Jeff Weiner on How Technology Accentuates Tribalism

This weekend is WIRED’s 25th Anniversary festival. We started it off with three conversations with brilliant CEOs about the future of work: Patrick Collison of Stripe, Stacy Brown-Philpot of TaskRabbit, and Jeff Weiner of LinkedIn. Here is the transcript of my talk with Weiner.

Nicholas Thompson: One thing that I love about you is that your career dates to 1994 and an essay that you read in WIRED magazine. So, explain how a review of a Nicholas Negroponte book led you to become who you are.

Jeff Weiner: It’s all true. I’m not sure I’d be sitting in this seat today if it weren’t for WIRED. I was first introduced to the internet prior to its commercialization while I was still in school as a senior at Wharton undergrad. I was on a consulting project with a buddy of mine and three DuPont engineers who were interested in leveraging this thing called the Internet for desktop teleconferencing. So I was exposed to the technology and became really fascinated by the implications and kind of developed this thesis that it was going to change everything, there would be this concept of convergence, and I had always been interesting in education reform. And so I really started to roll up my sleeves to better understand the opportunities and how it would impact society.

Fast forward, I ended up joining the corporate development group of Warner Brothers. I’d been in Boston in a consulting group for a little while. And shortly after joining, I read my copy of WIRED that month. It is probably close to 24 years to the day. And I would read WIRED cover to cover. Everything about it was fascinating to me—the look, the feel, the narration, the voice, how unique it was. And of course, it was covering something I was so fascinated by. I would even read the book reviews, including one in this particular edition about Nicholas Negroponte and his vision for the digital future. I ended up buying the book. And essentially what I picked up from it was everything that could be converted from an atom to a bit would be.

I had just joined Warner Brothers and I knew that everything about the place was going to be transformed. And within a month or two of that revelation the guy who was running corporate development at the time said Warner Brothers needed an interactive division. They would have a CD-ROM component, which was all the rage back then. They would have an online component, which most people in the group didn’t really understand or have experience with. I had just joined AOL about nine months prior. And it was going to have an out-of-home interactive entertainment component, a kiosk. That fell by the wayside. The CD-ROM component never got approved. But I volunteered to write the online business plan, and 24 years later, here we are.

NT: That is extraordinary. And that is, of course, one of the most important ideas of last 25 years, right. Everything that is an atom will become a bit. So let me ask you a very simple follow up question: What is the equivalent idea today?

JW: Let’s get Nicholas Negroponte on the phone and find out!

Jeff Weiner

Amy Lombard

For me, it’s far less about the technology today and it’s far more about the implications of technology on society. And I think increasingly, we need to proactively ask ourselves far more difficult, challenging questions—provocative questions—about the potential unintended consequences of these technologies. And to the best of our ability, try to understand the implications for society. I think it’s safe to say, certainly for those founders and CEOs that I know and work with in the Valley, people have the best of intentions when they are innovating, when they’re creating these breakthroughs, their visions for their companies. But you can see, it feels like every week there’s another headline that is talking about how some of this stuff is going in the wrong direction. And technology certainly didn’t create tribalism, tribalism is a part of human nature, it protects us. The whole idea of ingroups keeps us safe and secure.

But technology is dramatically accelerating and reinforcing tribalism at a time when increasingly we need to be coming together as a society—and you can talk about society in a town, a city, a state, a country, the world—when we increasingly need to be coming together to solve some pretty big challenges. So to me it would be about understanding the impact of technology as proactively as possible. And trying to create as much value, and trying to bring people together to the best of our ability.

NT: Alright. So, you set up an easy question in your answer, which is: You worry about the worst possible unintended consequences of technology. What is the worst possible unintended consequence of LinkedIn?

JW: So, you know, our vision is to create economic opportunity for every member of the global workforce. There’s over 3 billion people in the global workforce. And that vision was originally put into place to inspire our employees. It was true north. It was the dream, it wasn’t necessarily something we were going to measure ourselves against. That was our mission. That was the role of the mission, which is to connect the world’s professionals to make them more productive and successful. There’s roughly 780 million knowledge workers, or professionals, pre-professionals, students that aspire to become white-collar professionals in the world. Three billion people in the global workforce. The unintended consequence of too closely focusing on our mission without truly thinking through how we’re going to operationalize the vision is to reinforce unconscious bias, to reinforce these growing socioeconomic chasms on a global basis, especially here in the United States, by providing more and more opportunity for those that went to the right schools, worked at the right companies, and already have the right networks.

NT: Oh, I see. Your network could possibly reinforce all of the biases.

JW: Oh, not quite possibly—it does. And it does for all of us. And despite, again, the best of intentions, people have a tendency to want to work with and recruit those that look like them, that sound like them. And it’s not through, more often than not, it’s not through explicit bias. These are unconscious biases, and so I’ll give you a perfect anecdote here. We recently rolled out an Ask For a Referral capability on LinkedIn. And this makes all the sense in the world when you consider how many people find their jobs by virtue of who they know. So just a quick show of hands, How many people here have ever gotten a job by virtue of their network? Someone they knew at the company. So it’s about 90 plus percent. So we rolled out this functionality, made all the sense in the world. And it took off. And the results were incredible. We found that people asking for a referral within an organization they were interested in working for, by virtue of a job post on LinkedIn and tapping the power of their LinkedIn network, were eight times more likely to get the job. Eight times more likely to be hired. And it creates a more effective, efficient process for the prospect, for the company themselves, etcetera. So, our head of social impact, a woman named Meg Garlinghouse, who I’ve been working with for a really long time— we first met at Yahoo, and she’s one of, if not the, best in the business—she pulled me aside shortly after we launched this thing and she said, “I understand everyone’s celebrating the success of this product but have we considered the unintended consequences?” I said, “What do you mean?” She said, “What about the people that don’t have the networks?” Just stopped me cold in my tracks. I mean we have the wonderful privilege of working with some extraordinary organizations both here in the community locally and more broadly. Boys and Girls Club of the Peninsula, Gear Up, organizations like this where you’ve got extraordinary talent that just doesn’t necessarily have access to the right four-year diploma, or the right people. But we work with these people, we hire them, we’re thrilled to have them join the company because they are so capable, they have all the raw materials, all the aptitude, the resiliency, the grit, the learning curves, the compassion by virtue of the experiences they’ve had in their life. But they don’t have the networks. And so with questions like that raised, we are able to ask ourselves these tough questions and then answer them hopefully in the right way. And what we ended up doing with that kind of ethos in mind, to broaden this aperture, to create economic opportunity for every member of the global workforce, we created something called the Career Advice Hub. And the Career Advice Hub enables any member of LinkedIn to raise their hand and ask for help, and for any member of LinkedIn to volunteer to help them, to mentor them. And within a few short months after launching that, we’ve already had two million people ask for help. And we’ve had over a million people volunteer to mentor folks, ideally outside of their network. So that would be an example of how we’re addressing them.

NT: When I get LinkedIn connection requests, I usually sort them by “has mutual connections” to “has no mutual connections,” so I will commit to reversing, flipping from lowest the highest now.

JW: So it’s wonderful to hear that. And in all seriousness, we want to potentially try to productize this to raise greater awareness for how people can begin to diversify their networks, because again there’s this almost self-fulfilling prophecy, this self-reinforcing dynamic, just sticking with the people you know. So it’s wonderful to hear you’re doing that. We’re going to try to facilitate that for everyone.

NT: And you’ve also, I noticed a couple of weeks ago, I don’t know the timing, you rolled out an AI system to help hirers find more diverse candidates. Is that an initiative that came out of the same realization in the same conversation? And how does it work?

JW: To some extent. We started to think about the concept of diversity and really extending diversity to include inclusion and belonging. We don’t think diversity is enough. Oftentimes with regard to diversity initiatives, people will look to hire folks into their organization that are more reflective of the customers that they serve, which is wonderful. But all too often that becomes a numbers exercise. And it needs to be much more than that, because you can bring a more diverse group of people into your company, but if they’re not included in the right discussions where decisions are being made, then it’s not going to achieve the objective that you were looking for. So there’s got to be diversity, there has to be inclusion, and inclusion is not enough. Oftentimes now you’ll hear people talking about diversity and inclusion—D&I. At LinkedIn, we also feel like it’s really important to focus on belonging. So if you use the meeting as the metaphor and diversity is making sure you have the right people within your organization, then inclusion is making sure they’re invited to the right meetings, belonging is ensuring that once those people are in the meetings, when they look up at the people around the table, they actually feel like they belong there. And if you don’t go that last mile, you may have the right people around the table, but they look up and they don’t see people that look like them, or sound like them, or have the right or similar backgrounds or experiences. And when they don’t feel like they belong, they’re not operating at their best.

NT: But do you mean that LinkedIn…LinkedIn can solve that problem at LinkedIn. You as the CEO can change the way your corporate culture works, and you can solve the problem of recruiting at WIRED or at any other company. But do you actually think that LinkedIn can solve culture problems within outside organizations? Or is it just LinkedIn can solve pipeline of people coming in?

JW: So when you say “solve,” solve cultural or societal issues…

NT: Yeah, can you solve diversity in America, Jeff?

JW: I would love to think that we can help!

NT: No, but do you view LinkedIn’s mission as, working on this problem as on the outside, working on this problem as it relates to people come into the organizations, or do you view it as going higher up in a stack of how organizations are managed and run?

JW: The beauty of the vision is it’s all of it. So when we talk about every member of the global workforce, we mean it. So every employee of LinkedIn at this point, we are—it’s not just the vision, we’re operationalizing the vision. We are going to try to create economic opportunity for all three billion members of the global workforce. And there’s really two components of this “every” which is by far away the most important word in that vision statement. One is going beyond our core, the white collar worker the knowledge professional, to include frontline workers, middle skilled workers, and blue collar workers. And we have some really exciting initiatives underway along those lines.

And then it goes to the point we were talking about earlier. There are also professional aspirants. There are folks that want to become knowledge workers, folks that are working towards that end, that would fall more within our core addressable opportunity in terms of knowledge workers, who to the point we were just discussing, don’t necessarily have the right networks or don’t necessarily have the right degrees. And so we are very focused on that as well. And it comes from the kinds of products I was talking about earlier, the kinds of AI efforts, talent pooling searching capabilities that we’re developing to facilitate the way in which companies can go out and create a more diverse workforce, and create a greater sense of inclusion. It also includes the way we do business. So it’s on both fronts. And one example of that would be within our engineering ranks, for example. We’ve recently taken a page out of the German playbook, the vocational training playbook, and we’ve created an apprenticeship program for people that don’t have a traditional four-year CS background. And as long as they have completed coding bootcamp, we will train them and apprentice them, and hopefully be in a position where we can hire them as software engineers. And it’s not just on the R&D front. Our head of recruiting just recently created an apprenticeship program we call Ramp, which seeks to tap folks from underserved segments of our member population, underrepresented minorities, opportunity youth, veterans, people in the later stages of their career who are in midstream of making a huge change and may have trouble getting work, and we’re training them to be recruiters, because they have the networks that enable us to become more diverse. And with success, we want to open source that. This is not going to be proprietary. As much as we believe that could create a competitive advantage, it’s too important. It’s too aligned with our vision statement. So in the success, Brendan Browne, the head of recruiting, wants to graduate a thousand apprentices a thousand recruiters over the next ten years just within LinkedIn. And then we want to open that up, and share best practices with other companies to take that to the next level.

NT: I will say that as someone who worked in Silicon Valley for a Linux company in 1997, the fact that everybody at Microsoft is now talking about open source is the most extraordinary evolution I’ve seen! Let me ask you a little bit about the data you have. You probably have the best data set on the world’s workforce, probably better than any government. If not now, it will be soon. What are you seeing in the way jobs are changing, and the way churn is happening? I’ve seen lots of people are worried about the way AI will change jobs, that robotics will change jobs. What have you seen in the data set, and where are we headed? What do you know about how jobs will change that most of us don’t know?

JW: So in terms of forecasting the crystal ball, the data is a reflection of what’s happening now or what was happening. And we can certainly use that to try to connect dots and see some patterns, but we also partner with third parties, some incredibly bright folks—think tanks, consulting firms—to better understand these trends given what we’re trying to accomplish. McKinsey Global Institute would be a perfect example. They’re estimating currently roughly half of all work activities are susceptible, will be impacted by AI. So that’s current. This isn’t science fiction. And they more recently came out a study that suggested that between 400 and 800 million jobs could be displaced on a global basis by virtue of AI. That’s not a net number, and jobs will be created. But clearly this is going to have massive impact on society.

So how can folks begin to get ahead of those trends? And that’s where our data can become I think really valuable for companies who are trying to answer these questions and develop the right workforce strategies so they can create work for their employees, for the jobs that are and will be, and not just the jobs that once were. Because we have a tendency to be looking in the rearview mirror too often here. And our workforce strategies could be a bit antiquated if we’re not looking proactively into the future. So we’ve developed one methodology in particular that enables us to look at the state in a really unique and hopefully valuable way, which we call skills gap analytics. So for any given locality anywhere in the world we can better understand the fastest growing jobs within that locality, the skills required to obtain those jobs, the aggregate skills of the workforce within that locality, measure the size of the gap, and then make that data accessible to people who are trying to fix it. And so that could be working with local governments, it could be working with local schools, in could be in cooperation with public and private sector. And then last year we rolled out a product called LinkedIn talent insights that was opened up as a beta pilot program. We just rolled it out generally available to all of our customers, and that enables them to do the same workforce planning within their organizations that we can do for governments around the world. Two really interesting trends we’re seeing here in the US: When I talk about a skills gap here on stage, what’s the first thing that comes to mind? what’s the first skill you think there would be a gap on?

Audience: Coding.

JW: Coding. That’s what everyone says. So software development, software engineering, cloud computing, data storage, web development, mobile development, and, of course, AI. Very top of mind, and when I meet with and talk to customers all over the world, I’m feeling a far greater sense of urgency on that front. But it turns out, that’s not the biggest skills gap in the United States. The biggest skills gap the United States is soft skills. Written communication, oral communication, team building, people leadership, collaboration. For jobs like sales, sales development, business development, customer service. This is the biggest gap, and it’s counter-intuitive. Everyone’s so keenly focused on technology and AI. It’s related though.

The good news comes on two fronts with regard to this particular gap. The first is that for as powerful as AI will ultimately become and is becoming, we’re still a ways away from computers being able to replicate and replace human interaction and human touch. So there’s wonderful incentive for people to develop these skills because those jobs are going to be more stable for a longer period of time. We’re also capable of closing these gaps now, today. Companies have the expertise within their organizations to train and re-skill their current workforce and future prospects. So that’s the good news on that front. With regard to technology this is also a bit counterintuitive because rather than try to just train everyone to become a software engineer, one of the things that’s going to be most important in terms of preparing the workforce to re-skill for that trend we were talking about earlier, is that people just have basic digital fluency skills. Before you start thinking about becoming an AI scientist, you need to know how to send email, how to work a spreadsheet, how to do word processing, and believe it or not, there are broad swaths of the population and the workforce that don’t have those skills. And it turns out if you don’t have these foundational skills, if you’re in a position where you need to re-skill for a more advanced technology, if you don’t have that foundation in place, it becomes almost prohibitively complex to learn multiple skills at the same time. So that’s an area we want to help people focus on as well.

NT: Alright. So, do not tell your children to be engineers but do tell them to go on the streams and to like and to comment and to share, because that is a very important soft skill! Thank you very much Jeff! That was fantastic.

More Great WIRED Stories

Forget Banning Phones and Laptops at Meetings. Here's What We Should Ban Instead

Imagine you just walked into a meeting with your banker.

The main goal: To figure out how to pay for a new house.

You’re a little nervous, and you know this meeting will determine your future. You sit down and listen intently to what the banker is saying as he or she covers all of the financial details. Obviously, you are clued in to the discussion, but at one point the banker mentions something a bit odd. It’s a minor point about capital gains tax, and the year the rule changed. So, you scratch your head and pull out your phone.

A quick Google search reveals that he’s wrong about that specific tax law.

You argue the point, and resolve the issue.

The wonders of technology, right?

Sadly, a new school of thought has emerged, likely propagated by people who did not grow up with phones or tend to stick with a desktop computer during work hours.

A few years ago, an expert on this topic suggested to me that no one would ever bring a phone to a meeting with a banker. You need to stay focused and intent.

I’ve pondered that discussion a few times over the years.

Initially, I agreed and it made sense. In fact, I’ve repeated the story several times. I’ve also repeated the word “phubbing” (e.g., to phone snub) and explained how it’s a bad, terrible, no good thing. A more technical phrase is “continuous partial attention” which is one of the scariest concepts of our age. It means people are always in a state of partial attention because they are either on a phone or thinking about being on a phone.

Here’s my problem with all of this.

I don’t think phones and laptops should be banned from meetings.

I think boring topics should be banned from meetings.

I once heard a phrase, attributed to the musician David Crowder, that you should do something so cool that you don’t need to look at your phone. The same concept should apply to meetings. As someone who frequently mentors college students, I know that the minute a meeting becomes boring and routine, people tend to pull out phones or mindlessly surf on a laptop–suddenly, Fortnite is more interesting. Who can blame them? It’s not the laptop’s fault. It’s the meeting topic and the meeting presenter.

My view is that gadgets can help us verify information, they can help us add to the conversation, to look up interesting facts. Distraction is a bad thing, but there are other ways to solve that problem instead of banning our devices altogether.

In my example of the mortgage meeting, of course you would never mindlessly surf Instagram during the chat. Should you ban phones? Not at all, because they can serve a purpose, especially if you stop someone in mid-sentence and ask politely if you can check on some details. In my meetings with college students, I rarely see people surfing or looking at cat videos because we tend to keep meetings short and lively. And, every meeting is a “working” meeting. Laptops help at meetings, they don’t hinder. No one ever focuses on a laptop or phone during a meeting that is lively and engaging.

If someone does start phubbing, it reveals a much deeper problem. If the meeting is important and the discussion is good, and someone still phone surfs, it’s a sign that maybe there’s a problem with engagement on a project. Sometimes, it’s a sign of depression or some other difficulty in life. Or, it’s a sign of an unruly employee revealing many other issues for you to worry about other than using a gadget instead of paying attention.

My view is simple: Let the devices stay, but figure out how to make them part of the meeting and not a distraction. Don’t use rules and dictums. Make the meeting incredibly worthwhile, engaging, and valuable. Gadgets won’t distract people for long.

S&P 500 Weekly Update: Irrationality Isn't Always Associated With 'Exuberance' And 'Euphoria'

Corrections only are considered “natural, normal, and healthy” until they actually happen. Tony Dwyer, Canaccord Genuity

Many like to take past economic and market environments and use them to forecast what will happen next. While I do employ past market seasonality and statistics to form an opinion, I also try to keep in mind that each economic cycle will have its own nuances and challenges.

The past can afford us an idea of the risks involved when investing in the markets, but it doesn’t tell you where and when those risks will come from going forward. Trying to predict the future is impossible. What is then left forces every investor to analyze the present, while understanding the past. You have to make high probability decisions in the face of uncertainty, but those probabilities aren’t etched in stone.

That sounds like a maddening challenge for market participants. Hence the wide spectrum of opinions that are handed out daily. This bull market cycle has perplexed many experienced investors. That is confirmed by the continued skepticism being shown for the better part of this cycle, and it continues today.

It is my conclusion that too many analysts have been trying to use their historical notes and theories for how they assumed the markets should react. Their signals and patterns haven’t worked as well as they once did in markets that have evolved in the past. Many are calling that this is the end of the bull market. In their view, it will coincide with the end of the business cycle.

What they have failed to see for years now is that there are no time limits imposed by these cycles. Ahh, but now they believe they have the Fed in their corner to deliver the knockout punch to the equity market. A rising rate environment. Maybe they do. The typical U.S. business cycle is ended by the Fed, which hikes rates to levels that are too high in response to inflation. Then again maybe these analysts are wrong again.

Seems to me the Fed is raising rates in response to an improving economy. While inflation may be lurking, it isn’t here to the point of concern just yet. Of course, those that have their minds set on the Fed spoiling the party will always tell us the Fed is already behind the curve. Problem is it was supposedly behind the curve in 2014!

The ability to remain flexible and evolve with the environment is key. I have concluded that the best way to do that is to follow what THIS market is telling you. Those who have been the most wrong seem to be the people or firms who are the most entrenched in their own views.

It might be better to take the view of how you would handle the market in the future than speaking to how you would have handled it in the past. Any issue that one wants to bring up and debate surely does matter, but only to the extent of what the stock market is telling us.

A PhD can write four pages on the negative aspects that can be seen now with the Fed, economy, interest rates and inflation, and if I see an uptrend that is firmly in place, I’ll put that article aside.

No matter how certain you are in your market views, no one really knows how things will play out. It is all about probabilities. In my experience, I can draw a profile and rate the probability of how a particular situation may or may not play out based on price action.

Now before any reader believes I have lost touch with reality and buried my head in the sand dismissing what is happening around me during the recent selling stampede, think again. In times of stress and irrationality, the place to look is the LONG-TERM trend. Otherwise you will be whipsawed just like many others who then let emotion rule the day.

Chart courtesy of

At the close of trading on Friday, the S&P closed 5% below its all-time high. I’m not sure what some pundits use to define a bear market, but that isn’t it. All we hear now is that it is the start of something more serious. There is ZERO evidence to support that claim. Drawing conclusions from any SHORT-TERM chart or any of the negative rhetoric is a fatal mistake.

Didn’t we just witness that at the beginning of this year? It’s easier to embrace that idea because it is based on fear. For most of this week, our fears were heightened because we are seeing the values of portfolios decline. When we are afraid, we act irrationally.

Remaining in control coincides nicely with the other important factor in forming my investment strategy. Keep it simple. Complex strategies may be fine for some, but the average Joe and Mary investor will have a hard time keeping it all together when the situation gets tumultuous.

After that is accomplished, you have to be willing to accept the old adage that it’s better to be roughly right than precisely wrong. Following the “fear” rhetoric has been a recipe for disaster.

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The economy clearly is performing at a higher level with the recent positive economic reports. In my view, that is the catalyst for the recent run-up in 10-year Treasury yields. With inflation stable, the bond market seems to be focused on re-rating U.S. economic growth higher. There is little credit risk present as high-yield spreads are making new cycle lows vs. Treasuries. Lower tax and regulatory burdens are also contributing to economic strength.

It’s all about what trade will do to everything we touch. It seems that many have already lost sight of the fact that a pro-growth business environment is very much in place here in the U.S.

The headline PPI decelerated again last month down to 2.73% year over year from 2.83% the month before. This continues a trend over the past few months of the headline measure surprising lower.

Core PPI which removes food and energy accelerated slightly to 2.48% year over year from 2.4%. A more refined measure of PPI excluding foods, energy, and trade services increased the most, up 3.02% year over year compared to 2.84% in August. This is the first time this measure of core PPI has been higher than the headline number since June 2017.

CPI rose 0.1% in September with the core rate up 0.1% too. CPI rose 0.059% and the core increased 0.116%. There were no revisions to August’s respective gains of 0.2% and 0.1%. The 12-month pace on the headline slowed to 2.3% y/y versus 2.7% y/y, and the core was steady at 2.2% y/y.

Michigan sentiment fell to 99 from 100.1 in September, but left the measure still above its 7-month low of 96.2 in August, and at an historically high level that lies below the 14-year high of 101.4 last March and the 100.7 peak in October of 2017, but above the peak before that of 98.5 in January of 2017.

A solid employment picture is removing a huge thorn on the side of the taxpayers.

Other programs like food stamps and welfare are also on the decline. These were issues that were not sustainable, and the reduction that we are seeing is a plus for the government, the average taxpayer and the economy. Funny how that doesn’t make the headlines.

Earnings Observations

The banks started off this earnings season, and as expected, there were positive reports. Consumer banking was solid at JPMorgan (JPM) as it beat on both the top and bottom line.

Citigroup (C) also reported a positive quarter as well. If investors want “value,” the banking sector represents the best value in the stock market today.

FactSet Research Weekly Earnings insight for Q3 2018:

  • Earnings Scorecard: With 6% of the companies in the S&P 500 reporting actual results for the quarter, 86% of S&P 500 companies have reported a positive EPS surprise and 68% have reported a positive sales surprise.

  • Earnings Growth: The blended earnings growth rate for the S&P 500 is 19.1%. If 19.1% is the actual growth rate for the quarter, it will mark the third highest earnings growth since Q1 2011 (19.5%).

