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Tuesday, 17 January 2012 12:36

Past May Be Prologue, But I Just Warned Of A Central European Depression 2 Years Ago

cee_risk_map.pngClick the graphic to enlarge...

Exactly two years ago, I penned a piece called The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! I excerpt it as follows...

Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression! These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly "OVERBANKED" (a term that I have coined).

So as to quiet those pundits who feel I am being sensationalist, let's take this step by step....

I strongly suggest those interested in this topic to peruse the whole article for it explicitly warns of what is about to happen any minute now, but first lets see what's popping in world news today, as Bloomberg reports the IMF, EU May Need to Give E. Europe More Help:

The International Monetary Fund and other lenders, who spent $42 billion to stem an eastern European banking crisis after 2009, may be forced to commit more aid to the region to cushion the effects of banks cutting assets. The IMF, the European Bank for Reconstruction and Development, the World Bank and the European Investment Bank should “stand ready to provide external assistance and financial support to banks” in eastern Europe, the Vienna Initiative group of regulators and policy makers said in a statement after a meeting in the Austrian capital yesterday. “There is a very strong impact of this -- a potentially strong impact,” Erik Berglof, the EBRD’s chief economist, said in an interview today in Vienna. “You have the headquarters making decisions on assets that are very small when you look at the total balance sheet, but when you look at the subsidiaries in eastern Europe they are systemic in the countries where they operate.”

Regulators and policy makers are trying to shield economic growth in eastern Europe as western lenders must meet higher capital requirements to withstand the euro area’s deepening debt crisis.

This makes very little sense since the bulk of growth in the CEE states stems from trade with the EU. If the EU catches a cold, the CEE states contract chronic pneumonia!

About three-quarters of the banking market in eastern Europe is controlled by western European banks including UniCredit SpA (UCG), Erste Group Bank AG (EBS) and Raiffeisen Bank International AG (RBI), the biggest of which are raising capital and shedding assets, causing concerns that credit may become scarce.

As explicitly detailed to my subscribers two years ago, (subscribers, see File Icon Banks exposed to Central and Eastern Europe)

The Vienna group urged western European regulators and policy makers to work together to recapitalize banks and consider the effects on subsidiaries in other countries. Financial regulators need to step up coordination to reduce the risk of “disorderly deleveraging”...

Otherwise known as reality, a properly functioning market and transparent price discovery!!!

... in eastern Europe, Serbian central bank Vice Governor Bojan Markovic said at a Euromoney conference in Vienna today. By the end of June, European banks must have core capital reserves of 9 percent after writing down their holdings of sovereign debt, European Union leaders decided in October. That may require an additional 106 billion euros ($149 billion) of capital, a according to the European Banking Authority.

The 9 percent requirement “is not a very fortunate” plan given the current economic environment, European Central Bank Governing Council member Ewald Nowotny said at a Vienna conference today. “Regulatory requirements shouldn’t have a restrictive impact on the real economy,” Nowotny said.

Heh, let a banker tell the story and look what comes out! Appropriate regulatory requirements will have a restrictive impact on the economy if the prebious regulations were lax enough to allow abusive practives to juice the economy to unsustainable heights!!!

Deleveraging shouldn’t take place in countries that are growing and making structural changes to their economies, Albanian central bank Governor Ardian Fullani said today at the same conference.

Really? Suppose they aren't growing at the same rate that debt service emanating from piled derivative experiments are growing, and the structural changes being made are inadequate or fail to address the pertinent issues? I'm just saying...

The message to foreign banks is “don’t put everyone in the same pot,” Fullani said. “Give stimulus to the right countries.”

Hey, that's novel and new! I've never heard the cry for stimulus before... Like a junkie creeping for another hit...

Banks may reduce funding by as much as 30 billion euros this year, according to estimates by Raiffeisen, board member Patrick Butler said at the Vienna conference. “Compare that to the growth that we saw in 2006 or 2007 of 200 billion euros a year -- it’s minimal,” Butler said. “It is not a credit crunch.”

...“It is important that home country authorities internalize the cross-border effects on EU and non-EU countries in formulating their measures,” the Vienna Initiative said in its statement. “In particular, the recapitalization plans of international banks submitted to the EBA should be scrutinized” for their “systemic impact on host economies.”

