Author: Helen Law

In April of this year, I wrote an article discussing the 10 reasons the bull market had ended.

“The backdrop of the market currently is vastly different than it was during the ‘taper tantrum’ in 2015-2016, or during the corrections following the end of QE1 and QE2. In those previous cases, the Federal Reserve was directly injecting liquidity and managing expectations of long-term accommodative support. Valuations had been through a fairly significant reversion, and expectations had been extinguished. None of that support exists currently.”

It mostly fell on “deaf ears” as the market rallied back to highs. But the “worries” of the market have continued to mount despite the speculative rally. As Barbara Kollmeyer penned yesterday morning:

“The markets have enough to worry about these days, right? With major U.S. indexes in or near bear territory, a government shutdown underway and the White House falling over itself to assure us no one is firing Fed Chief Powell, Treasury Secretary Steven Mnuchin gobsmacked market participants by revealing that he made a weekend call from a beach in Mexico to the country’s six biggest banks, presumably to assure Wall Street that there’s ample liquidity sloshing around in the financial system.”

I can only presume the phone call between President Trump and Steve Mnuchin went something like this:

Trump: Hey, Steve. This market is bad. I mean it’s really bad… really bad. You need to do something to make it go up. I mean really go up.

Mnuchin: No problem. I’ll just call my buddies and tell them they need to start buying. You know, we can always hit up the “Plunge Protection Team” if we need too.

Trump: The what? Oh yeah… I’ve heard of those guys. Yeah, you do that. We need this market to go up really big. I mean really big. I got a whole big pile of s*** going on here, my ratings are down, and I need the market to go up. I mean go up a lot. You make that happen, okay. Cuz that a**hole Powell ain’t helpin’ me one bit.

Mnuchin: Check… I’m on it.

Of course, the only real reason that you would call the 6 major banks, and meet with the “Plunge Protection Team,” would be in the event there was a real concern about the financial stability of the markets. It didn’t take long for the markets to figure out there may be a real liquidity problem brewing out there (aka Deutsche Bank) and as Mark Decambre penned Monday afternoon:

“The S&P 500 index fell by 2.7% Monday, marking the first session before Christmas that the broad-market benchmark has booked a loss of 1% or greater – ever.”

That’s the bad news.

My Christmas Wish

If we take a look back at the markets over the last 20 years, we find that our weekly composite technical gauge has only reached this level of an oversold condition only a few times during the time frame studied. Such oversold conditions have always resulted in at least a corrective bounce even within the context of a larger mean-reverting process.

What this oversold condition implies is that “selling” may have temporarily exhausted itself. Like a raging fire, at some point the “fuel” is consumed and it burns itself out. In the market, it is much the same.

You have always heard that “for every buyer, there is a seller.”

While this is a true statement, it is incomplete.

The real issue is that while there is indeed a “buyer for every seller,” the question is “at what price?”

In bull markets, prices rise until “buyers” are unwilling to pay a higher price for assets. Likewise, in a bear market, prices will decline until “sellers” are no longer willing to sell at a lower price. It is always a question of price, otherwise, the market would be a flat line.

Again, what the weekly composite indicator suggests is that “sellers” have likely exhausted themselves to the point that “buyers” are likely starting to outnumber “sellers” to the point that prices will rise, at least temporarily.

This also highlights the importance of long-term moving averages. Again, as noted above, given that prices rise and fall due to participant demand, long-term moving averages provide a good picture of where demand is likely to be found. When prices deviate too far above, or below, those long-term averages, prices have a history of reverting back to, or beyond, that mean.

Currently, the market has started a mean reversion process back to the 200-week (4-year) moving average. As you will notice, with only a couple of exceptions, the 200-week moving average has acted as a long-term support line for the market. When the market has previously confirmed a break below the long-term average, more protracted mean-reverting events were already in process.

Currently, the bulls remain in charge for the moment with the market sitting just a few points above the long-term average. A weekly close below 2,346 on the S&P 500 would suggest a deeper decline is in process.

The same goes for the 60-month (5-year) moving average. With the market currently sitting just above the long-term trend support line, the “bull market” remains intact for now.

Again, a monthly close below 2,251 would suggest a more protracted “bear” market is underway.

How Much Of A Bounce Are We Talking About

Looking at a chart of weekly closes, the most likely oversold retracement rally would push stocks back toward the previous 2018 closing lows of 2,620-2,650.

On a monthly closing basis, however, that rally could extend as high as 2,700.

From yesterday’s closing levels, that is a 12.7% to 14.8% rally.

A rally of this magnitude will get the mainstream media very convinced the “bear market” is now over.

It likely won’t be.

The one thing about long-term trending bull markets is that they cover up investment mistakes. Overpaying for value, taking on too much risk, leverage, etc., are all things that investors inherently know will have negative outcomes. However, during a bull market, those mistakes are “forgiven” as prices inherently rise. The longer they rise, the more mistakes that investors tend to make as they become assured they are “smarter than the market.”

Eventually, a bear market reveals those mistakes in the most brutal of fashions.

It is often said the religion is found in “foxholes.” It is also found in bear markets where investors begin to “pray” for relief.

Very likely, there are many investors who have learned of the mistakes they have made over the past several years. Therefore, any rally in the market over the next few weeks to a couple of months will likely be met with selling as investors look for an exit.

Here is the other problem, there is currently no supportive backdrop for stocks on the horizon:

• Earnings estimates for 2019 are still way too elevated.
• Stock market targets for 2019 are also too high.
• The Federal Reserve is still targeting higher rates and continued balance sheet reductions.
• Trade wars are set to continue
• The effect of the tax cut legislation will disappear and year-over-year comparisons revert back to normalized growth rates.
• Economic growth is set to slow markedly next year.
• Chinese economic growth will likely weaken further
• European growth, already weak, will likely struggle as well.
• Valuations remain expensive
• The collapse in oil prices will weigh on inflation targets and economic activity (CapEx)

You get the idea.

There are a lot of things that have to go “right” to get the “bull market” back on track. But there is a whole lot more which is currently going wrong.

As I wrote in “The Exit Problem” last December:

“My job is to participate in the markets while keeping a measured approach to capital preservation. Since it is considered ‘bearish’ to point out the potential ‘risks’ which could lead to rapid capital destruction; then I guess you can call me a ‘bear.’

Just make sure you understand I am still in ‘theater,’ I am just moving much closer to the ‘exit.'”

After having sold a big chunk of our equity holdings throughout the year, and having been a steady buyer of bonds (despite consistent calls for higher rates), my “Christmas Wish” is for one last oversold rally to “sell” into.

The most likely outcome for 2019 is higher volatility, lower returns, and a still greatly under-appreciated risk to capital.

But, for the bulls, it’s now or never to make a final stand.

Just remember, getting back to even is not the same as growing wealth.

Surprise: it’s totally legal!

Welcome to Kentucky

A big part of the problem

Why can’t the government work for us?

The circa 5,000 virtual reality (VR) videos viewed over two weeks by Costa Coffee staff, looking to understand how best to prepare the company’s Christmas drinks range, highlight the appetite for learning in the organisation using this technology.

That is the view of Laura Chapman, head of learning at Costa, who says festive-themed training videos were not mandatory for its workforce, but they really captured the imagination of its people at this busy time of year.

“It’s still early days for us, but feedback show us teams are motivated to learn this way,” she says, commenting on the recent introduction to over 1,500 Costa stores of Google Cardboard headsets and associated tools, enabling teams to access 360-degree footage of coffee-making tips and techniques.

The move was announced at the end of October, and was primarily a way of helping induct new staff in the ways and methods of Costa baristas ahead of the busy Christmas trading period. However, it’s a platform that can be used for training all year round.

Chapman says the VR element is embedded into what she describes as an already comprehensive training programme, and currently includes tips on how to make an Americano or the Black Forest Hot Chocolate which appears on the menu in December.

And as consumers continue to seek out more compelling experiences, expertise and different types of engagement during a trip to a retail or food and beverage outlet, there are several ways the Costa VR staff training tool is catering for these demands by preparing staff accordingly.

“We have a high volume of millennials in the workforce, so we wanted to be able to provide an engaging and innovative way of training them, one which would really excite them to learn,” says Chapman.

“The VR 360 videos we currently have provide a wider insight into the coffee growing process with footage of coffee plantations in Peru along with sneak peaks inside our state of the art roastery and coffee lab in Basildon.

“In addition to this, we also feature drinks tutorials on our key products, so teams can learn faster by immersing themselves in a real-life environment.”

Walmart is another big retail business that is well under way with its use of VR for operational gain. Facebook-owned Oculus Go VR headsets are being used by the grocer’s staff across the US, with the STRIVR-created content teaching people about technology and compliance, and aiding soft skill development like empathy and customer service.

To indicate the scale of the technology’s usage, the plan is for four VR headsets in every Walmart “supercenter”, and two units to every neighbourhood market and discount store. In total, the retailer says 17,000+ headsets are in use at Walmart today.

VR training must run deep

Ed Greig, chief disruptor at Deloitte, agrees that some of the best cases of VR usage in retail are around staff training.

