Friday, Dec. 10, 1965

Two-Sided Market

Despite record profits, rising dividends and bullish forecasts for business in 1966, the stock market has been dropping for five straight weeks. As volume soared to an alltime high of 45 million shares last week, the Dow-Jones average of 30 industrials worried off another two points and closed at 946--just about where it was half a year ago. Is anything wrong? The answer is that Wall Street today is not just one market but two. While the blue chips lag and drag, investors are switching billions of dollars into lower-priced, lesser-known and more speculative issues.

Concentrated. Most of the 30 Dow-Jones stocks have not yet recaptured the highs that they fell from in last May's market break, but the 20 issues in Standard & Poor's index of low-priced stocks (less than $20) have jumped 39% above, their midyear lows. The most vigorously traded stocks lately have been highly speculative issues that have climbed spectacularly from their lows earlier this year. Among them, Transitron is up from 5 to 12 1/8, Ampex from 13 3/8 to 26 3/8, Fairchild Hiller from 7 to 21, and SCM from 161 to 56 3/4.

The recent risers are concentrated in a few industries. In November, airline issues climbed 17.5% because the industry is highly "leveraged"--every rise in sales beyond the break-even point translates into a tremendous advance in profits. Television manufacturers rose 16.1% as a group last month because of the color TV surge, and aerospace manufacturers gained 15.1% as a result of increasing defense orders.*

Solid Base. The Dow-Jones blue chips, meanwhile, have been hammered by stiffening Government controls over the economy, worries that interest rates will go up, and uncertainty whether profits can continue to climb. American Telephone & Telegraph has slumped from 66 7/8 to 61 3/8 since the Federal Communications Commission six weeks ago announced a thorough investigation of its rates, and Alcoa has dropped from 74 to 66 3/4 since the Johnson Administration cracked down on aluminum increases.

For all those blue-chip blues, the market seems solidly based and conservatively priced. Most of the trading is being done by savvy professionals and cautious institutions. Small investors account for a small (less than 10%) and steadily declining proportion of the volume. Most important, the key "price-earnings ratio" is low. Stocks in the Dow-Jones industrial average are selling for only 18.6 times their average per-share earnings--which is 7% below last year's level and 27% lower than the level just before the 1962 market break.

*The most spectacular performance last week occurred on the American Stock Exchange. After officers of Syntex, a supplier of basic material for oral contraceptive pills, reported that third-quarter earnings had more than trebled (to $5,900,000), the stock soared 22 3/4 points to 175 3/4--the biggest single-day advance in the recorded history of the American Exchange.

This file is automatically generated by a robot program, so reader's discretion is required.