A Transparent Speculator

It was decided to section off a part of the fund to create a speculative portfolio. The portfolio aims to focus on a diverse set of speculative stocks to maximize gains. It is important to note the speculative portfolio does not represent the standard investment strategies of Batty Investments, and is likely to be looked back upon as a self-indulgent act of waste and exercise in abject futility.

Without further ado, below is the current portfolio:


A couple of points to make:

EMC - My belief in EMC has been discussed here and here, and the opportunity to pick it up at $15 in afterhours following VMWare's disappointing earnings was too good to pass up.

FMCN - Focus Media is my Chinese stock for the run into the Olympics. I believe their market leading position in out of home display advertising will continue to grow rapidly as industry and tourism expands.

SOMX - They don't get much more speculative than SOMX as it really is a one trick pony (insomnia) in an already somewhat crowded space (Ambien, Lunesta, etc). They also don't get much cheaper than Somaxon as they have seen their shares battered over FDA stubborness, a lack of a commercial partner, and the sudden departure of their CEO. Despite all of these negative events, it's difficult to pass on the fact that their drug really works and provides another option to a very fickle patient population with insomnia. I believe that SOMX will be a strong performer in 2008, with 100%+ gain potential upon either an FDA approval, partnership, or buyout.

CEGE - I've written about my interest in CEGE here, but this is a position that will likely be added to over time. I bought the April $2.50's with the hope of an impressive showing at ASCO , but it will most likely expire a loser.

I will try to keep this updated weekly to reflect changes in the portfolio.

Buy EMC on Cisco Weakness

On February 6th, Cisco will be reporting it's eagerly anticipated 4th quarter results. While nobody really cares about their Q4 performance, many onlookers will gauge the health of corporate IT spending based off Cisco's outlook, and there are a few things to highlight:

1. Most IT budgets are performed towards the end of the 3rd quarter and validated in the early part of Q4. Given the market's weakness didn't rear it's true colors until December, it should be anticipated that '08 IT spending will not reflect current market conditions and should be very healthy. I expect Cisco to confirm this, however, they might be more cautious due to the nature of their product line.

2. To date, only pure play hardware manufacturers have seen weakness (i.e. Intel), and this should not come as a surprise given the underestimated power of virtualization. Software and professional services companies (i.e. IBM) have not seen any noticeable deterioration as their product portfolios focus more on reducing inefficiency and costs than relying on expansion and build-outs.

3. Any Cisco weakness will dent the entire enterprise tech sector, despite some clear trends unrelated to recession. They may be saved by continued growth in emerging markets, but I don't know if this can last forever as the world markets become cold.

If Cisco disappoints, expect EMC to be on sale due to it's sector relationship, but let me point out some clear differences:

1. While Cisco's growth is based off increasing network needs, EMC's growth is based off increasing amounts of data to store. Every macro business IT trend requires more data storage, availability, retention, and security. While Cisco is a pulse on economic growth and business strength, EMC is a pulse on a more stringent regulatory environment and enhanced records management requirements.

2. Sticking with end of life Cisco gear is far more acceptable of a risk compared to sticking with end of life SAN/NAS devices. When companies begin to layoff large amounts of staff, projects like data center expansions and network refreshes will be an early casualty, while the need for more storage remains as paper based workflows continue to go electronic. Less paper equals more storage requirements. While EMC is hardly immune to slowdowns in IT spending, it is no longer appropriate to use Cisco as a direct benchmark given the different trends in their core businesess.

3. Many will point out that EMC can't grow without Cisco given the 'network attached' definition of EMC's core business, however, the drivers for storage are far more bullish at this point than the drivers for network gear.

4. Cisco's acquisitions of WebEx and Scientific Atlanta, while excellent diversification for Cisco, don't come close to stacking up to the potential that a company like VMWare offers. VMWare's recent selloff, while perhaps deserved, now leaves a lot of upside for '08 results. Don't underestimate VMWare as the 1 yr chart shows what a difference their success can do for EMC price growth against CSCO


Who knows what Cisco will say next week, but if the jittery market doesn't receive it well then EMC should take an unnecessary hit. Any drop due to Cisco earnings will make EMC even cheaper and more attractive. Any less than $15 would price EMC emotionally bearish and not in line with fundamentals.

