WHY WALL STREET IS WORRIED

NERVOUS about inflation, tight money and the prospects of a business slowdown, Wall Street has more than enough to worry about these days. But last week the words and deeds of some very important people further unnerved investors. At the U.N., U Thant reported that fighting along the Suez Canal had erupted into "open warfare." It was the kind of news that Wall Street hates. In the U.S. Senate, Finance Committee Chairman Russell Long raised prospects of a long delay before action on extension of the surtax, and Wall Street was bothered even more. Most disturbing of all, Treasury Secretary David Kennedy put on yet another inexpert performance. At the beginning of the week, he and Federal Reserve Chairman William McChesney Martin met with 24 top bankers and, much to the disappointment of investors, failed to win any promise that bank interest rates will not be raised still higher. The next day Kennedy told the Senate Finance Committee that if Congress failed to extend the surtax, the Administration "may want to go into controls" on wages and prices.

Even though President Nixon quickly made clear that he abhors controls and none are on the way, Kennedy's casual remark accelerated the stock market's decline. The Dow Jones industrial average fell 34 points during the week. It closed at 852, even lower than it was at the end of 1965, and down 12% from the year's high of 969. The slide wiped out $60 billion worth of equity. Some indexes of speculative stocks have plummeted as much as 25%.

Held As Hostage. Wall Street analysts are more worried about the glamour stocks of yesterday than about the blue chips. Mutual funds have been selling, and in some cases there has been distress selling inspired by the fear that customers will redeem their fund shares for cash. Even those inveterate bulls, the managers of go-go funds, are unloading stocks, and the hedge funds have been hard hit. Some money is being shifted out of stocks into bonds. People who buy stocks on margin have to pay 11% interest, but those who buy bonds collect as much as 8% interest--a rewarding spread. Though analysts tirelessly repeat that the market is oversold, few see much chance for a strong rally until investors discern significant moves toward peace in Viet Nam or easier money at home.

What investors saw on the tax-and-money front in Washington last week was just the opposite. Extension of the tax surcharge has become the symbol of the Government's determination to fight inflation; if it is not extended, the Federal Reserve will have to make money even tighter, and 12% interest rates could become the rule. But Senate Democrats are holding the surtax as hostage, vowing that they will not vote for it unless it is combined with long-overdue tax reforms. They sense a taxpayers' revolt and know that reform has become politically popular. Tax reform is necessary, said Chairman Russell Long of the Senate Finance Committee. But extension of the surtax, he added, should be passed "before the summer recess. To mire the surtax in endless controversy over reform, said Long, would add another explosive element of uncertainty to the economy.

Secretary Kennedy's threat of controls--his second in little more than a month--was intended to push the Senate into moving on the surtax. Instead, it only strengthened a growing impression in the Administration, the Congress and the financial markets that he is a welterweight in the Nixon Cabinet. One of Kennedy's aides stated flatly: "I don't think anyone at Treasury has thought much about controls."

Economists of all shades of opinion consider controls undesirable, unworkable, unfair, even immoral. Conservative Milton Friedman has condemned them, and so has Paul McCracken, head of Nixon's Council of Economic Advisers. Another former CEA chief, Walter Heller, adds: "Trying to substitute Government omniscience for the brilliant cybernetics of the private market system would invite too many distortions, too many evasions." The public, however, is so fed up with inflation and so sick of the surtax that it favors wageprice controls--by a 47%-to-41% margin, according to the latest Gallup Poll. It has apparently forgotten the black markets and the gray markets that controls produced during World War II and the Korean War.

The only way for a control policy to get quick results now would be to begin with a freeze on all wages and prices. But Administration officials believe that the freeze would soon melt as policymakers found themselves forced to make exceptions to correct inequities.

Honeymoon's End. Knowledgeable bankers and brokers are less worried by any threat of controls than by a growing fear that inflation can be defeated only at the price of a recession. Corporate news has not been encouraging.

Airline stocks fell especially far last week after Pan American skipped a dividend as a result of a $19 million loss in the year's first five months. Traders were further depressed by a cutback in capital spending at Chrysler and news that retail sales dropped in June for the second straight month. These indicators might bring some cheer to the Federal Reserve Board, which has been desperately looking for evidence that its restrictive money policy has produced some slowdown. But New York's First National City Bank warned in its latest economic letter that, "to hold fast to a restrictive policy until the signs of an economic downturn are unmistakable means that the policy will have gone too far." Reason: economic indicators do not clearly signal a recession until after it has begun.

Consumers are gloomy, too. The University of Michigan's Survey Research Center found in its second-quarter study that an overwhelming 77% of consumers expect prices to rise as rapidly or even more rapidly in the next year as in the past twelve months. The Center found no confidence that higher interest rates would curb inflation. George Katona, director of the survey, noted that earlier questioning showed many consumers expressing confidence that Nixon could bring inflation under control. His interpretation of the new findings: "The Nixon honeymoon is over."

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