Part 8

Common stocks of railroads only were considered. Few Industrials have reached their tenth birthday, and aside from this, their introduction would make a false showing by increasing the dividend rate with no corresponding increase in the selling price of the stock.

The twenty stocks chosen for amalgamation were as follows:

Atchison, Topeka & Santa Fe, Baltimore and Ohio, Canadian Pacific, Canada Southern, Chesapeake & Ohio, Chicago & Great Western, Chicago, Milwaukee & St. Paul, Chicago & Northwestern, Chicago, St. Paul, Minneapolis & Omaha, Erie, Illinois Central, Louisville & Nashville, Missouri Pacific, New York Central & Hudson River RR., Pennsylvania, Reading, Southern Pacific, Southern Railway, Union Pacific, and Wabash RR.

PRICES OF COMPOSITE BY YEARS FROM 1896 TO 1906, INCLUSIVE.

Year High Average Low Fluctuation 1896 44 37½ 31 13 1897 53¼ 43⅞ 34½ 18¾ 1898 62½ 53¼ 44 18½ 1899 72½ 64¼ 56 16½ 1900 80½ 70½ 60⅜ 20⅛ 1901 106½ 89⅞ 73¼ 33¼ 1902 119¼ 105½ 91⅝ 27⅝ 1903 106½ 89⅞ 73¼ 33¼ 1904 105½ 91 76½ 29 1905 122¾ 109⅝ 96½ 26¼ 1906 125¾ 111⅞ 98⅛ 27⅝

Fractions were necessarily omitted from the totals employed in charting the movements. They are, however, unimportant. Dividends on Composite Common were as follows:

1896 1⅖ % 1897 1½ % 1898 1⅝ % 1899 1⁹/₁₀ % 1900 2½ % 1901 3 % 1902 3½ % 1903 3⅜ % 1904 3⁷/₁₀ % 1905 3⅞ % 1906 4¾ %

[Illustration: FLUCTUATIONS OF STOCKS FOR TEN YEARS.

(The rims of the circles touch the average high and low points of 20 railroad stocks, each year for 10 years.)

Reproduced, by permission, from MOODY’S MAGAZINE of August, 1906.]

It has been the frequent contention of the writer that a chart as a basis for speculative ventures is ridiculous, but a diagram framed for the purpose of pointing out certain facts, or inciting the student of speculative affairs to investigation of causes is a different matter. No interested person can look at the accompanying chart without being struck at once with the decline of 1903 following the steady advance of the preceding years. If this observation incites intelligent investigations as to the reasons for the reversal, much good may result. On the other hand, the fallacy of operating on mere mechanical records of the past is shown by the same diagram. If the chart had been handed to one of the mechanical traders in 1902 he would have argued that the average price of each year marked the approximate low point of each succeeding year. It certainly does look convincing, but what follows? The infallible system not only fails to work, but reverses itself, and the average price of 1902 becomes the approximate high price of 1903 and 1904. At about the time the system player has gathered enough figures to go on, a change occurs. No intrinsic merit attaches to any kind of diagram, they being merely convenient forms for tabulating history.

Some interesting coincidences occur in the chart; most remarkable is the exactly similar size and position of the circles representing the years 1901 and 1903. In no instance did the high or low points of any integral stock correspond in these years, but the total footings were identical in each case.

The speculator may extract some value from the diagram by observing that opportunities for profits of forty or fifty points did not occur during the entire period. The extreme possibilities in any one year were 33 points, and much less on the average. If the trader had purchased or sold Composite at an average price, his possibilities of profit would have been limited to about 15 points in any one year. This does not accord with accepted theories. The ordinary speculator who pursues his operations for ten or fifteen points successfully is almost certain to believe that much more profit lies before him, that he is only getting started. There is a reason for this; the public trader takes for his barometer some security which has been conspicuous for its extended fluctuations; he naturally notices and remembers it to the exclusion of the rank and file of stocks. For example, every active participant in speculative affairs knows that Copper had a range of 75 points in a single year, 1901. He bases possibilities too much on this sort of knowledge without reflecting that Copper was a cardinal exception, and that in order to participate in such movements he must throw caution to the winds, and deal in stocks which offer no degree of safety.

