William Peter Hamilton.

The stock market barometer; a study of its forecast value based on Charles H. Dow's theory of the price movement. With an analysis of the market and its history since 1897 online

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Online LibraryWilliam Peter HamiltonThe stock market barometer; a study of its forecast value based on Charles H. Dow's theory of the price movement. With an analysis of the market and its history since 1897 → online text (page 6 of 20)
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epithet, editorially, to the American Sugar of Henry
O. Havemeyer's day. The elimination of the New


York Stock Exchange's unlisted department is dne of
the most creditable instances of reform from within.
It was bitterly opposed by some conservative members
of the Stock Exchange, mainly those who profited
largely by that vicious vested interest. An ex-presi-
dent of that institution, now dead, took upon himself
to berate me loudly, in the presence of his customers,
for advocating that eminently necessary reform. Pie
said that such agitators were driving business away
from the Wall Street in which they earned their liv-
ing. He threw out of his office the newspaper and
the financial news service with which I was and am

But his own customers made him reinstate both,
with humiliating celerity. American Sugar and Amal-
gamated Copper and the other formerly unlisted securi-
ties are still dealt in on the floor of the Exchange.
Those companies saw that they laid their management
under the gravest suspicion by a refusal to comply
with the terms of publicity so wholesomely exacted
from reputable companies. Stock Exchange houses
are naturally inclined to look askance at reforms ad-
vocated from outside. But I have never heard one
of them even suggest the restoration of the unlisted

Federal Incorporation

It was said in an earlier discussion that something
further might be done for the protection of the public,
without the enactment of any of these u blue-sky" laws
which only embarrass honest enterprise without seri-


ously impeding the operations of the crook. In this
discussion I can briefly set forth the sane and success-
ful method which protects the speculator and investor
in Great Britain. Under what is there called the Com-
panies (Consolidation) Act of 1908 the London Stock
Exchange is enabled to deal in any security the moment
it is registered at Somerset House, London. That
registration cannot be made until the fullest possible
disclosure of purposes, contracts, commissions and
everything else has been made. However adventurous
the purposes of the company may be, the speculator
knows all about them from the start. After that, under
this statute, the old common-law rule of caveat emptor
let the buyer beware prevails. It is properly held
that the buyer can protect himself, as he should, when
he can find out all about the property, its origin and
its present conduct, for the fee of a shilling, at Somer-
set House.

There would doubtless be all sorts of ignorant oppo-
sition to Federal incorporation of this kind, with the
law enforced and the public protected through limita-
tion in the use of the mails. But I am convinced that
it might well be done, and should, of course, be done
in a strictly non-partisan spirit. To the utmost of its
ability the New York Stock Exchange protects its
members and their customers. But the New York
Curb Market Association is simply an unlisted depart-
ment in itself. I have no reason to believe that its
government is not capable and honest, and I have not
a word to say against its membership. But sooner or
later it is calculated to prove a source of danger and


scandal. If any of its members imagine that they
have something to lose, in the setting forth of the
absolute and original facts about everything in which
they deal, they are making exactly the same mistake
that ill-advised members of the New York Stock Ex-
change made when they shirked the disagreeable task
of compelling a number of industrial corporations
to comply with the listing requirements, on pain of
being stricken from the list.

Real Reform from Within

Let me disclaim, however, the intention of crusad-
ing, or any bent toward that blatant and ignorant
"reform" which has made such costly experiments in
recent years. In my experience of it the standards
of the Stock Exchange have steadily improved, to the
permanent advantage of the investor and of the small
speculator, who is, after all, only an investor in embryo.
Practices were customary in Dow's day which would
not be tolerated now. In any future bull market
manipulation on the scale of James R. Keene, when
he distributed Amalgamated Copper, would be im-
practicable, for the reason that the publicity now
required by the Stock Exchange, in the accounts of
such a company, would make it impossible to persuade
the most reckless private speculator that the prospects
of the new combination made it worth four times its
book value, on any expert test. Even in those days
"wash sales" were largely a figment of the public
imagination, and "matched orders" were declined by


any brokerage house of repute if their nature was
suspected. The Stock Exchange rule against fictitious
transactions is obeyed in spirit and in word. It was
not a mere letter even in those days, whatever it might
have been forty years ago, when the infant giant of
American industry was only awakening to conscious-
ness of his strength.

