GENERAL ARTICLES

BULL MARKET

GERALD ANGLIN June 15 1946
GENERAL ARTICLES

BULL MARKET

GERALD ANGLIN June 15 1946

BULL MARKET

Grandma, the Chinese laundryman and the man next door are having a delirious ride on the stock exchange. Only one thing is sure — it can’t last

GERALD ANGLIN

HALF AN HOUR on Bay Street and somebody is telling you about the Chinese laundry man, retired, who came pad-padding around the corner from Toronto’s Chinatown and ordered his broker to buy him 10,000 shares of a mining stock called Quemont at 10 cents a share. Quemont skyrocketed to $8, was even higher by the time the Chinese gentleman heard about it and came pad-padding back again to sell out for $90,000.

Ten minutes in a broker’s street-level board room and you spot Grandma—or someone like her.

“I guess I sold my Northern Gold too soon,” she says, sidling up to a customer’s man. “I bought it at 65 cents, and when it got to $1.25 yesterday afternoon I ordered it sold at opening this morning. And now look—it’s up to $1.30!”

Five minutes before closing time on the trading floor of the Toronto Stock Exchange, just down the street, traders hurriedly swap sales slips to keep up with a closing flurry in industrial stocks. A lone trader beelines across the floor and starts shouting meaningless gibberish into vacant air at Post Three ■—cheap to medium golds. He’s instantly the centre of another cluster of traders, who alternately huddle together, scribbling slips, then turn to wiggle contortionist fingers at order clerks on the sidelines, who man telephones connected by direct wires to brokerage houses all up and down the street.

A bell quells the uproar as the clock hands reach three. The traders saunter wearily off the floor, and you take the elevator down to the basement statistical office to try and find out what all this Bay Street talk and excitement’s about.

The story is handed to you on a large cardboard platter on which is drawn one of those roller-coaster graphs so dear to the hearts of financial men. This shows the index of stock prices on the Toronto

exchange for the past 12 years—a sort of financial Gallup poll. Your eye quickly drops to a cellarlike pit in April, 1942, when the index for Canadian industrial stocks had sunk to 79, with producing gold mines hitting bottom at 50 five months later.

“Then on Oct. 23,” explains a helpful statistical voice, “Montgomery struck at El Alamein. Two days later the market began to climb.”

Victory Boom

THERE followed the longest, steadiest bull market since the twenties. “Golds” climbed from that discouraging 50 level to 147 in February, 1946—and “industrials” hit a 12-year high in April this year of 203. But what’s it add up to?

Billions. The 549 different stocks listed on the Toronto exchange in 1942 were worth a mere $4 billions. By April this year 718 stocks were being traded, with a total value of nearly $8 billions— doubled in billions in less than four years.

No wonder Bay Street, Montreal’s St. James Street and the financial alleys where Canada’s other

three stock marts do business in Winnipeg, Calgary and Vancouver are somewhat more than purring happily these days.

Mine or prospect, new firm or old, except on the wildest hazards, the money is there to gobble up new issues and vie for the old. Close to $618 millions worth of shares were bought and sold on the Toronto Stock Exchange in victorious 1945-—a better than double jump from 1944, and more than 10 times 1942’s total sales. And all this was exclusive of heavy over-the-counter trading in hundreds of unlisted stocks.

Where’s all the heavy money coming from — financial moguls or retired munitions workers?

Are we likely to get carried away in another dizzy boom like the twenties—and pitch headlong into another disastrous crash like that of ’29?

Will Grandma and the venerable gentleman from Chinatown make a million, or get their fingers burned?

To try to solve these riddles, let’s take a stroll down Bay Street. It won’t do any harm if you keep your money pinned

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Bull Market

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to your shirt. It will at least provide a look at what goes on, and perhaps a few citizens who are smarter than the rest of us can be cajoled into guessing some of the answers.

Billion-Dollar Row

Bay Street, in the financial sense, runs for five blocks from Queen to Front Streets. It’s a city canyon flanked by the solid walls of two banking head offices and the steellatticed beginnings of a third, the gleaming windows of a massive department store, the gaudily painted front of the Tickertape Coffee Shop, and the imposing carved-stone façade of the Toronto Stock Exchange. Crannied in and about the canyon are the offices of 277 investment and brokerage houses, 93 of which hold seats on the Toronto Stock Exchange.

The 93 “member brokers” are each connected by direct telephone and two ticker wires to the Toronto Stock Exchange, where they are privileged to trade in securities listed on the “big board.” Recently such a seat changed hands for $65,000, as compared with a $12,000 sale just before El Alamein.

