Note: This is a very long post, and would have been longer if I didn't decide to break it up into pieces. I am presenting plenty of background material in it that regular readers have probably seen before because the subject matter is so pertinent to asset values both today, and tomorrow. I suggest those with interest in the real estate and/or banking arena read it in its entirety. The latter portion of the post is all new material that leads into valuations of real CRE properties that are currently on the market and ties in seemingly unrelated issues such Portugal's bailout and Greece's inevitable restructuring.
Last night, I spent an interesting time with the esteemed and world reknown macro economist, entrepreneur, NYU professor and strategist, Dr. Nouriel Roubini. Nouriel is a very, very bright guy. He has to be, he agrees with many of my viewpoints :-). Dr. Roubini had a client reception at his downtown loft in NYC. It was a delightful affair, plenty of heavy thinkers, a bevy of beautiful women, engaging debate of things geopolitical, macro-economic and financial... and of course at least one trouble maker. That would be that tall handsome fella in the middle who had the nerve, after Roubini literally deadened the room with his proclamations of what could come in the case of China crash, European default or US hard landing, to actually burst out and say the esteemed economist was actually being TOO OPTIMISTIC!
Hmmm, and they have the nerve to call Roubini Dr. Doom. Don't they know Dr. Doom wears a mask, a suit of armor, and is truly no joke?.
Yesterday, I bluntly called out the European state of economic affairs as I saw them in "Liar, Liar, European Pants on Fire!" Today, I present the article published by Property EU, one of the leading real estate publications in Europe which illustrates much of my thoughts on the topic of how and why Europe is nowhere near out of its economic malaise, and more importantly how this may pull the value of real estate down. The vast majority of European banks lend against real estate and when the value of said collateral goes down in conjunction with the value of what many are carrying on their books at par as risk free and hold to maturity assets at 30+x leverage... Well, you can use your imagination for the Lehman like results...
This week I will go through several property devaluation scenarios as applied to what looks like very promising cash flow scenarios using real life examples of NYC commercial real estate starting tomorrow, and culminating with a more in depth analysis for subscribers next week. The most interesting part of the analysis will be the application of our real asset protection program to hedge against the risk of property value decline. Stay tuned, it should be exciting, and if you are not a finance nerd like me - at the very least interesting...
As promised, I am presenting historical justification of the logic behind my call of absurdity in the drastic drop in share price after Google announces a redoubled effort in investment and marketing of its nascent businesses. I went into the logic in detail via our Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google. The following pages are excerpted the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).
To begin with, Google apparently realized early on that it could better realize returns by investing shareholder capital through acquisitions. It has actually been quite acquisitive, making 88 purchases over the last 13 year. Last year was Google's most acquisitive year, ever!
Of the major economic powers, China is the only economy that is facing true inflation as I see it and China is primed for a hard landing - at best. The US, EU, and UK face stagflation. After the AP excerpt below is a clip from my recent keynote presentation at the ING Real Estate Valuation seminar in Amsterdam on this very timely topic.
LONDON (AP) — Rising inflation around the world weighed on stock markets Friday as investors wondered how fast central banks will raise borrowing costs to counter the threat of rising prices, while the euro was undermined by ongoing worries that Greece will have to restructure its massive debts.
Figures Friday reinforced market expectations that both the European Central Bank and the People's Bank of China will soon be raising interest rates again to counter rising inflation.
In China, figures showed consumer prices rose 5.4 percent in the year to March, up from February's 4.9 percent. The increase was largely driven by surging food costs and represents a setback for the government, which has boosted interest rates four times since October to cool prices.
Analysts expect the People's Bank to enact further measures in the days to come in response to those figures.