“If you want to change the behaviour of your staff, that’s something you can do with VR in a way you couldn’t do with text-based e-learning,” he says.

“Some organisations are still using paper-based learning, and these are organisations that in other areas are very technical, but VR can enhance this process.”

Greig backs VR’s ability to improve the soft skills of store associates to align them with company values or to provide a platform for helping more senior staff improve management and empathy, but ultimately he sees the biggest gains for retailers coming from its wider deployment by human resources departments.

Wider recruitment

He acknowledges the idea of VR being used as a staff training tool has opened up conversations with Deloitte clients about their wider recruitment and subsequent learning strategy. As retailers embark on widescale digital transformation, he sees VR playing a central role in improving store design, supply chain operations, and general processes.

“Our motto is ‘fall in love with the problem not the solution’,” says Greig.

“There is a real danger with a new tech like VR and the subsequent modifications to that tech that people can fall in love with the solution [and forget why they need it in their businesses]. If you’re going to use VR, it should be about reshaping your entire learning strategy and how you look to develop people throughout the organisation.”

“It’s really effective when it’s used as part of the recruitment process, providing a consistency of experience for employees right from the first moment they have contact with a certain company,” he says.

“If retailers can nail that, it gives them a whole load of additional time where they’ve got people thinking about their brand values, and they can hit the ground running once they’re on the team.”

In a future internet of things (IoT) environment, Greig predicts multiple ways VR could play a part in the “digital twin” process, where a retailer’s physical premises are effectively digitally cloned. One can imagine staff using VR in this format to remotely change a retail store’s lighting or signage setting in real time, he asserts.

VR as standalone entertainment

VR is cropping up in various guises across retail, be it Virgin Holidays using Google Cardboard in stores to help customers experience locations before they book them, or Tommy Hilfiger kitting out global flagships with WeMakeVR-loaded SamsungGear devices to showcase its catwalk shows to in-store visitors.

But some of the most impactful uses of it revolve around creating an event out of VR technology. At Westfield Stratford City in 2016, Samsung ran an in-shopping-centre pop-up, enabling around a quarter of a million people to try out its Gear VR to experience roller coaster rides in North America or holidays in remote destinations.

Judging by that success, it is perhaps clear why ImmotionVR, a company that designs content for VR and operates simulators in public places around the UK, is continuing to scale its business based on a similar cinematic-like premise.

With 12 locations across the country, including at Manchester’s Arndale Centre, Birmingham’s Star City, Intu Derby, and most recently, Wembley’s London Designer Outlet, the company is creating theme-park-like, family-friendly experiences starting from £5 in shopping centres around the UK.

Martin Higginson, CEO of Immotion Group, says his company is looking to help the wider retail industry not by selling it VR technology as an internal solution, but by setting up its simulators and VR installations deep within retail – in the aisles of shopping centres or in locations left behind by collapsed or down-sizing retail chains.

“We’re focused on delivering an out-of-home experience,” he says.

“Currently shopping in general needs to bring theatre, because without that retail will wither on the vine. The high street and shopping malls need to change and start creating more theatre be it additional dining spaces, VR or something else; there needs to be a unique mix that creates a ‘theme park’ within shopping centres.”

Incentivising shopping mall visits

Higginson argues that venues from ImmotionVR, which creates its own content from its Manchester studios and offers VR experiences covering scenarios ranging from roller coaster rides to swimming with sharks off the coast of Tonga, can give families an added incentive to visit a shopping mall.

There is also a focus within the business on providing VR-enabled destinations for work parties and educational trips for schoolchildren.

“We want to create Disneyland in Westfield or Lakeside, or wherever – shopping centre owners have massive challenges with the likes of House of Fraser and Debenhams going through turmoil,” he says.

“We can bring experiences to shopping centres and fill them with guests throughout the week, helping malls become leisure destinations rather than venues for straight-out shopping.”

Higginson also argues the continued growth of his brand will open up VR to the mainstream. As a result, the tech might become more widely used in the home and in the workplace. In short, society could be about to see more of it in its various forms.

Costa and Walmart are clearly on the start of their VR journeys, but the staff engagement it has resulted in, and – in the case of Walmart – the rapid extended roll-out of the technology to date, suggests further exploration and usage is imminent.

VR roll-out a reality

Walmart announced in September that its VR technology was set to be accessible for all employee training across its entire US store portfolio, following initial usage solely for staff development in Walmart Academies. More than one million Walmart associates will now receive the same level of training as those in the academies, the retailer said.

Meanwhile, all of Costa’s fully owned stores – as opposed to its franchise and concession partners – have a Google Cardboard headset that allows staff to experience VR. And Chapman acknowledges the business is looking to make them available to its partnerships and international stores, while additional ideas for its usage keep arising.

“We could provide ‘on-the-job’ experiences to potential candidates so they get an idea as to what it’s like working in one of our stores,” she says.

“The coffee growing process and following the coffee journey from bean to cup is also something that we feel would be useful for inductions for everyone in the Costa family both among our store teams and in our support centre.”

People are always connected to their phones.

1. Get the right software. 

2. Begin collecting user’s phone numbers.

3. Make 100 percent sure you have the user’s permission to text them. 

4. Don’t bug your audience. 

5. Know the limits of text messaging.

1.    About 75 percent of the government stays open.

2.    But about 38 percent of employees will be hit.

3.    The National Parks stay open

4.    It’s a good time to cheat on your taxes.

5.    The Mueller investigation continues.

6.    You can get your passport (probably) and the mail will still be delivered.

7.    We sort of get a four-day repreive.

8.    Weirdly, many workers have to come in, only to be told to go home.

9.    Meat will be okay

10.    Sandwiches will be free. 

SHANGHAI/BEIJING (Reuters) – Tencent Holdings Ltd’s shares jumped by as much as 4.2 percent on Friday after a regulatory official said that some new games have been cleared for sale after a lengthy freeze in approvals.

Feng Shixin, a senior official of the ruling Communist Party’s Propaganda department, said in a speech at a gaming conference in Haikou on Friday that a first batch of approvals for games had been completed, according a transcript of the speech and the organisers of the event.

China, the world’s biggest gaming market, stopped approving new titles from March amid a regulatory overhaul triggered by growing criticism of video games for being violent and leading to myopia as well as addiction among young users.

The freeze on new approvals has pressured gaming-related stocks and clouded the outlook for mobile games, rattling industry leader Tencent and smaller peers.

“We hope through new system design and strong implementation we could guide game companies to better present mainstream values, strengthen a cultural sense of duty and mission, and better satisfy the public need for a better life,” Feng said.

Earlier this month, state media reported that Chinese regulators set up an online video games ethics committee, raising hopes the government was preparing to resume an approval process that has been frozen for most of this year.

“This is clearly exciting news for China’s gaming industry,” a Tencent spokesman said in written comments.

“We’re confident that after the publishing license approval, we will provide more compliant, high-quality cultural works to society and the public.”

The gaming freeze in China has dragged down Tencent’s shares this year and wiped billions of dollars of its market value. The Hong Kong-listed firm’s stock is down around 23 percent this year.

1. Share honest feedback.

2. Keep in touch.

Time Boxing & Limiting Technology

Tools and Tech

The Productive Road Ahead

1. Develop new products for your existing segment.

2. Introduce disruptive technologies to this domain.

3. Populating new domains to sustain your market.

4. Redefine your product to reach a new category.

5. Implement a plan of regular strategic acquisitions.

(Reuters) – Oracle Corp on Monday forecast current-quarter profit above estimates after growth in its cloud services and license support unit helped the business software maker surpass Wall Street expectations for the second quarter.

Shares rose 5 percent, with the company saying that excluding fluctuations in exchange rates, it expected third-quarter adjusted profit to be between 86 cents and 88 cents per share.

Analysts on average were expecting 84 cents, according to IBES data from Refinitiv.

Revenue at its cloud services and license support unit, its biggest, rose 2.7 percent to $6.64 billion and beat analysts’ estimate, as more companies shifted to cloud computing from the traditional on-premise database model to cut costs.

Oracle’s in June created a new revenue reporting structure that merged its cloud and software license businesses, which analysts have said gives little insight into the standalone performance of its cloud unit.

Oracle is a late entrant to the rapidly growing cloud-based software business, but has aggressively stepped up its efforts to catch up with rivals such as Workday Inc, Microsoft Corp and Salesforce.com Inc.

“Oracle’s growth in cloud services and license support of just 3 percent appears to be contradicting the strength in the overall cloud market,” said Daniel Morgan, senior portfolio manager of Synovus Trust Co, which hold 152,500 shares in the company.

Last month, Workday reported a 35 percent jump in cloud subscription revenue, while Salesforce’s flagship product Sales Cloud grew 11 percent.

“Oracle is still dragging behind other old line enterprise software players like Microsoft in its transition to becoming a top cloud company,” said Morgan, whose firm also hold shares in Salesforce and Microsoft Corp.

The company’s net income rose to $2.33 billion, or 61 cents per share, in the second quarter ended Nov. 30. Excluding items, the company earned 80 cents per share, beating the average analyst estimate of 78 cents.

