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Where's the millennium bug?

Who would have thought that Wall Street would forget the Y2K bug even before the arrival of the new millennium? The spectre of the bug was supposed to grow as we approached the year 2000. But the bug has almost disappeared, at least from the minds of stock investors.

Look at the way investors in the US stock bazaar reward the shares of companies that are most likely to be bitten by the Y2K bug. Some of the biggest winners in the past one year have been companies that we thought would get most affected by the year 2000 computer problem-- a problem that would arise if computers roll back to the year 1900 on January 1, 2000.

So, has the Y2K bug been completely eradicated? Perhaps not. A few strains of Y2K may still be hiding in personal computers or automatic appliances in American households or the computer systems of US corporations. But the average US investor does not seem to care.

Consider this: the NASDAQ, a composite index of technology oriented industries, is up 113 per cent in the last 13 months. As much as 76 per cent of NASDAQ's market capitalisation is based on sectors which are most likely to be affected by the Y2K bug, such as banks, insurance companies, telecommunications, computers and Internet-related companies. In the first 10 months of this year, NASDAQ is up 38 per cent. In contrast, the Dow Jones Industrial Average is up less than 16 per cent. And Standard and Poor's 500-stock index is up just 10 per cent since the end of last year.

Some people will argue that investors are buying the shares of high-tech industries because they think that if the Y2K bug affects the US economy, the demand for the expertise of high tech companies -- to debug the economy -- would rise. For it is the same people who created the Y2K bug that would be called to control the crisis.

I think they over-emphasise the point. A large number of stocks that have been rising are Internet-related stocks. Imagine what would happen to the sale volumes of web-retailers if 20 per cent of all computers in the US suffer from the year 2000 glitches, and they shut down for a week or two? The dot.coms, the e-tailors and the e-fotainment companies would virtually cease to exist for a fifth of their market. That's like saying all the markets in western India suddenly close down for trading in, say, wheat!

Another potential victim of the Y2K problem is banks. Surveys show that many people want to increase their cash holdings around the end of the year, just in case their ATM machines get infected by the bug. Has that deterred investors from buying bank stocks? No. In fact, they are quite bullish about banks stocks. In the past three weeks, the Standard and Poor's Bank composite index has jumped over 20 per cent. Despite the fact that many of these banks are still recovering from the South East Asian financial crises, some experts think that stocks of banks are under priced!

Banks in the US are highly technology dependent, and are likely to suffer a lot due to any technology problem. The mystery of bank-related stocks is that you may not know anything about their financial problems till they are in deep trouble. In an economic boom, banks get far more lax in their lending practices than during a recession. The US economy is passing through its longest peace-time economic boom in this century. So bank-stocks may not be a good bet in this bullish market.

Some will argue that investors have gone bullish on banks because of the US House and Senate have dismantled the Glass-Steagall Act. Consequently, banks, insurance companies and investment banks are now free to enter each other's area of business. But the law has been so diluted over the years that its passing away is unlikely to have much impact.

So why are investors not afraid of the Y2K bug any longer? Perhaps, high Y2K compliance of banks and investment companies has increased their confidence in these stocks. Or maybe investors have so much confidence in the long-term prospects of the high-tech industries that they are willing to take minor hits arising from Y2K type problems in their stride.

Neeraj Kaushal, a former senior editor of The Economic Times, now lives and works in New York.

Neeraj Kaushal

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