Twenty Years Agrowing
(See Cover]
At his stand outside Manhattan's famed old Trinity Church, Shoeshiner Sam Angarenti cast a glum eye on the Wall Street brokers, clerks and messengers who were hurrying to work in the drizzling rain. Yanking his fuzzy wool cap down tighter over his ears, Sam cursed the weather and bad business. "Nobody wants to get a shine any more," he growled, "but I guess they're making money over there."
"Over there" was the grey, stone-walled New York Stock Exchange. Inside, on the crowded trading floor, there was no gloom, only pent-up excitement. The huge cavern buzzed with talk of General Motors' new five-year contract with the C.I.O.'s United Auto Workers (see NATIONAL AFFAIRS). The pact had been announced the day before, after the market closed, and traders now wondered how this testimonial to continued prosperity would affect the market.
At 10 a.m., at the opening gong, the traders began milling around the 18 stock trading posts. The biggest crowd jammed around Post No. 4, where two specialists handle the buying & selling of G.M. stock. Up rose a babble of cries. "I'll take 2,500 shares," offered one eager buyer. So many cried to buy "at the market" that the specialists, flipping through the sell orders on their books, had to huddle with a governor of the Exchange to set a fair opening price.
While the specialists worked furiously, traders' watched the magnified ticker tape flickering across the screens at the four corners of the great room to catch the flash on the price. Not till ten minutes later, a long time by Wall Street's split-second standards, did the tape flash, the first sale--and bring a roar of approval from the floor. The sale: a 25,000-share bloc worth $2,243,750 was sold for 89 3/4, up 2 1/4 points from the previous close and within an eyelash of G.M.'s all-time high in 1929 of 91 3/4.
Happy Days. Under the spell of the good news, the market surged up: the Dow-Jones industrial average reached 222.57, a new peak, the highest since September 1930. (At the start of this week, with slow trading because of the Memorial Day holiday, the market was quiet.)
By rising on such good news--and holding steady on bad--the scraggly, unsteady calf that had been born two years ago (TIME, June 14, 1948) had grown into the biggest, heftiest bull that Wall Street had seen since the wild and rampaging days of 1929.
More than once the bull had seemed about to die of fright at the scary look of the world. But like the great U.S. industrial boom, which had been prematurely buried time & again, he had refused to play dead.
On a rich diet* of blue chip stocks, vitamin-enriched by whopping corporate profits and dividends, he had developed plenty of muscles and a confident look in his eye.
The New Pedigree. But the Bull of 1950 had an entirely different pedigree from the 1929 breed. This time there was no bobtail following of shoeshine boys, elevator operators and other shoestring speculators trying to make a killing with 90% of their stock bought on credit. Tightening-up of margins had ended that. Nor did the Bull of 1950 look like the 1946 animal, when the market was overrun with speculators, the easy-come, easy-go war rich and black-marketeers. This time the bull had fattened on the cash of those who bought for investment--security buyers who were less interested in a short-term quick profit than in the prospect of good dividends for the long pull.
Despite the 50% margin rule (i.e., half the purchase price must be cash), many an investor in the current market had paid in full--and then tucked his stock away. Merrill Lynch, Pierce, Fenner & Beane, biggest U.S. brokerage house, reported that for every margin trader on its books today, there are five others who pay in full. Said Managing Partner Winthrop Smith: "In 1929, it was just the other way around."
The 1950 market was different in other respects, thanks to the watchful eyes of the SEC. There were no oldtime insider pools to run up the price of a poor stock and then unload it on unwary outsiders. Although the short interest (those who had sold stocks they didn't own in the expectation that the price would drop and the stock could be bought back at a profit for delivery) had risen to above 2,000,000 shares, there was small chance of any old-fashioned bear raids. The trick of selling short while the market is falling and thus driving it even lower has been barred by SEC rules. Now short sales may be made only on the "up tick," i.e., when the stock has risen at least 1/8 of a point.
