A Long Look Upward

Wall Street runs two ways--up and down. This fact was recognized long ago by one of the Street's alltime moguls, J. Pierpont Morgan. When asked by a brash young investor for a forecast about how the market would go, Morgan glared down his generously endowed nose, bristled his mustache, and replied: "It will fluctuate, young man. It will fluctuate."

So it always has, and always will. When Morgan died in 1913, the Dow-Jones industrial average, even then the popular indicator of market performance, stood at 81, and investors were happy about it. Last week the Dow closed at 840.53, which would have seemed astronomical to Morgan. Yet there was widespread worry because even that figure represented a 16% fall-off from a moment last February when the average briefly broke through the mystical 1,000 mark.

Since February, the market has mostly fluctuated downward. Now it would plunge by as many as 16 points in a day. Now it would steady, now twitch nervously upward--only to fall again. Market analysts, always ready with reasons, have exercised considerable imagination in explaining the day-by-day declines. Thus, on May 31, industrials dropped 12.97 points, and analysts said the trouble was a peace scare based on rumors about Viet Nam truce talks. On June 29, the average fell 9.30 points, and the drop was attributed to a war scare because the U.S. was stepping up its bombing efforts against North Viet Nam.

This was not as paradoxical as it seemed. What it really added up to was uncertainty about U.S. Government policy. Uncertainty is anathema to investors, and they have felt a lot of it in 1966. The U.S. economy as a whole is still roaring ahead, but inflation fed by war and high Government spending is a constant threat, and there are nagging doubts about what, if anything, Washington intends to do about it.

"Why?" Seeking a degree of certainty, many investors have taken their money out of the market and put it into fixed-interest bonds which, largely because of the Federal Reserve Board's tight-money policy, are offering the highest rates in decades. Chief victims of this trend are the blue-chip stocks, eminently reliable but yielding relatively low returns. "Why," asks Atlanta Broker M. E. Ellinger, "should an investor put money in the stock market and get a return from A. T. & T. at 3 1/2% when he can buy Trust Co. of Georgia savings certificates at 5%?" As a result of this attitude, dollar losses among many blue chips have been staggering. G.M., already hit by Ralph Nader and the auto safety hearings, went from a high of 113 3/4 last October to a 1966 low of 78 1/8 last week; for 1,310,000 shareholders, this meant a total loss of $8.6 billion in the value of their investment. In roughly the same period, the world's most widely held stock, A. T. & T. (which has also had its troubles because of FCC rate investigations), went from 68 1/8 to 53, representing an $8 billion loss to 2,840,500 shareholders--most of them small investors.

No Panic. In times past, such reverses could have set off panic afflicting the nation's entire economy. Perhaps the most remarkable thing about the 1966 market is that even the small-time stock buyer, though uneasy, has refused to panic. Instead, he is playing the game with considerable cool. Says a Milwaukee schoolteacher: "Most of the people I know who invest have job security. We're only losing profits now. I'm not going to chicken out." Says Boston Physician Dennis Slone: "When I look around and see the demands of the people for goods, I feel there is nothing to worry about. Anyone who drops out of the market now is making a real mistake." Says St. Louis Chemicals Executive Brooks Bernhardt, 51: "My wife and I own 14 common stocks, plus shares in a mutual fund. We've put these away for our retirement. Recently, they've all gone down a little bit, but whether the market goes up or down in four months or two years doesn't make that much difference to us." In Cincinnati, Kenyon Z. Mitchell, 78, a retired railroad electrician, says almost proudly: "I'm not buying now because I want buying power for when the time comes. I've had some tremendous profits over the years. I've had some losses. Nobody has plusses all the time." And in Boston, Housewife Cici Philbin, 25, the daughter of a stockbroker, senses opportunity in the slide. Says she: "It's a good time to pick up G.M."

Such sentiments fly in the face of any 1966 doomsayers (or, in the old Wall Street word, bears) who in their most nervous moments may conjure up images of 1929, when stock values almost overnight plummeted by 50%. To talk about 1966 in 1929 phrases is to compare Gemini 10 to the tin lizzie. At the time of the Crash, a mere 1,371,920 people were, as the saying went, "playing the market." Most of these were either professional speculators or amateur gamblers who might have done better at the $2 window at the nearest race track. Today, corporate ownership through shareholding is the warp and woof of American life. Some 20,120,000 people (more than half of them women) own stocks in their own right. Another 3,600,000 participate in the market through shares in mutual funds, which themselves own $35 billion worth of common stocks. Millions more are linked to the stock market by company profit-sharing and corporate pension plans; pension funds alone have $39 billion, or 55% of the present market value of their assets, invested in common stocks.