Another point established is the lapse of time required in a readjustment of values. It took Composite Common seven years to advance from an average price of 37 to an average price of 105, 68 points. This again falls short of the speculator’s ideas. He expects to buy a stock at 50 today, and sell it at par six months hence, an operation which is shown by the movements of a representative stock to require a period of six years. Again his expectations are founded on exceptions. The same line of reasoning applies to one case as to the other. The speculator unconsciously magnifies everything connected with speculation.

In reviewing the movements of prices from 1896 to 1905, the most important question is, what caused the reversal of form in 1903? A complete answer to this question would be highly educational. There was no panic, nothing faintly resembling one; business suffered some stagnation, it is true; there was a falling off in the iron and steel business, but crops were good, and wheat, corn, oats, and cotton brought good prices in both 1903 and 1904. Serious business depression was more in anticipation than in realization, but 1904 witnessed no material recovery in prices. These causes do not fully explain so radical a change. If conditions had been such as to cause a reduction of dividends, or a scarcity of money in 1903, the decline would be explained, but money was plentiful enough, and dividends were unchanged. The ratio of dividends as compared with prices was also fairly maintained from 1896 to 1902, and it would appear that prices should merely stop advancing when dividends became stationary; but prices did not merely stand still, they went materially backward.

Without pretending to enter into a full discussion of the causes for the change, one or two points may assist in forming a conclusion. The steady advance in prices from 1896 to 1902 represented two things--a recovery from the great depression of 1893, and the natural advances of property values in a prosperous and growing country. The latter point is the more important, and as there has been no cessation of the growth of population or prosperity, other causes for the reversion must be sought. It is not sufficient to merely say that the recovery over-leaped itself, for such an event would have plainly mirrored itself in a reduction in the rate of dividend returns.

Capitalization of railroads in 1903 increased about 14% as compared with an average increase of 6% in the preceding seven years. Add to this the tremendous increase in the capitalization of industrial corporations, and an over-supply of stocks appears as one of the contributary causes--undigested securities.

Dividend rates were maintained, but were not increased. This particularly affects the simon pure speculator. Nothing will drive him into a panic quicker than a decreased dividend, and nothing makes him so sanguine of higher prices as an increase in the rate of payment. He is always basing his operations on rumors of higher dividends, and when one of these rumors fails of verification, it is almost as bad as a decrease.

And dividends did decrease in one important quarter; United States Steel, the speculative favorite, capitalized more heavily than a dozen ordinary corporations, cut its rate from 4 to 3½%, with every promise of a further reduction. This had a far reaching effect, both on speculators and small investors.

It is certain that fundamental conditions have more to do in shaping prices than has speculation, but the speculator helps, and in 1903 he was particularly potent because of the excesses engendered by the unusual speculative advances of 1901 and 1902. He helped to make the prices and he helped to break them, so he may be considered a factor in the reversal.

The small investor helped. He, too, is a dividend man; he seldom looks at earnings, improvements, or extensions--he wants dividends. United States Steel was a body blow to him; it not only affected his purse, but it frightened him.

And it is probable that an army of small investors sold their holdings for another reason--they discovered that they could make a higher rate of income in other channels. So long as both dividends and prices advanced they were satisfied. They were speculating, not investing, but you cannot convince the ordinary man that buying a stock outright, in the hope of an advance in price, is speculation pure and simple.

Much of the money diverted from the stock market in 1903 by the class last mentioned, has never returned to Wall Street. This bears out the theory that higher rates of interest are being found elsewhere. Never before has the public refused to enter the stock market during a period of great prosperity. They are absent now, and furthermore, they show no intention of returning. Possibly they are wrong. The same influences which are operating to give them better returns may be operating to greatly enhance the value of the shares they ignore,--but the small investors want dividends. Their failure to enter the stock market would seem to be strong evidence that they are finding other investment-speculations more attractive than listed shares. If this is the case, the influences leading to higher interest rates are already at work, although not clearly discernible. Diversification of investments would tend to obscure the truth for a time.

