DECEMBER 27, 1940
I have been thinking today of the experience of my friend A. B. in the stock market. He bought 1000 Warner at 3 1/8 outright in February 1935. This was at the beginning of a long rise which culminated in a severe crash in early spring 1937. I think A bought at that time on a mere hunch and without any thought of the coming rise. He held the stock and saw it go to a top of 18 in early 1937. Instead of selling and taking his profit he used this stock as collateral to buy more stocks on margin. In 1937 just before the collapse he bought and sold many stocks on margin. At one time his equity amounted to $30,000. In March 1937 the collapse came and he was wiped out. A year later he had a heart attack and died shortly after that. I have always felt that his experience in the stock market contributed to his illness. Looking back now it is difficult to criticize him. Even the experts did not foresee the coming rise in 1935 and none of them foresaw the collapse in 1937. It came and went without rhyme or reason. When A. began to speculate on margin early in 1937 business and the market were booming. Everybody was talking about the coming boom and inflation.
One thing is clear. Every speculator gets washed out sooner or later. If A. had sold his Warner stock late in 1937 and taken a profit—he would have gone back again for more. No one can guess right every time and sooner or later he would have gotten burned.
Another thing is clear. He held Warner stock for 2 years and watched a rising market carry it from 3 to 18—and then at the top of the market he began to buy heavily on margin. This was illogical. The market cannot go up forever and a break was due.
If A. had sold Warner at 18 and then held his money until a crash came then he could have bought again with some degree of safety. In 1938 Warner was selling again at 3. Since 1930 there have been 8 or 9 booms and collapses. The only person who could have survived them all—without much guessing or risk—would be one who bought bargains in sound stocks every time a collapse came and then selling at reasonable profit when prices returned to normal. If he bought a good stock outright at a bargain he would not have to worry or guess about what the market was going to do. His stock would not go much lower—would possibly pay dividends while he held it—and in all probability would someday go back to normal. This method presupposes some way of judging the real or intrinsic value of a stock. It also requires courage and patience—and liquid capital at a time when money is usually hard to get.
DECEMBER 30, 1940
President Roosevelt delivered a radio address last night in which he urged more aid to Britain. There will be a fight in Congress this coming session but I believe in the end Britain will get our help even if it means war.
The business picture for the coming year is clouded by war. Industry (and Youngstown in particular) will boom in the making of war materials. Wages will be higher and steadier and this ought to help my law practice. The lawyers deserve a break. Stocks however will be uncertain because of higher taxes, higher cost of production and war uncertainty.
Because American help to Britain is not yet effective it seems to me that Hitler must do something this spring or the tide will definitely turn against him. This means that the next three or four months will see much fighting and possibly an attempted invasion of Britain. If the attempt succeeds the outlook will be black and the stock market will crash. If the attempt fails it may well become the turning point of the war. With such failure should come greater confidence and a rising stock market. I think the attempt will fail and the next few months may offer the opportunity to accumulate well selected stocks. My guess (?) then is a different market until possibly May or June and then a rising market if the fortunes of war indicate that Britain can hold out until America can give her substantial aid. The chances are 50- 50 but I would bet on Britain.
1941
JANUARY 2, 1941
In an unprecedented step the U.S. Federal Reserve Board makes public certain recommendations to prevent possible inflation. It points out the danger of inflation rising from the huge armament boom, huge bank reserves, etc. The Federal Reserve Board has issued very few warnings in the past but they have been right every time. For this reason, I hope the President takes their warning seriously and follows the plan suggested.
JANUARY 2, 1941
Russel Weisman the economist gives a very conservative forecast for the coming year. He feels that much of the industrial activity in the past 6 months was devoted to producing for consumption in America rather than for Europe. Huge inventories have been built up in anticipation of higher prices. Since domestic supply is ample for the next 6 months, industry will now have to turn to war orders. It will take time to convert these plants to war orders and this means a slack season just as automobile plants close down each year to re-tool for new models. After war production starts, activity will be no greater than now because plants are working at full capacity and no new plants have been built. He does not look for a stock boom. “Smart money” stayed out of the market because government taxes and restrictions made large profits impossible. The same condition will exist in 1941 unless government policy is changed. Industry is just as active now as in 1918 but it is now a profitless prosperity. Hence the low prices of stocks.
4/1/62
He was very much wrong. This was a good time to buy.
Weisman predicts for 1941:
1. Costs will increase and profits get narrower.
2. Gov’t regulation will be extended.
3. Interest rates will not harden in next 6 months.
4. Non-war and luxury business will be restricted.
5. Corporations will make small profits in war orders.
6. Agriculture will be badly off on account of loss of exports.
7. Some rise in living costs—no inflation.
8. 1941 industrial production will exceed 1940 about 10%.
In Wall St. stock trading for 1940 was the smallest in 21 years, bond trading the smallest in 17 years and stock exchange seats sold at their lowest price since 1899. This in spite of industry enjoying a war boom. There is so much psychology in the picture that it seems to me that during the coming year a brighter chance for Britain to win or an inflation scare would send stocks up rapidly.
