SUMMARY - "PIG":
The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://nick.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
I have to disagree though with one aspect of Paul Milne's column.... Yes, the vastly increasing money supply has gone into asset inflation instead of goods inflation. But when the bubble bursts, I don't believe that this money supply will come flooding back into the economy. Instead, it will be vaporized, disintegrated, annihilated. The debt will still remain in mortgages and credit cards, but the paper wealth and wealth-effect good feelings will be gone. (The psychological effect will be just as devastating as the market crash.)
With the sudden loss of billions of dollars from the money supply, we will experience deflationary recession; probably a depression. The Fed can inject liquidity all they want, but it won't help. With the market trading at half or one-third of the current values, I think there will be just too much money destroyed too quickly for the Fed to compensate.
This reader has a lot on the ball, and I agree with him more than with Paul Milne on this point. (I will frequently print comments with which I don't completely agree, just for mental stimulation.) But I would rephrase the terminology.
We hear a lot about the "money in the stock market". I have said it before, and I will say it again: There is no money in the stock market, other than that required to settle trades. Stocks are an auction market; the seller shows up with stock, the buyer with cash; the trade takes place; the buyer leaves with the stock, the seller with cash. The amount of cash and the amount of stock in the hands of the public does not change. (The mechanics for initial public and secondary offerings are a little different, but the end result is similar; no "money" remains in the market, though the supply of stock has increased.)
When a bubble bursts, what has changed? People's expectations! People look at their portfolios, or at their 401(k) or 403(b) statements, and mentally mark up the contents, regardless of the prices paid, to the values at which the shares last traded. When their stocks get caught up in a mania and the prices soar to values which would not have been believed a few short years ago, they naturally begin to feel they're well-off (the so-called "wealth effect"). Then they start making fatal mistakes.... taking on more debt than they can support with their (non-stock) earnings, or planning for too-early a retirement, or plowing even more money into stocks at too-high prices, or simply living beyond their means.... just because they have mentally marked up their portfolio "wealth" to current prices.
Are these people really wealthy? Sure they are.... if they cash in. Otherwise, they're only as wealthy as the price of the last trade.
When the crash comes, nothing has really changed in material terms. They still own the same shares of the same companies, which presumably are producing the same goods and services, as before. Buyers and sellers continue to trade in the marketplace; no "money" leaves the stock market, nor is any money "destroyed". The money supply does not shrink because stock prices have been marked down.
But psychologically, what a bummer! People whose portfolio values are suddenly marked down to, maybe, one-third of what prevailed before the crash suddenly realize that, perhaps, they might be just a tad overextended. The reader is right; the debt does not disappear, but the illusion of wealth has. Especially in 401(k) and other retirement plans, the Gen-X and Gen-Y'ers, who have been watching their "savings" compound at 15%-plus per annum since puberty, suddenly realize they might have to retire in their 60s like the rest of us, instead of as millionaires at age 40.
It is this sobering-up that causes our hapless investor to try to bring things back into balance; to reduce debt to bring it in line with the marked-down value of assets. Now, we have an economic problem, as people forego present consumption for debt repayment.... or default outright, if one is overextended and the debt cannot be serviced.
Looking back at the great bubbles and crashes of the past.... Tulipmania/Mississippi, midwest land in the 1830s, railroad overexpansion in the 1870s, 1929, Japan in the 1980s.... all of these led to, at a minimum, a severe recession, with a depression an entirely likely outcome. The exception.... the crash of 1987.... demonstrated that a powerful central bank can inflate sufficiently to defer a debt contraction and economic correction that's overdue, in favor of an even bigger bust down the road (in my opinion; point to be proved).
A nation's capacity to produce and consume does not change greatly from year to year; but its propensity to produce and consume is highly variable, depending on the psychology of the times. The "wealth effect" is artificial; it shows only that people are violating en masse my Rule #1 of investing: Don't overpay for the merchandise. But psychologically, it's a real high. Like a drug high, the higher the high, the bigger is the downer that inevitably follows. This is why (even not taking into consideration Y2K problems) I expect at least a lengthy and severe recession following the crash (similar to Japan's experience in the 1990s), with a depression a real possibility.
Meanwhile, those people who relieved you of your cash for the
ridiculously-overpriced shares of stock you now own? These people
really are wealthy.... and they (like me) are waiting for you to
freak out and (through disinterest) drive stocks to bargain
levels, such as occurred in 1932, 1974 and 1982, where the companies they represent can be bought for a fraction of their real
worth in terms of production capacity. Then they will patiently
wait for the psychology to change; for you, the sucker latecomer
investor, who probably never knew what you were buying in the
first place, to forget your mistake of buying high and selling
low and to go on to make the same mistake all over again.
