Reggie Middleton

Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at Veritaseum.com, where we're ushering the P2P Economy.

 

The 20 page preliminary report is ready for download to all paying subscribers. It tells the "truth" about Apple. This report does not contain an updated valuation section just yet. I'm still working on that for it is a bit more involved and complicated than I originally anticipated. Considering how quickly all of the sell side came up with thier updated valuations and marking their historical accuracy to market as compared to mine, one would think the prudent investor would be given pause. 

image078

Click here to subscribe or purchase this update. Paid subscribers click here: File Icon Apple 4Q2013 preliminary update. As we wait for my elfin magicians and presdigitation analysts to finsih up on the updated valuation numbers, I'm quite comfortable in recommending subscribers adhere to the latest set of valuation numbers proffered in the last Apple update. 

Subscribers, download the Q3 2013 valuation reports (click here to subscribe).

The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescienct!

See also:

What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

 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

I’d like to start this report off with an excerpt from the last report, which ironically excerpted the one before that – to wit:

Possibly the biggest indicator of past research being of high quality is the ability to regurgitate it in the future as new research and have said research be considered of value, or better yet of extreme value and high quality. With that being said, I’d like all to realize that Our Q1 Report Said It All – Let’s Revisit How We Started That Report…

“Apple Is In Trouble – Plain & Simple!”

Apple has successfully transformed itself from a portable and desktop computer company to a mobile device company, and managed to do so right at the crux of the mobile computing boom. As such, it has benefitted mightily, briefly becoming the largest and most respected company in the world. Alas, what goes up must eventually come down. The largesse revenues and margins gleaned by Apple brought massive competition, and in the case of Google’s Android, business models specialized in gutting the fat margins which caused Apple to prosper. As a result, margin compression ensued, but very few actually saw a sign of it until it was too late (reference Deconstructing The Most Accurate Apple Analysis Ever).”

This quick traipse down memory lane is quite useful for Apple is now paying for the perceived above average margin displays of its recent past by reaping the extreme margin compression to be seen as it has now full transformed itself into a mobile device company. Again, as quoted from our Q1 report,

“Apple is now paying the piper for its shift into mobile by having its pipeline effectively saturated with mobile products, thus nullifying the margin expansion that the move into mobile products has brought on. Mobile products had higher margins than their desktop/laptop counterparts...

 The entire Apple story can be encapsulated in just two relatively simple charts. The first, found directly below, is profitability. Thus far, only the iPhone has been able to hold some ground but it has slowly been stripped of margin. The iPad business’s profitably is being gouged.

For those who haven’t done so, I strongly recommend that you read the last three Apple research reports. They have been absolutely on the money. Now, on to Apple’s most recent quarter…

Apple Still Has The Business and Financial Press Mesmerized With It’s RDF (Reality Distortion Field)

For some reason when I read management comments and financial statements I seem to see something totally different from Sell Side Analysts and the financial and business press. This is an excerpt from “Business Insider” on Apple’s Q4 earnings results:

Apple's numbers are out, and they're good. 

Revenue, EPS, and iPhone sales are ahead of expectations. iPad sales were a little worse than expected, but not too bad. 

The stock initially tanked after the numbers were out thanks to weaker than expected margin guidance. Apple guided to 36.5%-37.5%, which suggests a flat margin despite a new iPhone. 

On the company's earnings call, it explained why margin was lighter than expected and the stock came roaring back. At last check it was down slightly in after hours trading. 

Apple's margin will be hit by a combination of factors. It is selling new iPads that cost more to make, new laptops, foreign exchange issues, and most importantly, a $900 million sequential increase in deferred revenue thanks to all the software it is giving away with iOS and Macs. 

On the earnings call, Gene Munster of Piper Jaffray said the real margin would have been closer to 38.5%, and Apple basically confirmed it. This sent the stock climbing. 
Read more: http://www.businessinsider.com/apple-q4-earnings-2013-10#ixzz2jDN1vWa4

Let’s parse this piece by piece.

“Revenue, EPS, and iPhone sales are ahead of expectations.”

Three and a half years ago I released analysis that puts this myth to rest. Apple is one of the most accomplished of sandbagging management. Paying subscribers, reference Apple Earnings Guidance Analysis 08/12/2010

apple sandbaging1apple sandbaging3

 

iPad sales were a little worse than expected, but not too bad. “

I wonder how one defines “not too bad”…

ipad sales miserable and getting worse

 

“Apple guided to 36.5%-37.5%, which suggests a flat margin despite a new iPhone. “

I've warned, and warned, and warned....

Apple guided to 36.5%-37.5%, which suggests a flat margin despite a new iPhone. 

 

Apple hardware costs spiking

 

On the company's earnings call, it explained why margin was lighter than expected and the stock came roaring back. At last check it was down slightly in after hours trading. 

 

Apple's margin will be hit by a combination of factors. It is selling new iPads that cost more to make, new laptops, foreign exchange issues, and most importantly, a $900 million sequential increase in deferred revenue thanks to all the software it is giving away with iOS and Macs. 

 

On the earnings call, Gene Munster of Piper Jaffray said the real margin would have been closer to 38.5%, and Apple basically confirmed it. This sent the stock climbing. 

