FINANCE—PUBLIC AND PRIVATE.
CONDITIONS ON THE STOCK EXCHANGE.
[To THE EEHTOR OF THE "SPECTATOR.")
Sin,—Since writing my last letter the Stock Exchange has experienced a continuation of its tribulations in the shape
of heavy liquidating sales, but at the time of writing there
are not wanting signs of some improvement resulting from those developments in the situation to which I referred last week. I then explained so fully the main causes responsible for the liquidation that I need not go over the ground again. The liquidation has been exceedingly heavy, and it may be doubted whether it has yet come to
an end, for the main cause responsible for it—namely, the fall in commodities—is an important one, and is concerned
with influences of an international character. On both sides of the Atlantic the fall in commodities has adversely affected the position of those who were large holders of
goods, either as manufacturers or intermediaries ; and because of the old difficulty of selling on a falling market, financial congestion in some directions has been, and still is, very pronounced. Moreover, the complexity of the problem is increased by reason of the high cost of labour, because, even given readiness on the part of the retailer to cut losses and sell at lowest, the difficulty immediately arises of restocking on terms promising a reasonable chance of selling at a profit.
But, while the situation is still, therefore, an obscure one, and while I am far from asserting that the end of the liquidation has been reached, the mere fact that prices both of commodities and of securities now stand at a much lower level is in itself a favourable point in the situation, as indicating a healthy shake-out of speculative positions and as signifying that loanable capital will go further to finance transactions on the present level of values than it would a short time ago. I referred last week to the extensive fall which has taken place during the last three months in prices of commodities, and in the matter of Stock Exchange prices the movements are also very striking. To take, for example, a few representative but widely differing securities, it may be noted that the 5 per cent. War Loan, which has been as high this year as 924, now stands at about 83. Brighton Deferred from 62 has fallen to 44, and London and North-Western Ordinary from 98 to 75. Or again, to turn to the industrial and more specu- lative markets, J. and P. Coats, which have been ovor 805., are down to 46s., and Rand Mines from 100s. have fallen to 50s., while Be Beers from 334 have fallen to 134. The fall in this latter case is the more noteworthy because the report which has just been published is a much better one than a year ago, when the shares stood at 324. In fact, the movements in prices which have taken place in almost all departments of the Stock Exchange during the last few weeks are strongly indicative of a much-needed shaking out of weak speculative positions, though it does not necessarily follow that a renewal of speculative operations at the present juncture is therefore to be recommended.
In surveying these movements it is impossible not to be struck with the fact that events have entirely demon- strated the warnings given at the time that speculation "for the rise" during the early part of the year was unjustified by the actual facts of the situation ; and whik the setback has undoubtedly brought somewhat sounder conditions, I suggest that even now there are two cardinal facts to be borne in mind. One of these is that at present it is quite impossible to tell whether the present setback in trade must be regarded as temporary or permanent in character. If the latter, the time will no doubt arrive in due course when a transfer of capital from trade to securi- ties will justify expectations of an advance, but in the meantime it is far more probable that continued liquida- tion may occasion renewed depression. If, on the other hand, the reaction is temporary and trade activities increase in the near future, it is equally certain that the volume of available capital is insufficient to finailue at one and the same time commercial and Stock Exchange activities. On the maxim that it is no more possible to get in at the bottom than to sell at the top, the shrewd investor will doubtless see some directions in which it is well to acquire sound stocks at the present level, but even in this matter it must be remembered that the investor's choice and opportu nities are likely to be widened by the continuance of fresh capital issues expected in the near future.
Probably before my letter reaches you there will have amared an issue of Debentures by the Barcelona Traction Light and Power Company (Limited), and it may be cited as a fair example of the reasonably sound and attractive investments which are occasionally offered at such times as these. Briefly stated, the history of the issue seems to be this. The company issued some few years ago a line of 6 per cent. Prior Lien Debentures for about two millions to certain banking institutions in France, the issue being made by the banks in the form of francs, when its value was about twenty-five or twenty-six to the pound. Now, at a moment when the value of the franc has declined by over 100 per cent., these debentures have been bought back by the company at about the original price in francs, a transaction which means that the capital liability of the company has been reduced by not very far short of one million—a somewhat unique operation in itself. The bonds thus repurchased are to be placed in trust as a security for the new issue to be made of just over one million in 8 per cent. Debentures offered at 94 and redeemable at 106 by annual drawings by means of a cumulative annual sinking fund. It is estimated that the income attached to the bonds placed in trust should be sufficient to redeem the whole of the new debentures in lass than twenty years. The fact that Messrs. Baring Brothers are acting as trustees in itself indicates some idea of the calibre of the issue, and it will be seen that, including redemption, the yield to the investor on the average life of the debenture is nearly 91 per cent. At the same time, and if only by reason of the social unrest prevailing in Spain as in other countries in Europe, the debentures, of course, have the speculative risks which attach to all such undertakings nowadays which are affected by Labour considerations.
A further explanation of the improved tone of markets at the time of writing is undoubtedly to be found in the fact that supplies of investment resources are being increased through huge Government disbursements. On December 1st about fifty millions in dividends on War Loans are payable, and this year that amount is supple- mented through the repayment of about twenty millions in maturing Exchequer Bonds, so that altogether some- thing like seventy millions of " new " money is added to available credits. That the amount is obtained through a further regrettable expansion of credit resulting from the Government borrowing the money on Ways and Means Advances is true enough, but that is not a point at the moment to trouble the Stock Exchange, which is simply concerned with the possibilities of a fresh stimulus to investment business. In addition, it is also known that a good deal of gold has arrived here from France, most of which is expected to go gradually to the Reserve at the Bank of England. The full effect of this will not be seen during the month of December, owing to the expansion in the note circulation which always takes place during that month, but in January some improvement in the Bank's position should be shown. This week the return of the Bank must necessarily be prejudiced, in so far as the proportion of Cash to Liabilities is concerned, by the addition to the deposits which will result from the Govern- ment borrowing.
There is one direction, however, in which the market, and indeed general opinion, still rather inclines in the direction of pessimism. I refer to the insufficient heed given by the Government to the clamour for an immediate drastic reduction in national expenditure. When closely examined, the Premier's speech at Tuesday's gathering of the Federation of British Industries gives very little in the way of formal pledge, either as regards reduced expenditure or lower taxation, and you will have observed that the drastic policy of rationing the departments commended in Your leading article some time since is now receiving much attention in many quarters. The City, at all events, is quite convinced that there can be no permanent improve- ment in the situation until there is real economy in the outgoings of the Exchequer.—I am, Sir, yours faithfully,
The City, December 1st.
ONLOOKER,
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