The national spread of shareholding is such that the system itself has been dubbed "people's capitalism." It is fitting indeed that that title was invented by the Wall Street-based brokerage house that is most responsible for selling common stocks to the common man. Its corporate title is already part of American folklore: Merrill Lynch, Pierce, Fenner & Smith.

The Goliath. By any standard, Merrill Lynch is the Goliath of stockbrokers. The company maintains 165 offices: 15 in New York City, 134 elsewhere in the U.S., and the rest in such foreign trade centers as London, Paris, Madrid, Tokyo, Geneva, Hong Kong and Beirut. The international string of offices is hooked together by some 285,000 miles of private wire. Merrill Lynch belongs to 41 stock exchanges, from New York to The Netherlands, averages 4,900 sales or purchases during every market hour. On the biggest bourse of them all--the New York Stock Exchange--Merrill Lynch has a hand in 12% of the round-lot (100 shares or more) and 20% of the odd-lot (less than 100 shares) transactions. Its capital totals $148.2 million, almost three times that of its nearest competitor, Bache & Co. The vaults in Merrill Lynch's headquarters on Pine Street (two blocks from Wall) contain $13 billion in negotiable securities. In all its transactions last year, the big brokerage house grossed $228 million for a net profit of $30.8 million. More than ever, it fits the name that Wall Streeters in awe and envy bestowed long ago: "The Thundering Herd."

The head of the herd obviously holds huge responsibility--to his company, its clients, the nation, and for that matter, the world. It was therefore all the more remarkable that Merrill Lynch almost routinely underwent a major leadership change just last month. Michael McCarthy, 63, who had been chairman since 1961, moved up to executive committee chairman. President George J. Leness, 63, became chairman. With only two years left before mandatory retirement, McCarthy and Leness are really beginning to phase themselves out; they plan to spend most of their time pondering about Goliath's long-range future.

In as president and operating head stepped James Edward Thomson, 61, a taciturn type who has never sold a share of stock. It made sense that Thomson is an administrator instead of a salesman. Beamed Edward A. Pierce, 92, last survivor of the firm's founding fathers: "I don't know anybody I would pick over that boy as head of our firm."

Thomson takes charge of an organization that markets stocks with the same detail and cost consciousness that the A. & P. applies to tuna fish and canned peas. Among Merrill Lynch's major divisions:

>The "Front Office," comprised of 2,800 registered representatives, or "customers' men," who retail stocks and account for 65% of Merrill Lynch's business. The firm selects one of every 15 sales applicants, trains him for seven months in a program that includes McCarthy, Leness and Thomson as schoolroom lecturers. It pays salesmen a salary that is now at a median of $18,000 but ranges upwards of $200,000 for real stars. To discourage "churning"--the unnecessary turnover of stocks in a customer's account as a way of earning fees--Merrill Lynch, unlike most brokerage houses, does not pay its salesmen commissions. Instead, it gives "adjusted compensation," or extra pay, for good performance, together with year-end bonuses that can amount to an additional 17 weeks' pay. Registered representatives are also fined, in amounts ranging from $10 to $50, for mistakes in their paper work.

> Research, which includes an elite staff of 210 analysts, whose far-ranging corporate sleuthing costs up to $9,000,000 a year. The analysts, including six in Canada and four in Europe, keep tabs on 3,600 companies both to guide individual customers and to orient Merrill Lynch's own underwriting. The firm also has a staff of 80 whose only duty is to analyze customer portfolios as a free service; last year, they scrutinized and made recommendations about 51,000 stockholdings.

> Commodities, centered at the Chicago Board of Trade, where Merrill Lynch is one of the biggest, and most cautious, brokers. It handles 7,000 commodities accounts. Because of the precarious nature of commodities trading, the company requires that each prospective customer fill out an extensive financial form before it will accept him. The rule of thumb, says a vice president is, "Does this guy have $10,000 he can afford to lose?"

> Underwriting, in which Merrill Lynch has come from a poor 60th position among investment bankers 20 years ago to third place in management of corporate underwritings. The firm underwrote $1.3 billion worth of corporate securities last year, this year has already scored a major coup by handling the negotiations in which Howard Hughes sold his stock in TWA. Merrill Lynch got the business partly because, in a specialized field where personal contacts count, it had long ago been the broker that Hughes's father used. It sold the stock at $86 a share, pleased Hughes by handing over a certified check for $546,549,771, got $2,900,000 as a manager's fee for handling the transaction.

