The Technology sector, which lead the U.S. stock market higher for much of this year, has struggled lately.  Just 29% of tech stocks remain above their 50-day averages, well behind the 78% level for the U.S. Financials. While earnings misses from major players such as Microsoft, Intel, Dell, HP, Google and Texas Instruments could all be blamed somewhat on the shift in the consumer market from laptops to tablets, we can also place blame it on the well-known fact that these companies generate a higher level of sales from outside of the U.S., where economic growth has been softer.  While the average U.S. company earns 29.8% of its revenue abroad, tech companies take in 53.7% overseas.  That’s the most of any sector — and a perceived liability when investors are shunning Europe and Asia.

A phrase that we will be hearing much more about in the future in the tech industry is ‘monetizing mobile.’  This was what caused the recent shortfall in Google’s earnings and what has been responsible for the nearly 50% collapse in the stock price of Facebook since its public listing last spring.  Consumers are switching from laptops and desktop computers to tablets and smart-phones, where the screens are much smaller and the devices are used more frequently on mobile networks.  The problem is that companies such as Google, Facebook, Yahoo, etc. all depend heavily on advertising revenues to make their business models work, and there is less room for advertising on the smaller screens.  The companies are therefore seeing lower margins as they expand into these mobile devices.  Trying to make money from those mobile subscribers (or ‘monetizing mobile’) has become the top priority for Facebook, with its billion-plus customers.  How well these companies do in the future will depend heavily on their ability to generate income from this growing segment of their customer base.

We still like Google and believe that they can effectively monetize their mobile growth, driven in large part by the fact that they own the Android operating system that many of these newer devices are based on.  We continue to hold Microsoft, primarily for the valuation but also due to the recent release of Windows8 and the Surface Tablet, Microsoft’s entrée to the tablet market.  Windows8 is designed for the mobile market and tablets but will also be able to deliver all of the desktop programs that users want to have access to on a tablet.  We believe that Windows8 will allow Microsoft to hang onto their core business market.  Other names in the sector that we think have growth potential include Qualcomm and Broadcomm for their semi-conductor products in mobile.  The key global carriers also want a 3rd ecosystem of mobile networks in addition to the Android and OS (Apple) systems.  While RIM and Microsoft/Nokia each seem to be best-placed to grab this 3rd spot, we think that the launch of Blackberry10 in the first quarter of 2013 will allow RIM to enter a strong refresh cycle from their 80 million subscribers that could allow the company to grow again.  New management has done an exceptional job at growing subscribers and conserving cash despite the fact that they have basically had no new product introductions in over a year.  This is not a stock without risk at this point, but the risk-reward potential on the stock still looks attractive.

The Canadian stock market has lagged the US by almost 20 percentage points over the past year as financial, health care and consumer stocks lead the market while resources and industrials lagged.  Canada has a larger component of industrial and resource companies in our market and we are driven as much by the growth in the emerging economies of the world (and their need for basic resources) than we are by the developed economies such as the U.S. and Europe.  The chart below, covering the last 15 months, shows how the Canadian stock market has followed both the price of Copper as well as the movement of the stock index for Emerging Markets (EEM).  While all 3 markets peaked in April of 2011, they have all started to move higher again recently and have broken through key upside resistance levels, suggesting the probability of further gains to come.

Three Remarkably Similar Charts

The correlation of the 3 markets is also logical since Canada produces the key commodities, such as copper, that have disproportionately higher levels of use in the emerging economies of the world as they go through their industrialization and higher growth phases.  Copper market fundamentals also continue to look good as the ratio of inventory/consumption remains near 15-year lows, suggesting that supplies are tighter than most investors believe.

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