Market Thoughts Post Labor Day Weekend 2013

I recently made a market call ahead of July earnings thinking that the market might crack.  I have updated my SPX chart from my July Market Call posts, which you can read here and here.  I am currently LONG a lot of volatility.  It is currently working well and next week when the bond traders come back and we get NFP, Fed events, tapering no tapering, Syria, conference season, deficit ceiling, etc., I am happy to keep the lon vol trade on.  I am also long CL1 here and some high quality large cap tech stocks on the thesis of buy backs and dividends.  I have one big loser on the LONG side and that is FIO.  I hope they get taken out at this point. Continue reading

Market Mea Culpa, DevOps, Opco Tech Conf and Summer 2013

My July market call did not work out.  I am long some equities and long some vol (which is not working out), with a high percentage cash position.  The Yen short worked.  I am looking forward to the upcoming Cisco results as they will be the first to report a July month and if their guidance for enterprise spending is positive, I will go long high beta tech growth names.
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Quick Equity Thoughts…

Now that we have finished with confusing messages from the Fed week, we can move on and do some trading.  I am covering my SPX short with a 800bps loss.  The market will not turn down despite fund outflows, higher weekly claims, UPS pre neg, China GDP, earnings and guidance.  I am staying long VOL through earnings.  I will buy the QQQs today to increase net long SPX exposure to ~1700.  Maybe I am being fooled by the B wave, but who knows.  I will get some tailwind with the MS upgrade of NTAP this morning.  
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Updated: July 2013 Market Call

Ahead of the NFP, I prefer be short the SPX and YEN and long VOL.  I am going to look for some stupid strong GOLD day and will short GOLD when I see it.  I think GOLD is going to $1000.  Regarding my prior post on the carry trade being blown up and the change from duration to economic targets and what this did for gamma…blah, blah…read this article on Bridgewater interest hedging.
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July 2013 Market Call

Here is a link to my short term SPX chart, following up on last night’s post. I did watch the market today and that was nothing to get excited about on the long side. A few wildcards to deal with: (i) short week, (ii) NFP on Friday and (iii) earnings kick off in ~2 weeks. I updated my short terms SPX chart here. I also posted a picture of my SPX chart below. I think we will have a mini-rally into the NFP and we might continue to rally into next week as this is a holiday week.

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Old Habits Are Hard to Avoid: Eurodollar Stresses, Chinese ATMs and a Little Voice Telling Met to Get Out…

I am going to attempt to be brief as not to bore too many readers.  I have been spending the last few years fully immersed in networking and building a venture backed technology company.  Every now and then something in the financial world happens that stirs up memories from 2007-2008.  The last time I logged into a BBG terminal (FYI…BB journalists can independently confirm) was Feb 2011 and I am not following the markets.  In fact, I have gone days without looking at the markets, but I have been trading more frequently as readers will know.  For the record, I closed my shorts on GOLD and Treasuries on Friday.  I am long: MS, C, INTC, MSFT, FIO, NTAP and ERIC.  I took some profit in BSFT and will buy back in at a good technical entry point.

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Espresso and Equities

After approximately 15,000 pulled shots, I had to replace the piston the in my Pavoni home machine. I typically pull my shots ristretto style and I think over the past twelve years this abuse took a toll on the original the piston. Espresso 1 Espresso 2 Espresso 3I took apart the machine for more than a good cleaning and ordered a new brass piston to replace the molded piston that came with the machine. In the pictures to the left you can see the old piston and the new all brass piston.  The old piston broke and thus the seal was gone.  The good news is we are up and running and my beloved Pavoni is as good as the day it came home.
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Quick Equity Thoughts

I received a number of emails, tweets and so forth regarding my last network posts.  I am traveling to SFO this week and that means I will have some time to write a post or two.  I was in a meeting this past week with a company who was presenting some technology to Plexxi regarding multi-flow commodity graph theory modeling of networks at scale.  They did some really interesting work on the efficiencies of networks at scale and I plan to write up some of their work in a post for all the people who sent me emails about virtues of Valiant load balancing.
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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.



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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Follow-up to “11 Days to Quarter Close” Post

In the past three days there has been a number of interesting market days.  Monday and Tuesday were up days, yet yesterday was a mid day reversal.  I have found little to blog about on the technology side.  I started writing an adjunct piece to a Network World article on the twelve ways the cloud changes everything and I will probably finish it and post it tomorrow.

Until then I thought I would just offer up some thoughts on the market as the Greek-FOMC events are now in the rears and my inbox has been full of market talk and less tech talk.  Here is an example:

Francois Trehan has generally had this whole thing nailed.  Clear linkage with increasing inflation>LEI lower>lower mkt.  He argues that is largely preordained for another 6-9 months even with flat gas prices.  Witness philly and empire June numbers; we already setting up for another ISM miss.  Even DB (heretofore always bullish) is getting on board recently, suggesting an ISM averaging 50 in 2h would suggest S&P 1141 based on historical correlation.  These other sideshows on sovereign spending/debt are just turbochargers on the above.  Still strikes me the vast majority believes econ will pick up in 2h.  Too many CNBC references to japan, weather, my mother-in-law , yada, yada, yada as excuses.”

