software collage

Friday, the Wall Street Journal ran a piece that essentially channeled BoomBustBlog. It was quite controversial, Why spend six figures on a business degree? Students would do better to train and network on their own.

Imagine that you have been accepted to Harvard Business School. The ivy-covered buildings and high-powered faculty whisper that all you need to do is listen to your teachers, get good grades and work well with your peers. After two years, you'll emerge ready to take the business world by storm. Once you have that degree, you'll have it made.

But don't kid yourself. What matters exponentially more than that M.B.A. is the set of skills and accomplishments that got you into business school in the first place. What if those same students, instead of spending two years and $174,400 at Harvard Business School, took the same amount of money and invested it in themselves? How would they compare after two years?

If you want a business education, the odds aren't with you, unfortunately, in business school. Professors are rewarded for publishing journal articles, not for being good teachers. The other students are trying to get ahead of you. The development office is already assessing you for future donations. Administrators care about the metrics that will improve your school's national ranking. None of these things actually helps you learn about business.

Consider what you could do instead with that $174,400. The first step should be to move to a part of the country that supports your interests. If that's film, move to Los Angeles. Technology, San Francisco. Oil, Houston. You could live decently in these cities for $3,000 per month. Over the course of two years, that still leaves you $100,000 to invest in yourself.

Needless to say, I have addressed this in detail through many interviews, videos and articles over the last few months. Well, now, I offer the means to funamentally, arithmetically and convincingly prove the idealogy behind the assertion...

The Education Bubble Deflator & Valuation Software is now out of beta and available for purchase, download and use. See the end of this article for instructions on accessing the model. Here I will offer a brief overview of the model and the key findings from a hypothetical student funding his undergrad, grad and PhD studies with a 6% Sallie Mae loan. The application is designed to help individuals value their college/university education by calculating and valuing the real cash flows generated by diplomas/academic studies in addition to calculating the real world costs of obtaining said assets. 

We capture, quantify and illustrate the value of a diploma from higher education institutions across different disparate majors and give 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 the loan repayment, household expenses, taxes and the opportunity cost for pursuing a course.

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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

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 and even on a specific, major by major basis.

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Even when looked at on a more granular basis, we get the following...

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As can be seen, the returns are middling at best, particularly when compared with other forms of investment over time. Resultantly the break-even year impractically far in most cases - after the year 2040 (assuming a start year of 2013).

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As a matter of fact, we have actually marked the cash flows from this person's education to market, benchmarking it against several other risk assets. From an undergraduate perspective, it's a dismal comparison for the most part. 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!

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The model conveniently allows one to actually compare returns on a specific major between schools. This is invaluable in choosing schools. Most students and their parents select schools based on nominal affordabilty and/or repuation.

Now you can compare schools based on actual economic performance upon graduation - the way it should have been done from the beginning!!!

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Things Generally Look Much Better For Graduate Degrees, But..... The Catch 22!!!

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. The problem is that in order to pursue a master's degree you first must obtain an undergraduate degree which has a very high probability of putting you in the hole!

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.

Download Your Copy of the Education Bubble Deflator and Valuation Software Now! 

The cost is 29.99 for 30 days of use, but the first 100 users will get a 1 year subscription.

  1. Subscribe to BoomBustBlog
  2. Pay for the software here - $29.99.
  3. Download the software model here - File Icon College & University Education Valuation Model.
  4. Optionally, download the instructions if you're not comfortable with income and cash flows: File Icon Education Bubble Deflator & Valuation Model Instructions

This file must be opened in Libre Office Portable, a free lighteweight office suite that does not leave traces or changes on the client computer. You can download Libre Office Portable for free here: PortableApps 97 MB. A portable version of LibreOffice packaged in PortableApps.com Format, so you can take all your documents and everything you need to work from a USB, cloud or local drive. See PortableApps.com for more information.

Discuss this software, its findings and collaborate with othes on Facebook.

 

 More on this topic...

