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Tuesday, December 30, 2008

Tech rundown – December 30, 2008

Broadband – WSJ discusses cable industry lobbying for new definition of broadband speeds for tax credits and stimulus grants. The cable industry, which can easily deploy DOCSIS 3.0 equipment on their existing infrastructure, wants the definition of broadband to be 40-50 megabits per second. The telco providers of DSL not so much – they would have to do significant upgrades to compete. Cable wants to be incentivized to build out rural areas where there are fewer operators (and more opportunity to price gouge). The article suggests Clearwire (CLWR) would benefit if the government moved wireless broadband definitions over 2 megabits per second as Wimax can do 2-4 megabits per second. Prime beneficiaries of a massive broadband upgrade in cable would be Cisco (CSCO) and Arris (ARRS). Theoretically it would also benefit fiber to the home players like ADC Telecom (ADCT) as FIOS is compliant with the broadband speed ranges discussed. Another proposal in discussion is for state and municipalities to build the networks and open them up to service providers – a terrible idea, in my opinion.

India delayed their 3G bandwidth auction by 15 days apparently due to lukewarm response. Applications are now due on January 20th so get your forms in now.

FBR says distributor chip shipments fell 27% m/m in November – the 5 year historical average is down 1.5% m/m. Distributors have been cutting back shipments to poorly capitalized whitebox makers due to ability to pay concerns. TXN, MSCC and AMD saw large downward revisions due to their "sell-in" revenue recognition. NAND flash is perceived to be better positioned than DRAM due to its exposure to netbooks, smartphones and game consoles. Despite the order cuts, distributor inventories look to rise to 60 days on hand versus desired levels of 40-45 days. Nonetheless, FBR believes January will have a more historically normal sequential change (though off significantly lower levels than in years past) and that inventory replenishment could begin in the summer of 09 – a dubious conclusion as they just told you inventories are 35% higher than distributors would like presently. They like ONNN, MRVL, MSCC, SLAB, IRF, BRCM, FCS and ATML.

TSM/UMC – UDN ( reports utilization rates at TSM and UMC will drop below 50% and 30% respectively in January due to a combo of Lunar New Year days off and lousy demand.

SYNA – Thinkequity foresees the notebook touchpad market becoming more competitive as netbooks become the dominant market share driver in the market. Taiwanese notebook ODMs will report December figures next week and forecasts suggest they were down 15-20% m/m. Order cuts have been coming through the supply chain all through November and December and consequently Think says Taiwanese ODMs expect January shipments will be down 30% m/m from December's depressed levels. On top of these lowered unit volumes, Elan has been taking share in netbooks – they're in 80% of the Asustek models (the EEE PC). In PCs, netbooks are the top sellers at Amazon and Walmart. With Elan starting to get meaningful volumes and Cypress getting some design wins, Think believes there will be increased competition in notebook touchpads – previously it has been a duopoly of Synaptics and Alps. Though Synaptics has been successful in touchscreen cell phones and that market is robust, Think sees the proliferation of iPhones to Walmart as reducing Synaptics' potential gains as they're not in the iPhone (this is flimsy). The stock trades at 11* his $1.52 estimate – historically the stock has traded in a 10-25* EPS band.

AAPL – Macworld is next week. Kaufman says look for new desktop Macs and possibly updates to Apple TV and/or Time Capsule.

AMZN – Lazard says Amazon maintained market share at the expense of profit margins and reiterate their below consensus EPS expectations for the quarter. Amazon is the most expensive retailer on many valuation metrics and a hit to profit margins would not be taken well by investors.

Monday, December 29, 2008

Samsung doesn't like to pay royalties

As the company is the biggest royalty customer for both Qualcomm and Sandisk, who can blame them.

According to an article in the eetimes, Samsung is developing their own "4g" chips. These are chips for WiMax and LTE (long term evolution) which are wireless broadband technologies on the come. Samsung has done this before -- with 3G in fact. They said they were going to make their own chips, they did, they used it as a negotiating chip with Qualcomm to get their royalty rates lowered somewhat.

It's not much of a direct threat to Qualcomm at present, though the stock tends to get turbulent when people start thinking about the impact of a 20+% customer paying them less. Samsung is sending a message to Qualcomm that they're expecting to pay lower royalty rates in the future.

Friday, December 26, 2008

NAND prices tick up

On the back of recent spot market strength and numerous production cuts, NAND contract prices have edged up for the first time in months.

LastUpdate:Dec.24 2008, 16:20 PM (GMT+8) Flash Contract Price (2H Dec.)







