Following up on Deconstructing The Most Accurate Apple Analysis Ever, I am offering subscribers an updated valuation of Apple now that it has fallen to EXACTLY where I warned subscribers in October (the week of its all-time high of about $707 it would fall) to. After playing with the iPhone 5 for about a week, I told subscribers to expect the stock to bounce up against the pessimistic band of our valuation analysis. Apple last traded at $420, this is how I put it 5 months ago...

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This report is still available for download to paying subscribers:

•  Apple 4Q2012 update professional & insitutional
  
•  Apple 4Q2012 update - retail

With this report and Apple's subsequent ~40% or so drop, we have profited from Apple on both the long and short sides (After My Contrarian Calling Apple's 3rd Miss Accurately, I Release My Apple Research Track Record For 2 1/2 Years)

Now it's time to discuss where the stock will go from here. Valuation and specifics are the purview of paying subscribers only. All subscribers may email me for my valuation numbers (a quick summary only) and professional/institutional subscribers may contact me for a 5 minute discussion on this topic. I will have an updated valuation report out with 48 hours, likely by tomorrow midday. In the meantime I'll share a smattering of metrics, facts and trends that the sell side is still refusing to face. Let's dance, shall we?

Apple Is In Trouble – Plain & Simple!

Apple has successfully transformed itself from a portable and desktop computer company to a mobile device company, and managed to do so right at the crux of the mobile computing boom. As such, it has benefited mightily, briefly becoming the largest and most respected company in the world. Alas, what goes up must eventually come down. The largess revenues and margins gleaned by Apple brought massive competition, and in the case of Google’s Android, business models specialized in gutting the fat margins which caused Apple to prosper. As a result, margin compression ensued, but very few actually saw signs of it until it was too late (reference Deconstructing The Most Accurate Apple Analysis Ever).

Take note of the chart below which show Apple’s expenses at the corporate level spike.

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The spiking of expenses is corroborated by nearly all fundamental profitability metrics. Before delving into these metrics, let’s review how they margin compression is actually being leveraged. You see, Apple’s margin problem is not emanating from just aggressive competition with smart business models, ubiquitous cloud services (Google) and low cost means of production (Samsung). Apple is now paying the piper for its shift into mobile by having its pipeline effectively saturated with mobile products, thus nullifying the margin expansion that the move into mobile products have brought on. Mobile products had higher margins than their desktop/laptop counterparts. The chart below shows Apple as a nearly completely mobile products company.

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Now, one may say, “but even if they have turned completely into a mobile products company, margins should stabilize, not compress!”. How true, young grasshopper, except for the fact that as Apple has nearly completed its transformation, Google has started compressing margins in the mobile space, which has in turn started to put pressure on the margins of this nearly completely transformed company. Look at the progression of the revenue/product mix over time.

As can be seen from the chart below, Apple is not a phone/tablet company…

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From margin perspective, one may see an extra hit to margins as Apple has actually had a relative increase in Mac sales, whose margins are materially lower than iPad and iPhones. This will be compounded by iPhone 5 and iPad mini sales, both of which have lower margins than the products they replaced or are cannibalizing.

Now, follow the trend in entity level margin compression (below) while cross referencing the (the product mix revenue above) and you will see that there is a near saturation of mobile products, with lesser margin tablets and even lower margin notebooks creeping in over the last three quarters…

As a matter of fact, this has been the largest drop in margin (in terms of %) since I’ve followed the company.

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Oh, and BTW, you can have shrinking margins AND shrinking market share, re: 4:58 in this CNBC video below (watch the whole clip if you haven't seen it before).

So, exactly how did this all come to be?

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 Stay tuned. Tradable numbers will be forthcoming to subscribers (click here to subscribe) within 48 hours. To all retail investors (pros should know better) who do not subscribe, please do not attempt to read into what's in the subscription material by guessing from my public posts. All of the opinion and analysis that I make public has been of extremely high quality and quite accurate in aggregate, but it was not intended to be used as investment advice. That is what you pay for.

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It all started in June of 2011, many months before the IPO of one of the biggest scams to cross the US equity exchanges (and that's saying a lot in and of itself). I posted a forensic analysis of Groupon “What Does Groupon and the Matrix Have In Common?". I warned, I valued, the company went public, and... Nov 12, 2012 Multiple Muppet Mashing Leaves Groupon Shareholders Holding The Bag After 89% Off IPO Coupon. In that particular post, I actually offered the full Groupon research to download for free. It's amazing how this obvious Ponzi scheme got so much analyst and investor attention. Any and all BoomBustBlog subscribers saw it for exactly what it was, and hopefully shorted accordingly!

