Tuesday, July 25, 2017

Don't Put Much Faith Into The Steel Sector's Trump Trade. Short AK Steel ($AKS) On Today's Gains @ $7/share; +/- .20

Tuesday, July 25, Morning Global Market Roundup: Dollar Recovers From 13-Month Low On Strong PMI Readings, Asia Stocks Tread Water

By Nichola Saminather
July 25, 2017

The dollar held above a 13-month low on Tuesday after readings on U.S. factory and services activity beat expectations ahead of the start of a Federal Reserve meeting later in the day, but Asian stocks were subdued with few catalysts to drive them.

The dollar and U.S. Treasury yields rose on expectations the Fed will signal its readiness to begin reducing its bond portfolio at its September meeting.

The dollar index .DXY, which tracks the greenback against a basket of six major peers, was steady at 93.951 on Tuesday, up from Monday's low of 93.823, its lowest level since June 2016.

The dollar was little changed at 111.065 yen JPY=D4 on Tuesday, after touching a six-week low on Monday.

The 10-year U.S. Treasury yield US10YT=RR was at 2.2499 percent on Tuesday, not far from Monday's close of 2.253 percent and above Friday's three-week low of 2.225 percent.

On Monday, Markit's U.S. manufacturing and services flash surveys both beat expectations, while euro zone business growth at the start of the second half of the year slowed.

The euro EUR=EBS, which posted losses on Monday after earlier hitting a near two-year high, inched up 0.1 percent to$1.1653.

"As Europe's business surveys continue to outperform those of the U.S., last night was a minor victory at best for the greenback," said Matt Simpson, senior market analyst at ThinkMarkets in Melbourne. "The expectation of a slightly dovish Fed and a White House seemingly in turmoil is likely to weigh further on the greenback for the foreseeable future."

Jared Kushner, President Donald Trump's son-in-law and senior advisor, told Senate investigators on Monday he had met with Russian officials four times last year but said he did not collude with Moscow to influence the 2016 U.S. election.

The ongoing probes into Russia's meddling in the election by congressional panels and a Justice Department special counsel, as well as weak U.S. economic data and reduced inflation expectations, have weighed on the dollar for much of the month.

In stocks, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up less than 0.1 percent, with some markets looking for fresh impetus after hitting multi-year highs in recent weeks and few drivers in the region to guide them.

"Limited moves within global markets may leave Asian markets to chart their own course in the day," said Jingyi Pan, market strategist at IG in Singapore. "It would be no surprise to see markets holding once again for key items into the latter half of the week."

Australian stocks jumped 0.8 percent, clawing back all of Monday's 0.6 percent loss. But Japan's Nikkei .N225 slipped 0.1 percent, and South Korea's KOSPI .KS11 retreated 0.2 percent.

Chinese shares also fell, with the bluechip CSI 300 index .CSI300 down 0.3 percent and the Shanghai Composite .SSEC dropping 0.1 percent. Hong Kong's Hang Seng slightly advanced.

Overnight on Wall Street, the Nasdaq .IXIC set a record high as investors bet on solid earnings from technology companies. But the S&P 500 .SPX and the Dow .DJI closed in negative territory, following European stocks , which lost 0.2 percent.

In commodities, oil prices extended their recovery on a pledge by leading OPEC producer Saudi Arabia to cut exports in August to help reduce the global crude glut. Halliburton Co's (HAL.N) executive chairman also said the U.S. shale drilling boom would probably ease next year.

U.S. crude CLc1 jumped 0.6 percent to $46.63 a barrel, after closing up 1.25 percent on Monday.

Global benchmark Brent LCOc1 added 0.6 percent to $48.90, extending Monday's 1.1 percent rise.

The marginally stronger dollar kept gold's gains in check XAU=, with the precious metal pulling back slightly to $1,254.96 an ounce.

Article Link To Reuters:

Oil Extends Gains As Saudi Pledges Export Curbs

By Osamu Tsukimori
July 25, 2017

Oil prices extended gains on Tuesday after Saudi Arabia pledged to curb exports from next month and OPEC called on several members to boost compliance with output cuts to help rein in oversupply and tackle flagging prices.

Gains were also supported by a warning from Halliburton's executive chairman that the growth in North America's rig count was "showing signs of plateauing," a possible threat to U.S. shale oil production.

Global benchmark Brent crude for September delivery was up 28 cents at $48.88 a barrel after settling up 1.1 percent.

U.S. West Texas Intermediate (WTI) futures were up 28 cents at $46.62.