Apple's margins have been and will be hit harder as I've predicted.  This non-sense about the deferred revenue from giving away software and Gene Munster's "real margin" comments are utter nonsense. Apple's reported margin IS ITS "REAL MARGIN"! The reason it is giving away its core software products for free is to compete with the entry and the threat of Microsoft's Surface 2 tablet that comes bundled with a real, the real, office suite - Microsoft Office. This makes it real deal contender in the enterprise, where Office is not on the de facto standard - it is the standard. It also has to compete with Google's Android who bought Quick Office and is now giving that office suite for free. For those who don't think that makes a difference, what OS do you think took the iPad from 92% market share in 2010 to 32% market share last quarter?

There is a lot more contained in the upcoming (as in a few hours) Apple analysis for subscribers. Apple will have a very active year next year. The reason(s) is contained in the subscriber only report, in explicit detail, to be released in a few hours. I will update this post with links when it is ready for download. Yes, the truth is now for sale, and in Apple's case you can get a month of it for $275.

 

I refer my subscribers to the research documents below for the answers... 

 

Subscribers, download the Q3 2013 valuation reports (click here to subscribe).

 

 

The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescienct!

 

 

See also:

 

What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

 

 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

 

Apple announces after the market close today. For my subscribers, I believe true valuation hovers around my base case scenario from the last Apple update. Of course, after we have crunched the numbers from this quarterly update we will have considerably more empirical data to munch on. As a quick review...  

Apple's major problem is that the vast majority of its profits come from 2 products, both of which are rapidly losing market share and are outclassed by the competition in many different ways. On top of that, the competition is both undercutting on prices and outperforming on tech. That's a bad combination for a company that relies on fat margins to sustain their share price.

iPhone-5-vs-Galaxy-S4-Xperia-Z-Ultra

The mere diversity of the Android universe is a significant threat to Apple's margins. Check this out...

2 40

A water-proof phone must be corny, right?

I know, many will say.. "But, But this is tablet, not a phone!!!" Well, if that's the case, it competes mightily against both the iPad and the iPad mini (the mini hurts Apple's historical margins and the iPad is dropping in both ASP and market share like a rock). We all know what follows rapid market share loss, right?

In early 2010 I warned on Blackberry (then RIMM), with market share loss to Android being the prime determinant... . I put significant data out in the public domain to illustrate my point and put explicit price points out for subscribers, ie. RIM Smart Phone Market Share, RIP? Was I right?

Blackberry market share vs margin correlation analysisBlackberry market share vs margin correlation analysisBlackberry market share vs margin correlation analysis

Sony Xperia Z Ultra Apple Compare

The iPhone and the iPad business franchises are still making money hand over fist, but they are also losing market share and margin - and doing so quickly...

image038image039image048

 The addition of (margin) mini products and iPhone 5Cs simply evidence what is obvious, the existence of products like those below are pressuing Apple and continue to eat at its hegemony...

11 xperia z ultra 271315438590382730

On top of the fact that Apple faces extreme compeition on all fronts, common business sense begs the question, Have We Reached "Peak Premium Smartphone"?

See also:

Is Tim Cook Cooked? Market Share vs Profit Margin, part 2 - Follow What I Do, Not What I Say!

 

  1. Here I go again – Hardware is Dead & Samsung Agrees
  2. When Berries Go Bad: BlackBerry to Slash Workforce by Up to 40% (As Predicted)
  3. Samsung Follows Footsteps Of Apple, HTC, Nokia - Wasn't That Quick?
  4. Looking Through Windows To See The Big Data On Fruit - Or Android Gets 'em Again
  5. iPad Shipments Decline As BoomBustBlog Time Machine Disrupts The Apple Reality Distortion Field Once Again
  6. Apple Bonds Proven To Have A Nasty Taste
  7. Angels, ArchAngels and Data Demons: The Smartphone Battle Is Officially Taken To The Cloud!
  8. Google Has Officially Gone On Record To Confirm Reggie Middleton's "Negative Margin Business Model" Tactics
  9. Blackberries, Apples & Fruit Borne Successitis - The Problem With Excess Profits Is Hubristic Management Tends To Take Eyes Off The Prize!!!
  10. Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In

carrierIQ homepageAbout a month and a half ago, I penned the piece NSA's Greatest Weapon In Surveillance? Outright Ignorance In Tech Consumers. The goal was to attempt to wake up the less than conscious in regards to where and with whom the true threats to privacy and security stem from. Those harping on innovative designs such as Glass as security threats are failing to see the forest due to the massive amount of tree bark in the way. This piece is another attempt at education from my perspective. 

I have been hard on the large US carriers, and for good reason. Barring the smallest (and not by coincidence, the most innovative) of the 4, these guys exemplify the monopolistic behavior that has caused America to fall behind the world on many levels. Basically, from an innovation and financial performance perspective, they're basically deadbeats! Hence, 

One other reason many should be down on the deadbeat carriers is also a very fundamental given, that really shouldn't be given - Privacy! Nearly all of the major carriers use the device that they sold you to snoop on you. US cellular carriers use an app that is basically one of the most widely dispersed spyware apps in this country. It can systematically syphon out location data, keystrokes and other aspects of e-mail and SMS conversations. Don't belive me, this is a quote directly from the vendor of the spyware itself:

Network Operators and device manufacturers determine whether and how they deploy the iQ Agent and what metrics will be gathered and forwarded to the Network Operators.  The iQ Agent receives instructions in the form of a profile, which activates the iQ Agent and defines what available metrics are to be collected and provides instructions on how to pre-process the data prior to uploading. The Embedded iQ Agent is not visible or discoverable by consumers.  Since it is deeply embedded inside the device software, it cannot be deleted by consumers.