Total revenue fell marginally to $9.56 billion, but brushed past analyst expectation of $9.52 billion.

Shares of the company were up at $48 in after-market trading.

The rash started out as a small cluster of bumps, angry little irritants arriving out of nowhere. Was it poison oak? Hadn’t I touched some gnarly stuff during a recent hike? It never spread beyond my wrist, and over time, the itchy patch went away. Then I put a smartwatch back on my wrist, and the rash reared its red, scaly head again.

Thus began my smartwatch hiatus, after years of wearing some type of Bluetooth-connected thing on my left wrist. I still don’t know what caused the inflammation, and it would be irresponsible to guess. At the time, I had been alternating between a Garmin watch, an Apple Watch, and some bracelets.

I’ve been somewhat addicted to tracking my activity, information that’s interesting to absolutely nobody except me. Entire events—runs, hikes, swims, attempts to surf, walks downtown—don’t feel as valid if they aren’t recorded on my wrist. Or, as my colleague Adrienne So once said, “If a tree falls without a pedometer, did it really happen?”

At the same time, the value of an activity tracker isn’t always proportionate to the burden of one. They all have these damn proprietary chargers, and you have to charge them all the time, and for what? So they can count steps? The more I thought about it, the more I needed a break from wearing a wrist Tamagotchi. Be gone, smartwatch, I thought.

Then I started to really miss it.

My relationship with wearables started in 2011. Back then, the Fitbit Ultra and Jawbone Up were all the rage, pedometers for the modern age thanks to the availability of motion-tracking sensors and Bluetooth chips. An editor assigned me a story about Jawbone, and I became obsessed with this new class of products.

Could these elastomer wrist dongles eventually do more than track steps and offer shoddy estimations of your sleep? Would people be compelled to wear them for longer than a few months before ditching them? Were these wearables even telling us the truth? (For a brief period in 2013, I made a spreadsheet to compare step counts from four different activity trackers, suspecting they all would spit out different numbers during the same one-mile walk. They did.)

When Apple’s long-rumored smartwatch launched in 2015, I flew to New York to retrieve a review unit, then immediately flew back to San Francisco with the not-yet-released product. During the flight I felt like the future was pulsing on my wrist. Sure, the watch hadn’t fit under the barcode scanner at the airport, even though it was supposed to now serve as my boarding pass. And maybe that future flashing on my wrist was just the same green cluster of optical sensors that were in other wrist wearables. But the Apple Watch felt different. It was validation from the world’s most valuable company that wearable technology was a thing.

At first, the Apple Watch didn’t do much to move the needle technologically. It was slow, its battery barely lasted longer than a day, and faltered as a platform for third-party apps. Other smartwatches had (and still have) their own drawbacks. Samsung’s watches run on limited Tizen software. LG’s Watch Sport was comically ill-fitting on my wrist when I tried it. And plenty of smartwatches have found their place firmly in the world of licensed fashion brands: Did you know you could buy a Android Wear-based, Michael Kors-branded rose gold smartwatch named “Bradshaw”? (I couldn’t help but wonder: Was the watch named after the TV character who couldn’t help but wonder?)

But then smartwatches got better. When Apple waterproofed the Apple Watch, it didn’t just seal up ports to keep the water out; it came up with a solution that involves a tiny vibrating component ejecting water from the smartwatch’s speaker. This still blows my mind, not only because I was able to wear my smartwatch in the pool but because it was so delightfully over-engineered. Samsung introduced smartwatches with rotating bezels, so you can either twist the edge of the watch to navigate it, or tap the touchscreen. Rotating bezels aren’t just satisfying to use; they’re a bridge between the old watch world, in which we twist and turn and crank things, and the new watch world, where we so effortlessly swipe.

Crucially, the software improved, too. Apple Watches invite you to “close the rings,” one of the most clever and addictive forms of personal gamification I’ve seen on a wearable. The newest Apple Watch has an ECG app now. Garmin’s smartwatch maps are so advanced that you can access topographic maps on your wrist. You can even stream music from a smartwatch these days. In a few years, smartwatches have gone from dorky wrist computers with middling features to actually useful devices.

It’s been a week and a half since I stopped wearing any kind of smartwatch on my wrist. This marks the first time in years I’ve packed a travel bag without a proprietary smartwatch charger in it, or walked and run and cycled without tracking my activity. I don’t know what my resting heart rate is right now. I’m telling myself this is OK.

Last week, a group of people asked why I like wearing a smartwatch. I started to say that it was for three reasons: fitness tracking, text message notifications, and… what was the third? I forgot the third reason, and I don’t think there is one.

Maybe I really don’t need a smartwatch. Neither do you. Some people might say they need their phones, and that’s understandable. But a smartwatch—even one that purports to give you unique insights into the inner workings of your heart? Not so much.

Still, I want mine back. Sometimes our relationships with our things don’t always make sense. We like some things because even if they require more care and attention than they ever return, you once received that important text message on your wrist at a moment when you really couldn’t look at your phone. We like them because sometime companies over-engineer a feature on a product, and you at least respect the effort. We like them because they’re attached to us, and as a result, we become attached to them.

Is it bizarre that a friend of mine used to adjust the time zone on his Apple Watch so he could gain three more hours in the day and “close the rings” at night? Maybe, but a Facebook addiction would likely make him feel much worse about himself than taking 80 more steps. Is it egocentric that I enjoy looking back at the Garmin maps of places I’ve been and hiked and ran, or that I want to see if my resting heart rate is lower than it was the day before? Sure, but maybe it’s better to creep on your own private info than it is to complete an activity just so you can share it on social.

My rash is almost gone, and I’ve already decided I’m going back to wearing a smartwatch. Maybe in the new year. Maybe my Garmin watch, since its battery lasts so long. Maybe I’ll swap in a different band, just in case.

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More Great WIRED Stories

After the historic announcement in February 2016 hailing the discovery of gravitational waves, it didn’t take long for skeptics to emerge.

The detection of these feeble undulations in the fabric of space and time by the Laser Interferometer Gravitational-Wave Observatory (LIGO) was said to have opened a new ear on the cosmos. But the following year, a group of physicists at the Niels Bohr Institute in Copenhagen published a paper casting doubt on LIGO’s analysis. They focused their criticism on the experiment’s famous first signal, a squiggly line—representing the collision of giant black holes more than a billion light-years away—that was printed in newspapers worldwide and tattooed on bodies.

Even as LIGO sensed more gravitational-wave signals and its founders received Nobel Prizes, the Copenhagen researchers, led by professor emeritus Andrew Jackson, claimed to have found unexplained correlations in the “noise” picked up by LIGO’s twin detectors. The detectors — L-shaped instruments whose arms alternately stretch and squeeze when a gravitational wave passes — are located far apart in Livingston, Louisiana, and Hanford, Washington, to ensure that only gravitational ripples from space could wiggle both instruments in just the right way to produce the telltale signal. But according to Jackson and his team, the correlations in the noise data suggested that LIGO might have detected not gravitational waves but some terrestrial disturbance, perhaps an earthquake. They claimed that, at the very least, something was not right with the instruments or with the LIGO scientists’ analysis.

The findings were worrisome. LIGO scientists checked their work again, and a party of experts visited the Niels Bohr Institute last year to dig into the details of Jackson and colleagues’ algorithms. Two groups of researchers set out to independently analyze LIGO’s data and the Copenhagen group’s code.

Now both groups have completed their studies. The new papers explain different aspects of the problem that led Jackson and his coauthors to make their claim. Both analyses definitively conclude that the claim is wrong: There are no unexplained correlations in LIGO’s noise.

“We see no justification for lingering doubts about the discovery of gravitational waves,” the authors of one of the papers, the physicists Martin Green and John Moffat of the Perimeter Institute for Theoretical Physics, said in an email.

The pair has no direct ties to LIGO. “It’s important for science for people to do analysis of data and results independently of the group,” Moffat said, “especially for such a historic event in the history of physics.”

Frans Pretorius, a gravitational-wave expert at Princeton University who was not involved in any of the recent studies, said that for more than a year, he and most of the physics community have been satisfied that LIGO’s analysis, and its discovery, are sound. Nevertheless, he said, “it’s important that finally there is a thorough analysis in the form of a paper,” rather than “media back and forth.”

The spokesperson of the 1,200-person LIGO Scientific Collaboration, David Shoemaker of the Massachusetts Institute of Technology, said by email that the new findings corroborate internal discussions among the team. “Seeing those two non-Collaboration re-analyses does reaffirm my certainty that the detections [of gravitational waves] are genuine,” Shoemaker said, “and also is a reinforcement of our earlier perception of where the Jackson et al. paper has problems.”

In an email, Jackson called Green and Moffat’s paper, which was published in Physics Letters B in September, “absolute rubbish.” When asked to elaborate, he appeared to wrongly characterize their argument and didn’t address the most important issues they raised about his team’s work. Jackson also dismissed the second set of findings by Alex Nielsen of the Max Planck Institute for Gravitational Physics in Hannover, Germany, and three coauthors, whose paper appeared on the physics preprint site arxiv.org in November and is under review by the Journal of Cosmology and Astroparticle Physics. “We are in the process of writing a response to this latest paper,” Jackson wrote, so “I will not explain where they (once again) made their mistakes.”