Yeah, BoomBustBlog covered this in detail... Two years ago - Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

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.

foreign 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.

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.

Published in BoomBustBlog

Friday, 13 January 2012 13:51

The American Education System Exposed For What It Truly Is - A Worker Drone Factory For The Socio-Economic Elite!

This is the 3rd installment of my controversial rant against the American education system - this time in video. If you haven't been following me, it is recommended that you read through the first two (admittedly lengthy, yet well worth the time) posts:

I fully expect plenty of comments on this one! I come in at 3:40 in the video, but the first three and a half minutes may be worth viewing as well for those in the education industry.

laurynlister_Reggie_on_RT

Published in BoomBustBlog

Wednesday, 04 January 2012 12:42

Reggie Middleton Sets CNBC on F.I.R.E.!!!

thumb_Reggie_Middleton_on_Street_Signs_Fire

Last week I offered my susbscribers examples of the 2nd and 3rd sectors of the FIRE (Finance, Insurance & Real Estate) group that we see getting burned. I spent much of last year on the "F"portion of FIRE. Subscribers should reference the last 5 or so documents in the Commercial & Investment Banks section of the subscription content area. I then illustrated a Dutch real estate company facing the FIRE (again subscribers reference the latest submissions in Commercial Real Estate), and I will be offering US REIT entities at risk in the next day or two. Of particular interest was my explicit warning on the insurance industry two weeks ago, both publicly and to subscribers, which included a full forensic analysis of the company we thought would be make the best short candidate as the feces hits the fan blades. See You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! and Our Next Forensic Analysis Subject Is In The Insurance Industry for more on my opinion on such. I even appeared on CNBC yesterday, apparently the only investor/analyst/pundit warning on the FIRE sector for 2012. I outlined my summary outlook for 2012 here: Reggie Middleton on CNBC StreetSigns Sees 2012 As Reluctant/Manipulated Continuation of Q1 2009… The actual CNBC appearance is available below...

No Frames

From this point on, start this YouTube video and let it play in the background as you go through the balance of this post. It''ll help set the mood...

So, the day following the CNBC appearance warning of the risks to the FIRE sector, and specific risks to the insurance industry in the guise of combined ratios bumping heads with massive investment losses on sovereign and financial entity debt, guess what appears in the headlines of those very same media outlets??? Insurers’ 2011 Catastrophe Losses Hit Record:

Japan’s earthquake and U.S. storms helped make 2011 the costliest year on record for insurance companies in terms of natural-disaster losses, according to Munich Re (ARN).

Several “devastating” earthquakes and a large number of weather-related catastrophes cost insurers $105 billion, more than double the natural-disaster figure for 2010 and exceeding the 2005 record of $101 billion, the world’s biggest reinsurer said in an e-mailed statement today. Competitor Swiss Re earlier estimated that the industry’s claims from natural catastrophes reached $103 billion.

Global economic losses jumped to $380 billion last year, surpassing the previous record of $220 billion in 2005, with the quakes in New Zealand in February and Japan in March accounting for almost two-thirds of the losses, Munich Re said.

“We had to contend with events with return periods of once every 1,000 years or even higher at the locations concerned,” Torsten Jeworrek, Munich Re’s board member responsible for global reinsurance, said in the statement. “We are prepared for such extreme situations.”

In Beware Even Those "Safe" Insurer's Portfolios I illustrated to my susbscribers the risks that insurance investors face. Munich Re said 2011 was the costliest year on record, but they failed to state how difficult it would be to handle said record losses with additional and potentially greater losses on bond and FI porfolios. Munich Re's net exposure to sovereign debt of PIIGS as % of tangible equity at the end of 2009 = 41.2%. Damn! Many compmanies are worse than that (and I'll delve into those a little later). Now, by revisiting the insurance primer that I offered in You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! you can see that combined ratios may very well break 100 while investment losses spike. Somebody may not get their claims funded, eh?