In non-nerd, anti-dork English, this says carriers decide what the spyware app and Trojan Horse rips from your device and sends back to the carrier. This spyware/Trojan Horse is purposely hidden and concealed from the owner of the device. As per Wikipedia:

  • Spyware is software that aids in gathering information about a person or organization without their knowledge and that may send such information to another entity without the consumer's consent, or that asserts control over a computer without the consumer's knowledge.
  • Trojan horse, or Trojan, is a hacking program that is a non-self-replicating type of malware which gains privileged access to the operating system while appearing to perform a desirable function but instead drops a malicious payload, often including a backdoor allowing unauthorized access to the target's computer.[1] These backdoors tend to be invisible to average users, but may cause the computer to run slowly.  

 Here's a YouTube video showing the carrier spyware capturing keystrokes, SMS messages, emails, direct browsing activity, user names and passwords (in clear text, unencrypted) and other types of personal information. It also shows how aggressively the spyware is hidden from the enduser, and if found it is virtually impossible to stop or remove without rooting the phone. First a little Wikipedia background on the video's author:

On November 12, 2011, researcher Trevor Eckhart stated in a post on androidsecuritytest.com[23] that Carrier IQ was logging information such as location without notifying users or allowing them to opt-out,[24] and that the information tracked included detailed keystroke logs,[25] potentially violating US federal law.[26] 

On November 16, 2011, Carrier IQ sent Eckhart a cease and desist letter claiming that he was in copyright infringement by posting Carrier IQ training documents on his website and also making "false allegations."[27][28]Eckhart sought and received the backing of user rights advocacy group Electronic Frontier Foundation (EFF).

On November 23, 2011, Carrier IQ backed down and apologized.[29] In the statement of apology, Carrier IQ denied allegations of keystroke logging and other forms of tracking, and offered to work with the EFF.[30]

On November 28, 2011, Eckhart published a YouTube video that demonstrates Carrier IQ software in the act of logging, as plain text, a variety of keystrokes. Included in the demonstration were clear-text captures of passwords to otherwise secure websites, and activities performed when the cellular network was disabled.[31] The video of the demonstration showed Carrier IQ's software processing keystrokes, browser data, and text messages' contents, but there was no indication that the information processed was recorded or transmitted. Carrier IQ responded with the statement, "The metrics and tools we derive are not designed to deliver such information, nor do we have any intention of developing such tools."[32][33] A datasheet for a product called Experience Manager on Carrier IQ's public website clearly states carriers can "Capture a vast array of experience data including screen transitions, button presses, service interactions and anomalies".[34]

If the claims by Eckhart are true, the process of sending usage data is in conflict with Carrier IQ's own privacy policy which states: "When Carrier IQ's products are deployed, data gathering is done in a way where the end user is informed or involved."[35]

According to Wikipedia, IQ Agent (the spyware in question) was first shipped in 2006 on embedded feature phones and has since been implemented on numerous devices and operating systems, including smartphones (Android, RIM,[8] iPhone), USB modems and tablets. It is currently running on over 150 million devices, making it one of the most ubiquitous of spyware packages known to this author.

Here's some more interesting excerpts from said article:

 On December 1, 2011, Carrier IQ issued a "clarification" (reference 1 December 2011: Important Clarification About the Data Received from Mobile Devices) to its November 23 statements: "While a few individuals have identified that there is a great deal of information available to the Carrier IQ software inside the handset, our software does not record, store or transmit the contents of SMS messages, email, photographs, audio or video. For example, we understand whether an SMS was sent accurately, but do not record or transmit the content of the SMS. We know which applications are draining your battery, but do not capture the screen... As a condition of its contracts with operators, Carrier IQ operates exclusively within that framework and under the laws of the applicable jurisdiction. The data we gather is transmitted over an encrypted channel and secured within our customers’ networks or in our audited and customer-approved facilities... Carrier IQ acts as an agent for the operators. Each implementation is different and the diagnostic information actually gathered is determined by our customers – the mobile operators. Carrier IQ does not gather any other data from devices. Carrier IQ is the consumer advocate to the mobile operator, explaining what works and what does not work. Three of the main complaints we hear from mobile device users are (1) dropped calls, (2) poor customer service, and (3) having to constantly recharge the device. Our software allows operators to figure out why problems are occurring, why calls are dropped, and how to extend the life of the battery. When a user calls to complain about a problem, our software helps operators’ customer service to more quickly identify the specific issue with the phone."[39]

There has been debate whether Carrier IQ software actually sends the collected data in real time or if it is stored on the phone and only gets read out later. The company clearly states on its web page that its software is able to provide real-time data: "Carrier IQ’s Mobile Service Intelligence solution eliminates guesswork by automatically providing accurate, real-timedata direct from the source – your customers' handsets." (emphasis added).[40]

 

