Category Archives: Cloud Computing

Ericsson says well on track to reach cost savings target by mid-2018

STOCKHOLM (Reuters) – Swedish mobile telecom gear maker Ericsson is on schedule to reach its target of making at least 10 billion crowns ($1.21 billion) of annual savings by mid-2018, its top chief said on Wednesday.

Ericsson has made sweeping cost cuts and replaced much of its top management to try to turn around a business hit by competition from China’s Huawei and Finland’s Nokia, falling spending by telecoms operators and the hangover from a failed plan to diversify from core activities.

“We will reach the 10 billion well on time,” Chief Executive Borje Ekholm told reporters ahead of the firm’s annual general meeting at a venue close to its north Stockholm headquarters.

The fourth quarter of last year was the firm’s fifth straight quarter of operating losses. It said in January that the cost-cutting program was saving around 6 billion crowns on an annual basis at that time.

($1 = 8.2887 Swedish crowns)

Reporting by Olof Swahnberg and Helena Soderpalm; Editing by Simon Johnson and Louise Heavens

State Attorneys General Asked Facebook These 7 Questions About Cambridge Analytica

The pressure is piling up on Facebook and CEO Mark Zuckerberg.

Following the revelations that London-based Cambridge Analytica had harvested data from millions of Facebook users to influence elections, private citizens and politicians alike are fighting to hold the social media giant accountable.

Legislators in the U.S. and U.K. have called for government action, a non-partisan watchdog group has filed complaints with the Department of Justice and the Federal Election Commission, and the FTC has opened an investigation into Facebook’s privacy practice.

Now, state attorneys general are wading in. A bipartisan group of 37 attorneys wrote a letter to Zuckerberg in an effort to better understand Facebook’s role in the data breach.

The signees expressed profound concern, noting that the revelations “raise many serious questions concerning Facebook’s policies and practices, and the processes in place to ensure they are followed.” The AGs want to know:

  1. Were those terms of service clear and understandable, or buried in boilerplate where few users would even read them?
  2. How did Facebook monitor what these developers did with all the data that they collected?
  3. What type of controls did Facebook have over the data given to developers?
  4. Did Facebook have protective safeguards in place, including audits, to ensure developers were not misusing the Facebook user’s data?
  5. How many users in our respective states were impacted?
  6. When did Facebook learn of this breach of privacy protections?
  7. During this timeframe, what other third party “research” applications were also able to access the data of unsuspecting Facebook users?

The attorneys general also requested an update on Facebook’s efforts to maintain users’ privacy, saying, “Facebook has made promises about users’ privacy in the past, and we need to know that users can trust Facebook. With the information we have now, our trust has been broken.”

Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa) announced on Monday a hearing on the future of data privacy in social media to be held in April. Zuckerberg is among those invited to testify, alongside Google and Twitter CEOs Sundar Pichai and Jack Dorsey.

ICE Reportedly Uses Facebook Data to Track Suspected Illegal Immigrants

Cambridge Analytica isn’t the only entity using Facebook data for its own ends.

The U.S. Immigration and Customs Enforcement (ICE) has relied on Facebook data to find and track immigrants suspected of being in the U.S. illegally, according to a new report by The Intercept.

The report tells of one instance in which ICE used backend Facebook data to determine when the account of the person in question was accessed, as well as the IP addresses corresponding to each login. The agents reportedly combined this data with other routinely used records, such as phone records, to pinpoint his location.

Alongside Facebook’s Cambridge Analytica scandal, the Intercept story underscores questions about Facebook’s data privacy, but the use of Facebook data in ICE’s investigations is not illegal. The Intercept reports that the Stored Communications Act lets law enforcement request information from third-party record holders, including Facebook.

Facebook corroborated this point, telling The Intercept that “ICE sent valid legal process to us in an investigation said to involve an active child predator,” explaining that it responded to this request “with data consistent with our publicly available data disclosure standards.” However, Facebook denies that the data was used to identify an immigration law violation, saying it “does not provide ICE or any other law enforcement agency with any special data access to assist with the enforcement of immigration law.”

Beyond the legal issue, the report further demonstrates the increasingly aggressive tools ICE is using in its mission to crackdown on immigration and comply with the Trump administration’s deportation drives. Last September, ICE worked with Motel 6 to obtain guest information and in January immigration agents targeted dozens of 7-Eleven stores, arresting 21 people suspected of being in the U.S. illegally.

Americans less likely to trust Facebook than rivals on personal data

(This March 25 story has been corrected to remove reference to level of trust being lost over time)

FILE PHOTO: Facebook Founder and CEO Mark Zuckerberg speaks on stage during the annual Facebook F8 developers conference in San Jose, California, U.S., April 18, 2017. REUTERS/Stephen Lam

By David Ingram and Eric Auchard

SAN FRANCISCO/LONDON (Reuters) – Opinion polls published on Sunday in the United States and Germany cast doubt over the level of trust people have in Facebook over privacy, as the firm ran advertisements in British and U.S. newspapers apologizing to users.

Fewer than half of Americans trust Facebook to obey U.S. privacy laws, according to a Reuters/Ipsos poll released on Sunday, while a survey published by Bild am Sonntag, Germany’s largest-selling Sunday paper, found 60 percent of Germans fear that Facebook and other social networks are having a negative impact on democracy.

Facebook founder and chief executive Mark Zuckerberg apologized for “a breach of trust” in advertisements placed in papers including the Observer in Britain and the New York Times, Washington Post and Wall Street Journal.

“We have a responsibility to protect your information. If we can’t, we don’t deserve it,” said the advertisement, which appeared in plain text on a white background with a tiny Facebook logo.

