Even After Multiple Cyberattacks, Many Businesses Fail to Bolster Security. Here's What You Need to Do

Small businesses suffered a barrage of computer invasions last year but most took no action to shore up their security afterward, according to a survey by insurer Hiscox.

It found that 47 percent of small businesses reported that they had one attack in 2017, and 44 percent said they had two to four attacks.

The invasions included ransomware, which makes a computer’s files unusable unless the device’s user or owner pays a ransom, and phishing, in which emails that look legitimate are used to steals information. The invasions also include what are called drive-by attacks, which infect websites and in turn the computers that visit them.

Despite the prevalence of the data invasions, only about half of small businesses said they had a clear cybersecurity strategy, the report found. And nearly two-thirds said they didn’t bolster their security after an attack.

Hiscox estimates that seven out of 10 businesses aren’t prepared to handle cyber attacks, although they can cost a company thousands of dollars or more and ransomware can shut down operations. Cybersecurity tends to get pushed to the back burner while owners are busy developing products and services and working with clients and employees. Or owners may see it as an expense they can’t afford right now.

Some basic cybersecurity advice:

–Back up all of a company’s data securely. This means paying for a service that keeps a duplicate of all files on an ongoing basis. The best backups keep creating versions of a company’s files that can be accessed in the event of ransomware — eliminating the need to pay data thieves. Some backups cost just a few hundred dollars a year.

–Install software that searches for and immobilizes viruses, malware and other harmful programs. Also install firewalls and data encryption programs.

–Make sure you have all the updates and patches for your operating systems for all your devices. They often include security programs.

–If you have a website, learn how to protect it from hackers, using software including firewalls. But you might be better off hiring a service that will monitor your site with sophisticated tools that detect and disable intruders.

–Tell your staffers, and keep reminding them, about the dangers of clicking on links or attachments in emails unless they’re completely sure the emails are from a legitimate source. Educate your employees about phishing attacks and the tricks they use. Phishers are becoming increasingly sophisticated and are creating emails that look like they really could have come from your bank or a company you do business with.

–Hire an information technology consultant who will regularly look at your systems to be sure you have the tools you need to keep your data safe.

–The Associated Press

The Surprising Economic Benefits of Clean Energy

It seems to be a common misconception that environmentalism and economic growth are opposed, but nothing could be further from the truth. The economic power of the green movement is most visibly on display in the clean energy industry, which is rapidly growing and innovating daily.

Clean energy impacts residential, commercial, and industrial properties, so how it is supported and implemented is key to how it impacts both the planet and the economy. Here’s a look at programs that support the development and expansion of clean energy, as well as how clean energy is being integrated with our infrastructure today.

How clean energy impacts businesses

Clean energy might not seem, on its surface, like a business issue for anyone outside of the renewables industry. However, on the contrary, it is a powerful cost-cutting measure that carries with it a huge branding opportunity. Not only can businesses save money by harnessing the power of sun, air, or sea, but they can also demonstrate to a consumer base eager for corporate social responsibility that they care about their environmental impact.

Those benefits are driving adoption by more companies. In 2017, companies acquired more than 4 gigawatts of clean energy, the most of any year on record. And already in 2018 companies have acquired nearly three quarters of last year’s total, putting them on pace to easily surpass 2017’s record-breaking acquisitions of clean energy.

Adoption rates also mean that the branding advantage presented by the opportunity to shift to clean energy will soon turn into an imperative. Changing now means companies are responsible kids on the block, but waiting until later means they run the risk of looking like a lackadaisical polluter. As clean energy becomes more ubiquitous, it will be expected, rather than applauded. Large adopters are clearing the way for smaller companies, and clean energy is moving toward something that feels more like mass adoption.

Regulatory support for clean energy

In 2015, the White House established new Property Assessed Clean Energy (PACE) guidelines through the Federal Housing Administration that should help scale up adoption of clean energy. PACE enables low-cost, long-term financing for a variety of energy efficiency, renewable energy, water conservation, storm protection, and seismic improvements. PACE financing is repaid as a special assessment or tax on the property’s regular tax bill and is processed the same way as other local public benefit assessments like sidewalks and sewers.

Depending on where you live, PACE financing can be used for improvements on commercial, residential, nonprofit, light industrial and agricultural properties. PACE is designed to lower utility bills for homeowners, create jobs and help local governments achieve important environmental goals (although it hasn’t been without its opponents).

Real world implementation of clean energy

Technological development and theory are great things, but they are nothing without real action. How we implement clean energy and the market conditions surrounding it are the most important aspects of transforming the way we obtain our energy.

A number of companies use earth-friendly practices and products to provide the homeowner with energy saving solutions, offering qualifiable PACE improvements and upgrades that can be made to a home or business. Many work with financing companies like Renew Financial, a clean-energy finance company led by CEO Cisco DeVries, the innovator of the PACE finance model, to provide solutions that aim to keep the immediate environment clean and reduce energy waste and costs.

Environmental resiliency is certainly an issue across the country. In Florida in particular, homeowners are concerned due to the risks of flooding, hurricanes, and extreme heat.

One company, Evergreen Homes, says it’s seeing an increase in requests for critical property upgrades such as roofing, wind-resistant windows and other energy-efficiency improvements. CEO Ido Stern says it provides customers with a number of options “to make much-needed weatherization and energy improvements that make their properties hurricane safe, and comparable with new construction, while at the same time saving them money and increasing their property values.”

Every dollar saved by the implementation of green solutions and clean, renewable energies is a dollar that can be used in the local economy, boosting growth and improving the business environment. In this way, economic growth and environmental progress go hand in hand. So, the next time someone says you have to degrade the environment to make money, remember that a large sector of the American economy is driven by finding business solutions to critical environmental problems.

The Dark Side of the Crypto Revolution

The bitcoin Hodlers, ICO hustlers, and Lambo-owning crypto millionaires would like you to know that the cryptocurrency revolution is upon us. Before long you’ll be making breakfast on the blockchain! But as the trustless, decentralized world of digital tokens expands—and Fortune 500 companies, banks, restaurant chains, and even countries (ahem, Venezuela) cautiously wade in—a credibility problem persists. Silk Road and AlphaBay may be gone, but that hasn’t stopped fraudsters, gamblers, sex workers, and drug dealers from cashing in.

Javier Arce

Sex

Escorts, cam girls, and other sex workers now speak fluent crypto. (See: r/GirlsGone­Bitcoin.) At a club in Las Vegas, strippers accept tips in bitcoin, while PinkDate—the “Tinder of escorting”—claims it sold 40 million tokens in a recent coin offering.


Javier Arce

Gambling

Illegal online betting is much easier when money transfers can be made swiftly and untraceably. (No more payouts postmarked from shady banks in other countries!) Except now your crypto winnings could fluctuate along with the volatile market.


Javier Arce

Drugs

Cannabis startups such as Paragon and BudBo use blockchain tech to make it easier and more secure for suppliers to track their shipments. Meanwhile, on the dark web, traffickers of harder drugs are attracted to bitcoin’s perceived anonymity.


Javier Arce

Scams

Anyone can hype the next bitcoin—including pump-and-dump groups. Coordinating on private messaging services, they pick a random token, ­promote the heck out of it anywhere they can, and then sell at the top, screwing gullible investors.


Javier Arce

Fakes

Of course a northern Ohio fake-ID manufacturing ring operating on Reddit would prefer to transact in bitcoin. Only rubes use Venmo! The Feds seized $5.1 million worth of the currency from the alleged masterminds, who were indicted in February.


Javier Arce

Violence

It’s hard out there for ostentatious bitcoin tycoons, what with crypto robbers kidnapping them and demanding—at gunpoint—access to their digital wallets. Yes, this happens, and it’s one reason more of them are hiring bodyguards.


This article appears in the June issue. Subscribe now.


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The America (Fiscal Deficit) First Fed Tractor Beam Gradually Tightens Global Monetary Conditions Further

Fed Chairman Jerome Powell alleges that rising real US interest rates are not negatively influencing the global economy. His global conviction is now being strongly tested by Mr Market. Liquidity flowing to North America runs, away from tightening global monetary conditions, towards tightening American monetary conditions. In the short term, the global liquidity injection may outweigh the tightening US domestic liquidity conditions and provide a monetary stimulus to the American economy. Should Chairman Powell read this as a signal to tighten US monetary policy further, a singularity may occur at which this positive feedback system overloads and then breaks down.

Chairman Powell is lucky that the global liquidity is chasing US financial assets rather than creating inflation in the real economy. This good fortune however comes at the cost of a destabilizing bubble in capital markets asset prices that the Fed needs to manage. Managing this asset bubble with higher interest rates may thus create the same singularity event risk ultimately.

The adoption of a more global perspective by Chairman Powell is the fundamental solution. Since he remains hostage to President Trump’s America First prime directive, this global perspective will be difficult to achieve in practice without some negative event in the global economy that can be sold to and then sold by the President as a threat to American national security.

The thesis of the last report was that the Fed may be overtaken by the global headwinds before it hits the neutral rate. Recent events indicate that the Fed is now being overtaken, by both global and domestic events, yet shows no inclination to adjust its position.

Hiding in plain sight, among the archives of the Kansas City Federal Reserve’s analysis, is a piece of evidence which suggests that this inflection point actually may have been hit way back in late 2016/early 2017. It is maybe no surprise that this evidence has been largely ignored and suppressed, since Kansas City Fed President Esther George is a noted Hawk who has been in a hurry to build a conventional interest rate cushion to deal with the implications of her analysts’ research.

The Kansas City Fed’s smoking gun is to be found in a research report entitled Nominal Wage Rigidities and the Future Path of Wage Growth. The report finds that wage rigidity has been rising since late 2016, with the corollary impact of exerting greater resistance to rising wage pressures. The researchers find that this phenomenon is driven by their observation that companies, that retained staff during the Great Recession, are now responding to this negative historic cost of carry by not raising the salaries of these people to whom they ostensibly showed loyalty during the bad times.

By implication therefore, which the Kansas Fed report omits, the positive driver of wage inflation must therefore be from the net creation of new highly skilled jobs that can command a premium. America is not however creating such highly skilled jobs in the number required to overcome the legacy wage rigidity in existing employment.

More alarmingly, the uptick in wage rigidity seen by the Kansas Fed is now coming off a higher low. The greater trend is therefore for rising wage rigidity and hence increasing downward pressure on wages. What the chart on wage rigidity actually signals is that the economic recovery started circa 2012 in compensation terms. It then ended in late 2016. In compensation terms we are into the next recession!