The real question is, what is the point of the $40,000,000.00 expense? How will the monitors, displays, the commands barked out at the command center help anyone? ARF? WOOF! I am a big dog. BOW-WOW!
Even though Ko-skin-em may think he knows what the risks and vulnerabilities are, he doesn't. This is an IT problem. This isn't "Invasion USA-Y2K", staring Johannes Kosky as a bald, twittering Chuck Norris, General Peter Kind as George C. Scott, and Janet Abrams as a pale Pam Greer.
Will the top toy for Christmas 2000 be the Kosky inaction figure, a lump of clay with no form or substance?
What do they think they're going to monitor? Explosions? Bank riots? "Commandante! We're up to 17 bank runs now. Two have failed." "Keep up the good work and put that on the big board."
Have they been paying attention? The Nevada IT problem took longer than a half year to surface. Hershey has been a sea of loonie candy since June or July, mad chocolate bars racing from place to place, this didn't make the news for months. Whirlpool is going down the toilet but my electricity is still on and the stock market hasn't crashed.
As much as I dislike the word, their "methodology" is flawed. They're doing it wrong because, well, they're idiots.
Their command and control center goes live on December 28, 1999. Ho-kay, but things have been happening for months.... There are other things they should be doing, simple, inexpensive ones.
They could make a difference but they don't understand software and large systems. They don't understand Systems Engineering and Enterprise Systems. They don't know the risks so their solution misses the problem.
Where's my donut?
All the chips were replaced in computers with care
In hopes that ol' bugsy wouldn't stop there
While some folks could think they were snug in their
beds
Others had visions of dread in their heads
And Ma with her PC and me with my MAC
Had just logged on and kicked back with a snack
When over the server there arose such a clatter
I called Mr. Gates to see what was the matter
But he was away so I flew like a flash
Off to my bank to withdraw all my cash
When what with my eyes do you think I should see?
My good old MAC looking sickly to me.
The hack of all hackers was looking so smug
I knew that it must be the Y2K bug
His image downloaded in no time at all -
He snickered and shouted, Let all systems fall
Go Intel, Go Gateway, Now HP, Big Blue
Go everything Compaq and Pentium too
All processors big, all processors small
Crash away, crash away, crash away all
As I drew in my breath and was turning around,
Out through my modem he came with a bound
He was covered in fur and slung over his back
Was a sack full of virus just set to attack
His eyes, how they twinkled, his dimples how merry
As midnight approached things really got scary
He was chubby and plump and perpetually grinning;
I laughed when I saw him, then my hard drive
stopped spinning.
With a wink of his eye and a twist of his head
I soon got to know a new feeling of dread
He spoke not a word but got right to his work -
He stopped all the clocks then turned with a jerk
With a twitch of his nose and a quick little wink
All things electronic soon went on the blink
He zoomed from my system to the next folks online,
He caused such disruption, could this be a sign?
Then I heard him exclaim with a loud hearty cry
Happy New Year to all, kiss your PCs goodbye.
Has anyone ever seen Omega Man with Charlton Heston? It was a sci-fi flick from 1971 that had Chuck as one of the last men on earth after a deadly plague wiped everyone out. The only survivors were horrible mutants who attempted to kill him every night.... The current situation reminds me of Omega Man except I would call it Omega Bear. I'm the last Bear on earth! All of the other Bears have been wiped out and there is no one else left but mutant Bulls who were permanently altered by a mad scientist named Dr. Alan Greenspan. - Marc Sexton
The Fed chairman is the fairy godfather of the stock market. If it is a bubble, as I believe, then he is certainly blowing more air into it. - Ed Yardeni
Clearly, the Fed is poised to fuel financial system liquidity going into Y2K. The big problem, however, is that the manic stock market and overheated bubble economy need exactly the opposite medicine. With this in mind, never has it been as evident that this is one big accident in the making... - David W. Tice
What we are now witnessing is a continuation of a policy maintained by the Fed throughout the tenure of its current chairman, that is, any and all threats to liquidity in the financial markets are met with increased credit creation and consequently, an increase in the money supply. Eventually, this policy will lead to much higher consumer and producer prices, higher nominal interest rates and a collapse in the exchange value of the US dollar. - Steve Saville
The stock market lottery game continues to make millionaires of those who bought the winning tickets, especially in the high flying tech sector. To a certain extent, the euphoria is justified by big gains in productivity that are keeping a lid on inflation while boosting profits. But stock-led prosperity may be starting to outpace productivity-based prosperity. This is fine as long as nothing trips the charging bull. I've been spending too much time worrying about this possibility. Now, I just want to get wildly rich fast like everyone else! Maybe it's time to take www.yardeni.com public? - Ed Yardeni