“The Copenhagen group refuse to accept that they may be wrong,” Moffat said. “In fact, they are wrong.”

Experts say the problem came down to a combination of blunders: several by the Copenhagen physicists, and one by LIGO.

To help tease out the puny wiggle of a passing gravitational wave from a noisy background, LIGO’s algorithms constantly compare the lengths of the twin detectors’ arms, which oscillate when agitated by a passing gravitational wave or background noise, to “template waveforms” — possible gravitational-wave signals calculated from Einstein’s general theory of relativity. When there’s a close match between a signal detected in Hanford and one sensed shortly before or after in Livingston that also fits a template waveform, email alerts fly around the world.

The scientists then carefully determine the “best-fit” gravitational waveform that most closely matches the signal in the two detectors. When this waveform is subtracted from each of the signals, this leaves behind “noise residuals” — the remaining little wiggles in the detectors that should be uncorrelated, since the instruments are about 2,000 miles apart.

In their 2017 paper, the Copenhagen group claimed to have discovered that the noise in Livingston matched the noise in Hanford seven milliseconds later, just as the putative gravitational-wave signal arrived at both detectors. They interpreted this to mean that LIGO either hadn’t cleanly separated their signal from the noise, or correlations in the noise at exactly the right moment were responsible for the entire signal.

However, Green and Moffat identified a series of errors in the Copenhagen team’s data-handling that they say conspired to create a correlation that wasn’t really there.

To look for correlations in the residuals, Jackson and his colleagues picked a 20-millisecond segment of Livingston data and slid 20-millisecond segments of Hanford data across it, registering correlations whenever peaks overlapped with peaks and troughs with troughs. They found that strong correlations happened when the data was offset by seven milliseconds. But Green and Moffat noticed that when they took Jackson and colleagues’ code and reversed the procedure, fixing the Hanford noise data and sliding Livingston data segments across it, the correlation at seven-milliseconds offset went away. “This was a big red flag because it says, OK, you don’t have a calculational method that’s robust,” said Green, an expert in digital signal processing. Rather, the lengths of the data segments and their asymmetric treatment were “tuned to obtain a correlation signal at just about any desired time offset,” he said.

In a separate calculation, Jackson and his team seemed to find non-random, correlated patterns of peaks and troughs throughout the noise records in the two detectors. But Green and Moffat inferred that the Copenhagen physicists had not “windowed” the two sets of noise data. Windowing is a standard technique of smoothly dialing a signal to zero at the beginning and end of a segment of data before doing a mathematical operation called a “Fourier transform” that facilitates comparisons to other data. The Fourier transform treats a data segment as if it is cyclical, looping together the beginning and end. If the segment isn’t windowed, abrupt changes at the endpoints called “border distortions” can wind up looking like correlations when the data is compared with a second data set.

When Green and Moffat windowed the two sets of noise data, the claimed correlations went away. “Our concern is that the calculation that was done by the Copenhagen group was contrived to get the result they wanted to get,” Green said.

Nielsen and his coauthors — Alexander Nitz, Collin Capano and Duncan Brown — also concluded that the claimed correlation in the noise isn’t real, but they say the error can be attributed at least in part to LIGO’s mistake in providing the wrong data in the first figure of their 2016 discovery paper in Physical Review Letters.

Figure 1 is “the thing people have tattooed on their arms,” said Brown, a gravitational-wave astronomer at Syracuse University and a former LIGO member, who left the collaboration this year to pursue independent analyses of the data.

The figure’s top panel shows side-by-side squiggly lines representing the gravitational-wave signal detected in Livingston and Hanford. Below that are template waveforms closely matching the signals and, in the bottom panel, jagged lines representing the “noise residuals” in the two detectors, after the template waveform has been subtracted from each data set.

Brown explained that Jackson’s code, which he examined in detail during a visit to Copenhagen last year, detects an overlap in the residuals at seven milliseconds offset for a mundane reason: The template waveform shown in Figure 1 is not the “best-fit” waveform that LIGO actually used in its rigorous analysis. The figure was created for illustrative purposes, Brown and others explained. The figure-maker had matched a template waveform to the twin signals by eye, rather than using the best-fit signal as determined by careful calculations. Small imperfections in the subtracted waveform meant that there was some gravitational-wave signal left in both data sets that didn’t get subtracted off, and which ended up mixed in with the noise shown at the bottom of Figure 1—producing correlations that could be teased out by Jackson and colleagues’ algorithms. “What they discovered was an imperfect subtraction” of the signal waveform, Brown said. “When we subtract a better waveform than the one used in the PRL paper, we find no statistically significant residuals.”

“If LIGO did anything wrong,” he added, “it was not making it crystal-clear that pieces of that figure were illustrative and the detection claim is not based on that plot.” Jackson, however, accused LIGO scientists in an email of “misconduct” and making “the conscious decision not to inform the reader that they were violating one of the central canons of good scientific practice.”

Which is to blame, LIGO’s sloppy figure or the Copenhagen group’s faulty calculations? “In reality, I think it’s both,” Brown said. If Jackson and his colleagues were able to tune their parameters to create correlations at seven milliseconds offset, as Green and Moffat’s findings suggest, this would have essentially biased their calculations. Then, at the same offset, their biased algorithm picked out the imperfectly subtracted bits of signal in the noise, reinforcing the false impression.

Jackson, however, maintains that the unexplained correlations are present and says he and his colleagues are preparing a rebuttal to the recent work. He still thinks LIGO’s first, most powerful gravitational-wave signal (and all others by extension) might have been something else altogether — perhaps, he said, “a lightning strike in Burkina Faso, seismic, or even one of the mysterious ‘glitches’ that LIGO detectors see about once an hour.”

But both new papers reviewed and reanalyzed LIGO’s raw data and rediscovered the gravitational-wave signals within it, using different algorithms than LIGO’s. Other researchers have done the same.

“I think the pursuit of independent analyses of gravitational-wave data is a very important and valuable thing to do, and we are delighted that more people are getting involved,” said Shoemaker, LIGO’s spokesperson. “That the Jackson et al. work has stimulated some additional independent investigations can be seen as a positive outcome, but I personally think it comes with a fully unnecessary cost of ‘drama.’”

Meanwhile, LIGO’s twin detectors, along with a third instrument in Europe called Virgo that switched on in 2017, have recorded 10 black hole collisions to date and one space-time wiggle from colliding neutron stars. Scientists announced the four latest black hole detections this month and released dazzling graphics showing the universe’s growing population of these mysterious, invisible, super-dense spheres. When the neutron-star collision was detected last year, 70 telescopes swiveled toward the fireworks; their observations indicated the cosmic origin of gold, the expansion rate of the universe and more.

Brown said it isn’t surprising that LIGO’s revolutionary discovery invited skepticism. A powerful event was detected “basically the day we turned it on,” he said, and the rate of black hole collisions in the cosmos has turned out to be at the high end of expectations.

“The universe loves gravitational-wave astronomers,” he said.

Original story reprinted with permission from Quanta Magazine, an editorially independent publication of the Simons Foundation whose mission is to enhance public understanding of science by covering research developments and trends in mathematics and the physical and life sciences.

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SHANGHAI/SAN FRANCISCO (Reuters) – Apple Inc, facing a court ban in China on some of its iPhone models over alleged infringement of Qualcomm Inc patents, said on Friday it will push software updates to users in a bid to resolve potential issues.

Apple will carry out the software updates at the start of next week “to address any possible concern about our compliance with the order”, the firm said in a statement sent to Reuters.

Earlier this week, Qualcomm said a Chinese court had ordered a ban on sales of some older iPhone models for violating two of its patents, though intellectual property lawyers said the ban would likely take time to enforce.

“Based on the iPhone models we offer today in China, we believe we are in compliance,” Apple said.

“Early next week we will deliver a software update for iPhone users in China addressing the minor functionality of the two patents at issue in the case.”

The case, brought by Qualcomm, is part of a global patent dispute between the two U.S. companies that includes dozens of lawsuits. It creates uncertainty over Apple’s business in one of its biggest markets at a time when concerns over waning demand for new iPhones are battering its shares.

Qualcomm has said the Fuzhou Intermediate People’s Court in China found Apple infringed two patents held by the chipmaker and ordered an immediate ban on sales of older iPhone models, from the 6S through the X.

Apple has filed a request for reconsideration with the court, a copy of which Qualcomm shared with Reuters.

WHERE’S THE HARM?

Qualcomm and Apple disagree about whether the court order means iPhone sales must be halted.

The court’s preliminary injunction, which the chipmaker also shared with Reuters, orders an immediate block, though lawyers say Apple could take steps to stall the process.

All iPhone models were available for purchase on Apple’s China website on Friday.

Qualcomm, the biggest supplier of chips for mobile phones, filed its case against Apple in China in late 2017, saying the iPhone maker infringed patents on features related to resizing photographs and managing apps on a touch screen.