But the chief discouragement to short-term speculating is the high tax rate. Only by holding a stock for six months can an investor in the higher income brackets take advantage of the long-term capital gains tax, thus pay only 25% on his profits instead of an income tax up to 82%. None of these restrictions and safeguards means that investors can not lose. In Wall Street, a fool can still be separated from his money as fast as anywhere else. But to date, the bull has been a well-behaved animal. How long will he remain so?
The Wild Look? Traditionally, the bull gets a wild light in his eye when the public comes in--the thousands of eager buyers who think that the market is something like a horse race and that it's no trick to pick the winner. The public last week was not yet in the market, but it was beginning to take an increasing interest in the form sheet. Around the nation, brokers' offices were filling up with excited newcomers wanting to know what was being bought by the mysterious and nebulous group of big speculators known as "they," so that the little fellows could buy some of the same.* And many young investors who had stayed out of the market because they had been told what had happened in 1929, were now coming in. In a Seattle broker's office, one cocky young man said: "Father lost heavily in 1929, but then Dad didn't know how to do it."
Heady Nonsense. With the newcomers, some of the heady nonsense of the '205 was back. A few stocks once more soared on nothing more substantial than rumor. When word went around the street recently that a little-known company named Claude Neon (which controls an airline and owns an insurance company among other things) was buying a company that "had something to do with television," the stock shot from 3 7/8 to 7 1/8 in a few days. In Kansas City, an oil operator got a contract to sink a well in Canada for National Petroleum--and National went from 30-c- to $1.95 in a few weeks. In Atlanta, feverish talk that Rexall Drug had invented a new wonder drug sent speculators rushing to grab 30,000 shares of the stock from one brokerage firm alone.
But, in general, cheap stocks (see table: SHOOT THE WORKS) and cats & dogs that usually looked like bargains to the public simply because they were low-priced were not getting much of a play. Even though some were paying as much as 17% in dividends, buyers were wary; they wanted to be more certain that the stocks, many in feast or famine industries, would keep on paying dividends before they plunged. What some of the newcomers hoped to find were companies that had been overlooked in the general rush, usually because they had been poorly managed and had been losing money. Such stocks were selling far below their book value (the proportionate equity of each share of common stock in the net assets of a company). While book value is often only a hazy indication of a stock's intrinsic worth, many of these laggard companies were giving other indications of value. With better business and better management, many companies were in the black in 1950-5 first quarter and were catching the eye of those who wanted to take a chance (see table).
Fool's Gold? The biggest speculative spree in the last six months centered around the incredible television stocks. Although television was splitting its production britches as long as two years ago, no one had seemed much interested in investing in what TV makers loudly called "the most dynamic industry in the U.S." Even Television Fund, Inc., a mutual fund specifically organized to deal only in TV stocks, finally got cold feet: it began buying stock in magazines, business machines and many companies that had nothing to do with TV. Then, as one broker simply put it: "A lot of people decided they liked TV stocks."
Admiral Corp., which had been selling for 7 1/8in 1948, shot up to 30, and even after a 100% stock dividend climbed back up to 39 1/4. Thus, anyone who had spent $712 to buy 100 shares at the low point, would have ended up with $7,850 if he had sold out at the top. The stock of Los Angeles' smaller Hoffman Radio Corp. went from a 1949 2 5/8 to 23 3/4 Motorola went from 14 to 52 and anyone who had invested $1,400 at the 1949 low would have had $4,260 at last week's price for the stock.
But even some of the TV makers acted as if this glitter might be fool's gold. When the stock of Emerson Radio was priced at 15 1/2, Emerson President Benjamin Abrams sold 235,000 shares of his family's holdings--and missed out on more than $6,500,000 in profits when a 10% stock dividend was declared and the price eventually rose to 39 3/4.
Pay Dirt. While the stock of Zenith Radio was jumping from 31 1/2 this year to a high of 70 1/4, Zenith President Eugene F. McDonald Jr. formed a subsidiary, "Teco," and gave his stockholders the right to buy one share of Teco at $10 for every five shares of Zenith they held. Teco is to handle his Phonevision for televising movies (TIME, May 1) if & when he gets it on a commercial basis. In a few weeks, the price of Teco rights was bid up to $38 on Chicago's over-the-counter market. The rise alarmed McDonald. Last week he flatly called it "unwarranted," and drove the price of the rights down to $22 in one day.
