Author: A.T.

My friend Jim Halperin has done it again. In his first novel, The Truth Machine, he speculated on what the world would be like — how fried O.J. would be right now (though he didn’t use that example) — if we ever invented a 100% accurate polygraph of some kind. The saga of the book’s publication was as amazing as the book.

Here was a guy who’d never written anything in his life other than one slim tome on rare coin grading. I have a copy. It’s probably biblical in its significance if you’re a rare coin dealer (Jim and his partner are the country’s largest), yet it shows no signs of literary grace whatsoever.

But he had an idea for a book — this truth machine notion — and he just set about doing it. He wrote it. He sent it to all his friends for comment. The first chapter was great. The rest needed work. He rewrote it 20 times. He took a night course in writing. He hired local editors to coach him. All the while, he was running his business and fathering two small boys.

The book got better.

Then one day an actual bound book arrived at my door with a jazzy jacket exactly as you’d expect to see it on the shelves at Barnes & Noble. Jim had hired a jacket designer, contracted with a printer and a distributor — in addition to writing the book, he was publishing it. He printed 35,000 copies, a huge first printing for a first novel. He established a web site so people could read it free and comment.

Then one day he got a call from Ballantine, a division of Random House, offering him a couple thousand dollars for the paperback rights. Jim accepted.

And I am watching all this, from 1500 miles away, somewhat bemused. Everybody wants to write a novel, but who actually does stuff like this?

Then a month or so later, July 1996, he gets another call. Ballantine’s higher-ups have been reading the manuscript. They want him to stop selling the hardcover so they can publish it. In fact, they want to make it their lead title for the fall.

Now I am not just bemused, I am agape. Beyond agape. Agape would be that they want to make it their lead title. Plenty to be agape about, no? But that they want to make it their lead title for the fall is beyond agape to anyone who’s ever dealt with a book publisher. Normally, it takes a year after a novel is finished to hit the stores. They were proposing eight weeks for this one. And they hadn’t even begun negotiating the deal!

Long story short, Ballantine upped its offer from "a couple of bucks" to Real Money, took the remaining 30,000 of Jim’s books, rejacketed them, and raised the price from $19.95 to $24. Thousands were sent free to reviewers and "opinion makers" to get a buzz going. A thousand were handed out at the 1996 Republican National Convention — which is pretty funny when you consider that in the book (as in real life a short time later), Clinton wins reelection.

First Ballantine printing: 150,000 copies. This is surely ten or twenty times the size of the first printing of, say, John Grisham’s first novel, A Time to Kill.

Look for the movie from Twentieth Century Fox.

But none of this will make you live forever. It’s his second novel, The First Immortal, that deals with that. To read the prologue and first chapter, click here.

1. If you ask for “half a cup of coffee,” especially on an airplane, you will get a full cup. The way to get half a cup (60%, actually), is to arch your eyebrows in an unusual way and ask for “just a quarter of a cup.” To get a quarter of a cup, squint as if trying to see something very small and say, “Could I have just a sip — one finger — of coffee? Really: just one finger.” And hold out the index finger of your right hand horizontally, grasping it with the thumb and forefinger of your left hand, as if to put it on display.

2. Never use an S in Scrabble if it doesn’t enhance the score you otherwise could get by at least 15 points (unless you have two S’s, which is rarely the bonanza that it seems). Never use the blank other than to make a seven-letter word, or else to earn at least a 60-point score. Yes, JO, AA, AI, AE are words (and AG and ED are in the latest Official Scrabble Dictionary).

3. It is perfectly all right to eat a full grapefruit. And the best kind to eat are the ones with the thin shiny skins even though they’re harder to peel. (You peel them, because then you can just eat the sections, eliminating the need for a spoon, eliminating the waste, and eliminating the possibility of squirting juice on your tie or your companion.)

4. It is dumb to buy annuities. And yet people keep doing it, in droves. Stop it! (Having bought, though, it’s usually wise to hang on. And console yourself with the knowledge that, while it may not have been your very best alternative, you were a heck of a lot smarter buying the annuity than not saving that money at all.)

It was Friday afternoon, the “w” on my Thinkpad keyboard was in a state of obstreperous revolt (or should I say obswtrewpewrousw rewvolt?), IBM had not rushed me the “Easy-Serve” carton as promised (you get a carton, FedEx it to them, they fix and FedEx back), and I’d been meaning to splurge on an even newer, faster laptop, so . . .

I was all set to spring for an IBM Thinkpad 770, even though it’s almost twice the price, but (a) they don’t make it easy to buy, and (b) it inexplicably didn’t seem to come with a 56K modem like the competition (it still offered 28K).

A call to Dell revealed that El Niño in the Austin area had kept the company’s employees from getting to work that day (literally: the recording said they were closed).

So then I did what I almost always remember to do when all else fails — I called 800-243-8088, a phone number hardwired into my brain from way back in the mid-80s, when the 8088 chip was today’s Pentium II.