Youngstown ought to have a good year because employment is high and people have money. I hope it helps the law profession. During the past 10 years we lawyers—like investment bankers and brokers—have been shedding tears in the midst of seeming prosperity.
JANUARY 6, 1941
Russel Weisman points out today that the Federal Reserve recommendations have come too late to prevent inflation. To adopt the plan means higher interest rates and “hard money” policy. The gov’t debt is now $45 billion and may rise to $80 billion in the next 5 years. The gov’t must continue its easy money policy at low interest rates so it can carry this huge debt. An increase in interest would break the gov’t bond market, stop further gov’t loans during the war crises, create fear and bring on dreaded inflation immediately.
This means the easy-money policy must continue during the war crisis. Gov’t debt and bank reserves will increase. When the war ends and interest rates return to normal then the inflation will come. The longer it is postponed—the greater the debt and bank reserves—the greater will be the inflation and the subsequent break-down.
JANUARY 29, 1941
U.S. Steel reports 1940 earnings at $7.84 per common share. The stock sells at 67. Sheet & Tube earned slightly less than $6 in 1940 and the stock sells at 40. It is this way all thru the stock list even tho it seems that 1941 and 1942 will be busy industrial years. In spite of higher taxes and other restrictions I feel that these stocks are a good buy and that one day soon the market will break out of its present lethargy. The market has been almost at a standstill so far this year and yesterday a stock exchange seat sold for $30,000—lowest in 40 years.
In Youngstown business is slow even tho the mills are at capacity. People seem to be saving their money for expected strikes or other emergencies.
FEBRUARY 1, 1941
A stock exchange seat sells today for $27,000—lowest since Spanish American War. It reflects the pessimism of the stockbroker as to the future of the brokerage business. It is a crazy picture. Industry in a war boom—stock market stagnant—gov’t bonds bringing less than 1% and selling at a high premium—stocks low and selling at five times earnings. Looks to me like a good time to buy. Someday and somehow the dam will burst. [Undated note here: “Right you were—but you had no money to buy.”]
FEBRUARY 18, 1941
Industry booms—people hoard their money—general business only fair—and the stock market drags at low level. Seems to be waiting for the turn of events in Europe where the spring drive is just beginning to take shape.
MARCH 1, 1941
Business and the stock market drag along at low levels while industry booms. Germany takes over Bulgaria and prepares to march into Turkey. Looks as tho the war in Europe will get active again.
Six months ago the Federal Reserve Board recommended the gov’t take certain steps to avoid inflation. This advice was ignored and the gov’t continues to borrow at an increasing rate. If inflation was possible 5 years ago then it must be closer now. The gov’t plan seems to be to prevent price rise by decree and priority. It did not work in the French inflation and I do not think it will work here. Recently the gov’t put a ceiling on scrap prices. Many dealers who had large stocks held for a speculative rise simply refuse to sell at these prices or get boot-leg prices. Defense industries complain they cannot get enough scrap. Either the gov’t will have to take complete control or let prices go up in a national response to supply and demand—and this may be the beginning of inflation. Because we have pledged ourselves to huge armament production it seems to me that sooner or later prices will go up in order to get full production and I do not believe that government decree will for long halt the rise of prices.
MARCH 14, 1941
The screwy business situation continues. Steel mills operate at 100%—part of the population draws large pay envelopes—others are on relief. Retail business is only fair and law business is scarce. People hold on to their money because of fear of strikes. Congress after long debate passes the lease-lend bill which promises full aid to Britain. Congress is now passing a bill to give the President seven billion dollars to carry out the terms of the bill. This increases the debt to $53 billion with no limit in sight and yet there is no excitement or talk of inflation. People have become calloused to an increase of the debt. The stock market is at a standstill—stocks sell at 6 times earnings and pay dividends of 5% and 6% but no buyers. They are afraid of a collapse in Europe—confiscatory taxes—government control, etc. Bonds bring a return of 2%. It is truly a profitless prosperity. It seems to me a good time to buy stocks but what can one use for money? Someday—and soon I think—the bond market will collapse as stocks did in 1929 and then stocks will go up to more reasonable levels.
APRIL 5, 1941
The country is torn by huge strikes which slow up production for defense. All of the Ford plants are closed and a crisis is approaching in the steel and coal industries. So far the government has been pro-labor but it now seems to be facing a crisis with public sentiment rapidly changing against labor.
Rising wages and booming industry renew talk of inflation but the stock market remains stagnant. Retail trade, automobiles etc. are good but law practice continues slowly.
APRIL 8, 1941
Germany starts a blitz-krieg in the Balkans and for the first 3 days meets very little resistance. As a result the stock market sinks slowly.
The stores are having a busy Easter season with people buying like mad. In the midst of all this activity the law offices stand isolated and inactive.
Talk of inflation and rising prices crops up again. It is suggested that the government stop inflation by taking away increased earnings of the labor group in the following manner.
1. By increased taxes on lower incomes.