Archive for January, 2011

Earnings Season Update

We are in the middle of the fourth quarter earnings season, and so far the majority of companies are once again beating expectations.  Bellwether companies, such as Intel, Apple and Google have issued blowout reports.  Market reaction to this, however, has been muted.

While there are special circumstances in cases of the companies mentioned above — Intel’s future is now less certain (see my writeup on Nvidia), and there are top management changes at Apple and Google — when stock price fails to advance or starts declining despite stellar results, it always warrants caution.  The traders are also looking even for slight signs of disappointment, and punish the stock severely if they find them, as was the case for F5 Networks.

It is quite possible that we are nearing a short-term market peak here, which would not be all that surprising giving a 7 week winning streak for S&P 500 which is now near its two and a half year high.  A moderate pullback from these levels would actually be quite healthy — if the markets continue their march higher, a sharper correction will likely result in the future.

Short term worries aside, fundamentals of the market remain solid.  Company earnings continue to grow and exceed expectations.  Benjamin Graham said, “In the short-term, stocks are a voting machine and in the long-term, stocks are a weighing machine”.  And it is the earnings that are those weights.

January 23, 2011 at 7:11 am 2 comments

Seismic Shift in the Chip Industry

As is normally is the case, this year’s Computer Electronics Show (CES) in Las Vegas featured a slew of new product announcements and demonstrations.  But I think that Nvidia stole the show.

First, some background.  Nvidia is best known as a graphics chip manufacturer, and, together with ATI, they effectively control mid and high-end GPU  (graphics processing unit) market.  Intel has a significant share of the low end of that space.  Of course, Intel completely dominates x86 CPU (central processing unit) market, with AMD being a very distant second.

Several years ago, AMD acquired ATI (which almost lead to the demise of the company, but that’s another story), and started working on project Fusion, which goal is to bring the functions of CPU and GPU on a single chip, thus eliminating the need of a separate GPU altogether.  Intel also has solutions of its own in the low end, and it has been working to improve the graphics portion of its solution as well.  There were rumors that Nvidia may enter x86 CPU market, but the company stated that it has no interest to compete with Intel on its own turf.  As a result, Nvidia found itself to be in the difficult position of having GPU solution only, without any CPU exposure.   Many speculated that this would lead to the company being acquired in the best case, and to its demise in the worst.

The last two years were difficult for Nvidia, but it has been working to two fronts.  On the high end, it introduced supercomputing product Tesla, based on its GPU technology.  GPU chips are actually considerably more complicated and powerful than x86 chips, but so far have been only used for graphics applications.  Tesla product changed that and now Tesla-based supercomputers run circles around ones based on the x86 architecture.

On the low end, Nvidia introduced Tegra, a chip intended for smartphones and tablets.  Its adoption was slow at first, but at CES, dozens of manufacturers, such as Motorola, LG, Samsung and many others, announced new products based on Tegra chips.   It looks increasingly likely that Nvidia is set to control a high share of Android-based smartphone and tablet processors.  With only limited success in mobile space, Intel now finds itself surrounded by Nvidia from the low and high ends.

But the real bombshell was delivered at the end of the show.  Nvidia unveiled project Denver, its answer to AMD’s Fusion and Intel’s CPU/GPU integration.  Nvidia stayed true to its unwillingness to enter x86 market; indeed, x86 architecture is now quite dated.  Instead, Nvidia is basing its general purpose CPU on ARM chip, which is a newer design and has a number of advantages, such as low power consumption and better efficiency.  Also, rather than taking an old x86 chip and adding on considerably more complex GPU, as AMD and Intel are doing, Nvidia is taking the opposite approach — it starts with a GPU design in which in has unquestionable expertise and adds a considerably less complex CPU part to it.  This just makes a lot more sense.

But who needs a new chip for laptops and desktops?  That same day, Microsoft announced that it is going to port its upcoming Windows 8 to the new ARM architecture.  In other words, x86 monopoly on CPU is over.

Now, suddenly Intel finds itself in a difficult position.  Over the years, it has tried, and failed, to produce its own mid and high end graphics solution.  So it needs Nvidia to supply GPUs for their products.  Nvidia, however, no longer needs Intel.  In fact, the next day Intel and Nvidia announced the end of their patent disputes, and Intel is paying $1.5 billion to Nvidia for the right to use their patents.  That’s not chump change; it will go a long way for Nvidia to help fund its development of their new chip.  But the biggest loser in all of this is AMD — in fact, that same day its CEO was effectively fired by the board.  Its project Fusion only had a limited success and AMD has no presence whatsoever in the mobile space.

I think the events of the last few days mark a seismic shift in the chip industry.  While new Nvidia’s chip is still more than a year away, Intel dominance of the CPU market is likely over.  With popularity of Apple products and Android-based devices, Wintel days are numbered as well.  Nvidia can now effectively compete with Intel on the full computing spectrum.  Next several years will be very interesting.

January 14, 2011 at 8:47 pm 1 comment

Good Start for the New Year

They say on Wall Street that the year goes like January goes, and January goes like its first trading day.  Based on this observation and a great first day of the year, we should be all set for 2011.  Of course, this didn’t work for the last two years — markets rose despite poor January in each of the years.  But I am not a scholar of calendar anomalies, so let’s instead look at the fundamentals.  And they continue to be positive.  Consider:

– Consumer sentiment and spending continue to improve.  Even luxury items and cars show significant increases.  This bodes well for GDP in 2011.

– For the first time in three years, first-time unemployment claims dropped below 400,000, which is considered a “magic number” by many economists.  If first-time claims are below this threshold, real job growth becomes very likely.

– Corporate earnings and fundamentals are very strong, as evidenced by positive surprises in earnings reports over the last several quarters.

– Stock valuations, while near historical averages, are very attractively priced compared to bonds based on earnings yield.  It becomes more and more likely that investors will start to abandon perceived safety of bonds and transfer their assets to equities.

As always, not everything is all roses.  Investor optimism is quite high, which is a negative contrarian indicator.  Housing market is stubbornly depressed, as index of home prices fell recently.  We will of course have setbacks, but overall I believe that positives will prevail, and I look forward to a prosperous New Year.

January 4, 2011 at 8:08 pm Leave a comment

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Leon Shirman's long-term investment philosophy is summarized in his book, “42 Rules for Sensible Investing”, also available from Amazon.


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