As in Mark Twain’s case, reports of the death of the stock market are greatly exaggerated, but the patient isn’t exactly in the pink.
Halcyon 1973 isn’t. This will be remembered as the year of Equity Funding, shotgun marriages in the brokerage business and confusion in government regulation. It also will be remembered as the year individual investors got out at the bottom of the stock market in order to take advantage of the top of the real estate market and the year that two bushels of soybeans were worth more than one share of Chrysler.
What’s wrong with the stock market? Ask any expert, and you’ll get a clear, decisive answer. But don’t ask two experts unless you want two opposing clear, decisive answers.
One problem is the exodus of the small investor. Institutions have discovered that the old “to whom” joke is something to live with right now. Air pockets are alive and well in 1973, witness recent gaps in Natomas, Zapata and even hoary old IBM. There are fewer individual shareholders in 1973 than in 1972, the first decline in that indicator in many years.
There are probably many reasons for the departure of the small investor, but the two most obvious are commissions and lack of profits.
At the midway point of 1973 the Dow Jones Industrial Average was 100 points lower than it was in January, 1966. Seven and one-half years of less than no progress has not been conducive to profit taking by individual investors. The odd-lotter has been liquidating securities for a year. He’s supposed to be wrong all the time, but he looked like a champ during that period. Hope will sustain individual investors just so long if a crumb of profit doesn’t come their way every so often to keep hope pumped up.
Wall Street and the government’s approach to commission charges has been anything but consistent over the last few years. In 1966 institutions were accounting for about half the trading on the New York Stock Exchange and were paying about half the commissions. Realizing the inequity, in this statistic, the Securities Exchange Commission in its infinite wisdom and understanding of the industry it regulates pressured Wall Street to change its commission scales.
Negotiated rates, surcharges, volume discounts and the like produced more changes in the commission schedules in three years than had occurred in the previous 40.
The current schedule is just not working. Institutions now account for some 70 per cent of all trading and pay about 40 per cent of all commissions. That leaves individuals with 30 per cent of the trading and 60 per cent of the commission charges. The situation is so ridiculous a customer liquidated 15 shares of Exxon the other day, and it cost her almost $2 per share to make the trade.
Even the presidents of listed companies are complaining about the inequities in the current commission schedule. C. V. Wood, Jr., president of McCulloch Oil, heads up a group of 250 company presidents lobbying for changes in not only commissions but other rulings by government and practices on Wall Street that cater to institutions at the expense of the small investor.
Mr. Wood’s McCulloch stock, for instance, has been as high as 36 in the last year but recently languished around the six dollar level. Such are the penalties and rewards of institutional whim.
The rearrangement of commissions to favor institutional investors has been particularly devastating to brokerage firms. Services to the small investor have never been profitable to Wall Street, but there was enough gravy in large transactions to qualify the small trader for the stock market’s version of noblesse oblige. But the fat is gone.
The fat is indeed gone, except perhaps on Wall Street itself. Visit the financial center in New York during a bad market, and you’ll find the gloom thicker than Manhattan smog. Layoffs in the back office. Curtailment of services. Cuts in brokers’ percentages. Crackdowns on stock deliveries. Severe penalties for late payments. Closing unprofitable offices. All these measures are discussed by $100,000-a-year executives, resplendent in $300 Brooks Brothers’ suits.
Brokerage firms operate at the top much like they did ten years ago when the business was easy. There is talk now of another increase in commissions to the small investor, a solution much like raising the price of buggy whips because they’re a slow mover.
But that’s the way Wall Street’s top management thinks. Most are second and third generation brokers, and think what worked in Dad’s time will work again.
It won’t. There was enough fat in both the economy and the market to accommodate all sorts of mismanagement, but no more. Investors don’t line up to do business now, and no customer is flattered by the attention a broker lavishes on him. “Look, stockbroker, if you won’t call me for a year, I’ll send you $100,” is closer to today’s customer’s attitude.
Here’s a revolutionary idea: Pay brokers on how good a job they do for their customers rather than on volume of sales. How much chance does that have on Wall Street?
The companies who issue the securities that trade on the stock exchange must also share some of the blame for what’s wrong with the market. A lot of the accounting over the past few years seems to have been performed by Mickey Mouse, and not just at Equity Funding. Keeping one eye on the stock market is a good practice for any corporate executive, but to lock both orbs on the price of his stock is folly. If a corporate president makes his company perform as well as it can in producing whatever goods or services it provides, the price of the stock will take care of itself.
Investors themselves are partly to blame for what’s wrong with the stock market. There are two parts to every successful stock transaction, a buy and a sell. It’s unfortunate, but there will be no more buying stocks and putting them away. The economy changes too fast. We have gone from a nation enamored with products to a nation in love with services. Our population growth is zero right now. Agricultural surpluses have changed to shortages. The formerly sacrosanct dollar is more sensitive to international tumult than to what happens inside the 50 states. The changes are so frequent and so drastic that successful investing is and will be harder in the future.
It will require more knowledgeable brokers and more sophisticated investors. It will require institutions to realize that saving on commissions could be a pyrrhic victory if the small investor is no longer part of the market. It will require brokerage firms to realize that a franchise to act as agent in securities transactions is not a license to make money regardless of how the business is managed. Companies must make business decisions based on something other than the market price of their securities. And investors must learn that there are no bird nests on the ground.
When will the market get better? Probably sooner than we think. In July the ticker tape was describing a fire sale, and volume was so light they were spelling out the names of securities rather than using the symbols. Anytime the market gets to that point, the bottom isn’t far away.
Another good indicator is the general bearishness of Wall Street experts. They have a certain unanimity of opinion that the market has to go lower that is seen only when the market is ready to go up.
But there are two other indicators that are even more encouraging. One is broker’s income. Brokers who were making $5000 a month in December are scrambling to make a living now. When stockbroking is easy, the market is topping out. When it’s hard, the market’s feeling around for a bottom. The other encouraging indicator is the abandon ship drill going on in brokerage offices.
Watergate blues and monetary malaise won’t kill Wall Street anymore than high prices and poor plays could kill Broadway. Drop by the theater district in New York at 7:30 on a Saturday night. Investors, take heart. The original fabulous invalid lives!