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A word of caution
The tech market continues upward. But before you jump in, not all indicators point to brighter days.
September 5, 2003: 2:55 PM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - I know, I know: No one likes a wet sock. Now that things are finally starting to look up after such a prolonged dim spell, people want to tune out the Cassandras and enjoy.

But when I hear that people who can't answer the most basic questions about why they like a particular company or sector are thinking of jumping back into the market, it raises all sorts of red flags.

Quite a few investors apparently believe the tech sector has left its troubled past behind it and is heading nowhere but up. Granted, the sector's nine-month rise has a lot to do with fund buyers not wanting to be left behind and jumping into tech "because everyone else is." But individual investors often follow the same pack mentality, and even though the economy at large does show signs of improvement, tech is hardly a shining example of health these days.

What makes me say that? Consider the following anecdotes as evidence that there are still some bumps ahead. Investors, take note.

Cautionary tales

Last week it was revealed that Robert Dykes, the CFO of electronics manufacturing company Flextronics (FLEX: Research, Estimates), had sold all his remaining shares in the company and now owns only options. This summer, in three separate sales, he sold almost 800,000 shares, netting nearly $11 million in the process.

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CEO Michael Marks joined him in the sell-off, unloading 500,000 of his shares. Both men sold when the stock price was within 5 percent of a 52-week high, for a pretty nifty profit. A Flextronics representative could not be reached by press time to comment on the sales, but when top management is selling in large quantities just as the stock is hitting a high, it hardly instills confidence.

Tellium, a struggling maker of optical-networking switches, is set to be acquired by fellow failing networking company Zhone Technologies sometime this fall.

Optical-networking news site Light Reading points out that Zhone is in critical condition ($450 million spent on acquisitions, less than $100 million in annual revenues, and only $1.9 million in cash on hand) and is likely pushing the takeover to get to Tellium's nearly $150 million in cash reserves. As a result of the deal, Zhone will go public (a feat it attempted unsuccessfully in the past) and Tellium stockholders will see their shares morph into Zhone shares.

So who wins in this strange transaction? Not shareholders, some of whom are pushing for dissolution and dividends instead of the merger. Tellium execs, on the other hand, will do quite nicely. They'll see payouts of more than $10 million to forgive outstanding loans.

Like big numbers? Check out these: 114, 53, 39, 37. Those are the current price/earnings ratios of eBay (EBAY: Research, Estimates), Intel (INTC: Research, Estimates), Cisco Systems (CSCO: Research, Estimates), and Dell (DELL: Research, Estimates), respectively.

Intel is the New York Stock Exchange's best-performing stock so far this year, up over 80 percent. Juniper Networks (JNPR: Research, Estimates) is the Nasdaq's No. 1 2003 stock, and I'd list its P/E, but it doesn't have one because it's losing money.

Remember when people said during the stock slaughter of 2000 and 2001 that the day of reckoning for tech stocks had come and they would finally get in sync with the general stock population? For the most part, it doesn't look like that's happened -- yet. And if the tech washout of the last three years wasn't the massive correction we were promised, just what the hell will that look like when it hits?

And don't forget the other problems

That's what's happening in tech. More generally, investors should be aware that other problems have not gone away.

Executive pay, for example, is still excessive, to put it mildly. Just last week, NYSE CEO Dick Grasso wowed 'em on Wall Street when the details of his compensation, including his $140 million retirement package, were revealed. But where's the public outrage? Where's the hue and cry of investors and Wall Street watchers who complained bitterly about past executive extravagance?

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Apparently, they're too busy watching the NYSE numbers rise to care much. Grasso's lucky: Had his pay package been revealed a year or so ago, when the markets were still heading down, he might not have escaped a public flogging.

And finally, even though the job loss numbers haven't jumped up for a while, careful attention to corollary indicators shows that, in fact, people are still hurting.

Take Dollar General (DG: Research, Estimates), for example. The parent company to the retail chain of the same name, DG just reported a boffo second quarter and told analysts to expect even better things in the future. The company is opening 650 new stores this year and anticipates same-store growth rates of between 4 and 6 percent.

When a company that advertises that many of its customers "earn a small paycheck or depend on monthly government assistance" is going gangbusters, it doesn't bode well for the general economy.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.