Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts, engineers & developers to usher in the era of peer-to-peer capital markets.
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reggie@veritaseum.com
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Sunday, 05 January 2014 11:14
The Future of Money is Here: BoomBust Zero Trust Digital Currency Contracts
Note: New subscriber content available below.
I have created derivatives for Bitcoin that work exclusively on the Bitcoin network. They are capable of literally replacing the role of the large money center and investment banks. YES! This is a big thing. I will hopefully have a limited use beta example of the first product for the viewers of the show to experiment with. These products have been designed as zero trust contracts (meaning it was designed to eliminate the human judgment factor, thereby nearly completely automating the entire transaction). Currently, trust issues that the conventional OTC banking system products incur severely hamper free flowing capital markets. Greed begets inefficiencies. Digital zero trust contracts (as opposed to physical legal contracts) “theoretically” eliminate litigation and court involvement and expensive dispute resolution through means of the legal system. My BoomBust contracts allows anonymous parties to swap exposure in and out of Bitcoin from many widely traded currencies. (USD, EUR, YEN, CNY, etc.).
The state of the capitalist union today is ripe for Bitcoin activity to explode if knowledge of the platform spreads. Just to list a few catalysts:
- The lack of trust in the world’s reserve currency, the USD.
- The financial controls in the world’s most populous nations, India and China.
- The Pan-European sovereign debt crisis
- The confiscation of bank deposits in Cyprus (EU Bank Depositors: Your Mattress Is Starting To Look Awfully Attractive - Bank Risk, Reward & Compensation) and Ireland (As Forewarned, Irish Savers Have Just Been "Cyprus'd", And There's MUCH MORE "Cyprusing" To Come) and eventually anywhere banks are overleveraged and/or undercapitalized.
- The billions of the great “unbanked” of the world, in both 3rd world nations and even in the most developed nations on earth, ex. right here in the US.
- The paltry returns on loans and bank deposits as well as the unsubstantiated bubble returns on risk assets – all stemming from the Fed’s unprecedented 6 year global ZIRP real time experiment. I commented on this back in 2008 (A real life, real time example of the Great Global Macro Experiment)and it’s still running strong.
Possible uses for the BoomBust contracts:
Simple investment/speculation
Those who want to gain exposure to a foreign or digital currency can easily enter into a swap to gain said exposure without actually having to purchase said currency (other than BTC, of course).
Hedging
The swap can be used as a simple hedge for any party that has large exposure to BTC, USD, EUR, etc., such as a retailer with low margins and high volume, ex. Chinese widget manufacturer or smartphone OEM, that accepts bitcoin but wants to hedge out the volatility and market risk. The BoomBust contracts can be layered, levered and/or compounded to make more complex hedges as well.
Capital flight/mobility & Banking System Bail-in protection
Parties who are domiciled in free flowing capital hostile states that have tight capital controls, ex. China, India, and now France with its 75% effective wealth confiscation scheme, etc. that have banned or limited BTC trading by banks and/or individuals can take advantage of the BoomBust contracts to gain multi-currency exposure without explicitly violating the law. Take note that the systems with the tightest capital controls have been the one’s exhibiting the most aggressive stance to bitcoin. Unfortunately, they don’t seem to understand what Bitcoin is and what it can do. I stand to educate the masses. See below…
Cyprus banks closed on a Friday and announced confiscation of assets over the weekend. These BoomBust contracts could have been used to move monetary value outside of the Cyprus banking system assuming the participants had a store of Bitcoin (it is rumored that this is how some of the Russian money was removed over the weekend). Let’s assume a small businessman would like to purchase $1M euro worth of bitcoin, yet is concerned that the BTC volatility may cause more of a loss than the Cypriot capital controls. He buys the BTC then hedges his large BTC position into EUR. He proceeds to do that with a quarter of his monthly cashflows, building up a sizeable, fully hedged position in cyberspace (thus, effectively offshore) and outside of the fragile Cyprus banking system. The Cyprus banks pull the trigger to confiscate funds and the Russian bank depositor has significant funds mobile and ready to deliver anywhere in the internet connected world within minutes, even on a Sunday afternoon.
Another example of dealing with a company with tight capital controls would be India. India has extremely tight capital controls that have (IMHO) hampered its economic progress relative to China, despite having similar populations and the advantage of a large indigenous English speaking population stemming from British occupation (easier to do business with the larger capitalist nations when more of your constituents speaks the native tongue).
India has effectively outlawed trading in bitcoin, but Indians can still participate in the evolution of money by taking advantage of the liberalised remittances scheme of the Central Bank of India, a person can remit up to 75,000 USD offshore annually. These monies can end up in a Bitcoin friendly jurisdiction (amazingly enough, like the US), and be used to purchase BTC hedged, via BoomBust contracts, back into rupees or the currency of choice.
This can also work the other way around, which would actually be quite advantageous to the Indian government and potentially make them rethink the real world practicality of capital controls. Even in a country that has capital controls and fears Bitcoin may threaten its banks, a decentralized near friction free currency exchange would be beneficial solely do to international remittances from expats in foreign workers. A real world example are Indians that I know who lose significant money because of PayPal and Western Union fees (not to mention bank wire fees). Indians can send BoomBust digital contract rupee locked BTC home on a deferred basis. The registered exchange or ATM in India however could only be one-way so that it only accepts BTC from the Indian general public in exchange for rupees and not the other way around.
Spread Arbitrage
On Dec 13th, the EUR/USD exchange rate was roughly .78x, thus if one were to have sold 1 BTC into EUR than purchased USD, a $10.66 spread could have been realized over buying the USD with EUR directly.
Notice the differences in prices throughout the SAME MARKETS, contingent upon exchange.
I am happy to discuss this with institutional and professional subscribers whenever possible.
