Still conservative on technology stocks (page 1 of 4)

US Stocks

Industrial production was a plus 6.1% y-o-y for the month of September in 2000. After a year it was minus 5.8% y-o-y, a 12 consecutive decline. Coupled with the psychological blow of the September 11 terrorist attacks and anthrax scare, the ailing economy cannot tolerate any dramatically increase in energy cost. That is why the Bush administration is pushing its energy policy to increase domestic production and alternative source (non-OPEC) of oil.

In the '60s, 80% of all imported oil came from OPEC. It declined to 60% in the booming 90s, and by the year 2000, only 50% came from OPEC, and the reliance continues to trend lower. The nation's electricity needs are being generated by coal, nuclear, natural gas, and hydro. Oil is used mostly for transportation, as well as petrochemical, and heating (Northeast). Currently, the US imports about 50% of its oil needs, and half of that (26% of total consumption) came from OPEC countries.

Coal and nuclear energy accounted for more than 70% of US electricity generation in the year 2000:

Coal - 52%
Nuclear - 20%
Natural gas - 16%
Hydro - 7%
Oil - 3%
Renewable - 2%

Total: 100%

source: US Department of Energy

The need for a stable, and low cost source of energy for the nation has been put to the forefront by the attacks on the WTC. Coal should remain as the main supplier of fuel for the nation's utilities. The administration is also pushing to renew the 40-year old licenses of nuclear power plants.

Massey Energy Company (MEE $19.86), which supplies low sulphur coal of steam and metallurgical grades, should continue to benefit from this trend. Should nuclear power plants be decommissioned or get their licenses renewed, there would be a supply of radioactive waste that needs to be shipped and store safely. This is where Waste Management Inc (WMI $28.40) comes in. Not only is it the nation's largest waste management company, it is also on the road of an earnings recovery. Last year, hefty interest expenses due to past acquisitions hampered earnings. Management has been divesting non-core businesses to pare down debt. Debt/Equity has declined from 2.1x a year ago to the latest 2Q of 1.6x. Earnings for the 1 & 2 Q of the current FY 2001 though lower than expected, but managed to be in positive territory. Estimate for the 3Q is $0.368.

US Technology

On a week-on-week basis, the NASDAQ Composite Index gained 5.8% to 1768.

Since the low of the year at 1387, established after the September 11 (21-Sep-01) attacks, the NASDAQ Composite Index has traded higher for 5 consecutive weeks. While companies have reported mixed quarterly results over the past 3 weeks, the outlook given by them continues to be the same - (1) demand weakness nearing a bottom, and (2) potential earnings improvement in 2002. If we were to adopt a positive approach to viewing such general feedback, then the year 2002 appears to be a promising environment to be invested in, and as such, we should be actively buying now. However, while we are inclined to adopt a more positive stance on technology issues for the year 2002, we remain cautious on (a) the timing of the earnings bottom - 4Q01 or 1Q02, (b) the period for an earnings rebound - 3Q or 4Q, and (c) the sustainability of earning growth ahead.

We do not expect a "V" shaped recovery on the earnings front due to any sharp turn around in demand activity. While cost cutting initiatives over the past few months will no doubt help technology companies alleviate pressure on bottom line earnings deterioration, growth in customer orders will be a gradual process as corporations stringently migrate from "must-have" products and services, to "wish-list" items.