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

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

Better ethics from leaders, better performance

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

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

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

The big catch: Who decides what’s moral?

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

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

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

An Obscure Concealed Carry Group Spent Millions on Facebook Political Ads

Among the biggest spenders on Facebook political ads during the midterms are some names you’d probably expect. There’s Beto O’Rourke, who lost to Ted Cruz in Texas’s recent Senate race. There’s President Trump—both his campaign and his Super PAC. There are billionaires like JB Pritzker, incoming governor of Illinois, and Tom Steyer, the environmentalist leading the campaign to impeach Trump. And of course, there’s a multi-billion dollar oil giant, ExxonMobil. But tucked into that list, rounding out the top ten, is one name few have heard of: Concealed Online, a for-profit company that offers an online course and sells online certifications for concealed carry permits in Virginia.

Since May, it’s shelled out more than $2 million on Facebook ads—just slightly less than ExxonMobil, and far more than well-known groups like Planned Parenthood. Its ads warn about the “blue wave.” “MOB RULE IS COMING!” read one series of ads before the midterms. And after: “IT’S ALMOST OVER! The Gun Control Dems are IN.” The ads are laced with heated political rhetoric, but they don’t advocate for political action. Instead, they seem squarely designed to make the company money. They urge Facebook users to “certify online for free to carry concealed” through their website. (The certificates cost $65 to download.)

Concealed Online doesn’t share much more information about who’s behind it. The company’s website gives no indication of who the owner is. Its address as of early November was a virtual office in Burbank, California, but after WIRED inquired about it, the company changed the address listed on its site to Walnut, California. There’s no Concealed Online registered with the California Secretary of State, and the company’s website is registered to a business that buys domains on behalf of clients who don’t want their information disclosed. A legal complaint filed in the Northern District of California in February 2017, however, identifies OrionClick LLC as the parent company of Concealed Online.

WIRED reached out to Concealed Online through an email address on the company’s website. After WIRED received a response from Concealed Online’s lawyer, Karl Kronenberger, the company’s owner agreed to an interview if WIRED did not publish his name. The owner says he chooses to keep his identity private in part because he fears attacks by “crazies,” and in part because his personal politics are “the opposite” of the ones reflected in his ads. He insists he’s not a partisan actor, but an internet marketer, capitalizing on political events to make money.

“We’re opportunistic marketers, sure,” he says. “The point of the ad is to effect a purchase, not influence policy.”

Digital political ads exist in a regulatory no-man’s land. Where political advertisers on radio or television must file disclosures with the Federal Election Commission and include disclaimers about who paid for the ad, no such rules exist in the digital space, though some have been proposed. Even on television, for ads that aren’t purchased by candidates or PACs, the FEC only requires disclaimers on so-called “electioneering communications,” which must be publicly distributed shortly before an election and include clear references to a specific candidate. But the digital gap allows anyone, regardless of motive, to run highly targeted, politically divisive ads, with next to no oversight. With its ad archive, Facebook has tried to institute some transparency into the process. But Concealed Online’s multi-million dollar ad campaign raises questions about how transparent that system really is.

Concealed Online launched in 2016, three years after Virginia started allowing people to take online courses to qualify for concealed carry permits. Those permits are recognized in states across the country, and even non-Virginia residents are eligible. The company’s owner saw a business opportunity in that. So he developed an online training course, where people can watch a video on gun safety, take a test, and instantly download a certificate of competency with a handgun for a fee. You can take the test as many times as you need, making it nearly impossible to fail. I passed without watching the training video and with no firearms experience to speak of. I purposely got questions wrong and still passed.

Once you pass the test, you can download a certificate for a fee, which can then be used by Virginia residents and non-residents as part of an application for a concealed carry permit in Virginia, one of the only states that allows online certification. On its website, Concealed Online specifies that the Virginia permit isn’t recognized in all 50 states and notes that it’s the customer’s responsibility to heed the laws where they live. But the ads WIRED saw don’t include those caveats.

Instead, they feature urgent warnings, like, “The election is just DAYS AWAY and Gun Control Lawmakers could do a FULL STOP 🛑 on your 2nd Amendment rights! FAST-TRACK your Concealed Carry Certification ONLINE! It’s FREE, EASY, and STILL LEGAL! IGNORE AT YOUR OWN RISK.” And yet, Concealed Online’s owner rejects the idea that this is in any way a political ad. “It all depends on the intent of the ad. What’s the call to action? 100 percent of the time our call to action is: Click here to buy our product,” he says. “The intention is to cause a sense of urgency to achieve more sales.”

Concealed Online via Facebook

The Better Business Bureau gives Concealed Online an F rating, in part because it has received 25 complaints, primarily from people who paid for the certificate only to find out that Virginia’s permits aren’t recognized in their state. The most recent complaint was filed last month. The Better Business Bureau opened an investigation into Concealed Online’s ads but received no response. The company’s owner says Concealed Online sells certificates to people living in states like California and Colorado, which don’t accept Virginia permits, because they can use them when they travel to states that do.

Kronenberger, Concealed Online’s lawyer, stresses, “My client didn’t do anything wrong. They followed the law.”

Concealed Online is not the only company leveraging the Virginia permit as a business model. Others like National Carry Academy and US Concealed Online have popped up in recent years offering similar online certifications. The Virginia State Police confirmed the state accepts online certifications, but doesn’t endorse any particular program. But Concealed Online appears to be the only one that spent so substantially on ads in Facebook’s political ad archive. From May through November 10, the company ran 12,961 ads at a cost of $2,185,554, according to the archive report.

Concealed Online’s ads are included in Facebook’s political ad archive because they address an issue of national importance, namely, guns. The company’s owner, however, says his ads shouldn’t be listed alongside super PACS and political campaigns in Facebook’s ad archive, because their purpose is purely commercial, not ideological. In fact, he says business was better when it looked like Hillary Clinton was going to win the presidential election, because people were afraid that “everybody’s going to come take their guns.”

That may be, but in Facebook’s eyes, any ad that talks about guns—or immigration or abortion or any number of other political issues—is considered a political ad. There’s a reason for that. During the 2016 election, Russia’s infamous troll farm, the Internet Research Agency, ran ads focused on divisive political issues, like race and immigration, often, without mentioning a candidate at all. One page, called Black Fist, even posed as a commercial venture offering self-defense courses to black Americans.

Such ads wouldn’t trigger an FEC disclaimer, even if they appeared on television. But the backlash against Facebook and other platforms has been so fierce since 2016, that in its efforts to combat future manipulation, Facebook decided to include both candidate and issue-specific ads in its archive, which stores information on the advertisers and the ads themselves. The company requires these advertisers to go through an authorization process, which includes submitting their government-issued ID and a residential mailing address.

Concealed Online’s owner says he had no choice but to register as a political advertiser when Facebook instituted its new policies. Facebook wouldn’t run his ads until he completed an authorization process, which included sending a letter to his home to prove he was a US resident. But he considers Facebook’s new system to be an overreach. “Facebook made the rule. It’s not a law,” he says.

Facebook confirmed that Concealed Online is an authorized political and issue advertiser. A spokesperson for Facebook said the company has looked into Concealed Online’s ads and they don’t violate Facebook’s policies.

Concealed Online via Facebook

In a lot of ways, the ad archive does make political ads on Facebook more transparent. Before it, there was no way to see everything an advertiser was publishing, who they were reaching, or how much they were spending. Without the archive, Concealed Online’s ads would remain, well, concealed, except to those users who saw them in their News Feeds. Concealed Online is far from the only for-profit business swept up in the archive. Both Ben & Jerry’s and Penzeys Spices are also authorized political advertisers on Facebook. But the opacity of Concealed Online’s business also exposes a blind spot for Facebook and for the regulation of digital political ads in general, says Ann Ravel, a UC Berkeley law professor and former FEC commissioner under President Obama.

Despite all of the noise about protecting elections in Washington and Silicon Valley over the last two years, digital political ads remain largely unregulated. “The law doesn’t cover them,” she says. “My opinion is that it should. This is the essence of where campaigning has gone now.”

Ravel says Facebook’s archive is “not sufficient.” As the case of Concealed Online shows, Facebook’s database can tell you what entity placed the ad, but it reveals little about who’s really behind it. That’s an issue that’s hardly specific to Concealed Online. ProPublica recently reported on a dozen ad campaigns that appeared to be backed by oil giants hiding behind Facebook Pages of different names. And reporters have proved how easy it is to deceive Facebook’s authorization system. Vice News recently tried to buy Facebook ads that were marked as “paid for by” 100 different senators. The ads never ran, but Facebook approved the disclaimers.

With millions of ads being placed in any given election cycle, it’s just tougher for tech platforms to vet each advertiser thoroughly. That makes the problem of transparency, which exists offline, too, all the more difficult to address online. Democratic senators Amy Klobuchar and Mark Warner and the late Republican senator John McCain introduced legislation last year that would impose new disclosure standards on digital political ads, including ads related to “a national legislative issue of public importance,” like the ones Concealed Online runs. But that bill, the Honest Ads Act, hasn’t progressed.

“None of this is covered on the internet by any laws or regulations, no one has even attempted to consider the Honest Ads Act, and the FEC has done nothing,” Ravel says. “It’s really a bad portent.”

Instead, Facebook, Google, and Twitter have all devised their own systems of disclosure. But those systems operate differently and include their own, distinct databases, which are still works in progress. They’re no substitute, Ravel says, for unilateral standards on a federal level.

Facebook, for its part, says the fact that people are asking questions about what they find in the archive is a step in the right direction. During a meeting with reporters at Facebook’s New York office late last month, the company’s global politics director Katie Harbath, was asked about ProPublica’s big oil investigation. “Before this they would never have even seen those ads,” Harbath said. But she, too, noted that the issue of transparency in political advertising is a problem Facebook can’t solve alone. “There’s not a legal structure around some of this yet, particularly when it comes to issue ads and what they’re required to disclose,” she said. “We’re going to be limited somewhat in terms of what we, as Facebook, can do.”

Facebook is rolling out changes to reduce the spread of sensationalist content, which has traditionally gotten the most engagement on the platform. Whether that will have any impact on the effectiveness of ads like the ones Concealed Online runs is unclear. For now, Facebook remains a main source of customers for the company. As Kronenberger put it, “They’re using this language because it’s working.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reporting by Josh Horwitz; Editing by Christopher Cushing

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

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

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

It’s the thought that counts, after all.

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

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

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

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

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

This is, though, the problem with tech companies. 

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

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

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

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

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

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

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

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

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

King added:

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

At this stage.

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

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

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

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

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

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

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

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

And your numbers help Google make even bigger numbers.

Will that ever change? Probably not.

Cloud security: The essential checklist

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More Great WIRED Stories

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

(Source: imgflip)

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

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

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

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

What’s Causing Oil Prices To Fall

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


Brent Crude Oil Spot Price data by YCharts

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

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

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

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

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

Why Another Oil Crash Is Unlikely

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

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

(Source: Pioneer Natural Resources investor presentation)

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

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

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

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

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

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

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

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

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


Brent Crude Oil Spot Price data by YCharts

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

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

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

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

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

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

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

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

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

(Source: Shell investor presentation)

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

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

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

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

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

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

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

(Source: Exxon Investor Presentation)

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

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

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

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

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

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

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

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

(Source: Exxon Investor Presentation)

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

Oil Price In 2025

Exxon Annual Free Cash Flow

FCF Payout Ratio (Current Dividend)

Annual Retained FCF


$15 billion


$1.1 billion


$31.5 billion


$17.6 billion

$66 (Current Price)

$34.7 billion


$19.4 billion

$73 (Analyst Consensus)

$38.3 billion


$21.9 billion

$80 (My Best Estimate)

$52 billion


$38.0 billion

(Sources: Exxon guidance, Morningstar, GuruFocus)

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

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

(Source: Exxon Investor Presentation)

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

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

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

(Source: Exxon Earnings Presentation)

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

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

The next major growth opportunity is Brazilian offshore.

(Source: Exxon Earnings Presentation)

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

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

(Source: Exxon Earnings Presentation)

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

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

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

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

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

(Source: Chevron Investor Presentation)

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

(Source: Chevron Annual Report Supplement)

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

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

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

(Source: EQT Midstream Investor Presentation)

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

(Source: US Energy Information Administration)

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

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

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

(Source: Chevron Investor Presentation)

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

(Source: Chevron Investor Presentation)

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

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

(Source: Chevron Investor Presentation)

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

(Source: Chevron Investor Presentation)

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

Shell: Betting The Future On LNG

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

(Source: Shell Investor Presentation)

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

(Source: Shell Investor Presentation)

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

(Source: Shell Investor Presentation)

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

(Source: Shell Investor Presentation)

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

(Source: Shell Investor Presentation)

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

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

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

(Source: Shell investor presentation)

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

(Source: Shell investor presentation)

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

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

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

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

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

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

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

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

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

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

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

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

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


XOM Total Return Price data by YCharts

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

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

(Source: Investment Quality Trends)

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

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

(Sources: Simply Safe Dividends, Gurufocus)

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

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

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

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

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

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

Risks To Consider

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

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

(Source: ConocoPhillips Investor Presentation)

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

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

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

(Source: Exxon Mobil investor presentation)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

Slideshow (10 Images)


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

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

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

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

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

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

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

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

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

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

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

​Red Hat blends Kubernetes into Red Hat OpenStack Platform 14

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

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

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

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

This combination also provides new capabilities:

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

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

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The latest version also includes:

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

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

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

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

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

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Trade war and censors blow chill wind through China's giant tech scene

BEIJING (Reuters) – Wang Miaoyi’s small one-bedroom apartment, which doubles as her design studio, is overflowing with game magazines, figurines and boxes of sci-fi novels.

Game developer Wang Miaoyi works in her studio that is located in her appartment in Beijing, October 29, 2018.REUTERS/Thomas Peter

The 30-year old game developer is a child of the county’s tech boom: she studied at one of China’s top universities and her company hit it big with an award-winning game that was published on Nintendo’s Switch console and the PC gaming platform Steam, with plans for roll-out on other game platforms.

