The End of the Beginning

“When I was a child, I spoke like a child, thought like a child, reasoned and acted like a child. But when I matured, I actively stopped behaving and being treated like a child. Currently we see an enigma, but eventually there will be complete transparency. At this time, I only see pieces of the whole, but inevitably I will be able to fully understand what is going on, exactly as I have been fully understood.”

(1Co 13:11-12 paraphrased by Chris Montaño)

Stage 1. “Childhood’s End (1973 – 2013)”

In a recent Harvard Business Review post, Bruce Schneier compares the current state of security on the Internet to a feudal system. I have always liked Schneier’s take on security and privacy. He is a thought leader as well as facile “synthesizer” and communicator. He also has been a rare civilian cryptographer/cryptanalyst that has published several books on cryptography and is respected for his technical work. He recently joined the board of Electronic Frontier Foundation.

In equating the Internet to feudalism, Schneier is talking mostly about IT security and privacy. However, whether intentional or not, I think he is making a broader statement in a quiet manner. I think he has identified an IT reality, but also touched a raw nerve of the realities of a globally, internetworked society. We live with the Internet like serfs lived with feudal lords- in a state where we are viewed as “resources” rather than regarded as individuals with intrinsic human rights.

Imperial, unaccountable, idiosyncratic, personality-driven; feudalism is a system where the masses have little to no legal rights, little to no due process, and virtually no formal institution of political or economic power. Society’s resources may be diverted to the ruling elite and vassals roles are to serve up any and all resources required of us by the imperial. Feudalism is very simple – the masses trade our autonomy for civil structure and protection against chaos.

However, I think that the time is ripe for the next era in the use of the Internet. I think that we are either near or at a tipping point where we will demand that our fundamental human rights be recognized, honored and legally regarded on the Internet. While I consider Ed Snowden’s actions as criminal espionage, the resonance of his claims regarding privacy violations was a “weak signal” indicating forthcoming change in how we are treated as individuals on the Internet.

I surmise that this change is inevitable, because feudalism failed to maintain the social contract in an era of growing knowledge and maturing world views. It resulted in major social problems and was consequently dispatched to the dustbin of history as a rudimentary form of government because it simply didn’t work anymore.

Similarly, over the past 40 years we have been led by companies and the government into an international network of information access. The change was so significant, that it necessitated strong controls to help the world understand what the Internet is, how to use it and become part of the information explosion we are amidst. This was a necessary stage so that we could all reap the benefits of the instant knowledge available for the first time in history.

But we are more mature now. And the current system of surveillance business models which spy on us, repackage and productize and sell the results for outrageous profits will increasingly, not work. The detrimental impacts of concentration of income and wealth in the richest 1% of society cannot be overstated. Simply put, our current model of Internet usage and business no longer works for society. And similar to monarch rule, is destined to change significantly in the next 10-20 years.

Figure 1. Income Growth now Exclusively for 95-99.99 Percentile

Income Inequality

Source: NYT: Our Broken Economy, In One Simple Chart

Stage 2. “In the course of human events…” (2013 – ?)

I have a personal tradition that on the 4th of July, I renew my view of our state by reading the Declaration of Independence. It is a short document and a welcome opportunity to refresh my ideals so that I can face the often times cynical news flow throughout the year. This year, as I read the Declaration of Independence, I was gripped with the perspective that the state of the individual on the Internet is in a near identical situation as the 13 colonies were in 1776. We receive no hearing by the “rulers”, laws are made without authentic consideration of users, we are treated like an information resource to be bought or sold, rather than as persons and given little respect for dignity, privacy, personal information property – let alone legal rights. The colonists found themselves under a form of leadership that wasn’t sustainable. And in response, they worked for several years to develop something completely new.

With clarity and simplicity the signatories stated, “We have grown up. We require you to treat us not only as adults but equals on completely new terms. We are not asking permission but notifying you and everyone else what we are doing.”

There are several points in the Declaration that I wish to emphasize that are relevant to the Internet and our what I believe is our changing role as individuals:

1. Autonomy is a natural evolutionary process that results from maturation.

While we assail feudalism, we need to recognize that for a time, it worked. It served a purpose. But “When in the course of human events…” we grow, we evolve, we understand ourselves and our roles in the world in a more mature manner and wish to exert our autonomy and power. I believe that we have reached the point in the evolution of the Internet where we as individuals will begin to reclaim and assert our rights and autonomy as individuals.