The main indicator to watch is going to be enterprise IT budgets for 2009, as a full blown recession will mean very bad things for the entire sector regardless of what products they sell. We will not get any clarity into this until Q3 at the earliest, hence why EMC looks to be a strong buy for the next several months.

Don't get me wrong, Cisco is a wonderful company and is well position in the long term. It is a core holding and should be added to upon pullbacks, but in the short term it could be in for some tough times that I don't see EMC experiencing.

Cell Genesys - A Speculative Biotech Play

Cell Genesys (CEGE) announced Monday morning that an interim analysis of their VITAL-1 Phase III trial for prostate cancer immunotherapy candidate, GVAX, has been completed and the study was recommended to continue. While a relatively expected event, any idealistic hopes of achieving statistical significance during the interim peek has officially ended and the wait until final analysis (2nd half of '09) begins for CEGE investors.

To preserve ethical blinding for the interim analysis, the Independent Data Monitoring Committee (IDMC) did not inform CEGE management about the data they reviewed, and all they reported was that the trial can continue. While not the statistical significance that few may have hoped, it certainly is better than, heaven forbid, receiving tragic news to stop the trial. In the investment world, this result should be considered a tie, with longs still convinced in the long term efficacy of GVAX, and shorts feeling confident the drug just doesn't work. CEGE shares traded rather quietly following the release/conf. call, and shares ended the day relatively flat.

I remain somewhat skeptical about GVAX achieving statistical significance at the final analysis next year, not because the drug doesn't work, but instead due to the shifting paradigm represented by cancer immunotherapies and their different behavior patterns than docetaxal (Taxotere), a poorly tolerated chemotherapy and standard of care incumbent for prostate cancer. Combine this skepticism with an internally conflicted FDA proving resistant to change, and it becomes readily apparent the commercialization of GVAX via VITAL-1 faces unfavorable odds. These long odds, however, are reflected in CEGE's market capitalization ($170+mm) as the market is clearly pricing them to fail. It will take an eternal optimist to expect any meaningful catalysts between now and 2009 despite management's insistence about upcoming conferences, partnership possibilities, and data releases regarding other ongoing GVAX trials. The best possibility for short term upside would be a partnership, but the payout and terms of such a deal would be less fruitful than if negotiated after a statistically significant final analysis. On the flip side, a partnership would ensure continued drug development in the event the ongoing GVAX trials miss their primary endpoint of overall survival.

For those value investors looking for Buffett like investments, CEGE is not the right company for you, but anyone looking for a compelling risk/reward with the potential for blockbuster returns, CEGE can find it's place in even a conservative portfolio. Let's dig deeper as I attempt a long case for CEGE as a speculative biotech play.

Interim Analysis

Bears may point to the interim peek as yet more proof that GVAX doesn't work, but the interim analysis is truly a non-event. CEGE never disclosed the allocation of the VITAL-1 study alpha, but due to the slow onset of immunotherapy treatments, have followed the O'Brien&Fleming approach to alpha spending. This approach would minimalize the penalty at the final analysis, even though it comes at the expense of stricter efficacy requirements during the interim, therefore making interim success unlikely. Bottom line is that the only pragmatic expectation from the onset was to fully complete VITAL-1 to get GVAX past the FDA, and it's fair to expect that management has powered the alpha to maximize the likelihood of success at final analysis.

Given what we know, it appears unlikely that any cancer immunotherapy will achieve statistical significance during an interim analysis until the FDA accepts new efficacy markers and embraces modernized design of clinical trials. This is a 'work in progress', and investors/patients will rely on highly impressive final results and impeccable safety profiles to gain approval. Dendreon (DNDN) has learned the FDA is not as merciful as it is political, therefore leaving the dying prostate cancer patients without any humane treatment options and dismisses the common sense approach of leaving treatment decisions between well informed patients and their doctors.

