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iPhone: 4% of market, 50% of profit - Apple 2.0 - Fortune Tech

iPhone: 4% of market, 50% of profit

Posted by Philip Elmer-DeWitt
October 30, 2010 1:33 PM

Source: Asymco

When it comes to helping investors visualize the effect of Apple's (AAPL) entry on the mobile phone market, nobody does it better than Asymco's Horace Dediu.

It's not just that every new phone that arrives looks like an iPhone and comes with an app store.

Or that Apple has helped shift the industry from so-called "feature" phones, dominated by Nokia (NOK), to "smartphones," a market that was dominated by Research in Motion's (RIMM) BlackBerry until Apple came along.

It's that Apple is selling iPhones as fast as it can make them and raking in huge profits in the process.

Everybody else is playing catch-up while trying to match Apple's manufacturing efficiency and cost structure. To hold on to market share they either have to sell at razor-thin margins or give their product away in two-for-one deals.

The proof: These two pie charts. One shows Apple's share of the worldwide cell phone market in terms of unit sales (4%). The other shows Apple's share of the profits (50%).

As Dediu puts it: "The disruption continues."

Dediu has created a set of six pie charts that compare the mobile phone market in 2007 and 2010 in terms of unit share, sales share and profits. See here.

NOTE: In the last chart, he is using EBIT (earnings before interest and taxes) for the mobile phone division of each company as a proxy for profits.

via tech.fortune.cnn.com

More on models

via This is the Green Room by J on 10/19/10

Justin Fox asks, “Why didn’t people in finance pay attention to Benoit Mandelbrot?” — and it’s a great question. His conclusion:

I think it’s mainly that he didn’t provide them a handy alternative to Black-Scholes. I can’t pretend to fully understand the practical implications of his fractal view of markets, but it does seem more useful as a critique than as a positive model of market behavior. You can’t haul in big consulting fees or create giant new securitization markets with a critique. So the natural tendency of both scholars and bankers has been to hold on for dear life to the Black-Scholes approach to modeling market risk.

I think, sadly, that this is largely correct. Mandelbrot was unable to provide a concise alternative formula for pricing and risk measurement — that much should be obvious from his argument that models which make assumptions about the measurability (and predictability) of volatility are doomed.

But as easy as it is to follow that line of reasoning, just as it’s easy to hate VaR and copula pricing once all the cool bloggers are doing it, we need to breath. The world isn’t black and white, and neither are risk models. Black-Scholes may be an imperfect pricing model, but is it better than nothing? Absolutely. Same goes for VaR. As soon as we dismiss models like these for “failing to predict risk”, we have already failed the test. These models aren’t used — in fact, can’t be used — to predict risk. Anyone with the patience to examine them can see that. I’ve written it countless times: models are just the tools. A given model can no more predict, much less avoid, a financial crisis than a hammer can build (or destroy) a house.

So Black-Scholes: bad for predicting risk? Maybe. Good for pricing options? Maybe. Better at pricing options than the alternative, which is guessing? You bet.

Var: bad for predicting risk? Maybe. Good for measuring risk? Maybe. Good for defining a key risk level for a given distribution? Yes (in fact, that’s the only thing it’s good for. It’s actually the only thing it does!).

As much as I agree with Mandelbrot’s every word on the topic of finance (and many of my beliefs spring directly from his well), I can not jump on the bandwagon of I-told-you-so-ers who would like us to believe that we are better off with no models than with imperfect ones. A lot more damage has been wrought by people foolish enough to think their models conveyed information which they actually didn’t, than by any equation. You want to price an option with Black-Scholes? Go right ahead. Just keep your volatility forecasts to yourself.


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Here's The Truth About The Rare Earth Stocks That Are Surging Right Now

rare earth elements

Image: NASA

The rising global demand for rare earth metals - the elements needed to make items like hybrid electric cars and laptop batteries - have caused the value of rare earths mining companies to soar in just a few months.

We've told you about one company, Rare Element Resources, that saw its stock surge 1200% in the last year.

But China's outright monopoly in the industry, along with fears that it will cut down on its rare earth exports, are driving plenty of other stocks higher too.

But some of these companies have not even generated any revenue yet or lack the adequate facilities to even mine rare earths.

