Financial, Real Estate, Stock Markets Trends and Current Affairs

Two and a half years ago I declared in my mobile computing wars series that Google would commoditized the mobile computing space, thereby turning the industry on its head dramatically changing business models and margin outlooks. Curiously enough, despite rampant evidence that I've been nothing but correct, investors, pundits and even leading industry participants still don't get it. CNBC ran the following article this morning... Chinese Smartphone Users Snub Apple for Local Brands

Sales of smartphones in China are outpacing sales in the U.S., and yet many Chinese shoppers are choosing cheaper, local brands, which now have more than 50 percent market share. The Financial Times reports.

What CNBC failed to realize was that the primary beneficiary of all of this is Google, who benefits from volume in handset and tablet sales, not margin. I made this point clear in my paid research reports, free blog posts and multiple interviews - to wit:

• Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money!
• Which Is The More Sustainable Business Model - Selling The World's Information or Selling Shiny New Things???
• Now You Will See Margin Compression In iPhones As Well As iPads
• Many Don't Understand The Google/Apple/Microsoft Business Model Dynamic Nor How Dangerous This Apple Legal Win Can Be For Consumers
• Reggie Middleton currently leading the CNBC Stock Draft Pick contest, see his opinion on air here

Google's "less than free" business model has successfully put it on track to becoming the next Microsoft. Once it has 90+% market share in mobile OSs (it's currently knocking on 89%'s door), it will have the door opened to lead as the de facto provider of cloud services, basically acting as the Windows operating system (remember the importance of this OS in the 1990s) of the Web. We're not even broaching the topic of Google being the shepherd of global data and information throughout the web and the Internet connected world!

Let's face it, Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers! 

For those who disbelieve this statement, remember, there are no such things as cheap Chinese knockoffs anymore. It's all made in China, at least from a hardware perspective. The only thing that wasn't outsourced to Cheap Chinese Labor (CCL, but soon to be known as iCCL - inflation dinged not so cheap anymore Chinese Labor) was the IP and tech behind the OS and software. Here, Google easily reigns supreme, with its only viable competitors being Microsoft Windows Phone 8/RT/Pro and Apple's iOS6. Apple is nearly out of the picture, its just that the Hoi Polloi haven't received the memo yet (as was the case with our view of RIMM 2 1/2 years ago, and you see how that ended). Microsoft is simply an OTM call option with a decent amount of time premium still on it.

chinese wholesale android

Here you have a device available right now for just $160 retail, even less wholesale, unsubsidized. It actually blows the spec pants off of the iPhone 4S and keeps the iPhone 5 in the conversation! For the record, the iPhone 5 retails for $650 to $850 dollars!

phone1phone2phone3

Potentially profitable and disruptive? Ask the classified and newspaper industries (or at least what’s left of them) if Google knows what it’s doing!!!!

As excerpted from our nearly 70 page forensic Google report (Subscribers, see Google Final Report 10/08/2010), I attempt to educate on the investment prowess of Google (that is both internal investment and external acquisition). Remember, many of Google's investments have become the largest instances of their type in the indsutry. The largest web video presence: YouTube! The largest mobile OS? Android! The largest mobile ad presence? Admob! the largest online productivity suite? Docs/Drive! I can go on with Gmail, Voice, etc., but if I haven't driven the message home yet then I probably never will. Google management has made it clear that YouTube will compete with major networks and Google Docs will compete and is actually pulling some business from Microsoft Office in the Enterprise. These are mere anecdotal examples. We all know the Android story already...

Google Final Report Sep 29 Page 49Google Final Report Sep 29 Page 49

Google Final Report Sep 29 Page 50Google Final Report Sep 29 Page 50

Google Final Report Sep 29 Page 51Google Final Report Sep 29 Page 51 

Google Final Report Sep 29 Page 52Google Final Report Sep 29 Page 52

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Google Final Report Sep 29 Page 54Google Final Report Sep 29 Page 54

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade. 