VITAL-2 Phase III Clinical Trial

CEGE is currently conducting two GVAX Phase III clinical trials for prostate cancer. VITAL-1, which I discuss above, focuses on GVAX vs. Taxotere in asymptomatic AIPC. VITAL-2 focuses on GVAX + Taxotere vs. Taxotere alone in symptomatic AIPC. I believe the VITAL-2 study is the best designed of all the cancer immunotherapy trials and supports the growing sentiment in the medical community that an immunotherapy treatment followed by docetaxel will solicit the most efficacious results. I am more confident that VITAL-2 will achieve statistical significance during the final analysis (late 2010) as Phase II trials results demonstrated a dramatic increase in this treatment arm (median survival > 35 months) vs Taxotere alone (median survival less than 2 yrs).

For investors, VITAL-2 provides a layer of protection in CEGE market cap in the event VITAL-1 doesn't meet it's intended objectives. While it's safe to say that an unsuccessful VITAL-1 will dent CEGE's share price, it will not be to the extent that many other single-shot biotechs face when rejected by the FDA. With a strong GVAX pipeline relationship with Johns Hopkins (also Leukemia), and enough cash,technology, and assets to keep their manufacturing facility and operations going, the current valuation offers minimal downside compared to the explosive potential of this groundbreaking form of cancer treatment.

The interim analysis for VITAL-2 is scheduled for early 2009, and any positive results, albeit unlikely, would provide a huge catalyst as VITAL-1 winds to completion.

Dendreon

Dendreon's (DNDN) Provenge and GVAX are both prostate cancer immunotherapies, however, with different treatment approaches. When DNDN received a vote of confidence from the FDA advisory panel in March, shares skyrocketed from $5 to $25 practically overnight. At the same time, CEGE also saw it's price scream upwards from less than $3 to almost $7, demonstrating the impact FDA validation of a cancer immunotherapy has on the entire peer group. This dynamic means that any good news for cancer immunotherapy is good news for CEGE. Both DNDN and CEGE are pioneering new ways to deal with the growing problem of prostate cancer and despite their obvious head to head competition, their true competition is with a conflict of interest laden FDA. The controversy surrounding the Provenge decision is bringing important attention to the cancer immunotherapy space, and CEGE investors should be rooting for DNDN to gain FDA approval regardless of it's implications in the commercialization landscape.

With this being said, I believe that Provenge has the best shot of gaining FDA approval as a standalone treatment, and GVAX has the best shot of gaining FDA approval for a combination treatment with Taxotere. Having seen what a nod by the FDA would do for either company's valuation makes the risk/reward attractive, and as such, I recommend investors to take small positions in both companies as a bet on cancer immunotherapies with proven safety profiles and compelling efficacy data.

Recession

As the US economy slides into recession, CEGE investors are somewhat shielded due to the lack of direct economic dependencies on the overall business environment. Development stage biotechs with a stockpile of cash are rather immune to the macro level conditions of the markets. This is best seen by YTD action with major indices are down over 8% and CEGE up over 10%. While other aggressive growth industries like solar are taking a licking as market speculators jump ship, there is little downside to CEGE at this point without a catalyst in either direction.

Additionally, biotechs like CEGE are prone to heavy shorting, and a recession market provides far greater shorting opportunities than this already battered bunch. Binary events will drive CEGE, not market events, and this could work to investors benefit during this period of macroeconomic uncertainty.

Mercy

Taxotere, the only approved treatment option for AIPC, has a vicious side effect profile and is frequently refused by patients who do not want to endure the pain associated with chemotherapy. The safety profile of cancer immunotherapies has given dying PC patients hope of another option that will not come at the expense of quality of life. Anyone who listened to, or was present at, the Provenge FDA Advisory Committee in March witnessed a 17-0 vote of safety and despite some weaknesses in the efficacy data, a voted 13-4 in favor of it's effectiveness. This was a vote for the patients who have only one treatment option available to them, the brutal Taxotere. This was a vote for the field of immunotherapy, which has gained serious traction in the CBER division of the FDA, NIH, NCI, and the oncology community as a whole. The FDA's subsequent non-approval of Provenge was unthinkable for investors, many in the medical community, but no group could have been more devastated than the dying prostate cancer patients desperatly in need of another treatment option.

