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Infinite Curiosity

~ Exploring ideas related to tech, code, finance, markets, adtech, AI, humor …

Category Archives: trading

Baron Capital’s Ron Baron delves into the mind of Elon Musk

08 Tuesday Nov 2022

Posted by Grynn in aide-memoire, finance, trading, trends

≈ Leave a comment

Tags

investing, newsletter, tsla

Elon interview with Ron Baron Nov 2022

Elon’s longer term vision for Twitter is to use it as the base for his next generation identity & payments platform (apart from being a useful digital town square for ‘most’ people). Elon says that he knows how to make a better Paypal – a business that could be the world’s biggest/most valuable financial services company. He claims to have developed the blueprint during his days at ‘x.com’ (the pre-cursor to paypal); relatedly Twitter is owned by ‘X Holdings Inc’. Possibly related, the largest PE firm – Apollo Global is also focussed on identity & payments. This also links with something Dr. Harshvardhan (Trust Capital) alludes too – the value for transactions is not in the moving of money/entries in a ledger, but in fraud reduction through identity verification/KYC. The idea being that $MA, $V are not so much in the business of facilitating the movement of money as in the prevention of fraud. A bitcoin or Doge or similar network with an identity layer on top could be very interesting.

Elon claims: “Must be done for the future of civilization, without which nothing matters” which is plausible. Perhaps, Elon really thinks he has no choice but to act. He who owns Twitter controls who the next government is and that man is Elon.

Tweeted: Dec 12, 2022

My read is that Elon has switched from saying that $TSLA is over-valued to TSLA is undervalued, especially if as he believes autonomy adds 5x the value to cars without changing manufacturing cost. TSLA has 15% operating margin at the moment (gross margin: 27%); if cars can be sold for 5x current price, gross margin would expand to 85% (and given the size of the market, this would be larger than any other business in the world). In other interviews Elon has repeatedly said that he thinks TSLA will be worth more than Apple and Saudi Aramco combined (the two largest currently listed entities).

Edited: Nov 9 ’22: Elon sold an additional $4B of $TSLA (https://www.reuters.com/business/autos-transportation/elon-musk-sells-195-mln-tesla-shares-worth-395-bln-sec-filing-2022-11-09/). So my read was wrong; it looks like Elon thinks there is more pain to come. At some point his wealth could flip with the more of Elon’s net-worth coming from SpaceX & Starlink than from Tesla! (600B marketcap on Nov 9; Elon 14% => $84B).

Back of the envelope $TSLA model: At this point most TSLA analysts believe that TSLA will be selling between 10-20M cars by the end of 2030 (1.6M/year at the moment, with a 50% CAGR projected). At a 25% operating margin, and 20x terminal EV/EBIT $TSLA’s NPV is ~$990B. At at 40% operating margin, this increases to: $1.7T. Current market-cap: $655B (ATH: $1.2T)

Installed Base of Vehicles in the USA

AutomobileBusesTrucksMotorcyclesALL
104M0.5M159M8.2M271M
source:

Tesla semi & Cybertruck – should add substantial value by greatly expanding TAM.

Advertisement

YouTube Revenue Stats (2010-2021)

18 Friday Feb 2022

Posted by Grynn in aide-memoire, finance, trading

≈ 1 Comment

Tags

investing, tam

YearRevenue
(USD Billion)
YOY Growth3 Yr CAGR10 Yr CAGR
20100.80
20111.3063%
20121.7031%
20133.1082%57%
20144.2035%48%
20155.5031%48%
20166.7022%29%
20178.1021%24%
201811.1037%26%
201915.1036%31%
202019.7030%34%37.76%
202128.8046%37%36.32%
sources: https://www.businessofapps.com/data/youtube-statistics/, others…

Workings: Google Sheet

Thoughts on Bitcoin/Crypto

05 Saturday Jun 2021

Posted by Grynn in finance, trading, trends

≈ Leave a comment

Tags

idea, interesting, investing

Banking / Traditional finance (#tradfi) is ripe for disruption (and perhaps needs to be disrupted). Why 👇

