Via San Francisco...

Nature of Y2K Fogs Up Wall Street's Crystal Ball
Tom Petruno, Los Angeles Times
Tuesday, September 21, 99
)1999 San Francisco Chronicle

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/1999/09/21/BU48595.DTL

[Fair Use: For Educational/Research Purposes Only]

Wall Street loves a good mystery when the potential payoff for guessing the outcome is significant.

But what to do about Y2K?

This event messes with the market's mind in a big way. Financial markets, after all, are supposed to discount the future -- that is, investors are supposed to price securities at any moment based on some reasonable assumptions about the economy, corporate earnings, interest rates, etc.

Discounting Y2K, however, means discounting something everyone knows about, but about which no one can be certain, because we've never been here before. It also means discounting people's assumptions about how other people will react to their own assumptions.

Got it?

``Y2K throws a lot of sand into the gears of the market discounting mechanism,'' says Douglas Cliggott, U.S. equity strategist at J.P. Morgan Securities in New York.

Indeed, investors who try to devise a strategy for either taking advantage of, or avoiding, Y2K-related fears can quickly find themselves on a course that leads everywhere and nowhere.

Trimming stock and bond investments in favor of building a bigger cash cushion in one's portfolio seems to make sense, if you're really worried about economic disruptions because of potential computer failures.

But if everyone has the same idea, and securities prices are about to dive in coming months, selling into such a decline ought to quickly become less appealing.

Moreover, assuming the world doesn't end on January 1 even if some computers lose their silicon minds, anyone selling today might be expecting to simply buy back into markets in early January. Except that, at that point, millions of other investors would probably have the same idea, and you would risk jumping into an upside market panic at inflated prices.

That could be particularly true in emerging-market stocks, where it doesn't take much to move prices 20 percent in either direction.

For ``contrarian'' investors who would rather go counter to the actions of the masses, the logical strategy now would be to wait for others to dump securities in coming months and pick them up at cheap prices.

Yet that, too, poses a big challenge: How will you know when the bottom is reached? In the market for high-yield corporate ``junk'' bonds, for example, yields are nearing their highest levels in five years as the bonds' prices have declined. Are they attractive enough--or should you wait for even better returns, understanding that they might not materialize?

Even if you're confident about buying an investment that might be marked down by Y2K-related selling, there might be other considerations. If the investment is a mutual fund, for example, you've got to be aware of year-end capital gains payments, as other financial writers have noted. No point in buying an instant fund tax liability if you can avoid it.

Overshadowing all of these potential Y2K investment strategies is the strong possibility that any expenditure of effort in trying to calculate how things will work out could be a complete waste of your time.

Although there is a reasonable case to be made that some investors will flee higher-risk securities and markets in coming months, that is no more certain than any other prediction with regard to Y2K.

What if this all turns out to be the biggest yawner in Wall Street history? One can argue that we're on course for exactly that outcome in most markets.

For example, while it does appear that corporate bond yields are higher today at least in part because of Y2K fears, neither the U.S. stock market nor most other world equity markets seem to be registering much in the way of Y2K concerns.

Won't some investors leave financial securities entirely and buy gold instead, as the ultimate hedge against trouble? Not so far, that's for sure: Gold futures contracts in New York, at $255 an ounce now, are no higher today than they were in early July.

And for the year to date, you would have been much better off buying aluminum or zinc than gold. Petruno can be reached at tom.petruno@latimes.com.

)1999 San Francisco Chronicle Page D4

-- Diane J. Squire (sacredspaces@yahoo.com), September 21, 1999

Answers

Good catch, Diane. I fully expected this type of article to begin appearing by last Spring, but better late than never. There is one thing that the matket hates more than anything else: Uncertainty. I have been saying that since last Summer.

Is today the beginning of the slide?

-- semper paratus (almost@always.ready), September 21, 1999.

Donno. Don't expect a slide yet... actually. Think it will continue to "burble along" into November-ish. Of course, Mother Nature may have more related pre-Y2K lessons to teach us all.

She's endlessly inventive, when trying to make a point. I'd swap out her crystal ball for Wall streets' any day.

Diane

-- Diane J. Squire (sacredspaces@yahoo.com), September 21, 1999.

Good post, Diane. I think additional issues are driving the markets beyond Y2K, although I agree with you that it will become a key factor. The market is overvalued, there is considerable pressure on the dollar, and oil prices are rising. Examples of high tech earnings shortfalls such as what happened to Apple will help it to continue to pull back, slide or whatever words fit.

-- Nancy (wellsnl@hotmail.com), September 21, 1999.