Last month I posted updates of my search and studies of distressed European assets stemming from the banking crisis to be had at prime risk adjusted returns, see Preparing Resources To Shop For Distressed Assets As Banks Refuse To Come Clean On Near Fraudulent Reporting  and Which Banks Are We Looking At To Shop For Assets?. Well, a month later, the Economist economist jumps into the fray with the article "Till default do us part, A half-hearted banking union raises more risks than it solves". To wit:

Almost a year ago, as the euro crisis raged, Europe’s leaders boldly pledged a union to break the dangerous link between indebted governments and ailing banking systems, where the troubles of one threatened to pull down the other. Yet the agreement that seems likely to emerge from a summit later this month will be one that does little to weaken this vicious link. If anything it may increase risks to stability instead of reducing them.

Almost everyone involved agrees that in theory a banking union ought to have three legs. The first is a single supervisor to write common rules and to enforce them uniformly. Next are the powers to “resolve” failed banks, which is a polite term for deciding who takes a hit; these powers also require a pot of money (or at least a promise to pay) to clean up the mess left by bust lenders and to inject capital into those that can get back on their feet. The third leg is a credible euro-wide guarantee on deposits to reassure savers that a euro in an Italian or Spanish bank is just as safe as one in a German or Dutch bank. National insurance schemes offer scant reassurance to savers when sovereigns are wobbly and insured deposits make up a big chunk of annual GDP (see chart).


The logic behind this chart has been the engine behind out contagion model, the core thesis behind the short on continental Europe in general (see Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe) and our hypothesis against the French banks - reference "On Your Mark, Get Set, Bank Run".

There's much more to this bank run, capital flight thingy in Europe. I explained it in detail over two years ago:

First, the European banks are just too big in relation to Europe, herself!

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

image015.png

Second, as stated in the Economist, we have a liquidity time bomb! 

As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008image008

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipe out, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10BNP_Paribus_First_Thoughts_4_Page_10BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, and lying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

Lastly... When everybody's lying, no one is trusted with telling the truth! There's the sovereigns themselves lying through their collective teeth, reference Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware! There's the so-called "Troika", reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!. Then there's these banks and those damn stressless stress tests... Again, as excerpted from French Banks Can Set Off Contagion That Will Make Central Bankers Long For The Good 'Ole Lehman Collapse Days!:

On that note, ZeroHedge has come out with a blockbuster explanatory article: Credit Suisse Buries European Banks, Sees Deutsche Bank And 65 Other Bank Failing Latest Stress Test, €400 Billion Capital Shortfall

A day after Credit Suisse killed the Chinese bank sector saying that the equity of virtually the entire space may be worthless if NPLs double, as they expect they will to about 10%, the Swiss bank proceeds to kill European banks next. Based on the latest farce out of Europe in the form of the third stress test, which is supposed to restore some confidence, it appears that what it will do is simply accelerate the flight out of everything bank related, but certainly out of anything RBS, Deutsche Bank, BNP, SocGen and Barclays related.

I'd like to add that I've ridiculed all of these stress tests, US and European, although the European stress tests were by far the biggest joke. Dexia passed with a grade of A (or so), and will be nationalized momentarily. 'Nuff said!

To wit: "In our estimation of what could be the “new EBA stress test” there would be 66 failures, with RBS, Deutsche Bank, and BNP needing the most capital – at €19bn, €14bn and €14bn respectively. Among the banks with the highest capital shortfalls,SocGen and Barclays would need roughly €13bn with Unicredit and Commerzbank respectively at €12bn and €11bn. In the figure below we present the stated results. We note RBS appears to be the most vulnerable although the company has said that the methodology, especially the calculation of trading income, is especially harsh for them, negatively impacting the results by c.80bps." Oops. Perhaps it is not too late for the EBA to back out of this latest process and say they were only kidding. And it gets even worse: "We present in this section an overview of the analysis which we published in our report ‘The lost decade’ – 15-Sep 2011. One of our conclusions was that the overall European banking sector is facing a €400bn capital shortfall which compares to a current market cap of €541bn." Said otherwise, we can now see why the FT reported yesterday that banks will be forced to go ahead and proceed with asset firesales: the mere thought of European banks raising new cash amounting to 75% of the entire industry's market cap, is beyond ridiculous. So good luck with those sales: just remember - he who sells first, sells best.

And the scary charts:

1. Capital Shortfalls under Stress Test part Trois (9% min. CET1 ratio)

 

Judged against these three requirements, Europe’s new plan is a miserly one. Its outlines emerged in a joint paper released on May 30th by France and Germany. The minimalism of the paper suggests the summit will offer little more than the establishment of single supervisor and a promise to set up a vaguely defined “resolution mechanism”.


Those who follow me know that I'm medium term bearish on both any sovereign nations and their out-sized, profligate, insolvent banking systems which they support. Ireland makes a good  example - If I Provide Proof That The Entire Irish Banking System Is A Sham, Does It Set Up A Much Needed System Reboot? Let's Go For It... and The Beginning Of The Great Irish Unwind?!?!?!.

