Today's example of Bear Stearns/Hedge Fund attitude; just two examples among several:
When you combine the likes of Newman's (Bear Stearns) comments with that of Meeks (runs a Hedge Fund, formerly with Merrill) on Telecom you arrive at some interesting negative observations on the market:
A. Newman: ": The faster the market gets rational, the better off we are. Hope is a dangerous way to invest, and we need to get past it."
B. Meeks: "...but I also would short some big names, like Amazon.com, which I will short until the cows come home,
Telecom is already depressed, and these firms continue to advocate shorting the "big names"...
GV, now do you really think these individuals are being fully honest in their comments?
Market analysts: Telecom troubles may persist for years
by ELIZABETH V. MOONEY
• May 20, 2002
NEW YORK-High-technology companies face years of sluggish growth, primarily because the troubles in telecommunications, their single largest customer, are likely to persist for years, said panelists at the MIT Enterprise Forum of New York Inc. "Technology Valuation" roundtable.
"The Internet is a medium, not a market, except for the rare company like eBay, which created a whole new business model. The best thing about the Internet bubble is that it forced corporate America to invest in this medium," said Cary Davis, managing director of the software unit of E.M. Warburg Pincus, the world's largest venture-capital firm with $10 billion in assets.
"The second bubble was telecoms, in which $4 trillion was invested. The $1 (trillion) to $2 trillion of that now lost will be a big drag on capital for the next decade. In the broadband spectrum auctions, our government exported one-half to three-quarters of a trillion dollars out of the capital markets that should have been spent on infrastructure. And I am very much afraid we will fall behind Japan and Europe in telecommunications."
As in the late 1970s, the new millennium's investors are chastened and will be more selective, a stance that bodes well for more productive use of capital, he said. The next generation of Web services, which connect different companies and different systems within the same company, are one bright spot, as are XML (eXtensible Markup Language) transport and the space where applications platforms and Internet protocol meet.
"There also are assorted dead ends, including PKI (public key infrastructure)," Davis said.
Telecommunications companies rank first, followed by technology companies and financial services firms as the three largest consumers of high-tech goods and services. According to different estimates, they comprise between 55 percent and 75 percent of recent spending in the tech sector, said Barry Newman, senior managing director and vice chairman of the technology group at Bear, Stearns & Co. Inc.
"The problem is that the entire telecom industry is not spending, the capital markets are not open for technology companies and financial services companies are under pressure. The rest of the global economy is not growing fast enough to offset this," he said.
"What is it about Cisco beating low numbers that caused a market rally? How fast can Cisco grow without telecom growth? Microsoft is sitting on millions of dollars of cash, and at some point this will inhibit its growth. The faster the market gets rational, the better off we are. Hope is a dangerous way to invest, and we need to get past it."
The biggest concern for Vadim Zlotnikov, chief equity strategist for Sanford C. Bernstein & Co. Inc., is that he considers 2002 to be a repeat of the mid-1980s, rather than the late 1970s.
"I am most afraid we are at the same point as in 1984, the (end of the) last capital spending boom on new telecommunications services, the paperless office and productivity enhancements. Tech under-performed the market for seven years after that," he said.
"Productivity has translated into deflation, not margins. Telecom carriers hope people will migrate to higher-end goods and services, yet the demand for PCs (personal computers) and cell phones is from people who don't have a lot of money. Two-thirds of the world's people lack access to electricity, so their use of cell phones and PCs is limited. ... The cash-flow growth of telecoms is limited to that of their customers, about 6 to 7 percent (annually).
"RBOCs (regional Bell operating companies) and their vendors can't explain a broadband business plan that sells a product with a variable cost structure at a fixed price. They are selling a resource that, if people use it, the suppliers lose money. Who will subsidize this?"
Add to this mixture the confusing hodgepodge of pro forma and Generally Accepted Accounting Principles earnings statements and the real possibility that labor costs could double if companies have to count employee stock options as expenses. Consequently, Zlotnikov said he is, at best, neutral on the technology sector. "But under any scenario, we will have shortages of semiconductors, although the growth trend line has slowed permanently. Software will address bottlenecks going forward, but focus on individual companies because there is a big divergence between winners and losers. You can't buy software as a group the way you can semiconductors."
Also neutral on the technology sector is Paul Meeks, a hedge fund manager and independent consultant who formerly was senior portfolio manager of technology funds for Merrill Lynch Investment Managers.
"The problem is there are no killer apps. A year ago, it was supposed to be 3G wireless, but that's a maybe for 2004-2005, because no one is spending on it now. The telecom food chain, a big part of tech spending, will take a multi-year workout, and it won't rebound as fast as the general economy. There is real nastiness in software as companies miss already- lowered estimates by a landslide," he said.
"There are a few positive things: information security, disaster recovery, and applications integration. Semiconductor revenues should start rising into positive territory by July, getting a jolt from inventory replacement. I am bullish on outsourcing, including contract manufacturing. I like Amdocs and Symbol (Technologies), but I also would short some big names, like Amazon.com, which I will short until the cows come home." |