All paying subscribers (click here to subscribe) can download this introduction to our institutional level report on investing in cryptocurrencies: 
Digital Currencies' Risks, Rewards & Returns - An Into Into Bitcoin Investing For Longer Term Horizon. There will be much more to follow in the upcoming days. Below is the brief summary as how we have computed the following ratios:
Excess Risk Adjusted Return
Excess Risk Adjusted Return is defined as returns over and above the required return on asset based on its risk characteristics. BITCOIN being a very volatile asset, the required return of the currency has been computed using the CAPM (Capital Asset Pricing Model) approach. CAPM equation requires a variable known as Return on Market Portfolio (a portfolio comprising of all risky assets, conventional as well as alternative assets like antiques, currencies, private equity investments, etc.). For equity investments, general Market Index shall suffice but in our case the investment is altogether different (Digital Currency) and the conventional market index will be a bad proxy. Best Proxy in our case shall be a diversified Currency Portfolio – comprising all global as well as digital currencies. As such there exists no known proxy/Index consisting all Currencies, We have approximated it by using MSCI – EM Currency Index. The Index comprises a basket of 25 emerging market currencies.
Excess Risk Adjusted Return = (Return on Asset) – (Required Return on asset based on its risk characteristics)
Return on Asset (Ra) = Return on B ITCOIN for different periods like 3M, 6M 12M, etc.
Required Return on Asset = RFR + β * (Rm – Ra)
RFR = Current US I year Treasury Yield
Beta = Covariance of (Returns on Asset & Returns on comparable Index) divided by Variance of (Index Returns)
Rm = Long term return on comparable Index, (in our case which is the Currency Index return comprising 25 Emerging Market currencies)
What's so eery is that now even Ben Bernanke and I actually agree upon something...
Published in
BoomBustBlog
Tuesday, 31 December 2013 22:49
The Future of Money: A Matter of Functions Four, a Medium, a Measure, a Standard, a Store!
So, what is money? According to Wikipedia:
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money.
When currency is stable, money can serve all four of the functions above. Things get trickier when currencies are not stable. If we were all to be honest with ourselves, we'd have to query, "What fiat currency is truly stable over time?".
When unstable currencies or engineered forms of financial capital are brought into play the fourth aspect of defined money (and the least addressed) gains significantly in importance. Here we must differentiate and distinguish between true capital (economic capital) which comprises physical goods that explicitly and directly assist in the production of other goods and services, e.g. hammers for carpenters, paintbrushes for painters, wrenches for plumbers, tooling for factories, etc., and financial capital. Financial capital is funds provided by lenders and/or investors to businesses and entrepeneurs to purchase economic capital (ie.equipment) for producing real goods and services.
To explain why the 4th aspect of money's definition is important, yet often and in my opinion purposely ignored, let's examine the three concepts of capital maintenance in terms of International Financial Reporting Standards (IFRS): (1) Physical capital maintenance (2) Financial capital maintenance in nominal monetary units (3) Financial capital maintenance in units of constant purchasing power.
- Physical (economic) capital - We have covered already.
- Financial capital in monetary units is best described as basic accounting. It's how most financial reporting is done in the states (and in Europe). It fails to take into consideration the constant destruction of value of the fiat currencies, an aspect of the definition of money that is a foundation of money itself!
- Financial capital measured in constant purchasing power - something that effectively never happens. It is the "Real" value of money, adjusted for destructive aspects, ex. inflation, particularly purposeful inflation brought upon by a banking system that attempts to adjust and control the prices of goods and services for its own end (as opposed to the end that will benefit the masses) through the artificial manipulation of the value of the means of exchange, the currency.
Financial capital is provided by lenders for a price, commonly known as interest. This price to attain financial capital is not the only cost though, for the price of the financial capital provided by lenders through things such as debt does not take into account the cost of currency maintenance destruction, or the purposeful manipulation of the currency value by the lender or lending system to which the lender belongs to to further its own means. This is why the prudent may wish to identify a single standard of deferred payment to avoid purposeful manipulation (otherwise known as cheating) by transacting in a denominator of debt that the participant believes to be dropping in value, ie. fiat currency!
Relation to debt-based society
A debt in any form is essentially a deferred payment. The fourth definintion of money, standard of deferred payment, is usually what the debts are denominated in. The value of any and all money – including the most liquid and deep, ex. dollars or euros, or the oldest and revered, ex. gold and silver, or the newest and least understood, Bitcoin and cryptocurrencies – may fluctuate over time via inflation and deflation and often through direct manipulation and unforeseen results that stem from the same. The value of deferred payments (the real level of debt) likewise fluctuates.
Money, as Leading Economists Such As Paul Krugman Appear To Know It, Is Obsolete - There's a New Sheriff In Town
The definitions of money mentioned above are predicated upon the assumption that money must be dumb! What I mean by this is that money was defined in a time when the store of value was an inanimante object designed to represent a simple binary concept of buy or sell, that had no abilities other than to look or appear as if it had the value believingly bestowed upon it by society - or at least two of the participants in a particular transaction. What if money in this digital day and age was smart? What if money was able to do things besides just sit there and be called money?
Here's an example...
Historically, and up until now, deferred payment was/is based on enforceability of debts and rule of law. The rule of law, particularly engagement within the legal system is destructively expensive, time consuming and essentially the antithesis of friction free commerce, ex. capitalism. The rule of law is generally not relied upon when debts are unlikely to be collectable. For illegal transactions, or for low or zero trust transactions, gold or diamonds may be preferred as the medium of exchange and in those circumstaces there is no recourse in case of counterfeit currency (bogus, bank peddeled Mortgage Backed Securities, fake US dollars, etc.) is being used. — and there is rarely any deferral of payment: if there is, it will most likely be stated in dollars - which brings us back to where we started.
What if currency was smart enough to act upon a predetermined set of parameters, even after being released to the payee? What if trust never had to be a factor in negotiation fo payment, even in a negative trust environment? What if the highly ineffecient legal system could be wholly avoided in the risk/reward calculation of a monetary transaction? Would the existence of this possibility, in essence, demand a 5th definition for money - intelligence and/or malleability? You see, the cryptographic digital currencies are smart as compared to the dumb dollar or euro, or yen or yuan! It is this intelligent ability to control money during a transaction and even post transaction, the abilty to instruct money to disburse iteslf only open mutual agreement by all parties present, that appears to elude the prominent MSM economists of today.
