I participated in a very interesting debate in the NY Times regarding how to fix the rating agencies

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I end my contribution to the debate as follows:

How do you fix this (if it’s not obvious already)?

Eliminate perverse incentives. Whoever wants to buy an asset should have to pay to have it rated. Credit agencies shouldn’t be paid by the same entities they might have to chastise.

It would also help if agencies could no longer hide behind the excuse that their rating was only an opinion, rather than empirical research they must stand behind. There's no need to do a reliable job if you face no credible legal liability, and the government essentially limits the competition you face.

For six years, I have run circles around the three major agencies with timely and accurate predictions of where regional banks, commercial/investment banks (Bear Stearns collapseLehman Brothers), insurerscommercial real estateresidential real estate, US home builders (Lennar), and the pan-European sovereign debt crisis participants were heading. If I can do it, the agencies can too.

One thing many commenters seem to be confused about is the ability for investors to pay for ratings. You don't get anything for free. Never does something emanate from nothing. Any credible advice HAS to be paid for, period! S&P actually sells equity research to the end user, yet gives away fixed income research. Which do you think is the most credible? Most fized income investors are institutions, who are more than capable of paying for advice, and regularly do so anyway. 

We can fix the problems we have with rating agencies as end users, but you have to realize that the agencies themselves are not broken. It appears as if the agencies are broken only if you don't understand their business model...

This clip is an excerpt from the VPRO documentary on rating agencies, a worthwhile view. In the meantime, let's revisit my historical viewpoints on the topic:

The Embarrassingly Ugly Truth About Spain: The IMF, EC and ALL Major Rating Agencies Are LYING!!!

Rating Agencies vs Reggie Middleton, Part 3

Published in BoomBustBlog

In the video clip below, I explain that the rating agencies DID NOT fail to do their jobs during the credit bubble and subsequent bust of 2008-2009, nor did they fail in the ongoing pan-European sovereign debt crisis. They succeeded wildly because they served their actual constituency --- the banks!

Reggie VPRO Ratings agencies

Published in BoomBustBlog

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

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

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

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

apple stock and front month optionsapple stock and front month options

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

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

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

Let's contrast this to what I have espoused over a similar time frame...
    1.  - This pretty much says it all, right Mr. Munster of Piper Jaffrey??? Yeah, I called you out on this one! Here is an excerpt for good measure, but before you read it remember that Apple's thrashing at the exchange has forced it to renounce its earnigns manipulating ways - just as I anticipated!!!

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

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

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

Apple -Competition and Cost Structure - unlocked Page 01Apple -Competition and Cost Structure - unlocked Page 02Apple -Competition and Cost Structure - unlocked Page 03 copyApple -Competition and Cost Structure - unlocked Page 04 copyApple -Competition and Cost Structure - unlocked Page 05Apple -Competition and Cost Structure - unlocked Page 07 copyApple -Competition and Cost Structure - unlocked Page 08 copyApple -Competition and Cost Structure - unlocked Page 09 copyApple -Competition and Cost Structure - unlocked Page 10 copyApple -Competition and Cost Structure - unlocked Page 11
If after reading the articles and viewing the videos above and you believe that I'm the best thing since Wall Street brokerages were private partnerships that couldn't squander other peoples capital at insanely levered levels while misleading muppets with inanely bullshit analysis and sales pitches to 89% losses on their recommendations (reference Multiple Muppet Mashing Leaves Groupon Shareholders Holding The Bag After 89% Off IPO Coupon) just to get paid multi-million dollar bonuses instead of jail time, then feel free to subscribe here.
Published in BoomBustBlog

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

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

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

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

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

About Knowledge How: College and University Education Valuation Software

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

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

The table below shows the computation of cash flows

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6*

Gross Expected Salary

Adjusted for Unemployment/Underemployment

Less:  Taxes

Net Disposable Salary

 

 

 

 

 

 

