Foreign Trade

Foreign trade has an important bearing on prosperity and consequently on security prices. The margin of our foreign trade toward or away from a favorable balance of trade is a matter of some moment. National prosperity follows much the same rules that individual prosperity does.

About two weeks after the end of each month, export and import figures are sent out from Washington for the month. From them it is possible to keep close track of the trend of our foreign trade. These figures need to be read with care. A big excess of exports over imports does not necessarily mean satisfactory business conditions. The cause of the balance is of very great importance. Stationary exports and decreasing imports would give a balance in our favor, but would be anything but a favorable sign. Any conclusions about the balance of trade are valuable only after an examination as to the causes of the balance.

As a general rule, rising imports denote active trade and increased purchasing power. Such import statistics may, however, be artificially stimulated by rising commodity prices, in which case full allowance must be made in the use of figures as a gage of real business conditions. An increase in export business may be due to the simple fact that a great many manufacturers have been forced into a position of securing a foreign outlet to keep things moving or else of shutting down. The character of the exports should be noted. If the amount consists chiefly of food products, it may not necessarily indicate prosperous manufacturing and trading conditions in this country.

Railroad Earnings

Railroad reports have been standardized through the efforts of the Interstate Commerce Commission to such an extent that they reflect fairly accurately the trading •conditions of the country. These reports give us records of freight, handled from week to week, month to month, and year to year. The idle-car figures are significant for this same reason. In comparing railroad statistics with those of previous periods, great care should be exercised to determine whether the previous figures represent normal conditions or not.

Railroad earnings are somewhat late in reflecting business conditions. With most manufactured products a number of weeks or even months intervene between the time when the order is placed and the time when the goods are ready to be started on their way. It is perfectly possible for business to suffer a decided set-back and orders to fall off sharply while railroad earnings go on as though nothing had happened. However, by comparing the earnings from several months back, one is able to determine the large swings in business activity.

In using the earnings statement for comparison, allowance should be made for increased capitalization on a railroad. A corresponding increase should be shown in the earnings to represent equal conditions. A per-mile basis of comparison is not satisfactory because the money may have been spent for rolling stock and improvement of the road bed.

Iron And Steel

The steel industry is the basic industry of the country and represents fairly well the business activity in all other industries. When the steel business is in good shape the general trade is usually active and vice versa. By tracing the monthly record of iron production and of orders placed for steel, one gets not only a faithful portrayal of conditions as they have been and are, but also a sound basis for deductions as to the future trend.

Bank Statements

Money is the basis of all trade and therefore perhaps the most sensitive factor in business barometers. In applying money conditions and prospects to the probable course of security movements we find many phenomena which are easily read and almost certain in their effects.

The general money condition of our country may be read pretty accurately in the statements made by the comptroller of the currency. These statements show the money in circulation, the bank loans, the cash held by the banks, the deposits of the banks, and the surplus reserves. The percentage of loans to deposits and the percentage of specie to loans are perhaps the two most important factors in these reports. If the percentage of loans to deposits is unduly high, the money situation is paralyzed. This condition may be offset by a correspondingly high percentage of specie to loans. On the other hand, if the percentage of loans to deposits does not appear unduly high, but the percentage of specie to loans is very low, we may be in a dangerous position. It is when the two spread apart - when loans go up and specie falls - that the worst condition is indicated. The monetary and banking conditions abroad must always be taken into consideration, because of intimate international relations of banking.

The importance of bank statements upon the bearing of security prices is at once evident when we consider that security prices are determined primarily by two factors - the loaning rate of free capital and the general condition of business. A low rate of interest or the likelihood of low. rates has the effect of stimulating security prices, because banks and other money-lending institutions are forced into the investment market when they cannot loan money to advantage. Conversely a high rate of interest or the prospect of high rates has the effect of depressing prices, because banking institutions sell their securities in order to lend the money so released. When, therefore, money rates are low, securities tend to advance, and when rates are high, they tend to decline.

These forces may, however, be offset by the general business conditions. Good business conditions or the promise of good business conditions tend to advance security prices because they promise larger earnings and a stronger financial situation. Poor business conditions or an unpromising outlook give the reverse effect. The larger movements of security prices are always the resultant of the interaction of these two forces. When they work together the effect is irresistible.

When they do not work together the antagonism between the two forces may produce movements in different directions in different classes of securities. Let us take a simple example. If interest rates are low and business conditions bad, with prospect of still lower interest rates and still poorer business conditions, high-grade bonds such as choice municipals whose safety cannot be impaired by any extent of depression in business will advance because their market price is influenced wholly by money rates. Middle-grade bonds such as second class railroad issues will remain almost stationary, low money rates tending to advance their price and the fear of decreased earnings tending to depress them. The lowest grade of bonds and stocks whose margin of security even in good times is low, will probably suffer in price because the fear of defaulting interest and of reduction in dividends will act much more strongly than the mere stimulus of low interest rates.

Because of these price tendencies bank statements furnish a very valuable barometer guide to the intelligent business man. They show whether the credit condition of a state is so strained that liquidation is bound to take place or whether the banks are in a position to finance another upward movement in trade, especially if the international factor is properly considered in the calculations.