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NAND 16Gb 2Gx8 SLC






NAND 8Gb 1024Mx8 SLC






NAND 4Gb 512Mx8 SLC






NAND 16Gb 2Gx8 MLC






NAND 8Gb 1024Mx8 MLC






NAND 4Gb 512Mx8 MLC







As mentioned earlier this week, Sandisk is the only stock that makes much sense buying in the memory space. It generates substantial income from its patent portfolio – the stock's market capitalization is roughly 5* its trailing royalty stream. Admittedly, that royalty stream is in some degree of jeopardy in that Samsung is expected to stick Sandisk with lower royalty rates next year. The retail market for cards has been very weak. I think NAND will remain firmer than other aspects of memory as there is stacking opportunity there – lower prices means larger capacity moves into the market at more affordable prices relative to hard drives. In DRAM, PCs cap out at roughly 4 gigs. Theoretically the capacity opportunity in NAND is much larger as flash can take share from hard drives due to its smaller form factor. Non-mechanical storage has a durability benefit in portable applications as it has no moving parts.

It's encouraging to see prices pick up. I don't have a great sense of NAND card inventory at retail – it may be just a blip. I'm long some Sandisk.

Tuesday, December 23, 2008

Hynix gets deathbed extension; Powerchip reaches for lifeline

Hynix got banks to rollover some financing due in 2009 and got a cash infusion from Korea. Powerchip is asking Taiwan to bail them out, too. DRAM contract prices for 2H December collapsed further:







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DDR2 1Gb 128Mx8 667MHz






DDR2 512Mb 64Mx8 667MHz








Spot prices have started to back off as volumes are dry heading into the holidays.

Though output cuts from Hynix, Powerchip, Micron and the rest of the motley memory crew will help to alleviate pressure on prices, the really meaningful shutdowns don't happen when insolvent players are kept alive through government intervention. It stifles recovery and ultimately hurts all competitors. Hopefully Hynix follows through on its proposed output cuts after receiving their refinancing… but you never know what happens when bad businesses get new fistfuls of cash.


Google (GOOG) replaces cash bonus with booby prizes

Gizmodo reports Google has replaced the $20,000 holiday cash bonus with unlocked T-Mobile Android phones. Employees are not permitted to resell the phones. The memo explaining the gift (bet they didn't have to include memos with the cash!) talks about how they need to conserve money in the present environment.

Google has really been clamping down on spending. I've noted a handful of items that highlight their frugal attitude. They act like they're having significant revenue visibility issues. Margins will clearly improve assuming revenues haven't already collapsed. Market share data doesn't suggest a significant change in Google's competitive positioning. Keyword pricing, though, has to be under a decent amount of pressure as every asset in the known world has come down significantly. Cost per click has been dropping for many of the e-commerce vendors, which would suggest lower net revenue for a company like Google that effectively sells clicks.

With all the cost controls Google seems to have in place, one would think they would have a decent upside surprise to operating margins. It's the top line that seems vulnerable.

Monday, December 22, 2008

Sure, what the hell. Let's bailout DRAM too.

I understand bailing out the banks. I get bailing out the autos in spirit. I do not understand bailing out DRAM companies.

In recent weeks prices of commodity memory parts have collapsed due to widespread cancellations rippling through the PC supply chain. Memory manufacturers were already very weakened heading into the inventory destocking. Many of the Asian manufacturers like Hynix, Promos, Powerchip have been losing money for over a year now due to industry overcapacity. Qimonda of Germany is virtually insolvent.

As I've been talking about forever, semiconductor capital equipment companies had a larger percentage of orders and revenue coming from memory manufacturers than at any point in their history. It represented over 50% of Applied Materials book and they are one of the more diverse companies in the space. At companies like Lam Research and Mattson, memory was 80-100% of orders at the peak.

It is only in the last 9 months that any meaningful capacity cutbacks have been implemented. For the most part, these cuts have come in the form of capital expenditure reductions. Existing capacity has begun to see some real output cuts in the last quarter or so with Toshiba, Samsung, Hynix and assorted others reducing output to try to conserve cash. For the last several years, memory manufacturers have tried to produce as much commodity memory as possible in an effort to improve gross margins -- but gross margins have been negative throughout the industry in the latest leg of the downturn. There's no way to spend through that.

South Korea has been actively discussing further supporting ailing and failing Hynix. Taiwan is exploring ways to financially support their domestic DRAM business and is presently trying very hard to negotiate a bailout package. Qimonda managed to negotiate with the state of Saxony in Germany to pull down a 325 mil euro loan and an option to tap future federal aid.

Following announcements by Toshiba of a two week furlough of production and another 30% capacity cut from Hynix, DRAM and NAND prices have risen significantly. As the supply chain has been awash in parts for the last several months, the moves are very encouraging.