Is the whole TV boom that shaky? Worried Wall Streeters who had thought that the TV bubble might burst and dampen the whole market were changing their minds. Many TV stocks were actually living up to their high speculative hopes. For example, Emerson, though it was still selling around $35, had just turned in first-half profits of $3.47, thus was priced no more than a conservative five times its earnings. "You can call it speculation," said one thoughtful stock-market official last week, "but the figures on the use of television sets seem to lend a firm base to this kind of buying."
Premature Burial. The entire bull market had grown with the help of the same kind of hindsight. Born early in 1948, it was knocked to its knees by fears of war, the Truman election, the business recession and dozens of other minor frights. By June 1949, when the Dow-Jones industrial average had skidded from 193.16 to 161.60, some market experts officially hung a crepe on the bull. But others insisted that stocks were dirt cheap. Enough investors took their advice to start the market moving upward, even though industrial production was still going down.
By fall, it seemed the market had been an accurate barometer; industrial production had also started up with a rush. In the next six months, the Dow industrials climbed 30 points in one of the sharpest rises in the market's history, without once suffering a major break. Some diehard bears still quibbled that the market was not actually as high as the Dow-Jones indexes* indicated, because many stocks not on the indexes had not broken their 1946 highs. But to many analysts this only meant that the bull market was still in its first phase.
Broken Yardstick. The blue chips themselves, even after their long rise, still looked cheap in relation to profits and dividends. For example, the 30 stocks in the Dow-Jones industrial average will earn this year an estimated $25 per share v. 1929's $19.31. Even at their peak of last week, they were still yielding dividends of almost 6% v. 1.9% at the 1929 high of 386 and 3 1/2% at the 1946 high of 212.
Yet the whole U.S. economy has grown so impressively that comparisons with the past rarely told the whole story. In 1939, the U.S. population had total liquid savings (i.e., cash or its equivalent) of $49.6 billion, only $3.1 billion more than the total value of all stocks listed on the New York Stock Exchange. In 1950 the liquid savings stood at $175 billion, more than double the total value of all stocks listed on the Big Board.
The 1,254 companies listed on the Big Board had also changed. U.S. corporations last year had $67 billion in working capital, more than double the total ten years ago. Though they came out of the war with huge new modern plants which were largely written off as part of the war's cost, they have put another $70 billion out of profits into postwar expansion. In many cases, a company's stock, even after a year's steady rise, came nowhere near reflecting the actual value of the company. Said E. F. Hutton & Co.'s shrewd trader Gerald M. Loeb: "The stock market, uninflated, unmanipulated, unsupported by any Government props, is perhaps the soundest part of the whole economy."
How Big? Now the big question is: How long will the bull market last and how much higher will it go? No one knows for sure, but Wall Street, as usual, is full of opinions. Those who think it will go higher have plenty of solid arguments on their side.
There is no doubt that there are plenty of supports under the market. The most notable are the fast-growing investment trusts (TIME, July 11), which are pouring some $500 million a year into the market, much of it from people who have never bought any stock before. In the offing are millions more from the huge pension funds now being set up by company after company. Just as individuals are shifting from bonds, which pay only 2%-3% interest, into higher paying stocks, so pension fund administrators are planning to put much of their money into blue chips and perhaps even some businessman's speculations (see tables). After July1, the administrators of private trusts in New York State will also be able to invest in common stocks, the first time the state regulations have permitted them such leeway. They will be allowed by law to invest "up to 35% of their funds (an estimated $1 billion) in such common stocks as a "prudent man" would buy. The effect of all this safety-deposit buying would be to cut down the available supply of stock and consequently drive up prices.
