Article about Y2K, Stocks, and the Economygreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
Here is an excellent article from the gold-eagle site called Y2K, STOCKS & THE ECONOMY: THE UNAVOIDABLE BEAR MARKET OF 2000. It is by Paul Mladjenovic, who is a financial planner, national public speaker, writer, and business consultant. Apologies if this has been posted already.
Y2K, Stocks and the Economy
The author discusses the fact that besides Y2K, we also have other severe economic problems. Here is a brief excerpt:
Think about what is going on in the economy as this article is being written . . .
Record personal bankruptcies. 1999 will be the third year in a row of over one million personal bankruptcies.
Record corporate bankruptcies.
Consumer debt is at an all-time high.
Mortgage debt levels are at an all-time high.
The loan-to-value ratios of many of these mortgages are also alarming. For the first time in my career I have seen mortgages at 125% of market value. The dangers are obvious.
Margin borrowing is at an all-time high. More investors than ever before are leveraging their investments by borrowing against their stocks by loans from their brokers. A market correction would mean many investors would get those dreaded margin calls from their brokers. This in turn would trigger more selling that could in turn exert more downward pressure on the stock market.
The consumer savings rate is a negative number for the first time ever. Consumers are putting less money in savings accounts as they funnel the bulk of their money into the stock market.
According to the Wall Street Journal, corporate debt levels have tripled since the beginning of the decade. As deflationary pressures keep prices low, debt levels remain high. Current research suggests that corporations are currently seeking even more credit to pay for mounting Y2K remediation expenses and to also have a cash cushion in their year-end contingency planning.
The price/earnings ratio for the Dow Jones index stocks is at 29. This is twice as high as its average during the 80s and early 90s. Even the cautious Greenspan is concerned about high stock prices that are not sustainable.
The price/ earnings ratio for the S&P 500 is over 30. 10 years ago, stocks that had P/E ratios of 20 were considered risky.
The price/earnings levels for Internet stocks are outrageous by any rational standard. There are companies with P/E ratios of 400, 500 and over 1,000! Many Internet companies like Amazon.com have losses year after year and yet see their stock share prices at dizzying heights.
The international situation has not markedly improved. Most countries still have languishing economies that are not out of the woods. The currency and debt crises of recent years have not appreciably abated. Russia and Brazil have weak economies that are in danger of stumbling further into the abyss.
Even if Y2K was not an issue, the above points alone make the next 6-9 months a treacherous path for the economy. Y2K adds tremendous financial pressure to an already weakening economy. The budgets for Y2K planning, remediation and testing have continued to balloon. Peter Lynch regularly points out that "earnings drive stock prices." What happens to earnings as 1999's deflationary environment keeps revenues low and Y2K drives costs up? Companies that are already over-extended on debt will be squeezed even more. Earnings will decrease which will have a downward effect on stock prices. For companies dealing with Y2K, their choice in the coming months will be a tough one: either spend the money on Y2K or go out of business. The ripple effects from companies that see earnings drop, suffer losses or go bankrupt would be a tidal wave. Noncompliant companies will sink and drag down their compliant customers and vendors with them. The stakes are indeed very high.
-- (email@example.com), September 29, 1999
The following is an excerpt from the article where some advice is offered:
The threat of Y2K is real and it grows closer with each passing day. Ignoring Y2K will be the biggest blunder we can ever make. The tragedy will be that millions of consumers who rely on these financial advisors will be needlessly put at risk. For those who are concerned about Y2K, some low-risk precautions will help you minimize the risks:
Everyone tells you to keep good paper records. Do it! It is something you should be doing anyway.
Find out about the Y2K status of the companies you invest in. The most reliable way is to check their SEC filings. Look at the companies' most recent 10K & 10Q reports. Go to the Edgar database at www.sec.gov.
If you are not sure about selling stock, at the very least put stop- loss orders in place on all your stocks through your broker. Stop- loss orders make sense in any market. They are a sensible way to avoid major losses. For example, let's say you own XYZ stock which is currently priced at $100 per share. Call your broker and put in a stop-loss order at $90. Your upside potential remains intact and it protects the bulk of your investment from downside risk. I have recommended stop-loss orders since I did my first investing seminar in 1986.
Consider US Treasury securities for maximum safety. Treasury money market funds and US Savings Bonds are excellent vehicles for jittery Y2K investors. Also consider medium term and long term investments using Treasury notes and Bonds. Treasury bond funds also make sense. Speak to a financial planner that is not in "Y2K denial."
Consider re-allocating the investments in your 401K plan or IRA to more secure investments such as mutual funds that specialize in Treasury securities and other safer/ less volatile investment vehicles.
Inform yourself about Y2K. Don't take any one source --including this one-- as gospel about Y2K. Get the "Big Picture." Use the Internet and get as much information as possible.
-- Rob Michaels (firstname.lastname@example.org), September 29, 1999.
YOU GOT THIS FROM GOLD EAGLE SITE ???????? DID IT EVER OCCUR TO YOU THAT THEY ARE TRYING TO SELL GOLD???? GLOOM AND DOOM TALK SELLS GOLD?? YOU WITH ME???
-- (email@example.com), September 30, 1999.
Darn! Some idiot had to go and put these FACTS on the Gold Eagle site. Somebody might be gonna try to sell you something nasty like gold while you're reading them. I guess that makes 'em NOT FACTS anymore. Somebody better call up the Wall Street Journal and tell 'em to stop printing these because they have been CANCELLED. (Forget those ads in WSJ and other news sources trying to sell you something.) They are now FORBIDDEN FACTS. EXPIRED FACTS. FORMER FACTS. SOmebody STOP me!
(Let me do it, Andy:) WHAT A MAROON!
-- jor-el (firstname.lastname@example.org), September 30, 1999.
Excellant jor-el. You beat me to it. Wonder if this idiot is fully invested in tech stocks, which will become one express elevator to Hell. Or perhaps they are indexed. Nice on the way up, but let's see how they like being indexed to a Bear.
I have actually heard some pundits call this a "Goldilocks Economy." That is, not too hot and not too cold. Perhaps they forgot about the three Bears in that story. Y2K ensures they will be Grizzlies.
-- Rob Michaels (email@example.com), September 30, 1999.