Now, on to the title of the article and why these guys just don't understand Apple...

1. So point one, PCs are still alive and well (thus far)...
2. Point two, Apple makes nearly all of its money from PCs...
3. Point three, Apple is not the leader of the PC world right now. It's not Dell nor HP, either. An Asian company is the PC leader - Samsung!

Samsung has out innovated, out distributed, outran and outsold Apple using the leverage of a free OS/ecosystem that is currently best of breed and improving at what is at least 3x the speed of the competition. Here's a tidbit to chew on..

Worldwide (traditional) PC shipments totaled 89.8 million units in the fourth quarter of 2012 (down 6.4% from Q4 2011) and is on  rapid and continuous downward decline in terms of growth (4Q12) - IDC

In the worldwide smartphone market, vendors shipped 219.4 million units in 4Q12. The year-over-year growth was 36.4%, as compared to what most people consider the PC's growth of negative 6.4% Althought the high-growth smartphone market was dominated by Samsung and Apple, prices are being driven down substantially by challengers.  As excerpted from IDC's mobile press release:

Kevin Restivo, senior research analyst with IDC's Worldwide Quarterly Mobile Phone Tracker. "Vendors with unique market advantages, such as lower-cost devices, can rapidly gain market share, especially in emerging markets. A good example is Huawei, which overtook LG as a Top 5 vendor in the overall mobile phone market and passed HTC to become a Top 5 smartphone vendor."

"The fact that Huawei and ZTE now find themselves among the Top 5 smartphone vendors marks a significant shift for the global market," noted Ramon Llamas, research manager with IDC's Mobile Phone team. "Both companies have grown volumes by focusing on the mass market, but in recent quarters they have turned their attention toward higher-end devices. In addition, both companies have pushed the envelope in terms of industrial design with larger displays and smaller form factors, as well as innovative applications and experiences."

What do ALL of these Asian companies have in common? What do ALL of these companies, except Apple, have in common? Well, for one, they're all growing a hell of a lot faster than Apple. In addition, Samsung has already overtaken Apple. But there's more. Here's a hint... Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance - This illustrates the pace of Android innovation forcing Apple to take a back seat or face margin compression.

So, what else is the sell side missing? Hardware is Dead!

1.  For one: The open source OS paradigm calls for rapidly improving hardware specs at ever lower prices. I have pointed to evidence of this above, as these Asian OEMs produce ever better product at ever lower prices - just like the old school PC industry. This drives Google's info-centric business model which is why Google pushes free Android.
2. Two: after years of outsourcing manufacturing tech and UP to low cost labor Asian countries, those countries have found a way to produce trinkets of their own. Of limited quality and value so you say? Well, remember the iPhone is a Chinese phone, through and through -at least Chinese built. So now you argue, it's American designed, just Chinese made! Please peruse the Oppo Finder 5, a phone that's drastically superior to the iPhone 5 in practically every single way, retailing for $100 less than the cheapest iPhone 5 made. Low cost, low margin products combined with Google's free OS will drive the price of hardware down to near zero, if not negative. Google even has its own hardware arm now (Motorola) to facilitate this downward march in margins and prices. Suppose Google decides to create best of breed Nexus devices and give them away just below cost? Imagine the best smartphone available in the world, unlocked, without a contract, for the cost of a single monthly wireless phone payment??? Google's Nexus program is acting as a training ground to teach Google's Motorola division to build best of breed! Google's biggest and most successful partner - Samsung, is an Asian company. Samsung Electronics of South Korea reported today that its quarterly profit  jumped 76%, as its Galaxy smartphones beat rival Apple's iPhone in each quarter of 2012. What many seem to have missed is that EBITDA, Operating and Gross margins all slipped QonQ though. A sign of things to come??? Remember, Google benefits most when the barriers to access information are least. Reference "Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!" as well as my videos below...

• Research in Motion in early 2010: Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion
• Apple from 2010 till the ultimate short call in October just past: 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 .

Now, Samsung seems to be the most innovative of the handset vendors to date, but if I'm right, they will end up having to innovate in a commodity space just like the traditional PC manufacturers (Dell, HP, etc.) have to do now. Why?  Because of point number Three...

The new PC is not even a PC anymore, its a multi-tiered, multi-function, distributed cluster of interactive, location aware, multimedia applications sharing your social activities and data through a network of servers - in short, it's the cloud!

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

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

image002As the video denotes below, here we have big brother, traded on an exchange. The following are anecdotal notes and observations on Google's Q4, 2012. As is customary, I'm willing to discuss my views, opinions and findings with any professional or institutional BoomBustBlog subscriber over the phone or via Google+ Hangout. If you wish to have such a discussion, please email me.

Revenues were up 36% year-on-year, and 8% quarter-on-quarter. Google hit $50 billion in revenues last year - the company is only 15 years old. Motorola is still pulling income margin down, but I (and it appears the market) am confid-ent that Google will successfully monetize the IP and OEM production assets, if they have not already done so. Of concern is the fact that margins are shrinking sans the Motorola acquisition (see below). Does this concern me? Well...

Fears of maturation and saturation in Google’s core ad business appear to have been drastically overblown:

Paid Clicks increased approximately 24% over the fourth quarter of 2011 and increased approximately 9% over the third quarter of 2012. 24% growth in a business that was supposed to start leveling off is a hell of an achievement. What the armchair pundits apparently failed to realize is that the mobile market is akin to almost an entirely new field for Google to plunder. If anything, one should be looking at this from a bullish perspective, not a bearish one. Alas, the margins on this high growth, big opportunity market are bound to be lower – at least thus far, which brings us to…

Cost-Per-Click, which  decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012. Google is apparently losing some pricing power with the shift to mobile, as has everybody else in the business. It appears that some firmness has been found Q on Q, as was the case with Facebook as well. Time will tell if this is a seasonal thing, a temp blip, or the start of something more lasting. Remember, this is a new market and a new business for all.

TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $3.08 billion in the fourth quarter of 2012, compared to $2.45 billion in the fourth quarter of 2011. TAC as a percentage of advertising revenues was 25% in the fourth quarter of 2012, compared to 24% in the fourth quarter of 2011. Google’s cost of revenue acquisition is going up!

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs, credit card processing charges, and manufacturing and inventory-related costs, increased to $3.14 billion, or 22% of revenues, in the fourth quarter of 2012, compared to $1.25 billion, or 12% of revenues, in the fourth quarter of 2011. For those who are not paying attention, this is a Google "Call to War"! Google is rapidly ramping investment (incorrectly categorized and classified as expense by GAAP). I believe this is attributable to two things:

1. The preparation for mass monetizing of the hardware/cloud integration side of the Motorola acquisition. Motorola brought valuable IP, patents,and a mobile OEM business, but it brought material dead weight as well. This dead weight has been (is being) jettisoned, but we have yet to see the positive results of the handset/tablet business. Expect to see that in 2013.
2. Google is in a cloud infrastructure arms race with those most capable of competing in this arena, namely – Microsoft, Amazon and Facebook. No, I no longer believe Apple is a challenge, and I didn’t think they were much of a challenge last year either. See the accompanying video, Apple is more a purveyor of fads than cloud tech. In the push to usurp Windows as an OS (see Chrome OS and the Chromebook), Microsoft Office with Google Docs/Drive, conventional network TV with YouTube (see below) and the smartphone tablet space with Android - Google plans on tying everthing together in a massive cloud infrastructure. It singularly has the assets, infrastructure, IP and managerial expertise to become the world leader in all of the aforementioned categories - and most importantly, it can afford to be very entrepreneurial and take risks for it can subsidize its experiments with the Google Ad revenues.

Rumor has it that Google is reportedly developing real estate in London for about $2 billion and is doubling its investment in a South Carolina data center to $1.2 billion. There is a practical barrier of near impenetrable expense, not unlike a moat around an olde English castle, that protects Google’s primary and secondary revenue producing assets, not to mention many of the tertiary ones.

Search

To replicate or challenge this hegemony will take the massive resources and extant footprint of a company like Microsoft, with the strategic partnership of extant, long time players such as Yahoo to come in a distant second place.

Mobile Computing

What was the hottest (non smart phone) portable computing device of 2012? Hint: It was designed and marketed by a search company and only costs $200 - the Google Chromebook. See the reviews. 

What was the hottest mobile OS last year? Which one grew the fastest? Which one had the largest market share? Which had the most tech innovations and capability? Hint: It came from a search engine company. There's no need to tout the Android OS. With roughly 76% market share and still growing faster than all of its competitors combined, Android will soon be the de facto mobile computing platform, much as Windows was the de facto desktop computing platform. Imagine the profit potential that came from thinking different!!!

Online video (YouTube)

Currently has no true competitors, with the second runner up being roughly 90% smaller AND growing slower.  If you look at the second and third most popular video sites, you can probably tell where Google is heading with YouTube. 

1 | YouTube
4 - eBizMBA Rank | 450,000,000 - Estimated Unique Monthly Visitors | 4 - Compete Rank |4 - Quantcast Rank | 3 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

2 | NetFlix
81 - eBizMBA Rank | 55,800,000 - Estimated Unique Monthly Visitors | 34 - Compete Rank| 108 - Quantcast Rank | 100 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

3 | hulu
110 - eBizMBA Rank | 40,000,000 - Estimated Unique Monthly Visitors | 121 - Compete Rank | 39 - Quantcast Rank | 171 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

See http://www.ebizmba.com/articles/video-websites for more info.

Expect the barriers to network TV and subscription TV (ex. cable TV & satellite) to be cost shifted, just as the newpsaper, mobile advertising, classifieds and mobile OS industries have been.

Yes, TV is will soon be Googled! One would expect the TV and Movie distribution industries to be on their toes, looking for a new model that will actually usher in paradigm change versus sitting on their collective asses waiting to be commoditized. Yeah, one would expect...

Of additional concern is the fact that Google's total cost of business appears to be rising. Not only is the cost of revenues increasing (alhtough there was a QonQ decrease), but their operating expenses are increasing as well. Operating expenses, other than cost of revenues, were $4.81 billion in the fourth quarter of 2012, or 33% of revenues, compared to $3.38 billion in the fourth quarter of 2011, or 32% of revenues. This should be of concern to the casual observer. The not so casual observer should realize that much of what is being characterized as expense in the Google statements, is actually investment. GAAP accounting is deficient in capturing efficient economic investment vs actual expenses. Google is a master of long term vision, investment and risk taking. Subscribers should reference page 49 in the "Google Final Report" to see the results of Google's historical investment actions.

Operating Income – Although Google's net income is growing briskly, their margins have been shrinking. One obvious cause of the shrinking was the monstrous Motorola acquisition. The question is, "Was that the only reason?".

On a consolidated basis, GAAP operating income in the fourth quarter of 2012 was 24% of revenues as compared 33% of revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was 30% of revenues as compares to 38% of revenues in the fourth quarter of 2011.  Even when separating the Motorola acquisition, we find Google's margins are still dropping...

• Google Operating Income – GAAP operating income for Google was $3.75 billion, or 29% of Google revenues, in the fourth quarter of 2012. This compares to GAAP operating income of $3.51 billion, or 33% of Google revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was $4.42 billion, or 34% of Google revenues. This compares to non-GAAP operating income of $4.04 billion in the fourth quarter of 2011, or 38% of Google revenues.

• Motorola Mobile Operating Loss – GAAP operating loss for Motorola Mobile was $353 million, or -23% of Motorola Mobile revenues in the fourth quarter of 2012. Non-GAAP operating loss for Motorola Mobile in the fourth quarter of 2012 was $152 million, or -10% of Motorola Mobile revenues.

