Reminiscences of a Stock Operator
three companies were actually earning dividends on their common stock
for the first time in their history. Their principal stockholders did
not wish to part with the control. There was a good market for their
stocks on the Curb; and they had sold as much as they cared to part
with and they were content with things as they were. Their individual
capitalisation was too small to justify big market movements, and that
is where Jim Barnes’ firm came in. It pointed out that the consolidated
company must be big enough to list on the Stock Exchange, where the
new shares could be made more valuable than the old ones. It is an
old device in Wall Street--to change the colour of the certificates
in order to make them more valuable. Say a stock ceases to be easily
vendible at war. Well, sometimes by quadrupling the stock you may make
the new shares sell at 30 or 35. This is equivalent to 120 or 140 for
the old stock--a figure it never could have reached.
It seems that Barnes and his associates succeeded in inducing some
of their friends who held speculatively some blocks of Gray Stove
Company--a large concern--to come into the consolidation on the basis
of four shares of Consolidated for each share of Gray. Then the Midland
and the Western followed their big sister and came in on the basis of
share for share. Theirs had been quoted on the Curb at around 25 to 30,
and the Gray, which was better known and paid dividends, hung around
125.
In order to raise the money to buy out those holders who insisted upon
selling for cash, and also to provide additional working capital for
improvements and promotion expenses, it became necessary to raise a few
millions. So Barnes saw the president of his bank, who kindly lent his
syndicate three million five hundred thousand dollars. The collateral
was one hundred thousand shares of the newly organised corporation. The
syndicate assured the president, or so I was told, that the price would
not go below 50. It would be a very profitable deal as there was big
value there.
The promoters’ first mistake was in the matter of timeliness. The
saturation point for new stock issues had been reached by the market,
and they should have seen it. But even then they might have made a fair
profit after all if they had not tried to duplicate the unreasonable
killings which other promoters had made at the very height of the boom.
Now you must not run away with the notion that Jim Barnes and his
associates were fools or inexperienced kids. They were shrewd men. All
of them were familiar with Wall Street methods and some of them were
exceptionally successful stock traders. But they did rather more than
merely overestimate the public’s buying capacity. After all, that
capacity was something that they could determine only by actual tests.
Where they erred more expensively was in expecting the bull market
to last longer than it did. I suppose the reason was that these same
men had met with such great and particularly with such quick success
that they didn’t doubt they’d be all through with the deal before the
bull market turned. They were all well known and had a considerable
following among the professional traders and the wire houses.
The deal was extremely well advertised. The newspapers certainly were
generous with their space. The older concerns were identified with the
stove industry of America and their product was known the world over.
It was a patriotic amalgamation and there was a heap of literature in
the daily papers about the world conquests. The markets of Asia, Africa
and South America were as good as cinched.
The directors of the company were all men whose names were familiar
to all readers of the financial pages. The publicity work was so well
handled and the promises of unnamed insiders as to what the price was
going to do were so definite and convincing that a great demand for the
new stock was created. The result was that when the books were closed
it was found that the stock which was offered to the public at fifty
dollars a share had been oversubscribed by 25 per cent.
Think of it! The best the promoters should have expected was to
succeed in selling the new stock at that price after weeks of work and
after putting up the price to 75 or higher in order to average 50.
At that, it meant an advance of about 100 per cent in the old prices
of the stocks of the constituent companies. That was the crisis and
they did not meet it as it should have been met. It shows you that
every business has its own needs. General wisdom is less valuable
than specific savvy. The promoters, delighted by the unexpected
oversubscription, concluded that the public was ready to pay any price
for any quantity of that stock. And they actually were stupid enough
to underallot the stock. After the promoters made up their minds to be
hoggish they should have tried to be intelligently hoggish.
What they should have done, of course, was to allot the stock in full.
That would have made them short to the extent of 25 per cent of the
total amount offered for subscription to the public, and that, of
course, would have enabled them to support the stock when necessary
and at no cost to themselves. Without any effort on their part they
would have been in the strong strategic position that I always try to
find myself in when I am manipulating a stock. They could have kept the
price from sagging, thereby inspiring confidence in the new stock’s
stability and in the underwriting syndicate back of it. They should
have remembered that their work was not over when they sold the stock
offered to the public. That was only a part of what they had to market.
They thought they had been very successful, but it was not long before
the consequences of their two capital blunders became apparent. The
public did not buy any more of the new stock, because the entire market
developed reactionary tendencies. The insiders got cold feet and did
not support Consolidated Stove; and if insiders don’t buy their own
stock on recessions, who should? The absence of inside support is
generally accepted as a pretty good bear tip.