The FOMC on the other hand has been running to catch up and get ahead of the big fall in wage rigidity from 2015, which it interpreted as creating inflation risk in traditional Phillips Curve fashion. This risk seems to have abruptly ended in late 2016, but the FOMC is unwilling to acknowledge it. Now the FOMC “agonizes” over whether to call this risk of recession as mission accomplished on hitting the new lower neutral rate of interest.

The FOMC is not alone in its “agonizing” in relation to wage rigidity. It can draw a small measure of comfort from the fact that the world’s oldest central bank is also “agonizing” in the same regard. The Riksbank’s Henry Ohlsson recently commented that wage rigidity in Sweden is confounding the Phillips curve predictions, that tighter labor markets should produce wage inflation sooner rather than later.

(Source: Reserve Bank of Australia)

The Reserve Bank of Australia is also “agonizing” over the fact that the anemic pace of wage increases is challenging Australians’ “sense of prosperity,” with obvious headwind implications for the strength of the economic recovery there.

The growing global appreciation of wage rigidity, among the developed nation central banking fraternity, may ultimately become doctrinaire and temper enthusiasm for the raising of interest rates. Depending on how one looks at it, the Fed is either diverging from this doctrine or leading the charge towards it with gay abandon for a recession that it is creating.

(Source: Central Banking)

A more worrying diversion, down the global central bank thought leadership road on the Phillips curve however, comes from a Bank of England neophyte rate setter.

According to Silvana Tenreyo, the nascent inflation pressures in the Phillips Curve have become muted by the successful application of monetary policy by central banks. This little piece of panegyrics is setting the Old Lady and the young lady up for a great fall. If it goes to the heads of her global central banking colleagues, the fallout could be spectacular when the sound-bite expires, but the ride higher in risk asset prices could be well worth it for those who flatter through price discovery. As J K Galbraith noted: “Financial disaster is quickly forgotten. There can be few fields of human endeavor in which history counts for so little as in the world of finance”.

(Source: Boston Fed)

A second smoking disinflation gun, to go with that of the Kansas City Fed, was recently revealed by the Boston Federal Reserve. Boston Fed researchers have found another cause of wage rigidity, which they generally attribute to the rise of the all-pervading “gig” economy.

(Source: Quartz)

The Boston Fed may however be barking up the wrong tree, in identifying the causal relationship of wage rigidity to the “gig” economy. A recent study by the Bureau of Labor Statistics (BLS) has found that “gig” jobs’ share of employment is actually falling. So the “gig” economy is actually in decline, yet wage inflation is still not accelerating. Go figure?

With its own two smoking guns, clearly hiding in plain sight, it is going to become harder for the FOMC to argue for and deliver further interest rate hikes. The Fed’s ability to rebuild its conventional monetary policy interest rate cushion, to be used in the event of the next economic slowdown, is thus be challenged by its own thought leaders.

(Source: Bloomberg)

The incoming inflation data suggest that the Fed has hit its inflation target and/or the new lower neutral rate. Whilst the likes of James Bullard and John Williams have already broken out the “Champagne” and “Goldilocks” guidance epithets respectively in celebration of this, there is no cause for euphoria or any strong justification for thinking that these good times will last. The inflation drivers, that have nudged the needle to target, are not the pro-cyclical ones traditionally associated with strong economic growth. The party may therefore be short-lived and very embarrassing for the Fed’s revellers when it all ends.

The last report discussed the “agonizing” going on within the Fed over when and how to announce arrival at the neutral rate and then what to do next. The Kansas City Fed shows us that American workers have been in compensation “agony” since late 2016. Their “agony” has been exacerbated by the Fed’s normalization process. The Fed is in effect behind the compensation curve. St Louis Fed President James Bullard was also observed popping the champagne corks to celebrate the workers’ “agony,” which loosely translates into what San Francisco Fed President celebrates as the “Goldilocks” economy. Evidently, these two gentlemen, who didn’t get fired during the Great Recession, have had great pay rises in contradiction to the rising wage rigidity curve and can wash their lukewarm porridge down with “Champagne”! The Fed is clearly not on the same compensation curve that it is studying.

Having sobered up somewhat, Bullard has now moved on to address the problem of the inverted yield curve. He recently added to the agony, of his voting colleagues, by announcing that it is now time to slow the pace of normalization. This implies that he believes that the neutral rate has been reached, and it is now time to steepen the yield curve to stop sending the recession signal that its current shape is sending to some. A slower pace of continued normalization rather than a pause, combined with a tolerance for a slight inflation overshooting in line with the new “symmetrical” target, should then work its way through the forward curve into a steepening.

Fed Governor Lael Brainard’s practical way of dealing with the agony involves maintaining the “appropriate” tactics of gradually raising interest rates, whilst the headwinds from the global economy remain in a dynamic equilibrium with the domestic tailwinds. Her ultimate target is a “modestly restrictive” position, suggesting that the dynamic equilibrium will move in favor of the fiscal tailwinds over time. She has no fear over the collective market fear that the flat yield curve is a harbinger of recession. The last report suggested that Chairman Powell was done with reforming Fed guidance and would attempt to strangle-off the communications of his colleagues. Noting this looming threat, Brainard has alluded to the need to get rid of “stale” guidance.

New York Fed President John Williams chose the warmer than “Goldilocks” halo effect, of the May Employment Situation, to frame perceptions of the Powell choke on guidance. In this frame, the Fed should continue gradually hiking interest rates for the next two years and should then reach the neutral rate after three more rate hikes. As rates near neutral, there will be less need for forward guidance and the notion of “accommodative” policy will become less relevant as interest rates rise in his view.

The last report suggested that the Fed wished to steepen the yield curve. Williams ritually obliged in this endeavor, by opining that the Fed does “not necessarily” need to pause interest hikes after hitting the neutral rate. On the contrary, if the economy remains strong, interest rates could actually go above neutral for a period of time. Having previously tried and failed to steepen the curve, by discussing the tolerance for inflation overshooting target, Williams is now trying to show intolerance of this to achieve the same resultant steeper yield curve shape.

True to form, the voluble Minnesota Fed President Neel Kashkari is not going to be choked by the Chairman without a fight. He projected his own halo onto the latest jobs data in order to keep his viewpoint in the policy debate. Acknowledging jobs growth, he also observes some more slack in the labor market which can act as a drag on the rate hike and normalization process. This slack may also lower the neutral rate, thus obviating the need for further rate increases.

Kashkari’s thesis is not too dissimilar from that of the wage rigidity researchers at the Kansas Fed. It may also be borne out in the micro-economic behavior of companies as we shall see below.

(Source: Bloomberg)

The Fed is making leaps and bounds in its embrace of diversity. Unfortunately it does not expand this embrace of race and gender to business skills. The Fed is still an institution rigidly bound by its belief in the skills of career economists and/or career bureaucrats, with the occasional career policy wonk or Wall Streeter thrown in for good measure. The Fed’s view and policy is therefore framed by the collective capture by these great estates of the American polity. What is lacking are businessmen and entrepreneurs, the real creators of economic wealth rather than phony prosperity in the form of inflated asset prices.

This glaring omission is highlighted by the Fed’s current “agonizing” over the shibboleth known as the Phillips Curve. The Fed keeps hoping that the inflation from a tight labor market shows up. As noted by the previous Kansas City Fed study of labor market rigidity above, this may be a mirage. In the real economy businesses, especially small businesses, have been forced to exercise extreme financial discipline as a response to the enforced credit rationing experience of the Credit Crunch. Just as their consumers have deleveraged and changed their behavior, so American companies have also responded with efficiencies.

This rational discipline, on the part of business, now manifests in the recruiting process. There is a well-accepted skill shortage. Business however has to remain profitable. Since consumers have reformed their behavior, higher wage costs can no longer be passed on with ease. Thus even though companies would like to pay up to hire skilled staff, their narrow profit margins prevent this. In addition, there is a lack of skilled staff available, so it would be illogical to chase people who do not exist in reality. American business has therefore reached the labor supply side limit of productivity driven growth. Large nonfarm payroll increases may thus be a thing of the past, as America conforms to the new economic productive labor straitjacket.

Ironically, immigration and global free trade are the only things that can break this iron labor supply constraint – a fact unfortunately ignored by the populist tendencies of the leadership at present. The Fed, anchored in its own economic theory however, will read the tight labor markets and rising trade war barriers as inflationary. A man with a hammer only sees nails, so the Fed will continue with its gradual nailing of the real economy with gradual rate rises until it sees the economic deceleration that it is contributing to in the data.

As a consequence, American businesses will now have the headwind of higher interest rates and rising employment costs to deal with. This margin pressure will thus make them even more conservative in behavior. This conservative behavior will come in the form of aggressive cost saving. Aggressive cost saving will translate into aggregate economic stagnation at the national level. Since the Fed’s contribution to this stagnation is gradual, with interest rate increases, this deceleration will be slow in coming unless the global economy falls off a cliff in the meantime.

(Source: Econoday)

The latest FOMC decision to raise interest rates and signal confidence that an extra one can be inserted this year, provided no hint that the central bank has twigged the wage rigidity issue.

Under Powell’s leadership, the data dependent Fed is reactive to incoming data (which is itself historic) so that there is no possibility that it can get ahead of any curve real or imagined. The Dot Plots once again showed where it all goes pear shaped. The forecasters assume weak growth and inflation; however, they predict the rate hiking to continue presumably as the Fed builds a conventional monetary policy cushion to deal with the weak economy that it is weakening further with tighter monetary policy. The Dot Plots thus clearly signal the wage rigidity and the Fed’s ignorance of or unwillingness to do anything about it. By this metric therefore, the Fed is actually behind the curve.

(Source: Seeking Alpha)

The previous article in this series suggested that Chairman Powell would “strangle” the guidance of his colleagues in order to focus market attention on his own guidance. Further evidence in support of this thesis was provided by the Chairman himself, who stated that he will hold a press conference after every meeting. In addition to this “strangle” he also announced that forward guidance on the evolution of monetary policy will be dropped, thus fulfilling John Williams and Lael Brianard’s earlier predictions.

The Chairman has pretty much monopolized the guidance mechanism for himself and also made this process data dependent by nature of his own cognitive bias in this direction. The Fed has therefore become more opaque by default, thus increasing the risk of surprises for itself and by logical extension the market.

