Guest Post: Technology Is Not Destroying Jobs Poor Policy Is

The following is from my friend and former investment manager Doug Rudisch.  The essay has already been reblogged on  I asked Doug to post it to my blog a few weeks ago when I read an early draft.  Even though it is now replicated on few major financial sites, I thought it was worth posting here for the technology focus.

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Commodity Sell Off…

Tough day to be long GOLD.  It has taken out the 1437 that I wrote about last week.  As predicted 1300 could happen real fast.  I would not be surprised to see GOLD get to 1309 by tomorrow and then take a breather.  That would erase the the 2011 gold rally.   We should find some support around 1300.  We will need to test conviction at 1300 otherwise 1145 is the next stopping point.



Notebook 02.19.13: Merchant Silicon, Insieme, Controllers, Portfolio and stuff…

Before the week is over, I am going to write a blog post entitled “Imagine that SDN Did Not Exist, What Would Do with All the Free Time?”  That is something I will find the time to crank out either on my current flight to SFO or the return flight.  Until then, here are a few things I have been collecting in my SIWDT Evernote to write about.
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Notebook 01.24.13

On board the train heading out of a cold NYC.  Had a super cool day at the Oktay Technologies SDN conference.  They had an A-list line up of speakers with the CEO of Arista, Martin Casado of Nicira/VMware and others.  I presented yesterday’s blog post in PPT format.  That is enough networking for the day.
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Notebook 12.18.12

The last few months have been a blistering pace at Plexxi and it has impacted my time to write.  Writing is important to me as it is my method of thinking in depth without the interruptions of email, calls, text and tweets.  Outside my window a Biblical rain is falling and I have Zac Brown playing.  As with past notebook entries, here is collection of topics I have been reading and thinking about over the past few weeks.
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Writer’s Block Leads to Stock Picking…

I had dinner in NYC with an old acquaintance from my stint on the buy side.  During dinner I was asked what I like long and short.  Admittedly, I have been in more cash, HY credit and some gold for the past six months and I have not really thought about equities.  There I was almost half way through my second Manhattan at Keens (wow, what a bar at that place) in midtown talking stocks.  It was pretty fun to just rattle off tickers and sectors.  It seems like a long time since I just talked stocks and positions.  In rapid fire, here is a summary of some longs, shorts and thoughts.
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HPQ and Product Cycles

If I told you that HPQ had 349,000 employees at last report would you be surprised?  I did not attend HP’s analyst day this past week, but I did read a few of the headlines with surprise.  Here are few that I thought were noteworthy:

  • HP CEO Whitman says company is now a diversified IT company
  • HP’s CEO: We are number 1 or 2 in each of the major markets
  • Hewlett-Packard CEO cites management changes as slowing down company
  • HP’s Whitman says turn around will take time

On CNBC the day after:

  • Hewlett-Packard CEO Whitman says ‘very comfortable’ with make-up of board
  • Hewlett-Packard CEO Whitman: I don’t think company is too big

I have written a few times on my blog about HPQ.  The last entry of note was over a year ago in September 2011 here.  At the time I wrote “This is an interesting chart when you consider that it is framed by $25B for Compaq in September 2001 and the iPad shipping in January 2010.  Assume for moment that the credit crisis did not happen and the chart is down a bit in 2008 and then peaked in 2010.  HPQ acquired EDS in 2008.  They did this because they were believing in the ongoing propagation of Moore’s Law and the enterprises would consume more network infrastructure and having the ability to influence or control the decision making process in regard to that consumption was a good position.  Kind of interesting that the peak in HPQ equity coincided with launch of the iPad, which marks an important transition point for the PC market in the same manner that the iPhone marked a transition point for the mobile device market.”

