The Market

If a schoolteacher told an unruly pupil that as long as his conduct did not disturb the rest of the class she would not disturb him, the pupil might not feel complimented but he would certainly feel reassured. Last week U. S. stock-traders felt guilty about high security prices, wondered if the current Bull Market foreshadowed inflation, menaced the nation's future. To them Marriner Stoddard Eccles, Governor of the Federal Reserve Board, replied from Washington.

"How is it possible to have inflation when men are idle and plants are idle? There can be speculative excesses when surplus funds bid up stocks or real estate, but inflation in the generally accepted sense can come about only by increasing means of payment . . . faster than we can increase production. The volume and velocity of money must be related to the volume of actual and potential production of real wealth.

"What is meant [by talk of dangerous inflation] is not inflation . . . but a stock market inflation." Thus Governor Eccles dismissed the Market as being unrelated to the actual production of wealth, sniffed at apprehension over "speculative excesses."

True, such excesses might become dangerous if they absorbed too large a portion of the nation's credit and restricted funds available for more basic enterprises. But, said Governor Eccles, "the rise in security prices has not been financed by bank credit. The securities are being bought mostly for cash. . . . Money going into the stock market is not . . . retarding recovery." To prove his point, he cited the fact that although stock prices have risen 48% since mid-March, the Federal Reserve System's loans on securities (including loans to brokers) have declined during the same period.

The Governor concluded: "The System has no authority whatsoever to curb buying of securities. . . . Its only authority in this matter is over margin requirements, which apply only when transactions are on credit. . . . There is no speculative use of bank credit in the present situation."

Thereupon stock traders, freed from fear of the Federal Reserve Board, whooped gladly and put on a brisk weekend rally. Headlined the New York Times: WASHINGTON WILL NOT APPLY BRAKES TO BOOM IN STOCKS; ECCLES CALLS IT HEALTHFUL. Said one smart broker, reading Governor Eccles' statement: "Best market letter in years!" Traders drew only one moral: the Administration's "breathing spell" for business is to be followed by a breathing spell for the Stock Exchange.

That the Market was not at all easy in its own mind was shown by events preceding Governor Eccles' statement. Business news was nearly all favorable. Commercial Investment Trust, National Lead, many another corporation, declared extra dividends. Woolen mills were taking more wool than in any year since the War; boot & shoe production ran at an all time high. Utility companies were primed to battle the Utilities Act (see p. 62) and New York Central had upheld railroad solvency by paying back a large chunk of its R. F. C. debt (see p. 63). But the Market, wobbling uncertainly, broke sharply in a 3,900,000 share session with Chrysler, Case, American Can, National Steel, Allied Chemical and other favorites the chief losers. Commentators blamed profit-taking, French francs, and that old standby, "technical recession." A technical recession in the Market is like a strategic retirement in war. In both cases the long-term outlook is supposedly good but advancing troops have overrun their supports and need to consolidate their positions. The Market had done a good deal of overrunning. In their 48% rise from March to November, stocks moved from 63% of a 1926 "normal" to 93%.* Meanwhile industrial production had gone from 73% in March to 77% in November. Commodity prices were practically stationary. Earnings were estimated at about 42% of 1926. Thus recovery in the Market was far in advance of recovery in production, prices and earnings.

The Market, however, lives in the fu ture, not in the past. Looking over U. S. industries, it found improvement. Some times the improvement had already expressed itself in good earnings. Thus in the thriving automobile industry, the Market has run Chrysler from $31 to $90 and General Motors from $26 to $59. Sometimes the improvement has not yet blossomed into large earnings, but production is increasing and customers are ordering. Thus prosperous farmers are buying tractors and J. I. Case has gone from $45 to $111, Allis-Chalmers from $12 to $37 (TIME, Oct. 28). And booming motor manufacturers are buying steel, have lifted American Rolling Mill from $15 to $32, National Steel from $40 to $83. Sometimes improvement has shown small absolute but large percentage increases from depressed levels, and the percentage rise has been translated into a big boom for 1936. Thus a sharp recent upturn in building--though building is still at not more than 25% of pre-Depression levels--has raised American Radiator from $10.50 to $22 and Johns-Manville from $38 to $99. At $99 Johns-Manville was selling at over 50 times probable 1935 earnings. So, rotating from industry to industry, the Market has discovered better days and translated them into happy days.

