In the early spring of 2010, while trading at over $60 per share and still a darling of the street and corporate users, I warned that RIMM not only would not be able to compete with Android and iOS, but will be a phenomenal short. Well, two years later, while trading in the low teens the RIMM research is still pushing out profits. Research in Motion reported a minutes ago and...

  • RESEARCH IN MOTION 4Q REV. $4.19B, EST. $4.51B
  • RESEARCH IN MOTION 4Q ADJ. EPS 80C, EST. 81C
  • RESEARCH IN MOTION SAYS BALSILLIE RESIGNS FROM BOARD
  • RESEARCH IN MOTION SAYS JIM ROWAN TO LEAVE
  • RIMM WONT' GIVE QUANTIVE VIEWS DUE TO LONG TERM FOCUS
  • RESEARCH IN MOTION REVIEWING STRATEGIC OPPORTUNITIES 

BoomBustBlog banking and tech research has been quite prescient for 2010/2011. Subscribers who took advantage of this deserve kudos. To wit, and as excerpted from Another RIMM Job? It's Amazing How Many Institutions Don't Read The BoomBust!

Let's try this again: As Forecast Last Year and Clearly Demonstrated This Year, Research in Motion's Problems Are Far From Over

Research in Motion has been one of the most successful tech shorts of this blog's history (thus far). We first recommended a short last year and reiterated it in the fist quarter of this year. Reference:

  1. BoomBustBlog Research Performs a RIM Job!
  2. BoomBustBlog's Fundamental/Forensic Analysis of Research in Motion Has Returned 2x-3x Original Investment This Year!!

This is a snapshot of RIMM as of the writing of this article...

image002

As you can see, the results have been spectacular, particular if well timed puts have been put to use. In January I posted:

I personally see a clear leader in mobile computing becoming visible in 2012. Using options, a minimum of 2012 expiration OTM and ATM contracts can be purchase at the most optimistic break points demarcated by the model above after being populated with assumptions you feel most valid. I will have a proprietary BoomBustBlog option model available for download to paying subscribers by the end of next week, at which time we will revisit the analysis above.

A 50% drop in price later... On that note, Bloomberg reports: RIM to Cut 2,000 Jobs as BlackBerry Loses Share to IPhone

... 

Google's Android has, by far, inflicted much more damage to RIM than Apple ever has. This was easily seen over 13 months ago, at least by BoomBust Bloggers, referencing BoomBustBlog Research Performs a RIM Job!...

Page 5 of our Research in Motion forensic analysis (released in the summer of 2010 - File Icon RIMM Forensic Analysis and Valuation – Professional & Institutional or File Icon RIMM Forensic Analysis and Valuation – Retail) clearly stated that while we expected RIMM’s handset shipments to rise as a result of a rapidly expanding smartphone market, it will lose considerable market share....

As it turns out, it appears that we were erred slightly to the optimistic side with an 18% market share estimate for 2010. By the end of the 3rd quarter, RIM has fallen to 15.3% according to information calculated from IDC, and its decent has accelerated far faster than even we (the bears) have anticipated – a full 350 basis points for the quarter. This is 6x the decent of last quarter and 7 x the decent of the quarter before that. It is quite safe to assume that they will be materially below this point at year end (the data that we crunch is lagged by a quarter). This market share loss is most assuredly caused by the outsized growth of Android, which I will demonstrate in a minute. Below are charts generated from an updated version of the subscriber document File Icon Smartphone Market Model – Blog Download Version:

As you can see above, for the full year of 2010 RIM has trailed smartphone market penetration growth and that trail has increased each and every quarter with the rate of decent rapidly increasing.

RIM’s share price has benefited from an increasing equity market as well as the announcement of new products. The Torch, although possessive of redeeming new qualities, is essentially still a generation behind Apple and 1.5 generations behind Android. See RIM Smart Phone Market Share, RIP?

Research in Motion is following the EXACT path we at BoomBustBlog had laid out for it since the 3rd quarter of 2010.

Those that chose to follow this short recommendation had plenty of tools to assist in the decision making:

RIM Model Assumptions

RIM Model Factors Driving Growth

After populating the assumptions tab, jump to the “Factors Driving Growth” tab and choose the player whose market share and penetration data you want to populate the valuation model for the sake of comparison. The choices are “Nokia”, “RIMM”, “Apple”, “HTC” and “Others”. This tab is annual data only.

RIM Model Quarterly Factors (driving growth)

On the next tab, you can do the same as the previous (this tab is quarterly growth). Each of the growth tabs has charts that are print and presentation quality. Just be sure to tell everyone where you got thesis, data and analysis from :-) .

Other tabs in the model…

RIM Model Income Statement

RIM Model Device Market Analysis

RIM Model Revenue Analysis

RIM Model Device Revenues

Valuation and Multivariate Scenario Output

Final output is RIMM’s valuation using our analytics and your assumptions as input in the assumption tab above, as well as a multivariate scenario analysis showing changes in quite a number of variables (assuming all others remain the same) and their effects on your base valuation, as well as the percentage upside/downside from the current price.


Additional RIM writings...

Published in BoomBustBlog

image015As most who follow Apple know by now, management has decided to return approximately $45 billion of cash to shareholders over three years. Of course, given Apple's recent historical free cash flow generating performance, this is not a very big sacrifice assuming Apple can continue its meteoric growth (which we actually doubt).

Observations and opinions of interest:

  1. Cook et. al. have made it abundantly clear that they plan to run Apple differently than that of Steve Jobs Company. This can be gleaned from Jobs insisting that Apple accumulate cash for a rainy investment fund as a growth company. This would have actually have been my preference as a shareholder, assuming I believe management had both the clarity and the vision to foresee new revenue streams as well as the managerial execution to see said revenue streams through. Under Steve Jobs' reign, Apple excelled in such. Under Cook's helm, I fear less so. Contrary to popular opinion, I don't necessarily believe that this is due to Jobs being materially superior to Cook in execution and/or vision, but due to the fact that Apple's primary revenue driving product lines are maturing and competition has increased immensely (read as Google, Samsung, HTC, etc.) in the very short period since Steve Jobs incapacitation.
  2. Apple's management as openly and obviously declared their days as a "high growth" company are most likely numbered. This is evident because Apple has made the managerial decision that best interest of the shareholders would be better served in returning a substantial portion of its cash horde than attempting to invest it directly in ongoing (or new) operations or M&A. In other words, they believe that investors could make more or better use of the money than Apple management can. This is typical behavior for maturing companies, those that are leaving the high growth stage and entering the mature corporate phase. What is not so typical is to have a company that has been growing at the rate of Apple make such a decision, unless of course I was correct in my assumption that Apple's growth will see material growth headwinds in the near to medium term. If that is truly the case, then Apple's management is doing (by far) the best thing as per the interests of the shareholders.
  3. If one has to return cash to shareholders, then the actual and explicit "return" of cash is the way to do it, ex. pay a dividend. Share buybacks, although hugley popular amongst the Fortune 500 crowd, is an ineffecient and in my opinion unproven method increasing shareholder value over the long term.
Recent Apple articles and relate research and opinion...
Subsciber only:

Apple Margin & Valuation Note: a more comprehensive, more "scientific" update and approach to our piece from last year Apple - Competition and Cost Structure

Published in BoomBustBlog

Yes, its a little late but I had a few pressing matters that took priority. Apple had a remarkable blow out quarter in Q4 2011, basically knocking almost everything out of the park. Those who follow me and study my research realize that this was not necessarily unexpected. Those who pay attention realize that Apple has made a lot of money, but the theory behind the margin compression still stands. As a matter of fact, it stands stronger now than ever before. Let's peruse a few anecdotal points, but before we do I want to reveal that I've had more institutional interest in my Apple/Google research (primarily asset management and hedge funds) than ever in the history of my writings. It appears as if some of the thoughtful money sees the writing on the wall as well.