Behind the Exchange’s polished steel and glass doors is transacted 68% of all trading done on the

nation’s stock markets and twice that done in Montreal, once unchallenged financial capital of the Dominion. The Exchange offers a channel through which private savings can flow into new production—from motor cars to baby buggies, canned goods to gold.

It is also the biggest gambling joint in the country, where manipulators with half a million for play can “make a market” in a mining stock to lure in the little men, then unload for a killing when the price is right. Where insiders of mighty enterprises can split old shares three ways and (in politer language) “take a profit” when the resultant flurry of interest among new buyers has boosted the new and more numerous issue above the old presplitting level. Where Grandma and a hundred thousand amateurs like her can take a daring flier, then panic at some unexpected drop and turn it into an avalanche, carrying the market and their own modest fortunes into the dustbin.

Because of what happened in disastrous fashion in 1929, drastic steps have since been taken to try and stave off future calamities. Securities commissions everywhere have tightened regulations. Exchanges have redoubled their scrutiny of all companies applying to have their shares listed for trading, and endeavor to police their own members.

The Toronto Stock Exchange, for instance, carries out a regular annual

audit and periodic surprise audits. Members must submit all advertising material for approval. And clients who feel they’ve been ill done by can take their complaints against a broker to the Exchange directors.

Yet listing by a reputable exchange doesn’t mean any stock is risk-free. The exchange can’t guarantee the proposition advertised. The honesty and complete good faith of every broker can’t be taken for granted.

Perhaps one of the most important post-’29 safety measures has been the restriction on margin buying. In the twenties a speculator could play the market on as little as 10% margin: for $1,000 he could “buy” $10,000 worth of stock, the broker borrowing the other $9,000 from a bank and charging the interest to the client. When stocks rose the speculator made 10 times the profit—but when prices fell the broker called for more margin, and when the big plunge came many a large fortune and small family nest egg were wiped out in frantic efforts to “cover.”

Since January this year you must purchase outright all stocks on the New York Exchange. In Canada margin requirements have been steadily increased by the exchanges, at Ottawa’s instigation, until now no stock may be bought on margin if the price is less than $2 per share. On higher-priced stocks margin requirements are 50%.

Stocks now held on margin can be shown to represent less than half of one per cent of Toronto’s $8 billions listed values.

But eveft that runs into a tidy $33 millions in “call loans” held by banks and other lenders this April against margin-bought listed stocks, greater by $5 millions than during the pre-war bull market of 1937. A bad slump this May would have found a lot of Canadians scrambling to put up cash in a hurry or be sold down the river.

Cheap Money

For a first call on our Bay Street rounds let’s try the youthful but knowledgeable head of the bond department of one Exchange broker.

“Wartime full employment put a lot of money in circulation,” he explains patiently. “The war ended with much of it still on the loose. And so most people have put their money to work earning more.

“But you’re lucky to get five per cent on a mortgage these days, and you’ll get less than three on bonds. So a great many people are buying stocks with an eye on good postwar dividends—and because they’re not at all averse to making some money on speculation on a rising market, since this is ‘capital gain’ and free of income tax.”

But just what people? You still want to know who’s doing all the current buying.

Two days and 10 brokers later the so-called “little man” in the market is still an unknown quantity. Many old faces that hadn’t been seen scanning a ticker since ’36, or even ’29, reappeared in brokers’ board rooms in 1945, and there were many brand-new faces to be seen as well.

“They’ve come in here waving $1,000 in Victory Bonds and ask me what to put it on, like it was a horse race,” declares a cigar-smoking customer’s man.

“We haven’t taken any new accounts in months,” you hear in haughty tones in one deep-carpeted, lofty-ceilinged emporium. “We were in the excess profit brackets by March, you know, and aren’t really interested in new business.”

Certainly the Bay Street picture is nothing like the delirious twenties, when the big glass-fronted board rooms packed in the customers like groceterias do these days, when brokers had dozens of modishly tailored salesmen and branch offices all over the province.

The ground floor board room, with its green board displaying latest sales on all stocks, the moving tickertape projected movie-style on a screen, and its fragrant aroma of tobacco smoke, hasn’t entirely vanished, but only regular clients may sit and watch the magic figures in many a dignified establishment hidden away in a skyscraper. Out-of-town business is now done almost entirely through local independent brokers on a commission-splitting basis.

“Sure, my whole business is new clients and I’ve got plenty of them,” says a customer’s man in one of the remaining hospitable board rooms where you can stand—not sit—by the hour. “But you better talk to the boss . . .”

And the boss says, “I don’t think the public’s back in the market nearly as much as some dealers would like to believe. Besides,” he adds forebodingly, “in this office we give this bull market only another year before it breaks.”

