Why insiders did not share Mr. Joseph's conviction that things could only get better going forward? Well, one picture is worth a thousand words, take a good look at the chart below:

In 2000, investment from the private sector approached nearly 20%, the highest ever, how did that happened? It happened due to an unprecedented increase in IT spending. Investment in capital equipment dominated by purchases in high tech gear, accounted for 25% of U.S. growth in the second part of the '90s, according to Dick Berner, economist with Morgan Stanley. Consequently, there is a massive glut of un-needed tech gear that will take more than just two quarters to work off. So, make no mistake: Capital spending is the main cause of the economic slowdown. Unless it begins to recover in earnest, economic growth will improve only modestly, and will not justify current share prices. Of course the "talking heads" will immediately point out to the aggressive easing by the FED and how it will cure any and all ills. Well, we hate to inform you that rational managers borrow in order to invest, only when the return on the investment exceeds the cost of financing. It does not matter what the level of interest rates is, if you can't earn on your investment more than what it costs to finance it. At the moment there is no reason to borrow in order to invest in new gear, most companies have more of everything than they can handle "Tech spending grew 40% a year for 4 or 5 years," says Chris Conkey, chief investment officer of equities for mutual-fund manager Evergreen Investment Management Co. Since new technology has an average life span of three years to five years, the spending that happened in 1999 and 2000 won't be repeated until 2002 or 2003 at the earliest. "Tech spending," says Conkey, "is the pig in the python." How about "non-tech" capital spending? Unfortunately, the numbers suggest that area is not doing very well either Lehman's Harris projects a worsening trend for non-tech spending – a 4% decline in the second quarter and 5% in the third. Meanwhile, he expects spending on high-tech equipment to drop 9% in the second quarter and 7% in the third. Why the gloom? there is little incentive to invest in new plant and equipment. As of May 31, capacity utilization for the manufacturing sector was 76%, the lowest level since the recession of 1982-'83!

The "brains" at CNBC thinking aloud will say " there is quite a bit of evidence that tech companies have taken aggressive steps to write off their inventory" We agree, the problem is this: it is written off from the books, but physically it is still there and it provides no incentive ti increase production capacity. And even when that inventory is gone warns Banc of America Securities chief economist Mickey Levy, nobody should expect a repeat of the late 1990s, when business spending on high-tech equipment and software grew in excess of 20% annually. Those spending outlays were not just the effect of a quick-growing economy, he says, "but also [of] the virtually zero cost of capital due to the stock market boom."

In conclusion, the current slow down will probably last another year, during which IT spending will be approximately 4% to 5% which is in line with the last two tech slowdowns, in 1986-87 and 1990-91, during which, we had growth rates in IT spending of 4% and 2.5%, respectively." Do share prices reflect that? we do not think so, when you consider that the NASDAQ 100 trades at a forward p/e which implies a rate of growth in excess of 30% to 40% in 2002! More over the tech sector is a much larger share of the economy, thus its rapid deceleration has much more pronounced effects to the rest of the economy. The simultaneous combination of big job cuts by big high-tech companies such as JDSU, CSCO, LU, MOT, TXN and the collapse of tech stocks in household portfolios will begin to affect consumer spending in the second half of the year (that is the same second half that according to the "talking heads/brains" will bring improvement and prosperity beyond imagination) We already see that earnings short-falls are now spreading to non tech companies across a wide spectrum of industries (look at the earnings short-falls at Federated Dept. Stores, Merck, Three M, etc.) Is that fact reflected in the SP500? We do not think so, when it trades at a forward p/e of 22!