$46 billion in revenue

Yes, that's a big number. That's very big for annual revenues, but Apple hit it in just one quarter. The problem is that many believe Apple simply hit this number out of organic growth, the quarter after it missed analysts expectations, expectations which have been historically heavily managed. I'm sorry, but this business is just not that volatile, as can be seen below.

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.

Taken from BoomBustBlog Subscription material - File Icon Apple Earnings Guidance Analysis

So, what was behind this surge in fundamental performance? 

Quite a few factors, namely....

Apple's primary profit machine sales were off the charts. Apple is, from a revenue and profit perspective, essentially a smartphone company (subscribers reference File Icon Apple – Competition and Cost Structure)

Of course there's more to the story.

The iPhone Debuted On Three Major Carriers vs One in the Past

Apple, for the first time, had the iPhone offered on EVERY major US carrier - Verizon, Sprint, and AT&T. This is in comparison with just an AT&T exclusive, and then an offering on Verizon that just capture part of a quarter. When the iPhone (or any extremely popular product ) debuts on a a carrier, there is pent up demand from people waiting for the product availability in order to purchase it. This pent up demand on a product debut through a carrier is unrepeatable. It is a one-time event. Apple had this phenomena... X3!!!

The Delayed iPhone Update Occured in Q1 of the following year and happened to land in the biggest retail holiday (Christmas) quarter vs Q4 normally

This contributed to the miss in Q4 and substantially contributed to the surge in Q1

The iPhone 4S is a maringally minimal improvement over its predecessor, hence costs were kept to a minimal

The iPhone 4S was basically the same phone with a chip, camera and OS upgrade. As a matter of fact, this upgrade is still at least a generation behind Samsung's Galaxy SII series, which is already a year old. Thus, Apple was able to sell deprecated product like gangbusters to those who do not purchase on quality, but rather seek brand, vendor lock-in or simply purchase what's in. This contributed greatly to the margin boost to 44.7 percent. This is a temporary spike though. As I said, Apple has sold a shitload of antiquated product for top dollar that is still materially inferior to its year old competition. There's but so much that even Apple's vaunted marketing machine can get away with before driving away customers. Next quarter, you will probably see:

  • a much more expensive camera,
  • a much more expensive screen,
  • a much more powerful quad core CPU and related GPU (graphics chip)
  • much more expensive memory (RAM and ROM)
  • and a much more expensive battery...

Why, you ask? Well, the tech in the Samsung Galaxy (or even the Motorola Razr thin 24 hour phone - that's a real battery, soon owned by Google) is simply no joke - and has significantly pulled away from what is available from Apple. Apple's management is too smart to allow themselves to be Nokia'd, RIMMed or Microsofted so early in the game - so they will pony up the investments and expenditures. For those silly people that believe Apple can buy Samsungs and LGs components cheaper than Samsung and LG can supply themselves - you are simply delusional. Apple broiled in litigation with its two largest vendors, who supply the most important parts to its most profitable products, with said vendor being the number one competitor to said most profitable product. Exactly how is this a positive thing for anybody other than the consumer (which is a very good thing BTW)?

How much will Apple have to ding margins by investing to improve product? Well, let's look at the phone Samsung has on tap, the phone that is easily the number one competitor to the iPhone...

Samsung's Galaxy S range of devices have come to symbolise the strength in competition faced by Apple's iPhone. They are highly powerful devices and offer the modern user everything they could want from a top-level smartphone. Anybody who doubts the quality of these devices is a) ignoring that they are the top revenue driver in Samsung's history, b) ignoring that they are the best selling phone in Korea and surrounding areas (besting the iPhone which benefited from a new launch) and c) have probably never even played with the phone because the difference is strikingly obvious.

In order for Apple to remain competitive with products such as these, they will have to spend money on R&D, components and software. That means lower margins, particularly lower than the margin spike they just experienced from selling all of those antiquated products last quarter. 

samsung galaxy s III

The leaked specifications of the Samsung Galaxy S3 are -

  • 1.5 to 2 GB of RAM
  • 1.5 to 1.8 ghz Exynos Quad Core ARM Cortex processor, extended energy management
  • 32-64 GB Internal storage memory
  • SD Card slot to expand memory
  • 4.65″ “Super AMOLED III” curved and contoured display, 1,280×720-pixel resolution, extreme contrast and brightness
  • 10 - 16 megapixel camera, most likely a 12 mp camera. The camera on the current Galaxy is the best in the industry save the 12 - 14 megapixel fringe phones from Nokia and Sony, which no one is even aware of.
  • 1080p video recording at 60fps - outstanding, this is pro-sumer camcorder territory
  • 2250mAh battery - nearly twice the capacity of today's average smartphone, at half the thickness and weight
  • NFC Chip - Google Wallet credit card on the phone
  • Ice Cream Sandwich OS with Touchwiz 5.0

Source

These specs are all literally twice that of the current generation iPhone, and unlike many previous iterations of the iPhone, Apple has real competition in the market for components now (HTC, Samsung, LG, Motorola, etc.) so it can't buy everything for pennies. As a matter of fact, its biggest competitor IS ITS MAIN VENDOR, whom they are suing in 7 countries (or more)! How's that for a stroke of genius business plan from Google.

Apple's losing tablet market share faster than it lost smartphone market share

Android has moved to over 40% marketshare in tablets from less than 9% in less than a year. That's amazing and much faster growth than it exhibited in smartphones - which it literally took over the world in smartphone growth in just a few short years. Apple dropped from just over 90% to just under 60% in the same time frame. Again, as with the smartphones, the tablet tech blows iOS products out of the water and there are enough consumers who actually pay attention to features and capabilities to cause this market shift. My current tablet (I have iPads, Windows tablets and several Androids) is the Transformer Prime. It literally competes head to head with ultrabooks, MacBook Airs, and iPad 2s and does so quite favorably - running circles around ALL of its Apple competition. You can actually do productive work with it. Believe it, because I'm actually creating this post with on right now. Am I the only one that feels this way? The Prime is sold out everywhere, except for scalpers successfully selling them at 30% premiums on eBay.

With an 18 hour battery, full keyboard and all necessary ports and plugs, 1080P graphics and the slimmest form factor of any tablet and nearly any netbook, this is a fabulous productivity product and will need real R&D and component sourcing to prevent it from rising even faster than it already is. I can actually do a commercial for this, because unlike practically all other tablets you can really get work done on it.

 

Transformer_prime_availability

Ask almost anybody who has used one if it is worth it. Go to BestBuy where they sell both Apple and Android and ask three or four salespersons which is the better tablet, by far! Ask them which is the hardest one to keep in stock. After that, ask them which phone is better, the Galaxy or the iPhone 4S, then ask them which their next personal phone will likely be. Go ahead, do some field work. The Apple thesis is based on what will happen in the near to medium term, not what happened last quarter.

Remember, I never said Apple will go out of business, I said they will have to spend more to remain competitive against Google's less than free business model, see Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android.

Cook has even said himself that one shouldn't expect the margins Apple exhibited last quarter again, and the reason he said it wasn't because he was reading BoomBustBlog that morning -  or Sliced Apple Margins For Dinner? or Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! 

 

Apple Had An Extra Week Of Sales In Its Most Recent Quarter 

The Q1 of Apple had an extra week of retail and channel sales in it as compared to the previous quarter, and when moving product at the pace that Apple does, that week makes a difference... A big difference. These nuances need to be noticed and taken into consideration (ex. the revenue miss from Google stemming from FX fluctuations, yet attributed to fundamentals). 

The Steve Jobs Effect

Last but not least, the unfortunate passing of Steve Jobs did create a boost in mindshare for Apple and Apple products. This is (fortunately) not repeatable unless another superstar CEO passes away - which is highly unlikely. The margin boost from selling decamillions of antiquated product will not be produced in the near term either. The simultaneous launch on multiple large carriers and the pent-up demand will not be repeatable as well. The holiday season quarter lag, probably not. 