New Wonders. But overall, the biggest power under the market is still the stability and steady growth of the U.S. economy. From last summer's low point of 161, the Federal Reserve index of industrial production has moved upward to an estimated 192 for May, only a few points below the postwar peak. And business is still getting better. Last week U.S. steel mills produced at the rate of 99 million tons a year, the highest in history, and orders were piled up for months ahead. The automakers, who had been cracking records week after week, cracked another: they turned out 146,470 cars. Production workers' earnings were still on the rise. And in April, unemployment fell from 4,100,000 to 3,500,000.
Housing units were going up at the rate of 1,185,000 a year; in the building industry, 1950's first four months were 53% ahead of the same period in 1949, the previous peak year. The rush to buy building materials had created such shortages that a grey market had sprung up again.
Although businessmen still worried over the federal deficit and the threat of an increase in their already high corporate taxes, many were genuinely hopeful about the outlook for the next nine months. They thought that business would remain close to the present level--or even increase. At a meeting of 51 of the nation's top businessmen in Boston a fortnight ago, Thomas J. Watson of International Business Machines predicted: "As I look out into the future, I see better things for the individual than I've ever seen before."
New Price Tags. Along with all this boom and optimism, the U.S. was also getting a strong puff of inflation. Last week the prices of tires, aluminum, food and a long list of other items rose. While the price rises were poisonous to consumers and many a businessman, they were so much more food to the bull market; many investors firmly believe stocks a fine hedge against inflation.
Though honest-to-goodness bears were hard to find, Wall Streeters kept their fingers crossed, simply because the market had often reacted to what people thought was going to happen, rather than to what the economic signs indicated. Last week many Wall Streeters worried because the bull market had not had the reaction (i.e., a backtracking of perhaps one-third to one-half of the advance) that had interrupted long market rises in the past.
According to the folklore of Wall Street, a rising market needs a periodic shaking out to give it firmer footing for a new rise. Such a shakeout might well come, simply because enough people think it will and, by selling in preparation for the shakeout, cause it to happen. But there was no reason that it had to happen. "This market," chirpily insisted Wall Street Analyst Ben Davis, "is a one-way street, which will run without appreciable reaction up to the dead-end marker."
Most bulls were betting that the deadend marker would not be reached until the industrial average hit at least 250, a relatively conservative mark of only ten times current earnings. The Chicago Journal of Commerce's Justin Barbour, the Middle-west's expert on the Dow theory, went even further. "The current rise is still the first primary rise of this bull market," wrote he. "Barring war [it] is likely to run into 1951 and above 300 for the industrial average." And J. H. Allen of Manhattan's Cohu & Co. bravely predicted that this was only the beginning. "The market at the present time may bear a position somewhat similar to 1924 [when it began an ultimate 296-point rise]." This was not as fantastic as it sounded; if the stocks in the Dow-Jones industrial index rose until they sold at 15.7 times earnings--the 1946 ratio--the index would top1929's record high of 386. Said cautious, sober New York Curb Exchange President Francis Adams Truslow last week: "Barring short-term adjustments, I am sure that the trend is toward a higher level." Wall Street Analyst Thomas W. Phelps put it more sprightly: "The people who jump out of windows this time are going to be those who sold too soon."
-Far from rich is the diet of many Wall Streeters nerve-racked by the ups & downs of the market. Wall Street restaurants are probably the only ones in the world where the ulcer-treating diet of crackers & milk is listed as a specialty of the house. One eating place proudly lists six different combinations: a choice of sal tines or graham crackers with milk, half & half, or cream. At least one "they" expert was no longer operating: Frederick N. Goldsmith, who thought the comic strips disclosed what "they" were buying & selling and who peddled the tips in his market letter, has been banned from the street by New York State. ' The New York Times index of 50 stocks last reek hit 148.21, only a shade under its 1946 high of 148.50. The New York Herald Tribune's index of 100 stocks reached 131.01, still under its 1946 high of 137.45. The most comprehensive index of all, a compilation by Barren's financial weekly of the prices of all common stocks on the Jew York Exchange, stood at 256.38 at the end of April (the most recent figure), compared to its 1946 high of 273.1. With the upsurge in May, Barren's index was estimated to be close to the previous high.
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