Thanks Ed for the excellent forum.

I need some feedback/advise with regard to the upcoming economic debacle and it's effect on the stock markets.

I have prepared physically to be self sufficient during y2k. However, I can't seem to decide what to do with my and my mom's investments.

Things that I expect based on my current understanding of the y2k challenge:

1. The masses will play it safe in the late fall of 1999 and sell stock or transfer stock mutual fund monies to money market accounts to avoid uncertainty related to date changeover. If everyone pulls the trigger to be safe, the markets go down--right?

2. Foreign and domestic supply chain problems for US manufacturers will lead to decreased ability to produce thereby affecting company profits following y2k date rollover. Lower profits means lower stock price--right? If this happens on a broad scale, the markets go down--right?

3. Oil/petroleum product shortages occur following date rollover and oil companies boost fuel prices dramatically as they always do in times of uncertainty. Higher fuel prices reduce consumer confidence and discretionary income thereby leaving less left over to invest. Results similar to early 70's oil crunch. If this happens the markets go down--right?

4. Mutual fund managers become much more cautious with rollover uncertainty and up their cash positions dramatically for towards the end of the year in 1999. If they cash out of stocks enmass to preserve returns, the markets go down--right?

5. Inventory build up in 1999 due to rollover uncertainty leads to an inventory recession following date changeover. Companies and people use inventory during first half of 2000 instead of buying at that time. If this happens, lower sales will be the result. Lower sales leads to lower profits. This would result in decreased stock market valuation--right?

6. Inflationary pressures occur both before and after date turnover, resulting in Federal Reserve interest rate increases. Stock markets don't like inflation or higher interest rates. If this happens, it will cause the markets to go down--right?

7. Currency liquidity trouble at the end of 1999 results in cash rationing by the US government. This will lead to consumer uncertainty with regard to finances and they will seek safe havens for the rollover. If this happens, the markets go down--right?

The only counter-arguments that I can conceive of for the markets heading south are:

1. Foreign money floods into US markets as safest haven in a crisis. If this happens, it will support the stock market--right?

2. Effects of the glitch are overblown and markets go up due to increased productivity resulting from massive update of company computer systems. IT has resulted in increase productivity in the past. Increased productivity will support stock market--right?

3. Market meltdown forces the government to close the stock markets for a period of time--stock market holiday. This would prevent them from going down.

4. US is first to recover from glitch and becomes supplier to a non-compliant world. This would support the stock markets--right?

I am trying to ascertain what to do now with mutual fund retirement money.

Options:

a. transfer part of it to a bear fund to make something from market decline. b. buy put options against the major indices. c. transfer to US govt bond funds. d. cash out and pay penalty and tax. e. transfer to federally insured bank CD. f. transfer to money market account within the existing fund-- (not federally insured).

I can't seem to get a handle on what to do. I respect the opinions on this forum--both GI and DGI. Feedback please!

-- cantbelieveit (dontknow@aol.com), March 20, 1999

Answers

I'm not an economist, but I believe in two simple guidelines with respect to the economic impact of Y2K:

1. Don't put all your eggs in one basket. Diversify, spread your risks. The reason many people have become concerned is that one of the "baskets" in which they put their eggs -- i.e., the conventional banking system -- had been perceived as having no risk for the past 60 years. Now we're beginning to think that the banking system has some risks (maybe a little, maybe a lot, depending on your perception of the situation), and there's a temptation to over-react by moving all of your assets out of that basket, into some other basket. But every basket has a risk, whether it's cash, gold, real estate, T-bills, rare wine, or jars of peanut butter. So, it makes sense to me to pick a handful of baskets that seem to be relatively low-risk, and distribute your eggs among those baskets.

2. In times of uncertainty, it's a good idea to be liquid, flexible, and debt-free. If you were absolutely certain that Y2K would lead to hyperinflation, you could make an argument in favor of loading up on debt now. It seems to me that deflation is a more likely outcome, but I'm not willing to "bet the farm" on that outcome. At the same time, it seems likely to me that many of us will have a disruption in our normal intake of "cash flow" because of unemployment, furloughs, delays in getting paid by our employer, etc. In that scenario, especially if one's assets are temporarily frozen in a bank account, it would be very uncomfortable to be stuck with paying big credit-card bills, servicing a big mortgage, etc.

Ed

-- Ed Yourdon (ed@yourdon.com), March 20, 1999.

'course you can do all of the above.

When you invest in a bull market do you put all of your money in one investement, or do you diversify? Diversification might be the only way to survive what's coming.

Especially, you can do a, b, and c.

