How I See It.
The below is how I see what happen last year, what is happening now, what will be happening as the year transpires.
First since dot.com bombs going off, and bubble bursting of the high-tech market dominated last year, I will state the reason for the slow down.
Why we had dot.bombs went off and why we have a slow down.
1. The attempt to replicate what is now commonly called the old economy and move it to net was a flawed premise.
2. Number 1 above created an artificial frenzy in buying of high-tech gear for the running of the dot.com bombs, once the bubble was burst it becomes obvious why companies that where either established or came about because of the net be it software, service, hardware, hosting, even ISPs are now having a slow down or will go out of biz all together.
3. As the old economy saw that there was no hurry to fight off the dot.coms some of them have slowed or discontinued there net initiative altogether, I feel this will come back to bite some of them.
4. The PC has reached a nirvana state for the current level of software industry product offerings, there is just no killer app. Furthermore, people are using handheld’s more and more relegating the PC to a lesser role.
5. Cellular Phones now suffer from the same condition as the PC, there is just so much you can do with that little screen and the bandwidth we have now.
6. The consumer has been on one long buying binge, which reached its apex with the advent of monster tank like ATV’s they are driving around now, much like the cars with fins of days gone by. I’m even seeing backlash to the above large trucks, coming from Volvo, Audi, and Japanese marketing smaller versions or wagons. The commercial with the woman hanging from the tailgate unable to close it says it all about the monsters trucks. I don’t see similar product offerings from the USA auto industry; maybe they will be caught flat-footed? Also, there are just so many people that will buy digital devices like MP3 players and digital cams, all you have to is look at SNDK earning out look to see that this is true.
7. Consumer buying power has been reduced because of the high prices for oil, which goes right against the grain of having monster trucks as the family sedan.
8. Last buy not least, the FED misguidedly raised rates exasperating all of the above. If the FED had it right they would not have to be lowering rates in such a hurry.
What will happen? It’s all not dire.
1. The term, “Don’t fight the fed” is an old tired and true Wall Street saying. The surprise fed .50 rate reduction largely has change the psychology on Wall Street like one large blanket providing warmth to what was looking like a very cold winter.
2. We can hide under FED rate reduction blanket for only so long. Say, by mid summer we don’t see evidence of the economy turning around, we will have crash number two on our hands. So, I see a window of Teflon conditions for the market, lastly until near the middle of the spring.
3. Tax reduction will have a more immediate psychological and monetary effect then rate reduction since consumers by and large understand taxes more then FED rate reductions. Also, depending on what comes out of Washington, they could get physical evidence in the form of more money sooner then later.
4. One of the reasons for the slowing in the high-tech sector and will have a lasting effect on the economy if it’s not turned around soon is the telco spending slow down. This slow down is being caused by a various reason. The dot.com blow up reducing avenues for money flow, too many providers chasing the same customers, in some cases vanishing customers, and an already cash outlay intensive industry trying to do too much too soon. What needs to happen, and this is one of the reason an economic slow down is not bad, is that some of the smaller providers will go out biz, consolidation will happen, joining the weak with strong, eliminating cost over head, stream lining the process. Some of the providers, such as Global Crossing (GX), that have a more advance network will weather the storm better the others. Lastly, with the reduction of rates starting to happen, cheaper loan rates are now available. I’m seeing evidence of the providers dipping in to the bond market now, using the window of opportunity to raise the much-needed funds to build out the next generation broadband networks. I think the CEO of the JDSU said it best. If they telco industry stops upgrading their systems the net will end up like what they have now in California, I complete joke! I feel competition will work it’s magic here too and the telco industry will continue to move forward but at an unfortunately slower pace.
5. The Cellular industry is moving toward providing more bandwidth with 3G roll out this will reenergize cell phone sales, but it going to happen much slower then people realize. Maybe by the end 3rd quarter the street will start to anticipate the roll out. QCOM of course is the one to watch.
6. The PC up grade cycle will come back into to play when we have more bandwidth on a mass consumer level. The PC’s role will change to, from the center of the family’s computer experience, to more of a home server like device where management and connecting to outside world of our ever-increasing high-tech lives will be done.
Some history and conclusion
The high-tech industry had been dominated by the PC sector for some time, which reached its nirvana state when the bulk of the USA consumers that wanted to get connected did just that. Apple is a perfect example of this. The PC while still important, will not play as big a role as it once did, communication, software, and service will play an ever increasing role as the net grows from the fish bowl cams of the days gone by, to a totally interactive experience with all mans past knowledge and future knowledge digitized, and available by wireless and wireland connected devices. That’s the consumer level. On the corporate level, corporation that failed to embrace the net and continue to spend on IT, will be left behind, and find it harder and harder to compete against the corporation that see the efficiency that can be derived from the net. I feel competition will work it’s magic here, but spending will be more concentrating on the software side for now due to reduce economic outlook. Stocks to watch are, SEBL, PPRO, ARBA, MSFT for short list. For the net to go to the next step it is going to take large intuitions to provide the service, to maintain, and to create the content. I think IBM really is position well, so is MSFT, and AOL, and for the interactive part, GMST. Lastly, the handling and storage of all this data. During EMC earnings statement they mention that they will not see any slowing of sales during the first half of the year. It can’t be more obvious from EMC statement that date storage biz is still growing by leaps and bounds. Of course there is NTAP, BRCD, EMLX among others.
In sum. PE still matters, some the stocks I mention above still have very high PE’s or no PE’s at all, it remains to be seen if the market can accept the still outsized valuation or not. I believe will get though this downturn in due time, an indictor to look for is the IPO market coming back, once you see that you will know that the market is back on it’s footing.
Greg |
