California's GDP would make it the eighth largest economy in the world. It's current account deficit is $26 Billion [or $15 billion if you throw in a few accounting tricks].

BBR's (Bapcha's Bond Ratings) CA Bond Ratings looking forward twelve months: 100/100. We expect CA to substantially meet all of its fiscal obligations by doing whatever it takes to keep their ratings.

As a partner of [company name deleted - as it was recently formed], I attended the Analysts’ Day at nVidia (NVDA) on June 16, 2009.

Highlights:
1. nVidia is convinced that the future belongs to a new architecture in which both a CPU and a GPU share the tasks that they are more appropriately designed to perform. Jen-Hsun Huang likened the use of a CPU to perform all functions to the use of a Bugatti Veyron’s 1001 HP engine for city commutes [generates a lot of heat].

Among the companies that we looked at in the prior article, many can be eliminated with ease. So, let’s get the job done systematically.

a. Applied Materials (AMAT). With pristine financials and the enviable position as the #1 purveyor of machines that the semiconductor industry needs to make their chips, Applied flies through the initial screen.
b. nVidia (NVDA). With little debt, and already having survived a brush with bankruptcy, nVidia is flush with over a billion in cash, and a winning portfolio of graphics chips and cards. nVidia gets through the initial screen too.
c. Silicon Storage Technologies (SSTI). This one is a little harder. This manufacturer of NOR flash is extremely tight fisted [and I like that]. Their off-balance sheet assets easily exceed the company’s current market value. Add to this, a steady stream of royalties [$30 to $40 million per year], SSTI squeaks through the initial screen.
d. SanDisk (SNDK) - I have this eerie feeling that this is the only memory chip maker with the possible chance of making it to the final five.
e. Lam Research (LRCX) - has done well in the last few years, and has decent financials, but they are looking at several very difficult years ahead of it. Lam does not make it through the initial screen.
f. Novellus (NVLS) - similar to Lam.
g. Kyocera (KYO) - this maker of ceramic packages for chips is flush with cash, and has survived Japan’s nuclear winter through the last two decades. They sure need a break.
h. Intel (INTC) - the #1 chipmaker is still profitable. I am sure it will make the top five.
i. Texas Instruments (TXN) - has a chance.
j. Linear Tech (LLTC) - with gross margins in excess of 70% and a current yield of over 3.5%, Linear is sure of making it to the top five.
k. Maxim (MXIM) - with a current yield of 6.5%, a billion in cash and no debt, and gross margins close to 60%, maximum gets through round one with ease.
l. Marvell (MRVL) - This one gets a reject due to corporate governance issues.
m. Broadcom (BRCM) - Yes. These guys easily make it through round #1.
n. Altera (ALTR) - with gross margins in excess of 60% and a history of profitability, ALTR makes it through round #1 with ease.
o. Xilinx (XLNX) - numbers are similar to Altera’s and with excellent products and software.
p. Lattice Semi (LSCC) - CUT.
q. Actel (ACTL) - CUT again.
r. Micron (MU) - CUT. No need to explain things here.

Semiconductor sales for 2009 will be down anywhere up to 25% from about $250 Billion in 2008, and with sales exceeding 2008 levels only in 2012 or 2013. The ASP [average selling price] for all memory makers is in the trash, and for high-margin companies like Linear (LLTC), Maxim (MXIM), Analog Devices (ADI); their sales to automobile companies has evaporated. Currently, the only company making real money is Intel (INTC). In fact, if Intel had not entered the flash business [through the IMFT joint-venture], they would be making even more money.

Which beings us to the still-profitable niche players - like Altera (ALTR), and Xilinx (XLNX). But, even in this niche, Lattice (LSCC), QuickLogic (QUIK), and Actel (ACTL) are just surviving.

I will not rehash any of the financial information that anyone can find at the ISRG website or at the SEC database. This article’s focus is my take on ISRG’s management, their tools, technology, and the chances that anyone else can beat them. Read on...

