V
Political Influences, Crops, Etc.
The possibility of legislation adverse to corporations is always present as a market factor, and at times severe declines have been recorded through such action. It is not always the case that such legislation is truly a bear factor, although it is fashionable to so interpret anything in the nature of legislative interference with corporate affairs. It is the writer’s opinion that a great deal of misunderstanding has recently arisen in regard to the attitude of certain party leaders toward the heads of great railroad corporations. The opinion has been widely fostered by opposing politicians and others that the credit of railroad corporations was being badly impaired, and the interests of stockholders jeopardized because investigations were ordered as to the methods of individuals or directorates.
It does not appear that any reasonable man could, as the stockholder of a corporation, or as a private citizen, object to having dishonest or sharp practices on the part of the active management of the property in question exposed and prevented. Where it is shown that an individual, in his capacity as the head of a business, has employed his office as a means of juggling stocks or reaping enormous personal gains, it cannot but be to the interest of stockholders to have such practices stopped. If the means at issue are honest and legitimate, the benefits reaped should go to the stockholders. It is impossible to reconcile any other plan with equity and common honesty. Let us look at the matter without the mystery that obscures the affairs of a great corporation.
Suppose a member of a certain firm, its manager, finding the firm in need of funds, secures money at a high rate, and at great profit to himself—is that right? Or is it the manager’s business to work entirely in the interest of the partners he represents? Is it possible for him to legitimately acquire personal profit of any kind in administering the affairs of the firm? It is not sufficient to point out that the manager’s action in securing funds redounded to the great benefit of the business concern, or that his capability and shrewdness were reflected in enormous partnership profits. His associates in business are entitled to all, not a portion, of the gains secured in the management of its affairs.
It is submitted that much of our recent legislation which is popularly supposed to have injured stock values has, in reality, aimed to protect the small holder and throttle the unscrupulous men who, while actually in their employ, were milking their business of millions. Legislation which effects publicity and simplicity in the affairs of corporations is an unmixed benefit to the small investors.
It is almost invariably the case that when a great decline in stock prices occurs, the set-back is popularly attributed to some factor which, in reality, had little to do with the reversal. In the decline of 1907, thousands of people attributed the inability of railroads to borrow money at low rates of interest almost entirely to hostile legislation. Apparently these rapid-fire thinkers did not know or realize that interest rates had risen the world over, that there was not a free money market in the world, and that money, instead of being withheld from 4% issues, was fully employed in other lines. Such, however, was the case; British Consols, French Rentes,—all the choice securities of civilized countries had kept pace with the declines in our own bonds and stocks; but these facts seem to be unappreciated.
It is true that adverse legislation sometimes seriously impairs the value of a security. A public utilities company, for example, which is forced to reduce its selling rate, is unquestionably injured from an investment point of view. Such legislation, however, may be weighed correctly by a little calm consideration, and it may be said that action of this nature is usually for the purpose of correcting abuses, rather than as a revengeful and confiscatory attack on vested interests. Measures which prevent a fair return on capital will perish of their own iniquity. So far as measures which are formed to prevent extortion are concerned, it is impossible to criticize them.
In order to correctly weigh the effects of legislative measures on security values and prices, we must therefore examine fairly what the legislation seeks to accomplish, taking care not to allow a contemporaneous price movement which may be due to other causes, to act as a verification of a false view. This error occurs very frequently; in fact, one of the most remarkable things about speculation is that the true causes of great movements are fully appreciated by the majority only in retrospect.
The probable market effect of legislative and political affairs can be correctly gauged only by examining the nature and importance of the issue in question. This is true not only of state and municipal action, but in regard to presidential elections. There is a popular idea that it is dangerous to buy stocks on the eve of a new presidential campaign, but there is not much in history to uphold the view. True, in a majority of cases, a decline has preceded such a contest, but there have been frequent reversals of this action, and we have had too few elections to attempt any chart-playing on this influence. Such a guide would be empirical.
