It started in 2012 wiith the article "Deadbeat Carrier Creative Destruction In The Ongoing Mobile Computing Wars". That's when I warned that margins in the carrier space will collapse - just as they did in the cellular handset space, as new business models and the effect if Android start to ripple and reverbrate. My latest article in the series, "The Smallest & Liveliest Of The DeadBeat Carriers Successfully Launched Wireless WMDs" detailed how T-Mobile will throw the gauntlet down and turn the wireless industry on its head - at great risk not just to margins but entire business models. To wit:

There are 4 major national carriers in the US, basically two big ones two smaller ones. The smallest of the 4, T-Mobile, consistently get beat up - losing out on the right to subsidize the iPhone at a loss (like AT&T used to and Sprint still does) and basically losing subscribers. Then they decided to do something about it. They said, "Hey, let's stop being deadbeats!". By changing their pricing plans and eliminating subsidies and instead selling pure access to their virtual pipes (like a carrier is supposed to) combined with actual "real" financing of the hardware (at competitive rates, nonetheless) they essentially committed DeadBeat Carrier Blashphemy. The only issue was, it worked, to the chagrin of the competition - reference:

 Reggie Middleotns Carrier Cost ComparisonReggie Middleotns Carrier Cost Comparison

Reggie Middleotns Carrier Subsidy Cost ComparisonReggie Middleotns Carrier Subsidy Cost Comparison

  As a matter of fact, in Deadbeat Carriers Compete, aka #MarginCompression!!! (exactly ONE year ago), I prognosticated that T-Mobile will kick off a pricing war that will bring about the greatest savings to the wireless consumer it has seen since the birth of the industry. I even went so far as to include and online interactive spreadsheet for readers to analyze their own savings - or potential therefore.

Well, fast forward to today and we get to see if Reggie's thesis is still holding water. From the Street.com in How the Consumer Wins In the Wireless Wars:

Carriers are engaging in a price war in order to win market share, with T-Mobile's "uncarrier" plans really shaking things up. T-Mobile has been aggressively trying to grab market shares by eliminating consumer "pain points," specifically the issue of locking customers into two-year contracts. T-Mobile has been rolling out programs to entice customers to switch their carrier, with the latest three offerings announced in April, where the company under the "Simple Starter," "Tablet Freedom" and "Overage Freedom" - eliminated all domestic overage charges for consumers, even those on legacy plans. T-Mobile had announced in March 2013 its "Simple Choice" plan that offered no annual service contract and low out-of-pocket costs on smartphones.

The company must be doing something right, given its impressive first-quarter subscriber growth of 2.4 million total net customer additions for the three months, making it the "fastest growing wireless company in America," it said in its earnings release last week.

Both Verizon and AT&T are combating T-Mobile by touting payment agreements for customersthat require little to no down payment, more data, and fewer service charges when it comes to multiple phones or being able to pay for the device itself in installments as appealing features to switch over. (Check with your carrier to see the latest offers available.)

That said, it's easy for consumers to get confused by the growing array of options, but it's clear that for once, the consumer is winning since costs associated with smartphones are becoming more transparent and understandable. "This trend, combined with a wider selection of fully functional mid-range and low-end devices, should help win over the undecided consumers but also will shift the growth away from the high end," Kantar stated.

Between the first quarter of 2013 and the first quarter of this year, spending on smartphones on contracts dropped to $93 from $119, while pre-pay spending dropped to $148 from $187, Kantar said.

Now, the mainstream media and sell side analytical community is just a year (or two) late in realizing this, but better late then never, eh? Also from the Street.com we have Why T-Mobile Is Beating AT&T and Verizon:

 T-Mobile US shares were surging 8.1% to $31.67 following news that larger rival Sprint was prepping plans to propose a buyout of the carrier as its impressive subscriber growth for the first-quarter shows that consumers are digging its offerings.

T-Mobile, known for its "Un-carrier" initiatives, has been aggressively trying to grab market share by eliminating consumer "pain points," specifically the issue of locking customers into two-year contracts like Verizon , Sprint and AT&T . T-Mobile has been rolling out programs to entice customers to switch their carrier, with the latest three offerings announced in April, where the company under the "Simple Starter," "Tablet Freedom" and "Overage Freedom" - eliminated all domestic overage charges for consumers, even those on legacy plans. T-Mobile had announced in March 2013 its "Simple Choice" plan that offered no annual service contract and low out-of-pocket costs on smartphones.

The company must be doing something right, given its impressive first-quarter subscriber growth.

T-Mobile reported first-quarter earnings results earlier this morning in which it boasted 2.4 million total net customer additions for the three months, which included more than 1.8 million branded net customer additions, making it the "fastest growing wireless company in America," it said in its earnings release. T-Mobile ended the quarter with 49.1 million customers, it said. On the other hand, the company experienced "record low" churn of 1.5%, down 20 basis points from the fourth quarter and down 40 basis points from the year-earlier period.

...  T-Mobile actually posted a net loss of $151 million, or 19 cents a share, for the three months ending March 31, compared to a profit of $106 million, or 20 cents a share in the year-earlier quarter, according to its quarterly filing. However, revenue at the Bellevue, Wash.-based company rose 47% to $6.87 billion year over year. 

... Adjusted EBITDA came in at $1.1 billion, down 12.2% sequentially, which it attributed to increased equipment sales due to the "significant acceleration in customer growth and the success of its Un-carrier 4.0 - Contract Freedom offer." Adjusted EBITDA margin was 20% compared to 24% in the fourth quarter of 2013.<story_page_break>

... T-Mobile expects branded postpaid net additions between 2.8 million and 3.3 million for the full year and adjusted EBITDA to be in the range of $5.6 to $5.8 billion, it said.

Althouth T-Mobile may be hard pressed to replicate that pop in revenues and subscribers, I expect the trend to continue until and unless the other carriers match it in both pricing model and marketing efforts. I doubt they will do this until it is too late. They should, but they won't. That is unfortunate for thier investors for, as T-Mobile is the smallest of the top 4 national carriers, this is Verizon/ATT/Sprint's (in that order) fight to lose!

In addition, as revenue and subscriber rate increases subside, EBITDA may level off as the switching incentive costs amortize. This is not even considering what may happen if an entrepenurial and disruptive force (ex. Google Loon offshoots) appears on the scene.

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On or about February 23rd, 2014, Mt. Gox (on of the larger bitcoin exchanges) collapsed. The MSM (mainstream media) had a field day...

kapre

LA times on btc

yhoo on btc

I warned everybody that the fall of Mt. Gox was simply a poorly managed small business getting its just dues. To correlate the fortunes of Mt. Gox with the fortunes of the Bitcoin ecosystem is akin correlating the fortune of the World Wide Web with that of Pets.com or Alta Vista in the 1990s. Sounds silly doesn't it? Well, fast forward 3 weeks from the Gox'd experience and this is what we find... BTC volatilityThe week after the media frenzy regarding Mt. Gox started to fade, the price of BTC (bitcoins) started a dramatic phase of price stabilization. This apparent price stabilization was verified by the very dramatic drop in standard deviation.

If we drill down to the weeks in question, we find... BTC volatility1

This price stabilization has occurred even before the wide scale adoption of UltraCoin. 

As always, I'm looking for:

  1. financial capital
  2. intellectual capital
  3. developers, management and sales/marketing expertise.

If you have any of this in abundance, hit me at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Yahoo borrows a page from Google's book and gets disruptive for 2014. I like!!! 