  1. Fiat Currencies: Store of Value/Mobilize Savings
    Inflation is Taxation Without Legislation -Milton Friedman
    1. Government issued currencies (fiat) are prone to debasement – losing value every year
    2. Rely on a central government that controls supply (and value) 
    3. The central government has an incentive to create more money every year (steal from savers)
    4. Checks & Balances in the form of a link to gold / something with limited supply (scarcity) have disappeared
    5. Predictably supply increases every year (and in times of crisis, by massive amounts)
    6. ==> The USD has lost 95-96% of its value over the last ~100 years (at the FED’s current inflation goal of 2% the USD would loose half its value in ~34 years). If inflation is closer to 7% then the USD looses half it’s value in just 10 years!

  1. Banks
    1. “Fiat” cannot be stored without the use of intermediaries (banks, regulated by Central Banks)
    2. Your money is just some banks’ liability; you have exposure to a bank’s creditworthiness (and the banks in turn are exposed to the creditworthiness of the central bank)
      1. One can store “cash/gold/diamonds/paintings”, but this is inconvenient at scale; susceptible to seizure; susceptible to demonetization; susceptible to theft etc.
      2. Gold/cash can be faked; BTC cannot, easily verifiable by anyone.
    3. If banks go poof, then the money they created/owe you also goes poof
    4. FDIC / Government insurance of this money, makes the government liable to pay when/if banks go poof
      1. So the government protects the banks from going poof (systemically important)
      2. This means banks are immune from failure; so they do not innovate and improve customer service; instead they find new ways to tack on “fees”.
    5. Original intent: Bitcoin was created after the 2008 bank bailouts; https://news.bitcoin.com/a-deep-dive-into-satoshis-11-year-old-bitcoin-genesis-block/ (Note the bailouts were required because 95-96% of all dollars/rupees/pounds (fiat) are actually just bank liabilities not physical “notes”/real money.)
  1. Fiat Currencies: Medium of Exchange
    1. “Fiat” currencies cannot be transferred without the use of intermediaries (payment networks like Visa/Mastercard/Amex which are susceptible same regulations as banks)
    2. Banks are exclusionary. Only a few have access to the SWIFT network.
    3. You can move “cash” without using a bank, but this is difficult to do at scale (inconvenient form factor, susceptible to seizure, theft etc)
    4. Regulations limit innovation at banks (and now bank’s culture), because they are systemically important entities.

Enter Bitcoin:

Bitcoin is many things; digital gold; a commodity with limited supply; a medium of exchange; a store of value

The core innovation is the lack of central “authority” (aka gatekeeper, that can be corrupted). Central authority is distributed and yet no participant can just claim all the coin. Scarcity without a single authority! Incredible. 

  1. Medium of Exchange:
    1. Easy to transfer anywhere in the world, where there is internet; code is open, network is open
    2. No permission needed; every single participant (node) can verify & create transactions without requiring any permission from anyone
    3. Becoming a participant is permissionless too; no gatekeepers
    4. DOES NOT work without internet; sure you can write down long codes and use pigeons, but really it does not work. (In times of crisis, governments like to cut off internet access; see Kashmir, Yemen, Syria ….)
  1. Store of Value
    1. Supply is “algorithmically” limited; cannot be debased – (not without a hack/security flaw/corruption of the core BTC dev-team); 
    2. There can never be more than 21M Bitcoin*; in fact some will get lost every year in abandoned wallets, so the supply is likely to decrease YOY.
    3. No insurance (FDIC); if your money is stolen no government will help. May be alleviated by private cos offering insurance?
    4. No plunge protection team like the US FED (i.e. no Bernanke PUT)
    5. No one to kill competitors (the US has an army and uses stronger army diplomacy when folks want to supplant the USD as the reserve currency)
    6. OTOH the army of bitcoin maximalists grows every day and is quite a strong force 
  1. Commodity:
    1. Similar to say physical steel; supply is limited; mining is needed to mint new coins; has high volatility; 