  • Valuation: With the rout in stock prices this week, the forward 12-month P/E ratio for the S&P 500 is 15.7. This P/E ratio is below the 5-year average (16.3) but above the 10-year average (14.5).

Unless the earnings forecasts coming into this earnings season are totally wrong, corporations are making a lot of money because of the pro-growth backdrop that suddenly is being forgotten.

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The Political Scene

You wouldn’t know it with all of the focus on China these days, but in reality the tensions in the geopolitical environment have eased amid a reconfigured NAFTA. The EU negotiations are ongoing on the trade front with positives being reported. Analysts remain focused on the negatives, while dismissing the positives.

It fits nicely with the other negative commentary that is concerning investors.

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The Fed and Interest Rates

For those that think bond yields are “telling you something,” the same was said a month ago, when the UST 10-yr yield was declining to 2.8% and people were calling for disappointing data that could be a harbinger of economic weakness.

I have been adamant during this entre bull run that the bond market isn’t telling me anything at all. These comments are simply rolled out to fit the interest rate story of the day.

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From the AAII survey of individual investors, bullish sentiment had its largest one week drop since mid-November 2017, falling 15.05 percentage points. Bullish sentiment is now down to 30.6% from 45.66% last week. This is the lowest level for bullish sentiment since the first week of August, but it’s still pretty far from the lowest level on the year that we saw in April when it fell to 26.09%. Bull markets don’t end with this type of pessimism.


Crude Oil

The EIA weekly inventory report posted a larger-than-expected build in inventories of 6 million barrels for the week. Two large increases in a row totaling 14 million barrels. At 410.0 million barrels, U.S. crude oil inventories are at the five-year average for this time of year. Total motor gasoline inventories also showed an increase. Rising by 1 million barrels last week and remaining about 7% above the five-year average for this time of year.

The five straight weeks of gains came to an end as WTI closed the week at $71.51, down $2.83. Profit taking, bearish inventory numbers, or the fear of a global slowdown are all reasons for the selling, take your pick. Then again, perhaps it is just normal trading activity after five weeks of gains.

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The Technical Picture

October has not started out like many had envisioned. Initially we saw plenty of carnage under the hood as the indices were holding their own. That is not the case anymore. The market has narrowed. Since late August, even the strongest of the market breadth measures, the NYSE Daily Advance/Decline Line, has failed to confirm highs, while the weakest, 52-week highs and lows, has continued to erode.

Meanwhile, all of the cumulative Advance/Decline (A/D) lines were negative on a short-term trading basis. As we have seen in other major selling events, key support levels were taken out as if they weren’t really there at all. There remains a lot of negative energy out there, and it still could be released on the downside.

However, we are at an oversold level that usually indicates the selling is about to abate. Of interest is that the NASDAQ’s A/D line closed last week below its 200-DMA, which historically has signaled a short-term trading bottom.

The DAILY chart shows just how much short-term damage has been done. It also reveals how scary the price action looks compared to the S&P WEEKLY chart displayed earlier.

Just look over to the left of this chart. We have been here before, a wicked selling stampede, and the 200-day moving average is once again in play. This one is more of a surprise to me because the market was NOT wildly overbought like it was in January. I added another point on the chart indicating a severely oversold condition. These are points in time where we have seen rebounds.

Friday’s close was a small victory for the Bulls, a retake of the 200-day moving average (2,866) right at the close. I suspect that will now be the battleground in the next few days. The low that the Bulls will be defending is S&P 2,710.

So depending on your time horizon and station in life, this is as good a time as any to dig out the watchlists and the lists of stocks that were tossed away in the wild selling. Companies that were showing solid earnings growth and raising guidance are the babies that were tossed out with the bathwater in the last few days.

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Individual Stocks and Sectors

One of the best places to start looking for that baby that has been tossed out with the bathwater is to look at those companies that just reported solid earnings results. Take note of any company that raised their guidance last quarter.

Good fundamentals and good earnings will trump all of the issues that the market faces when it runs into one of these emotional selling stampedes.

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We’re now close to one half of the way through October, which has historically been a good month for equities. Not so this year. After watching what developed during the summer, I did have a sense that many pundits had it backwards this year. Far too many were telling investors to get out of stocks for the summer, based on historical patterns. The idea was to sit out the summer and come back on board in October.

That didn’t work. June, July, and August saw the S&P gain 7.7% and the Dow 30 post a 9+% gain. So while October isn’t over, all that believed October HAD to be bullish are getting a nasty surprise.

This bull market has been in force for years, yet some continue to highlight that ONE issue calling it the Achilles’ heel for stocks. Not so today, this time around they have a slew of issues that point to the end of the bull market story.

Each time any or all of these issues surfaced, they presented OPPORTUNITIES. Remember, this is exactly what happens during a bull market. As long as that primary backdrop remains, it will continue to play out that way. Those that abandon the trend before it changes are ALWAYS left in a quandary.

Anyone remember something called Brexit? This isn’t a one trick pony market, no matter what the skeptics try to sell. There are far too many positives, and no need for panic just yet. Remember, just a few short weeks ago, ALL indices were making new highs in sync. A Dow Theory buy signal was just generated. In the past, these signs led to much higher stock prices down the road. It would be unprecedented to have that across the board strength just disappear. So for those telling me that is THE top, I ask where is the evidence when no primary, intermediate- or long-term trend has been broken. While its prudent to remain vigilant and proceed with an open mind, this appears to be just a pause in the primary trend.

There is no playbook for stock market corrections. Every correction doesn’t have to turn into a crash. However, that’s a tough sell to investors watching the violent swings we have seen in the equity markets lately. You could make the case that we are in a different market environment now where the bears have control. Every single trading day seems like we see extreme selling going on in the final hours of trading that takes the major indices out at the lows for the day.

Bouncing off the lows and remaining in a trading range isn’t the worst thing now. Earnings season is on tap, and the economic data is still positive. The earnings picture is the brightest we have seen in a few years.

Of course, it is best to keep all options on the table. No one can predict the future, believe it or not, that includes the naysayers. The game to play is simple. Ask yourself WHAT is the PROBABILITY of an event, or issue that is troubling you, actually occurring? Hanging your hat on pure speculation, supposition, or a hypothetical isn’t the way to manage money.

What I also hear are the retorts from analysts indicating that they are searching for reasons why the stock market can’t go higher. Trust me when they do find them, the market will be higher and may be headed down. Failure to look at ALL of the data, issues, and the investing environment that exists is a recipe for disaster.

The long-term underlying trend is still in control. When that isn’t the case, changes will be made. Strong corporate earnings, and at the moment, low investor expectations, add to the positive outlook. Despite all the turmoil around me, I see no reason to abandon the trend and the Bull market. Therefore I remain invested and adding stocks when I see an opportunity.

I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.

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to all of the readers that contribute to this forum to make these articles a better experience for all.

Best of Luck to All!

Disclosure: I am/we are long JPM,C.

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.

Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.

This article contains my views of the equity market and what strategy and positioning is comfortable for me. Of course, it is not suited for everyone, as there are far too many variables. Hopefully it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.

The opinions rendered here, are just that – opinions – and along with positions can change at any time.

As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.

OPEC September Production Data

The below charts were created with data from the OPEC Monthly Oil Market Report and the data through September 2018.

OPEC crude only was up 132,000 barrels per day in September to 32,761,000 bpd. That is still 650,000 barrels per day below their all-time high in October of 2016.

August production was revised up by 63,000 bpd so production was actually up 195,000 bpd from what was reported last month.

Iranian production was down 150,000 barrels per day in September. Sanctions are beginning to have an effect.

Iraqi production was up only slightly in September but they seem to be holding at their new all-time high.

Kuwait was also up slightly in September. I think they will be holding at this level for a while.

Libya was up 103,000 barrels per day in September.

Nigeria was up 26,000 barrels per day in September.

Saudi Arabia was up 108,000 barrels per day in September. They are now only 114,000 bpd below their high in December 2016.

The UAE was up 30,000 bpd in September. They are 86,000 barrels per day below their high in December 2006.

And Venezuela continues to plunge toward total collapse.

OPEC big 5 was flat in September. Declines from Iran was offset by gains from the other four.

The other 10 OPEC producers were up 130,000 barrels per day in September in addition to the 345,000 bpd it was up in August. The lion’s share of this increase came from Libya and Nigeria.

If OPEC’s data is correct then the world reached a new all-time high in total liquids production in September.

I have received data for all the world’s largest fields, created in 2013 by Mike Horn who is now deceased. He used the data of many of the great geologists who worked in the Middle East. His sources are listed below:

Al Shdidi, Saad, Gerard Thomas, and Jean Delfaud, 1995, Sedimentology, diagenesis, and oil habitat of Lower Cretaceous Qamchuqa Group, Northern Iraq: AAPG Bulletin, v. 79, p. 763-778.

Beydoun. Z. R., 1991, SG 33: Arabian Plate Hydrocarbon Geology and Potential-A Plate Tectonic Approach: AAPG Studies in Geology #33, 77p.

Carmalt, S.W., and Bill St. John, 1986, Giant oil and gas fields, in Future Petroleum Provinces of the World: AAPG Memoir 40, p.. 11-53, Table 1. Dunnington, H.V., 1958, Generation, migration, accumulation, and dissipation of oil in Northern Iraq, in Habitat of Oil: AAPG, p. 1194-1251.

El Zarka, Mohamed Hossny, Ain Zalah Field-Iraq Zagros folded zone, Northern Iraq, in Structural Traps VIII, AAPG Treatise of Petroleum Geology Atlas of Oil and Gas Fields, v. VIII, p. 57-68.

Halbouty, Michel T., A.A. Meyerhoff, Robert E. King, Robert H. Dott, Sr, H. Douglas Klemme, and Theodore Shabad, 1970, World’s giant oil and gas fields, geologic factors affecting their formation, and basin classification: Part I: Giant oil and gas fields, in Geology of Giant Petroleum Fields: AAPG Memoir 14, p. 502-528, Table 1.

Horn, M.K., 2003, Giant fields, 1868-2003 (databases), in Giant Oil and Gas Field of the Decade 1990-1999, AAPG Memoir (in press).

Ibrahim, M.W., 1983, Petroleum geology of Southern Iraq: AAPG Bulletin, v. 67, p. 97-130.

Konert, G., A.M. Afifi, S.A. Al-Hajri, K. de Groot, A.A. Al Naim, and H.J.Droste, Paleozoic stratigraphy and hydrocarbon habitat of the Arabian Plate, in Petroleum Provinces of the Twenty First Century: AAPG Memoir 74, p. 483-515.

Majid, A. Hamid, and Jan Veizer, 1986, Deposition and chemical diagenesis of Tertiary carbonates, Kirkuk oil field, Iraq: AAPG Bulletin, v. 70, p. 898-913.

St. John, Bill, A.W. Bally, H.Douglas Klemme, 1984, Sedimentary provinces of the world÷hydrocarbon productive and nonproductive: AAPG. map and booklet (35 p.).

Versfelt, Porter, L., Jr., 2001, Major hydrocarbon potential in Iran, in Petroleum Provinces of the Twenty First Century: AAPG Memoir 74, p. 417-427.

There are 1,048 fields listed in this index. They are sorted by country. I list below the Saudi fields and then the fifty largest fields. I will post other data in later posts.

All Saudi Arabia fields:

The Fifty largest fields in the world.

So, Self-Driving Cars Could Make Humans Unhealthier Than Ever

Cars kill people. More than 37,000 over the course of 2017—what would statistically be considered a ‘good year.’ Big tech has a solution: Have the cars drive themselves, free of the distractions, drunkenness, and other human foibles. Flood the roads with autonomous vehicles, and watch collision deaths plummet.

Too bad this lovely narrative has a major plot hole: Blunt force trauma isn’t the only way cars kill. Each year, hundreds of thousands of people die prematurely from breathing exhaust-poisoned air. Even more insidious is how the mere act of sitting in a car for an hour or so each day drastically increases peoples’ risks of developing life-altering—sometimes life-ending—conditions like obesity and heart disease.

A widespread shift to vehicles that drive themselves, some experts say, could weaken humanity’s already slipping stance in a two-front war against pollution and sedentary behavior. They worry that once the stress of traffic and overt dangers of car travel are gone, people will spend more time in their rolling barcaloungers. And just because cars drive themselves doesn’t mean they’ll all be battery-powered, or that they’ll somehow inspire their occupants to get active.

The only way to ensure the chauffeured masses don’t reach their final destinations far too soon is to address the automobile era’s original sins. Sins that aren’t rooted in who’s working the pedals.

Fear and Loafing

If people were rational, top phobias like snakes, sharks, and spiders would be replaced by things like sitting too much, skipping workouts, and living close to freeways. Together, exposure to pollution and sedentary behavior are two of the most common risk factors for heart disease, which accounts for one in four deaths in the US each year. They also put people at risk of developing many types of cancers, lower respiratory diseases, diabetes, stroke, and other lifestyle diseases. (If you’re morbidly curious, car accidents mop up about 1 percent of the nation’s annual death toll, below marginally more prolific killers like suicide, Alzheimer’s, and the flu/pneumonia.)

Now, pollution and sedentary behavior are nebulous things, each with a variety of causal factors. But want to hazard a guess at what is one of the biggest contributors to people breathing bad air and not getting enough exercise? That’s right: spiders.

Seriously, though, it’s cars. Numerous studies have linked traffic to air pollution, in the form of lung-spackling poisons like particulate matter, volatile organic compounds, carbon monoxide, and nitrogen oxide. Not even homebodies are safe, as vehicular belches can waft indoors. Motor vehicle pollution is so bad that EPA warnings about it survived Scott Pruitt’s information purge.

At the same time, car commuters tend to live more sedentary lives, and as a group experience elevated rates of obesity, diabetes, and heart disease. “Although people think these risk factors are individual behavior choices, the reality is that our choices are shaped by our environments,” says Karen Lee, a physician and associate professor of preventive medicine at the University of Alberta in Canada. Over the course of the 20th century, vehicle ownership made it possible for people to work in cities without having to live in them. Personal chariots begat the personal fiefdom, which begat urban cores surrounded by ever-thickening rinds of suburbia.

So, for many people, walking is no longer an option. Sprawl makes public transportation untenable: You’d need too many buses, or too many miles of rail, to service all that acreage. The ironic twist of the personal freedom cars enabled is they required everyone make the same choice: Get a car, or get bent.

“Why do we care about safety?” says Peter Norton, a transportation historian at the University of Virginia. “Because we care about human health.” Norton warns that the autonomous future will result in less walking, more sprawl, and—without dedication to electric propulsion—a huge spike in pollution. “When your car drives itself and you can spend the commute doing whatever you want, who cares if a trip that used to take 20 minutes now takes an hour?” he says.

It doesn’t have to be this way. In November 2017, a British parliamentarian laid out a proposal to clear away any impedimentary regulations, and invest £1 billion in self-driving technology, so the nation could have autonomous vehicles on its roads by 2021. This plan had some notable oversights. Early proposals focused on benefits, like how people would have so much more time to work during their commute, and how that might benefit the economy. “I was concerned about how the supporters of this plan focused on productivity,” says James Harris, a policy and networks manager at the Royal Town Planning Institute in the UK.

Harris encouraged his country’s transportation planners to look at how autonomous transportation might worsen public health. Or, how it would change land use patterns, by encouraging Brits to move farther and farther from the places they work, shop, and recreate.

So, how to deploy a potentially life-saving technology without exacerbating already serious public health problems? Maybe by skipping cities. Allowing vehicles into urban areas in the first place was one of those original sins. Cars foul the air, don’t move enough people, and rob funding and space from transportation modes that make sense here, like buses with dedicated lanes, bicycle infrastructure, and safe-to-cross streets for pedestrians.

Autonomous vehicles might make the most sense in the suburbs and on highways. First of all, because this is where the majority of road fatalities occur. And while they wouldn’t roll back sprawl, they could at least, if connected to public transit, make city-bound suburbanites spend some time on foot—going from the curb to the train, from the train to work—which could make a dent in the epidemic of preventable lifestyle diseases.

More Great WIRED Stories

How Tech Swagger Triggered the Era of Distrust in Government

Last month, I heard Jill Lepore give a talk about These Truths, her single-volume history of America from the 15th century through the 2016 presidential election. She got her biggest laugh when she made fun of WIRED for predicting in 2000 that the internet would both lead to the end of political division and be a place where government interference would be senseless.

There are many famous WIRED moments that also fit this description, including Jon Katz’s assertion in 1997 that Netizens had nothing but contempt for government, John Perry Barlow’s 1996 Declaration of the Independence of Cyberspace, or the Joshua Quittner profile of EFF in 1994 depicting Electronic Frontier Foundation co-founder Mitchell Kapor and the fabled Esther Dyson as people who “got it.” Their goal was to have the net be a wiring together of humanity that would restructure civilization. The EFF would “find a way of preserving the ideology of the ’60s,” Kapor told WIRED.

Much of that early libertarian net culture—white, rich, smart, and full of “let’s just geek around it” swagger when it came to government—has become mainstream in Western democracies in 2018. Paradoxically, that ideology came from a time when, in fact, government was doing a lot for people.

Those baby boomers being profiled by WIRED had known only a United States full of generous government support for education, a time of continuous upward mobility, and an America that could carry out enormous and inspiring public infrastructure projects—including requiring that phone companies permit competing internet service providers to use their lines. The voices in WIRED were those of a very secure bunch of people. And they were bored by it all; they saw government as a set of clueless, bland bureaucracies. Who needed that?

As it turns out, we all did. Today, globally interconnected changes in climate and widespread disdain for democratic institutions are the key titanic, messy trends that are likely to begin producing shocking results 25 years from now. At that point, with the globe dealing with punishing heat and alarming levels of water, it won’t be internet technology that will be doing the disrupting. There are signs that the internet will be fading from view as a distinctive “place” prompting political and social changes. Indeed, if we keep to our current course, communications capacity and what humans do online may be controlled by a few highly profitable actors who will be uninterested in the unpredictable. Given this context, there is a substantial risk that 25 years from now the breathlessly libertarian views trumpeted by WIRED’s early voices will have reached their unpleasant apotheosis.

I hope I am wrong.

Let’s start with the weather. Techies are good at positive feedback loops, and these days we’re seeing one operating at global scale. As the dynamics of air patterns change around the world in response to overall warming, melting ice in the Arctic is having an effect on distant lands. Weather is getting stuck in place, making both extreme dryness and extreme downpours routine. It’s a giant, resonating system of ever-increasing cataclysmic change.

We humans are a resilient, cheerful group, so presumably we’ll adapt. But it is probably already too late to carry out the large-scale planning that would have been necessary to move people comfortably and gradually away from the coasts and change the economics of places that are plunging into unending drought. Millions or billions of our fellow less-well-off beings will be forced into climate refugee status.

What’s particularly troubling is that even relatively rich countries may be losing the capacity to plan ahead for all of their citizens. And that’s the second messy force that will affect the next 25 years: increasing cynicism about the role of democratic government in people’s lives, particularly in Western Europe and the US.

Unless something changes, government at all levels will come to be viewed as a thin, under-resourced platform whose purpose is to help already-thriving people make even more money. The familiar drumbeat that will get us there will include fewer people voting, increasing talk about shrinking government, declining trust in most levels of government, and outright, unabashed disdain for “bureaucrats.” And so authoritarianism may increasingly fill the void, with countries like Hungary, Poland, and Brazil added in the years to come to a list that now includes places like Cuba, Russia, and China.

Into this swirl of depressing global trends steps WIRED, the internet, and those ’60s-culture voices. It turns out the pixie dust of digital did not remove the crushing economic and social truth that unrestrained moneymaking leads to chaos and despair. But the larger public caught the WIRED mystique and amplified the message of complete freedom from old-fashioned governmental constraints—not knowing that the message had implicitly assumed the ongoing presence of a functioning public sector. (For starters, absent government involvement and regulation—that dreaded word—the early net-heads would not have been able to use an internet protocol that elegantly allowed computers to speak to each other across heterogeneous networks.)

Take these trends to their extremes decades from now and you could have a hollowed-out public sector, growing affection for essentially private strongmen who might be able to protect your socioeconomic tribe from searing heat and punishing storm surge, and an online world that has, like electricity, faded into the background as a social change agent. Not only will all generations be used to “digital” (at varying levels depending on their wealth and location), but if we keep following the Barlow rhetorical path, life online may not be all that that interesting. Imagine a wholly oligopolistic, vertically integrated online ecosystem focused on entertainment and advertising—access to which is subject to neither competition nor oversight—and try to feel creative.

After the two world wars and the Great Depression, Americans and the citizens of every other developed country absolutely understood that it simply is not true that the incentives of unrestrained private gain are always aligned with or lead to public good. You would have been laughed off the stage in the early ’50s—under a Republican president, by the way—if you’d said anything like that.

Nothing happens quickly, and we may still see a return to a more balanced view of the role of government, particularly as rising waters and changing weather dynamics disastrously change human lives. But for now, and for the foreseeable future, we are increasingly on our own.

More Great WIRED Stories

Google Just Revealed a Brilliantly Simple Trick to Totally Destroy Telemarketers. (Wait, Why Aren't We Doing This Already?)

Google just announced it has come up with new way to thwart telemarketers–heck, to completely destroy their business model. It’s brilliantly simple, and it seems like it will actually work.  

Here’s how Google’s solution works–introduced at its hardware event in New York Tuesday. It’s called simply, “Call Screen, and it’s built into Android on the Pixel 3.

  • When you get a call from a number you don’t recognize on an Android device, click “Call Screen” on your device.
  • Google Assistant answers the call, with a greeting like, “Hi, the person you’re calling is using a screening service from Google, and will get a copy of this conversation. Go ahead and say your name, and why you are calling.”
  • The caller will either hang up–in which case it’s probably not important–or else provide an answer, which will then be transcribed and displayed on your screen.
  • Then it’s up to you to decide whether to answer.

So if the message you receive reads something like, “Bill, this is your wife, I lost my phone, pick up,” you’d answer (I hope). But, if it’s something like, “This is the IRS calling to say we will arrest you for not paying taxes,” you can just ignore it, since it’s absolutely a scam.

“Just tap the ‘Screen Call’ button and your phone will answer for you and ask who’s calling and why,” Google product manager Liza Ma said in announcing the new feature, followed by the eight most important words of her presentation: “You’ll never have to talk to another telemarketer.”

You can also mark spammy incoming calls as “Spam.” That way, if you ever get a call from that number again, it will come with a big red interface reminding you that you’ve previously pegged the number as suspicious.

That’s it. Call Screen won’t remove your phone number from telemarketers’ lists. But, it could ultimately make the entire telemarketing industry totally unprofitable. If telemarketers can never reach anyone to pitch, they can never close a sale.

And if it works as expected, expect the feature to go forth and multiply (meaning, coming soon to an iOS near you). And for telemarketers, bye-bye business model.

(h/t to Gizmodo for getting the cool shot of Google revealing this)

This is pretty cool, and simple. It’s also very close to what your parents probably used to do back in the 1980s, when people had mechanical telephone answering machines, and they’d just let incoming calls go to the machine before you decided whether to pick up.

And it’s not far from the screening options that Google has been offering with Google Voice for nearly a decade–only you don’t get a transcription in real time.

For the Google Voice solution, just connect Voice to your cell phone, let a list of trusted numbers dial through to you directly, but prompt everyone else to state their name after the tone, and you’ll get the recording without answering.

You can even direct repeat offender straight to voicemail without disturbing you–or else, my personal favorite, upload something like this recording that says your number is not in service, and get off their lists for good.

I’ve often wondered why most people don’t do this same thing–but the Google announcement today explains why. We are all ridiculously busy, so we need things like this to be simple, simple, simple.

It takes time to do all that setup I described on Google Voice. It takes no time at all to hit “Call Screen” when you have an incoming call you don’t recognize.

And that’s what makes this so simply brilliant. Or brilliantly simple. Whichever, you decide.

SoftBank in talks to buy majority stake in loss-making WeWork: source

SAN FRANCISCO/NEW YORK (Reuters) – Japan’s SoftBank Group Corp (9984.T) is in discussions to buy a majority stake in U.S. shared office space provider WeWork Cos, a source said, potentially doubling down on one of its biggest bets on a loss-making startup.

FILE PHOTO: The logo of SoftBank Group Corp is displayed at SoftBank World 2017 conference in Tokyo, Japan, July 20, 2017. REUTERS/Issei Kato

Pricing and other details have yet to be firmed up, the source said, adding that it was not a done deal.

A second source also said SoftBank is in talks about a major new investment in WeWork.

