WALL STREET

The Lessons of History

The stock market's response to the Middle East crisis demonstrated what a powerful teacher history can be. At the first emotional scare headlines, the big international oils dropped and, as expected, carried the market down with them. Dow-Jones industrials tumbled 5.96 points in a single session, the biggest sell-off of the year. Then investors paused--and realized that panic is always unprofitable. As in the Suez crisis and other flareups, they turned their attentions to shares that might benefit from a harder U.S. stand. In buying surges that frequently left the ticker behind, investors sent industrials up 3.7 points to 486.55 and a new high for the year on the greatest weekly volume (15,395,350 shares) of 1958.

Offense & Defense. The major international oil companies did not recover. No one really expected them to. Royal Dutch dropped from 45 7/8 to 42; Texas Co. from 71 5/8 to 68; Gulf from 118 to 109 1/8. Domestic oils, which could benefit from greatly increased production at home in another situation like Suez (see below), staged a smart rally. Atlantic Refining rose from 38 to 40 3/4; Shell from 76 to 80 5/8; Amerada from 104 to 109 1/4. Like the home-grown oils, many other industries slowed by the recession picked up market strength as investors gambled on an imminent change in the business tides. Some steels, coppers and aircrafts rose to new highs for the year; Crucible Steel, one of the most active, rose 4 1/4 points to 24. The few groups that did not benefit from Wall Street's afterthoughts on Lebanon and Iraq were defensive issues such as tobaccos and foods, which have been recession favorites. As investors switched to "hardware" stocks, Lorillard dropped 3 1/2 to 67 1/4; General Foods slid 1 1/4 to 62 3/4. "A whole new set of uncertainties now faces us," said John W. Finley, vice president of Blair & Co. "A stock like Lorillard would really be hurt by an excess profits tax, because such a tax penalizes a company with sharply rising earnings."

Despite the general enthusiasm, many shrewd traders are skeptical of the current market level, feel the market is due for a retrenchment. The experts argue that prices are already so high that they discount both a business upturn and any acceleration the Mideast crisis might bring. "Korea brought a quick dip and then a quick recovery," said Ralph A. Rotnem, partner of Harris, Upham & Co. "But today the market is more vulnerable; people are paying twice as much for earnings now as in 1950." Bears point out that the Dow-Jones industrials in mid-1950 sold at eight times earnings; during the '53 recession they sold as low as 9.5 times earnings; currently they are selling approximately 18 times earnings and yielding 3.9%, v. 6.16% at the time of Korea.

Fabulous Future. Looking at last week's market surge, veteran Wall Streeters feel that the lessons of history may have been learned too well. "You see in this market a conditioned response," says Samuel L. Stedman, partner of Carl M. Loeb, Rhoades & Co. "In previous crises, the doubters have been proved wrong, so that now the market in its enthusiasm is throwing away all the classical methods of measuring the value of stocks and assuming the fabulous future is just around the corner. I'm not reaching for the steels, coppers and aircrafts; if there's no shooting war, these stocks will have to come back down in price. It takes time to reactivate an honest boom."

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