Five Signals the Tech Slump Is Nowhere Near Over

Markets reacted with euphoria to the Fed's announcement after yesterday's FOMC meeting.

Still, it is difficult to get too excited about the immediate prospects for the tech industry. Here are five signs that the tech downturn will not end quickly.

• Companies are cutting their workforces. If there were any chance that the tech downturn was drawing to a close and that demand was going to rebound, companies would be holding on to their experienced employees. They are not. Every day there are new announcements of layoffs in all sectors worldwide. Today it is RF Micro (RFMD) in the US. Yesterday it was Taiwanese IC distributors. Last week AT&T (T) announced plans to cut 12000. There are expectations AMD (AMD) will announce more layoffs next month. Even Google (GOOG) is reducing staff. The list goes on.
• Companies are cutting production. Companies always adjust production in response to changes in demand. The production cuts being announced lately are so large that they merit announcement to the media. RF Micro is in the spotlight today with a production cut. Yesterday Toshiba (TOSBF.PK) and SanDisk (SNDK) announced two week shutdowns and cuts in production of approximately 30%. DRAM vendors have already cut production.
• Companies are cutting prices in order to shed inventory amid weakening demand. Margins are becoming a secondary concern. There are reports that spot prices for polysilicon and solar cells are plunging as producers in China try to unload product at any price. We have already seen plunging prices for memory chips.
• Insider buying is dwarfed by selling. This past weekend the Wall Street Journal had some interesting information in their Insider Trading Spotlight section. They provided a breakdown by sector. For tech, there were 1,070,544 share purchased versus 72,158,381 shares sold. If the tech slump was close to a bottom, there should be a lot more insiders buying their stock. The fact that so much selling is still going on is alarming.
• Semiconductors sales are projected to endure a sharp decline in 2009. Semiconductors are the canary in the coal mine. With the exception of the software and services sectors, the rest of the technology industry is dependent on semiconductors in order to make the hardware work. If semiconductors are not in demand, it is a sure bet the hardware further up the tech food chain isn't in demand either.

The five signs listed above are an indication that tech company CEOs do not see a quick end in sight for the current downturn. The corporate strategies of reducing headcount and production are typically utilized as demand is recognized to be falling, not when things are perceived to be about to improve. Proving the negative outlook of company managers is the lack of insider buying despite the fact that share prices are already beaten down.

Enjoy the current rally while you can. The problems in tech are far from over.

Disclosure: none

Comments

[DanM:]

I agree that the tech slump will continue, but disagree with the reasons.

So much of tech is bought because they have the budget for it. In big companies, often its a use it or lose it scenerio and buying technology provides an excuse to exist. The large r issue is we're hitting pinnacles in certain technologies where the gains are minimal and simply do not warrant the expense of money and time. Technology, over time, should allow a company to hire less people to get the same results so I disagree that headcount reduction is a sign of the prolonged tech slump. Its more likely managers are starting to ask for a ROI on such investments and simply not seeing it.

2008 Dec 17 02:44 PM

[bobbobwhite:]

Have not bought tech stocks since 2000 and won't ever again. Recessions and depressions make it clear to me that stocks representing companies whose products are needed all the time no matter the economy are the ones to own, if any. Some even do as well or better in a down economy, like alcohol and smokes.

Bottom line: A top market guy I know says AT LEAST 1/3 of all market investors will never return to the market after this latest debacle of deception and crime and that we will never again see the stock market be nearly as powerful or charismatic as it has been in influencing the lives of Main Streeters.

I agree.

2008 Dec 17 02:52 PM

[Trade Radar...:]

DanM -

Your point about tech gains being minimal is quite valid and I did allude to that concept in a post titled "Who needs tech in a recession?"

As for the headcount reduction, I am referring to tech companies themselves, not their customers. It is not a sign of growth in the tech industry when tech companies are laying off employees.

2008 Dec 17 03:11 PM

[Jolly_Rancher:]

I agree completely. After the huge 2000 tech bubble, investors gave many tech stocks a second chance and bid up the shares to what were perceived as reasonable prices only to shrug and say in 2008, "When is tech going to make any money?" Most of the companies were way over-valued again in 2007 with most still incurring losses quarter in and quarter out. There is no hope for tech. Margins are poor, competition high, and the technology changes too rapidly for profits to overtake capital investment costs. I will not buy tech again.

2008 Dec 17 09:20 PM

[DanM:]

Then we agree. My bad, I should have picked up on that since the article is about tech.... One reason i like the subscription and cloud computing models is it gives tech companies a more predictable revenue stream....

On the flip side, one good thing about tech's is they have no to low debt and oodles of cash. The recession will present huge buying opportunities for them and we're moving quickly towards an industry that will consist of maybe 10 players






On Dec 17 03:11 PM TradeRadarOperator wrote:

> DanM -
>
> Your point about tech gains being minimal is quite valid and I did
> allude to that concept in a post titled "Who needs tech in a recession?"
>
>
> As for the headcount reduction, I am referring to tech companies
> themselves, not their customers. It is not a sign of growth in the
> tech industry when tech companies are laying off employees.

2008 Dec 18 08:28 AM