Bull Market

(See Cover)

It was getting so a regular customer couldn't be sure of a place to sit; eager-eyed newcomers were beginning to crowd the nation's 4,200-plus brokerage offices. The public was not doing much buying yet--it was still a professional's market--but moving ticker tape was once again a sight to see, and dreams of quick killings were again dreams to dream. Wall Street was nursing a baby bull, and a lot of cow-eyed mother love was suddenly loose in the land.

Rosy Glow. The bull was still scraggly, unsteady on his feet, not quite sure whether he was going to bellow or belch. Though still young enough to be scared by any wisp of bad news that came floating along, he was learning slowly--and, most important of all, putting on a little weight every week. Almost everyone admitted he was a pretty cute trick.

On the New York Stock Exchange, the Dow-Jones industrial averages last week edged up to a high of 191.32, best since Aug. 26, 1946. Then they worried off a shade or two. After such a fast climb as they made in May (180.28 to 191.06), a spell of backing & filling was to be expected. Many Dow theorists even expected a substantial "correction."

In some respects, the Dow-Jones averages--which record the rise & fall of 65 (out of 1,398) stocks on the Big Board--did not show the true strength of the baby bull market. Day after day last week, scores of stocks hit new highs for 1947-48 and stayed there. The booming oils had even passed their 1929 peak.

The U.S. economy seemed to warrant the rise. Overall profits were well up from last year's record peak. U.S. industrial production, which had slipped a bit during the spring, was climbing again. Backlogs of orders were building up in some industries faster than production could consume them. And U.S. employment, now soaring above 58,000,000, was expected to be greater than ever by midsummer.

Most of Wall Street's 1,200 market dopesters and crystal ballers felt a rosy glow. Some expected a rise of 20 points more or less, which would put the industrial average even with the peak of the 1946 bull market. Others, like Shields & Co.'s Edmund W. Tabell, were more optimistic. Said he: "My ultimate objective [for the average] is ... 250 to 260."

Grey Chill. A few even imagined 1929 all over again (without the hangover). But no one put much stock in such notions. The giddy '20s were gone forever. Now there are 75% margins; a speculator has to put up more than three times as much money to buy the same amount of stock as he did in '29. Moreover, greatly increased taxes have slashed the amount of cash available for speculation; and, in addition, the 25% capital gains tax cuts deeply into any profits.

In the face of these checks and dampers, Stock Exchange President Emil Schram, a onetime New Dealer with a deep-seated fear of wild speculation, was "not so sure this is anything more than a flurry." The diehards who were clinging to their bearish positions hoped he was right. Broker John H. Lewis, who had been one of the first to see the 1946 bear trend, was still seeing the market in a cold grey light. But he confessed that he was lonely. "Until a few weeks ago I had a lot of company," he said. "Now, I'm about the only one left. The others have all jumped on the bull wagon."

Confidence in the Future. What the bull wagon needed, if it was going to get rolling, was a public push. The "little fellow," who traditionally gets in the market just in time to get cleaned out, was not taking any big chances yet. Said Francis Adams Truslow, president of the New York Curb Exchange: "Investors have been hesitating for the past several years. They are just beginning to exhibit their confidence in the future."

The public doesn't come in, according to an old Wall Street saw, "until its avarice grows stronger than its fear." Even though the U.S. economy is bigger and richer than ever before, the investing-speculating public is dogged by fears of international crises, labor-management strife and lower profits.

As a barometer, the stock market has proved none too accurate, notably in the last two years. Back in 1937, the market fall was far worse than the drop in production; since 1942, the market has been much lower--in comparison with the gross national product--than it was even in the dark days of 1932 (see chart). The Dow-Jones industrials, now earning even more ($20 a share) than they did in 1929, are selling for only half as much.

In the inflated U.S. economy, Wall Streeters consider stocks generally deflated, feel that the Big Board is selling the U.S. short. Item: Standard Oil (N.J.), with indicated 1948 earnings of $16 a share, is now selling at $84--only a bit more than five times earnings. Many another stock, with years of steady dividends behind it, is paying anywhere from 7% to 11% a year in dividends (most bonds are paying only 3 to 4%). Samples: Westinghouse Air Brake, Standard Brands, Underwood Corp., American Safety Razor Corp., Cluett, Peabody & Co.

Such tasty bait as this, Wall Streeters hoped, would sooner or later lure in the public. They had some pious arguments in favor of it: a big bull market, for one thing, would not only fatten brokers' commissions, but would permit industry to raise some of the capital, through stock issues, that it badly needs for expansion. One simple recipe, favored by both Schram and Truslow to attract more investors: cut margins to 50%.