Now her ambitions – and those of many others across China’s giant tech industry – are facing a reckoning, amid rising state control over the sector, tightening regulation and a biting trade war with the United States stymieing growth.

“(In 2015) doing a start-up was popular. So many young people set up small businesses, like developing games, and dreamed of making big money as well as being free,” she said. “But they found out now it’s really unrealistic.”

Wang says she has had to abandon for now hopes of releasing the game on new platforms in China, closing the original studio that developed it and working instead on updates with a skeleton crew of freelancers. She has moved from the Beijing tech hub of Zhongguancun to the city’s cheaper far-west outskirts to cut costs.

She is not alone. Reuters interviewed a dozen tech industry insiders, from gig economy workers to investors, who said that the boom days of easy returns looked to be over.

Until last year, China’s tech industry had enjoyed years of breakneck growth. Firms including Alibaba Group Holding Ltd and Tencent Holdings Ltd almost doubled in value in 2017 alone, making big-ticket investments as part of a multi-billion dollar expansion into cloud, offline retail and finance.

But now the market is feeling the pinch. Hiring numbers are down, company margins are thinner and tumbling technology stocks have wiped nearly half a trillion dollars this year from the value of China’s top listed tech firms.

The biggest names in tech have flagged concerns, including Alibaba and Baidu Inc, who revised down their full-year sales forecasts in recent weeks on the weaker outlook.

“Investments into the tech space have definitely cooled down, measured by almost every metric: number of deals, deal size or fund raising,” said Zhang Chenhao, Shanghai-based Managing Partner at technology-focused Prometheus Fund.

“I think this year is the first time over the last 30 years when greed yields to the fear.”


The technology sector is facing challenges on all sides.

A broader economic slowdown saw China’s third quarter GDP slow to its weakest pace since the global financial crisis. The currency has slid against the dollar and domestic markets are down sharply.

Alongside a series of tit-for-tat trade tariffs, the United States has accused China of stealing technology, barring tech acquisitions by Chinese firms and blacklisting others.

At home, tech companies from social media to gaming and fintech have seen tightening regulation and a heavier hand from the ruling Communist Party.

Gaming and social media giant Tencent has seen its stock price dive by more than 25 percent this year amid a temporary ban on licenses for games, its top revenue driver.

At the country’s top internet forum in Wuzhen this week, officials signaled they would look to rein in the country’s tech giants.

“They can be big but we should also be well-regulated,” said Gao Xiang, vice minister of China’s Ministry of Industry and Information Technology on Thursday.

China’s regulators have already cracked down on everything from rude joke apps to livestream bloggers disrespecting national anthem – sending a chill through the free-wheeling and innovative online arena.

“The people who worry about technology is first older people, second government and third successful people, they hate it and worry about it,” Alibaba’s billionaire executive chairman Jack Ma said at an event in Shanghai last week.

“Normally businesses do innovation and governments talk innovation. In order to protect yesterday’s interests… they will say please don’t do it.”

This year Alibaba has lowered its revenue forecast for the first time since listing in 2014.

Meanwhile, local ride-sharing giant Didi Chuxing, backed by Japan’s SoftBank Group Corp, has cut the subsidies it pays to drivers after being forced to shutter its car-pooling services under a plan agreed with regulators following criticism over the murders of two young female passengers in separate incidents.

“(In 2015) I bought my first vehicle because you could earn almost 800 yuan a day with the subsidies,” says Huang Sun, who used to drive full-time for the company but now says he only takes rides when he is bored. “Now maybe you can’t even earn 200 yuan if you drive all day.”


The chill across the tech industry is reflected in hiring data.

According to statistics released by leading local job website, job demand in the IT and internet sector has dropped by 51 percent as of September compared with a year earlier.

Companies have slowed hiring in certain fields, including sales and software development, recruiters and human resources staff at Alibaba and Tencent said, asking not to be named because they were not authorized to speak to press.

Tencent did not respond to a request for comment. Alibaba had no immediate comment.

“In general, they are all reducing headcount, or they’re not preparing a very big budget for headhunting,” said Mocca Wang, who is the director of the IT industry unit at international recruitment firm Spring Professional, which works with companies like Alibaba, Tencent and Baidu.

Smaller start-ups, a key driver of growth in the sector, are also being squeezed by tighter access to credit.

“These companies can’t get capital and can’t invest,” said Wang. “They’re going bankrupt.”

China’s tech firms are, to be sure, still posting sales growth rates above overseas peers.

Tencent chief Pony Ma told state television in a recent interview that there was still “tremendous potential” in the market, though admitted “there are challenges of various kinds right now”.

But the numbers suggest tougher times lie ahead – a worry for China’s steeply-valued private tech start-ups and newly-listed firms such as smartphone maker Xiaomi Corp and Tencent-backed food deliver giant Meituan Dianping.

“Before the feeling was that anyone can get funding, that if you throw out words like blockchain, AI, big data and machine learning that would get you funding,” said Benjamin Speyer, managing director at Hangzhou-based consultancy Serica.

“Now everyone is a bit more nervous about potentially making a mistake with their money.”

Alibaba, whose China commerce sales growth dropped to its lowest rate since 2015 in the last quarter, said it would take less income from its platforms for the near future, effectively subsidizing merchants, in an effort to retain brands on its platform.

Competitor Inc, which posted a loss last quarter, is seeking to revive profits by outsourcing some of its 2.5 million square meters of warehouse space.

The country’s upstart technology workforce are even more keenly aware of the slowdown.

Even as property and living costs continue to rise sharply in major cities such as Beijing and Shanghai, tech workers say salaries can’t keep up.

Game developer Wang Miaoyi works in her studio that is located in her appartment in Beijing, October 29, 2018. REUTERS/Thomas Peter

Beijing-based Liu Wangwei works as a software engineer at one of the country’s highest-valued start-ups and rents a two-bedroom apartment because his partially-disabled mother often stays with him.

He said his rent has risen by almost 50 percent since they moved to the area in 2014 and says he is considering moving to another of the company’s offices in a smaller city where the government subsidizes housing for technology workers.

“I always thought I could join the well-known tech companies and never worry about money,” said Liu. “When I was in university our teachers gave us encouragement to be like (Steve) Jobs and Jack Ma. It’s not the same as we were promised.”

Reporting by Cate Cadell; Editing by Adam Jourdan and Alex Richardson

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

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

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

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

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

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

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

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

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

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

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

More Great WIRED Stories

Weighing The Week Ahead: Market Storm Averted?

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

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

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

Has the stock market storm been averted?

Last Week Recap

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

The Story in One Chart

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

A close up of a map Description automatically generated

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


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

The News

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

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

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

The Good

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

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

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

But a look at JOLTS requires examining the Beveridge Curve!

The Bad

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

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

The Ugly

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

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

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

These names should be untouchable.

The Week Ahead

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

The Calendar

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

And of course – continued tweets, leaks, and speeches. has a good U.S. economic calendar for the week. Here are the main U.S. releases.

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Next Week’s Theme

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

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

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

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

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

Has the storm been averted?

I have recently offered some bearish viewpoints and suggested some flaws. This week, let’s try it the other way around, starting with a list of what might go right. publishes both stock and bond commentary, part of their free services. Patrick J. O’Hare’s market assessment, “From the Midterm to the Final Exam,” is interesting and balanced. I will take a closer look, once again intermingling my comments in cases where there is something important to add. I’ll put my thoughts in italics. While data-based, these represent my own conclusions. I act on them, but you should make your own decisions!

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

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

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

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

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

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

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

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

Possible catalysts?

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

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

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

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

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

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

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

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

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

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

The Featured Sources:

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

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

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

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

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

Guest Commentary

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

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

Insight for Traders

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

Insight for Investors

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

Best of the Week

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

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

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

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

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

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

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

Stock Ideas

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

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

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

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

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

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

Personal Finance

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

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

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

Watch out for…

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

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

Final Thought

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

Scenario One: Escalation of the Trump Investigation

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

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

Investment implications:

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

Scenario Two: Death to Initiatives Requiring Cooperation

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

Investment Implications:

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

Scenario Three: Impeachment and/or Constitutional Crisis

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

Investment implications:

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

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

I’m more worried about:

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

• Additional crippling of compromise.

I’m less worried about:

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

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

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

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

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

Has the stock market storm been averted?

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

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

Additional disclosure: GIS vs short calls

A Phony Elon Musk Scam, Foreign Malware Samples, and More Security News This Week

Did you hear? There was an election this week! Not only does that mean the 2020 campaign has officially started (help!) but also that we saw a ton of misinformation trying to affect the vote. That includes from the secretary of state of Georgia, who accused his Democratic opponent of hacking the state’s voter roles, even though all evidence strongly suggests that’s not the case. At least, though, law enforcement had a massive coordinated effort to protect the election from actual hacking.

While it was mostly election coverage this week, some non-political news popped up as well. Popular drone company DJI had a vulnerability that would have allowed attackers to take over user accounts, giving them access to flight paths, photos, and more. We took a look at how to control what permissions websites can access on your computer. And we had a long, on the record conversation with Sue Gordon, the second-highest ranking official at the Office of the Director of National Intelligence.

Also, sorry, one more voting story: You can’t do it online, unless you’re military or live in one of a handful of states that allow it. Which honestly is probably for the best.

And there’s more! As always, we’ve rounded up all the news we didn’t break or cover in depth this week. Click on the headlines to read the full stories. And stay safe out there.

A Fake Elon Musk Scammer Scored $180K in One Day

There’s a popular Twitter scam that you may have seen—but hopefully not fallen for—where imposter accounts posing as someone famous ask people for a little bit of bitcoin, promising lots more bitcoin in return. Tale as old as time! But a recent campaign proved more successful than others, thanks to taking the extra step of hacking into verified accounts like those of Pantheon Books. By switching the user name and profile picture to Elon Musk, they made it seem like it was the billionaire’s verified account. They took home $180,000.

Dutch Cops Compromise IronChat Crypto App

End-to-end encrypted messaging services offer great protection against potential snoops, even if they’re not invincible. If law enforcement gets your phone, for instance, they can still see any messages you haven’t erased. But Dutch police appear to have recently managed to actually compromise the encryption of a service called IronChat, leading to the arrest of the alleged owner of the company and his partner, who have been accused of money laundering. Most of which is just a good reminder that you should just be using Signal.

Flaw in Crucial and Samsung SSDs Leave Encrypted Data Vulnerable

Researchers this week revealed several critical issues in popular solid state drives. Poor password set-ups let them be unlocked with relative ease, and Microsoft’s BitLocker encryption protection apparently did little to act as a backstop for Windows machines. The researchers derided the home-grown cryptography deployed by the affected companies, noting that open-source software tends to be safe, since it can be vetted by a wide number of parties.

US Cyber Command Will Start Sharing the Foreign Malware It Finds

Few organizations have as much insight into exotic malware as US Cyber Command, a branch of the Department of Defense. Now, instead of keeping that intel to itself, the group’s Cyber National Mission Force will upload samples of foreign malware to VirusTotal, a popular malware repository. They seem to be sharing legitimately useful code already, including new details about the LoJack malware that Russia’s Fancy Bear hackers recently used as part of a so-called UEFI rootkit attack.

Is Realty Income Getting Too Big For Investors' Own Good?

Source: Shutterstock

REITs depend more heavily on their ability to raise capital than most other companies because unlike companies that have discretion to reinvest the cash they generate, REITs are required to distribute much of their cash flow in the form of dividends.

It’s not surprising then that if a REIT has difficulty raising capital, it will potentially stop growing, and depending on their operational abilities, could wither away and fade. As a REIT gets bigger, therefore, it must raise higher and higher amounts of capital to fund additional growth opportunities – which include either acquiring another REIT or buying additional properties.

The darling of the REIT world and perhaps the REIT with the lowest cost of capital is Realty Income (O), which as most readers know, owns triple-net lease single-tenant properties and rents them out to the likes of Walgreens Boots Alliance (WBA), CVS Healthcare (CVS) and others.

With a market cap of $16 billion and a portfolio of about $15.6 billion in real estate assets at cost, the amount of capital it needs to continue to grow seems daunting. But investors are accustomed to quarterly dividend increases and if that streak gets broken – a streak I poked fun at in a previous article – investors might get concerned – even if for no legitimate reason.

The growth bogey becomes even more difficult when prior investments – good investments I might add – might actually hurt future results.

Above Market Leases

One of the tables that jumped out at me when looking at Realty Income’s Q3 10Q is a table that shows its In-Place Lease Intangibles. This table highlights the impact of above or below market leases on potential future revenue and amortization expenses. In this case, the tables show a net decrease to revenues in future years because current leases have lease terms that are above market rates. In 2019, rental revenue is expected to decrease by $15M and amortization expense is expected to be $97.6M higher. This results in lower net income in 2019 if all other variables are held constant. The table also shows the impact on above-market leases for each subsequent year on revenues and amortization.

Source: Realty Income 10Q – 2Q2018

The increase to amortization expense is the amount that must be amortized each year due to the difference between current market rates and in-place lease terms. When properties are acquired, the acquirer takes on the in-place lease terms, barring any clause that will allow a tenant or new landlord to change them. Whether they are considered above or below market depends on the calculation of the discounted value of the current contract versus that of the discounted value of a contract at prevailing market rates and includes vacancy, re-leasing costs, etc. in the calculation.

When those values differ, there is the potential for an asset or liability to be created. That is, when an above-market lease is acquired, as in this case, the current leases are considered assets and must be amortized. But while the landlord benefits from above-market rates, when those leases come up for renewal, there is a possibility that lease terms rates might be adjusted downward.

Realty Incomes Above Market Leases – acquisitions needed

With a net decrease to revenues due to resetting of above-market leases, I wondered, how many properties does Realty Income need to acquire to maintain the same FFO, or better yet, meet analyst expectations for 2019 and 2020?

In the table below, I used the YTD data through 2Q and annualized it to arrive at a full year forecast for 2018. The FFO/share forecast is in line with management’s guidance but on the lower end of the guidance range.

