Y2K Gloom?
Doom? or Boom?
"The
Year 2000 problem is attracting much attention among the media, organizations,
and investors, and rightly so. It is consuming considerable employee time
and energy, as well as diverting company resources away from other revenue-generating
activities. It has the potential to affect business and commerce, and subsequently
equity and fixed income prices. It is also leaving many investors in a state
of bewilderment as they form and implement investment strategies consistent
with personal beliefs about the outcome of Y2k," notes Terry Sandven,
Portfolio Strategy Group, U.S. Bancorp Piper Jaffray.
The Y2K Problem
Simply
stated, the Y2K problem is the inability of the world's computers, software
applications, and embedded semiconductor chips to cope with the change of
date from 1999 to 2000. Some computer programs, written to recognize only
the last two digits of a year, could read the digits "00" as 1900
instead of 2000, thus generating errors or system crashes on January 1,
2000. This is potentially troublesome given that much of what we doboth
business and personalis contingent on properly functioning computers.
Level of Preparedness
Senator
Robert Bennett, the Senate's leading expert on the Y2K problem, perhaps
said it best when he noted last month that "Y2K is an unpredictable
event that may have life-threatening consequences However, Y2K will not
be the end of the world as we know it."
"Most
economists believe [the Y2K problem] will be a non-event because they think
contingency planning will cushion the effect and that the problems will
be rapidly accessed and fixed. I just don't buy into that." Economist
Ed Yardini of Deutsche Bank.
The
State Department recently warned that U.S. citizens travelling abroad during
late 1999 and early 2000 should be prepared for possible Y2K-related disruptions,
such as canceled or delayed flights, limited medical resources or limited
acceptance of credit cards and availability of ATMs. By October 1, the State
Department plans to provide country-by- country Y2K information on its Web
site (travel.state.gov/y2kca.html).
All
sectors, industries, and companies must deal with the Y2K problem in varying
degrees of complexity. Three sectors that must absolutely "get it right"
are utilities, banking/finance, and telecommunications. While these sectors
arguably represent the highest Y2K risk, they are also the most heavily
regulated and are generally regarded to have made the most progress in their
Y2K remediation efforts.
The
Securities and Exchange Commission has set a target date of August 31 for
stock brokerages to complete their year 2000 compliance efforts. However,
the SEC will allow additional time for unprepared firms to show they will
be ready no later than November 15th.
"Any
firm that cannot achieve Y2K compliance in a timely fashion will be required
to cease doing business by December 1st," said SEC Chairman Arthur
Levitt.
The
SEC estimates 40 or so brokerages out of nearly 3,900 are in danger of missing
the August 31 date.
The
market watchdog agency is applying the same rules to securities transfer
agents and requires mutual fund companies to disclose their readiness.
Y2K Will Be The Pin
To Burst The Bubble
Howard
Ruff, noted author, lecturer and publisher of The Ruff Times believes
the stock market will end in a bloody crash and Y2K will contribute to it.
Ruff predicts the Dow will fall to or even below 2000 next year.
Writing
in The Ruff Times, Howard Ruff gave his reasons, opinions and action steps
to take.
"The
stock marketespecially the Dowis a gross, hugely vulnerable bubble with
boggling valuations.
In
the past, price-to-earnings ratios and price-to-dividends ratios were universally
accepted measures of value. The historical price/earnings ratio is 12. It
reached 22 before the '29 crash. It's now 30! The historical average price/dividends
ratio is 23. It reached 40 before the '29 crash. It's now 70!
If
the Dow were to reflect the valuations we've seen at the peak of historic
bull markets during the history of the Dow, the Dow would be at 3400 to
4500. If it were to fall to the historic average valuationswhat the mathematicians
call "regression to the mean"the Dow would be at 2500.
Analyst
Bob Prechter says a mania born in a long-term uncorrected bull market, involves
broad public participation and ends in a time of historic overvaluation
by all traditional measures.
Such
bubbles don't just "correct," they implode! Everything from the
South Seas bubble to the Tulip Mania, to the low-margin-driven, over-inflated
stock market of 1928-29. But most of the time, it takes a pin to pop the
psychology bubble. Y2K is my candidate for the fatal pin. But the public
has to stop throwing money at the money managers.
Why
is Y2K a pin? There are lots of reasons.
1.
Enough brokers could be non-Y2K compliant and mess up your account
balances and cripple the markets.