Now A Question To Get The FanBois Riled Up

Which CEO had the greatest effect on the world to date, Steve Jobs or Bill Gates? I welcome all opinions and answers, just stay polite and professional.

Other links of interest...

Published in BoomBustBlog

Notes of interest as I browse through the Goldman Q4-2011 earnings release...

  1. Many analysts dropped their estimates for Goldman (considerably after I warned on the firm), setting up the old Wall Street bait and switch move... Yet, despite this setup on reduced earnings, Goldman STILL MISSED on the top line! This is the most important number and has trended downward sharply.
  2. Goldman has padded earnings by slashing its compensation. For this I query my hyperintelligent BoomBustBloggers (and anyone else who has a synapse or two to spark), exactly what is that Goldman makes again? What's their prized formula? Their secret sauce? Their patented product? Oh yeah, they really don't have any thing of the sorts outside of their human capital - their employees. Those very same employees in which Goldman is not making a negative investment in order to make numbers (on earnings, they can't do anything about missing the top line). As a result, Goldman's only true product - their only real inventory, is heading for the hills. What does this bode for the future? Well, you guys are smart. You know its bullish when companies invest heavily for the future. What is it when they pare investment back significantly???
    1. The earnings pad is not even as optimistic as it seems. Revenues have decreased more than the effective reduction in compensation, thus it can be argued that effective comp as a % of revenues has increased. Should shareholders be excited about the proportion of their revenues increasing to compensate those who have underperformed so drastically???
  3. The net gain attributable to the impact of changes in the firm’s own credit spreads on borrowings for which the fair value option was elected was approximately $600 million for 2011.
    1. So, the firm's actual cash earnings decrease was materially higher than appears on the surface...
  4. During the year, the firm repurchased 47.0 million shares of its common stock at an average cost per share of $128.33, for a total cost of $6.04 billion, including 9.2 million shares during the fourth quarter at an average cost of $98.54, for a total cost of $908 million. The remaining share authorization under the firm’s existing repurchase program is 63.5 million shares.

    1. Goldman has taken a $1.3B loss on its share buybacks for 2011! Keep that in mind when taking their investment recommendations to heart! I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!! Even when they are advising themselves on share buybacks though???
  5. The MSM news organizations forgot to mention that althought Goldman's asset base is shrinking, it is shifting ever more of those shrinking (read devaluing) assets into the level three category.

image006_copy_copy

I will extend this note for subscribers if I find anything of interest in subsequent filings or the conference call notes.

Here are some links that you are unlikely to find anywhere else...

Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss

I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & IntroductionI'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & IntroductionI'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction  

I'm Hunting Big Game Today: The Squid On A Spear Tip

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

 Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?  

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...
 Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!  

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies 

What Was That I Heard About Squids Raising Capital Because They Can't Trade?

Reggie Middleton vs the Squid That Can't Trade!

Published in BoomBustBlog

On Friday, the 9th of December 2011 I published What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer! wherein I made clear that rating agencies are STILL moving in slow motion and using kids gloves, as was articulated in the piece Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? Remember, I warned of a European bank runs early on and even warned the public (after my subscribers had an opportunity to take positions) of the impending fall of BNP Paribas. See "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely "Bank Run Liquidity Candidate Forensic Opinion" - A full forensic note for professional and institutional subscribers.

I then went on to throroughly analyze the risks and potential downfalls of Goldman, Morgan Stanley and Bank of America - all while the sell side had strong buys on both these banks and the industry. Well, it appears as Fitch has either caught an attitude, caught religion or both. As reported through the MSM, Fitch Downgrades Several Big US and European Banks

Fitch downgraded its credit ratings on several big banks, including Bank of America and Goldman Sachs, citing "increased challenges" in the financial markets.

I also went so far as to declare celebrity bank analyst Dick Bove to be wrong on his stance on banks - perennially wrong - and despite his long track record that has been both in direct contravention to my outlook and to that which actually happens (aka reality) he is CONSTANTLY featured in the MSM. To wit, look who arrives late to the party, touted and showcased by the mainstream media saying the same thing that I screamed from BoomBustBlog 6 months ago while he was saying BUY! BUY! BUY!  Bove Slashes Price Targets on Goldman Sachs, Morgan Stanley

Bank analyst Dick Bove cut price targets and earnings estimates on financial giants Goldman Sachs (GS), Morgan Stanley (MS) and Credit Suisse (CS) on ...

 Here's my rant on the man known as Dick...

CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!!

As excerpted...

Now that we've established a small base of potential credibility when it comes to bank failure, back to today and Dick's proclamations on CNBC, let's start with Bank of America, who Dick says won't be affected by European malaise. This is Reggie's take...

Then there's Goldman Sachs, the bank where Reggie is just so loved...

After all, I'm sure there'll be no volatility in the markets if Europe blows up. Then again, even if there is volatility in the markets, Goldman's prop desk can handle it, right? I sure hope you guys don't think I'm being a Dick, do you?

What Was That I Heard About Squids Raising Capital Because They Can't Trade? Well, you guys know where I stand on this, and I have warned you ad nauseum...the Squid Can't Trade!

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

I'm Hunting Big Game Today: The Squid On A Spear Tip

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies

On to the next Banque de Dick... You'd think with Dexia in the news, one would know to either stay clear of JP Morgan or at least subscribe to the BoomBust, eh? CNBC reports today (as highlighted in the introductory graphic) France, Belgium Wrangle About Dexia Deal: Reports. Why is this important? Well, look at why Dexia's in trouble in the first place. In the (must read) post Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn you will find..

...Similarly, many sell-side researchers award stocks “buy” or “overweight” ratings even as their internal asset-management units unload shares, presenting a conflict of interest and ethical dilemma. Goldman’s most famous front-runs to date were the Abacus transactions, through which the bank allegedly postured for high ratings for its mortgage-backed CDOs, sold them to clients and then shorted them.

According to research from the Street.com, Goldman put a Conviction Buy Recommendation on JP Morgan Chase shares and issued it to their clients, and then sold 4,200,009 shares of JPMorgan Chase. At an average of $45/share,  that means that Goldman had a lack of conviction in its own "Conviction Buy" recommendation to the tune of $189,000,405. I'd hate to see what the company would do if they recommended clients sell, or worst yet short sell, stock. Oh yeah! We already know, don't we.

Bloomberg reports: Dexia Takes 3.6 Billion-Euro Charge on Asset Sales

That charge taken by Dexia was more than necessary, and most likely not nearly enough. But wait a minute, why did JP Morgan do the exact opposite regarding the exact same asset class?

Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:

I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.

'Nuff said! Let's move over to Morgan Stanley... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? You know, I'm still quite bearish on Asian, European and American banks. Just look at the facts as they're laid before you...

  1. Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

  2. Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably!

  3. Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies!

  4. What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer!

On Friday, the 9th of December 2011 I published What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer! wherein I made clear that rating agencies are STILL moving in slow motion and using kids gloves, as was articulated in the piece Where Are The Ratings Agencies Before UK & German Banks Go Boom? How About Those Euro REITs? Agencies Anybody? Remember, I warned of a European bank runs early on and even warned the public (after my subscribers had an opportunity to take positions) of the impending fall of BNP Paribas. See "BoomBust BNP Paribas?" (it is strongly recommended that you review this article if you haven't read it already) I started releasing snippets and tidbits of the proprietary research that led to the BNP short, namely File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers.

I then went on to throroughly analyze the risks and potential downfalls of Goldman, Morgan Stanley and Bank of America - all while the sell side had strong buys on both these banks and the industry. Well, it appears as Fitch has either caught an attitude, caught religion or both. As reported through the MSM, Fitch Downgrades Several Big US and European Banks

Fitch downgraded its credit ratings on several big banks, including Bank of America and Goldman Sachs, citing "increased challenges" in the financial markets.

