"A survey today shows Merrill Lynch is only into 40% equities... could it also have been a smoke screen while they are reducing their equity position."
World events have changed so much recently that their decision makes sense. In fact, it's almost the same as my own. I can't explain their reasoning, but I can explain mine.
The S&P is way overvalued, having been driven up by baby-boomer accounts and foreign investments from countries whose economies are failing. With a lack of new sources of influx, the free ride up is over. There are several forces soon to drive EPS reports downward: declining exports to failing foreign economies, lost revenue from Y2K snafus (such as missing parts from a supplier, or the supplier's supplier), Y2K repair expenditures, and Y2K related litigation.
As Y2K awareness grows, concern about preserving equity will spawn large scale profit taking. Because fear is not too logical, profit taking will be broad and indiscriminate, and will flow to bonds. When the news media proclaims bonds to be the new safe haven, bond prices will soar.
How will Y2K firms play out?
The market is a dynamic system where new surprises are around every corner. Who, just five years back, would have imagined all that the internet is doing today? Or that almost any stock related to e-commerce would be sky high?
When trying to forecast stock price, a firm's technological superiority isn't the only factor to consider. I remember when RCA boasted having the most advanced form of that day's technology and the most efficient factories to produce it. just one year later, RCA suffered heavy losses. Almost overnight, the market switched from electron tube to transistor technology. Of course, the issues are different today, but keeping abreast of an ever-changing market is part of the challenge investors face each day... or so it should be.
Two years ago, Y2K investing was a "sure thing" and investor emotion drove prices unreasonably high. Large profits were made as well as large losses. Recently, one smart investor lamented that the days of easy profits are over, and from here on out, you're going to have to work at it. How true.
Who imagined two years ago that the corporate world would be so "irrational" as to ignore their Y2K dilemma? But for the sake of showing nice quarterly reports, they did, and in doing so, provided technologists breathing room for the rapid growth of new windows of opportunity. Not just for solving the Y2K issue, but much larger issues regarding mass upgrading and vertical integration of a firm's information resources as well. For example, the new millennium has sparked the imagination of over 100 vendors in the data management market alone.
Will Y2K firms make sufficient profit, soon enough, to boost share prices before the market's overall decline? I now believe many firms simply plan to fix Y2K problems as they arise. For cash strapped nations like Russia, that's fast becoming their official policy. When the mess becomes too great to patch, and survival is at stake, firms will then either simplify operations and buy new off-the-shelf software, or elect Y2K servicing. This implies a long term scenario whereby sufficient profits for Y2K vendors will arrive, but not soon enough to precede the market's overall retreat.
Yes, as always, the playing field is changing and you can't fight today's battles with yesterday's strategies. The battle lines are ever shifting, and who/what will be the clear winner for the next few years is uncertain, but at least investors are asking the right questions. And I think Merrill Lynch has it right.
Regards,
Mark Jurik |
