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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (121259)	7/3/2002 10:14:01 AM
From: John Hayman	Read Replies (1) \| Respond to of 152472

RTW Report. The Telecom Death Spiral July - If you thought that the telecommunications market was in turmoil now, just wait, it's going to get much worse By: Paul Philp July 2002 The death spiral in the telecommunications industry has accelerated over the past month. We don't want to rehash the sensational news from about fraud at WorldCom except to understand that it points a spotlight on the troubles in the industry. The cost of building long distance infrastructure has been dropping for twenty years. The infrastructure overbuild sparked by the Internet accelerated this process. The lower costs have led to increased competition and a massive price war. The long distance business has been a negative cash flow business for more than five years. This situation leaves the large long distance companies paying off the debt incurred to build their networks from a decreasing revenue and cash flow. The assets financed by the debt decrease in value faster than the companies amortize them. The long distance business has been weakening on the income statement, cash flow statement and the balance sheet. The fraud at WorldCom shows how desperate the situation has become. The long distance business, as it is currently structured, is now bankrupt. We are simply waiting for the existing cash pools to reduce to zero. WorldCom will file first but Sprint and ATT Business Services will not be far behind. The Internet was the great hope for the telecommunication industry. The Freedom of Communication Act of 1996 was supposed to open the field up to competition and enable a new era of communications services enabled by the Internet. What was spawned was the largest technology-driven bubble since the American railway bubble in 1845. Trillions of dollars were spent building competing Internet backbones. The resulting overcapacity sparked a bloody price war making it impossible for the new Internet providers to service their debt. The Internet service business, as it is currently structured, is now bankrupt and most providers have already filed for bankruptcy protection. If the current situation looks terrible, it is about to get worse. The best of the networks that enter bankruptcy are being recapitalized. The resulting companies will emerge with the combination of the best networks and a much lighter debt load. This will allow these companies to lower prices even more. The networks that have not been bankrupted will match the lower prices and accelerate their own eventual bankruptcy. Eventually this dynamic will force every long distance and Internet backbone operator to file for bankruptcy. The situation is complicated by the fact that the increased competition was never really possible under the 1996 Act. In fact, the Act increased the monopoly power of the incumbent local exchanges (ILEC), the regional Bell operating companies. These monopolies have yet to upgrade their networks as promised and their monopolistic practices make competing at the customer end almost impossible. These companies are very profitable and they generated a cumulative $6B positive cash flow last year. There are 27 major telecommunications services providers in the United States today. It is likely that 23 of these companies will cease to exist before the restructuring of the industry is complete. It is also likely that the only surviving companies will be the current ILECs. It could take the rest of this decade for this restructuring to be completed. This makes investing in the telecommunications providers and the network equipment providers extremely risky. The situation is very much like the 1845 railway bubble. All the pioneers who invested money to build the original railway infrastructure lost all their money. After the bubble burst, the railways and the equipment providers under performed the overall market for almost 40 years. It will not take 40 years but it will be a long time before the telecommunication industry is a safe place for investors.

To: Wyätt Gwyön who wrote (121259)	7/3/2002 2:18:19 PM
From: quartersawyer	Read Replies (2) \| Respond to of 152472

i should also mention that not even Greenspan uses the fed funds rate to value stocks. the so-called Fed model uses the 10-yr Treasury and compares this to the earnings yield on the SPX. with the SPX earnings yield at around 2.5% while the 10yr bond is at 4.8%, that implies the market is almost 50% overpriced. "[prior to recent bad news] I was considering raising my exposure to equities because the market was 16% undervalued according to the Fed's Stock Valuation Model. [ratio of S&P 500 index to it's Fair Value (12-month forward expected consensus operating earnings per share divided by the 10-year US Treasury bond yield) minus 100.] The latest reading shows that the S&P 500 is 15.2% undervalued." -Ed Yardeni in the Prudential Financial Investment Strategy Weekly, July 1 '02 --------------- Different?