Apple argues the injunction should be lifted as continuing to sell iPhones does not constitute “irreparable harm” to Qualcomm, a key consideration for a preliminary injunction, the copy of its reconsideration request dated Dec. 10 shows.

“That’s one of the reasons why in a very complicated patent litigation case the judge would be reluctant to grant a preliminary injunction,” said Yiqiang Li, a patent lawyer at Faegre Baker Daniels.

HIT LOCAL SUPPLIERS

Apple’s reconsideration request also says any ban on iPhone sales would impact its Chinese suppliers and consumers as well as the tax revenue it pays to authorities.

The request adds the injunction could force Apple to settle with Qualcomm. But it was not clear whether this referred to the latest case or their broader legal dispute.

Qualcomm has paid a 300 million yuan ($43.54 million) bond to cover potential damages to Apple from a sales ban and Apple is willing to pay a “counter security” of double that to get the ban lifted, the copy of the reconsideration request shows.

Apple did not immediately respond to questions about the reconsideration request and Reuters was not independently able to confirm its authenticity.

Lawyer Li said the case would undoubtedly ramp up pressure on Apple, especially if a ban was enforced.

“I think that Qualcomm and Apple, they always have those IP litigations to try to force the other side to make concessions. They try to get their inch somewhere. That’s always the game.”

Summary

Much is written about Tesla (TSLA) and Elon Musk on this platform and elsewhere. The circus that surrounds Tesla is well-known and heavily-covered on this platform – so I won’t write about any of that here.

Instead, this is simply an attempt to forecast Q4/18 vehicle deliveries based on the best available data. Overall, I estimate that Tesla will deliver ~91,085 vehicles – up 9% from last quarter, including over 61,000 Model 3s. This estimate implies that Tesla will meet their 2018 target for 100,000 Model S and X delivered with a bit of breathing room to spare.

Given analyst revenue estimates of ~3.5% sequential growth, Tesla will need to keep ASPs from slipping more than 4.5% to meet those top-line targets, assuming my estimates are close and assuming the Tesla’s non-automobile units are flat sequentially. Tesla has raised prices several times over the last few months, which should help prevent too much price erosion on their vehicles, although this will be offset by the introduction of the $46,000 Model 3 MR.

In my view, Tesla has a good chance of beating its Model S/X delivery target and a reasonable chance of beating analysts’ top-line estimates. I will continue to hold my Tesla shares.

Model S Delivery Estimate: 14,907 Vehicles

Each of the estimates herein is based primarily on three pieces of data.

Each estimate is based on Tesla’s actual delivery information from past quarters. This data is available in Tesla’s quarterly update letters delivered on earnings day. Tesla also provides estimates of this data in an 8-K filing within a day or two of the end of a quarter. This data provides Tesla’s actual deliveries but is only available quarterly – unlike many manufacturers which provide similar data every month.

(Inside EVs Monthly Plug-in EV Sales Scorecard)

Estimates are also based on monthly estimates for Tesla’s American sales from Inside EVs Monthly Plug-in EV Sales Scorecard. Inside EVs only includes sales in the United States but is updated each month, usually within a few days of the end of the month.

(Tesla Motors Club)

Estimates are further based on European vehicle registration date from Tesla Motors Club. A post on TMC’s forum contains European sales data from each European country, with data updated as it becomes available. This data is a bit incomplete for the most recent month, as shown above: Spanish Model S registration results are not yet available.

Compiling these three data sources into one for the Model S, and combining the data into quarters rather than months, I arrive at the following table:

(Author based on data from Inside EVs and Tesla Motors Club)

Here, the “Model S Registrations, Europe” is data from Tesla Motors Club, by quarter. “Model S Sales, United States” is data from Inside EVs, also organized by quarter. Total Model S Sales is simply the addition of those two lines and Tesla Deliveries refers to Tesla’s published total Model S deliveries in a given quarter. Most of this data comes from 8-Ks, as Tesla doesn’t usually break down S vs. X deliveries in its quarterly update letters.

As shown, over the past year, sales in Europe and the United States have made up ~85% of sales of Model S vehicles over the past year, with the remainder of sales primarily occurring in APAC and Canada.

We could simply multiply sales by ~1.5x to move from the two-month Q4/18 sales to three-month sales, but history tells us this would be very inaccurate. Why? Because Tesla tends to sell the fewest vehicles in the first month of each quarter and more vehicles in the last month of each quarter:

(Author based on data from Inside EVs and Tesla Motors Club)

As shown, Tesla has had six months where they sold more than 10,000 Model S and X vehicles combined: 9/16, 12/16, 3/17, 9/17, 12/17, 3/18, and 9/18. All of those months are the third month of a fiscal quarter. Indeed, since the start of 2015, Tesla has always delivered the most vehicles in the third month of the quarter.

Thus, simply multiplying the first two-month results by 1.5x will yield inaccurate delivery estimates: Those estimates would have been too low in each of the past 15 quarters.

(Author based on data from Inside EVs and Tesla Motors Club)

To remedy this problem, the above chart includes only the first two months of European registrations and Inside EVs sales estimates from every quarter. For example, last quarter, Insides EVs showed Tesla having Model S sales of 1,200 in July, 2,625 in August, and 3,750 in September. Thus, the above chart shows 3,825 (1,200 + 2,625) Model S vehicles sold in the United States in Q3/18 – excluding the 3,750 reported September sales.

The Tesla deliveries above are actual deliveries for the quarter, and the percentage of sales is sales in the first two months divided by total sales. As shown, last quarter, U.S. and European sales in the first two months of the quarter accounted for 37% of total Model S deliveries in Q3/18.

For Q4/18, I estimate that Tesla will deliver ~14,907 Model S vehicles. This is based on assuming that reported deliveries in the first two months will be 39% of total quarterly deliveries – the average percentage of the last two quarters. Averaging the last two quarters here is conservative compared to using the 37% metric from Q3/18, which would yield an estimate closer to 16,000 Model S deliveries.

Model X Delivery Estimate: 14,923 Vehicles

(Author based on data from Inside EVs and Tesla Motors Club)

Last quarter, Tesla delivered 13,190 Model X vehicles. Thus far in Q4/18, Tesla has delivered 5,683 vehicles, although data from Tesla Motors Club is again missing Spain for November. That is a very minor exclusion though, given that Spain is averaging 15.9 Model X registrations/month. Given the level of error inherent in these estimates, the absence of this data is trivial.

We will again take the first two months’ data rather than full-quarter sales data to form estimates: Sales of the Model X show a lot of seasonal variability as in the chart above.

(Author based on data from Inside EVs and Tesla Motors Club)

Last quarter, first two-month sales in the United States and Europe represented 38% of total Model X deliveries. If we estimate that the same percentage of Model X deliveries occurred in those regions in those months, this suggests that Tesla may deliver ~14,923 Model X vehicles in the fourth quarter.

Notably, while Tesla did not provide a Q4/18 forecast for Model 3 deliveries (or production), Tesla did forecast deliveries for the Model S and X (combined):

In each of the last four quarters, Tesla has suggested that Model S and X deliveries should total 100,000 or more. If Tesla meets my estimates, they would beat this target with a little bit of breathing room to spare:

Tesla Deliveries	Q4/17	Q1/18	Q2/18	Q3/18	Q4/18E
Model S/X Deliveries	28,425	21,815	22,319	27,710	29,830?
Cumulative, 2018		21,815	44,134	71,844	101,674?

That said, the margin of error on this estimate is quite high. Notably, this estimate excludes China, which may have seen sales fall off in the fourth quarter. Tesla has denied reports that sales in China fell 70% in October:

“‘While we do not disclose regional or monthly sales numbers, these figures are off by a significant margin,’ a Tesla spokesperson told MarketWatch in emailed comments.”

MarketWatch, Nov 27, 2018

However, even with less dramatic declines than 70% it is possible – perhaps even probable – that these estimates will be too high as Tesla’s U.S. and European sales may make up a higher proportion of total sales given tariffs in China. We’ll find out in January.

Model 3 Delivery Estimate: 61,255 Vehicles

(Author based on data from Inside EVs)

The Tesla Model 3 is not available in Europe. According to Autoweek, the Tesla Model 3 will roll out in Europe in February 2019 – well after the end of Q4/18. Because of that, Model 3 deliveries are based solely on data from Inside EVs.

Aside from the United States, the Tesla Model 3 is only available in Canada – it is also not yet available in APAC. Thus, American sales represent the vast majority of Tesla Model 3 deliveries. Last quarter, for example, Inside EVs reported Model 3 sales equal to 97% of total Model 3 deliveries.

(Author based on data from Inside EVs)

Sales of the Model 3 have not been going on long enough to draw as strong of conclusions as for the Model S and X. Sales appear to show some monthly seasonality: Last-month-of-quarter sales were the highest in four of the five quarters that the Model 3 has been offered. However, in Q2/18, Model 3 sales were higher in the second month of the quarter (May 2018) than in the final month of the quarter (June 2018).

