Financial, Real Estate, Stock Markets Trends and Current Affairs

 On July 23, 2011 I penned The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! which detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

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Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series).

 A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Model that we developed n 2010. In a nutshell, the Swiss banking industry was built upon impenetrable bank privacy for high net worth clients. Once the US decided it needed to boost its tax revenues during hard times, it literally collapse the Swiss hegemony in secret banking and left that banking industry to compete in actual banking versus asset concealment. This left Swiss banks naked, for they don't appear to me to truly be able to compete aggressively and successfully in other areas. 

Add to this mix potential contagion issues for the Swiss banking industry due to the fact that Switzerland has a veritable cornucopia of exposure all over the soon (if not already) serial recession ridden world, and well...

The first chart is raw contagion exposure as a % of GDP. The 2^nd chart is the same exposure ran through our “reality” model. Food for thought.

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

Description: foreign claims of PIIGSforeign claims of PIIGSforeign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

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I.          Summary of the methodology

·         We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.

·         In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors - a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.

·         Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.

·         The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

·          Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings

·          Sovereign Contagion Model - Pro & Institutional - contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.

The bank run in other European nations:

Related Pan-European Sovereign Risk Non-bank Subscription Research Archives

·         Ireland public finances projections_040710

·         Spain public finances projections_033010

·         UK Public Finances March 2010

·         Italy public finances projection

·         Greece Public Finances Projections

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Apple's victory over Samsung appears... extreme. Since I'm not a lawyer, I can only give my layman's opinion which is likely worth about what you paid for it. Nonetheless, it appears as if the the opinion will be under attack by Samsung shortly (reference Legal analysts suggest Apple-Samsung verdict may not be safe). Whether that attack will be successful is unknown.

Potential Grounds For Reversal?

The jury form was apparently inconsistent, and Samsung's lawyers apparently anticipated such, as can be seen by this motion found on Grollaw:

Late in the process yesterday at the Apple v. Samsung trial, when the parties and the judge were reviewing the jury verdict form, Samsung noticed that there were, indeed, inconsistencies in the jury's verdict form, a possibility Samsung anticipated [PDF]. Here's the jury's Amended Verdict Form [PDF], amended to fix the mistakes. Here's the original [PDF]. Here's the note [PDF] the jury sent to the judge when told to fix the inconsistencies. What are they, they asked? "Please let the jury know," they wrote in the only note ever sent in their deliberations, "of the inconsistencies we are supposed to deliberate on."

In two instances, results were crazily contradictory, and the judge had to have the jury go back and fix the goofs. As a result the damages award was reduced to $1,049,343,540, ¹ down from $1,051,855,000. For just one example, the jury had said one device didn't infringe, but then they awarded Apple $2 million for inducement. In another they awarded a couple of hundred thousand for a device they'd ruled didn't infringe at all. This all was revealed by The Verge in its live blog coverage:

The jury appears to have awarded damages for the Galaxy Tab 10.1 LTE infringing — $219,694 worth — but didn't find that it had actually infringed anything....A similar inconsistency exists for the Intercept, for which they'd awarded Apple over $2 million

Intercept: "The jury found no direct infringement but did find inducement" for the '915 and '163 utility patents. If a device didn't infringe, it would be rather hard for a company to induce said non-existant infringement.

Also according to The Verict site (by way of Groklaw)

While the nine jurors in the Apple v. Samsung trial are busy working their way through the verdict form [PDF], trying to keep straight all the instructions they were read yesterday, I want to show you something that speaks to the issue of fairness, or lack thereof, in the trial. Reading two recent orders in the case will give you a clue, I think, as to why Samsung's lawyer, John Quinn of Quinn Emanuel, earlier dramatically said what he did to Judge Koh, after Samsung was not allowed, once again, to present evidence because it was allegedly "too late", "Why even have a trial? What's the point?" He was saying in effect that Samsung wasn't being treated fairly.

Was he right? We get a window into the matter, because we have now both the order [PDF] by the magistrate judge denying Samsung's request for an equal adverse inference order against Apple on the purported grounds that it was too late to file it, and the order [PDF] that overruled it by the presiding judge, the Hon. Lucy Koh. She wrote that it was "contrary to law" to hold it was untimely. And besides, there was a question of fairness:

It is only fair that the same standard of analysis be applied in adjudging the merits of Samsung’s motion as was applied to Apple’s.