Here is a collection of my archived posts on the topic:
- Economic contractions AND rising prices, dare Reggie utter the “I” word – Enter a global phenomenon
- Reggie Middleton’s Take on Investing for Inflation, pt. 1
- Reggie Middleton’s Take on Investing for Inflation, pt. 2
- Reggie Middleton’s Take on Investing for Inflation, pt. 3
- Reggie Middleton’s Take on Investing for Inflation, pt. 4
- Reggie Middleton’s Take on Investing for Inflation, pt. 5
- More on my stagflation rant
- Deflation, Inflation or Stagflation – You Be the Judge!
- Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?
- China’s Most Expensive Export: Price Inflation
Attention subscribers: related content is available for download: BoomBustBlog Complimentary FX Index model
The definition of "Inflation" is when the "value" and "price" of some of the most widely held and most used assets fall dramatically in price... NOT!!! Well then, why are all the financial rags, blogging pundits and mainstream media outlets crowing about inflation? Mr. and Mrs. Editor, stand up and stick that "S" on your chest. That's right, not Superman, but "Stagflaton Man".
With all due respect to that Nassim Taleb dude who popularized the term "Black Swasn", Black Swan events are both overrated and the term is sloppily bandied about by those who may not be putting the requisite thought into just how utilitarian the knowledge of Black Swans actually are. Since you can't accurately predict, nor back test against, nor adequately hedge against such events, exactly what good is a Black Swan discussion. Well, I can answer that question. Black Swan events do maximum damage when the economic cycle is at its weakest. In Reggie Middleton's Economic Circle of Life (think the Lion King) it is the right portion of the circle in which Black Swan events do the most damage.
Actually, it is not the Black Swan events themselves that do the damage but said event do serve as the catalyst that either bust a bubble that was waiting to pop anyway, or break a structure that was hobbling along on one leg as it was - where we happen to be now in many places of the developed world - sans rampant propaganda, misinformation and disinformation from less than disinterested sources.
I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the "Peak" phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality...
What do you get when you add...
The world's most prolific mobile OS with the largest market share and greatest growth rate
The world's greatest advertising company
The world's largest cloud computing company
The world's largest online retailer???
A hell of a lot of competition for everyone else in the mobile computing space. Amazon app store: Launchpad for mobile dominance! Amazon is opening it's Android app store Tuesday (today). It will run as a subset of Google's Android Marketplace and will be heavily monitored and moderated by reviewers, very much like the Amazon store is - which will set it apart from Google Marketplace and be similar Amazon's running of the FAO Schwatz and ToysRus websites.
The tech media has multiple reports of Amazon focusing on competitively lower prices for apps to gain a competitive edge.
Bloomberg has Warren Buffet saying:
"Warren Buffett said he’ll probably prolong his aversion to electronics makers such as Apple Inc. (AAPL) because their business prospects are harder to predict than companies such as Coca-Cola Co. (KO)
“We held very few in the past and we’re likely to hold very few in the future,” the billionaire chairman of Berkshire Hathaway Inc. (BRK/A) said in Daegu, South Korea, today, referring to electronics makers. Coca-Cola, based in Atlanta, is “very easy for me to come to a conclusion as to what it will look like economically in five or 10 years, and it’s not easy for me to come to a conclusion about Apple,” he said".
He's absolutely right. Not only does Warren not know what lies in store for Apple's future, nobody else does either. Combine that with the fact that everyone is acting like they do know what lies in store for Apple's future - with the majority preaching abject and unfettered success if not domination, spells opportunity.
See my post from earlier this morning - How the “I Love Apple, There Is No Other Fever” Adds To The Attractiveness Of An Ever So Unpopular Apple Short and More On Realistic Views of Apple and the Undervaluation of Google.
