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The Ways Your Halloween Office Party Can Easily Turn Into a Living Nightmare (That You Probably Haven't Considered)
October 28, 2018 12:00 am|Comments (0)

The potential problems begin from the start with the assumption that everyone in your office is actually interested in celebrating a holiday dedicated to demons, debauchery or drinking, depending on how you happen to roll on All Hallow’s Eve.

Truth is there’s actually plenty of employees out there who may find the very notion of a Halloween party offensive on religious grounds. 

“This is why attendance should be optional – those who wish to observe Halloween in a particular manner or not observe it at all should not be forced to attend a function that offends them,” explains labor and employment law attorney Dennis J. Merley

This is an area where managers should tread particularly lightly, as it could be unlawful to even tease or allow teasing or peer pressuring of employees who choose not to participate in a celebration for religious reasons.

Another reason parties should be optional is that any accidents or injuries that happen, even after workers have left the party, could wind up coming back to haunt the company. 

Speaking of accidents, a party that involves alcohol, cumbersome and often identity-concealing costumes just might be a harassment, OSHA or workman’s compensation disaster waiting to happen. 

Sorry to be a wet blanket (which is also not a good costume choice), but it’s just common sense that introducing booze and probably a few awkward outfits increases the risk of a mishap or poor decision of some type. 

Now when it comes to costumes, there’s a lot of advice out there for get-ups that are “work-appropriate,” but as labor and employment attorney David Barron advises, even the most innocent idea can easily go wrong.

“Any safe for work costume can be made inappropriate by simply adding “Sexy” to the title,” he explains in a column for The Ladders. “Office Halloween parties are no place for ‘sexy’ outfits, political statements or costumes that might be offensive based on a protected class such as race or gender.”

Barron suggests that offices share clear dress codes for Halloween costumes and even encouraging the coordination of costumes beforehand.

Bottom line, while a Halloween party might seem like a good way to let loose at the office, it’s not an excuse to fly by the seat of your pants or throw caution to the wind. You wouldn’t do that with any other aspect of your business. The good news is that with the right amount of thoughtfulness and planning, there’s no reason to cancel the festivities.

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Delta Is Being Accused of Sneakily Tricking People Into Booking Much Worse Seats Than They Think
September 3, 2018 12:00 am|Comments (0)

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

When I book flights, I try to be patient.

Perhaps like many people, I go to Kayak or Google Flights, and hope to find everything that’s available. 

Then, I might wait a few days to see if prices go up or down, depending on the urgency of my booking.

It’s like playing with your cat, really. Most of the time, Tibkins is quicker. Just occasionally, though, you get him. 

The accusation was that Delta Air Lines made ordinary Economy Class flights appear as if they were Premium Economy when booked via Google Flights.

Or, as the Points-Saving God puts it: “Delta displays economy prices for Virgin Atlantic Premium Economy, and at no point during booking does it actually specifically tell you you’ve got the wrong deal.”

In essence, if you go through the Google Flights search process, wanting to book, say, return flights from London to LAX, you get what seems like a wonderful deal.

If you book via Delta’s site rather than its partner Virgin Atlantic’s, that is.

The price difference is more than $ 1,000. Which is clearly the very definition of a steal.

Because you like saving money and feelings clever, you click on that deal and still believe you’re booking Premium Economy.

It’s just that, if you look closely, it has a novel and delightful name: Economy Delight.

This is actually Virgin’s fancy name for something that’s slightly better than so-called Economy Classic, but is still very much Economy Class and not the wider seats and more pleasant experience of Premium Economy.

Which Virgin calls, oddly, Premium Economy.

For all you know, however, Economy Delight is what Delta calls Premium Economy.

There are so many names these days.

And nowhere, said God Save The Points, is it clear that it isn’t. After all, why are you being shown this option when you searched for Premium Economy fares?

I asked Delta for its view.

An airline spokeswoman told me: 

Delta recognizes the limitations of some current shopping experience on third-party sites may not be ideal. That’s why we are leading industry collaboration to ensure customers have access to all of Delta’s products, no matter where they shop.

Ah, so it’s Google Flights’ fault?

Delta seems to think so. Its spokeswoman continued: 

It’s time for third-party displays, including Google Flights, to invest in the technology necessary to display the various products available so customers can view all their options clearly, just as Delta has done for customers on delta.com. 

An airline mocking Google’s technology? That resembles entertainment.

So I asked the Silicon Valley company for its reaction and will update, should I hear.

I remained perplexed. If Virgin Atlantic’s fares are accurately depicted, why aren’t Delta’s?

I was so moved by all this that I tried the search for myself.

I got very similar results to God Save The Points. 

Not exactly close.

I clicked through to Delta’s site and there it was, the Economy Delight designation.

Only if I scrolled down would I see that an upgrade to Premium Economy would cost an additional $ 257.75 each way.

This all feels a touch unhealthy. 

Delta says it’s the champion of the people, but airlines aren’t always so keen to play with third-party sites, where many people go to make comparisons.

Risibly, the airlines’ lobbying group claims this is all intended to increase, please wait for it, transparency.

It might even, say the comparison sites’ lobbyists, threaten the ability of fare comparison sites to operate.

Worse, the airlines seem to believe that third-party sites should deliver all the detailed information that airlines have, yet those same airlines refuse, in some cases, to give those sites that very information.

Which all should make emptors do a lot of caveating.

And we thought technology is going to make things easier. 

Easier for corporations, perhaps.

