Y2K Fears Focus On Foreign Markets

Updated 5:25 PM ET December 29, 1999

By DUNSTAN PRIAL, AP Business Writer

NEW YORK (AP) - This month's record-breaking stock market performance offers strong evidence that investors have shrugged off any immediate fears that Y2K-related computer crashes will wipe out their portfolios.

Still, concern is growing that millennium bug problems overseas could cut into the profits of U.S. companies and ultimately derail the long-running bull market.

Earlier this year conventional wisdom held that investors would pull money from the stock markets as the new year approached as a precaution against potential Y2K disasters.

But that hasn't happened. To the contrary, money has been pouring into the stock markets since late October, pushing major indexes into record territory both at home and abroad.

In the U.S., for instance, both the Dow Jones industrial average and the Nasdaq composite index closed at record highs on Wednesday. And the Nasdaq, which closed over 4,000 for the first time, has risen more than 1,000 points in less than two months.

Some analysts believe stocks have surged in part because money that was kept out of the markets based on Y2K fears is now flowing freely as those fears have dissipated.

Furthermore, some expect the markets to receive another infusion of cash when - and if - Jan. 1 passes without incident.

But the euphoria could be short-lived if some of the latest Y2K predictions prove reliable.

This school of thought goes as follows: Y2K disturbances will be minimal in the U.S., but widespread overseas, occurring primarily in less developed areas, such as Asia, Eastern Europe and Russia.

Disruptions in electrical, telecommunications, water and sewage systems could cripple distribution channels and prevent U.S. companies from selling their goods in those regions. The resulting loss of sales will cut into the profits of many American companies slicing the value of their stocks.

Gregory Spear, a Wall Street analyst and editor of the Spear Report newsletter, said history has shown that markets that rise quickly are vulnerable to rapid declines.

Widespread Y2K related breakdowns overseas could easily serve as a catalyst for a big selloff in the U.S. stock markets, Spear said.

"This runup just cannot continue. The market has come too far too fast," he warned.

Edward Yardeni, chief economist and global investment strategist at Deutsche Banc Alex Brown in New York, has been one of the loudest forecasters of Y2K-related doom and another proponent of the theory that Y2K could be the strong wind that blows down the stock market's house of cards.

In a recent report, Yardeni concluded: "Investors seem certain that Y2K disruptions will be minimal. Greed, not fear, is the emotion driving the stock market to new highs. While many stock prices are actually down for the year, the narrow bull market is led by a buying panic in technology stocks, the ones that are most likely to head straight south if Y2K turns out to be a serious event."

But not everyone is so pessimistic.

David Klaskin, chairman of Chicago-based Oak Ridge Investments, likened the expected Y2K disturbances to a bad storm that temporarily shuts down a region. "It's nothing that will be long lasting," he said.

Markets are generally thrown into turmoil following unexpected events, Klaskin noted. "We had never heard of Saddam Hussein in 1990, but we've known about Y2K for years," he said. If foreign companies are shut down due to Y2K-related disruptions, it could create a window of opportunity for U.S. companies in those regions, said Hugh Johnson, chief investment strategist at First Albany Corp.

"It could provide an opportunity for a competitive advantage," Johnson said. "There will be trade offs. Some companies will be hurt and others will be helped."

The biggest problem for investors, however, lies in the uncertainty that continues to hover over the Y2K issue. Most investors base their decisions on forecasts that rely on the most reliable information available. Y2K has made that process difficult.

"The main problem is that it's extraordinarily difficult to anticipate the outcome in advance," Johnson said. "It creates this uncomfortable feeling that something's going to happen, we just don't know when or where."

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Ray

-- Ray (ray@totacc.com), December 29, 1999