The Project Veritas Twitter Videos Show the Conservative Backlash Against Moderation

Conservative activist James O’Keefe has returned. In a series of illicitly filmed videos with current and former Twitter employees, the right-wing provocateur claims to have exposed partisan bias at the social network. The offensive may have been inevitable. While O’Keefe’s Project Veritas has mostly focused on the media and liberal institutions, recent moves by platforms like Twitter, Facebook, and YouTube to more aggressively moderate user content have left them exposed them to this exact sort of attack.

The Project Veritas videos, filmed without apparent awareness or consent, show a range of selectively edited insights from inside Twitter. One engineer for the company says that Twitter would theoretically comply with a Department of Justice investigation into Trump’s Twitter account. Another video shows a series of current and former employees explaining “shadowbans,” a practice by which Twitter will sometimes make it more difficult to find and view a user’s tweets, rather than banning that person outright. And a third, released Monday, explains how the company tracks user behavior and screens direct messages for prohibited content, like porn spammers and unsolicited dick pics.

Many of the employees filmed used sensational language, but they also thought they were talking candidly to strangers at a bar. It’s not exactly unusual to embellish your job—and to elide its nuances—to a potential new friend or romantic interest.

And in any case, none of these gotcha moments amount to anything revelatory. Tech companies comply with valid legal investigations all the time; if anything, Twitter has historically taken a relatively hardline stance against federal intervention. Shadowbanning is such a closely guarded secret that Twitter details the practice in its easily accessible online Help Center. Tracking is how Twitter—and every free platform online—sells ads. And Twitter employees don’t read every single direct message sent on the platform—an insurmountable task—but the company does screen instances in which abusive behavior is reported.

These videos don’t prove that Twitter has a partisan bias against its far-right conservative users. (Indeed, they’re some of its most prolific users.) They do show, though, that the right-wing backlash against tech giants has reached a new height. With every new policy intended to curb abuse, Twitter, YouTube, Facebook, and other platforms invite rancor. The new rules have been necessary to fight an increasingly toxic atmosphere online. But Project Veritas sees those steps, and the ban of high-profile far-right users—over clear, apolitical terms of service violations—as an attempt not to improve discourse online, but to quash the free exchange of ideas.

The Mounting Backlash

O’Keefe’s videos quickly became the top story on sites like Breitbart over the past week, and Fox News host Sean Hannity discussed them on national television. The videos also put Twitter on the defensive, despite uncovering a whole lot of nothing.

“The individuals depicted in this video were speaking in a personal capacity and do not represent or speak for Twitter,” a spokesperson said in a statement. “We deplore the deceptive and underhanded tactics by which this footage was obtained and selectively edited to fit a predetermined narrative.”

But to a large segment of right-wing internet users, the videos’ substance doesn’t matter. The way they were filmed matters even less. The footage validated a deep-seated suspicion that social media companies treat conservatives differently.

In one sense, critics are right to say that Twitter has treated its users differently lately. In December, the social media platform rolled out a series of aggressive policies meant to curb abuse and the glorification of violence. When the new rules took effect, a number of far-right accounts were suspended, including the anti-semitic Traditionalist Worker Party and the American Nazi Party.

Removing hate groups from Twitter has been a net good. But deciding whether a user violated these new policies sometimes involves making a subjective decision. By giving up what Twitter saw as absolute neutrality—former executive Tommy Wang famously once described the company as “the free speech wing of the free speech party”—Twitter and other platforms have opened the door to specious claims of bias.

It’s not just O’Keefe. The first Project Veritas Twitter video debuted just two days after “alt-right” troll Chuck Johnson filed a lawsuit against the company. In 2015, Twitter permanently banned Johnson after he tweeted that he wanted to “take out” civil rights activist DeRay McKesson. While Johnson likely won’t win his case, it’s significant that he chose to sue now, and not three years ago when Twitter first suspended his account. The narrative has shifted in his favor.

The so-called alt-right also isn’t only mad because some of their most prominent voices—including Johnson and Milo Yiannopoulos—have been banned. Even those that remain on the platform often allege that Twitter suppresses their views through other means.

After last year’s presidential election, for example, some users said when they tried to respond to Donald Trump’s tweets, their replies disappeared. It turned out that Twitter likely couldn’t handle the volume of replies that Trump generated, and thus the threads were “breaking” by accident.

The incident highlighted how Twitter and companies like it often don’t—or can’t—explain exactly how their services work, leaving users to craft their own conspiracy theories. It doesn’t help, either, that every major tech platform is headquartered in notoriously liberal Silicon Valley, leaving right-wing users to suspect that few tech employees care much about advocating for their viewpoint.

Take also another incident from last summer, when Google fired James Damore, a former software engineer who penned a 10-page memo advocating against Google’s diversity hiring programs. Damore argued in part that biological differences between men and women accounted for gender disparities in fields like software engineering. He was let go for “perpetuating gender stereotypes.”

Right-wing news sources held up Damore’s firing as evidence that Silicon Valley doesn’t welcome conservatives. Damore appeared on Fox News, and Breitbart started a “Rebels of Google” series, where it interviewed former and current employees about partisan bias. Far-right groups even planned a “March on Google,” that never materialized. Damore is now suing Google, alleging that the company is systematically biased against caucasians, males, and conservatives.

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Damore’s firing wasn’t the smoking gun that right-wing media made it out to be. For one, the engineer was only one employee, and others have written memos alleging that the company doesn’t do enough to promote diversity, rather than too much. Damore also said that Google gave special privilege to women, but the company is currently wrapped up in a dispute with the Department of Labor over “systematic compensation disparities against women pretty much across the entire workforce.”

Doubling Down

As pressure against these platforms continues to mount, the most instructive case for Twitter might be the one that has the most merit. A 2016 Gizmodo investigation found that Facebook’s “news curators,” who were in charge of managing Facebook’s Trending Topics bar, had systematically suppressed stories from conservative outlets. The story immediately caused a massive backlash from right-wing users.

Instead of making an earnest, if flawed, commitment to filtering out untrusted sources, Facebook instead fired its entire Trending team, and let an algorithm take over. The trending bar soon filled with fake news and conspiracy theories. Facebook shied away from making its platform a better place in the name of neutrality, and everyone suffered as a result.

So far, Twitter has done the opposite. In the face of persistent backlash from the right, the company has doubled down on its intention to curb abuse and threats of violence. It hasn’t made a public show of firing moderators, or claimed it wants to be entirely neutral. Good. To improve their platforms, companies ultimately have to make value judgements that lots of people won’t like. The question now is whether Twitter’s convictions can survive the backlash.

Social Media and Speech

-Should Facebook and Twitter be regulated under the First Amendment?

-How WeChat Spreads Rumors, Reaffirms Bias, and Helped Elect Trump

Science Says These Factors Determine Good Leadership

For a company to evolve and grow, entrepreneurs must develop into good leaders.

But what are the factors that determine good leadership? Do good leaders share common traits? Are there secrets to becoming a great leader?  What is the impact of gender in regards to leadership? 

The development of sound leaders is a complicated process that is both dependent on the individual, his or her team, and the industry in which they work. But working to become a good leader is essential, especially in today’s business environment, where studies have shown that over 80% of people don’t trust their boss. Eventually, employees leave jobs where they don’t respect their boss. Good leadership is imperative to employee retention and creating long-term organizational success.

There are a variety of skills that provide a solid foundation for good leadership. However, science says that some people are pre-disposed to be better leaders than others.

Inherent traits play a role in leadership potential.

Scientific studies reveal that good leaders are ambitious, curious, and sociable. By having these characteristics you have a better chance to grow within your discipline or company and become a leader. Another critical aspect of leadership is integrity. By having integrity, you can build trusting, supportive teams, with positive work cultures where people feel valued and supported. While a high IQ does have an impact on leadership potential, the correlation is extremely small, less than 5%, when compared to these broader positive traits.   

Are some people born leaders?

Personality traits and intelligence levels are impacted by genetics, which means some people are born with stronger pre-disposition to take on roles in leadership. In fact, estimates suggest that 30-60% of leadership is heritable. However, if you don’t naturally have the traits listed above – sociability, curiosity, ambition, and integrity – it doesn’t mean you won’t become a leader. Through training and coaching, it’s possible to develop the competencies necessary to stand at the helm of a project or company.

Does gender play a role in leadership?