The
Financial Services Industry recently did "an industry-wide Y2K test"
and proclaimed there were few or no problems. This is an industry with thousands
upon thousands of companies involved in financial services, ranging from
thousands of brokers to thousands of mutual funds, bond dealers, state and
federal government agencies, transfer agents, clearing houses (the New York
Clearing House in New Jersey has 12,000 square feet lined with cabinets
full of computers that process 1.5 million electronic transfers a day worth
$9 billion), etc., all connected by computers.
The
so-called industry-wide test involved slightly over 400 of them. We know
some of them had troubles, but we don't know which ones, because no one
would participate unless the results would not be disclosed to the public,
identifying which institutions had troubles. We don't even know, except
for the big ones, which companies participated in the test. I think we can
assume that those who did not were not Y2K compliant by the test day.
2.
The public's Y2K fears could kill the market, especially if wide-spread
concerns are raised about brokers' Y2K status. Some unknown percentage of
the public will liquidate "just in case."
That's
why we see this massive PR campaign by banks, government and the financial-services
industry to tell people how safe their money is. That's why the Y2K managers
are not telling us their real status. Rather than telling us they are "Y2K
complainta legal term of art that means fixed, Online and technically ready,
which is virtually a guarantee of success, they are saying "Y2K ready,"
another legal term of art which means they think they can deal with any
problems that develop, with "workarounds," manual backups and
a process they call "windowing," which I don't have space to explain.
These
short-term patches are short of Y2K "compliant." That's why vacations
are being canceled over the holidays so everyone is on hand to fix Y2K glitches
that pop up.
That's
why they may close the market the first one or two business days of 2000,
to give them time to deal with any Y2K problems -- maybe!
But
when the public hears "Y2K ready," they think it is "fixed."
They hope the widespread use of the term in optimistic press releases and
letters to customers will fend off a general "just-in-case" stock
liquidation, which could be catastrophic.
I
believe the PR campaign will fail, that as the speculation crescendos toward
the year-end, millions of investors will take the just-in-case route.
3.
If the banks run out of paper currency and general confidence in
the banking system plummets, the impact on the brokerage industry will be
huge.
We
no longer have a paper-money systemit's a cyber-money system, and only a
few savvy people know it. The money supply simply consists of data on computers.
Just because they don't have paper cash to give you doesn't mean they are
broke, but it will seem like it. These fears will have a devastating impact
on the psychology of the endlessly growing economy and the endlessly profitable
stock market.
4.
Brokers' vendors could fail or produce faulty data. Brokers interface
with government bond dealers and hundreds of credit-reporting agencies.
They interface with each other, and depend upon the banks and transfer agents
to consummate transactions by computer. At this point, we (and they) have
no idea how compliant those vendors may be. A typical broker has hundreds
of them, and any one could be sand in the operational gears.
5.
Perhaps the biggest single threat to the stock market is that at least some
major industries will have big Y2K troubles. We don't know precisely
which ones, although we can make some educated guesses. Major companies
unable to conduct normal operations because of computer failures will have
a devastating effect on the stocks of other companies in those industries,
and the ripple effect will hurt the whole market.
My
top candidates for trouble are Airlines, Railroads (there goes the Transportation
Index), Manufacturing, including automobiles, Textiles (most of the clothes
we buy are manufactured overseas in countries that don't have a chance of
being Y2K compliant), Shipping and Utilities, including gas, electric and
water.
Y2K
is so burdened with uncertainties and complexities that it is beyond human
ingenuity to precisely calculate these complex inter-relationships and know
exactly what will happen.
If
one company is truly Y2K compliant but the people they interface with are
not, their data will be contaminated and will get bad numbers. They will
have to sever computer interface with non-Y2K compliant computers. But the
problem is, they don't know which ones are or aren't compliant. Some of
them may be in an incompatible way, as there is no broadly accepted standard
for compliance.
Can
you imagine the effect upon the stock market if any or several of these
problems happen all at once, especially if it breaks the back of the psychology
and panic ensuesfirst among the wet-behind-the-ears brokers and money mangers,
then with the public. If 1% of all public companies can't function, that's
tens of thousands!
6.
Foreign economies are incredibly threatened. Japan is toast! You'd
think with all their technical skills and corporate efficiencies they would
have been leading the pack. But in Japan, corporate decisions are made by
consensus, and it can take a long time to come to consensus. They needed
bold decisions by strong leadership 2-1/2 years ago in order to be ready
in time, and the Japanese business model just doesn't work that way.
Any
corporate board would think long and hard before committing millions of
dollars to do the Y2K repair job, knowing it would eat up maybe the next
two or three years' profits. That's how CEO's lose their jobs!