In November 2011, I wrote the following on HPQ “Meg Whitman, CEO of HPQ on CNBC: I think companies should give Y/Y guidance only and report a monthly set of numbers, which would be a subset of financials and unaudited.  I think this would take a lot of emotion out of quarterly results as well as the channel check drama.  With that said when companies stop giving guidance or provide less transparency, I do not see how this is helpful and I sell or short the stock until I can trust the management team.  I listened to Meg Whitman’s comments on CNBC yesterday.  She said there was a lot of complexity and cost in HPQ and she wants to strip it away and simplify the company (my take away from her talking points).  Leo was there 9 months, so did all this cost and complexity come from him or did Hurd oversee it?  I viewed Hurd was an acquisitive cost cutter and when he was ousted the management team at HPQ was quick to tell investors that Hurd and stripped the company down to the bare bones and there was no investment in innovation and growth.  Apparently I am confused.”

Here is updated version of a weekly chart for HPQ going back to the time of the Compaq acquisition.  A year later and HPQ is going full on RIMM.  I have a colleague at work that has a thesis I have heard him tell many times.  His meme is about the large tech companies (e.g. IBM, HPQ, DELL, and OCRL) have been on a binge to become diversified IT companies.  If you look at the history of tech acquisitions post the LEH bankruptcy it supports his meme.  We joke about every Board Room having a white board full of categories on the Y axis and the big players on the X axis.  Management teams are focused on filling in every box: IT services, cloud, storage, networking, tablets, mobile, big data, little data, dumb data, etc.

In terms of HPQ, I think it is good that the CEO is comfortable with the BOD because that has been one BOD full of drama since the Compaq deal.  I am not sure investors could take another decade of drama, pre-texting, spying, tattle telling, etc.  I am not sure if the CEO thinks the company is too big, too small or just the correct size.  I suspect that the leadership team and BOD are all trying to determine what size is correct as well.  What I do know is the PC market has turned against the company, printing has gone with it and the EDS business is not a grower.  The rest of the business is a just a bunch of parts and they may be 1 or 2 in each market, but they are not great markets.  As for being a diversified IT company, whatever happened to the diversified IT companies of the 1970s and 1980s?  You know…IBM, EDS, NCR, ATT, Amdahl, CA, Tandem, Wang, DEC and DG.  I am not sure being a diversified IT company is a good thing, but as usual I could be wrong.

[Note…it is Monday morning and I already see the break-up, sell off, sum of the parts notes coming out of Wall Street.  I would not be buyer on any sum of the parts, break up value or IP value notes.]



* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. **

SDN: What it Means, Max Hype Level Achieved and Code Words

The SDN washing is reaching new heights.  Apparently, I missed the memo that all companies were doing SDN two years ago.  The WSJ published a piece on SDN.  With all the SDN washing and the WSJ article, I think we might have hit the peak (i.e. inflated expectations) of the Gartner hype cycle for SDN.  As another example, here is an email that is representitive of about five emails I have received over the past month requesting the same.  The ironic aspect of this email is readers of my blog know that I have been posting the answers to these questions for over year.


Hi William,
I work at XXXX with XXXX, I think we may have actually met [in the past]. I came across Plexxi in my readings on SDNs. I am trying to work the implications across the value chain of SDN, for instance where will it be adopted, what does it do to traditional networking world, what are the implications for chipsets, modules etc.   Was keen to hear your views on it and get more familiar with Plexxi; any way we can try a call soon? Thanks.



My view of SDN is different than most.  That was the subject of my post prior to Structure.  When I look at how SDN is defined today, I call it the neoclassical definition or view of SDN.  Neoclassical SDN is concerned with the separation of control plane and the data path and how there can be APIs that allow a central controller to inject forwarding decisions.  I think there is a little if any chance of mainstream adoption for neoclassical SDN.  What will happen is new networks will be built and they will be built using some aspects of neoclassical SDN, but components of the solution and the application of these components will be different than what is generally available at present.  My definition of SDN is:

  • Computation and algorithms, in a word math. That is what SDN is.
  • Derive network topology and orchestration from the application and/or the tenant.  This is how SDN is different from switched networks.
  • Ensure application/tenant performance and reliability goals are accomplished.  This is part of the value proposition.
  • Make Network Orchestration concurrent with application deployment. This is what SDN is for.
  • A properly designed controller architecture has the scope, the perspective and the resources to efficiently compute and fit application instantences and tenants onto the network. This is how SDN will work.

