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IT: Running ahead of realities? - Views on News from Equitymaster
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  • Aug 27, 2009

    IT: Running ahead of realities?

    Stocks from the IT sector were in the limelight yesterday, with IT bluechips providing three of the top five gainers on the Sensex. But the recent run up in IT stocks seems quite unusual to veterans in the IT industry. According to a report in a leading business daily, Mr. V Balakrishnan, the Infosys CFO has been quick to point out that even though there were slightly better macro-economic indicators, the situation at the customer level has not changed at all when compared to the earlier quarter. Says Mr. Balakrishnan, "The velocity of our business has come down due to the spending pressure on customers. We have to wait and see how the coming quarter will pan out. For now, there is no reason (for us) to relook at the guidance we have given". Infosys has given a guidance of a QoQ degrowth of 1% to 2.8% for the September 2009 quarter.

    A spokesperson from Wipro too had similar things to say, and expressed his surprise at the sudden bullishness of investors with regards to IT stocks in light of the fact that nothing much has changed in the company this month (August) compared to the last (July). The business environment remains tough for the companiesí customers with no increase in their subdued spending levels. According to the company, if at all robust growth were to return, it will not be before at least 1 to 1.5 years from now.

    It is not surprising to us though that the markets may well have run ahead of business on the ground. After all, it is an old habit of Mr. Market to keep attempting to accurately predict and forecast the future. And, as we all know, old habits die hard.

    US builders back to buying land
    After a prolonged period of write downs and distressed sales, builders in the US are back to buying land. They are now hunting for bargains, especially in states like California, Florida, Arizona and Colorado, which have been hit the hardest by the recession. But cycles have to turn, as they always do, even if they give the impression of nothing but a disastrous future when at the bottom. And so, builders are now back to doing what they do best -'build'. Their recent land purchases have been successful at sending out signals that the real estate market in the US may finally be looking up once again. According to the S&P/Case-Shiller index, an index that is representative of real estate prices in the US, home prices in 20 major cities in the US rose 1.4% on average in June from May.

    But Robert Shiller, the creator of the index, has not yet turned fully positive due to this data. According to him, even though this might be an impressive turnaround, there have been many other such corrections like this in the past that have suddenly begun to look good, only to later reverse once again, and that could easily be the case this time too.



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