Readjustment Problems Are Being Faced Without Fear
BUSINESS & INVESTMENTS
WHAT is the tale the ticker tells? Those who watch it from time to time in the brokers’ offices know that occasionally it seems to stutter when there is nothing doing, and it heats a sort of tattoo until the next sale comes over the wire. Applying the simile, it may he said that the ticker is now engaged in a stutter which has lasted several weeks and the meaning of which is not yet clear to the listeners. All they know is that the ticker is trying to make up its mind about something, and that is the future course of business, which cannot yet be foreseen with any certainty. It is said that the ticker never lies, and that, as soon as conditions clear, it forecasts the future events six months or more ahead.
Therefore, the inference is that, while stuttering continues, developments in business and finance are of an indecisive character, and that we may not enter upon the definite recovery desired and expected for some time to come. The January rally in Canadian stocks was practically an annual affair, which comes after the distribution of large sums in interest and dividends at the beginning of the year, and reflects something of the new hope that comes with the turn of the calendar. A few market observers were deluded in .January, 1921, by the belief that the spring upturn, which most people expected, had arrived ahead of time. The flurry was not of long duration, and trading since then has had the usual dayto-day changes which mark periods of dullness between the big swings.
A reading of the ticker’s hesitation would seem to imply that important further changes must come before the country gets its stride and moves ahead in a consistent manner. There has been a steady but slow improvement in many lines of business. Retailers have felt the change, as buyers cannot indefinitely stay out of the market. There has been an improvement in wholesale trade, though retailers are buying cautiously. More industries are opening their doors after some weeks of shut-down, which has been used to repair plants, but often to adjust wages. Lumbermen report more inquiries and some of their lines have stiffened in price. Greater activity in the motor industry is bringing back employment and hopefulness to several small cities in which these industries have centered. Prices in a number of commodities have fallen too low, and with the recent return of demand there has been already a tendency to advance quotations.
How Law of Demand Works
THIS is one of the puzzling features of the present situation, and yet not unexpected by those who counselled against the continuance of the buyers’ strike. If consumers refused to buy because prices were excessive, they brought prices down, and now, when they re-enter the market, their very demand brings back in part the conditions to which they first objected. One cause of this is the fact that production dropped below normal when the consumer stopped buying. Now when he resumes he does not take long to create a scarcity.
How we are to get back to healthy conditions under such touch-and-go movement is one of the mysteries of economics. There is no doubt that price levels must still undergo many changes. Food costs have been reduced materially, and so have some commodities, but the consumer
knows that his list, taken as a whole, is not down to the level it should reach. Nor is It clear how this is to be brought about. It would seem that the gulf between the retailer and the consumer is still the principal obstacle. It is poor consolation that shoes are still little below the peak in price, while hides are a drug on the market and leather considerably reduced. Take, for instance, the case of woollens. Canadian clothing makers appear to have been stampeded into buying high-priced woollens last year on the representation of sellers that prices would be still higher this year. Now the tailors hesitate to sell their clothing at a loss after paying such figures for their raw material.
The last big struggle in readjustment will be on wages. Reductions of 10 to 20 per cent, have been numerous, but the reduction in living costs has yet to become more convincing, and then the real struggle will come with some of the more powerful unions. .A central incident will be the relations with the railroad brotherhoods, which is already a matter of much discussion in the United States. It is claimed that the very large increases granted to railroad employees when the American roads were under Government control is now operatingseriously to prevent railroad traffic, both passenger and freight, and is putting an excessive burden on commerce. Just as Canada inherited the increases from the action of the United States, it is expected that when the decreases come the change will be immediately made on this side.
Paper Stock Declines VtyHILE followers of the stock market r r have naturally been most concerned over the serious declines in some of the paper stocks, the matter is really of wider interest, because of the question it raises as to conditions of what has become an important basic industry of the country. In olden days politicians were wont to address the agriculturist as “the backbone of the country,” but nowadays they would have to qualify that flattery and imply something for the importance of the hardy men who enter the woods, cut down the spruce trees, drive the logs to the paper mills, and then ship more than $100,000,000 worth each year to other countries, to help meet our foreign debt and pay for the heavy imports needed by this country.
When, therefore, such companies as Brompton and Abitibi fell rapidly in the estimation of the stock market recently, there were questions as to whether there was anything fundamentally wrong with the industry. Mainly, however, the action was probably a revulsion from the hysterical speculation which proceeded in paper stocks during the greater part of 1920. That speculation was based on several reasonable conditions, but it far exceeded justifiable bounds, both on the part of the traders and some of the paper manufacturers and financiers.
