Who Is Holding Up the Show?

By Duru

July 08, 2004


The storm continues as small and medium-sized technology companies continue to rain bad news on unsuspecting investors. This time we got a heavy dose of software company brain-freeze. In some cases the reasons for the sudden shortfalls are eerily similar. SEBL said: "These disappointing results were primarily due to unexpected delays in purchasing decisions by certain prospects and customers near the end of the quarter." BMC agrees that it has "…experienced delays in customer purchasing decisions among larger accounts, primarily in the U.S." Makes you wonder whether it is the same set of companies that are playing hard-to-get!

Again, all these warnings certainly FEEL ominous, but you cannot lose sight of the fact that most of these companies are smaller entities. Analysts have long argued that big-cap, high-quality stocks were over-due to retake market leadership away from the small-caps and perhaps we are finally witnessing that prophecy come true. However, we also should not go so far as to completely discount these developments as one money manager (Harry Papp, the private client business manager for L. Roy Papp & Associates) does: "The earnings warnings issued in recent weeks have come from 'flaky, small' technology companies that have little effect on the industry's leaders" ("Technology stocks pummeled ahead of earnings" - Daniel Sorid, Reuters, July 6, 2004). Those are fighting words! The rash of selling in techland demonstrates that Mr. Papp is in the clear minority but to the extent this sentiment exists out there, we could soon find support for the general market…even if not for the bearers of bad news. My caution is that these same corporate buyers who have gotten stingy with the purse strings may not be so unique and their reluctance to invest may extend beyond "niche" software. If THIS is the case, we have a bigger problem on our hands: these corporate buyers who are holding up the software parade may postpone the whole show altogether!

In other news, gold FINALLY made the break-out move that many of us gold bugs have been waiting for. I would be very surprised if this move lasted, but I think it is yet another sign that economic conditions are not as rosy as we would want to believe. I also suspect that the Fed will NOT be raising rates as aggressively as folks may be assuming. Certainly the recent mild rally in the bond market lends credence to this view. But oh what a box Greenie has painted himself into! If he dares NOT to raise rates at the next meeting, he will in effect be declaring his waning confidence in the strength of the economic recovery. The market's reaction to THAT kind of move could be as bad as its reaction to a hike in rates in the face of same weakness. Let the ironies abound.

Regardless, me-thinks the summer will be a LOT more interesting (dare I say "dramatic"?!) than anyone anticipated. Keep an eye on that VIX, and be careful out there!


Ó DrDuru, 2004