For 2019 and each subsequent year, I assumed a reduction in rental revenue per the table above, as well as an increase in amortization, which leads to an estimate for net income. The FFO figure is based on adjustments to 2018’s FY forecast, and accounting for the revenue differences expected in each subsequent year, assuming margins remain consistent. A brief analysis using a more robust model with varying margins revealed comparable conclusions.

In this example, I assumed no new shares outstanding, which I briefly address later in the article.

Source: Realty Income 10Q – 2Q2018

With the reduction in revenue and increase in amortization expense, FFO per share would decline to $3.11 per share. That’s a decline of FFO of about $0.05 per share, which translates into $15M of FFO and $21M of revenue.

Based on Realty Income’s current FFO margins, it would need another $263 million in acquisitions to make up for the impact of above market leases in 2019 and then another $250 million to compensate for the impact of above market leases in 2020.

Source: Realty Income 10Q – 2Q2018

Not a big deal considering it is looking to invest $1.75 billion for full year 2018 and has already invested about half of that amount YTD through June 2018.

Acquisitions needed to meet FFO expectations

But analyst expectations at the time this analysis was completed are for FFO to reach $3.27 per share in 2019 and $3.37 per share in 2020. If maintaining the status quo looks easy, what would it take to meet analyst expectations? Again, the amount of acquisitions needed look reasonable, but the numbers certainly start to look daunting.

To meet analyst estimates of $3.27 FFO per share, my estimates show that Realty Income needs an additional $783 million of acquisitions – preferably towards the beginning of the year, to reach $3.27. Since the company has been investing at a $1.5B to $1.75B rate annually, the estimates still look well within reach.

The same analysis shows that it would need another $500 million in 2020, or $1.2 billion over the two-year period – to meet consensus forecasts of $3.37 in 2020. Still not a big deal.

Source: Realty Income 10Q – 2Q2018

Capital needed to fund acquisitions

The challenge is increasingly becoming the need to raise capital. Not that Realty Income has any issues raising capital. But issuing more equity dilutes current shareholders and issuing more debt requires higher interest payments.

Realty Income only has about $30M in cash on the balance sheet so it must raise most of the capital needed for the acquisitions or use its current revolvers. At an estimated FFO per share of $3.27, Realty Income must generate approximately $931M in FFO in 2019, according to our calculations. That’s another $30M in FFO above the current annualized FFO rate of $902M before the impact of above market leases. How much capital does it need to raise to generate $931MM in FFO?

The company paid out $373M in dividends through June 2018. If they don’t raise the dividend again this year – I know, not likely – it would pay out another $373M in dividends. Net cash provided by operating activities was $477M for the six-month period so we can assume it will be similar during the 2H of 2018. Once dividends are paid, the company is left with $104M in additional cash, bringing its total cash on the balance sheet to $134M.

For $783M worth of acquisitions and $134M in cash, it would need to raise approximately $648M.

An Equity Raise

To raise $648M, the company would need to issue an additional 11M common shares at a price of $57. No big deal, but that figure is actually higher if we consider per share metrics. With an additional 11M shares, the FFO for 2019 of $931M would be $3.15 per share – and here we go again, calculating the amount needed to get to $3.27 FFO per share. In fact, by only issuing additional shares, the math just doesn’t work.

A Debt Issuance

What if the company issues $648M in debt? For starters, it would cost roughly 4%, which translates into a reduction in net income and FFO of about $25.6M, which results in a higher level of acquisitions to make up for the additional interest costs.

Again, quite possible, but as you can see the figures are daunting and at some point we will be extremely concerned that growth can continue at attractive rates.

Our Take

There were plenty of assumption in my calculations. But the reality is that Realty Income’s acquisition nut is starting to get pretty big. Even if market lease rates increase to the point where lease rates can be re-priced much higher when tenants re-sign, the amount of new properties needed to drive growth will have to come increasingly from new properties.

Re-leasing Rates

We do believe re-leasing rates will compensate some of the loss of rental revenue from above market leases and contribute to the expected growth in FFO. For example, the rent recapture rate for expired leases has been 104.7% through June 2018, indicating that lease renewals for those leases not included as assets on the balance sheet could be favorable. In other words, some leases have been fully amortized and may now have below-market lease rates that could be increased at expiration – They make up a greater share of the total leases under contract.


Even though we are calling for the need for a greater level of acquisitions, however, if returns are favorable, dispositions could enhance returns and be another form of raising capital. Selling underperforming assets could improve the metrics and lead to a more conservative yet higher value-add acquisition strategy that results in a smaller incremental acquisition figure.


  • Selectivity – The table below highlights the volume of deals sourced and the percentage of deals completed as a percentage of total volume. The declining selectivity percentage is an indication of a robust opportunity set. But I wonder, with the acquisition requirement getting increasingly large, will management be able to remain as selective even if the opportunity set deteriorates. At some point, the investment parameters may have to be loosened in order for more investments to be approved.

  • Margins – Despite the size advantage provided by economies of scale, Realty Income’s G&A costs are already well below the net lease peer median. Over the last couple of years, they seem to have turned upward, which could have a negative impact on net income, FFO, and AFFO even though they remain the lowest in the industry.


From a P/FFO perspective, the stock does look fairly valued at a P/FFO of 18.9.

But with an increasingly challenging growth goal and some short-term headwinds as we’ve described above, we are reducing our rating to Neutral. That means, we will continue to hold the stock in the portfolio for its 4.6% dividend, stability of FFO, and low stock price volatility.

Note: Since this analysis was completed, Q3 results have been announced and while positive, we also note that consensus estimates for AFFO per share have been raised further to $3.30 and $3.46 in 2019 and 2020, respectively.

Disclaimer: This article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It does not provide individualized advice or recommendations for any specific reader. Also note that we may not cover all relevant risks related to the ideas presented in this article. Readers should conduct their own due diligence and carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances.

REITs, Opportunities, & Income (ROI)

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Disclosure: I am/we are long O.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This Famous Airline Thought It Would Offer Veterans Special Pre-Boarding. The Reaction Was Shocking

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

Some things are, though, universal, aren’t they?

That must be what the bosses at Virgin Australia thought when they offered veterans priority boarding.

But Australia isn’t necessarily like, say, America.

Frankly, nowhere is. 

When you’ve lived in different countries on different continents — guilty as charged — you garner a wider perspective on how people think and, just as importantly, the nuances that go into their feeling processes.

So, instead of a gloriously positive reaction, some veterans rather thought Virgin should take its offer and shove it back in the cargo hold it was stored in.

Oh, and “faux American bollocks.”

Instead, she suggested: “Spend more on suicide prevention and health support.”

Neil James, the head of the Australian Defence Association also suggested there were better ways to help. 

“There’s a fine line between embarrassing them and thanking them and, in some cases, where they’re suffering a psychological illness, effusively thanking them in public might not necessarily help them,” he said of veterans.

On Twitter, many piped up with similar feeling.

Sample, from John H. Esq.: “Jeez! Do veterans really want this type of peurile [sic] Americanised faux recognition of their service?”

The airline seemed so stunned by the reaction that its CEO John Borghetti issued this statement: 

Over the coming months, we will be working consultatively with community groups and our own team members who have served in defense to determine the best way forward.

In America, there’s considerable — and, some might say, superficial — support for veterans.

Indeed, our nation has many curious, vaguely militaristic and nationalistic habits that other nations find curious. Flag unfurlings and national anthem renditions before every single sporting event, for example.

In Australia, though, perhaps veterans want tangible benefits, rather than being used for marketing purposes.

Interestingly, one of Virgin’s rival airlines, Qantas says it has no intention of offering veterans priority boarding.

It offered this statement: 

We carry a lot of exceptional people every day, including veterans, police, paramedics, nurses, firefighters and others, and so we find it difficult to single out a particular group as part of the boarding process.

Doesn’t that seem wise?

Clever Tech Keeps America's Disabled Farmers on the Job

In 1982, Ed Bell was 21 years old, owned 1,000 hogs, and was running his parent’s farm in Hagerstown, Indiana. He was just beginning to get serious with a girl named Debbie. But Debbie had a jealous ex-boyfriend, who had a .44 caliber revolver.

“I was shot, and paralyzed from under my arms all the way down,” he says. After three months in the hospital, Bell came home in a 28-pound stainless steel wheelchair that he could barely navigate through his family’s log cabin home. His dreams of hog farming fell apart. His parents nearly lost the farm.

It was technology, coupled with his tenacity, that got him back to work. Bell now has two electric wheelchairs, one with treads for off-roading through his fields and another that allows him to stand up. Mechanical lifts made by a company called Life Essentials get him in and out of his tractors, the controls of which have been modified so he can operate them solely by hand. The only reason he had time to talk to me in the middle of harvest was because a storm had rolled in.

Bell’s story is unusual. But its narrative arc—farmer gets hurt, technology helps farmer get back to work—is not. A recent study published in The Journal of Agriculture Safety and Health suggests as many as one in every five US farmers suffers from a disability that impacts their physical health, senses, or cognition. Offsetting that statistic and keeping Americans fed are technologies like four-wheel-drive golf carts, auto-locking tractor hitches, and even boring old smartphones.

For nearly 30 years, a federally funded program called AgrAbility has been central to connecting disabled members of the ag community with whatever help fits their need. Yet its future is uncertain. President Trump has redlined it from both budget proposals he’s sent to Congress. Legislators from rural states added it back, but the program’s precarious fate makes clear that mishap is always on the horizon for farmers.

Spring Awakenings

Bell was at a farm show in Kentucky when he came across a booth for a new Purdue University program called Breaking New Ground. Its director, a physical therapist named Bill Field, was handing out ear plugs as conversation starters about disabilities and ag. Field got into this space in 1979, when a farmer, paralyzed after his truck rolled over, called Purdue University’s USDA Extension to see if they had any folks who could help him get back into his tractor. The university passed the message along to Field, who gathered up some engineering students. Together, they rigged up a mechanical wheelchair lift and modified the tractor’s cab so the farmer could operate the machine solely by hand.

Inspired by the success, Field established Breaking New Ground. At first, it was just one of many similar ad hoc state-level initiatives that had been around for decades. But Field was persistent, and the program built up steam. Bell rejected Field’s help at first—“My pride was in the way,” he says—but before long his was a regular face at the program’s many workshops and conferences. In 1990, Congress added a line item to the Farm Bill mandating the Department of Agriculture fund an “Assistive Technology Program for Farmers with Disabilities.” This became AgrAbility. Purdue’s Breaking New Ground was selected as the headquarters for the national program.

In his 2017 and 2018 budget proposals, President Trump eliminated AgrAbility from the USDA’s finances. It was up to members of Congress to ensure the program kept going.

Paul Jones

Despite its hands-on origins, AgrAbility today acts as a facilitator and, when needed, funder of technology, services, and other social resources for disabled members of the ag community. One of its premier resources is its Assistive Technology Database, an index of more than 1,400 vetted solutions for myriad problems. Each submenu is a cornucopia of mobility tech. Has arthritis put a cramp on your shop work? Check out the plethora of easy-grip hand tools. Blown out knees or creaky hips? Telescoping technology can help you tend your fruit trees. One submenu features a variety of lifts for tractors and other farm equipment—customized forklifts, modified cranes, homebuilt cherrypickers, commercial cranes and lifts.

“When I got hurt, the doctor told me: ‘It’s sad you got neck broken, but you couldn’t pick a better country and a better time in history to have it done,’” says Bell. His doctor wasn’t just referring to medical science, mobility tech, or even compassionate care. The US is one of the most progressive nations in history when it comes to legislation for disabled people. AgrAbility has been part of the annual Farm Bill (the current version of which is wallowing in the widening congressional gyre) since 1990. Barack Obama was the first president to include it in his budget, earmarking more than $4.5 million for the program. In his 2017 and 2018 budget proposals, however, President Trump eliminated AgrAbility from the USDA’s finances, “to direct funding to higher priority activities.” Once again, it was up to members of Congress to ensure the program kept going.

If AgrAbility does somehow wind up on this administration’s cutting room floor, it won’t be for lack of need. The ag industry is worth about $1.37 billion—a full percent of the US GDP. It’s hard to calculate how much of that is propped up through assistive care and technology. However, another trio of studies released this year confirms AgrAbility’s effectiveness for improving mental health, physical independence, and overall quality of life.

Disability doesn’t have to be as debilitating as paralysis to curtail a person’s ability to farm. Bad vision or hearing can be debilitating. And many in this profession struggle with mental illness—farming is a low-margin industry with lots of year-to-year uncertainty. “The largest percentage of our clients don’t suffer from injuries, they have what we would call chronic conditions, like arthritis and lower back impairments,” says Paul Jones, the project manager at the National AgrAbility Project in Indiana. “The average age for farmers now is 57, so there’s a lot of wear and tear on the body,” he says.

Ed Bell is now 57, and he can attest to that. “When I was younger, even in a wheelchair I had endless energy,” he says. “I don’t do anything fast anymore. I delegate. I hire help. I maybe don’t work as hard every day, but I still get it all done.”

More Great WIRED Stories

Ford Truck Sales Slowing

Many economic data points have been tapping the brakes recently indicating slower economic activity. One data point that we like to look at is Ford (NYSE:F) truck sales. Trucks are typically purchased by small businesses and contractors, so they provide a good read on the health of the small business sector. Based on these sales totals for October, small businesses took a little bit of a step back.

Last month, sales of Ford F-series trucks totaled 70,438, which was down over 7% from last October’s total of 75,974. Although one caveat to this decline is that in 2017 sales totals were boosted by repurchases of vehicles flooded in the hurricanes making for a tough y/y comparison. Outside of 2017, this October’s sales were the highest since 2004, which also lends some credence to that argument even if this year did have an extra day of selling compared to last October (26 vs. 25).

On a YTD basis, sales of F-Series trucks have totaled 749.5K, which is still up slightly from last year’s pace and is the strongest YTD reading through the first ten months of the year since 2004.

