State of the Market

In relation to production, U.S. common stocks last week hit the lowest point since World War I. Although industry has jumped output nearly 30% since last spring, stock prices have marched the other way, are now 22% under a year ago (see chart).

Stocks also came near hitting new lows in relation to yields and earnings. Ever since a few brokers swapped stocks beneath a Manhattan buttonwood tree, the rule-of-thumb way to value a stock was to multiply its profits by ten. Stable earners (like tobacco manufacturers, food companies, utilities, etc.) might be worth up to 20 times earnings. But today many stocks sell at four, three, or two times earnings. Examples:

> Glenn L. Martin, bomber builder, cleared $1.70 in the first quarter (after walloping big tax reserves), equal to $6.80 a year. But the stock wobbles over the tape at 27, four times earnings.

>Booming Aluminum Company of America sells at 130, only five times 1940 profits of $25.12 a share, even less compared with expected 1941 earnings of $25-35 a share.

> U.S. Steel, world's No. 1 steelmaker, earned over $3 in the first quarter, a $12-a-year rate. But Big Steel sells for 51, or four times these profits. This, however, is not greatly different from World War I (1916) when Big Steel ranged between 79! and 129!; two to four times 1916 profits of $48.46 a share.

> Bethlehem Steel earned $14 in 1940, and $2.95 in the first quarter (after leaving room for heftier taxes), but its shares sell at 70. In World War I, Bessie was the No. 1 war bride, reached a top of 700 in 1916, 25 times profits of $28 a share.

>No war bride is Champion Paper & Fibre, but its stock sells for 17, only four times projected 1941 profits of $4.25 a share (quarter ended Feb. 2: 98-c-).

>International Paper & Power common idles around 13 although this year's per-share profits may be the best ever, touch $8 v. $6.07 in 1940. In 1929 International hit a high of 44 1/2 although profits did not cover preferred dividends. Today preferred arrears total $10.

From a stockholder viewpoint, higher earnings mean little unless the cash is paid out. But shareholders have no kick; dividends are up. The New York Times reported first-quarter payments at $893,749,274, up from $851,901,802 last year. Present stock prices are 45% below 1937's high, although March dividends of $268,584,978 were only 5% under March 1937.

With stock yields near a record high, bond yields are scraping an all-time bot tom. Treasury bonds--haven of many a former stockmarket dollar--yield less than 2% compared with 3.6% in 1929, a 5% peak after World War I. Top-flight industrial liens yield only 2.3%, half the 1929 rate. Biggest mystery in Wall Street is why investors will grab the bond of a Government-harassed utility paying $30 on a $1,000 investment, but close tight their checkbooks on Chrysler common, which returns $60 a year on exactly the same outlay.

Most common explanations for the low level of stock prices are three: 1) Investors agree with business bigwigs that when the rearmament boom ends, business will have a record crash. The FORTUNE Forum of Executive Opinion in December voted two-to-one that business conditions after the war will be the worst ever because the U.S. entered the rearmament spree without first setting its economic house in order. 2) Investors are sure the Administration is fundamentally unfriendly to business, expect company profits to be squeezed between rising wages and taxes carefully planned to siphon off profits. 3) Demand for stocks is being cut by prospective taxes aimed at oversaving among the fiscally fat classes who usually buy stocks. At the same time, the British are unloading their investments here.

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