Through his monopolizing reform of the guidance process, the Fed Chairman has effectively set himself up to be the hero or the loser. This binary outcome of his admirable embrace of leadership does not appear to be sitting too well at present. The signs of his unease were clear, as he tried to field reporters’ questions during his latest press conference. In the past he has made it clear that, he “intuitively” believes in a structural trend towards disinflation, causally associated with spare global capacity, advancing technology and competitive markets. Picking away at this scab, reporters pressed him to conjecture upon what the new natural rate of unemployment may be, and hence what tight labor markets imply for monetary policy.

Noticeably uneasy on such pure econometric pursuits, Powell reached for the Dot Plots and then noting the risk in doing so swiftly grasped for his “intuitive” crutch. He averred that: “there’s no sense that inflation will – no sense in our models or in our projections or forecasts that inflation will take off or move unexpectedly quickly from these levels, even if unemployment does remain low,” and “if we thought that inflation were going to take off, obviously we’d be showing higher rates. But that’s not what we think will happen.”

If Chairman Powell is going to do anything serious about avoiding being hanged by his own petard, this author wagers that he will bin the Dot Plots because they are an embarrassment that may catch him out in the future.

(Source: Bloomberg)

The Dot Plots will also be of major concern to the global economy. The predicted rise in real US interest rates will provide a bid for the US Dollar and suck liquidity from the global economy. Chairman Powell’s belief that this is not a problem for the global economy is well known, so we should all be scared. High real interest rates are probably just what America needs to finance its rising fiscal deficit, ballooned even further by President Trump, so one should not be surprised at Chairman Powell’s America First bias in enabling this situation by reducing Federal Government access to the Federal Reserve’s balance sheet. Just as the Fed stops buying US Treasuries, the global flight to alleged quality and higher yields will pick up the slack. Chairman Powell is gradually providing that attractive yield whilst simultaneously undermining the sources of global capital flows. Global insecurity, created by higher US interest rates and trade war threats, is the corollary of American national security as perceived by the Trump administration and the captive Fed Chairman.

The great American dragging of global real interest rates higher is just something else that America’s trade partners will have to wear, as they renegotiate the new terms of global trade under constant threat of tariffs. Capital sucked from the global economy, into the attractive return environment of America, may even end up in more jobs and higher wages!

As the Fed sucks global capital back into American capital with monetary policy, it is simultaneously reinforcing these flows and their inherent risks with its macro-prudential rule rollback. The initial post-Crisis provisions of Dodd-Frank and the Volcker Rule are under attack. Most recently the Fed diluted its single-counterparty exposure provisions further for larger systemic US and global institutions. The bore of the pipes to connect global liquidity with American capital markets are thus being widened, as the monetary policy forces to boost these flows are being ratcheted up. As usual, it will be better to ride this flow than to arrive when it breaks.

Since this real interest rate dragging process is essentially a gradual one, the threat of sudden shock to the global financial markets is minimal. The threat of multiple limited duration financial shocks, as we have seen, each time real interest rates are incrementally ratcheted-up is a higher probability outcome. Balance sheets, both corporate and sovereign should be prepared for more of the same. Buyers of dips should take note to buy those who are prepared for this eventuality.

(Source: Seeking Alpha)

From its unique perspective, as custodian of America’s threatened global hegemonic legacy, the IMF has been well placed to see the next emerging global crisis developing. After the Fed recently tightened and the ECB and BOJ amplified this tightening by doing nothing, the IMF quickly stepped in with a warning principally aimed at America. Identifying America’s pro-cyclical stimulus enabled by higher US interest rates as the catalysts, the fund warned that this dangerous situation “will elevate the risks to the U.S. and the global economy.” Unfortunately President Trump and Chairman Powell don’t do globalism at present, so something stronger than globalist rhetoric will be needed to change their viewpoints.

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.

Gold Bullish On Fed Hike 3

Gold weathered the Federal Reserve’s 7th rate hike of this cycle this week. Gold-futures speculators and to a lesser extent gold investors have long feared Fed rate hikes, selling ahead of them. Higher rates are viewed as the nemesis of zero-yielding gold. But contrary to this popular belief, past Fed rate hikes have proven very bullish for gold. This latest hike once again leaves gold set up for a major rally in coming months.

The Fed’s Federal Open Market Committee meets 8 times per year to make monetary-policy decisions. These can really impact the financial markets, and thus are closely watched by gold-futures speculators. These elite traders wield wildly-outsized influence on short-term gold price action due to the truly extreme leverage inherent in gold-futures trading. What they do before and after FOMC decisions really impacts gold.

This week’s latest Fed rate hike was universally expected. Trading in the federal-funds-futures market effectively implies rate-hike odds. Way back in mid-April they shot up to 100% for this week’s meeting, then stayed there for 5 weeks. In the last several weeks they averaged 91%. So everyone knew another Fed rate hike was coming. That’s typical, as the FOMC doesn’t want to surprise the markets and ignite selloffs.

The big unknown going into the every-other FOMC meetings followed by press conferences from the Fed chairman is the future rate-hike outlooks. Top FOMC officials’ individual federal-funds-rate outlooks are summarized in a chart traders call the “dot plot”. That was hawkish this week, with 2018’s total expected rate hikes climbing from 3 to 4. More near-term rate hikes projected have really hammered gold in the past.

But on this week’s Fed Day gold didn’t plunge despite these hawkish dots and 7th rate hike of this cycle. Gold was around $1297 as the FOMC statement and dot plot were released that afternoon, and only fell modestly to $1293 after that. Then it started rallying back a half-hour later during Jerome Powell’s post-decision press conference. Gold closed that day at $1299, actually rallying 0.3% through a hawkish FOMC.

Gold-futures speculators usually sell leading into the every-other “live” FOMC meetings with dot plots and press conferences. Incidentally the first thing the new chairman Powell discussed this week is he is going to begin holding press conferences after all 8 FOMC meetings each year starting in January! So the gold-futures-driven gold volatility surrounding the Fed could very well become more frequent in 2019 and beyond.

All that gold-futures selling before FOMC meetings leaves speculators’ positions too bearish. And the Fed tries hard to never majorly surprise on the hawkish side anyway. So after FOMC decisions the very gold-futures speculators who sold aggressively leading into them often start buying back in. This trading dynamic forces gold lower leading into Fed Days, and then drives big rebound rallies coming out of them.

This week a single gold-futures contract controlling 100 troy ounces of gold worth about $130,000 had a maintenance-margin requirement of just $3100! So futures traders can run up to 41.9x leverage to gold, which is mind-boggling. The legal limit in the stock markets has been 2x for decades. At 40x each dollar deployed in gold futures has 40x the impact on the gold price as another dollar invested in gold outright.

So even if you don’t trade gold futures like the vast majority of gold investors, they are important to watch since they dominate short-term gold action. This first chart looks at gold and speculators’ total long and short positions in gold futures over this Fed-rate-hike cycle. Each of these 7 rate hikes is highlighted, showing how gold sells off into them before rallying out of them mostly driven by speculators’ gold-futures trading.

Back in late 2015, the FOMC hadn’t hiked its FFR for nearly a decade. At its late-October 2015 meeting, the FOMC statement warned the Fed was “determining whether it will be appropriate to raise the target range at its next meeting”. That hawkish signal shocked gold-futures traders and they started dumping long contracts while rapidly ramping short sales. Gold was crushed on that, falling 9.1% over the next 7 weeks.

On the eve of that fateful mid-December FOMC decision to start hiking rates again for the first time in 9.5 years, everyone was convinced that was bad news for gold. Gold yields nothing, so surely higher bond yields would divert investment away from gold. It sounds logical, but history has proven the opposite. So just days before that initial Fed rate hike, I wrote a bullish essay showing how gold thrived in past rate-hike cycles.

Gold surged 1.1% the day of that first hike, but plunged 2.1% to a 6.1-year secular low of $1051 the very next day. Foreign traders had fled overnight following that rate hike. But gold started powering higher right after that. By mid-February 2016 gold had roared back up 18.5% on all that post-FOMC-rebound spec long buying and short covering! Gold formally entered a new bull market at +20% a few weeks later.

The Fed’s second rate hike of this cycle came exactly a year after the first in mid-December 2016. Again the Fed telegraphed another hike, so again gold-futures speculators fled longs and ramped shorts. In the 5 weeks leading into that FOMC meeting, gold plunged 11.2%. That was really exacerbated by the extreme Trumphoria stock-market rally in the wake of Trump’s surprise election victory early in that same span.

While everyone saw that Fed hike coming, the dot-plot rate-hike outlook of top FOMC officials climbed from 2 additional rate hikes in 2017 to 3. So spec gold-futures selling exploded, battering gold 1.4% lower that day and another 1.2% to $1128 the next. That hawkish FOMC surprise of more rate hikes faster was the worst-case Fed-decision scenario for gold. The general gold bearishness was epically high.

But gold didn’t plunge from there like everyone expected. Instead it rebounded dramatically higher with an 11.4% rally over the next 10 weeks or so! When speculators’ gold-futures longs get too low and/or their shorts get too high heading into any FOMC decision, these excessive trades have to be reversed in its wake. Any pre-FOMC gold-futures selling directly translates into symmetrical post-FOMC buying.

Since the FOMC spaced out its initial couple hikes of this cycle by an entire year, there was rightfully a lot of skepticism about when the third would come. So up until just a couple weeks out from the mid-March-2017 FOMC meeting, the FF-futures-implied rate-hike odds were just 22%. But Fed officials jawboned them up to 95% by a couple days before that meeting. Gold was again hit on Fed-rate-hike fears, falling 4.7%.

But right after that third rate hike of this cycle, gold immediately caught a bid and surged 7.6% higher over the next 5 weeks or so. That dot plot kept the 2017 rate-hike outlook at 3 total, not upping it to 4 as the gold-futures speculators expected. So again they were forced to admit their pre-FOMC bearishness was way overdone and buy back in. Fed rate hikes aren’t bearish for gold despite traders’ irrational expectations.

After being wildly wrong for three Fed rate hikes in a row, some of the gold-futures speculators started to pay attention heading into this cycle’s 4th hike in mid-June 2017. But gold still fell 2.1% over several trading days leading into it. That hike too was universally expected like nearly all of them, and the dot plot was neutral staying at 3 total hikes in 2017. But the gold-futures selling broke precedent to continue that time.

In the first week or so after that 4th hike last summer, gold fell 1.9%. Those post-hike losses extended to 4.2% total by early July. That particular rate hike was unique to that point in that it came to pass early in gold’s summer doldrums. In June and early July, gold investment demand wanes so it usually just drifts sideways to lower. Thus this decades-old seasonal lull effectively delayed that post-FOMC gold reaction rally.