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Amazon forays into Australia with small loss
August 3, 2018 12:00 pm|Comments (0)

SYDNEY (Reuters) – Online retail giant Amazon.com Inc, whose entry into Australia last year rattled established bricks-and-mortar retailers, posted a modest loss in its earliest days in the country, corporate filings show.

FILE PHOTO: Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City,U.S., January 29, 2016. REUTERS/Mike Segar/File Photo

Amazon’s foray into Australia was met with fevered attention from investors and a steep selldown in traditional retail stocks.

The U.S. company launched its website on Dec. 5, though it ran preparatory operations through the year, racking up a modest loss of almost A$ 9 million ($ 6.6 million).

In the Christmas trading weeks from the launch to Dec. 31, it turned over A$ 6.3 million in direct sales versus total Australian retail sales of A$ 26.3 billion that month.

These figures, however, are unlikely to be indicative of the future performance of a company that reported losses and roller-coaster results for years, but is now the second-biggest company in the world and closely watched on Wall Street.

The Australian trading period was too short for meaningful analysis, said Evan Lucas, chief market strategist at fund manager InvestSmart.

“Amazon is not the kind of company that accepts failure – they have a longer term goal.”

Amazon hit logistical snafus in Australia’s vast interior and handed eBay Inc – market leader in Australia – some victory after a move last month to block Australians from shopping on its foreign websites drew customer backlash.

A spokesman for Amazon declined to comment on the filing and directed Reuters to previous commentary about record Australian sales during a promotion in July without quantifying them.

The filing was lodged in April but the results were not reported at the time. They were first reported on Friday by the Sydney Morning Herald newspaper.

Last week, Amazon forecast strong fall sales for its overall operations and posted a $ 2.5 billion quarterly profit that was double Wall Street targets on the back of its younger businesses – cloud computing and advertising.

($ 1 = 1.3569 Australian dollars)

Reporting by Tom Westbrook; Editing by Sayantani Ghosh and Manolo Serapio Jr.

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Cisco sinks on report Amazon wading into networking equipment
July 13, 2018 6:48 pm|Comments (0)

(Reuters) – Shares of Cisco Systems Inc and other network equipment makers fell on Friday after a report that Amazon.com Inc’s cloud services business was considering selling its own network switches to business customers at much lower prices.

FILE PHOTO: Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City, January 29, 2016. REUTERS/Mike Segar/File Photo

Cisco’s shares were down 5 percent, wiping off nearly $ 11 billion from its market capitalization. Shares of Juniper Networks Inc and Arista Networks Inc fell 4 percent as investors feared that Amazon’s scale and pricing power could disrupt the sector.

The report comes days after Amazon sent shockwaves across the drug retailing sector with its move to buy small online pharmacy PillPack.

The networking devices will consist of open-source software and unbranded hardware known as “white-box” switches and come with built-in connections to AWS cloud services, such as servers and storage, the Information said.

Amazon Web Services could price its white-box switches 70-80 percent less than comparable switches from networking giant Cisco, the report said, citing one of the people with direct knowledge of the unit’s plan.

“If true, we think this would be a notable negative for the networking equipment space going forward,” RBC Capital Markets analyst Mitch Steves wrote in a note.

AWS expects to launch the switches for sale within the next 18 months, according to the report.

Amazon and Juniper did not immediately respond to a request for comment. Cisco and Arista declined to comment.

Reporting by Arjun Panchadar in Bengaluru; Editing by Arun Koyyur and Saumyadeb Chakrabarty

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A Discounted Backdoor Into An 18% Yield – Buyout Should Close Very Soon
June 23, 2018 6:13 pm|Comments (0)

Due to a generous 8.7% discount to its post-buyout price/unit, we just increased our holdings of Southcross Energy Partners (SXE), a smaller midstream LP, which is being bought by American Midstream Partners LP (AMID).

The deal is supposed to close by the end of Q2 2018, and it has already been approved by SXE and AMID unitholders, and has received final state approval.

Deal highlights – Among many other positive attributes, AMID’s mgt. sees this deal as being immediately accretive to its Distributable Cash Flow. This makes sense – SXE used to pay $ .40/unit quarterly, but eliminated its payout in February 2016. However, SXE generated $ 25.36M, and AMID generated $ 89.88M in DCF over the past four quarters.

(Source: AMID site)

The new entity will also have a simpler structure, with four segments: Gas G&P, Natgas Transportation, Liquid Pipelines, and Offshore Pipelines, with the offshore segment being its largest, contributing 57% of gross margins:

(Source: AMID site)

AMID Assets

AMID has significant offshore assets in the eastern Gulf of Mexico, an area which is projected to see 32% production growth over the next 3 years. Technological advances should also reduce production costs for Gulf oil.

AMID’s CEO detailed this growth on the Q1 ’18 earnings call:

“In February of this year, the Gulf of Mexico produced 1.7 million barrels per day of crude oil and 2.6 Bcf a day of natural gas. To put this in perspective, the Gulf of Mexico is the second largest crude oil producing base in The United States behind only the Permian Basin. It is producing roughly 30% more oil than either the Bakken or the Eagle Ford basins and 3 times more than the Anadarko basin, home of the SCOOP.”

“In Q1 ’18, AMID’s Okeanos pipeline had volume increases of over 10% vs. Q1 ’17, and were up 6% vs. Q4 ’18, due to additional volumes from dedicated wells tied into the system.”