Professional Subscribers, reference the addendum to the icon Sovereign Debt Exposure of European Insurers and Reinsurers (439.61 kB 2010-05-19 01:56:52) whcih can be found online here: Insurer and Reinsurer Sovereign Debt Exposure Worksheets - Professional

Published in BoomBustBlog

Wednesday, 28 December 2011 16:55

Why Pick on Greece... and Sell Side Research Analysts As Sales Support Staff

I discuss how Greece became over indebted through banks imprudently making bad loans, and more importantly why practically no one in all of Wall Street warned of the sovereign debt crisis besides BoomBustBlog. This is hard hitting opinion that is too controversial to publish anywhere else.

How did I see this "Eurocalypse" coming while Wall Street remained aloof? Well the same question can be asked as to how I saw the Housing market crash, the fall of Lennar, Voodoo Accounting & the homebuilders, the breaking of the Bear Stearns, wondering whether Lehman really was a lemming in disguise or the fall of commercial real estate, among a plethora of other controversial, contrarian, and direct contravention to the Sell Side calls that I have made.

As explained in the second half of the video above, many still fail to understand the typical Wall Street bank business model, and more importantly fail actually audit the performance of said banks advice, recommendation and trading. I have laid it bare in BoomBustBlog many a time, which is probably the reason why my blog is banned from more than half of the big bank intranets!!! If you need an explicit example of what I a talking about, simply reference "Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!"

re_fund_returns.png

For those who have not heard....

We believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

In the video above, the audience's interesting question as to why I clamored on about the Pan-European Sovereign Debt Crisis, warning since January 2010 while the sell side of Wall Street kept selling PIIGS debt to clients was quite telling, indeed. Well... The proof is in the pudding. Click here for the first year of warnings and admonitions, or click here for the latest scoop!

Anecdotal picks from the BoomBustBlog archives nearly two years ago...

The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.
What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.
The Coming Pan-European Sovereign Debt Crisis, Pt 4: The Spread to Western European Countries
The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
The Beginning of the Endgame is Coming???
I Think It’s Confirmed, Greece Will Be the First Domino to Fall

Published in BoomBustBlog

Tuesday, 27 December 2011 15:07

The Chickens Have Finally Come Home To Roost At Sears

sears searsIn January of 2009 (nearly three years ago, which is ironic), I went bearish on Sears due to a variety of reasons, the least of which was less than competent management (hedge fund managers don't necessarily make good department store managers), macro conditions and fundamentals sloped towards hell. Although this was initially a very profitable trade, the rip roaring bear market rally of 2009 shredded the short profits - turning them into losses if uncovered, and simutaneously disguised the many issues that we brought up in our initiail short analysis. Well, you can run but you can't hide, and the truth will ultimately rear its head. On that note...

CNBC Reports In the Wake of Poor Sales, Sears to Close Stores

Sears Holdings plans to close between 100 and 120 Sears and Kmart stores after poor sales during the holidays, the most crucial time of year for retailers.

In an internal memo Tuesday to employees, CEO and President Lou D'Ambrosio said that the retailer had not "generated the results we were seeking during the holiday."The closings are the latest and most visible in a long series of moves to try to fix a retailer that has struggled with falling sales and shabby stores.

Sears Holdings Corp. said it has yet to determine which stores will close but said it will post on the list online when it's compiled. Sears would not discuss how many, if any, jobs would be cut.

The news sent shares of Sears [SHLD 36.50 -9.35 (-20.39%) ] to their lowest point in more than three years, and it was posting the biggest percentage decline in the S&P 500 Index.

As does Bloomberg: Sears Plunges on Plans to Close as Many as 120 Stores

Sears Holdings Corp., the retailer controlled by hedge-fund manager Edward Lampert, tumbled the most in... Sears fell (SHLD) 18 percent to $37.65 at 9: 42 a.m. in New York,...

As shoppers may realize, the retail store is at a disadvantage this year for sales activity has simply been weak. Thus, U.S. Stores Ramp Up Bargains as Sales Lag. I discussed the effects of this on retail malls last week in The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet! The kicker is the effect on Sears will be most exaggerated since it has real estate, fundamental, macro, industry induced and management issues to deal with as well as the paradigm shift towards internet shopping (which it should have been able to hedge with Sears.com and Kmart.com, alas this brings us back to the management issues, doesn't it?. BoomBustBlog subscribers, please refresh your memories by downloading the following...

