Ander's Market Theories

[AnderL]

Seems like this is a steady trend over the last few years. From CFSB analyst :

Semple noted that a report from the Department of Commerce showed that order growth for computers and related products slowed significantly in September.

Semple said in a research report that new orders of $8.2 billion for PCs, storage devices, terminals, and peripherals, increased 6% from September 2004; previously, "the slowest growth recorded by any month in 2005 was 24% in July." For the year so far, new orders for computers and related products are up 28% from the same period a year ago, "but this represents a marked deceleration from the 34% growth reported in both the first quarter and second quarter."

There could be a "difficult" fourth quarter ahead for the sector. "While industry-wide double-digit unit growth is usually nothing to scoff at, it is clear that the PC market's unit progress is being almost completely offset by price declines, particularly in notebooks, and a secular shift to the low end of the market owing to the robust growth in emerging markets including China, India, and Latin America," Semple said. "Further exacerbating the situation is the less-than-favorable component price environment, which makes it more difficult for U.S. OEMs to respond to aggressive pricing while also maintaining margins."

The analyst said the dynamics will remain in place throughout most of the fourth quarter "before components prices finally abate."

Not just in the computer industry but in other industries as well. Airline, Auto, Brokerage, Textile. It seems that the increased competition in the market place has forced companies to decide weather they will cater to the high end with quality or to the lowe end with quantity. Because the high end of the market has fewer consumers that demand the best it is difficult to break into that markets. Plus with the lack of volume in sales you have to generate high profit margins on the fewer sales to maintain an operation.

On the low end you can sacrifice quality and in turn lower prices. Profit margins are tighter but you more than make up for it in volume of sales. Your company looks like it dominates the industry but in reality it is a fragile house of cards.

The problem with going the low end is that it makes your company more susceptible to economic shifts as lean profit margins require the company to be efficient in operations. It is almost imperative to do so. With profit margins on unit sales being so tight that kind of company is more susceptible to economic shifts like rising energy and material costs. A 10% jump in gasp prices would have to be reflected in eroding profits or cuts elsewhere. Maybe the company requires retails to buy in one time larger orders rather than monthly ones.

Recent rising energy prices is killing airlines and it seems the only ones that are not severely damaged are the smaller carriers or the ones that operate luxury class charters. Even the auto industry in now felling the effects of trying to provide larger vehicles but keep them with the price range of middle to upper class consumers.

Inevitable a slowing economy will spread through every major industry and the companies that became dependant on tight profits and volume sales will end up raising prices or having to trim meat off their bones.

The funny thing about all the trimming to maintain their operations further cuts spending in the economy either by firing or laying off staff or simply reducing the spending ot maintain operations. After all expenses go back into the economy as purchased of pencils, post-it notes, computers, health insurance, etc.

It-s goings to hurt when the brokerages feel it and they have to start raising their rates to offset the lack of trading because less money is flowing int the markets.