AMID’s Delta House asset has been under maintenance, which has reduced its output. On the Q1 call, management pointed out that “current production is just under half of pre-maintained levels or about 55,000 to 60,000 barrels a day equivalent. However, by July, we anticipate the crude oil and natural gas volume should increase from current levels by 64% and 155%, respectively”.

In addition, AMID is receiving support from ArcLight Partners’ affiliate, Magnolia Infrastructure Holdings, LLC, “to provide additional capital and corporate overhead support to us during the first three quarters of 2018 in connection with temporary curtailment of production flows at Delta House. Pursuant to the agreement, Magnolia has agreed to provide support to us in an amount to be agreed, up to the difference between the actual cash distribution received by us on account of our interest in Delta House and the quarterly cash distribution expected to be received had the production flows to Delta House not been curtailed. Subsequent to the balance sheet date of March 31, 2018, we have received $ 9.4 million for such support”. (Source: AMID Q1 ’18 10-Q)

(Source: AMID site)

AMID has over 1,565 miles of natural gas and crude oil gathering systems, 8 processing plants with ~325 MMcf/d of capacity, 4 fractionation facilities, a fleet of 75 crude oil transportation trucks and 95 trailers, and ~20 NGL transportation trucks. Its onshore assets are located in some of the most prolific production areas, including the Permian and Eagle Ford basins:

(Source: AMID site)

(Source: AMID site)

AMID’s natural gas transmission segment has significant firm, take or pay contracted volumes in Arkansas, Alabama, Mississippi, and Louisiana, with a balanced customer mix.

Management commented upon the uptick in volume on the Q1 ’18 earnings call:

“AMID’s Southeast Natural Gas Transportation assets performed very well, establishing a new throughput record of over 835 million cubic feet a day. This segment experienced 75% growth in gross margin over 2017, as a result of the acquisition of the Trans-Union pipeline in the fourth quarter of 2017 and strong demand as a result of exceptionally cold weather across the Southeast US.”

A Backdoor Discount

SXE continues to sell at a discount to its post-buyout price, which is equivalent to .16 units per AMID unit. With AMID at $ 10.00 on 6/21/18, SXE should have been trading at $ 1.60, but it closed at $ 1.46.

Distributions

SXE doesn’t currently pay a distribution, but after the buyout, the converted SXE units will receive the same $ .4125 quarterly payout as current AMID unitholders.

At $ 1.46, SXE is trading at a post-buyout equivalent of $ 9.13, which translates into an 18.08% yield. AMID’s next ex-dividend date should be ~8/3/18, with a pay date of ~ 8/14/18:

Deal Terms

“AMID has agreed to acquire equity interests in certain Southcross Holdings’ subsidiaries that directly or indirectly own 100% of the limited liability company interests of the general partner of SXE and approximately 55% of the SXE common units by issuing 3.4 million AMID common units, 4.5 million new Series E convertible preferred units (the ‘Preferred Units’), options to acquire 4.5 million AMID common units (the ‘Options’) and the repayment of $ 139 million of estimated net debt. The Preferred Units will be issued at a price of $ 15.00 per unit and may be paid-in-kind at the AMID common unit distribution rate at AMID’s option for two years. AMID will have the right to convert the Preferred Units to AMID common units if the AMID 20-day volume weighted average price exceeds $ 22.50. The Options are American-style call options with an $ 18.50 strike price that expire in 2022.” (Source: AMID site)

There shouldn’t be any immediate threat of the Series E convertible preferreds converting into more AMID common units since they can’t convert unless AMID’s common price goes higher than $ 22.50, which is over twice its current price level.

Here’s the breakdown of pre- and post-buyout units, which will total ~63.22M after the deal goes through:

We calculated what the post-buyout distribution coverage should look like, using the combined trailing Distributable Cash Flow/Unit of both companies as of 3/31/18 vs. AMID’s current $ 1.65/year payout.

The initial post-deal coverage should work out to about 1.10X, which is what AMID’s press release listed:

“AMID expects the transaction to be single-digit accretive to DCF/unit in 2018 and 2019, approaching double-digit accretion in 2020. AMID expects to maintain a pro forma distribution coverage of 1.1 to 1.3 times”. (Source: AMID site)

Trailing Earnings

Judging by AMID’s and SXE’s trailing figures, this deal should be just what the Dr. ordered – both companies should emerge stronger as one entity.

Due to non-core divestitures, AMID has had declining DCF and distribution coverage, with coverage falling to 1.04X. EBITDA has been down slightly over the past four quarters as of 3/31/18.

SXE’s EBITDA has been just about flat, but its DCF fell -17.82% over the past four quarters.

In addition to its divestitures, AMID’s management has made a series of acquisitions in order to transform the company into a more stable cash flow model. AMID hasn’t gone to the equity markets to fund these acquisitions.

(Source: AMID site)

Valuations

The market has pressured SXE’s price/unit to an extreme point – it’s currently selling for just 15% of Book Value and .11X Price/Sales. SXE’s Price/DCF of just 2.81X is also the lowest valuation we’ve seen in many moons.

Debt

Another part of the rationale for this buyout is for the combined company to emerge with lower debt leverage. Since AMID hasn’t funded its growth via issuing more units, its debt leverage has increased:

“In conjunction with the transaction, AMID will continue executing against its stated capital optimization strategy to deliver a strong pro forma balance sheet with substantial liquidity. AMID is targeting an additional $ 400 to $ 500 million of non-core asset sales primarily related to its terminaling services segment.”

