40% Bulls & 50% Bears

One day last week while all Wall Street watched, President Roosevelt was closeted with his two chief Wall Street policemen-- Chairman William 0. Douglas of the Securities & Exchange Commission and one-time Chairman Joseph P. Kennedy. Though no connection was admitted by those involved, within two days the New Deal took a step for which brokers and bankers had clamored since the stockmarket smash began over ten weeks ago. Without offering explanation, the Federal Reserve Board reduced margin requirements for stock purchases from 55% to 40%.

The 55% level was established by the Reserve Board in February 1936 when the Dow-Jones industrial averages stood at a healthy 147 and Chairman Marriner Stoddard Eccles detected a tendency for brokers' loans to mushroom. Since then the Dow-Jones industrial averages have risen slowly to 194.40, and fallen sharply back to an unhealthy 125.73. By last week, the contraction of prices had reduced the equity of so many traders below 55% that, according to Frazier Jelke & Co., at least half the margin accounts were "restricted" (i.e., not eligible for new transactions which would increase the margin deficiency).

Saving grace of these circumstances was that brokers' loans last week stood at only $779,000,000, lowest point since April 1935. To businessmen who have wondered whether the current market troubles presage a major catastrophe such as occurred in 1929, this low figure was a bulwark of optimism. It proved that Wall Street credit was not over-extended as it was in 1929 when brokerage loans toted up over $8,000,000,000. Except for this strong argument the Reserve Board would almost certainly not have yielded to the Wall Street demands for lessened Government restriction.

Having yielded so much in the unpopular direction of Wall Street, the Reserve Board last week made a gesture in the opposite direction. In deference to amateur economists who believe that short selling by wolves of Wall Street is responsible for all recessions in stock prices,* the Board, for the first time in its history, imposed a margin requirement on short selling-- 50%. This gave the impression that bears were to be regulated more strictly than bulls, who are now permitted 40% margins.

Heretofore it has been considered beyond the Reserve Board's legal powers to restrict short sales and that job has been left to the stock exchanges. The New York Exchange has long imposed a margin requirement of ten points on any stock sold short. For a stock selling at $1 this meant not 50% but 1,000% margin. For the average priced stock it meant about 35%, but this was only a minimum and many a brokerage house upped it as high as 50% in special cases. On the 7,000,000-share "black Tuesday" fortnight ago, of the 15 most active stocks only four closed at prices above $18.12--and until a stock rises over that figure the old ten-point margin requirement means a margin of at least 55%. On the basis of this data, the new short-sale restriction was an empty gesture.*

The reduced margin on stock purchases was no empty gesture, however. Although it was an open admission that the Government was worried over the state of the market and could, therefore, be considered deflationary, on the day after the announcement stocks vaulted up. General Motors opened with the sale of 5,000 shares up $2.75 to $43.63; Chrysler with 10,000 up $5.25 to $74.75; U. S. Steel with 15,000 up $4.25 to $62.63. Prices presently lagged but closed in a final sprint which left the Dow-Jones industrial averages up nearly three points for the day. By week's end the averages had climbed to 138, up some 13 points from the week's low, the most optimistic display the market had made since August.

*Said Chairman Edward T. Taylor of the potent House Appropriations Committee last week: "I do not think there is any question but that the insiders in Wall Street brought on the present situation in an attempt to embarrass the Roosevelt administration." *Fast on its feet for once, the New York Stock Exchange month ago began a study of daily average short sales in A.T. & T., General Motors, S.O.N.J., New York Central. U. S. steel, last week announced that so far they were only 22.7% of the total.

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