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What Is Adamis Worth?

On the evening of July 1st, investors in Adamis Pharmaceuticals (NASDAQ:ADMP) received the long-awaited news that the developmental biotech had secured Novartis (NYSE:NVS) as its partner to lead the US commercialization efforts for Symjepi, an FDA-approved epinephrine injector.

Some of the specifics of the deal, such as the size of upfront payments and milestones, were not included in Adamis’s original announcement. But even without the details, shares began to rise precipitously. In premarket trading on Monday, shares had climbed 65%. That rise proved somewhat short-lived, however, and shares began to retrace early in the trading session. A rally in the afternoon led to a close up 50% from the previous day, at $4.80 per share.

We published an article in reaction to the news, providing some initial thoughts on the deal. This research note delves a bit deeper into the deal, which was detailed in an 8-K filing published Monday afternoon. We also address the broader question of valuation in order to determine an appropriate price target for Adamis in light of its new partnership and the potential of its pipeline.

The Deal at Hand

The 8-K added some valuable new information to the original announcement, but it failed to dispel all the question marks. Specifically, it does not provide details of the upfront payment, nor the scale and magnitude of milestone payments. This makes a full assessment of the deal somewhat challenging, but it appears Adamis has opted for a larger piece of the profits than for upfront cash. We can, of course, guess at a figure. Analyst predictions range from $2 million to $5 million, which would be in keeping with a deal that leans heavily on profit-sharing. We will have to wait until the Q3 2018 earnings report to get the full details on this. Interestingly, in a break from its usual tendency to disclose as little information to the public and shareholders as possible, Adamis evidently wanted to announce the amount of the upfront payment. Novartis has insisted on confidentiality, and Adamis has – unsurprisingly – complied.

While we do not have a lot of information about the immediate financial boons coming Adamis’s way, we do know quite a bit more about the nature of the partnership and Adamis’s earning potential. From the recent 8-K:

Under the terms of the Agreement, the Company appointed Sandoz as the exclusive (including as to the Company) distributor of Symjepi in the United States and related territories (“Territory”), in all fields including both the retail market and other markets, and granted Sandoz an exclusive license under the Company’s patent and other intellectual property rights and know-how to market, sell, and otherwise commercialize and distribute the product in the Territory, subject to the provisions of the Agreement, in partial consideration of an upfront fee by Sandoz and potential performance-based milestone payments. There can be no assurances that any of these milestones will be met. As part of the Agreement, Sandoz has commercial rights to the Symjepi Epinephrine Injection USP 1:1000 Injection 0.3mg pre-filled single dose syringe product previously approved for marketing by the U.S Food and Drug Administration (“FDA”), as well as the Symjepi (epinephrine) Injection 0.15mg product if approved by the FDA, which is intended for use in the treatment of anaphylaxis for patients weighing 33-65 pounds and for which the Company submitted a supplemental new drug application to the FDA on November 27, 2017. The Company retains rights to the intellectual property subject to the Agreement and to commercialize both products outside of the Territory, but has granted Sandoz a right of first negotiation regarding such territories. In addition, the Company may continue to use the licensed intellectual property (excluding certain of the licensed trademarks) to develop and commercialize other products (with certain exceptions), including products that utilize the Company’s Symject syringe product platform.

The Agreement provides that Sandoz will pay to the Company 50% of the net profit from net sales, as each such term is defined in the Agreement, of the product in the Territory to third parties, determined on a quarterly basis. The Company will be the supplier of the product to Sandoz, and Sandoz will order and pay the Company a supply price for quantities of products ordered. Under the Agreement, net profit is determined based on the amount of net sales less the supply price that Sandoz pays the Company for quantities of the product sold in the applicable period and less certain additional amounts relating to sales, distribution and other expenses and amounts allocable to the product, and net sales is determined based on the net sales recorded by Sandoz for sales of the product and reflecting a number of customary deductions allocable to the product including, without limitation, product recalls or returns, discounts and credits, rebates, and certain other items.

The Company will be responsible for all manufacturing, component and supply costs related to manufacturing and supplying the product to Sandoz. The Company is responsible for component sourcing and regulatory compliance in the supply chain and for testing of lots of product. The Agreement includes customary provisions relating to ordering, delivering and payment for product ordered by Sandoz.

We should take a moment to unpack the details of this deal. One immediate win for Adamis is its retention of all commercialization rights outside of the United States, which could carry significant financial benefits as Symjepi eventually moves into international markets. The deal also covers the lower-dose pediatric Symjepi Jr., which is currently under FDA review.

What is most interesting is the nature of the deal itself. Adamis will receive “50% of the net profit from net sales”, which is different from many pharmaceutical partnership agreements. Most often, royalties are paid as a percentage of net sales. In the case of Symjepi, other costs will be factored in, including the supply price and cost of sales. What that will mean in practice remains to be seen, but we can conclude with relative certainty that Adamis will be getting a much larger slice of the profits than is conventional in a drug commercialization partnership arrangement.

Valuing Symjepi

All eyes will be on Symjepi’s commercial rollout in the coming quarters. If it can secure substantial market share in relatively short order, then it will be generating very substantial returns for Adamis quite quickly. Since getting insurers online can take some time, it is likely to take a number of quarters to make serious headway and to compete for market share against competitors.

That said, Symjepi appears quite well-placed to seize considerable market share. Novartis has tremendous marketing muscle and could go toe-to-toe with Mylan (NASDAQ:MYL), the maker of EpiPen. Mylan and its market-leading product have been savaged in the media and by consumers over the past year due to the company’s aggressive pricing strategy that has tipped into the range of price gouging. A generic EpiPen has not helped much, thanks to persistent manufacturing issues that have led to a nationwide EpiPen shortage. Other competitors have failed to emerge. Kaleo’s Auvi-Q has been one of the few products competing with the EpiPen, but it lacks any discernible advantage in size, ease of use, or price. Despite the lack of any meaningful advantage, Auvi-Q managed to move from 4.4% market share in January 2016 to 32.5% in August 2017. Symjepi can beat out the market leader on all those factors.

The epinephrine injector market represents over $1 billion in annual sales. Mylan’s EpiPen still dominates the market; in 2016, it recorded $1.1 billion in sales, which translated to $419 million in net profit after taxes. Obviously, that level of profitability cannot be replicated in a scenario involving a lower-cost competitor, but the downward pressure on price should be counteracted – at least in part – by a growing overall market. Indeed, the global epinephrine auto-injector market is projected to grow 15% annually to 2026 to reach $6 billion, up from $1.63 billion in 2017. The United States is by far the biggest market, accounting for about 60% of consumption.

If Auvi-Q could, over the course of 18 months, seize more than 30% of the market without significant product differentiation, then it seems reasonable to surmise that Symjepi could do likewise – and more likely better. Taking 30% market share as the base case, Symjepi could see US sales worth $250 million in very short order, and could conceivably hit global sales worth $400 million in the relative medium term.

Future Value Drivers

Looking forward, Adamis has two principal value drivers: Symjepi and Naloxone. Symjepi will retain center stage for the foreseeable future, but it is important also to realize that the company’s pipeline has considerable potential. Mark Flather, the head of investor relations at Adamis, has frequently lamented that the market has paid little attention to the pipeline and other avenues for value creation. Now that the dark cloud of interminable commercial partnership negotiations has been dispelled, the market may be willing to give more credence to other pieces of the Adamis story.

The company submitted its investigational new drug application for its naloxone injection in December 2017. The naloxone market has been growing rapidly in recent years due to the opioid crisis. With prices rising rapidly for existing products, a lower-cost and easier-to-use alternative could seize considerable market share. Adamis may have the opportunity to disrupt yet another market with its naloxone offering – even if it is smaller and not quite as inefficient as the epinephrine injector market currently is.

Overall, there a number of catalysts inbound that should see significant value addition. Approval of Symjepi Jr. is expected, and the Symject naloxone treatment remains a high-potential opportunity slightly further down the line.

Cash is Still Concerning

Whether the upfront cash payment from Novartis is $2 million, $5 million, something in between, or something better entirely does not matter all that much to the Adamis story over the long term. However, it may matter in the short run. Given Adamis’s near-term cash constraints, the upfront payment could potentially mean the difference between the company opting to do a stock offering or not.

Adamis reported a net loss of $7.6 million for Q1 2018, with net cash used in operating activities of $7.9 million, leaving $10.1 million in cash and equivalents. That left the company with 1.5-2 quarters of runway left. With Q2 2018 now at an end, Adamis may have a couple months’ worth of cash. $5 million in upfront payment would likely allow the company to stretch out a little farther and to pay the upfront portion of the $2 million owed the investment bank that helped broker the deal, but it may prove difficult to keep the lights on without going to the market.

If Adamis intends to go to the market, it will likely do so after submitting its Q2 earnings report. That report will also give an updated read on cash burn. Shareholders should be especially mindful of the company’s actions over the next couple months.

Investor’s Eye View

So, where does this leave us?

On the positive side, Adamis is poised to rake in considerable earnings from sales of Symjepi. On the downside, it may take a little while for sales to ramp sufficiently to cover operating needs. The challenge for shareholders is finding the correct balance between these factors.

