Forbes America’s Most Promising Companies: Technology Firms Leads

From Forbes.com

The companies on our AMPC list hail from 22 industries, with software-and-services taking the biggest slice (35%). Some fast facts: 90 have raised outside capital; 70 have a CEO who is also one of the founders; 12 have one younger than 35 years old; 7 have yet to generate revenue; and one sells a burger topped with pastrami. None of these outfits may blossom into the next Google or Apple, but all, it appears, have bright futures.

Read the rest and see the list here

Technology companies taking the lead represents as more signs of the evolving transition to the information age.

Information Age Investing: Entrenching Technology Sector Leadership

Bespoke Invest shows us some very important developments in the US stock markets during the recent sharp volatility: Technology Sector’s market leadership has been intensifying

Bespoke Invest writes

As shown, the Technology sector, which was already the largest sector in the index, has seen the biggest gain in weighting since the bull market peaked. On April 29th, Tech had a weighting of 18.07%. As of now, its weighting is 19.06%. The gain in Tech is even more impressive because the only other sectors that have seen increases in their weightings since the bull market peaked are non-cyclical in nature (Cons. Staples, Utilities, Health Care, Telecom).

Additionally, the technology sector has been outpacing the industrials.

Again from Bespoke Invest

While Industrials have been slumping, the Technology sector has been ramping. Although there have been numerous calls to avoid the sector during this downturn, Tech stocks have been handily outperforming the market. In fact, heading into today, Technology was the least oversold of the ten sectors.

My thoughts

Recent volatility has been proving to be more of a shakeout than a genuine inflection point.

The underlying change of market leadership or divergent actions in the sectoral performances, which reveals of an ongoing rotation towards the technology sector, shows that this has not been a debt deflation driven financial market sell down, as global central bankers have been applying aggressive activists measures.

The gap in the market cap weighting of the technology and other sector has been widening. In the Philippines, the Mining sector has been assuming this role.

As I have been saying, as the information age deepens, the pie of the technology sector relative to the economy will continue to expand.

Global production process will continue to lengthen or experience enhanced specialization as more technology products and services will be offered and provided to the marketplace. Competition led innovation will be the major driving force for this dynamic.

People hardly notice that the internet search industry is one big example of this ongoing dynamic.

The technology market leadership dynamic will continue to be reflected on prices of technology equities, which should be expected to have a greater share in the US equity market’s sectoral weightings as time goes by.

Essentially, a bet on the information age should translate to a bet on the technology sector.

But as caveat, since policies of central bankers have led to periodic bubble cycles, the capital intensive technology sector could be in a formative bubble cycle process. Although I guess this has yet to reach a maturity phase.

Of course, US treasuries are the ultimate bubble in the US, which I think is in a near maturity or blowoff phase. The global bond bubble applies to many developed economies based on the 20th century designed welfare system.

And so goes the US treasury securities and other bond bubbles (EU, Japan), so with the US dollar and the US dollar system.

I’d stick to precious metals and the technology sector.

Are Internet Stocks A Bubble?

That’s an interesting question posed by the Economist in a recent article.

They note of three powerful forces among many influencing the evolution of the internet world particularly, rapid advance in technology, wider range of willing investors and globalization

Read their explanation here.

Nevertheless they also point to the following as beacon...

Lofty prices in the secondary markets.

The Economist writes,

Their task has been made easier by the advent of secondary markets in America, such as SharesPost and SecondMarket, that allow professional investors to trade the equity of private companies more efficiently. They have also made it simpler for employees and angel investors to offload some shares—and have enabled the world at large to observe a remarkable rise in valuations

And the winning streak of technology stocks.

I talked about the potentials of the technology sector as a source of bubble where I used the Charles Kindleberger model of dislocations.

Here is what I wrote in July 2010

Some factors that may prompt for a technology based dislocation (Kindleberger model) bubble are the following:

-less government intrusion in the market clearing process of the previous dot.com bust,

-swift obsolescence rate of the technology cycle and or rapid rate of innovation could mean new applications

-globalization means more consumers of technology products and services, thus a wider reach and bigger markets, albeit a more niche oriented one (another potential source of dislocation)

-importantly, freer markets which allows for more intensive competition could spawn heightened innovation from which new products with widespread application could emerge.

