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Wednesday, December 17, 2008

Five signs tech slump no where 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.
  • Tech 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 in the US. Yesterday it was Taiwanese IC distributors. Last week AT&T announced plans to cut 12000. There are expectations AMD will announced more layoffs next month. Even Google is reducing staff. The list goes on.
  • Tech 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 and SanDisk announced two week shutdowns and cuts in production of approximately 30%. DRAM vendors have already cut production.
  • Tech 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 shares purchased versus 72,158,381 shares sold in the previous week. 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 CEO's 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.

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