An Economic System Solidly Based on -- Emotions!

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HAPPY 2000. GOT CASH?

 

May 26, 1999: 2:12 p.m. ET

 

USA TODAY (NB) -- By Sandra Block and Susan Decker, USA TODAY. Alan

Loomis, a railroad conductor in Los Ojos, N.M., isn't taking any chances

on Y2K.

 

To protect himself against the impending change of the millennium clock

on Jan. 1, 2000, he's moved most of his investments into short-term

Treasury bills, "the safest, most liquid investment you can be in

today," he says. Because he suspects his brokerage firm hasn't immunized

itself against the Y2K computer bug, he bought his bills directly from a

Federal Reserve bank.

 

That hasn't allayed all of Loomis' Y2K anxieties. He's worried that

computer glitches at his bank will prevent the Fed from electronically

transferring the proceeds from his Treasury bills to his savings

account. That means he'll have to get the money through the mail, he

says. And he doesn't believe the U.S. Postal Service is ready for Y2K,

either. Still, he says, "it's the lesser of two evils."

 

Loomis, who ordered an electric generator in January, may seem extreme,

but when it comes to his investments, he's hardly alone.

 

On Jan. 1, computer programs that aren't updated could recognize the

digits 00 in dates as the year 1900, instead of 2000, a glitch that

could affect everything from elevators to e-mail.

 

Fearing a Y2K-triggered market meltdown, many investors say they're

planning to move money out of the stock market in the coming months.

Some are moving it into bonds and money market accounts; others are

stashing it in coffee cans and sock drawers. A USA TODAY/Gallup Poll

earlier this year found that 55% of those surveyed believe it's likely

banking and accounting systems will fail because of Y2K-related

problems.

 

For that reason, financial analysts are warning that the fourth quarter

- historically a bumpy period for stocks --could rattle even the most

stalwart of long-term investors.

 

"There is every reason to believe that there will be significant turmoil

in the market" during the fourth quarter, says Harold Evensky, a

financial planner in Coral Gables, Fla., and author of Y2K and Your

Money. "There are fundamental reasons, and there are emotional reasons."

 

Evensky, like most financial advisers, says long-term investors should

ignore blips in the market, Y2K-related or otherwise. But a few of his

clients are having a hard time coping with the uncertainty the end of

the millennium brings. For those individuals, he recommends shifting 20%

of the money they have in stocks or stock mutual funds into bonds until

next March.

 

"The rational thing to do is nothing, but people aren't rational," he

says. "They're human. Our job is to help people deal with their

humanness."

 

Timing is everything

 

Predictions of worldwide economic collapse are nothing new. But unlike a

lot of the apocalyptic stuff you see in some supermarket tabloids, Y2K

is a real problem with genuine economic consequences.

 

The government and private industry are spending billions to adjust

computer systems, and some analysts forecast only minor inconveniences

on Jan. 1. But worriers can find plenty of support for their worst

fears. Deutsche Bank Securities chief economist Ed Yardeni, who

predicted in 1995 that the Dow Jones industrial average would hit 10,000

before the turn of the century, believes there's a 70% chance Y2K will

trigger a global recession.

 

Some investors see that as an opportunity. Scott Cowan, 37, a computer

software engineer in Portland, Ore., says Y2K offers a rare chance to

time the stock market: He's planning to move money in his 401(k) out of

stocks and into money market funds in mid-August.

 

"Fear is the big thing. Fall is the time," he says. "It's going to

happen anyway, so you should get out and get back in when it's low."

 

Likewise, Jim Vaillencourt, 39, a computer programmer in San Antonio,

intends to take his money out of the stock market in July or August. He

expects a 20% to 30% drop in the Dow Jones industrial average. When that

happens, he'll be ready to buy his favorite stocks at depressed prices,

he says.

 

"I think the media hype is going to start in September or October," he

says. "I'm going to pull it out, then put it right back in. If it

doesn't go down, I don't lose anything."

 

Bryan Lloyd, 25, a credit analyst in Wayne, N.J., also expects a

downturn in the market later this year "since the market tends to react

negatively to uncertainty, and there's a lot of uncertainty about Y2K."

 

Lloyd isn't putting any new money in stocks, opting instead for

short-term bond funds and money market funds. If investor panic causes

stock prices to fall, he plans to jump into the stock market, he says.

"I'm expecting that there may be a lot of buying opportunities."

 

Cowen believes the stock market will hit bottom in early January, while

Vaillencourt and Lloyd expect a revival by March.

 

Other investors aren't so optimistic. Bill Muir, 47, who owns a dry

cleaning business in Redding, Calif., already has sold his stocks and

invested his money in precious metals. He believes the market could fall

as much as 80% and stay that way for a long time.

 

"We're in that same type of scenario as 1929," he argues. "Y2K will be

the straw that breaks the camel's back." The market, he says, "will be

imploding on itself, with everyone heading for the door, and it will be

a very small exit."

 

That kind of talk unnerves Richard Kullander, 37, a real estate agent in

Cedar Rapids, Iowa. A fan of legendary stock picker Warren Buffett,

Kullander believes in buying shares of good companies and holding them

forever. Until recently, he gave little thought to how Y2K would affect

his portfolio. That changed after he went on a trip with a group of

retirees.

 

"They're running out and buying generators and containers to hold water.

One lady said she was going to fill her bathtub up on Dec. 31,"

Kullander says. Even more worrisome, he says, the retirees plan to pull

their money out of the stock market and their banks.

 

"These people are expecting a disaster, so they plan accordingly," he

says. "It's going to be a self-fulfilling prophecy."

 

Kullander says he probably won't make changes in his portfolio as Y2K

approaches, but he's not ruling it out. "I don't think it's going to

sway my investment strategy," he says. "But if I feel there are enough

people out there who are going to overreact, it might make sense for me

to take my money off the table to take advantage of huge swings."

 

How long?

 

If fourth-quarter turmoil is likely, how long will it last? Some

analysts say the decline could be short, particularly if most of the Y2K

doomsday forecasts prove false. "Come January, once people see the sky's

not falling, you'll see massive inflows to the market," says David Kay,

a financial planner in Dayton, Ohio. "That will drive the market to new

highs." Similarly, Scott Kahan, a planner in New York, believes money

from 401(k) plans will continue to drive up the stock market in early

2000, preventing a prolonged slump.

 

Investors have shown themselves remarkably resilient to market tremors

the past few years. When the Standard & Poor's 500 index plummeted 19%

between July 17 and Aug. 31, 1998, most investors bit their lips and

stayed in the market. Short, sharp dips in the stock market have become

so common that most investors shrug them off.

 

Still, some financial planners say Y2K could test investors' resolve.

"Earlier market blips were blamed on profit taking or cycles," Evensky

says. "With Y2K, there's something specific. Those are the kinds of

things that will scare people out of the market and keep them out."

 

For some, a prolonged bear market has a positive side. "We will probably

have to have economic difficulties to get back to family values," says

Loomis, the railroad conductor in Los Ojos. "I'm very positive about

life in general and believe the Good Lord is leading us in a good way."

 

Reported by USA Today,

http://www.usatoday.com