Wall Street Beat: Uncertainty Hits Tech Stocks

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Computer companies on the Nasdaq Thursday closed, in aggregate, up by 6.07 percent for the year while companies in the tech/media/telecom sector of the New York Stock Exchange closed up by 5.47 percent for the year. But by Friday afternoon, all major exchanges were down for the day with tech leaders including Microsoft, Intel, IBM, Oracle and Google trading below their Thursday close.

Even if markets make last-minute gains before closing for the weekend, Friday's news dumps cold water on what had been burgeoning confidence in the economy.

The labor poll results that came out Friday were not pretty. Nonfarm payroll employment was essentially unchanged in June, with on balance only 18,000 people hired (including all gains and losses in nonfarm sectors), and the unemployment rate was little changed at 9.2 percent, the labor bureau reported.

Though "professional and technical" jobs did incrementally better than other sectors, with a total of 24,000 hirings, the overall news was much worse than expected.

"It caught everybody offguard, simply because most of the other indicators that came out recently ...
... over the last couple of weeks on employment suggested that the numbers would be quite strong, between say 150,000 and 200,000," said economist Nariman Behravesh, in an interview with the "Daily Ticker" sponsored by Yahoo Finance.

Payroll processor ADP, for example, reported earlier this week that private employers added 157,000 jobs last month. Reports like that helped fuel confidence in the economy and sparked a market rally over the past few weeks. The Dow Industrials index last week rose 648 points, or 5.4 percent, its greatest gain in two years. The close of trading Thursday marked seven out of eight days of gains for all major exchanges, helping to bring shares of tech vendors back into positive territory for the year.

Market reports on IT this week continued with good news for the sector. Enterprise software is in particularly good shape, according to forecasts. For example, Gartner on Thursday forecast global software-as-a-service (SaaS) revenue to reach US$12.1 billion in 2011, a 20.7 percent increase from 2010. SaaS will continue to experience healthy growth, Gartner said, projecting worldwide revenue to hit $21.3 billion by 2015.

"After more than a decade of use, adoption of SaaS continues to grow and evolve within the enterprise application markets," said Tom Eid, research vice president at Gartner, in the report. "This is occurring as tighter capital budgets demand leaner alternatives, popularity and familiarity with the model increases, and interest in platform as a service (PaaS) and cloud computing grows."
And though sales of traditional desktop and laptop PCs hit a slump earlier this year, growth in the tablet market continues. IDC on Friday raised its tablet shipment forecast for the year, ascribing growth to increasing consumer interest in tablets and the introduction of new devices.
IDC hiked its global tablet shipment forecast to 53.5 million units, up from the previous forecast of 50.4 million units.
A healthy IPO market and mergers and acquisitions market for tech also indicate underlying confidence in the sector among industry insiders, as vendors and private equity companies alike lay down cash to place strategic bets.
For example, ERP (enterprise resource planning) software vendor Infor and its parent holding company Golden Gate Capital completed a $1.8 billion takeover of Lawson Software on Wednesday.
The move will take Lawson, which had been one of the largest remaining publicly traded ERP vendors, off the exchanges. Combined, the companies will have close to $3 billion in revenue, and be the third-largest -- albeit distantly -- ERP vendor after SAP and Oracle.
Infor itself has long been expected to file for an IPO, but the tasks associated with integrating Lawson as well as an ambitious series of product initiatives may further push off those plans.
Despite the good sector-specific news, however, the poor labor report and resulting rough ride in the markets Friday underline how fragile many people believe the recovery is, even for tech.
"Businesses are being super, super cautious," said Behravesh, discussing reasons for the unexpectedly bad jobs report. "What are they scared about? Well the only explanation you can come up with is that they are very worried about what's going to happen with the tax environment, with the government spending environment, as this whole debt-ceiling negotiation continues."
With Democrats and Republicans locked in negotiations, racing against a deadline to lift the U.S. debt ceiling to avoid a government default, an air of uncertainty is hanging over the economy. The U.S. Treasury will run out of cash to pay bills by Aug. 2 unless a political compromise is reached.
Earnings season starts in earnest in a few weeks, but even if vendors start reporting strong second-quarter results, full confidence in tech, or any other sector, most likely will not come back until the political air is cleared.
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