Omega Healthcare Investors: Sometimes Short-Term Bad Can Be Long-Term Good

This article is about Omega Healthcare Investors (NYSE:OHI), a REIT, and why it’s a buy for the income investor long term, even when OHI has a short-term problem with one of its operators. I believe that the management of OHI is good and has already outlined the steps to be taken to get the Orianna properties to new operators with reduced rents.

Omega Healthcare is one of the largest operators of skilled nursing care properties and assisted living properties. OHI is a full position at 6.0% in The Good Business Portfolio. OHI’s position will be left to grow over time and added to whenever a dip like this happens. The company has at many times been under pressure and gotten down to $28 range, and each time it has bounced back, so this is another chance to buy into a good company with a very high yield.

When I scanned the five-year chart, Omega Healthcare Investors has a poor chart going up and to the right for 2013-2014, then down slowly for three years ending behind the market. In 2013, OHI had a good year when the market was up 27%; the company came in at a 30% increase.

Chart

OHI data by YCharts

Fundamentals of Omega Healthcare Investors will be reviewed in the following topics below:

  • The Good Business Portfolio Guidelines
  • Total Return And Yearly Dividend
  • Last Quarter’s Earnings
  • Company Business
  • Takeaways
  • Recent Portfolio Changes

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article “The Good Business Portfolio: Update To Guidelines And July 2016 Performance Review“. These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Omega Healthcare Investors passes 9 of 11 Good Business Portfolio Guideline, a fair score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below:

  1. Omega Healthcare Investors does meet my dividend guideline of having increased dividends for seven of the last ten years and having a minimum of 1% yield, with 10 years of increasing dividends and a 9.3% yield. Omega Healthcare Investors is therefore a good choice for the dividend income investor. The average five-year payout ratio is high at 82% because of its REIT designation. After paying the dividend, this leaves cash remaining for investment in expanding the business by buying bolt-on properties to the 1,000 it already owns or leases.
  2. I have a capitalization guideline where the capitalization must be greater than $7 billion. OHI fails this guideline by a small amount. OHI is a mid-cap company with a capitalization of $6.2 billion. Omega Healthcare Investors’ 2017 projected total yearly AFFO flow at $646 million is good, allowing the company to have the means for growth and increase dividends.
  3. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.1%. The one-year forward CAGR of 7.0% meets my guideline requirement. This good future growth for Omega Healthcare Investors can continue its uptrend benefiting from the continued growth of the senior citizen population.
  4. My total return guideline is that total return must be greater than the Dow’s total return over my test period. OHI fails this guideline since the total return is 64.33%, less than the Dow’s total return of 78.53%. Looking back, $10,000 invested five years ago would now be worth over $18,700 today. The total return in the good year of 2013 was 29.6% compared to the Dow gain of 27%, a small beat. This makes Omega Healthcare Investors a fair investment for the total return investor that has future growth as the senior citizen sector continues to grow. As an added plus we have President Trump cutting corporate taxes (both domestic and foreign) which will increase earnings slightly.
  5. One of my guidelines is that the S&P rating must be three stars or better. OHI’s S&P CFRA rating is three stars or hold with a recent calculated target price to $35.4, passing the guideline. OHI’s price is presently 25% below the target. It is under the target price at present and has a low price to AFFO of 10.8, making it a good buy at this entry point if you are a long-term investor that wants income with an above-average dividend yield.
  6. One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is weak, but an above-average yield makes OHI a good business to own for income with moderate growth long term. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and also generates a fair income stream. Most of all what makes OHI interesting is the potential long-term growth, as more skilled nursing care facilities are required and the income for the income investors is great.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Omega Healthcare Investors misses the Dow baseline in my 56.0-month test compared to the Dow average. I chose the 56.0-month test period (starting January 1, 2013, and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The fair total return of 64.23% makes Omega Healthcare Investors a fair investment for the total return investor who also wants a steady increasing income. OHI has an above-average dividend yield of 9.3% and has had increases for the past 21 quarters, making OHI also a good choice for the dividend growth investor. The dividend has recently been increased to $0.65/Qtr., from $0.64 or a 1.6% increase for the quarter.

Dow’s 56.0-month total return baseline is 78.53%.

Company Name

56.0-month total return

Difference from Dow baseline

Yearly dividend percentage

Omega Healthcare Investors

+64.23%

-14.3%

9.3%

Last Quarter’s Earnings

For the last quarter, on October 30, 2017, Omega Healthcare Investors reported AFFO of $0.79 that missed expectations by $0.06 and compared to last year at $0.82. Total revenue was higher at $194 million, up 4.4% year over year and missed expectations by $44 million. This was a poor report with the bottom line missing expectations and the top line increasing. The next earnings report will be out in late January 2018 and AFFO is expected to be $0.82 compared to last year at $0.82. The company guided AFFO for the year to $3.27-3.38, but this assumes it will be able to fix the problem with one of its operators. Earnings will most likely be very volatile over the next six months.

Business Overview

Omega Healthcare Investors is one of the largest skilled nursing care and assisted living facilities REITs in the United States.

As per Reuters:

“Omega Healthcare Investors is a self-administered real estate investment trust (REIT). The Company maintains a portfolio of long-term healthcare facilities and mortgages on healthcare facilities located in the United States and the United Kingdom. It operates through the segment, which consists of investments in healthcare-related real estate properties. It provides lease or mortgage financing to qualified operators of skilled nursing facilities (SNFs) and assisted living facilities (ALFs), independent living facilities, rehabilitation and acute care facilities. Its portfolio consists of long-term leases and mortgage agreements. As of December 31, 2016, its portfolio of investments included 996 healthcare facilities located in 42 states and the United Kingdom and operated by 79 third-party operators. As of December 31, 2016, the Company’s portfolio consisted of 809 SNFs, 101 ALFs, 16 specialty facilities, one medical office building, fixed rate mortgages on 44 SNFs and two ALFs.”