Sears Holdings Research Report - Retail 2009-01-27 01:13:07 50.42 Kb

Sears Holdings Research Report - Pro 2009-01-27 01:11:41 313.25 Kb

Those who don't subscriber can view the 4 page preview below.

SHLD_ResearchReport_23January2009_-_Pro_Page_01

SHLD_ResearchReport_23January2009_-_Pro_Page_02

SHLD_ResearchReport_23January2009_-_Pro_Page_03

SHLD_ResearchReport_23January2009_-_Pro_Page_04

Subscribers should also review the Sears Q1 2009 Update 2009-06-01 12:28:26 398.99 Kb

Published in BoomBustBlog

Tuesday, 27 December 2011 14:10

The Little Known, Yet Significant "Domino Effect" Powers Of Small EU Nations: Greece & Iceland

The Little Known, Yet Significant "Domino Effect" Powers Of Small EU Nations: Greece & Iceland - number two in a series of conversation style presentations on a variety of topics covered in BoomBustBlog. See Reggie Middleton Ruminations on the Greek sovereign debt crisis for part one.

The full forensic analysis of the insurance short candidate as well as several US REITs that we are investigating will be released within 24 hours. For those who are not familiar with me, please visit "Who Is Reggie Middleton?"

The latest Reggie Middleton comments, opinion and analysis on this topic...

Published in BoomBustBlog

Tuesday, 06 December 2011 13:54

So, Now The Rating Agencies Want To Acknowledge The Existence Of The FrankenFinance Monster???

In the headlines today: S&P Places EFSF's Long-Term AAA Ratings on Creditwatch Negative, May Lower Ratings by One or Two Notches

Is this truly a surprise? Does anyone truly believe this heavily financially engineered FrankenFinance monster actually deserves a AAA rating? Yes, I do mean Frankenstein assets. I implore you to delve in further - "Welcome to the World of Dr. FrankenFinance!" and Financial Innovation vs Financial Fraud.

As a matter of fact, it actually appears that those few members of S&P that do read my blog have actually found some influence in the company. If you remember, last week I challenged the rating agencies with this taunting post -Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? Now, it's not as if the agencies have went so far as to actually take heed to my warning, but those who follow me know that I have been leading my subscribers through an explicit path of "contagion to come" for two years now. Who is the major conduit of said contagion? Well, the very same nation who is the 50% of the bilateral lynchpin of the EFSF. See:

Of course, if France is 50% of the fire power behind the EFSF, and Reggie keeps banging the rating agencies about Frances impending fall from true economic AAA grace (as if it ever deserved such in the first place), then by default if one goes the other must follow. As a matter of fact, I even warned that the smaller, supposedly more staid countries are truly at risk - Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly? And as if by magic, Bloomberg reports: S&P Puts 15 Euro Nations on Watch for Downgrade Amid Sovereign-Debt Crisis

Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade.

The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks.

“Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement.

Back in April of 2011, I told a curious audience of several hundred bankers and institutional investors in Amsterdam exactly how this will turn out. Thus far, I'v been right on point, as has the predictions dating as far back as 2009 in the Pan-European sovereign debt crisis series.

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations

S&P Puts 15 Euro Nations on Watch for Downgrade Amid Sovereign-Debt Crisis

Published in BoomBustBlog

Tuesday, 06 December 2011 11:44

The Very Structure of Risk Management/Internal Audit Departments of Big Banks Are J-O-K-E-S! Ask MF Global Clients

The WSJ reports Corzine Rebuffed Internal Warnings on Risks:

MF Global Holdings Ltd.'s executive in charge of controlling risks raised serious concerns several times last year to directors at the securities firm about the growing bet on European bonds by his boss, Jon S. Corzine, people familiar with the matter said.

The board allowed the company's exposure to troubled European sovereign debt to swell from about $1.5 billion in late 2010 to $6.3 billion shortly before MF Global tumbled into bankruptcy Oct. 31, these people said. The executive who challenged Mr. Corzine resigned in March.

The disagreement shows that concerns about the big bet grew inside the company months ...