The Wall Street Journal reported earlier that SoftBank’s investment could be between $15 billion and $20 billion and would likely come from SoftBank’s Vision Fund. A smaller SoftBank investment under discussion earlier in the year valued WeWork at up to $40 billion, the Journal reported in June.

A logo of U.S. co-working firm WeWork is pictured during a signing ceremony in Shanghai, China April 12, 2018. Picture taken April 12, 2018. Jackal Pan via REUTERS

WeWork and SoftBank declined to comment. The sources spoke on the condition of anonymity as the details of the talks were private.

SoftBank and its Vision Fund invested $4.4 billion in WeWork last year and the Japanese company holds two board seats.

WeWork’s prospects have been treated with skepticism by some Silicon Valley investors who see the company as an overvalued real estate play vulnerable to a property market downturn. In its first ever release of financial results in August, WeWork said its second-quarter losses mounted.

SoftBank shares fell 5 percent in Tokyo afternoon trading on Wednesday. Some traders said the news of the potential WeWork investment was negative for SoftBank, which has substantial exposure to the technology sector whose shares have been under pressure.

A majority stake in WeWork by SoftBank, which has raised more than $93 billion to create the technology-focused Vision Fund, would be a shift from its more common practice of taking minority stakes in high-profile late-stage startups.

SoftBank has invested billions of dollars in loss-making U.S. ride-services firm Uber Technologies [UBER.UL] but owns only a minority stake.

WeWork and the Japanese company are closely entwined, with hundreds of SoftBank staff using space at the two companies’ Japanese joint venture and SoftBank considering moving its headquarters into WeWork offices.

SoftBank’s other real estate-related investments include Compass, an online real estate marketplace, Katerra, a construction start-up, and Indian hotel chain OYO Hotels.

SoftBank CEO Masayoshi Son points to artificial intelligence as the common thread linking its portfolio companies, with that technology in the future able to drive vehicles, diagnose diseases and power financial services.

Eight-year old WeWork’s business is growing rapidly, with second-quarter sales more than doubling from a year earlier. In September it surpassed JPMorgan (JPM.N), the biggest U.S. bank, as the largest tenant of Manhattan office space, highlighting growing demand for flexible leases.

WeWork’s Chinese unit raised $500 million in July from investors including SoftBank, Hony Capital and Trustbridge Partners, to drive its expansion in that country.

Reporting by Heather Somerville in San Francisco and Gregory Roumeliotis in New York; Writing by Sanjana Shivdas in Bengaluru and Sam Nussey in Tokyo; Editing by Peter Cooney, Edwina Gibbs and Muralikumar Anantharaman

7 Strategies to Maximize Your Productivity While Traveling

Whether you hate the idea of traveling or you actually look forward to it, it’s hard to deny that travel can sabotage your productivity–at least temporarily. It takes hours of planning and coordination to prepare for some trips, and hours to navigate airports, not to mention the actual time you spend traveling.

It can make a full day of responsibilities feel like a waste, and put you behind on achieving your goals. Fortunately, there are some helpful strategies that can make you more productive–no matter how you’re traveling.

Try using these tactics to get more done when you’re setting course on a major trip:

1. Get used to a different sleep cycle.

One of the biggest sources of productivity disturbance while traveling is the disruption in your sleep cycle. Depending on where you travel to, you could be dealing with timezone changes and jet lag, and you may not be able to get a comfortable eight hours of sleep when you’re used to getting it.

Instead, you can try a biphasic cycle or an everyman cycle, which rely on split patterns to break up your time sleeping; that way, travel may not have as big of an impact on you. The caveat here is that it takes time to get used to a new sleep cycle, so it’s best for frequent travelers only.

2. Take a private jet.

One of the biggest sources of time delay while traveling is navigating the airport; going through customs, waiting to board the plane, dealing with delays, etc., can add several unnecessary hours to your trip.

Taking a private jet allows you to circumvent most of these problems–and it’s cheaper than you think. If a few hundred dollars can save you literally hours of time, and afford you a better workspace when you’re flying, it’s likely worth the extra money.

3. Look for coworking spaces when you arrive.

Coworking spaces are popping up everywhere, so you shouldn’t have trouble finding one at your destination. Instead of going straight to a hotel or meeting, check into one of these productivity hubs; you’ll be able to get coffee, work in a peaceful environment, and if you’re up for it, socialize with other people who may be in similar situations. It’s a great way to both decompress and get more work done, so take advantage of it.

4. Rely on audio.

While you’re driving, navigating the airport, or dealing with a lack of lighting or Wi-Fi, you won’t be able to work on your most important heads-down tasks–but that doesn’t mean you can’t be productive.

Try focusing on audio-specific tasks when you can, listening to recordings of old meetings to prepare for the future, catching up on your favorite industry podcasts, and listening to audiobooks that can improve your skills or expand your professional horizons. There’s no shortage of audio content to plunder, so make good use of it.

5. Prepare travel-specific tasks.

While traveling, you won’t be able to do tasks that require multiple monitors, or meet with your teammates in person. You’ll have limited space, and in some cases, limited Wi-Fi connectivity.

Prepare tasks that you can work on under these conditions, so you don’t run out of things to do. As long as you have a few days’ heads-up, you can handle your least travel-friendly tasks in advance, and set yourself up to work offline for the next several hours.

6. Say “no” and delegate.

New things are going to come to your attention before and during your travel; for example, you might get a client email requesting a change to a piece of work you submitted. If this is the type of work that can’t be done efficiently when traveling, don’t bend over backwards trying to do it; instead, tell them you’re traveling, and not able to do it right now.

If it’s an emergency, or if you won’t be able to get to it for a while, consider delegating it to someone who can handle it.

7. Rest (if you can).

To some people, sleeping may seem like the opposite of productivity. But in reality, sleeping is one of the best things you can do for your mental energy and cognitive capacity. It can even reduce your susceptibility to illness and improve your overall physical health.

Accordingly, if it’s possible for you to take a nap during a long flight or car ride, take advantage of the opportunity. Use a face mask, a neck pillow, or some comforting white noise from your headphones–whatever you need to get some extra shuteye when you’re between destinations. You’ll thank yourself later.

Finding Your Own Style

Not everyone is going to travel the same way. For example, some people may not be able to read while in a vehicle, and some may have trouble sleeping on airplanes. The goal isn’t to fall in line with a series of productive habits, but rather to craft your own habits to maximize your personal productivity. Learn which strategies and actions suit you best, and customize your own set of approaches.

These Parents Are Angry That American Airlines Wouldn't Let Their 5-Year-Old Boy with Autism Board a Flight

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

The disappointment was crushing. Especially after the preparation. 

Adam and Heather Halkuff have five children, two of whom have autism. 

They wanted to take the whole family on a trip to Kansas City. So the Texas family did all they could to make it happen.

As NBC 5 reports, they called American Airlines in advance. The airline has a program that helps kids, including those with autism, become familiar with all the trials and quirks of flying. 

Five-year-old Milo and two-year-old Ollie took part, on September 24, more than a week before their flight. 

Yet on the day of the flight, Milo became distressed — many call it a meltdown — during the boarding process at Dallas/Fort Worth airport.

A meltdown might involve screaming, crying and other expressions of feeling overwhelmed.

The Halkuffs say other passengers were kind, but an American Airlines gate agent was less so.

“Right away she goes, ‘He can’t get on the flight … he’s going to bother the other passengers and then he’ll still be upset during the flight and we’ll have to turn around and escort you off the plane,” Heather Halkuff told NBC.

Some might observe that they’ve seen all sorts of kids get on planes and express upset.

Sometimes, they calm down quickly. Surely everyone has at least once been on a flight when a child didn’t quieten at all. 

At times, ground crew and Flight Attendants can be sympathetic. At other times, not so much.

The Halkuffs depiction of this particular gate agent suggests that she was of the latter variety.

Worse, Heather Halkuff says that the whole family weren’t allowed to board. Even though Adam Halkuff offered to take Milo home, so that at least Heather and the other children could still take the trip.

I contacted American for its view and a spokesperson told me:  

We are concerned to hear about this situation. Our team has reached out to the Halkuff family to gather more information about what transpired at Dallas/Fort Worth. The American Airlines team is committed to providing a safe and pleasant travel experience for all of our customers.

Clearly, the fact that American provides a service to help children — including those with autism — get used to flying means that the airline isn’t insensitive to the potential issues.

Moreover, we have no idea of the level of distress Milo might have undergone.

Yet again, though, we’re in a customer service situation when individuals are involved and initial reactions matter.

If the Halkuffs’ story is accurate, then some might conjecture the gate agent reacted too quickly. 

There could, perhaps, have been an alternative solution. Could anyone really know if Milo might have calmed down, once on the plane?

Not allowing any of the family to fly, however, seems to be the sort of draconian decision still too often taken by airline staff. 

I recently wrote about a dad who says he called American to explain that his three-year-old had a burst appendix and please could the airline rebook their trip.

American, he says, insisted on still charging $200 change fees for both of them. Before, says dad, the decision gained some Twitter traction.

Then the airline made a “one time exception.”

When it comes to boarding passengers, airline employees are graded severely on so-called D0.

This is the measure of whether a plane departs at the very minute and second it’s supposed to.

It could be that thoughts of this may have played upon this particular gate agent’s mind.

Yet as long as customers still see airlines as being in the customer service business — perhaps erroneously — such stories are likely to reach the media and become examples of airline insensitivity.

Airlines employ enormous numbers of people and are therefore at the mercy of each of their employees’ behavior.

The Halkuffs hope that what happened doesn’t cause Milo’s older brothers to resent him.

Perhaps there’s some way that American might provide another attempt for Milo to fly with his family.

Indeed, American told me:

A few members of the American team have been in touch with the family, and yes, we are hopeful they will reschedule and try once again.

Walmart partners with MGM to boost video-on-demand service Vudu

NEW YORK (Reuters) – Walmart Inc (WMT.N) said on Monday it would partner with U.S. movie studio Metro Goldwyn Mayer to create content for its video-on-demand service, Vudu, which the retailer bought eight years ago.

FILE PHOTO: Walmart signage is displayed outside a company’s store in Chicago, Illinois, U.S. November 23, 2016. REUTERS/Kamil Krzaczynski

Walmart has been looking to prop up Vudu’s monthly viewership that remains well below that of competitors like Netflix Inc (NFLX.O) and Hulu LLC, which is controlled by Walt Disney Co (DIS.N), Comcast Corp (CMCSA.O) and Twenty-First Century Fox Inc (FOXA.O).

Media outlets had reported the Bentonville, Arkansas-based company was looking to launch a subscription streaming video service to rival that of Netflix and make a foray into producing TV shows to attract customers.

Walmart is not planning such a move, company sources have told Reuters. The retailer continues, however, to look for options to boost its video-on-demand business and offer programs that target customers who live outside of big cities.

Walmart and MGM will make the announcement at the NewFronts conference in Los Angeles on Wednesday. It will include the name of the first production under the partnership, which Walmart will license from MGM.

“Under this partnership, MGM will create exclusive content based on their extensive library of iconic IP (intellectual property), and that content will premiere exclusively on the Vudu platform,” Walmart spokesman Justin Rushing told Reuters.

The focus will be on family-friendly content that Walmart customers prefer, Rushing said.

The financial deals of the deal were not disclosed.

Licensing content is a cost-effective strategy at a time when producing original content has become a costly venture. As of July, Netflix said it was spending $8 billion a year on original and acquired content. Inc’s (AMZN.O) programming budget for Prime Video was more than $4 billion, while U.S. broadcaster HBO, owned by AT&T Inc (T.N), said it would spend $2.7 billion this year.

Walmart acquired Vudu in 2010 to safeguard against declining in-store sales of DVDs. Walmart bet that customers would continue to buy and rent movies and move their titles to a digital library, which Vudu would create and maintain for viewers.

But the video site has not posed a significant challenge to rivals that dominate the segment even though it is pre-loaded or can be downloaded to millions of smart televisions and video-game consoles.

Vudu offers 150,000 titles to buy or rent, while its free, ad-supported streaming service, called Movies On Us, includes 5,000 movies and TV shows.

There are currently more than 200 video services that bypass cable providers and stream content directly to a TV, laptop, phone or game console. That is up from 68 five years ago, according to market researcher Parks Associates.

Reporting by Nandita Bose in New York; Editing by Peter Cooney

The Cars of the Paris Auto Show Reveal a Quirky, Urban, Electric Future

The Renault Ez-Ultimo brings the high-end glitz to the show this year. Just because cities of the future may prioritize ride sharing over private cars doesn’t mean you should have to slum it on the way to opening night at the Opéra national de Paris.

This rounded bronze box is about as far from a production car as a concept can be (could those wheels even turn? where’s the ground clearance for cobbled streets?) but Renault says it shows a vision of an autonomous future, where passengers demand more from vehicles. In particular, the interior “reflects French elegance” with wood, leather, and marble.

Citroën went the opposite direction, unveiling a very real, very modest EV. The DS3 Crossback E-Tense is a fashionable crossover SUV, and an update on Citroen’s tres popular DS3 supermini car. The electric version comes with a 50-kWh battery—about half that of a high-end Tesla—a range of 186 miles on the generous European test cycle, and a 0-60 time of 8.7 seconds. None of those specs are going to blow buyers away, but at the right (to be revealed) price, the quirky car, with sharp angles and odd window cutouts, could rival the Nissan Leaf or Renault Zoe, as a city runabout.

Europe has taken styling cues from the US for the Peugeot E-Legend concept, albeit with a little added flair. There are plenty of muscle car hints in the styling, with a side profile reminiscent of the modern Dodge Challenger, and a Mustang-like front squint. Of course it’s a concept, so it’s electric and autonomous, and supposed to show that those things don’t have to be boring or bland.

The retro theme continues inside with velvet upholstery and fake wood screensavers for the displays when they aren’t in use. It’ll apparently have a 100-kWh battery pack and all-wheel drive, but it’s so concept-y that wise money should be on all that potentially changing, if and when the E-Legend makes it to production.

It wouldn’t be a European auto show without a city car, and Smart is the brand synonymous with cars so small they can be parked end-on to a curb. The Smart Forease moves that theme into an electric age. The rather optimistic concept banks on the future always being sunny, given that it doesn’t have a roof. Not even an optional one. (Have these people been to Europe?)

Smart has already stopped the sales of all internal combustion engined cars in the US, and if this car makes it across the Atlantic (and to reality) it could find a place in some Californian garages. The Golden State has good EV electric rebates, and as close to a guarantee of good weather as you’re going to find.

Infiniti is keeping it real with its Project Black S hybrid, based on a Q60 coupe and its V6 engine. Infiniti engineers turned to electrification, and lessons from partner Renault’s Formula 1 team (there’s the French connection) to give the machine an e-boost.

It’s a hybrid, but one that delivers performance rather than economy. The three motors add 213 horsepower to bring the total to 563, and drop the 0-60 mph time to under four seconds.

Toyota didn’t use the Paris show to unveil radical new concepts, but did introduce a term that will be new to most buyers: self-charging hybrids. This is no magical perpetual motion-type technology: Self-charging hybrids are just cars that can run on battery power, but can’t be plugged in. The type Toyota has been selling for years with the Prius, when they used to be just called “hybrids.” As they’ve gone from being radical, to commonplace, to somewhat lame given the influx of more robust electric options, Toyota is looking to rebrand to remind people that the tech is still quite clever, and does save fuel.

?Red Hat Satellite integrated new, improved Ansible DevOps

When Linux’s sysadmin graybeards got their start, they all used the shell to manage systems. Years later, they also used system administration programs such as Red Hat Enterprise Linux (RHEL)‘s Red Hat Satellite and SUSE Linux Enterprise Server (SLES)‘s YaST. Then, DevOps programs, like Ansible, Chef, and Puppet, appeared so we can manage hundreds of servers at once. Now, Red Hat is bridging the gap between the old-style server management tools and DevOps with Red Hat Satellite 6.4.

This new management tool comes with a deeper integration with Red Hat Ansible Automation automation-centric approach to IT management. This enables sysadmins to use the Red Hat Satellite interface to manage RHEL with Ansible’s remote execution and desired state management. This integration will help identify critical risks, create enterprise change plans, and automatically generate Ansible playbooks.

Also: How Red Hat’s strategy helps CIOs take baby steps to the cloud TechRepublic

Red Hat claimed, “This exciting integration is designed to help not only identify critical risks but then create enterprise change plans and automatically generate Ansible playbooks to better remediate those risks.”

The updated Red Hat Satellite also comes with these new features:

  • Redesigned user interface for easier navigation and improved auditing of user events.
  • Increased supportability including the ability to provision in AWS GovCloud and custom configuration preservation.
  • Enhanced performance including RHEL Performance Co-Pilot integration and general stability fixes.

Red Hat Satellite 6.4 will be available later in October through the Red Hat Customer Portal.

But that’s only the start of Red Hat’s DevOps and sysadmin news. Red Hat is also introducing a Red Hat Ansible Automation Certification Program to deliver tested, trusted, and supported Ansible Playbooks.

These certified Playbooks, from Red Hat and its partners, will provide everything you need to automate your infrastructure, networks, containers, and deployments. Besides Red Hat’s offerings, Cisco, CyberArk, F5 Networks, Infoblox, NetApp, and Nokia will offer 275 Ansible modules in the initial release.

These Playbooks, Modules and Plugins are scanned against known vulnerabilities, checked for compatibility, and validated to work in production. These will have a similar lifecycle to Ansible Engine. They’ll also be regularly re-evaluated for certification qualification and are fully-backed with Red Hat’s support.

Also: From Linux to cloud, why Red Hat matters for every enterprise

If you’re using Ansible and RHEL and you don’t want to build your own Playbooks, this new offering is a must.

Looking ahead, Red Hat is adding automated security capabilities, such as enterprise firewalls, intrusion detection systems (IDS), and security information and event management (SIEM) to Ansible.

In 2019, Ansible will include the following security features:

  • Detection and triage of suspicious activities: Automatically configure logging across enterprise firewalls and IDS,
  • Threat hunting: Automatically create new IDS rules to investigate the origin of a firewall rule violation and whitelist non-threatening IP addresses.
  • Incident response: Ansible will be able to automatically validate a threat by verifying an IDS rule, trigger a remediation from the SIEM solution and create new enterprise firewall rules to blacklist the source of an attack.

It will do this, in part, by integrating Check Point Next Generation Firewall (NGFW); Splunk Enterprise Security; and Snort, the open-source IDS program.

Joe Fitzgerald, Red Hat Business Management VP, explained in a statement:


Red Hat acquired Ansible in 2015, we have been working to make the automated enterprise a reality by driving Ansible into new domains and expanding automation use cases. With the new Ansible security automation capabilities, we’re making it easier to manage one of enterprise IT’s most complex tasks: systems security. These new modules can help users take an automation-centric approach to IT security, integrating solutions that otherwise would not work together and helping to manage and orchestrate entire security operations with a single, familiar tool.”

It sounds good to me. We’ll see early next year how well Red Hat delivers on this promise.

Related stories:

Tesla's Musk mocks SEC as judge demands they justify fraud settlement

NEW YORK (Reuters) – Tesla Inc’s Elon Musk on Thursday mocked the U.S. Securities and Exchange Commission, just hours after a federal judge ordered him and the regulator to justify their securities fraud settlement, which let Musk remain chief executive.

FILE PHOTO: Tesla Chief Executive Elon Musk stands on the podium as he attends a forum on startups in Hong Kong, China January 26, 2016. REUTERS/Bobby Yip/File Photo

“Just want to [sic] that the Shortseller Enrichment Commission is doing incredible work,” Musk, a frequent critic of investors betting against the electric car company, wrote on Twitter. “And the name change is so on point!”

The tweet came five days after Musk settled SEC charges that he misled investors in tweets on Aug. 7, including that there was “funding secured” to take his Palo Alto, California-based company private at $420 per share.

Musk agreed to pay a $20 million fine, and step aside as Tesla’s chairman for three years, to settle charges that could have forced his exit from Tesla. The company also accepted a $20 million fine, despite not being charged with fraud.

Tesla and the SEC declined requests for comment.

Former SEC lawyers questioned the wisdom of Musk’s latest tweet, but said it was unlikely to jeopardize the settlement, which prevents Musk from denying wrongdoing or suggesting that the regulator’s allegations were untrue.

“I don’t think the SEC would look at this as a denial of the facts alleged,” said Peter Henning, a law professor at Wayne State University in Detroit. “But you don’t take gratuitous shots at the SEC. There’s no real upside.”

Shares of Tesla closed down $12.97, or 4.4 percent, at $281.83, and fell another 2.1 percent to $276 following Musk’s tweet after market hours.

The tweet came less than four hours after U.S. District Judge Alison Nathan in Manhattan ordered Musk and the SEC to explain by Oct. 11 in a joint letter why their settlement was fair and reasonable and would not hurt the public interest.

Nathan said it was her regular practice to request such letters.

FILE PHOTO: A newly installed car charger at a Tesla Super Charging station is shown in Carlsbad, California, U.S. September 14, 2018. REUTERS/Mike Blake

“She may want to know why Tesla is paying a fine because the CEO doesn’t know when to shut up,” said Adam Pritchard, a University of Michigan law professor and former SEC lawyer.


The settlement also required Tesla’s board to implement procedures for reviewing Musk’s communications with investors, which include tweets.

Thomas Gorman, a partner at Dorsey & Whitney in Washington, D.C., said Musk might argue that the latest tweet might be a mere “personal lament,” and not a violation of the settlement.

For her part, Nathan may have limited room to intervene, after a federal appeals court curbed the ability of judges to reject SEC settlements.

One such judge was Jed Rakoff, a colleague of Nathan’s who objected to the SEC policy of letting some corporate defendants settle without admitting or denying wrongdoing, as Musk did.

But in 2014, the 2nd U.S. Circuit Court of Appeals overturned Rakoff’s rejection of a $285 million SEC settlement with Citigroup Inc, saying he should have given “significant deference” to the regulator.

The 2nd Circuit has jurisdiction over Nathan’s court, and lawyers said Musk’s settlement would likely win approval, though orders such as Nathan’s are not too common.

“In and of itself it’s not an ominous sign,” said Jordan Thomas, a partner at Labaton Sucharow and former SEC lawyer. “The vast majority of settlements like this are approved by courts.”

Pritchard said before Musk’s tweet that he saw no “serious chance” for a rejection of Musk’s settlement, based on 2nd Circuit precedent. “This is just a hoop to be jumped through,” he said.

The case is SEC v Musk, U.S. District Court, Southern District of New York, No. 18-08865.

Reporting by Joanthan Stempel in New York; Additional reporting by Sonam Rai in Bengaluru and Jan Wolfe in Washington; Editing by Anil D’Silva and Lisa Shumaker

Dark Clouds Still Loom Over This 8% Dividend REIT

We missed the upside surge on Omega Healthcare Investors (OHI) since we last wrote about the stock in March 2018. The stock is up over 20% since we suggested that there was still too much uncertainty within its operator ranks. While the stock has been up, however, the operator woes remain unresolved. I continue to suggest staying away and yes, hindsight being 20/20, it was a bad call earlier this year. No matter, I drive by looking out my front windshield not my rear view mirror and there are still some ominous clouds on the horizon. Whether those clouds turn into a thunderstorm I don’t know – neither does anyone else for that matter. But just like I found other opportunities that have performed well, like Innovative Industrial Properties (IIPR), which was up 40% last month, I’ll find other opportunities in lieu of this one. In other words, no regrets missing out on a 20% spike – I still think it was the right decision at the time and believe it is a Sell at these levels.

ID 43069464 © Tamara Bauer |

The Operator Saga Continues

Omega Healthcare Investors is one of the prominent REITs in the healthcare sub-sector that has provided great returns for investors over the long term. However, the company’s stock price has seen a decline over the past few years as the healthcare REIT sector has been affected by changing government reimbursement policies and the weakening fundamentals of the overall sector. The skilled-nursing subsector, Omega’s primary focus domain, remains prone to policy-related risks even though it has the potential to generate better-than-expected revenues.

The business pressures on the sector have increased ever since the Centers for Medicare & Medicaid Services (CMS) have stipulated value-based incentive programs for skilled nursing facilities (SNF). Under this program, the incentives received by SNFs will be based on the quality, rather than the quantity, of care they give to patients. This means that the federal agency will be evaluating an SNF on the basis of a hospital’s measure that is linked to a patient’s readmission within 30 days of the SNF stay.