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

Google Q1-2012 Valuation Summmary 04/20/2012

Google Q1 2011 results 04/18/2011

Google Q3 2010 reveiw 11/08/2010

Google Final Report 10/08/2010

An Analysis and Valuation of Google's Android and AdMob 09/27/2010 

Google Valuation Model 09/21/2010 

 Google's VOIP and Telephony Services 09/16/2010

Google Cloud Based Services

Google TV Analysis

A couple of bits from our archives...

1. Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android  
2. Did A Blog Best Wall Street's Best of the Best In Guaging The True Value of Google? We Have To Think More Like An Entrepreneur & Less Like A Wall Street Analyst

There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

As a quick reminder, we're still looking out for the Great French Unwind, for it will start as The Pandemic Bank Flu Spread From Italy To France To ... You see, as I see it, the duopoly of those controlling the EU purse strings is far from invulnerable. As a matter of fact, from many perspectives, they have the farthest to fall. All you need to do is sit back and wait... Wait for the time when The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink! That's when the stinky brown stuff spatters from the fan blades. France will likely be the first to crack, with Italy as impetus, then recessionary Germany will stand alone, no? Not! For those hopium smoking Eurocrats who feel that Germany still will pull out of this unscathed, I reference the riddle: The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

I know all of this can get confusing, but it was easily foreseen back in 2010, and we've built a contagion model that helps track possible paths of mayhem. Of course, it's difficult to predict when things will go down or the precise route, but the how is really rather obvious. On with the concept of obvious, as stated many times in BoomBustBlog, French banks, hence the bank bailing socialist French government, is highly levered into Italy and Italian debt, among other porcine based fixed income instruments...

image008

Subscribers can reference French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian exposure

This exposure leaves France quite sensitive to Italian woes, considerably more so than your typical rating agency may lead you to believe even when downgrading France from AAA status - albeit it a year or so too late (Moody's Actions Add Pressure To The Inevitable In France?). Today, we see the MSM outlet CNBC espousing the obvious regarding Italy: Will Italy Need a Bailout in 2013? As you read this, remember they are essentially talking about France as 2nd derivative:

“We still see as our baseline scenario that Italy will likely be forced to ask for an international bailout at some point in 2013,” said Citi Analyst Giada Giani in a report on the country.

“Italian economic fundamentals have not really improved, despite some improvement in market conditions. The negative feedbacks from fiscal austerity on growth have been severe, as the ability of the private sector to absorb fiscal tightening by lowering its saving rate is limited.”

Economists at other banks and research institutions agreed that Italy’s recession will be deeper than financial markets are currently pricing in.

“The composition of austerity so far — skewed towards increases in taxation rather than cuts in expenditure — and the tight credit conditions, will weigh very negatively on the economy and the market will have to take stock of it,” said Nomura Economist Silvio Peruzzo.

“Weaker growth will have implications for fiscal plans and debt sustainability and could trigger a return of tensions.”

Mark Willis, an economist at Roubini Global Economics, said market focus on Greece’s and Spain’s economic woes had distracted investors from the structural weaknesses inherent in both Italy’s economy, and its political system.

He added that Italy suffered from three “core vulnerabilities” of weak growth, very high levels of public debt and regular bouts of political instability, the latter of which is likely to reappear in the build-up to the spring 2013 general election.

Italian woes lead to French Lows. Believe it! Subscribers are recommended to review the document  Italy Exposure Producing Bank Risk (788.3 kB 2012-11-28 06:00:45)

As stated in the seminal pieces, The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! and The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!, Bank runs are inevitable! 

Excerpted from our professional series  Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008image008

Yes, European bank runs are inevitable, but the causes of the bank runs are not. That's the problem. Instead of addressing the root causes of the bank runs, EU decision makers opt to throw more paper money into a gaping furnace to be burned as fast as it can be shoveled. 

Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional), read the balance of this article for perspective, then populate the assumptions and inputs with what you feel is realistic. I'm sure you will come up with conclusions similar to ours. Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)

image014

Excerpt: You see, pretending you create jobs while waiting for an economic recovery that is still many biz cycle units away is a far cry from actually having real jobs that pay real people real money to buy real, tangible, useful things of value that help the real economy. Don’t hate on me, I’m just keeping it real! Here are the investment sectors and particular companies to look out for…

 bernanke on unemployment

A few months ago I went I Went To The NY Fed To Illustrate The Lies Perpetrated By The Fed Chairman Himself. These lies centered around his purported aid to the general economy and in particular the labor market by pledging to buy $1B USD of mortgage back securities per month.

Now, I’m not going to get into how enriching MBS traders and banks holding fraudulent loans get’s Joe Sixpack a job in this diatribe, but those who are interested can join the conversation via the following:

• EXXXACTLY As Claimed On The World's 1st Financial REALity TV Show, Bernanke Bailed Out The Banks Through A Public LIE To His Fellow Countrymen
• Bernanke's Lying Through His Teeth and Not A Single Pundit/Analyst/Banker Has Called Him On It!!!
• Lauren Lyster & I See The iBubble Go iPop Once Those 10 Million MBS Trader Jobs Fail To Materialize As Bernanke Promised

What I do aim to accomplish in this piece is to illustrate the problems of such potential malfeasance in not only the consumer discretionary sectors (see Reggie Middleton's REALity TV #2 - Bernanke's Bank Bailouts Blow Up Consumer Discretionary) but a side variety of other investment sectors. You see, pretending you create jobs while waiting for an economic recovery that is still many cycle units away is a far cry from actually having real jobs that pay real people real money to buy real, tangible, useful things that help the real economy. Don’t hate on me, I’m just keeping it real!

The BoomBustBlog research team has performed another fundamental/forensic scan to uncover near to medium term Bernanke victims. We identified several main sectors and their primary segments. From that we drilled down into:

• Sub-sectors/segments

• Negative factors and their potential impact: factors driving negative outlooks

• Illustrative companies in each subsector (not the shortlisted ones): These are example Companies, with actual shortlisted companies being released to subscribers later this week via detailed exercise

• News articles/key comments from the sell side and independent analysts - includes supporting articles and key comments

The actual document is available to all paying subscribers here  Economic Recession Short Candidate (Global Macro, Trades & Strategy). As promised, specific shortlisted candidates will be upcoming this week and throughout next week, but be forewarned that we are tweaking and improving the list even as I type this. For those that don't subscribe, here's an excerpt...

re-recession short candidate research

The illustrative companies above are pretty much common sense. Ethan Allen, who can't sell much upper middle class furniture in a recession and a faux housing recovery. Fossil, with trinkets and wares whose demand is generated almost solely by trendy name branding. Fedex, UPS and Ryder - all companies which are literally barometers of global economic commerce and health since they represent commercial purchasing and shipping. Below are some less obvious candidates, though...

transport short candidates

Again, these are simply illustrative companies. Subscribers who are interested in those companies from this exhaustive list who have made it to the initial short list of Bernanke victims that:

1. have underlying options trading,
2. are liquid enough to short and
3. still have enough meat on the bones to feast,

should download this document -  Economic Recession Short Candidate. Casual readers may click here to subscribe. 

Much more to follow... Don't forget Ruminations on the Fed, the Dollar, ZIRP, QE and Math vs Magic - Hey, Even Harry Potter Has Problems...

 Throughout the last two quarters I have bandied about corny, colloquial, yet highly descriptive articles describing the factual representation of Spain's outlook, such as The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain or You Have Not Known Pain Until You've Tried To Limit The Borrowing Costs of Spain!!! Well, as humorous as my nascent stand-up routine may appear to be, the facts of the matter should have market participates on edge. 

Fact 1: As revealed in the post, The Embarrassingly Ugly Truth About Spain: The IMF, EC and ALL Major Rating Agencies Are LYING!!! Spain has serious asset/liablity mismatch and extreme issues with NPAs in its banking system. It will NOT be able to grow out of this situation in the near term and this was apparent 3 years ago! 