Currently, Adamis has a market cap of a little under $170 million. Even factoring in a 10% dilutive offering, that valuation is extremely low. With a well-differentiated product, a hated incumbent, and a strong backer, Symjepi should do very well. Novartis plans to move with haste to get a piece of the back-to-school action. That compresses the timeline somewhat, meaning Adamis may not need to raise funds. But if it does, it will do little to upset the underlying value proposition.

Setting a price target is challenging, given the multitude of moving parts and question marks. A couple analysts have already come out with revised targets in the wake of the partnership announcement. H.C. Wainwright has set a price target of $10, up from $7, while B. Riley FBR has raised its price target from $6.25 to $7.50 and Raymond James increased its target from $6.40 to $8.50. The Maxim Group has set the most ambitious price target, projecting a share price of $13.

Reworking some of our previous modeling, we currently see $9.25 as an appropriate 6-month price target, factoring in a potential 10% dilutive offering. With rapid and effective execution on the part of Novartis, there could be considerable further upside. Evidence of not needing to access funding from capital markets would also increase our target.

With many variables and scenarios to game out, we will work to refine our projections in the days and weeks ahead. But no matter which way we slice it, Adamis looks like a worthy stock to own.

Disclosure: I am/we are long ADMP.

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.

The Myths Of Stocks For The Long Run – Part V

Written by Lance Roberts, Michael Lebowitz, CFA and John Coumarianos, M.S. of Real Investment Advice

Choosing The Right Portfolio Benchmark

Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” -Ben Graham

Benchmarks serve an important role in growing one’s wealth. Most importantly they provide a yardstick to see how we are doing in meeting our future retirement goals. For those that rely on professionals to manage their money, a benchmark allows the client to gauge how the manager is performing versus what the market is providing.

We do not disparage the use of benchmarks. However, the purpose of this article is to help you understand the differences between an equity index and your portfolio. As we discussed in Part 2 of this series, the proper benchmark for any portfolio is the rate of inflation plus a rate of growth that achieves the specific level of inflation-adjusted dollars required at retirement. Meeting such a benchmark guarantees you meet your goal. No other index can claim that. Benchmarking to the S&P 500, or any other equity index, requires investors to take on excess investment risk which is not correlated to the financial goals or duration of the portfolio.

This article specifically addresses the difficulty of trying to track an equity benchmark index (i.e. the S&P 500.)

The continual efforts to “beat the benchmark” leads individuals to make emotional decisions to buy and sell at the wrong times; jump from one investment strategy to another, or from one advisor to the next. But why wouldn’t they? This mantra has been drilled into us by Wall Street over the last 30 years. While the chase to “beat the index” is great for Wall Street, as money in motion creates fees, most individuals have done far worse.

The annual studies from Dalbar show the dismal truth, individuals consistently underperform the benchmark index over EVERY time frame.

The reason this underperformance consistently occurs is due to emotional and behavioral tendencies and the many differences between a “market capitalization weighted index” versus a “dollar invested portfolio.”

Let’s set aside the emotional and behavioral mistakes for today, and focus on the differences between a benchmark index and your portfolio which make beating an index difficult.

Building The Sample Index

To best understand why tracking the S&P 500 index is hard we must first understand how the S&P 500 index is constructed. The following explanation is from Investopedia:

The S&P 500 is a U.S. market index that is computed by a weighted average market capitalization. The first step in this methodology is to compute the market capitalization of each component in the index.

This is done by taking the number of outstanding shares of each company and multiplying that number by the company’s current share price, or market value. For example, if Apple Computer has roughly 830 million shares outstanding and its current market price is $53.55, the market capitalization for the company is $44.45 billion (830 million x $53.55).

Next, the market capitalizations for all 500 component stocks are summed to obtain the total market capitalization of the S&P 500, as illustrated in the table below. This market capitalization number will fluctuate as the underlying share prices and outstanding share numbers change.

In order to understand how the underlying stocks affect the index, the market weight (index weight) needs to be calculated. This is done by dividing the market capitalization of a company on the index by the total market capitalization of the index.

For example, if Exxon Mobil’s market cap is $367.05 billion and the S&P 500 market cap is $10.64 trillion, this gives Exxon a market weight of roughly 3.45% ($367.05 billion / $10.64 trillion). The larger the market weight of a company, the more impact each 1% change will have on the index.

For example, if Exxon Mobil were to rise by 20% while all other companies remained unchanged, the S&P 500 would increase in value by 0.6899% (3.45% x 20%). If a similar situation were to happen to The New York Times, it would cause a much smaller, 0.0076% change to the index because of the company’s smaller market weight.”

Okay, with that baseline understanding of the construction of the S&P 500, let’s create a most basic index called the Sample Index which is comprised of 5 fictional companies. For simplicity purposes, each company has 1000 shares of stock outstanding and all trade at $10 per share. The table shows the index versus “Your Portfolio” which is a $50,000 investment weighted identically.

We will take both the Sample Index and Your Portfolio through various events and price changes that cause differences to occur between the two. The events, and passage of time, are labeled at the top of each table. At the end of the exercise, we provide you a performance chart covering the entire period.

In Year 1, our starting point, we divide “your portfolio’s” $50,000 investment into exactly the same weights and stocks as the Sample Index as follows:

There are a couple of caveats here. The first is that by using so few stocks the percentage changes to the index, and subsequently the portfolio, are amplified versus that of the must broader indexes. However, this only for informational and learning purposes – it is the concept we are after.

Secondly, there are many other factors, outside of the examples that we will cover today, that have major impacts on performance. Corporate events such as mergers, buyouts, and acquisitions affect the index. Your portfolio is also impacted by withdrawals, contributions, and your dividend reinvestment policy.

Lastly, and most importantly, none of the examples today include the significant impacts to portfolio performance over time which comes from taxes, fees, commissions and other expenses. These factors alone typically account for a bulk of the underperformance over the long term but are often ignored by investors trying to chase some random benchmark index.

The Status Quo

In year two, we assume that nothing exceptional, other than typical price appreciation or depreciation occurred. The table below shows the impact of price changes on both the Sample Index and Your Portfolio.

As you can see the Sample Index and Your Portfolio had the same price return and remain exactly the same.

Share Buybacks & Bankruptcy

Over the last ten years, corporations have become major buyers of their own stock, pushing such actions to record levels. Stock buybacks are typically viewed as a good thing by Wall Street analysts supposedly because it is a sign that the “company believes” in itself; however, nothing could be further from the truth.

The reality is that stock buybacks are often a tool used to artificially inflate bottom-line earnings per share which, temporarily, drives share prices higher. The biggest beneficiary of buybacks are the executives whose compensation is heavily tied to stock options. The losers are the long-term shareholders. Not only must the debt and interest expense, frequently incurred to conduct buybacks, be paid for with future earnings, but the buyback, in many cases, took precedence over investment in the company’s future. The long-term implications for the company and the economy are troubling.

The importance of buybacks cannot be overlooked. The dollar amount of sales, or top-line revenue, is extremely difficult to fudge or manipulate. However, bottom-line earnings are regularly manipulated by accounting gimmickry, cost-cutting, and share buybacks to enhance “per share” results in order to boost share prices and meet “Wall Street Expectations.”

Stock buybacks do not show faith in the company by the executives but rather a lack of better ideas for which to use the capital.

Importantly, for our overall example, the reduction in outstanding shares reduces market capitalization.

Let’s go back to our original index and portfolio example.

In year 3, Company DEF buys back 100 shares and each company experiences a change in its share price.

The table below shows the impact of these three events on the index and the portfolio.

Notice that the DEF share buyback caused the market capitalization of the index to fall and the weighting of DEF to decline versus the other stocks. Your Portfolio was unchanged and accordingly, the weightings of the index and your portfolio are different. As we will see, the returns will begin to diverge at this point because of the slight change in weighting.

Substitution Effect

In year four we introduce the “substitution effect.”

When company’s such as GM, AIG, Enron, Worldcom, and a host of others in history, goes bankrupt or have shrunken considerably, they are swapped out of the index for another company. The index is naturally reweighted for the “substitution.” The table below shows the impact of the substitution on the index and your portfolio.

The substitution not only adds a new stock to the index, but a stock with a much higher weighting than the one removed. Not only does Your Portfolio not hold the new stock but whatever value is left on the removed stock is still affecting your portfolio. Additionally, the change in weightings cause further misalignment between the index and your portfolio.

In order for you to get your portfolio back into alignment with the Sample Index, the stock of MNO Company must be sold and replaced with PQR. The problems with doing this are shown in the next table.

The Replacement Effect

The replacement of a stock in your actual portfolio is confronted by a problem. Since there is no cash in the portfolio, other than what was raised by the sale of MNO – only 100 shares of PQR can be purchased as shown in the table below.

As with each year previously we also included changes in price for each individual company other than PQR so that the substitution and replacement were done at the same price for example purposes.

Note: Yes, I could have rebalanced the portfolio to raise cash to purchase more shares of PQR, however, we have NOT rebalanced the index. Therefore, using just available cash is the appropriate measure.