From a leadership potential perspective, gender has little impact. In fact, data has shown that women can be extremely successful as leaders. Over an eight-year study of publicly traded companies, it was discovered that organizations with female CEO’s or female Director’s of Boards produced a better annual return when compared to male counterparts. We don’t have fewer women leaders because of a lack of female leadership potential or a propensity for business. In truth, the number of leaders is currently skewed in favor of males because of social factors such as gender biases, lack of fairness in hiring opportunities, and a history of male dominance in business.

Being in a position of leadership may not feel comfortable for everyone, and that’s okay. As individuals, we engage with the world in different ways, and we have innate strengths that should be utilized to our advantage. Specific traits may lead to a higher propensity toward taking on leadership roles, while other factors such as gender play a much smaller role.

But let me be clear. If you want to become a leader, don’t let scientific studies, your family, or any article convince you that goal is unattainable. You can learn, grow, and evolve, becoming the leader you want to be.

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2 Energy Stocks Set To Rally This Week

Last Friday, I alerted investors that I was buying $50K of Southwestern Energy Company (NYSE:SWN) at $5.42. Southwestern has been on my radar screen for a few weeks now, looking for the right entry point to put capital to work. My other pick is Chesapeake Energy (CHK), which is up 20% since I recommended it in a December 13th article titled Buy The Shakeout.

Super majors in rally mode

While I love the big majors like BP (BP) and Royal Dutch Shell (NYSE:RDS.A), they both have been in rally mode since August. BP is up over 30% since I pounded the table to buy under $34 in an article you can view here.

I still love the BP story, but the stock will likely consolidate some gains and may trade flat to down near term as investors digest what should be a fantastic earnings report. On a technical level, it looks a little stretched, but I love the BP story with its 7 new major projects that came online in 2017.

Why do I share the article on buying oil stocks in capitulation? Because I want investors to see what my views were on particular stocks at crucial buy points and where they currently trade so they can make their own decisions on whether to give credence to anything I have to say.

I see the oil rally continuing on global strength and high demand for the coming year. WTI is in a new trading range in the $60s with crude breaking out to late December 2014 levels. If WTI hits $70 in the coming weeks, then oil and gas stocks will continue to rocket higher.

Investors that sold nat gas last week in the $2.70 level are regretting that decision as nat gas rallied nearly 20% in a few days to close the week at $3.20.

Southwestern Energy is a Bargain at this level

SWN is an energy company engaged in natural gas and oil exploration, development, and production. The Company operates through two segments: Exploration and Production (E&P) and Midstream Services.

Its operations in northeast Pennsylvania are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale. Through its affiliated midstream subsidiaries, it is engaged in natural gas gathering activities in Arkansas and Louisiana.

With a forecasted PE of 7.4, SWN is undervalued, in my opinion. The company has nearly $1B cash and a revolving credit line of $800M, giving the company plenty of financial flexibility for 2018 and beyond.

Last year’s losers, this year’s winners?

Southwestern Energy and Chesapeake were both horrible performers in 2017, with SWN down 44% over the last year. Chesapeake had similar dismal performance, down 48% last year. However, both stocks have rallied over the last month with CHK up 21% and SWN up 7%.

I want to show these graphs for comparison as I believe that Southwestern is poised to rally 10% to 40% over the coming weeks and months.

S: Schwab

Here is the same clip from CHK.

Source: Schwab

One thing I want to point out to interested investors is this: One week ago, the CHK clip was nearly identical for SWN with Chesapeake down 48% yoy. The shakeout in Southwestern Energy was just that; a shakeout, I believe that anyone buying at this level will participate in a strong reversion trade that will take the stock back to the $7 level in the next 90 days.

This chart above compares nat gas with CHK and SWN. One can see the divergence with CHK up 12% nat gas up 9% and SWN -2%. There are times in the market when a stock makes that final shakeout coming off a multi-year low that screams BUY. In my opinion, Mr market presented this opportunity in Southwestern Energy last Friday when the Dow was up 220 points.

The bottom is in for SWN

Here is another technical chart showing the multi-year bottom that I now believe is firmly in place. Here is a 3-year chart for your viewing.

It’s easy to see why investors would be scared away and disgusted with Southwestern’s stock performance over the last three years. One can see the drop in late 2015 and 2016, followed by a sharp rally back to $16 and a prolonged sell-off that wiped out anyone long the stock in 2017.

The past is history, the future is a mystery, and the present is a gift, which is why they call it the present. In my view, the time to buy SWN is NOW!

The time to buy Chesapeake was last week at $3.92, or December 15th at 3.51. The stock is now in breakout mode after several false starts with another 20% rally in the cards near term.

Nat gas broke out last week with a Friday close of $3.20 up from $2.76. Southwestern did not participate in the rally as option expiration Friday took January 12 $5.50 call options to ZERO.

Positive catalyst to move stock back to $7

Southwestern is actually making a positive cash flow while Chesapeake is still striving to be cash flow positive. I am long both stocks but have doubled up on SWN as I feel it is in a better position with $1B in cash as of the latest earnings report. I encourage investors to click here for the investor conference to gain more insight into company operations.

The company is doing very well in the Appalachia region with resource potential of 45 Tcfe over 4,200 locations.

Here is another clip from the November investor conference showing great improvement in EBITDA which I expect to continue for the foreseeable future.

By clicking on the chart above, investors can see that the turn in profits and revenues is in the works. This is the time, in my opinion, to steal shares of SWN. One can see the revenues are up $642M from $1.752B to $2.394B. Earnings are growing at a strong rate with adjusted EBITDA up nearly 100% to $902M from $407M in the year-ago period.

Earnings are moving in the right direction, why the disconnect in share price?

The disconnect is just that, many times the market will wait while a company is making the turn back to positive earnings. A stock will make a good move up on positive earnings results, sucking in investor dollars only to sell off; testing the mental will of those weak-handed players long the stock.

One more 6-month chart to help you understand why I believe this is the ultimate buy point in SWN.

Here is the story told through the charts of behavioral finance. It is clear to see this triple-bottom that has occurred over the last six months. Remember, the bottoming process takes time. Multi-year bottoms like this are excruciating for shareholders, the market rallies 100s or thousands of points while the stock you are stuck in goes nowhere.

In this case, the stock bottomed at $4.90 in late October, then came a pretty good earnings call, which took the stock to the mid $6.70 level where it pierced the 186 and 200 DMA. Investors then experienced tax loss selling that took the stock back to the low $5s where it traded for 5 days before rallying to $6. Last week’s little capitulation to $5.37 was in my strong opinion, the shakeout before breakout.

Conclusion

Southwestern Energy and Chesapeake Energy offer a fantastic entry point for a substantial rally. Higher oil and nat gas prices should bode very well for both companies bottom line. Southwestern Energy has the better entry point right now, Chesapeake had the best entry point a few weeks back at $3.52.

Both companies are greatly improving profit margins, and it’s only a matter of time before the market takes notice. I believe the bottom is in for both of these beaten down stocks, and the past is not the future.

I see a strong 25% to 50% rally coming in these two 2nd tier stocks that have under-performed the market over the last 12 months.

I continue to like BP and Royal Dutch Shell. They have already rallied 30% and are a hold, in my view. I am a buyer of BP on weakness or a violent sell-off in the markets.

As always do your own research and always have an exit strategy in place before making any trade.

Disclosure: I am/we are long SWN, GE, CHK, LYG, BP, HABT, MDXG.

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.

Lesson Learned: Don't Short A Blue Chip REIT

There seems to be more articles on Seeking Alpha in which authors recommend shorting Blue Chip REITs. A few days ago there was a short thesis on Tanger Factory Outlet (SKT) and the author explained,

“I have a hard time convincing myself that the good results will continue into the future. I personally am not comfortable with the sales per square foot metrics at these properties… the current stellar portfolio performance may possibly suddenly see itself deteriorate in the next 5 years without warning.”

I have already provided my counter to that article (HERE), and most of my followers know that I’m not a market timer who picks tops or bottoms.

Instead, I am a value investor and I have found that it’s simply better to be in the market invested in stocks that offer the highest potential returns than play the timing game.

Many of you know that I’m generally a buy-and-hold investor and that means that I like to invest in REITs that I can own for the long haul. It’s rare that I bet against securities that will fall in price… that’s like gambling that my plants will die. I prefer to plant my seeds firmly in the ground and wait for my crops to grow.

Occasionally, I run across a few plants (stocks) that seem to be deteriorating and, as a result, I seek to avoid the companies all together. I’m not a proponent of shorting REITs, that’s just RISKY!

