THE WALL STREET PUZZLE
By NICHOLAS DAVENPORT The strange capacity of the market to disregard bad news was illustrated by the case of Chrysler. In April this company reported a $15 million loss for the first quarter—against a profit of $46+ mil- lion in the corresponding quarter of 1957—and cut its quarterly dividend from 75 to 25 cents. It seemed heading for a hefty loss for the year. The common stock fell about three points to 44 and then recovered to over 47—higher than it was before the bad news. It is now steady at 451. Borg-Warner is another case of the Wall Street Practice of eudemonism. This company's chair- man reported in April a near 50 per cent. drop in earnings and predicted an even greater percentage fall in the current year. At the same time it was announced that it had lost its big contract for automatic transmissions for Ford Motor. The Common stock fell 21 points to 251 and is now standing at 291. Such joyous flights from reality have not been seen in the market since the decep- tive rally after the great autumn crash of 1929. That false movement lasted five months and raised the Dow Jones index 47 per cent, above its November low. It eventually cost the bullish spec- ulators much more money than the initial slump.
When I asked Professor Galbraith on his recent visit why the professional investment managers of today did not read his story of the great crash, he said that Americans were not interested in his- tory, (Far more copies of his excellent book have been sold in Europe than in the USA.) Most of them are comparatively young men who have had no experience of market crashes or cyclical trade slumps. They have come to their jobs in a period of expansion and investment boom and are con- vinced that it is not 'high-class' to play the market, that what they call 'growth' stocks will always go higher in time in spite of temporary setbacks, that America is a dynamic society and that it never Pays to sell America short.' As a matter of fact, professionally managed institutional funds are never very active in the market. Take the case of four 'blue chips' which figure in all the institu- tional portfolios—General Electric,. General Motors, Sears Roebuck, and Standard Oil of New Jersey. The number of shares of these companies
traded in during 1957 was 3.3 per cent., 2.4 per cent., 3.9 per cent., and 3.1 per cent. of the capital stock outstanding—an average of just under 3.2 per cent. This suggests that the amount of institu- tional investment holdings which comes to market in a year is well under 5 per cent. of their total portfolios. And at the end of last year the port- folios of the investment institutions—investment trusts (open and closed), pension funds, college endowments and other foundations, life insurance companies, etc.—amounted to $30,000 million or 151 per cent. of the total market value of the stocks traded on the New York. Stock Exchange. The current behaviour of Wall Street is dictated, in other words, much more by the respectable investment institutions who refuse to sell than by the private or professional speculators who have sold short. Curiously, Throgmorton Street is the reverse—we have become a more speculative market than Wall Street.
The institutional reluctance to sell is perhaps best expressed by the three leading 'closed-end' investment trusts—Lehman Corporation, Tri- Continental and General American Investors. All of them, being free to convert shares into cash or bonds without offending their clients, should be among the most active of managements. Yet last year the indicated sales they made expressed as a percentage of the market value of their portfolios at the end of December were 9.3 per cent., 15.4 per cent. and 8.8 per cent. respectively. In the face of the most bearish news from the companies they invest in these professional managers decided to take only minor evading action.
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At the back of the professional investor's mind may be the thought that the Eisenhower policy is too uncertain and flabby for more decisive action, or that the wage-cost inflation has not been stopped and that all equity stocks are in some mysterious way 'inflation hedges.' But if the con- sumer has been priced out of the market in con- sumer durable goods and if there is a definite consumer shift away from these goods into spend- ing on services, travel and leisure, the resulting decline in capital spending will make some of these equity stocks the worst possible inflation
hedges. The leaders of one bull market are rarely the leaders of the next. The irrational optimism which marks the American institutional invest- ment policy of today suggests the desperate last stages of a bull market rather than the beginnings of a new glorious upturn.
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