The strength in DRAM prices has begun to drag NAND prices higher -- particularly MLC parts. I prefer NAND plays to DRAM plays as I think falling NAND prices will boost solid state drive adoption -- and that's a new market for NAND. DRAM just doesn't get a lot better without some breakthrough application that eats up memory and I don't see it. NAND has a massive and virtually untapped opportunity in SSD and each SSD drive uses up multiple parts relative to their current end markets of mp3 players, digital cameras and cell phones.

The structural industry problems in DRAM remain. Too much capacity is not typically solved by more cash to burn. Capacity cutbacks are a reason to be bullish. Government bailouts are going to keep unprofitable businesses running, though, and that's not good for anyone.

PCs rarely require more than 4 gb of memory so there's a ceiling of sorts there. Low cost netbooks are the fastest growing portion of PC growth right now and they are typically configured with 1 gb of memory and cap out at 2 gb. There are not many new markets being addressed for the parts.

So I won't be chasing Qimonda (QI) or Micron (MU), though I suspect Micron is actively negotiating in Taiwan to cut themselves a good deal.

Sandisk (SNDK) owns all the NAND intellectual property and quite a bit of the royalty stream -- I suspect when Samsung ultimately cuts themselves a better royalty arrangement it will be the last shoe to drop for the stock. The quarter isn't good. The outlook won't be good. The stock trades for 4-5* the royalty stream, though, and that makes it tough to be negative on the stock here. The real question is going to be on the balance sheet -- what does it look like as they keep backpedaling out of the Toshiba joint ventures. Time will tell.

STEC recently lowered guidance due to weakness on the DRAM side of their business. Allegedly the NAND drive side remained healthy... at least relatively healthy. It's an interesting spec at $4.

I can't get bullish on semicap plays yet though I suspect we're looking at the worst of the order patterns and the rate of deceleration is at it's peak. I don't see why order patterns would improve much near-term. I could see them stabilize, though, and maybe that will bring people into the stocks to bet on a recovery. My suspicion is we drag along the bottom for a while but massive government interventions could provide short-term capital and keep orders from dropping further... which would seem wildly bullish comparative to the last several quarters of trend.

I am long a little Sandisk. I hold no positions in any of the other stocks mentioned.

Friday, December 19, 2008

Software doing relatively well. I can’t believe I just said that.

Oracle and Accenture reports suggest that ex-currency, business is holding. Oracle saw some slowness in database which was expected. Accenture saw some softening of bookings which was expected. Their outlooks were cautiously optimistic. Both stocks trade at the lower end of their historical multiples. The group could be seen as a safe haven in tech – at least their numbers aren't imploding at double digit rates like semiconductors are. Like with everything else, what will matter going forward is the length of the downturn and the shape of the recovery. For now, though, Oracle and Accenture look like ports in a storm.


Research In Motion (RIMM) 3Q:2009 results

Last quarter RIMM had guided significantly lower. I suggested that there were significant margin issues developing due to the variety of products they were offering – Storm and Bold are totally different base designs than the existing line. Efficiencies of scale tend to decline as design breaks out of the box – the Bold with its 3G internals and the Storm with its multi-touch screen will cost more to produce due to their less than standard parts. Economies of scale evolve from doing the same thing repeatedly. RIMM makes a lot of QWERTY keyboards for their phones and has been doing it long enough that its cheap for them to do. By tangling with the touch screen, they've opened themselves to a whole lot of new costs and subsequently lower margins.

After preannouncing lower results for the current quarter on November 2, RIMM slightly missed consensus revenue figures due to product hiccups getting out the Bold and the Storm. They guided to much stronger revenue for 1Q:2010 (3.2 – 3.3 bil versus consensus of 2.9 bil) but EPS guidance goes up only slightly to .83 - .91 versus consensus of .83. Gross margins are the culprit – guidance of ~41% is significantly below the ~46% the street has modeled. Some of this is due to well-publicized Storm issues – its slow as hell and subject to false-clicks that make it difficult to navigate for the user. As this phone is positioned as an iPhone challenger, difficult navigation is a gigantic problem versus expectations of buyers. People are expecting an smooth as glass iPhone-like experience and instead their touchpad is like flypaper and keeps sucking them into the wrong commands. Software updates are ongoing and the problem is being corrected but the damage is done on some level – the media has thrown out numbers like 40-50% of Storms are being returned within the 30 day window. Despite this, the product is in short supply.

I worry their revenue guidance for 1Q:2010 will prove to be aggressive – they weren't as big in consumer in years past and they likely will be surprised by the magnitude of the post-holiday drop as the economy sets in and the financial layoffs discourage upgrades – blackberry has been historically very dependent on the financial community. Some of the lower margin guidance is likely related to lower anticipated enterprise sales of software – there is excess capacity on Wall Street now.

