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All in Context

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All in Context
by System Administrator - Wednesday, 9 September 2015, 10:05 AM
Colaboradores y Partners

All in Context

A drumbeat of fear is being driven into investors’ heads and hearts repeatedly in a three-part measure: China’s slowdown, the Federal Reserve’s indecisiveness on interest rates, and the slump in oil prices.

Taken out of the larger context of the US and global economies, corporate performance, and the stock market, we are left with mostly abstract notions that appeal to our emotions, stir up confusion, and propagate volatility in equities.

Stepping back from the fray, we need to ask ourselves a series questions about the events involving China, the Fed and energy markets. For instance, what are the different scenarios for each? What are the potential consequences? And how will each impact the economy and markets?

Starting with China, the biggest concern is that weakness in the second-largest economy in the world will spread beyond the emerging markets and extend to the US. The reality is that headline-making events are not signs of an impending crash but responses to trends that have been long at work.

China’s problems are nothing new and hardly surprising. The headline-making plummet in the Shanghai composite happened after a 100%-plus surge in only a few months. The yuan had appreciated significantly versus the dollar, euro and yen in recent years and its devaluation is a response to boost competitiveness and stimulate exports.

Importantly, the Chinese economy is managed unlike the free-market economy in the US. Since the government can intervene in an instant, it is unlikely that a severe crisis will happen, as it did in the US in late 2008.

Finally, US consumers, who contribute roughly two-thirds of economic activity, have little exposure to China. They are also benefitting from several positive trends, including lower gas prices, rising employment and improving wages.

David Kostin, chief US equity strategist at Goldman Sachs, says China’s struggles “will not derail the US economic expansion.” Approximately 2% of the revenue of S&P 500 constituents is generated in China, and US exports account for just 13% of GDP, with less than 1% going to China.

The Fed’s game of ‘now-we-see-it-now-we-don’t’ is sucking an inordinate amount of attention away from other important matters, and it would be a mistake for investors to place too much ‘currency’ in the daily thought-processes of FOMC members and those close to the group.

As I’ve said, the action and outlook for the markets overrides all else for the Fed, despite pronouncements to the contrary. The current global turmoil, despite the positives for the US economy, will be enough to cause policy makers to hold off in September and very possibly to December or beyond.

Philosophical Economics points out two years ago this month, the Fed held off on the QE taper plans that it had been signaling to markets. The argument for holding off now, amid the current global market turmoil, seems much stronger than it was then.

The publication then concludes that it’s one thing to talk, and an entirely different to do the walk.

“The decision as to when to finally pull the trigger on the first hike, in the aftermath of this long and painful recession, is easily the most important central-banking decision the members of this FOMC will ever make. They’re going to want the conditions to be right.  If there are nagging uncertainties, the bias is going to be towards holding off.”

Nobody can be certain how consumers and businesses will react to a rate tightening, should it happen in the next few months. Psychology is a fragile thing and ChangeWave’s latest surveys reinforce the view that people are fairly cautious about spending and managing finances. They also show confidence levels remain subdued.

Finally, for all the crosscurrents and complexities about oil, the commodity’s price is ruled by the laws of supply and demand. Lower prices are forcing some producers to cut back and that will eventually stimulate demand once the global economy gets through the current malaise and parts of the US economy, particularly housing, garner more investment.

It may not happen this year or even next, but the global energy complex still runs on oil and many of the largest economies in the world are dependent on it for industry and continuing growth.

Now let’s examine highlights from ChangeWave’s latest corporate software purchasing survey and see what we can learn about current trends in IT spending.

Software Drives the Enterprise

Marc Andreessen, venture capitalist and founder of Netscape, famously said that software is ‘eating the world’. It’s tough to disagree with his assessment. Yet how do we account for the fact that we’re reportedly spending nearly a full percentage point of GDP less on IT than we were 15 years ago?

What’s likely happening is that the cost of acquiring digital technologies is falling even as they deliver increasingly greater capacity and capabilities. Going forward, there is no telling if IT will represent more or less as a percentage of GDP, but what we do know is that software is becoming ever more vital to the functioning of business and all facets of life.

Interestingly, software spending had experienced a slight drop-off after the tech bubble burst and the Y2K fiasco passed, but we’re back near the all-time peak.

MIT economist Andrew McAfee explains as follows:

“It’s true that this spending has been pretty flat for the past fifteen years, but we should keep in mind that this is also the time when open source software and the cloud and everything-as-a-service burst on the scene. All of these developments have significantly lowered the bill for a given level of enterprise software capability…”

In other words, we’re getting a heck of a lot more bang for the IT buck these days compared to 10, 15, or even 20 years ago. Hardware advances like Apple’s (AAPL) iPhone aside, it’s the software that is enabling us to do what we do with our computers and other devices.

Software now accounts for over half of all IT spending, according to McAfee, who expects Moore’s Law, volume manufacturing, and the cloud to continue to drive down the costs of hardware – and software’s share of total spend to continue to rise steadily.

ChangeWave’s latest corporate software purchasing survey shows that business software spending is not only essentially unchanged from last quarter, but in line with trends going back to the beginning of 2007, with the exception of mid-2008 to mid-2009 when the brunt of the Great Recession swept over the US economy.


The convergence of cloud, social, mobile and data science technologies is fundamentally transforming how companies sell, service, market, engage and innovate.

Importantly, cloud computing allows companies to gain access to a variety of business apps via an Internet browser or mobile device on an as-needed basis, without the cost and complexity of managing the hardware or software in-house.

One of the new, emerging ways that companies are applying these technologies is for digital marketing, which aims to simplify and automate repetitive tasks in the marketing process, allowing companies to market across multiple channels including email, social media and websites. 

Adoption of Marketing Technology

Marketers deploying software is a segment that is still in its earliest stages. According to ChangeWave’s findings, only 26% of marketers have adopted, or plan to adopt, any digital marketing.

For those that have, email unsurprisingly is the overwhelming application.


Social Media Integration (57%) ranks second followed by Campaign Management (50%) and Reporting and Analytics (50%).

As a 451 Research report comments: “That's a group that has easier and more immediate problems to solve, not one that's likely to make a strong push into areas that have traditionally been the purview of the ad agency.”

Looking ahead, the increasing use of customers’ proprietary data for ad targeting will open more opportunities for collaboration between the two distinct areas of ad technologies and marketing technologies.

451 Research sees the marketing-tech ecosystem evolving as these two disciplines mature and find more advanced ways to collaborate.

“Marketers are increasingly using data about their known customers and prospects to optimize their online-advertising efforts. Using data about current customers helps efficiently target that audience with relevant digital ads that can lead to additional sales. The data can also be used to help identify audiences with similar attributes as a marketer's current customers – another efficient way to optimize digital-ad spending.”


Joshua Levine
ChangeWave Investing

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