Finally, she decided that the sanction language he had earlier chosen against Samsung had been too harsh anyhow. So she has, to her credit, righted that wrong. Although Judge Koh appeared annoyed in the moment, I think when Quinn stood up and publicly said what he did, it may have caused her to think more deeply about whether or not this trial *was* being fairly handled by one and all. In at least this issue, the answer is that it was not. And it's a fairly egregious example. So let's take a look. For sure, if Samsung loses, this issue is going to resurface, I would think, in the inevitable appeal. 

It gets worse, more from Groklaw: 

If the jury instructions [PDF] are as long and complex as they were in this case, a quick verdict can indeed mean it shirked its duty. For example, if the jury rushed so much it assigned $2 million dollars to Apple, and then had to subtract it because there was no infringement, it raises a valid question: what was the basis for any of the damages figures the jury came up with? If they had any actual basis, how could they goof like this? Was there a factual basis for any of the damages figures?

Time will tell, but keep in mind that one of the plays you'll see next will likely be a Rule 50(b) motion by Samsung, and that's the one where you ask the judge for various relief on the basis that no reasonable jury could find what it did find on the evidence presented. Here's Google's still pending Rule 50(b) motion for judgment as a matter of law in the Oracle v. Google case, to give you an idea of what they look like. As you can see, you can ask for victory across the board or just on one part of what the jury decided.

This story is far from over, in other words, and while Apple's CEO, Tim Cook, waxed philosophical about the trial, and saying that it was about values, not money, one important US value is that the jury fulfill its responsibilities, one of which is to read and make sure they understand and follow the jury instructions they are given. I believe Cook would agree that trials are supposed to be fair, with everyone doing their part. If this jury thought they knew the right result without instructions, and if they hurried so much they made glaring mistakes, and they did, and all in Apple's favor, something isn't right in this picture. As the legal blog, Above the Lawexpressed it:

Here’s the thing, ladies and gentlemen of the Apple v. Samsung jury: It would take me more than three days to understand all the terms in the verdict! Much less come to a legally binding decision on all of these separate issues. Did you guys just flip a coin?

If it would take a lawyer three days to make sure he understood the terms in the form, how did the jury not need the time to do the same? There were 700 questions, remember, and one thing is plain, that the jury didn't take the time to avoid inconsistencies, one of which resulted in the jury casually throwing numbers around, like $2 million dollars for a nonfringement.

Come on. This is farce.

It literally appears that the Jury glanced over prior art deliberation at the behest of the jury foreman who held a related patent himself. This is getting stick already, as per CNet, who interviewed a juror:

The decision was very one-sided, but Ilagan said it wasn't clear the jurors were largely in agreement until after the first day of deliberations.

"It didn't dawn on us [that we agreed that Samsung had infringed] on the first day," Ilagan said. "We were debating heavily, especially about the patents on bounce back and pinch-to-zoom. Apple said they owned patents, but we were debating about the prior art [about the same technology that Samsung said existed before the iPhone debuted]. [Velvin Hogan] was jury foreman. He had experience. He owned patents himself. In the beginning the debate was heated, but it was still civil. Hogan holds patents, so he took us through his experience. After that it was easier. After we debated that first patent -- what was prior art --because we had a hard time believing there was no prior art, that there wasn't something out there before Apple.

"In fact we skipped that one," Ilagan continued, "so we could go on faster. It was bogging us down." ...

"Once you determine that Samsung violated the patents," Ilagan said, "it's easy to just go down those different [Samsung] products because it was all the same. Like the trade dress, once you determine Samsung violated the trade dress, the flatscreen with the Bezel...then you go down the products to see if it had a bezel. But we took our time. We didn't rush. We had a debate before we made a decision. Sometimes it was getting heated."

From a layman's perspective, a mistrial or a thrown verdict may be in the making. Also from Groklaw (I encourage my readers to visit this site due to its heavy reliance on documented fact and relevant industry links):

Update 2: Dan Levine of Reuters has some words from the foreman:

"We wanted to make sure the message we sent was not just a slap on the wrist," Hogan said. "We wanted to make sure it was sufficiently high to be painful, but not unreasonable."

Hogan said jurors were able to complete their deliberations in less than three days -- much faster than legal experts had predicted -- because a few had engineering and legal experience, which helped with the complex issues in play. Once they determined Apple's patents were valid, jurors evaluated every single device separately, he said.

Now the jurors are contradicting each other. Lordy, the more they talk, the worse it gets. I'm sure Samsung is glad they are talking, though. Had they read the full jury instructions, all 109 pages [as PDF], they would have read that damages are not supposed to punish, merely to compensate for losses. Here's what they would have found in Final Jury Instruction No. 35, in part:

The amount of those damages must be adequate to compensate the patent holder for the infringement. A damages award should put the patent holder in approximately the financial position it would have been in had the infringement not occurred, but in no event may the damages award be less than a reasonable royalty. You should keep in mind that the damages you award are meant to compensate the patent holder and not to punish an infringer.