In a bull market, employees are willing to take stock options in lieu of salary. When exercised, the employee is taxed on the basis of market value. That is, the difference between the exercise price and the market price is treated as income, on which the employee is then taxed regardless of whether the stock is sold. The market price thus becomes the new basis for future capital gains taxes. The company takes an income tax deduction equal to its tax rate times the employee's calculated income, but typically records no corresponding charge to earnings on its P&L. Thus, while the newly-issued stock causes dilution in per share earnings, the wage or salary expense that it represents -- the difference between the market price at issuance and the exercise price -- does not impact earnings and increases reported cash flow by the amount of the tax deduction. Whatever one thinks about the accounting conventions that apparently allow this treatment, it is clear that companies compensating large numbers of important employees in this fashion are headed for significant financial and personnel problems should their stock prices merely level out, never mind fall. - Reg Howe
Accounting principles offer management a choice: pay employees in one form and count the cost, or pay them in another form and ignore the cost. Small wonder then that the use of options has mushroomed. If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go? - Warren Buffet
Yesterday [November 11] on CNBC, an economist went so far as to state that with one more 25-basis-point interest-rate increase next week the Fed would "nail the coffin shut on inflation." Such talk confirms our belief that many brains are suffering from overexposure to the bull market. - David W. Tice
Some financial commentators are undoubtedly aware that excess liquidity is driving the stock market to ever-more dangerous levels, but have chosen to close their eyes to the truth. Perhaps they hope that a failure to acknowledge a problem will avoid the necessity of ever having to confront the problem. It is like the entire world is marveling at the record-breaking, but blatantly drug-enhanced, feats of an athlete. As long as no-one forces the athlete to take a drug test then we are all free to go on embracing an illusion. - Steve Saville
Government of the Fat Cats, by the Fat Cats and for the Fat Cats. America in late 1999. The American banking oligarchy, with their high priest Alan Greenspan, serenely sailing into Y2K's uncharted waters oblivious to the distant sound of the waterfall.... What is that sound in the distance, Alan? The sound we'll all hear after Y2K on 1-1-2000. Is it Niagara Falls, or just a "bump in the river?" - Doug McIntosh
Global outstanding interest rate swaps, currency swaps, and interest rate options alone now exceed $100 trillion. According to Alan Greenspan, the derivatives market carries some $80 trillion of most short-term debt, world-wide, with U.S. banks holding $33 trillion of this debt. If some of the debtors should ever default because of an unexpected decline in financial markets or Y2K failures, the banks will be holding worthless IOUs, which would cast doubt on their solvency. Surely, the Federal Reserve will want to come to their rescue, but it is inconceivable that it can create trillion-dollar credits or print trillion-dollar notes. Any such attempt would seriously damage the U.S. dollar, lead to rampant price inflation, and irreparably ruin the world dollar standard. It is more likely instead that the federal government will declare bank holidays and impose a myriad of controls on the people. The controls in turn will generate a financial underground which will develop standards of its own. - Hans Sennholz
If a Russian default almost took down one company which required Greenspan to bail it out to save the Western banking system, what do you think a Russian collapse, in the context of Y2K, will do? Can anyone say $2500 an ounce gold? OK, maybe only $2000. - Doug McIntosh
People are buying Internet stocks as if they're Beanie babies. A Beanie Baby is worth 23 cents, but temporarily I've got to pay $20 for it. And I'll pay even $150 for it, until I'm no longer interested, and then I'll say, "Damn! It's just a piece of felt and some beans. What was I thinking?" - Lise Buyer [CS First Boston analyst]
There really isn't any sound valuation to most of the active stocks these days and they are pretty much trading like Beanie Babies or Pokemon trading cards. - Marc Sexton
Perhaps for most, the [Y2K] threat is a 1930s-style devaluation and an end to Tulipmania (or a return to realistic stock values where dividends are valued more than the hope of finding a REALLY great fool). - Cory Hamasaki
In 1997, three economists with nothing better to do fed all the data available to economists in 1929 into a new high-powered computer. Based on these data, they asked the computer: Is a Great Depression coming our way? Using the most advanced economic models, the computer checked and cross-checked every conceivable angle. It concluded that there was zero chance that a Great Depression was about to happen in 1929. - John Rothchild
During the past eight weeks, broad money supply (M3) has expanded by $125 billion (keep in mind that M3 grew $273 billion during the first 5 years of the decade), or more than $15 billion per week, at an annual rate of more than $800 billion. And similar to last year, it looks like the major impetus behind this money explosion has been aggressive financial sector leveraging. Remember that last year the financial sector increased borrowings by an unprecedented $1 trillion, creating massive liquidity for the financial system and economy in the face of a global crisis and near meltdown in our credit system. Over the past two months, there has been a similar bout of liquidity creation.... This is.... certainly much responsible for.... the overliquefied state of financial markets. - David W. Tice
How far credit card companies have gone was illustrated recently when a mother in Rochester, N.Y., filled out an unsolicited application her 3-year-old daughter had received. She listed the child's occupation as "preschooler". Under "income" she wrote nothing. The toddler was promptly sent a Platinum Visa card with a $5,000 limit (which she, no doubt, quickly maxed-out on Barbies and Pokemon toys). - Arianna Huffington