It was now 4:23 p.m. Eastern Standard Time. Justin, who answered with minimal branching (with IBM you want to kill yourself by the time you get to a human), said he’d be happy to get a computer to my home 1500 miles away before noon the next day — Saturday. The one I picked required some extra memory to be installed and tested, but they could do that, too.

“How much time do I have before the cutoff?” I asked quickly, figuring it was a matter of minutes. “Until 9 p.m.,” Justin said, although he himself would be there working until 1 a.m.

So he leisurely faxed me the specs, I called back, placed the order, and had my new laptop delivered — with its additional 32MB of RAM installed — at 11:15 a.m. the next morning.

Call for software or a printer cartridge — or a laptop — in the evening and there it is, right as rain, in the morning.

Awesome.

I’m sure PC Connection is not the only outfit that can do this. (They have their warehouse at an airport, which helps.) But in a world of “please listen carefully as our menu options have changed,” 800-243-8088 is a good number to remember.

It was October 2, 1976. General Electric had bid to acquire Utah International for $2 billion. Reported the New York Times:

The largest merger proposed in the nation’s history
will not be challenged by the Justice Department.

This got me thinking. We seemed to have become merger mad. If it kept up this way, where would it lead?

So I wrote an article for New York magazine set in the impossibly far-off future — March 3, 1998, to be exact. (Horrors! I’d be fifty by then.)

Now, like a time capsule, that day has actually arrived. I thought it might be fun to reprint the article here. (To see what really happened, pick up a copy of Fortune‘s famous “500” issue, out in mid-April.)

THE DAY THEY COULDN’T FILL THE FORTUNE 500

NEW YORK, March 3, 1998 — It wasn’t such an awesome decision, really, and it had to be made, so Carol J. Loomis, formerly one of Fortune‘s most gifted writers and now, in 1998, its managing editor, made the obvious choice: They would still call it “the Fortune 500,” even though this year there would be only 479 companies on it.

The day had finally come.

In prior years it had been possible to fudge a little: In 1991 the list had been broadened to include firms based outside the United States; in 1995 nonindustrial companies had been added to the list, where previously they had been accorded their own lists.

But now there was nothing for it, unless you wanted to include some of the Soviet bloc or Chinese state enterprises, a step which Fortune — every bit as much a capitalist tool as Forbes — simply would not take. (Not that the communist firms were really so different from the many noncommunist giants that were government-owned.)

First on Fortune‘s list again this year, it would surprise no one, would be Citicorp, with worldwide assets, expressed in American dollars, of $1.2 trillion. (Fortune had switched from sales to assets in making its rankings when nonindustrial companies were added to the list.) Over the past 22 years, Citicorp assets had grown at a more or less steady 15 percent, right on target. Buried somewhere in that total were this writer’s automobile loan (and 17 million others, worldwide), his mortgage (the lines between savings and commercial banks having long since been erased), and a vast computer network that, with others like it at the seven rival global megabanks, had largely eliminated the use of checks and significantly lessened the use of cash. The same Citibank computer network handled this writer’s brokerage transactions and travel arrangements, prepared his taxes, reminded him of upcoming birthdays and holidays, clipped his municipal bond coupons, evaluated his creditworthiness, and would doubtless have scrambled or unscrambled his eggs for him, as it did his bank statement, had he been of a mind to sign up for the service.

The remarkable thing was that Citicorp had managed to expand so dramatically, swallowing so many other banks and financial institutions in the process, and yet still keep its payroll down to the 50,000 or so who were needed to man the infant operation back in the mid-1970s. Where once there had been fifteen clerical people at a work station, now there was a thumbnail-size silicon chip. Tellers now were mostly electronic. Mail boys had been replaced by robots — beginning as long ago as 1975. The entire margin department of what had once been the brokerage firm of Harris, Upham & Company, files and all, was now contained in a Citibank computer cell the size of a pack of Salems. Almost all of the people on the payroll in 1998 were officers. Several hundred were in the $250,000-plus compensation range.

Second on Fortune‘s list this year would be Aramco, with stockholders on six continents but more than 80 percent of its shares in the hands of the Saudi royal family — which itself had spread lavishly over six continents. Once a largely American-owned oil operation, the global energy combine had most recently acquired a million square miles of Brazilian interior — 640 million acres — which Brazil, desperate to outbid Japan for an assured long-term source of energy, had reluctantly bartered. Valuing this land at $100 an acre, Saudi Aramco had in one falcon swoop added $64 billion to its asset base, putting it, too, over the trillion-dollar mark.

There followed the predictable list of megabanks, multinational energy combines, conglomerates, IBM, and AT&T in much the same order as in 1997. But it wasn’t the rankings so much as the process of growth itself that had started Loomis ruminating.

