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As oil spurted from the $30s to the $70s during the past few years, as the price of petrol at the pump in the US exploded from about $1.50 to nearly $3.00, as copper quadrupled, the handwringing was all about how the consumer would collapse and inflation would skyrocket. It turns out that the positives, a strong global economy, a friendly Fed and the coinciding booming housing market, trumped the negatives of spiking raw material costs and energy prices.

Great, so the bullish thesis in that rather steady state of the economy since 2003 bore out well. But what about now? Commodities have pulled back hard. Oil’s dropped nearly 25 per cent since mid-summer. Petrol’s dropped more than 20 per cent. Copper’s down double digits from its spring
highs too.

And those commodity stocks that went parabolic earlier this year? They’ve been crushed. RTI International Metals, a titanium company whose chief executive I interviewed on CNBC on May 9, when the company had secured a nine-year, multibillion dollar supply deal with Boeing, has been cut in half. Don’t go crying too hard for shareholders though, the stock was up several hundred per cent and was up 25 per cent the day the deal was unveiled.

Coinciding with the collapse in commodities has been the downturn of housing. Yes, that elixir for all concerns consumer has seemingly topped out in its own right and housing inventories are soaring. Sales are dropping, and fear rules the real estate market in most areas of the US.

Somehow, just as spiking commodity prices didn’t kill the consumer in the midst of a housing boom, I don’t think we can expect the collapse in commodities to bail out the consumer if that housing boom truly turns to bust. Our economy, driven mostly by the ongoing technology revolution, seems to have grown to a point where commodity trends are but a ripple in the lake – at least as far as the consumer is concerned.

But that’s not necessarily the case for the enterprise. And that’s where this set-up gets exciting. In large part because of those parabolic commodity stock charts, I pulled in my reins and went almost entirely to cash (and added a holding in Microsoft) back in early May. I was motivated by fear of a meltdown in the commodity markets and the potential for it spreading into other sectors. I’m starting to put money back to work in tech now though, despite the looming housing decline, because enterprise spending on tech is about to take off on a growth spurt of its own.

There’s this little thing called the Windows operating system that’s about to have its first major upgrade cycle since Windows 95 carried the world out of the DOS ages.

On the hardware front, Intel has finally caught up with AMD, and both groups are rolling out newer, faster dual-core chips.

Meanwhile, Microsoft’s recent so-called “upgrades” such as from 98 to 2000 to XP were simply incremental improvements. The new Vista system is more than an increment. The new chips are going to combine with that new operating system and broadband connectivity and the Metcalfe Network Effect (which holds, simply put, that the value of a network increases by the square of the number of users on it) to enable killer applications that nobody can possibly conceive of just yet.

All the while, corporations, which have not been able to pass along those spiking raw material costs to their customers, are about to see their gross margins grow as the collapsed commodity prices work their way through the marketplace. These corporations have record levels of net cash on their balance sheets. That will start to burn holes in their pockets as they see their competitors continue to leverage computers and networks to juice the bottom line and fuel growth.

Finally, if housing gets much weaker, the Fed is likely to step in and cut rates. That would spur speculation and would likely create fuel for the tech spend cycle too.

The biggest risk? Probably a return of the commodity bull market, which conventional wisdom says should run 17 years or so, combined with a big collapse in housing. Regardless, the balance of risks and rewards for enterprise-centric tech like Cisco and Microsoft seems rather favourable as we exit 2006.

Cody Willard is a hedge fund manager at CL Willard Capital. cody@clwillard.com

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