Yet there are many factors from which technology should play a role in shaping markets and the economy. Fundamentally this involves greater dispersion of knowledge and the deeper role of specialization, which some have labeled as the Hayekian Moment.

The impact of which should include vastly improved business processes via the development of organizational capital, provide for more real time activities which immensely reduces transaction costs thereby generate an explosion of commercial or commercial related activities, and significantly flatten organizational hierarchy which becomes attuned to the dynamics of a more competitive environment.

Economic development trends appear to be tilted towards having a greater share of technology based service sector. The more competitive an economy is, the greater the share of the technology based service economy.

This, essentially, is the running transition away from the industrial age towards the information age.

Thus, free market based competition has been directing economic development towards more specialization, or in Austrian economics terms-the lengthening of the production structure.

So a Kindleberger bubble should be on our watch list.

Given the above plus the artificially suppressed interest rates and credit easing policies (a.k.a. quantitative easing), this essentially combines segments of the Austrian Business Cycle with the Kindleberger’s model, which means the answer is a likely yes; the internet sector would seem like candidate of an inflating bubble.

But remember bubble cycles signify a process. This means that internet/technology stocks can stretch higher until it reaches its maximum point of elasticity where eventually it snaps.

Besides that’s what US authorities have been looking for, a replacement bubble.

The Battle For The World's Most Valuable Technology Company

The following chart from New York Times details on the rivalry of Apple and Microsoft in terms of market cap.

Apple recently grabbed the top spot as the "world’s most valuable technology company"...

Interesting comment by the New York Times:

"The rapidly rising value attached to Apple by investors also heralds an important cultural shift: Consumer tastes have overtaken the needs of business as the leading force shaping technology."

This reminds us that consumers ALWAYS play the lead role in determining how resources are allocated. And businesses only compete to satisfy consumer needs or tastes, through innovation or adaption of more efficient processes. Profits and higher market cap are consequences of the success of such pursuit. According to Ludwig von Mises,

``The economic foundation of this bourgeois system is the market economy in which the consumer is sovereign. The consumer, i.e., everybody, determines by his buying or abstention from buying what should be produced, in what quantity and of what quality. The businessmen are forced by the instrumentality of profit and loss to obey the orders of the consumers, Only those enterprises can flourish that supply in the best possible and cheapest way those commodities and services which the buyers are most anxious to acquire. Those who fail to satisfy the public suffer losses and are finally forced to go out of business."

Go to the New York Times site here to see the company milestones accompanying the chart.

However, maybe the rivalry shouldn't be limited to Apple-Microsoft. Perhaps newcomer Google should be part of it.

Google's market cap is currently at $156 billion according to yahoo finance, (chart from bigcharts.com) more than 30% off from Apple's $233.7 billion.

But again, the rewards will depend on who among these companies will satisfy the consumers most.

US Protectionist Pressures: India Is Feeling The Heat Too

One of the misguided notions held by the liberal view in the US is that the proposed protectionist measures targeted to resolve so-called "global imbalances" will likely be confined to a US-China affair.

Unfortunately, this view, which panders to sensationalism, fails to take to account the repercussions of rabble rousing. In the other words, the likely side effect from demagoguery is to fuel a nationalist hysteria that would brook xenophobia and or racism. (These people seem to have forgotten the ultra-nationalism of Nazism which triggered World War II during the last century)

And it appears that India has also been taking the heat from such pressures.

India's commerce minister has been reported by Financial Chronicle as rebutting allegation that India has been taking away American jobs.

Here is the Financial Chronicle,

``Urging the US to reform its visa policies, commerce minister Anand Sharma said here today that the paranoia of the Americans about Indians taking away their jobs, especially in the IT and services sectors, is a myth.

``There is an incorrect perception in the US that Indians are taking away the jobs of Americans, which is driven more by the fast-paced growth India in the IT and services sectors, Sharma told newsmen.

``Citing three recent reports, including one by PricewaterhouseCoopers and International Business Forum, Sharma said, "contrary to popular perception, Indian BPO companies have created income worth USD 106 billion inside the US in the past three years ending 2009, and generated 3,00,000 jobs out of which 2,50,000 were filled by Americans."

