Net Future Value

A former engineer over at SA provided a technical analysis on why Intel will win vs. AMD.  Also, as a result, $APPL will suffer.

There has been a great deal of discussion about whether or not Intel’s recent failure to continue its long train of increasing sales and profits – year to year – in each quarterly report, is critical. Many proponents have taken the position that Intel’s stutter is singular and reflects a temporary reduction in PC sales and/or a hiatus before new products become available for the PC market and newer growing mobility markets. Many opponents support a position that says that ARM (ARMH) has decimated Intel in the mobility markets and that there is no way Intel can take market share from ARM. And now, AMD is preparing to enter the fray, presumably to capture market share from ARM and compete with Intel.

The Intel proponents cite significant semiconductor process advantages and new products to be released soon. The ARM proponents cite better architectures and lower power, along with an abundance of design wins in existing platforms. The AMD proponents – well, they don’t have anything to cite except maybe low cost.

How is an investor to evaluate the rhetoric and determine the financial outcome of this battle of words?

My position as a technical expert allows me to evaluate the true capabilities of ARM/TSMC (really ARM/ anybody_who_can_build_ARM_processors) vs. Intel – with AMD nipping at everyone’s tail, when it comes to mobility applications. I am about to do that in a way that should settle this hassle for the near future.

Without further ado, I can state with certainty that the new mobile oriented processors coming from Intel later this year will capture the processor space for the leading smartphones and tablets.

There are two fundamental, related, reasons for this:

1. These processors are faster than anything that ARM/TSMC (or AMD) can offer at the same level of power consumption.
2. Their power consumption at the same level of performance is much less than anything ARM/TSMC (or AMD) can offer.

You have heard all this before, but many of you don’t believe this and are still arguing that moving to 28 nanometer or 20nm (still planar) will save ARM from the Intel bomb. Well, that’s just wrong! Read on!

These two statements, above, are corollaries to laws of physics relating to silicon FET-based integrated circuits. In current technologies – 32 nanometer and smaller – constructed in a planar (TSMC) fashion, the predominant use of energy occurs as a result of leakage in inactive FETs. The FETs leak because they are running at low voltage, and in order to do that, they must have low threshold voltages. When you construct a FET with low threshold voltage in a planar technology, you can’t completely turn it off. So it leaks.

When you construct a FET for the same use in a 3D or “finFET” technology, the gate (the valve that controls the flow of charge carriers) has much more effective control and is more nearly able to completely extinguish the leakage current in the inactive FETs. Voila, the battery charge lasts longer. And because the gate length is shorter, the FET uses less energy for each transition from one state to another. So you can squeeze more transitions from a given amount of stored energy in the battery, i.e. it runs faster.

It’s the laws of physics that controls the winner in the processor race for mobile applications, and Intel has already won this race. Anyone who disagrees is in denial, has some ulterior motive, or is just dense.

What all this means is that whoever builds phones or tablets using Intel processors can make them run faster and run longer on a given battery than by using an ARM (or AMD) processor.

This argument cuts off the other arguments about market share, design wins, better architecture and other objections by the Intel opponents.

Market share is a measure of the past. What was, not what is. What is, is that the 22nm finFET is a better transistor and it makes for a better processor. If you want the best processor in your next phone/tablet/mobility_device, it had better be an Intel processor.

Architecture is an abstract thing; the “goodness” of an architecture can only be measured by objective effects. How quickly can I do something? How long will the battery charge last? Intel wins again, by actual comparison in Motorola phones!

I have given you the facts that support my statement that Intel has already won this race. If any of you want to continue to argue about this, please supply the facts that support your argument. I don’t argue with people I don’t know unless I know the facts that they are trying to use to support their arguments.

Now, the impact of this win:

It’s clear that Intel will rapidly gain market share pitting phones with Intel inside against phones with ARM or AMD inside. As I have stated elsewhere, this is a case where word of mouth will sell Intel-based phones and tablets. Whoever buys one will be delighted and tell their friend about the long battery life and the great performance – and their friends and their friend’s friends will go out and buy “Intel inside.” Marketing 101!

This will likely have a strong negative impact on Apple (AAPL), TSMC, and AMD. It will take TSMC about 3 years to fully vet a 14 nanometer finFET process in preparation for full production. Intel should be there in a year. So Intel has a near-term 2-year lead; that’s a painful disadvantage in the marketplace.