All of the SDN articles and emails coming out the research world are really code words for an soft economy.  Business is soft, so let’s blame and hype SDN.  Much the recent SDN talk is really dancing around the underlying point of SDN.  SDN is not about network programability.  SDN is not about APIs.  SDN is not really about retrofitting legacy networking equipment with APIs and replicating old technologies in new wrappers.  The problem that has been growing over the past 18 years (note this is the era of switched networks) is the problem of IT OPEX.  There is no Moore’s Law for OPEX in world of IT.  Companies have dealt with it through several strategies with one of those strategies being outsourcing.  The thinking here was that companies could cap or at least predict their IT OPEX by outsourcing networks over to firms who would manage their network as well as others; thus allowing the outsourcing firms to get to scale.  The companies outsourcing get a fixed operating cost line, reduce headcount and create a lean organization.  Good in theory, but the result has not been as expected – it has been disappointing.  This is clearly my view that is only validated by my in person observations of the market.

When I look at how SDN will develop and I look at companies like Nicira, I understand the implications on the network.  The problem being addressed is the problem of OPEX and in part CAPEX in terms of customers asking do I need to upgrade now or can I wait?  In terms of SDN, the inverted Moore’s Law curve for IT OPEX is the driving force around the concept of SDN.  SDN is one possible tool to reduce OPEX.  The interesting part that I have found over the past 6-12 months is that IT leaders are exploring SDN as means to deploy new networks, but differently and for the first time in more than a decade they are thinking about tackling the OPEX curve and SDN holds promise as a strategy or tool in this objective.  As we close out the era of switched networks (1992-2012) and begin the next era of networking we have part of the market that will go for IT outsourcing to the cloud provider.  I still see this market segment (outsourcing group) as the broader SMB market served by cloud providers.  The high end of the market will build and deploy their own data centers using the post neoclassical definition of SDN.  I think the real SDN market develops in two segments: cloud providers and high-end enterprises deploying a hybrid utility compute DC.  My time line looks like this:

  • 2012 is the proof of concept (POC) year for SDN.  In 2012 we will see the first SDN proof of concept networks in the deployment range of 250-1000 10G servers.
  • 2013 is the year that at scale SDN builds start transitioning from POCs.  I think we will see SDN networks that scale up to 10,000 10G servers by mid to late 2013.
  • 2014 is the first big bang year.  2014 will be the year that we go to hyper scale and build DCs with 100k 10G servers, minimal hops, no OSR in a post neoclassical SDN world with controllers.

As always, this is just a blog and it is very possible that I am incorrect.


DEC, OpenVMS, Miles Davis and Being Swayed by the Cool

I joined my first startup in 1989.  I was the fourteenth employee.  Down the street in the Old Mill was the headquarters of Digital Equipment Corporation (DEC).  They had 118,400 employees, which was their peak employment year.  In the late 1980s, DEC was dominating the minicomputer market with their proprietary, closed, custom software.  DEC was a cool company and the fifth company to register a .com address (; a decade before NetScape would go public.  DEC was one of the first real networking companies outside of the world of SNA.  Radia Perlman inventor of spanning tree worked at DEC.  Most recently her continued influence on networking can be seen in the development of TRILL.

The continued rise in microprocessor capabilities would prove to be an insurmountable challenge for DEC.  DEC had built over the years a massive, closed software operating system with a non-extensible control plane that was extended across proprietary hardware.  This architecture would be eclipsed by the workstation and client/server evolutions.

