Bathysphere

Two shocks last week hit U. S. stock-markets. The first was 100% spectacular. Henceforth Tuesday. Oct. 19 can lay claim to being the most startling single day in stockmarket history since famed Oct. 29, 1929. Prices ended about where they started, but in between they went through an excursion similar to Dr. Beebe's junkets to the bottom of the sea in a bathysphere. Prices on Monday had fallen in the worst break of the current decline and everyone anticipated that opening prices Tuesday would be down as a result of widespread margin calls.

What actually happened is classically exemplified by the stock of Nash-Kelvinator Co. Monday it closed at $10.50. Opening sale Tuesday was at $5. At close it was back to $9.63. Chrysler bounced down to $52.50, back to $61; American Telephone & Telegraph to $140, back to $147; General Motors to $31.25, back to $38.25. On massed selling orders American Rolling Mill opened at $15.50 (down $4.75), closed back at $20.25. Trading volume in the first two hours was 3,890,000 shares, by day's close had reached 7,287,080, greatest since 1933. Fluctuations were the widest since 1929. At one point the ticker was 22 minutes behind, traders many minutes behind that as orders stacked up at the posts.

The second shock was less spectacular but more illogical. Three weeks before the current market slump began in industrial stocks on Aug. 15, railroad shares had started down as the public gradually became aware of the fact that railroad operation costs had grown much faster than revenues (TIME, Sept. 13). With this crisis becoming more acute, the decline in railroad shares dragged down simultaneously the operations of many a basic industry, best example being steel. Hobbled by several factors, among them curtailment of railroad equipment orders,* steel production last week stood at 55.8% of capacity down from its spring high of 92%.

Since steel production is a basic economic index and since the stockmarket's traditional bellwether is U. S. Steel (whose operations last week were down a similar percentage"), a good case can be built to prove that railroad weakness is the governing factor in the current market slide. Last week this case was very much confused by the behavior of railroad stocks in one of the most tumultuous weeks in stockmarket history.

One reason railroad revenues are not up in proportion to operating costs is because the Interstate Commerce Commission on Jan. 1 removed the emergency freight rates set up in 1931. Anticipating this $120,000,000 cut in revenue, the roads in October 1936 petitioned the I. C. C. to raise freight rates on certain basic commodities. Last week it somehow became generally understood in Wall Street that the I. C. C. was about to announce a favorable decision. With throttle wide and all passengers clinging to their seats, railroad stocks thundered up, pulling the whole market along with them.

From the year's low of 30.09 the Dow-Jones railroad averages climbed briskly to 35.03 (year's high: 64.46). New York Central, which had been down to a low of $15.13, came back to $21.75. Pennsylvania was up from $20 to $27.50; Southern Pacific up from $17 to $23.75. Leading industrial and utility stocks showed almost parallel rises. From last week's low of 125.73, the Dow-Jones industrial averages stepped up almost ten points. U. S. Steel alone remained sulky, hovering around the $61 level.

Sure enough, one evening after the New York Stockmarket's closing gong the I. C. C. announced a favorable decision. Remarking that "net earnings of the railroads are now inconsistent, in general, not only with constitutional standards as to the rights of private owners, but also with the conditions necessary for the proper conduct of the public service of railroad transportation by private enterprise," the I. C. C. authorized rate increases expected to yield some $47,500,000 more revenue per year.

The rate increase, pleasing as it was to railroads, remains many millions below what they feel they need, and they immediately set about asking for more.* Meanwhile, however, railroad stocks on California exchanges, which had not yet closed when the I.C.C. decision was announced, surged still further ahead on the good news. New York Central closed in San Francisco $1.13 above its New York final sale. Witnessing this, many a Wall Street "market letter" went out that night predicting a thumping bull market in Manhattan next morning. Instead, to the confusion of prophets, railroad stocks and most others fell like a load of corncobs dumped from a hopper car. In heavy trading for a half-day (1,570,000 shares), the ticker lagged four minutes behind and order clerks went hoarse as prices dropped as much as ten points. U. S. Steel thudded to a new low of $52.50, New York Central to a low that day of $18.38. Bonds were under heavy fire from selling and grew cheaper & cheaper. At the close of the day and week, Dow-Jones railroad averages stood at 32.32, industrials 127.15--about the level of October 1935 and taken together a decline of 37% since August.

Early this week, though steel production dwindled to 52.1%, U. S. Steel perversely led the market back up the ladder, $6.13 up to close at $58.63. Rails were full of vigor, but Chrysler was the most spectacular stock of all, jumping $9.50 to $69.75. Highlight of the 2,000,000-share trading was a 51-minute "reverse air-pocket" during which a would-be buyer of 5,000 shares of Chrysler could find no offering.

*Others: scanty new building, the annual slack season for automobile manufacture. *A day later the I.C.C. allowed railroads in the Southeastern territory to raise coach rates for passengers from 1 1/2-c- to 2-c- a mile.

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