Microsoft Will Not Use Personal Data For Profit, Says Satya Nadella

Microsoft CEO Satya Nadella took a potshot at Google and Facebook in an interview with the London Times yesterday, saying Microsoft (msft) doesn’t use customers’ personal data for profit, unlike some other companies.

It’s not that it doesn’t have the data — LinkedIn, which Microsoft bought in 2016, counts 562 million users, and Bing remains the No. 3 search engine worldwide, with Microsoft websites accounting for 24% of search traffic on U.S. desktops.

“We don’t want to overmonetize. If anything, one of the things we’ve done is to is to make sure that the utility is maximized for the users,” Nadella said.

Nadella has called data privacy “a human right” in the past, as has Apple CEO Tim Cook. He said at a Fortune event in June that Apple (aapl) executives predicted that the creation of “detailed” online profiles about users “would result in significant harm over time” and that those profiles could be “used for too many nefarious things.”

Microsoft may have learned its lesson in the early 2000s, when it faced antitrust authorities in the U.S. and the EU. Now the younger generation of tech giants is facing the music. Google (googl) has been fined billions by the European Commission in antitrust cases. Facebook (fb) is still trying to recover from the Cambridge Analytica scandal earlier this year, in which personal data for as many as 87 million users was improperly accessed.

When Europe’s General Data Privacy Regulation went into effect in May, it had repercussions for internet companies around the world. Since then, California approved its own data privacy law that will go into effect in 2020, and now Sen. Ron Wyden of Oregon has proposed a nationwide privacy law. Wyden’s Consumer Data Privacy Act proposes not only fines of up to 4% of their global annual revenues but also personal fines and jail time for CEOs.

Microsoft has extended GDPR-style rights to users outside Europe, and Nadella said his competitors can decide whether to follow suit. He said he was not one to pick “on my competition’s business model” but that customers “deserve a choice” about how their data is used.

Nadella said that Bing and LinkedIn couldn’t succeed long-term if they abused customer data. “Users should only use that service if that customer data creates utility for them. If you think about LinkedIn, it is all about economic opportunity for the member. It’s not about taking member data and using it for something else,” he said in London.

Since Nadella succeeded Steve Ballmer in February 2014, Microsoft’s market value has nearly tripled to more than $800 billion, making it the world’s second-largest listed company after Apple. Nadella has led the company into new markets of cloud computing, games and artificial intelligence, and Microsoft bought open-source repository GitHub for $7.5 billion this year.

Should You Buy Or Sell Apple For No Longer Disclosing iPhone Sales Numbers?

Apple (NASDAQ:AAPL) released its Q4 results on Thursday, beating analysts’ estimates in earnings, revenue and iPhone average selling price. In the company’s conference call, CFO Luca Maestri made the shocking revelation that Apple will no longer be providing iPhone, iMac and iPad numbers.

The news caused the stock price to drop from $222.22 at Thursday’s close to as low as $206.08 after-hours.

Apple stock price Q4

Source: Google

Although Apple left the announcement until the conference call, the significance of the decision is huge. Over 60% of the company’s revenue in 2018 has come from iPhone sales alone, meaning that the smartphone device is by far its most important product.

iPhone sales share of Apple’s total revenue worldwide

iPhone sales

Source: Statista

Whilst most public companies try to warm to their investors, Apple’s decision to withhold information that was previously provided could be perceived as giving investors a cold shoulder. I wouldn’t go as far as to say that Apple has burned a bridge here, but the company certainly has not strengthened its relationship with the shareholders. Nonetheless, shareholders are partnered with Apple to ride their coattails and reap the benefits of their financial success, not to make friends.

In order to decide how we should react to Apple’s new shady stance, we must consider why the tech giant has made the move. Is it obfuscating information to deceive investors from a much darker truth here? I would argue not. Apple is far from being in dire straits and has been demonstrating strength in a time when the stock market bears are winning.

Taking a look at its Q4 earnings, it would seem that the company is doing well too. EPS came in at $2.91, versus analysts’ expectations of $2.78. Revenue hit $62.9 billion, higher than the $61.57 billion expected. The average iPhone selling price demolished expectations of $750.78, coming in at $793.

The only area that Apple fell short was on iPhone sales, coming in at 46.89 million, not 47.5 million as forecasted. So, the only area that the company failed to meet expectations is the only area that it is now hiding. What should we make of this?

Well, this is not the first time Apple has missed analysts’ targets of iPhone numbers. In 2014, 2016, 2017 and, of course, 2018, it fell short on analysts’ expectations of iPhone sales. Nonetheless, the company continued to prove analysts wrong and excel in all other areas. Just because Apple missed analysts’ iPhone sales expectations does not mean it failed.

I don’t like analysts anyway

Leading up to Q1, anxiety about how well the iPhone X would or would not sell shook Apple stock price. When the company eventually announced on February 1st that its 10-year-anniversary, industry-shifting flagship failed to meet sales expectations in Q1, the stock price slipped to its lowest in 2018.

Apple Q1

I saw this as an immediate buying opportunity. Apple sold 77.3 million iPhones instead of 80 million as expected by analysts. Was it now a lousy company because it sold just under 3 million iPhones than some Wall Street nerd had predicted? Of course not. 77.3 million is a gargantuan number of anything, and selling 77.3 million of your main product is unquestionably an impressive feat. Thus, analysts’ predictions in terms of iPhone sales actually mattered very little to me – all it did was bring down Apple stock price for me to buy more.

However, from Apple’s perspective, analysts’ predictions matter, as they are damaging to the stock price. Apple missing the numbers, which eventually prove to be somewhat unfounded and arbitrary, makes for great headline stealers, but this is not an accurate reflection of the company’s achievements.

Whilst the company continues to outperform financially, Apple suffers far too much from analysts’ expectations. By hiding these numbers, the stock price won’t be as vulnerable any more.

CFO Luca Maestri said in the conference call that the number of units Apple sells each quarter is “not necessarily representative of the underlying strength of our business.” He added that “a unit of sale is less relevant for us today than it was in the past, given our breadth of our portfolio and the wider sales price dispersion within any given product line.”

Maestri also reminded shareholders that “top competitors in smartphones, in tablets, in computers do not provide quarterly unit sales information, either.” It’s true – Google (NASDAQ:GOOG) doesn’t reveal Pixel numbers. Apple also doesn’t reveal Apple Watch numbers, and its increasingly popular AirPods are listed in “other products”.

Source: Apple 10-K 2017

The bottom line here is: does Apple’s decision to hide iPhone sales change the fundamental structure of the business? Absolutely not. Will the average consumer who has their eye on a new iPhone be affected at all by this news? Definitely not. The reasons why people are buying Apple products have not changed in the slightest.

Therefore, shareholders who believe in Apple should not be deterred by the company’s new decision. If anything, this could be one of the last chances to buy an analyst-iPhone-expectation-related dip.

Disclosure: I am/we are long AAPL.

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.

Carlsberg AS ADR B (CABGY) CEO Cees 't Hart on Q3 2018 Results – Earnings Call Transcript

Carlsberg AS ADR B (OTCPK:CABGY) Q3 2018 Results Earnings Conference Call November 1, 2018 3:00 AM ET


Peter Kondrup – VP, IR

Cees ‘t Hart – President and CEO

Heine Dalsgaard – CFO


Michael Rasmussen – ABG

Sanjeet Aujla – Credit Suisse

Jonas Guldborg – Danske Bank

Hans Gregersen – Nordea

Richard Withagen – Kepler Cheuvreux

Soren Samsoe – SEB

Trevor Stirling – Bernstein

Ed Mundy – Jefferies

Olivier Nicolai – Morgan Stanley

Andrea Pistacchi – Deutsche Bank


Cees ‘t Hart

Good morning, everybody, and welcome Carlsberg’s Q3 2018 Conference Call. My name is Cees ‘t Hart. And I have with me CFO Heine Dalsgaard and Vice President of Investor Relations Peter Kondrup. I will go through the current state of the business and highlights of the quarter, and Heine will talk you through the regions and outlook.

Before I go through the Q3 numbers, let me evaluate on the progress of our business. Internally, we apply three lenses and look at the financial, strategic and organizational health of our company.

Financially, the group continues the positive trajectory, and we are confident that 2018 will be a year that delivers good top line growth, margin improvement and a very healthy cash flow.

At the same time, we have been and are investing significant funds in the business to strengthen the growth profile of the company. From the outset of the year, our ambition was to shift gears to growth. And after the first 9 months, we are very satisfied with execution of our plans for the year, albeit we have been helped by a very warm summer in Western Europe. A proof point of this year’s financial health is last week’s upgrade of the full year earnings expectations, which Heine will get back to.

Strategically, we are making good progress on our growth priorities in Asia and for craft, specialties and alcohol-free brews, and we continue to invest in further strengthening our capabilities within areas such as digital and data, sales and marketing as well as the roll out of DraughtMaster.

Looking at the organizational health of the business, we are also moving in the right direction. Although it is an ongoing journey, our winning culture has become much better embedded across the group.

Our pool managers and people in areas such as commercial, digital, data, finance and supply chain have strengthened and is characterized by a winning spirit. In addition, we see very good traction behind bringing to life our purpose of brewing for a better today and tomorrow, including our ambitious sustainability program Together Towards Zero.

With that intro, let us now focus on the Q3 performance. Please turn to Slide 2. Organic net revenue grew by 9% in Q3. This was driven by 1% price mix and a strong 7.6% organic volume growth, not least driven by impressive results in Western Europe.

For the 9 months, organic net revenue growth was 6.4%. Before, this volume growth was 100 basis points higher than the organic volume growth due to the increased ownership of Cambrew, which was consolidated from the 1st of August. Reported net revenue grew by 7.4%, positively impacted by Cambrew and negatively by currency movements. The negative currency impact was broadly based, now with the largest impact coming from Eastern Europe.

Please turn to Slide 3 and a few comments on our international premium brands for which we saw good growth. 1664 Blanc continued its strong performance and grew by 49%. We saw particularly strong growth in markets such as China, Russia, Ukraine and France. Grimbergen continued its double-digit growth and grew by 15%.

The growth mainly came from Western Europe, with particularly strong results achieved in France. Our largest brand Tuborg grew by 11%, supported by strong growth in China and India. The brand also grew in several markets in Western Europe, such as Denmark, Serbia, Croatia, Bulgaria and Germany.

In Turkey, Tuborg continued its strong performance, driven by our very dedicated partner. In Q3, Carlsberg volumes were up by 9%, driven by strong results across many markets, including Denmark, Sweden, UK, Poland, China, Malaysia, India and Russia.

Please turn to Slide 4 and a brief update on some of our strategic priorities. The craft and specialty portfolio grew by 29%, with positive contribution from many markets across the group. In particular, we saw very strong growth in markets such as France, Denmark, Sweden, Poland, UK, Russia and China.

Alcohol-free brews grew by 58% in Western Europe and by 50% in Russia. In Western Europe, the growth was supported by the warm summer, and we saw very strong growth in markets such as Poland, France, Lithuania and Denmark.

In September, we unveiled a new design for the Carlsberg brand, along with a series of sustainable packaging innovations. The new design will be applied to all packaging and glassware and will be available in the first markets in Q1 of next year. One high-profile innovation is the pioneering Snap Pack solution, which is said to reduce plastic waste by more than 1,200 tons per year.

The reason for this reduction is that Snap Pack glues together multipacks instead of using plastic wrap. In addition the Snap Pack, we have made a number of other betterments for the brand, for example, caps which remove the oxygen so that the beer tastes fresher for longer and changing the green-colored ink to a Cradle-to-Cradle certified ink to improve recyclability. We were pleased with the very positive feedback from our customers and the amount of positive publicity that we received globally.

I will now hand over to Heine, who will take us through the regions and outlook.

Heine Dalsgaard

Thank you, Cees. Please turn to Slide 5 and Western Europe. Net revenue grew organically by 8.5% as a result of total volume growth of 10.7% and price mix of minus 2%. Reported net revenue grew by 7.7% due to a negative currency impact primarily related to the Norwegian, the Swedish and the Swiss currencies.

We saw solid price mix in most countries in the region, but two reasons drove price mix into negative territory. Firstly, the warm weather in the Nordics resulted in higher growth of non-beer products, which have a lower net revenue per hectoliter than beer. Secondly, country mix in our export and license business reduced price mix.

As we’ve reported throughout the year, we saw lower volumes to high-priced export markets in the Middle East, but growth in license markets such as Turkey. Adjusting for export and license, price mix was around 0.5% positive for the region.

The strong volume growth was supported by very warm weather in several of our markets, especially in the northern part of the region, largely the same markets that experienced a very bad summer last year. We estimate that our market shares were slightly growing for the quarter.

Looking at a few selected markets, our total volumes in the Nordics grew strongly by 11%, supported by the weather and cycling a particular bad month of July last year. As mentioned, the strong growth of non-beer products led to a negative price mix. In Denmark, we saw good traction of all beer categories, including craft and specialty, alcohol-free and core beer volumes.

Despite a price increase on the Tuborg brand earlier in the year, brand volumes grew by 4%. In Sweden, we saw very good growth of our craft and specialty portfolio and alcohol-free brews.

In Norway, volume, growth and price increases led to a very healthy top line growth. In Finland, price mix improved slightly, despite a negative channel mix with strong results achieved in the off trade.

In France, our craft and specialty portfolio continued to develop particularly well. The French beer market grew slightly, and our business had a very strong Q3 with high teen volume growth, although this was also driven by different timing of certain large campaigns compared to last year.

In Poland, we saw solid volume growth during the summer after a weak beginning of the year, due to our price increase in Q1. This positively impacted price mix along with our successful premiumization efforts.

In the remaining markets in the region, we saw growth in the Baltics, the Balkan markets and the UK, while volumes declined in Greece and in Italy.

Please turn to Slide 6 and Asia. Our Asian region had another strong quarter, although growth as expected moderated somewhat compared to the very strong first half performance.

Net revenue grew organically by 11%, driven by 5.8% volume growth and a solid price mix of 5%. Reported net revenue grew by 12.6% due to the acquisition of Cambrew, which more than offset the negative currency impact.