Comparison Is The Problem

The point of this exercise is to show how different types of index and corporate events change the composition of the Index. Unless one is consistently rebalancing their portfolio they will not be able to match the index. Even if one is constantly trading to mimic the index, the commissions, taxes, and fees will weigh heavily on results over time and will lead to underperformance of the benchmark index.

The chart below once again returns us to our $100,000 invested into the nominal index versus a $100,000 portfolio adjusted for “reality.” A $100,000 investment in 1998 has had a compounded annual growth rate of 6.72% on a nominal basis as compared to just a 4.39% rate when adjusted for reality. The numbers are far worse if you started in 2000 or 2008.

Furthermore, both numbers also fall far short of the promised 8% annualized rates of return often promised by the mainstream analysts promising riches if you just buy their investment product, or service, and hang on long enough.

The reality, as shown previously, is that such an outcome will likely prove to be extremely disappointing. However, the financial media continually pushes the idea that we must “beat the index.”

However, comparison is the cause of more unhappiness than anything else. Perhaps it is inevitable that human beings as social animals have an urge to compare themselves with one another. Maybe it is just because we are all terminally insecure in some cosmic sense. Social comparison comes in many different guises. “Keeping up with the Joneses,” is one well-known way.

Comparison is why individuals have trouble patiently sitting on their hands, letting whatever process they are comfortable with work for them. They get waylaid by some comparison along the way and lose their focus. If an individual makes 12% on their investments, they are very pleased. That is, until they learn “everyone else” made 14%. Now they are upset.

The whole financial services industry, as it is constructed now, is predicated on making people upset so they will move their money around in a frenzy. Money in motion creates fees and commissions. The creation of more benchmarks, indices and style boxes is nothing more than the creation of more things to compare to which keeps individuals in a perpetual state of outrage creating more revenue for Wall Street.

Comparison of your performance to an index is potentially dangerous to your investing objectives.

The major learning points regarding benchmarking are:

1) The index contains no cash

2) It has no life expectancy requirements – but you do.

3) It does not have to compensate for distributions to meet living requirements – but you do.

4) It requires you to take on excess risk (potential for loss) in order to obtain equivalent performance – this is fine on the way up, but not on the way down.

5) It has no taxes, costs or other expenses associated with it – but you do.

6) It has the ability to substitute at no penalty – but you don’t.

7) It benefits from share buybacks – but you don’t.

In order to win the long-term investing game, your portfolio should be built around the things that matter most to you.

Capital preservation

A rate of return sufficient to keep pace with the rate of inflation.

Expectations based on realistic objectives. (The market does not compound at 8%, 6% or 4%)

Higher rates of return require an exponential increase in the underlying risk profile. This tends to not work out well.

You can replace lost capital – but you can’t replace lost time. Time is a precious commodity that cannot be regained.

Portfolios are time-frame specific. If you have 5 years to retirement but build a portfolio with a 20-year time horizon (taking on additional risk) the results will likely be disastrous.

We want to reiterate an important thought from the start of this article. Stock indexes have little to do with your goals. Later in this series, we will discuss a benchmark that is extremely relevant to every investor but used by a precious few – inflation. Simply, if your portfolio is growing faster than inflation your wealth is growing. However, just because your portfolio beat the S&P 500, it does not mean your wealth is actually growing.

As Ben Graham suggests, investing is not a competition and there are horrid consequences for treating it as such.

France's Bollore Group strikes partnership deal with Alibaba

PARIS (Reuters) – Bollore Group, the French conglomerate run by billionaire businessman Vincent Bollore, said it had signed a global partnership with E-commerce company Alibaba.

A man stands near the logo of Alibaba Group at the company’s newly-launched office in Kuala Lumpur, Malaysia June 18, 2018. REUTERS/Lai Seng Sin

The two companies said the partnership would cover cloud computing services, clean energy, logistics and other areas such as new digital technologies and innovation.

Bollore Group, which runs a large logistics business in former French colonies in Africa, also has a stake of around 20 percent in French media giant Vivendi.

Alibaba has been expanding its logistics network at home and abroad as it works to diversify its customer base.

Reporting by Gilles Guillaume; Editing by Sudip Kar-Gupta

This Is How Your Startup Should Emerge From Stealth, With A Bang

At least 4 Israeli startups emerged from stealth mode in June by announcing significant funding rounds.  At Start-Up Nation Central, we define stealth mode companies as business entities officially registered at the Israel Corporations Authority but lack a website with any  information publicly visible. Sometimes the stealth mode company’s founders won’t list the company on their LinkedIn profile –they prefer to stay “under the radar”. This usually happens because the technology they’re working on may need more testing and development, the founders may want to raise more money, their potential consumer base needs to be adequately understood and marketed –what’s called a product-market fit– or the company may be preparing for a big launch event to capture the public’s attention –emerging out of anonymity with a bang.

In June, some very serious tech companies unveiled their products to the market.

Panorays, a cyber security automation company, emerged from the stealth and announced a $5M Seed round led by Aleph VC. With Panorays, companies can shorten their third-party security evaluation process from 6 months to just 72 hours, while gaining continuous visibility and compliance to regulations such as GDPR. Panorays was co-founded by experienced technology industry executives from companies such as Imperva, AVG, ironSource, Windward, WalkMe and enSilo. Some were also former members elite Israeli Air Force technology units.


Meir Antar, Matan Or-El, Demi Ben-Ari.

Developer of deep learning chips for the car industry, autotech company Hailo Technologies emerged from the stealth and announced $12M in a Round A. The round was led by Maniv Mobility with participation from OurCrowd, Next Gear Ventures, and a number of angel investors, including Hailo’s own chairman Zohar Zisapel and Chief Executive Officer at Delek Motors, Gil Agmon. Hailo Technologies was founded by by two grads from the Israel Defense Forces secretive military intelligence Unit 81 (supplies the newest technology to Israeli combat soldiers). 

Ride Vision, which makes computer vision technology for motorcycles, emerged from stealth and raised a $2.5M Seed round led by YL Ventures. Ride Vision develops an automated driver assistance system (ADAS) for motorbikes.

Fintech startup Obligo, a developer of billing authorization software allowing landlords to bill tenants for damages, emerged from stealth mode and announced the completion of a $5M Seed financing round. The round was led by Israel-based venture capital firm 83 North, with participation by Entrée Capital, HFZ Capital, and Viola Credit.

Start-Up Nation Finder, the innovation discovery platform for the Israeli tech ecosystem, is tracking some 450 stealth mode companies, so keep an eye on Start-Up Nation Central’s channel on Forbes for more regular news on exciting Israeli startups.

Big Airlines Just Filed a Legal Document to End Ridiculous Emotional Support Animals. It's Absurdly Brilliant

When it comes to emotional support animals on airplanes, truth is stranger than fiction. You’ve seen the headlines–from Southwest, Delta, and United and others:

Now the biggest U.S. airlines have banded together to try to do something about the situation. The result is a 39-page legal document that starts out earnestly, and ultimately makes clear just how crazy it’s all become.

Officially entitled, “Comments of Airlines for America and the International Air Transport Association,” the airlines filed it earlier this month with the U.S. Department of Transportation. It reads like a legal brief, but it’s more like a position paper, and it starts out dryly enough.

By the time we get to the end, however, it’s clear that emotional support animals have gotten way out of hand. The absurdity of the descriptions in this lobbying document might just be enough to finally get the government to do something.

“Barking, biting, urinating and defecating…”

Airlines for America includes most big carriers, such as Alaska, American, JetBlue, Southwest, United, and others. Its filing starts by laying out some of the raw numbers:

  • A 56 percent increase in one year, in the number passengers traveling with emotional support animals. One member airline reports an 8x increase since 2012.
  • An almost uncontrollable surge in passengers trying to travel with “wild and/or untrainable species” that they claim as emotional support animals.
  • A “surge in the number of incidents involving animals manifesting aggressive behavior (including barking, biting, nipping, growling, and fighting) and uncontrolled urinating and defecating…)”
  • Finally, “the cheap and easy availability of fraudulent credentials … via unscrupulous vendors,” that let people with untrained and unsuitable animals claim they’re medically necessary support animals.

​But wait, the unsuspecting reader might think, reading this for the first time: Aren’t there laws that cover all of this? That’s where the absurdity really kicks in.

The big, obvious problem

There are a lot of different laws that seem cover emotional support animals, and they sometimes conflict. But Problem #1, according to the big airlines, is that the DOT requires them to let a wide variety of service animals fly, but then never actually defines what a service animal is, or what training or qualifications it needs to have.

Ironically, Other federal agencies do define service animals–for example the Justice Department says “dogs only,” but those definitions don’t apply to airlines. As a result, you can’t bring an emotional support peacock or iguana on a train or a bus or into a retail store, but airlines are on much shakier ground to stop you.

“It strikes most people as absurd that, under DOT’s current rules, airlines must consider allowing, for example, pigs and birds to travel in cabin on a case-by-case basis,” the airlines wrote.

Instead, they want DOT to copy the Justice Department, and also limit the definition of service animals to include only dogs.

Can we at least agree on endangered species?