But whatever the causes for the stock market relapse of 1903 may have been, the recovery has been complete. The average prices of 1906 were the highest on record.

_Cycles of Grain Speculation._[5]

In examining the price movements of wheat and corn for the last ten years, a gradually advancing trend is apparent. That such would be the case was a foregone conclusion; we naturally expect to find wheat and corn in the foremost ranks of a universal movement towards higher prices. The underlying causes for this general appreciation have already been extensively and clearly discussed in Moody’s Magazine.

[5] Reprinted from MOODY’S MAGAZINE of May, 1906.

_All Prices Advancing._

The price appreciation of wheat and corn is merely confirmatory of the theory that all prices are advancing, and that they will continue to advance until the balance between gold and other commodities is readjusted.

But there is something else written between the lines of the statistics of price changes in wheat and corn. The _relative_ advance of the two cereals is all out of proportion.

This fact leads us to seek for some specific cause operating either to depress one cereal or enhance the other, irrespective of the influence already named.

The figures for the last ten years are as follows:

WHEAT.

Year High Average Low 1896 94⅜ 73¹¹/₁₆ 53 1897 109 86⁹/₁₆ 64⅛ 1898 185 123½ 62 1899 79½ 71¾ 64 1900 87½ 74½ 61½ 1901 79½ 71⁵/₁₆ 63⅛ 1902 95 81¼ 67½ 1903 93 81¾ 70¼ 1904 122 101¹⁰/₁₆ 81¼ 1905 124 100¹⁵/₁₆ 77⅞ 1906 94¾ 81⅞ 69⅛

CORN.

Year High Average Low 1896 30⅝ 25¹/₁₆ 19½ 1897 32⅝ 27³/₁₆ 21¾ 1898 38 32 26 1899 38⅛ 34¹/₁₆ 30 1900 49½ 40 30½ 1901 67½ 51¾ 36 1902 88 65⅞ 43¾ 1903 53 47 41 1904 58⅛ 50⁷/₁₆ 42¾ 1905 64½ 53¼ 42 1906 54¾ 46¾ 39

The average price of wheat in the first year (1896) was 73 ¹¹/₁₆ in standard format, in the two following years very high prices were established, and the average may be considered abnormal, as the years 1897 and 1898 cover the rise and fall of Joseph Leiter.

[Illustration: FLUCTUATIONS OF WHEAT PRICES FOR TEN YEARS.

(The rims of the circles touch the high and low prices of wheat each year for 10 years.)

Reproduced, by permission, from MOODY’S MAGAZINE of August, 1906.]

To digress for a moment, it may be interesting to note that efforts to carry prices beyond reasonable limits almost invariably result in disaster to the promoters, no matter how far they may be successful in establishing black-board quotations. With the exception of “Old Hutch” wheat corner in 1888, all the numerous attempts to speculate successfully on wholly artificial prices in commodities, have failed. The Sully cotton campaign, the Leiter wheat deal, the Phillips corn deal, the Coster-Martin corn deal, all ended in ruin for their sponsors.

From 1899 to 1901 inclusive, the average price of wheat was a little above 70 cents, in 1902 and 1903 it rose to 80 cents, and in 1904 and 1905 to $1.00.

In the latter years, allowance must again be made for unusual influences, the Russo-Japanese war naturally helping wheat prices; making due allowance for this, it may be fairly considered that wheat has in the last ten years increased its average selling price from about 70 cents to 90 cents, or approximately 30%.

_Why Corn Has Risen More Than Wheat._

Corn prices in the same period have advanced 100%; the comparatively large number of uses to which corn is put may partly account for the disproportionate enhancement of its price, but the discrepancy is too great to be entirely explained away on this account. It is necessary to seek some additional and more powerful reason.

[Illustration: FLUCTUATIONS OF CORN PRICES FOR TEN YEARS.

(The rims of the circles touch the high and low prices of corn each year for 10 years.)

Reproduced, by permission, from MOODY’S MAGAZINE of May, 1906.]

The following statistical facts will make it clear that corn and wheat are in wholly different positions.