Photo Credit

Why Short a REIT?

I find it amazing that some of the wealthiest REIT investors – the hedge funds – claim to have a vast knowledge and understanding as to the nature of their complex strategies, yet the funds’ overall performance often turns into Fool’s Gold.

We all know that hedge funds by nature are opportunistic as they are designed to pool people’s money to invest in a diverse range of assets. Because hedge funds are lightly regulated (and are not sold to retail investors), they typically buy riskier positions and they often employ the use of short selling and leverage.

Although it is difficult to evaluate hedge fund performance compared with other investments (because the risk/return characteristics are unique), I remain baffled as to why so many hedge fund managers cross into my sweet spot – REITs – trying to short a particular stock that is anything but distressed or even showing signs of weakness.

You can see why the $12 billion hedge fund Pershing Square took advantage of the falling value in General Growth Properties (NYSE:GGP) back in 2009. That was a wise bet for William Ackman (who runs Pershing Square) who has a history of investing in distressed real estate. But history has also shown that there is little opportunity for the short sellers who pursue high-quality blue chips.

For example, in 2009, Ackman waged a battle against Realty Income (O) on the thesis that the “monthly dividend company” had poor credit quality. Ackman argued that Realty Income was suffering from mispriced risk since the REIT was paying a dividend of around 7.5% while the private market cap rate values were closer to 10.5% – a 40% premium. Ackman was suggesting that Realty Income’s fundamentals could not support the dividend and that a cut was imminent. Boy was he wrong!

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Think about it like this, the outcome of a short sale is basically the opposite of a regular buy transaction, but the mechanics behind the short sale result in extremely volatile risks.

In fact, it’s somewhat like the law of gravity as the law of investing is inflation (instead of gravity) and that means that betting against the upward momentum is inherently risky. That means that when you bet against the momentum and you keep a short position for a long period of time, your odds get worse.

Also, when you short sell, you don’t enjoy the same infinite returns you get as a long buyer would. A short sale loses when the stock price rises and a stock is (theoretically, at least) not limited in how high it can go.

In other words, you can lose more than you initially invest, but the best you can earn is a 100% gain if a company goes out of business and the stock loses its entire value.

Finally, and the most concerning risk is leverage or margin trading. When short selling, you open a margin account, which allows you to borrow money from the brokerage firm using your investment as security. Just as when you go long on margin, it’s easy for losses to get out of hand because you must meet the minimum maintenance requirement of 25%. If your account slips below this, you’ll be subject to a margin call, and you’ll be forced to put in more cash or liquidate your position.

For all of these reasons, I’m not willing to risk hard earning capital to short a REIT. Plain and simple, it’s just way too risky and I believe that by patiently taking advantage of the margin of safety, my portfolio will hold more winners than losers.

Regardless of my risk tolerance level, the short sellers haven’t stopped betting against REITs and when that feeding frenzy becomes a catalyst, the “squeeze” ensues (as more and more of the short investors buy shares to cover their positions, share prices skyrocket).

This Blue Chip Bet Paid Off Handsomely

In May 2013, Highfields Capital decided to short shares of Digital Realty (DLR) based on the premise that shares were too expensive and should be trading for around $20.00 per share. Jonathon Jacobson stated (at the 18th Ira Sohn Investment Conference last week) that “pricing is going lower, competition is increasing, and the company (Digital) is tapping into capital markets as aggressively as they can.”

At the time, Digital was trading at $65.50 per share with a total capitalization of around $14 billion.

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Highfields claimed at the time that Digital’s fundamentals were deteriorating and that the REIT was a commodity business with no barriers-to-entry. Simply put, Highfields was speculating that the stock would fall, without any true catalyst supporting the short, other than manipulating prices for personal gain.

Simply said, Highfields is shorting Digital because they think they know something others don’t know. They are plain and simple: speculators, obsessed with dangerously manipulating prices and driving down prices for their own personal gain. In an article, I offered my “back up the truck” commentary,

“ …it’s time to jump on this cloud. Digital has a most attractive valuation of 13.6x and I consider the fundamentals sound. Driven by growing world-wide demand and a very high-quality tenant base, Digital has evolved into a best-in-class global data center platform. Digital’s “first mover advantage” has allowed the REIT to build a commanding barrier-to-entry model in which its mere scale provides access to capital and strong expertise in the global cloud supply chain.”

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Over the years, I have continued accumulating shares in Digital Realty as this Blue Chip has been one of the best picks in my Durable Income Portfolio. As evidenced below, Digital has returned an average of 16% annually since I began purchasing shares in May 2013.

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The “D” in DAVOS

Last week I provided a summary of my All-American DAVOS portfolio that consists of Digital Realty, American Tower (AMT), Ventas, Inc. (VTR), Realty Income, and Simon Property (SPG). These 5 REITs returned 9.2% since December 31, 2016, and Digital returned over 23%.

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In Q2-17, Digital announced that it was merging with DuPont Fabros in a transaction consistent with Digital’s strategy of offering a comprehensive set of data center solution from single-cabinet colocation and interconnection, all the way up to multi-megawatt deployments.

At the far end of the spectrum, this combination expands Digital’s hyperscale product offering and enhances the company’s ability to meet the rapidly growing needs of the leading cloud service providers. The DFT merger is also consistent with Digital’s stated investment criteria and mission statement:

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The DuPont transaction expanded Digital’s presence in strategic U.S. data center metros and the two portfolios are highly complementary. The transaction was expected to be roughly 2% accretive to core FFO per share of 2018 and roughly 4% accretive to 2018 AFFO per share. The combination also enhanced the overall strength of the balance sheet. DuPont Fabros portfolio consists of high-quality purpose-built data centers, as you can see below:

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The merger also bolstered Digital’s presence and expanding footprint in its product offering in three top tier metro areas, while DuPont realized significant benefits of diversification from the combination with Digital’s existing footprint in 145 properties across 33 global metropolitan areas.

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Digital closed on the acquisition of DuPont during the third quarter and the integration is well underway… but the blue chip REIT is not slowing down…

In October, Digital announced a 50/50 joint venture with Mitsubishi Corporation to enhance its ability to provide data center solutions in Japan. Digital is contributing a recently completed project in Osaka and Mitsubishi is contributing two existing data centers in Tokyo. Although the venture is non-exclusive, the expectation is that this will be both partners primary data center investment vehicle in Japan.

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According to Digital’s CEO, Bill Stein, “Japan is a highly strategic market (with) tremendous opportunity for growth over the next several years. This joint venture establishes Digital’s presence in Tokyo, which has been a longtime target market.”

In addition, Digital expects this joint venture will significantly enhance the company’s ability to serve its customers data center needs in Japan. In particular, Digital expects that Mitsubishi’s global brand recognition and local enterprise expertise will meaningfully improve the ability to penetrate local demand.

Also, in the US, Digital entered into an agreement to acquire a data center in Chicago from a private REIT for $315 million. This value add-play offers a healthy going in yield along with shell capacity that gives Digital an opportunity to boost the unleveraged return into the high single digits. This investment represents an expansion in Digital’s core market and is occupied by existing customers with whom Digital has been independently working to meet their expansion requirements.

Also, during the third quarter, Digital announced that it was breaking ground on a new 14 megawatt data center in Sydney, Australia, adjacent to an existing facility. Digital also expanded its Silicon Valley Connected Campus with a 6 megawatt facility at 3205 Alfred Street in Santa Clara, California (scheduled for delivery in the first quarter of 2018).

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The Improved Balance Sheet

In order to continue to scale its global footprint, Digital continues to demonstrate a disciplined balance sheet.

In July 2017, Digital issued two tranches of Sterling denominated bonds with a weighted average maturity of 10 years, and a blended coupon of just over 3% raising gross proceeds of approximately $780 million.

In early August, the company pre-funded a portion of the DuPont acquisition with the issuance of $1.35 billion of U.S. dollar bonds with a weighted average maturity of nine years, and a blended coupon of 3.45%. (This was only the sixth time an investment grade U.S. listed REIT has issued a $1 billion or more in a single tranche of bonds).

The transaction was well oversubscribed and priced 10 bps inside of where Digital’s existing bonds were trading on the secondary market prior to the transaction. Digital also raised $200 million of perpetual preferred equity at 5.25%, an all-time low coupon for Digital and the lowest rate ever achieved on a REIT preferred offering with a crossover rating.

