wall street pines for tech recovery

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    Traders on the floor of the New York Stock Exchange observe a moment of silence for military personnel involved in operation "Enduring Freedom" - Reuters
    Wall Street Pines For Tech Recovery
    02/02/2003 09:46 AM
    Herbert Lash
    Something funny is happening on Wall Street. Companies are slashing their capital spending budgets due to a dicey economic outlook, yet tech stocks have shown some light on hopes of a recovery in technology spending.

    The tech-laced Nasdaq Composite Index has lost ground since the new year's rally peaked two weeks ago. But its drop has been less than that of the Dow Jones industrial average and runs counter to its usual wider swings than the Dow.

    There are several reasons this could be happening:

    ** The Nasdaq -- which was once over 5,000 -- has been battered the worst in the past three years and the rest of the stock market might just be catching up;

    ** Tech spending has all but disappeared in the past three years. Eventually, people will need new computers;

    ** Investors often feel the need to buy something, and the bull market in the late 1990s was a tech-driven phenomenon. Some may think now is the time to get ahead of the next rally.

    Behind the tech stock push are hopes the bear market has bottomed and expectations information technology will pick up at the end of the year, or by early 2004, as companies replace equipment bought during the year 2000 build-up.

    "My sense from everything you read is the rate of decay has slowed. The news hasn't been getting incrementally worse," said Donna van Vlack, director of trading at Brandywine Asset Management, which oversees $7 billion. "How many shipwrecks have you seen? The world's not going to be in hell forever."

    But the bet on tech may be dead wrong, as some say the bear market, the deepest since World War II, isn't over yet.

    "The watchword is spend as little as possible," said Erick Maronak, research director at NewBridge Partners, about corporate IT spending. "We're past things deteriorating quarter after quarter, but the issue is when will companies return to revenue growth?"

    Many tech shares shot up 40 percent to 60 percent after the Nasdaq hit multiyear lows in early October, on hopes the rout in technology had run its course. Worries the latest rally will be just another in a series of bear market bounces has made some investors question the likelihood of a tech recovery.

    "There's an inability to reconcile what we saw in stocks (during the October rally) with the fundamentals," Maronak said. "At this point, given all the head fakes investors have bought into, they're being a little leery."

    Tech Dreams

    After three years of decline on Wall Street, and with warnings of a fourth down year, investors can be forgiven for not buying into the call for a tech recovery.

    But rising revenue forecasts can easily be found on Wall Street, even though many companies have said they will not provide forecasts this year because the economic outlook is clouded by a possible war with Iraq.

    SG Cowen said on Wednesday that it recently spoke to a high-level official at the U.S. Office of Management and Budget. Federal IT spending budget is expected to increase 20 percent in 2003, up from a 5 percent increase last year, the brokerage said.

    Cisco Systems Inc. is expected to be the primary beneficiary, said SG Cowen analyst Christin Armacost.

    Getting a handle on how much companies will spend is difficult because of particular company needs and the wide spectrum of what can be bought.

    UBS Warburg said it expects global wireless capital spending of about $68 billion in 2003, though it said its estimate could be reduced after AT&T Wireless Services Inc. announced on Wednesday spending would be slashed almost 40 percent to $3 billion.

    U.S. Bancorp Jaffray said even the most optimistic forecasts for PC components call for barely half the 17 growth range of several years ago when Y2K spending was on a tear.

    "Many observers, justifiably so, see this as a largely saturated market hamstrung further by a worldwide economic slump," said Bancorp Jaffray analysts Ashok Kumar in a report.

    Valuations Still Too High

    To be sure, technology earnings will increase 31 percent in 2003, following a 22 percent decline last year, said Ed Yardeni, Prudential Securities' chief investment strategist.

    The view is in line with Wall Street consensus, Yardeni said, and though it seems high, it will only put the sector back to what its earnings were in 1995, he said.

    "I'm not real enthusiastic about tech," Yardeni said. "Overall, I think this is going to be a distressed sector for awhile. You can have an earnings rebound, but not enough to justify current valuation multiples."

    On a 12-month forward-earnings basis as of January, tech stocks were trading at price-to-earnings ratios of 30, whereas prior to 1998 they traded at about 16, he said.

    Tech will continue to be a trading vehicle, sparking great rallies that last a few weeks, only to give back most of their gains, Yardeni said. Since the Nasdaq peaked in March 2000, there have been seven rallies that turned out to be duds.

    "We have to get over this tech obsession," he said. "We have to get on with life."

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