Risks to participation as a speculator

  1. Security: 
    1. A single double spend, or other weakness in the core consensus algo would destroy all value.
  1. Competition: Competition among peers, BTC vs ETH vs Doge vs CumRocket etc.
    1. Is this a winner take all market? Will there be one global ledger (blockchain) or many? Will some be more important than others?
    2. While easier to transfer if you have internet, physical stores like gold/diamonds/guns don’t need internet or electricity … 
    3. Central Banks could also create their own “coin”, and thus compete. They’d have the resources to force compliance, esp. from institutions & companies.
  1. Regulation
    1. IMHO Crypto is anti-fragile, regulation will spur innovation and make crypto even more resistant to threats.
    2. Something with this much demand is more likely to be taxed than outlawed; but heh, Cocaine has demand and it outlawed, so …

Risks that I don’t think are really risks, but hey, I could be wrong

  1. High volatility ; the USD exchange rate is volatile 
    1. Has not hurt adoption so far; # of wallets, nodes, transactions all rising
    2. High vol is good, it removes paper hands.
  1. Excessive Power Usage / Inefficient
    1. The network will and can vote to change from Proof of Work to say Proof of Stake or Proof of Space or something else
    2. This can be solved.
  1. Stability: 2.5 trn of crypto recently went thru a 30-50% drop in price; no FED/SEC stepped in to save the “banks”. No vultures (economists) jumped in to save the rich by stealing from the plebs (or Is the Fed meant to the opposite, protect the plebs? I get confused sometimes). Nothing bad happened, no systemic risk. There was plenty of leverage and those who took the leverage paid for it. No one else was affected. Imagine if the SPX plunged 50%; there would be carnage and the losses would be socialized. Crypto market cap is now > than top 2-3 banks I think – which should be considered systemically important! and yet nothing untoward happened when it tanked. The fact that Central Banks want to get in on the game, by making a digital currency (crypto) just legitimizes the model. It works. If you can’t beat ’em join ’em. 
  1. Lack of Utility:
    1. What is the utility of money if it cannot be exchanged for good & services? BTC is liquidateable at scale (100’s of M/day)…

Risks to adoption / Technical Risks

  • Low transaction speed; since every transaction must be broadcast / verified by every node, there is an inherent limit to the number of transactions per second. There are solutions like Bitcoin lightning, but there is no one clear winner as yet. This is also a problem for Ethereum and similar chains;
  • Poor UX: Wallets are not terribly easy to use; much easier to use hosted wallets like Coinbase, but then the distributed, pseudonymous nature of Bitcoin is lost.
  • Trust / Anti-fraud: For example there is no reliable service that provides trust; #Bitcoin has the carrots that incentivise good behaviour but none of the sticks. Cannot kick out / ban bad actors especially since pseudonymity makes it harder to identify a bad actor.

Apple shipped 3x as much battery capacity as Tesla in 2014

25 Wednesday Feb 2015

Posted by Grynn in finance, tech, trading

≈ Leave a comment

Tags

$TSLA, aapl, apple, tesla

So, everyone’s talking about the possibility of an Apple iCar; it looks certain that it’s got something to do with batteries (Apple’s being sued for recruiting scientists from A123) and arch-rival (wannabe arch-rival?) Samsung just bought out a company that makes automobile batteries…

So I was thinking – who sells more batteries today? Apple or Tesla? And because it’s not quite Apples to Apples I’ll try comparing battery-capacity.

Apple Battery Capacity 2014:

  • approx. 180m iPhones; the iPhone 6 has a 7.9 watt-hour battery, while the 6+ has 11 watt-hours. Presumably a decent chunk of the 180m phones were older 5, 5s, 4 etc. So let’s say the average capacity per iPhone is 8 watt-hours. Total: 180m * 8 = 1440 million watt-hours (i.e. 1.44 GWh aka Giga-Watt-hours)
  • approx: 60m iPads; the iPad Air 2 has a 27.6 Wh battery, while the Air (1) had a 32.9 Wh battery. Let’s hand-wave and say 28 Wh average. Total: 60m * 28 = 1680 million watt-hours (1.68 GWh)
  • approx: 19m MacBooks; MacBook Air’s have between 38 & 54 Wh, Pro’s 63.5 to 91 Wh. Let’s say 54 Wh on avg. Total: 19m * 54 Wh = (1.02 GWh)

Apple also sold a quite a few other devices with batteries, remotes, iPods, Beats headphones, Wireless keyboards and watt-have-you (haha), but’s let’s ignore it for now.

