Subprime Auto Loans: 6.6 Mn Borrowers In 2012, 18% Increase From 2011

Wear your seat belts. Subprime Reloaded is here. We spotted this stat today, that there has been a surge in subprime auto loans across the US. 6.6 million borrowers took out subprime auto loans from car dealers in 2012, an 18% increase from the prior year. And who is funding these loans? Listen to this: “These loans are being bundled, sliced and sold to yield-hungry fixed-income investors: so far this year, lenders have sold $5.7 billion in securities backed by subprime auto loans, up 13% over the same period in 2012.” (Source)

Sounds familiar? We are not saying that the next step would be to make some derivatives out of these securities backed by subprime auto loans. We are also not saying that you can use a particular three letter acronym starting with C and ending with O to represent these derivatives.

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Bitcoin’s Rise: What If It Is Not A Bubble?

Some very smart folks have written about the recent rise of Bitcoin – the general consensus seems to be that this is definitely a bubble and will soon end in ‘tears’. Yes, someone out there is paying real money to buy these Bitcoins, but the financial world quotes one simple reason – ‘hey you can’t short it’ and attributes the recent rise of Bitcoin to that one factor, calls it a bubble, and tries to move on.

But what if it is not a bubble?

We have had our doubts on the Bitcoin economy – specifically, around the way the economy is shaping up – we had said this before – ‘If you think about it, the current model, where you have these ‘middlemen’ saying ‘Just pay me in Bitcoins. I will pay for what you need in USDs ‘ – is not natural. It would just get the hoarding levels up. It is one big issue with the Bitcoin Economy – and would impact its health in a bad way.’

So what is the basis for our question – “what if it is not a bubble?”

1. Many Bitcoin startups have received VC funding. The total amount invested in these startups could me more than $5 Million (Source). It’s not the scale, it’s the fact that they thought that the Bitcoin ecosystem could thrive – that is huge. Each one of those investments is a calculated bet on the future of Bitcoin.

2. How can you call something a bubble, when nobody has any idea how to value the thing? The whole dotcom bubble was a “bubble” because valuations for companies were not justifiable based on traditional valuation methods (profits and cash flows) – but those traditional methods existed. In this case, no such valuation methods exist.

3. A better term to explain what is happening with Bitcoins could be ‘Gold Rush’. But even in the Gold Rush, it is a fact that some people actually managed to make tons of money.

4. When we do not know the source of funds, such a rise in prices is actually more convincing, because we could argue that a diverse set of folks are analyzing the future of Bitcoin and are arriving at similar conclusions. (In the housing bubble, money came from the banks in the form of sub-prime loans, so it is easy to call it a bubble for example). It is possible that most folks are not buying Bitcoins right now to sell it for a profit before the music stops (in which case it would be a bubble). In this case, there are definitely other reasons why the money is coming in.

5. You cannot short Bitcoins, but you can sell them for sure. Where is the selling pressure?

(Historically, the ability to short-sell a commodity has never been a requirement for efficient price discovery)

We don’t know if this is a bubble or not – but we need to ask ourselves ‘what if it is not a bubble?’ – let us not make the mistake of missing out on the early stages of a truly revolutionary concept by dismissing the whole thing as a bubble driven only by speculation.

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What Was The Most Profitable Insurance Company Last Year?

When you look at a question like that, you try guessing some names. when you find that the answer was not something you even considered – you get a solid surprise. We spotted this stat today, that the most profitable insurance company inthe US in 2012 was Fannie Mae – the government-backed company that insures mortgages against default. Fannie made $17.2 billion last year, versus Berkshire Hathaway’s $14.8 billion. Fannie was the third-most profitable financial firm in 2012, after JPMorgan Chase and Wells Fargo. (Source)

What is the implied message there? Fannie and Freddie are turning out to be cash machines for the US Government – and soon the role of the US Government in these entities will come under a lot of discussion.

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Hold On, The S&P 500 Index Is Nowhere Near A Record High

We were surprised by that statement as well – and that is true: if you adjust for inflation, the S&P 500 index is nowhere near its record high. We spotted this stat today, that according to calculations by JP Morgan (JPM), the inflation-adjusted peak for the S&P 500 is 2,065. To get there, stocks would need to rally another 31.6%. (Source)

If you think about it in more detail, is it not surprising that ‘all-time high’ ‘record high’ are all based on nominal values and not real values (i.e., adjusted for inflation)?

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OMG, What Happened To Netflix In 2012?

We had come across quite a few articles on Netflix after their Q4 earnings, mostly along the lines of ‘They are back’. We were analyzing some numbers from the earnings report from Netflix – when we realized that 2012 overall has been a disaster of a year for Netflix. Here are some numbers (we have made all comparisons between the Twelve Months Ended Dec 31, 2012 and the Twelve Months Ended Dec 31, 2011).

1. (This is probably the most shocking of all) For an additional revenue of $404.7 Million in 2012, the Cost of Revenue has gone up in 2012 by $585.97 Million. Read that sentence again – are we missing something here? What is Netflix up to? We had spotted cost of revenue issues with Facebook as well – but this one beats everything else.

2. Marketing costs are up 20.3 percent. Some of this might have to do with Splitgate. But a warning bell for sure.

3. Technology and Development costs are up 27 Percent. This is a strategy shift, and will take a couple of years to play out.

4. Operating Income down 86.7 percent in 2012 compared to 2011.

5. Earnings Per Share down by 92.75 percent in 2012 compared to 2011.

Look at those 5 points again. What needs to be up is down, and what needs to be down is up. Is it too early to say that this train is headed in the wrong direction?