To counter the these threats, DEC considered openning their software ecosystem by adding extensibility and programmability including a standardized interoperability mechanism (API).  The idea of opening the DEC software ecosystem would culminate in 1992 when DEC announced an significant update to their closed, proprietary operating system.  The new software release would be called OpenVMS or Open Virtual Memory System.  The primary objective of OpenVMS was allow for many of the different technology directions in the market to become one with the DEC ecosystem.  It made a lot of sense.  In 1992, workstations were the hot emerging trend of the market, the Internet was only two years removed from ARPANET control.  Windows 3.0 was two years old and anyone who used Win 3.0 knows it was a huge improvement over 2.1.  The rack server was a decade away.  Some companies still chose OS/2 over Windows.  The Apple Newton (i.e. iPhone) was a year away from release.  Here is a summary of DEC’s OpenVMS release:


OpenVMS is a multi-usermultiprocessing virtual memory-based operating system (OS) designed for use in time sharingbatch processingreal-time (where process priorities can be set higher than OS kernel jobs), and transaction processing. It offers high system availability through clustering, or the ability to distribute the system over multiple physical machines. This allows the system to be “disaster-tolerant”[10] against disasters that may disable individual data-processing facilities. VMS also includes a process priority system that allows for real-time processes to run unhindered, while user processes get temporary priority “boosts” if necessary.[11][12][13]

OpenVMS commercialized many features that are now considered standard requirements for any high-end server operating system. These include:


In 1997, five years after announcing OpenVMS, DEC was acquired by Compaq; a personal computer company.


Market Thoughts, the End of the Cold War, Credit Crisis of 2008

My wife and I were privileged to have her uncle, John Maresca stay with us for a few days last week. He was in town to speak at his 1959 Yale class mini-reunion.  I immensely enjoy his company which is far too infrequent.  I was able to indulge myself in three days of continuous discussion of geopolitics, history, the Cold War, economics, politics, books and the general history of the world post the Second World War.  I spend my days working in the technology business; the three days Jack was with us was a rare over indulgence in my favorite subjects.  Jack even stayed up late to watch the Celts fall to the Heat in game 2 with me.  The subject of his speech to his Yale class was that the war of his generation was not Korea, not Vietnam, but rather the Cold War 1945 to 1989.  We were honored to sit at a table with a two-time survivor of an attack on the WTC.  In the course of our discussions, I provided Jack with my mini-thesis on the economy of the US post 1989 till today.

The basis of my thesis, which I have hinted at before on this blog, is rooted in the expansion of credit without an accompany expansion of higher capital ratios and reserves.  I bring this up because in course of my many discussions with Jack, I said that I thought Greenspan, Larry Summers and others were the team that failed theUS.  On one had they oversaw a great expansion of credit and debt, but they did not oversee an accompanying expansion of capital reserves.  All of this has been discussed before, I would simply say that if the money multiplier stays were it is, we well have a lot of Friday’s like last week ahead of us.  I posted some charts from the St. Louis Fed.  If you look at these charts and see the expansion of credit, it makes CEOs who talk of productivity gains in the 1990s look like fools.  Do not underestimate what expanding credit debt levels can do make everyone feel good and look like geniuses.

Back in August 2011, I posted my notes from a meeting on Wall Street from March 14, 2008; which also written about in the book The Big Short, by Michael Lewis (see pages 228-230).  The portion of my notes under “XXXX, Former Fed Person” are from Alan Greenspan and the portion before it under “XXXX, Hedge Fund PM” is from Eisman.  I am revealing the names because I want to highlight a few of the notes:

  • AG: The complexity of the models are still too simple to capture human nature.  That is the problem.
  • AG: During the euphoria bankers would tell me they were under pricing risk, but they were forced to play the game.  Was that a BOD level problem?  Why were bankers forced to play the game and under price risk in the market like the others?
  • AG: 20 years ago it seemed that banks were very cautious on how they booked reserves.  The mathematicians took over and said your reserves are wasting money and today it seems the banks are low on reserves.  Part of this accounting issue, some of this is a philosophical style.  Earnings and profitability pressures to mark to market have caused more problems than have capital reserves.
  • SE: Banks in the US are under capitalized, no reserves, pace of credit problems are accelerating, they have not come to grips to with their problems and I would not own a single bank in Florida.  The only good news is the banks in Europe are in worse shape.
  • SE: Capital market problems are worse.  Rating agencies have no idea what they are doing.
  • SE: The buyers of structure mortgage products are structured mortgage people.  It is Ponzi scheme.
  • SE: What is a SIV?  It is 5% cash, 5% Treasuries and 90% asset backed paper, which is leveraged 20 to 1 based on ratings from the ratings agencies published in the paper…what a joke.
  • SE: We are going through the greatest de-levering in the history…there are a lot more Carlyles and Thornbergs…there is not a real solution but to take the pain over time
  • SE: Nothing is going to stop the de-levering process