Success on new products has the effect of reducing buyers of the other lines: they're getting lots of customers for the products that are more expensive for them to make and selling less of the really profitable products. Normally this would be great but as the Storm is an "exclusive" product for Verizon, there won't be the same kind of efficiencies on it going forward. When they start to ramp touch screens for other carriers, there may be some economies of scale.

In the meanwhile, numbers will head lower on the margin guidance. The stock is cheap relative to its growth rate should margins stabilize and begin to ramp again. I'm sidelined presently and I'll be looking for signs of positive inflection. I don't want to buy the stock here. I want to buy it at $30-31. Technically that's where I think its going. It'll also be pretty cheap if it gets there as earnings estimates range from $3.00 - $3.65 for 2010.

Wednesday, December 17, 2008

Fed: We’re going to zero

Yesterday the Federal Reserve cut the discount rate to 0.50%. They talked about the diminishing threat of inflation and a commitment to promoting price stability and growth. There are unprecedented credit problems within the economy at so many levels. Previous comparable real estate troubles resulted in significant US stock market declines from 1929-1932 (down 90% peak to trough). The Fed pursued a much tighter and more restrictive policy then. The good news is the current Federal Reserve has proactive policy in place to combat the biggest threat to financial stability this country has ever faced. The bad news is it may not matter. The administration (Treasury and Fed) continue to try to loosen credit conditions by replacing frozen credit vehicles with fresh money, as if the problem is that there is not enough lending. There remains too much credit outstanding and it will require some time to repair the damage to consumer balance sheets. Americans are rightly more concerned about maintaining what they have than picking up new credit obligations. It's not the lack of lending – it's the lack of desire to borrow. Businesses borrow to fund anticipated growth opportunities and businesses see no growth opportunities at present – most seem to expect a dour 2009 at least. That will not spur demand for loans, just for refinancing. It's not about growing here – its about surviving.

Perhaps a better comparable to our current woes is Japan, which burst a real estate bubble in 1990. Interest rates in Japan did not hit zero percent until 1996. There was a brief rally during the cuts but those rallies became the highs over the next several years and not the lows in the stock market. Though the Nikkei's slide had already brought it from 38000 to 20000, it continued to spill for the next several years, reaching a low in the low 8000s – a decline of some 77% and 13 years from its 1990 high.

Monday, December 15, 2008

NPD data out - Macs down a little in November

After +28% y/y sales gains in Macs in October on the back of new Macbook releases, sales slowed. Piper's piece says now they're running up 11% y/y for the December quarter. What he's not saying is November was down 1% y/y. Big deceleration... lot of guys hiding there. Apple still holding up a lot better than you'd think -- they're priced at twice the competitive offerings. Nonetheless, the economy even catching them. Goldman had a very prescient call this morning downgrading the stock.

Wednesday, December 10, 2008

Make ‘em squirm

Too big to fail, too fat to live. The automobile sector employs hundreds of thousands of people, and that's just the ones getting paid for not working. They can't get let 'em go under. Conversely, they're totally corrupted. They've spent hundreds of millions of dollars to avoid having to make more fuel efficient cars. They show up to beg for billions in private jets. There's something utterly wrong with the way they think. They think the problem is we're not buying enough cars and not that they're making too many. It's arrogance on a grand scale.

The Bush administration is prepared to give them the bare minimum of what they require to survive. GM has estimated they need 9 billion to get to March. Chrysler says they need 4 billion. Ford says they can get by but they'd really love some money anyway. So they're going to give them 15 billion. This is probably correct – if they gave them the 34 billion they asked for, it wouldn't force much change. By giving them as little as possible, it makes them address the model, not just the cash requirements. It also makes them come back and beg. They should have to report on their progress, on their cost improvements, on how they're going to address a 10 million car run rate instead of the artificial 16 million rate they're geared to.

Really, though, the auto industry suffers from massive overcapacity. They produce better cars than they did. And those cars last longer. This is a great example of the structural problems created by the credit bubble. As financing was so readily available, perfectly good cars were retired because it was so easy to just get another one. The used fleet is enormous and quite young and able. We don't need all the cars they produce and without the easy credit we can't possibly consume them. If they start the credit flowing there again, it will just continue to create unnecessary overcapacity there. This harkens back to the Depression – their business is geared towards a much higher volume than the economy requires due to shamefully lax credit conditions for so many years.

I'm trying to buy a car now. It's an interesting exercise. The car dealers are really suffering. They're still long a lot of 08s and the 09s are not moving either. I was offered an 09 for 1k under invoice price last week. The dealer is already freaking out that he's not going to be able to sell his 09s… and its still 2008. What about the dealers? Does that 15 billion dollar package do anything for them? Probably not. With auto sales down 40% there's probably more inventory than ever and with people hunkered down, the used market is the place they'll turn for bargains. New cars are in trouble till the existing fleet gets older and retired. At least, that's what should happen. Maybe they'll come up with some manipulative stimulus package to get people to keep buying new crap they don't need. That seems to be the overarching intention of the government intervention so far.