 

So Apple shipped 4 GWh (1.44+1.68+1.02=4.14 GWh) of battery capacity last year alone. That’s about $2 billion (cost) assuming Apple has the same cost as Tesla for battery capacity. I’d argue that it’s lower, but who knows.

 

“Tesla Motors may have the lowest rates for electric car batteries; the estimated battery costs for Tesla Motors is around US$200 dollars per kWh.” — From <http://en.wikipedia.org/wiki/Tesla_Motors>

 

Now Tesla shipped 17,300 Model S cars (http://insideevs.com/monthly-plug-in-sales-scorecard/). They can have a 65kWh or 85kWh battery-pack. Say 75kWh on average. Total: 17.3k * 75kWH = 1.3GWh.

 

So there you have it. Apple shipped 3x as much battery capacity as Tesla in 2014.

 

Some more fun napkin math (let me know if it’s all wrong…): Apple’s batteries pack 25% more energy per gram than Tesla’ (so for the same weight, using Apple battery tech in Tesla’s could improve range by 25%!)

 

The iPhone 5s battery is 26g -> 7Wh 26g (26/7 = 3.7 g/Wh)

(http://www.ebay.com/itm/Original-1560mAh-3-8V-Li-ion-Internal-Replacement-Battery-for-iPhone-5C-5S-/201227137579?pt=LH_DefaultDomain_2&hash=item2eda12722b)

 

Tesla cells are : 10Wh 45g -> (45/10 = 4.5 g/Wh)

(http://industrial.panasonic.com/lecs/www-data/pdf2/ACI4000/ACI4000CE17.pdf)

 

Apple’s batteries probably charge faster too (assuming that you can parallel charge the 1200 or so MacBook Air batteries that make up a single Tesla sized 65kWh pack).

 

Also interesting: Batteries like memory are super-high-margin. Like 60-70% gross.

 

Disclosure: I’m long Apple (+ve net delta) and have no position in Tesla.

$MU

31 Friday Oct 2014

Posted by Grynn in finance, trading

≈ Leave a comment

Just putting this out here:

Recommended $MU on Oct 20 @ $29.69 (right here on this blog)

It’s up 11.5% to $33.08 since then (10 days).

image

I’m going to be replacing my stock with some PUTs. Perhaps 1/4th my position. +ve delta and theta.

And it turns out the scuttlebutt was right, the iPad Air 2 has 2Gb of RAM. (And a unexpected, to me at least, 3rd core)

Can anyone think of a reason why DRAM demand would fall from here on?

Does an $intc short make sense?

30 Wednesday Apr 2014

Posted by Grynn in finance, tech, trading, trends

≈ Leave a comment

Job postings suggest Amazon is planning to make its own ARM-based servers.

Google eyes Power chips

Software Engineer, ARM Server ($FB)

Looks like everyone is evaluating ARM servers; makes sense to me. Small, cheap servers that can saturate a 100Mbps network connection…

I think $INTC is under attack on all fronts:

Servers: ARM could make serious inroads (classic Clayton Christensen, the innovation looks like a toy, flies under the price umbrella till it’s too late for the incumbent, who cannot (or will not) self-cannibalize based on something that looks like a toy …)

Mobile: $QCOM, $AAPL, SMSN:LI rule here…

Desktop/Notebook: As I posit in my last article, $AAPL may make a move here (or not). But the fundamental thesis is the same. Desktops will move to from the Core variants to the Atom variants. They’re nearly good enough now. $MSFT providing Windows free for low-end boxen? It’ll only add to the fire.