In a way, she couldn’t complain. Her bank service was excellent; her phone service — miraculous (it now cost only 35 cents for the first minute to call from New York to Tokyo, although the rates to Westchester and Long Island were still somewhat higher). Her hamburgers were uniformly nutritious and quality-controlled, her brokerage commissions were cheaper than they once had been, and many of the companies she dealt with, although subsidiaries of one or another giant, were left largely on their own so long as they produced adequate profits.

And yet she was troubled. Somehow it struck her wrong — and had as long ago as 1976 — that Marquis Who’s Who, the snob-appeal company, was just another arm of ITT; that Dannon Yogurt had sold out to multibillion-dollar Beatrice Foods; that Halston was part of Norton Simon; that Welcome Wagon was part of Gillette; that Simon & Schuster was part of Gulf + Western; that Indiana Farmer magazine was one of the American Broadcasting Companies. What had really killed her was when, years later, L. L. Bean had been merged into Spencer Gifts, a division of entertainment octopus MCA.

The day The New Yorker, too, went to MCA — MCA had long been looking for a profitable magazine to acquire — had been even more depressing. Loomis had canceled her plans for a weekend out in Long Island’s sludge-free zone and just moped around her apartment.

This relentless conglomeration troubled Fortune‘s managing editor, but she couldn’t say for sure that, on balance, it had been a bad thing. As for the executives who had built and now directed these giants, she considered most of them brilliant, ethical, tremendously hardworking men and women. They had played by the rules — and won.

Part of the problem, Loomis reflected, was just that — competition. Competition in industry was not like competition in an athletic league. In an athletic league, teams are of equal size and get to start out with a clean slate at the beginning of each new season, no matter how badly they have been clobbered. In a competitive economy, the strong tend to get stronger and the weak tend, over the long run, to go out of business.

The brokerage industry in the 1970s was just one example. In the spirit of free enterprise, the U.S. government had stepped into the securities industry to require price competition. As a result, commissions were cut, weak firms were liquidated or merged into stronger ones, and what had been a highly fragmented, largely inefficient industry became by the end of the decade a handful of efficient firms. (Their absorption in the following decade into still larger financial concerns simply completed the process.)

The same thing happened with the airlines in 1979, when the government lifted its price and route regulation, only there had been fewer companies in the industry to begin with.

And it happened throughout the economy generally when the government began cracking down in earnest on what the courts had come to define as “tacit price fixing.” The crackdown — at first — was hailed with great enthusiasm by all but the tacit price fixers themselves. It was given much of the credit for slowing inflation to a crawl — but then most of the blame for plunging the country, and with it the rest of the world, into depression. The Econolypse of ’81, it was called, although it actually stretched well into 1986. Truly aggressive competition had led to truly horrendous bankruptcies, which in turn led to a self-fulfilling lack of confidence in the future.

Vigorous competition was a requisite for a healthy economy, Loomis reflected, but winners posed a bit of a problem.

She recalled a ditty Malcolm Forbes had spotted which illustrated the problem neatly:

You’re gouging on your prices if You charge more than the rest.
But it’s unfair competition If you think you can charge less.
A second point that we would make to help avoid confusion:
Don’t try to charge the same amount — that would be collusion!
You must compete. But not too much, for if you do, you see,
Then the market would be yours — and that’s monopoly!
— R. W. Grant, Tom Smith and His Incredible Bread Machine

It wasn’t only competition, by any means, that had led to a world of 479 giant enterprises. It was largely the process of conglomeration — of old family managements selling out for estate reasons; of young entrepreneurs selling out to cash in big; of financially straitened companies merging into solid ones (particularly during the Econolypse); of acquisitive managers spying opportunities for synergy (at best) or for easy growth (at least); and of empire builders collecting assets as Midas once collected money.

My God, she thought, just look at what had happened! In the last three decades, small-town banks by the thousands had become BankAmerica branches (81,000 in all on six continents). Luncheonettes and family delicatessens had folded in droves under competitive pressure from McDonald’s and McDeli’s (two of eleven McCorp Corp. subsidiaries), from Jack-in-the-Box (a Ralston Purina subsidiary), and from Burger King (a Pillsbury subsidiary). Local groceries had given way to Grand Unions or to 7-Elevens. (Along with Gristedes and many others, the 7-Eleven chain was even in 1976 an arm of Southland Corporation. Grand Union was a branch of the British-based Cavenham empire. Abroad, Southland and Cavenham were partners.)

Small proprietorships had become branches of subsidiaries of divisions of subsidiaries of conglomerates. And this was before taking any notice of the interlocking directorships between the sprawling giants.

What some called diversification Loomis had as long ago as the mid-1970s thought of as corporate dilettantism. General Tire operated radio and TV stations and an airline (Frontier) and bottled Pepsi-Cola; General Electric was acquiring Utah International, a California-based mining conglomerate with major interests in Australia; General Motors grew coffee in Brazil; General Mills owned Parker Brothers; Parker Pen owned Manpower; Manpower operated service stations under contract to Shell; Greyhound, once a bus line, was in the meatpacking and computer-leasing businesses; LTV, the steelmaker and aerospace firm, was a major factor in meatpacking, too; and Esmark, the largest meat packer of them all, was making dental supplies and panty hose and drilling for oil in the North Sea.