The graphic below shows the type of facilities required today. With seniors remaining active into their 80s, 90s and beyond, skilled nursing facilities continue to evolve to meet the higher expectations new generations of seniors and their families want with regards to amenities, décor and care.

Source: Omega Healthcare Investors Web Site

Overall, Omega Healthcare Investors is a good business with a 7% CAGR projected growth as more skilled nursing care facilities are needed going forward. The good AFFO provides OHI the capability to continue its growth by increasing revenue as it buys bolt-on properties and increases dividends.

Also as a tailwind, we have President Trump wanting to lower corporate taxes on income. As the corporate tax rate is lowered, earnings of OHI should increase slightly.

The economy is showing moderate growth right now (about 2.9%), and the Fed has raised rates in June 2017, with future rate increases dependent on the United States economy and inflation. The Fed projects for one more increase in 2017. I feel the Fed is going slowly; it doesn’t want to trigger a slowdown in the economy.

From October 30, 2017, earnings call, Taylor Pickett (Chief Executive Officer) said:

Adjusted FFO for the third quarter is $0.79 per share. Funds available for distribution, FAD for the quarter is $0.73 per share. The reduction in adjusted FFO and FAD is primarily related to converting the Orianna portfolio to cash basis accounting with no adjusted FFO or FAD recognized for Orianna in the third quarter.

During the third quarter, we cooperatively completed the transition of Orianna’s Texas facilities to another Omega operator, and we completed the sale of the Northwest facilities to two buyers. Unfortunately, the remaining portfolio continues to underperform and Orianna continues to apply free cash flow to pay down past due vendors and other obligations.

We are in active discussions with Orianna’s owners and consultants regarding the potential transition and/or sale of certain assets versus a federal or state court restructure. We are hopeful, we can develop an out-of-court plan, which if successful, would likely result in cash rents of $32 million to $38 million per year, as compared to the current annual contractual rent of $46 million.

“We remain confident in our ability to pay our dividend, increasing our quarterly common dividend by $0.01 to $0.65 per share. We’ve now increased the dividend 21 consecutive quarters. Our dividend payout ratio remains conservative at 82% of adjusted FFO and 89% of FAD, and we expect these percentages will improve as the Orianna facilities return to paying rent. Our revised 2017 guidance reflects the impact of Orianna’s cash accounting and our anticipation that no cash were received for the balance of the year. “

This shows the feelings of the top management for continued growth of the business and shareholder returns and the action being taken to fix the problem with Orianna.

From October 30, 2017, earnings call Daniel Booth (Chief Operating Officer), said:

“Turning to new investments. During the third quarter of 2017, Omega completed two new investments totaling $202 million, plus an additional $36 million of capital expenditures. Specifically, Omega completed $190 million purchase lease transaction for 15 skilled nursing facilities in Indiana and as part of that same transaction simultaneously completed a $9.4 million loan for the purchase of the leasehold interest in one skilled nursing facility with an existing Omega operator.”

This shows that OHI is still growing even with an operator in trouble.

Takeaways

Omega Healthcare Investors is a great investment choice for the long-term income investor with its high yield and a fair choice for the total return investor. I take this downturn as a long-term opportunity to get a great income stream at a bargain price. Omega Healthcare Investors is 6.0% of The Good Business Portfolio and will be held as we watch it grow over time. If you want a growing income, OHI may be the right investment for you, but it will be volatile for the next six months and you should be a long-term investor.

Recent Portfolio Changes

  • Increased the position of Omega Healthcare Investors to 6.0% of the portfolio. I wanted a little more income and to take advantage of the recent dip in price.
  • Recently, on October, 16 trimmed Boeing (BA) from 11.3% of the portfolio to 11.0%. A great company, but you have to be diversified. The Paris Air Show was great for Boeing, and it easily beat Airbus (OTCPK:EADSY) in orders by a mile.
  • Wrote some L Brands (LB) November 17 strike 42.5 calls on the part of the holding. If the calls remain in the money near exercise time, they will be moved up and out.
  • Increased the position of L Brands to 3.2% of the portfolio; I believe the downturn in LB is well overdone.
  • Increased position of GE (NYSE:GE) to 4% of the portfolio, a full position. GE has now become a value and income play.
  • Sold the Harley-Davidson (HOG) position from the portfolio and will watch it see if President Trump cuts corporate taxes or brings foreign profits back at a low tax rate. This sell gets rid of an underperformer and makes room for a company with more present growth.
  • Added a starter position of 3M (MMM) at 0.5% of the portfolio. It has a good steady dividend history, a dividend king with 58 years of increasing dividends, and great total return. Please see my article “3M: Dividend King With Great Total Return“.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio: Johnson & Johnson (JNJ) 8.8% of the portfolio, Altria Group (MO) 6.8%, Home Depot (HD) 8.6%, and Boeing 11.0% of the portfolio; therefore, BA, JNJ, and Home Depot are now in trim position with Altria getting close.

Boeing is going to be pressed to 11% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 million in the first quarter, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 million, a big jump from the first quarter. The second-quarter earnings were fantastic with Boeing beating the estimate by $0.25 at $2.55. The third-quarter earnings were $2.72, beating expectations by $0.06 with revenue increasing 1.7% year over year, another good report. Recently S&P Capital IQ raised its one-year target to $272.

JNJ will be pressed to 9% of the portfolio because it’s so defensive in this post-Brexit world. Earnings in the last quarter beat on the top and bottom line, and Mr. Market did like the growth going forward. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2017 2nd Quarter Earnings And Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter’s performance after the earnings season is over.