I also went so far as to declare celebrity bank analyst Dick Bove to be wrong on his stance on banks - perenially wrong - and despite his long track record that has been both in direct contravention to my outlook and to that which actually happens (aka reality) he is CONSTANTLY featured in the MSM. To wit, look who arrives late to the party, touted and showcased by the mainstream media saying the same thing that I screamed from BoomBustBlog 6 months ago while he was saying BUY! BUY! BUY!  Bove Slashes Price Targets on Goldman Sachs, Morgan Stanley

Bank analyst Dick Bove cut price targets and earnings estimates on financial giants Goldman Sachs (GS), Morgan Stanley (MS) and Credit Suisse (CS) on ...

 Here's my rant on the man known as Dick...

CNBC Favorite Dick Bove Admits To Being Wrong On Banks, But For The Right Reasons, But Those Reasons Are Still Wrong!!!

As excerpted...

Now that we've established a small base of potential credibility when it comes to bank failure, back to today and Dick's proclamations on CNBC, let's start with Bank of America, who Dick says won't be affected by European malaise. This is Reggie's take...

Then there's Goldman Sachs, the bank where Reggie is just so loved...

After all, I'm sure there'll be no volatility in the markets if Europe blows up. Then again, even if there is volatility in the markets, Goldman's prop desk can handle it, right? I sure hope you guys don't think I'm being a Dick, do you?

What Was That I Heard About Squids Raising Capital Because They Can't Trade? Well, you guys know where I stand on this, and I have warned you ad nauseum...the Squid Can't Trade!

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

I'm Hunting Big Game Today: The Squid On A Spear Tip

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies

On to the next Banque de Dick... You'd think with Dexia in the news, one would know to either stay clear of JP Morgan or at least subscribe to the BoomBust, eh? CNBC reports today (as highlighted in the introductory graphic) France, Belgium Wrangle About Dexia Deal: Reports. Why is this important? Well, look at why Dexia's in trouble in the first place. In the (must read) post Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn you will find..

...Similarly, many sell-side researchers award stocks “buy” or “overweight” ratings even as their internal asset-management units unload shares, presenting a conflict of interest and ethical dilemma. Goldman’s most famous front-runs to date were the Abacus transactions, through which the bank allegedly postured for high ratings for its mortgage-backed CDOs, sold them to clients and then shorted them.

According to research from the Street.com, Goldman put a Conviction Buy Recommendation on JP Morgan Chase shares and issued it to their clients, and then sold 4,200,009 shares of JPMorgan Chase. At an average of $45/share,  that means that Goldman had a lack of conviction in its own "Conviction Buy" recommendation to the tune of $189,000,405. I'd hate to see what the company would do if they recommended clients sell, or worst yet short sell, stock. Oh yeah! We already know, don't we.

Bloomberg reports: Dexia Takes 3.6 Billion-Euro Charge on Asset Sales

That charge taken by Dexia was more than necessary, and most likely not nearly enough. But wait a minute, why did JP Morgan do the exact opposite regarding the exact same asset class?

Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:

I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.

'Nuff said! Let's move over to Morgan Stanley... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? You know, I'm still quite bearish on Asian, European and American banks. Just look at the facts as they're laid before you...

  1. Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

  2. Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably!

  3. Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies!

  4. What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer!

Published in BoomBustBlog

Nearly all of my calls on equity, sovereign nations and industries are highly contrarian. At first blush, I get a lot of flack, negative feedback and very little attention save that small coterie of paid subscribers whom I cater to. In the spring/summer of 2010 with RIM trading in the $60s or so, I warned that this company had defintiely seen its heyday. I put out very specific research to subscribers, including downloadable models and extensive reports. I was dismissed as having nationalistic beefs with Canadian companies (WTF???). Well, about 75% in market value loss later that short is still popping profits.

rimm 

CNBC reports RIM Earnings Top Forecasts but Outlook Is Weak, as ZeroHedge parses...

  • RESEARCH IN MOTION 3Q ADJ. EPS $1.27    
  • RESEARCH IN MOTION 3Q REV. $5.17B, EST. $5.22B
  • RESEARCH IN MOTION SEES 4Q ADJ EPS 80C-95C, EST.$1.08
  • RIMM SEES 4Q BLACKBERRY SHIPMENTS 11M-12M UNITS, EST. 12.8M
  • RIMM SEES 4Q REVENUE OF $4600-4800bn, EST. $4854.30
  • RESEARCH IN MOTION 3Q GROSS MARGIN 36.7%, EST. 37.1%
  • RESEARCH IN MOTION SEES 4Q GROSS MARGIN 38%
  • RIMM SHIPPED 150,000 BLACKBERRY PLAYBOOK TABLETS IN 3Q - that would be the since cancelled Playbook yes?

RIMM_after_hours_12-15

BoomBustBlog banking and tech research has been near perfect for 2010/2011. Subscribers who took advantae of this deserve kudos. To wit, and as excerpted from Another RIMM Job? It's Amazing How Many Institutions Don't Read The BoomBust!

Let's try this again: As Forecast Last Year and Clearly Demonstrated This Year, Research in Motion's Problems Are Far From Over

Research in Motion has been one of the most successful tech shorts of this blog's history (thus far). We first recommended a short last year and reiterated it in the fist quarter of this year. Reference:

    1. BoomBustBlog Research Performs a RIM Job!

    2. BoomBustBlog's Fundamental/Forensic Analysis of Research in Motion Has Returned 2x-3x Original Investment This Year!!

This is a snapshot of RIMM as of the writing of this article...

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As you can see, the results have been spectacular, particular if well timed puts have been put to use. In January I posted:

I personally see a clear leader in mobile computing becoming visible in 2012. Using options, a minimum of 2012 expiration OTM and ATM contracts can be purchase at the most optimistic break points demarcated by the model above after being populated with assumptions you feel most valid. I will have a proprietary BoomBustBlog option model available for download to paying subscribers by the end of next week, at which time we will revisit the analysis above.

A 50% drop in price later... On that note, Bloomberg reports: RIM to Cut 2,000 Jobs as BlackBerry Loses Share to IPhone

Now, all should sit back and watch as those other two highly contrarian calls take root:

And on the long side...

More on my opinion of Google and the liklihood that they will control smartphone mobile computing for the balance of the decade...

  1. Google's Android Market Share Explodes As It Expands Its Reach To Cars, Toys, Home Automation, Music & Movies - All In The Cloud
  2. Even With Apple's Successful Launch On Verizon, Google Continues To Increase It's Lead In The Smarthphone Space  
  3. Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android  
  4. Did A Blog Best Wall Street's Best of the Best In Guaging The True Value of Google? We Have To Think More Like An Entrepeneur & Less Like A Wall Street Analyst


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.

Published in BoomBustBlog

That guy(s) Tyler Durden over at ZeroHedge (obviously not speaking about yours truly) is pretty sharp. He busted Morgan Stanley with the old hide the sausage game. See Exposing The Latest Eurodebt Exposure Scam Courtesy Of Morgan Stanley: Gratuitous Level 1 To Level 2 Position Transfers:

For the latest gimmick to mask PIIGS sovereign debt exposure (where we already know that the traditional fallback of "gross being irrelevant and only net being important" crashed and burned today after Jefferies offloaded precisely half of its gross exposure, while raising net, thereby confirming that gross exposure is indeed a risk), we turn yet again to Morgan Stanley. As a reminder, despite our note that the company's gross exposure (which is now a major risk factor, thank you Rich Handler for proving our "bilateral netting is flawed" thesis) to French banks alone is $39 billion, Morgan Stanley downplayed this by saying that only $2.1 billion is the actual net funded exposure to Peripherals Eurozone countries. We'll see if Jack Gorman will have to revisit his defense after today's Jefferies action. Well as it turns out, we now have gimmick number two, one which will surely delight the bearish investors out there looking to find a bank doing all it can to mask not only its gross but net exposure (and wondering why it has to resort to such shenanigans). Presenting the Level 1 to Level 2 switcheroo, courtesy of, who else, Morgan Stanley.

