Amazon Said It Wanted to Recruit 'Hundreds' of People to Start Delivery Services. Now Things Have Changed Big Time

In June, Amazon announced that it wanted to recruit a network of “hundreds” of entrepreneurs across the country, who would then start small delivery companies.

They’d have contracts to deliver for Amazon, and they’d use Amazon-branded vans that they actually leased from Amazon itself. In the best cases, Amazon was predicting that small businesspeople should be able to take home about $300,000.

But now there are some new numbers out, and they’re suggesting something very different.

First, Amazon says it didn’t just get “hundreds” of applications. It’s received “tens of thousands,” according to Dave Clark, Amazon’s SVP of worldwide operations.

“We expected a lot of interest but the sheer volume — the tens of thousands of people who actually went all the way through the process to make themselves eligible for the program — has been really humbling,” he told CNNMoney.

Second, while Amazon originally was talking about ordering 5,000 delivery vans to lease to these delivery service owners, they’re already way above that: they’ve entered into a deal to obtain 20,000 Mercedes-Benz Sprinter vans. 

How big is a 20,000-vehicle fleet? Compare it to:

  • FedEx Ground, which says it has about 60,000 “motorized vehicles.” We can assume that’s not just counting last-mile delivery vans, but includes big tractor trailers, and other vehicles, too.
  • UPS which has, by my count, about 94,000 total vehicles in the U.S., including “package cars, vans, tractors and motorcycles.” (UPS doesn’t break out its vehicles by country, so it’s an estimate based on its total worldwide fleet of 119,000 vehicles).
  • The U.S. Postal Service, which has about 100,000 Grumman LLVs, which are the slope-hooded vans you probably think of when you think of a mail truck. 

Obviously Amazon is massive. But the idea of creating a network of private delivery companies that’s functionally about a fifth the size of the U.S. Postal Service, and doing it within a matter of months–that’s pretty darn impressive. 

They’re launching the equivalent of one of the largest private delivery services in America–and one that would apparently have only one customer. So, obviously UPS and the postal service should be a bit worried. If Amazon has its own network, it presumably would use the legacy package services less.

But the most important question for entrepreneurs is whether this news of the program’s scope suggests it’s a better deal or less so for would-be delivery service owners? 

I’m not sure, actually. It shows Amazon’s serious about the program, but it also suggests there could be a lot more competition than people might have originally thought.

Still, if you were coming to me for investment, even without this program, and said you wanted to start a delivery program that would have Amazon as a client, and that you’d be able to get lower cost vehicles, technology, and training from them, I’d certainly listen.

One way or another, you’ll start seeing them soon. Clark told USA Today that some of the vans will be on the road shortly, and the full 20,000 vans, to be built at a new Mercedes-Benz plant in South Carolina, will be on the road during 2019.

5 Great Routes for Self-Driving Trucks—When They're Ready

Say you wake up tomorrow morning and there’s a robo-truck just sitting in your driveway. It’s yours. What do you do? Where do you go?

Today, no one really has a self-driving truck yet—though plenty are working on it. There’s Peloton Technologies, Kodiak Robotics, and Waymo, Daimler and Volvo, Embark and Starksky Robotics. Even the US Army is in on the act. Their advances—and testing operations in states like Nevada, California, Florida, Arizona, and Georgia—are impressive, but not there yet.

Still, the tech should arrive one day, which is why that thought experiment is helpful. Especially if you’re a government official trying to determine how self-driving trucks might help—or hurt—the economy. The technology promises to reduce road deaths, cut labor-related shipping costs, maybe even slice congestion by upping efficiency. But who needs to prepare for this change, coming 10, 20, or 30 years down the line?

Today, the traffic analytics company Inrix gives them at least part of an answer. Using its own traffic data, collected all over the US from over 1.3 billion vehicle trips between early June and early August of this year, it crunched the numbers to determine where automated trucks might be most helpful.

The results weren’t necessarily the most bumping commercial corridors. The stretch of I-80 and I-90 between Eastern Ohio and Cleveland, for example, is one of the more well-trafficked by human truckers in the US, but doesn’t make Inrix’s list of top 10 places to deploy the robots. That’s because Inrix used a melange of freight data, road incident numbers, and traffic congestion to come up with their top five routes.

You want roads carry a lot of freight, sure, but also roads plagued by frequent traffic accidents, and those that don’t have the kind of pesky congestion that makes AV developers nervous. That’s where taking the human out of the loop could make the biggest difference.

According to Inrix’s data, these are the top 10 US corridors for commercial returns, due to their high freight volumes but low traffic congestion.

Inrix

Thus, their top five: The I-5 from the Canadian border to Northern California, which is nice and long and has an unfortunate number of truck-related crashes. The I-95 between Jacksonville and Miami, Florida, which carries a nice amount of freight with little traffic. The I-75 between Valdosta, Georgia, and Miami, which is shorter but used by lots of haulers. The I-70 between Utah and Kansas, the most dangerous stretch of roadway in the ranking. And the I-85 between Georgia and Greensboro, North Carolina, which carries the most freight out of all five.

According to Inrix’s analysis, the top five US corridors for automated trucking deployment include stretches of I-95, I-5, and I-70.

Inrix

“We hope public sector and private sector take note of this sort of data-driven scenario,” says Avery Ash, who heads up Inrix’s autonomous mobility efforts. “This is an opportunity for the two to work together to open up test corridors”—that is, places to test and develop self-driving trucks. And with this data, places where the tech can have a real impact.

This data might be helpful to officials. But Ash admits that Inrix doesn’t consider what the tech developers really work about—where these vehicles will work best. For example: weather. Autonomous vehicle technology hates the snow for its lidar- and camera-confusing properties. It also hates pot holey roads, and ice and freezing rain don’t help that picture. That’s why you see most companies testing in places like Atlanta, Texas, and southern California—the places where the sun tends to win out.

“The southern half of the US is super effective,” says Stefan Salz-Axmacher, the CEO of Starsky Robotics. “A lot of freight moves through there, and the weather conditions are good.” (Good thing robots don’t mind a damp heat.)

The second is labor. Companies know they’ll be more welcome in places with trucker shortages, like the US and Australia.

The third is regulations. Right now, it’s up to states to make their own rules. Some have welcomed the tech. Arizona, Florida, and Texas have become some of the top places to test. At this point, it doesn’t make sense for companies to go anywhere without a favorable regulatory climate—no matter how much freight is shooting down its roads.

So when it comes to testing a big, intuitively scary, and possibly world shaking technology like self-driving trucks, data is a good guide. But for now, it’s far from the only metric in town—or on the highway.


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Cyber Saturday—Massachusetts Gas Fires, Credit Freezes, Snowden Reassessment

On Thursday evening, 60 suspected gas fires broke out in three Massachusetts towns north of Boston. Naturally, people wondered about the cause.

Some accounts on Twitter began to speculate, baselessly, that the explosions were the result of hacking. One hacker-activist with a large following stoked the rumor mill by asking whether anyone else suspected the fires “might be some kinda of cyber attack targeting SCADA systems?” (SCADA systems, or supervisory control and data acquisition systems, refer to industrial control hardware often used in power plants.) Another Twitter account followed this up with an unsupported claim that U.S. agencies were “looking for traces of weaponzied stuxnet virus,” referring to a malware program, widely attributed to U.S. and Israeli intelligence agencies, that knocked out Iranian nuclear centrifuges in the aughts.