With the Federal Reserve lowering US growth expectations, I think investors and analysts need to be careful about multiples.  When the economy slows, growth slows for the best companies and multiples contract.  I have been told by a number of sell side analysts that they do not model in macro, so it is left up to the buy side as well as strategists and economists.  A few quick observations from my Monday piece:

–         AAPL…rallied with the market, but still below the 200MA.  I have read a few “it will break $300” calls.

–         CSCO…John Mendelson (who I have met with many times) of ISI was positive from a technical perspective, but I think he is early.  I still think CSCO lacks catalysts and product cycles are not positive, but at $14-15 can be a place to hide.

–         AKAM…I should probably write a post on AKAM, but in the meantime I thought this was interesting from Dan, yet most people seemed to have missed it.

–         FFIV…numbers were raised on Wednesday at Barclays and it was downgraded at JPM today.  I stand by what I wrote on Monday which is they need to print solid growth numbers or the multiple is going to contract.  “Here is another stock needing a beat and raise in July.  The stock is precariously poised at a neutral position where the results are going to make the bulls or the bears a winner.  One up trend line has already been broken.  This is a great company and I have told the management team that on many occasions, but the expectations are very high.  One good characteristic this management team has is they do not hide crap.  If they are going to miss, the management team will make announcement early.  If I was on the leadership team and the numbers are going to be good or bad I would pre pos or pre neg.  That will decide the issue.”

–         APKT…I think the growth potential and product lead over competition is insurmountable.

–         CIEN…I bought some CIEN at $16.50.  I am positive LT that the company will benefit from an upgrade cycle, but I think this is a 36 month cycle and they are about 6 months into it, so these things take time as SPs are not spending wildly.  Have patience.

–         GOOG…broke $500, below every MA going into quarter close.  I think it sees $460 before the print.

I was reading a note from one of my favorite technicians, Tom Fitzpatrick at Citi.  His note on Europe, specifically Ireland and Portugal is worrisome and just because the Greeks had a vote I do not think that is a reason to put risk on.  I played golf with a hedge fund PM on Tuesday and he complained the market is all macro and no fundamentals.  I think that is what the credit crisis and central banks have given the equity markets almost three years after LEH: the gift of macro and less fundamentals.  I just watched the weekly claims print and with the futures down 10 handles, those weekly numbers are not going to help.


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

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

It is Cheap for a Reason

Here is a thesis I never understand when promoted.  The Bloomberg piece is here saying that RIMM should be acquired because it is cheap so Microsoft should buy the company.  RIMM is cheap for reason and it is getting cheaper and that is not a reason to buy the company.  Just because it is cheap, does not make it a buy.  How many people go to the car dealer and say “I would like to buy your cheapest car that needs a lot of work, has legacy problems like a few accidents.  I would like to do this because the car is cheap and maybe a lot of people rode in it over the years and I think the brand is iconic so I plan to wave at the other aging models on the rode too.”  Why would MSFT or any other company want to take on the RIMM problems just because they are cheap?  As if the problems are less surmountable now that you can buy the problems for less than you could a few weeks ago?  Some foolish person will buy the stock because (1) it is cheap and (2) hope that some other company would pay a premium to acquire some cheap problems.  That thesis makes little sense to me.


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

** Comments are always welcome in the comments section or in private. Just hover over the Gravatar image and click for email. **

11 Days to Quarter Close: What are you doing with your tech portfolio?

Eleven days until Q2 CY11 closes.  We should be entering the peak spending period of the calendar year.  Budgets are set and open for spending.  Half the year is done and CFOs have a good feel for business trends and will have given the green light to spending.  If anything is amiss, we are going to find out next week or the week after the long weekend as that would be the period for any pre announcements.  For a look into the 2H of 2011, we will need to wait until reporting companies give guidance during July reports.  For company executives, the next eleven days could be easy if the quarter is almost done or it is pressure time to close deals, ship products and make the numbers before customers disappear for the long weekend.

Since the RIMM pre-neg on April 28th, we have had series of disappointing numbers from technology companies.  I highlighted those earlier as well as here.  I thought I would walk through a few charts and look at the near term action in a few selected tech stocks and think about what I would do with this these stocks into the July print.  The stocks are: CSCO, JNPR, FFIV, RVBD, APKT, ADTN, AAPL, QCOM, GOOG, AKAM, MMI, GLW, BRCD, JDSU, MSFT, AMT, EQIX, AMZN, NFLX, T and VZ.  I will provide my quick take on each of these equities with a relevant chart.  These charts are directly out of my account and I will try to add some annotations.  I think charts are a reflection of sentiment and I do think that some indicators like Demarks and Ichimoku help determine where the stock is going to trade depending on the data.  I do not think equities trade because of the chart, but rather the chart helps indicate where it will trade based on the news or the print.

