L.A. Times article on the stock market and Y2K

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Link -- http://www.latimes.com/excite/990808/t000070578.html

Y2K Jitters Are Finally Starting to Register on Wall St.

by Tom Petruno

Stocks are sinking, interest rates are rising, oil is nearing $21 a barrel and the dollar is suddenly the planet's wimp currency.

But Wall Street doesn't know what trouble is. The French--now they understand what trouble is.

Trouble is Paris being destroyed as the Mir space station falls on it this Wednesday while a total solar eclipse darkens a broad swath of Europe.

That unscheduled Mir rendezvous, as predicted by fashion designer-cum-mystic Paco Rabanne, has had the French capital in a tizzy for weeks.

If he turns out to be right, Messr. Rabanne will no doubt be elected President-for-Life of France, or whatever's left of it.

Otherwise, his cheery forecast will most likely be viewed as just a foretaste of global pre-millennium nuttiness.

It may be easy to laugh at Rabanne, but on Wall Street, Y2K-related worries are quickly moving from the conceptual to real-world.

Example: Companies worldwide have been rushing to borrow money via bonds before the fourth quarter arrives, on the assumption that few investors will be interested in ponying-up for large financial transactions as Jan. 1 nears.

That borrowing binge is adding to the current upward pressure on interest rates, which have hardly needed the assist--not with oil prices staying aloft (and threatening higher inflation worldwide), economic growth picking up in East Asia and Europe, and the U.S. economy's "Goldilocks" image under severe attack.

Friday's government report that the economy created 310,000 net new jobs in July, well above expectations, may well have been the last straw for the inflation-paranoid Federal Reserve.

Coming just one day after other data showed a sharp drop in worker productivity in the second quarter while labor costs rose, the employment news appears to make another Fed interest rate increase a certainty when Chairman Alan Greenspan and peers gather on Aug. 24.

"We now expect the Fed to tighten policy . . . moving the federal funds rate up to 5.25%" from 5%, Merrill Lynch economists told clients last week, in a missive echoed by many other forecasters.

The bond market didn't really need a memo. Yields on Treasury and corporate bonds rocketed Friday after the employment news, pushing the benchmark 30-year Treasury bond from 6.04% on Thursday to 6.18%, the highest since November 1997.

If Wall Street could believe that another quarter-point rate hike would be all the economy requires to guarantee a slowdown and relieve inflation worries, the uproar in the bond market might soon cease, allowing yields to level off.

But the guesswork about the Fed's plans now also includes Y2K. Many economists assume the Fed doesn't want to be raising interest rates in the fourth quarter, when the worldwide focus on whose computer systems will or won't work starting Jan. 1 seems certain to intensify, potentially riling financial markets.

If you're Greenspan, then, do you raise rates just a quarter-point on Aug. 24--or go for a half-point increase to try to front-run the economy and inflation and avoid having to move again before Jan. 1?

The Fed's decision-making is further complicated by concerns that the economy could accelerate in the fourth quarter precisely because of Y2K worries.

How so? A new report from brokerage Goldman, Sachs & Co. predicts there will be enough stockpiling of goods by companies and consumers in the fourth quarter to have a "noticeable" effect on economic growth.

That poses a challenge for the Fed, because if stockpiling helps boost prices of goods--driving the inflation rate higher--bond investors could demand ever-higher yields to compensate. They would also expect to see the Fed engaged in the anti-inflation fight by tightening credit, which Greenspan might be reluctant to do for the aforementioned reasons.

(Never mind that any inventory-related boost to growth in the fourth quarter could be reversed in the first quarter of 2000, assuming the world doesn't end and most computer systems pass the Y2K-bug test. The bond market probably wouldn't choose to look that far ahead.)

The backdrop for all of this is a classic case of "beware what you wish for": The global economy is looking better, which is good news to most people, of course.

But with an acceleration of growth comes the risk that we've seen the lows in inflation. The oil market certainly is telegraphing that message. Crude oil futures in New York ended Friday at just under $21 a barrel. Prices are up 50% since March, as global demand has risen while producers have held the line on output.

Given the rebound in oil and the surge in bond yields this year, maybe the biggest surprise is that global stock markets aren't faring worse.

True, investors have been fleeing Internet stocks in recent weeks, leaving many of them off 50% to 70% from their 1999 highs. But no one can possibly be surprised that those stocks are coming down from the stratosphere. It was always a question of when, not if.

The Dow Jones industrial average, at 10,714.03 on Friday, is down just 4.4% from its record high set July 16. The Standard & Poor's and the Internet-heavy Nasdaq composite, both of which also peaked July 16, are down 8.4% and 11%, respectively, since.

That's not a great start to August, which has too often been a miserable month for stocks. But share volume on the New York Stock Exchange and Nasdaq has remained subdued, suggesting there's no great rush to sell.

Investors who can make the leap of faith that 2000 will bring a stronger world economy without a dramatic pickup in inflation may well figure that stocks are going in the right direction now--that is, you're getting the chance to buy in at cheaper prices.

* * *

Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

Copyright 1999 Los Angeles Times. All Rights Reserved

-- (M@rket.watching), August 09, 1999


Yeh Baby!! When my friends and I are looking for solid info on falling space stations we go to....who else, Paco the Predictor. I have some friends from France staying with us for a month and they are in tears laughing about the Mir situation. They feel that Paco has been guzzling too much of his product, but who knows. I asked them why are they not home to witness this once in a lifetime event and I got a less than amusing reaction. News at 11.

-- For (your@info.com), August 09, 1999.

So a twinge of awareness is starting.

-- Ashton & Leska in Cascadia (allaha@earthlink.net), August 09, 1999.

Moderation questions? read the FAQ