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. 

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 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...

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

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

thumb image006

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

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

Economic Return on Investment (eROI)

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

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

Click to expand...

thumb image031

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

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

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

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

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

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

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

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

Click to enlarge...

 thumb image034 

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

Click to expand!!!

thumb image014

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

This is one of those pieces where, after reading it you say "Damn, why didn't I think of that!".. By demonstrating how Google is transforming the telecomm landscape, I may actually save up to $5,700 for at least a quarter of the readers who are perusing this blog. Yes, it's for real, and its a benefit of the "knowlege how" mentality that I described in my previous pieces on education. You'll see where I'm coming from once you get to the long graphic below...

T-Mobile has had a serious problem competing with the big boys of US wireless carriers. They are the only one not to carry the iPhone. This, in my opinion, was a wise move for the subsidy game has been a money loser from the get go, and although the iPhone is still selling like hotcakes, those hotcakes are looking much cooler as Andrioid sales have taken off. Still, T-Mobile doesn't seem content, so it decided to do what most of the carriers should have done a long time ago. T-Mobile is breaking the wireless carrier contract hegemony and offering pure service without the BS. For ANYONE who can count, this makes the decision to go with T-Mobile as brainless a decision as the sneeze is a reflex reaction. Let me count the ways...

Rip Up The Contract & You Reduce The Risk For Both The Carrier & The Consumer. As A Matter Of Fact, Only Fat Margined Hardware Vendors Have Anything To Fear - Oh Yeah, As Well As Those Carriers That Still Rely On Contracts!

The grand disruptor, Google, has been trying to break the grip the carriers have had on the smartphone industry for years, starting with the introduction of the Nexus phone which it sold direct to consumers online. The propeller heads at Google figured they would offer a better product at a lower price and people would simply flock in to buy it. Said propeller heads apparently didn't understand people. They won't always do what's best for them, but they will buy what is sold to them. So this time around, with 3rd (or 4th?) iteration of the Nexus phone, Google has paired with a major carrier in addition to selling it direct. Now, Google sole the last Nexus through Verizon, but Verizon crippled the device in attempt at carrier lock-in - an old school, naive and ultimately self destructive move, in my humble opinion.

Now, T-Mobile will be offering the device (it's already in stores, just not officially selling yet) and will offer it unlocked, off contract, for its original (not inflated like other carriers) price of $299, and with its original capabilities. This device is state of the art, btw, and blows the iPhone 5 out of the water in practically every way. Keep in mind that an iPhone 5 would retail at your local carrier retail store for $200 to $300, subsidized, tied to a 2 year contract. You can buy a far superior device outright for just about the subsidy downpayment of an iPhone.

One of the best devices on the market, approximately  1.5x the device the iPhone 5 is for roughly half the price! $299

Google Now. Amazing Photo Sphere camera. Totally wireless... OR you can pick up a very good Chinese phablet for even less....

ZOPO ZP950 Phablet - 5.7 Inch HD Screen Dual Core 8MP Camera 1GB RAM Android Phone

ZOPO ZP950

Short Description

- 5.7 inch HD screen, 1280*720 pixel display
- 1GB RAM + 4GB ROM
- 1GHz dual-core MTK MT6577 processor
- Support 3G network: GSM 850/900/1800/1900 & WCDMA 850/2100 MHz
- 8MP rear camera + 2MP front camera

Price: $279

OR you can pick up a smaller form factor for over $100 less...

Zopo ZP500 Libero ICS SMARTPHONE

ZOPO LIBERO ZP500... $178.99

These are actually very good devices , without compromise. They are, in my opinion, more desirable in terms of functionality than the iPhone 5. For less than the contract sign up price for an iPhone of ATT/Sprint/Verizon late model phone, you can fully purchase one of these devices and pay for the first month of service - contract free, free to leave the county, and free to change carriers or quiet at will. That's not the gist of it...

A Smart Mentality For Dumb Pipes

 T-Mobile may actually profit where other companies take a loss by eliminating the expensive and risk subsidy/contract trap. In addiion, it will pull head of the pack by recognizing what it is, and being aware of what it is not. T-Mobile, like the other carriers (they just don't know it yet) is a utility. It's a dumb pipe through which Goog;e's customers pump data. It is not a software programmer or development house like Microsoft (so it has finally stopped trying to skin Android), and it is not a transaction company (so it has stopped trying to compete with Google Wallet). It is not a content company (so it does not attempt to compete with Netflix, Amazon or iTunes). Unfortunately, the other carriers haven't realized this yet. As a result, although they are bigger and better funded, the new T-Mobile is posed to change the industry. In recognizing that it is a dumb pipe that should compete on data throughput, volume and quality, it is on the road to creating a new business model of being a smart pipe - just as handset makers moved from dumb phones to smart phones. In order to do that though, they will need a change in mindset.

The Performance Trap: Is LTE Really the next big thing or just a thing carriers use to charge you more?

Verizon, Sprint, Metro PCS (a MVNO reseller) and AT&T all market their 4G LTE services heavily. They also charge accordingly. I purchased a Galaxy 3 LTE phone and ran up a $150 bill within 18 days (that's right, I was just over halfway through the monthly billing cycle), without even trying. I called customer service, and they offered me a $50 credit, but the damage was done. I returned the phone forthwith. T-Mobile offers its HSPDA+ service as 4G, and it is actually quite fast for what is considered an antiquated technology. As excerpted from Fiercewirelss.com and Rootmetrics:

RootMetrics: Average download and upload speeds

 

Click here for the RootMetrics report. Read more: RootMetrics: Average download and upload speeds - FierceWireless http://www.fiercewireless.com/pages/rootmetrics-average-download-and-upload-speeds#ixzz2HbzGDs4h 

To the average user, T-Mobile's speeds will barely noticeable in terms of difference from AT&T. Uploads may be noticeably slower, though. Verizon seems to blow them both out of the water, but there is this real life consideration of cost  real life perofrmance issues that comes into question. With that, the equation changes considerably. The battery life on T-Mobile's HSPDA+ is practically twice that off the same devices running LTE. Until better tech is released, LTE is not a valid all day, battery operated solution IMO. Then there's the issue of cost. Uh Oh!!!!...