The old media is ripe to be shaken up even further, and why should everyone let Google's Youtube have all of the fun. Lauren Lyster, a personality who used to interview me often on RT joined Yahoo last year as well. She's good and Yahoo is aggressively recruiting talent and investing in this space. 
Now, the old guard media, if they had any sense, would retaliate by pushing harder into the new media space. Don't hold your breath for that one to happen any time soon, though.

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I was going to name this piece "Why Sell Side Wall Street and the Mainstream Media Can't Touch Me", but I decided to go the humble route :-) Do you guys remember those highly paid Wall Street analysts and popular MSM guys who had $1,000+ price targets on Apple just a few months ago? Let's reminisce, shall we...

Let's contrast this to what I have espoused over a similar time frame...
  1.  - This pretty much says it all, right Mr. Munster of Piper Jaffrey??? Yeah, I called you out on this one! Here is an excerpt for good measure, but before you read it remember that Apple's thrashing at the exchange has forced it to renounce its earnigns manipulating ways - just as I anticipated!!!
    • Riddle me this - If Apple can consistently beat the estimates of your favorite analysts quarter after quarter, after quarter - for 11 quarters straight, shouldn't you fire said analysts for incompetency in lieu of celebrating Apple's ability to surprise? ... Apple management consistently lowballs guidance to such an extent that it can easily manage, no - actually create outperformance. This has has a very positive effect on their valuation... The analytical community and the (sheeple) investors which they serve... Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

      Below, I drilled down on the date and used a percentage difference view to illustrate the improvement in P/E stemming from the earnings beats.

      In our analysis of Apple, we are using real world assumptions of future performance derived from backing in to the low balling this company is prone to. If you look at its history carefully you can gauge what management is comfortable with, hence what they may be capable of on the margin. Using these more realistic numbers, it is much more likely Apple will deliver a miss in the upcoming quarters in its battle with the Android! The following is the reason why.

  2. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple - This reviews the history of the commoditization of the PC at the hands of Microsoft (2010)
  3. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance - This illustrates the pace of Android innovation forcing Apple to take a back seat or face margin compression
  4. Apple on the Margin - This is an illustration of margin compression, before the fact. Yes. Tomorrow's financial news,,, yesterday!

 Now, on to the title of the article and why these guys just don't understand Apple...

Apple is not the leader of the post PC world!Rotten plus GreenApple

Post PC World! That was part of the marketing mantra created by Steve Jobs and his RDF (Reality Distortion Field). PCs are personal computers. Personal computers are small (relative to mini computers and mainframes) computing devices. Apple made/makes nearly ALL of its revenues from PCs, particularly once they became imbued with always on telecommunication capabilities (ex. the Internet). These PCs include iMacs. Macbooks, iPods, iPads or iPhones - any way you look at it they are just PCs or ultra-portable PCs.
  1. So point one, PCs are still alive and well (thus far)...
  2. Point two, Apple makes nearly all of its money from PCs...
  3. Point three, Apple is not the leader of the PC world right now. It's not Dell nor HP, either. An Asian company is the PC leader - Samsung!

Samsung has out innovated, out distributed, outran and outsold Apple using the leverage of a free OS/ecosystem that is currently best of breed and improving at what is at least 3x the speed of the competition. Here's a tidbit to chew on..

Worldwide (traditional) PC shipments totaled 89.8 million units in the fourth quarter of 2012 (down 6.4% from Q4 2011) and is on  rapid and continuous downward decline in terms of growth (4Q12) - IDC

In the worldwide smartphone market, vendors shipped 219.4 million units in 4Q12. The year-over-year growth was 36.4%, as compared to what most people consider the PC's growth of negative 6.4% Althought the high-growth smartphone market was dominated by Samsung and Apple, prices are being driven down substantially by challengers.  As excerpted from IDC's mobile press release:

Kevin Restivo, senior research analyst with IDC's Worldwide Quarterly Mobile Phone Tracker. "Vendors with unique market advantages, such as lower-cost devices, can rapidly gain market share, especially in emerging markets. A good example is Huawei, which overtook LG as a Top 5 vendor in the overall mobile phone market and passed HTC to become a Top 5 smartphone vendor."

"The fact that Huawei and ZTE now find themselves among the Top 5 smartphone vendors marks a significant shift for the global market," noted Ramon Llamas, research manager with IDC's Mobile Phone team. "Both companies have grown volumes by focusing on the mass market, but in recent quarters they have turned their attention toward higher-end devices. In addition, both companies have pushed the envelope in terms of industrial design with larger displays and smaller form factors, as well as innovative applications and experiences."

What do ALL of these Asian companies have in common? What do ALL of these companies, except Apple, have in common? Well, for one, they're all growing a hell of a lot faster than Apple. In addition, Samsung has already overtaken Apple. But there's more. Here's a hint... Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance - This illustrates the pace of Android innovation forcing Apple to take a back seat or face margin compression.

So, what else is the sell side missing? Hardware is Dead!

Or at least the fat margined hardware model. Reference Smartphone Hardware Manufacturers Are Dead and Computer Hardware Vendors Are Dead, Part Deux! Yeah, you're not going to hear this from many investors or analysts, but then again how many can really see the forest for the trees? So, you ask, "How is it that hardware is dead?" Well....
  1.  For one: The open source OS paradigm calls for rapidly improving hardware specs at ever lower prices. I have pointed to evidence of this above, as these Asian OEMs produce ever better product at ever lower prices - just like the old school PC industry. This drives Google's info-centric business model which is why Google pushes free Android.
  2. Two: after years of outsourcing manufacturing tech and UP to low cost labor Asian countries, those countries have found a way to produce trinkets of their own. Of limited quality and value so you say? Well, remember the iPhone is a Chinese phone, through and through -at least Chinese built. So now you argue, it's American designed, just Chinese made! Please peruse the Oppo Finder 5, a phone that's drastically superior to the iPhone 5 in practically every single way, retailing for $100 less than the cheapest iPhone 5 made. Low cost, low margin products combined with Google's free OS will drive the price of hardware down to near zero, if not negative. Google even has its own hardware arm now (Motorola) to facilitate this downward march in margins and prices. Suppose Google decides to create best of breed Nexus devices and give them away just below cost? Imagine the best smartphone available in the world, unlocked, without a contract, for the cost of a single monthly wireless phone payment??? Google's Nexus program is acting as a training ground to teach Google's Motorola division to build best of breed! Google's biggest and most successful partner - Samsung, is an Asian company. Samsung Electronics of South Korea reported today that its quarterly profit  jumped 76%, as its Galaxy smartphones beat rival Apple's iPhone in each quarter of 2012. What many seem to have missed is that EBITDA, Operating and Gross margins all slipped QonQ though. A sign of things to come??? Remember, Google benefits most when the barriers to access information are least. Reference "Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!" as well as my videos below...