Chapter IX

EVERY effort has been made to simplify these dis-
cussions. They have been offered with the most
stringent exclusion of extraneous matter. In serial
form they aroused much criticism and comment, some
of it illuminating and helpful. But old preconceptions
and prejudices still survive. One critic, whose scanty
knowledge of the subject appears to have been derived
from the reading of perhaps two of these articles,

"How can we trust your barometer if we cannot trust the
stocks which the Stock Exchange deals in? You have said
nothing about overcapitalization. What about water?"

Watered Labor

Water is more unpopular than ever in the United
States just now. But the financial center of the United
States, with the business of the country in view, is far
more concerned about watered labor than watered
capital. There is only one way to squeeze the water
out of labor the factory or apartment house which
cost a million dollars to build and represents only
$500,000 of real value. That way is by bankruptcy.
Of the apartment houses that were built in New York,
during a period of high wages and "ca' canny" which


set in long before the war, very few have not passed
through a stage of financial reorganization, due to
watered labor in construction, long before rents began
to advance. The stock market has a short and simple
method of dealing with water in stocks. It exists for
the purpose of squeezing that water out. The process
does not involve a receivership.

The very word "water" begs the question. You
may call the capitalization of an industrial flotation
"water" because you do not see the potential values
of a great creative organization. But with justice,
and better knowledge, the late J. Pierpont Morgan
might have called that capitalization intelligently an-
ticipated growth. Whatever it may be and I shall
give an example from the most striking instance, the
capitalization of the United States Steel Corporation
the stock market is forever adjusting prices to
values. The water soon evaporates.

Squeezing Out the Water

To recapitulate, we are studying the stock market
barometer, having established the fact of its known
and orderly movements the long primary swing, the
secondary reaction or rally, and the daily fluctuation;
and to do this we are taking the averages of two
groups of stocks twenty active industrials and twenty
active railroads. All adjustments of the prices of these
stocks individually must primarily be based upon
values. For all practical purposes the Stock Exchange
is an open market, and the business of such a market


is to adjust conflicting estimates to a common basis,
which is expressed in the price. By manipulation,
James R. Keene advanced the price of Amalgamated
Copper twenty years ago to one hundred and thirty,
and obviously the group of financiers which offered the
stock at par originally, without success, assumed one
hundred as value for it. The stock market does not
make its adjustments in a day. But, over a period
which seems brief in retrospect, it knocked one hun-
dred points off the highest figure Amalgamated Cop-
per attained in a general bull market.

This is the business of the stock market. It has to
consider both basic values and prospects. At the close
of a major downward movement, a primary bear mar-
ket, prices will have passed below the line of values.
The causes of the liquidation will have been so serious
that people have been compelled to realize their hold-
ings at less than their normal worth; less, indeed,
than their book value the worth of the company's
assets, that is, irrespective of productive capacity and
good will. The prices of the standard stocks will be
injuriously affected by the prices of "cats and dogs"
dealt in on the Curb market, many of them of such a
character that any bank would refuse them as collateral
in its loans. When the banks are compelled to call
loans made on Stock Exchange securities, the stocks
of tested worth, of properties competently and repu-
tably managed, will be the first to suffer because it is
those stocks which are pledged in bank loans. The
constantly recruited Curb group is highly speculative,
but trading there is always limited, and indeed safe-


guarded, by the large margin which is necessary to
carry Curb stocks.

