Snap Needed Emotional Intelligence This Week but Didn't Have Any

Snap, parent corporation of social network Snapchat, has faced a number of recent leaks about the business, including a new round of layoffs. But the company’s reaction, a threat to sue or imprison employees who might talk to the press, was the second time in a week the company showed a disturbing lack of emotional intelligence.

Snap has made some bad moves in the past, like the initial fight among the co-founders. Turning down $3 billion for an acquisition by Facebook and the fall stock plunge. But the biggest problem of late has been the attitudes toward employees that management clumsily communicated.

Patience is understandably running thing. Over the last six months, Snap has faced the following:

  • Expenses raced ahead of income, increasing fiscal pressures as user growth has not kept pace with expectations. (When Fortune writes, “Its first trick was making selfies disappear. Its latest is sending gargantuan piles of cash into the ether,” you know the coverage will be ugly.)
  • The company saw two big stock drops immediately after earnings announcements in August and November.
  • The current stock price of about $14 remains far below the $17 IPO figure.
  • Layoffs this week and October after a September restructuring suggest the level of problem and money pressures Snap faces.

Snap has been like a sieve for insider news getting out to the press, which has made the company irate, as reported by Cheddar’s Alex Heath. This resulted in a harsh memo that in part said the following:

As a result, all employees must keep our information strictly confidential until disclosed by Snap. We have a zero-tolerance policy for those who leak Snap Inc. confidential information. This applies to outright leaks and any informal “off the record” conversations with reporters, as well as any confidential information you let slip to people who are not authorized to know that information.

If you leak Snap Inc. information, you will lose your job and we will pursue any and all legal remedies against you. And that’s just the start. You can face personal financial liability even if you yourself did not benefit from the leaked information. The government, our investors, and other third parties can also seek their own remedies against you for what you disclosed. The government can even put you in jail.

Not that anyone should minimize the need for a basic level of confidentiality. Leaking information from a public company, particularly if some people have a chance to trade on the insights before others do, can be a significant legal risk. But there are different ways to communicate, and Snap management opted for as heavy-handed a one as might be imagined. If they wished an effective deterrent, internal training and emphasis would have been far more effective.

Instead, this move is almost guaranteed to scare employees not into knowing compliance with right actions but further into psychological bunkers and out of the company as soon as possible.

What can you expect when a culture of secrecy reportedly makes many employees feel isolated and in danger? This is like entrepreneurs who are so intent on protecting their “brilliant” ideas that they never learn how limited or flawed the concepts are because they won’t listen. If you regularly divide employees, you miss the communication and collaboration necessary for innovation and solving problems.

And speaking of innovation, as the hammer comes down in this way, it also strikes in another. In the memo released at the time of the most recent layoffs, via Cheddar, CEO Evan Spiegel discussed the need to create a “highly scalable business model” and an “organization that scales internally.” He wrote, “This means that we must become exponentially more productive as we add additional resources and team members.”

To many, that translates as “your life should be ours.” There is only so productive people can be. They aren’t machines, and if you continually expect more and more, even with additional tools and resources (but likely not), you burn people out. That may work if you think everyone but yourself is replaceable and you want to use individuals as tools to make money — but, on second thought, no, it probably won’t. Some have pulled it off, but far more often these attitudes have limited success at most.

Then that memo ended as follows:

Lastly, I’d like to make it very clear that our team is not here to win 2nd place. The journey is long, the work is hard, but we have and we will consistently, systematically, out-innovate our competitors with substantially few resources and in far less time. And we will have a blast doing it.

Put differently: You won’t have the resources you need but you will succeed and work faster and harder because you are order to, and you will enjoy the process whether you want to or not.

The communications style of Snap in these two instances betrays a remarkable degree of emotional tone deafness. Even though the people responsible are likely sure they are motivating employees while helping select for the types of people who will do well by them, they transmit subtexts that are off-putting to many who could be of immense help but are unwilling to submerge themselves into the drive to enhance the financial well being of a tiny group.

The people at Snap could have avoided the problem with a few steps:

  • Clarify and be honest with yourself about what you really want to achieve. Have someone from the outside look at materials, interview people, and offer a disinterested observation of the situation.
  • Look at things from an employee’s viewpoint and put yourself in their shoes. Given the general atmosphere, if you heard this as an employee, how might you react?
  • Recognize that how you feel personally and what you want to accomplish may not work well together. Focus on approaches most likely to produce the needed results, not something that makes you feel vindicated.
  • Get expert help. If you pride yourself on an engineering culture, as Snap seems to, don’t assume you’re also a master of psychology and motivation. Chances are that you aren’t.

Google CEO Has No Regrets About Firing Author of Anti-Diversity Memo

Google CEO Sundar Pichai on Friday expressed no regret over the firing of James Damore, author of an infamous memo criticizing Google’s pro-diversity policies and culture.

