Is this the Recession's Other Shoe?
As I say in the video below, there's an uneasy feeling in much of the Valley these days. We're watching the economy crater all around us, but....well, we're not really seeing any direct impact. Just like watching a pitcher throw a no-hitter, I almost feel like I should whisper that.
Most everyone I know is making more money than they did last year. I only have one friend who has reported a substantial drop in his home price. And the only few people I know who've lost their jobs are journalists-- and that has little to do with the economy, and everything to do with a general industry's ineptitude. Sure we pay sky-high oil prices, but people seem to get around that by biking, taking the train, carpooling and of course driving hybrids. Making things more uneasy for those here in 2000: We didn't cause this one.
It's actually made my challenge at TechTicker harder, because we're supposed to be covering tech from Silicon Valley and Wall Street. On Wall Street, the "tech story" is the same story as every other market story: FINANCIAL MARKET ROLLER COASTER! But in the Valley, people only tangentially seem to care. This has left everyone wondering if we're truly getting a pass on this downturn or if there's a another shoe out there to drop.
Leave it to the new Mr. Sunshine, Paul Kedrosky, to find that shoe. Henry Blodget used to be called Mr. Sunshine around the Tech Ticker offices for his general bearishness of tech stocks earlier in the year, but Paul easily stole that title a few weeks ago in a hotly debated segment on whether falling oil prices are as bad for the economy as rising oil prices. (I agree with his point, btw. And come to think of it, that's one that hurts the Valley too, although more tangentially.)
Kedrosky is back today to argue why a strong dollar is bad for the economy, and it -- finally and unfortunately-- comes back to tech. Tech gets about 55% of its revenue from international sales and that is where a lot of the growth is for the large, publicly traded Valley companies. You know: The ones that would actually greatly affect our local economy if they stumbled, unlike the more written about Web 2.0 upstarts. Watch the video for his full point:
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Although a strengthening dollar might affect international sales somewhat, Tech sector margins are such that adjustments can be made to compensate if this is what management wants. For example, Microsoft during 2nd quarter had net income of $4.27 B on sales of $15.8 B (27%). This includes an R&D expense of over $ 2 B. Compare this to bad boy Exxon's 2nd quarter net income of $11.6 B on sales of $138 B (8.4%). Exxon's sales and net will be more heavily impacted by a stronger dollar than the Tech sector, so fear not and enjoy the schadenfreude.
Posted by: Coolpops | August 20, 2008 at 04:51 AM
It feels like the tech sector isn't really real yet. People make money almost completely on speculation and guessing on what will be the next "big" thing and the tech stocks continue to grow because people are afraid of what they "might" miss out on.
So there is a natural insulation. Since there is little correlation between most markets and technology needs. When the economy drops off, people stop buying and there is a direct correlation to retail sales. Companies may slow some fringe spending in tech, but they know to do more with less takes more technology, not less. When the economy gets better, they can spend a little more to attempt to get that edge on the competition. But, I don't think the margin of spending is very wide between the extremes.
Posted by: csjohnstone | August 20, 2008 at 08:33 PM