In a meeting in St. Petersburg on Monday, the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers discussed extending their deal to cut output by 1.8 million barrels per day (bpd) beyond March 2018 if necessary.

Saudi Energy Minister Khalid al-Falih added his country would limit its crude exports to 6.6 million bpd in August, almost 1 million bpd below levels of a year ago.

Nigeria voluntarily agreed to join the deal by capping or cutting its output from 1.8 million bpd, once it stabilizes at that level. Nigeria, which has been producing 1.7 million bpd recently, had been exempt from the output cuts.

OPEC said stocks held by industrial nations had fallen by 90 million barrels over January to June, but were still 250 million barrels above the five-year average, which is the target for OPEC and non-OPEC.

"Despite the goals for rebalancing, the market is still not sure that inventories would fall precipitously to achieve their target," said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting in Tokyo.

Russian Energy Minister Alexander Novak said an additional 200,000 bpd of oil could be removed from the market if compliance to OPEC-led deal was 100 percent.

"In our view ... these meetings were aimed at saving face and diverting the market's attention away from Iraq's poor compliance, shale's resilience, and Libya's and Nigeria's markedly higher output," Britain's Barclays bank said.

China's crude imports will exceed 400 million tonnes (8 million bpd) this year and likely grow by double digits next year, a Sinopec Group executive said.

U.S. commercial crude oil inventories likely fell by 3 million barrels last week, a preliminary Reuters poll showed ahead of a data release from the American Petroleum Institute.

Article Link To Reuters:

Europe’s Next Crisis: The Balkans

Russia and Turkey stir up trouble, while the EU focuses on its own problems first.

By Walter Russell Mead
The Wall Street Journal
July 25, 2017

At a recent closed think-tank meeting, a well-informed German official was asked what problem in Europe caused him the most worry. His answer came without hesitation: the Western Balkans, where a new crisis is brewing as Turkey and Russia stir the pot.

In his worst-case scenario, Russia and Turkey would encourage their proxies in the Balkans, Serbia and Albania, to help them redraw the region’s borders. The Serbian government, with Russian support, could annex large portions of Bosnia populated by ethnic Serbs. Turkish support could help Albania pull off a similar maneuver, not only in heavily Albanian Kosovo but also in Macedonia, where much of the large Albanian minority would like to reunite with the motherland.

This course of events is unlikely. Since some of the territory claimed by Greater Albania partisans is in Serbia, it would be difficult for the two countries to agree on a new map. But it’s not an impossible outcome, even if the idea more likely would inspire a James Bond villain than a foreign minister. And increasing numbers of wannabe Bond villains seem to be popping up in world politics these days.

There is a grave reality underlying the German’s concerns. The Balkans are unraveling, and the West now must worry about more than Russian meddling. Turkey is becoming more of a NINO (NATO in Name Only) power, and despite deep Turkish suspicions of Russia, President Recep Tayyip Erdogan is cooperating more closely with President Vladimir Putin.

Turkey and Russia have been brought together by their opposition to Germany and the European Union. Russians don’t just hate NATO; they see the EU as a barrier against Russia’s historical great-power role in European affairs. Turkey has also turned against the EU and is looking for leverage against Germany and its fellow members. For Russia and Turkey, the ability to cause Europe trouble in the Balkans with relatively little risk and cost is too good to pass up.

The prospect of EU membership for countries like Serbia, Macedonia, Montenegro, Kosovo and Bosnia has done more than anything to keep the fragile peace in the Western Balkans. Every Balkan country would rather be part of the EU than be allied to either Russia or Turkey.

But hopes of near-term EU membership are fading. Europe is losing Britain and has had a hard time managing relations with members like Hungary and Poland. The 28—soon to be 27—EU members have little desire to take in five obstreperous new Balkan states that would make the union even more ungovernable, and would expect financial aid at a time when the post-Brexit EU budget will already be stretched.

Serbs and Albanians are both signaling that if the West walks away, they will have to look east, and that will mean shifting to a nationalist agenda with Russian and Turkish help.

For the EU, a new round of Balkan chaos would be a disaster: refugees, crime, radicalization among Balkan Muslims, greater opportunities for hostile powers to gain influence at EU expense. But the EU doesn’t think it can manage the Balkans on its own. The U.S. will have to be part of the solution, Germans say.