Furthermore, dumb money as purely fiat is truly without physical value or utility value as a physical or digital commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for all debts, public and private - including taxes, where in the US, it is the only currency accepted. Laws in place such as these essentially imbue fiat money with the value of any of the goods and services that it may be traded for within the nation that issues it. The fact remains though, the value of fiat money is held in belief and belief only, enforced by the whims of government. With this being the case, there is no true utility argument to be made for fiat currencies, including the USD.
Digital cryptocurrencies such as Bitcoin, however, have an implicit edge on the fiat currencies in that its utility (or use value) is dramatically leveraged as compared to fiat because it comes part and parcel with its own, virtually unassailable transmission system. In essence, this means that if Bitcoin, the USD and the EUR were cars, BTC would be the only one that comes with its own international roads open 24/7 that were able to bypass all of the toll roads and bridges, everywhere there was an Internet connection - not to mention power itself with a virtual fuel that was limitless and had no costs. Now, if one were to think of it, such an aspect is so valuable and useful (as in utilitarian) that not only does it qualify for significant use value, but in the very near future one could wonder how the world ever got along without it. Does this mean that a sixth aspect of the definition of money needs to be added - autonomous transferability!
This is why I say there's a new sheriff in town and the old schoolers whose eyes are not yet open should recognize that the future of money is here!
According to famed economist and NY Times pundit Paul Krugman, "To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value."
I counter these widely believed assumptions with the fact that the USD, the world's reserve currency, has not been a stable store of value. As a matter of fact, from its underpinnings (as described in the BoomBustBlog link below) and throughout its history, the dollar has consistently lost its value over time to inflation. Thus, as per Krugman, the USD is not successful!
As per Wikipedia:
To be widely acceptable, a medium of exchange should have stable purchasing power (Value) and therefore it should possess the following characteristics:
- Value common assets
- Constant utility [I have explained the constant utility of Bitcoin above, a utility which trumps the relatively dumb dollar]
- Low cost of preservation [the cost of preservation is a fraction of that of the dollar, with constant reprinting of physical dollars and coins and the power, machinery and labor required to do so; as well as the recircutlation of those new bills, not to mention the destrcution of the old bills]
- Transportability [This is moderately difficult with large amounts of physical bills, but much easier with the digital manifestation of those physical bills that most institutions deal with. The mere existence of the banks as necessary intermediaries and middlemen add signficant, and in this day and age of P2P technology, unnecessary costs and frictions and rules. This hampers portability significantly - no transfers on weekends and bank holidays, no low margin business models due to artificially high transaction costs, big up Visa, Mastercard and Paypal!)
- Divisibility
- High market value in relation to volume and weight [Bitcoin can't be beat in this regard]
- Recognisability
- Resistance to counterfeiting [A currency based on cryptography, need I say more?!]
As quoted from the Wikpedia link above:
"fiat money is the root cause of the continuum of economic crises, since it leads to the dominance of fraud, corruption, and manipulation precisely because it does not satisfy the criteria for a medium of exchange cited above. Specifically, prevailing fiat money is free float and depending upon its supply market finds or sets a value to it that continues to change as the supply of money is changed with respect to the economy's demand. Increasing free floating money supply with respect to needs of the economy reduces the quantity of the basket of the goods and services to which it is linked by the market and that provides it purchasing power. Thus it is not a unit or standard measure of wealth and its manipulation impedes the market mechanism by that it sets/determine just prices. That leads us to a situation where no value-related economic data is just or reliable.[3][4]"
I will continue this missive in part 2 of the series wherein I will announce my efforts in bringing the beneftis of smart money to light. I'm sure these concepts and products will blow your socks off, even if you are an old school economist! For those who don't follow me, this is who I am. - Who is Reggie Middleton? I believe track record speaks louder than Op-Ed columns, degrees or TV show appearances. Let me know if you agree...
Published in
BoomBustBlog
Monday, 30 December 2013 00:00
Bitcoin Trading & Investment: Risk vs Return Analysis
This article showases my 3rd installment of Bitcoin analysis, explanation and investment opportunities. As a quick recap of the 12 minute video, I reviewed:
Bitcoin's dramatic and near unprecendented run and generation of 6 digit gross returns...
The definition of Alpha and its Bitcoin's historical generation of Alpha over the last 3 years.
Risk, risk vs. reward and the application of said idealogies to true risk adjusted investment returns as compared to fiat currencies...
Arbitrage opportunities available through Bitcoin and Litecoin trading....
A comparison of daily returns between Bitcoin and high beta emerging market currencies...
And last but not least, the innovative, unique and unprecendented finanical products we're looking to launch in the beginning of the new year, starting with digital currency to fiat swaps, avaible from any smartphone, PC or even Google Glass...
chocomalk +Stephen Pettyjohn What you are saying is that the cost/price of any real world currency should not matter either?
".After all it is infinitely divisible"
Isn't that one of the arguments of bitcoin? That it fixes the problem of over printing by limiting the issuance to a finite amount? So we see now the people did not understand monetary theory since issuance is only one factor in the inflation/deflation cycle of circulating currency.
Because of price fluctuation and its divisible nature, there is in effect an infinite amount of bitcoin in circulation. There is a plus side to this but that is not the point. As I stated there are flaws in the system.
And I understand why the energy cost is high but I also understand that any competing currency will outdo Bitcoin by not only matching or exceeding its security but doing so more EFFICIENTLY. Some smart developer will write a more efficient code or better way of managing the overall system and that will pop bitcoin.
Anyway my argument was not to disparage cryptos but to point out the flaws and the flawed logic presented here. If anything bitcoin has shown the worth of the underlying structure that caused the other internet bubble and that is the internet itself. The most valuable and one of the greatest inventions ever.