Less: Tuition Cost

Less: Lost Wages or Opportunity Cost

Less: Household expenses

Less: Loan installments

Net Cash Flows

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

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

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

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

Undergraduate Courses

Postgraduate courses

PhD Course

BA Economics

Masters of Business Administration

PhD Course

BA English

Master of Architecture

BA Political Science

Juris Doctor

BA Psychology

Master of Science

All undergraduate courses

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

image001

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

Structure of the App’s Financial Model

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

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

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

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

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

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

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

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

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

Key Assumptions / Inputs

The model uses the following key inputs

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

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

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

Interest on loan

6% p.a

Income Tax Rate

30%

Loan Term after employment starts (in years)

10

Household expenses (monthly)

US$2,520

Opportunity cost (per annum)

-          Bachelors

-          Postgraduates

-          PHD

US$18,000

US$40,000

US$60,000

Salary Growth

3% p.a

Unemployment adjustment

-          Bachelors

-          Postgraduates

-          PHD

8.4%

3.9%

3.4%

image031

Key Findings

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

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

Return from Undergraduate Courses

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

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

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

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

Return from Postgraduate Courses

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

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

NPV @6% is positive in all the cases.

Return from PhD Courses

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

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

The Importance of the Variable, Inputs and Assumptions

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

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

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

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

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

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

The Government's take?

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

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

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

     
  2. Feb 6, 2012 – While all of those information sources may not be aligned to the extent necessary to populate the College Scorecard as currently proposed...
  3. Dec 3, 2012 – The College Scorecard, President Obama's proposed way to provide students with better data about their college options, leaves many of those ..[PDF] 
    File Format: PDF/Adobe Acrobat - Quick View
  4. The President has proposed providing this information to students and families. ABCCollege. ABC College  Institutions that enroll similar types of students ...
  5. Dec 5, 2012 – ... on the Obama administration's proposed college scorecard. The scorecard, a reference for students considering attending higher education, ...[PDF] 
  6. File Format: PDF/Adobe Acrobat - Quick View
    The White House will soon unveil a final version of its “college scorecard”—an online tool .... The President has proposed providing this information to students ...
  7. Feb 2, 2012 – Categories: Accountability, College Costs and Student Debt, Higher ...proposed “College Scorecard” and “Financial Aid Shopping Sheet”.
  8. Dec 3, 2012 – The college scorecard, a proposed online tool meant to help students make ... The proposed “college scorecard” that aims to give prospective ...
Published in BoomBustBlog

I see many pundits on CNBC commenting on Apple. I believe they are ALL wrong! To begin with, nearly all of them are coming up with revaluations after the fact - which is simply too late and lacks credibility. Second, Apple has some serious steps to take if it is to get back into the mobile computing race. David Einhorn's recommendation to return cash to shareholders (on the CNBC front page today) is not one of them. He's approaching this from a trader's perspective, and not from the perspective of a strategic long term investor. To date, Apple has outperformed nearly all hedge funds in the reinvestment of its cash. If Apple does the right thing, the  ability to replicate this performance by only 50% will whip the pants off of nearly every hedge fund, Einhorn's included. In addition, Apple is about to go through a depression style bout of margin compression that it will need cash to battle. I explained this to a group of entrepeneurs last year. Basically, Apple's $137B+ in cash is a call option on future opportunities and a put option on future mishaps. Einhorn is asking management to sell that call/put option straddle now, and forgo the ability to capitalize on future opportunities while running naked against margin compression at the same time that Apple's competition has surpassed it in technical ability (product/service wise) while Apple has shown ineptitude in competing in the cloud (see the maps fiasco), the next battle ground for the end user. This option sale will be had for the one time premium of a cash distribution. Wise, eh?

Does this mentality smack of the short term-ism indicative of a trader to you, or is it the mentality of the long term, innovative vision of Steve Jobs that got Apple where it is now? See the video below where I delve into this in detail...

Since I was practically the only one (at least that I know of) to accurately and timely call the turn on Apple BEFORE THE FACT, I would love to take this time to point out what it is that's wrong with Apple and what it would take for it to regain its shine. Just to illustrate this point, let's reminisce, shall we...