As an aside, I should mention that the positive effects of the finFET process for Intel are not limited to the mobile market – which to my mind includes smartphones, tablets, and laptops/ultrabooks.

Depending upon the degree of emphasis Intel applies to the Foundry business, this can be very big for them also – not only will customers want to use these processors inside of most ASICs (Application Specific Integrated Circuits), but they will enable the Intel Foundry to gain customers who are unable to build their chips in TSMC processes. This class of customer includes anyone who is trying to build a very large chip, a chip that will melt as a result of its own leakage current when built by TSMC can turn into duck-soup for the Intel Foundry.

And finally, do a Wiki search on “Intel MIC.” There you will find some information about multiple integrated core processors and who is buying them from Intel.Stay tuned for more articles on Intel.

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A rather skewed distribution in asset returns Year to Date (through March 31), with the winners so far i) the Nikkei, in both JPY and USD terms, on endless jawboning out of the Japanese political apparatus that it may do virtually anything – although in a few hours we will see just what the BOJ actually will do, the S&P on the $85 billion in monthly liquidity injections, and finally the FTSE on expectations the arrival of yet another Goldman central planner will unleash yet another epic episode of monetization in July, just as the Japan effect is fading. The losers: pretty much everyone else. (BitCoin was not included in the sample).

Total Return Performance of Major Assets YTD 2013

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Every morning, the first thing I do is read my emails. Seth Godin is one of my blog subscriptions. He writes some great stuff, this was today’s feed. I highly encourage subscribing to his blog.

Toward zero unemployment

Abstract: The paper presents evidence that econometric techniques
based on variance- L2 norm are flawed –and do not replicate. The result
is un-computability of role of tail events. The paper proposes a
methodology to calibrate decisions to the degree (and computability) of
forecast error. It classifies decision payoffs in two types: simple payoffs
(true/false or binary) and complex (higher moments); and randomness
into type-1 (thin tails) and type-2 (true fat tails) and shows the errors
for the estimation of small probability payoffs for type 2 randomness.
The Fourth Quadrant is where payoffs are complex with type-2
randomness. We propose solutions to mitigate the effect of the Fourth
Quadrant based on the nature of complex systems.

Download the paper: SSRN or NFV

Here is a paper I had to write for one of my classes this semester. Figured I would share it! Hope you guys enjoy it.

Creating Customer Loyalty in Small Businesses by Using the Endowment Effect

By, Evan Mayberry

The endowment effect was first introduced in 1980 by an economist named Richard Thaler. His definition for this effect is “people often demand much more to give up an object than they would be willing to pay to acquire it”. In other words, as soon as ownership has been made, individuals will value it more. This effect is considered an irrational behaviour and is found in behavioural economics. Traditional economics indicates that all human beings make rational decisions and through those rational decisions economists can predict future outcomes. However, in my opinion, I believe people want to be rational, but in reality they are quite irrational with their decisions. In this paper, I am going to exploit this irrational behaviour and show how the endowment effect can create customer loyalty in small businesses. To do this I will first introduce customer loyalty and why it is important for small businesses, then I will provide various real-life scenarios in which the endowment effect has been successfully used to create loyalty. At the end there will be a conclusion of what was covered in the paper, along with my personal recommendations in how small businesses can encourage customer loyalty through a perceived sense of ownership.

 “Customer loyalty is the result of consistently positive emotional experience, physical attribute-based satisfaction and perceived value of an experience, which includes the product or services”– beyondphilosophy.com

This definition works perfectly with the endowment effect because it describes emotional experience. Emotions are what drive behavioural economics and are what make consumers act irrational.

Customer loyalty in small businesses is essential. If to be so bold, I would say it is the most important thing for a business to work towards. Naturally, in this type of business, everything is small (the building, the customer base, the employee base and the product line or the services offered). Given this, creating strong long-term relationships with customers should be a business’s number one priority. Why? Because not many people will know you exist. But for those people who do know you exist, they need to be sending out a positive and consistent message about your business. Positive word of mouth is one of the most influential and powerful ways of marketing. Creating loyalty will promote positive word of mouth, which in return will give you a competitive advantage. (Sounds good, right?)