Price vs. Performance

Let's look at the monthly cash flows.... Yes! You actually SAVE $5,500 per bi-annual cell phone contract. Read carefully and thank me later... Click to enlarge...

image006 copy copy

I will hold an interactive video chat on this topic at approximately 9:45 am, Friday the 11th in the Valuable Knowledge Community on Google+. I welcome all to attend.

Who ultimately benefits? 

First, you, the consumer. Thsi competition is very good. The second beneficiary also happens to be the one that started this mess in the first place, Google! You see, Google is a data company, and data companies need bandwidth. The more cheap bandwidth you have access to, the more data you will be prompted to move, access, save, search for, request and engage with. The cheaper the hardware, the more hardware you will use. The more advanced the hardware, the more you will do with it. "Do what", you ask? Do data! Do Google! This is what Android is truly all about. This is why its free! This is why Google is poised to take over the (data) world. All of those armchair pundits and silly sell side guys who constantly quip about Google not making money on Android sound similar to those who scream, "But that damn fox is not making a dime on the free trips the chicken taxi is making to the chicken coops!" "'Hens R Us' makes more fare on transporting those chickens to the fox hole than Mr. Fox does!" Yeah! Think about it for a few seconds. That's all it takes in terms of critical thought to comprehend the Google business model. Yes, sometimes it is hard to see that forest with all of the tree bark in the way...

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.

A couple of months ago I posted Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business, wherein I shared the opinions of a social media expert extolling the virtues of Google's newest social media thingy, Google Plus Communities. I created a sample community that I will use as an interactive research distribution and learning platform and started playing with some of the features. I can sum it up in less than a sentence. Facebook is in some very serious trouble! What Google has done was to create an extremely rich, extremely interactive, highly social multimedia publishing and sharing platform accessible from any connected device. It can broadcast video/audio/apps/presentations live and automatically post both the live stream and an automated archive on its ubiquitous YouTube site.

I started drawing traffic and comments within 4 minutes of starting my impromptu test of the platform sitting in my car after dropping my daughter off from school, the very same car seat that I'm sitting at typing this post ten minutes later. One can simply imagine what corporates can do with a small budget, a studio and some real determination. Click here to view the post on Google+ complete with screen scrapes of my client's Apple profit margin models, video and sharing. The auto-generated YouTube video is below.

Note: I will be hosting a more organized (as opposed to this impromptu, informal and disorganized) Google+ Hangout at 9:30 AM tomorrow (Friday) morning. I invite all to come by, participate, and assist me in picking apart Apple's margins, and potentially Facebook and Google, time permitting. Click here to join the learning community and my Circle.

The pertinent points made in Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business are even more salient now. For instance, for Facebook, subscriber growth is an issue...

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These facts should not have been a surprise, and blog subscribers were made aware nearly a 2 years ago, as excerpted from our 2nd most recent forensic analysis.

FB IPO Analysis Valuation Note Page 04FB IPO Analysis Valuation Note Page 04

Now, Facebook can afford a drop in subscriber growth if it can monetize its current base without a material amount of attrition. This appears to be the crux of the massive spike in its share price. 

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Now, those who are bidding up the FB share price should be cognizant of the level and quality of competition that the company faces. Most importantly, Google offers a superior version of much of what Facebook offers through its Groups apps, for free (Facebook charges good money). Ask Google's other competitors how easy it is to compete with a free product, particularly a free product that is better. Back to the excerpt:

Google, with the introduction of Google+ communities, has essentially matched or surpassed every level of functionality available on Facebook for a Business to develop its brand, and attract a growing number of followers to its audience. The additional features of SEO, Authority, and Trust associated with a Google+ presence is a difficult thing to pass up, and I predict that the steady stream of Businesses building a Brand Presence on Google+ will soon, with the addition of Google+ Communities will soon become a flood. 

• • Because Facebook has no public search engine, all content is confined within its forums. Facebook will not be able anytime soon to emulate what Google has done with SEO, Authorship or even Hangouts.  You see, the video performance of Hangouts cannot be duplicated without an associated fiber-network between datacenters like those Google has built. 
  • Google+ users connect through this network, away from all of the latency adding routers, switches, repeaters that connect together the rest of the internet. Creating desktop video conferencing for up to 10, or (15 users with a paid Google Apps account) is basically impossible given today’s video compression standards.  Google has promised HD Hangouts in the not too distant future.  I would expect to see those first along Google’s Fiber rollout for users in Kansas City, MO. 

Whew! That's a lot of info to digest. I apologize for excerpting so much of JC's content, but he had so much of relevance to contribute I had to. This is not all of it, by a long shot, so I again urge you to read the original SocialMedia Today article. The obvious question is, "Does he actually make a valid point?" BoomBustBloggers as well as FB and Google investors really need to know. Even though Facebook Does The Reverse Gravity Thing, Defies Logic, I still had to quip  - Hey Muppets, Only Another 100% Climb In Share Price To Go Before You Break Even With MS/GS/FB Investment Advice. 

By effectively combining search with social media (which Google is doing) Google can convert Plus into a push versus pull scenario. Now for the most important point: Google Plus has just been launched, and it is now just launching new aspects of the platform. All of these platform aspects from Google are absolutely free. If you factor in the cost of paid advertising on LinkedIn, Twitter, or Facebook and cost per page visit, Google Plus shoots way up to the top. WAAAAYYYYYYY UPPPP!!!! Try ti for yourself. Divide the cost of advertising on these platforms plus the cost of content creation and management by the net visitor or engagment session or purchase (or however you measure success) and you will find Google Plus to end up at the top of the list - and that is despite its highly nascent state! Imagine what happens once Google actually gets the ball rolling!!!