I warned that Spain was effectively ignoring some very large, bank related and budgetary problems as far back as 2009/10.... Reference The Spain Pain Will Not Wane: Continuing the Contagion Saga:

In the general our analysis Spain public finances projections_033010, the first four (of 12) pages basically outline the gist of the Spanish problem today, to wit here are the first two:

Spain_public_finances_projections_033010_Page_02

Fact 2: These NPAs will get much worse before they get better, detailed in As The Truth Catches Up With Spain, Will Banks Finally Be Forced To Mark To Market? You don't need my analysis to see the light. Spain currently sports more than  than 50% youth unemployment. Greater than 50% - and it's major grading partners are not far behind, or even far ahead!

See this chart from  ZeroHedge:

Data: Bloomberg and Greek Statistics Office

Fact 3: Spain is already on FIRE, yet so few refuse to smell the fumes.

Five months ago I posted Moody's Actions Add Pressure To The Inevitable In France? Yesterday we see MOODY'S DOWNGRADES FRANCE'S GOVT BOND RATING TO Aa1 FROM Aaa as well as FRANCE MAINTAINS NEGATIVE OUTLOOK BY MOODY'S. As excerpted from the Moody's press release (emphasis supplied by ZeroHedge)...

Moody's decision to downgrade France's rating and maintain the negative outlook reflects the following key interrelated factors:
1.) France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.
2.) France's fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.
3.) The predictability of France's resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France's exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.

Moreover, France's credit exposure to the euro area debt crisis has been growing due to the increased amount of euro area resources that may be made available to support troubled sovereigns and banks through the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the facilities put in place by the European Central Bank (ECB). At the same time, in case of need, France -- like other large and highly rated euro area member states -- may not benefit from these support mechanisms to the same extent, given that these resources might have already been exhausted by then.

In light of the liquidity risks and banking sector risks in non-core countries, Moody's perceives an elevated risk that at least part of the contingent liabilities that relate to the support of non-core euro area countries may actually crystallise for France. The risk that greater collective support will be required for weaker euro area sovereigns has been rising, most for notably Spain, whose economy and government bond market are around twice the combined size of those of Greece, Portugal and Ireland. Highly rated member states like France are likely to bear a disproportionately large share of this burden given their greater ability to absorb the associated costs.

More generally, further shocks to sovereign and bank credit markets would further undermine financial and economic stability in France as well as in other euro area countries. The impact of such shocks would be expected to be felt disproportionately by more highly indebted governments such as France, and further accentuate the fiscal and structural economic pressures noted above. While the French government's debt service costs have been largely contained to date, Moody's would not expect this to remain the case in the event of a further shock. A rise in debt service costs would further increase the pressure on the finances of the French government, which, unlike other non-euro area sovereigns that carry similarly high ratings, does not have access to a national central bank that could assist with the financing of its debt in the event of a market disruption.

Excerpts from my warning 5 months ago, which has a slightly different, although potentially more realistic bent...

As a result Italian yields went up a few days ago - Italian Yields Forced Higher on Rating's Cut Ahead of Debt Sale, and went even higher today as Bund yields were actually issued with negative yields pushing that spread/gap ever wider... Bunds rise as Germany sells debt at negative yields

Italian 10-year yields were four basis points up at 6.07 percent, with two-year debt underperforming, yielding 8 bps more on the day at 3.96

Mish (Mike Shedlock) adds... Italy GDP expected to contract by 2% globaleconomicanalysis.blogspot.com/.../

So, when are the alarms going to be sounded by anybody other then BoomBustBlog for France??? I have made this quite clear in the past, namely in Watch The Pandemic Bank Flu Spread From Italy To France To ... where I simply quoted the arithmetical obvious, then in French Banks Can Set Off Contagion That Will ... where I basically did the same. The French banking problem is woefully unrecognized, although I'm sure the rating agencies will pick up on it this time next year, after the collapse and/or bank run. This is basically the gist behind that hard hitting European documentary on the US rating agencies...