The FDA has clearly lost it's way, and the biotechs, their investors, and most importantly, the patients left with nothing but hope, are dragged down with them. The next two years will prove pivotal as CEGE and DNDN complete their ongoing trials and demonstrate to naysayers once and for all that immunotherapies are indeed effective enough to let well-informed patients and doctors make treatment decisions instead of leaving them in the hands of an FDA worthy of investigation. With a valuation of less than $200mm and enough cash to stand their ground, CEGE is well positioned in this exciting space to show significant upside if the hope of it's various stakeholders are finally realized.

CKXE - Buyout Update & Overview

I wanted to provide an update of what is going on with CKXE in order to simplify the rather confusing buyout transaction. If you want a complicated, non-contextual version, you can go here.

The basic premise of the buyout is that CKXE will be going private in a dynamically priced transaction with prime assets like American Idol and the Elvis/Muhammed Ali/Beckham licensing going back into the pockets of CEO Bob Sillerman and 19x CEO Simon Fuller. The transaction is cleverly engineered as it once again demonstrates Sillerman's masterful use of the public markets to build upon his already massive wealth by taking the profit heavy IDOL franchise away from the public in exchange for the debt heavy real estate ventures (FXRE) in Vegas and Graceland. Let's run down the basics of the deal:

• CKXE goes private and IPO's FXRE, a real estate company with prime land in Vegas and exclusive licensing rights to exploit the Muhammed Ali and Elvis Presley names in real estate ventures.
  
• Shares of FXRE have been issued to CKXE shareholders as of January 10th at a ratio of 2 shares of FXRE for every 10 shares of CKXE held.
• The current CKXE share price of $9.40 reflects the sell off from arb players following the ex-div date (Dec 31) of the FXRE shares.
• The final payout of CKXE is contingent on the value of FXRE shares during a 20 day measuring period following the IPO of FXRE. By way of example, if the average trading price of FXRE during the measurement period is $5.00, $10.00, $20.00 or $30.00, CKX stockholders will have received $14.38, $15.00, $16.25 or $17.75 in cash and liquid securities. This means that selling CKXE at $9.40 is pretty silly at this point considering the fair cash value is between $10.75-$12.75 per share.
  
• Additionally, CKXE shareholders have recently been proposed to participate in a rights offering of FXRE shares at $10 per share. Shareholders will be eligible to buy 1 share of FXRE for every 2 shares of CKXE they own. Assuming the current price of FXRE shares ($7.00) is going to change over the coming weeks, the rights offering may become attractive.
  

FXRE Stock     Adjustment   Cash Received  Total FXRE   TOTALS
Price        in Cash       at Closing   Stock Value
during     Consideration ($13.75 minus  Received per 
Measurement  (7.5% of FXRE   Adjustment     CKX share 
Period     Stock Price)     Amount)    (Two shares  
                                         of FXRE  
                                        stock for   
                                        every ten 
                                        shares of
                                        CKX stock
                                          owned) 
------------ -------------- ------------- ------------- ---------
   $5.00         $0.375       $13.375         $1.00   $14.375
------------ -------------- ------------- ------------- --------
  $10.00          $0.75        $13.00         $2.00   $15.00
------------ -------------- ------------- ------------- -------
  $15.00         $1.125       $12.625         $3.00   $15.625
------------ -------------- ------------- ------------- --------
  $20.00          $1.50        $12.25         $4.00   $16.25
------------ -------------- ------------- ------------- -------
  $25.00         $1.875       $11.875         $5.00   $16.875
------------ -------------- ------------- ------------- ---------
  $30.00          $2.00        $11.75         $6.00   $17.75
------------ -------------- ------------- ------------- --------
  $35.00          $2.00        $11.75         $7.00   $18.75
------------ -------------- ------------- ------------- --------

