This is a sobering analysis of current U.S. employment metrics. As per the earlier post today, investors should not gain any solid conviction from these charts as to whether the worst is over, or if there is more pain and agony still to come for the American economy. Almost every positive chart is offset by a negative one, and vice versa. This helps support the potential for more short-term volatility. Crossroads.
Right now feels like that few seconds of silent suspense before something really big happens. And no one knows which way it's going to go. Whichever way it goes, the charts seem to indicate that the downside looks steep and fast, and the upside looks slow. The U.S. Treasury is likely looking at more precise data, and it does not want to risk the potentially harrowing downside. This may be why it has hinted that it is willing to step in to provide even more stimulus later this year if it needs to, despite all of the green shoots sprouting up.
The outlook from Q2 may help. INTC reported a BEAT with nice growth in sales and, more importantly, a margin surprise. It has maintained it full-year outlook, which should be considered a neutral indicator.
Let's all sing:
Should I stay or should I go, now
If I stay there will be trouble
If I go it will be double
C'mon and let me know
Should I cool it or should I blow...
Disclosure: I do not own INTC shares.
RIP Joe Strummer.
Showing posts with label recession. Show all posts
Showing posts with label recession. Show all posts
1/9/09
Why The Tech Sector Is a Good Play in This Recession
Yesterday I was speaking to someone regarding the future of the information technology sector in the short-term and long-term. I believe that we can to the following conclusions:
1. Information technology is a horizontal sector, meaning that it pertains to consumer, government, services and industrial markets, and all niches from consulting to metal stamping, from coffee shops to open-pit mines. Information is infrastructure.
2. Information technology is no longer a speculative bubble as it was in 2000-2002, although there remain speculative niches within the broad sector. Overall, the sector generates reasonable cashflow and free cashflow growth.
3. Relative to some sectors, the cash to long-term debt ratios are positive.
The conclusion was that because information technology is such a broad sector, it should mirror not the US economy but the world economy. Worldwide stimulus initiatives by governments should create areas of opportunity within the sector. As President Obama (he's pretty much running the show now) puts the finishing touches on his massive stimulus package, the IT sector should benefit overall, however it is becoming clearer that some niches should benefit more than others:
- Companies that provide IT infrastructure including storage, bandwidth, switching, routing, virtualization, and security should benefit directly from the stimulus package.
- Clearly healthcare technology providers should benefit, although there should be few winners and a lot of losers. There has been a lot of work done already on EMR in anticipation that the healthcare sector would adopt more IT solutions. To date, lack of political will has resulted in anemic uptake and a highly fragmented niche with a lot of minor vendors struggling to make money. There are likely to be few upstart winners, although most of the business should be earned by established healthcare technology providers like McKesson (MCK.NYSE). One could expect to see the usual suspects, led by Google (GOOG.Q), Microsoft (MSFT.Q), and IBM (IBM.NYSE) become more aggressive in gobbling up small and mid-sized specialists in the area.
- A vast majority of stimulus packages worldwide are focused on physical infrastructure such as roads, bridges, rail, and power. Although these initiatives are much smaller than the Obama package, there is likely to be benefit to engineering, production, and project management applications vendors.
- speaking of power, Obama's alternative energy plans will require significant IT support in hardware, firmware and software.
- Congressional hearings related to the financial meltdown are likely to result in more rigourous regulatory regimes, which could benefit IT vendors at a scale similar to the Sarbannes-Oxley accounting regulations resulting from the Enron scandal.
Public stimulus projects are only part of the story. Consumer spending habits and behaviors are already changing, and priorities should be much different this time around as compared to previous recessions. Here are some themes ( which have been touched on previously):
- Mobile subscription is a utility that is more important that cable TV, landline telephony, internet access, and in some parts of the world, electricity.
- According to published reports by the Mastercard Advisors, this Christmas online spending trends outperformed bricks and mortar. We may find an upsurge in online spending as consumers become more frugal and retailers move deals online. As retailers are forced to begin to consolidate the physical retail network, look for a new wave of investment in online security, payment systems, and logistics.