You can almost feel the frustration behind the authorship of this document. It starts raising some ridiculous scenarios that appear to be authorized technically under current DOT rules, and asks for guidance or at least an assurance that airlines won’t be prosecuted.

For example, the current federal rules seems to allow an individual passenger to travel with as many as three different support animals at once. How is that supposed to work?

“For example, can the passenger control up to three animals simultaneously throughout the journey?” the document asks. “Are the animals trained to behave, including within the confines of an aircraft cabin?”

And, the airlines list some restrictions its members want to start using unilaterally, for example barring passengers from claiming animals like goats, hedgehogs, insects, birds, and any animal on the endangered species list, among others.

Would DOT at least consider exercising its “prosecutorial discretion” not to enforce laws against airlines that “refus[e] to transport animals other than dogs, cats, and miniature horses?” (We don’t yet know.)

Emotional support spiders and armadillos

There are some other requests as well–things that I think will seem almost overly reasonable in comparison to the current situation.

The airlines want to be able to require people traveling with support animals to actually check in with a person, rather than simply showing up with an online boarding pass.

And they want the right to ask passengers more questions about the animals, and require them to provide documentation of “vaccination, training and behavior.”

But eventually we get to the point that it seems as if the airlines are arguing with an invisible person. 

Because there can’t really be anyone at the DOT who thinks that the laws are truly set up to protect a passenger who wants to fly with an emotional support spider, for example, or an armadillo. 

That would be patently absurd, wouldn’t it? I think that’s exactly what the airlines want the public to know.

Stock Markets Hyper-Risky 3

The lofty US stock markets remain riddled with euphoria and complacency, fueled by an exceptional bull. Investors believe downside risks are trivial, despite long years of epic central-bank easing catapulting valuations to dangerous bull-slaying extremes. This has left today’s markets hyper-risky, with a massive bear looming as the Fed and ECB increasingly slow and reverse their easy-money policies. Caveat emptor!

History proves that stock markets are forever cyclical, no trend lasts forever. Great bulls and bears alike eventually run their courses then give up their ghosts. Sooner or later every secular trend yields to extreme sentiment peaking, then the markets inevitably reverse. Popular greed late in bulls, and fear late in bears, ultimately hits unsustainable climaxes. All near-term buyers or sellers are sucked in, killing the trend.

This mighty stock bull born way back in March 2009 has proven exceptional in countless ways. As of late January, the flagship S&P 500 broad-market stock index (SPX) had powered 324.6% higher over 8.9 years! Investors take this for granted, but it’s far from normal. That makes this bull the third-largest and second-longest in US stock-market history. And the superior bull specimens vividly highlight market cyclicality.

The SPX’s biggest and longest bull on record soared 417% higher between October 1990 and March 2000. After it peaked in epic bubble-grade euphoria, the SPX soon yielded to a brutal 49% bear market over the next 2.6 years. The SPX wouldn’t decisively power above those bull-topping levels until 12.9 years later in early 2013, thanks to the Fed’s unprecedented QE3 campaign! The greatest bull ended in tears.

The second-largest bull was another 325% monster between July 1932 to March 1937. That illuminated the inexorable cyclicality of stock markets too, as it arose from the ashes of a soul-crushing 89% bear in the aftermath of 1929’s infamous stock-market crash! Seeing today’s central-bank-inflated bull balloon to such monstrous proportions rivaling the greatest stock bulls on record highlights how extreme it has become.

All throughout stock-market history, this binary bull-bear cycle has persisted. Though some bulls grow bigger and last longer than others, all eventually give way to subsequent bears to rebalance sentiment and valuations. So stock investing late in any bull market, which is when investors complacently assume it will last indefinitely, is hyper-risky. Bear markets start at big 20% SPX losses, and often near or exceed 50%!

Popular psychology in peaking bull markets is well-studied and predictable. Investors universally believe “this time is different”, that some new factor leaves their bull impregnable and able to keep on powering higher indefinitely. This new-era mindset fuels extreme euphoria and complacency, with memories of big selloffs fading. Investors’ hubris swells, as they forget markets are cyclical and ridicule any who dare warn.

To any serious student of stock-market history, there’s little doubt today’s stock-market situation feels exactly like a major bull-market topping. All the necessary ingredients are in place, ranging from extreme greed-drenched sentiment to extreme bubble valuations literally. If this bull was merely normal, the risks of an imminent countertrend bear erupting to eradicate these late-bull excesses would absolutely be stellar.

But the downside risks in the wake of this exceptional bull are far greater than usual. That’s because much of this bull is artificial, essentially a Fed-conjured illusion. And that was even before the incredible 2017 taxphoria surge in the wake of Trump’s surprise victory! Back in early 2013 as the SPX was finally regaining its previous bull’s peak, the Fed unleashed its wildly-unprecedented open-ended QE3 campaign.

Understanding the Fed’s role in fomenting this anomalous stock bull is more important than ever. Not only is the Fed deep into its 12th rate-hike cycle of the past half-century or so, it has begun quantitative tightening for the first time ever. This QT is starting to unwind the trillions of dollars of QE that levitated the stock markets for years. While QT started small in Q4’17, it’s ramping to a $50b-per-month pace in Q4’18!

The Fed’s QE giveth, so the Fed’s QT taketh away. Literally trillions of dollars of capital evoked out of nothing by the Fed to monetize bonds directly and indirectly bid stock markets higher. The Fed’s deep intertwinement in this stock bull’s fortunes is easiest to understand with a chart. Here the SPX in blue is superimposed over its implied-volatility index, the famous VIX that acts as a proxy for popular greed and fear.

This anomalous stock bull was again birthed in March 2009 in the wake of the first true stock panic since 1907. After that epic maelstrom of fear fueled such an extreme plummet to climax a 57% bear market, a new bull was indeed overdue despite rampant bearishness and pessimism. The very trading day before the SPX bottomed, I wrote a hardcore contrarian essay explaining why a major new bull market was imminent.

Back in early 2009 stock-market valuations were so low after that panic that a new bull was fully justified fundamentally. And its first four years or so played out perfectly normally. Between early 2009 to late 2012, this bull market’s trajectory was typical. It rocketed higher initially out of deep bear lows, but those gains moderated as this bull matured. And its upside progress was punctuated by healthy major corrections.

Stock-market selloffs are generally defined in set ranges. Anything under 4% isn’t worth classifying, it is just normal market noise. Then from 4% to 10%, selloffs become pullbacks. Beyond that in the 10%-to-20% range are corrections. Selloffs greater than 20% are formally considered bear markets. In both 2010 and 2011 the SPX suffered major corrections in the upper teens, which are essential to rebalance sentiment.

As bull markets power higher, greed naturally grows among investors and speculators. They start to get very complacent and expect higher stocks indefinitely. Eventually this metastasizes into euphoria and even hubris. Major corrections, big and sharp mid-bull selloffs, rekindle fear to bleed away excessive greed keeping bulls healthy. Interestingly even in 2010 and 2011 the Fed played a key role in stock-market timing.

Those early bull years’ major corrections coincided exactly with the ends of the Fed’s first and second quantitative-easing campaigns. QE is an extreme monetary-policy measure central banks can use after they force interest rates, their normal tool, down to zero. The Fed’s zero-interest-rate policy went live in mid-December 2008 in response to that first stock panic in a century, and QE1 then QE2 soon followed.

Quantitative easing involves creating new money out of thin air to buy up bonds, effectively monetizing debt. While QE1 and QE2 certainly caused market distortions, both campaigns had predetermined sizes and durations. When traders knew a particular QE campaign was nearing its end, they started selling stocks which drove the major corrections. So the Fed decided to change tactics when it launched QE3.

As the SPX approached 1450 in late 2012, that normal stock-market bull was topping due to expensive valuations. After peaking in April, stock markets started rolling over heading into that year’s presidential election. Stock-market fortunes in the final several months leading into elections can really sway their outcomes. So in mid-September 2012 less than 8 weeks before the election, a very-political Fed hatched QE3.

QE3 was radically different from QE1 and QE2 in that it was totally open-ended. Unlike its predecessors, QE3 had no predetermined size or duration! So stock traders couldn’t anticipate when QE3 would end or how big it would get. Stock markets surged on QE3’s announcement and subsequent expansion a few months later. Fed officials started to deftly wield QE3’s inherent ambiguity to herd stock traders’ psychology.

Whenever the stock markets started to sell off, Fed officials would rush to their soapboxes to reassure traders that QE3 could be expanded anytime if necessary. Those implicit promises of central-bank intervention quickly truncated all nascent selloffs before they could reach correction territory. Traders realized that the Fed was effectively backstopping the stock markets! So greed flourished unchecked by corrections.

This stock bull went from normal between 2009 to 2012 to literally central-bank conjured from 2013 on! The Fed’s QE3-expansion promises so enthralled traders that the SPX went an astounding 3.6 years without a correction between late 2011 to mid-2015, one of the longest-such spans ever. With the Fed jawboning negating healthy sentiment-rebalancing corrections, sentiment grew ever more greedy and complacent.

