A WARNING TO WALL STREET AMATEURS

PETER
Dreams -plus brought

B. BART

of the affluent society and the space age an old-fashioned hundreds urge to gambLe-have of greenhorns into of thousands

the stock market .... so foolishly

Many of them are behaving

v

that they scare even the old pros.

NE of the more popular stories making the rounds of Wall Street saloons this spring concerned the fellow who called his broker and asked him to buy four hundred shares of a company called Ultrasonics Precision. When the broker asked whether his customer knew anything special about the company the customer replied: "My barber told me to buy it-he's given me some good tips lately." The transaction was completed, but two weeks later, after the next haircut, the customer called again. "I was all wrong," he said. "My barber recommended Ultrasonics Industries, not Ultrasonics Precision. Sell Ultrasonics Precision and buy me the right one." The broker did as di-

rected only to find that his customer had cleared an $800 profit on the "wrong" stock. The story, and its several variations, may be apocryphal, but, like most such tales, it tells something of the tenor of the times. And the tenor of the times on "Vall Street these days is deeply disturbing to many thoughtful financial men because there are too rna ny barbers and friends of barbers acting exactly like the people in the story. In short, Wall Street is. worried abou t the I growing role of the small 'speculator in ioday's market. It was this sort of worry that led Keith Funston, the tall and august Presiden t of the New York Stock Exchange, to flash a warning signal early this spring. Addressing the public in the manner of an impatient parent who had just caught his child with a hand in the cooky jar, M r. Funston intoned: "There is disquieting evidence that some people have not yet discovered that it is impossible to get something for nothing." A month later he warned: "The behavior of the public makes a mockery of the word 'investing'." What triggered Mr. Funston's warnings was the sudden speculative fever that swept the market in March, April, and May. Volume soared to

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WARNING

TO

WALL

STREET

AMATEURS give the market a "bad name" for at least another generation. This is a disquieting prospect for Wall Street leaders who have struggled long and hard to enhance the stock market's "corporate image." Thanks to their efforts and expenditures, the symbolism of the bucket shop and the backroom manipulator has been banished, and a new aura of gray-flannel respectability now surrounds the stock market. It is this structure of confidence and respectability which the outbreak of mass speculation threatens, and that is why Wall Street is uneasy.
NO IF MATTER IT'S NEW WHAT,

share-owning population of perhaps thirty million in another five years or so. The problem with a speculative boom in this sort of mass market, say Mr. Thurlow and many other analysts, is that it would inevitably lead to a spectacular bust-a bust which could destroy millions of investors as well as speculators and

record levels, the Dow-] ones industrial average hit a new high, standing-room-only crowds suddenly materialized at many brokerage-house board rooms, and, in the words of one broker, "people raced around buying stock as if they feared there wouldn't be any left the next day." The sudden mass enthusiasm for the stock market was attributed to several factors-the apparent end of the recession, the change of Administration in Washington, the prospect of further inflation. But it also reminded Wall Street of. an important change that has taken place in the securities business in recent yearsnamely, that the stock market has become a mass market. Although Wall Street has worked hard to bring about this change, it knows remarkably little about the new "monster" that it has created. How will the mass market behave in periods when significant gains in the economy appear in the offing? How will it respond to sudden downturns' and' disappointments? Will it be able to contain its speculative surges? No_one pretends to know the answers to these questions, but many analysts are extremely apprehensive about what the answers may turn out to be. "We may be about to witness a phenomenon once deemed inconceivable-a wave of mass speculation that would have been impossible in the 1920s," said Bradbury K. Thurlow, vice president and treasurer of the Wall Street firm of Winslow, Cohu and Stetson, Inc. "The 1929 boom may actually have been only a trial run for the one now apparently getting under way." Mr. Thurlow pointed out that in 1929 only about 1,500,000 people owned common stocks while today the number of share-owners is estimated at fifteen million. The big brokerage houses, noting that the number of stockholders has doubled in less than ten years and that new accounts are '._ openinp' at ~ '--;LDJrI t'1t~ F-" r , " , ,~ "'" n H' '" ....1.' hVpe lor

As a financial reporter on the "New York Times," Peter B. Bart has been watching the stock market become a supermarket. He is a Swarthmore graduate who studied also at the London School of Economics and has done financial and general reporting for the "Wall Street J ournal" and Chicago "Sun-Times."