Now that I have established what customer loyalty is and why it is so important. Let us now look at various real-life examples in which the endowment effect has successfully worked in creating customer loyalty. The various environments I will be covering are: professional photography, restaurants and my personal favorite a local climbing gym.

The Boiling Crab

Established in 2004 as Boiling Crab, this seafood restaurant has been making an incredible impact all across United States for their delicious food and consumer personalized ambience. You might be asking what this consumer personalized ambience is… let me tell you. In the picture above is the inside of one of the Boiling Crab restaurants located in New York. It doesn’t look that attractive, right? Instead of a restaurant with an elaborate and contemporary ambience, Boiling Crab lets their customers control the ambience. They do this by allowing customers to write whatever they like on the walls (to a limit), after consuming a meal.

How does this relate to the endowment effect and customer loyalty?

When customers have the opportunity to essentially put their signature (write on the wall) in the restaurant it creates a small sense of perceived ownership for that customer. Once that ownership has been established that customer instantly gains some emotional value, which will in turn make him/her more loyal to the restaurant. An example of this would be taking your friends to the Boiling Crab, so you can show him where you left your signature. Once your friends see what you wrote, they too will want to write something (but they have to eat something first).

JMC Photography

Based out of Maui, Hawaii, photography by Bonnie and John Carpenter (JMC) “specializes in professional wedding and portrait photography throughout the Hawaiian Islands”.  JMC photography is well renowned in Hawaii because of their ability to produce brilliant photos by creating multi-frame single shot images.  Multi-frame single shot images is the process of combing many different frames into one through Photoshop. Doing this allows them to create the best possible image and it also allows them to utilize the flash on the camera appropriately. This in turn produces amazing highlights on the image in various areas. To take these multi-frame single shots someone needs to be pushing the button on the camera. The camera is typically placed on a tripod for stability purposes and Bonnie or John is working with the placement of the individuals to create the best shot. So, who is pushing the button? Instead of hiring an assistant to take the shots for them, they have the customers take the shots.

How does this relate to the endowment effect and customer loyalty?

Having the customers push the button creates a sense of ownership because they are participating in the creation of the photo. Even though this participation is quite minimal in the whole photography process, customers can still say, “I helped JMC photography create this photo”. This makes a huge impact on the customer because it gives the photo even more emotional value than it already has. The return from this is a customer that will become more loyal to JMC photography and will want future events photographed by them.

Cliffside Climbing

This last example is my personal favorite, Cliffside Climbing gym located in Kamloops, British Columbia. Cliffside Climbing offers a series of route problems for top-rope (using a harness and rope to climb above twelve feet) and bouldering (climbing twelve feet or under without a rope). I have incorporated climbing in to my life and Cliffside Climbing were the ones who introduced it to me. Currently, I go to this gym about two to three times a week. The atmosphere is quite welcoming with positive energy and easygoing attitudes.

Cliffside Climbing offers some neat activities in which members can participate in. A couple of these activities are setting your own route problems and putting your hand print on the climbing walls. Setting your own route problems involves placing a series of different holds on wall to create a problem. This problem is left up on the wall for approximately four months with your name attached to it, to recognize your efforts. The other activity involves placing your handprint at the twelve foot mark on the climbing walls. This mark indicates the max height you can safely climb to without a rope.

How does this relate to the endowment effect and customer loyalty?

For the more involved member at the climbing gym, they are able to set route problems. Once they set the route problem they are recognized for it. This act creates a great sense of ownership within the climbing gym. While you are in the gym you will see other members climbing the route and feel a sense of personal accomplishment. The personal accomplishments will increase the emotional value of going to the climbing gym, which in turn will increase customer loyalty.

For the more casual member at the climbing gym, they are able to participate in placing their handprint on the climbing walls. Doing this creates a sense of ownership because you are placing your mark on the climbing gym. The next time those members come to climb at the gym they will see their handprints, which will increase the emotional value of going to the gym. With this increase in emotional value there will be an increase in customer loyalty.

What does this all mean?

As you can see from these three different examples, there is a positive correlation between the endowment effect and customer loyalty within small businesses. Creating some type of ownership for customers, regardless of how small it is, increases the emotional value of the customer for that business. This increase in emotional value in turn increases customer loyalty. In other words, the endowment effect can be quite a useful tool for businesses if used correctly.

