American doubts
JOHN BULL
Wall Street and Throgmorton Street have marched roughly in step this year. Both reached record levels in early August, both have since fallen back, though not seriously so. I offer this as a strange coincidence, not as evidence that either normally takes its cue from the other. All the same, Wall Street has a devoted follow- ing in this country: investment trusts and in- surance companies have massive funds invested in American securities; investment techniques employed in New York can sometimes be suc- cessfully transplanted to London.
Managers of large funds in this country, for instance, are being chided for not having the aggressive attitude to investment which their American counterparts exhibit. The per- formance-conscious American operator runs a short list of stocks, studies them, and trades repeatedly in and out. Two factors inhibit this active approach over here. The first is the tax penalty attached to 'dealing,' effectively the difference between capital gains tax (30 per cent) and corporation tax (40 per cent). The second is the size of the market. Few British share registers are large enough to allow American style turnover. But not all ex- perienced observers are happy about the goings on in Wall Street. The undertone is disquieting. Aggressive investment shades into dangerous speculation. The culprit is the computer, or so it seems to the extremely influential New York financial weekly Barron's, which has just pub- lished a detailed report on the subject.
To begin with it must be realised that Ameri- can investors have precise information about the volume of turnover which takes place each day in each stock. In London we can see how many bargains reach the Official List, which is as many as the jobber cares to report. In New York, the total volume of transactions is announced each hour and at the end of each day one knows how many shares have changed hands in any given stock. Thus the theory that the way to pick the winners is to look for knowledgeable buying—signalled by abnormal share turnover—gets a good run in New York.
Following the knowledgeable, which in this context means the people who have inside in- formation, has also flourished as an investment technique because the alternative approach, what is known as 'fundamental analysis,' has been shown up as a poor guide. Fundamental analyists reckon to forecast future earnings by looking at a company's record and adjusting for current economic conditions and recent management changes. But the record shows that the routine has provided the wrong answers on an unnervingly large number of occasions.
The one hundred computers scanning the ticker tape have behind them one hundred powerful investment institutions. Inevitably the 'buy' signals start a well-heeled stampede for the stock in question and inevitably the stock runs up to fancy price. Then the 'sell' signal bleeps out of the machine, and all come down again together. Barron's quotes a succinct description of the game: 'the swingers are play- ing a game of musical chairs. The aim is to take a position in a stock quickly, ride it up, and then get out before the others do. The object is not to be caught holding it when the music stops.' The other main undercurrent of worry concerns the way certain types of shares have become highly fashionable (something Throg- morton Street has to be careful about too). At present the rage is for electronic manufac- turers. Wang Laboratories, for instance. was launched last Wednesday at $12 50c. It im- mediately soared to $41 at which level it is selling at an astonishing eighty-one year's pur- chase of current earnings.
As for prospects for American shares in general, the market should remain reasonably firm until the end of the year. Two factors which together make for optimism are the recent string of price increases and the grossing volumes of manufacturers' orders. Prices have gone up for tyres, steel plates, aluminium sheet, vynyl flooring, construction materials and trucks. Against these have to be set the wage negotiations which are just getting under way in the automobile industry. On Tuesday of this week, General Motors and Ford made their offers. These amount to wage increases aver- aging 2.8 per cent a year for 1968 and 1969 plus various fringe benefits. True to form, union officials took only a few minutes to make up their minds to reject the new terms. The next stage is that Mr Walter Reuther, the union president, selects a company for strike action. The deadline is 6 September. Wall Street, how- ever, will not panic. 'NeVer sell on strike news' is a rule professional investors take to heart.
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