The world’s largest social media network is coming under growing government scrutiny in Europe and the United States, and is trying to repair its reputation among users, advertisers, lawmakers and investors.

This follows allegations that the British consultancy Cambridge Analytica improperly gained access to users’ information to build profiles of American voters that were later used to help elect U.S. President Donald Trump in 2016.

U.S. Senator Mark Warner, the top Democrat on the Senate Intelligence Committee, said in an interview on NBC’s Meet the Press” on Sunday that Facebook had not been “fully forthcoming” over how Cambridge Analytica had used Facebook data.

Warner repeated calls for Zuckerberg to testify in person before U.S. lawmakers, saying Facebook and other internet companies had been reluctant to confront “the dark underbelly of social media” and how it can be manipulated.

A figurine is seen in front of the Facebook logo in this illustration taken March 20, 2018. REUTERS/Dado Ruvic

“BREACH OF TRUST”

Zuckerberg acknowledged that an app built by a university researcher had “leaked Facebook data of millions of people in 2014”.

“This was a breach of trust, and I’m sorry we didn’t do more at the time,” Zuckerberg said, reiterating an apology first made last week in U.S. television interviews.

Facebook shares tumbled 14 percent last week, while the hashtag #DeleteFacebook gained traction online.

The Reuters/Ipsos online poll found that 41 percent of Americans trust Facebook to obey laws that protect their personal information, compared with 66 percent who said they trust Amazon.com Inc, 62 percent who trust Alphabet Inc’s Google, 60 percent for Microsoft Corp.

The poll was conducted from Wednesday through Friday and had 2,237 responses. (reut.rs/2G9hvrv)

The German poll published by Bild was conducted by Kantar EMNID, a unit of global advertising holding company WPP, using representative polling methods, the firm said. Overall, only 33 percent found social media had a positive effect on democracy, against 60 percent who believed the opposite.

It is too early to say if distrust will cause people to step back from Facebook, eMarketer analyst Debra Williamson said in an interview. Customers of banks or other industries do not necessarily quit after losing faith, she said.

“It’s psychologically harder to let go of a platform like Facebook that’s become pretty well ingrained into people’s lives,” she said.

Data supplied to Reuters by the Israeli firm SimilarWeb, which measures global online audiences, indicated that Facebook usage in major markets and worldwide remained steady over the past week.

“Desktop, mobile and app usage has remained steady and well within the expected range,” said Gitit Greenberg, SimilarWeb’s director of market insights. “It is important to separate frustration from actual tangible impacts to Facebook usage.”

Additional reporting by William James in London, Dustin Volz in Washington D.C. and Chris Kahn in New Editing by Kevin Liffey

Why The Market Is 'Crashing' And What You Need To Do About It

(Source: imgflip)

The stock market just had its worst week since the correction began, with the S&P 500 (SPY), Dow Jones Industrial Average (DIA), and Nasdaq (QQQ), falling 5.6%, 5.9%, and 7.3%, respectively.

Chart

SPY Price data by YCharts

This means that the market has now retraced to its previous low, something I warned was historically likely to happen.

Chart

SPY data by YCharts

But still investors are understandably worried about the return of such volatility, after 2017’s freakishly calm and bullish year. In fact, according to CNN’s Fear & Greed Index, a meta analysis of seven different market indicators, investors are not just afraid but are petrified right now.

(Source: CNN)

But since the root cause of fear is uncertainty and doubt, let’s take a look at what caused the stock market’s latest freakout. More importantly discover why these fears are likely overblown, and why the you shouldn’t be racing for the exits.

What The Market Is Freaking Out Over Now

On Thursday, President Trump announced that he would be imposing 25% tariffs on $50 billion to $60 billion worth of Chinese imports covering 1,300 products including: aerospace, information and communication technology, and machinery. This was in retaliation for years of Chinese intellectual property theft against foreign companies, including US firms.

The Chinese responded with calls for America to “cease and desist” and the Chinese embassy said:

“If a trade war were initiated by the US, China would fight to the end to defend its own legitimate interests with all necessary measures.” -Chinese Embassy

Thus far, Chinese retaliation has been modest, just $3 billion against 128 US imports including: pork, aluminum pipes, steel and wine. However, according to Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, those $3 billion in tariffs appear to be in response to Trump’s earlier steel and aluminum tariffs.

Those only affected $29 billion in US imports, before Trump began exempting most US allies.

The Wall Street Journal is reporting that China will now ratchet up its own counter tariffs, specifically against, “U.S. agricultural exports from Farm Belt states.” Specifically, this means tariffs on U.S. exports of soybeans, sorghum and live hogs, most of which come from states that voted for Trump.

Apparently, the Chinese began planning for a potential US trade dispute last month when the Chinese Commerce Ministry met with major Chinese food importers to discuss lining up alternatives sources of major US agricultural products. For example, China is considering switching its soy imports to Brazil, Argentina and Poland.

The concern that many people have is that during the announcement on the Chinese tariffs, which cover just 10% of all US imports from that country, Trump stated that this was just the first in a series of upcoming tariffs against China.

So many are worried that if the President truly believes that “trade wars are good and easy to win”, then he could potentially escalate this trade tiff into a full blown trade war. Something that history shows is never a good thing, and sometimes has disastrous consequences.

How Bad Would A Full Blown US/China Trade War Be?

The White House has stated that it wants to reduce the US/China trade deficit by $100 billion a year, or about 20%. Theoretically, that could mean that Trump might impose tariffs on all Chinese goods, in order to make them more expensive and less competitive with either US goods or those from non-tariffed countries.

