The New Normal: 10 Themes and Their Implications on the American Economy (Part 3) Media Saturation

On September 17th I introduced 10 themes that we see as having significant impact on the future of the US economy. Along with the a description of the theme, I include what "The New Normal" could look like, along with the possible risks and opportunities for investors. Here is the third theme of ten.

3. Media Saturation

Why MSFT ORCL RIMM VMW and HP will continue to post solid results.

We have been building a thesis that, regardless of the recent deceleration of economic growth in the US economy, the enterprise IT sector is on a bit of a roll that should persist for the next several quarters. Investors may want to look at business/enterprise IT technology for overweighted returns. Please note that 26% of the aggregate market cap of the sector is in cash and/or equivalents.
RIMM, MSFT, ORCL, VMW, and HP all reported better than expected results, and all presented fairly positive outlooks. Although CSCO met expectations, its outlook was positive. Our channel sources confirm that American business is investing in productivity at the desktop, in the pocket, and in the back office.

The New Normal: 10 Themes and Their Implications on the American Economy (Part 2) Tax Inequity

In my previous post I introduced ten themes that represent a "new normal" for the American economy as it continues to exit from the 2007-2009 recession. Evidence suggests that the potentially greatest impact on the economy, and the first theme of the "new normal" is simple demographics. Baby Boomers are getting older, wealthier, more cautious, and  more powerful than ever as a cohort. To them its now about assets not equity; dividends not growth. If the United States recovers to maintain its economic leadership, its largest cohort will likely need to behave differently than any other previous cohort at a similar life stage and throw caution to the wind. More than ever, the American economy needs investment in new ideas, new business models, and the skills of its diminishing workforce in order harness American ingenuity to actually grow its economy. This is not likely to happen because Baby Boomers have accumulated vast wealth and they are unwilling to part with it for any reason.

The second theme is related to the first.

2. Tax Inequity

The New Normal: 10 Themes and Their Implications on the American Economy (Part 1)

History clarifies the present and that won’t happen until it’s too late. In the meantime, we are left trying to make economic sense of this messy human condition in real-time. At no point in history has the mess been more interconnected and complex than it is today. Those that are able to distill situations and make effective decisions in real-time are most likely to succeed, and then there is the other 99% of us.

Investors can no longer easily “peel back the onion” to uncover fundamental risks and opportunities and act upon them. There are just too many onions and they are appearing at faster rates, compressing the available time to uncover, solve, and act upon opportunities. And even as the onions are peeled, sometimes they turn into completely different vegetables.

No wonder investors are hiding under their desks right now. They are being pummeled by data, commentary, opinion, and opinion disguised as data from everywhere and continuously. Not all of the data is valuable, valid, or unbiased, which makes it difficult to make objective decisions. Hence, we see low volume and high volatility in equity markets.

In an effort to decipher secular and objective trends and events which could impact the performance of companies that I cover for my clients, I have been scouring for objective research and data that can provide some backdrop to the recommendations that I make.

For the most part, I cover small cap technology stocks. At no time in recent history have technology companies had as much money on their balance sheets, and at no time have these companies traded at a discount to the main index, despite showing 15% growth in earnings year-over-year. Among technology bellwethers, nine out of ten reported earnings growth last quarter, six out of ten beat estimates and 7 guided higher. Prior to 2008, this would have represented a fairly significant move up for the NASDAQ and a perceived buying opportunity. For Q2 2010, it represented a meaningful move down for most of those same stocks. Behavior that I have taken for granted over the past two decades did not occur, which leads me to believe that there are new fundamental drivers and conditions affecting the market. In other words, there appears to be a “new normal” emerging from this recession that is impacting not only the narrow band of technology stocks that I follow, but also the broader economy. The trends are sobering. However, as a generally optimistic individual, I am hopeful that Americans will find a way to alter their path. The world economy will depend upon it.

I have organized the New Normal into ten themes. Within each theme, I attempt to identify the risks, opportunities, and investment sentiment. Without changes to policy that could alter the present course, the overall indicators are that the United States appears to be entering a period of persistent low economic growth with high volatility and increasing polarity between rich and poor. As with all things, Americans have the ability to alter course. The interesting question is whether they have the will to do so.

Here are the 10 themes:

1. Demographic Shift
2. Tax Inequity
3. Media Saturation
4. War(s)
5. Education Deficit
6. Health Deficit
7. Innovation Deficit
8. Debt
9. Accountability & Ethics
10. Political Intractability