Let's contrast this to what I have espoused over a similar time frame...

Now, what do we have in sell sidevaudville today? CNBC reports Apple Heading Toward $200?: McLean. WTF???? What happen to $1,000????

Yes, I'm going after the sell side again. And I'll keep doing it. I'm a monster to the charlatan crew... A monster, I tell you...

Apple needs to start spending money, needs to spend wisely, needs to spend it in droves, and it needs to do ALL of this, NOW!!!! That is what Apple REALLY needs to do to compete with Google and enrich shareholders. Now, those shareholders with short term-ism will consider this Apple management burning cash in a desperate attempt to save the ship. These limited horizon guys will jump ship and drive the share price down. It is then that Apple will be a strong buy if, and only if, management succeeds in making leeway... Much in the same way that Google did in its acquisition spree that gave it some of its most valuable properties and multi-billion dollar franchises that literally run the web in their respective categories - to wit:

  • YouTube
  • Android
  • Google Voice
  • AdMob

For anyone who thinks this acquisition spree is a foolish endeavor, ask those who listened to the "short Google, long Apple" advice of the pros...

image001

Just as much (if not most, not withstanding the "Muppet Factor") of the Sell Side of Wall Street Doesn't Truly Understand Apple, many of them equally clueless regarding Google as well… Google has used it's call option of billions of dollars of cash and its cash producing cash cow business model of ad serving to literally buy value at discounted prices. Of course, those with short term vision can't see the value - just as fails to see a forest due to all of that tree bark in the way!!!

Google Final Report Sep 29 Page 53 copyGoogle Final Report Sep 29 Page 54As a reminder, I warned in plenty of time to both avoid loss and profit on the short and long side for each company involved in these mobile computing wars. As a matter of fact, three years ago, I laid out in detail the entire mobile computing war map - along with the prospects of the major competitors - Google, Apple, Research in Motion and Microsoft/Nokia, reference "The Mobile Computing Wars" series. How accurate were these predictions, predilections, and analyses?

Now, for all of you senstive types who may consider this bragging or boasting, it is far from such. As a matter of distinct fact, the contents of this entire post should have been glaringly obvious to anyone years ago who actively used and followed the products and services of the companies herein, and had even a rudimentary understanding of business valuation. You know, it's amazing how far an awareness of cognitive biases (Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All) and a mastery of second grade math () can get you on Wall Street.

The Sell Side 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.

Again, a master of the basics, the fundamentals, common sense and 2nd grade math can actually bring you tomorrows news yesterday! For those interested in the research behind these many calls, as well as many others, Subscribe to BoomBustBlog today!

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Published in BoomBustBlog

This is an update to our first three Facebook forensic analyses, two of which released before the actual Facebook IPO  (search the :downloads section for the first two documents). The updated valuation for Facebook (which has actually has an increase in terms of value now that we have more information to deal with) is available to download for all paying subscribers (FB Q4-2012 Analysis & Valuation Note - update with per share valuation). I'm available to discuss this with professional and institutional subscribers via phone or Google+. Click here to subscribe or upgrade.

As of the writing of this addendum, Facebook is trading at $31.10, not even a year after debuting at $38.This utter disappointment and gutting of the Muppets is exactly what our research has anticipated. Facebook has fell as low as $17.xx, and is now on the rebound towards its IPO price. Notwithstanding the massive capital losses suffered by those who bought into the over hyped IPO against my admonitions, or the losses suffered by those who bought in the Sell Side powered private offerings which was actually valued higher than the majority of trading time as a public company, the argument is being made that Facebook has finally got the mobile thing and can’t be valued using conventional metrics due to its status as a high growth company.