Of course, on the same page I got there clarification (1 December 2011: Important Clarification About the Data Received from Mobile Devicesfrom, you can also find this press release: 19 October 2011: Nielsen and Carrier IQ Form Global Alliance to Measure Mobile Service Quality. The authors at Wikipedia picked this up as well, to wit:

Although the phone manufacturers and carriers by and large say the software is strictly used to monitor its phone systems and not to be used by third parties, a press release on October 19, 2011 touted a partnership with Nielsen Company. The press release said, "Together, they will deliver critical insights into the consumer experience of mobile phone and tablet users worldwide, which adhere to Nielsen’s measurement science and privacy standards. This alliance will leverage Carrier IQ's technology platform to gather actionable intelligence on the performance of mobile devices and networks."[48]

Long story, short (as if it isn't already too late for that), instead of worrying about new Glasses taking a picture of you walking down the street (after 40 other cameras just did the same thing), you should be more focused on all of the info stored (against your will) and ripped from your cellular handset. Even if you were to give ALL of the carriers, and ALL of these spyware companies the benefit of the doubt, the way THIS Trojan horse is put together (client server relationship with complete push/pull capabilities), all the NSA has to do is flip a switch and the'll know what flavor 'snuff great grandma likes to chew! 

Consider yourself warned! I doubt very seriously if this revolution will be televised (or even streamed from Netflix!).

It took me nearly an hour to get this stuff off of my device, and even more time to lock it down. Those who are interested in having this institutional spyware removed from their phones for a fee should contact support [at] boombustblog [dot] com. My son is starting a service that will do it for you, but you will void your warranty as a result of seeking said privacy. Of course, anyone who purchased insurance should be covered anyway, but always read the fine print.

Despite all of this I still believe Tech Is Far And Large The Biggest Thing This Millennium - Lehman, EU Crisis Included. I am actively looking to servce on the boards of tech companies.  Security companies in the mobile space currently have my eye, but I'm looking to advise and serve on the boards of any company in the mobile computing space. For those who don't know me, reference "Who is Reggie Middleton?".

I'm going to take this time to demonstrate what I consider excellence in forensic and fundamental analysis. As most know by now, Google blew out the sell side analysts forecasts last Thursday to surge 18%+ to $1,011 per share. They beat on both the top and bottom line even as a major shift to mobile with its lower cost per clicks scared most analysts into forgoing the power of the Google engine. Well, my subscribers knew better. Reference Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?:

Google has almost consistently outgrown the adoption rate of web advertising. What does this mean? Well, it means that although Web advertising is getting bigger and more popular as a slice of the total advertising pie, Google is getting even bigger and more dominant in the space – not less. Google is beating competition back even as the market grows! 

Google ad growthGoogle ad growth


That's right! I easily informed all that Google is growing its ad business faster the market is growing, hence Google can outrun margin compression, and it has - reference Google Shares Jump To All-Time High On Q3 Earnings Forbes‎: 


Despite concerns over declining ad prices, Google GOOG +0.49% beat expectations in thethird quarter in both profits and revenues.

The search giant earned a profit before certain costs such as stock compensation of $10.74 a share on a 12% rise in revenues, to $14.89 billion. Net income was nearly $3 billion, or $8.75 a share.

Google’s shares were rising fast, by more than 6%, in extended trading immediately after the earnings announcement. The stock had fallen about 1%, to $889, in today’s trading.

Analysts had expected earnings before certain costs such as stock compensation to rise 15% from a year ago, to $10.35 a share. Net revenues were expected to rise 5%, to $11.9 billion (gross revenues of $14.8 billion), a big slowdown from even a quarter ago.

Ad prices, measured by cost per click, fell 8% from a year ago and 4% from the last quarter. In the second quarter, prices had fallen 6%, so if anything, the price declines are rising. Paid clicks rose 26% from a year ago and 8% from the second quarter.

The bottom line is that while ad prices continue to decline, that decline is offset considerably by more people clicking on the ads. “Clicks were up much more significantly than we expected,” Roger Barnette, president of search marketing firm IgnitionOne, said in an interview. However, 12% revenue growth is down yet again, the fourth straight quarter of declining sales, which were up 31% as recently as the first quarter.

There is much, much more to this story, though. My valuation numbers from last quarter have not changed much, but my foresight into the future has grown demonstrably, and I will be putting opinion out and investment opportunities accordingly over the next week - for both public and private equity investors. In the meantime, my paying subscribers should review the following valuation notes - as appropriate.

To demonstrate the level of foresight of BoomBustblog research, I present below is a 5 page excerpt of the 69 page Google forensic analysis that I released to professional and institutional subscribers three years ago. 

Google Final Report Sep 29 Page 01

Google Final Report Sep 29 Page 02Google Final Report Sep 29 Page 03Google Final Report Sep 29 Page 04Google Final Report Sep 29 Page 05Google Final Report Sep 29 Page 06Google Final Report Sep 29 Page 07

hese commands take even more precedent when viewed in context of Google's biggest launch of the year, Glass....

Google is in the final phases of launching a product, a product that is to personal productivity as the smart phone was to computing. The company is up about 10% since that video about a month and change ago...

From the latest quarterly valuation update for BoomBustBlog subscribers (click here to subscribe): 

BoomBustBlog releases its updated valuation on Google Inc. in the 2nd quarter of this year. The stock has registered a +47% return since our last valuation update in March 2012.