I think this is true, not because of any political or philosophical view I hold. It is based upon the current generation that is dominating the Internet globally. This current generation holds a richly textured, sophisticated technological and societal perspective of the Internet. Having been in the middle of the Internet’s explosion into the public consciousness during the late 1990s, I am truly wowed by their intuitive understanding of how the mechanics of the Internet interact societally. An example of this is the role played by Wael Ghonim in Egypt’s revolution. This generation is truly remarkable and deserves to be recognized as the pioneers they have proven to be in their actions. They are leading this transition into this next era. And as Egypt demonstrates, it won’t be easy. But this transition is part of the natural evolution of society. I believe it is unstoppable. However, I don’t for a moment think it is beyond being repressed and it will certainly be opposed by those who will lose economic and political power.

2. Assertion of the unarguable legality of autonomy, equality, dignity and respect for the individual- you either get this or you don’t.

Our fundamental human rights are not a debatable point; it is how we view ourselves. It is THE super-ordinate value and consequent world view we possess. All that we are as a society and government rests upon this fundamental assumption. We have built our nation on the premise that individuals have unquestionable legal rights of dignity, autonomy and reasonable freedom to pursue our personal growth and maturity [life, liberty and the pursuit of happiness].

The next era won’t discuss whether human rights will be extended to the Internet, it will be about the struggle to assert the human rights we intrinsically hold. There will be no dialog about the fact that we are bestowed with “… certain unalienable Rights, among these are Life, Liberty and the pursuit of Happiness. …” (Please note that this is not an exhaustive list, it is a call-out of some important rights among others.)

It is my view that a mature governmental and business perspective must understand this basis of our society in order to have a long-term, viable government or business. Governments that deny this fundamental truth will eventually be rebelled against as the Founders did against their taskmasters. And companies that are not able to grasp and honor this fundamental truth of customers’ rights and dignity will eventually crash, crumble or decay. The best they can do is control the trajectory of the transition and so maintain a legitimate role.

3. It is harder to change than to suffer, but a tipping point is eventually reached.

It is fascinating to read the 18th century equivalent statement that I expect to find in a contemporary self-help book. Apparently, it has always held true that if the data demonstrate a consistent pattern of abuse without recourse or adequate response, there is no other choice but radical change. Companies and governments love our current system. In it, they hold all the cards and all the money, they make all the laws, and they get most of the benefits. I won’t belabor the 99% arguments that others have made so much more eloquently than I could, but I will point out that we are hurtling toward an unsustainable economic and political imbalance. As circumstances continue concentrating economic and political power, societal pressure is building and will eventually drive change. The combination of non-sustainable economic profits and unabated surveillance by governments and companies is driving us toward this tipping point.

It is not only the U.S. government that is grappling with changes foisted by the Internet, Egypt demonstrates that any educated population requires a measure of freedom, order and autonomy. While repression is real and can persist for a long time, ultimately, an open Internet will lead to big changes. Hence, non-progressive governments are scrambling to erect Internet firewalls that edit content that could potentially instill ideas of individual freedom. In absence of active, aggressive repression, the Internet offers an unprecedented channel for knowledge, education and freedom of press. If governmental power is rampantly abused, there will come a tipping point where a rigged legality is trumped by broadly recognized lack of legitimacy. This is a dangerous place to go and I hope we don’t.

What I haven’t seen yet, is the commercial equivalent where individuals begin actively rebelling against their corporate feudal lords. Examples of this could be an anticipated wave of privacy based companies or some form of information co-op whereby individuals band together for network economics and control the flow and payment of personal information assets. There could also be legislation explicitly declaring that content we naturally generate from of our lives is personal intellectual property and therefore covered underneath IP law. That we own it and it may not be stolen or used without our consent. It may be the case where legally, individuals are given special protections to compensate for the resource imbalances between corporations and people. I personally believe that the golden era of personal information arbitrage is over- not because of political or philosophical ideology, but because all economic profits eventually trend to zero. Smart companies, entrepreneurs and investors recognize this and may already be starting companies and adjusting their strategies, expectations and business trajectories.

4. Autonomy is hard and requires commitment, focused attention and our resources.

As serfs maturing into responsible adults, we have a lot to learn and it is going to be hard. It will require our efforts and resources. This is the weight on the other end of the individualism and rights- they are costly and weighty.

