Tape Reading and Market Tactics

Humphrey B. Neill

• Publisher: Golden Springs Publishing
• Year: 2016
• eBook ISBN: 9781787201378
• Topic: Economics
• Subtopic: Investments & Securities
• Index: Economics

In this 1931 Wall Street classic, author and noted economist Humphrey B. Neill explains not only how to read the tape, but also how to figure out what's going on behind the numbers.
Illustrated throughout with graphs and charts, this book contains excellent sections on human nature and speculation and remains a classic text in the field today.

PART ONE—STOCK SPECULATION

I—STOCK SPECULATION

BEFORE we launch into our study proper, let us first review our ABC’s.

What is the stock market? It is simply a market-place for the exchange of certificates for money, or money for certificates. In the world of securities speculation, stock certificates hold the same place as, say, cloaks and suits do in the cloak-and-suit trade: they are merchandise, to be bought and sold for profit. Whereas the cloak-and-suit manufacturer buys cloth from which he makes his merchandise, the financial “manufacturer” (called “underwriter” or “banker”) seeks situations for which he may manufacture stock certificates. Many plans of refinancing have been initiated by the financial community when their shelves have been bare of merchandise. They must sell stocks or they cannot earn profits.

In addition to the manufacturers, there are others who do no underwriting, but act solely as distributors of stocks; and others still who limit their business to buying and selling for their own purposes.

When common stocks possess certain qualifications, their listing is permitted upon the New York Stock Exchange. In addition, there are thousands of issues listed upon the other exchanges. I shall devote the discussions in this book to the New York Stock Exchange, although the principles will hold good in nearly all speculative situations.

Who make the purchases and sales of stocks so listed? Let me group them roughly into three divisions:—

1. Investors, seeking income.

Institutions (insurance companies, industrial corporations, trusts, etc.).

Banks’ investment affiliates.

Investment trusts (those which actually invest).

2. Business-men speculators, brokerage-office traders, and the other thousands of amateurs who trade in the hope of making easy money; also, trading trusts and corporations.

3. Professional operators, stock exchange floor-traders, pools, investment bankers, and other intelligent speculators.

We shall here be concerned chiefly with Groups Two and Three, the speculators; for Group One, the investors, could not possibly buy a fraction of the stocks which are exchanged in one day alone. For instance, during an active day’s trading 150,000 shares of United States Steel common stock may be exchanged: at an average price of $200 per share, this by itself would total $30,000,000. In order to give some idea of the magnitude of the value of the stocks listed on the New York Stock Exchange, I shall remind you that by November, 1930, nearly forty billions of dollars had been sheared from their value as represented by the prices at which those stocks had been selling only a little more than a year previous.

I am emphasizing this because, if we are to appreciate the important place speculation holds in our present financial set-up, we must realize the gigantic task which the speculative element shoulders.

The United States Steel Corporation, as of September 30, 1930, reported that the holdings of their investors were 7,056,679 common shares, or 81.04 per cent of the total outstanding capitalization. This compares with investors’ holdings of 74.75 per cent on September 30, 1929, and shows an unusual gain during that year, no doubt due in large part to many marginal traders’ taking up their stock in full during and after the breaks.

As of September 30, 1930, there were 1,612,599 shares in the hands of brokers and speculators. This compares with 2,034,512 shares in 1929. In other words, assuming an average price of $150 per share and an average floating supply of around 2,000,000 shares, which was the average for the four years prior to 1930, you will note that the speculators and brokers alone carried some $300,000,000 worth of the common stock of United States Steel Corporation.

Many corporations pointed with pride to their increased numbers of stockholders during 1930. E. I. Du Pont de Nemours and Company, a conspicuous one among them, disclosed the interesting fact that the number of their stockholders had increased from 24,134 to 32,683, as of October 31, 1930. These stockholders held an average of 28 shares each. No indication was given, of course, that this increase also may have been caused, as in Steel and many another corporation, by large numbers of our Group Two who during the decline became involuntary investors.