QE3 was finally wound down in late 2014, leading to this Fed-goosed stock bull stalling out. Without central-bank money printing behind it, the stock-market levitation between 2013 to 2015 never would’ve happened! One of the most-damning charts of recent years shows the SPX perfectly tracking the growth in the Fed’s balance sheet as its monetized bonds accumulated there. This great stock bull is largely fake.

Without the Fed’s QE firehose blasting new money into the system, stock-market corrections resumed in mid-2015 and early 2016. After topping in May 2015 not much higher than QE3-ending levels, the SPX drifted sideways to lower for fully 13.7 months. That too should’ve proven this artificially-extended bull’s top, giving way to the overdue subsequent bear. But it was miraculously short-circuited by the Brexit vote.

Heading into late June 2016, Wall Street was forecasting a sharp global stock-market selloff if the British people actually voted to leave the EU. What was seen as a low-probability outcome promised to unleash all kinds of uncertainty and chaos. And indeed when that Brexit vote surprised and passed, the SPX plunged for a couple trading days. Then meddling central banks stepped in assuring they were ready to intervene.

So this tired old bull again started surging to new record highs in July and August 2016, although they weren’t much better than May 2015’s. After that euphoric surge on hopes for post-Brexit-vote central-bank easings, the SPX started to roll over again heading into the US presidential election. Wall Street warned just like Brexit that a Trump win would ignite a major stock-market selloff, and again proved dead wrong.

The enormous post-election stock surge has been called Trumphoria or taxphoria. Capital flooded into stocks for a variety of reasons. In addition to hopes for far-superior government policies boosting corporate profits, funds rushed to buy to chase good year-end gains to report to their investors. And the resulting stock-market record highs, and fevered anticipation for big tax cuts, started seducing investors back.

This exuberant psychology greatly intensified in 2017, with the SPX periodically surging to series of new record highs on political news fanning investors’ optimism. Since Trump won the election, nearly all of the SPX’s significant daily rallies ignited on news implying big tax cuts were indeed coming soon as widely hoped. The wealth effect from that stock elation unleashed big spending, which boosted corporate profits.

But this Fed-goosed stock bull was already very long in the tooth, and stock valuations were already near bubble territory, even before Trump was elected. The resulting Trumphoria surge on hopes for big tax cuts soon really exacerbated serious pre-election risks. That included extending the span since the end of the previous SPX correction to 2.0 years. Normal healthy bull markets see correction-grade selloffs annually.

We did finally see a sharp volatility-shock selloff in early February 2018, where the SPX plunged 10.2% in just 9 trading days. That was barely a 10%+ correction and proved far too small and too short to rebalance sentiment as recent months proved. By mid-June investors’ euphoria and complacency were back up to challenging January’s peak levels, with everyone convinced stock markets were heading higher indefinitely.

Between the SPX’s original top in May 2015 soon after QE3 ended and Election Day 2016, at best stock markets simply ground sideways. At worst they were rolling over into what should’ve grown into a major new bear. Taxphoria short-circuited all that, sending stocks sharply higher and delaying the inevitable cyclical reckoning. By late January 2018 the SPX had rocketed a crazy 34.3% higher since Election Day alone!

An ominous side effect of that anomalous late-bull surge was extremely-low volatility, with all kinds of low-volatility records set. The VIX S&P 500 implied-volatility index on this chart reflects that, slumping to multi-decade lows throughout 2017! Low volatility reflects low fear and high complacency, the exact herd sentiment ubiquitous at major bull-market toppings. Just like stock markets, volatility is forever cyclical too.

Volatility often skyrockets off exceptional lows, as the great sentiment pendulum must swing back to fear after peaking deep in the greed side of its arc. And the only thing that generates fear late in stock bulls is sharp selloffs. No matter how bad news is, euphoric investors happily ignore it if it doesn’t drive stocks lower. But eventually some catalyst always arrives, often unforeseen, that finally stakes the geriatric bull.

When the last stock bulls peaked in March 2000 and October 2007, there was no specific news that killed them. Lofty euphoric stock markets simply started gradually rolling over, mostly through relatively-minor down days which generated little fear. These modest grinds lower kept most investors unaware of the waking bears, boiling them slowly like the proverbial frog in the pot. But even little losses eventually add up.

Since the huge stock-market gains between late 2012 to mid-2015 were directly fueled by the Fed’s QE3 money printing, fears of the accelerating quantitative tightening may prove the bull-slaying catalyst. The Fed conjured money out of thin air to buy bonds in QE, and it will destroy that very money by effectively selling bonds in QT. QT’s capital outflows should prove as bearish for stocks as QE’s inflows were bullish!

The FOMC actually started discussing QT at its May 2017 meeting, and formally announced it at its September 2017 meeting. QT actually got underway in Q4’17 at a modest $10b-per-month pace. But it’s on autopilot to grow by $10b per month each quarter until it reaches terminal speed at a $50b-per-month pace in Q4’18. That will make for $600b per year of QE-injected capital removed from markets and destroyed!

QT is utterly unprecedented in history, and its acceleration this year has profoundly-bearish implications for these lofty QE-inflated stock markets. As QT started late in 2017 at low levels, it only totaled $30b last year. But in 2018 alone that will soar 14x higher to a total of $420b of QT! Prudent investors will sell in anticipation of QT hitting full steam, as unwinding the Fed’s huge QE-bloated balance sheet is a grave threat.

Back in the first 8 months of 2008 before that stock panic, the Fed’s balance sheet averaged $849b. By February 2015, it had ballooned to a freakish $4474b. That’s up a staggering 427% or $3625b over 6.5 years of QE! QE levitated the stock markets in two primary ways. That Fed bond buying bullied yields to artificial lows, forcing bond investors starving for yields to buy far-riskier stocks that were paying dividends.

More importantly those unnatural contrived extremely-low yields courtesy of QE fueled a boom in stock buybacks by corporations unlike anything ever witnessed. American companies took advantage of the crazy-low interest rates to borrow literally trillions of dollars to buy back their own stocks! Between QE3’s launch and today, corporate stock buybacks have been the dominant source of stock-market capital inflows.

QT along with the Fed’s current rate-hike cycle will allow bond yields to rise again, eventually greatly retarding corporations’ desire and ability to borrow vast sums of money to use to manipulate their own stock prices higher. In late June, the Fed’s balance sheet was still way up at $4280b. These QE-inflated stock markets have never experienced QT, and it ain’t gonna be pretty no matter how gradually QT is executed.

While this easy Fed is far too cowardly to fully reverse $3.6t worth of QE since late 2008, even a trillion or two of QT over the coming years is going to wreak havoc on these QE-levitated stock markets! That’s a serious problem for today’s extreme Fed-goosed bull with a rotten fundamental foundation. Underlying corporate earnings never supported such extreme record stock prices, and the coming reckoning is unavoidable.

Regardless of the Fed’s balance sheet, quantitative tightening, or valuations, the near-record-low VIX slumping into the 9s back in December shows these stock markets are ripe for a major selloff anyway. At absolute minimum, it needs to be a serious correction approaching 20%. But with this stock bull so big, so old, and so fake thanks to the Fed, that selloff is almost certain to snowball into the long-overdue next bear.

And investors aren’t taking the threat of a new bear seriously. Crossing the bear threshold just requires a 20% retreat. Even such a baby bear would erase all SPX gains since early 2017. A normal bear market at this stage in the Long Valuation Waves is actually 50%, cutting stock prices in half! That would wipe out fully 2/3rds of this entire mighty stock bull, dragging the SPX all the way back down to late-2012 levels.

Even more ominously, bear markets naturally following bulls tend to be proportional. That makes sense since bears’ job is to rebalance sentiment and work off overvalued conditions. So there’s a high chance this coming bear after such an anomalous Fed-goosed bull won’t stop at 50%! The downside risks from here are incredibly dire after such a huge bull driven by extreme central-bank easing instead of corporate profits.

And that finally brings us to valuations, this old stock bull’s core problem. This final chart looks at the SPX superimposed over a couple key valuation metrics. Both are derived from averaging the trailing-twelve-month price-to-earnings ratios of all 500 elite SPX companies. The light-blue line is their simple average, while the dark-blue one is weighted by market capitalization. Today’s valuations ought to terrify investors.

Every month at Zeal we look at the TTM P/Es of all 500 SPX companies. At the end of May, the simple average of all SPX companies actually earning profits so they can have P/Es was still an astounding 31.2x! That’s literally in bubble territory, just as Trump had warned about during his campaign. 14x earnings is the historical fair value over a century and a quarter, and double that at 28x is where bubble levels start.

If you study the history of the stock markets, stock prices never do well for long starting from bubble valuations. Such extreme stock prices relative to underlying corporate earnings streams actually herald the births of major new bear markets. Again these usually cut stock prices in half. So buying stocks here, late in a huge old bull market artificially levitated by the Fed, is the height of folly. Massive losses are inevitable.

Wall Street hoped Republicans’ massive corporate tax cuts would fuel exploding profits to force bubble valuations lower. But while earnings for most top US companies indeed surged in Q1’18 which was the first quarter under this new lower-tax regime, that still didn’t meaningfully moderate overall valuations. The last 6 months of SPX valuation data is very ominous, showing continuous bubble-grade extremes.