Published in BoomBustBlog

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It all started in June of 2011, many months before the IPO of one of the biggest scams to cross the US equity exchanges (and that's saying a lot in and of itself). I posted a forensic analysis of Groupon “What Does Groupon and the Matrix Have In Common?". I warned, I valued, the company went public, and... Nov 12, 2012 Multiple Muppet Mashing Leaves Groupon Shareholders Holding The Bag After 89% Off IPO Coupon. In that particular post, I actually offered the full Groupon research to download for free. It's amazing how this obvious Ponzi scheme got so much analyst and investor attention. Any and all BoomBustBlog subscribers saw it for exactly what it was, and hopefully shorted accordingly!

Earlier, I got on the Ponzi Exposure Express once again... Sep 26, 2011 I Suggest Groupon Offer Coupons To It's IPO Investors, They're Going To Need Them. And previous to that, once again...

Here's an abstract from our June subscriber-only analysis - Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

“Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants an agreed upon percentage of the purchase price to the featured merchant. So the comparable number for price-to-sales to use for Groupon is gross profit, or the fees it collects from merchants, which the management has correctly stated as the best proxy for the value created by the company. To put things into perspective, if eBay used the same math as Groupon does, it would have reported revenues of $61bn instead of $9bn. The company reported gross profit of $530m over last 12 months. At $25bn valuation that would put the valuation at 42x “comparable sales”. To put things in perspective, Google trades at Price-to-sales of 5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at 3.4x.“

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In the latest S-1 registration statement, the company has revised its revenue figures by more than half. The company has restated its 2010 revenues from $713m to $313m while Q1-11 revenues were restated to $296m from $645m previously. The company has restated its financial results “to correct for an error” in the way it reported revenue. The revenue accounting change is Groupon’s second since it filed to go public. The company has also changed the presentation of certain expenses to be consistent with reporting revenue. Clearly, such errors and frequent change in the accounting policies clearly puts strain on the credibility of management – and that’s putting it lightly, especially for a company that is contemplating an IPO, not to mention that such changes are top line numbers such as revenues. In another blow to Groupon, the company’s COO Margo Georgiadis is leaving the firm to join back Google.

How about... Muppets Get MASHED Once Again - Groupon Half-off (Share price) Sale, Aug 14, 2012 – CNBC reports that Groupon [GRPN 5.815 -1.735 (-22.98%)] plunged more than 20 percent...

I can go on, but why bother? This company was pumped, dumped and marketed by several big name analysts and banks. One would think independent analyst shops would be one of the biggest shops in all of Wall Street, no?

I have commented ad nauseum on the percieved need to do business with name brands, those who do God's work, and those who simply cannot trade - muppet masters and all - as I clearly articulated on the Max Keiser show.
... and on previous shows. 

Now, all of you Goldman, Morgan Stanley, et. al. lovers, don't get your muppetware in a bunch, you know that I know that you know that It Is Now Common Knowledge That Goldman’s Investment Advice Sucks???, as excerpted:

Published in BoomBustBlog

The following is a guest post by a very bright individual whom I've had the pleasure of building with on several occasions, Mr. Mordechai Grun. This is what he's had to say on the topic of Europe, with ample commentary from me along the way.

_______________________________________________________

Human behavior predications usually follow the ‘least resistance, least painful, and self serving’ path in spite of its being harmful in the long run. This disposition is even more truly said of politicians and bureaucrats. "Will is the origin of all thought." Flowing from such will we have the intellectual analysis and arguments to justify those behaviors. We will therefore look at Europe through this lens and see where it takes us.

The next major crisis in Europe is lurking just beyond the bend.

Reggie’s note: the last crisis has actually never left, so this is not the next one, just a continuation of the same. I called this exactly three years ago, in explicit detail (The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one)

It will take form as either the comeback of Bond vigilantes or as a political calamity, where some peripheral country finally votes for a party that is seriously proposing to forsake the Euro.

Reggie’s Note: The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

Or… As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

Some smart politician will certainly test the ECB’s resolve and do away with austerity and call their bluff. The consensus of the population can only be subjected to so much strain before it turns on itself and they vote for radical (read: costly) change. While the case can be made that the government bond-funding crisis has subdued, the economic pain of the general public has not.

Reggie’s note: Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

The likeliest scenario is that both of these crises will play out at the same time, thus creating a Lehman-type crisis.

