June Boom?

Through April, May and early June last year -- while 1938's recession was bottoming--the stockmarket was indigo blue. At 10 a. m. on June 20, something happened. The market turned in its tracks and began to climb. Blue turned to rose color. For two weeks stocks climbed spectacularly. So far as the market was concerned the corner had been turned. Last week something resembling the June turn of a year ago, but on a much smaller scale, took place in the market. Brokers talked jubilantly of another corner being turned.

Shorts. Biggest resemblance between the two movements was in the behavior of the shorts. At the end of May last year speculators had sold no less than 1,343,000 shares which they did not own, and were waiting to buy them back at lower prices. In the two weeks following the turn they were panicked into bidding up the prices of stocks which they had blithely sold. Some of them emerged without their shirts.

Last week if shorts did not lose their shirts, some of them lost their neckties. At the end of April the short interest amounted to 662,000 shares, a 48% increase in four months. In Chrysler stock (the No. i flier) the short interest had increased 176% to 65,000 shares. Shorts had gauged all too well that business was receding. Overenthusiastic pessimists who had had trouble finding buyers, suddenly found too many buyers. When professional buying began, the shorts ran to cover, joined the buying parade. Result: in two days the Dow Jones Industrial average rose 3.76 points, and stockbrokers enjoyed two successive million-share days--enough to add up to a boom by 1939 standards.

Commodity Prices. Last June shorts were squeezed in cotton, hide, rubber, lesser commodities, as well as in stocks. Last week, also on a lesser scale, speculatively minded manufacturers, who had gone short of raw materials, again turned to buy in a rising market. The difference this year is that the commodity price upturn is accompanied by falling instead of rising production, is more speculative, than industrial; cotton textile prices rose as inventories peaked again at over 200,000,000 yards, and manufacturers discussed ways of carrying unwanted cloth; hide prices zoomed as leather production fell from 121 to 114.

Production. Very different in one respect was last week's upturn from that of a year ago. At that time the Federal Reserve Board's index of production fell two points in April, one point in May, turned in June, was on its way up in July (although reported several weeks late its trend can generally be anticipated from weekly figures on various industries). Last week the Board's index reported a six-point drop for April, and May production was guesstimated at 90, June still lower.

The difference was that a year ago consumer goods industries, notably automobiles, had recovered from their inventory troubles of 1937. This year, production of nondurable goods as well as of more sensitive durable goods is declining.

Bulls had, last week, two isolated spurts in production to argue for their optimism: 1) in the third week of May automobile production increased from 72,000 to 80,000 cars; they hoped that after the strike at Briggs Manufacturing Co. last week, production would resume its higher trend; 2 ) reports that large steel orders had been placed during May's steel price flurry (TIME, May 22) and a recovery in the steel rate.

The hard facts were that Detroit expected a virtual shutdown this week, strike or no strike, Decoration Day or no Decoration Day (the same week in 1937 car production was 131,000), that the steel business placed during the May price cuts was mostly options, not orders, some of them merely verbal, and few even specified the size and composition of the steel wanted; therefore the present increase in production is mainly going into inventory.

The stockmarket did not heed the men who know most about the steel industry. In Manhattan the American Iron & Steel Institute held its annual meeting and tough Tom Girdler, head of Republic Steel --dressed up for the evening in a white tie and tails, as he handed over the presidency of the Institute to his successor, shrewd E. T. Weir, head of National Steel --said bitterly:

"Judging from the record, the [steel] industry has become allergic to profits. To look at its performance you would think it had anticipated those who want the profit system abolished, and for all practical purposes had established itself as the first great industry devoted to the idea of production for use."

Government Magic. The 1938 market upturn was signalized by Franklin Roosevelt's decision to prime the pump once again by putting $4,000,000,000 of emergency money into circulation. Last week the President had made no such decision but speculators hoped for other forms of Government magic. They had reason to expect that business would get a modest boost from repeal of some of the more painful provisions of the tax law (see p. 15).

The speculators even talked seriously of far less likely magic such as further dollar devaluation--which would make it cheaper for the dictatorships to buy needed supplies in the U. S. and would put a strain on the pound sterling and the franc, a distinct disadvantage in the President's eyes.

Significance. The most notable feature of last week's stockmarket upturn was that so far as it rested on solid ground it was based on expectation of Government action. Imminent repeal of taxes on capital gains and undistributed profits entitle stocks to enjoy a modest two or three day rally. But for the first time in nearly a year the market ceased to be a slavish follower of production. Time was when the market presumed to anticipate changing trends in production three to six months in advance. In June 1938 the market anticipated production by only a few weeks. Last November the market and production peaked about the same time, then fell together. In April the market hit its 1939 low and production did also. Last week they parted company for the first time in a year.

* The coal tie-up accounted for about one-third of the decline (see chart, p. 72).

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