The same instruction is repeated in Final Jury Instruction No. 53, in case they missed it the first time. Did they obey those instructions? Nay, did they even read them? The evidence, judging by the foreman's reported words, point the wrong way.

How the actual product market will react?

Samsung still has some life left in the product that may be banned in the US, (to a greater extent the S2 phone, and a lesser extent the 10.1 tablet). As quoted from Bloomberg:

Injunction Chances

“We expect there is a two-thirds chance of an injunction against Samsung products,” Peter Misek, an analyst at Jefferies & Co. Inc., wrote in an Aug. 26 report.

Samsung’s schedules for introducing products won’t be affected by the verdict, James Chung, a Seoul-based spokesman for the company, said by phone on Aug. 25.

The global lineup for the rest of this year includes the next version of the Galaxy Note, which sold more than 10 million units in less than a year. The company began selling a tablet edition of the Note this month, following the May release of the Galaxy S III, the newest version in its bestselling smartphone series.

Samsung, which has gotten around other sales bans by modifying some product features, has sought to differentiate its products since the global patent fight with Apple began last year, and the design and feature of the Galaxy S III may be distinctive enough to avoid a ban, Seo said.

More Revenue To Be Gained From The S3 Phone Than To Be Lost From The S2 Ban

While the loss of revenue from the Galaxy S2 will be regrettable since that device has yet to see its nadir in the market, the more uniformly distributed S3 phone should be a revenue geyser. It is being distributed across all major and many minor carriers and even pre-paid (MVNO) carriers with now physical customizations and modifications. It is (finally) seeing marketing muscle that can challenge Apple in awareness, and it is selling very, very fast.

Apple's Symbiotic, Incestuous Relationship With Its Vendors/Competitors Should Yield Interesting Results Should This Verdict Not Be Overturned

Let's not forget what you see if you rip open an Apple iPhone or iPad... You see a bunch of Samsung manufactured parts. Should Samsung truly feel pressure from a revenue perspective from this loss, it will invariably up the prices of the parts it sells to Apple. This is not only a justifiable business move, it invariably raises the prices of iPhone/iPad products and/or decreaes Apple margins (there goes that margin compression theory again). Due to Apple's outstanding success and extreme sell through rate, it has very, very little choice in where it sources its parts from. Samsung, who is also Apple's biggest competitor, is basically the only game in town - save LG. Guess what Samsung and LG have in common?

Apple is Samsung’s largest customer, even as they compete to sell phones that allow users to surf the Web and play games, and as they fight in courts on four continents over patent infringement claims. Apple accounts for about 9 percent of Samsung’s revenue, making it the company’s largest customer, according to data compiled by Bloomberg.

Be aware that the margins on Apple's tablets have already compressed, and expect the same from the upcoming iPhone 5 (Apple deftly managed to sell deprecated hardware passed its competitive tech life cyce, thereby benefiting from inflated margins off of said product). The reason Apple's corporate margins have been increasing is due to the mix of gross sales tilting heavier to the iPhone and to a much lesser extent the iPad as compared to notebooks/desktops/peripherals. Notice during both the earnings misses in the past year, corporate margins dropped as iPhones made up less of the revenue mix. 

This may grant Apple a reprieve to catch up in the tech race, for its mainstay product is drastically and dramatically behind the curve technology and capability-wise.

• Samsug Galaxy S3 vs iPhone 4s: This is an unfair comparison with the iPhone 5 coming out in a few weeiks, but the iPhone 4S is simply not in the running.
• Samsug Galaxy S3 vs iPad with Retina Display: I was in the NYC flagship store yesterday, and surprisingly enough, streaming 1080p HD YouTube videos, the Samsung phone literally blew away the brand new iPad with Retina Display (marketing speak for hi res screen).  The comparison was not even close enough to warrant a debate. This brings me pause as to whether Apple will be able to compete with S3 upon the launch of the iPhone 5. Not only is it expected to have only a 4 inch screen, but it will invariably adopt the hi res, iPad screen tech. I invite anyone with an S3 or (Galaxy Note) to stream 1080p HD content onto the top of the line iPad and your devive simultanesouly to see where I'm coming from.
• Samsug Galaxy S3 feature and performance will need to nearly be matched by Apple - somthing that it never had to do before. Of course, the Apple marketing momentum will ensure mucho sales, but the hyper-growth component is the question. Will Apple be able to pull it off? The iPhone 5 launch is probably the most important and critical product launch in the history of Apple...
• As for this being a big break for the other players, outside of Motorola (due to Google's acquisition) and HTC, I don't think there's much of a reprieve. Samsung has released a far surperior product and has finally learned how to market it (although it is still not doing as good as job as Apple does). Nokia is still dead in the water until it can show and prove with Windoes (mobile) 8. You all know how I feel about RIM (see Hindsight Is 20/20, And As Luck Has It Our Foresight On Research in ) from way back in 2009.

