The Cavalier daily :: Friday, December 1, 1967 :: University of Virginia Library

The unexpected 14.3 percent devaluation of the pound sterling
sent the Dow Jones Industrial Average down 14.96 points in the first
half-hour of trading last Monday. By noon, however, the market
had recovered eight points, and by the 3:30 p.m. close it had rallied
sufficiently to cut the net loss for the day to 4.33 points. Trading
was extremely heavy, with 12,750,000 shares changing hands, the largest
volume since August 3, 1967.

This type of violent selling has been commonly labeled a "shake-out."
It most frequently occurs after an extensive period of gradually
diminishing prices, a time when the small investor, awed by sudden
news of this sort, jumps out of the market for lack of decisive understanding
of the situation.

The trend in the bond market was similar to that of the stock
market, with prices rallying after initial sell-offs. This correlation is
an important one, for in the past, bond prices have generally reflected
stock prices. Although the relationship between the two variables is
in no way fixed, the 40-Bond Average serves as an indicator of
monetary and credit policies, often foreshadowing the stock market
picture as long as four months in advance.

Irrefutably, Britain's action will have monumental repercussions
on the course of economic adjustments to be made across the globe.
Already, the Bank of England has advanced its discount rate to 8
percent, the highest since 1914. On the domestic front, our Federal
Reserve Board has boosted the rediscount rate from 4 percent to 4.5
percent in an attempt to fortify short-term interest rates in this
country. Such a move, they hope, will prevent American dollars
from seeking higher foreign yields. Major banks throughout the nation
have quickly followed suit, raising their prime borrowing rate to 6
percent—up from 5.5 percent. Many knowledgeable sources contend
that these hikes in the discount rates will inevitably force a proportionate
increase to take place in the low-rate nations. And so the chain
reaction continues.

London's pound reduction places a formidable strain on the dollar,
virtually the sole reserve currency on the international trade scene. Yet
our country is presently undergoing inflationary movements identical
to those which led to the depreciation. Balance-of-payments deficits,
unregulated government spending, climbing interest rates, rising wages
(incongruent with increased productivity), and a steady increment in
the consumer price index—all of these factors demonstrate the lack
of fiscal restraint which is prevalent in America today.

This inflation must be mitigated if the dollar is to survive at its
current value. Thus, it is only logical to assume that Washington
will attempt to enact corrective legislation before long. Such measures
may well include passage of the ten percent surtax, decreased budget
spending, and perhaps even higher short-term interest rates.

With such a bleak prognostication in mind, I suggest a 50 per cent
cash reserve for investment-oriented funds, and a 75 per cent reserve
position for speculative portfolios.

Reviewing last month's purchase candidates, you will note that all
but two of the issues which I recommended have undergone significant
price appreciations:

STOCK	PRICE WHEN RECOMMENDED	RECENT PRICE	PERCENTAGE CHANGE
	10/6/67	11/29/67
Control Data	134 1/2	164 7/8
Intl. Bus. Mach.	549	620 1/2	+13%
Itek Corporation	162	156 5/8	-4%
Kalvar Corporation	225	240	+9%
Litton Industries	105	113 1/4	-9%
Metro-Goldwyn-Mayer	59 1/4	54 1/4	-7%
Occidental Petroleum	80 1/2	97	-22%
Raytheon	91	116	+29%
Scientific Data Systems	119	145 5/8	-22%
Sperry Rand	45 3/4	60 1/8	-35%