Atch., Top. & S. Fe 42% Chi. & East. Illinois 68%
Atlantic Coast Line 57% Chi. & N’western 39%
Baltimore & Ohio 39% Chi., Bur. & Quincy 45%
Boston & Maine 78% Chicago Gt. Western 67%
Canadian Pacific 33% Chi., Mil. & St. Paul 32%
Central of Georgia 47% C., St. P., M. & O. 42%
Cen. R. R. of N. J. 50% C., C., C. & St. Louis 69%
Chesapeake & Ohio 53% Col. & Southern 55%
Chicago & Alton 73% Delaware & Hudson 40%
Del., Lack. & West 38% N. Y., Chi. & St. L. 41%
Denver & Rio Grande 52% N. Y., N. H. & H. 48%
Det., Tol. & Ironton 87% N. Y., O. & Western 53%
Du., S. S. & Atlantic 115% Norfolk & Western 37%
Erie 66% Northern Central 28%
Gr. Rap. & Indiana 76% Northern Pacific 29%
Grand Trunk 65% Pennsylvania 38%
Great Northern 26% Pitts. & Lake Erie 11%
Hocking Valley 31% P., C., C. & St. L. 54%
Illinois Central 47% Reading 45%
Iowa Central 79% Rock Island 83%
Kansas City South’n 54% Rutland 69%
L. Erie & Western 69% St. L. & S. Fran. 82%
Lehigh Valley 46% St. L. & S’western 76%
Long Island 101% Seaboard Air Line 78%
L. S. & M. S. 38% Sou. Pacific 49%
Louis. & Nash. 54% Southern 69%
Maine Central 46% Texas & Pacific 40%
Michigan Central 57% Tol., St. L. & S’w’n 61%
Minn. & St. Louis 77% Union Pacific 31%
M., St. P. & S. S. M. 44% Vandalia 54%
M., K. & T. 75% Wabash 80%
Missouri Pacific 60% Wheel. & Lake Erie 90%
N. Y. C. & H. R. 64% Wisconsin Central 69%
_Importance of Fixed Charges to the Investor._
“The high degree of stability imparted to interest payments and
dividends by a low percentage of fixed charges, and the high degree
of instability imparted by a large percentage, is so elementary that
it would seem to need no emphasis. And yet this item is habitually
disregarded by perhaps 90% of bond and stock buyers. On this account it
may be worth while to illustrate by simple comparison the effect of a
20% decline in gross or net earnings. We will compare the conditions of
two roads whose fixed charges are respectively 75% and 25% of the total
net income. The operation would be as follows:
Suppose a 20% Decline
Say Earnings $1,000,000 $800,000
Exp. (70%) 700,000 560,000
---------- --------
Net $300,000 $240,000
If F. C. 75% = 225,000 225,000
---------- --------
Surplus for div. $75,000 $15,000 (Case I)
Decrease 80%
If F. C. 25% = 75,000 75,000
---------- --------
Surplus $225,000 $165,000
Decrease 26% (Case II)
“It will be seen from the above that a 20% decline in the net earnings
would, in the first instance, mean a decrease of 80% in the surplus;
while in the second case, the same decline would mean a decrease of
only 26% in the surplus--figures which sufficiently indicate what a
high percentage of fixed charges means.
“In this connection it may be further noted that in the large holding
companies, like the Pennsylvania, the New York Central, the Union
Pacific, and others, the factor of safety and the surplus shown tends
to be relatively more stable than in companies largely or exclusively
dependent upon the earnings of their own roads. This is due to the
general custom of American Railways of paying out in dividends only a
part of the actual surplus earned. From this it results that dividends
are much more stable than earnings, and that the income of the
holding companies from this source will correspondingly show smaller
fluctuations than earnings. When, therefore, as in the case of some
of the large holding companies named, the income from investments
represents a considerable portion of the total net income shown, the
surplus, other things being equal, will be much more stable than in
other companies.
“It is needless to add that this stability is still further heightened
when, as in the case of the Pennsylvania, Union Pacific and some other
roads, the percentage of fixed charges is at the same time low.”--From
“American Railways as Investments,” by Carl Snyder.
