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Wall Street holds its breath

U.S. investors looking to limit their exposure to Y2K-related risks have determined that there's no place like home.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
5 min read
U.S. investors looking to limit their exposure to Y2K-related risks have determined that there's no place like home.

Fears of the Y2K bug have depressed some foreign stock markets, with trading volume shrinking by an estimated 30 percent and several initial public offerings in Asia and Latin America being withdrawn.

In the United States, however, there has been no broad sell-off by investors worried that the financial establishment will be crippled by computer failures.

Although it's too soon to say what might happen when the clock starts ticking down in December, Y2K damage so far has largely been limited to Year 2000: The cost of fear individual cases of companies reporting that sales are down because customers are tackling the bug rather than buying new hardware or software.

For instance, IBM last month announced that first-quarter earnings for fiscal 2000 would be flat or slightly below the first quarter of 1999. The reason: a slowdown in mainframe computer sales as customers concentrate on zapping Y2K bugs.

The following day, IBM stock plunged about 20 percent on the news, sending the entire Dow Jones Industrial Average into a nosedive.

Investors eventually shrugged off their concerns about IBM and the stock markets overall, reflected by the fact that the Dow and the Nasdaq Composite Index are now hovering at record highs.

Investors' blas? attitude is partly the result of the financial industry's extensive Y2K testing and remediation efforts.

"The biggest thing you're concerned about is that your data will be accurate. If it's not, then all your calculations will be wrong, and that can be catastrophic," said Bill Bone, program officer for the National Association of Securities Dealers' Year 2000 project. "You also want to make sure all your systems are working, like computers and the facilities and infrastructure."

Billion-dollar repair job
To accomplish those goals, the industry has spent about $5 billion, said Margaret Draper, a spokeswoman for the Securities Industry Association (SIA). But the work hasn't stopped: More testing will take place through the New Year's weekend.

The Securities Industry Association's John Panchery tells CNET News.com TV that the U.S. markets are ready 
John Panchery
Last spring, the SIA conducted a Y2K readiness test with 400 brokerages, dealers, exchanges, and financial utilities. The test simulated a complete trading cycle, and "we passed with flying colors," Draper said. "Of all the 260,000 expected results, there were 0.002 percent Y2K-related problems." The glitches were date-related, ranging from early settlement of some trades to incorrect dates listed on research reports.

The trade group also commissioned a study to gauge investors' concerns regarding Y2K.

Conducted by Yankelovich Partners, the study found that just 12 percent of the 803 participants were "very likely" or "somewhat likely" to pull their money out of the stock market.

"Investors aren't believing the hype of Y2K. The number of people who are planning to take their money out is a very small pool," said Louise Barbic, associate director of research for Yankelovich.

That sentiment was shared by James Cloonan, chairman of the American Association of Individual Investors.

"Y2K is a pretty low profile thing with our members," Cloonan said. "Generally, people feel there may be a few things to go wrong, but that it'll be fixed in a day or two."

The markets will have a couple of days to digest any problems.

The exchanges will close early on Friday, December 31, with the trading day ending at 1 p.m. ET, said Rich Adamonis, a spokesman for the New York Stock Exchange. When the clock strikes midnight, and potentially unleashes the Y2K bug, technicians will have two full days to tackle any problems.

Even if the problems are more intractable, the Yankelovich study found that investors are confident that remedies will be found fairly quickly. Almost 60 percent of those surveyed believed that the industry would resolve any Y2K glitches within the first month, and 42 percent of those investors who planned to take money out of the markets said they will reinvest within the first quarter.

Foreign concerns
Outside of the United States, the news is good and bad: Wary investors have shunned some markets, but that has created an opportunity for bargain hunters.

Nasdaq's Patrick Campbell assesses the investment impact 
Patrick Campbell
Investors are more fearful of leaving their money in foreign markets for two reasons: They perceive that foreign exchanges and economies are more vulnerable to the bug, compounded by the inherent risk of investing in emerging markets, said Jay Pelosky, global emerging markets strategist for Morgan Stanley Dean Witter.

"We have already seen an impact on the liquidity, pricing, and index levels in the major foreign exchange markets for the G3 currencies [euro, yen, and dollar]," he said. "These markets, which are the deepest and most liquid, have contracted by 30 percent in trading volume because of Y2K concerns."

The markets for new issues in Latin America and in Asia outside of Japan also have been affected.

According to Pelosky, "We estimated there was $15 billion in non-Japan Asia equity issues planned from September 1 to the end of the year. We think about 20 to 30 percent of those IPOs have been pulled from the market."

Latin America, a region already suffering from a lack of liquidity and a weak IPO pipeline, got hit with a double whammy as demand for new issues further deteriorated, Pelosky said.

Three-month money market instruments in some emerging markets also have been hit, Pelosky said. The issuers of these instruments are paying a premium of 30 basis points (or 0.3 of a percentage point) to attract investors who are hesitant to lock up their money through January.

Pelosky, however, believes that cash may soon flow back to these markets.

"Several large banks have fiscal years that end on November 30, and the hedge fund community has sizable cash reserves," he said. "They may want to reposition themselves before the end of the calendar year...It makes more sense to take on risk when you have 12 months to work it off [rather] than one month."

As a result, Pelosky said, "We think this cash buildup makes it quite possible we'll have a rally toward the end of the year." 

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