Redefining Tech and Banks

 | Dec 22, 2011 | 1:15 PM EST
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There's good tech and then there's bad tech. There are good banks and then there are bad banks. These are huge sectors and they can't be regarded as unified or uniformed. Yet that's what people do.

There's always been a sector pull to these two, but it's never been as great as now because of the ETF-ization of everything, making it so that stocks that shouldn't trade together trade together and it causes someone like me, who wants to endorse particular stocks, to be tarred as changing his mind and flip-flopping like "Jim, you hate tech, how can you like Google?"

So, let me explain myself. First, there wasn't always tech. It wasn't until the early 1980s that people even thought about tech as a sector. That's when we began to see the notion of the computer as a growth business. It really wasn't' considered that, just an extension of the U.S. economy.

Then the adoption of the personal computer changed things. You began to see people recognize that one sector was growing much faster than the rest of the economy and that was the sector that processed information in forms that were radically fast and efficient. It was the automation of things done by hand, and the digitizing of data to where it could be manipulated in forms that weren't thought of.

Further, in the mid-80s it got personalized to the point where we began to think that perhaps everybody in the country might one day own a computer, something that was simply ridiculous as a concept a few years before. I am not saying there wasn't processing. We know that National Semiconductor and Texas Instruments (TXN) were around, as was Motorola (MOT), and they made semiconductors that allowed lots of mechanical functions to be handled in sophisticated ways through computerization.

But I am talking about niche going to mass. That's when we started thinking of tech as a super-growth place, something that was energized by the founding of Microsoft (MSFT) and the morphing of Intel (INTC) into a processor company, not a DRAM company.

Why was this so important? Because before Microsoft and Intel semiconductors were often just gross domestic product plays, like Caterpillar (CAT) or Alcoa (AA).

The PC changed all of that. On top of the PC came e-mail. On top of e-mail came the Web. On top of the Web came smartphones. On top of smartphones came video on those phones, and the cloud, where we are now.

These were all fabulous secular trends that spawned trillions of devices and created trillions of dollars of wealth.

With each iteration came pushes and tugs. Who has the value in the chain? The semis? The hardware assemblers? The software assemblers? The disk-drive makers? The enterprise software companies?

All along the way there were companies that were marginalized, too, like Burroughs, Control Data, Digital Equipment, Data General, Micron (MU) (yes, Micron), AMD (AMD) (yes, AMD) and countless others that fell behind.

The problem is, at this very moment, more are falling further behind than I can ever recall and that is making it so the growth rate for the industry is only slightly better than the world's growth as we are getting saturated with everything from PCs to smartphones to enterprise computing to telecom equipment and to all of the pieces that go inside.

That means there are only select portions of tech that can run, so the notion of tech as a group has gone by the wayside. In fact, most of tech will grow more slowly than most industrials, which is why I am focusing on actual companies that can grow faster than the cohort itself. Frankly, there are few and getting to be fewer as the Oracle (ORCL) call alone took down so many parts of tech, hardware, software, consulting and, of course, the cloud.

Banking's similar. We know there are banks that are much better at banking than others. But it hasn't meant much because of the ETF-ization of banks. I like some regionals, and have said that US Bancorp (USB) is the best. Yet, when the best of the best has given you a 1% return for the year, doesn't that make you question the whole sector?

I mentioned with tech that I care about growth that exceeds worldwide GDP, and very few tech companies can provide that performance. No banks can. None. Plus, let's face it, the best way to win office in this country is to run against the banks. They are whipping boys for both parties. The regulators want them to put up more capital. The Fed is making it so they can't make much money just turning on the lights every day and playing the yield curve. Fees are coming down. Competition is thick and lending standards have gotten so high that there's not enough business to go around.

Both groups are also challenged by what this market wants the most: dividends. Historically, tech companies have been sources of capital gains. That's no longer the case. They viewed their businesses as growth businesses and questioned whether issuing dividends wasn't a badge of dishonor. That view dies hard. Only Intel offers much of a dividend. Hmm, maybe that's why it has bucked the trend and is up 14% this year.

Dividends and banks? Most are still in cut mode. The government has to approve dividends and the government doesn't want to approve them. So they have no defense against the sell programs that wrack the market so much and are often caused by problems in Europe, of which the banks are directly linked.

Again, there are standouts. Google's (GOOG) cheap. Apple (AAPL) has some strong momentum for the holidays. I think that housing could get stronger in 2012, which is good for selected regional banks.

But in the end, there are so many other places to go and so few that buck the headwinds of banking and tech that I ask, why bother? If gross domestic product grows, I would rather own the industrials. If it slows, I would rather own the foods and the drugs and pocket the dividends.

There's just no room at the inn for these two groups going into 2012.

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