August 24, 2007 10:55 AM PDT

Mortgage meltdown: Tech stocks' gain?

Hey buddy, has that sagging real estate investment got you down? Could we interest you in some VMware shares?

Even if the answer to that first question is "yes"--and surely it is--don't count on too many investors answering the second in the affirmative. Securities and fund analysts say the markets will likely take a breather after the anguish over a possible credit crunch and the harsh realities of subprime mortgages going belly up.

And while those who had been plowing money into Real Estate Investment Trusts and mortgage companies are pulling back, analysts don't expect investors to suddenly switch over to technology stocks, unless they are large-cap stocks.

"During periods of heightened uncertainty, investors tend to favor large-cap stocks as a safe haven," said Jordan Rohan, managing director of RBC Capital Markets. "Sometimes the safe havens are technology stocks, but I doubt the tech sector is receiving a disproportional amount of investor attention."

Although the markets have recovered a bit in the past four days, the Dow Jones Industrial Average in Friday morning trading was off approximately 9 percent from its 52-week high of 14,121 on July 19, while the tech-heavy Nasdaq was down 6.4 percent from its high of 2,724.74 on that same date.

Meanwhile, those who put their money into mutual funds tend to stay within a general investment category, such as retail. During a market downturn, for example, investors of this ilk may seek out large-cap institutions such as retailing giant Wal-Mart Stores while foregoing the hip, cool and trendy new small-cap retail companies, say analysts.

And that hesitation about the tech sector may well be prudent. Even its so-called large-cap safe havens such as Microsoft, Intel, Cisco Systems and IBM may not be immune to wobbliness on Wall Street.

Fallout from one sector to another
Tech companies that rely on customers in the financial services industry, which includes banks, insurance providers and real estate companies, may suffer in a prolonged market downturn stemming from the subprime mortgage mess. Feeling the heat from the credit crunch, those services companies may curtail IT spending, which in turn can hit the bottom line of tech companies and, hence, their stock price.

The financial services industry comprises about 19 percent of all IT spending worldwide, according to IDC. IBM alone receives approximately 27 percent of its total sales from the financial services industry--a sector that yielded an 11 percent year-over-year gain for the company in the second quarter, noted Rick Hanna, an equity analyst for mutual fund research firm Morningstar.

Hanna isn't too worried about Big Blue, however.

"Even though IBM may have a higher percentage than the overall average (in financial services revenues), I think they are actually less at risk than average," Hanna said. "The reasoning is, its customer base is large and global and thus better equipped to weather some turbulence."

He added that IBM also receives a greater percentage of its revenue from recurring sources, such as software licenses and services contracts, compared with discretionary hardware spending.

Tech stocks may have already felt a bit of a spillover effect from the subprime market problems, said Toan Tran, equity strategist with Morningstar.

Some hedge funds that rely on computer models for trading, or quantitative funds, were caught up in the markets malaise late last week, resulting in a steep sell-off of some of their holdings. Some of those holdings, Tran said, likely included tech stocks.

On the other hand, tech IPOs have been gaining steam. To date, approximately 44 tech stocks have debuted this year, compared to roughly half that during the same time last year, according to Thomson Financial. And recent investor enthusiasm for VMware's initial public offering could propel more companies to flock to the public markets.

"If you have a very good company that wants to go public like a VMware, or has a lot of demand like a Facebook, then you could still go out. But if you're a marginal IPO, the deal may not get done at all in this market," Tran said.

Tech stocks may catch a break because of sales to foreign companies, said Matthew Wu, senior portfolio manager for Rydex Technology Fund. He noted that technology companies receive roughly half of their revenue from overseas markets, which are not affected by the domestic credit crunch in mortgages.

And keeping an optimistic outlook, Israel Hernandez, a Lehman Brothers technology analyst, noted that all is not lost in the current market environment.

"From our perspective, it's early in the quarter and if the markets settle down, this may not amount to a whole lot of (trouble)," Hernandez said.

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8 comments

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Time to revisit emerging markets
What many technology companies have been doing is:

1) Sending money to emerging economies through outsourced services, either by availing of the services, or setting up the outsourcing centers.

2) Providing globally accessible Internet services that enable the economies of emerging markets to use cuting edge Web 2.0 technologies. All they need is an Internet connection.

It's a repeat of the early 1990s and a reverse of the late 1990s when money moved out of emerging markets to fund the new technologies of the dot.com boom.
Posted by Maccess (610 comments )
Reply Link Flag
The point is why is it only in USA the "Mortgage meltdown"
As usual the Big media is lying and lying and lying to the people as to what is going on.
That is what is behind the so called "Housing sales slow down in US" and the "Sub-prime melt down...."

Why aren't the Europeans and the Canadians having the same problem. Actually quite reverse of US, Europeans and the Canadians housing prices are increasing and increasing, as further evident by ever increasing value of their currencies against the US dollar.
Why is that?

