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 Technology Investments
  in U.S. Stock Market - Intro

- Types of Slowdowns

- Nasdaq & SP 500 changes

- IPO Hard Sells

- Value Investing - Buffett

- Risk Factors & Lessons


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the-south-asian.com                            March 2001

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Page  2  of  6

Technology & Investment in U.S. Stock Markets (cntd) 

Type of Economic Slowdown

  1. Stock market decline : High [ 30-50 ] PE ratios
  2. The Nasdaq makes up only 20% of the US market capitalization and has suffered a 60 % decline[ it was at 1830 around March 20 2001 since its "irrational exuberance"  highs of 5,200 in 2000 March. Nasdaq PE ratios are at an average of 50 instead of the high 400 a year ago, and this has been the average Nasdaq PE ratio since 1985.

    The rest of the economy was deprived of capital, as most of the capital was invested in the stock market IPO's of DOT COM companies of Internet – whose business models were not profitable and whose stock prices have since come back to ground with a quick reality check. Yahoo and Amazon.com whose stock prices highs touched  the $200 + range in 2000 are now at $10-15 levels.

    Surprisingly every sector of the Standard & Poor Index, excluding the Telecom and Technology stocks, is up from a year ago. Interestingly big companies such as GM Ford are at Price-Earnings [PE ratio] multiples of 8. (See Nasdaq & SP 500 changes in 2000 on next page).The average multiple for the ten largest Nasdaq stocks[ see the table later ] is now 33 times future reduced estimates.

  3. Employment:
  4. The US economy created 135,000 non-farm jobs - being primarily a service economy. The unemployment rate is holding steady at 4.2 percent.

  5. Treasury yields:
  6. At 4.92 percent the yield on the long-term 10-year Treasury is anything but low. This has ranged from a High of 8 to a low of 4 over the last ten years.The spread [difference] between the  two and ten-year year treasury is now at 50 basis points. Last summer is was at minus  -50 basis points. The average spread over  the last 35 years is +65 basis points . Many economists point to the shape of the yield curve as a predictor of recession and inflation. So far this approximate bond market indicator does not suggest either a recession or inflation.

    4. Over Production /Inventory Correction, Planned Obsolescence.

    Despite just in-time inventory supply chain management systems , advanced capitalist economies are always faced with a built-in contradiction - advanced consumption and over production of goods. Witness the constant "Sales" in the US Retail stores such as Wal-Mart, Macy’s, Target, CompUSA, Best Buy and Car Dealers.

    In technology the planned obsolescence has led to the current PC inventory glut and subsequent fall in stock prices of Intel, Dell, Compaq. The average PC life is 33 months and the Commerce Department Bureau of Economic Analysis sets its depreciation schedule in order to measure the size of the capital stock [total supply of productive machines, buildings, equipment and software]. So it will take a short time to bring down the stock of such equipment to desired levels. From a peak increase of 30 percent in September there has been an increase of 13 percent in January from a year earlier. In comparison large machine tools have a useful life of 8-10 years.

    The Case for continued Technology investment expansion- 

    Installation of Fibre optic cable, which many analysts argue has led to over-capacity by the investment /buildout of new carriers such as Williams, Qwest, Level 3 Comm. However JP Morgan’s senior economist Jim Glassman says that it’s a lot better to have " too much fiber [optics] than too many office buildings with no one to occupy them", which was the problem in Asia in 1990s. Further it is important to note that much of this fiber is "Dark" fiber as against "Lit-up" fiber. What "Dark" means is that it has not been activated for voice/data traffic with the use of expensive Network Switch and Cross Connect Equipment, which go into developing the working networks that enterprises and consumers require. So more telecom equipment will be required to operate networks.

    In the case of automobile sector, the inventories of cars and trucks at GM, Ford, and Chrysler fell to a 66 a day supply at February end compared to 90 a day in January. With sales still strong the auto-makers should be adding 1.5 percentage points to the real GDP growth in the second quarter following six consecutive quarterly declines according to Ward’s Automotive Reports.

    So the question as to whether the Federal Reserve Bank under Greenspan can stimulate both consumer spending and Capital spending [technology, computer, communication equipment, etc = 40 percent of business capital spending] may be answered as follows.