Wall Street generally believes what it wants to believe, that Y2K will be a benign non-issue - a blip with no major problems. Corporate America sold the Street that bill of goods. Corporations regularly promote themselves and deceive. It is human nature.... But in general, U.S. corporate Y2K compliance progress is one of the biggest corporate deceptions I have seen in 30 years of analytical experience. The problem is that Wall Street didn't have the analytical experience of IT competence, nor the IT infrastructure values from which to ask intelligent questions. - Paul Cohen [President of Dirty Dozen Research: No Agenda]
The Year 2000 problem stands ready to shake up our economy and force the stock market down to rational levels. Even though this is painful in the near-term, this can only be good for the long term growth of our nation. (Only a fool would support the notion that a highly-speculative, greed-driven stock market is good for the long-term economy of any nation.) Once reason is restored to our equities markets and amateur armchair investors are finally scared away, the stock and commodities markets can go back to doing its important business: Namely, spreading risk, rewarding innovation, and punishing poor business decisions. - Mike Adams
Anti-gun people are trying to sell more restrictive legislation on the false premise that fewer guns mean a safer society.... Whether such legislation would make us safer is no longer a matter of conjecture. Evidence in countries where gun laws tougher than ours exist show more, not less, crime. In Australia, where strict new gun legislation was passed following a 1996 shooting rampage by a man who killed 35 people and wounded 19 others, gun-related crime has increased. According to the Australian Bureau of Statistics, the number of armed robberies went up 39 percent last year and assaults involving guns rose 28 percent. Gun murders increased 19 percent.... Prior to the new gun laws, crime in Australia was in decline.... In Great Britain, where massive firearms-confiscation programs were enacted following a widely publicized shooting in Scotland, gun-related crimes have increased, including "hot" robberies, meaning those conducted while the victims are at home.... Maybe the NRA has been right all along. When guns are outlawed, only outlaws will have guns. Anyone want to debate that point with facts instead of feelings? - Cal Thomas
Mainstream journalists are basically carnival barkers for advertisers. But they never think of themselves this way. No, they are
tireless searchers of truth, uncoverers of hidden motives. - Gary
North
Through some twisted invocation of selective logic that has yet to be questioned by a single journalist in the popular press, the White House congratulates businesses, industry and government departments for stockpiling supplies while insisting that individuals who pursue the same Y2K risk-reduction strategy are wackos and extremists. What's good for the people, it appears, is no longer good for the country. And by all means, unless you want to be called an "extremist," be sure that you take absolutely no action whatsoever to prepare for Y2K. - Mike Adams
I expect enough large systems to fail that we will pitch over into a depression. The scramble will be on to re-fix these things. The question is whether the firms will flub on failure, bypass and limp on, or what? I plan to sit this one out. I don't want to take on work, listen to the clueless contract administrators yelling and crying, and get stiffed when they're fired and their company goes bankrupt. Vendors and suppliers are paid last. Net30? Forget it. But we'll see. 45 days now [on November 16], 1096 Hours. I took a look at one of the Polly Places on the Internet the other day. Those boyz are running scared. It's one thing to polly-rant when the storm is way out at sea but this one is starting to rattle the windows. This will be greater than a category five IT failure.
Category Definition/example Resolution
1 occasional missing records DR, reprocess next week
2 slow performance DR, schedule maintenance
3 < 30 minute outage DR, call VP, tiger team
4 one day failure Crisis, switch to backup
5 > one day failure Call bankruptcy lawyers.
What's unique about this is that is that there will be multiple
simultaneous category five failures.... Almost everyone, everywhere, at the same time. Nothing like this has ever happened on
a global scale before. - Cory Hamasaki
I do not know what will happen on January 1 or in the months following. However, Y2K is not, nor has it ever been, about predicting the future. It is about risk management.... I do believe that the bump-in-the-road scenario is the least likely based on what most unbiased surveys continue to show. The only way you can assume that this is a likely scenario, in my opinion, is to take the self-reported data at face value and read nothing more than Y2K press releases.... reports all indicate that Y2K remediation is lagging, even in some of the largest organizations and in some of the most significant industries. I honestly don't know how anyone can assess this data and be optimistic. It appears to me that it is in spite of the facts rather than because of them.... I still have an informed hunch that Y2K is going to be a rough ride. - Michael S. Hyatt
The news, in my opinion, is getting drastically worse, yet the government, utilities, banks, etc. are (at least publicly) becoming more and more happy-faced in order to avoid panic. - Steve Baxter [webmaster, Canadian Y2K website]
Y2K is just like the fellow who stepped off a 10-story building. He's now at the second floor and everything's OK so far. - Ralph Burgess [Peer Financial Ltd.]