Back to that Economist article:

If a pot of money is pledged it will probably be a small fund raised through a tax on banks and without the backing of governments. If Europe’s bail-out fund, the European Stability Mechanism (ESM), is referred to it is likely to be only as a last resort to recapitalise lenders after ailing countries have already bankrupted themselves standing behind their banks. A euro-wide deposit insurance fund is so controversial it isn’t polite to mention it.

...The legal challenges are also enormous. Each country in the euro has its own bankruptcy code. A change in the treaties governing the European Union would probably be needed to give a new resolution authority the power to seize bank assets and impose losses on creditors.

 Events outside the negotiating room have also reshaped the scope of a banking union. The “bail-in” of Cypriot banks earlier this year dipped into the savings of uninsured depositors in order to recapitalise lenders. Repeating that tactic would risk deposit flight from peripheral banks and a sharp increase in banks’ funding costs. But rather than committing public funds to shore up banks elsewhere, some politicians would doubtless prefer to hit uninsured depositors again.

But,,,, but,,,, without a definitive source of "rescue" capital, a bail-in is all but guaranteed, right Ireland???!!! I hate to pick on them, but the Irish make a good  example - If I Provide Proof That The Entire Irish Banking System Is A Sham, Does It Set Up A Much Needed System Reboot? Let's Go For It... and The Beginning Of The Great Irish Unwind?!?!?!

A strategy of incrementally moving towards a full banking union might have worked in normal times. Doing so in the middle of a crisis is risky. Over the coming year the ECB will have the unenviable task of assessing the health of the banks it is about to supervise. Its root-and-branch examination may well reveal gaping holes at a number of big banks. Yet without ready access to a pot of money to fill these holes, the ECB could be reluctant to force banks to come clean. “It is madness to expose capital shortfalls if you don’t know where new capital is going to come from,” says one bank supervisor.

Oh, I see. This must explain the blatantly fraudulent-esque goings on I uncovered in the Irish banking system. In case you haven't heard, I issued a Direct Challenge To Federal Reserve & Irish Central Bank Bubble Blowers. When I did Provide Proof That The Entire Irish Banking System Is A Sham, the ECB did absolutely nothing! No phone calls! No meetings! No emails! Makes you wonder why, eh? 

 "Over the coming year the ECB will have the unenviable task of assessing the health of the banks it is about to supervise. Its root-and-branch examination may well reveal gaping holes at a number of big banks. Yet without ready access to a pot of money to fill these holes, the ECB could be reluctant to force banks to come clean."

Madness, I tell you! Madness!!!

Published in BoomBustBlog

archangel vs demonToday Reuters reports Samsung Electronics loses $12 billion market value on smartphone worries while yesterday Barron's reports Apple, Samsung Sees Weakening Smartphone Sales. You know, reading BoomBustBlog is like reading the pre-eminent news sources of the world, just 3 months into the future. March 7, 2013, BoomBustBlog posts Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!

I'm preparing a brief report for my subscribers to illustrate a potentially highly skewered risk vs reward opportunity for equity investors in the tech space. It's borne from the battle for mobile computing supremacy, opportunity lies with more than just Google! As a recap, now that Google Has Officially Gone On Record To Confirm Reggie Middleton's "Negative Margin Business Model" Tactics used to cut Apple's, et. al. margins down to size, most observers are just getting a taste of what BoomBustBloggers have known for years, ie. Blackberries, Apples & Fruit Borne Successitis - The Problem With Excess Profits Is Hubristic Management Tends To Take Eyes Off The Prize!!! As I have said several times, it's not just he high flying fruit names that will see #MarginCompression in the upcoming years, though. Remember, I proclaim smartphone hardware vendors are dead! Google's recent comments support that assertion, as well as recent market activity. If that's the case, then what happens to Google's hardware and OEM partners for Android? Well, even the most popular one's may succumb... Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!

What's Samsung to do? Well, if you haven't realized it yet, Samsung management is highly astute. They shoved Apple a fat one, and don't think they will take Google's marginaliztion of their core revenue and profit drivers (now, smartphones) lying down. Of course, as I mentioned in the above-linked article, Samsung's margins are already slipping - even as its revenues and profits rise. This is a dangerous sign that Nokia, HTC, Blackberry and Apple ignored  (and I warned years in advanced for the "fruit" companies -  Blackberries, Apples & Fruit Borne Successitis). Apparently, someone at Samsung reads my blog, for they have decided to take the battle to the cloud to compete with Google. 

How would they do such, you ask? Well, in order to compete with Google you'd need data... LOT's of DATA! Where in the world would Samsung get that much data, enough to compete with world's current shepherd of global data? Well, here's the crib notes answer. Samsung has sold over 220 million phones thus far. It has sold over 120 million "S" series smartphones (the higher end smart phones with extended capabilities) and about 20 million of its current high end flagship, the "S4". Each of these phones contain an array of sensors which measure and collect vast amounts of data about you and from around you. The higher end the phone, the more advanced and plentiful the sensors. Here's what last year's Samsung tech look liked...

phone sensors

That's a lot of stuff! Samsung is most assuredly gathering data through all of those little portals. Take a look at how many "what're you doing now, where, and how?" sensors are in its new flagship phone...

gs4hidden

They're probably going to be up to 125 to 150 million of these little privacy pits walking around by this time next year. Imagine the type of data that Samsung can amass in the cloud if it just executed with the slightest modicum of competence!!!