Coffee House Compact. The New York Exchange was built on speculation; in early days it often seemed jerrybuilt. Wall Street (socalled because of the log wall that peg-legged Peter Stuyvesant had built) was a natural site for trading: near the docks at its foot, there had long been a slave market. There, in 1790, when the first U.S. Congress voted "public stock" to redeem the Continental scrip which had financed the Revolution, a lively trade in the U.S. "stock" sprang up.

Wall Street's merchants and insurance brokers then did their trading under a buttonwood tree. Soon, 24 of the most active traders signed a compact: to favor each other and not charge less than 1/4% commission. They held a daily "call" of stocks in the Tontine Coffee House, which was "in an eternal buzz with gamblers."

The buzz persisted through the years--years in which the New York Stock Exchange was plagued both by fire (which, in 1835, destroyed its building and 647 others) and the continued forays of a ruthless crew of freebooters. There was grim-faced Daniel ("Uncle Dan'l") Drew, who originated the term of "salted & watered stock" (while driving cattle to New York, Drew used to feed them salt, then increase their weight by letting them drink enormous quantities of water); and the coldly scheming Jay Gould ("whose name, built upon ruins, carries with it a certain whisper of ruin"), whose attempt to corner gold brought on the "Black Friday" of 1869 and disrupted the nation's whole credit structure.

There was also lusty Jim Fisk, Gould's co-raider of the Erie ("harlot of the rails"), who was shot to death by a rival in love; Cornelius Vanderbilt, who used "salt & water" to good advantage in pasting together the New York Central; Jay Cooke ("parson & fox"), whose crash brought on the panic of 1873 and closed the Stock Exchange for ten days. And, too, there were hundreds of hardworking, little-publicized brokers who helped finance the incredible expansion of plants and railroads across the continent which put Wall Street at the front of the world's money marts.

Bloody Struggle. At the corner of Wall and Broad Streets, opposite the fortress-like House of Morgan, stands the $13 million, Corinthian-columned temple that now houses the Exchange.* The trading "floor," six stories high, is almost as cavernous as Grand Central Station. On weekdays, between 10 and 3, as many as 800 Exchange members (out of a total membership of 1,375) scurry among the horseshoe-shaped "trading posts," where the stocks are listed, some 70 to a post.

Around noon, the floor crowd thins as members dart out for a quick, nervous lunch. For those who take the elevator to the members' luncheon club above the high ceiling there is a bronze reminder of the daily battle: a bear & bull locked in bloody struggle.* Lunches are usually bolted, before the battle can take an unprofitable turn.

The basic operation of the market for the ordinary investor (who is usually optimistic and thus a bull) is as simple as was the trading under the buttonwood tree. Example: when an order is placed at an Omaha brokerage office to buy 100 shares of General Motors, it is wired to the broker's New York office and phoned to the firm's "floor partner" at the Exchange. He goes to the post where the stock is listed, finds another broker with G.M. stock to sell. He makes a deal, and sends a notation of the purchase back to his office by a telephone clerk. The number of shares bought and the price is then recorded on the ticker tape, which is tele-typed to 1,922 brokerages, banks and other offices in 310 cities. The actual stock certificate changes hands later.

For professionals, the market has another side (the short position), in which many of the biggest killings are made. Usually only professionals sell short, chiefly because the ordinary investor is vaguely suspicious of the process. Shorts (bears) sell stock which they do not own, hoping that the market will go down and that they can buy the stock later at a lower price. Meanwhile they borrow stock from brokers, sometimes paying a small fee, to turn over to the buyer. Eventually, of course, the short trader has to replace the borrowed stock by actually buying equivalent shares.

The fastest and most dangerous market ride is in "puts & calls," which is much like betting that a crapshooter does or doesn't make his point. For as little as $137.50 a speculator may buy a "call," i.e., a 30-day option to buy 100 shares of stock at the price prevailing on the day he bought the call. If the stock rises, he exercises the option and takes his profit. A "put" is the reverse: a trader buys an option to sell stock, cashes in if the price falls. (Both puts & calls are used as hedges to protect paper profits.)

All who buy & sell on the floor must own Stock Exchange seats, which are currently worth about $68,000 apiece (1929 price: $625,000). Some of the big brokerage houses, like Merrill Lynch, Pierce, Fenner & Beane, own a number of seats, while small houses with only two or three partners (and no branch offices) own only one. Since they work on a commission basis, most brokers were not getting rich until business picked up in this spring's upsurge. (Last year, Merrill Lynch, which did almost 10% of the Exchange business, netted $1,827,952; divided equally among the 81 partners, as it was not, that would be about $22,567 apiece.)

Brokers also trade on their own accounts, like every other speculator trying to outguess the market. If they succeeded with any regularity, they obviously would not have to sit around waiting for commissions.