Within the past few months heavy extensions of plant have been made on the supposition that the demand for paper would continue at the previous high level, and probably also in the belief that paper prices would suffer no reduction. Both expectations have been proved unfounded. Depression in business led to decreased advertising, and, therefore, lowered consumption of newsprint and other papers, and with that depression came, slow as it was, a reduction in newsprint prices recent-
ly announced. It was not reasonable to expect that paper-making could escape the revulsion which was shaking other industries through declines in demand and declines in prices. Canada too occupies a unique position as a producer of paper, being now the largest external source of supply for the United States, the greatest consumer of paper in the world, but, as in the case of sugar, leather, copper and other commodities, the peak had to be passed and a period of over-production approached if not reached.
Contributing causes to the slump in paper stocks were the series of new financing arrangements of the past few weeks. Abitibi has placed a $4,000,000 bond ssue in the United States; Howard Smith Paper Mills has a $1,000,000 issue for the market, while several other companies are known to need money to pay for important and costly extensions. Within the past two months, in fact, a few Canadian paper companies have entered the market for $21,000,000 new money, and several more millions are yet to be sought. The unfortunate part is that these borrowings are necessary to pay for extensions made at high cost just after half a dozen or more companies have split up their stock at the rate of from 2 to 5 shares for one, necessitating higher dividend appropriations and they now face a declining market for their commodity. This eagerness to cut “melons” has prevented some of the companies from setting aside earnings to pay for extensions, which more conservative financing would have suggested.
Fortunately, the present outlook for newsprint prices is that perhaps for the greater part, if not all, of 1921 the paper companies will be in receipt of a price still higher than the average in 1920. The statement of the Howard Smith Paper Company recently published is an indication of healthy revenue conditions for last year, net profits having been $1,089,898, compared with $704,261. President Howard Smith said business had slackened since the first of the present year, but, as there was no surplus of paper under normal conditions in the world, the directors of the company anticipated a lively demand in the near future.
Melon-Cutting Days are O'er
JUST here it may be worth recalling the
changes made in leading Canadian paper companies in the direction of “melon-cutting.” These took place at different times during 1920, and, while they brought fat returns to stockholders and boomed the market quotations of the shares to undreamed-of levels, it would seem that the reaction has now set in, and it is feared that some of the dividends are in danger of reduction or suspension. The changes made by the various large companies were as follows:
Abitibi—5 for 1—April, 1920. Brompton—2 for 1—July, 1920. Howard Smith—No change. Laurentide—3 for 1—January, 1920. Price Bros—5 for 1—October, 1920. Provincial Paper—3 for 2—April, 1920. Riordon—Action still pending. Spanish River—No change. Wayagamack—2 fori—December, 1920.
Up the hill and down again seems to be the course of Canadian industry, as it finds its level once more after the buoyant days of the war boom. Annual reports are beginning to tell the story of the depression which set in late in 1920 and reduced profits for the calendar year, and which will affect returns for 1921. The war did much for Canadian industrial development, and it remains to be seen how safely the financing of the prosperous period was conducted with a view to the return of less profitable times. Bankers say that a great many companies laid aside enough profits when they were doing well to see them safely over the period of reduced inventories which is now upon us. Those who were wise enough to take that course need have little fear for the next few months, but others, like so many
individuals, lived but for the time, and now regret their rashness. They are apt to make their employees suffer unnecessarily for the lack of foresight on their own side. The best of companies are almost bound to make a poor showing this year compared with recent records, and examples already seen in annual reports will prepare the public for somewhat monotonous revelations of this character for months to come. A well-informed banker gives the opinion that most of the companies will come out pretty well on the year’s operations, compared with an average over a long period, as the majority of them have been careful in setting aside profits to meet the time when they had to write down inventory.