CSCO: It looks like my prediction on where CSCO stock was heading post Q3 results was spot on.  Now what should do with it?  The first point to consider is that CSCO will be affected by JNPR, CAVM, NETL results as well as some of the contract manufactures.  CSCO will report on August 10, after completing the full month of July and they will guide for Q1 and most likely Q2 of FY12.  That means CSCO is going to tell us how they think spending is going to hold up through January 2012.  Maybe the company will guide the full FY12.  I think the stock is increasingly looking like a place to hide around this $14 level.  It is hard to be bullish without getting a feel for the guidance in August.

JNPR: This a poster child chart of a stock that ran on better global macro and then fell off a cliff on macro getting worse.  The fall since June was from comments by sell side analysts and the CEO on a back end loaded quarter.  Maybe the JNPR team will be working hard over the next 11 days?  Stock is in a precarious position.  Right on the trend line off the MAR 09/JUL 10 lows.  JNPR is currently below all the MAs except the 600MA which it is within 83 cents of convergence.  Resistance is setup around $33.50-34.  Bullish analysts are freaking out with the collapse as I read one report in which the analyst was now using a 2014 multiple to justify his PT.  Please.  JNPR needs to meet and guide up on the July print or this stock is going to trade in the $26-32 range for the rest of the year.  The window to short is closed.  I would not own it until I see the numbers.

FFIV: Here is another stock needing a beat and raise in July.  The stock is precariously poised at a neutral position where the results are going to make the bulls or the bears a winner.  One up trend line has already been broken.  This is a great company and I have told the management team that on many occasions, but the expectations are very high.  One good characteristic this management team has is they do not hide crap.  If they are going to miss, the management team will make announcement early.  If I was on the leadership team and the numbers are going to be good or bad I would pre pos or pre neg.  That will decide the issue.

RVBD: Here is the FFIV chart twin.  The one difference I would say is the chart is looking far more ominous than the FFIV chart.  These guys need a serious beat and raise or the stock is back to the mid $20s.  This is another chart with too much risk for me.  Although the stock did run off the March 2009 bottom, it was really the 2H 2010 rally that pushed RVBD to levels it had never sniffed before.

APKT: I have been an APKT bull for long time.  This chart looks a bit like FFIV and RVBD, but the recent action and bounce off the upward trend line are all good indicators.  Product cycles are positive, large market growth potential, management team bullish at conferences.  I am buyer and still a buyer into the print.  I would say that a break of $60 and I am out until it settles, but I would be a buyer here at $62-63.

ADTN: The third brother to FFIV and RVBD.  When I first started blogging again I wrote about ADTN, which was on the eve of Q1 earnings.  It feels like the stock might have gotten ahead of itself in terms of CAPEX spending expectations.  ADTN is one of the first companies to report and I consider them to be a table setter for JNPR, CIEN, CSCO, TLAB and all the other stocks levered to service provider CAPEX.  One concern here is that CIEN just had their analyst day in NYC and they did not really call out booming SP CAPEX so that is a warning.  This stock feels like it finds it self range bound in the $30-36 range unless their business is seeing a good inflection from SPs.  They will give guidance for Q3 around 10:50 in the morning on July 13.

AAPL: If you are stock bell weather person then the chart of AAPL is concerning.  CNBC has teams of these people who talk about stock leadership.  I see very little wrong with AAPL’s business, but I would state that trading below the 200MA and showing some topping formation is very concerning.  It feels like a bunch of LOs are banking some profits and this stock could settle in the $250-275 range before making a run post August.  Just a feel at this point.

QCOM: I have been bullish on QCOM for awhile.  I also think QCOM is one of the ways you play real value and positive product cycles in the mobile device market which I generally think sucks.  As much as I like the stock, I am not a buyer at this level.  I am not a seller, I am just cautious and would buy a pull back or if the numbers reflect some serious growth I am happy to jump on the momentum train.  Footnote…I am using a 10 year weekly chart for QCOM as this has been a high drama stock over the past six years as I think a daily chart has too much noise.

GOOG: I have been wrong on GOOG and I have admitted it.  I still see significant value in the company and I am buyer under $500, but this is another stock that is alarming to people who watch market leadership stocks.  The GOOG chart is breaking down on many levels and I think it might see $435 before it sees $535 again.  Should the market get over the macro blues this stock will run although the tone and disclosure of the management team on the next call will be important as investors are still getting comfortable with the cadence and disclosure of the new leadership team.

AKAM: This is an ugly chart.  I would say that the July print is very important for AKAM.  When they blew up in 2008, it was the July print.  When it sold off in 2007, it was the July print.  In 2009 it sold off after the July print.  This stock is considered an indicator for the digital media transition and of late has been suffering from competitive concerns with LVLT and LLNW.  I think the evolving structure of the network has more to do with their challenges, but this is a fact missed by all the analysts who cover the stock as they look at CDN pricing as a leading trend.