The auto executives will be back in 3 months and they ought to be. It'll be Obama's problem and we're probably better served having Obama deal with it versus having the current administration float them for any longer than they have to. These companies need to rationalize their business models, not just feed money into their bloated manufacturing lines and pension funds.

Tuesday, December 9, 2008

Semis rally on bad news

Broadcom, Altera, National Semiconductor, Integrated Device Technologies and Texas Instruments are all up sharply after guiding estimates well below the street. Does this mean it's time to pile in?

The business environment is perhaps the worst I've seen in 25 years of watching the market. Valuations are telegraphing major estimate cuts for next year. And this seems right to me. And today, the market is saying there is enough conservatism in investor sentiment that even 30% reductions in outlooks for semiconductors are acceptable and that these rates of decline are unsustainable. And I agree. They won't see these kinds of drops in their sales consistently.

This move today comes after a 20% rally off the lows in the SOX. We're in the dead spot between Thanksgiving and Christmas. The conference presentations I'm listening to don't suggest any kind of imminent uptick. In fact, it looks like semi inventories were relatively elevated coming into the quarter and the reductions in order patterns are appropriate.

I think semis will start to work higher when order rates begin to pick up. At least, historically, that's what makes them work higher. We are still seeing cuts. We have no clear picture on OEM demand going forward. I suspect that the economy has been hampered enough that Cisco and Dell will see no immediate snap back to business. I think without a snap back in business, the OEMs will force the semis to live hand to mouth – like they've done in the past.

Q1 is typically down for technology for a number of factors but those have become more pronounced in recent years as electronics have become a much larger mix of holiday shopping. I assume no bounce in the early days of January… and I expect further disheartening outlooks from PC and handset makers will keep a lid on any kind of sustained rally. Gross margins literally are just cracking this quarter for many semi companies. There's no sense of a near-term bottom in those and gross margin is what makes these stocks work. Without expanding gross margins you just get more sweat and tears for less profit. I think its too easy for them to rally on these kitchen sink numbers.

I'm a better seller of tech here in general. I think people have the right idea here… I just think they're probably too early and that the group will go lower again once the dour nature of Q1 becomes apparent. I'm not saying this right here is the top… I just wouldn't be buying them here unless I had a very long time horizon… which I rarely do. I think they'll be lower in January.

Monday, December 8, 2008

Texas Instruments (TXN) guides way lower

The street was braced for $2.8ish billion. They guide to $2.3 - 2.5 billion. EPS goes from 30-36 cents to 10-16 cents.

What would you expect? The whole chain has guided lower and most of the OEMs with the exception of the freakishly strong HPQ have also.

Anyway... tomorrow should be interesting.

Molex (MOLX) guides down... so does Altera (ALTR)... so does Integrated Device Technology (IDTI)

Molex makes electrical connectors. They go in all your doo-dads. December revenue is now expected to be 650-670 mil versus prior lowered outlook of 750-800 mil. They declined to give operational profit guidance as they're trying very hard to get costs down and can't tell how successful they'll be yet.

Altera, which a couple of months ago had guided to what seemed like an aggressive midpoint of down 1% now says revs will be down 9-12% for the December quarter.

IDTI says "Order patterns have deteriorated since mid-November as customers become more cautious in the face of a weakening economic environment. As a result of
diminishing demand from customers across all geographies and end markets, we now
anticipate that fiscal third quarter results will be below our prior
projections." Revs are guided to 165-170 mil vs prior 175-185 mil. EPS are guided a nickel lower. This one looks good compared to some of the others -- they're only down 10% at the midpoint versus their prior guidance.

I'm going to post this quickly before someone else blows up.

National Semiconductor (NSM) in-line, guidance apocalyptic

420 mil for revs is in line w/ their guidance. Guidance of down 30% sequentially equates to roughly 295 mil in revs for next quarter, the street has 374 mil modeled. They say gross margins will decline -- no kidding!

Dell trade

I've been waiting for $12 to short Dell. I made some short sales. I've left some room to make more sales at $12.75 should it come to that.

Broadcom (BRCM), National Semiconductor (NSM), Texas Instruments (TXN), Altera (ALTR)

Broadcom (BRCM) has an analyst day. The webcast is available.

National Semiconductor (NSM) reports tonight. As most analog semis have seen big downticks of ~25% to their December quarter outlooks, expect National Semi to guide down. They've got a nasty triple threat in their results this quarter – September, October and November – all of which were the weakest months in the last several years for the industry. It won't be pretty.