“These proceeds, incremental debt financing and modest equity will allow the combined entity to target closing pro forma trailing debt to EBITDA of near 4.5 times with a 12- to 18-month goal of near 3.5 times and target pro forma liquidity of $ 300 to $ 400 million.” (Source: AMID site)

In February, AMID announced a definitive agreement for the sale of its refined products terminaling business to DKGP Energy Terminals LLC, a joint venture between Delek Logistics Partners LP (DKL) and Green Plains Partners LP (GPP), for approximately $ 138.5 million in cash, subject to working capital adjustments. The transaction is expected to close in the first half of 2018.

AMID’s management just announced on 6/18/18 that it has “entered into a definitive agreement for the sale of its marine products terminaling business to institutional investors advised by J.P. Morgan Asset Management, for approximately $ 210 million in cash, subject to working capital adjustments. The transaction is expected to close in the third quarter of 2018.” (Source: AMID site)

We assembled this table to get an idea of how the proposed debt leverage is working out. As of 3/31/18, AMID had Net Debt/EBITDA leverage of 6.63X, its leverage was 8.03X, and the combined leverage was 7X.

In this table, we used AMID management’s Net Debt/EBITDA targets in tandem with its asset sales to see if the targets are realistic. Management is targeting annual post-deal EBITDA of $ 300M and a 12-month goal of ~4.5X leverage.

With the sale to DKL of $ 138.5M, and the $ 139M paydown of SXE’s debt, the initial Net Debt/EBITDA may be ~5.88X, which is much better than the Q1 ’18 figure of 7X.

Moving forward to Q3 ’18, with the JPMorgan $ 210M sale, the debt could reach $ 1,250.99M, with a Net Debt/EBITDA ratio of 5.04X. This is assuming a devil’s advocate scenario in which trailing EBITDA merely stays flat, at $ 248.52M, which may be too conservative seeing that mgt. is targeting $ 300M annually.

Management addressed post-deal debt and DCF on the Q1 ’18 call, asserting that it should generate $ 300M in EBITDA and hit $ 140M in DCF, which is much higher than the combined $ 115M AMID and SXE generated in the most recent four quarters:

“Following the closing of the Southcross acquisition and combined with a positive impact of recent growth initiatives, we remain on track to generate pro forma annualized EBITDA in excess of $ 300 million and approximately $ 140 million in distributable cash flow.”

It looks like the combined companies could hit that 12-month leverage target of 4.5X if they’re able to increase their EBITDA:

Risks

Debt Leverage: AMID’s 2018 Q1 10-Q states that, as of 3/31/17, its total leverage ratio was 5.23X. However, we came up with a higher figure of 6.6X. One of the distinctions that management makes is not counting non-recourse debt in its presentations – it refers to “compliance leverage”:

(Source: AMID 2018 Q1 10-Q)

Moody’s downgraded AMID on May 4, 2018, but note the reference to the financial support from ArcLight Partners:

“Speculative Grade Liquidity (SGL) Rating to SGL-4 from SGL-3. Other ratings remain on review for downgrade. The downgrade of the liquidity rating to SGL-4 reflects deterioration in liquidity and Moody’s expectation that AMID will have weak liquidity over the next 12 months as the partnership continues to rely heavily on its revolver while executing on aggressive growth strategies and repositioning of its asset base”.

“The SGL-4 liquidity rating reflects Moody’s expectation that AMID will have weak liquidity over the next 12 months. At year-end 2017, the partnership had $ 9 million of cash and only $ 48 million available under its $ 900 million revolver. Financial covenants limit access to less than the full revolver which expires in September 2019. ArcLight intends to support the partnership through April 2019 to comply with its financial covenants, if necessary. Also supporting the partnership’s liquidity is its ability to monetize assets. Moody’s notes that the partnership anticipates it will close on the sale of its refined products terminals during the second quarter of 2018 for $ 138.5 million (subject to working capital adjustments).” (Source: Moody’s)

Deal Execution – There’s always a chance that the buyout won’t go through. However, it has been approved by both boards, by the unitholders of both AMID and SXE, and 4/10/18 they received the final state-level regulatory approval for the merger. On the Q1 ’18 call, management said that “at this time, we expect to close this transaction during the second quarter.”

Summary

We increased our holdings of SXE, based upon the current post-buyout price discount, and the very attractive 18% post-buyout yield. Another plus is that a very supportive, veteran energy investing firm, ArcLight Capital Partners, owns ~27% of AMID’s units.

(Source: AMID site)

All tables furnished by DoubleDividendStocks, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure: I am/we are long SXE, DKL.

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

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It Is Mind-Bogglingly Easy to Rope Apple’s Siri into Phishing Scams
June 9, 2018 6:12 pm|Comments (0)

A month ago I was milling about a hotel room in New Orleans, procrastinating my prep for on-stage sessions at a tech conference, when I received a startling iMessage. “It’s Alan Murray,” the note said, referring to my boss’ boss’ boss.

Not in the habit of having Mr. Murray text my phone, I sat up straighter. “Please post your latest story here,” he wrote, including a link to a site purporting to be related to Microsoft 365, replete with Microsoft’s official corporate logo and everything. In the header of the iMessage thread, Apple’s virtual assistant Siri offered a suggestion: “Maybe: Alan Murray.”

The sight made me stagger, if momentarily. Then I remembered: A week or so earlier I had granted a cybersecurity startup, Wandera, permission to demonstrate a phishing attack on me. They called it, “Call Me Maybe.”

