Bull Fever, Bear Facts

In Wall Street they tell of a trader who bought Chrysler near its depression low of 5, sold it near its 1937 high of 135 1/4, traded thousands of shares and yet lost a few hundred dollars on the stock. Reason: instead of sitting tight and letting the bull market work for him, he was in and out of Chrysler several times a day, buying on meaningless rises, selling on fractional declines.

Last week, with business dropping rapidly from its end of 1939 peak, the stock market started upwards from its recent doldrums, sprinted a surprising four points in four days. Bulls, to whom most news is good news, argued that the market always anticipates the production trend; that the '39 Wall Street doldrums had called the turn on the new business recession; that last week's sprint meant more capacity operations around the corner. But bears (to whom most news is bad news) remembered the Chrysler trader who failed to outguess the tape. They reasoned that the market's way of rising is to go down 1, up 2; that its way of falling is to go down 2, up 1; that last week's rally will soon be just another pointless zigzag in a longer decline.

Immediate stimulus behind the market's show of life was not:

> President Roosevelt's appointment of a "peace emissary" (see p. 15). Even if Sumner Welles were a peace emissary, peace would kill hopes of a real export boom.

> Nor was it the spectacular earnings report of Chrysler's tough, chipper K. T. Keller, who, in spite of a 54-day strike in the crucial last quarter, showed a 1939 net of $36,879,829, nearly twice 1938's. The market has been flicking salt on many other excellent 1939 statements, regarding them as eulogies of past business, irrelevant to earnings prospects now. More immediate news from Detroit was not so bullish: production was dropping below 100,000 cars a week, while dealers still had a premature stock of about 400,000 new cars on hand.

Main reason for the market's rally was the widespread belief that this recession which began about Jan. 1 would "run its course" by the end of March, clean out the inventories accumulated by the 1939 overproduction boom, free factories for a strong start this spring. Question last week was whether this bullishness had reckoned with these facts:

January production, not much below December's, was still too good to allow much dent in high current inventories. Federal Reserve Board production index, 128 in December, will probably be 120 for January, but this includes a seasonal adjustment which penalizes January for not being better than December. Actually, many production lines were kept close to capacity all month by backlog orders left over from 1939. Only now are unfilled orders being cleaned up, a real decline in output getting under way.

> A new buying wave could stop this decline, give the bulls something to snort about. But new buying depends on inventories waiting to be consumed. National Industrial Conference Board summary of 500 leading companies shows a 13% increase in value of inventories since Labor Day. Last week the ordinarily sluggish Bureau of Labor Statistics' price index (which jumped at the outset of the war boom) dropped from 79.1 to 78.8. This was evidence of the pressure of surpluses, suggested that inventories have become a problem, as in 1937.

Meanwhile, the 1940 "corrective" recession was gaining momentum. In Textiles, surpluses pushed prices down most sharply. Cotton mills, mostly on three shifts for months, are practically through shipping on 1939 orders, must face the fact that new orders are equal to only 33% to 40% of their capacity. Woolen mills are in the same plight.

> In Steel, production has fallen in six weeks from capacity to under 70%, is still heading down to the rate of current sales-about 45%. Ford last week bought 25,000 new tons (mostly of odd specifications) for only minor price concessions. But other big steel customers, sitting on ample inventories, were unfeazed, are trying to put steelmen over the barrel before reordering. Steel swings 18% of the Federal Reserve Production index.

> In Metals, price-cutting on copper continued (TIME, Jan. 29). The industry followed Kennecott down to 11 1/4-c- a lb. (war boom high: 13-c-), still failed to induce new orders. By now U. S. coppermen have become bearish on war export prospects (except to Russia--see p. 69). The trade anticipates a 33% cut in output if reordering does not save it in the next few weeks. Lead prices were cut twice in as many weeks for the same reason.

> In Coal, production was up from December, mainly because of colder weather, but under inventory pressure prices begin to follow the general downtrend. Evidence of increasing coal inventories in mining centres: freight loadings of coal fell, in spite of increased production, in spite of the freezing of the Ohio around Pittsburgh which prevents shipment by river. Further declines in steel & other production will curtail coal demand.

> In Lumber, production has been pacing sales for some time, is now off 13% from the year end peak.

> In Oil, inventories have been topheavy right through the boom, are still climbing, still bearing prices down.

> In Construction, contracts placed in 1940's first six weeks are 24% below the $412,263,000 placed in the same period of 1939. Reason: failure of privately financed construction (up $31,583,000) to offset the $131,404,000 decline in government financed contracts.

> In Retail Consumption, chain store and mail order sales were 12.4% ahead of January 1939, but the slowest months of the year were at hand. Even curtailed production (in autos and textiles for example) will probably run ahead of sales for the first quarter, when manufacturers almost always overproduce against increased spring sales. This year, normal seasonal overproduction may neutralize the recession's job of cleaning out surplus inventories. If so, the slump in production would be prolonged into the second quarter.

Adding all this up to mean wait-and-see, such big-money investors as:

New York City's Banks went further on relief (interest-wise), put another $18,000,000 into low-yield government bonds, could see no other more profitable investments to make.

Bethlehem Steel felt safe in retiring capital, announced it would pay off an $18,000,000 preferred stock issue. This unusual move, showing that Steel has no immediate use for money, was discouraging from the standpoint of U. S. investors, who have too few profitable places to put their money as it is.

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