The combined bill for fixing y2k in the U.S. is $100 billion. That's a lot of money to spend because of consultants' hype. Senior managers are obviously easy marks for unknown consultants. All that money to fix a problem that really did not exist! It's amazing how the profit system works. People in control of the crucial institutions are unable to recognize a $100 billion scam. It's amazing that they reached such positions of influence. - Gary North
When I worked for XXX, they had a plan in 1995 to try to convert all mainframe systems to client/server, and address the Y2k bug in the process. They did a pilot project, finished in 1997. They then planned to do about a thousand other programs in the next 3 years. This is actually a project that would take 100 years with the programmers they have. Failure is a certainty. When I worked for company YYY, they were installing SAP. They abandoned that a few months ago, and are going to convert all their mainframe programs to be Y2k compliant. Not holding my breath, sold my stock. These management types have never been able to do accurate time estimates. The smart ones ask programmers for time estimates. Most of them, however, simply work backward from the deadline, announcing that you will be done at such and such time. This is the equivalent of telling a house builder that he will have your house built in a week. Doesn't work. - Amy Leone
Last month, International Multifoods Corp. (NYSE:IMC) filed a 10Q with a boilerplate-type Year 2000 disclosure.... The Company did not warn that installing a new Y2K-compliant system would create massive distribution problems. On Nov. 11, news that problems associated with the computer upgrade would affect this quarter's earnings slammed the stock down over 20 percent.... The stock fell so rapidly that orders became delayed and trading was temporarily halted. Investors in Multifoods lost about $112 million from the crash. - Michael S. Robbins
I saw the most delightful article in the Wall Street Journal the other day, just a minute, ah, here it is.... "Heard on the Street" reported that Chase Manhattan's bond balance sheet had a $40,000,000,000.00 discrepancy earlier this year. Yowza, that's what Bill Gates would call real money. The Chase worked on it and got the discrepancy down to $14,000,000,000.00 by September. They spent more months looking through their thousands of bond issues, the WSJ uses the word "painstaking", and have reduced the error to a mere $5,000,000,000.00. The problem started with a software system called "Bondmaster" that seems to have gone berzerk. There is no evidence that this is Y2K related nor (or is it or) have the fingerprints of one Jo Anne Slaven been found at the scene. Earlier when I raised the JAE and detailed my concerns the pollies said that no company could lose track of its balance sheet. You Pollies need to read WSJ, get out more. Maybe talk to the Chase. They both obviously don't have your big polly bra ins.... The pollies in denial-ville will claim that since the sun came up and my ATM card worked, this is incontestable proof that SAP is the answer, that banks "Get it", and that a college drop out with a PeeCee can solve the problems because. So there. Oh, and sell real estate too. No. It doesn't work that way. The problems at, sigh, Hershey, Bang and Olufsen, Samsonite, Whirlpool, the World Bank, the State of Nevada, and now The Chase are mere warnings. I sense a disturbance in the force. The main event is yet to come. These early warnings are just that, warnings. Evidence that the world doesn't work the way the pollies think it does. Evidence that banks don't "Get it", that SAP is not the answer, that simple problems can persist for months.... The forty billion dollars that the Chase misplaced is $160 for every person in the U.S. This statement makes as much sense as: "We're 99% done." So, if your heart stops for 15 minutes, 1% of the day, you're still dead.... "All our mission critical systems are ready." Ready for what? They'll still break because that's what software does. I'd be laughing if this weren't so sad. This is playing out worse than I expected. We're in for it. - Cory Hamasaki
I know this much about Chase, although it is secondhand. They could use an application of jam as they are toast. Instead of using an outside company to review their Y2K remediation, they used a very young, somewhat inexperienced group of new hires. The results? Bug city. The friend I spoke to was a consultant on site through last month. He advised me that the problems are being discovered during normal operations. No parallel testing. No stepped implementation.... His contract expired, as he had planned, and they begged him to stay on. He wanted no part of it, especially the thought of working in their shop on New Year's Eve, a long way from home. Even scarier is that they have basically given up and gone into what he called "bunker mode". They are resorting to F-O-F.... Just a cheery thought from a friend of mine who was at COMDEX trading war stories... - John "9.5" Galt
Y2K publicity efforts are filled with inherent contradictions. Take the North American Electric Reliability Council's "Y2K drills," for example. These drills were heralded as some kind of "industry-wide" test of the Y2K compliance of electric utilities. That was the public explanation, and that's what the press reported. But upon closer inspection, it turns out the drill didn't test electrical generation or distribution in any form whatsoever! In fact, this drill tested nothing but the backup communications systems of electric utilities. In some facilities, this was nothing more complex than a couple of guys chatting on walkie talkies. They say, "Can you hear me?" "Yes, I can hear you!" "Good, tell NERC we're Y2K ready!" - Mike Adams
The reports from the Wall Street Journal and Washington Post confirm my predictions of the look and feel of an IT meltdown. I can't recall any time in the last 30 years that there have been so many IT mega problems.... the right thing to do would have been to put every geek and geek wannabe to work in 1997, that doesn't mean that people will do it. They didn't. I overestimated the smarts of management. I was wrong, I thought they had a clue... So my sense of the mess is that the work did not get done. The few IT megaflops.... are indications and warnings. These show us what a flop is like, how long it takes to recover, and what the impact is. - Cory Hamasaki
More money has already been spent on Y2K readiness than the government spent on of all of World War II.... We are confident things will be OK. But we won't say there will be power. - Michael A. Thompson [account manager, Massachusetts Electric Co.]