This is going to be a problem for all of those social media sites whose business models are predicated on ad revenue. How can you charge for something when your competitor gives the same thing away (arguably on a better platform) for free? This is the question of doom that proved to be the death of the classifieds industry, soon the news industry as we know it, and the smartphone OS industry (ask RIMM if I know what I'm taking about BoomBustBlog Research Performs a RIM Job!, or even Apple Deconstructing The Most Hated Trade Of The Decade, The w 375% BoomBustBlog Apple Call!! and Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All).

Google is able to disintermediate these industries through a process known as cost shifting - basically offering a competitors cash cow product for free to the end user by shifting the cost of making and delivering said product to a natural producer who must incur said costs anyway, thereby totally disrupting the business models and crushing the margins of the established status quo. With the newness of Facebook et. al., it may be hard for old timers to consider them status quo, but in Internet Time, Facebook is old school and faces disintermediation through cost shifting if they don't figure something out, and figure it out fast! 

Here I break down Google Cost Shifting on the Max Keiser (who, after being broadcast on China TV, may very well be the most seen independent newscaster in the world) Show

Here's where I broke it down on Capital Account

I also happened to do the same on the Max Kesier show...

I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below...

Additional Facebook analysis, valuation and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Double your money by shorting the Street's advice! Once Again!

How the Facebook story got started...

Facebook started its institutional investment life as a very popular, very well known company. Goldman took this story (private) stock and went bananas with it, as meticulously illustrated in the following blog posts:

1. 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!
2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!

I issued private research to my subscribers while publicly warning that Facebook at, or anywhere near, its IPO price was a blatant bald faced SCAM & RIPOFF!!!

1. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
2. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

As the actual IPO arrived, JP Morgan, Morgan Stanley, Goldman Sachs, etc. piled on the Bullshit, basically espousing how great an investment this was at $38, screaming that this was a once in a lifetime opportunity. Basically, they took the opposite stance of yours truly. And how did that worked out??? BoomBustBlog Challenges Face Ripping Facebook Share Peddlers That Left Muppets Faceless And Nearly 50% Poorer After IPO.

Here is a full year of free blog posts and paid research material warning that ANYBODY following the lead of Goldman, Morgan Stanley and JP Morgan on the Facebook offering would get their Face(book)s RIPPED!!! Could you imagine me on a reality TV show based on this stuff??? Well, it's coming...

1. 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!
2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly
8. On Top Of The 2x-10x Return Had Off Of BoomBustBlog Facebook Research, Our Models Show How Much More Is Available...
9. Is Time For Facebook Investors To Literally Face the Book (Value)?
10. Facebook Bubble Blowing Justification Exercises Commence Today
11. Facebook Options Are Now Trading, Or At Least The PUTS Are!
12. Reggie Middleton breaks down "Muppetology," Face Ripping IPO's, and the Chinese Wall!
13. Facebooking The Chinese Wall: How A Blog Has Outperformed Wall Street For 5 Yrs
14. Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?
15. Shorting Federal Facebook Notes Are Not Allowed Today ?
16. As I Promised Last Year, Facebook Is Being Proven To Be Overhyped and Overpriced!

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog Analysis. Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012. I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update, and the latest iteration can be found here FB IPO Analysis & Valuation Note - update with per share valuation 05/21/2012. It is recommended that subscribers (click here to subscribe) also review the original analyses (FB note final 01/11/2011).

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 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...

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A Basic Illustration Of How The Blind Pursuit Of A Debt Funded Diploma Can Lead To Personal & Intellectual Insolvency

The Topic Of Knowledge

Knowledge that vs Knowledge How

In academia, the kind of knowledge usually proffered is propositional knowledge, more colloquially described as "knowledge that." "Knowledge that" or "know that" is distinct and should be discerned from "knowledge how" (know how). The best way to describe this concept is to use simple real life examples. In mathematics, it is commonly known that (hence knowledge that, or know that) 1 +1 = 2, but there is also knowing how to add the numbers one plus one together and understanding what their sum (two) is. 

In physics, we can take this concept even farther. It has been argued to by college age students of knowledge that (who are currently mired in academia) that a physics engineer cannot approach know how without being first well versed in know that. This is a mindset that is the result of today's modern academic group think.

This concept is also easily enough disproved by using a common example known to most of us, and that is riding a bicycle. The theoretical knowledge of the physics involved in maintaining a state of balance on a bicycle (knowledge that, or know that) cannot substitute for the practical knowledge of how to ride (knowledge how, or know how). The importance of understanding how to ride a bike is obvious, established and grounded - at least to those interested in bike riding. There is absolutely no prerequisite of having the theoretical knowledge of the physics involved in maintaining the state of balance of the bicycle to learn to ride the bicycle, nor to ride it proficiently, nor to pass this knowledge on to others. Thus, it is obvious and clear that an engineer does not need to be versed in "know that" to move on to "know how". Any failure to acknowledge the distinction between knowledge that and knowledge how can lead to vicious regresses.

   

In philosophy, an infinite regress in a series of propositions arises if the truth of proposition P₁ requires the support of proposition P₂, the truth of proposition P₂ requires the support of proposition P₃, ... , and the truth of proposition P_n-1 requires the support of proposition P_n and n approaches infinity. This is more commonly known as the circular argument, as explained in Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!