Samsung is also currently Google's biggest threat. This (soon to be combative) symbiotic relationship is akin to the relationship that Samsung had with Apple. Competitors, yet symbiotic partner/clients. Samsung and Google are poised to have a slugfest. Their relationship is similar to that of Samsung and Apple, with Samsung being the Apple in this case. Apple is highly reliant upon Samsung for memory and processor chips, and screens. Although Apple is a the biggest Samsung client, it's by far not the only one and the Chinese manufacturers are up and coming. 
Since Samsung is highly reliant on Google's Android but Google has significant diversification when it comes to its reliance on Samsung, Samsung's role is reversed here. You do see who's winning the Samsung/Apple battle, don't you? Expect the same conflict with similar results when Samsung butts heads with Google, unless some significant changes come into play - Which is quite possible in this rapidly morphing landscape.
Despite this, I'm sticking with Google on this for now. You see, despite Samsung's meteoric growth and triumphs over Apple, even its margins are sliding Q on Q, but most miss this because of the massive jump in earnings. Yes! Margin compression! Remember, RIMM and AAPL (and Nokia too) both exhibited this massive jump in earnings before commoditization born from the Android less than free model struck home. Many were caught with their pants down who didn't read BoomBustBlog.
I warned in plenty of time to both avoid loss and profit on the short side for each company:

Now, Samsung seems to be the most innovative of the handset vendors to date, but if I'm right, they will end up having to innovate in a commodity space just like the traditional PC manufacturers (Dell, HP, etc.) have to do now. Why?  Because of point number Three...

The new PC is not even a PC anymore, its a multi-tiered, multi-function, distributed cluster of interactive, location aware, multimedia applications sharing your social activities and data through a network of servers - in short, it's the cloud!

For right now, GOOGLE IS THE CLOUD! See my video descriptions of Google's business models above.
 
Apple can't do cloud! 
 
Simply ask those iMap (our whatever it's called) users who were Bamboozled into switching from Google Maps.... and Apple will not learn the Cloud until it has been a "has been" in the likes of Sony and the Walkman or the PlayStation. That's the base case scenario. The optimistic case is that Apple learns to do the cloud enough to compete with and possibly beat Google, and burns deep into its cash horde, reducing margins along the way. Yes, that's the best case scenario. You see, it's not about who has the best products services at this point. I believe that's Google and its partners, but again that belief is beside the points.  In order for Apple to be competitive in a truly post PC world (I can't even say remain competitive) it simply HAS TO DROP MARGINS!!!
 
When Apples MARGINS drop (which they will have to) then the stock valuation drops. That's the margin compression theory that I've been pushing since 2010, culminating with a public call to short the stick into the lower band off the valuation range that I posted my paying subscribers on my site. See  Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!! Was I right? Well when the most loved and highly captialized stock in the world drops fro $707 to about $440 in  few months, you tell me?
 
This should have been glaringly obvious to anyone who actively used and followed the products and services of Google and Apple, and had even a rudimentary understanding of business valuation. You know, it's amazing how far an awareness of cognitive biases and a mastery of second grade math can get you on Wall Street. It can actually bring you tomorrows news yesterday! Subscribe to BoomBustBlog today!
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In 2009, Max Keiser warned interviewed the Bundesbank and uncovered the fact that much of (if not most) Germany's gold resided in NYC. Well, now as this information has become mainstream, the Bundesbank has announced that it is repatriating much of their gold to national lands, under a stated "storage plan", aka potential currency war.

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While perusing the news today, I came across this most interesting article in Bloomberg, Swaps ‘Armageddon’ Lingers as New Rules Concentrate Risk'. Before we delve into it, I want to review how vehemently I've sounded the alarm on this topic over the last 6 years. Let's start with So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?, where I've aggregated my warnings into a single article. In a nutshell, 5 banks bear 96% of the global derivatives risk. The argument to defend such ass backwards risk concentration is "but it's mostly hedged, offset and netted out". Right! You know that old trader's saying about liquidity? It's always available, that is until you need it!

Even though I've made this point of netting = nonsense multiple times, I must admit, ZH did a more loquacious job, as follows:

..Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 

Hey, there ain't no concentration risk in US banks, and any blogger with two synapses to spark together should know this... From An Independent Look into JP Morgan.

Click graph to enlarge

 image001.pngimage001.pngimage001.pngimage001.png

Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who".

So, the Bloomberg article that got this rant started basically says that the risk is being shifted from the banks to clearing houses, who demand above board, translucent collateral for transactions. This should solve the problem, right? Hardly! You see, the Fed and US banking regulators have made it legal and acceptable for banks to outright lie about the qualit of their collateral and the condition of their finances. It all came to light with my research on Lehman (and Bear Stearns, amonst others). These mistakes are so repetitive of the ones made in the past, I literally do not have to right any new material, let's just re-read what was written several years ago:

Lehman Brothers and Its Regulators Deal the Ultimate Blow to Mark to Market Opponents

Let's get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying "How the hell did he know that?"

The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain't so and I'm not going to lie to you. The truth of the matter is I sniffed these incongruencies out because 2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating "This time is different", "There is a new math" (as if there was something wrong with the old math), etc. and so on and associated bullshit.

So, the question remains, why is it that a lowly blogger and small time individual investor with a skeleton staff of analysts can uncover systemic risks, frauds and insolvencies at a level that it appears the SEC hasn't even gleaned as of yet? Two words, "Regulatory Capture". You see, and as I reluctantly admitted, it is not that I am so smart, it is that the regulator's goals are not the same as mine. My efforts are designed to ferret out the truth for enlightenment, profit and gain. Regulators' goals are to serve a myriad constituency that does not necessarily have the individual tax payer at the top of the hierarchical pyramid. Before we go on, let me excerpt from a piece that I wrote on the topic at hand so we are all on the same page: How Regulatory Capture Turns Doo Doo Deadly.

You see, the banking industry lobbied the regulators to allow them to lie about the value and quality of their assets and liabilities and just like that, the banking problem was solved. Literally! At least from a equity market pricing and public disinformation campaign point of view...

A picture is worth a thousand words...

fasb_mark_to_market_chart.pngfasb_mark_to_market_chart.pngfasb_mark_to_market_chart.png

So, how does this play into today's big headlines in the alternative, grass roots media? Well, on the front page of the Huffington Post and ZeroHedge, we have a damning expose of Lehman Brothers (we told you this in the first quarter of 2008, though), detailing their use of REPO 105 financing to basically lie about their
liquidity positions and solvency. The most damning and most interesting tidbit lies within a more obscure ZeroHedge article that details findings from the recently released Lehman papers, though:

On September 11, JPMorgan executives met to discuss significant valuation problems with securities that Lehman had posted as collateral over the summer. JPMorgan concluded that the collateral was not worth nearly what Lehman had claimed it was worth, and decided to request an additional $5 billion in cash collateral from Lehman that day. The request was communicated in an executive?level phone call, and Lehman posted $5 billion in cash to JPMorgan by the afternoon of Friday, September 12. Around the same time, JPMorgan learned that a security known as Fenway, which Lehman had posted to JPMorgan at a stated value of $3 billion,was actually asset?backed commercial paper credit?enhanced by Lehman (that is, it was Lehman, rather than a third party, that effectively guaranteed principal and interest payments). JPMorgan concluded that Fenway was worth practically nothing as collateral.

Well, I'm sure many are saying that this couldn't happen in this day and age, post Lehman debacle, right? Well, it happened in 2007 with GGP and I called it -  The Commercial Real Estate Crash Cometh, and I know who is leading the way! As a matter of fact, we all know it happened many times throughout that period. Wait a minute, it's now nearly 2013, and lo and behold.... When A REIT Trading Over $15 A Share Is Shown To Have Nearly All Of Its Properties UNDERWATER!!!

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names. In putting a realistic valuation on PEI, we independently valued a sampling of 27 of its properties. We found that many if not most of those properties were actually underwater. Most of those that weren't underwater were mortgaged under a separate credit facility.   