Some will rise to the challenge more effectively than others. Some will be able to develop and lead, and others will cling to what they know because it is easy. But I think that history shows that as we mature and grow individually and collectively, our structures and forms of society must either evolve with us or be swept away. Our choices have never been easy. But a reading of that magnificent document that is the Declaration of Independence, reminds me that that growth and maturity is the struggle that builds strength enabling us to move yet further again.

I am not calling for anything other than recognition and legal enforcement of the fundamental human rights we recognized in our Declaration of Independence, United States Constitution and Bill of Rights. I say this because it is who we are and how we defined our society to be when our nation was created. I think that the founding fathers got it right on the human rights ideal. As we have for the past 237 years, we practice our ideals imperfectly, but guided by the ideal of respect for each person and their unquestioned value. I am simply pointing out that I think that this ideal will eventually embody itself in how we are treated on the Internet and that this change is inexorable and inevitable.


R&D Spending- A Tale of 2 Companies

In my last post regarding solar companies, I looked at the continuing revenue build out and the market share battle between First Solar (FSLR) and Suntech Power Holdings (STP.) We saw that First Solar’s thin film offering appeared to be taking market share from the phtovoltaic provider, STP. In this note, I will again revisit the revenue build of this nascent industry as well as look at what I consider to be a primary long term indicator of growth potential, research and development.

Revenue appears to be recovering from March Lows

In spite of stellar growth the previous 7 quarters, the 12 alternative energy companies that I track showed Q/Q declines in the December ’08 and March ’09 quarters. While the June ’09 quarter was a positive Q/Q result, it was still an almost 22% decline on a Y/Y basis. Perhaps the worst is over for solar technology’s revenue growth, however, I believe that fledgling industries such as this with blockbuster demand curves remain anybody’s market for some time. For example, the Internet investment opportunity was kicked off by Netscape, America Online and Yahoo. Today, only one of those companies is operational and Yahoo is fighting to remain a dominant player in light of the fairly late market entrant of Google. Likewise, in solar technology, I anticipate that there may be category defining companies that are private or not even yet formed.

Figure 1. Revenue Build Recovers from the March, 2009 Bottom

Alt Energy Companies 20090923

Source: Chris Montaño, CFA;  Gridstone Research

R&D -The Lifeblood of Technology Companies

In formative industries with great demand curves, I like to look at research and development. While there is no guarantee that spending money on R&D will result in winning products, it simply makes sense to me that companies investing in the future through research have the best chance to adapt to unpredictable market conditions and evolving technology. And even though the demand curve for solar power technology looks massive today, it remains an uncertain and difficult market in very early stages.

I also think that the key to solar technology’s long term viability as a renewable energy source is its economics- can we produce electricity from photovoltaics at the same cost as coal or gas? Without technologies that enable production of electricity at a price point equivalent to coal or gas powered generation, photovoltaic electric generation will remain a niche method. Efficiency of solar cells regardless whether they are thin film or silicon substrate is the cornerstone of economic viability. The company that can produce the highest efficiency photovoltaic device is in the best position to become  a major company through the world’s most ancient energy source and newest business- solar energy.

Figure 2. R&D in Absolute Dollars and as a Percentage of Net Revenue

Alt Energy RandD 20090925

Source: Chris Montaño, CFA;  Gridstone Research

As I look at the graph in figure 2, I am struck by a couple of things:

  1. Photvoltaics are still massively underinvested in view of the market opportunity. I was surprised at the modest quarterly spending in absolute dollars -$53M. Even on a trailing 4 quarter basis, this seems a bit on the small side. I think this means a couple of things- it could mean that there are simply not enough photovoltaic professionals to absorb more R&D dollars. Or it could also mean that the companies are still pouring all of their resources into a technology that is immature and requires so much engineering effort, that the industry itself could be considered “R&D.”
  2. 2.5% of industry revenue needs to climb for photovoltaice generation to achieve “grid parity.” It seems a stretch to think that 2.5% of industry revenue will achieve the products that will generate electricity as cheaply as utilities. The types of efficiencies that photovoltaics will need to attain economical generation without subsidies and tax benefits will likely require a lot more than $53M. And while the trailing 12 month number is a bit more encouraging on an absolute basis ($180M), it is still less than 2% of total industry trailing 12 month revenues.

