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―  THE FRIDAY LETTER  ―

(emailed weekly, from Gilder Publishing,
for friends and subscribers)

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 | http://www.gilder.com/ | Issue 245.0/May, 5 2006

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HEADLINES:

▪ The Week / Ikanos: A double in two years?
▪ Friday Feature / One of the Worst Ideas in Economics?
▪ Friday Blogger Bonus / Gasoline Doesn’t Count
▪ Readings /

 

The Week / Ikanos: A double in two years?
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Charlie Burger, www.Gildertech.com, (05/03/06): Fabless VDSL pioneer Ikanos (IKAN) reports 10m ports shipped through the first quarter of this year compared to a few hundred thousand ports from all competitors combined, giving the company an early advantage in rolling out its next-generation VDSL2 (very high bit rate digital subscriber line) products. But competitors are gaining steam, which is still good for Ikanos because it has given major carriers the confidence that the industry is ready to support serious VDSL2 deployments, which CEO Rajesh Vashist believes will begin later this year or early in 2007.

 

Last quarter, Ikanos completed a second offering of common stock, which provided another $47.5m in cash, in part to fund the purchase of Analog Device’s (ADI) gateway products for $30m. Prior to the acquisition, Ikanos focused mainly on chipsets for layer-1 functions in central office DSLAMs (digital subscriber line access multiplexer). ADI adds layers 2-7 to Ikanos’s portfolio, including wire-speed NPUs, VOIP and security engines, and wireless-LAN capabilities, enabling full-featured gateways for homes and businesses.

 

Though the acquisition was not completed until half-way through the quarter, the new gateway products contributed to 10% of total revenue and half of the 26% sequential sales increase. They also helped to increase Ikanos’s geographic diversification outside of Japan.

 

In preparation for initial deployments of VDSL2, systems houses may have been building inventories over the past year. Thus, Ikanos expects its sales growth may moderate a bit over the next few quarters. In addition, expenses will increase this quarter due to initial production costs for new chipsets with high revenue potential beginning later this year…

Excerpted from a Ikanos (IKAN) company update on www.Gildertech.com.  To read the complete Ikanos update as well as new updates, posted this week, on Corning (GLW), Broadwing (BWNG), NetLogic (NETL), and LanOptics/EZchip (LNOP), logon with your subscriber ID at www.Gildertech.com.

Gilder Technology Report subscribers winning big in ‘06… Companies listed on the Gilder Technology Report’s “Telecosm Technologies” list are enjoying impressive year-to-date returns. Broadwing is up 130%, Finisar is up 126%, EZchip is up 80%, Zoran is up 69%; Equinix is up 62%; and NetLogic is up 48%! Subscribe today to download the latest report.

Friday Feature / One of the Worst Ideas in Economics?
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Charles Wheelan (05/03/06), The Naked Economist: Economist Arthur Laffer made a very interesting supposition: If tax rates are high enough, then cutting taxes might actually generate more revenue for the government, or at least pay for themselves… In fairness to Mr. Laffer, there's nothing wrong with this theory. It's almost certainly true at very high rates of taxation. If you consider the extreme, say a 99 percent marginal tax rate… But here's the problem when we take Laffer's theory and try to apply it in the U.S.: We don't have a 99 percent marginal tax rate… when applied to the U.S., it's intellectually dishonest. The Laffer Curve offers the false promise that we can cut taxes without making any sacrifice on the spending side, and that's simply not true. It's the economic equivalent of arguing that you can lose weight by eating more… Read Wheelan’s complete commentary: http://finance.yahoo.com/columnist/article/economist/4065

George Gilder (05/05/06): The fact is that countries with low or declining tax rates increase their government spending (the best measure of revenues) three times faster than do countries with high or rising tax rates. The reason is that the low tax countries grow six times faster than the high tax countries. The benefits of the tax cuts cascade through the entire economy and yield increased revenues at every level of government while massively increasing the size of the private sector measured by income or market cap.

By reducing the top rate on corporate income to 12% and its top personal rate to 42% (from over 60%), for example, Ireland went from the poorest and most conflicted country in Western Europe to one of the richest and most peaceful with a third more income per capita than the UK and 40% more than Germany and with a third lower inflation than the U.S. Because it grew far faster than any of its European rivals, it could raise its government spending more than any of them while keeping spending down to 14.2% as a share of GDP. There are endless stories like this. Wheelan's hypothetical calculations about the U.S. show a complete ignorance of the global evidence. A flat rate of 15% on all income and value added would raise far more revenues than the current maze of gouges and gotchas.

The chief reason people oppose the Laffer curve is that it allows the creation of more wealth, which is regarded as bad for the economy and for the self-esteem of economics professors.

To read more Gildertech subscriber message board posts by George Gilder logon with your subscriber ID at www.Gildertech.com.

More from the www.Gildertech.com Message Board:

GTR Subscriber (5/4/06): What are your thoughts on Semitool (SMTL) at the moment? 

George Gilder (5/5/06): My quick view is that Semitool is a great company and that its wet semiconductor processing technologies, contrary to the widespread intuition, become more important at smaller geometries. Revenues from its Raider cluster tool are lumpy, like most capital equipment sales, and thus it occasionally gets whacked by bad timing (as during the last quarter). Fully vertically integrated, SMTL is one of America's greatest manufacturing stories.

 

Gilder/Forbes TELECOSM 2006 Hosted by George Gilder and Steve Forbes | October 4 - 6 The Resort at Squaw Creek | Lake Tahoe, California Register BEFORE JULY 31 to SAVE OVER ½- OFF the Forbes.com Telecosm ’06 Registration Rate.

Friday Blogger Bonus / Gasoline Doesn’t Count
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Russell Redenbaugh (05/03/06):  The following is a conversation I had with Scott Granis, a long time friend and one of the best fixed income managers I know:

 

Russell: Those who see no inflation are not going to the food stores or the gas pumps. Over a 4 hour period yesterday in Oakland, gasoline prices increases 20 cents/gallon.

 

Scott: Oh, that’s easy to explain. You see, the Fed has told us that only core inflation is important. Gasoline doesn’t count! Seriously, I am absolutely amazed at the widespread denial in the bond market. No one is worried about inflation! Even most of my colleagues unfortunately. I think the inflation problem is becoming serious. John Ryding at Bear Stearns shares my view. We are both refusing to make inflation forecasts, for fear of being considered insane.