The internet is the road. Show less Reply •
The raw cost of the network is the barrier to obtaining a large share. For instance, the switch from GPUs to ASICs (Im throwing out FPGAs here because that was a very short phase) reduced the cost per GH from about $270 to $5 with a subsequent reduction in power cost of about 25X. This only made it easier for mining pools like cxe.io to take over larger market shares because they were able to gain an efficiency edge. Increases in efficiency do not yield increases in security. The only thing that blocks people from obtaining a larger mining share is the cost of obtaining that share. The only thing that could "pop" bitcoin at this point is a new form of the dirty pool attack, which is arguably not effective or a method of breaking the 256k1 eliptic coding, which is not used outside of bitcoin (or rather is used infrequently) and thus very little work has been done on this front. Show less Reply •
As I stated, printing(issuance) and deflation(withdrawing from circulation) is only one way this cycle can happen.
Imagine if the dollar went from 1 - 1000 in a year and then tell me why it was a good thing outside of the investment potential.
I didn't say efficiency leads to security but it can, the efficncy will lead to less power consumption.
Sorry but a united front of world governments could halt bitcoins advance. Even the US alone could provide the pressure needed. That would relegate bitcoin to the black market and if they ever decide to stop the war on drugs lol Show less Reply •
As a side note to my last comment, there used to be smaller increments of the dollar than the penny. It is as divisible as bitcoin, it all relies on the system itself. Reply •
Also, it is worth noting that the estimated cost of electricity for the current mining network is 1/30th the estimated hardware cost. As long as hardware is price competitive and will yield a return at current or short term predicted value people will buy it. Arguably Scrypt produces less waste by not leaving giant ASIC doorstops around, but I'm sure in a world where Litecoin or a Scrypt derivative is the prominent currency FPGAs or ASICs will be built and well be back to the same point.
But why are they investing? Because they are using it to transact or because of the profit potential? Hard to answer.
Bottom line here is the argument that it bypasses the system fails if the system it is bypassing decides to get involved. India might not be able to stop people from buying or using it in outside transactions but they can regulate he business end in India itself as can other countries, they just haven't yet.
Sure some may not make it illegal but they will want a cut of the action and if they can't get a cut they will make all effort to stamp it out I assure you.
So in the end will it be better than a central currency? Imagine if right now the entire world just adopted it and odd man out, if you didn't have the sense to get in early you are effectively screwed and poor as punch.
"current value is obviously in jeopardy"
This is really the basis of my entire argument, bitcoin is a great invention outside some flaws I listed and others outside my keen. Miners should receive compensation but the current system makes monopoly and overt profits way to easy.
Reply •
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chocomalk
And obviously you have not looked into the "fuel cost" of Bitcoin, it is actually quite high. Your analogy of a road can be used with the present regulated transfer system.
There is nothing Bitcoin can do that another more efficient(cheaper) CURRENCY can do and that is the point, at these price levels, bitcoin is an investment vehicle not a currency.
Is it a ponzi? I don't know but it could be.
It's a great idea with horrible implementation. Show less Reply •
View all 9 replies Stephen Pettyjohn
+chocomalk India is openly arresting individuals operating exchanges (http://www.dnaindia.com/india/report-first-time-in-the-country-ed-raids-a-bitcoin-seller-in-ahmedabad-1941187) and it's citizens still take part in the currency. In addition, one or two EU countries treat it as a good and tax a massive VAT on it's exchange. All that happens is the population is less likely to transact with it. Considering less than 10% of BTC exchange happens in the US (and even that number is suspect given that a large portion of that exchange is done via brokers to exchanges in Slovenia and Russia) I doubt the US could control the currency significantly. As long as some governments are willing to open their doors (Cyprus, Sweden, Spain, Singapore) then I am relatively certain regulation will not kill the currency. Now, current value is obviously in jeopardy (China's recent regulatory stance) but in terms of long term prospects I think we are relatively safe.
Also, it is worth noting that the estimated cost of electricity for the current mining network is 1/30th the estimated hardware cost. As long as hardware is price competitive and will yield a return at current or short term predicted value people will buy it. Arguably Scrypt produces less waste by not leaving giant ASIC doorstops around, but I'm sure in a world where Litecoin or a Scrypt derivative is the prominent currency FPGAs or ASICs will be built and well be back to the same point.
But why are they investing? Because they are using it to transact or because of the profit potential? Hard to answer.
Bottom line here is the argument that it bypasses the system fails if the system it is bypassing decides to get involved. India might not be able to stop people from buying or using it in outside transactions but they can regulate he business end in India itself as can other countries, they just haven't yet.
Sure some may not make it illegal but they will want a cut of the action and if they can't get a cut they will make all effort to stamp it out I assure you.
So in the end will it be better than a central currency? Imagine if right now the entire world just adopted it and odd man out, if you didn't have the sense to get in early you are effectively screwed and poor as punch.
"current value is obviously in jeopardy"
This is really the basis of my entire argument, bitcoin is a great invention outside some flaws I listed and others outside my keen. Miners should receive compensation but the current system makes monopoly and overt profits way to easy.
Published in
BoomBustBlog
Thursday, 26 December 2013 16:38
Bitcoin for Big Dummies: Why The Digital Currency Is Spiking & Why It's Not A Bubble
2014 is set to be a banner year for BoomBustBlog. As you may have noticed, positings have slowed down to almost nothing. This due to another battle with hackers on the server. As we bounce back, we will take the global macro world by storm. This includes the digital currencies and how they will affect the world as we know it.
I have recorded a brief simple video to explain my perspective on digital currencies. Let it be known to all who don't normally follow me: I'm not a gold bug, I'm not crypto-currency bug, I'm a risk-adjusted return bug! I attempt to see things as they truly are and will call it as I see it. Those of you who instanteously dismiss Bitoin as a bubble or Ponzi scheme are likely doing so without taking the time to fully understand it (it is quite different, I must admit), or read the disruptive change that it's capable of bringing into play - a disruptive change at the level of the Internet and World Wide Web during the the early to late 90's. For an example of this broad based, yet widely followed misunderstanding, reference The "Anti-Economist" Calls Bitcoin the A…
Now, there's no doubt that Bitcoin has been on a tear as of late, after all...
The vast majority of that 6 digit (that's right, "Six" digit) return has occurred within the last year.