We
hear the mantra from Congress and John Koskinen (the President's Y2K Czar),
that foreign economies may have trouble, but we will be okay. That's like
saying, "we're okay because the leak is in the other end of the life
boat."
We
are a world economy. The major money-center banks like Chase Manhattan,
City Bank, Bank of America, etc. earn from 40-60% of their profits through
their overseas operations. Money center banks are exposed to the collapse
or even big slowdowns of foreign economies. And small banks park overnight
deposits in these big banks to earn interest. These foreign countries are
suppliers of cheap finished goods and huge quantities of raw materials.
Their ports are highly computerized, especially in the more primitive countries
we rely on for basic commodities and raw materials. Their ports are also
obsolete and non-Y2K compliant, and these countries also depend on the functioning
of the canals. We have been told that the Panama and Suez Canal will not
be Y2K compliant, and no one knows if they will be able to open and close
the locks.
7.
Transportation is very much in danger. The airlines did their so-called
industry-wide test, but to call it that is flagrant false advertising. The
FAA has 222 major mission-critical systems that manage thousands of planes
in the air at any one time. Their carefully rehearsed test was one airplane
and six systems, after which the Air-Traffic Control System was declared
"Y2K ready."
The
railroads transport the bone and
muscle of American industry. They no longer have the ability to do manual
switching, and certainly not the personnel for manual backup. It's all computerized.
That's how they keep track of individual cars and route the trains in the
right direction. They're not ready yet, and they deliver the coal to the
power plants.
The
FAA has a backup plan, which consists of increasing separation between flights.
I'm
a pilot; I've used the Air-Traffic Control System. I know a busy airport
depends on being able to bring the planes in every minute or two on parallel
runwaysin good weather and bad. If the controllers don't trust the information
they are getting on radar, they will increase separation by as much as 50%
when there is good weather in both ends. If there is bad weather on either
endinstrument conditionsseparation could be increased by as much as 80%.
This will create a huge choke point for American business, not just for
passenger flights, but for UPS, Fed Ex, and the Postal Service. What effect
will that have on the economy and the stock market?
8.
Periodic power outages and brownouts will be a problem. Only one
electric utility I know of claims to be fully Y2K compliant. Most simply
tell us they are "on track" to be "Y2K ready." There
are thousands of power companies in America, and they are dependent on each
other to pick up the slack when they go offline. The stresses and strains
on the power grid are impossible to predict, but at best they will be significant,
and at worst, devastating!
The
biggest problem is the great unknown. The market hates uncertainty. The
sheer complexity of the Y2K problem, coupled with the innate tendency of
important industries and government PR types to lie, makes this impossible
to quantify.
Some
companies may be compliant, but their lawyers won't let them say so for
fear that if they have made a mistake, it exposes them to huge legal liabilities.
Then, of course, those that are not ready or will not be ready will lie
in a desperate effort to keep their customers from panicking while they
try to fix things.
We
are in a desperate race against an inflexible deadline, and that's why it
is impossible to say exactly what will happen. All I know is there is more
than enough at risk that if too many things go wrong, the stock market psychology
will crash, and millions could decide to liquidate.
When
bubbles burst, they tend to "regress to the mean," which means
to come back to traditional valuations before the conflagration is put out.
That's why 2000 seems like a reasonable number to me.
Action Steps
How
should you manage your investments?
Most
of the problems that will plague the stock market will not become evident
until 2000. The Gartner Group, the most respect and most widely quoted Y2K
consulting firm, says that 5% of the Y2K problems have happened already,
25% of them will occur in the last half of 1999, 55% in the year 2000, and
15% in 2001.
If
you want to see a list of Y2K-related problems that have already occurred,
some of them to recently repaired systems, check the Web site posted by
the Canadian government. Most of the incidents were in the U.S. They are
eye-opening: http://strategis.ic.gc.ca/SSG/yk04849e.html.
This
means things will not be exactly as I first thought: it won't be a one-time
event on New Year's Eve, but will happen over time. There are certain prudent
steps to take.
1.
Get a written statement from your broker as to whether or not he is Y2K
compliant. The odds are that most small brokers are not. The big ones probably
will be: they have spent most of their budgets, and at least you should
be able to get an accurate account balance. All bets are off if the broker's
computers are screwed up.
2.
The last week of December, get a hard copy of your account status and portfolio,
just in case you have to prove something.
3.
Unless you are a quick-on-your feet trader, get out of the market now. Do
like Joe Kennedy did; get out early and be willing to be laughed at.
