Evening star. [volume] (Washington, D.C.) 1854-1972, 1927-06-11
DANGER SIGNALS
IN STOCK MARKET
Shares Rise Despite Evil
0enCe Boom Has Out
stripped Business.
BY CHARLES F. SPEARE.

stocks and a few favorite induStrialS
although the price list continues to
advance and caution concerning specu'
lation is being preached in every quar-
ter.
The market succeeds in rising lit.
tie, day by day and from week to
week, on the basis of two or more
years of success, after having passed
that point where there is a legitimate
relation between current market val
ues and current business conditions
and outlook.
Until from some unsupported quar-.
ter there develops a situation that
will focus attention on facts now being
ignored it is quite probable that prices
may go on rising under the influence
of easy money, the indisposition of
. holders of securities TO realize their
profits and a generally satisfactory
state of trade.
Market Is at Fantasy Stage.
Markets always go much higher
than they should in period of pros
perity and considerably lower than
values warrant when the country is
facing depression. We now are in
the era of abundance and have been so
long that few can direct their imag-
ination toward any other prospect
than that of continued high records of
stocks, bank exchanges, retail sales,
pay rolls, gold holdings and foreign
credits.
1t is easy in such times to believe
the impossible. Therefore the public
is generously treated to all sorts of
fantastic stories dealing with railroad
mergers and contests for railroad con-
troll as well as payment of high
guarantees on shares of low merit.
This is normal phase of the kind of
market that has been reaching out
further and further to enmesh those
who always are drawn into it in it's
last stages.
Danger signs stand out clearly, but
the public rushes by. The rapid ex-
pansion in loans required to carry com.
mitments in stock and undigested
bonds is one of them. Loans are now
above $4,000, 900, 900, having increased
nearly 00,000,000 in the past II
months. The natural tendency of these
loans is to increase so long as mar
kets remain active and price averages
advance, and while the outpouring of
new securities is in excess of the de-
n1and for them. Sooner or later this
expansion will result in pressure on
the part of the banks, through the
Federal Reserve, to shut down on
loans for speculative purposes.
Bond Market Is GIutted.
The congestion in bonds is also an
evidence that conditions are not
healthy in the security markets. While
the volume of new offerings has been
greater than in any other half year
in the country's history, the prices
asked for them have been above those
which the public is willing to pay. In
confirmation of this fact only a rela.
lively small proportion of the holders
of second liberty Ans have thus far
exchanged for new 3&s. Competition
for business among investment bank
ers has been very keen, with both do
nestle and foreign bonds purchased
on basis compelling high retail
price in order to give the principals
IN the trade even a small profit.
Underwriters have built UP huge
selling organizations in the last few
years that must be kept busy. so we
have in the bond distributing business
condition of low profits on high
gross sales aparalleling those in COM
nercial lines. Along with this is the
tendency to stimulate borrowing by
governments. municipalities and cor
porations abroad and by industrial
companies at home that may properly
be catalogued as poor risks.
Reinvestment Demand to Aid.
1t is unusual for the speculative and
the investment markets to move in
opposite directions as positively as
they have this week, when extreme
weakness was exhibited in the latter
and buoyancy in the former. Between
this date and July 1st, there should
be sufficient advance inquiry cover
ing the reinvestment of July LIST funds
to take up some of the slack.
Banks and corporations are both
employing idle money in this market
though latterly more in short terms
than in long term bonds. However,
unless the flow of new issues dimin-
ishes materially there will be a poor
Summers business for the distribu-
tor of investment issues.
Some of the trade recessions visible
this week were more than seasonal.
1t is to be expected that between
April and June, for instance, there
should be a sharp decline in the pro-
duction of automobiles. The contrac-
ton in this period this year, however,
has been sharper than usual. On the
average. business is about 10 per cent
less than a year ago..
In the iron and steel trade the
since the end of May, both in pro-
duction and in the amount of untitled
orders. The latter decreased over 405,-
900 tons in May and at the end of
that month were the smallest for the
period in may years.
Rubber Prices Break.
Prices of rubber after holding steady
for a while, have broken down again
and are now equal to those prevailing
last February. With 1t there has come
a period of price cutting in manufac'
tured goods and slump in the mar
ket values of securities of rubber com
panies. An incident this week that
called attention to the struggle that
some of the primary New England
industries have been making against
new economic forces was the passing
Of the dividend on American Wooden
Co.'S preferred stock after an uninter'
rupted record of payment dating back
over rs years. 1t is true that an
extravagant and visionary manage
ment in the decade between 1915 and
1925 had quite as much to do with
creating the present situation as die
the misfortupas "e trade.
The season Is late for planting and
harvesting crops and cold weather ir
most sections of the country has af
fected retail trade and postponed col
lectionS. The Winter wheat State:
will have a considerably reduced crol
this year, but fortunately they have
had q number of seasons of abundant
returns and their people are in {
strong financial position. In thu
Northwest, T1.=-e, the yields of whea
have been lower than the average tn,
last two years. with railroad earning:
and merchandise sales corresponding,
affected, the outlook at the presen
time is satisfactory.
In the Mississippi Valley the worl
of repairing the flood damage is go
ing forward, crops are being planted
homes and roads rebuilt, and meas
ures taken to prevent another TRACED
Of this sort. This area will show tn
signs of it's sufferings for long tim