MMI: This chart says stay away.  I continue to think that outside of AAPL and HTC, the way to play the mobile device market is through stocks like QCOM and GOOG.  Not RIMM, NOK or MMI.  If you want to be involved in MMI than you are making the assumption that a vertically integrated maker of smartphones has a better R&D team and product cycle than HTC, Samsung, LG, Huawei, Sony-Ericsson, etc.  Maybe.  Maybe not.

GLW: This chart just feels like convergence to the 600MA.  I would be willing to get long GLW, but the global macro trends suck and I do not think the average consumer is going to put 10 flat panels in their home.  I have two flat panels now and drops for the another 4 with no plans to buy  more, but we all need to buy a lot more panels and devices with Gorilla Glass to keep this stock above $20.  Feels like a $15-19 stock.  It will be levered to panel prices and global consumer spending.

BRCD: Stock got a boost when Paul Mansky of Canaccord Genuity said it was a likely take out target for DELL because DELL needs to acquire more real estate in the data center (DC).  I do think that BRCD owns prime real estate in the DC, but I am not sure it is real estate that anyone else but BRCD wants to own.  Stock is in an up channel after bottoming in mid-2010.  I just do not see it as an exciting growth stock with public spending in down period and the best that can be said is DELL, who has their own issues to sort out, should buy them.  I see no reason to own either way.  Product cycles need to improve to be interesting.

JDSU: Wow…did a number of people get excited after the Q4 print.  The recent FNSR report pushed it back down through the 50% Fibb level…I think the stock is going to find some support in the $12-15 range and that is where I would be a buyer.  It is a difficult company to model as it has three distinct businesses with very few synergies.  If networking and optical networking is booming the stock works and they are trying to expand into the commercial laser business as well.  Experienced investors with a long memory will always fret about inventory builds and annual price concessions.

MSFT: Similar to QCOM, I like to look at weekly on MSFT versus the daily.  The daily chart is signaling a near term breakdown and I would be careful about being long at this price level.  The weekly chart says the stock is at the bottom of the long term channel around $23 and would be a buy here.  A break of $23 on the weekly would a disaster so if you want be long, I would set stops at this level.  Barons had piece on MSFT over the weekend.

AMT: This looks like a place to hide to me.  Stock is resting near the highs with little threat to the business.  I would be long even at these levels.  In general I think the tower business is good business to be in as I think real estate is more defensible than a smart phone.  A better way to play the mobile device market is through companies that contribute a defensible element to the mobile device market.  I would put AMT in the bucket with AAPL, QCOM and GOOG.

EQIX: I am a contrarian on this stock as I do not think this is the way to play the cloud.  Perhaps I will write about that in detail later, but for now the chart is very worrisome and I would say the bulls and the bears on this stock are very opinionated and the stock could easily trade in the $60s from this level.  This is a stock for people who like to read 60 page quarterly filings and not for the faint of heart.

AMZN: The stock has been on a tremendous run an I think this is one of the best ways to play the cloud.  I think the stock collects itself around the $175 level before resuming a march higher in post August time frame.   Utility computing is a trend I want to be leveraged to and this is one smart company.  My prior blog post had a link to a video about AMZN which I think all cloud investors should watch.

NFLX: Wow…stock has been lights out since Feb 2010.  It looks like it is completing a higher low cycle and will go on another run.  I would be a buyer here looking for pop and if I got it, I would put a stop loss in around this $245 level where I would be a buyer.  Stream content to a multitude of devices over the internet is a big theme.

T:  T getting some serious love for a large cap in March when macro turned negative.  Hard to be an incremental buyer up here, but if it dips back into the mid to upper $20s it is a nice add.  If macro turns worse this equity will see inflows.  If it does pull back some more, it will be a nice hedge to buy against a macro blow up like Europe or US debt.  When they report on July 18, the CAPEX number is going to affect a lot of networking stocks.

VZ: Like T, a bit a defensive play but the stock got a run going on the iPhone launch.  It has recently fallen through the 150MA as well as upper support levels.  Too close to the 200MA for my interest.  I would wait for a better entry point or to see how the Vodafone dividend drama plays out.

If you want to be bullish and you think the marker trades higher into year end, then I have some good macro fodder for you.  The market has been strongly macro driven in 2011 with Japan, Europe, ISM and unemployment numbers driving the tape.  I had one large cap PM recently write to me in an email that “This market is brutal. Just brutal.”  Here is some bullish commentary from a Deutsche Bank note from Friday:

Given there are many similarities between 1980 and today from a geopolitcal perspective (Oil in 1980 was at $91 in today’s terms, the Soviet Union was invading Afghanistan / there was an uprising in Syria and inflation was on the upswing. The big difference?  Fed Funds was 9-20% in 1980 vs. 0-0.25% today), I looked back at the SPX500 performance in 1980 to see how the market performed from ISM peak to trough.  From February to the market lows in March, the market was down ~17% (2 months ahead of the ISM bottoming in May ’80).  But from the March market lows to 12/31/80, the market rallied 38% (see attached chart).  We are only down 7% from the YTD highs and believe it or not, the market is STILL up 1% YTD.”


