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TIME Magazine, June 14, 1948 (cover story): BUSINESS & FINANCE: WALL STREET: Bull Market ...On the New York Stock Exchange, the Dow-Jones industrial averages last week edged up to a high of 191.32, best since Aug. 26, 1946. Then they worried off a shade or two. After such a fast climb as they made in May (180.28 to 191.06), a spell of backing & filling was to be expected. Many Dow theorists even expected a substantial "correction." In some respects, the Dow-Jones averages--which record the rise & fall of 65 (out of 1,398) stock on the Big Board--did not show the true strength of the baby bull market. Day after day last week, scores of stocks hit new highs for 1947-48 and stayed there. Among the specialty groups, the booming oils had even passed their 1929 peak. The U.S. economy seemed to warrant the rise. Overall profits were well up from last years record peak. U.S. industrial production, which had slipped a bit during the spring, was climbing again. Backlogs of orders were building up in some industries faster than production could consume them. And U.S. employment, now soaring above 58,000,000, was expected to be greater than ever by midsummer. Most of Wall Street's 1,200 market dopesters and crystal ballers felt a rosy glow. Some expected a rise of 20 points more or less, which would put the industrial average even with the peak of the 1946 bull market. Others, like Shields & Co.'s Edmund W. Tabell, were more optimistic. Said he: "My ultimate objective [for the average] is ... 250 to 260." Grey Chill. A few even imagined 1929 all over again (without the hangover). But no one put much stock in such notions. The giddy '20s were gone forever. Now there are 75% margins... ...The Dow-Jones industrials, now earning even more money ($20 a share) than they did in 1929, are selling for only half as much. ...Standard Oil (N.J.) with indicated 1948 earnings of $16 a share, is now selling at $84--only a bit more than five times earnings. Many another stock, with years of steady dividends behind it, is paying anywhere from 7% to 11% a year in dividends (most bonds are paying only 3 to 4%)... ...Coffee House Compact. The New York Stock Exchange was built on speculation; in early days it often seemed jerrybuilt. Wall Street (so called because of the log wall that peg-legged Peter Stuyvesant had built) was a natural site for trading: near the docks at its foot, there had long been a slave market. There, in 1790, when the first U.S. Congress voted "public stock" to redeem the Continental scrip which had financed the Revolution, a lively trade in the U.S. "stock" sprang up. Wall Street's merchants and insurance brokers then did their trading under a buttonwood tree. Soon, 24 of the most active traders signed a compact: to favor each other and not charge less than 4% commission. They held a daily "call" of stocks in the Tontine Coffee House, which was "in an eternal buzz with gamblers." The buzz persisted through the years--years in which the New York Stock Exchange was plagued by fire (which, in 1835, destroyed its building and 647 others) and the continued forays of a ruthless crew of freebooters. There was grim-faced Daniel ("Uncle Dan'l") Drew, who originated the term of "salted & watered stock" (while driving cattle to New York, Drew used to feed them salt, then increase their weight by letting them drink enormous quantities of water); and the coldly scheming Jay Gould ("whose name, built upon ruins, carries with it a certain whisper of ruin"), whose attempt to corner gold brought on the "Black Friday" of 1869 and disrupted the nation's whole credit structure. There was also lusty Jim Fisk, Gould's co-raider of the Erie ("harlot of the rails"), who was shot to death by a rival in love; Cornelius Vanderbilt, who used "salt & water" to good advantage in pasting together the New York Central; Jay Cooke ("parson & fox") whose crash brought on the panic of 1873 and closed the Stock Exchange for ten days. And, too, there were hundreds of hard-working, little publicized brokers who helped finance the incredible expansion of plants and railroads across the continent which put Wall Street at the front of the world's money marts. Bloody Struggle. At the corner of Wall and Broad Streets, opposite the fortress-like House of Morgan, stands the $13 million, Corinthian-columned temple that now houses the Exchange. The trading "floor," six stories high, is almost as cavernous as Grand Central Station. On weekdays, between 10 and 3, as many as 800 Exchange members (out of a total membership of 1,375) scurry among the horseshoe-shaped "trading posts," where the stocks are listed, some 70 to post. Around noon, the floor crowd thins as members dart out for a quick, nervous lunch. For those who take the elevator to the members' luncheon club above the high ceiling there is a bronze reminder of the daily battle: a bear & bull locked in bloody struggle.