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GARP Is Back - Goldman Pushes IT As The Lemming Sector To Be In
If there is one acronym that is more indicative of the madness of herds than BRIC, it is the recurring stupidity that is GARP, which tends to show its head at or just after the market has peaked. With hedge funds still in possession of 3.0x + leveraged liquidity and easy money no longer an option, bottom of the barrel PMs need a self validation in the form of some branding concept, even if it means buying 60x forward P/E stocks that trade on valuations made not out of fumes but of sublimated insanity. Sure enough, here comes Goldman's latest GARP reminder, telling all its best clients that after a 100% run up, IT is the sector to invest in... Just like it told them to buy, no sell, no stay away from Euros in just the last month. So without further ado, here, for those who need to throw money down the trash chute, is David Kostin on the magic that is GARP.
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Hmm growth And value in IT.....time to push on large cap dot com era names again!
Just in from the latest IT Rag Information Technology's salary survey. All wages are flat for the first time Y over Y. Lay-offs increasing.
Anecdotal: Dice.com job listings have dropped like a rock in the last few months. Dice.com is a IT jobs board.
Most jobs offered on Dice.com appear to be Temp in nature only. What does temp really mean? No benefits. Obviously you work for the temp agency and no guarantees as many of these 6-8 month assignments involve relocation over many states. In what can only be described "only in America" one of the 5 openings I saw was for the Mayo Clinic on Rochester.
The temp wage was $40/hour no benefits, W-2 with a 8 month assignment. Perfect if you are young and mobile but the experience level and sheer range of skills demanded seemed to rule out that age group. Health Insurance is on the temp's dime. It 's very probable that if the temp were to get sick he would not be in-network for the premiere medical facility on the country. So they would be taken to another Rochester facility unless it was life threatening. Then they would be stabilized at great cost , then moved to a in-network facility unless the person had the money to pay 2x the rates.
Logically they wouldn't if they working a temp job from out of state. All of this then brings us to the obvious question: If the premier medical facility in the country in the only area of the economy that is growing besides govt is doing this to highly skilled workers, what are the rest of the companies using temp labor doing?
I don't have any data to go on but it appears that employers will use the temp industry to fill voids for an extended period of time so any any job growth will come from there which may be statistically pleasing, but will be a cover for the reality of what lies underneath.
The wages for this skill level are very low. This is the IT world that is GARP. As I read other IT rags, I get the impression that IT managers are trying to make do without the benefits of the latest technologies which means workers will be working unpaid overtime to overcome the deficiencies of the beta product that was purchased as new ( which is how it's done in the temp world) to come up with interim solutions to corporate needs.
It may very well be that with the supply demand imbalance so far is wildly in favor of employers , with the exception of a few skill areas, that the next step up technologically ( large scale upgrades, huge software expenditures and hardware expenditures) at the enterprise level will be be subdued for some time because the cost of labor is reduced significantly when much of it can be had sans benefits or obligations like obeying the law.
If this is as wide spread as I think it is , I don't see how tech firms will benefit. That doesn't mean their stocks won't go up if they have been the selected engine to power the stock market up , but there is no reason to believe that fundamentally the prices will be justified. Not with an 11 million person buffer , mainly coming from the temp world before the first person who was laid of from the recession theoretically needs to be rehired.
I would say, the public temp companies would be a better investment right now. They generally mark up 2x employee wages to client billing. I don't know if it's common to include the gross up in that mark up, but if so, I would suggest people look into them as they will be heavily used to fill in any spots. If a company wants to get rid of a temp worker they just call the agency and the next day or that day the employee is no longer on the premises.
On these relocate jobs, that terminate order could be a week after the relocation if a permanent employee didn't take a liking to the employee or , taking sides equally, the temp, out of desperation lied. But I don't see that happening much as the temp agency as part of their overhead include 30 hoops to jump through including intensive background checks, skill testing and mandatory drug testing.
Again, "Only in America", many of the temp reps have a very hard time with English.
It should be noted that refreshes in the home market probably won't be as big as people hope as the power levels achieved in PCs since 2006 was a huge leap . Unless people are budding video editors, 3D animators or gamers, the consumer side has all the power it needs for quite some time. If use isn't heavy, computer components last for some time which is why PCs are commodities where it's cheaper to replace them then repair them which also takes a huge bite out of the break and fix companies that once were soaring.
As someone who does small biz and home IT work ( Break and fix) from time to time to supplement income, I find myself advising clients to buy a new computer rather than pay me $400-$500 to fix a 4-5 year old computer. Many bought when prices were up around $3,000 for a complete set-up and aren't aware they can get a full upgrade with monitor from Dell for $429.00 that is 5-10x faster. Still they won't buy it many times because in their minds they can't accept that something is superior that is 20% of a price they paid 5 years ago. It just is not within the average persons compute area how that could possibly work.
With Virtual Machine usage soaring,and the "cloud " growing hardware purchases in the enterprise level at the expensive and profitable server level will be cut to pieces. Software sales should be reasonable but with the prices of software acting like Health Insurance, I don't see a huge move there either. It seems the more people who move to free open source software the higher the prices go to bang the people who are locked into some proprietary system who don't want to break out the big bucks to move out that to save in the long term. Long term thinking as defined by business as q over q and by politicians as election cycle to election cycle.
Put another way, this website is running on free open source software that can be installed on bargain basement price PCs that act as servers. If the load gets to be too much and the tech staff is savvy in Linux, they can cluster the machines on open source free web server software, database software and the middle ware (PHP) that allows this site to interact with the database back-end.