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Amazon’s Sudden Decline In 2012 International Operating Income

We were analyzing Amazon’s Q4 2012 results – while most of the key points have been analyzed and well discussed in the tech press and among analysts, there is one number that stood out: Operating Income for the International Segment.

The segment operating income for North America is $1.592 billion on sales of $34.813 billion for the twelve months ending Dec 2012. That is an operating income margin of 4.57 percent. Whereas for the International segment, for the same time period, the segment operating income is just $76 million on sales of $26.28 billion – a margin of just 0.29 percent. As a comparison, the International segment seemed to have done well comparatively last year – $640 million operating income on sales of $21.372 billion – a margin of almost 3 percent.

What happened to Amazon’s International segment in 2012? Why did the margins come down to 0.29 percent in 2012 from 3 percent in 2011?

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Wait A Minute. Facebook Has A Huge Problem

We were analyzing Facebook’s Q4 2012 results when we came upon something that could potentially be a huge issue in terms of Revenue growth and profitability for Facebook. It is an issue with ‘Asia and Rest of World’. What exactly is the problem?

Well, it is very simple actually: Facebook is struggling to improve the ‘Average Revenue Per User’ (ARPU) numbers for Asia and Rest of World; and that is precisely where its next billion users are going to be from. As it is, these are low ARPU users: for 2012, the ARPU of facebook users from US/Canada was $13.58, and for users from Asia was $2.35, and for rest of the world was $1.84.

That makes for interesting comparisons, like this one: A facebook user in the US is six times more valuable to Facebook than a facebook user from Rest of World – but here is the bigger point: the rate of growth of ARPU for Rest of World is slowing down. For instance, between 2010 and 2011, the Rest of World ARPU for a facebook user grew by 59.57 percent – but that growth rate dropped to 22.66 percent between 2011 and 2012. For Asia, the growth rate between 2010 and 2011 was 37.58 percent, and it dropped to 14.63 percent between 2011 and 2012. As a comparison, for the US/Canada Geography, the ARPU growth rate between 2011 and 2010 was 35.85 percent, and it dropped to 19.85 percent between 2011 and 2012. It is a significant drop, but not as dangerous as Asia and Rest of World.

Facebook might have done a great job in getting everyone to talk about facebook on mobile – but the reality is this: It has maxed out its ‘good ARPU’ users; the next billion users would come from a low ARPU pool; and the ARPU growth rate there is slowing down dangerously.

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Apple Buyout Rumors Make This Stock Jump 45 Percent

How is 45 percent for a jump? Yes, it is based on a rumor – but a hot rumor this time. Apple is rumored to be buying out this German TV manufacturer called Loewe – resulting in the stock price jumping from 2.72 Euros to 3.93 Euros in a single day (Source).

The secret that the world knows is that we will have an Apple TV (a real one, not the hobby) soon. So the rumor was hot for two reasons: Apple needs to move real fast here, and this rumor had actually surfaced in May 2012 so there is probably something happening here for real.

Apple has to prove that the product pipeline has not dried up, and a TV is something the market has already (kind of) decided that Apple is working on. A new kind of TV that changes the whole TV viewing experience, in ways that only Apple can do, could be just what Apple needs to get its stock price out of the trough it has gotten into. Apple TV remains a hobby for Apple, in spite of its recent promise.

Apple needs to act fast – Samsung already has a good presence in the market, and we already see lots of innovation from Samsung in terms of integration with its smart devices.

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The ‘Jeff Bezos Reality Distortion Field’

Convincing Wall Street that you are a growth story is one thing; keeping them convinced that you are still a growth story for more than a decade, without showing much of profits – that is something else. People talk about the ‘Steve Jobs Reality Distortion Field’ but he just made you shell out money for a real product, after all. Jeff Bezos, on the other hand, has such a strong reality distortion field, that he makes you shell out money for AMZN, which is essentially a promise on future cash flows.

Two points to look at:

1. AMZN shareholders are paying $265.00 for $.075 of trailing earnings. (Source)

2. “Amazon has been around for well over a decade, and they have never been able to get their EPS over $3.00 for a full year, even with revenue per share as high as $124.00. Meaning they have never been able to even get EBITDA to crack that $2.5 billion threshold – or 2% of their company’s current shareholder-determined value.” (Source)

The Jeff Bezos Reality Distortion Field id the real deal. He has managed to sell AMZN as a perennial growth story – with growth on the topline and a near-non-existent bottomline.

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Facebook’s ‘Cost Of Revenue’ In 2012 Is 26.8 Percent Of Revenue. Why?

We spotted this, from Facebook’s results:

1. Facebook’s ‘Cost of Revenue’, as a percentage of Revenue, was 23.17 percent for the year ending Dec 31, 2011. It has shot up, to 26.80 percent of Revenue, for the year ending Dec 31, 2012.

2. For the quarter ending Dec 31, 2011, the ‘Cost of Revenue’, as a percentage of Revenue, was just 21.83 percent. For the quarter ending Dec 31, 2012, this has shot up to 25.11 percent.

There is good reason to believe that Facebook has already hit the point on the curve where additional traffic comes at a higher incremental cost. Are we missing something?

(As a comparison, this number for LinkedIn is generally in the 13 – 14 percent range)

If Facebook is buying traffic at these rates, that is an indication of bigger issues. But wait a minute. Facebook has a huge problem anyways. And do have a look at Mark Zuckerburg’s new hoodie.

The more we look at monetization challenges at Facebook, we more we think about how Mark’s bar will make money, ever.

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