Samsung slashes capex, calls end to chip boom after record third quarter

SEOUL (Reuters) – Samsung Electronics Co Ltd slashed 2018 capex by more than a quarter on Wednesday and warned of lower profit until early next year, calling an end to a two-year boom in memory chips that fueled record third-quarter profit.

FILE PHOTO: The logo of Samsung Electronics is seen at its office building in Seoul, South Korea, March 23, 2018. REUTERS/Kim Hong-Ji

The downbeat forecast by the world’s biggest maker of memory chips and smartphones adds to investor jitters over waning global demand for mobile and other electronics devices that roiled world stock markets this month.

The South Korean technology giant said it expected a quarter-on-quarter earnings decline in the fourth quarter due to weak demand for memory chips and higher smartphone marketing spend during the year-end holiday season.

“Looking further ahead to 2019, earnings are forecast to be weak for the first quarter due to seasonality, but then strengthen as business conditions, particularly in the memory market, improve,” Samsung said in a statement.

Analysts said the capex cut should ease concerns over further supply growth and price declines, as prices of some memory chips have already fallen to over two-year lows and rivals are set to start new production lines next year.

Samsung, one of the industry’s biggest buyers of chip-manufacturing tools, said its capital spending this year would drop by 27 percent to 31.8 trillion won ($28 billion) from a record 43.4 trillion won last year.

“NAND (flash memory) chip prices will further decline through the first half of next year … (as) Toshiba’s new production line will start and Hynix starts mass production of one of its NAND lines,” said Song Myung-sup, an analyst at HI Investment & Securities.

“Oversupply is expected to continue.”

Samsung, however, sought to assuage investor concerns of a steep downturn in the chip market, citing solid demand from servers as cloud-based data services grow fast.

A Samsung executive said the company believed it was at the “start of a virtuous up-cycle” in chip sales to the server industry.

“Temporary price changes can repeat but fundamentally we have a very strong demand base for memory,” Chun Sewon, senior vice president of Samsung’s memory marketing, told analysts.

Samsung also said it was considering converting some of its NAND production lines to make DRAM chips next year, rather than add capacity amid a glut of NAND flash chips.

SOFT LANDING

Samsung reported a record 17.6 trillion won operating profit in the July-September quarter, in line with the company’s estimate.

With chip prices weakening after years of stellar growth, analysts expect Samsung’s fourth-quarter profit will decline by 4 percent from the third quarter’s record, according to Refinitiv data.

That will be still up 11 percent from a year ago, helped by efficiency improvements and cost-cutting in the chip business, which accounts for nearly four-fifths of Samsung’s operating profit.

“Since Samsung continues to reduce the costs of (semiconductors), it is not very likely to witness a so-called hard-landing situation,” said Avril Wu, senior research director at DRAMeXchange.

Higher server demand would help the memory chip market regain stability after the first quarter of next year, Samsung said, chiming with the outlook given by South Korean peer SK Hynix last week.

Samsung’s semiconductor business booked a 37 percent rise in operating profit to 13.7 trillion won, while the mobile business posted a 33 percent fall to 2.2 trillion won.

Squeezed by competition with Apple Inc in the premium segment and with Chinese rivals in other segments, Samsung’s smartphone business saw profit fall to the lowest level since the first quarter of 2017.

It plans to share details of its development of foldable smartphones at a conference early next month, hoping the model will help revive its premium cache.

Samsung said third-quarter revenue rose 5.5 percent to 65.5 trillion won, slightly ahead of its guidance.

Shares in Samsung, which has $265 billion in market value, fell 1.2 percent. The stock has fallen 16 percent so far this year.

Reporting by Heekyong Yang and Ju-min Park; Writing by Miyoung Kim; Editing by Stephen Coates

IBM acquires Red Hat

IBM has agreed to acquire Red Hat for $190 per share in cash. The total value of the deal is approximately $34 billion, making this the biggest Linux or open-source business deal ever.

Red Hat is the leading corporate Linux company. Prior to this deal, Red Hat had a market capitalization of about $20.5 billion.

The market hasn’t loved Red Hat recently. Red Hat missed its most recent revenue estimates and its guidance fell below Wall Street targets. That said, the company subscription revenue was still at 20 percent year over year to $722 million. Red Hat was still on pace to become the first Linux or open-source company to break the billion-dollar-a-quarter barrier.

IBM CEO Ginni Rometty focused on the cloud benefits of IBM acquiring Red Hat rather than Linux. “The acquisition of Red Hat is a game-changer. It changes everything about the cloud market. IBM will become the world’s number one hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”

Rometty continued:

“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs. The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”

“Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Jim Whitehurst, Red Hat’s CEO. “Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience–all while preserving our unique culture and unwavering commitment to open source innovation.”

In the 2000s, there were rumors that Oracle, Microsoft, and, yes, IBM might acquire Red Hat. Nothing came of these stories. Today is a different story, which reshapes the Linux, open-source, and cloud worlds.

Related Stories:

IBM Buying Open Source Specialist Red Hat for $34 Billion

IBM just spent $34 billion to buy a software company that gives away its primary product for free.

IBM Sunday said it would acquire Red Hat, best known for its Red Hat Enterprise Linux operating system. Red Hat is an open source software company that gives away the source code for its core products. That means anyone can download them for free. And many do. Oracle even uses Red Hat’s source code for its own Oracle Linux product.

Spending billions to acquire an open source software company might seem strange. But companies pay Red Hat to support those products, to the tune of around $3 billion in revenue each year.

IBM has long been a big user of and contributor to Linux and other open source projects. Open source was once a fringe, idealistic movement in software, but it’s now a core part of how big companies operate, from internet giants like Google and Facebook to Walmart and ExxonMobil. Sharing code with competitors allows companies to work together to solve common problems. Even Microsoft, which once openly mocked open source, has come around. Microsoft has released multiple open source projects and just closed a $7.5 billion acquisition of the code hosting and collaboration company GitHub.

Meanwhile, IBM has struggled in recent years to transform itself into a cloud computing company. A survey commissioned by cloud management company RightScale earlier this year put IBM as the fourth-most-widely-used cloud service, behind Amazon, Microsoft, and Google, and found the company growing slower than the top three. Its Watson-branded artificial intelligence services have experienced setbacks such as the decision by cancer center MD Anderson to walk away from a contract with IBM last year, big layoffs, and widespread criticism within the AI industry that Watson is simply overhyped.

Red Hat has had its own problems. Its shares fell 14 percent in one day in June after it issued a financial forecast that disappointed investors. Shares have fallen an additional 17 percent since then.

Red Hat isn’t a major host of cloud services, but it is a major player in the building of cloud services. While Red Hat is best known for its operating system, it offers a growing range of other products that make it easy for companies to build cloud-like platforms in their own data centers or manage applications that run on multiple different cloud computing services. They include OpenShift, which which is based on increasingly popular technology known as “Linux containers.”