 Apple Margin & Valuation Note (click here to subscribe).

I believe I was one of the very few to declare Greece a foregone default in February 2010 (I Think It’s Confirmed, Greece Will Be the First Domino to Fall and then with with more specificity a month later As I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!). By the 2nd quarter of 2010 I was one of the very few to clearly and articulately detail exactly how Greece would default with specific structures in play- What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates. Due to a few institutions who were skeptical, I attempted to make it a bit more real - A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

Well, Greece defaulted according to plan, despite all of the "people in the know" saying otherwise - Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! - from government officials tothe EC and IMF - Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Even after the default, I made clear that this wasn't over for Greece, for the default actually left Greece worse off fundamentally, not better. Go wonder... I know I did, reference the warning from 5 months ago:

This will be exacerbated by a re-default of the Greek debt that was designed to bail out the defaulted Greek debt. Why will this happen? Greece has severe, rigid structural problems that simply cannot (and will not) be solved by throwing indebted liquidity at it. As a matter of fact, the additional debt simply exacerbates the problem - significantly! This was detailed in the post Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

This situation will simply get worse, considerably worse. I demonstrated in the post The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. 

Well, fastforward to Der Speigel as of yesterday, as I highlight some choice excerpts:

Athens has not been having an easy time coming up with the €11.5 billion in cost cutting measures over the next two years it has promised Europe. Indeed, Greek Prime Minister Antonis Samaras is reportedly set to request an additional two years to make those cuts... 

... the financing gap his country faces could be even greater. During its recent fact-finding trip to Athens, the so-called troika -- made up of representatives from the European Central Bank, the European Commission and the International Monetary Fund -- found that Greece will have to come up with as much as €14 billion to meet the terms for international aid.

Methinks the Troika should renew their subscription to BoomBustBlog, for early in 2010 I noted their accuracy on the Greek situation...

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Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revised their forecasts to still end up wildly optimistic. image018.pngimage018.pngimage018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

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The EU/EC has proven to be no better, and if anything is arguably worse!

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Revisions-R-US!

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and the EU on goverment balance??? Way, way, way off.

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If the IMF was wrong, what in the world does that make the EC/EU?

The EC forecasts have been just as bad, if not much, much worse in nearly all of the forecasting scenarios we presented. Hey, if you think tha's bad, try taking a look at what the government of Greece has done with these fairy tale forecasts...

greek_debt_forecast.png

Alas, I digress. Back to the der Spegiel article...

According to a preliminary troika report, the additional shortfalls are the result of lower than expected tax revenues due to the country's ongoing recession as well as a privatization program which has not lived up to expectations. The troika plans to calculate the exact size of the shortfall when it returns to Athens at the beginning of next month.

I'm sorry, but I simply cannot resist. This article was posted on BoomBustBlog in July of 2011 - Greek Asset Sales Fall Short, As We Virtually Guaranteed They Would In Spring 2010. In it I reviewed how the BoomBustBlog team detailed EXACTLY how bullshit the privatization plan was, in explicit detail - in the spring of 2010. THAT WAS MORE THAN TWO AND A HALF YEARS AGO, PEOPLE!!! If a blog can have this much foresight, with this much specificity, than what does one make of this so-called troika??? As excerpted:

This is a tragic Greek comedy. Professional/institutional subscribers should reference the Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb in its entirety. For those who chose not to subscribe, I am posting excerpts from pages 5 and 6 from said document, don't read this while eating or drinking for fear of spitting up your lunch!

Any subscribers who would have went heavily bearish into these banks when I first commented on the would have done quite well:

• •  Banks exposed to Central and Eastern Europe
•  Greek Banking Fundamental Tear Sheet

Okay, I digress - yet again... With such excessive bullshit, one does tend to get thrown off track. Back to the der Spiegel excerpts...

The news of the potentially greater financing needs comes at a sensitive time for the country. Many in Europe, particularly in Germany, are losing their patience and there has been increased talk of the country leaving the common currency zone. Over the weekend, German Finance Minister Wolfgang Schäuble reiterated his skepticism of additional aid to Greece. "We can't put together yet another program," he said on Saturday, adding that it was irresponsible to "throw money into a bottomless pit."

