Document r92X8rJL2p01LbZjomq3qNrv

ir`tM STOCK ANALYSIS By Heinz H. Biel No Bed Of Roses By now we have digested the mul titude of economic forecasts for 1970. As usual, they varied a great deal, and the end result is confusing rather than enlightening. However, whether we have a major recession or continuing inflation, or a combination of both; whether we experience a financial cri sis or an easing of credit policies, one thing is sure: This is not likely to be a year when the investor can delude himself and expect to rest on a bed of roses. It is pretty obvious by now that the American economy has stopped boom ing. Residential construction, except for mobile homes, is in a real slump. Color TV sets don't sell. Automobile production and sales are running well below earlier projections. Retail sales are flat, at best. A growing number of the economists' "leading indicators" have turned negative. Yet there is no sign of a letup in inflation. Prices continue to rise, especially the cost-ofliving index, which includes "services" and such items as urban transporta tion costs (like the 50% increase in New York City transit fares). Strangely, despite the slowdown in business, which is the intended result of the Federal Reserve's anti-inflation ary monetary policies, the rate of un employment has remained at a low level. While no one wants to see the human misery that goes hand in hand with joblessness, the side effects of near-full employment are the exces sive demands of certain labor unions for huge increases in wage rates and fringe benefits. A financially strong giant like General Electric can afford to put its foot down and accept a three-month strike rather than sub mit to unreasonable wage hikes. But what can the smaller entrepreneur do when confronted by the overwhelming strength of the Teamsters? It is unrealistic to expect that the cost-push type of inflation, fueled by sharply rising labor costs, can be con trolled, or even alleviated, merely through restricting credit, unless we are prepared to provoke a depression of such magnitude that massive unem ployment will break the power of the labor unions. Obviously for politi cal, social and economic reasons, this Mr, Biel is a partner in the New York Stock Ex change firm of Emanuel, Oeetjen & Co. is completely out of the question. Since our fiscal policies, as reflected in the new tax bill, also are not anti inflationary, particularly, too, because of steadily increasing expenditures by the states and municipalities, we had better have no illusions and be pre pared for continuing inflation close to the present pace of around 6% a year. This also means that interest rates will not, cannot, decline appreciably, since the lender will always demand a fair return plus compensation for inflation. Investors' Choice The stock market has been grap pling with these problems all through 1969 and may have adjusted itself to present realities such as high interest rates and a profit squeeze for cyclical and labor-intensive industries. Wheth er the adjustment is adequate is an other question, but the market itself seems to say that it is. While a great many individual stocks are still mak ing new lows, the most broadly based averages, like the NYSE index and the S&P industrials, seem to find strong support near the lows of last summer. This is a hopeful sign and the bottoming-out process may be nearing completion. The lure of exceptionally high in terest rates is continuing, of course. Brokers report an unusual amount of bond buying by small investors, but this is probably savings-bank money rather than funds which normally would flow into common stocks. Large investors, whether they be individuals or institutions, undoubtedly have large sums of money sitting on the side lines, but they invest mostly on a short-term and highly liquid basis, just waiting for the right moment to jump back into the market. The temptation to settle for a se cure, high yield is great, particularly when one has qualms about the stockmarket outlook. Yet as soon as a de gree of confidence returns, the attrac tion of the stock market can become difficult to resist. A safe yield of 8% or 10% a year quickly loses its appeal when you can see a chance of mak ing 20% or more in stocks. There are virtually hundreds of deeply de pressed stocks that may have little to commend themselves at the moment but will snap back vigorously as soon as the investment climate improves. The near-term outlook for a company like Chrysler is uninspiring right now, but 1970 is not the end of everything. It requires little imagination and not much of a bull market to visualize Chrysler selling at 40 (its 1968 high was 72S!) or 20% above its current market price. There is no apparent reason for being or getting bullish at this time, but neither is there cause for increas ing pessimism. What was so bearish for the stock market a year ago was the severely restrictive monetary pol icy of the Federal Reserve, designed to combat inflation. This restrictive ness has its limits. To go beyond such limits and to prolong it unduly can have serious consequences. This opin ion is expressed by a growing number of prominent economists, a few mem bers of the Federal Reserve Board and several members of President Nixon's Cabinet. It is not unrealistic, there fore, to conclude that as far as credit conditions are concerned we have seen the worst. Only the timing and the degree of easing remain in doubt. The stock market, which has already shown how sensitive it is to changes in credit conditions, is likely to re spond promptly to any visible indica tion that the Federal Reserve Board is easing up. The entire country has been aroused by the growing pollution of the air we breathe and the filth in our rivers and lakes. The stock of any company involved in pollution control has skyrocketed, often to levels that seem utterly unsupportahle_hy_actual factg^and-figuies aiid ljy -realistic sibnities. My choice in this group is Joy Manufacturing. This stock, too, ~~ has had-a sharp~gdvance, but even itspresent price is not unreasonable in relation to S&P's earnings forecast for the current fiscal year of $2.80 a share vs. $2.55 for last year. Joy's prin cipal business is specialized coal-min ing machinery, and recent legislation for the protection of the miners should benefit this company. Pollution-control devices account for unly a very small part of' West inghouse Electric's sales. If this com pany can escape the kind of strike that has been crippling GE since last October, Westinghouse should have a pretty good year, with earnings hold ing close to the estimated $3.75 a share for 1969. In fact, if the economy should improve during the second half, profits could approach the $4 level, a record. The division manufac turing heavy apparatus for Yhejitility jndncq-y should h working at rapanl tvfer'Some years to come. Atapric* the 50s, Westinghouse Electric is a olid investment. 60 FORBES, FEBRUARY 1, 1970 DSW 552173 STLCOPCB4090590