Room at the Top

For the seventh time since World War II, the Federal Reserve Board last week made it harder for investors to buy stock with borrowed money. It did so by raising the so-called margin requirements from 50% to 70%--meaning that to pick up $1,000 worth of listed stock, an investor will have to put down at least $700. The Fed's seven governors, who often split on other matters, voted unanimously for the "precautionary" boost. But they passed the word around that they plan no further movement of margins for quite a time.

Why the increase last week? The Fed believes that the recent flurry of stock splits and dividend increases has at last begun to tempt many small investors back to the market, and it wants to protect them from going too far out on a limb. Loans for stock purchases have jumped 43% in the past 16 months to $6.9 billion. While this is little more than 1% of the value of the shares on the New York Stock Exchange, the Fed figured that the upward trend meant it was time for tightening, and felt that the market was strong enough to take the margin increase.

Stronger Footing. When margins have been raised in the past, the market has usually responded by dropping for a fortnight or so, then climbing anywhere from 5% to 27% for three months to a year before topping out. Last week the Dow-Jones industrial in dex worried off 5.19 points in the first day after the hike, but came back 6.78 points in the next two days to close the week at 750.81. Where the market will move next depends much less upon margins than upon the soundness of the U.S. economy. As of last week, U.S. business was climbing toward all kinds of new records in 1963: a $584 billion gross national product, $462 billion in personal income, $27 billion in aftertax corporate profits.

The Dow-Jones index has risen 40% since June 1962, and the market is on much firmer ground than it was at the time of its previous peak in December 1961. The average price of stocks in the Dow-Jones average is 19 times per-share earnings now v. 25 times earnings then. Of the 30 Dow-Jones blue chips, 18 are selling for less now than at the end of 1961, although their profits are generally higher. (The index is up largely because of strong gains by eight stocks: Chrysler, G.M., International Harvester, General Electric, Texaco, Standard Oil of New Jersey, Standard Oil of California and Sears.)

Fastest Risers. Of 1,140 stocks on the Big Board, 880 have risen and 250 have fallen this year. The fastest risers lately have been the manufacturers of color-TV sets and office equipment, while the laggards have been the space and defense stocks. As of last week, brokers were generally bullish about many drug producers, airlines and electronics companies, and down on hotel chains, real estate firms, savings and loan associations. Perhaps it is time to be wary when most Wall Streeters start talking alike, and perhaps the market will take a beating if tax-cut hopes fail. But there is a consensus on Wall Street that the bull is strong and there is still plenty of margin at the top.

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