The 1 Troubling Aspect of Elon Musk Raging at the Media

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

Elon Musk is unhappy.

I know this because I follow him on Twitter and his tweets today are coursing with something that looks like rage.

Tesla’s CEO seems to believe that the media are writing unfairly about his cars, including the Model 3. 

Oh, this doesn’t bother me so much.

As it happens, friends of mine bought a Model 3 recently. They love it, save for the first five minutes of embarrassment when they realized they’d never test-driven it and had no idea how to switch it on.

Still, some members of the media are concerned, for example, that the thing Tesla calls Autopilot isn’t really an autopilot and lulls drivers into a false sense of auto-relaxation which might lead to auto-mishap.

Musk, though, thinks the media auto-overplays accidents involving his cars.

This has now led him toward threatening to create a site that examines journalists’ truthiness.

Yes, Pravda already exists, but I doubt it will sue. I fear, though, a Russian person in a bedroom somewhere might get upset and, well, you know, start messing with Teslas from afar.

But this isn’t what bothers me either.

Nor is it even his accusation that because Tesla doesn’t do paid advertising — in the conventional sense — it’s likely to get poor media coverage when compared to, say, conventional car companies that advertise seemingly all the time, everywhere, until they really do sound like the car dealers so many try to avoid.

This does seems strange. Tesla really doesn’t have to advertise because Musk and the fascinating nature of cars garner so much free publicity.

I can think of few business or tech personas who receive more favorable fawning that does Musk. And sometimes, with good reason.

He’s engaging, forward-looking, even occasionally witty.

The fact that he’s suddenly railing against his fawners still doesn’t bother me too much.

No, what bothers me is the logic in another of Musk’s Wednesday tweets, the one that represents the core of his ire.

In it, Musk bristles about being compared with a certain president who’s not fond of being subject to negative media appraisal.

My eyebrows did commit a strange shivering motion here.

You see, if no one believes the media anymore, why should Musk worry about what the media writes?

And, well, there you have it. Just a bit of auto-suggestion.

Programming As Art: How Blockchain Can Help Artists (And Save Art)

Can blockchain save art?

Last month I spent a week in Moscow where I spoke at the Skolkova Robotics Forum on Smart Matter: 4 Things That Are Making Every “Thing” Smart. While there, I happened to visit a very unique gallery in the heart of Russia’s top cybernetics institute, the National University of Science and Technology, or MISiS.

There, I met Anna Karganova, the director of the Russian Abstract Art Foundation, and Olga Uskova, its president. (Olga is also a scientist, CEO, and self driving car technologist.)

After viewing some of the art, our conversation surprisingly turned to blockchain.

To put it mildly, that’s not what I expected from an art historian.

But as the conversation developed, it became clear that artists and curators are looking to blockchain as a possible solution to three problems in art. Provenance, or where an artwork came from, is always a challenge. Fraud will be an issue as long as people are paying millions of dollars for famous paintings. And knowledge about the art is something that curators are always hoping to share.

Here’s a summary of our conversation:

Koetsier: How can blockchain help artists and the art world? 

Karganova: In the future, within just 5-7 years, blockchain technology will significantly increase the safety level for all participants of the art process. There are issues that blockchain can already solve now and some issues for which the technology still needs to “grow up.”

For us collectors, the most attractive and important thing this technology can give is the potential transparency of all the processes. In the open decentralized database which we can already build with the use of blockchain, we can store information and learn about the origin of the artwork … we can get info [such as] who’s the owner of it and who owns the copyrights. This technology also makes it possible to monitor all the transactions with the particular piece of art and maintain the provenance (exhibitions participation, publications in the catalogs, etc.).

If we have such a database, all the painters and their heirs will be able to track all the movements and relocations of their artworks. This will protect them from illegal sales and situations when after the exhibition the works are not returned to the owners for long time. It’s worth mentioning that the technology will be really useful and important for acceptance of artist’s resale royalties. So in long term perspective, painters and collectors will be more willing to participate and give their works for various temporary exhibitions.

The most interesting feature that can be developed with the help of blockchain technology is the possibility to purchase a piece/a share of an artwork. But for this one – the necessary legislative base is not yet available in the world. 

Uskova: In this regard, in my opinion, we can implement such an advanced thing as a special cryptocurrency that will be used to evaluate artworks. Accumulation of the art’s capital/net worth can depend exclusively on demand: for example – on the total number of views or on the number of acquisitions.

Koetsier: Where would it be the most useful? 

Karganova: First of all, blockchain technology can significantly help us increase and control circulation of the artworks. If we link all the originals to a single open database – this will ensure the number of copies of the paintings/photos/videos is fixed and guaranteed. In general, for all the new multimedia in art – blockchain is a perfect breakthrough system. And it will be especially interesting for those potential buyers who are attracted by innovations and high-tech in arts, but who are often stopped from a real purchase because of the particular insecurity of the art segment.

Koetsier: Honestly, I was really shocked to hear you talk about blockchain. Maybe I had an internal prejudice … art is creative, and blockchain is technology. How did you get interested in technology? 

Karganova: Art and Technology have been linked for a long time already and we just can’t ignore this fact. Some time ago there were doubts about online auctions, but now this method of bidding has successfully and organically merged into the art environment that is historically quite conservative.

The convergence of arts and technology is a process that comes from several directions.

Artists who work with audiovisual and VR technologies often build their works on the basis of rethinking classic art and ideas embedded in it. More and more traditional museums include media artworks in their expositions. And of course all museums are trying to make their expositions digital to store them in worldwide web. One of the important reasons for this is the necessity to attract young audience. There are steps towards art from the developers of artificial intelligence too. 

Uskova: Blockchain is a technology that is based on a new revolutionary ideology. For the artist it’s not only about the safety of the artworks’ storage and an easy access to virtual galleries, but it is an opportunity and a tool for creation of a new type of digital art. For example it may be an object that consists of many decentered, infinitely embedded worlds that are linked to and united by a single idea.

In the collection of our foundation we have works of a unique artist, Vladislav Zubarev. Back in 1977, when the world hadn’t yet suspected the existence of String Theory and before the discovery of the Higgs Boson particle, Zubarev introduced to the contemporary art world his Concept of Temporality.

He said that in a current time, with its dynamics and pace of change, it’s impossible to be a truly modern creator without putting time into a single coordinate system. He began to draw in four dimensions and his paintings got really magical dynamics, secrets of which are still not solved up to date by experts from around the Globe. Zubarev’s Theory of Temporal Art (1977) included so many correct guesses about the nature of space and time that in 2000s delegations of physicists visited him trying to understand how could an artist in the 1970s visualize what has later been discovered in 2000s.

So this is what can happen with blockchain technology too. Decentralized blockchain is a system of the different connected worlds of ever-changing information … a great basis for art objects of a new type.

Koetsier: How big an issue is fraud in the art world? Any idea of the scope of the problem?

Uskova: The problem of buying fakes is not that big at the moment as it was 10-15 years ago. There are several explanations for this.

Firstly, buyers’ interest has shifted towards the post-WWII and contemporary art, where there are a lot of options to track the origin of the artwork and its provenance. Secondly, methods of technological analysis have really improved. As for those who prefer to buy antique and classic art – these people do this for many years already and they are experts themselves. It’s more correct to call them not collectors but connoisseurs. 

For Russian art, the most frequently falsified period is Russian avant garde of the beginning of the 20th century. It may now seem to everyone that the most famous fraud cases are left in 2000s, but nearly several months ago the Museum of Fine Arts in Ghent was involved in one huge scandal. Russian and international experts doubted the authenticity of some avant garde paintings from one private collection on show in the museum. This led to a large-scale investigation and early closure of the exhibition. It turned out that the provenance of paintings was unclear and consisted of different fake legends, and even the mentioned publications in exhibition catalogs were forged. 

So what should we prepare for? I think that in a short term perspective the art of the middle 20th century will be in focus of fake makers. In Russian Abstract Art Foundation we have already started creating the database of samples for our artists and completing the catalogues raisonnés for internal use. 

Koetsier: Defending against fraud is one thing blockchain can help the art world with. Anything else?

Karganova: Before buying an artwork, you should check as many details and facts as possible.  