So what's the reality? A lot of these stocks are rising right now based on a narrative. That narrative is as follows:

  • China, which controls the rare earths market, decides to export less.
  • Demand continues to rise globally for the good at the same time.
  • Hey, we have this land! With rare earths in it! And we're gonna mine it.
  • But it's not open just yet, you have to trust us, it's going to be great.

So, there are clear macro problems with this thesis.

  • China doesn't cut off supply, and many of these mines can't break even on their mine investments because prices don't go high enough.
  • Demand declines due to a global slowdown.
  • There's rare earths all around the world, and if production ramps up quickly, prices could easily collapse, just like it has before.

Many companies also have serious problems on a micro level. So if you believe in the thesis, you may want to look deeper at each company and see what the truth about their mines looks like.

via businessinsider.com

The amazing Amazon stock bubble - Fortune Tech

While Amazon continues to execute at a very high level – yesterday it reported better than expected sales growth of 39% and earnings growth of 16% -- the stock still trades at a very lofty 67 P/E ratio. That's more than triple Apple's 20.1 P/E ratio, or Google's 24.6 P/E ratio. Even more striking is that the company trades at 2.31 times its expected 5-year growth rate, which indicates that the stock has gotten way ahead of itself. Ideally, a company should trade at no more than a 1:1 PEG ratio unless the company has a consistently proven track record (like Apple) of far exceeding analyst expectations.

via tech.fortune.cnn.com

The enormous mortgage-bond scandal | Analysis & Opinion |

But remember that Clayton had tested only a small portion of the loans in the pool. So Citi knew that if there were a bunch of bad loans among the loans that Clayton tested, there were bound to be even more bad loans among the loans that Clayton had not tested. And those loans it couldn’t put back to the originator, because Citi didn’t know exactly which loans they were.

If there had been any common sense in the investment banks, that would have been the end of the deal. But there wasn’t. Rather than simply telling the originator that its loan pool wasn’t good enough, the investment banks would instead renegotiate the amount of money they were paying for the pool.

This is where things get positively evil. The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

In fact, the banks had an incentive to buy loans they knew were bad. Because when the loans proved to be bad, the banks could go back to the originator and get a discount on the amount of money they were paying for the pool. And the less money they paid for the pool, the more profit they could make when they turned it into mortgage bonds and sold it off to investors.

via blogs.reuters.com

Through the looking glass again

via Ultimi Barbarorum by Baruch on 10/17/10

I’ve been catching up on my reading and dear Bento, if anyone tells you they have a clear view on what is going to happen to the econo-world from here, walk away briskly. As Ed Hyman of ISI* puts it, with the now imminent onset of QE2 we are in “scary times”, a world of “unintended consequences”.

The only intellectually honest position to take at this point, it seems, is to admit we haven’t a clue. Personally I, Baruch, am getting really confused. My default setting is that we will muddle through and everything will be OK. But the cone of potential outcomes that surround that base case is now as loose and flappy as a wizard’s sleeve.

Note also that even the “muddling through” scenario doesn’t presume any particular level of the S&P at the end of the next 12 months. Plus or minus 30% and in Baruch’s view we’d still be all right.

Where to start? Well, here’s a list of the factors that I think are going to make us move, in the form of a dialog in Baruch’s head. None or all of them could dominate. Maybe some are already priced in. Some of them I hope are  made up and will go away. There’s nothing particularly original here I admit, but I want, at this juncture, to sum up where we may be. Baruch’s future self might find it interesting. Here goes:

1) we are getting QE2! It will save us from Japanese-style deflation. Yayy!

2) Yes, but this is not necessarily a good thing. QE2 is the first move, the invasion of Poland if you like, in the coming currency war against everyone who is good at exporting, especially the Chinese. In the ensuing cycle of “bugger thy neighbour”, we will descend into massive disruption of trade and runaway inflation. Oh no!

3) But don’t worry. The Chinese are going to make structural reforms in their upcoming 5 Year Plan which will massively boost consumption over the next few years. The Yuan will rise anyway, no matter what the result of the horrible currency shenanigans, and their ensuing import boom will be the engine dragging the world out of debt-deflation! Yayy!