Industry professionals swiftly tamped down on the unsubstantiated gossip. Rob M. Lee, CEO and founder of Dragos, a startup that specializes in industrial cybersecurity, approached the incident with characteristic level-headedness. “[T]hese events sadly happen and cyber is often the least likely answer,” he wrote in a tweet. “[T]he folks involved will be focused and thorough to find the root cause. I.e. wait.”

Kudos to the cooler heads, like Lee, who urge caution while officials sort this mess out. I tend to agree with Kevin Mandia, CEO of cybersecurity firm FireEye, who told a Senate committee this week that frequent talk of an impending “cyber Pearl Harbor”—a theoretical attack that could cause national power outages—distracts from the real threat. As Mandia put it, “I believe that our nation is more likely to face an enduring, more protracted cyber campaign akin to ‘cyber trench-warfare.’”

Indeed, and so often that trench warfare takes the form of disinformation run amok online.

***

The ransacking of Equifax has had at least one positive outcome. Next week a federal law kicks in that will force the big three credit bureaus—Equifax, Experian, and TransUnion—to provide fee-less “security freezes,” hold orders on credit files that help prevent identity theft. Starting on Sept. 21, the credit bureaus will no longer be allowed to charge for the service—a long overdue reform. Brian Krebs, an investigative cybersecurity journalist, has a nice write-up of the upcoming policy change on his website.

Have a great weekend.

Robert Hackett

@rhhackett

[email protected]

Welcome to the Cyber Saturday edition of Data Sheet, Fortune’s daily tech newsletter. Fortune reporter Robert Hackett here. You may reach Robert Hackett via Twitter, Cryptocat, Jabber (see OTR fingerprint on my about.me), PGP encrypted email (see public key on my Keybase.io), Wickr, Signal, or however you (securely) prefer. Feedback welcome.

Bill Gates Buys China: CEF Yields 8.4%, Trades At 11% Discount To NAV, Priced For Significant Upside

Co-produced with Julian Lin of High Dividend Opportunities.

Templeton Dragon Fund (TDF) is a closed-end fund from Franklin Templeton Investments which seeks to invest in attractively valued equities in “Greater China” stocks, which in addition to China also includes Hong Kong and Taiwan. TDF issues 1099 tax forms (no K1s). TDF is run by a management team which has proven itself to be extremely aligned with shareholders. Furthermore, we are not the only ones who believe China is cheap as Bill Gates recently disclosed a 5% position in TDF. TDF is a strong buy and offers a high yield way to play the recovery in the Chinese stock market.

Why China, And Why Now

Investors have a history of overreacting and allowing emotions to influence their investment decisions. This sometimes manifests in “over-bought” fervor, as seen in the historic stock run of the 2000s dot-com bubble:

This also is seen when “over-sold” pessimism leads to seemingly-uncontrolled selloffs, as seen in the gruesome aftermath of the “popping” of the aforementioned dot-com bubble:

When the dust settles, investors have a choice to make. Do they continue to sell in fear or do they take a courageous stand and buy what they know to be cheap? Warren Buffett has a famous quote which applies well in this context, “be fearful when others are greedy and greedy when others are fearful.”

There’s great reward for bravery – investors who have the courage to buy would be acquiring stocks at extremely opportunistic valuations.

We believe we have found such a similar opportunity right in front of us: That opportunity is China.

The ongoing trade war conflict between the U.S. and China has sent Chinese equities in a free fall:

Yes, the trade war will negatively impact many Chinese markets and has significantly raised uncertainty moving forward. But with prices this low, is the selloff overdone? We have the opinion that contrarian value investors must buy, not sell, when there’s blood on the streets, and in China, the streets are bleeding red.

Opportunistic Valuations

At our marketplace service High Dividend Opportunities, we have been recommending to overweight U.S. equities since January 2018 and underweight European and Asian equities for many reasons which include:

  • A healthy and growing GDP growth rates, at a time when many emerging economies are seeing decelerating growth.
  • Low tax rates and a friendly tax environment.
  • Relatively higher population growth rates than most large economies.
  • A safe-haven status – as compared to Europe and the Far East.
  • Finally, the U.S. is a service-oriented economy and is much less prone to political uncertainties on the other side of the globe, such as the turmoil in Turkey today.

For the time being, the U.S. regained its crown as the most favored region for stocks for the first time in five years, according to fund managers surveyed by Bank of America Merrill Lynch. In fact, it was reported that fund managers have recently pushed their allocation to U.S. stocks to near all-time highs.

This has proven to be a profitable call as during the past three months the S&P 500 index has returned 3.6% compared to a negative return of 7.3% for emerging market stocks, and a negative return of 11.4% for European stocks.

However, the recent underperformance in emerging markets and China especially has however led us to change our views as China has become too cheap to ignore.

The price to earnings multiple (P/E) of Chinese equities, as reported by TDF, was just under 14 for the trailing 12 months. That represents a huge 44% discount to the 25 times trailing earnings seen in the S&P 500. We should note that the S&P 500 has not itself seen such a low multiple since the 2012 correction – it has more than doubled since then. As we will argue next, this valuation is just “dirt cheap” for one of the strongest economies in the world.

The Market Is Too Pessimistic On China’s Outlook

The trade war has seen significant tariff escalations on both sides. The U.S. has imposed $34 billion in tariffs on mainly agricultural products, upon which China has retaliated with its own $34 billion in tariffs on things like soy beans, beef, whiskey, and off-road vehicles – both took effect on July 6th. On July 10th, President Trump released a list identifying a further $200 billion in potential tariffs, upon which China has indicated it would “introduce counter measures to defend the country’s dignity.” Every market selloff begins with a reason and it appears that investors are concerned that the back and forth will lead to long-term negative consequences for China’s economy.

We believe however that investors have become overly pessimistic. China has seen very strong growth rates to GDP in the past decade as it has sought to transform itself into a global superpower:

(World Bank)

With its population at a staggering 1.4 billion, China also presents a very compelling consumer base which naturally draws strong demand from retailers seeking to tap such a large market.

Possible Catalyst for Chinese Equities to Strongly Outperform

There’s reason to believe that the trade war should be ending sooner than later. On August 27th, the U.S. and Mexico reached an agreement to overhaul the North American Free Trade Agreement (NAFTA). The new deal would rewrite parts of NAFTA in a three-country trade deal that includes Canada. We expect that Canada also will sign on the agreement and this will remove a lot of economic and political uncertainties that the recent trade war escalations have brought. This news is significant because it’s a good indication that President Trump’s trade war escalations have been more of a negotiating tool rather than protectionist behavior that many have accused him of. In fact, this strategy has proven to be successful so far. This also opens the door for the possibility that a trade deal could be struck with China soon, which also will be bullish for global and Chinese equities.

Furthermore, President Trump is set to meet his Chinese counterpart President Xi Jinping in a G-20 summit in Argentina, which begins on November 30. This raises hopes that the two countries might find a solution to end the dispute. We should note that the two have not met since late 2017. There is a good chance that some sort of agreement, or de-escalation of tensions could occur, and this could result in higher equity prices for emerging markets.