Wait a minute! Facebook as a high growth company is actually growing revenue SLOWER than its biggest and better capitalized competitor – Google! Considerably slower!  While it’s perfectly prudent for the management of a high growth company challenged for market share in a fast moving industry undergoing a paradigm shift, results must result from said efforts. Google is out Facebooking Facebook. Reference I Don't Think Facebook Investors Will "Like" This!!! Google Has Already Caught Up In Terms Of Active Users

In my previous warnings of Facebook euphoria, I brought up the topic of growth many times, particularly active user growth. Reference The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1, while remaining cognizant that this was written exactly 1 year ago:

Thus, it is highly unlikely one can legitimately factor in the type of growth needed to justify the current Goldman $50B valuation - particularly when you consider that Facebook's growth is already slowing!

Well, let's see if I had a valid point now that we have clear and convincing historical evidence from which to base our analysis... (click any of these graphics to enlarge to print quality size)c

thumb image008 copy

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

thumb image014 copy

At this point, I can't help myself. I MUST point out the literal rippoff that Goldman Sachs pushed as a once in a life time investment a year and a half ago. As excerpted from Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman's Pricing: Here's What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week! while remaining cognizant that this was written exactly 1 year ago:

Goldman warns, 'We’re probably going to dump this load, but we may also need you to remain behind to hold the bag!'

In its offer for the $1.5bn stock sale of privately held social-networking company Facebook,Goldman Sachs disclosed that it might sell or hedge its own $375m investment without warning clients. Under the deal, private wealth-management clients would be subject to “significant restrictions” limiting their ability to sell stakes while Goldman Sachs own holding can be sold or hedged at any time, and without warning. One would hope that astute clients and investors would be put on guard by such conflicting and restrictive liquidity measures! In addition, it appears as if Goldman Sachs failed to disclose its clients that it had offered Facebook shares to its internal investment group, Goldman Sachs Capital Partners, headed by one of its star fund managers, Richard A. Friedman.

So, this begs the question, "Has the easy money already been made Facebook???" Well, let's take an empirical look now that we have some hard data to steer us throught that sell side fog, that very same fog that people pay me to clear.... (click to enlarge to printer size)

 thumb image005 copy copy

'Nuff Said!

I’m available to discuss this in detail with all professional and institutional subscribers via Google+, or phone.

Is It Now Common Knowledge That Goldman’s Investment Advice Sucks??? Tuesday, 25 January 2011

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

I must admit, I was shocked when I first read this headline and saw the accompanying cover. After all, Bloomberg was the organization that published a story lavishing adulation upon a young Goldman analyst that had a 38% win rate throughout the credit crisis and (faux) recovery. I see those results as mediocre at best, and downright horrible from a realistic perspective. To make matters even worse, I believe I ran circles not only around that analyst, but the entire firm, see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Published in BoomBustBlog

Rotten plus GreenAppleBertha Coombs of CNBC reports the NASDAQ Composite is down 21 points due to NFLX spiking up 38%, thereby adding 1.5 points to the composite. Meanwhile AAPL is dropping 10.7%, which subtracts 32 points from the composite. Where have you heard this iBubble warning before. Read BoomBustBlog: Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All or watch TV, right here http://youtu.be/Q3g__vy6Pmw?t=3m 

Here I explained that not only will Apple's share price collapse (called near the all time high), margins will collapse (call thus far executing like clockwork), lose significant market share (check), but an Apple fall will also compress the NASDAQ... iBubble.

Published in BoomBustBlog
Apple has reported, and rather than go through my usual analytic narrative, I've decided that I'll just post my Twitter stream from the last 30 minutes. For those that don't follow me, I have been practically a lone bear on Apple and finally publicly called for a short on their stock the week the iPhone 5 was released. That was about $700 per share. AAPL is trading after hours and after earnings at about $459 per share, or over 400% later in 3 month puts? Many sites had commentors, with ZH and Seeking Alpha in particular, spread no shortage of hate. Well, karma would have 100s of apologetic, "You were spot on" style apologies, correct? New comers to my writings should review "Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All" in detail. No further comment necessary...
 
Eric B 13 @13EricB

@ReggieMiddleton Genius calls on#AAPL for the last year and a half. Great Research!