Stock Profits and Income Tax

Conversely, a bull market starts with stocks much
below their real value, certain to be helped in anticipa-
tion by the general improvement in the country's busi-
ness which the stock market foresees and discounts.
In the long advance values will be gradually overtaken,
and toward the close of the advance an uninformed
public, incapable of recognizing the bargains which
were offering when the movement started, is buying
on prospects only. Experienced traders in Wall Street
say that when the elevator boy and the shoeblack are
asking for bull tips on the market it is time to sell and
go fishing. When I sailed for Europe early in October,
1919, to report on financial conditions in Britain and
Germany, the market was in the last sanguine stage
of a long bull movement. The inflation bull argument
then was most curious. It was that the people who
had large profits would not sell, and could not sell,
because in turning those paper profits into cash they
would show such a large earning of income for the
year that the tax-gatherer would take a prohibitive
share of the profits. We analyzed this fallacy in the
smoking saloon of the Mauretania, and at least some
of the business men on board concluded to divide up
with Uncle Sam. The argument was preposterous in
itself, because it pictured the most vulnerable kind of
bull account that it would be possible to conceive. It
was glaringly up to be shot at, and the poorest marks-


man could fill it full of holes. Rough seas stove in
five of the Mauretania's lifeboats, and put the wire-
less apparatus out of commission for the last three
days of that voyage. When we arrived at Cher-
bourg we learned that the stock market itself had
begun to free the bulls of stocks from the embar-
rassment of paying excessive income tax. They had
not much to worry about in that respect by the end
of the year, for the paper profits had been rapidly

Well-Distributed Holdings

There is no way of permanently holding up artificial
prices created by an overbought market. One great
protection to the public is in widely distributed stock
ownership. When a single group in Wall Street owns
practically all of the stock in a property like Stutz
Motor, that group can call the market price anything
it chooses. It will not be the "market" price because
there will be no real market. Abraham Lincoln pointed
out long ago that you could not talk five legs onto a
dog by renaming its tail. All the stocks in the average
have shared in the wide and healthy distribution of
securities. The average holding of Pennsylvania
(which has the greatest capitalization of any of the
railroads in our average) or of the five and a half
million shares of United States Steel common is noth-
ing near one hundred shares for each holder. So far
as the public is concerned, there is, indeed, safety in

"Valuation" and Market Prices

To the inquirer quoted at the beginning of this article,
who asks, "What about water?" we may answer, well,
what about it? He cannot show us any water in the
averages. We may go further and tell him that he
cannot show us any water, at prices and not at the
nominal par, in the whole Stock Exchange list. For
the railroads, no valuation which could be instituted by
Congress and carried out by a committee of the Inter-
state Commerce Commission could begin to compare
with the market prices of the securities themselves,
taken in a normal month of a normal year, with the
prices not inflated on overestimated prospects or de-
flated by forced liquidation, brought about largely to
protect unsalable securities and warehouse receipts not
associated with the railroads or the standard industrial
companies in any way.

Every scrap of intelligence and knowledge available,
uninfluenced in any real degree by manipulation, has
been brought to bear in the adjustment of the stock
market prices. Reproduction value, real estate value,
franchises, right of way, good will everything else
have been brought into the free-market estimate in a
way which no valuation committee appointed by Con-
gress could ever attain. The Interstate Commerce
Commission's valuation of a railroad has merely his-
torical worth if it has any. As a true estimate of
the property, if the method of fixing it were commonly
just, it is out of date the moment it is printed, or,
indeed, months before it is printed. But the Stock


Exchange price records the value from day to day,
from month to month, from year to year, from bull
market to bear market, from one of Jevons's cycle
dates to another; and the bankers of America and
any other civilized country accept that valuation and
advance real money on it, without reference to the
arbitrary estimate of the Interstate Commerce Com-

The Fetish of Watered Stock

It is astonishing to what depths of foolishness the
fetish of watered stock has carried this country. The
capitalization in stocks and bonds of its railroads,
alleged to represent water, is not one-fifth that of the
railroads of the British Islands, mile for mile. It is
less per mile than that of any European country or
of any government or privately owned railroad in
Britain's self-governing colonies. I am not afraid to
go on record with the statement that the American
railroads are uneconomically undercapitalized, on their
real value. The charge of watered stock made against
the listed industrial corporations is equally absurd.
The stock market had far more than squeezed out the
water in that capitalization at the Stock Exchange
prices current in 1921. It had squeezed blood.