So what effects would this have on the US? Well, first of all prices will increase initially, since companies like Walmart (WMT) have complex supply chains with contracts for sourcing for its stores. So in the likely case a 25% tariff on $50 billion to $60 billion in Chinese imports represents a $12.5 billion to $15 billion increase in US input costs.

Or to put another way Trump’s China tariffs are likely to boost inflation by 0.08%, and drive core PCE from 1.5% to 1.6%. Now that isn’t the total negative affect to the US economy. After all, China has already retaliated in response to steel tariffs, and is likely to now ratchet up its own counter tariffs.

How bad could that be for American exporters? Well, China supplies just 2% of US steel, meaning that the steel tariffs represent a $580 million loss of export revenue. In response, they slapped tariffs on US goods (with apparent plans to completely replace them with foreign alternatives) of $3 billion. That’s a retaliation tariff ratio of 5.2, meaning for every $1 in export revenue threatened by US tariffs, China appears to be willing to cut its US imports by as much as $5.20.

However, in 2017, Chinese imports of US goods totaled $130 billion, so there is no way this retaliatory ratio could hold. However, theoretically, if the US and China were to get into a full blown trade war, China could cease importing up to $130 billion of US products.

That worst case scenario would likely require Trump imposing similar (25%) tariffs on all Chinese imports to the US, which totaled $506 billion last year. In the worst case scenario, that could temporarily raise US prices by $127 billion.

Worst Case US/China Trade War Costs

Impact

Cost To US Economy

% Decrease In Real GDP Growth

Increase In Inflation

Core PCE

Higher US Prices

$127 billion

0%

0.7%

Lost US Exports

$130 billion

0.7%

0%

Total

$257 billion

0.7%

0.7%

2.2%

Sources: thebalance.com, CNN, Marketplace, Bureau of Economic Analysis

Nominal US GDP would not fall due to rising prices; in fact, it would increase. However, GDP is reported as inflation adjusted, meaning that price increases would not have an measured affect on economic growth since they are by definition excluded.

However, they do represent a true cost to the economy, since it means consumer pay more and have less money to spend on other things. The effect on GDP would potentially be seen via China’s replacement of potentially $130 billion in US exports with those from other nations. That would knock off 0.7% from US economic growth. Currently, the Federal Reserve is projecting 2.7% growth in 2018, so in our worst case scenario that would fall to 2.0%.

Meanwhile, the higher US prices would represent about 0.7% increase in inflation, pushing the core, (ex-food & fuel), personal consumption expenditure index to 2.2%. Core PCE is the Fed’s preferred inflation metric because it’s a survey of what people actually buy, taking into account rising prices, (switching to cheaper alternatives).

The bottom line is that a full blown US/China trade war has the potential to do significant damage to America. It could potentially lower economic growth 25% over a year, and raise inflation by nearly 50%. But just above the Fed’s stated 2.0% target. Fortunately, this worst case scenario is unlikely to actually happen.

Trade Wars Are Terrible But This “Tariff” Isn’t Likely To Become One

First understand these tariffs are not immediate. US Trade Representative Robert Lighthizer’s office will have 15 days to publish a list of the goods, which will be followed by a 30-day comment period before they go into effect. Tariffs and retaliatory tariffs are not a light switch, but a slow moving regulatory process.

This means that it will likely be six weeks (early May) before any US tariffs on Chinese imports begin. Chinese retaliation in terms of decreased exports would likely start by late June/early July at the earliest. Or to put another way, half of the impact of the worst case scenario would be eliminated by timing.

And time is our friend here because most trade disputes, even threatened tariffs, are merely negotiating tactics. Most of the time tariffs get called off relatively quickly as both sides seek some kind of resolution.

After all, China potentially could take a 3.8% hit to GDP if it lost its US export market, cutting its economic growth in half. That’s something it has no interest in. Meanwhile, the sharp hit to Trump’s constituency (states that helped elect him), plus slower US economic growth, would certainly not help the President’s re-election efforts in 2020.

We’ve already seen that the President’s threatened tariffs can get walked back. For example, the steel and aluminum tariffs that freaked out the market a few weeks ago. Trump has since “temporarily” exempted: The European Union, Canada, Mexico, Brazil, Australia, New Zealand and South Korea. These countries actually are responsible for 2/3 of all US steel imports while China represents just 2%.

In early March, China’s Supreme Court vowed to strengthen China’s protection of intellectual property rights, something that Chinese tech firms have been calling for. This means that the trigger for these tariffs might already be fading. It also means that both China and the US have a relatively easy way out, in which no one loses face, because each side can claim some kind of victory.

What The Fed Did To Potentially Spook The Markets

The other potential partial factor for this week’s sharp drop is the Federal Reserve’s March meeting in which it hiked the Federal Funds rate by 25 basis points to 1.5% to 1.75%. This was already priced in by the bond market and was a surprise to no one. The Fed said that, “The economic outlook has strengthened in recent months” and boosted its economic growth forecasts:

  • 2018: 2.7% (from 2.5%)
  • 2019: 2.4% (from 2.1%)
  • 2020: 2.0% (from 1.8%)
  • Long-Term: 1.8% – unchanged

The Fed also updated its core PCE projections:

  • 2018: 1.9%
  • 2019: 2.1%
  • 2020: 2.1%

Meanwhile the Fed’s new unemployment forecast is:

  • 2018: 3.8%
  • 2019: 3.6%
  • 2020: 3.6%

Now none of these upgraded projections are significant, since they basically mean the Fed is just more bullish on the economy. But what potentially concerned the market is the Fed’s slightly more hawkish stance on interest rates.

