High Tech "State of the Union", Q1 2017

Source: Pinterest

The year 1927 was the midpoint of a turbulent and frightening period of societal upheaval in German history. The Weimar Republic that rose to power after Germany's crushing defeat in the First World War had fallen into disarray and disrepute. A calamitous hyperinflation had ended two years previously, yet economic stability continued to elude the nation as communist and fascist street gangs terrorized an impoverished and shaken civilian population. The old, well ordered, pre-war German polity was hopelessly and irretrievably shattered, leaving a people who feared what new disasters the future would bring and yearning for a return to some sort of normalcy and stability.

It was in this year of strife, near-anarchy and widespread despair that Fritz Lang produced his most visually striking and memorable work - "Metropolis", a tale set in an unspecified future where Lang imagines a world of technological wonders set in a dense, forbidding urban landscape with a social and economic fabric resembling more than anything else an 'industrialized feudalism' composed of an oppressed, restless working class ruled by a tiny and far removed clique of elites. 

Source: youtube

The film came under a fair amount of criticism upon release, with pundits complaining about its length, storyline and, in particular - indirectly foreshadowing the real horrors to come - over its potential communist sympathies. At least 25% of the original film was considered lost after it was heavily edited, though efforts over the last 90+ years have managed to restore it to 95% or so of its original extent. 

The above link is the best I've found of the restored work and I highly recommend a full viewing. Though it is a silent film, the visual elements and soundtrack make the experience anything but boring. There is also an underlying 1920's art deco motif which imagines a future quite a bit more eye-catching and attractive than the bland, generic glass towers of today's cityscapes.

At this point, some of you may be thinking "Oh, brother, here we go again - stop waxing prosaically and get to the point, will ya, baldie?"

Source: looneytunescaps.blogspot.com

Very well. Let's get to the heart of the matter.

Though Lang's dystopian vision may have missed the mark in assorted technical details (there are no computers, smartphones or jet aircraft in "Metropolis"), the general themes of the film are hauntingly familiar - both for 1920's Germany and today. We are encircled by myriad engineering and scientific marvels in communications, transportation and architecture in a world that is more thoroughly enmeshed every passing day across geographic, cultural and economic divides. Yet amidst the popular talk amongst elite circles in academia, business and media of a growing unity across the globe purported to be steadily eroding national borders, an increasing estrangement and disharmony between economic and social classes across much of the 1st world, along with rising dissonance and feuding between religious, ethnic, cultural and tribal entities on a global scale is starkly evident.

"The Tower of Babel", Pieter Bruegel the Elder, 1563 (source: wikimedia.org)

A comparison to the mythical Tower of Babel (a legend at least 4000 years old originating from early Sumeria in the Fertile Crescent) is apropos and is, in fact, a pivotal symbol in a futuristic manifestation in "Metropolis." While the mightiest, most egomaniacal potentate of Mesopotamia four millennia ago proclaimed the ascendancy of mankind united under his rule by building a tower that reached to the heavens in order to display his own supposed magnificence, tensions between class, culture and tribe simmered among his subjects until they boiled over, scattering humanity in all its peculiar foibles, quirks and differences across the face of the earth.

Then rose the seed of Chaos, and of Night,
To blot out order and extinguish light. - Alexander Pope, "The Dunciad"

Such seem to be the cycles of human history, irregular as they are in magnitude and occurrence. A civilization grows to impose its own social, economic and political order, mastering serial challenges, then losing momentum as it either fails to overcome further difficulties or finds the fabric of its institutions unable to adapt sufficiently to changing circumstances, leading to that society's decay, collapse and replacement with a culture which preserves that which is still useful, discards the rest and develops new paradigms in order to contend successfully with fresh obstacles and trials. With the global struggles of the 20th century now behind us, a previously bipolar world order and its system of rules, obligations and limitations is reverting to a multi-polar disorder, accompanied by a distinctly atonal symphony of disruption, retrenchment, discord and trepidation. We seem to be at a great inflection point whose ultimate outcome remains far from certain.

Technology has always been an agent of change - created to solve specific problems, yet generating effects that spread, bifurcate and cascade unpredictably in both magnitude and direction, thus driving further unplanned and unforeseen developments. It's been over a year that we haven't scrutinized together the lay of the land in High Tech, and much has transpired in these last 15 months. Let's start by looking at some of the 'old guard' participants to gauge how changing times are affecting them.

The Big Iron

We now have almost 9 full years of quarterly revenue data on IBM, HP and Cisco, so any trends and/or changes should be clear at this point. The chart below has a deliberately stretched vertical axis to make some of the new data easier to discern.

Cisco - John Chambers resigned as CEO in July 2015. 5 quarters into his tenure, new CEO Chuck Robbins has yet to make any meaningful impact on the company and put it back on the path to growth - this, despite his highly aggressive initiatives in the IoT and the growth of Big Data, Cloud Computing and the Datacenter market. Yet I would not rule Robbins a failure just yet - after all, Chambers failed to produce any substantive growth in his final 3 years at the helm. What the revenue trend suggests is that the worldwide communications market has been more or less stagnant for the last 4-5 years.

HP - one of the Silicon Valley originals, HP broke into personal computing (HP Inc) and business system (HPE) groups in Q1 2016. The primary reason for stretching the above chart was to provide some visibility for the revenue data on these two entities. The results were quite surprising, making the industry pundits once again look stupid, as HPE struggled and HP Inc strengthened - the reverse of expectations. Nonetheless, combined revenues maintained a long term yearly downward trend begun in Q1 2011. 