Alan Murray had not messaged me. The culprit was James Mack, a wily sales engineer at Wandera. When Mack rang me from a phone number that Siri presented as “Maybe: Bob Marley,” all doubt subsided. Jig, up.

There are two ways to pull off this social engineering trick, Mack told me. The first involves an attacker sending someone a spoofed email from a fake or impersonated account, like “Acme Financial.” This note must include a phone number; say, in the signature of the email. If the target responds—even with an automatic, out-of-office reply—then that contact should appear as “Maybe: Acme Financial” whenever the fraudster texts or calls next.

The subterfuge is even simpler via text messaging. If an unknown entity identifies itself as Some Proper Noun in an iMessage, then the iPhone’s suggested contacts feature should show the entity as “Maybe: [Whoever].” Attackers can use this disguise to their advantage when phishing for sensitive information. The next step involves either calling a target to supposedly “confirm account details” or sending along a phishing link. If a victim takes the bait, the swindler is in.

The tactic apparently does not work with certain phrases, like “bank” or “credit union.” However, other terms, like “Wells Fargo,” “Acme Financial,” the names of various dead celebrities—or my topmost boss!—have worked in Wandera’s tests, Mack said. Wandera reported the problem as a security issue to Apple on April 25th. Apple sent a preliminary response a week later, and a few days after that said it did not consider the issue to be a “security vulnerability,” and that it had reclassified the bug as a software issue “to help get it resolved.”

What’s alarming about the ploy is how little effort it takes to pull off. “We didn’t do anything crazy here like jailbreak a phone or a Hollywood style attack—we’re not hacking into cell towers,” said Dan Cuddeford, Wandera’s director of engineering. “But it’s something that your layman hacker or social engineer might be able to do.”

To Cuddeford, the research exposes two bigger issues. The first is that Apple doesn’t reveal enough about how its software works. “This is a huge black box system,” he said. “Unless you work for Apple, no one knows how or why Siri does what it does.”

The second concern is more philosophical. “We’re not Elon Musk saying AI is about to take over the world, but it’s one example of how AI itself is not being evil, but can be abused by someone with malicious intent,” Cuddeford said. As we let machines guide our lives, we should be sure we know how they’re making decisions.

This article first appeared in Cyber Saturday, the weekend edition of Fortune’s tech newsletter. Sign up here.

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In concession, Trump says will help China's ZTE 'get back into business'
May 13, 2018 6:02 pm|Comments (0)

WASHINGTON (Reuters) – U.S. President Donald Trump said in a tweet on Sunday that he has asked the Commerce Department to help Chinese technology company ZTE Corp “get back into business, fast,” a concession to Beijing ahead of high-stakes trade talks that will take place this week.

FILE PHOTO: A ZTE smart phone is pictured in this illustration taken April 17, 2018. REUTERS/Carlo Allegri/Illustration/File Photo

ZTE, one of the world’s largest telecom equipment makers, suspended its main operations after the U.S. Commerce Department banned American supplies to its business.

Trump’s offer to help comes as Chinese and U.S. officials prepare for talks in Washington with China’s top trade official Liu He to resolve an escalating trade dispute between the world’s two largest economies.

Trump’s reversal will likely have a significant impact on ZTE’s U.S. suppliers such as Qualcomm Inc and Intel Corp. U.S. companies are banned from exporting goods to ZTE, making it difficult for the phonemaker to manufacture new products or update older ones.

“Too many jobs in China lost. Commerce Department has been instructed to get it done!” Trump wrote on Twitter, saying he is working with Chinese President Xi Jinping on a solution.

The ban is the result of ZTE’s failure to comply with an agreement with the U.S. government after it pleaded guilty last year to conspiring to violate U.S. sanctions by illegally shipping U.S. goods and technology to Iran, the Commerce Department said.

American companies are estimated to provide 25 percent to 30 percent of the components used in ZTE’s equipment, which includes smartphones and gear to build telecommunications networks.

The Commerce Department did not immediately respond to a request for comment on Sunday.

Reporting by Valerie Volcovici and Chris Sanders, additional reporting by Karen Freifield; Editing by Lisa Shumaker

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GOF – The Popular Fund You Should Not Marry Into Your Portfolio
May 6, 2018 6:07 pm|Comments (0)

Please Note: This article was first published for Income Idea subscribers on Thursday along with additional analysis and implementation ideas. All data in this article is as of 5/2/2018.

I have generally been a fan of actively managed funds where the management team has the flexibility to invest in a variety of asset classes where they best see fit, in line with the investment policy statements laid out in the prospectus documents.

For those reasons, many of my client portfolios will typically include a “strategic income” fund of some sort for fixed income investors. This could be either an open end mutual fund, ETF or a unit investment trust (‘UIT’).

Such fund typically outperform over longer periods of time however you do run into the issue where generally speaking “strategic” = “junk bonds.” This applies to both taxable and tax free fixed income.

Where these funds are great however is that during flat or uncertain fixed income markets, by investing in go anywhere fixed income funds you are giving up that investment decision to the portfolio manager whom you believe has a better read on the market and more importantly is able to find those opportunities which neither you or I have access to as individuals.

Perhaps the most well known of such funds is the PIMCO Dynamic Credit Income Fund (PCI) which I wrote about in “PCI – Not For Me.” My issue with the fund was that as great as it is performance wise there is a very hefty price, the lack of transparency around certain aspects and the exceptionally high leverage and fees.