I have decided to post a recent email exchange to illustrate the psychological component of a potential Apple short. As all who follow me know, I believe that the amount and quality of competition that Apple is and will be facing in the near future will curtail its hyperbolic growth and/or margins, essentially invalidating the lofty price targets that have been assigned to it by the well followed sell side analysts. There is also a market psychology side to this as well. Apple has, by far and wide, the greatest amount of reverence I have ever seen bestowed upon a corporate entity. Its employees, products, and stock are literally worshiped and zealously, if not aggressively defended. This nearly blind devotion can and does tend to cause one to take a blind eye to shifts in market dynamics, fundamentals, competitive forces and adverse macro economic trends. In a nutshell, emotions take over where the brain should be leading. At ~$340, a near doubling, the greatest competitive forces the company has ever had, the removal of first place in market growth rate (mobile) as well as displacement in market share, a myriad of global macro-economic disasters, abject worship by Wall Street's sell side analysts (who tend to lose more than they win, yet drag many a retail investor down with them) and the fact that it is one of the world's most largely held stocks - albeit held by many who overlook the obvious - Apple makes an appetizing short if the entry can be timed and hedged correctly. Think about it. Here you have an opportunity where a company MAY be slowed down considerably hitting potential macro, competitive and logistical headwinds in a potentially stiff macro environment, with an all time high triple digit share price (good for options traders) and there is literally close to ZERO competition for the short because EVERYBODY is long and convinced Apple is not a fruit but bread-like manna from heaven. When everyone is crowding to one side of a boat, it is wisest to make your way over to the opposite side.
On that note, here is an email exchange that I recently had with a polite yet zealous Apple fan that follows my blog.
In continuing with what appears to be one of the very, very few voice that look at the mobile computing wars from an empirical perspective I will update readers on the price action in Apple and why I feel that the market may be getting wise to what BoomBustBloggers have known since last year. I want to make it clear that this is in no way to be considered investment advice or a recommendation. It is simply a reflection of my thoughts and ruminations on the mobile computer space and the relative prospects of the front leaders therein. On March 16th, I posted Shorting Apple and Why Software Developers Can Make More Money On Android wherein I discussed the suitability of shorting(putting) Apple stock with tight stops. This, or course was in direct contradiction to the recommendation of Goldman Sachs who has a $430 target on the company. See Taking The Challenge To Goldman Sach’s Apple Proclamation One Step Further and Is It Now Common Knowledge That Goldman’s Investment Advice Sucks!
I followed up the next day with Note For The Few Realistic Apple Bears…
Shortly thereafter the trade was stopped out with a roughly 31% gain. I have put a similar position back in this morning. Let's take a look at the divergent price action between the two mobile computing war front runners.
Apple has had the expected effervescent launch to its iPad 2 last week, which was tarred some in Asia by the trifecta calamity Japan's earthquake, resultant tsunami, and consequent nuclear reactor near meltdowns - still going on. The problems Apple face go farther than a mere temporary (or not so) hampering of the Japanese market to the new iPad 2. Apple is relying on the iPad 2 to diversify its current ~65-70%+ concentration of profits in its highly successful iPhone product line. Any disruption in the selling of iPad 2s gives Google's Android tablet products more room to expand and capture market share. From CNBC:
The iPad 2 battery, which IHS iSuppli said is "unusually thin", is manufactured by Apple Japan, an Apple subsidiary, and likely requires advanced manufacturing technologies that reside in the country.
"Logistical disruptions may mean that Apple could have difficulties obtaining this battery, and it may not be able to secure supply from an external, non-Japanese source," the report said.
Production at many Japanese manufacturing facilities has come to a halt following Friday's 9.0 earthquake and subsequent tsunami, which has left more than 5,600 people dead and destroyed swaths of the country.
Toshiba, which is one of the companies that produces the NAND flash memory used in the iPad 2 according to IHS iSuppli's research, briefly shut down a flash memory manufacturing facility in Japan and warned it could face hurdles distributing its products.
Suppliers of other components whose factories weren't damaged are likely to be affected by logistical issues, such as difficulties procuring raw materials and shipping finished products, the report said.
Apple launched the iPad 2 in the United States last week to strong demand, with many stores selling out of the device and analysts estimating that the company sold 1 million units during the debut weekend.