In mid-September, Digital closed on the DuPont acquisition and exchanged all the outstanding DFT common shares and units for approximately 43 million shares of DLR common stock and 6 million OP units. Also, in conjunction with the DuPont acquisition, Digital exchanged the DFT 6.625% Series C Preferred for a new Digital Realty Series C Preferred with a liquidation value of $201 million.

The company also tendered for the DFT 5.875% high-yield notes due 2021, settled nearly 80% of the $600 million outstanding at closing in mid-September and redeemed the remainder within a few days post closing. After quarter-end, Digital redeemed all $250 million of the DFT 5.625% high-yield notes due 2023 and a blended 106.3% of par or a total cost of $270.5 million, including accrued interest and the make-whole premium.

When the dust settled at the end of Q3-17, Digital’s debt-to-EBITDA stood at 6x and fixed charge coverage was just under 4x, as you can see below:

After adjusting for a full-quarter contribution, the balance sheet actually improves as a result of the DuPont acquisition and debt-to-EBITDA dips down below 5x and fixed charge coverage remains above 4x, as you can see on the right-hand side of the chart.

As you can see from the left side (chart below), Digital has a clear runway with nominal debt maturities before 2020. The balance sheet remains well-positioned for growth consistent with our long-term financing strategy.

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The Fundamentals

Construction activity remains elevated across the primary data center metros, but leasing velocity remains robust and industry participants are mostly adhering to a just in time inventory management approach, helping to keep new supply largely in check.

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Demand is outpacing supply in most major markets. The near-term funnel remains healthy and demand seems to be picking up as we head into the end of the year.

In addition, vacancy rates remain tight across the board prompting Digital to bring on measured amounts of capacity to meet demand in select metro areas like Sydney, Silicon Valley and Chicago. The company has seen a flurry of recent land deals in core markets and the number of new competitors is on the rise, although Digital believes its global platform, scale and operational track record represent key competitive advantages.

As Digital’s CEO, Bill Stein, explains:

“Given the sector’s recent history, any prospect of an uptick in speculative new supply bears watching. However, we remain encouraged by the depth and breadth of demand for our scale, co-location and interconnection solutions. We expect the demand will continue to outstrip supply, while barriers to entry are beginning to grow in select metros, which we believe bodes well for long-term rent growth, as well as the enduring value of infill portfolios such as ours.”

Stein adds:

“…we are well-positioned to connect workloads to data on our global connected campus network and through our Service Exchange offering. Enterprise architectures are going through a transformation and workloads are transitioning from on-premise to a hybrid multi-cloud environment. Our comprehensive product offering is critical to capturing this shift.

Cloud demand continues to grow at a rapid clip, but future growth in the data center sector will come from artificial intelligence. The power, cooling and interconnection requirements for AI applications are drastically different than traditional workloads, and Digital Realty is well-positioned to support the unique requirements and tremendous growth potential of this next-generation technology suite.”

The Latest Results

Digital signed total bookings for the third quarter of $58 million, including an $8 million contribution from interconnection. The company signed new leases for space and power, totaling $50 million during the third quarter, including a $6 million co-location contribution. The weighted average lease term on space and power leases signed during the third quarter was nine years. Digital’s management team explains,

“Our third quarter wins showcase the strengths of our combined organization as the bulk of our activity was concentrated on our collective campuses in Ashburn, which is not only the largest and fastest growing data center market in the world, but also the combined company’s largest metro area in terms of existing capacity and ability to support our customers growth.”

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In Q3-17, Digital’s current backlog of leases signed but not yet commenced stands at $106 million. The step up from $64 million last quarter reflects the $50 million of space and power leases signed, along with the $59 million backlog inherited from the DuPont acquisition offset by $67 million of commencements. The weighted average lag between third-quarter signings and commencements improved to four months.

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Digital retained 86% of third-quarter lease expirations, and signed $66 million of renewals during the third quarter, in addition to new leases signed. The weighted average lease term on renewals was over six years, and cash rents on renewal leases rolled down 3.8%, primarily due to two sizable above market leases that were renewed during the third quarter, one on the East Coast and one in Phoenix. Digital expects cash re-leasing spreads will be positive for the fourth quarter, as well as for the full year 2017.

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As you can see from the bridge chart below, Digital’s primary driver is a full quarter with the higher share count outstanding following the close of the DFT acquisition late in the third quarter. Digital still expects to realize approximately $18 million of annualized overhead synergies and expects the transaction will be roughly 2% accretive to core FFO per share in 2018 and roughly 4% accretive to 2018 AFFO per share.

However, these synergies will not fully be realized until 2018 and the quarterly run rate is expected to spring load in the fourth quarter before bouncing back in 2018.

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As you can see below, Digital’s non-cash straight-line rental revenue has come down from a run rate of $23 million in the fourth quarter of 2013, all the way down to less than $2 million in the third quarter.

Over that same time, quarterly revenue has grown by 60% from $380 million to more than $600 million. This trend reflects several years of consistent improvement in data center market fundamentals, as well as the impact of tighter underwriting discipline, which has driven steady growth in cash flows and sustained improvement in the quality of earnings.

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Buy This Blue Chip?

First off, I am not selling this BLUE CHIP REIT. I am confident with my overweight exposure and I will continue to add more shares in price weakness. Let’s take a look at the dividend yield, compared with the peers below:

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Let’s take a closer look at Digital’s dividend history, and specifically the FFO Payout history…

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As you can see, Digital has continued to widen the margin of safety related to the Payout Ratio (helps me SWAN)…

Now, let’s examine the P/FFO multiple, compared to the peers:

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As you can see, Digital is cheaper (based on P/FFO) than the peers. Let’s examine the FFO/share growth chart below…

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As you can see, Digital is not growing as robustly as the peers; however, the company has continued to generate ~8% FFO/share growth and this powerful pattern of predictability is the primary reason I own shares in this REIT. Take a look at this FFO per share history…

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The average FFO/share growth since 2014 has been around 7.6%… now take a look at the P/AFFO/share chart below…

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This suggests that Digital is easily positioned to continue to grow its dividend by at least 5% annually, possibly a tad better in 2018.

In summary, Digital has been one of my best BLUE CHIP buys since I commenced the Durable Income Portfolio (in 2013). I consider the shares soundly valued today (nibbling); however, I would recommend buying closer to $100/share. As Ben Graham famously explained, “a stock does not become a sound investment merely because it can be bought at close to its asset value.”

Selecting securities with a significant margin of safety remains that value investor’s definitive precautionary measure. I consider Tanger Factory Outlet to be the best BLUE CHIP buy today, as any value investor knows – “it pays to wait patiently for the storm to subside, knowing that a sunnier and more plentiful time is bound, as a law of nature, to resume in due course.”

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Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Other REITs mentioned: (COR), (QTS), (CONE), and (EQIX).

Sources: FAST Graphs and DLR Investor Presentation.

Disclosure: I am/we are long APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DDR, DEA, DLR, DOC, EPR, EXR, FPI, FRT, GEO, GMRE, GPT, HASI, HTA, IRET, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, QTS, REG, RHP, ROIC, SKT, SPG, STAG, STOR, STWD, TCO, UBA, UMH, UNIT, VER, VTR, WPC.

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.

I'd Buy General Electric At The Right Price Too

In a recent interview, Warren Buffett told CNBC’s Becky Quick that he would buy General Electric (GE) at the “right number”, which led to speculation that Berkshire Hathaway (BRK.A)(BRK.B) may currently be looking to get back into a GE position. Let’s remember that it was only a few short months ago that Berkshire disclosed that it sold a small GE position and build its stake in Synchrony Financial (SYF) [a 2014 spin-off from GE]. Since this announcement, GE shares are down over 20% while SYF shares are up over 30%.

Source: Nasdaq

Talk about great timing, right? After a rough 2017 (GE shares were down ~45% compared to the S&P 500 being up ~20%), the company’s stock has actually performed pretty well in the new year. So, what should investors do now? I believe that the “right number” for this industrial conglomerate depends on many factors, including your time horizon, but, in my opinion, you will not get burned if you layer into a GE position at current levels.

My 12-month Price Target

Before the recent run-up for GE shares, I am on record for saying that my 12-month price target was $19 per share. This target still holds true today, even with shares trading slightly below this mark ($18.76 as of January 12, 2018). Some may be asking why a person that is so bullish on GE long-term is standing firm with a price target of $19 but, in my opinion, it is important to note that the real tests (i.e., quarterly earnings reports and management commentary) are still yet to come.