IBM - Ginni Rometty and her executive staff continue their track record of "success" in gutting and poisoning the greatest technology company ever, having now achieved 5 consecutive years of deep revenue decline. It is not hyperbole to suggest that, if Rometty and her crew were deliberately attempting to destroy IBM, they would have done less damage. I suspect most Soviet-era industrial bureaucracies were run better than this.

In summary, the Big Iron numbers are deeply troubling. These three companies represent the infrastructure segment of High Tech. As systems houses, their clientele encompasses the entirety of the global IT market for both the private and public sector. Aside from grotesque managerial incompetence at IBM, what these revenue numbers tell us is that for the past 6 years, the global economy has been largely stagnant or in mild decline.

Wintel

Contrary to all my instincts, these two companies continue to impress me. There is nothing about their histories which suggest they should be competitive - 4 decades old and more, quasi-monopolists that are still producing (by and large) the same mix of products that they have steadily evolved over that same timeframe and governed by stifling corporate bureaucracies. Yet Intel and MSFT continue to maintain their position as relative bright spots in my quarterly State of the Union reports. 

MSFT appears to have stumbled with its abortive Nokia cellphone acquisition from April 2014, which it had to divest at considerable loss (over $7B, to be precise) 15 months later, as well as its extended Windows 10 rollout as a free product and the associated revenue hit. On the bright side, there is continuing strength in the Azure cloud offering - a direct challenge to market leader Amazon and a growing threat. In this, MSFT continues to demonstrate that they have absolutely no fear of gigantic competitors (including Google/Alphabet.) An oddity is the acquisition of LinkedIn, which the company purchased for a whopping $26.2B. MSFT's Skype acquisition seems to have been a waste of money, with empirical evidence suggesting that Skype users are now less satisfied with the service than before. What MSFT's plans for LinkedIn are and how they expect it to contribute to the company's strategic direction is not clear at all at this point. All in all, I am still cautiously optimistic about MSFT and hope that the company does not prove my optimism to be misplaced.

Intel completed its Altera buyout at the end of Q4 2015 and revenues from the acquisition are already accretive. The purchase was intended primarily to drive growth in the Datacenter segment, already Intel's healthiest market. Despite the continuing drag on earnings from the extended decline of the PC segment, Intel is starting to look strong and may be breaking out of its 5+ year stagnation. 

The Stone Masons

Qualcomm and Mediatek appear to be marching in lockstep for now. This is unsurpising, as their primary market (smartphones) is forming a plateau and will either stagnate or decline to low single digit growth for the foreseeable future. Paralleling the experience of many other companies, attempts at diversifying the customer base thru efforts in the IoT have proven ineffective. The Internet of Things remains a nascent market and will not advance until one or more killer apps emerge. Qualcomm's fortunes may change in the short and medium term with its recent acquisition of NXP (discussed in greater detail below.) Mediatek, however, will likely remain moribund until it can expand beyond smartphones.

Broadcom has exploded upward and is poised to become a Titan of the industry, perhaps second only to Intel. As outlined in exhaustive detail in my 5/29/15 blog post, Avago's three year M&A binge gobbled up LSI, the original Broadcom and nearly a half dozen other smaller firms to create an enterprise offering HW and SW IP that begins at the smartphone RF block and extends thru the wireless and wireline chain all the way to the datacenter. By demonstrating genuine strategic sagacity, Broadcom/Avago's executive team is achieving spectacular growth in an otherwise moribund semiconductor market. I confess that I am in awe of this company and will be following their strategic moves closely.

Nvidia has finally embarked on an exciting growth streak. How they have achieved this, though, is a far less impressive story. A good 75% of its sales are still in the PC market with its graphics products, as other departments have provided only token revenue contributions - this despite a massive R&D effort in recent years. My longer term outlook is thus negative. It is doubtful the graphics business will continue growing at such a pace (especially as AMD seems poised to re-energize its competitive stance in graphics) and Nvidia currently has nothing else 'in the pipe' from its other initiatives which appears poised to break out. Perhaps the company's datacenter efforts will bear greater fruit in the coming quarters, though the segment has already become crowded with competitors. We shall have to wait and see.

As for the final company on the chart, I have included Xilinx here for two reasons: 1. Lattice and Altera have both been acquired, leaving Xilinx as the only large independent programmable logic company. I have thus scrapped the "Vanara" chart and transferred Xilinx to the Stone Masons.
2. There is some value in continuing to track Xilinx. Programmable Logic is a leading indicator of design activity.  Any upswing in the systems houses will be presaged by 9 months in the programmable logic market. 
Currently, though, Xilinx's long record of desultory performance establishes an unhappy trend, foretelling continuing stagnation in the Big Iron. If the company has any ambition to grow and is not simply content to wait for a buyer to come along, it will need to expand its technology horizons beyond programmable fabrics and learn to compete head to head against the other Stone Masons in the wired and wireless communications segments.

Area 51

Apple broke a three quarter streak of y-y declining revenue with its latest earnings report. Unfortunately, I suspect time will prove this to be an outlier. The medium and long term prospects for the company are negative because of the developing (and likely permanent) plateau in the smartphone market. The excellent revenue number predominantly represents gains in market share at the expense of competitors - notably Samsung, with its new phones having hit the market "with a bang" - as well as announced gains in China. Without breakthrough new products, however, Apple is more than likely to reverse course in terms of revenue and decline to the levels of 2012-2013 over the next 2-4 years. Price pressures on smartphone HW and service providers will only continue to worsen and, with the end of Moore's Law, the ability of vendors to add value to their mobile computing products will be severely constrained. Perhaps there are highly creative developers within the bowels of Apple who are working on VR products with compelling SW content or IoT devices that will be genuine game changers. Only time will tell if the spirit of Steve Jobs still haunts the hallways of Apple's Cupertino HQ. 