The most recent and the most typical example of how the Market lives in the future is seen in the current boom in railway equipment stocks. This industry during Depression came close to hitting absolute zero. In 1932 no U. S. railroad ordered a single full-sized steam locomotive. For months the Market has been popping with statistics on the terrible obsolescence in railroad equipment. Two-thirds of U. S. steam locomotives are more than 20 years old. Obsolete equipment is expensive to operate. There are not enough good freight cars left to handle any considerable traffic increase. The railroads are bound to get into the equipment field soon. Such talk has resulted in a great boom in rail equipment stocks. Example:

Baldwin is about even with American in locomotive production alone; each building more than 40% of whatever building there may be. But Baldwin also controls Midvale Co. Baldwin lost $3,698,000 in

1934 and is reorganizing under Section 77B. Its common has risen from $1.50 to $6. its preferred from $7.50 to $36.

American Locomotive also makes steel wheels and springs and a complete line of oil-refinery equipment. In the first half of 1935 it booked orders for eleven locomotives. It lost $2,100,000 in 1934, may lose $1,500,000 in 1935. Its common has risen from $9 to $27, the preferred from $32 to $74.

Lima gets the rest of the locomotive business. The company recently got a $650,000 order (five locomotives) from Chesapeake & Ohio. Lima lost $491,000 in 1934; its 1935 deficit will probably be a little larger. Its stock has advanced from $13.50 to $27.

Pullman, Inc., with a monopoly on sleeping car transportation and a manufacturing division that is No. 1 car builder of the U. S., made $2,957,000 in 1934, lost $505,000 in the first nine months of 1935. Pullman recently cut its dividend from $3 to $1.50 yet Pullman stock has risen from $29.50 to $52.

American Car & Foundry is second largest freight and passenger car builder. This company has a capacity of 98,000 freight cars a year. During the first seven months of 1935, railroads bought from all builders 7,091 freight cars. The company lost $1,900,000 in the year ending April 30, 1935. Its common stock has gone from $10 to $32; its preferred from $25 to $64.

Westinghouse makes 75% of U. S. railroad air brakes, has an interest in auto brakes and is a large manufacturer of signal and safety devices. It made $656,000 in 1934, lost $95,000 in the first half of 1935. Westinghouse stock has risen from $18 to $35.

New York Air Brake which makes the rest of the railroad brakes, made $54,000 in 1934, lost $65,000 in the first half of 1935. But U. S. railroads have a ten-year-plan for equipping 2,000,000 freight cars with a new, improved and more expensive brake. New York is working on a recent order for 1,000 new-type brakes. Its stock has moved from $18.50 to $36.

As rail equipment companies were worse off in 1935 than they had been in 1934, traders admitted that the stock boom was strictly on a when, as & if issued basis. Pessimists pointed out that though obsolescence is a matter of fact when the purchaser has money, it is a matter of opinion when he has not. The railroads were expected to lose more money in 1935 than they had lost in 1934. They still had an excess supply of locomotives and freight cars, and Railway Age estimated a 1935 production of only 100 locomotives. To this traders retorted that rail equipment stocks were still underpriced, that even a small equipment expenditure by a railroad would be big income for an equipment company. No other group of securities offered such an extraordinary gap between depression lows and prosperity highs.

The Market felt that the U. S. was at last in a definite recovery stage, regarded the present upturn as merely the beginning of the next boom. It saw no harm in getting ahead of the parade, as long as it knew that the parade had started. The spirit of recovery remains considerably superior to its statistics, but the Market was never one to live on bread alone.

*Figures from Standard Statistics, with 1926 equaling 100%.

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