Earlier, I got on the Ponzi Exposure Express once again... Sep 26, 2011 I Suggest Groupon Offer Coupons To It's IPO Investors, They're Going To Need Them. And previous to that, once again...

Here's an abstract from our June subscriber-only analysis - Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

“Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants an agreed upon percentage of the purchase price to the featured merchant. So the comparable number for price-to-sales to use for Groupon is gross profit, or the fees it collects from merchants, which the management has correctly stated as the best proxy for the value created by the company. To put things into perspective, if eBay used the same math as Groupon does, it would have reported revenues of $61bn instead of $9bn. The company reported gross profit of $530m over last 12 months. At $25bn valuation that would put the valuation at 42x “comparable sales”. To put things in perspective, Google trades at Price-to-sales of 5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at 3.4x.“

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In the latest S-1 registration statement, the company has revised its revenue figures by more than half. The company has restated its 2010 revenues from $713m to $313m while Q1-11 revenues were restated to $296m from $645m previously. The company has restated its financial results “to correct for an error” in the way it reported revenue. The revenue accounting change is Groupon’s second since it filed to go public. The company has also changed the presentation of certain expenses to be consistent with reporting revenue. Clearly, such errors and frequent change in the accounting policies clearly puts strain on the credibility of management – and that’s putting it lightly, especially for a company that is contemplating an IPO, not to mention that such changes are top line numbers such as revenues. In another blow to Groupon, the company’s COO Margo Georgiadis is leaving the firm to join back Google.

How about... Muppets Get MASHED Once Again - Groupon Half-off (Share price) Sale, Aug 14, 2012 – CNBC reports that Groupon [GRPN 5.815 -1.735 (-22.98%)] plunged more than 20 percent...

I can go on, but why bother? This company was pumped, dumped and marketed by several big name analysts and banks. One would think independent analyst shops would be one of the biggest shops in all of Wall Street, no?

The following is a guest post by a very bright individual whom I've had the pleasure of building with on several occasions, Mr. Mordechai Grun. This is what he's had to say on the topic of Europe, with ample commentary from me along the way.

_______________________________________________________

Human behavior predications usually follow the ‘least resistance, least painful, and self serving’ path in spite of its being harmful in the long run. This disposition is even more truly said of politicians and bureaucrats. "Will is the origin of all thought." Flowing from such will we have the intellectual analysis and arguments to justify those behaviors. We will therefore look at Europe through this lens and see where it takes us.

The next major crisis in Europe is lurking just beyond the bend.

Reggie’s note: the last crisis has actually never left, so this is not the next one, just a continuation of the same. I called this exactly three years ago, in explicit detail (The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one)

It will take form as either the comeback of Bond vigilantes or as a political calamity, where some peripheral country finally votes for a party that is seriously proposing to forsake the Euro.

Reggie’s Note: The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

Or… As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

Some smart politician will certainly test the ECB’s resolve and do away with austerity and call their bluff. The consensus of the population can only be subjected to so much strain before it turns on itself and they vote for radical (read: costly) change. While the case can be made that the government bond-funding crisis has subdued, the economic pain of the general public has not.

Reggie’s note: Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

The likeliest scenario is that both of these crises will play out at the same time, thus creating a Lehman-type crisis.

Faced with this crisis, only two options will present themselves:

1. Massive sovereign debt defaults, bank runs and bankruptcies as many banks’ liabilities are larger than the GDP of the countries that are guaranteeing them – and a potentially resulting currency crisis

Reggie’s note: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

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1. A truly massive QE Program that not only bails out the banks and the existing governments debt and deficit, but also sponsors an enormous stimulus program for anything that can be thought of, e.g. infrastructure, education, green energy, etc.

Following scenario B, the challenge will be this: Why would the Germans and Fins want to debase their currency to send their monies elsewhere? The answer will be a mix of ‘candy and stick’, so to speak. The QE stimulus program will be structured upon some European formula – per capita or otherwise – that sends significant amounts of newly printed money to them too, while, in the alternative, if the Euro disintegrates, Germany will have to recapitalize the Bundasbank and resort to either massive stimuli or quantitative easing so to cheapen their currency and rescue their own economy. Those countries that leave the Euro will, nevertheless, default on any external bondholders, as they are restructured and recapitalized in the new currency, their banks will default as well. Why wouldn’t Germany be gracious and monetarily benevolent with funds they would lose either way? This would blend in with the fact that even the new Mark will be too expensive for their export-driven economy, and they would be pressed to cheapen it. They also won’t have destination countries to export to in Europe, as each country will turn to hyper-protectionism, safeguarding the jobs they have from disappearing in an effort to stabilize their home currency in order to avoid hyper inflation (Argentina, anyone?).