April 22nd 2009 was Intuitive Surgicals’ investor day. Apart from a rehash of numbers from Q1 2009, and a predictable slate of votes, there was much to be impressed about, and I learned a lot more than I thought I would from the meeting.

What was cutting-edge back in the 1970s - in the days of mainframe computers and centralized computing - is new again. I am talking about virtualization. The current version of virtualization is significantly different in that the computing equipment need not necessarily be centralized. In fact, in its current iteration, distributed “clouds” of computers can be configured to work as a virtual server, or if there is an excess of centralized computing power, that can be fractioned into multiple servers. The only down-side of virtualization is that the administrator of the data center cannot go to a box, look at the status LEDs and monitor the console, kick it, whatever.

The most elegant solution to managing these “clouds” is already on the market care of the near-forgotten ex-manufacturer of software for mainframes, but now blazing a new trail for themselves - BMC Software (BMC). But I will cover that in a following article.

On Friday, I was looking into a few large-cap stocks to trade, and came up with a one-shot almost risk-free way to make 10% on one’s money in two months. After I was done, I realized that it was the same thing as a “split-strike trade” wherein you combine a stock and two option trades to make the down-side a fifth of the upside. The whole “strategy” was valid for five minutes - the market adjusted to remove this inconsistency before I could place a trade.

If you are a large market maker, with access to instant efficient execution of trades, yes - you can occasionally make money using a split-strike strategy. For starters, one needs to be a non-newbie investor to even understand this strategy on paper. A more sophisticated investor *knows* that money can be made using this strategy. Throw in the operations of one of the larger market makers, and it is easy to take the next logical mental step that one could consistently churn out positive returns in the market. Add to this a whisper campaign that you are front-running your order queue, and the further sophisticated the investor, the higher the chances are that one can actually place a value on front-running the market.

<<<Return to part 1

Among the companies that we looked at in the part one, many can be eliminated with ease. So, let’s get the job done systematically.

Friday morning, Gartner (IT) and IDC had sobering news for the semiconductor business. Sales for 2009 will be down anywhere from 15% to 33% from about $250 Billion in 2008, with sales exceeding 2008 levels only in 2012 or 2013. ASPs [average selling price] for all memory makers is in the trash, and for high-margin companies like Linear (LLTC), Maxim (MXIM), Analog Devices (ADI), their sales to automobile companies have evaporated. Currently, the only company making real money is Intel (INTC). In fact, if Intel had not entered the flash business [through the IMFT joint-venture], they would be making even more money.

Which brings us to the still-profitable niche players like Altera (ALTR) and Xilinx (XLNX). But, even in this niche, Lattice (LLTC), QuickLogic (QUIK), and Actel (ACTL) are just surviving.

The Gramm-Leach-Bliley [GLB] act repealed Glass-Steagall [G-S] - which was the law of the land here in the USA from 1933 to 1999. G-S created the FDIC, and prohibited large private banks - whose primary business is the investment business - from receiving deposits from the public. In fact, one in five banks failed during the great depression. Senator Carter Glass and the Congressman from Alabama Henry Steagall wanted to create a system to gain the public’s trust so as to not ever have a run on banks [which received much coverage in the press - even without television or the internet].

In the nineteenth and early twentieth centuries [and after GLB], bankers and brokers were indistinguishable. Then, after the Banking Collapse of 1933, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the years prior. There were TWO G-S acts passed in 1933. The second G-S act was called the Treasury Act of 1933, and was passed on the 16th of June, 1933. Hearings back in 1933 revealed conflicts of interest and fraud in many banking institutions’ securities activities [the more things change, the more they stay the same]. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act - [only to be pissed away in 1999, by GLB].

When Intuitive Surgical (ISRG) traded at a PS of 10 and a P/E of 75, I opined that ISRG is worth a look if the P/E drops to below 25. Much like Cisco’s (CSCO) fall from grace that was brief, back in 1994, CSCO went up in value fifty fold after that [from 1993 to 2000]. While Cisco from the 1990’s is similar to ISRG today, the differences are huge too.