Will the U.S. play ball? Engaging in distant Balkan quarrels to make Germany’s life easier isn’t exactly Donald Trump’s idea of smart foreign policy. Even as Atlanticist a president as Bill Clinton struggled for two years to keep the U.S. out of the post-Yugoslav wars. Mr. Trump may be even more skeptical of intervention and treat the possibility of a new round of Balkan wars with the chilly aloofness that Barack Obama displayed in Syria. This would be a grave mistake. Although the quarrels in the Balkans are trivial compared with larger problems elsewhere, what happens in the Balkans doesn’t always stay in the Balkans, and NATO as well as the EU could be shaken to the core by another round of Balkan bloodletting. The crisis has the potential to redefine U.S.-EU relations for decades.

Europeans argue that relatively small, short-term American investments—active diplomacy and building up U.S. forces in Kosovo—could go a long way. But we have a president who may not find that argument convincing. Mr. Trump’s core foreign-policy conviction seems to be that the U.S. has let its allies enjoy a decadeslong free ride. Europeans who worry about Balkan peace need to think about how they can persuade a skeptical White House to engage. The old appeals—to NATO solidarity, defense of freedom, fear of Russia—may not be enough. Mr. Trump thinks in terms of deals, and Berlin needs to think about how to bring him to the table.

Article Link To The WSJ:

America's Biggest Oil Port Wants To Be A Two-Way Street

LOOP may be able to load crude onto supertankers by early 2018; Cost to ship U.S. crude to Asia seen lower from LOOP.

By Hailey Waller and Sheela Tobben
July 25, 2017

The biggest U.S. oil-import hub wants to grab a piece of surging North American crude exports.

Louisiana Offshore Oil Port, the only terminal along the U.S. Gulf Coast able to handle a fully laden supertanker, is gauging interest from shippers in sending crude overseas on the world’s biggest ships by early next year. The port would continue to take in foreign oil, LOOP LLC said in an emailed statement Monday.

Ports are competing to fill the needs of domestic oil producers looking for outlets for their growing supply. At the same time, the boom from U.S. shale fields and Canadian oil-sands mines has reduced refiners’ need for imported oil. LOOP’s ability to handle tankers capable of carrying 2 million barrels in their holds would reduce shipping costs for companies looking to send crude to refiners in Asia.

“LOOP is the most obvious place for U.S. crude exports since as a deepwater port it makes it more manageable to load up a large ship such as a VLCC,” Sandy Fielden, director of commodities and energy research at Morningstar Inc., said by phone from Austin, Texas. “It makes huge sense from a logistical perspective as it will allow for more efficient cargo shipments.”

Currently, shippers have to load oil onto smaller tankers in ports such as Houston or Corpus Christi, Texas, that then transfer their cargoes onto Very Large Crude Carriers sitting offshore. That adds cost and time to the shipments. While Corpus Christi received its first VLCC at the end of May, the port’s channel isn’t deep enough for a ship that size to load a full cargo.

Nigerian and Saudi Arabian oil will continue being unloaded from massive supertankers at LOOP’s marine terminal 17 miles offshore and pumped into storage caverns one-third of a mile under its Clovelly Hub in Louisiana, as it has for over 30 years. But LOOP is turning some of its operations around as exports surge after restrictions were lifted at the end of 2015.

“Today, customers are seeking the optionality to safely and efficiently load or offload, which is a natural request for a port," LOOP President Tom Shaw said in the statement. "This service offers our customers the scalability to fully load a VLCC."

LOOP will be competing with Corpus Christi, which in 2017 became the top oil-export hub for the U.S. Canadian producers are looking for more options for selling their crude to higher-priced markets around the world, lessening their dependence on U.S. refiners.

In recent years, shipping oil overseas has become more economical, thanks to low-cost drilling methods unlocking vast deposits in West Texas and other areas. U.S. production reached 9.6 million barrels a day in April 2015, according to the Energy Information Administration.

Rising Output

Daily U.S. output is hovering at more than 9 million barrels, much of which is lighter than what local refineries are configured to process. The excess is heading overseas, boosting American exports above those from OPEC members Qatar, Libya, Ecuador and Gabon. VLCC shipments to Asia are expected to jump 52-fold this year, shipping analysts at McQuilling Partners Inc. said in a note. That makes a port able to load the huge ships attractive to traders.

The additional capacity at LOOP could add another 300,000 barrels a day of U.S. exports, according to Fielden.

"Professional exporters will be drawn to this as they will want to export more regularly."

Article Link To Bloomberg:

Prospect Of Trump Tariff Casts Pall Over U.S. Solar Industry

By Nichola Groom
July 25, 2017

U.S. solar companies are snapping up cheap imported solar panels ahead of a trade decision by the Trump administration that could drive up costs and cloud the fortunes of one of the economy's brightest stars.

