Proper, but Innocuous

Trading on the New York Stock Exchange had closed down for the day of July 9, and in San Francisco, three time zones behind, the Pacific Coast Exchange had responded as usual by sinking into afternoon doldrums. Many brokers had left the floor and were just settling down to leisurely lunches in the dining room of the Merchants' Exchange Club when page boys began moving quickly from table to table whispering an urgent message: "The Federal Reserve Board has just cut the margin from 70% to 50%."

Throwing their napkins into the Crab Louis, or whatever else was before them, the San Francisco brokers rushed back to the exchange floor to handle the buy orders they knew would follow the news. In the 2 1/2 hours of trading still left, A.T. & T. which had closed in New York at 108 1/2, climbed to 110 in San Francisco, and General Electric (New York close: 63 3/8) rose to 66.

Six out of Six. Next day the rally spread to New York: the Dow-Jones industrial average opened nearly 16 points above the previous day's close, and trading volume more than doubled to 7,120,000 shares. But by the end of the week, volume subsided to a modest 3,380,000 shares, and the Dow-Jones average settled back to 590.19, a gain of about 14 points for the week as a whole.

The week's gains were predictable. Six times since World War II the Federal Reserve Board has cut the margin requirement, and all six times there has been a sharp--but brief--upswing. Last week's rise was blunted, however, by professional traders, who seized the opportunity to sell off holdings they had been stuck with on Blue Monday. Such buying as the professionals did do was a highly selective search (see table) for strong profit potentials and intriguingly low price-earnings ratios.

Money & Desire. There were some who thought that in cutting the margins Federal Reserve Board Chairman William McChesney Martin had yielded to pressure from the Kennedy Administration and was trying to push stock prices back up. Actually, the Fed was only acting as it had in the past. The Fed was given the power to control margins in 1934 in order to prevent a repetition of 1929, when the crash was intensified by the vast number of speculators operating largely on credit. So when stock prices soar and speculators' borrowing increases, the Reserve Board raises margins as a damper. Traditionally, when credit to securities buyers falls about 10%, the Fed interprets it as a sign that speculative pressure has ended and cuts margins. Currently, credit to securities buyers stands at $5 billion--about 12% below the figure when the market started slipping from its alltime high last December; so, in the Fed's eyes, the time was ripe for a cut to what many brokers regard as the "normal" margin of 50%.

Presumably, both the Fed and the Administration are very aware that a margin cut does not by itself produce any sustained market advance. ''People don't lack the money to buy stocks; they lack the desire," says Heinz Biel of Wall Street's Emanuel, Deetjen & Co. Many Wall Streeters, in fact, believe that most of last week's rally was just a continuation of one that started a week earlier, and they look for it to peter out somewhere between 600 and 635 on the Dow-Jones average. The margin cut has done nothing to change their opinion. "It's a proper move, but innocuous," says Biel. "It doesn't do any harm; it doesn't do any good."

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