Another fund that fits this bill and sponsored by one of my favorite managers is the Guggenheim Strategic Opportunities Fund (GOF). While I have looked at it a number of times for myself, I have never written about it or invested in it myself for the simple reason that I do not buy CEFs at a premium.

I did have a number of readers ask me about the fund and that is why we are taking a deep dive into the fund today, particularly as it may be just the recipe for the uncertain fixed income markets of tomorrow.

Fund Basics

  • Sponsor: Guggenheim
  • Managers: Guggenheim Partners Investment Management, LLC
  • AUM: $ 619 million in investment exposure, $ 511 million common assets
  • Historical Style: Diversified Fixed Income, predominantly below investment grade
  • Investment Objectives: The Fund seeks high total return through investment in US Government and agency issued fixed income debt and senior equity securities, corporate bonds, mortgage and asset backed securities and through utilizing an options strategy
  • Number of Holdings: 377
  • Current Yield: 10.44% based on market price, monthly distributions
  • Inception Date: 7/27/2007
  • Fees: 1.8%
  • Discount to NAV: 8.78% PREMIUM

Sources: CEF Connect, Guggenheim Website, and YCharts.

The Sales Pitch

For whatever reason the fund does a horrendous job on its website and in its marketing material to set the case for investing in the fund.

On one hand, they do not need to as the fund only raises capital at its IPO or during follow up offerings but still…. why not put up a few graphics or paragraphs outlining why investors should consider it?

Since the fund fails to do that job, I will attempt to.

As I stated in the introduction, I am a fan of go anywhere investments, especially when they can give you uncorrelated investment exposure.

A Closed End Fund structure further lets the fund use leverage and due to its structure, management does not need to have money allocated to cash for any redemptions which occur with open end mutual funds.

The CEF structure also lets you, in most cases, to purchase funds below their net asset value further generating alpha. (Although this has generally not applied to GOF.)

In the fund’s semi-annual report the fund manager does point out that “thorough research and independent thought are rewarded with performance that has the potential to outperform benchmark indexes with both lower volatility and lower correlation of returns as compared to such benchmark indexes.” Source: GOF Semi-Annual Report

The Alpha/Fund Strategy

Unlike in an exchange traded or an open end index fund which follow an underlying index with their generally transparent index methodologies, no such things exist in go-anywhere, actively managed funds.

As such, investors generally rely on the information provided in the prospectus for the fund’s general investment guidelines.

As a true “strategic income” fund, the fund may invest without any limitations in fixed income securities rated below investment grade, aka junk bonds.

The fund may further invest up to 20% in non-US dollar denominated securities, including up to 10% in emerging markets.

What makes the fund relatively unique is that it may invest up to 50% in equities and up to 30% in fund of funds or pass through securities.

Source: GOF Website

The Portfolio

One of my personal attraction points to Guggenheim is their strong position in asset backed securities, particularly aerospace.

Even though this is an actively managed go-anywhere fund, it is not overly concentrated. The top 10 holdings make up just 7.98% of the fund.

Source: Guggenheim Website

Looking at the fund more broadly, even though it can allocate up to 50% to equities, the fund is currently 80% allocated to fixed income with just a bit over 15% allocated to common stocks.

Source: Guggenheim Website

Breaking it down further shows us that more than half of the fund is allocated to floating rate bank loans and ABS, or asset backed securities. In general, these are below investment grade.

Source: Guggenheim Website

High yield bonds add another 14% while investment grade corporate bonds are just under 5% of the fund.

This obviously shows up in the credit quality. More than 90% of the fund is either rated at or below BBB or not rated. More than 70% is either below investment grade or unrated.

Source: Guggenheim Website

Unfortunately due to the nature of the fund and the fund’s decision, Guggenheim does not publish some common statistics such as the average effective maturities and durations. From the transparency side this is a disservice to investors and I hope the sponsor changes it in the future.

The only reference to duration which I found was in the semi-annual report.

Source: GOF Semi-Annual Report

Guggeneheim does disclose that the fund had an average duration of about .7 years which is quite good. We do not however know whether that was leverage adjusted or not.

In either case, what this means is that for a 1% rise in interest rates, the fund’s NAV should be expected to decline by just .7%. If we have to adjust for leverage it would be closer to 1%.

The opposite is also true if interest rates decline.

Looking at the risk data we can find a 5 year beta of .997. This implies that the fund has essentially been as volatile as the underlying markets.

Source: YCharts

The maximum draw-down which the fund experienced was 54.69%, likely during the closed end fund sell off in 2007/2008 when the leverage markets dried up and funds were forced to liquidate.

Looking at the risk adjusted metrics, the fund has achieved a 10 year Sharpe ration of .7935 and a Sortino ratio of .6941. While these are not mind blowing… for a closed end fund of this nature it is quite good.

Leverage

Like most closed end funds, the Guggenheim Strategic Opportunities Fund(GOF) uses leverage.

The fund uses two primary methods for obtaining leverage.

First, the fund uses reverse repurchase agreements whereby it pledges its investments through transactions creating leverage.

As of November 2017, the fund had $ 58 million in reverse repurchase agreements with its syndicate of banks on which it paid an average weighted interest rate of 1.85%. These costs would be higher today.

Source: GOF Semi-Annual Report

The second source of leverage is a traditional credit facility with a lender.