While we have no crystal ball, we can conclude from the trade war thus far that no one seems to be really benefiting as any new tariffs imposed from the U.S. are just met with an equal amount of tariffs from China. We believe that the political drama will eventually end, perhaps soon, and that Wall Street will then give appreciation to the Chinese economy which is clearly firing on all cylinders.

Getting To Know The Fund

TDF aims to invest at least 45% of assets in Chinese stocks – and most recently had more than 77% of assets invested in China with the rest divided mainly between Hong Kong and Taiwan:

TDF is very diversified among industries, and is particularly overweight financials, technology, and semi-conductor stocks:

Readers should note that TDF does not currently utilize any leverage. This makes their performance (as we will see in a moment) particularly impressive. The top 10 holdings of TDF are seen below:

Fee Structure

TDF has a very reasonable 1.35% expense ratio which is on the low side among CEFs. The fee rate is dependent based on net assets and decreases as net assets increase, as seen below:

Performance History

TDF has performed very well both in its own right and as compared to its index, the MSCI Golden Dragon Index. As we can see below, TDF has outperformed both in the near term (one year by NAV and three year by share price) and long term (10 year by both NAV and share price):

China Is Rising: The Top Holdings

While the steep undervaluation of China is reason enough to get one excited on shares, it was a close look at the top holdings that really opened our eyes to the high level of innovation taking place in Greater China. In particular, the three largest positions in TDF are most important to discuss as they comprised a nearly 30% combined allocation as of last month.

Tencent (OTCPK:TCEHY) was TDF’s largest holding before its underperformance this year. TCEHY is most well known as the “Facebook (FB) of China.” This is because they own the social network app WeChat which has more than 1 billion users which as of 2016 used the app on average 66 minutes per day.

(WeChat)

With about $4 billion in social networking advertising revenues in 2017, WeChat clearly has a long growth runway ahead of it, as Facebook reported nearly $40 billion in advertising revenues in 2017.

But that’s not all – while investors wait for TCEHY to continue monetizing WeChat, they also are investing in a company which has established itself as arguably the No. 1 video game company in the world. TCEHY owns many of the most well-known games globally, including League Of Legends:

(League of Legends)

They own a 48% stake of Epic Games, the creator of the smash hit Fortnite which is considered one of the most popular games of all time with more than 125 million players. TCEHY also owns stakes in the developer of PlayerUnknown’s Battlegrounds (PUBG) and Activision Blizzard (ATVI), meaning that they have their hands in all of the top four PC games in North America and Europe:

(NewZoo)

In spite of proving itself to be one of the greatest growth stories coming out of China, TCEHY trades at only 40 times trailing earnings. TCEHY is likely to have a significant multiple re-rating upwards as investors once again warm up to the name.

(TSMC 2017 10-K)

Taiwan Semiconductor (TSM) is currently the fund’s largest position. TSMC is the world’s largest semiconductor foundry and is headquartered in Taiwan. In short, TSMC manufactures semiconductor products for its customers, who then sell those products. TSMC held the leading market share in 2017 in the foundry segment of the global semiconductor industry, with an estimated market share of 56%. TSMC has customers all over globally, and prides itself in never selling its own semiconductor product, meaning that it never competes with its customers. This has allowed them, in their own words, to be “everybody’s foundry.” As the industry leader and innovator, TSMC is well positioned to take advantage of the tailwinds from “increasing semiconductor content in electronic devices, continuing market share gains by fabless companies, gradual increases in IDM outsourcing, and expanding in-house application- specific integrated circuits (OTC:ASIC) from systems companies. (2017 TSMC 10-K). Furthermore, with the “internet of things” (‘IoT’) technologies being included in more and more applications including smart watches, smart light bulbs, and self-driving cars, the market for semiconductors should continue to grow for the long future, and TSMC finds itself as a primary beneficiary of such a movement.

Alibaba (BABA), the fund’s third largest holding, is perhaps the most well known Chinese stock to American investors. BABA is known as the “Amazon (AMZN) of China” because of its e-commerce platforms, known as Taobao and Tmall.

(2017 Investor Day)

BABA has executed perfectly in capturing the e-commerce market as according to recent studies their platforms already account for 58% of all e-commerce transactions in China as of 2018. Basically, if companies want to sell to the Chinese consumer, then they pretty much have to go through BABA.

In addition to their e-commerce business, BABA also has a strong cloud computing business, payment processing business through their 33% stake of Ant Financial and social networking exposure through their 31% stake in Sina Weibo (WB), known as the “Twitter (TWTR) of China.” As a result of their strong execution, BABA has in turn seen very strong revenue growth:

(March Quarter 2018 Presentation)

Readers may find it interesting to know about BABA’s push into the grocery business through its stores “Hema grocery.”

(HEMA Grocery)

These stores aim to revolutionize the grocery shopping experience by reducing the need for customers to wait in lines. If you forget your smartphone, then no worries! Their stores are able to use facial recognition (link includes a video) to identify the customer and complete checkout. We really do recommend watching the video linked above. AMZN does have one store with a similar concept, but get this – BABA already has more than 20 such stores in China and aims to continue rolling out this concept aggressively. Interested readers can see more by viewing this video.

BABA trades at only 56 times trailing earnings which compares very favorably with AMZN, which trades at over 150 times earnings yet does not have as many of the additional business segments that BABA does.

Quick take: By taking a look at some of the growth companies in China and their potential, it’s clear that many Chinese equities have been unfairly punished in spite of arguably being just as exciting as their U.S. counterparts. Many of these companies are comparably in the earlier stages of their growth trajectories yet do not trade at the same multiples that their U.S. counterparts did back then. Consequently, we see tremendous opportunity here for multiples to be revalued upwards.

Dividend History

Based on recent prices, TDF trades at a 8.4% yield based on its recently announced 2018 payout of $1.6114. TDF pays its distributions based on the dividends received from the underlying holdings and realized capital gains:

(Chart by Authors, data from CEFConnect)

These distributions are usually paid once or twice annually (in September, December, or in both). As seen above, these distributions can widely vary from year to year, and therefore cannot be relied upon as a stable source of income. Because the performance of Chinese equities has been flat in the past 12 months, this year’s yield is slightly lower than last year’s payout of $1.7105. The main attraction in buying into TDF is the future performance which should result in solid capital gains and a higher distribution in the year 2019.

Valuation

Most CEFs, especially equity CEFs, tend to trade at discounts to NAV. TDF is no exception as it has historically traded at double-digit discounts:

(CEFConnect)

The discount has narrowed slightly very recently from around 14% to 11%, probably due to the announcement of Bill Gates investing in the fund, as discussed below:

(CEFConnect)

The one-year Z-score is still at 0.4, suggesting that TDF trades 0.4 standard deviations higher than its historical NAV discount for the past 12 months. Still, the 11% discount to NAV is very deep which is entirely undeserved. Unlike other CEF management teams, TDF is actually run by one which actively takes advantage of the discount.