Once last year’s summer-doldrums low passed, gold again took off like a rocket as specs scrambled to normalize their excessively-bearish gold-futures bets. So gold surged 11.2% higher between early July and early September on heavy gold-futures buying. This gold reaction to last June’s 4th Fed rate hike may be the best template of what to expect after this June’s 7th one. Summer may again delay gold’s rebound.

But whether gold’s usual post-FOMC rally starts now or a few weeks from now is ultimately irrelevant in the grand scheme. The seasonally-weak summer doldrums don’t change the fact that speculators’ gold-futures bets get too extreme heading into telegraphed Fed rate hikes, so they have to be normalized in the FOMC’s wake. This gold-bullish pattern has held true to varying degrees after all 6 previous hikes of this cycle.

The Fed took a break from hiking in September 2017 to announce its wildly-unprecedented quantitative-tightening campaign to start to unwind long years and trillions of dollars of QE money printing. So the rate hikes resumed at that every-other-FOMC-meeting tempo in mid-December 2017. Again the goofy gold-futures traders started fearing another hawkish dot plot, so gold fell 4.0% in several weeks leading in to it.

But that 5th rate hike of this cycle was accompanied by a neutral dot plot forecasting 3 more rate hikes in 2018 instead of the 4 gold-futures traders expected. So again they had to admit their bearishness was way overdone and buy back in aggressively. So over the next 6 weeks after that FOMC meeting, gold shot 9.2% higher to $1358 nearing a major breakout! How can anyone believe rate hikes are bearish for gold?

The 6th hike of this cycle came right on schedule in late March this year, accompanied by a neutral dot plot still forecasting 3 total rate hikes in 2018. But again the gold-futures traders worried leading into that FOMC decision, pushing gold 3.2% lower over the prior month or so. They started buying back in that very Fed Day, so gold sharply rebounded 3.3% higher to $1353 within 4 trading days of that Fed rate hike.

This gold-futures-driven gold price action surrounding Fed rate hikes is crystal-clear. Gold falls leading into FOMC meetings with expected hikes on fears of hawkish rate-hike forecasts in the dot plots. All that pre-FOMC selling leaves speculators’ collective gold-futures bets way too bearish, with longs too low and/or shorts too high. Then once the Fed acts and specs realize gold isn’t collapsing, they quickly buy back in.

The Fed’s again-universally-expected 7th rate hike of this cycle came this Wednesday. And despite the gold-bullish examples of all the prior 6 hikes, gold-futures traders again sold leading into it. Starting back in mid-April, they embarked on a major long liquidation that pushed gold 4.0% lower by this week’s FOMC eve. In their defense that was mostly in response to a US dollar short squeeze, so maybe they are learning.

Gold-futures data is released weekly in the CFTC’s famous Commitments of Traders reports. These are published late Friday afternoons current to preceding Tuesday closes. So the latest data available when this essay was published is from the CoT week ending June 5th. Even then a week before this 7th Fed rate hike, total spec longs at 235.9k contracts were way down at a 2.3-year low! Speculators were all out.

The Fed indeed hiked as expected, and specs’ hawkish forecast seemed to be confirmed by this newest dot plot. Finally at this week’s FOMC meeting the collective rate-hike outlook rose from 3 total hikes in 2018 to 4. That was the perfect excuse for gold-futures traders irrationally terrified of higher rates to sell gold hard! Yet they couldn’t, with their longs among the lowest levels of this bull the selling was already exhausted.

So gold is once again set up with a very-bullish June-rate-hike scenario like last summer. Once again specs need to normalize their collective gold-futures bets after waxing too bearish leading into another Fed rate hike. That big gold-futures buying is inevitably coming, although it may once again be delayed for a few weeks by the summer doldrums. That would simply add to gold’s powerful seasonal autumn rally.

Gold’s resilience this week in the face of that hawkish dot plot was very impressive. Remember the last time the near-term FFR forecast added another hike in mid-December 2016, gold plunged 2.6% in only 2 trading days. The fact gold didn’t suffer another kneejerk plunge this week on adding another hike this year shows considerable strength! Speculators could’ve aggressively short sold gold futures, but refrained.

Thus gold’s post-rate-hike reaction after this 7th one is likely to mirror the strong rallies after the prior 6. They ranged from 3.3% to 18.5% in the weeks and months after hikes, averaging 10.2%. Given we’re in the heart of the summer doldrums, gold’s post-FOMC rally this summer could mirror last summer’s. It didn’t start until early July, but from there gold blasted 11.2% higher into early September. That’s a big deal.

Gold was trading at $1295 this Tuesday before this week’s FOMC decision. That’s a high base relative to gold’s bull-to-date peak of $1365 from early July 2016. A decisive 1% breakout above that happens at $1379. That would change everything for gold psychology, unleashing a major new wave of global gold investment demand. That critical breakout level for sentiment is only 6.4% above this week’s FOMC-eve close!

So there’s a good chance this coming 7th post-rate-hike rally of this gold bull will push gold’s price into major-breakout territory! As long as gold doesn’t slump too deep in the remaining summer doldrums of the next few weeks, that targets a potential breakout span in this year’s autumn rally. Those tend to peak by late September. With gold relatively high and spec gold-futures longs super-low, gold’s setup is very bullish.

For 7 Fed rate hikes in a row now, most traders have believed and argued that higher rates are bearish for gold. This rate-hike cycle is now 2.5 years old, plenty of time for that popular thesis to play out. Yet between the day before that first hike in mid-December 2015 and this week’s 7th hike, gold still rallied 22.4% higher! The US Dollar Index, which was supposed to soar on rate hikes, slipped 4.7% lower in that span.

Conventional wisdom on Fed rate hikes is obviously very wrong. That’s nothing new, as my extensive research has documented. Throughout all of modern history, gold has thrived during Fed-rate-hike cycles. Today’s cycle is the 12th since 1971. During the exact spans of all previous 11, gold averaged a solid 26.9% gain. During the 6 of these where gold rallied, its average rate-hike-cycle gain was a huge 61.0%!

The Fed’s last rate-hike cycle ran from June 2004 to June 2006, dwarfing today’s. The FOMC hiked in 17 consecutive meetings, totaling 425 basis points which more than quintupled the FFR to 5.25%. If rate hikes and higher rates are bad for gold, it should’ve plummeted at 5%+. But instead gold surged 49.6% higher over that exact span! Fed-rate-hike cycles are bullish for gold, regardless of what futures guys think.

Sadly their irrational and totally-wrong bearish psychology even infects gold investors. This next chart looks at gold and the physical gold bullion held in trust for GLD shareholders. That is the world’s largest and dominant gold ETF (GLD). Its holdings reflect gold investment trends, rising when capital is flowing into gold and falling when investors are leaving. That futures-driven gold action around rate hikes is affecting investment!

Unfortunately this essay would get far too long if I dive deeply into this chart. But I couldn’t exclude it from this discussion either. Because of that goofy gold-futures trading action surrounding Fed rate hikes in this cycle, investors have followed suit to varying degrees. They tend to sell gold leading into Fed rate hikes, and that downside momentum often continues in the weeks after hikes. That really weighs on gold.

But after a couple weeks of strong post-FOMC rallying driven by that gold-futures rebound buying, investors once again start warming to gold. They resume buying GLD shares faster than gold itself is being bought, and start amplifying gold’s post-rate-hike rallies after retarding them initially. It is disappointing that investors too are drinking the psychological tainted Kool-Aid poured by gold-futures speculators.

As a battle-hardened speculator myself and lifelong student of the markets, I don’t care which way they are going. We can trade them up or down and make money. But it’s very frustrating when the traders who dominate gold’s short-term price action continue to cling to a myth, distorting signals and misleading everyone else. History has proven over and over again that Fed-rate-hike cycles are very bullish for gold.

Gold has rallied strongly on average after 6 of the past 6 Fed rate hikes of this cycle! Last summer was the only quasi-exception, when gold’s weak seasonals delayed its post-hike rally for a few weeks. There is literally no reason not to expect gold to power higher again after this week’s 7th hike. And with gold at these levels, that next post-FOMC rally should see a major bull-market breakout that will bring investors back.

The last time investors flooded into gold in early 2016 after that initial December rate hike, gold powered 29.9% higher in 6.7 months. The beaten-down gold miners’ stocks greatly amplified those gains, with the leading HUI gold-stock index soaring 182.2% higher over roughly that same span! Gold stocks are again deeply undervalued relative to gold, a coiled spring ready to explode higher in this gold bull’s next major upleg.

The bottom line is Fed rate hikes are bullish for gold, and this week’s is no exception. Gold has not only powered higher on average in past Fed-rate-hike cycles, but has rallied nicely in this current one. Gold enjoyed big rebound surges after all 6 previous Fed rate hikes of this cycle. Gold-futures speculators who sold too aggressively leading into FOMC meetings had to buy back after to normalize their bearish positions.

And gold looks super-bullish in the coming months after this week’s 7th Fed rate hike of this cycle. Those gold-dominating futures traders sold their longs down to levels not seen since the initial months of this gold bull! So they’re going to have to do huge buying to reestablish normal positioning. While gold’s summer doldrums may delay that a few weeks, the coming gold-futures buying could drive a major upside breakout.

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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own extensive long positions in gold stocks and silver stocks which have been recommended to our newsletter subscribers.

Puerto Rico's Observatory Is Still Recovering From Hurricane Maria

As Hurricane Maria approached Puerto Rico in late September 2017, planetary scientist Ed Rivera-Valentin knew he needed to get out. His apartment was near the coast, in Manatí, and some projections had the storm passing directly over. “I knew I couldn’t stay there because something bad was going to happen,” he says.

Some people stayed with inland family, or in shelters. But Rivera-Valentin went to work, driving an hour or so into the island’s karst formations, the knobby, tree-covered hills left as water dissolves limestone. Between the peaks sits Arecibo Observatory, the 1,000-foot-wide radio telescope where scientists have, since 1963, studied things up above. Rivera-Valentin grew up in the city of Arecibo, and as an adult, the telescope became his professional home: He got his dream job using Arecibo’s radar to study asteroids. As the hurricane approached, he also thought perhaps the observatory could be his bunker.

The telescope, though, was soon to meet with unusually strong forces of nature. Like the island itself—which was hit with some $90 billion of damage, hundreds or thousands of deaths, and infrastructural failings—the observatory took a beating from Hurricane Maria. Eight months later, with recovery money from the federal government newly available, Arecibo is just beginning to bounce back. While the hurricane didn’t knock Arecibo out, it did leave the telescope a fraction as effective as it once was. And it did so at the same time that the telescope faces decreased funding from the National Science Foundation and a disruptive change in management.