Overall, the trend here is that last-month-sales are becoming decreasingly over-sized for the Model 3. This is based up by first two-month data:

(Author based on data from Inside EVs)

As shown, over the past four quarters, first two-month sales have made up an increasing proportion of total sales – from 31% in Q4/17 up to 57% in Q3/18. As the quarters pass, Tesla’s monthly Model 3 sales are becoming flatter and flatter, with respect to in-quarter seasonality.

Because of flattening monthly variations, I will estimate the first two-month sales make up 59% of total Model 3 sales – continuing the 53%, 55%, 57% trend of increase by 2 pp each quarter. Thus, I estimate that Tesla will deliver ~61,255 Model 3 vehicles in the fourth quarter of 2018.

Tesla to 90,000: Total Deliveries Estimate is ~91,085

(Author based on Tesla filings and own estimates)

In total, my estimates would result in 91,085 Tesla deliveries in Q4/18. This would be a record for the company. This estimate implies ~9% sequential growth in automobile deliveries.

Given 9% sequential growth in deliveries, Tesla should break their own record for the most automotive revenue in a quarter, set last quarter at $6.1 billion. Given the relatively small size of Tesla’s other segments, Tesla would also be very likely to beat their Q3/18 revenue as well.

Last quarter, Tesla earned $6.82 billion in revenue. Analysts at Yahoo Finance expect Tesla to generate $7.06 billion in revenue next quarter, up 3.5% from Q3/18. If automobile sales rise 9% in Q4/18, that may be an achievable target: Tesla would need to prevent automobile ASP from falling more than ~4.5% to beat this revenue target, assuming they ship 91,085 automobiles and assuming that non-automotive segment revenue is flat from Q4/18.

The primary driver for falling ASPs in Q4/18 will be the introduction of the less-costly Model 3 mid-range. Depending on product mix, this $46,000 vehicle could reduce average sales prices substantially, although that decline may be offset by waves of price increases on Tesla vehicles, beginning in the middle of last quarter. Given those price increases, Tesla may have a good shot at beating top-line revenue estimates. We will find out in ~early February.

Happy investing!

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Disclosure: I am/we are long TSLA. 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.

Never underestimate the market-moving potential of a nagging child. “Mom, Dad, I want THIS for Christmas!” is a phrase that each year leads to billions of dollars of toy sales. And it’s a phrase parents can appreciate, because knowing what your kid actually wants to find under the tree helps minimize Christmas morning tears. Toy manufacturers and retailers spend millions of dollars each year to make sure their products are the ones on everyone’s wishlist, with TV and online ads, special retail displays, and old-fashioned toy catalogs.

The stakes are particularly high this holiday season, since one-time retail juggernaut Toys R Us closed all its US locations earlier this year. Even while its sales were declining, Toys R Us still accounted for around 12 percent of the estimated $27 billion total toy sales in 2017, according to Juli Lennett of NPD Group, the leading toy industry analysts in the US.

With Toys R Us gone, those sales are up for grabs, and Amazon wants them. The digital-first company was already beating Toys R Us in market share. And while it alone was not responsible for the demise of Toys R Us—poor business decisions and its sizable debt were also to blame—Amazon did put intense pressure on the toy store chain with extremely low prices, especially during the past few holidays seasons, using its familiar tactic of sacrificing profit for market share. Toys R Us couldn’t compete. Now Amazon hopes to feed from the carcass.

And so the ecommerce giant went retro this holiday season, mailing out its first-ever print toy catalog, like the one Toys R Us used to be known for. The “Holiday of Play” lookbook from Amazon is 68 pages long and features toys like the über-popular LOL! Surprise dolls, LEGO’s Star Wars Solo, and the Osmos Genius Kit for iPad. An Amazon representative told WIRED the catalog was sent it to millions of customers in November, but wouldn’t give exact numbers. It’s also available at Whole Foods and some physical Amazon store locations, or online in PDF and Kindle form.

The catalog may be made of paper, but it’s designed as a gateway to a digital transaction. What it lacks in pricing information it makes up in QR codes and stickers that kids can use to make note of presents they want their parents to buy. It also works with the Amazon app: Take a photo of the catalog item you (or your kids) want, and the app will pull up the listing and let you buy it from your phone.

“The great thing about a catalog is that it sits on the coffee table, where kids can find it,” says Steve Pasierb, CEO of The Toy Association, a trade group representing American toy manufacturers. “The catalog is a market share play. Amazon has a huge chance to win a lot of those holiday sales.”

Amazon’s top competitors for Toys R Us’ sales are Target and Walmart, according to experts—traditional retailers that have mailed out holiday catalogs for years. And in the wake of Toys R Us closing, both companies decided to devote more shelf space in their retail locations to toys, says Pasierb. With only a handful of physical stores in a few major cities, Amazon’s toy push comes in the form of a dedicated landing page for kids on its website, and its catalog.

“They’re emulating a proven method of doing business, which is the catalog, but using their muscle to engage at a particular time when there are just fewer retailers now that sell toys,” says Richard Gottlieb, CEO of research firm Global Toy Experts. Gottlieb was impressed with Amazon’s catalog, though he far preferred eBay’s catalog, full of weird and wild and expensive one-of-a-kind toys, which launched this season as well.

Amazon and eBay are joining the many other ecommerce companies still finding that print catalogs have value in the digital era. Catalogs are harder to ignore than the clutter of online ads, one footwear startup founder told Digiday earlier this year, explaining that his company gets a slightly higher return on direct mail versus digital-only marketing. Companies can also use data to target catalogs to customers they know are likely to spend more money. And they are a traditional way for families to compile gift wishlists.

“I’m old enough to remember the Sears catalog,” says Gottlieb. “I remember laying on the floor just going through it. I didn’t get much anything out of it. But you know, marking things, studying it in detail. It was wonderful and a wonderful way to communicate with your parents what you want.”

People really want and love catalogs. Take a glance at the reviews for the Kindle version on Amazon’s website. Plenty of customers posted bad reviews, not because they didn’t like the catalog but because they were annoyed that they didn’t get one.

“Why can’t we get a book and why didn’t we get one? We have been prime members for years, have 4 kids, buy lots of toys, and no book. And we can’t order one,” reads the top-rated review right now. “Would love to have the toy catalog delivered through the mail. The children love looking at it and circling what they like. I dont use Kindle. I’ve been a prime member for many years and did not get one,” reads another. A review from November 15 is even more direct: “Disappointed that I didn’t and can not now get a hard copy in the mail even though I have two small children and spend a ton on toys through Amazon Prime. I AM YOUR TARGET MARKET. Speaking of Target – I’ll be doing my toy shopping there because I am THAT petty.”

The disappointment those Amazon reviewers felt speaks to the reason catalogs have worked so well. They’re convenient, above all. Enjoyable, even. And this time of year, when millions of Americans are going to buy toys, it’s easier for children to thumb through a physical catalog that feels like a big book of wonders than a notoriously hard-to-navigate website.

Kids, especially, don’t have a great way to discover toys on the actual Amazon website. Even its dedicated toy section divided by age group is confusing to navigate. And while the site does have a wishlist feature, parents might not trust their kid to trawl through Amazon’s website on their account, since they could accidentally push one button and buy something. A print catalog is a way for Amazon to directly get its offering in front of children, while also giving parents a little bit more control over the process.

The toy catalog is a familiar marketing throwback in an otherwise rapidly evolving industry. Pasierb notes that with the growth in streaming entertainment for kids, the kinds of ads children see have changed. “Unboxing videos, the online kind of stuff is for a lot of our toy companies as important or now more important than traditional television advertising. A lot of our companies that no longer do traditional TV advertising do almost all exclusively digital,” says Pasierb. The highest-paid YouTube celebrity this year, according to Forbes, was a 7-year-old boy making unboxing videos of toys, earning an estimated $22 million in 12 months.

“[These kinds of ads] are entertainment in their own right,” says Lennett. “A lot of these kids, I don’t think they know the difference between watching a show—a real show—versus watching another kid playing with a toy on YouTube.”

“In my household, the word ‘TV’ is gone. Now it’s just ‘shows.’ Children have already fully internalized the idea of on demand, and that disrupts the ad model completely,” says David Carroll, professor of media design at the New School.

But Carroll doesn’t let his two kids watch YouTube, where they might see those ads. I don’t let my three-year-old son watch it, either. We are the exception; a recent Pew survey found that 81 percent of parents do allow their young kids to watch YouTube. Our reasons are less to do with fear of seeing ads than fear that we can’t control the algorithm and our children might get exposed to inappropriate, creepy, or ideological videos. Instead, our kids mostly watch on-demand shows on Amazon Prime, Netflix, iTunes, or Google Play—and those are largely free of ads.

“The only way [Amazon’s toy offerings] are getting in front of my children is through a catalog,” says Carroll. Only Carroll never got an Amazon catalog, despite his prolific Prime usage. Neither did I. Neither did Lennett, who says, “I’m mad I didn’t get one.” Though her kids are teenagers, she buys lots of stuff on Amazon and thought they’d receive one in the mail, as some of her friends did. An Amazon representative declined to comment on how the company decided who to send the catalog to, though the person offered to send me one. (I declined.)

