Posted on 12/05/2001 10:00:09 AM PST by TPartyType
By Amy Baldwin
AP Business Writer
Wednesday, December 5, 2001; 1:19 PM
NEW YORK –– Technology shares led the stock market higher for a second straight session Wednesday, helping to propel the Dow Jones industrials up by triple digits and into the 10,000 level. The advance also lifted the Nasdaq composite index past 2,000.
Investors bet that the battered sector would trigger a new bull market. Upbeat comments from Cisco Systems and Oracle fed the growing optimism.
Amid heavy trading in early afternoon, the Dow surged 181.50, or 1.8 percent, to 10,075.34, adding to Tuesday's 129-point advance. The Dow has not closed above 10,000 since Sept. 5, when it finished at 10,033.27.
Broader stock indicators also rose sharply. The Nasdaq composite index soared 75.12, or 3.8 percent, to 2,038.22. The tech-focused index hasn't finished above 2,000 since Aug. 7 when it stood at 2,027.29.
The Standard & Poor's 500 index, which is Wall Street's widest measure, gained 21.85, or 1.9 percent, to 1,166.65.
Analysts attributed technology's strong run to buying by professional money managers looking to improve yearly performance. Historically, analysts said, the sector fares best in the fourth quarter.
"We are coming to the end of the year, and portfolio managers are reaching for performance. And tech stocks have done the best this quarter," said Richard Dickson, technical analyst for Hilliard Lyons in Louisville, Ky.
Technology has made the biggest strides since the Sept. 11 terror attacks. Through Tuesday's session, the Nasdaq has risen nearly 38 percent from its post-attack low of 1,423.19 on Sept. 21. The Dow has moved up 20.1 percent from its low; the S&P, up 18.5 percent.
Wall Street is also increasingly optimistic about an economic recovery occurring next year, and investors don't want to miss out on the market's next upturn, analysts said.
"You are getting momentum going. And, momentum begets momentum," Dickson said. . . .
I predicted earlier this year that the tech sector was going to rebound strongly in 2002. That forecast was based entirely on tax law and the effect that Y2K had on equipment replacement cycles. Because capital equipment can be depreciated for tax purposes over three years, businesses have an incentive to replace high-tech equipment as soon as they even think they need it. As a result, there is an expectation that in any given year approximately one out of every three computers, copiers, cell phones, etc. will be replaced.
Y2K changed all of that because many companies interrupted their three-year cycle in 1999 and replaced much of their equipment on a one-time basis even if it wasn't due for replacement until 2000 or 2001. The direct result of this replacement cycle interruption was that sales of high-tech equipment were depressed in 2000 and 2001.
2002 figures to be a banner year for the tech stocks, since all of that stuff that was purchased in 1999 will be due for replacement.
You heard it here first.
A comment about overvaluation, though. A company with a P/E ratio of 40 can hardly be considered "overvalued" in the current climate, since it is providing a return of 2.5% in an age when interest rates are at historical lows. When you factor in the growth potential for this company, a P/E ratio of 40 may be a bargain.
People point to the Microsoft suit in early 2000 as the start of the tech slide, but the truth is that the slide began beneath the surface on January 1, 2000. Companies like Dell, Cisco, and Microsoft had nobody to sell to except new start-ups, since everyone had purchased new equipment throughout 1999.
Do you think that the PC and equipment replacement cycle are not anticipated in earnings projections? Of course they are. Here's the kicker though. There is so much spare equipment on the market that companies are basically self-insuring. Why by a new Cisco router when you can buy one on E-bay from a dot-bomb for 1/3 the cost? Also, have you noticed the PC price war? What does it mean when the anticipated volume is replaced but at lower revenues? Oh, and one more thing, do you think the tightening of the screws in capital expenditures by companies that don't want to spend any cash will impact the three year replacement cycle?
Please tell me these friends are not analysts. If so, can you tell me who they work for to make sure I never read one of there recommendations....;-)
2002 figures to be a banner year for the tech stocks, since all of that stuff that was purchased in 1999 will be due for replacement.
You heard it here first.
Spot On, but they didn't hear it from you first. When this economic slump started in March of 2000, myself along with several others here made the very same observation. Speaking from personal experieince, the company I work for replaced all it's financial and HR systems in '99 in preparation for Y2K, replaced ALL our antiquated AIX Unix servers with new, and replaced our mainframe. The total dollar amount invested in technology that year was staggering, and we've been waiting to achieve our max ROI prior to doing a technology refresh again.
I said back in March 2000 that I suspected we weren't the only ones, and as it turns out --- we weren't. Q2 of '02 is going to be *spectacular* ...
That, you're hearing here first. :)
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