Red Hat could be a good fit for IBM’s business. IBM has largely transformed from a hardware giant into a services-centric company, and has long partnered with Red Hat. The big question is whether the two companies will be a good cultural fit. IBM says Red Hat will operate as a standalone unit within its Hybrid Cloud organization, with Red Hat’s leadership staying intact.


More Great WIRED Stories

Cyber Saturday—Reader Reactions to Facebook’s ‘War Room’

Last weekend’s newsletter, “Facebook’s ‘War Room’ Is a Marketing Ploy,” elicited mixed reactions. Some readers agreed with my criticism that Facebook’s unveiling of a misinformation-quashing initiative was a PR stunt. Other readers felt I had been unfair to the company, arguing that it is taking the threat of fake news seriously. Below is a sampling of the mailbag.

J.B.: “Thank You for calling out FB for their PR/marketing ploy with their ‘war room’. I was surprised and disappointed from a number or articles from other news organizations that essentially praised the company for all of its efforts while failing to exercise any basic form of journalistic/critical thinking.”

K.S.: “Sorry but I’m with Facebook on this…. The unanimous view is, there’s no reliable technology available today using which Facebook, or anyone else, can conclude that a piece of news is fake news at the point it is posted.”

A.J.: “I smiled as I read your analysis. But then, as a professional communicator who eschews hype (though not transparency), I wondered how should FB solve this: 1. Should it go dark? Can’t do that now, since it would seem like they were hiding. 2. Should it go very proactive? Not sure that would work since it would feel like hype.”

Melanie Ensign, ex-Facebook, present Uber PR: “The event might have been a performance for press, but the team/effort/initiative is real w/ origins long before the 2016 drama began. We all know plenty of journos who require a ‘visual element’ before they commit to anything.”

M.C., discussing whether Facebook had contradicted itself when one executive said it’s easier for the fake news-fighting squad to work side-by-side in a single office, whereas the company’s cybersecurity director said it’s harder for them to collaborate with external partners when seated next to one another: “From a security perspective, it is absolutely easier to collaborate virtually. Allowing employees of your competitors into your office, with access to your systems, is a huge security risk compared to digital collaboration. The exec and security director are both correct.”

Oren Falkowitz, CEO and cofounder of cybersecurity startup Area 1 Security, summed the reactions up best when he posted a gif from the film Dr. Strangelove (a personal favorite). “Gentlemen, no fighting in the war room!”

***

One note: in last weekend’s newsletter I misinterpreted views held by Jason Witty, chief information security officer at U.S. Bank, who was referenced talking about these flashy, cybersecurity workspaces in a separate New York Times story. He did not say that the war rooms themselves are mostly for show but, as paraphrased by a Times reporter, that “the blinking map he breaks out for customer briefings is mostly for show.” Susan Beatty, U.S. Bank’s communications lead, corrected me: “Jason believes that such ‘war rooms’ are very important and highly valuable to our company and our customers.”

Marketing at its finest. Have a great weekend.

Robert Hackett

@rhhackett

[email protected]

Welcome to the Cyber Saturday edition of Data Sheet, Fortune’s daily tech newsletter. Fortune reporter Robert Hackett here. You may reach Robert Hackett via Twitter, Cryptocat, Jabber (see OTR fingerprint on my about.me), PGP encrypted email (see public key on my Keybase.io), Wickr, Signal, or however you (securely) prefer. Feedback welcome.

Pittsburgh Synagogue Shooting Suspect's Gab Posts Are Part of a Pattern

11 people were killed and six others—including four police officers—injured Saturday when a gunman opened fire during a baby-naming ceremony at the Tree of Life Congregation, a Synagogue in Pittsburgh. The shooter, Robert Bowers, 46, surrendered to the police and was taken to the hospital, a local councilwoman told the The New York Times. Bowers—who has been linked to an account on the social media site Gab that shared anti-Semitic messages—is expected to face hate crime charges. The Anti-Defamation league called the shooting “likely the deadliest attack on the Jewish community in the history of the United States.”

Gab, a relatively small social network that claims to “defend individual liberty and free expression online” has fewer restrictions on what users can post than platforms like Twitter and Facebook. Its relative lawlessness has made it a gathering spot for white supremacists and other members of the extreme alt-right. The network released a statement following Saturday’s shooting identifying an account believed to have belonged to Bowers, the Synagogue shooter. “The account was verified and matched the name of the alleged shooter’s name, which was mentioned on police scanners,” the statement reads. “This person also had accounts on other social networks.” Gab says it took down Bowers account and contacted the FBI, according to the post. Paypal banned Gab from its payment platform after Saturday’s shooting.

This is the second attack this week in which the perpetrator has been linked to social media accounts that shared online conspiracy theories. Cesar Sayoc, 56, who was arrested earlier this week in connection with 13 explosive devices sent to prominent Democrats and CNN, is believed to have used sites like Twitter to share ultra-right-wing conspiracy theories about many of the people he targeted. That includes George Soros, a prominent Jewish philanthropist who is often the target of right-wing conspiracy theories, which have been repeatedly echoed by President Trump. The first device discovered Monday was located at Soros’ home.

It may never be entirely clear why Sayoc and Bowers chose to carry out violent attacks. But their social media activity is part of a broader increase in anti-Semitism online. Jonathan Albright, a researcher at Columbia’s Tow Center For Digital Journalism, has recently found a high volume of anti-Semitic content on Instagram, under hashtags like “#soros”. In advance of the midterm elections, far-right extremists have used anti-Semitism as a talking point on social media, according to a report released Friday from the Anti-Defamation league, a Jewish civil-rights group that tracks bigotry and hate crimes. The ADL’s researchers interviewed five Jewish Americans who are involved in politics and analyzed more than 7.5 million Tweets, sent between August 31 to September 17 of this year. In that time, they found that amount of anti-Semitic language had increased. “The online public sphere—now a primary arena for communication about American politics—has become progressively inhospitable for Jewish Americans,” the researchers wrote. They also concluded that the majority of anti-Semitic messages posted to Twitter came from real individuals, not bots.

Anti-Jewish sentiment is also on the rise in seedier online locales, including Gab and the message board 4Chan, both of which are already known to house hate speech and far-right conspiracy theories. The use of term “jew” and a slur for Jewish people dramatically increased on Gab and 4chan’s politically incorrect message board following political events like the 2016 presidential election, President Trump’s inauguration, and the 2017 white supremacist rally in Charlottesville, Virginia, according to a study conducted by the non-profit Network Contagion Research Institute that has yet to be peer-reviewed.

