What 'Capex' Is and Why It Matters

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What is capex? I get asked this million times a day. This is what capex is: It is capital expenditures by the like of AT&T, 360 Networks, WorldCom, British Tel, Deutsche Tel, Teligent, and ICG Communications, SBC Communications and Verizon and all of the other tels. It is their equipment budgets. It is what they are going to spend.

Most spending in this country is retail spending. Cars. Stores. What you buy for food, clothing and shelter. But there is another kind of spending. Giant capital spending. Capital spending is spent by companies to do their business. There are dozens of companies out there trying to expand network capacity. They do that by buying product. The product is made by Nortel (NT:NYSE - news - boards) and Lucent (LU:NYSE - news - boards) and other companies. These orders are huge. They are much bigger than retail orders. They are in the billions.

If you wanted to meet the network capacity, or bandwidth, you had to order this new equipment from these companies. It is what the customers want. They want it badly. So the big telcos had to buy. But now the big telcos are hurting. They are not making enough money off the new equipment and there are too many telcos -- as many as 14 different networks in this country alone. They are now not in shape to buy more equipment. And the junk-bond market, which raised money to fund these networks' purchases, is tapped out. More than $200 billion has been raised in the past 10 years for the buildout of these networks, but the well is dry.

So the companies are cutting back on their capital expenditures. Or, in English: They don't have enough money to buy all of that equipment anymore. That's why it matters. That's why we are having this downturn. That's why capex matters so much. Just as you make up your budget at home and have to cut back on purchases you would like because you may not have enough money coming in, these telco companies, everyone from AT&T to British Tel, are doing the same. So numbers come down. And stocks get hit.

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James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Nortel common stock and long Nortel puts. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at [e-mail].