How many of these involuntary investors will become speculators again when stock prices rise? I leave this problem to you to solve definitely. However, I am certain that thousands of people who say, today: “Never again; I’ll own my stocks outright after this,” will very shortly forget their depression-year resolutions and be back for more profits—or punishment.

The stock market is a great cauldron of the hopes, desires, and despairs of speculators, or traders. If it were not for the speculators, there would be no active stock market. If it were not for the speculators, America would not stand where she does, as the leading industrial country in the world. We may deplore speculation, but if it were not for this outpouring of money for stocks, you and I should not enjoy a fraction of the comforts and luxuries which we accept as necessities.

The speculators “carry the ball” until the goal is reached; that is to say, speculators keep stocks afloat until they sink into the strong-boxes of investors.

We all know that there is a constant battle being waged between the professionals of Group Three, and the amateurs of Group Two, otherwise known as “the public.”

The public is the customer to whom the professional trader or the financial manufacturer hopes to sell his product. As competition is the life of commerce, so is it the life of speculation. The speculatively-minded public hopes to make money by trading in stocks in a hit-or-miss manner, while the professional strives for his profits through engineering his maneuvers so scientifically that the public will take from him property which he has acquired at lower prices.

Unless we who make up the public have a thorough knowledge of why the professional exists and how he operates, we cannot hope to win in our engagements with him.

First, let us look into Group Three more closely and break it down, in order to differentiate between the various types. The investment banker (or any banking organization that underwrites, or purchases, stocks or bonds from one who needs capital) is the manufacturer and distributor. As we have seen, he is the same as a cloak-and-suit manufacturer, in that he must sell the goods he has fabricated before he can make his profit.

The stock-and-bond manufacturer may employ from time to time other distributors, high-pressure salesmanagers (pool-operators), and may appoint any number of agents to sell for him throughout the world. He often receives aid from stock brokers also, and from their legions of salesmen (customers’ men). The pool-operators accumulate stocks when, in their judgment, they are cheap, with the expectation of selling them to us, the public, later at higher prices.

Besides these members of the professional speculative element, there are the many important, individual traders, who buy and sell stocks for their own accounts, depending upon their own wits, skill, and judgment to make money out of their buying and selling operations; to say nothing of many other persons performing functions not immediately pertinent to our study. The ramifications of the manufacturing and distributive system for stocks and bonds are probably more intricate than those of any other commercial pursuit.

The professional may be called in as a specialist in any one of a number of situations. A manufacturer of bath-room fixtures may wish to raise capital with which to build a new plant, but before issuing more stock he calls upon the financial manufacturer. This specialist may advise him that before he actually issues the new stock it would be wise to arrange for a more active market in his present stock, for then he can sell his new stock at higher prices. Therefore, the plans are worked out similarly to the plans which would be carried out if the manufacturer were planning to market a new line of his own merchandise, bathroom fixtures.

The professional may be called in by a group of large stockholders of a given corporation who wish to sell their stock, but who realize that they cannot all offer their holdings for sale simultaneously without breaking the price of the stock. The professional will undertake to sell their stock for them to the public, and his agreement with the stockholders will be to obtain a given average price.

A number of professionals may bank together—form a pool—for the purpose of acquiring a quantity of a stock which they think may be marketed to the public at a higher price.

One company may wish to gain control of an-other company through open market acquisitions of the stock. It may need, for example, only 50,000 shares to gain a working-control. A professional may be called in to act as the purchasing agent. In this instance his tactics will be reversed. It will be his job to buy. cheaply, rather than to sell dearly. His tactics will be to depress the stock in price in order to persuade the public to sell.

There are any number of examples which I might give to demonstrate the reasons for the existence of the professional. The thought to bear in mind is that the business of the financial community is to sell stocks to the public. There is a purpose behind every operation by a professional: it may be simply an individual campaign for personal profit; or, it may be a well-conceived plan for the raising of capital for industry. As soon as we appreciate that the professional element looks upon us as customers, rather than as partners, we shall begin to perceive the task we face in attempting to make money by trading in stocks or, incidentally, even by investing in stocks.