Anti-Semitism is also on the rise in the real world too. Instances of anti-Semitic harassment, vandalism, and assault increased 57 percent from 2016 to 2017, according to an Anti-Defamation League report released earlier this year. It’s the largest single-year jump the ADL has recorded since it began collecting data in the 1970s. In its most recently released survey, the FBI found that was an almost 5 percent rise in hate crimes in 2016—and, that of the roughly 20 percent of hate crimes that were religiously motivated, more than half were targeted against Jews. From 2014 to 2015, the FBI recorded a 10 percent rise in hate crimes.

It’s impossible, at this point, to directly correlate Sayoc and Bowers’ online postings to their subsequent violent attacks—but taken in tandem, the combination is troubling. Digital communities provide a fertile breeding ground for hate speech to fester and organize. It wouldn’t be the first time these online ecosystems spilled that hate into real world violence.


More Great WIRED Stories

Apple Shows Massive Cost Saving

Apple (AAPL) has been able to keep costs under control in the recent cycle. A recent teardown by IHS has shown a marginal increase in bill of material, BOM, compared to last year’s iPhone X. While the retail price of the iPhone XS Max has increased by $100 in comparison to the iPhone X, the BOM has seen only a $20 increase. The BOM cost for the iPhone X was $370 while the BOM cost for the iPhone XS Max is $390. Hence, the BOM makes only 35.48% of the total cost in the iPhone XS Max. In the iPhone X, this percentage was 37%.

Despite a higher SDRAM and a shift to 7nm processor technology, the cost increase has been quite low. The same report mentions that a Samsung Galaxy S9+ had a BOM of $375.80 with a retail price of $840. This shows that the S9+ had a much higher BOM cost of 44.73%. In addition to better margins on the iPhone XS Max, Apple is also reported to be performing better than last year’s cycle in terms of unit sales. This should certainly provide a strong tailwind to overall margins of the company. It is possible that Apple is able to break its eleven-quarter streak of falling year-on-year operating margins.

Better pricing

Many analysts believed that Apple would go with a lower pricing in this iPhone cycle. The upward price move was a bit of a surprise but it has helped Apple improve its gross margins in this segment. We can see from the IHS teardown that there has been over a 150 basis-point of improvement in the BOM margin of the XS Max compared to the iPhone X of last year. The touchscreen display cost is the biggest component in the overall BOM. This year, the display cost has remained close to last year’s cost of $120, even though the screen size has increased.

Apple cost savings on Xs Max

Fig: Major bill of material components in the iPhone XS. Source: IHS

Before the launch of this iPhone cycle, many reports suggested that Apple will maintain the $999 price level for its most expensive model. At this price range, the BOM of the XS Max would have increased to 39% of the retail price. All eyes are now on the unit sales generated by XS models and the reception of the XR model. Between the XS and XS Max, it seems that the XS Max has the upper hand. The incremental price is only $100 and many customers have a preference for bigger screens. This is especially true in China where bigger screens help in easier navigation of one-stop ecosystems.

It would be important to see if Apple can keep up this improvement in the XR model. The teardown of the XR model by IHS will happen within a week of the launch of the device. Although the XR model has a retail price which is $250 less than the XS model, several component costs would also be much lower for Apple. The biggest cost saving would be on display.

The cost of an LCD display is usually around $40-$50 which gives a cost saving of $70 from the OLED version. Another big component cost is the camera. In the XS Max, the camera cost is $37.60. The XR will have a single rear camera while the XS has a second telephoto lens. If the XR’s BOM cost is 36% of the retail price, the XR would have a total component cost of $270. This is $120 less than the XS Max.

Most of the projections estimate that the XR would corner over 50% of total unit shipments in the current iPhone cycle. There is a historical trend to support this forecast. CIRP estimated that the iPhone X sales were less than 20% of the total unit sales in June. This trend could be repeated in this cycle, which should boost the sales of the lower-priced XR. Hence, it would be very important to see the BOM of the XR and the level of cost saving which Apple can deliver in this model.

Source: CIRP

Growth in Services and margins

The Services segment has been showing good growth rate for the past few quarters. The trailing twelve months revenue from the Services segment is over $35 billion. Even at this level, Apple is able to deliver over 30% YoY growth in this segment. However, the Services segment is made up of revenue streams from several different businesses with huge differences in margins.

For example, it includes revenue from both the App Store and Apple Music. According to estimates, the App Store has a gross margin of close to 90% while Apple Music has a gross margin of 15%. Faster growth in lower margin businesses will improve the overall growth rate of the Services segment, but will not help in increasing the margin.

This is one of the reasons why Apple’s operating margin has been falling for the past eleven quarters.

Fig: Fall in operating margin of Apple on a YoY basis for the past eleven quarters.

The product mix in the Services segment will further shift towards lower-margin businesses as Apple grows its digital content offerings. Hence, it is very important that the iPhone segment continues to show improvement in gross margins by keeping the BOM under control. Investors should also note the sales mix within the iPhone segment. We can see from the CIRP image that there was a considerable decrease in the percentage share of the latest models compared to earlier cycles.

In this image, the latest models made close to 50% of total sales in June 2018 while in the earlier cycle, the latest models made over 80% of total sales mix. Apple has reduced the number of iPhone models available in this iteration. This should give the flagship models a better chance to improve their percentage share.

If Apple can limit the bill of materials for its iPhone XR model, we could finally see a break in the falling operating margin trend.

Investor takeaway

Apple has shown an improvement in BOM for the iPhone XS Max model according to a recent teardown by IHS. The BOM of this model is 35.48% of the retail price compared to 37% for the iPhone X in the last cycle. Apple could show a similar improvement in the XR model by controlling the cost of display and camera. If the sales mix in this cycle moves heavily towards the newer models, we should see significant improvement in margins from Apple.

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.

Amazon projects holiday season sales below Wall St. targets

(Reuters) – Amazon.com Inc (AMZN.O) forecast disappointing holiday season sales on Thursday, projecting its fourth-quarter revenue growth would be the slowest in years, sending shares of the online retailer down 6 percent in after-hours trade.

A logo of the Amazon fulfillment is seen outside the Amazon fulfillment center in Kent, Washington, U.S., October 24, 2018. REUTERS/Lindsey Wasson

Third-quarter sales also missed analyst estimates, and Amazon forecast operating income for the fourth quarter below estimates.

The outlook marks a potential change for Amazon, which has posted consistent and strong revenue increases for years.

The retailer is preparing for its busiest time of year, the holiday shopping season that runs from around the U.S. Thanksgiving holiday in late November through New Year’s. It forecast that fourth-quarter sales will rise between 10 percent and 20 percent, or up to $72.5 billion. Analysts were expecting $73.9 billion, according to Refinitiv data.

That would be Amazon’s lowest quarterly sales growth since at least the start of 2016.

Amazon forecast operating income between $2.1 billion and $3.6 billion, below the $3.87 billion expected by analysts, according to FactSet.

Amazon’s chief financial officer, Brian Olsavsky, told reporters on a call that the company expected a strong holiday season.