In China, volume growth slowed down as expected compared to the first half. Nevertheless, volumes grew by 6%, and price mix remained solid due to the continued excellent growth numbers of our international portfolio, which grew by 11%. Our big city expansion in China is well on track, achieving volume and numbers ahead of our expectations.

Our Indian volumes grew by 15%, supported by strong growth of the Carlsberg brand. Price mix was positive in the mid-single digits. As always in India, market conditions varied significantly from state to state.

Overall, we’ve seen a rebound of volumes this year following the very disruptive year of 2017. The first 9 months market growth is estimated at 12% with our volumes growing ahead of the market.

In other markets in the region, Laos was hit by flooding and higher-than-normal rainfalls. This dampened beer volumes, although growth remained solid at mid-single-digit percentages. In Malaysia, we saw good momentum in the quarter. The new sales and services tax was implemented on the 1st of September.

We have fully part on the tax, leading to price increases of 5% to 6%. Consequently, our customers stocked up in August, while destocking in September and October. Nepal growth was mainly strong in the strong beer segment and the economy segment.

On August 1st, we gained control of Cambrew in Cambodia. And we are now in the process of upgrading our systems, our processes and our capabilities. The foundation for turning Cambrew back into a strong business is certainly there.

The brewery is new and efficient, and the Angkor brand is well known by Cambodian consumers. We are very positive about the future for Cambrew, but it will require a few years of additional hard work before we believe we should be there.

Slide 7 and Eastern Europe, please. Net revenue in Eastern Europe grew by 8.2% due to 4.2% volume growth and 4% price mix. Reported net revenue increased by 0.6% due to the weak currencies across all markets, with largest impact coming from the Russian ruble.

The Russian market grew by an estimated 4% for the quarter and [2.3%] year-to-date. The quarter was positively impacted by the World Cup. Our volumes grew by 6% for the quarter, and our market share was flat sequentially. Price mix was impacted by the continued high level of production [ph] activities in the PET segment and was plus 1%.

Results in Ukraine have been very strong in recent years. In Q3, our volumes were down slightly, impacted by less promotional activity and some destocking. Price mix was double digit due to price increases and growth of our craft and specialty portfolio. Year-to-date, volumes in Ukraine grew by 6% and revenue by 25%. In the remaining Eastern European markets, we continued to see solid volume and price mix development.

Please turn to Slide 8 and the outlook for the year. As you saw last week and also as Cees briefly touched upon at the beginning of the call, we increased our 2018 earnings expectations last week from high single-digit percentage organic growth in operating profit to an organic growth of 10% to 11%.

The upgrade was the second one this year and due to the strong third quarter results, which were driven by good progress of our strategic priorities, continued strong execution of Funding the Journey and a warm summer in Western Europe.

We’ve received some questions as to why we issued the release last week in advance of our Q3 trading statement today. The reason is the EU market abuse regulation, or MAR, that came into effect in the beginning of 2017, which is very much a focus area for the Danish FSA and, of course, also for us.

In spite of the strong Q3 and last week’s earnings upgrade, we still expect second half profit to be lower than first half. Let me briefly reiterate the reasons for this. Firstly, in first half, Asia was impacted by the sell in to the festive seasons, and Eastern Europe witnessed an extraordinary strong month in June due to weather.

Secondly, we’ve been accelerating sale investments in second half, which especially will have an impact on central costs. And thirdly, there is a different phasing of certain costs, mainly depreciations, between first half and second half compared with last year.

Based on the spot rates on the end of October, we still assume a negative FX translation impact on operating profit of around minus DKK500 million. Remember when you do a modeling that there will be a 5-month acquisition impact in second half coming from Cambrew.

This corresponds to close to 1 million hectoliter in volume and around $300 million to $350 million in net revenue and an operating profit loss in the magnitude of around DKK50 million. The last is due to the fact that we are increasing costs this year in order to bring the business back into good shape as fast as possible.

Other assumptions for the year were also stated last week and are as follows. CapEx is expected to be between DKK4 billion and DKK4.5 billion. Last week, we adjusted that down from previous expectations of around DKK4.5 billion due to currencies and slightly lower CapEx in Asia.

Net finance cost, excluding FX and fair value adjustments, are still expected to be around DKK800 million, and the effective tax rate is still expected to be below 29%. Back to you, Cees.

Cees ‘t Hart

Thanks, Heine. Before we open up for questions, a few final remarks from my side. The group delivered a strong Q3, with organic net revenue growth of 9% and organic volume growth of 7.6%. We see good growth in our key strategic priorities, such as craft and specialty and alcohol-free brews.

We will be able to deliver good top and bottom line growth for 2018 and at the same time invest significant resources back into the business. Finally, the strong Q3 led us to increase our earnings outlook last week. And with this, we are now ready to take your questions.

Question-and-Answer Session


Thank you. [Operator Instructions] First question comes from the line of Michael Rasmussen from ABG. Please go ahead. Your line is open.

Michael Rasmussen

Thank you very much and well done, guys, on really a good set of results. So three questions from my side. First about, can you talk a little bit about the momentum of DraughtMaster, including how many of these have you installed now, what are the plans for the next 12 months? And also, maybe if you could share how large of a share of your on-trade revenues actually goes through the DraughtMaster system at the moment.

My second question is on France. Heine, I think you mentioned that volumes grew by double digits. I don’t imagine the market grew by that much. So is this something which we should remember when we do our Q4 numbers, and how large in perhaps volume or revenue terms is this timing impact?

And my final question goes to you, Cees, on the marketing spending going forward. What are you thinking here, for example, as a percentage of revenues or any general comments that you can make on marketing spending? Thank you.

Cees ‘t Hart

Thank you, Michael. Good morning. Well, with regard to DraughtMaster, we are rolling out DraughtMaster as we speak in Denmark. And we’re moving to Norway, to Sweden. We have some installations almost close to 1,800 in the UK. So we’re rolling that out. And that means that, in some of the markets, like Denmark, we will totally convert in the course of the coming 2 years. So that means that, in these markets indeed, from the percentage of sales from the on trade, it will be slowly, slowly move – or rapidly moving to 100% in 2020.

We’re going to roll these DraughtMaster systems as well out in our big cities in China in the course of next year. So we feel very confident about the momentum and the impact of DraughtMaster. Heine, on France?

Heine Dalsgaard

Yes. Good morning, Michael. So market share in France is flat year-to-date. We lose on Kronenbourg. So mainstream lager is declining, while we are gaining on Grimbergen, Tourtel and Blanc. It is important to remember that the strong Q3 is also due to different timing of campaigns versus last year.

Michael Rasmussen

Yes, but, Heine, that’s exactly what I was asking into. So how big was this timing impact? And I understand that that will obviously be a negative in Q4.

Heine Dalsgaard

Yes, we don’t split it. As we said, in Q2, France was not that strong in Q2. Now France is very strong in Q3. So it is difficult to take out one quarter. So the key message here is that there is a different timing of campaigns. Q4 is not the biggest quarter, as you know.

Michael Rasmussen

Okay. Thank you, Heine.

Cees ‘t Hart

And, Michael, with regard to the marketing spending, the percentage this year will be slightly up. In the second half of the year, we will as well continue to invest in SAIL’22 in order to keep the good momentum. We allocated money very much to DraughtMaster, to craft, specialty and to alcohol-free beer.

Michael Rasmussen

Thank you very much.


The next question comes from the line of Sanjeet Aujla from Credit Suisse. Please go ahead.

Sanjeet Aujla

Hi, Cees and Heine, can you just give us some early indications on how you’re thinking about the input cost environment into 2019, what plans you might be taking on pricing or incremental cost to try and mitigate that?

And secondly, just on the UK business in particular, with the Carlsberg relaunch there, how long do you think that business will take to turn around?

Cees ‘t Hart

Good morning, Sanjeet Thank you. Heine?

Heine Dalsgaard

Good morning, Sanjeet. Yes. So on 2019, for good reasons, we cannot give detailed comments on ’19 for now. We will come back to this in February 2019. But it is clear that, with a very positive sort of 2018, we will have a tough base for next year. We don’t comment specifically on 2019. It’s clear, on the positive side, that we have good momentum from our strategic priorities, our tight cost control. Our performance management is very strong.

We will enter ’19 with a strong underlying momentum. We’ve been able to and we’ll continue to be able to invest into our brand activities and also capabilities. And then as you’re saying, on the negative side, there are two main factors.

One is the high input costs, which will require price increases, as we will pass on the higher input costs to our sales prices, and then the tough comps in particular in Western Europe and Eastern Europe.

But the conclusion is, from our side, that the business has a very strong momentum. We believe that we are very well prepared for 2019. And we should be able to continue to grow both top and bottom line.

Cees ‘t Hart

And then, Sanjeet, with regard to the UK, indeed, we just started. And [indiscernible], frankly, I think it will take an investment of 2 to 3 years at least. As we said earlier, we are declining with our brand in a declining mainstream segment. Obviously, we cannot hold the declining of the mainstream segment. But we should be able to hold the decline of our market share.

We have upgraded the visual identity of the brand. We have updated the logo. We have a new bottle. We have several sustainability innovations on packaging. So we’re pretty confident that we will be successful with this re-launch, not only in the UK, but across the globe.

However, please remember that the UK business for us is for not that significant. It is only 1.5% to 2% of group EBIT. But obviously, we do want to change the course of the Carlsberg brand there.

Sanjeet Aujla

Got it. Thanks.


The next question comes from the line of Jonas Guldborg from Danske Bank. Please go ahead.

Jonas Guldborg

Yes. Good morning. Thank you for taking my questions. I have two. First of all, if you could put some more words on the upgrade last week in — where is it coming from? Is it primarily Western Europe and the good weather or what is driving it?

And then the other question would be on Russia and if you’re seeing any change in the competitive dynamics and in that market after the merger between ABI and Efes? Thank you.

Cees ‘t Hart


Heine Dalsgaard

Good morning, Jonas so on the question of the upgrade last week, there are three elements. We don’t split specifically sort of on the three, but there are three main elements here. One is the fact that our sale investments are coming through. So that means top line investments into craft and specialty, alcohol free, DraughtMaster, China, India, it’s coming through.

Second is the continued success and good traction of our Fund the Journey initiatives. We continue to be focused on Funding the Journey. We continue to be focused on tight cost control.

And then the third element, as is very clear, is the unusual weather on top of an unusual bad weather last year, in particular in the northern part of Western Europe. So these are the three main reasons.

Cees ‘t Hart

And with regard to Russia, we can say that the – obviously, here, that the merger’s moving on between ABI and Efes. We’ve seen a very strong program in July in relation to the World Cup. And in that month, our share declined a bit.

But in August and September, we were back on a positive trend. So the merger so far has not impacted us in our share. And obviously, we are prepared for the battle in 2019.

Jonas Guldborg

Thank you very much.


And the next question comes from the line of Hans Gregersen from Nordea. Please go ahead.

Hans Gregersen

Good morning. You mentioned that China, yet you’re growing ahead of expectations. Could you provide a little bit further insight to your commercial development and also if you could sort of indicate to us how many new cities you’re going to add onto 2019 is the first question. In Asia, also in India, can you give a little bit more insight into the growth profile and your market share?

And then finally, on Western Europe, if I got it right, you stated that, excluding the license and export, you had a positive price mix of 0.5 percentage point. I do imagine that soft drinks and water has negative price mix impact. So if adjust for the extraordinary weather impact, what would the price mix have been?

And then finally, you mentioned on Cambrew DKK50 million in extra costs. Should we read your EBIT guidance that we have the 10% to 11% organic growth minus FX? Should we also deduct DKK50 million for Cambrew? Thank you.

Cees ‘t Hart

Thank you, Hans. And good morning. With regard to China, yes, we have a good momentum in China. We’re rolling out our big city strategy there. And by the end of 2018, we will be in 21 cities with 10 added during the year. And for 2019, we expect to add an additional 10 cities, meaning that, by the end of 2019, we should be in 31 cities. We are quite successful in the premium brand segment.

Our total international premium brand portfolio is 11%, and Carlsberg grew by 9% and Tuborg by 10% and 1664 Blanc even by 38%. Our share is up by 70 basis points in that segment. And we are, as we said earlier, pretty indeed positive about the development in China. We’re as well positive about the development in India. The market went up.

But we outgrew the market. We estimated our market share is slightly above 18%. Q3, we looked at a 15% volume increase and more than 20% value increase. We are now number 1 or 2 in 6 states and number 3 in 3 states. And we serve 37,000 outlets versus the universal 64,000. So that’s an update on India, Hans. Heine, over to you.

Heine Dalsgaard

Yes. Good morning, Hans. So we don’t split the sort of price mix impact further. What we’ve said is that, if you take out export and license, it is 0.5. We don’t split it then further on soft drinks and on beer. But in total, it’s in line with our expectations.

On the DKK50 million, it is an acquisition impact. So that means you take the 10% to 11%, and then you take the FX out, the DKK500 million, and then you take the acquisition impact, the DKK50 million from Cambrew, out.

Hans Gregersen

But, Heine, could I just go back to your comments on price mix? It is right to conclude that there’s been a negative mix impact from more sales of water and soft drinks due to this warm summer weather?

Heine Dalsgaard

Yes, absolutely right.

Hans Gregersen

So the underlying performance is actually quite good also in Western Europe.

Heine Dalsgaard


Hans Gregersen

Thank you.


And the next question comes from the line of Richard Withagen from Kepler Cheuvreux. Please go ahead.

Richard Withagen

Good morning. I’ve got two questions, first of all coming back on the UK, on the new Carlsberg launch or the re-launch that you did there, can you talk a bit about how that has been taken up by your trade partners and also perhaps by consumer? Because, obviously, it’s a new liquid, as you’ve stated before?

And the second question is to come back on India. What do you see in terms of market growth? I know that Tuborg is by far your biggest brand. But is the mainstream market growing as well, and what is the growth differential between premium and mainstream in India? And how is the competition with Indian whiskeys?