Google, the modern day master of the cloud is releasing a phone with even more sensors and more interactive intelligence. It was previously known as the Motorola X Phone, but is now called the Moto X. Gotta Be Mobile broke it down just as well as I would:

Google executives have been underplaying the potent power of Motorola Mobility’s X Phone, which has was recently referred to as the Moto X, but the device could signify trouble for dominant smartphone-makers Apple and Samsung.

You betcha!

The Price is Right

Google had aggressively priced its Nexus devices in the past to come with competitive specs and a very competitive price. And even with the Nexus devices, the specs may not be bleeding edge compared to rival flagships, but Google offered nice trade-offs with pricing and an unlocked strategy. Likely, the Moto X Phone will be priced aggressively and carrier subsidies will make Motorola a good bet for those looking to upgrade.

Hitting the Competition Where It Hurts

Where the X Phone really is important is its pricing strategy. Google has demonstrated that its Asus-made Nexus 7 tablet with a $200 price point could dominate the smaller form factor tablet market. With the X Phone, Google could deliver a better than decent phone experience and change the market.

Apple and Samsung, which are known to be the biggest winners in the smartphone industry and share the bulk of the market’s profits, will have to price their flagships down to compete against Google. Since the Nexus 7 debuted, Samsung’s Galaxy Tab series have seen prices dropping from when the slates first debuted.

For Samsung and other smartphone hardware companies, selling a product at or near cost may not make sense. For Google, this strategy is effective, as it doesn’t need to profit on hardware–it just wants to sell you another portal so that you’d want to use Google services. It’s like Gillette giving away free razors so you’ll buy the blades later, or HP handing away free printers so you’ll get the ink cartridges when you run out.

So on the surface, the Motorola X Phone may not wow you with its mid-range specs, but it will be an industry game changer where it matters: a good user experience with solid specs, pricing that’s affordable, a mainstream distribution strategy, and forcing industry pricing downward.

And my #MarginCompression thesis marches on into the mainstream!

Appealing to Your “Senses”

One area that Motorola’s new head Dennis Woodside had hinted to was a sensor network for Motorola’s future phone. Woodisde had stated that the company has been applying what it learned about always-on sensors and low power consumption as a result of the Motorola MOTO ACTV sports watch, and those battery-lengthening technologies could allow Motorola to construct a phone with more sensors.

motoactv-press-shotConsumers would benefit from graphs and analysis of the distance they walked or drove in any given day, the changing temperatures, and other information that embedded sensor networks may provide.

Google, on the other hand, could benefit if it could find meaning in the information it collects to improve its anticipatory Google Now search. It’s a win-win on both ends.

And given Google Now, a service, is a big draw to Android right now given how well it works in presenting data it learns about users in a meaningful way, the experience may be best experienced on a Motorola phone given the added sensors and data that Now could collect, process, and learn.

Just Plain Smart

At the end of the day, your smartphone experience isn’t about having the fastest and best specs on the market. It’s about the device being smarter, more agile and nimble to anticipate your needs and deliver you information as you need it.

And today, with cloud services, specs increasingly don’t matter on a phone. You no longer need a powerful phone to edit photos thanks to new Google photo and editing cloud services through Google+. As services move to the cloud, an entry level smartphone could become just as powerful as a high-end model, just with less cost.

Google is in a good position to start the next mobile revolution through its large Internet empire, and given the right pricing, the Motorola X Phone could be an invaluable, affordable gem that has the power to change the industry.

Then there's always Google Glass - the game changerIn closing, let me excerpt from Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!.

So, you ask, "How is it that hardware is dead?" Well....

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

Samsung is also currently Google's biggest threat. This (soon to be combative) symbiotic relationship is akin to the relationship that Samsung had with Apple. Competitors, yet symbiotic partner/clients. Samsung and Google are poised to have a slugfest. Their relationship is similar to that of Samsung and Apple, with Samsung being the Apple in this case. Apple is highly reliant upon Samsung for memory and processor chips, and screens. Although Apple is the biggest Samsung client, it's by far not the only one and the Chinese manufacturers are up and coming.

Subscribers, click the following links for my updated price targets on Google (click here to subscribe) and read  Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?:

The biggest risks to these price points are:

  1. A market that's being levitated by central bank magicians running short on magic spells...
  2. Regulatory pressure, which I feel is quite material and inevitable, but will not be a major factor in the near term. 

For those interested in a long position in Apple, see 

Published in BoomBustBlog

TMO-Verizon-Head-to-Head Legal-approved FINAL-smallI received several letters in response to my Deadbeat Carrier Series. Here are a few, along with my responses to them.

Reggie, I found what I think are some flaws in your carrier monthly cost numbers in your "Deadbeat Carriers Compete" blog posting. First the biggest flaw is that the $70 T-Mobile plan does NOT include unlimited hot spot service. It only includes 500mb of hot spot service. You can read it on this link from T-Mobile.com. http://www.t-mobile.com/shop/plans/individual-plans.aspx I couldn't find the cost of 10gb of data including hot spot service but obviously it's going to be more than $70/month.

This is only a problem if you do not embrace Android as your default OS, and Android 4.2.2 is quite capable of doing so for over 85% of computer users. See the video below...