PEI Underwater  Overly Encumbered Properties

What are the chances that the properties, whole loans and MBS being pledged by PEI's creditors are being pledged at par? Back to the future, it's the same old thing all over again. Like those banks, PEI is trading higher with its public equity despite the fact that its private equity values are clearly underwater - all part of the perks of not having to truly mark assets to market prices.  

 From Bloomberg: Swaps ‘Armageddon’ Lingers as New Rules Concentrate Risk

Clearinghouses cut risk by collecting collateral at the start of each transaction, monitoring daily price moves and making traders put up more cash as losses occur. Traders have to deal through clearing members, typically the biggest banks and brokerages. Unlike privately traded derivatives, prices for cleared trades are set every day and publicly disclosed.

And what happens when everybody lies about said prices? Is PEI's debt really looking any better than GGP's debt of 2007?

GGP Leverage Summary 2007

Properties with negative equity and leverage >80% 32
Properties with leverage >80% 44
% of properties with negative equity (based on CFAT after debt service) 72.7%

PEI Summary 2012

PEI Underwater  Overly Encumbered Properties

Both of these companies have debt that have been pledged by banks as collateral. Would you trust either of them? The banks then use the collateral to do other deals leading to more bubbles. What's next up in bubble land? I warned of it in 2009...

Check this out, from "On Morgan Stanley's Latest Quarterly Earnings - More Than Meets the Eye???" Monday, 24 May 2010:

Those who don't subscribe should reference my warnings of the concentration and reliance on FICC revenues (foreign exchange, currencies, and fixed income trading).  Morgan Stanley's exposure to this as well as what I have illustrated in full detail via the  the Pan-European Sovereign Debt Crisis series, has increased materially. As excerpted from "The Next Step in the Bank Implosion Cycle???":

The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.pngbank_ficc_derivative_trading.png

So, How are Banks Entangled in the Mother of All Carry Trades?

Trading revenues for U.S Commercial banks have witnessed robust growth since 4Q08 on back of higher (although of late declining) bid-ask spreads and fewer write-downs on investment portfolios. According to the Office of the Comptroller of the Currency, commercial banks' reported trading revenues rose to a record $5.2 bn in 2Q09, which is extreme (to say the least) compared to $1.6 bn in 2Q08 and average of $802 mn in past 8 quarters.

bank_trading_revenue.pngbank_trading_revenue.png

High dependency on Forex and interest rate contracts

Continued growth in trading revenues on back of growth in overall derivative contracts, (especially for interest rate and foreign exchange contracts) has raised doubt on the sustainability of revenues over hear at the BoomBustBlog analyst lab. According to the Office of the Comptroller of the Currency, notional amount of derivatives contracts of U.S Commercial banks grew at a CAGR of 20.5% to $203 trillion by 2Q-09 from $87.9 trillion in 2004 with interest rate contracts and foreign exchange contracts comprising a substantial 84.5% and 7.5% of total notional value of derivatives, respectively. Interest rate contracts have grown at a CAGR of 20.1% to $171.9 trillion between 4Q-04 to 2Q-09 while Forex contracts have grown at a CAGR of 13.4% to $15.2 trillion between 4Q-04 to 2Q-09.

In terms of absolute dollar exposure, JP Morgan has the largest exposure towards both Interest rate and Forex contracts with notional value of interest rate contracts at $64.6 trillion and Forex contracts at $6.2 trillion exposing itself to volatile changes in both interest rates and currency movements (non-subscribers should reference An Independent Look into JP Morgan, while subscribers should referenceFile Icon JPM Report (Subscription-only) Final - Professional, and File Icon JPM Forensic Report (Subscription-only) Final- Retail). However, Goldman Sachs with interest rate contracts to total assets at 318.x and Forex contracts to total assets at 11.2x has the largest relative exposure (see Goldman Sachs Q2 2009 Pre-announcement opinion Goldman Sachs Q2 2009 Pre-announcement opinion 2009-07-13 00:08:57 920.92 Kb,  Goldman Sachs Stress Test ProfessionalGoldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 MbGoldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb,). As subscribers can see from the afore-linked analysis, Goldman is trading at an extreme premium from a risk adjusted book value perspective.

bank_forex_exposure.pngbank_forex_exposure.png


Back to the Bloomberg article:

Disaster Scenario

The need for a Fed rescue isn’t out of the question, said Satyajit Das, a former Citicorp and Merrill Lynch & Co. executive who has written books on derivatives. Das sketched a scenario where a large trader fails to make a margin call. This kindles rumors that a bank handling the trader’s transactions -- a clearing member -- is short on cash.

Remaining clients rush to pull their trading accounts and cash, forcing the lender into bankruptcy. Questions begin to swirl about whether the remaining clearing members can absorb billions in losses, spurring more runs.

“Bank customers panic, and they start to withdraw money,” he said. “The amount of money needed starts to become problematic. None of this is quantifiable in advance.” The collateral put up by traders and default fund sizes are calculated using data that might not hold up, he said.

The collateral varies by product and clearinghouse. At CME, the collateral or “margin” for a 10-year interest-rate swap ranges between 2.89 percent and 4.06 percent of the trade’s notional value, according to Morgan Stanley. At LCH, it’s 3.2 percent to 3.41 percent, the bank said in a November note.

How Much?

The number typically is based on “value-at-risk,” and is calculated to cover the losses a trader might suffer with a 99 percent level of confidence. That means the biggest losses might not be fully covered.

It’s a formula like the one JPMorgan used and botched earlier this year in the so-called London Whale episode, when it miscalculated how much risk its chief investment office was taking and lost at least $6.2 billion on credit-default swaps. Clearinghouses may fall into a similar trap in their margin calculations, the University of Houston’s Pirrong wrote in a research paper in May 2011.

“Levels of margin that appear prudent in normal times may become severely insufficient during periods of market stress,” wrote Pirrong, whose paper was commissioned by an industry trade group.


Oh, but wait a minute? Didn't I clearly outline such a scenario in 2010 for French banks overlevered on Greek and Italian Debt (currently trading at a fractiono of par)? See The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

The problem then is the same as the European problem now, leveraging up to buy assets that have dropped precipitously in value and then lying about it until you cannot lie anymore. You see, the lies work on everybody but your counterparties - who actually want to see cash!

 

image012image012

Using this European bank as a proxy for Bear Stearns in January of 2008, the tall stalk represents the liabilities behind Bear's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk displayed in the first chart in this missive, and that is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

image006image006

I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence. The risk of a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable.

You see, the risk is all about velocity and confidence. If the market moves gradually, the clearing house system is ok. If it moves violently and all participants move for cash at the same time against bogus collateral... BOOMMMM!!!!!!!

Back to the Bloomberg article...

Stress Levels

What’s more, clearinghouses can’t use their entire hoard of collateral to extinguish a crisis because it’s not a general emergency fund. The sum represents cash posted by investors to cover their own trades and can’t be used to cover defaults of other people.

Clearinghouses can turn to default funds to cover the collapse of the two largest banks or securities firms with which they do business. They have the power to assess the remaining solvent members for billions more, enough to cover the demise of their third- and fourth-largest members.

But wait a minute, the other members are only solvent because they have hedges against the insolvency of the insolvent members. If those hedges fail, then the so-called solvent members are insolvent too! Or did nobody else think of that?

After all, this circular reasoning worked out very well for Greece, didn't it? See Greece's Circular Reasoning Challenge Moves From BoomBustBlog to the Mainstream...