Domestic consumers and businesses have been embracing solar energy at a furious pace - thanks to a big assist from China. Low-cost photovoltaic cells and panels made in China and other Asian countries have helped drive down costs by around 70% since 2010, enabling more Americans to go solar.

Installations in the United States last year hit a record. Jobs are mushrooming too. The domestic industry now employs more than 260,000 people, according to The Solar Foundation, most of them construction workers hammering panels on rooftops and erecting utility-scale solar plants in the nation's blistering deserts.

But signs of a chill are already visible as the industry waits to see how President Donald Trump responds to a recent trade complaint lodged by a Georgia manufacturer named Suniva. The company has asked the administration effectively to double the price of imported solar panels so that U.S. factories can compete. About 95% of cells and panels sold in the U.S. last year were made abroad, with most coming from China, Malaysia and the Philippines, according to SPV Market Research.

Trump has wide latitude to levy tariffs to protect domestic firms. His actions could determine whether sun-powered electricity can compete with fossil fuels to light the nation's homes and businesses.

The White House would not comment on the solar trade case. But the administration has vowed to protect steelmakers and other U.S. manufacturers by penalizing "unfair" imports.

That has the solar industry bracing for the worst. Panic buying has sent spot prices for solar panels up as much as 20 percent in recent weeks as installers rush to lock up supplies ahead of potential tariffs.

Skittish U.S. energy customers are putting some solar projects on hold. Manufacturers are eyeing other markets to develop. And some investors are running for cover. Funding for large U.S. solar deals fell to $1.4 billion in the second quarter, down from $3.2 billion in the first quarter and $1.7 billion a year earlier, primarily due to concerns about the trade case, according to research firm Mercom Capital Group.

Developers of solar farms that provide utilities and big companies with energy are particularly vulnerable; panels account for as much as half of the cost of their projects.

A steep rise in panel prices "could be huge and disastrous for large-scale solar," said Tom Werner, chief executive of San Jose-based SunPower Corp (SPWR.O), a top U.S. solar company that is majority owned by France's Total (TOTF.PA). "Developers are alarmed and planning."

Solar firms that cater to homeowners are nervous too. A spike in panel prices could slow residential installations and all the jobs that come with them.

(For a look at the booming U.S. solar sector, see tmsnrt.rs/2ttRRLG)

Ed Fenster, chairman of San Francisco-based Sunrun (RUN.O), said moves by Trump to punish foreign manufacturers could harm American blue collar workers he has vowed to help. The solar industry employs more than five times as many workers as the coal mining industry that Trump has championed.

"A solar-panel tax imperils what our country needs most: well-paying jobs that can't be exported or automated," Fenster said.

Seeking Relief

The solar spat is just the latest example of global trade that has been hard on U.S. factories but delivered huge cost savings for consumers.

The United States invented photovoltaic technology and accounted for more than a quarter of global solar manufacturing as recently as 2001. But its share has dropped to less than 2 percent due mainly to China, now the world's top producer.

Competitors have long complained that Chinese companies use government subsidies and illegal dumping to capture market share. The United States in 2012 slapped duties averaging around 40 percent on firms from China, and in 2014 imposed average duties of about 20 percent on producers from Taiwan, according to GTM Research.

Those levies are still in effect. But Suniva, which filed for bankruptcy protection in April, is looking for more. Less than two weeks after its Chapter 11 filing, it lodged a rare form of trade complaint with the U.S. International Trade Commission (ITC).

In its petition, Suniva said previous tariffs weren't working because China and Taiwan were just shifting production to other low-wage countries to avoid the duties.

It asked the government to establish a minimum price of 78 cents a watt on panels produced anywhere outside the U.S. to keep companies from circumventing the penalties. That's more than double the average of 35 cents a watt that prevailed before the recent price run-up.

Ironically, Suniva since 2015 has been majority owned by a Chinese firm. In May, SolarWorld Americas Inc., the U.S. division of Germany's SolarWorld AG (SWVKk.DE), joined Suniva as a co-petitioner on the case.

Suniva is looking to give American producers "the opportunity to succeed," the firm's attorney Christian Hudson told Reuters in an emailed statement.

"If U.S.-based solar manufacturing disappears, then developers and installers will ultimately face greater volatility, as the manufacturing industry will ultimately come from one sector of the world," Hudson wrote.

