Market ready for a Reagan rally -- and built-in snags

By , Business and financial correspondent of The Christian Science Monitor

The expectation on Wall Street is that Ronald Reagan will win the election Tuesday. In fact, traders are getting ready to sell into any "Reagan rally," since many of them have decided that whoever is elected on Tueday will face major problems over the next year.

The first problem, says Larry Wachtel, an analyst with Bache Halsey Stuart Shields Inc., is that the Federal Reserve Board has to restore its credibility. This must be done, the analyst points out, since the Treasury hopes to sell some budget deficit. If the bond markets remain as aloof to new offerings as they have been recently, the outlook for retailing these bonds is cloudy at best.

To Wall Street money managers, the Fed's problem is simple: It has allowed the money supply to expand at an unrealistic rate. Lawrence Kudlow, an economist at Bear, Stearns & Co., a brokerage house, notes: "There is no question that monetary policy has been way too loose since last April."

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Mr. Kudlow says critics are questioning not only Paul Volcker, the Fed's chairman, who issues "a steady diet of hard-money rhetoric," but also the entire method the Federal Reserve operates under. In particular, he says, the system appears to be trying to control at the same time the Fed funds rate, various money-supply growth rates, and the dollar exchange rate. He concludes, "Although these objectives might serve as commendable long-term policy goals, they are nonetheless entirely incompatible as short-term operating instruments." Thus, the short-term major gyrations in the money-supply numbers and bank reserve statistics have resulted in money managers' skepticism.

Mr. Wachtel is forecasting that the Federal Reserve will very soon have to raise the discount rate, the rate which major banks must pay if they borrow from the central bank, by at least 1 percent. This would not be unexpected, since the cost of borrowing money on the open market right now is considerably higher than the cost of borrowing money from the Federal Reserve. Such a gap often results in banks borrowing heavily from the Fed when money gets scarce. Already , the rise in open-market rates has driven up the prime rate to 14 1/2 percent.

Not only will the president-elect have to face a climate of rising interest rates, but he also might find a wilting economy. Mr. Wachtel says the prospects for a "double dip" recession have increased considerably with the rise in interest rates. To complicate matters further, the continuation of the Iran-Iraq war will boost oil prices on the spot market to $40 a barrel by the first quarter and $45 a barrel by midyear.

Finally, says Milton J. Ezrati, an economist at Lionel D. Edie & Co., the sluggish economy will probably lead Congress to pass a tax cut next year which will increase the budget deficit from $25 billion or $30 billion to $60 billion.

Seldom do Canadian events have a significant effect on the US stock market. Last week, however, investors here were shaken by the Canadian government's decision to introduce a budget that proposes the takeover of a large share of the oil industry in Canada.

The Canadian oil companies had been high fliers on both the American and New York Stock Exchanges. Proposals to change the way they operate in Canada left investors uneasy. Thus, stocks such as Dome Petroleum, Gulf Canada, Superior Oil, Texaco, and Mobil fell sharply. Combined with apprehension over the election, rising interest rates, and profit taking, stocks fell sharply. For the week the Dow Jones industrial average dropped 19.11 points, closing at 924. 49. Volume was moderate.

Have you lined your bathroom walls with old stocks certificates?

Before you paint over them, you might want to see if they have any value to a "scripophilist," that is a collector of old stock and bond certificates.

Earlier this year, the firm of R. M. Smythe & Co. held its first auction of old certificates. Diana e. Herzog, one of the principals in the firm, reports it was quite successful. Since then, more auctions have been held and at its latest one, on Oct. 16, $71,347 was bid for 340 certificates.

Among the highlights in the sale was the auctioning for $3,000 of a New York & Harlem Railroad Company certificate signed by Commodore Cornelius Vanderbilt, the $850 sale of a Death Valley Railroad certificate, and some stocks and bonds signed by Thomas Alva Edison which sold for $300 to 400 apiece.

Mrs. Herzog notes that the value of the certificate depends on its rarity. In order to inform the collecting public about the increasing or decreasing value of the certificates, Herzog issues a magazine five times a year. Auctions are held twice a year.

Smythe has been involved with old stock certificates since the company entered the business of researching old certificates to determine if the companies had any current value. For example, as the price of gold rose, some old gold mining companies found their claims were more valuable. For $20 a company, Smythe will determine if the certificate has any value. For the magazine or an appraisal write to Diana Herzog, R. M. Smythe & Co. Inc., 170 Broadway, New York, N.Y. 10038.

Investors looking for a big spurt of new capital spending to give the economy an extra shot may be disappointed. Tax experts are telling their clients to wait until 1981 before making new commitments so they can see what new depreciation laws Congress may enact. Seidman & Seidman, an accounting firm, is also advising its clients to shift income into 1981, where possible, in the advent of a tax cut.

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