Cees ‘t Hart

Good morning thank you very much. With regard to the UK, we are – we have just announced that we had a trade visit of some very important customers here to Copenhagen and to inform them about the changes and to show them what we call the betterments. And they were very enthusiastic. And we have gotten already the first big promotional slot for the Snap Pack in Tesco. So that’s a good pickup.

With regard to the consumers, it’s far too early to say that. First of all, it still needs to more or less hit the market. And then we need to see as well the repeat sales. So I think, by June, July next year, we will give you a bit more — we can give you a bit more information about how the consumers appreciated the new betterments. Of course, we have tested this, and we see very encouraging, a very good result out of that. So we are really optimistic and self-confident on that one.

With regard to India, well, that’s a big question because the price indexes are not that different in the market, if you like. Carlsberg is between 120 and 150 index, and Tuborg indexes on 100. So basically, when we see that market, still the further development in terms of penetration. As you know, we go from state to state. We want to be number one and number two in a state. And as at the moment that we are there successful, we only then move to a next state.

And as said earlier, we’re totally now in 9 states. The Carlsberg brand as such has 30% of premium in India. We see the market still growing. And obviously, that is in some areas on the expense of the hard liquor. It’s how we call it a conversion market.

And in that respect, we feel that the market growth will continue in the coming years. We said earlier it will not be a kind of straight line to continuous growth. There will be some hiccups. It’s 3 steps forwards and sometimes 2 steps back. But 2018 so far has been three steps forward with – in Q1 30% growth and Q2 so far 7% growth in total.

Richard Withagen

And the – in terms of your brands Carlsberg and Tuborg, not specifically for Q3, but maybe for the 9-month period, which one grew faster in India?

Cees ‘t Hart

I don’t have that information because, basically, both of them move in the same kind of direction. So I can’t give you that detail. But there’s not a big difference. Thank you, Richard.


And the next question comes from the line of Soren Samsoe from SEB. Please go ahead.

Soren Samsoe

Yes. Good morning. Basically, if you could tell us whether this strong weather we’ve experienced has led you to take some costs that you would probably not have taken if it would’ve been normal weather over the season. So you sort of have taken this opportunity to take more cost through.

And secondly, if you could just comment — we’ve seen some of your colleagues in the industry cut dividends. Maybe you could elaborate a little bit on the journey you are on and what you — your thoughts here? Thank you.

Cees ‘t Hart

Heine, over to you.

Heine Dalsgaard

Yes, sure. Good morning, Soren. The weather impact has a sort of — and whether we’ve taken additional costs as a consequence of that, I would say, no, we haven’t. We’ve continued — as we’ve said all through the year, we’ve continued to invest into future growth. We’ve continued to stay focused on making sure that we get the benefits from Funding the Journey coming through and then being relatively bold as to how much it is that we invest into future growth initiatives. Just this year, we will, when we close the year, have invested more than DKK500 million into Q2 growth.

It’s clear that, had Q3 been a catastrophe from a sales point of view, we would probably have done the opposite, which is then to cost because we’re also protecting our bottom line. But the weather has not sort of led us to sort of step up anything because these are investments that are carefully thought through and are part of a bigger plan.

In terms of the dividends, we can say that we have no plans of cutting our dividends. As you know, we set out a journey a few years ago with a few very clear priorities in terms of capital allocation.

The first one is to continue to invest into organic growth. We’ve done that this year with more than DKK500 million into real organic growth initiatives within craft and specialty, alcohol free, DraughtMaster, India, China and so on.

Second priority was that we said we’re going to reduce our leverage below 2. We’ve done that. You saw the half year numbers. We’re below 2, well below 2. And then we said we will increase our payout ratio, so increase our payout ratio, not the opposite. We’ve done that from a historical level of 25%, now to 50%. And that is the level for ordinary dividends that we will maintain. Then the fourth priority where we’ve said that we will come back in February is what we call additional shareholder returns in order to keep the leverage sort of comfortably around 1.5 to 2 times. And that’s something we will come back with in February. But — and it’s something we’re discussing, we have discussed with the major shareholders, we have discussed with our supervisory board. And it’s a topic that we will come back to in February. So we’re doing the opposite.

Soren Samsoe

Okay, good to hear. Thank you.


The next question comes from the line of Trevor Stirling from Bernstein. Please go ahead.

Trevor Stirling

Hi, Cees and Heine, just one question from my side. Clearly, spectacular results in Western Europe. I guess the best ever – Denmark reflecting the best ever volume growth in Western Europe. But if you strip out the good weather and the easy comp, do you have a sense of the underlying volume growth in your mix of markets? Is it still broadly flat, or are we starting to creep into a little bit of growth?

Cees ‘t Hart


Heine Dalsgaard

Yes, no, we – if we take out the weather impact, and there definitely is a weather impact, but if we take that one out, there is still an underlying growth, in particular within craft and specialty and alcohol free, but also now, we see positive trends within some of our core beer portfolios.

Trevor Stirling

Great. Thanks very much, Heine.

Heine Dalsgaard

Thank you.


And the next question comes from the line of Ed Mundy from Jefferies. Please go ahead.

Ed Mundy

Good morning, everyone. Two questions, please. The step up in alcohol free within the third quarter, is that just weather, or are there new markets and new brands that are driving that? And then just coming back to the guidance again of 10% to 11% EBIT growth for the year, I think that implies broadly flattish margins in the second half. I know you said that the second half won’t be as strong as the first half, but why shouldn’t we expect some operating leverage in the second half?

Cees ‘t Hart

Thanks, Ed. Good morning. With regard to the alcohol free, whether it’s just weather between brackets, well, it grew by 58% in Western Europe and by 50% in Russia. So what we see here is the increasing momentum of both the category and now people themselves to really put now focus on that.

We started this 2 years ago in articulating this as well as our priorities. Obviously, it always takes some time to really get the momentum. And we feel that we really now hit the momentum of the market with the right brews, the right attentions, and the right investments. So it’s more than the weather in our view. But that’s what we need to prove to you and to ourselves in 2019.

Heine Dalsgaard

Yes. On the question on the guidance and second half. First of all, 10% to 11% growth in operating — organic operating profit is a — from our point of view, a strong outlook, and it does require also growth in the second half. But it is right that second half growth in organic EBIT is lower than first half. And there are three reasons for that.

One is the fact that, in first half, Asia was impacted very positively in the beginning of the year by the sell in to the festive season. Secondly, as you know, we have accelerated rather aggressively our sale investments in the second half. For instance, to DraughtMaster, to Birell, which is our — as Cees mentioned, sort of our alcohol-free brands and also into expansion in China and into digital.

So that’s the second. And then thirdly, there is a different phasing of certain cost elements, including depreciations versus last year in first half versus second half.

Ed Mundy

Okay. Thank you. And then – and, Cees, just a follow up again on the alcohol free, are you seeing change in consumption habits here, more people drinking this at lunch at first, just maybe substituting it for normal beer in the evening?

Cees ‘t Hart

Yes, it’s early days, but we see at least the segment growing pretty quickly. And we’re taking share in the segment. We are really coming in with a broad portfolio, so not only as line extensions of our local power brands, but as well from some of our international brands, like Carlsberg, and on top of that Birell, as Heine said.

So it’s a cumulative effort on that, that really grows that segment. We see the consumers being interested in it. And we see them using alcohol-free beer in more and more — at more and more moments, which is of course very good for the potential growth of that segment, and it’s margin enhancing for us. So in this respect, we’re really keen to continue this growth.

Ed Mundy

Okay. Thank you.


And the next question comes from the line of Olivier Nicolai from Morgan Stanley. Please go ahead.

Olivier Nicolai

Hi. Good morning, everyone. Just two questions, please. Firstly, on Russia, how big is the premium beer segment today as a percentage of the market? And essentially, where do you see this in, let’s say, 5 years’ time? Just trying to have an idea of the growth potential of the craft and specialties and brands like Grimbergen in Russia?

And second question, it’s about the tax rates. You maintained your tax rate guidance. I think you’ve mentioned in the past that it was some efficiencies potentially to get in China between some of the subsidiaries which were loss making, and some were making profit. How far are you in this journey, and could be material to the group tax rate going forward? Thank you.

Cees ‘t Hart

Thanks, Olivier. Good morning. Well, obviously, at the moment in Russia is that the premium segment is slightly higher than 30%, so 31%, and the superpremium is 6.5%. And actually, we see some growth in these segments. We are overrepresented with our brands in the premium. We are underrepresented in the sugar premium. But for 2019, we have a program for that. So we’re positive about the development of these two segments, which of course is good news for our business in Russia. Heine?

Heine Dalsgaard

Yes. So on the tax rate, you’re right. We are maintaining our guidance of an effective tax rate below 29%. We are running, as you know, several initiatives within tax. The big one is actually to increase the focus and the attention and the discipline around tax, both when it comes to the effective tax rate, but also when it comes to tax compliance.

The different initiatives that we are running, including the one in China, is — and they’re all sort of progressing well, and we feel confident that we will also after 2018 continue the journey of strong focus on compliance and focus on ensuring a continued reduction in our effective tax rate.

Cees ‘t Hart

Can we have the last question please?


Last question comes from the line of Andrea Pistacchi from Deutsche Bank. Please go ahead.

Andrea Pistacchi

Yes. Good morning. I have three brief questions, please, first one on Switzerland, if you could just say a few words on your performance in Switzerland, important market for you in Europe.

Second, on Poland, please, on the competitive environment there, if that — how that has evolved through the year, if it’s improved. And finally, just a technical thing in Asia about shipments. The Chinese New Year, the sort of Asian festivities will be a bit earlier this year, whether this will impact your shipments. Should we expect — last year Q1 benefited in [indiscernible]. Will there be a shift this year to Q4 of shipments, please?

Cees ‘t Hart

Okay. Thank you very much, Andrea. With regard to Switzerland, there, we saw a kind of modest growth, but still in a stable market very good results in our view. The organic growth was around 1% in Q3, and the net revenue 1.4% with more or less stable market shares. So in that respect, we are still really satisfied with the performance in Switzerland.

Poland showed very different figures, 6.8% in Q3 volume, 15.5% in value. We have [indiscernible] due to our price increases. The market is 4% up year-to-date in August, 7% in value. And for year-to-date, we are losing a bit of market share, but we had a very strong Q3 in terms of market share. We had a strong price mix due to the price increases in the beginning of the year. And we have very good performance of our upper mainstream.

And that is basically impacting our value market share, upper mainstream brands and premium brands in Q3, like Okocim, Zatecky [ph], Grimbergen, Blanc and Brewglen [ph]. So good performance and progress in Poland. With regard to Asia, we indeed had the sell in from Christmas — sorry, from Chinese New Year in Q1. And Chinese New Year in 2019 is a bit earlier.

So we will have part of the impact in Q4 and part of the impact in Q1 2019. So it’s difficult now to see which countries will have an early sell in and which one will have slightly later. So it’s difficult, Andrea, to assess at this moment of time, the impact of that.

Andrea Pistacchi

Great. Thank you for all that color.

Cees ‘t Hart

Thank you very much. Then before I close, I owe Richard a detailed answer. In India, Tuborg grew by 12% year-to-date and Carlsberg by even 37% year-to-date. That was then the final answer for today. Thank you for listening in, and thank you for your questions. We’re looking forward to meeting some of you during the coming days and weeks. Have a nice day. Bye, bye.

Don’t Be Duped by Voting Misinformation Before the Midterms

The midterm elections are just a few days away. Though historically the president’s party takes a beating in the House and Senate, that’s far from assured this year. Will the midterms be a rebuke or an endorsement of the Trump administration? On November 6, you will decide.

As 2016 emphatically demonstrated, elections are also a major battleground for information warfare. Coordinated misinformation campaigns focus not just on individual candidates but also the electoral system itself. And though political operatives have used misleading tactics for years, the amplification and network efforts of social media have been like gasoline to a fire. Misinformation now spreads farther, faster, and ensnares unwitting accomplices who share bad information without realizing it.

Tech companies and governments are slowly beginning to realize that the information war is on and they need to respond. But you still need to be aware, and be informed.

The Facts

The balance of the House and the Senate will be decided on Tuesday, along with 36 governorships, 30 state attorneys general, many state legislative seats, and crucial local ballot initiatives on everything from a new tax to fight homelessness in San Francisco to recreational marijuana to climate change to drug sentencing reform.

To find out accurate information about where you can vote, whether you can still register, and who and what is on the ballot in your area, you can consult your local election officials. The US Election Assistance Commission lists the phone numbers and websites for every state and US territory on its website. There are also third-party tools supported by nonpartisan organizations like Ballotopedia, Democracy Works, and, which allow you to input your address and receive individualized voter information for your area.

What People Are Saying

There’s a ton of misinformation out there, and it’s always evolving, but there are a few general themes that come up every election cycle.

Voter Fraud

Voter fraud is a constant boogeyman. In the months leading up to the 2016 election, for instance, President Trump warned that millions of undocumented immigrants would vote. After he won the presidency but lost the popular vote to Hillary Clinton, he said that voter fraud was the reason. None of this, said the state authorities whose job it is to maintain the integrity of elections in the US, was true. In fact, when all the votes had been tallied—137.7 million of them—states investigating claims of voter fraud found “next to none,” according to Tthe New York Times.

Still, months into his first term, President Trump created a commission explicitly to study voter fraud. After intense criticism from experts who called it unnecessary, as well as legal challenges, it was dissolved in January, having released no evidence to substantiate the president’s allegations that millions of people voted illegally in the 2016 election. That hasn’t stopped people from claiming it’s a major issue, or from imposing restrictions like voter ID.

