Inside With 'Inside Information'

SPRING is habitually the season of soaring hopes. The Northern suburbanite finds his imagination fired in January by the glowing possibilities of the seed catalogues; The first south winds of March bring inspections of the winter-harried perennial row. Discovery of the green tulip and iris shoots is to his enthusiasm as a ten-for-one stock split and dividend increase to a fortunate shareholder. From then on, the atmosphere is charged with excitement until the stately Darwins and fluttering flag lilies have withered; after that, the more prosaic business of fighting weeds and insects, as the struggle with the enemies of the garden gains impetus.

As with the Northern garden, so with that equally speculative avocation or vocation— the stock market. The first of the year, business forecasts gild the investment horizon for the fortunate being with funds. The reports from the New York and Chicago automobile shows invariably add to the optimism.

March may see a ‘corrective reaction’ to ‘place the market on a firmer technical basis,’just as the garden may experience a belated blizzard; but with its passing comes a renewed burst of confidence that is aided by the seasonal rebound in industry. Industrial operations increase. Mercantile sales improve. Steel ingot output moves steadily higher. Carloading statistics shine by comparison with preceding weeks.

It. is in this seasonally hopeful period of late April and early May that real distribution takes place, alike for the seed and bulb houses and for the stock-market pools. Each has gathered an inventory of salable goods in the declining days of autumn and early winter. The one relies on the delightful articles on garden lore which appear in the household magazines at this time, the other on the flow of investment gossip which is familiar to any observer of market activities.

The less reliable financial services and publications and the brokerage market letters teem with specific recommendations regarding stocks. The future of this company and that is painted in terms that put the glowing phraseology of the seed catalogues to shame. The items on the ticker service tapes grow both in number and in length. Much of this information is within the bounds of truth, but its aim is not exactly disinterested.

After that, the summer dull period. While the commuter-gardener is fighting aphids and cutworms, stock values drift to lower levels.

As the stock-market excitement approaches its seasonal climax, that mysterious and all-inclusive thing known as ‘inside information’ is discussed in the customers’ rooms and in more conservative quarters. One watcher of the ticker tape hears of a new manufacturing operation, another of merger overtures. Profits are improving with this corporation, sales with that. The confidential air with which the news is imparted seems to guarantee its authenticity and to give it an otherwise unmerited weight.

As a matter of fact, most of this information can be put down as either spurious, exaggerated, or so old among the initiated in business circles as to be valueless as a market factor. Occasionally, however, some hint of a development comes through banking or brokerage channels which is both authentic and truly ‘inside’ in its nature. Even here the utmost caution is warranted.

A company may plan to call a preferred stock at a figure materially above current quotations and replace it with a low-interest bond issue, only to find market conditions adverse to the newoffering and postpone the whole programme indefinitely. A corporation may arrange for an extensive group of licensees under a seemingly valuable patent, only to find sales of the finished product unexpectedly slow and royalties affected accordingly. A merger may be tentatively agreed to, only to be balked by the final auditors’ reports; or changed economic conditions may make the combination inadvisable.

Two specific examples of merger failures are still fresh in financial history. Few insiders could have foreseen in the early stages either the dropping of the Sinclair-Prairie Oil negotiations or the prolonged court fight over the combination of the Bethlehem Steel and Youngstown sheet and tube companies.

Under the guise of ‘inside information’ comes another variety of gossip which is equally dangerous to the recipient. It deals chiefly with sales and profits prospects.

The modern business psychology is such that no management will concede a possible decline in earnings until the trend is irretrievably established. Sales organizations are filled with enthusiasm by high-pressure group, district, and headquarters gatherings. Favorable developments are overemphasized and the unfavorable I left undiscussed in the belief that a defeatist philosophy is fatal. New products are extolled out of all proportion to the immediate outlook for their reception by the public.

The result is a warped judgment that prevails with all save the inner circle of a corporation’s executive organization, and occasionally exists even there. Thus a salesman for an implement company may tell a friend with the utmost sincerity that sales are breaking all previous records and know nothing of the partial crop failure that is gathering just around the seasonal corner.

Perhaps the best proof of the dangers of ‘inside information’ when both genuine and timely is the number of corporation executives who were caught by the market collapse of 1929, and the steadier but equally severe decline in the fall of 1930. They knew the prospects for their companies intimately, but they failed to foresee the greater and adverse world forces which were gathering in the commodity markets. So they fell financially when the storms finally broke, just as did the less-informed outsiders.

Amid such a background of failures, there is but one course of action open for the chance recipient of information of this nature. His first step should be to apply every possible test to determine its authenticity. This should include a careful study of the market trend of the security affected. If it has shown a sharp advance during the last month, the ‘inside’ news may be put aside as worthless. At its best, it has become known to too many similar bargain hunters, while the probability is that it is purely stock-pool propaganda.

If the examination fails to disclose any danger signals, a careful analysis of the company in question should follow. Its earnings, the ability of its management, and the demand for its products should be studied carefully, as with any ordinary investment.

For, while a bit of authentic ‘inside information’ may be used as a signpost pointing the way to possible profits, it should never be allowed to become the determining factor in a security purchase.