Marriott Says It Will Pay for Replacement Passports After Data Breach. Here’s Why That’s Likely Baloney.

As you have no doubt heard by now, Marriott disclosed a massive data breach that exposed up to 500 million customer records. Hackers accessed information in the company’s Starwood reservation system, which affected brands such as W Hotels, St. Regis, Sheraton Hotels & Resorts, Westin Hotels & Resorts, and other properties in the Starwood portfolio, the company said. The intrusion apparently began in 2014, two years before Marriott acquired Starwood. This oversight in the M&A process calls to mind another recent, post-acquisition hacker-surprise: Yahoo, whose two mega-breaches remained undetected when the company sold to Verizon last year. Coincidentally, Marriott’s hack is the biggest suffered by a corporation, second only to those at Yahoo.

After news of the Marriott breach came out, Sen. Charles E. Schumer (D-N.Y.) called on the hotel chain to foot the bill and replace people’s passports which were potentially compromised as part of the breach. Marriott quickly promised to cover the cost for as many as 327 million people whose passport numbers may have been exposed. At a fee of $110 per passport, that would put Marriott on the hook to pay up to $36 billion—a price tag equivalent to the value of the entire company, per its market capitalization. A devastating payout.

Here’s the thing though: While seemingly noble, Marriott’s promise is a bunch of baloney. The company said it will follow through on reimbursement only in instances where it “determine[s] that fraud has taken place.” What this caveat conveniently excludes is that Marriott’s hack likely had little to do with fraud and everything to do with espionage. In other words, if you’re a victim, don’t expect remuneration.

As Reuters reported, investigators believe the perpetrators of this attack were Chinese spies. The breach used tools, tactics, and procedures that matched Beijing’s style. The intrusion is said to have begun shortly after a breach of the government’s Office of Personnel Management, which government officials have attributed to China. The Starwood database represents a massive trove of potential intelligence: information on who is staying where, when—a bonanza for building up profiles of targets and tracking people of interest.

Geng Shuang, China’s Ministry of Foreign Affairs spokesperson, issued a statement saying the country “opposes all forms of cyber attack,” per Reuters. He said the country would investigate the claims, if offered evidence. Meanwhile, Connie Kim, a Marriott spokesperson, said “we’ve got nothing to share” about the Chinese attribution claim.

The Marriott breach—which took place quietly over years, as spies prefer—does not appear to have been a cybercriminal score. That’s why the passport payment pledge is probably bunk; nevertheless, if you think you might have been affected, it won’t hurt to follow these steps to refresh your cybersecurity hygiene and better protect yourself.

A version of this article first appeared in Cyber Saturday, the weekend edition of Fortune’s tech newsletter Data Sheet. Sign up here.

U.S. accuses Huawei CFO of Iran sanctions cover-up

VANCOUVER/LONDON (Reuters) – Huawei Technologies Co Ltd’s chief financial officer faces U.S. accusations that she covered up her company’s links to a firm that tried to sell equipment to Iran despite sanctions, a Canadian prosecutor said on Friday, arguing against giving her bail while she awaits extradition.

The case against Meng Wanzhou, who is also the daughter of the founder of Huawei, stems from a 2013 Reuters report here about the company’s close ties to Hong Kong-based Skycom Tech Co Ltd, which attempted to sell U.S. equipment to Iran despite U.S. and European Union bans, the prosecutor told a Vancouver court.

U.S. prosecutors argue that Meng was not truthful to banks who asked her about links between the two firms, the court heard on Friday. If extradited to the United States, Meng would face charges of conspiracy to defraud multiple financial institutions, the court heard, with a maximum sentence of 30 years for each charge.

Meng, 46, was arrested in Canada on Dec. 1 at the request of the United States. The arrest was on the same day that U.S. President Donald Trump met in Argentina with China’s Xi Jinping to look for ways to resolve an escalating trade war between the world’s two largest economies.

The news of her arrest has roiled stock markets and drawn condemnation from Chinese authorities, although Trump and his top economic advisers have downplayed its importance to trade talks after the two leaders agreed to a truce.

A spokesman for Huawei had no immediate comment on the case against Meng on Friday. The company has said it complies with all applicable export control and sanctions laws and other regulations.

Friday’s court hearing is intended to decide on whether Meng can post bail or if she is a flight risk and should be kept in detention.

The prosecutor opposed bail, arguing that Meng was a high flight risk with few ties to Vancouver and that her family’s wealth would mean than even a multi-million-dollar surety would not weigh heavily should she breach conditions.

Meng’s lawyer, David Martin, said her prominence made it unlikely she would breach any court orders.

“You can trust her,” he said. Fleeing “would humiliate and embarrass her father, whom she loves,” he argued.

Huawei CFO Meng Wanzhou, who was arrested on an extradition warrant, appears at her B.C. Supreme Court bail hearing in a drawing in Vancouver, British Columbia, Canada December 7, 2018. REUTERS/Jane Wolsak

The United States has 60 days to make a formal extradition request, which a Canadian judge will weigh to determine whether the case against Meng is strong enough. Then it is up to Canada’s justice minister to decide whether to extradite her.

Chinese Foreign ministry spokesman Geng Shuang said on Friday that neither Canada nor the United States had provided China any evidence that Meng had broken any law in those two countries, and reiterated Beijing’s demand that she be released.

Chinese state media accused the United States of trying to “stifle” Huawei and curb its global expansion.

IRAN BUSINESS

The U.S. case against Meng involves Skycom, which had an office in Tehran and which Huawei has described as one of its “major local partners” in Iran.

In January 2013, Reuters reported that Skycom, which tried to sell embargoed Hewlett-Packard computer equipment to Iran’s largest mobile-phone operator, had much closer ties to Huawei and Meng than previously known.

Slideshow (9 Images)

In 2007, a management company controlled by Huawei’s parent company held all of Skycom’s shares. At the time, Meng served as the management firm’s company secretary. Meng also served on Skycom’s board between February 2008 and April 2009, according to Skycom records filed with Hong Kong’s Companies Registry.

Huawei used Skycom’s Tehran office to provide mobile network equipment to several major telecommunications companies in Iran, people familiar with the company’s operations have said. Two of the sources said that technically Skycom was controlled by Iranians to comply with local law but that it effectively was run by Huawei.

Huawei and Skycom were “the same,” a former Huawei employee who worked in Iran said on Friday.

A Huawei spokesman told Reuters in 2013: “Huawei has established a trade compliance system which is in line with industry best practices and our business in Iran is in full compliance with all applicable laws and regulations including those of the U.N. We also require our partners, such as Skycom, to make the same commitments.”

U.S. CASE

The United States has been looking since at least 2016 into whether Huawei violated U.S. sanctions against Iran, Reuters reported in April.

The case against Meng revolves around her response to banks, who asked her about Huawei’s links to Skycom in the wake of the 2013 Reuters report. U.S. prosecutors argue that Meng fraudulently said there was no link, the court heard on Friday.

U.S. investigators believe the misrepresentations induced the banks to provide services to Huawei despite the fact they were operating in sanctioned countries, Canadian court documents released on Friday showed.

The hearing did not name any banks, but sources told Reuters this week that the probe centered on whether Huawei had used HSBC Holdings (HSBA.L) to conduct illegal transactions. HSBC is not under investigation.

U.S. intelligence agencies have also alleged that Huawei is linked to China’s government and its equipment could contain “backdoors” for use by government spies. No evidence has been produced publicly and the firm has repeatedly denied the claims.

The probe of Huawei is similar to one that threatened the survival of China’s ZTE Corp (0763.HK) (000063.SZ), which pleaded guilty in 2017 to violating U.S. laws that restrict the sale of American-made technology to Iran. ZTE paid a $892 million penalty.

Reporting by Julie Gordon in Vancouver and Steve Stecklow in London; Additional reporting by Anna Mehler Paperny in Toronto, David Ljunggren in Ottawa, Karen Freifeld in New York, Ben Blanchard and Yilei Sun in Beijing, and Sijia Jiang in Hong Kong; Writing by Denny Thomas and Rosalba O’Brien; Editing by Muralikumar Anantharaman, Susan Thomas and Sonya Hepinstall

This Is the Most Riotously Insane Thing About the Massive Marriott Data Breach You're Likely to Hear

Not to worry, Yahoo, you still had the largest data breach in corporate history, at 3 billion records. But at 500 million, Marriott is a strong second, and maybe should be first.

That’s because of the nature of the data that went out the door for about 327 million of the people who had stayed at a Starwood property on or before September 10, 2018. (And starting in 2014, because that’s how long it’s been since someone first broke into the system.)

The data included some combination of name, mailing address, phone number, email address, Starwood Preferred Guest (“SPG”) account information, birth date, gender, arrival and departure information, reservation date, communication preferences, and passport number.

Passport number? Yup. They kept them on file. And an undisclosed number of encrypted payment card numbers, expirations dates, and maybe–Marriott’s really not quite sure–enough information to let someone crack the encryption.

Yes, this is really, really bad.

Oh, and TechCrunch also noted the the claim that Russian cybercriminals got into the Starwood servers. It can’t keep getting worse, right?

You know the answer.

Marriott’s promised email notifications to affected customers will come from a fake-ish looking email address, as TechCrunch noted, and one that could be easily spoofed by people who want to cause even more damage. In other words, beware of phishing hacks that stand on the back of Marriott’s efforts to address the terrible position it’s put so many customers into.

And now we come around to the latest insanity. As part of its response, Marriott set up a website that ultimately points you to a third party service that “monitors internet sites where personal information is shared and generates an alert to the consumer if evidence of the consumer’s personal information is found.”

The third party running the service, corporate investigations and risk management firm Kroll, of course is going to need information from you to see if it pops up on the dark web. Here is what they might want, directly from their website:

  • name, address, phone number, and e-mail address
  • date of birth, driver’s license number, social security number, passport number, and other similar information
  • copies of government-issued photo identification, Social Security card and/or utility bill(s), where applicable
  • credit card number and other financial account data, including your consumer credit file(s), as applicable
  • your responses to security questions; the information you provide in customer service correspondence; and general feedback

You’re going to have to cough up enough information to see if they can match it to anything on the dark web. You’ll have to trust that everything will be fine. Which is what you did with Marriott in the first place.

Fat lot of good that did almost half the country.

How does this keep happening? As I explained in a piece over at Vice Motherboard, it all comes down to economics. The ultimate penalties big companies pay are so infrequent and small in comparison to their revenues that it becomes something just as easy to ignore. The millions of dollars you may hear about as the cost of a data breach is significantly smaller than a rounding error in accounting to them.

Not that I’m suggesting Marriott is ignoring this. Just a comment on the general treatment of customer data security by large corporations.

The only hope is that government officials take enough heat from voters that they put significant fiscal punishment into place. I’d settle, at least in this case, for Marriott to pay the cost for all the people who might now need to obtain a new passport. That at least would be a start.

But there’s the other factor: consolidation. Marriott is the largest hotel operator in the world. If you’re traveling, there’s a good chance you’ll land in one of its properties. Unless, of course, you remember all this nonsense and intentionally stay elsewhere.

Even if you don’t get more points, you might at least keep your data secure.

U.S. lawmakers make final push to win approval of self-driving car bill

WASHINGTON (Reuters) – Key U.S. senators are making a last-ditch effort to win approval of a bill to speed the use of self-driving cars without human controls, but face an uphill battle on Capitol Hill.

The U.S. Capitol building is seen in Washington, U.S., February 8, 2018. REUTERS/ Leah Millis

Staff for Republican Senator John Thune and Democratic Senator Gary Peters circulated a draft of a revised bill aimed at breaking a legislative stalemate.

The pair have been working for more than a year to try to win approval of the bill by the Senate and have said they may try to attach the measure to a bill to fund U.S. government operations.

The U.S. House unanimously approved a measure in September 2017, but it has been stalled in the Senate for over a year. Automakers and congressional aides concede they face tough odds of getting approval in the final days before the current Congress adjourns.

A key sticking point has been whether the measure would limit the ability of companies to compel binding arbitration for consumers using autonomous vehicles. The aides’ draft limits the use of those clauses in death or serious injury crashes, while the bill that passed the House did not include the limitation.

The revised draft would require manufacturers to validate that self-driving cars can detect all road users – including pedestrians, bicyclists and motorcyclists.

It would also require additional reports of potential safety issues involving vehicles that have systems like Tesla Inc’s Autopilot that handle some driving tasks.

Automakers say the bill is critical to advancing the technology that could save thousands of lives, but a group of safety advocates in a letter to lawmakers urged they not to move ahead with legislation in the final days of the current Congress.

“Rushing through a driverless vehicle bill that lacks fundamental safeguards will make our roads less safe and risks turning an already skeptical public even more against this technology,” the letter said.

Under the legislation, automakers would be able to win exemptions from safety rules that require human controls. States could set rules on registration, licensing, liability, insurance and safety inspections, but not set performance standards.

Automakers have been pushing for legislation as they try to move forward.

General Motors Co in January filed a petition with U.S. regulators seeking an exemption for the current rules to use vehicles without steering wheels and other human controls as part of a ride-sharing fleet it plans to deploy in 2019, but has receive no decision to date.

Alphabet Inc’s Waymo unit plans to launch a limited commercial autonomous ride-hailing service in Arizona by year-end.

In March, a self-driving Uber Technologies Inc [UBER.UL] vehicle struck and killed a pedestrian, while the backup safety driver was watching a video, police said. Uber suspended testing in the aftermath and some safety advocates said the crash showed the system was not safe enough to be tested on public roads.

Reporting by David Shepardson, editing by G Crosse

Qualcomm says China comment will not revive NXP deal

(Reuters) – U.S. chipmaker Qualcomm Inc (QCOM.O) said on Monday it was not looking to revive its abandoned $44 billion acquisition of Dutch peer NXP Semiconductors NV (NXPI.O), a day after the White House said China would reconsider clearing a deal if it was attempted again.

Qualcomm, the world’s biggest smartphone-chip maker, walked away from its agreement to buy NXP in July, after failing to secure Chinese regulatory approval. The planned deal was first agreed between the two companies in October 2016.

Qualcomm, headquartered in San Diego, California, and NXP, based in Eindhoven, the Netherlands, needed China’s blessing for their deal because of their presence in that country.

After high-stakes talks on Saturday between U.S. President Donald Trump and Chinese President Xi Jinping in Argentina, the White House said in a statement that China was “open to approving the previously unapproved” deal for Qualcomm to acquire NXP “should it again be presented”.

But Qualcomm said there was no prospect for the acquisition to be revived.

“While we were grateful to learn of President Trump and President Xi’s comments about Qualcomm’s previously proposed acquisition of NXP, the deadline for that transaction has expired, which terminated the contemplated deal,” a Qualcomm representative said via email.

“Qualcomm considers the matter closed.”

NXP declined to comment.

On Monday, White House economic adviser Larry Kudlow told reporters that President Trump put the issue of the acquisition on the table in the talks with the Chinese president.

Kudlow added that the Chinese president’s openness to the deal was a sign of further cooperation on multiple issues, including corporate mergers. Xi’s reported comment could embolden some potential acquirers in the semiconductor space to explore transactions, corporate dealmakers said.

“Although that acquisition cannot be resuscitated, Xi’s comment reveals in plain sight that Chinese antitrust policy is inherently politicized,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies in a blog post.

FILE PHOTO: A sign on the Qualcomm campus is seen, as chip maker Broadcom Ltd announced an unsolicited bid to buy peer Qualcomm Inc for $103 billion, in San Diego, California, U.S. November 6, 2017. REUTERS/Mike Blake

Qualcomm shares closed up 1.5 percent at $59.14 in New York on Monday, while NXP shares ended up 2.75 percent at $85.67.

Qualcomm and NXP did not lobby for the Trump administration to bring up the abandoned deal in its meeting with Xi and other Chinese officials on the sidelines of the G20 summit in Buenos Aires on Saturday, which was dominated by negotiations over trade tariffs, according to sources close to the companies.

The two companies were surprised to see that the terminated deal resurfaced as an issue, the sources added, requesting anonymity to discuss confidential deliberations. Qualcomm was given just an hour’s notice by the Trump administration about Xi’s comment on the NXP deal, and its inclusion in the White House statement, according to two of the sources.

The Trump administration had unsuccessfully lobbied the Chinese government earlier this year to give its blessing to the deal.

China’s foreign ministry declined to comment on Qualcomm during a regular media briefing on Monday.

Qualcomm had sought to purchase NXP because of its market position as a dominant supplier to the automotive market, as car makers add more chips to vehicles each year. Qualcomm is now focused on developing its own chips for the automotive market, according to one of the sources.

Qualcomm had to pay NXP a $2 billion fee to terminate the deal. To appease its shareholders, Qualcomm has also embarked on a $30 billion stock repurchase plan to return to them most of the money that would have been used for the NXP deal. It has spent more than $20 billion in share buybacks in the last 12 months. NXP has also announced its own $5 billion share buyback program.

DEALS ABANDONED

Several deals by semiconductor companies were put on ice after the Qualcomm/NXP deal fell through, simply because they had a footprint in China and required regulatory approval there. Now, chip companies may be more optimistic about their regulatory chances in China.

One example could be Xilinx Inc (XLNX.O), a U.S. provider of chips used in communications network gear and consumer electronics that has a big presence in China. Xilinx is currently vying to acquire Israeli chip maker Mellanox Technologies Ltd (MLNX.O) after it decided to run an auction to sell itself, according to people familiar with the matter. A successful acquisition of Mellanox could prove an important test of China’s appetite to approve such deals. A representative for Xilinx declined to comment. Mellanox did not immediately respond to requests for comment.

A more near-term test being watched by dealmakers is KLA-Tencor Corp (KLAC.O) pending acquisition of fellow semiconductor equipment maker, Israel’s Orbotech Ltd (ORBK.O). The $3.4 billion deal, announced in March, is still awaiting Chinese regulatory approval. KLA-Tencor’s CEO said on the company’s last earnings call that he expects the deal to close by year end.

Thus far, other high-profile mergers and acquisitions involving U.S. companies in other sectors have received Chinese approval. Last month, China approved United Technologies Corp’s (UTX.N) $30 billion purchase of aircraft parts maker Rockwell Collins Inc and Walt Disney Co’s (DIS.N) $71.3 billion deal to buy most of Twenty-First Century Fox’s (FOXA.O) entertainment assets.