Reggie_VPRO_Ratings_agenciesReggie_VPRO_Ratings_agencies

Continuing my rant on the effectiveness (not) of the ratings agencies, I bring to you an interesting documentary on the rating agencies' effect on the sovereign debt crisis in Europe, produced by VPRO Tegenlicht out of Amsterdam. You can see the full video here, but only about half of it is in English. I appear in the following spots: 4:00, 22:30, 40:00...

Reggie Middleton Discussing the Rating Agencies effect on Sovereign Europe

Subscribers can reference French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian exposureFrench bank Italian exposure 

French bank Italian Exposure: As Italy pops with outrageous funding yields (just like Greece), France will be forced to bailout its banks once again, leaving the socialist country facing the dilemma of potentially having to ask for a bailout itself. As you may know from my previous writings, the French banking system is bigger than France itself so a true bailout cannot practically come from within.

Another BIG Reason Why BNP Paribas Is Still Ripe For Implosion!

As excerpted from our professional series  Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008image008

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipe out, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10BNP_Paribus_First_Thoughts_4_Page_10BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

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

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

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

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

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

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

Subscribers, see also 

•  Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
•  Sovereign Contagion Model - Pro & Institutional
•  Irish Bank Strategy Note
• Euro Bank Soveregn Debt Exposure Final -Retail
•  Euro Bank Soveregn Debt Exposure Final - Pro & Institutional

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ZeroHedge reports: EURUSD Soars As Eurogroup Calls IMF Bluff

Whether it is a pure low volume technical run for the 200DMA, or fundamental bias as 'officials' comment that the release of a EUR44bn aid tranche to Greece is expected by December 5th, is unclear. One thing is certain, the Eurogroup is placing the decision squarely back in Madame Lagarde's lap as it appears to be behaving as if the IMF's threat not to disburse funds (due to Greece's unsustainable debt load) does not exist. While Lagarde is unlikely to want to be the trigger for GRExit, the non-European members may have differing perspectives or will they all just continue kicking the can down the road - proving once and for all that all the power lies with the Greeks as their supposed overlords "can't handle the truth".

Yeah, I know no one wants to hear it, but I told you so. This situation was clear from the start, the very day that Greece defaulted the FIRST time. Until the 3rd default, I can simply keep cutting and pasting the following, for a negative Primary Balance simply prevents anyone from sinking money into Greece from getting it back - PERIOD!!!

As The Year Comes An End The Ability Of Greece To Kick The Can Mirrors The Chances Of A Man With No Feet

Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.

Greece_Primary_balanceGreece_Primary_balanceGreece_Primary_balanceGreece_Primary_balance

The primary balance looks at the structural issues a country may have.

Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!

Greece_Primary_deficit_copyGreece_Primary_deficit_copy

FB Sep 21 12 18 puts

A couple of weeks ago after Facebook reported, I posted Hey Muppets, Only Another 100% Climb In Share Price To Go Before You Break Even With MS/GS/FB Investment Advice. You see, I warned about FB a half of a year before the IPO (reference the FB IPO Analysis & Valuation Note - update with per share valuation released exactly 5 months ago on 05/21/2012 (click here to subscribe)) stating that this thing was coming to market at multiples of a realistic valuation. So, what did Facebook's bankers do? They raised the offering price even more. Makes sense doesn't it?

Well, it makes more sense than the lock-up of hundreds of millions of shares ending, flooding the market with excess supply and the price of the stock.... increases!!!

Well, there may be a logical reason for this. By now, the more astute early investors in Facebook either read my analysis or somehow have come up with similar conclusions independently. That being the case, these guys had massive unrealized capital gains and a strong incentive to preserve them. Thus, they did what every hedge fund should do but what so little ever seem to do. What is that you ask? They hedged. I would assume that as soon as FB shares became available for short and/or puts started trading, these guys competed with me to get short in order to lock in whatever gains they still had left. That being the case, once the lock-up period expired, and actual sales occurred it was offset (and possibly then some) by the supportive buying created by the short position covering.