Well, my friend, if you had that BoomBustBlog subscription, you would have known before you spent that first euro that Greece was a bottomless pit. Let me reiterated what I pasted up top... This situation will simply get worse, considerably worse. I demonstrated in the post The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. And guess what? Anyone who dips new money into Greece now will suffer the EXACT same fate!

As excerpted from 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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Greece's default will hit an already bank NPA laden Spain quite hard: The Spain Pain Will Not Wane: Continuing the Contagion Saga and ditto with Italy "As We Assured Clients Two Years Ago, Italy's Riding The Broken Promise Express To Restructuring". Once Italy gets hit, the true bank runs will start as socialist France (the so-called half of the EU anchor) loses control of its bankinsg system. Reference "As The French Bank Runs....": 

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

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renege  

Etymology

From Latin renego, from nego (“deny”). Possibly influenced by renegotiate. See also renegade.

The question Du Jour is,,,,, Will reneging be the fiscal management policy of the new millennium? Can you blame those who even try? Are they wrong? Now that Greece has set the precedent of just not paying its bills, the floodgates are open. Don't be fooled if just a few drops of water come out at first!

My posts from last year...

The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media

My readers and subscribers know that I have been warning that Greece would guaranteedly default as far back as two years ago. As a matter of fact, I stated that the haircut needed would have to be around the 53% mark in order for Greece's economy to truly cash flow again, and that was two years ago when things were much, much better for the country. Now the issue has metastasized into something much worse. How much worse? Well, it's safe to say the situation is at least twice as bad. That being said, twice times 53% means 60, 70, even 75% NPV haircuts just won't cut the mustard. Since this is already a forgone conclusion, I will now release the research and economic models that have been available to BoomBustBlog professional subscribers two years ago (March 2010), take notice how prescient, how crystal balllish it all seems..

Contagion Should Be The MSM Word Du Jour, Not Bailouts and Definitely Not Greece!

In continuing with my rant on the absurdity of even pretending the Greek situation is salvageable or that Greece will somehow be bailed out without a near complete absolution of their debts, I  bring forth from the BoomBustBlog archives the Sovereign Contagion Model. For those who haven't read my most posts on this topic, please review The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media and Grecian Tragedy Formula, Bailout Number 3.

It is my contention that Greece's significant default is a forgone conclusion. It is also my contention that media attention should be much more focused on the damage to be done by a Greek default - considerably more so than whether Greece will ultimately default of not or what type of bailout it may or may not recieve. I have been of this mindset for several years which is why I had my analyst team create the Sovereign Contagion Model below.

foreign claims of PIIGS

Germany's Sophisticated Ignorance Doesn't Even Look Sophisticated Anymore

Surprise! Spain Makes The Same Ass-Backwards Mistake That The US and UK Made - Banning Shortselling

CNBC reports that Groupon [GRPN  5.815 -1.735  (-22.98%)] plunged more than 20 percent after the daily-deals site missed sales expectations and handed in a cautious earnings outlook, due to Europe's weak economy and currency fluctuations. Shares have already plunged nearly 70 percent since the company's IPO last November. At least eight brokerages slashed their price targets on the firm.

You know that you really don't have to follow eight brokerages to make money on Groupon. All you really had to do was subscribe to BoomBustBlog, reference For Those That Want To Take A Peek Inside the Professional BoomBustBlog Paywall, Here's All of My Groupon Research - MUPPETS!!!

It's official, the mainstream media has turned on those "doing God's work" and come to the side of BoomBustBlog.

............................

Okay, enough the Muppet Manipulating, Money Marauding, Doing Work in God's Name Brand Bank Bashing... Let's get down to the nitty gritty of the report that I said I will give away for free. I am offering the report, earnings advisory addendum and accompanying simplified model to show what we're made of. Of course paying subscribers, and even casual blog readers, cannot say that I didn't thoroughly warn you! Early shorts on this stock as per our research notes valuation matrices would have given pleasant Christmas presents and would have also stuffed one hell of an Easter basket as well!!!

In case you still don't get it, the sell side research departments of these banks did not offer BoomBustBlog research to their clients. Oh no, then how in the hell can they dump their stock??? They issued glowing reports from their own analytical cum soft sales staff.

On that note, let's reminisce.... In June of 2011 I release proprietary research to BoomBustBlog Subscribers. You can now download said report absolutely free, here  Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36). After reading said report, prepare for some real comedy, as reported by Dailypolitical.com:

Groupon (NASDAQ: GRPN) was downgraded by equities research analysts at Stifel Nicolaus from a “hold” rating to a “sell” rating in a research note issued to investors on Monday.

