When the Market Is High

When Democratic Senator J. William Fulbright casually told a reporter last January that the Senate Banking and Currency Committee might look into the booming stock market, he got a rude jolt. As the news hit the wires, stock prices were falling. Hurriedly, the Senator, scared by the political effect of a market break, called in the press. What he had in mind, said Fulbright, was no punitive probe like the 1932-34 Pecora investigation (when a circus pressagent popped a midget on J. P. Morgan's knee). Instead, Fulbright was planning "a friendly study."

Last week, as the Dow-Jones industrial average hit a new high of 419.68, the friendly study got under way in the Senate caucus room. First witness was President G. Keith Funston of the New York Stock Exchange. Neatly turned out in a grey plaid suit, Funston started testifying nervously, polished off two full pitchers of water before lunch. But as he worked through his scholarly study of why the market has risen, he relaxed, realizing that he was indeed among friends. There were plenty of reasons why demand for stocks has gone up so fast, said Funston. Among them: easy money and credit, postwar inflation, institutional buying, the death of the excess-profits tax. At the same time the supply of stocks has not kept pace, partly because corporations have been raising money by borrowing instead of issuing stock, partly because the 25% capital-gains tax discourages investors from selling. Funston suggested that the tax should be halved, and the holding period (to qualify for long-term gains) cut from six to three months.

Funston also suggested that the capital-gains benefits now accorded home buyers be extended to stock buyers. If an investor sold stock and put the money into another stock within six months, the capital-gains tax should be waived, as it now is for home buyers.

Good Climate. Even at present levels, said Funston, the market is not too high. Stock yields now average 4.3% v. 3.3% in 1929; stock prices, in terms of 1929 dollars, have risen but 68% in a period when the size of the U.S. economy has doubled. Furthermore, the market today has little of the speculative froth of the past; only 1.1% of the value of the listed issues is held on margin (v. 10% in 1929).

In a poll of brokers, the Banking and Currency Committee had found that many attributed the recent rise to confidence in the Eisenhower Administration.

Indiana's Republican Senator Homer Capehart decided to get in a few political licks: Did Funston agree? Funston neatly dodged the question. Said he: "I would agree it shows confidence in the future, but what the exact reason is, I don't know." Fulbright wanted to know if the exchange's campaign to get more investors in the market was not "inflationary" in that it contributed to the shortage of stocks. The object, said Funston, was not to persuade people to buy but "to create a climate where our members can sell stocks." To the "two miracles of mass production and mass consumption which have done so much for our country, we must add a third: mass investment . . . We believe that owning their own industries is good for [Americans]."

Was Funston worried about a market break? Not at all, said he. "I bought some stocks in January and February, and as soon as I get some more savings, I'm going to buy some more."

Dogs & Rumors. Next day, up stepped President Edward McCormick of the American Stock Exchange, a lifelong Democrat and onetime SEC commissioner under Harry Truman. Like Funston, McCormick argued that stock prices are not out of hand. Said he: while Standard & Poor's stock index "shows an increase from 1929 of 13%, cost of living is up 56%, farm income 133% . . . hourly wages 228%, bank deposits 229%, personal income 230%, gross national product 242%." Was today's stock market like 1929's? There are "dogs on both exchanges," said McCormick. But "let's not kid ourselves. The market in 1929 was rigged . . . Pools were operating it. We don't have that kind of market now." Today, he added, "we have a rule that it's grounds for expulsion if a member is found spreading rumors."

But what about other rumor spreaders, specifically radio & TV tipsters such as Walter Winchell? Said McCormick: "It is one of [my] biggest headaches." McCormick told about the havoc caused by Winchell's tip on Pantepec Oil one Sunday night (TIME, Jan. 31). The stock had closed on Friday at 6 3/4, and McCormick knew that it would soar at the opening on Monday; it was up to David Jackson, the American Exchange specialist in Pantepec, to do everything he could to maintain an orderly market in the stock by supplying as much as he could.

Since there were orders to buy 357,600 shares of stock "at the market price" and few orders to sell, there was no way to post an opening price for the stock. The best guess was that the stock would open at 15, and all the buyers at the market would have to pay that price. The only way the buy orders could be filled was for Jackson to sell 133,000 shares short, i.e., stock that he did not have, in hope of buying it back cheaper later. After three hours Pantepec finally opened at 8 7/8. It proved to be its peak. As the price eased, Jackson began to buy to cover his short sales, thus kept the market from collapsing. In the process he made $50,000. (In a similar situation last year, he lost $100,000.) Last week, said McCormick, Pantepec was down to 7, and those who bought on the Winchell tip had lost almost one-third of their money. Added McCormick: "Imagine what the losses would have been if we had allowed it to open at 15." To give an idea, McCormick cited another Winchell tip: an assertion in 1953 that Amurex Oil had brought in a new field. After the Sunday-night broadcast, the stock opened at 20 7/8, up 6 points from the Friday close. When Amurex denied the reports, the stock dropped, costing buyers $2,125,000.

One of the remarkable aspects of the Pantepec deal was that in the week before the Winchell tip, the volume of trading in the stock hit 170,000 shares, v. a normal weekly average of 20,000 shares. McCormick handed to the committee the names of all the people who had bought the stock before and after the tip. At week's end Senator Capehart said he was "sure" that Winchell would be called to the witness stand to testify on his tips.

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