Two Studies Paint Bleak Picture For Capital Spending
NEW YORK (Dow Jones)--Two reports issued Tuesday paint a dire picture for capital spending, the juice that companies need to restore and sustain profits.
Outlays for technology products won't pick up until the middle of the decade, and virtually all industries will keep their purse strings tight this year, according to separate studies by Merrill Lynch & Co. and Goldman Sachs & Co.
"Inadequate pools of available funding" will persist and push the technology industry's recovery into 2004 or even 2005, says the report by Merrill Lynch's U.S. economics team.
"Companies have made good progress at paying down debt and shoring up cash balances," said David Rosenberg, Merrill's chief economist. "But more work needs to be done before companies can shift their focus from fixing up their balance sheets to stepping up their investment spending."
At Goldman Sachs, the economics team surveyed the firm's equity analysts and found they expect capital spending in general will drop by at least 10% this year after a 15% fall in 2002. Declines by merchant energy, telecom, airline, cable and electric utility companies will more than offset "small gains" that may be made by material, financial, health-care and consumer companies, the Goldman report said.
The studies don't bode well for a stock market that prizes profit growth and has fallen over the past three years on a deficit of capital spending. In fact, investors have already gotten a taste of things to come as companies have been closing out 2002 - fourth-quarter profits in many cases are beating expectations, sometimes greatly so - but outlooks for 2003 are dismal, lacking the crucial ingredient of sales.
The studies also point out the schisms that still exist at some Wall Street investment firms, where one team takes a bearish view and another feels that investors should be buying stocks aggressively.
That's the case at Goldman, whose downbeat capital-spending outlook appears to butt heads with uber-bull Abby Joseph Cohen, the firm's chief investment officer, who has said by many measures, 2002 was a "surprisingly good year," and sees the Dow Jones Industrial Average rising to 10,800 this year, or 36% from current levels.
Cohen, who is believed to have seen a copy of the economists' report, didn't return a call for comment. But Jan Hatzius, a senior economist at Goldman and one of the report's authors, said in an interview, "I think she agrees the economy is going to be slow, but with her it's more of a valuation call," meaning she may feel stocks have fallen so low they are worth buying at this point.
The dynamic is quite different at Merrill Lynch, where the capital-spending report is very much in sync with the sentiments of chief investment strategist Richard Bernstein, who fired his own cannonball across bulls' bow on Tuesday. Bernstein, already a bear, for the first time said the economy is now in danger of a double-dip recession because of rising energy prices. "Every significant oil shock over the past 30 years has caused, or at least contributed to, a recession," Bernstein said. "Rising energy prices are already starting to constrain consumer spending and a war probably won't help the situation."
The reports are being greeted on Wall Street with a mix of resignation and incredulity by investors and strategists who at this point thought they had heard it all.
"Wow," said Peter Jankovskis, director of research at Oakbrook Investments, of Merrill's projection that technology spending won't recover until 2005. "That's going to have a very dampening effect (on stocks) if it comes to pass."
Indeed, the market's rally in early January was on the back of technology stocks as investors continued to feel the group could retain its position as a stock-market leader. Even now, when the stock market rises, the first gainers are often large-cap tech stocks.
But Goldman Sachs' view that overall industry spending will be off in 2003, "isn't really a surprise," Jankovskis said. "We know that struggles continue."
Arnie Berman, chief investment strategist at SoundView Technology Group, took issue with the Merrill projection, saying he's hearing from companies that there is a growing need for systems to keep operations going.
"They're not out for systems that will provide the next great leap in productivity," Berman said. "But after such a dry spell, there is bound to be spending on basics."
Berman said investors "don't have to jump into technology with two feet right now," but there are stocks that will be well positioned as spending inevitably picks up. He said Microsoft Corp. (MSFT), Oracle Corp. (ORCL), Nokia Corp. (NOK), Hewlett-Packard Co. (HPQ) and Taiwan Semiconductor Manufacturing (TSM) are among the group.
-By Karen Talley, Dow Jones Newswires |
