Trump attacks Amazon, again, over U.S. postal rates

(Reuters) – U.S. President Donald Trump launched his second attack in a week on Amazon.com Inc on Saturday, accusing the world’s biggest online retailer of getting unfairly cheap rates from the U.S. Postal Service and not paying enough tax.

FILE PHOTO: The logo of Amazon.com Inc is seen in Sao Paulo, Brazil October 17, 2017. REUTERS/Paulo Whitaker/File Photo

Trump’s comments on Twitter reiterated criticisms he made on Thursday about the company. He may have been prompted by a report from news website Axios saying he was obsessed with Amazon and considering ways to rein in the company’s power, possibly with federal antitrust or competition laws.

Investor concerns about regulatory action sent Amazon shares down 3.3 percent over Wednesday and Thursday, knocking $24 billion off the company’s market value.

“While we are on the subject, it is reported that the U.S. Post Office will lose $1.50 on average for each package it delivers for Amazon. That amounts to Billions of Dollars,” Trump tweeted on Saturday.

A Citigroup analysis last year showed that if the U.S. Postal Service (USPS) reallocated costs to account for the growing volume of packages it delivers, it would cost $1.46 more to deliver each package. Federal regulators, which review contracts made by USPS, have not raised any issues with the terms of its contract with Amazon.

U.S. President Donald Trump arrives at Palm Beach International Airport, Florida, U.S. for the Easter weekend at Mar-a-Lago in Palm Beach March 29, 2018. REUTERS/Yuri Gripas

“If the P.O. ‘increased its parcel rates, Amazon’s shipping costs would rise by $2.6 Billion’,” Trump tweeted, although it was not clear what report he was citing. “This Post Office scam must stop. Amazon must pay real costs (and taxes) now!”

A White House spokeswoman said on Thursday the administration has no Amazon-related action at this time.

Trump also accused the Washington Post, owned privately by Amazon Chief Executive and founder Jeff Bezos, of being a “lobbyist” for Amazon.

The newspaper, a frequent target of Trump’s ire, won a Pulitzer Prize last year for its critical investigation of Trump’s donations to charities.

Amazon declined comment. The Washington Post did not immediately reply to a request for comment.

Reporting by Bill Rigby; Editing by Bill Trott

Czechs extradite suspected Russian hacker Nikulin to United States

PRAGUE (Reuters) – The Czech Republic has extradited Russian citizen Yevgeniy Nikulin to the United States where he is accused of hacking social networks including LinkedIn, the Czech Justice Ministry said on Friday.

The decision by Minister Robert Pelikan defied Russia, which had also asked for his extradition after Nikulin was arrested in Prague in cooperation with the U.S. Federal Bureau of Investigation in 2016.

“We confirm extradition to the United States,” a Justice Ministry spokeswoman said in a text message after earlier reports. “He has already flown out.”

A U.S. federal grand jury in California indicted the 29-year-old Nikulin in 2016 on suspicion of hacking into the U.S.-based social media companies LinkedIn, Dropbox and Formspring in 2012.

LinkedIn has said the case was related to a 2012 breach at the social networking company that it previously said may have compromised the credentials of 100 million users, prompting it to launch a massive password reset operation.

Nikulin has in the past denied any wrongdoing in comments to Czech media. Reuters could not immediately reach his attorney on Friday.

After Nikulin’s arrest in Prague, Russia also asked for his extradition. A Moscow court issued a warrant for his arrest in November 2016 for the alleged theft of $3,450 via Webmoney in 2009, the Czech Justice Ministry said then.

Czech courts have ruled extradition to both countries was permissible, and the decision was up to Pelikan.

Prime Minister Andrej Babis has said he was in favor of extradition to the United States but Pelikan said President Milos Zeman, who often takes a pro-Russian stance, had urged extradition to Russia.

Pelikan refused in 2016 to extradite two Lebanese citizens charged in the United States with an attempt to sell ground-to-air missiles, cocaine trafficking and other crimes.

Another Czech cabinet minister said at the time that this decision was connected with the return of five Czechs from a presumed kidnapping in Lebanon.

Babis needs Zeman’s support as he tries to build a new government after his minority cabinet lost a confidence vote last month. Zeman has the right to appoint prime ministers and has promised Babis another try at installing a government.

Reporting by Jan Lopatka; Editing by Richard Balmforth/Mark Heinrich

Businesses, consumers uncertain ahead of China VPN ban

BEIJING (Reuters) – Businesses and consumers in China are bracing themselves ahead of a March 31 ban on non-state sanctioned virtual private networks (VPNs), saying regulators have not provided clarity on how the ban will be implemented.

A computer network cable is seen above a Chinese flag in this July 12, 2017 illustration photo. REUTERS/Thomas White/Illustration

VPNs, which can bypass China’s Great Firewall, the world’s most extensive effort to try to control cyberspace, allow companies and individuals to secure access to information stored outside the country and gain access to websites blocked in China, including news sites, social media and search engines.

New regulations introduced last year ban companies and consumers from using VPNs that are not government approved, starting on Sunday, but it is still not clear how strictly the rules will be implemented.

Businesses say they have not received directives from authorities about the ban and say the lack of transparency around the rules is cause for concern.

“We’re not expecting a sudden impact, but at the same time there is no clarity, it’s not helpful” said a Beijing-based executive at a U.S. tech firm who declined to be identified because of the sensitivity of the subject.

“We have products that have been removed or reviewed in the past under similar laws … we are fairly confident that there will be a discussion before there are any rash moves,” the executive said.

The Cyberspace Administration of China and the Ministry of Industry and Information Technology, which together drafted the new rules, did not respond immediately to faxed requests for comment.