I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, OHI, DLR and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them in my list of previous articles.

Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own.

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, MMM.

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.

Tesla: 10-Q Deep Dive

As many of you know by now, the most interesting articles for me are those where I am either writing about crunching through numbers myself or reviewing the work from other organizations.

We are once again ready to crunch through Tesla’s (NASDAQ:TSLA) 10-Q released a short while ago. As we already know Tesla’s loss in Q3 was over $600 million, far exceeding my guess of $450-500 million. The average price per delivered unit dropped by over 13% in Q3. That is a whopping decline in average selling price of over $13,000 per unit.

For this entire article, these two links for Q3 (here) and Q2 (here) 10-Qs should be all the reference sources you will need.

By the zones

Tesla reports global revenues by breaking them down into four zones. The U.S, China, Norway, and all Others lumped into one group. If we subtract out Energy generation/storage, Services and other, and ZEV credit sales, we should have a pretty accurate number of New Automotive Sales for the four regions. We know of little in the way sales outside the U.S. for energy and services, so until Tesla offers us better information, I am giving the U.S. all the credit for these revenues.

What is startling is the decline in growth of new car sales revenue for the U.S. After delivering over 4,100 more units in Q3 over Q2, and increasing revenues by $175 million, why was the U.S. not a bigger participant? Sales only grew by $39 million, which included 220 Model 3 units. Using an average of $50,000 for each Model 3 means Tesla had $11 million in sales. That reduces the Model S and X growth to just $28 million in the U.S. What we find is a slowing increase in sales in the U.S. and strong growth in China and Norway. For Norway, this matches the information in updates I receive from Andreas Hopf for that region. However, the $100 million in new Chinese growth is a bit of a surprise. While numbers are difficult to come by, evobsession.com had Chinese sales at just 2,100 new units in the last month of Q2. At the end of June, the same website was estimating total sales of Model S and X at a combined 9,299 units. If we add the revenues from Q1 and Q2 and divide by the number of units, we arrive at an average sale price of $104k in 1H17. Apply that number to the revenues and we can estimate sales at 5,418 units. Evobsession.com had Tesla sales at 310 units in July and 1,700 in August. That would mean a rough delivery number of 3,408 in September or a 62% increase in sales over Q2. While not out of the question, it may be a better indication of a growing number of used car sales in China.

What do the “deliveries” numbers represent?

Tesla reported an increase in deliveries of over 4,100 units in Q3, but it appears new vehicle revenues only increased $175 million or an average of $42,682 per unit. Something is way off. There are only two explanations.

I have gone back two years through every delivery report. The word “new” is never used. Could Tesla be now (or may have always been) reporting CPO sales in deliveries? (I have not been able to confirm this one way or the other because Tesla has not responded to my questions on the issue.) CPO units are being given the same treatment at the delivery centers as new units. The cars are refurbished to look as close to new as possible (at great expense it would appear). So why would they not be?

The second option is Tesla gave away everything but the sales office furniture to achieve those additional sales in Q3. This is the more probable answer. Jon McNeill was promised a $700,000 bonus in late August if he could “move the metal”. He is doing just that. It would explain the huge average price drop from $103,937 in Q2 to $90,320 in Q3. We also know the Q3 sales exceeded available production by over 2,000 units built before Q3. Where these units are being stashed until sold is anyone’s guess. But my calculations show here are still 6,600 unsold units accumulated just since Q3 last year (see chart below).

The Tesla website currently claims there are no new 75kWh battery pack cars remaining. Sadly, this is not true because it is easy enough to go to the EV-CPO.com website, do an inventory sort for 75kW cars and find direct links to specific cars back on the Tesla website ignored by an inventory search. For a tech company, as Tesla claims to be, its website is amateurish at best, and pretty much useless.

Are increased sales really helping?

Tesla revenues set a new record in Q3 at nearly $3 billion. But is Tesla getting anywhere by growing revenues? It appears not. While revenues increased by just 7%, the costs of goods sold jumped a huge 19%. This slashed gross profit by 32%. Management can make all the excuses it wants but just growing sales is not working.

As you can read in the chart above, Tesla’s quarterly loss took a HUGE jump in Q3. This was caused by not only a drop in gross profit shown above but also continued increases in R&D and SG&A expenses. Whether the recent reductions in headcount will offer any relief in either direct or indirect labor expense is doubtful since Tesla seems to be planning to replace most of the fired workers.

Inventory

In my most recent article yesterday, I took a lot of flak for my predictions regarding what the new inventory numbers would reveal. I was partially right and partially wrong.

We know that the average unit sold for $90,320 in Q3. We know that the accumulated inventory was reduced by 2,174 units or about an adjusted $147 million by removing at a 25% gross margin.

But we now know finished goods only lowered by $52 million. That should mean Tesla was sitting on about $95 million worth of finished Model 3 units on 9/30. On a cost basis of $35,000 for each retailed $50,000 unit, there should be over 2,700 Model 3 units sitting somewhere as of Sept. 30. But Tesla only claimed to have 40 units sitting on 9/30. Is Tesla now recording 2,600 partially built Model 3s as finished goods? Are they all sitting waiting for their battery packs from the Gigafactory?

The only substantial inventory growth was in raw materials and not in work-in-process (WIP) as you would expect for a new model ramping up production.

So where are these hundreds of thousands of anticipated parts coming from the suppliers? As one commenter suggested yesterday, Tesla should be sitting on trainloads of parts from suppliers by now. The $54 million in raw materials is probably in aluminum and steel needed for all of the cars since they are still building all three models.

Does this mean all of the incoming shipments were not recorded or unloaded in September? If so, we are going to see a huge increase in accounts payable in Q4.