Average stays have been in decline as Medicare Advantage has become a more popular coverage. The average stay for Medicare Advantage patients is 20.5 days, 12% fewer than Medicare patients.

Source: Omega Investor Presentation, May 2018

The new regulations require SNFs to incur additional expenses related to staff training, infection prevention and control programs, discharge planning, and other services, which obviously puts pressure on margins, profits, and funds from operations. The chart below shows the difficulties being faced by some of the operators and their effect on OHI.

Source: Omega Investor Presentation, May 2018

Being exposed to intense business pressures, SNFs have become more susceptible to bankruptcies and the regulatory environment has clearly affected OHI, not to mention declines in occupancy.

Source: Omega Investor Presentation, May 2018

OHI recently suffered a setback when Orianna, one of its major tenants, initiated voluntary Chapter 11 proceedings in the U.S. Bankruptcy Court after it fell behind on its rent payments. Back in 2013, OHI had acquired 55 SNFs and 1 ALF (Assisted Living Facility) operated by New Ark Investment Inc. and leased the facilities back to New Ark which does business as Orianna Health Systems. As of June 30, 2018, the 38 facilities remaining under OHI’s direct financing leases with Orianna were predominantly located in seven states in the southeastern U.S. (37 facilities) and Indiana (1 facility). OHI’s recorded investment in these direct financing leases, net of the $172.2 million allowance, amounted to $337.7 million as of June 30, 2018. Additionally, four facilities owned by OHI are leased to Orianna under a master lease which expires in 2026. The leaseback transaction was accounted as a direct financing lease with rental payments yielding 10.6% per annum over the 50-year term of four master leases.

As of December 31, 2016, Orianna was OHI’s second largest operator operating 59 facilities across the USA. At that time, OHI’s investment in the Orianna facilities represented nearly 7% of its overall investment portfolio, with a gross investment of over $619 million. In 2016 and early 2017, Orianna began to experience a number of operational pressures that affected its profitability and its ability to pay timely rent to OHI. OHI neither recognized any direct financing lease income nor realized operating lease income from Orianna for the period from July 1, 2017, through June 30, 2018. Orianna has not paid the contractual amounts due and collectability is still uncertain. OHI has been handling the Orianna account on a cash basis ever since Orianna fell behind on its rent payments in Q3 2017. On March 6, 2018, Orianna filed for Chapter 11 bankruptcy protection to begin a comprehensive financial restructuring plan.

Since the filing of Orianna’s bankruptcy protection, OHI has been making attempts to protect shareholder value. OHI entered into a Restructuring Support Agreement (RSA) with Orianna to execute a restructuring plan that involved transitioning 23 of the 42 Omega owned facilities to new operators and the potential sale of the remaining 19 facilities. The RSA established a specific timeline for the planned restructuring and it also provided the recommencement of partial rent payments at $1 million per month. In May 2018, a federal bankruptcy court approved the RSA and the payments were prorated for March 2018.

Additionally, OHI extended up to $30 million in debtor-in-possession (DIP) financing to Orianna for liquidity purposes. The DIP financing was also approved by the bankruptcy court and it was to be used to repay in full Orianna’s current working capital lenders and to provide Orianna with additional liquidity for on-going business operations. OHI’s DIP financing comprises of a $14.2 million term loan and a $15.8 million revolving credit facility. Both of these were secured by a security interest in and liens on almost all of Orianna’s present and future personal and real property. The $14.2 million term loan bears interest at 1-month LIBOR plus 5.5% per annum and the full amount of the term loan will be used to repay Orianna’s previous secured working capital lender. The term loan matures on September 30, 2018, and approximately $14.2 million was outstanding on this term loan as on June 30, 2018. The $15.8 million revolving credit facility bears interest at 1-month LIBOR plus 9.0% per annum and the borrowings are to be used for general business expenses and other uses as stipulated in loan documents. The loan matures on September 30, 2018, and approximately $10.5 million is outstanding on this credit facility as of June 30, 2018.

When Orianna defaulted under the DIP facility, OHI terminated the DIP facility July 23, 2018, and declared that the amounts owing under the DIP facility are immediately due and payable. Citing its frustration with the restructuring process, OHI also terminated the RSA on July 25, 2018. While pulling out of the agreement, the REIT also stressed its concern to protect the interests of its shareholders. While speaking about the company’s decision to terminate the agreement, Taylor Pickett, Omega’s CEO, indicated that the previously announced transfers will remain on track. In a statement made at the Q2 2018 earnings conference call, Mr. Pickett stated:

The company will be considering and/or pursuing alternative courses of action to protect our assets and shareholder value. We continue to believe that final resolution will result in our previously stated range of $32 million to $38 million of rent or rent equivalents from the assets that constituted our Orianna portfolio.

As of June 30, 2018, OHI’s total investments outstanding with Orianna was approximately $40.0 million. This also includes $15.2 million outstanding on a working capital loan that was provided to Orianna in May 2017 and which matures on April 30, 2022. In accordance with the Bankruptcy Court’s interim order approving the DIP financing, Orianna is required to pay half of all accrued post-bankruptcy interest payable on the revolving working capital loan at a rate of 5% per annum.

On July 1, 2018, OHI transferred 13 Orianna facilities in Mississippi to an existing Omega operator with annual contractual rent of $12 million. Recently, on August 1, 2018, OHI transferred an Orianna facility in Indiana to an existing operator with annual contractual rent of $0.5 million. The July 1 transaction along with $5 million of additional transfers over the course of the next few months have mitigated the overall risk posed to OHI due to the Orianna bankruptcy. Referring to the July 1 transaction that involved the transitioning of Orianna’s Mississippi portfolio to an existing Omega tenant, Taylor Pickett pointed out that the transfer would bring in $12 million in annual rents; hence, the termination of the restructuring agreement will not affect OHI in an adverse way.

Besides Orianna, OHI has also faced trouble from other operators over the last 18 months. Previously, the REIT had to enter into a restructuring agreement with Signature HealthCARE when the operator had fallen $25 million behind on its rent. Under the terms of the agreement, OHI provided $25 million in working capital financing to the operator in addition to rent deferments and annual funding for capital expenditures. Preferred Care, another major tenant of OHI, had also filed for chapter 11 bankruptcy in Q4 2017 thereby affecting the OHI’s profitability and prospects of dividend growth. In addition, finding a new operator for troubled or failing facilities is a difficult as well as an expensive process, hence the importance of the financial health and quality of OHI’s operators. Something that has recently been a cloud over the company’s otherwise attractive prospects.

After taking into consideration the effect of Orianna, the dividend payout ratios have been forecasted to be 81% of adjusted FFO and 91% of FAD. In its guidance statement, OHI has tightened its adjusted FFO guidance to a range of $3.03 to $3.06 per share. The REIT’s FAD guidance has been adjusted to a range of $2.67 to $2.74 per share.

In the first two quarters of 2018, OHI sold 64 facilities for a total amount of $311 million. The bulk of OHI’s asset sales is complete and the sold assets do not include the Orianna facilities that are scheduled for transition. The REIT’s robust sales reflect the continued demand for SNF assets by local market private buyers, which has enabled the company to unload assets at a reasonable rate.

The REIT believes that it will be successful in restructuring its portfolio and deploying the sales proceeds to high-quality assets for business growth. In Q2 2018 earnings call, management has expressed its confidence in selling or transitioning the remaining Orianna assets. While acknowledging near-term labor cost pressures, OHI management has expressed optimism due to improving demographics, increasing demand and a new reimbursement model that will be introduced in October 2019.

The New Model

CMS’s new reimbursement model will replace the existing SNF case-mix methodology with a new system that is termed as the Patient-Driven Payment Model (PDPM). Under the new system, payments will depend on resident’s classification amongst 5 service components, namely physical therapy, occupational therapy, speech-language pathology, nursing, and ‘non-therapy ancillary services’. A resident’s total per diem rate will be calculated by taking into consideration the payment calculations for each component. CMS believes the new model will save money and reduce administrative expenses. The payments to SNFs will also increase by 2.4% or $850 million. Additionally, the reporting window for the public display of SNF outcome measures would be expanded from 1 to 2 years. The new system will come into effect on October 1, 2019. It will be interesting to see what happens from now until then.

Our Take

By the company’s own admission, the next 12-24 months remain challenging. For investors, however, it’s hard to ignore an 8.1% dividend yield from a company that historically has navigated the complex healthcare world pretty well.

Source: Image created by author with data from company SEC filings

It is also trading at a considerable discount to peers in the healthcare sub-sector at a P/AFFO of just 11.7.

Source: Image created by author with data from company SEC filings

In my opinion, this is a stock for someone with a higher appetite for risk which may eventually pay off in the form of higher returns. For the faint of heart and those that watch their positions closely for the slightest bit of bad news, this is not for you. The company still has too many issues around Orianna, which if isolated, may have been more palatable. But the fact that the Orianna troubles come on the back of other operator challenges gives us pause. This stock lands squarely in our Sell bucket with an intent focus on a catalyst that will change operational risks and investor perceptions.

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Disclosure: I am/we are long OHI.

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.

Ford Motor: Say Goodbye To The Special Dividend

Ford Motor (F) released weaker-than-expected U.S. sales for the month of September on Tuesday that are likely going to continue to weigh on already sour investor sentiment. The tariff tit-for-tat between the United States and China also isn’t resolved just yet, meaning the special dividend the company used to pay in the last three years could get scrapped. In the absence of a major, positive catalyst for Ford Motor’s share price, the base dividend is about the only reason why investors may want to stay invested here. An investment in Ford Motor yields 6.5 percent.

Not A Good Year For Ford Motor

The escalating trade conflict between the United States and China has already taken a big toll on U.S. auto companies. Ford Motor’s share price, for instance, plunged 25.5 percent year-to-date as the tariff conflict between the two largest economies in the world heated up. In comparison, General Motors’ (NYSE:GM) share price has dropped 18.8 percent in 2018.

Importantly, Ford Motor’s shares once again fell to a new 52-week low last week @$9.09, indicating that investors remain fearful of a continued escalation of the trade conflict. In my article “Ford Motor Is A Single-Digit Stock: What Should Investors Do Now?” I said that the reduced adjusted EPS guidance for 2018 was also weighing on investor sentiment (Ford Motor revised its adj. EPS guidance down ~11 percent from a midpoint of $1.58/share to $1.40/share).

2018, at least so far, has not been a good year for Ford Motor.

Source: StockCharts

Ford Motor’s U.S. Sales In September

Ford Motor’s shares closed down 1.29 percent yesterday after the company released weaker-than-expected U.S. sales for the month of September.

According to Ford Motor’s September sales update, the auto company sold 197,404 vehicles last month, marking an 11.2 percent decrease compared to last year when Ford Motor sold 222,248 vehicles. Retail sales also showed some weakness, dropping 12.6 percent to 148,233 vehicles while fleet sales slumped 6.7 percent to 49,171 sales. The consensus estimate was for about a ten percent decline in sales compared to last year.

The reason for the year-over-year decline in sales was that September 2017 sales rebounded after Hurricane Harvey hit the United States last year, thereby inflating sales numbers. Hence, the year-over-year drop is nothing to worry about in my opinion, especially since General Motors also reported a big drop in sales.

Year-to-date, Ford Motor has sold 1,887,625 vehicles which compares against sales of 1,933,459 vehicles in the first nine months of last year, reflecting a decrease of just 2.4 percent.

Say Goodbye To The Special Dividend

Ford Motor has paid three special dividends in the last three years as sales and cash flow remained robust (Q1-2016: $0.25/share, Q1-2017: $0.05/share, Q1-2018: $0.13/share). Though I don’t expect Ford Motor to adjust its base dividend, I think chances are that management will not declare a special dividend in Q1-2019 in light of extreme uncertainty in the sector.

Ford Motor Still Dirt Cheap

Ford Motor’s shares are extremely cheap, which is a reflection of growing investor concerns about the company’s prospects for growth in an environment of rising protectionism and populism.

Both General Motors and Ford Motor are dirt cheap right now. Ford Motor’s shares, for instance, sell for less than seven times next year’s estimated profits.


F PE Ratio (Forward 1y) data by YCharts

Your Takeaway

Ford Motor has been weighed down by the escalating trade conflict between the United States and China, which shows no signs of easing at the moment. Ford Motor already reduced its 2018 EPS guidance as a result, but the company could be forced to revise its earnings guidance down further in case both countries continue the saber rattling.

September sales were not great, but also not as bad as they looked because they are compared against inflated sales numbers a year ago. Given the political and macro challenges Ford Motor faces, I think management will decide against paying a special dividend next quarter. Unless Ford Motor slashes its base dividend, I am staying the course.

If you like to read more of my articles, and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click ‘follow‘. I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.

Disclosure: I am/we are long F, GM.

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.

Hackers Can Stealthily Avoid Traps Set to Defend Amazon's Cloud

Cloud services host vast quantities of valuable information, making them perpetually attractive targets for hackers. Attackers regularly develop new and clever ways to access cloud accounts—or find ones that have been left exposed—and exfiltrate data. Those in charge of protecting cloud accounts have their own methods of shoring up defenses and securing account perimeters. But just in case someone slips by, they also lay the digital equivalent of a booby trap or a trip wire to sound the alarm on any interlopers. They’re called honeytokens.

A honeytoken can be any data planted to attract hacker interaction. You might, for instance, send yourself an email marked “Important bank stuff,” and put in a link that’s really a honeytoken, to let you know if your account gets breached. In the cloud, honeytokens are often authentication credentials that look like the keys to the kingdom, but actually act as canaries in the coal mine. It’s a clever ruse, and a vital one given the stakes of cloud security.

But researchers from the network security firm Rhino Security Labs have made the troubling discovery that attackers can identify many honeytokens planted in Amazon Web Services, the largest cloud provider, and silently avoid them while going about their nefarious business. It’s like a mouse that learns to grab the cheese without tripping the trap.

“You as the defending company put these keys out there so when I as the attacker grab them you’re alerted and you know that I’ve compromised that area,” says Ben Caudill, the founder of Rhino Security Labs. “But the problem we’ve found allows us to do a universal bypass where we can take those keys and without actually triggering the honeytoken. We can identify that it’s booby-trapped, and avoid those AWS services that it would otherwise trigger.”

The problem Caudill and Rhino Security Labs penetration tester Spencer Gietzen discovered has two components. AWS manages honeytokens through an auditing and compliance service called CloudTrail, but there are a handful of niche services that CloudTrail doesn’t support. Since CloudTrail doesn’t extend its visibility features to them, it also doesn’t create logs for activity connected to these services—and for hackers, no logs means no trace.

The second component the researchers discovered is that certain failed AWS queries provide a lot of information in their error messages—what the researchers call a “verbose error message.” One thing the errors show is the “Amazon Resource Name,” or the name of the credentials you used to send the query. The Amazon Resource Name will also reveal if you’re using a honeytoken. As a result, an attacker could intentionally produce errors to check the identity of credentials they encounter, and see whether they are honeytokens. And all of this can happen without CloudTrail having any record of it.

“It’s both the fact that AWS doesn’t have logging on those services and the fact that certain error messages from AWS show you which user you are,” Gietzen says. “The API functionality’s universal response means that I can use an unsupported CloudTrail service as the attacker to get information back. And there’s no way for you as the defender to know I did it.”

Both the security company Thinkst, which offers a honeytoken service called Canary, and the enterprise software developer Atlassian, which oversees the open source honeytoken project SpaceCrab, are making changes to remediate these issues as much as they can. But Caudill and Gietzen note that a full fix to the larger conceptual issue can only come from architectural changes to AWS. Amazon did not return a request for comment by publication.

“This is a fundamental issue within AWS that I think is not known well enough and can be exploited by an attacker,” Caudill says. “People rely on these defenses, but there is an inherent risk.”

More Great WIRED Stories

Netflix Consumes 15% of the World’s Internet Bandwidth

When it comes to devouring bandwidth online, no company can hold a candle to Netflix.

The streaming video giant consumes 15% of the total downstream volume of traffic globally, according to the latest Global Internet Phenomena Report from Sandvine. In the United States, that figure jumps to 19.1% of total traffic.

Demand for Stranger Things and other Netflix shows spikes even higher at night.

“At peak hour on fixed networks, this number can spike as high as 40% on some operator networks in the region,” the study says.

Sandvine does credit Netflix for its superior stream compression technology, noting “Netflix could easily be 3x their current volume and at 40% of network traffic all the time”.

Other traffic hogs on a global scale included HTTP media streams, such as embedded videos on websites, which took up 13.1% of bandwidth; YouTube, which commands 11.4% of the world’s bandwidth; and web browsing at 7.8% of downstream traffic.

Streaming video continues to grow, also. In the U.S., Amazon Prime Video has now surpassed YouTube in data consumption (7.7% vs 7.5%).

Other takeaways from the report include the prominence of piracy, despite the best efforts of studios and companies to fight it. BitTorrent represents 22% of all upstream traffic on the internet, according to Sandvine. And Fortnite might get the lion’s share of the spotlight these days, but League of Legends still has more than 51% of gaming connections among the top 100 titles.

Tesla shares jump on Model 3 numbers, Musk deal

(Reuters) – Shares of Tesla Inc (TSLA.O) jumped 18 percent on Monday as signs it had met targets for quarterly car production added to relief at Chief Executive Elon Musk’s settling of a lawsuit with regulators that had threatened to force him out.

FILE PHOTO: Tesla Motors CEO Elon Musk reveals the Tesla Energy Powerwall Home Battery during an event in Hawthorne, California, U.S., April 30, 2015. REUTERS/Patrick T. Fallon/File Photo

The electric carmaker’s shares sank last week after the U.S. Securities and Exchange Commission accused Musk of securities fraud, opening up the prospect of a long-drawn out fight that could have seen Tesla lose its leader, and undermined its ability to raise capital and ramp up production.

Under the settlement announced at the weekend, Tesla and Musk will pay $20 million each to the regulator and Musk will step down as chairman but stay as CEO, leaving in place one of America’s best-known corporate figures.

Analysts hoped the deal, which enforces oversight of Musk’s public communications, would put an end to several months of turmoil that has prevented investors from focusing on a business that churned out a reported 80,000 cars in the third quarter.

Relief at the settling of the lawsuit drove the biggest one-day gain in Tesla shares in more than five years.

“Those people who are bullish on Musk and think he’s a visionary think they just skirted an issue,” said Yousef Abbasi, global market strategist for broker-dealer INTL FCStone.

Automotive news website Electrek reported here that Tesla had produced 53,000 of its Model 3 sedans in the third quarter, up from 28,578 in the previous three months and making good on a promise in August it would produce 50,000 to 55,000 of the cars.

Tesla did not immediately respond to a request for comment.


Musk has gained legions of fans for his bold approach to business and technology, using his 23 million Twitter followers account to promote Tesla, his rocket company SpaceX, and tunnel venture, the Boring Co.

But the claim on Aug. 7 that he had the funding to take Tesla private, and a subsequent U-turn, stunned Wall Street and came amid public appearances which saw Musk smoke marijuana live on air and call a British diver in the Thai cave rescue a “pedo”.

He has tweeted only once since the settlement was announced – posting a music video by rap group Naughty by Nature.

As part of the settlement with the SEC, Tesla will also appoint an independent chairman and two independent directors, responding to calls on Wall Street to relieve the pressure on Musk and provide more balance in the carmaker’s management.

“The ideal chairman is someone with operational experience in the automotive industry because that’s really where they’ve struggled, on the operational side in terms of the model 3 ramp,” CFRA analyst Garrett Nelson said.

Lawyers said that the settlement and size of the fine might give more ammunition to short-sellers pursuing separate cases against Musk for manipulating the company’s shares through the Aug. 7 tweet, as well as to a probe by the Justice Department.

But several experienced litigators also said that, while the DOJ probe is separate, the SEC’s settlement might mark the end of official action against Tesla and Musk.

“The standard of proof for any potential criminal charge is higher than that of a civil case, which the SEC had,” said Jay Dubow, a former branch chief in the SEC’s enforcement division.

“It is possible that the DOJ investigation does not result in any criminal charges at least in part because the DOJ could determine that the SEC’s action resolved the matter and that no further governmental action is required.”

Neither Musk nor Tesla admitted or denied the SEC’s findings as part of the settlement, which still must be approved by a court.

Reporting by Arjun Panchadar, Akanksha Rana, Sonam Rai in Bengaluru and Ross Kerber in Boston; editing by Patrick Graham

American Midstream: Remorseless ArcLight Goes For The Jugular

Sometimes shareholders just cannot trust other shareholders to stand with them. General partner ArcLight has a fair number of limited partnership shares of American Midstream (AMID). After some bad luck and a misstep or two, the limited partner unit now trades for about a third of the highest price just a couple of years back.

One would have thought that ArcLight would work to restore the luster of this once thriving partnership. But instead, ArcLight knows a great deal when it sees one. The end of the third quarter is “window dressing time” for institutional funds. Therefore, to the detriment of long-term unit holders, ArcLight would like to take the partnership private at the “bottom of the market”. In fact ArcLight even waited for the window dressing period to depress the unit price as much as possible when making its latest offer to buy the partnership.

The offer from ArcLight was for a whopping $6.10 per limited partner unit. The shares of course rallied above that price. But ArcLight knows Mr. Market pretty well. Long-term holders would probably get disgusted enough to sell their shares to traders who would be happy for a small short-term profit.

ArcLight can increase the offer another 10% to 15% down the road to assure market acceptance at a premium to what the units are trading. However, ArcLight typically does not go for small profits. The firm usually aims to make far more money than 15%. The actions of ArcLight actually give credence to the value arguments that American Midstream is probably worth about $10 to $12 per limited partner unit. ArcLight is probably betting that the market will not bid the unit price to anything close to full value. Then ArcLight can take American Midstream private and realize the value of the assets in other ways.

This ArcLight strategy takes advantage of the very poor market attitude towards this limited partnership. Normally, after a period of poor earnings and an over-extended capital structure, Mr. Market wants a growth track record before restoring a partnership to its full value. ArcLight appears to be impatient with Mr. Market. So the general partner has devised a way to speed up the return to full valuation.

A few years back an investor could hardly imagine this situation. American Midstream was growing and the unit prices were heading towards the high teens. Periodic distribution increases were the order of the day. Then came the merger with JP Energy Partners. The ballyhooed effects of that merger were definitely not apparent after one year. The unit price lagged severely as it often drifted towards $10.

Source: American Midstream Presentation At MLP & Energy Infrastructure Conference May 2018

ArcLight sold some under-performing divisions and then replaced those divisions with other divisions. But then a pipeline ruptured at the bottom of the sea and forced the general partner to contribute to the partnership while Delta House awaited the return of contracted volumes. Some commentators saw no progress between contributions from the general partner the year before for a warm winter.

Then came the disastrous offer for Southcross Energy Partners (SXE). That was it. Mr. Market had had enough of missed guidance and unfulfilled promises. A distribution cut to deleverage the balance sheet was the final nail in the coffin. The partnership units were left for dead.

But this is one general partner that is not about to leave a discount on the table. It matters not that ArcLight helped the partnership earn that discount to asset values. If the market would not value the partnership properly in the eyes of the general partner, then the general partner would buy the partnership. Later the partnership could be sold in pieces or repackaged and sold to the public at a later date. Profit is profit. ArcLight is not an organization that leaves spare change hanging around.

The Southcross merger termination came with an announcement that Moody’s upgraded the liquidity rating of the partnership. That was followed by the second-quarter report where management announced a lower leverage ratio and further progress towards forecast goals for the year. Still the progress made did not impress Mr. Market at all. After all, the distribution had been cut significantly. Therefore nothing else mattered but that distribution cut.

Obviously long-time shareholders would like to see the general partner make good on those long-term (great return) promises. Obviously, ArcLight never told the other shareholders that the bright future the general partner had in mind did not include the limited partner unit holders. Evidently the limited partners could bear the risk of failure without the rewards of success.

Hopefully the limited partners now realize that ArcLight managed the partnership for aggressive growth. Income, even speculative income was never the main goal. The generous distributions were a side benefit of a very aggressive growth strategy. More importantly, if the market punishes the partnership “too much,” then ArcLight as the general partner will take the partnership private to realize a second profit by obtaining full value for the partnership assets.

Maybe ethical behavior would dictate a public auction and sale of the limited partnership assets (or some sort of recapitalization followed by a return to growth). Clearly ArcLight went for the maximum profit plan and set the ethics part aside. This is something that potential long-term holders should keep in mind for any future ArcLight-led ventures that are potential investments. Clearly, ArcLight looked out for the interests of ArcLight first without worrying about the future consequences caused by unit holders taking a loss in their American Midstream investment.