Acquisitions of U.S. companies by Chinese companies, on the other hand, have been few and far between in the last year, after the Committee on Foreign Investment in the United States (CFIUS), a government panel that scrutinizes deals for potential national security risks, shot down more of these deals, such as Ant Financial’s plan to acquire U.S. money transfer company MoneyGram International Inc (MGI.O). U.S. lawmakers also passed reforms earlier this year that increased CFIUS’ scrutiny of deals.

Reporting by Liana B. Baker in New York and Kanishka Singh in Bengaluru; Aditional reporting by Greg Roumeliotis in New York, Michael Martina in Beijing and Jeff Mason in Washington, D.C.; editing by Diane Craft

China transport ministry fines Didi executives in crackdown on illegal practices

BEIJING (Reuters) – Chinese authorities announced a broad crackdown on China’s ride-hailing industry on Wednesday, targeting market-leader Didi Chuxing with fines following the deaths of two passengers in separate incidents earlier this year.

FILE PHOTO: The company logo of the Didi ride hailing app is seen on a car door at the IEEV New Energy Vehicles Exhibition in Beijing, China October 18, 2018. REUTERS/Thomas Peter

China’s Ministry of Transport said Didi had violated multiple safety rules, presenting a “major safety hazard”, including failing to properly flag high-risk drivers and improperly handling deposits.

“The driver’s qualifications and background checks are not in place. The company’s management of people and vehicles is out of control,” said the ministry in a notice posted on Wednesday morning.

It said it will “severely crack down” on ride-hailing platforms hiring illegal drivers, and will fine Didi’s executives and legal representatives an undisclosed amount of money.

The strong rebuke comes after two women were assaulted and killed earlier this year in separate incidents involving drivers using Didi’s carpool service, Didi Hitch, drawing widespread criticism of the company on social media.

In one of the incidents, the driver was able to circumvent safety controls on Didi’s app to use a relative’s account, despite being previously flagged for harassment.

The carpool service, which was advertised by Didi as a way to meet people, has been suspended, and authorities said on Wednesday the suspension will continue indefinitely.

“As a young company, Didi still needs to work on many shortcomings and imperfections that have brought the public great concern,” said Didi Chief Executive Cheng Wei in a statement on Wednesday.

“Even if the industry might not be able to completely root out criminal behavior or accidents, we will try our upmost best to protect riders and drivers.”

The rebuke also comes as Didi struggles to counter increased waiting times in large cities, where residence restrictions of drivers have slashed the number of available rides.

Authorities also said they will take steps to reduce anti-competitive behavior in the industry.

Since acquiring Uber’s China business in 2016, Didi – backed by Japan’s SoftBank Group Corp – controls close to 90 percent of the country’s ride-hailing market, though new rivals have begun entering the fray, including a service backed by Meituan Dianping.

Reporting by Cate Cadell; Editing by Christopher Cushing

Chinese transport authorities slam Didi for skirting safety measures

BEIJING (Reuters) – Chinese authorities announced a broad crackdown on China’s ride-hailing industry on Wednesday, targeting market-leader Didi Chuxing with fines following the deaths of two passengers in separate incidents earlier this year.

FILE PHOTO: The company logo of the Didi ride hailing app is seen on a car door at the IEEV New Energy Vehicles Exhibition in Beijing, China October 18, 2018. REUTERS/Thomas Peter

China’s Ministry of Transport said Didi had violated multiple safety rules, presenting a “major safety hazard”, including failing to properly flag high-risk drivers and improperly handling deposits.

“The driver’s qualifications and background checks are not in place. The company’s management of people and vehicles is out of control,” said the ministry in a notice posted on Wednesday morning.

It said it will “severely crack down” on ride-hailing platforms hiring illegal drivers, and will fine Didi’s executives and legal representatives an undisclosed amount of money.

The strong rebuke comes after two women were assaulted and killed earlier this year in separate incidents involving drivers using Didi’s carpool service, Didi Hitch, drawing widespread criticism of the company on social media.

In one of the incidents, the driver was able to circumvent safety controls on Didi’s app to use a relative’s account, despite being previously flagged for harassment.

The carpool service, which was advertised by Didi as a way to meet people, has been suspended, and authorities said on Wednesday the suspension will continue indefinitely.

“As a young company, Didi still needs to work on many shortcomings and imperfections that have brought the public great concern,” said Didi Chief Executive Cheng Wei in a statement on Wednesday.

“Even if the industry might not be able to completely root out criminal behavior or accidents, we will try our upmost best to protect riders and drivers.”

The rebuke also comes as Didi struggles to counter increased waiting times in large cities, where residence restrictions of drivers have slashed the number of available rides.

Authorities also said they will take steps to reduce anti-competitive behavior in the industry.

Since acquiring Uber’s China business in 2016, Didi – backed by Japan’s SoftBank Group Corp – controls close to 90 percent of the country’s ride-hailing market, though new rivals have begun entering the fray, including a service backed by Meituan Dianping.

Reporting by Cate Cadell; Editing by Christopher Cushing

Japan's Line Corp to establish bank in tie-up with Mizuho: source

FILE PHOTO – The logo of Line Corp is seen at the company’s headquarters in Tokyo, Japan, January 25, 2017. REUTERS/Toru Hanai/File Photo

TOKYO (Reuters) – Japanese mobile chat app operator Line Corp will tie up with Mizuho Financial Group Inc to establish a bank, a source with direct knowledge told Reuters on Tuesday, declining to be identified because the plan is not yet public.

Mizuho is scheduled to hold a news conference at 3:30 p.m. (0630 GMT) to brief on a new business. Officials at the bank were not immediately available to comment on the tie-up with Line, which was first reported by public broadcaster NHK.

Line did not immediately respond to a request for comment.

Reporting by Taiga Uranaka; Editing by Chang-Ran Kim

Tesla China sales plunge 70 percent in October: auto industry body

FILE PHOTO: A man finishes charging his Tesla car at a charging point outside Tesla China headquarters in Beijing, China July 11, 2018. REUTERS/Jason Lee/File Photo

BEIJING/SHANGHAI (Reuters) – Tesla Inc’s (TSLA.O) vehicle sales in China sank 70 percent last month from a year ago, the country’s passenger car association told Reuters on Tuesday, underscoring how the Sino-U.S. trade war is hurting the U.S. electric carmaker.

An official from China Passenger Car Association said data from the industry body showed Tesla sold just 211 cars in the world’s largest auto market in October.

Tesla did not respond to repeated calls and written requests for comment on Tuesday.

The electric carmaker, which imports all the cars it sells in China, said in October that tariff hikes on auto imports were hammering its sales there. In July, Beijing raised tariffs on imports of U.S. autos to 40 percent amid a worsening trade standoff with the United States.

While so-called new-energy vehicle sales have continued to climb in China, wider auto sales have slowed sharply since the middle of the year, taking the market to the brink of its first annual sales contraction in almost three decades.

Tesla, led by billionaire CEO Elon Musk, said last week it was cutting the price of its Model X and Model S cars in China in a shift in strategy to make the cars “more affordable” and absorb more of the hit from higher tariffs.

Tesla recently secured the site for its first overseas factory in Shanghai that will help it avoid the steep tariffs.

Reporting by Yilei Sun and Adam Jourdan; Editing by Himani Sarkar

Risk Off Intensifies: As These Attractive Opportunities Fall, The Flight To Omega Healthcare Grows

This week’s Blue Harbinger Weekly digs into specific investment ideas following the powerful market-wide “flight to quality” since October, including a detailed review and trading idea for big-dividend (7.3% yield) REIT Omega Healthcare Investors (OHI), which is now up 44% year-to-date while the S&P 500 is essentially flat (do you think Omega is Overbought?).

We also review the names on our Income Equity watchlist, as well as the results of an attractive Growth Equity stock screen. We provide an update on our market-wide health monitor, and we conclude with some ideas about how you might want to position your investment portfolio going forward.

When Will The “Flight To Quality” End?

As we can see in the above chart, the markets have been selling off since October, and there has been a subsequent “flight to quality” as low-beta high-income sectors (such as REITs) have performed better than high-beta, high-growth sectors such as tech stocks. And as Dr. Brett Steenbarger asks and answers in his recent excellent blog post Oversold In An Oversold Market:

The assumption seems to be that because we’ve seen weakness in stocks, oil, high yield bonds, etc., we are in danger of an outright bear market.

According to his data, the answer to that notion is:

Maybe.

However, look at to REIT expert, Brad Thomas: Realty Income Is A Flight-To-Quality Trade. Specifically, Brad explains:

Mr. Market sees some clouds forming on the horizon and that’s what’s driving the flight-to-quality trade.

Realty Income’s (O) recent strong performance is certainly consistent with the current “risk off” environment, and that’s exactly why many people own high-quality REITs in the first place.

But is the flight to quality trade overdone? Is it time to move some of your chips around? We absolutely advocate sticking to your personal long-term investment strategy, but that doesn’t mean you can’t be opportunistic on the margin.

According to Ariel Santos-Alborna, The Great Rotation (from Growth To Value And Risk-Off) may be underway. Ariel provides lot of good data to support his thesis, and it’s something we keep on our radar for risk management purposes.

And depending on your individual situation, we’ve highlighted some attractive stock-specific opportunities, and dramatic recent stock price moves, in the next section, for you to consider.

Stocks For You To Consider:

1. Watchlist: High-Income Equities…

The following table includes a list of high income securities that we follow (many of which we have written about, in great detail, in the past). These securities generally offer large dividend yields, and many of them have sold off over the last month as the market has sold off (although they haven’t sold-off nearly as much as the names on our Growth Equity list, which we will share later).

One of the first thing to note about this list is the large dividend yields. For example, we’ve had success owning 12% dividend yield New Residential (NRZ), which has recently pulled back in price. We’ve written about NRZ previously here, and encourage investors to consider the big risks before investing. We also currently own Omega Healthcare (a top performer in the table), which we cover in detail later in this report.

2. Watchlist: Contrarian Growth Ideas…

Also worth considering, we ran the following list of more growth-oriented stocks that had been performing so well this year, that they’re still up sharply year-to-date, even after selling off dramatically in recent months as part of the market-wide flight to quality.

The list includes big movers in the technology, consumer cyclicals, and information services sectors (because they tend to contain many of the higher beta growth stocks), but we’ve also been sure to include the FANGs. It’s still hard for us to believe names like Netflix (NFLX) won’t continue to grow rapidly and experience some powerful price reversion back much higher in the future (Netflix is still up 36.6% year-to-date, even after selling-off 22.5% over the last three months. For perspective, the S&P 500 is at the bottom of the table, and shows just how much more volatile the other stocks have been relative to the overall market.

Also, if you’re wondering, the “Money Flow Index” in the table is a technical measure of price and volume, or money flow over the past 14 trading days with a range from 0 to 100. A MFI value of 80 is generally considered overbought, or a value of 20 oversold.

Omega Healthcare Investors:

3. Stock of the Week: Is Big-Dividend REIT Omega Healthcare Overbought?

Big dividend yield (7.3%) REIT Omega Healthcare Investors has been on fire this year, gaining over 44% year-to-date. Granted, the shares have been rising from a low base (related to distress among many of its large operators). However, the company’s recent upbeat earnings announcement, combined with the market-wide “flight to quality,” has benefited the shares significantly. And by many measures, the shares are now approaching “overbought” levels in the short term, irregardless of your views of the stock over the long term (for the record, we like Omega as a long-term income-investment, and we continue to own the shares).

As long-term investors, and before we get into the details of our recent short-term income-boosting Omega options trade (spoiler alert: we sold very attractive covered calls), it’s worth reviewing the current fundamentals behind Omega’s business.

Omega Overview and Recent Challenges:

Omega is a healthcare REIT focused on skilled nursing facilities (“SNF”), and despite favorable long-term demographics, many of its SNF operators have been struggling financially, to put it mildly. As a result, Omega has temporarily halted dividend increases, and has been focused on disposing of certain properties to generate near-term cash flow instead of focusing on long-term growth. As a result, many of Omega’s critical financial health metrics have reached precarious levels as shown in the following table.

And as a result of the precariously high dividend payout ratios and negative Funds From Operationsgrowth (see above table), the shares had understandably sold off dramatically (before the recent sharp rebound).

Specifically, many Omega analysts and pundits were expecting the worst, however Omega remained positive and upbeat in its last two quarterly earnings announcements, and the shares have rebounded dramatically. For example, here’s a very encouraging statement from Omega’s CEO during its most recent quarterly earnings call.

With the bulk of our asset sales and repositioning behind us, we expect that in 2019 acquisitions will meaningfully outpace dispositions, as we return to our historical growth model.

However, in perhaps a new chapter to the recent Omega drama, the shares are becoming dramatically overbought by many technical measures. For example, the 200-day moving average and two-week Money Flow Index show Omega’s overbought levels are increasing sharply while much of the rest of the market (e.g. the S&P 500 (SPY) and Nasdaq (QQQ)) is moving in the other direction and becoming oversold.

Our Omega Trade:

Because we remain bullish on Omega’s long-term prospects (we own shares), but recognize the potential short-term headwinds, we have elected to sell income-generating call options on our existing Omega position. This generates attractive income for us now, and if the shares continue to rise significantly (before our options contract expires on January 18, 2019), they’ll get called away from us (our strike price is $38) at an even larger profit than we already have in the position.

And if they don’t get called away from us before the options contract expires, then we’re happy to keep holding the shares for the long -term, plus we get to keep the attractive premium income we just generated for selling the calls, no matter what.

And worth mentioning, the premium income currently available is higher than usual because market volatility and fear also is higher than usual, as evidenced by the heightened VIX (more on the VIX, and overall market health, later). For perspective, if the shares get called away from us within the next two months (when the contract expires) that’s an extra 35% income for us on an annualized basis (((($38+ $0.40) / 36.28) -1) x (2/12 months) = 35%).

We believe Omega remains an attractive long-term investment despite the climbing near-term technical levels. And as a long-term investor, we view now as an attractive opportunity to boost near-term income with covered calls. Further, if you enjoy the idea of boosting your income with covered calls, Dr. Jeff Miller has been running an outstanding series on boosting your income with calls, and his latest is available here: Boost Your JM Smuckers Dividend Yield.

Overall Market Health:

We view long-term market conditions to be healthy and constructive, whereas near-term conditions warrant caution. Here’s a look at some of the data that goes into our assessment:

Despite the recent spike in volatility and fear (as measured by the market “fear index,” the VIX, aka CBO Volatility Index), and despite the recent market-wide sell off (which has been more pronounced for technology, growth and momentum stocks versus “fight to quality” stocks – such as REITs), long-term market conditions remain healthy. However, in the short term, volatility is persistent, and risk is elevated.

Remember, the risk versus reward trade-off is one of the most basic tenets of investing. Specifically, if you take more volatility risk – you should be compensated, over time, with higher returns. Therefore being a contrarian and “buying low” after/during a sell-off is often a better opportunity if you are a long-term investor. However, there’s certainly no guarantee that the market won’t go much lower in the short- and mid-term. And if you cannot handle the shorter-term volatility (or if you are in a comfortable financial position where you don’t need to take on the volatility risk), then there’s really no need to take on that risk with your investments.

Worth noting, from a short-term standpoint, negative indicators include an elevated Volatility Index (VIX), and an uptick in credit-spreads (which are still low by historical standards), which are both indicators of near-term risk as volatility is persistent. Also interesting to consider, @AlphaGenCapital reminds us that there have never been so many investment grade bonds approaching junk status.

From a long-term standpoint, positive market health indicators include an increasingly attractive S&P 500 forward P/E ratio, low unemployment, low interest rates (even though they are rising), and continuing GPD growth.

Overall, despite elevated near-term risks, the market remains relatively healthy and attractive from a long-term investment standpoint.

Conclusion:

The risk-off flight to quality in recent weeks has been quite pronounced as fearful investors ditch volatile high-growth stocks in favor of lower-risk, lower-beta securities including REITs such as Omega Healthcare. Not only has the market’s preference for REITs helped Omega’s share price, but so too have the company’s last two earnings announcements which were both very positive, especially relative to the dire operator challenges the company has faced (and been working through) over the last year. We like Omega over the long term, and we continue to own the shares. However, we recognize the increasingly overbought technical indicators for Omega in the short term, and we’ve elected to sell income-generating call options against our shares for the reasons described in this article.

More broadly speaking, near-term market volatility has created some attractive investment opportunities across the market, such as those described in this article. It makes sense for investors to be opportunistic around the margin (i.e. pick up a few attractive shares at discounted prices if it’s consistent with your investment time horizon and goals), but don’t ever do anything crazy like ditching your long-term plan out of fear or greed. Be smart. Stick to you plan.

Disclosure: I am/we are long OHI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

3 tips for negotiating with your public cloud providers

The last time you renewed or got a new contract in place with a big pubic cloud provider, how did your negotiations go? For most enterprises this past year, such negotiations did not go very far. These days, the amount of money on the table is much larger, and the public cloud providers are starting to negotiate more like enterprise software providers—like IBM, Oracle, Adobe, and SAP—than like public cloud utilities.

So, I am commonly asked, “How do I negotiate with my cloud provider when they already know that I’m dependent on them as my cloud platform of choice?”

Here are three tips that will give you some advantages, even if your back is up against the cloud wall.

Chinese online shopping sites ditch Dolce & Gabbana in ad backlash

BEIJING (Reuters) – Chinese e-commerce sites have removed Dolce & Gabbana products amid a spiralling backlash against an advertising campaign that was decried as racist by celebrities and on social media.

The ads – released earlier this week to drum up interest in a Shanghai fashion show the Italian brand later canceled – featured a Chinese woman struggling to eat spaghetti and pizza with chopsticks, sparking criticism from consumers.

The blunder was compounded when screenshots were circulated online of a private Instagram conversation, in which the brand’s designer Stefano Gabbana makes a reference to “China Ignorant Dirty Smelling Mafia” and uses the smiling poo emoji to describe the country. The brand said Gabbana’s account had been hacked.

Amid calls for a boycott, the furore threatened to grow into a big setback for one of Italy’s best-known fashion brands in a crucial market, where rivals from Louis Vuitton of LVMH to Kering’s Gucci are vying to expand.

Chinese customers account for more than a third of spending on luxury products worldwide, and are increasingly shopping for these in their home market rather than on overseas trips.

China’s Kaola, an e-commerce platform belonging to China’s NetEase Inc confirmed it had removed Dolce & Gabbana products while luxury goods retailer Secoo said it removed the brand’s listings on Wednesday evening.