Last week, a local corporation sent e-mail to the department managers: "URGENT! What is your contingency plan for Y2K?" They just discovered that their MIS system will fail on the rollover. This is after assurances for the last year from the vendor that it was compliant. By itself, this is not a big deal. This organization can function using paper and pencils, FAXes, pocket calculators. - Cory Hamasaki
I was contacted by a Time reporter who wanted to interview me about my plans for New Year's Eve, and I declined to get involved. As you may remember, Time did a cover story at the beginning of the year that focused on the religious-fanatic aspect of Y2K, with a rather lurid graphic on the cover of the magazine. The problem was that several of us Y2K "activists" (for lack of a better term) were interviewed at great length by reasonably intelligent reporters WITHOUT being given any inkling that the senior editors had already decided on the overall theme and perspective of their story. As a result, we got incorporated into a story that we would have preferred not to be associated with at all. Having thus been burned once, I now know enough to stay away from Time reporters... - Ed Yourdon
I have a friend who knows Ed Yardeni quite well. He says that in
private, Yardeni paints a picture of extreme depression. - Greg
Caton
The period between Thanksgiving and Christmas typically is a good one for stocks.... call it the "holiday effect".... and a crash during this period is highly unlikely, no matter how ridiculously overvalued the popular stocks are, or how extreme are the divergences between the popular stocks and the rest of the market. With a few boring old manufacturers replaced by high-tech wonders in the Dow Jones Industrials average, the Dow may go on to make new highs during this period, until the high-tech craze burns out.
An exception would be: If there are enough Y2K enterprise-systems failures in the first week of December (as Cory Hamasaki expects), that could spook the market; but my own opinion is that these won't reach "critical mass" to grab the public's attention (largely because the press is too dumb to figure out what's going on).
In the last week of December, I expect the Y2K failure rate will pick up sharply. Whether there will be enough of these to spook people (Help! I'm not prepared!), I simply don't know.... there are too many unknowns to make an intelligent guess. So stocks might crash in the last week of December, and they might not.
If we get through December OK, and if I'm right about Y2K being an economic hazard for most people, not a physical one, then as we cross into the early days of 2000 we could see a big rally in stocks as the public, which has been conditioned to expect all Y2K failures to arrive on 1/1/00, collectively heaves a big sigh of relief. (This is traditionally a time for rallies, anyway.)
Then comes the trouble, as it dawns on people that Y2K was not completely fixed, especially overseas, and it acts like "sludge in the system". Somewhere in the process of Y2K failures multiplying through the economy like a malignant computer virus.... er, sorry, not a good example.... investors will realize that a recession is inevitable, and the asset bubble will pop.
OK, Nick, you say, suppose you're wrong? Well, I must admit, I have been wrong on occasion before.... so, purely hypothetically, let's say I'm wrong about Y2K. It's just a bump in the road, which nobody notices because the press can't even detect bumps in the road; it's too busy cranking out soap-opera "news".
In that case, around mid-January the Fed will begin withdrawing the gusher of liquidity it's squished into the banking system to get it across the 1/1/00 boundary... the liquidity surge which has really picked up in the last month, distorting the money supply figures and adding oomph to the mania in the selected popular stocks. (The Fed is even selling "liquidity options" to member banks.... the right to borrow from the Federal Reserve as lender of last resort.... should the private credit markets dry up. Uncle Sam, world's largest derivatives dealer! ....except in this case, the derivatives are perfectly safe, because they're backed by the printing press.)