If the move from Core/Xeon series is towards Atom – it will margin compression. If it’s towards ARM, it will mean substantial loss of market share. And $INTC is now setup to be a player at scale. Not sure if they can compete like a scrappy little startup anymore. I wonder if that’s left in the DNA?

As a long term $INTC fan – nearly every compute device I’ve bought had Intel Inside, this marks the end of an era to me….

When will the transition be visible in stock prices? Is much of this already priced in?

With $INTC trading near the top of it’s 52W range ($27.24) I think the risk (for a short) is quite low. Say about $4  = 15% ($31), which is where many analysts are calling it. The gain could easily be $7 = 26% ($20). I think it’s time to nibble a bit…

Red:

Short interest seems to be under 1% of the float, why is it so low?

PE ratio is just 14; multiple expansion is easily possible if $INTC shows signs of life in the mobile space. $INTC has been talking about a better radio, which seems to be a key weakness for them….

There could be a revival in the desktop space (unlikely IMHO).

The main risk I see is that the move could take longer than I can hold … will a move take more than a year?

Amber:

I just love the Xeon Phi (in abstract terms). Can’t see the whole point of Tesla/GPU compute if you can do cheap enough, dense enough full-featured cores. A whole bunch of ‘em. But then there’s the fun projects like Parallella. The software effort required for to write apps for GPU compute languages has never made sense to me.

Green:

NUC is a joke.

Atom in the Datacenter means severe margin compression. ‘Course an Atom doesn’t measure up to the raw compute of the Core / Xeon E series … but then the price differential is substantial.

What’s the $INTC bull case?

1) Success in mobile – scaling down the Ivy-Bridge architecture to be competitive in the 2W TDP space.

I think $INTC is competitive already – but it’s not leading to design wins because:

1.1) Low-end is extremely price-conscious; INTC realistically has not much   chance of competing in this space. Sure they can ‘bribe’ companies (contra-revenue as they’re calling it) to use INTC, but I think this is akin to buying eyeballs….pointless in the medium term.

1.2) High-end, there’s no market outside of AAPL, SMSN and neither is going to use INTC at the moment. Perhaps Nokia (err… Microsoft Mobile Oy) may give it a shot? Lenovo? maybe, but really I can’t see a third player (at any scale) for at least the next few years.

Can INTC use the leverage it has – in terms of desktop/server to bully Apple? Don’t think so — Apple is perhaps one the largest single customers for INTC, they need Apple more than Apple need INTC.

2) Datacenter growth continues un-abated, with Intel continuing to rule the roost, picking up another couple of percent in terms of market-share by destroying what little remains of AMD?

I certainly think Datacenter will continue to grow pretty fast. The cloud is more important than ever. Indeed INTC bet that growth in mobile would require equivalent growth in datacenter and the margins in datacenter were much fatter….(find quote from outgoing INTC CEO here…). Is the relationship linear?

Apple, intc

25 Friday Apr 2014

Posted by Grynn in finance, trading

≈ Leave a comment

I just had an idea. There’s some rumours that $AAPL is about to introduce a 12″ fanless, retina MacBook Air. Could this be the first non-$INTC MacBook? A MacBook Air that uses an Apple designed and fabbed, ARM ISA chip? 

“Kou says that Apple is working on an ultra slim 12-inch MacBook Air with some updated specifications. The new Air is said to be thinner than the current model, have no fan, and to feature a track pad with no buttons. A higher resolution display is also tipped, presumably of Retina quality.”

From <http://www.slashgear.com/12-inch-macbook-air-retina-rumors-surface-for-late-2014-launch-10324626/>

Why would Apple want to use a non-Intel chip?

The single biggest item in an MacBook Air’s Bill of Materials (BOM) is the CPU. Replacing the CPU will allow Apple to compete in the $500-700 laptop space while retaining margins.

Also there is now not that much to differentiate between a MacBook Air (13″) and a MacBook Pro (13″) in terms of weight and size. What is a logical evolution of the MacBook Air line? Especially if we assume that the Pro will slim down further, reaching or exceeding Air size?