On Yoox Net-A-Porter – owned by Cartier parent Richemont and a leading online high-end retailer – the label’s wares were no longer available on its platforms within China. The company declined to comment.

Checks done by Reuters on Thursday morning also showed pages that previously linked to Dolce & Gabbana items on the e-commerce sites hosted by Alibaba Group Holding Ltd and JD.com Inc were no longer available and searches for the brand returned no products.

Alibaba and JD.com did not respond to requests for comment, and Dolce & Gabbana did not comment on the retailers’ moves.

RESPECT

After its China missteps quickly went viral on China’s Twitter-like Weibo platform, it apologised in a statement on the site.

Celebrities including “Memoirs of a Geisha” movie star Zhang Ziyi criticized the brand, while singer Wang Junkai said he had terminated an agreement to be the brand’s ambassador.

An airport duty fee shop in the southern Chinese city of Haikou said on Weibo it had removed all Dolce & Gabbana products from its shelves.

The Communist Party Youth League, the youth wing of the ruling Chinese Communist Party, said on Weibo “we welcome foreign companies to invest and develop in China … companies working in the country should respect China and Chinese people”.

The gaffe is not the first by Dolce & Gabbana in China, even as it pushes to increase its appeal there. It came under fire on social media last year for another series of ads showing the grungy side of Chinese life.

The unlisted firm does not publish earnings or disclose how much revenue it derives from China.

Other uproars have come and gone in China without appearing to cause lasting damage, including at brands like Kering’s Balenciaga, which apologised in April amid a backlash over how some Chinese customers had been treated in Paris.

But there was an increased chance such controversies could affect sales as buyers became more discerning about brands, some analysts said.

FILE PHOTO: People walk past a Dolce & Gabbana store at a shopping complex in Shanghai, China November 22, 2018. REUTERS/Aly Song/File Photo

“It’s a different market now – Chinese customers are more savvy, and there’s so much more choice,” said Sindy Liu, a London-based luxury marketing consultant.

“A lot of western brands don’t really understand China that well when it comes to cultural sensitivities. But most brands are quite careful, they don’t do things that are humorous.”

Controversial comments by designers can be devastating for luxury brands. In one of the worst fallouts from in the fashion world, Christian Dior, now fully part of LVMH, fired designer John Galliano in 2011 after a video of him surfaced hurling anti-Semitic abuse at people in a bar in Paris.

Reporting by Pei Li and Cate Cadell in Beijing; Additional reporting by Sarah White in Paris and Claudia Cristoferi in Milan, Editing by Himani Sarkar

Sticking to Your Morals Benefits Your Company, Study Says (But There's a Catch)

That little twinge of temptation to cheat. Fudge. Lie. Play favorites. Maybe you’ve felt it. And as hundreds of headlines show us, companies veer off of the rules all the time. But according to research, if you want your business at the top, the one thing you shouldn’t skimp on is your ethics.

Better ethics from leaders, better performance

In a study published in Academy of Management Annals, researchers reviewed more than 300 books, studies and other texts on moral leadership published between 1970 and 2018. They found that the organizations with the highest performance had leaders who prioritized morality. Those companies had employees were more satisfied, engaged, creative and proactive.

But why does sticking to a moral path get this result?

Coauthor Jim Lemoine, assistant professor of organization and human resources at the University of Buffalo, says that the employees tended to see ethical leaders not only as more effective, but also as more trusted. When workers know you stand for something, that you’ll do what you think is right, they feel protected and stable. This subsequently frees them to focus on their jobs better, be more creative and interact with others in a relaxed way.

The big catch: Who decides what’s moral?

As Lemoine points out, what’s “right” can be subjective. As an example, consider the decision to open a new coal plant. One leader might say this is ethical because it provides jobs and relies on a natural resource. Another leader might say it’s not ethical because of the harm to the environment or because there are more cost-effective forms of energy now available.

What’s more, the research study asserts, different approaches to ethics can get different outcomes. For instance, leaders who focus on norms and standards can excel at keeping companies out of hot water legally or politically. But they might twist the rules to their own benefit.

At the end of the day, Lemoine says, there’s no best moral philosophy. Just make sure you have a philosophy you live by. Even as you abide by a particular approach, you should recognize that others might have a way of looking at a situation or the world that’s different than you. This doesn’t make them right or wrong, but it does require that you communicate as openly as possible to avoid conflicts and work better together.

China's Xiaomi swings to net profit in third-quarter on robust sales in India, Europe

HONG KONG (Reuters) – Chinese smartphone maker Xiaomi Inc said on Monday it swung to a net profit in the third quarter, beating analyst estimates, driven by robust sales in India and Europe.

Xiaomi branding is seen at a UK launch event in London, Britain, November 8, 2018. REUTERS/Toby Melville

Profit for the three months through September reached 2.48 billion yuan ($357.23 million), versus an 11 billion yuan loss in the same period a year earlier. That compared with a 1.92 billion yuan average of five analyst estimates compiled by Refinitiv Eikon.

Xiaomi also said operating profit sank 38.4 percent to 3.59 billion yuan in the third quarter. Revenue rose 49.1 percent to 50.85 billion yuan.

The mixed results come amid a slowdown in smartphone purchases both in China, where Xiaomi once was the top-selling handset brand, and overseas.

Nevertheless Xiaomi, along with fellow low-cost handset makers Oppo and Vivo, accounted for around a quarter of the global smartphone market in the first half of 2018, showed data from researcher IDC.

Xiaomi’s fastest-growing markets are India, where it has had success with its budget Redmi phone series, and Europe, where it entered in 2017 with launches in Russia and Spain. Earlier this month it released its flagship Mi 8 Pro device in Britain.

But to weather the global market slowdown, analysts said Xiaomi needs to expand to new markets and also sell more higher-priced devices with wider profit margins.

The firm has been adding new brands to its smartphone portfolio to target niche consumers. Concurrent with today’s earnings, it announced a partnership with Meitu Inc, a maker of a photo app popular with young women, to sell phones under its brand. Earlier this year it launched Black Shark, a phone targeted at gamers, and Poco, a value-for-money device aimed at India.

Mo Jia, who tracks China’s smartphone makers at research firm Canalys, said attempts to sell more expensive devices requires changing its brand perception.

“It’s still very hard for Xiaomi to change its perception of being a low-end device manufacturer as the majority of its smartphone shipments are the Redmi series.”

Xiaomi also aims to transform itself from a smartphone firm into a software company. As the firm prepared for its IPO, founder Lei Jun touted internet services – namely advertisements placed on the firm’s in-house apps – as its future and key differentiator from other handset brands.

In the third quarter, Xiaomi’s smartphone division grew revenue by 36.1 percent while its internet service division grew 85.5 percent. But phones made up 64.6 percent of total sales, while internet services made up 9.3 percent.

The results are the second set released by Xiaomi since the smartphone maker raised $4.72 billion in an initial public offering (IPO) in June, valuing the firm at about $54 billion – around half of some earlier industry estimates of $100 billion.

Its shares have fallen roughly 20 percent since they started trading in July amid a broader Chinese stock market sell-off and concern about a slowdown in China’s tech industry.

Reporting by Josh Horwitz; Editing by Christopher Cushing

American Airlines Flight Attendants Are Protesting in 15 Cities Today. Here Are the Details (Plus Why They Chose This Day to Do It)

It’s the busiest travel week of the year. Now, American Airlines flight attendants say they’ll kick it off with a nice, big protest in 15 of the airline’s most important U.S. cities.

The reason? Their “extreme dissatisfaction” with American Airlines, they said in a press release.

To be clear, this isn’t a strike. There’s no reason to think that any American Airlines flight attendants who are scheduled to work won’t show up, or that flights will be affected.

But the union representing flight attendants say they chose this weekend for a protest in order to commemorate what happened when they actually did go on strike–25 years ago Sunday.

November 18, 1993

November 18 was a Thursday in 1993, one week before Thanksgiving, and American Airlines flight attendants walked off the job, crippling the airline.

What’s more, they promised to stay away for exactly 11 days, which basically meant the entire Thanksgiving travel rush. American scrambled to fly as many planes as it could, but many flights were canceled.

Meanwhile, the airline moved planes around the country to places where anticipated that flight attendants might cross picket lines, or else that they’d have other employees available who’d been trained to work as replacements.

In the end, President Clinton stepped in. The strike ended officially five days after it launched, and well ahead of Thanksgiving. 

‘Extreme dissatisfaction’

Now, the union says it feels like it’s still fighting over the same issues, a quarter century later.

“It’s unbelievable that we are here 25 years later still fighting for fair and equitable working conditions for our flight attendants. Our members chose this historic date to show their extreme dissatisfaction,” the union’s national president, Lauri Bassani, said in a press release.

Among the things she says they’re upset about: “failed scheduling systems, a punitive new sick policy, and continued contract and seniority violations.”

Here are the cities where the union said it’s holding airport protests between 11 a.m. and 1 p.m. local time.

  • San Francisco
  • Los Angeles
  • Phoenix
  • Dallas
  • Charlotte
  • Miami
  • Raleigh-Durham
  • St. Louis
  • Philadelphia
  • Pittsburgh
  • Boston
  • New York
  • Washington D.C.
  • Chicago

‘An outstanding flight attendant team’

In a statement to the Chicago Business Journal, which reported on the protests, American Airlines said:

“We have an outstanding flight attendant team that takes terrific care of our customers on every flight. There has been a tremendous amount of change for our team, and we respect their right to voice their opinion.

We will continue to work closely with our partners at the Association of Professional Flight Attendants to prioritize the needs of our 27,000 flight attendants.”

Again, it’s a protest, not a strike. No need to panic over the idea of canceled flights. We can’t overemphasize that enough.

That’s a good thing, because Thanksgiving travel this year is projected to be the busiest since 2005, with more than 54 million Americans taking to the roads and skies for the big national holiday.

As for what happened in 1993? The flight attendants went back on the job, but American Airlines still took a hit–both because of severe wintry weather in some parts of the country, but also because passengers had made other plans before the strike was canceled.

Anecdotally, the New York Times reported at the time, many American Airlines flights took off at well under 50 percent capacity on the day before Thanksgiving.

“This may have been a smaller crowd than we expected,” a spokeswoman for the airline said back then. “It’s no secret that many of our passengers have booked on other carriers.”

With 1 Simple Move, Google Showed Yet Again Why It's Not the Company You Thought It Was

Absurdly Driven looks at the world of business with a skeptical eye and a firmly rooted tongue in cheek. 

They hope, though, that you don’t notice when those promises become, well, a little diluted over time.

It’s the thought that counts, after all.

One thought offered by Google when it committed itself to your health was that Deep Mind, its profound subsidiary that uses AI to help solve health problems, was that its “data will never be connected to Google accounts or services.”

Cut to not very long at all and Deep Mind was last week rolled into, oh, Google.

In an odd coincidence, this move also necessitated that an independent review board, there to check on Deep Mind’s work with healthcare professionals, was disappeared.

This caused those who keep a careful eye on Google — such as NYU research fellow Julia Powles — to gently point out the company’s sleight of mouth.

This is TOTALLY unacceptable. DeepMind repeatedly, unconditionally promised to *never* connect people’s intimate, identifiable health data to Google. Now it’s announced…exactly that. This isn’t transparency, it’s trust demolition. 

This is, though, the problem with tech companies. 

We looked at them as if they were run by wizards doing things we could never understand.

Any time we became even slightly suspicious, the tech companies murmured that we should trust them. Because, well, we really didn’t understand what sort of world they were building.

Now, we’re living in it. A world where everything is tradable and hackable and nothing is sacred.

A world where the most common headlines about the company seem to begin: Google fined..

I asked Google whether it understood the reaction to its latest Oh, you caught us, yes, we’re going to do things differently now move. 

The company referred me to a blog post it wrote explaining its actions.

In it, Google uses phrases like major milestone and words like excited

It also offered me these words from Dr. Dominic King a former UK National Health Service surgeon and researcher who will be leading the Deep Mind Streams team: 

The public is rightly concerned about what happens with patient data. I want to be totally clear. This data is not DeepMind’s or Google’s – it belongs to our partners, whether the NHS or internationally. We process it according to their instructions – nothing more.

King added:

At this stage our contracts have not moved across to Google and will not without our partners’ consent. The same applies to the data that we process under these contracts.

At this stage.

Oh, but you know how creepily the online world works.

You know, for example, that advertising keeps popping up at the strangest times and for the strangest things.

Within minutes, certain apps on my phone were full of ads for Google’s new Pixel 3 phone. Which I could buy most easily, said the ads, at a Verizon store. 

Who would be surprised, then, if personal health data began to be linked with other Google services, such as advertising?

Too many tech companies know only one way to do business — to grow and wrap their tentacles around every last aspect of human life. 

The likes of Google operate on a basis of a FOMO paranoia that even teens and millennials might envy.

They need to know everything about you, in case they miss out on an advertising opportunity.

You are not a number. You are a lot of numbers. 

And your numbers help Google make even bigger numbers.

Will that ever change? Probably not.

Cloud security: The essential checklist

Cloud security is one of those things that everyone knows they need, but few people understand how to deal with. I

The good news is that it’s actually pretty simple, and somewhat similar to security for your enterprise systems. Here’s a checklist of what you may need and how to make these features work.

  1. Directory service. If you use identity and access management, you need a directory to keep the identities. Although Microsoft’s Active Directory works just fine, any LDAP-compliant directory will work. Note that you need to deal with security at the directory level as well, so the directory itself does not become a vulnerability.
  2. Identity and access management. IAM is needed to ensure that you can configure who is who, who is authenticated, and what devices, applications, or data they can access. This gives you complete control over who can do what, and it puts limits on what they can do. These IAM tools are either native to the public cloud platform or come from a third party.
  3. Encryption services. What specific encryption you needwill largely depend on where you are in the world and the types of things you need to encrypt, as well as if you need to encrypt data at rest, in flight, or both. I say “services” (plural) because you’ll likely ise more than one encryption service, including at the file, database, and network levels.
  4. Security ops. Often overlooked, this is the operational aspect of all of security. Security ops, aka secops, includes the ability to proactively monitor the security systems and subsystems to ensure that they are doing their jobs and that the security services are updated with the latest information they need to keep your system safe.
  5. Compliance management. Another often overlooked security feature, this is where you deal with those pesky rules and regulations that affect security. No matter if you need to be GDPR-compliant or HIPAA-compliant, this is where you have a console that alerts you to things that may be out of compliance and lets you take corrective action.

Of course, you may need more security features than these five types, based on who you are, what sector you’re in, and your own enterprise’s security requirements. However, this checklist provides a solid foundation for security success. Chances are that you’re missing one or two of them.

How Did the 'Freedom From Facebook' Campaign Get Its Start?

In July, executives from YouTube, Facebook, and Twitter testified before Congress about their company’s content moderation practices. While Facebook’s head of global policy Monika Bickert spoke, protesters from a group called Freedom From Facebook, seated just behind her, held signs depicting Sheryl Sandberg and Mark Zuckerberg’s heads atop an octopus whose tentacles reached around the planet.

Freedom From Facebook has garnered renewed attention this week, after The New York Times revealed that Facebook employed an opposition firm called Definers to fight the group. Definers reportedly urged journalists to find links between Freedom From Facebook and billionaire philanthropist George Soros, a frequent target of far-right, anti-semitic conspiracy theories. That direct connection didn’t materialize. But where Freedom From Facebook did come from—and how Facebook countered it—does illustrate how seemingly grassroots movements in Washington aren’t always what they first appear.

The point here isn’t to question Freedom From Facebook’s intentions. Their efforts seem to stem from genuine concern over Facebook’s outsized role in the world. But the labyrinthine relationships and shadowy catalysts of the efforts on all sides of that debate show just how little involvement actual Facebook users have in the fight over reining the company in.

Since the 2016 presidential election, Facebook has confronted an onslaught of scandals, many of which drew scrutiny from federal lawmakers. First, Russian propagandists exploited the social network, using duplicitously bought ads to sway US voters. This March, journalists revealed data firm Cambridge Analytica had siphoned off information belonging to tens of millions of users. In the wake of this second controversy, Freedom From Facebook was born.

The initiative wasn’t formed by everyday Facebook users. It’s instead the product of progressive groups with established records of opposing tech companies, whose own relationships illustrate just how tangled these connections can be.

Specifically, Freedom From Facebook is an offshoot of the Open Markets Institute, a think tank that operated under the auspices of the New America Foundation until OMI head Barry Lynn publicly applauded antitrust fines levied against Google in Europe. Google is a major New America donor; Lynn’s entire team studying tech market dominance and monopolies got the ax, and spun out Open Markets as an independent body.

Earlier this year, former hedge fund executive David Magerman approached Lynn’s group with the idea to start to start a campaign in opposition to Facebook. Magerman poured over $400,000 into what became Freedom From Facebook, according to Axios. His involvement wasn’t known until Thursday. The connected between Freedom From Facebook and OMI was also not entirely explicit.

Freedom From Facebook has done more than stage protests on Capitol Hill. During Facebook’s annual shareholder meeting in May, the group chartered an airplane to fly overhead with a banner that read “YOU BROKE DEMOCRACY.” When Sandberg spoke at MIT in June, Freedom From Facebook took out a full-page advertisement in the student newspaper calling for the social network to be broken up. On Thursday, the group filed a complaint with the Federal Trade Commission asking the agency to investigate a Facebook breach disclosed in September that affected 30 million user accounts.

Freedom From Facebook also formed a coalition with a diverse set of progressive organizations, like Jewish Voice For Peace, which promotes peace in Israel and Palestine, and the Communications Workers of America, a labor union that represents media workers. The coalition now comprises 12 groups, who “all organize around this fundamental principle that Facebook is too powerful,” says Sarah Miller, the deputy director of Open Markets Institute. Confusingly, according to Freedom From Facebook’s website, the coalition also includes Citizens Against Monopoly, a nonprofit Miller says was set up by Open Markets itself.

Eddie Vale, a progressive public affairs consultant, also confirmed in an email that Open Markets hired him to work on the Freedom For Facebook Initiative. He led the protest in July featuring the octopus signs.

Definers began lobbying journalists, including those from WIRED, to look into Freedom From Facebook’s financial ties this past summer. The effort was led by Tim Miller, a former spokesperson for Jeb Bush and an independent public affairs consultant, according to The New York Times. “It matters because people should know whether FFF is a grassroots group as they claimed or something being run by professional Facebook critics,” Miller wrote in a blog post published Friday. He added that he believes the push to connect the group to Soros does not amount to anti-semitism, especially if it contains a modicum of truth. Facebook itself asserted much the same in a statement it released Thursday.

