Anatomy of a Bull Market

The New York Stock Exchange last week had three 2,000,000-share days, two 1,000,000-share days, a 750,000-share Saturday half-day. The Dow-Jones industrials average moved up to 130.7--its highest level since December 1940. Brokers in the back room worked ten-and eleven-hour days, and some smaller houses figured that their commission business had already paid their overhead for the full year.

This upsurge of the market had little to do with corporate earnings: during the week the National City Bank reported that earnings of 710 manufacturing companies were down 13.4% in 1942 from 1941. Nor was better war news the basic reason. The market apparently reflected something else--a dangerous something: the rise represented the bets of many investors that the general price level is still on its way up--that inflation is gaining ground.

The strong point of the buying was not in blue chips. What kept the tickers chattering was small-lot customers paying hard cash for "cats & dogs"--stocks selling under $5 a share (see chart).

On Monday seven of the ten most active stocks on the Big Board sold for less than $3 a share. Highest price in the lot was overcapitalized New York Central, which closed at 13 3/4, up almost 35% from its 1943 low. The No. 1 seller was Brooklyn-Manhattan Transit, a dead cat now being liquidated, for which eager buyers paid up to 1 1/2, well over its estimated liquidating value. (B-M-T's George W. Jones hastily issued a statement warning investors away from his company.)

By Thursday the cat-&-dog situation was bad enough to induce New York Stock Exchange President Emil Schram to lecture investors who are "intrigued only by the fact that particular securities may be selling at very low prices." Things quieted down a little--but not much.

The fact was that the cash-&-carry, cat-&-dog business has boomed ever since last fall: by the end of February, 20 "penny stocks" had risen 60% since May 1942, as against a 30% rise in the blue chips (represented by the Dow-Jones industrials average). And market men figure that some 90% of all recent sales have been for cash.

Wall Street was not rejoicing over this boom in bad bargains. Such buying troubles brokers: it takes little account of intrinsic values. Further, the dogs--once they get out of line--almost invariably fall faster than they rise. As market fluctuations go, cash-&-carry buying itself is safer than margin buying by unsophisticated bargain hunters--though smart-money margin buyers often tend to stabilize the market. But traditionally the cash buyer is the same little fellow who would rather have 100 bad shares at 2 than four good ones at 50. And brokers have an old maxim: the time to sell is when the elevator man starts to buy.

Wall Street also remembers that the last time the little fellow came into the market in a big way was when he went broke in the '29 crash--and learned to hate "the interests." The Street would like to see him spend his war earnings on real values this time. But the main significance of the bargain boom was that lots of people were willing to bet good money that the U.S. Government could not check inflation.

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