Management already guided for adjusted EPS to be in the range of $1.00-$1.07 for full-year 2018, so, even after the 2017 blood bath, GE shares are not as cheap as what you would expect.

Chart
GE PE Ratio (Forward) data by YCharts

While I believe that Mr. Flannery low balled the 2018 guidance, which is a smart approach given the moving pieces that he will have to contend with, it is still too early to say that GE is a must own at today’s price. GE is trading below the average forward P/E ratio of its peer group but, in my opinion, GE’s management team has a lot to prove before the conglomerate can make the argument that it warrants a valuation that is in line with the likes of Honeywell (HON) or 3M (MMM).

So, at the end of the day, I am sticking with the 12-month price target of $19 for GE because there is definitely going to be concerns (i.e., cash flows metrics, growing debt balance, Power struggles) that the bears will run with in 2018. GE’s 2018 stock performance will largely depend on how management is able to fend off the bears, in my opinion. If successful, $19 per share will be way too low of a price target but it is still too early to tell.

But, on the other hand, there have definitely been some positive developments for GE over the last few months that could result in this company eventually warranting a higher price target later in the year.

Positive Developments

The backdrop for GE has improved since management provided the 2018 outlook in November 2017 but I believe that the two items mentioned below have the potential to be significant tailwinds in 2018.

(1) Oil Prices

The rise in crude oil prices has resulted in a great deal of attention for GE, and rightfully so, as this company is highly levered to the commodity.

Source: CNBC

Remember, GE merged its oil & gas business with Baker Hughes in 2017 to create Baker Hughes, a GE Company (BHGE). No one really knows what will happen with oil and/or gas prices in 2018 or 2019, but it is hard to deny that it has been a great start for these commodities in the new year. And, BHGE has been a direct beneficiary.

Chart
BHGE Market Cap data by YCharts

As shown, BHGE’s market cap has increased by over 20% since late 2016 but it has meant nothing for GE shares, as the company’s stock is down by almost the same percentage over this time period. Let’s think about this, GE still owns a majority stake in BHGE (62.5%) so the industrial conglomerate’s holding is now worth over $26B, or ~16% of GE’s current market cap, and the recent rise has had no bearing on GE’s stock price. BHGE alone is not enough to move the needle for GE, but a rising BHGE stock price will bode well for GE and its shareholders in 2018.

There are rumors that GE may look to spin-off BHGE at some point over the next few quarters (an approach that I prefer), as BHGE’a structure gives Mr. Flannery a lot of optionality, but I would not be surprised if GE retained the majority stake well into the 2020’s.

(2) Promising Policies

GE may not directly benefit from the tax reform bill, as many pundits believe to be the case (a thought that I do not necessarily agree with), but, in my opinion, the downstream impact of this business-friendly policy will have a significant impact on GE. For example, a JPMorgan analyst predicts that the new bill will be extremely positive for the companies of the S&P 500:

“The upcoming reduction of US corporate tax rates may be one of the biggest positive catalysts for US equities this cycle,” [Marko] Kolanovic, who serves as JPMorgan’s global head of quantitative and derivatives strategy, wrote in a client note. “We think that little is priced into the market and hence there is potential for market upside. Clients are not repositioning portfolios until they see the reform passed.”

The importance of tax reform to that call can be seen in the breakdown of JPMorgan’s earnings growth forecast for next year. The firm projects that half of earnings upside — or roughly $10 a share for the S&P 500 — will be due to a successful GOP tax bill.”

Joe Ciolli, JPMorgan’s quant guru says traders are waiting for tax cuts to unleash more stock market gains, Dec. 15, 2017

The tax bill has already started to have an impact, as analysts’ EPS estimates for 2018 have increased by 2.2% (to $150.12 from $146.83) from December 20, 2017 to January 11, 2018.

Source: FactSet

Full Disclosure: the 2018 bottom-up EPS estimate is an aggregation of the median 2018 EPS estimates for all of the companies in the index.

The 2.2% may not sound like much but it is the largest move over this specific period of time since FactSet began tracking this data in 1996.

Additionally, analysts are bullish on several sectors that GE operates in.

Let’s just remember that this industrial conglomerate operates in industries that are critical to the U.S. economy so GE will benefit as other industrial companies benefit from the tax bill, of course in my opinion.

And a Trump infrastructure bill in 2018 would simply be icing on the cake.

Risks

The main risk for investing in General Electric starts with management. There is no guarantee that Mr. Flannery is the right man to turn around a company that is widely viewed as a directionless, complex industrial conglomerate. Sentiment is the number one factor for GE shares being down by almost 50% in 2017 so shareholders are putting a lot of faith in a largely unproven leader, at least on this type of stage.

Another risk factor is the Power operating unit. Any additional downward pressure for this unit will not bode well for the consolidated results in 2018 or 2019. Management has big plans for Power over the next 24 months so investors should be paying close attention to the progress that is being made toward rightsizing and reshaping this unit for the future.

Bottom Line

The market is flying at (or near) all-time highs and many stocks, including GE shares, have enjoyed a nice ride so far in 2018. I believe that there is a lot to like about GE as we head into 2018 and beyond, but this company’s new management team has a lot of prove over the next 12-18 months. Therefore, investors that think that they missed the boat when shares were trading at (or below) $18 per share will likely get another opportunity at some point in the first half of 2018.

However, looking out, I believe that this industrial conglomerate is attractively valued if you are willing (and able) to hold onto shares for at least the next three-to-five years. Investor sentiment is the main culprit for the poor performance for GE shares in 2017 and I believe that shares will rocket higher if Mr. Flannery is able to sell the market on his “plans” for this industrial conglomerate. That is why I, a person that plans to hold GE for many years, will not sell my GE shares now and try to get back in under $18 because timing the market is hard to do (or should I say impossible?). As such, investors with a long-term perspective should consider layering into a position at today’s levels because, in my opinion, GE shares have the potential to be trading significantly higher in the years ahead.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long GE, BHGE, BRK.B.

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.

GLD: Is 'It' Happening?

Introduction

On Friday, the dollar index fell to a low not seen since late 2014. Continued weakness in the dollar will lead to inflation in all dollar-based commodities like gold, crude oil and agricultural products.

Next week, the U.S. financial markets will have a shortened holiday week. There are big political issues looming, like a potential shutdown of the U.S. government, and an ongoing battle over immigration reform. As a result, the week ahead could see continued volatility in the U.S. dollar – either up or down. These moves in the dollar will likely affect gold, crude oil and other commodities – one way or another.

Is IT Happening?

Is this the beginning of the dollar collapse? Is that why Bitcoin and other cryptocurrencies have risen so far, so fast? Does the pending yuan-based oil futures contract lead to the end of the petro-dollar? Is that why oil has risen so far, so fast? Is IT happening??

Will the U.S. government shutdown close its doors amid political posturing and theater? Will the political climate in Washington, D.C. get even worse? Will the Democrats invoke articles of impeachment on Donald Trump? Will the U.S. and its allies attack Iran?

Should I go “all in” on the SPDR Gold Trust (GLD) to profit from all of these potential events? Or will all of these storylines get resolved, and leave the gold bulls, once again, kicking air instead of a football – and landing flat on their backs?

Gold Divergence from Real Interest Rates

The price of gold has historically had a close correlation with real interest rates. Since the beginning of 2017, however, gold and real interest rates have seen increasing divergence. Is this a sign that we have entered a new era where the old correlations are no longer valid? Possibly.

For the price of gold and real rates to converge again, 5-year real rates would need to fall precipitously below zero. Or gold would need to fall below the 2016 lows. Or, some combination of the two. We can see that real interest rates have hit a peak in late December of every year since 2013 before correcting lower.

Gold is money. However, it is currently traded as a paper derivative. I can’t (and won’t attempt to) predict the day when gold will be set free from its paper chains. I view physical precious metals as a store of value and an insurance policy to protect against macro market risks.

Meanwhile, since I closely track gold and silver, I also swing trade “paper” gold and silver on a short term basis – both long and short – with an eye on several traditional and proprietary indicators.

GLD Charts

The weekly gold chart continues to look bullish, although is nearing an over-bought RSI signal. On a purely technical basis, I would expect at least a pull-back to the uptrend line and/or $124 at some point.