 

A distinction must be made between infinite regresses that are truly "vicious" and those that are comparatively benign. A truly vicious regress is an attempt to solve a problem that by and large re-introduced the initial problem in the (or as the) proposed solution. Examples of this can be found in today's global Ponzi scheme of using more debt to solve the debt dilemma of Greece, thus the ease of my predicting serial re-default. This is not truly a practical (or doable) solution, and as one continues along these lines, the initial problem will recur infinitely and will never be solved. Not all regresses are vicious, however the truly circular argument is. This is the crux behind the article, "How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery" and the reason why the Pan-European sovereign debt crisis is nowhere near being solved (again reference  Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!). Remember, failure to acknowledge the distinction between "know that" and "know how" leads to vicious regresses. With academia being a bastion of "know that" rooted in the rote memorization of facts and information bits, those well versed in know how can literally run circles around those immersed in said schools of thought once it comes to problems solving, value creation and getting things done (or undone) in the real world. 

 

It is the reason why the legion's of ivy league academics failed to foresee following while I clearly articulated the risks and consequences well beforehand: 

• The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?
• The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC.
• The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007): The Commercial Real Estate Crash Cometh, and I know who is leading the way!

I have a rich history in seeing and benefiting from the things that the "know that" crowd cannot perceive. Reference Who is Reggie Middleton? for more about me.

What Is This Really About?

There is a very important and distinct difference between "knowing that" and "knowing how," with the crux of the distinction being the difference between this initiative and that vast swath of modern academia. "Know that" is a function of rote memorization of static information, passed down from the Prussian method of education implemented over 200 years ago and still common use today and "know how" is basically understanding of how to get things done...

"Know how" is what has separated the labor intensive low margin industries of the far east from the Intellectual Property rich industries found in the US, at least until now. After decades of toiling in an antiquated teaching system producing a legions of leveraged "know that" recipients who then seek "know how" in the work force (basically asking employers to pay to learn on the job what they should have learned from school) to pay off or compensate for hundreds of thousands of dollars of tuition bills and debt, the US is finally paying the piper for its lackadaisical approach to real education. Asian companies such as Samsung are actually outperforming their sterling US counterparts such as Apple in both product capability, product quality and even market share. In order to stem this tide, true "know[ledge] how" must become - once again - the aim, goal and accomplishment of the education system, similar to the apprenticeships of old.

 

The basis of doing things and solving real world problems by thinking through them and value creation (making things) by applying a real, true skill. Academia is primarily interested in the first, Reggie Middleton is deeply ensconced in the latter.

 

The next installment will focus on a sampling of individual schools that peddle and push leveraged "know that" to the masses, ranging from the gleaming ivy league towers to the workshop tutoring courses down the street. This pandering of leveraged "know that" is to the dismay of all who relied on the so-called scholars from said schools to actually know what they were talking about in predicting crises, managing assets and conducting policy through said crises, and coming up with solutions for the same. I have already laid my "know[ledge] how" track record for all to see (reference Who is Reggie Middleton?) and it would be interesting to perform an apples to apples comparison to those purveyors of "leveraged know that" to see if this blogger cum entrepreneurial investor is on to something or not. I don't possess a masters degree, not to mention one from the ivy league, yet I feel I have run circles around many, if not the vast majority of those that have. You can view the data and judge for yourself - Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? It's not necessarily the raw intelligence, that has enabled this, but the ensconced approach to learning. 

 

I currently have my analysts working on explicit ROIs for degrees (both cash and levered) from the following schools: Harvard, Yale, Wharton, Princeton, NYU, Capella, University of Pheonix, DeVry, CUNY, SUNY with explicit comparisons to investing borrowed funds in the NASADAQ and S&P 500 over the same time period(s) and interning for free at various institutions who hire from said schools. This installment will also review the business models of said schools and the following installment will illustrate my answer to this mess.

In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is  having a problem with volatile earnings that are probably going to get worse.

Education Co. 1-3-2013

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What makes this truly ironic is that anyone who truly received a real business admin, management or finance education would be able to run these rudimentary calculations and thought processes themselves which would result in the invalidation of the actual degree to which they are seeking...

One of the most popular (although I feel not popular enough, considering the importance of the subject matter) articles of BoomBustBlog 2012 was my pieces on the near uselessness of the US education system - How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery. The accompanying graphic easily encapsulates a material portion of the piece, basically illustrating how the public school system serves as a mass indoctrination machine which has close to nothing in common with true education, knowledge dissemination, creativity or value creation. 

The post secondary and private school systems are simply continuations of the same, but worse yet, charge exorbitant fees for said injustice. Many poor victim either saves up a half lifetime of savings or worse yet goes into insolvency skirting debt to purchase a so-called education (which as described above is nothing of the sort) that is represented buy a piece of paper known as a diploma that is literally not worth the paper it is written on. 

For those who think that I'm exaggerating, assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com:

In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.
Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5

If I'm not mistaken, wages have dropped on a inflation adjusted basis since then, but I digress. Using the figures above you would have just about broken even over an 8 year period, save a few common sense facts.

• Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree.
• Debt service: Oh, yeah! Since you borrowed the money you'd probably would have to pay it back, but since you also have to work and pay rent (you can forget a mortgage at these income levels) you'd be paying back the minimum levels and scraping to do so. You'd better hope and pray you don't live in Manhattan or downtown Brooklyn too!
• Oppurtunity costs: Yes, you could have used those four years and $176,000 to do something else maybe a tad bit more productive.

So, on the fifth year following your freshman orientation, assuming you studies well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000. The $16,000 per year positive cash flow (assuming you didn't need food, shelter, clothing, transportation or anything else) would give you about 12 years or so to pay off the debt and break even. I'm not even goint to run the math on the ROI, so let's just pick something outrageously generous like 8% (remember, this is over a 16 year period).

To wit, let's compare some other basic investments  - that is assuming someone besides your school and your lender actually consider your academic mis-education an actual investment.

