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 7 of 20)
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that the gold dollar will buy less because gold is the
world's accepted standard of value. But it stimulates
speculation, and the stock market had seen this in
1904, when this was written, even if the houses with
bonds to sell thought it rather "unclubby" to say any-
thing which would disturb their business. Of course,
these quotations are far from dogmatic, because Dow's
Theory was only beginning to be understood. We
shall see as the years went on that the theory allowed


for much more explicit statements of the market's
condition and its prospects. It is sufficient to record
how soon the stock market barometer proved its use-
fulness when Dow's sound method of reading it had
been set forth.

Chapter X

HAND" 1906

IN discussions such as these it is necessary to antici-
pate objections and explain apparent discrepancies.
There is nothing more deceptively fascinating than a
hypothesis which holds together too well. Out of
that sort of theory much obstinate dogma arises, which
seems able to continue its existence after time has
proved the theory unsound or inadequate. We have
established what is called Dow's theory of the price
movement the major swing, the secondary reaction
or rally, and the daily fluctuation and out of it have
been able to evolve a working method of reading the
stock market barometer so constituted. But we are
to guard ourselves against being too cocksure, and to
recognize that while there is no rule without an excep-
tion, any exception should prove the rule.

The San Francisco Earthquake

The year 1906 presents an interesting problem in
this way. It is the problem of an arrested main bull
movement or an accentuated secondary reaction, ac-
cording to the way you look at it. It has been said
that major bull markets and bear markets alike tend
to overrun themselves. If the stock market were
omniscient it would protect itself against this over-



inflation or over-liquidation, as it automatically pro-
tects itself against everything which it can possibly
foresee. But we must concede that, even when we
have allowed for the further established fact that the
stock market represents the sum of all available knowl-
edge about the conditions of business and the influences
which affect business, it cannot protect itself against
what it cannot foresee. It could not foresee the San
Francisco earthquake of April 18, 1906, or the sub-
sequent devastating fire.

Tactful to Call it a Fire

If you want to make yourself popular with that
somewhat strident individual, the California "native
son," you will not even allude to the San Francisco
earthquake. In California it is considered bad man-
ners to do anything of the sort. All that is conceded
there is the fire. For our purpose the earthquake
admits of no argument. Chronic California boosters,
however, cannot permit a general impression that
there might be, for instance, another earthquake in
San Francisco as bad as the last. A fire, on the other
hand, might occur to any city, anywhere, without de-
tracting from those natural advantages of climate
and other things of which California is so proud.
There is nothing more charming than the naivete
of the Los Angeles native, who says "It is a fine day,
if I say so myself." But earthquakes are different.
They put the Pacific coast in a class by itself, and a
class not at all to the taste of the inhabitants. As



Beau Brummell, the great English dandy of the early
years of last century, said: "A hole may be the result
of an accident which could happen to any gentleman,
but a darn is premeditated poverty."

Effect on the Stock Market

But the San Francisco earthquake came up in a
clear sky, and took an already reactionary stock mar-
ket by surprise. You will remember the clause in the
Lloyds ship insurance policies which excepts "the act
of God and the King's enemies." This aberration of
Nature was an exception, and it went far to explain
an exceptional year in the record of the stock-market
barometer. There was an undoubted bull market
from September, 1903, reaching a high point in Janu-
ary, 1906. It did not hold that point without reces-
sion; and it may be said that as a general rule there
is often no marked warning line of distribution at the
top of a major bull swing, especially when that bull
swing has overrun itself, as, for instance, it did in
1919. The market in the spring of 1906 was declining,
but with no such precipitancy as to indicate the bull
market would not be resumed, or had even been much
overbought when the earthquake occurred. We must
remember how serious the losses were. The convul-
sion set up a fire in the ruins of the immense number
of collapsed houses or those shaken to their founda-
tions, and this fire rapidly assumed the proportions
of what the insurance companies call a conflagration.
The American companies, without exception of con-


sequence, and the English companies, paid up
promptly, to help the sufferers, although they had an
excellent fighting case over the earthquake itself.
We might have learned a little of German methods
from the action of Hamburg companies, who adopted
the opposite policy and repudiated their liability. It
might have taught us something of the German meth-
ods in the conduct of war and diplomacy, of the
German conceptions of the spirit of a contract and of
sportsmanship. At least after that time the fire insur-
ance companies of Hamburg wrote little insurance in

Sound Prediction Under Difficulties

When the stock market is taken by such a surprise
there is a violent break closely akin to that of a panic.
The basis of a panic, when analyzed, is essentially
surprise. It cannot be said that the stock market of
1906, in the last days of April, got out of hand. But
the decline had been sufficiently serious. The twenty
railroad stocks which sold at 138.36 on January 22,
1906, on May 3d had declined over eighteen points;
the twelve industrials then used had reacted from
one hundred and three on January I9th to 86.45 on
the later date. There seems to be some sort of uni-
formity which obtains in breaks like this. Experience
records a recovery of part of the panic break, with a
subsequent and much slower decline which really tests
the strength of the stock market. In fact, The Wall
Street Journal of July 6, 1906, called attention to this


fact, in predicting a general recovery from the show-
ing of the averages. It said:

"It is a uniform experience, over the years when such averages
have been kept, that a panic decline is followed by a sharp rally
of from 40 per cent to 60 per cent of the movement, and then by
an irregular sag ultimately carrying the price to about the old
low point. It seems to need this to bale out the weak holders
who were helped over the panic. It could hardly be said that
the break on the San Francisco disaster was exactly of the panic
class, and the market in rallying recovered to 131.05 in the case
of the railroad stocks, which is only 1.61 below the price at which
the earthquake decline started. The rally, however, does repre-
sent about 60 per cent of the decline since January 22d, and the
course of the market since has been curiously parallel to the
movement observed after a panic rally. It seems fair to infer
that liquidation of very much the same kind as that following a
panic has been necessary."

Seriousness of the Disaster

At this distance of time we may easily forget how
serious the San Francisco disaster was. The loss direct
has been estimated at $600,000,000. The Aetna Fire
Insurance Company admitted that the conflagration
had cost it the savings of forty years. If that was the
effect on the strongest fire insurance company in the
United States, and one of the strongest in the world,
how severe must have been the consequences else-
where. It was all very well for the shallow, half-
taught optimist to say that broken windows made work
for glaziers and manufacturers of glass. But it cost
you something to put in a new pane, and the money
you spent on it would have been spent on something


else, while, as Bastiat said, you would still have your
window. If that sort of reasoning were good, the
quick road to prosperity would be to burn down all
the cities in the United States.

We see that the railroad stocks suffered more than
the industrials, and we should remember that they
were in a higher class, both relatively and positively.
But in a sudden and demoralizing break people sell
the things for which there is some market in order
to protect those for which there is no market. As
The Wall Street Journal put it at that time : "The
first decline in a panic is scare, and the second and
slower decline is the demonstration of the general
shock to confidence;" going on to say, in speaking
of the market on July zd, that the line of prices was
well below the line of values and that the indications
were bullish.

Rally From a Break in a Bull Market

This inference proved correct, and it has been the
custom, which is followed in these discussions, to con-
sider the bull market which began in September, 1903,
as actually terminating and turning to the bear side,
not in January, 1906, but in December of the same
year. At the time the bullish inference quoted was
published the market was making a line which proved,
as the analyst correctly surmised, to be one of accumu-
lation. The forecast was soon verified, and on August
2 ist The Wall Street Journal again discussed the
market from the point of view of the averages. There


was a greatly active market at that time, and it re-
marked how absurd it was to suppose that within two
hours of trading on a Saturday one single interest
could possibly manipulate one million six hundred thou-
sand shares. This is a useful confirmation, coming
out of the past of fifteen years ago, of what we have
already seen for ourselves in demonstrating the rela-
tive unimportance of manipulation. In that discussion
The Wall Street Journal went on to say: "We can
only suppose that the long decline between January
22d and July 2d represented a somewhat extended
bear swing in a bull market."

Average Deductions Uniformly Correct

Remember that this correct inference was drawn at
the time, and not after the event. I could easily go
back and show how trustworthy these deductions have
been over the twenty-odd years since Dow formulated
his theory. It would be absurd to say that it was
possible to call the exact turn in the major swings,
much less anticipate the unexpected. But these studies
in the price movement did what was much more useful
from the point of view of those using the barometer
from day to day: they were continually right when
they said of a major movement that it was still in
progress, even when a deceptive secondary movement
had made superficial observers bearish in a bull market
or bullish in a bear market.

There is a story, probably apocryphal, of James R.
Keene saying that he would be well content to be


right 51 per cent of the time. I don't believe he ever
said it. He must have found a much larger percentage
necessary. The balance in his favor would not have
paid operating costs, to say nothing of keeping a
racing stable. But the deductions from the evidence
of the price movement have been right, as the printed
record proves, much the most of the time. After
searching both the record and my conscience I can
find no instance of a radical misinterpretation of the
meaning of the barometer. The studies based upon
its use were uniformly able to anticipate what the
public was thinking about business before the public
knew its own thoughts. The errors, where any oc-
curred, were mainly due to the almost impossibility of
forecasting the secondary movement of the market.
This is really much more difficult than the interpreting
of the major swing, just as it is easier for the Weather
Bureau to forecast weather for a large area than it
is to say whether it will rain in New York to-morrow

