Current Business Cycle Is Running True to Form

A. W. ELUE August 1 1930

Current Business Cycle Is Running True to Form

A. W. ELUE August 1 1930

Current Business Cycle Is Running True to Form


Hundreds or thousands of dollars are lost annually In Canada through careless investment. Fraudulent and worthless securities are being con. stantly poured on to the market to trap the unwary. A general observ ance of this simple maxim will assist in the reduction and elimin ation of this economic waste -"BE FORE YOU INVEST-INVESTIGATE"


BUSINESS, it seems, like some people we know, cannot stand prosperity. Corporate and individual habits follow a closely parallel course during an era of economic expansion. Good times and quick profits breed extravagance and wastefulness; but that keen perspective of sound business principles which makes for economical management is dimmed in the glare of prosperity, and in due course the inevitable recession develops, necessitating a prolonged and painful adjustment to conservative but sounder standards.

The economic history of the past hundred and fifty years presents many similar epochs of economic progress, always terminated by reactions of more or less severity. There is nothing unnatural in the present wave of depression which has spread throughout the civilized world, since it merely marks the completion of one phase of the business cycle and the beginning of another. The hope was frequently expressed by business leaders and economists, during the late period of expansion, that a greater degree of conscious control exercised over the operation and production of industry would tend to modify or flatten down the cyclic tendencies of business; but developments of the past few months have amply discredited these theories.

The question of primary interest at the moment to most people, whether capitalists, wage earners, or investors, concerns the future of business. How long will the present depression continue? When may recovery of business prosperity be expected? Of course it is not possible to supply positive information on these points, but one may outline business expectancy with some degree of approximation from experiences of the past.

Almost a year ago the first evidences of recession began to manifest themselves. Within the year were compassed many momentous economic developments; the collapse of the greatest bull market in history; the world-wide deflation of basic commodities; the adjusting of investment sentiment from rampant enthusiasm to extreme caution, and the complete reversal of the money market from a condition of extreme high rates to one of unusually cheap and abundant supplies. These are the visible externals of the tremendous changes that have been going on within the business structure, which is now busily engaged in remodelling itself on new and more substantial lines after the excesses of the past.

The Business Cycle

ET US trace out the workings of this mysterious phenomenon which has defied human ability to control, and which periodically causes so much concern and pain to the public at large. The

National City Company, in its monthly letter, presents an excellent summing up of the economic causes of the depression inevitable after an era of prosperity. Such periods of prosperity, it is pointed out, induce heavy investments of capital for increasing production, and the industrial equilibrium is not always maintained. Management, lulled by easy profits, to a false sense of security, tends to relax that constant vigilance over costs which is the price of economical operation, permitting carelessness, extravagance and neglect of sound business principles to undermine efficiency. Costs and prices rise, speculation develops, and the business situation becomes honeycombed with weak spots which give way under a strain.

It is characteristic of good times that a great body of indebtedness is created to be paid off in the future. The expenditure of these capital sums is one of the features of prosperity, but if the investments prove unprofitable or not promptly remunerative, this pace of expenditure cannot be maintained, and reactions follow. It is an old saying that people go into debt in good times and pay their debts under the pressure of bad.

As a result of such conditions, industry loses the fine adjustment of relationship which we have seen to be the condition of prosperity. A boom period commits errors that have to be corrected and paid for, and the period of recession which follows is a period of readjustment and reorganization. The whole industrial organization slows down to regain its equilibrium. Business men go through their shops with a keen eye to reducing costs. Uneconomical methods and loose practices that have grown up during the tolerant times of prosperity are thrown out. Surplus personnel is dispensed with and waste motion eliminated wherever possible. Management and technical staffs redouble their efforts to find ways of producing the same or better products more cheaply. Business, in short, undergoes a thorough overhauling, is shorn of its excess fat, and trained down once more to fine competitive form.

And so business in Canada, the United States, and the world over is going through that process at the present time, and once the process is completed will be on a vastly sounder basis than a year ago.

Portents of Trouble

THE first signs of change in the complexion of the business world from ruddy prosperity to emaciated depression came from the primary producing countries, that is, from the countries which specialize in the production of some basic commodity for which there is a world market, such as the rubber producers of Malaysia, the tin producers of the Malay Straits and Nigeria, the wool producers of Australia, the coffee producers of Brazil, and the wheat producers of Canada and the United States. Difficulties appeared last year, but industry for a time ignored them. But as the fall in commodity prices gained momentum, the business world could no longer afford to disregard this evidence of a change in the world economic trend, and last autumn witnessed a change in the trend of business and an abrupt break in security prices throughout the world, severest in New York where speculation had been unduly exploited.

Even yet it is not clear whether the downward trend of commodity prices has been permanently halted and the turningpoint reached. Added to the list named above are copper, zinc, lead, silver, silk and sugar. Naturally, while prices are declining or wavering, there is little disposition to buy. Some potential buyers hold off because of the lack of confidence that has been created by the fall, and others are influenced by an inherent desire to purchase at the lowest possible price. During such a period of suspended activity stocks pile up, and the adverse features of the situation appear to be exaggerated; but at the same time there is being built up a tremendous latent buying power which must manifest itself sooner or later when the time seems opportune. Under such circumstances excessive stocks rapidly disappear. It will be recalled that all through the winter buying in the copper market was at a low ebb, because copper was being artificially held at eighteen cents a pound. A subsequent break to fourteen cents did not stimulate activity on the buying side, but when copper later broke to twelve and a half cents and recovered within a day or so to thirteen, deferred buying came into the market, with the result that copper sales for the month of May were the greatest on record.