Using the endowment effect properly is quite easy, but there are a series of guidelines that should be covered while doing it. Firstly, small businesses should make sure that everyone is treated as an equal. Each and every customer should have the equal opportunity to participate in the activity that is offered by the business. Secondly, small businesses should avoid complex activities that require a lot of thought processing. Use the KISS (keep it simple, stupid) principle when constructing and implementing the activity. Thirdly, make sure that the activity is fun and engaging. Having an activity that is fun and engaging will increase the emotional value for the customer. Moreover, it will leave the customer with positive remarks towards the business. The last note that I will leave on, is to treat customers as if they were family. In small businesses all relationships with each customer, is just as important as another. Keep the relationships professional, but go that extra mile for customers when the opportunities arise. If done properly, the results are amazing and rewarding.

References:

Beyond Philosophy; Company Website, 2013; http://www.beyondphilosophy.com/customer-experience/customer-loyalty

Boiling Crab; Company Website, 2004, www.theboilingcrab.com

Chan, Lawrence; 2 Simple Ways to Gain Customer Loyalty, October 2010; http://www.tofurious.com/marketing-tips/simple-ways-to-gain-loyalty-endowment-effect/#comments

Cliffside Climbing; Company Website, 2008: www.cliffsideclimbing.com

JMC Photography; Company Website, 2008; www.jmcmaui.com

wiseGEEK; blog/forum, 2003-2013; http://www.wisegeek.com/what-is-the-endowment-effect.htm

First we got GM subprime interest-free car loans,  then we got subprime ABS securitizations, then we got soaring student loan defaults and delinquencies, then we got the opportunity to sell and short student loan exposure, and now, finally, the credit bubble is complete as FastFunds Financial Corporation is proud to announce that it has acquired exclusive mortgage servicing rights for an “Innovative New Mortgage Product.” Why is it so innovative? Because it requires no credit verification, no credit history, no docs and needs no personal guarantees. In other words, it is the very worst of the worst lending practices we saw in 2006: the NINJA.

But there is a twist: “all that is required to qualify for a mortgage loan is qualifying for a life insurance policy, a down payment that usually amounts to 10% of the purchase price and verification that the borrower has the financial ability to pay the monthly payments.”

In other words: buy life insurance, get a subprime, no doc mortgage for free.

Ye olde days are truly back.

From the FastFund credit bubble peak press release:

NET LIFE is a development stage enterprise that has developed and is offering an innovative new mortgage product that is not based on credit history (no doc) or personal guarantees. It is only secured by the underlying collateral and a life insurance policy on the borrower. Therefore, all that is required to qualify for a mortgage loan is qualifying for a life insurance policy, a down payment that usually amounts to 10% of the purchase price and verification that the borrower has the financial ability to pay the monthly payments. NET LIFE believes this mortgage product will be attractive to a wide spectrum of potential borrowers including:

• first time homebuyers;
• borrowers who have experienced prior financial difficulties such as foreclosures, bankruptcies, late payments or credit problems; are presently employed and whose current income would qualify for a mortgage loan; but who couldn’t otherwise qualify; and
• borrowers who may wish to bypass the traditional paperwork involved in the typical underwriting process but who would otherwise qualify.

Since its formation in 2012, NET LIFE has completed development of its mortgage product and conducted testing via a limited number of successful closings. NET LIFE is now developing plans for a national launch of its product line.

“We are excited to be on the forefront of launching this exciting new product and especially being on the servicing side where we can gain substantial benefit without the risk associated with traditional mortgage underwriting,” stated Barry Hollander, acting Chief Executive Officer of FastFunds.

* * *
We, on the other hand, are just as excited to sit back and watch how this time the most spectacular credit bubble ever created with the full complicity of every central banker in the world “will be different” and have a different outcome than the last time…

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Nassim N. Taleb is a former derivatives trader who became a scholar and philosophical essayist in 2006. Although he is currently Distinguished Professor of Risk Engineering at New York University’s Polytechnic Institute, he self-funds his research and operates in the manner of independent scholars. Taleb is the author of The Black Swan (2007–2010) and Antifragile (2012). His works focuses on decision making under uncertainty, as well as technical and philosophical problems with probability and metaprobability, in other words “what to do in a world we don’t understand”.

