Wrong! Tactics and Strategies
Time and Prices Will Determine a Tech Bottom
By James J. Cramer
2/27/01 8:48 AM ET
URL: thestreet.com
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If earnings aren't coming back and the momentum seems to be gone for the foreseeable future, what will get the technology stock market back on track?
This downturn, while vicious and seemingly endless (its one-year anniversary is next week), will end, as all downturns do. But I see nothing in the pipe right now that ends it. Interest rates won't end it because much of the decline is secular in nature (see my series on this subject). Demand for some of the market, notably personal computers, might get stronger as the consumer gets more liquid, but it is more likely that those additional dollars will go into home improvements.
Ultimately, in order for tech to bottom, a series of things must happen that will take time as well as price to occur. Here's a checklist of things you will have to see before we find a bottom worth investing in. (There will be plenty of trading bottoms like we saw last Friday, but only the most nimble, the Todd Harrisons of the world, can profit from them.)
First, we have to have capacity taken out. There are too many of everything right now: too many phone companies, too many personal computer makers, too many cell phone companies, too many Web storage companies and too many networkers. Whenever there is a surfeit of players, consolidation and failures must occur before the turn can be seen. (I have been preaching this in the Internet world, but it has failed to happen because the egos are too great and the pride of the venture capitalists and founders are still too strong. The only mergers that have taken place of any variety are of the last-stand nature: Women.com (WOMN:Nasdaq) and iVillage(IVIL:Nasdaq), for example. If that deal had happened a year ago, I think both would make it. As it is now, I think they don't have much of a chance.)
In the telco world, for example, instead of 14 phone companies in the United States, we need only about three or four. Heck, we got by for a long time with one! We have way too many of them. But the winners, which will be Qwest(Q:NYSE), Verizon(VZ:NYSE), SBC (SBC:NYSE) and BellSouth (BLS:NYSE) (I don't even think AT&T (T:NYSE) will make it anymore, and WorldCom (WCOM:Nasdaq) seems deeply troubled, for that matter) need to buy up everybody else. Naturally, they don't need to buy them as they are currently configured. The remaining companies have so much debt that they will most likely have to file for bankruptcy before they can be bought.
In the process, they are sure to take down more than one or two phone equipment providers, as so many of these have made loans to players that will certainly file for bankruptcy before this era is over. Until the consolidation comes, however, you can bet that earnings will continually disappoint as customers simply don't have the money they used to have to buy and the vendors are swearing off risky financing. It bothers me to no end that, with the exception of Ravi Suria, the terrific bond analyst at Lehman, nobody is willing to admit any of this.
Yet it is precisely what is going to happen. I was skeptical at first when I met Suria last year, but pretty much everything he has said seems to pan out, with the possible exception that he is getting more sanguine about Qwest's and Global Crossing's (GX:NYSE) prospects. That's why I stick with Qwest as a buy, knowing that it is going to be one of the survivors and the survivors are going to be amazingly profitable when the smoke clears.
Second, we have to have new technologies that transcend the current group, all of which seem incapable of catching our fantasies. Right now, the only technology that seems to have anybody excited is the Blackberry, put out by Research in Motion(RIMM:Nasdaq). I see people recommending that stock left and right because of the Blackberry, to which I say, give me a break. That's just some incremental positive that will flame out without fortunes made by anybody except insiders who sold the stock when it was higher.
We need sea-change innovations, personal computers that can pump up speed of downloads, phone company lines that allow you to order movies on demand, personal computers that sell for $200 and are as good as the ones we have now (why not?), cell phones that can do much more than they do now for a fraction of the price -- that type of thing. The bulls in Cisco(CSCO:Nasdaq), for example, tell me that the next generation of Cisco product will be so breakthrough that you will get excited again about the stock. To which I say, terrific, because I ain't too excited about this current generation of stuff. And I love Cisco, the company.
Third, we need to see massive attrition of the sector, and a reduction in its size in the S&P. Tech was simply too big when it hit 28% of the S&P last year. It probably should go to half of that level before it bottoms. There were too many multibillion dollar tech companies created in the last four years that aren't worth more than a couple of hundred million.
Fourth, we need to see the tech-heavy mutual funds lose their terrific three-year records. Once 1998 is dropped and replaced with 2001 (which I believe will be crummy for these funds, too) then you will have very little for the mutual fund industry to sell. These funds love to sell the hottest issues, but when 1998 gets dropped off, that leaves only 1999 as stellar. Then these funds will be sentenced to oblivion and they won't have the capital to support their sector.
Finally, you will need to see a belief that owning a tech stock is a thing of the past. This is the toughest one to imagine right now. I don't think we will regard tech stocks the way we regard those utility-stocked portfolios of our parents. But we will have to get over the mindset that you have to own tech or else before tech bottoms. A friend of mine dropped in on our place on Saturday and, naturally, the conversation turned to stocks. He's in real estate, but he wanted to buy some blue-chip tech, as he called it, because the stocks had come down so far. I wanted to talk to him about Merrill Lynch (MER:NYSE) and Goldman Sachs(GS:NYSE) and Schlumberger(SLB:NYSE). His eyes glazed over. He wanted my OK on Intel (INTC:Nasdaq) and Cisco and PMC-Sierra(PMCS:Nasdaq). I came back with Philip Morris (MO:NYSE) and Merck(MRK:NYSE). He wanted to know if Lucent (LU:NYSE) was right.
Finally I gave in and said, if you have to buy tech, buy IBM (IBM:NYSE) or Electronic Data Systems (EDS:NYSE) or maybe Microsoft (MSFT:Nasdaq) because it has a good ruling coming. Those, however, were too boring for him. Again, he wanted to know about Nortel (NT:NYSE) and Intel or maybe Sun Micro (SUNW:Nasdaq) or Dell(DELL:Nasdaq).
I told him how every single conversation I have with people about stocks always goes the same way; they have no interest whatsoever in the Mercks and the Morrises. I told him that alone tells me that we aren't done going down. He looked at me, thought about what I said, and then ventured that "Intel probably can't go much lower." I said, "Yeah, fine." And gave up. The hell with it, I figured. It's conversations like that, conversations that I have with individuals hundreds of times a month, that tells me, ultimately, that we can't make money investing in tech yet.
Time and price, time and price -- both have to be right. Unless these five changes occur, tech stocks will remain just a trade, and even then, not necessarily a trade to the long side.
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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. While he cannot provide investment advice or recommendations, he invites you to send comments on his column to jjcletters@thestreet.com.
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