 

 


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One of the inevitable results of cost shifting (see the video below) is not just the compression of margins, but the rapid advancement of adoption by the masses. This rapid adoption causes users producers, and in the tech space - programmers and hardware OEMs to dump significant amounts of resources into the product in the race for revenue and proftis. The end result? A materially superior product, even if that product started off inferior to the competition. This was the case with Windows back in the 80's and 90's, where Windows 2.0 was trash, and by the time you got to Windows 95, the application space was ubiquitous.

Well, the new millenium digital master of cost shifting, has taken its less than free product and imbued it with technology from both a hardware and software perspective that is totally unmatched by ALL of its competiion. reference this article from Bloomberg: HTC Said to Halt Larger Windows Phone on Display Resolution

 HTC Corp. (2498) scrapped plans to produce a large-screen smartphone using Microsoft Corp. (MSFT)’s operating system because the screen would have had lower resolution than competing models, a person familiar with the project said. The Windows software doesn’t support resolutions as high as that on Google Inc. (GOOG)’s Android platform, said the person, who asked not to be identified because the information isn’t public.

It should be noted that Apple's iOS can't support anything near the 1080p resolution as well. Microsoft does have the Windows RT and Pro OS lines. I'm typing this on a Windows 8 convertible tablet/notbeook (the Lenovo Yoga 13, a truly wonderful device that should make Apple iPad purchases seem daft in retrospect), but I feel it may be too little to late to make any inroads into the mobile space that will truly dent Google's prominence.

Chief Executive Officer Peter Chou’s decision to halt the project using Windows Phone 8 software leaves HTC with only Android for phones measuring larger than 5 inches diagonally, dealing a blow to Microsoft in its efforts to win share from Google and Apple Inc. (AAPL) Taoyuan, Taiwan-based HTC had planned to introduce the device next year to claw back share from Samsung Electronics Co., which offers Galaxy Note devices with larger screens using Android. Android snared 72 percent of the market in the third quarter, while Apple’s iOS software had 14 percent, according to Gartner Inc.

Microsoft isn't the only casualty here, for Bloomberg reports: First China Mobile, Now Russia's MTS Drops iPhone. Basically, the largest of the foreign carriers are either dropping Apple are demanding larger concessions from the company before they decide to carry the phone. This results in two things, unrestricted reign for Google's Android to proliferate (first indicated by BoomBustBlog nearly three years ago, Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance), and margn compression in Apple - a thesis presented nearly three years ago again - Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space, and perfected within a week or two of Apple's all time high and consequent fall from grace:  (see Right On Time, My Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!! I went into detail with Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All). 

The call to short Research in Motion two years ago () was born from the same logic. We all know how that story turned out - BoomBustBlog Research Performs a RIM Job! and Another RIMM Job? It's Amazing How Many Institutions Don't Read ... Margin will not be available to companies using last millenium's software model, and fat margined hardware is dead. The hardware is quickly becoming a commodity, see Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers and Computer Hardware Vendors Are Dead, Part 2). ALL of the hardware vendors need to do what the (use to be) pre-eminent software vendor is doing now, reference Microsoft Is Doing What The "Has Been Giants Of Yesteryear" Were Afraid To Do, Make A Radical Change BEFORE ITS TOO LATE! All of these "emergencies" are borne from Google and thier extremely dangerous cost shifting business model.

Google's cost shifting business model, explained...

Google's last three mobile phone software incarnations (Android 4.0, 4.11/2, & 4.2) are so materially superior to all of the competition in nearly everyway as to be nearly incomparable. Now, thanks to massive adoption by hundreds of OEMs around the world and the extreme rate of R&D expansion into this space, the hardware pushing the software is incomparable as well, with 8 core CPU chips and full 1080p unbreakable screens breaking the horizon next quarter, all with battery lives that can pierce the 36 hour mark. This is fascinating for smart phone shipments now handily outpace traditional PC shipments (I say traditional because smartphones are essentially ultra mobile PCs now). The company that controls the smartphone platform becomes the new age Microsoft of the last millenium. It amazing, since the old age Microsoft was the one best suited (at least it appeared) to be the new age Microsoft, but big company mentality, mixed with hubris and execution errors allowed Google to reinvent the software business model.

Could anyone have seen this coming? Of course they could have, at least they could have if they read BoomBustBlog...

Two and a half years ago, on Thursday, 05 August 2010 I penned: Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space. Let's traipse through it to see how accurate these near three year predictions in this volatile space have been:

Many commenters are lamenting on the fact that Google is not making money on Android sales since the OS is given away for close to free while Apple is making $250 per handset sold. Those who are looking at it from this perspective are missing the forest due to that big fat tree that is in their way! Yes, Apple is making a killing on its iPhone sales, and it would be difficult to attempt to catch them with a fat margined product. They have managed to produce both margin and volume and have wrapped it up with extreme customer loyalty. What the armchair pundits are missing is the power of reach. Google is developing massive reach, and developing it ridiculously quickly. A byproduct of this reach is the commoditization of the smart phone platform which will probably cut the fat margined business model off at its knees. That is not to say that Apple will be cut off at the knees, but they will have to alter their business model for the competitor-less margin that they enjoyed for the last three years will no longer be a given. It also means that anyone else reaching for the crown (including Apple) will have to spend more upfront to gain less per unit sold. This actually benefits Google, for they are not in the hardware race, yet they benefit from each and every handset, tablet, desktop and automotive unit sold. Google is trying to become the new Microsoft!

As clearly anticipated, Apple's margins have dropped, and are expected to drop even more and at a faster rate. Bingo! Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money!

In the meantime, Google ramps up the potential to push software as a cloud service, downloadable software and interactive, activity/context sensitive rich media ads and services to hundreds of millions of new users. This opens up a phenomenal opportunity for Google, and it appears as if many are missing the point because Google (wisely) decided not monetize it immediately, but to let it gestate and grow. Do you remember 15 years ago when many felt the same about search and the fact that Google wasn’t making any money providing search (pre-advertising)? Now this is not to say that Google is going to win the Smart Phone Wars, although at this point Google looks like the number one contender (IMO, Apple, Google and Microsoft are the ones to look out for). Apple has a very different and unique approach that is executing quite well from a profit and market share approach. Google has very strong momentum, and Microsoft has, by far, the strongest infrastructure. The only definite that I see is that this is a very exciting time to be a consumer of these products, for the competition is forcing everybody to push out the best that they have to offer – very much unlike the time when MSFT ran everything and which produced Windows Vista. Don’t believe me? Well, if you haven’t had a chance to yet, check out the features packed into the new Windows Mobile 7 OS - After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play.

Other perks from the Smart Phone Wars competition:

    • You can bet your left ass cheek that the iPhone 5 will have an Evo-sized screen with resolution to match today’s LCD flat screens, accompanied by the opening up of the iPhone to standards-based peripherals, ex. HDMI plugs and USB. The screen size increase is a definite, but peripherals is a maybe. Die hard Apple fans won’t mind that they have to jump through hoops to connect their device, but the rest of the world will lean towards an Android device if they can’t easily use their phone/tablet with existing hardware. Apple sees this as well as I do. I’m sure they’ll find a way to gimp the standard somewhat, but more open is better than less open.

The iPhone 5 did come out with a larger screen, albeit just now quiet large enough. For power users and those who are on their phone a lot  or consume significant multi-media, this is a deal breaker. Apple also went deeper into the proprietary field versus more standards based. This will give a temporary blip upwards in profits and lock-in, then ultimately cause #FAIL as Android ubiquity seeps in. This was a major error on the part of management.