4.
Realize there is a time to sow and a time to reap. This is the time to reap.
As I have explained elsewhere in this issue, I recently made some recommendations
based on the assumption that a final blowoff is coming. Proceed with caution!
5.
Start shifting some of your money into gold-mining stocks, especially the
big producers, and into gold and silver, because I also believe "2000
in 2000" applies to gold as money flows into the metals, looking for
safety."
"After
almost two decades of unprecedented prosperity, America is on a collision
course with tremendous economic, social and poltical volatility," says
Howard Ruff. A culmination of potentially catastrophic events have inspired
Howard Ruff to write another potential best-selling book, How To Prosper
During The Hard Times AheadA Crash Course for the American Family in
the Troubled New Millennium, 258 pages, $24.95. The book is available
from Phoenix Ink, P.O. Box 887, Springville, UT 84663 or call 1-800-773-7833.
MC, Discover and Visa accepted.
10 Additional Steps Towards Getting Your Financial House in Order
Larry
Abraham publisher The Insider Report, a geopolitical investment
letter for over 15 years, wants to go on record with a statement on which
he stakes a lifetime reputation, and one which if proved to be untrue will
force him to lay down his pen and cease publication of his monthly newsletter:
"The architects of perverse power are going to use Y2K, its anticipation,
and its aftermath in every way possible to restrict your individual liberty
and it will start with your money."
Here
are Abraham's comments and 10 additional steps towards getting your financial
house in order:
"At
this point, my greatest fear of Y2K has nothing to do with the number of
annual digits in a software program or silicon chip. It has everything to
do with what government will do to "solve" the problem or "meet
the emergency."
If
you take the advice I'm about to give you, you have absolutely nothing to
lose and everything to gain in both individual freedom and potential profits.
If you choose to ignore it, you can console yourself, go about as if nothing
is happening and trust Bill Clinton and Al Gore to do their best for you
and your family. Here are my suggestions. You can take them or leave them,
but be on notice, this is what I am doing or am going to do:
1.
Forget about trying to make new scores in the stock markets for the remainder
of the year. If I am right, and you do as I do, what you give up this year
you will more than make up for next.
2.
Slowly turn as many liquid assets as possible into cash (but I underscore
slowly)stocks, bonds, 401(k)s, IRAs, real estate, the whole kit and kaboodle.
3.
For the balance of the year, put these monies into dollar-denominated money-market
accounts both on and off shore, or try to take advantage of short-term investment
opportunities, but don't use a time horizon that takes you beyond the end
of October.
4.
At the same time you're doing No. 3, establish a Swiss-franc denominated
account either through a bank or mutual fund, but don't move the big dollars
into it until the last two weeks of December.
5.
Buy quality (and low premium) gold coins, junk silver coins, and especially
quality gold stock. My favorites are Euro-Nevada, Franco Nevada, Newmont,
American Barrick, and a few of the South Africans.
6.
Buy some fully-paid up, self-insured Y2K insurance which will help mightily
to move tax-deductible dollars off-shore and into safe handsyours. Funding
an off-shore segregated cell-account with after-tax dollars is also a very
good idea.
7.
Slowly but surely, build an in-hand dollar reserve that will cover you and
your family's needs for at least three months. Start now if you haven't
already. If you find yourself queued up at an ATM come December 31, it will
be too late.
8.
Be mentally and economically prepared to move back into the equity markets
with a vengeance sometime in the first quarter of next year. By that time,
value investing will be all the rage and the real survivors of the absurdly
priced Internet stocks will be had for pennies on the dollar. Some of them
will be the Microsofts of the future.
9.
If you can afford it, and most of you can, rent or lease for three months
a place where you can bask in the sun and not have to worry about staying
warm as you go about the business of meeting the millennium. Almost every
tourist visa for visiting Americans has a 90-day grace period before you
have to leave. Avoid certain parts of Mexico, Jamaica, Colombia, or South
Africa. Almost everywhere else in the Southern Hemisphere will do just fine,
plus, giving you plenty of bang for the buck.
10.
Don't talk about any of these things except with family members or trusted
financial advisors. Nobody else needs to know."
Why You Will Survive Y2K
Harry
Browne, noted author and the 1966 Libertarian presidential candidate says
there is good news and bad news regarding the Y2K computer problem.
The
good news: Civilization isn't going to collapse in the year 2000.
The
bad news: I don't know where you can unload all the coins and food storage
you've acquired.