Reggie's Note: A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina - Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get... Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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This turmoil will, obviously, generate widespread economic malaise as well. As a politician faced with this decision the answer is obvious. I can already picture the smiling politicians announcing their courageous decisions and courses of action, claiming that they have saved the Euro from certain demise while helping the people and creating new projects and job opportunities that will launch Europe into the future. It is possible that they will punish the instigator (Greece, presumably) and cut them out of the money party aka Lehman.

Is this feasible for Europe? I believe the answer is yes, as one significant minutia is overlooked. The Euro is way too high, even for Germany. This will become ever clearer as time clambers on. Europe can survive – even thrive – at 0.65 Euro to the dollar. I recall this precise scenario in Canada during the early 90s. The resulting inflation at the consumer level was much milder than expected, as taxes, services, rents, salaries and many consumer goods and products (including cars) are priced in the local currency. Of course, energy costs would rise. In Europe, though, lowering the high taxes on fuel can mitigate this. On the positive side, manufacturing and tourism in Canada flourished, generating a strong trade surplus (this was prior to the commodity boom). Europe can probably afford 6-8 trillion in QE over a 3-year period without hyperinflation, especially as this will be taking place while many other major currencies are orchestrating their own QE. If, as they do this, the peripherals restructure their own economies and bring down or solve their structural or primary deficits, the Euro may actually increase eventually, as they will have significantly lowered their debt to GDP ratios and positioned themselves on a financially sustainable path.

Reggie's note: This is code language for DEFAULT! The defaults will codify, quantify and solidify the capital destruction that we all know is there in the first place. I don't think the ride will be quite that easy. Greece has defaulted (exactly as I anticipated and clearly called) and is about to default again, and it's still f#@ked. For more on this, reference This Time Is Different As Icarus Blows Up & Burns The Birds Along The Way - Greece Is About To Default AGAIN! ... and then there's the contagion effect! Subscribers, see

• •  Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
  •  Sovereign Contagion Model - Pro & Institutional

All others, reference: 

1. 1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
   2. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
   3. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
   4. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

The sad reality, though, is that they will promise such changes and not deliver on their word.

Reggie's Note: WHAAAT???!!! You mean you can't trust the European oligarchs??? 

• Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
• Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
• Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
• Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…

This will turn the crisis into only a short- to medium-term solution while eventually creating a fundamental currency crisis that will give way to no solutions.

Can the Euro handle that much QE? I believe the answer is yes. The ECB can forgive all the bonds they either own or collected as collateral for loans. Does anyone believe the principal on these loans will ever be paid down? The only stimulus from such a move will be the miniscule interest being saved.

Reggie's note: Moral hazard be damned, eh? What's to prevent other market participants from pushing to get a similar deal of borrowing money and not paying it back, expecting not to get punished. Massive forgiveness on this scale will fracture the market mechanism and destroy market pricing (as if it's not already wrecked as it is, does anybody really think core European bonds should yield what they do now?)

However, from a public confidence perspective, it would be huge, as it would drastically lower debt to GDP ratios.

Reggie's note: It will also bring about massively more stringent underwriting the next time around, effectively driving up rates anyway - you know, just as rates would have been driven up had the borrowers defaulted. Who in they're right mind would voluntarily make the same mistake twice in so short a period of time. As a reminder from my seminal link Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

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It is important to note that Europe will be faced with a stark choice: either deflate assets and wages or deflate the currency. And, since as discussed, the Euro needs a significant reduction anyway, why not milk it and bring it down through QE?  The crisis created by a country like Spain leaving the Euro will harm the Euro by much more than a giant QE would. There exists capacity for Europe to kick this one down a really long road and, with some discipline, actually solve it along the way.

Reggie's note: Possible, yes! Probable, Nah!!!

The challenge will be that, unlike the US, Europe has multiple players and can't turn on a dime. The crisis, when it comes, will be overwhelming, and will require solutions over a weekend or short bank holiday. Can so many politicians and central bankers on opposing sides of the language barrier figure out that their collective interests are far more in harmony than their differences? Prejudice, ego and vindictiveness – combined with an overly sensationalist media and so many involved players – stage the scene for things to easily get out of hand. If history is any guide, the answer is not very encouraging. However, Europe now shares a bureaucracy and central bank as well as a mostly shared corporate interest. So let's hope this time around is a bit different.

Reggie's note: I really liked this piece, and Mordechai is bright fellow. Of course I like it better with my commentary, which sort of... well.. Keeps it real!

In closing...