I will agree I may have gotten a bit ahead of my skis on finished goods. But Tesla still needs to explain the $95 million discrepancy. If it is indeed partially completed units that is a big change in its reporting.

Recap

  • Higher sales
  • Lower profits
  • Bigger expenses
  • Higher losses

Add these all up and you have a company that should get out of the car business and stick to “energy generation and storage”. It is the only place Tesla knows how to make money it seems after more than 13 years in business.

Based on inventory counts, it seems Tesla never had any plan to build 5,000 units a week in 2017. It doesn’t have the parts to build that many units a month let alone a week. Unless we see a big leap in inventories in Q4, it will certainly not have the parts to build them in Q1 either.

The conference call struck me as a group of men struggling to find answers to some very basic questions. How do we control costs while selling more product? Why can’t we build a simpler car in less time than it took to ramp up the Model S? Why do we need more people and spend more money to build a car than every other manufacturer on the planet?

Bill Maurer had a great article (here) on the rising guarantee obligations Tesla is facing. Just one more nail in the proverbial coffin.

If it doesn’t figure this out soon, Tesla won’t be around by the end of 2018.

Disclosure: I am/we are short TSLA VIA OPTIONS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I would like to thank the many SA readers who have helped make me the #1 most read author in both the “Short Ideas” and “Consumer Goods” categories! I do my best to make my articles not only informative but also entertaining and thought-provoking. If you want automatic notification and faster access to all of my new articles, please click the “Follow” button at the top of this article and check the “Get email alerts” box.

Equifax clears executives who sold shares after hack

(Reuters) – Equifax Inc (EFX.N) said on Friday four of its executives who sold shares before the credit-reporting firm disclosed a massive data breach that wiped out billions from its market value were not aware of the incident when they made the trades.

FILE PHOTO: Credit reporting company Equifax Inc. corporate offices are pictured in Atlanta, Georgia, U.S., September 8, 2017. REUTERS/Tami Chappell/File Photo

A special committee set up by Equifax’s board to investigate the trades concluded that no insider trading took place and that pre-clearance for the trades was appropriately obtained. (reut.rs/2habhk9)

The company’s shares were up 0.2 percent at $109.10 on Friday at midday, around 24 percent lower than on Sept. 7 when Equifax disclosed that cyber criminals had breached its systems and accessed sensitive information on 145.5 million consumers.

The shares slumped as much as 37 percent in the days after the disclosure.

Atlanta-based Equifax had been aware of the breach since July 29, days before some of its senior executives, including its chief financial officer, sold $1.8 million in shares.

After an investigation that included 62 interviews and a review of over 55,000 documents, including emails, text messages, phone logs, and other records, Equifax said the executives had no knowledge of the breach when they sold the stock.

“The conclusion that the Company executives in question traded appropriately is an extremely important finding and very reassuring,” non-executive Chairman Mark Feidler said in a statement.

Former Equifax Chief Executive Officer Richard Smith, who stepped down in September and agreed to forgo his annual bonus, told lawmakers last month that the executives would not have known of the breach because suspicious incidents are detected every day at the firm and take days or weeks to confirm.

The U.S. Justice Department is conducting its own criminal investigation into the share sales.

The hack, among the largest ever recorded, exposed information that included names, birthdays, addresses and Social Security and driver’s license numbers.

It has also prompted investigations by multiple federal and state agencies as well as scores of class action lawsuits.

The exact financial toll on Equifax is still unknown, and as of early Friday, the company said it still had not set a date to release its third quarter financial results. If the company does not release the results by Nov. 9, it will have to seek an extension from the U.S. Securities and Exchange Commission, which gives large companies 40 days after the close of a quarter to report their financials to investors.

Equifax is also still searching for a replacement for former CEO Smith.

Credit monitoring services such as Equifax collect vast amounts of financial information from consumers, working with banks and other lenders, for example, to track the creditworthiness of individuals.

Reporting by John McCrank in New York and Aparajita Saxena in Bengaluru; Editing by Saumyadeb Chakrabarty and Frances Kerry

Our Standards:The Thomson Reuters Trust Principles.

Tens of Millions of Americans Want an Apple iPhone X for the Holidays

Americans of all ages hope to get their hands on the iPhone X this holiday season.

A whopping 20% of American adults have placed Apple’s iPhone X atop their holiday smartphone wishlists, rewards provider Ebates revealed in a survey released this week. Among teens who said they want a smartphone this year, 35% chose the iPhone X. Collectively, tens of millions of people hoping to get a smartphone this year have their sights set on the iPhone X.

However, Ebates, which worked with researcher Propeller Insights in its survey of more than 1,000 adults and 500 teens, suggested the iPhone X has some competition. Namely, 38% of adults said they’d prefer the Samsung Galaxy S8, and 28% of teens said the same. Apple’s iPhone 8 Plus was atop 23% of adult smartphone wish lists, and the iPhone 8 attracted 22% of would-be adult smartphone buyers. A quarter of teens would like the iPhone 8 Plus and 35% say they’d like to get an iPhone 8.

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Apple’s AAPL iPhone X hits store shelves on Friday. The smartphone is the most expensive iPhone Apple has ever released at a starting price of $999. However, for that price, users are getting a dramatically redesigned handset with a screen that nearly entirely covers its front panel, a Face ID facial-scanning feature, and wireless charging.

There has been some debate over the extent of iPhone X demand. Some market analysts have wondered whether the price will drive customers away. Others have suggested that Apple’s pricing isn’t a problem and the company will attract customers far and wide. GBH Insights analyst Daniel Ives believes Apple could attract tens of millions of customers this year.

Apple started offering the iPhone X on pre-order last week, and its available units sold out in just minutes. Carriers similarly sold out quickly, though some iPhone X models were still available well into the day on Friday. Apple itself has not announced actual sales or pre-order figures, but called early pre-orders “off the charts.”

