INVESTORS ABUZZ OVER MILLENNIUM BUG
Where some see a global crisis, others see an opportunity
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Chicago investment banker Dennis Grabow had just left his job at Morgan Stanley to buy a West Coast technology company on his own when his due diligence uncovered a shocker.
Computer problems related to the year 2000 not only would trash the company but also trigger an economic crisis, he concluded.
"I got into this issue, and 'Oh, my God,' " Grabow said. "This is the event that bursts the bubble. This will lead to the greatest transfer of wealth in the 20th Century."
Given that revelation, Grabow passed on buying the company and instead started a "Year 2000" consulting firm.
On its face, the problem is simple: Many computers can't read dates after Dec. 31, 1999. In many instances, computers are equipped to read just the last two digits of 2000; they'll interpret the "00" as indicating the year 1900.
In Grabow's estimation, such seemingly minor glitches will cause widespread gridlock--from bank shutdowns and shipping halts to far-reaching electric-power outages.
The 52-year-old Grabow, who advises investors through his Millennium Investment Corp., foresees a stock-market collapse, credit crunch and, ultimately, an economic recession. "It will disrupt the flow of goods and information," predicted Grabow, who advocates a highly defensive investment posture--light on stocks and heavy on government securities.
To be sure, many market pros don't buy the bleak scenario Grabow describes, and stock prices have continued galloping ahead even as 2000 draws close.
Some believe the so-called "Millennium Bug" will be nothing more than a speed bump by the time the millennium rolls around.
Yet for investors of all persuasions, Year 2000 computer issues are presenting at least some risks and opportunities.
Whether retreating to the trenches, as Grabow suggests, or making bold advances into millennium-sensitive equities, investors should take stock of this one-of-a-kind event, experts advise.
That said, it's difficult to find a consensus about the effects of the Year 2000 on the broader economy. Some dismiss out of hand the recession forecasts of Grabow and other pessimists.
On the contrary, the corporate and government spending needed to correct the computer bugs will give the economy a boost, predicted First Chicago NBD chief economist James Annable. Grabow's advice for a bulletproof portfolio is off by "180 degrees," Annable said.
[CK: Give the economy a boost?? Give me a break! Glad Annable's NOT managing MY money.]
Overemphasizing the impact of any one factor, be it the Asian crisis, Millennium Bug or the current White House investigation is "a blueprint for losing money in the market," Annable contended.
Many investors already have lived through a boom-and-bust cycle in the companies that solve Year 2000 problems, such as Zitel Corp., Data Dimensions and Viasoft.
After posting huge gains, those stocks retreated as spending for remediation failed to meet bullish estimates. To a greater degree than suspected, companies were buying new computer systems rather than hiring specialists to patch the old.
Although some Year 2000 stocks are rebounding, such as Computer Horizons, the best opportunities may already have passed. [CK - LOL]
"I don't think of the Year 2000 as a real play," said Patrick Adams, portfolio manager at Berger & Associates. "The sweat shops that rewrite the code are going to fade away."
[CK: Fade away? When? 2015? HA HA HA]
For the broad range of public companies, more about their Year 2000 exposure will be known shortly.
The Securities and Exchange Commission is demanding more extensive disclosure of Year 2000 spending in the regulatory reports companies file this year.
The biggest risks, Adams said, apply to small banks and insurers, mom-and-pop manufacturers and perhaps health-care service companies that have failed to keep up with the times.
"Most of the big companies won't have a problem," he said. "It will be the second- and third-tier companies. They'll say, 'Forget it, it's not worth fixing.' "
Even companies that have fixed their systems could be vulnerable if vendors and suppliers go down.
"You're not your own island," explained Greg Jackson, portfolio manager at Chicago mutual fund group Yacktman Asset Management. "You may be ready, but will your system talk to everybody else's?"
That goes double for companies with global businesses. Some investors believe the Year 2000 effect will be much more pronounced overseas, where preparations are said to be less intensive. As Adams put it: "I hear Europe is a disaster."
That's not necessarily so, countered Marcel Houtzager, portfolio manager at Chicago's Wanger Asset Management, known for its Acorn Funds.
True, corporate Europe has more on its plate than just Year 2000 problems, including the systems issues raised by the impending monetary union.
But even if the Year 2000 risk is greater, the valuation of European stocks is generally lower than those in the U.S., Houtzager explained. "The risk-reward ratio may be in favor of European equities," he said.
Meantime, some European computer-services stocks have soared as demand has skyrocketed.
Although none is a pure Year 2000 play, key equities such as WM-Data of Sweden and Atos of France have strong futures, and their stock prices reflect it, Houtzager said: "There is a wild boom going on in that sector."
Grabow, for one, said he's worried that investors are underestimating the magnitude of the problem.
Few have recognized the far-reaching impact on "embedded" processors--built-in computer chips that run factory equipment and the like--as well as the infrastructure for utilities providing power and water, he said.
It adds up to a red light for all but the safest havens. The market is "breathing its last sigh," Grabow said, proclaiming confidently, "I am a bear."
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By Greg Burns - Chicago Tribune Staff Writer - March 29, 1998
chicago.tribune.com
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I TOTALLY AGREE WITH GRABOW.
Grabow understands manufacturing & embedded systems VERY well. He acquired and ran a manufacturing company thru a LBO in the early '80's.
I'm a bull for certain Y2K stocks .... until possibly 1st quarter '99.
Market in general ... I'm a bear. I expect MAJOR sector rotation in the near future. My guess is some DOW blue chip profit will be going into selected small caps.
I personally see the CRASH ... either 4th quarter '98 or second quarter '99. A lot depends on how the media handles the Y2K story.
Cheryl |