At the end of December 2017, the simple-average trailing-twelve-month price-to-earnings ratio of all 500 SPX companies was 30.7x. That was well into bubble territory above 28x before these record corporate tax cuts went into effect. That number was conservative too, as we truncate all P/Es at a maximum of 100x to minimize the skewing effect of outliers. So absurd 100x+ valuations like Amazon’s aren’t fully reflected.

By the end of January 2018 soon after the SPX peaked in extreme taxphoria, that metric rose to 31.8x. Despite that sharp yet minor correction in early February, valuations merely retreated to 31.5x at the end of that month and 30.5x by the end of March. None of those months reflected the corporate tax cuts yet, since those Q1’18 earnings weren’t reported until early Q2. Even I figured they would push bubble P/Es lower.

Yet at the ends of April and May, the SPX’s simple-average TTM P/Es were still way up at 30.8x and 31.2x! The new end-of-June data wasn’t available yet as this essay was published, but odds are valuations remain deep into dangerous bubble territory. The stock markets rallied strongly in early June, while capital increasingly concentrated in the market-darling tech stocks which tend to be super-expensive.

Remember stock markets perpetually meander through alternating bull-bear cycles. Back in late 2012 before the Fed stepped in to try and brazenly short-circuit these valuation-driven cycles, valuations were actually in a secular-bear downtrend. After secular bulls drive valuations to bubble extremes, with greed forcing stock prices far beyond underlying corporate earnings, secular bears emerge to reverse those excesses.

During secular bears, stock prices grind sideways on balance for long enough for profits to catch up with lofty stock prices. Before QE3 temporarily broke stock-market cycles, that process had been happening as normal between 2000 to 2012. Secular bears don’t end until valuations get to half fair value, 7x earnings. So instead of being into bubble levels, valuations would normally be between 7x to 10x today.

That’s the massive downside risk stocks face due to their Fed-conjured bubble valuations! While the red line above shows the actual SPX, the white line shows where it would be trading at 14x fair value. Even that is way down around 1125 today, less than half current levels! But mean reversions from extremes nearly always overshoot in the opposite direction, so the potential SPX bear-market bottom is much lower.

Sadly Wall Street will never bother telling investors that valuations matter. Stock-market history proves beyond all doubt that buying stocks high in valuation terms nearly always leads to considerable-to-huge losses. All the financial industry cares about is keeping people fully invested no matter what, since that maximizes their fees derived from percentages of assets under management. Talk about conflicts of interest!

The more expensive stocks are in valuation terms when they are purchased, the worse the subsequent returns will be. And no matter how awesome lower corporate taxes may ultimately prove, they still can’t justify these bubble valuations. Throughout 2017, Republicans’ coming big tax cuts were way more than fully priced in. The tax-cut rally already happened last year, despite Wall Street claiming it was earnings-driven.

Valuations prove otherwise. Again by late January 2018 the SPX had soared 34.3% since Trump won the US presidency. But during nearly that same span the SPX’s simple-average TTM P/E surged 21.1%. Thus only about a third of the entire taxphoria rally was driven by higher corporate profits! And even that is suspect, since the wealth effect from last year’s record stock markets fueled exceptionally-high spending.

The stock markets’ lofty valuations before Trumphoria and the bubble valuations since are a very serious problem that can only be resolved by an overdue major bear market! Only that will drag stock prices low enough for existing and future corporate earnings to support reasonable valuations again. Investors sure don’t believe a new bear market is coming, but they never do when bull markets are topping in extreme euphoria.

It’s not just the Fed’s QT that’s coming in 2018 and 2019, but the European Central Bank is also slashing its own QE campaign. That ran at a blistering €60b-per-month pace in 2017, totaling €720b. It was cut in half to €30b a month in January 2018, will be tapered again to €15b monthly in October, and will then end entirely this December. The combination of Fed QT and ECB QE tapering is going to strangle this stock bull!

Together these leading global central banks so critical to stock-market fortunes are effectively tightening massively in 2018 and 2019 compared to 2017. A QE-conjured stock bull can’t persist when QE is reversed and slashed. 2018 alone will see the equivalent of $900b more Fed QT and less ECB QE than 2017 when stock markets surged. And in 2019 that number will swell to another $1450b less than 2017!

These extreme bubble stock-market valuations are wildly unsustainable with around a staggering $2350b less liquidity from the Fed and ECB in 2018 and 2019 alone. Early February’s sharp correction was just a small foretaste of what’s to come. The inevitable reckoning is nearing to pay the piper for this extreme central-bank-goosed stock bull. Stock markets are forever cyclical, and proportional bears always follow bulls.

Investors really need to lighten up on their stock-heavy portfolios, or put stop losses in place, to protect themselves from the coming central-bank-tightening-triggered valuation mean reversion in the form of a major new stock bear. Cash is king in bear markets, as its buying power grows. Investors who hold cash during a 50% bear market can double their stock holdings at the bottom by buying back their stocks at half-price!

Put options on the leading SPY S&P 500 ETF (SPY) can also be used to hedge downside risks. They are cheap now with euphoria rampant, but their prices will surge quickly when stocks start selling off materially. Even better than cash and SPY puts is gold, the anti-stock trade. Gold is a rare asset that tends to move counter to stock markets, leading to soaring investment demand for portfolio diversification when stocks fall.

Gold surged nearly 30% higher in the first half of 2016 in a new bull run that was initially sparked by the last major correction in stock markets early that year. If the stock markets indeed roll over into a new bear this year, gold’s coming gains should be much greater. And they will be dwarfed by those of the best gold miners’ stocks, whose profits leverage gold’s gains. Gold stocks rocketed 182% higher in 2016’s first half!

The bottom line is today’s euphoric stock markets remain hyper-risky. They are still trading at dangerous bubble valuations despite the largest corporate tax cuts in US history! And that’s at a time when the Fed and ECB are slowing and reversing their long years of QE which fueled this exceptional bull. A major bear market that will at least cut stock prices in half is way overdue, don’t be fooled by this extreme complacency.

Prudent investors have to overcome this groupthink herd euphoria and protect themselves from what’s coming. That means lightening up on overvalued stocks, building cash, and buying gold. Central banks have a long history of trying and failing to eliminate stock-market cycles. The longer they are artificially suppressed, the worse the inevitable reckoning as these inexorable market cycles resume with a vengeance.

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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own extensive long positions in gold stocks and silver stocks, which have been recommended to our newsletter subscribers.

Will A.I. Lead to the Demise of Humanity?

Will A.I. Lead to the Demise of Humanity? [VIDEO] | Inc.com


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Inc. Editors James Ledbetter, Jon Fine and Zoe Henry debate how dangerous artifical intelligence will be to the future of humanity.

Published on: Jun 29, 2018






Walmart rolls out 3D virtual online shopping

(Reuters) – Walmart Inc said late Wednesday it is introducing a 3D virtual shopping tour on its website that would help customers browse and choose items for their homes.

FILE PHOTO: The main entrance to a Walmart store is pictured in Sao Paulo, Brazil February 14, 2018. REUTERS/Paulo Whitaker/File Photo

The new feature would enable customers to take a virtual shopping tour of a curated apartment showcasing about 70 items from national brands, besides Walmart’s private label offerings.

Starting from July, the company said it would allow customers to add a group of items to a cart that will provide a complete look for their apartments and homes. bit.ly/2Mw61RQ

The announcement comes at a time when retailers are seeking technological advancements to enhance in-store and online customer experience.

The U.S. retail giant is pouring billions of dollars into beefing up its e-commerce business and recently announced partnerships with logistics companies to deliver groceries ordered online.

Walmart’s technology incubator, Store No 8, bought virtual reality startup Spatialand in February to build VR products for the retailer’s stores and websites.

Reporting by Philip George in Bengaluru; Editing by Sunil Nair

New Zealand's Z Energy flags possible data breach in online card system

(Reuters) – New Zealand-based fuel supplier Z Energy Ltd on Wednesday said it has been presented with evidence that customer data from its Z Card Online database was accessed by a third party in November 2017.

The database held customer data such as names, addresses, registration numbers, vehicle types and credit limits with the company, Z Energy said in a statement. The data accessed did not include bank details, pin numbers or information that would put customer finances directly at risk, it said.

Z Energy did not specify the extent to which its customer data had been compromised.

The company said it had notified affected customers and advised the Privacy Commissioner of the breach. It said the system in question had been closed since December 2017.

The Z Card allows customers to manage fuel accounts online, and is used primarily by companies with vehicle fleets.

Z Energy said it had been made aware of a potential vulnerability in the system in November, but had not found evidence of any data breaches at that time.

Z Energy operates in both New Zealand and Australia. New laws in Australia requiring companies to report data breaches took effect in late-February this year.

Reporting by Ambar Warrick in Bengaluru

How ARM Is Using Artificial Intelligence To Supercharge Its Patents

Enough paperwork already: Masayoshi Son of SoftBank and Stuart Chambers of ARM Holdings didn’t have to trawl through thousands of documents to clarify each others intellectual property, thanks to a clever AI tool. (Photo credit should read NIKLAS HALLE’N/AFP/Getty Images)

Something strange happened when Softbank bought the powerful chip designer ARM for $32 billion in July 2016.