The extent of the Soros relationship seems to be that the billionaire philanthropist does provide funding to both Open Markets and some of the progressive groups who constitute the Freedom From Facebook coalition. There’s no indication, though, that he has any direct involvement with the initiative. Open Markets’ Miller says the think tank wasn’t aware Facebook was paying an opposition firm to ask journalists to look into its work. “I just think knowing Facebook as we do, I don’t know that I would say that we were surprised, but I do think the Soros angle was surprising,” she says.

After The Times published its report Wednesday evening, Facebook severed its ties with Definers. “This type of firm might be normal in Washington, but it’s not the sort of thing I want Facebook associated with,” CEO Mark Zuckerberg said on a call with reporters Thursday. Both Sheryl Sandberg and Mark Zuckerberg claim they didn’t know Facebook was working with Definers until the The Times published its story. This is not the first time Facebook has employed an opposition research firm. In 2011, the social network hired a public relations firm to plant unflattering stories about Google’s user privacy practices.

By distancing itself from Definers, Zuckerberg and Sandberg are putting space between themselves and how the sausage gets made in Washington. As they have grown more powerful, tech organizations including Facebook, but also Google, Amazon, and others, have poured millions into lobbying on Capitol Hill. Those efforts include fighting back against well-funded and sometimes secretive campaigns, like Freedom From Facebook. Meanwhile, the social network’s over two billion users mostly sit on the sidelines, watching the high-stakes battle unfold.


More Great WIRED Stories

These 3 High-Yield Blue-Chips Are Retiree Dream Stocks

(Source: imgflip)

All income investors can agree that safe and rising income is a top priority when choosing dividend stocks. That’s especially true for retirees or those near retirement, who are counting on steady passive income to help pay the bills during their golden years.

This is why most conservative high-yield investors generally stick to non-cyclical industries when looking for good investment candidates. However, even cyclical industries such as energy can sometimes offer great high-yield income growth opportunities that shouldn’t necessarily be ignored. In recent weeks, the price of oil has crashed into a bear market, causing several readers to ask me to offer some top picks for taking advantage of the rapid decline in crude.

So, let’s take a look at not just what’s causing oil prices to dive off a cliff, but why Exxon Mobil (XOM), Chevron (CVX), and Royal Dutch Shell (RDS.A) (RDS.B) are three of the best high-yield choices for conservative income investors.

Not just have these three oil giants proven they can deliver safe income (and good total returns) for decades in all manner of oil price environments, but there are five reasons I expect them to continue to do so for the foreseeable future. What’s more from current prices, all three are likely to deliver market-beating returns as well, though Exxon Mobil is my top pick among these three blue-chips for new money today.

What’s Causing Oil Prices To Fall

In recent weeks, the global oil standard, Brent, has flirted with bear market territory.

Chart

Brent Crude Oil Spot Price data by YCharts

West Texas Intermediate, the US oil standard, has had it even rougher. On Monday, November 13th its price plunged nearly 8%, the worst single-day decline in over three years. And that previous decline was during the second worst oil crash in over 50 years, in which crude eventually plunged as much as 76%. In fact, WTI has now fallen for 12 consecutive days, which is the longest losing streak ever, or at least since oil futures began trading in 1983. WTI is now at $56, off $20 or 26% from its recent four-year high of $76. That places US oil firmly in a bear market. What’s causing oil prices to tank so hard and fast? Three things mainly.

In the short-term, there are the Iranian sanctions that were supposed to go into effect on November 5th. Previously some analysts had warned that these could take up to 2 million barrels per day or bpd off the global oil market in a matter of weeks. To offset this, Saudi Arabia and Russia agreed to increase daily production by 1 million bpd to stave off a sharp spike in oil prices. However, thanks to President Trump granting six-month oil importation waivers to eight major oil importing countries (ironically enough that includes China), that big supply disruption hasn’t occurred.

Now, Saudi Arabia has said that it will cut production next month by 500,000 bpd to help stabilize crude prices. However, that decline in supply is being offset by continuing strong growth in US shale production, which the EIA just reported hit a record high of 11.6 million bpd. That’s up 2 million bpd in the past year and is putting the US on track to potentially exceed the EIA’s 2019 US year-end production forecast a year early. According to OPEC’s latest forecast, US shale is expected to drive 2.23 million bpd of new supply in 2019.

Finally, you have rising fears of less rapid oil demand growth next year over concerns that the world economy is slowing. For instance, OPEC’s latest 2019 oil demand growth forecast is down 70,0000 bpd to 1.29 million. That might not seem like much but what has the oil market worried is that it’s the fourth straight monthly growth forecast decrease. Back in July, OPEC said it expected 2019 global demand for crude to rise by 1.45 million bpd. That 11% decrease in expected demand growth has the oil futures market concerned since crude is priced at the margin, thus the reason for its extreme volatility.

So, does this current short-term supply glut, which Wall Street fears might become protracted, mean another oil crash in coming?

Why Another Oil Crash Is Unlikely

Most likely not. That’s because there are major differences between today and the events that led to the oil crash of mid-2014 to early 2016. Most notably back then OPEC threw open the taps to try to drown US shale producers in an ocean of cheap crude. That was because at the time US oil & gas companies were spending not just all of their cash flow to ramp up production but also taking on mountains of debt (because of record low interest rates). At the time, OPEC (and most analysts) estimated that break even shale oil production prices were about $80. So, OPEC gambled that it could quickly bankrupt the industry that was blindly hiking production and stealing its market share.

Today, despite continuing to raise production, most oil companies (who have spent the last four years aggressively deleveraging) are committed to funding production growth with operating cash flow and maximizing returns on investment, not growth for its own sake.

(Source: Pioneer Natural Resources investor presentation)

In addition, breakeven prices for US shale have proven to be far lower than earlier forecasts (as low as $27 for some formations). OPEC now realizes it can’t bankrupt the US shale industry, at least not unless it also guts its own finances. That’s why Khalid al-Falih, Saudi Arabia’s oil minister, said on November 13th. that OPEC (and Russia which has effectively joined it via the so-called “Vienna Consensus”) might cut production 1 million bpd. Note that this 1 million bpd cut would be enough to totally offset the supply glut caused by next year’s non-OPEC production increase. This shows that the world’s major oil producers are NOT looking to repeat the oil price war they kicked off in 2014.

But what about soaring US supply? Well while that has indeed been impressive, consider this. According to the International Energy Agency or IEA 52% of the world’s oil supply is currently coming from legacy fields that are, on average, seeing 6% annual decline rates. This means that just to maintain global supply at current levels requires about 3 million bpd of new production to come online each year. And according to some analyst estimates, the total amount of new production set to come online each year from currently announced oil projects between 2019 and 2022 is just 1 million to 1.5 million bpd.

OPEC estimates that, due to pipeline constraints, US total production, driven mostly by shale, will hit 13.4 million bpd in 2023. That amounts to long-term US oil production growth (over six years) of about 1 million bpd. Which means that even US shale, as might as it is, probably won’t be enough to even close the necessary production gap just to keep current global production steady. Factor in continued (though slower) oil demand growth over the coming years and you get a scenario where another oil crash (to $30 or below) is extremely unlikely.

In fact, taking a longer-term view another major oil crash also seems even less likely. That’s because, according to the EIA, 80% of all new production growth through 2040 will merely offset the natural decline rates of legacy oil fields. As a result, Exxon estimates that the oil industry will need to invest $400 billion annually over the next 22 years ($8.8 trillion in total), just to allow supply to match demand. That is far less spending than what’s currently planned meaning that the long-term outlook for oil prices remains higher, not lower.

However, let’s say I and most analysts are wrong. After all, the oil market has been befuddling nearly all attempts to forecast prices for nearly 150 years. Say that we do have another oil crash. Even then, there are numerous reasons that Exxon, Chevron, and Shell are likely to prove great sources of safe and even rising income for retirees.

1. Exxon, Chevron, And Shell Have Great Dividend Track Records

The first thing income investors should look at with any long-term investment is the dividend track record. You at least want to see a company, even an oil major, able to sustain its payout in all economic, industry, and interest rate environments. Better yet, you’d like to see dividends grow every year, which can help you sleep well at night no matter what the stock price or commodity prices are doing.

Shell’s dividend track record is the third best in the industry, with the company maintaining or growing its payout every year since WWII. Note that Shell did pay part of the dividend in stock during the oil crash, but in late 2017 returned to full cash payouts. However, considering that most oil companies were slashing or eliminating their payouts at this time, this is still a very impressive long-term track record. Especially given that a repeat of the last oil crash isn’t likely anytime soon.

Meanwhile, Chevron’s dividend track record is even better, thanks to 32 consecutive years of dividend increases that makes it one of just three oil industry dividend aristocrats. Exxon is also an aristocrat, having raised its dividend every single year since 1983. That 35-year payout growth streak is the second longest in the oil industry (HP has been raising since 1973) and is but one reason that the stock is so trusted by conservative income investors.

Chart

Brent Crude Oil Spot Price data by YCharts

These three companies’ dividend track records are even more impressive when you consider the context in which they were created. Specifically, they have been maintaining, or growing dividends every year even during prolonged periods when oil averaged about $15 (much of the 1990s), interest rates were as high as 12%, and when financial markets almost completely froze up during the Financial Crisis.

This shows that, barring an even worse recession than 2008-2009, none of these companies is likely to cut its payouts or break its dividend growth streaks. That’s due to their industry leading balance sheets, which for oil companies is the most important dividend safety factor.

2. Industry Leading Balance Sheets Are The Key To Riding Out Downturns

Because oil is a depleting asset, even during commodity crashes, when revenue, earnings, and cash flow fall off a cliff, oil companies must continue to invest billions into growth projects. This means that maintaining or growing dividends, plus growth capex, must be largely funded by debt. As a result, the number one thing conservative income investors need to focus on is an oil company’s balance sheet.

Specifically, five key metrics are important to know, which shows how likely it is that an oil company can ride out a protracted industry and or economic downturn. These are the debt/EBITDA (leverage) ratio, the interest coverage ratio (operating cash flow/interest), the debt/capital ratio, the credit rating, and the average interest cost.

Company Debt/EBITDA Interest Coverage Ratio Debt/Capital S&P Credit Rating Average Debt Cost
Exxon Mobil 0.9 62.6 10% AA+ 1.8%
Chevron 1.0 50.3 17% AA- 2.0%
Royal Dutch Shell 1.2 23.0 26% AA- 4.3%
Industry Average 1.8 11.5 24% NA NA

(Sources: Morningstar, Gurufocus, Fast Graphs, CSImarketing)

Royal Dutch Shell has the highest leverage ratio of these three blue-chips, but still far below the industry average. Chevron and Exxon, not surprisingly, maintain the most conservative leverage ratios in the industry.

Shell’s relatively high debt (among these three) is mostly due to the 2015 $70 billion acquisition of BG, which included a lot of debt assumption but also made Shell the world’s largest liquified natural gas or LNG company. Management has stated it’s making paying down its debt a priority and is targeting a long-term debt/capital ratio of 20%. The company has managed to steadily pay down its debt, which it began to do as soon as oil prices started to recover.

(Source: Shell investor presentation)

But even at current levels, Shell’s cash flow is sufficient to cover its interest costs 23 times over, more than double the industry average.

Chevron and Exxon’s interest coverage ratios are sky-high, which is why each enjoys such strong credit ratings. Shell’s rating was just upgraded by S&P to match Chevron’s for the second strongest in the industry. As a result of their strong balance sheets, all three companies can borrow at low interest rates. However, Chevron and Exxon have been the best at minimizing interest costs thanks to taking advantage of foreign bonds because interest rates overseas are still near zero.

Ultimately this means that Chevron, Exxon, and Shell should have no trouble maintaining and growing their dividends, while still investing in future growth. That’s great news because all three companies have solid long-term growth plans that should ensure years, if not decades, of generous, safe, and rising dividends.

3. All Three Companies Have Solid Growth Plans To Deliver Safe And Rising Dividends In The Future

Exxon Mobil has frustrated investors for years, thanks to upstream (oil & gas) production being essentially flat at 4 million bpd over the past 10 years. However, Morningstar analyst Allan Good actually has a very different take on the company.

We continue to rate Exxon as the highest-quality integrated firm, given its ability to capture economic rents along the oil and gas value chain. While its peers operate a similar business model with the same goal, they fail to do so as successfully, as evidenced in the lower margins and returns compared with Exxon.” – Allan Good, Morningstar (emphasis added)

I happen to agree with Mr. Good and consider Exxon my favorite oil major. That’s for several reasons including the strongest balance sheet in the industry, the second best dividend growth track record, and its superior historical returns on capital.

(Source: Exxon Investor Presentation)

Despite what investors might have thought of former Exxon CEO Rex Tillerson (CEO until early 2017), the man did lead Exxon to the best long-term returns on capital of any oil major. And under his watch, despite some botched acquisitions (which all oil companies occasionally make), Exxon reported the smallest impairments (losses on investments) of any of its peers.

But new CEO Darren Woods (a 27-year company veteran) has a very different vision for Exxon. He still plans to focus spending on the highest return projects, but unlike Tillerson, is very much pro production growth. That’s thanks to what management calls the best long-term investment opportunities in 20 years. During the Q2 conference call, Woods told analysts that Exxon was on track for its extremely ambitious growth plans.

Key projects in Guyana, the U.S. Permian Basin, Brazil, Mozambique and Papua New Guinea are positioning us well to meet the objectives we outlined in our long-term earnings growth plans.” – Darren Woods, Exxon CEO

What are those growth plans? Well to take advantage of the industry’s deeply inadequate capex spending, Exxon is being contrarian and plans to jack up its growth spending in a big way.

  • 2016: $19 billion in capex
  • 2017: $23 billion
  • 2018: $24 billion
  • 2019: $28 billion
  • 2020-2025: Average of $30 billion per year

By 2020, Exxon might be spending the most of any of its peers on growth. But in keeping to the company’s historic focus on maximizing returns on capital, it plans to spend those massive amounts wisely. Here are Exxon’s 2025 goals:

  • Increase production 25% from 4 million bpd oil equivalent to 5 million bpd oil equivalent.
  • Increase chemical production by 30% (40% in North America and Asia).
  • Achieve 20%, 20%, and 15% ROIC on production, refining, and chemical, respectively.
  • Double earnings from refining and chemical.
  • Triple earnings from oil & gas production (at $60 oil).

Overall the company thinks it boosts the company’s returns on capital from 7% in 2017 to 15% in 2025. While that’s slightly below its 10-year average, it would still make Exxon the second most profitable oil company (based on this important metric) behind Chevron. More importantly for income investors, it would mean a massive increase in cash flow.

(Source: Exxon Investor Presentation)

Even should oil prices fall to $40 by 2025, Exxon anticipates that its operating cash flow would increase by 50% and thus generate $15 billion in free cash flow. That’s good enough for a 93% dividend payout ratio at the current rate (which was raised 6.5% for 2018). And if oil prices come in at higher levels than Exxon will become a money minting machine:

Oil Price In 2025

Exxon Annual Free Cash Flow

FCF Payout Ratio (Current Dividend)

Annual Retained FCF

$40

$15 billion

93%

$1.1 billion

$60

$31.5 billion

44%

$17.6 billion

$66 (Current Price)

$34.7 billion

39%

$19.4 billion

$73 (Analyst Consensus)

$38.3 billion

36%

$21.9 billion

$80 (My Best Estimate)

$52 billion

27%

$38.0 billion

(Sources: Exxon guidance, Morningstar, GuruFocus)

Retained FCF is free cash flow (what’s left over after running a company and investing in future growth) minus the dividend cost. Even accounting for Exxon’s likely 6% to 7% dividend growth through 2025 ($20 billion annual dividend cost in 2025) the company will still likely have enough to meet its ambitious future spending plans while maintaining a fortress-like balance sheet.

But how exactly does Exxon plan to achieve such impressive and profitable growth? One strategy is to increase production from its US shale acreage.

(Source: Exxon Investor Presentation)

Exxon estimates that it has about 10 billion barrels of reserves locked up in US shale that can generate 10% or better returns even at $35 oil. In fact, thanks to fracking 3.0 technology (which includes AI driven real-time drilling analysis), Exxon thinks it will be able to lower its break-even cost on US shale to just $20 per barrel over the next six years.

A big reason for that is the superior economics of the Permian Basin, where multiple layers of oil-bearing rock are tightly stacked on top of each other. In 2017, Exxon spent $6.6 billion to acquire Bass Energy Holdings, which doubled its Permian reserves to about 6 billion barrels. Since then both further bolt-on acquisitions, as well as organic discoveries, have increased those reserves a further 66%. Exxon expects that by 2025 its Permian production will have increased five-fold, and all while generating exceptional returns on capital (30+%). But the Permian is expected to account for just 60% of Exxon’s 1 million in daily oil production growth. The remaining oil increases are coming from several of its very promising global growth projects.

One of the most exciting is Guyana, the small South American country. Exxon had previously announced eight major oil discoveries off that country’s coast totaling four billion barrels of recoverable oil.

(Source: Exxon Earnings Presentation)

That figure is actually likely to rise since Exxon just announced a 9th major Guyana offshore discovery. Management is so confident that even more oil pockets remain to be discovered that it has deployed a second exploration ship to the country to keep looking for even more offshore deposits.

Now it’s important to note that Guyana is still an early project for Exxon. Production is expected to start in 2020 and hit just 100,000 bpd by the end of that year. But by 2026 (beyond Exxon’s current mega-growth plan) Guyana production is expected to rise 700% to 800,000 bpd. And if the company keeps finding new deposits that figure could ultimately rise to 1 million bpd or more over time. For context remember that Exxon’s entire seven-year growth plan calls for 1 million bpd in extra production meaning that Guyana alone would be enough to get the company the majority of the way there, even account for ongoing natural depletion from existing wells.

The next major growth opportunity is Brazilian offshore.

(Source: Exxon Earnings Presentation)

Since the oil crash, Exxon has managed to lower production costs for offshore drilling that even at $40 oil (40% lower than current price) it expects to be able to generate at least 10% returns on its Brazilian operations.