In 22 years the pace of conglomeration had, if anything, picked up. Take publishing. By 1976, many small newspapers had been consolidated into chains, such as Britain’s Thomson Organization (148 newspapers and 138 magazines); most airline magazines had been consolidated into a single publishing company, East/West Network; and a company called Professional Sports Publications was putting out programs — once highly local affairs — for no fewer than 27 pro teams. But in 1983 all three of these — the Thomson chain, East/West, and Professional Sports — were picked up in rapid succession by publishing behemoth McGraw-Hill.

Rival publishing giant Macmillan, meanwhile, after a brush with bankruptcy in 1982, had been acquired by Mobil/Marcor, the oil-and-retailing giant, and had, with this new backing, gone on to acquire MCA, Morton Salt, and Motown Records. Analysts began to wonder whether strategic planners at Mobil/Marcor/Macmillan had decided, in a moment of corporate whimsy, to go after only M’s — when without warning the company turned around and acquired Belgium.

(Why not? The Belgians were a practical people, and Mobil’s terms had been good. If countries could own companies — as, for example, Britain owned British Steel or Iran owned the Iranian National Oil Company — why couldn’t companies own countries?)

Carol Loomis closed her eyes. All she could see were corporate logos, corporate slogans, corporate letterheads. Then she had a vision of a Gulf Stream IV zooming across the sky at supersonic speed with Harold Geneen, still deferring retirement, waving from the window. Geneen, whose ITT would be nineteenth on this year’s list, with assets of $122 billion, was one of the original, and most adroit, conglomerateurs. Charlie Bluhdorn was another, and he, too, had not let up. A vigorous 72, he had in the past eight years added to Gulf + Western, among others: Perdue Farms, the Lefrak Organization, Federated Department Stores (which included, as of 1976, Rich’s, Bloomingdale’s, I. Magnin, Burdine’s, Bullock’s, and Filene’s, and had subsequently added Abercrombie & Fitch, Franklin Simon and Zayre), Bally Manufacturing, and the E. & J. Gallo Winery. All had gone kicking and screaming to Gulf + Western, which the average man on the street still mistook for some kind of far-flung railroad. Financiers marveled at how Bluhdorn, cursed as always with a pitifully low stock market multiple, had managed to pull off these acquisitions, but pull them off he had.

The antitrust division of the Justice Department, which enjoyed a confidence rating of 8 percent of the public even in 1976, could not begin to cope with the conglomeration of the world economy. Its big effort of the late 1970s and early 1980s, the crackdown on tacit price fixing, valiant though it was, had brought on the Econolypse and, with it, a spate of colossal desperation mergers. (It was the Econolypse that finally cemented Chrysler to Volkswagen, for example.) To the extent Justice wasable to keep firms from acquiring related concerns, it merely forced them to go outside their fields of legitimate expertise in search of growth.

Beyond that, lawyers in the Justice Department were ridiculously outnumbered and undercompensated vis-à-vis their corporate counterparts. And much of the conglomeration had been achieved abroad, where U.S. antitrust regulations did not apply. A favorite merger haven, particularly after Mobil acquired it, was Belgium. Just as U.S. firms had once favored Delaware as their state of incorporation, so now multinational firms tended, for technical purposes anyway, to be headquartered in Belgium.

As for other regulators, well, they had gradually been made to see private industry’s point of view. For example, there had been the marathon bargaining session late into the night of March 3, 1983, when the bankers agreed, for their part, not to foreclose on the cities, and the President agreed, for his, to see to it that the banks be allowed to cross state lines. (“The President is still the President,” opined one dismayed columnist, “but Citibank’s Walter Wriston, apparently, is chairman of the board.”)

Conglomeration, competition, automation, economies of scale, corporate elephantiasis . . . in 1964 there were 1.2 million egg farms in the United States (statistics like this stuck in Loomis’s head; she didn’t know why), and by 1976 the ranks had been thinned to 200,000, of which 4,000 accounted for 90 percent of production. By 1997, seven major producers accounted for 98 percent of total production, and all but one were subsidiaries of larger firms.

It was all damnably efficient, damnably rational, and Loomis found it damnably depressing.

She turned her attention back to the list. There were more than 479 companies in the world, she knew she would have to explain in her preface. There were still tens of thousands of firms that ranged from one-man shops up to what once would have been considered a fairly good-sized company. But the gap between these and the 479 giants was enormous. It would have looked silly to put even a company with $248 million in assets on the list, when the next largest, United Immortality (hospitals, nursing homes, artificial organs, blood banks, sperm banks, vitamins, pharmaceuticals, and health foods) — number 479 — had assets of nearly $7 billion.