L THO UGH the speculative fever has affected all facets of the securi ties business, it has focused particularly on small, relatively unknown companies-especially companies selling stock to the public for the first time. So strong has been the swing to the little companies that some analysts have labeled it "the revolt against the blue chips," The "new issues" were a fit target for specu lation. For one thing, companies selling stock to the public for the first time generally issue a small amount of shares. And because there are so few shares in the hands of the public the price can be driven up even by a minor surge of interest. Moreover, the new shares usually are issued at prices designed to attract investor interest. In a bull market, these often are bargain prices indeed. Finally, many of the new companies "going public" are in space-age industries and bear such melodramatic names as Datamation, ElectroSonic Laboratorier, ~1eetr5iitl'S' ~~ss'h~s Com-' pany. Corporate names like these have pull in the market. (Agricultural Equipment Corpora. tion, a manufacturer of weed burners, recently changed its name to Thermodynamics, Inc., prior to issuing stock.) As a result of these various fa otors , brokers have been besieged by customers demanding shares in the new issues, and the prices have taken off like rockets. Companies like Packard Instrument, Renwell Electronics, and Pneumodynamics have doubled within days of the stock issue. Stock in Alberto-Culver, a small producer of hair tonic and shampoo, was issued at $10 and soared almost immediately to $25 a share, Shares in one company bearing the .non-space-age name of Mother's Cookie Company leaped from $15 to $25 within forty-eight hours. Cove Vita-

BY min and Pharmaceutical went from .$3 to $60 in three months. "My customers don't even want to know what a company manufactures or what its earnings prospects are," said one young Wall Street broker. "If it's a new issue they want it, whatever the case." Some Wall Street firms have tried to cool the ardor of their customers. White, Weld and Company refused to open accounts for customers who were interested solely in new issues. Merrill Lynch, Pierce, Fenner and Smith made a survey of forty-six companies that had issued stock during the 1945-46 new-issues boom, and found that only two of the companies now are selling above the offering price. These efforts in general, however, were without much effect. "In this kind of situation a broker is like a prostitute," reflected a high official of one old-line Wall Street firm. "If we turn away any business we know darn well they'll just take it elsewhere." The basic problem with a new-issues boom, however, is that it tends to be self-propelling. Public enthusiasm for the newly issued securities encourages more companies to bring out stockthus there are more new securities registration statements before the Securities and Exchange Commission at this time than ever before in that agency's history. Meanwhile, prestige underwriters who formerly snubbed smaller issues have suddenly developed a fondness for them because of the profits involved. And the small speculator is encouraged all the more to dive into the new-issues market because he sees such distinguished firms backing the shares.

PETER

B.

BART

23

CULT

OF

GROWTH

STOCKS

N 0 THE R reason it is difficult to bring order to the new-issues boom is that most new offerings first appear on the volatile overthe-counter market, where they are harder to control than on the exchanges. In fact, it is here that the most frenzied speculation has taken place not only in new issues but in established stocks as well. The over-the-counter market is something of a misnomer, since there is no counter and no clearly defined market-that is to say, no central place where the shares are auctioned off as in the case of the New York Stock Exchange or the American Stock Exchange. The so-called "market" consists of some five thousand dealers in offices scattered all over the country, each of whom has a battery of phones and a nervous