Of course, this is just a theory, but its a plausible one. Only time will tell if it holds water, for if the upward price pressure was cause by short covering, it will be over by next week and we should see a marginal decline.

Last Friday I posted Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!!, wherein I outlined the profitability of the BoomBustBlog Apple research from a trading perspective. 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, until I notably went bearish and Apple promptly lost 25%.

apple 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. The following was a document that was only available to paid subscribers (published in late 2010) but now is freely available since its message has come to pass. As you read this, please keep in mind that the document was published a year and a half ago, even though it does seem like it is recent. I have just released fresh research on Apple that details the lower bounds (pessimistic scenario) that I see for the share price. Subscribers can access it here Apple 4Q2012 update professional & institutional and Apple 4Q2012 update - retail).

If after reading the article linked in the first sentence and the material below, and you believe that I'm the best thing since Wall Street brokerages were private partnerships that could 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 jsil time, then feel free to subscribe here. 

Apple -Competition and Cost Structure Page 08Apple -Competition and Cost Structure Page 10

As very accurately predicted in our report published above over a year ago, Samsung has eclipsed Apple in smartphone sales and capability!applApple -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 11Apple -Competition and Cost Structure Page 08Apple -Competition and Cost Structure Page 10

Following up on the post of Tuesday, 14 August 2012, Muppets Get MASHED Once Again - Groupon Half Off Share Price Coupons Selling for 20 Cents On The Dollar!!! Groupon is now trading at $2.61 after its most recent earnings announcement. We warned pre-IPO that this stock was pure trash. Let's see how that warning panned out... (spoiler alert: free BoomBustBlog Anti-sell side research available for download below)...

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An 89% drop since the IPO. For those not paying attention, that's damn near all of the share price... disappeared! You could have made a fortune selling this. You may have even made a dollar or two litigation with the issuers or the company itself. Don't forget,  At least eight brokerages slashed their price targets on the firm. Where were these firms when we were warning pre-IPO? 

Here are some key highlights: Groupon restates revenue, EXACTLY as I warned just three months earlier.

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

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

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Groupon Valuation redacted Page 14

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

Many have asked me if I believe in austerity measures or the Keynsian approach of spending out of recession. I have stated, time and again, that the question is loaded - hence the answer can never be sufficient. When you are trying to go from your home to the market across town in a crowded urban environment, you cannot make the trip successfully by deciding ahead of time that you are just going to make left turns (austerity? Austrian?) or right turns (stimulus? Keynsian?). You come to an intersection and you make the turn that's necessary to get you where you want to go. It might sound overly simplistic and common, but I'll be damned if common sense is one of the most uncommon things I've come across over the last 7 years or so!

On that note, there does appear to be a misunderstanding on how government finances work as compared to finances in the private sector. The government is not a for profit player that competes directly with those in the private sector, but is instead a universal support network that benefits from the success of the private sector. Hence, the government must work in the best interests of the private sector in order to thrive. This sometimes entails taking the other side of the trade to ensure that a trade can take place. One pundit who has done a good job of explaining this through pretty charts that explain the peculiar situation that we are now in (a balance sheet recession), is Dr. Richard Koo of Nomura Securities. See the FT.com article abstract:

In 2008, Barack Obama told the US people the nation’s economic crisis would take a long time to overcome. In 2012, many of those voters are losing patience, because they have not been told why this recession has lasted so long or why his policies were the correct response. Here is the missing explanation – based on not only the US experience, but also that of Japan and Europe. 

when-the-government-tries-premature-fiscal-consolidation-things-get-much-worse-and-debt-goes-higher

Today, the US private sector is saving a staggering 8 per cent of gross domestic product – at zero interest rates, when households and businesses would ordinarily be borrowing and spending money. But the US is not alone: in Ireland and Japan, the private sector is saving 9 per cent of GDP; in Spain it is saving 7 per cent of GDP; and in the UK, 5 per cent. Interest rates are at record lows in all these countries.