The most likely reason stems from media exposure. Please note that I don't think it's due to media exposure, it stems from it. You see, as explained in the short video below, Bitcoin's primary value stems from its inherent ability to truly and absolutely circumvent the gate keepers of monetary value today - the Central and Money Center Banks of the world.
Basically, the gatekeepers of money can now have the locks on their gates picked. The tertiary value is that this new money is "programmable," but more on that later. The more people who realize the value of this new, finite, cryptographic money, the higher the demand pushes the value of the money.
Do I have a point? Well, look at it from obscurity in 2010 to media darling in 2013 - Yes! All 391,288% worth of appreciation!
Stay tuned for more on my take on smart money in the very near future.
Published in
BoomBustBlog
Tuesday, 26 November 2013 14:05
War On Sell Side Wall Street - Apple Edition: To $1,000 & Beyond!
This is a video follow-up to the post I did a couple of weeks ago after the Apple earnings announcement titled "Again, The Sell Side Analysts (Even The Rock Star Analysts) Don't Seem To Understand The Mobile Computing Wars".
Initially, I was going to go the PC (as in politically correct) route and treat Mr. Munster with kids gloves, but we're all adults here and I want everyone to realize that this is not a form of character assassination, a personal or professional attack, libel, slander or even my just being rude. Gene Munster is a professional, and a seemingly intelligent one at that. It's just that he is wrong, dead wrong, and has been wrong for some time. Despite his extreme inaccuracies regarding Apple and its share price, he is the go to guy for the financial press and mainstream media, not to mention the Apple-centric blogosphere for all things Apple investment related - despite his being wrong as hell.
First reference this quick 3 minute video..
Now reference the following graphic illustrating a search on Mr. Munster's Apple price targets...
Click here to subscribe or purchase this update. Paid subscribers click here: 
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).
Apple 3Q2013 Valuation Update - Retail
(Technology)- Apple 3Q2013 Valuation Update - Pro & Institutional
(Technology)
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:
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
Published in
BoomBustBlog
Tuesday, 19 November 2013 11:13
Apple Is Now Losing The Tablet Wars Not Only To Android But Itself As Well
Below are additional observations regarding Apple's most recent earnings announcement. Please pay particular attention to the new video content.
Quick chain of events:
- I explained the business strategy behind the iPad designed to allow Apple to enter the netbook fray without Margin compression it worked!
- The iPad, a raging success, still had lower margins than the cash cow iPhone franchise but still served its purpose in allowing Apple to diversify its revenue streams for over 60 percent of its profits came from a single product - and that's dangerous!
- I warned that Google's Android will quickly start eating Apple's lunch, which was high in margin fat. I was proven correct as Apple's tablet market share (a market that Apple ingeniously reinvented) fell from 92% to 32% in just 3 short years.
Reference:
Sliced Apple Margins For Dinner?
Then go on to BGR.com: History repeats itself: Android tablet shipments blow past iPad
Whether or not people are really using Android tablets, it has become clear thatAndroid tablet shipments are absolutely exploding as Apple’s overall iPad shipments decline.
iPad Shipments Decline As BoomBustBlog Time Machine Disrupts ...Jul 31, 2013
Apple's iPad Is Losing Market Share And Profit Margin As Apple Hits ...Mar 16, 2012
- Samsung emerged as the top Android vendor (again as forecast at BoomBustBlog, reference Deconstructing The Most Accurate Apple Analysis Ever) by offering a wide array of products, many of which offered superior performance to Apple's, due in large part to Android performance enhancements and capabilities.
- Samsung released 7 and 8 inch tablets which sold well. I forecast that tablet sales will continue to dwindle due to the increasing capabilities and screen sizes of cell phones. The performance and comfort of use delta is shrinking quickly.
- Samsung released the Galaxy Note, though panned by tech critics and pundits, was a success in the market.
- Samsung released the Galaxy Note 2 which further defined the segment and was a raging success.
- Google launch its own branded tablet, the Nexus 7, at a cut rate price with leading performance and it was an immediate hit- confirming my thesis on the converging form factor - reference Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!
Apple US sales have completely stalled and growth is coming only from international sales. Those sales will be stymied in part by devices such as the Moto G on the low end and the Oppo Find 5 and N1on the high end - both with a price/performance ratio that can't be touched by a fat margin vendor - Apple or otherwise.
Subscribers, download the Q3 2013 valuation reports (click here to subscribe).
Apple 4Q2013 preliminary update
Apple 3Q2013 Valuation Update - Retail
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The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescient!
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Thursday, 14 November 2013 15:15
The Financial Times Follows Up On Reggie Middleton's Admonitions Of A Canadian Housing Bubble
Two months ago I answered the query, Is There A Bubble In The Canadian Condo Market? for my subscribers. The missive started off like this:
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. The demand for housing overall is slowing down, with sales in the last few months of 2013 falling on y-on-y basis. In most major Canadian markets there is an increase in listings and decrease in sales (even though prices are still somehow rising, which should in and of itself be indicative of a problem).
Well, the Financial Times is now weighing in on the issue... Canada’s housing market teeters precariously
Robert MacFarlane, a long-time crane operator, surveys his empire from the top of one of Toronto’s flashy new apartment buildings. “I can see more than 50 tower cranes,” said Mr MacFarlane, whose bird's-eye photography from the country’s tallest crane has gained him online notoriety as interest in Toronto’s property sector escalates.
These cranes – which can offer clues to bubble-like conditions – emerged in response to lofty demand for condominiums from investors and homebuyers taking advantage of Canada’s ultra-low interest rates.
This is a fact. I've observed this in the bubble markets that I've personally experienced: Miama, NYC, DC - cranes and construction galore. In retrospect it appears virtually impossible for anyone NOT to realize we were in a bubble.
But as home prices rally and construction projects proliferate – particularly in Toronto, Montreal and Vancouver – industry analysts say the country’s property sector is perched precariously at its peak.
David Madani, economist at Capital Economics, believes the nation is on the verge “of what will prove to be a prolonged correction”.