stomach. Nonetheless, it is the nation's biggest mechanism for trading securities, with five times as many stocks regularly traded as on the "Big Board" of the New York Stock Exchange. It has long served as a proving ground for small companies as well as a pleasant retreat for established concerns which shy from the publicity surrounding the major exchanges or don't want to disclose data required to attain a listing on the exchanges. However, as a result of the fad for new issues and the general surge of speculation in relatively unknown companies, the apparatus for over-thecounter trading has been strained to the breaking point. Dealers in over-the-counter securities use words like "fantastic" and "unbelievable" to describe their volume of business, and many say that they made more money in commissions during the first quarter of 1961 than during all of 1960. If many of the old timers on the over-thecounter market have been awed by the tremendous volume, they've been equally aghast at the way in which the public has cast aside the tradi tional yardsticks used in evaluating stocks. These yardsticks involved such considerations as the dividend yield (5 per cent was considered reasonable) or the "price-earnings ratio"-the relationship between a company's earnings and the price of the stock. (1 a stock sold at more than ten or twelve times the company's earnings, many brokers used to consider it overpriced.) In today's market, with attention focused on so-called growth stocks, people clamor to buy stocks which have no yields and sell at fifty or one hundred times earnings. Thus in May IBM was selling at 75 times earnings, Polaroid at 95 times earnings, and Fairchild Camera at 60 times earnings. "It's possible to .argue that the IBMs and Polaroids are well worth their current price," notes Stephen H. Weiss of A. G. Hecker and Company. "But in a market like this one the good growth stocks tend to cast their aura of glamour around dozens of small, unseasoned companies operating in roughly parallel fields. The result is astronomical and unjustified prices [or unknown, unstable stocks." The cult of the growth stock traces its origins to several sources. For one thing, it's in keeping with the speculative spirit of the times. For another, most people in the upper tax brackets prefer to maneuver among the esoteric, lowyield growth stocks and pay a capital-gains tax limited to 25 per cent rather than pay higher taxes on dividend income. Finally, investors

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WAR N 1 N G

TOW

ALL

S T R E ETA

MAT E U R S

fig-urethat the growth stocks hold out the brightest prospects for short-term appreciation rather than the once-popular but sluggishly performing "blue chips." The growth-minded mood of the current market was effectively, if unintentionally parodied not long ago by comedians Lou HoI tz and Jack Paar when Mr. Holtz confided to Mr. Paar on a national television show that he owned a stock listed on the American Exchange which would move from $10 to $1,000 in ten years. The following day was a memorable one for the Exchange's $10 stocks. The favorite with the televisionminded speculators was a company named MPO Videotronics, and trading in that stock couldn't be opened until a few minutes before the close because of a rush of buy orders. Alas, the company proved to be a double disappointment. To begin with, it wasn't the stock Mr. Holtz had in mind; and its principal product turned out to be television commercials. As one Wall Street analyst commented on the whole episode, "Never have so many people invested so much money so stupidly."
TIGHTENING THE SCREWS

HE Jack Paar-Lou Holtz incident was hardly the only case in which stocks suddenly took off under mysterious circumstances. In this case, of course, the underlying cause seemed to be innocent enough. In a number of other cases, however, the suspicion of manipulation hung over the market. There is no way of knowing how much oldfashioned price rigging takes place in Wa 11Street today, i.e., the creation of an artificial demand to buy or sell a stock by influential insiders. Some financial men scoff at the idea; others insist, however, that price rigging persists to an alarming extent and is a very real threat to public confidence. The position of the latter group would appear to gain credence from several recent actions of the Securities and Exchange Commission against prominent Wall Street firms. The most spectacular case involved charges of massive rigging and illegal distribution of $10 million worth of securities. In May, these charges resulted in the expulsion of Gerard A. Re and his son, Gerard F. Re, from the American Stock Exchange. Re, Re and Sagarese at one time was one of the largest specialist firms on the American Exchange. The Re case aroused a great deal of comment [or several reasons. For one thing, it was the