What We Learn From Firefighters

Since 2004, interest in ‘stocks’ and ‘bonds’ has plunged by more than 50%. Despite a renaissance for bonds in 2008, and stocks in 2009, the ‘Great Rotation’ appears to be ‘out of investing’. Google Trends also shows that, as expected, ‘Bonds’ have been more popular than ‘Stocks’ since the crash – a development the Fed is so desperately trying to reverse, by imposing ever stricter central planning, ironically the reason why most have “just said no” to anauthoritarian, inefficient, and farcical policy instrument formerly known as the market. Is it any wonder so many retail brokerages, commission-takers, and asset-gatherers are advertising day-in, day-out and constantly reassuring with the “it’ll all be ‘ok’ in the long-run meme”?

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It’s an ugly start to the day wherever we look. Europe is a bloodbath as the dead-cat-bounce hopes fade with Swiss 2Y rates notably negative once again and Italian bond spreads 55bps wider on the week (near the wides of the week) as Italy’s equity market plunges back to the lows (-4%) on the week. US equity futures are fading rapidly and after tracking gold for most of the last 12 hours, we are now seeing gold (and silver) resurge as stocks continues to slide back towards bonds un-exuberance. Treasury yields are at the lows of the week (-11bps). From weak macro data overnight to the whocouldanode sequestration, there’s plenty to worry about, but then again we have POMO in a few hours…

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Hedge fund icon Stanley Druckenmiller sat down with Bloomberg TV’s Stephanie Ruhle, saying that he’s decided to speak out now because he sees “a storm coming, maybe bigger than the storm we had in 2008, 2010.” His fear is that the ballooning costs of Social Security, Medicare and Medicaid (which with unfunded liabilities are as high as $211 trillion) will bankrupt the nation’s youth an pose a much greater danger than the debt currently being debated in Congress.  He said, “While everybody is focusing on the here and now, there’s a much, much bigger storm that’s about to hit… I am not against seniors. What I am against is current seniors stealing from future seniors.” While not exactly Maxine Waters’ sequestration-based 170 million job loss, this concerning interview is must-see for his clarity and forthrightness from who is to blame, to the consequences of gridlock, our society’s short-term thinking, and the concerning demographics the US faces.

Druckenmiller on why he’s speaking out now:

“I see a storm coming, maybe bigger than the storm we had in 2008, 2010.  And really, the reason could happen without people looking as for a lot of similar reasons that we could get into.  But  the basic the basic story is, the demographic bubble I was looking at way back in ’94 that started in 2011, we are right at the first ramp-up of this thing that is about to hit.”

On U.S. demographics:

“Something remarkable has occurred since 1994 until now, which is entitlement spending, or let me say transfer payments to be a little more correct.  Transfer payments which were 28% and 60, and were 50% when we were in the budget mess in ’94.  Lo and behold, they’ve gone up to 67% of government outlays.  But they haven’t gone up because of demographics. They’ve gone up because the seniors have a very, very powerful lobby.  They keep getting more and more transfer payments from the youth. But the demographic storm is just starting now. It reminds me of ’05 when people just extrapolated housing prices going up for 50 years…Everyone sorta lives with their rulers in the past and doesn’t look at coming changes. So what’s going to happen is we now have a working population, this is the way entitlements work, where the current workforce is paying for the benefits of the seniors. And since 2000, we’ve had about 4.5 to 4.8 workers for every retiree.  By 2050, that number will drop to 2.4 workers per retiree.  Another catchy way to say it is by 2030, the average population of the United States is gonna be older than the average Floridian right now.”

On who is going to stop seniors from stealing from the next generation:

“You asked me why I’m here.  And I think people like me and others need to speak out. It’s about the future, not about the present where the problem is.  And let me just say one thing.  I am not against seniors, okay.  I love seniors.  Unfortunately I’m going to be one in the not-too-distant futures.  What I am against is current seniors to me stealing from future seniors.”

