Thursday, December 4, 2008
Signals to watch for the software equity market recovery
Now that we know we are officially in a recession the debate has started on how long will it be - 6 months? 9? 12? There's an active debate on whether this will be the worst recession since the Great Depression - but even if it is there are many indicators that it could be over by mid summer - see the thoughtful and surprisingly positive article in Fortune this week. What's more in question is the rate of recovery once the recession is over and this is where the health of the financial markets will play a big role. Will the deeply wounded banking system act as an anchor to the recovery?
But when it comes to the valuations there are increasing numbers of our clients who think when the recovery comes to the equity market it will be very fast. The level of volatility in the market is enough to make one motion sick - but it is an indicator of some of the forced effects going on underneath the obvious. The market blood-letting is a result of the relentless programmatic-like selling - which is the direct result of the deleveraging and redemption pressures across the markets, especially in small to mid-caps. The result is that at current valuations prices have become uncoupled from company related fundamentals. In software (which is typically not burdened by debt) many companies are trading below revenue, below recurring maintenance revenue, and below cash. Valuations are close to half what they were at the end of the tech bubble.
So what will be the signal for the change? As one of our customers told me, the absence of mandatory selling is likely to be the quiet trigger and if tech stocks returned to prior historic lows that would be a significant market upswing. We have a private bet on for dinner as to when it happens.
1 comments:
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