Squeezing the Great Bull

When Chairman Morehead Patterson rapped the annual meeting of American Machine & Foundry Co. to order in Manhattan last week, one of the first things stockholders wanted to know was why the company's stock had fallen from $63 to $32 in the past year. "God knows," said Morehead Patterson candidly. "We were the same corporation . . . What bothers me is that we have 30.000 more share holders now than before it happened, and I'm sorry for every one of them.'' Patterson's failure to predict any rise in AMF shares in the near future was coldly realistic: together with dozens of other glamour issues that have hit bottom since last fall, AMF stock is caught in the grip of a stubbornly listless stock market.

Since the Dow-Jones industrial index hit its alltime high of 734.91 last December, the market has mushed indecisively into a slow decline. Last week, after being frightened down to 684.06 by the President's clash with Big Steel, the index man aged .to climb back up to 694.25. But the gains were made on a thin market; the number of shares traded on the New York Stock Exchange ran at only 3,000,000 a day, v. 5,000,000 a day a year ago.

The Stimuli. The market's lackluster performance was all the more baffling in the light of last week's spate of encouraging economic news. Personal income in March, the Commerce Department reported, rose $2 billion above the February figure to a record annual rate of $435 billion. More important, the consumers were spending their fat paychecks: even allowing for the effects of a later Easter this year, department-store sales for the second week in April were up 6% over 1961. and auto sales were running a whopping 48% above last year. The only important indicator that was off was the volume of new orders for durable goods, which fell 4% from February to March.

Topping off a week that, on the face of it. should have put Wall Street in a rosy glow was mounting evidence that corporate profits had set a first-quarter record in 1962. From corporations across the whole spectrum of industry came glittering reports. Du Font's first-quarter earnings were a record $2.23 a share v. $1.85 last year; Republic Steel's were 99-c- v. 37-c-. U.S. Rubber's 75-c- v. 68-c-. Standard Oil of California's $1.12 v. $1.01.

The Dampener. Why was Wall Street indifferent to all this encouragement? Most market analysts attribute part of the investor apathy to disappointment with the economy's failure to achieve the superboom levels so freely predicted last fall; analysts also consider the present drop in stock prices a necessary correction of December's "ridiculous" highs. But despite last week's favorable earnings reports, what concerns the worriers most is the long-term state of corporate profits.

Since 1947, corporate profits after taxes have slipped from 7.84% of the gross national product to 4.47% last year. The profit squeeze has become particularly acute in the past four years, during which weak consumer demand and Government policy have kept retail prices relatively stable, thus halting the price inflation. But cost inflation, which hits industry through rising labor and overhead costs, has not been stopped. If industry cannot offset higher costs with higher prices. Wall Street sees even slimmer profit margins in the long run. And since stock prices in the end reflect the profit potential of industry, some analysts argue that the market will inevitably have to go down if profit margins continue to narrow.

Trading Range. Nevertheless, the consensus among the analysts is that the market will hit one more peak in 1962. But they warn that the market is in a "trading range,'' i.e., one where as many stocks go down as go up. and that to make money, a selective investor must watch for undervalued shares of companies with strong profit potentials. A minority of Wall Streeters even suggest that the next peak may mark the end of the Great Bull Market--which has persisted for 15 years despite temporary setbacks. Not even the pessimists, however, predict a selling panic; what they gloomily expect is month after tedious month during which stock prices mill around endlessly in the trading range--never crashing into the cellar, but never making new highs.

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