On who should be blamed for hurting the economy:

“It’s hard to tell who’s going to be blamed– if we don’t act and this occurs…There’s plenty of blame to go around. If I had to analyze how do we get into the financial crisis, I would say it started way back in the ’90s when then-Chairman Greenspan refused to address the dot-com bubble, came up with some new theory of productivity and therefore we’re not going to have a problem, so all these NASDAQ companies who were never going to earn money went to hundreds-of-times earnings and then of course, we had a major bust.  And instead of taking a recession and having the cleanup…they needed an offset. So they created the housing bubble. So now by hindsight, everybody says, ‘Well, you had these horrible Wall Street actors,’ and I’m sure there were quite a few horrible Wall Street actors.  And I don’t doubt that they were part of the problem.  In fact, I know they were part of the problem.  But I also know it was negative real interest rates for 12 outta 20 years that enabled these actors to do the things they were doing and incented, yes, incented them to go out and gamble the way they were gambling.”

On gridlock in Washington:

“I’m pretty frustrated.  This sequester thing– if you just look at how it came about, first of all, every five minutes all the suffering and all this horrible stuff is going to happen in various sectors if this goes through.  But there’s three things that are not on the table in the sequester.  I know you’re gonna be shocked by this.  Medicare, social security and Medicaid, okay.”

On why Medicare, Medicaid and Social Security are not on the table:

“I’m sure it’s because of short-term politics.  The problem with politicians is, they really only do have a four-year life cycle.  The rest of us should have the responsibility to look a little further than that ahead.  But yeah, I don’t know whether ‘mad’ is the word.  I’m extremely frustrated by their refusal to deal with this problem. And the sequester thing, I think the president made a deal. It was a deal so they would extend the debt ceiling, which they did, all right.  I am very much for tax reform.  But I don’t think it should be part of this particular thing and we should be parading out the crowd we’d been parading about to say how horrible this is going to affect the economy. Let me tell ya, I don’t know what the economy’s going to do.  But it’s just a little ridiculous to say a $600 billion tax increase over ten years and $150 billion increase in the payroll tax is going to have no affect on the economy.  But an $85 billion cut in discretionary spending is going to tank the economy?  If the economy were to soften, I can tell you it won’t be because it will not be because of this $85 billion.”

On why he doesn’t become a policymaker:

“Because my wife loves New York and I love my wife.”

On equities vs. bonds:

One of the things that is kinda one of my pet peeves is hearing all these people on TV say, ‘Well, you gotta go into equities ’cause they’re so cheap relative to bonds and there’s no other game in town.’  They are cheap relative to bonds.  But everything is cheap relative to bonds…So just because equities are cheap relative to bonds doesn’t mean their price isn’t subsidized.  I’m not making a forecast here because the subsidization could go on for a long time.  But real estate, gold, equities, they’re all priced off of ZIRP, zero interest rates, and they’re all subsidized.”

On whether the hedge fund industry could be in hot water 12-24 months from now and become even further consolidated:

“Oh, I don’t know.  I think the hedge fund’s short-term thinking is just a manifestation of our entire society.  Whether it’s the fed or whether it’s– the administration or whether it’s Congress, no one bothers to think about the long term anymore.  And the hedge funds are just one more manifestation of that.”

On where investors should put their money right now:

“That’s hard for me to answer.  Because I have the luxury of a lot of experience in sitting in front of a screen.  And I can go into currency markets where it’s at a relative price.  So it’s the one area where prices aren’t subsidized.  And I’m arrogant enough to think I can time these things.  But I don’t really know how to answer that question for public invest– but let me just say that this idea that you’ve got go plowing into risk because rates are zero, that they will rue the day one day.  The music will stop.  And I would probably be invested right now thinking I’m smart enough to know that we’re quite away from the music stopping.  I don’t think Bernanke is about to end these policies for a while.  But let’s just know what we’re dealing with here.”

On whether there needs to be more consolidation in the banking industry:

“I’d like to see them be more like utilities.  I could care less whether they make money, unless I happen to own equities in it.  But if we’re talking about as a United States citizen–I have no problem with banks being utilities and going back to what banks used to do…”

On whether banks should just be making loans:

“Yeah.”

On whether the most sophisticated bankers should work at hedge funds, not on sell-side trading desks:

“You said it, Stephanie, not me.”

On what his future looks like:

“I’m probably going to disappear again at some point.  But in the meantime, I’m gonna do what I can to try and bring the awareness of this issue out because with respected economists, again, focusing on a little problem over here when you’ve got this big problem over here, I think the message needs to be out there.”

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