Unusually Aligned Management Team

When we look for strong management teams in our CEFs, the main important factor aside from strong performance, which we have already seen above, is their alignment with shareholders. Because CEF managers are typically paid based on a percentage of net assets, this means that management teams often are in no hurry to close any discount to NAV through share repurchases, because doing so may cause net assets to decrease, in turn potentially decreasing their associated salaries. This is not the case with the management team at TDF. TDF has an outstanding share repurchase authorization in place of up to 10% of shares outstanding, which is in addition to an initial 10% previously authorized. TDF has not been shy about making use of this program, recently retiring 209,534 shares in 2017, 435,156 shares in 2016, and 116,708 already this year. At the same time, they did not issue any shares in these two years as all shares issued from dividend reinvestment programs were accounted for in their repurchase program. Considering that there were 34.2 million shares outstanding as of the end of 2017, these are clearly very large share repurchase amounts. What’s more, since the inception of their share repurchase program, TDF has repurchased an astounding 8.9 million shares. TDF easily has one of the most aligned CEF management teams we have ever seen and we expect them to continue repurchasing shares moving forward.

Bill Gates Is Buying, Are You?

(Bill Gates, co-founder of Microsoft)

We are not the only ones who believe that China is getting cheap. As of August 8, 2018, the Bill and Melinda Gates Foundation Trust owned 1,697,739 shares, or 5% of the shares outstanding of TDF, making the trust the fourth-largest shareholder according to S&P Capital IQ. Microsoft (MSFT) co-founder Bill Gates and his spouse Melinda French Gates are co-trustees of the trust. Readers are probably well aware of Gates’ legendary investment track record and we believe that it’s no surprise that they have chosen TDF with its large exposure to Chinese equities and extremely shareholder-friendly management.

Risks

  • As we discussed earlier, there’s great uncertainty moving forward as to how the trade war will progress. There’s still possibility of further downside if trade negotiations between the U.S. and China are unable to find common footing. However, the already depressed valuations suggest that there’s little further downside as expectations have effectively been “reset.”
  • As with all equity CEFs, TDF is especially exposed in the event that the Chinese economy experiences a slowdown or recession. This however does not appear likely as the economy continues to grow at torrid rates – and besides, equity valuations are effectively priced as if such a meltdown already has occurred. Such is the beauty of targeting deeply discounted securities.
  • The recently announced distribution may lead to short-term volatility from investors focused on the dividend income. We however believe that investors with a longer term mindset may be rewarded with an outsized distribution in 2019 if Chinese equities are able to recover.

Bottom Line

TDF is an attractive way to invest alongside shareholder friendly management while waiting for the Chinese economy to rebound. TDF trades at a double-digit discount to NAV, which we expect management to continue to take advantage of with share repurchases. China itself is trading at a material discount to the U.S. stock market, in spite of an economy continuing to grow GDP at impressive rates and having companies continuing to push the limits of innovation. TDF is a strong buy for the next two years as we anticipate investor sentiment to improve, leading to a higher dividend payout in 2019 and capital gains.

A note about diversification

To achieve an overall yield of +9% and optimal level of diversification, at High Dividend Opportunities, we recommend a maximum allocation of 2-3% of the portfolio to individual high-yield stocks, and a maximum of 5% allocation to high-yield exchange traded products (such as ETF, ETNs and CEFs) such as TDF. For investors who depend on the income, diversification usually results in more stable dividends, mitigates downside risk, and reduces the overall volatility of their portfolio.

If you enjoyed this article and wish to receive updates on our latest research, click “Follow” next to my name at the top of this article.

Source note: All tables and images from Templeton Dragon Fund’s website, unless otherwise stated.

Disclosure: I am/we are long TDF.

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.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Hurricane Florence Threatens to Spread Hog Poop Over North Carolina

Shimmering in pools on industrial hogs farms in North Carolina, several million tons of urine and feces await the arrival of Hurricane Florence.

The state is home to about as many pigs as it is people. Its hog farms are a major part of the state economy, with many of them concentrated in the eastern part of North Carolina, where Hurricane Florence is expected to drop 20 to 30 inches this week. The water will pour down on the hog farms’ denitrifying lagoons: big pools that hold pig urine, poop, blood, and other bodily excrements. Experts worry that if the lagoons flood, their contents could spread to nearby areas and contaminate local water supplies.

Pig waste carries bacteria like E. coli and Salmonella, says Lance Price, George Washington University public health professor and founder of the Antibiotic Resistance Action Center. Scientists also consider North Carolina hog farms a hot zone of antibiotic-resistant bacteria. Hospitals near industrial pig farms in eastern North Carolina have found distinct strains of MRSA among livestock farmers. “Scary bugs are going to be in the waste and in the poo,” says Price.

To prepare for the storm, farmers are stockpiling feed, moving their animals to higher ground, and checking their generators. They’ve also been spraying waste onto fields as fertilizer all summer, to help prevent the lagoons from overflowing. But with all the incoming rain, researchers and activists worry that the waste from the fields will wash down rivers and streams, just as it would if the lagoons are breached.

Even under normal conditions, pollutants on the farms cause health problems in nearby settlements, triggering respiratory problems and reduced lung function. “These farms affect wellbeing, health, and water quality in the area,” says Jill Johnston, formerly an epidemiologist at the University of North Carolina and now an environmental health professor at the University of Southern California. Her research team found that the pollutants from pig farms disproportionately harm African American, Latino, and Native American communities.

During the last major hurricane in the area, Hurricane Matthew in 2016, power went out, trees fell down, and 26 people died in North Carolina. Out of 3,750 lagoons in the state, 14 of them flooded. As the the North Carolina Pork Council points out, municipal waste facilities also spewed sewage during that storm.

But pigs produce ten times the amount of poop that humans do. And Hurricane Florence threatens to drop twice the amount of rain as Matthew. “I’m really, really scared that the consequences will be worse than everything we’ve ever seen,” says Rick Dove, senior advisor to the Waterkeeper Alliance, an activist group that advocates for drinkable, fishable water. The National Hurricane Center is warning of a storm surge—a flood of water that will rise from the coast—as well as tropical-storm-force winds and flooding further inland. The already higher-than-usual sea levels are intensifying the problem. “We have never, in the history of North Carolina, had a storm like the one that’s coming in right now,” says Dove.

Hog farming has become an increasingly condensed operation over the last few decades, especially on the east coast, which intensifies their effects in both day-to-day life and hurricane season. “You can’t tell me that you can put that many hogs and chickens on soil that is largely beach sand and it will not have significant environmental impacts,” says Scott Marlow, senior policy specialist at Rural Advancement Foundation International, a nonprofit group that supports farmers.

With the roads filled with evacuating North Carolinians, no one’s going to ship the poop out on trucks, as the farms sometimes do. If Florence-scale hurricanes become routine, however, the state may have to find better solutions. As Price puts it, “We can’t afford to have a million pounds of pig shit flowing into our streams every time there’s a heavy storm.”


More Great WIRED Stories

Facebook's AI Can Analyze Memes, but Can It Understand Them?

Billions of text posts, photos, and videos are uploaded to social media every day, a firehose of information that’s impossible for human moderators to sift through comprehensively. And so companies like Facebook and YouTube have long relied on artificial intelligence to help surface things like spam and pornography.