Texas Instruments (TXN) will guide lower yet again on their mid-quarter update. Nokia, their largest wireless customer, seems to be in major disarray and Texas Instruments has totally stuffed the channel for a couple of quarters. The downward revision here could be startlingly severe. The street has been moving numbers down to the 2.9 – 3.0 bil area. It could be 10-20% weaker than that without too much imagination stretch. This is the slowest boat in semis and always hits the drawbridge head on when it comes down.

Altera (ALTR) also has a mid-quarter update after the call. No edge there. Obviously it'd be surprising if they didn't lower guidance.

DRAM contract prices lower again

Cribbed from







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DDR2 1Gb 128Mx8 667MHz






DDR2 512Mb 64Mx8 667MHz






Resistance at 9200 in the DJIA

A couple of months ago one of my readers commented that his 3 year old draws lines better than the ones in my charts.

With that in mind, here is the DJIA chart with a few lines that seem to intersect around 9200 DJIA.

I would think they have trouble getting through there initially. And maybe longer-term.

Friday, December 5, 2008

Business environment still deteriorating and its getting boring

The last couple of days have been quiet here at theskew. It's not that I'm not reading all about how bad business is. I am. I'm just not writing about it because its starting to feel awfully redundant. Do I add value in telling you AMD blew up again? That Intel numbers are coming down because AMD blew up? I don't know. It doesn't seem like its particularly helpful. Should I rant about the fact that congress shouldn't but will give the auto companies money because if they don't the economy will dead stop? That's on every editorial page in America.

Business isn't getting better. If holiday promotions, aggressive as they are, are failing to move product in better volumes, I fear the March quarter will be an unmitigated disaster – and I think that's what companies are telling you when they lower revenue guidance 25% for the December quarter and layoff 10-20% of their workforce. Things are going to get worse.

Despite the extreme volatility in the market this year, the business cycle we are in is extremely long. The credit-based expansion began in earnest during the Reagan administration with the advent of voodoo economics and has expanded for over two decades. It is unrealistic to expect a reversion to the mean to happen in a few short months. Bubbles are excessive speculative forces that reshape the landscape – when they pop they leave craters behind. It is very possible the economy will remain depressed for years to come. The stock market may well be in the 4th inning of a multi-year correction.

The Fed managed to break mortgage rates with their recently announced plans to buy mortgages. Refinance requests went through the roof. Unfortunately they also started to explore the idea of doing federally funded home loans at below market rates, which is likely to freeze the market again. Federal efforts to manipulate the market only complicate investor's ability to calculate true market valuations. It's hard to know what the true baseline is when they keep trying to prop up the baseline.

See, that's why I'm not writing much. Nothing has changed. Valuations appear reasonable if you assume business will resume normal trends. They probably won't. We're a consumer driven economy, which means we've been buying replacements for things we already have for years. Without disposable income and credit, its like our economy is geared wrong and it will take a long time for the excess capacity to dissipate.



Wednesday, December 3, 2008


Quick comment here. Company said they're planning for 4-6 quarters of flat to down. That's obviously not good on a fundamental basis. In terms of the stock, though, it sets expectations very low and that can be a benefit for investors down the road.


Company is saying they're focused on cost controls, they have a strong cash position. The problems in the industry are oversupply and consolidation and its obviously affecting orders. He's very specific in saying its not demand-related -- a debatable position as strength in netbooks and low-end notebooks are driving memory per box flat to down for the first time in several years.

Smaller customers are under massive over-supply pressure just to stay alive, they're not dying to buy more capacity. The bigger customers who can weather the storm are grinding down their gross margins by negotiating better pricing.

I think at some point the SSD bottleneck will break and there will be a big transition to SSD which will firm up NAND demand. Presently NAND configurations tend to be 4--32gb. When that moves to 80-120gb, it will start to soak up the supply. That's not going to happen until at least 4Q:2009 and even that might be aggressive in terms of time table. In the meanwhile, until these body shops in Asia churning out memory like they're potato chips shut down, the overcapacity situation will overhang the market.

Lam is a good company with great operating discipline and one to buy when there's some light at the end of the tunnel. For now, we're still fumbling around in the dark.

Cisco @ CSFB

John Chambers spoke for an hour about how well they're doing in internet teleconferencing and how great it is for productivity within Cisco itself. He travels less, it's environmentally friendly because he's not burning jet fuel, it allows him to communicate with people all over the world simultaneously, and he can talk instead of write as he says his english writing skills are poor.

He declined to talk about current business trends or try to guess at the shape of the downturn or the recovery. He's going to stick with the guidance he has out there unless he changes it.

Tuesday, December 2, 2008

Research In Motion (RIMM) preannounces lower

Press release here.

Revs guided to 2.75 - 2.78 bil vs prior expectation of 2.95 - 3.10 bil, non-GAAP EPS guided to .81 - .83 vs prior expectation of .89 - .97 ... subscribers 2.6 mil versus guidance of 2.9 million. Reasons for shortfall are currency and macro-economic weakness. In explanation, they talk somewhat about product launch delays (Storm) and about good sales trends and activations of new products.