first time since the establishment of the SEC in 1934 that the agency had taken action against a specialist. The specialist's role is a pivotal one on the exchanges, since he is charged with the responsibility of maintaining an orderly auction market in those securities assigned to him. Moreover, one of the many prominent men who had been victimized by some of the Re deals was Edward T. McCormick, president of the American Stock Exchange. As part of its crackdown on market manipulation, the SEC announced that it would undertake an investigation of the American Stock Exchange. Meanwhile, it brought disciplinary action against Bruns, Nordernan and Company, for manipulating the price of shares in Gob Shops of America, a small chain of Rhode Island stores, and against an underwriter, R. A. Holman and Company, on charges of holding back shares in a stock sale in order to create an artificial demand. The SEC also warned underwriters against so-called "tie-in sales" in which newly issued securities are sold on condition that the buyer later will purchase an additional amount on the open market. While the SEC was cracking down on some of the more blatant market malpractices, the exchanges also were tightening the screws in other areas. The New York Stock Exchange, for example, recently stiffened its requirements for getting a stock listed. The New York and American Exchanges have stepped up their so-called "stock watching" activities, in which staff members quietly investigate situations where prices suddenly spurt or volume soars for no apparent reason. The New York Exchange also reminded companies on the Big Board of their obligation to disclose immediately any information that might have an effect on the prices of Iisted securi ties. The Big Board's warning was precipitated by a series of incidents in which important companies were especially obvious in "leaking" information in advance of official announcements. One big electronics company, for example, took groups of reporters and security analysts out to see an important new computer several days before the story was to be released for publicalion. The visits generated sufficient rumors to push up the stock by five points during the two days immediately preceding the announcement. It is this sort of practice which has given new' currency to the old Wall Street saying: "Buy on the rumor and sell un the news." The reasoning behind it is that when important news is brewing about a company-a merger, stock

BY split, or important new product-the stock will rise until the story hits the papers and then will decline. The effect is to put the squeeze on the gullible investor who is impressed by what he reads in the paper-and to increase the flocking of lambs into 'Vall Street for shearing. Burton Crane, the stock-market columnist of the New York Times) traced the market performances of twenty-eight companies which had announced stock splits and found that nearly all had climbed in the weeks prior to the announcement. However, far more stocks fell than rose during the period immediately following release of the news. Thus some cynical members of the financial press refer to many of their stories as "near-news" rather than news. "Near-news" is information that has been methodically leaked to all persons who might possibly have interest in the story and who might be in a position to profit from advance knowledge. The expanded role of "near-news" has coincided with the growing importance of special stock deals in that part of the public relations industry which specializes in publicizing and distributing financial and business news. More and more companies now include some sort of stock arrangement as part of the total remuneration paid to public relations agencies. For instance, many corporations grant stock options to the PR agencies which allow them to buy stocks at their original low prices well after they have increased in value. The effect has been to focus the attention of the PR people on the price of the stock rather than on getting out the news, so that some agencies have become "stock touts" rather than publicists.

PETER

B.

BART

25

These practices raise deeply disturbing questions: Does the small investor or even the small speculator get a fair break in the market? Does he have proper access to corporate news? Is he victimized by market riggers? When speaking for public consumption on these questions, nearly all Wall Streeters take the position that (a) the market is basically honest, (b) they are nonetheless concerned lest arrant speculation or a few well-publicized cases of price rigging may seriously shake public confidence in the market. "You can never do away with the 'insiders,' and you can never get around the fact that some people inevitably are going to know things and profit from this knowledge while others will remain in the dark," said one experienced 'Wall Street analyst. "Thus people are certainly not competing on equal terms in the stock market. But, nonetheless, within this framework we must strive to make things as equitable as possible. In the stock market everyone should be equal, even though some people inevitably will be a little more equal than others." It was the great misfortune of Dr. Irving Fisher, the distinguished economist at Yale from 1893 to 1935, to have achieved immortality with a misjudgment. Said Dr. Fisher in 1929: "Stock prices have reached what looks like a permanently high plateau." Not many people talk about "permanently high plateaus" any more. Many Wall Street analysts currently seem to subscribe to an economic adaptation of Newtori's law that every action has an equal and opposite reaction. They theorize that every boom runs to excess and inevitably generates some sort of "correction" or

"The {locking of lambs into Wall Street for shearing."