The answer is that Europeans and the Canadians get Universal Health care, Universal Education, Universal daycare, plus many more social services for the same, if not lower, Taxes that they pay. US citizens instead get just about nothing for their Taxes but for a gargantuan Military and one war after another war. I mean just think about it, in USA 45 Mill have no health coverage, of those that do most are denied coverage when they need it or charged exorbitant deductibles and co-pays etc. Just think about in US a hospital stay
for 1 week could easily cost you $50,000; even if you have Health insurance it could easily cost you $2000 in deductibles, in Europe or Canada this would cost you $5. Of course then the Europeans and the Canadians have much more money to pay for their Mortgages than the miserable Americans do. Now apply the situation with Education and Daycare too, and you can see how absolutely poor Americans are in comparison to Europeans and the Canadians and thus why there is the so called "Housing problem..." in US.

Now what can we do about this?
We need to get behind those that are working for change in USA: to bring Universal Health care,
Universal Education, Universal daycare, etc, to US as they have in Canada & Europe as a result of which they are getting richer and richer.
And one place that is doing alot about this and which I support is AnooX search engine (www.anoox.com), because they are donating 100% of their profits to organizations that are working for these same exact things.

P.S., For sake of full disclosure I am both an Anoox Advertiser and Affiliate
Posted by free_people (66 comments )
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Why is the mortgage meltdown only in the US?
Conspiracy theories aside, here are the reasons why this is mainly a US phenomenon:

1) The US housing market has had an extended run with steadily increasing prices. This ended in some parts as early as 2005, with prices starting to decline. As of July 2007, property prices have been declining across the US.

2) The subprime loans were structured with a two year low interest rate promo, followed by a sharp jump in interest rates.

3) The genius who designed them also put hefty prepayment and pre-termination clauses, so borrowers wouldn't seek re-financing. This left borrowers with only two choices: Pay the exhorbitant interst rates after the second year or default.

3) Because property prices began to soften just as many borrowers were entering their third year of payments, the amortizations ballooned while their property values decreased. Many were left with negative equity (owing more on the house than what the house was worth). This means it also made sense to default.

So those who couldn't afford defaulted, and of those who could afford, many decided that defaulting would be more prudent.

4) Wall street got into the picture by bundling these sub prime loans and offering them to investors. This meant that the sector had way too much money than it should have. The mortgages were marketed agressively, even by SPAM, and borrowers wanting $50,000 were encouraged to borrow many times that, more than they could afford.

5) Subprimes have been around a long time, but they were never a significant part of the housing loan market. Thanks to Wall Street, they are now.

6) Thanks to Wall Street, billions of dollars of these bundled subprime papers are in the hands of otherwise conservative banks, and many banks around the world, which means they'll need to increase loss provisions and lend less to other customers.

7) They're also in many investment funds and many unit trusts, and that's how it's affecting everyone.

It has nothing to do with health care.
Posted by Maccess (610 comments )
Link Flag
Blame Bubble Man
Alan "Bubble Man" Greenspan created this housing bubble just like he created the stock market bubble a few years earlier. He did his masters' bidding and kept mortgage interest rates too low for too long. This created a classic speculative bubble. We finally ran out of "greater fools" that could not or would not keep the bubble inflated.

It's interesting to note that personal bankruptcy laws were changed out in front of this bubble. That was no accident.
Posted by Stating (869 comments )
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Your logic does not hold
They had, and have even now, lower interest rates in Euro Zone than we had and have in US. The ECB rate is still 1% less than US Fed fund rates now. So if what you are saying was true then they would have had a bigger real estate bubble and thus bursting of it in Europe than we have here. They have not, there is no mortgage crisis in Europe, home prices are rising there still in double digits.

The problem with US is exactly as other poster noted: that is we get NOTHING for our Taxes whereas Europeans get Universal Health care, Education, and more for it. Just think about it, Millions of Europeans go to a Doctor for total health care and pay $5, Millions of Americans go to a Doctor for a simple care and get a $10,000 bill. I can tell you from my own experience this is the case. A month ago I went for a check up, total time spent for the check ups was about 3 Hours, the hospital sent me a $5,000 bill! My insurance company Blue cross did not cover it because they said it was from previous condition!
A European would have gotten a $5 bill for this check up, hek they would have gotten a $5 bill for the check up & the cure. Can't you see how Americans are being driven into poor house by our Government wasting our Taxes on one war after another, rather than investing it in our society as European and Canadians do.
Posted by caudio_roma (57 comments )
Link Flag
The Mortgage Sky Is Falling!
Seriously, is the mortgage market as bad as everyone says. NO I don't think so. Yes some people gambled on a short term ARM and some even got suckered into a 1% Pay Option ARM but outside of that - it's the rustbelt economic problems holding back any good news. Home values dropped yes but if you didn't gamble on a short term ARM you'll be fine - values will rebound again in a few years.

Read all of my mortgage market comments at;

<a class="jive-link-external" href="http://www.stupidhomeowner.com" target="_newWindow">http://www.stupidhomeowner.com</a>

Warmest Regards,
Terry Lamb
Posted by stupidhomeowner (1 comment )
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