Second, where are you getting the costs for AT&T? I went to their website and they don't have minute plans that go up to 6000 minutes. Their individual plans are 450 minutes for $40, 900 minutes for $60 and unlimited minutes for $70 then you can add $20 for unlimited messaging. The data plans on the individual plans only go up to $50 for 5gb which includes hot spot service. They also have AT&T Mobile Share with unlimited talk and text plans which reduces the cost greatly from what you listed. Their 10gb mobile share plan costs $120/month and a single smartphone with that plan costs $30/month and you can use the hot spot service at that plan for no additional cost (I confirmed this with AT&T) so the total is $150/month (not $200 as you indicated).

AT&T has modified their pricing since I created the model, but the pricing has changed, not necessarily gotten cheaper. They effectively charge $10 per gigabyte for data, $70 for unlimited voice and $20 for unlimited texts. So 10 GB of data would be $100, and voice and text would be $90 combined - adding up to $190 before taxes, surcharges and fees which would add another nearly 20% on the price or roughly $220 total - as compared with T-Mobile whose package would be about $76 - all in (only sales tax is added in with pre-paid plans)! If one were to compare T-Mobile to the Mobile Share plan, there's still a big discrepancy for the reader forgot to include surcharges, fees and taxes - again another nearly 20% tacked on, so we're talking $180 per month, and that's just with 10 gigs of data use. If one were to use 40 gigs like me, then you'd add another $36 per month on that - or roughly $216 which is pretty much where we started in the first place.

Lastly, where are you getting the costs for Verizon? Again, they appear to be way off. Verizon's share everything plan with 10gb of data costs $100/month and then you add $40/month for single smartphone (with unlimited voice minutes and messages) and you can use the hot spot service at that plan for no additional cost so the total cost is $140/month (not $240/month as you indicated). I'm looking forward to your response. Thanks.

Again, the author is comparing family share plans to the single plan that was used in the model. Even so, Verizon pricing is far from a bargain. Let's look closely at the numbers he provided. Verizon is charging the same as AT&T, $10 per gig, but charging more for the handset service @ $40. If one where to use 40 gigs per month, that would be $400 per month plus $40 for the handset plus the nearly 20% in taxes, fees and surcharges - all told over $500 per month, compared to the flat $76 from T-Mobile. Even if you used half the data, your looking at about $280.

My next gift is your ability to generate your own chart with your own wasted wireless carrier dollar expenditures. Check it out..

As I said, deadbeat carriers. Here's some more mails...

Reggie, Good postings. One of the reasons why I'm switching off from AT&T very shortly and going to T-Mobile. They just have the same offerings for a LOT less. Isn't that what things were all about in the beginning before AT&T and Verizon slowly increased their prices and plans? On top of that one of the T-Mobile MVNO's, Solavei, has been on the market for just under a year now I believe and Solavei offers things for $49 "ünlimited." They're main offering is working it into a MLM/referral-based program where a few referrals can chop the bill to 0 or make a few bucks. Worst case it's good for a while before that program crashes possibly, then just jump back to T-Mobile (or other pre-paid style plans that offer nearly the same data and specs for less) Keep up the good work.

And here's another one...

Reggie,

To point one in the direction of "future" in the US, it probably suffices to point one in the direction of some carriers in Europe. Particularly these from Estonia. Sample plans here: https://www.emt.ee/en/internet-telefonishttps://www.elisa.ee/et/Eraklient/mint-mobiilis/562/MiNT-mobiilipaketid (use google translate), https://pood.tele2.ee/et/serviceplans/572 (use google translate).
Or some examples: 
    1. 10€/month for unlimited data at 3.5 Mbps (Elisa)
    2. 5€/month for unlimited data at 1 Mbps (Elisa)
    3. 11.95€/month for 30 GB of data at 6 Mbps (Tele2)
    4. My current plan from EMT: €38/month for a family plan with 4 phones, 400 minutes (unlimited calling between the family phones), text, unlimited internet on 2 of the phones.
Additionally the country (Estonia) is pretty much 100% covered - you get high-speed internet in the thickest of forests from all of the carriers.
When comparing these plans with anything considered "normal" in the US ($300-$400 for a similar 4-person family plan from US Cellular with white areas in every valley between moderate hills), it's clear that there's a very, very long way for the US providers yet to go. It's simply amazing how much US customers are paying for the little amount of services they are actually getting!
All the best,

So, what does this all mean? Google's Android will become much more pervasive as Web access becomes cheaper. It also means that the Wintel duopoly is primed to potentially be toppled. Take note that Intel is now supporting Android and system makers are adopting it. Android is rich enough to replace windows for many, and believe it or not in this short period of it's exisitence I believe Android has surpassed Windows in active users. What happens when the power of Intel Core I7 chips are pushing Android? I'm sure Microsoft doesn't want to know!

Published in BoomBustBlog

Reggie Middleton on UK Bank Taxation Without Representation

First up, a quick history lesson courtesy of Wikipedia:

"No taxation without representation" is a slogan originating during the 1750s and 1760s that summarized a primary grievance of the British colonists in the Thirteen Colonies, which was one of the major causes of the American Revolution. In short, many in those colonies believed that, as they were not directly represented in the distant British Parliament, any laws it passed taxing the colonists (such as the Sugar Act and the Stamp Act) were illegal under the Bill of Rights 1689, and were a denial of their rights as Englishmen.

