Pierre and Keith, two factors seem to be influencing the decline in oil prices. First, as you note, is the notion that a worldwide economic slump means lower oil demand. This is only partly true, since it turns out that demand for oil is relatively inelastic (people still heat their houses and drive their cars, good economy or bad).
Second, a substantial amount of production was made available in the Middle East for possible consumption by military forces. This put a temporary glut on storage facilities, causing a price drop in Europe, which in turn led to a price drop in the U.S., after U.S. traders saw the earlier action in Europe.
If there were a free market in oil, instead of one where production is highly regulated by OPEC, one might be able to conclude that a drop in oil prices is in response to a general economic downturn. But where the prices are essentially rigged by OPEC, one can only conclude that OPEC is dealing the cards, irrespective of economic conditions.
The conclusions I draw from these price movements are:
(1) Oil prices are dropping only temporarily, but over the long term are still trending upward, since the rate of increase in demand exceeds the rate of discovery of new oil resources.
(2) The apparent recovery in tech stocks is not necessarily connected with a drop in oil prices and does not represent a shift in interest from oil to technology.
(3) The apparent recovery in at least certain tech stocks reflects a general belief among individual investors, analysts, and portfolio managers that many of these stocks are simply oversold. Note in recent weeks the increasing number of buy recommendations for QUALCOMM (at higher than current prices).
(4) Despite more interest in tech stocks, the facts remain that business and consumer spending domestically is down, and is down even more in certain countries overseas, the main exception being China. Thus, the short term future for QUALCOMM seems more connected with China than ever before. The disappointing and stubborn resistance of TDMA and GSM users to the adoption of a more efficient CDMA technology will continue to depress short term growth prospects for QUALCOMM.
(5) Finally, the reports of a NextWave settlement appear to provide additional help for struggling TDMA and GSM users, and less market potential for products that incorporate QUALCOMM proprietary technology.
Bottom line: Unless we hear some pleasant surprises between now and the next earnings release, QCOM shares will probably not perform any better or any worse than the overall market for tech stocks. In an ideal world, where companies were intent on providing the best performing products at lowest cost to consumers, QUALCOMM would outdistance every other telecom equipment company. Investing in this company requires a lot of patience, but for investors looking for intrinsic value that is tied to patented technology, QUALCOMM remains still the fairest one of all.
Art Bechhoefer |