Now that the transaction is summarized, let's try to put a book value on FXRE. The Park Central property that FXRE owns (one of the last prime lots remaining on the central Vegas strip) has a real estate value of $360mm based off the recent acquisition of the other 50% by FXRE at $180mm. So if nothing is built on that land, the book value of the lot is minimally at $360mm. FXRE also owns over 1.1mm shares of RIV, which is worth about $30mm at today's price. An attempt from FXRE to acquire the rest of RIV was voted down by the RIV board, but will likely be back on the table if the price of casino stocks continues to decline and FXRE is able to use their public equity as strength. FXRE also has rights to the development of 100 acres connected to Graceland for three potential hotels/shopping centers/etc. Adding the real estate and common stock of RIV, FXRE has about $390mm of assets in their possession, however, there are licensing costs, some existing loans, and an inevitable debt burden which is yet to begin.

One of the releases stated that the distribution of FXRE shares to CKXE holders would amount to 50.25% of FXRE common stock. Using the 2 shares for every 10 ratio, this means approximately 19.5mm shares were distributed. The rights offering guarantees another 9.9mm shares for $99mm. The other 25% (9.9mm) will be kept by Sillerman and his endless array of entities. With this being said, it is expected there will be about 39 mm total shares of FXRE upon it's listing. At a $10 rights offering, this would give a market value of FXRE at $390mm, which is virtually identical to the book value of their assets (land & RIV stock). The added value, according to CKX, comes from their exclusive rights to build real estate themes around Elvis (Graceland) and Ali/Elvis (Vegas), but the reality is that FXRE will be in debt up to their eyeballs.

Sillerman will be the CEO (huge) of FXRE and has bypassed any salary in exchange for 6,000,000 options at $20/share, a move I would consider to be far more bold if he wasn't already a billionaire who's trying to reduce his cash payout from taking CKXE private. The management team is in place behind Sillerman, and the deal looks as if it is going to go through with Credit Suisse and Deutsche Bank funding the CKX buyout group and their exotic transaction.

Due to the awful timing of entering into a capital intensive, debt-laden real estate transaction, I only like the FXRE prospects because Sillerman is taking the reigns as CEO. The more you know about the guy, the more you realize that he really wants to own a grandiose Vegas casino/hotel and if history is any indicator, he usually gets his way. He is smart enough to not deal with billions of debt on his personal balance sheet, so he will once again use the public markets to fund his toys and hobbies. By the time FXRE needs to enter into large borrowing transactions (mid '09), the lending activities of investment banks may be returning to a more normalized state. Assuming FXRE can obtain the capital to pull off it's Vegas ambitions, it should be good for shareholders, but as always, great for Sillerman.

EMC - A Bellwether Bargain

There's been quite a bit of concern amongst tech analysts that a slowdown in business IT spending is imminent, specifically amongst the precious financial services firms who are seeing their profits deteriorate as a result of the sub-prime/credit mess. As was seen during the dot-com fallout, bad front office performance directly correlates to a drastic reduction in IT investment, so it isn't all that bold to predict the same will occur as a result of the whole sub-prime fiasco. EMC, along with Cisco, HP, and IBM, are the typical tech heavyweights whose performance are largely tied to business IT spending and have recently seen their share prices fall over the past couple months. As EMC sits with 86% ownership of VMWare (VMW) equity in their back pocket, the value proposition is increasingly compelling following the pullback to around $16 per share. This article will address mainly macro-level issues that impact EMC/VMWare and will not focus on a detailed technical analysis of their respective balance sheets or short term performance.

As a brief background, EMC is the market leader of external controller based storage (SAN/NAS) and provides a range of enterprise products and services to improve the way corporations can secure, access, and manage their data (Documentum for content management/RSA for security). While perhaps difficult to grasp for the layman, EMC's infrastructure solutions store and manage the critical data for many large corporations and government agencies around the world. Recent spin off/IPO superstar, VMWare, is in the exciting and emerging field of virtualization, which in simple terms, is software architecture that reduce hardware spend by creating multiple logical instances on a single physical device. This allows companies to get control of their out-of-control data centers, reduce power/space consumption, and lower the entire physical footprint of their IT infrastructure by maximizing the value of underutilized hardware resources. There is a reason why VMWare carries such a lofty valuation, and it's because their solutions address a growing pain point for most enterprise environments and they actually reduce costs!