The issues involved in a presidential contest, however, may sometimes influence prices. Here again a careful examination of facts and probabilities will generally uncover the truth. If the nominee of one party stands on a dangerous platform and the outcome of the contest is in doubt, we may well dispose of shares if for no better reason than that the element of danger is present. Danger, whether or not it is finally realized, is a bear factor, just as safety is a bull factor.
Tariff agitation should be accorded careful consideration by the speculator. This is particularly true as regards the effect on industrial corporations. A reduction of the present tariff on Iron and Steel, for instance, would materially lower, if not destroy, the value of many of the common stocks of steel manufacturing corporations. A very clear and comprehensive work on this subject is mentioned in the bibliography on page 183.
No cut and dried rules or suggestions can be offered as to the effects of political or legislative issues on prices. Each point must be scrutinized as it arises, and judgment formed thereon. Sympathetic movements will sometimes occur because of apprehension or misunderstanding, but such effects will be short-lived.
Crops and Crop Failures.
The question of crop failures is of great importance. It is not difficult to form a fairly correct idea as to the ultimate yield. The estimates of the Government sometimes go wide of the mark, but it must be remembered that they are estimates and nothing more, and that conditions may change somewhat after the figures are compiled. The speculator is frequently confused by the conflicting opinions of private experts. It is probably safer to disregard the various authorities and pin one’s faith to the computations of the bureau at Washington. These official documents have been criticized at times, and no doubt the criticism has been warranted, but they form our most dependable source of information and will improve as time rolls on.
A crop failure, or a short crop, invariably brings forth much fallacious vaporing from the rooters of Wall Street. They are as bad in their efforts to obscure the truth as are the crop-killers with their fabrications. A crop failure is a serious thing and must be faced as such. The contention which is always heard in lean seasons, that the evil has been counter-acted because of the large reserves of Wheat, Corn or Cotton in farmers’ hands is ridiculous. Farm reserves are wealth. They have already found their place in the business structure. In many cases the money they represent has already been spent in the form of credits. Nor do high prices for cereals or cotton overcome the evils of short production. Small crops mean decreased employment for laborers; a diminution of per capita purchasing power, and increased cost of living. They also mean smaller tonnage for the railroads, and consequently decreased earnings.
And in examining crop prospects, we should consider the fact that each year’s normal crop should be larger than the one preceding it. This is distinctly shown by tracing production back for a term of years.
There will, of course, be fluctuations in this gradual increase, but the tendency is certain. We may also consider that as railroads are constantly extending their lines and increasing their facilities, it follows that increased production in the commodities they transport is necessary to their well being.
And short crops the world over in the same year have the same elements of economic evil. The purchasing power of the world is reduced, and even if we ourselves make fair crops and export them at high prices, the world’s poverty is felt in lack of demand for other exportable surplus. The civilized world is too closely knit together in its affairs to permit of the entire localization of the effects of a serious property loss.
A lean crop year can probably do more to temporarily injure the actual value of railroad shares than can any other single influence bearing on prices. Tonnage is affected both ways, so is passenger traffic. There is less grain or cotton to haul to the markets, and, as purchasing power has been reduced in the affected localities, there is less freight to haul back to the producers. In the last analysis, the products of a community represent to a great extent the mere exchange of these products for other luxuries and necessities, and the effect of decreased production is a two-edged sword, so far as the transporting companies are concerned.
Accidents.
The effect of accidents on stock prices has been fully discussed in a former work, and the contention offered that accidents could no more be provided against, or considered, in the investment or speculative world than in any other walk of life. It is also thought that accidents are more frequently the excuse for movements than the cause of them. If a market is in a bad technical or general condition, the slightest adverse happening may create panic; while if the foundation is sound, even a great calamity, such as the San Francisco earthquake, will cause only a temporary halt. The man who speculates correctly has little to fear from accidents.
In the following section of this work, the writer has undertaken to touch on such features as appear of most interest and benefit to the speculator or investor. Some of the matter presented, such as the question of dividend dates, will appear to many readers so simple as to be unnecessary, but it is true, nevertheless, that many very elementary facts are misunderstood or unappreciated by a large class of public participators.