Thursday, May 11, 2006

Over Reaction

I thought at late november that the market for x86 microprocessors this year was going to be stellar. There are some phenomenons taking place that pretty much guaranteed it:

  • The convergence between entertainment and computers
  • The launching of Microsoft Vista
  • The increasing market for home editing of digital video with its huge demands of raw performance
  • The impressive strentgh of the digital audio market
  • Growth of the digital photography market
  • The development of all the normal computing needs
  • The growth of China and India markets for technology
  • The growth of mobile computing.
Some of these principles would operate on the consumer side, some others on the server side. For instance, the heating of the competition struggle between Google, Yahoo, and MSN search engines guarantees growth in the market for servers. Leading edge games keep requiring 1+ K$ microprocessors, etc.

Since AMD was in a much better position to benefit for that clearly defined bullish market for its products thanks to the abysmal all-around advantages they have over the competition, the easiest investment was AMD, which climbed like a rocket up to a multiyear record of $42. But then something happened, and came back crashing to levels it had *before* its two greatest quarters: 2005 Q4 and 2006 Q1.

I feel the need to explain what happened.

Right now, by coincidence, it is happening the collapse of not one, or two market Bellwethers with a lot of influence on the microprocessor market, but three! And what kind of Bellwethers: Intel, Dell, and Microsoft!

They are so important that I won't abuse my audience's intelligence summarizing them.

So, the market for microprocessors became shit for the year.

AMD is healthy, strong, growing; but right in the middle of the trio.

Intel is trying desperately to preserve the monopoly, betting all what is left of its credibility at the success of at best mediocre bloated products that try to accomplish by brute force what AMD's products do through sound design. Finally Windows collapsed under its own weight and Microsoft hasn't been able to build anything else on top of it after five years of trying (!). And Dell...

Let me tell you about Dell. Unexplicably some years ago they decided not to care about the customers, yanked the technical support to make an extra dime, which in reality made them slide a bit. To compensate, Dell decided to cheapen the products diminishing quality. Then the slide became worse, and then they decided that they were going to "compensate" by fooling the consumers with rebates and warranties impossible to execute, manipulating the accounting books at earnings, and not giving the customers what they want - AMD. Perhaps the uncompetitiveness of Intel processors was the last straw that broke the Dell's back, they are now in a terminal collapse. Please, members of the honorable audience, I need to understand why this all began, post a comment.

Going back to Microsoft, it finally hit the wall of complexity. I would say that Windows finally collapsed under its own weight, Windows is a staggering collection of patches. See the bottom of this post for a better description of Windows problems.

Anyway, these three former Wall Street darlings really lost status seriously. All three of them insist in the very ways that got them in the hole, with increasing degrees of desperation. Thus they are doing truly stupid things, and the net consequence is that the market for computers became shit.

Microsoft doesn't provide a needed 64bit operating system for the masses, thus what would be one of the greatest current advantages of AMD became irrelevant. Dell is dumping its products, thus damaging the market for all other players. And Intel is doing everything in its power to prevent AMD to become stronger.

I concurr with the opinion that Wall Street's Market Makers have a lot of clout in the financial media. This is important because due to tradition, history, and amounts, Intel, Microsoft and Dell are companies for which the Market Makers will go the extra mile to protect.

That's bad for AMD: The MM can't even allow the public to have the perception that there is a creditable supplier of 64 bits ยต-procs, because that would mean that Microsoft has just been incompetent at Vista and at providing drivers for XP-64. So, on top of a bad market, this company will have to endure a lot of media flak.

Finally, the money at AMD is very weak. This is a company with an awful record as an investment, basically it has given zero returns. It doesn't have a really solid trajectory of earnings, in the past it has conquered the technological leadership only to crash harder than Intel with the 2000 bubble; all things that provide lots of fears and worries to the investors every time a credible threat shows up.

When there is just a bit of nervous selling, these fears scale into a multiple percentage points sell off. Since temporarily the stock becomes severely undervalued, the reality of the fundamentals make it rebound, to produce a roller coaster ride.

That's why the market overreacts in both directions.

I have the special benefit of really understanding the technology behind these products, thus I am in the position of independently coming up with an assessment of the chances for this company. And my verdict is bullish, very bullish, in fact.

