Easing Some Pain

Ordinarily, talk about higher taxes is not very cheery. But U.S. stock and bond investors last week seemed to brighten up just when word got out that the Johnson Administration was seriously considering tax increases as an adjunct to tight money in the fight against inflation. Both stock and bond prices improved, but then at week's end, the stock market lost about a third of the week's gains, partly because the impression grew that Washington might not act swiftly.

For the eleventh consecutive week, the New York Stock Exchange opened with a Monday tinted blue: the Dow-Jones industrial average dropped 13.53 points to 767.03, its lowest level since Jan. 2, 1964. Next day, Treasury Under Secretary Joseph Barr told a House committee that the Government "can't rely on monetary policy much more," must boost taxes or cut spending "if we have to do more" to curb the exuberant U.S. economy.

Apparently taking Barr's comment as an indication that the Johnson Administration may take decisive action in the economic field, the market bounded up smartly. The Dow-Jones average gained 8.69 points Tuesday, 12.69 points Wednesday and 3.68 points Thursday for the longest rally in a month. Blue-chip industrial stocks, among the biggest losers in the market's seven-month slump, led the comeback. Some of the long-missing investment demand came from institutions that have been sitting on the sidelines.

"You could see the mutual funds coming out in force for the first time in three months." said San Francisco Stockbroker Robert Anderson of Paine, Webber, Jackson & Curtis. "It makes me a lot more comfortable."

The market turned down again on the final trading day, with the industrial average losing 4.40 points to close the week at 787.69 for a modest 7.13-point gain. Still, a drop is traditional before holiday weekends, when professionals lighten their risk by lightening their holdings.

Welcome Sedation. In the rate-sensitive bond market, where tight money has pushed up the return to investors to a 40-year peak, prices jumped rapidly last week in the sharpest rally in years. Yields correspondingly fell. The return on face-value 41% U.S. Treasury long-term bonds, for example, dropped from 5.05% to 4.99% in one day, closed the week at 4.92% .

Bond traders considered that a welcome sedation. Measured by the amount of new funds it consumes annually, the bond market is 20 times the size of the nation's stock markets. Expansion-minded businessmen, hungry for more loans than they can get from banks, have lately deluged bond dealers with offerings. Corporations have increased their publicly floated bond borrowing from $3.7 billion in the first eight months of 1965 to $5.5 billion so far this year. Such corporate issues rose to an alltime peak of $1.34 billion last month, close to four times the level of August a year ago.

In consequence, with the Federal Reserve putting strong brakes on the nation's money supply, bond interest rates soared so rapidly last month that one issue after another proved unsalable at its offering price. At the height of that pinch, investors even spurned half of a 61% issue by such a blue-chip utility as Southern California Edison, and American Telephone & Telegraph's new $250 million bond issue sold at a stunning 5qr% discount, thus offering a 5.96% return. That is the highest yield for any prime U.S. corporate bond since 1877.

The Next Victim. Corporations can afford today's lofty interest rates. Many local governments feel that they cannot, even though municipal and state bonds enjoy a lower rate level because investors pay no federal income tax on their earnings. Nashville last week postponed a $25 million offer of sewer and water bonds, and Baltimore failed to obtain a single bid on a $31.8 million issue because the city set an interest limit of 41% -- the equivalent of a 9% taxable investment for a man in the 50% income tax bracket. After housing, bond men forecast, civic improvements may well become the next big victim of high-priced money.

At week's end, more than at any time in the recent past, the nation's stock and bond men seemed to be watching the baton of the maestro in the White House.

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