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Inequality in the US is alive and thriving

How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery

The BoomBustBlog.com Socio-economic Stratification Model

Anectdotal research conributed by the BoomBistBlog community. We do not endorse, corroborate or guarantee the accuracy of the content below. It is offered for informational purposes only.

The Medicaid and healthcare outlook in the US

From 2009 to 2011, total health spending grew at the lowest annual pace since they started keeping these records (52 years ago).  In fiscal year 2012, Medicare spending per beneficiary grew just .4%.  Overall Medicare spending grew 3% (because there are more beneficiaries).  The CBO projects spending on Medicare and Medicaid in 2020 will be $200 billion – a 15% drop from the CBO’s projections three years ago.

Compare the slowdown to historical growth.  For the past 43 years, Medicare spending per beneficiary grew 2.7% faster than the overall economy.  Medicare spending grew from $7.7 billion in 1970 (.7% of GDP) to $551 billion in 2012 (almost 4% of GDP).  But, for the last three years, Medicare costs per person have grown 1.3% slower than GDP.

What explains this drop?  Analysts think that the weak economy is only part of the reason for reduced growth in health spending.  We’ve also been starting to see changes in the way insurance is compensating doctors.  The slowdown in spending started even before the recession (so it’s not purely a recessionary issue).  On the downside: (1) this doesn’t solve our problems; (2) we’ve had temporary slowdowns in spending before; and (3) this may reduce pressure on Congress to address our long-term problems.

The future isn’t pretty.  Unfortunately, the number of Medicare beneficiaries is projected to grow 3% each year as the boomers retire.  This is why Medicare spending is expected to be more than 4% of GDP in 2023 and 6.7% in 2037.

On Thursday, 17 November 2011 I penned "When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!", basically detailing the upcoming rift between the French and German governments, led by the burgoening chasm in their respective economic performances. As excertpted:

The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue. Reference the series:

• • Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding
  • Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

Well, today, Reuters reports...

Chasm opening between weak French and strong German economies

The schism dividing the euro zone's strong and weak economies deepened to include its core pairing in February as French firms suffered their worst month in four years in stark contrast to prospering Germany.

The gap between the two biggest economies in the euro zone is now at its widest since purchasing manager surveys (PMIs) started in 1998, the latest sounding showed. It dealt a blow to hopes the euro zone might emerge from recession soon, showing the downturn across the region's businesses worsened unexpectedly this month.

 I think we can start to see how this may end...

The Catch 22 is that Germany's woes are not that far detached from France's, yet it appears that they do not see this. I reiterate, then query again - Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! This is a Pan-European sovereign debt crisis, not a southern or western European sovereign debt crisis. The countries fates are inextricably linked.

And for those who believe what Fed Member Bullshitterard said, at least according to CNBC: European Debt Crisis Unlikely to Impact US: Fed's Bullard, I refer you to my extended, self-answered query, "Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably! " I place this stamp on Bullard's comments...

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If you really want to know the truth, simply read my post from yesterday, Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

 Bloomberg ran a very interesting article yesterday, jumping on the bandwagon of what I espoused years ago - and in great detail. Let's take a look at the article as I run down a check list of Reggie's favorite bank busting hits...

On television, in interviews and in meetings with investors, executives of the biggest U.S. banks -- notably JPMorgan Chase & Co. Chief Executive Jamie Dimon -- make the case that size is a competitive advantage. It helps them lower costs and vie for customers on an international scale. Limiting it, they warn, would impair profitability and weaken the country’s position in global finance.

Hmmm.... JP Morgan, Jamie Dimon, check... An Independent Look into JP Morgan

Back to Bloomberg...

So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?

Enlarge imageToo Big to Make Money?

Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.

Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.

 In one relatively thorough effort, two researchers -- Kenichi Ueda of theInternational Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

Big Difference

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.

Big bank bailouts? Check!

The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

Hmmmm. Taxpayer subsidized, big name hedge fund bank barely breaking even without bailout funds... Check!

The BoomBustBlog Review of Goldman Sach's 2nd Quarter, 2010 ...

GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.

gs_roe.jpggs_roe.jpggs_roe.jpg

Subscribers can download my full review of GS's most recent quarter here: GS 2Q10 review. It is a recommended read, for we have performed some sleuthing and believe we may have conclusive evidence that the solvency of this overly marketed hedge fund investment bank is again at risk, just as it was in 2008. For those who wish to partake in our services, you may subscribe here.

And back to Bloomberg...

Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy.

Hmmm! Hundreds of millions of bank bonus cum taxpayer dollars recycled back into government official's pockets in teh form of lobbying dollars, donations and gifts? Check!