Other equities research analysts have also recently issued reports about the stock. Analysts at Bank of America (NYSE: BAC) downgraded shares of Groupon from a “buy” rating to a “neutral” rating in a research note to investors on Monday. They now have a $20.00 price target on the stock, down previously from $30.00. Separately, analysts at Benchmark Co. cut their price target on shares of Groupon from $32.00 to $28.00 in a research note to investors on Monday. They now have a “buy” rating on the stock. Finally, analysts at Goldman Sachs (NYSE: GS) reiterated a “buy” rating on shares of Groupon in a research note to investors on Thursday, February 9th.

Groupon traded down 3.20% on Monday, hitting $14.54. Groupon has a 52-week low of $14.85 and a 52-week high of $31.14. The company’s market cap is $9.376 billion.

Whoa!!! Goldman Sachs reiterated their "buy" recommendation just in time for their damn Muppet Clients to lose ~40% by the close of the market today. Go ahead, stuff those damn Muppets, fellas!

Groupon_Crash_warnings

For the record, in June of 2011, a full ten months ago, I made clear to my subscribers the following (as excerpted from the now free download)...

We value Groupon at $6.6bn using DCF. The current valuation is based on 10 years of revenue projections which are overly optimistic in our view.  We have forecasted revenues of $4.0bn in 2011 and expect revenues to nearly double to $7.5bn in 2012 and reach $35bn by 2020. We have assumed cost of equity of 12% and terminal growth of 3% from 2021 onwards. We have kept gross profit at stable levels and assumed operational gearing to (∆ Operating Profit / ∆ Revenue) to improve considerably. Despite these optimistic projections we were still not able to justify a valuation close to $10bn let alone $20-25bn. We only see downside risks to valuation of $6.6bn and believe that Groupon’s rejection of Google offer of $6.0bn was a mistake in first place. Google’s valuation of $6.0bn most assuredly included a premium for synergies that Google could have achieved with Groupon which would be clearly absent in the standalone entity. We see the fair value of Groupon close to $3.0-4.0bn if we assume a more realistic picture. Given all kinds of questions surrounding Groupon’s business regarding the sustainability of revenue growth, costs control and even the business model itself (i.e., the relationship with merchants) and external competition, we remain deeply concerned even on the sustainability of a successful IPO for Groupon. 

For the record, at about $14 per share, Groupon is market-valued at about $9.1 billion dollars!!!! Here are some key highlights: Groupon restates revenue, EXACTLY as I warned just three months earlier.

1. Monday, 26 September 2011 What's The Best Way To Profit From Groupon's IPO?
2. Groupon Revenue Restated 09/26/2011

Groupon starts trading on the Nasdaq via IPO...

1. Sunday, 13 November 2011 I Hope You Groupon IPO Investors Got Coupons At The IPO!!! Yeah, That's Right I Was The First To Say It

Favorite hits from said documents...

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Groupon_Valuation_redacted_Page_03_copy

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There's a WHOLE LOT MORE, but this post is long enough as it is. Simply download the links above, and don't forget to reference the valuation section of original forensic report. There's an early Christmas present in there for the stingy muppets!

 

 

My series on the mobile computing wars has been quite prescient do date, as has my forensic analysis of the players (click to access the free opinions and paid reports): Apple - Google - Microsoft and RIM.  I am not just saying that now, the current path was apparent two years ago as well...

1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All Monday, 21 June 2010
2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift Friday, 09 July 2010
3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught Tuesday, 13 July 2010
4. Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet Wednesday, 14 July 2010

As Garter corroborates:

• Android, led by Samsung, is far and away the growth leader in smartphone sales.
• With nearly 99 million units sold, Android devices captured 64% of the smartphone market for the quarter (compared to 43.4% a year ago, and nearly 0% in 2007).
• Samsung’s Galaxy line of devices accounted for more than half of all Android sales, reaching 45.6 million devices sold.
• The new Galaxy S3 sold 10 million units in its first two months of its release. “The Galaxy S3 was the best-selling Android product in the quarter and could have been higher but for product shortages,” Gartner notes.
• Apple’s iOS-based iPhone devices saw growth as well at almost 29 million units, but this was only in line with overall smartphone market expansion, causing market share to remain static. The platform captured 18.8% of the smartphone market (versus 18.2% the year before). Gartner notes that sales of the iPhone fell.

Yes, I know that Apple is attempting to clear inventory for new product, but to do so by price matching the big box commodity pushers such as Target and BestBuy is simply walking down the path to margin compression. You see discounting, price slashing and fire sales are a slippery slope to manuever. Once a consumer is given a sale, they are programmed to expect a sale and it is very, very difficult to "unprogram" them. Back the Gartner data...

