CHAPTER II.

THE IMPORTANCE OF SPECIAL KNOWLEDGE REGARDING THE REGULARLY RECURRING CAUSES THAT INFLUENCE THE MARKETS.

[Sidenote: THE TEMPER OF THE PUBLIC.]

If a speculator has not closely studied the special causes that influence the Stock markets at regularly recurring intervals, he has not learned the alphabet of his business. We shall endeavour to pass in review some of these. First of all, there is the temper of the public. Many persons have puzzled over the causes which will at one time combine to produce activity among buyers of stocks, and at another dead stagnation; and it is a very interesting study, albeit somewhat difficult of correct analysis.

[Sidenote: METEOROLOGICAL INFLUENCES.]

There are periods of the year when the temper of investors tends to sulkiness, in sympathy with a fall of the mercury. Dull and disagreeable weather, as a rule, adversely affects the Stock markets more or less, according to the extent of counteracting influences. If we take the beginning of a year, in January investors will usually be found in a conservative frame of mind, with which speculators will sympathise as they perceive it; for it may safely be said that unless the public can be calculated upon to follow their lead, it is useless for professional speculators to stir up the markets. In the first month of the year capitalists are in more or less of a stay-at-home mood; and now so many buyers of securities live on a line of railway, they take as many holidays as they can well find excuse for.[20]

A speculator should have a good aneroid barometer, that has a good big indicator, hung up in his hall, and he would not be very far wrong if he were to buy and sell according to the indications given by this instrument that it was going to be good or bad weather. Most people are like any one you may chance to single out of a crowd, from a physical point of view.[21] The change from fair to foul weather will have the same effect upon a crowd as upon that one man. Foggy, wet, and cheerless weather sends people to their homes with a contented mind, if they feel they can hold their own until the return of sunshine; just as a storm causes navigators to run for a harbour, or seek the nearest shelter from its fury. When buyers keep away from the markets, prices droop with their own weight, and, from the mere absence of any buying at all, will often fall as regards value, out of all proportion to the extent of the sales. Such a period is a very good one to turn round and buy, as there is sure to be a nearly corresponding recovery with a favourable change in the weather.

[Sidenote: A FAVOURABLE PERIOD OF THE YEAR.]

Unless there are special causes at work, during the first month of the year the Stock markets are usually as hard and inelastic as the frozen earth outside. At Christmas-time people make up their accounts for the year, and most of them, having gained less than the total pictured by their imagination, are more or less out of humour, and disinclined to enter upon commitments outside the limits of their business proper. At such a period, therefore, a speculator may look for fluctuations which as a rule will not occur. As February creeps on, if circumstances are generally favourable for trade, so that the newspapers can dish up their daily fare with sauces that encourage their readers to look on the future with hopefulness, losses that are written off will begin to assume less harrowing proportions, and the old inclination to launch out will come to the front.[22] The professional speculative element in the community sniffs this movement on the part of the public with the accuracy of a pointer that has found his bird, and they commence to draw the credulous by fictitious prices, now and then unloading to be ready when the relapse comes, to commence anew when another favourable opportunity offers. As the spring comes in, with its delights and young verdure, and cheering early sun-rays, which draw the notes of the lark and the linnet, the disposition becomes more general to disregard those strict lines of prudence which the bleak winds of autumn and the shorter days of an aging year, mark out so prominently for observation. At a period of the year when spring is merging in early summer, with all its pleasant prospects of pleasure to come, it is quite natural to suppose that a desire should arise to make money, by which everything could be made smooth and delightful during the most enjoyable part of the year. Then again, as the half-year wears on, there are the dividends to look forward to, which is always an inducement to buyers; the great cities are filling with pleasure seekers, the import and export trade with foreign climes is in full activity after the liberation of whole fleets of vessels which have lain frozen up in northern parts during the winter. The young corn is beginning to clothe the naked furrow, and the various fruits of the earth are appearing, which only to read and hear of is to fill the eye with a sense of plenty that half converts a Tory Stock Exchange operator into an ultra-radical speculator. Under fairly favourable circumstances, the course of general business during the first half of the year is more active than during the second six months. The Parliamentary session is in full swing, and large numbers of people congregate in the capital towns of all European states to transact business, no small part of which is the investment of their surplus profits in public securities. When a new year is fairly on its legs, say in March, if war or such like causes do not interfere with the natural course of events, between that month and the end of June, a speculator for the rise should find, on an average, his greatest opportunities. In the London market more especially is it so, on account of the effect produced on the money market by the collection of the revenue, which always keeps the Bank of England’s reserve at a comparatively higher figure during the period named, a circumstance of considerable importance. In the first half of the year also there is more floating capital spread out, and more disposition to extend credit to catch the profits that are to be gathered when the nations of the earth are enticed into activity and movement, both for business and pleasure, by genial weather and long days.