Investors can vote no on the coming shareholder vote for the ArcLight offer. Probably the best that will happen is a 10% to 15% increase in the offering price. The conflicts committee clearly has proven to be a rubber stamp body that is worse than useless to the small shareholder. Lawyers may not be much help in this situation either. Probably the best thing to do is sell the investment and move on. Promise yourself that you will not support any ArcLight ventures in the future regardless of the profit potential. If enough investors shun ArcLight’s products, then maybe it would behave differently in the future. But definitely do not count on an overnight transformation in favor of the small investor.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

Disclosure: I am/we are long AMID.

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.

Hurom H-AI Juicer Review: It's Too Expensive, and Juice Isn't All That Good for You Anyway

Driving across the border into Canada late this summer, the CBC anchor on the radio announced that a glut of blueberries had pushed their prices down to historic lows. Having brought a fancy new juicer with me, I sensed an opportunity.

The juicer in the back of the car was a Hurom H-AI, a sort of Maserati of juice machines, with a powerful motor that gives it a near-unflappable ability to liquefy whatever you throw in the hopper.

It is a very effective machine, but it had a lot of convincing to do if I was going to like it, as the damn thing costs $700—a number that created a hurdle I was worried I couldn’t clear.

I dropped off my wife Elisabeth and the juicer at my mother-in-law’s house and headed to the produce store, returning with a mammoth flat of blueberries and 50 loonies worth of other fruits and vegetables to throw in there.

A few years back, I reviewed one of the H-AI’s predecessors, the Hurom HH Elite, and was curious to see what changes were in store. The major differences turned out to be the streamlining of the machine, and an extra hopper, this one a basket-like “self-feeding” number, allowing you to dump food in there en masse. I also wondered if the “AI” in its name stood for “artificial intelligence,” but instead, a company rep told me that the letters have “no meaning.”

As I unpacked these parts and accessories—13 to 15 of them, depending on how you count them—they spread out far enough to cover an entire dishcloth, with enough bits and bobs that I started to wish the juicer came with its own pegboard.

Still, that new hopper was nice. I could chop up some fruit and dump it in there with abandon thanks, in part, to a multi-armed spindle that twirls around and keeps things moving toward the auger. For most foods, it’s a marked improvement over the traditional chute hopper.

This convenience does not mean less prep is involved. Unless it’s something like those blueberries which just need a quick rinse, most of what you juice will require prep—washing, scrubbing, removing pits from stone fruits, and sometimes peeling. You’ll also need to reduce your juice-ables down to what could be called “just bigger than bite size.” This all takes a while.

I set up the Hurom and got crushing, watching those blueberries wobble around in the hopper, then emerge as liquid through the strainer below, a lovely shade of violet. I was, however, surprised at the output—just a little more than half of the berries turned to juice while the rest became pulp. Isn’t pulp good for you? Curious, I tasted that pulp and imagined how it could be spread on toast and sprinkled with a little sugar, or—gasp!—thrown in a blender with the juice. Almost all of the juices I made were downright delicious, but the quantities it took to make each glass reminded me why juice is so expensive.

I, uh, pressed on, learning that I couldn’t cheat and put melon spears in the new hopper: cubes go down much faster. The juice was fantastic. I tossed in some figs, and perhaps due to their not-terribly-juicy nature, they were mostly squished out as pulp. I peeled and pitted a mango, juiced that and—apologies for cheating here—but I threw the juice and the pulp in the blender with some yogurt and called it a damn fine lassi. Later, I chopped up some tomatoes, threw them in and, while I hoped it would make something that I could turn into tomato sauce (alas, too thin!), it did make some lovely juice. Carrots went in next, and I combined their juice with the tomato, adding salt, pepper, and some of my mother-in-law’s Mrs. Dash seasoning, turning it all into a lovely blend that could be used as a base for a gazpacho, a Bloody Mary or, this being Canada, a Caesar.

Next, I switched gears and tried kale, watching the leaves get nudged around in the hopper, then slowly spun into juice with the auger, giving me the weird feeling like I had a front-row view of two stomachs of a cow.

One sip revealed an intensely bitter flavor reminiscent of grass clippings. Elisabeth demurred when I offered her a taste, saying, “Not after that face you made. You eat everything.”

I know people don’t drink kale juice straight, even if it is good for you, but stirring it into some other juice can only be a destructive process.

So, it was nagging at me … is juice good for you? And more importantly, am I ready for the flak that’ll come my way if I say anything bad about it? The answer to those questions has me putting on running shoes.

I started with a 2017 study from the Journal of the American College of Cardiology.

“…while the fruits and vegetables contained in juices are heart-healthy, the process of juicing concentrates calories, which makes it much easier to ingest too many. Eating whole fruits and vegetables is preferred, with juicing primarily reserved for situations when daily intake of vegetables and fruits is inadequate,” it reads. “Until comparative data become available, whole food consumption is preferred…Guidance should be provided to maintain optimal overall caloric intake and to avoid the addition of sugars (e.g., honey) to minimize caloric overconsumption.”

The study features an illustration with three columns: “Evidence of Harm,” “Inconclusive Evidence,” and “Evidence of Benefit.” Juicing only appears in the first two.

“We don’t have the evidence that says juice does something wonderful,” says Kevin Klatt, a PhD in molecular nutrition and a clinical trainee at the National Institutes of Health. “Across the board, juice is better than soda, but 16 to 20 ounces [an amount adults and kids often consume] is way too many calories and too much sugar.”

Comparing juice to soda is a pretty low bar, but even if it’s not a juice that runs on the sweeter side, you tend to run into trouble on most truth-seeking missions.

“There are very common claims that juices have magical properties,” says Klatt, “but outside of a few examples, there aren’t randomized control analyses comparing juice and most health outcomes.”

For fun, I picked a juice from Hurom’s recipe book at random to read it to Klatt, falling on the “Secret Woman” drink in a section called “Ladies Juice.” (Yes, really.) The Secret Woman headnote talks about “vegetable estrogen,” “essential fruits,” and the pomegranate’s apparent ability to delay menopause and maintain youthful skin.

“That just sounds made up,” Klatt said, “They’re using bad logic to make a triangulation that this could be good for you. It’s extremely indirect.”

The takeaway here seems to be: drink juice if you like juice, but there’s scant evidence that it’ll do you any good.

Add It Up

So here’s the part where the math and the practicalities of the Hurom get tricky. When I was talking earlier about all of those (mostly) yummy juices made in the Hurom, I didn’t mention all of the cleaning. If you’re making a mixed juice, you can fudge it a little and not do a full cleaning between different ingredients, but every time you use the juicer, plan on spending a good hunk of time afterward cleaning.

Once disassembled after a juicing, it took a solid five minutes to hand wash all of the parts, and hand wash you shall, as none of the parts except the auger can go in the dishwasher. Between setup, food prep, actual juicing, and cleanup, you’re in it for a good long while.

Also, let’s say it again because holy moly this is a lot to pay for a juicer, the H-AI costs $700. Hurom even offers a monthly installment payment plan, which sounds pretty nuts; if $700 isn’t chump change to you, maybe just don’t buy it. There are lots of capable juicers out there, including highly-praised offerings for less than half the price of the H-AI. You should give those a look if you’re still interested in making juice at home.

I also took a little tour of my neighborhood while writing this review, stopping by the Taproot Cafe, where their juices run between five and nine bucks. Nearby, at the grocery store, I could get an apple-shaped bottle of Martinelli’s apple juice for less than two bucks, a selection of Odwalla juices for three, and some really fancy brands for eight.

I get that it’s not exactly the same thing, but bear with me: you could go the cafe- or store-bought route and buy anywhere from about 100 to a few hundred juices for $700, and that’s ignoring the price of fruit and the time you invest in making your own juice.

That said, the Hurom is a well-built machine, a sort of luxury car in the world of juicers. If you do a lot of juicing, are unfazed by the price tag, and have room for a very capable belle objet on your countertop, knock yourself out. For me, though, I’m OK without one. If I get a craving for a nice, fresh juice, I’ll head down to the Taproot, or back up to Canada for a Caesar, enjoy my drink and let someone else deal with the cleanup.

Here's Why Venture Capitalists Are Pouring a Record $1 Billion Into Coffee Startups This Year

Continuing a trend that began roughly four years ago, investors are pouring a record amount of venture capital into the industry. Coffee startups raised $600 million in the first seven months of the year alone–more than four times the total amount raised in 2017, according to data from CB Insights. By the end of 2018, that total is expected to surpass $1 billion.

It helps that more Americans are picking up the caffeine habit. About 64 percent of U.S. adults have at least one cup of coffee every day, up from 57 percent in 2016, according to data from the National Coffee Association.

Investors continue to see huge potential upside in betting on coffee despite the fact that it has not traditionally been a venture capital-driven business. Coffee in the U.S. is a $12.9 billion market, so any company that can disrupt this industry with a new product has a massive opportunity to scale. 

“I think everyone can see the prize with coffee,” says Sam Lessin, a partner at Slow Ventures, which invested in coffee startups like Blue Bottle and Alpine Start. “Building an iconic brand in the space–can be a really big win.”

The entrepreneurs behind these coffee startups say the venture funding is crucial to going up against the major chains like Starbucks and Dunkin Donuts, not just so they can compete on the ground with brick-and-mortar locations but also to stay one step ahead on product innovation.

Matt Bachmann is a co-founder of the New York City-based cold brew company Wandering Bear Coffee. Wandering Bear has raised $10.5 million, according to Crunchbase, and sells boxed coffee on tap, designed for the home or office, along with ready-to-go containers.

Bachmann notes that startups like his were selling cold brew concoctions long before Starbucks and Dunkin Donuts adopted the trend and helped make it a wildly popular drink. Wandering Bear’s start at about $4 for an 11-ounce bottle and $29 for a 96-ounces on-tap container.

The trend moves from “bottom up, not top down,” says Bachmann. “It’s the startup that does something different at a small scale, proves to be popular, and then gets adopted more broadly.”

Refrigerated ready-to-drink coffee is one such trend driving the recent boost in investments. By 2024, the ready-to-drink coffee and tea industry is expected to reach sales of $116 billion, up from $71 billion in 2015, according to Grand View Research. The latest iteration of the trend involves coffee beverages with a healthy twist.

New York City-based KITU makes a ready-to-drink “super coffee” that is sugar-free, lactose-free, and includes 10 grams of protein in a 12-ounce bottle. CEO Jim DeCicco says the key to his company’s success is the ability to offer healthy coffee products without sacrificing taste. “If we are providing a better-for-you option, it has to be as delicious as the high-calorie products on the shelf,” says DeCicco. KITU is sold online and in retailers like ACME, Wawa and Whole Foods. 

Grant Gyesky, the co-founder of Rise Brewing, which sells a ready-to-cold cold brew infused with nitrogen to give the drink a creamy flavor, says adding the nitrogen gave the brand an identity in a crowded space. Gyesky says Rise’s products appeal to consumers’ growing preference for healthier food and drink products. Rise declined to share how much total funding it’s raised. Rise, which raised an undisclosed amount of VC, sell its products  online and in select Whole Foods and Safeway stores. 

And customers are willing to spend more on these specialty drinks: 48 percent of Millennials drink gourmet coffee beverages every day, according to National Coffee Drinking Trends. Blue Bottle sells Port of Mokha coffee from Yemen, and charges $16 per cup. 

There are people who like almost anything, you just have to find them and make sure you put the right experience in front of them,” says Lessin. “I don’t think its just price, it’s flavor profile and it’s experiences.”

Dan Scholnick, general partner at Trinity Ventures, which invested in Bulletproof Coffee–a line of coffee beans, ready-to-drink beverages, supplements, and oils–still sees plenty of room for innovation among coffee startups.

“When you see disruption like that in a market, it’s a signal it’s a good opportunity for startups to enter and fill the void created by changing consumer tastes,” Scholnick says. 

But when will the specialty coffee market cool down?

“The peak of artisanal coffee is not so black and white–consumers always need energy and coffee is addictive,” says KITU’s DeCicco, who suspects the next big acquisition will be La Colombe. “I think if we see a peak in cold brew it will just lead to innovation in enhanced coffee or other coffee categories.”

50 Habits That Will Make You a Millionaire

OK, so maybe a $1 million isn’t as cool as it used to be. Thanks, inflation, David Fincher’s “The Social Network” and Russ Hanneman!

Making the two-comma club is still a noble financial goal. And an attainable one, with a little luck and a whole lotta work. Or vice versa, depending on where you’re at in life and how much money is already sitting in your bank account.

With that caveat in mind, here are 50 ways that, taken collectively (more or less), could make you a millionaire.

1. Save 40 to 50 percent of your paycheck.

If you’re just starting out in the workforce, “keep living like a student,” Jeff White, a financial analyst with, says. Which means, yes, try to set aside almost half of your income. Saving is important, but you’ll also want to …

2. Invest.

Because, let’s face it, these days, it’s pretty much impossible to nickel-and-dime your way to $1 million.

3. Diversify.

Take that 40 to 50 percent of your paycheck and “invest [it] into more than one source,” White says. That includes stocks, bonds, real estate and mutual funds. But if you’re already overwhelmed (we get it: investing is terrifying) …

4. Start small.

There are plenty of investing apps out there that can get you started. Some apps, like Betterment and Wealthfront, are robo-advisers, while others serve as online investment brokers. Think Robinhood and Stash. And then there’s Acorns, which lets you invest your spare change. You can find a rundown of how these apps work here.

5. Mix in long-term investments.

We’re talking IRAs and 401(k) plans. These funds are essential for a stable retirement. But the tax penalties associated with early withdrawals should dissuade you from tapping that money for non-emergencies. In other words, “you don’t feel the temptation of diving into those accounts just to go to Disney World,” White says.

6. Max out an employer-sponsored 401(k)…

If your employer matches up to a certain amount, well, that’s the amount you should deposit into the fund each paycheck. Otherwise, you’re basically leaving free money on the table.

7. … and your annual IRA contributions.

In 2017, for instance, your total contributions to all of your traditional and Roth individual retirement accounts can’t be over $5,500 ($6,500 if you’re 50 or older) or your taxable compensation for the year, assuming your compensation was under that limit.

8. Take part in an IPO.

Terrifying, we know, but think about how much Facebook stock originally sold for ($38 per share) and how much it’s worth now ($214.67 as of writing this.) Of course, be sure to consult a financial adviser before making any major investments.

9. Don’t waste money.

Sounds like a no brainer, sure, but people (ahem, Gen-Zers and Millennials) are into being extra these days. Don’t fall for it, Gen-Zers and Millennials: $400 pants are not an investment.

10. Embrace minimalism.

That’s the theory all those tiny house hunters you’re watching on HGTV subscribe to: Less is more … and great for your bank account.

11. Sell your stuff.

If you decide to downsize — or, maybe, when you decide to downsize — make some money from your still-salvageable stuff. There are plenty of sites and apps, like eBay and Poshmark, that’ll help you sell your gently used wares to the masses.

12. At the very least, trim the fat.

True minimalism isn’t for everyone. (Fumio Sasaki, a leading voice in the minimalism movement, only keeps a roll-up mattress, three shirts, four pairs of socks, a box that serves as a table, chair and desk, and a computer.)

But, even if your budget is already lean, there’s usually at least some place you can trim more fat. Common money-wasters? Avocado toast. Your morning coffee. $1,000 smartphones. You know, the usual.

“Millionaires are made by years of smart financial choices,” entrepreneur Tyler Douthitt says. “Make the cuts to your budget to make it work.”

13. Remember, you’re not cheap; you’re thrifty.

There are plenty of wealthy individuals who are unabashedly frugal. Consider Oracle of Omaha Warren Buffett, who once had a vanity license plate that said “thrifty.”

14. Avoid debt.

Notice we didn’t say “pay your debt down.” That’s certainly important, but also it’s own thing. Like, if you’re seriously in debt, focus more on paying it down and less on making your million, you know?

Future millionaires keep debt to an absolute minimum — even the good kind, which is essentially debt associated with an asset that’ll increase in value. Like a home. Speaking of which:

15. Don’t be house poor …

That’s a term used to describe someone who’s living in a home that’s essentially eating all of their income. So, yes, you might be paying your mortgage, but you’ve also got credit card debt and $0 in your emergency fund. If you can’t save three to six months’ worth of expenses, how are you going save $1 million?

“Only buy a house that fits your family, without feeling the need to be in the most expensive neighborhood,” White said. “You don’t need to build a home from scratch if you’re trying to save.”

16. … but do try to buy a home.

Because it’s an investment. Plus, depending on where you live and how much of a down payment you can put down, a monthly mortgage payment could be more affordable than the one you’re making to a landlord. If you must lease …

17. Keep rent well below 30 percent of your income.

That’s the general rule of thumb when it comes to the cost of housing, but, if you’re trying to hit a mil, you’ll need to aim higher. Or lower, in this case. Think 20 to 25 percent.

18. Properly insure your stuff …

Lest a fire, break-in, explosion, etc. drain your coffers and blow your master plan. And, yes, that goes for renters, too. You can learn more about renters insurance here.

19. … and yourself.

Disability insurance will replace some or most of your income if you’re suddenly unable to work for a period of time. Car insurance covers you if you cause an accident with your vehicle. And, as your wealth grows, umbrella liability insurance can cover anything in between. Bottom line: If you’re trying to build your net worth, you have to protect your assets.

20. Keep your credit shiny.

As anyone involved in the Equifax data breach undoubtedly knows by now, your credit affects everything: how much interest you pay on a loan, what apartments you can score, how high your car insurance premiums climb. The list goes on and on.

To keep good credit, pay all your bills on time (yes, every single one), keep your debt low (told you) and add new lines of credit organically over time.

21. Renegotiate everything.

It’s easy to get entrenched in a contract, but we’d be the first to tell you, it pays to shop around. Call up your current service providers — cable company, credit card issuer, etc. — to see if you can score a lower rate. If not (and your contract is set to expire), take your business elsewhere.

22. Actually, negotiate everything.

Just saying.

23. Doing life? Save less … just not too much less.

Once you get to spouse and 2.5 kids-mode, it gets a lot harder to bank nearly half of your paycheck. Aim instead to invest 20 percent-plus of your monthly income into a retirement account.

That way, “by the time you hit retirement, the compounding returns should easily make you worth much more than $1 million,” White says.

And, listen, if even that gets tricky …

24. Save a minimum of 10 percent of your income.

“No matter what happens,” he said.

25. Automate your savings.

There are ways to make saving a little bit easier. One method involves setting it and forgetting it.

“Every time you have a [paycheck] deposited, have your bank account setup to automatically put a certain amount in your savings account or investment portfolio,” Jay Labelle, owner of The Cover Guy, says.

26. Keep your emergency fund separate from your actual savings.

That way “you don’t dive into your savings or investment accounts if something unexpected happens, which it will with kids,” White says.

27. Avoid the hotspots.

Couples with kids are (probably) less inclined to throw down a bunch of money on $85 pet rocks. But there are certainly temptations prospective $1 million parents will need to negotiate.

“Find memorable, but affordable, vacations,” White says. “You can have a blast with your kids without spending $20K.” Here are some affordable family vacations to consider, if you’re in the market for a getaway.

28. Bank your windfalls.

Sure, you want to buy a new TV or Escalade, but you’ll reach a $1 million much faster if save that money for later.

29. Early to bed, early to rise.

Makes a person healthy, wealthy and wise, you know.

30. Get a side hustle.

If you can’t save more, make more. And, thanks to the gig economy, there are plenty of ways to bring in a little extra income on your nights and weekends.

31. Provide short-term lodging.

Thanks to sites like Airbnb and VRBO (Vacation Rentals by Owner), it’s also possible to make some extra money when you away. You just gotta be cool with renting out your place to strangers. 

32. Start a business.

Who knows? Your side hustle could turn into a full-time gig. Or maybe you’ve got an innovative idea venture capitalists will love. That might sound real pie-in-the-sky, but consider this stat, courtesy of the Cato Institute: Roughly one-third of first-generation millionaires are entrepreneurs or managers of nonfinancial businesses.

33. Go full-fledged landlord.

That could mean scooping up some investment/rental properties as your wealth grows. Or something as simple as renting out a room in your abode to help with your mortgage. We hear house hacks are all the rage these days.

34. Become an influencer.

Dirty word, we know, but, per Forbes, top influencers can take home about $187,000 per Facebook post and $150,000 per Instagram.

35. Never relax …

That’s according to Mark Cuban, and while it sounds … well, kind of terrible, we figured we’d pass it along.

36. … like, ever.

Not enjoying life is actually a theme among self-made millionaires. Earlier this year, VaynerMedia CEO Gary Vaynerchuk said Millennials were financial failures because they watch too much Netflix and play too much Madden. 

37. Exercise.

Studies have found wealthy people exercise more. Plus, you know, it’s good for your health.

38. Lean in.

Wage stagnation has let up at least a little bit since the recession, so you might find there’s more money to be made in your current position. Case in point: Senior executives who changed jobs in 2013 received compensation increases that topped 16 percent, according to a survey from Salveson Stetson Group.

39. Earn your bonus.

Don’t take any bonus options you have at work for granted — and, by that, we mean don’t assume you won’t net the full amount. It might require a mad dash to December, but you definitely won’t get the money if you don’t put in the work. Not already eligible for a bonus?

40. Ask for a bonus.

So long as you deliver on a certain goal, of course.

41. Avoid lifestyle creep.

If you want to make a million, you need to make sure your spending doesn’t increase alongside your income. Seriously. Lifestyle creep is a big problem that’s kept plenty of high earners from maximizing their money.

42. Think like a hacker.

This one comes courtesy of Facebook CEO Mark Zuckerberg.

“The Hacker Way is an approach to building that involves continuous improvement and iteration,” he wrote in a 2012 memo to Facebook shareholders. “Hackers believe that something can always be better, and that nothing is ever complete.”

43. Go on a game show.

I mean, the grand prize for Survivor and Who Wants to be a Millionaire is $1 million.

44. Catch up.

Remember, once you’re over the age of 50, you can make annual “catch up” contributions into certain retirement accounts, including 401(k) plans and IRAs. You can learn more about what amounts you can allot to each account on the IRS’ website.

45. Hold off on taking Social Security.

Also helpful for people who are older, but not quite at the $1 million mark, because, thanks to delayed retirement credits, your can receive larger (in fact, the largest) Social Security benefits by retiring at age 70.

46. Work all the tax breaks.

Flexible Spending or Health Savings Accounts. Commuter benefits. Property tax and mortgage interest deductions (told you it helped to own a home). Make sure you’re capitalizing on anything and everything Uncle Sam offers in terms of tax breaks.

47. Get some help.

The higher your income, the more complex your finances will be. (Case in points: all those tax breaks we just mentioned.) And, at a certain point, it’s a good idea to bring in the professional — a certified financial planner or certified public account — to help you manage your money.

48. Stick with it.

Because you can’t make amass a small fortune overnight. In fact, a 2016 study found it took the average self-made millionaire an average of 32 years to become rich.

49. Believe in yourself.

Because you can make $1 million.

“Confidence will get you through your moments of weakness when you want to pull money out of savings or your investment accounts,” White says. “Keep going, and before you know it you’ll hit your goal.”

Or, you know, you could just cross your fingers and hope you …

50. Win the lottery.

It could happen.

Coinbase Wants To Be Too Big To Fail

THE NEW TITANS OF FINANCE prowl a glass fortress 3,000 miles from Wall Street. High above San Francisco’s Market Street, their headquarters take up three floors with sweeping views of the bay and city below. The reception desk bears jars brimming with chocolate coins near a jokey “Initial Chocolate Offering” sign. Beyond it, in an open space with no corner offices, big shots poached from Silicon Valley giants sit beside junior hires clutching free cans of LaCroix. This is the home base of Coinbase, the buzzy startup that wants to rewire the financial system around blockchains and digital currency.

But good luck finding it. There’s no logo outside the building or in the lobby. Nor is there any signage in the hallway outside that reception desk, just fortified metal doors and an intercom. Coinbase employees maintain a low profile, they explain, because most own virtual cryptocurrency, some ?in quantities that make them multimillionaires on paper.? A kidnapper could capture someone and “pull out their fingernails,” a staffer says, to learn the location of their fortune—as if betting your career and well-being on a volatile, unproven financial technology weren’t stressful enough.