But as if the Permian, Guyana, and Brazil weren’t enough Exxon is also planning to give Shell a run for its money in terms of trying to become the world’s largest producer of LNG.

(Source: Exxon Earnings Presentation)

Exxon is currently working on two major LNG projects in Papua New Guinea and Mozambique that could potentially boost its 2025 LNG capacity to double that of its nearest rival today.

The bottom line is that Exxon today offers investors a great opportunity to benefit not just from a generous, safe and growing dividend, but also has the long-term vision to deliver some of the industry’s best dividend growth long into the future.

Chevron: Growth With Laser-Like Focus On Maximizing Returns On Capital

Chevron is my second favorite oil major and might one day even top Exxon for my number one pick in the industry. That’s because, like its slightly larger aristocrat cousin, Chevron has a proven shareholder friendly track record of dividend growth, but also excellent long-term capital allocation resulting in great returns on investment.

New CEO Mike Wirth (who took over in 2018 and has been with Chevron for 26 years), has outlined the most conservative capex plans of any of these three companies, just $18 to $20 billion per year through 2020. However, thanks to putting that money to good use (75% of capex will be producing cash flow within two years) in its best growth opportunities in the Permian Basin, Gulf of Mexico, West Africa, and Western Australia, the company expects that to drive industry-leading production growth of 4% to 7% annually.

(Source: Chevron Investor Presentation)

Chevron has been killing it in 2018, thanks to superior execution allowing it to update its 2018 production growth guidance to 7%, the top end of its medium-term plan. And that’s even accounting for continued non-core asset sales. Chevron’s Q3 production soaring 9%, mostly thanks to the company’s booming Permian operations.

(Source: Chevron Annual Report Supplement)

Chevron owns 1.7 million net acres in the Permian, which is the crown jewel of its shale assets. Those assets include an estimated 17.5 billion barrels of recoverable oil equivalent, about 25% of the company’s total reserves. Chevron has been steadily adding to its Permian acreage, including 70,000 acres in 2017 and plans to buy 90,000 more in 2018.

Chevron’s love of the Permian is for the same reason that Exxon is so bullish on the formation. Massive, low-cost reserves that allowed the company’s Permian production to grow by 80% YOY in Q3. In fact, Chevron’s Permian production of 338,000 bpd in the last quarter was over 100,000 bpd more than its previous guidance back in March. The oil industry has high amounts of execution risk (bringing projects in on time and on budget) and so far, the Permian is allowing big oil to not just meet expectations, but exceed them by a country mile. Analysts currently expect Chevron’s Permian assets to be able to more than double in the coming years, to 700,000 bpd.

But Chevron is far from purely focused on US shale oil in the Permian. It also owns 873,000 net acres in the hyper-prolific Marcellus/Utica shale of Pennsylvania, Ohio and West Virginia.

(Source: EQT Midstream Investor Presentation)

Production in both formations is growing like a weed and that’s expected to continue for the foreseeable future. While natural gas is not nearly as profitable as oil, the reason that Chevron still invests heavily in it is that gas has a much longer growth runway than crude.

(Source: US Energy Information Administration)

According to the EIA, US oil production is expected to peak in 2030 and then start declining around 2043. But thanks to strong export demand growth from emerging markets like Mexico (gas), and India and China (LNG), US gas production is expected to keep growing steadily through at least 2050.

But it’s not just US gas that Chevron is planning to grow its production in. Like Exxon and Shell, Chevron is betting big on the future of LNG. After several years of costly delays and cost overruns, the Australian Gorgon and Wheatstone LNG projects are now complete and ramping up quickly. By the end of the year, Chevron expects these two projects to be generating the equivalent of 400,000 barrels of oil. Those projects are price indexed to oil (thus higher margin) and expected to see minimal depletion rates over the next 20 to 25 years.

But production growth for its own sake is worthless to income investors. Cash flow, especially free cash flow, is king. Which brings me to the other major reason I like Chevron so much.

(Source: Chevron Investor Presentation)

Chevron has been among the most aggressive cost-cutters among the oil majors and by 2020 expects to lower its average production cost 50% compared to 2014. Combined with strong medium-term growth in production that equates to very strong growth in operating cash flow, and even better growth in free cash flow.

(Source: Chevron Investor Presentation)

Even assuming just $60 oil by 2020, Chevron estimates that its free cash flow will increase 30% between 2017 and 2020. That’s the biggest FCF increase of any oil major and Chevron is currently beating that impressive guidance by a wide margin. Specifically, higher oil prices have allowed it to generate $14.3 billion in FCF in the past 12 months, compared to just $9.2 billion forecast for the end of 2020. The company’s river of FCF is what allowed it to pay down $2.4 billion in debt in Q3 while also buying back $750 million in stock (part of a $3 billion buyback authorization).

Ok, so maybe Chevron is having a great year, but what about if oil prices crash below $60 and stay there? Well the good news is that, even without asset sales, Chevron’s lean operations can sustain the dividend at $50 oil. That’s a level that the Russia and Saudi Arabia won’t likely allow it to fall below.

(Source: Chevron Investor Presentation)

And since oil is likely to go higher in the coming years, not lower, that bodes well for Chevron returning to its former industry leading dividend growth rate.

(Source: Chevron Investor Presentation)

Beyond 2020, Chevron is going to need to accelerate capex spending, since the strong production growth is mostly being driven by earlier projects and the Permian. But even over the long term, analysts expect Chevron to deliver 4% production growth and industry leading 20% returns on capital (by 2020). If Chevron can indeed pull that off, it will overtake Exxon as the highest-quality oil blue-chip you can own.

Shell: Betting The Future On LNG

Shell is still an oil company and so part of its $25 billion to $30 billion in annual capex spending over the coming years will be focused on increasing oil production by 1 million bpd or 25% above 2017 levels.

(Source: Shell Investor Presentation)

However, while that kind of production growth is impressive enough for an oil major, Shell’s biggest growth efforts are focused on boosting its LNG capacity by 50%. That’s because, while oil demand growth is expected to continue rising for decades, gas demand is expected to rise much faster.

(Source: Shell Investor Presentation)

The reason that Shell is so gungho on LNG specifically is that it’s the most cost-effective way for transporting large amounts of gas around the world (LNG is 1,000 times denser than natural gas in its standard form). Asian gas demand is expected to grow 3% annually through 2035, which is three times the growth rate of energy in general.

(Source: Shell Investor Presentation)

In fact, Shell expects that global LNG demand will be the fastest growing part of the fossil fuel industry, courtesy of Asia’s enormous demand growth, mostly due to emerging markets like China and India.

(Source: Shell Investor Presentation)

Shell’s LNG focused growth strategy began in 2012 when it began construction of the $12 billion Prelude floating gasification ship (Shell owns 68% of the project).

(Source: Shell Investor Presentation)

The Prelude is 1601 feet long, displaces the equivalent of six US supercarriers and is now complete and generating LNG 300 miles off the coast of North Western Australia. Shell expects to keep the ship there for the next 20 to 25 years where it will feed off cheap natural gas and produce 5.25 million tons per annum or MTA of LNG, gas condensates, and liquefied petroleum gas. This will then be shipped to export markets in Asia, mostly via Shell’s own LNG tanker fleet (it owns 20% of the world’s LNG tankers).

Which brings us to the second part of Shell’s LNG pivot. That would be the BG acquisition which made Shell into the world’s largest producer and shipper of LNG. While that deal involved a lot of stock, Shell has said it will buy back $25 billion worth of shares between 2017 and 2020 to neutralize that dilution.

Ultimately, the BG acquisition is likely to prove a big win because it has made Shell the top name in global LNG (for now). The company plans to pad that lead via even bolder investments by recently announcing it will be going forward with LNG Canada. This joint venture is already included in the company’s annual capex budget and expected to generate 14 million MTA of low-cost LNG. That will then be exported to Asia, at about 5% lower overall cost (including shipping) which gives Shell a major competitive advantage over rival LNG shippers operating from America’s Gulf Coast.

(Source: Shell investor presentation)

Shell expects to generate about 13% returns on capital from this project, which is above its 2021 target of 10% return on capital company wide (up from 8% in 2017).

(Source: Shell investor presentation)

As a result of its strategic growth plan, Shell expects to be able to average $25 billion in annual free cash flow between 2019 and 2021 at $60 Brent oil, and $30 billion at $65 crude.

Today, Brent is $66, and most analysts think it’s likely to average around $73 over the next few years. Note that assuming Shell’s forecasts come true its dividend payout ratio will fall to 47% to 56% during the next few years. However, should Brent indeed average $73, then Shell is likely to enjoy even greater FCF, courtesy of its impressive cost discipline (production costs are down 35% since the oil crash and overall capex spending is 40% lower). That potentially greater FCF would then be funneled into larger dividend hikes (though still modest) and more aggressive share buybacks.

Note also that Shell has stated it plans to invest $1 to $2 billion per year into alternative energy, as it starts planning for a post-fossil fuel world. Management expects its “new energies” segment to generate 8% to 12% returns on capital, in line with its overall company profitability.

The bottom line is that all three of these oil blue-chips have ample financial resources to fund aggressive growth in their businesses, all while also delivering generous, safe and rising income over time. That in turns should also allow them to generate marketing-beating total returns.

4. All Three Offer Generous, Safe Income And Good Return Potential

The most important part of any income investment is the dividend profile which consists of three parts: yield, safety, and long-term growth potential. Combined with valuation it’s what tends to drive total returns.

Company Yield TTM FCF Payout Ratio 10 Year Projected dividend growth Projected 10 Year Total Return (From Fair Value) Valuation Adjusted Expected CAGR Return
Exxon Mobil 4.2% 81% 6% to 7% 10.2% to 11.2% 13.3% to 14.3%
Chevron 3.9% 59% 6% to 7% 9.9% to 10.9% 10.4% to 11.4%
Royal Dutch Shell 6.0% 85% 1% to 3% 7% to 9% 7.5% to 9.5%
S&P 500 1.9% 38% 6.4% 8.3% 0% to 5%

(Sources: Morningstar, Simply Safe Dividends, Fast Graphs, BlackRock, Vanguard, Yardeni Research, Multpl.com, Gordon Dividend Growth Model, Dividend Yield Theory)

All three oil giants offer very attractive yields, at least double that of the S&P 500. More importantly, those dividends are low-risk thanks to sustainable FCF payout ratios and fortress like balance sheets.

Over the long term, Exxon and Chevron are likely to continue their historical 6% to 7% dividend growth rates, courtesy of their robust FCF. Shell on the other hand, represents a tradeoff. You get a much higher yield today, but much slower historical long-term dividend growth. Given management’s priorities (deleverage and buybacks first through 2020), I don’t expect Shell to deliver more than about 2% payout growth, essentially offsetting inflation.

Combining yield with long-term dividend growth (Gordon Dividend Growth Model, effective for dividend stocks since 1956), we can estimate what each company’s long-term total returns will likely be from fair value. Exxon and Chevron are pretty evenly matched with Shell bringing up the rear with about 8% return potential. That’s below the S&P 500’s 9.2% historical total return, but likely to beat the market over the next five to 10 years. That’s because Morningstar, BlackRock and Vanguard expect just 0% to 5% CAGR total returns from the market over that time.

However, those expected total returns are from fair value, and when we adjust for valuations we find that, Exxon, among these three blue-chips, becomes the best stock you can buy today.

5. Valuation: All Three Are Buys But Exxon Is The Place For New Money

Chart

XOM Total Return Price data by YCharts

Thanks to the recent plunge in crude prices, all three stocks are underperforming the S&P 500 over the past year. But for value investors such underperformance merely presents better buying opportunities.

There are many ways to value a stock, but for dividend blue-chips, one in particular has proven highly effective since 1966. It’s called dividend yield theory or DYT, and it’s been what asset manager and newsletter publisher Investment Quality Trends has been exclusively using to beat the market for decades (and with 10% lower volatility to boot).

(Source: Investment Quality Trends)

DYT works well for stable dividend stocks whose business models (and growth rates) don’t change much over time. It compares a stock’s yield to its long-term historical norm to determine whether or not a stock is overvalued, undervalued, or fairly priced. That’s because dividend stocks tend to have mean reverting yields that cycles around a relatively fixed point over time. Thus, their historical yields can be thought of as a “fair value yield” at which buying a quality company is a good idea.

Company Yield 5 Year Average Yield 13 Year Median Yield Estimated Fair Value Yield
Exxon 4.2% 3.5% 2.6% 3.1%
Chevron 3.9% 3.9% 3.5% 3.7%
Royal Dutch Shell 6.0% 6.0% 5.4% 5.7%

(Sources: Simply Safe Dividends, Gurufocus)

For my fair value yield, I take the midpoint between a stock’s five year average yield and 13 year-median yield. That gives you a more accurate sense of what the market values each company at across various economic, industry, and interest rate environments.

Today, Chevron’s and Shell’s yields are trading slightly above their fair value yields indicating both are good buys. However, Exxon’s yield is far above its historical yield meaning it’s the most undervalued of the three.

Company Discount To Fair Value Upside To Fair Value 10 Year CAGR Valuation Boost Expected CAGR Total Return
Exxon 26% 35% 3.1% 13.3% to 14.3%
Chevron 5% 5% 0.5% 10.4% to 11.4%
Royal Dutch Shell 5% 5% 0.5% 7.5% to 9.5%

(Sources: Simply Safe Dividends, Gurufocus, Dividend Yield Theory)

At today’s prices, I wouldn’t expect much valuation boost from Shell and Chevron, but Exxon is likely to outpace its cash flow and dividend growth significantly (about 3% CAGR over the next decade). Add in this long-term valuation boost to the current yield and long-term dividend growth rate (valuation adjusted Gordon Dividend Growth Model) and Exxon offers the best total return potential by far. That’s not to say that Chevron and Shell won’t generate decent returns as well, but for new money today I consider Exxon the best option for conservative high-yield investors.

Of course, that’s only if you’re comfortable with the rather complex risk profile that comes with owning any oil stock.

Risks To Consider

While Exxon, Chevron and Shell are the lowest risk dividend blue chips in the industry that doesn’t mean they don’t still have a complex set of risks that investors need to be comfortable with.

The first is, of course, that their sales, earnings, and cash flow are highly dependent on oil & gas prices, which as we’re seeing now is extremely hard to predict.

(Source: ConocoPhillips Investor Presentation)

And given the capital-intensive nature and long lead times for major production growth projects, that can make profitable long-term capital allocation decisions challenging. For example, ConocoPhillips’s (COP) proprietary long-term oil forecast model shows that oil could realistically average anywhere from $40 to $82 per barrel by 2025. The actual price will depend on hundreds of factors including long-term growth rates in the global economy, the rate of alternative energy adoption, and how quickly US shale production ramps up and for how long. And that’s just a few of the things that oil companies must guesstimate when making their long-term investing plans.

Analyst and government agency models are similarly volatile and uncertain. For example, last year, analyst firm McKinsey, in its long-term (through 2050) energy industry report, estimated that peak global oil demand might come as early as 2030. That’s far quicker than most large oil companies (and government agencies) expect (the 2040’s). This year’s updated report now puts that peak oil demand estimate at 2036. While that’s closer to the current industry consensus, the point is that long-term demand forecasts can be nearly as volatile as the short-term price of crude itself.

Now, of course, the good news is that oil giants are not just in the oil business, but the gas business too. And even with the rapid adoption of electric vehicles or EVs, rising demand for baseload electricity from gas-fired power plants is expected to still see natural gas (and LNG) demand increase through at least 2040 and potentially 2050.

(Source: Exxon Mobil investor presentation)

But here too we must remember that these long-term projections are merely current best guesstimates that can change over time. Improved renewable energy (including low-cost storage) technology might end up disrupting natural gas power far quicker than most analysts, government agencies, and oil companies currently expect. For instance, one analyst at Credit Suisse thinks that renewable energy might “effectively be free” by as soon as 2030.

Now I track both the fossil fuel and renewable energy industries closely and while I agree that renewables + storage prices will drop substantially over time, I consider such a forecast to be highly unlikely. But the point is that even if natural gas isn’t made obsolete within the next decade, today’s oil & gas investors are relying on a far longer growth runway that might actually exist.

And of course there are plenty of other risks that oil companies and investors need to contend with including:

  • cost overruns and delays on new projects (between 1993 and 2003 13% of global oil projects ended up 40% over budget)
  • complex regulatory environments all over the world (including in unstable emerging markets)
  • investment losses due to sanctions (such as against Russia)
  • seemingly never-ending lawsuits filed by US cities and states over climate change in an attempt to recreate a tobacco industry-style class action mega-settlement.

With so many risk factors to content with conservative income investors are better off sticking with time-tested blue-chips like Exxon, Chevron and Shell. These companies have not just the enormous financial resources to deal with inevitable setbacks but are also the most likely to be able to eventually transition to a renewable energy-focused future. Or to put another way, while most oil stocks are unlikely to be “buy and hold forever” investments, these three giants are the most likely to be able to eventually pivot and not just survive in the coming decades, but thrive and continue delivering solid income quarter after quarter.

Bottom Line: The Oil Industry Is Volatile But Exxon, Chevron And Shell Are Three High-Yield Stocks You Can Rely On

The oil industry is known for its volatility and complex risk profile. That’s why for conservative income investors it’s generally a good idea to stick to time-tested high-yield blue-chips. Companies like Exxon, Chevron, and Shell have proven over decades that even oil stocks can make great dividend stocks. That’s because all three companies have:

  • industry leading balance sheets that let them maintain dividends and invest in growth even during oil crashes
  • shareholder-friendly corporate cultures dedicated to safe and growing dividends over time
  • good long-term growth plans that should allow all three to deliver strong total returns in the coming years

And thanks to the most recent oil bear market, all three of these high-yield blue-chips are once more trading at attractive valuations that make them good buys today. However, Exxon is by far the most undervalued which makes it my top recommendation for conservative income investors looking for direct exposure to the oil industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Netflix Subscribers Will Pay Less (Or Possibly More) Depending on Where They Live, According to 2 Surprising Reports. Here Are the Details

It’s releasing 700 new shows this year. Think about that. It’s almost two new shows per day, counting new seasons of existing series.

And it turns out many subscribers absolutely love it. In fact, a new study by a Wall Street firm says a majority of U.S. Netflix users would be willing to pay a lot more for the service –40 percent or more than they currently pay.

That has to be tempting to Netlix, which simultaneously has spent $8 billion to produce and license new shows.