"These are jobs for Americans created in America but by Indian companies. This is a myth that jobs are being taken away by Indians," Sharma said"

There seems to be a sense of desperation that has been creeping into the progressive camp as seen in the recent actions of politicians and their intellectual followers as election season nears.

This desperation appears to have been manifested yesterday when the liberals finally got into the act to successfully ram down the throats of the American public, the highly controversial and unpopular Obama Health reform legislation in the House of Congress, a year after President Obama's assumption to office.

And such impetuousness appears to be 'throwing the gauntlet' to any party that crosses path with their desired political agenda. And India appears to be a victim of such emergent antagonistic sentiment.

Nevertheless the apparent anxiety is likely to be reflected on the outcome of the next elections.

So, the current crop of leaders are doing whatever they can to generate a sense of emergency for them remain in power, regardless of the consequences of their actions. It's a case of when "push comes to shove".

Be careful what you wish for.

Where Yahoo Beats Google

This from Randall Stross (New York Times)

``Google has an outsize image as the deft master of information. Its superior technology seems to pitilessly grind up its rivals. But Google’s domination in search has proved hard for it to match in some information domains. When serving financial news and information, for example, Yahoo draws 17.5 times the traffic of Google, according to comScore Media Metrix.

``Yahoo Finance, which has occupied the top spot in the category for 19 consecutive months, drew 21.7 million unique United States visitors in July; Google Finance drew only 1.2 million unique visitors, placing it 17th in comScore’s rankings for the category, one slot above a site called FreePressRelease.com."

Will The US Technology Industry Function As The New Economic Driver?

Pew Research gives us some interesting clues in the changes of consumer habits or consumer preferences of Americans in today's crisis dominated environment.

Seen from the the investing dimension, if we are to bet on a new economic paradigm emerging from today's crisis, some of the "recent" trends may portend or serve as prologue to the future.

According to Pew Research (bold emphasis mine), ``In hard times, the Pew Research survey finds that many Americans are changing their minds about which everyday goods and services they consider essential and which ones they could live without. The survey also shows that "old-tech" household appliances have fared the worst in the public's reassessment of the line between luxury and necessity in their daily lives.

``Of 12 items tested1, six dropped significantly in the necessity rankings from 2006 to 2009, while the other six basically held their own. All of the "old-tech" household appliances on the list dropped in their necessity ratings. For example, the proportion of people who rate a clothes dryer as a necessity fell by 17 percentage points in the past three years. There are similar declines for the home air conditioner (16 points), the dishwasher (14 points) and the television set (12 points).

``A few of the "middle-aged" household appliances and services also declined. The microwave, a kitchen staple since the late 1980s, is currently viewed as a necessity by less than half the public, a 21-point drop in the past three years. The proportion who rate cable and satellite television service as a necessity fell 10 percentage points since 2006, nearly matching the declining value of a television set."

Adds Pew, ``In contrast, none of the newer information-era gadgets and services has fallen in Americans' assessment of what they absolutely need to have. Cell phones and home computers continue to be seen as a necessity by half of the public, unchanged from three years ago. High-speed Internet access is seen as a necessity by about three-in-ten adults, also unchanged from 2006. Two items that came onto the consumer scene in this decade -- iPods and flat-screen TVs -- are still seen as a necessity by a very small share of the public, but that share hasn't declined during the recession."

Why is this important?

First, it shows that the weight of consumer activities or consumer preferences appears to be shifting towards communications in the form of high end TV, iPod or the internet. Despite the recession, while other appliances are suffering from consumption retrenchment, positive growth is still seen on technology based devices or equipments.

This gives further validation to some studies alluding to the ongoing explosive growth in non traditional media as social networking, see our previous post, Wikinomics: The Exploding Growth In Social Networking Media

Next, note that today's crisis won't last forever which possibly means that some of the recent trend shifts may accelerate when economic growth will be restored.

Third is the issue of demographics.

The cellphone and landline usage depicts of the technology "generational gap" trends between youth and the elderly.