Alphabet continues to grow but, despite its massive technology R&D and new product efforts, still depends almost completely on Google and, to a lesser extent, Youtube advertising revenue for its earnings. Changes in the organization and executive management of the company have not helped to diversify the company's offerings to any real extent and it remains a one trick pony. I have friends in the company who are quite happy and truly love working there, which says lots of good things about Alphabet's general management principles. Nonetheless, knowing how fickle the advertising business can be, if I were a stockholder I would be feeling increasingly irritated and unsettled.

The Carolingians

Holland-based NXP continues to be the most impressive member of this group, continuing the growth trend that commenced in Q1 2012 with an explosive breakout beginning in Q1 2016 (the spike being driven primarily by the absorption of Freescale, bought for nearly $12B in 2015 and consolidated at the end of Q4 that same year.) Like its counterparts, NXP has distanced itself from low margin consumer segments to focus on building defensible niches in the Industrial sector. Automotive is a particular strength of the company, and it has even managed to build a solid business in a market where almost everyone else has failed - the IoT. With a strong position in MCU and divestiture of low end logic and discrete products thru the Nexperia spinoff, NXP has become the dominant player in Europe. This position will soon change, however, as Qualcomm has acquired NXP for $47B in a deal that will likely close in Q4 of this year. This will bring together two of the absolutely best executive management teams in the semiconductor sector and create a multinational company with a solid foundation of cash cow businesses (smartphone applications and baseband processors, automotive and security) along with a leading position in IoT. As it stands today, the next ten years in the semiconductor industry are shaping up to be primarily a struggle for dominance between Broadcom/Avago and Qualcomm/NXP.

As for the other two members of the group, a stunning flip-flop has occurred - STMicro has recovered from its 5 year tailspin and Infineon has stumbled. I would not have predicted such an event to be even remotely possible, to be frank. Unless one of them makes some sort of major strategic move (most likely thru an intelligent acquisition), the struggle between these two companies will boil down to the relative success of each in the automotive and industrial markets.

A Time of Troubles

Ajax the Lesser Drags Cassandra From the Temple of Athena During the Sack
of Troy (detail from pottery, 360-370 B.C.; Source: www.mlahanas.de)

History is replete with tales of peoples, rulers and governments failing to face cold, hard reality when confronted with existential crises. The Trojan War is the earliest example of this in Western civilization. Cursed by the Olympian Gods with a gift for prophecy that would never be believed, Cassandra repeatedly warned her countrymen of Troy about the perils they faced in their decade-long struggle with the Achaean Greeks. Yet it was to no avail, as they derisively laughed at her and scorned her, called her a madwoman and blissfully ignored her dire visions.

Today's deep dissatisfaction, disillusion and distrust of cultural, political and economic institutions underlies our currently tumultuous public discourse. It is not just an American phenomenon, but is evident worldwide, and most especially in the advanced economies of 1st world nations. A manifest symptom of this is the rise of violent social and political movements from the political fringes that have taken on the semblance of cults. Again mirroring our own times, the second to last manuscript for Fritz Lang's "Metropolis" contained extensive references to occultism and mysticism, both of which are very evidently attracting followers today.  

In deeply unsettled times, we search for the causes of disquieting events, attempt to discern meaning from the circumstances that disturb our tranquility and hope from our contemplation to see a way forward towards a fresh start. Under great and prolonged anxiety, we also tend to seek supernatural insight, as if there was an underlying natural order to things beyond our ability to grasp which could help make sense of our current distress and confusion, providing some sort of guiding light for us to follow.


And so, dear readers, we once again take the mountain trails to the slopes of Mount Parnassus in order to consult with the Oracle of Delphi. We may not have a Cassandra for a seer, so the Pythia will have to suffice. What can she reveal to us after we place our offerings in the temple of Apollo and she sits in her place of honor above the sulfurous vent at her feet?

There is a history in all men's lives,
Figuring the nature of the times deceas'd,
The which observed, a man may prophesy
With a near aim, of the main chance of things
As yet not come to life, which in their seeds
And weak beginnings lie intreasured. - Shakespeare, Henry IV Part II

In our analysis of the High Tech sector, we've seen that there are a couple of companies that are finding ways to grow (mainly thru M&A, though there is some organic growth, notably for Broadcom) and a few others that are shrinking (with a diseased IBM standing out from the rest.) The overall picture, though, is one of listlessness and sluggishness. Without a primary growth driver such as PCs, networking or mobile computing & communications, and with no fundamental breakthroughs in semiconductor technology that could revive Moore's Law, the High Tech market has stalled.

What can we say about the economy in general? The news gives us a very confusing and incomplete picture: the NYSE has achieved new highs and official government statistics suggest unemployment is so low as to be nearly inconsequential; yet home ownership, labor force participation, disposable income and wage growth are all at 30, 40 or 50 year lows. Clearly something is not right. 

Per my previous quarterly reports, I've used different measures as barometers of economic health - in particular, the BDI (Baltic Dry Index), which measures freight rates at ports around the world, and the two major commodity indexes - the BLS CRB and the Thomson Reuters-Jefferies CRB, which differ only modestly in their choices of commodities to be measured.

Let's start with the latest BLS CRB:

As reported previously, the index went into free-fall begining in 2014 all the way thru most of 2016. It has recently recovered a bit, but is still at levels not seen for a decade.

Now the Thomson Reuters/Jefferies index, bracketed to a 10 year range:

We can see the mid-2008 peak, a violent collapse to mid-2009, and then only a partial recovery. Paralleling the BLS CRB, the index turned down again in 2014 and staged another partial recovery at a lower level halfway thru 2016.

Finally, the BDI, again with a 10 year timeline:

For some points of comparison: the BDI opened at 1000 in January 1985. It's record high was 11793 in May 2008, with a record low of 290 on February 10, 2016. According to the above chart, it is at 688 as of February 14, 2017.

