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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: gfs_1999 who wrote (74646)	4/10/2001 11:06:12 PM
From: puborectalis	Read Replies (1) \| Respond to of 99985

Tech Sector Will Stay Afloat on the Seven C's By Tony Crescenzi 04/10/2001 01:40 PM EST For ages, mankind has been seeking new, more efficient ways to enhance the art of living. Not a day goes by that someone somewhere isn't inventing something. It's just human nature. Today, people in our civilization innovate not only because it's instinctual, but to gain a profit. This new motivation in an age of mass production has spurred advances beyond the dreams of our ancestors and is a firm reason to believe that the innovations will continue. You might say that the instinct to innovate is a "deep fundamental" that will help support the technology sector for as far as the eye can see. Despite this, the doomsayers argue that the technology sector is set for a secular decline. They argue that spending will decline for a while, due to excesses in investment and capacity built up over the past few years. The retrenchment, they say, will last for two years or more. But the view that the technology sector will continue to thrive after it passes through a period or cyclical weakness appears to have much greater merit. Indeed, despite choppy waters there are seven "C's" that I believe will keep the technology sector afloat for some time to come: 1. Cyclical Forces: The simultaneous slowing in the economy and the tech sector has disproved the notion that the technology sector is impervious to cyclical forces. Cyclical forces clearly played a greater role in the technology boom than was given credit. Moreover, the fact that non-tech capital spending slowed at the same time as tech spending suggests that weak corporate earnings were a major factor behind the recent tech slowdown. Businesses have rationally decided that the rate of return on capital spending in a slow economy does not currently justify high levels of spending. But when the economy rebounds, businesses will raise their technology spending again. Moreover, individuals will consume more technology products. 2. Cost-Reduction Imperatives: In the current economic climate, it has become imperative that businesses reduce costs to maintain profitability. Businesses must therefore continue to spend on new technologies that will help to bring down their operating costs via increased productivity and improved resource utilization. A good example of this is an announcement by Honda that they will invest in a new technology that reduces the need for expensive palladium and platinum in the manufacture of catalytic converters. 3. Control Imperatives: The recent buildup of unwanted inventories disproved the notion that the adoption of just-in-time inventory (JIT) procedures would shield businesses against the ravages of excess inventories. But while JIT did not eliminate the excess, it at least reduced their severity. It is therefore imperative that businesses continue to improve the efficiency of their JIT procedure. This requires continued spending on technology, which is at the heart of the inventory control process. 4. Competitive Forces: In a capitalist society, competitive forces play a great role in motivating companies to innovate. And for every company there's another one waiting in the wings to become top dog. To stay on top, companies must therefore invest in technology to maintain their competitive advantages. This is especially true in the US where companies have big competitive advantages over their global counterparts. US technology companies have particularly large advantages. If they wish to maintain these advantages they will have no choice but to outspend their rivals both here and abroad. If they don't, they'll forsake their dominance. 5. Capital-Stock Depreciation Rate: According to the Bureau of Economic Analysis, the depreciation rate on information-processing equipment is roughly 31% per year versus 10% for most other types of industrial machinery. In other words, it takes about four years to depreciate technology equipment versus 10 years for other types of machinery. This means that businesses are apt to replace their information-processing equipment fairly often owing to big tax advantages and high obsolescence rates. Moreover, the average age of the technology capital stock is currently about 4.5 years, comfortably above the 50-year average of a little over four years. This means that despite the recent surge in technology spending, the average age is high enough to limit the magnitude and duration of the technology slowdown. 6. Capital Deepening Increases Capital Returns: Earlier this year, when Federal Reserve Chairman Alan Greenspan expressed optimism about the US economy in testimony he delivered before Congress, he expressed particular optimism over the outlook for technology spending. He said, "Although recent short-term business profits have softened considerably, most corporate managers appear not to have altered to any appreciable extent their long-standing optimism about the future returns from using new technology." And why should they? The use of new technology has proven to be a great source of increased productivity, as recent productivity data has clearly shown. Moreover, with labor costs somewhat high at present, increased resources are likely to be put toward capital rather than labor. Businesses are therefore likely to invest in technology to increase their return on capital. 7. Cultural Fabric: Consumers and businesses simply love new technology products. Some Americans just can't get enough of them. Today's teens seem to be particularly fond of technology products -- so many of them seem to be walking around with wireless phones, for example. This fascination for technology products is not likely end anytime soon, especially since tech gadgets and gizmos get more exciting by the day. Americans' long-winded embrace of technology is therefore part of its cultural fabric and is now a greater part of it than ever before. There's every reason, therefore, to expect consumers to continue their love affair with technology products. These seven "C's" will help keep the technology sector sailing along no matter how turbulent the economic climate. Rumors of its demise are surely misplaced. Tony Crescenzi is chief bond market strategist at Miller Tabak & Co. and CEO of BondTalk.com. Crescenzi frequently appears on CNBC, CNNfn, and Bloomberg TV and is often quoted across the print and electronic media. He is a regular participant in the Fed's Livingston Survey of economic forecasters.