During an appearance with YouTube CEO Susan Wojcicki, Pichai said, “I don’t regret it,” when asked about Damore’s firing by Recode head Kara Swisher. He insisted that the firing was primarily a strategic decision for Google. “The last thing we do when we make decisions like this is look at it with a political lens,” Pichai said, according to TechCrunch.

Google has been working to increase its hiring of women. Damore’s memo, which became public in August, argued in part that women might not be biologically suited for careers in engineering or technology. Many commentators felt that retaining Damore after the memo’s distribution would make Google a hostile work environment for women.

Wojcicki also described the firing as “the right decision.”

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Though Google’s priority was internal cohesion, Damore’s memo was broadly criticized by many in the tech sector and beyond, including for faulty interpretations of biological science. Damore quickly revised inaccurate representations that he had completed a Harvard PhD in biology.

At the same time, reports did indicate that Damore’s views were quietly widespread in the lower ranks of Google.

Damore earlier this month initiated a lawsuit against Google, alleging that the company discriminates against white men. That case seems difficult to make on its face, since its most recent diversity report found that the company is 69% male and 91% white or Asian, with black or Hispanic people making up only 3% and 4% of new hires, respectively.

Canada's Hydro Quebec unable to meet demand from digital currency miners

MONTREAL (Reuters) – Canada’s largest utility, Hydro Quebec, is reviewing its commercial energy strategy after being inundated with demand from global digital currency miners rushing to the province to benefit from political stability and low energy prices.

Hydro Quebec will not have the long-term capacity to meet all the anticipated demand, a company spokesman said, after the utility’s potential mining projects more than doubled in a week to 70.

Bitcoin mining consumes large quantities of energy because it uses computers to solve complex math puzzles to validate transactions in the cryptocurrency, which are written to the blockchain, or digital ledger.

The first miner to solve the problem is rewarded in bitcoin and the transaction is added to the blockchain.

Expectations of a crackdown in China, one of the world’s biggest sources of cryptocurrency mining, on the sector has made energy-rich Quebec an attractive site for companies, and its chief executive is now receiving queries on his Linkedin profile.

Bitmain Technologies, operator of some of the largest mining farms in China, is among the companies searching for sites in Quebec. Others include Japan’s GMO Internet Inc (9449.T), but it has not yet taken a decision on whether to start operations in the province, a source familiar with the matter said. A GMO company spokeswoman declined to comment.

“We are receiving dozens of demands each day. This context is prompting us to clearly define our strategy,” said Hydro Quebec spokesman Marc-Antoine Pouliot by phone.

“We won’t be able to power all the projects that we’re receiving,” he said, while stressing that Hydro Quebec is not automatically refusing entrepreneurs. “This is evolving very rapidly so we have to be prudent.”

Hydro is also keen on attracting data centers, which generate more employment than bitcoin mines.

According to Hydro Quebec, the province estimates it will have an energy surplus equivalent to 100 terawatt hours over the next 10 years. One terawatt hour powers 60,000 homes in Quebec during a year.

A shortage of sites in Quebec with the necessary electric capacity has prompted several entrepreneurs to break down their projects into smaller investments, said Laurent Feral-Pierssens, executive director, emerging technologies at KPMG Canada.

“This is the tip of the iceberg, as only a fraction of the initiatives have reached out to Hydro Quebec yet,” said Feral-Pierssens, who works with digital currency miners that want to open operations in the province.

Reporting By Allison Lampert; Additional reporting by Hideyuki Sano in Tokyo; Editing by Denny Thomas and Susan Thomas

Facebook Adds First Black Board Member, Former American Express CEO Kenneth Chenault

Former American Express CEO Kenneth Chenault has joined Facebook’s board, the first African American to do so.

The social network’s CEO, Mark Zuckerberg, announced the board appointment on Thursday and said he had been “trying to recruit Ken for years.”

“He has unique expertise in areas I believe Facebook needs to learn and improve — customer service, direct commerce, and building a trusted brand,” Zuckerberg wrote in a Facebook post. “Ken also has a strong sense of social mission and the perspective that comes from running an important public company for decades.”

Chenault retired in October after a 16-year stint leading American Express, and was the credit card company’s first back CEO and one of the few black leaders among Fortune 500 companies. With him no longer leading American Express, the Fortune 500 has only three black CEOs.

Shortly after announcing his planned retirement, Chenault described the lack of African-American CEOs leading Fortune 500 companies as “a real problem” that is “embarrassing for corporate America.”

In October, Facebook chief operating officer Sheryl Sandberg told the Congressional Black Caucus that the social network was looking to add an African-American board member. The caucus has criticized Facebook and other technology giants for failing to fix the lack of diversity in Silicon Valley, where minorities and women are underrepresented, especially in high-paying roles and executive leadership positions.

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Civil rights activist and Rev. Jesse Jackson also criticized Facebook in June during a shareholder meeting for failing to add any African-Americans, Asians, or Latinos to its board.