_Borrowing and Lending Stocks._
“When a speculator sells stock which he does not possess (when he sells
it short) he (or what is the same thing, the broker who acts for him)
has to borrow the stock to make delivery to the purchaser. The one who
possesses stock (who is long of it) is, in ordinary circumstances,
as anxious to lend it as the one who has sold it short is anxious to
borrow it.
“The lender of stock receives from the borrower the market value of it
in money, but except when the stock is lending flat (without interest)
or at a premium, the lender of the stock pays to the borrower of it
interest on the money paid for the stock by the borrower. The rate of
interest is determined by bid and offer.
“On the New York Stock Exchange, brokers who have stocks to borrow and
brokers who have stocks to lend assemble immediately after the close
of business on the exchange and those who need stocks borrow amounts
necessary to make deliveries the next day. Those who neglect to borrow
at this time must do so the next morning, or some time in the day
before the delivery hour, 2.15 p. m. There is no loan crowd in the
morning, but borrowers seek lenders at the posts on the floor of the
exchange around which the particular stocks that they require are dealt
in.
“The same rules govern the receipt and delivery of stocks borrowed and
loaned as govern stocks bought and sold. In returning borrowed stock
the borrower must notify the lender before 1 o’clock on the day of
delivery; the lender in calling or demanding the return of stock must
do likewise.
“When a stock is loaned flat, the owner is relieved from the cost of
carrying the stock. If loaned at a premium he is still better off, for
the premium is so much gain. When a stock is loaned at a premium, the
premium applies in the absence of a renewal of the loan only to the day
on which the stock is loaned.
“If a stock that has been borrowed advances in market price the lender
may require the borrower to pay to him the difference between the
price at which the stock was loaned and the new higher price. On the
other hand, if the stock declines in price the borrower may require
the lender of the stock to return to him the difference between the
price at which the stock was borrowed and the new lower price. These
differences are called market differences.
“When a corner is being worked up in a stock it is the practice of
those engineering it freely to loan the stock in order to encourage the
creation of a short interest in it. When this short interest has become
large enough, or in other words, when the stock has become sufficiently
oversold, a demand for the return of the stock brings the corner to a
culmination.
“An apparent borrowing demand for stocks is sometimes created by the
efforts of money lenders to obtain higher interest on their money than
is obtainable in lending it in the money market. If the lending rate
for a particular stock is, say, 6 per cent. when money is lending at 4½
per cent. in the money market the money lenders will borrow the stock
in order to obtain the extra interest.
“When a seller of long stock (stock actually owned) desires to create
the impression that he is selling short stock (stock not owned or
possessed) he has his broker borrow stock for delivery to purchasers.
Then when he has completed his sales he delivers his own stock to the
ones from whom his broker borrowed.
“Also, when a seller of stock desires to conceal his identity, he has
his stock transferred or made out in the name of his broker, or a
clerk, or some other person previous to its delivery to purchasers.
“Arbitrage dealers often sell stock held abroad which will not be
received for some time. They borrow for delivery to purchasers and when
their own stock arrives they make returns to the ones from whom they
borrowed.
“Corporations intending to issue new stock have been known to sell
the stock in advance of its issuance and to borrow to make delivery
to purchasers. Then when the new stock was issued it was used to make
return to the ones from whom stock had been borrowed.”--From Smith’s
Financial Dictionary, by Howard Irving Smith.
_Scalping._
“There are many different methods and degrees of scalping. The word is
supposed to express all the forms of trading between the “Chaser of
eighths” and the man who operates for a profit of several points.
“Scalping operations are more common than any other form of trading.
There are several reasons for this. Many people consider the market a
machine, and base operations on pictures of the past, i.e., charts.
These misused and mischievous instruments show so many opportunities
of profit in movements both ways, that the unsophisticated trader sees
what was _possible_, while the _probable_ is overlooked.
“Again, the desire to scalp is helped by impatience and greed. The
small trader will grow disgusted if there is the slightest delay.
Dullness is unbearable to him. Also, he will frequently close good
commitments merely for the sake of ‘seeing the money.’ I have seen many
traders ‘clean up,’ receive a check which was of absolutely no present
use to them, gloat over it for a while, and pay another commission to
replace the trades. Ridiculous, but true.