The United States raised, in 1905, 693,000,000 bushels of wheat. The world’s wheat crop in the same year was 3,275,200,000 bushels. Therefore, we raised approximately 21% of the world’s wheat crop. The year 1905 is fairly indicative of the proportions for the last ten years.

The acreage of wheat in the United States in 1896 was 43,618,646; in 1905 it was 47,854,079, an increase of 38%.

The world’s wheat acreage as indicated by production, is increasing at about the same rate as is the acreage of the United States.

The United States raised, in 1905, 2,708,000,000 bushels of corn. The world’s corn crop was 3,396,800,000; therefore, we raised 80% of the world’s corn.

The corn acreage of the United States in 1896 was 81,027,156; in 1905 it was 94,011,369, an increase of 16%. The world’s corn acreage, as shown by production, did not keep pace with our own ratio of increase, but remained almost stationary.

These figures show that the world is depending on the United States for only 21% of its wheat, and that wheat acreage the world over has increased about 38% in ten years; but the world is depending on the United States for 80% of its corn, and the world’s corn acreage has increased less than 16%.

In order to grasp the full significance of these figures, our practical monopoly of corn production must be appreciated. Even if we admit an equal ratio of increase in corn acreage the world over, it remains for the United States to provide 80% of the increase.

_Corn Area Limited._

The probability of any considerable area of new corn land being exploited, either at home or abroad, is very small. A recent circular letter by a man prominent in the cash corn trade, states that there is not an uncultivated acre of available corn land in the United States. This is a radical statement, and does not allow for the fact that with a sufficient price stimulus, considerable wheat, or even cotton land, would be diverted to corn. But whatever allowances are made for an increased corn production, it must be admitted that the possibilities are largely confined to the United States.

Wheat acreage is not thus circumscribed; in fact, the case is practically reversed; almost 80% of the natural increase in wheat production will come from outside our boundaries. Of the principal wheat producing countries,--France, Germany, Russia, Poland and Caucasus, Italy, Hungary, Spain, Roumania and Argentine Republic--the two first named alone fail to keep pace with the United States in ratio of increased production, and others have made up the deficit of these two laggards.

In a nutshell, the difference between the relative positions of wheat and corn is this: The world’s supply of wheat will be furnished by the world, while the world’s supply of corn must be furnished by the United States.

It appears, therefore, that while wheat and corn may both be expected to gradually seek a higher average price in sympathy with the general upward trend, corn is affected by a specific influence, the effects of which must be added to the homogeneous advance.

It is not possible that the supply of corn should increase as rapidly as the demand, under the circumscribed conditions herein set forth. As has already been suggested, the price of corn may become attractive enough to cause the diversion of wheat and cotton lands to corn growing. The possibilities of such a course, however, are not only limited by nature, but such action would stop itself at a certain point by decreasing the supply of wheat or cotton, and again restoring them to favor with the planter.

The speculator may, therefore, reasonably believe that corn is destined, eventually, to reach much higher prices. He must, of course, allow for the temporary influences of large and small crops, and the numerous other actual and technical conditions which cause intermediate fluctuations, and must furthermore bear steadily in mind the fact that there is a limit beyond which the price of corn can never be sustained.

When a given commodity goes beyond a price where it can be replaced by another commodity, it has gone too far; and when necessities become luxuries, they take their places as such, and demand slackens.

[Illustration: FLUCTUATIONS OF COTTON PRICES FOR TEN YEARS.

(The rims of the circles touch the average high and low price of cotton each year for 10 years.)

Reproduced, by permission, from MOODY’S MAGAZINE of June, 1906.]

_Cycles of Cotton Speculation._[6]

The accompanying chart, formed on the same plan as the diagram illustrating the movements of stocks in Moody’s Magazine for May, develops some interesting features in the movements of Cotton for the last ten years.

[6] Reprinted from MOODY’S MAGAZINE of June, 1906.

For the benefit of those readers who did not follow the stock chart, it may be said that each circle represents the fluctuations for a single year. The bottom rim of the circle rests on the lowest price during the period, and the top rim on the highest price. The average price is, of course, established at the axis.

The chart illustrates speculative extremes in cotton, the figures on which it is based are not the prices of Spot cotton, but extreme high or low prices for all options. The result, however, would have been only slightly changed had Spot cotton prices been employed.

