BARTON BIGGS BEAR MARKET IN TECH STOCKS...
From Barton Biggs of Morgan Stanley:
"Don't look now, but a bear market may already have descended on technology stocks.***The steady slide has led at least one market pundit, Morgan Stanley's Barton Biggs, to declare that a bear market has crept up on the technology group, masked until recently by a continued rally among the largest tech stocks such as Intel, Microsoft and Advanced Micro Devices. Now that the bigger stocks are also getting hit, he says, the carnage is becoming more obvious."In real terms a bear market has begun," said Mr. Biggs in an interview Tuesday. "I believe the tech cycle has peaked," he said, elaborating on comments made to clients on Monday in a conference call, following a note he sent to clients last week on the same subject."Orders and shipments won't decline. But the rate of growth will slow to 10% from 20% or 25%," he says. And, he adds, "prices are continuing to go down but instead of a 10% decline, it will be a 15% decline. These companies are leveraged for growth. Their expenses require them to grow at 15%. So, the combination of those three trends will have a devastating effect on technology stock prices," he says.Will the broader stock market follow? Mr. Biggs thinks the market has at least one last spurt before running out of gas, based on his belief that interest rates will fall in coming months, leading to "a final glorious surge" in the overall market. Tech stocks, on the other hand, he believes are in for a "growth recession" that will last "several years" at least.
Not everyone agrees. "It's quite unlikely we're entering a bear market," says Merrill Lynch's semiconductor analyst, Thomas Kurlak, who held an upbeat conference call with clients Tuesday morning. "From our perspective, chips are raw material for the electronics industry and demand is strong. It's hard to believe the end market is having a problem. Businesses are shifting to higher-speed computers," he says. However, the occasion for Mr. Kurlak's call was a disappointing earnings release by chip maker Micron Technology, whose stock promptly dove 4 1/8 to 40.
"It's simply a case of too much technology equipment having been stuffed into information technology departments that can't effectively digest it. Users are questioning the payback they are getting from their massive investments in [technology]," he said in his March 10 note to clients. The bigger problem, he says, is too much capacity. "This tech boom began in 1991 when the capital spending cycle picked up. Basically, rising prices and a speculative environment led to an infinite ability to raise money for technology companies," he says. That has led to increased competition among technology companies and an oversupply of new products.
Now, says Mr. Biggs, it will take a number of years for the situation to correct itself. "In my view, this is the beginning of a new growth recession in technology. A fresh up-cycle will not begin for several years at least. After all, the previous cycle peaked in 1984, and a new one didn't begin until 1990." But wait a minute. Hasn't one of the arguments behind ever-rising technology stock prices been that the technology industry's earnings were no longer cyclical, meaning that they deserved higher price-to-earnings multiples? After all, the profusion of personal computer sales has been driven by rising usage of computer networks both at home and in the office.
Unlike technology bulls, Mr. Biggs argues that they are as cyclical as ever, with their fortunes tied to the ebb and flow of the economy. Indeed, a big part of his argument for why technology stocks should be in for a bear market is that he believes the economy is slowing. Indeed, he forecasts disinflation and a 30-year bond that could drop to as low as 5% over the next year and a half.
Some say it has been clear since as far back as fall 1995 that the semiconductor business was as cyclical as ever, as excess capacity drove chip prices lower and lower. It was then that Micron began a lengthy decline from a peak of 94 3/8 on Sept. 11, 1995, to its current level of 40. Mr. Biggs, for one, believes that's when the seeds of the bear market took root.
Source: WSJ March 27, 1997 "Is That Growling Sound A Tech-Stock Bear Market?"
That's right...these comments were made over one year ago in March 1997. Biggs called it pretty much right from my perspective. It appears we are in a bear market in tech stocks. Pick about any sector of the tech stock market and look what has happened to prices. And if he is right, the upturn is a long way off.
Why post this? Sometimes you have to re-visit the past to understand the future...and right now the future may be dim for tech stocks for many months to come.
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