In view of my previous post where I compared FSLR and STP revenue contribution, I thought it might be interesting to see how STP and FSLR fared in their respective R&D investments. Figure 3 makes an interesting graph depicting the divergent R&D priorities being invested by two companies. First Solar seems quit3 aggressive in its spend while Suntech Power appears to be tapering off.

Figure 3. A Tale of 2 R&D Budgets

STP and FSLR RandD

Source: Chris Montaño, CFA;  Gridstone Research

While it certainly takes a lot more than R&D to make a great company, one thing I am personally convinced of- without world class R&D, it is very difficult to attain and maintain a leading role in the technology industry.

The “Audacity of Hope” in Cambodia

Today the Cambodian genocide trial began for the most infamous Cambodian prison camp leader, Kaing Guek Eav ‑ better known as Comrade Duch who ran the S-21 camp also known as  Tuol Sleng. It was at that camp where he is accused of executing 12,380 people in the “killing fields” at Choeng Ek. (Great blog entry here…) It is uncertain exactly how many people perished in this atrocity, but estimates are that anywhere from 12 to 20 thousand people were killed in this camp.

Photo 1. at Choeng Ek also Known as the “Killing Fields”

thailand-sm-200305-0311_2461Source: Chris Montaño

It is reported that there were only 7 survivors of the horrible camp. Among them was a painter named Vann Nath. He is an artist who survived because “Duch” liked his paintings of Pol Pot. After the ordeal, Vann Nath painted his experience and his works are the pictorial testimony of the crimes committed in that dark place. They now hang on the walls of the former prison and are haunting in their depiction of the atrocities committed there.

When I visited the prison, I was riveted by the paintings and their stark, realistic renderings of the things once done where I now stood. As I toured the prison, I could see the terrible conditions ( See Photos 2. and 3.) but it was the paintings that I could not shake from my mind. For me the paintings were like taking an emotional tour of the prison and overwhelming to say the least.

Photos 2. A Torture Table and Painting Depicting its Usethailand-sm-200305-0301_236Source: Chris Montaño

Photo 3. The Stark Prison

thailand-sm-200305-0254_233Source: Chris Montaño

After we toured the prison itself we were taken by minibus to the killing fields where many of the executions were carried out.  The arrival at the killing fields is quite prosaic with a lovely Buddhist temple set amidst some trees. However, as you get closer to the temple you are greeted with a specter that was stunning- there are several floors of the temple encased in glass with skulls neatly situated on platforms of wood. (See Photo 4.) The contrast between the peaceful, countryside place of spiritual reflection is scarred with a reminder of the darkest behavior of humankind and the two juxtaposed against one another created for me a very strong emotional reaction.

Photo 4. The Raw Reality

thailand-sm-200305-0315_250Source: Chris Montaño

Cambodians have left the fields in relatively rustic conditions and as you walk around you can see shards of human bones and clothes. Apparently, they used metal rods to break the necks of prisoners as they deemed bullets to valuable to waste in executions. Of course what slim possessions the executed had left at that point were taken. The tour was a very emotional day for me and my friends and even our Cambodian tour guide broke down into tears as he remembered family members that perished there.

As I reflected upon our day trip to hell (fyi- there is no sarcasm in this choice of words), I thought, “How does a man like Vann Nath go on after this? Where does he find his hope to face the rest of his life? In fact, how does he think about hope at this time?”

I saw real images that day that I wished I never saw. Yet I found that it was the paintings of Vann Nath that came to my mind and I could not avoid. Over dinner, I spoke with a friend that lived in Phnom Pehn about the day and related my thoughts about Vann Nath’s paintings. She informed me that he was local and if I wanted she could inquire into a piece of his work for me to purchase.

I thought about it and asked her to commission a work from Vann Nath. I gave her a single word– hope. “Ask him to paint for me, ‘Hope.'”

We left the next day and later I found out that Vann Nath was willing to take the job. Once complete, my friend rolled up the oil painting and stuck it into a poster tube and sent it along with a friend of hers that traveled to the U.S. The painting was then mailed to me and my family. (See Photo 5.)

Photo 5. Hope by Vann Nath


Source: Chris Montaño

Mr Vann Nath has given my family a great gift in in this work. It hangs on our living room wall and I am reminded of that day I went to that horrible dungeon. But I am also reminded that even amidst the darkest cell of despair, there lies the seeds of hope within. I admire Vann Nath for emerging from that place – almost certainly wounded, yet not distorted or warped by its darkness. He is a hero of mine and I will always remember him for his courage, not only to survive, but to emerge as a an eloquent voice to never forget and never lose hope in dark circumstances.

