Wall Street Goes Amateur
McCabe, George
WALL STREET GOES AMATEUR By GEORGE McCABE JEREMIAH clanking his chains among the ruins of Jerusalem cannot compete for our sympathy with the present plight of the apologists for "prosperity"...
...Insull Utility Investment stock, one of the most active in the list, opened at 85, fell to 65, and recovered to close at 83...
...The 1907 panic was a parade alongside of this collapse, because it took ten months for the corresponding measure of deflation to be accomplished...
...In brief, how can unrealized paper profits be spent ? Only, of course, by sale of the stock...
...What is the investor to do if bonds issued by reputable, long-established houses are subject to default in some cases, and serious market depreciation in most instances...
...4) that the 40 percent margin required by most brokers and bankers would not permit a disorderly selling out of part paid accounts...
...Speculative buying has failed to support not only the stock market but bond and farm lands as well...
...Their 61/2 percent debentures are currently quoted around 40 percent of par...
...This is a clew to the reason underlying the unheard-of price fluctuations: the overemphasis put on financial news items...
...Lazarus, we will say, had an unrealized profit of $500 in Bankinshares...
...One of the leading investment news services (the Standard Statistics Company) recommended the purchase of high-grade common stocks up to September 30...
...The much-talked-of bankers' pool that was to have regularized trading after the first break failed utterly a few days after formation to prevent a second collapse...
...Many more damaging cases can be found in the lists of transactions in "cat and dog" stock markets like Chicago...
...The break in the bond market in April, 1928, caught most of the bond houses with large blocks of unsold securities on their hands...
...These were issued a few years ago at 96...
...So many fundamental changes, like the Federal Reserve Bank, stock split-ups and foreign loans, have come about that we can scarcely blame the professional for going amateur...
...It may be urged in defense of speculation that this is not a representative stock, but it is one that is widely held, a popular favorite and a sound stock...
...the Federal Reserve system as a sure cure for panics, and the collapse of speculation as a price stabilizer for stocks, bonds, grain, farm land and other commodities which can be traded on a speculative basis...
...Many "gilt edge" bonds like New York Central 41/2 bonds have fallen 15 percent, from 100 to 85, during 1929...
...A leading text on economics defines speculation as "the buying and selling of goods for the sake of profit from price changes...
...Now that the Carnegie Commission has completed its search for professionals among athletes in colleges, they might well take up the inquiry in Wall Street...
...Consequently they have had to use their working capital and credit to carry these...
...The 5 to 20 percent depreciation in the bond market continues...
...5) that the day of stock-market panics was over...
...2) that this belief had put stock prices on a permanently higher plane...
...Then worst of all, a rally in the afternoon brought it back to 75, a rise of 50 percent...
...He planned when the market reached the top to take his profit by sale of his stock and buy a car, but was still looking for "a new peak for all time" when the break occurred...
...In brief, the professional operators in these fields seem to hold off in an emergency, just as amateur speculators will not buy in a declining market...
...Another advised until October 21 (Moody's Investors' Service) holding good stocks, provided the stocks are held with a view to benefiting in the long-range growth of the United States...
...In the New York stock market, probably the most highly organized and carefully regulated exchange in the world, the decline from September 3 of this year to October 29 in the Dow Jones average of prices indicates a decline from 381 to 212, or 44 percent in the short space of fifty-six days...
...The $500 purchasing power which Lazarus might have used for the purchase of a car does not affect the economic situation, because Dives has it instead...
...The disintegration of the Detroit United Railways and the Michigan Electric, and the recent suspension of interest payment on the Key System Transit Company and New York State Railways, are serious indictments of the bankers concerned, because $30,000,000 worth of these bonds have been sold since the war to investors too remote from business affairs to realize that the interurban traction industry has been in rigor mortis since 1919...
...This was quite different from the impression foisted on the public by newspaper announcements of the formation of the pool...
...Another source of misinformation is the forecasting services...
...This danger, it was shown, does not accompany stock investment because the dividends increase as prices go up...
...in disgust he sells his shares for $100 instead of $600 to Mr...
...Montgomery Ward, for example, opened at 84, fell to 50, a decline of 42 percent...
...Dives...
...The banker is traditionally forced to say that the outlook for general business is good...