For starters, ISRG has a competitive edge over any offering from Medtronic (MDT) or JNJ - who remain ISRG’s biggest rivals that can out-spend or buy out ISRG. Intuitive Surgicals’ daVinci is protected by hundreds of patents in the fields of electrical, mechanical and fluid engineering; and has created a new genre of minimally invasive robot-assisted surgery (MIRAS).

Back in Sep 2008, I wrote that Apple (AAPL) was losing its mojo [the stock was at $140 back then]. I argued that apart from doing a lot of things correctly, Apple was guilty of doing a lot of things incorrectly - which led me to question/pick on Apple’s mojo. Here’s the list:

1. Not being brave when updating the Nano.
2. Slighting their faithful.
3. Not marketing iPod Touch as a MID.
4. Gravitating towards proprietary hardware.
5. Once again, thwarting generics [which did them no good the first time around].
6. The Cult of Jobs - dependence on one single person.

Apple’s marketing department did fix #3 and the iPod Touch is marketed as a MID and then some. But Steve Jobs’ temporary exit from the helm for health reasons has the stock down some 7% after-hours Wednesday. The stock went down 5% when Jobs was rumored to have died. I have a deep dislike for rumor and innuendo - especially when it applies to the life of a human.

Since the decimation of Satyam Computers (SAY) is now complete, it is game over for SAY stockholders. Or is it? When it applies to asset preservation, the company has been quite slow to act. All of the former promoters/board members are gone, and for someone in the US who owns the ADR, there is zero recourse [not that Madoff investors did any better]. At the minimum, Maytas Infras and Maytas Properties must be integrated into SAY - so that the now beat up stockholders can get something for their billion that never was.

My proposal to save what is left of SAY:

If I told you that there is a Swiss Biopharmaceutical Company that has an enviable success record that even Genentech (DNA) would be proud of; that it was founded in 1997; has revenues in excess of a billion dollars a year; gross margins in the high 80s; and that its stock has not lost any value if you held it from Jan 1, 2008 to today; and while Fidelity owns 6% of the outstanding shares of the company, it is tracked by TWO US based analysts (that includes me), could you name it?

It has partnerships with Glaxo SmithKline (GSK), Hoffman LaRoche, Merck (MRK), and its most significant future product candidate is an orexin receptor antagonist/almorexant that is supposed to restore sleep. In other words, it will be [if successful], the next best thing for sleep since Ambien. It is in Phase III. Its arithmetic chances of success is less than ten percent, but given the fact that I am familiar with a bit of the research, I give it a one in three chance of success - which will vault our Swiss biotech into the rarefied world of Gilead Sciences’ (GILD) valuation.

There is a serious over-supply of chips. There is a tremendous over-supply of Silicon [wafers]. Yet, there are some bright spots. The spot market was hot the week of Christmas, but the up-trend was NOT confirmed by long-term pricing of Flash and DRAM memories. Solar has for sure hit the skids, and it does not make any sense to install solar - if you are a business or a homeowner - unless of course, you live in California or Hawaii - where rates can easily exceed 38c/KWH on a sunny weekday afternoon, and the state is still willingly paying $1.55/watt for your solar power generation system which should cost a lot less than what I got as quotes from four of the largest names in solar.

When I tell them that there is an over-supply of panels, these guys just want to stick to script and convince you that it really is worth your while for the state/feds to pick up the tab - for an overpriced system that will not supply electricity when the grid is down [even when there is ample power generated by your system]. So, the worst company to buy into now is MEMC Electronic Materials (WFR) - it sells silicon wafers - that need a lot of energy to manufacture. Which gets us to the best semiconductor company at the current quote - NVIDIA (NVDA).

Yes semiconductor fans, there is some good news to be had at the tail end of the year when everyone is sleeping [or in shut-down]. NAND and DRAM proves for spot delivery [turns orders] are up a whopping 10% week over week - the biggest increase since the last successful release of a Microsoft (MSFT) OS [Win NT].