    • You will probably see Nokia adopt Android or Windows Mobile on some of its devices, or you will see continued market share decline. Nokia makes some kick-ass hardware, and will challenge HTC if they had the OS to go along with it.

 As predicted, Nokia did adopt the Windows platform, and it did so en masse - reference The Nokia/Microsoft Alliance & Android's Commoditization Of the Mobile OS Platform. While many believe this to have been a foolish move on the part of Nokia, I believe it was their better bet. Now, they need to work on pushing the hardware boundaries like Samsung, HTC, et. al. This is not to say they will win, but it makes losing marginally less likely.

    • Microsoft is guaranteed to extend their hegemony on the desktop and enterprise server space to the handset, as well as their reach into the consumer living room via the Xbox. The result? More functionality, more usability, and better overall products.

Another accurate prediction as Microsoft goes full tilt into the hardware business (not peripherals, but actual computers with their Surface intiative). This was a very risky move on Microsoft's part, but something had to be done and the move is applauded by this author, as is the switch to the Windows 8 touch paradigm. Again, reference reference Microsoft Is Doing What The "Has Been Giants Of Yesteryear" Were Afraid To Do, Make A Radical Change BEFORE ITS TOO LATE!

Roughly 3 years ago in my "mobile computing wars" series, I foretold of The Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars! In particular, I warned of the benefits to the consumer and pitfalls to the potential losers of the battle between Apple, Microsoft and Google, reference There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All. By the way, by Q1 2010, it was already evident to BoomBustBloggers that Research In Motion was a goner - ). While the bulk of my opinion and analysis was directed between the upcoming heated battle between Apple and Google (The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift and An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught) which was accurately called, I also appeared to be the lone gunman in warning that Microsoft is not even close to being out of the race just yet - . This was early 2010. Well, nearly 3 years later, we have MSFT doing what IBM, LOTUS, HP, DELL, and a wide variety of other tech companies simply didn't have the balls to do. What is that, you ask? They risked cannibalizing their cash cow revenues and kicking their lazy, unmotivated (despite declining margins and market share, via ass whoopin's from Google and Apple) OEM's in the nuts, forcing either an exponential growth via a pheonix-like rebirth style wake-up call or a collapse from atrophy. Either way, Microsoft is attempting to position itself to benefit. The previous world tech rulers simply got too comfortable in their make money by doing nothing, cash cow, monopolistic business lines and sat around while more innovative and nimble competitors literally ate their lunch then came bombarding in demanding dinner as well (say Apple).

    • The Android clan (which is nearly everybody who is not RIM, Apple and MSFT, and maybe Nokia) will try their best to pump their R&D departments to their limits, and you will be getting bleeding edge products pushed to your door step on a quarterly basis until a clear winner is selected - which will probably be sometime from now.


Again, another very prescient call, as can be referenced through the public release of our latest report on Apple, :

Like the Galaxy Note 2 clearly makes the iPhone appear to be a toy rather than a useful device, the Surface does the same to the iPad.

Apple -Competition and Cost Structure - unlocked Page 09

Currently, the best phone on the market (feature-wise) also happens to be the cheapest phone on the market, and also happens to be a Chinese phone... Sold by a Chinese Company.

The-OPPO-Finders-Different-Views

This phone is one of the thinnest phones ever sold at 6.99 millimeters thick.

It has a 5 inch, FULL HD 1080p screen resolution with 441dpi density. This is approaching twice the resolution of the iPhone 5 and a full 1/3 greater pixels more than the "retina' screen.

The phone has the fastest chip on the market, the new quad-core Snapdgragon, materially faster than the chip inside the iPhone, and not just spec-wise but actual real world performance as well.

It has a 2.1 mega-pixel front facing camera that can do full HD video conferencing and a 12 mega-pixel rear facing camera with dual xenon flash (one of the highest resolutions in the market).

This cell phone will outrun and outperform a Macbook air laptop in many instances!

It is not a cheap Chinese knock-off. If anything, the iPhone 5 is a cheap American designed, Chinese made knock-off. Try doing this with your iPhone 5....

Oh yeah! A two year old already tried it, not with a grown man via hammer and nails, but just with her mommy's keys (may I add that iFixit is a well respected outfit):

Long story short, if anything, the iPhone 5 is the cheap knock off in terms of speed, durabilty or functionality!

This phone retails, unsubsidized and fully unlocked for just over $500 USD, as compared to the iPhone 5 which starts at $649. As I have been saying for quite some time, Apple is WAAAAYYYY behind the curve in terms of functionality, specs and quality and the only way they can catch up to the Android clan (that is if they even can catch up) is through share price destroying #MarginCompression, as told throughout this blog's Apple research history (see, again, Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money).

Must read Smart Phone Wars commentary from 3 years ago becomes true in real time:

    1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
    2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
    3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
Google's "less than free" business model has successfully put it on track to becoming the next Microsoft. Once it has 90+% market share in mobile OSs (it's currently knocking on 89%'s door), it will have the door opened to lead as the de facto provider of cloud services, basically acting as the Windows operating system (remember the importance of this OS in the 1990s) of the Web. We're not even broaching the topic of Google being the shepherd of global data and information throughout the web and the Internet connected world!

I have lamented several times before the anti-Apple rhetoric hit the MSM, Which Is The More Sustainable Business Model - Selling The World's Information or Selling Shiny New Things??? as Apple Bias In The Media Has Simply Gone Too Far, Potentially Hoodwinking Investors Into Believing Apple Has Not Reached Its Zenith!

Related BoomBustBlog Subscription-only Research:

Apple 4Q2012 update professional & institutional

Apple 4Q2012 update - retail

 

Apple -Competition and Cost Structure - unlocked Page 03Apple -Competition and Cost Structure - unlocked Page 03 

Apple -Competition and Cost Structure - unlocked Page 04Apple -Competition and Cost Structure - unlocked Page 04 

Apple -Competition and Cost Structure - unlocked Page 05Apple -Competition and Cost Structure - unlocked Page 05 

Apple -Competition and Cost Structure - unlocked Page 06Apple -Competition and Cost Structure - unlocked Page 06 

 Apple -Competition and Cost Structure - unlocked Page 08

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

file iconGoogle Q1-2012 Valuation Summmary 04/20/2012

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

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 Throughout the last two quarters I have bandied about corny, colloquial, yet highly descriptive articles describing the factual representation of Spain's outlook, such as The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain or You Have Not Known Pain Until You've Tried To Limit The Borrowing Costs of Spain!!! Well, as humorous as my nascent stand-up routine may appear to be, the facts of the matter should have market participates on edge. 

Fact 1: As revealed in the post, The Embarrassingly Ugly Truth About Spain: The IMF, EC and ALL Major Rating Agencies Are LYING!!! Spain has serious asset/liablity mismatch and extreme issues with NPAs in its banking system. It will NOT be able to grow out of this situation in the near term and this was apparent 3 years ago! 

I warned that Spain was effectively ignoring some very large, bank related and budgetary problems as far back as 2009/10.... Reference The Spain Pain Will Not Wane: Continuing the Contagion Saga:

In the general our analysis Spain public finances projections_033010, the first four (of 12) pages basically outline the gist of the Spanish problem today, to wit here are the first two:

Spain_public_finances_projections_033010_Page_02

Fact 2: These NPAs will get much worse before they get better, detailed in As The Truth Catches Up With Spain, Will Banks Finally Be Forced To Mark To Market? You don't need my analysis to see the light. Spain currently sports more than  than 50% youth unemployment. Greater than 50% - and it's major grading partners are not far behind, or even far ahead!