“Canada’s housing market exhibits many of the symptoms that preceded disruptive housing downturns in other developed economies, namely overbuilding, overvaluation and excessive household debt,” he adds.
Mr Madani’s comments chime with a chorus of policy makers, rating agencies and hedge fund managers who have warned of the risks posed by Canada’s overheated housing market.
Alongside Norway and New Zealand, Canada’s overvalued property sector is most vulnerable to a price correction, according to a recent OECD report. It is especially at risk if borrowing costs rise or income growth slows.
And why in the world would borrowing costs rise with all of the world's most powerful central banks pushing #ZIRP4EVA???
In its latest monetary policy report, the Bank of Canada, the nation’s central bank, noted: “The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy.”
The riskiest mortgages are guaranteed by taxpayers through the Canada Mortgage and Housing Corporation, somewhat insulating the financial sector from the sort of meltdown endured by Wall Street in 2007 and 2008. But a collapse in home sales and prices would be a serious blow to consumer spending and the construction industry that employs 7 per cent of Canada’s workforce.
But isn't that a circular argument???
...the flipside of a low interest rate policy designed to buttress the economy has meant that household debt levels have hit record highs as homebuyers stretched themselves to jump into the housing market. That in turn propelled demand and prices.
... Household debt has risen to 163 per cent of disposable income, according to Statistics Canada, while separate data show a quarter of Canadian households spend at least 30 per cent of their income on housing. This is close to the 1996 record when mortgage rates were substantially higher.
On a price-to-rent basis, which measures the profitability of owning a house, Canada’s house prices are more than 60 per cent higher than their long-term average, the OECD says.
... Year-to-date new home sales in the Greater Toronto Area – an area accounting for a fifth of Canada’s home building activity – are down by half from two years ago, according to the Building Industry and Land Development Association.
... Mr Madani forecasts a market correction in home prices over the next few years, predicting a 25 per cent drop.
But those that are bullish on the market point to resilient regional data. October sales of existing homes rose 38 per cent in Vancouver and 19 per cent in Toronto.
“It’s a mistake to think that what happened in the US will happen in Canada,” said Gregory Klump, CREA’s chief economist said.
Yes, because this time it's different!!!
... Mr MacFarlane too has yet to be convinced of an imminent slowdown. “In the past when things have slowed down, there has been a distinct ‘feeling’ from the boots on the ground perspective. I don’t really sense that right now.”
Nothing like that good 'ole empirical forensic analysis to make an investor feel all warm and cozy, right?!
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The Canadian Real Estate Bubble? Featured -Jul 25, 2012 - Below is an email that I recieved from a reader: RIO Canada is one of the biggest reit's in Canada I know some of there management and from
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Thursday, 14 November 2013 14:52
As Predicted, Google Forces Cost Shifting Business Model Down Throat Of Smartphone Market, Disruption Ensues
Google has fired a shot across the bow of the smartphone market, and it quivers in response
Yesterday, Google's Motorola division released the Moto G, a $179 full featured smartphone with a screen resolution and size superior to the $650 iPhone 5S, and an all day battery that bests the iPhone and Samsung Galaxy S series as well. This is a fully functional smartphone that is priced below the cost (as in the cost to build!!!) iPhone 5S and Samsung Galaxies (as in all of them!). Needless to say, this threatens to give Google significant market share in the low and mid-tiers, not to mention full vertical integration (the hardware, software, app ecosystem, cloud and services will belong to Google - leaving only the wireless pipes for it to contend with, and I would not sleep there either [Google Fiber in your diet}).
Google's cost shifting business model allows them to sell this phone below the actual cost of manufacturing and development of many if not all of its competitors. For those not familiar with the concept of cost shifting...
This is how Google did it...
For those who do not remember the importance of market share on margins, let's reminisce on post past...
Looking Through Windows To See The Big Data On Fruit - Or Android Gets 'em Again
In early 2010 I warned on Blackberry (then RIMM), with market share loss to Android being the prime determinant... Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion. 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 analysisBlack
I explained this in detail in the post "Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!". Failure to achieve the network effect effective is tantamount to a failure to be able to control you margins, long term. Of all people to of know this, who do you think preached it most convincingly?
Margin compression was sure to kill Blackberry, even if they did hit their sales numbers, which they didn't and couldn't!!!
Related reading...
The Smallest & Liveliest Of The DeadBeat Carriers Successfully Launched Wireless WMDs
Within two years of getting the mobile computing crown (toppling Apple and insuring that Nokia and Blackberry didn’t stand a chance), Samsung is already prepping to relinquish it. I know, the hoi polloi screams from the common street analyst’s rooftop, incessantly chanting “… but Samsung is dominating handset sales, creating and literally owning categories, and essentially out Appling Apple!”
Well, the reason why I apparently out-maneuver the Street in this space (as in others) is not vastly superior intellect nor a LiPoSilica Oxide powered crystal ball borne from some extraterrestrial technology. It’s actually so much simpler than all of that.
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Subscribers, see also...
- Google Q1 2013 Valuation Note - Retail
(Technology) - Google Q1 2013 Valuation Note - Professional & Instititional
(Technology) - Google Q1 2013 Valuation Note - Professional & Instititional
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Subscribers, download the Q3 2013 valuation reports (click here to subscribe).
- Apple 4Q2013 preliminary update
- Apple 3Q2013 Valuation Update - Retail
(Technology) - Apple 3Q2013 Valuation Update - Pro & Institutional
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The update from two months ago is also of value for those who haven't read it. It turns out that it was quite prescient!
Published in
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Monday, 11 November 2013 14:52
The Oppo N1 vs LG G2, Nokia 1520 & 1020 Pureview Cameras and the Apple 5S
In foillowing up on the photographic capabilities of the flagship device from Oppo, I want to make my followers aware of the following updates. I have taken a few more pictures around town and I'd like to share what I've discovered from this capable device from the Chinese Margin Compressor known as Oppo.
After takng a trip to a local AT&T store...