For the third quarter, net sales rose to $56.58 billion from $43.74 billion a year earlier, but missed analyst estimates of $57.1 billion, according to Refinitiv data.

Amazon’s net income rose to $2.88 billion, or $5.75 per share, in the third quarter ended Sept. 30, from $256 million, or 52 cents per share, a year earlier.

Total operating expenses surged 21.8 percent to $52.85 billion as the company invests heavily in its Prime program, grocery delivery from Whole Foods stores and the creation of original video content.

Revenue from Amazon Web Services, the company’s fast-growing cloud services business, surged 45.7 percent to $6.68 billion, narrowly edging past estimates of $6.67 billion.

Shares of Amazon were trading down at $1,674.12.

Reporting by Jeffrey Dastin in San Francisco and Arjun Panchadar in Bengaluru; Editing by Leslie Adler

FCC to vote to allow U.S. devices to use European navigation system

WASHINGTON (Reuters) – The U.S. Federal Communications Commission said on Wednesday it will vote in November to allow U.S. devices to access the European global navigation satellite system known as Galileo, a move that could improve the services Americans use.

Galileo is a 10-billion-euro ($11.40-billion) satellite program being developed by the European Union as a rival to the U.S. Global Positioning System (GPS) that launched initial services in late 2016.

FCC Chairman Ajit Pai said in a Wednesday statement that “enabling the Galileo system to work in concert with the U.S. GPS constellation should make GPS more precise, reliable and resilient for American consumers and businesses alike .”

The FCC is proposing to waive its licensing requirements for non-federal operations with Galileo signals known as E1 and E5, subject to certain technical constraints, officials said.

The FCC includes conditions to ensure users of satellite-based positioning, navigation and timing services in the United States will benefit from Galileo signals. The systems are interoperable under a 2004 agreement.

Pai noted that GPS “is integral to numerous everyday applications – ranging from driving directions to precision farming.”

The EU has had to rely on Russian or U.S. GPS signals.

Europe in July launched four more Galileo satellites, taking the number in orbit to 26 and moving a step closer to having its own navigation system.

The Galileo system aims to have a total of 30 satellites by 2020. The EU aims to use Galileo to tap into the global market for satellite navigation services, the market for which it estimates will be worth 250 billion euros by 2022.

The EU, which first decided 17 years ago to move ahead with Galileo, has suffered some setbacks – including delays, financing problems and two satellites being put into the wrong orbit.

In August, Britain said it would start work on an alternative satellite system to Galileo.

Pai also said the FCC will vote in November to allow companies, like Tesla Inc CEO Elon Musk’s SpaceX and TeleSat Canada [PSPENC.UL], to expand the frequencies they can use so “that their fleets of low Earth orbit satellites can offer even better broadband service.”

In March, the FCC approved an application by SpaceX to provide broadband services using satellites at home and abroad and previously approved a similar request by Telesat, which is principally owned by Canada’s Public Sector Pension Investment Board and Loral Space & Communications Inc.

Pai also is proposing the first comprehensive review of the FCC’s orbital debris rules since their adoption in 2004 to address the “growing risk” to satellites from the rising amount of space junk.

Reporting by David Shepardson, editing by G Crosse

Apple and Amazon Might Still Be At Risk

The tech giants claim that Bloomberg’s story keeps changing and that much of it lacks evidence. However, there’s an ever better reason why the Bloomberg story can be dismissed out of hand: it’s completely ridiculous because if China wanted to add a spying capability to hardware, they have a far less detectable way to do so.

Contrary to how they appear to the electronically illiterate, circuit boards are not particularly complex. An competent electronic engineer can compare a board as manufactured to the board’s circuit design simply by eyeballing. That’s especially true as circuitry has migrated from the boards onto SOC (System On Chip) designs, which tends to make boards less complex.

Sticking a “spy chip” on a circuit board is about as subtle as storing a “secret” key to your car by using it as the hood ornament. The entire concept is beyond ludicrous, especially since it would be trivial for the Chinese government to hide the spy circuitry inside one or more the chips.

There are two ways this could be accomplished with little to no chance of detection:

1. When the chip is originally designed.

It’s been decades since chip designers laid out the internal circuity in a semiconductor by hand. Today’s designers use fantastically complex programs (called EDA or Electronic Design Automation) that handle the layout of the billions of components and connections that make up a modern chip.

During that process, much of the circuitry is transferred into the chip design in the form of “blocks” of pre-defined intellectual property (IP) that’s already been designed and tested to correctly perform certain functions. IP blocks are basically black boxes; if a designer upstream inserted some rogue circuitry, it would be propagated everywhere that IP block ends up.

There’s no evidence that this has ever happened but it remains a possibility. However, there’s much more likely point where a bad actor could insert rogue circuitry into a chip…

2. When the chip is manufactured.

Chip manufacturing plants (aka fabs) don’t simply make chips as designed. Especially at the smaller (and thus harder to manufacture) geometries reserved for the most important chips, fabs tend to have their own, proprietary manufacturing processes with their own peculiarities.

As a result, chip manufacturers have their own design engineers who make changes to the original chip design to ensure it can be correctly manufactured with an acceptable yield (i.e. a small number of failed chips.) While the fab engineers typical work closely with the original designers, it would be trivial for a fab engineer to add a rogue “spyware” block of IP that would be virtually undetectable.

What’s scary about this scenario is that chip-embedded rogue IP would be almost impossible to detect except, maybe, when it was communicating with another device or chip, like by piggy-backing data on the “noise” accompanying a wireless signal. (I don’t know if that would actually work, but there are probably other ways to accomplish the same thing.)

Note: I’m not saying that this has actually happened nor am I accusing SMIC of anything. (I’ve reached out to SMIC for comment but have not heard back from them.) Frankly, based upon what I’ve heard, their industry reputation is sterling. Certainly they’re extremely competent technically.

I am saying, however, that if China wanted to widely spy on companies and individuals, it wouldn’t need the absurdly ham-handed approach of adding a chip to a circuit board. In short, as ridiculous as Bloomberg’s “spy chip” story might seem, it theoretically could contain a core of truth. So maybe it’s unwise to immediately dismiss the Bloomberg story as utter nonsense.

Oculus Co-Founder and CEO Brendan Iribe Is Leaving Facebook

The co-founder and CEO of Facebook’s Oculus virtual reality business is leaving.

Brendan Iribe said in a Facebook post on Monday that he was stepping down from Facebook, without saying why. Although Iribe had the title of CEO—a carryover from when Oculus was an independent startup—Facebook CEO Mark Zuckerberg hired Hugo Barra, a former executive of the Chinese smartphone maker Xiaomi, to lead Oculus in 2017 as Facebook’s vice president of virtual reality.

Facebook bought the Oculus VR startup in 2014 for $2 billion and has since debuted several VR headsets like the Oculus Rift and Go, although the technology hasn’t caught on with mainstream consumers.