How Regulatory Capture Turns Doo Doo Deadly

• Regulatory capture (adopted from Wikipedia): A term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is an explicit manifestation of government failure in that it not only encourages, but actively promotes the activities of large firms that produce negative externalities. For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether - blah, blah....

About a year and a half ago, after sounding the alarm on the regionals, I placed strategic bearish positions in the sector which paid off extremely well. The only problem is, it really shouldn't have. Why? Because the problems of these banks were visible a mile away. I started warning friends and family as far back as 2004, I announced it on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be ready to collapse some time soon. Most investors and pundits won't realize it because a) they don't read BoomBustblog, and b) due to regulatory capture, the bank has been given the OK by its regulators to hide the fact that it is getting its insides gutted out by CDOs and losses on loans and loan derivative products. Alas, I am getting ahead of myself. Let's take a quick glance at regulatory capture, graphically encapsulated, then move on to look at the recipients of the Doo Doo Award as they stand now...

A picture is worth a thousand words...

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And back to the Bloomberg article...

The result is a bloated financial sector and recurring credit gluts. Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009.

Excessive liablities potetially outstripping the ability of the .gov to bail? Check! The BoomBustBlog Review of Goldman Sach's 2nd Quarter, 2010 ...

So, what is GS if you strip it of its government protected, name branded hedge fund status. Well, my subscribers already know. Let' take a peak into one of their subscription documents ( Goldman Sachs Stress Test Professional2009-04-20 10:06:454.04 Mb- 131 pages). I believe many with short term memory actually forgot what got this bank into trouble in the first place, and exactly how it created the perception that it got out of trouble. The (Off) Balance Sheet!!!

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Contrary to popular belief, it does not appear that Goldman is a superior risk manager as compared to the rest of the Street. They may the same mistakes and had to accept the same bailouts. They are apparently well connected though, because they have one of the riskiest balance sheet compositions around yet managed to get themselves insured and protected by the FDIC like a real bank. This bank's portfolio looked quite scary at the height of the bubble.

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More recently...

Bigger Tax Payer Bank Bailouts Cometh?

But there are solutions, as detailed in How To Prevent Bailouts, Bank Runs & Other Fun

Observe the setting of the infamous "Bamboozled" speech delivered by Malcom X on 125th Street in Harlem in the video below. Take careful note of the signs and banners and tell me if they don't apply to today's situation & what banks/captured regulators have gotten away with today...

A discussion on bank bailouts, bank runs and other fun things to do with your hard earned dollars... Plus a simple solution to prevent such occurrences.

Let there be no mistake, most have been "Bamboozled by the Banking Industry"

If rampant bank bailouts irk you, read this and get ready to SPIT FIRE!!!

10 Ways to say No, the Banks Have Not Paid Back Their Bailout ...

Dipping into the BoomBustBlog archives with "Bank Run" on the brain???...

Bernanke's Bold Bailout Of The Banking Sector Has

Reggie Middleton's REALity TV #2 - Bernanke's Bank Bailouts Blow ...

Bank of America Lynch[ing this] CountryWide's

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Two weeks ago, I continued my irradiation of common sense, math over magic/mysticism and simple truth drawing attention to the single fact that ALL of Wall Street seems to have over looked. That fact was that the most hyped IPO in the history of the world, the company that is not only a household name but also that halved the investment of those invested in the IPO, and whose share price is now increasing rapidly - is actually shrinking in terms of its user base, reference The Truth About Facebook That No Media Outlet Or Analyst Has Bothered To Notice. In addition, this company is still attempting to flesh out its business model. While it is a multi-billion dollar company (in terms of revenues), it is burning cash like a furnace in an attempt to outgrow its competition - all the while reinvesting profits and compressing margins. This behavior has been excused as it was(is) marketed as a high growth social media play.

Contrast that scenario with LinkedIn, another hi-growth social media play. I actually use social media, albeit not much for personal endeavors but for marketing and advertising. LinkedIn, where I've been a member for years, has always had a rather cumbersome, lackadaisical interface. A recent revamp and overhaul of the site has pumped new life, new vitality, and new revenue growth into this concern. It now boasts over 200 million members. My attention was recently drawn to LinkedIn after I got this notice in the mail...

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 While this 200 million may not look like much compared to Facebook's billion, LinkedIn's user base is growing rapidly at the same time that it's revenue per user is expanding as well while Facebook's base has already started shrinking. Despite this, Facebook is still being marketed as a high growth play in a hot tech space - social media.

Uh huh! Facebook is MOVING BACKWARDS! IT'S LOSING USERS! LOOK OUT BELOW!!!

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A high growth company whose userbase is already shrinking leads one to believe that the easy money has already been made...