Initiation of a Bear Market

Near the top of this bull market The Wall Street
Journal uttered a caution. It pointed out, on Decem-
ber 15, 1906, that there had been a "line," especially
in the twenty active railroad stocks, and that the
possibility of a break through the lower level of the
line should be considered as indicating the warning of
a coming decline. This forecast did not commit itself
to anything more than a possible bear swing in what
had been for three years a primary bull market. It


was altogether too early to call the actual turn. In
the beginning of 1907, large railroad earnings, materi-
alized in the case of the spectacular dividend policy
announced for the Harriman roads during 1906, were
set off against high money rates, which, as we soon '
saw, were already beginning to warn the market, and
business generally, of that severe crisis brought about
later in the year; when the reserve of the old national
banking system virtually went to pieces, call money
became practically unobtainable at unparalleled rates,
and the banks resorted to clearing-house certificates
for the first time since the panic of 1893.

In the month of January, 1907, the active profes-
sional traders were selling stocks. Political meddling,'
was beginning to scare investors, and before the year
was out there was what amounted to a strike of
capital. The decline in stocks had already started,
and it is interesting to trace the elapsed time taken
to decide that a major bear swing had replaced the
preceding long-continued bull movement. A decline
of prices in January is always disturbing to the stock
market because that is a time of year when, other
things being equal, the tendency is oftenest bullish, i
It is a time for cheap money, and the reinvestment off
the profits of the preceding year. It is a time, more-!
over, when it is peculiarly unpopular to talk bearish
in Wall Street. The prophet of evil, as I have already
frequently demonstrated, is totally without honor in
that part of the country.


Boom Times and a Falling Barometer

In the long bull market there had been an unusually
large emission of new issues, and it was then that the
late J. Pierpont Morgan originated the phrase about
undigested securities. America loves a good phrase,
and that one caught hold. Industrial earnings, and
especially those of the United States Steel Corpora-
tion, continued remarkably good. The railroads were
making an excellent showing of both gross and net.
But the sharp decline in the averages in January made
our commentator most cautious, particularly in de-
clining to predict a rally, much less assume that noth-
ing more than a secondary reaction had been estab-
lished. It was altogether too soon to be positive
about the major movement. In fact the severe decline
kept everybody guessing; but it appears from the rec-
ords that early in March the existence of a primary
bear market was conceded and The Wall Street
Journal, very like any other newspaper, was doing
all it could to cheer up the dispirited investor with a
statement of the genuinely satisfactory features.

Some Bearish Influences

But the market was looking at all the facts, and
the far-reaching consequences of some of them were
reflected in stocks. These bear arguments were given
on March 15, 1907, and they read curiously now.
They were :

"i. Excessive prosperity.

"2. High cost of living, due largely to the effect upon prices
of a great gold production.


"3. Readjustment of values to the higher rates of interest.

"4. Speculation in land absorbing liquid capital that might
otherwise be available for commercial enterprises."

"5. Roosevelt and his policy of government regulation of
the corporations.

"6. Anti-railroad agitation in the various states.

"7. Progress of socialistic sentiment and demagogic attacks
on wealth.

"8. Harriman investigation of exposure of bad practices in
high finance.

"9. War between big financial interests.

"10. Over-production of securities.

"u. Effect of San Francisco earthquake."

There were other causes quoted of only momentary
consequence, in which possible bear manipulation was
put last. It has been said already that there never
was a bear market which was not justified by the facts
subsequently disclosed. Are we not entitled to say
that some of these influences became permanent, to
an extent which even the stock market could not pos-
sibly foresee, conceding that it is, at least theoretically,
of longer and larger vision than any of us? As after
events proved, the over-regulation of the railroads
alone was sufficient to justify investors in protecting
themselves, whatever the consequences to the stock
market might be.

An Abnormal Money Market

In retrospect, the year 1907 seems to me the most
interesting I have ever spent in Wall Street, and per-
haps the most instructive. It is full of lessons and
warnings. I wish that the scope of these discussions


permitted a treatment of it in greater detail. There is
no better story of it for the student than that of Alex-
ander Dana Noyes in his Forty Years of American
Finance. He was financial editor of the Evening
Post at that time. I remember that at the beginning
of the year, when industry was booming, when railroad
gross and net earnings were making about the best
showing on record, when the stock market was only
receding a little from three years of advance, where
prices, moreover, at least on paper, had not overtaken
values, he was struck, as I was, by the abnormal
money market. That is the time of year when money
should be cheap, and it was almost painfully tight in
February. The stock market foresaw the meaning of
it long before we did, as the major bear swing of 1907

No Bigger Than a Man's Hand

There was a broker of that time, since dead, whose
face comes up before me as I write. He talked in
terms of Wall Street, but his illustrations were vivid
and his intelligence was well above the average. He
was an educated lover of music, and much more rever-
ent than he sounded. He was speaking to me one
day about a performance of Mendelssohn's "Elijah"
that he had once heard, with the title role taken by
the greatest oratorio artist of all time, the late Charles
Santley. The dramatic story had appealed to my
friend. He talked of the priests of Baal being "corn-
ered bears of the stock Elijah controlled," and of
"their frantic efforts to cover their shorts." He was


impressed with the way Elijah had, as he expressed it,
"joshed" them in their extremity, suggesting that their
god was taking a nap or was, peradventure, "on a
journey." There was a phrase that had stuck in his
mind which describes the condition at the beginning
of 1907: "Behold, there ariseth a little cloud out of
the sea, like a man's hand." The "great rain" fol-
lowed in the autumn of the year 1907.

