Finance
Dangers of a Boom
MY excuse for returning this week to the subject of new loans and the investor must be that the activity in capital creations to which I then referred has, if possible, become intensified. And because I know that,. The ,Spectator stands for the interests of the investor, and especially of the small investor, I feel that there are some' further things to be said with regard to the present activity in new flotations which should be said before it is too late.
It must not be supposed, however, that I am about to indulge in anything like a• vendetta against new capital creations ; , on the contrary, the ,movement on the whole is a proper and a natural one, and moreover is one in which,. if the investor exercises care and judgement, oppor- tunities are often afforded for obtaining a somewhat higher income than can be obtained from existing securities, many of which have now been rushed up to heights which offer a meagre yield to the investor. , Nor, indeed; is the occasion one for wholesale censure of the wiles of the promoters of new loans or of new companies. What I wish rather to 'draw attention to is, first, that there are certain elements in the present situation which offer exceptional opportunities for the flotatitio of undesirable or risky adventures. while in the second place the greatest danger probably exists in the speculative tendencies of the public themselves.
THE INVESTOR'S DILEMMA.
First, however, let me say something with regard to those elements in the situation for which the public is in no way responsible, but which undoubtedly have given a great stimulus to the promotion of new loans ani new companies. For something like two years no x the supply of money, has been so abimdant that bank depositors have only been able to obtain a merely nominal rate on their banking deposits. In fle second place, circumstances have conspired to make those deposits unusually large, so that the volume of " unused "• money is large. In the third place, in so far as high- class securities of the trustee type arc concerned, the rise in market values has been directly assisted by a system of Treasury control which, while advantageous to the borrower in the sense of preventing an indis- criminate rush of loans, has at the same time prevented the investor from obtaining the advantage which might have accrued to him if an indiscriminate rush had been promoted.: How far this system of Treasury control may have been inspired by motives calculated to keep up quotations of Government securities themselves it is unnecessary perhaps to enquire, but the net result has undoubtedly been to aid the borrower in obtaining the very finest terms possible. In the fourth place the ban on foreign loans, however justified, has concentrated borrowing activities upon home undertakings, or those connected with the British Empire. In the fifth place, while money in Lombard Street •phraseology has been " cheap," the ordinary public has still been oppressed by high taxation and the higher cost of living, so that pressure to maintain standards of living and the increasing difficulty of obtaining investments giving an adequate yield have also played into the hands of trios who, taking advantage of these exceptional 'conditions; are active in providing new issues for the public to absorb, A SPECULATIVE RUSH.
In the circumstances I have roughly outlined, it is scarcely surprising perhaps not only that there should be a multiplicity of new issues offerecl, every week, but also that the borrower should become increasingly bold in imposing his terms. In the case of some of the more speculative issues no attempt .is made to hide the enormous profits made by those offering the shares to the public and indeed the bolder the statement the greater seems to be the. appeal to those who are specula- tively. inclined. and who •trust to the quick establis lenent of large premiuMs to enable them' to secure a profit. Vast 'Week. I referred 'tb' the:filet; that, in the case of an (Continued on papa 37.)
Finance .
(Continued from page 36.) offer of 10s. shares in a mining company. at the price of 20s. per share where the whole of the money had to be planked 'd6Wn., on application, the issue was covered more than forty times, and it looks as if similar results might attend the flotation of an issue made Atiting the past week of 10s. shares in another gold mining 'company at the price of 22s. Gd. per share. The prospectus stated quite 'frankly that no esti- 'Mate of probable ore reserves, or of ultimate mining poSsibilities could be given until extended exploration had been performed by means of shaft sinking and 'deVelopment At the same time 'the fact that the Property was adjaCent 'to other properties where develop- ments were' faVOurable and also that the issue was Sponsored by South 'African houses of high standing caused such a rush for the issue that it is estimated to hit've been 'covered very Many times. Indeed it would 'be true' to say that almost every issue offered in recent Weeks has been covered' many time with the subscriP- lion list's 'closing within a few minutes of the opening. TILE CHIEF DANGER..
And this brings me to mention what after all is perhaps the , greatest danger in the situation7.—namelr—the excessive eagerness of the „applicants themselves, an eagerness sometimes prompted by the necessities of the case as described earlier in this. article, but more often perhaps prompted by the sheer spirit of gambling, so that the desire which ought to be present to sift the intrinsic merits of the proposition gives place merely to a wish to obtain the issue in the hope of snatching a quick profit from a rise in prices. How often this disposition on the part of the public leaves the investor finally stranded when shares, which are saleable' enough in a bobm, become' Unmarketable when once this phase has passed is 'a matter of hiStory. How many of the boom flotations of 1928-29 give returns to the investor today ? Experience, however, has shown that warnings during boom times usually fall on deaf ears, but never- theless-the duty of 'the responsible journalist to utter these warnings remains.
OFFERS OF SHARE CAPITAL.
And so far as I am concerned my warning at the present juncture is certainly not intended to e'head off the investor from all and sundry .flotations such is far :from the case. . What, of course, is necessary is that the investor—the lender of money--rshould keep his head and see that he, or she is being offered a fair return for . the . money risked, And in this connexion there is. one particular point , to which I would draw attention. Many of. the capital flotations of today are now concerned with the offer of Ordinary, share capital. At the commencement of the movement when the investor was " shy " it was usually a case of offering Debenture stock or Preference shares, but how that the more speculative tendencies have ,been awakened Ordinary capital is being offered very freely. In this again' there is nothing wrong, in itself. What, however, is, very noticeable is. ,that. advantage is .being taken of the ,difficulty in obtaining an adequate yield on sound prior charge stocks to offer Ordinary capital on terms where .the . yield is little better than . might be expected from, a', well-secured Preference share,, and in the case of these Ordinary shares premiums are often being asked which are scarcely justified by the record of profits and 'future prospects. It behoves investors therefore to scrutinize with "morethan ordinary care the'iirospectuses brought 'to their notice.
-Airrniiit W. KIDDY.
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