to be most satisfactory. Why should the stock
continue to sell off?" — L. D. H. How would you answer
L. D. H.'s question?
ANSWERS TO STARRED QUESTIONS
"FORCES WHICH MAKE PRICES"
*2. The experienced and better-informed. These are often referred to
as "insiders" and professionals; and while they are not always right, they
nevertheless secure very satisfactory results in general.
The conclusion is: Reverse the methods followed by the public and thus
act upon the methods of "insiders" and professionals.
*3. Bought at the top. Sold at the bottom. Loaded more heavily at
high prices than at low prices.
*6. The industrials have been "booming" evidently because of their
prosperity. And this increased business in turn calls for increased use of
transportation, which normally is reflected in larger earnings and higher
prices for rail securities. Moreover, for sentimental and other reasons within
Wall Street, stocks often do move together.
This common action does not always occur, however. The industrials,
newly organized and their securities largely "undigested" made compara-
tively little headway in 1900-1502, while the rails advanced sharply; and the
rails, with their rates practically unchanged and operating costs mounting,
advanced little in 1915-1916 while the industrials enjoyed an unusual bull
move.
The only sure way is to keep examining the forces which make prices.
*8. These topics • — ■ inflation, exchange rates, crops, etc. — concern
vitally business conditions as a whole, and hence the earnings of individual
corporations. The charts on Pages 49-50 indicate that fundamentals and
stock prices are closely correlated. Since the editor's real business is to
present information which is helpful, he properly devotes considerable space
to fundamentals.
*9. These are old questions, which during every election and war are
thrashed over in Wall Street. Elaborate deductions, often accompanied by
numerous charts, are presented showing what the market has done, and
hence what it should do this time. Considerable benefits can be derived
from all this, provided conditions are similar.
The war, a bull argument on industrials in 1916, turned into a bear
argument in 1917, when the United States entered it. Whereas, orders were
large in both cases, new factors, such as the excess profits tax, changed con-
ditions decidedly.
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