See this chart from  ZeroHedge:

Data: Bloomberg and Greek Statistics Office

Fact 3: Spain is already on FIRE, yet so few refuse to smell the fumes.

What is FIRE? See Reggie Middleton Sets CNBC on F.I.R.E.!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set...

For more on this, see The F.I.R.E. Is Set To Blaze! Focus On Banks, part 1. A lot of people, even professionals, truly believed that the FIRE malaise would not be European in nature. Whaattt????!!!

Here are some more anecdotal facts fanning the FIRE...

Egypt Pays Less Than Spain for Euros as IMF Talks Persist

Businessweek- Egypt locked in lower borrowing costs than higher-rated Spain in selling a more-than-planned 640.2 million euros ($817 million) of debt, 

Spain's bad loan ratio hits new record of 10.7%: central bank

MADRID -- Spanish banks' bad loans surged to a new record level in September with more than one in ten classed as high risk, the central ...

Spain Sells 4.94 Billion Euros of Debt, Exceeding Maximum Target

Spain exceeded its maximum target at an auction of bills and its borrowing costs were little changed from a month ago as euro region finance ..

To bad the Spanish aren't Egyptians, though... Egypt Pays Less Than Spain for Euros as IMF Talks Persist

Egypt locked in lower borrowing costs than higher-rated Spain in selling a more-than-planned 640.2 million euros ($817 million) of debt, ..

The Spanish heat is not just in real estate and banking, either. Reference this European Insurer That Needs Insurance As $6B Of Its Bonds Are Instantly Subordinated Due To "Spain's Pain". Insurers are very heavy investors in European sovereign debt AND the debt of financial institutions. This is a wonderful place to be when you are recovering from the most expensive natural disaster that hit the US eastern seaboard, eh? But hey, weren't the European financial institutions getting killed by choking on Sovereign debt (reference Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead)? You know the saying, "You can run but you can't hide?" Well, banking officials have been doing a lot of hiding (of NPAs), and soon its going to be time for the running to come into play. In case you missed the pun, European Bank Run Watch: Spaniard Edition

It would be interesting to see who will be in the condition to feast at the Spanish barbecue...

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Roughly 3 years ago in my "mobile computing wars" series, I foretold of The Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars! In particular, I warned of the benefits to the consumer and pitfalls to the potential losers of the battle between Apple, Microsoft and Google, reference There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All. By the way, by Q1 2010, it was already evident to BoomBustBloggers that Research In Motion was a goner - ). While the bulk of my opinion and analysis was directed between the upcoming heated battle between Apple and Google (The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift and An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught) which was accurately called, I also appeared to be the lone gunman in warning that Microsoft is not even close to being out of the race just yet - . This was early 2010. Well, nearly 3 years later, we have MSFT doing what IBM, LOTUS, HP, DELL, and a wide variety of other tech companies simply didn't have the balls to do. What is that, you ask? They risked cannibalizing their cash cow revenues and kicking their lazy, unmotivated (despite declining margins and market share, via ass whoopin's from Google and Apple) OEM's in the nuts, forcing either an exponential growth via a pheonix-like rebirth style wake-up call or a collapse from atrophy. Either way, Microsoft is attempting to position itself to benefit. The previous world tech rulers simply got too comfortable in their make money by doing nothing, cash cow, monopolistic business lines and sat around while more innovative and nimble competitors literally ate their lunch then came bombarding in demanding dinner as well (say Apple).

Well, this is a good time (albeit a risky one) for MSFT. With revenues and margins declining on a structural basis for the first time (in its history) it is actually attempting to reposition itself to lead in the fastest growing segment in technology, not to mention the segment that is currently eating its lunch. That is the ultra mobile computing segment. Windows phone is a work in progress, and while capable from a software perspective, still lacks the downright killer hardware and flexibility of Android high end devices an also lacks the cult-like following and brand loyalty of Apple's devices. It's a shame since MSFT was actually in this space early, nearly first. Actually, it was early in smart phones, right behind Nokia and Psion (both European companies) and was first in actual usable (arguably) tablets - both in the early 1990's. It that monopolistic apathy that allowed Apple to come from behind with relatively dumbed down tech and outgrow Microsoft. The Surface Tablet is MSFT's revenge though. CNet calls it the best productivity app yet...

Like the Galaxy Note 2 clearly makes the iPhone appear to be a toy rather than a useful device, the Surface does the same to the iPad.

 I noticed that many pundits pan the Surface for its lack of available apps. The Surface is a 1st gen product, and it does lack a wealth (or even a moderate amount) of 3rd party apps. What seems to be overlooked is that MSFT has built the Surface around the most in demand, the most profitable, and the least likely to be accurately replicated apps in the industry - the ubiquitous Microsoft Office Suite of apps. To assert that the Surface doesn't have any apps when it ships with the latest and the only touch-centric version of this app suite is to totally miss the point of the product. Let's be serious here- the iPad, and most Android tablets (save the Asus Transformer series) is/are useless for true productivity where content creation (sans drawing on a screen) and productivity are concerned. They come nowhere near PC replacements. Even those products that can come near (such as the Transformer Prime) lack a truly accurate reproduction of the office suite that is used in 90% of the workplaces world wide. As this Bloomberg article states: Microsoft’s Surface Tablet Lacks Apps to Rival IPad

Microsoft Corp. (MSFT) will be constrained in a contest against Apple Inc. (AAPL) in the market for handheld computers by unveiling a tablet that doesn't work with some of the most widely used downloadable applications. The Surface RT, a tablet that runs the latest version of Microsoft’s flagship operating system and goes on sale tomorrow, won’t feature applications for Facebook Inc. (FB)’s social-networking service or Apple’s iTunes music store.

One can combine the profits (and daily users) from Facebook and iTunes, double the sum, and you probably wouldn't get to half the profits of the Office franchise. True Office compatibility is what is holding back those who spend the truly big bucks in both the consumer and the enterprise side from adapting tablets en masse and truly dropping the desktop or notebook form factor PC for good. Comparing Facebook and iTunes to Office is like comparing a go kart to a minivan. Anyway you look at it, factoring superior build quality, pleasing aesthetics, and most importantly, something you can actually use to get work done, Microsoft has released a truly credible threat to the Android/Apple franchise in the tablet space - I still remain unconvinced in the phone space (where Android is killing them), but the jury is still out and the curtains don't' close till the calorically challenge chick sings...book

The Surface is being touted as a full PC (Ballmer: Microsoft Surface 'Literally a Full PC), and it appears as if there's some credibility to that. It will be very interesting to see what Google's response is (they have purchased a popular mobile phone/tablet office suite to bolser their current Google Apps/Drive cloud storage offering. Bundling this into both high end tablets and thier upcoming $99 offerings with ultra thin keyboard covers would be just what the doctor offered for both the enterprise and the student markets. Unfortunately, I feel Apple's hubris may be their shortcoming, for the iPad-mini is a disappointment, and appears to be simply an answer to the Nexus 7 and Amazon tablet, overpriced to avoid the margin compression inevitably coming down the pike (). The same appears to go for the iPhone 5, for I feel they should have packed much more tech into that device. It is so far behind the Samsung Galaxy Note 2 and S3 (roughly two years behind) that the only real sales they will get will come from extreme brand loyalty or from those who have never tried the Samsung and other competing Android products. While this may permit Apple to grow at impressive rates, basically they will start to simply cannibalize their existing user base and many new users will opt for the best and the newest tech. Apple may feel "Blackberried" or "RIMM"ed sooner than expected.