When it came to doing the due diligence on ARM’s patents, the usually long-and-labourious process that can last for weeks on end, sped through in just a couple of days.  The reason was software powered by artificial intelligence that could read documents at light speed, compared to humans. 

Both Softbank and the law firm Slaughter & May, which represented ARM during the deal, used the same AI-based tool to trawl through both ARM’s and Softbank’s patent portfolios.

The searches, which would have taken weeks and cost thousands of dollars with human lawyers, took just a few seconds, says Nigel Swycher, whose startup Aistemos built the patent-trawling tool. London-based Aistemos says it has just raised £3 million (about $4 million) from investors including Beringea Capital. 

Increasingly, companies like ARM and aerospace firm BAE Systems are using such software not just to skimp on patent-lawyer fees, or to keep a watchful eye on the competition, but to also look for a broader range of acquisition targets and even scout for licensing opportunities. 

Recently, a digital-money firm used Aistemos to find out who owned a patent in the area of ATM cash transfers. When the firm consulted Swycher’s team, it was surprised to find it was the one company holding such patents. “Lots of people own patents they don’t know about,” says Swycher. 

Swycher, 56, argues that AI-powered software which can read and analyze thousands of pages of technical information in seconds can dispel much of the confusion around what types of patents exist.

Over time, that could also crack open a trillion-dollar global marketplace that’s been manned primarily by patent lawyers till now, making it accessible to insurers, engineers and marketing experts. 

A recent report commissioned by his startup suggests corporate executives believe licensing opportunities would increase by 6%, if information about patent ownership was more readily available. 

Image via Aistemos

An example of a Cipher report on autonomous vehicle technology.

Swycher lauched his Cipher tool in 2016 after 25 years as a partner at Slaughter & May, a leading law firm for patent litigation, where he helped companies do their patent-due diligence before making acquisitions. He recalls “a lifetime of scars” from chugging coffee in meeting rooms till 3am, while trawling through thousands of sheets of paper. 

Manually going through the documents in so-called data rooms (or rooms filled to the brim with patent documentation) was costly and sometimes in vain. Swycher recalls working on a billion-dollar deal, and executives asking his team on Day 60 of deal talks if the company being acquired actually owned the technology that was core to its business. 

To answer that question, a team of five people spent two weeks reading through patent documentation and writing reports, at a cost of around $65,000. When it finally got to Day 90 of deal talks, they had devastating results: there were four other patent holders of the same core technology, and one had an exclusive license in China.

The deal was effectively scuppered, but not after tens of thousands of dollars had been spent on advisory fees.

The process was typical, and practically Dickensian, Swycher says. “My customers were people doing M&A, licensing, managing risk, and I got increasingly frustrated that the information we needed to do deals wasn’t there.”

Since launching Cipher in 2014, Swycher’s Aistemos has sold subscriptions costing between $50,000 and $100,000-a-year to around 50 corporate customers, including ABB, Ocado and BAE Systems. The tool, which is browser-based like FactSet, only answers one question, says Swycher, which is “Who is doing what?”

The human equivalent of a single search on Cipher costs $10,000 and takes two weeks. “Our average user does 250 searches a year,” he says, suggesting the service becomes cost effective after about half-a-dozen uses.    

“Intellectual property is having something of a revival,” had adds. “Despite being an asset class that existed for 300 years, it has only recently become important for so many companies… Everyday somebody’s filing for a new one, and they need to see what’s already taken.” 

It's Alive: EV Startup Faraday Future Gets New Top Investor, U.S Funding Approval

AP Photo/Jae C. Hong

Faraday Future’s FF91 electric car is unveiled at CES International in Las Vegas in January 2017.

After more than a year of financial turmoil and executive turnover, China-backed luxury electric-car maker Faraday Future has secured a degree of stability with a new main shareholder and U.S. Treasury Department approval of a much-needed $2 billion funding deal.

Evergrande Health Industry Group, a Hong Kong-based unit of Chinese billionaire Hui Ka Yan’s Evergrande Group, acquired a controlling 45% stake in Faraday Future for about $860 million (HK$6.75 billion) through the transfer of the Season Smart Limited partnership created last year to aid Faraday, Evergrande said in a June 25 Hong Kong Stock Exchange filing. Faraday’s original investors retain a combined 33% stake, with the remaining 22% of company equity to be distributed to employees as part of an incentive program, according to the filing.

Los Angeles-based Faraday, headquartered in a building that was once part of Nissan’s U.S. West Coast campus, also said its $2 billion equity funding deal arranged in November got a green light from Treasury’s Committee on Foreign Investment in the United States.

“This marks a major milestone for FF to achieve its vision of delivering a clean, intelligent, connected and shared global mobility ecosystem,” the company said in a statement. Additionally, Faraday founder Yueting Jia, who goes by YT, is now officially its CEO.

The Evergrande deal includes an additional $1.2 billion to be invested in two $600 million installments, at the end of 2019 and 2020, according to the filing. Whether the new ownership structure and much-needed funding can turn Faraday Future into the would-be Tesla rival YT had hoped to create remains to be seen.

After a splashy demonstration of its flagship FF 91 model at CES 2017 in Las Vegas, a cash shortage forced Faraday to mothball a $1 billion, 3 million-square-foot auto-assembly plant in Nevada. However, this month the company said it’s moving forward with a smaller facility in Hanford, California, that is to be ready to build the battery-powered FF 91 by the end of the year.

In January the company also sued its former CFO and CTO, claiming theft of intellectual property and the poaching of at least 20 former Faraday Future employees, for a competing EV startup they founded in December.

At the same time, YT is contending with his own legal problems. He has debt and tax issues stemming from the troubled LeEco conglomerate he created, and so far hasn’t complied with a deadline set by Chinese securities regulators to return to resolve those matters. Instead, he’s remained in the U.S. to focus on FF 91 production, according to the South China Morning Post. Chinese media reports said this month that YT is on a list that bars people with outstanding tax issues in that country from luxury air and rail travel.

If delivered as promised, the FF 91, a crossover wagon that would compete with Tesla’s Model X SUV and the new Jaguar I-Pace, could be an attention-grabbing entry. The company vows 0-60 mph acceleration in 2.39 seconds and up to 378 miles per charge. The vehicle would also come to market with features such as facial recognition technology and an array of sophisticated sensors, including laser Lidar, to enable autonomous driving and a “valet” self-parking feature.

Yet the company also faces a host of competitors in the advanced EV market beyond Tesla, including China-backed Byton, NIO and essentially every major European luxury auto brand, all of whom have their own next-generation models in the works.

But for a company that appeared to be on life support not long ago, Monday’s news looks like a major shot in the arm.

'NBA Live 19' News: Joel Embiid Revealed As Cover Athlete

, Opinions expressed by Forbes Contributors are their own.

Trust the Process.

Credit: EA Sports

Joel Embiid on the ocver of NBA Live 19

Apparently, EA does, because on Monday night during the NBA Awards, Philadelphia 76ers star Joel Embiid was revealed as the cover athlete for NBA Live 19. It was a big night for the 76ers as Embiid’s teammate Ben Simmons took home the Rookie of the Year award as well.

This image leaked via Twitter:

Embiid replaces James Harden, who was the face of the franchise for NBA Live 17 and NBA Live 18. Harden is still likely a member of EA’s overall marketing program for the game as he appears in a few of the screenshots for Live 19 already, but that hasn’t been confirmed.

Embiid is coming off the best season of his young career. The 24-year-old averaged 22.9 points, 11 rebounds, 3 assists and 1.8 blocked shots per game while helping the 76ers to their first postseason berth in six years. Embiid is the first 76ers player in history to grace the cover of an NBA Live game, and just the third in franchise history to appear on the cover of any game.

Allen Iverson was the cover athlete for the first five versions of the NBA 2K series. Way back in 1983, 76ers great Julius Erving was on the cover of One on One with Larry Bird, one of the earliest hoops video games. The full demo for NBA Live 19 will release on August 24. The full release hits stores for PS4 and Xbox One on September 7, but Xbox owners who subscribe to EA Access will have access as early as September 2.

OnePlus 6 Review: A Fast And Smooth Phone For Half The Price Of Apple Or Samsung

Ben Sin

The OnePlus 6.

Over the past five years, Shenzhen-based OnePlus has managed to do something that most Chinese tech brands have struggled to accomplish: build a hip image in the west, and gain a devoted following to boot (people were actually lining up around the block to buy the phone at launch).

The company was able to do this by offering two things: flagship-quality handsets at almost half the price of other big brands; and a very clean Android experience that westerners tend to prefer.

With the OnePlus 6, the story is mostly the same. I’ve been testing the phone thoroughly for two weeks, and the two thoughts that constantly came to mind were:

Is the 6 every bit as polished as the absolute top dogs? Not quite all the way there. It can’t charge wirelessly; it has no official IP water and dust resistance certification (though tests have shown it will survive being submerged in water briefly); its 6.3-inch OLED display doesn’t get as bright as the Galaxy S9’s; and its camera can’t quite produce night shots as stunning as the current king, the Huawei P20 Pro.