For those who may not get the gravity of this statement, it makes no sense to save money with a negative risk/reward proposition, unless of course the saver does not see it that way. One must save if savings are in deficit, and the risk to invest funds is considered greater than the benefit of having said funds in the first place. We are still attempting to wade through the bursting of a massive bubble, and we are playing defensive - not offensive.  In other words, are Americans seeking return OF capital over return on said capital? We are over-leveraged, and to effectively delever you cannot borrow more money or take the risk of aggressive investments. This is so even if investment capital is being offered at zero interest rates. Mr. Koo illustrates the consequences of such behavior eloquently...

However, if someone is saving money or paying down debt, someone else must be borrowing and spending that money to keep the economy going. In a normal world, it is the role of interest rates to ensure all saved funds are borrowed and spent, with interest rates rising when there are too many borrowers and falling when there are too few. 

But when the private sector as a whole is saving money or paying down debt at zero interest rates, the banks cannot lend the repaid debt or newly deposited savings because interest rates cannot go any lower. This means that, if left unattended, the economy will continuously lose aggregate demand equivalent to the unborrowed savings. In other words, even though repairing balance sheets is the right and responsible thing to do, if everyone tries to do it at the same time a deflationary spiral will result. It was such a deflationary spiral that cost the US 46 per cent of its GDP from 1929 to 1933. 

Those with a debt overhang will not increase their borrowing at any interest rate; nor will there be many lenders, when the lenders themselves have financial problems. This shift from maximising profit to minimising debt explains why near-zero interest rates in the US and EU since 2008 and in Japan since 1995 have failed to produce the expected recoveries in these economies. 

For some reason, the Fed doesn't seem to get what Mr. Koo and BoomBustBloggers do!

With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector.

Wait a minute! The EU states are definitely borrowing, but they are not redploying the capital back into the private sector, they are simply bailing out banks! In addition, the banks are not deploying the capital into the private sector, they are simply sitting on it, just as Mr. Koo stated they would in the article excerpt above! So, after trillions of borrowing, there's no surprise why there's just relatively pennies making it into the private sector. What Mr. Koo and many who follow Keynsian economic theories seem to forget to include, is that upon borrowing the money to plunge into the private sector, you have to have a plan for paying said monies back. When you borrow said monies and simply waste them (ex. perpetual dead bank bailouts) you create a truly structural problem. Simply ask Greece, or see How Greece Killed Its Own Banks! and then move on to...

As The Year Comes An End The Ability Of Greece To Kick The Can Mirrors The Chances Of A Man With No Feet

Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.

Greece_Primary_balanceGreece_Primary_balanceGreece_Primary_balance

The primary balance looks at the structural issues a country may have.

Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!

Greece_Primary_deficit_copy

On to Mr. Koo's diatribe... 

Recovery from this type of recession takes time because the flow of current savings must be used to reduce the stock of debt overhang, necessarily a long process when everyone is doing it at the same time. Since one person’s debt is another person’s asset, there is no quick fix: shifting the problem from one part of society to another will solve nothing.

The challenge now is to maintain fiscal stimuli until private sector deleveraging is completed. Any premature attempt to withdraw that stimulus will result in a deflationary implosion – as in the US in 1937, Japan in 1997, and Spain and the UK most recently.

Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.

Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.

The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.

I have ventured along these lines several times in the past. Here is the subscription research that I feel is best poised to take advantage of the guaranteed mistakes to be made ahead, simply click your industry/sector for the most recent research (note, non-subscribers will only be able to view free reports, you may click here to subscribe)...

• Consumer Discretionary
• Banks & Financial Services
• Insurers, Insurance & Risk Management
• Real Estate
• Retail

As for whether Mr. Koo is correct in the application of severe austerity when one should be trying to prime the pump....

Greece Is To Pathogen As Cyprus Is To Contagion As Spain Is To Infected...

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