The conclusion is inescapable - the global economy never recovered fully from the 2008 banking crisis and is currently sputtering along at a near-comatose level of activity. As best as I can tell, the culprit is the debt situation with sovereign governments and multinational/TBTF banks and other financial institutions. Their combined leveraging is such that, despite global debt financing with interest rates at or near zero, there is precious little capital available for driving actual business investment and growth. 

Sadly, this situation is not without precedent. Japan is in its third decade of economic stagnation. After the late 80's RE bust, Tokyo coddled its banking sector instead of letting the poisoned commercial debt load clear thru bankruptcy courts. Japan's central government also initiated a cycle of chronic deficit spending. The result has been not only economic lifelessness, but net shrinkage of the economy by 40% when discounted for inflation. Sovereign debt is now 2.3x greater than GDP and is effectively non-serviceable. America is now closing in on a full decade of similar economic staleness, for the same reasons as Japan's. 

Invention, it must be humbly admitted, does not consist in creating out of void, but out of chaos. - Mary Shelly, in the introduction to "Frankenstein"

According to the Generational Cycle theory of history developed by the famous demographers Strauss & Howe, we are in a crisis period that comes around roughly once every century. Their theory suggests that the current turbulence in the fabric of society will resolve itself sometime around the middle of the next decade. However, the theory cannot hope to predict what form that solution will take.

As far as the High Tech industry is concerned, though, the way forward is clear. Technology has traditionally progressed thru the introduction of disruptive inventions which occur spontaneously from the sudden, even random confluence of a multiplicity of incremental advancements and innovations. The current doldrums becalming the seas of High Tech are not a new or singular phenomenon.

What form such a disruptive event would take is anybody's guess. Quite predictably, the IoT froth has substantially receded as 'smart watches' did not turn out to be the new smartphone-like driver. Work on further IoT applications proceeds regardless, so a disruptive technology flowering in the sector some time over the next 10 years would not be surprising. VR and digital eyewear such as Google Glass have also failed to materialize into the 'next big thing', but development and experimentation continues. Trial and error is part of the process of creation and is, per Nassim Taleb, vital to the 'optionality' nature of invention, making the process anti-fragile over the long term. Perhaps something that superficially seems very mundane will trigger the next wave of High Tech expansion. For instance: what if someone discovered a technique or methodology that made chip development at, say, the 10nm node cost 1/10th as much as it does now?

In the meantime, we must keep our eyes peeled to the far horizon as we maintain our lighthouse vigil. Perhaps the clouds and winds will forewarn us of what is about to come; perhaps a rogue wave will suddenly sweep ashore.

We shall have to wait and see. :-)

"Shipping off the Eddystone Lighthouse", Vilhelm Melbye, est. mid to late 1800's (source: Wikimedia)

---------------------------------------------------------------
Dear readers,
This is my first regular post in over a year. I have quite a few things on my plate at the moment, including efforts to spec out a software product for the industrial market which would serve as the basis for soliciting angel funding to develop, contract writing work and a sequel to my first novel, "Initial Conditions" (which, btw, is available at the link on the right upper sidebar; just click on it to go to the Amazon page - hint hint, nudge nudge ;-) .) Thus, posting on a weekly or bimonthly basis will be impossible. I will, however, endeavor to provide new content once every 4 weeks. With that in mind: what are some of the current issues in High Tech that you would like to see explored? So far I've received suggestions on 5G and MEMs, but would be happy to receive further inputs.

Ladies and gentlemen,

Welcome back!

I apologize for the extended absence of new content from this blog. That will be changing in the coming weeks and months.

In the meantime, I offer you the following as the latest of my writing efforts: a new book!

I just published my first Science Fiction novel. It's actually a critique of current AI research directions while also exploring future microelectronics technology, exotic physics issues and lots of other things.

https://www.amazon.com/dp/B01N5SHBGJ/ref=sr_1_1?s=books&ie=UTF8&qid=1485241471&sr=1-1&keywords=pete+gasperini

You will find each of the 25 chapters to be prefaced by a famous quotation that sets the stage for the chapter (old habits die hard, I suppose ;-). ) There is also an extensive appendix to explain some of the language choices as well as the scientific and engineering topics explored, as all of them are either theoretical or in their infancy.

My next post (which I will try to release in the next 2 weeks) will be a doozy: I'll be updating the financial data for the companies I previously tracked in my "State of the Union" updates. It will include fresh data for all the companies on the list, as well as changes due to M&A (such as the Lattice and Altera buyouts) and the HP split.

Again, welcome back, everyone! 

Some bold adventurers disdain
The limits of their little reign,
And unknown regions dare descry. - Thomas Gray, Ode on a Distant Prospect of Eton College

The Big Data Frontier - EBN

M.C. Poulsen, "John Colter Meeting Shoshones at Castle Rock" (Source: theautry.org)

Dear Readers,
This week's post is actually on Electronic Business News - an article jointly written by myself and Suhas Marathe, CEO of Cueris. You can view the article at this link:

http://www.ebnonline.com/author.asp?section_id=3836&doc_id=279221&

We'll return to our regular blogging after Thanksgiving.

https://www.youtube.com/watch?v=LQ961y0VKEk

High Tech "State of the Union", Q3 2015

Greeks sacrificing a boar, c. 500 BC, pottery collection of the Louvre (source: Wikipedia)

"An nescis, mi fili, quantilla prudentia mundus regatur?"

Don't you know, my son, with how little wisdom the world is governed? - Latin proverb, multiple attributions

In these last 19 months we've made quite a number of visits to Delphi to receive the augury of the Pythia regarding the future of High Tech. Though we have left gold in the temple of Apollo and brought laurel branches to the seance, we have consistently neglected one of the oracle's primary traditions - that of bringing a goat for sacrifice.