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LinkedIn, on the other hand, is still handily outperforming on both user growth...

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 and revenue growth as well as margin expansion... The company has also successfully diversified revenues... 

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The reason for LinkedIn's apparent success in terms of business modeling is management's fruitful reinvestment into the website's social structure. Each member's profle now serves as a media rich resume or CV, or in terms of corporate pages and entrepenuers, a potentially immersive marketing platform. Most importantly, the vast community of members serves to verify the validity of assertions, awards and recommendations and endorsements - lending an air of credibility that competitive sites such as Monster.com could not come close to replicating.

Below, you can find exerpts from my profile (click here to see the live profile) where you can find video interviews, educational walkthroughs, endorsements and recommendations...

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The company has also addressed the issue of stickiness on the site by giving a handful of respected and well followed personalities a publishing platfrom from which they can espouse their ideas. This "macroblog" idea has garnered a huge following from a sufficiently broad audience, enough of a following that this is now a force in the media space to be reckoned with. It is something that Facebook should have thought of first.

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LinkedIn's considerably more concrete business model in addition to their reliable and clear paths to growth have not been lost on the market - particularly in comparison to Facebook...

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Subscribers are asked to download our LinkedIn Valuation sheet here -  LinkedIn valuation overview 2-2013. Later on this week, professional and institutional subscribers will be able to access the entire LinkedIn valuation model on the web. Stay tuned, and in the meantime, please follow me...

Yesterday I appeared on CNBC Street Signs, and dropped the truth about America's favorite over hyped company. Check it out...

One viewpoint that is prevalent is the ideology that Apple's problems are temporary and can be fixed with a smattering of pixie dust and fairy farts within the crumbling Apple RDF (reality distortion field). The pundit in the segment above stated that their are no signs of margin compression in the iPhone franchise because ASPs are level. Wait a minute dude! ASPs may be level but costs are increasing. Steady sales plus increasing costs mean lower margins right? I called this last year on TV. Reference...

 The short call - October 2012, the month of Apple's all-time high and my call to subscribers to short the stock:  Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All

This crux of that article was to debunk the widely assumed notion that I was bearish on Apple's share price for 2 years. The reality of the matter was that the paid research and opinion clearly supported much of Apple's share price until right about the last earnings report and release of the iPhone 5, until I notably went bearish and Apple promptly lost 35%, or about 4 Dells with a LinkedIn thrown in to boot...

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Notice how this chart shows subscription research would have provided ample profits LONG and short, with the long presumed to be unleverred as a straight stock purchase. This is to put to bed any naysayers. Now, as to whether my many proclamations over the last two years regarding Apple were able to hold water, we let the facts speak on the reasoning behind the call and the accuracy of my call in the deterioration of Apple's margins, market share and status.

Now, if you recall, there were many sell side analysts calling for Apple to break $1,000 per share just a few months ago. On Friday, 25 January 2013 I penned "What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!", and is excerpted as follows:

Well, let's see what's in today's news... Oh yeah!!! Apple cuts MacBook Pro Retina and Air prices, boosts specs 

Apple has slashed the price of its MacBook Pro with Retina display notebooks, throwing in some updated specifications along the way.

Hey, wait a minute! Didn't I say that in the CNBC segment yesterday, and all through last year? Subscribers can access my full Apple report and valuation here Apple 4Q2012 update professional & institutional and Apple 4Q2012 update - retail). Those of you who don't subscribe can review the dated, redacted version below...

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This is the 4th installment in the education bubble series. This piece gets down to the nitty gritty, and details the valuation software that we've built to actually value YOUR college education, that of those whom you care for, or assist you in selecting a path through the higher education process. The app is available online in beta form for all to peruse. I simply request that you report any bugs, usability issues or inconsistencies to me in exchange for its beta use. The simplified web version of the app for undergraduate studies only, is available here. The instruction  for said app can be downloaded here if you have a problem viewing the images in a browser.

Let me make a couple of things perfectly clear before we proceed:

1. There really is no tool such as this commonly available to students, parents and families to assist in the education decision-making process.
2. Despite what you make think, as an individual, about the merits of post secondary education, the actual empirical and economic value of said education should be one of the primary factors used in considering to pursue such.
3. For those who are currently ensconced in the pursuit of a business, economics or accounting degree, the contents of said modeling software should be second nature and the results of said analysis should be of no surprise. If a negative ROI takes you aback, you should come to either one of two conclusions:
   1. There is an egregious error in the software (not very likely), or
   2.  The value of the education that you are currently pursuing is overstated and/or fictitiously inflated.