Information is the foundation of modern economies. The need for more efficiencies, reliability, and effectiveness should increase as the world economy recalibrates. Niche opportunities exist within the broader market that could have a 3 to 5 year time horizon.
I do not own any of the stocks mentioned in this post, nor do I receive any compensation from management.
1. Information technology is a horizontal sector, meaning that it pertains to consumer, government, services and industrial markets, and all niches from consulting to metal stamping, from coffee shops to open-pit mines. Information is infrastructure.
2. Information technology is no longer a speculative bubble as it was in 2000-2002, although there remain speculative niches within the broad sector. Overall, the sector generates reasonable cashflow and free cashflow growth.
3. Relative to some sectors, the cash to long-term debt ratios are positive.
The conclusion was that because information technology is such a broad sector, it should mirror not the US economy but the world economy. Worldwide stimulus initiatives by governments should create areas of opportunity within the sector. As President Obama (he's pretty much running the show now) puts the finishing touches on his massive stimulus package, the IT sector should benefit overall, however it is becoming clearer that some niches should benefit more than others:
- Companies that provide IT infrastructure including storage, bandwidth, switching, routing, virtualization, and security should benefit directly from the stimulus package.
- Clearly healthcare technology providers should benefit, although there should be few winners and a lot of losers. There has been a lot of work done already on EMR in anticipation that the healthcare sector would adopt more IT solutions. To date, lack of political will has resulted in anemic uptake and a highly fragmented niche with a lot of minor vendors struggling to make money. There are likely to be few upstart winners, although most of the business should be earned by established healthcare technology providers like McKesson (MCK.NYSE). One could expect to see the usual suspects, led by Google (GOOG.Q), Microsoft (MSFT.Q), and IBM (IBM.NYSE) become more aggressive in gobbling up small and mid-sized specialists in the area.
- A vast majority of stimulus packages worldwide are focused on physical infrastructure such as roads, bridges, rail, and power. Although these initiatives are much smaller than the Obama package, there is likely to be benefit to engineering, production, and project management applications vendors.
- speaking of power, Obama's alternative energy plans will require significant IT support in hardware, firmware and software.
- Congressional hearings related to the financial meltdown are likely to result in more rigourous regulatory regimes, which could benefit IT vendors at a scale similar to the Sarbannes-Oxley accounting regulations resulting from the Enron scandal.
Public stimulus projects are only part of the story. Consumer spending habits and behaviors are already changing, and priorities should be much different this time around as compared to previous recessions. Here are some themes ( which have been touched on previously):
- Mobile subscription is a utility that is more important that cable TV, landline telephony, internet access, and in some parts of the world, electricity.
- According to published reports by the Mastercard Advisors, this Christmas online spending trends outperformed bricks and mortar. We may find an upsurge in online spending as consumers become more frugal and retailers move deals online. As retailers are forced to begin to consolidate the physical retail network, look for a new wave of investment in online security, payment systems, and logistics.
Information is the foundation of modern economies. The need for more efficiencies, reliability, and effectiveness should increase as the world economy recalibrates. Niche opportunities exist within the broader market that could have a 3 to 5 year time horizon.
I do not own any of the stocks mentioned in this post, nor do I receive any compensation from management.
11/21/08
Post 9/11 Head Fake
Yesterday, the Dow closed at 7552, below the lowest monthly close of 7591 in September of 2002. The 2002 bear market was caused by uncertainty related to post-9/11, post-tech bubble and various high profile accounting scandals. Mostly, consumers were feeling insecure about their future (due to the fear of more terrorist attacks) and investors were mistrustful of the stock market.
At the time, the U.S government intervened aggressively to prevent a further deterioration of the stock market, and to prevent its malaise from spreading to the general economy. Sarbanes Oxley legislation combined with aggressive monetary policy and credit deregulation was an attempt by the US government to restore faith in the stock markets and to induce consumers to spend more. By 2002, it was un-American not to spend. The problem was that the Consumer only had pocket change. Individual savings were at historical lows in 2002 and 2003, with less than 1% savings rates compared to the three previous decades when consumers typically saved 7% of their incomes. There was the proverbial problem of getting blood from a stone, a challenge that was solved (as we all know) through asset leverage.
