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Tech stocks - Thursday, February 19, 2009

Forget Nationalization, Bring Back The Uptick Rule!

Like everyone else, the staff at tech:stocker is hearing the rumors that President Obama is considering nationalizing Bank of America (BAC:NYSE), Citigroup (C:NYSE) and any other financial institution that appears to be headed for life support. Nationalization of these banks is a bad idea. A very bad idea.

Have you ever visited an IRS office? Would you want to wait in that endless line every time you needed to go to a bank? And when you finally got to the front of the line, would you want to be treated with that same indifference and/or scorn that you are assured of receiving? Of course not.

The U.S. government had a hard time finding someone to run AIG (AIG:NYSE) and CEO Edward Libby isn't the modern day messiah the company truly needs. If Mr. Libby was the government's best choice for the job, we can only imagine who is waiting in the wings. Ivan Boesky? Maybe the government will work out a plea deal with Bernie Madoff making him do hard time as the head of the national bank earning only $500,000 a year. Not only would he be assured of an instant divorce from Mrs. Madoff (there's no way she could survive on that type of coin), Mr. Madoff would actually have to show that he knows how to make money the honest way, by earning it. A federal prison would have a hard time delivering a worse punishment.

Before we decided the government throws itself into a bigger mess than Iraq and decides that giving away free toasters with new accounts is a good idea, we recommend bringing back the uptick rule. We're a little late to the party as many people have been recommending this over the last year but nobody seems to be listening. So now is the time to make our case.

In case you don't know, the uptick rule states that short sellers must sell their shares at price above the last previous sale price or at the previous sale price, whichever is higher. Without the uptick rule in place, short sellers are thriving on the uncertainty in many of the financial stocks and scoring big profits on a daily basis. Nothing would make us, and Bank of America CEO Kenneth Lewis, happier than putting the uptick rule back in place. It would provide some needed time for these plundered companies to actually focus on making money versus worrying how to prop up their withering stock price.

Stepping away from the soap box, Hewlett Packard (HPQ:NYSE) reported its quarterly earnings today and we were mildly surprised to see them miss analyst expectations.

We were expecting PC sales to be off so seeing the 25 percent decline in desktop sales was hardly alarming. Americans want to be mobile so we expect desktop sales to continue to decline until corporations ramp up their IT budgets. But, seeing notebook revenues drop 13 percent was a surprise. We expected a drop, just not that large.

Even more concerning was the 19 percent drop in revenues in the imaging and printing group. Printers have been a stronghold for HP and the drop in the wildly profitable ink sales is going to hurt the company's bottom line until they return to printing large black numbers.

And of course we are worried that almost 50 percent of HP's sales would be considered discretionary spending. At a time when every business and consumer is looking to reduce expenses, having 50 percent of your product line considered optional is not a recipe for success in the current economic environment.

Most troubling is HP's decision to cut the pay of their executives by 15 percent while other employees will realize a pay cut of up to 5 percent. Pay cuts never go over well with employees. At a time when the company needs its employees to work proactively to help the company increase its revenues, cutting their pay sends the wrong message. We believe more layoffs would be beneficial to reduce costs versus making everyone miserable.

While you would expect us to issue a "stay away" rating, instead we're putting a 12-month target price of $37 on HP. CEO Mark Hurd has done a solid job building this company and we believe he'll continue to do a solid job leading the company out of this economic mess. And when the economy finally turns around, HP will be ready to reap the rewards.