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

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

Looking at the Big Picture and Connecting the Dots

I am sitting at my desk looking at several reports on various technology companies.  I think investment research; especially sell side research is often wonderfully optimistic about the future.  Thematic reports on new technologies and market adoptions are almost universally bullish.  No firm writes an investment research report entitled “Cloud Computing Set to Disappoint,” rather the investment community gets 30-40 reports on cloud computing being the next big thing.  Apple is a pretty simple company from a product and business line perspective.   They have six product lines and Wall Street has 40+ analysts who cover it.  I understand the need for a firm to have an Apple note to use for marketing, but 40 analysts plus another 20 or more boutique research firms and we are talking 60, 70, maybe 80 reports on Apple.  Many firms publish weekly notes on Apple.  Do we really need so many reports and is there anything relevant or differentiated in these reports, but I digress from the topic at hand.

I like to go through what I call a framing exercise.  Readers of the T&G blog from 2006-2007 know where I am going.  I like to layout a number of facts as well as suppositions and create some conclusions.  Here are few frames:

05.09.11: David Yen, EVP and GM of Juniper’s fabric and Switching business unit leaves for CSCO.

05.11.11:  CSCO Reports Q3 FY11 Earnings:  Cisco is one of the first companies in tech to report on the month of April and the first to give expectations for May-June-July.  Stock down big on the forward view of the business.

05.14.11: Barron’s positive on JNPR.  JNPR stock @ $39.12 on the Monday 05.16.2011 close.  It closed at $29.91 yesterday.

05.17.11: HPQ reports and lowers forward guidance.

05.25.11: Auriga downgrades JNPR due to slowing enterprise business and Openflow concerns.

05.27.11: Transmode (TRMO) prices IPO

06.01.11: JNPR CEO is reported to offer cautious comments on backend loaded quarter at the BofA/ML Conference in NYC.  The business pace of the quarter that the CEO spoke about was precipitately reported by Sanjiv Wadhwani of Stifel on May 31.

06.09.11: CIEN Reports Q2 FY11 Earnings: CIEN is reporting an April quarter end, heavily levered to service provider CAPEX and guiding for the months of May-June-July.  Ciena missed street expectations and lowered their guidance as well.

Catch-up Spend: I wrote about the catch-up spend several days ago, but it is even clearer when you layout the operating models for a good sample size (~15) of companies that are in the technology market.  The spending catch-up (started Q2 2009) from the credit crisis spending collapse is over.  Many companies benefited from this event because they cut their operating models in the 2H 2008 expecting a prolonged downturn.  The downturn was deep, but brief lasting 2-3 quarters and then spending came back and accelerated into 2010 year end.  Many good things happened because of this 21-24 month recovery: (1) margins recovered and then (2) earnings peaked, (3) IPO window opened for companies like CALX, TRMO, Avaya (4) M&A returned with a vengeance: DDUP, STAR, COMS, CIEN/NT, CALX/OCNW, Telecordia (today), etc, (5) large public companies refinanced debt and (6) private companies were able to fund.

My supposition is that the negative impact of the spending cycle catch-up is it fooled companies as to the direction of the market.  Because of their size and global reach, CSCO is a key indicator in the technology world and in some ways the tip of the sword.  They had it all figured out.  They were going to have ~15 billion+ business units.  They went aggressively into the downturn planning to use their balance sheet to take share.  For awhile, it worked and they put up the best numbers in the company’s history in the 1H of 2010.  When they saw the underlying business deteriorating they tried to buy their way out: STAR, Tandberg, etc.  Here are two charts showing CSCO’s quarter revenue trends.

The onset of the global credit crisis enabled CIEN to buy Nortel’s Optical Business Unit all because NT’s North American business unit went bankrupt because the company kept too much capital off shore and the tax to repatriate made funding the business a challenge.  CIEN was able to correct two significant errors with the NT deal.  (1) The had completely missed the 40G/DQPSK cycle preferring to focus on 100G and (2) there were a large number of global service provides that were not CIEN customers.  Now both of those errors are fixed at the cost of $1B.  My point is that CIEN is now set in their product plans.  They know who they are and their ability to alter their product offerings is limited because they are going to be really busy for next 30-36 months consolidating their customer base and sorting through the product roadmaps of two companies.

It appears, that looking at companies missing in 1H of 2011 that the miss is 7-9% from plan.  Meaning that the market is growing, but it was linear from Q4 2010 to Q1-Q2 of 2011.  I think this is a re-composition period.  The spending catch up is done, now consumers of technology are putting more thought into what is next.  If you accept the emerging three pillars of (i) centralized control-plane, (ii) software defined ecosystem and (iii) lower priced storage-compute-switching power pack, then I think several companies will have challenges.