From the just released 10-Q:

"Financial instruments owned—Other sovereign government obligations.    During the quarter ended September 30, 2011, the Company reclassified approximately $1.8 billion of other sovereign government obligations assets and approximately $2.1 billion of other sovereign government obligations liabilities from Level 1 to Level 2. These reclassifications primarily related to European peripheral government bonds as transactions in these securities did not occur with sufficient frequency and volume to constitute an active."

Uhm, are you serious? Transactions in all PIIGS securities were sufficiently active in both frequency and volume. We are delighted to present Morgan Stanley with a CUSIP list of all PIIGS bonds together with price and volume data if they so desire to confirm to them that their excuse is about to get tested substantially by the market as one not of prudent accounting (we jest: Level 2 assets are merely a legal way to get par marks for a security that is realistically trading at 35 cents on the dollar in the case of Greece and 87 in the case of Italy), but one of yet another attempt at blatant obfuscation.

I must admit, that this type investigative reporting takes very sharp minds, very witty reporting and a thirst for finding the truth. It probably can only be accomplished by tall handsome brothers with that sharp sense of humor... Know what I mean??? From the Bank Run Liquidity Candidate Forensic Opinion (A full forensic note for professional and institutional subscribers) released in August:

Click to enlarge...

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You see, this game is getting rampant, and it not just french banks and Morgan Stanley, is it Mr. Goldman of Sachs, aka the SQUIDDD!!!

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS

Published in BoomBustBlog

image007When French bankers gorge on roasting PIIGS...

From the NY Times:

PARIS — BNP Paribas, the largest French lender, announced a sharp decline in third-quarter profit Thursday and said it was writing off 60 percent of the value of all the Greek debt it holds, a belated acknowledgment that the loans are largely unrecoverable.

The bank, based in Paris, said it was setting aside about €2.1 billion, or $2.9 billion, of the value of its Greek sovereign debt. It is writing down about €116 million of exposure to Greek corporate bonds.

It's but so much of an acknowledgement, the write downs are woefully insufficient - alas, they do match the numbers being bandied about in the pop media so I guess management says that's sufficient "can kicking" material...

The bank said it had also moved to address its exposure to embattled euro zone government debt in the latest quarter, selling €1.9 billion of Greek sovereign debt, €8.2 billion of Italian debt and €2.5 billion of Spanish debt.

Yeah, but the question du jour (or should that be "question du trimestre") is what is the P&L hit of those sales (we all know they couldn't dump that trash without significant pain, and how much of it (my guess, none) is illustrated in the Q3 numbers???

‘‘The new Greek debt restructuring plan has adversely impacted this quarter’s net income, which, otherwise, is in line with the performances of previous quarters,’’ Baudouin Prot, the chief executive, said in a statement.

But that "new" Greek restructuring plan was old before it was even launched. Greece cannot last at 120% GDP under extreme austerity measures. I know that, and they know it too. Back to the drawing board, buddy!

Many large banks went on to write down half or more of their exposure, and when a new Greek aid deal was announced on Oct. 27, its call for a 50 percent ‘‘haircut’’ on the loans merely codified what a number of banks had already put into practice.

On with the game playing. First, there was no haircut needed. According to TPTB, there was no insolvencies, there would absolutely NO haircuts, defaults or insolvencies (see Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!). Okay, we were just joking, there weill be some haircuts, but no more than 21% (see A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina). Did we say 21%? We meant 50%, must've been something lost in the translation (see How Greece Killed Its Own Banks!). We said 60%, don't you understand. That is what the banks are writing in, even though the IMF (whom Reggie Middleton has proven to be wrong to the optimistic side nearly 100% of the time during this crisis, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!) says the haircuts need to be 75%. You don't even want to know what Reggie says they should be!

Attention professional and institutional subscribers! I will rerun the BNP numbers with the most up to date and realistic numbers and publish them within 24 hours. I will be avaialble to discuss them in the private forums, or if you wish through a Google+ video conference call if enough of you are interested.

Click to expand...

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From Forbes.com:

Many outside of Europe ask why are government’s paying so much attention to Greece, such a small economy in EU terms, instead of focusing on larger problems, like Italy and Spain.  BNP Paribas’ third quarter earnings illustrate the case.

France’s largest bank, BNP Paribas saw its profits drop 72% to euro 541 million, after writing down an additional € 2.4 billion in Greek debt, 60% of its total exposure. 

Contagion is the name of the game in Europe, and that’s why BNP Paribas has been trying to cut its exposure and beef up its core tier 1 capital ratio.  BNP lowered its exposure to bailed out peripherals (Greece, Ireland, and Portgual) by 37.9% through the third quarter to € 3.3 billion.

Still, BNP holds those € 3.3 billion in debt from bailed out countries (€ 1.6 billion of it in Greek debt), half a billion in Spanish debt, and a whopping € 12.2 billion in Italian debt.  While the bank managed to cut its exposure to Italy almost by half from € 20.5 billion, the value of its portfolio has taken the hit.

BNP Paribas’ total assets under management fell 4.1% to € 851 billion, as a reaction to the drastic fall in asset prices, the accelerated outflow of assets, and losses on its fixed income portfolio.

Corporate and investment banking (CIB) revenues tanked 39.8% to € 1.75 billion.  It was a slaughtering at the CIB unit, with fixed income revenue down 33.4%, equities down 44%, and the financing business down 13.6%.

The bank remains leveraged 22.3 times and is struggling to lower its exposure to U.S. dollar funding... 

Through the third quarter, BNP Paribas lowered its U.S. dollar funding needs by euro 20 billion, as it moves toward a 9% core tier 1 capital ratio.

BNP’s share price action is another illustration of the dire situation in Europe.  Despite these brutal results, shares in BNP Paribas actually rallied on Thursday, up more than 7%.  The stock is still down almost 40% over the trailing 12 months, compared with a 10% drop for JPMorgan Chase and nearly 30% for Citi.

The large French bank is a perfect example of the interconnections between European nations and the exposure to peripherals.  A default by Greece would spark a domino effect, as BNP Paribas would have to go from writing down 60% of their peripheral exposure to 100%.  As credit spreads widen in Italy, Spain, and the other PIIGS, further stress would be put on BNP Paribas’ balance sheet, possibly tipping it into insolvency.

Hmmm... This article was dated 11/03/2011. 

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BoomBustBlog susbscribers were alerted to BNP Paribas woes as far back as May 2010. We issued explicit and verbose warnings with valuation bands for BNP in June of this year. I am not aware of ANYONE on the sell side warning of BNP's woes. ANYONE!?!?!? Subscriptions, anybody? As you can see from the chart above, it has been a very profitable ride down on the short side. As excerpted from This Is Why BoomBustBlog Is THE Place To Go For Hard Hitting Research: BoomBust BNP Paribas?:

Bear Stearns/Lehman Deja vu?

Yesterday, in my post 'As The French Bank Runs....", I queried of the sell side, "What the hell took you so long to come to these rather astute observations, dude?" Well, in continuing my crusade of truth against the potential insolvency of French banks, I reference the WSJ article titlled "BNP Paribas Denies Funding Problem"

PARIS—BNP Paribas SA on Tuesday denied it is facing a dollar-liquidity problem, as reported in an opinion column in The Wall Street Journal. BNP Paribas said it is fully able to obtain U.S. dollar funding in the "normal course of business," either directly or through swaps. In a column published in The Wall Street Journal Tuesday, Nicolas Lecaussin, director of development at France's Institute for Economic and Fiscal Research, cited an unidentified BNP executive saying the bank "can no longer borrow dollars."

