Zeev's Turnips Patch-No Politics (ZEEV)

[Alex G]

8:30 AM Tuesday July 13, 2004:
http://www.technologyinvestor.com/

The warnings from tech stocks come fast and furious. Not good. Intel (INTC) is just pennies above its pre-9/11 price. AT&T (T) popped nearly $1 yesterday on news of offering VoIP phone service in a bunch of markets. It won't last. Smith Barney's technical analyst (she uses charts, not earnings) talks about a "Technology Bubble Aftershock?" She suggests that tech stocks are about to suffer their second drop (their first one being the Tech Wreck of 200-2002). Her words:
"As with earthquakes, stock bubbles, too, may produce aftershocks (see arrow on Figure 1 -- a chart of highflier RCA's stock in 1929).
• Notice in Figure 1 on RCA that after one or two bounces off the first low, the stock ran up from approximately two to 14, about three years after the low – impressive – as have been the Technology stock advances recently. But notice that price then faltered and retreated back toward the lows. We might refer to that decline as “bubble aftershock.”
• Could Technology again be in the throes of its aftershock?! We have put together a selection of Technology names as we ask whether the Technology universe might be initiating its “bubble aftershock.” We would be extra vigilant as Technology names may be again separating the wheat from the chaff.
• What might this mean for Nasdaq? This process, we believe, is part of a larger capitalization shift taking place as money appears to be leaving Technology, Financials, Pharmaceuticals/Biotechnology, and Broadcast & Media, and repositioning into the Industrial-related and Energy sectors, with select Consumer Staples participating, too." For her full short report, click here. http://www.technologyinvestor.com/images/smithbarneytechalert.pdf

In short, it's proving the yuchy summer stockmarket I predicted. A place NOT to be. Unless you're short selected issues. I'm short AT&T, Intel and Citigroup. See previous days for more ideas.

The plummeting price of everything computing and telecommunications: Each time I started a new computing or telecom magazine in the 1980s and 1990s, I'd predict that the intelligence of the stuff would soar and its price would plummet. Never, in my wildest dreams did I expect the prices to where they are in the summer of 2004 -- rock bottom. Free phone calls. Throw-away computers. Rock bottom networking. So cheap you wonder how any tech company can make a profit. And, of course, that's the basic problem. The good news is for you and I as consumers. Item: A weekend catalog from Best Buy advertised:
+ 802.11b wireless routers with 4-port switches for $40.
+ 802.11b notebook cards for $40.
+ A 5-port network switch (better called a hub) for $10.
+ A portable DVD player for $200.
+ A Koss home theater system with seven speakers and a DVD player for $200.
+ A 52" widescreen projection HDTV monitor for $1300 -- $100 less than I paid for my 42" screen several months ago.

Expect commodities to soar in coming years: A friend runs a successful hedge fund betting on commodities, which is not an area I know anything about. But I'm learning. His logic seem impeccable. He writes to his investors:

"The agricultural world has changed dramatically in the last 6 years, particularly in the areas of grain, oilseeds and livestock. The changes have been worldwide and involve both supply and demand. As just one aggregate example, the total world stocks of wheat, feed grains and rice have fallen from 560 million metric tons (mmt) in 1999 to 336 mmt this year and, even with normal yields, will probably fall well below 300 mmt over the next couple of years.

There are many factors involved in this decline, but the role of the agrarian revolution in China cannot be overemphasized. Historically, China has been a net exporter of grain. In 2002/03 they exported 17 mmt of all grains. In the current year net exports will be about 5 mmt and next year, in 2004/05, China will be a net importer. By 2006/07 net imports can be conservatively projected to be over 40 mmt. This is a swing of about 60 mmt in 5 years. As an order of comparative magnitude, the entire exportable surplus of the U.S. in wheat and feed grain is only 80 mmt.

The essence of the agrarian revolution is that more people are eating better and living in cities and fewer are in the country side producing food. Rice is a perfect example that can only be described as hopeless. Paddy rice production technology is labor intensive and has not changed for hundreds of years. Paddy rice is still planted seedling by seedling. Recent production increases have resulted from using the land more intensively (double- or triple-cropping). However, with the decline in the rural labor force the intensity of land use in rice production has begun to decline and with it, rice production. There is no way China can maintain per capita rice consumption from domestic production alone. Imports are not an answer either, since very little rice is traded internationally. Vietnam and Thailand, the largest exporters, sell about 12 mmt between them. China consumes over 135 mmt of rice now and would have to import twice the exportable surplus of both Vietnam and Thailand in coming years just to maintain per capita consumption. A switch to wheat is the most likely solution. However, wheat production in China is declining also.

The growth of soy meal usage in China tells an even more dramatic story. Higher incomes and city life have increased the demand for meat and soy meal is a vital protein ingredient in producing compound animal feeds. In the last 10 years meal usage in China is up 600% and shows no sign of slowing. In fact, the fear of food inflation (currently a problem for Chinese leaders) should maintain a strong import market in animal feeds.

All of the foregoing problems have been mitigated in recent years by the drawing down of large stocks accumulated in the 1990s during and just after the regime of Deng Xiaoping. China's prospective swing from net exporter to net importer would have occurred much earlier had these stocks not been available. Since 1999 total grain stocks have fallen from 325 mmt to less than 80 mmt. Over the next 5 years such draw downs will not be possible.

The leading exporters (U.S., Brazil and Argentina) will be hard pressed to keep up with this growing Chinese demand, as well as with normal rest-of-world growth, at anything approaching current prices. Moreover, China is not the only area of rapid growth in feed demand. Domestic use in Brazil and Argentina themselves is growing rapidly, and India could be viewed as an early stage "China."

In summary, the margins for error in either supply or demand projections are small in coming years. For a number of reasons including a hiccup in Chinese growth rates, fear of interest rate increases in the U.S. and heavy fund liquidation, corn and soybeans have joined many other markets and corrected 40% plus. However, given the low margins for error noted above and the sub-par beginning to the growing season, we think our option positions in new crop corn and beans have excellent prospects. They continue to reflect our belief that the agricultural boom in U.S. prices is a multi-year phenomenon."

I don't do politics in this column. Still, I was impressed with Bob Herbert's Op-Ed piece in the New York Times yesterday. He titled the short column, "The Real Enemy Staring Us in the Face." To read it, Click here. http://www.technologyinvestor.com/images/TheEnemyStaringAtUs.html