There are two main types of expertise: technological research and the one provided by art historians. Technological expertise studies pigments & binders and defines whether the painting fits the period that is claimed. But this type of study doesn’t prove or identify the artwork’s authorship. To confirm or to disprove the authorship, during the technological expertise, experts take X-rays. This study case helps to see the structure of the painting and compare it to the museum samples. In some cases ultraviolet light may be implemented. It identifies the signatures applied over the old varnish and shows the preparatory drawings that are individual for each artist.

If we talk about the expertise by art historians, they usually do some kind of a scholarly research. If you are about to close a deal, it makes sense to ask for an opinion of several experts, and better from different countries. Usually for a certain time period or an author – there is a limited number of experts. If two or three experts say that the work is genuine, then in the case of suspicion there will be no one to make an objection. The given certificates themselves should also be checked for authenticity. Nowadays to do that, specialists from auction houses ask the organization, that provided the expertise, to confirm has it issued the submitted papers or not.

All these processes are very time-consuming. And just imagine if all the data could be uploaded to one open database! 

A clear provenance is a very strong reason to buy an artwork. The ideal and rare situation is when the whole history of the artwork can be traced from the artist’s studio to all the exhibitions and all owners. If any time periods are missing – then the provenance research is required.

Koetsier: Anything else that I’m missing?

Uskova: Nowadays we can witness just the beginning of the blockchain technology formation process; it is now still on the early stage. But the first deals begin to appear. There are still very few of them, but they set a precedent and allow us to identify all the possible downsides and limitations.

I think that the attractiveness of blockchain will grow with the generation that develops it. The great role of the current art world is played by people who are used to some certain rules and entourage. Pre-auction exhibitions, electrified atmosphere in the auction houses, discoveries of various unexpected data, positive art experts’ feedback – all of these provides emotions that are so important to the collectors of the old formation. This emotional experience, that is integral from the process of artwork purchase, is one of the most important parts of arts collecting. When people for whom speed and results are more important will get the necessary resources — then the introduction of the blockchain will no longer be an issue.

But now, when mathematicians and software developers work with AI projects, they also can no longer work without Contemporary Art. For example the Cognitive Pilot project team, that is now developing neural networks for self-driving cars, has recently moved to a new level – developers are now creating emotions for artificial intelligence.

This kind of work requires a fundamentally different approach: not mathematics, but arts … in order to understand and project emotions. So in order to understand different emotions, neural networks specialists participate in master classes about Arts that are conducted by the unique method of Ely Belyutin.

Modern programming is a form of a modern art. It has ceased to be a purely logical apparatus. With the advent of heuristic methods of programming and the creation of AI-objects, software products have a new theme of emotion that is so inherent to contemporary art.

Koetsier: Thank you for your time!

Few Rules Govern Police Use of Facial-Recognition Technology

They call Amazon the everything store—and Tuesday, the world learned about one of its lesser-known but provocative products. Police departments pay the company to use facial-recognition technology Amazon says can “identify persons of interest against a collection of millions of faces in real-time.”

More than two dozen nonprofits wrote to Amazon CEO Jeff Bezos to ask that he stop selling the technology to police, after the ACLU of Northern California revealed documents to shine light on the sales. The letter argues that the technology will inevitably be misused, accusing the company of providing “a powerful surveillance system readily available to violate rights and target communities of color.”

The revelation highlights a key question: What laws or regulations govern police use of the facial-recognition technology? The answer: more or less none.

State and federal laws generally leave police departments free to do things like search video or images collected from public cameras for particular faces, for example. Cities and local departments can set their own policies and guidelines, but even some early adopters of the technology haven’t done so.

Documents released by the ACLU show that the city of Orlando, Florida worked with Amazon to build a system that detects “persons of interest” in real-time using eight public-security cameras. “Since this is a pilot program, a policy has not been written,” a city spokesperson said, when asked whether there are formal guidelines around the system’s use.

“This is a perfect example of technology outpacing the law,” says Jennifer Lynch, senior staff attorney at the Electronic Frontier Foundation. “There are no rules.”

Amazon is not the only company operating in this wide open space. Massachusetts based MorphoTrust provides facial-recognition technology to the FBI, and also markets it to police departments. Detroit police bought similar technology from South Carolina’s Data Works Plus, for a project that looks for violent offenders in footage from gas stations.

The documents released Tuesday provide details about how Orlando, and the sheriff’s department of Oregon’s Washington County use Amazon’s facial recognition technology. Both had previously provided testimonials about the technology for the company’s cloud division.

Orlando got free consulting from Amazon to build out its project, the documents show. In a prior testimonial, Orlando’s chief of police John Mina said that the system could improve public safety and “offer operational efficiency opportunities.” However a city spokesperson told WIRED that “this is very early on and we don’t have data to support that it does or does not work.” The system hasn’t yet been used in investigations, or on imagery of members of the public.

Washington County uses Amazon’s technology to help officers search a database of 300,000 mugshots, using either a desktop computer or a specially built mobile application. Documents obtained by the ACLU also show county employees raising concerns about the security of placing mugshots into Amazon’s cloud storage, and the project being perceived as “the government getting in bed with big data.”

There’s no mention of big data in the US Constitution. It doesn’t provide much protection against facial recognition either, says Jane Bambauer, a law professor at the University of Arizona. Surveillance technology like wiretaps are covered by the Fourth Amendment protections against search and seizure, but most police interest in facial recognition is in applying it to imagery gathered lawfully in public, or to mugshots.

State laws don’t generally have much to say about police use of facial recognition, either. Illinois and Texas are unusual in having biometric privacy laws that can require companies to obtain permission before collecting and sharing data such as fingerprints and facial data, but make exceptions for law enforcement. Lynch of EFF says hearings by the House Oversight Committee last year showed some bipartisan interest in setting limits on law enforcement use of the technology, but the energy dissipated after committee chair Jason Chaffetz resigned last May.

Nicole Ozer, technology and civil liberties director at the ACLU of Northern California, says the best hope for regulating facial recognition for now is pressuring companies like Amazon, police departments, and local communities to set their own limits on use of the technology. “The law moves slowly, but a lot needs to happen here now that this dangerous surveillance is being rolled out,” she says. She says Amazon should stop providing the technology to law enforcement altogether. Police departments should set firm rules in consultation with their communities, she says. In a statement, Amazon said all its customers are bound by terms requiring they comply with the law and “be responsible.” The company does not have a specific terms of service for law enforcement customers.

Some cities have moved to limit use of surveillance. Berkeley, California, recently approved an ordinance requiring certain transparency and consultation steps when procuring or using surveillance technology, including facial recognition. The neighboring city of Oakland recently passed its own law to place oversight on local use of surveillance technology.

Washington County has drawn up guidelines for its use of facial recognition, which the department provided to WIRED. They include a requirement that officers obtain a person’s permission before taking a photo to check their identity, and that officers receive training on appropriate use of the technology before getting access to it. The guidelines also state that facial recognition may be used as investigative tool on “suspects caught on camera.” Jeff Talbot, the deputy spokesperson for the Washington County Sheriff’s Office, said the department is not using the system for “public surveillance, mass surveillance, or for real-time surveillance.”

Ozer and others would like to see more detailed rules and disclosures. They’re worried about evidence that facial recognition and analysis algorithms have been found to be less accurate for non-white faces, and not accurate at all in law enforcement situations. The FBI disclosed in 2017 that its chosen facial-recognition system only had an 85 percent chance of identifying a person within its 50 best guesses from a larger database. A system tested by South Wales Police in the UK during a soccer match last year was only 8 percent accurate.

Lynch of EFF says she believes police departments should disclose accuracy figures for their facial recognition systems, including how they perform on different ethnic groups. She also says that despite the technology’s largely unexamined adoption by local police forces, there’s reason to believe today’s free for all won’t last.

Consider the Stingray devices that many police departments began to quietly use to collect data from cellphones. Amid pressure from citizens, civic society groups, and judges, the Department of Justice and many local departments changed their policies. Some states, such as California, passed laws to protect location information. Lynch believes there could soon be a similar pushback on facial recognition. “I think there is hope,” she says.

Louise Matsakis contributed to this article.