Animal sacrifice was widely practiced by the ancient Greeks who, depending on the diety to be appeased and the purpose of the ceremony, would bring deer, goats, cattle and other animals to the altar. The behavior of the victim before the sacrifice was considered significant, and reading the entrails afterwards was also thought to be important (a practice shared by the Romans, particularly in their reading of omens in bird organs before battle.)

Legends tell of the Greeks first learning sacrificial rites from Prometheus, the Titan who was a patron of Mankind, protecting mortals from the early machinations of Zeus and gifting them the secret of Fire stolen from the very halls of Olympus itself. Tricking Zeus by exploiting his vanity, Prometheus taught humans to leave only the bones and hides of sacrificed animals on the altar while keeping the edible parts for themselves.

Oral traditions passed down from Homer, however, tell of a darker period in Greek history during the era of the Mycenaeans, predecessors to what we consider the classical ancient Greeks. Before setting sail for Troy, Agamemnon appeased an angry Artemis, goddess of the hunt, by sacrificing his eldest daughter Iphigenia. Even after the war's genocidal conclusion, the Mycenaeans sacrificed Polyxena, youngest daughter of Priam, over the grave of Achilles, slain by a poison arrow from the bow of Paris, brother to Polyxena, in order to appease the angry ghost of the semi-divine warrior.

Fortunately, we no longer need to engage in bloody rituals to pacify deities and receive prophecies. In their place we have mathematics and statistics to guide our way.

From previous "State of the Union" installments, everyone is already well acquainted with the backgrounds of the 17 covered companies. This time the individual company commentaries will be brief and the focus will be on revenue data. Select macroeconomic indicators will be used subsequently to place the current state of affairs of High Tech in perspective against the general economy.

The Big Iron

Cisco is the pick of the litter in this group, showing relatively steady if uninspiring growth. The Q413 year-long dip was provoked by revelations of NSA tampering with Cisco hardware, with predictable consequences to international sales. The impact of new executive leadership is not yet evident in the numbers, and I suspect we will need at least a full year of fresh data before we can even begin making any assessments along those lines. Cisco's future is potentially wonderful - the IoT, automotive, robotics and AI all drive Big Data, which should play right into the company's hands and hopefully drive its growth more energetically. Naturally, time will tell.

HP is now officially two companies - a smaller Enterprise firm and a significantly larger & far less profitable consumer arm for personal computing and printers. Interestingly, all product revenues declined except for the Server group. Services, PCs, printers and Software are all 'sucking wind.' 

It is now 'do or die' time for HP - revenues have been steadily declining for 19 quarters, employee morale is terrible and privately held Dell is obviously regrouping in both personal and enterprise computing (as its $67B buyout of storage powerhouse EMC attests.) Perhaps the memristor/RRAM - based "Machine" will be the savior of both subsidiaries. Whatever HP does to rescue itself from its predicament, it had better do it quickly.

USS Essex under kamikaze attack off the Philippines, November 1944 (source: theatlantic.com)

IBM continues to slide, unsurprisingly, thanks to the most stunningly incompetent and willfully value-poisoning executive team in the history of private enterprise. As is plainly evident from the revenue graph, earnings are deteriorating at an accelerating rate. Ginni Rometty and her Keystone Cops continue to undermine the server hardware business - the very heart of the company - in favor of low margin cloud computing and analytics services which Rometty inexplicably describes as 'high value.' When asked about the fact that IBM's hardware business was decreasing faster than its 'strategic imperatives' were growing, she responded with the mind-boggling claim that the company has been shrinking these last four years 'by design.' And thru all this, the $1.5B stock buyback program continues unabated so that Rometty can reward herself and her staff for the bang-up job they're doing. Unless this executive team is replaced wholesale by the end of the year, I think we may be seeing the end of Big Blue - and from all self-inflicted wounds.

German battleship Graf Spee, burning and sinking after being scuttled by its officers following the Battle of the Rio de la Plata off the coast of Uruguay, 1940 (source: thewarillustrated.info)

Wintel

Intel has evidently recovered from its 1st quarter slump but continues to struggle with the albatross of the Personal Computing market strung around its neck. The decline in desktops, laptops and tablets has been at least somewhat offset by Intel's gains in the datacenter business. Nevertheless, with Microsoft making Windows 10 available for free, it is unlikely that there will be any near term recovery in the PC market. On the bright side, the Skylake CPU launch seems to be reassuring customers who had found the Broadwell line to be a major disappointment. The X-Point MRAM/RRAM project with Micron also holds much promise for the future. I remain cautiously optimistic about the long term prospects of the company.

Microsoft, on the other hand, has taken a decided turn for the worse. Once the clear strong horse of this pair, MSFT is smarting from revenue losses incurred by offering Windows 10 for free as well as from a 40% collapse in its mobile phone business. The Nokia phone acquisition turned into a total failure, and MSFT's main segment for its handsets is in very cash-restricted, low margin developing economies. It will be some time before the company will have an opportunity to reap higher gains from this niche with more advanced smartphone offerings. 

Despite these problems, the enterprise software and cloud services businesses are growing, as well as the subscription base for Office 365. Overall, Microsoft seems intent on diluting its consumer profile and is taking on an increasingly B2B character. In the short and medium term, I am expecting MSFT's revenue to enter a plateau much like that of Intel. The great strategic challenge that lies ahead is the contest between Surface Pro 4 and the iPad Pro for both consumer and enterprise markets. The stakes are enormous, as the winner of this contest will likely be the best prepared to champion and dominate an enormous future market where laptops, tablets and smartphones finally merge into a Portable Personal Processor line of hardware.