A Wall Street Journal representative wasn't immediately available to comment. BNP Paribas said its has abundant euro short-term funding and has a net dollar short-term funding with maturity shorter than a year worth €60 billion. The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks. The bank also said it is using foreign-exchange swaps to more than offset the recent reduction and "shortening" of funding from U.S. money market funds. French banks, in particular BNP Paribas and Société Générale SA, have been hurt by a perception that they face difficulties in tapping short-term funding in the U.S., as money-market funds cut their exposure to the banks amid fears about potential contagion from the Greek and broader European sovereign debt crisis. Shares of BNP Paribas were down 8.3% at €23.97 recently, the biggest loser on the Paris stock exchange, where the benchmark index was down 1.8%. SocGen was down 3%."

Hey, Big Wall Street Bank Execs Always Tell the Truth When They're in Trouble, RIIIIGHT????

Here's more of Alan Schwartz lying on TV in March of 2008

Like I said above, it's not as if upper management of these Wall Street banks would ever mislead us, RIGHT????

Erin Callan, CFO of Lehman Brothers Lying giving an interview on TV in March andagain in June of 2008.

Even if the big Wall Street banks would lie to us, we have expert analysts at hot shot, white shoe firms such as Goldman Sachs, who of course not only are "Doing God's Work" but also happen to be the smartest of the smart and the "bestest" of the best, RIIIGHT!!!??? Below we have both Erin from Lehman AND Goldman lyingon TV in a single screen shot. Ain't a picture worth a thousand words???

We even had the inscrutable Meredith Whitney say "To suggest that Lehman Brothers is going out of business is a real stretch!" (She OBVIOUSLY DOESN'T READ THE BOOMBUST) as well as Erin Callan, the CFO of this big Wall Street bank on TV lying interviewing again...

But that damn blogger guy Reggie Middleton put his "put parade"short combo on Lehman right about that time, and had all of these additional negative things to say...

Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008

 

So, does BNP have a funding problem, or is it at risk of the same?

BoomBustBlog subscribers know full well the answer to this question. I'm also going to be unusually generous this morning being that our prime French bank run candidate has approached my "crisis" scenario valuation band. So, as to answer the question as to BNP, let's reference File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers, and otherwise known as BNP Paribas, First Thoughts...

The WSJ article excerpted above quotes BNP management as saying: "The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks."

OK, I'll bite. Excactly how did BNP get to this €135 billion figure? Was it by using Lehman math? Methinks so, as clearly delineated in my resarch report on the very first page:

BNP_Paribus_First_Thoughts_4_Page_01 

The following two pages of this report go on to reveal the games being played to potentially come up with a figure such as the 135 billion quoted above. Boys and girls, I fear those may be Lehman bucks! 

For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same:

But wait, there's more - much more!

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BNP_Paribus_First_Thoughts_4_Page_05

BNP_Paribus_First_Thoughts_4_Page_06

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This document is 19 pages full of stuff that BNP management may have forgotten to tell you, as well as valuation for both "crisis" and bailout scenarios. What you have before is an anecdotal 5 pages. To put this in perspective particularly since no on the sell side warned about French bank risk before the fact, let's look at the chart as of the day this research was released and I'll let you tell me if it was worth the subscription...

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Roughly 50% and falling as Vol and gamma explode! 

Just to add a sense of chronological depth to this post, let's revisit the timeline from yesterday's piece, "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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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!

I also provided a very informative document for public consumption which clearly detailed exactly how this French bank collapse thing is likely to go down: File Icon French Bank Run Forensic Thoughts - pubic preview for Blog - A freebie, to illustrate what all of you non-subscribers are missing!

So, What's the Next Shoe To Drop? Read on...

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

Other reading of interest...

  1. The Anatomy of a Serial European Banking Collapse
  2. Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!
  3. The French Banks Are The First To Accept a Voluntary Greek Restructuring
  4. Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
  5. Click, Clack, Click: The Sound of Falling Dominoes Behind The Door of the Eurocalypse!
  6. LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?
  7. Eurocalypse Cometh! Principal Haircuts, Serial Bailouts, ECB Insolvent! Disruptive Sound Of Dominoes In Background Going "Click, Clack"! BoomBustBloggers Instructed To Line Up Bearish Positions Again!
Published in BoomBustBlog
Thursday, 03 November 2011 02:40

Reggie Middleton vs the Squid That Can't Trade!

thumb_image001_copyLearning to fly with tentacles instead of wings may prove difficult for the Squid!

Note: Subscribers can download the GS 3rd quarter review with the updated valuation opinion hereicon Goldman Sachs Q3 update Final (482.35 kB 2011-11-03 03:03:51)

In our Goldman Sachs update note, “Show me how to trade” (August 2011), we challenged Goldman Sachs’ ability to create alpha. Besides Goldman’s apparent lack of skill in generating returns in downward markets, we also presented an analysis on how its share price is driven by momentum (equity markets) instead of the commonly accepted metric of book value. Those who would have followed the traditional school of thought (sell side) by bidding the price up instead of down would have seen their capital erode by 9%; the stock is down 9% since our most recent publication. Below are some of the extracts from our previous note alongside updated charts including Q3 results to peruse before we delve further into the quarterly results the BoomBustBlog way.

Unfortunately, despite the entire start syndrome attached to Goldman Sachs, its prop desk is yet to exhibit the ability to create alpha, let alone match the returns of boombustblog.com. The table in the exhibit shows Goldman Sachs’ trading (under) performance vis-à-vis S&P

Given the high correlation of Goldman’s prop trading desk to equity markets and taking into consideration the state of equity markets in Q2-Q3, it would be interesting to see how Goldman Sachs share perform in the coming quarter

‘Goldman Sachs’ share price is driven less by book value per share and is driven more by momentum (multiple)”

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With Goldman Sachs return on equity (ROE) already under considerable pressure to meet even its cost of capital, additional strains on capital could put further pressure on its profitability. In Q3 ROE declined to a negative 2.6% from 6.1% in Q2 and 10.4% in Q3 2010, Goldman Sachs return on equity has declined substantially due to de-leveraging in an adverse market (the absolute wrong time to deleverage, yet the time when most banks seek to do it) and is below its current cost of capital. With ROE down to sub10% from c40% during pre-crisis levels, there is no way a stock with high beta as Goldman Sachs could justify adequate returns to cover the inherent risk. For Goldman Sachs to trade back at 200 it has to resume its ROE of 20% which means it has to increase its leverage back to pre-crisis levels of c25x. With curbs on banks leverage and de-risking this seems highly unlikely. image006_copy

 

Two months or so ago (Monday, 22 August 2011), I penned the public blog post that also relased my most recent research on Goldman Sachs - The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets? Who's Gonna Tell The Shareholders and Tax Payer??? -  as excerpted:

The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don’t call Goldman the world’s most expensive federally insured hedge fund for nothing!

And for those who haven't been following my Squid Hunting series, there's a lot more to come from those boys at 200 West Street. If you want to know what will happen next, just look at the first few pages of the lastest Goldman subscription docs (click here to subscribe):

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

 

I'm Hunting Big Game Today: The Squid On A Spear Tip

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

 

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...
 

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn't Look Like What They Show You In The Movies

Discuss Finance, Investment, Blogs, Global Macro and Research with Reggie Middleton of BoomBustBlog at Salon de Ning

700 Fifth Avenue  New York, NY 10019

6:45 pm, Friday November 4th

I will bring plenty of research, debate and discussion, so put your smart caps on, be prepared to overpay for drinks and be in the company of beautiful women.

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Previous BoomBustBlog events have been more than worth it...