More Great WIRED Stories

Foxconn's unit targets raising $4.3 billion in biggest China IPO since 2015

TAIPEI/SHANGHAI (Reuters) – Foxconn Industrial Internet (601138.SS), a subsidiary of the world’s largest contract manufacturer Foxconn (2317.TW), announced plans to raise up to 27.1 billion yuan ($4.26 billion) in what will be mainland China’s biggest IPO in almost three years.

FILE PHOTO: Visitors are seen at a Foxconn booth at the World Intelligence Congress in Tianjin, China May 19, 2018. REUTERS/Stringe

The Foxconn unit, which is known as FII and makes electronic devices, cloud service equipment and industrial robots, is offering up to 1.97 billion shares at 13.77 yuan per share in Shanghai, according to a statement it filed to the stock exchange late on Tuesday.

With 10 percent of its enlarged capital offered in the initial public offering (IPO), Shenzhen-based FII would have a valuation of about $43 billion at listing. Bookbuilding for the IPO is on May 24.

The listing is widely seen as a step for Terry Gou’s Foxconn, a major Apple Inc (AAPL.O) supplier formally known as Hon Hai Precision Industry Co (2317.TW), to wean itself off heavy reliance on manufacturing smartphones for the California-based iPhone maker and to diversify into new areas.

Foxconn has signaled previously that FII will launch projects in areas including smart manufacturing, industrial internet, cloud computing, and fifth-generation wireless technologies.

The IPO is also a reflection of Beijing’s seriousness in luring tech giants onto mainland exchanges.

At about $43 billion, the unit’s valuation would not be far behind parent company Foxconn’s market capitalization of about $49 billion.

The IPO’s pricing represents 17 times FII’s historical earnings, well below the valuation cap of 23 times favored by Chinese regulators.

FII plans to sell 30 percent of its public share offering to a group of strategic investors in a rare move for mainland deals.

The strategic investors are not being called cornerstones – investors who accept a lock-up period in return for large allocation, which is a practice common in other Asian markets such as Hong Kong to bolster demand for large deals.

However, the group will function as such, with its investments tied up for between one and three years. In an additional unusual move, 70 percent of institutional investors’ allocated shares will also be locked up for 12 months.

FII’s IPO ranks as the fourth largest in the mainland over the past 10 years, outpaced only by China State Construction Engineering (601668.SS), which raised $7.3 billion in 2009; China Railway Construction (601186.SS), which sold shares worth $5.7 billion in 2008; and Guotai Junan Securities (601211.SS), which raised $4.8 billion in 2015.

Clients of FII include companies such as Amazon (AMZN.O), Apple (AAPL.O), Cisco (CSCO.O), Dell, Huawei and Lenovo (0992.HK).

Reporting by Jess Macy Yu in Taipei and Julie Zhu and Jennifer Hughes in Hong Kong; Additional reporting by Engen Tham and Yiming Shen in Shanghai; Editing by Muralikumar Anantharaman

Using Tinder Doesn’t Lead to More Casual Sex, a New Study Says

A new study has found that Tinder and other picture-based dating apps don’t increase users’ success in pursuing casual romantic connections. That’s not because the app doesn’t work, but because people inclined to have casual sex do so at similar rates whether they’re using an app, or more old-fashioned methods.

The study, conducted by researchers at the Norwegian University of Science and Technology and highlighted by Scienceblog.com, was based on a survey of over 600 young Norwegian students—so its findings can’t necessarily be globally generalized.

But they make intuitive sense. According to the researchers, rates of casual sexual activity are determined by an individual’s level of “sociosexual orientation,” or openness to sex outside of a serious relationship. That personality trait was far more determining of their level of sexual activity than whether or not they used dating apps. In other words, those looking for flings will find them online just as easily as at the grocery store or park.

Get Data Sheet, Fortune’s technology newsletter.

Tinder got its reputation as a “hookup app” quickly after its 2012 release. That was largely thanks to its focus on user portraits in place of the detailed personal profiles used on sites like Match.com or OkCupid, and the decisive “swipe” mechanism that let users rapidly filter dozens or hundreds of prospective dates. One writer notoriously slammed the app as a sign of a “dating apocalypse” and the end of romance.

If Tinder really were about nothing but detached sex with almost-strangers, the new study would be a turnoff for the entire userbase—they might as well go outside. But it was already increasingly clear that no-strings sex isn’t what all—or even most—Tinder users are looking for.

For some—particularly women—Tinder has long been at least as much a source of entertainment as a serious way to look for romantic partners. The new study affirmed that women spent more time on dating apps, but were more discerning about swiping right. Women also used the app to boost their own self-esteem. Men were, not too surprisingly, more focused on pursuing (short-term) connections.

Which, if it doesn’t make easier, Tinder does at least make more convenient.

6 Reasons Apple Could Keep Crushing The Market Over The Next Decade

(Source: imgflip)

My dividend growth retirement portfolio is predicated on one core principle above all else; the right company at the right price. That means that I want to avoid overpaying for a stock at all costs. That’s even for industry-leading blue chips like Apple (AAPL) whose business model I love and that I consider to be a must-own dividend growth stock.

Chart

AAPL Total Return Price data by YCharts

But thanks to Apple’s solid returns over the past year, keeping up with the red hot Nasdaq and soundly beating a very strong (and overvalued) S&P 500, I’ve been struggling to justify purchasing Apple. That’s because I use several valuation methods to confirm a good buy, and some of them were giving me conflicting signals about Apple.

However, then I read that Warren Buffett, the greatest value investor in history (and a man who is famous for avoiding overpaying for companies) increased Berkshire Hathaway’s (NYSE:BRK.A) (BRK.B) stake in Apple by a stunning 45% in the past quarter. This made me reconsider my own valuation techniques and take another look at Apple’s long-term fundamentals, including as a dividend growth stock.

After careful analysis, I’ve concluded that I may have been using the wrong valuation methods for the company. In fact, there are six reasons why I now consider Apple to be a strong buy, even near its 52-week highs.

Let’s take a look at why the world’s most valuable company still likely has what it takes to be a strong market beater over the next decade, and possibly far longer. In fact, despite its $930 billion valuation, I think the company can realistically generate 13.2% annual total returns over the next decade, which would probably outperform the S&P 500’s 8.1% likely total returns by about 63% per year.

Apple’s Growth Engine Shows No Signs Of Slowing Down

Ahead of earnings many investors and analysts were expecting disappointing results, particularly due to fears that the flagship iPhone X (which costs $1,149 for the top end model) would disappoint and hurt iPhone revenue.

Metric

Q2 Fiscal 2018 Results

First Half Fiscal 2018 Results

Revenue Growth

15.6%

13.9%

Operating Income Growth

12.7%

12.6%

Net Income Growth

25.3%

17.2%

Free Cash Flow Growth

16.6%

9.9%

Share Count Growth

-3.7%

-3.4%

EPS Growth

30.0%

21.4%

FCF/Share Growth

21.1%

13.8%

Forward Dividend Growth

15.9%

13.3%

FCF Payout Ratio

33.4%

19.1%

(Source: earnings release)

As you can see those fears were wildly overblown. Apple continues to grow strongly, including operating earnings which were not boosted by tax reform. In fact, according to CEO Tim Cook:

Customers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter. We also grew revenue in all of our geographic segments, with over 20% growth in Greater China and Japan.” – Tim Cook

iPhone volumes grew 3% in the past quarter which might not seem like much but keep in mind that global smartphone volumes actually shrank 1.8%. That means that Apple bucked the trend and saw its global market share rise to 14.7%

That was helped by iPhone unit sales growing by double-digits in several markets including: Japan, Canada, Switzerland, Turkey, Central and Eastern Europe, Mexico and Vietnam. Many of these are fast growing emerging markets where Apple is an aspirational brand whose products are highly sought after by consumers in those countries rapidly growing middle class.

(Source: earnings supplement)

This is largely thanks to the highest consumer satisfaction in the industry. According to a survey by 451 research iPhone customer satisfaction stands at 95% across the entire product line. For the top shelf iPhone 8, 8 Plus, and X models it’s 99%. This is why 78% of business buyers who said they were planning on buying a smartphone in the June quarter planned on getting an iPhone.