 
Shane MacDougall @Tactical_Intel

@ReggieMiddleton You've been calling the Apple margin compression issue for a long time. Kudos.


  

Posted b4 4th #AAPL miss: Cost Shifting Your Way To Prominence: Google Wins - Apple, RIM & Microsoft Have ALREADY LOST! boombustblog.com/blog/item/6246…

Published in BoomBustBlog
The college endowment investment results have rolled in, and if Harvard were to get a grade for the year it would probably receive an "F" as reported by the NY Times:

"Harvard reported a 0.05 percent loss and a drop in its endowment of over $1 billion in the same period, even as a simple Standard & Poor’s 500-stock index fund gained about 5.5 percent. Harvard’s endowment decline is more than the entire endowments of roughly 90 percent of all colleges and universities.

Ironically enough, if one were to calculate the ROI of a Harvard undergraduate diploma, the number is remarkably similar at about 0.05%. See the graph below...

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These returns have been calculated by our proprietary College/University ROI Analysis Engine. At the bottom of this post you can find a link to a simplified beta of this engine, which will be freely available to blog subscribers, and will be available via smart phone app and over the web as well.  This app has morphed into an incredibly comprehensive and capable piece of knowledge kit - so much so that it had to be materially simplified just to post a portion of it on the web! 

There are many concepts used in the model that may be new to the Sheeple type. For instance...

Economic Return on Investment (eROI)

Introducing a reality-based method of valuing an education - the "Economic Return on Investment". You see, unlike many  other investments, the education is  a completely hands on, active experience. You cannot simply dump money into a fund and walk away. You must manage it, and  your labor (or how the market actually values your labor) is actually part and parcel of the return on investment .

Thus, it would be highly unrealistic to exclude the economic cash flows stemming from your attempts to pay debt service (assuming debt was used) in calculating  ROI. Since said debt is truly full recourse, its service must be factored in, and as such so should all of the practical variables that affect said servicing. Think of the net return on stock investments.

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This episode of the Keiser Report was one of the (if not the) most viral episodes ever. What was so interesting and controversial? A topic that damn sure hit home, that's what. Click here for the full episode.

When factoring in reality, many diplomas really don't look so appetizing considering the time, labor, effort, risk and expense in attaining them and fruitful employment related to the diploma afterward. Let's mark some top ivy league (remember, this is the so-called creme de la creme) diplomas to market, as well as the lowly disrespected for-profit online schools, trade schools and city universities. Oh yeah! I forgot to mention that I threw in an internship with a tech company for good measure. Let's add this quip in for the sake of argument (Yahoo Finance):

A few reports circulating this week have pointed to some fortunate Facebook software engineering interns who are set to bring home an average monthly salary of $6,225, according to Glassdoor.com, a careers site that provides data on salaries (based on employee generated content). That works out to a yearly salary of $74,700. For comparison, median household income from 2006 to 2010 was nearly $52,000, according to the latest Census data. (The average monthly pay for all Facebook interns, according to the site, is around $5,800.)

Jealous yet? There’s more. A few anonymous Facebook interns posted further details, with one second-year student saying he/she was offered $5,400 a month and a $1,000 housing stipend. Another computer science graduate student said they got $6,800 a month with a $1,000 housing stipend, negotiated up from $6,600. (Some Quora commenters noted intern salaries correspond to the number of years of college you’ve completed.) Facebook software engineers make an average of $111,452 a year, according to Glassdoor.