Four years later with the Europe experiment on the brink of failure, the gains of the Europe Economic Union, which were possible through the stability provided by the winning of the Cold War, now look to be at risk.  I wrote some of this before, but not is such direct terms.  In the past I wrote that “it is clear that many nation-states are working through the stages of political change or revolution fueled by the global credit crisis of 2008.”   The question I should ask my wife’s uncle is: will I be writing a history of the Second Cold War in thirty years?


Notebook 05.12.12: CSCO, INTC, SDN, OpenFlow, Cash

It has been awhile since I thought about CSCO in terms of the equity value.  I read many reports on CSCO post their Thursday earnings call and most reports generally like the long term prospects of the company and think CSCO will do better as the macro economic conditions improve.  Over the past year, I have written a lot about CSCO and it is all in the blog archive.  Here a few thoughts on CSCO post their recent earnings call.

Chart: Below is a 10Y weekly chart of CSCO.  Technical charts do not predict the future, but they do show a sentiment trend from the past and it is possible to map the trend to events.  The three red circles from the center to the lower right represent the price peaks from mid-2007.  They are a series of lower highs.  There is a five year wedge developing and the astute observer will note that this wedge looks to be resolving around the Oct/Nov time frame, which is the end of CSCO’s Q1 FY2013 and early November reporting date.


It should be noted that wedges do not necessarily resolve to the negative.  Below is a 10Y weekly chart of INTC and the breakout of a long downward channel is visible.  I pitched INTC as part of the 1G to 10G server transition to the CEO and tech analyst at Alger in September 2011 when I interviewed for a position with the firm.  I wrote about it here.

End of the Switching EraI am firm believer that we are at the end of the 20 year run of the Switching Era (1992-2012) in networks.  The network is changing and that is going to have an affect on CSCO.  They will buy innovation through Insieme and/or others.  The new networks will start small this year, barely noticeable to CSCO and become visible by mid 2013 and they will have a real affect on CSCO in 2014.  All you need to know is that then entire global base of networks are up for replacement.  CSCO will win their share, but it is possible and probable they will lose share in this cycle.  The last cycle was the evolution of shared LANs to switched LANs driven by GbE and CSCO used M&A and product cycles (Cat 5k/6k) to win the vast amount of market share in that era.  If you want to be long CSCO, forget about macro conditions, telepresence, transformational connected communities, cloud, big data, mobility and all the other crap.  All you need to be comfortable with is the knowledge that CSCO will win and upgrade the core of networks in the next five years.


OpenFlow/SDN: I have written a lot about SDN and OpenFlow and what it all means or might mean or does not mean in the past month.  The real question you have to ask about CSCO is why do they fail at internal innovation?  CSCO confirmed the Insieme investment ($100M with right to buy for $750M) last month.  They have used this proven method in past to great success.  No arguments from me on the validity or success of the strategy.  The question I would ask is why does CSCO have to use this method?  I accept that it works, I accept that it is proven — but AAPL does not use this strategy.   A person who thinks about companies might ask:  why does a company with an annual R&D budget of $5B need to use the spin in strategy?  Is $5B too little to fund innovation with so many legacy product lines to support?  The other odd data point is the Insieme team is building a product for the heart, I repeat the heart of the Cisco franchise.  Switching is not some adjunct part of the company.  Switching is the business in which the company made the very first acquisition.  I know that great innovation has been done by companies taking teams and separating them from the core business such as IBM with the PC.  I get it.