The present easiness of money can be associated with widespread depression in trade, signalized in the first place by a decline in the price of raw materials and in foodstuffs, and in the second by a contraction in industrial activity. The present situation may be regarded as a major cyclical reaction, and in consequence it is possible to anticipate the same sequence of events leading to recovery that have marked similar occasions in the past.

Some authorities express the opinion that the recovery will be more rapid than that of preceding eras of depression, owing to the cheapness of money and to the earnest endeavors of industry itself to lower costs and enhance production.

How Long Will It Last?

THIS brings us back to the question: How long will this current trade reaction last? A study of business cycles indicates that during the past forty years there have been several notable trade reactions on this continent, in which Canadian business was directly involved. A business recession got Under way in the year 1893 and lasted sixteen months; another in 1895 lasted thirteen months; in 1899, twelve months; 1903, thirteen months; 1907, eight months; 1910, sixteen months; 1919, twelve months. In the post-war interval, the first expanding movement lasted nine months, from May, 1919, to January, 1920, whereas the subsequent depression lasted twenty months, from February, 1920, to September, 1921. The second cycle comprised an expansion of twenty months, from October, 1921, to May, 1923, followed by a receding movement of fourteen months, from June, 1923, to July, 1924. Thereafter followed a period of twenty-seven months of progressive business from August, 1924, to October, 1926, followed by fourteen months of recession, from November, 1926, to December, 1927. The recent movement of expansion dates from December, 1927, and culminated about August or September of last year.

On the basis of past experience a receding movement of fourteen months would be normal, which should bring business back to a more substantial footing by October or November of this year. If on the other hand we have entered one of those more difficult phases of adjustment, which does not seem logical, then recovery may be delayed until well into next year. It seems reasonable to expect, as far as can be judged at present, a recovery well before the end of the year, with 1931 a year of progressive economic improvement.

What has all this to do with the investor? Simply this, that so far as the bond market is concerned easy money seems likely to continue for some time, and easy money is always a bull card for high-grade bonds. From the standpoint of the investor interested in the more speculative type of security, common stocks, it is well to bear in mind that the stock market thrives on expanding business or the prospect of expansion. The stock market can visualize the future with an accuracy that is not permitted the individual human mind. Reviving activity and strength in the stock market are indicators of business expansion just ahead. It is interesting to watch the stock market for clearing weather signals.


TN CONTINUATION of the series of JL recommendations as to common stocks printed in the July 15 issue of MacLean’s Magazine, there follows a further instalment of such recommendations by representative brokers.

Oswald and Drinkwater, Montreal

We are still in a buying zone, and there is no reason why investors should not buy the stocks of our tried Canadian Companies around present levels, always providing they have confidence in the future of the country. If they have this it seems to us they can confidently buy the common stocks of such companies as follows:

Imperial Oil Canadian Pacific Railway

Dominion Bridge Steel of Canada

Montreal Power Power Corporation of Canada Shawinigan Water Power

It is only necessary to look through the past records of any of these companies to realize what splendid progress they have made over a long period of years, and to have every confidence that they will do as well, or even better, during the next decade.

There is another Canadian company whose properties are in a foreign country, but which is well worthy of consideration at this time on aocount of the improving conditions there. We refer to Brazilian Traction Light & Power, which company, we believe, has a great future.

R. A. Daly and Company, Toronto

In our opinion, the following stocks seem to have excellent chances for investment over the term of the next two or three years, both as to dividends and appreciation in market value which we feel will be due them through improvement in the individual companies, and the general prosperity of Canada:

British American Oil Imperial Oil Limited International Petroleum Limited Ford of Canada “A”

Bell Telephone Company of Canada Canadian Pacific Railway Service Stations

In the case of the oil stocks mentioned, and also of Bell Telephone and Canadian Pacific Railway, the future of these companies is closely interlocked with the development of Canada as a whole, and, enjoying as they do the best possible management, and holding their strategic positions, we feel that these stocks cannot be disregarded in any diversified holdings of Canadian securities.

Ford of Canada “A.”—The recent report of this company for the year 1929 was satisfactory, and showed earnings of $3.15 on the combined Class A and Class B shares. Dividends were established on both classes of stock at the rate of $1.20 per share, per annum, together with án extra dividend of thirty cents.

Despite the unfavorable experience of most motor car companies, this company's retail deliveries thus far in 1930 have been practically on a level with last year’s sales. While we do not anticipate any sharp upward movement in the market value of this stock, for those willing to purchase long-term holdings, and disregard the minor market fluctuations, this stock has excellent possibilities.

Service Stations: This company is a holding corporation, controlling ten operating subsidiaries with thirteen plants manufacturing gasoline and kerosene pumps, oil and grease equipment, steel drums, gas water heaters, oil burners, and numerous other articles along this line.

Dividends are being paid on both classes of common stock at the present time at the rate of $2.60 per annum.

This company was the originator of the Clear Vision Pump, and since then has been a leader in the industry. We feel that this line of business will continue to improve, as the number of automobiles being used in Canada is increasing steadily, and probably will increase. This, in turn, will help the gasoline refining companies, who will eventually increase their number of stations to cope with the trade.