On the daily chart, we can see that GLD came back into a prior uptrend channel. If GLD continues upward, then in hindsight we might describe the drop below the channel as a “bullish under-throw.” GLD is over-bought on the daily RSI.

Gold COT Report

I view the gold COT to be neutral, perhaps slightly cautionary. In the week ending January 9th, the net commercial short interest increased by 23%. When price increases, the commercial banks tend to create paper gold to satisfy paper gold demand.

Peaks in net commercial short interest have almost always coincided with nearby sell-offs, and valleys in commercial short interest have almost always coincided with nearby rises in price. One should be careful when trying to “time” tops or bottoms based upon the COT report, for at least two reasons: 1) the COT report is published on Fridays with Tuesday’s data, so it is three trading days old, and 2) the bullion banks have demonstrated patience in covering their shorts, and it could take many weeks for the COT data to look meaningful in hindsight.

While the gold commercial short interest has increased rapidly from its recent low, it only recently crossed over its 3-year average. And net commercial interest is below recent highs.

Gold OPEX Price Magnet

I closely track the options market for gold, crude oil and natural gas and have created a program to calculate OPEX price magnets for these commodities. Here is a recent history of the gold futures price versus the calculated OPEX magnets.

Since June 2017, the futures and OPEX price magnets have tended to converge onr or before the options expiration date. The next option expiration date for COMEX gold is January 25th, 2018.

The OPEX price magnets that I have developed are related to the “max pain” theory. This Youtube video does a good job at describing the “max pain” theory. There are free max pain calculators online for publicly traded stocks; however, the OPEX price magnets are in my view more relevant and are calculated on futures contracts.

Conclusion

Rising gold prices, a weakening U.S. dollar and divergent real interest rates may provide evidence that gold is regaining its luster as a unique “safe haven” asset. Historically important correlations appear to be broken, and the dollar is setting multi-year lows. Add to this mix increasing political and geo-political risks, and we may have a formula for “IT” to happen. Gold could soon be free of its paper chains, and ETFs like GLD could continue to rise in value – and perhaps move sharply higher.

On the other hand, we might be witnessing beginning-of-the-year allocations and adjustments that become an eventual “nothing burger” for GLD and other gold-related investments. If we continue in the old paradigm, then I see reasons to be cautious for paper gold investments like GLD. GLD is over-bought on its daily RSI, and real interests rates could drag lower. Moreover, the nearby gold OPEX magnet suggests that gold could pull back before the end of January.

I wish all of you the best of luck navigating this interesting market.

Disclaimer

This article was written for information purposes, and is not a recommendation to buy or sell any securities. I never intend to give personal financial advice in any of my articles. All my articles are subject to the disclaimer found here.

I am currently offering a two week free trial.  In addition to my daily content, I also have good input from my subscribers in the chat section.  Come and check it out.

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: I am always net long precious metals in various forms, and currently hold out-of-the-money GLD puts as a hedge.

Trump's 'Shithole Countries' Comment Tops This Week's Internet News

Last week Facebook decided that maybe it should make some changes to the information people see on the platform; also, a lot of people got very interested in the pay discrepancies between Mark Wahlberg and Michelle Williams. But, beyond that, it was also a week where everyone learned that a school kid could play the Cantina Band song from Star Wars with a pencil.

Yes, it was yet another strange, wonderful week on the internet. But what else happened? Here we go.

President Trump’s Unsavory Comments

What Happened: President Trump reportedly referred to Haiti, El Salvador, and some African nations as “shithole countries.” The internet responded in kind.

What Really Happened: There is absolutely no denying that Trump has had an impressively full week, declaring himself a stable genius, denying the possibility that he might be deposed as part of the Russia investigation, and avoiding Kendrick Lamar. But it was his comments reported Thursday that will likely have the longest-lasting impact.

Oh.

Some were concerned about journalistic standards…

…but many more were concerned about presidential standards, instead.

Naturally, media reports came fast, furious, and horrified. As the fallout from the comments continued, perhaps the most surprising reaction was the fact that the White House didn’t even try to deny it initially.

And they weren’t the only ones failing to denounce Trump’s crude language.

Still, at least one prominent conservative was willing to correct Trump.

As some of the countries mentioned started asking for comment on the comments, Trump said this:

Well, that’s what he said publicly, at least…

The Takeaway: Twitter?

Breitbart Says Goodbye to Bannon

What Happened: Apparently, when shadow presidents fall, it happens quickly and they even lose their satellite radio shows. Sorry, Steve Bannon.

What Really Happened: As those reading Michael Wolff’s Fire and Fury book know, there is one figure that looms arguably even larger throughout the entire thing than Trump himself: self-proclaimed genius (hey, another one!) Steve Bannon. Turns out, the ego-stroking he might have gotten from the book was likely a farewell gift, considering how the rest of his week went.

Yes, Bannon has lost the Breitbart job he swiftly returned to after leaving the White House back in August, despite releasing a full-throated walk-back of his comments in the Wolff book. So, what happened?

That’d do it. Sure enough, Breitbart was tweeting about his departure.

But it wasn’t just Breitbart that dumped him, it turned out.

(Bannon lost his Sirius show because it was a Breitbart-related venture, for those wondering; it wasn’t a coincidence, just cause and effect.) As would only be expected, news of his departure was everywhere in the media, but how did the rest of the internet respond?

It wasn’t only glee at Bannon’s misfortune, of course; some were also wondering just who could replace him at the outlet. Or maybe that should be, “what.”

The Takeaway: If only there was some kind of lesson to be learned from the swift rise and fall of Steve Bannon. Maybe it’s this?

The Leak of the Week

What Happened: In a political environment consumed with the concept of leaking, a surprise release of previously secret testimony to Congress took the internet by storm.

What Really Happened: Despite what certain POTUSes might have you believe, the investigations into potential collusion between the Trump campaign and Russia are ongoing, although at least one—the one being carried out by the Senate Judiciary Committee—is running aground thanks to internal strife between Republicans and Democrats on the committee. At the start of the week, one of the topics causing the most upset was the testimony of Fusion GPS co-founder Glenn Simpson over the origins of the company’s infamous “Russian dossier.”

Simpson testified in a closed session in August, but faced new calls from Republican committee chairman Chuck Grassley last week to testify again, publicly. Simpson and co-founder Peter Fritsch, in an op-ed that appeared in the New York Times, argued that Congress should simply release the transcript of his earlier testimony. Things seemed at an impasse… and then they didn’t. What changed?

People were surprised at how hardcore the move was…

…especially after Senator Feinstein responded to questions about why she did it.

This kind of thing is, well, unusual to say the least, so of course it was everywhere almost immediately. The 312 page document was, unsurprisingly, very enlightening.

This was, in other words, a really, really big deal. Although what kind of a big deal apparently depended on which side of the ideological spectrum you were on.

Expect this one to run and run.

The Takeaway: Actually, wait, we never checked in on how Trump responded to this news. Mr. President?

She Is Spartacus

What Happened: When it looked as if a news story was going to out the creator of a secret list of crappy men, the internet took it upon itself to handle the situation first.

What Really Happened: Perhaps you heard of the “Shitty Media Men” list before last week; it was a Google spreadsheet shared and edited anonymously that listed more than 70 men who were accused of being, to some degree, abusive towards women, whether it was creepy DMs or physical and sexual abuse. Since its creation in October of last year, it’s been the topic of much speculation and discussion, not least of all because no one actually knew where and how the list got started. And then, last week, that all changed.

It all started with a thread from n+1 editor Dayne Tortorici.

There’s much more in that thread, but those are the most salient points. Tortorici’s comments prompted a response from journalist Nicole Cliffe, and follow-ups from other journalists and editors.

It turned out that the writer of the piece, Katie Roiphe, was willing to comment that she was not about name anyone involved in the list.

Maybe the creator(s) of the list wouldn’t be named, and there was no need to worry about doxing! Well, OK, that was unlikely (for reasons we’ll soon get to). But then, something wonderful happened.

Indeed, so many women came forward to claim responsibility that a hashtag was created, #IWroteTheList, to share collective responsibility:

And then, the real author stepped forward.

Donegan’s piece for The Cut had an immediate impact.

The Takeaway: Nicole Cliffe, want to wrap this one up?

The (Flagging) Power of CES

What Happened: Someone at CES 2018 took the idea of “lights out” a little too literally.

What Really Happened: What would be the most unfortunate thing to happen at a trade show where electricity is kind of important?