“Ken and I have had dinners discussing our mission and strategy for years, and he has already helped me think through some of the bigger issues I’m hoping we take on this year,” Zuckerberg said Thursday.

Amazon Joins Growing List of Employers That Won’t Ask About Your Salary History

Will this be the year we finally make progress in closing the gender pay gap?

It’s only the middle of January, but 2018 has already seen the implementation of new laws and policies that have the potential to boost women’s paychecks. The latest news comes from Amazon, which this week banned its hiring managers from asking prospective hires about their salary histories, according to BuzzFeed.

The tech giant follows in the footsteps of companies like Google, Facebook, and Cisco, which earlier this month were legally banned from posing the question to potential employees in California, thanks to a new law that took effect on Jan. 1. Though the law technically applies only to those who work in the Golden State, most have proactively applied the law to all of their U.S. hires. Massachusetts, Oregon, Philadelphia, New York City, and San Francisco have passed similar laws over the past couple of years—though Amazon’s home state of Washington has yet to do so.

Also this week, New Jersey Gov. Phil Murphy signed an executive order banning state agencies—though not private companies—from asking the controversial question. (The rule takes effect on Feb. 1). New York, Delaware, New Orleans, Pittsburg, and Albany already have similar laws in effect.

While such laws technically apply to a specific jurisdiction, they may have a broader effect. Rather than creating a different set of policies for various cities and states, some companies simply use the strictest set of employment laws as the benchmark for the entire company’s human resources policies. This may explain why major employers like Amazon, which has half a million workers across the country, are opting to embrace a blanket rule.

Many of the policy changes are being positioned as efforts to fight the pay gap that plagues women and people of color. In Gov. Murphy’s statement accompanying the executive order, he called the policy, “the first meaningful step towards gender equity and fighting the gender pay gap.”

In 2016, women made about 80 cents on a man’s dollar, a number that has remained mostly stagnant. The gap is wider for women of color and has been growing for Millennial women. One of the reasons for this, says Andrea Johnson, senior counsel for state policy at the National Women’s Law Center (NWLC), is the salary history question, which “forces women to carry pay discrimination with them from job to job.”

Johnson calls the efforts to ban the question “exciting,” but notes that such laws are just one piece of the puzzle. Her organization is currently focused on pushing for pay transparency laws, which have already gone into effect in Iceland and the U.K. An Obama-era effort to collect salary information via EEO-1 forms—which must be filled out by any company with 100 or more—has been rolled back under the current administration. The NWLC is one of the dozens of civil rights groups challenging that decision.

Without the support of the federal government, companies’ embrace of policies that advance fair pay—such as Amazon’s move to ban the salary history question and Citigroup’s recent decision to share pay data—are especially important and powerful. Says Johnson: “It’s harder to de-bias minds and easier to de-bias processes.”

U.S. enterprise telecoms firm Avaya trades again after bankruptcy

(Reuters) – Avaya Holdings Corp (AVYA.N) shares started trading on Wednesday on the New York Stock Exchange, the first time the enterprise telecommunications provider has been public in more than a decade.

Shares ended down 0.9 percent at $20.80.

Avaya spent the past year sorting its financials in a Chapter 11 bankruptcy process before listing its shares publicly this week. It was acquired in a leveraged buyout in 2007 for $8.2 billion by Silver Lake Partners LP and TPG Capital LP.

When Avaya was under the strain of its former debt pile, “it was like driving a car with the parking break on,” Chief Executive Jim Chirico said.

One new challenge for Avaya, which now has a market capitalization of about $2.2 billion, as well as $2.9 billion in debt, will be attracting a new set of shareholders after being private for so long. It converted its debt to equity in order to list its shares.

“With the debt converting to equity, I would imagine we would transition over the next few months to new value equity shareholders,” Chirico said in an interview.

Chirico, a longtime Avaya executive who was named CEO last October, brought in a new management team, formed a dedicated cloud software unit and increased spending on research and development. The company hired Mercer Rowe, a former IBM executive, as well as a new chief financial officer, Patrick O‘Malley, from Seagate Technology Plc (STX.O) in recent months.

“We are going to have an execution focus that we haven’t had at the company before,” Chirico said.

The Silicon Valley-based company, which was spun off from Lucent Technologies Inc in 2000, is now in better financial health and said it had more than $300 million in annual cash flow.

“What a lot of people don’t know is that we are a very profitable company,” Chirico said. “The competitors took their best shot while we were in Chapter 11, but we added customers and we’re stronger now that we’ve ever been.”

Chirico added that “our eyes are wide open” to do acquisitions as well.

Before Avaya entered its restructuring process, it explored a sale of its unit providing software to call centers for about $4 billion. When asked about whether the company would ever consider a sale of that unit again, Chirico said “it’s all about shareholder value” but added that the company is closely linked to its other main business line that provides telephone and cloud services to companies.

Reporting by Liana B. Baker; Editing by Susan Thomas

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!

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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.

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