Rivera-Valentin wasn’t the only employee who had decided to retreat to the telescope. At the observatory, most of the employee-evacuees hunkered down in the visiting scientists’ quarters, meant for out-of-town astronomers, and the cafeteria. But Rivera-Valentin stayed in his office. As water seeped through every gap it could find, he put himself on mopping duty. Inside the control room and engineering building, where the main corridor was flooding, another scientist—Phil Perillat—protected the electronics.

As the calm eye of the storm passed over, Perillat snapped a photo of the telescope’s “line feed”—a 96-foot-long radio receiver that looks like a lightning rod. It hangs 500 feet above the dish, pointed toward the ground. You might remember it from Golden Eye, when James Bond dangles from the rod in an adrenaline-filled chase scene. But in Perillat’s picture, the line feed itself is dangling. It had snapped in the wind, which reached 110 miles per hour at the observatory site.

At some point, Rivera-Valentin heard a boom: The dangling line feed, he would later learn, had completely detached, falling hundreds of feet onto the dish and smashing through its surface panels like a meteorite.

After the storm had passed, on September 21, people were stuck at the observatory for days. The two roads leading down from the site were blocked by trees, landslides, and even a newly-formed lake. But observatories, in general, are meant to keep up operations when the grid goes down. They have generators, water. Angel Vazquez, director of telescope operations, was able to contact the outside world with his HAM radio, and let them know everyone was OK.

The radio telescope, however, was not. When employees first attempted to assess the damage, they went to the visitors’ center, where an observation platform overlooks the dish. They couldn’t get as up close as they usually could, by walking underneath it: An eight-foot-deep lake—which lingered till December—now lapped against the telescope’s undergirdle. Eventually, they paddled beneath the massive structure in kayaks, and saw damaged panels hanging below the surface, looking like roof metal twisted in a tornado.

Meanwhile, the observatory itself had morphed into a relief center. When one of the the roads finally opened, about two days after the hurricane’s landfall, local residents arrived for support. “Anyone who walked up to the observatory, they were getting water,” says Rivera-Valentin. “Anyone who came up and said we need to do laundry, they could do laundry.” FEMA helicoptered in supplies to pass out to the community.

On September 29, staff brought the dish back online with generator power. The observing run wasn’t much, just “passive” work; they just held the telescope’s pointing mechanisms in place and simply let the sky drift over as it watched for signals from pulsars. In part, they wanted the scientific data. But they also wanted to run a diagnostic on the scope’s performance.

“The shape of the dish itself had changed,” says Rivera-Valentin. It couldn’t quite focus, like if someone had warped your camera lens. All the receivers still worked—save the one that, you know, crashed into the telescope. The telescope could still function, but its sensitivity was hobbled.

Despite the dish difficulties, which continue today, the observatory slowly began to do more science, in low-power mode. In November, it tracked a fast radio burst, and did a run in cooperation with a Russian radio telescope. And then in December, the region’s electricity flickered on. With that, the observatory could use the diesel generators to run its power-sucking radar. They sent powerful radio waves streaming into space, waited for them to hit an asteroid millions of miles away, and then waited for them to bounce back to their battered antenna.

It worked.

On December 15, they observed the asteroid Phaeton. Rivera-Valentin was glad to have the data (and make little videos from it). It was a piece of normal.

But Arecibo has a long way to go before it’s all the way back. “They have started repairs,” says the National Science Foundation’s Joe Pesce, who until recently oversaw the Arecibo program. “But the vast majority of them are still underway.” It could take a couple of years.

Abel Mendez, who runs the Planetary Habitability Laboratory, has seen the change in the telescope’s performance firsthand. Mendez works at the University of Puerto Rico at Arecibo, training the telescope toward red dwarf star systems that have planets, to understand more about their habitability. After Maria, the telescope’s effectiveness dropped by about 50 percent in the high frequencies he uses, because of alignment, pointing, and panel issues. “Fortunately, the telescope was so sensitive before that that 50 percent—for what we’re doing—is not a big concern,” he says. At lower frequencies, the telescope was about 20 percent less effective post-hurricane. Still, some scientists need every bit of gain they can get. Much of the universe, after all, is far away, and hard to see.

The bipartisan budget act, made law in February, allocated $14.3 million to get the observatory back to full working order. The observatory just got its first allotment of that money, through the National Science Foundation, at the beginning of this month. Getting that federal money has been slow, but now that it’s in hand, the real work can begin.

The initial allowance—$2 million—is for the basics, like removing debris, fixing the fraying roofs, and giving CPR to the generators, three of four of which are having problems. “Work on those is up and going,” says Pesce. “Longer-term, there are the bigger fixes, like repairing the line feed.”

But in February, the NSF announced that Arecibo would soon be under new ownership, which means a leadership transition is taking place at the same time that a scientific rehab is starting. The NSF has historically funded much of Arecibo’s operations. But it had been looking for “partners” for a while. These partners would not only manage the facility, as the previous management team had, but would also pay for some of its operations, taking part of the financial burden from the NSF.

And so a three-organization consortium took over on April 1. The University of Central Florida, under the leadership of Florida Space Institute director Ray Lugo, is at the helm. Lugo used to manage operations and maintenance at Cape Canaveral, and in that role, he contracted with Yang Enterprises, a Central Florida company that provides technical, operational, and logistical services. Yang soon became the second part of the Arecibo partnership. The third entity is Universidad Metropolitana in San Juan, Puerto Rico. Together, the three will run the facility, expand its science, and search for new sources of funding. That hunt for cash comes because NSF is ramping down its funding, which will drop from $7.5 million to $5 million between the first and second years of the new project, and then down to $2 million by the fifth.

The NSF said—on a PowerPoint slide in a town hall meeting at a recent astronomy conference in Denver—that there are “some transition difficulties to be worked out.” Some employees, for instance, have left, which surely presents difficulties for them and for the observatory: For many people who have worked at Arecibo, it’s not just a job. It’s an identity, a home, a community, a place where everyone can do laundry when they need to. And a telescope needs people who have expertise on it.

Yan Fernandez, one of the university scientists leading the collaboration, says UCF will look to scientists beyond their consortium to figure out what cosmic questions Arecibo should pursue. “We want the scientific community to give us info about how Arecibo can keep its place as a cutting-edge observatory in the future,” he says. “The scientific priorities have to come from the scientists who know best.”

With the recovery money, the telescope should be fully restored and able to pursue those priorities, but it won’t ever be the same. And neither will the people who were there for it all. By the time Arecibo was first able to use its radar system in December, Rivera-Valentin had already left the island. His partner had gotten a promotion that took him to Texas, and Rivera-Valentin transferred to the Lunar and Planetary Institute in Texas, which is run by the same organization that co-managed Arecibo until April.

For a while, Rivera-Valentin was able to keep his affiliation with Arecibo Observatory. But when management changed, he became a passive observer. He still plans to use the telescope, as a guest. And while he’ll miss the island where he grew up, and the giant dish nestled into it, there are some positives. “The moment someone says the word ‘hurricane,’ I can drive all the way up to Canada,” he says.


More Great WIRED Stories

7 Reasons You Should Buy This High-Yield Dividend Aristocrat Right Now

(Source: imgflip)

My retirement dividend growth portfolio has a simple goal; assemble a collection of quality income-producing assets to generate generous, safe, and exponentially growing income. A cornerstone of my strategy is to buy highly out of favor sectors.

(Source: FactSet Research)

Currently, telecom is the most hated sector, trading at just 10.4 times forward earnings. That’s significantly below both its 5- and 10-year average. These low valuations are due to a combination of interest rates rising off their all-time lows, as well as concerns over cord-cutting and stagnant growth.

Chart

T Total Return Price data by YCharts

And few telecoms have underperformed more than high-yield Dividend Aristocrat AT&T (NYSE:T). That’s because Ma Bell not just suffers from the same short-term growth challenges, but has been locked in a battle with federal regulators and the Department of Justice since October 22nd, 2016, to acquire media giant Time Warner (NYSE:TWX).

Well, now that battle is over, because on June 12th, Judge Richard Leon approved the merger without conditions, and even said that any appeals by the DOJ would not result in a stay on the merger closing. AT&T has said it plans to close the merger by June 20th.

Let’s take a look at the many reasons this merger is a huge win for shareholders of AT&T. In fact, it could be just the growth catalyst that finally allows the company to generate long-term market-beating total returns, especially from today’s incredibly attractive valuations.

1. The Merger Provides Just The Short-Term Boost AT&T Needs To Keep Growing

(Source: Simply Safe Dividends)

AT&T is America’s second-largest telecom provider with over 143 million wireless subscribers. However, due to the saturated nature of the US telecom market, the company has been struggling with flat top line organic growth for nearly a decade. In fact, only large-scale acquisitions, such as 2015’s $49 billion purchase of DirecTV, have helped keep AT&T’s revenues growing in the past few years.

The company has been plagued by two main issues. First, while its wireless business continues to gain customers at a steady pace, most of those are not the highly profitable postpaid (monthly subscribers), but prepaid and connected devices.

(Source: AT&T earnings presentation)

The company’s postpaid subscriber count growth has slowed to a crawl, thanks to T-Mobile (NASDAQ:TMUS) kicking off an industry-wide price war that included unlimited data plans. Sprint (NYSE:S) joined in that fight, and both Verizon (NYSE:VZ) and AT&T had to follow suit, offering lower-cost bundled plans that have driven down average revenue per user, or ARPU, by 6.9% in the past two years. This has caused mobility revenue (39% of 2017’s company total) to remain flat since 2016.

(Source: AT&T earnings supplement)

The other major business unit that’s struggling is the entertainment group, which includes broadband internet and pay TV.

(Source: AT&T earnings presentation)

Over the past year, cord-cutting at DirecTV cost the company 700,000 subscribers. Meanwhile, U-Verse (cable) saw its subscriber base decrease 10%. The good news is that DirecTV Now, the company’s new streaming platform, is growing like a weed, allowing AT&T to maintain flat video subscriber numbers over the past year.

The issue, however, is that DirecTV Now generates only about $31 per month in net revenue, which means that as it’s grown in popularity, Video ARPU has fallen significantly (9.3% in the last quarter, though some of that is due to the new corporate accounting rules).

(Source: AT&T earnings supplement)

AT&T did continue to see strong growth in its Mexican wireless business with 543,000 new total subscribers.