Not only was the collapse in business tremendous.
It developed with a suddenness which simply took
our breath away. At the close of the year I was
traveling on the Pennsylvania railroad with Mr.
Samuel Rea, now the president and then the first vice-
president of the road. The Pennsylvania carries
and carried then a tenth of the railroad freight of
the United States. Mr. Rea said that at a time when
they were only a month away from the peak of their
load, apparently able to count upon the crop movement
and the industrial traffic, both ways, of the Pittsburgh
district, business seemed to shut up like a jackknife,
almost overnight. We could see the empty cars in
the stub-end sidings and yards all along the system
between Philadelphia and Pittsburgh, at a time of year
when railroads are normally using everything but the
cripples in the repair shops.

The Deadly Hand of Politics

There had been nothing like it since the collapse of
1893, when that Congressional monument of economic
ignorance and sectional folly, the Sherman Silver Pur-


chase Act, reaped its grisly harvest in the most demor-
alizing and far-reaching panic we ever saw. That
seemed to have been a lesson to our lawgivers. The
lean years which followed that panic, with the almost
universal bankruptcy of the railroads and those who
served them, finally put, the fear of the Lord into the
politicians. For ten prosperous years previous to 1907
they had quit kicking the business dog around. But
in that year they had fully resumed that highly ex-
pensive sport, and before the end of the year there
was a strike of capital. Every man who had any-
thing to lose was terrified. Every man who knew
anything foresaw what bureaucratic meddling and un-
intelligent regulation would do for the business of
the country. It seems to me, if I am not wandering
from my text, that this is largely what is the matter
with the country now, war or no war, and that the
stock market for two years past has been foreseeing
some of the further consequences of fool politics. It
may also be that in the impending improvement in
business, already foreshadowed by the averages and
the underlying investment demand shown in bonds,
the market foresees some return to sanity, even if the
indications in Congress at present are anything but

Chapter XI


WE have been considering in some necessary de-
tail the record of the stock market barometer,
and we shall have some further historical study to
make in that interesting and little understood period
between the bear market which culminated in 1910
and the outbreak of the World War. We have hith-
erto paid small attention to the tempting "cycle
theory" of human affairs, and especially of business
affairs. In an early discussion I set forth the panic
dates for the eighteenth and nineteenth centuries as
recorded by Jevons, together with Dow's brief account
of our panics of last century. But it was essential to
establish something of an irregular stock market cycle
of our own, not necessarily, and hardly more than
incidentally, involving a panic for, indeed, the panic
has more than once proved to be merely an interrup-
tion in the main movement of the barometer.

Our Own Modest Cycle

We can see that we have established some sort of
irregular rotation through Dow's theory of the stock
market price movement its major swing up or down;
its secondary reaction or rally, as the case may be;
and the daily fluctuation in prices on the Stock Ex-
change as reflected in the records of the averages.



But the theory of the longer rhythmical cycle will
not down. It seems to be almost an obsession with
many of my readers and critics. None of them seems
to have analyzed his belief in it in any searching way.
The general impression is that there is "something
in" the idea; that if it is not proved true it should
be true ; that the world's panic dates themselves indi-
cate a striking degree of periodicity; that, given such
periodicity in the past, we may anticipate something
like it in the future ; that men will always be as stupid
in the conduct of their own business as they seem to
have been when judged by the records of history.

Basis of the Cycle Theory

Probably this unwillingness to analyze the panic
theory arises from the fact that in the eighteenth
century, according to Jevons, there were exactly ten
noteworthy crises at an average of ten years apart. I
am content to waive the one Jevons omitted that
of 1715, when the Scots invaded England because
there were not enough spots on the sun in that year
to establish his daring theory of the relation between
the two phenomena. We may note that Jevons gave
1793 and 1804-5 as crisis years, while it is of record
that our own first panic of the nineteenth century was
consequent upon the British capture of the city of
Washington in 1814 an event which no cycle could
have predicted, unless we are to assume that the cycle
theory could have predicted the late war. But, count-
ing 1814, and what Dow calls the "near approach to


a crisis" in 1819, there were ten American crises in
the nineteenth century.

Let us see how the cyclist if that is the correct

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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 7 of 20)