Sharks in Tempting Tech Waters?
Saturday August 18, 7:34 am Eastern Time
By Pierre Belec
NEW YORK (Reuters) - The New Economy has punched the lights out of a lot of people, and investors should not expect technology stocks to be the unimaginable wealth producers they once were.
Experts warn: Don't get fooled by the new mantras on Wall Street such as ``The worst is over'' and ``The water's fine, come back in.''
What's happening is that the technology industry is going through its first recession ever after U.S. businesses, striving to become the world's most productive, loaded up on computers, telecommunications and other technology that they're now gagging on the stuff.
Adding to the problem is that the economy and venture capital -- the two things that could pull the technology industry out of its deep recession -- are sick and unable to do their magic.
The fallout from businesses cutting back drastically on capital spending, which came out of the blue, poses a contagion risk for the rest of the American economy.
``The economy is being led into recession by excesses in technology,'' says Ray DeVoe Jr., publisher of the DeVoe report, a financial newsletter.
``Information technology was propelled by a survival mentality that IT equipment had to be upgraded and the company needed the latest and most sophisticated equipment with all of the bells and whistles or else they would be overtaken by the latest upstarts of the Internet Age,'' says the veteran Wall Streeter.
``A lot of companies upgraded their operations far more than they really needed,'' he says. ``Making matters worse, the slowdown in the economy has cut further into the businesses' need for IT.''
The best example of over-capacity: Only 2.5 percent of all of the fiber optics that have been laid out throughout the nation are now operating, DeVoe says. Fiber optics lines are the backbones of the networks for data communications, including the Internet.
WHAT WERE THEY THINKING?
``The big problem during the technology craze was that people expected demand would be boundless, with traffic on the Internet and telecommunications doubling every three months,'' DeVoe says. ``These were awful big numbers that amounted to a 16-fold increase in demand in one year.''
Some analysts are betting the rollout of Microsoft Corp.'s (NasdaqNM:MSFT - news) new Window XP operating system -- the biggest upgrade to the software in six years -- will inject new life into computer sales.
XP, which is expected to be launched on Oct. 25, at first was considered to be one of those ``killer'' applications but the excitement over the product has since subsided.
``It won't be that big of a product,'' DeVoe says.
Making life tougher for computer makers is the deluge of bankruptcies among the dot-coms. The defunct dot-coms are having huge American-style ``garage sales,'' selling the sexiest equipment money can buy for 50 cents on the dollar.
``Hundreds of dot-coms have gone out of business and almost-new equipment is coming back into the market, interfering with new product sales,'' DeVoe says. ``Some of the goods are still in their original shipping boxes.'
Then there's the sorry state of the venture capital market -- the billions of dollars in rocket fuel that lifted the tech revolution from the launch pad in the '90s.
Venture capital funding for U.S. companies in the second quarter plunged 66 percent from a year-ago, to $8.2 billion from $24.2 billion, according to PricewaterhouseCoopers and Reuters Group Plc (quote from Yahoo! UK & Ireland: RTR.L; NasdaqNM:RTRSY - news) company VentureOne.
The companies' joint survey, called MoneyTree, found that 669 companies got seed money, down from 1,511 at the same time in 2000, a 56 percent drop.
The start-ups are dying to raise first-round money but the venture capitalists are demanding much tougher terms. They're not only looking under the hood but also checking the credentials of the executives at the wheel of the companies. During the happy days of the stock market's bubble, they only kicked the tires before handing out buckets of money.
Worst hit by the venture capital cutback were fiber optics and software makers.
Venture capital money won't come back as long as the market for initial public stock offerings, which used to generate fat rewards, stays flat.
The cash crunch also threatens to cut off the stream of technological innovations that propelled U.S. productivity and snuffed out inflation.
Don't look for any quick comeback in business spending, says John P. Hussman, professor of economics at the University of Michigan and publisher of Hussman Econometrics.
``With companies carrying very high debt loads, private savings woefully inadequate and our dependence on foreign capital at unsustainably high levels, we believe that a resumption of the recent capital spending frenzy is extremely unlikely,'' he says.
DeVoe is betting that businesses won't upgrade their operations until they are sure it will directly impact their sluggish earnings.
History shows that Wall Street has often reacted with irrational exuberance when it comes to new technology. Radios, railroads, electricity and cars all triggered mania as investors rushed to be first to make a killing, pricing the then ``New Economy'' stocks out of this world until the market blew them up.
``The current tech downturn represents not a speed bump but an inflection point -- the point which separates a period of rapid growth from a period of slower growth, saturation and deleveraging,'' Hussman says. ``Indeed, for industries such as telecom the high-water mark of recent activity may not be surpassed for years.''
LOOK AT THE PAST TO SEE THE FUTURE
``The record of every major industrial boom demonstrates that new technology has a familiar pattern of growth,'' Hussman says. ``Growth is extraordinarily rapid as the technology is initially adopted. During this period, the path is undistinguishable from an ever-increasing exponential curve. But ultimately, as expansion plans are completed and customer markets become saturated, growth hits an inflection point and slows down dramatically. That's where we are now.''
Recently, some of the New Economy cheerleaders came out of their bombshelters to proclaim a cease-fire on the technology stocks.
Goldman Sachs this week told investors to buy semiconductor chip stocks. ``Buy chip stocks now,'' blared Goldman's bold research note. ``The recovery writing is on the wall.''
Last month, it was Merrill Lynch that came out with an optimistic view of the technology sector.
The comments come even as analysts have no idea when orders for microchips will rebound after falling into the abyss last year.
Then Lehman Bros. dropped a bombshell, warning of a bloody price war between Intel Corp. (NasdaqNM:INTC - news) and rival Advanced Micro Devices Inc. (NYSE:AMD - news)
There's no doubt that some time in the future the stock market will again turn higher and the tech sector will again have its day in the sun.
But it will a different type of bull market if investors recall the message that, when stocks are priced on the basis of unrealistic expectations, the crash can be as profound as the overvaluation.
For the week, the Dow Jones industrial average sank 176 points to 10,240. The Nasdaq composite index tumbled 89 to 1,867 and the Standard & Poor's 500 was down 29 at 1,161. |