And it’s why the same Wall Street firm, Piper Jaffray, is predicting that Netflix will “bump pricing up across many of its markets in 2019,” according to Business Insider, because a “primary determinant in the ability of Netflix to raise price is subscriber perception of content quality.”

Or to put it a bit more plainly: people like it, so they’re willing to pay more, so you can expect Netflix to charge more.

That makes sense. But the news comes in the context of another report–one that says Netflix is actually playing around with an idea to charge less in other parts of the world.

Last week, a Malaysian news site called The Star Online reported that Netflix was trying a somewhat stripped down, mobile device-only subscription plan that goes for 17 Malaysian ringgit a month–which works out to about $4.25 in U.S. currency, and is less than half what a regular Netflix subscription costs in Malaysia.

Netflix confirmed to TechCrunch and USA Today that it’s running these cheaper, mobile-only subscriptions “in a few countries,” but didn’t provide further details. But it’s in keeping with what CEO Reed Hastings told Bloomberg last week, about want to experiment with different pricing strategies around teh world.

Of course, as Netflix users know, the content that you see in one part of the world isn’t always the same as what you’ll see in other parts of the planet. And Netflix has been emphasizing local content recently in Asia, where it faces stiff competition from lower-priced streaming services.

Besides meaning that Netflix, not Apple or Alphabet, keeps the customer data, it also means Netlix doesn’t have to pay a 15 or 30 percent cut to those companies to reach its own subscribers.

That could free up more opportunity to drive prices down in some markets. But not, analysts predict, in the United States and perhaps other wealthier countries. 

It might literally be a first world problem, but if these analysts’ predictions are right, we’ll likely be paying a bit more before long. Either way, you’ll probably keep watching.

By the way, I contacted Netflix via email to ask them for comment on these reported price fluctuations, but I haven’t heard anything back. If they do reply I’ll update this column. 

Amazon picks New York City, Washington D.C. area for new offices

SAN FRANCISCO/WASHINGTON (Reuters) – Amazon.com Inc (AMZN.O) picked America’s financial and political capitals for massive new offices on Tuesday, branching out from its home base in Seattle with plans to create more than 25,000 jobs in both New York City and an area just outside Washington, D.C.

The world’s largest online retailer plans to spend $5 billion on the two new developments in Long Island City and Arlington, Virginia, and expects to get more than $2 billion in tax credits and incentives with plans to apply for more.

The prize, which Amazon called HQ2, attracted hundreds of proposals from across North America in a year-long bidding war that garnered widespread publicity for the company. Amazon ended the frenzy by dividing the spoils between the two most powerful East Coast U.S. cities and offering a consolation prize of a 5,000-person center in Nashville, Tennessee, focused on technology and management for retail operations.

Losers said they learned from the process, while winners said it was costly but worthwhile.

“Either you are creating jobs or you are losing jobs,” New York Governor Andrew Cuomo told a news conference on Tuesday.

With more than 610,000 workers worldwide, Amazon is already one of the biggest employers in the United States and the world’s third-most valuable company, behind Apple Inc (AAPL.O) and Microsoft Corp (MSFT.O).

Still, it faces fierce competition for talent from Alphabet Inc’s (GOOGL.O) Google and other companies working to build new technologies in the cloud. Those rivals routinely offer free food and perks in sunny California, seen by many as a better draw than Amazon’s relative frugality in rain-plagued Seattle. Google also has a growing footprint in New York City.

Already marketing its forthcoming location in the New York City borough of Queens, Amazon talked up Long Island City’s breweries, waterfront parks and easy transit access. Rents there are typically lower than in Midtown Manhattan, which is just across the East River. The former industrial area also has a clock counting down the hours until the end of U.S. President Donald Trump’s first term in office.

The choice of Arlington, Virginia, just across the Potomac River from downtown Washington D.C., could hand Amazon greater political influence in the U.S. capital, where it has one of the largest lobbying shops in town. Locating close to the Pentagon may also help Amazon win a $10 billion cloud-computing contract from the U.S. Department of Defense, said Michael Pachter, an analyst at Wedbush Securities.

Jeff Bezos, Amazon’s chief executive and the world’s richest person, privately owns the Washington Post, which has written critical articles about Trump. In turn, Bezos’s companies have been a frequent target of broadsides from the president. The newspaper maintains full editorial independence from its owner.

Amazon’s choice largely bypassed the middle of the United States, where many cities had hoped for an economic boost and bid for the new jobs. The company already had large corporate workforces in greater Washington and New York.

“My heart is broken today,” Dallas Mayor Mike Rawlings said.

A couple walk past an office building at 1851 S. Bell St. in Crystal City where Amazon may place some of its workforce after announcing its new headquarters would be based in Arlington, Virginia, U.S., November 13, 2018. REUTERS/Kevin Lamarque

TAX BREAKS

At the outset of its search last year, Amazon said it was looking for a business-friendly environment. The company said it will receive performance-based incentives of $1.525 billion from the state of New York, including an average $48,000 for each job it creates.

It can also apply for other tax incentives, such as New York City’s Relocation and Employment Assistance Program that offers tax breaks potentially worth $900 million over 12 years. What benefit the company would actually get was unclear.

In Virginia, Amazon will receive performance-based incentives of $573 million, including an average $22,000 for each job it creates.

These rewards come on top of $1.6 billion in subsidies Amazon has received across the United States since 2000, according to a database from the Washington-based watchdog Good Jobs First.

Amazon says it has invested $160 billion in the country since 2010 and that the new offices will generate more than $14 billion in extra tax revenue for New York, Virginia and Tennessee over the next two decades.

It expects an average wage of more than $150,000 for employees in each new office.

Slideshow (8 Images)

HOUSING CRISIS

Amazon’s emphasis on new, high-paying jobs earned publicity as it faced criticism for low wages in its sprawling warehouses.

The company got $148 million worth of media attention across the English-language press in the two months following the launch of its search last September, according to media measurement and analytics firm mediaQuant Inc.

Amazon received 238 proposals and New York and Virginia beat out 18 other finalists from a January short list, which included Los Angeles and Chicago.

New Jersey made headlines early in the contest by proposing $7 billion in potential credits against state and city taxes if Amazon located in Newark and stuck to hiring commitments.

Others with less money to offer took a more creative approach: the mayor of the Atlanta suburb of Stonecrest, Jason Lary, said he would create a new city from industrial land called Amazon and name Bezos its mayor for life.

In evaluating its options, Amazon looked at the quality of schools, meeting with superintendents to discuss education in science and math. Amazon also wanted helicopter landing pads for the new sites, documents it released on Tuesday show.

The company has already had to navigate community issues at its more than 45,000-person urban campus in Seattle. An affordable housing crisis there prompted the city council to adopt a head tax on businesses in May, which Amazon helped overturn in a subsequent city council vote.

Some critics had pushed for more transparency from cities and states in the bidding process, warning that the benefits of hosting a massive Amazon office may not offset the taxpayer-funded incentives and other costs.

“Our subways are crumbling, our children lack school seats, and too many of our neighbors lack adequate health care,” New York State Senator Michael Gianaris and City Council Member Jimmy Van Bramer said in a joint statement. “It is unfathomable that we would sign a $3 billion check to Amazon in the face of these challenges.”

Amazon shares closed down 0.3 percent at $1631.17, giving the company a market value of almost $800 billion.

Reporting by Jeffrey Dastin in San Francisco and David Shepardson in Washington; Additional reporting by Arjun Panchadar and Supantha Mukherjee in Bengaluru, Angela Moon, Hilary Russ and Laila Kearney in New York, Suzannah Gonzales and Karen Pierog in Chicago; Writing by Nick Zieminski; Editing by Meredith Mazzilli and Bill Rigby

​Red Hat blends Kubernetes into Red Hat OpenStack Platform 14

Featured stories

There was a bit of fear when IBM acquired Red Hat that Red Hat might abandon the OpenStack Infrastructure-as-a-Service (IaaS) cloud. Nah!

In Berlin at OpenStack Summit, Red Hat introduced its latest OpenStack distribution: Red Hat OpenStack Platform 14. It comes with a generous helping of Kubernetes container orchestration via Red Hat OpenShift Container Platform.

Also: Best Black Friday 2018 deals: Business Bargain Hunter’s top picks

Red Hat’s new OpenStack is built on top of the OpenStack “Rocky” community release. This version is noted for its significant bare-metal improvements in Ironic, its bare metal provisioning module, as well as in Nova, its compute instances provisioning program. Red Hat makes use of both improvements by automated provisioning of bare metal and virtual infrastructure resources in its OpenShift Container Platform.

To manage those containers, no matter if they’re on bare metal or in a Virtual Machine (VM), the new OpenStack Platform 14 is more tightly integrated than ever with Red Hat OpenShift Container Platform, Together, OpenStack Platform 14 aims to deliver a single infrastructure offering for traditional, virtualized, and cloud-native workloads.

This combination also provides new capabilities:

  • Automated deployment of production-ready, high-availability Red Hat OpenShift Container Platform clusters, helping to provide a path toward continuous operations without a single point of failure.
  • Integrated networking enabling OpenShift container-based and OpenStack virtual workloads from the same tenant to be connected to the same virtual network (Kuryr) increasing network performance.
  • Automated use of built-in OpenStack load balancer services to front-end container based workloads.
  • Use of built-in OpenStack object storage to more efficiently host container registries.
  • Director-based scale-out and scale-in Red Hat OpenShift nodes, enabling businesses to expand or retract resources as workload requirements change.

Red Hat OpenStack Platform 14 also extends its integration with Red Hat Ansible Automation, Red Hat’s DevOps tool. This makes deploying OpenStack — always tricky — much easier than in previous versions.

CNET: Best Black Friday deals 2018 | Best Holiday gifts 2018 | Best TVs to give for the holidays

The latest version also includes:

  • Processor scalability for emerging and extreme workloads like artificial intelligence (AI) and graphics rendering through a Technology Preview of NVIDIA GRID Virtual PC (vPC) capabilities. This enables the sharing of NVIDIA graphics processing units (GPUs) across virtual machines and applications, making it easier to scale resources to meet the demands of intensive applications.
  • Improved storage availability, management, data migration, and security through enhanced integration with Red Hat Ceph Storage including the ability to share the same Cinder storage volume across multiple VMs.
  • Inclusion of Skydive, a innovative, layer-independent network analysis tool that simplifies the validation, documentation, and troubleshooting of complex virtual network topologies as a Technology Preview.

Finally, Red Hat continues to support not only x86 processors, but IBM Power architecture as well. Yes, this means you could set up an OpenStack cloud, which could run across both Commercial off-the-shelf x86 servers and mainframes.

TechRepublic: A guide to tech and non-tech holiday gifts to buy online | Photos: Cool gifts for bosses to buy for employees | The do’s and don’ts of giving holiday gifts to your coworkers

In a statement Joe Fernandes, Red Hat’s Cloud Platforms vice president concluded:

“As the de facto standard in Linux container orchestration, Kubernetes adoption is often a key part of the technology mix for enterprise digital transformation, but this can require a scalable, flexible foundation for organizations to realize its full potential. By more tightly integrating the industry’s most comprehensive enterprise Kubernetes platform in OpenShift with the latest version of Red Hat OpenStack Platform, we’re providing a robust, more reliable foundation for cloud-native workloads.”

Red Hat OpenStack Platform 14 will be available in the coming weeks via the Red Hat Customer Portal and as a component of both Red Hat Cloud Infrastructure and Red Hat Cloud Suite.

Related Stories:

The US Is the Only Country Where There Are More Guns Than People

Americans could be forgiven for becoming numb to the swarm of stories reporting gun massacres. In the last five years, ordinary Americans have been murdered in mass shootings in a synagogue, in churches, at elementary and high schools, at a nightclub, at a bar, at a music festival, at a center for people with developmental disabilities, among countless others. After a shooting in Isla Vista, California, in 2014, The Onion wrote, “‘No Way To Prevent This,’ Says Only Nation Where This Regularly Happens.”

The Onion got it right—at least for the “only nation” bit. The US is the only country where this keeps happening. And the US also claims the dubious distinction of being the only rich nation to see so many deaths from firearms, as the chart below shows. (We kill ourselves even more than we kill each other: Worldwide, the US ranks second only to Greenland in the rate of suicides by firearm; when you remove suicides from the equation, the US falls to number 28 worldwide for deaths from firearms, both from violent acts and accidents. But even subtracting suicides, the US’s death rate from guns remains far ahead of every single European nation and nearly every Asian one.)

Most countries that see high rates of gun violence are also economically depressed; El Salvador, for example, which claims the world’s highest rate of deaths from gun violence, has a per capita GDP of around $4,000—roughly 7 percent of the earnings per citizen in the US. The chart below shows that, generally, it’s the poorer countries that see high rates of violence, while rich countries—Luxembourg tops the list—tend to lose very few residents to gunfire. The US, again, stands alone for having a relatively high GDP per capita (number 8 worldwide) and a high level of gun violence (number 12 worldwide).

Rich countries that see virtually no deaths from firearms include Japan, the United Kingdom, Singapore, and South Korea, according to data from the World Bank and the Institute for Health Metrics and Evaluation’s Global Burden of Disease survey.

Unsurprisingly, firearm deaths are correlated with firearm proliferation. American companies manufacture millions of guns each year and import many more. Domestic firearm manufacturing increased dramatically during President Barack Obama’s first term, in part because of fears that, after eight years of a Republican White House, a pro-gun-control president would take away citizens’ weapons.

That didn’t happen. By 2017 the number of handguns, shotguns, and rifles available in the United States was nearly three times higher than it was two decades earlier, according to the US Bureau of Alcohol, Tobacco, Firearms, and Explosives. Today, the US boasts more firearms than residents.

Canada, for its part, may have a lot of guns as well, as the chart below shows, but its citizens don’t often die from gunfire; the country ranks 72nd in the world for deaths from firearms. Despite having one firearm per every three Canadians, the country’s death rate from gun violence is about one-tenth that of the US (though still four times that of the UK). While mass shootings have been on the rise in Canada, only 223 Canadians died from firearm violence in 2016, compared with more than 14,000 in the US. Prospective gun buyers in Canada must pass a reference check, background check, and a gun-safety course before receiving a firearm license; the country also imposes a 28-day waiting period for new gun licensees. The AR-15 rifle—which was used to kill high school students in Parkland, Florida, moviegoers in Aurora, Colorado, and worshippers at a Pittsburgh synagogue, among many others—is a “restricted” firearm in Canada, meaning owners must pass an additional test and obtain a special license.

If Barack Obama had succeeded in passing stronger gun laws, would it have helped save lives? Maybe. On a state-by-state basis, there’s a general correlation between stronger gun laws and lower rates of firearm deaths. A May 2018 paper in JAMA Internal Medicine that sought to evaluate whether strong gun laws resulted in fewer deaths concluded, “Strengthening state firearm policies may prevent firearm suicide and homicide, with benefits that may extend beyond state lines.” Still, a February 2018 analysis by The New York Times found that most weapons used in mass shootings had been obtained legally.

The Giffords Law Center to Prevent Gun Violence gives the states of Alaska and Louisiana a failing grade for their gun-safety laws; those states also claim the nation’s highest per capita rate of deaths from firearms. Massachusetts, New York, and New Jersey all receive higher marks for their laws and have comparatively lower death rates from guns.

But as long as it’s easy for firearms to be transported from, say, a gun-friendly state (like Nevada) to a state with strong gun laws (like California), as long as lawmakers fail to enact strong policies to restrict sales to people with mental illnesses or a history of violence, as long politicians continue to take money from the gun industry, as long as the gun lobby continues to pressure medical doctors to stop advocating for their patients with bullet wounds, and as long as a box of ammunition for an AR-15 rifle costs $20 for 50 rounds, the shootings will no doubt continue.


More Great WIRED Stories

Weighing The Week Ahead: Market Storm Averted?

We have another normal economic calendar. The election is behind us. The Fed decision is behind us. What next?

Some of the punditry convened after Wednesday’s rally to say that it was time to get “back to reality.” Others are wondering about a year-end rally. Since everyone keys off what happened the day before (!) the preponderance of commentary might go either way.

In either case, I expect pundits to look back at recent volatility, technical support levels, and headline risk. They will be asking:

Has the stock market storm been averted?

Last Week Recap

In my last edition of WTWA I guessed that the punditry focus on the continuing market pressures and warning technical signals. There was some validity in this until Wednesday. My suggestion that the end of the election would be a market positive proved to be correct. We do not know, of course, the exact reason. Some insisted on a “gridlock” interpretation, but the outcome was in line with expectations. My guess was “OK, but not great.” It was a tough week to call and we stayed on the right side of the trade.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis

A close up of a map Description automatically generated

The market gained 2.1% (added to last week’s 2.7%) and the weekly trading range was 3.4%. The range was lower than in recent weeks, but it did not feel that way for those closely watching the market. I summarize actual and implied volatility each week in our Indicator Snapshot section below.

Noteworthy

Will a robot take your job? Jenny Scribani at Visual Capitalist pulls together the evidence.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

New Deal Democrat’s high frequency indicators are an important part of our regular research. This week reflects some softening in the long leading indicators, although his rating remains “neutral.”

When relevant, I include expectations (E) and the prior reading (P).

The Good

  • Earnings forecasts are showing surprising strength. Brian Gilmartin tracks the quarter-by-quarter changes, generally not showing the declines we often see. Company reports are also mentioning tariffs less frequently on earnings calls. John Butters illustrates the pattern, sector by sector. See also Avondale’s excellent article summarizing conference call notes.

  • Initial jobless claims dipped to 214K, continuing the streak of low readings (Bespoke).

  • The Fed decision of no policy change was expected by all and the accompanying language was not worrisome.
  • Foreclosure inventory falls to the pre-recession average. (Calculated Risk).
  • ISM non-manufacturing registered 60.3 E 58.8 P 61.6.
  • Rail traffic improved but the pace of improvement is decelerating. Steven Hansen does a comprehensive analysis with special emphasis on what he calls the “economically intuitive sectors.” This is a valuable element, not seen in other sources.
  • Mortgage credit availability is increasing. “Davidson” (via Todd Sullivan) explains why this is significant for the economy, construction, and lenders.
  • The JOLTS Report continues to reflect employment strength. I especially like the chart below from Jill Mislinski. It shows the improvement of all key elements of the series, compared with a flat line for layoffs. This interesting survey only goes back to 2001, so we do not have many business cycles to analyze. Read the entire post for a collection of other charts and interesting business cycle analysis. Hint: No sign of labor market weakness.