GOF has an $ 80 million credit facility on which it pays a borrowing rate of .85% over 3 month LIBOR. On this line as of the end of November the fund had just $ 2 million outstanding as it had paid down the majority of the credit facility.

Source: GOF Semi-Annual Report

What is important to note here is that most of the CEF leverage which we have looked at is typically a spread of .7% to 1.2% over 1 Month LIBOR. In the case of GOF it is 3 month LIBOR which is a higher rate.

While generally this was a small spread, the gap is now close to .5%! As such, the fund’s current borrowing costs on this credit facility would be over 3%!

Chart

1-Month LIBOR based on US Dollar data by YCharts

Fortunately it seems that Guggenheim is employing some smart people to run the fund, namely Scott Minerd who has been quite critical of the markets. As such, the fund has been deleveraging as of late.

Source: GOF Semi-Annual Report

The Numbers

The fund is currently distributing a market price distribution yield of 10.44% and is trading at a PREMIUM of 8.78% to its NAV, or net asset value.

Source: CEF Connect

Over the previous year the fund has continued to trade at premiums although it did come very close to parity earlier this year.

Generally speaking, the Net Asset Value has failed to grow beyond its initial IPO even though there is a growth component. THIS IS QUITE CONSISTENT with the findings of the distribution analysis. A few good years bail out many bad years however there has not been meaningful growth.

Looking back over the fund’s lifetime, we can see the fund has generally traded at a premium over the previous 7 years or so however did trade at a discount in 2015/2016 and during the financial crisis when it was trading at close to 30% discounts to NAV. This is once again consistent with “junk bonds.”

Chart

Performance wise, year to date the fund has been sold off with most other CEFs. The fund is up a mere .21% on a total return basis accounting for the distribution. The price per share is down 3.27% while the NAV is down 3.04%.

Do note at the price vs NAV action early this year when the fund was thrown out and decreased 9%. This is a risk to buying a fund which is trading at a premium as any sustained sell off turns premiums into discounts, adding more misery to the underlying losses.

Chart

Over the previous year the fund did give investors a 10.28% total return. This came strictly from the distribution. The underlying price per share is down .6% while the net asset value fell 2.89%. Over distributed? AHA!

Chart

Over the last 3 years the story remains the same. The fund presented investors with a 36.17% total return while the price fell 2.9%. The underlying NAV declined 2.5%. A good 2016 bailed out the fund’s track record during this time.

Chart

Over the previous 5 years we have precisely the same story. The total return was all about the distribution. The underlying price per share declined 9.28% while the NAV declined 8.99%.

Chart

Going back 10 years would have you purchase the fund near the lows of the financial crisis. AS such, the fund has achieved phenomenal results. The fund would have a 270.8% total return (if reinvested). The price per share increased 24.11% while the NAV grew just 8.5%.

Chart

Since inception the numbers are not as good. The total return declines to 233.8% with a 4.38% price per share gain and an essentially flat NAV.

Chart

The moral of the story, the fund did a PHOENOMINAL job coming out of the financial crisis but it was quite volatile and since 2011 or so, has not grown its NAV in the greatest bull market yet.

Should have? Want signs of over distribution? Plain vanilla (AGG) and (MUB) grew their NAVs during this time.

Chart

To put the fund into perspective, we will take a look at the fund against a number of competing products, both levered and unlevered.

As far as “go anywhere” type funds, there are a number of competing closed end funds such as the BlackRock Multi-Sector Income (BIT), the PIMCO Dynamic Credit Income (PCI), and the DoubleLine Income Solutions (DSL) funds. PCI is managed by the PIMCO team and the DoubleLine fund is a representation of the famed Jeffrey Gundlach’s ideas.

I also wanted to take a look at how it does against a covered call fund such as the BlackRock Enhanced Global Dividend fund (BOE).

Lastly we can take a look at two unlevered open end funds, the Fidelity Strategic Income (FSTAX) and the PIMCO Total Return (PTTAX) funds.

Year to date on a total return basis we can see that generally speaking, GOF has lagged for most of the year and was actually the most impacted during the sell off in February. It has since rebounded and comes in the middle of the pack. For the year however (PCI) and (DSL) have been the best performers.

Chart

If we look over the last year we can see (GOF) has beat most of its peers coming in behind PCI. Interestingly (BIT) lead the way until the sell off this year. Also of note, even though also PIMCO managed, the open end Total Return Fund was the worst performer.

Chart

Over the last three years we have a similar story. PCI lead the way followed by GOF, DSL and BIT.

The equity focused BOE lags and is followed by the two open end funds which were quite stable. In either case, the Fidelity fund handily outperformed the PIMCO Total Return fund.

Chart

Looking back 5 years we essentially have PCI and GOF leading the way, followed by (BIT). The high performing DoubleLine fund however comes in at the bottom of the CEF pack simply due to its horrible performance in 2015.

Once again it shows the importance of risk management. It is not as import as to how much you make, and it is more important to focus on how much you DON’T LOSE!

Chart

This is ever so important for buy and hold investors.

To get a 10 year number we only have the (GOF) and (BOE) closed end funds along with our two open end funds. This is critical but we do not have any idea how (PCI), (BIT) and (DSL) would perform during a financial crisis.

As we can see, the two closed end funds were decimated during the crisis. While GOF recovered, BOE never did. In fact, the plain vanilla open end Fidelity income fund would provide better total returns than an equity CEF fund.