The diagram is based on fluctuations of 25 points, or ¼ cent per pound; the prices shown, therefore, are not exact, but they serve to illustrate comparative movements with sufficient accuracy. The high and low figures are not those of a calendar year, but of a fiscal, or crop year, ending August 31 of the years named; thus the prices for 1896 represent the fluctuations of the season 1896-1897. As production is necessarily a vital factor in making prices, this method was adopted to prevent confusion in examining the price effects of lean or abundant production. The range of prices for the period considered (1896 to 1906 inclusive), was as follows:

Season High Average Low Fluctuation 1896-97 8.50 7.59 6.69 1.81 1897-98 7.50 6.50 5.62 1.88 1898-99 6.73 5.84 4.96 1.77 1899-00 10.00 8.38 6.76 3.24 1900-01 10.60 8.80 7.01 3.59 1901-02 9.67 8.51 7.35 2.32 1902-03 13.75 10.81 7.87 5.88 1903-04 17.46 13.23 9.01 8.45 1904-05 11.15 8.77 6.39 4.76 1905-06 12.54 10.93 9.32 3.22 1906-07 11.30 9.95 8.60 2.70

In the first three years considered we find low prices, and naturally restricted speculation. The speculative price range for the entire three year period is only a shade more than 3½ cents per pound. This was occasioned by two things; first, the general depression following the panic of 1893, and second, over-production. An examination of the prices of staples shows that unusually low figures prevailed in 1898 and 1899. Corn, for example, averaged 27 cents in 1897, and 31½ cents in 1898. Wheat shows high average prices, but the showing is a result of fictitious speculative figures established by the Leiter deal, and cannot be considered a fair criterion. It may be added, however, that wheat sold as low as 64 cents in 1897, and 62 cents in 1898.

The question of over-production will be made apparent by reference to the following table:

Season Crops in Bales 1896-97 8,714,000 1897-98 11,180,000 1898-99 11,235,000 1899-00 9,439,000 1900-01 10,425,000 1901-02 10,701,000 1902-03 10,758,000 1903-04 10,123,000 1904-05 13,556,000 1905-06 10,697,000 1906-07 13,000,000

Prior to 1897 no crop of over 10,000,000 bales had ever been made; the two bumper crops, 1897-98 and 1898-99 coming together, naturally brought about very low prices, particularly as they occurred in a period of general depression.

In the season next following, 1899-1900, there is a marked falling off in production, which is again reflected in a higher average price. But from that time on, we do not find prices and production in such perfect accord.

It is generally considered now that 10,500,000 bales is a fair crop. In the four seasons from 1900-01 to 1903-04 inclusive, we raised normal crops, while prices advanced. It would be manifestly unfair to consider the year 1903-04 as reflecting with any degree of accuracy the normal price of cotton, for in that period occurred the disastrous Sully campaign. Making due allowance for this, however, it may be assumed that prices would have advanced if no such deal had occurred. This statement is supported by the fact that the bursting of the bubble did not put prices below 9 cents at any time.

Now the most important part of the period is reached, the seasons of 1904-05 and 1905-06.

In 1904-05, in the face of an unprecedented crop of 13,600,000 bales, and in spite of the depressing influence of a speculative debauch in the previous year, the average price of cotton was 8¾ cents.

Still later, in 1905-06, a crop only a little below normal was raised and sold at an average price of 10.93.

Eliminating speculative extremes, and the temporary effects of large or small crops, it appears that the price of cotton is steadily advancing. This is the principal fact for the speculator to consider.

No one pretends to dispute the fact that the prices of all staple-food stuffs, metals and other commodities, as well as labor, have advanced materially in the last ten years. Yet the ordinary speculator ignores this broad general principle, and seeks specific causes for the readjustment in cotton prices. And even this research is seldom conducted intelligently. The investigator attempts to explain higher cotton prices by pointing to reduction of acreage, diversification of crops and organizations formed for the purpose of withholding supplies from the market. He disregards the fact that while these influences play some small part in the matter, cotton is also seeking a higher level in common with every commodity that is bought and sold.