As this is written, United States Steel common is
selling under $80 a share. But stringent analysis of
an industrial corporation offering the most exhaustive
figures of any like company in the world gives a book
value to the common stock of $261 a share. In the
twenty years of its history it has put upwards of a


billion dollars into the property in new construction,
and so little is this watered in the capital that this
new investment out of earnings is represented in prop-
erty account by only $275,000,000. The quick assets,
largely cash, are over $600,000,000 alone, something
like $120 a share with the whole concern scrapped.
Where is the water? A common stock capital of
$550,000,000 looks large, but it is only relatively large.
Was not Morgan right if he called this intelligently
anticipated growth? If his spirit could revisit the
pale glimpses of the moon, surely he would be aston-
ished at his own moderation.

And yet the distribution of the United States Steel
common and preferred stocks, made in the major swing
of a great bull market, was brought about largely by
the most stupendous manipulation the market ever
saw, under the direction of the late James R. Keene.
And what was the end of that manipulation? It was
to sell the common stock at fifty and the preferred stock
at par. If the people who bought at those prices put
the stock away after paying for it, would they have
anything to regret even at the low market prices of
August, 1921, attained after a major bear swing of
unusually long duration?

Buying on Values

Probably some one will charge me with writing a
bull argument about Steel common, because I set this
simple illustration before the public. There again we
have the inveterate prejudice against Wall Street.

1902 1903 19041 19051 190| 1907




The facts I have stated are of record, accessible to
anybody, perfectly well known to some of the people
at least who were selling Steel common in 1921. But
they were selling the stock because they needed the
money, at a time when most of us needed money.
When the Rothschild of the days of Waterloo, a week
before the result of that battle was known, was buying
British consols at fifty-four, a friend asked him how
he could buy with such confidence on an outlook so
uncertain. He said that if the outlook were certain
consols would not be selling at fifty-four. He knew
that with that uncertainty they must necessarily be sell-
ing below their value. Everybody needed money at
the same time, and he was one of the few people who
had any. I suppose no one will ever know how Russell
Sage did it, but he could lay his hands upon more real
money in a panic than anybody in Wall Street. He
believed in quick and liquid assets, short-time paper
maturing all the time, call loans and deposits every-
thing which could be turned into cash, not to hoard
but to buy freely when people who had lost sight of
values were selling.

A Story of Russell Sage

All sorts of stories are told of Russell Sage and his
extraordinary frugality. That is not exactly the word
I would use; nor would I call it miserliness, for he
was anything but a miser. I remember the last time
I ever saw him, when I was a young reporter, or at
least a younger reporter. I was trying to find out
something about a railroad property in which he was


dominant with another financier of nation wide noto-
riety, or reputation. Lying is a word which is seldom
used (or needed) in Wall Street, and it would be bet-
ter to say that the other financier had given me infor-
mation calculated to let me deceive myself if I was
not exceptionally wide-awake. With the idea, there-
fore, of seeing if Mr. Sage's terminological inexacti-
tude would differ from his comrade's, with enough
significance to enable me to deduce something from
the points upon which the two fairy tales did not agree,
I went over to see Sage, who was always accessible to
the newspaper men.