Iribe’s departure from Facebook follows the March 2017 departure of controversial Oculus co-founder Palmer Luckey. Two other Oculus co-founders, Nate Mitchell and Michael Antonov, remain at Facebook.

Iribe did not disclose any future plans.

His exit from Facebook comes amid arguments between higher-level executives there over a decision to cancel a future Rift VR headset that’s powered by personal computers, according a report by TechCrunch that cites an unnamed source. Facebook recently debuted its Quest VR headset that doesn’t need a PC to operate, but hinted during its annual Oculus event in September that it was still planning a newer version of its Rift headset.

Mitchell said in a Tweet on Monday that Oculus was “still driving forward on the Rift/PC platform with new hardware, software, and content.”

Several other executives from other startups that Facebook acquired have also left the social media giant in recent months.

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Instagram co-founders Kevin Systrom and Mike Krieger said in September that they would leave Facebook, just months after Jan Koum, the CEO of messaging app WhatsApp, said he was leaving the company.

Fortune contacted Oculus for more information and will update this story if it responds.

U.S. regulator orders halt to self-driving school bus test in Florida

WASHINGTON (Reuters) – The National Highway Traffic Safety Administration on Monday said it had ordered Transdev North America to immediately stop transporting school children in Florida in a driverless shuttle as the testing could be putting them at “inappropriate” risk.

The auto safety agency known as NHTSA said in an order issued late on Friday that Transdev’s use of its EZ10 Generation II driverless shuttle in the Babcock Ranch community in southwest Florida was “unlawful and in violation of the company’s temporary importation authorization.”

“Innovation must not come at the risk of public safety,” said Deputy NHTSA Administrator Heidi King in a statement. “Using a non-compliant test vehicle to transport children is irresponsible, inappropriate, and in direct violation of the terms of Transdev’s approved test project.”

In March, NHTSA granted Transdev permission to temporarily import the driverless shuttle for testing and demonstration purposes, but not as a school bus.

The agency said the company had agreed to halt the tests. A spokeswoman for Transdev did not respond to several requests for comment on Monday.

Transdev North America is a unit of Transdev, which is controlled by France state-owned investment fund Caisse des Dépôts et Consignations.

The company in August issued a news release saying it would “operate school shuttle service starting this fall with an autonomous vehicle, the first in the world.”

Transdev said the 12-person shuttle bus would operate from a designated pick-up area with a safety attendant on board, would travel at a top speed of 8 miles per hour (13 kph), with the potential to reach speeds of 30 mph (48 kph) once additional infrastructure was completed.

There are numerous low-speed self-driving shuttles being tested in cities around the United States with many others planned.

NHTSA previously said it was moving ahead with plans to revise safety rules that bar fully self-driving cars from the roads without equipment such as steering wheels, pedals and mirrors as the agency works to advance driverless vehicles. The agency has said it opposes proposals to require “pre-approving” self-driving technologies before they are tested.

NHTSA told Transdev that failure to take appropriate action could result in fines, the voiding of the temporary importation authorization or the exportation of the vehicle.

Earlier this month, French utility Veolia (VIE.PA) agreed to sell its 30 percent stake in Transdev to Germany’s Rethmann Group.

Reporting by David Shepardson; Editing by Bill Berkrot

House Passes Retirement Component Of Tax Reform 2.0

Posted by Jon Vogler, Senior Analyst, Retirement Research on Oct. 18, 2018, in Retirement

House passes retirement component of Tax Reform 2.0

On Sept. 27, the House of Representatives approved retirement reform legislation (the Family Savings Act) as part of the “Tax Reform 2.0” package of bills.

The House also passed the American Innovation Act of 2018, which is the small business innovation portion of the Tax Reform 2.0 package. On Sept. 28, it also passed the Protecting Family and Small Business Tax Cuts Act of 2018, which is the part of the package that would make permanent various individual and small business tax provisions from the Tax Cuts and Jobs Act.

The version of the Family Savings Act which passed is very similar to the measure I described in a previous blog entry. Among other items, the bill would:

  • Relax the minimum distribution requirements for retirement savings.
  • Open up multiple employer plan (MEP) membership so that small companies without a common interest could band together to sponsor plans.
  • Create a new Universal Savings Account.
  • Improve the rules relating to election of safe harbor 401(k) status by eliminating the notice requirement for non-elective contributions.
  • Permit plan participants to roll over their lifetime income investment to another retirement savings vehicle if the plan sponsor decides to discontinue that investment option in the plan.
  • Allow employers to adopt a qualified plan up to the due date of their tax return.
  • Repeal the maximum age for traditional individual retirement account (IRA) contributions.
  • Modify nondiscrimination rules to protect older, longer-service participants.
  • Allow families to access their retirement accounts for new child expenses without payment of the 10% penalty tax for early distributions.
  • Expand 529 education savings accounts.

The latest bill includes four key amendments

The bill also reflects four changes made via amendment before the full House vote was taken. These additional provisions would: (a) create a fiduciary safe harbor with respect to the selection of an insurer for a guaranteed retirement annuity contract in a defined contribution (DC) plan, (b) allow a 529 account to designate an unborn child as a beneficiary of the account, (c) eliminate a provision in the Family Savings Act that would have required a study of the Pension Benefit Guaranty Corporation’s single employer insurance program, and (d) exempt the bill from certain “pay-go” rules that otherwise could apply in the absence of revenue offsets.

According to the Joint Committee on Taxation, the Family Savings Act would reduce tax revenues by $21 billion over 10 years. The three most costly provisions are the new Universal Savings Account, the exemption from the required minimum distribution rules for individuals with an aggregate account balance (among IRAs and DC plans) of $50,000 or less and the open MEP changes.

As noted in my earlier blog, many of the provisions in the Family Savings Act were drawn from the Retirement Enhancement and Savings Act (RESA), a bipartisan Senate bill. It is unlikely that the Senate will take up the entire Tax Reform 2.0 package, or even the Family Savings Act, before the mid-term elections. It is possible, though, that the House and Senate could agree on a retirement package that reflects portions of the Family Savings Act and RESA in the lame duck session. It’s our understanding that preliminary talks between House and Senate staffers are already underway about a potential combination of the Family Savings Act and RESA.

We’ll keep you posted.

Sources:

Ignites, “House passes retirement reform,” Joe Morris, Sept. 28, 2018

NAPA Net, “Retirement component of Tax Reform 2.0 moves to Senate,” Ted Godbout, Sept. 28, 2018

SPARK Institute, “House passes Family Savings Act, which contains SPARK-supported provisions,” Michael L. Hadley, Sept. 27, 2018

PlanSponsor, “Annuity selection safe harbor tacked onto retirement bill,” Rebecca Moore, Sept. 28, 2018

Important information

Blog header image: Lucky-photographer/Shutterstock.com

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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House passes retirement component of Tax Reform 2.0 by Invesco US

Weighing The Week Ahead: Major Market Misperceptions

We have a light economic calendar with a focus on housing. Earnings season would normally be the most important market theme. For now, observers are seeing what they want to see in earnings reports. That makes it easier for pundits to take up a favorite topic: What is about to go wrong?