(Source: CME Group)

Basically, this revised plan from the Fed calls for:

  • 2018: two more hikes (same as before)
  • 2019: three hikes (same as before)
  • 2020: two hikes (one more than before)

The Fed basically expects to raise its Fed Fund rate, which is the overnight interbank lending rate, to 3.5% by the end of 2020. Of course, that’s assuming the US economy keeps growing as quickly as predicted.

3.5% is still far below the historical norm (4% to 6%), so why should that have concerned investors? Simply put because it indicates that the Fed might end up triggering a recession.

Yes You Should Fear An Inverted Yield Curve…

While the Fed Funds rate has no direct link to the bond markets that actually control US corporate borrowing costs, most US banks do benchmark their prime rate off it. The prime rate is how much they charge their most creditworthy and favored clients.

The prime rate has now been raised to 4.75%. The prime lending rate is what most non mortgage consumer loans are benchmarked off. So this means that US consumer borrowing costs are rising, and could rise another 1.75% by the end of 2020. That could certainly slow the pace of consumer borrowing, and potentially increase the US savings rate. While a good thing in the long term, it would potentially cause consumer spending to slow. Since 65% to 70% of US GDP is driven by consumer spending that might in turn slow US economic growth and, more importantly to Wall Street, corporate profit growth.

But here is the real reason that investors should worry about the Fed Funds rate potentially rising another 1.75%. Because under current economic conditions, it would almost certainly cause a recession. That’s based on the single best recession predictor we have, the yield curve. This is the difference between short-term and long-term treasury rates.

The yield curve is 5/5 in predicting the last five recessions. If the curve gets inverted, meaning short-term rates rise above long-term rates, a recession follows relatively soon (usually within one to two years).

Why is this? Two reasons. First, if short-term rates are equal to or above long-term rates, the bond market is signaling that it expects little economic growth and inflation ahead.

More fundamentally, it’s because financial institutions borrow short term to lend long term, at a higher interest. This net margin spread is what creates lending profits and is why loans get made in the first place. So if short-term borrowing rates rise higher than long-term rates, it can decrease the profitability of lending, and result in fewer loans. Thus, consumer spending can fall, businesses invest less, and the economy slides into a recession.

And while the Fed Funds Rate has no direct link to the interest rates that companies care about (long-term rates that benchmark corporate bond rates), studies show that the short-term treasury bonds track closely with the Fed Funds Rate. But long-term rates, such as the 10-year Treasury yield, do not, as they are set by the bond market based mostly on long-term inflation expectations.

This is why the market freaked out over January’s labor report that showed wages rising 2.9%. The fear is that if the labor market is too hot, then rising wages trigger faster inflation which forces the Fed to hike rates high enough to trigger a yield curve inversion. This is what occurred before the last three recessions.

Basically, this means that if the Fed were to proceed with its revised rate hike schedule, then short-term rates would likely rise by 1.75% or so. Long-term rates, on the other hand, are set by inflation expectations and the 10-year yield of 2.83% is currently pricing in 2.1% inflation.

(Source: Bureau Of Economic Analysis)

However, inflation has been stuck at 1.5% for the last four months, and so far shows no signs of rising to those long-term expectations. Which means that 10-year yields are not likely to rise 1.75% by 2020, in line with rising short-term rates.

That in effect indicates that seven rate hikes would almost certainly invert the yield curve, heralding the next recession. The good news? The Fed isn’t likely to keep hiking if inflation remains low and threatens to invert the yield curve.

…But The Fed Isn’t Likely To Invert The Curve

So if the Fed’s current forecast calls for low inflation, but enough rate hikes to likely trigger a yield curve inversion and possible recession, why am I not freaking out? Two main reasons. First, Jerome Powell, the new Fed Chairman, is not an economist, but a veteran of Wall Street. Over his career, he’s been:

  • Managing director for Bankers Trust – a US bank
  • Partner at The Carlyle Group – a private equity firm
  • Founded Severn Capital – a private equity fund specializing in industrial investments
  • Managing partner for the Global Environment Fund – a private equity fund specializing in renewable power

Here is why this matters. Economists are big fans of economic models, such as the Phillips Curve. This says that as unemployment falls below a certain, (full employment), wages and thus inflation, must rise.

Powell has indicated that he’s willing to go where the data takes him, and not just assume the models are correct. In other words, Powell doesn’t buy into the fears of the Fed’s more hawkish members.

In fact, take a look at what he said during the last Fed post meeting press conference:

“There is no sense in the data that we are on the cusp of an acceleration of inflation. We have seen moderate increases in wages and price inflation, and we seem to be seeing more of that… The theory would be if you get below the sustainable rate of unemployment for a sustained period, you would see an acceleration of inflation. We are very alert to it. But it’s not something we observe at the presentWe will know that the labor market is getting tight when we see a more meaningful upward move in wages… Wages should reflect inflation plus productivity increases … so these low wage increases do make sense in a certain sense… That is a sign of improvement (rising labor participation rate), given that the aging of our population is putting downward pressure on the participation rateIt’s true that yield curves have tended to predict recessions … a lot of that was when inflation was allowed to get out of control.” -Jerome Powell

What we see in these quotes is a man who understands finance and understands that the world is more complex than simplified models would indicate. He seems to realize that we are NOT at full employment. So until wages start rising there is no reason to assume we are and that inflation is about to accelerate to dangerous levels.

Powell has also indicated that he expects tax cuts to fuel more investment, boosting productivity, which would allow wages to rise without triggering higher inflation. This is something that I expect as well and the key reason that I’m personally so bullish on the economy, and expect the current expansion to continue for many years.