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I have received SO MUCH flack over the last year for pointing out the obvious FACT that Apple's phenomenal growth will be hit by Android's extra-phenomenal growth, it has been borderline disheartening. Well, the time is hear folks, and as is usual, logic. common sense and rational thinking rule the day once again. The results should be interesting, if not immediate, for many Apple investors and consumers are beyond loyal and ede to borderline fanatic. This portends much more irrational emotion in decision making and potentially unnecessarily drastic actions in the end. What do I mean? Well, Apple is purportedly just under 7% of the NASDAQ. If the Apple religion falls out of fad... Well, look out below! This may not happen immediately, for the love affair is truly torrid, and all sorts of excuses will be made. At the end of the day (or fiscal year, to be more accurate) the reality is bound to hit that Apple is a C corporation like everyone else and is subject to market pressures and competition, and truly does not fart fairy dust.

Of course, logic would dictate that the (literally) hundreds of hate mails I received should be replaced with hundreds of "Hey, Reg, you were right" mails, but it won't happen due to the fact that the nature of those that generated the hate mails forbids them from examining fact and instead allows them to be guided by a bisection of corporate marketing, brand loyalty and emotion. It should be quite interesting to see what the responses to this article will be in the comments section. This is a long post, but more than worth you time. I urge you to read in its entirety, or at least up until the part that reminisces:

"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..."

Early last year, I started tracking the rapid ascent of ultra mobile computing in my Mobile Computing Wars series. At that time, I didn't have a favored winner, but as I researched more and dug deeper, clear patterns started to emerge. These patterns simply got clearer and stronger as time progressed, and it ended in my putting out highly contrarian research on Google in public - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google and in substantially more detail in private -the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).

I also issued similarly contrarian research on Apple: File Icon Apple – Competition and Cost Structure).

Of course, the mainstream media and the Sell Side of Wall Street took the opposite sides of these bets, to wit: Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past? and Reggie Middleton Takes The Challenge To Goldman Sach’s Apple Proclamation One Step Farther, Apple’s Closed System Risks Failure!”. Realize that It Should Now Be Common Knowledge That Goldman’s Investment Advice Sucks. Of course, that doesn't necessarily mean that there is any credibility in said proclamations, though. Reference this priceless nugget in light of the links above... Goldman Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client’s Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now!I'd also like to reiterate, I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!!

Well, as luck would have it, the Street was wrong on Google, see Did A Blog Best Wall Street's Best of the Best In Guaging The True Value of Google? We Have To Think More Like An Entrepeneur & Less Like A Wall Street Analyst July 19th, 2011.

There were wrong on Apple, and to be absolutely honest, they are wrong in general - reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? Not that this tidbit of fact and simple math will stop the sheeple from shoveling over billions upon billions of dollars to this industry to be recycled back into the bonus pool, versus supporting truly independent research such as BoomBustBlog, no matter HOW many times I'm right and they are proven wrong - and it has been a lot, trust me.

We also had pundits in private equity who I would have normally assumed should have know better jump on the Apple wagon, as excerpted from My Thoughts on Roger McNamee's View of Google and Mobile Computing...

Of note, pundit recommended long Apple and short Google for guaranteed profits. Google blew out numbers this quarter (Our Uber Growth Thesis For Google Is Intact and Performing Well) and Apple missed, all the while Google is strategically positioned to do much, much more damage. As for the comment about nobody makes money from Android, well those entities that make money from Android disagree. I have outlined this in the first quarter, reference Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming Monday, February 14th, 2011.

On this point, I must give props to Herb Greenberg for allowing me to espouse my contrarian, yet highly accurate mantra concerning Apple as well as US banks' derivative exposure through the mainstream, namely CNBC. The derivate issues have recently reported by Bloomberg and ZeroHedge, reinforcing my many warnings, ex. So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

Of course, as timing would have it, I predicted that Apple would miss 4 to 6 quarters after the pronouncement I made on international TV exactly 1 year ago via CNBC on the eve of Apple's earnings (3:40 into the video). Exactly 4 quarters later.... Hmmm!

Simple math, simple business logic, simply common sense, yet the Apple hordes attacked relentlessly. Listen, what Google has created to compete with Apple, RIM, MSFT and Nokia, was not a new technology - but a new way of doing business. Less than free was their new business model and it proved to be pretty damn effective.

Margin compression follows a slip in sales due to competition. You see, in order for Apple to maintain its unit growth, it wiill have invest more into the product, cut costs, or both. Any scenario leads to margin compression. Since I have written so much on this topic, I will not rehash, but simply point to the prophetic post I made two weeks ago in calling for what I considered to be the obvious: Sliced Apple Margins For Dinner?

In the meantime, let's parse today's news event: Apple Misses Big on Earnings, Revenue; Shares Tumble

Apple posted a rare miss on both earnings and revenue as far fewer iPhones were sold during the quarter than expected. Shares tumbled after-hours.

Again, it's Apple's expectations that will be the eventual undoing of this company as an investment. They are simply unrealistic, as I will get to in a moment, but first I'd like to point out the extreme favoritism that is still given to this company by the MSM.

Bloomberg reports: Apple Misses Estimates on Delayed Sales

Apple Inc. (AAPL) fell in German trading after profit missed analysts’ predictions for the first time in at least six years, evidence that customers delayed iPhone purchases before the release of the latest model.

This statement is bullshit. Customers delay purchases right before the release of every new model, yet that somehow didn't cause a miss for the iPhone 3G, the iPhone 3GS and the iPhone 4, did it? iPhone's sales dissappointed for one reason, and one reason only!!!


Profit was $6.62 billion, or $7.05 a share in the fiscal fourth quarter, compared with $4.31 billion, or $4.64 a share, a year earlier, Cupertino, California-based Apple said yesterday in a statement. That missed analysts’ predicted profit of $7.31 a share, the first disappointment from Apple in at least 26 quarters.

Apple sold 17.07 million iPhones, less than the 20 million projected by analysts surveyed by Bloomberg, as consumers held out for the iPhone 4S, released after the close of the period that ended Sept. 24. The shortfall underscores the growing importance to Apple for the iPhone, which was introduced in 2007 and accounted for 39 percent of revenue last quarter.

“The market was expecting very strong iPhone sales going into the product launch,” said Giri Cherukuri, head trader at Oakbrook Investments LLC, which holds Apple shares. “It stands to reason that a lot of people were waiting for the new iPhone to come out.”

Again, Bullshit! Why didn't this phenomena occur during the last three product launches? Oh yeah, that's right, because Android wasn't up to speed by then.

Apple shares dropped as much as 7.3 percent to the equivalent of $391.75 in German trading and were down 6.4 percent as of 9:03 a.m. in Frankfurt. Yesterday, the stock fell 6.3 percent to $395.50 in extended U.S. trading. The stock had closed at $422.24 in New York.

Sales of the smartphone are rebounding this quarter, and the decline in Apple shares represents a “buying opportunity,” said Cherukuri, whose firm is based in Lisle, Illinois.

Yeah, and thereing lies the problem, shares of Apple are always a buying opporutunity, no matter what the facts or circumstances are, right?

As excerpted from Apple on the Margin:

Writing about Apple is like writing about gold, despite the fact that there is a strong fundamental argument for or against it, the emotional response and lack of empirical outlook clouds the fundamentals, ex. Apple  and the iPhone vs Android or Gold and fiat currencies/inflation. I am not a Apple hater, and I am probably one of the most advanced iPad users you know of. Apple has its pluses and minuses, but people (including many professionals) are failing to look at the facts and instead are joining their respective "fanboi" clubs. 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: . After nearly a year of showing nearly incontrovertible evidence that Apple has seen its heyday, the mainstream media is catching on. First a quick overview of my thoughts...