Technology leadership in the network is coming from unfamiliar places.  I wrote about this recently.  I am interested in understanding how these new leadership entities are affecting spending entities for 2012 and what new technologies are they adopting for specific applications?  What spending entities will lead the adoption of the three pillars?  Some of this is cloud a discussion, but I really dislike the term cloud.  To me the data center/cloud evolution is four segments:

  1. Warehouse scale (GOOG, AMZN, AAPL, MSFT, Defense/Intelligence)
  2. High performance compute (HPC) clusters (Financials, Energy, R&E and select enterprises)
  3. Private DCs (Bulk of the market who can afford to own their on DC and will outsource small portions for replication etc)
  4. Hosted DCs (SMB market)

The data center/cloud market is going to be big, but I think there are multiple points of entrance and multiple strategies to employ. Here is my short summary of access to each of the four segments:

  1. Warehouse Scale: As I discussed before, this is the evolution to all photonic switching starting with the removal of the aggregation switches, then the TOR switches go away and eventually blades to switches and Openflow is important.  Need to focus own on how the network element interfaces into the virtualized I/O on the blade server.
  2. HPC Clusters: This is another place in the network where technology changes are afoot. This is your higher end, high transaction compute centric enterprise.
  3. Private DC:  I think this is the bulk of the market.  Most companies can afford to own their own data center and will continue to do so, but outsource varying elements to cloud providers.
  4. Hosted DC: This is the long tail of the market.

When I read research reports and transcripts of earnings calls, I am not surprised to see CxOs and analysts using expressions like “history repeats itself” or back in 2001 or 1994 we did X so this time around we are going to do X because X worked then.  That is a bunch crap.  History does not repeat itself.  We say and think those things because we are often lazy and it makes us comfortable to associate events in the present with memories from the past.  There are five behavioral characteristics we see in the market as well as in corporate leadership:

  • Need for Thought Anchors: The process of making decisions is most comfortable when we can associate the decision to that which is familiar.  We tend to justify a decision by saying, “this is just like when we made the decision to do X last year.”  We begin with what is familiar and try to associate future with the past.  John G. Stoessinger described this action as image transfer because “…policy makers often transfer an image automatically from one place to another or from one time to another without careful empirical comparison,” [see Nations in Darkness, John G. Stoessinger, 1971, page 279].  Dr. David D. Burns described this behavior as “all-or-nothing thinking” or “labeling” behavior [see The Feeling Good Book, David D. Burns, 1989, page 8-11].  It is much easier for humans to use thought anchors to build their decision making process around – rather than pursue unfamiliar thought positions.
  • Power of Story and Legends: Decision making based on story and legend often motivates more than facts and research.  We are emotionally driven people.  That is why revolutions are emotionally draining events.  The power of story and legends is the act of basing decisions on simple reasons and not investigating and understanding the complexities of the decision criteria.
  • Overconfidence and Ignorance: There is a tendency for humans to be overly confident on subject matters on which they are enormously ignorant.
  • Herding Behavior: The power of the crowd.  The power of revolution.  In the absence of facts, or when facing a daunting amount of work to justify a decision, it is easier to follow the crowd.
  • Denial – Failure to Accept Mistakes: Humans rarely admit, or learn from, their mistakes.  Mistakes are a natural byproduct of being human.  Admitting and learning from mistakes is an unnatural human activity.

Putting it all together I think:

  • The catch up spend is done.  A number of companies are starting to realize they made some architecture mistakes and failed to realize the effect of the three pillars of (i) centralized control-plane, (ii) software defined ecosystem and (iii) lower priced storage-compute-switching power pack.
  • A number of big companies got trapped by the catch-up phase like CSCO, JNPR, CIEN, etc and they are now in a negative product cycles.  I experienced this at XCOM in the early 1990s against CSCO in the switching market and it really sucks.  You never have enough capital to spend your way out; it keeps deteriorating.
  • The leading edge of the market is beginning to move.  You want to be building in the leading edge of the market.  Companies with nimble product development teams are already focused on the emerging entities affecting the technology selection.  I like to think of technology selection as Darwinism.  Anytime you hear a person talk about Darwinism and survival of the fittest they are quoting urban myth.  Darwin’s theory was about selection – not survival. Going forward technology selection will choose the winners – the biggest is not necessarily a survivor (ask DEC, WANG, Nortel, etc).

If you are a generalist PM I would guess you have no idea what I just wrote in the prior 1800 words.  Most sell side analysts are probably scratching their head thinking I am nuts and wondering what this has to do with their price target and forward multiple on their outperform rated stocks.  Any executive reading this in a networking company is wondering how I know what their forward sales funnel looks like and what customer feedback has been of late.  History is not repeating itself.  The technology ecosystem is changing and evolving everyday and the underlying forces driving that change are coming from unfamiliar places.  We can all jump with the herd on the cloud rush.  We can believe in the stories of the internet breaking and exafloods or we can accept what is really going on.  By the way…did FB just peak too?  I would not know, left it more than a year ago.


