Bad Weather for Bulls

The great bull market stumbled to its knees last week. In five days stocks, as rated by the Dow-Jones industrial average, took their worst spill in 15 years. The selling started slowly on the first day of the week. Next day, as brokers crowded around the 18 trading posts of the New York Stock Exchange, the trickle of sales turned into a deluge. On four out of five days prices dropped, volume soared as high as 4,590,000 shares a day, highest daily total since the beginning of the year.

Aircraft stocks, favorites in the recent rise, led the list down. In one day Boeing went down 3 7/8 points to 79. Lockheed dropped to 1 1/4to 52 1/2, Douglas 3 7/8 to 79 1/2. After a one-day respite, the selling again spread through the list, to the railroads, steels, oils, motors. By week's end blue-chip losses ran to 3 3/8 points for U.S. Steel (76 1/2), 5 7/8 for Jersey Standard (110), 4 1/4 for American Telephone & Telegraph (179 1/4), 5 1/8 for General Motors (92 7/8). In five days the Dow-Jones industrial average dropped 19 points, to 401.08--lower than where it started the year.

"Rather Risky." For many a market break, Wall Streeters are hard put to find an explanation. But for last week's, the reason could be found right in the Washington hearing room where Senator J. (for James) William Fulbright was holding his "friendly study" of the stock market. As the days wore on, the tone of the questioning made it clear that the affair was becoming less friendly every minute, with no noticeable increase in studiousness. Senator Fulbright was questioning not only the doings on the stock exchanges, but was using his hearings to investigate business in general. He called for the Defense Department to produce names of the top 100 defense contractors, so he could check up on the impact of defense spending on the market; he got as far afield as the price of General Motors cars, which he seemed to think were too high.

As Fulbright opened the week's activities, the market declined only a little. It tumbled next day at the testimony of Harvard Professor John Kenneth Galbraith, 46, a onetime underling of Leon Henderson in World War II's Office of Price Administration. Galbraith, who says he has never bought stocks speculatively, was introduced as the author of a forthcoming book on the 1929 crash. Not surprisingly, he seemed to have the crash on his mind as he testified. In the present market, said Galbraith, there were resemblances to 1929 that were "possibly disturbing." Prices had risen at an "unhealthy rate," and if the market kept going up, "there could be a collapse."

Would Galbraith agree, asked Fulbright, that encouraging people to come into the market now, as the New York Stock Exchange has been doing, is "rather risky"? Galbraith agreed. In fact, said he, stock margins should be raised from the current 60% to 100%, to discourage new investors. After Galbraith finished, the New York Journal-American's Financial Columnist Leslie Gould suggested a headline to describe the effects of his testimony: EGGHEAD SCRAMBLES MARKET.

"I Don't Know." The task of unscrambling fell to Managing Partner Winthrop H. Smith of Merrill Lynch, Pierce, Fenner & Beane, world's largest brokerage house, who took the stand next day. Diplomatically, Smith said he doubted that the goings-on at the investigation had anything to do with the falling market. But he was "much more certain that there has been nothing in my testimony that would make the market sell off . . . than I am sure there wasn't in Professor Galbraith's [testimony] . . . I am happy to say the 1929 situation does not exist today." Well, asked Virginia Democrat A. Willis Robertson, is the market too high? Said Smith: "I would be perfectly willing to sit down . . . and discuss specific companies, but to say that the market is too high or too low . . . I don't know, and I do not believe anybody else knows." It might well "be asked why stock prices did not advance sooner than they did . . ."

When Smith said that he "would like to see" the capital-gains tax removed altogether, Fulbright asked: Why not tax capital gains as regular income? Said Broker Smith: "Why not be honest and have a tax on capital or confiscate capital?" Asked Fulbright: "Do you think they confiscate my salary? Do you sympathize with my position?" Snapped Smith: "I do, if you will sympathize with mine."

What about raising margin requirements, as Professor Galbraith suggested, to 100%? Said Smith: "I think it would be a very great mistake . . . It would dry up the market" at a time when business needs some $200 billion in new capital over the next ten years. A better place to worry about credit, he suggested, was in home mortgages (see below). Asked Smith: "If you limit borrowing on securities, why not limit it on real estate or cars?" Smith was not alarmed at the amount of credit in the stock market ($4.3 billion now v. $8.5 billion in 1929, when the dollar was worth half again as much). Among Merrill Lynch's new customers, said he, only an estimated 13% buy on margin, and only 25% of its old customers do so.

Did Smith agree with one market letter that said bull markets usually push prices to "ridiculously high levels"? Generally speaking, he did. And should there be a law to prevent this? asked Fulbright. Replied Smith: "It is pretty difficult to legislate against frenzy or against fools . . ."

Cause for Caution. Two old Washington hands then got their turns at bat: Chase National Bank Chairman John J. McCloy, former High Commissioner in Germany and ex-head of the World Bank, and Banker Marriner S. Eccles, for twelve years chairman of the Federal Reserve Board under Presidents Roosevelt and Truman. Both agreed that there was some cause for caution in the stock market's recent rapid rise, and Eccles wanted margins boosted to 75% in a hurry. But they thought that there was even greater cause for concern in "excessive" easy mortgage terms. Said Eccles: "I believe a point of [building] saturation is fast approaching with serious economic consequences to the economy as a whole."

Eccles also had a sensemaking plan for changing the present capital-gains tax. To encourage "the real investor," he would extend the holding period from six months to a year, make the tax on one-to two-year profits 20%, and scale it down on longer-term gains until "a tax-free status is ultimately reached."

Mighty Weak? At week's end Master Merchandiser Robert E. Wood, longtime boss of Sears, Roebuck, stepped up to tell about the success of Sears's $634 million retirement fund, which controls 26% of the company's common stock. General Wood noted that the fund had on hand $90 million in cash, which the trustees did not want to risk in the market now. Did that mean he thought the market was too high? Said Wood: "I wish I knew. I think the stock market depends on the country, and the country is growing . . . If we don't have a war and we continue to prosper, the market may not be too high." On the news of Sears's big cash position, the market sold off some more.

The final witness of the week was Manhattan Financier Benjamin Graham. When asked if he thought the Fulbright hearings had anything to do with the break in the market, Graham had a straightforward answer: "Yes, sir."

If that was so, rejoined Fulbright, then the market must have been "mighty weak." When Bill Fulbright started his hearings, he admitted that he knew nothing about the stock market. What he had not yet learned was that the market, no matter how fundamentally strong, is always sensitive--not just to one day's happenings in Washington, but to what the events may forebode for the future. With all the talk about boosting margins and closer controls for the market, it looked to Wall Streeters as if Fulbright's friendly study was turning into a political sideshow that would do the market no good. Under the circumstances some thought it best to lighten up on their stocks and see what the future might bring.

In the early days of the hearings. Fulbright wondered aloud whether there should be some kind of legislation to keep such columnists as Walter Winchell from handing out tips on stocks, thus running up prices. Last week the Wall Street Journal threw the idea back in Fulbright's face, with a twist of its own. One of these days, said the Journal, someone is going to ask for "a law to make it illegal for Senators to do anything that might affect the market."

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