The bottom line is that Powell seems to be a man who will, for the sake of expectations, make a forecast. But he seems more than willing to ultimately alter monetary policy as the economic data indicates is necessary, not raising rates just because the Phillips Curve says to.

And as a former Wall Street banker who is well aware of the yield curve and its importance, I don’t consider it likely that he’ll blindly keep hiking rates based on a plan from a few years ago. When the facts change, Jerome Powell changes his mind.

Which brings me to the biggest reason to shake off and ignore this last terrible week in the stock market.

US Economic Fundamentals Remain Strong And That’s All That Matters

The stock market may be a forward looking instrument, but it’s also prone to fits of violent pessimism whenever anything bad happens. The market often takes a worst case scenario like “sell first, ask questions later” approach.

Trump announces tariffs? It MUST mean we’re headed for a full blown global trade war that will trigger massive inflation, a shrinking economy, and a bear market! Sell everything!

The truth is that while sometimes the worst case scenario happens (such as the Financial Crisis), 99% of the time negative effects of anything are not as bad as people fear. Or to put another way very seldom is it true that “this time is different.”

So let’s take a page of out Jerome Powell’s playbook and look at the data. I’ve already covered why the last jobs report was darn near perfect.

Meanwhile, the risk of a recession is the lowest I’ve seen since I discovered Jeff Miller’s excellent weekly economic report 18 months ago.

(Source: Jeff Miller)

Specifically, according to a collection of meta analyses of leading indicators and economic reports, the four- and nine-month recession risk is 0.39% and 15%, respectively. Of course, these can and do change over time as new data comes in. But the point is that based on the most recent evidence there is no reason to fear a recession.

Finally, the New York Fed’s Nowcast (real time GDP growth estimator) is saying that Q1 and Q2 GDP growth is likely to come in at 2.9%, and 3.0%, respectively.

Now that also changes with economic reports as they come in, but if true then this is how US economic growth is trending:

  • 2016: 1.5%
  • 2017: 2.3%
  • Q1 2018: 2.9%
  • Q2 2018: 3.0%

Does this portend doom and gloom for the economy, labor market, or corporate earnings growth? No it does not.

I’m not saying stick your head in the sand and ignore all risks. But rather than freak out over POTENTIAL worst case scenarios to the economy we focus on the facts as best we know them. Right now those facts are:

  • low and stable inflation
  • strong job market but not at full employment (otherwise wages would be rising)
  • accelerating economic growth
  • strong and accelerating corporate profits
  • stock market trading sideways = valuation multiples falling = less risk of a bubble and crash

Bottom Line: Markets Are Driven By Short-Term Emotions, Your Portfolio Decisions Shouldn’t Be

Don’t get me wrong a full blown trade war with China would be a terrible thing. It would undoubtedly significantly increase inflation, slow the economy, and potentially force the Fed to raise rates to dangerous levels. These are things that could certainly trigger a bear market or even a recession.

However while all those risks are real, the probability of such a worst case scenario remains remote and speculative. What we do know for sure is what the economic data shows. Which is that the fundamentals underpinning the current economic expansion and bull market remain strong. More importantly, in an economy this large, it would take a large and protracted negative shock to derail those fundamentals and trigger the kind of market crash that many now fear is imminent.

That doesn’t mean that you shouldn’t protect yourself. I myself am continuing to de-risk my high-yield retirement portfolio with a strong focus on quality, undervalued, low volatility, and defensive stocks. But my point is that I’ve been doing that for several months now, back when the market was still roaring higher, and before fears of a trade war surfaced. That’s because I believe in building a bunker while the sun is shining so you never have to fear any market storm.

My recommendation to investors remains the same. Stay calm, focus on your long-term strategy, and don’t let the market’s knee-jerk reactions to likely overblown speculative fears cause you to make costly short-term mistakes.

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.

Micron: Is The Catbird Seat Heating Up?

Micron (MU) reported Q2 revenue of $7.35 billion and eps of $2.82. The company beat on revenue by $70 million and beat on eps by $0.08. MU fell nearly 8% after earnings. I had the following takeaways on the quarter.

Top Line Growth Remains Gaudy

Last quarter Micron grew total revenue by 71% Y/Y. It followed up that performance this quarter with revenue growth of 58% Y/Y and 8% sequentially. The tremendous leverage driven by higher sales are helping the bottom line. Gross margin improved to 58% from 37% in the year earlier period. This double-impact caused gross profit on a dollar basis to more than double.

Revenue from the Compute & Networking Business Unit (“CPBNU”) was up over 90%, due to increases in average selling prices (“asp”) for products sold into the client market, growth in the cloud driven by out-sized increases in DRAM content per server, and increased sales into the enterprise market. The Storage Business Unit’s (“SBNU”) sales of Trade NAND products was up 45% Y/Y but fell off 9% sequentially; asp for NAND component sales fell, partially offset by increases in SSD sales. Meanwhile, the Mobile Business Unit (“MBU”) revenue was up 20% Y/Y driven by Micron’s low-power DRAM product and sales of mobile DRAM into smartphones.

On a product basis DRAM revenue was up 14% Q/Q and 76% Y/Y. ASP and gigabits sold increased Y/Y in the low 40% range, and low 20% range, respectively; they also grew sequentially. Trade NAND revenue was up 28% Y/Y, but fell 3% sequentially. ASP decreased Y/Y in the high single digits while gigabits sold increased in the low 40% range. ASP also fell sequentially in the mid-teens range. According to management, the ASP decline was caused by a mix shift in the company’s SBU NAND components. This could be a trend to watch going forward.