You know the traditional formula: Shrinking money supply = lower
stock prices = don't fight the Fed. (And the Fed is already
pushing up bank lending rates.) I would be extremely surprised to
see a bull market in any class of financial assets except precious metals persist beyond the third week of January.
Original cost: $ 8,090.45
Present value: $ 5,775.07
Increase: $-2,315.38 [-28.60%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is -19.06%, for a compound annual rate of return of -1.62%. COMMENT on "Phoenix": The "CASH" figure currently shown is now totally bogus, as I have withdrawn money from this account for Y2K preparations. Actual cash remaining, as of November 26, 1999, was $276.40. Obviously, I will now have to burn out my calculator doing some heavy math. Here's how I will probably handle the withdrawal for performance calculations: First, bring the cash balance (before Y2K withdrawal) up to date with the accumulated interest and fractional-share sales from Citizens Utilities; then, calculate the true loss in portfolio value; then, adjust the present value for the cash withdrawal; then, adjust the "original cost" to reflect the paper-value loss of the adjusted "present value" through November 26, 1999. A similar adjustment will be made for the combined-portfolios value. These changes will not affect the stated performances to date, but will have the effect of amplifying (either negatively or positively) future performance, as a cash buffer has been removed.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $ 8,675.00
Present value: $10,016.29
Increase: $ 1,341.29 [+15.46%]
COMMENT on "PIG": There is no change from the last issue.
The PIGs' Web page is at http://www.assumption.edu/HTML/Faculty/Kantar/WPigs.html
C. Roth rollover IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $10,866.47
Increase: $ 2,540.28 [+30.51]
The performance of this portfolio (including its predecessors)
from January 1, 1987 to the present is -0.92%, for a compound
annual rate of return of -0.06%.
D. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar1992 stock @ 56.65 MM @ 13.41
29Apr1992 MM @ 13.48 bond @ 31.19
19Jun1992 bond @ 32.14 MM @ 13.55
29Jun1992 MM @ 13.57 stock @ 56.74
24Jul1992 stock @ 56.76 MM @ 13.61
29Oct1992 MM @ 13.72 stock @ 58.61
23Dec1992 stock @ 61.48 MM @ 13.78
16Jan1995 MM @ 14.83 equity-index @ 26.44
20Jan1995 eq-index @ 26.19 MM @ 14.84
30Oct1997 MM@ 17.24 bond@47.56 (27.17%)
30Oct1997 MM@ 17.24 i-i bond@26.12 (27.17%)
11Feb1998 bond@ 48.84 MM@17.52 (27.17%)
11Feb1998 I-I bond@ 26.23 MM@17.52(27.17%)
16Jun1998 MM@ 17.84 TIAA Traditional (45.87%)
23Sep1999 MM@18.99 I-I bond@27.56 (53.32%)
Values, 26Nov1999: stock, 197.00; MM, 19.16; bond, 52.06;
inflation-indexed bond, 27.85; TIAA current yield in SRA, 6.75%
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%; 1998: 5.72%
Gain, January 1 through September 30, 1999: 4.129% (5.52%
annual rate of return)
Total gain since January 1, 1988 (11.75 years): 185.35%
Compound annual rate of return: 9.33% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained
472.60%, for a compound annual rate of return of 16.02%.
COMMENT on "Timer's Trend":
The July 20 SELL signal is still in
effect. I guess I didn't have to worry about "Timer's Trend"
failing to give a sell signal before the crash arrives. It has
remained solidly bearish since late last July.... four months'
warning (at least). Should I ever live long enough to see another
market mania, I know I will be able to trust "Timer's Trend" to
ride the bubble upward and still be able to get out in time.
(Sadly, "Timer's Trend" is not nearly as good at picking off
market bottoms.)