But a look at JOLTS requires examining the Beveridge Curve!

The Bad

  • Individual investor sentiment becomes more bullish, viewed as a contrary indicator. (Bespoke)

  • Hotel occupancy declined a bit. Calculated Risk analyzes the seasonal components and comparisons with prior year. YTD 2018 is slightly ahead of the record in 2017.
  • PPI ran hot with core final demand up 0.5% MoM. (Jill Mislinski).

The Ugly

Forgetting veterans. Some Chicago politicians are proposing raising desperately needed cash by selling naming rights to various public holdings. I don’t mind City Hall, if they can find a buyer, but the airport idea is repugnant.

O’Hare Airport began as a military installation, Orchard Field. It is still designated as ORD, but was renamed for Edward “Butch” O’Hare, the Navy’s first flying ace and the first WWII naval recipient of the Medal of Honor.

Midway Airport opened in 1926 and was originally called Chicago Municipal Airport. It was renamed for the Battle of Midway in 1949.

These names should be untouchable.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

The calendar is normal in significance. The CPI will be watched closely, especially after the PPI report. Retail sales are expected to show a sharp rebound – important to confirming economic strength. The Philly Fed attracts interest as the early read on November data.

And of course – continued tweets, leaks, and speeches.

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.

A screenshot of a cell phone Description automatically generated

Next Week’s Theme

Last week I opined, “It will require a major surprise for a market reaction to the election.” Unless many were surprised by the expected result, that was a bad call! Eddy Elfenbein always provides a simple, concise, and meaningful interpretation of such events. He writes:

On Tuesday, Americans went to the polls and they voted for gridlock. Or more accurately, the Democrats won control of the House of Representatives while the Republicans increased their Senate majority.

What does this mean for us as investors? Eh… not much, really. Sure, I know how partisans like to jump and holler, but the long-term impact on the markets is pretty small. Historically, bull markets have done just fine while there’s been gridlock in Washington. If anything, Wall Street seems pleased that the uncertainty of the election has passed.

But Eddy is not willing to signal “all clear” and neither am I.

We were on the edge of a storm, with many danger signals. Last week’s trading has improved the technical picture. This shifts the question to the headline risk, referred to as “the fundamentals” by some who are uncomfortable with math. I expect pundits of all stripes to be wondering:

Has the storm been averted?

I have recently offered some bearish viewpoints and suggested some flaws. This week, let’s try it the other way around, starting with a list of what might go right.

Briefing.com publishes both stock and bond commentary, part of their free services. Patrick J. O’Hare’s market assessment, “From the Midterm to the Final Exam,” is interesting and balanced. I will take a closer look, once again intermingling my comments in cases where there is something important to add. I’ll put my thoughts in italics. While data-based, these represent my own conclusions. I act on them, but you should make your own decisions!

There are a number of reasons the punditry is making a case for the stock market to finish this year with a bang:

• The uncertainty surrounding the midterm election is over and investors can feel good that a split Congress means there won’t be a legislative unwinding of market-friendly policies. [The split Congress has little effect on market-friendly policies. Nothing was going to be repealed over a veto. What it means is no tax-cut 2.0 and a likely fight over debt limits.]

• November marks the start of the best six-month return period for the stock market, so this is typically a seasonally strong time. [True, but the seasonal effects have not been very important in recent years. The end of the year does encourage everyone to start thinking about next year’s earnings, so stocks seem a bit cheaper. They should, of course, always be looking forward, but most do not.]

• There is going to be performance-chasing by fund managers who have underperformed their benchmark. [There is not much to chase so far! Lagging results have come mostly from under-owned FAANG stocks. I don’t see how “chasing” will help the overall market.]

• Corporate share buyback activity will pick up in earnest now that the third-quarter reporting period is mostly behind the market. [True.]

• Valuation is more attractive in the wake of the October correction. The S&P 500 trades at 16.1x forward 12-month estimates – a slight discount to the five-year historical average and versus 18.3x at the start of the year. [This is the biggest factor, reflecting improved fundamentals. Eventually, attractive pricing trumps negative sentiment.]

• They expect President Trump and President Xi to convey some trade tension detente after meeting at the G20 Leaders’ Summit Nov. 30-Dec. 1. [This is the single biggest factor. Most do not realize how much trade negativity is reflected in current stock prices. My estimate is 10% in the overall market, and much more if you own the right stocks. Saying that it is important is quite different some “expecting” some policy shift.]

• The Federal Reserve could signal that it might not raise interest rates as much as it currently projects. [Don’t hold your breath. It would take a real economic reversal at this point.]

Possible catalysts?

Mr. O’Hare sees two possible catalysts – a trade agreement with China and a Fed decision to slow the planned rate of rate hikes. He does not see either as especially likely, leaving the outlook uncertain.

[I continue to see trade negotiations as the most important catalyst. The tariff impact has been important throughout GOP states, including the Trump base. His key contributors and congressional supporters will be feeling some pain. Some of the asserted executive power is subject to legislative challenge. The real-time economics lesson is playing out. The intra-party pressures could not surface before the election, but I expect to see some signs of change.]

There is a third possible catalyst – the breaking of the bogus recession narrative. This has a surprising grip, even among sophisticated investors. So many believe that Mr. Market wisely forecasts recessions and they should take cover. This is precisely backwards.

Urban Carmel, in an economic assessment packed with charts and data, concludes as follows:

Equity prices typically fall ahead of the next recession, but the macro indictors highlighted above weaken even earlier and help distinguish a 10% correction from an oncoming bear market. On balance, these indicators are not hinting at an imminent recession; new home sales is the only potential warning flag (its most recent peak was 11 months ago) but it has the longest lead time to the next recession of all the indicators (a recent post on this is here).

This is an excellent, comprehensive article. It addresses many of the skeptical points often raised by the “reliably bearish” pundits.

I have included most of my key ideas, but the Final Thought will focus on some scenarios for investor planning.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients: Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

Short-term trading conditions remain at high alert. The identification as “very bearish” is a reaction to volatility, not a prediction of market movement. There is always a risk/reward balance to consider in your trading. When conditions are technically challenged, we watch trading positions even more closely. Each of our models has a specific exit strategy. The technical health rating may drop enough for a complete trading exit. It got close to that level twice in the last two months, but has now improved slightly.

Long-term trading has improved a notch on a technical basis. The big post-election rebound helped the technical picture – for us, and for others. Our methods did not “stop out” at the bottom, an important consideration. When your approach tells you to exit on a technical basis, a key question is when to get back in.

Fundamental analysis remains strongly bullish. Earnings are great, prices are lower, and there is even less competition from bonds. We reduce fundamental positions (as we did in 2011) when we get a warning from the recession or financial stress indicators, not merely as a reaction to technical signals.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.”

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession. Here is the latest chart on the Business Cycle Index.

Guest Commentary

Nick Maggiulli explains how stock touts convince you of their prowess, finding winners week after week. Hint: There are some other letters to non-winners!

He then enlightens us with this valuable analysis of whether McRib is available. I recommend reading the full post before trading on these results.

Insight for Traders

Check out our weekly “Stock Exchange”. We combine links to important posts about trading, themes of current interest, and ideas from our trading models. This week we asked traders: Do you trade binary events? One inspiration for this was the election, of course, although it was not completely binary. Drug trials are another good example. As usual, we also shared advice by top trading experts and discussed some recent picks from our trading models. Our ringleader and editor, Blue Harbinger, provided fundamental counterpoint for the models, all of which are technically-based.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Ben Carlson’s valuable and delightful account, “Things You See During Every Market Correction.” It takes special skill to achieve the simultaneous goals of informing and entertaining. Ben provides an accurate list of what you can expect to hear from so many pundits. Here is one of my favorites (but choose your own):

…people will start making recession predictions even though the stock market is a poor predictor of recessions because no one remembers that when stocks are in the midst of a downfall. Eventually, someone will be right about this but most of the time these predictions are based on luck.

And then he has the list of clichés from professional investors on TV. Each is designed to portray the speaker as both informed and properly positioned for what just happened. Here are two of my favorites:

• We see Dow 26,104.3487 as a key level of support. If it breaks that level, watch out below. …

• The technical damage to the stock market is much worse than investors realize.

Victor Niederhoffer’s site, Daily Speculations, is also a source of humor and inspiration. The commentators are quite good, but this one is “Anonymous.”

Peter Schiff was the first one where I realized there is an actual gloom-and-doom industry full of people who consistently predict disaster, and then every X years there is a big market downturn, and they can claim to have been right all along, and the cycle starts again.

Stock Ideas

Chuck Carnevale provides a cornucopia of twenty high-quality, attractive dividend growth stocks – diversified by sector. This is a great list of ideas. I am including the list to whet your appetite, but it is no substitute for reading the full post and watching the video.

Continuing my series on boosting your dividend yield, I described how the system could be used with General Mills (GIS). This is a good approach for those whose principal need is income.

Ray Merola provides a thorough analysis of Royal Dutch Shell (RDS.A) (NYSE:RDS.B), which he likes very much. This article is another good combination of an idea and a lesson on how to do your homework.

Can Celgene (CELG) rebound from the biotech sector doldrums? Stone Fox Capital sees a buy signal.

Delta Air Lines (DAL) reported earnings a week ago, encouraging D.M. Martins Research.

Volkswagen? The company with the Beetle and the emissions problems? Barron’s thinks the “stock is cheap and has lots of horsepower.”

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich’s Asset Allocation Daily is consistently both interesting and informative. Each week he highlights stories of interest for both advisors and investors. He also provides insightful commentary on important topics. Be prepared for something that cuts against the grain!

My favorite this week was his discussion over the supposed “oil bear market.” Most people are accepting this uncritically. Gil urges a deeper look and nudges us in that direction.

Abnormal Returns is an important daily source for all of us following investment news. I read it religiously. His Wednesday Personal Finance Post is especially helpful for individual investors. As always, this week there are several great choices. My favorite was Tony Isola’s analysis of the effect of inflation on retirement plans. This is not something you can ignore!

Watch out for…

Square (SQ). Stone Fox Capital is concerned about elevated valuation and “exploding” share counts.

Emerging markets. “Not yet” says Eric Basmajian. [Jeff: I agree with his conclusion, but I’d like to chat with him about some of the argument. For one thing, I don’t trust global PMIs.]

Final Thought

Here are a few ideas about the election aftermath and near-term trading. In each case I have more confidence in what I expect to happen than in the market reaction.

Scenario One: Escalation of the Trump Investigation

This is a near-certainty. Democratic committee chairs will have subpoena and investigative power. Trump is threatening that use of these powers threatens policy compromise. Even if the Democratic leadership bought that argument (and they won’t) they cannot control all the individual Committee Chairs – all fiefdoms. In my class on legislative behavior I cited a source saying that it was nearly always right to refer to someone as “Mr. Chairman” (in those days they were nearly all men) because the number of subcommittees awarded a chairmanship to nearly everyone.

The Democrats will launch various investigations. If the Mueller probe is threatened, it will become even more aggressive.

Investment implications:

  • Cooperation on an infrastructure bill is unlikely.
  • The President may need to reach out more to supporters already in office instead of voters.

Scenario Two: Death to Initiatives Requiring Cooperation

Democrats are unlikely to accede on any key proposal requiring Congressional support. This raises the implementation of the NAFTA replacement is a key worry. We might also see another round of debt-limit debates, with a possible bad ending. Expect the partisan roles to be reversed. The Trump-led GOP has not demonstrated a successful record of reaching across the aisle. That will now be essential on the budget and debt issues.

Investment Implications:

  • A crisis of confidence like what we saw in 2011. The economy runs on confidence.
  • A delay in the crucial North American trade agreements would affect many industries and have a ripple effect.

Scenario Three: Impeachment and/or Constitutional Crisis

This still seems unlikely, but Democrats will not accept firing of Mueller. Some Republicans will agree. I don’t want to get into what substance there is behind the various allegations but suppressing whatever it is will not work.

Investment implications:

  • Another type of crisis of confidence. The US would be weakened in global affairs and development of fresh domestic policies would halt.
  • The specific effects would depend upon which policies – Iran, tariff, immigration, debt ceiling, etc. – had already been implemented.
  • The market will not like uncertainty, but it should not rival 1974.

[There is a lot resting on your current investment decisions – risk, traps, assuring income, and seizing opportunity. Write to us for my free papers on each of these topics.]

I’m more worried about:

• The gradual effect of the trade war. As I have often noted, it is a real-time econ lesson. The effects are more obvious each week – lower growth, higher inflation.

• Additional crippling of compromise.

I’m less worried about:

• Earnings growth. It is a strong positive, supported by a strong economy.

• Debt issues. This is a staple complaint of those struggling to find something wrong. I have often said that this is an important problem, but not currently urgent. It must be addressed, but not right now. Read this piece from David Kotok.

We have another normal economic calendar. The election is behind us. The Fed decision is behind us. What next?

Some of the punditry convened after Wednesday’s rally to say that it was time to get “back to reality.” Others are wondering about a year-end rally. Since everyone keys off what happened the day before (!) the preponderance of commentary might go either way.

In either case, I expect pundits to look back at recent volatility, technical support levels, and headline risk. They will be asking:

Has the stock market storm been averted?

Disclosure: I am/we are long GIS, CELG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: GIS vs short calls

How Amazon's Marketplace Supercharged Its Private Label Growth

In 2009, Amazon launched its first private label brand AmazonBasic. Today, Amazon has 100+ private label brands that offer over 4,600 products. That explosive growth has been supported by rich data that Amazon mines from its marketplace. The modern monopoly’s control over search results on its website, mobile app, and Alexa voice queries further exacerbates the problem by giving its own brands premium listing space (or in the case of some voice searches, the only listing).

Reinventing the private label game

To be clear, Amazon is a late comer to the private label game. For decades large retailers such as Walmart, BJ’s, and CVS have placed private labels on their shelves at a cheaper price than other brands.

In the decades before the rise of online marketplaces, retailers stocked their shelves by making deals with big manufacturers like Proctor & Gamble or Nestlé. Those big consumer good conglomerates wielded the power to shove out smaller brands, demand premium shelf space, and trade for other perks as part of their deals with big retailers like Walmart. Consequently, Walmart could, and did, use the data it gathered in its stores to build its own private label brands.

On its face, Amazon’s approach looks no different – that is, it gathers data on products sold of the website and builds out a private label strategy with that data. However, Amazon’s platform business and market share gives it advantages that brick-and-mortar retailers could only ever dream of.

Predatory pricing in Amazon’s private label brands

The proliferation of Amazon’s private label brands has consumer good sellers squirming. Because Amazon prioritizes growth over profits, the tech giant has been able to move quickly across many product categories from electronics to fashion to home and kitchen, pet products, cosmetics, health and beyond. Like the private label brands of traditional retailers, Amazon’s products often sell for cheaper than other brands on its own market, and often (though not always) at a loss.

As Lina M. Khan wrote in the Yale Law Review in an article discussing antitrust issues with Amazon, “The economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational.”

Amazon’s multi-channel revenue, including the revenue it makes from third-party sellers on its marketplaces, subsidizes its private label experimentation and dominance. But Amazon’s platform has done more than provide financial cover for Amazon’s private label brands, it has also provided the right data.

Data richness and search results

Amazon’s marketplace catalog dwarfs even the largest traditional retailers, such as Walmart’s catalog (especially pre-marketplace). Amazon democratized access to the consumer for sellers. Soon small brands and living room product startups could open shop on a marketplace that commanded over half of online sales.

That boon cut both ways. Amazon gained access to all the data for itself, and the quality of the data is much richer and more granular than any data collected by traditional retailers at their stores.

The combination of granular data and the democratization of access has quickly benefited Amazon in a matter of years. Consider Anker, a smaller brand of portable battery packs, speakers, and other electronic goods. Before 2017 they were sold almost exclusively on Amazon’s marketplace. Compare and contrast Anker’s portable bluetooth speaker with Amazon. Anker’s is $40 and Amazon’s is $20.

Both even come in black, blue, and red! Notice Amazon is out of stock of its blue speaker. Most of its private label brands carry a limited stock of each item to test their performance.

In addition to hyper specific data mining, Amazon also accounts for 49% of online product searches, while another 36% of product searches start on Google and point to Amazon first (according to research firm Survata). Amazon can, and does, list its items before competitors. In the case of voice shopping via Alexa using generic product terms such as ‘batteries’, the smart speaker chooses an Amazon brand for the consumer (a practice that, among others, is inviting antitrust scrutiny).

How manufacturers and resellers should respond

Given Amazon’s monopolistic advantage, what can product sellers do? In the short term, pulling your product from Amazon simply isn’t practical. Amazon accounts for over half of all online sales. They have the consumer goods retail market by the wallet.

Rather than just hoping that antitrust regulation is successfully brought against Amazon, product vendors should build or acquire a marketplace of their own. Listing stock on competing marketplaces is a good idea, but it isn’t enough. The publishing industry tried that approach with books, and it found little success. By building or buying a competing marketplace, product companies can scale niche, specialized marketplaces that can serve as a competitive moat against Amazon.

This Woman Walked 7,000 Miles to Discover the Secrets to Happiness. Here's What She Learned

How far would you travel to uncover the secret to happiness?

Vermont-born Paula Francis has already walked nearly 7,000 miles on behalf of Gross National Happiness USA, a nonprofit dedicated to changing how we measure success. She recently told a CBS affiliate that her research thus far points to caring, compassion, and listening as the key ingredients to a happier life.

You may not be ready to wear out your tennis shoes like Francis (she’s going on 14 pairs), but that doesn’t mean you can’t improve your own happiness factor.

When Francis studies people, she absorbs their stories, a technique that combats self-focused negativity. It’s tough to be hard on yourself when you’re concentrating on being in the moment with another person. Plus, learning about someone else’s personal journey can put your own woes into perspective.

Does it take intention to forge a better life? Of course, but making a few smart choices will go a long way. For me, it’s simply a matter of switching up my attitudes and routines.

1. Choose nontoxic friends.

We’ve all had the experience of dealing with an emotional vampire at work, someone who sucks our soul dry of energy and happiness. You may not be able to fully cut ties with this person, but you can keep your distance.

As one long-time Harvard study indicated, being happy for the long haul has more to do with positive relationships than anything else. The stronger the connections between family members, co-workers, and friends, the greater the sense of joy. So ditch the folks who bring you down and find ones who pick you up.