For Amazon, a catalog also fits well with its bigger push into the physical world, with everything from actual store locations to Dash buttons you physically push to order goods. “[Amazon owner Jeff] Bezos has total world domination as the goal. So from that perspective it makes sense that they would not take a digital-only approach. They would take a whatever works approach,” says Carroll.

For world domination, Amazon has to be everything. And everywhere. Even in the living room, where your kid can find it and come up to you whining, “Mom! I want this!” That is, if Amazon sent you one.

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How do you store data across a Kubernetes container cluster? With etcd. This essential part of Kubernetes has been managed by CoreOS/Red Hat. No longer. Now, the open-source etcd project has been moved from Red Hat to the Cloud Native Computing Foundation (CNCF).

What is etcd? No, it’s not what happens when a cat tries to type a three-letter acronyms. Etcd (pronounced et-see-dee) was created by the CoreOS team in 2013. It’s an open-source, distributed, consistent key-value database for shared configuration, service discovery, and scheduler coordination. It’s built on the Raft consensus algorithm for replicated logs.

Also: Kubernetes’ first major security hole discovered

Etcd’s job is to safely store critical data for distributed systems. It’s best known as Kubernetes’ primary datastore, but it can be used for other projects. For example, “Alibaba uses etcd for several critical infrastructure systems, given its superior capabilities in providing high availability and data reliability,” said Xiang Li, an Alibaba senior staff engineer.

When applications use etcd they have more consistent uptime. Even when individual servers fail, etcd ensures that services keep working. This doesn’t just protect against what would otherwise prove show-stopping failures, it also makes it possible to automatic update systems without downtime. You can also use it to coordinate work between servers and set up container overlay networking.

In his KubeCon keynote, Brandon Philips, CoreOS CTO, said: “Today we’re excited to transfer stewardship of etcd to the same body that cares for the growth and maintenance of Kubernetes. Given that etcd powers every Kubernetes cluster, this move brings etcd to the community that relies on it most at the CNCF.”

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Must read

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That doesn’t mean Red Hat is walking away from etcd. Far from it. Red Hat will continue to help develop etcd. After all, etcd is is an essential part of Red Hat’s enterprise Kubernetes product, Red Hat OpenShift.

Moving forward, etcd will only grow stronger. It being used by more and more companies, as Kubernetes is adopted by almost every cloud container company. In particular, Phillips said, he expects far more work to be done on etcd security.

Related stories:

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.

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.

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.

SAN FRANCISCO (Reuters) – Chip supplier Qualcomm Inc (QCOM.O) on Tuesday unveiled a new generation of mobile phone processor chips that will power 5G smartphones in the United States as soon as next year.

The key feature of the Snapdragon 855 chip, launched at an event in Hawaii, is a so-called modem for phones to connect to 5G wireless data networks with mobile data speeds of up to 50 or 100 times faster than current 4G networks.

Mobile carriers are investing in 5G networks and are eager to sell 5G phones and data plans to recoup investment costs.

Qualcomm, the largest supplier of mobile phone chips, said Snapdragon 855 would power Samsung 5G smartphones that Verizon Communications Inc (VZ.N) and Samsung Electronics Co Ltd (005930.KS) said on Monday would be released in the United States in the first half of 2019.

The modem would also enable “computer vision” to help phones recognize objects and faces, and support a new Qualcomm fingerprint sensor that can read a user’s fingerprint through the glass screen of a smartphone.

The Samsung phone would be a major challenge for Apple Inc (AAPL.O), its biggest rival in the premium handset market in the United States as the iPhone maker is locked in a legal battle with Qualcomm. Citing sources familiar with the matter, Bloomberg reported on Monday that Apple would wait until at least 2020 to release its first 5G iPhones.

WASHINGTON (Reuters) – The United States Postal Service should have more flexibility to raise rates for packages, according to recommendations from a task force set up by President Donald Trump, a move that could hurt profits of Amazon.com Inc (AMZN.O) and other large online retailers. The task force was announced in April to find ways to stem financial losses by the service, an independent agency within the federal government. Its creation followed criticism by Trump that the Postal Office provided too much service to Amazon for too little money.

The Postal Service lost almost $4 billion in fiscal 2018, which ended on Sept. 30, even as package deliveries rose.

It has been losing money for more than a decade, the task force said, partially because the loss of revenue from letters, bills and other ordinary mail in an increasingly digital economy have not been offset by increased revenue from an explosion in deliveries from online shopping.

The president has repeatedly attacked Amazon for treating the Postal Service as its “delivery boy” by paying less than it should for deliveries and contributing to the service’s $65 billion loss since the global financial crisis of 2007 to 2009, without presenting evidence.

Amazon’s founder Jeff Bezos also owns the Washington Post, a newspaper whose critical coverage of the president has repeatedly drawn Trump’s ire.

The rates the Postal Service charges Amazon and other bulk customers are not made public.

“None of our findings or recommendations relate to any one company,” a senior administration official said on Tuesday.

Amazon shares closed down 5.8 percent at $1,669.94, while eBay (EBAY.O) fell 3.1 percent to $29.26, amid a broad stock market selloff on Tuesday.

The Package Coalition, which includes Amazon and other online and catalog shippers, warned against any move to raise prices to deliver their packages.

“The Package Coalition is concerned that, by raising prices and depriving Americans of affordable delivery services, the Postal Task Force’s package delivery recommendations would harm consumers, large and small businesses, and especially rural communities,” the group said in an emailed statement.

Most of the recommendations made by the task force, including possible price hikes, can be implemented by the agency. Changes, such as to frequency of mail delivery, would require legislation.

The task force recommended that the Postal Service have the authority to charge market-based rates for anything that is not deemed an essential service, like delivery of prescription drugs.

BAD NEWS FOR AMAZON

“Although the USPS does have pricing flexibility within its package delivery segment, packages have not been priced with profitability in mind. The USPS should have the authority to charge market-based prices for both mail and package items that are not deemed ‘essential services,’” the task force said in its summary.

That would be bad news for Amazon and other online sellers that ship billions of packages a year to customers.

“If they go to market pricing, there will definitely be a negative impact on Amazon’s business,” said Marc Wulfraat, president of logistics consultancy MWPVL International Inc.

If prices jumped 10 percent, that would increase annual costs for Amazon by at least $1 billion, he said.

The task force also recommended that the Postal Service address rising labor costs.

The Postal Service should also restructure $43 billion in pre-funding payments that it owes the Postal Service Retiree Health Benefits Fund, the task force said.

Cowen & Co, in a May report, said the Postal Service and Amazon were “co-dependent,” but that Amazon went elsewhere for most packages that needed to arrive quickly.

Cowen estimated that the Postal Service delivered about 59 percent of Amazon’s U.S. packages in 2017, and package delivery could account for 50 percent of postal service revenue by 2023.

The American Postal Workers Union warned against any effort to cut services. “Recommendations would slow down service, reduce delivery days and privatize large portions of the public Postal Service. Most of the report’s recommendations, if implemented, would hurt business and individuals alike,” the union said in a statement. 

Amazon, FedEx Corp (FDX.N) and United Parcel Service Inc (UPS.N) did not return requests for comment.

SAN FRANCISCO (Reuters) – More than 200 engineers, designers and managers at Alphabet Inc’s Google demanded in an open letter on Tuesday that the company end development of a censored search engine for Chinese users, escalating earlier protests against the secretive project.

Google has described the search app, known as Project Dragonfly, as an experiment not close to launching. But as details of it have leaked since August, current and former employees, human rights activists and U.S. lawmakers have criticized Google for not taking a harder line against the Chinese government’s policy that politically sensitive results be blocked.

Human rights group Amnesty International also launched a public petition on Tuesday calling on Google to cancel Dragonfly. The organization said it would encourage Google workers to sign the petition by targeting them on LinkedIn and protesting outside Google offices.

Google declined to comment on the employees’ letter on Tuesday as Alphabet shares fell 0.35 percent to $1,052.28.

Google has long sought to have a bigger presence in China, the world’s largest internet market. It needs government approval to compete with the country’s dominant homegrown internet services.

An official at China’s Ministry of Industry and Information Technology, who was unauthorized to speak publicly, told Reuters on Tuesday there was “no indication” from Google that it had adjusted earlier plans to eventually launch the search app. However, the official described a 2019 release as “unrealistic” without elaborating.

About 1,400 of Google’s tens of thousands of workers urged the company in August to improve oversight of ethically questionable ventures, including Dragonfly.

The nine employees who first signed their names on Tuesday’s letter said they had seen little progress.

The letter expresses concern about the Chinese government tracking dissidents through search data and suppressing truth through content restrictions.

“We object to technologies that aid the powerful in oppressing the vulnerable, wherever they may be,” the employees said in the letter published on the blogging service Medium.

The employees said they no longer believed Google was “a company willing to place its values over profits,” and cited a string of “disappointments” this year, including acknowledgement of a big payout to an executive who had been accused of sexual harassment.

That incident sparked global protests at Google, which like other big technology companies has seen an uptick in employee activism during the last two years as their services become an integral part of civic infrastructure.