______________________________ TIMER'S TREND _________________________________ Wed 11 Aug 99 . #I . |10787.80 | . - * Thu 12 Aug 99 .# I . |10789.39 | . - * Fri 13 Aug 99 . & . |10973.65 | .- * Mon 16 Aug 99 .# I . |11046.79 | .- * Tue 17 Aug 99 . & . |11117.08 |-. * Wed 18 Aug 99 .# I . |10991.38 | - * Thu 19 Aug 99 .# I . |10963.84 | - * Fri 20 Aug 99 . I# . |11100.61 |-. * Mon 23 Aug 99 . I #. |11299.76 |-. * Mon 23 Aug 99 . I #. |11299.76 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~* Tue 24 Aug 99 .# I . |11283.30 |-. * Wed 25 Aug 99 . I# . |11326.04 + . * Thu 26 Aug 99 # I . |11198.45 |-. * Fri 27 Aug 99 # I . |11090.17 |-. * Mon 30 Aug 99 # . I . |10914.13 | .- * Tue 31 Aug 99 # . I . |10829.28 |~.~*~~~~~~~~~~~~~~~~~~~~~~~~ Wed 1 Sep 99 .# I . |10937.88 | . - * Thu 2 Sep 99 # . I . |10843.21 | . - * Fri 3 Sep 99 . I # |11078.45 | . - * Tue 7 Sep 99 . & . |11034.13 | - * Wed 8 Sep 99 .# I . |11036.34 | - * Thu 9 Sep 99 . & . |11079.40 |-. * Fri 10 Sep 99 . I# . |11028.43 + . * Mon 13 Sep 99 # I . |11030.33 |-. * Tue 14 Sep 99 # . I . |10910.33 | - * Wed 15 Sep 99 # . I . |10801.40 | .- * Thu 16 Sep 99 # . I . |10737.46 | . - * Fri 17 Sep 99 . #I . |10803.63 | . - * Mon 20 Sep 99 #. I . |10823.90 | . - * Tue 21 Sep 99 # . I . |10598.47 | . - * Wed 22 Sep 99 # . I . |10524.07 | . -* Thu 23 Sep 99 # . I . |10318.59 *~.~~-~~~~~~~~~~~~~~~~~~~~~~~ Fri 24 Sep 99 # . I . |10279.33 @| . - * Mon 27 Sep 99 # I . |10303.39 @| . - * Tue 28 Sep 99 # . I . |10275.53 @| . - * Wed 29 Sep 99 #. I . |10213.48 | . - * Thu 30 Sep 99 .# I . |10336.95 | . - * Fri 1 Oct 99 # . I . |10273.00 | . - * Mon 4 Oct 99 . #I . |10401.23 | . - * Tue 5 Oct 99 # I . |10277.11 | .- * Wed 6 Oct 99 . & . |10588.34 | - * Thu 7 Oct 99 # I . |10537.05 | .- * Fri 8 Oct 99 # I . |10649.76 | - * Mon 11 Oct 99 .# I . |10648.18 | .- * Tue 12 Oct 99 # . I . |10417.06 | .- * Wed 13 Oct 99 # . I . |10232.16 | . - * Thu 14 Oct 99 # . I . |10286.61 | . - * Fri 15 Oct 99 # . I . |10019.71 @| . * Mon 18 Oct 99 # . I . |10116.28 @| . - * Tue 19 Oct 99 #. I . |10204.93 @| . - * Wed 20 Oct 99 # I . |10392.36 | . - * Thu 21 Oct 99 # . I . |10297.69 | . - * Fri 22 Oct 99 . #I . |10470.25 | . - * Mon 25 Oct 99 # . I . |10349.93 | . - * Tue 26 Oct 99 # . I . |10302.13 | . - * Wed 27 Oct 99 # I . |10394.89 | . - * Thu 28 Oct 99 . I #. |10622.53 | .- * Fri 29 Oct 99 . I # |10729.86 | - * Mon 1 Nov 99 . #I . |10648.51 |-. * Tue 2 Nov 99 . #| . |10581.84 + . * Wed 3 Nov 99 . #| . |10609.06 + . * Thu 4 Nov 99 . |# . |10639.64 + . * Fri 5 Nov 99 . |# . |10704.48 |-. * Mon 8 Nov 99 . # . |10718.83 + . * Tue 9 Nov 99 .# I . |10617.32 |-. * Wed 10 Nov 99 . & . |10597.74 + . * Thu 11 Nov 99 . #I . |10595.30 |-. * Fri 12 Nov 99 . & . |10769.32 |-. * Mon 15 Nov 99 . & . |10760.75 |-. * Tue 16 Nov 99 . | #. |10932.33 +~.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~* Wed 17 Nov 99 . #I . |10883.09 + . * Thu 18 Nov 99 . & . |11035.70 + . * Fri 19 Nov 99 # I . |11003.89 |-. * Mon 22 Nov 99 #. I . |11089.52 | - * Tue 23 Nov 99 # . I . |10995.63 | .- * Wed 24 Nov 99 # I . |11008.17 | . - * Fri 26 Nov 99 .# I . |10998.91 | . - * ========================================================================"Timer's Trend" is based on 4% and 10% exponential moving averages of the New York Stock Exchange advance/decline line (that is, the ratio of advancing to declining stocks). There are many symbols shown above, but the ones that count are the braces: {, } = "Timer's Trend" (4% exponential confirmed by 10% exponential) SELL ({) or BUY(}) signal.
NEXT ISSUE - will appear about December 20 (a little earlier than usual, to insure delivery before Y2K messes up the Post Office). /Nick Chase