There are so many candidates that picking one as a theme would be a pure guess – even more than usual. Sticking with my promise to focus on the most important questions, regardless of pundit preferences, I am going to summarize the most important current market misperceptions.

Last Week Recap

In my last edition of WTWA I asked whether earnings season would spark a rebound in stocks. That was indeed a frequently discussed topic. For part of the week, it looked like the answer would be “yes.” At week’s end, that issue is still in doubt.

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 the futures chart from Investing.com. The image posted here shows a static view. If you go to the site, you can check out the news at various points during the week and adjust the view in many other ways. Since futures trade when the stock market is closed, you can also see that trading.

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The market was virtually unchanged on the week. That seems amazing to those who were watching it play out. The weekly trading range was 2.7 % — less than last week, but larger than we have experienced over the last few years. The VIX implied volatility measure remained higher than the actual results which are only slightly higher than the long-term average. I summarize actual and implied volatility each week in our Indicator Snapshot section below.

Noteworthy

I trust that the astute WTWA readership has strong and varying passwords. If you have many accounts, you need a password manager. I use Dashlane and monitor their blog, where I ran across the 2018 NFL Password Power Rankings. Noting that her Packers were only #10, Mrs. OldProf said the results should be population-adjusted. (I think the model requires an intelligence variable as well!)

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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. They remain positive overall but have weakened somewhat in all time frames. The long-term indicators have drifted back to the neutral range.

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

The Good

  • Earnings news – good so far. FactSet reports that 80% of companies have a positive earnings surprise and 64% a positive sales surprise. These are both better than the average result. The year-over-year growth has been 19.5%. The size of the beats is a bit less than average. Guidance has also been better than expected. The earnings news has been strong, but without much market reaction.

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  • Builder Confidence increased in October. Calculated Risk provides the analysis of the small beat over last month and consensus forecasts, concluding it to be “a solid reading.”

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  • The JOLTs report was again very strong, up over 18% year-over-year. David Templeton (HORAN) writes, “This is not the type of data output that occurs in a recessionary environment.”

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  • Some labor slack remains demonstrates Matthew C. Klein (Barron’s). He looks at the “super prime age” employment population and the increase in part-time workers resuming full-time jobs. The lack of wage pressure is the result.

The Bad

  • Housing starts registered only 1201K (SAAR). P 1268K E 1230K. Calculated Risk notes that starts are up 6.4% year-to-date compared to 2017. The comparisons will now be getting tougher. Bill’s continuing view is that there will be further growth in housing starts.

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  • Building permits for September were 1241K (SAAR). P 1249K E 1273K.
  • Existing home sales for September were 5.15M (SAAR). P 5.33 M E 5.30M. Calculated Risk notes that this is a “reasonable level” and less important than new home sales. While the YoY decline is small, it may reflect rising mortgage rates and the limitations on property tax deductions.
  • FOMC minutes should not really have been a surprise, but the market was troubled by the apparent willingness of the committee to raise rates beyond neutral.
  • Retail sales for September increased only 0.1% P 0.1% E 0.6%.Jill Mislinski tracks the data, noting that growth has been rising less than the post-recession trend for the last three years.

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The Ugly

Flood insurance in a World with Rising Seasis a study by Queens College, City University of New York researchers. The research notes the perverse incentives provided by government flood insurance, “$23 billion in the red as of 2016”. Coastal development and property values increase despite the higher risks of flooding.

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 a light one, with a focus on housing data. There will be plenty of earnings news, which would normally be the biggest story of the week.

Briefing.com has a good U.S. economic calendar for the week (which is why I am a subscriber). Here are the main U.S. releases.

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Next Week’s Theme

Earnings news is episodic. It is often challenging to find a theme in the stories. While the earnings reports will get attention, I expect pundit focus on a favorite theme: What is about to go wrong?

These stories will get plenty of attention. Some are valid concerns, but many reflect common misperceptions. I will balance the scales a by looking at the facts behind the assertions. To help follow the arguments, I am breaking with my customary procedure of offering opinions only in the Final Thought. My comments are italicized and in brackets.

Overview

The Corbin Advisors Industrial Sentiment Survey captures the concerns of the buy-side. Here is the word cloud.

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Some of these are certainly valid concerns. Let’s consider some misconceptions.

  • The economic cycle has lasted so long, it is about to end (and with it, the bull market). [I have seen several studies about the imminence of a cycle peak as a function of the length of the cycle. None show any support. Since this makes intuitive sense, and fits the purpose of the writer, it is simply asserted without evidence].
  • The VIX is a good predictor of market declines. [The VIX, calculated from the cost of equity options, is a concurrent or even trailing indicator, not a predictor. It also does not indicate complacency when the value is low. As I show each week, the cost of insurance always exceeds the actual volatility].
  • Things are so good, they must be about to turn. Jesse Colombo, cited in a MarketWatch report, explains why wealth is bad. Here is the key chart:

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[I hardly know where to start with this chart. It compares a combination of government, business, and individuals on the income side with individuals alone on the wealth side. Why? The Dot-com circle does not prove the point, so there is exactly one prior case. The vertical index is almost left to your imagination, and of course, no long scale to make the time periods similar. Why 1951, other than that is when the data started? Why is the stock market the cause of wealth? What about savings? But mostly, the problem is the “good is bad” concept. If you begin with a trough and go backward, you will find a peak. That does not help you identify a peak in real time. In the “housing bubble” circle, for example, you could have called the peak at any time after 2004. It is only in retrospect that the claim seems persuasive].

  • Indicator X (insert one of several) shows that there will be a recession soon. Last week it was a JP Morgan report of a 60% chance within the next two years. The chance for next year is 28%. [Little is known about JP Morgan’s model, but I am not impressed with the reports I have seen. There are not that many relevant past cases. Overfitting a model with a lot of variables is the biggest danger. You need to know how it was developed. That said, I don’t object to the odds for the next year. I don’t think they (or anyone else) can forecast more than a year ahead with any accuracy].
  • A crash is coming! Last week John Hussman pegged the possible loss at $20 Trillion. The report also listed other bearish forecasts with somewhat lower declines. [The forecasts suggest varying causes, but the numbers are all attention-getting. Large market declines have almost all been linked to recessions and/or financial stress, highlighting the importance of our weekly indicators].
  • The yield curve is inverting. [When there is an inversion we have a signal. That precedes a cycle peak by a year or so. There is no need to “forecast the forecast” as business cycle expert Bob Dieli puts it. Here is an example from his latest report.