... So how do interns at the social-networking giant fare compared with their counterparts at other firms? Glassdoor released a report last month listing intern salaries at 20 top-rated companies (rated by current and former interns). Here are some highlights (figures are average monthly salary):

Software engineering intern, Google: $6,463 
Research intern, Microsoft: $6,746
Software development engineer intern, Microsoft: $5,539
Intern, Cisco: $4,017
Software development engineer intern, Amazon: $5,552
Graduate technical intern, Intel: $5,681
Intern, IBM: $3,935

As we know, majoring in computer science is a smart move. Finance and accounting offers lucrative job opportunities as well:

Tax intern, Ernst & Young: $4,136
Advisory intern, PricewaterhouseCoopers: $4,702
Audit intern, Deloitte: $3,822
Business analyst intern, Target: $2,785

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As you can see, a 2yr unpaid internship that yields a nominal salary growing at 3% per annum beats a levered ivy league diploma (salaries were sourced from the respective schools graduate statements and surveys). Debt can be a bitch, as can the time value of money and opportunity costs. For those who may not understand how this works, just think about starting school today with student loans and not breaking even until 2045 - that's right, the year 2045! Debt slaves - one and all!!!

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Of course, the major that you are pursuing has an awful lot to do with the value of the diploma, as does the current business environment and the point in the economic cycle. We will explore that in detail in my next post on this topic.

The YouTube videos that I have made on this topic are also of interest. Check out the comments left for this illustrative video titled "The (Mis)Education Bubble 101".
  • I have been far more successful and far more diversified in my skill set with out a degree. Companies take my physical real world experience of 15 years in the technology sector over a long list of graduates every time.. In the past 10 years, I've been without work for about 2 weeks, and that was due to a longer job transition. I transition jobs about every 3yrs to further broaden my experience in developing areas of technology.. Working without a degree has made me more competitive.

  • 2001lextalionis 10 hours ago

    I think to a certain degree it is relatively easy to access debt for purposes of education.

    Conversely if one is operating under the assumption that I have 90K saved up because I didn't go to school is somewhat flawed. Most folks have little or no savings so the math comparison of school versus stocks/internship is somewhat lacking in my view.

    Comparing debt free internship with zero capital to invest v 200K BA yields a far more interesting decision matrix

  • What about these for-profit online institutions like the Apollo Group? The founders of these companies barely made it past high school, yet are responsible for leeching billions of dollars each year in the form of FAFSA loans (our tax dollars). They specifically target the single mother demographic, and will admit them without even having so much as a valid GED. Have you ever heard of Ashford University? They just lost there accreditation, and over 100,000 of their graduates still owe thousands

  • justjacqueline2004 8 hours ago

    This type of education cost a huge amount of time and even worse,you start out by not knowing what you don't know,particularly in the sciences.

  • Qomowale 12 hours ago

    the current "(mis)education system" is a racket & a joke! ppl, think outside the box & educate urselves as much as possible, 'cuz the system intends 2 enslave all of us. what passes as education is really indoctrination & fiscal slavery based on a wicked interest-driven, fractional pimp game. go Reggie Middleton & Max Keiser! good luck trying 2 wake up the sheeple.

  • mrzack888 12 hours ago

    that's limited. real education like Reggie Middleton described has hands on and has pragmatical real world value.

 Click here to access the early beta version of the BoomBustBlog College/University ROI Analysis Engine. The next post on this topic will go through the model in illustrous detail and present the next iterative version of the beta for all to play with, as well as instructions on how to get the most out of it. It will enable you to value any diploma from any school, complete with ROI, NPV of funds invested, and time to break-even. 
Published in BoomBustBlog

Maurice Greenberg, the ousted CEO, Chairman, and founder of AIG who remains a major investor in the company, filed suit in 2011 on behalf of fellow shareholders against the government. He has urged A.I.G. to enjoin which should pressure the government into settlement talks - that is if the powers that be don't start distending the law. NY Times Dealbook looks at it this way:

Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. Suing the government would not only placate the 87-year-old former chief, but would put A.I.G. in line for a potential payout.

Yet such a move would almost certainly be widely seen as an audacious display of ingratitude. The action would also threaten to inflame tensions in Washington, where the company has become a byword for excessive risk-taking on Wall Street.

Some government officials are already upset with the company for even seriously entertaining the lawsuit, people briefed on the matter said. The people, who spoke on the condition of anonymity, noted that without the bailout, A.I.G. shareholders would have fared far worse in bankruptcy.