The ITC has said it will decide by September 22 whether imports have harmed domestic producers. If it finds serious injury, the commission by November 13 will recommend remedies to the president, who is free to implement ITC's advice or do something different.

What Trump might do is anyone's guess. He has been largely dismissive of renewable energy until recently, when he suggested putting solar panels on his proposed border wall with Mexico.

China is all but certain to retaliate if he takes action. It responded to the 2012 tariffs by imposing its own duties on U.S.-made polysilicon, the raw material used in solar cells.

Bracing For The Worst

Solar players are already changing their business practices.

Korea-based Hanwha Q CELLS Co Ltd (HQCL.O) has inserted a clause into its contracts allowing the panel maker to cancel or suspend U.S. shipments if Trump imposes new trade remedies.

SunPower, which manufactures panels in the United States and the Philippines and is also a major U.S. project developer, would "without question" look abroad for more business if the U.S. industry is hobbled by tariffs, Werner, its CEO, said.

Southern Current LLC, a South Carolina-based solar company that builds utility-scale and residential projects, has been purchasing modules and warehousing them for future use. Normally the company waits until a deal is financed, according to Bret Sowers, vice president of development and strategy.

"We are putting money at risk to buy panels because we are worried that we won't be able to get them," he said.

In Texas, utility Austin Energy warned that one of its solar power plants could be delayed if tariffs are imposed, it said in an emailed statement.

St. Louis-based McCarthy Building Companies, which constructs large solar farms, recently had a project shelved due to all the uncertainty, said Scott Canada, senior vice president of renewable energy.

But at least one company is benefiting: Tempe, Arizona-based First Solar Inc (FSLR.O).

First Solar's panels are made from cadmium telluride, not the crystalline silicon that dominates the market and is the target of the trade case. The company's shares have gained more than 50 percent since Suniva filed its petition.

First Solar declined to comment, saying it was in a "quiet period" ahead of releasing its quarterly results on July 27.

Article Link To Reuters:

The West’s Decadent Foreign Policy

By Chris Patten
Project Syndicate
July 25, 2017

Nowadays, the West can be described as decadent. That does not mean simply that we are addicted to “bread and circuses,” from welfare programs in Europe (which we can barely afford) to the Super Bowl in the United States. It means also that we are increasingly reluctant to allow our own vision of civil liberties and human rights to shape our foreign policies, owing to the potential commercial costs.

Consider the case of the Chinese dissident and Nobel Peace Prize laureate Liu Xiaobo, who recently died while serving an 11-year prison sentence for calling for democracy in China. The Chinese authorities refused Liu’s request, made just weeks before his death, to seek treatment abroad for his aggressive cancer, and his wife remains under house arrest.

China’s treatment of dissidents like Liu is nothing short of savage. Yet Western leaders have offered only a few carefully phrased diplomatic statements criticizing it.

I can only wonder how many Western leaders in recent years have raised Liu’s case with their Chinese counterparts behind closed doors. Opportunities surely abounded, including at this summer’s G20 meeting, when Liu was on his deathbed.

But it seems unlikely that Western leaders confronted Chinese President Xi Jinping on the matter. After all, when Liu was awarded the Nobel Prize in 2010, and an infuriated China attempted to ostracize Norway, the West did not express outrage or display real solidarity with a NATO ally.

China’s treatment of Hong Kong has gone similarly uncontested by Western leaders. China seems intent on violating its obligations, established in the “joint declaration” signed with the United Kingdom, to preserve the city’s way of life and the rule of law until 2047. Already, it has threatened the independence of the judiciary, the autonomy of universities, and freedom of the press. Yet there has been little pushback from the West, including the UK.

Why are Western countries so reluctant to criticize China’s behavior more loudly and consistently? The answer, it seems, is money.

Greece, which proudly claims to be the cradle of democracy, has leaders who largely grew up opposing an authoritarian military government. Yet its cash-strapped government recently blocked the European Union from criticizing China’s human-rights record at the United Nations, because China provides critical investment, particularly from the China Ocean Shipping Company, known as COSCO, which in August 2016 acquired a majority stake in the port of Piraeus. Greek Prime Minister Alexis Tsipras – a supposedly radical leftist who, paying homage to Che Guevara, named his son Ernesto – has become a Chinese patsy.

The West’s moral bankruptcy is on display closer to home, too. The EU continues to hold back from condemning the thuggery of Hungarian Prime Minister Viktor Orbán, who has proudly boasted of his belief in “illiberal democracy” (an oxymoron if ever there was one). Under Orbán’s leadership, breaches of human-rights conventions in the treatment of refugees have been accompanied by a crackdown on civil society, particularly on organizations that receive money from outside the country.

