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Trouble in the Money Markets
By year's end, a severe money squeeze was developing. Blue-chip businessmen had to pay 6¾% for prime loans, another alltime high, and many home buyers were paying well over 7¼% on mortgages. Bond yields rose so swiftly that scores of corporate and municipal borrowers postponed or scaled down the size of new issues.
The trend toward tighter and costlier money—combined with expectations of continuing inflation—portends trouble in the U.S. securities markets. Bond dealers are afraid that even the high yields on fixed-interest securities are too low, relative to the rate of inflation. These dealers figure that they may have a tough time floating the issues that industry needs to expand and modernize. With somewhat less justification, stockbrokers worry that investors will switch out of stocks and into bonds because the difference in yields is so enormous. This month, the average yield on Triple-A corporate bonds climbed to 6.47%, while the average dividend paid by the 500 stocks in the Standard & Poor's index was down to 2.89%, the lowest since February 1962.
Speculation in Stocks
Inflation in 1968 helped to foster a contagious speculative mood in the stock market. Led by the "gogo" mutual funds, many once staid institutional investors plunged into small new issues that offered a chance for quick profit. Fried-chicken franchisers, wig makers and small computer-service firms had no trouble bringing out new—and often highly speculative—stock issues. Frequently, the prices of their stocks soared unrealistically, to 50 or even 100 times their per-share earnings.
On the New York Stock Exchange, the belwether Dow-Jones industrial aver age advanced strongly after President Johnson announced on March 31 that he would not run for re-election and that he was making new overtures to end the Viet Nam war. The average sagged in August but soon rebounded in what brokers called "Nixon rallies." At year's end, the index was approaching its historic peak of 995.15, set in February 1966.
Securities trading became one of the greatest growth industries. On the Big Board, the year's volume jumped 20% to a tape-taxing record of nearly 3 billion shares. The torrent swamped securities-delivery channels, spurring belated efforts to computerize archaic clerical procedures. All the trading also lifted Wall Street profits to a level that even Big Board officials consider embarrassing. Brokerage commissions reached about $5 billion, and some top customers' men earned as much as $500,000 each. Prodded by the Securities and Exchange Commission, the New York Stock Exchange cut commissions by 7% on orders of 1,000 shares or more. Unless the Nixon Administration forces the SEC to change course, this is only the beginning of far-reaching changes in both commissions and the privileges of the stock exchanges. They now have almost monopolistic powers to limit access to trading and to fix commissions so high that the big men in firms with exchange memberships are practically assured of making fortunes.
The Merger Rush