Google continues to play a dominant-leader role in the online advertisement and search market. Its market share in online advertisement has been consistently growing not only in the US, but also in the other geographies. Besides being a leader in the online advertisement market, the company has been continuously taking initiatives to broaden its product and service offering. The last year has seen a number of (now) well-known products.

The continuous endeavor to diversify product and services through sustained efforts in research & development forms an important component of our valuation. While we expect that the company will continue to grow its revenue off its leading space in the advertisement and search market, its ability to diversify its future revenue in different streams is a key to the current valuation. We therefore expect its revenue to grow along a more diversified route. This statement requires some explanation, for most still don’t seem to understand the Google business model. Google monetizes the vast majority of its initiatives through ad revenue. This causes many to label Google’s various ventures as a failure, due to being misled by cost shifting. Google cost shifts through a myriad of products, disrupting entire industries, then monetizes the results through “Ad Revenue”. Thus, looking for direct revenue streams from Android is fruitless in comparison to searching for strength in ad revenue bolstered by Android.

So how do I know if my thesis on this revenue diversification is on point. I instruct all to simply look at...

Google’s ‘other’ revenue

The nondescript "Other" revenue line... 

•“Other” revenue in 2009: $762 million, or 3.2% of $23.65 billion in total revenue

•“Other” revenue in 2010: $1.09 billion, or 3.7% of $29.32 billion in total revenue

•“Other” revenue in 2011: $1.37 billion, or 3.6% of $37.9 billion in total revenue

•“Other” revenue in 2012: $2.35 billion, or 4.7% of $50.18 billion in total revenue

The 2012 numbers are not inclusive of the Motorola Mobility operations. The Motorola revenue was approximately $4.14 billion on top of the other “other” revenue. For those who are not paying attention, Google's non-advertising revenue was $6.49 billion last year — or 12.9% of total revenue and growing like a weed!!!

How fast is the growth acceleration in the "Other" category? Q3 “other” revenue grew 85% compared with the year-ago period to $1.23 billion. That means that Google nearly doubled this revenue from last year, or put another way it's half of the entire total in calendar 2012 - made in just one quarter. If one were to look at the growth from a longer historical perspective, 2 years ago the “other” revenue total for third quarter 2011 was $385 million. That means that Google has produce MORE than 3x the revenue it did two years ago! Wait until Glass is released!

Expect the sell side to finally catch on to this, and when they do, expect valuation models to change accordingly.

IMG 34530563165874

Four months ago I posted the self explanatory piece aptly titlted "Bernanke's Bluffing Because A True QE Pullback Will Cause Fundamentals To Reassert In Banking Sector". In it I stated the obvious... 

Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down???

Today, ZH reports:

Just out from Fed "hawk" Dick Fisher:

    • FISHER: FISCAL SHENANIGANS HAVE `SWAMPED' QE TAPER PROSPECTS
    • FISHER: HARD TO NOW ARGUE TO CHANGE COURSE OF MONETARY POLICY
    • FISHER HAS FAVORED TAPERING FED MONTHLY BOND PURCHASES
    • U.S. FED'S FISHER REPEATS BEST TO 'STAY THE COURSE' ON BOND BUYING AT OCTOBER FOMC MEETING

For anyone who is surprised by this, don't worry... I have this levered deal to by this Bridge in Brooklyn, real cheap too, near zero percent interest! 

 

I like Professor Shiller and respect his work. Really, I do, but... Massive bubbles, the sort of the proportion of the 2008 crisis, are nigh impossible to miss if you can add single digits successfully and are able to keep your eyes open for a few minutes at a time. Yes, I truly do feel its that simple. I saw the property bubble over a year in advance, cashed out and came back in shorting - all for a very profitable round trip. Was I a genius soothsayer? Well, maybe in my own mind, but the reality of the situation is I was simply paying attention. Let's recap:

  1. The housing market crash in the spring of 2006 and publicly in September of 2007:Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?
  2. Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 (not a single sell side analyst that we know of made mention of this very material point in the industry): Lennar, Voodoo Accounting & Other Things of Mystery and Myth!
  3. 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?

We all know what happened after this part. Well, 5 years later, before we even ran off the effects of the last crash, things are looking bubblicious again and again very few are facing facts. Reuters/CNBC reports "Nobel Prize Winner Says Housing Market Looking A Little Bubbly":

Robert Shiller, who shared the 8 million Swedish crown ($1.25 million) prize with fellow laureates Eugene Fama and Lars Peter Hansen, said the U.S. Federal Reserve's economic stimulus and growing market speculation were creating a "bubbly" property boom.

You think so?!

The Royal Swedish Academy of Sciences lauded the economists' research on the prices of stocks, bonds and other assets, saying "mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy."

This was the case in the collapse of the U.S. housing market, which helped trigger the 2008-2009 global financial crisis. Markets are at risk of committing the same error now, Shiller told Reuters after learning he had won the Nobel prize.

"This financial crisis that we've been going through in the last five years has been one that seems to reveal the failure to understand price movements," Shiller said.

Bubbles are created when investors fail to recognize when rising asset prices become detached from underlying fundamentals.

