"Who needs Las Vegas or Atlantic City when you can have Wall Street!" This statement by a New York financial editor pretty much summed up the feeling of many people after the "Granville stock market" last Wednesday. Now the stock market has joined the bond and commodity markets in volatility.
On Friday morning, long Treasuries declined three points. However, when the money-supply figures were released late Friday, showing a sizable decline for the third week in a row, the Treasuries retraced most of their earlier losses. Just another example of the uncertainty and volatility that exists.
The tragedy is that the underpinnings of our capitalistic system, our financial markets, are being changed from areas of serious investment to areas of glorified gambling. As long as there is no stability, there will be volatility. And as long as there is more volatility, the less likely it is that legitimate investors will place their money into long-term investments.
This means more funds will be concentrated in high-yielding money market instruments and not in areas that allow long-term projects and longterm growth. A lack of incentive to invest will be the end result, and, despite a great deal of talk from Washington officials, little has occurred to restore the investors' faith in our financial markets.
In fact, the year-end rally was largely based on the expectations that the new administration could bring order into chaotic government spending, turn the economy around and slow inflation. Unfortunately, investors are now realizing that all facets of this herculean problem will take a long time to solve. All the markets ask is a responsible beginning.
The corporate market surprised the new year with several issues totaling $700 million. The returns ranged from 14.75 percent on a BAA 10-year maturity to 13.25 percent on an AA 30-year industrial. The pent-up corporate demand for money is enormous.
Dealers bid too aggresively for the $200 million State of Oregon tax-exempt issue. Since there were so few bonds in inventory, it appeared that the dealers were buying last week's Oregons at a rich price and hoping that the Federal Reserve would ease credit so that the bonds could be sold this week at higher prices.
When the Fed indicated that rates would remain high for a while, the dealers were left high and dry with unsold bonds. The same was true on the 20-year government issue, which returned an average of 11.82 percent. Dealers bought the issue, and by the end of the week the bonds were selling around 12 percent.
The flood of housing bonds that came in December will spill over into 1981. The law stated that the various housing authorities had to deliver the bonds to the underwriters by year's end or they could not be sold.
To get around this, "temporary certificates" were delivered to underwriters, and many of these issues will be sold in January. However, investors should be wary of these or any recent housing bonds.
Once the authorities receive the funds from the sale, they are faced with making mortgage commitments at high rates (15 to 16 percent) plus investing the proceeds of the sale in governments to pay interest on the bonds and to make up for any loss of principal.
If all the money cannot be placed in mortgages in 18 months, the authority must call in and pay off the bonds. If they have not earned enough income on their governments, they may not be able to pay off 100 cents on the dollar. For protection, look to the older state housing authority issues.