The stock market seems to be playing a waiting game with a Congressional bailout taking on a new shape in Washington. I’m hearing about a new bailout plan that would raise FDIC insurance limits from $100,000 to $250,000 and would include some kind of capital gains tax relief to ease pressure on investors. The core of the plan – billions in payouts to Wall Street firms strangling on toxic debt – is still intact.
Still, that sounds better to me than the “crap sandwich” (as one House GOP leader put it) that Barney Frank and Nancy Pelosi tried to foist upon taxpayers on Monday. Let the free markets run their course, as painful as that may be. But the new provisions, geared toward protecting banking customers and easing taxes and regulations on investors, is a major step in the right direction.
Once passed, and that should happen this week, look for an immediate lift on Wall Street, with credit becoming slowly more available and businesses breathing a sigh of relief. I do believe we’re kicking the can here and not addressing the root cause of this economic prices – falling home prices and horrible lending practices – but something needs to be done now.
That’s the new meme from Wall Street, anyway. Whitney Tilson, founder and managing partner of T2 Partners and Tilson Mutual Funds appeared on the invaluable Tech Ticker this morning. He said that Congressional approval will have an immediate "psychological impact" on the financial markets. That's key because credit markets have seized up again and getting them functioning again is critical to avoiding disaster, he says.
But avoiding disaster is the best-case scenario, Tilson told Tech Ticker, who believes the housing market may be only 50% through its decline.
The bailout plan will be "very successful" if housing prices just start to stabilize a few percentage points below current levels, he adds. "I'm crossing my fingers we can muddle through," but the economy is going to face "severe headwinds" for the next 2-3 years -- bailout or no, he added.
What does all of this mean to the tech sector, and more importantly, the people who work there? I’m going to get to that in my next blog, but the view from 20,000 feet is that a new bailout package should stem the bleeding in the technology stock sector. After that, good luck. We’ve been fortunate so far in that companies are still ordering tech goods and services, but with a tightening credit market, that’s not going to last.
We saw evidence of that on Monday, when the stock market dropped 778 points and the tech-heavy NASDAQ fell a whopping nine percent. The carnage included Apple, which had been flying along from quarter to quarter, bolstered by solid sales of its flagship iPhone and continued strength with the iPod, as well.
But Apple saw its stock price fall 23% to $105. HP and IBM fared a little better, only falling 3.6% and 5%, respectively. But the tide is turning against continued technology spending as businesses begin to feel the pinch of the real economic pain this week. Now, it’s cost containment, and not capital spending, that is dominating discussions in tech company executive offices.
Tech spending in the reeling financial sector is poised for a major cliff dive. Says the Associated Press this morning. “IT employment will also see turmoil, particularly in the financial services industry. In announcing Monday that it plans to buy Wachovia Corp. for $2.16 billion, Citigroup Inc. said it expects to save $3 billion of "annualized expense synergies" through consolidations. Look for data centers to be part of any consolidation, said analysts.”
“Wachovia isn't alone. Last week's demise of Washington Mutual Bank, which was seized by the U.S. government and then acquired by JPMorgan Chase & Co. for $1.9 billion, will (also) mean changes for its IT workers. Washington Mutual will be moving to Chase's technology platform, with integration expected to be complete by 2010, said Chase."
The silver lining? Tech stocks are among the first to feel the pinch of a bad economy, but among the first to rebound. So hunker down, keep your job, and look for a better tech sector climate in 2009. If you're a tech investor, lay low, as well. We haven't hit bottom yet, but it's coming soon, bailout or not.