The "Friendly" Findings
When Arkansas Senator J. William Fulbright ran his "friendly study" of the stock market last March, Wall Street doubted that the end result would be friendly--and, as a result, the market tumbled. But the report that the Fulbright committee issued last week, along with recommendations for changes in security regulations, had little in it to worry Wall Street. Instead, Democrat Fulbright and his majority colleagues centered their fire on the Federal Reserve Board.
The FRB, said the report, did not raise margin requirements fast enough or high enough to stop what the committee called the "unhealthy speculative developments" in the market since late 1954. The two recent 10-point margin boosts (which raised to 70% the amount of cash a purchaser must put up to buy stock) were assailed as too small. The committee questioned whether they had much influence in bringing speculation under control, although there was plain evidence that they had in the way the market has been acting ever since credit was tightened (see below).
The committee recommended that companies listing their stock "over the counter" (instead of on the regulated security exchanges) should be put under the Securities and Exchange Commission's close supervision. SEC should also be empowered to go after "penny stock" promoters who keep "most of the money" from the sale of their stock but dodge SEC by keeping their issues under $300,000, the cutoff point for SEC regulation of any kind. Further, SEC, the State Department and the Canadian government should join forces to prevent confidence men north of the border from selling "ten to 50 millions of dollars" in worthless securities every year in the U.S. The report also laid out the committee's future work; a subcommittee is now investigating the way proxy fights have been run, while the committee will probe the effects on the stock market of heavy security purchases by institutional investors, e.g., banks, pension funds, etc.
Three of the committee's seven Republicans (New York's Ives, Connecticut's Bush and Maine's Payne) went along with the Democrats' recommendations but appended a note of disagreement on the committee's view of the stock-market rise. The report, said they, gave "insufficient emphasis" for the rise to the confidence that the public has in the Eisenhower Administration.
One who felt even stronger about this point was Indiana's Senator Capehart, who fought bitterly with Fulbright during the hearings. Filing a minority report along with three other Republican Senators (Ohio's Bricker, Utah's Bennett and Maryland's Beall), Capehart accused the Democrats of bringing forth a gloom-and-doom report, aimed at damaging the Republican Administration. The real reasons for the rise in stock prices, wrote Capehart, were not "iniquitous speculation," but the higher rates of production, and the stability that the Eisenhower Administration has brought about.
Ever since the Federal Reserve Board increased margin requirements to 70%, volume on the New York Stock Exchange has been shrinking. All winter long, sales were averaging 3,000,000 shares a day, but during May daily volume averaged about 2,000,000 shares. One day last week, sales fell to 1,650,000 shares, the smallest since October 1954. Most stocks have been steadier. At the end of May, the Dow-Jones industrial average closed at 425.66, just 1 point above the close at April's end.
Even though the amount of bank loans to brokers for the purpose of financing their customers' purchases of securities went up $85 million last week--pushing the total to an eleven-year high of $1,955,000,000--the FRB is no longer worrying about market speculation. The total is small when stacked up against the $8.5 billion lent in 1929. Moreover, by no means all of the brokers' loans are used to support margin trading. About 40% goes to finance a dealer's own portfolio of stocks and bonds, or to underwriters, who use the loans to finance new security issues.
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