On the other hand if you add up all the venture capital in the next-generation of networking companies in the US it has to be around $200M give or take $50M.  CSCO invested $100M in Insieme, provided space and have a call option on Insieme for $750M.  Was it not possible to do the same internally for $250M over two years, which is 5% of the annual R&D budget?  Did anyone on the BOD even ask the question why the company has to go outside the company to build something innovative for company’s core franchise?  This leads back to the 10Y chart.  If the company has to do something special to accelerate a product solution in the core franchise of their business, two unspoken facts must be true.  (1) There is a bigger threat to their core switching franchise than they are willing to identify and (2) they cannot drive their internal teams in the their core franchise to innovate.

I have read speculation that the whole OpenFlow/SDN movement will die in a few years.  As I posted earlier, changes in how networks will be designed will have little to do with OpenFlow in my view and SDN is just a poor term.  Networks have always been about software.  We have all been through various software debates in networking.  How many people remember APPN versus APPI?  Back in the early 1990s, CSCO was all about APPI when they were going against the monster incumbent IBM who was willing to license APPN for $400k.  Interesting comments from CSCO this past week complaining about Huawei using on site support people to lock out competition.  I felt the same way in the late 1980s and early 1990s, but I used to complain about the teams of IBM employees at every F500 company selling SNA.  Where is IBM today in terms of networking?  Market share can shift from the company with 80% share.  Perhaps more of you remember tag switching and Ipsilon Networks; today we have MPLS.  Side note on IBM.  It may be unnoticed by many people, but IBM acquired a company called BNT in October 2010.  I continue to read speculation that IBM is going to rebuild their networking division.  The same division that CSCO destroyed in 1990s and then purchased in 1999.  More than a decade after IBM exited the networking business, why would IBM want to get back in the networking business?  You can come up with your own answer, but I do not think the answer is: more of the same.

Cash: CSCO has not filed their 10Q for the Q3 FY12 yet, but if we look at the 10Q filed on 2.21.12 CSCO had $41.7B of cash off shore and $5B of cash in the US.  I do support CSCO’s position that US companies domiciled in the US should be offered a cash repatriation holiday perhaps with some sort of on-shore investment requirement.  I would call it bring home cash for US jobs.  How is that a bad?  I think it is terrible that US companies are using off-shore cash for  foreign investments when that cash could be used in the US.

As always this is just a bunch of speculation by me.  I am sure I not in possession of all the relevant facts and it quite likely much of my speculation is incorrect.  For new readers to my blog, Notebook posts are a collection of data points and theses that I am thinking about.  I was inspired to write Notebook posts after reading Alchemy of Finance.


Abstract Networking Thoughts: ONS, Sad State of DC Networking, Random Market Thoughts

I will be spending the upcoming week at the Open Networking Summit (ONS) in CA.  With all the SDN buzz over the past year, this week’s ONS appears to be a good test of the hype.  Will the energy be sustained by the event or diminished?  Will the event be a repeat of 2011 or will fresh, new ideas and progress with SDN be showcased?   Personally, I do not look forward to industry conferences, but I am looking forward to this conference.   I will try to blog some thoughts during the conference or each night.

Sad State of Data Center Networking: An interesting post this past week over on the Packet Pushers website concerning the sad state of data center networking.    The second paragraph entitled the Inconsistent Network makes a lot of sense to me.  I have been in the networking business since 1988, when my boss at the time explained how spanning tree works.  What I have found to be true in networking across the enterprise-service provider continuum is that selling in the transition zone from legacy to emerging solutions is where the most value can be created.  Selling legacy technology is a simple theta calculation.  Selling the future in which the proposition is all or nothing, or forklift upgrade or a limited solution set is not a big winner.  How vendors address the transition zone is the difference between winners and losers.  I will be looking for indicators of how SDN vendors intend to sell into the transition zone at ONS.