The MacBook Air is defined by small, light, portable compute… it makes sense to drop the fan, slim down even more etc. This to me suggests a move to either an Intel Atom or an Apple designed & fabbed, ARM ISA chip, perhaps an ‘X8’ desktop chip instead of the A8 mobile.

Moving to an Atom would allow Apple to go fanless, reduce size, maintain battery life (even with a shrink in battery capacity, size and weight) while retaining compatibility with the x86/x64 binaries & drivers. But this can be replicated by others. Acer/Sony/Google or even a newly invigorated MSFT could make an Atom based laptop. They’ve kind of done this already – in the form of netbooks – though I think the timing wasn’t quite right – simply because the Atom’s of last year simply did not have the oomph to make it. Apple owns the OS and the hardware (apart from the CPU). Why not continue backward integration and take over the CPU too?

I’ve always been wondering why Apple, with it’s huge cash pile, doesn’t simply buy out INTC (or AMD) and the only answer I’ve been able to come up with is that Apple’s making its own fab. If you believe the semi-accurate news published by semiaccurate.com – then there’s reason to believe that Apple’s busy making its own fabs.

Napkin Math

MacBook Air current generation (mid-2013) retail price: $999 ($1099 for 13″ model with same CPU).

Intel Core i5-4250U, Tray: $315,  http://ark.intel.com/products/75028/

Apple A7, Tray: $20 (estimated)

Intel Atom E3827, Tray: $41

The Core i5 has a 15W TDP; 1.3 Ghz clock (turbo to 2.6Ghz); 2 cores, 4 threads. Sunspider 250ms.

The Apple A7 has a 2W TDP; 1.3Ghz clock; 2 cores, 2 threads. Sunspider 397 ms.

http://cpuboss.com/cpus/Intel-Core-i5-4250U-vs-Apple-A7

It’s not looking all that different! Esp. when you take into account that the A8 will be twice as fast (think Tegra K1) – i.e – a Sunspider score of 200ms maybe?

Any evidence at all?

Apple’s been calling the A7 a ‘desktop’ class chip. If the A8 is twice as fast, in a similar power envelope…. 

Thoughts

Assuming I’m not waaay off the mark: Will Apple upscale iOS or downscale OSX? Will it make:

  • A netbook : with downscaled OS X (+Atom)
  • A chromebook : with a whole new OS, i.e. not iOS and not OSX
  • Something entirely different: an upscaled iOS (with better keyboard integration?)

I think it’s a Chromebook – that’s the model that seems to be gaining traction (evidence: MSFTs anti-chromebook ads). Netbooks are dead, everyone knows that.

An `AirBook’ implies a new OS. Which lends a little more credibility to the idea of a new CPU …

Yet Another Use for the bitcoin ledger…

25 Friday Apr 2014

Posted by Grynn in finance, trading

≈ Leave a comment

From a recent email (estimize.com) comes this very interesting idea:

“Imagine a stock market where every trade has to be conducted on a public ledger for all to see. The SEC wouldn’t even have to lift a finger to find out who is doing insider trading. Because when one person commits insider trading it hurts other investors, the investment community would write algorithms to catch each other conducting illegal trading activity. Then they would report the public address codes of traders involved in highly suspicious activity to the authorities. From there the regulators would have some way to investigate and identify the perpetrator if the evidence was sufficient . Everyone would still be pseudonymous until the SEC is handed a complaint, then it could act as the enforcer that it’s supposed to be and crack down on the illegal activity discovered by other traders.

Crime and law enforcement have always been and will always be in a technological arms race. Utilizing the transparency of the blockchain protocol and shifting the burden of detection away from the SEC and into the hands of the crowd could be a much better way to do it. Other traders obviously have a much stronger incentive than the SEC to be vigilant and proactive in eradicating insider trading because they’re the ones who stand to lose money when it goes undetected.”

