Bell Wrings the Market

One factor that has kept stock prices down this year is the voracious appetite of U.S. business for new capital at a time when it remains scarce. Instead of moving into existing stocks, investment money has been flowing into new issues of corporate securities. The most vivid demonstration of the trend came last week when American Telephone & Telegraph Co., the world's largest private enterprise, floated a $3.2 billion financing--a size usually associated only with U.S. Treasury offerings. After the issue went on sale, the Dow-Jones industrial average dropped nearly 10 points in two days as investors switched out of other securities to buy the bluest chip of all.

Instead of turning as usual to institutional lenders for such a large quantity of funds, A.T. & T. sought to tap a different source of capital: millions of small investors who save their money for special opportunities. The company offered a highly complex mixture of debentures, rights and warrants to buy stock. Countless investors did not understand the package, but enthusiastic professional traders immediately bid the warrants to a premium on the New York Stock Exchange.

Bell put an 8 3/4% interest rate on its debentures, which had the immediate effect of pressing up other rates in the bond market by as much as one-quarter of 1%. As a result, corporate and municipal borrowers are likely to pay more for money in the bond market in the weeks ahead. Not even Bell's banker, Morgan Stanley, was sure that the 8 3/4% rate on such a large issue would attract enough investors. As a result, the company sweetened the package.

Basically, the offering consisted of $1.6 billion in 30-year debentures accompanied by warrants to buy $1.6 billion worth of A.T. & T. stock between November 1970 and May 1975. Each warrant entitles the holder to buy a share of A.T. & T. stock for $52, about $3 above last week's closing price; thus any increase in the price of the stock above $52 during the next five years will give the original warrant holder a profit. The company began mailing the subscription offer to its 3,140,000 shareholders only last week, and Wall Street will not know for some time just how successful the entire package was. Normally, A.T. & T. shareholders take up about half of any new issue offered to them. Until the first $1.6 billion is paid to Bell in early June, the mammoth issue will hang over both the bond and stock markets and will probably serve as a negative force on prices.

Shift at the Fed? The stock market is being hit by a record number of additional offerings. Managers of many companies that normally raise capital for expansion by selling bonds have decided instead to sell stock in order to avoid paying the high interest rates for bonds. U.S. corporations added an estimated $1.5 billion worth of new stock to stock already outstanding during the first quarter: for all of 1970 the increase will probably be $6.4 billion--nearly double that of last year. The rising supply of shares on the market may tend to weaken stock prices.

On top of that, money may be tightening again. The Federal Reserve Board, which only a month ago was primarily concerned about recession, has returned to its old worry: inflation. Members of the board are apprehensive that the federal budget may fall into deficit because of the new law, signed last week by President Nixon, that raises the pay of Government workers by 6%. They also worry that consumer spending may jump because of the recent increase in Social Security benefits and the scheduled end of the 5% surtax on June 30. Thus the board, which has been expanding the money supply in recent weeks, may now rein in a bit. Though there is no talk of returning the economy to the constricting days of absolutely no monetary growth, even a slight shift to slower expansion of the money supply will do little to help corporations' hunger for more capital or shareholders' hopes for higher stock prices.

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