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

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

Three Dislocations: Will They Meet?

When I started this blog, we were on the eve of Q1 earnings and I thought it was prudent to get out of the way of the market.   Before the long holiday weekend in the US, I wrote a quick note on 20 tech stocks.  I read a lot of the daily Wall Street dribble that comes out hyping this stock or that stock and this TAM versus that TAM and how big this market is going to be compared to that market.  Blah, blah….when I posted over the weekend that things are going to be different, it is because the drivers that are affecting the technology ecosystem (i.e. the network as all encompassing term) are coming from unusual places.

The technology industry used to be pretty straight forward.  Technology companies innovate and they bring their solution to market.  Customers whether enterprise or service provider or consumer had some input, but it was really more of a RFI/RFP process which a consumer of technology would request a proposal to solve a problem or build a service.  The following chart is something I created in 2006 to illustrate technology cycles and the companies taking advantage of those cycles (i.e. markets).  I am going to update this later, but for now I think that this chart helps illustrate my point that in the past, technology companies helped push the technology market cycles.

What I think is different today is that the drivers seem to be coming from inside the network; from the users, from the consumers – not from the traditional technology suppliers.  An example is Openflow, but Openflow is an element of the change I see.  I am not willing to call it a SeaChange event, but maybe in the future.  What I do know is that it appears that technology suppliers have lost some control of architecture and the technology decisions.  It seems that consumers of technology have more control of what is being developed for the network deployment.  To me the future looks much more driven by software control, virtualized I/O, meshed connections, SLAs, SSL and whole bunch more concepts that we could spend hours talking about in front of a white board.

By this time you are probably wondering what does this have to do with the market.  The first three paragraphs were intended to convey the point that I think many established technology companies have been living off the 2009 catch up spend from the 2008 collapse.  Spending stopped post LEH and it took about 4-5 months to restart.  When it did restart (~Feb 2009) it lifted all companies, but some companies had fundamentally flawed product cycles like NOK while others had fundamentally beneficial product cycles like APKT.  We are now 27 months into the catch up cycle and as comps have gotten tougher and the forces I have be writing about have started to affect the network ecosystem, companies are starting to realize that choices made a few years ago have put them into a difficult position.

Last week’s economic data was not a good.  I think that leading indicators are neutral at best, more likely negative for the remainder of 2011.  Forward GDP and industrial production numbers have been cut.  We are almost mid year so with the economy hitting a rough patch, an air pocket, a slow down…whatever Wall Street speak you want to call it, the real question is how are companies going to handle the next few quarters?  Stay the course?  Make a correction?  What changes will occur?

What I really see is three dislocations.  The first is what is going on in the network and the sources driving technology adoption; consumption and innovation are different from the past.  The second dislocation is the established technology companies and what they have to offer to a changing market.  Products and solutions are set.  Portfolios and value propositions do not change in 90 days.  The catch up spend is over so how are companies with product cycles turning negative going to react to a harder market?  It seems that what the technology market is doing is disconnected from what many of the established technology companies expected and third dislocation is what investors expect from prior two.  Dislocations create opportunities.


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

 ** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

20 Technology Stocks in <10 Minutes for Friday Open

I have been off the stock picking subject matter for a few weeks as there has been a lot to digest in terms of technology.  For an early Friday post before a long weekend in the US, I review a few of the stocks I made calls on since the blog restarted and added a few more for twenty.

JNPR: The analyst at Auriga downgrade JNPR a couple of days ago based on concerns about Openflow affecting adoption of Juniper’s QFabric as well as pricing pressure in routing and switching markets.  I think the product cycle is still positive for JNPR, but there is a theta calculation to this cycle.  I am not concerned about Openflow affecting adoption of QFabric as I think failing to technically explain QFabric to the world has more to do with the confusion around the architecture than the headwind of Openflow.  The stock has definitely cooled in the past few weeks and I am neutral.  I would wait to buy around $33-34 if you want to be long.

ADTN: Product cycle positive.  US capex favorable, but the stock seems topped out around the mid $41 level.  Neutral.

CSCO: I have written a lot about CSCO.  Chart is right on track with the prediction after earnings.  I still think you need to wait till post August earnings before it is a buy.  Product cycles are still negative.  Neutral.

RIMM: Product cycles are negative, but the new BB with the Snapdragon processor is getting positive reviews.  Stock has bottomed out in my opinion, but it is hard to see a positive catalyst without better clarity on earnings.  Neutral.

NOK: Another challenged mobile device maker and I do not want to hear about how some new Windows phone will save 2011 and produce better earnings.  Product cycles are negative.  Stock is bottoming out at the $8 level.  Hard to see a positive catalyst for 2011 unless a large group of investors want to have a kumbayah moment.  Neutral.