...He cannot even put his money in the bank for a return of 3 to 41/2 percent without being disturbed by nightmare visions of himself back at work, because, according to the Honorable Pole, Comptroller of the Currency and the grand vizier of National Bank Examiners: About 5,000 banks closed their doors and tied up depositors of more than $150,000,000...
...In that case most of the issues now outstanding will not return to the prices at which they were issued in 1927-1928...
...In four states from 40 to 53 percent of all banks in existence in 1920 failed...
...Still another force that has amateurized speculation in the stock market is the practice by the press of gathering a pearl harvest of opinions from bankers, economists and brokers...
...Then the buyer of the stock is out just as much purchasing power as the stockholder is in...
...The October issue of the Monthly Review of the largest bank in the country said: The activity of manufacturing and trade has continued at a high level during the past month [September...
...A third (the Annalist) on October 11 was quite optimistic, basing its opinion on the two factors which the other two services regard as dangerous to the credit situation and general business conditions...
...On the following Tuesday, October 29, the big break occurred in spite of the pool...
...From then on liquidation was urgently advised...
...The author then goes on to state that the speculator equalizes prices by ironing out extreme fluctuations so that a commodity like wheat traded on a speculative exchange does not rise or fall in price as suddenly or rapidly as a commodity like coal, which is not subject to active speculation...
...The financial editor of the Annalist (October 25, 1929) has summarized the underlying fallacies that have led to this panic: (1) that common stocks are as good as, or better than, bonds, and with diversification just as safe...
...For example, the Wall Street Journal said in regard to the bankers' pool: Bankers Halt Stock Debacle...
...One Billion for Support...
...These oracles are retarding the recovery of the market by their concerted decision that the decline in stock prices will cause a curtailment in purchasing power...
...However, it may well be that the failure of professional speculators to buy cheap and sell dear, thus leveling prices, has been due to the failure of their previous experience to serve as a basis for post-war decisions...
...Again that the default in interest on real-estate bonds on hotel projects has become almost general is borne out by the recently announced liquidation of the American Bond and Mortgage Company, one of the oldest and largest concerns in the business...
...Now his paper profit has vanished...
...their only action was to place bids for stocks some distance below the market price...
...Although there has not been the marked seasonal expansion that usually occurs in September, this is hardly surprising after the basic industries have been running at a record-breaking pace for such an extended period...
...The only net effect of the break, on the demand for commodities, arises from the redistribution of purchasing power...
...Babson was the only Cassandra on hand, and he missed the date by four years...
...Dives uses the $500 he would have spent for stock for a fur coat, whereas Lazarus would have bought a cheap car...
...and so were unable to support their issues on the exchanges...
...We will take a possible case for example: Mr...
...The bond-buying public was urged by responsible economists and brokers to substitute common stocks for bonds because the fixed income from bonds is subject to the risk of loss of purchasing power should prices rise...
...The purpose of this article is to show that this generalization is subject to serious qualification in the light of recent events...
...None bothers to explain this, but it is difficult to see how it will follow...
...Most of them were caught quite unawares by the turn of events in Wall Street...
...Whether the bond market will come back, as the experts prophesy, depends on the public reaction to the stock-market panic...
...Then the bankers in the pool, asked why they had not supported the market, replied that they had no intention of buying stocks to strengthen the prices...
...This may be true, with some qualification, but the price level has shown a tendency toward decline...
...A more serious indictment of speculation as a stabilizer is found in the record of transactions on Thursday, October 24, because many stocks suffered price changes of 50 percent...
...These headlines appeared on Friday morning...
...We are assuming that Dives would have paid $600 for the shares if the break had not come in the market...
...Probably they will demand more than 454 to 5^4 percent for placing their funds in fixed income bonds...
...those who, like the Federal Reserve Board, do not follow this tradition are first jeered at, then ignored...
...WALL STREET GOES AMATEUR By GEORGE McCABE JEREMIAH clanking his chains among the ruins of Jerusalem cannot compete for our sympathy with the present plight of the apologists for "prosperity" enmeshed in ticker tape among their crumbling exhibits: employee ownership of stock as a solution of the labor problem, customer ownership of public utility stocks as a remedy for monopoly baiting and ruthless regulation by commissions...
...3) that the investment trusts could act as stabilizers of the market...
...In comparison with previous declines this is the worst on record, not in extent but in precipitancy...
Vol. 11 • December 1929 • No. 6