Meanwhile, its other hardware lines saw flat to modest sales growth. But the star of the show was services and other products, which includes things like Apple Pay, Apple Music, subscription services, AirPods, and Apple Watch (which saw 50% sales growth). Service revenue was up not just 31% YOY in total, but up 25% or more in every single geographic market. This indicates that Apple has cracked the code in terms of monetizing its enormous installed base in every corner of the globe.

Better yet? Apple saw modest to strong growth in all regions it operates in and CFO Luca Maestri offered Q3 guidance that indicates that Apple’s double-digit sales and earnings growth is likely to continue for the rest of the year.

Metric

Q3 2018 Guidance

Revenue Growth

15.6%

Operating Income Growth

14.5%

(Source: Management guidance, Morningstar)

So fears of Apple’s growth slowing to paltry levels were overblown. But what about the future? What’s going to keep the world’s largest (and most valuable) company growing in the coming years? Fortunately, Apple has two good catalysts to keep investors happy.

Strong 2018 Lineup Of New iPhones

In the previous quarter, Apple’s success with the iPhone X drove an 11% increase in its average selling price to $749. That’s 106% more than the $363 average for the industry. But of course, given that the iPhone X was all new and very popular many are wondering whether this means that the company’s iPhone average selling price or ASP will peak in 2018. While it is certainly possible and iPhone unit volumes might flatline next year I actually think Apple will have another record year in 2019, both in terms of volumes and maybe even continued increases in ASP.

That’s because in late 2018 Apple is expected to once more revamp its iPhone line, including with an introduction of an even more premium phone that analysts are (for now) calling the iPhone X Plus.

(Source: Benjamin Geskin)

According to KGI Securities’ analyst Ming-Chi Kuo (who is usually highly accurate with his predictions), this phone is expected to have a 6.5″ OLED screen. But thanks to a wrap-around edge to edge display, it will have the same physical footprint as the 5.5″ iPhone 8 Plus. Samsung, Apple, and numerous other phone makers have shown that when it comes to screens, bigger is better, especially with consumers in Asia where giant phones are the most popular.

Playing off the “bigger is better if it’s the same size” strategy Apple is expected to launch a total of four new models in September 2018, with three carryovers to sell at lower cost points. Overall here’s what the new line-up is expected to look like including projected starting prices:

  • New: iPhone SE 2: $349
  • Retained: iPhone 7 and iPhone 7 Plus: $449 and $569
  • Retained: iPhone 8 and iPhone 8 Plus: $549 and $669
  • New: 6.1-inch iPhone with Face ID: $649, $749, or $799
  • New: 5.8-inch second-generation iPhone X: $899
  • New: 6.5-inch second-generation iPhone X Plus: $999

Assuming that the lineup predictions are correct, I expect that the introduction of a larger iPhone might very well keep volumes growing steadily (about 2% to 3% in 2019). In addition, I wouldn’t be surprised if, given the success of the iPhone X so far, the price point on that phone is retained and the starting price on the X Plus is actually $1,099 (with top model $1,249).

After all these price projections, showing Apple cutting the prices on its major phones, came during a time when rumors were swirling that the iPhone X was seeing disappointing demand. Now that we know those rumors were 100% false and that demand for super priced iPhones remains robust, I think Apple could potentially see not just further volume sales growth in 2019, but a rising ASP as well. That’s because if the X Plus is good enough (in terms of features and quality) there are plenty of people that might be willing to pay the higher price, especially given the 99% customer satisfaction survey results we’ve seen on the iPhone X.

Ok but even if Apple does reveal an improved line-up of phones in September, including a larger, better, and more expensive X Plus, that only grows sales and earnings through 2019. There must be a limit to how big smartphones can get and we’re likely approaching that limit. Fortunately, the future of Apple’s strong growth lies not in hardware, but in software.

Behold The Future Of Apple’s Growth: Services

Apple’s future growth is not in the iPhone, but in monetizing its enormous installed base of 1.3 billion devices. In other words, Apple wants to grow its subscription services to generate steady, recurring, and high margin cash flow. Currently, Apple’s subscriber base is 270 million, up 170% from 100 million a year ago (and up 30 million in the last 90 days). What’s more user transactions on things like digital subscriptions, AppleCare, Apple Pay, and Apple Music tripled over last year driving 31% revenue growth in service revenue.

(Source: earnings supplements)

This is the thing that Wall Street largely seems to miss. That Apple’s future lies in its services, where revenue is not just growing the fastest but accelerating over time. In fact, service revenue went from 6.4% of total sales in Q1 2015 to 15.0% in the last quarter. Management expects that by 2020 service revenue will have grown to $50 billion (Credit Suisse thinks it will hit $53 billion that year). But to keep that strong service growth going Apple needs to ensure its ecosystem remains top-notch. This is where R&D and growth investment comes in.

In recent years Apple has been massively boosting its R&D and CapEx spending. Those investments are going into key strategic initiatives that are designed to make the Apple ecosystem even stickier, keep iPhone sales growing (to expand the installed base), and keep service revenue growth accelerating.

For instance, it plans to invest $30 billion in US growth capex over the next five years, (and hire 20,000 new American workers). Meanwhile, R&D spending on new products continues to hit new all-time highs.

Chart

AAPL Research and Development Expense (NYSE:TTM) data by YCharts

In fact, the company’s R&D as a percentage of revenue is at its highest levels in 14 years. And given how much larger Apple has grown since then that’s saying something.

Chart

AAPL R&D to Revenue (TTM) data by YCharts

What is all that money going towards? Well, a few things. First Apple is doubling down on artificial intelligence or AI. That’s because Siri is far behind rival AI systems like Alphabet’s (NASDAQ:GOOGL) (GOOG) Google Now, Microsoft’s (MSFT) Cortana, and Amazon’s (AMZN) Alexa. So Apple has hired John Giannandrea, former head of Google’s AI department, to help improve its AI integration across its ecosystem. That integration involves partnerships with IBM (IBM) to create Watson integrated enterprise applications for every industry from insurance and cyber security to healthcare.

In addition, Apple is doubling down on in house engineering, specifically making more of its internal components for the iPhone, Mac, and other hardware. This is a trend that larger phone makers have been pursuing including Samsung (OTC:SSNLF) and Huawei. This started with Apple’s 2008 acquisition of P.A Semiconductor which led to Apple’s switch to its A-series of chips beginning with the A-4 in 2010.

Apple’s plans for the future involve designing more and better chips for the iPhone, its wearables (sales up 50% YOY), and even potentially Macs by as early as 2020. Apple’s logic is that customers pay for a premium experience so it wants total control of chip design so it can optimize its hardware and software.

(Source: Tom’s Guide)

This has been a winning strategy thus far with Apple’s A-series chips helping its phones run circles around the competition year after year.

Now Bloomberg is reporting that Apple wants to take even more of its component designs in house by developing its own displays. Apple co-developed OLED display tech with Samsung and then outsourced manufacture to LG. However, LG has had a tough time keeping up with strong demand for the iPhone X. And with Apple planning on an even larger and potentially better selling OLED phone coming this year the company wants to improve its supply chain.

Apple apparently wants to design MicroLED screens, which are the next generation of display technology promising “to make future gadgets slimmer, brighter and less power-hungry.”

The bottom line is that for all those investors who worried that Apple wasn’t spending enough on innovation or R&D, well you can rest easy. Apple is going full bore on growth investment, but in a smart and disciplined manner.

One that optimizes its current growth strategy of maximizing its install base and then monetizing it to efficiently, profitably, and at an accelerating rate. And given that Apple’s trailing 12-month returns on invested capital were 21.6%, all that extra spending means that earnings and free cash flow growth should continue to grow strongly for years.

More importantly, Apple has another major growth catalyst to help boost its EPS and FCF/share, which likely spells great news for dividend investors.

Epic Cash Return Program Makes Apple The Ultimate Low Risk Dividend Growth Investment

One of the biggest reasons I plan to own Apple is because its massive cash hoard means strong buybacks and double-digit dividend growth for as far as the eye can see.

(Source: Apple)

Keep in mind that Apple paid a $38 billion repatriation tax which means that had it not been for that one-time event the total cash position would have grown to an all-time high of $305 billion.