VMWare has seen it's shares vault to $125 per share before returning to a more realistic $73 as the valuation models began to reflect increased competition and future pricing pressures. At $73, VMWare still sports a mouth-opening market cap of around $28bn. With 86% of VMW, EMC owns just under $24bn worth of VMWare equity. A pretty good investment for EMC, to say the least, considering they spent $635mm for VMW just a few years back.

So let's explore why I am bullish on EMC as everyone begins to predict a decline in spending. First, let's outline why VMWare is such a coveted asset:

1. VMWare is 'best of breed' in a game changing technology. Virtualization is changing the manner in which IT executives are strategizing and VMWare stands to benefit from what will be a multi-year explosion in virtualization investment. If indeed business IT spending is reduced, VMW should still expect to grow rapidly as they compel executive (IT and even non-IT) management with a demonstrable ROI that most other standard IT investments cannot.

2. Bears of VMWare point to increased competition and inevitably lower pricing with the 800lb gorilla, Microsoft (MSFT), sporting their own hypervisor platform. While I expect Microsoft to chop away at market share due to tight integration with Server '08 and beyond, it would be foolish to discount VMWare's sizeable lead and unparalleled credibility in this space. Microsoft has never provided a compelling virtualization product before (never really needed one as an OS monopoly other than a sloppy Virtual PC) and has left a lot of IT decision makers with a perception that they are reactively, and reluctantly, entering the virtualization space. Microsoft will have a close to impossible time pulling large customers who have signed multi-year ELAs (enterprise licensing agreement) with VMWare, and quite ironically, will struggle from the same competitive barriers that made Microsoft the behemoth that it is in the OS space.

A hot topic these days is virtualization security, and VMWare will benefit from the perception that Microsoft can't even secure it's own software along with a mental barrier about using Microsoft software to manage non-Microsoft operating systems whom they aim to destroy. VMWare offers a range of solutions, services, and partners around virtualization management (monitoring/security/patching/maintenance/etc), and the scope will extend beyond Microsoft's reach as the antitrust courts ever watching eye ensures nothing too sneaky. It should be expected that pricing will fall as VMWare transforms to a management services company and hypervisor products see price wars that will inevitably make them low cost/free. However, if VMWare can fend off Microsoft somewhat successfully, it is not outlandish to anticipate VMWare will eventually (5-7 yrs) become more profitable than EMC's entire core business.

3. IT systems engineers like VMWare solutions. They are getting trained and certified in mass as part of an industry wide expansion of their professional skillset. No new entrant has penetrated enterprise IT departments over the past 5 years as quickly and as successfully as VMWare has. Their VMWorld customer/partner conference breaks attendance records every year and the penetration of their software over the last 5 years has been nothing short of amazing. Dell, HP, IBM, and any other x86 based manufacturer with a large enterprise sales force has been desperately partnering with VMWare to get their fair share of the lucrative services market around integrating VMW virtualization products with their physical products. The market outlook for virtualization is full steam ahead and VMWare is sitting on top, swallowing niche competitors and preparing to defend their position.

4. Virtualizing the data center and virtual appliances are where all the hype is right now, but at some point over the next decade (and many billions of $$$ later) they will be widely adopted and reach a certain level of maturity. The next explosive market in virtualization is at the desktop level where just north of 1% of enterprise desktops are virtualized. IT research firm Gartner predicts that by the end of 2010, all new PC deployments will be virtualized. That's a whole lot of market to compete for. While Microsoft is well positioned to get a good portion of this market by building virtualization into future operating systems, they struck out with Vista in this area (amongst many others).

Providing just a product is no longer the answer for Microsoft as VMWare is lining up vendor partners who provide end to end solutions that address systems management, support, audit/compliance, and ofcourse the needs of the end user. One such partner, Panologic, leverages VMWare infrastructure solutions to simplify the desktop environment and reduce costs. While Panologic might not turn out successful as a result of being too early to the game, the concept will eventually be a success and VMWare stands to benefit from even minor market share gains. I encourage you to visit Panologic's website to get a glimpse at the next wave of desktop technology, VMWare style.