Such is life at Coinbase, a company where the mood alternates between upbeat and under siege. It was founded in 2012 as an exchange that lets individuals and companies easily buy and store digital currencies, most notably Bitcoin. And by 2017, when investor interest in those currencies moved to the mainstream, Coinbase was perfectly positioned to capitalize, becoming a 21st-century Wells Fargo for a new digital gold rush.

In short order, Coinbase became the first U.S. cryptocurrency startup to earn a $1 billion “unicorn” valuation from investors, and the first to bring in $1 billion in annual revenue. (The still-private company is profitable, according to regulatory filings, though it won’t disclose specific earnings.) Coinbase now claims 25 million customer accounts—a five- fold increase from two years ago—putting it on a par with traditional finance giants like Charles Schwab and the brokerage arm of Fidelity. The tech press is buzzing about new, higher-valuation funding rounds and a looming IPO. And the company’s first-mover status has made it something of a home planet for the universe of crypto-oriented business; a surprising number of top industry figures are connected, in one way or another, to Coinbase and its 35-year-old founder and CEO, Brian Armstrong.

Still, life at the top is tense. Coinbase owes its preeminence in part to last year’s unprecedented speculative surge in cryptocurrency investing. Today the buoyant Bitcoin runs of 2017 seem a distant memory, as more investors question the value of assets that have?yet to prove their staying power. Many of the most popular digital currencies trade 80% or even 90% lower than their peaks last December, and the popping of the bubble has erased a staggering $600 billion in market capitalization. The collapse has meant less trading and less commission revenue for Coinbase, even as new low-fee competitors threaten? to turn the company’s core service into a commodity—and even as the company recovers from self-inflicted problems that alienated customers during the boom.

Presiding over all this is an introverted founder who sees the cryptomania of 2017 as just one chapter in a longer story. Armstrong belongs to a generation of evangelists who view digital currencies, and the blockchain technology on which they’re based, as tools that will make investing, borrowing, and saving money faster, cheaper, and more egalitarian. And he wants Coinbase to become the banking empire that brings those tools to the masses.

Armstrong and his colleagues have laid the groundwork for that future, carefully wooing regulators and investing in new technology. What he hasn’t done yet is convince the wider financial world that crypto is a must-have technology. If Armstrong can’t eventually make a compelling long-term case, it may be not just Coinbase that crumbles, but an entire industry.

THE IDEALIST: Brian Armstrong at Coinbase’s San Francisco headquarters. “I really want to see crypto be used by a billion people in the next five years,” he says.

THE IDEALIST: Brian Armstrong at Coinbase’s San Francisco headquarters. “I really want to see crypto be used by a billion people in the next five years,” he says.

Winni Wintermeyer for Fortune

GROWING UP IN SAN JOSE, Armstrong often felt bored and confined. His parents, both successful engineers, provided a comfortable upbringing and a brisk intellectual environment. But while Armstrong saw the Internet as a tool to change society—in the same way Apple’s Steve Jobs and Intel’s Andy Grove who built their empires minutes from his househad done with computers and chips, two decades earlier—he fretted that others had beat him to it. “By the time I graduated from college and I was starting to work, I felt maybe I was too late—this Internet revolution had happened,” he said.

Armstrong arrived early, however, for the genesis of a different revolution. While surfing the web at his parents’ house on Christmas of 2009, he encountered a nine-page paper written by a pseudonymous author named Satoshi Nakamoto. The idea it described—a global currency beyond the reach of banks or governments—was so compelling he began to read ?it again, tuning out his mother’s entreaties to join the holiday festivities downstairs.

Nakamoto’s paper is now famous for describing the architecture of Bitcoin—and the broader notion of using a global network of computers to maintain a common record ?of any kind of transaction. Like other early believers, Armstrong became enamored of the idea of a financial system that could minimize the influence of middlemen and politicians. His fixation grew after a trip to Argentina. He recalls sitting in restaurants in Buenos Aires where prices on menus were covered with stickers that changed almost daily—symptoms of rampant inflation that had wiped out the savings of ordinary people. Bitcoin, he thought, represented a way to store or transfer wealth beyond the control of rapacious states. It was digital gold.

Childhood photograph of Brian Armstrong. Armstrong says he saw the Internet as a tool to change society: “By the time I graduated from college and I was starting to work, I felt maybe I was too late—this Internet revolution had happened.”

Childhood photograph of Brian Armstrong. Armstrong says he saw the Internet as a tool to change society: “By the time I graduated from college and I was starting to work, I felt maybe I was too late—this Internet revolution had happened.”

Courtesy of Coinbase

For this vision to come to pass, though, ordinary people would have to use crypto- currency—and in its early days, that was wildly impractical. Would-be Bitcoiners had to engage in a recondite rigmarole of downloading “wallet” software and then funding the wallet with an offshore bank transfer or working with shadowy middlemen.

Armstrong’s vision was to make the process more akin to buying stock online. In 2012, he left his job as an engineer at Airbnb to make it a reality. He designed Coinbase to allow customers to use traditional bank accounts to purchase cryptocurrency. Whereas buying Bitcoin had once required serious tech chops, the Coinbase version was more like using PayPal or Venmo. And instead of requiring users to store currency using complicated cryptographic keys, Coinbase stored it on customers’ behalf.

There turned out to be plenty of demand for an easy-to-get Bitcoin service; barely a year after launching in late 2012, Coinbase reached the million-customer mark. At a time when concerns about drug dealing and money laundering hovered over the crypto world, Coinbase took pains to comply with know-your-customer laws and other strictures of U.S. banking law. And during last year’s mania, as hundreds of new crypto “coin” investments sprang up, the company—fearful of scams or trouble with the Securities and Exchange Commission—declined to sell the vast majority of them. (Today there are?15 cryptocurrencies with a market cap over? $1 billion, but Coinbase offers trading in? only five of them.) Fretting about compliance didn’t endear Armstrong to the crypto world’s self-styled renegades, whose tastes run towards cocaine, Lamborghinis and anti-government diatribes. But it has put Coinbase on the cusp of regulatory approval for a broker dealer license. It is also in talks to obtain a federal banking charter—a once unthinkable idea for any Bitcoin-related company.

“What matters in financial products is the first-mover advantage and who sets the standards,” says Christian Bolu, an analyst with Sanford C. Bernstein. “Coinbase is assuming that mantle and setting the regulatory agenda.”

Charts show price of Bitcoin and estimated number of Coinbase users

Charts show price of Bitcoin and estimated number of Coinbase users

The company is also a darling of blue-chip venture capital firms, including early investors Union Square Ventures and Andreessen Horowitz. The latter’s $25 million investment in 2013 came as the VC community’s first truly big bet on cryptocurrency. The young CEO, his backers say, quickly revealed an instinct for self-improvement. “Every meeting you have with him, he sends follow-up questions,” says Chris Dixon, a partner at Andreessen. “He’s constantly curious and looking for mentorship.” Armstrong’s bid to better himself is almost pathological. Last year, he obtained his pilot’s license but largely lost interest upon becoming satisfied he could fly a plane. At Coinbase, Armstrong will grill employees about what he, and they, could do better: He once emailed his performance review from HR to the entire staff in order to solicit tips.

He consumes large numbers of books, mostly by audio. His tastes include science and behavioral psychology, but lean to management bromides and great man biographies (Steve Jobs, the Wright Brothers, Dwight Eisenhower). Reading Michael Malone’s Bill and Dave, a history of Hewlett-Packard, prompted Armstrong? to urge employees to approach him anytime with ideas, lest someone else snap them up. “Steve Wozniak, when he was an engineer at HP, brought them the Apple 1,” Armstrong recounts. “He’s like, ‘I built this, I think HP should manufacture it.’ And they said no. And, of course, then he left and created Apple Computer, right?” Armstrong’s nightmare, it seems, would be for success to elude him after being right under his nose.

BUT WHEN SUCCESS did arrive, Coinbase and Armstrong found they had a?lot to learn about managing it. In 2017, as Bitcoin and other digital currencies rose 20-fold or more in value, Coinbase made a killing on trading fees. During the height of the mania, Armstrong has said, Coinbase signed up more than 50,000 new customers a day. This led the company’s website to crash and sputter and leave the site’s engineers to feel like they were holding back an avalanche with Saran Wrap. For some Coinbase customers, the site became a hellish experience, as glitches reigned and orders went unfilled. Twitter and the website Reddit lit up with anguished accounts of money stuck in limbo and customer service tickets landing in black holes, unresolved for days. Dozens of other customers filed complaints with the Better Business Bureau and the SEC.

Hackers, meanwhile, began targeting customers with elaborate phishing and bank fraud scams; Coinbase was at one point spending 10% ?of its revenue on resolving fraud-related issues. Employees weren’t happy, either. The chaos left many engineers and customer service reps working 18-hour days, and some quit in exhaustion.

Another serious hiccup occurred on June 21, 2017, when a high-net-worth “whale” abruptly sold millions of dollars’ worth of the popular currency Ethereum. The result was a “flash crash,” as prices plunged from $320 to under 10¢ before shooting back up again, triggering automated sell orders that resulted in some unlucky investors ditching their whole position for a pittance. Unlike most big stock exchanges, Coinbase hadn’t built a trip wire to halt trading in the case of a panic selloff—a big technical blunder. Armstrong eventually decided to rescue the victims by canceling their side of the trades—a calm-restoring but costly proposition.

At the peak of the crypto boom, Coinbase took another hit to its credibility over its handling of Bitcoin Cash, a spinoff of Bitcoin. It initially declined to support the new cur- rency, then reversed its position after a wave of customer complaints. But in December, just before Coinbase announced the reversal, there was a sudden, unusual uptick in Bitcoin Cash’s price—sparking speculation that Coinbase employees had traded on inside information and bought the currency in anticipation of an influx of new money. According to a former employee, the outcry led Coinbase to abruptly delete two of its channels on the messaging app Slack, which employees used to discuss the crypto market and trading strategies.

Coinbase concluded after an internal investigation that its employees had not engaged in insider trading, and the company tells Fortune it closed the Slack channels out of an abundance of caution rather than any wrongdoing. Given the evolving regulatory regime around cryptocurrency, it’s not clear that trading the currencies based on inside information would even be illegal. Still, the controversy, combined with the site’s customer service woes, sent a message: Just as cryptocurrency was commanding a national spotlight, Coinbase seemed unready for primetime.

Its struggles didn’t scare away investors, however: In August 2017, the startup raised $100 million, giving it a $1.8 billion valuation. That provided Armstrong with the capital and clout to hire talent that could help him right the ship. Coinbase poached longtime Twitter operations executive Tina Bhatnagar to help repair its customer service shambles, and it brought on HP veteran Asiff Hirji as COO. Armstrong has also committed to hiring inclusively: Coinbase, by company rule, interviews three qualified people from underrepresented backgrounds for each open position, and 33% of leadership roles are held by women.

Employees give their boss high marks for staying on an even keel as the crises unfolded. Armstrong himself believes he found his footing as the company grew. At first, he recalls, “I thought [a CEO] had to be a military general, barking orders. But I feel I’ve embraced my own style of leadership, which is a little bit more collaborative. It’s seeking the truth, not trying to be right. I also realized you shouldn’t try to be something you’re not because that’s the worst kind of leadership.”

Coinbase has also doubled its headcount over the past year to nearly 1,000. The extra staffing has helped restore work/life balance and reduce the number of all-nighters. Arm- strong, for his part, is showing his staff that he too can chill out. This includes recapturing some of the vibe from the company’s early days. Back then, Armstrong and Coinbase’s third employee, Olaf Carlson-Wee (who today runs Polychain Capital, the largest U.S. crypto hedge-fund) would team up in epic Halo matches against business VP Fred Ehrsam, a former high school gaming champ. There was also a lot of ping-pong and rock-climbing. Today’s version of chilling out includes Armstrong indulging his penchant for belting Disney songs in the office and at off-site karaoke. One staffer (who calls Armstrong a “great singer”) described the CEO leading a recent Little Mermaid sing-along at a bar in San Francisco’s Castro District.

PART OF YOUR WORLD: Armstrong with staffers at Coinbase’s San Francisco headquarters. The CEO wants the company to eventually become the crypto equivalent of a global bank.

PART OF YOUR WORLD: Armstrong with staffers at Coinbase’s San Francisco headquarters. The CEO wants the company to eventually become the crypto equivalent of a global bank.

Jason Henry—The New York Times/Redux

Customer service, meanwhile, has improved dramatically under Bhatnagar, says Mike Dudas, a Google veteran who runs a crypto-news startup The Block. By mid-2018, Coinbase claimed to have eliminated 95% of its backlogs, and it says it responds to complaints within 10 hours—a far cry from the peak of the Bitcoin mania, when many tickets took a week or longer to resolve.

Of course, if complaints are a far cry from where they were, that’s because Bitcoin mania is too. Cryptocurrency prices have lost more ground since December in percentage terms than the Nasdaq did during the dotcom bust of 2000–02. The research firm Diar recently reported that Coinbase trading volume has dropped from over $20 billion in January to less than $5 billion a month this summer.?Since Coinbase charges commissions that range up to 1.99% of the value of each trade, the simultaneous plummeting of values and volumes is a double whammy. And its margins are under threat from new competition. Over the past year, fintech companies Robinhood and Square and European brokerage eToro have wooed crypto investors with low- or no-cost trading. That ominous drumbeat adds urgency to one of Armstrong’s biggest missions: converting Coinbase into a diversified blockchain-banking giant that isn’t solely dependent on trading revenue.

IT’S A SWELTERING EVENING in Washington, D.C. as Armstrong, clad in a tan suit, sits down for dinner. He and a small retinue are gathered in a hotel restaurant near Dupont Circle, where the food is both expensive and mediocre. Tucking into poached salmon, he reflects on his day meeting lawmakers and senior regulators. Armstrong, ever the Silicon Valley engineer, is not wowed by the political atmosphere. “I think my favorite part was the underground train,” he says, referring to the hidden monorail that whisks elected officials and elite visitors to and from the Capitol. Still, the CEO and his team have been persistent in educating the political class about cryptocurrency and blockchains. And these efforts are paying dividends, as more regulators see the technology as a useful tool rather than an inherently criminal threat—opening more opportunities for Coinbase and its competitors.

In addition to its impending broker-dealer license, Coinbase has won permission to provide custody services for big institutional customers that wish to own cryptocurrency assets. These services could prove lucrative if the company can lure more big players like mutual funds, pensions, and private equity funds to trade with it. There’s already some progress on this front: Earlier this year, its services aimed at professional traders and institutions—primarily wealthy “family offices” and cryptocurrency oriented hedge funds—surpassed its consumer platform as the company’s biggest source of trading volume.

“I don’t think it’s going to be easy,” cautions Richard Johnson, a financial technologies expert with consultancy Greenwich Associates. “The institutional market will be a different one for them to crack,” especially since mainstream fund managers are waiting for a stronger regulatory framework before investing.

Emilie Choi, vice president of corporate and business development. Choi, a veteran of LinkedIn, is a tech M&A specialist; she has helped Coinbase buy nearly a dozen smaller blockchain and finance firms to build out its own empire.

Emilie Choi, vice president of corporate and business development. Choi, a veteran of LinkedIn, is a tech M&A specialist; she has helped Coinbase buy nearly a dozen smaller blockchain and finance firms to build out its own empire.

Stefan Ruenzel—Fortune Video

But recent acquisitions could help Coinbase be ready when that framework emerges. One of its recent hires is Emilie Choi, VP of corporate and business development, who presided over 40 acquisitions at LinkedIn. Since signing on in March, Choi has helped Coinbase snap up nearly a dozen small blockchain and financial firms that could help it provide a broader range of services. Still, for a company that likes to style itself as “the Google of crypto,” Coinbase is still waiting for an encore hit to its trading platform, along the lines of Google adding Gmail or Maps or YouTube to its core search service.

Right now, Coinbase’s most promising project, say Johnson and others, involves a new class of investments known as security tokens, which represent investable assets as tokens on a blockchain. Armstrong has spoken of building an alternative investment market around such tokens, run by Coinbase. Supporters say tokens could be used to convert assets that are relatively illiquid and expensive—privately held companies, for example, or art and other collectibles—into units that are easy to trade.

Trying to understand security tokens and their implications is much like trying to grok the Internet in 1994. Just as people were puzzled by terms like “browser” two decades ago or “app” a decade ago, the vocabulary of blockchain—including “tokens” and “wallets”—is still baffling to many. One of the industry’s better explainers is Coinbase CTO Balaji Srinivasan, a charismatic 38-year-old with spiky hair, salt-and-pepper stubble and eyes that glisten. Srinivasan has written a series of influential essays on tokens’ potential to remake the venture capital industry.

“Blockchains are the most complicated piece of technology since browsers or operating systems,” he says, adding that only a handful of savants possess the expertise in a range of fields—including cryptography, game theory, networking, databases, and cyber-security—to wrangle them. But tokens are different, he explains. They can be built by a much broader class of engineers, while still taking advantage of blockchains’ powerful attributes, such as being tamper-proof and indestructible. And when used to securitize assets, they represent an efficient new way to recognize and distribute ownership.

Balaji Srinivasan, Chief Technology Officer. Srinivasan joined Coinbase this spring when it acquired, a crypto startup he founded. He’s an expert on security tokens, tech that Coinbase thinks could be the foundation of a blockchain-based investment market.

Balaji Srinivasan, Chief Technology Officer. Srinivasan joined Coinbase this spring when it acquired, a crypto startup he founded. He’s an expert on security tokens, tech that Coinbase thinks could be the foundation of a blockchain-based investment market.

Steve Jennings—Getty Images

David Sacks, the venture capitalist and founding COO of PayPal, sees U.S. real estate— a $7 trillion market that is highly illiquid—as particularly ripe to be subdivided and sold via tokens. “It’s like going from an analog to a digital system of ownership. Today, a deed or private security is a piece of paper in a file cabinet somewhere. A token digitizes it,” said Sacks, who is backing a company called Harbor that creates code to ensure tokens comply with security laws. The real estate idea is already moving from theory to reality: The owners of the upscale St. Regis in Aspen, for example, announced in August that they would sell a 19% stake in the hotel in the form of tokens.

Preston Byrne, a financial consultant and cryptocurrency lawyer, argues that the security tokens will make it easier for businesses ?to raise capital, by streamlining regulatory compliance and record-keeping—as information that currently occupies dozens of disparate files gets consolidated onto blockchains. Tokens could also make companies less reliant on investment banks and other middlemen, slashing the costs associated with mergers, acquisitions, and the issuance of equity or bonds. “Coinbase is in a very good position to leverage all that because they’ve got the tech,” Byrne says. “This is where the rubber hits the road, as tech startups start eating big banks’ business.”

The big banks, of course, may eat before they get eaten. Flush with cash and stocked with their own tech talent, financial monoliths like JPMorgan Chase and Citigroup are funding their own blockchain projects. And Coinbase hardly has a monopoly on crypto- currency trading technology; rivals including Circle and Gemini are also jockeying to build institutional trading platforms.

Still, Coinbase remains an investor favorite. Multiple sources confirmed to Fortune that the company is in the final stages of a hefty funding round. In April, when Coinbase acquired crypto company, reports leaked that Coinbase projected its own value at about $8 billion. The company has not confirmed that figure but doesn’t dispute it.

As for the broader cryptocurrency revolution, Armstrong hasn’t lost sight of the ideal of a global payment system independent of banks and governments. To this end, Coinbase is building software called Coinbase Wallet to help ordinary investors navigate the world of tokens. And Armstrong remains even more ambitious than his investors. “I really want to see crypto be used by a billion people in the next five years,” he says.

This article originally appeared in the October 1, 2018 issue of Fortune.

Capital Product Partners: Nearly 12% Yield With Growing Coverage And No K-1

CPLP Overview – 11.5% Yield, Conservative Posture

Image Credit: CPLP, Q2-18 Earnings Presentation

Capital Product Partners LP (NASDAQ:CPLP) is a shipping holding company specializing in vessels with medium and long-term charter contracts, primarily in the product tanker and container sectors. CPLP has superior forward revenue visibility due to the nature of its contracts and staggered roll-offs. This allows it to appeal to more income-focused investors versus direct rate speculators. Despite this strength and a very strong balance sheet, the stock has been trading terribly towards the end of summer 2018.

This report will examine current asset values, cash flow potential and long-term sustainable payout levels. Current NAV is over $4/unit, even with underlying asset values near record lows.

CPLP currently trades at $2.79 with approximately 130 million common units outstanding, for a current market capitalization of just over $360 million. It also has nearly 13 million convertible preferred units (privately held), with a par value and conversion at $9/unit. CPLP common units currently offer a quarterly distribution of $0.08 for a current yield of 11.5%.

Fleet and Employment Overview

CPLP has a fleet of 37 vessels, primarily made up of product tankers and containerships on medium- and long-term charters. The majority of these vessels are on fixed charters to top-tier counter-parties, with current employment shown below.

Source: Capital Product Partners, Q2-18 Presentation, Slide 8

The primary exceptions are its 4 Suezmax crude tankers, of which 3 are on weak spot rates and 1 is on a weaker short-term charter. These weaker rates have been holding back cash flows, but spot rates have recently improved, and I expect significantly better performance by Q4-18.

Fleet Values and Balance Sheet

Although income vehicles are traditionally valued on yield, the underlying asset values are important to intrinsic value. Most high-yield companies have unsustainable payouts backed by weak assets. That’s not the case at CPLP.

We can calculate CPLP’s “intrinsic worth” by figuring out net asset value (“NAV”), which is similar to tangible book value. For shipping firms, this is essentially fleet valuations minus net debt.

According to VesselsValue, our preferred source of live valuations, the current fleet is worth $914 million. Additionally, CPLP has above-market charters (very lucrative charters on 8 containerships and 1 dry bulk vessel), which I value at $208 million using a 10% discount rate to EBITDA, adjusted for vessel depreciation.

Source: VesselsValue, CPLP Fleet Overview

For the liabilities side of the house, as of Q2-18, CPLP reported net debt (6-K, page 2) of roughly $449 million. It also had $117 million in par value of preferred equity. Altogether, the company’s NAV is about $556 million ($1.12 billion in assets minus $566 million in liabilities).

With 129.7 million units outstanding (127.25 million common and 2.44 million GP), current adj. NAV at CPLP is about $4.30/unit, which means the current units trade at a huge 36% discount to intrinsic value. Unlike the vast majority of high-yield plays, CPLP’s yield is simply high due to a weak price, not because of weak assets or unsustainable payouts.

Significant Asset and Yield Upside

CPLP’s current NAV is based on underlying asset values that are near all-time adjusted lows. Sentiment has been terrible after several rough market years, and ship prices reflect this.

If product tanker markets recover substantially by 2020, I anticipate that as earnings increase, the company’s underlying fleet values could surge by $200-300 million and NAV could easily surpass $6/unit. In such a market environment, which I believe is very likely prior to 2020, CPLP’s payout could see significant increases. If an eventual refinancing is achieved, a doubling is possible.

Regulation Tailwind

The IMO 2020 regulations, which limit the use of high-sulfur fuel to a maximum of 0.5%, go into effect in just over 15 months. This new regime will force shipowners to pursue regulation-compliant blends and is poised to add significant demand to the product tanker sector. This is CPLP’s primary exposure, and almost all of its containerships are also on long-term contracts (which means CPLP doesn’t pay for rising fuel costs), so unlike many other shipping companies, its net impact is clearly skewed positive.

On its Q2-18 conference call, Ardmore Shipping (NYSE:ASC), a product tanker peer, shared the following guidance:

… IMO 2020 sulphur regulations are expected to have an impact from mid-2019. The initial estimates suggest that approximately 2 million barrels a day of refined products will display high sulphur fuel oil, with the majority of this moving at sea and over longer distances, with some analysts calling for a 10%-plus increase in product tanker demand.

This surge will likely occur right as CPLP begins to roll over lots of its contracts. It is very possible we could see a surge in DCF, which further strengthens CPLP’s hand towards longer-term deals and potential refinancing.

Stable Results and Long-Term Coverage Capacity

CPLP recently produced steady Q2-18 results, demonstrating strong cash flow even as all other product tanker peers have struggled due to weak spot markets. The company was able to secure strong employment for eight of its product tanker vessels by offering 2-3 year contracts to Petrobras (NYSE:PBR).

Despite arguably strong results, CPLP investors have grown concerned with reported distribution coverage, with the company announcing 1.0x coverage for Q1-18 and 0.9x coverage for Q2-18. The most recent breakdown is shown below. Pay close attention to the line items “capital reserve” and “decrease in recommended reserves.”