2. Ghost your phone sometimes.

When Tim Cook, the CEO of Apple, says he needs to take a step back from his phone, it’s a wake-up call for all of us. So much screen time leads to bad sleeping habits, missed opportunities to deepen human connections, and fear of missing out (FOMO) stress.

You can add some joy to your life by breaking an unhealthy routine. If you spend too much time in the virtual world and not enough in the real one, keep your phone out of the bedroom for a week. You might wind up like the study participants who reported more happiness, less stress, and improved relationships when they stopped sleeping with their phones.

3. Give to get.

Lending a helping hand is a surefire way to feel happier and get more enjoyment out of your day. After all, our brains experience the same rush when helping someone as we get from a nice meal. If a co-worker is swamped, ask what you can take off his plate. Doing someone a solid will make you feel good, too.

Outside of work, pick causes you’re passionate about and volunteer occasionally. Alternatively, you may want to give money or items to an individual or organization. As long as you do it with altruistic intentions, you can expect a positive return in the form of adrenaline and happiness.

4. Follow the “benefit of the doubt” rule.

Not everyone is out to get you, no matter what you’ve heard. When you start to tell yourself that a co-worker is trying to use you, ask yourself why you feel that way. Is there a historical reason? Or are you just assuming the worst about human nature?

Our biases can lead us to misjudge actions and words. Instead of convincing yourself that you’re the target of a conspiracy, let yourself accept the possibility that you’re not being mistreated by those around you. It may give you a freeing lift.

5. Push yourself just enough.

Happiness comes from exceeding expectations, so put a bit of pressure on. Try out for the company softball team. Add a yoga class to your weekly schedule. Tackle a big project for the head honcho.

You’ll feel some stress, but it’s the kind that lends happiness based on a sense of accomplishment. Even if you don’t succeed in doing a Tough Mudder or snagging the corner office, you can celebrate the progress you made along the way–and feel happy with how far you’ve come.

6. Celebrate others’ successes.

Why be stingy when you can share some good vibes? Look for opportunities to support those around you when they succeed. For instance, when your colleague receives a bonus, be happy for her rather than feeling like you deserved it more.

By being able to remove yourself from the center of the universe, you savor the happiness of connecting with others. Plus, you set the stage for the people in your life to see you as a trove of optimism.

I didn’t have to travel across the U.S. to boost my happiness, and you don’t, either. You can raise your happiness quotient with just these few tweaks in perspective.

How Alibaba Made Singles’ Day the World’s Largest Shopping Festival

Valentine’s Day can be a lonely time if you don’t have a partner. But, at least in China, there’s a holiday that celebrates singledom too. Aptly named Singles’ Day, the unofficial holiday is a multi-billion dollar sales event bigger than Black Friday and Cyber Monday combined, and it’s happening this weekend.

The annual celebration is always on November 11 – or 11/11, a date chosen for its likeness to “bare sticks”, which is Chinese slang for bachelors. Although it was conceived in the 1990s by a group of college students protesting traditional couple-centric festivals, the event’s exponential growth is all down to China’s number one e-commerce site, Alibaba.

In 2009 the retail giant took Singles’ Day and promoted it as an opportunity for consumers to splurge on gifts to themselves, offering steep discounts through its consumer shopping site, Tmall.

That first year, the gross merchandise value (GMV) of goods ordered during the sales period clocked in at $7.5 million. Even though GMV is a questionable metric, since it doesn’t necessarily reflect net revenues, the figure’s sensational growth is worth noting.

Within eight years, Singles’ Day GMV had ballooned to over 3,000 times its 2009 level, hitting $25.3 billion in 2017 with Chinese consumers racking up $1 billion of purchases in just the first two minutes of Singles’ Day. For comparison, it took Amazon 30 hours to cinch that same value during its Amazon Prime Day sales the same year.

Alibaba combines online shopping discounts with offline entertainment to give its Singles’ Day sales a boost. Since 2015, it has hosted extravagant annual galas to launch the day’s festivities. These televised events draw in an audience of around 200 million viewers, who tune in to catch product launches, win prizes, and witness A-list celebrities make bewildering appearances.

Highlights from last year’s gala include Pharrell Williams performing an original ode to Singles’ Day, Jessie J offering an unironic rendition of her hit song Price Tag, and Nicole Kidman introducing a short kung-fu film starring Alibaba co-founder Jack Ma. That film itself was bursting with martial arts royalty, with Ma sparring against opponents like Jet Li and Donnie Chen.

Underpinning the festival’s success is Alibaba’s logistics network, Cainiao, which boldly handles the deluge of orders surging throughout the day. In 2017 over 331 million boxes were dispatched on Singles’ Day, with the first order taking just 13 minutes to reach its destination (a customer in Shanghai had bought some snacks).

Achieving such fluidity in a nationwide logistics network is certainly a marvel. Last month Cainiao unveiled an almost fully automated warehouse in preparation for another blockbuster Singles’ Day. The warehouse can supposedly process orders 50% quicker than entirely-manned facilities.

But each additional package processed adds strain on the environment. Last year parcels from Singles’ Day generated an estimated 160,000 tons of packaging waste, only 10% of which is recyclable.

Also, for all its bluster, the sales event is not necessarily a windfall for merchants. Sellers have complained of being pressured into offering excessive discounts during the event, slashing prices over 50% and occasionally shipping items at a loss.

With Alibaba suffering one of its worst performing years, whether Singles’ Day continues its strong performance this weekend will be closely watched. The company’s stock has crashed 21% since January and reports from the previous two quarters have been troubling, warning of weaker sales to come.

But there’s a bigger picture too. Analysts see Alibaba’s performance as a bellwether for the Chinese economy, which is driven by consumption. A weak Singles’ Day could signal a loss of confidence in the economy as China is battered by tariffs and burdened with debt. So whether it’s for the razzle-dazzle of the gala or the data behind the sales, all eyes will be on Alibaba this November 11.

Camp Fire: The Terrifying Science Behind California’s Massive Blaze

Editor’s note: This is a developing story about California’s Camp Fire, Hill Fire, and Woolsey Fire. We will update it as more information becomes available.

At 6:30 Thursday morning, a wildfire of astounding proportions and speed broke out in Northern California. Dubbed the Camp Fire, it covered 11 miles in its first 11 hours of life. A mile an hour might not seem fast in human terms, but it’s an extreme rate of speed as far as fires are concerned. At one point it was burning 80 acres a minute. When it hit the town of Paradise, home to 27,000 people, those buildings became yet more fuel to power the blaze.

“It appears that the town was either wiped out or severely damaged,” says Stephen Pyne, a wildfire expert at Arizona State University. “We’re seeing urban conflagrations, and that’s the real phase change in recent years.”

It used to be that fires destroyed exurbs or scattered enclaves. “But what’s remarkable is the way they’re plowing over cities,” Pyne says, “which we thought was something that had been banished a century ago.”

The Camp Fire horrorshow, which burned 70,000 acres in 24 hours, is a confluence of factors. The first is wind—lots of it, blasting in from the east. “We have a weather event, in this case a downslope windstorm, where as opposed to the normal westerly winds, we get easterly winds that are cascading off the crest of the Sierra Nevada,” says Neil Lareau, an atmospheric scientist at the University of Nevada, Reno.

A windstorm barreling from the east just set the stage for this week’s burning disaster. It’s a normal phenomenon that comes from the jetstream, which this time of year grows stronger. North and south “meanders” in the jetstream, known as troughs and ridges, get amplified. These cold air masses travel through the Great Basin in Nevada and spill over the Sierra Mountains in eastern California. Big meanders set up very high pressure areas that accelerate winds.

“Then they get local accelerations on top of that as they flow down the mountain ranges, kind of like water over a dam,” Lareau adds. Some areas in California are particularly prone to downsloping winds. “Unfortunately, right where the Camp Fire is is one of those places.”

“I always like to say nothing good comes from an east wind in California,” Lareau adds.

As the air descends at an accelerating pace, it warms up and drives the relative humidity down. Which brings us to our second factor in the horrorshow: fuel—lots of it. It may be November, but California is still extremely dry, which means plenty of vegetation that’s primed to go up in flames.

The east winds further dehydrate the vegetation. This is where something called the evaporative demand drought index comes in. “You can think about it as how thirsty the atmosphere is,” says Lareau. “How strongly does the atmosphere want to pull water out of the vegetation and out of the ground?”

Very strongly, in the case of the Camp Fire and those downslope winds. So it isn’t just a matter of things being generally dry for the season in Northern California—ground and vegetation moisture fluctuates day to day, too. Scientists can calculate this in part by going out and cutting vegetation, weighing it, drying it out, and weighing it again.

“This tells us those fuels have been drying out really, really rapidly over the past few days and into this event,” says Lareau. Just take a look at the eerily prescient tweet below from meteorologist Rob Elvington the day before the Camp Fire broke out.

So you’ve got hot, dry gusts of 40 or 50 miles per hour from the northeast pushing the fire, and the fire is itself creating wind, further accelerating the conflagration. As it moves along, embers fly out of the front of the fire. “As the fuels get dryer, a smaller and smaller spark can leapfrog the fire through the landscape,” says Lareau. “That’s just another way this thing comes up and bites you.”

“It’s hot, dry and windy, are your ingredients,” he adds. “We checked off all three here.”

That’s probably why the city of Paradise appears to have suffered such astonishing losses. Urban areas aren’t supposed to burn, at least they haven’t been supposed to since San Francisco in 1906. They’ve been designed and built with better materials (read: a whole city isn’t made of wood alone anymore) and more defensible spaces. But with a conflagration like the Camp Fire, it can overwhelm an urban area by setting off hundreds or thousands of tiny fires, perhaps miles ahead of the conflagration itself. There’s no single line to put up a fight, so firefighters are overwhelmed.

“It looks like it’s another case where you’ve got billions and billions of embers riding with the wind,” says Pyne. “It only takes one ember to take out a house or a hospital. If there’s any point of vulnerability, all those embers will find it.”

As the Camp Fire raged Thursday, the Hill Fire broke out in Southern California, burning 10,000 acres so far. And yet another, the Woolsey Fire, has forced the evacuation of Malibu.

It was no coincidence that these fires landed all at once. “Literally the same air mass is what’s causing the beginnings of a strong Santa Ana event ongoing now, as this air mass sags south through California,” says Lareau.

North or south, the state is extremely dry already. But these warm winds ripping through the Sierras are only making matters worse, siphoning what little moisture California’s vegetation has left. While the winds will likely die down a bit over the next few days, they’re due to pick back up again Sunday, which could bring still more fires.

This is what a climate change reckoning looks like. “All of it is embedded in the background trend of things getting warmer,” says Lareau. “The atmosphere as it gets warmer is thirstier.” Like a giant atmospheric mosquito, climate change is sucking California dry.

The consequence is fires of unprecedented, almost unimaginable scale. Just over a year ago, the Tubbs Fire raged through the city of Santa Rosa, north of San Francisco, becoming the most destructive wildfire in state history. California cities are no longer safe from fire, and with climate change, things are only bound to get worse from here.

“Mass shootings and mass burnings,” says Pyne. “Welcome to the new America.”


More Great WIRED Stories

5 Leadership Blind Spots That Limit Your Ability to Keep Up With Change

While the willingness and ability to change is recognized and espoused by every business owner or founder I am asked to advise, far too many of you seem to be stuck in a rut, or very slow to actually decide what changes are necessary to survive and thrive.

You may not be blind to the changing market and technology, but being blind to internal traps that can be just as devastating.

I saw this challenge of inertia described very well in a new book Transforming the Clunky Organization by Samuel B. Bacharach. From his leadership consulting with a host of companies, clunky and innovative, he explains why owners and executives fall into traps of inertia and he details the critical pragmatic leadership skills needed to regain the required momentum.

Here is our joint list of some common traps that you and your company leaders must avoid at all costs:

1. Too satisfied with how things are going, or status quo.

The status quo trap is set when things have gone well for a while, and you are too busy to look ahead to see what’s around the corner, or commit time and resources into developing the next generation of innovative ideas.

Then when market demand slows, you are not able to react in time.

For example, Blockbuster was so busy expanding its hugely profitable video rental business, adding stores at a breakneck rate, that it failed to really take notice of new entrants like Netflix with no late fees, Redbox’s automated kiosks, and video-on-demand.

The result was a major change in the industry, and Blockbuster disappeared.

2. Throw money into a sinking project, hoping to save it.

This bailing-too-late trap is when you make a big investment in a venture that doesn’t take off, but you refuse to abandon it or pivot because of sunk costs, with the hope of success just over the horizon.

The result is a business damaged past the point of recovery, instead of just dented.

I see this often as an angel investor, approached by desperate entrepreneurs who have spent all their resources over a period of years on a failing solution, but are still convinced that one more cash infusion will turn the curve from down to up.

At this stage, investors won’t believe that more money for sales and marketing will turn the tide, so we all lose.

3. Tackle a new market or technology you don’t know.

When you propose to enter a new market or technology without the requisite resources or skills to compete, you may be triggering the overreaching trap.

Although paradigm shifts and disruptive technologies imply huge new opportunities, they may require more time and risk than you can tolerate.

The Pebble smart watch is an example of overreaching, especially for a startup with limited resources. Even though the original Pebble became the most-funded Kickstarter product of all time, tech giants Apple and Samsung quickly overran them, and they were forced to disappear into Fitbit.

4. Focus on short-term gains, ignoring long-term risks.

Short-term wins are great, but if you pursue them at the expense of long-term success, then it’s a trap. Companies caught by the short-term trap often miss new bigger opportunities.

Thinking short-term requires satisfying customer change with more already existing products, skills, and resources.

Kodak is famous for falling prey to the short-term trap. At one time Kodak was a leading innovative company centered around film photography. Their short-term focus did not allow them to see the long-term benefits of digital photography, cost them their leadership position, and ultimately resulted in their filing for Chapter 11.

5. Let your company be a victim of analysis paralysis.

If you lead your business on endless journeys of analyzing, discussing, researching, and testing new ideas without getting anything off the ground, you are a part of the overthinking trap.

You are guilty of wasting precious time and money, and throwing away the opportunity of real innovation.

The result of any of these traps is an inertia that prevents recognition of the need to change, and a sluggishness in implementing the necessary change actions before it is too late.

If you sense these symptoms in your domain, or hear them highlighted by your advisors, the time to take action is now. I advise initiating a change in your leadership style, before the market moves on without you.

Tesla taps director Denholm as chair after Musk rows

(Reuters) – Tesla Inc director Robyn Denholm, a telecoms executive who has worked for Toyota, has been promoted to chairwoman of the electric car company and tasked with regulating billionaire Elon Musk’s regime after months of turbulence.

An Australian accountant, Denholm is currently finance chief at telecoms firm Telstra Corp Ltd and replaces Musk after he was forced to relinquish the role as part of a deal to head off charges of fraud by the Securities and Exchange Commission.

The change in structure at the Silicon Valley company, agreed to by Musk in a September court settlement, is supported by many on Wall Street who worry that his record of erratic behavior is undermining the company’s progress.

While she will resign from Telstra to take the role full-time, some analysts expressed concern that she may not be far enough removed from Musk to rein in the billionaire’s public outbursts and bring more order to Tesla.

Denholm, 55, has been an independent director of Tesla since 2014 and the head of its audit committee. She was paid almost $5 million, mainly in stock options, by the company last year, making her the highest remunerated of its board members.

Musk, who remains Tesla’s biggest shareholder and the driving force behind its ambitious plans to reshape electric battery technology and car transport, tweeted here his approval of the appointment.

“Musk, I believe has a ton to do with the selection and he wants to be sure that they can see eye-to-eye,” said Elazar Capital analyst Chaim Siegel.

Tesla’s court-approved settlement agreement with the SEC requires the company to appoint an “independent” chairman, although it does not define what it considers to be so.

The regulator declined to say on Thursday if it had approved the appointment of Denholm.

Stephen Diamond, a professor of corporate governance at Santa Clara University, said in general the definition of “independent” is relaxed and that as a result he believed the SEC would not object.

“But it does violate the spirit of the settlement, which was to change the culture of the board so there was a check on Musk’s worst instincts,” he added.

Top proxy advisers Institutional Shareholder Services and Glass, Lewis & Co had each classified Denholm as an “independent” director of Tesla in reports to the carmaker’s investors earlier this year.

HUMBLE BEGINNINGS

Denholm pumped petrol at her parents’ filling station before going on to study at Sydney University and joining accountancy firm Arthur Andersen.

Since then, she has worked at Swiss power grid maker ABB Ltd, network gear firm Juniper Networks and 1980s and 90s computing giant Sun Microsystems.

Telstra CEO, Andy Penn, said when he appointed her: “Robyn has a proven track record as a global COO in a business focused on telecommunications networks.”

“She has overseen business model transformation, supply chain and broader business process re-engineering. She has been a senior executive and director in a range of complex technology environments which make her ideally qualified for the role.”

Executive recruiter Patricia Lenkov, however, said that Denholm likely was not the right pick for the job, arguing Tesla needed a figure with more experience dealing with strong founders.

“There might be an element of risk here. She’s not a proven entity in this kind of work,” she said.

While Tesla is finally starting to make good on Musk’s promises on production of the Model 3 sedan, seen as crucial to the company’s future, it has lost senior executives for sales, human resources, manufacturing and finance in recent months.

Its vice president for manufacturing Gilbert Passin was reported last month to have left.

“We view the fact that Denholm has prior industry experience with Toyota positively,” said CFRA Research analyst Garrett Nelson, adding it made sense that Tesla should seek to avoid the risk of a genuine outsider clashing with Musk.

The Silicon Valley billionaire’s gift for self-promotion has made Tesla one of the world’s most talked-about businesses but also caused public spats with journalists, analysts, Wall Street investors and rapper Azealia Banks.

He is being sued for calling one of the divers behind this year’s Thai cave rescue a “pedo”.

Robyn Denholm and Elon Musk. REUTERS/Files

According to The Australian newspaper, Denholm said the only things that really disappoint her are rudeness and waste.

“Politeness costs you absolutely nothing. It doesn’t matter whether you are the most senior person in the room, or the most junior,” she told the paper in an interview a few years ago.

Tesla shares were up 1.4 percent in morning trading.

Additional reporting by Akanksha Rana and Philip George in Bengaluru, Melanie Burton in Melbourne, and Michelle Price and Jan Wolfe in Washington; Editing by Patrick Graham, Bernard Orr