Area 51

Apple continues to define the future of computing with its iPhone 6/6s line. The above revenue curve is beautiful to behold. But there are clouds building on the horizon. The ADHD-addled press and fanboy pundits are oblivious to the fact that Apple doesn't appear to be much interested in talking about the Apple Watch anymore. Furthermore, iPad sales dropped 20% from last year. There are others who have seen thru the hype of Apple's financial talking points and have noticed indications of future weakness in the China geography. Details can be found at these links:
http://www.zerohedge.com/news/2015-10-27/apple-beats-sales-and-eps-misses-iphone-ipads-sales-china-slows-down-quarter-charts
http://www.zerohedge.com/news/2015-11-02/key-apple-supplier-halts-hiring-due-poor-iphone-sales

Perhaps the iPad Pro will revive the company's tablet fortunes and put Apple back on the path of discovering a product line that combines the laptop, tablet and smartphone markets in some sort of merged iPad/iPhone Personal Processor. Early reviews, however, suggest that the iPad Pro falls short of its principal rival, the Microsoft Surface Pro 4. As a consequence, my outlook for Apple in the near term is cautious, and, in contrast to the mentally deficient blabbermouths of the MSM, I suspect Apple's seasonal revenue spike in Q4 will fall short of last year's record (you heard it here first, folks.)

Google is now officially known as "Alphabet." The "Google" name now only applies to the search engine subsidiary, with all advanced technology research projects being treated in effect as a separate group of company-seeded startups. Alphabet's growth continues to be steady, but nonetheless not stellar - a increasing source of irritation to investors who continue to wait for an actual ROI from the company's many R&D projects. That growth should not be taken for granted, however - competition from Microsoft's Bing engine is maintaining pressure on Alphabet's advertising rates. In an effort to alleviate investor anger, Alphabet has announced that it will embark on a $5.1B stock buyback program. This is a particularly disturbing development, as it suggests Alphabet's executive lineup has developed the same disgraceful attitude of so many other corporate management teams who, lacking the necessary intelligence, skillset, dedication and ethics to grow the firm, decide instead to loot its value and line their own pockets. Because of this, I suspect Alphabet's growth will begin plateauing and anticipate a flat 2016.

The Vanara

As a whole, the programmable logic companies are not particularly interesting per se, but nevertheless serve as useful indicators of things to come. Xilinx and Altera gave notice 4-6 quarters ago that a downturn was in the making, and the fact that revenues continue to decline strongly suggests that this will become evident in the wider High Tech market and the global economy in general thru the last months of the year. 

Lattice stands out because of its steady growth against the trend. This has come about from an M&A effort of a strategic prescience rivaled only by Avago's purchase of Broadcom (see the May 29th editorial here: http://vigilfuturi.blogspot.com/2015/05/special-report-avago-broadcom-deal.html .) 

Lattice has grown its IP portfolio to include specific low power and I/F capabilities particularly suited for the nascent Robotics and IoT markets. I expect Lattice will perform comparatively better than its much larger counterparts during the near term economic decline and emerge from it much faster and stronger than its rivals.

The Carolingians

The above chart is unfortunately incomplete, as Infineon (red line) has entered an extended 'quiet period' and will not be announcing Q3 results until the end of November. Nevertheless, I will stick my neck out for the company and anticipate that it will report at least modest growth for the quarter. 

All three companies have a more or less identical strategic vision - that of avoiding highly price sensitive and high volume consumer applications in favor of specialized niches in analog, mixed signal, power management and MCU. The earnings differences between them are issues of finer granularity. 

Infineon is executing beautifully and has the advantage of a quasi-lock on the German domestic market. NXP is by far the most aggressive of the trio. Its merger with Freescale should complete before the end of the year and we will naturally witness a significant jump in revenues afterwards. The dutch firm has also been energetically divesting itself of product lines and divisions to sharpen its focus on value-added offerings for its target markets, yet has not shown a corresponding dip in revenues - an impressive feat. STMicro continues to be the 'sick man of Europe', though, as its serial quarterly revenue plateau suggests more than anything else that its deterioration will continue next quarter and perhaps even steepen. This is a company that needs an executive purge just as urgently as IBM. STMicro's executives do not seem to realize what it is to be leaders and are obviously quite content to function as mere administrative clerks.

The Stone Masons

Qualcomm, for so long a seemingly perennial champion in wireless semiconductors, is finally experiencing a swing towards the bottom end of the wheel of fortune. Based upon the company's R&D in Robotics, AI & the IoT as well as its growing interest in the datacenter, Qualcomm has indeed been preparing for the day that the smartphone market peaked and began to wain. The problem is that the peak in its established markets occurred before the R&D poured into nascent markets could bear fruit.

An aggravating factor is the targeting of Qualcomm by Beijing. Based on the open hostility of the Chinese central government to the California firm, China's handset makers likely feel a certain level of impunity in not reporting accurate sales numbers to Qualcomm and withholding payments. It stands to reason that they are also probably favoring the more culturally and politically well-aligned Mediatek for future designs. Several Chinese manufacturers are also busy developing their own applications and baseband processors, suggesting long term difficulties for Qualcomm in this largest of all mobile phone geographies.