The Rules. Whether it deals with an eccentric multimillionaire like Hughes or with a centric, ten-share customer in its Wilson, N.C., office, Merrill Lynch imposes upon itself a set of rules that goes far beyond the requirements of law or the ordinary ethics of Wall Street. As a privately held corporation, it need not make much public disclosure about its transactions; yet almost alone among Wall Street houses, it issues a candid annual report addressed "To Our Customers." Also standing solitary among the big brokers, Merrill Lynch so far has refused to deal with the mutual funds, thereby turning away at least $10 million a year in commissions. The reasoning: there might be an argument about who should be given the first chance to buy attractive stocks. Should it be the huge mutuals? Or should it be the firm's individual customers who have made its fortune?

Merrill Lynch also places extraordinary--for Wall Street--restrictions on its own employees. None is permitted to make a bank loan using securities as collateral. None is allowed to sell stocks short on his own account. "Significant debts" are grounds for firing. So is "high living." As a result, Merrill Lynch men are a notably ingrown group, spend many of their social hours with one another playing low-stakes bridge.

Just to make certain that all offices observe the rules, the company keeps inspector teams constantly on the move. Top executives often act as inspectors--as witness a time early this year when Thomson, then executive vice president, paid unannounced visits to the Tokyo and Hong Kong offices.

This discipline was drilled into Merrill Lynch by the man who can, more than anyone else, be called the firm's founder. He was Charles E. Merrill, son of a doctor and drugstore owner in Green Cove Springs, Fla. As a youth, Merrill went north to Amherst College, where he worked part time as a men's clothing salesman, made $1,300 in commissions during his freshman year. Though he left Amherst after two years, his recollections of the college were fond enough for the school to benefit handsomely from his will: Amherst currently gets about $500,000 annually in income on Merrill's estate, will some day get one-fifth of the principal, which continues to grow, now totals $35 million. From Amherst, Merrill went back to Florida, became a reporter-typesetter for a West Palm Beach newspaper. He finally hit Wall Street as a fledgling bond salesman in 1914, almost immediately opened his own firm with $4,000 in savings and a salesman of soda fountain supplies named Edmund Lynch as partner. They intended to call themselves "Merrill, Lynch & Co." but an errant printer forgot the comma. Merrill decided to ignore the error--to the confusion of later generations of investors, who still address letters to "Mr. Merrill Lynch."

By 1928, Merrill Lynch was prospering. But Merrill was among the first to notice ominous signs on Wall Street. "Now is the time to get out of debt," he advised friends and customers. And he practiced what he preached. Merrill and Lynch sold out, transferred $5,000,000 of their capital and most of their employees to the Chicago firm of E. A. Pierce & Co. They spent the Depression looking after their personal investments--which in Merrill's case included a succession of three wives. Lynch, whose main job over the years had been to temper Merrill's flamboyance, died in 1938.

First Floor Frills. In 1940 Merrill decided that it was safe to re-enter the brokerage business. He reconstituted Merrill Lynch and merged with E. A. Pierce; a year later, Fenner & Beane, which was among the most important commodity houses at Chicago's Board of Trade, entered the growing complex. During his restful Depression Period, Merrill had seen where the future lay: selling to small investors. "Let's bring Wall Street to Main Street," he exhorted his aborning herd. Main Street, however, was not yet that enthusiastic. Merrill's first annual report to customers, issued for 1940, recorded the only loss the firm has ever incurred --$309,000.

Undeterred, Merrill continued to expand his company, dropped from his personally written creed of conduct a couple of rules. Among these was one instruction to "Eliminate All Expensive Frills." From upstairs offices, Merrill Lynch moved down to showplace street corners, upped advertising, sent salesmen out to explain the stock market to anybody who would listen. The system worked. Comments Author Robert Sobel in his history of the New York Stock Market: "Merrill was able to accomplish something the New Deal attempted and could not carry through; he brought Wall Street to the nation."

The Name's the Same. After Merrill's death in 1956, the firm name changed again. Since, because of death or departure, no more Beanes had an interest in the company, the title of Merrill Lynch, Pierce, Fenner & Beane became Merrill Lynch, Pierce, Fenner & Smith. This honored Winthrop H. Smith, who had risen from office boy to operating manager. Three years later, in 1959, the firm made an even more significant switch. Anxious to keep its capital stable even if partners died or retired, Merrill Lynch incorporated itself, with McCarthy as president. One of the key stockholders (690 in all) was James E. Thomson, who had been hired in 1924 as a Wall Street runner by Merrill himself.

