(The document is as follows:) Mr. EMIL SCHRAM, F. EBERSTADT & CO., INC., President, the New York Stock Exchange, New York, N. Y. DEAR MR. SCHRAM: During the year 1947 there were presented to us sound financing and security distribution programs, which we were unable to consummate due principally to market conditions, aggregating between 65 and 70 million dollars. They were divided amongst the several industrial groups roughly as follows: Machinery, farm equipment,. and machinery parts. Chemicals_. Electrical equipment and electronics__ Tires and rubber_ Metals and mining Containers__ Public utilities. Publishing- Total__. $25, 000, 000 15, 000, 000 10, 000, 000 5, 000, 000 4, 000, 000 4, 000, 000 2,500,000 1, 000, 000 66, 500, 000 These are well-managed concerns, of medium size, possessing good prospects of future growth and development. With best regards, Sincerely yours, F. EBERSTADT. Mr. SCHRAM. This is from Mr. Eberstadt, who as I say, deals in this smaller growth companies. He said that during 1947 they had offered to them plans for raising equity capital aggregating between 65 and 70 million dollars. They were divided into machinery, farm equipment, chemicals, electrical equipment, tires and rubber, metals, containers, public utilities, and publishing. These are all well-managed concerns but they are medium sized. I do not think any of them are listed companies. Some of the listed companies can get some money. They have to pay a high rate for it. But you get into the medium size, and the smaller group, and the market is just almost completely vanished. The record is replete with those withdrawals, Senator. The CHAIRMAN. Would it follow, roughly speaking, that the risk in the type of small companies that you have described is perhaps larger than in the gilt-edged companies, long-established large companies? Mr. SCHRAM. I expect generally that is true, yes, although some of these smaller growth companies that are well managed are considered, of course, a more risk investment. You will find the more conservatively managed funds, however, will go into the larger companies where you will have a listed market, where they can sell quickly if they have to, and things of that kind. Senator BARKLEY. Are these corporations on this list you passed around here a moment ago all listed on the New York Stock Exchange? Mr. SCHRAM. No, sir; they are not. You will find a good many unlisted on that list. Moreover, investment bankers have discouraged managements which have approached them on new financing prospects. Thus, there is no record of those projects that do not reach the registration stage. Reverting to our tabulation and the letters and telegrams received in connection with this exhibit, I emphasize that most of these companies are relatively small and their securities are not listed on the New York Stock Exchange or any other national security exchange. I am equally interested in them because, unlike larger companies with established credit, they have practically no place to go when doors of the capital markets are shut on them. Two sound important operating public-utility companies have recently offered stock at prices to yield 712 and 8 percent to insure the success of common-stock offerings made for additional investment in plant. Insurance companies needing additional capital have had to sell stock at far below the liquidating value, resulting in a dilution of the equity. I am advised that, except for a limited number of our largest urban banks, there is scarcely a bank stock throughout the United States that is not currently selling for considerably less than its known book value. To press the point, if an investor, whether in a small bank in Maine, Ohio, or Nebraska, held a majority or controlling interest in such an institution and were compelled to sell for any unforeseen reason, or if in the event of death the stock had to be sold to pay inheritance taxes, the tendency would be to liquidate the institution rather than accept the large discount from known book value through sale in the market. I might add: What is to be the attitude of the management of a bank compelled to raise new capital or to grant rights to stockholders where this condition exists and where a stockholder might not have sufficient savings to avail himself of his rightful portion of the new stock? This is dilution with a vengeance. As outlined in our tax study, the stock market also is suffering from persistent foreign liquidation and the effects of sales of large holders, brought about, in many instances, by tax factors, adding to the supply of stocks without any sufficient offset from new risk savings. The volume of trading on the New York Stock Exchange last