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Listen to and learn from connected consumers.

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.

Looking for a dependable high-yield vehicle? The management at USA Compression Partners LP (USAC) have maintained the company’s $.52 quarterly through previous boom and bust cycles:

(Source: USAC site)

If you’ve ever researched how natural gas gets pulled out of the ground, you’ve already discovered that compression is an increasingly important part of the operation. Compression also is a vital element in shale fracking production, which requires more compression than traditional techniques.

Although you wouldn’t know it from its current low price, which is near its 52-week low, USAC is in a good place now – demand for its large horsepower units is robust, and the major acquisition it made of the assets of CDM in early 2018 put it into a dominant position in its industry.

Management referenced this on the recent Q3 ’18 earnings call:

“The overall market for compression services remains very strong, driven by solid natural gas fundamentals and the continually midstream infrastructure buildup, which does not just combine to one region, but rather it’s taking place across the country in areas which we operate. We continue to take advantage of the strong market to push through rate increases while prudently investing capital in the business. Our utilization metrics demonstrate the current strength of the market and we expect continued strength throughout 2019, based on the current visibility for compression services demand.”

Natural gas has multiple drivers – increasing utilization as a replacement for coal at power plants, LNG exports, exports to Mexico, and demand as a feedstock for petrochemical companies, which continue to ramp up their presence in the US, in order to take advantage of larger natural gas supplies:

(Source: USAC site)

Many have posed the age-old question, “Does size matter?” with advocates on both sides of the argument.

However, when it comes to the scintillating world of compression, size does matter, and here’s where USAC has a distinct advantage over its competitors. The trend is toward outsourcing, particularly for large equipment, which tends to be “sticky” – it’s expensive for a customer to demobilize this type of equipment, ($60K – $200K plus), which promotes longer contracts and increasing prices for USAC.

“The market for large horsepower equipment has remained very tight as we’ve experienced throughout the entire year. Demand continues to be especially strong for the very largest horsepower categories in which USA Compression specializes.”

“Compression – the way forward continuing to outsource actually is trending to accelerate. So, I think you’re actually in a very unique time right now that you’ve got limitations on access to capital, you’ve got limitations on access to people and you have limitations on access to new equipment. So, all of those three things together can provide for a perfect storm which we think plays well to our strength of large horsepower infrastructure equipment and will allow us to re-price our book upward over time.”

“We’re in the equivalent of a seller’s market right now where there is a lot of demand and not a lot of supply.” (Source: Q3 call)

(Source: USAC site)

Looking forward, USAC should be able to capitalize on a better pricing environment: “When we look at the spot pricing on the new units we’re deploying, 120,000 some odd horsepower for next year, these are extremely attractive new unit economics, effectively five-year or less cash on cash type of payouts, low 20s, IRR on an levered type of basis.” (Source: Q3 ’18 call)

Distributions:

USAC’s next distribution should have an ex-dividend date sometime in early February. It pays in the usual Feb/May/Aug/Nov LP cycle for LPs, and issues a K-1 at tax time. At a $13.50 price/unit, USAC yields 15.56%, with trailing coverage of 1.02X.

DCF coverage was just 1.01X in Q3 ’18. However, moving forward, management sees additional cost savings synergies from the CDM deal kicking in for 2019, as it finalizes the transition. The entire 900 employees of the company are now using the same customer, contract and asset data systems. This should improve coverage going forward, in addition to forward price increases.

No More IDR’s:

USAC closed on the CDM deal on 4/2/18. CDM was the compression services arm of Energy Transfer Partners LP, and Energy Transfer Equities, which merged into Energy Transfer LP (ET). CMD was valued at ~ $1.8B.

This deal included the following:1. The contribution of ETP’s subsidiaries, CDM Resource Management LLC and CDM Environmental & Technical Services LLC, to USAC.2. The cancellation of the incentive distribution rights in USAC.3. The conversion of the general partner interest in USAC into a non-economic general partner interest. As part of the transaction, ETE acquired the ownership interests in the general partner of USAC, and approximately 12.5 million USAC common units from USA Compression Holdings.

(Source: USAC site)

Earnings:

This table illustrates the impact that the CDM deal has had on USAC’s operations. It was transformative, ramping up revenue and EBITDA by well over 100% and DCF by over 54% in Q3 ’18, while Q2 ’18 saw even larger increases.

USAC had a larger than normal number of legacy CDM field technicians after the CDM deal closed, and also used outside parties to perform routine maintenance on some compression units, which was much more expensive than using internal personnel. It took a while to find the right caliber of technicians, due to a strong marketplace environment, but they’ve fixed the situation, and upgraded their staff talent level.

USAC’s coverage has improved dramatically over the past four quarters, rising from a sub-par .87x (when the GP was relinquishing IDR rights to support the payouts, up to 1.09X in Q2 ’18, and averaging 1.02x over the past four quarters).

Looking forward to 2019, if we use an average of the post-CDM deal Q2 and Q3 2018 DCF figures of $47.5M and $51.4M, respectively, that gives us an average DCF of ~$49.45M/quarter.

We compared and extrapolated that $49.45M DCF average to the Q3 ’18 total cash distributions of $47.02M, which were higher than the Q2 ’18 total of $43.5M.

If USAC’s DCF and total distributions stay flat, we should see 1.05X coverage in 2019. This is without the benefit any cost savings, or additional revenues from price hikes.

Fleet Utilization:

Fleet horsepower was over 3.6M, as of 9/30/18, an increase of more than 53,000 horsepower vs. Q2 ’18. Active horsepower increased 61,000 to over 3.2M, up ~2% over Q2 2018.

Another positive is that management has been able to redeploy ~353,000 horsepower of idle horsepower from the combined fleets at nominal additional capex costs. (CDM’s fleet had a lower utilization rate.) Most of its idle equipment is in the small horsepower category – long before the CDM deal, management had been shifting USAC’s emphasis toward large horsepower equipment.

USAC has had a very stable fleet utilization rate of ~93% for more than a decade:

(Source: USAC site)

Guidance vs. Performance:

Management narrowed its full-year 2018 adjusted EBITDA guidance range to $310 – $320M, and its 2018 DCF guidance range to $170m – $180M.

We pro-rated this 2018 guidance to three quarters to get an idea of USAC’s actual Q1 ‘3 ’18 results compare to the guidance. So far, EBITDA looks roughly in line with the low end of 2018 guidance, while DCF is ~4% above it.

Risks:

Natural Gas downturn – If there’s another protracted downturn in the energy patch, this could lead to a cutback in rigs, and potential demand for compression services, even the large units, which are in tight demand now.

Unlike crude oil, which has had a rough go of it in 2018, natural gas futures are up 34% over the past month, and 46% year to date in 2018. However, producers need compression to get their product out of the ground, which gives USAC a cushion in energy cycles, as its fleet utilization has had a strong, long term record of 93% utilization.

IRA Holders – Holding an LP in an IRA may result in tax complications for IRA holders due to UBTI. You’ll also get more tax deferral advantages from investing in USAC in a taxable account. You should consult your accountant about these aspects of investing in LPs.

Valuations:

At $13.50, USAC is less than 5% above its 52-week lows – its price hasn’t been this low since April 2016. It’s also selling at .85x of book value, and its price/DCF is one of the lower valuations we’ve seen recently.

Analyst’s Price Targets:

That $13.50 price puts it nearly 26% below analysts’ lowest price target of $17.00, almost 44% below the $19.43 average price target.

Insiders Are Buying:

Management just upped its skin in the game last week – they bought 45,000 units at a price range of $13.40 to $13.90.

(Source: finviz)

Financials:

Due to negative net income, which includes heavy non-cash depreciation and amortization charges, USAC has negative ROA and ROE valuations.

The interest coverage factor of just .69X looks poor, when compared to the 1.45X average, but, again that includes a great deal of non-cash depreciation and amortization charges.

USAC’s EBITDA/Interest coverage factor for Q1-3 ’18 was 4.49X.

Debt and Liquidity:

“As of September 30, 2018, the Partnership had outstanding borrowings under the revolving credit facility of $1 billion, $578.2 million of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $309.7 million. As of September 30, 2018, the outstanding aggregate principal amount of the Partnership’s 6.875% senior notes was $725 million.”

(Source: USAC site)

USAC’s Credit Agreement has an aggregate commitment of $1.6B, with a further potential increase of $400M, and has a maturity date of April 2, 2023.

Its 6.875% senior notes Senior Notes mature on April 1, 2026.

Options:

We have options picks for USAC in our Double Dividend Stocks service, which we can’t divulge here, but you can see trade details for over 25 other option-selling trades in our Covered Calls Table and Cash Secured Puts Table.

Summary:

We rate USAC a long-term buy. Demand for its natural gas compression services isn’t going away any time soon, just the opposite. USAC has a strong position in its niche industry, and is well-positioned to benefit from increasing demand for large-scale horsepower compression.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

CLARIFICATION: We have two investing services. Our legacy service, DoubleDividendStocks.com, has focused on selling options on dividend stocks since 2009.

Disclosure: I am/we are long USAC.

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.