4) Hang on. I’ve just had some bad news. The financial system is insolvent again. All the mortgages securitised in the past X years stopped being asset backed, as they umm. . . lost the paperwork. The holders can’t foreclose, and the people who have been foreclosed on may have had their houses taken away illegally. Many may have to get their houses back. So stuff that the banks still own has to be written down again. Hell, even the people who can pay their mortgages have a big incentive not to any more. We’re totally fucked.

5) Don’t worry! All that crap’s been written off already or backed by the Feds! Isn’t it? They can’t be as stupid to have it still on their books, right? While we may have jeopardised a couple of banks, the Foreclosure Crisis may also have solved the US consumer debt problem! All the mortgages will be cancelled!! As long as a few banks can survive we still got QE2, massive Chinese consumption growth AND a reset to US private indebtedness. Those crazy Americans can now re-re-mortgage their houses and buy another round of LCD TVs for their McMansions, and reinstate the semi-annual holidays in Disney World! We can’t lose!!

6) Not so fast, cheeky monkey. The US banking system may be meta-fucked. Turns out the banks who securitised mortgages may have defrauded their customers and broken the law, because they secretly did in fact do some due diligence, and knew all the mortgages were rubbish. There is no better person to tell you about this than our old mate Felix; who says bloggers can’t do journalism? Good news: bankers may not be the total idiots we thought they were. Bad news: they were fraudulently criminal instead, and apparently may have to pay cash at par for all the stuff they all wrote down already, plus a bunch of extra fines.  Even if the SEC throws up its hands and the DoJ doesn’t want to prosecute, I imagine foreign prosecutors won’t be so shy if there’s a case to be heard. Certainly you would think a civil case would be worth a shot, and if proven, I can only imagine the settlements. I hope they remember to ask to have the checks made out in Yuan.

7) You poor sap. You ridiculous perma-bear. Bernanke has our backs! You don’t think he doesn’t know this stuff already? You were wondering why he was so keen to rush into QE2 despite the positive turn in the leading indicators, and pump us all up before the mid-terms. You got it now? We’re going to get the mother of all easings, bigger than the trillion dollars everyone’s expecting, something open-ended, maybe.

Anyway, that’s as far as I got. Any better ideas out there? Anything I missed? Is any of it wrong? Can you help poor old Baruch make sense of it all?

* ISI is the only macro strategist my team actually pays for, everyone else seems to offer their opinions for free


The hi-tech miracle rescuing Ireland from a banking crisis - Telegraph

Life sciences make up a third of Ireland’s €160bn exports. Boston Scientific alone has 4,500 employees in the country, mostly graduates, some making drug-coated stents to stop arteries clogging up.

The sector hardly missed a beat during the “Great Recession”, and will grow 10pc this year. It is insulated from Ireland’s banking debacle.

“We don’t even look at the Irish market in our planning,” said John O’Dea, head of the Galway start-up Crospon, which makes catheters with imaging technology for stomach surgery. Crospon’s products are sold to hospitals in Europe and the US.

“We got fat during the Celtic Tiger era but we’ve woken up pretty abruptly. Wages are not going up anymore – we’re bending the cost curve downwards,” said Mr O’Dea. Wages for entry-level jobs have dropped 10pc to 15pc, tracking cuts in public wages.

via telegraph.co.uk

FT.com / The long view - Plot thickens in the scary world of pensions

But how bad does it need to be, and what effect will it have on asset prices? Could the large group of the aged help push down share prices and thereby dent the pensions that the elderly will receive? Quite possibly. Earlier this year, this column featured research by Barclays Capital. It compared cyclical price/earnings ratios on stocks (as good a measure of equity valuation that exists) since 1950 with the ratio of 35-54-year-olds in the population. The fit was excellent; the more people were in the peak demographic for investing, the higher stock multiples went. The peak of the Nasdaq bubble in 2000 came just as baby boomers were saving and producing the most.

The corollary is disturbing. As people of peak investing age begin to be outnumbered by the elderly, logic suggests that share valuations will fall.

via ft.com

Beware of Greeks Bearing Bonds | Business | Vanity Fair

In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn’t take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs: it’s still true. “We have a railroad company which is bankrupt beyond comprehension,” Manos put it to me. “And yet there isn’t a single private company in Greece with that kind of average pay.” The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland’s.
via vanityfair.com

zna bit, da ste ze brali... Michael Lewis as good as ever