Wall Street Beat: Confidence buoys tech despite turmoil

Industry insiders remain hopeful that tech companies won't be dragged down as Wall Street giants collapse.

Even though a smattering of IT vendors including Dell and Nortel issued earnings warnings this week, industry insiders remain hopeful that tech companies won't be dragged down as Wall Street giants collapse.

After reports surfaced Thursday that the federal government is considering creating a repository for the failing banks' bad debt, the tech-heavy Nasdaq Composite Index jumped 5 percent, or 100 points, to close at 2199. The report about the repository seemed to allow underlying confidence in the tech market to push up even IT stocks that had been battered earlier in the week.

Dell shares tumbled about 10 percent Tuesday after it reported that demand for its products has dropped this quarter. Over the next two days, however, the shares recovered most of their value. Even Nortel shares, which lost half their value Wednesday after the company issued an earnings warning, rose again Thursday. Nortel said carriers are lowering capital expenditure plans, and some corporate users have deferred IT investments.

On Thursday, Dell shares rose by US$1.06 to close at $17.25, while Nortel's shares rose by $0.23 to $2.91.

The collapse of Wall Street investment banks, however, sent a shock wave through the technology sector. The banks are IT leaders due to the computing-intensive nature of financial services. Wall Street alone accounts for about 30 percent of the approximately $127 billion that the entire financial services sector will spend on IT this year in the U.S., according to Andrew Bartels, a principal analyst with the Forrester Group. Lehman Brothers, one of the investment banks that failed this week, spent $1.14 billion on IT last year alone.

But a bank's failure doesn't mean that its entire IT budget will vanish, Bartels pointed out. Banks that are folding or being bought out, like Lehman or Merrill Lynch, have IT systems that will keep running under different management.

"When banks merge they may end up using one e-mail system, but some trading platforms will still need to be supported," Bartels noted.

"From our perspective, the bigger issue is not what is happening on Wall Street but what is happening in the larger economy," Bartels said. A tightening of credit could curb both corporate and consumer spending, he noted.

That's one reason that Forrester earlier this week revised its U.S. IT spending forecast for 2009. That forecast now calls for 6.1 percent growth, down from its previous forecast of 9.4 percent. The downturn that Forrester and many other analysts thought would hit in the first half of 2008 is now expected to occur in the second half of the year and the first half of 2009.

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