To support claims for widespread voter fraud, many point to states and counties where there are more registered voters than eligible adults. In California, for example, the claim that 11 counties have more people registered than are eligible to vote has spread from a conservative activist group called Judicial Watch to Alex Jones to Breitbart all the way to secretary of state candidate Mark Meuser, who regularly records and tweets out videos alleging widespread registration fraud in the state. This argument is misleading, as The Sacramento Bee, the Los Angeles Times, and The San Diego Union Tribune have all reported, because they combine “inactive” and “active” voters lists. In California, inactive voters—who, for example, may have moved but not returned an address confirmation notice—are still eligible to vote, according to state law; they just need to show proof of residency when they arrive at the polls. A January report from the California secretary of state noted that only 75 percent of eligible voters in the state are registered.

Fraudulent claims of voter fraud don’t always come in the form of misleading numbers; they can be photos, too. Doctored or out-of-context photos and videos that purport to show voter fraud taking place were shared during the 2016 election—such as one Photoshopped image that combined two separate photos to make it look like ICE was arresting people in line to vote—and as recently as last week during the presidential election in Brazil. As with other misinformation campaigns, real images taken out of context are often used as fake “proof.”

What makes this kind of misinformation so intractable is how it has the trappings of verisimilitude—a lawsuit from a Washington, DC-based group, the buy-in of political candidates and mainstream-adjacent news organizations. It also feels right to many people, who have been primed for years to suspect that fraudulent votes are a huge problem.

It’s not that voter fraud never happens; it does. But very rarely, and nowhere near the levels suggested by right-wing conspiracy theories or the president. Here’s where you can find these numbers yourself: The nonpartisan Brennan Center for Justice, run by the New York University School of Law, has put together lots of research on the persistent myth of voter fraud.

Voter Suppression

Under the National Voter Registration Act of 1993, states are required to accurately maintain their voter rolls. The rules by which states purge voters vary by jurisdiction, and they are incredibly confusing. Errors in the process and inaccurate data have led to the disenfranchisement of thousands of eligible voters. And some states have become far more aggressive in purging voter rolls since the Supreme Court struck down aspects of the Voting Rights Act in Shelby County v. Holder.

Georgia, in particular, is facing ongoing lawsuits for voter suppression over its practices. Other states have drawn national scrutiny for moving polling places miles out of town or implementing voter ID laws that disproportionately affect certain communities.

But the issue of voter rolls can be complicated and varies by state, making it a perfect topic to sow confusion along party lines. For instance, one viral stat going around says that 700,000 voters have been removed from the voter rolls in Colorado; some have suggested this is part of the nationwide effort to purge legitimate voters. The Colorado government has pushed back, pointing out that these voters were purged over the course of a decade, according to the Republican secretary of state, Wayne Williams, for legitimate reasons.

Voting Machines

There’s also misinformation swirling around the actual hardware we use to vote. Again, this is nothing new. In the 2016 election, a video that purported to show a “rigged” machine not allowing a vote for Trump in Pennsylvania went viral, at least in part after being promoted by Russian operatives. The malfunction turned out to be user error, but it was shared as proof of voting fraud by thousands of people.

During early voting for this year’s midterms, reports emerged of machines in parts of Texas switching US senate race votes if people vote the straight party ticket. This is actually happening; according to the Texas secretary of state’s office, only 20 or so people have reported such a problem, and the government and the voting machine company blame the issues on user error. But voting experts say the problem lies with the machines themselves, which have been known to be unreliable when voting a straight party ticket for years. And while experts have also said that the machines are insecure, there does not appear to have been hacking in this case. Nevertheless, claims that this is the work of hackers or a coordinated conspiracy by Republicans have flourished.

Stories about voting machines are ripe for misinformation. After 2016, the US is on high alert for election interference: More than half of Americans say they are not too confident or not at all confident that the US election system is secure from hacking or other technological threats, according to a recent Pew survey. In both of the above cases, though, quirks of the voting machines themselves turned out to provide the more likely explanation—something to remember before drawing quick conclusions. And while progress has been uneven, it’s worth noting that election officials have taken steps to shore up the electoral system in the past few years.

Bad-Faith Campaign Messaging

Spreading misinformation and uncertainty about elections is another unfortunate electoral tradition, whether it’s by candidates, parties, or more anonymous actors. Historically, these tactics often target specific communities, such as robocall campaigns intended to suppress the black vote or fake flyers distributed on college campuses or in communities of color. This week, North Dakota’s state Democratic Party affiliate posted on its website and Facebook a warning to hunters that they may lose their licenses in other states if they vote in the election.

Politicians and their campaigns are engaged in direct disinformation targeting people likely to vote for their opponents, as The New York Times notes. This includes everything from the wrong date for election day being sent out to voters, to text messages that seem to come directly from the president. These texts are made to look like the presidential alert that went out a few weeks ago, though in this case they are telling voters that their early vote has not been recorded. The purpose seems to be merely to confuse, as the Daily Beast reported, noting that state governments aren’t sure the messages are illegal but are looking into it. Fake text messages have also popped up this campaign season, too.

Why It Matters

Voting in America is hard. It happens on a work day. People aren’t automatically registered when they hit voting age or even when they get a driver’s license in most states. The early voting process is different in every state. All of this contributes to low voter turnout, particularly in non-presidential elections.

Researchers trying to understand why people don’t vote point to myriad factors, including confusion about how to vote and whether people are eligible. It’s this problem that misinformation can so easily exacerbate. In 2007, then senator Barack Obama and Senator Chuck Schumer introduced the Deceptive Practices and Voter Intimidation Prevention Act, after high-profile cases of misleading voter tactics in the 2006 midterms. It didn’t pass, and subsequent attempts haven’t been any more successful. California recently passed a law creating an Office of Elections Cybersecurity to explicitly counter online misinformation intended to discourage voting. Facebook also recently announced a new policy to try to address misinformation on its platform that is intended to suppress the vote.

To help you recognize fact from fiction, familiarize yourself with the many sites and sources devoted to identifying misinformation. There are fact-checking sites like Snopes, where you can look up specific stories. The nonprofit investigative news organization ProPublica runs a coalition of newsrooms called Electionland dedicated to accurate reporting on the midterms, which is a fantastic resource for finding real news that matters. (WIRED is a partner on ProPublica’s Political Ads Collector project.) You can also arm yourself with tools, such as the new bot-catching Chrome extension BotCheck, which will reveal bots in your social feeds, and reverse-image-search tools, which let you figure out where an image actually originates.

With voter turnout during midterms historically low, each vote can have a large impact—particularly when it comes to local elections, which can be decided by a handful of votes. If misinformation, intentional or otherwise, can dissuade one person from showing up, that matters.

More Election Coverage from WIRED

Trump’s ‘Game of Thrones’ Tweet Is Odd, but Trademark-Infringing? Probably Not

Of all the apparatuses presidents have at their disposal for making pronouncements—press secretaries, official statements, televised addresses from the Oval Office—the one President Trump used to trumpet forthcoming sanctions on Iran is by far the strangest: a Game of Thrones meme.

On Friday morning the president posted the image below on Twitter. It’s a picture of himself emblazoned with the phrase “Sanctions Are Coming” in a typeface not that dissimilar from the one used in the Game of Thrones logo along with the date “November 5.” Subtle, it was not.

As soon as it went up, and as soon as it was clarified by the White House that the sanctions in question were indeed the ones that had been relaxed during the Obama administration and which Trump had been seeking to reimpose, Twitter went nuts. Folks began responding with memes of their own—”Indictments Are Coming” etc.—and even the show’s cast got involved. Sophie Turner, who plays Sansa Stark, replied “Ew,” and Maisie Williams (Arya Stark), in perhaps the best Twitter drag of the day, retweeted the president and just added “Not today.” (“Not today,” for those who don’t remember, is what Arya Stark’s swordfighting instructor, Syrio Forel, told her is what she should say to the god of death.)

Then HBO got in on the action, sending out a tweet reading, “How do you say trademark misuse in Dothraki?” Reached for comment the network added, “We were not aware of this messaging and would prefer our trademark not be misappropriated for political purposes.” Trump evoking the show’s logo and slogan, it seems, doesn’t sit very well with the people who actually make the show.

But could the network or creators successfully sue? Probably not. First off, it doesn’t seem likely that HBO actually wants to make a legal claim of trademark infringement. At most, the network is playing along. Trump referenced the show; they responded. Simple as that. But the response, and subsequent online chatter, did raise some questions about whether or not the president went too far.

Most likely, he didn’t.

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If HBO were to bring a claim, it would probably be for what’s known as trademark dilution, says Daniel Nazer, a staff attorney for the Electronic Frontier Foundation’s intellectual property team. Typically, these are the kinds of claims companies make when they feel their very-famous trademarks are being used in ways that deplete the uniqueness, or dilute, their intended message. A company can’t, say, put something that looks like the Nike “swoosh” logo on the side of a commercial plane or use “Just do it.” to sell condoms.

A dilution claim also generally requires that the entity claiming infringement be able to prove the public was genuinely confused. Because Trump’s tweet wasn’t being used in commerce, and because it’s unlikely anyone thought he was legit affiliated with Game of Thrones, dilution would be a hard argument to make. “I think this would be a tough, a tough case,” Nazer says. “No one is likely to be confused that HBO is endorsing this tweet or sponsoring sanctions against Iran. My view is that this shouldn’t be a viable suit.”

Instead, Nazer says, Trump’s tweet would be treated more like a parody—legally speaking. If, for example, Saturday Night Live did a sketch about waiting for a train in New York titled “The G Train Is Coming” that pokes fun at MTA tardiness and references Game of Thrones, that’s not an infringing use. (It’s also a funny idea, SNL. Please make that sketch and credit Nazer.) As for Trump’s use of the Thrones font, the files used in typefaces can be protected, as is (presumably) the actual logo, but because Trump just uses a script that looks like the GoT emblem, the image the president tweeted is likely not infringing. It’s ironic, but the bottom line is that the man who likes to take shots at the media is protected here by the First Amendment.

The parody aspect, though, is compelling, because the metaphor doesn’t quite align. In Game of Thrones, “winter is coming” is a call to remain vigilant, and a warning that White Walkers could come and threaten the living when winter arrives. Yet winter has been coming on the show since the pilot; it’s a slow march that’s taken seven years. Trump’s “November 5” warning promises something he intends to do in a matter of days. Also, one presumes, Trump thinks the sanctions are a good idea, but the coming of winter in Game of Thrones is something most sane people in Westeros fear. It’s possible Trump wants Iran to be afraid of the sanctions, but the wordplay still doesn’t quite land.

“It’s kind of riffing on it, but it’s hard to know what the satirical or parodic intent is here,” Nazer says. “Winter in the Game of Thrones universe is kind of terrible, so I’m not sure if they really thought it through. There’s probably nothing much beyond it looks cool.”

Half an idea without any sense of its viability? Sounds about right.

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Learn to Fly Sikorsky's New Helicopter in Just 45 Minutes

With the possible exception of Tom Cruise, learning to fly a helicopter demands months of classroom, simulator, and in-air training. The controls feature all the logic of Bop It: Twist one hand, move the other to the left. Push one foot, then the other. Watch the instruments, but don’t forget to look at the horizon. I once spent a full day working with Airbus’ top instructors, and by the end couldn’t even keep the chopper in level flight. I was nowhere near pulling off a low hover, a move that looks simple but requires extraordinary coordination and concentration.

But last month, a group from the US Army, including one person who’d never even been in a helicopter, flew a Sikorsky S-76B helicopter up and over a small watching crowd in Fort Eustis, Virginia, hovered over an adjoining field, dropped down, adjusted their position to dodge another vehicle, then safely landed. And they did it all after as little as 45 minutes of training.

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“It’s pretty neat to see the transformation from ‘I have no idea what this system does’ to ‘I can now control this system,’” says Sikorsky helicopter pilot Mark Ward, who put the newbies through their minimalist training. “This is not to say that they’re combat-ready, hardened, ready to go. But it is a testament to the ease with which they can now adapt to a nonlogical control system like a helicopter,” he says.

It’s not like these people are aeronautical savants (no offense) or leather-clad Carrie-Anne Mosses. But computers are key, as given away by the retro blocky graphic on the chopper: “Matrix Technology.” This, as you may have guessed, is no ordinary helicopter. It’s controlled by a hand-held tablet that lets wannabe pilots fly about using familiar gestures and movements, like they would to play a game or fly a quadcopter drone.

Matrix Technology is the name of Sikorsky’s program for rotorcraft that minimize, or even eliminate, the role of the human pilot. It’s part Darpa’s Alias program (that’s the Aircrew Labor In-Cockpit Automation System). Just as some automakers are approaching self-driving cars with gradually more capable driver assistance tech, the idea here is that making a chopper easier to fly is a step toward letting a computer take control.

The human on board controls the flight using a tablet and a couple of joystick-like controllers called interceptors. “It allows the onboard crew members to rapidly communicate their intent to the autonomy system, which kind of becomes like a copilot,” says Igor Cherepinsky, director of Sikorsky’s autonomy program.


Instead of learning the steps of the complicated throttle and pedal dance, the human onboard controls the flight using a tablet and a couple of joystick-like controllers called interceptors. The tablet is used for inputting mission changes, like changing the destination. The interceptors are for more immediate inputs, like a push to the right or a quick climb. But unlike in conventional flight, adjusting any of these controls leads to an input into the computer controlling the flight, requesting a change, rather than a direct movement of a flight control surface. This is fully fly-by-wire, under the control of an algorithm.

“It allows the onboard crew members to rapidly communicate their intent to the autonomy system, which kind of becomes like a copilot,” says Igor Cherepinsky, director of Sikorsky’s autonomy program. The human gives orders, the computer executes them.

Although Sikorsky put the humans in the helicopter for this demo, the system could work just as efficiently as a kind of remote control, says Cherepinsky, with the human on the ground below holding the tablet, or in a remote center, dialing in and supervising. Those applications could be useful for first responders like firefighters, who could direct aircraft over forest blazes from a safe distance.

For the military, automating more aspects of flight could help make missions safer. “Really, we want the pilot’s eyes and mind on the fight rather than holding an altitude,” says Graham Drozeski, the Darpa program manager for Alias. For Darpa, Sikorsky is now integrating its system into a UH-60 Black Hawk helicopter, for more mission-driven demonstrations next year.