Shiller and other economists warn that prices in some markets have risen too far, too fast due to the Fed's ultra-easy monetary policy. The benchmark U.S. Standard & Poor's 500 index hit a record in September, though it is generally not considered overvalued based on expectations for corporate earnings results or economic growth.

Shiller's work led him to suggest in 2005 that the U.S. housing market might be overheating. He helped create a closely watched gauge of housing prices, the S&P Case/Shiller Index.

In June this year, he pointed to a potential new housing bubble in some of America's largest cities. 

"It is up 12 percent in the last year. This is a very rapid price increase right now, and I believe that it is accelerated somewhat by the Fed's policy," he said.

China, Brazil, India, Australia, Norway and Belgium, among other countries, were witnessing similar price rises. "There are so many countries that are looking bubbly," he said.

The Fed has held U.S. interest rates near zero since late 2008 and almost quadrupled its balance sheet to around $3.7 trillion through a campaign of bond buying, or quantitative easing, to hold down long term borrowing costs.

Bloomberg TV & Reggie Middleton on the Flawed Case Shiller Index: "That's what they said in Japan about 12 years ago, look where they are now!"

Previous opinions on the topic...

Is There A Bubble In The Canadian Condo Market? We Drill Down Into The Facts To Find Out

The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales....

20130406 FBC371

Bernanke's Bluffing Because A True QE Pullback Will Cause Fundamentals To Reassert In Banking Sector

A little over two years ago I queried "Is Another Banking Crisis Inevitable?". This post attracted the attention of certain ING executives who apparently were asking themsevles the same question. I was invited as the keynote speaker at their valuation conference in Amsterdam wherein I dropped the negative reality bomb! Interest rates were GUARANTEED to spike and when they do, those banks with fictitious bank sheet values and business models predicated upon credit bubble metrics were GUARANTEED to start collapsing. 

It's not just the European banks either. In 2009 I queried "Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?". Then there's real esate in both the US... CNBC's Fast Money Discussing Hopium in Real Estate...

 

hat visual relationship is corroborated by running the statistical correlations...

Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

 

Crain's New York illustrating Reggie's BoomBustBlog and the followup article in Crains illustrating his accuracy in calling real estate and the European debt debacle,"

“His work is so detailed, so accurate, it's among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton's research.

20131009 162741 271 x

Before I get started, I just want everyone to know that I always declared that There's Something Fishy at the House of Morgan (Wednesday, 27 April 2011). Here are a few historical graphics to bring you up to speed to what should now be painfully obvious, re: JPM!

I have warned of this event. JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011.

Traditional banking revenues: manifest destiny as forwarned - Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks

Okay, now back to today's news...

JP Morgan reported this morning and we got more of the same, simply that much harder to ignore. On Thursday, 06 January 2011 I posted "As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies". Today Bloomberg reported JPMorgan’s Dimon Posts First Loss on $7.2 Billion Legal Cost to mounting litigation and regulatory probes. No surprises here. We saw it coming two years ago and warned accordingly. As excerpted:

The third-quarter loss was $380 million, or 17 cents a share, compared with a profit of $5.71 billion, or $1.40, a year earlier, the New York-based company said today in a statement. Shares of the company rose 2.6 percent at 7:50 a.m. after profit adjusted for one-time items beat analysts’ estimates. 

...The pretax legal charge was $9.2 billion, compared with $684 million a year earlier. Litigation reserves at the end of September were $23 billion, the bank said, adding that “reasonably possible” losses in excess of those reserves were $5.7 billion.

And the (now perennial) kicker...

JPMorgan rose to $53.90 in New York trading from $52.52 at the close yesterday. Earnings adjusted for one-time items were $1.42 a share, exceeding the $1.30 average estimate of 20 analysts surveyed by Bloomberg.

Pray thee tell me, how many times do "one time" items have to occur before they're no longer considered "one time" items???!!! JP Morgan "found" earnings in the form of reserve releases (again), from the press release:

$1.60 billion pretax benefit; $992 million after-tax ($0.26 per share after-tax increase in earnings) from reduced reserves in Consumer & Community Banking

Now, we've seen this movie before haven't we? The following is an excerpte from a post I made TWO YEARS AGO!:

 As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. Time will tell if I am correct, but the trends are still moving in my favor. From Bloomberg:

JPMorgan Chase & Co. and the biggest U.S. banks face billions of dollars in legal costs related to their role in the financial crisis, threatening their profits and the stock price gains they made in 2010, analysts said.

JPMorgan, the second biggest bank by assets, reported $5.2 billion of legal costs in the first nine months of 2009, compared with a gain of $10 million in the same period a year earlier. The costs would rise if the bank reserves for multibillion-dollar lawsuits byLehman Brothers Holdings Inc. and the trustee liquidating Bernard L. Madoff’s firm.

... JPMorgan’s third-quarter net profit of $4.4 billion, up 23 percent from the year earlier, would have been larger if it hadn’t set aside $1.3 billion of pretax income for lawsuits and $1 billion for mortgage repurchases. Banks haven’t yet reported their results for the fourth quarter.