I am still optimistic about the company's prospects in the long term. They are obviously not throwing in the towel on the future of mobile computing and are working to turn 5G into a standard that will be friendly to the company's own objectives in the IoT:
http://www.eetimes.com/document.asp?doc_id=1328175&_mc=NL_EET_EDT_EET_wirelessandnetworkingdesignline_20151104&cid=NL_EET_EDT_EET_wirelessandnetworkingdesignline_20151104&elq=484ad762fa7341c5aeac6893d14ca807&elqCampaignId=25598&elqaid=29127&elqat=1&elqTrackId=050dfaa889bf417297c948dda292ce34

Yet despite the evident MSM idiocy in reporting Qualcomm's Q3 as a 'good quarter', one can see from the chart that the firm is in real trouble. Executive management announced a 15% layoff mid-summer; however, based on Q3 results, the continuing downward trend in revenues and management's own guidance for more bad news to come, I suspect there are several more RIF's in Qualcomm's future. The smart near and medium term move for Qualcomm is to use some of that $30.9B it has in excess cash to buy one or more companies that can quickly push the company into other established markets. It is, in fact, surprising that Qualcomm has not done so already, at least for datacenter products.

Broadcom surprised everyone - including me - by having a strong Q3. This came about despite continuing weakness for the company in networking. The Avago merger should close in Q1 2016, at which point revenues should jump by 20-25%. That is not likely to hold, though, as the merger is bound to cause disruptions to the management hierarchy and multiple points of friction, with the inevitable result that the company partially takes its eyes off the ball. Depending on how poorly the combined Broadcom-Avago executive team handles this will determine whether 2016 earnings are flat or down.

Mediatek is showing some life again. Revenue growth is mostly in China, though net income is sliding due to ferocious pricing pressures from Chinese handset makers. I suspect that Mediatek has been growing in the China handset market at Qualcomm's expense, since the San Diego company is clearly considered by Beijing to be a mortal enemy of China's domestic technology sector. 

Mediatek's focus on the IoT and its attempts at fostering an expanding ecosystem have both increased. Thus, the company is reasonably well positioned strategically in terms of technology initiatives, culture and the extant political atmosphere. Whether this is sufficient to bring high enough growth and overcome the negative effects of margin pressure remains to be seen. One quarter of good financial data is not enough to determine a trend.

Nvidia reported record quarterly revenues. All their growth, however, was in graphics chips and cards. The other product lines - professional graphics, datacenter and the Tegra line - all shrank. One can hypothesize that the slowdown in PC sales is provoking desktop and laptop owners to upgrade their current machines as they see fit rather than buy new tricked-out systems, leading to higher graphics processor sales for Nvidia. The company continues more than ever before to be a one trick pony, despite its many and lengthy R&D efforts. Investors are going to lose patience with Nvidia management one day, just as they are beginning to do so with Google/Alphabet. Something further to take note of: going into the holiday season, Nvidia is forecasting flat revenues. I find that to be very revealing indeed.

Thucydides

Athenean amphora c. 530 BC (source:mfa.org)

For the love of gain would reconcile the weaker to the dominion of the stronger, and the possession of capital enabled the more powerful to reduce the smaller cities to subjection. - Thucydides, "The Peloponnesian War"

The Persian invasion of Greece came to a definitive conclusion in 480 B.C. on the plain to the east of the tiny city of Plataea, where a combined 50,000-60,000 southern Greek hoplites, led by large contingents from Athens and Sparta, utterly routed a 360,000 man Persian force (half of whom were northern Greeks from territories under subjugation to the Persians and who were, shall we say, less than enthusiastic about being there.) The war was such a tremendous experience for the Greeks that, for a while, it united them spiritually as a people and initiated their Classical Age, producing famous historical figures such as Aeschylus, Sophocles, Aristotle, Herodotus, Xenophon and many others who generated art, literature, philosophy, science, architecture and sculpture that inspired cultures across Europe, North Africa and the Middle East for another 2400 years and counting.

"Non semper erit aestas."

It will not always be summer. - Roman proverb

Yet as Greek civilization blossomed splendidly at its zenith, the seeds of its demise were being sown. The Delian League, led by Athens, continued warring against a staggered Persian Empire, conquering territory in northern Greece and along the coast of Asia Minor, ejecting the Persians altogether from the Aegean and vaulting Athens into dominance, its maritime empire controlling roughly 1/3 of mainland Greece and the entire coastline of the Aegean Sea along with all its islands.

Athens succumbed to the vices and temptations of runaway success and began to exercise oppressive control over previously independent Greek cities and towns, even extracting tribute from former allies. Resentment, fear and envy began to build throughout the Greek world, culminating in a fateful gathering of the Peloponnesian League in 432 B.C. Egged on by Corinth and other Greek cities with their own ambitions and grievances against Athens and reinforced by recent arrogant imperial actions by the Athenians themselves, the Spartans took counsel of their fears concerning Athenian hegemony and declared the long peace to be at an end. 

And so did the Golden Age of Greece come to a close to begin a long tale of woe, where first Athens and then Sparta fell, neither to ever recover their former glory, while Greek cities rapidly entered and exited alliances of convenience as Thebes, Corinth and eventually Macedonia vied for hegemony over a war-torn and desperately impoverished Hellas. Battles, massacres, genocides, revolutions, assassinations, cruelties and injustices followed one upon the other beyond counting, until the Roman consul Lucius Mummius finally put an end to it all nearly three hundred years later by razing the city of Corinth and absorbing all of Greece into the Roman sphere.