Now, as you may recall from my post yesterday (A Thorough Look At The Oppo N1's Photographic Capabilities: Low Margin, High OEMs That Can Threaten Apple & Samsung) regarding the N1's dissappointing camera performance I believe this hardware can do better. As you can see above, if the subject is saturated with light the N1 outperforms in terms of realism if not resolution. I mailed the company yesterday (Sunday) early evening and they replied early this morning (remember, the company is based in China, I'm in NYC). This is the reply:
We'll be sending out a firmware update on Nov. 14th (subject to change) and you should see improvements with both the camera and the battery life. Will confirm that date when I can. Thanks for sending in that post!
Maybe I'm a little cynical, but I doubt very seriously I can get a turnaround that fast from Samsung, LG, Apple, Nokia/Microsoft or Apple. I have a problem getting samples of the product sent over. Let this be and example of how hungry and responsice this little manufacturer of high end equipment is. When you raise the bar on performance and drop prices, what does it mean????
On the topic of battery life, the N1 has the biggest battery that I'm aware of in a cell phone. Here's the results of my first day of usage. For those who don't speak Android, I used this phone for 22 and half hours taking photos and videos, VOIP phone calls, surfing the web, etc. and still had 19% battery left. Oppo says there's an update coming out in 3 days that will further extend battery life. How do they achieve such a long lasting battery? A 3,600mAH battery (the largest in the industry) coupled with a CPU chip that is frugal, no LTE (but it does have penta-band HSPA+) and optimized and above all, light, customization to the Android OS.
Regarding the picture below, the phone was plugged into a car charger between 10 to 20 minutes in the middle of the day, and although the cellular radio was on, no SIM chip was installed. Instead I used VOIP while tethered to my other phone throughout the day. Most other sensors and radios were on and I took extensive full resolution pictures with and without the flash.
o
Why am I focusing on the camera so much?
When the first camera appeared on cell phones in Japan in 2000 and shortly thereafter in the states, photography from the phone was a novelty. The pictures were grainy, blurry and very low resolution. It was at this time that the camera manufacturers should have caught on. Alas, like practically any other successful industry, they rested on thier laurels as cell phone and then smart phone manufacturers steadily increased the performance of their devices. Fastforward ten years and these cell phones have all but decimated the once powerhouses in point and shoot photography. Ask Kodak, Olympus, Polariod and Minolta if you doubt me, or reference Put your point-and-shoot in a museum, next-gen phones have finally...
Now, we have the heavy weights of the photography industry - who have all gove digital - and they are exhibiting the same hubris as the smaller point and shoot guys - you know, the guys who are all but out of business. Reference To Save Itself, The DSLR Market Should Look To Smartphones And Revalue Each Press Of The Shutter or reference the WSJ report claiming DSLR camera shipments could fall 9.1 percent by the end of 2013, versus 2012, according to research firm IDC. As you might imagine, DSLR diehards poo poo this notion, but then again so did the executives of the point and shoot industry 5 years ago. Don't worry fellas, I know - "But... But... But... It's different this time!"
From the N1 without the software patch... 
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Subscribers, download the Q3 2013 valuation reports (click here to subscribe).
- Apple 3Q2013 Valuation Update - Retail
(Technology) - Apple 3Q2013 Valuation Update - Pro & Institutional
(Technology)
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:
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
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Saturday, 09 November 2013 22:42
A Thorough Look At The Oppo N1's Photographic Capabilities: Low Margin, High Quality OEMs That Can Threaten Apple & Samsung
In continuing with the "Hardware is Dead" mantra, I bring you a company that I introduced last year as the maker of some of the most beautiful, durable and innovative handsets available. Below is an introductory overview of their latest flagship handset, the N1 from Oppo - a Chinese company that I featured on my blog about a year and a half ago with thier then flagship - the Finder 5. It was the first five inch full HD phone that I was aware of. It was the first phone sporting a 13 MP camera that I knew of. It was sexy, a sandwich of metal and hardened glass. It was also the thinnest smartphone that I knew of at the time. Although a year old, it is still competitive in terms of performance and specs. Unlike the iPhone, it was durable as well. How durable? Check out this demo...
So, if you're a true nerd such as I, you must wonder what the follow-up flagship from this little known company that makes reference quality high end Blu-Ray players is like. Well, rotating 13 MP camera, 3600 mAH battery, BLE remote control, rear mounted touch pad - it's different and an obvious attempt at innovation beyond the simple rectangular slabs that we've grown used to. Of course, not everthing is herbs and roses here, but one thing is for sure - priced below $600 US, it can easily put margin pressure on the big boys if it catches on. I should know, because I pioneered the hypothesis of Southeast Asian companies armed with Android ripping through profit margins of the big boys three years ago when the mere thought of such was blasphemous and I was thought to be inept. Now, if you Google "Apple Samsung margin compression" you get...
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Samsung Follows Footsteps Of Apple, HTC, Nokia - Wasn't That ... Sep 6, 2013 - I've written several articles on this topic, with Samsung, Apple, RIMM, NOK and ... Apple Gears Up To Combat The Margin Compression That...
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Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry ...Mar 7, 2013 - Two and a half years ago I declared in my mobile computing wars series that Google would commoditize the mobi...
Here's a quick video of the unboxing and a comparison to the market leader as well as my personal favorite. There are two technical errors in the video, One, the camera does NOT have OIS (optical image stabilization) which is apparent in low light situations, and two the camera assembly has a 6 element lens array, not 7. This may be minor to most, but the technical geeks among you will notice the snafu.
About the camera...
There's a lot to write about the camera on this phone. Let's start with...
The Good
Let's face it, the iPhone is still probably the most popular phone among the cosmopolitan, metropolitan cutie crowd. They buy it because it's cute, and these girls use the cute iPhone to make a lot of cute "selfies". From grade school, to high school, to undergrad, to college and grad school, to the young adult dating scene, to married with kids, to taking self portrait flics with the grand kids - the front camera on smartphones get worn out by the female cosmo crowd. This is where the N1 stands out. It uses one very high quality camera on a swivel instead of a big/little combination back and front. The results, combined with innovative software, are quite impressive.