Of course, there are a few tidbits missing from this statement that can add to its accuracy. Let's see... Where did those profits come from? Again, you will find divergence between how BoomBustBlog reports and that of mainstream financial reporting. See JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! Sunday, October 17th, 2010

In a Nutshell, JPM’s quarterly results were downright horrible – as we expected and warned of in our previous quarterly analyses (see notes at bottom of page)…

JP Morgan’s Q3 net revenue declined 11% y/y (-5% q/q) to $24.8bn as investment banking revenue declined 18% y/y (-9% q/q) to $12.6bn from $13.9bn in the previous year and net interest income declined 2% y/y (-2% q/q, off of a combination of ZIRP victimization and a rapidly shrinking asset base and loan book) to $12.5bn versus $12.7bn in the previous year. Non-interest expense increased 7% y/y (-2% q/q) to $14.4bn as compensation expenses to net revenues remained broadly flat (28% vs 27.5%) while non-compensation expenses to net revenues jumped to 33% vs 23% in the corresponding period last year. As a result of “Fraudclosure” we expect this number to skyrocket next quarter. Overall, the efficiency ratio (total expenses-to-net revenues) increased to 60% vs 51% and we expect this ratio to spike next quarter as well as the banking business becomes even more expensive.

Click to enlarge…

However, despite a decline in net revenue and increase in non-interest expenses (both of which appear to be part of an obvious trend), profit before taxes was up 22% y/y as provisions for credit losses were slashed by 60%. JPM decreased its provision for credit losses despite no evidence of a substantial, sustainable improvement in credit metrics (please reference As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves). Provisions have lagged charge-offs for two consecutive quarters in a row.

As a result, banks allowances for loan losses have decreased to 4.9% in Q3 from 5.1% in Q2 and 4.7% in previous year.  Although under provisioning has helped the bank to mask its dearth in profits it has also materially undermined its ability to absorb losses if economic conditions worsen. The Eyles test, a measure of banks ability to absorb losses, has consequently worsened to 1.9% in Q3 from 3.7% in Q2 and 5.9% in Q3 09.

Wait a minute! If Reggie Middleton complained about reserve pulling and legal expenses 1,2 and 3 years ago and was proven right, how are the occurence of these items in 2013 to be considered "One Time" items????

Exactly!

ZeroHedge puts itsuccinctly: 

In short: of the firm's $1.42 in pro forma EPS, a whopping $1.59 was purely from the addback of these two items.

 
 

 As per Bloomberg: IMF says Greece will miss bailout target

The International Monetary Fund published a report predicting that Greece's 2014 budget surplus will fall 0.4 percentage points short of the 1.5 percent gross domestic product mark required by the terms of the country's international bailout. Greece was previously thought to be on track to meet the surplus target, but the forecasts were overoptimistic.

Get the hell outta here! Optimistic! Really? From the IMF???!!! As I channel my post from 2010, aptly titled "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!"

image005.pngimage005.pngimage005.png

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic. image018.pngimage018.pngimage018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

image013.pngimage013.pngimage013.png

... The EU/EC has proven to be no better, and if anything is arguably worse!... If the IMF was wrong, what in the world does that make the EC/EU?

The EC forecasts have been just as bad, if not much, much worse in nearly all of the forecasting scenarios we presented. Hey, if you think tha's bad, try taking a look at what the govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!...

Alas, I digress. Back to the Bloomberg/IMF snippet...

Tax collection is sagging; Greece is still in recession; and privatization is proceeding much slower than planned.


But this was quite evident last year as Greece failed to achieve Primary Balance and was slipping ever so farther away from that rather lofty (at least to most of continental Euope on a real, applied basis) goal. Don't say you didn't know, because I told you so, and on a European broadcaster as well...

And back to our snippet of the day...

The Greek finance ministry immediately responded to the new IMF projection, saying the government would do whatever was necessary to achieve a surplus of 1.5 percent GDP: cut spending, step up tax collection or both.

Oh yeah, that will work just fine. Cut off your legs to reduce your weight and drag so you can run faster. Does anyone in these financial ministries know anything about FiNANCE???!!! 

Further cuts, however, may be politically untenable: The country is already in turmoil over the government's austerity measures. Meanwhile, failure to reach fiscal targets may delay further aid from both the IMF and the euro area. A new Greek crisis is a distinct possibility for next year.

Uhhh. PSSST!!! But, we haven't finsighed the "OLD Greek crisis" yet, you know the one I warned you about in 2010! From my 2010 article for subscribers, Greek Debt Restructuring Analysis - Professional, I excerpt as follows:

In 2012, Der Speigel ran an article stating what I told my subscribers for the two years previous - Greece was in a hole that it simply couldn't crawl out of. From the piece aptly titled "Greece Fulfills Its BoomBustBlog Derived Destiny - Shows This Time Really Isn't All That Different After All!!!":

I believe I was one of the very few to declare Greece a foregone default in February 2010 (I Think It’s Confirmed, Greece Will Be the First Domino to Fall and then with with more specificity a month later As I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!).
By the 2nd quarter of 2010 I was one of the very few to clearly and articulately detail exactly how Greece would default with specific structures in play- What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates. Due to a few institutions who were skeptical, I attempted to make it a bit more real - A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

Well, Greece defaulted according to plan, despite all of the "people in the know" saying otherwise -Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! - from government officials tothe EC and IMF - Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Even after the default, I made clear that this wasn't over for Greece, for the default actually left Greece worse off fundamentally, not better. Go wonder... I know I did, reference the warning from 5 months ago:

This will be exacerbated by a re-default of the Greek debt that was designed to bail out the defaulted Greek debt. Why will this happen? Greece has severe, rigid structural
problems that simply cannot (and will not) be solved by throwing indebted liquidity at it. As a matter of fact, the additional debt simply exacerbates the problem - significantly! This was detailed in the post Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

..Subscribers can download my full thoughts on Greece's sustainability post bailout here - debt restructuring_maturity extension blog - March 2012. Professional and institutional subscribers should feel free to email me in order to receive a copy of the Greek restructuring model used to create these charts and come to these conclusions.