Yes, the 2018 Consumer Electronics Show was hit by a twohour power outage last week. Before the cause was known—apparently, it was just rain—some people had some… special theories about what was happening.

Others were just philosophical about it all.

Some were even wondering who “won” the blackout. To be fair, a couple of brands definitely tried their best to claim the crown.

Ultimately, though, the answer to who won is fairly obvious, surely.

Some people at the show really seemed to enjoy the darkness, even if they didn’t make off with any free gifts. Hell, some went to so far as to hope it wasn’t a one-off.

The Takeaway: Of course, it’s worth keeping some sense of perspective about things…

Rocket Internet CEO says ready to pounce with cash pile

BERLIN (Reuters) – Germany’s Rocket Internet (RKET.DE) needs to hold on to its mountain of cash so it can compete with rivals from the United States and China and pounce when investment opportunities arise, the chief executive said in an interview.

The internet investor has a cash and equity warchest of up to 3.8 billion euros ($4.6 billion), but is under pressure to return part of it to shareholders to boost a stock price that is almost half the level it listed at three years ago.

Oliver Samwer, a serial entrepreneur who has become one of Germany’s richest men through his savvy investments, said Rocket wanted to be ready to invest “several hundreds of millions” at once in 2018 or 2019.

“We believe capital is a very important instrument in the tech area. To build firms of a certain size, you need more capital than ever before,” Samwer told Reuters on Wednesday.

He said U.S. and Chinese firms had access to much more capital.

Samwer noted that two years ago investors were concerned that Rocket might run out of cash due to funding so many loss-making start ups and now they were worried it had too much cash.

Founded in Berlin in 2007, Rocket started out with a focus on ecommerce, but it made a big bet on online food in 2015, which paid off last year with the listings of its biggest investments HelloFresh (HFGG.DE) and Delivery Hero (DHER.DE).

However, that did little to help Rocket’s own share price, with its current market capitalization of 3.8 billion euros implying that the market puts no value on its assets beyond its cash and its stakes in the two listed food firms.

Samwer noted that Rocket’s share price has risen more than 10 percent since he spoke to investors in late November, but said he was still not satisfied with the stock, admitting that the company had made mistakes in the past over how it communicates.

“Rocket Internet is pursuing a complicated, perhaps also unique business model. Over time, the market will reward this because the figures of our investments are so good,” he said.

Rocket Internet CEO Oliver Samwer attends an interview with Reuters in Berlin, Germany, January 10, 2018. REUTERS/Hannibal Hanschke

He said it is not Rocket’s plan “at the moment” to consider a delisting and declined to comment on possible new share buybacks after a current 100 million euro program.

CAUTIOUS MARKET

Rocket is invested in more than 100 start-ups, including in financial and property tech, logistics and travel sites, with its stakes in the five biggest of them potentially worth more than 1 billion euros to Rocket, according to Berenberg bank.

“While we understand that investors may be reluctant to accord a platform value to Rocket … we think the market is taking far too cautious an approach with this company,” said Berenberg analyst Sarah Simon, who rates the stock “buy”.

Samwer said he was currently focused on Rocket’s online furniture sites Westwing and Home24, its Jumia ecommerce business in Africa and the travel sector.

He said the idea of merging Home24 and Westwing, floated by some observers, was a “pure game of make believe”. He noted that the sites target different customers and markets.

However, he said consolidation was likely in coming years in the online food delivery sector, where Delivery Hero competes with Just Eat (JE.L), GrubHub (GRUB.N) and Takeaway.com (TKWY.AS).

Rocket Internet has a team of about 25 staff looking for new opportunities, scanning about 200-300 companies a month.

Samwer highlighted peer-to-peer lending marketplace Funding Circle, small business financing firm Billie and British home loans agent Nested as Rocket companies to watch.

“We are planting new seedlings so we can harvest them in 2020 and beyond,” he said. “Small seedlings can suddenly grow big.”

Editing by Anna Willard

How the Government Hides Secret Surveillance Programs

In 2013, 18-year-old Tadrae McKenzie robbed a marijuana dealer for $130 worth of pot at a local Taco Bell in Tallahassee, Florida. He and two friends had used BB guns to carry out the crime, which under Florida law constituted robbery with a deadly weapon. McKenzie braced himself to serve the minimum four years in prison.

But in the end, a state judge offered McKenzie a startlingly lenient plea deal: He was ordered to serve only six months’ probation, after pleading guilty to a second-degree misdemeanor. The remarkable deal was related to evidence McKenzie’s defense team uncovered before the trial: Law enforcement had used a secret surveillance tool often called Stingray to investigate his case.

Stingrays are devices that behave like fake cellphone towers, tricking phones into believing they’re pinging genuine towers nearby. By using the device, cops can determine a suspect’s precise location, outgoing and incoming calls, and even listen-in on a call or see the content of a text message.

McKenzie’s lawyers suspected cops had used a Stingray because they knew exactly where his house was, and knew he left his home at 6 a.m. the day he was arrested. The cops had obtained a court order from a judge to authorize Verizon to hand over data about the location of Mckenzie’s phone. But cell tower data isn’t precise enough to place a device at a specific house.

The cops also said they used a database that lets law enforcement agencies locate individuals by linking them with their phone numbers. But the phone McKenzie was using was a burner, and not associated with his name. Law enforcement couldn’t adequately explain their extraordinary knowledge of his whereabouts.

The state judge in the case ordered police to show the Stingray and its data to McKenzie’s attorneys. They refused, because of a non-disclosure agreement with the FBI. The state then offered McKenzie, as well as the two other defendants, plea deals designed to make the case go away.

The cops in McKenzie’s case had ultimately failed to successfully carry out a troubling technique called “parallel construction.”

First described in government documents obtained by Reuters in 2013, parallel construction is when law enforcement originally obtains evidence through a secret surveillance program, then tries to seek it out again, via normal procedure. In essence, law enforcement creates a parallel, alternative story for how it found information. That way, it can hide surveillance techniques from public scrutiny and would-be criminals.

A new report released by Human Rights Watch Tuesday, based in part on 95 relevant cases, indicates that law enforcement is using parallel construction regularly, though it’s impossible to calculate exactly how often. It’s extremely difficult for defendants to discern when evidence has been obtained via the practice, according to the report.

“When attorneys try to find out if there’s some kind of undisclosed method that’s been used, the prosecution will basically stonewall and try not to provide a definitive yes or no answer,” says Sarah St. Vincent, the author of the report and a national security and surveillance researcher at Human Rights Watch.

In investigation reports, law enforcement will describe evidence obtained via secret surveillance programs in inscrutable terms. “We’ve seen plenty of examples where the police officers in those reports write ‘we located the suspect based on information from a confidential source;’ they use intentionally vague language,” says Nathan Freed Wessler, a staff attorney at the ACLU’s Speech, Privacy, and Technology project. “It sounds like a human informant or something else, not like a sophisticated surveillance device.”

Sometimes, when a savvy defense attorney pushes, an unbelievable plea deal is offered, or the the case is dropped entirely. If a powerful, secret surveillance program is at stake, a single case is often deemed unimportant to the government.

“Parallel construction means you never know that a case could actually be the result of some constitutionally problematic practice,” says St. Vincent. For example, the constitutionality of using a Stingray device without a warrant is still up for debate, according to the Human Rights Watch report. Some courts have ruled that the devices do violate the Fourth Amendment.

Hemisphere, a massive telephone-call gathering operation revealed by The New York Times in 2013, is one of the most well-documented surveillance programs that government officials attempt to hide when they use parallel construction. The largely secret program provides police with access to a vast database containing call records going back to 1987. Billions of calls are added daily.

In order to create the program, the government forged a lucrative partnership with AT&T, which owns three-quarters of the US’s landline switches and much of its wireless infrastructure. Even if you change your number, Hemisphere’s sophisticated algorithms can connect you to your new line by examining calling patterns. The program also allows law enforcement to have temporary access to the location where you placed or received a call.

The Justice Department billed Hemisphere as a counter-narcotics tool, but the program has been used for everything from Medicaid fraud to murder investigations, according to documentation obtained in 2016 by The Daily Beast.

“What Hemisphere’s capabilities allow it to do is to identify relationships and associations, and to build people’s social webs,” says Aaron Mackey, staff attorney at the Electronic Frontier Foundation (EFF). “It’s highly likely that innocent people who are doing completely innocent things are getting swept up into this database.”