As I have hinted in "The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications" I knew the ex-CEO of MF Global, and in particular member(s) of in the internal audit staff - one of which I knew very well and trained. There is one glaring FLAW in the structure of internal risk management and audit in MF Global, and that was that it was WEAK! If internal audit answers to operational executive management, then how can it truly crack the whip on its own boss. Now, granted, this is not endemic to just MF Global, but it is truly a problem. Internal audit/risk management needs to answer to a separate entity, apart from the CEO and possibly apart from the Board itself if the CEO has had a part in selecting the board. This way there is true independence and the nonsense that you just saw with MF Global has a much less likely chance of happening.

Alas, such is life. For instance, why are you reading this through a subscription blog versus PWC's audit report of MF Global? Hmmmmmm.....

Published in BoomBustBlog

Wednesday, 09 November 2011 14:46

Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!!

picsay-1319726495ZeroHedge reports Barclays Says Italy Is Finished: "Mathematically Beyond Point Of No Return"

Summary from Barclays Capital inst sales:

1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math--growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over
5) The danger:high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out--policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
10) And rate of change in negatives not enuff to offset slow drip of positives
11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
12) At the moment ECB remains unwilling to be lender last resort on scale needed
13) But frankly will have hand forced by market given massive systemic risk

Bloomberg also reports: Italy’s Woes Spell ‘Nightmare’ for BNP, Agricole, but.....

All seem to be missing the point! I have been warning since early 2010 Pan-European sovereign debt crisis! I warned of BNP in June, with very accurate reseach reports and models available to subscribers - BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. Despite all this, I fear the greater picture is being missed by most.

At the risk of sounding overbearing, Italy heard the fat lady acapella last year, it's just that no one was listening. BoomBustBlog Subscribers should reference Italy public finances projection from March of 2010. The killer is that France is inexoriably leveraged into Italy through its banks. If Italy defaults (and it will) it literally breaks the French banking system. All BoomBustBlog followers have read this - Wednesday, 03 August 2011 - France, As Most Susceptble To Contagion, Will See Its Banks Suffer

Now when (and not if, but when) French banks fail, France will both get downgraded and be forced to bail out - once again. They will have to choose between bailing out Greece, Portugal and Ireland - or themselves. I'll leave it up to you which is the most probable path.

Once the inevitable happens, then the Faux Caucus-Franco bailout mechanism that was suppose to support the unsupportable collapses in throught as it had already collapsed in reality. The result? Everybody should then realize that those risk free Bunds are risky as hell because they are backed by a net export nation (Germany) that will have nobody to export to, and spend much of its economic output bailing out the unbailable, or running from said entities.

Things are much, much worse than many are making it out to be.

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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Thursday, 28 July 2011 The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

- French Bank Run Forensic Thoughts - Retail Valuation Note - For retail subscribers
- Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers

Published in BoomBustBlog

Wednesday, 02 November 2011 14:44

The Perilous Game of Patent Pain That Apple Plays May Very Well Cause It Some Long Term Share

Paid Content reports: A Spanish Android Tablet Maker You’ve Never Heard Of Beats Apple In Court

Apple has been going tooth and nail after big Android device makers, especially Samsung, accusing them in courts worldwide of lifting designs and other features from Apple products like the iPad and iPhone. But one case decided yesterday in Spain illuminated a couple of key facts: Apple’s been targeting much smaller Android licensees, too; and despite initial success against Samsung in markets like Germany and Australia, Apple is not winning everywhere.

The case in Spain started a year ago, when a small firm based in the east of Spain, called NT-K (short for Nuevas Tecnologías y Energías Catalá) received a letter from Apple, claiming a new Android-based tablet that it developed, called the NT-K Pad, copied the iPad tablet. In the letter, Apple ordered NT-K to destroy its stock. When NT-K refused, it was landed with an injunction.

As part of the process, the company’s devices got seized by Spanish customs officials and NT-K found itself listed on a piracy register, according to a blog post from the company (translated here). Then Apple’s case got expanded to a criminal suit, filed in December 2010.

Yesterday, however, a court ruled that the devices in question do not infringe the Community design rights that Apple claimed.

... NT-K now says that it will be filing an antitrust complaint against Apple, claiming loss of earnings, and loss of potential future business.

...The implications of this case could go beyond NT-K, too. Foss Patents, which brought this case to paidContent’s attention, points out that the Community design right is the same one that Apple asserted against Samsung in its cases in Germany.