year, as a percentage of the mean number of shares listed, was down to 14 percent, the lowest since 1942. This year to March 1, the volume of trading on the New York Stock Exchange amounted to 37,788,892 shares against 48,305.280 shares in the same period of 1947, a reduction of 22 percent. In the first 2 months of this year the volume of trading was at the annual rate of about 10 percent of the number of shares listed and only slightly above the 1942 rate which was 9 percent-the lowest on record. Senator LUCAS. Would you say that 1946, where you sold 48,305,000 was an average year? Mr. SCHRAM. No; that was considerably below the average, Senator. Senator LUCAS. What is the average? Mr. SCHRAM. Our average has been running around 400,000,000; is that correct? Mr. COLE. That is about what you ran last year, but you fluctuated between 86 percent turn-over in 1926, which is the year accepted as normal in most of your indices, clear down to 9 or 10. It is hard to say what you really would regard as normal, but the present activity is certainly on a very depressed basis. Senator LUCAS. What was the turn-over in 1926? Mr. COLE. Senator, I could not give you the exact figure. I know it was 86 percent of the mean of the listed shares. That is brought out in our study that you have before you. We give you the percentage turn-overs. Senator LUCAS. Mr. Schram, in this statement, you say: * * ** amounted The volume of trading on the New York Stock Exchange to 37,788,892 shares against 48,305,280 shares in the same period of 1947, a reduction of 22 percent. What I am trying to find out is the number of shares sold during the normal year so I can make a fair comparison in my own mind. Mr. SCHRAM. When you refer to 1926, that means that 86 percent of the stocks turned over. There was an 86-percent turn-over of listed shares now running at the rate of about 10 percent of our listed shares. Senator LUCAS. I can understand that, I ut I was wondering about the outstanding shares at that time, and what the number was that turned over during the year. You quote figures here of 48,305,000, and I was wondering what figure you could quote as being the normal year. Mr. SCHRAM. We can supply that information. Senator LUCAS. I would like to know the number of shares the stock exchange considers the normal turn-over which keeps the stock exchange, say, from raising the complaint that they raise here at the present time about the risk capital. How much would it take? Senator GEORGE. The normal would necessarily be expressed in percentage of entire listed stocks; would it not? Mr. SCHRAM. That is right. Senator GEORGE. And your listed stocks are now very much greater than they were in 1926? Mr. SCHRAM. Yes; we have listed the highest number now in the history of the exchange, almost 2,000,000,000 shares listed. Senator LUCAS. You say in 1926, which you considered a normal year, there was 86 percent turn-over in stock. Mr. COLE. Eighty-six percent turn-over in 1926 and only 14 percent last year. Now it is at the rate of 10 percent. Mr. SCHRAM. Speaking in percentage of turn-over, it is about oneeighth of what it was then. Senator CONNALLY. That turn-over is influenced both by the timidity of investors and the desire of those who have the stocks to keep them; is it not? Mr. SCHRAM. That is right. Senator CONNALLY. So, little turn-over does not necessarily mean that conditions are bad because present owners of stocks are getting good profits and they do not want to sell; is that true? Mr. SCHRAM. Of course, our market has shifted, Senator, from a speculative market, and there is more emphasis now on investment than on speculation. Senator CONNALLY. That is why they want to keep them. They are good investments, and they do not want to sell them. Mr. SCHRAM. If you compare the turn-over on the commodity market with the stock exchange, you get quite a difference in activity, of course. Senator CONNALLY. A speculative period would naturally make a bigger turn-over; would it not? Mr. SCHRAM. Yes, sir. Senator CONNALLY. Because they are wild, and so forth. Senator CONNALLY. 