The NASDAQ composite returned 98% over the last for years. Dumping the money in the NAZ comp would have brought you close to doubling it - although you would not have had access to all of the funds at once for a lump sum investment, a roughly 50% gain looks likely. Now, you would have gained 4 years of simplistic (as in index watching) experience as compared to your competitor's fancy schmancy 4 year degree, yet you would had nearly a quarter million in cash, as well as roughly $70,000 in equity while he would have had $173,000 in debt, interest payments due immediately and the hope of finding a job with which his trusty diploma would surely help him, right? If you had a small financial business, who would you hire? The fool or the entrepreneurial investor???

Suppose you Interned for free with Apple, Google or Facebook while simply leaving the monies in the bank at .25% interest? You would have had a superior education and only been in the hole for $16,000, as well as having $160,000 in cash to play with. How about starting your own business? Invested in commercial real estae? Scalping Greek bonds post bailout? You see, there are so very few who compare getting a diploma or getting a loan for a diploma with other investments because they are brainwashed to believe this is the way to get ahead in life. It is not! It's the way to get educator entities and banks ahead in life, as you become a debt slave. 

What makes this truly ironic is that anyone who truly received a real business admin, management or finance education would be able to run these rudimentary calculations and thought processes themselves which would result in the invalidation of the actual degree to which they are seeking, alas... I digress...

Why the student loan bubble is worse than the subprime bubble 

Zerohedge has run an interesting series of the student loan bubble in the recent past, hence I will not rehash what has already been done in such exquisite detail. For those who have not been following, this is the case in a nutshell...

Student loan delinquencies break the 20% mark as total student debt tops a trillion dollars, rivaling and likely surpassing the subprime debt debacle.

This is how the Fed described this "anomaly": 

Outstanding student loan debt now stands at $956 billion, an increase of $42 billion since last quarter.  However, of the $42 billion, $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter. As a result, the percent of student loan balances 90+ days delinquent increased to 11 percent this quarter.

oh and this from footnote 2: 

As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.

And more from ZH:Over $120B in student loans currently in default. For private private  institutions lead the way with a 22% default rate.

Today's public school system diploma, post secondary diploma, and for the most part, many if not most graduate degrees and PhDs are a waste of good ink and (relatively) valuable paper. This paper is quite similar to the MBS and sovereign debt paper which I have written so presciently and accurately on over the last 6 years (see Asset securitization crisis and Pan-European Sovereign Debt Crisis). The crises from these essentially depreciating assets stemmed from the piling of excessive debt on top of assets with fictional value. Trust me, I can see these things clearly, as can anyone who takes an objective view. When have we had instances similar to this Student Loan Bubble (or Stubble)? When I made a small fortune shorting...

• The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?
• The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC.
• The fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties [nation's 2nd largest mall owner] in particular (November 2007): The Commercial Real Estate Crash Cometh, and I know who is leading the way!

I can go on for a while (particularly on RE and sovereign debt), but I feel you've got the point. The pattern is inevitable. There is a  true business opportunity here, for many college graduates couldn't earn their way out of a wet paper bag, and many of those that could are squandered by toiling away in a system of derivatives of derivatives based upon synthetic products (think of mortgage CDO cubed traders) which are merely shadows of social constructs, versus the inception, design, production and sales of real, value creating, tangible (as well as intangible) assets, products and services.

My next article on this topic will show how I am positioning myself and others to capitalize on this education bubble burst on both the short side and the long side. In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is  having a problem with volatile earnings that are probably going to get worse.

Education Co. 1-3-2013

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or see my social media stream.

In May Of 2010, I published a series of reader contributions on the cruise line industry as well some proprietary research on a particular company in said industry - Royal Caribbean Cruise Lines. The consistent, globally synchronized flood of money totally distorted market pricing and risk in public equities - thus often distorted practically applicability of hard core fundamental and forensic research. Long story short, 2+2 equalled 4 arithmetically, but as a speculator in the globally liquidity slush bowl that was the playground of the coordinated international central banking cartel, the sum was more like 8. Of course, this meta-math is quite unsustainable. Quite frankly, it was a wonder that it has lasted this long, but sooner or later, math tends to subvert magic, which at the end of the day, is really nothing short of psychological prestidigitation, smoke and mirrors. We have revisited this industry after finding a tad bit more optimism for one of the leading companies than we feel is warranted. That report will be posted for subscribers tomorrow, but for now let's look at how we came to this conclusion through 2 and a half years of observation.

The following is a summary compilation of contributions from readers and some rough spreadsheet work from our analytical team regarding RCL. It has not been put in formal report form, but we feel the contents are worth perusing. The entire document is available to subscribers here: RCL_050910_Reader Contribution. The proprietary research on this company is available to subscribers here: RCL 050510 Release Candidate 05/06/2010. And now, on to a brief of the analytical view of recent history...

Existing qualities for an optimal short candidate:

• ROIC < WACC and decreasing, for many years
• Huge leverage and debt maturities currently with low coupons
• Altman Z score <1
• Industry requires enormous capital to grow the business
• Industry has excess capacity and is adding more anyway
• Huge exposure to the Euro and US consumer and vulnerable to weak macro
• High cost producer
• Weak competitive position with competitors who are lower cost with better balance sheets
• Bullish investor sentiment and valuation above long term averages
• Insiders dumping their stock

RCL Summary: “Slow Motion Train wreck”

Market cap: $7B

Ev: $15.1B

Target holding period> 1.5 years

One must remain cognizant that the holding period suggested was not that of a momentum, nor a day trader.

Current Valuation: EV/EBITDA of 11.6 street estimates, 18 P/E on 2010 EPS.

Shares already sold short: 27M shares

Total float: 130M shares

Stock Downside: real possibility the equity goes to $0 over next 2 years based on Altman Z score and potential that CCL decreases prices to push on RCL’s stressed balance sheet.  Consider the impact sovereign defaults would have on RCL if credit markets froze up in response while RCL attempts to fund $2.6B in debt maturities and $4.4B in ship building commitments over the next 3 years with a vulnerable balance sheet and minimal/zero fcf.

