Bear in the Street

When Lawyer James Watson Gerard, onetime (1913-17) Ambassador to Germany, arrived in Manhattan from Europe last week he was in a critical mood. He said President Hoover should up and say Prohibition is nonsense. He chided Manhattan's bankers for paying more attention to Germany than the U. S. He scolded big corporations for not giving out intelligible statements; he and Mrs. Gerard have some 2,300 shares of General Electric and he defied "any one to tell from the statements of this company what it is doing." Because Mr. Gerard has previously been known as a foe of shortselling, no Wall Streeter was surprised to read that he added: "I also feel that shortselling here should be curbed immediately."

But this Gerard interview was only a prelude to a week replete with attacks on methodical bears. A few days later Law yer Gerard declaimed that shortselling is illegal because it is gambling, is as bad as setting fire to property. "It is selling something which the seller has not got and which he hopes to buy at a lower price, that lower price being made possible by the mere fact of the sale. . . . The result is that the stock which the small investor bought on margin ... is actually used as a club against him."

Although Wall Street has pat answers to this attitude, it became apparent last week that more than pat answers may be necessary if anti-bear legislation is to be headed off. The first attack on bears will probably come from the New York Legislature. Through his business associate, Patrick Sullivan, Mr. Gerard last year presented a bill to make it necessary for a broker to obtain the written consent of an owner of stock before it can be loaned to shorts. The bill was shelved but will be aggressively revived this session by Assemblyman Sullivan, nephew of the Timothy Sullivan who sponsored New York's famed Sullivan Act against concealed weapons.

Interference with shortselling in New York alone might lead to a rapid growth of some interior market. But last week's developments included a resolution against shortselling passed by the Chicago City Council and given to the Governer's Revenue Committee. There was also an acceleration of agitation in Federal Government circles.

Leader of the movement seemed to be James Eli Watson, Republican floor-leader of the Senate, commonly regarded as a spokesman for the Hoover Administration. Last week he said: "It is the belief of many that we shall not recover from our present depression until transactions of this kind [shortselling] are either prohibited or greatly curtailed or properly safeguarded. ... I have no doubt that one or more resolutions of this kind will be passed [by Congress]." Since President Hoover last week was conferring with many a financial leader, it was felt that Senator Watson knew whereof he spoke.

Heartily in agreement with Senator Watson were Senators of less orthodox views on financial matters. Iowa's Smith Wildman Brookhart exclaimed that he would see to it that interstate transmission of shortsale quotations is prohibited. Apparently he was unaware that the Stock Exchange's machinery does not include anything which tells whether a seller of stock owns it or not.

Other attacks included:

A resolution by United States Chamber of Commerce's directors that shortselling be limited to sellers who deposit a 40% cash margin and show evidence of possessing the rest. This would not materially alter the present situation, for bears must deposit 25% in most houses, present credit credentials before opening an account.

The Scripps-Howard chainpapers, professional crusaders, also took up the battle against bears.

With so much agitation against short-selling it was becoming apparent last week that the New York Stock Exchange would have to make some move itself or else run the risk of very drastic impositions upon it. One fair-sized member firm, Pouch & Co., announced it would no longer lend stocks to bears because, while shortselling helps a normal market, it is "utterly immoral and unwarranted" in a crisis. This attitude was not, however, officially that of the Exchange.

As an opening move in its defense the Stock Exchange last week ordered all members not to use the phrase "bear-raid" unless they could substantiate it. The reason was clear: When a stock tumbles, perhaps on some internal development in the company, brokers often say it was because of a "raid" and increase the feeling against bears. That the move was a little late seemed implied by the lack of differentiation last week between raids and real shortselling when bears were attacked. A raid is definitely aimed to depress a stock through sheer force or by knowledge of stock that will come on the market if the price can be shoved down a little. A legitimate short sells on values, feels that time and earnings reports will adjust the price downward. The difference is the same as between an operator and an investor.

Another commentator on the situation last week was Yale's Professor Irving Fisher. Said he: "My former master in economics, President [Arthur Twining] Hadley, put it well when he said that speculation of any kind ... is beneficial when it merely anticipates a rise or fall of prices. For it then mitigates the rise or fall. It is injurious when it manipulates prices against the natural tendency. Manipulation is usually impossible when the supply is large and there is not much overextension of margin buying. Today, however, shortselling ... is capable of extreme abuse." The goateed professor also made this acute distinction between longbuying and shortselling: "Borrowed money comes out of an almost infinite reservoir, whereas borrowed stock may come from a very small reservoir. ... It is practically impossible for speculators to manipulate the value of money."

So far during the Depression the Stock Exchange has moved against bears by the Questionnaire and the complete ban on shortsales which was imposed for two days when Great Britain suspended gold payments. The Questionnaire was used in the autumn of 1929 to learn the extent and personnel of the "bear party." President Richard Whitney later revealed the short interest was at no time large during the days of great breaks. It was used again last May and members who were too aggressive in their tactics received sharp callings down. The Questionnaire in effect last week revealed every bear, whether he was short 10 shares or 10,000 for one hour or one month. It placed the Exchange in a position to act if it wished to, but did not deter shortselling. Floor traders, however, had practically a "gentlemen's agreement" to refrain from taking short positions.

In few nations nowadays is there a "free and open market." The Berlin Bourse closed from July 13 to Sept. 3, opened with shortselling banned, then closed again. In Great Britain all trades were put on a cash basis which practically eliminated shortselling, as did restrictions imposed on the French and Athenian Bourses. On the Paris Bourse a seller must deposit 40% margin, also 25% of the amount of stock sold, which makes bear activities a rich man's privilege. One of the most dramatic events of the present crisis occurred in Amsterdam on Sept. 21 when, after a terrific slump in prices, all transactions were cancelled, the Exchange closed in statu quo. Montreal and Toronto met the British crisis by banning shortsales and establishing "minimum prices'' for securities but both last week were open with no restrictions. The Tokyo Exchange has been closing and opening repeatedly during recent weeks. Tokyo stocks broke badly when the shares owned by interests who operate the Exchange collapsed.

Restrictions exist in two important U. S. commodity markets. The New York Cotton Exchange does not permit a fluctuation of more than 200 points per unit (100 bales) in any one day. Since 1925 no single futures account on the Chicago Board of Trade may exceed 5,000,000 bushels at any one time, either long or short. This is a "working agreement" with the U. S. Grain Futures Administration and is strictly enforced, although it does not apply to bona fide hedging. Thus overextension of a trader on a scale which would hurt all other traders is almost impossible.

The Market. From a high of 156.93 reached during the jubilant Moratorium Market, the Dow Jones industrial averages slumped until last week they were at 95.66. The drop was 39.7% from the Moratorium Market's high and represented the greatest downward swing of the Bear market since the 48% shrinkage in October-November 1929. Last month the value of 240 listed stocks dropped $7,188,000,000 compared to the depression record loss of $9,514,000,000 in October 1929. One out of four stocks now sells at less than $6, about half a dozen active ones remain above $100, none above $200. The New York Times's index of 50 representative stocks last week offered buyers an average yield of 8.80% against 6.10% a month ago and 5.05% a year ago, showing the current nervousness over dividends. Nine months' dividend changes included 684 reductions, 991 omissions against 812 unfavorable actions in the same period last year. In September alone 106 payments were decreased, 128 passed. Although business conditions and forced selling from abroad have been the major factor in the market's performance, these gloomy figures last week spurred bear-hunters to action.

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