You can even manage to do a. and c. and keep your money in a retirement account. Options generally aren't permitted in a retirement account. You can also buy gold (US Eagles) in a retirement account, but you don't get to hold the physical coins.

-- imprudent bear (fund@wallstreet.com), March 20, 1999.

Most coworkers I know have diverted all their stocks into a stable income fund (money market). Can't cash in the 401K because of the tax penalties so you put it in the safest place available. It's a gamble either way.

-- ~~ (~~@~~.com), March 20, 1999.

It appears to me that the stock market is the riskiest investment of all. I still have about 2% of my financial assets in it. All of my stocks are from Y2K repair companies or my employer's company.

Price-earning ratios are at or near all time highs. They are set to collapse if any major problem occurs. We only have to remember last summer and early fall. Alan Greenspan bailed out the world with lower interest rates then. With a surging economy, I do not believe he can do it again.

With Henry Kissinger preparing to pull all of his money out of the bank, how far behind are the other powers-that-be? If they don't trust the banks, how are they going to trust the stock market?

-- Incredulous (ytt000@aol.com), March 20, 1999.

Thanks for this thread. It's nice to have a discussion among people who want more options than just pulling out. My husband and I have discussed doing the above options. We hadn't thought about the CD idea; that's an interesting one. My only concern would be holding onto a piece of paper next year that says the bank promises to pay me $XXXX and that bank no longer exists and the FDIC has run out of money due to paying out claims. What would happen then? Would Congress allocate money towards it, like the S&L crisis, and the smaller investors would be SOL? So many uncertainties. We're probably going to diversify. I've seen mentioned that $10,000.00 is the magic amount that sets off the bells & whistles. Is that true, and does anyone know how often to take money out to keep the curious at bay? Thanks.

Jeannie

-- jhollander (hollander@ij.net), March 20, 1999.

If you do include buying put options in your plans, you might consider LEAPS, perhaps index LEAPS. LEAPS are long term options, so you don't need to be as precise on the timing as you do with regular options. Expiration dates in late 2000 can cover a wide range of scenarios other than a prolonged closing of markets. With that exception, a small investment may apreciate greatly if stocks tumble, whether quickly or slowly. If stocks do not tumble, or if the markets stay closed for a long time,you are out that small investment.

If you stay in any kind of mutual or money market funds, try to find out if they are using leveraged investments, like selling put options. :-)

Ed's multiple baskets approach is good even when things are "normal"; it is essential if things get bonkers.

Jeannie,

Re: your reference to the $10,000 magic amount. If your withdraw $10,000 or more in cash from a bank in the USA, you need to fill out a form, due to Federal regs. Not a big deal, as far as I can tell. If you make a series of withdrawals which add up to $10,000 or more over some period of time (I do not know if the period of time is specified anywhere), very big deal! You may be presumed guilty of the "crime" of "structuring". I kid you not.

Jerry

-- Jerry B (skeptic76@erols.com), March 20, 1999.

Cantbelieveit,

A few observations to contemplate:

My ancestors regarded any investment away from home as unwise until their buildings were in fine shape, their livestock was well bred, their woodshed was stocked for at least two years, their fruit and root cellars and graneries were full and their boots were in top notch condition. They would then loan their surplus to others for first mortages against good collateral worth five times the loan. The philosophy was that loans of more than 20% of anothers assets were too tough for the borrower to repay and therefore too risky for their hard earned savings.

Today, "investors" are paying over 5 times the book values of most companies' shares. Our ancestors would have regarded this as utterly insane. The Dow will now buy a previously unheard of 35 ounces of pure gold. It would only buy two ounces in 1933 and one ounce in 1980. A reversal in trends just might show us a two for one ratio of Dow at 4000 and gold at $2000 per ounce in 2000. If $2000 per ounce sounds wild, reflect back on how wild $850 in 1980 would have sounded to folks when gold was at $35 in 1972. Also reflect on how wild 10,000 on the Dow would have sounded to folks when it was at 1,000 in 1982. Extremes breed extremes and today we are at the greatest extremes of this century.

Fertile land that you occupy, gold that you hold in your own posession and at home reserves that you require for home living insurance may still be your best investments under current circumstances. None of these investments involve the promises of others that could fail under adverse conditions. Should you move in this direction, our ancestors will applaud you.

I wish you well in preserving your lives, your savings and your wellbeing,

-- Watchful (seethesea@msn.com), March 20, 1999.

Good point about the price to earning ratios, Incredulous. I mentioned this to a stockbroker recently, and he said the "PE ratios no longer apply to many companies...

I found that one to be a hoot.

-- Tim (pixmo@pixelquest.com), March 21, 1999.