I called in to four of the big players, and only Samsung (SSDIF.PK) and Hynix are taking advantage of the turns orders to be had - which nevertheless produce gross margins of 0% [better than the negative ten percent that they got for all of the other orders]. For those not familiar with semiconductor sales, turns orders are ones that are booked and shipped in the same quarter [as opposed to contracted sales].

The US car companies General Motors (GM), Ford (F) and Chrysler have been in trouble before. Notably, Chrysler, back in the early 1980s when it got a whopping $1.5 Billion dollar loan [Chrysler got the loan approved in 1979, and financed in early 1980] - and appointed Lee Iacocca as the Chairman/spokesman. Chrysler paid off the loan by 1983. Additionally, the US military then bought thousands of Dodge pickup trucks which entered military service as the Commercial Utility Cargo Vehicle (M-880 Series). The most important reason why Chrysler survived was innovation - the introduction of the family mini-van, which was a huge sales success through the 1980s and into the 1990s.

In the past, the car companies would grudgingly offer the public what they wanted, by way of cars. In fact, Detroit was very very slow in hopping onto the bandwagon to make fuel-efficient cars - even during the oil embargo of the 1970’s. The Japanese companies succeeded in making small fuel-efficient cars back then, and they still are in a leading position now (despite Toyota's (TM) woes which are well documented - and have more to do with the financial market than the desirability of its cars). Chrysler “second-sourced” Mitsubishi (MMTOF.PK) cars in the 1970’s when it figured that it could not turn its businesses around as quickly as the marketplace wanted it to.

Recently, Apple (AAPL) did not announce that they would be selling their iPhone at WalMart (WMT). In fact, the San Jose Mercury news said that a $99 4-GB version would be sold at the #1 retailer - before Christmas; and the leading rumor site for all things Apple countered with “only the $198 8-GB version will be available at WMT, and that would be after the 28th of Dec.”

Either way, this will significantly increase the number of people who desire to own an iPhone [or an iPod Touch]. Obviously, this is not aimed at expanding Apple’s presence in the business community [not aimed at the Blackberry market], but instead, Joe-6-Pack [or is that Joe the plumber?]. In the unfortunate event that the potential buyer just signed a contract with another cell carrier, they could be cross-sold an iPod Touch - at WalMart.

I worked at Atmel (ATML) from 1994 to 1998, in their (now merged into ASIC) Programmable Logic Group. George Perlegos was the CEO and most of the people at Atmel loved him; he had founded the company in 1984, with no venture funding in the early days (he/Atmel did get venture funding later on, before its 1991 IPO).

The company exceeded a billion dollars a year in revenue by the time I left Atmel, but the stock was exactly where it was when I joined the company in 1994. Back then the company was one of ARM Holdings’ (ARMH) first “big semi” licensees - in fact, ATML licensed Arm’s Thumb and Arm processors. ATML hedged its ARM bet by buying a small Norwegian maker of the AVR 8 bit RISC. The first generation of Atmel’s AVR based micro-controllers had the same pin-out as Intel’s 8051 and were designed as plug-in replacements, albeit with many technical improvements over the dated 8051.

The last time around that I picked on SunPower (SPWRA) - there was a lot of opposition to my conclusions - most of which have proven to be true. Plus, its [alternative energy] situation has been worsened by a decrease in the price of crude oil, and the strength of the dollar [which will cut U.S. based companies' earnings - SunPower in particular - as it did not properly hedge its projected foreign sales]. In any case, SunPower’s growth over the next couple of years is projected to be heady - in the twenty to forty percent annualized rate [depending on who you ask].

Most of this growth will be in the EU, and California - where everything alternative-energy is heavily subsidized.  With the European & the CA economy also in the tank [much like the U.S.], we see the ability to get subsidies as becoming substantially harder as the months/years progress, and companies that rely on these hand-outs, [despite being inherently inefficient, they get to rely on subsidies as "free money"] will find it impossible to do business without the aid of the government - making them vulnerable to competition from more efficient players in the same marketplace - domestic and foreign.