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:

• • Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding
  • Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

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...

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

 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

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?

Enlarge imageToo Big to Make Money?

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: 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 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

 Follow me:

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 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) 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:  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.

 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 collapse, Lehman Brothers), insurers, commercial real estate, residential 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

Two weeks ago, I continued my irradiation of common sense, math over magic/mysticism and simple truth drawing attention to the single fact that ALL of Wall Street seems to have over looked. That fact was that the most hyped IPO in the history of the world, the company that is not only a household name but also that halved the investment of those invested in the IPO, and whose share price is now increasing rapidly - is actually shrinking in terms of its user base, reference The Truth About Facebook That No Media Outlet Or Analyst Has Bothered To Notice. In addition, this company is still attempting to flesh out its business model. While it is a multi-billion dollar company (in terms of revenues), it is burning cash like a furnace in an attempt to outgrow its competition - all the while reinvesting profits and compressing margins. This behavior has been excused as it was(is) marketed as a high growth social media play.

Contrast that scenario with LinkedIn, another hi-growth social media play. I actually use social media, albeit not much for personal endeavors but for marketing and advertising. LinkedIn, where I've been a member for years, has always had a rather cumbersome, lackadaisical interface. A recent revamp and overhaul of the site has pumped new life, new vitality, and new revenue growth into this concern. It now boasts over 200 million members. My attention was recently drawn to LinkedIn after I got this notice in the mail...

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 While this 200 million may not look like much compared to Facebook's billion, LinkedIn's user base is growing rapidly at the same time that it's revenue per user is expanding as well while Facebook's base has already started shrinking. Despite this, Facebook is still being marketed as a high growth play in a hot tech space - social media.

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

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A high growth company whose userbase is already shrinking leads one to believe that the easy money has already been made...

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LinkedIn, on the other hand, is still handily outperforming on both user growth...

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 and revenue growth as well as margin expansion... The company has also successfully diversified revenues... 

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The reason for LinkedIn's apparent success in terms of business modeling is management's fruitful reinvestment into the website's social structure. Each member's profle now serves as a media rich resume or CV, or in terms of corporate pages and entrepenuers, a potentially immersive marketing platform. Most importantly, the vast community of members serves to verify the validity of assertions, awards and recommendations and endorsements - lending an air of credibility that competitive sites such as Monster.com could not come close to replicating.

Below, you can find exerpts from my profile (click here to see the live profile) where you can find video interviews, educational walkthroughs, endorsements and recommendations...

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The company has also addressed the issue of stickiness on the site by giving a handful of respected and well followed personalities a publishing platfrom from which they can espouse their ideas. This "macroblog" idea has garnered a huge following from a sufficiently broad audience, enough of a following that this is now a force in the media space to be reckoned with. It is something that Facebook should have thought of first.

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LinkedIn's considerably more concrete business model in addition to their reliable and clear paths to growth have not been lost on the market - particularly in comparison to Facebook...

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Subscribers are asked to download our LinkedIn Valuation sheet here -  LinkedIn valuation overview 2-2013. Later on this week, professional and institutional subscribers will be able to access the entire LinkedIn valuation model on the web. Stay tuned, and in the meantime, please follow me...

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

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...

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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:

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...

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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

 *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.

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.

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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:

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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

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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.  Provide Input on Proposed Federal "College Scorecard ... - Educause
   
   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. High-School Students Take Dim View of College Scorecard, Report ...  
   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] 

   University of the United States (UUS) Costs ... - The White House 

   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.  CAP Report Reveals Student Confusion with Obama College ...
   Dec 5, 2012 – ... on the Obama administration's proposed college scorecard. The scorecard, a reference for students considering attending higher education, ...[PDF] 

   Improving the College Scorecard - Center for American Progress 
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. The Quick and the Ed » Higher Education Needs a Flashlight 
   Feb 2, 2012 – Categories: Accountability, College Costs and Student Debt, Higher ...proposed “College Scorecard” and “Financial Aid Shopping Sheet”.
8. The Quick and the Ed » college scorecard
   Dec 3, 2012 – The college scorecard, a proposed online tool meant to help students make ... The proposed “college scorecard” that aims to give prospective ...

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

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

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

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

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

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

• YouTube
• Android
• Google Voice
• AdMob

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

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

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

• I told clients to SHORT Research in Motion in early 2010, right before a 90% drop: Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion
• I warned on Apple from 2010 till the ultimate short call in October just past, right about the company's ALL-TIME HIGH: Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All
• I also laid clear the path to Google's prominence as far back as 2010, when there was not a peep from the sell side, see Google's Q4, 2012: This Looks To Be The Leader Of The New Distributed Information Paradigm. The 9 month performance was actually documented on international TV in the CNBC stock picking contest.