The phrase captures a sentiment central to the cause of the English Civil War, as articulated by John Hampden who said “what an English King has no right to demand, an English subject has a right to refuse” in the Ship money case.

... The British Parliament had controlled colonial trade and taxed imports and exports since 1660.[1] By the 1760s, the Americans were being deprived of a historic right.[2] The English Bill of Rights 1689 had forbidden the imposition of taxes without the consent of Parliament. Since the colonists had no representation in Parliament, the taxes violated the guaranteed Rights of Englishmen.

...The phrase had been used for more than a generation in Ireland.[7][8] By 1765, the term was in use in Boston, and local politician James Otis was most famously associated with the phrase, "taxation without representation is tyranny."[9] In the course of the Revolutionary era (1750-1783), many arguments seeking to resolve the dispute surrounding Parliamentary sovereignty, self-governance, taxation, and the constitutional rights of 'commoners' to representation were pursued.[10]

Why go through this US grade school history lesson? Well, UK taxpayers have been paying substantial taxes to essentially bail out an Irish bank with no say so in how said bank is operated. As a matter of fact, they don't even know the extent of said bank's indebtedness despite paying a ton of money to bail it out. RBS investors have taken material losses due to this very same bank. Both of these parties went without adequate disclosure or... "representation".  A couple of months ago I penned a piece titled "I Illustrate How The Irish Banking Cancer Spreads To The UK Taxpayer And Metastasizes Through US Markets!" wherein the Royal Bank of Scotland's failure to adequately report the full (and quite excessive, in my opinion) liabilities of its ill-fated acquisition, Ulster Bank of Ireland. Ulster Bank pumped massive losses into RBS, who in turn neared collapsed and required a massive bailout by the UK taxpayer (billions of pounds massive), who still owns 81% of this sick creature as I type this missive. Those losses were generated by an Irish bank in Ireland, but paid by UK citizens, and the losses were materially understated in my opinion for Ulster Bank was/is much less solvent than RBS is letting on through its US SEC reporting, having encumbered all of its ECB eligible assets available for lending... ALL OF ITS ASSETS! See "I Illustrate How The Irish Banking Cancer Spreads To The UK Taxpayer And Metastasizes Through US Markets!" for complete details, it's a doozy!

I know more than a couple of UK taxpayers who'd much not rather pay Irish bad debts. I decided to rub a little salt in the UK wound by throwing some arithmetic illumination on the situation via an embedded Irish bad bank tax calculator...

The app below allows the UK Taxpayer to calculate for themselves exactly what their individual contribution (pro rata) is to the government bailout of RBS.

I've taken the liberty of pre-populating the input fields for you, but if you don't agree with the numbers then by all means insert your own!

Lo and behold, about a monthafter my reports the BBC published an article titled "Will the bad be taken out of RBS?" wherein they reported on plans to split the farce formerly known as a bank - RBS - into a good bank/bad bank scheme (ahem!). Shortly thereafter, the Irish Times ran the following article "UK Treasury considers Irish takeover of Ulster Bank - Reports suggest UK authorities want the Irish government to take control of bank". I really, really wonder why? As excerpted:

A “radical” restructuring of Royal Bank of Scotland, which is largely owned by the UK taxpayer, could see it transfer control of its Irish operation, Ulster Bank, to the Irish government.

The future of RBS is currently being considered by the Parliamentary Commission on Banking Standards, and a draft report from the commission called for the split of RBS into a good bank and a bad bank.

However, a speculative report from BBC business editor Robert Peston has suggested that “another, more radical option is also being assessed by the Treasury”.

This would involve somehow removing Ulster Bank from RBS. The bank has been one of the worst performing parts of the group, with losses of £1 billion in 2012.

Mr Peston said that one idea raised is to “transfer Ulster Bank into the arms and ownership of the Irish government”, by swapping all or part of the bank for the British loans and investments currently owned by Ireland’s “bad bank”, the National Asset Management Agency (Nama).

Hmmm... That's interesting, trading trash for garbage!

Published in BoomBustBlog

Last week I posted on the demise of the Deadbeat Carrier, whose antiquated business models will quickly cause theiir obsolescence. In said post I showed how cost effective it is to use unlimited wireless carriers as a sole source of connectivity. Well, the Wall Street Journal ran a similar piece, Cord-Cutters Lop Off Internet Service More Than TV, to wit:

Hundreds of thousands of Americans canceled their home Internet service last year, surveys suggest, taking advantage of the proliferation of Wi-Fi hot spots and fast new wireless networks that have made Web connections on smartphones and tablets ubiquitous.

Last year around 1% of U.S. households stopped paying for home Internet subscriptions and relied on wireless access instead, according to consumer surveys by Leichtman Research Group Inc. Just 0.4% of households in the last year canceled their pay-television subscriptions in favor of getting video entertainment over the Internet via services such as Hulu orNetflix NFLX -3.48%.