It’s unclear from the Ebates study why some adults might prefer the Galaxy Note 8 or iPhone 8 over the iPhone X. It is worth noting, however, that those handsets are readily available at stores and cost less than Apple’s top-of-the-line smartphone.

raceAhead: Free Speech Online, Colin Kaepernick Is The 2017 Racist Costume of Choice, Dennis Banks Dead at 80

How do we protect vulnerable people in a technological age?

This is the fundamental question behind “I Am Jane Doe,” a documentary film by Mary Mazzio, that explores the trafficking and sexual enslavement of children and teens, specifically enabled by online advertisements.

I attended a St. Louis-area screening of the film last night. It is a disturbing look at how girls – typically runaways, or otherwise temporarily separated from friends or caretakers — can be lost to rings of predators who find a seemingly never-ending supply of customers online.

But “I Am Jane Doe” also excels as a legal thriller, a nail-biter which follows the quest of several desperate parents of formerly trafficked girls who enlist the aid of local, under-prepared attorneys to help them find justice. Their target is Backpage.com, a website that was once part of Village Voice Media, which serves the majority of these problematic ads, making tens of millions in the process.

That the first brave mother to file suit against Backpage in 2010 was from Ferguson, Mo., makes a difficult story even more poignant.

But the true villain in the drama is Section 230 of the 1996 Communications Decency Act or CDA, a tiny legislative carve-out which protects websites that post third-party content from being subject to civil or criminal liability. As a result, the heartbreaking legal efforts of families to shut down Backpage.com over a period of six years were doomed from the beginning.

While the individual stories cannot possibly fail to move you, the legislative solution the film supports is more complicated.

Mary Mazzio is crisscrossing the country screening the film and participating in panel discussions about recent bipartisan legislation, the Stop Enabling Sex Traffickers Act or SESTA (S. 1693) which aims to amend the CDA specifically to allow websites that “facilitate” sex trafficking to now be held liable. (You can see the film anytime on Netflix, among other places.)

The film showcases the work of high profile Senators: Arizona’s John McCain, Missouri’s Claire McCaskill, and Ohio’s Rob Portman, chiefly among them. And as the lawsuits mount, the legal arguments get more interesting as well.

Spoiler alert: If you were a fan of jurist Richard Posner before this film, you probably won’t be afterward.

But the other villains in the piece are Google, Facebook, Twitter, and other technology companies who rely on third-party content.

SESTA, which would allow state attorneys general to prosecute websites under state laws, could open up a potential floodgate of wide-ranging lawsuits. “We recognize that attempts to amend Section 230 target sex traffickers are well intended. However, the likely result will be to create a trial lawyer bonanza of overly-broad civil lawsuits,” says Gary Shapiro of the Consumer Technology Association.

“[M]ost tech companies have been circumspect about their opposition to the bill, choosing to voice their concerns by proxy through trade groups like the Internet Association, which includes Google, Facebook, Microsoft, Amazon, and Twitter among its members,” says The Verge in this useful explainer.

But lately, worried about being standing on the wrong side of an emotional issue, big tech is signaling some openness to change.

In recent Senate testimony, Abigail Slater, the Internet Association’s general counsel said in addition to criminal sanctions against Backpage, “We also support targeted amendments to the Communications Decency Act that would allow victims of sex trafficking crimes to seek justice against perpetrators.”

Disney, Fox, HP, IBM, and Oracle have recently signed on in favor of the bill.

There’s a lot at stake, particularly now as Facebook, Google, and Twitter head back to Capitol Hill to explore how Russian trolls may have influenced the U.S. election. “The abuse of our platform by sophisticated foreign actors to attempt state-sponsored manipulation of elections is a new challenge for us — and one that we are determined to meet,” says Twitter’s acting general counsel in written testimony.

But propaganda, like sexual coercion and abuse, is nothing new.

Important cultural issues are surfaced in “I Am Jane Doe,” but largely ignored. The girls, once rescued, faced bullying, blaming and shaming from their peers. They feel isolated and alone. The men who paid to have sex with them — often suburban men with jobs, families, and reputations to protect — are rarely punished. And the parents are still struggling to find ways to help their traumatized daughters heal. That this is how we treat women should come as no surprise in the #MeToo era.

While we all need to better understand SESTA, one thing remains clear. If we want to protect vulnerable people online or anywhere else, it would help if we also faced these bigger, real world issues head-on. That’s something that all the Decency Acts in the world won’t be able to do for us.