In the next office they’ll tell you two years, or three, or five, and there it is again—the shadow of the big axe. They’ll debate when the break will come, but you’ll never hear anyone trying to kid themselves that it won’t come.

Certainly, if the elusive little man is anywhere, it’s in the mining field, which has been enjoying a boom all on its own. Here the money’s really been rolling in.

While wartime restrictions prevented shaft sinking and other underground activity in gold prospects, they did not ban the staking of new claims, the formation of companies to exploit them, and diamond drilling to get sample ore values and provide the sort of news that whets the hopeful buyers of prospect stocks.

In all, Canada has some 63 producing gold mines. The last three years have produced another 60 reasonably good prospects and any number of properties running all the way from “hopeful” to “frustrated.” Value of such prospect stocks listed on the Toronto exchange has soared 7,000% since those dark days of 1942—from $3 millions to $221 millions at last year’s end. Jet-propelled ascents of such stocks as Quemont (18 cents to nearly $20 in 1945) and Giant Yellowknife ($1.99 after listing in 1944, to over $11.50 in 1945) have made money for thousands despite the fact that neither has produced an ounce of metal.

Thousands have lost money, too, on golds like Eldona, which climbed to a proud $3 on the “big board,” then tumbled back to 75 cents, and Bear Exploration and Radium, which reached $2.70, then settled to $1.

Penny Ante

But it’s the penny stocks, where you get a lot of pretty paper certificates for your money and an even prettier batch of get - rich - quick dreams, that lure Grandma away from her bridge parties and into the market, or at least into “the street.”

For far from all prospect golds are listed on those trading posts in the Toronto Stock Exchange. Almost all such issues are first floated on the “over-the-counter” market, traded directly between broker and broker.

You could have found bids for no more than perhaps 50 such unlisted mining stocks in ’42—and only six of them selling for more than 10 cents a share. As 1946 started, unlisted traders were buying and selling 550 prospect stocks, which, at an average price of 24 cents, were estimated to have a total value of $200 millions.

High in a skyscraper just off Bay Street two men face each other across a massive desk. Down its middle runs a panel of 70 telephone switches and a row of blinking green lights.

The two men are Mr. High and Mr. Low, partners in High & Low, dealers in unlisted mining stocks. The switch panel between them is their telephone exchange and their stock

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exchange, and just watch those flying fingers.

“Abaleno?—I’ve got 1,000 shares at 18 cents” . . click. “Four hundred Emmaline at 24? I’ll take that” . . pencil scribbles the purchase on a ruled pad, and another light blinks . . “Nightlight?—Sorry, I’m a seller on that myself.”

Despite a slump in mining stocks this February and March, Mr. Low will tell you, any good day this spring saw close to 400,000 shares being traded across that telephonic table.

Messrs. High & Low, like many other such operators, are simply traders. The more colorful and sometimes notorious characters in the street are the dealer promoters, who contract with new mining firms to put their stock issues on the market, and here’s where the high-pressure tactics are sometimes turned on.

The Ontario Securities Commission this spring cracked down on 18 brokerage firms, 24 stock salesmen, two issuers of securities and one prospecting syndicate, cancelling licenses for high-pressure selling, publishing technicolored blurbs as mining “reports,” and other malpractices.

In fairness it must be appreciated that any gold mining deal, essentially and inevitably, is a high-risk proposition—and the risk is there for the prospector, the men who form the company and the dealers who launch the stock sale, as well as the public.

When a mine proves worth while, the men behind it and its promotion collect high stakes because they hold large blocks of stocks on option at perhaps 10 cents a share. As the street or market price rises they take up their options and sell out at a big profit. There’s a temptation to manipulate the market, getting a falsely increased price by overglorifying the property’s potential or by buying up shares on the open market to create false interest. Apart from being highly unethical, this is a dangerous game at best.

Take the story of a promoter who became a victim of his own propaganda. This man made a neat half million on paper by turning on a whoopenholler sales campaign and feeding the right news from the north to the public at the right time. But it began to look like the price might hold at $1.50, so instead of selling out his option stock and taking his killing he not only held on but started buying in more at that price, in carload lots. But the market got worse. The drill holes got worse. The stock wound up in the 10-cent class placing this gentleman among the many who have a nice pile of paper and a costly stack of experience.

You, too, can make big money on the stock market or in the street —you, Grandma, and the Chinese laundryman. But you three and a lot of other people can take an awful beating if you don’t know what you’re doing—as too often the little man doesn’t.

“Investigate before you invest” has always been the safest rule in buying anything—it’s only a gift horse you’re not supposed to look in the mouth. And when you’re out for profit in speculation, take a double look—with a glance over your shoulder for the shadow of the axe.