There were still small companies, and any man or woman with enough gumption and modest backing could still try to build his or her own business. But as the giant corporate sector of the world economy had ballooned, the independent entrepreneurial sector had shrunk nearly to nothing as a proportion of the whole.

Loomis had worried over this problem on and off for 30 years and had never come up with much of an answer. The problem was so abstract, and corporate momentum so overwhelming, that no one had done much of anything at all — and this was the result. And Carol Loomis was not even sure that it was bad. But it troubled her.

#

PS – Three weeks after the foregoing appeared in New York magazine, in December 1976, New York was itself, without warning, acquired by media conglomerateur Rupert Murdoch.

DEFLATION

Recently, I sketched a few of the big positives and negatives — four each — I thought could affect the market. Writes Roger Dankert: “If worldwide automobile production capacity in the year 2,000 is 80 million cars/year, and effective demand is 59 million cars/year (according to morning Baltimore Sun), who loans the money for customers to buy the extra 21 million cars or do they not get made? Of course prices can fall somewhat to help clear the market, but more likely production will have to be shut in. I don’t see deflation or excess capacity on your list. Do you have an antidote?”

Yes: Growth.

But you raise an important and completely valid point.

On the one hand, of course, factories don’t have to produce everything they’re capable of for companies to stay afloat. And the least efficient plants can get shuttered — one or more auto companies could get swallowed up and “downsized” by the acquirer. That wouldn’t be the end of the world.

But the real question is, how good a job will the world do of providing the economic climate for increased demand? Imagine all the Russians and Chinese, etc., who would like cars. If these economies can get onto (or in the case of Asia, back onto) a strong growth path, the demand will be there. If not, it’s going to be some tough times.

My own feeling is that when push comes to shove, we will not go down the path of trade wars, protectionism, etc. that could lead to a global recession, deflation, pushing-on-strings and all the other rotten stuff that could go with it. But you’re right: it’s a possibility.

* *

THE SOCIAL SECURITY PROBLEM

“Just a quick comment regarding the Social Security Number ‘problem’,” writes Michael Rosner. “Since these ‘numbers’ really don’t count anything, there’s really no reason that the digits have to be numbers. By using letters as well, the number of sequences available becomes (26+10)^9, or over 101,000,000,000,000. Not a likely population to be reached any time soon. Even excluding the letters ‘O’ and ‘I’ to avoid confusion with the numbers ‘0’ and ‘1’, the number is still over 60,000,000,000,000. Plenty of room. Of course, all of our legacy programs will need to be adjusted to allow for Social Security ‘Alpha-Numerics.'”

Clearly this problem is far off and, in any event, nothing compared with the Year 2000 problem we’ve been talking about.

* *

CROATIA

“Incidentally,” I quoted Dan Scott, “most Bosnians speak Serbian, a relative of Croatian.” Now comes Tomislav Peric: “I’m sorry, but Dan Scott is wrong. The Bosnians are now attempting to ‘create’ their own language. Only linguists will decide whether it is a ‘real’ language. Prior to that, Bosnians (Muslims and Croatians) spoke Croatian. They used, and continue to use, Latin letters such as used in English. Muslims and Croatians are a clear majority, about 70%. They do NOT speak Serbian. The Bosnian Serbs speak and write Serbian, using Cyrillic letters. P.S. My family has lived in the same Bosnian village for 200 years.”

Tomorrow: The Day They Couldn’t Fill the Fortune 500

Making the Internet rounds, in case you missed it:

“The Jewish people have observed their 5758th year as a people,” the Hebrew teacher informed his class. “Consider that the Chinese have observed only their 4695th. What does this mean to you?” After a reflective pause, one student volunteered, “Well for one thing, the Jews had to do without Chinese food for 1063 years.”

(With respect to Jewish humor generally, and the Jewish parrot joke in particular, if you missed it, please click here.)

From William Richmond: “Tell Walt Lamphere that I fail to see how getting my money out of the markets now is going to help me after 2000. If the financial meltdown is going to be so severe that our economy and government collapse, the dollar won’t be worth anything anyway. And as for buying gold and silver . . . Let’s just say that I think people will scoff at the idea of using heavy metals as a means of exchange after the so-called financial apocalypse. It’d be too inconvenient.”

From Thorsten Kril: “If there are enough people like Walt, it may indeed make sense to buy silver now. And then sell it in December 1999, just in time before the big crash of a couple of ATMs and VCRs. Wouldn’t be too surprised if Warren would do just that.”

From Wayne Arczynski: “If the world’s banking system were to collapse due to the year 2000 problem, do you actually believe the governments would allow Warren Buffett or anyone else to take their silver? Perhaps you should be looking at the true hard currency for the year 2000, Satellite Bandwidth.”

A.T.: And here I thought frequent flier miles were the true hard currency. (And no, I don’t think the banking system will collapse, but I do think there could be — could be — a recession, lower profits, lower stock prices.)