On Point

So far, the racist costume of the season involves Colin Kaepernick
I know it’s still early, but there seems to be a clear trend in the making. First, a campus police officer at the University of Nevada put on a wig and fake nose, painted on a beard, donned a homemade 49ers jersey and scrawled a sign that said,“will stand for food.” After photos were shared, the director of police services on campus was forced to issue an apology.  Then, at Dickinson College in Carlisle, Pa., a student was photographed in blackface and a Kap wig, looking stupid, with someone else holding a gun to his head. I won’t link to the vile photo, but the obligatory apology from Dickinson’s dean of student life is below.
Dickenson
So far, the racist costume of the season involves Colin Kaepernick
I know it’s still early, but there seems to be a clear trend in the making. First, a campus police officer at the University of Nevada put on a wig and fake nose, painted on a beard, donned a homemade 49ers jersey and scrawled a sign that said,“will stand for food.” After photos were shared, the director of police services on campus was forced to issue an apology.  Then, at Dickinson College in Carlisle, Pa., a student was photographed in blackface and a Kap wig, looking stupid, with someone else holding a gun to his head. I won’t link to the vile photo, but the obligatory apology from Dickinson’s dean of student life is below.
Dickenson
Twitter is attempting to crack down on revenge porn
Revenge porn is a nasty form of retaliation, perpetrated by jilted or otherwise disturbed former associates when they post sexually explicit photos or videos of others without their consent. Twitter has done a poor job of preventing this in the past. While their previous rules prevented users from posting “intimate photos or videos that were taken or distributed without the subject’s consent,” the new rules go into greater detail about what constitutes “compromising imagery.” Hope it helps.
Fortune
Twitter is attempting to crack down on revenge porn
Revenge porn is a nasty form of retaliation, perpetrated by jilted or otherwise disturbed former associates when they post sexually explicit photos or videos of others without their consent. Twitter has done a poor job of preventing this in the past. While their previous rules prevented users from posting “intimate photos or videos that were taken or distributed without the subject’s consent,” the new rules go into greater detail about what constitutes “compromising imagery.” Hope it helps.
Fortune
Top editor Michelle Lee is winning at <em>Allure</em>
Lee earned kudos a couple of months back for banning the term “anti-aging” at the woman’s publication, to stop “reinforcing the message that aging is something we need to battle.” She’s also been a champion for diverse faces and points of view, tackling real issues head-on — like mastectomies and transgender activism. And Muslim model Halima Aden appeared on the cover of the July “American Beauty” issue — the first time a woman wearing hijab was featured on the cover of a major American magazine.
Ad Week
Top editor Michelle Lee is winning at <em>Allure</em>
Lee earned kudos a couple of months back for banning the term “anti-aging” at the woman’s publication, to stop “reinforcing the message that aging is something we need to battle.” She’s also been a champion for diverse faces and points of view, tackling real issues head-on — like mastectomies and transgender activism. And Muslim model Halima Aden appeared on the cover of the July “American Beauty” issue — the first time a woman wearing hijab was featured on the cover of a major American magazine.
Ad Week
Native American activist Dennis Banks has died
Banks, who helped found the American Indian Movement in 1968, died from complications after heart surgery. He was 80. Banks may have been best known for leading the group’s 1973 takeover of Wounded Knee on the Pine Ridge Reservation in South Dakota, in a 71-day protest against both the U.S. and tribal governments.“Dennis Banks is somebody who had an indelible impact on history, not just in our native community but throughout our country,” said Anton Treuer, a professor of the Ojibwe language at Bemidji State University. Banks died surrounded by friends and loved ones. Click through to his Facebook page for stories and tributes. His bio is below.
Associated Press
Native American activist Dennis Banks has died
Banks, who helped found the American Indian Movement in 1968, died from complications after heart surgery. He was 80. Banks may have been best known for leading the group’s 1973 takeover of Wounded Knee on the Pine Ridge Reservation in South Dakota, in a 71-day protest against both the U.S. and tribal governments.“Dennis Banks is somebody who had an indelible impact on history, not just in our native community but throughout our country,” said Anton Treuer, a professor of the Ojibwe language at Bemidji State University. Banks died surrounded by friends and loved ones. Click through to his Facebook page for stories and tributes. His bio is below.
Associated Press

The Woke Leader

Writer Ta-Nehisi Coates takes on John Kelly and Civil War revisionism
White House Chief of Staff John Kelly continues to be a polarizing figure. After he lauded Confederate general Robert E. Lee as a hero, and said that the Civil War was caused by a “lack of compromise,” writer Ta-Nehisi Coates woke up early and took Twitter to civics class. “Regarding John Kelly’s creationist theorizing on Lee and the Civil War, its worth pointing out a few things,” he began in a detailed thread on history, compromise, and war. “This stuff is knowable,” he said. “But you do have to actually read what the people who started the War actually said.” And, this: “You do have to get these guys were the worst of America.
Twitter
Writer Ta-Nehisi Coates takes on John Kelly and Civil War revisionism
White House Chief of Staff John Kelly continues to be a polarizing figure. After he lauded Confederate general Robert E. Lee as a hero, and said that the Civil War was caused by a “lack of compromise,” writer Ta-Nehisi Coates woke up early and took Twitter to civics class. “Regarding John Kelly’s creationist theorizing on Lee and the Civil War, its worth pointing out a few things,” he began in a detailed thread on history, compromise, and war. “This stuff is knowable,” he said. “But you do have to actually read what the people who started the War actually said.” And, this: “You do have to get these guys were the worst of America.
Twitter
The mathematical genius of John Coltrane
Coltrane was a magical figure to many — part transcendent jazzman, part spiritual seeker. Those two elements came together in a sketch experts called “the Coltrane circle,” a version of the musical “circle of fifths” — a representation of the twelve tones of the chromatic scale — but amplified with a Coltrane twist. Some see elements of Islam in the sketch, a musical mathematics that’s connected to the divine. But in addition to his mystical journey, “Coltrane was also very much aware of Einstein’s work and liked to talk about it frequently,” says musician and writer Josh Jones. “Musican David Amram remembers the Giant Steps genius telling him he “was trying to do something like that in music.”
Open Culture
The mathematical genius of John Coltrane
Coltrane was a magical figure to many — part transcendent jazzman, part spiritual seeker. Those two elements came together in a sketch experts called “the Coltrane circle,” a version of the musical “circle of fifths” — a representation of the twelve tones of the chromatic scale — but amplified with a Coltrane twist. Some see elements of Islam in the sketch, a musical mathematics that’s connected to the divine. But in addition to his mystical journey, “Coltrane was also very much aware of Einstein’s work and liked to talk about it frequently,” says musician and writer Josh Jones. “Musican David Amram remembers the Giant Steps genius telling him he “was trying to do something like that in music.”
Open Culture
Halloween: A cautionary tale
Last year, a man dressed as Cookie Monster in New York’s Times Square district attempted to break up a fight between a man dressed as a pilot and a man dressed as a stereotype of a Native American. The pilot, who was portraying a Tuskegee Airman, set upon the other man, declaring the costume “racist.” He pulled a knife when Cookie Monster attempted to intervene. Cookie Monster was treated and released. I hate Halloween.
Gothamist
Halloween: A cautionary tale
Last year, a man dressed as Cookie Monster in New York’s Times Square district attempted to break up a fight between a man dressed as a pilot and a man dressed as a stereotype of a Native American. The pilot, who was portraying a Tuskegee Airman, set upon the other man, declaring the costume “racist.” He pulled a knife when Cookie Monster attempted to intervene. Cookie Monster was treated and released. I hate Halloween.
Gothamist

