Wall Street Jumps Gun on a Tech Rebound
Audio/Video
Analyst upgrades LU, NT, sees companies well-positioned - (ON24)
Needham analyst cuts ratings on CSCO and JNPR - (ON24)
By Pierre Belec
NEW YORK Nov 16 (Reuters) - Technology stocks are on fire -- again.
A lot of investors who lost their shirts after the tech bubble burst in early 2000 are jumping back into a sector that was once fantastically rewarding. But experts say these overly optimistic people are betting on the wrong horse.
In October, technology stocks climbed an impressive 17 percent while the rest of the market was flat. Some sectors lost 2 percent while others gained 4 percent.
The tech comeback, after a nosebleed of a drop of some 70 percent from March 2000 to mid-September this year, has been a stunner. The technology-heavy Nasdaq composite index has jumped 33 percent since September.
The line of thinking is that the tech story got so horrific that business can only get better from now on. Investors have been tempted by upbeat comments from the likes of Cisco Systems Inc. (Nasdaq:CSCO - news), the world's largest maker of gear that powers the Internet. Cisco sees light at the end of the tunnel.
Texas Instruments Inc. (NYSE:TXN - news), the biggest maker of chips used in mobile phones, this week said the third quarter could mark a bottom for semiconductor orders. And Corning Inc. (NYSE:GLW - news), the world's largest maker of fiber-optic cable, forecast a turnaround in its business in the second half of 2002.
Some Wall Street strategists are also luring investors with the reasoning that because the tech sector has been the biggest loser, then it should be the one to lead the market back up.
FANTASY OF FIRST-IN-FIRST-OUT STRATEGY
``But we find this rationale lacking from a purely fundamental perspective,'' says Tobias Levkovich, strategist for Salomon Smith Barney. ``Business basics should all contribute to the plausible success of any stock or group, rather than the notion of any type of simplistic first-in-first-out analysis.''
The technology industry is going through the type of transition that only hits a revolutionary sector once in a century. It is coming down from a peak hit during the boom days of the 1990s when businesses spent wildly on things to boost productivity.
More than a year after the industry was caught flat-footed as tech consumption reached saturation point, the companies are still drawing down their inventory of unsold goods. Some estimates say the inventory drawdown may persist for another two years.
The demand side doesn't look good, either, because the global slowdown has muddied the economic picture, thereby delaying the next wave of spending on technology.
The big unknown is the length and depth of the recession, which some economists believe started in March this year and deepened after the Sept. 11 attacks on the United States. The last time there was such a widespread recession was in the 1970s and it lasted for 1-1/2 years.
For that reason, rosy tech industry forecasts should be treated with caution. Consumption will eventually rebound but the shape of the recovery may be a far cry from what tech companies were used to in the 1990s, when business spending climbed by 20 percent or more each year.
Spending on information technology, or IT, usually lags corporate profits by a couple of quarters. In other words, companies, especially those with lousy credit, set their IT budgets only after they've earned enough to pay for the stuff.
SHORT-TERM PAIN, LONG-TERM GAIN FOR TECHS?
``U.S. corporate earnings will recover in the second half of next year but because of that lag effect, the companies won't start spending again on technology until late 2002 or early 2003,'' Levkovich says. ``So stock market investors are taking a lot of time risk in buying tech stocks now for a resumption in tech spending 12 months out.''
The other reality is that a lot of the buyers of hardware, software and Internet equipment have gone out of business. What we saw over the last 1-1/2 years is capitalism at work as dot-coms disappeared from the face of the earth. Hundreds of thousands of jobs and billions in capital spending went with them.
In fact, for the first time ever, worldwide spending on IT will drop in 2002, as companies run a red pen through their budgets due to the economic downturn.
American companies' spending on technology is expected to be down as much as 5 percent next year after increasing in 2001 by some 8 percent, says Meta Group's annual survey of large computer users. The rest of the world's spending is estimated to be flat after this year's gain of 6 percent.
The Stamford, Connecticut-based research firm conducted the survey between August and part of September. Since then, economic growth slowed to a crawl, which would suggest even bigger spending cutbacks.
Worth remembering is that IT spending also lags the jobs market, which has gotten slammed recently. A staggering 415,000 jobs were lost in October, the heaviest in more than two decades.
The jobless losses, following the Sept. 11 attacks, were the sharpest for any month since May 1980, with unemployment soaring to 5.4 percent from 4.9 percent in September. Worldwide, more than 1 million job cuts have been announced by high-profile companies this year.
``Companies are firing workers, which makes it unlikely they will be spending as much on new high tech for people who are no longer employed,'' Levkovich says. ``If a company fires 10,000 of its work force of 35,000, then it would be unrealistic to expect them to increase tech spending because there won't be a need to hook up 10,000 employees to the Internet.''
James Dines, publisher of the Dines Letter, sees big changes for the Nasdaq next year as investors realize the tech sector has not only been looking down the gun barrel of over-capacity, but a second barrel of obsolete goods.
``What is happening in the technology area is very subtle,'' Dines says. ``The future of technology is in hand-held wireless, but a fortune has already been invested in land-lines-based infrastructure, fiber-optics, that's already obsolete.''
He says the other problem is that telecommunications companies have monstrous debts they'll be unable to repay.
``The viability of companies like Lucent Technologies (NYSE:LU - news) is in doubt and the depressed level of its stock is telling people that something is wrong,'' he says. ``The crash in these stocks says their survival is threatened because they all went overboard borrowing money to build things where the future is not going to be.''
Dines' bet: Wall Street has still not fully discounted the fact that land lines will eventually be useless.
For the week, the blue-chip Dow Jones industrial average (^DJI - news) rose 258.99 points, or 2.7 percent, to end at 9,866.99. The tech-laden Nasdaq Composite Index (^IXIC - news) advanced 70.10 points, or 3.8 percent, to finish at 1,898.58. The broader Standard & Poor's 500 Index (^SPX - news) added 18.34 points, or 1.6 percent, to close at 1,138.65. |