Something like a white supremacist meme, though, can be more challenging for machines to flag, since the task requires processing several different visual elements at once. Automated systems need to detect and “read” the words that are overlaid on top of the photo, as well as analyze the image itself. Memes are also complicated cultural artifacts, which can be difficult to understand out of context. Despite the challenges they bring, some social platforms are already using AI to analyze memes, including Facebook, which this week shared details about how it uses a tool called Rosetta to analyze photos and videos that contain text.

Facebook says it already uses Rosetta to help automatically detect content that violates things like its hate speech policy. With help from the tool, Facebook also announced this week that it’s expanding its third-party fact checking effort to include photos and videos, not just text-based articles. Rosetta will aid in the process by automatically checking whether images and videos that contain text were previously flagged as false.

Rosetta works by combining optical character recognition (OCR) technology with other machine learning techniques to process text found in photos and videos. First, it uses OCR to identify where the text is located in a meme or video. You’ve probably used something like OCR before; it’s what allows you to quickly scan a paper form and turn it into an editable document. The automated program knows where blocks of text are located and can tell them apart from the place where you’re supposed to sign your name.

Once Rosetta knows where the words are, Facebook uses a neural network that can transcribe the text and understand its meaning. It then can feed that text through other systems, like one that checks whether the meme is about an already-debunked viral hoax.

The researchers behind Rosetta say the tool now now extracts text from every image uploaded publicly to Facebook in real time, and it can “read” text in multiple languages, including English, Spanish, German, and Arabic. (Facebook says Rosetta is not used to scan images that users share privately on their timelines or in direct messages.)

Rosetta can analyze images that include text in many forms, such as photos of protest signs, restaurant menus, storefronts, and more. Viswanath Sivakumar, a software engineer at Facebook who works on Rosetta, said in an email that the tool works well both for identifying text in a landscape, like on a street sign, and also for memes—but that the latter is more challenging. “In the context of proactively detecting hate speech and other policy-violating content, meme-style images are the more complex AI challenge,” he wrote.

Unlike humans, an AI also typically needs to see tens of thousands of examples before it can learn to complete a complicated task, says Sivakumar. But memes, even for Facebook, are not endlessly available, and gathering enough examples in different languages can also prove difficult. Finding high-quality training data is an ongoing challenge for artificial intelligence research more broadly. Data often needs to be painstakingly hand-labeled, and many databases are protected by copyright laws.

To train Rosetta, Facebook researchers used images posted publicly on the site that contained some form of text, along with their captions and the location from which they were posted. They also created a program to generate additional examples, inspired by a method devised by a team of Oxford University researchers in 2016. That means the entire process is automated to some extent: One program automatically spits out the memes, and then another tries to analyze them.

Different languages are challenging for Facebook’s AI team in other ways. For example, the researchers had to find a workaround to make Rosetta work with languages like Arabic, which are read from right to left, the opposite of other languages like English. Rosetta “reads” Arabic backwards, then after processing, Facebook reverses the characters. “This trick works surprisingly well, allowing us to have a unified model that works for both left to right and right to left languages,” the researchers wrote in their blog post.

While automated systems can be extremely useful for content moderation purposes, they’re not always foolproof. For example, WeChat—the most popular social network in China—uses two different algorithms to filter images, which a team of researchers at the Univeristy of Toronto’s Citizen Lab were able to successfully trick. The first, an OCR-based program, filters photos that contain text about prohibited topics, while the other censors images that appear similar to those on a blacklist likely created by the Chinese government.

The researchers were able to easily evade WeChat’s filters by changing an image’s properties, like the coloring or the way it was oriented. While Facebook’s Rosetta is more sophisticated, it likely isn’t perfect either; the system may be tripped up by hard-to-read text, or warped fonts. All image recognition algorithms are also still potentially susceptible to adversarial examples, slightly altered images that look the same to humans but cause an AI to go haywire.

Facebook and other platforms like Twitter, YouTube, and Reddit are under tremendous pressure in multiple countries to police certain kinds of content. On Wednesday, the European Union proposed new legislation that require social media companies to remove terrorist posts within one hour of notification, or else face fines. Rosetta, and other similarly automated tools, are what already help Facebook and other platforms abide by similar laws in places like Germany.

And they’re getting better at their jobs: Two years ago CEO Mark Zuckerberg said that Facebook’s AI systems only proactively caught around half of the content the company took down; people had to flag the rest first. Now, Facebook says that its AI tools detect nearly 100 percent of the spam it takes down, as well as 99.5 percent of terrorist content and 86 percent of graphic violence. Other platforms, like YouTube, have seen similar success using automated content detection systems.

But those promising numbers don’t mean AI systems like Rosetta are a perfect solution, especially when it comes to more nuanced forms of expression. Unlike a restaurant menu, it can be hard to parse the meaning of a meme without knowing the context of where it was posted. That’s why there are whole websites dedicated to explaining them. Memes often depict inside jokes, or are highly specific to a certain online subculture. And AI still isn’t capable of understanding a meme or video in the same way that a person would. For now, Facebook will still need to to rely on human moderators to make decisions about whether a meme should be taken down.


More Great WIRED Stories

AMD: Winter Is Coming

If you walk away with only one thought, it needs to be this – the total addressable market (aka TAM) for servers took a massive leap up. TAM went from $18.5 billion to $22.5 billion. That is a rising tide that will raise all server-related ships, be it AMD (AMD), Nvidia (NVDA), or Intel (INTC) providing the hardware.

EPYC is the Spark, Rome is the Fire, Winter is Coming for Intel

To travel down memory lane, AMD was a much different company before Ryzen was released. The company was struggling to stay alive and selling off various parts. Ryzen changed everything. Let that sink in. Ryzen put AMD back on the road map and gave the company a pulse again. AMD’s server chip EPYC is the spark for AMD. EPYC is starting to ramp.

According to AMD CTO Mark Papermaster, “We expect to be able to end the year at about 5 percent of the market and grow to double digit next year.”
The server followup chip Rome is going to be the fire. Winter is coming for Intel. AMD is going to take its chunk of the server market with time.

Winter Intel

Big Growth in Server TAM

Estimates place the server market at $22.5 billion. According to IDC, the market is broken down as follows:

“Volume server revenue increased by 42.7% to $18.4 billion, while midrange server revenue grew 63.0% to $2.5 billion. High-end systems grew 30.4% to $1.7 billion.” That is quite the TAM for AMD to attack. Assuming AMD takes 4.5% to 5.5% of that market by Q4 with ramping going to 10%-plus by the following Q3… you get the picture.

https://static.seekingalpha.com/uploads/2018/9/12/4206551-15367765571490183.jpg

Looking above, we see some very nice growth in server units sold. Prices are rocketing up. According to Nextplatform.com “our guess is that half of the increase in revenues in Q2 2018 was due to rising component costs.”

This bodes well for AMD since EPYC gives performance at reduced component costs for AMD partners, while providing AMD with very high gross margins. As EPYC ramps, we can expect to see a corresponding rise in margins.