One notable target of repression is Central European University, a bastion of open debate, teaching, and research in Hungary, which is funded by George Soros. Orbán has even gone so far as to resurrect some of the nastiest anti-Semitic images of 1930s Hungary (an ally of Nazi Germany) to demonize Soros. Yet Orbán himself attended the University of Oxford (where I am Chancellor) on a Soros-funded scholarship, and studied there under the great liberal thinker Isaiah Berlin.

Even as Orbán’s Hungary rejects the obligations of EU membership, it receives more than €5.5 billion ($6.4 billion) from the EU each year, while contributing less than €1 billion to the common budget. Why should European citizens pay so much to a government that thumbs its nose at them and compares the EU to the Soviet Union? At the very least, the EU should apply the provisions of the Lisbon Treaty that allow it to suspend some of the rights of a country that is breaking its rules and showing contempt for its standards and values.

The behavior of Poland’s Law and Justice (PiS) government – which shows scant concern for either law or justice – raises similar issues. The government is working to overhaul the constitution, in order to thwart democratic checks and balances. It plainly wants judges to do what politicians tell them, and it does not want the media to be able to say much about it. I dare say that China’s rulers would have no difficulty in understanding the PiS’s approach.

Turkey, of course, is not a member of the EU, nor will it ever become one if it continues along the road of dictatorial repression taken by President Recep Tayyip Erdoğan, no small fan of Russia’s Vladimir Putin. But, judging by the EU’s growing tolerance of illiberalism, some EU leaders may well be prepared to contemplate a closer relationship with Erdoğan’s Turkey.

Such foreign-policy decadence threatens to undermine the EU’s claim to be a community of values, not just a glorified customs union. As we know from the 1920s and 1930s, as decadence breeds more decadence, the world becomes an increasingly dangerous and unstable place. It is time for Europe – to be joined by the United States after President Donald Trump leaves office – to find our moral compass once again.

Article Link To Project Syndicate:

Malice On The Mount: The Hate Behind The Latest Mideast Crisis

By Benny Avni
The New York Post
July 25, 2017

Being right isn’t always enough. And, as Israel is learning the hard way amid continued violence in Jerusalem and beyond, sometimes it isn’t even close.

Here, for those too busy with Washington scandals, is a recap of what officials in the Washington and the Middle East will try to prevent from turning into a holy war:
-- Last Thursday, three Israeli Arabs shot and killed two Jerusalem cops. The assailants then retreated to Islam’s third holiest site, the al Aqsa mosque compound. Israel later released evidence the killers, and perhaps others, used the compound to hide weapons.

--  After briefly shutting the compound, Israel installed metal detectors at the entrance. Palestinian leaders cried foul, urging the masses to shun the “defiled” mosque and flood the streets instead in “peaceful” demonstrations. Hamas called for active “resistance.” In the ensuing violent clashes with police, three Palestinians were killed, hundreds injured.
-- On Friday night, a Palestinian man entered a home in Halamish, a West Bank settlement, gruesomely stabbing to death three members of the Solomon family as they sat at their Sabbath dinner table.

--  Over the weekend, anti-Israel demonstrations spread across the Muslim world, from Morocco to Malaysia. A synagogue in Turkey was besieged. Israeli embassies were under lockdown.
-- In Amman, Jordan, a local carpenter working near the Israeli Embassy tried to stab a security guard Sunday. The guard shot and killed his assailant, who quickly became a local hero — a martyr “for al Aqsa.” After holding the embassy staff and demanding the guard stand trial in Amman (in violation of international conventions guaranteeing immunity), Amb. Einat Shlein and her entire staff arrived in Israel Monday evening.

The whole thing sounds crazy. Are they really going to start World War III over metal detectors?

Yes, it’s a holy site. But so is Mecca, which has metal detectors. And the Vatican. And many buildings in Manhattan and around the United States.

Yet on Monday the UN Security Council convened an “emergency” session on this new “threat to international peace and security” — and did so behind the safety of UN metal detectors.

This isn’t about metal detectors.

For the longest time, Palestinian Authority President Mahmoud Abbas has utilized al Aqsa to manufacture Palestinian and Muslim rage. Cynically whipping up religious rage has always worked in a pinch for the man who has trouble holding the attention of the “Arab street.” Indeed, Abbas has never acknowledged Jewish ties to the Western Wall — or any place in Jerusalem, for that matter.

