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Too Late for Tech Negativity


Fast forward 18 months from now, the recovery will be priced in.

At my firm, we have been of the mind that 2009 will be the worst year for IT spending since 2002 for some time now. Thus we have expected that Street expectations for technology would come down for 2009 and the recent crash in credit has simply accelerated this process. What people need to keep in mind is that:

1) IT spending is an enormous number (will finish around $3.4 trillion for 2008, according to Gartner).

2) The top two expenses by category are people and electricity. The point here is that as more processes become automated and virtual environments move further into production, both of these expenses come down, leaving a greater percentage of your budget for other types of purchases. The notion that what's going on in the financials is bad for tech I believe is reasonably known.
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This is no time to be getting negative on technology: That money has largely been made already. The market is already heavily discounting in a disastrous year end, and, to a certain extent, an unexciting first half of 2009 and best.

In the meantime, I believe the secular story for technology spending has never been more intact. The world is getting flatter and while you have seen a lot of hot air come out of emerging markets and developing nation's stock markets, those secular growth stories are still in play and will be for years to come. The answer to getting more productivity out of your IT infrastructure is continued investment. Even with respect to the recent crash in the credit markets and the ensuing panic, if you choose to see the forest from the trees you can reasonably expect a paradigm shift in the oversight and regulatory landscapes which will create tremendous demand for technology.

As more information is made readily available over the Internet, the secular stories in security software stocks, infrastructure stocks, virtualization, and service oriented architecture will likely thrive.

The point here is this: What we know is that we are in the midst of an economic crisis that is clearly destroying substantial IT customers. However, I believe that because it is so widely known, it is widely being priced into the market, and will likely continue to be between now and the end of the year.

I also believe that it's in times like these where real wealth can be created by looking beyond that, and finding names where that doom and gloom is already priced in, and there are plenty of them out there. Novell (NOVL), EMC (EMC), Cisco (CSCO), Red Hat (RHT), and Microsoft (MSFT) come to mind.

I'd be slowly building positions between now and year end. I think if you fast forward 18 months from now, you are sitting on a cost basis that you are really going to like because at that point, a good portion of a recovery in IT will likely be priced in.

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Positions in NOVL, RHT, EMC.
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