Born in Southampton, Ont., of a Scottish father and a mother of English descent, Thomson was a bright but restless student. He left Canada at 18 without finishing high school, headed south of the Canadian border, turned up at the home of an uncle in the Queens borough of New York City. Interested in figures and bookkeeping, he went to Wall Street for a job, was hired by Merrill as a runner at $14 a week. "I remember the salary well," says Thomson, whose present annual income is over $100,000. "I couldn't live on it."

Thomson soon moved into the "backstage" offices. He clerked by day, by night took accounting courses at New York University. In 1930, after E. A. Pierce & Co. took over Merrill Lynch's business, Thomson moved west to work in Cleveland and Detroit; in the depth of the Depression, he and other employees were sometimes paid in scrip (which was good for food) instead of cash. After the 1940 reorganization, Thomson moved back to New York, where he worked under, and eventually succeeded, his longtime friend Mike McCarthy as head of operations, the paperwork part of the business.

Success & Savings. Under Thomson, Merrill Lynch's backstage today is the most highly automated and most economical operation on Wall Street. As a junior executive in the 1940s, he began fretting about all the time that it took to move paper back and forth between front office and back. He thereupon introduced a conveyor-belt system that cut paper shuffling (and costs). In 1956, the firm moved boldly into computers. Strange as it may seem, Wall Street, which certainly has pressing need of computers, was slow to get into the electronic act; the New York Stock Exchange itself is still in the midst of conversion from a hand-run system to a computerized operation.

In this area, Merrill Lynch leads the Wall Street field by miles. By day, its computers direct orders and confirmations to and from trading floors, provide up-to-the-second quotations on 490 over-the-counter stocks and computerized estimates on the value of 2,600 others. By pressing a few buttons on a desk console, a salesman anywhere in the U.S., within five minutes can get back a computerized analysis of the prospects of almost any stock. At night, while human employees rest, computers handle the firm's accounting, run off customer statements, prepare monthly reports, figure margins on individual accounts, reckon Merrill Lynch's daily cash position.

Hard but Clear. In the highly competitive brokerage business, Merrill Lynch naturally plays hard. Most of its rivals agree that it plays clean. Attempting to set up a computerized operation for members of the Midwest Stock Exchange in Chicago, Midwest President James Day recently called upon Thomson for advice. "I think that computers are good for the industry as a whole," said Thomson. "We'll be glad to help you out." Says Day today, after receiving the benefits of Merrill Lynch advice: "We are entering an era in which the computers are going to do everything except make love. Jim Thomson is a man capable of understanding what these machines can--and cannot--do."

While he is computerized at work, Thomson leads a quietly unprogrammed life outside his office. He and Wife Dorothy, whom he married in 1927 after a courtship that began when a mutual friend introduced them on a commuter train, live in a shyly elegant ranch house in Westfield, N.J., an hour's trip by train and ferryboat from Wall Street. Thomson, in Merrill Lynch fashion, is an eager train-and evening-out bridge player; though he has a bent-armed swing, he plays golf in the low 80s, has certificates to prove that he has thrice scored holes in one. His two children, both grown and married, remain close to the marketing place. Son Donald, 34, an Amherst graduate, is a registered representative in a Merrill Lynch New York branch office. Daughter Joan, 30, is married to a Merrill Lynch junior executive, soon to be transferred to Detroit to the same job his father-in-law held some 30 years ago. Thomson has five grandchildren; and in preparation for visits from the older ones, he maintains in his Westfield home a slot machine of the sort classically known as a "one-armed bandit." He even furnishes the kids with dimes to try their luck at the monster. Explains he: "I want to teach them that no matter what they do, they're going to lose money when they gamble."

9% a Year. To Thomson, investing in the market is no gamble, and he has statistics to prove his point. Under Merrill Lynch encouragement--to the tune of $400,000--the University of Chicago's Center for Research in Security Prices recently studied all stock-price changes since 1926, carried out 56,558,000 computerized transactions. Result: a long-term profit that varied according to tax bracket: a tax-exempt institution would have earned 9% per year on its investment since 1926; an individual in the $10,000-a-year bracket, 8.2%; and one in the $50,000-a-year bracket, 6.8% .