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  • Well maybe it is not inverting, but rates are going higher. [This is typical commentary. As the long end rates moved higher, the inversion complaint shifted to an overall concern about rates. That type of analysis is a good indicator of an analyst on a mission. His/her glass will never get close to half-full].
  • Geopolitical issues are a threat to current stock prices. This is usually just presented as a laundry list, often with the claim that the current stock prices do not reflect these fundamental concerns. [There are some valid geopolitical concerns – those that affect global growth or inflation. Impact on oil prices, trade effects on prices, and reduced US exports are all good examples. Our challenge is to separate those concerns from a generalized list of “headwinds”].
  • Debt is growing and will undermine the entire financial system. [Debt is certainly growing, but so are assets and income. Looking only at the size of debt – with no log scale of course – makes things look totally out of control. I am not concerned about individual debt given the improvement in repayment ability. I am not very concerned about corporate debt, which may well be a rational choice given low interest rates. Government debt is another matter. It is a real problem. It needs to be addressed. Like many problems, there are no immediate consequences of neglect].
  • Indicators are “rolling over.” This is often cited as “growth is decelerating.” [A very high rate of growth cannot keep increasing forever. Settling back to a normal rate of growth is just fine. If, for example, the rate of GDP growth dropped to 2.7% or so, that would still be a healthy rate – good for employment, earnings, etc. A slowing of the rate of growth always happens before a decline, but it does not always indicate a decline. Think of it as a necessary but not a sufficient condition. Expect to see many indicators like this in the next few months].
  • The Fed is raising rates. [Interest rate increases in the current range are not very important for stock prices, according to all the historic data we have. This is not just a matter of a slogan. Check out any of the recent WTWA posts for more on this topic].

There are many other candidates for the list of pundits’ favorites. Please add your own ideas in the comments. In today’s Final Thought, I’ll add a few more observations.

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

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Short-term trading conditions have taken a turn for the worse. The identification as “bearish” is a reaction to volatility, not a prediciton of a short-term decline. When conditions are technically challenged, we watch trading positions even more closely. It is possible for our trading models to exit completely if there is further deterioration.

Long-term trading has also dropped a point on a technical basis. This differs from the fundamental analysis which remains very strong.

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.

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.

Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis. To emphasize the difference between sentiment and reality, it is time for another update of the Big Four indicators – the key elements in recession dating.

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The Big Four shows consistent and broad growth.

Guest Commentary

Liberty Street Economics takes a close look at the effect of increased regulation on bank arbitrage activity. The authors conclude that additional costs have decreased activity both by banks and hedge funds. You can readily see the flattening and recent decline of the notional value of derivatives. [Jeff – And of course, these positions are largely offsetting. We don’t really know the net exposures].

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James Picerno’s (The Capital Spectator) business cycle risk report provides a watchful positive.

For now, the risk of recession remains virtually nil and it’s unlikely that a downturn will start in the immediate future, according to broad set of indicators. But projections for next year, which remain highly speculative at this point, suggest that recession risk will rise – a forecast that deserves close attention as new data arrives in the weeks ahead.

Insight for Traders

Check out our weekly Stock Exchange post. We combine links to important posts about trading, themes of current interest, and ideas from our trading models. This week we asked whether traders would rather be “right” or be successful. This important concept is something you should decide and then live with. 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 this analysis of a trade by “Davidson” (via Todd Sullivan). He explains that market psychology and business returns often diverge, and he provides a helpful example of Kansas City Southern (KSU).

Market psychology often diverges from business returns. Identifying these situations is what produces investment opportunity, but the investment return is dependent on market psychology turning in the direction which benefits the investment decision. History tells us that investors eventually respond to the underlying returns. The issue for investors is that one may have to wait through a frustrating period of watching business returns evolve as anticipated without markets responding. KSU provides an excellent example of the investment process.

Check out the entire post to appreciate the example.

Stock Ideas

Chuck Carnevale applies his powerful analytical methods in a look at a popular candidate, IBM. As usual, he combines a lesson in analysis with good ideas about a specific stock. Watch the video! (See also Nicholas Ward’s analysis below in the “watch out” section.

Emerging markets? The Barron’s Roundtable highlights some beaten-down choices including Alibaba (BABA), Tencent (OTCPK:TCEHY), and Baidu (BIDU). “Alibaba was the consensus favorite of the roundtable.”

Morningstar identifies economic moats and strong balance sheets as the keys to maintaining dividends. Using that as an initial screen, they then look for the cheapest candidates, creating an interesting list of possibilities.

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!

This week I especially enjoyed his discussion of annuities. I have joined others with annuity warnings – high commission products that substantially trail alternative methods. Gil thinks objectively about the concept, identifying why this approach might fit some investors.

[Jeff – BTW, I have occasionally had a client where an annuity was the correct solution. I take pride in helping people find a suitable solution at a discounted price.]

Abnormal Returns is an important daily source for all of us following investment news. His Wednesday Personal Finance Post is especially helpful for individual investors. I especially liked the Morningstar article by Christine Benz, Guess What? It May Actually Be Different This Time. She looks back at 2008 and her family’s wisdom in holding on. But then, are things different now? Not necessarily for the market, but for you? Tadas also pointed to the “watch out” piece below about ambulance chasing advisers. And also the Ben Carlson post on market corrections.

Watch out for…

Market advisers who play on your fears. Quentin Fottrell (MarketWatch) urges you to “proceed with caution when you sense that someone is trying to sell fear.”

IBM. Nicholas Ward speaks, no doubt, for many investors who have given up on the stock. He notes the difficulty in analyzing a company with a high yield, slowing revenue growth, but plenty of stock buybacks. [Jeff –In general, I agree that the stock is not exciting as a standalone purchase. We occasionally use it as a platform for selling near-term calls, allowing it to be called away. This has worked well, and we’ll probably invest in the buy/write on Monday.]

Final Thought

The progress in behavioral economics has made many people aware of anchoring – a perception that lingers in your mind, interfering with rational thought and analysis. David McRaney has a nice discussion. He reviews several interesting (and fun) examples of how providing a random number alters the perceptions in a group of subjects. How many African countries are in the UN? What is the population of Venezuela?

This effect is now widely accepted by nearly all market analysts. And then it is forgotten. The constant repetition of an idea has an effect. The factual basis does not matter. The aging bull market, the role of the Fed, and assorted correlation/causation errors are all examples. I have tried to illustrate a few of these, helped by readers who inquired about some of the posts mentioned.

Why are the anchoring stories so negative? Because the stories almost write themselves and attract the attention of a wide audience. Dr. Hussman thinks we might lose $20 Trillion (assuming we have done no profit-taking along the way). Mr. Colombo warns us that the apparent good news about improved wealth is actually a bad omen. The Hussman commentary often leads the list of popular articles. Mr. Colombo reports that he has 10 million followers across several different platforms. They are both major, successful forces in the world of market influence.