...Dropping home Internet service isn't a great deal for heavy Internet users, however. While smartphones are fine for email and social networking, wireless data plans can be expensive and easily drained by even a single streamed high-definition movie. Free Wi-Fi is more widely available than ever, but cutting the Internet cord means users have to rely on cellular access at home.

Still, frustrated by rising cable and Internet bills, some subscribers are testing whether their smartphones and free Wi-Fi might be good enough. Others, unable to afford both services, are having to make do without easy access to streaming video for entertainment and education, underscoring the persistent differences in how people of various economic levels go online.

...Right now, replacing home Internet with wireless doesn't make much economic sense for any but the lightest users, says Craig Moffett, an independent telecommunications analyst. Leading carriers Verizon Wireless and AT&T Inc.T -0.66% have installed high-speed networks, but the companies also are trying to make more money from Internet traffic by pushing plans that charge subscribers by how much data they use.

Well that's the leading carriers! Nobody forces you to do business with a carrier that overcharges for its services!

The broader wireless industry offers less-expensive options, including unlimited plans at Sprint Nextel Corp. S -0.96% and the T-Mobile US Inc., TMUS -2.05% although Verizon Wireless and AT&T have the most extensive networks at the highest speeds.

This simply isn't true, and I demonstrated such in the demise of the Deadbeat Carrier by actually measuring the speeds of both AT&T and T-mobile. T-Mobile speeds are quite compariable in real world situations.

"The way we think about it is, wire-line and wireless networks are going to coexist," says Mike Roudi, senior vice president for corporate development at Time Warner Cable Inc. TWC -1.20% "It would be hard for somebody to rationalize getting rid of their home connection and moving all of that traffic to a wireless rate plan."

Hey, I did it nearly a year ago. It's working out just fine for me!

Still, with average home Internet charges approaching $50 a month and typical low-end smartphone plans costing at least that much, many Americans can't or don't want to pay for both. Surveys suggest that those who have to make the choice are choosing smartphone service—which, after all, offers both voice and online access—instead of home Internet. Minorities and people with low incomes are far more likely than the average American to rely on their phones as their primary way to get online, the Pew Research Center found last year.

Leichtman Research surveys show that spending for home Internet service has risen steadily over the years, to an average of $46.78 a month last year from $28.46 in 2005. People trading up to faster services—from dial-up to DSL to cable to fiber-optic—accounts for some of the increase, but so do rising prices.

I've tested my my T-Mobile LTE/HSPA+ hypbrid connection against AT&T DSL, Verizon Fios fiber-optic and Verizon DSL and it blows the DSL services out of the water and is price competitive with Verizon fiber up to about 15 MBs. Again, see the demise of the Deadbeat Carrier.

For those who don't believe my, I come bearing gifts. First, pretty charts...

Reggie Middleotns Carrier Cost Comparison

My next gift is your ability to generate your own chart with your own wasted wireless carrier dollar expenditures. Check it out..

Published in BoomBustBlog

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On Thursday, 12 August 2010 I penned . In said piece I unequivocally detailed the process and mechanism with which Google would systematically slash the profitability of the fat-margined OEM hardware and software vendors. I was the ultimate contrarian at this time for there was not a single well known analyst, investor or media personality that espoused a similar viewpoint. Apple was the "the next big thing" at that time.

This time last year I took time to go into detail in regards to how Google is able to go about this...

Eariler this year, I delved even deeper into the details of how Google will cut the fat-margined companies (read as Apple, et. al.) off at the knees!

As coincidence would have it, Google management has now come out in public with affirmation of the business model that I have attributed to them these last few years, as reported today by the Financial Times on their front page.

Google is preparing an attack on Apple’s iPhone with a device that is more aware of its surroundings and smart enough to anticipate how it will be used next, according to the head of the internet company’s Motorola subsidiary.

The gadget, called the Moto X, will be made in the US and will be part of a campaign to drive down the cost of smartphones and end the high profit margins companies such as Apple have enjoyed, said Dennis Woodside, the Google executive installed to run Motorola after it was acquired in late 2011.

Mr Woodside’s comments, made at the D11 conference in southern California, marked the first official confirmation by Google that it would launch a “hero” phone, or flagship handset capable of competing with devices such as the iPhone and Samsung’s S4.

I have also said on several occasions that the current market sweetheart, Samsung, is not immune to the hardware margin compression woes. As a matter of fact, no hardware vendor in this segment is. It's quite evident now that Google's plans for Motorola is precisely to drive down the margins of all OEM vendors - even their Android partners who are also competitors. A complex relationship, eh? Let's face it, Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers (and Computer Hardware Vendors Are Dead, Part Deux!). I commented on the predicament that Samsung is in now as it reaps increasingly large profits, just like Apple did - Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!

Mr Woodside hinted that the new handset would go on sale later this year and be priced well below the iPhone 5, adding that the sort of steep price declines seen in consumer electronics from personal computers to televisions were overdue in the smartphone market.

Without naming the iPhone directly, he said: “Those products earn 50 per cent margins. We don’t necessarily have those constraints. Those [margins] will not persist.”

... He added that Google was confident that the device, which will be “broadly distributed”, would be a big seller because “the experiences are unlike other experiences out there.”

For those who actually think that Apple's share price can afford such a battlle, I bring you this graphic from "Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In"

Click the graphic once to view, twice to enlarge to printer quality...