[Sidenote: CAUSES AFFECTING THE VALUE OF ENGLISH RAILWAY STOCKS.]

As regards some stocks, there will be no need to make a special study of causes which affect the dividend; but this is not the case with railway stocks. A speculator in railway stocks must watch the course of trade, the colonial produce, the Manchester and Liverpool markets, and note the character of the business doing in the great staples of Industry. Upon the profitable nature of these trades depend very much the traffic receipts of railways. A speculator devoting his attention especially to railway stocks will, of course, analyze the reports of the various companies, carefully noting the weekly published traffic receipts. Then, again, there are the northern iron and coal districts, the operations in which affect the price of railway stocks in two ways which are obvious. A speculator who operates solely in railway stocks should be posted from hour to hour in such matters, or he will be assuredly “hung up,” as the saying is, with stock on which he has made a loss.

[Sidenote: THE COURSE TO PURSUE AT THE TURN OF THE HALF-YEAR.]

Whether there be any more rise or not left in public securities as a body after the turn of the half-year,—we are speaking from a bull point of view, as that is the way in which the public, in ninety-nine cases out of a hundred, operate,—we should always recommend a speculator to pack up his traps and go right away, whether he has won or lost on balance. If he has lost, which will probably be the case, there is all the more reason for not continuing, for he is as certain then as the day dawns, to increase it by going in heavily, or “plunging,” as it is termed. If he retires from the scene, and permits his nerves to recover, he will return to be “cleaned” out in a more wholesome frame of mind, which will enable him finally to quit such haunts without probably resorting to such desperate measures as might have been adopted, had his coffers been emptied all at once under a July sun.

At all events, the most methodical and prudent speculator, who manages to amuse himself, and by extreme care, like good whist players, leaves off at the end of six months about even, would not dispute the wisdom of closing his book when all the world was going away for their holidays.

[Sidenote: SECOND HALF OF THE YEAR MORE FAVOURABLE FOR BEAR OPERATIONS.]

As the first half of the year is favourable for the bull speculator, so the second half is more likely to favour the operations of the bear. When people have had their outing and spent their money, they return to business, and to think of the necessity of prudently providing the comforts needful in the chilly autumn and cold winter. Business begins to slacken in many important branches with the approach of that period of the year when the days and nights come to be of equal length all over the earth, except just under the pole. There may be a good deal of money about at such periods, and yet very little investment business going on in the stock markets. It should be remembered that large extra accumulations of money at the great centres very often mean, in fact, generally, an unprofitable state of trade; and when the foreign shipments leave no profit, from the great merchant princes down through every link in the chain to the labourer at thirty shillings a week, the effect is felt, and there being no profits, there is obviously nothing in the shape of surplus gain to invest. On the contrary, most people wish to sell. In the later months of the year locomotion for nearly all purposes begins to diminish both as regards business and pleasure, which affects the receipts of the railway companies. If there should have been a bountiful harvest, an important favourable influence may thus be exercised; but even as regards this, it has been evident for many years past that the harvest question in England is of comparatively diminishing importance, and there is every prospect that much of the land now under corn will return by degrees to its primitive state, and will pay better as pasture for fattening beasts.[23]

As we spoke of the Bank of England becoming temporarily rich, by the accumulation of revenue early in the year, so it becomes, as a rule, poor in the autumn. People are getting more used to this ebb and flow in Threadneedle Street, and the trouble it caused when Mr. Lowe first begun experimenting is not now experienced to the same extent; but still it is one of the elements which is disadvantageous, and to be kept in view by the speculator as a regularly recurring adverse influence.