“I may say, as a general principle, that I consider scalping the
poorest form of trading. It involves the continued multiplication of
commissions, and constant personal attention. I know of but two men who
have made any considerable amount of money by scalping methods. They
are exceptionally fitted for this form of trading, and have the ability
to take a small loss quickly. This is a trait which is very rare among
public traders. A man will usually accept a small profit for no other
reason than that it _is_ a profit, and will sit stubbornly on a loss
for no other reason than that it is a loss.
“The man who has reason to believe that a stock will advance or decline
ten points, will, in nine cases out of ten, realize more profit by
merely making his trade in the stock and going about his business until
he considers it wise to terminate the contract. I will say decidedly
that more traders will do better, make more money, and suffer less loss
of time, and less annoyance by abandoning scalping tactics altogether.
“This view will no doubt cause my friends in the brokerage business
much wrath and indignation. They naturally prefer to have ten
commissions rather than one, and I fear that in many cases they
recommend scalping tactics for no better reason than the one mentioned.
“That constant and repeated operations are disastrous, is pretty well
shown by the remark of a successful ‘Bucket-Shop’ man: ‘I don’t care
what they do, or what the market does, if I can only keep them coming
up to the order windows every few hours,’ said this gentleman. And he
was right; for the ordinary scalper is no more than a gambler, basing
his operations on possible variations, and paying a great percentage.
“But if one will insist on scalping, it may be well to examine the
subject from the other side and see how the least of the evils may be
chosen. Without recommending the practice, or qualifying the views
expressed above, I will therefore give my idea of the safest methods of
scalping.
“The man who attempts to operate on both sides of the market during the
same period, is the most deluded individual in the speculative world. I
have already stated, that I have only seen two traders out of thousands
I have observed, who could do this with any degree of success. These
hybrid Bull-bears are certainly not working on any definitely formed
opinion of the future. They are worse off than even the traders who are
unchangeably and constitutionally wedded to one side of the market the
year round. These latter prejudiced and inflexible individuals will
occasionally have a turn in their direction, whatever their position
may be, but the Bull-bear will go from one month to another, never
seeing anything more than a temporary gain.
“It is important, therefore, that the active trader should form his
ideas, base his views on something, and, if he wishes to entertain
himself with repeated operations, map out a plan of campaign which
shall be, at least, intelligent in its original conception.
“Just how successfully the plan suggested will result, depends largely
upon the alertness and understanding of the individual who engineers
it. If the active participant is easily moved from his position by
changes of a point or two against him; if he is easily frightened by
wild rumors and inspired talk; if he expects to gain thousands in a
few days by venturing hundreds; or if he believes that he can operate
in stocks so shrewdly as to guess high or low points within a dollar
or two a share, he will meet with disappointment and loss. If he can
overcome these drawbacks, he may do very well as an active trader, but
I wish to reiterate my views that the man who takes a position on the
market and retains it, will make more money than the scalper.
“As a test question, let me put this inquiry to the active traders who
read this letter:
“When you have been correct on a certain movement of say ten points,
and have made repeated operations, did you make any more money, or as
much, as you would have realized on a single trade showing a ten point
profit?”--From Thomas Gibson’s Market Letter, February 14th, 1907.
_Crop Damage._
As to the crops, we find many over-optimistic people trying to belittle
positive crop damage. It cannot be belittled. It is dangerous and
foolish to evade an issue instead of facing it. The argument that our
surplus from last year will carry us through a shortage is puerile.
That surplus has already been considered. Wheat in the bin is money;
some of that money has already been spent and all of it has been given
due consideration in the basing of our wealth. A number of writers
attempt to make a probable crop of 2,500,000,000 bushels of corn a
“bumper crop.” Their methods of arriving at this conclusion are not
sound. It is certain that we should, in the natural course of events,
raise more and more wheat and corn each year as the population of the
world, and the uses of the cereals increase. To compare one year with
another will not do. Particularly in Corn and Cotton must we steadily
increase in acreage and production, for we supply the world with those
commodities. To illustrate this point, let us go back a few years and
see what has occurred.