Faced with this crisis, only two options will present themselves:

  1. Massive sovereign debt defaults, bank runs and bankruptcies as many banks’ liabilities are larger than the GDP of the countries that are guaranteeing them – and a potentially resulting currency crisis

Reggie’s note: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

 

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

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  1. A truly massive QE Program that not only bails out the banks and the existing governments debt and deficit, but also sponsors an enormous stimulus program for anything that can be thought of, e.g. infrastructure, education, green energy, etc.

Following scenario B, the challenge will be this: Why would the Germans and Fins want to debase their currency to send their monies elsewhere? The answer will be a mix of ‘candy and stick’, so to speak. The QE stimulus program will be structured upon some European formula – per capita or otherwise – that sends significant amounts of newly printed money to them too, while, in the alternative, if the Euro disintegrates, Germany will have to recapitalize the Bundasbank and resort to either massive stimuli or quantitative easing so to cheapen their currency and rescue their own economy. Those countries that leave the Euro will, nevertheless, default on any external bondholders, as they are restructured and recapitalized in the new currency, their banks will default as well. Why wouldn’t Germany be gracious and monetarily benevolent with funds they would lose either way? This would blend in with the fact that even the new Mark will be too expensive for their export-driven economy, and they would be pressed to cheapen it. They also won’t have destination countries to export to in Europe, as each country will turn to hyper-protectionism, safeguarding the jobs they have from disappearing in an effort to stabilize their home currency in order to avoid hyper inflation (Argentina, anyone?).

Reggie's Note: A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina - Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get... Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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This turmoil will, obviously, generate widespread economic malaise as well. As a politician faced with this decision the answer is obvious. I can already picture the smiling politicians announcing their courageous decisions and courses of action, claiming that they have saved the Euro from certain demise while helping the people and creating new projects and job opportunities that will launch Europe into the future. It is possible that they will punish the instigator (Greece, presumably) and cut them out of the money party aka Lehman.

Is this feasible for Europe? I believe the answer is yes, as one significant minutia is overlooked. The Euro is way too high, even for Germany. This will become ever clearer as time clambers on. Europe can survive – even thrive – at 0.65 Euro to the dollar. I recall this precise scenario in Canada during the early 90s. The resulting inflation at the consumer level was much milder than expected, as taxes, services, rents, salaries and many consumer goods and products (including cars) are priced in the local currency. Of course, energy costs would rise. In Europe, though, lowering the high taxes on fuel can mitigate this. On the positive side, manufacturing and tourism in Canada flourished, generating a strong trade surplus (this was prior to the commodity boom). Europe can probably afford 6-8 trillion in QE over a 3-year period without hyperinflation, especially as this will be taking place while many other major currencies are orchestrating their own QE. If, as they do this, the peripherals restructure their own economies and bring down or solve their structural or primary deficits, the Euro may actually increase eventually, as they will have significantly lowered their debt to GDP ratios and positioned themselves on a financially sustainable path.

Reggie's note: This is code language for DEFAULT! The defaults will codify, quantify and solidify the capital destruction that we all know is there in the first place. I don't think the ride will be quite that easy. Greece has defaulted (exactly as I anticipated and clearly called) and is about to default again, and it's still f#@ked. For more on this, reference This Time Is Different As Icarus Blows Up & Burns The Birds Along The Way - Greece Is About To Default AGAIN! ... and then there's the contagion effect! Subscribers, see

All others, reference: 

 

    1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
    2. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
    3. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
    4. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

 

The sad reality, though, is that they will promise such changes and not deliver on their word.

Reggie's Note: WHAAAT???!!! You mean you can't trust the European oligarchs??? 

This will turn the crisis into only a short- to medium-term solution while eventually creating a fundamental currency crisis that will give way to no solutions.

Can the Euro handle that much QE? I believe the answer is yes. The ECB can forgive all the bonds they either own or collected as collateral for loans. Does anyone believe the principal on these loans will ever be paid down? The only stimulus from such a move will be the miniscule interest being saved.

Reggie's note: Moral hazard be damned, eh? What's to prevent other market participants from pushing to get a similar deal of borrowing money and not paying it back, expecting not to get punished. Massive forgiveness on this scale will fracture the market mechanism and destroy market pricing (as if it's not already wrecked as it is, does anybody really think core European bonds should yield what they do now?)