Consumers were induced to leverage their net worth in order to buy more. According to testimony to Congress by Alan Greenspan on February 17, 2005, by 2004 consumers were creating disposable cash by leveraging increases in Net Worth driven primarily by the value of their real estate. According to Mr. Greenspan at the time, the Net Worth to Income ratios were at historically high levels and even higher than the ratios leading up to the tech bubble. Persistently low interest rates, combined with increasing home values and ongoing credit deregulation provided mortgage brokers and bankers incentives to create high risk credit products that were used to induce lower income families to become homeowners…and spend. Everyone was becoming upwardly mobile, consumerism ruled, and the American Dream was thriving. People leveraged their inflated Net Worth to spend above their economic bracket. Meanwhile, the financial engineers that created and managed the architecture underlying the Great Spend made gobs of money.
The US consumer spending frenzy became globalized. Suddenly Chinese, Indonesian, and Indian factories were deluged with orders to help fulfill the American Dream. Giant middle classes formed, creating their own spending power and consumer demand. Resulting materials shortages and the thirst for energy created possibly the single largest commodity boom ever, which persisted a full year beyond the beginning of the collapse starting in August 2007, and we know well what has transpired since.
Are we at the bottom? Earlier this year I was certain that the stock market would bottom at 2002 levels and then begin a slow recovery spanning the following 6 to 8 quarters. It was my belief that once the false post 9/11 boom was effectively wiped out, markets would regain momentum as consumer net worth to income ratios aligned to those of previous decades, and consumer savings rates returned to 5% to 7% of net income. With current deflationary pressures, caused by a clamp on consumer spending, we may in fact be seeing the front end of the adjustments happening right now. It should be an austere Christmas.
However, there remains risk that a bottom has yet to be reached. Unlike today, in 2002 the financial markets were fairly sound. Uncertainty was limited to unsavory accounting practices of a handful of high profile Companies. Despite continued intervention by Governments worldwide, the current state of the worldwide financial sector remains unstable at best – this a much greater scale of pain than illegal accounting practices by a handful of US companies. This is not a stock market issue; it is a fundamental financial issue.
In 2002, government intervention along with the underlying theme that, if American consumers didn’t spend, the terrorists would win, drove an already leveraged consumer to more leverage. But it worked, and the Wall Street declines did not spread to Main Street. In hindsight, maybe it should have. If the 2002 downturn became a natural recession as it probably should have, maybe we would be dealing with a less severe reality today.
Main Street is probably just as opaque as Wall Street. In the infamous words of Dick Rumsfeld “there are known knowns, known unknowns, and unknown unknowns”. What happens if the buffoons that lead the US auto sector are unable to convince Congress that they have a plan? What is the next big industry at risk of collapsing? Who will bail out the construction industry? And what happens to municipalities as the tax base declines? Are the Chinese and Indian middle classes real, or will they disappear? Is the American middle class real? Will all of this uncertainty foment the re-emergence of trade union power and the unrest associated with it? And while the world reels, what are the terrorists planning?
I am hopeful that we have reached the bottom that seemed apparent earlier this year based on a 20 year chart. If not, the next leg down could be 6500 based on a 50 year chart.
Although there are many risks, there are also bright spots including the new Presidency. Hope is a powerful emotion to harness. If the new Administration can execute the basics while instilling hope with the battered American middle class, there is more upside than downside to the economy by the second half of President-elect Obama’s first term.
By attacking world symbols of capitalism on 9/11, Al Qaeda had hoped to throw the world economy into turmoil and immediate economic collapse. It is widely believed that Al Qaeda failed because the American consumer threw the world economy on its back and dragged it out of perceived danger. The question now is how much danger was there, really? How much damage was done to the American consumer and how long will it take for it to recover? And what will it become? While the US consumer recuperates, where are we heading? What are the possibilities of worse things to come?
At the time, the U.S government intervened aggressively to prevent a further deterioration of the stock market, and to prevent its malaise from spreading to the general economy. Sarbanes Oxley legislation combined with aggressive monetary policy and credit deregulation was an attempt by the US government to restore faith in the stock markets and to induce consumers to spend more. By 2002, it was un-American not to spend. The problem was that the Consumer only had pocket change. Individual savings were at historical lows in 2002 and 2003, with less than 1% savings rates compared to the three previous decades when consumers typically saved 7% of their incomes. There was the proverbial problem of getting blood from a stone, a challenge that was solved (as we all know) through asset leverage.