 Reggie Middletonss Ultimate Apple Value Infographic

Putting stock market performances aside, the question du jour is, "Is this negative margin attack working?". Quick answer, hell yeah! I opined on margins by means of the market share vs profit share debate over the last two days, reference"

  1. Blackberries, Apples & Fruit Borne Successitis - The Problem With Excess Profits Is Hubristic Management Tends To Take Eyes Off The Prize!!! and
  2. Is Tim Cook Cooked? Market Share vs Profit Margin, part 2 - Follow What I Do, Not What I Say!

This strategem employed by Google was visible at its onset and could have been mitigated had Apple been less greedy in terms of short term profits (it was one of the, if not the most profitable companies in the world) and gunned for ubiquitous distribution. You see, over time, every company's margins get cut. The pertinent question and the inflection point into the next paradigm centers around the next logical questions, "Will you be the one to cut your own margins or will you allow your competitors do it for you?"

As long as the market leader actively and religiously cuts its own margins it essentially trades incremental profit margin for incremental market share growth. From a long term cash flow perspective, it actually averages out to about the same. The problem is if you fail to cut margins often and early, you reap large cash flows in the beginning of the cycle to forgo them through margin compression towards the middle and end of the cycle, characterized by market share loss at the onst.

I've been using Blackberry as an example of this...

Blackberry market share vs margin correlation analysis 

All of the former tech titans and market leaders have fallen the same way - Nokia, HTC, DEC, Polariod, etc.

Related reading:

Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?

Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In

Short Term Gain Brings About Long Term Pain? A Roadmap To Apple's Resurgence That Management Is Ignoring!!!

See also: Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance

For paying subscribers only:

Recent Apple Valuation Reports

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!

Recent Google Valuation Reports

Published in BoomBustBlog

Tim Cook was in the media yesterday weighing in on market share. It's as if he is in a delirium, that is if you believe his words, which I don't. He states that for Apple, quality is more important than quantity (or something of that sort). As per Endgadget:

Apple's head honcho Tim Cook is chatting up Android's growth explosion, and it turns out he's not flustered. "Do I look at that? Of course, I don't have my head stuck in the sand," said Cook." But for us, winning has never been about having the most." Instead, he stands by the old Apple line of quality versus quantity. "Arguably, we make the best PC, but we don't make the most," he added. "We made the best music player, and we wound up making the most -- but we didn't initially."

Mr. Cook is ignoring his own ex-boss's words. For those who didn't read my piece yesterday, "Blackberries, Apples & Fruit Borne Successitis - The Problem With Excess Profits Is Hubristic Management Tends To Take Eyes Off The Prize!!!", I quote:

What ruined Apple was not growth … They got very greedy … Instead of following the original trajectory of the original vision, which was to make the thing an appliance and get this out there to as many people as possible … they went for profits. They made outlandish profits for about four years. What this cost them was their future. What they should have been doing is making rational profits and going for market share.

You see, my post yesterday clearly showed that the financial metrics, over time and in handset companies, heavily favor market share over initial profit margin. As a matter of fact, I demonstrated that as market share decreases margins drop commensurately, or in other words "Quantity is quality in a fast moving, technologically dynamic market!"

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 analysis

The has been the case with IBM, Nokia, Dell, HTC, Apple, Blackberry, etc. Mr. Cook, take the advice of Mr. Jobs if you don't wish to follow Mr. Middleton. I actually do believe that Cook understands these dynamics and is just putting on a dog and pony show for the media but his corporate actions don't bear this out. I strongly suggest they start spending that $174B cash horde on something other than massaging hedge funds.

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So, does Mr. Cook's lack of adherence to Steve Jobs wisdom portend a potentially uber-successful company misunderstood by the markets (meaning time to buy stock) or is this the beginning of the end of an iconic corporate era?

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

Published in BoomBustBlog

 posts Apple & Samsung's "Profit Share" Trap on Tech Thoughts blog:

Smartphone "Profit Share"

Over the past few days, there has been a lot of noise in the tech media about the supremacy of "profit share" over "market share", specifically related to Apple's performance in the smartphone market (but it can be extended to Samsung as well). Most proponents of this argument seem to fundamentally misunderstand the long-term relevance of the "profit share" metric.

Exactly! I've been preaching this mantra since the beginning of my coverage of the mobile computing sector. Let's recap...

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 analysis

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? Take note:

What ruined Apple was not growth … They got very greedy … Instead of following the original trajectory of the original vision, which was to make the thing an appliance and get this out there to as many people as possible … they went for profits. They made outlandish profits for about four years. What this cost them was their future. What they should have been doing is making rational profits and going for market share.

Who did I just quote? None other than the RDF Chief in Charge, Steve Jobs (circa 1995 Forbes interview)! So, if he was able to see what happened to his baby in the '90s, what happened in the new millennium? I certainly warned it would happen again, see this three year old article - A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple. In Apple on the Margin I showed the margin fade coming ahead of time, as well as in the following references:

  1. More of the Android Onslaught: Increasing Handset Revenues and Growth 

So,Apple's top management knew how this worked. I knew how this worked. What happened? Who the hell cares, a short is a short. Next up was the contrarian call of the decade, but it took very little intelligence and as much as I'd like to claim credit for being a genius... all  you had to do was watch the trend.