Chart

Overall, GOF has been a good fund especially if we consider that it has been generally less levered than its peers. More importantly from the risk management perspective the fund is leading the way in delevering while its peers are increasing their leverage to maintain the distribution level.

Bottom Line

Guggenheim is an experienced manager and if you want to capitalize on and follow Scott Minerd, (GOF) is a way to do so. Here is a good article on Scott Minerd’s recent thoughts.

From the pricing side, it is very tough for most closed end fund investors I know of to justify purchasing it today, or even keeping it if you already own it.

Over the previous year the fund traded at a premium to NAV of as low as .62% to as high as 11.33%.

Source: CEF Connect

As we can see, the current 8.78% premium to NAV is quite expensive over EVERY measured time period and the Z-Score solidifies that. The right time to buy it would have been earlier this year when it was trading at near parity.

Source: CEF Connect

Overall it is certainly a peculiar time for funds like GOF, PCI and DSL.

I think a great way of thinking about them is like dating a super model. Yes, they look really pretty and you have a great time dating and you get lots of envious looks. But are they the people you believe would end up being terrific soul mates to live together and raise a family?

GOF, PCI, DSL and other high yield junk bond funds have certainly become the “popular guy/gal” and people are paying premiums for them. At the same time, high quality funds and munis have been left at the alter.

Yes, they have performed exceptionally well in a terrific bull market for both fixed income and equities, but so did the housing market in the early 2000s.

The “crazy” part comes in where on one hand we see premium prices for those funds, yet the underlying fundamentals are either turning or completely falling apart such as the distribution coverage with GOF and others.

Of course, I once again have to remind, a distribution is not a dividend and you have to take an underlying look at how the fund is doing.

Bottom line, this is certainly a fund worth owning, but perhaps when the prices are quite a bit better and we have another opportunity to buy in ONCE the tornado comes through.

In the mean time, the BlackRock Multi-Sector Income Fund (BIT) will let you play in the same space at a far lower cost, a 10% discount versus an 8.78% premium and while I have not looked at it yet, the underlying distribution coverage can’t be as bad as (GOF)?

For more information on the fund, please visit the fund’s website at Guggenheim – GOF.

For more reading on the mentioned funds, please take a look at:

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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.

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Smugglers Caught Using Drones to Drop $80 Million Worth of iPhones Into China
March 30, 2018 6:32 pm|Comments (0)

Chinese customs officers have arrested smugglers who attempted to drop millions of dollars worth of iPhones from drones into China.

Twenty-six suspects were arrested in China recently after they tried to use drones to fly two 660-foot cables from Hong Kong to Shenzhen, according to Reuters. Those cables were going to be used to lift iPhones worth 500 million yuan ($ 79.6 million) to the mainland, where they could be sold via the black market for a hefty profit, according to the report. A local Chinese report from the Legal Daily said it was the first time drones were employed to smuggle phones.

The operation was set to go off at night, where smugglers would pack small bags with approximately 10 iPhones and attach them to the drones. Those drones would then fly from Hong Kong to the mainland in just a matter of seconds. According to Reuters, the smugglers had the ability to transport up to 15,000 iPhones each night.

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Smuggling of high-value products—like iPhones, jewelry, and luxury products—is nothing new in China. In fact, the government has been working hard to crackdown on the practice and do a better job of breaking up what has become an increasingly powerful black market.

Smuggling gangs often steal devices or buy them at a deeply reduced rate and sell them for a higher price in China. They’re careful, however, to keep their prices below the going rate for those who purchase products legitimately. The result is a profitable business for smugglers and an opportunity for Chinese consumers to get authentic goods at a cheaper price.

Despite breaking up the drone attempt, Shenzhen officials warned that smuggling would continue. According to Reuters, the customs officers are planning to use several types of equipment to thwart other attempts by the smugglers.

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Apple brings Alibaba-linked payment system into China stores amid market push
February 7, 2018 6:00 am|Comments (0)

BEIJING/SHANGHAI (Reuters) – Apple Inc will accept Chinese mobile payment app Alipay in its local stores, boosting its ties with giant e-commerce firm Alibaba Group Holding Ltd amid a push by the iPhone maker to revive growth in the world’s No.2 economy.

The tie-up will make Alipay, run by Alibaba affiliate Ant Financial, the first third-party mobile payment system to be accepted at any physical Apple store worldwide, Ant Financial said in a statement on Wednesday. Apple’s own payment system has had a lukewarm reception in China.

The Cupertino-based firm will accept Alipay payment across its 41 brick-and-mortar retail stores in China, said Ant Financial, which was valued at $ 60 billion in 2016.

Apple, whose China website, iTunes store and App Store have been accepting Alipay for more than a year, did not immediately respond to requests for comment.

The deal comes as Apple is doubling down on the market and looking to strengthen ties with local Chinese partners and government bodies. The firm’s CEO Tim Cook has made regular recent visits to the country.

Apple is also shifting user data to China-based servers later this month to meet local rules and last year removed dozens of local and foreign VPN apps from its Chinese app store.

Alipay is China’s top mobile payment platform, but faces stiff competition from rival internet giant Tencent Holdings Ltd’s payment system that is embedded within its hugely-popular chat app WeChat.

China’s official Xinhua news agency said late on Tuesday that Apple would build its second data center in China in Inner Mongolia Autonomous Region after it set up a data center in the southern province of Guizhou last year.

Reporting by Pei Li in BEIJNG and Adam Jourdan in SHANGHAI; Editing by Himani Sarkar

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