(Source: AT&T earnings presentation)

The issue, again, is that most of those were lower-margin prepaid users. In addition, the Mexican wireless business, while being the company’s fastest-growing unit, is also the least profitable.

(Source: AT&T earnings supplement)

The good news is that Mexican wireless EBITDA margins are improving steadily. The bad news is that the entire international segment represents a low-margin (though relatively fast-growing) drop in the bucket. For instance, in 2017, all of AT&T’s international operations, including its Latin American satellite TV business, made up just 5% of the company’s revenue.

All told, AT&T continues to suffer from declining top line growth. The good news is that tax reform and cost-cutting has helped to drive growth in adjusted earnings and free cash flow (what funds the dividend).

Metric

2017 Results

Q1 2018

Revenue

-2.0%

-3.4%

Adjusted EPS Growth

7.3%

14.9%

FCF/Share Growth

3.9%

-6.7%

Dividend Growth (YOY)

2.1%

2.0%

(Source: AT&T earnings release, earnings supplement)

Note that this quarter’s decline in free cash flow – what’s left over after running the business and investing for growth – is mostly due to the lumpy nature of the company’s capex.

(Source: AT&T earnings presentation)

FCF is cyclical from quarter to quarter, and what investors need to focus on is that management reiterated its early guidance for very strong growth in both adjusted earnings and free cash flow for 2018. In fact, FCF is expected to soar almost 20% to $21 billion this year. That, in turn, means that AT&T’s pre-merger dividend cost of $12 billion will result in a very safe FCF payout ratio of just 58%.

Metric

2018 Guidance

Adjusted EPS Growth

14.8%

Free Cash Flow Growth

19.3%

FCF Dividend Payout Ratio

58%

(Source: Management guidance)

Of course, that large increase in the company’s bottom line is a one-shot deal created by a combination of tax reform and new accounting changes. Since these tailwinds won’t be repeating next year, investors are understandably worried about where AT&T’s future growth will come from.

This is the first reason I’m so thrilled to have the Time Warner merger be approved. That $85 billion deal is 50%/50% stock and cash. Note that AT&T is borrowing $40 billion to fund part of the cash portion of the buyout.

Company

Revenue

Forward Adjusted Net Income

Forward FCF

Shares

Adjusted EPS

FCF/Share

AT&T

$159.2 billion

$21.6 billion

$21.0 billion

6.183 billion

$3.50

$3.40

Time Warner

$31.5 billion

$6.0 billion

$4.3 billion

0.791 billion

$7.59

$5.44

Combined

$190.7 billion

$27.6 billion

$25.3 billion

7.32 billion

$3.77

$3.46

(Sources: Morningstar, AT&T earnings releases, F.A.S.T. Graphs, Management guidance)

Starting in Q3 of 2018, the new combined company will become a true juggernaut, the world’s largest telecom/entertainment company with almost $200 billion in annual sales.

More importantly for dividend lovers is the fact that, assuming analyst forecasts for Time Warner’s growth are correct, the merger will boost AT&T’s adjusted EPS from $3.50 this year to $3.77 in 2019. That’s about 8% adjusted EPS growth. Free cash flow per share is expected to increase about 2% but increase the company’s total free cash flow to $25.3 billion. That’s compared to a new dividend cost of $14.6 billion, meaning that AT&T could be generating post-dividend FCF of $10.7 billion in 2019.

Meanwhile, the good news is that the approval of this merger also means that the $26 billion T-Mobile/Sprint merger is more likely to be approved. Already, AT&T is seeing its ARPU declines decelerating as the price war started by its smaller rivals starts to dissipate.

(Source: AT&T earnings presentation)

Analysts expect that US wireless postpaid prices should stabilize in 2019 and then start climbing again as all the major telecoms focus on maximizing cash flow to invest in the coming switch to 5G. If T-Mobile and Sprint end up merging, then the odds are even greater that AT&T will be able to see its ARPU start climbing again in 2020 and beyond.

Or, to put it another way, AT&T’s recent struggles mean that the company needed a bridge to get it past its current growth slump. In 2018, tax reform provided that bottom line boost, and in 2019, the Time Warner merger will. That gets the company to 2020, at which point 5G and the company’s ongoing transition to streaming should restore its core business units to organic top and bottom line growth.

2. Vertical Integration Could Help Boost AT&T’s Top And Bottom Lines

The biggest reason AT&T gave for wanting to buy Time Warner was the latter’s wide-moat, industry-leading content. Combined with its own current assets, this will turn AT&T into the world’s largest media delivery company with operations in nearly every country.

(Source: AT&T investor profile)

The heart of Time Warner’s wide-moat assets are its three business units:

  • HBO & Cinemax: 134 million global subscribers in over 150 countries.
  • Turner Networks: It owns numerous cable channels, including Adult Swim, Bleacher Report, Boomerang, Cartoon Network, CNN, ELEAGUE, FilmStruck, Great Big Story, HLN, iStreamPlanet, Super Deluxe, TBS, Turner Classic Movies (TCM), TNT, truTV and Turner Sports.
  • Warner Brothers Entertainment: Produces over 70 TV shows a year and has a film library consisting of over 8,000 titles.

In the age of mobile phones and video-on-demand (streaming), content is king, and Time Warner has one of the world’s largest stockpiles of valuable content. It also has deep pockets to constantly make more, including $9 billion it spent last year across HBO, cable channels, and Warner Entertainment.

Time Warner’s major competitive advantage is that its cable networks have 90% market penetration in the US, and cable companies are loath to let in new channels (competitors). Which brings us to how AT&T plans to not just benefit from its marginal revenue, earnings, and cash flow, but use this content to stabilize its entertainment group.

DirecTV now is growing much faster than rival products like Dish Network (NASDAQ:DISH)’s Sling TV, Hulu Live, or Sony (NYSE:SNE)’s PlayStation Vue. In fact, within a few quarters, analysts expect DirecTV Now to surpass Sling’s current 2.3 million subscriber count, making it the third-largest US streaming service behind Netflix (NASDAQ:NFLX) and Hulu. But remember the problem with DirecTV Now, specifically its lower price.

According to analyst Michael Nathanson, while AT&T is charging $35 per month for the basic DirecTV Now service, thanks to bundling, the average net revenue is actually $31 per month. What’s more, content costs are running about $30 per month, and Nathanson estimates that AT&T is actually losing $.26 per month on each DirecTV Now subscriber.

Given that DirecTV Now as well as the company’s upcoming skinny TV streaming bundle (AT&T Watch, $15 per month, free to unlimited wireless subscribers) are going to dominate the future of the entertainment segment, the company needs to figure out a way to make them profitable.

(Source: Motley Fool)

One way AT&T plans to try is offering additional services, such as DVRs, as well as pay-per-view. However, the trouble is that many consumers are drawn to DirecTV Now for its simplicity and relatively low price (compared to cable). This means that the company needs a stronger approach to boosting margins on streaming.

That would be on the cost side, which is where Time Warner’s content comes in. By owning many of the channels that are part of its streaming packages, AT&T will be able to lower content costs and turn a profit on its streaming options. But that’s only part of the long-term plan to restore its wireless and video businesses to organic growth.

The other is bundling. According to CEO Randall Stephenson, “Bundling allows us to have profitability from that combined account…It also creates higher value, lifetime value, for each of those customers.”

Bundling basically means cross-selling its various products by offering discounted prices for customers who subscribe to multiple offerings.

(Source: AT&T earnings presentation)

AT&T has managed to steadily increase its bundled offerings, which now include 30% of postpaid wireless subscribers and 48% of video subscribers, respectively. AT&T Watch, being free to unlimited wireless subscribers, may be able to help boost the company’s postpaid ARPU. Combined with the stabilizing of wireless pricing that Morningstar analyst Allen Nichols expects in 2019 (with prices rising in 2020 and beyond), the company’s biggest and most profitable segment should once more return to growth.

This provides the company the bridge it needs to get to its big growth catalyst of the 2020s: 5G.

3. Merger Serves As A Growth Bridge Until 5G Takes Off

5G is the next generation of wireless and offers three distinct benefits:

  • Greater speed (up to 20 GB per second) and data capacity
  • Up to 200 times lower latency (time to send data packet to receiving device)
  • The ability to connect a lot more devices at once (such as sensors and smart devices)

Not only does 5G offer the promise of much faster data connections for smartphones, but it’s also going to be the backbone of the Internet of Things, or IOT. That’s where devices are connected to the internet to allow real-time data gathering and analysis in order to optimize performance, maintenance, and overall profitability. Intel (NASDAQ:INTC) projects that the number of IOT-connected devices will increase from 15 billion in 2020 to 200 million by 2020. And by 2025, some analysts expect the global IOT market to hit $6.2 trillion. Super-fast and efficient telecom networks will be what the mountains of data created by the IOT (which includes driverless cars) runs on. That, in turn, should greatly boost AT&T’s potential top and bottom line growth.

The other major growth opportunity in 5G is in gigabit wireless internet. The average home uses 190 GB of data via its internet connection each month. This makes offering home internet service via 4G LTE not practical, since it would overload the network. However, 5G is going to change the game by allowing internet that’s potentially up to 40 times faster wirelessly. In fact, AT&T has been experimenting with what it calls Project AirGig, which uses 5G transmitters attached to power lines. According to Andre Fuetsch, president of AT&T Labs and chief technology officer, AirGig could “bring this multi-gigabit, low-cost internet connectivity anywhere there are power lines – big urban market, small rural town, globally.”

That could help AT&T win major market share in the internet service provider, or ISP, market. Last year, there were 93 million US subscribers, who generated $118 billion in revenue in 2017. For context, the US wireless market saw revenue of $180 billion last year.

And in Mexico as well, where AT&T is investing $3 billion into expanding its wireless network, AirGig could help the company leverage its large investments in that country to break into the fast-growing but still far from saturated Mexican ISP market.

(Source: Statista)

Currently, AT&T is experimenting with 5G in numerous cities and plans to launch full service in 12 major markets by the end of 2018. However, global 5G standards won’t be decided until 2019, and the first wireless chips with 5G capabilities are also coming next year. Thus, it will likely be until 2020 or 2021 until the company really starts to see 5G start to contribute significantly to its top or bottom line. Fortunately, the acquisition of Time Warner helps bridge that gap in two important ways.