$34,852,564,500 - That's How Much BoomBustBlog's Apple Research Was Worth Today!

So, now the question remains, "Is Apple a steal at these prices?" Well Doug Kass seems to think so (Doug Kass: 4 Reasons Apple Is Turning Around - CNBCand I'd love to discuss this with him on air or, or both! This was discussed here in detail - Is It Time To Buy Apple As A Valuation Play? The Contrarian That Called The Top In Apple Weighs In.

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

Published in BoomBustBlog

Following up on the many emails, but not so many actual site comments from yesterday's post "Deadbeat Carrier Creative Destruction In The Ongoing Mobile Computing Wars" I bring you hard evidence that there's about to be a massive disruption in the telecomm space. We're not just talking Google Fiber here. The smallest, most upstart of carriers has broken the holy grail and did away with multi-year, hardware subsidizing contracts while at the same time materially boosting its bandwidth, coverage and throughput. This means that the price-gouging competitors are going to fave that Apple thingy, #MarginCompression.

As states in yesterday's post, T-Mobile's subway experience delivers Verizon FiOS speeds via LTE. Well, T-Mobile must have read that post for they turned LTE on in Brooklyn and that's what I'm using to make this very article. It's very fast, very cheap, its opening in more places than many would have thought. What does this mean? It means prices will probably collapse across the board, you know... #MarginCompression. It ain't just Apple, RIMM and Nokia!

For those who don't believe my, I come bearing gifts. First, a pretty charts...

Reggie Middleotns Carrier Cost Comparison

Wait until people realize how much they are actually paying for those "free", subsidized phones... Then things will really get interesting...

Reggie Middleotns Carrier Subsidy Cost Comparison

My next gift is your ability to generate your own chart with your own wasted wireless carrier dollar expenditures. Check it out..

Of course, this doesn't look to good for Microsoft or Intel, for the Android camp is encroaching on the Wintel camp much faster than the Wintel camp is returning the favor. 

I have a lot of thoughts and ideas circling these developments. Institutional and professional subscribers (click here to subscribe) are welcomed to email or call me to discuss this further.

Related articles...

US Cellular Carriers Are At Risk Of Being Marginalized Into Nothingness Unless They Learn To Think Outside The Box... Yesterday

The Death Of The Deadbeat Carriers, Part 2 

This week I opined on Apple, et. al.

Is It Time To Buy Apple As A Valuation Play

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

Published in BoomBustBlog

 I have personally tested the T-Mobile LTE service in a NYC subway (the 42nd street station) using what is currently the best (big brand) mobile handset available, the LG Optimus G Pro.

20130522 140401 3799

The speeds I attained are phenomenal for a cell phone. This combo is more than capable of replacing a small business or home network Internet connection through FiOS or AT&T.

This is a similar LTE speed test performed in the AT&T store in Union Square, NYC.

20130522 143033 26462

The majority of my work is now done off of smart phones, so I know this stuff fairly well. AT&T charges roughly 3x what T-Mobile would charge for about 31GB of bandwidth use, while T-Mobile delivered 2.5x the speed. Now, T-Mobile's network is not under load yet, and results can vary by location, weather, yada, yada... Long story short, if T-Mobile continues to focus on being a pure play pipe provider, AT&T and Verizon will need to get their shit together!!!

T-Mobile, if they play their cards right, can truly shake up the industry. If you did not already know, T-Mobile has eliminated carrier subsidies of handsets and has instead given a 0% APR (allegedly, although an implied rate could be built into the price of the hardware) loan to have the user pay for the device directly, and has reduced the price of its plans commensurately. T-Mobile has also dropped contract requirements totally and has made a big push into its pre-paid plans with an offer of unlimited data. It is this option that makes a lot of sense for power users and techies. Today's Android phones (ex. the LG Optimus G Pro) have more than enough oomph to power an office - and I mean it. I actually do it.

With a 14 - 32mbs always on connection, you can fully replace Microsoft Office, your overpriced DSL, FiOS, AT&T, etc. connection, and your overpriced cell phone carrier with a single phone, some inexpensive peripherals and a single $70 per month ($76 with all taxes and fees included) T-Mobile plan.

This is a very big deal, for if consumers start using their heads and pull out a calculator or two, AT&T and Verizon have an awful lot of price slashing to do, and the likes of the pretty but considerably less functional OEMs such as Apple have a lot of R&D and production ramping to do as well.

You have heard me predict this in the past.

April and May 2012 I opined on the carriers

US Cellular Carriers Are At Risk Of Being Marginalized Into Nothingness Unless They Learn To Think Outside The Box... Yesterday

The Death Of The Deadbeat Carriers, Part 2 

This week I opined on Apple, et. al.

Is It Time To Buy Apple As A Valuation Play

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

Of course, this doesn't look to good for Microsoft or Intel, for the Android camp is encroaching on the Wintel camp much faster than the Wintel camp is returning the favor. 

I have a lot of thoughts and ideas circling these developments. Institutional and professional subscribers (click here to subscribe) are welcomed to email or call me to discuss this further.

Published in BoomBustBlog