Sean Udall is the author of the TechStrat Report. The following is a free sample. Take a free trial!Perverse Conditions vs. The Innovators
Yesterday I was going to comment the Consumer Confidence number was inane. However, it turned out the market basically awoke and realized the same thing within an hour. Looking at historical charts would be useful here as the very low confidence readings have a high correlation with significant turning points off lows. It's the oppositie for very high confidence numbers. Note the very low readings in the Spring of 2009, the Summer/Fall of 2002, and the middle of 1998. Likewise, consumer numbers were very strong before major declines in 2007, 2000, and 1987.
I think the consumer is reflecting the post "debt ceiling to the brink"/Euro-mess malaise while numbers like yesterday's PMI reflect more of the actual demand that is still chugging along and may yetl surge once again. In reality we really have two economies globally. We have the economy of "perverse conditions" and the economy of the innovators. Note I'm not using the producers and don't worry, I'm not going to get all Atlas Shrugged in this piece.The Perversion is Hammering Economic Output
In short, the things related to the "perverse conditions" are industries tied to government policy, market/accounting rules, stimulus, and regulatory hurdles. Note the lagging sectors such as banking, housing, some heavy industry, some healthcare, and -- a bit more broadly -- Europe. All these are in limbo and awaiting various forms of government resolution. (I'd note that it seems the proximate cause of the aggressive selling just recently infused into the market is a rumored mortgage bailout plan.)
There are many examples of the perverse conditions: Cash for Clunkers, Sarbox (Sarbanes Oxley), the recent new home buyer only tax credit, and all the market/accounting rules since 2007.
Looking back to the housing morass provides an excellent example of a perverse condition that just needs to be fixed -- the current appraisal rules. Home lending is extremely constrained by these regulations. If banks were able to lend on the paying capacity of the borrowers with some flexibility on the loan size vs. appraisal values, we would see home lending refinance explode. This alone would probably cause home prices to expand by 5-10%, if not more.
The beauty of fixing a perverse condition is that it generally doesn't cost the government/taxpayers a dime. Fixing the financial sector by destroying FAS 157 rule cost the world nothing and helped magnitudes more than the various stimuli put forth. Europe, are you listening? The Innovators are Creating Economic Growth and Jobs
Things tied to the innovators include all the items/gadgets/internet/services we humans seems to desire by increasing numbers. iRobot's
(IRBT) products and other automation gadgets continue to gain adoption. Innovative payment methods proliferate. I don't even have to mention smartphones and tablet computers. Auto tech advancements seem to be accelerating. Cloud applications, storage, data analytics, and all things tied to my AAAOC theme
show little signs of slowing down.
All the above in turn have created a stimulation to old school industries such as retail. One needs to look no further than Amazon
(AMZN) to see what can be done in the digital world with physical products.
(AAPL) and Google
(GOOG) has created whole new sub-industries underneath them which have encouraged massive amounts of economic growth, income, and actual jobs. I'm talking about applications development, programming new operating systems, media platform delivery, blogging, shopping aggregation, rapid semiconductor advancements (Qualcomm
(BRCM), and others)... I'm just scratching the surface here.
In some ways, tech innovation is disruptive and causes job destruction, but that is usually replaced with many more news industry jobs, wealth creation, and economic output. The Net Effect
What is truly scary is thinking about where global economies would be right now if we were not currently in a phase of stunning technological advancement. However, I also contend that the real growth is being vastly underappreciated. Sure, we have some low prints on GDP. Underneath we have seen AAPL produce revenue growth of 89% recently. Much of the rest of the tech sector is growing anywhere from the high teens to over 50%. Also, old school industry is benefitting. One example: Priceline.com
(PCLN) is not selling trips via virtual reality tours, it's booking real flights to real destinations.
Simply put, perverse conditions create perverse outcomes. We have been awash in these perverse outcomes and it's simply time to fix the conditions, and to do so without spending any money.
The net effect of fixing these conditions is extremely positive (see FAS 157). If just a few key policy/rules/barriers are removed, the economy of the innovators will win -- and big. In turn the stock market would benefit from intense growth cycle valuation expansion. In the near term, valuations are terribly constrained by the economy of the perverse.Twitter: @Udalltechstrat
Positions in AAPL, QCOM, CIEN, GOOG, BRCM
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