Random Market Thoughts: Market rips on Thursday fueled by the global growth recovery China GDP vibe and the market declines on Friday fueled by the global growth recovery stalled China GDP disappointment vibe.  This is why all the “trader talk” is stupid talk.  If you are actively trading equities in this mess, good luck.  I trimmed my exposure heading into earnings, but still long a few equities such as FNSR, as I think inventories are lean, bad news priced in and any uptick in CAPEX should benefit FNSR.  I starting shorting oil and gas this week and feel good holding this through the summer.  GOOG reported this past week.  I think my call on GOOG over the past year was correct, but another class of stock is confusing.  When stocks becoming confusing, my reaction is to not be involved.



* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. **

Arista at Networking Field Day, Insieme Follow-up and Markets

The Tech Field Day team posted videos from most of their meetings last week.  I was an avid viewer during the week, but I was sure I missed some points so I went back and watched a few selected videos.  One of the videos I watched was from Andy Bechtolsheim, co-founder of Arista Networks.  I heard Andy speak at the Flagg 2012 High Performance Computing Linux for Wall Street conference on Monday and it was a good opportunity to compare notes.  Here are three paraphrased points and three quotes from the video.  The quotes are at the 7:40 mark of the video:

  • We are not aware of a single production OpenFlow network
  • OpenFlow does not interoperate with legacy infrastructure
  • Really hard to change how networks are built

Networks have evolved pretty slowly from a protocol perspective.”  I agree and have written the same here.

Reality is people spend a lot of money on networking gear. Once it is installed it works. Don’t touch it, you may break it.”  I have been writing about this for more than a year and I called it out in my Tubthumping post.

Once people have adopted a certain network topology they are highly unlikely to change it unless there is really something better comes along.”  I agree with Andy and have written much the same, but this is the point at which we diverge and I choose The Road Not Taken.

Insieme Follow-up: My two posts on Insieme here and here are by far the most popular posts I have written.  As expected they generated a lot of reader reaction.  In my first post I offered up a couple of possible product strategies.  I tend to think that the Path 1 strategy is the most likely direction.  Use custom ASICs in a new Leaf/Spine product set (note if you watch the AB video I linked to in the first paragraph, Andy talks about this network architecture being the state of the art and locked in for years as networks are slow to change).  The new Leaf/Spine product set will have the ability to hook back into the legacy Nexus (~10k installed customers), but have very high bisectional bandwidth for storage.

For years it has been speculated that CSCO would buy a storage company like NTAP, but with the rise of flash, SSDs (note there are ~14 storage startups targeted at the home-enterprise-cloud provider markets), CSCO could add storage to the Nexus platform with the new Insieme product line.  Let us assume the company has product plan hashed out and they are aggressively recruiting the product development team.  If we assume January 2012 start, we could expect this product in 18-24 months and the 18 month assumption is if everything goes perfectly.  Most likely is we would see the product in 1H 2014.  What we would see is a new Nexus compatible set of switches, 100G ready, but using ASICs that allow for very high cross-sectional bandwidth and some sort of CSCO storage product.  Yes, I think this team puts CSCO squarely into the storage game against incumbents and startups alike.  UCS now gives you networking, blades (Romley) and storage.

I think the days of getting a significant (e.g. Cerent) integration and cost advantage through an ASIC are over, but using an ASIC does provide deterministic supply advantages.  Back to the Andy video, he says that Arista prefers to use merchant silicon from all suppliers and in his talk at the HPC he had several slides onMoore’s Law and riding the merchant silicon wave and predicated 16/32/64 core silicon in years to come.  As the Leaf/Spine architecture holds (remember (i) slow rate of network architecture change and (ii) once the network is installed do not touch it) some competitors will ride the merchant silicon cycle and a few will do ASICs.  Using ASICs does remove one from the pack and having to be tied to the product development cycles of chip suppliers (BRCM, MRVL and INTC), but at the same time there are suppliers like Pica8 and Cumulus Networks who are thinking ODM hardware from Asia-Pac and bring your own OS.  It looks like the battle will be joined with CSCO/Insieme thinking closed architecture, ASICs, one stop shop for network-compute-storage and at the other end of the spectrum are the white box/DIY/Open Flow abstraction layer companies with several companies in the middle focused on specific application use cases and even putting FPGAs with APIs in the switch data path.  As always this is all speculation and probability is in favor of me being in error.