That’s despite returning over $275 billion in cash to shareholders over the past six years. This is due to the company’s prodigious ability to generate free cash flow including $54.1 billion in the last 12 months or a FCF margin of 22%. Note that this figure has been declining a bit over time (in recent years it was as high as 25%). But that’s not a bad thing because Apple is doing what it’s supposed to and accelerating growth investment.

“Our current net cash position is $163 billion and given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash neutral over time.” – Luca Maestri, CFO

According to Luca Maestri, Apple’s CFO, Apple wants to reduce its net cash position to zero over time. That’s why the company announced an additional $100 billion in buyback authorization on top of the existing one which runs out at the end of the current quarter. It’s also why Apple hiked its dividend by 16% for 2018, the largest increase ever since it re-instated a quarterly payment in 2012.

As importantly Maestri said the company’s M&A strategy of relatively small and strategic bolt-ons to “accelerate our product road maps” won’t change. So anyone hoping that Apple would go on a wild buying bender and purchase Tesla (TSLA), sorry you’re out of luck.

Why am I so excited about Apple’s capital return program? Because unlike most buyback programs which peak during times when a company’s earnings (and share price) are at their maximum, Apple is able to aggressively repurchase shares that are almost perennially undervalued.

Chart

AAPL PE Ratio (Forward) data by YCharts

For example, since the buyback program began in 2012 Apple has never once repurchased shares at a forward PE of greater than 18.1. In fact, most of the time it’s been repurchasing shares at a PE multiple of about 15, far below that of the broader market.

And each share Apple buys back at a reasonable (or sometimes deeply undervalued) price means that its fast growing dividend costs less. Remember that FCF/share is ultimately what funds the dividend. So by reducing the share count Apple is boosting its FCF/share growth and thus keeping its payout ratio very low. That allows faster (but highly safe) dividend growth for longer. Just how long and fast?

Well, consider this. Right now Apple’s net cash position is $145 billion and the new dividend (assuming zero buybacks) is $15 billion for the next 12 months. This means that after accounting for the dividend Apple could theoretically buyback $130 billion of shares or 14.2% of its shares.

That would reduce the cost of the dividend to about $13 billion (what it was before the hike). Then Apple, with no net cash left, would have to fund its capital returns purely from annual free cash flow. Assuming a modest 10% growth in annual FCF (which we are easily on track for) that means $60 billion in FCF over the next year. Subtract $13 billion for the dividend and that leaves $47 billion to repurchase an additional 5.1% of the shares. That reduces the dividend cost by $660 million a year and means that Apple can hike the dividend by 5.1% in 2019. That assumes zero additional growth in free cash flow, and is purely on the strength of its buybacks.

In reality, Apple’s strong growth catalysts likely mean it will be able to generate organic (non buyback induced) earnings and free cash flow growth of 6% to 8%. But when you add in the effects of 4% to 5% long-term share repurchases that means that Apple’s bottom line (and dividend) could continue growing at low single digits for the foreseeable future. Which in turn would likely drive very strong market beating returns over time.

Dividend Profile: Double-Digit Payout Growth Potential Means Apple Could Outperform Market By 63% Per Year Over The Next Decade

Company

Yield

TTM FCF Payout Ratio

Projected 10 Year FCF/Share Growth

10 Year Potential Annual Total Return

Apple

1.6%

27.7%

11% to 12%

12.6% to 13.6%

S&P 500

1.9%

50%

6.2%

8.1%

(Sources: earnings release, Gurufocus, F.A.S.T.Graphs, Multpl, CSImarketing)

The most important part of deciding whether to buy (and recommend) a dividend stock is the payout profile which consists of three parts: yield, safety, and long-term growth potential.

Now I’ll be the first to admit that Apple’s 1.6% yield is rather paltry. This is not the stock for you if you are looking for generous income right now. However, Apple’s dividend is not just low risk, it’s one of the safest on Wall Street.

That’s because the new dividend’s trailing 12-month FCF payout ratio is under 28% meaning that it’s barely making a dent in Apple’s river of fast growing free cash flow. But there’s more to dividend safety than just a well-covered payout. The balance sheet is also important so that management doesn’t have to choose between investing in future growth and paying investors.

Company

Debt/EBITDA

Interest Coverage Ratio

S&P Credit Rating

Interest Rate

Apple

1.5

29.2

AA+

2.3%

Industry Average

2.0

59.3

NA

NA

(Source: earnings release, Morningstar, Gurufocus, F.A.S.T.Graphs)

Apple’s balance sheet doesn’t appear that impressive if we just use standard relative debt metrics. After all it does owe $122 billion. And while its leverage ratio is below that of most tech companies, the interest coverage ratio is only about half as large.

However, we can’t forget that Apple’s net cash position of $145 billion means that such comparisons are largely superfluous. Apple can literally repay all its debt at any time. However, because of its incredibly strong credit rating it was able to borrow at an average interest rate of just 2.3%. And the post-tax (interest is tax deductible) effective interest rate is about 2.0%. This means that Apple has no reason to repay its debts early but just as they mature.

What about the long-term dividend growth prospects? Well, it’s certainly possible that Apple might continue hiking the dividend by a larger amount, say 15% to 20% per year. But for long-term modeling purposes the truth is that what matters isn’t the dividend growth but the growth in FCF/share.

That’s because over the long-term studies show that total returns for dividend stocks approximate yield + dividend growth. However, that model (called the Gordon Dividend Growth model or GDGM) assumes a constant payout ratio implying that dividend growth is a proxy for earnings and cash flow growth.

Or to put another way the GDGM says that your total returns will approximate the income you are getting now plus the capital gains that result from a company’s growth in the bottom line. That’s because over time a stock’s yield will fluctuate around a fixed point meaning that as the dividend grows in line with earnings and cash flow the price should rise at roughly the same rate (over the long-term).

This means that even if Apple were to grow its dividend faster than FCF/share the share price likely won’t appreciate at the faster rate. This is because investors would realize that the more rapid growth was a result of payout ratio expansion that must ultimately stop once it reaches some level (say 50%).

Still the end result is that Apple appears to have long-term FCF/share growth potential of 11% to 12% (analyst consensus 11.6%). So under the GDGM that would imply a 13.2% total return potential. Given the S&P 500’s current valuations it’s likely that Apple will be able to handily beat the 8.1% total returns the broader market is likely to generate over the next decade. And even if the S&P 500 manages its historical 9.2% total return (since 1871) Apple will still prove a superior investment.

Valuation: Believe It Or Not Apple Is Still A Great Deal

Chart

AAPL Total Return Price data by YCharts

Given that Apple is near its 52-week high and has easily beaten both the tech-heavy Nasdaq and S&P 500 this year, it’s understandable that many investors are worried about buying at current levels.

The thing about valuations is there is no objectively correct method. That’s why I usually use at least three valuation models to determine whether or not a stock is trading at fair value or less.

The first is using the Gordon Dividend Growth Model to see whether or not a stock has the potential to reach my personal total return target of 10+%. Apple passes that test easily.

Another model I use is comparing the yield against its historical average. Remember that over time a stock’s yield will mean revert, or fluctuate around a relatively fixed point that can serve as a good proxy of fair value.

(Source: Simply Safe Dividends)

This is where I’ve always run into trouble with Apple, because since early 2017 the company’s valuation under this method has shown it to be overvalued. I generally err on the side of conservatism and require a stock to pass all three of my valuation tests before buying it.

However, with tech stocks (which are usually not owned for their dividends) I’m sometimes willing to make an exception. That’s especially true for industry leading blue chips like Apple. Specifically that means that I ‘m willing to buy it if it passes just 2/3 of my valuation screens.

What is the third screen? Looking at the earnings multiple, which is where Apple shines.

Forward PE Ratio

Implied Growth Rate

Historical (13 Year Median) PE Ratio

Estimated Benjamin Graham Fair Value PE

Potential Discount To Fair Value

16.2

3.90%

25.6

29.1

44.3%

(Sources: F.A.S.T.Graphs, Gurufocus, Benjamin Graham)

There are two parts to this screen. The first is comparing the forward PE to the historical PE. As you can see that comparison makes Apple appear extremely undervalued. Of course, since Apple was previously growing at 100+% for several years that figure is skewed much higher and thus shouldn’t necessarily be trusted on its own.