Though clearly not as sanguinary, High Tech's participating firms are entering a comparable historic period, busily consolidating into larger competing entities and engaging in ruinous, margin-crushing price wars. M&A for Technology firms in 2015 has already surpassed $100B, a higher level than the previous six years combined:

http://www.eetimes.com/document.asp?doc_id=1328108&_mc=NL_EET_EDT_EET_socdesignline_20151029&cid=NL_EET_EDT_EET_socdesignline_20151029&elq=11a9c98bb10941bd8178559691a0dc0b&elqCampaignId=25480&elqaid=28976&elqat=1&elqTrackId=d9ed899a476a407486f054828f118c15

We've already reviewed or reported on some of the bigger acquisitions that have happened during the year - Broadcom and Avago, Altera and Intel, Freescale and NXP and so forth. There are quite a few others, however, which have completed, are in process or are reputedly being negotiated:

 - Dell & EMC

 - Global Foundries & IBM's microelectronics group

 - Dialog & Atmel

 - Microsemi & Vitesse

 - Infineon & International Rectifier

 - Avago & LSI

 - KLA-Tencor & Lam Research

 - Microsemi and Skyworks bidding on PMC-Sierra

 - ADI and TI pursuing Maxim (rumored)

 - Western Digital & Sandisk

 - Infineon & Fairchild (rumored)

What we've also touched on in recent editorials is the strategic priority for Beijing in becoming self-reliant in High Tech, from the foundry level up to systems. Government-backed Chinese corporations and holding companies have bid on or executed several deals this year and further activity is virtually assured:

http://semiengineering.com/what-china-is-planning/

Converging with this trend are (1) the general decline in High Tech revenues and (2) a heavy round of layoffs across the industry. HP alone announced 30k in headcount reductions and Sprint is putting together a $2B expense cutting plan to be implemented by the end of January which will cost 'several thousand' people their jobs. To be explicit, it would not surprise me if, after the M&A surge tails off and the smoke clears, up to 100k High Tech employees will be out of work.

So little pains do the vulgar take in the investigation of truth, accepting readily the first story that comes to hand. - Thucydides

Bouyant (and supremely deluded) forecasts at the beginning of the year for 5%+ growth in semiconductors have, as predicted in previous posts, turned sour. Hype-prone IC Insights is now predicting -1% and Gartner is also projecting a 1% decline from 2014. I suspect the SIA/WSTS, late to the party as always, will follow suit before the year is out.

As one can see from the charts above, many of the industry-leading companies examined are shrinking or struggling just to stay even. Of the very few genuine growth companies, all but Lattice (and maybe Infineon) are quite obviously at risk and sailing into rising headwinds spawned from the end of the spectacular growth of mobile computing. 

All of this data stands in stark contrast to articles filed by the MSM during this quarter's financial reporting season. The published stories by and large reflect the posturing and positive spin of company executives. The fact that their verbal dreck is accepted passively or even occasionally reinforced by members of the financial press suggests either willing and active participation in the deception or profound vapidity on the part of the reporters.

"Historia est vitae magistra."

History is the tutor of life. - Roman proverb

And what of the global economic environment? Some would say that the height of the Dow Jones is all the indication one needs to assess the relative health of the economy. We all know better at this point, as the reason why the S&P and Nasdaq have done so spectacularly well has been covered in previous "State of the Union" reports, along with the deceptions in BLS employment statistics.

Let's return to the favorite measures we've used in the past - the CRB (both classic and Reuters-Jefferies) and the BDI.

First, the classic CRB going back to 1947:

As we can see, the index has been in near continual freefall since early 2014.

Now the Reuters - Jefferies CRB, from May 2008 to today:

  

The commodities mix is somewhat different and the scale is logarithmic, but the story is still nearly identical - a 'dead cat bounce' from the 2008-2009 recession to early 2011, then a steady decline until early 2014 with a steepening drop afterwards.

Finally, two versions of the BDI - a 3 year chart:

And the BDI from May 2008 until today:

Some observations:

1. The three year BDI shows the improvement in shipping rates that resulted from a mass retirement of old freight haulers in 2013. Note the very clear downward trend in the data that followed, as well as the truly piss-poor level of the index today - a period that should be experiencing a sharp spike for shipping final product to retailers for the holiday season. One can readily deduce that the happy-smiley MSM reports of most retailers breaking with the practice of opening on Thursday the 25th has nothing to do with executives wanting their employees to spend time with families on Thanksgiving but rather their expectation that low customer turnout this year will make paying workers overtime on Thanksgiving day pointless.

2. The logarithmic scale on the Y axis for the longer graph again compresses the peaks in the data. Nevertheless, the trend is clear - after the May 2008 all time high of 11k+, there was a severe crash in shipping rates which has been bottom-bouncing ever since, with spikes of steadily decreasing magnitude.

"Bene diagnoscitur, bene curatur."

A disease known is half cured. - Roman proverb

The 'time of troubles' is upon us, dear readers. Rare as the Koh-i-Noor are generations that experience no major trials during their lifetimes. But no one enters the field of High Technology without becoming reasonably inured to stress, difficulties, disappointments and severe tests of fortitude.

Before we emerge from this tempest, we will have to sail over its boiling mountains of water and canvas-shredding blasts of wind. I have colleagues who, most encouragingly, are finding that their 20-something direct reports are proving to be much more willing, capable and hardy than the way Millenials are being portrayed by the MSM. They do not seem to be wilting as they hear the first gales howling thru the lanyards and great waves roll up and crash into the bow. Yet it is the old sea salts who will need to guide the efforts of the novice swabbies and who will make the greatest difference in surviving this storm - those veterans of 15 or more years who bear the scars of many a battle with Poseidon and his monsters of the watery abyss. This essay is primarily directed at you, my fellow swashbuckling mariners, and I charge you with this duty:

"Ductus Exemplo."

Lead by Example. - Roman proverb

Greek Trireme on the Nile, section of a Roman Mosaic, 1st century B.C. (source: gettyimages.se)

https://www.youtube.com/watch?v=QVgS03XLWwE

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Dear Readers,
It has been suggested to me that some of my readers would benefit if I wrote much more detailed reports on individual companies. If any of you agree, please let me know; also, please indicate which companies would be of greatest interest. In order to keep your interests and preferences private, feel free to send me a message on LinkedIn. :-)