However, from a public confidence perspective, it would be huge, as it would drastically lower debt to GDP ratios.

Reggie's note: It will also bring about massively more stringent underwriting the next time around, effectively driving up rates anyway - you know, just as rates would have been driven up had the borrowers defaulted. Who in they're right mind would voluntarily make the same mistake twice in so short a period of time. As a reminder from my seminal link Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

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It is important to note that Europe will be faced with a stark choice: either deflate assets and wages or deflate the currency. And, since as discussed, the Euro needs a significant reduction anyway, why not milk it and bring it down through QE?  The crisis created by a country like Spain leaving the Euro will harm the Euro by much more than a giant QE would. There exists capacity for Europe to kick this one down a really long road and, with some discipline, actually solve it along the way.

Reggie's note: Possible, yes! Probable, Nah!!!

The challenge will be that, unlike the US, Europe has multiple players and can't turn on a dime. The crisis, when it comes, will be overwhelming, and will require solutions over a weekend or short bank holiday. Can so many politicians and central bankers on opposing sides of the language barrier figure out that their collective interests are far more in harmony than their differences? Prejudice, ego and vindictiveness – combined with an overly sensationalist media and so many involved players – stage the scene for things to easily get out of hand. If history is any guide, the answer is not very encouraging. However, Europe now shares a bureaucracy and central bank as well as a mostly shared corporate interest. So let's hope this time around is a bit different.

Reggie's note: I really liked this piece, and Mordechai is bright fellow. Of course I like it better with my commentary, which sort of... well.. Keeps it real!

In closing...

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Published in BoomBustBlog

On Thursday, 17 November 2011 I penned "When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!", basically detailing the upcoming rift between the French and German governments, led by the burgoening chasm in their respective economic performances. As excertpted:

The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue. Reference the series:

Well, today, Reuters reports...

Chasm opening between weak French and strong German economies

The schism dividing the euro zone's strong and weak economies deepened to include its core pairing in February as French firms suffered their worst month in four years in stark contrast to prospering Germany.

The gap between the two biggest economies in the euro zone is now at its widest since purchasing manager surveys (PMIs) started in 1998, the latest sounding showed. It dealt a blow to hopes the euro zone might emerge from recession soon, showing the downturn across the region's businesses worsened unexpectedly this month.

 I think we can start to see how this may end...

Yeah, right! "Surprise" , "loss". Interesting terms considering the warning was given a year and a half ago. Those damn non-BoomBustBlog subscribers... So, where goes Italy, so follows France...After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It - or  Focus on Greece? No! How About Italy? No! It's About Baguettes, Mes Amis! See also, When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

The Catch 22 is that Germany's woes are not that far detached from France's, yet it appears that they do not see this. I reiterate, then query again - Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! This is a Pan-European sovereign debt crisis, not a southern or western European sovereign debt crisis. The countries fates are inextricably linked.

And for those who believe what Fed Member Bullshitterard said, at least according to CNBC: European Debt Crisis Unlikely to Impact US: Fed's Bullard, I refer you to my extended, self-answered query, "Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably! " I place this stamp on Bullard's comments...

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If you really want to know the truth, simply read my post from yesterday, Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

Published in BoomBustBlog

 Bloomberg ran a very interesting article yesterday, jumping on the bandwagon of what I espoused years ago - and in great detail. Let's take a look at the article as I run down a check list of Reggie's favorite bank busting hits...

On television, in interviews and in meetings with investors, executives of the biggest U.S. banks -- notably JPMorgan Chase & Co. Chief Executive Jamie Dimon -- make the case that size is a competitive advantage. It helps them lower costs and vie for customers on an international scale. Limiting it, they warn, would impair profitability and weaken the country’s position in global finance.

Hmmm.... JP Morgan, Jamie Dimon, check... An Independent Look into JP Morgan

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

Back to Bloomberg...

So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?

Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.

Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.

 In one relatively thorough effort, two researchers -- Kenichi Ueda of theInternational Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

Big Difference

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.

Big bank bailouts? Check!

The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

Hmmmm. Taxpayer subsidized, big name hedge fund bank barely breaking even without bailout funds... Check!