Now let me turn back a moment in order that we may see the methods by which a professional gains his ends.

Let us assume, for the sake of an example, that a number of us believe that the common stock of the Amalgamated Motor Car Company is cheap at prevailing prices. We are acquainted with the officials of the company, who tell us that their business is picking up, that certain things point to larger profits in the near future. They advise us further, confidentially, that the directors are planning a pleasant surprise for their stockholders, and expect to capitalize a portion of the huge surplus which has been built up; in other words, we learn that a stock dividend is pending.

Upon investigation, we find that there are only three large stockholders who would be likely to sell any quantity of stock; and with these we make arrangements whereby they give us options on their stock at prices considerably above the current market. We are now prepared to accumulate a line of stock, knowing that, because of these options, there will not be any large blocks offered for sale the moment the stock becomes active.

The officials of the company are interested in our plans, inasmuch as an active market for their company’s stock is favorable to their business and to their stockholders. They, therefore, are pleased to cooperate with us by keeping us posted as to operations, increasing profits, and other pertinent details.

We call in a professional who has had a successful career as a poolmanager, and retain him to act, first, as our purchasing agent and, second, as our salesmanager.

His first job will be to buy as cheaply as he can the amount of stock which we have decided to accumulate. He may do this by publishing conspicuously the statistics of the company’s earnings, which during the past six months have been poor. He may then sell a quantity of stock “short,” by which method he hopes to “bring out stock” from the public, thereby further depressing the price. Naturally, the time which he will select for this purchasing-program will be when the market as a whole is weak technically and when public sentiment is pessimistic.

We having accumulated the stock, the important campaign remains. Our salesmanager plans his advertising and publicity features. He releases information to the effect that business for the corporation is looking up. Statements from the president and treasurer are prearranged. Encouraging rumors are allowed to circulate. Financial statements are prepared for the press and for market-letter writers, brokers, and customers’ men. Everything is planned ahead.

The most persuasive sales-arguments, however, are rising prices for the stock. The principal medium used in this advertising plan is the ticker tape. In order to increase activity and interest, we may have to continue to buy stock for a while. Offerings from the rank and file of smaller traders will have to be absorbed; but they should not be large, and these sellers will return later as buyers when they see the stock gradually, but steadily, advance in price. If too much buying comes along our poolmanager may sell some stock in order to prevent a too rapid advance.

During all this time the various publicity stories are circulated. A widespread interest grows in the affairs of the corporation. People begin to ask their friends if they have noticed XYZ. Brokers receive inquiries. The advertising campaign is having its effect.

Still our salesmanager has not been able to sell a great amount of our stock. He has been forced to support the stock as traders have taken profits. Some speculators, noting the advance, have sold the stock short; and this selling is being absorbed all along; quite gladly, however, inasmuch as those who are selling short now become potential buyers, can be counted upon to add their purchase orders later when their aid is needed. In fact, our poolmanager has been happy to lend stock to the short sellers, and has engineered several reactionary maneuvers purposely to invite short selling. (Occasionally pools themselves sell short against balance, if they find it necessary to do so in order to control the market-action of their stock.)

As the public becomes more and more interested in our merchandise, the salesmanager’s job becomes more difficult. He has the professional element to deal with, as well, now, which is more difficult to outsmart than are the members of Group Two.

Rumors now are allowed more circulation; the public is buying greedily, believing that an extra dividend, or a “melon” of some kind, is sure. The poolmanager begins selling stock in earnest; the increased activity causes faster rallies, and consequently more severe reaction...

Table of contents

• Title page
• TABLE OF CONTENTS
• DEDICATION
• BOOKS BY THE SAME AUTHOR
• PREFACE
• LIST OF FIGURE AND CHARTS
• PART ONE-STOCK SPECULATION
• PART TWO-TAPE READING
• PART THREE-MARKET PHILOSOPHY
• REQUEST FROM THE PUBLISHER