NW - I mentioned the economy and 'slowdown' the other day in my post to you. Here are some reasonable comments on the economy from Nancy Lazar in this week's Barron's. Now some will argue that the 'importance' of tech in a firm's strategic arsenal precludes a cutback, but I guess that is what 'makes markets' <ggg>.
John
Q: Would you characterize the runup in tech stocks as a bubble?
A: I don't know if I would call the tech boom a bubble, but I believe very strongly that we are experiencing a cyclical slowdown in tech, which will last longer and be potentially deeper than expected. A simple point to make is that tech is cyclical.
Q: A point people seem also to have forgotten.
A: If anything, technology is more cyclical today than in the past.
Q: Why is that?
A: It's a bigger share of capital spending. If companies have to cut back on capital expenditures, it is more difficult today not to cut back on tech. In the old days, when tech was 5%-10%-20% of your cap-ex budget and you had to cut back, you could leave tech alone. Today, tech is approaching 50% of cap-ex and that makes it more vulnerable to a cyclical slowdown, not less. Also, a lot of the boom in tech has been financed by debt. Nonfinancial corporate debt has been growing very rapidly for two years, 13% for two years. I can't prove this is all tech-related, but a good chunk of it is.
If you look at the corporate financing gap, which is the difference between corporate cash flow and capital spending, you have had this huge deficit. The level of cap-ex has been rising faster than the level of cash flow, which has led to a plunge in the corporate financing gap. And that corresponds with this surge in debt growth. A lot of the junk-bond problems are tech-related. So, the fact that tech cap-ex is now such a big part of cap-ex and that a lot of it has been leveraged make tech a more, not less, cyclical industry. It is cyclical to start with, it moves with the business cycle, but it has just been a long time since we've had a slowdown. The tech slowdown is here along with the global slowdown, and the question there, too, is how prolonged and deep will it be.
Q: You mentioned that the Nasdaq is already down 40%. Do you we have further to go?
A: The Nasdaq tends to lead cap-ex, and so the Nasdaq is foretelling what is going to happen to the tech sector. But I'm not sure the markets have fully discounted the duration of the slowdown. That would be my concern.
Q: And once they figure it out?
A: Tech stocks will turn up before tech activity turns up. But for now, I'm concerned the extent of the slowdown isn't discounted yet in the market. You've seen some very dramatic moves on the tech side. DRAM prices are down over 60% in just a four-month period. The growth rate in U.S. semiconductor orders has slowed from 38% to 4%. We've counted over 500 dot.com company problems.
Q: Problems or total busts?
A: Problems. Some are just layoffs or IPOs pulled.
Q: In what time period?
A: In the last seven months. Again, this tech slowdown is global, and certainly a lot of company news points in that direction, as do the data. European semi sales are slowing, and Siemens' problems and Dell suggesting that some of its problems were European-related point to a global slowdown. It isn't just semiconductors. Telecommunications orders have slowed from 40% to less than 20%. Every sector of tech has slowed. The tech slowdown will continue as long as global growth continues to slow.
Q: Any sectors showing resilience?
A: I would rather stick to the basic economic outlook. One thing I'll say, just because I feel strongly about this point, is that there are certain sectors of the market, like cyclicals, that look cheap. But if you look historically, they typically don't do well or start to outperform until after you've had some Fed easing. And we are not there yet. If growth does tend to be weaker for longer than people expect, the cyclical sector is likely to continue to get hit. There's a reason they're cheap, and near-term there's a reason they could get cheaper. These guys get hurt the most in the kind of economic environment we expect. |