The ruling Communist Party has tightened controls on society since President Xi Jinping assumed power, from online censorship to a crackdown on activists and non-governmental organizations.

Officials say China has a sovereign right to govern the internet as it sees fit, and its expansive national security and cyber security regulations are needed to address threats such as hacking and terrorism.

Foreign diplomats say officials have rebuffed efforts to discuss the cyber rules, and they warn that the restrictions could harm China’s image, undermine its competitiveness and put a dent in international cooperation. [nL4N1MR3IY]

In January, Lester Ross, head of a policy committee at the American Chamber of Commerce in China, told reporters the VPN rules could put a burden on small businesses forced to pay for expensive international private leased circuits (IPLC) to get beyond the Great Firewall.   

“For larger companies, in many instances they already have these and it’s a cost of business they can absorb. But for smaller companies, it’s a real problem,” he said.

“It’s all part and parcel of the party’s emphasis on data control and information control. This is likely to be an even bigger concern as we go forward.”

Reporting by Cate Cadell and Michael Martina; Editing by Robert Birsel

MuslimCrypt Steganography App Helps Jihadists Send Secret Messages

ISIS has long taken full advantage of secure communication tools, and utilized mainstream communication platforms in unexpected ways. Extremist groups even develop their own software at times to tailor things like encrypted messaging to their specific needs. One such project is the clandestine, unfortunately named communication tool MuslimCrypt, which uses an encryption technique called steganography to spread secret messages. And while many of these homegrown tools don’t live up to their promised protections, a new evaluation of MusilmCrypt by the Middle East Media Research Institute reaches a basic, but crucial conclusion: MuslimCrypt’s steganography works.

MuslimCrypt was first released by unknown actors on January 20 in a private, pro-ISIS Telegram channel, and like other steganographic tools, it hides information in plain site. Think of writing in invisible ink, except instead it’s encoding a digital message in an otherwise unremarkable piece of software. And while steganography has of late been linked to malicious hacks, MuslimCrypt brings the technique back to its clandestine communication roots. (In fact, Osama bin Laden was apparently a regular practitioner.)

Specifically, MuslimCrypt hides information in images that can be shared or posted freely because only the recipient will know to check it for the secret message. MuslimCrypt doesn’t come with a manual or provenance, so MEMRI researcher Marwan Khayat worked to trace the tool’s history on Telegram, look into the users who talked about and posted it, vetted the tool in an attempt to confirm that downloading it wouldn’t be dangerous, and then examined it in a software sandbox to determine how to use the tool. He then focused on testing its ability to actually encode information in image files—JPEGs and TIFs—and then facilitate extraction of that data on the receiver’s end. Given that ISIS and its sympathizers use active multimedia propaganda campaigns, there are a lot of places for messages to hid.

“It’s really fascinating actually that they’re using steganography,” Khayat says. “I found random pictures online, checked that you can embed a message and checked that you can extract it, and compared the two images visually. Someone online who sees the resulting image, there’s no way to tell. So to me it is working.”

Though the algorithms driving MuslimCrypt remain mysterious, the fact that the tool works in any capacity is a significant first step. But Khayat notes that just because the tool is functional doesn’t necessarily mean that its users have actually leaned on it for clandestine communication yet. “Think about it as a jihadi,” Khayat says. “I hid a message inside and then I have it on my computer then what? Where do I send it?”

Steganography’s value as a secret communication tool makes it unsurprising that jihadis would eventually adopt the technique, says Simon Wiseman, chief technology officer at the British network security firm Deep Secure, which works on malicious steganography defense. “Trying to communicate covertly is the traditional view of steganography, and MuslimCrypt is a standard application intended to do the encoding and decoding,” Wiseman notes. Meanwhile, “detection through analysis is very difficult to do accurately so [investigators] may try to spot the distribution of the tool. I guess the next phase of the operation for MuslimCrypt would be to disguise that and create covert distribution.”

Analysts point out that once a group discovers steganography’s benefits, they’ll naturally evolve and refine their techniques. But MuslimCrypt’s murky origins pose the biggest barrier to understanding more about its intended uses and the real goals behind the project. “Part of the issue is we don’t know who released it,” Khayat says. He tried to trace the digital personas who talked about and posted MuslimCrypt in the Telegram group “MuslimTec DE/EN 2,” including admin Mahed Razzul/@DrAlman and user Bayyi Almani/@BayyiAlmani. The names all indicate a German-speaking origin or affiliation, and the users sometimes write in German, but Khayat emphasizes that all of this could easily be a false flag. And when he tried to trace the personas, he instantly hit a dead trail.

“They know they’re being monitored on Telegram, they know people are watching them,” Khayat says. “They could be actual jihadis or the whole thing could be some intelligence agency or anything else, I have no clue.”

Fear of spy-agency influence could also itself be the motivation for the creation of MuslimCrypt, though. Diwakar Dinkar, a research scientist at the security firm McAfee who monitors steganographic advances, points out that countless steganography tools are available online precisely because it’s difficult to know which ones have been cracked by security agencies. “Just as a safeguard people build their own,” Dinkar says. “In fact, designing your own steganography algorithm isn’t difficult. Anyone who has sound knowledge of coding and a bit of mathematics can do it.” Dinkar analyzed the MuslimCrypt binary himself and saw some potentially suspicious attributes, like a possible key logger. But there was nothing that made Dinkar definitively conclude that the tool is malware. “It seems to be just a legitimate software tool which is used for secure or hidden communication,” he says.

MEMRI’s Khayat plans to investigate MuslimCrypt further, but the findings so far reinforce to him that the tool represents an important step in jihadist communication technology. “Steganography is not really just a science, it’s like art and science together. And it seems like it’s working.” After all, as Khayat puts it, “You can’t examine every image everywhere all the time.”

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.

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