History & Hysteria

Wall Street last week made some history and some hysteria. On the opening day of trading on the New York Stock Exchange, industrials continued their rise to record highs, and utilities touched their highest since Sept. 23, 1930; three times the tape fell behind. Next day the market turned right around and headed down, falling 4.23 points on the Dow-Jones industrial average. Not since President Eisenhower's heart attack in September 1955 had the market seen such heavy trading. As 5,110,000 shares changed hands, the tape fell behind seven times, once as much as 15 minutes, for the greatest number of late tapes since the Exchange began to count them in 1940. Wednesday the market tumbled further, and industrials dropped 5.58 in heavy trading.

Shortly after the market closed, the Federal Reserve Board raised margin requirements from 70% to 90% (buyers must put up 90% cash on their stock purchases), the highest requirement in eleven years. The Fed said it was alarmed by the rise in public borrowing to buy securities (which reached a record $4.3 billion in September), wanted to protect the public from getting in too deep. Actually, the public, i.e., small investors, has been getting out of the market since June.

Not a Dime. Day after the Fed's announcement, industrials moved up again. At week's end the rally sent industrials up 6.25 points to set another historic high at 546.36. The week's daily average volume of 4,880,514 was the highest for any week since July 22, 1933.

Blue chips were the chief gainers in the market rise, but many a less distinguished stock chalked up impressive gains. The week's most active stock was Studebaker-Packard. Though the company has not earned a dime in four years, its stock gained if for the week, largely on the strength of a recapitalization program approved by stockholders at midweek. In two months Studebaker's stock has doubled its value.

Forget the Present. Worry about inflation was one of the factors sending the market skyward. There was also realization that lagging earnings can come back fast (see below). Thus, though stocks in historic terms are overpriced (18 times earnings for the industrials), many Wall Streeters are using a method to evaluate them which simply disregards the present. Said Edmund W. Tabell, top market analyst for Walston & Co.: "What an investor must do is take an average of earnings over the past five years [$32 for the industrials], measure it against projected 1959 earnings [now being quoted at a record $40], and come up with something in between. What happens? By overlooking 1958 earnings, you are not really paying 18 times earnings at today's prices, but only 15 times earnings, which is a reasonable ratio in a business recovery." Tabell's prediction: the market will go to 750 within two years.

Many of the experts, who only a few months ago were predicting that the market would go down, joined Tabell in seeing a big rise ahead. Yet Wall Street was hard-pressed to find logic in the rise. Said Daniel L. Gutman, partner of Zuckerman, Smith & Co.: "The ravages of inflation are over for at least the next two years. To buy stocks today only as inflation hedges is like locking the barn after the horse is out."

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