The current wait time for an iPad ordered online is 4-5 weeks.
Within 4-5 weeks, Samsung should be launching its 10 inc Tab product which arguably the most competent threat to Apple's iPad 2 to date, and only the 2nd of over 3 dozen tablet-specialized "Honeycomb" devices to ship in the next quarter or two. From As The Tablet Margin Crunching Parade Marches On, Consumers Benefit From The Cheapest Prices Of The Best Products:
Even without the launch of these higher end specialized products, Android 2.x tablets are already flooding the retail markets. Here is a page from Sear's website after typing in the term "tablet"... Click to enlarge.
These are not just the junk tablets often pushed over from the wholesale Chinese shops either. Included for $300 and change is the Viewsonic 10" tablet which can dual boot Windows 7 and Android, and its cousin the pure Android 10" tablet. With a software upgrade to versions 2.2 to 3.0, this tablet mirrors the much more expensive Motorola Xoom and Samsung Tab and can run neck and neck if not beat the iPad 2 at nearly all function - yet it is priced less than the current iPad 1. Yes, all available from Sears. Remember my admonitions concerning margin compression - these prices are, and will continue, to drop like rocks.
- The Tablet Pricing Wars Have Commenced, Targeting Apple’s iPad 2 Which Is Not Even For Sale Yet…
- Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!
So, as the iPad 2 enjoys one to one and a half month delays, these Android tablets will continue to sell and occupy mindshare that probably would have gone to Apple. If Apple does not succeed in diversifying its profit base farther, it will be left vulnerable. The Japanese incident is a perfect example. The two popular mobile products that are grown (ever so slightly) market share are very vulnerable to happenstance disruptions. Google actually benefits from this by building a very diversified base of vendors from every hardware corner imaginable, many of which may not be as effected as Apple who has sole sourced certain components. In the meantime Google Is Said to Test Mobile-Payment System With VeriFone - Bloomberg. If Google is successful in cornering this market, it simply adds to the ubiquity of Android as it will surely be built into the OS. Do remember how quickly Android has risen from near zero to pole position in terms of market share.
In 7 quarters, Android went from last place to first place - WORLDWIDE! Expect the same to happen in the tablet space where competition is even worse and the Android camp has a much larger stable of much more capable competitors ready to jump out of the gate as the iPad has only one year head start as compared to the iPhone's 3 year head start. Does the market see this? At the money, front month puts jumped 41% while Apple fell faster and farther than Google during the market rout, and gained less, slower during the government pump up.
I am slowly gathering puts on Apple again, with tight trailings, of course. Apple's situation may not become apparent immediately, but it is definitely in more of a competitive bind than many are letting on. I have been clamoring that Apple's margins will get chopped by Android's commoditizng the smartphone space - both on the lower and and the higher end. See Apple on the Margin and my on air proclamation just hours before Apple released earnings and declared - surprise, surprise - a drop in margins. Go to 3:40 in the video... [iframe http://plus.cnbc.com/rssvideosearch/action/player/id/1618325359/code/cnbcplayershare 400 380]
- The Potential Equity Investments Most Likely To Prosper From the Google/Apple/Microsoft Mobile Computing Battle
- The Nokia/Microsoft Alliance & Android’s Commoditization Of The Mobile Computing Platform…
- Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming
- Will Google Win The Mobile Computing War? Let’s Walk Through Where They Stand Now & How To Value Them
- Sony Bites The Bullet & Joins The Android Camp, Adding Its Entire Suite of PSOne Games To The Android Platform
- If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors…
Subscribers are reminded to review the Apple iPhone Profit Margin Scenario Analysis Model as well as review the Apple Earnings Guidance Analysis document that details how Apple’s management expertly manages sell side earnings expectations, and consequently their share price. Non-subscription readers should reference How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue and then compare and contrast to Will Google Win The Mobile Computing War? Let’s Walk Through Where They Stand Now & How To Value Them.