Buying at the Bottom?

By February 1930, one Wall Street broker had had enough of a good thing, was ready to get out while the getting was good. His name: Charles Edward Merrill. His firm: Merrill Lynch & Co. His fortune: a comfortable eight-digit one. Out of broking, Merrill Lynch continued as an underwriting and investment house, specializing in equity securities of growing chain-store systems. Its babies: Safeway Stores, First National Stores, McCrory Stores, Lerner, Kresge, Western Auto Supply.

Heir to Merrill Lynch's brokerage business was E. A. Pierce & Co., whose handsomely pompadoured, soft-spoken Edward Allen Pierce prides himself on operating the largest U. S. security & commodity brokerage chain: 40 offices in 38 cities, linked by 17,000 miles of private wires. To the rest of Wall Street, during the dead markets of recent years, Broker Pierce has been the No. 1 example of conspicuous luxury, operating on a nationwide overhead geared to forgotten two-and-three-million-share days. Ever since Depression II, Street sages have guessed at Pierce's losses, wondered when he would start dismantling offices or throw in the sponge. Last week, Ed Pierce fooled them, consolidated with Friend Merrill (and a Merrill Lynch subsidiary, Cassatt & Co., Inc.) to form a new firm of underwriter-brokers -- Merrill Lynch, E. A. Pierce & Cassatt.

In the Street's Winchellian political terminology, Pierce has been called a New Dealer because of his backing of the 1938 Conway Committee revolt (TIME, Feb. 7, 1938) which purged the Old Guard from Stock Exchange leadership, installed young, earnest Bill McChesney Martin on Sing Sing First Baseman Dick Whitney's throne. But Broker Pierce's merger with an underwriter has little to do with the New Deal, more to do with his notorious optimism. Favorite Pierce dictum: "I'd rather be optimistic and wrong than pessimistic and half-right." But his latest move follows the classic pattern of the late Financier E. H. Harriman. who always bought at the bottom. Wall Street, long in the dumps (a Stock Exchange seat last week sold at $48,000--lowest since 1918), has to Optimist Pierce and Realist Merrill become a buy again.

One reason for their confidence is Pierce's little-reckoned-with commodity trading department. In 1939, E. A. Pierce grossed about $9,000,000, of which commissions on commodity trading accounted for a little more than $1,000,000, securities business the rest. Given offices and a wire service, which Pierce had anyway for his securities business, commodity brokerage involves no costly physical handling, no more plant than a set of books. Hence, this end of the business earned enough to keep the Pierce operating deficit at only about $300,000 (after 6% interest on capital), less than the total salaries drawn by 19 Pierce partners.

Not only does the Pierce commodity business go far to offset the Pierce security department's losses, it can also be of special value to Underwriter Merrill. Most of it is anti-speculative, comes from industrial customers who carry big raw-material inventories (hides, wool, etc.) and have to hedge their commodity commitments. To shrewd Underwriter Merrill, this business offers a steady contact with industrialists who may be wanting some underwriting done. Merrill has put between one and two millions of fresh capital into the new firm, which (with total capital of around $5,000,000) will start as one of the ten or so best-heeled in the Street.

But Merrill also knows that almost no amount of capital can put an investment banker in the big league unless he has a nationwide security selling organization or a number of big and intimate institutional connections. Leading Street underwriters do not own the distributors through whom they sell, but they have built up an uncrackable circle of friends over the years. The Pierce brokerage chain offers Merrill a ready-made framework for a new distributing organization of his own. And if the same offices, through their Pierce commodity-trading connections, prove good developers of new underwriting business, Merrill and Pierce will have a complete two-way securities circuit. This will also provide the one thing Wall Street needs to make money again: a new way of bringing business out of the sticks.

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