Shiny apples

12 Saturday Apr 2014

Posted by Grynn in finance, trading, trends

≈ Leave a comment

[Edit: 17-Apr-2012, scuttlebutt is the iPhone 6 will cost $100 more than the iPhone 5s (retail) and that Apple is asking telcos to absorb some of this increase, to which there is some push-back. See bottom of post for more analysis.]

Idle speculation, whilst on the treadmill ….

Where could $AAPL be planning to use its Sapphire? (too much smoke for there not to be a fire; Apple’s planning something to do with Sapphire, but what?)

1) iPhone screen – ok, so every other dude and his dog, thinks this is the plan.

Criticisms: It’s too expensive – about 10x the cost of Gorilla Glass ($GLW) they say

It’s too heavy, denser than Gorilla Glass….

It’s harder, but not more shatter proof. It’ll scratch less but may not be more durable.

It’s less transparent.

So assuming all of the above is true to some degree:

It’s heavier, less transparent, at greater risk of shattering and costs 10x more –> but is much more scratch-resistant. There’s some scepticism…but is it a case of hater’s gonna hate?

2) iPhone Back – no one’s saying this (at least no one I’ve heard as yet …)

iPhone backs (the metal bits) are what seems to get scratched the most; a very thin sheet of Sapphire coating the back would make it super-awesome. Shatter-resistance would come from being bonded to the metal underneath?

3) Trackpads – Sapphire is insanely smooth; much much smoother than glass. Fingers glide so much more freely.

Not as big as screens. Less to worry about in terms of weight and transparency. Perhaps it’s trackpads on MacBooks?

4) Some new device altogether – perhaps some kind of remote….?

Go on, tell me what you think ….leave a comment….

CoCo’s reinvented …

19 Friday Mar 2010

Posted by Grynn in finance, trading

≈ 1 Comment

Tags

2009, 2010, bond, CoCo, financial times, FT, government, Lloyds, scam, UK, wall street journal, WSJ

I just love how the FT can misreport stuff and get away with it. Like “Snakes on a Plane”, it’s so bad, it’s good!

Check out:

http://www.ft.com/cms/s/0/76bc2ae2-e34c-11de-8d36-00144feab49a,s01=1.html

“Are they bonds? Are they stocks? Or are they actually catastrophe insurance?

Bankers declared the birth of a new asset class – contingent convertible capital notes, nicknamed CoCos – after Lloyds Banking Group announced a successful take-up of a £9bn exchange of CoCos for some of its existing hybrids.

Regulators think these instruments are the answer to banks’ capital prayers because they clear up the uncertainties of existing hybrids by converting into equity at a pre-set trigger and price.

But how do CoCo bonds work? Our interactive feature explains.”

You’d think that CoCo’s are a new asset class?

Nope! Old scam. CoCo’s were used as a means to inflate reported earnings. You did not have to report CoCo’s as equity when computing fully diluted earnings. You could pretend the contingency would never arise and therefore, pretend that your yield was that much higher than any sensible definition (based on pragmatism) would allow.

In 2004:

“I don’t like deals that don’t have a real reason other than an accounting gimmick," says Ted Southworth, a fund manager at Northern Trust. The CoCo, he says, is "close enough to a gimmick that we’d probably be better off without it."

Possible Accounting Change May Hurt Convertible Bonds
Aaron Lucchetti.  Wall Street Journal (Eastern Edition). New York, N.Y.:Jul 8, 2004.  p. C.1

In 2005:

FASB Rule 128 dented the enthusiasm somewhat. CoCos became forgotten. Now being revived with the active connivance of the FASB which has been diluting all kinds of rules off late 🙂

In 2009:

So why is this old scam being revived? ‘Cuz CoCo’s count as equity when it comes to computing “Tier-1” Capital. Figured that out from the FT’s interactive graphics? Good on you!

So what happens when err… a bank’s totally safe, ‘AAA’ rated assets fall in value? CoCo’s convert into? worthless equity further diluting existing shareholders, causing equity value to fall, triggering "protection” money being robbed from us tax payers. And we can blame it all on the “derivatives” bogey-man.

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