This time, Abbas was so outraged he announced the Palestinian Authority would be cutting all ties with Israel, including security cooperation. (Spoiler: It’s an empty threat. That cooperation keeps him in power, and alive.)

Given all that, is it really reasonable to expect Israeli leaders to anticipate and acquiesce to bogus complaints at the risk of Israel’s own security?

Well, in part.

Prime Minister Benjamin Netanyahu quickly approved the metal detectors on recommendation from his police force. He brushed off warnings from other security quarters — his own intelligence officials and army brass — who warned that visible detectors would ignite more outrage than was worth it for the amount of security the magnetometers provide.

More important, Bibi acted unilaterally, failing to coordinate with his Palestinian and Jordanian counterparts. Jordan, after all, manages the mosques as result of an arrangement dating back 50 years, and which Bibi swears to keep.

Remember: Israel is a democratic Jewish anomaly in a despotic, largely Muslim region, where religion is used as weapon and where emotions, not facts, are currency. Jerusalem needs to calculate its moves with extra caution, and leverage regional alliances more effectively.

Also, we’re talking about a country that prides itself in finding creative, unconventional solutions to universal problems. Devices like hidden cameras that can use facial recognition to identify potential trouble makers, for example, may well provide better security than those ugly gates we’re so used to seeing everywhere else.

That approach seems to have resolved the crisis. First son-in-law Jared Kushner and special envoy Jason Greenblatt were said to be on the case, having helped secure the release of Israel’s embassy officials. And Israel on Tuesday agreed to remove the metal detectors while deploying other security measures.

This could work, lowering tempers for now. Hopefully, they’ll cool off before next Friday, when Muslim prayers may reignite flames.

In the long run, however, America’s right (and smart) move is to start addressing the follies of manufactured Muslim outrage and holding Abbas and the Palestinians accountable for their incitement that quickly turns campfires into forest fires. That, not security moves by Israel, is the true threat to international peace and security.

Article Link To The NY Post:

Cops And Robbers, All Rolled Into One

Law-enforcement agencies seize billions a year without filing charges. Even burglars take less.

By Tony Lima
The Wall Street Journal
July 25, 2017

There aren’t many things government can claim to do more efficiently than the private sector. Taking people’s property is one. In 2014 the federal government seized about $4.5 billion from people who hadn’t been charged with crimes. That exceeds the private-sector equivalent, burglary. According to an analysis by Armstrong Economics, perpetrators absconded with only $3.9 billion that year.

Since 2007 the Drug Enforcement Administration alone has seized more than $3 billion in currency from individuals in civil actions under which legal protections for criminal charges do not apply. Criminal asset forfeiture requires an indictment against both an individual and the property in question. With civil asset forfeiture only the property is charged before being seized.

Last week Attorney General Jeff Sessions stated his intention to increase the volume of these asset forfeitures. Contrary to published reports, the Sessions directive does not extend asset forfeiture to states that have outlawed the practice. It clarifies that federal asset forfeiture can only be applied to violations of federal law.

But there’s no doubt Mr. Sessions is putting himself in bad company. As California attorney general, Kamala Harris opposed a 2011 law restraining the practice of civil asset forfeiture. In 2015 she sponsored a bill to allow authorities to seize suspects’ assets before filing charges. That year California forfeitures totaled $50 million. Ms. Harris is now a U.S. senator in the midst of a 2020 presidential boomlet.

Civil asset forfeiture has become a profit center for law enforcement. Any law-enforcement official can seize assets, and anyone suspected of a crime can be a target. In 2016 half of all forfeitures in Connecticut were valued at less than $570, casting doubt on the claims of many government agencies that civil asset forfeiture is used only against big-time thieves and drug dealers. Many states allow law-enforcement agencies to keep all or part of what they seize.

It’s impossible to know how many instances of federal asset forfeiture lead to criminal convictions, because the Justice Department doesn’t keep such data. “Although the Department of Justice’s forfeiture database tracks more than 1,300 variables about cash and property seizures, not one indicates whether a criminal charge or conviction accompanied a forfeiture,” according to a 2015 report from the Institute of Justice, a free-market legal group. “The DOJ carefully tracks and reports forfeiture revenue, but fails to publicly report whether forfeitures target proven criminals.”

In 2013 the Internal Revenue Service seized $33,000 from Carole Hinder. It was the entire balance in her restaurant’s checking account. Ms. Hinder had operated her business for more than 40 years, accepting only cash. The agency then got a warrant to seize another $150,000. Ms. Hinder’s crime? Making deposits of less than $10,000, the threshold above which banks must report transactions to the IRS.

