A Case of Amnesia?

The stock market's rally from its late-May low of 631 on the Dow-Jones industrial average lost a bit of steam last week. Having climbed nearly 70 points since mid-August, the blue-chip indicator dropped nine points and closed at 762, reflecting profit taking, worry over possible auto and railroad strikes and concern about the danger of a new explosion in the Middle East. Despite the dip, analysts are generally cheerful. As the market moves into its traditional post-Labor Day period of reappraisal --both of economic prospects and of individual portfolios--many Wall Streeters think that prospects for a gradual lessening of inflation, recovery of production and easing of tight money form a sound base for continued gains.

What does worry analysts is a surprising change in the leadership of the recovery. In June and July, the rally was led by established blue chips. But lately the market has shown renewed symptoms of speculative fever. As a result, the list of the biggest percentage gainers since May is dominated by the names of Indonesian and Canadian oil producers, mobile-home builders and unclassifiable "special situation" issues (see box). To some Wall Streeters, this development suggests nothing so much as a case of mass amnesia among individual and institutional investors who, they fear, have forgotten that speculative issues took the worst beating during the December 1968-May 1970 bear market. "When people are hungry," says Vice President Bradbury K. Thurlow of Hoppin, Watson & Co., "they go into volatile stocks."

Exciting Mystery. There are sound reasons for the popularity of some of the stock groups that have shown the largest gains. The nation's approaching energy shortage (TIME, Aug, 31) presages rising demand and probably higher prices for oil; but for obvious reasons, the ability of oil companies with major interests in the Middle East to profit from that demand is in growing doubt. Oil producers with operations in Western Canada--a group that includes Home Oil, Banff Oil and Pacific Petroleums--seem better situated to exploit the prospects. The oil producers exploring off Indonesia, among them Natomas and Asamera, are more speculative. No one can yet tell what their rigs eventually may turn up, and that very mystery excites investors. Volatile Natomas, the biggest gainer of all, recently has been traded so heavily that Paul Hayes, oil analyst at William D. Witter Inc., calls the stock "a football being tossed back and forth by the funds."

The enormous backlog of pent-up demand for housing could easily make home construction one of the industries that would benefit most from conversion of the U.S. economy from a war to a peace footing. Prices of conventionally built homes, however, have risen beyond the reach of more than half of the nation's families. The result, already beginning, may be a bonanza for mobile-home manufacturers, such as Redman, Philips Industries, Champion Home Builders and Mobile Home Industries.

Savings and loan associations, a group that includes Imperial Corp. and Great Western Financial, supply nearly half of the mortgage money for home building. They are already beginning to reap the benefits of declining interest rates and an easier money policy on the part of the Federal Reserve Board.

Choosing the Best. The problem for investors, however, lies not in identifying the industries that will benefit most from emerging trends in the economy, but in picking which companies are best equipped to profit and in judging at what point the run-up in the price of those stocks has reflected the prospects for increased earnings. Many seasoned brokers, who remember past fads for uranium, color television, aerospace and conglomerate securities, are by no means convinced that investors are making the right choices now.

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