China says unlikely to grant licenses for world's hottest video game

BEIJING (Reuters) – China’s content regulator on Monday said it was unlikely to grant licenses for the world’s hottest video game, PlayerUnknown’s Battlegrounds, as being too bloody and violent, thus effectively denying firms the opportunity to cash in.

The ban on the South Korea-made multiplayer game, whose players kill to be the last survivor, is the latest bid to cleanse internet content, after President Xi Jinping painted a vision of China as a culturally confident rejuvenated great power in a speech this month to the Communist Party Congress.

The game’s gladiator-like battle “severely deviates from the socialist core value and the Chinese traditional culture and moral rule,” the China Audio-Video and Digital Publishing Association said in a statement on its website.

Its ethos also goes against the psychological and physical health of juvenile consumers, it added.

The association, grouped under the umbrella of China’s top content regulator, the State Administration of Press, Publication, Radio, Film and Television, said SAPPRFT took a negative view of the game and others of the same kind, and any licenses for it were unlikely.

Reuters’ telephone calls to the games publisher, Bluehole Inc., to seek comment, went unanswered.

Leading Chinese gaming and social media company Tencent Holding Ltd., which hinted on its verified site on China’s Twitter-like Weibo that it might introduce the game on its WeGame platform, did not respond to requests for comment.

Still, Chinese gamers can access the game through overseas gaming platforms, though the association, in its statement on Monday, said Chinese companies should not seek to research, develop and import such games.

Gaming platforms and live streaming sites should not provide promotion and advertisement services to such games, it added.

Audiovisual content featuring topics ranging from drug addiction to homosexuality and incest should be restricted, a government-affiliated entity said in June.

China also bans a number of American television shows, such as “The Big Bang Theory” and “House of Cards”.

Reporting by Pei Li and Adam Jourdan; Editing by Clarence Fernandez

Our Standards:The Thomson Reuters Trust Principles.

Tech

Golf Champ Denied Trophy Because She's a Girl Raises Uncomfortable Questions for Any Team

Emily Nash, 16, plays golf where she attends school–at Lunenburg High School in Massachusetts. Playing from the boy’s tees, she earned the best score in the Central Mass Division 3 Boys’ Golf Tournament. Her score helped her team move up, too–no problem counting her contribution to the team’s record. 

Emily Nash: champion trophy and title denied

But her record? Washed away. Her first-place trophy and title (which can help on golf scholarship applications) was awarded to a boy four strokes behind her. And he publicly accepted it, although privately, she says he later offered it to her and she appreciated that.

Not only did Nash not get the opportunity to visibly receive the recognition she earned on the field, the champion watched her title go to another. That young man can move forward to the state championships while she is held back. Washington Post writer Callum Borchers summed it up well: “Nash is the best Division 3 golfer, male or female, in central Massachusetts, and maybe one of the best high school players in the entire state, but she won’t have a chance to prove it because she is a girl.”

“I wasn’t aware that if I won I wouldn’t get the title or the trophy. I feel like it’s a bit unfair,” she told NPR local station WPBF. Professional Golf Association writer TJ Auclair agrees. He wrote, “It’s 2017. This rule sounds like it was created in 1917.”

If sports are a training ground for life, what’s being taught? 

Think of the lesson Nash just received–and the different takeaway the boy playing with her got. It goes something like this: “girls can play when guys can take the credit.” That may sound harsh, but let me just share an echo of this reality from the lunch I had last week with a retired, Fortune 500 C-suite executive. She said, “when it came down to who was left to run the company, it was me and three guys. Each guy then got placed automatically in the next role. The role I would be most likely to fill–and was doing–they ran an exhaustive global search for. No searches for the guys–just automatically promoted.”

The Nash dynamic is playing out in our teams on the field right now in business every single day.  It’s the essence of what is popularly called “the pipeline problem.” You probably know one story–or twenty–like this. No matter the number, it’s too many. 

Biases like the one Emily Nash faces are destroying trust in our teams.

“If you were to force me to rank the most important qualities of leadership, I’d put trustworthiness at the top,” writes New York Times columnist Adam Bryant. He’s famous for  “The Corner Office” column about CEOs.  He wrote last weekend, reflecting back on 525 intimate portraits of CEOs, on how trustworthiness is created. It’s mainly by focusing on doing a great job in the job you’re in, and respecting your team, he suggested, pulling from his body of work. 

You can see how that makes sense–and how skewed it is when we create different rules for some, but not others. Chances are, the boys in the tournament felt respected–even to the point of being lifted above their level of play. Literally, a girl on the same field–well, imagine for yourself what that level of rejection and being used feels like, when your score advances only your team but never yourself, and your trophy is given away to the next in line pro forma. The champion been offered a copy “consolation” trophy. What she asked for was a rule change.