Some Concrete Facts A FEW examples will illustrate the -r*condition of large industries. Canada Cement Company, which operated at a disadvantage last year from lack of coal, reports net earnings of $2,362,742, hut the company had to draw $525,887 from surplus in order that the common dividend be maintained. The draft on surplus for the same purpose in the preceding year was $241,666. It will be remembered that Cement was generously capitalized at the time of its organization, but the claim was made not long ago that high earnings had resulted in much of the water being squeezed out. Woods Manufacturing Company had an operating deficit of $412,000 last year. Canada Foundries & Forgings, which underwent a severe reorganization in its directorate at the recent annual meeting at Brockville, had net income of $117,475, compared with $242,062 in 1919, and $612,117 two years ago. Bell Telephone Company, which is still awaiting on its application for increased rates, had earnings of $881,522, compared with $2,153,324 and had to draw $1,800,010 from previous surplus to maintain its dividend. Canada Steamships, as well as Canada Foundries & Forgings, has had to pass its dividend on common, and it may be expected that there will be other dividend suspensions until business picks up. How far a company is justified in maintaining dividends not earned by drawing on previous surplus may be a legitimate question for debate by advocates of the respective causes of the shareholder and the consumer.
As already stated, the war period did much for the financial position of many Canadian industries. A survey of their record usually shows steadily mounting earnings on their stocks from the beginning of the war to 1917 or 1918, after which the percentage falls off, and its future course is a matter that no one can foretell with certainty. In this connection the following table is of interest, showing the indicated earnings on a few representative large Canadian industrials during the past few years:
1915 1917 1918 1919 1920 Abitibi .......... 5.42 8.82 16.03 ..... Brompton......... 9.57 9.10 9.82 ..... Can. Cement.. 4.09 12.56 7.86 5.68 3.1 Asbestos .......... 9.45 18.73 22.93 ..... Can. Gen. Elec. 7.83 12.42 16.21 11.92 ..... Can. Loco........ 26.31 24.15 34.89 8.65 Dorn. Steel . 0.70 26.70 25.42 17.04 6.75 Dorn. Textile . 7.73 15.56 21.96 53.20 22.08 N.S. Steel . . 24.22 10.80 10.61 6.03 ..... Ogilvie ...... 55.18 48.75 72.61 59.70 32.76
A modified steel merger has been announced under the same name as the British Empire Steel Corporation which figured so prominently in financial discussion last year. The new concern is to include only three enterprises, Dominion Steel Corporation, Nova Scotia Steel & Coal Company and Halifax Shipyards, Limited. This omits Canada Steamship Lines and five other companies which were to have been included in the original plan. There seems to be a fair argument for the merging of the two steel companies because of the facts that their iron ore j bodies in Newfoundland and their coal J areas in Nova Scotia adjoin and obstruct [ one another to the disadvantage of profitable operations. The case for the inclusion of the shipyards is not so complete, j but it is said that Dominion Steel makes
plates for the Halifax yards, and that their relationship may be a close and profitable one, while good returns are made by the repair work in the yards, even though shipbuilding is at present at a low ebb. The former capitalization of $500,000,000 is to be retained though not all used.
THE difficult position in wrhich Canada finds itself when now forced to rely largely on its own financial resources for its various needs has scarcely been realised as yet. Previous to the war, Great Britain was the chief source for Canadian money, and supplied about two-thirds of the capital obtained each year by the sale of securities. That proportion steadily declined until it is now less than 1 per cent. Last year the United States stepped in, and furnished two-thirds of the total, and during the first few weeks of 1921 Wall Street was again a considerable factor in Canadian financing. Lately there has been such a heavy call on New York for loans for various foreign countries, as well as to meet the needs of the great railway systems of their own country now down-at-the-heels in equipment, that Canada has not found it advantageous to enter that market to any extent.
This set of conditions serves to emphasize the importance of such a question as Rural Credits now before the Ontario Legislature, and also under discussion in some of the other Provinces. The Ontario bill is designed to aid in the raising of money for the use of farmers on both short term and long term, through the organization of local associations for the former and a Provincial Board for the latter. The experience of Manitoba, where a Rural Credits plan has been in operation since 1917, has been the main inspiration for instituting the plan in Ontario. The first snag in Manitoba came in February, 1920,when the chartered banks declined to advance any mbre funds for the Rural Credits Society at less than 6Lé per cent. To meet this emergency, the Province opened a savings bank to receive deposits at 4 per cent, interest, and this is reported to have operated successfully. In Quebec, there is what is called the “Co-operative People’s Bank,” which has made a start in raising money for the benefit of farm loans, but the system is voluntary and has not yet become widely operative. In Saskatchewan, Hon. C. A. Dunning, Treasurer, recently pointed out that a Province like that, which is still in the pioneering stage, could not find sufficient money within its own boundaries to establish a short-term agricultural credit system, and operate it successfully. This was because at the time when the greatest demand for loans would be made, deposits would be their lowest ebb, as the main industry of the Province is seasonal in character.