Consumers were induced to leverage their net worth in order to buy more. According to testimony to Congress by Alan Greenspan on February 17, 2005, by 2004 consumers were creating disposable cash by leveraging increases in Net Worth driven primarily by the value of their real estate. According to Mr. Greenspan at the time, the Net Worth to Income ratios were at historically high levels and even higher than the ratios leading up to the tech bubble. Persistently low interest rates, combined with increasing home values and ongoing credit deregulation provided mortgage brokers and bankers incentives to create high risk credit products that were used to induce lower income families to become homeowners…and spend. Everyone was becoming upwardly mobile, consumerism ruled, and the American Dream was thriving. People leveraged their inflated Net Worth to spend above their economic bracket. Meanwhile, the financial engineers that created and managed the architecture underlying the Great Spend made gobs of money.
The US consumer spending frenzy became globalized. Suddenly Chinese, Indonesian, and Indian factories were deluged with orders to help fulfill the American Dream. Giant middle classes formed, creating their own spending power and consumer demand. Resulting materials shortages and the thirst for energy created possibly the single largest commodity boom ever, which persisted a full year beyond the beginning of the collapse starting in August 2007, and we know well what has transpired since.
Are we at the bottom? Earlier this year I was certain that the stock market would bottom at 2002 levels and then begin a slow recovery spanning the following 6 to 8 quarters. It was my belief that once the false post 9/11 boom was effectively wiped out, markets would regain momentum as consumer net worth to income ratios aligned to those of previous decades, and consumer savings rates returned to 5% to 7% of net income. With current deflationary pressures, caused by a clamp on consumer spending, we may in fact be seeing the front end of the adjustments happening right now. It should be an austere Christmas.
However, there remains risk that a bottom has yet to be reached. Unlike today, in 2002 the financial markets were fairly sound. Uncertainty was limited to unsavory accounting practices of a handful of high profile Companies. Despite continued intervention by Governments worldwide, the current state of the worldwide financial sector remains unstable at best – this a much greater scale of pain than illegal accounting practices by a handful of US companies. This is not a stock market issue; it is a fundamental financial issue.
In 2002, government intervention along with the underlying theme that, if American consumers didn’t spend, the terrorists would win, drove an already leveraged consumer to more leverage. But it worked, and the Wall Street declines did not spread to Main Street. In hindsight, maybe it should have. If the 2002 downturn became a natural recession as it probably should have, maybe we would be dealing with a less severe reality today.
Main Street is probably just as opaque as Wall Street. In the infamous words of Dick Rumsfeld “there are known knowns, known unknowns, and unknown unknowns”. What happens if the buffoons that lead the US auto sector are unable to convince Congress that they have a plan? What is the next big industry at risk of collapsing? Who will bail out the construction industry? And what happens to municipalities as the tax base declines? Are the Chinese and Indian middle classes real, or will they disappear? Is the American middle class real? Will all of this uncertainty foment the re-emergence of trade union power and the unrest associated with it? And while the world reels, what are the terrorists planning?
I am hopeful that we have reached the bottom that seemed apparent earlier this year based on a 20 year chart. If not, the next leg down could be 6500 based on a 50 year chart.
Although there are many risks, there are also bright spots including the new Presidency. Hope is a powerful emotion to harness. If the new Administration can execute the basics while instilling hope with the battered American middle class, there is more upside than downside to the economy by the second half of President-elect Obama’s first term.
By attacking world symbols of capitalism on 9/11, Al Qaeda had hoped to throw the world economy into turmoil and immediate economic collapse. It is widely believed that Al Qaeda failed because the American consumer threw the world economy on its back and dragged it out of perceived danger. The question now is how much danger was there, really? How much damage was done to the American consumer and how long will it take for it to recover? And what will it become? While the US consumer recuperates, where are we heading? What are the possibilities of worse things to come?
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