While this has proven to be historically pessimistic, and frankly even a tad bit pessimistic at the outset, the logic behind the funding issues was (and still is sound). The sovereign debt issue is a credit/currency crisis that has been postponed by central bank prestidigitation, with a literal cornucopia of stop gap measures that have prevented currency collapse and postponed several serial defaults but at the price of compounding the over-indebted problem by piling indebted countries with even more debt while crippling revenue production through austerity measures - thus at the same time not only failing to provide a lasting solution but further exacerbating the problem while simultaneously extending it. Reference 

1. Greece Is To Pathogen As Cyprus Is To Contagion 
   

2.  If You Tire Of Hearing Me Say "I Told You So" Re: Greece Default ...

Stock Upside .: A 20% premium on 10 year average EV/EBITDA multiple gets 11.4x.  Then using 10% higher than the already optimistic 2011 street estimates of EBITDA of $1.5B, so RCL generates $1.65 in EBITDA in 2011.  This would imply an ev of ~$18.8B, subtract ~$9B of net debt at that time and get market cap of $9.8B vs. current $7B market cap. Or potential upside of 40% if they blow away optimistic estimates, issue no equity and earn a 20% premium to historical valuation multiples.  Limited takeout risk given industry fundamentals.

Risk/Reward: 2.5x   (100%gain/40%loss)

“90 second Summary” on short RCL equity

A short of RCL equity as a way to express an opinion of a long term shift in US and EU discretionary spending patterns and increasing savings rates.  RCL equity has further downside from being over leveraged coming into a competitive pricing environment in a business with tremendous fixed costs. 

Due to long lead times on ship orders, I believe the cruise operators are portraying an unrealistic future in order to secure future capital.  Nearly every other leisure industry from gaming, theme parks and airlines are all postponing capex and pushing out orders are much as possible yet the cruise line industry (primarily CCL and RCL) are both increasing capacity steadily in 2010 and 2011 after dramatic capacity increases in the past.  Street estimates call for increases in prices and net yields while capacity is added to an industry with decreasing demand.

I prefer shorting RCL to CCL due to a very stressed balance sheet, weak market position, poor relative profitability and increasing likelihood of price competition with largest and dominant competitor. 

Timing: 

Insider sales have been accelerating with a recent flood of open market sales by a wide range of company insiders including the CEO

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Fundamentals and Catalyst

Recently CCL and RCL equity has moved sharply up on talks of price increases.  Given huge inherent leverage in an industry with large fixed costs this is tremendously bullish for the stocks.  Recent talk of price increases but could be marketing just to incent people to book ahead of time since lead times decreased dramatically in 2008-2009.  Not expecting prices to get back to 2008 levels. 

Position Strategy

One could go long CCL to hedge out risk of industry wide rebound and use CCL div to pay RCL short cost.  Could also use put options on WTI to hedge out risk of oil declining.  Short oil not a bad trade in its own right.  One can sell otm puts to help pay for short and help buffer risk. 

5 key points why shorting RCL and the cruise liner industry is attractive

Excess Capacity and aggressively adding more

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Very low asset turnover.

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Simply not generating enough sales on their assets.

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1% change in net yield is .24 for RCL

Over last 10 years capacity has roughly doubled by growing at 8.5% CAGR.  Ended 2008 with over 370k berths on ~300 ships.  Between 2009 and 2012 capacity will increase by another 25% to over 460k berths.  Expecting US gross capacity to grow 3-4% 2009-2012 with Europe gross adds in the 8-9% vs. historical CAGR of 10% over past 10 years.

Cruise lines international association says that global cruise passenger traffic only grew 7.3% CAGR between 1990-2007 and by 5.1% to 13.2M passengers in 2008.  This huge increase in capacity over the last 10 years has been the cause of falling ROIC and decreasing profit margins as supply > demand.  Instead of pulling back on capacity they are adding more!

Increase in global capacity?  8.6% in 2010, 5% in 2011 and 3.6% in 2012, but installed base has increased 50%+ higher than that which existed before the last fleet expansion in 2003. 

Between 2009-2012 CCL expected to spend $9B on 17 new ships, 11 for EU and 6 for NA.  RCL though has 6 ships at a cost of $5B and adding 28% to their capacity.  The 5400 berth Oasis of the Seas and Allure of the Seas will both be the largest cruise ships in the world.  Average cost for both is $225k per berth. 

 In 2010 CCL is growing capacity in 2010 by 8% and 6% in 2011.  RCL by 12.7% in 2010 and 9% in 2011.

The bullish news is that RCL only is going to add 2/3 of a ship per year after 2013?! This industry should be adding NO new ships starting NOW.

Bull case is that new boats will have higher margins and drive more revenue, but it seems logical to me that given the large influx of new boats coming online that the older boats will become less preferable for customers and likely need further discounting  (since discount to get occupancy up to 100%).

More efficient vessels increasing margins while capacity increasing revenue?? Not unless consumer spending rebounds dramatically.

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Weaker US and European consumer

1. Don’t need to tell you that the US and European consumer is facing serious leverage and income issues.  Worth noting that shorter notice of trip planning require more working capital also.
2. This change in spending patterns though would be the last draw as more capacity chases decreasing demand now, pricing will certainly come under pressure.  In this situation the competitor with lower costs and a stronger balance sheet will emerge the victor.

Huge fixed costs creates enormous operating leverage, if pricing decreases, this devastates cash flow and earnings.

1. Cruise liners have tremendous leverage as over 40% of costs are fixed with the rest semi fixed (ie personnel).  20% of revenue from onboard spending, with nearly 100% fixed costs. 
2. RCL and CCl are 75% of the market.  And cruises are priced so they always sail at least 100% occupancy so regardless of pricing they will ensure they fill the boats.   

So, after reviewing this I'm sure many are wondering what went wrong with such a well through out thesis. I will revisit what went wrong and more importantly whether or not the entire thesis is wrong in the next two to three articles.