Thanksgiving from the Turkey’s Perspective

It was hard to miss the news today that Citigroup has busted the buck intraday. It was not too long ago that the banks were considered dull, uneventful and steady with Citigroup being the flagship. But that era is ending badly. Unable to help myself, I looked at the price chart and copied it below.

Figure 1. Citigroup Price Chart for the last 20 Years.

Source: Yahoo Finance

The initial March 1989 price was $1.85 and the shares soared to a of $55+ in May of 2007 and subsequently have crashed in dramatic fashion. While the shares rallied to a close above $1 today, the market cap is a modest $5.56B. Citigroup equity is essentially vaporized, down from a staggering ~$275B market cap on May 24, 2007.

The shape of the chart made me think of an illustration in a book I have been reading recently titled, “The Black Swan: The Impact of the Highly Improbable” by Nassim Taleb. Great book with lots of provocative ideas to think about. I highly recommend it.

One of the early concepts Nassim introduces is Thanksgiving from the perspective of a turkey. For the preceding 1,000 days before Thanksgiving, the turkey is fed generous portions of whatever it is that turkeys eat. It is very likely that the prospective feast is thinking that there is every indication that the current trend of being well fed and cared for will continue. In fact, it may be that the unaware turkey is thinking that currently visibility on getting fed looks better than ever and anecdotal evidence indicates that day 1,001 will continue at the same robust growth that seems… well automatic. Life is good! Lotsa food, no hunters and the farmer cares for the turkey lovingly and looks at him with a twinkle in his eye. Unfortunately, we know how this story ends- on day 1,001, the turkey is slaughtered and eaten for the Thanksgiving feast. See chart below.

Figure 2. Thanksgiving from the Turkey’s Perspective

Source: The Black Swan by Nassim Taleb

According to Taleb, the turkey’s problem lay in its inability to discern the true nature of his circumstances. In other words, the turkey was ignorant of the risk his position contained. The turkey simply had no way of knowing the profound danger it lived under because its circumstances gave no indication about it. And while life seemed so clear and understandable from the experiential perspective, it was entirely misleading with respect to his real risk- until it was too late.

While I have reproduced the graph imperfectly and retold the tale clumsily, I cannot help but see the parallels between the chart of the turkey and the stock price of Citigroup. The similarities are striking. Steady increases with no indication that the bottom would fall out. Then it did.

Now before you incorrectly infer that I am comparing holders of Citigroup to turkeys, I will state that based on my experience with institutional investors, they are mostly highly intelligent, capable and very thorough investors. In fact, the complete opposite of turkeys.

And therein lies the sobering truth in front of us. If the best and most accomplished among us have trouble understanding the true nature of risk inherent in the markets, what does that mean for the rest of us? As we are (re)learning almost daily, the market is a wild beast and once it turns, it can and does bring significant losses as well as gains. And while mostly in my life the market has been much like the 1,000 days preceding Thanksgiving, it can and does eventually become day 1,001. Be careful out there. Risk is real.

Just when the sun comes out…

We have been getting a lot of rain here in San Francisco. This is the rainy time of year. But yesterday we had sunshine and it was great and I quickly forgot the rain — until this morning.

I have been thinking about alternative energy and specifically solar power and was curious about its revenue growth. I put together a trailing 12 month revenue chart for the following companies:

Figure 1. Selected Alternative Energy Technology Companies


I looked at total revenue for the firms and found a great revenue growth track record over the last 8 quarters.


Source: Companies and Chris Montaño, CFA. Data courtesy of Gridstone Research

While this is all fine, it is a bit uncertain what the next 8 quarters are going to look like. Key questions I have include:

  • does credit constrict growth?
  • how quickly will the stimulus’ alternative energy initiatives impact the industry?
  • will homeowners postpone solar installations?
  • what about the pendulum swing of polysilicon under-supply swinging to over-supply?
  • wildcard: thin films
  • what the heck is up with Nanosolar’s $1b valuation?

In spite of an outlook that is murky, a couple things are certain. The sun will keep shining on (even when there are clouds) and we will increasingly need energy. Gotta watch these stocks.