Thomson was recently elected a governor of the New York Stock Exchange. Three afternoons a week, therefore, he walks the two blocks from his office to the Exchange for Board of Governor meetings. In the N.Y.S.E. board room, Merrill Lynch is considered to be a maverick. It is pushing for changes that leave old conservative brokerage houses aghast. By 1975, the number of U.S. shareholders will double, the number of listed shares will double (to 20 billion), and the daily volume of trading will grow by some 60% (to 10 million shares in an ordinary day). To handle all this business, Thomson figures, both the Exchange and the brokerage houses it serves are going to need a lot more modernization. In all, Thomson estimates, Wall Street will need as much as $1 billion in new capital, and there is only one way to get it. That is by allowing N.Y.S.E. member firms to go public, selling stock in their companies to outsiders. This runs contrary to Big Board rules and regulations. And it is with some justice that Merrill Lynch people gibe at the N.Y.S.E.'s promotional slogan--"Own a share in American Business." That, goes the plaint, ought to be expanded by two words: "Except Ours."

Despite disagreements and rivalries, all stockbrokers share the concern about the continuing downward market movement. There is a cliche that brokers don't care whether the market goes up or down; after all, they make their 1% standard commission on both sell and buy orders. No broker can safely adopt that attitude. If the market were to perform so badly that Americans lost faith in shareholding as a viable way of investing, there would be few sales, few purchases and few commissions for brokers. Which, to some extent, is precisely what has been happening this summer as averages fell, investors decided to wait and see, and daily volume dropped.

In Wall Street phraseology, the blue chips have been "leading" the market downturn. By anyone's terms, big investors have been showing the way. In the last nine months, mutual funds sold $73.1 million worth of General Motors stock and $31 million in A.T. & T. At the same time, the mutuals have been buying growth and glamour stocks. They now hold 24.4% of the stock in nine domestic trunk airlines--which, despite the airlines strike, still have great potential. They also own 11.2% of companies in the "office equipment" area--such as SCM and Xerox--and 10.6% of corporations involved in the explosive field of color television.

The individual investor has been following the same pattern. Somehow the blue chips have come to be regarded as the square buy. On the other hand, many a corporation with "on" or "onics" at the end of its name seems to take on an inviting glow. Examples: Textron, up since the February break from 43 3/8 to 53 1/8 and Transitron up from 13 3/4 to 18.

Despite the market's overall malaise, investors can still do very nicely through careful shopping. "This is a 20% market," says lohn Zeisler, a Chicago broker. "One out of every five stocks is still going up." Along with the onics, there are other swinging investment areas. One is education, where a teaching revolution in methods and televised or computerized machinery is under way. Crowell-Collier has risen from 45 1/2 to 51 3/8, McGraw-Hill from 66 1/4 to 69, while shares of IBM, counting a three-for-two split and a new issue in May, have increased in value 5.1%. Recreation is big on Wall Street. And Polaroid, which has gone from 130 1/4 to 171 1/2 since February, is its high flag. Even the money-spending programs of the Great Society offer opportunity to the selective investor: thus, medicare has injected new strength into drug and hospital-supply company stocks. Becton, Dickinson & Co. is up from 59 to 72 3/4.

Firmer Stance. What does the future hold for the market? Some pessimists say that the average will plop into the low 700s and stay there for a long while; corollary to this theory is the idea that some time next year the U.S. economy will suffer a recession.

No one can say flatly that this will not happen, but it seems unlikely. After the 1966 elections are over in November, the Johnson Administration can be expected to take a more definite stance on fiscal policy; this should put an end to some of the uncertainty that has been depressing the market. Moreover, many investors feel that the blue chips have gone down by about as much as they ever will. Take the testimony of Judson Sayre, retired vice president of Borg, Warner, who now spends his time investing for himself in a quiet office in Chicago's Merchandise Mart. Sayre has done very well on growth stocks, reputedly has made $1,000,000 on Xerox and Syntex. Last week Sayre bought 5,000 shares of Pennsylvania Railroad, and he intends to pay more attention to other blue chips. Says he: "They have all their future in front of them."

The future, after all, is what the stock market is really about. And in their offices in the financial canyon of lower Manhattan, James Thomson and his Thundering Herd constantly ponder the possibilities of tomorrow, next month, next year and next decade. In their own expansion plans, Thomson & Co. are betting heavily on a bright market future. "The biggest problem facing Merrill Lynch right now," says Thomson, "is to be in a position to handle bigger volume when it comes. And we believe it is coming."

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