It would be interesting to calculate the market gains since Dr. Hussman first used “overbought, overbullish, and overvalued” and even before he added “obscene.” I’ll take the “over” on $20 Trillion.

We would all like to identify bubbles and get out of the way. An expert on bubbles must not see them everywhere. Compare this 2014 Forbes Colombo article with the one mentioned above: These 23 Charts Prove That Stocks Are Heading For A Devastating Crash. It had 170K page views, and every chart is a Silver Bullet candidate. [I raised questions at the time but got no response].

Predicting disaster is exciting and profitable!

Check out Ben Carlson’s list of those who benefit from a correction. There is no way to inoculate yourself against the anchoring bias, but you can follow a fact-driven process.

I’m more worried about:

  • Brexit. Necessary changes between the UK and the EU have not been negotiated (Barron’s). Contracts, derivative clearing, data protection, and key UK financial employees who are EU citizens. Will there be a delay?
  • The psychological effect of worries. Business and consumer confidence are important for a strong economy.

I’m less worried about:

  • Earnings growth. Can it be a catalyst again this month? The reaction to conference calls will give us a sense of the market mood.
  • The Saudi issues. The death of a US journalist is an important story. Like many other news items, it is not a financial story.

Disclosure: I am/we are long BABA.

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: About to buy IBM versus short calls

This 9-Year-Old Girl Scout Just Displayed Warren Buffett's Best Advice to Entrepreneurs. (It Worked Perfectly)

Keep that start in mind as we share the story of a 9-year-old Canadian Girl Scout (actually, they call them Girl Guides in Canada). Because she managed to sell an entire stock of Girl Scout cookies in 45 minutes recently, in a way that displays Buffett’s key advice to entrepreneurs.

Reporter Emily Fitzpatrick from the CBC found the girl, named Elina Childs, as she towed her wagon full of cookies down a line of people waiting to buy newly legal Canadian marijuana, at a store called Nova Cannabis.

The nine-year-old Girl Guide and her father … sold all 30 boxes in less than 45 minutes, earning $120 for Girl Guides.

“It amazed me how quickly they went,” said her dad, Seann Childs. “Even people in cars driving on the avenue there would stop and roll down their window and ask for cookies.” 

Which brings us back to Buffett. His best advice for entrepreneurs? (It differs from his top advice from investors, of course.)

“If there’s one thing to remember: Delight your customer,” Buffett told interviewer Dina Habib Powell at a Goldman Sachs event in 2016.

Regardless of whether Elina Childs actually knows about Buffett, his advice describes exactly what she did here. She found an audience that would be delighted by her product, rather than trying to force it onto other people.

Consider the more traditional methods lots of parents encourage their daughters to use to sell Girl Scout cookies, and how this compares.

  • Sell them door to door? Super inefficient. Who knows who’s even home? 
  • Stand outside a shopping center? Maybe, if you’re allowed to. But you’re probably trying to sell cookies to people on their way to or from a big store with a much bigger selection. Plus you’re competing with other girl scouts.
  • Bug your parents’ coworkers? This is a common strategy. I’m not sure how much it’s about delighting customers though, as opposed to pressuring them.

Instead, the 9-year-old Childs and her dad took the cookies to an audience that they could be sure would be delighted by the idea of buying cookies. 

(One thing that I haven’t understood, not having a lot of experience with this myself: Don’t you get the munchies after using marijuana, not before?)

Regardless, even if it’s been done before, it’s a smart way to find people who love your product: and a brilliant execution of Warren Buffett’s best advice.

5 Ways to Spot Bad Customers That Also Identify Great Employees

There is a cliche saying in marketing that it takes eight or 11 or 17 impressions — it gets longer every time marketers say it — before a customer is ready to buy from you. While some version of that is undoubtedly true, it’s easy to confuse those passive marketing impressions with your more intentional sales follow ups

So, how hard should you try to convince someone else to buy from you? In my opinion, not hard at all. The hardest customers for you to close will be the hardest customers for you to satisfy. 

I’ve seen this over and over again. When a prospective customer is skeptical of your product or service, it’s tempting to want to spin your conversation in a dozen ways so that they finally see the value that you provide. 

And, when you’ve persisted long enough for them to convert, they look for every opportunity to prove you wrong — to convince you that they weren’t actually a fit after all. Cue the cancellations, refunds, and over-and-beyond support to try to make things right.

While you shouldn’t waste time trying to close those picky customers, you should definitely invest time recruiting picky employees. The same traits that make for the worst customers are often found in the best employees. 

Here’s how to spot them.

They have options, and they are the prize.

The worst customers come to you with 10 other companies that are vying for their business. One of my consulting clients, a printing brokerage, was bombarded with estimate requests from companies that seldom intended to buy; they just needed at least three bids to appease management.

Rather than connecting with your messaging or seeing something unique in your product or service, the customer has put you on a long list of possible providers. Red flag. 

But, when a prospective hire has multiple companies pursuing them, it gives you confidence about their value in the marketplace. And, it moves the process along faster, because if you don’t get them, someone else will. 

They’re price shopping.

When a customer shops solely on price instead of value, that’s a recipe for disaster. Unless you’re selling a commodity or reselling a product against an identical supplier, a great customer would weigh the pros and cons of the full relationship and not just select the lowest price.

The best applicants, however, know their value and are willing to ask for it. Likely, they have multiple opportunities, and the price that you’re willing to pay is a key part of the equation. 

They come in with obscure questions.

If a customer is asking extremely specific questions during the sales process, rest assured that they will have extremely specific customer support tickets as well. When I demo our software at Trainual, a customer with a few clarifying questions about the product is good. A customer that asks about modifying the printing margins on a PDF export makes me raise an eyebrow.

But, the best employees ask a lot of questions during the hiring process. They want to know about your products and services, your team, your benefits, your mission — everything that will help them determine if your company is the right fit for them.

They want to make it a group process.

When a customer requests a demo, and then another demo with a different set of people, and then starts an email thread with a larger group, it shows that they aren’t the decision maker, and the sale is going to take a while. 

When an employee is interviewing, however, they should want to meet as many people as possible to make sure they’re a good fit with your team. They should ask questions about your teammates outside of town, introduce themselves to others when touring the office, and give everyone a chance to weigh in on the hiring process.

They don’t make quick decisions.

Some customers are decisive. They recognize the value of your solution and they pull the trigger. Other customers don’t make quick decisions, and can take weeks, months, or even years to convert, taking up a lot of your resources in the process. 

When you’re hiring, a quick decision or quick start date can show a lack of options, so a slightly longer decision process is actually a good thing. It can be frustrating when a transaction with a customer takes a long time to cultivate, and there are several red flags along the way. But, learn to recognize these same characteristics as positive with potential hires.

The customers that are hardest to sell are the hardest to please. The applicants that are hardest to sell are the hardest to live without.