 “No matter what people say about culture, it’s all tied to who gets promoted, who gets raises and who gets fired…

“You have your stated culture, but the real culture is defined by compensation, promotions, and terminations. Basically, people seeing who succeeds and fails in the company defines culture. The people who succeed become role models for what’s valued in the organization and that defines culture,” says Hea Nahm, managing director of Storm Ventures, sharing his leadership insights with Bryant. These words echo on the macro field of business and are first written on the micro level of middle school tryouts, high school championships, and college entrance exams.

Bryant shares, “Are there differences in the way men and women lead?” 

“I’ve been asked this question countless times. Early on, I looked hard to spot differences. But any generalization never held up . . . That said, there is no doubt women face much stronger headwinds than men to get to the top jobs. And many of those headwinds remain once they become CEOs. But the actual work of leadership It’s the same, regardless of whether a man or a woman is in charge.”

It’s nearing the end of the year. That means end-of-year reviews, bonuses, raises–and team dynamics coming to the fore.

My hope is that we can all remove some of the protective cronyism from team dynamics and reward each other’s greatest performances, no matter what our champions look like or how challenging they are to the status quo. Let winners win or we’ll keep caretaking a second-best culture that complains of dysfunction, incompetence, and insularity at the top. Sound familiar? It does not have to. You personally can make the difference where you are.

Tech

Facebook Friends With Your Co-Workers? Survey Shows Your Boss Probably Disapproves

You and your colleagues pitch in together on difficult projects, lunch together, and have drinks together after work. You probably think it’s the most natural thing in the world to friend them on Facebook or follow them on Twitter or Instagram. Your boss, though, probably thinks you shouldn’t.

That’s the surprising result of a survey of 1,006 employees and 307 senior managers conducted by staffing company OfficeTeam. Survey respondents were asked how appropriate it was to connect with co-workers on various social media platforms. It turns out that bosses and their employees have very different answers to this question.

When it comes to Facebook, 77 percent of employees thought it was either “very appropriate” or “somewhat appropriate” to be Facebook friends with your work colleagues, but only 49 percent of senior managers agreed. That disagreement carries over to other social media platforms. Sixty-one percent of employees thought it was fine to follow a co-worker on Twitter, but only 34 percent of bosses agreed. With Instagram, 56 percent of employees, but only 30 percent of bosses thought following a co-worker was appropriate. Interestingly, the one social platform bosses and employees seem to almost agree about is Snapchat, with 34 percent of employees thinking it was fine to connect with colleagues, and 26 percent of bosses thinking so too.

What should you do if you want to connect with a colleague on social media–if you get a connection request from a colleague? Here are a few options:

1. Use LinkedIn.

LinkedIn was not included in the OfficeTeam survey, but because it’s a professional networking tool, few bosses will object to you connecting with coworkers there. And LinkedIn has many of the same features as Facebook–you can even send instant messages to your contacts.

2. Keep your social media connections secret.

Most social networks give users the option to limit who can see what they post and who their other connections are. You can use this option to keep your social media interactions limited to the people you choose. If that doesn’t include your boss, he or she may never know that you and your co-workers are connected.

3. Talk to your boss.

He or she may not agree with the surveyed bosses who said connecting on social media was inappropriate, in which case there’s no problem. And if your boss does object, he or she may have some good reasons you hadn’t thought of to keep your professional life separate from your social media one. The only way to find out is to ask.

4. Consider the future.

It may be perfectly fine to connect with your co-workers on social media when you’re colleagues. But what happens if you get promoted to a leadership position? You may regret giving your former co-workers access to all the thoughts you share on Facebook or Twitter. So if a colleague sends you a social media request, or you want to make one yourself, take a moment to think it through. Will you be sorry one day–when you’re the boss yourself?

Tech

Teforia, the $1,000 Juicero of Tea, Goes Under

The “smart” tea brewer attracted more than $ 17 million in venture funding.

Teforia, the maker of a $ 1,000 internet-connected tea brewing machine, announced on Friday that it was shutting down effective immediately. The company touted the quality of its award-winning product, but said that “we simply couldn’t raise the funds required” to “educate the market” about it.

In some ways, Teforia’s shutdown is reminiscent of Juicero, the maker of a $ 400 “smart” juicer which shuttered in September. Both companies’ core products were remarkably pricey – Juicero’s machine was originally $ 700 – making them convenient symbols of both widespread income inequality in the U.S., and of a strain of investor gullibility when it came to anything remotely techy.

Back in 2015, we wondered whether the $ 5.1 million in seed funding Teforia had accumulated at the time was a sign of investor over-enthusiasm for connected kitchen devices. Despite our skepticism, the company went on to raise another $ 12 million in a 2016 Series A round – thought that’s still nothing compared to the more than $ 118 million in bad bets placed on Juicero by the finest minds in venture capital.

There were big differences between the two products, though. Juicero, infamously, shut down after a Bloomberg report found that its juice packs could be squeezed almost as well by hand as by the Juicero machine. In other words, the thing wasn’t really a “juicer” at all.

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Teforia’s device, by contrast, appears to have done a sterling job of brewing drinks, in part thanks to an algorithm that tracked brewing temperatures and times for different types of tea. A few negative reviews focused on the machine’s price, but it was named Best Tea Brewing Device (Electric) at the June 2017 World Tea Expo. And aficionados aren’t shy about shelling out for high-end tea or coffee machines: one commercial “smart” coffee and tea infuser, the Bkon Craft Brewer, sells for a reported $ 13,000.

It seems plausible, then, that Teforia’s problems raising further capital could actually be blamed on Juicero. Negative coverage of the juicer in recent months has likely left investors skittish over high-end connected beverage devices, even though Juicero’s problems were very much of its own unique making.

That’s a rough ending for Teforia, but there’s a short-term upside for tea drinkers: the last few Teforia machines are now on sale for the downright reasonable closeout price of $ 199.

Tech