In the civilian world, increased autonomy, and smarter helicopters in particular, could be a useful stepping stone on the way to fully autonomous air taxis, whisking commuters from building top to building top in Dallas and LA by 2023— if Uber has its way. At the same time, startups like SkyRyse are betting that helicopters with sensors and smarts will show that air trips can be cheaper, quicker to dispatch, and ultimately more useful than they are now. Even before they become fully autonomous, which could take years of technological and regulatory overhauls, they would lower the bar for human pilots.

Sikorsky’s system is all about augmenting the human, at least for now, Cherepinsky says. “We are all marching toward the holy grail of pushing one button on the screen saying ‘get me here,‘ point A to point B.”

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Fitbit Shares Jump 10% On Higher-Than-Expected Third Quarter Sales

Sales to healthcare plans helped wearable maker Fitbit surprise Wall Street in the latest quarter and lift its shares from the basement.

Revenue from healthcare customers, which the company has yet to disclose by dollar amount, grew 26% in the third quarter from the same period a year ago. The business includes sales of Fitbit’s wearable devices, as well as software and services, to health plan providers and directly to some employers.

But overall revenue rose a mere 0.3%, as the company is still working to get back on track after sales of its main product, simple fitness trackers, stalled out over the past few years.

Nevertheless, investors were pleased that the company’s sales were at least stable after declining in the first half of the year. Fitbit’s (fit) shares, which hit an all-time low of $4.23 earlier this week, gained 7% in Wednesday’s regular trading and another 10% in extended trading after the earnings report, to $5.18.

Fitbit CEO James Park tells Fortune that the company will offer more details about its healthcare segment in coming quarters. “We’re calling it out now because it’s demonstrating a lot of traction and growth,” he said. Many plans use the fitness trackers to help users who have chronic diseases stay on top of their health and medication, he explained. “We’re really capitalizing on that growing need.”

About 1,600 health plans and other organizations are buying Fitbit products already. Last month, Humana (hum) expanded a partnership with Fitbit to include Fitbit Care, the company’s new virtual health coaching service built off of technology it acquired by buying Twine Health in February. Coaches can offer users health advice via an app, on the phone, and in person.

Still sales of simple fitness trackers, Fitbit’s original business, peaked several years ago. The drop has pummeled the company’s revenue.

Although the extra growth from healthcare helped Fitbit’s overall third quarter sales, they remained essentially flat at $394 million. But that was enough to beat the $381 million that analysts had expected as did adjusted profits of 4 cents per share, which were modestly higher than the 1 cent loss that had been expected.

In terms of profit on the basis of generally accepted accounting principles, Fitbit lost 1 cent per share, or $2.1 million.

Fitbit’s healthcare effort comes as some studies have recognized that wearables and the “gamification” of wellness can prompt people to exercise more and live healthier lives. That in turn has prompted some health plans and large employers to partner with the company and buy fitness trackers for workers along with software and services to track their progress. Apple (aapl) is also aiming at that segment with its Apple Watch.

Park’s decision to get Fitbit into the smartwatch market last year also paid big dividends. The company’s strong-selling Versa smartwatch, along with its less popular Ionic watch, grabbed $193 million of revenue, almost half of the total for the quarter and up from $165 million in the second quarter. Fitbit smartwatches outsold all other vendors except Apple in the U.S. market in the quarter, Park said.

Apple this year added several new health features, including an EKG reader and a fall detection system, to its smartwatch. Park wouldn’t say exactly how Fitbit would match Apple’s moves, but hinted the company had some new healthcare features of its own, coming soon.

“We are very focused on adding more advanced health capability to our products over time,” he said. “We are in clinical studies and validation for a few deeper health conditions such as sleep apnea and (Atrial fibrillation) and we’re working with the proper regulatory agencies to get that into the hands of consumers. as soon as we can.”

Apple spruces up Macs, iPad Pros and raises prices

(Reuters) – Apple Inc (AAPL.O) refreshed some of its lesser-known products at a New York event on Tuesday, adding iPhone features like facial recognition to the iPad Pro and faster processors and better displays to some Mac computers that had gone years without a major update.

A line of new iPad Pros stands ready for demos during an Apple launch event in the Brooklyn borough of New York, U.S., October 30, 2018. REUTERS/Shannon Stapleton

The devices will hit stores on Nov. 7. Counting new iPhones and Apple Watches released last month, Apple will have more than half a dozen new products on shelves for the holiday shopping season, many at higher prices than previous models.

The Cupertino, California, company introduced new versions of the iPad Pro, its higher-end tablet that competes with Microsoft Corp’s (MSFT.O) Surface, with thinner bezels and more screen space, along with the face unlock system found on Apple’s newer iPhones.

Prices for the iPad Pros increased to $799 and $999 for 11- and 12.9-inch models, though Apple plans to keep an older 10.5-inch version on sale for $649.

Apple unveiled the updates at an opera house at the Brooklyn Academy of Music, calling the venue a haven for creative activity. The company has been working to win back professionals like graphic designers targeted by Microsoft with its Surface tablets, which have gained market share this year.

Apple also played up software partnerships with Adobe Inc (ADBE.O) and Autodesk Inc (ADSK.O), whose programs will now work on Apple’s iPad Pro.

In July Apple reported its worst quarter of Mac sales since 2010, with unit volumes down 13 percent year over year, while iPad unit sales rose only 1 percent from a year earlier. Revenue for both fell 5 percent from the prior year.

A new version of the Mac Book Air, originally released in 2011, will feature a higher-resolution display and thinner bezels and start at $1,199, up from $999.

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“Yes, you save a bit compared to the Mac Book Pro, but that’s not your main reason for buying it,” which is instead power and portability, said Carolina Milanesi, an analyst at Creative Strategies. She said Apple “knows they have a very loyal user base that will be willing to spend the money.”

Apple said the Mac Mini, a small desktop customers provide their own display and accessories for, would add processing power and memory capacity and start at $799, also an increase.

As with previous models, the new machines rely on processors from Intel Corp (INTC.O), but Apple said an increasing number of security features on the devices are being handled by its own so-called T2 chip.

Apple introduced new iPhones and Apple Watches last month, but the older product lines accounted for $45 billion in sales in the most recent fiscal quarter. In comparison, iPhones brought in revenue of $141.3 billion.

“They really wanted to show the world they haven’t forgotten about the iPad and the Mac,” said Mika Kitagawa, a senior principal research analyst at Gartner.

Some of the recent dip in Mac sales can be explained by timing. Apple had waited until July to release new Macs, instead of June as in previous years.

And Mac sales growth has outpaced the PC market, while the iPad has been the most successful tablet in a market that turned out to be smaller than Apple hoped when it released the device in 2010.

Microsoft’s Surface line offers a hybrid between a tablet and laptop that runs Microsoft’s full Windows operating system. The iPad Pro runs the same operating system as iPhones.

The iPad Pro models have a USB-C port that allows them to work with an external monitor for the first time. When combined with the existing ability for an iPad Pro to work with a keyboard, the new port brings the devices closer to becoming a laptop competitor, Milanesi said.

“When people are looking at using this as their main computing device, that’s where you might seem the move toward the 12.9-inch” iPad Pro, she said.

Reporting by Stephen Nellis; Editing by Lisa Shumaker and Meredith Mazzilli

7 Simple Ways to Check Your Bias and Make Better Business Decisions

Everyone has conscious and unconscious biases. It doesn’t necessarily mean we’re prejudiced — biases are simply the way we view the world and the people around us based on our background, upbringing, culture and self-identity. 

The existence of bias isn’t inherently bad, but it can become a problem when we allow personal beliefs and preferences to creep into objective decision-making processes. As a founder, it’s essential to become aware of your own biases and actively work to set them aside when you’re making business decisions. Below, seven entrepreneurs explain how to do just that.

Ask people you trust to weigh in.

Founders are used to being the ones with the final say, but that doesn’t mean you should be the only one involved in the decision. Ben Landis, CEO of Fanbase, recommends surrounding yourself with a group of trusted colleagues and advisors who can give you a gut check.

“When it comes time to make a big decision, I run my thoughts by those around me who I trust most,” he says. “They know why I am coming to them and will play devil’s advocate to help me see all sides.”

Wait 24 hours before making a decision.

Making impulsive, emotional decisions is the easiest way to let your biases get the best of you. That’s why Mauricio Cardenal, founder of Roofing Marketing Pros, always waits a full day before making any important decisions.

“One thing that can help me make a rational choice is to wait 24 hours and create a list of pros and cons,” says Cardenal. “When I wait, I know my choice will be less based on emotion.” 

Recruit a diverse team.

Thursday Bram of The Responsible Communication Style Guide knows how powerful a diverse team can be. “The only way to understand our own biases is to talk to people with different experiences,” she explains. 

Talking to people with local knowledge helped her tremendously when she moved from the Midwest to the East Coast. “When I first moved, I didn’t have the basic knowledge of what running a local event would require,” says Bram. “The difference between the need for public transit access (and the reduced need for parking) was earth-shattering, and something I wouldn’t have known without a diverse team.”

Step back and look at the bigger picture.

It’s easy to get wrapped up in the day-to-day aspects of running your business, according to Joey Kercher, president of Air Fresh Marketing. However, founders need to get away from being “in” the business and take a 10,000-foot view to really see things clearly.

“Give yourself space for at least 30 minutes each day to think high-level,” Kercher recommends. “Establishing a clear vision of what you are trying to do and accomplish is critical, as is outlining the small steps required to get there.” 

Rely on data.

Data can be your best friend when it comes to unbiased decision-making. As Baruch Labunski of Rank Secure notes, “you can’t argue with the numbers.”

“Whether you’re reviewing an employee’s performance or the business overall, you have to remove your emotional bias from your view and look at the cold, hard facts,” Labunski says. “Understanding how your bias might impact you is a good step to ensure you’re looking objectively at the current picture of your business.”

Consider the benefits of the opposite choice.

When faced with a decision, you probably have a gut reaction telling you which choice you want to make. Adelaida Sofia Diaz-Roa, COO of Nomo FOMO, says it’s important to consider all sides and perspectives of potential actions or decisions — even if you have to Google why doing the opposite of your intended decision would be a good choice.

“It not only helps you feel more sure of your decision if someone questions it, but it helps you notice if there is something that you might have missed because of an unconscious bias,” adds Diaz-Roa.

Remove yourself from the equation.

Whenever Karlo Tanjuakio of is faced with a tough decision, he finds it’s best to remove himself from the situation. 

“Being impartial is tough. Emotions generally run high when you’re making decisions on things you’re passionate about. I think about what’s best for the business and its growth — not what’s best for me personally,” he says. “When the business wins, everyone wins.”

China’s Private Attempt to Send a Satellite-Carrying Rocket Into Space Fails

China’s first try at sending a privately developed rocket that could carry a satellite into space failed during a launch Saturday.

The first and second stage of the Zhuque-1 rocket operated as it should have, according to Beijing-based Landspace, which developed the spacecraft. But the rocket ultimately didn’t reach orbit after something went wrong with the third stage, Reuters reports.

Landspace posted to its Weibo social media account, saying that “cowling separation was normal but something abnormal happened after the second stage,” though it did not elaborate further on the subject, according to Reuters and the Associated Press. The statement did say building such rockets is “the right decision for the company.”

The satellite involved in the launch was being carried for state media China Central Television (CCTV), according to Chinese media reports cited by Reuters and the AP.

Another Beijing-based private firm, OneSpace Technology, successfully launched a smaller rocket, the “Chongqing Liangjiang Star,” into space in May.

IBM nears deal to acquire cyber security company Red Hat: sources

FILE PHOTO: A logo of IBM is seen at the Mobile World Congress in Barcelona, Spain February 28, 2018. REUTERS/Yves Herman/File Photo GLOBAL BUSINESS WEEK AHEAD

(Reuters) – IBM Corp (IBM.N) is nearing deal to acquire software company Red Hat Inc (RHT.N) in a deal that could exceed $30 billion and allow it to expand its cyber security offerings, people familiar with the matter said on Sunday.

The deal would be by far IBM’s biggest acquisition. The move underscores IBM CEO Ginni Rometty’s efforts to expand the company’s subscription-based technology offerings and diversify it business beyond software sales and mainframe servers, which have faced sluggish growth.

An agreement between IBM and Red Hat is expected to be announced later on Sunday, the sources said, asking not to be identified because the matter is confidential. IBM and Red Hat did not immediately respond to requests for comment.

Red Hat specializes in Linux operating systems, the most popular type of open-source software, which was developed as an alternative to proprietary software made by Microsoft Corp (MSFT.O).

Red Hat charges fees to its corporate customers for custom features, maintenance and technical support. It has a market capitalization of $20.5 billion. IBM has a market capitalization of $114 billion.

Reporting by Liana B. Baker and Greg Roumeliotis in New York; Editing by Cynthia Osterman

Tesla's Elon Musk says tweet that led to $20 million fine 'Worth It'

FILE PHOTO: Tesla Motors CEO Elon Musk speaks during the National Governors Association Summer Meeting in Providence, Rhode Island, U.S., July 15, 2017. REUTERS/Brian Snyder/File Photo

(Reuters) – Tesla Inc (TSLA.O) Chief Executive Elon Musk said the tweet that cost him and the company $20 million in fines each by the U.S. Securities and Exchange Commision was “Worth It”.

The tweet, sent late Friday evening less than an hour before Musk tweeted that he would take a break from Twitter “for a few days,” was in response to a question from a Twitter follower.

The SEC in September charged Musk, 47, with misleading investors with tweets on Aug. 7 that said he was considering taking Tesla private at $420 a share and had secured funding. The tweets had no basis in fact, and the ensuing market chaos hurt investors, regulators claimed.

Tesla Inc and Elon Musk have agreed to pay $20 million each to financial regulators and the billionaire will step down as the company’s chairman but remain as chief executive, under a settlement.

Under the settlement agreement, Tesla needs to appoint an independent chairman by Nov. 13.

Reporting by Kenneth Li; Editing by Chizu Nomiyama