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TechCrunch reports: iPhone 5 Sells Over 5M In Opening Weekend, Limited Only By Device Supply

Apple broke records again opening weekend, with the iPhone 5 selling more than 5M in its first three days, compared to 4M for the iPhone 4S.

Wait a minute! Apple's share price was spiking due to speculation that the iPhone 5 debut may double or more the sales of the iPhone 4S, remember? Let's take a gander at some of the bullshit that came out of the press.

  1. Analyst Estimates On iPhone 5 Launch Weekend SalesRange From 3M-10M TechCrunch‎ - 5 days ago Analysts have begun making their predictions about the iPhone 5's odds of success for launch weekend sales, and in fact there's quite a range ...
  2. Blockbuster iPhone 5 launch expected to push Apple stock to $850 Apple Insider‎ - 3 days ago
  3. iPhone 5 Crushes Sales Forecast In First Weekend - Forbes – Apple (AAPL) announced today that pre-orders for the new iPhone 5 have now exceeded supplies, forcing some phones to be shipped in ...
  4. Surge in iPhone 5 sales forecast - FT.com Sep 13, 2012 – Apple's rapid international rollout of the new iPhone 5 has prompted many analysts to upgrade their sales forecasts for the smartphone, with ...
  5. Some analysts increase iPhone 5 sales predictions - CBS News Sep 13, 2012 – (CNET) Some analysts expect the iPhone 5 to be so popular that they've recalculated their iPhone sales estimates for September despite a lack ...
  6. Holiday iPhone sales projected to reach 46.5M as pundits ... – Holiday iPhone sales projected to reach 46.5M as pundits 'underestimate' Apple. By Neil Hughes. Tech pundits who find the iPhone 5 "boring" ...
  7. iPhone 5 Sales Projections: 10 Million Units to be Sold Following ... – The iPhone 5 has high expectations upon its release, not just for Apple customers, but the effect it could have for the US economy. Apple began ...
  8. iPhone 5 sales to hit 170 million over next year, predicts analyst ...cnet.com/.../iphone-5-sales-to-h.. And based on past sales, the iPhone 5 will capture around 85 percent of ... Schiller explained the company's ... 

From Business Insider:

Apple sold the iPhone 5 in 9 countries over its opening weekend. It sold the iPhone 4S in 7. It actually sold fewer iPhones per country this year than the last. That's not just deceleration, that's shrinkage:

iPhone Sales per country

Decelerating growth is not good for a company like Apple, which despite a modest P/E ratio, has one of the most generous trailing 12 month revenue multiples of any hardware company on the public markets.

 As I explained in detail on the Max Keiser show, Google will be a very difficult company for Apple to successfully compete with. The problem is that practically no one seems to understand what kind of company Google is, and hence why Apple will have a nigh impossible time competing....

This thesis has come into its own with Apple's new iOS6 operating system and its exclusion of Google Maps for its inclusion of its own in-house mapping system. The end result? #FAIL, ##disasater!!!

Hacker reportedly ports Google Maps to iOS CNET‎ 

iPhone 5 Problems: Apple Tries to Steal Google Maps Staff to Fix Its iOS 6 Maps Mess PolicyMic

iOS 6 Maps problem, maybe Apple should have called it beta ... www.phonesreview.co.uk/...

Wrong turn: Apple's buggy iOS 6 maps lead to widespread - The Verge Apple has a maps problem. The major new feature of the company's new ...

Apple Mapocalypse Sends iOS 6 Users Into a Tizzy, Riverbank - Wired

Apple On iOS 6 Maps Flubs: This Is Hard, Okay?

Apple statement apologises for iOS 6 Maps problems | Electricpig

 

This is what happens when a handset manufacturer attempts to take on the world's largest data company. Now to be fair, Apple had very liitle choice in the matter since its relationship with Google and its OEMs have gotten global litigation level bad, but still this is an area where Apple is sorely outclassed and it will never hav a chance to catch up while maintaining those uber-fat margins that the hedge fund hotel crowd has grown to relay on.
This guy Ben Parr over at Cnet was the only one in the Apple adoring press that seems to have gotten it right, read on...
 
Mapping is a core function of any smartphone. Every person who has a smartphone has a need for maps. If Apple removed Maps from iOS completely, customers would start switching to other smartphones. It's just that important.

So if you're Tim Cook, you have two choices. You can either A) let your enemy Google continue to power your default Maps application, or B) you can build your own Maps app and kick Google to the curb.

This is the decision that Tim Cook and his team faced when they decided to jettison Google Maps as the default mapping application for iOS. Instead, Apple decided to build its own Maps application, powered partly by data from TomTom.

As many of you know by now, Apple Maps has been under fire since its release. The complaints are numerous: Maps doesn't come with transit directions, mislabels cities and other landmarks, forgets rivers and thinks farms are airports. There's even a popular Tumblr dedicated to the mistakes iOS 6 Maps makes.

iOS 6 Maps, while a beautifully-designed application, clearly wasn't ready for prime time. This shouldn't come as a surprise: Google Maps is more than seven years old, and Google employsmore than 7,000 people on it, including the thousands of drivers who make Street View possible. Apple, on the other hand, is frantically hiring engineers to fix the gaping holes users have uncovered in Maps.

Let's go back to the original question: did Apple make the right decision with Maps? It's easy to say in hindsight that Apple should have stuck with Google or waited another year to release its own Maps app. However, consider the factors that Apple had to deal with:

  • Allowing Google to control a key piece of iOS was unacceptable. If Apple had no alternative to Google Maps, the search giant could have made high demands that Apple would have had to accept. Having no default Maps application is unthinkable for a major smartphone.
  • The longer Apple took to release its own Maps app, the more entrenched Google Maps would be.
  • The only way to test a new map application at a large scale it to release it to users. They will be able to find holes quicker than a small team of engineers.
  • A mapping application can only go so far without large amounts of user-generated data.

....iOS 6 Maps is a disappointment any way you slice it. I have friends who refuse to upgrade to iOS 6 because of Maps. But Apple wasn't going to learn anything keeping Maps locked away for another year, and there was no way it was going to let Google control its mapping technology for a minute longer than it had to.

Apple's taking some serious blows for its buggy Maps app. But it made the right decision releasing it. Now it's just a question of how quickly Apple can fix iOS 6 Maps' many flaws and stem the negative press it has generated. Apple's probably going to be feeling the pain for a while.

I clearly called Apple's problem in the Max Keiser interview above. Google is light years ahead of Apple in cloud/distributed computing/applied data tech, experience and capabilities. This maps fiasco is merely the beginning, for Apple TV will face a real challenge from YouTube once it becomes an actual network in lieu of simply a platform (witness and reference the push for new, original content) and Google's many cloud based apps start making the iOS functionality appear as dated as it is. Apple has a very, very slim chance of catching up, and if it does it will because it spend a LOT of money, chopping up those margins.

Hence the prophetic, yet lonely and controversial piece from two years ago - Apple on the Margin, as well as Evidence Of Apple's Margin Compression Crops for its tablets.

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Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

Unique, Indpendent and Accurate Apple Research

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