Too Much Demand

Current rumors paint a picture of demand exceeding supply for Intel chips.
Per DRAMeXchange: “TrendForce has adjusted its 2018 global notebook shipments projection downwards due to the worsening shortage of Intel CPUs” and “TrendForce now estimates that this year’s total notebook shipments will drop by 0.2% YoY, and the CPU shortage may further impact the entire memory market as well.” That’s an interesting projection, but if I were a laptop maker such as Dell you can bet I would be considering an alternative CPU supplier such as AMD to replace those chips that Intel is unable to supply.
Supply Gap

Lastly DRAMeXchange leaves us with this paragraph concerning the supply gap:

“The precise reason behind the shortage of Intel CPUs is currently unclear because the problem simultaneously affects the newly arrived CPU product lines and product lines that have been in the market for some time. The affected products include the improved version of 14nm++ and product lines based on the 14nm+ Coffee Lake platform, which has been in mass production for half a year and is one of the solutions for mainstream models in the notebook market. The lack of supply for existing CPU product lines is having a significant impact on the notebook market as a whole. TrendForce estimates that the CPU supply gap in the notebook market has increased from around 5% in August to 5-10% in September. There is a possibility that the supply gap may extend to over 10% in 4Q18, and the shortage is expected to be resolved rather later in 1H19.”

HPE Recommends AMD

Semiaccurate recently published a story that HPE was telling customers to buy AMD EPYC chips since Intel Xeon was MIA due to demand. Why so much demand for Intel? Well, no one ever got fired for buying Intel. AMD is the underdog, but “every dog has its day” and that day gets closer when HPE is recommending clients buy AMDs’ EPYC. Short term, Intel will benefit from the demand but its part of the server pie will shrink given time.

Conclusion

To wrap, the TAM is growing fast and the rising tide bodes well for AMD. AMD has run very fast and we personally consider the stock dangerous, but it’s also dangerous to be on the sidelines missing a spectacular run.

Thus, we are using options to place less capital on the firing line. However, the capital we use has far more risk associated with it. If AMD were to pull back, the options would suffer. Given the time decay things could get rather nasty. The takeaway is that if you want to gamble, gamble smart.

Our Play

While cautious of any fast rise, we do need skin in the game. Currently, we are sitting on our January 2019 $30 calls, February $30 calls, April $30 / $31 calls. We have opened February $35 calls as a very speculative position (in case the run continues).

Do note: These are dangerous positions (due to the nature of options), but in our opinion we prefer this to buying large swaths of common stock. These options should be viewed as simply ideas to explore. Due to the fast nature of options, they should not be viewed as something to mimic (as the data will be stale for the reader). If you require more help, please consult your broker.

Lagniappe
In case you missed it – here’s the interview w/ Dr. Lisa Su.

Disclosure: I am/we are long AMD, NVDA.

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.

Apple's Fall Event: All the New Products

The brand new iPhone Xs (pronounced “tennis,” not “excess”) looks a lot like last year’s iPhone X, with some smart refinements. At 5.8 inches, the Xs is a smallish phone, but it’s all screen—the bezel is barely there. If you want even more screen, there’s also the bigger iPhone Xs Max. Both the Xs and the Xs Max use Face ID, like the iPhone X. They come with dual-lens cameras, 4K video capabilities, and a “smart” HDR feature. Better camera software encourages all kinds of fun stuff, like adjusting depth of field after you take a shot. Sounds cool, looks cooler.

A Warning On Canadian Pot Stocks

Stocks of Canadian cannabis producers and sellers are on a wild run in 2018. A selection of talked about names have doubled or tripled in value the past few months, with others not far behind. Price action like that is bound to pique the interest of investors and traders who may be wondering what has caused the surge in prices, something that is looked at in the first part of this article. Other investors and traders already familiar with the space may be questioning the valuation of major names, which is a second major focus of this article. The final focus of this article is to provide a precautionary tale and some tips for anyone looking to get exposure, long or short.

Chart

TLRY data by YCharts

Figure 1: Performance of four Canadian cannabis producers since mid-July (IPO of TLRY): Cronos Group Inc (CRON), Aphria Inc (OTCQB:APHQF), Canopy Growth Corporation (CGC) and Tilray Inc (TLRY).

Key developments that started the hype

The recent run up in Canadian pot stocks comes off the back of announcements that major beverage makers had either made or were looking to make investments in Canadian pot stocks. However, such investments would likely not materialize were it not for legislative developments and so we might argue that the passing of new laws is what is truly responsible for the run up.

A landmark event for the space occurred on June 19, 2018, when the Canadian senate voted to approve bill C-45 (The Cannabis Act), which received Royal Assent on June 21, effectively legalizing recreational use of marijuana from October 17, 2018. Those over 18 will be able to purchase cannabis products from a provincially/territorially regulated retailer (or from a federally licensed producer), carry and share (with other adults) up to 30 grams, and cultivate up to four plants in their homes. Royal Assent for the bill was actually met with a sell the news reaction by some Canadian pot stocks, which was likely due to the fact that approval of bill C-45 was largely expected and some names had already begun to run up approaching the news. The approval however, did clear the way for a number of deals.

A recent major deal was announced on August 1, when Molson Coors Canada, the Canadian arm of Molson Coors Brewing Company (TAP) notified investors it had entered into an agreement with The Hydropothecary Corporation (HYYDF, TSX: HEXO) to form a joint venture which would develop cannabis-infused beverages. The initial reaction from HYYDF was pretty modest, perhaps because the press release noting the deal didn’t provide a lot of detail on the potential financial benefit to HYYDF. Supposedly some warrants would be issued and purchased, but how much would this bring in for HYYDF was not clear.

In connection with the closing of the transaction, subject to the final approval of the Toronto Stock Exchange, HEXO will issue to Molson Coors Canada warrants to purchase shares of HEXO. – Comments from August 1, 2018, press release from TAP and HYYDF.

The next deal announcement in the Canadian Cannabis space had a much higher impact, perhaps due to clarity on the financial benefit to the cannabis producer involved. On August 15, Constellation Brands (STZ), a Fortune 500 alcohol beverage company, announced it would increase its stake in CGC by acquiring 104.5 million shares at $48.60 CAD (a 51% premium to the close the day prior to the press release). The deal will increase STZ’s holdings in CGC to approximately 38 percent of shares outstanding (assuming certain existing warrants are exercised, the PR suggests this is the case). As part of the deal STZ will also receive additional warrants which, if exercised, would give STZ greater than 50 percent ownership of CGC.

Figure 2: STZ lays out the addressable market in Canada, 15 years from now. Source: STZ investor overview presentation.

The STZ-CGC deal fueled additional speculation: Which beverage giant would strike a deal with which cannabis company next? August 24 saw a report from BNN Bloomberg noting Diageo Plc (DEO) was holding discussions with three or more Canadian cannabis producers. The speculation continued when on August 28, The Globe and Mail published an article noting multiple beverage makers including Anheuser-Busch InBev SA/NV (BUD), Pernod Ricard SA (PDRDF, PDRDY), Heineken Holding NV (OTCQX:HEINY), The Coca-Cola Company (KO) and DEO were making the rounds with cannabis producers. Investors and traders might believe now is the time to go long one or more Canadian pot stocks before one of these beverage makers decides to make a move, but with such a run up already, it makes sense to consider the valuation of some of the key names in the space.

The problem: The valuation

Lets look at the market cap of just the four names shown in Figure 1 and Aurora Cannabis Inc (OTCQX:ACBFF). We will start with CGC. Seeking Alpha’s Julian Lin notes due to shares being issued for STZ to buy from CGC, the number of shares outstanding has increased substantially, something some do not appear to be taking into account, and other analysts are trying to get clarification on.