From Dan Nachbar: “I can’t resist adding my 2 cents. The Y2K problem has been well known within the computer business for decades. I first heard of the Y2K problem when I was an undergraduate computer science student in 1981. My database teacher, a chap named Mike Stonebraker, predicted in lecture that at least one Fortune 500 company will go out of business because of a Y2K problem. Today, I think his assessment is probably right. I do not believe that broad economic chaos will result. Most healthy companies will figure out a way to fix the problem or limp along until they get it fixed. But there will be some companies that simply don’t have the cash or credit on hand to rewrite all of their software from scratch. Their management will be like deer in the headlights. To their credit, the SEC realized that these cash poor companies will prefer to keep quiet about their troubles. So, the SEC recently issued new disclosure guidelines for publicly traded companies with regard to Y2K (see http://www.sec.gov/rules/othern/slbcf5.htm). So watch those annual reports for a whole new set of red flags.”

From Dennis Peterson: “Just read your column about that ‘tongue-in-cheek leap year computer problem.’ Actually, the whole leap year issue is causing some concern in Y2K circles. The problem is, most programmers knew that every 100 years it’s not a leap year — but many of them didn’t know that every 400 years it IS a leap year. So on Feb 29, 2000, we may get another round of failures.”

From Iowa: “I forwarded your column to a friend who works programming computers for banks, and here is his reply: ‘Yes, there will be some problems, but the rest of the hype is hogwash. We functioned without computers before and some businesses may have to until they fix their problems. The gov’t is probably going to be in the worst shape. This is going to be survival of the fittest. The businesses that solve their Y2K problems now will survive. Those that don’t will die off. Where I work, we installed our Y2K upgrade last September. The bank-side will be installing soon. If people are worried about losing their money, make sure they go to a financial institution that uses M&I software. If the general public is smart, they will have all of their finances clearly documented by 12/31/99. This way they can prove what’s in the bank should something go wrong. Why else would we get a bank statement? People with more assets will have to do more work, but it is a bitch to be wealthy! I had to reply, because I am tired of hearing about it. If the Y2K brings us to the end of the human race, then we didn’t deserve to be around.'”

A.T.: Why do I not find this more comforting?

From Howard, who works for a company that’s in the Year 2000 business: “There was recently a request to make Dec. 31, 1999 (a Friday) a trading holiday so that companies could run the programs to close the 1999 books while still in 1999. Apparently, the request has been denied. Well, the financial industries are ahead on fixing the problem, but this decision seems like a lot of hubris. If there are still problems in the computer systems, there is a much greater chance that running the year end closing programs while the current date is still in 1999 will succeed than waiting until the year 2000 to run them. It will be interesting to see.

“If you read the various computer press you regularly see things that indicate that even now somewhere between 50-75% of companies have NOT yet begun to fix their code. Conservative estimates easily have 20% of the companies not completing their conversions by 2000. So, here is a question, what would happen if a random 5% (random because we will not really know who fixed their Y2k problem until we roll into 2000) of publicly traded companies (and non publicly traded companies) cannot do business coming into 2000? This is not a doomsday scenario, but a fairly conservative possibility based on people just not having stepped up to do the work. GM has trouble when one of its suppliers is on strike, what happens if 5% of its suppliers cannot ship. Seems like we could be in for deep trouble.

“Personally, I think I am going to ‘time’ this market as we head from 1999 to 2000. Seems like there is a much greater chance that the market will be tumbling as we head toward and into 2000 then of having a spectacular year. Do you have an opinion on how an investor might want to deal with the uncertainty of this problem? Will public discussions on this be productive as year 2000 approaches or will they be more likely to generate a run on the market? Do you consider taking the possible Year 2000 problems into account in an investment strategy a good idea or just another attempt to time the markets response to an externality that we cannot be sure about?”

A.T.: Well, public discussions will be productive to the extent they galvanize everyone into sensible contingency plans. Businesses and government agencies need to think through what their own software problems might be and how to minimize the impact of glitches or delays others might cause them. Individuals will be saving their paperwork and perhaps building up a little reserve of the type they might if there were fears of a power outage. I’m 95% confident there will be no horrendous problems, but one reason for that is that people will make these kinds of plans and will back up their data even more carefully than usual at the end of 1999. And so on.

I also think that, with the market at record highs, it would be unwise to be in stocks on margin (if you have a car loan and own stocks, in a sense, you’re in on margin). I also think that this is a good time to be sure you have adequate liquid emergency money (what if there’s a flood? a medical problem? a job layoff? your child needs a lawyer?) — which you should always have before you invest in stocks. “Timing the market” is impossible to do successfully over the long term, especially if you have taxes to pay on your gains in order to do it (whatever advantage your brilliant timing provides is likely to get more than eaten up, over the long run, by the drag of those taxes). But that doesn’t mean you should always have 100% of your assets in the stock market no matter what. Between Asia, Year 2000 and Iraq, I’m not sure it’s all smooth sailing ahead. I certainly don’t have all my money in stocks. Then again, there are powerful positive trends in place as well: see Where Are We Now?.