Are these things worth the extra three or four hundred bucks though? It depends on who you are. I think most people would say no.

Ben Sin

Glass all around.

Ben Sin

The bottom of the phone houses a single speaker grill and a USB-C charging port.

The fast and the familiar

If there’s one area to nitpick the OnePlus 6, it’d have to be the hardware design. Don’t get me wrong, the OnePlus 6 is a beautiful, well-built, premium-feeling glass sandwich handset. It’s just that the phone not only has notch design that’s found on almost all other phones, but the overall look and in-hand feel of the 6 is very similar to the Oppo R15 Pro and Vivo X21. There are superficial differences such as the shape of fingerprint scanner and camera module positioning, but for the most part all three phones feel eerily similar in the hand. There’s a good explaination for that—all three companies are owned by the same parent company hence the likelihood of shared production lines—and considering that OnePlus markets to a very different crowd as Vivo and Oppo, I am not going to hold it against OnePlus too much, but it’s still something worth mentioning.

But move past the physical similarities and you’ll be greeted by what makes the 6 special: the speed. The speed is a combination of three factors: there’s a whopping 8GB of RAM in my demo unit, with the most powerful Qualcomm chipset (845), plus OnePlus’ software, OxygenOS, is the cleanest and leanest of all Android skin. I’ve been on the road for the past three weeks and bouncing between multiple phones, and the speed of the OnePlus 6 is noticeable. The iPhone X and Samsung Galaxy S9 aren’t slow phones by any means, but the OnePlus 6 is noticeably zippier when I’m jumping between apps. On the iPhone X, specifically, re-opening an app I had opened a couple hours ago will result in a second of load time. On the 6? It’s almost instantaneous.

I’ve gone on record calling OxygenOS my favorite version of Android, even more than stock Android, and that still holds true.

I do wish, however, that OxygenOS would offer some form of one-hand mode, as phones today are mostly too large to fully use completely one-handed. Other than this, I have no complaints about OxygenOS at all. I love the ambient display that shows notifications and time in low-powered black and white format whenever I pick up the phone, and I love all the customization options such as the ability to change the entire color scheme of my phone’s settings and notifications panels.

Pixel almost-perfect

OnePlus phones have been very good since, well, day one. The area that’s kept them from being the best have been the cameras, which tend to fall far short of whatever Huawei or Samsung is on the market at the time. The 6 fixes this mostly by further fine tuning its image processing software and giving its main 16-megapixel sensor a larger pixel size of 1.22-microns. The larger pixels results in noticeably more details and light in low light shots. During the day, the 6’s images are well-balanced if a bit muted, as the auto HDR mode seems to be a bit hesitant to go all out.

Ben Sin

The OnePlus 6 has a 16-megapixel camera with a 20-megapixel secondary lens.

A big win for the 6’s camera is that it can shoot videos at 4k 60fps, which most phones aside from the iPhone 8/X and Samsung Galaxy S9 can’t do. Videos in this mode do come out a bit shaky, as the OIS doesn’t work here. Shoot in 1080p or 4k 30fps, though, and OIS is there to help jitters significantly.

Ben Sin

A night shot captured by the OnePlus 6.

Ben Sin

A macro shot, taken with the 6’s manual controls.

The secondary 20-megapixel lens helps detect depth, which really helps produce natural-looking bokeh shots.

Ben Sin

A bokeh shot taken of a stray dog in Cuba.

Ben Sin

Notice the depth of field around the statue is spot on, but the two women who walked by messed with the camera’s depth sensors.

As I mentioned earlier, if I wanted to blow up the images and pixel peep, or really compare night shots side by side, the 6’s image still fall short to something coming out of the Huawei P20 Pro or Samsung Galaxy S9, but the 6 is inching closer to equaling those much pricier handsets.

I also think OnePlus’ camera software app layout is among one of the best. Switching between modes requires just swiping left or right or hitting buttons in the lower part of the disdplay, which makes the camera easy to use even with one-hand.

Ben Sin

The Pro mode offers manual controls and is easy to use with one hand.

Punches above its weight class 

Elsewhere, the OnePlus 6 offers more than its price tag suggests. The 6.3-inch OLED panel is not quite as bright or punchy as what’s found on Samsung’s Galaxy S9, but it’s every bit as good as everything else on the market. The notch doesn’t get in the way, as enough Android apps have worked around the slight cutout. Gaming performance and battery life are also top notch, with the latter giving me five hours of screen-on time, which is just enough to go a whole day.

There are two things I have to nitpick: the bottom firing speaker is weak, but given that there is a headphone jack and bluetooth 5.0 support, that is not a huge deal. I’m more annoyed by the mediocre haptic engine. Generally, I love typing on Android more than on iPhones because I enjoy vibration feedback as I type on each key (Apple doesn’t allow this). On a phone with a great haptic engine (LG G7 and LG V30), it feels almost as though each key my thumb hits is vibrating individually. It’s a great tactile experience. On the OnePlus 6, the vibration feedback is so mushy and all over the place that it actually resulted in me getting more typos. After a couple of days I turned off the vibrating keyboard altogether and typed like I was on an iPhone.

I think the lame haptics bothers me more than it would most people though.

The price is right

OnePlus’ tagline for the OnePlus 6 is “the speed you need,” and while I can’t say I really “need” the 3% speed/smoothness boost over something like an iPhone X or Huawei P20 Pro, it is absolutely welcome. The OnePlus 6 is the fastest and smoothest phone I’ve ever used (yes, including the Pixel, which is surprisingly buggy given how much Android purists swear by stock Android), and I find myself scrolling through apps in overview mode sometimes just to watch the zippy animations.

More importantly for consumers, however, is that the OnePlus 6 is at the very least a top two best value in smartphone right now. Xiaomi’s Mi Mix 2S and Mi 8 both offer the same Snapdragon 845/8GB RAM combo at a relatively close price point, and other than these two nothing else offers the same level of power without a significant bump in price.

Ben Sin

The 6 is a great value.

The Common Drug That Makes Opioid Overdose Five Times As Likely

(Photo by: BSIP/UIG via Getty Images)

Opioid overdoses continue to increase, accounting for nearly two-thirds of all overdose deaths in the US, but a high percentage of those overdoses also include other drugs. A new study shows that the combination of opioids with one common class of drugs in particular is especially risky in the first 90 days of concurrent use. Those drugs are benzodiazepines (often called “benzos”), the class that includes alprazolam (Xanax), diazepam (Valium), and clonazepam (Klonopin), meds frequently prescribed to alleviate anxiety.

The study examined data from more than 71,000 Medicare Part D beneficiaries to find out how simultaneous use of opioids and benzos influence overdose risk over time. Patients were divided based on whether they had only taken opioids prior to overdose or had a supply of both opioids and a benzo drug. For those in the group with a supply of both, the researchers subdivided by the cumulative number of days they’d taken an opioid with a benzo.

The analysis showed that overdose risk was five times higher for patients taking both drugs during the first 90 days compared to those only taking an opioid. Risk was doubled for those taking both drugs during the next 90 days. After 180 days, risk of overdose was roughly the same as taking only opioids.

“Patients who must be prescribed both an opioid and a benzodiazepine should be closely monitored by health care professionals due to an increased risk for overdose, particularly in the early days of this medication regimen,” said lead study author Inmaculada Hernandez, Pharm.D., Ph.D., assistant professor at the Univeristy of Pittsburgh School of Pharmacy, in a press statement.

The researchers adjusted the results to account for a range of demographic factors and clinical factors, including the number of clinicians that prescribed the drugs. The adjustment revealed that risk increased with the number of clinicians involved — the more clinicians prescribing drugs to any given patient, the greater the risk of overdose. The researchers think this result points to lack of communication between doctors treating the same patient.

“These findings demonstrate that fragmented care plays a role in the inappropriate use of opioids, and having multiple prescribers who are not in communication increases the risk for overdose,” said senior study author Yuting Zhang, Ph.D., of the University of Pittsburgh Graduate School of Public Health.

The risk of combining opioids and benzos has been studied extensively, with alarms sounded by multiple public health groups and government agencies, including the US FDA and Centers for Disease Control and Prevention. The FDA released an emphatic warning earlier this year, citing risk of respiratory depression when taking both drugs because both are potent central nervous system depressants.

Respiratory depression occurs when breathing becomes slow and erratic and the body can’t adequately remove carbon dioxide. In the case of overdose, breathing can completely stop, leading to respiratory arrest and potentially death.

More than 30% of overdoses involving opioids also involve benzos, according to the NIH National Institute of Drug Abuse (a third common drug, alcohol, another central nervous system depressant, often also plays a role in overdose deaths involving opioids and benzos).

A 2017 study found that among more than 315,000 privately insured patients, the number that were prescribed both an opioid and a benzo increased 80% from 2001 to 2013. Similar to the latest study, that study also found a significant increase in overdoses among patients taking both drugs.

The latest study was published in JAMA Network Open.