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Continued from...Reform and Protection in the Stock Market
Every effort has been made to simplify these discusions. They have been offered with the most stringent exclusion of extraneous matter. In serial form they aroused much criticism and comment, some of it illuminating and helpful. But old preconceptions and prejudices still survive. One critic, whose scanty knowledge of the subject appears to have been derived from the reading of perhaps two of these articles, says: "How can we trust your barometer if
we cannot trust the stocks in which the Stock Exchange deals in? You have
said nothing about overcapitalization. What about water?"
Watered LaborWater is more unpopular than ever in the, United States just now. But the financial center of the United States, with the business of the country in view, is far more concerned about watered labor than watered capital. There is only one way to squeeze the water out of labor - the factory or apartment house which cost a million dollars to build and represents only $500,000 of real value. That way is by bankruptcy. Of the apartment houses that were built in New York, during a period of high wages and "ca' canny" which set in long before the war, very few have not passed through a stage of financial reorganization, due to watered labor in construction, long before rents began to advance. The stock market has a short and simple method of dealing with water in stocks. It exists for the purpose of squeezing that water out. The process does not involve a receivership.The very word "water" begs the question. You may
call the capitalization of an industrial flotation "water" because you
do not see the potential values of a great creative organization. But with
justice, and better knowledge, the late J. Pierpont Morgan might have called
that capitalization intelligently anticipated growth. Whatever it may be
- and I shall give an example from the most striking instance, the capitalization
of the United States Steel Corporation - the stock market is forever adjusting
prices to values. The water soon evaporates.
Squeezing Out the WaterTo recapitulate, we are studying the stock market barometer, having established the fact of its known and orderly movements - the long primary swing, the secondary reaction or rally, and the daily fluctuation; and to do this we are taking the averages of two groups of stocks - twenty active industrials and twenty active railroads. All adjustments of the prices of these stocks individually must primarily be based upon values. For all practical purposes the Stock Exchange is an open market, and the business of such a market is to adjust conflicting estimates to a common basis, which is expressed in the price. By manipulation, James R. Keene advanced the price of Amalgamated Copper twenty years ago to one hundred and thirty, and obviously the group of financiers which offered the stock at par originally, without success, assumed one hundred as value for it. The stock market does not make its adjustments in a day. But, over a period which seems brief in retrospect it knocked one hundred points off the highest figure Amalgamated Copper attained in a general bull market.This is the business of the stock market. It has to consider both basic values and prospects. At the close of a major downward movement, a primary bear market, prices will have passed below the line of values. The causes of the liquidation will have been so serious that people have been compelled to realize their holdings at less than their normal worth; less, indeed, than their book value - the worth of the company's assets, that is, irrespective of productive capacity and good will. The prices of the standard stocks will be injuriously affected by the prices of "cats and dogs" dealt in on the Curb market, many of them of such a character that any bank would refuse them as collateral in its loans. When the banks are compelled to call loans made on Stock Exchange securities, the stocks of tested worth, of properties competently and reputably managed, will be the first to suffer because it is those stocks which are pledged in bank loans. The constantly recruited Curb group is highly speculative, but trading there is always limited, and indeed safeguarded, by the large margin which is necessary to carry Curb stocks.
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From The Stock Market Barometer by William P. Hamilton, published in 1922
| "Water" in the Barometer | The Market and Valuation of Stock Prices |
| Buying Stocks on Values | A Bull Market Forecast |