Market Thoughts: We have ha a bit of sell off.  As I wrote a few days ago I had been trimming exposure into rally.  I let the APKT position go on Monday and I hope to buy it back.  I have some shorts on and would like to go back to being long oil and gas, but I took profits in those positions a few weeks ago and now I am just waiting for entry points.  We have earnings starting soon and I really do not like having any large positions into earnings events.  I am content to read the news and react.


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. ** 

SPX Technical Chart for 2012

A slow week in the world of technology has afforded me the time to look at some charts which I have not done in a few months.  Sometimes separation from daily data points provides the ability to see trends and perspectives not visible on a daily basis.  I spent some time looking at a three year chart of the SPX asking myself if I should be putting more cash to work in the market in equities.

I thought last year’s market was easy to figure out.  The US economy was going to disappoint and all you needed to do to figure this out was talk to people in the real world. Europe was going to blow apart and as such there was going to be a lot soft revenue numbers when Q1-Q3 numbers were reported.  This brings us to 2012 and what will the market do.  The easy and accurate answer is I do not know and no one else does either, but I think there are few trends and events to think through in the context of the market charts I posted to the left.

1. I think Q4 reports on balance will be a neutral to positive.  I think a lot of companies (mainly tech) had a decent Q4 based on end of year demand and this is positive based on reduced expectations.  I think forward guidance will be soft, but most investors will give it pass saying it is still early in the year.  A few more semi companies will come out, blame floods inThailandand report they under shipped demand, thus pushing the problem out a quarter, kind of like Congress.

2. Congress and the Election.  The election is a wildcard.  Congress will do nothing meaningful ahead of the election.  If Obama is reelected the market will not like that and we are in for another four years of nothing.

3. Problems inEuropeare still unresolved. Francewill be downgraded, ECB will print and the low economic activity will just keep the world muddling through. Greeceprobably withdraws from the Eurozone and maybeFranceandGermanyget into a good old fashioned row and we see one side or both mentionAlsaceandLorraine.

4. I do not foresee a broad economic pickup ahead of the election.  The trends are better, but uncertainty in policy will keep most CEOs on the far side of conservative for 2012.  I think the SMB market adopts a similar approach for 2012.

5. QE3 is a wildcard for the year.  I think if the market starts to sense the Fed expanding their balance sheet then the SPX could see a 150-225 point rally.  I only think we get QE3 is the economic numbers start to trend negative again so a 200 point rally in the SPX might start from 1075 bringing us right back to where we are today.

6.  If I look at the two charts I posted (3 year and 2 year) this is what I see in no specific order:

– QE1 and QE2 boxes clearly show the market rallies on QE, so if the economy is bad enough to force the Fed into Q3, put money to work and take the gross up buying higher beta tech stocks

– The SPX has put in a series of lower highs (four) since the market peaked with the end of QE2.  This is not a good trend and not something that has really happened in three years.

– We are currently completing a wedge and it looks like the SPX will break to the upside or the downside with Q4 reports.  That puts a lot pressure on Q4 reports.  Currently it appears that the market is setup for a breakout to the upside, but this could change with any bad news out ofEurope.

– 1125 seems to be the key support line from the 666 and 1074 lows.

Net conclusion…I would trim exposure on any rally in the next couple of weeks and wait to see how European politics play out post the holidays and how guidance will be in Q4 reports.  If I am forced to pick tech equities in this market, I would be focused on companies with high GMs delivering a software product in an appliance or compute element.  Just random thoughts and most likely I am wrong…happy New Year.


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. **