It is, of course, of the last importance to keep a watch over the foreign exchanges, as these are affected more or less at certain periods when the imports and exports of special kinds of produce and manufactures are active.

Other influences which occur with machine-like regularity will be referred to as occasion may require, and we now proceed to go more into detail.

[Sidenote: ACTIVITY AMONG BUYERS.]

[Sidenote: THE BULL SPECULATOR’S GREAT CHANCE.]

[Sidenote: THE GREAT IMPORTANCE OF BEING NOW AND AGAIN ALTOGETHER CLEAR OF THE MARKETS.]

[Sidenote: THE MOVEMENT OF PRICES NEAR THE SETTLEMENTS.]

We will take activity among buyers:—It is clear that active buying in any market arises from a strong demand from persons who desire to purchase for reasons known to themselves. A strong _bona fide_ demand for securities means that the public is making money, as they do not enter the Stock markets as _bona fide_ purchasers, unless they have surplus monies which they desire to invest and put by in the form of savings. Now, a speculator who is watching for an opportunity to buy should keep in view one set of circumstances as favourable to his operations in the same way that a seller should watch for an opposite combination of causes as favourable for speculative sales. A bull speculator should know that his great opportunity occurs after securities generally have been driven down in price by a severe commercial crisis, which has compelled holders of stocks upon a large scale to realize. In other words, when prosperity is beginning to revive after a prolonged stagnation, and the prices of stocks are very low, the bull speculator’s great chance occurs. When the great industries of a nation seem to rise as from the grave, and where lifelessness and inactivity ruled before the blows of the hammer resound and the blast furnace roars, a new life springs through the arteries of the commercial system, and the result is a rise in public securities. The solid rise in the price of stocks is that caused by the hard money-buying by a public that is well to do. At such a time the bull speculator should be in the van, for then the golden harvest prepared for his special sickle invites the reaper. Every trade gets its turn to a certainty. We will say, during a period of prosperity, a general recovery of the sounder stocks to a level at which they yield on the money invested 4½ per cent. per annum, takes two years from the time the advance had fairly set in. During that two years is the bull speculator’s opportunity. If he does not make money then, he never will. Now we come more to the minutiæ: “Any jackass can take a profit, but it requires a devilish clever fellow to cut a loss,” is a well-worn expression in the city of London, but there never was a truer one. During the two years of recovery in prices to which we have referred, there will be a great number of small periods of time when the bull speculator should be out of the markets altogether. To decide when those periods are to be is his _pons asinorum_. After he has once realized the importance of having his accounts open ready for the periodical waves to carry him in and land his profit, the difficulty is to get him to realize the importance of keeping out while the water sweeps back, carrying with it the greedy speculators, who were not content to take their profits. After every great rise comes a fall, and the secret of such success as is possible lies in the buyer getting out at or near the top and in again at the bottom. It is obvious that a speculator must watch for the ever-changing circumstances to reveal themselves and act accordingly. We will suppose nothing extraordinary happens, such as a war, famine, or pestilence, but that the influences during the two years are of the ordinary type. There are the settlements. As a fortnightly settlement approaches, prices as a rule move more or less in an opposite direction to that which they have taken for some days previous, the extent being in proportion to the foregoing movement. For instance, if for the first week of an account prices have fallen heavily for some reason, such as a sharp bullion drain and a sudden rise in the value of money, there will almost to a certainty be a recovery, because a heavy fall is generally occasioned largely by bear speculators, who will begin to buy back as the account approaches, causing a recovery in values. If a speculator, therefore, is out of the markets when a fall is taking place, he is almost sure to make money by buying at the reduced figures as an account approaches.[24]

Then among minor influences, which are regularly recurring, are the “drawings” attached to most foreign stocks, and to all that have been issued for many years past. When a drawing approaches, other things not being unfavourable, there will probably be some buying for the chance of getting a bond or two drawn, and the price will improve.[25]