4. Time Warner Brings The Higher-Margin Business Model….

Being the nation’s second-largest wireless provider gives AT&T strong economies of scale. For example, according to Morningstar, AT&T Mobility has 900 subscribers per wireless employee, fully 50% more than T-Mobile’s 600. This helps to better amortize high fixed costs over more customers and results in stronger profitability. AT&T is also able to spend relatively less on wireless capex, 16% of revenue compared to T-Mobile’s 19%, because its existing network is more developed and requires less expansion (it already covers 99% of the US).

Company

Gross Margin

Operating Margin

Net Margin

FCF Margin

AT&T

52.8%

16.3%

12.3%

11.3%

Time Warner

41.0%

22.9%

20.6%

13.4%

Telecom Industry Average

48.1%

8.8%

4.1%

NA

(Sources: GuruFocus, Morningstar)

This is why the company boasts some of the industry’s best profitability, including net margins that are three times as high as most of its peers. More importantly, despite massive capital spending (over $140 billion in the past five years), AT&T is still able to generate relatively high free cash flow margin.

But as impressive as AT&T’s profitability is, it pales in comparison to Time Warner’s. That’s to be expected, given that Time Warner is in a far less capital-intensive business, where content creation is its biggest expense. Because Time Warner will represent 17% of the combined company, this means that the merger closing should instantly boost AT&T’s net margin by 1.4% to 13.7%.

Or, to put it another way, on June 20th, when the merger closes, AT&T will become an 11% more profitable company.

5. Merger Boosts AT&T’s Long-Term Growth Potential By 37%

One of the biggest frustrations AT&T investors have had is with the slow growth rate of the last decade. Well, not only is AT&T’s FCF/share growth rate expected to increase organically in the coming years (5G and recovery in wireless pricing), but by acquiring the faster-growing Time Warner, investors in this Dividend Aristocrat should see their long-term growth potential boosted by 37%.

Company

Current FCF

10-Year Analyst FCF Growth Projection

Analyst Projected 2028 FCF

AT&T

$21.0 billion

4.3%

$32.0 billion

Time Warner

$4.2 billion

10.8%

$12.5 billion

Combined

$25.2 billion

5.9%

$44.5 billion

(Source: Management guidance, F.A.S.T. Graphs)

Note that long-term analyst projections are educated guesstimates, so must always be taken with a grain of salt. That being said, Time Warner is a major purchase, and unlike the Mexican business (2% of revenue), is going to represent a needle-moving (and profitable) deal when it closes.

6. Dividend Profile: High, Safe Yield, With Market-Beating Total Return Potential

Company

Yield

2018 FCF Payout Ratio

10-Year Dividend Growth

10-Year Total Return

AT&T (without merger)

6.2%

58%

3.5% to 4.3%

9.7% to 10.5%

AT&T with merger

6.2%

58%

4.8% to 5.9%

11.0% to 12.1%

S&P 500

1.8%

40%

6.2%

8.0%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Yardeni Research, Multpl.com)

The most important component of any income investment is the dividend profile, which consists of three parts: yield, dividend safety, and long-term growth potential.

AT&T’s yield has now risen to 6.2% (as I write this), thanks to the share price tanking 5% on news of the merger being approved. This means that it is now yielding over three times the paltry payout of the S&P 500. More importantly, at a projected 2018 FCF payout ratio of 58%, that dividend is very well-covered by the company’s river of free cash flow.

Of course, there’s more to dividend safety than just a low payout ratio. You also need a good balance sheet that allows a company financial flexibility to grow, while preserving the 34 consecutive years’ streak of rising dividends.

Company

Debt

TTM EBITDA

Debt/EBITDA

TTM Interest Cost

Interest Coverage Ratio

AT&T

$163.0 billion

$46.9 billion

3.5

$6.8 billion

6.9

Time Warner

$22.3 billion

$16.9 billion

1.3

$1.2 billion

14.1

Combined

$225.3 billion

$63.8 billion

3.5

$9.0 billion

7.1

Industry Average

2.2

8.2

(Sources: Morningstar, GuruFocus)

This is where many worry about AT&T because of the massive amount of debt it will be taking on to close this merger. In fact, it will have the highest debt load in corporate America. And while it’s certainly true that the company’s leverage ratio and interest coverage ratio are worse than the industry average, the surprising fact is that once the merger closes, AT&T’s debt burden won’t be any harder to service. That’s because Time Warner is large and profitable enough that the far larger company’s debt/EBITDA ratio will remain the same and the interest coverage ratio will actually go up a bit.

Net debt for the combined company will be $174.7 billion. With AT&T generating $10.7 billion in annual post-dividend FCF, this means that within about 3.5 years the company will be able to bring its net debt down to about $137 billion and lower its net debt/EBITDA ratio below 2.0 (from its current 2.7).

However, this does mean that while AT&T has the potential for faster dividend growth, the company won’t be able to actually achieve that until after it has paid off tens of billions in its new loans. This is why analysts don’t expect the company to increase its dividend until 2022 or 2023. That’s when dividend growth is expected to increase to 2 cents per quarter per year instead of 1 cent. But the good news is that even with the current rate of dividend growth (2% annually), at its current rock-bottom valuation, AT&T should be able to generate 8.2% annual total returns. This is actually slightly higher than what the broader market is likely to do from its currently stretched valuations.

And if AT&T executes as expected, and returns to faster dividend growth, then this low-volatility blue chip will be likely to generate double-digit total returns that will put the S&P 500 to shame.

7. Valuation: AT&T Is Trading At A Fire Sale Price

Chart

T Total Return Price data by YCharts

It’s not been a good year for AT&T shareholders, as the combination of rising interest rates, growth concerns, and merger uncertainty have caused it to badly underperform even the weak telecom sector. However, this underperformance is precisely what has me so excited to recommend the stock right now, because market pessimism has gotten so large that Ma Bell now represents a potentially excellent deep value proposition.

There is no 100% objectively correct way to value a stock, which is why I like to use a three-step approach with my valuation models. This creates a more robust estimate that minimizes the chances of overpaying for a company.

Step 1 is determining whether a company has market-beating long-term total return potential under the Gordon Dividend Growth Model (TR = yield + long-term dividend growth). AT&T passes this screen, even if it maintains its current token dividend growth for far longer than I expect.

The second screen is looking at the most relevant valuation metric – which, in this case, is price/free cash flow (what pays the dividend) – and comparing that to its historical norm. This is because over long stretches of time, valuations tend to be mean-reverting and come back to a relatively fixed point that represents fair value.

Company

Forward P/FCF

Implied 10-Year FCF Growth Rate

Historical P/FCF

Yield

Historical Yield

% Of Time In Last 22 Years Yield Has Been Higher

AT&T

8.0

-0.3%

17.2

6.0%

5.3%

8.8%

(Source: Management guidance, Morningstar, GuruFocus, YieldChart.com, Benjamin Graham)

Currently, AT&T’s price-to-forward FCF is a stunningly low 8.0, which is less than half its 20-year average. Now it’s true that the company’s growth has slowed dramatically since 1998, which means it deserves a lower multiple. However, 8 times forward FCF means the market is pricing in -0.3% FCF/share growth for the next 10 years. Even with all the growth challenges it faces, I think AT&T’s numerous growth catalysts, most notably the Time Warner acquisition, mean that it should easily beat this super-low hurdle rate.

Finally, I like to compare the company’s yield to the historical yield, given that my primary focus is on dividends. And just like with price/FCF, yields are mean-reverting and tend to approximate intrinsic value well over time. Currently, AT&T’s 6.2% yield is 17% above its 13-year median yield, indicating the stock is likely 17% undervalued. That’s in line with Morningstar’s fair value estimate of $40 (19% undervalued), based on a dual stage, long-term discounted free cash flow model.

What’s more, AT&T’s yield has only been higher 8.8% of the time in the past 22 years. This likely means the stock is close to bottom, which creates an even larger margin of safety for investors buying today. This is why I’m strongly recommending AT&T for anyone seeking a source of low-volatility, high-yield income. That is assuming you’re comfortable with the company’s risk profile.

Risks To Consider

While AT&T is a low-risk blue chip, that doesn’t mean the company doesn’t face numerous challenges in the coming years. For one thing, the company’s wire-line business is expected to see negative long-term growth as its legacy land line business continues to deteriorate. Meanwhile, cable companies like Comcast (NASDAQ:CMCSA) have made good strides in recent years in winning market share from AT&T, which is why its broadband subscriber base has been growing at a snail’s pace. Now, ISPs are also going after enterprise customers, which has previously been an area of major strength for AT&T. This only puts more pressure on management to execute well on 5G in order to reverse these trends and win back market share in the company’s internet business.

Next, we can’t forget that the capital-intensive nature of the telecom business means that AT&T’s debt load might act as a competitive disadvantage in future. That’s because the company must continue investing heavily, not just into new 5G infrastructure but into maintaining its existing 4G LTE networks. This is because 5G and 4G are going to have to co-exist for at least a decade before all customers are switched over to the new and superior standard.

Speaking of debt, AT&T’s mountain of bonds, while not yet threatening the dividend, is still going to be the highest in corporate America. This means that it will need to make deleveraging a priority. This means dividend growth lovers are going to be waiting until at least 2022 or 2023 before they can see faster payout growth. And of course, there’s no guarantee that the company will actually increase its dividend faster once its balance sheet is stronger.

After all, CEO Randall Stephenson has shown himself a fan of empire building on an epic scale. That includes highly questionable capital allocation decisions, such as overpaying for DirecTV (a company already in decline at the time), as well as entering the monstrously competitive Mexican wireless market. While AT&T’s subscriber base has been growing quickly in Mexico, America Movil (NYSE:AMX) is the juggernaut in that country with seven times the number of subscribers. It also commands nearly 60% market share in ISP, meaning that AT&T’s ability to leverage its Mexican wireless investment via 5G may prove fruitless.

Another concern I have is that now that the merger approval will kick off a wave of media industry consolidation. Already, Comcast is preparing a hostile all-cash (and debt) bid for Twenty-First Century Fox (NASDAQ:FOXA). Disney (NYSE:DIS) – which is buying Fox – is apparently talking with bankers about borrowing to add a cash component to its all-stock deal to counter the coming Comcast bid. Meanwhile, CBS Corp. (NYSE:CBS) and Viacom (NYSE:VIA) are locked in a complex soap opera, and some analysts expect to eventually see the two companies re-merge (CBS was spun off in 2006).

Then, there’s all manner of smaller but still large media companies that the market is now buzzing are potential takeover candidates, including Lions Gate Entertainment (NYSE:LGF.A), which is shopping itself around to potential buyers. The point is that AT&T’s win in court is expected to set off a media merger mania. And so, in a few years, I wouldn’t be surprised if Stephenson decides he needs to return to the content well with yet another medium-to-large sized deal – one that could end up replacing the debt the company has paid off with fresh loans that make it impossible for AT&T to accelerate its dividend growth beyond the current token 2% annual rate.