And then, one more housekeeping and I’m sorry to because it wasn’t clear in the release. So I’m trying to calculate the fully diluted number of shares now… – Andrea Teixeira, JP Morgan.

So let me while Tim digs up the share count. – Bruce Linton, Co-Founder, Chairman & CEO of CGC, August 15, 2018, earnings call.

You know it’s bad when someone has to “dig up” the share count (maybe go easy on issuing so many shares?). Tim [Saunders, the EVP and CFO of CGC] did come up with a number of 268M fully diluted shares outstanding prior to the STZ deal. Still we can go ahead and add 104.5M shares to that for STZ and the additional warrants that were granted (139.7M) to come up with a fully diluted count of 512.2M shares. Now how many of those are outstanding now? Well, I don’t think the 139.7M which could come from the exercise of those warrants are in play just now given their conditions (88.5M are exercisable at $50.40 CAD and 51.3M are exercisable at the volume-weighted average price at the time of exercise). However the warrants and options which led to the 268M count have more favorable terms and so one can’t pretend they represent potential dilution that probably won’t happen, they are in the money (heavily) and need to be included in any market cap calculation. For example as of June 30, 2018, there were 18,969,495 options outstanding as part of an employee stock option plan exerciseable at prices between $0.56 and $40.51. Similarly as of June 30 their were 18,876,901 warrants outstanding with exercise of $12.97 (these are the original STZ-held warrants which were to be exercised to get STZ to 38 percent stake in CGC). Those options and warrants account for most of the 268M fully diluted number noted on the August 15 earnings call and so I’m adding 268M to 104.5M (total 372.5M) for my market cap calculation. At the close of $51.53 on Friday September 7, that yields a market cap for CGC of $19.19B.

TLRY‘s 10-Q notes 93,144,042 shares outstanding as of August 29.

As of August 29, 2018, the registrant had 16,666,667 shares of Class 1 Common Stock… and 76,477,375 shares of Class 2 Common Stock… – Comments from TLRY 10-Q.

Class 1 and Class 2 shares have different voting rights. At Friday’s close of $77.89, TLRY’s market cap was $7.25B.

APHQF notes 232,372,569 shares outstanding in a recent investor presentation, that yields a market cap of $3.6B based on Friday’s close of $15.49.

Table 1: Shares, options and warrants outstanding for APHQF. Source: Recent investor presentation.

Isn’t it great when the number of options grows overnight? Below is the same table based on July 31, rather than August 1. If one wanted it would be possible to use the 238M number which adds in the exerciseable and in the money options and warrants to get a partially diluted market cap like I did for CGC (funny that APHQF refers to this as fully diluted).

Table 2: Shares, options and warrants outstanding for APHQF on July 31. Source: 2018 annual report.

CRON had 177,147,970 shares outstanding on August 14 corresponding to a market cap of $2.12B based on Friday’s close of $11.99.

Table 3: Shares, options and warrants outstanding for CRON. Source: Exhibit 99.2 from August 14, 2018, 6-K filing.

ACBFF noted 564,783,420 shares outstanding on May 7, 2018.

Table 4: Shares, options and warrants outstanding for ACBFF. Source: Q3 FY ’18 results.

However ACBFF acquired MedReleaf Corp shortly following Q3 FY ’18 earnings in an all share deal worth $3.2B. MedReleaf shareholders were to receive 3.575 shares of ACBFF per share of MedReleaf. The exchange ratio implied a price of $29.44 CAD per share of MedReleaf suggesting ~109M shares were being acquired. That calculation agrees with the number of outstanding shares, warrants and options of MedReleaf around the time of the acquisition (Table 5) and suggests ~390M shares of ACBFF were used to make the acquisition.

Table 5: Shares options and warrants outstanding for MedReleaf. Source: MD&A dated June 18, 2018.

So go ahead and add that ~390M used to acquire MedReleaf to the 564.8M shares outstanding on May 8, that gets us to ~955M shares outstanding, which agrees with Bloomberg’s 951.41 M (I’d say the 109M is a little high and because of the 3.575-to-1, being off by 1M on MedReleaf means being off by 3.575M on ACBFF). I’ll use the Bloomberg number to be conservative, but know that many of the options and warrants listed in table 4 may have been exercised by the time we get the next update from ACBFF (likely next month) and so a shares outstanding count of over 960M should not be a surprise. Thus at Friday’s close of $6.17 ACBFF had a market cap of $5.87B.

Now if we add up the market cap of just these five names, we get to $38B. Above in Figure 2, STZ notes Canadian sales estimates of $11B. So these five pot stocks together trade at 3.5 x Canadian sales estimates (sounds good)… sales estimates for around 2032 that is (oh)… based on sales at the retail level (not good). The actual Canadian supplier revenue pool is estimated at $7B and that yields a multiple of 5.4 (again, 15 years from now in 2032). We can also look at sales estimates of $4.9B in 2022 for Canada from another source and that would have these five companies together trading at a multiple of 7.8 x 2022 sales. That may sound a little more encouraging but there are not just five Canadian pot stocks and the share count of these companies seems to grow overnight (meaning the market cap will grow unless the price comes down).

Investors may have read that Canada has restrictive conditions with regards to obtaining a licence to produce and supply cannabis products. There are however, already 116 licensed producers of cannabis for medical purposes in Canada, up from just six at the end of 2013. For more color, Nova Scotia Liquor Corporation placed purchase orders with 14 cannabis vendors in August, so there is already plenty of competition. If we were to add up the market cap of those 14 companies, the valuation would look even more stretched.

Justifying current valuations: Wishful thinking required

To justify current valuations, Canadian cannabis producers would need to tap into the worldwide market to quite an extent. However, where ever cannabis is legalized, an industry seems to pop up around it, we saw this already in state after state in the USA. On the other hand, in Uruguay there are actually only a two licensed producers. Prime opportunity for Canadian cannabis producers to capture, you suggest? Not really, the government has set the price at $2.50 a gram (and the population of Uruguay is about 3.5M making it a much smaller market). Compare that to estimated Canadian sale prices of closer to $10 CAD and the profit margins in Uruguay seem barely worth it (you’d have to ship the product a bit further too).

When you can produce something domestically, do you really need to import it? Is Canada really the cheapest most efficient place in the world to grow Cannabis? Or does growing cannabis require a whole lot of lighting, heating (especially in colder climates), pumps and fans? Consider the cost of electricity in Canada compared to elsewhere in the world. Does Canada pay workers the lowest wages in the world, making it a cheaper place to produce cannabis? Or is the rising minimum wage in Canada actually threatening job numbers there?

Canadian cannabis producers do have or are setting up warehouses elsewhere, but as countries legalize cannabis, legislation to make sure the industry creates money for the country/state concerned and not some other nation (Canada) doesn’t seem unlikely. I just don’t see why a lot of the world’s cannabis won’t end up being grown domestically or produced in the developing world at lower costs.