He greeted me in the most friendly way, as indeed
he did anybody whose visit had nothing to do with
money. I put my question and he rapidly changed
the subject. He said: "Do you know anything about
suspenders?" I was exasperated, but I replied mod-
estly that I did not know any more about them than
any other wearer. "What do you think of these?"
said Uncle Russell, handing me over a pair certainly
inferior to those worn by reporters, who are not, or
certainly were not at that time, given to undue extrav-
agance in such an article of attire. "What about
them?" I asked. "Well, what do you think of them?"
said Sage; "I gave thirty-five cents for those." Per-
haps I was a little vindictive, having failed to secure
even the poor information I had come to seek. I
said : "You were robbed. You can get better in Hester
Street for a quarter." Sage looked at me doubtfully.
"I don't believe it," he said. But he was really trou-
bled. It was not the difference of ten cents, and I


would not have sworn to the Hester Street quotation.
It was the principle of the thing. His judgment of
values had been impugned.

Values and Averages

And there you have it. The things in which Russell
Sage dealt had value. He had to know those values,
and it was by knowing them when they had ceased to
be apparent to other people that he died worth more
than $70,000,000. The stock market barometer
shows present and prospective values. It is necessary
in reading it to judge whether a long movement has
carried the average prices below that line or above it.
In looking back over the various analyses of the stock
market as a guide to general business, published in
The Wall Street Journal since Charles H. Dow died,
at the end of 1902, I find a typical instance of the
application of the averages which may seem remark-
able to the reader, although I regard it as the merest
common sense. There is no one so unpopular as the
man who is always telling you that he "told you so,"
but the illustration is impersonal.

A Cautious but Correct Forecast

No severer test could be taken than the interpreta-
tion of the averages in what might almost be called
the transition period between a bear and a bull market.
The bear market which developed from September,
1902, saw its low points in the September of the fol-
lowing year, and it is weeks or even months after-


wards before the change in the major swing can be
definitely asserted. But on December 5, 1903, The
Wall Street Journal, after a review of the fundamen-
tally sound tendency of business in then recent years,

"Considering the extraordinary advance in wealth of the
United States during that period, considering that railroad
mileage has not increased in anything like the ratio of increase
in surplus earnings, and finally considering that the ratio of
increase in surplus earnings available for dividends has been at
all times in excess of the rise in market prices and at the present
time shows a larger percentage on market price than at any
time since the former boom started, the question may well be
asked whether the decline in stocks has not culminated. There
is at least some evidence in favor of an affirmative answer to
that question."

A Bull Market Confirmed

It would be easy to say that such an opinion could
have been given without the help of the averages, but
it was given with the price movement clearly in view
and at a time when there was an easy possibility that
the main bear movement might be resumed. It cor-
rectly foresaw the bull market, allowing for the cau-
tion necessary in such a prediction and, indeed, for
the fact that analysis of the market movement was
still in its infancy. The bull market then foreseen
ran throughout 1904, and can be said to have ter-
minated only in January, 1907. But some nine months
after this editorial analysis of the business situation,
judged by the averages, was written, The Wall Street
Journal tackled the almost equally difficult question of


whether the bull market then getting into full swing
might be expected to continue. Remember that the
advance had been running with moderate but increas-
ing strength for twelve months, which would allow for
at least some discounting in values. On September 17,
1904, The Wall Street Journal said:

"There is apparently nothing in sight to lead one to believe
that railroad values are not on the whole maintaining their high
position, and that as time goes on this will bring a further
appreciation of prices. Much will depend on the coming win-
ter, which will at all events bring a clear indication of the
general trend of values. In the long run values make prices.
It is safe to say that if present values are maintained, present
prices are not on an average high enough.

"It must further be remembered that the continued increase
in the production of gold is a most powerful factor, which can-
not fail to be felt in the future as making for higher prices of
securities other than those of fixed yield."

A Vindication of the Theory

Note carefully that last line. We have satisfied
ourselves that bonds held for fixed income decline
when the cost of living rises, and more gold means

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Online LibraryWilliam Peter HamiltonThe stock market barometer; a study of its forecast value based on Charles H. Dow's theory of the price movement. With an analysis of the market and its history since 1897 → online text (page 6 of 20)