Stock is interesting on the chart $30-31. Wonder if it gets there tomorrow morning.

Cablevision network problems today

I heard about 2 lines of the NTAP presentation and that was about it today. Intermittent internet connections are so 1999. I'm on Metro North now with the best connection I've had all day with my blackberry plugged into my netbook. So sad.

Marvell (MRVL) reports slightly better than their guidance, non-gaap eps a penny better. The stock is at $5. I have a scary line at $4.25 it may need to test and hold. There's resistance at $5.65 -- if it trades through there it can probably work to $7.5. I'd definitely wait for the guidance as unit forecasts stink and the supply chain continues to see cuts.

Omnivision (OVTI) guidance is pathetic. This is the big problem with value trap stocks -- they're "cheap" because they stink. Book value and large short interest are the bull proponents in this stock. With the company printing losses, book value will erode. Samsung, Micron, STM are all using their leverage in other components to take slots from them and Omnivision has nothing to respond with besides lower price. Add into the mix a weaker cell phone market at the low end and tighter credit standards that hold back new adds. Not pretty for Omnivision. Cheap, though!

CSFB Tech Conference underway in Arizona

I'm going to listen to a few of these. The conference is being webcast and has links to the Q&A sessions which is a rarity.

In the opening keynote, Michael Dell said Black Friday was pretty good, that the audience survey of a PC market down 0-5% next year sounds reasonable to him. He doesn't foresee a big drop in demand after the holidays but he also said it will depend on the economy.

Monday, December 1, 2008

What the hell is Cyber Monday?

There's a lot of Black Friday estimates out there. The takeaway for me is people really like low priced merchandise and will kill you to get to it first.

From what I've read items under $500 move all right, specifically low priced notebooks.

I read a couple of times that Amazon is doing well because online sales were flat to up slightly on Black Friday. Amazon guided up 10-25% for the December quarter. I don't think flat to up slightly is going to help the stock price much. In fact, a number like that would send it to $30 pretty quick. It's very early to be making a call on the holidays as Black Friday is technically the beginning of the selling season.

Not to be outdone by the Black Friday headlines, online retailers have declared today "Cyber Monday". That is one lousy name. What is Cyber Monday?
Apparently it's site maintenance day for the Gap, Jcrew and Bloomingdales. They're all doing so well this holiday season they've got more important things to do with their sites than sell stuff. Nice planning, folks.

Tuesday, November 25, 2008

More unfree(zing) market

Following up saving the allegedly perfectly healthy Citigroup, the Federal Reserve and Treasury unveiled new cash for trash programs targeted at alleviating the pressure on the mortgage backed, credit card backed, student and auto loan backed securities markets. The Fed will buy them. No discussion as to how this would work in terms of valuations that I've seen.

Yesterday Obama edged into the limelight to announce key members of his cabinet. He's a very well prepared man and seems to soothe the markets so far. Sorry if my partisanship is showing.

The most interesting development was mortgage rates dropping hard and fast from 6 pct last night to anywhere from 4.875 - 5.5 pct today. Its a sign that the actions of the Fed and Treasury are finally starting to impact "real" rates that help someone besides flailing financial institutions.

The ted spread ticked up today. 10 year treasury credit default swaps ticked up to 50 basis points, too. It may be a blip. Or it may be doubts about the long-term viability of the government coffers under such substantial financing offers. One concern the interventions raise is that given a choice between trading counter-parties, participants are going to trade with the Fed every time and not with each other. Policy-makers need to layer in a penalty for using these facilities or they run the risk of bifurcating the market further between the haves and have nots.

From an AP article:

The latest federal moves raised U.S. commitments to contain the financial crisis to nearly $7 trillion — though no one thinks the government will actually spend anything like that figure, which would be almost half the nation's total gross domestic product.

Yes, let's hope they don't actually spend anything like that figure. It'll be a billion dollars to the peso if they do.

Monday, November 24, 2008

Hewlett Packard (HPQ) conference call commentary

EDS helped a lot. Check this slide out:

Ex-EDS, sales slowed substantially.

HP both raised prices on ink and plans to raise it further. Channel inventories went up 1/2 a week. They said it had to do with sell-out slowing down at the end of the quarter, as if to say inventory in the channel didn't go up much on a dollar basis -- the days to sell went up because they're selling less per day. If there's a price increase in there, too, it would follow that dollars should have gone up a lot. The language around this is confusing. The impression management gave was there isn't much to make of it. I'm going to give them the benefit of the doubt. Ink is a consumable and printers are an evil market -- you sell the hardware for nothing and gouge the hell out of your customer with ink. Those $39 printers are awesome but it costs you $50 to refill it with ink. It's diabolical.