Micron Is Sitting In The Catbird Seat

The importance of the cloud and gaming segments is creating explosive demand for memory and storage capacity. The secular shift from the previous PC-based market to the current dealer market is amplifying that demand. Micron is poised to exploit this secular shift. According management, memory is also making possible applications like artificial intelligence and virtual reality:

This market now supports a healthy demand environment with several secular demand drivers that I have discussed earlier. More specifically, memory is making possible applications such as AI and VR, and enabling new cloud-based business models which deliver a fundamental value far in excess of a price per bit.

Management estimates DRAM bit growth in the 20% range in calendar year 2018. NAND bit growth could exceed 40%, driven by the transition to 64-layer 3D NAND. The NAND bit growth is predicated on an increase in supply to meet customer demand.

The Catbird Seat Could Get Hot

DRAM makes up over 70% of Micron’s revenue. Its increased asp and bit growth across products has led to the company’s outsize top line growth. Can the DRAM market hold up? Which industry players will increase capacity that could potentially drive down asp? Micron may have partially answered that question on the earnings call.

Micron wants to diversity its portfolio of LPDRAM, MCP and managed storage solutions to meet customer demands. The company also wants to expand its 64-layer 3D TLC NAND capabilities and its portfolio of low-power solutions with 1X LPDRAM and 1X nanometer DRAM designs. Micron needs additional capacity to meet the demands needed by growth in the cloud, artificial intelligence, and increased memory needs in the mobile space. It announced plans to build a $7.5 billion clean room space:

Accordingly, we are executing plans to add clean room space in our NAND and DRAM SAS network. With the support of the Singapore Economic Development Board, we have finalized plans to build additional shelf space in Singapore, adjacent to our existing NAND Center of Excellence. The primary purpose for this new clean room space will be to transition our existing wafer capacity to future 3D NAND nodes …

The first phase of this clean room is expected to be completed by the summer of 2019, with initial wafer output from the facility expected in the fourth quarter of calendar 2019. We are also building out incremental clean room space in our fab in Hiroshima, Japan, which will be available for production at the beginning of calendar year 2019. This clean room space will be used to continue our 1Y nanometer DRAM transition. For fiscal year 2018, we expect our capital expenditures to be in the upper end of our previously guided range of $7.5 billion, plus or minus 5%. Long term, we target capital expenditures as a percentage of revenue to be in the low 30% range.

Micron has cash on hand of nearly $8 billion. Free cash flow for the first half of the year was $4 billion, which equates to a run-rate of $8 billion. The company has ample cash and cash flow to fund its capital expenditure requirements. Its $4.2 billion capital expenditures through the first half of 2018 was exactly 30% of its total revenues. Maintaining this spend should not be a problem going forward.

In the short term, capacity expansion could help meet customer demand requirements without being disruptive to DRAM and NAND prices. What happens if demand peaks or if Samsung (OTC:SSNLF) or Hynix (OTC:HXSCF) follows suit? NAND prices are already facing headwinds. If DRAM prices stagnate it could hurt the MU growth story.

Conclusion

This was another strong quarter for Micron. Declining NAND prices and the uncertain impact on DRAM from capacity expansion make MU a sell.

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

Tencent loses $24 billion in market cap after Naspers' selldown

HONG KONG (Reuters) – China’s Tencent Holdings Ltd (0700.HK) saw its shares down 4.51 percent at the midday trading break on Friday after the internet firm’s largest shareholder, Naspers Ltd (NPNJn.J), said it would lower its stake for the first time in 17 years.

A Tencent sign is seen during the fourth World Internet Conference in Wuzhen, Zhejiang province, China, December 4, 2017. REUTERS/Aly Song

The Hong Kong-listed stock opened 7.8 percent lower at HK$405, its lowest opening price since Feb. 9, before regaining ground to HK$419.6 by noon. The benchmark Hang Seng Index .HSI was down 2.81 percent.

A day earlier, the stock fell 5 percent following Tencent’s late Wednesday report showing quarterly revenue missed estimates as well as expectations of margin pressure, although profit beat forecasts.

Friday’s decline wiped $24 billion (17 billion pounds) off Tencent’s market value, though at $508 billion, it is still Asia’s most valuable listed company and fifth globally behind Apple Inc (AAPL.O), Alphabet Inc (GOOGL.O), Amazon.com Inc (AMZN.O) and Microsoft Corp (MSFT.O).

South African media and e-commerce group Naspers said on Thursday it planned to sell up to 190 million Tencent shares, or 2 percent of its holding, in a sale that could earn Naspers up to $11 billion. It also said it had no plans to further reduce its holding for the next three years.

“The funds will reinforce Naspers’ balance sheet and be invested in classifieds, online food delivery and fintech globally,” said CICC analyst Natalie Wu. “We think it is a good opportunity to buy into dips given Tencent’s solid fundamentals.”

Jefferies analyst Karen Chan said, “Given Naspers’ largest single shareholding and board representation in Tencent, we believe its stake sale is unlikely to be a reaction to Tencent’s quarterly results. Instead of a timed profit-taking move, we believe this is more to improve Naspers’ own free cash flow and allow it higher flexibility in pursuing investment opportunities.”

A Tencent spokeswoman said it was informed and supportive of Naspers’ decision, and that Naspers’ intention to keep its remaining stake for the next three years demonstrated its confidence in Tencent.

Reporting by Sijia Jiang and Donny Kwok; Editing by Paul Tait and Christopher Cushing

BlackBerry to provide software for Jaguar Land Rover EVs

(Reuters) – BlackBerry Ltd and Tata Motors Ltd’s Jaguar Land Rover (JLR) said on Thursday they reached a licensing agreement to use the Canadian company’s software in the luxury car brand’s next-generation electric vehicles.

