As of this writing, 5/9/98: While we all discuss the end of the world, Wall St. does not seem to care. The Dow continues to climb, people who have left the market because of y2k have lost potential money. Have they zigged when they should have zagged? Banks merge, Benz buys Chrysler, Toyota is flirting with GM. Dont they know how bad thing are?

-- Bill Solorzano (notaclue@webtv.net), May 09, 1998

Answers

No, they don't. It's the Dilbert principle in action. All this would actually be hysterically funny if it weren't for the very real pain and suffering ordinary people will have to endure because the world is run by "C" students with good hair.

-- anon (anon@anon.com), May 09, 1998.

I think the market reacts. Things are pretty good. Everyone is working, money is flowing, and so far this Y2K thing is down the road. When it starts to be a problem, the "buzz" will get loud and then a panic. I'd buy "puts". Go long ( DJX- Dec. 2000 leaps-64 ). I haven't yet myself, and would solicit the input from this forum on the validity of this plan. it seems that things will probably get worse gradually, leading up to Jan 1, 00. By buying put's well past D-day, (DEC. of 2000) is it likely these things could go up say by August? of 1999.

-- lou (theknowzone@mindspring.com), May 09, 1998.

I have been considering this question. How many people contribute to their 401,403b,sep, keogh, etc. by automatic draft. I guess my point is that with more money automatically deposited with the mutuals or banks, these instutions have to buy something. Since, at any given time there are only a given number of "things" that can be bought, there has to be an increase in cost. This of course assumes that the continual contributions are making a real impact on the total market volume.

What do you think??

-- Danny Beard (dpbeard@earthlink.net), May 10, 1998.

Dan:

Your reasoning makes perfect sense. With the massive contributions made by pension plans and salary deductions, the mutual managers have to put it into the market. There was little of this in 1929, so the market had to have been more sensetive to fluctuations. Of course, using the same reasoning, if the market goes "Bear", it will stay Bear for a longish time.

-- Bill Solorzano (notaclue@webtv.net), May 11, 1998.

Wall Streeters rarely look more than 3-6 months ahead. (Ask yourself how many Wall Street "gurus" saw the Asian financial crisis coming, even after the Thai baht was devalued on July 2nd and triggered a wave of regional currency devaluations.) Also, as someone pointed out, a lot of pension money, etc., is going into mutual funds. Finally, as one trader recently noted, the "psychological currency" is stronger than anyone has ever seen it. Everyone has heard about the tremendous run-up in the market in recent years and everyone wants to get in on the action; during Clinton's tenure the Dow has gone from roughly 3200 to 9200, which makes the run-up in the late 1920s look tepid. During the first quarter of this year, while average corporate profits grew at an anemic rate of 2%, the Dow gained 15%. Almost half of adult Americans are now in the stock market; for the first time in history, Americans have more invested in stocks (28% of all assets) than in real estate (27%). The total American investment in equities is now about $5.8 trillion--ironically equal to the national debt.

Of those Americans who even really know what Y2K is, they continue to be reassured that it is really "no problemo." The WSJ recently ran a few articles acknowledging Y2K but with the basic theme that "it's costly but not catastrophic." A top Fed official, Kelley, a week ago said that, at most, Y2K repair costs will shave only .1% or .2% off the growth in GDP next year. Of course, Mr. Kelley said nothing about the costs after 1/1/2000 if a significant minority of government and corporate computer systems are not fixed on time, or how we will be impacted by probable Y2K economic disasters overseas (especially in Asia and developing countries).

No one has a crystal ball, but there seems to be a vague consensus, at least among bearish types, that Wall Street will probably get this on its radar screen some time this fall. (Of course, if the national TV media suddenly starts ballyhooing Y2K as an impending disaster, the Y2K blip will appear much sooner!) For various psychological reasons, plus the tendency of some fund managers to lock in annual profits and do some selling, October is often a shaky month for the Street anyway. If, correctly or incorrectly, Wall Street does see Y2K as a looming catastrophe, you could see a full-blown crash--down 50% or more. Most bearish analysts seem to expect a somewhat lesser (but nevertheless unnerving) drop: for instance, Yardeni pegs the fall at 20% or more; Westergaard 2000 sees a drop of 20-30%. Given the inflated P/E ratios, many analysts may have expected such a drop anyhow. The average S&P 500 P/E ratio is now 28:1, twice the historical average. And that doesn't tell the whole story. While there has been more "market breadth" in recent years, much investor money is still in a relatively narrow range of stocks--the blue chips, leading high techs, etc., that power the various indices. (For instance, the NASDAQ, while it has thousands of OTC stocks listed, is really driven by only the top 100 or so in terms of the indice.) If you look at where the money really is, you will see P/E ratios in the range of 30:1 up to 60:1 or even more. Even granting a stable, fine-tuned economy, low inflation, and a long bond yield below 6% (letting us "cheaply" service all that national debt), this is dangerous overvaluation. Ask the Japanese. Or ask IMF head Camdessus, who the other day said Western bourses are overvalued and who warned governments to exercise due vigilance. (And do what? Warn greedy, ignorant Baby Boomers not to buy stock?!)

Most Baby Boomers, who have not known depression or world war, think that any correction, even crash, would be relatively short-lived, a la 1987. They don't realize that, after the 1929 crash, it took the Dow 25 years to recover fully. And only a small minority of Americans were in the stock market in 1929.

In early Dec. 1996, with the Dow around 6200, Greenspan warned against "irrational exuberance." A month later, a "Frontline" documentary warned much the same thing. Today, 17 months later and 3000 points higher, nobody in an official, prominent place is saying much--unless you count Clinton's recent press conference remark that he'd rather see the market go up than down!

Nobody wants to pull out the bottom card from the card house. Whether Y2K will do that remains to be seen--but I note that Mr. Yourdon got out of the stock market.

-- Don Florence (dflorence@zianet.com), May 12, 1998.