Snoop & Jiggle. Though the Street always purrs with "inside information," the days of great market rigging schemes and of pools operated by "insiders" are dead & buried. (In 1929, there were 105 pools in which insiders ran up the price of the stock by buying heavily, then sold to outsiders and left them holding the bag.) The Securities & Exchange Commission keeps too close a watch now for any such shenanigans.

Working on the theory that "it takes a snoop to catch a jiggle," SEC has 1,100 employees watching all market operations, keeping a constant check on the ticker tape, looking for any unusual buying or selling. (In Manhattan, SEC's tape watcher is an old pool operator of the '20s who knows all the tricks.) If SEC smells something suspicious, it questions the traders, the officials of the company and, if need be, follows up with subpoenas and injunctions. Stock Exchange members, who once bitterly hated the reforming SEC, have learned to live with it; and the Exchange has tightened its own rules to make it hard for members to indulge in any fiscal high jinks.

Despite all these precautions, a foolish investor can lose his shirt just as fast as he ever could. Yet some innocents persist in thinking SEC more powerful than it is, and that somehow it will guarantee them against losses. All that SEC can do is make sure the investor gets an even break and that he can find out all about a stock before he buys. After that, he is on his own.

Lemmings & Sunspots. Some speculators put a good deal of trust in such diverse signs as the number of lemmings in Norway, the thickness of moss on trees, the trend of sunspots and tides. A somewhat better understood and far more widely followed "system" is the one evolved by Charles H. Dow, the bearded, brilliant editor of the Wall Street Journal at the turn of the century. Although the Dow theory now has almost as many variations as practitioners (and many Wall Streeters hoot at it, it is so highly regarded that it touched off an avalanche of buying last month--when it "confirmed" the bull market (TIME, May 24).

Dow thought investors would do "a great deal better in the long run if they tried to get 12% per annum on their money instead of 50% weekly." With that cautious approach, he decided that the ups & downs of. the market could be followed by charting the swings of key industrial and rail stocks.

In effect, a bull market was "signaled" when both averages--after a period of ups & downs--rose above their previous highs. If the averages fell--and went below their previous lows--that meant a bear market. Example: in 1946, the bear market hit a low in October, then sank close to it again in May 1947. When it failed to "break through," some Dow theorists hopefully looked for a bull market. When the averages rose last month and broke through their previous highs (made in July 1947), they proved to the satisfaction of chartists that a bull market was under way. Many a non-believer in Dow had said so long before that date.

If the Dow theory was right, a bull market had now been firmly established. As a barometer of the hopes & fears of businessmen, the Big Board in turn seemed to confirm the nation's bullish state of mind. The fear of a recession, which had haunted the U.S. for two years, had vanished under the stimulus of ECA, rearmament and continuing consumer demand. Retail sales, which had been slowing down, were increasing again: they were up 11% over last year. Industrial profits were up too, in many cases 25% or more above last year's peak. After last February's slump, commodity prices had almost edged up to January's levels.

Tight Breeches. Wherever one looked, the U.S. was splitting its breeches. In Texas, cash farm marketings had jumped from $469 million in 1939 to $1,974 million last year. In mushrooming Houston, millionaires were so common that nobody paid them much attention. In Atlanta, Frank H. Neely, chairman of the sixth district Federal Reserve Bank, took a look at the new industrial South and said: "I think we are more or less permanently on a higher level."

In the Pacific Northwest, where the huge public power developments of the 1930s had created whole new industries, Oregon's population had increased 39% since 1940 (compared to 10.4% for the U.S. as a whole). F.N. Belgrano Jr., president of the First National Bank of Portland, thought "the bull market long overdue . . . We should continue to have good profits." In the Midwest, the seventh district Federal Reserve Bank estimated that it would be two to four years before heavy industries catch up to demand.

There were soft spots here & there, especially in textiles and shoes. There were also many businessmen who were worried about what a drop in business might do to the present fat profits because of industry's high break-even points. It was a fact that more & more consumers were running out of cash, and going into debt; installment credit has risen to $13 billion, one-third more than it was in 1941. Nevertheless, it was a good bet that Wall Street's baby bull would put on some real meat before the bull-throated roar of the U.S. economy dies down.

* There are stock exchanges in 19 other U.S. cities, where trading is principally in stocks of local companies. Among the biggest: Chicago, Boston, San Francisco, Los Angeles, Philadelphia, Detroit, Cleveland. * The use of "bear" to describe a short-seller stems from an old saying about "selling a bearskin before the bear is caught." The use of "bull" to describe a speculator on the long (or up) side is believed to have come from the upward toss which a bull gives to his horns.

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