Again from Pew, ``The survey also finds that some consumer products, including some high-tech devices that have entered the marketplace relatively recently, appear so far to be "recession-proof." About half of respondents in the current survey (49%) and a similar proportion in 2006 consider a cellular telephone to be a necessity. That overall finding obscures a considerable generation gap: Currently 60% of adults under the age of 30 say a cell phone is a necessity, compared with 38% of those 65 years old or older. But this generation gap is not significantly larger today than it was three years ago; in fact, views on the need for a cell phone have not changed significantly among any age group since 2006.

``An equally dramatic generation gap opens when Americans are asked whether landline telephone service -- the familiar home phone -- is a luxury or a necessity. But this gap runs in the opposite direction. More than eight-in-ten (84%) adults ages 65 and above say a landline phone is a necessity, while only 49% of those younger than 30 agree. And younger adults are nearly four times as likely as older adults to say an in-home phone is a luxury (51% vs. 14%)."

Our point is that the younger generation appear to be more adaptive in utilizing applications from technological innovation, although even the elderly seems to be fast catching up.

And considering that in 2020, demographic trends as seen from the chart above by nationmaster.com indicates of the probable shift in the weightings of the population distribution in the US, where its bulk is expected to comprise the age levels of 25-39. This effectively extrapolates to today's biggest technology users as the core market for the technology industry.

In short, we may expect a huge surge in industry growth in terms of penetration level or in the diffusion of users.

Barring the risks of imposition of extreme regulations which may restrict and choke off innovations, my predisposition is for unexpected or underappreciated technology originated economic recovery for the US. Albeit I think any solid recovery may not be seen anytime soon as the US could be faced with growing risks of hyperinflation.

Nonetheless, the present outperformance of the technology rich bellwether the Nasdaq relative to the broadmarket as signified by the S&P 500 seems to provide some foundation for such thesis.

As Don Tapscott and Anthony Williams wrote in Wikinomics, ``The future, therefore, lies in collaboration across borders, cultures, companies, and disciplines. Countries that focus narrowly on "national goals" or turn inward will not succeed in the new era. Likewise, firms that fail to diversify their activities geographically and develop robust global innovation webs will find themselves unable to compete in a global world. Effectively it's globalize or die."

A Future Race Between Energy and Technology For Market Leadership?

Bespoke Invest has another set of great charts shown below. They reveal of the fluid dynamics of the composite weightings of the S & P 500.

Since the latest rally, the mangled financial sector has made a significant move to regain some of its lost grounds.

Although what really caught our eyes is the seeming emergence of a new leadership seen in the technology sector.

From Bespoke, ``After representing nearly a quarter of the S&P 500 at its peak, the Financial sector's weighting in the index fell all the way to 8.88% on March 9th. Since then, however, the sector has regained some market share and now represents 11.78% of the index. This share gain of 32.66% is by far the biggest jump for any sector off the 3/9 lows. Consumer Discretionary increased its weighting by 11.34%, followed by Industrials (6.52%), Technology (3.24%), and Materials (0.32%) on the upside. The Energy sector has seen its representation in the S&P 500 fall the most during the rally with a decline of 12.27%. Telecom, Utilities, Consumer Staples, and Health Care are the other sectors with declines in market share. Technology still holds the title for the biggest sector at 18.15%, with Health Care in 2nd place and Consumer Staples and Energy in a race for 3rd." (bold highlight mine)

As presented in a table...

Bespoke also illustrates the historical trending of each sector of the S&P 500.

Adds Bespoke, ``Below is a historical look at S&P 500 weightings for each sector. The red line represents the average weighting for the sector since 1990. As shown, Financials moved sharply below average at the end of 2008, but have bounced slightly recently. Technology is just above its historical average, while Health Care and Energy are well above average but headed lower. Consumer Discretionary, Industrials, and Materials are below average but appear to be headed higher." (bold emphasis mine)


We have been looking at the energy and material sector as possible market leaders over the longer term since they've been depressed for quite sometime. (yes decades)

Nonetheless, technology has also been a downtrodden sector since the dot.com bust during the advent of the millienium. But given the rapid explosion of technological advances, it wouldn't be a surprise for this sector to have a shorter cycle relative to the others.

So a question popped into my mind, could the next bubble be a race between the energy and technology industry?

Stay tuned.