“On the one hand, from a corporate governance perspective, it appears they’re being extra cautious and careful,” said Frank Partnoy, a former banker who is now a professor of law and finance at the University of San Diego School of Law. “On the other hand, it’s a slap in the face to the taxpayer and the government.”

AIG has every right and responsibility to sue the US for excessive interest payments on it's bailout! Yes, the company failed in execution. Yes, the company would have went bust if the government didn't rescue it. But that is besides the point. If the government wanted market forces to reign supreme they would have let AIG collapse. The fact is they didn't. The reason is because the government was bailing out the banks, namely the most politically connected publicly traded entity in the entire world. The Vampire Squid! Goldman Sachs! As excerpted from the NY Times:

At the end of the American International Group’s annual meeting last month, a shareholder approached the microphone with a question for Robert Benmosche, the insurer’s chief executive. “I’d like to know, what does A.I.G. plan to do with Goldman Sachs?” he asked. “Are you going to get — recoup — some of our money that was given to them?

As a condition of AIG's bailout, the government "insisted" on paying Goldman et. al. 100 cents on the dollar of its CDS written with AIG, something that wouldn't have been necessary if Goldman had prudently underwritten counterparty and credit risks that it was taking. Apparently, the US government believes that it didn't. In addition, it's somethng that wouldn't have been possible if the government didn't intervene on behalf of the banks, forcing the AIG shareholders to take a hit, but shielding the Goldman, et. al. shareholders. As my grandma used to tell me, what's good for the goose is good for the gander! It's not as if these credit/counterparty risks were invisible, I saw them as far back as early 2008 - reference I won't say I told you so, again. This page also happened to of shown the credit risk concentration of every bank granted a reprieve by the government after the fact. As a matter of fact, there's still more than a modicum of risk present, as clearly illustrated in...

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...

 

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...

Now, AIG's shareholders are being forced to finance the bailout of Goldman Sachs. To not combat that should open AIG management up to shareholder lawsuits, for they are not acting as a fiduciary of the shareholder capital if they let this slide. It's one thing to pay for the AIG bailout, but its another to pay for the Goldman bailout. In addition, this forced bailout that refused to force AIG creditors not to take haircuts runs counter to the ideology the government used when it forced the Chrysler's creditor's to take massive haircuts.

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société GénéraleDeutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.

The anger here should be directed at Goldman, et. al., and not AIG. AIG's management is doing its job, something that our government officials failed to do in making Goldman, et. al. whole during the bailout. Can anyone say regulatory capture?  Goldman et. al.'s transgressions against its clients and counterparties in terms of misrepresentation and what appears to this lay person as outright fraud have been downright egregious, as clearly articulated in Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Walk Over Clients, it's just that this time, the US taxpayer AND the AIG shareholders are the "Muppets"! The Abacus deal was particularly atrocious, Paulson, Abacus and Goldman Sachs Lawsuit. How about Morgan Stanley's CRE deals on behalf of their so-called clients? Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!

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 If Goldman, et. al. were allowed to swim solely at the mercy of the free markets, it (they) would be sinking, Goldman Sachs Latest: Vindicates BoomBustBlog Research ...

... documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2009 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.

Regulatory capture! Banks simply lobby harder and pay more to the government than auto companies. How many auto company execs are embedded in government leadership seats worldwide?

As a Congressional commission convenes hearings Wednesday exploring the A.I.G. bailout and Goldman’s relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive toward A.I.G. and overly forgiving of banks during the bailout — signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders’ ability to recover damages.

“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”

“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.

Nahh? It's called the Federal Reserve Bank, not the Federal Reserve Insurer, nor the Federal Reserve Taxpayer! Who the hell do you think they will back in a crunch?

About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners like Goldman and Société Générale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not A.I.G.

Of which the interest of about 50% of which should be refunded to AIG shareholders. Without the AIG bailout, these banks would have recieved ZILCH, NOTHING, NADA, Bull Sh1t!

Published in BoomBustBlog