The pot stock bubble has happened before

In late 2012, 2013 and 2014 pot stocks, mostly US based saw similarly remarkable price action to what is being seen now with Canadian pot stocks. Washington state legalized possession of up to one ounce of marijuana in late 2012 for those 21 or older, Colorado soon followed suit. Some of the pot stocks caught up in the hype were legitimate names (that doesn’t mean their ridiculous valuations persisted) and others were a little more scandalous.

Figure 3: Screen capture of 2014 warning about pot stocks. Highlights by Biotech Beast. Source: SEC website.

So what happened to those names? Well Fusion Pharm Inc (OTC:FSPM) is down from highs over $9 in 2014 to $0.02. Cannabusiness Group Inc (OTC:CBGI) is down over 90 percent from 2014 highs as is Growlife Inc (OTCQB:PHOT). Advanced Cannabis Solutions became General Cannabis Corp (OTCQX:CANN) but the name change hasn’t stopped it trading down 90 percent from 2014 highs. Petrotech Oil and Gas Inc (PTOG, which at the height of the US pot stock bubble decided to enter the Marijuana space) is down over 99 percent. Another name being pumped at the time was Medbox Inc (formerly MDBX), on January 2016, Medbox Inc (MDBX) changed its name to Notis Global Inc (OTCPK:NGBL), shares are currently trading at about $0.0001 down from highs around $100 in January 2013. Solid performance then. MDBX appears to have been an outright fraud for those interested, of course the SEC settled.

Now if the valuation of Canadian pot stocks doesn’t deter you, nor the fact that many US pot stocks blew up, I have a few tips which will mostly be useful for newer traders and investors.

1. These are likely not buy and forget stocks

Don’t put pot stocks in your retirement account. These are not blue chip names with reliable dividends. Be particularly wary of some of the small names in the space, the penny pot stocks and even those in the $100M-$1B range. These smaller players may fail to compete with the larger players in the space who have better economies of scale and greater access to funding (they can issue stock a little easier and are more likely to trick a beverage company into investing in them).

If you are thinking about buying and holding a selection of speculative names, consider first how things went for those who bought and held the US pot stocks in 2013/2014. An investor who bought $10,000 of MDBX (now NGBL) at $50 would have… 2 cents left (based on the close of $0.0001 recently). Yep, $0.02. You can’t even get a packet of ramen for $0.02. Good luck putting food on the table if you buy and hold penny pot stocks. The SEC is also seeking to warn investors again about the risk of pot stocks, like it did in 2014.

Figure 4: Screen capture of 2018 warning about pot stocks. Source: SEC website.

2. Technicals may help you exploit momentum

While I don’t view most pot stocks as the most obvious buy and hold opportunity, they do represent a compelling short term trade. I notice with some pot stocks the formation of a potential high and tight flag (HTF).

Image result for high and tight flag

Figure 5: High and tight flag representation. There are minor differences in the definition of this pattern from one source to the next. Source: Breakoutwatch.com.

Renowned chart expert Thomas Bulkowski notes that HTF’s are the best performing chart pattern in bear and bull markets.

Table 6: Bulkowski’s notes on high and tight flags. Source: Thepatternsite.

I note a HTF formed in CannTrust Holding Inc (OTC:CNTTF) shortly following commencement of trading and an HTF could be setting up again. Others have noted HTF’s seen in TLRY and also CGC.

3. Don’t hold any unhedged short overnight

Pot stocks can gap up between sessions leading to large losses for those short. Any trader looking to short these stocks outside of intraday trading should seriously consider hedging their position with options. Not all of these stocks are optionable so that may not be possible in some cases. In the absence of using options, position size has to be considered even more carefully than one normally would. A double overnight is not out of the question and so 1000 shares held short of a $20 stock which pops to $40 would result in a $20,000 loss overnight. In my opinion, consideration of position size alone isn’t enough when dealing with pot stocks, and so without options I wouldn’t be shorting them outside of intraday trading. You don’t want to end up asking for cash via a gofundme campaign because your short blew up your account.

Figure 6: In late 2015 a trader shorted KaloBios Pharmaceuticals and blew up his account due to an unexpected piece of positive news, Martin Shkreli acquired shares and saved the company which was running out of cash. Source: MarketWatch article.

Summary

  • You need to assume Canada will become the major player in cannabis production for the whole world to justify current valuations, but does that really make sense?
  • You don’t want to buy and hold pot stocks long term. Take any money you make and get out.
  • Look for a long or a short with help from technical analysis.
  • Don’t short overnight without some sort of insurance.

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.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Internet group backs 'national' data privacy approach

WASHINGTON (Reuters) – A group representing major internet companies including Facebook Inc (FB.O), Amazon.com Inc (AMZN.O) and Alphabet Inc (GOOGL.O) said on Tuesday it backed modernizing U.S. data privacy rules but wants a national approach that would preempt California’s new regulations that take effect in 2020.

People look at data on their mobiles as background with internet wire cables on switch hub is projected in this picture illustration taken May 30, 2018. REUTERS/Kacper Pempel/Illustration

The Internet Association, a group representing more than 40 major internet and technology firms including Netflix Inc (NFLX.O), Microsoft Corp (MSFT.O) and Twitter Inc (TWTR.N), said “internet companies support an economy-wide, national approach to regulation that protects the privacy of all Americans.”

The group said it backed principles that would ensure consumers should have “meaningful controls over how personal information they provide” is used and should be able to know who it is being shared with.

Consumers should also be able to seek deletion of data or request corrections or take personal information to another company that provides similar services and have reasonable access to the personal information they provide, it said.

The group also told policymakers they should give companies flexibility in notifying individuals, set a “performance standard” on privacy and data security protections that avoids a prescriptive approach and set national data breach notification rules.

Michael Beckerman, president and chief executive officer of the Internet Association, said in an interview the proposals were “very forward looking and very aggressive” and would push to ensure the new rules apply “economy wide.”

He said the group “would be very active working with both the administration and Congress on putting pen to paper.”

The Internet Association wants new rules to be technology and sector neutral, which would mean any new privacy protections would cover anything from how grocery stores or other physical retailers use consumer data to car rental, airlines or credit card firms as well as internet service providers.

The White House said in July it was working to develop consumer data privacy policies and officials had been meeting major firms as it looked to eventually seeing the policies enshrined in legislation.

Data privacy has become an increasingly important issue, fueled by massive breaches that have compromised the personal information of millions of U.S. internet and social media users.

California Governor Jerry Brown signed data privacy legislation in June aimed at giving consumers more control over how companies collect and manage their personal information, although it was not as stringent as Europe’s new rules.

Beckerman said “we definitely want to get this in place prior to California because California got it wrong.”

The U.S. Chamber of Commerce also unveiled privacy principles last week that aim to reverse California’s new rules.

Under the law, large companies would be required from 2020 to let consumers view the data they have collected on them, request deletion of data, and opt out of having the data sold to third parties.

Many privacy advocates have called for robust new U.S. data protections.

Laura Moy, deputy director at Georgetown Law’s

Center on Privacy & Technology, told Congress in July that lawmakers should not overturn new state privacy rules and federal agencies “must be given more powerful regulatory tools and stronger enforcement authority” and more resources.

The European Union General Data Protection Regulation took effect in May, replacing the bloc’s patchwork of rules dating back to 1995.

Reporting by David Shepardson; Editing by Paul Tait