Which is where I turn to Benjamin Graham, the father of modern value investing (and Buffett’s mentor). Graham developed a simple rule of thumb formula for determining whether or not a stock was reasonably priced.

Fair Value PE = (8.5 + (2 X 7 to 10 year projected growth rate))/ Discount Rate

The idea is that even a company that’s not growing (but has a stable business generating good cash flow) is worth something. This formula can serve as a good test of any company’s current earnings multiple to see whether it is reasonable given realistic growth potential. If a company isn’t growing at all then using a 9.1% discount rate (what a low cost S&P 500 index ETF would have generated since 1871 net of expenses) shows that buying that company at an earnings multiple of 7.8 is reasonable. Assuming all the earnings get paid out as a dividend it means you’ll earn the same return as the market. Anything below that is a bargain and any multiple above it is overpaying.

For Apple using the current analyst consensus that would imply a fair value Benjamin Graham PE of 29.1 or about $334 per share for Apple. Now that implies that Apple is currently 44.3% undervalued which might raise some eyebrows. That’s good because while models are useful you always need to remember that they are only as good as the assumptions and projections baked into them.

The question is how realistic are analyst’s long-term growth assumptions of 11.6%? Well, given that Apple can easily buy back 4% to 5% of its shares using purely organic excess FCF (after paying the dividend), they seem pretty realistic to me. In fact, since Apple’s enormous net cash position should allow it to repurchase 6% to 7% of its shares for several years, the company requires very little actual revenue growth as long as it can maintain its margins.

The other useful thing about the Benjamin Graham model is that it allows us to determine an implied growth rate. In other words, given Apple’s current earnings multiple what growth rate does Wall Street appear to be pricing in. The answer is 3.9% earnings (and FCF) growth per share over the next decade. Now this is where my confidence in recommending Apple at today’s price really goes up.

Because even if Apple were to do something incredibly stupid, such as pay out all of its net cash as a one-time dividend, the organic buyback rate of 4% to 5% per year would allow it to easily meet or likely beat that low hurdle. And given that Apple is likely to buy back shares at a much faster rate, and continues to generate strong organic sales and earnings growth as well, I have no qualms about declaring it a strong buy at today’s price.

Of course, that is only if you are comfortable with the company’s risk profile.

Risks To Consider

There are three risks to keep in mind with Apple.

In the short term, the company might see margin pressure for two reasons. The first is that the company is starting to see higher component costs. This can be partially offset by higher average selling prices on iPhones but there is a limit to how high that can go. For example, if past trends (of Apple’s largest iPhone being its most popular) hold then success in the iPhone X Plus should mean ASPs rise into 2019. However, it’s always possible that Apple’s margins on that super premium phone might actually be lower than its less expensive models.

That’s because Apple’s flagship usually comes with the company’s most advanced tech which can mean higher production costs than simpler models. The good news is that as the world’s second largest smartphone maker Apple has enormous pricing power with suppliers. Thus it will likely always hold a competitive advantage compared to its smaller peers, meaning that any margin compression is likely to be smaller and potentially last shorter than for other phone manufacturers.

In addition, a rising ASP on new iPhone models could help to offset rising input prices, assuming the iPhone X Plus isn’t loaded with too much expensive Star Trek tech. But given that I doubt Apple will be launching an even larger and more premium line after that (say a 7″ iPhone X Plus Pro) then future ASP increases will largely have to come from Apple’s strong pricing power via annual price increases.

The other potential margin pressure point is the rising dollar. Remember that Apple generates most of its sales overseas. This means that if the US dollar strengthens relative to local currencies than not only will its products become more expensive in those markets (potentially hurting sales growth) but its bottom line could also fall. That is because a rising dollar creates growth headwinds as foreign profits end up converting to fewer dollars for accounting (and capital return) purposes.

Chart

^DXY data by YCharts

Through most of 2017 optimism about stronger coordinated economic growth around the world caused the US dollar to fall significantly against most currencies. This was because investors expected foreign central banks to start raising interest rates faster matching rising rates in the US.

However, in the first quarter of 2018 growth has slowed down worldwide, and central banks have thus held off ending quantitative easing and have not started hiking rates. Meanwhile, continued strong economic growth in the US has caused our long-term rates to rise. In addition, the Federal Reserve has said it plans seven more rate hikes through the end of 2020 (which will likely push up short-term rates).

Since global capital flows to where it can get the best return US rates rising while rates in other economies don’t can create stronger demand for US dollars that causes its relative value to increase. Note that this means that all multinational US corporations could be facing a currency growth headwind for the next year or two.

The second risk is longer-term and ties into the first, which is Apple’s pricing power. That is based on the strength of its brand and stickiness of the ecosystem. For years many analysts and investors have worried that Apple was doomed to follow in the footsteps of Blackberry (BB) and Sony (SNE), once dominant consumer tech companies who became complacent and were later disrupted.

Thus far Apple has done a masterful job of continuing to improve iOS as well as its service offerings, resulting in continued strong growth in both iPhones and a booming subscription business. And its increasing R&D spending gives me confidence that management will avoid the kind of complacency that spelled the downfall of earlier consumer electronic companies.

But that being said Apple’s ultimate growth potential rests on one key factor. It must maintain strong market share in emerging markets like China, India, Latin America and eventually Africa (which is expected to see its population grow by 1.3 billion by 2050).

The risk is that technology by its very nature tends to become commoditized, meaning that prices/capability fall over time. While Apple has managed to remain an industry leader by adding new features that delight its users, ultimately much cheaper smartphones might prove “good enough” for the needs of many poorer consumers around the world. Or to put another way in the long-term it’s hard to say whether or not Apple will be able to keep its product offerings far enough ahead of lower cost budget Android phone makers to maintain enough future global smartphone market.

Global Smartphone Sales Projections

(Source: Statista)

And even if Apple can maintain its current market share in premium smartphones the overall growth rate of that market is expected to slow down and potentially peak in 2021. Note that this is likely due to consumers (especially in emerging markets) upgrading at a slower pace (phones are “good enough”). Over the long-term continued population and economic growth around the world (mostly emerging markets) should cause smartphones sales to continue rising over time.

However, as we know the market can be a fickle mistress. Which means that bears and fair weather bulls (who only love a stock if its constantly rising) could fixate on slowing iPhone sales in the future resulting in short to medium-term price volatility.

Fortunately, as long as Apple’s iPhone sales remain flat it will still represent a large and growing user base that it can monetize via its fast-growing and increasingly profitable service business.

Finally while it’s a more speculative risk, and certainly a good problem to have, I am a bit worried that if Apple can’t get to its net cash goal of zero fast enough management might eventually start to feel pressure to do something stupid. That might including splashy acquisitions that numerous analysts have recommended over the years.

  • Netflix (NFLX): $141.0 billion
  • PayPal (PYPL): $95.5 billion market cap
  • Tesla (TSLA): $47.0 billion
  • Activision Blizzard (ATVI) $54.8 billion
  • Pandora (P): $1.9 billion

Apple could easily acquire any of these companies and plausible sounding cases can be made that buying something like Netflix or Pandora would fit nicely into Apple’s service oriented growth future. However, thus far the company has managed to do a great job at compounding shareholder value without such giant and overpriced acquisitions. Rather Apple is famous for smaller bolt-on purchases that fit into management’s long-term strategy. And given the CFO’s comments during the last conference call I have little concern that Apple is going to potentially make such bone headed deals in the future.

What is a larger concern is the potential for a giant one-time special dividend. I’m extremely opposed to such an idea because a one-time dividend literally creates no long-term value. The share price is reduced by the same amount on ex-dividend day, and the cash that’s distributed reduces the value of the company by that much. What’s worse such a one-time dividend would mean far smaller future buybacks and slower dividend growth, which is the core of my long-term investment thesis for the company.

Fortunately, it appears that at least for now Tim Cook and company are avoiding activist pressure for such a pointless short-term capital allocation move. And given that management has said that it agrees with me that shares remain highly undervalued chances are that Apple will simply accelerate the buyback program to meet its long-term net cash zero target.