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Related reading:

S#I have warned that Apple will face margin pressure on its core products as the smartphone and tablet competition heats up, ie Apple Gets Sliced and Diced As Google Enjoys Fruits Of Long Range Planning. Well, Macworld, Endgadget and several other sources report Apple reportedly price matching iPhone discounts from carriers and other retailers

Apple reportedly price matching iPhone discounts from carriers and other retailers

According to a leaked screengrab hosted up at MacRumors, Apple retail shops now have the authority to price match carrier and rival retail discounts on iPhone. Specifically, the note informs employees that prices from Best Buy, "carriers," Radio Shack and Target can be matched, with $49.01 seeming to be the savings across the board. Curiously, places like Wirefly, Amazon, Negri Electronics and even Walmart aren't mentioned, so we wouldn't recommend trying to work the price down based on ads seen from any of those. 

Price matching big box retailers clearly shows the luxury, premium aura of the iPhone to be at the end of its cycle. That means from this point on, Apple may very well have to compete on tech and capabilities, where it is sorely outclassed by its Android competition. The iPhone 5 launches in about 30 days, and not only will it have to be the Samsung Galaxy S3 and HTC One series, it will have to outrun the revamped Note and whatever new Google is cooking up through its Motorola acquisition (don't beleive Google won't transform Motorola into a new age device manufacturer). Remember, Samsung and LG manufacturer much of the processors, memory chips and screen tech that go into the iPhones. While there are other firms that can produce such, very few can produce 100s of millions of them other than Samsung and LG - two staunch Apple competitors running a common platform -- Android!!! It is nigh impossible to win a competition with your own vendors, so one is best served not to get into such a competition in the first place. 

I explained the tense competition between Apple and Google in a way that many participants fail to recognize on the Max Keiser show - I Illustrate Exactly What Kind Of Battle The Google/Apple Thing Really Is On Max Keiser Show

As explained in Apple Gets Sliced and Diced As Google Enjoys Fruits Of Long Range Planning:

Apple gargin was 42.8 percent compared to 41.7 percent in the year-ago quarter. Wait a minute... Isn't that margin number sliding in the wrong direction? It's because they are selling less iPhones as compared to iPads and the iPads are lower margin products, and the margins are getting even lower as competition ramps up and ASP drop while unit costs rise in relation. Of course, I went through this in detail several times.

For all of those near fanatics who do not subscribe, I suggest you ask a friend who does subscribe to share with you the difference between last month's valuation note target price (page 10 of  Apple Margin & Valuation Note) and the price of Apple today (click here to subscribe). I also urge the same for Google using our latest Google Q1-2012 Valuation Summary.

As excerpted: 

It is worth noting that the key assumptions that underline the above valuations – (1) iPhone continuing to witness stupendous growth *******  in 2012 and ****** 2013 over a larger base and (2) iPhone margins continue to remain healthy off stable prices and despite increase in material cost – should be keenly watched over the next couple of quarters. 

Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. As stated many times in the past, The BoomBustBlog argument and analysis is solid.

What else is there to the earnings announcement? Well we were absolutely correct in terms of the oncoming margin compression of the the product lines, something that was actually easy to see coming but many refused to admit. Of course, there will be those select few that say, "But wait, the company reported an INCREASE in margins while you said there will be a decrease!". Yes, that's true and both can exist simultaneously.

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Yesterday, I posted The Difference Between Money and Wealth and Why You Can Easily Print One But Must Actually Create The Other, and as if on cue, global inkjet nozzles 'round the world started whizzing - to wit:

• ECB Cuts Rate to Record Low of 0.75%, Deposit to Zero and Bank of England Prints Money Again to Boost Economy
• China Cuts Rates for Second Time in Month and China Set to Post Worst Growth Since 2008 Crisis
• BOE Restarts QE Amid Euro Crisis

Why such rampant printing? The whole world's afraid Europe's impending implosion will engulf global economies. They very well shoud be, this was quite evident 3 years ago (Pan-European sovereign debt crisis) and the can kicking is nearing the end of its useful cycle... ECB's Draghi: We See Now a Weakening of Growth in Whole Euro Area

Here's the secret that BoomBustBlog subscribers know yet seems to be lost on much of the European powers that be: cutting rates and printing will absolutely NOT prevent the nuclear winter in Real Assets. Since loans behind real assets are anywhere between a vast chunk and the majority of bank loans, when this thing goes the European banking system goes with it. This will manifest itself stateside (see sidebox), but the Europeans will get hit harder, at least initially... The reason? Well, it doesn't really matter how low interest rates are - if banks don't lend, borrows will not gain access to capital. Banks are too weak and skittish to lend despite "so-called" record profits, billions in bonuses and compensation, and trillions in bailouts. I repeat, and I repeat again, the only solution is to let the insolvent fail.