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

Below, I drilled down on the date and used a percentage difference view to illustrate the improvement in P/E stemming from the earnings beats.

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

Yesterday I appeared on CNBC as they announced that I won their Superbowl themed stock picking contest. The contest involved 15 investment professionals choosing amount 21 stocks. It was light-hearted, but as all who know me can attest, I take everything money related quite seriously. I want to take the time to illustrate why I picked the stock that won - Google, and what was wrong with many of the other picks. Unfortunately, shorting wasn't allowed, for if it was my readers and subscribers know that Facebook and Apple would have been shorted in combination with a Google long that would have produced even more spectacular returns and less volatility (risk).

As can be seen below, I usually bring my children to interviews so they can watch me pontificate and debate issues on international television.

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I pulled my 6 year old out of school for her to watch the interview and afterwards we discussed the topics at hand:

• paradigm shifts
• the difficulty in analysts and financial professionals seeing shifts in demand and technology
• network effects
• unique business models

I took the risk that her 2nd grade teacher wouldn't be covering those topics last period. I mention this because a big focus later on this week at BoomBustBlog is the risk, bubble and burst of the US education system. It will be part four of my education bubble rant and it will be a doozy, not to mention directly related to the way people invest, manage risk and pick stocks and other risky assets. See the first three installments here:

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!

Theses education articles are hard hitting, and unavailable nearly anywhere else on the Web. They contain info and knowledge that effects us all and thus should have literally millions of views, yet they barely have an average following. This, in and of itself, is representative of the state of true learning in the US and a glimpse into the future of our ability to maintain a leadership role in the world economy. 'Nuff said! Now on to the topic at hand...

One thing that I didn't correct the host on was his assertion that Google makes over 90% of its money from advertising and the rest of the stuff was just a hobby. That is a mischaracterization of Google's business model. Google "cost shifts" thus uses advertising to monetize practically everything. Thus, Google makes its money from search, Android and Chrome mobile OS, Gmail, YouTube, etc., but uses advertising to both subsidize low or zero cost product (of very high quality, may I add) and monetize it. Here's a video from the Max Keiser show where I went into the topic in detail...

Another point of interest is the comment by Herb Greenberg, a reporter who has a true analytical bent (I believe he's a CFA) and a healthy pessimistic curiosity of corporate management proclamations. As he said in the video, we are both known for picking apart companies and finding things wrong. While many who don't know better call it perma-bear, as you can see its really known as fundamental analysis. When there's something wrong, there's something wrong. If you look at companies objectively, you not only see what's wrong, but you also recognize what's right. To be absolutely honest, my calls in this stock picking contest were the absolute antithesis of what Wall Street's sell side analysts have been selling its clients. Let's run through the Wall Street sell side mantra, shall we? Trust me, those who don't regularly follow me should click the links below and read the articles thoroughly. While they said...

1. Buy Apple till $1,000 - What Sell Side Wall Street Doesn't Understand About Apple...
2. Hurry and get this Facebook IPO while its hot- The Truth About Facebook That No Media Outlet Or Analyst Dare Admit and more to the point, Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman's Pricing: Here's What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!,
3. and short Google to go long Apple - My Thoughts on Roger McNamee's View of Google ...

I said the exact opposite! Are the results a coincidence? I'm afraid not! Did A Blog Best Wall Street's Best of the Best In Gauging The True Value of Google? We Have To Think More Like An Entrepreneur & Less Like A Wall Street Analyst. Google is not the only time Wall Street's sell side fell to this lowly blogger. We're at roughly 72 companies/industries/countries/opportunities and counting... Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Believe it, naysayers and all!!!

My next post will discuss the other stocks in the stock picking contest which fell behind Google. In the meantime, feel free to peruse both my free and subscription Google research:

Google's Q4, 2012: This Looks To Be The Leader Of The New Distributed Information Paradigm

Subscribers should reference page 49 in the "Google Final Report" to see the results of Google's historical investment actions.

I feel that margins may increase slightly but for advertising they are on a long-term downward trend. That is the price Google will pay as digital advertising becomes more ubiquitous. What will be bought at this price? Google will permeate all aspects of digital life with cost-shifted products, based in large part on advertising revenues. In general, margins will drop, but revenues will explode. No longer will we get to keep 40% of our single dollar, but we will get 20% on the $10 dollar revenue bill. While Apple is pondering the Apple TV, Google is working on a wide variety if literally paradigm changing products - many of which are literal game changers: Google Glass, driverless cars, Google Fiber...

Related articles...

1. More Evidence That Google Is Already The New Microsoft, and Android Is The New Windows (To YOUR OWN Information)
2. Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!
3. As Lower Margin, High Price iPad Minis Outsell All Other iPads The BoomBustBlog Apple Margin Compression Theory Is Incontrovertible & Mainstream
4. Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business

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. 

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