PROSPERITY! The great wave of prosperity, which this country has experienced during the past few years, has been in many ways responsible to the stock market. The great increase in the value of stocks has increased the borrowing power of various companies and has permitted expansion and even inflation. The pendulum has swung so far in one direction that many people have forgotten that it can ever swing back in the other direction, but one extreme always follows another and it will not fail at this time. Stocks, like water, always seek their level.
The great earnings of many large corporations during the past year cannot be expected to continue. Over confidence is just as bad as extreme pessimism. It is just as easy for a big man to make a mistake, as it is a little man. In my judgment many of the wisest speculators who have made large fortunes out of this bull campaign will overstay their market and be caught just the same as they have in the past. Then when the decline gets under way and they try to liquidate in a bear market, they will bring about a real smash in prices. It is one thing to mark stocks up to dizzy heights and quite another thing to be able to sell all of them near top prices. As stocks decline, forced selling both by pools and the public always comes into the market and causes prices to go lower than they naturally would if there had not been over speculation. The public never has been considered good leaders in a bull market. The fact that they are now in the market in greater numbers than ever before makes the technical position of the market more dangerous.
INFLATION: The volume of trading on the New York Stock Exchange during 1928 was the largest in history and at this writing the total sales for the year have exceeded 750,000,000 shares and will approach 900,000,000 by the end of the year. Stock Exchange seats have had the greatest advance in history. Brokers’ loans doubled in 1927 and 1928. Such enormous volume of trading at extreme high levels with feverish markets and wide fluctuations can mean only one thing, - that the pools and insiders have taken advantage of public buying to liquidate stocks and when once they have sold all they have to sell, they will not support the market. With the public so heavily involved in such large numbers and being unable to support the market, when once the decline gets underway, it will be more sharp and severe than ever before. Loans will be called and bankers will make new loans only on the very best security. We will hear of many stocks being thrown out of loans.
Another contributing factor to inflation was our large holding of gold but this has changed materially during 1927 and 1928 when more than half a billion of gold has flowed out to foreign countries and there are no prospects that it will not continue during the next few years.
INSTALMENT BUYING: People are still living beyond their means and instalment buying continues on a large scale. We believe it will yet prove to be the greatest menace to business and to the prosperity of the country. When depression sets in and unemployment increases and people are unable to pay for goods which they have bought on a credit, buying power will be reduced and many companies will not only lose business but will lose money on goods sold on a credit.
AGRICULTURAL SITUATION: Has been so unfavourable during the past few years that the Government has had to devise means to help the farmer and no doubt President Hoover will see that some law is passed to remedy this condition. However, we are in a cycle, which is likely to produce crop failures or a series of small crops for some years to come. This will reduce the purchasing power of the farmer and help to bring about deflation in stocks.
PROSPERITY COMPLEX: The recent wave of seeming prosperity has been due to the psychological effect on people. They have watched stocks go wild in the past three years until they are hypnotized into believing that every concern and everybody is prosperous, but facts do not confirm it. During 1927 about 45% of all concerns making income tax returns showed a loss in business and 1928 will not be much better. It is now a survival of the fittest. The small businesses are failing more every year. Conditions are changing so fast that many old firms are being forced out of business. Electricity and oil are taking the place of coal and wood. Automobiles supplanted the horse, and the railroads, despite the large increase in population and business, have not shown as great earnings as they did 20 years ago. Many industries have not been prosperous for some time. The textile, coal and agricultural industries have suffered. The oil situation has been bad until recently. The rubber industry has been demoralized by low prices. Sugar has been at low levels for the past two years. When people realize that prosperity is not general and confined to only a few lines, and then they will have the “panic complex."
PUBLIC CONFIDENCE: As long as the public believes that everything is all right, they will hold on and hope, but when public buying power has exhaust itself and the largest number of stock gamblers in history lose confidence and all start to sell, it requires no stretch of imagination to picture what will happen. When the time cycle is up, neither Republican, Democrat, nor our good President Hoover can stem the tide. It is a natural law. Action equals reaction in the opposite direction. We see it in the ebb and flow of the tide and we know that from the full bloom of summer follows the dead leaves of winter. Gamblers do not think; they always gamble on hope and that is why they lose. Investors and traders must pause and think, look and listen, and get out of stocks before the great deluge comes.
WAR: Our great prosperity has caused jealousy throughout the world, and as conditions get worse in foreign countries, greed and, jealousy will lead to war. It is the hungry dog that starts the fight. A study of the rise and fall of nations shows that when any country enjoys unusual prosperity for a long period of time, war is one of the main causes of the start of depression. While we hear a lot of talk about peace, the facts show that many of the leading foreign countries as well as our own country, are spending more money preparing for war than ever before in their history. When a man or a country is armed and gets ready to fight, he usually gets what he is ready for.
FOREIGN COMPETITION: Germany is rapidly coming back and competition for trade will be keener in the coming year. Many of the other foreign countries are making desperate efforts to regain their pre - war trade and will make progress along these lines, which will hurt our business.
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