Bottom Line: Apple Remains A Must Own Dividend Growth Stock And A Strong Buy At Today’s Valuation

Don’t get me wrong I’m not saying that Apple is going to continue soaring like it has this year or last year. In the short term, there is no telling what factors the market might fixate on, which could drive wild swings in the price of any company.

What I do know is that Apple, despite trading at near 52-week highs, is still undervalued based on its top-notch fundamentals and realistic long-term growth potential. Growth potential that will be driven by strong short and long-term growth catalysts and the largest capital return program in history.

All of which is why I plan to take an initial position in Apple next week. That’s because I have high confidence that management will do a great job of exponentially compounding my wealth over the next decade thanks to double-digit dividend hikes for the foreseeable future.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AAPL over 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.

Regretting It Already

Last Sunday, I wrote a fun little something for this platform called “Jerome Powell May Live To Regret These Statements“, in which I flagged a series of comments the newly appointed Fed chair made at an IMF/SNB event earlier this month.

Here, for anyone who missed it, is what Powell said about the likely resilience of emerging markets (EEM) as the Fed normalizes policy:

Monetary stimulus by the Fed and other advanced economies played a relatively limited role in the surge of capital flows to (emerging market economies) in recent years.

There is good reason to think that the normalization of monetary policy in advanced economies should continue to prove manageable for EMEs. Markets should not be surprised by our actions if the economy evolves in line with expectations.

In the first piece linked above, I gently suggested that while rising U.S. rates and the ongoing rally in the dollar (UUP) needn’t necessarily lead to a broad-based unwind in EM, past a certain point it won’t be possible to contend that the only real issues here are a recalcitrant Erdogan in Turkey and a crisis of confidence with regard to the Argentine peso.

In other words, there’s only so long you can lean on the idiosyncratic, country-specific stories excuse when the pain is spilling over to other locales amid a continual rise in U.S. rates and still more dollar strength. Although it’s really only possible to know this in hindsight, often (and this doesn’t just apply to emerging markets) we discover that what we thought were “idiosyncratic” stories were in fact coal mine canaries or, to mix metaphors, the wobbliest dominoes.

As I noted last Sunday, “what you’ve seen recently in the Brazilian real and also in Indonesia is evidence of contagion.” I started talking at length about the Indonesia story weeks ago and around the same time, BofAML’s Michael Hartnett (he’s the guy who told you to sell based on his “perfect” indicator back on January 26, a week before things got dicey), said this about the Brazilian real:

EM FX never lies and a plunge in Brazilian real toward 4 versus US dollar is likely to cause deleveraging and contagion across credit portfolios.

Well, this week, Indonesia hiked rates for the first time since 2014 and Brazil’s central bank eschewed what would have been a 13th consecutive rate cut in an effort to put the brakes on the currency pressure.

Neither effort was effective. In Indonesia’s case, the rupiah plunged to its lowest since October 2015 on Friday:

(Heisenberg)

Have a look at the selloff in bonds (benchmark yields for Indonesia are up some 65 bps this quarter, that would be the largest quarterly jump since late 2016):

(Heisenberg)

In short, the rate hike is not going to be enough. Capital flight is accelerating.

As for Brazil, the “hawkish” decision to forgo another rate cut similarly failed to assuage concerns and worse, it deep-sixed Brazilian equities. The real continued to fall, hitting a two-year low on Friday and I think you’ll agree that what you see in the following chart looks like trouble:

(Heisenberg)

And look, if you’re in the camp that’s predisposed to suggesting none of this matters until it spills over into developed markets, do your friends who hold the popular iShares MSCI Brazil Capped ETF (EWZ) a favor and don’t feed them that line, ok? Have a heart. Empathize. Because they just had their worst week since the circuit breakers were tripping last May:

(Heisenberg)

When it comes to Brazil there’s probably no need to panic just yet. There’s some electoral uncertainty, but nothing that should justify what you see in the currency.

“BRL is slightly weak but not too devalued. This is not an overshooting,” Goldman’s Alberto Ramos told Bloomberg in an e-mail, adding that this is a reflection of external shocks (think: stronger dollar and rising U.S. rates) that “are common to other EM currencies.”

He did go on to note that we could see 4.00 on the BRL, but that “would require the intensification of global EM FX pressures and more concern about the October election.”

Right. Well when it comes to “the intensification of global EM FX pressures” (i.e., when it comes to the kind of 30,000 foot view), the MSCI EM FX index has fallen for six of the past seven weeks:

(Heisenberg)

It was down every day this week.

The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) has also fallen for six of the last seven weeks:

(Heisenberg)

And how about the iShares JP Morgan EM Local Government Bond UCITS ETF? Well, it’s down handily, has seen some $550 million in outflows this month alone, and as Bloomberg notes, hasn’t seen a net inflow since March:

(Heisenberg, Bloomberg)

Look at the slide in its market cap just over the past two months:

(Bloomberg)

Now, let me take a moment to remind you that I have been persistently warning about Turkish President Recep Tayyip Erdoğan’s penchant for pushing a laughably unorthodox “theory” about how higher interest rates cause inflation and currency depreciation. If you follow Turkey, you know all about this. Here’s what I said in the post linked here at the outset:

In case you were under the impression that Erdoğan is going to be inclined to moderating his stance on interest rates (which, in his bizarre version of economics, cause inflation if they’re too high), he is going out of his way to ratchet up the rhetoric and disabuse you of that idea on a daily basis.

Well, do you know what he did this week? He went on Bloomberg TV and all but confirmed that once next month’s election is out of the way, he’s going to effectively commandeer monetary policy. You can watch that interview for yourself here and/or read my longer commentary here, but suffice to say it pushed the beleaguered lira to a fresh all-time low and confirmed everyone’s worst fears about what’s going to happen once he officially consolidates power:

(Heisenberg)

As an amusing aside, if you’re following along on Twitter, you knew that Bloomberg interview was bound to cause trouble:

All of this played out in a week that saw 10Y yields (TLT) in the U.S. hit their highest since 2011 and 30Y yields touch 3.25%.

Oh, and remember how the dollar rally stalled last week? Yeah, well it resumed this week, rising for the fourth week in five:

(Heisenberg)

What you’re seeing here is not only notable, but extremely important for what it says about how the environment is shifting as the Fed normalizes. As I’ve been keen on noting for at least a year, everything became one trade as QE drove everyone down the quality ladder in a relentless hunt for yield and as dovish forward guidance kept rates vol. anchored. That’s now reversing.

How violent that reversal will ultimately be is debatable. Some folks think it wouldn’t be the worst thing to just let emerging markets go. The following excerpts are from the latest by former trader turned Bloomberg columnist Richard Breslow:

These positions can be put to the test without necessarily having negative implications for the broader asset classes. In fact, it may represent a very positive development. A big chunk of these trades weren’t originally done because people were feeling chuffed. They were just desperately searching for yield and following the bidding of the central banks.

But if you’re fascinated by big names, then you might note that Carmen Reinhart is concerned. Here’s what she said this week about emerging markets:

The overall shape they’re in has a lot more cracks now than it did five years ago and certainly at the time of the global financial crisis. It’s both external and internal conditions. This is not gloom-and-doom, but there are a lot of internal and external vulnerabilities now that were not there during the taper tantrum.

And then there was this from El-Erian (via Twitter):

Now look, if what you want to do is pretend as though this is all immaterial for developed market investors, then by all means, but just know that this is one of those scenarios where the old adage about being “entitled to your own opinions but not your own facts” applies. As Heisenberg readers know, I generally despise old adages, but that one is apt here.

This is absolutely material for all investors and the whole point of documenting the spillover from Turkey and Argentina into other locales and charting the decline in various indices and funds is to demonstrate that rising U.S. rates and the stronger dollar are the proximate cause of the problem.

This is all a consequence of the buildup of imbalances in the QE era. It was always a matter of how smoothly the unwind of all the trades that are part and parcel of the global hunt for yield would be and the verdict from emerging markets right now is: “not smoothly”.

Trade accordingly. Or don’t. It’s up to you. But don’t say you don’t have the information you need to make an informed decision.

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.

