Technically Speaking: The Nasdaq and Dow Jones bond composite are the indices to watch

Thursday 12th April 2001

1. Nasdaq composite

2. Dow Jones bond composite average

The Nasdaq composite index (chart 1) is on life support, even if it is not dead yet. The glamour index of just a year ago has become the leading disaster story and is followed closely by markets all around the world.

The index had come to symbolise instant riches and the superlative strength of the US' now defunct new economy. US households had basked in its wealth effect and boosted debt and consumption.

These same households are now perilously exposed by the crash in what has become nicknamed the "tulip index" after the Dutch tulip craze.

The technology bubble is having serious repercussions in the US. Layoffs are soaring as both technology and other companies slash their payrolls. Labour market downturn figures are piling up.

Despite a lift in March consumer confidence, US unemployment is back up to mid-1999 levels of 4.3%. More disturbing is a steep decline in payroll growth to the lowest levels since the end of the 1991 recession.

Over the past three months 1.9 million laid-off workers have reported they do not expect to be recalled to their jobs. The help-supply services sector, which provides temporary workers, has slumped.

Confidence will be jeopardised by labour market turmoil. The closely watched services sector labour market, which up until now has resisted broader workforce gloom, has begun to crumble as non-farm payroll layoffs rise.

Part-time workforce participation, which would normally provide extra disposable income for households, is weakening, implying a fall in consumption ahead.

If confidence falls deeply on labour market decay, then recession in the US is less likely to be of the "V" shaped quick rebound variety. Problems for the US would then switch from acute to chronic.

Technology companies are sending alarming signals. Cisco Systems has said it has "no visibility" on performance over the balance of the year. In other words, it has opted out of forecasting.

Agilent Technologies - a network testing equipment maker - has said the same thing on plunging orders and wage cuts.

Fears are emerging that more companies will eschew projections. Fundamental analysis and standard valuation models such as projected price earnings ratios would suffer as a result, damaging market confidence further.

Is it all doom and gloom then? Not necessarily, according to US investment e-zine Red Herring's tech stock pundit Paul R. La Monica <www. redherring.com>. He has tipped 10 tech stocks to buy and 10 to shun.

For the buy list he recommends Autodesk (AutoCad and Discreet software), Comverse (wireless telecommunications software), EMC (data storage), Harris Corporation (government telecommunications equipment), Linear Technologies (analogue integrated circuits), Network Appliances (data storage), Newport Corporation (testing equipment for optical networking components), NCR (data warehousing and point-of-sale software), STMicroelectronics (analogue integrated circuits) and Unisys (e-business software and services).

What all these stocks have in common are trailing P/Es and price-to-sales ratios below five-year averages, and reasonable forward P/Es for 2001 projections. He also used criteria such as low debt load, net profit margins above five-year averages, and expected earnings growth. His criteria could be useful to apply to local stocks.

His hate list includes AT&T Wireless (3G spectrum development - an expected black hole for set-up costs), DoubleClick (internet advertising), EBay (online auctioneering), Electronic Arts (gaming software publishing), Ericsson (cellphones), Inktomi (search engine software), Liberate Technologies (interactive television software), Red Hat (Linux software), Sapient (internet consulting) and Yahoo! (internet portal advertising).

Most of these firms feature threatened revenue streams yet still have high prospective P/Es despite share price collapses. Yahoo!, for example, is still trading at 333 times projected 2001 earnings even though its share price has crashed. DoubleClick, which NBR reported had made a Kiwi with its licensing rights in Japan a multimillionaire, is trading at 258 times 2001 earnings when online advertising has become a sharemarket pariah.

Mr La Monica's criteria for poor stocks could be applied to New Zealand listings.

Quick profits are not promised by Mr La Monica even on his favourites. Many listings on the Nasdaq must have further to fall before prospective P/Es reach rational levels. The Nasdaq will remain a key index to watch for recovery.

Another index to watch is the Dow Jones bond composite (chart 2). While bonds are rampant, even if not up at earlier index values, shares will struggle to compete, especially when companies are faced with lower earnings forecasts that some firms are now reluctant even to guess at.

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