AAPL: Product cycles are positive, but the stock looks like it is topping out.  I would be reducing the long position at this level.  Sell.  It can be traded around the WDC an iPhone 5 launch.

GOOG: I think there is a lot of positive product cycle momentum with GOOG, but I will be the first to admit that the weekly and daily charts broke all manner of technical indicators and that makes it very concerning.  Sometimes you have to accept what the market is telling you.  I would look for new entry point and it is probably below or around the $500 mark.  Long, but looking for lower entry point.

FNSR: Product cycle is still positive, although ROADM momentum has slowed.  Price level back to trend line from 2009 market bottom.  Resistance starts at $25-30, but it is a buy here as CAPEX trends should be favorable into YE.  Long.

APKT: Nothing has changed despite market none-sense chatter contrary to my prior post.  Long.

FFIV: F5 presents a very interesting chart.  I would be long the stock through June.  July is another matter, but for now the technical indicators and stock action imply the bulls what to rally this stock into the next print.  Owning it into the next print is another matter for later.  Long.

RVBD: I put RVBD right after FFIV because these stocks look like twins.  The product cycle is still positive for RVBD, but the recent stock action looks like the bulls want to rally it into July earnings.  As with FFIV, I think earnings is another matter.  For now, if I wanted to be involved I would be long.

SCMR: Not sure much has changed with recent earnings since the last post.  It has a high level of risk/reward.  If I could buy it at $16-18, no problem; at $22+ not so sure.  Neutral.

QCOM: Positive product cycles, but the stock seems to be getting tired after the last run.  I am okay buying it at this level.  Long.

HPQ: Every other day it seems the WSJ has a negative article on HPQ.  After the Hurd drama the WSJ should send a check to HPQ for providing so much content over the past year.  All we need now is a Baron’s piece that says the Baron’s Trader is positive on HPQ and Cramer rant to put a bow on it.  HPQ finally bounced off the lower resistance level from 2009 a few days ago.  $35 and change seems to be the bottom point if you want to be a buyer.  More reward to the upside than the down side, but it is likely the stock does nothing here for a few months.  Long if anything, cover the short.

DELL: Stock just made a triple top off the 2009 low after breaking the down channel from the 2009 peak.  It is not often that stocks have such big swings.  Despite all the moves, hard to declare the company is in a positive product cycle in the age of tablets and blades.  Neutral with a bias lower at this price level.  I would not own this into August earnings.

JDSU: A lot of overhead resistance at the $20 level.  As with FNSR I like the stock to perform better in the 2H, but it might be easier to buy this stock late in August and September for a run into early 2012.  Neutral with a bias to the upside.

INTC: More of an industrial company than a technology company, the stock did something on a weekly chart it had not done in 9 years.  The product cycles are positive and it finally broke a very long downward channel during which there were four peaks and three new lows.  Long.

MSFT: Despite all the recent headlines, the stock is center in a ten year weekly up channel.  The daily chart looks disappointing, but are you really going to own this stock in a world of tablets and MACs for growth?  Stock is a holding bucket.  Neutral.

BRCD: Defiantly in a upward momentum channel and at the current rate will regain the October 2009 high sometime in mid-2012.  Long with a low interest level.

S: On a daily chart, Sprint looks like it is breaking out in a new bullish channel.  On a 9 year weekly chart the move requires a microscope to detect.  Coming off the 2009 low, $6 has been a tough barrier for the stock to break.  Momentum is better and it looks like $7 is in the future before $5, but I think there are better risk/reward equities.

LVLT: When had my old blog in 2007, I once wrote a negative post on LVLT in February 2007 perfectly timing the $6.80 high.  The stock has not had a whiff of this level since.  I received fantastic hate mail as well as bullish emails so far fetched I wondered how detached from reality the authors were.  For entertainment purposes before the weekend I included an example below from February 2007.  As for the stock today, it does look bullish for the first time in a long time, but I would not be involved in this company when you can buy AAPL, FFIV, APKT or GOOG which are companies that make a lot of money and have a really good business.

CroweBonics is Silicon Economics applied to our communications business. It’s a fun reference to the phenomenon which Crowe has opined so often. It’s nothing more unless we get into the more complex Mini Max Model. I have never used their model due to the simplicity of my mindset when looking to apply investment thesis-when the company started, and some believe, will factually kick in with the tsunami of video traffic hitting all “networks.”  It’s the price elasticity of demand concept. We are comfortable with 3:1 ratios where bit demand is growing three times price compression.  If demand is growing at 75 percent and prices are dropping at 25 percent; we have a 32 percent GROWTH rate.  The hangover in telecom killed the formula, as you know. Even traffic growth doubling each year would be revenue neutral to the top line while fifty percent year over year price degradation might occur.  At last check, IP & Data traffic was growing at 40 percent according to my research. I believe we have begun and are heading into the HYPER GROWTH portion of the S curve…So William, we have a “healthy business” it appears again (CroweBonics), and a best of breed management team!


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

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **