Labor Day came and went, along with a glorious summer. I don't know about you, but I could swear time is moving faster as I get older. Just as I get into the swing of a lazy summer season, fall hits me square in the face. Usually, August is a quiet time in tech stocks. The reasons are many, but I think the biggest one is that everyone who trades or invests on the East Coast starts thinking about his or her place in the Hamptons. Shortly thereafter, they're physically there, and the market volume goes downhill fast.

Most CIO and IT surveys earlier this year showed that enterprise software was going to be the spending priority in the second half of the year. It seems to me that it's getting pretty late into the second half of the year. In fact, it's beginning to feel like the fourth quarter. To use a bad football analogy, it feels like it's fourth down and 30 yards to go if we're going to hit the sales numbers that the analysts projected for many enterprise software companies.

I fully expected capital spending to pick up much faster after 2003. It hasn't happened. True, there may be a strong fourth-quarter capital-spending splurge to get the dollars into 2004 instead of 2005, but it still feels back-end loaded, with too many managers sitting on the fence when it comes to actually signing new contracts.

Sarbanes-Oxley keeps being mentioned as a big reason for the lengthening approval process, which is extending or deferring some deals. The recent economic slowdown doesn't help, either, as buyers are reluctant to spend money in face of a possible downturn.

We've already seen signs that desktop PC demand isn't as high as expected this year, and semiconductor stocks have suffered from a reduction in demand across almost all sectors. That means the third quarter, ending September, also is likely to have a few more misses versus Wall Street expectations, in my opinion. Not exactly what technology investors want to hear.

But there's a silver lining. If technology stocks continue to get beaten up, they may become value stocks for many investors. If expectations for tech stocks decline enough, we may yet get a fourth-quarter capital-spending flush that will result in lowered expectations being beaten. In that event, you may actually see a rebound in the share prices of the more beaten-down technology names.

One of the other overhangs continues to be whether options will be expensed in 2005--this would be a big negative for many technology stocks. Smith Barney analysts projected their large-cap technology stocks would, on average, see a restatement of earnings downward by 26% and the median small-capitalization technology stock would see a downward adjustment of 37%.

Some may argue this is already in the share price, but I'm not so sure. Accounting is very esoteric and until some investors see the final result in print, my experience tells me that not enough investors fully adjust for the negative news. Is it any wonder that tech stocks haven't been able to stage a rally recently?

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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