The EFF filed Freedom of Information Act and Public Records Act requests in 2014 seeking info about Hemisphere, but the government only provided heavily redacted files. So the EFF filed a lawsuit in 2015. It’s currently waiting for a California judge to decide whether more information can be made public without impeding law enforcement’s work.

“[The government] is obscuring what we believe to be warrantless or otherwise unconstitutional surveillance techniques, and they’re also jeopardizing a defendant’s ability to obtain all the evidence that’s relevant,” says Mackey.

Parallel construction can also involve a simple event like a traffic stop. In these instances, local law enforcement follows a suspect and then pulls them over for a mundane reason, like failing to use a turn signal. While the stop is meant to look random, cops are often working on a tip they received from a federal agency like the DEA.

“Sometimes when tips come through, the federal authorities don’t even tell the local authorities what they’re looking for,” says St. Vincent. The tip could be as simple as to watch out for a car at a specific place and time.

These stops are referred to as “wall off” or “whisper” stops, according to the Human Rights Watch report. In these instances, local law enforcement has to find probable cause for pulling the suspect over to avoid disclosing the tip. The tip is then never mentioned in court, and instead the beginning of the investigation is said to be the “random” stop.

The Human Rights Watch report concludes that Congress should pass legislation forbidding the use of parallel construction because it impedes on the right to a fair trial. Some representatives, like Republican Senator Rand Paul, have also called for banning the practice.

Opponents of parallel construction believe it should be outlawed because it prevents judges from doing their jobs. “It really gives a lot of power to the executive branch,” says St. Vincent. “It cuts judges out of the role of deciding whether something was legally obtained.”

One of the most concerning aspects of the practice is it shields government surveillance technology from public scrutiny. Stingrays, the cellphone-tracking device used in the Florida robbery case, have existed for years, but they’ve only recently been disclosed to the public. Lawyers and legal scholars haven’t yet conclusively decided whether their use without a warrant violates the Fourth Amendment, in part because so little is known about them. That means many people may have been convicted using techniques that violated their rights.

In the future, if the government hides new surveillance technology like facial recognition, the public will be unable to discern if it’s biased or faulty. Unless judges and citizens understand how surveillance techniques are used, we also can’t evaluate their constitutionality.

The public needs to determine if hiding surveillance programs is something it’s comfortable with at all. On one hand, keeping certain techniques secret likely helps authorities apprehend criminals. But if we don’t know how at least the basic contours of how a program works, it’s hard to have any discussion at all.

Exiting Your Startup: The Grand Finale

Your company has finally achieved success.

You’re finally looking to cash out on the effort you invested.

Deservingly so, but you’re not done yet. The most critical stage is near-;the exit.

Founders can’t simply hand over the reins in exchange for a handsome payday. It’s more complicated, as exiting is a strategic decision-;one that founders must be aware of early on.

We have invested in over one hundred successful startups, and founded our own açai-infused vodka company, VEEV. We learned lessons the hard way, and we want to make it easier for you.

Here’s a fact that most founders overlook. You need a reason for potential buyers to actually want to buy your company.

What about taking your company public via an initial public offering (IPO)? The reality is that IPOs comprise a small percentage of total exits, so we’ll focus on more common acquisitions.

Consider how your company will be positioned for an attractive acquisition. There are many areas of your business to focus on to ensure a successful exit. Mastering any three of the following areas will greatly work in your favor:

  1. Your distribution model

  2. Your access to a particular demographic

  3. Your brand’s strength

What about revenue?

Revenue is important, but potential acquirers rarely buy a company for the added revenue. Odds are that the incremental revenue barely moves the needle for your acquirer.

While revenue-;especially revenue growth rate-;is important, the three aforementioned areas carry more weight. Let’s discuss them in further detail.

Create a nimble distribution model that an acquirer couldn’t replicate.

PetSmart’s acquisition of Chewy for $3.5B in the spring of 2017 is a great example of a purchase based on a distribution model. PetSmart, the brick and mortar retailer of pet supplies, needed Chewy, an e-commerce provider of pet supplies, for its direct-to-consumer channel.

In the end, PetSmart gains critical online access while Chewy receives the expertise and resources necessary to refine and expand its business.

A win for both parties.

Additionally, corporations realize the need to gain access to new demographics-; especially Millennials.

Consider RXBAR, the maker of simple ingredient, protein bars. Founded in 2014, the company has experienced meteoric growth, due in no small part to its support from Millennials who are attracted to RXBAR for its simplicity in both labeling and ingredients. Food manufacturer Kellogg’s-;eager to enter the space-;announced in October 2017 its intention of acquiring RXBAR.

RXBAR plans to remain an independent company within Kellogg’s all the while expanding its product, and Kellogg’s can effectively leverage the access to RXBAR’s target demographics.

Again, a win for both parties.

Finally, it’s impossible to overstate the importance of your brand image. Corporations are seeking ways to capitalize on emotion-based purchasing.

We’ve previously mentioned the increasing role that emotion is having on consumer purchasing behavior and significance of brand image here. However, it is worth reiterating the point again.

Why?

Because corporations-;not just consumers-;are looking for products with a strong brand that evokes a particular emotion. Oftentimes, this is not their area of expertise. Corporate competitive advantages traditionally lie in the form of a cost advantage.

Now, they’re looking to acquire companies with an emotional advantage.

PepsiCo’s acquisition of the sparkling probiotic drink maker KeVita is a prime example. A slogan of KeVita’s, “Revitalize from the Inside,” represents the pathos that PepsiCo was looking to capture. In a time where consumers are turning away from traditional soft drinks, PepsiCo found a perfect opportunity in the health-conscious KeVita.

The acquisition places Kevita on a larger stage, giving it increased access to new distribution channels and resources. PepsiCo now has the means to leverage KeVita’s image to ideally position itself in a time of changing consumer behavior.

Yet again, a win for both parties.

Determine early on what makes your company a threat to potential acquirers. If they need you more than you need them, you’re in a good position.

You know what to focus on.

Now you need to balance the operations of your company with the intricacies of an exit.

Now let’s address the less concrete aspects of selling your business and how to best-position yourself. Two pieces of advice come to mind:

  1. Base your exit on operational milestones, not a timeline

  2. Keep potential acquirers in the loop

A fundamental misunderstanding that many founders have is basing exits off a timeline, and not an operational milestone.

This principle can be applied in a greater context, especially when it comes to fundraising. All too often, founders seek a certain amount of capital to grant them X months or years of runway. Rather, they should seek this capital to reach a particular milestone, such as achieving a particular customer acquisition cost or breaching a given revenue threshold.

The same issue occurs with exits.

Founders are too focused on exiting in Y years, and not based off a given milestone. A major reason we sold VEEV was because we realistically could not keep growing the business. We had reached an intermediate size, and realized that we didn’t have the distribution capacity or necessary connections to expand VEEV internationally and further grow.

This telltale milestone was far more helpful than any time-based method in determining the right time to sell. Additionally, milestone-based exits are also more flexible than their time-based counterparts. They account for unpredictable macroeconomic factors that can either expedite or slow your timeline.

With that said, build relationships with potential acquirers well-before you reach your desired exit milestones. You should keep them in the loop from an early date.

It’s known that you should contact investors well before your intent to raise the next round of fundraising. The same logic applies to exits.

There a few reasons for this.

The first is simply the importance of getting your foot in the door and establishing relationships with corporate partners early on. The second-;and equally as important-;reason is that they can help you reach or tailor your operational milestones.

Essentially, your potential acquirers can outline the kind of milestone that would spark their interest in a deal.

However, be straightforward if challenges arise that may hinder the completion of a milestone. Acquirers should be willing to work with you. They will not be willing if you paint a rosy picture, only to have them later discover issues in the due diligence process.

That should go without saying, but we have seen it adversely affect many deals.

A final note is to realize that this process takes time. We may have mentioned the importance of stressing milestones over time, but it’s important to realize that a corporation moves slower than a startup. You should be in discussion with companies at least a year before any intention to sell, and know that exit deals usually take at least six months.

In the end, it’s no secret. Exiting is difficult.

Applying this advice will differentiate yourself from the competition and increase the odds of gaining the attention of an acquirer.

The earlier you start the process, the better your odds of success.

From experience, we realize that the timing is never perfect and an ideal match is rare. With that said, it’s important to always keep the exit in the back of your mind, and explore the many ways that you can capture the value of the business you created.

Now, get to work!

And if you need help to guide you along the way, find resources from people who have been there and done that. 

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