The Day of the Little Bulls

In many ways, President Johnson's anti-inflation package failed to wrap up answers to the nation's basic economic problems. But, for at least the short term, it provided a lot of ribbon, and Wall Street investors responded enthusiastically.

At last, the bulls returned to Wall Street. For the first time since June, investors got a rise out of the stock market on Monday--the Dow-Jones industrial index spurted 15 points for the best single-day gain in 15 months. At week's end the Dow-Jones had risen 39 points, to 814, regaining $25 billion in paper values. As if to celebrate, hundreds of Wall Streeters observed "Mexico in New York Week" by watching an open-air performance by Mexican folk dancers and a troupe of musicians aptly called Los Toritos--The Little Bulls.

Ease in the Squeeze. The market had been ripe for a rise. Its ninth major downswing in 20 years had dropped shares to their lowest levels, relative to earnings, since 1958. Dozens of giltedged stocks--among them G.M., Du Pont and Allied Chemical--were underpriced. Such a situation was tempting to the mutual funds, which have been waiting for the right moment to buy at bargain rates. Then, too, there was good news: the elections in Viet Nam; the decision by the U.S. to buttress Britain's pound with more credits; the prediction by G.M. that next year's car sales will reach 9,000,000.

All these portents helped, but what really gave the market its momentum was President Johnson's better-something-than-nothing moves to battle inflation, primarily suspending the 7% tax credit for business investment. Nobody knew precisely what benefits

Johnson's prescription would produce, but it did tranquilize that ineffable factor, investor psychology.

Support from the Club. Though many businessmen were miffed by Johnson's Indian-giver tactics on the 7% tax credit, his proposal was endorsed in testimony before Chairman Wilbur Mills's House Ways and Means Committee by three corporate chiefs: A.T. & T.'s Frederick Kappel, the Pennsylvania Railroad's Stuart Saunders and Campbell Soup's William Murphy. They agreed to testify under pressure. Commerce Secretary John Connor phoned Murphy, urged him to testify and to recruit other members of the President's "club" of business advisers to come to his aid.

Murphy got in touch with Kappel and Saunders, then saw the President in the White House, told him that if business was to be called on to make its sacrifice, then it was also high time for Johnson to cut spending and to speak up more bravely against inflationary wage increases.

In the Ways and Means hearings, Treasury Secretary Henry Fowler professed an amazing lack of knowledge of what the proposals would accomplish. But he and Chief Presidential Economist Gardner Ackley privately gave Chairman Wilbur Mills plenty of data to help him win over his divided committee. The Administration argued that capital investment is running at an unsustainable rate of $62 billion this year; plant capacity is rising at 7% a year while demand is expanding by only 5%. Business appetite for credit has grown so lusty that in the first half of 1966 the volume of corporate bond issues was 82% greater than in the same period last year. The borrowing spree, says the Administration, is the reason why many small businessmen have a tough time getting loans at any price.

Removing the 7% tax credit, contended Fowler and Ackley, would reduce capital spending by an annual rate of $2 billion to $4 billion in the first half of 1967.

The Confidential Memo. The package is certain to be enacted, though many Congressmen suspect that it will be insufficient. One reason is that spending is accelerating, though the Administration refuses to say just how its outlays will climb this year. These figures are pretty well spelled out in a memorandum headed "To: Wilbur Mills, Confidential--Appraisal of the Economy." In it, the President's economists estimate that the administrative budget in fiscal 1967 will swell to at least $120.8 billion, way up from the original estimate of $112.8 billion. That rise heightens prospects for a tax increase after November's election and indicates that the President's halfway anti-inflation program, so soothing to the millions of voters who own stock, was dictated more by politics than economics.

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