* Lunches are usually bolted, before the battle can take an unprofitable turn. The basic operation of the market for the ordinary investor (who is usually optimistic and thus a bull) is as simple as was the trading under the buttonwood tree. Example: when an order is placed at an Omaha brokerage office to buy 100 shares of General Motors, it is wired to the broker's New York office and phoned to the firm's "floor partner" at the Exchange. He goes to the post where the stock is listed, finds another broker with G.M. stock to sell. He makes a deal, and sends a notation of the purchase back to his office by a telephone clerk. The number of shares bought and the price is then recorded on the ticker tape, which is teletyped to 1,922 brokerages, banks and other offices in 310 cities. The actual stock certificate changes hands later. For professionals, the market has another side (the short position), in which many of the biggest killings are made. Usually only professionals sell short, chiefly because the ordinary investor is vaguely suspicious of the process. Shorts (bears) sell stock which they do not own, hoping that the market will go down and that they can buy the stock later at a lower price. Meanwhile they borrow stock from brokers, sometimes paying a small fee, to turn over to the buyer. Eventually, of course, the short trader has to replace the borrowed stock by actually buying equivalent shares. The fastest and most dangerous market ride is in "puts & calls," which is much like betting that a crapshooter does or doesn't make his point. For as little as $137.50 a speculator may buy a "call," i.e., a 30-day option to buy 100 shares of stock at the price prevailing on the day he bought the call. If the stock rises, he exercises the option and takes his profit. A "put" is the reverse: a trader buys an option to sell stock, cashes in if the price falls. (Both puts & calls are used as hedges to protect paper profits.) All who buy & sell on the floor must own Stock Exchange seats, which are currently worth about $68,000 apiece (1929 price: $625,000). Some of the big brokerage houses, like Merrill Lynch, Pierce, Fenner & Beane, own a number of seats, while small houses with only two or three partners (and no branch offices) own only one. Since they work on a commission basis, most brokers were not getting rich until business picked up in this spring's upsurge. (Last year, Merrill Lynch, which did almost 10% of the Exchange business, netted $1,827,952; divided equally among the 81 partners, as it was not, that would be about $22,567 apiece.) ...Lemmings & Sunspots. Some speculators put a good deal of trust in such diverse signs as the number of lemmings in Norway, the thickness of moss on trees, the trend of sunspots and tides. A somewhat better understood and far more widely followed "system" is the one evolved by Charles H. Dow, the bearded, brilliant editor of the Wall Street Journal at the turn of the century. Although the Dow theory now has almost as many variations as practitioners (and many Wall Streeters hoot at it), it is so highly regarded that it touched off an avalanche of buying last month--when it "confirmed" the bull market (TIME, May 24). Dow thought investors would do "a great deal better in the long run if they tried to get 12% per annum on their money instead of 50% weekly." With that cautious approach, he decided that the ups & downs of the market could be followed by charting the swings of key industrial and rail stocks. In effect, a bull market was "signaled" when both averages--after a period of ups & downs--rose above their previous highs. If the averages fell--and went below their previous lows--that meant a bear market. Example: in 1946, the bear market hit a low in October, then sank close to it again in May 1947. When it failed to "break through," some Dow theorists hopefully looked for a bull market. When the averages rose last month and broke through their previous highs (made in July 1947), they proved to the satisfaction of chartists that a bull market was under way. Many a non-believer in Dow had said so long before that date... * The use of "bear" to describe a short-seller stems from an old saying about "selling a bearskin before the bear is caught." The use of "bull" to describe a speculator on the long (or up) side is believed to have come from the upward toss which a bull gives to his horns. |
The "bull market" of 1948 ended just a few weeks after the above story appeared.
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