Replies to post #105517 on Zeev's Turnips Patch-No Politics (ZEEV)

[Koikaze]

For those interested, I've added some material to the Zeev's Ideas Board (#board-1351).

Fred

[Justa Werkenstiff]

In this tech. rally, MSFT has been AWOL.

[Culmus]

Zeev,

I think there is no telling how much consumer and corporate borrowing can or will retreat. It will coincide with the economic trough, agreed.

However, there are certain aspects that will foretell an impending rebound of borrowing and hence of the economic cylce as low as it may go before that.

These aspects are the conditions that currently lead to shrinking borrowing. On the consumer side a rebound of consumer sentiment should happen before borrowing grows again. And most likely an improving consumer sentiment should be preceeded by unemployment insurance claims dropping markedly below 400K again. A rebound in the help wanted index would also be an early indication as would be rising employment again.

As for corporate investment, you probably are aware that roughly 60% of corporate investment nowadays is in IT systems (what else in a services economy?). So I am tracking corporate investment plans with the CIO poll undertaken monthly by CIO Magazine and Dr. Ed Yardeni. The latest one is here:

http://www.peoplepolls.com/results/CIO/041003.asp

An excerpt concerning what exactly is holding back corporate IT investments at present:

 
 9) Special Question: Which of the following is the number one negative for your IT spending over the next 12 months?       
  
 (Total Votes: 279) 
   
 (Select One):                               2         0.7%   
 Profits are weak:                         107        38.4% 
 Financing conditions are tight:            89        31.9% 
 Less pressure to keep up with competitors:  9         3.2% 
 Current IT systems are sufficient:          6        22.2% 
 Not sure:                                  10         3.6% 
 

As one would expect, profits are a main factor. Even though profits have stabilized now, they mostly have done so by way of cost cutting rather because of end market demand growth. So I would expect end market demand growth to precede an impending investment rebound. End market demand appears to depend on improving consumer spending though.

The second most mentioned reason of tight financing conditions IMO is one point that has somewhat neutralized the numerous rate cuts during the last two years. As rates came down banks have tightened credit standards and that has taken some wind out of the Feds sails.

We'll see how things pan out.

Culmus