I realized that I became an "early adopter", which means that I am in football terms in "off-side", ahead of where the market is. In any case, I feel comfortable buying deep on margin the shares. To benefit from my understanding of the turbulence that surrounds this company, I am writing monthly slightly out of the money covered calls. This is my second month employing the strategy with success.

In case you don't know much about options, a covered call write is when the holder of shares backs up with them the written call contracts. If the price goes down, then the fee obtained by selling the call contracts mitigates the losses on the shares, if the price goes up, but below the contracts' strike price, it is all gains for the writer. Thus, this strategy doesn't give money in short-term spikes up, gives money in slight growth or decline, and is wide open to crashes in the stock price. But I am not afraid of AMD being a bad long term investment, so I happily incurr in that risk.

WINDOWS: This is the explanation about Windows. Windows was based in good ideas that became corrupt thanks to the emphasis Microsoft wanted to give to certain features in certain circumstances.

For instance, NT3.51, a "serious" operating system, had the hardware properly separated from the operating system. But by the time Microsoft wanted to launch NT4, it was clear that Microsoft didn't have a good contender to Unix, just a well received User Interface (the one of Windows 95), thus it had to make sure that NT4 had the W95 U.I.; but the hardware separation, vital to have a robust Operating System, made that much harder to have the fast and fancy Windows95-like user interface for NT4, thus Microsoft broke the separation and included deep into the kernel some graphical issues. Thus NT4 became vulnerable to problems in the graphics hardware.

In Windows there are three processes that must collaborate for every application to run, including the one that controls the user interface. That is an idea that is not bad per se, but in Windows it was taken to a degree, and distorted in a way that made the operating system almost inoperant because all applications are catastrophically vulnerable to all those complex processes interoperating. For instance, have you noticed how when your computer gets in trashing because it doesn't have enough RAM memory for a demanding application, you basically can't fire up the Task Manager to kill the application because although the system is in trashing, yet the Task Manager is requesting more memory to load the graphical widgets it needs? Thus there is no way to actually execute an important operating system service such as killing a process when you need it the most.

There is also the issue of security. Since all software produced by Microsoft disregards good software practices (because of marketing reasons that have proven correct), it became a tower of patches that no one would ever be able to audit, with more security holes than a colander. The only approach that would work to solve this issue would be the
tabula rasa, but Microsoft doesn't dare.

Vista is a nearly perfect complement in Software to Intel's V//V. A brand, or name, that really doesn't tell you nothing about what is it. Nobody really knows what is it either, it is just a marketing buzzword. What are the problems, defficiencies, or innovations that Microsoft is going to put in play with Vista?

I had one idea: It was natural for Microsoft to make use of the opportunity to really clean the Application Programming Interface (the set of services the O.S. gives to the applications, the very definition of the O.S. itself) to make it up to current standards in reliability, security, stability; and of course, implementing new and exciting User Interface ideas. But no, it seems that Microsoft chose to do XP service pack 3 and call it "Vista" (by the way, XP itself may be thought off as a Windows 2000 service pack).

I wrote a premonitory article in January about Vista and Microsoft, it is still vigent


Anonymous said...

I'm not quite sure what you mean by the following sentence:

"Finally Windows collapsed under its own weight and Microsoft hasn't been able to build anything else on top of it"

can you please elaborate that?

Anonymous said...

The market thinks ahead and had already factored in the Q4/Q1 good results hence the $42. Now they are thinking of the future again and so are downgrading them, rightly or wrongly. It is nothing to do with Intel, MS or Dell being weak.

Eddie said...

The market in technology is the most myopic thing I have ever known. AMD got to $42 on pure momentum, and the momentum (overreaction) ended as soon as Intel announced that Conroe supposedly would beat anything AMD could put in the market this year.

Your claim of the farsightedness of the market doesn't hold: AMD beat the expectations by a huge margin and the stock shot up to $42, then AMD *again* beat the expectations, but instead of climbing it went down because most holders waited until after earnings and guidance was too conservative, provoking a sell off.

Eddie said...

As an AMD investor, I sincerely desire Intel, Dell, and Microsoft to do good on the stock market. Some analysts said that Dell's bad news were good news for AMD, but I wrote "in the money calls" knowing that another plunge was looming. Sure enough, I covered with close to 80% gains

Anonymous said...

Is it my impression or the good publicity around Intel, platform wise, as to do with Apple. The aliance with Apple can save Intel in home Media centers and mobile space.
They must have paid a lot to get Apple but they are getting a good return.