Finally, we can’t forget that there is no guarantee that the company will be able to convert the promise of 5G into the kind of growth analysts currently expect. T-Mobile, whether or not it merges with Sprint, is going to remain a fierce competitor – one whose CEO has taken a Jeff Bezos-like approach to winning market share by focusing on the best possible customer experience (including lower costs). This means that T-Mobile, even if swallows Sprint (and thus becomes bigger than AT&T in wireless), might end up maintaining negative pricing pressure, causing AT&T’s ARPU to flatline or even continue drifting lower.

With the company’s wireline business expected to continue declining steadily (and video ARPU drifting lower by 1% per year due to increased streaming), AT&T has a lot of growth headwinds to overcome in order to live up to its full potential. Fortunately, the company’s rock-bottom valuation and sky-high yield means investors buying today are being adequately compensated for these risks.

Bottom Line: Time Warner Merger Means AT&T Has Vastly Improved Long-Term Growth Prospects And Is A Potentially Great Buy Today

Don’t get me wrong, AT&T’s growth challenges are not going to be cured by acquiring Time Warner. However, the successful completion of the merger will provide numerous benefits, both in the short and long term. These include a faster-growing, higher-margin business, important assets to stabilize its video and wireless units, and a growth bridge to the 5G ramp-up (in 2020 and beyond).

And while the dividend growth-boosting effects are likely still far in the future (2022 or 2023), in the meantime you still get paid very handsomely to wait for the company to execute on its long-term growth potential. And even if AT&T ends up executing rather poorly on its growth catalysts, at today’s price investors are unlikely to lose money over time. Rather, they will probably enjoy high, safe, and stable income from this Dividend Aristocrat for the foreseeable future.

Disclosure: I am/we are long T.

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.

This New Boston Consulting Group Study Might Change How You Think About Startups

Which startups have the best chance of making money today? That’s the question MassChallenge, the globally ranked accelerator whose startup alumni have raised over $3B and created 80,000 jobs, asked the Boston Consulting Group (BCG). The accelerator offered five years of their data. It came to 350 startups, 25% of which were founded by women and 75% by men. BCG crunched the numbers on a quest to find the DNA of great deals.

The biggest predictor of value wasn’t a hot new technology.

Controlling for lots of variables, one trend emerged. Women-led companies averaged 10% greater revenue than the men-founded companies. Female founders achieved this while raising less than half, on average, of what the men raised. The so what? “For every dollar of funding, these [women-led] startups generated 78 cents, while male-founded startups generated less than half that–just 31 cents,” the authors wrote. They study is titled “Why Women-Owned Startups Are A Better Bet.”

That women-owned startups are more likely to play an outsized role in portfolio performance is a note that’s been struck before. First Round, for example, credited their female-led investments with outperforming by 63%. More recently Primary VC shared that while only 16% of their first fund was invested in female-led startups, 27% of the portfolio value was driven by those investments.

Takeaways for founders and investors

If you’re a female founder raising capital, the BCG/MassChallenge study basically said you’ll have to accept a biased, unfair and often uninformed process. But while you’re working within a broken system, work smart. Get coached by a VC on how to pitch. When you’re pitching, ask for more than you think you need. Don’t be modest about your business. Firmly handle investor feedback. If you don’t agree with the feedback, share the unique information you have rather than “playing nice” with the investor, who knows less than you do about your industry.

If you’re a VC investor–92% of which are male–the study authors encouraged investing outside of your comfort zone. “The lack of funding means that there is less competition for women-backed companies, and those companies, on average, perform better than those with all-male founders,” they wrote. The fact is, male founders are overfunded. All those stats about underfunding women can just as easily be read as overfunding something else. Capital is diving in because a deal looks “normal,” when extraordinary is the right bar regardless of gender.

Acacia says ZTE business to remain suspended until ban lifted

(Reuters) – Acacia Communications Inc’s supply agreement with ZTE Corp will remain suspended until the U.S. Department of Commerce implements its recent settlement with the Chinese firm, the U.S. company said on Tuesday.

FILE PHOTO – Visitors pass in front of the Chinese telecoms equipment group ZTE Corp booth at the Mobile World Congress in Barcelona, Spain, February 26, 2018. REUTERS/Yves Herman/File Picture

The settlement, which was made public on Monday, would allow China’s No. 2 telecommunications equipment maker to resume business with U.S. suppliers.

But the ban on buying U.S. parts, imposed by the department in April, will not be lifted until ZTE pays fines and places $400 million more in an escrow account in a U.S.-approved bank.

Acacia said the settlement may ultimately allow it to resume ties with ZTE.

The company’s shares have fallen 13 percent since the ban was imposed in April.

Reporting by Sonam Rai in Bengaluru; Editing by Saumyadeb Chakrabarty

Streaming The Next Ed Sheeran? Steereo Plays Unsigned Acts Into Ubers & Lyfts

Ed Sheeran performs at Etihad Stadium in Melbourne, Australia. (Photo by Sam Tabone/WireImage)

We’ve all had those awkward Uber rides: when polite chat with your driver runs dry, and you’re grateful for the pop hits blasting out from the radio.

But what if the cab ride homeor to the airport, or your officewas a place of musical discovery: a mini gig venue where you could hear the hottest unsigned artists from around the world?

This is the concept behind Steereo, a streaming service that soft-launched in New York and Austin in March.

It’s already live in 8,000 Uber, Lyft and Juno cabs, and has played songs from 1,000 rising artists in over 250,000 rides. These tracks are organized into Steereo playlists by genre, showcasing everyone from Brooklyn’s pop-soul songstress Enisa, to Nashville’s modern countryman Charlie Rogers, and San Francisco Capella pro Mario Jose (who’s already opened gigs for Grammy Award Winners Pentatonix).

“We want people to be able to consume great music, and not be force-fed the A-list major artists who are on heavy rotation on radio right now,” Jennifer Cullen, one of Steereo’s cofounders, tells Forbes.

Steereo could even be where the next Drake or Taylor Swift is discovered, says it’s Director of Operations. “We let the bands dictate who the new Ed Sheeran will be, rather than whoever the big music labels are putting their money behind.”.  

Photo courtesy of Steereo.

Steereo streams unsigned artists into your cab.

Inspiring Steereo

Given that 15 million people use rideshare apps daily, and that the digital audio advertising was $31 billion last year, Steereo certainly has an intriguing business model.

But can it really win big in cabs? A space where Spotify and Deezer have already been—a space where consumers might be perfectly happy listening to whatever’s on the airwaves, or plugging in music from their smartphone?  

Cullen who is based in Dublin, Ireland, is one of Steereo’s four cofounders who believe that answer is yes: she says that Steereo doesn’t just solve a real problem for unsigned artists, it incentivizes drivers to get their passengers involved.

It was Cullen’s brother, the singer-songwriter Keith Cullen (now signed to former CEO of Virgin Records, Warner Bros and EMI, Phil Quartararo), who first inspired the streaming-on-wheels concept. As Keith’s manager, Cullen had seen first-hand how difficultand expensiveit was for him to break into the industry.

“The real struggle for the unsigned artists out there is that there’s so much talent, but also so much noise,” she explains, pointing to the traditional publicist model where it costs anywhere from $500,000-$2 million to launch an unsigned artist in a major market.

Photo courtesy of Steereo.

Steereo playlists are curated by genre.

Steereo significantly undercuts this cost, charging unsigned artists a monthly fee of $12.99 which allows them to upload music to the platform’s app, see their analytics, and buy “boosts” (these come with personalizable budgets, a bit like Facebook or Youtube ads).

Drivers, on the other hand, are financially encouraged to bring Steereo into their cabs and get riders on board (they are paid per second, and make on average $120-$300 a month, Cullen claims).

Beyond this, brands can also partner with artists through audio messaging, branded playlists, event sponsorship and music licensing, a model that has seen the platform generate revenue since launch, says Cullen.

The idea is that in future Steereo could start to use the data it collects in smart ways.

“The goal for us is to be able to start to see trends, so we can push artist towards labels and say, ‘Look this is what people are really consuming, these are the songs that are really hot right now,” says Cullen.  

Musicians could even see where their fans are located and arrange local gigs, she adds.

Photo courtesy of Steereo.

Jen Cullen, cofounder at Steereo.

Breaking into a tough scene

Cullen says she has already faced “resistance” from some because of the sheer novelty of Steereo, and believes the startups journey has been made harder by the sexist stigma that remains in both the tech and the music industry today (in the U.S. hold just 25% of computing jobs, the number of women in tech falls to 17% in the U.K., and there is a broad underrepresentation of women across the music industry).

“We are predominantly led by females, and in the tech industry and in the music industry, that’s perceived as a negative. People don’t take you as seriously,” she explains.

However, where possible, Cullen has tried to turn any prejudice to her advantage. “You’re never seen as a threat,” she laughs.

Having a team straddled across Belfast in Northern Ireland and in New York and L.A. in the U.S. has also brought its own unique challenges. “The time differences are insane,” says Cullen, describing the team’s three weekly meetings, and their efforts to be in the same country whenever possible.

But Cullen says she loves the different cultural elements this transcontinental approach brings: “the typical Irish ‘If in doubt, drink tea’, the aggressive ‘Get it done’ mentality of New York, and the energetic ‘Anything is possible’ feeling of L.A.”

“Combined we all bring something great to the table,” she says.  

The future for Steereo

Today Steereo is part of Sparkplug, the accelerator run by global marketing communications company Y&R. Soon it will leave to join Quake Capital’s accelerator in LA, Cullen explains.

The next step for the startup will be the development of a customer-facing Steereo app so that you don’t have to rely on your Uber driver to control what you’re hearing.

Steereo’s cofounders are also focused forging new partnerships to allow music fans to use Shazam to get more information on songs, such as links to an artist’s Facebook, Soundcloud or their iTunes store. And the team is currently closing a $1.5 million fundraise to help it scale, with plans to grow in New York before taking on L.A., London and China (where Cullen has already met with major players like Tencent).

Ultimately, Cullen says she wants people to think of Steereo in the same way they think of other music-tech leaders like Spotify or Pandora or Deezer.

“There’s no denying the future of music is technology-based, but it’s now about finding a balance between art and tech,” she says.

Your awkward Uber journey could be numbered. Who knows, you might even discover the next Ed Sheeran.

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