1929 was pretty wild, was it not? Senator CONNALLY. That was a speculative period. Mr. SCHRAM. I could use a stronger term than "speculative period” in 1929. Senator BARKLEY. Let me ask you in that connection: You made a comparison between the stock and commodity markets. Mr. SCHRAM. Yes, sir. Senator BARKLEY. It strikes me it is not an exact comparison because everybody who raises commodities wants to sell them. That is what they have raised it for. But that is not true of everybody who has a stock, that they want to sell; so you would expect a larger turn-over in the commodity market than in the stock market. Mr. SCHRAM. That is true. Senator BARKLEY. Because that is why they grow those things, to turn them over. It Mr. SCHRAM. That is true. Senator BARKLEY. I do not think it is quite an accurate comparison. may be an accurate comparison, but it does not carry the implication that because the commodity market is more liquid than the stock market there is, therefore, anything particularly wrong with the stock market. Mr. SCHRAM. There is quite a little difference, of course, in the controlling factors that have created the activity in the commodity market and that lack of activity in the stock market. You have had a good many factors injected in the commodity market we have not had in the stock market. Senator BARKLEY. The gradual rise in the price of commodities has stimulated speculation, just like the constant rise in prices of stock stimulates speculation there. There has not been that degree of fluctuation in the stock market that has induced a lot of people to try to make profits by buying them cheap and selling them when they go up. But there has been a long gradual climb in the price of commodities at the same time when the stock market itself was going down. Mr. SCHRAM. That is right. The CHAIRMAN. Is it not correct, Mr. Schram, in normal times, the present relation of the cost of the stock to its earning power would attract a much larger number of buyers to the market than at the present time? Mr. SCHRAM. And under normal conditions, it should; yes. The CHAIRMAN. Obviously with such bargains available, is it not correct there must be an underlying lack of desire to buy those bargains for the reason on deeper consideration, in relation to your net after you get the bargains through the operation of taxes you have not got a bargain? Is that not correct? Mr. SCHRAM. That is the objective of this tax study, Senator, and we have tried to write out the reasons for that. Senator BARKLEY. Do you have any figures that would indicate the proportion of dealings on the stock market attributable to speculation and those attributable to investment? Mr. SCHRAM. No; we do not. Senator CONNALLY. May I ask a question there? The CHAIRMAN. Surely. Senator CONNALLY. Along the lines of the chairman's interrogation, these holders of stocks who are now getting satisfactory returns, they may say: "Well, we made $17,000,000,000 here last year. I do not want to sell this stock." If they do not have stock for sale, there will not be any buyers. Mr. SCHRAM. And if there are no buyers, there will be no sales. Senator CONNALLY. That is right, and they will have to give something more attractive than present earnings they have been getting, unless it is a hardship case or something like that. Mr. SCHRAM. The lack of activity is not because the yield is so high, Senator. That should attract activity. You should have more purchasing. You should have more people wanting to buy those stocks. Senator CONNALLY. But there has to be a seller whenever there is a buyer. Mr. SCHRAM. That is right. Senator CONNALLY. The same incentive to buy choice stocks operates in reverse on the owner to keep it; does it not? Mr. SCHRAM. Senator, we have more people wanting to sell stocks today than we have people to buy them, and that is why we have the depressed prices we have. Senator CONNALLY. I do not know about that. You have the facts, and I do not know. But, as I view it, nobody can buy stock unless somebody wants to sell. When the attraction of the stock to the man who wants to buy also appeals to the man who has the stock, he says, "What do I want to sell this stock for? It is good income. It is sound. It is on the stock exchange, and I can cash it in whenever I get ready. I will not sell until I have a need for it." Mr. SCHRAM. Senator, when we have people refusing to sell, that is when the market goes up. It will bid the market up to the point which makes it attractive for him to sell. But the opposite is true today. We have more sellers wanting to sell their securities, and we do not have the buyers. That is what we are suffering from now. If stocks were so attractive, the price would be in a better relationship to earnings, but we have too many sellers now and not enough buyers. We have dried up the sources. Senator BARKLEY. Do you think that is all attributable to the present tax laws, or is part of it due to world uncertainty? Mr. SCHRAM. I think a great deal is attributable to the tax laws. Some, of course, is attributable to world uncertainty, and additional burdens that are placed on the market. They are liquidating large estates for tax reasons. We have to absorb the foreign selling, as I pointed out here, and we are not supplying new buyers. Our capital has aged. |