They may put a relatively small amount of money to upgrade the machines that carry the database server(s) which has a high utilization rate. But until a site like this is serving up millions of pages the Google approach is just fine. If they have people with Google like intelligence than common off the shelf components and hand built computers are the way to go with free software and some custom coded stuff doing the public facing stuff.
Google doesn't even bother trying to find the servers that fry, their coders have the system set up to route around them. They have millions of them too. So if anyone benefits it will be the Chinese.
Apple will go up because it has to be in everyone's portfolio. BIDU will continue to rise becuase people are convinced that all the money that Google made in China will transfer to BIDU.
Other than that, I don't see any fundamental reason why tech stocks can be described as "GARP". In Mar of 09 , yes, not in April of 2010.
So the new economic engine of growth is not an engine at all. It's the promise of fumes that could possibly run an engine.
how about this deal goldman.
i buy some shares now.
in 20 years, you buy them back at 10,000 times the price i bought them.
that is how markets work, no?
Financials are in the 'unattractive' sector. That is the Goldman hint I needed. Monday I am long Citigroup and Bank of America.
Noticed that too, i was wondering where GS was thinking of placing their own industry. So by definition, they should be short themselves. Hmmm.. moral hazard anyone?
Here's a series of question that ZH should ponder about.
When has ZH been right about the market is overvalued deal?
Did ZH ever understand the concept of technical trading vs some market news caused a move?
Did ZH appologize to any money managers it kept on insulting that appeared on TV that claimed they are looking for SPX to be between 1100 and 1200 by the end of 2009? because I think ZH owes an apology to everyone who's been right.
And lastly, when is it reasonable to pay 20 PE, and when is it reasonable to pay 40 PE and when 60 or 80 PE?
It's better to trade on too much information than too little... And if these stories make people think twice about sitting down at the card tables, all the better.
You never need too much information.For trading you don't need much info, the less the better. What you need is an understanding of levels and watching reaction as price gets to a level.
There is nothing wrong with being at a card table, as long as you know exactly what you're putting at stake and can live with it.
Just saying. Personally I'm a 'contrarian' but if Goldman wants to sell me a turd, I ain't buying. Staying away from herds and not listening to salespeople has always treated me well.
At least they have two whole pages of disclosures, which accounts for 2/5ths of the whole document. Didn't see anything in there about the company's policy of trading against their clients, purchasing politicians (Obama), and conveniently surviving the worst recession since the Great Depression and coming out on top.
FINALLY a sell-off for the NAZ. When GS is recommending you buy buy buy it must mean they have their short orders in place.
Waaah....
DavidC
Software sector has completely and utterly destroyed itself by bringing in massive numbers of foreigners on H1-B and Green Card visas from India and China. This has left many thousands of 'best and brightest' American and Europeans to essentially live at home, and keep their otherwise idle minds busy developing open source/free software. Which has further served to destroy compensation to software professionals and firms.
10-12 years ago, before this nonsense surged full steam ahead, vendors like SCO, Sun, HP, Digital, etc., were charging $1000-$2000 for a copy of Unix to run each and every web server on the Internet. Today, practically everything runs on 'free' software. Free/Open Source got started by a bunch of people who hated Microsoft and wanted to develop better/more reliable software themselves. They only partially succeeded at their goal; yes, free/open source software is great, but instead of destroying Microsoft, they destroyed much of the paid software industry and their prospects for future well-paid employment as technology professionals.
I agree with your first point about insourcing software engineers, but from the mid-90s into the early 21st century, there has been a "learning curve" associated with how to accurately price and devise I.T. and intellectual property products. Without bringing the immaterial nature of intellectual property into the mix, we have seen a huge dive in the perceived value (as mostly a person's time is the main input) of software products.
What used to cost tens of thousands or even millions may now be had for free or a token cost. I'm not sure the problem is so much open/free source software routing the market, rather than society evolving from manufacturing/industrial based economies. Growing pains.
T.I.M.E. from Fidelity is another chuckle.
I am in IT management and I have to say that there is a big lack of good quality talent. Even more so, the talent off shore is atrocious. More and more we are seeing companies go back to USA sourcing instead of India because the quality is not there and the cost is not lower in the long run when you take into account management, process and documentation overhead. What likely will stay off shore are the "mindless" jobs like 24 x 7 monitoring. Paying someone in India to send an e-mail when a light turns red is easy to do and cheap. Paying them to develop a system just won't work out any better or cheaper. I'd rather pay a quality USA team more to get it done more efficiently and with better quality.
This flat year of wage stagnation and no additional jobs is just the fact that the recessions (plural and yes I need to also include the one from 2001) finally caught up with IT. The sky is not falling here. IT jobs have been hot for so long, big f'ing deal we take a 1 year pause. Corporations have to replace those servers and network infrastructure every 3-5 years. Corporations have to upgrade to Windows 7 and Office 2007. Corporations will continue to support and deploy Blackberries and now iPads.
Don't worry about IT. We'll turn out just fine.
Sorry...Let me add something else here. My point is not to suggest investing in IT company stock. I, too, feel the market is overvalued and rigged. My discussion above is only to make the point about IT jobs in the USA. Not investing.
I told my dad to buy Apple (increase position) and sell his GOOG right before the GOOG earnings. I should have taken my own advice as GOOG is down over $70 and AAPL is up over $35. I am now telling him to sell both.
Regarding lack of good IT talent, i've heard from my professors that the MIS (mgmt info systems) has the lowest amount of majors across Canada. Not sure how it is in the States, but undergrads/grads simply aren't interested in it. Of course, i dont mean to stereotype as a whole and across countries, but for example from the 900 grads in mgmt last year, over 650 were mktg+finance, OB/HR ~100, entrepreneurship ~100, maybe 50 were left over for MIS which in previous years (closer to the tech years) had easily the largest amount of majors.
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