Some
companies and some government agencies will have problems on January 1,
2000when some of the computers think it's January 1, 1990. But most companies
will have no major problems and life will go on largely undisturbed. For
most of us, the problems of January 2000 will be smaller than the inconveniences
we already enduresuch as the power failures from government-sheltered electric
companies when we need air-conditioning in the summer or heat in the winter.
The
Y2K problem has been exaggerated by people who don't understand computers,
and by computer experts who don't understand how the free market works.
Many
large companies do need to upgrade old computer systems and databases (although
your personal computer probably will have no problems). Upgrading a computer
system is a formidable task. But so is moving into a new factory, changing
a product line, or dealing with new regulations. Companies deal with such
problems as they arise, and one way or another they usually solve them.
The
Y2K problem seemed uniquely dangerous because millions of companies have
to deal with it at the same time. Hundreds of thousands of COBOL programmers
would have to be foundto examine old computer programs, change every date
reference, and test the corrections. But, in truth, a wide-spread problem
is easier to handle, because it offers bigger profits to people who can
devise solutions.
Forming an Opinion and Strategy
"Perhaps
the best way that investors can confront the Y2K problem is to obtain clarification
of Y2K issues and events, take a critical look at current investment portfolios,
and gain peace of mind by implementing an investment strategy that is consistent
with portfolio objectives and personal beliefs about the outcome of Y2K
issues, says Terry Sandven.
"Don't
Panic: First and foremost, we encourage investors to remain logical.
Moving to a "doomsday" mode would likely result in increased capital
gains and missed opportunities.
"Consider
Asset Allocation: For investors who believe Y2K will largely be a nonevent,
we recommend that they "stay the course," maintaining normal diversification
among all asset classes. For investors who wish to become more defensive,
we recommend adjusting asset allocation percentages. To take defensive measures,
investors could reduce equity exposure, particularly small/mid-capitalization
and international exposure in favor of U.S. large companies that generally
offer greater predictability of earnings; sell "losers" or companies
with poor earnings visibility; and buy bonds," advises Sandven.
Year-End Precautions
While
many people disagree on the outcome and implications of the Y2K problem,
there are several easy-to-do and inexpensive year-end precautions that we
believe should be included in personal preparedness efforts.
Consider
consolidating financial accounts, working with fewer firms implies fewer
potential errors.
Keep
hard copies of financial records, bank statements, credit card statements,
brokerage statements, retirement accounts, insurance, particularly during
the last quarter of 1999 and the first three months of 2000.
If
you bank by computer, download your transactions before December 31, print
out hard copies and store them on a backup disk.
Request
a print out from your mortage lender going back from the origination of
the loan. Request another print out after the 1 st quarter of 2000. You
may have to pay a small fee.
Get
a copy of your credit report before year-end. Don't leave this too late
as there will be delays in getting the reports out to you. Get another copy
in the 1 st quarter of 2000 to verify accuracy. You can order a copy of
your credit report from the three major agenies by contacting Equifax Credit
Information Services, P.O. Box 105873, Atlanta, Ga. 30348, 800-685-1111;
Experian, P.O. Box 104, Allen, Texas 73013-2104, 800-682-7654; and TransUnion
Consumer Relations, P.O. Box 390, Springfield, PA. 19064-0390, 800-888-4213.
A credit report, which costs $8, should provide a special number for reaching
someone to discuss its contents.
Consider
prepaying year-end expenses such as mortgages, loans, leases, etc. in early
December.
Maintain
slightly higher cash-on-hand levels; the Federal Reserve is preparing for
$500 per household. Have enough cash on-hand to pay essential bills during
January, buy food, medications.
Store water. Keep two gallons per person per day.
Try to limit credit card use during December and January.
Maintain
a one-month food supply at home. You can start now to build a supply. If
you there are 4 or more persons in your family you may want to consider
a food storage program such as ones provided by Safe-Trek, 90 Safetrek Pl.,
Bozeman, MT 59718, 1-800-424-7870 or (406) 4840.
Maintain
supplies of flashlights, batteries, candles, etc. Obtain a battery operated
radio.
Have
gas/charcoal grills accessible and operational in event of a localized power
outage.
Fill
fuel levels prior to year-end.
Order large quantities of critical medical supplies. Have at least
a sixty-day supply of any prescription medicines by mid-December.
Be
on alert for scams and unqualified advice.
Hopefully, this information will help you prepare for any possible
Y2K glitches. To learn more more Y2K, the problems and solutions visit the
Web sites listed on our Web Watch page.