Source: Capital Product Partners, Q2-18 Presentation, Slide 5

Why was coverage lower? Suezmax Crude and LIBOR Rise

The primary reason CPLP’s coverage was weaker is due to the very weak Suezmax tanker markets (as noted earlier), where the company has had 4 vessels roll off from $21-26k/day charters into a spot market with Q2 performance around $10k. Three of these vessels are currently operating in the spot markets and 1 vessel is employed with an $18k/day contract.

This impact alone is set to drop cash flow by nearly $4 million a quarter, around 3-4 cents per share. This was slightly offset by a new Aframax dropdown and improved containership rolls, but challenging product tanker markets have left CPLP’s core fleet mostly treading water. The good news is that Suezmax spot rates have stabilized and are set to increase into Q4.

Interest expenses are set to decrease q/q going forward from Q2; however, the y/y comps are difficult because the credit facility is tied to LIBOR, specifically L+325 basis points (3.25%). As the chart below shows, LIBOR shot up in early 2018, but has now stabilized. Assuming $450 million of long-term debt, the increase in LIBOR by roughly 100 basis points (1%) since last year adds nearly $5 million in annual costs, or about 1 cent per quarter.

Source: St. Louis Fed, 3-month LIBOR Chart

The combination of these two negative impacts have been the primary reason why CPLP’s coverage has been reduced. Operating performance has generally been quite strong, but these are difficult markets.

Forward Challenges? Slight Dip in Product Tankers

Product tanker markets are difficult, but medium and long-term charter rates have been mostly stable for the past two years. CPLP has a few challenging forward rolls, such as the 5 product tankers shown below, but with my current market estimate at around $15k/day, we’re looking at roughly a 1 cent impact per quarter, easily offset by just the recent improvements in Suezmax conditions alone.

Source: Capital Product Partners, Q2-18 Presentation, Slide 9

Forward Coverage?

With all of the facts described above, I expect overall reported coverage for both 2018 on average, and most of 2019, to be very close to 1x. The 4 Suezmax crude tankers offer a chance for higher coverage if CPLP can improve those charters. There will also be a natural improvement in reported coverage, as debt loads are reduced and LIBOR rates seem to have plateaued for now.

The rest of the report will discuss how the company’s current reported coverage is incredibly conservative and long-term sustainable levels are actually much higher.

CPLP’s Current Credit Facilities and Repayments

Under its current financing structure, announced in October 2017, and also disclosed in its annual report (20-F, page 92), CPLP must repay $12.9 million per quarter, split into two primary tranches. (Note: Originally it was $13.2 million/qtr, but now it is $12.9 million following the 25th April, 2018, sale of the 2013-built Aristotelis for $29.4 million and the associated $14.4 million debt repayment.)

The full amortization split is also disclosed in its most recent quarterly filings, which shows the impact of these payments.

Source: CPLP Q2-18 SEC Filings, Page 8

As can be seen, the 2015-built “Amor,” the 2016-built “Anikitos” and the 2017-built “Aristaios” each have their own credit facilities of $15.8 million, $15.6 million and $28.3 million respectively. Compared to recent valuations, these three facilities carry leverage of 59%, 56% and 71% respectively, all of which are very typical levels for modern assets. (Note: The Aristaios is on a lucrative 4-year charter, so banks allow slightly higher leverage.)

2017 Credit Facility – Assets and Coverage

Setting those 3 minor facilities aside, we are left with $419 million of debt ($406 million after the July 2018 payment), attached to 34 vessels worth $822 million, and around $200 million worth of above-market charters. Total leverage is a fairly paltry 40%, or a moderate 49% even if charters are excluded.

This facility is split into two parts: Tranche A, covered by 10 modern vessels, and Tranche B, covered by 24 middle-aged vessels.

Tranche A: 54% Leverage, 10 Modern Assets

Tranche A currently carries an estimated $231 million balance and will be repaid through 2023 ($187 million due in 2023). As shown below, the current fleet values for this basket of assets is about $427 million, and leverage is 54%.

Source: VesselsValue, CPLP Fleet Valuations

Tranche B: 44% Leverage, 24 Middle-Aged Assets

Tranche B has an estimated balance of $176 million and will be 100% repaid by Q4-2023 (repaid in 24 equal quarterly installments of $8.4 million). As shown below, the combined fleet valuations are about $395 million. Based on the rigorous amortization schedule, demolition values alone will surpass the corresponding debt by mid-2019, but only one vessel (“Amore Mio”) is even remotely a demolition candidate until at least 2026. This is an unprecedentedly conservative financing facility.

Source: VesselsValue, CPLP Fleet Valuations

Tranche B Amortization: A Major Short-Term Drag

I walked through each of the financing facilities to give a clear fleet picture for CPLP, but the newest 13 vessels all have pretty traditional financing and there’s not much to discuss.

The significant disconnect is related to the 24 older vessels secured by the “Tranche B,” which is so incredibly conservative that demolition values will surpass total debt by April 2019. Based on the current draconian debt paydown structure, CPLP’s core fleet will be entirely debt free by late 2023, but the majority of the fleet has significant life remaining.

A normal expectancy for a product tanker and dry bulk carrier is 20-25 years depending on markets, and containerships should easily do 25-30 years of service. This means that even in heavily bearish outcomes, CPLP doesn’t need to replace much of its fleet until 2026. The sole exception is the 2001-built “Amore Mio,” which is likely to be scrapped in the next few years. This vessel is currently valued at $10.4 million and is likely to generate nearly $10 million from demolition, so there’s virtually no risk here.

Why is this facility a “drag?”

The Tranche B results in distorted reported coverage levels because it forces CPLP to funnel cash to the banks instead of either investing in more growth (dropdowns) or shareholder returns (distributions). Obviously, older vessels need more conservative financing, but to be unable to borrow in excess of demolition levels is more extreme than common sense would dictate.

I believe that once market levels stabilize, rates improve and CPLP locks many of these vessels on medium-term and long-term employment, there is a clear path to a refinancing that could easily result in a $100 million or larger cash-out. Unfortunately, in 2017, spot rates were terrible and the company wasn’t bargaining from a position of strength, so it got stuck with this stinker for now…

If rates improve in 2019-2020, I expect CPLP will be able to easily secured an enhanced financing deal with both lower amortization and a higher overall balance (i.e., enough to pull fresh cash out).

Credit Facilities vs. Long-Term Coverage

Recall earlier, when I highlighted CPLP’s sort of odd distribution coverage chart. We’re now going to dive into the calculations and illustrate how the company is presenting overly conservative numbers, effectively sandbagging its own results.

“Capital Reserve” – What is This?

Virtually every other MLP or LP structure utilizes line items called “maintenance capital reserves” and “replacement capital expenditure reserves.” They are often combined into one line. This is how KNOT Offshore Partners (NYSE:KNOP), Hoegh LNG Partners (NYSE:HMLP), GasLog Partners (NYSE:GLOP), Golar LNG Partners (NASDAQ:GMLP) and Dynagas LNG Partners (NYSE:DLNG) all report their results.

These levels are based on calculations describing what it costs to maintain and what it costs to replace assets down the road. Maintenance is relatively simple: it comes down primarily to drydocking and special surveys. Replacement is the annual allotment required for CPLP or others to set aside to buy a new product tanker in 25 years, a new containership in 30 years, etc.

CPLP does something different: the company reports real-time bank amortization, presenting a sort of “free cash flow” instead of “distributable cash flow.” The difference might appear subtle or meaningless, but it makes a legitimate huge long-term difference. DCF should, in theory, showcase exactly what is a sustainable long-term payout level. Whereas CPLP’s method of FCF only shows what is payable based on that exact quarter of results and debt structure.

Current bank amortization shouldn’t be relevant to long-term DCF. Otherwise, a company can simply buy modern assets, sign a goofy financing deal with almost zero upfront debt payments, and then tout a blatantly bloated number as its DCF. Conversely, if bank amortization is draconian, the reported DCF is sandbagged, because it under-reports the true long-term payout potential. Simply put, CPLP reports these coverage metrics differently than virtually every single peer out there.

In the long term, I believe this is because the company is hopeful it can refinance down the road and secure enough “friendly” bank facilities that its DCF and coverage ratios will soar; however, in the immediate term, the net result is that CPLP drastically under-reports its DCF compared to peers.

“Decrease in Recommended Reserves” – What is This?

When CPLP reports an amount here, it is showing the cost of the distribution in excess of quarterly generated cash flow. Therefore, the company was $1.5 million short during Q2-18. Its immediate FCF supported a 7 cent payout, whereas 1 cent came straight off balance sheet cash.

CPLP had $51 million in cash as of 30th June, so a $1.5 million draw is almost insignificant, but it’s still worth keeping an eye on. Bearish folks would point to this as a major weakness of CPLP, but what these folks are ignoring is the massive underlying asset values and conservative debt structures.

“True DCF”

Without full access to CPLP’s internal calculations, it is difficult to calculate a 100% accurate “correct DCF,” but if we utilize a 20-year replacement curve for crude tankers (4x Suezmax – $55 million, 1x Aframax – $45 million), a 25-year replacement curve for bulkers (1x Capesize – $45 million), 25-year for product tankers (6x MR1 – $30 million, 15x MR2 – $35 million) and a 30-year replacement curve for containers (10x – $50-80 million), then we come up with a replacement valuation of nearly $1.7 billion, or about $1.4 billion net of demolition recoveries.

I’ve designed a spreadsheet that calculates each vessel’s annual replacement reserve against the above inputs, and we reach a required replacement reserve of $54 million. However, this is an overly simplistic calculation which does not discount back for retained fund investment.

Investment of Retained Funds

When you keep a replacement reserve, these funds are not simply stuck on a shelf or hidden in a mattress. They are instead continually invested into new assets. MLPs must use a calculation for the expectation of investment returns beyond general inflation – a general benchmark is to use a 5% annual return placeholder.

When we utilize this same system for CPLP, we reach an annual requirement of $24.5 million in retained funds. Therefore, the “true” replacement reserve calculation is about $6.1 million per quarter.

What About Maintenance Reserves?

This is an important calculation as well. CPLP must include a reserve to fund dry docks, special surveys and regulation compliance (i.e., ballast water treatment). These requirements differ by asset type, but I estimate them to range from about $200k/year for the smallest MR1 assets to about $500k/year for the larger tankers and containerships. Using these assumptions, the company must retain close to $12 million per year. Therefore, the “true” maintenance reserve calculation is about $2.9 million per quarter.

Bringing Them Together – Adjusted Coverage Ratio (1.26x)

When these two buckets are combined ($6.1 million replacement reserve + $2.9 million maintenance reserve), we realize CPLP needs to retain about $9 million per quarter, which is significantly less than the $13.2 million currently earmarked for “capital reserve.” Altogether, this means its long-run DCF capacity is at least $0.03/qtr higher than currently suggested.

Source: Capital Product Partners, Q2-18 Presentation, Edits by Author

Downside Risk?

CPLP is inherently safer than most of its peers due to the strong NAV levels and contract fixtures; however, the company isn’t totally immune from a prolonged market downturn. If the current trade war concerns lead to a major global slowdown or recession, CPLP’s fleet values would likely drop by at least another 10-20%.

As product tankers contracts roll off into this potential weaker market, DCF would also drop, and in the absolute worst case, $0.08/qtr might not be covered in the short term. To model such an impact, we need to consider what happens to fleet values with a 20% haircut, which would reduce NAV by around $183 million ($914 million down to $731 million). That’s a haircut of about $1.40 per units, which brings CPLP’s NAV down from $4.30 to $2.90.

If we add another 25% discount onto the $2.90 NAV to account for market uncertainty and general pessimism, that gets us to about $2.20, which is what I would use as a bear-case terrible market target.

Conclusion: Solid Long-Term DCF and Underlying Value

We’ve approached CPLP both from long-term yield potential and underlying asset values. Our yield analysis shows that the current annual payout of $0.32 is covered by nearly 1.3x under current market conditions, leading to a current DCF yield of nearly 15%. Obviously if market conditions improve, I expect this number to increase significantly.

Our value-based analysis demonstrates that CPLP is worth about $4.30, which is substantially higher than the current pricing. In a full bear scenario, our target price is about $2.20, based off a projected NAV of $2.90. Therefore, we see over 50% upside potential versus about 20% of downside risk.

Bottom line: CPLP is cheap, the balance sheets and payouts are conservative, and I believe there’s around 50% upside potential to base-case markets. My target price is $4.30, which is based on current NAV.

J Mintzmyer collaborates with James Catlin and Michael Boyd on his Marketplace service.

We’re currently working on our quarterly income review, which covers over 50 opportunities including partnerships, preferred equities, and bonds. Please consider joining the discussion at Value Investor’s Edge. Send a private message at any time for more info. I look forward to sharing new ideas soon!

Disclosure: I am/we are long CPLP.

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.

Instagram co-founders resign in latest Facebook executive exit

Rockville, MD (Reuters) – Instagram on Monday said co-founders Kevin Systrom and Mike Krieger have resigned as chief executive officer and chief technical officer of the photo-sharing app owned by Facebook Inc, giving scant explanation for the move.

FILE PHOTO: Instagram founders Mike Krieger (L) and Kevin Systrom attend the 16th annual Webby Awards in New York May, 21 2012. REUTERS/Stephen Chernin/File photo

The departures at Facebook’s fastest-growing revenue generator come just months after the exit of Jan Koum, co-founder of Facebook-owned messaging app WhatsApp, leaving the social network without the developers behind two of its biggest services.

They also come at a time when Facebook’s core platform is under fire for how it safeguards customer data, as it defends against political efforts to spread false information, and as younger users increasingly prefer alternative ways to stay in touch with family and friends. Concerns over Facebook’s business sparked the biggest one-day wipeout in U.S. stock market history in July.

Systrom wrote in a blog post on Monday that he and Krieger planned to take time off and explore “our curiosity and creativity again”.

Their announcement came after increasingly frequent clashes with Facebook Chief Executive Mark Zuckerberg over the direction of Instagram, Bloomberg reported.

In a statement, Zuckerberg described the two as “extraordinary product leaders”.

“I’ve learned a lot working with them for the past six years and have really enjoyed it. I wish them all the best and I’m looking forward to seeing what they build next,” Zuckerberg said.


Koum’s departure in May followed the exit of his WhatsApp co-founder Brian Acton.

That led to a reshuffling of Facebook’s executive ranks, increasing Zuckerberg’s ability to influence day-to-day operations. Zuckerberg ally Chris Cox, who leads product development for Facebook’s main app, gained oversight of WhatsApp and Instagram, which had been given independence when Facebook bought them.

Adam Mosseri, who had overseen Facebook’s news feed and spent a decade working closely with Zuckerberg, became Instagram’s head of product.

Instagram and Facebook have operated independently and the two services barely mention each other. But as regulators have pushed Facebook to improve information safeguards for individual privacy, to combat addiction to social media, and to stop misinformation or fake news, Zuckerberg and other leaders have been under more pressure to monitor units beyond the core social network.


Systrom and Krieger notified the photo-sharing app’s leadership team and Facebook on Monday about their decision to leave, Instagram said. Their departure would be soon, it said. The New York Times first reported the move.

Systrom and Krieger met through Stanford University and worked separately in Silicon Valley before forming Instagram in 2010.

Facebook bought Instagram in 2012 for $1 billion. The photo-sharing app has over 1 billion active monthly users and has grown by adding features such as messaging and short videos. In 2016, it added the ability to post slideshows that disappear in 24 hours, mimicking the “stories” feature of Snap Inc’s Snapchat.

The photo app’s global revenue this year is likely to exceed $8 billion, showed data from advertising consultancy EMarketer.

Increased advertising on Instagram has seen the average price-per-ad across Facebook’s apps decline this year after a year of upswing. A new privacy law in Europe also has affected prices.

Instagram had been hailed in Silicon Valley as a flashy acquisition done right, with the team kept relatively small and Systrom having the freedom to add features such as peer-to-peer messaging, video uploads and advertising.

“I see Mark [Zuckerberg] practice a tremendous amount of restraint in giving us the freedom to run, but the reason why I think he gives us the freedom to run is because when we run, it typically works,” Systrom told Recode last June.

The app’s latest product, IGTV, has been slow to gain traction. Offered through Instagram and as a standalone app, IGTV serves up longer-length video content, mostly from popular Instagram users.

Video content has been a major emphasis for Facebook as it seeks to satisfy advertisers’ desire to stream more commercials online.

Reporting by Paresh Dave and Subrat Patnaik; Additional reporting by Bhargav Acharya; Writing by Peter Henderson; Editing by Gopakumar Warrier and Christopher Cushing

The night a Chinese billionaire was accused of rape in Minnesota

MINNEAPOLIS/NEW YORK (Reuters) – With the Chinese billionaire Richard Liu at her Minneapolis area apartment, a 21-year-old University of Minnesota student sent a WeChat message to a friend in the middle of the night. She wrote that Liu had forced her to have sex with him. founder Richard Liu, also known as Qiang Dong Liu, is pictured in this undated handout photo released by Hennepin County Sheriff’s Office, obtained by Reuters September 23, 2018. Hennepin County Sheriff’s Office/Handout via REUTERS

“I was not willing,” she wrote in Chinese on the messaging application around 2 a.m. on August 31. “Tomorrow I will think of a way to escape,” she wrote, as she begged the friend not to call police.

“He will suppress it,” she wrote, referring to Liu. “You underestimate his power.”

This WeChat exchange and another one reviewed by Reuters have not been previously reported. One of the woman’s lawyers, Wil Florin, verified that the text messages came from her.

Liu, the founder of Chinese ecommerce giant Inc, was arrested later that day on suspicion of rape, according to a police report. He was released without being charged and has denied any wrongdoing through a lawyer. He has since returned to China and has pledged to cooperate with Minneapolis police.

Jill Brisbois, a lawyer for Liu, said he maintains his innocence and has cooperated fully with the investigation.

“These allegations are inconsistent with evidence that we hope will be disclosed to the public once the case is closed,” Brisbois wrote in an email response to detailed questions from Reuters.

Loretta Chao, a spokeswoman for, said that when more information becomes available, “it will become apparent that the information in this note doesn’t tell the full story.” She was responding to detailed questions from Reuters laying out the allegations in the woman’s WeChat messages and other findings.

Florin Roebig and Hang & Associates, the law firms representing the woman, said in an email that their client had “fully cooperated” with police and was also prepared to assist prosecutors. Florin, asked if his client planned to file a civil suit against Liu, said, “Our legal intentions with regard to Mr. Liu and others will be revealed at the appropriate time.”

Representatives for both Liu and the student declined requests from Reuters to interview their clients.

The police department has turned over the findings of its initial investigation into the matter to local prosecutors for a decision on whether to bring charges against Liu. There is no deadline for making that decision, according to the Hennepin County Attorney’s Office.

The Minneapolis police and the county attorney declined to comment on detailed questions from Reuters.

Reuters has not been able to determine the identity of the woman, which has not been made public. But her WeChat messages to two friends, and interviews with half a dozen people with knowledge of the events that unfolded over a two-day period provide new information about the interactions between Liu and the woman, a student from China attending the University. founder Richard Liu, also known as Qiang Dong Liu, is pictured in this undated handout photo released by Hennepin County Sheriff’s Office, obtained by Reuters September 23, 2018. Hennepin County Sheriff’s Office/Handout via REUTERS

The case has drawn intense scrutiny globally and in China, where the tycoon, also known as Liu Qiangdong, is celebrated for his rags-to-riches story. Liu, 45, is married to Zhang Zetian, described by Chinese media as 24-years old, who has become a celebrity in China and works to promote

As the second-largest ecommerce website in the country after Alibaba Group Holding Ltd, the company has attracted investors such as Walmart Inc, Alphabet Inc’s Google and China’s Tencent Holdings.

Liu holds nearly 80 percent of the voting rights in Shares in the company have fallen about 15 percent since Liu’s arrest and are down about 36 percent for the year.


Liu was in Minneapolis briefly to attend a business doctoral program run jointly by the University of Minnesota’s Carlson School of Management and China’s elite Tsinghua University, according to the University of Minnesota. The doctoral program is “directed at high-level executives” from China.

Liu threw a dinner party on August 30 for about two dozen people, including around 20 men, at Origami Uptown, a Japanese restaurant in Minneapolis where wine, sake and beer flowed freely, according to restaurant staff and closed circuit video footage reviewed by Reuters.

Liu, who Forbes estimates is worth about $6.7 billion, ordered sashimi by pointing his finger at the first item on the menu and sweeping it all the way down to indicate he wanted everything, one restaurant employee said. The group brought in at least one case of wine from an outside liquor store to drink along with the dinner, according to the restaurant staff.

Security video footage from the restaurant shows the group toasted each other throughout the night.

Later the woman told a second friend in one of the messages that she felt pressured to drink that evening.

“It was a trap,” she wrote, later adding “I was really drunk.”

The party ended around 9:30 p.m. The tab: $2,200, the receipt shows. One inebriated guest was helped out of the restaurant by three of his associates, according to the restaurant security video footage.

Liu and the woman then headed to a house in Minneapolis, according to one person familiar with the matter. Another source said that the house had been rented by one of Liu’s classmates in the academic program to give the class a place to network, smoke, drink whiskey and have Chinese food every night.

But they did not go in. Liu and the student were seen outside the house before Liu pulled her into his hired car, a person with knowledge of the incident said.

In the WeChat message to one of her friends sent hours later, the student said Liu “started to touch me in the car.”

Slideshow (2 Images)

“Then I begged him not to… but he did not listen,” she wrote.

They ended up back at her apartment, according to sources with knowledge of the matter.

Reuters could not determine what happened over the next two hours. According to the police report, the alleged rape occurred at around 1 a.m.

The woman subsequently reached a fellow University of Minnesota student who notified the police, according to two sources and her WeChat messages.

Minneapolis police came to her apartment early that morning while Liu was there, but made no arrests, another source familiar with the situation said. Reuters could not determine exactly what occurred during the police visit, but the source said the woman declined to press charges in Liu’s presence.

In a WeChat message with one of her friends, she asked her friend why the billionaire would be interested in “an ordinary girl” like her.

“If it was just me, I could commit suicide immediately,” she wrote. “But I’m afraid that my parents will suffer.”

By Friday morning, she also wrote to one of her two friends that she had told several people about what had happened, including the police, a few friends and at least one teacher. She wrote that she would keep her bed sheets. “Evidence cannot be thrown away,” she wrote.

On Friday afternoon, the student went to a hospital to have a sexual assault forensic test, the source said.

Police officers arrived at a University of Minnesota office shortly after an emergency call around 9 p.m that night. The student was present at the office, alongside school representatives, and accused Liu of rape, the source said.

Representatives for the University of Minnesota declined to comment on detailed questions from Reuters.

Liu came to the university office around 11 p.m. while police were there, according to the person familiar with the matter. As an officer handcuffed him, Liu showed no emotion. “I need an interpreter,” he said, according to the source.

Liu was released about 17 hours later. Minneapolis police have said previously that they can only hold a person without charges for 36 hours.  

Within days, Liu was back in China, which has no extradition treaty with the United States.

“Liu has returned to work in Beijing and he continues to lead the company. There is no interruption to’s day-to-day business operations,” Loretta Chao, the spokeswoman, told Reuters.

Additional reporting by Blake Morrison and Christine Chan in New York, Adam Jourdan and Engen Tham in Shanghai, and Cate Cadell in Beijing; Editing by Paritosh Bansal and Edward Tobin

American Airlines Has Changed Something Very Basic About Its Service. It Just Hasn't Told Passengers Yet

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

Airlines are run with very little room for maneuver.

Once the system breaks down in a single place, it can have a terrible knock-on effect. 

And, of course, every new decision taken at the top has little consequences lower down.

It can all add up.

Have you noticed, for example, that the boarding time on your American Airlines boarding pass doesn’t always correspond with when the plane actually boards?

Yes, sometimes it’s delayed. Because delays are an integral part of flying enjoyment.

Sometimes, though, flights are boarding early. 

After all, there’s only one aisle and scores of fraying tempers.

There’s also the pressure all American employees feel to get the planes out on time.

Still, it can be annoying to turn up at the gate on time for boarding and discover that, oh, it’s already begun.

Cue the involuntary spasms caused by wondering whether there’ll still be overhead bin space.

Why, though, doesn’t American have the correct boarding time on its boarding passes?

View From The Wing’s Gary Leff offers darkly: “This is a known issue at American, and one they’ve chosen not to spend on the IT to fix.”

I asked American the inside story.

An airline spokesperson offered: 

It is not that we don’t want to update our IT. We have many projects we are working on, and we expect the fix will be in place in November.