FILE PHOTO: A Blackberry sign is seen in front of their offices on the day of their annual general meeting for shareholders in Waterloo, Canada in this June 23, 2015. REUTERS/Mark Blinch/File photo

BlackBerry will provide its infotainment and security software to JLR, in the Canadian firm’s latest licensing deal for its autonomous-driving technology after similar agreements with Qualcomm Inc, Baidu Inc and Aptiv Plc.

BlackBerry’s QNX unit, which makes software for computer systems on cars and has long been used to run car infotainment consoles, is expected to start generating revenue in 2019.

Its Certicom unit focuses on security technology and serves customers such as IBM Corp, General Electric Co, and Continental Airlines.

JLR, which was bought by the Tata group in 2008, said last year that all its new cars would be available in an electric or hybrid version from 2020.

Britain’s biggest carmaker said in January it would open a software engineering center in Ireland to work on advanced automated driving and electrification technologies.

Reporting by Ismail Shakil in Bengaluru; Editing by Amrutha Gayathri

General Electric's Gem Should Be Sold

One of the largest and most significant assets on the books of General Electric (NYSE:GE) is the company’s Healthcare segment. The operation was founded in 1994, but its roots trace back to the late 1800s under the name Victor Electric Company. Over the years, the segment has grown to be a real powerhouse for the conglomerate, generating several billions of dollars in sales and profits annually. Undoubtedly, this adds value to General Electric and is a bright spot for the company in this time of investor pessimism.

A major player in the healthcare space

By almost every measure, GE Healthcare is a force to be reckoned with. In a prior article, I highlighted the company’s ultrasound operations, but I have yet to piece together the segment as a whole. According to management, and shown in the image below, the segment’s largest source of revenue comes from diagnostic imaging and related services, with sales at about $8 billion per year. However, the segment’s $5 billion in sales from life sciences, followed closely by mobile diagnostics and monitoring at $4 billion, is large as well.

*Taken from General Electric

In all, this major footprint has allowed the company to amass a sizable chunk of its markets. Over 1 million imaging and mobile diagnostics devices that are under the GE Healthcare banner are estimated to be installed globally today. They perform in excess of 16 thousand scans every minute and in aggregate they have over 230 million exams of varying natures under their belts. As you can see in the image below, management has utilized its position to create partnerships with players like Amazon’s (NASDAQ:AMZN) AWS, as well as other prominent names like Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC).

*Taken from General Electric

What’s more, management isn’t done trying to grow GE Healthcare. Last year, the firm launched 26 products and through GE Additive and Stryker Corp (NYSE:SYK) it has more than 50 active projects in its pipeline. Another area (though management hasn’t provided any meaningful detail of it) that has been entered into is providing cloud-related services. This could be a material player for the segment in the future, but until we see evidence that management can compete in what has become a very crowded (but high-growth) space, I can’t warrant putting too much stock into that bet.

Performance has been robust but growth is slow

GE Healthcare has a history of being a great source of profit for its parent company. As you can see in the chart below, sales have slowly risen over at least the past five years, rising from $18.20 billion in 2013 to $19.17 billion in 2017. As you can see in the same graph, despite seeing a tick down from 2013 to 2014, sales of the segment have been pretty flat as a percentage of General Electric’s total industrial revenue.

*Created by Author

In recent years, international exposure has become more relevant for GE Healthcare. Today, the segment employs around 52 thousand employees spread across more than 140 countries and management has listed China as an attractive growth prospect moving forward. In fact, non-US sales for the segment totaled 55.5% of aggregate segment sales for it in 2017. This represents an increase from the 53.6% of sales that came from outside of the US just one year earlier.

As revenue has risen for the segment, so too has backlog. In 2013, this figure totaled $16.1 billion, but it has since risen to $18.1 billion. Without any doubt, this metric has benefited from a growth in orders over time. In 2017, total orders for the segment amounted to $20.4 billion. This represents an increase over the $19.2 billion seen in 2013 and 2016. According to Reuters, the imaging industry is likely to see significant growth over the next few years. In 2016, total industry sales were $29.8 billion, but that number is expected to balloon to $45.1 billion in 2022. That implies an annual sales growth for this space of around 10.9% per annum. Assuming this or anything close to this comes to fruition, backlog will grow over time for the segment.

*Created by Author

From a profitability perspective, the figures over time have been even better. After seeing segment profits decline from $3.05 billion in 2013 to $2.88 billion in 2015, we saw a nice rebound over the past two years that brought profits up to $3.45 billion for 2017. That’s the highest figure I saw on record for GE Healthcare and it accounted for 23.4% of General Electric’s Industrial segment profits, which was also a record high that I could see.

*Created by Author

Based on the numbers provided, this growth in profits, driven not only by higher sales but by cost reductions (according to management) has led to GE Healthcare’s profit margin expanding as well. Over the past five years, GE Healthcare’s segment profit margin grew from 16.7% to 18% (dipping as low at one point as 16.3%). A similar trend can be seen in the graph below, which shows that the return on assets for the segment has grown over time, rising from 10.9% to 12% today.

*Created by Author

Strong growth prospects, combined with attractive and improving margins has led to the formation of a thought in my mind. At this point in time, General Electric is stuck between a rock and a hard place. On one hand, the firm has been slammed by insurance reserves, SEC investigations, and other issues in recent months. This has resulted in shares of the business declining by around 54% from their 52-week high, effectively erasing $143 billion worth of market value from the firm.