There is no need to go into statistical details. The price of
Consolidated Stove fluctuated with the rest of the market, but it never
went above the initial market quotations, which were only a fraction
above 50. Barnes and his friends in the end had to come in as buyers
in order to keep it above 40. Not to have supported that stock at the
outset of its market career was regrettable. But not to have sold all
the stock the public subscribed for was much worse.
At all events, the stock was duly listed on the New York Stock Exchange
and the price of it duly kept sagging until it nominally stood at 37.
And it stood there because Jim Barnes and his associates had to keep it
there because their bank had loaned them thirty-five dollars a share
on one hundred thousand shares. If the bank ever tried to liquidate
that loan there was no telling what the price would break to. The
public that had been eager to buy it at 50, now didn’t care for it at
37, and probably wouldn’t want it at 27.
As time went on the banks’ excesses in the matter of extensions
of credits made people think. The day of the boy banker was over.
The banking business appeared to be on the ragged edge of suddenly
relapsing into conservatism. Intimate friends were now asked to pay off
loans, for all the world as though they had never played golf with the
president.
There was no need to threaten on the lender’s part or to plead for
more time on the borrower’s. The situation was highly uncomfortable
for both. The bank, for example, with which my friend Jim Barnes did
business, was still kindly disposed. But it was a case of “For heaven’s
sake take up that loan or we’ll all be in a dickens of a mess!”
The character of the mess and its explosive possibilities were
enough to make Jim Barnes come to me to ask me to sell the
one hundred thousand shares for enough to pay off the bank’s
three-million-five-hundred-thousand-dollar loan. Jim did not now expect
to make a profit on that stock. If the syndicate only made a small loss
on it they would be more than grateful.
It seemed a hopeless task. The general market was neither active nor
strong, though at times there were rallies, when everybody perked up
and tried to believe the bull swing was about to resume.
The answer I gave Barnes was that I’d look into the matter and let him
know under what conditions I’d undertake the work. Well, I did look
into it. I didn’t analyse the company’s last annual report. My studies
were confined to the stock-market phases of the problem. I was not
going to tout the stock for a rise on its earnings or its prospects,
but to dispose of that block in the open market. All I considered was
what should, could or might help or hinder me in that task.
I discovered for one thing that there was too much stock held by too
few people--that is, too much for safety and far too much for comfort.
Clifton P. Kane & Co., bankers and brokers, members of the New York
Stock Exchange, were carrying seventy thousand shares. They were
intimate friends of Barnes and had been influential in effecting the
consolidation, as they had made a specialty of stove stocks for years.
Their customers had been let into the good thing. Ex-Senator Samuel
Gordon, who was the special partner in his nephews’ firm, Gordon Bros.,
was the owner of a second block of seventy thousand shares; and the
famous Joshua Wolff had sixty thousand shares. This made a total of
two hundred thousand shares of Consolidated Stove held by this handful
of veteran Wall Street professionals. They did not need any kind
person to tell them when to sell their stock. If I did anything in the
manipulating line calculated to bring in public buying--that is to say,
if I made the stock strong and active--I could see Kane and Gordon
and Wolff unloading, and not in homeopathic doses either. The vision
of their two hundred thousand shares Niagaraing into the market was
not exactly entrancing. Don’t forget that the cream was off the bull
movement and that no overwhelming demand was going to be manufactured
by my operations, however skillfully conducted they might be. Jim
Barnes had no illusions about the job he was modestly sidestepping in
my favour. He had given me a waterlogged stock to sell on a bull market
that was about to breathe its last. Of course there was no talk in the
newspapers about the ending of the bull market, but I knew it, and Jim
Barnes knew it, and you bet the bank knew it.
Still, I had given Jim my word, so I sent for Kane, Gordon and Wolff.
Their two hundred thousand shares was the sword of Damocles. I thought
I’d like to substitute a steel chain for the hair. The easiest way,
it seemed to me, was by some sort of reciprocity agreement. If they
helped me passively by holding off while I sold the bank’s one hundred
thousand shares, I would help them actively by trying to make a
market for all of us to unload on. As things were, they couldn’t sell
one-tenth of their holdings without having Consolidated Stove break
wide open, and they knew it so well that they had never dreamed of
trying. All I asked of them was judgment in timing the selling and an
intelligent unselfishness in order not to be unintelligently selfish.
It never pays to be a dog in the manger in Wall Street or anywhere
else. I desired to convince them that premature or ill-considered
unloading would prevent complete unloading. Time urged.
I hoped my proposition would appeal to them because they were
experienced Wall Street men and had no illusions about the actual
demand for Consolidated Stove. Clifton P. Kane was the head of a
prosperous commission house with branches in eleven cities and