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WARNING

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WALL

STREET

AMATEURS have done much in recent years to improve the caliber of their staffs. But there are still too many ill-prepared, ill-educated brokers in the securities business, who mislead their customers-if not cheat them. These are problems that must be tackled over the long term. On the more immediate level, some Wall Streeters and independent observers favor several short-term devices to curb the excesses in the market: 1. A crackdown on the advertising placed by some investment advisory services which make get-rich-quick promises. 2. A further increase in the staffs maintained by the SEC and the major exchanges to watch for price rigging and other irregularities. g. Continued warnings to the public by the exchanges themselves-and even by officials in Washington-against the dangers of excessive speculation. (Mr. Funston issued another such warning in mid-May.) 4. A greater effort at self-policing by the financial community in general. For instance, prestige firms should refuse to underwrite stock offerings for undercapitalized and poorly managed enterprises. 5. A tightening of SEC rules governing new issues, which would require fuller disclosure of financial information. by companies involved, and the certification of the accuracy of such information for small as well as large stock issues. (At present, no certification by accountants is required for stock offerings of $300,000 or less.) 6. New legislation giving the SEC stricter controls over securities trading and over new issues, enabling it, for example, to bar doubtful companies from selling stocks to the public. These reforms-not to mention more radical proposals-are likely to run up against the laissezfaire instincts of the financial community. However, there are now increased stirrings in Washington for Congress to take a hand in the regulation of the market. W"hether new controls come from "Vall Street itself or from Washington, there is growing recognition that something must be done: Having transformed the securities business into a truly mass market, Wall Street must now face the responsibilities which this change entails. Whether it will or not is an open, and urgent, question.
~n'Y'hp.yC'
i11,. __

downturn in the market. This principle places the analysts in something of an ambivalent position, to be sure, since, though Wall Street thrives on booms, it also knows that the greater the boom, the greater may be the correction.
POISED TO RUN AWAY

T PRE SEN T, there are fears that Wall Street .may be poised for a speculative boom of run-away proportions and that the "shakeout" or "correction" which will' follow may do a great deal of damage to the investing public. There is much disagreement over what may trigger the "shakeout." It could be an unexpected diplomatic crisis in Berlin, Southeast Asia, or some other trouble spot; or a sudden "flood tide of corporate larceny" -::-the ruilll~~ mtlktng . ri0fcorporate .assets by high executives-which, according to J. K. Galbraith, was a factor in the 1929 crash; or a loss of public confidence due to disclosures of serious manipulation, or any number of other factors. If conditions were sufficiently sensitive, it wouldn't require too catastrophic an incident to set off a shakeout since the movement of relatively few shares establishes the prices for all shares of stock. (Only a small percentage of the total amount of stock in existence is actively traded in the market.) if and when a break does occur, the market will be propelled downward by a number of forces. For instance, insiders in companies whose stock has only recently been issued to the public -and has enjoyed great increase in value-may well try to unload a good part of their holdings. And other "paper millionaires" will no doubt join them. Whatever the causes, however, surprisingly few Wall Streeters are prepared to suggest steps to ward off a "bust." In a society of mass affluence, they reason, there's little that can be done to prevent people from gambling away their money. Lifting margins or curbing- the activities of nonregulated lenders would be of little use, they argue, because most of the speculation in today's market takes place on a cash basis. "If the public wants to shoot craps, there's nothing we can do about it," says one high SEC official. There are, of course, several long-range measures that could be taken and that have the support of Wall Street: chiefly, increased efforts to educate the public in the economics of the stock market and in economics in generaL Secondly, just as investors should be better informed, so should their brokers. The big Wall Street houses

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