Playing With Blue Chips

In a Beverly Hills brokerage office last week, a veteran trader cocked an indolent eye at the New York Stock Exchange quotations. "It's hardly any fun any more," he complained. "I don't even have to watch the board for moves. Market goes up about $1.50 a day, so who am I to try to outguess it?"

Wall Street's big bull market was almost that automatic. For weeks it has been moving upward almost as regularly as an escalator. Last week, slowly, steadily, unspectacularly, it kept right on rising. With a gain of 2.17 points for the week. the Dow-Jones industrial average set a new 21-year-record high of 276.37. Moreover, the more stable New York Times and Herald Tribune averages likewise hit new bull-market peaks.

In three years, the charging bull has pranced up more than 110 points (see chart), has put on weight despite such hammer blows as 1948's Berlin blockade, 1949's recession, 1950's outbreak of war. Each time, with nothing more than a momentary stumble, it has roared back louder and lustier than ever.

Home-Town Favorites. One reason is that the public is back in. In Chicago, a stockbroker told how his cabdriver asked him about Motorola and a hairdresser wanted advice on how to invest $5,000 in "sound stocks."

Every region brags of the fabulous rise of local favorites. Texans have seen obscure Delhi Oil Corp., whose stock sold for $1.10 in 1944, run up to $38. Dewey & Almy Chemical (Cambridge, Mass.), which sold at eleven in 1949, has reached the equivalent of 57 1/2. Chicago's Emhart Manufacturing Co. (flexible plastic bottles) has soared from $50 to $80 in three months. Californians recount the wonders of Signal Oil & Gas Co.'s four-year rise from 85 to the equivalent of 582.

Beverly Hills is almost a stock exchange by itself: its cinemoguls and retired oil millionaires keep eleven Wall Street branch offices humming, frequently account for almost 10% of all Big Board trading. Since it is only 7 a.m. on the Coast when the New York Exchange opens at 10, Stockbroker Thomas O. Peirce wakes his biggest customers with a telephoned word on how G.M. (the bellwether they follow) has fared. Explains Broker Peirce: "G.M.--that means good morning."

Sad Memories. Many a middle-aged American, remembering the giddy air of 1929, thought that all this had a familiar ring. Actually, the 1951 bull market is like no other the U.S. has ever seen. Unlike 1929, when stocks could be bought for as little as 10% down, the margin requirement is 75% and most of the buying is for cash. The public has rushed in, but instead of chasing after low-priced and highly speculative "cats & dogs," it has usually bought "blue chips." Reason: the public is a lot smarter, partly because 1920's memories still linger but also because brokers have done a great deal to teach small investors what to buy.

Merrill Lynch. Pierce, Fenner & Beane, for example, runs classes for housewives and other new investors. Bache & Co. takes radio spots to arouse interest in the market. Brokers have set up exhibits, replete with figures on earnings and dividends, at county fairs and flower shows. The campaign has paid off: in two years the popularity of common stocks v. bonds as an investment has tripled. Small investors are holding on to their stocks. So far this year, they have bought 5,000,000 more shares than they have sold.

But the biggest way the public has gone into the market is through the fast-growing investment trust or fund. The investor who doubts his own judgment simply buys shares in such trusts, which diversify their holdings and pay dividends on their earnings. In ten years, the amount of their investments in the market has risen from $450 million to $3 billion. They are now increasing at the rate of $500 million a year. The market has been boosted by three other big buyers: 1) industrial pension funds, now investing some $200 million a year in common stocks, 2) insurance companies, which in most states have now been authorized to buy stocks and are doing so at the rate of $290 million a year, 3) private trusts, which also have been empowered in some states to invest up to 35% in stocks. Like investment trusts, all these conservative buyers want dividend-paying "blue chips."

High-Flyers. As a result, the bull market has been highly selective. The averages, made up largely of blue chips, have gone scooting up, but the great mass of stocks has lagged well behind. Only 17% of the Big Board's stocks were at their year's highs last week, and many were even at their year's lows. The major hunt by all investors has been for "growth" stocks, such as chemical and antibiotic drug companies, or for companies with great natural resources (e.g., oil reserves), whose value can rise with inflation and provide a hedge against it.

This chase has driven up the prices of some stocks so that they now outpace their apparent growth possibilities for years to come. For example, Amerada Petroleum, a prime favorite with investment trusts because of its huge oil-land leases, is already selling at 20 times its earnings; Du Pont is at 18 times earnings. Many a trader now thinks that some of these growth companies and blue chips are too high. And the market is still a place where an investor can get his fingers burned if, according to the old saw, he "pays too much for a stock in the belief he can find a bigger fool to sell it to."

The Long & the Short. The big question now is: Is the market at its peak? Wall Street is full of bears who believe that it is, and that it is in for a major tumble. Many of their reasons are technical (e.g., the fact that railroad stocks have lagged so far behind the industrials); others are practical. Many corporate earnings have already been cut by taxes and cutbacks in civilian production. The new tax bill will take still heavier bites out of profits. Example: estimated profits of U.S. Steel will be cut from $3.61 in the first six months of this year to $2.70. Moreover, defense orders will not take up the slack for many companies for a long time, nor will arms production yield anywhere near the profits of peacetime goods. Yet not even many of the bears believe that the bull market is about to end for good. The worst they expect is a shakeout to 225 or 200 in the Dow-Jones average, followed by a new upsurge to still higher ground.

But the rest of the country is full of bulls who believe that the current upsurge will continue. They argue that by all the old rules of thumb, stocks are still underpriced. Even after the big rise of the Dow-Jones average, it is only 89% above the 1935-39 level, while during the same period corporate earnings after taxes have risen by 516%. Even the 30 Dow Jones industrials (e.g., A.T. & T., Standard Oil, G.M.) are still yielding returns of around 6% v. 3% for triple-A bonds, and dividends on Big Board stocks in 1951's first half were 17.3% above the 1950 period. The whole market is still full of good earning stocks which have had no major rise. Many stocks (e.g., Foster Wheeler, White Motor) are still selling for less than the actual cash (net working capital) in the company's till. The very "exclusiveness" of the market so far makes bulls proclaim that the "real" bull market cannot begin until whole broad new segments of stocks come in for heavy play. For example, the rails, which have led the final phase of many bull markets, are still far below their February peaks.

But the bulls' main argument is that the U.S., launched on unprecedented peacetime spending for armament, is in for a whole decade of inflation. Wages, warned Defense Mobilizer Charles E. Wilson this week, can never go back to pre-Korea levels since the U.S. is "still an expanding economy." When costs and prices rise and dollars cheapen, savings can be protected only by converting them into ownership of "things"--including shares in the land, tools, bricks & mortar of U.S. industry. Moreover, arms spending, already at the rate of $2.5 billion a month, is really just getting under way, will rise to at least twice that before it tapers off. By the time it slackens, two or three years hence, huge new backlogs of deferred demand for peacetime goods are expected to accumulate and feed the boom. Eventually, any boom largely resting on such artificial props as deficit spending and arms production (as this one now is) must end, if not in a collapse, in at least a severe recession. But for the next few years, at least, bulls see nothing but higher prices for everything, including stocks.

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