If you have not read the previous installments in this series, please do:

1. How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime & More Dangerous Than Sovereign Debt!
2. How To Profit From The Impending Bursting Of The Education Bubble, pt 2 - "Knowledge How", Replicating Grecian Insolvency & Why Most Diplomas Are Depreciating Assets In Real Terms
3. How To Profit From The Impending Bursting Of The Education Bubble, pt 3: As Bad As Harvard Endowment Funds -0.05% ROI? The Levered Harvard Diploma!

About Knowledge How: College and University Education Valuation Software

This application captures, quantifies and illustrates the value of a diploma from higher education institutions across different disparate majors and gives each a distinct eROI (Economic return on investment) figure for students pursuing these courses.  The app uses inputs of (1) expected salary of a student after completing a major, (2) the tuition payable for pursuing the major, (3) any loans that would be taken to finance the course fee, (4) a blended tax rate to compute disposable income, (4) interest rate for the loan, (5) household expenses that a person is likely to incur, (6) growth rates in salary, (7) Opportunity cost for pursuing a major full time, (8) and an adjustment for the unemployment rate to factor in the impact of unemployment.

The app also computes cash flows that a student is likely to earn over the life of his career after considering his installments for student loan repayment, household expenses, taxes and the opportunity cost for pursuing a major.

The table below shows the computation of cash flows

 *The model runs over the expected career life a student after the completion of a course

The app comes pre-populated with data to compute the economic internal rate of return (IRR) and Net Present Value (NPV) @ 6% for the following universities across undergraduate, postgraduate and PhD courses

1. Harvard
2. Yale
3. Princeton
4. DeVry
5. University of Pennsylvania
6. City University of New York (CUNY)
7. Capella
8. Pheonix

 The undergraduate, postgraduate and PhD courses that have been considered in the model for computing & comparing returns are listed below.

The IRR and NPVs of above listed universities across undergraduate, postgraduate and PhD courses are also compared with return on equities, commercial real estate and precious metals.

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The pre-populated data is easily overwritten to allow the app user to use their own prospective/actual institutions, interest rates and assumptions.

Structure of the App’s Financial Model

 (How the model is structured in terms of information, inputs and results)

Input & Assumption Sheet: The model has one input & assumption sheet. It has all the inputs for assumptions that are linked to different sheets in the model. These assumptions can be changed to see different results if desired.

Visual Analysis Sheets: There are three sheets – one each for Undergraduate, Postgraduate and PhD. These sheets display graphical results for return on investment across different Majors and institutions.

Break-even Analysis Sheets:  There are five sheets – one each for Undergraduate, Postgraduate, PhD, Bachelors + Post Graduate, and Bachelors + Post Graduate + PhD. Each sheet shows the cumulative cash flows for majors/courses & universities for all years in a student’s career life cycle. It also displays total cash flows during the period and the year of break-even for a course from a university. The graphical representation of the information (in the same sheet) helps to quickly and visually compare cash flows and year of break-even across different courses and universities

Summary Analysis Sheets: There are five sheets - one each for Undergraduate, Postgraduate, PhD, Bachelors + Post Graduate, and Bachelors + Post Graduate + PhD. These sheets summarize & compare ROI and NPV @ 6% across courses from different universities

Market to Market Sheet: The sheet compares the return of equities, CRE, and precious metals to those of bachelors, postgraduate and PhD degrees from the universities.

Summary Return Analysis Sheet: There are five sheets –one each for Undergraduate, Postgraduate, PhD, Bachelors + Post Graduate, and Bachelors + Post Graduate + PhD. These sheets show detailed calculations on ROI and NPV for different courses across the number of universities.

Unpaid Internship: The sheet shows IRR and NPV computation in a scenario that a person works as an unpaid intern with a top or progressive company in the US instead of pursuing a bachelors’ degree

Data: The sheet has data on cost of courses from different universities as well as salaries for students graduating from them

Key Assumptions / Inputs

The model uses the following key inputs

Tuition/Course Fee: The fees for different courses have been sourced from the respective universities for the academic year 2013-14

Salaries: The current offered salaries for students graduating with different majors & universities has been sourced from www.payscale.com

Other Assumptions: Assumptions which have been applied consistently across different courses & universities are as follows:

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Key Findings

The current weak economic environment has seriously dented the economic viability of pursuing a degree (Bachelors, Masters or a PhD) from some of the top universities in the US. The persistent decline in salaries being offered to graduates from these universities coupled with continued rise in cost of courses has resulted in a fall in economic return to students from these majors.

In the US, the trend of increasing duration of student loans and higher aggregate student loans outstanding are a matter of immediate attention. These trends have increased concern over higher student loan default in the near future, resultantly seriously raising the need for evaluation of value of securitized assets based on such loans. In essence, it’s the mortgage bubble all over again.