As concerns grow that cash flow may not be enough to meet spending needs (especially now that GE Capital has cut off its distribution to its parent) and the company’s dividend to shareholders, now might be the time to consider selling off GE Healthcare. It’s difficult to tell what kind of value exists here for shareholders, but one good estimate might be derived from looking at Danaher (NYSE:DHR).

According to the management team at Danaher, 63% of the company’s revenue is split between life sciences and diagnostics operations. These are essentially the same kinds of operations that GE Healthcare engages in. Another 15% of Danaher’s revenue is attributable to the dental space, which isn’t too dissimilar to make the case that Danaher is largely a proxy for GE Healthcare.

*Taken from Danaher

Like GE Healthcare, total segment profits (I’m excluding “other” that shows up as a $170 million loss), carry with them nice margins. Using 2017’s figures, the profit margin for Danaher was 17.4%. With revenue of $18.33 billion, the company is just a bit smaller than GE Healthcare as well. When you consider that Danaher’s market cap is $69.97 billion as of the time of this writing, you come to the conclusion that the firm is trading for 3.82 times revenue and 21.9 times segment profits. Applying the same figures to GE Healthcare would imply a value on the business of between $73.02 billion and $75.51 billion. Such a sale, at the high end, would be enough to reduce General Electric’s debt from $136.21 billion to $60.70 billion if management so desired.

Takeaway

GE Healthcare is a great business. Despite seeing sales grow slowly, margins associated with the segment are attractive and the industry’s upside is material. Additional value would probably be realized from having the company be separated from the conglomerate since a new management team could place a more concerted effort toward growing the enterprise. The value of Danaher suggests that management could also solve a lot of its issues regarding liabilities if it were to decide part ways with the segment, perhaps even freeing up capital to reinvest toward higher-growth prospects like Aviation, Renewables, and Oil & Gas.

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.

Exclusive: Kaspersky Lab plans Swiss data center to combat spying allegations – documents

MOSCOW/TORONTO (Reuters) – Moscow-based Kaspersky Lab plans to open a data center in Switzerland to address Western government concerns that Russia exploits its anti-virus software to spy on customers, according to internal documents seen by Reuters.

FILE PHOTO: The logo of Russia’s Kaspersky Lab is displayed at the company’s office in Moscow, Russia October 27, 2017. REUTERS/Maxim Shemetov/File Picture

Kaspersky is setting up the center in response to actions in the United States, Britain and Lithuania last year to stop using the company’s products, according to the documents, which were confirmed by a person with direct knowledge of the matter.

The action is the latest effort by Kaspersky, a global leader in anti-virus software, to parry accusations by the U.S. government and others that the company spies on customers at the behest of Russian intelligence. The U.S. last year ordered civilian government agencies to remove the Kaspersky software from their networks.

Kaspersky has strongly rejected the accusations and filed a lawsuit against the U.S. ban.

The U.S. allegations were the “trigger” for setting up the Swiss data center, said the person familiar with Kapersky’s Switzerland plans, but not the only factor.

“The world is changing,” they said, speaking on condition of anonymity when discussing internal company business. “There is more balkanisation and protectionism.”

The person declined to provide further details on the new project, but added: “This is not just a PR stunt. We are really changing our R&D infrastructure.”

A Kaspersky spokeswoman declined to comment on the documents reviewed by Reuters.

In a statement, Kaspersky Lab said: “To further deliver on the promises of our Global Transparency Initiative, we are finalizing plans for the opening of the company’s first transparency center this year, which will be located in Europe.”

“We understand that during a time of geopolitical tension, mirrored by an increasingly complex cyber-threat landscape, people may have questions and we want to address them.”

Kaspersky Lab launched a campaign in October to dispel concerns about possible collusion with the Russian government by promising to let independent experts scrutinize its software for security vulnerabilities and “back doors” that governments could exploit to spy on its customers.

The company also said at the time that it would open “transparency centers” in Asia, Europe and the United States but did not provide details. The new Swiss facility is dubbed the Swiss Transparency Centre, according to the documents.

DATA REVIEW

Work in Switzerland is due to begin “within weeks” and be completed by early 2020, said the person with knowledge of the matter.

The plans have been approved by Kaspersky Lab CEO and founder Eugene Kaspersky, who owns a majority of the privately held company, and will be announced publicly in the coming months, according to the source.

“Eugene is upset. He would rather spend the money elsewhere. But he knows this is necessary,” the person said.

It is possible the move could be derailed by the Russian security services, who might resist moving the data center outside of their jurisdiction, people familiar with Kaspersky and its relations with the government said.

Western security officials said Russia’s FSB Federal Security Service, successor to the Soviet-era KGB, exerts influence over Kaspersky management decisions, though the company has repeatedly denied those allegations.

The Swiss center will collect and analyze files identified as suspicious on the computers of tens of millions of Kaspersky customers in the United States and European Union, according to the documents reviewed by Reuters. Data from other customers will continue to be sent to a Moscow data center for review and analysis.

Files would only be transmitted from Switzerland to Moscow in cases when anomalies are detected that require manual review, the person said, adding that about 99.6 percent of such samples do not currently undergo this process.

A third party will review the center’s operations to make sure that all requests for such files are properly signed, stored and available for review by outsiders including foreign governments, the person said.

Moving operations to Switzerland will address concerns about laws that enable Russian security services to monitor data transmissions inside Russia and force companies to assist law enforcement agencies, according to the documents describing the plan.

The company will also move the department which builds its anti-virus software using code written in Moscow to Switzerland, the documents showed.

Kaspersky has received “solid support” from the Swiss government, said the source, who did not identify specific officials who have endorsed the plan.

Reporting by Jack Stubbs in Moscow and Jim Finkle in Toronto; Editing by Jonathan Weber