What does that mean? The fact that this got overturned in Spain could come up again in those cases that Apple is bringing against Android-based device makers in Europe and potentially elsewhere, all of which are still ongoing.

I have said many times over that this litigious patent aggression is a dangerous, yet necessary game for Apple. Apple is first, and foremost, a smartphone and tablet vendor, as defined by both revenues and profits. It cannot, and I repeat,,, cannot afford a mistep and lose a strategic case, for it is already signfiicanty behind the technology curve and the market share curve as compared to Android and its top three vendors. It has already lost its app dominance, and it will be a signfiicant loss if it loses a case and is hit with punitive sanctions. As excerpted from Apple on the Margin:

... Thus, in continuing with my attempt to educate my readers on the folly of believing Apple's position to be unassailable, I am illustrating exactly how vulnerable Apple is to either a compression of margin on the iPhone or a slow down in sales. Apple is just penetrating the market and has a fertile field to conquer, it is just that it will not be able to pursue that field devoid of competition as it has over the past 3 years. This should dictate an adjustment to the highly optimistic aura attached to the multiples used in forecasting economic results.

The graph below illustrates the importance the iPhone represents to Apple's franchise. Believe it or not, this graph actually understates the importance of the iPhone to Apple for while it brings in 45% of the revenues, it is responsible for about 70% of the profits. Apple has become too reliant on one product, although that reliance was borne from the fabulous success of said product. While Apple will probably derive some much needed revenue diversification from iPad sales, the iPad will face the same hurdles that the iPhone is coming up against - and that is competition from Android-based devices and potentially even Windows Mobile 7 8 (albeit this is an admittedly much more speculative statement).

Breaking the argument down even further, you see how the iPod and the iPhone have literally transformed this company. While I am sure it will continue to be fantastic company with cool products, I doubt very seriously that it will be able to grow in the future as it has in during the last 7 years.

The saving grace is that the smart phone and portable computing market will grow quite quickly, allowing companies with dwindling market share to still capture increasing revenues. The ugly reality is that those revenues will have to be burdened with increasing R&D, marketing and distribution costs since the amount of competition will probably scale faster than the market itself. That, my friends, is a very good thing for you and I, the consumer!

All paying subscribers are welcome to download the mini-model which shows Apple's earnings sensitivity to margin compression through competition. This is the very crux of determining the extent of Apple's success or lack thereof, in the near to medium term. Click here to download ( File Icon Apple iPhone Profit Margin Scenario Analysis Model), and click here to subscribe.

... Apple said that while iPhone sales fell off last quarter, the holiday quarter will be its best yet. First-quarter per- share earnings will be about $9.30 on sales of about $37 billion, Apple said in the statement.

That surpassed analysts’ projections, suggesting that iPhone sales are bouncing back with the release of the iPhone 4S, which set a record with debut-weekend sales of 4 million.

“In our wildest dreams, we couldn’t have gotten off to as great a start as we did with the iPhone 4S,” Cook said on the call. The drop in demand for iPhones in the second half of last quarter was “substantial,” said Cook.

This may very well be the case. I don't doubt it, but it also doesn't negate the generally stagnating growth trend - see Google's Android Now Leads In Market Share, Growth Rate and Potential Buyer Preference. Apple released a new product on two new carriers, which at best matches (and that's at best, I believe it falls far short) the Android flaghip device from 6 months ago! This much wider distribution network coupled with the iPhone popularity is bound to boost sales, but the popularity of Android (now the number 1 OS, globally and domestically, with the highest growth rate, to boot) make it unliekly Apple can regain the growth crown through marketing alone. It is now quickly becoming common knowledge that high end Android phones such as the Samsumg Galaxy S II series handily outperform anything from Apple thus far. As a result, the sales are becoming more fad generated and less technology/usability driven. We all know what happens to very fad, don't we? Apple will have to invest heavily into the tech, and that ain't free nor is it a guarantee for success. Hence the margin compression thesis. Look to my writings from last summer to determine the common sense reasons why Apple is at risk despite the lovefest that the media, the sell side of Wall Street and the equity markets have for it: How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue. After nearly a year of showing nearly incontrovertible evidence that Apple has seen its heyday, the mainstream media is catching on.

Published in BoomBustBlog