Capital for Farmers
' I 'HIS, then, brings up the question as to how the necessary capital is to be raised to permit farmers to carry on their business, which requires more and more money as compared with early conditions. The proposal in Ontario for enlarged deposit-taking powers for loan companies has evoked warm discussion, but it crystallizes the real issue as to the methods that will be necessary if Canada is to finance its own way in the world. Already it has been hinted that important changes may be made when the Canadian Bank Act comes up for revision in 1923. It is just possible that banks, which have been restrained by the limits of their legislative authority from investing in real estate mortgages, may take some means of meeting the new conditions.
While the chartered banks have adopted a friendly attitude towards the Rural Credits bill in Ontario it is not likely that they are blind to the encroachment which may lie on their territory through the proposed extension of deposit-taking powers for loan companies. Canadian bankers, as a rule, have been men of vision and it is possible that they may
meet such an invasion of their territory by seeking the privilege of making loans on real estate. The complaint has been frequently made that Canadian banks favor business and industry to the disadvantage of agriculture, but if the real estate loan privilege were added they would overcome that objection, and probably gain in popularity. More people than ever are probably now feeling the importance of Canadian basic industries, among which agriculture is placed first, and, if this state of mind develops further, the premier financial institutions of the country will not be causing surprise if they take means of strengthening their positions iff relation to the agriculture of the country.
Tribute to Canada
BRANCH managers of Canadian banks are so prone to accept their guidance of customers in financial affairs as wholly a part of daily business routine that it will surprise many of them to find the New York Herald expressing commendation of the part Canadian bankers have taken in the Dominion’s readjustment. The Herald article speaks highly of conditions in Canada and indicates its belief that this excellent state is due to the fact more that Canadian farmers seized time by the forelock and sold “while the selling was good” than was the case in the United States.
This international tribute was directly aimed at Canadian bankers, for it was upon their urging that our agriculturists “got from under” with their crop. Appreciation coming from abroad is more than ever acceptable, for it was not easy to foresee conditions six months ahead and at the time the advice to liquidate was not a happy duty that head offices put upon the shoulders of the branch managers last September.
The early autumn urgings of Canadian bankers for the liquidation of bank loans was criticized rather widely at the time, but their action has been completely vindicated. Exchange created an advantage which financiers appreciated. Fuller realization of this is given to our Western farmers in the banking and business collapse in the State of North Dakota, where, as the result of wheat hoarding and frozen credits, 36 banks have been compelled to suspend and the farmers are loaded up with farm products the prices for which have continually slumped since the crop was garnered.
Turning Over the Crop
THIS year in Canada thé early-selling farmer got the price advantage. H. B. Shaw, general manager of the Union Bank, the only one of Canada’s banks with head office in Winnipeg, said at the recent annual meeting, “the handling of our crop to date has been on a much more rapid turnover basis than in ordinary years.”
This liquidation, the New York Herald avers, put money into circulation and prevented the development of a condition of frozen credits, such as has prevailed in the agricultural and many other areas of the United States.
Commenting upon the New York appreciation, the Manitoba Free Press maintains that liquidation in Canada was in part due to the fact that Canada is a newer country, and that our farmers were compelled in many cases to liquidate, while farmers in the older sections of the U.S. were in a position to hold. In this case, as the Winnipeg paper points out, it so happens that men who had no credit and who were forced to sell are now in a better position, financially, than those men who possessed credit and were able to hold. The Free Press recogrfizes with its New York contemporary that the advice of Canadian bankers played an important part in clearing the situation.
Unusually Big Loans
WHILE rendering this service of advice the Manitoba Free Press finds that Canadian bankers were ready to
make usual advances and indeed, as C. W. Rowley, of the Canadian Bank of Commerce, Winnipeg, emphasizes in an interview, “loans were in fact larger this past fall than in any previous fall in the history of the country. There was thus some credit due to the Canadian banks in this matter. The position of Canada is not wholly a matter of accident.”
Mr. Rowley, according to Winnipeg report, stated that the Canadian Bank of Commerce, from the early part of the past season, had been convinced that the deflation which had then set in, to some extent, was permanent and that they had advised all their customers, both farmers and traders, to liquidate. Apropos of this Mr. Rowley said that recently one customer has stated that if he had followed the advice of the bank it would have saved him a very large sum, many thousands of dollars.
Bank advances are still comparatively heavy in the West, but the situation is much better than the early harvest situation indicated Would be the case.