In essence, then, the airline simply hasn’t got around to it.

Can’t you see that it’s busy?

Actually, I’m sure it is. Management puts all sorts of pressure on employees to deliver on a whole range of new parameters, as the big airlines fight for marginally more business and try to squeeze additional revenue from passengers.

Someone has to implement all that. That’s not always easy.

And have you seen how often airline IT systems break down? Why, American’s last vast issue was only in June.

Honestly, dear passenger, you can be so annoyingly inconsiderate sometimes.

Just wait in line, would you?

Retirement: How To Earn High Income Without The High Risk

Generally, a vast majority of folks, especially retirees, associate the Closed-End Funds [CEFs] with high risk, high leverage, and high fees. Many consider them unsafe and unsuitable for long-term holdings. Some others would argue that they have no place in a conservative or a retirement portfolio. Though it is easy to understand why, we tend to have a different opinion. There is no doubt that at times, their market prices can be volatile, more than the broader market-indexes or dividend stocks. It is also difficult to separate the good funds from the bad ones. We believe that in spite of their obvious risks if used with the appropriate diversification and right proportions, they can provide high-income, moderate risk in line with the broader market and at the same time provide market-matching or market-beating returns. It is not about all in or nothing; it is about the right proportions. How much is appropriate? The right amount of exposure to a specific type of investment usually depends on several factors including an individual’s goals, risk tolerance, and personal situation.

We will go over both the benefits and the risks of investing in this kind of portfolio strategy. However, we believe that there are more positives than the downsides and that’s why it deserves a place in your overall strategy. At the same time, they are not for everyone. First, if your investment pool is large and your income needs are less than 3-4% of your investment pool, there may not be a need at all to go for a higher income portfolio. Second, if you cannot tolerate slightly higher volatility (than S&P500), even while you are receiving the high income, you should probably stay away. Lastly, if you do not care about income, but just the total return, obviously these investments are not for you.

We will run several back-testing examples to provide the readers a glimpse of benefits versus risks in comparison to the broader market indexes. In fact, if used in the right proportions in terms of allocation, a CEF portfolio may provide higher income, lower risk, and the longevity of an income-focused portfolio.

In the end, we will provide some updates on our 4-year-old model portfolio, “The 8% Income CEF Portfolio”, which we have maintained here on SA and provided regular updates/reviews. Incidentally, this portfolio is also part of our Marketplace HIDIY service.

Back-Test # 1: (10-CEF Portfolio – Investment over 10 years)

CEFs selection and strategy:

We selected 10 CEFs that were introduced in 1994 or earlier. Selecting CEFs with such a long history is a tough call since a lot of popular CEFs today did not exist prior to 2004 or 2005. Another important criterion for CEFs selection was that we wanted each CEF to belong to a different asset class, and would avoid duplicity as much as possible.

By selecting 1995 as the beginning year, we would be making purchases at increasingly higher prices, especially in 1997-1999. But the subsequent bear market from 2001 to 2003 would even out our cost basis. By selecting the period from 1995 to 2017, we are able to include two full-blown bear markets and two bull-market periods.

We fully understand and appreciate the fact that this process would introduce some element of selection bias. The first factor is that a fund with such a long history would (more than likely) be a successful one. But that may not be entirely true, as there would be others with mediocre performance. However, a selection strategy of picking the best fund among its respective asset class can avoid the pitfalls. Secondly, there may be the beginning year bias. To remove the beginning-year bias, we have included an additional back-testing model (please see the model#3), which should help remove any doubts on that front.

Here is the list of 10-CEFs that we selected going back to 1994-1995:

CEF Name




John Hancock Financial Opportunities Fund


Equity Securities – U.S. Banks, Regional Banks, Thrifts/Finance holding cos.


Tekla Healthcare Investors


Healthcare and Medical Technology


Alliance World Dollar Government Fund I


High Yield Government and Corporate Fixed Income Securities


Cohen & Steers Total Return Realty Fund


Real-Estate – Equities and Debt Securities


PIMCO Commercial Mortgage Securities


Mortgage-backed Securities, Non-Investment Grade Securities


New America High Income Fund


Corp High Yield Bonds


Morgan Stanley Emerging Markets Fund


Emerging markets Equity Securities


Liberty All-Star Equity Fund


Equity Securities – US Companies


John Hancock Premium Dividend Fund


Preferred Stocks and Dividend Equity Securities


Blackrock Muni-Yield Fund


Municipal Bonds – Investment Grade (Tax Exempt)

## Blackrock Muni-Yield Fund (NYSE: MYD) is a Tax-Free Municipal Fund. It may not be suitable inside a 401(k) or IRA account. However, one can choose a taxable municipal fund.


  • We invested $10,000 every year from 1995 to 2004 (first trading day, every January). Over 10 years, total original investment amounted to $100,000.
  • We would withdraw 6% income from this portfolio (on a yearly basis at the year-end) on the invested capital and take an increase of 2.5% per year for inflation adjustment.
  • Income withdrawals would start right from the first year.
  • The begin- date for the back-test is January 1st, 1995. End-date is December 31st, 2017.

10-CEF Portfolio Return & Income Calculations: – 6% (with inflation) Income Withdrawn:

S&P 500 Return & Income Calculations:– 6% (with inflation) Income Withdrawn:

Performance comparison of the 10-CEF portfolio with S&P 500:

10-CEF Portfolio

(From 1995-2017)


(From 1995-2017)

Total Original Investment

(Contributions made for first 10 years)



Total Income Withdrawn



Net Portfolio Value (after income)



Compounded Annualized Return (in addition to income)



Net Portfolio Value (No income withdrawn)



Compounded Annualized Return (when no income is withdrawn)



*Annualized returns were calculated on the basis of 18 years (not 23 years) since investments were made over 10 years.

**Performance of S&P500 has been taken from the Vanguard 500 Index Fund.

As you could see, for nearly 24 years, the 10-CEF portfolio has performed very well. It provided inflation adjusted 6% income every year and still provided nearly 5% compounded return in terms of capital appreciation. However, if you had put the same amount in S&P 500, after taking inflation-adjusted 6% income every year, S&P 500 did not perform nearly as well and ended up providing very little appreciation (0.86%) in the capital.

Back-Test # 2: (10-CEF Portfolio – Investment over 20 years)


  • We invested $10,000 every year for 20 years from 1995 to 2014 (first trading day, every January). Over 10 years, total original investment amounted to $200,000.
  • We would withdraw 6% income from this portfolio (on a yearly basis at the year-end) on the invested capital and take an increase of 2.5% per year for inflation adjustment.
  • Income withdrawals would start right from the first year.
  • The begin-date for the back-test is January 1st, 1995. End-date is December 31st, 2017.

Performance of CEF Portfolio – 6% (with inflation) Income Withdrawn:

Performance of S&P500 – 6% (with inflation) Income Withdrawn:

Performance comparison of the 10-CEF portfolio (contributions for 20 years) with S&P 500:

10-CEF Portfolio

(From 1995-2017)


(From 1995-2017)

Total Original Investment

(Contributions made for first 20 years)



Total Income Withdrawn



Net Portfolio Value (after income)



Compounded Annualized Return (in addition to income)



Net Portfolio Value (when no income withdrawn)



Compounded Annualized Return (when no income is withdrawn)



*Annualized returns were calculated on the basis of 13 years (not 23 years) since investments were made over 20 years.

**Performance of S&P500 has been taken from the Vanguard 500 Index Fund.

As you can see, when we do not draw any income, CEF Portfolio performs better than S&P500 leaving a larger balance in the end. However, performance improvement becomes more prominent and significant when we are drawing a constant 6% income (with annual 2.5% increments for inflation).

Back-Test # 3: (10-CEF Portfolio – Multiple Beginning Years)

We wanted to remove the beginning-year bias if there was any, so we decided to include another back-testing model. We would perform the same test (Back-test#1) for our 10-CEF portfolio and S&P 500 with commencement year to move by a year each time (from 1995-2016).


  • We invested $10,000 every year for 10 years from 1995 to 2014 (first trading day, every January). Over 10 years, total original investment amounted to $100,000.
  • We would withdraw 6% income from this portfolio (on a yearly basis at the year-end) on the invested capital and take an increase of 2.5% per year for inflation adjustment.
  • Income withdrawals would start right from the first year.
  • We conduct a series of tests, each time we change the commencement date. We start with 1995, then with 1996, 1997, 1998 and so on until the year 2016.
  • For each back-test series, the End-date is December 31st, 2017.

Here are the results, in a graphical form. The results favored the 10-CEF portfolio strongly until the year 2008. Only after the year 2009, S&P 500 started outperforming the 10-CEF portfolio slightly.

Note: In the graph, starting years from 2009 to 2016, the investment was less than 100,000 (10K per year). However, they were normalized to a base of 100,000.

Up until the year 2008-2009, the 10-CEF portfolio beat S&P 500 almost every time, irrespective of the year you may have started this portfolio. After 2009, however, both have performed more or less even, but S&P500 has taken a small but clear lead due to the very strong bull market of the last 10 years. The chart also shows that if you were a buy-and-hold income investor, investing in the S&P 500 index during 1995-2001 was not such a good idea.

Backtesting Summary/Remarks:

Even with these three extensive back-testing models, we do agree that some element of selection bias could remain as to the kind of CEFs we picked. One possibility could be that since we were looking for CEFs that had 25+ years of history, a majority of them probably had a better-than-average track record, and the ones with bad track records did not survive for this long, so never made to our list.

In our view, the success of 10-CEF portfolio boils down to the following factors:

  • Wide diversification among varied asset classes; some of them have low correlation with the stocks.
  • Investment over long periods (in a staggered manner), in this case over 10 years. By doing so, even though we bought at the very peak prices during 1996-1999, but we also bought at the bottom during the recession of 2001-2003 at the bottom.
  • Selection of CEFs that have a good track record of maintaining their NAVs (Net Asset Values). We need to be careful to be selective about which CEFs we buy into. Not all are equal in terms of quality.
  • Selected CEFs should have yields in excess of 6-8% and possibly have positive UNII (Undistributed Net Investment Income). This may not apply to some categories of CEFs.

Risks to CEFs Investing:

Obviously, there are some risks to CEF investing, especially when the entire portfolio is based on CEFs. There are several well-known risks.

  • A vast majority of CEFs use high leverage, generally in the range of 20-35%. Some use even higher. This leverage helps them earn higher investment income which then supports a high level of distribution rates. However, leverage works both ways. It does wonders in good times, but during recessionary times it can really hurt their bottom lines.
  • CEFs are generally known for high fees. Normally a part of these fees covers the interest on the leverage being used. However, NAVs are reflected net of fees, and there are no separate fees that the investor has to pay.
  • CEFs provide high distributions, ranging from 6-10%. However, many times, the high distribution may consist of ROC (return of capital). The ROC is not always bad, but it is difficult to separate the good ROC from a bad one.
  • Their market prices normally differ from their NAVs, and this difference is known as discount or premium. To an investor, a discount is obviously better as you would be buying it less than what it is worth. But sometimes, a CEF may be trading at a large discount for a valid reason, for example, its UNII is consistently negative and is not sufficient to support the distribution and a distribution cut may be imminent. When a distribution cut happens, not only the income will reduce, but the market price will fall as well. Another reason could be its track record in terms of NAV has been less than desirable.

In our view, the track record of a fund matter, especially with regards to its NAV. Of course, the comparison should be made within the asset class that the CEF invests in. For example, we know that all energy-related CEFs had performed poorly during 2015-2017 energy prices bust, but still, there will be some who have performed better than others within their class. Also, when we talk about performance, it is better to compare NAV performance rather than the market price.

Our Current “8% Income CEF Portfolio”

We started this model portfolio in October of 2014, and since then, we have published several periodic updates on SA. At the outset, this portfolio had two simple goals; first, to provide 8% income (by way of dividends and distributions); and secondly, provide some capital appreciation over the long term. For income-seeking investors, 8% income will allow a withdrawal rate of up to 6% and leave 2% for growth.

Author’s Note: This model portfolio is part of our “High Income DIY Portfolios” SA Marketplace service. For more details, please see at the top of the article, just below our logo.

In this model portfolio, we allocated $100,000 initially, and another $100,000 was allocated in the next 12 months ($8,333 in 12 installments). Thus the total cost basis for the portfolio stands at $200,000 (excluding the reinvested dividends).

Cash added/contributed:

Initial Investment 10/17/2014:


From Nov. 1st, 2014 until Oct 1st, 2015


12 installments of $8333. 33

TOTAL Contribution (Cost basis)


In this income-centric portfolio, we utilized a diversified group of CEFs. Initially, we selected 12 funds and added a few more in the subsequent years. This approach has provided us a broad diversification, high distributions, and exposure to different types of assets such as Equity, Bonds/Credit Securities, Utility, Infrastructure, Energy MLPs, Preferred Income, Floating-Rate Income, Healthcare, etc. Currently, we have three individual company stocks, one ETF, one ETN, and 11 CEFs.

Here is the current portfolio consisting of 16 securities:

Fund/Stock Name


Fund’s composition


DNP Select Income (NYSE: DNP)


Utility (80%)


Kayne Anderson MLP (NYSE: KYN)


(MLP – Master Limited Partnership)


Guggenheim Strategic Opp Fund (NYSE: GOF)


Equity CEF fund


Columbia Seligman Premium Tech Growth (NYSE: STK)


Equity CEF fund


Nuveen Muni High Inc Opp (NYSEMKT: NMZ)


Muni Tax-Free ( Tax-free yield)


PIMCO Dynamic Credit Income (NYSE: PCI)


Global Income, including corporate debt, mortgage-related and other asset-backed securities




Debt obligations and other income-producing securities





Preferreds 90% (This is an ETF, not CEF)




REIT (Real Estate) CEF


COHEN & STEERS REIT & Preferred Income Fund (NYSE: RNP)


Preferred is 48%, 50% REIT


Cohen & Steers Infrastructure (NYSE: UTF)


Utility+Infrastructure (50% is International)


UBS ETRACS Monthly Pay 2xLeveraged ETN (NYSEARCA: CEFL)


Exchange Traded Note (based on the index of CEFs)


Tekla Healthcare Investors ( HQH)




Annaly Capital Management, Inc (NYSE: NLY)




Main Street Capital Corp (NYSE: MAIN)


BDC (Business Development Co)


Ares Capital Corp ( ARCC)




Total dividends earned since portfolio inception: $59,263*

(*this includes $1,382 from securities already sold)

For the year 2018, the projected yield is in the range of $17,000, which will be 8.5% yield on cost.


Dividends collected until 09/17/2018



Cost basis excluding dividends (09/17/2017)



Portfolio balance (09/17/2018)



Net profit/Loss (incl. dividends) (09/17/2018)



Return on total contributed capital, including un-deployed funds


Here is the portfolio as of 09/17/2018. The gains/losses shown below are without counting dividends, as they are not re-invested into original securities, but get deposited as cash.


The table below shows the funds in the portfolio in the order of performance (from best to worst) as of Sept. 17, 2018. The performance has been calculated and sorted after including the dividends.

Comparison with 60:40 Stock-Bond Portfolio:

Here is the performance comparison with a typical Stock-Bond portfolio.

Our Stock-Bond portfolio allocates in the ratio of 60:40 to stocks and bonds. The Stock/Bond portfolio mirrors the invested amounts with 8% CEF Portfolio (at different times). The hypothetical stock/bond portfolio has a 40/20/40 allocation to Vanguard Total Stock Market ETF (NYSEARCA: VTI), iShares MSCI EAFE – International (NYSEARCA: EFA), and (Vanguard Total Bond Market ETF (NASDAQ: BND). So far, the 8% Income Portfolio has beaten the Stock/Bond (60/40) portfolio on both total return and income for the majority of the time.

As of 09/17/2018

Total value

Dividends (since inception)

8% Income portfolio



60:40 Stock/Bond portfolio



Closing Remarks:

We believe an all CEF portfolio presents a viable alternative to an all-stock or a balanced stock-bond portfolio, however, as part of a broader strategy and allocation model. Obviously, the primary benefit of this portfolio is the constant stream of cash income that it generates, and one does not need to sell shares to withdraw income. It appears that in good times (bull market), this portfolio, after including the dividends, should at least match the broader market performance. However, more importantly, during tougher times, the cash dividends would help protect the downside considerably, as is evident from back-testing models. The constant stream of income will also help the investor to resist the temptation to sell at the worst time.

With the help of several backtesting models and from the past four-year performance from our current model portfolio, in our opinion, we feel this 8% model will likely perform better than a broader market index fund, especially if we need to withdraw high levels of income on a consistent basis. So, we believe this portfolio would have a special appeal to income-seeking investors.

It is important to point out that this portfolio will not protect the investor from a broader market crash or correction. To avoid getting caught in a situation like 2008, we always recommend that one should invest gradually over a period of time, adding equal sums of money every time, which would hopefully smoothen the ride.

Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.


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.

55 Straight Hikes, 8% Yield, Strong Long-Term Growth

Looking for consistent distribution hikes and consistent growth? You may want to take a look at Holly Energy Partners L.P. (HEP), whose management has achieved quite a long string of distribution hikes and impressive CAGR since the company’s IPO.


HEP is a Delaware LP formed in early 2004 by HollyFrontier (HFC) and is headquartered in Dallas, Texas. HEP provides petroleum product and crude oil transportation, terminalling, storage, and throughput services to the petroleum industry, including HollyFrontier Corporation subsidiaries.

HEP’s assets include:

(Source: HEP site)

(Source: HEP site)


Management has raised the quarterly distribution for 55 straight quarters, delivering a 7.4% CAGR since HEP’s IPO.

(Source: HEP site)

One of HEP’s strengths is that it has been able to keep raising its distributions through various boom and bust cycles. The most recent downturn, in 2014 – early 2016, saw many LPs cutting or eliminating their payouts in order to stay afloat. HEP’s management, however, kept the payout party going right through the downturn.

HEP pays in the usual Feb./May/Aug./Nov. cycle for LPs and its unitholders get a K-1 at tax time. Its next payout should go ex-dividend ~11/2/18. Given its past quarterly hike increments, the November payout will probably bring the distribution to ~$0.665/unit.

(Source: HEP site)

Although the quarterly hikes have been consistent, HEP’s distribution coverage has been less than robust over the past four quarters, running between ~.94X in Q3 ’17 and 1.04X in Q1 ’18.

There’s some seasonality with HEP’s operations, particularly its joint venture UNEV pipeline, as management pointed out on the Q2 ’18 earnings call:

Coverage was adversely effected by typical seasonal factors on UNEV, while we expect a significant improvement in the second half of 2018 to the contractual tariff escalators effective on July 1. We continue to expect our coverage ratio to be 1 times or higher for the full year 2018.”


If you’re more interested in a relatively short-term trade, here’s a February 2019 covered call trade which we just added to our free Covered Calls Table. The February $35.00 call strike has a bid of $.55, a bid less than HEP’s most recent $.66 payout.

These are the three main profitable scenarios for this trade – static, assigned before the ex-dividend date, and assigned after the second ex-dividend date. $2.05 leaves quite a bit of headroom between HEP’s $32.95 price and the $35.00 strike, giving ample coverage if HEP’s price/unit should rise and the units were to be assigned prior to the ex-dividend date.

We’ve added this February trade for HEP to our free Cash Secured Puts Table, where you can find more details for it and over 30 other trades.

If you’re leery of buying HEP at its current price level, the February $30.00 put strike pays $.90 and gives you a breakeven of $29.10.


HEP’s coverage also was ~1X in the previous four quarters, running from .93X to 1.07X. Although EBITDA rose 29% and DCF rose 14.7% in the most recent four quarters, HEP’s unit count rose by 64.5% due to the big IDR swap deal that HEP did with HFC in October ’17.

That deal eliminated the incentive distribution rights held by HEP’s GP and converted HEP GP’s 2% general partner interest in Holly Energy into a non-economic interest in exchange for the issuance by Holly Energy of 37,250,000 of its common units to HEP GP.

(Source: HEP site)

Year-over-year, HEP has had good growth over the past four quarters due to its acquisition of the remaining interests in the SLC and Frontier pipelines in late 2017.

Sequentially, it looks like HEP’s earnings peaked back in Q4 ’17, but that quarter’s EBITDA and net income were pumped up by a $36.3M one-time gain related to the re-measurement to acquisition date of the fair value of HEP’s preexisting equity interests of the SLC and Frontier pipelines. Without that one-time gain, EBITDA would’ve been ~$88M, very similar to HEP’s Q1 ’18 EBITDA figure.

As we mentioned earlier, Q2 ’18 had some seasonal headwinds for HEP, which produced lower earnings than Q1 ’18.


Segment revenue has risen by 15.3% so far in 2018, with the biggest gain coming from third-party pipelines and terminals, which rose by 60%. Pipelines and terminals contributed 87% of operating income in Q1-Q2 ’18, which was up by ~16%.

(Source: Q2 ’18 10-Q)


Dilution – The IDR deal has been somewhat dilutive to the distribution coverage in 2018. However, management is still targeting full-year 2018 distribution coverage of 1X, with higher coverage ratios in the second half of the year due to contractual tariff escalators.

Debt – In a capital-intensive industry, such as energy infrastructure, debt is often the gorilla in the room. Fortunately, HEP’s management has been able to reduce its net debt/EBITDA leverage to 3.75X, as of Q2 ’18 vs. 4.26X in Q2 ’17. (More on this in the Financials section.)

Growth Projects:

As we look toward the second half of 2018, HEP plans to continue expanding our logistics infrastructure to serve the growing distillate demand in the Permian Basin. In May, we announced our intention to construct a new truck loading rack in Orla, Texas. This facility will be able to deliver up to 30,000 barrels per day of diesel that would otherwise be rail or tuck into the area. Construction is underway, so we expect this rack to be operational by the end of the year.” (Source: Q2 ’18 call)

HEP’s crude gathering volume trended lower in 2016 vs. 2015 and was ~flat in 2017. However, 2018 barrels/day volume has set company records, surpassing 2015’s volume.

(Source: HEP site)

Analysts’ Price Targets:

At $32.95, HEP is 11.5% above analysts’ average price target of $29.56 and is just about even with the $33.00 high price target.


Although HEP has outperformed the benchmark Alerian MLP ETF (AMLP) in 2018, it trails the broader market. However, it has caught a bid over the past quarter and has outperformed the S&P 500, rising 11.24%.


Investors are giving HEP units a premium valuation over other midstream high yield companies. Those relentless quarterly hikes have created a lot of goodwill for HEP in the market, leading to higher P/book, P/DCF, P/sales, and EV/EBITDA, even with HEP’s lower distribution coverage and yield.

Another factor that has created a strong following for HEP is its long-term track record – management has delivered strong revenue, EBITDA, and DCF growth for unitholders since the IPO:

(Source: HEP site)


We show HEP’s trailing net debt/adjusted EBITDA to be at 3.75 vs. management’s figure of 4.2X for net debt/EBITDA, due to higher adjusted EBITDA of $369.93M and net debt of $1388.94M. Management expects EBITDA leverage to be around 4X by the end of 2018, which would be roughly in line with other high-yield midstream companies we cover.

Total debt/equity has inched down to 2.98X since Q2 ’17, as have HEP’s ROA, ROE, current ratio, and operating margin. Compared to other high-yield midstream companies we cover, HEP has a much better ROE and operating margin.

Debt and Liquidity:

HEP has a $1.4B senior secured revolving credit facility expiring in July 2022 and $500M in Senior Notes, which expire in 2024. As of 6/30/18, its current liquidity was ~$507M.

(Source: HEP site)

HEP also has a continuous offering program under which they may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200M. In Q1-Q2 ’18, HEP issued 17,1246 units under this program, providing ~ $5.2M in gross proceeds.


This is one for the watch list. There’s a lot to like about HEP – we just don’t like the current price as an entry point. Long term, HEP’s management has a good track record in terms of ROE, DCF, EBITDA, and DCF growth.

However, its current price/unit of $32.95, which sits right near the high price target of $33.00, and its higher valuations vs. other high-yield midstream firms, give us pause. We rate HEP a Hold and intend to either wait for a pullback and/or perhaps sell cash secured puts below HEP’s price/unit, in order to get paid to wait and have a lower breakeven.

All tables furnished by unless otherwise noted.

Disclaimer: This article was written for informational purposes only and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

CLARIFICATION: We have two investing services. Our legacy service,, has focused on selling options on dividend stocks since 2009.

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.

Additional disclosure: We may sell cash secured puts below HEP’s price/unit in the near future.