Given the low interest rates, people figure money has to keep going into the stock market — where else could it go? And there’s a lot to that. But one place it could go is to paying off debt. And if the market should ever drop sharply, some people will seek the comfort of fixed-rate guaranteed investments . . . at just the moment stocks are beginning to look attractive again.

Anyway, the short answer (as you can see) is: I don’t have a clue. If you’re young and have begun putting $200 or $1,200 a month into the market, directly or via an index fund — keep it up! Over a lifetime, you’ll be glad you did.

About the only original idea I can add to this discussion is the need we will all soon feel for words that rhyme with millennium. (Surely you will not be allowing the moment to pass without sharing poetic sentiments with your loved ones.) I hereby offer you plenty o’ ’em, as in:

Will there be problems in the millennium?
Probably not!
But there’s always a chance there could be plenty o’ ’em.

(Caused, I might add, by shortsighted programming long before Pentium.)

“I love the replicator! Now, in order to make this happen tomorrow rather than in ten years, you need to get the bar code scanners in the homes of millions. The potential market is so huge that the supermarket checkout scanner manufacturers would probably be willing to cut a deal on the price of a home version. Also, nationwide trained delivery people would eat up a lot of capital. Why not leverage the delivery people who go every day to every door in the country already? Yes, US Postal’s finest men and women in blue. The USPS is quite entrepreneurial as government agencies go, and their cut of the revenue from this operation might allow them to start delivering envelopes for free, which, together with their new delivery products, would keep the USPS vibrant and relevant in the age of electronic communication.” — Andrew Hoppin, UC Berkeley

“I think the package delivery system suggested by your reader is a great idea! I like the overhead trolley system the best. Imagine how much fun children can have smacking at the packages with sticks as they come floating by. It’ll be like a giant piñata system for kids! Or even better, if you do run out of shampoo, why not go out to the end of your driveway and grab one of the boxes coming by! You can look inside for some shampoo and if nothing is there, you can put it back on the trolley. But, if you do come across some shampoo, just squeeze out a little, and put it back, no one will miss a little dab of shampoo!” John T.

“Boy do I love those two ideas — the replicator/Internet ordering/FedEx delivery idea and the refrigerator & freezer mail slots. Now that’s service. I’m not very old (33), but I do remember we had an insulated metal box by the back door to receive milk deliveries. The milkman came at an early hour, and the milk stayed cool until Mom got up and retrieved it. Sometimes the best new ideas are old ones. Now what can you do to make them reality? BTW — which mail slot does the Domino’s pizza get thrust into — maybe we need a warming oven slot too? (I’ve heard that you can order pizza over the Internet now.)” — Mary Longacre

You see what makes this country great? You start with a harebrained idea (mine), and through careful analysis and flashes of inspiration, tweak it until it becomes the next Tickle Me Elmo.

“I have a comment about your piece on finding the buyers. I thought the market makers were charged with and responsible for providing an orderly market for their securities. That means buying when everyone is selling and selling when everyone buys. To offset this risk, they charge (often criminal) spreads on these issues and hedge their exposure with options. (And they also run customers’ stops and limits to get more order flow, but that’s another story.) A good market maker shouldn’t have to halt trading in a stock if he’s providing adequate liquidity. And gaps should be kept to a minimum as well, except for the ones associated with news breaking when the market is closed. Am I missing something here regarding the role of market makers?” — Loren Siebert

Well, there are a couple of distinctions to be made here. The first is between “specialists” and “market makers.” The New York Stock Exchange, which is an auction market, works much as you say (except perhaps for the criminal part). Because there’s only one specialist firm for each stock — a very privileged position — specialists do assume the responsibility you describe. And some fulfill it more faithfully than others.

In a dealer market, on the other hand, there are as many market makers in a stock as want to be. They have no obligation to preserve an orderly market; they just do their best to offer attractive prices (to snag the trade) while making as much money as they can.

The second distinction is between routine trading and “an event.” You will recall that the questioner asked, When a stock is shocked by bad news and there is a torrent of sell orders, where do the market makers find all the buyers?

In routine trading, there is some stock at 40-1/4, say, and a seller comes in with 20,000 shares and there are no buyers at the specialist’s post (those round “islands” on the floor of the New York Stock Exchange, like atolls in the Pacific), the specialist will buy the 20,000 shares at, say, 40-1/8 or 40. He’s put up $800,000 of his own money. If he’s lucky, a buyer will soon appear to whom he can sell the same shares back for an eighth of a dollar more — he’s made $2,500 on his $800,000. If sellers keep coming without buyers, he’ll keep inching the price down in an orderly way as he buys more. Later, he’ll sell back the stock he’s acquired. He may have to do that at 38-1/2, if the sellers have just kept coming and coming and it’s taken a while for buying interest to show up — in that case he might have acquired 100,000 shares at an average price of 39-1/2 which he sells at an average price of 38-1/2 for a $100,000 loss (I’m just making these numbers up, to give you a sense of it) . . . but don’t cry for the specialists. They do OK.

