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How Y2K Is - and Is Not Already Discounted in the Market
By Michael S. Robbins September 17, 1999
A great misunderstanding of Y2K on Wall Street is that pre-Y2K expenditures have any relative significance compared to the post-Y2K disruptions to come. This is because the former costs are easily quantified, unlike the costs to come from economic friction caused by the Millennium Bug in January.
An example of the pre-Y2K economic effect could be seen on Sept. 13, 1999. Computer Task Group (NYSE:TSK) fell $0.31 to $15.19 on 845% of average volume, hitting its 52-week low in intraday trading, partially due to a negative Y2K spending impact. The company, a provider of information technology (IT) services, said Monday it expects revenue and earnings per share for the remainder of 1999 to be below analysts' current estimates.
"The shortfall is attributable to an industry-wide reduction in both Year 2000 and non-Year 2000 IT spending. Like others in the industry, Computer Task is experiencing a decline in revenues as companies are deferring new systems development and integration work until the actual impact of Year 2000 on their systems can be assessed and resolved."
Computer Task said it believes that this industry-wide slowdown is a short-term phenomenon and that the long-term growth prospects for its business remain very strong for 2000 and beyond.
This Y2K market effect is one of several that has occurred in the IT industry due to falling earnings expectations for the third and fourth quarter of 1999. Traditional financial analysis can easily identify this lost revenue because it relates to corporate and government planned spending on correcting the Year 2000 Problem in 1999. Changes in spending on IT projects for the next 3 ½ months is a relatively easy figure to assess for the industry. However, the cost-to-fix does not include the economic impact of global business interruption from uncorrected Millennium Bugs on January 1, 2000, which may be much greater.
Capers Jones of Software Productivity Research has estimated that for every dollar not spent on correcting the problem before Jan. 1, 2000, the cost of failure may be up to $20. Assuming a $800 billion global cost to fix and 70% completion of the project by January, the global economy could face up to a $4.8 trillion impact. That cost will also be compressed in a smaller timeframe than pre-Y2K remediation costs, which began as early as 1996.
The effect of system failure, though potentially more significant, is not nearly as tangible as pre-Y2K cost-to-fix expenses. Thus much of the financial impact of Y2K reported in the media today usually indicates an immaterial cost because it addresses pre-Y2K expenses.
Many Asian and South American governments and companies will not be Y2K-ready. There may be a significant erosion to next year's earnings caused by the temporary malfunctioning of computer systems, and that is a cost not being included in analysts' estimates.
According to Karl W. Feilder, President and CEO of Greenwich Mean Time and acknowledged world authority on the Year 2000 PC problem, Japan is the biggest Y2K risk in the world today. Yet since January 1, 1999, the Nikkei is up about 33% and the Dow Jones is up about 18%.
China Telecom (NYSE ADR: CHL) has a relatively high probability of experiencing Y2K problems compared to Sprint (NYSE: FON). Yet China Telecom, with approximately the same market capitalization as Sprint, has almost twice the price earnings ratio valuation. China Telecom has a price-sales ratio of 16.94, compared to Sprint's 2.54.
On September 9, 1999, the Wall Street Journal reported a brief surge in Asian interest rate futures as investors speculated on the impact 9/9/99 might have on computers, even though most experts knew the Sept. 9 computer issue would be negligible compared to Y2K. Through July and August 1998, the Dow Jones Industrial Average lost 20 percent of its value from the perceived economic problems associated with the "Asian Flu." Perhaps Sept. 9 was a sure sign that the markets will be unable to withstand a correction before Jan.1, 2000.
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I also recall the above bolded situation caused an overnight liquidity crisis in Japan as well. I thought the situation in Japan re: 9/9/99 was an uncalled for, senseless, over-reaction. Upon reflection the reaction belies their "confidence" and highlights their misunderstanding of where the real risks lay. This is not good. |