Yes, 'Call of Duty''s Single-Player Campaign Will Be Missed

It’s always premature to declare the death of a videogame series. The creative seas of the big-budget games industry ride unending tides of stagnation and reinvention, a cycle of death and renewed life that wrings millions of dollars out of consumers every year. If you miss something, just be patient; it’ll come back, eventually. This is videogames, after all. Death is always temporary.

Even so, it’s hard for me not to feel a pang of sadness over the confirmation that Call of Duty: Black Ops 4, developer Treyarch’s newest installment in Activision’s mammoth first-person shooter franchise, will be without a traditional singleplayer campaign when it ships this fall.

According to Treyarch, this is a daring move, built around offering a more complex, most involved multiplayer suite than any that’s ever existed in a Call of Duty title. And maybe it is; news that BO4 will include a true battle royale mode is certainly intriguing, and there’s always a chance that Treyach—routinely the most innovative of Activision’s stable of rotating Call of Duty developers—could pull off something truly remarkable. What I played at the game’s reveal event yesterday was certainly fun. Daring, though? it’s too soon to say.

What I can say is that Treyarch made the best Call of Duty campaigns in the past decade, and its contribution to the strange saga of singleplayer Call of Duty is going to be sorely missed.

I’ve been frustrated with the most recent Call of Duty campaigns, but the core potential of the series’ singleplayer narrative remains. Whether at their best or worst, Call of Duty campaigns are massive, expensive, well-researched spectacles, drawing together reams of actual military expertise and fantastical military fiction into a shooting-gallery slurry, each bit suffused with ideas about America’s complicated and often ugly relationship with its armed forces.

And Treyarch told these stories the best. The Black Ops series refines the formula to the point of paranoia, pushing it as far as it can possibly go before breaking. From Cold War hallucinations to futures ruined by climate change and overtaken by sentient military AI, Call of Duty: Black Ops has always provided players with absurd and fascinating sites of cultural exploration. The subseries has been smartly designed, wildly written, and blisteringly entertaining to play. The writing is not always good, in a traditional sense, and the design is sometimes too esoteric for its own good. But more than anything else in the entire two-decade Call of Duty ouevre, Black Ops has always offered something to talk and think about—even if you hate it.

But with no traditional singleplayer to speak of, Treyarch is electing not to offer that sort of singular experience this year. From a financial standpoint, that may be a wise decision. It’s certainly a money saver. But it’s still a loss, and even if the Call of Duty campaign will one day live again, I’m here to pay my respects for its loss here and now.


More Great WIRED Stories

FCC investigating website flaw that exposed mobile phone locations

WASHINGTON (Reuters) – The U.S. Federal Communications Commission said on Friday it was referring reports that a website flaw could have allowed the location of mobile phone customers to be tracked to its enforcement bureau to investigate.

FILE PHOTO: The Federal Communications Commission (FCC) logo is seen before the FCC Net Neutrality hearing in Washington, U.S., February 26, 2015. REUTERS/Yuri Gripas/File Photo

A security researcher said earlier this week that data from LocationSmart, a California-based tech firm, could have been used to track AT&T Inc (T.N), Verizon Communications Inc (VZ.N), Sprint Corp (S.N) and T-Mobile US (TMUS.O) mobile consumers within a few hundred yards of their location and without their consent.

Senator Ron Wyden, an Oregon Democrat, on Friday had urged the FCC to investigate, saying on Twitter that a “hacker could have used this site to know when you were in your house so they would know when to rob it. A predator could have tracked your child’s cell phone to know when they were alone.”

He later praised the FCC decision to investigate, as first reported by Reuters.

“I urge the FCC expand the scope of this investigation, and to more broadly probe the practice of third parties buying real-time location data on Americans,” Wyden said.

Robert Xiao, a researcher at Carnegie Mellon University, said a flaw in a demo tool from LocationSmart could have been used to track anyone.

LocationSmart spokeswoman Brenda Schafer said on Friday the vulnerability “has been resolved and the demo has been disabled.”

Prior to Xiao’s efforts, which included locating up to two dozen users, Schafer said the company believes no one else exploited the vulnerability.

The company is committed to “continuous improvement of its information privacy and security measures,” she said.

Last week, the New York Times reported that the former sheriff of Mississippi County, Missouri, used Securus Technologies [CASHAL.UL] to track mobile phones – including those of other police officers – without court orders, citing charges filed against him.

Several published reports said Securus is getting its data through an intermediary of LocationSmart.

Verizon spokesman Rich Young said Friday the company has “taken steps to ensure that Securus can no longer access location information about Verizon Wireless customers.” He added the company has “initiated a review of this entire issue.”

AT&T spokesman Mike Balmoris said the company does not “permit sharing of location information without customer consent or a demand from law enforcement. If we learn that a vendor does not adhere to our policy we will take appropriate action.”

Sprint said it is conducting an internal review of the issue. T-Mobile US did not immediately comment.

Securus said later on Friday that access to location-based services “data has been disabled for the time being,” out of an abundance of caution and in light of ongoing discussions with partners.

The company also said it has “no direct business relationship with LocationSmart,” adding it is ready to work with law enforcement and vendors to reinstate the service as soon as possible.

Last week Wyden said that Securus, a major provider of correctional facility telephone services, was purchasing real-time location information from carriers and providing information “via a self-service web portal for nothing more than the legal equivalent of a pinky promise.”

Wyden wrote all four of the U.S. major mobile carriers, saying the practice “exposes millions of Americans to potential abuse and unchecked surveillance by the government.”

Reporting by David Shepardson; editing by Chizu Nomiyama and G Crosse

Elon Musk brings technology charm offensive to Los Angeles tunnel plan

LOS ANGELES (Reuters) – Billionaire entrepreneur Elon Musk is bringing his technology charm offensive to an attempt at digging a tunnel beneath part of Los Angeles to test designs for a high-speed subterranean transportation network he envisions for the city.

SpaceX founder Elon Musk smiles at a press conference following the first launch of a SpaceX Falcon Heavy rocket at the Kennedy Space Center in Cape Canaveral, Florida, U.S., February 6, 2018. REUTERS/Joe Skipper

Musk, the Silicon Valley high-tech tycoon best known for his Tesla Inc electric car manufacturer, planned to make a rare personal appearance at a public event in Los Angeles on Thursday night to answer questions from residents about his tunneling plans.

Efforts by Musk’s aptly named underground transit venture, the Boring Company, to win fast-track city approval of the proposed tunnel has drawn a court challenge from two neighborhood organizations.

The venue for his town hall-style meeting is the Leo Baeck Temple, a synagogue in the city’s affluent Bel-Air district, where Musk owns a residence, about 10 miles (16 km) north of the would-be tunnel site.

Plans call for excavating a 2.7-mile (4.4-km) passage below a stretch of the congested Sepulveda Boulevard corridor on the West Side of Los Angeles and the adjacent town of Culver City.

The Los Angeles City Council’s public works committee last month approved Boring’s request to exempt the tunnel from a lengthy environmental impact review that would otherwise be required under state law.

Boring says the tunnel would serve as an experimental proof-of-concept site to demonstrate ideas for a traffic-easing system Musk wants to build to rapidly whisk individual cars and small groups of pedestrians from place to place beneath the surface.

But two neighborhood advocacy groups have filed suit to block the excavation, arguing the project is really intended as the first segment for a much larger tunnel system planned by Musk. They say he is trying to obtain a waiver to evade environmental regulations that forbid piecemeal fast-track permitting of big-scope projects.

Musk launched his foray into public transit after complaining on Twitter in December 2016 that clogged traffic was “driving me nuts,” vowing to “build a boring machine and just start digging.”

The Boring expansion comes as Musk wrestles with production problems for the rollout of the Model 3 sedan at Tesla, his electric car and energy-storage business. He also is chief executive of rocket builder Space Exploration Technologies, or SpaceX, and the profusion of leadership roles has concerned some investors that he is spread too thin.

The West L.A. tunnel is the latest project Boring has undertaken after quietly digging a slightly shorter tunnel underneath tiny neighboring municipality of Hawthorne, where SpaceX and Boring are both headquartered.

Reporting by Steve Gorman; Editing by Peter Cooney