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<html> <head> <title>Untitled Document</title> <meta http-equiv="Content-Type" content="text/html; charset=iso-8859-1"> </head> <body bgcolor="#FFFFFF" text="#000000"> <br> <br> From boom to gloom. How fickle we all are. Not only did I lose at tennis, but the weekend's reading was positively depressing. It didn't contradict what I've been saying unpopularly for while (until I changed cautiously last week)... but it's so depressing. And, sadly, so accurate. Are we back to shorting? Are we back to Harry's old, boring refrain, "Tech Stocks are <b>not</b> the place to be?" The answer? It's too early to tell. Caution remains they key word. The good news last week was that Wednesday and Thursday's gains largely held on Friday. We didn't see sellers stepping in to take profits on their suddenly-higher tech stocks. They seemed happy to hold them. But going forward will lack last week's great catalysts -- Greenspan's 50 basis point cut and some super great earnings. It's clear that many of the big tech stocks with unclear earnings will be under pressure, especially from analyst downgrades. This morning we see downgrades on <b>Siebel Systems (SEBL), Vitesse Semiconductor (VTSS), PMC-Sierra (PMCS), Applied Micro (AMCC), Intel (INTC), </b>and<b> Oracle (ORCL).</b> I'm more optimistic about "value priced" tech stocks. Our portfolio has a bunch of them.<i><b> </b></i>Now to the gruesome articles:<i><b><br> <br> Business Week </b></i>talks about "<i>The Tech Slump</i>" and asks the question, "<i>Two More Years?</i>" Says the magazine, "Lower interest rates, though they cheer the stock market, can't do much directly about the tech sector's biggest problems, overcapacity and excess inventory. But indirectly, lower interest rates can help by buttressing Old Economy industries that buy a lot of tech equipment. In addition, rate cuts can provide liquidity to the financial system and make it less likely that tech-related defaults or bankruptcies will trigger bigger financial problems. So are we close to the end of the tech slump? Even before the Fed's surprise cut, there were faint signs that the tech cycle had bottomed out. Despite its sales slide and an 82% drop in earnings in the first quarter, Intel reported that its personal-computer business was starting to stabilize. Then, on Apr. 18, IBM said that its first-quarter net income rose 15%. But even if the tech sector has stopped deteriorating, more and more tech execs are concluding that sluggish growth will last well into 2002, rate cut or not. ... Given the current climate, one likely scenario is that <b>the current slump lasts two years from the time it began in late 2000</b>; during that time, info-tech spending will likely average about 3% to 5% annually. That would feel like a kick in the head to an industry that enjoyed gains of 18% and 23% in 1999 and 2000. But such a slowdown would just bring the industry's five-year growth rate back to the long-term average of 12% per year, according to the Commerce Dept.'s figures for business spending on information-technology gear and software. Moreover, a 3%-to-5% growth rate would not be unprecedented. The last two tech slowdowns, in 1986-87 and 1990-91, showed two-year tech-spending growth rates of 4% and 2.5%, respectively." To read the entire piece, <a href="http://www.businessweek.com/@@UqU*gGcQX3JK9AgA/premium/content/01_18/b3730050.htm"><b>click here.</b></a> <p><i><b>The New York Times'</b></i> Gretchen Morgenson, whom I greatly respect, wrote an article, "<i>A Splash of Cold Water on Technology Stocks' Revival." </i>Here are excerpts: <i> "</i>With Alan Greenspan doing his best to spur on the economy, many investors seem to believe it's back to the races in the stock market. Buyers have been particularly giddy about technology stocks, pushing the Nasdaq composite index up 10.3 percent last week. But one authority on technology stocks suggests that investors pull up on the reins a bit. Steven Milunovich, technology strategist at Merrill Lynch, says he believes that it is especially important for investors to remember that yesterday's growth stocks more often than not will falter tomorrow. Few tech-stock investors appear to be tuned into this thinking. <b>The Merrill Lynch technology index is trading at 166 times trailing earnings</b> for the 100 companies in it, including <b>Cisco Systems, EMC, Altera </b>and<b> AOL Time Warner</b>. By contrast, the Standard & Poor's 500-stock index trades at <b>27 times earnings</b>. Hopes for the sector are certainly high. Too high, Mr. Milunovich said, for two reasons. First, even after slashing their revenue and earnings forecasts for technology companies, analysts have long- term expectations that are still far too optimistic, he said. For instance, analysts expect 85 percent of companies to increase their sales by a compounded rate of 20 percent or more during the next three years. But since 1981, only 36 percent of technology companies have achieved such growth rates for any consecutive three-year period.</p> <p>"Today's depressed state of capital spending is another concern. Mr. Milunovich said the rate cut by the Fed last week was in large part a reaction to the severity of the capital investment slowdown. The Fed's statement included this comment: "Capital investment has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward." If the Fed is right, technology earnings are probably not going to be rebounding anytime soon. And while stock market investors are famous for spotting turnarounds well before they are quantifiable, Mr. Milunovich thinks the recent rally in tech stocks has been overdone. </p> <p>"<b>Investors have been very impatient trying to call the bottom </b>in the Nasdaq," he said. "I'm still more on the skeptical side." His skepticism is based at least in part on a study of revenue growth at technology companies going back 20 years. The results show how hard it is to maintain high growth rates for extended periods and indicate that it is difficult for tech companies to produce outsized growth even in nonconsecutive years. Here are the numbers: <br> <br> " Of the 1,800 technology companies in the study, only half were able to generate 30 percent compound revenue growth for any three of the years in the study. Only 28 percent could manage such growth for any five years, and just 7 percent for 10 years. As a result, Mr. Milunovich said investors should not rush to buy technology stocks based largely on analysts' rosy growth projections. Yet some technology companies are trading at more than 50 times their earnings estimates. <b>Siebel Systems, Juniper Networks</b> and <b>PMC-Sierra</b> are just three of the companies in this amazing category. "Stocks are due for a bounce," Mr. Milunovich said. "But time is going to be as important as price in getting us out of this technology malaise. Weakness could continue into next year." To read Gretchen's entire piece<b> <a href="http://www.nytimes.com/2001/04/22/technology/22WATC.html?searchpv=nytToday">Click here.</a></b></p> <p>Depressing, but absolutely fascinating reading, <b>"Russia is Finished" </b>by Jeffrey Tayler in the latest issue of <i><b>Atlantic Monthly. </b></i><b><a href="http://www.theatlantic.com/cgi-bin/o/issues/2001/05/tayler-p1.htm">Click here</a></b> for the article.<b> </b></p> </body> </html>