    1. Look & Listen Closely As The Solitary Margin Compression Theory Slowly Bears Fruit: Apple to Drop Flagship iPad Prices?
    2. Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! 
    3. Is The Evidence For An Apple Margin Collapse Now Incontrovertible? 
    4. I Absolutely Dare Anyone To Read This And Still Not Consider The Probability (Not Possibility) Of Apple Suffering From Margin Compression

Smartphone Rivals

The new touchscreen handset is vying with new smartphones from companies including Samsung Electronics Co. and HTC Corp. (2498), which use Google Inc.’s Android operating system.

As excerpted from "Is The Evidence For An Apple Margin Collapse Now Incontrovertible?" 5/19/11:

This is going to be a much tougher fight for Apple than even that of the smartphone market, and you see how well Android did in that category as the current market leader in both footprint and growth rate. Literally98% more competition is coming down the pike this year, and products are already widely reviewed as at parity or superior in Apple's chief diversification segment (remember, derives ~70%  of its profits from the iPhone). With that, even the iPhone is supremely challenged by Apple's own parts vendors, Reference :

Apple's biggest suppliers (the most important parts vendors for the products that contributes about 75% of Apple's profits) and the companies that Apples is currently embroiled in global litigation with (no wonder why) also produce similar products, ex. the LG Optimus 3D and the Samsung Galaxy S II.

Speaking of the Samsung Galaxy, this newest refresh is nearly universally thought of to be the best smartphone available, including the Apple iPhone. I haven't found a single review yet that has said otherwise. This is an impressive feat considering how "Apple-centric" the media currently is. Reference this snippet from Endgadget:

For a handset with such a broad range of standout features and specs, the Galaxy S II is remarkably easy to summarize. It's the best Android smartphone yet, but more importantly, it might well be the best smartphone, period. Of course, a 4.3-inch screen size won't suit everyone, no matter how stupendously thin the device that carries it may be, and we also can't say for sure that the Galaxy S II would justify a long-term iOS user foresaking his investment into one ecosystem and making the leap to another. Nonetheless, if you're asking us what smartphone to buy today, unconstrained by such externalities, the Galaxy S II would be the clear choice. Sometimes it's just as simple as that.

Endgadget is not the only reviewer to go head over heals over Android super-powered phones. Check it out, courtesy of onlinesocialmedia.net:

    1. Dan Sung of Pocket-Lint rates the phone with 4.5 out of 5 stars and calls it a “cracking experience” and like Engadget, “better than any other Android smartphone.” Very minor complaints included the 1080p DLNA streaming, which was noted could be better, plus minor quibbles with the camera lens but overall the conclusion is that “no one buying this superphone will have anything to complain about.
    2. Chris Davies over on Slash Gear. Guess what, Davies also says, “this could well be the best Android smartphone on the market today” and noted that iPhone users that were shown the Galaxy S II said they could have their heads turned by it. There were minor criticisms, such as the keyboard, but these were said to “pale in comparison to the Samsung’s strengths.” In conclusion Davies says “we’re running out of reasons not to buy the Galaxy S II.”
    3. Electric Pig by Ben Sillis, who gave the phone a staggering 5 out of 5 star rating and says “Samsung has triumphed again with theSamsung Galaxy S 2.” There are some quibbles about software in this review but not enough to get in the way of it being a “surefire contender for phone of the year,” and again the superb display gets a special mention.

... Apple’s fourth-quarter revenue was $28.3 billion, below the $29.6 billion predicted by analysts. Missing expectations caught investors by surprise since the company has so consistently beaten predictions. During the previous 19 quarters, Apple had exceeded profit estimates by an average 28 percent, according to Piper Jaffray Cos.

‘Clueless’

“Shame on me and other investors who got lulled into complacency based on how much they’ve beaten estimates in the past,” said David Rolfe, chief investment officer at Apple investor at Wedgewood Partners Inc.

Apple had said in July that it expected sales and profit to fall because of changes to its product lineup.

“It’s not the company that missed, it’s the people who follow Apple that are clueless,” said Trip Chowdhry, an analyst at Global Equities Research in San Francisco.

Analysts may revisit projections that Apple will continue to grow at a record rate and exceed estimates, said Michael Obuchowski, chief investment officer at First Empire Asset Management.

“That the company can maintain the growth rate that some of the analysts envision is not very realistic,” he said. “There will be a reevaluation of the analysts’ expectations.”

"Clueless"! “Shame on me and other investors who got lulled into complacency"!

Taken right out of the Reggie Middleton playbook! Refereince Apple Once Again Surprises The Unsurprisingly Inept Analyst Estimates: When Will Investors Catch On To The Earnings Management Game?: I will repost (for the 6th time) the earnings guidance snippet and challenge readers to possibility that we may have a very valid point.

In the meantime, sheeple-like investors are being hoodwinked by quarter after quarter of Apple blow out earnings. Don't get me wrong. I feel and fully acknowledge that Apple is executing on all 8 cylinders of a 6 cylinder engine, but it still has its real world limitations. Apple will start to bump up against these limitation over the next 4 quarters, and the signs of this bump are already apparent. Of course, the signs are being handily masked by the games that Apple management and the sell side analysts of Wall Street play, with the "Sheeple" retail and the lazier component of the institutional investors being put out to take the eventual bullet.

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? After all, it is no longer a surprise after the 11th consecutive occurrence, is it? I would be surprised if my readers were surprised by an Apple surprise. Seriously! 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. Of course, I do not blame Apple management for this, of they are charged with maximizing shareholder return. The analytical community and the (sheeple) investors which they serve is another matter though. Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: File Icon 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...

In the meantime, more inaccurate and uncalled for Apple bias in the media that will do naught but cause losses for investors that bother to pay it any attention... Bloomberg reports Google, Samsung Announce Updated Android Phone:

“Ice Cream Sandwich could provide the critical push in the race to catch Apple,” said Mark Newman, an analyst at Sanford C. Bernstein & Co., who is based in Hong Kong. “Apple’s software is still on the cutting edge.”

This is outright nonsense! Apple's most recent OS5 release simply brings iOS up to par with what Androids are currently running since the beginning of this year. As a matter of fact, as of today, Apple's tech is still behind since Google just released an OS update (Ice Cream Sandwich) that again puts it leaps and bounds above the Apple OS. 

Apple’s new iPhone was unveiled earlier this month with Siri technology, which lets users ask for weather updates, make calendar appointments or send messages without tapping on the keyboard. The iPhone is the company’s best-selling product.

The article fails to mention that this feature was available in Android from the beginning of the year, at least. Again Apple is playing catch up, but it has not yet caught up!

The latest Android incarnation also offers easier multitasking and a new People app, which helps check status updates from Google+ and other social networks.... Android controlled 43.4 percent of the global smartphone market in the second quarter, while Apple’s iOS had an 18.2 percent share, according to researcher Gartner Inc.

This is up from zero hust three or so years ago, reference:

  1. More of the Android Onslaught: Increasing Handset Revenues and Growth
  2. The Complete, 63 pg Google Forensic Valuation is Available for Download

For tablets, Apple’s iOS dominated with 61.3 percent market share in the second quarter, according to research company Strategy Analytics. Android accounted for 30.1 percent of the tablet market.

Take note that the the tablet market is taking a very similar path to the phone market where Apple started with ~90% share and dropped very, very quickly with no explicit recognition of such from the media or the sell side. Reference:

 

Archived 2010 posts on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

  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
  4. This article should drive the point home: 
  5. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  6. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  7. RIM Smart Phone Market Share, RIP?
  8. Android is gaining preference as the long-term choice of application developers
  9. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  10. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  11. Apple on the Margin
  12. RIM Smart Phone Market Share, RIP?
  13. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  14. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  15. More of the Android Onslaught: Increasing Handset Revenues and Growth
  16. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  17. The Complete, 63 pg Google Forensic Valuation is Available for Download
  18. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  19. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  20. As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
  21. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?
Published in BoomBustBlog