Tronic Boom

Tronic boom

In the 1959-62, promoters, eager to satisfy the insatiable thirst of investors for the space-age stocks of the Soaring Sixties, created new offerings by the dozens. More new issues were offered in that period than at any previous time in history. The new-issue mania rivaled the South Sea Bubble in its intensity and also, regrettably, in the fraudulent practices that were revealed.

It was called “tronic boom”, since the stock offerings often included some garbled version of the word “electronics” in their title even if the companies had nothing to do with the electronics industry. Buyers of these issues didn’t really care what the companies made – so long as it sounded electronic, with a suggestion of the esoteric. For example, American Music Guild, whose business consisted entirely of the door-to-door sale of phonograph records and players, changed its name to Space-Tone before “going public”. The shares were sold to the public at 2, and within a few weeks rose to 14.

The name was the game. There were a host of “trons” such as Astron, Vulcaton, Dutron, Transitron, and a number of “onics” such as Circuitronics, Supronics, Videotronics, and several Electrosonics companies. Leaving nothing to chance, one group put together the winning combination Powertron Ultrasonics.

Jack Dreyfus, of Dreyfus and Company, commented on the mania as follows:

Take a nice little company that’s been making shoelaces for 40 years and sells at a respectable six times earnings ratio. Change the name from Shoelaces, Inc. to Electronics and Silicon Furth-Burners. In today’s market, the words “electronics” and “silicon” are worth 15 times earnings. However, the real play comes from the word “furth-burners,” which no one understands. A word that no one understands entitles you to double your entire score. Therefore, we have six times earnings for the shoelace business and 15 times earnings for electronic and silicon, or a total of 21 times earnings. Multiply this by two for furth-burners and now have a score of 42 times earnings for the new company.

Tronic Boom. Photo by Elena.

In a later investigation of the new-issues phenomenon, the Securities and Exchange Commission uncovered considerable evidence of fraudulence and market manipulation. For example, some investment bankers, especially those who underwrote the smaller new issues, would often hold a substantial volume of securities off the market. This made the market so “thin” at the start that the price would rise quickly in the after-market. In one “hot issue” that almost doubled in price on the first day of trading, the SEC found that a considerable portion of the entire offering was sold to broker-dealers, many of whom held on to their allotments for a period until the shares could be sold at much higher prices. The SEC also found that many underwriters allocated large portions of hot issues to insiders of the firms such as partners, relatives, officers, and other securities dealers to who a favor was owed. In one instance, 87 percent of a new issue was allocated to “insiders”, rather than to the general public, as was proper.

The following table shows some representative new issues of this period and records their price movements after the shares were issued. At least for a while, the new-issue buyers did very well indeed. Large advances over their already inflated initial offering prices were scored for such companies as Boonton Electronics and Geophysics Corporation of America. The speculative fever was so great that even Mother’s Cookie could count on a sizable gain. Think of the glory they could have achieved if they had called themselves “Mothertron’s Cookitronics.” Ten years later, the shares of most of these companies were almost worthless:

Security: Boonton Electronics Corp. Offering Date: March 6, 1961. Offering price: 5 ½. Bid Price first Day of Trading: 12 ¼ High. Bid Price 1961: 24 ½ Low Bid Price 1962: 1 5/8.

Security: Geophysics Corp of America. Offering Date: December 8, 1960. Offering price: 14. Bid Price first Day of Trading: 27 High. Bid Price 1961: 54. Low Bid Price 1962: 9.

Security: Hydro-Space Technology. Offering Date: July 19, 1960, Offering price: 3. Bid Price first Day of Trading: 7. High Bid Price 1961: 7. Low Bid Price 1962: 1.

Security: Mother’s Cookie Corp. Offering Date: March 8, 1961. Offering price: 15. Bid Price first Day of Trading: 23. High Bid Price 1961: 25. Low Bid Price 1962: 7.

(Per unit of 1 share and 1 warrant).

Where was the Securities and Exchange Commission all this time? Hadn’t it changed the rule from “Let the buyer beware” to “Let the seller beware”? Aren’t new issuers required to register their offering with the SEC? Can’t they (and their underwriters) be punished for false and misleading statements?

Yes to all these questions and yes, the SEC was there, but by law it had to stand by quietly. As long as a company has prepared (and distributed to investors) an adequate prospectus, the SEC can do nothing to save buyers from themselves. For example, many of the prospectuses of the period contained the following type of warning in bold letters on the cover.

Warning: This company has no assets or earnings and will be unable to pay dividends in the foreseeable future. The shares are highly risky.

But just as the warnings on packs of cigarettes do not prevent many people from smoking, so the warning that this investment may be dangerous to your wealth cannot block a speculator from forking over his money if he is hell-bent on doing so. The SEC can warn a fool but it cannot prevent him from parting with his money. And the buyers of new issues were so convinced the stocks would rise in price (no matter what the company’s assets or past record) that the underwriter’s problem was not how he could sell the shares but how to allocate them among the frenzied purchasers.

Fraudulence and market manipulation are different matters. Here the SEC can take has taken strong action. Indeed, many of the little known brokerage houses on the fringes of respectability, which were responsible for most of the new issues and for manipulation of their prices, were suspended for a variety of peculations.

The staff of the SEC is limited, however; the major problem is the attitude of the general public. When investors are infused with a get-rich-quick attitude and are willing to snap up any piece of bait, anything can happen – and usually does. Without public greed, the manipulators would not stand a chance.

The tronics boom came back to earth in 1962. The tailspin started early in the year and exploded in a horrendous selling wave five months later. Growth stocks, even the highest-quality ones, took the brunt of the decline, falling much further than the general market. Yesterday’s hot issue became today’s cold turkey.

Many professionals refused to accept the fact that they had speculated recklessly. Rather they blamed the decline on President’s Kennedy’s tough stand with the steel industry, which led to a rollback of announced price hikes. Former president Eisenhower blamed the decline on Kennedy’s “reckless spending programs,” and columnist Walter Lippmann chastised Kennedy for not fulfilling his “promise to bring about something near to the full employment of capital and labor and a rising rate of economic growth.”

Others did recognize the speculative mania and said simply that the market (and growth stocks in particular) was “too high” in 1961. As far as steel prices were concerned, with strong foreign competition in steel prices rises would probably have been rescinded anyway. Very few pointed out that it is always easy to look back and say when prices were too high or too low. Fewer still said that no one seems to know the proper price for a stock at any given time.

(Source: Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.)