The self photography (or selfie) market is bigger than even I thought. I took the N1 to various spots around NYC city and let cute girls esconced in make-up try it out. They loved it. Check this out...
You swivel the camera a full 270 degrees to the from to take a hi-res selfie...
You then invoke the "Make-up" app and choose the desired effect (sexy, elegant, sping freshness, blah, blah, blahhh...). The phone then applies its processing wizardy around your face, eyes, head and mouth. If you click the "fine tuning" option, you can drill down to specific facial parts to custom sculpt your face...
You custom sculpt your facial parts by grabbing and dragging the dots to where you'd like to expand or contract your eyes, mouth and lips...
This is the finished product...
For those non-make up type guys (I profess that I may be one of them) who may not be able to see the difference, this is a split screen comparison...
I believe Oppo may be on to something here...
Then there's the Bad...
I consider the N1 to be a photography-centric phone, and as such I must admit that I was rather dissappointed with the performance of the camera in low light settings and even in broad daylight, particularly when compared to competing high performing shooters such as the LG G2 and the new Nokia phablet (I believe it's the 1520) & the 1020. There was a material amount of noise, graininess and trouble locking on focus. From a company that has put out such high quality product in the recent past, I was really taken aback. So much so that I decided to look into the problem further. In defense of the company, I believe I got one of the very first - if not the first - production models and it may have shipped a tad bit incomplete.
The camera on the Oppo N1 is a 13 Megapixel Sony EXMOR RS Stacked CMOS Sensor unit. This is the exact same sensor found on the Find 5 (above), the Lenovo K900, the Samsung Galaxy S4 and the Galaxy Note 3. It is a 1/3.06″ sensor. Oppo attempts to set it apart from the competition by complementing it with a six element f2.0 aperture lens. According to the marketing material the lens is coated with IR and Blue filters for reduced chromatic aberrations and purple fringing. The innovative part is that whole unit sits on a swivel-type arrangement that can rotate 206 degrees for using the same camera for front-facing as well as rear-facing shots.
Remember investors, it is the higher end cameras on phones that have all but destroyed the point and shoot industry (ie. Minolta>Sony, Samsung, Nikon, Canon, etc.) and is clearly threatening to move up the food chain to higher end prosumer and mirrorless devices. Many may poo - poo this statement and sentiment, but then again so did those consumer point and shoot manufactuers from a few years ago - you know those very same guys whose market is just about subsumed, and it is clear that the smart money will look for photographic innovation from companies who are trying to outrun margin compression. The problem is you will probably not be able to do so unless you have low labor cost structure - as in SE Asia, and even then, the laws of economics will catch up to you - right Samsung? From the Oppo web site...
Cutting Edge Optics
N1 is the first Android smartphone to use six physical lenses, giving you a clearer image while eliminating any distortion. The latest generation stacked CMOS sensor, upgraded type 1/3.06 imaging module and f/2.0 wide aperture lets more light in, so you can take great photos even in dark environments.
Not satisfied with what was available, we partnered with the leading optics companies to tailor make our own image-processing solution for improved white balance, exposure and focus. No matter the lighting condition, the N1 camera captures astonishing clarity and detail.
Reinvented Flash Technology
Like any camera, the N1 is equipped with a flash to light up dark environments. The dual flash design consists of a normal flash for back facing shots and a diffused softer light for when you flip the camera forward. With its brightness tunable via the OPPO N1 camera software, the front facing flash will provide perfect lighting conditions for any front facing shots.
Capture the Essence of Time
With unprecedented hardware support, the N1 supports long exposure photography of up to 8 seconds. Capture more than pictures; capture the pulse of the moment.
Camera Design
Designing a rotating camera was a challenging engineering problem. More than a year of work and over 20 different camera designs ultimately led to the simple brilliance of the OPPO N1. The small camera housing includes more than 10 modules, 50 cables, and 67 components. Every part is structurally reinforced and undergoes anti-static treatment.
So, you must be asking the same question that I asked myself. With all of this fancy schmancy camera tech, how is it that the N1 produced pictures that I wasn't happy with? For one, I believe it's a low level firmware and/or driver issue. That means that the N1 could still quite possible be the best thing since sliced bread, but was shipped (to me, at least) with half-baked software that crippled what looks like excellent hardware. This is a guess, mind you. This is the evidence.
This is the LG G2 pic taken at full resolution with all automatic settings on, the picture has been cropped to fit comfortably on this page.
This is the Oppo N1 pic taken under the same conditions and settings...
There is much more noise in the N1s version, and the more you zoom in and the closer you look the more apparent it is. The N1 underperformed the Note 3's camera and LG G2 (although most cameras do, even the Note 3). The N1 was litereally blown out of the water by the Nokia phablet. I presumed such poor performance from such apparently premium hardware stemmed from over compression and misprocessing of raw data from the sensor. To remedy such I downloaded Camere FV5, an app that allows DSLR level flexibility in configuring your Android smartphone's camera. It allows you to adjust the compression of the JPG file upon saving and to save in a near lossless PNG format. To all of the non-geeks who actually have a life and have no idea of what I'm talking about, this app allows you to take pictures without being tampered with by the OEM enginneers forethoughts on how the picture should be processed once taken. The logis is, if the pics were being overprocessed or compressed too much, this would solve the problem. Alas, even with the lack of compression, subpar results ensued.
I'm going to give Oppo the benefit of the doubt on this one and request they clarify the issue with the camera. If I'm right and the drivers need to be tweaked and/or rewritten, the N1 may very well still be one of the best photographic phones on the market.
My next post on this topic will cover the N1s other features in comparison to its competition, how it pans out in day to day use (there's plenty of other sites who do benchmarks and other tech stuff) and most importantly whether this device or a device like this can make a dent in the US markets and consequently in Apple and Samung's profit margins.
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Reggie Middleton's The Only Investor/Analyst To Publicly & Timely Call To Short Apple At It's All Time High and Go Long Google On CNBC!
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Since the inception of his BoomBustBlog, he has established an outstanding track record, including but not limited to, the call of....
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