The BoomBustBlog Review of Goldman Sach's 2nd Quarter, 2010 ...

GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.

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Subscribers can download my full review of GS's most recent quarter here: File Icon GS 2Q10 review. It is a recommended read, for we have performed some sleuthing and believe we may have conclusive evidence that the solvency of this overly marketed hedge fund investment bank is again at risk, just as it was in 2008. For those who wish to partake in our services, you may subscribe here.

And back to Bloomberg...

Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy.

Hmmm! Hundreds of millions of bank bonus cum taxpayer dollars recycled back into government official's pockets in teh form of lobbying dollars, donations and gifts? Check!

How Regulatory Capture Turns Doo Doo Deadly

  • Regulatory capture (adopted from Wikipedia): A term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is an explicit manifestation of government failure in that it not only encourages, but actively promotes the activities of large firms that produce negative externalities. For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether - blah, blah....

About a year and a half ago, after sounding the alarm on the regionals, I placed strategic bearish positions in the sector which paid off extremely well. The only problem is, it really shouldn't have. Why? Because the problems of these banks were visible a mile away. I started warning friends and family as far back as 2004, I announced it on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be ready to collapse some time soon. Most investors and pundits won't realize it because a) they don't read BoomBustblog, and b) due to regulatory capture, the bank has been given the OK by its regulators to hide the fact that it is getting its insides gutted out by CDOs and losses on loans and loan derivative products. Alas, I am getting ahead of myself. Let's take a quick glance at regulatory capture, graphically encapsulated, then move on to look at the recipients of the Doo Doo Award as they stand now...

A picture is worth a thousand words...

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And back to the Bloomberg article...

The result is a bloated financial sector and recurring credit gluts. Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009.

Excessive liablities potetially outstripping the ability of the .gov to bail? Check! The BoomBustBlog Review of Goldman Sach's 2nd Quarter, 2010 ...

So, what is GS if you strip it of its government protected, name branded hedge fund status. Well, my subscribers already know. Let' take a peak into one of their subscription documents (Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional2009-04-20 10:06:454.04 Mb- 131 pages). I believe many with short term memory actually forgot what got this bank into trouble in the first place, and exactly how it created the perception that it got out of trouble. The (Off) Balance Sheet!!!

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Contrary to popular belief, it does not appear that Goldman is a superior risk manager as compared to the rest of the Street. They may the same mistakes and had to accept the same bailouts. They are apparently well connected though, because they have one of the riskiest balance sheet compositions around yet managed to get themselves insured and protected by the FDIC like a real bank. This bank's portfolio looked quite scary at the height of the bubble.

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More recently...

Bigger Tax Payer Bank Bailouts Cometh?

But there are solutions, as detailed in How To Prevent Bailouts, Bank Runs & Other Fun

Observe the setting of the infamous "Bamboozled" speech delivered by Malcom X on 125th Street in Harlem in the video below. Take careful note of the signs and banners and tell me if they don't apply to today's situation & what banks/captured regulators have gotten away with today...

A discussion on bank bailouts, bank runs and other fun things to do with your hard earned dollars... Plus a simple solution to prevent such occurrences.

Let there be no mistake, most have been "Bamboozled by the Banking Industry"

If rampant bank bailouts irk you, read this and get ready to SPIT FIRE!!!

10 Ways to say No, the Banks Have Not Paid Back Their Bailout ...

Dipping into the BoomBustBlog archives with "Bank Run" on the brain???...

Bernanke's Bold Bailout Of The Banking Sector Has

Reggie Middleton's REALity TV #2 - Bernanke's Bank Bailouts Blow ...

Bank of America Lynch[ing this] CountryWide's

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Published in BoomBustBlog
Thursday, 21 February 2013 08:40

Frontrunning the Myopic Muppets - 8:53 am, 2/21

These are observations gathered from the BoomBustblog readers and constituency. We are not vouching for the accuracy or veracity of the content below which is offered for informational purposes only...

Lower Q1 earnings

Sixty-three S&P companies have lowered their forecasts for Q1 earnings, while 17 have raised them. This is the largest disparity since the firm began tracking the data in 2006.

 For context, reference ) 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.


Published in BoomBustBlog

 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