Reference the quite informative post from which the graphics below were excerpted: Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE

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 So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

• •   Debt Analysis, Blog Subscriber Edition
  •  Preliminary Download

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Fastforward to today, and NIEUWE STEEN INVESTMENTS N.V. - NSI (one of our shortlisted REIT) suffered the most due to revaluation of their Dutch office portfolio. It therefore witnessed 26% decline in last 4 months.

NSI

NSI is simply a microcosm of what's to come for many larger real asset investors. I have warned that the Dutch, with what many consider to be a strong and relatively stable economy, was not immune to the European contagion, reference Are The Ultra Conservative Dutch Immune To Pan-European Economic Contagion...

Goldman's strategy desk just came out with a recommendation that mirrors my guidance to subscribers, a 3 weeks later, reference Armageddon Puts Versus Truly Busted CRE REITS: Looking for that 5x-10x ROI 

Yesterday, I received a couple of emails along the lines of the one displayed below...

"Hi Reggie,

Can you please put out any guidance on your Armageddon Puts for your lowly retail subscribers?

Thanks"

Well, I would like all to know that I'm not a typical mo-mo type trader. I'm a strategist. With that being said, I'm also not the one to look a strong risk/reward proposition in the face and do nothing. Below is a set of charts that should drive the mindset home.

SPX_puts

The actual chart with the series and strike of the puts can be found in the retail investor's discussion forum. I will also be available to chat there as well.

If one would have averaged small OTM put purchases with with ample time value attached over the last week and a half, one would have amassed a neet little collection of Armageddon puts that will start popping into the money today. They were cheap enough to throw away in the rallying market, and if things go awry (quite likely) three digit returns are virtually guaranteed. The following is Goldman's note from this morning...

Published 10:46 AM Thu Jun 21 2012 ________________________________

Noah Weisberger

Aleksandar Timcenko

We are recommending a short position in the S&P 500 index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390. This morning, the Philly Fed print of -16.6, down sequentially and worse than expected, provides further evidence that weakness has extended into June. Although yesterday's FOMC delivered easing as expected, with a dovish statement, positive risk sentiment ahead of the FOMC had already buoyed markets. And we now think, with incremental US monetary policy on hold, the market will need to confront a deteriorating growth picture near term. The risk to our recommendation is that the data soon reverts to the 2-percent growth path our economists expect, that China growth turns, or that European policy-makers' rhetoric buoys risk sentiment further from here, with the upcoming end-of-June summit a focal point on this count.

The MSM headline barrage continues to confirm my multiple warnings on the increasingly ugly macro situation both here and abroad...

• US Mid-Atlantic Factories Slow; Leading Indicators Rise The US never really left recession
• Manufacturing, Jobs Reports Add Up to More Bad News Ditto
• Spanish Banks Need Up to $79 Billion in Capital: Auditors Yeah, right - that's before you mark assets to market, right?
• Beware the Looming 'Monetary Cliff': Hatzius yep!
• Europe May Have Found a New Use for Its Bailout Fund This is dangerous. The ECB wants to lax collateral rules to assist southern banks (read Italy, Greece and Spain) in obtaining funding. That means the ECB will be filled with even more trash than before. Reference my work on this topic 
  • You Have Not Known Pain Until You've Tried To Limit The Borrowing Costs of Spain!!!
  • Is Morgan Stanley Once Again The "Riskiest Bank On The Street"?
  • CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?"

This is how the European banks were killed in the first place -  Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead. The ECB will become the world's largest insolvent hedge fund (sans the hedges, of course) if it is not so already...  Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What.

More MSM headlines to drive the point home

• ECB Mulls Scrapping Sovereign Rating Rules: Sources - See what I mean? And the rating agencies have been much, much to soft and slow to rate the soveriengs accurately, to boot. What in the world would happen if you really had a thorough analytical force in there to guide clients in the clients (not the sovereings or the banks) best interests? Reference Rating Agencies vs Reggie Middleton, Part 3 and the Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts
• China's Factory Activity Shrinks for 8th Straight Month - Uh Huh! Reference A Quick Note On China's Rate Cut and Reggie Middleton Speaks On China, Greece Playing Chicken and US Ponzinomics, then Will China Hit That Inflation Deer In The Global Macroeconomic Headlights Anyway, Despite The Fact They Are Slamming On The Brakes?
  
  

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