Despite Microsoft's clear advantage as an enterprise desktop monopoly, innovation is somewhat limited due to their legacy dependence on x86 hardware manufacturers. VMWare benefits by developing a brand that represents a shifting dynamic in IT strategy to previously unthinkable solutions to the growing hardware management problems. Microsoft created the problem, and has missed the mark for years in identifying the solution. VMWare is forcing their hand, and Microsoft will once again resort to reactive tactics that have cost it loyalty and brand perception value.

Now let me get into why I like EMC:

As mentioned earlier, EMC's core business provides infrastructure products and services that stores critical enterprise data. They are, however, not alone in this space as Network Appliance, IBM, HP, Hitachi, and Sun all compete in the saturated NAS/SAN market. With new technologies emerging every time you turn the corner, EMC is always seen as facing the risk of losing market share to the 'next big thing'. Here is why EMC's market share is difficult to penetrate and it's core business is strong:

1. Their established customers (usually the biggest of the large enterprises) are buying complex engines (i.e. Centera) with technically complex back end storage arrays (i.e. ClaRiiON/Symmetrix). This technology requires a lot of investment, not only to buy the gear and supporting management tools, but also to train inhouse IT engineers on how to implement and support it. This skillset and investment alone create high barriers for entry and have led to EMC retaining critical customers for long periods of time (with no loss in sight).

2. Given that NAS/SAN solutions store the most critical enterprise data, migrations away from EMC's proprietary solutions would create significant operational/business risk and, dare I say it, a potential to lose critical data. In the new world of Sarbanes-Oxley and strong regulatory oversight, there are very few large enterprises that would accept this risk. While competitive offerings may leave EMC temporarily at a disadvantage, they have proven that customer patience will be rewarded. Next gen NAS topics like thin provisioning might not have EMC out in front, but they will be there over time with industrial strength solutions.

3. EMC's active acquisition strategy clearly paid off with VMWare, but a number of niche acquisitions have not culminated into corresponding product offerings to customers. I expect this to change in the coming years as EMC is more mature in their organizational structure and has learned what works with their culture and what doesn't. Spinning off VMWare was a sign of maturity for EMC management as they understood it was better off independent compared to being tied down to the rest of EMC's product portfolio.

4. Lastly, and most importantly, when IT spending practically came to a grinding halt in 2001-2002, the following were factors in play that are not present today:

• 1998-2000 - The markets bubbled beyond comprehension and Y2k preparation resulted in extreme and unsustainable IT spending as businesses/governments spent freely in preparation of a doomsday scenario. This 'over spending' inflated the underlying growth of the tech sector, therefore leaving it vulnerable for a correction
  
• 9/11/2001 - Terrorism occurred and created an almost unprecedented level of fear in the markets. New regulatory requirements were instituted and the disaster recovery model was born, both requiring IT infrastructure gear like EMC's for compliance.
  
• 2001-2002 - The dot-com bubble burst and created a situation of uncertainty with regards to tech growth. Valuations became difficult and the entire tech sector went down, and in retrospect, much harder than necessary.

While EMC may struggle to make the numbers that analysts forecasted for '08, I don't expect the impact to be nearly as bad as their share price indicates. EMC now has a market cap less than $34bn and an '08 PE of 19.3. With VMW ownership factored in, EMC's core business is valued at less than $10bn and a '08 PE of less than 6. At this valuation, the market is assuming that not only will IT spending shrink, but that VMW is worth about half it's
current market cap. I don't agree.

The current credit crisis and pending recession are reason for concern, and I discussed the events above to highlight that a return to 2001-2002 is very unlikely to happen. The market is valuing EMC at a level that assumes many negative events that have yet to unfold, and with an emerging growth currency in VMW equity, it seems too conservatively priced and trades at a 25% discount.

Enterprise IT spend might not meet the expected growth in the coming year and VMWare shares may continue to fall into more achievable valuations, but if you can weather some short-term term volatility, EMC is quickly becoming a bellwether bargain.