The same thing happens in reverse if there are buyers but no sellers. A specialist may have shares in “inventory” he can sell. But once those are gone, he keeps selling shares he doesn’t own, knowing he will soon be buying them back.

But what of a sudden influx? The specialist’s obligation to make an orderly market does not extend to suicide. If there’s a “torrent” of sell orders, he will notch the stock down in a rapid series of tiny steps . . . or if there’s a large imbalance, he may ask for a brief halt either for news to be disseminated and/or to give potential buyers a few minutes to appear. Faced with orders to sell 2 million shares, the specialist is not going to buy them at 40 or even 36 and risk $80 million or even $72 million of his own money. He goes through the process of issuing “indications” that I described. Pretty soon, the market has found its new, lower level, and then the orderly trading resumes.

So the answer to your question is . . . yes and no.

#

“Please elaborate on the concept of the ‘specialist’ at the NYSE as mentioned in your column today. Does someONE actually have responsibility over each stock traded on the exchange? I guess I don’t quite understand the human dimension behind all the numbers.” — Mark

Well, it’s not one man or woman — and if he or she is out sick, the stock doesn’t trade. But close. Specialist firms tend to be quite small, and actual people do stand at their posts all day, heavily wired with their now-computerized “book” of good-til-canceled buy and sell orders, making a market. Each NYSE stock is traded at just one “post,” with just one specialist firm. Each such firm typically has charge over something like 10 to 40 stocks (don’t hold me to the exact number, but that’s the ballpark).

“Dear Andy: Please write a column urging stockowners to pay attention to the proxy statement booklets they get this time of year, and then vote their shares accordingly. I know you once wrote that you just tossed the proxy statements (and I presume the proxy ballot). Please reconsider. There really are important things being proposed. As a matter of fact, you could sponsor resolutions yourself. All you need is $1000 of stock held for one year.” — Carl Olson, Chairman, Fund for Stockowner Rights

Thanks, Carl. Good point. But do you have any anecdotal evidence or otherwise of cases where it’s made a difference? With so few people voting (and most stock held by their pension fund), if a measure gets 3% or even 23%, does management really take note?

To which Carl persuasively replied:

“Dear Andy: Here is some good data for you. As you may know, the SEC is considering a proposed rule change to make it much harder for stockowners to propose items for votes at annual meetings. A massive battle is on. You can see it at the SEC web page www.sec.gov under the proposed rules, including hundreds of comments (including mine as chairman of Fund for Stockowners Rights). This is a quote from the SEC presentation:

Based on the information provided to us by IRRC [Investor Responsibility Research Center in Washington, D.C., which analyzes issues to advise stockowners how to vote], we understand that in the period January 1, 1997 to date [July], 19 proposals obtained shareholder approval out of a total of 234 submitted to shareholder votes. Nine were proposals to repeal classified boards. Nine sought redemption of companies’ shareholder rights plans. [Poison pills]. One focused on ‘golden parachute’ payments to executives. Even if a proposal does not obtain shareholder approval, however, it may nonetheless influence management, especially if it receives substantial shareholder support. A proposal may also influence management even if it is not put to a shareholder vote. We understand that in some instances management has made concessions to shareholders in return for the withdrawal of a proposal.

“In my own case, I proposed that Occidental Petroleum Corp. adopt a confidential voting policy. In 1991 it got 54,000,000 shares in favor; in 1992 it got 71,500,000, and in 1994 it got 111,400,000 (versus 93,000,000 against). The board finally adopted a watered-down one. The same thing happened at The LTV Corp. Oftentimes it takes a multi-year approach in order to build support. Another example is the Fleming Companies (food wholesaler). Another stockholder has been able to have passed proposals in both 1996 and 1997 to eliminate the poison pills.

“This coming season of annual meetings has a lot of exciting matters.

“1. At Occidental Petroleum and LTV, I have proposed that the stockowners should be told how much financial backing the auditors have for their opinions. You may have seen that the Big Six now have LLP after their names. This means that the individual partners are NOT liable for the misdeeds of the other partners. Thus, for the Big Six, security in the amount of $3 billion to $5 billion has been removed from the stockowners of an audited firm. We ought to know. This issue right now is up for an appeal to the full SEC.

“2. At AT&T, a permanent confidential voting policy.

“3. At Lucent, GM, Ford, and BellSouth, an anti-slave labor policy (not just sweatshop, but real forced labor, such as the massive ‘laogai’ system in China that Harry Wu is exposing). ”

OK, Carl. I’m not sure I’m against slave labor, but I’m no fan of poison pills. I’ll try to vote more often. Keep up the good work!

(This is a joke. I am against slave labor.)