Inventories in the channel also rose a week in PCs, as one would expect for the seasonal period. Of course, this year is anything but seasonal. They dialed 1Q:2009 down on an anticipated slowdown. I would speculate 2Q:2009 could also come in lighter as it looks like they stuffed the channel a little on PCs. It doesn't sound like it when you listen to them as they say they're gaining lots of share and notebooks are accelerating.

The company's financing group showed good growth in the quarter and the company plans to tap the Fed's commercial paper facility. Good for them, they're actually borrowing money from the government and loaning it to customers like they're supposed to. Dell, which took a whack on growth this quarter, pulled back from customer financing due to the risks. Hewlett Packard is going the other way. If the economic spiral stops and we have a regular recovery, HP will benefit from being more aggressive.

Hewlett Packard (HPQ) reports

A little better than the preannouncement. Notebooks a bigger chunk of the mix. Desktops down y/y. The EDS acquisition added a lot to services -- they were up 99% with EDS and up 10% without it.

HP makes most of their money in printers. From the release:

Imaging and Printing Group

Imaging and Printing Group (IPG) revenue declined 1% to $7.5 billion. Supplies
revenue grew 9%, while Commercial hardware revenue and Consumer hardware revenue
declined 10% and 21%, respectively. Printer unit shipments decreased 8%, with
Consumer printer hardware units down 8% and Commercial printer hardware units
down 9%. Operating profit was $1.2 billion, or 15.5% of revenue, versus $1.1
billion, or 14.5% of revenue, in the prior-year period.

It will be interesting to hear whether channel inventories of supplies went up (they probably did) and what they have to say about printers leading ink in terms of forward visibility. Also its worth noting that the revenue includes a currency benefit -- the overall company grew 16% in constant currency but 19% with the benefit. Presumably that means in constant currency the imaging unit was worse than down 1%.

I'm not a big fan of HP though their big advantage is they sell a captive consumable (ink). Of course, people can and will print less in a recession... but they'll hold up better than some others because of it.

More after the call.

Analog Devices (ADI) guides down 20%

Street mean has down 8% modeled. Gross margins are targeted to 57% for next quarter, the street is using closer to 60%.

It shouldn't be a giant surprise that an analog player is guiding lower. What's a little different is that ADI doesn't have the same channel dynamic -- they recognize on sell-through not sell-in. This suggests major cutbacks from OEMs in orders -- which we know, but part of the dramatic weakness at the analog companies was attributed to poor credit conditions for the analog distributors. The weakness is flowing straight through from OEMs it would seem.

My friend Helene Meisler at often talks about ADI's tendency to lead the semiconductor index so I'll be paying a lot of attention to how it acts in the next few days.

Apple (AAPL) discounts at Best Buy (BBY)

It's totally unheard of for Apple to discount product. Nonetheless, Best Buy is offering $50-150 discounts on Macbooks. They're also running a free $15 itunes card promotion on the skinny new one and discounts on almost every other ipod. It's unclear whether the discounts are driven by Best Buy themselves in some sort of desperate market share grab or by Apple corporate in some sort of desperate market share grab but so far Apple's online store isn't matching their prices (or the itunes card offer).

Macbooks are supposed to be the strongest part of Apple's business right now and to see them on sale is extremely unusual.

Anecdotally, my wife was in an Apple store the other day getting her Powerbook fixed and the genius she spoke to (his official title, I might add) said business has been very slow.

Western Digital (WDC) eyes flash market

Article by the guy that used to write for blocksandfiles. He shut it down and went to work for

Bottom line is Western Digital is missing a key consumer market. They're open to the right opportunity to play there.

With the capital markets shut down as they are, Western Digital would be far more likely to partner with someone to enter the market versus buying someone to enter the market.

Google scales back Christmas party

Google (GOOG) has decided to "scale back" the year end extravaganza this year. At least they're having one... a lot of others aren't.

Obama takes the stage - sell the news?

Nice big rally in front of his appointments. I think they sell off here.

Mastercard says you tightwads still aren't spending

The real balance sheet that is struggling is not at Citigroup -- it's yours and mine. The consumer is tapped out of credit, in danger of being laid off and hunkered down. Mastercard reported some pretty grim spending trends this morning:

Specialty apparel down 19%
Electronics sales down 22%
Luxury items down 21%
E-commerce as a whole down 7.5%

In related news, Santa laid off 20% of his elves.

E-commerce is less affected because e-commerce tends to grow at a more accelerated pace due to the secular shift to online purchasing. Keep in mind that Amazon has forecast a 15% rise in year over year sales for the December quarter. Down would be a disaster. The overall trend seems in line with the year over year declines in October.

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