The Weekly Sample

Articles and News

While we are sector focused, not macro focused, it is difficult to write about last week without acknowledging the massive structural changes in American finance currently underway; the ultimate ramifications of which are totally unknown. We are witnessing a de facto nationalization of the American investment banking industry, financed by the full faith and credit of the United States government.

I’ll take the risk of editorializing in an area which I am marginally experienced and indicate my preference for minimal government involvement. The US Treasury is setting up what I like to refer to as a “Superfund” program for financial securities, with $700B earmarked to buy what were once valuable securities now considered toxic waste. Never has this cliche been more appropriate: When a person with money meets a person with experience, the person with the experience leaves with the money and the person with the money ends up with an experience. The government has a lot of money and Wall St. is very experienced at taking it.

Yet, the financial risk to the taxpayers and bondholders is far outweighed by the systemic risk of rapid and enthusiastic government activism in financial markets. The intersection of crisis, markets, and politics is a totally unpredictable process. All I can say is: Hope for the best, plan for the worst.

Nortel was the designated Chernobyl stock of the week, following Time Warner Telecom last week and Ciena the week before. It was down –44% for the week (not a typo, I didn’t miss a decimal point). In a move I find inexplicable, Nortel announced its intention to sell off it’s core Optical and Carrier Ethernet division. The announcement was made in quite possibly one of the worst liquidity environments of the last 80 years, with no indication a buyer might even exist.

Selling a major niche business isn’t like selling a house – one morning you don’t walk into your front yard and stick a For Sale sign next to the driveway. This announcement will cripple Nortel’s ability to compete, further exacerbating a tough situation. Alcatel/Lucent encountered significant customer traction problems AFTER their merger announcement. Nortel has put themselves in the same position PRIOR to having a deal, without a timeline for closure. Customers now face an unquantifiable risk when selecting Nortel as a vendor. This was the worst of a number of options the company had, and clearly reflects the seriousness of the situation in Ottawa. That a company with such talented engineering could find itself in this position is sad and I can’t imagine the frustration felt by many of the employees there. Nortel is well on the way to becoming Canada’s Digital Equipment Corp (DEC).

The warnings written in my letter last week about the importance of liquidity over technology have taken on greater meaning given the events of last week. Easy money for this sector is over. This is good as it will force the final round of changes to “purge the rottenness from the system” (note: this quote has been radically abused in the past week and I use it in an effort to educate readers – follow the link). The process of getting there will involve yet more pain, as Nortel shareholders discovered this week.

On a lighter note, participation by component and equipment companies in our ongoing Asian focused FTTH report has been excellent and we can’t thank folks enough for the high participation rate. I’ll be traveling to California next week for four days of meetings (14 meetings, to be precise) with one in Southern CA and three in Northern CA. If somehow you feel you’ve been missed, contact us.

Links

Light Reading - Nortel to Sell Carrier Ethernet, Optical Biz

What is next - the family jewels? Nortel may want to sell but who is the buyer? Why not just spin it off? And why pre-announce you are selling so competitors can bury you in the ground? There are no angrier people in this industry now than Nortel carrier salespeople;Their job at this point must be impossible. This decision indicates that things inside Nortel are worse than people believe.

Lightwave - Making the case for WDM-PON

It appears to me that the only people touting the benefits of WDM PON are WDM PON vendors. The reality is it requires 2x the optics of standard PON for no tangible benefit to carriers. What am I missing here?

WSJ.com : New Reason to Raise Taxes on the Rich: 'Patriotism'

This brings to mind the famous Samuel Johnson quote:

Patriotism is the last refuge of a scoundrel.

Landline Use Continues Slow Death - 20M U.S. residents now cellphone only…

Just imagine what a consumer recession is going to do to landline disconnects. Many strapped consumers are more likely to disconnect their land line than their cell phone at this point.

Chambers `Never' More Comfortable With Cisco Outlook : Bloomberg

Continues to predict 12-17 percent revenue growth. Investors gravitate towards the 17% number but reality is more towards the 12%. Continues to beat the video drum.

MarketBeat : Investment Banks, By the Numbers

The velocity of money is rapidly dropping.

Debt, equity and equity-related underwriting, 1H08: $3.045 trillion. 1H07: $4.782 trillion.

Market capitalization of the five investment banking firms as of 1/1/2008: $237.22 billion. 9/15/2008: $115.27 billion.

Net revenues at Goldman Sachs, 3Q07: $12.334B. 3Q08: $6.035B.

Pew/Internet - Home Broadband Adoption 2008

Report compiled by the Pew foundation on internet use and penetration stats in America. Wireless broadband on the rise, FTTH less than 2%, dial up penetration down to 10% and only 1 in 7 of remaining dial up users want broadband.

Unstrung - Verizon Wireless: Rise of the Machines

90 percent of the devices that are in the Verizon Wireless open access certification process are actually focused on machine-to-machine (M2M) communication. The first steps in the death of coin operated machines are being taken.

Lighting Up Next-Gen Nets

Excellent overview of power supply issues with FTTN and FTTH equipment. A single AT&T Lightspeed remote terminal uses as much power as a small home. Carriers looking to use 190V line power over legacy copper. Fuel cells… 5 pages of crazy stuff.

GigaOM Interview: Bill Hambrecht, Legendary Silicon Valley Banker - GigaOM

Shakycam interview. On the liquidity crisis: “I don’t think it will have much of an impact on Silicon Valley as an operating entity. What is going to be interesting is what happens to the underwriting/IPO market.” Tech IPOs will become even more tough.

Nyquist Sector Performance

Last weeks trading activity can’t be summarized in a neat and tidy fashion, and the weekly summary of the Dow and Nasdaq fail to capture the +/-10% volatility. There were large dislocations in several stocks, particularly as fear plumbed new lows on Wednesday afternoon and Thursday morning, and as exuberance reigned on Friday. Even with the uncertainties of last week median volume was only 1.4x normal. This was not a ‘clean out’ week.

Nortel picked a really bad week to make their announcement and dropped 44%. It consistently sold for $25 a share up until a year ago. Today it sells for $3, lower than even the lowest of the dark times of 2002. People in the business know how bad 2002 was and the market believes things are worse now.

There were some very odd events last week. Sycamore suddenly became important again on Thursday (+15%) as investors rediscovered the attraction of cash and decided SCMR stock was less risky than a money market fund, something that reversed the following day. Volume was 2.6 times normal.

Finisar had the opposite happen – the stock dropped 25% on what I believe were concerns over short term debt maturities, only to violently reverse Friday.

The rest of the market can be summed up neatly: the stocks that rallied on Friday and those that didn’t. There was no common denominator that allowed classification of which stocks performed well and which did not and I won’t attempt to manufacture one. It’s a very emotional market and things are far from settling.

To learn more about the Nyquist Index, including historical performance and what companies are included, please visit the dedicated page for The Nyquist Small/Mid Cap Index. It identifies the companies that make up the Nyquist Index universe and the methodology behind the calculation of this benchmarking tool.

Upcoming Events

Sep 29- Oct 2 – FTTH Road Show - California

October 7 – Finisar Analyst Day - NYC

Oct 20-21 - Lightreading Ethernet Expo - NYC