Return from Undergraduate Courses

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Almost all universities (listed below) offer very low returns over a student’s career life if aggregated as an “all majors” category. The high cost of courses and lowering of salary being offered upon completion of courses are major drivers for lower returns.

NPV @6% p.a is negative for all schools on an aggregated basis.

Resultantly the break-even year impractically far in most cases - after the year 2040 (assuming a start year of 2013).

The returns are far lower compared with the 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%). When taking individual majors into consideration, the numbers get even more interesting for diversity comes into play. The accompanying app shows the divergence in value not only between different majors within a school, but also the same majors between different schools, thereby actually valuing both the majors and the schools themselves!

Return from Postgraduate Courses

Postgraduate degrees offer a much better return compared with other asset classes than do undergraduate degrees.  

The break-even year is achieved much earlier, in most cases within 12-16 years.

NPV @6% is positive in all the cases.

Return from PhD Courses

Similar to undergraduate courses, return from PhD courses is lower compared to postgraduate courses. The returns are also lower compared to 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%)

The break-even year is achieved after a very long time, after almost 26-28 years.

The Importance of the Variable, Inputs and Assumptions

The eROI of the degrees in question is highly sensitive to the inputs made to calculate it. The primary inputs with the largest influence are:

Opportunity costs – while in school, the money that you are not making simply adds up very, very quickly. Many take the money and experience gained in the actual workforce for granted when attempting evaluate a degree. From an mathematical perspective, that is a mistake.

Debt – the amount of loans taken, if any and the terms of said loans. Thus grant and scholarships make a big difference, as does (to a much lesser extent, of course) equity cash payments.

Salary upon graduation – this is the actual positive cash flows allegedly stemming from the education. A mediocre salary earned earlier actually has a strong chance of being more valuable via time value than a strong salary earned much later. This is particularly the case when debt is thrown into the equation. Again, math rules the day.

Living expenses – when calculating the eROI of a degree, one simply cannot ignore the net cash flows since that is the ONLY way to monetize one’s education. Living expense drastically reduce net cash flows, and they must be taken into consideration when calculating  eROI, as opposed to many more passive investments.

Unemployment rate and business climate upon graduation – with high unemployment, high underemployment (individuals who are employed, but considerable underpaid in proportion to their education and/or experience), sluggish economic environments and/or shifts in business cycles that favor one industry over another, it is quite likely that one will not materialize the expected average salary of the mean graduate (the inputs used for the [salary upon graduation] input, above) upon entering the workforce. Cyclical trends amongst and in between industries tend to have the same of similar effect. 

The Government's take?

In closing, I'd like to point out the government's attempt at proffering a quantitative tool to assist in selecting colleges. Of course, it focuses more on nominal cost than economic result (as does our model), but it's better than what any other administration has put out (read as nothing). Those who are interested can peruse the following links:

1. High School Students Critique Obama's College Scorecard - High ...

   The Obama administration's proposed College Scorecard is all Greek to high school students, according to a report released Monday by the 

    
2.  Provide Input on Proposed Federal "College Scorecard ... - Educause
   
   Feb 6, 2012 – While all of those information sources may not be aligned to the extent necessary to populate the College Scorecard as currently proposed, ...
3. High-School Students Take Dim View of College Scorecard, Report ...  
   Dec 3, 2012 – The College Scorecard, President Obama's proposed way to provide students with better data about their college options, leaves many of those ..[PDF] 

   University of the United States (UUS) Costs ... - The White House 

   File Format: PDF/Adobe Acrobat - Quick View
4. The President has proposed providing this information to students and families. ABCCollege. ABC College  Institutions that enroll similar types of students ...
5.  CAP Report Reveals Student Confusion with Obama College ...
   Dec 5, 2012 – ... on the Obama administration's proposed college scorecard. The scorecard, a reference for students considering attending higher education, ...[PDF] 

   Improving the College Scorecard - Center for American Progress 
6. File Format: PDF/Adobe Acrobat - Quick View

   The White House will soon unveil a final version of its “college scorecard”—an online tool .... The President has proposed providing this information to students ...
7. The Quick and the Ed » Higher Education Needs a Flashlight 
   Feb 2, 2012 – Categories: Accountability, College Costs and Student Debt, Higher ...proposed “College Scorecard” and “Financial Aid Shopping Sheet”.
8. The Quick and the Ed » college scorecard
   Dec 3, 2012 – The college scorecard, a proposed online tool meant to help students make ... The proposed “college scorecard” that aims to give prospective ...