    Now that venture capital has stopped being available, and consumers have lost their savings in their 401K retirement plans [mostly in stocks], consumers have less money to spend on goods [such as TV, Freezers, consumer electronics, PC’s, etc]. Capital is flowing into Money market [ CD's  time deposits , cash, etc ]funds, Bonds and no longer into stock markets.

    "The Capital stock, much of it in information technology, will take at least a year to work off in terms of depreciation."

    In technology, with all the excess capacity of fiber, business is looking for a killer application to sell to consumers – such as video conferencing. High speed Internet access is still not possible unless the home is about 18,000 feet away from the Central Office Exchange - and current cable modem Internet access is about $ 50 per month.

    Nevertheless , E-commerce B2B front office supply procurement still offers enough of a payback/return on investment. Back office B2B [ automatic accounting reconciliation similar to banking branch reconciliation ] will follow in a few years if not earlier. There are too many cost savings/profits to be made, only the sound and the fury [ hype] have lessened.  The logic of capital [ profit making] to reproduce itself is inevitable.

    Knowledge management [corporate intranets, knowledge sharing , online training] is being aggressively used to increase the cycle of product innovation and increase office productivity. 

    Many businesses and government offices [GSA, IRS, Defence] are still going forward with these technologies in order to save costs of up to 60-90 %. This in turn means more bandwidth requirements from long distance carriers such as AT& T, Sprint, and Worldcom for the frame relay and ATM data services - with growth in the 20-50% range.

    In other parts of the world, Western European build out will be similar to USA - steady growth instead of high-speed bandwidth growth. Countries such as India, China, Far East, South America [Brazil] but not Argentina [debt problems] will continue to offer stability to the growth of telecommunication equipment makers such as Nortel.

    Finally the "last mile" problem worldwide will definitely keep wireless networks on a growth path – albeit slower. (In Europe wireless penetrations range from 50 % in UK, Italy, Germany to 70 % in Finland and Sweden. In UK 50 % of the children aged 15 + have a mobile telephone. In Japan NTT DoCoMo and in Europe Wireless operators aregetting ready to launch Third Generation 3G wireless [ high speed - 1.5 - 3 Mb ]  internet data access.

    Globally the end of the cold war , the fall of the Berlin wall[ 1984] , collapse of USSR /Russia and East European economies, China Vietnam has started a trend. This has led to a re-allocation of resources towards economic growth and the material well being of people.

    In terms of adopting such technologies Peter Drucker has often written of the rule that technology gets adopted when there is a productivity advantage of a factor of ten times. So when one considers the fact that a Boeing 777 was completely designed on a Engineering Work stations from Sun, HP, Silicon Graphics and that 40 % of the US population has internet access , then extrapolating this argument [ connectivity = productivity] to the rest of the world economies, this is only the beginning of the longest drawn out technology build out.

    The benefits from all these opportunities comes in the form of added stability, broader market geographies, so that the vicious technology profit cycles of the past may become more stable.

    5. High Energy Prices [ OPEC cuts ]

With OPEC cutting oil production to maintain its Crude Oil prices between $22-28 per barrel and the California Power shortages along with the Washington state Gas & Electricity prices rising sharply, this could be the biggest danger to the US economy out of all the above factors.

6. Other Economy Sensitive factors.

The mounting National Debts of countries such as Turkey , Brazil , Argentina, Pakistan and the  Banking industry all over the world is especially susceptible to its increasing vulnerability to bad loans . The recent [ 1998] asian crisis in Korea, Thailand , Indonesia, Malysia and Hongkong are potent factors in assessing the overall global economic situation that could lead to serious financial meltdown of the US and the strongly dependant south asian countries economies. 

In south asia some  Indian, Pakistani banks and companies balance sheet problems and bad loans are too numerous to be mentioned here. 

The recent Foot & Mouth disease in the UK shows that a small problem can easily affect other countries [ Europe ] and impact he agriculture & tourism sectors of the economy.


next page

page     1 - Introduction - Japan & US - Similarities & Differences

page     2 - Types of Economic Slowdowns

page     3 - The Long View - Nasdaq & SP500  Compositions

page     4 - Investment  Bankers/Analysts - IPO Hard Sells

page     5 - Value Investing - Warren Buffett 'the Sage of Omaha'

page     6 - Technology Investment Risk Factors
Lessons for South Asia









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