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

Alas, I digress. Back to the der Spegiel article...

According to a preliminary troika report, the additional shortfalls are the result of lower than expected tax revenues due to the country's ongoing recession as well as a
privatization program which has not lived up to expectations. The troika plans to calculate the exact size of the shortfall when it returns to Athens at the beginning of next month.

I'm sorry, but I simply cannot resist. This article was posted on BoomBustBlog in July of 2011 - Greek Asset Sales Fall Short, As We Virtually Guaranteed They Would In Spring 2010.
In it I reviewed how the BoomBustBlog team detailed EXACTLY how bullshit the privatization plan was, in explicit detail - in the spring of 2010. THAT WAS MORE THAN TWO AND A HALF YEARS AGO, PEOPLE!!!
If a blog can have this much foresight, with this much specificity, than what does one make of this so-called troika??? As excerpted:

This is a tragic Greek comedy. Professional/institutional subscribers should reference the Greece Public Finances ProjectionsGreece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb in its entirety.
For those who chose not to subscribe, I am posting excerpts from pages 5 and 6 from said document, don't read this while eating or drinking for fear of spitting up your lunch!

Any subscribers who would have went heavily bearish into these banks when I first commented on the would have done quite well:


Okay, I digress - yet again... With such excessive bullshit, one does tend to get thrown off track. Back to the der Spiegel excerpts...

The news of the potentially greater financing needs comes at a sensitive time for the country. Many in Europe, particularly in Germany, are losing their patience and there has been increased talk of the country leaving the common currency zone. Over the weekend, German Finance Minister Wolfgang Schäuble reiterated his skepticism of additional aid to Greece. "We can't put together yet another program," he said on Saturday, adding that it was irresponsible to "throw money into a bottomless pit."


Well, my friend, if you had that BoomBustBlog subscription, you would have known before you spent that first euro that Greece was a bottomless pit. Let me reiterated what I pasted up top... This situation will simply get worse, considerably worse. I demonstrated in the post The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. And guess what? Anyone who dips new money into Greece now will suffer the EXACT same fate!

As excerpted from Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!

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

image022image022image022

Greece's default will hit an already bank NPA laden Spain quite hard: The Spain Pain Will Not Wane: Continuing the Contagion Saga and ditto with Italy "As We Assured Clients Two Years Ago, Italy's Riding The Broken Promise Express To Restructuring". Once Italy gets hit, the true bank runs will start as socialist France (the so-called half of the EU anchor) loses control of its banking system. Reference "As The French Bank Runs....": 

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

image012

Will Greece Set Off the Pan-European Sovereign Debt Crisis?

About 6 months ago I said "Economic Depression Is The New Success". In said article, I forcast serial European bank runs, to wit:

From the BBC: Iceland's 'tenacity' lifts economy out of crisis

Whisper it - Iceland's economy is on its way back. The frozen island on the edge of the Arctic, which had 10 straight quarters of shrinking GDP, is suddenly on a steady run of seven quarters of growth averaging at 2.5% per annum - something that few European countries can boast. Unemployment has fallen to just below 5% and confidence is returning...

Ready! Set! Bank Run!!!

Cyprus contagion rawCyprus contagion raw

Subscriber downloads below (click here to subscribe):

Well, today Bloomberg reports "Icelanders Run Out of Cash to Repay Foreign Debts: Nordic Credit". Basically, as percieved to be cut off from foreign markets, Icelanders are running out of non-Krona denominated cash to pay off foreign debts. Here's more on the dilemma:

Non-krona debt owed by entities besides the Treasury and the central bank due through 2018 totals about 700 billion kronur ($5.8 billion), the bank said yesterday. The projected current account surpluses over the next five years aren’t estimated to reach even half of that and will equal a shortfall of about 20 percent of gross domestic product.

The nation faces a “repayment risk of foreign debt by private entities in the economy, who don’t have access to foreign financial markets,” Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based central bank, said yesterday in an interview. “We view this as being exacerbated or made worse by the fact that our current account is actually declining.”

Prime Minister Sigmundur David Gunnlaugsson has said Iceland’s foreign exchange shortfall is “a matter of huge concern” as he tries to scale back currency controls in place since 2008. The government’s biggest challenge is to allow capital to flow freely without triggering a krona sell-off that would cause Iceland’s foreign debt to spike and undermine the nation’s economic recovery.


Wait a minute, if the Icelandic debt spikes, what happens to the Icelandic banks banks whose primary government bond (aka "risk free", ahem...) holdings happen to be Icelandic. Here's a hint: The Anatomy of a Europan Bank Run!