NEW YORK-Although the technology-laden Nasdaq posted its strongest one-day gain ever in response to the Federal Reserve Board’s surprise rate cut Jan. 3, the market remains poised for gradual shakeout of accumulated excesses.
The transition to more rational corporate valuations and expenditures will be uncomfortable, in the view of speakers at the New York Society of Security Analysts’ Jan. 4 seminar, “Market Forecast 2001: An Investor’s Odyssey.” However, it also bodes well in the short run for certain kinds of technology companies and in the longer term for the overall economy, they said.
“I predicted the Internet would meet its Waterloo. Some companies-including big ones we were bankers for so I can’t name them-will never make money. The price of Internet services will go to zero because there has never been a time when the barriers to entry were so low,” said Byron Wien, managing director and chief investment strategist for Morgan Stanley Dean Witter.
“But the Internet is the most exciting phenomenon of our lifetime, and it’s the old economy companies that will benefit.”
Notwithstanding the Internet’s possibilities, the American economy needs to pay off some whopping bills to creditors, $7 trillion in outstanding personal debt and $10 trillion in outstanding corporate debt. It will take years to reduce this overhang, he said.
“The reason I’m so cautious is that we’ve had a 10-year period when the economy just went up. It wasn’t just day traders, but companies borrowed too much to buy their stock back at ridiculous prices,” Wien said.
“Technology spending hit 4.7 percent of GDP (Gross Domestic Product), 1 percentage point higher than any other country, because (U.S.) companies bought the ridiculous notion that they needed the latest technology to maintain market share. The machines are so much smarter than the people using them that much of the technology capacity is not yet being used.”
However, Wien said he believes there is a 50: 50 chance that new products associated with wireless data and fiber optics will begin “an important growth trend” sometime this year.
The American economy spent 1997 through 1999 on a “Y2K spending orgy,” but the transition to a pervasive Web-based infrastructure has just begun, said Arnold Berman, managing director of Wit SoundView Technology Group. Although recession diminishes capital spending, it also forces companies to prioritize. “Web-ification” of corporate enterprises, the third stage in the transition from mainframes to personal computers to Internet architecture, will get top billing, he said.
“I want to be careful how much enthusiasm to show for e-commerce. This is more about greasing the wheels of the old economy. It means a shift in locus from dot-coms and new wave phone companies to Global 1000 corporations that undertake extended vendor screening and have long decision cycles.
“Big companies want to use the Internet to touch their customers and suppliers. They don’t trust systems integrators like a Razorfish that’s just been around for a few years,” Berman said.
“Everyone is fearful about communications equipment because it has always gone from hype to disillusionment. Networks that make sense will get built. Iridium and Globalstar won’t get built, but a pervasive, wideband Internet will get built.”
Philip J. Orlando, chief investment officer of Value Line Asset Management, said he is optimistic about the prospects for companies involved in computer software, networking and storage.
“That the Nasdaq 100 went up 19 percent in one day (following the Fed’s recent rate cut) shows there is a pent-up demand for technology and a lot of cash sitting on the sidelines,” he said.
Those “enormous pools of capital in the United States” are being put to work in ways that do define a new economy, argued Anna Copeland Wheatley, editor in chief of AlleyCat News, which follows developments in New York’s Silicon Alley.
In the old economy, through the mid 1990s, new companies were forced to tap the public equity markets prematurely because venture capitalists were unwilling “to write checks for $50 million,” she said. That has changed significantly in recent years.
Many of those venture-capital investors are big, established corporations.
“They are outsourcing their R&D by taking an equity stake in entrepreneurship instead of owning it outright and putting it on a shelf for five years,” Wheatley said.
She described the mood in Silicon Alley as one of cautious optimism and the view of venture capitalists as more prudent but still active.
“Keep an eye on any companies getting V.C. investment during the last quarter of 2000 and the first quarter of 2001. They must be really good,” Wheatley said.