Ms. Hinder’s mother had advised her to make smaller deposits because it would be more convenient for the bank—the required IRS Form 8300 is long, complicated and time-consuming for banks to fill out. The IRS alleged that Ms. Hinder’s deposits were “related and excessive.” Thankfully, sanity eventually prevailed. The IRS dismissed her case in late 2014.

In 2012 Bi-County Distributors, a small family-owned business on Long Island, watched the federal government yank $446,000 from its account. Three different banks had stopped doing business with Bi-County because of the reporting requirements triggered by its frequent large cash deposits. Bi-County’s accountant advised the company to stay below the $10,000 limit, which, of course, drew the IRS’s attention.

In January 2015, Loretta Lynch, then U.S. attorney for New York’s Eastern District, signed a settlement returning the $446,000 to the company. Bi-County survived because its vendors allowed it to postpone paying bills. At one point, Bi-County owed a supplier almost $300,000.

Asset forfeiture imposes costs on the broader economy as well as individual businesses. Capital that is tied up in court proceedings or accounts payable is not available to finance productive enterprise. Instead of expanding this practice, Mr. Sessions should reform it. His recent directive took a tiny step in this direction by expediting both the notification and appeal processes.

But he should do more. The Justice Department should start keeping track of forfeitures that do not lead to charges and urge Congress and the states to pass reforms, especially an end to the practice of using the proceeds as a source of revenue for the government.

Article Link To The WSJ:

Activist Hedge Funds Pull Hard On The M&A Lever

By Michael Flaherty
July 25, 2017

Of all the demands that activist hedge funds make, one has emerged as a clear favorite over the past year: asking the management of a company they target to put up the "for sale" sign.

Heady valuations have made the windfall from a sale too hard to resist for dissident shareholders, turning what used to be a fall-back option in past campaigns into preferred strategy, and prompting a slew of takeovers in the process.

The uptick in activist-driven deals has helped boost returns of the dissident investors. However, campaigns to spur company sales could put activists at odds with some large and powerful investors and undermine their recent efforts to project the image of long-term value creators rather than quick-buck artists.

U.S. activist campaigns that called for companies to explore some type of sale process totaled 91 so far this year, more than double the number a year ago, Thomson Reuters data show. The data excludes companies worth $300 million or less.

For activists, the demands are increasingly turning into deals.

The number of activist investments that ended with a company sale jumped from seven in 2010 to 25 four years later and 36 last year, according to research and data provider Activist Insight.

"Most small to mid-cap companies eventually get bought. That's the way the world works. There's nothing wrong with that. It's actually quite healthy," said Daniel Plants, the founder and chief investment officer of Voce Capital Management LLC, a $100 million activist hedge fund.

Voce's campaigns have contributed to the sale of several U.S. companies, including the acquisition of medical helicopter operator Air Methods Corp by private equity firm American Securities LLC for $2.5 billion, which closed in April.

More than 500 M&A-related campaign demands were made by activists globally during the 2016 and 2017 proxy seasons, representing around 75 percent of the total number of demands, according to JPMorgan (JPM.N).

Driving the trend are struggling mutual fund managers who support the deal campaigns to lock-in a positive return, and the decreasing number of targets where a quick fix can yield results, according to Goldman Sachs Group Inc. (GS.N).

"The number of companies where a quick divestiture or capital allocation change will work is dwindling," said Avinash Mehrotra, Goldman's co-head of its shareholder advisory group, which advises companies on defending against activist investors. (Graphic:tmsnrt.rs/2eIUVwX)

Healthy Windfall

The most high-profile example this year of activism prompting a sale was the nearly $300 million profit Jana Partners made on its three-month investment in Whole Foods Market Inc (WFM.O).

Jana disclosed last week that it sold its entire 8.2 percent Whole Foods stake, worth $1 billion at the time and around 40 percent more than what it paid, after the organic grocer agreed to Amazon.com Inc's (AMZN.O) $13.7 billion acquisition offer.

Some activists also pile into companies already on the block, adding further pressure to seal the deal, a tactic applied in the sale of contract research firm Parexel International Corp. (PRXL.O).

Fueling the frenzy has been a surge in overall M&A volumes during the past several years, underpinned by cheap financing and lofty valuations.

Thanks in part to M&A, the performance of the HFRI ED Activist Index in the last 12 months is up 16.46 percent, the fourth best performer among all hedge fund strategies and a major turnaround from losses suffered last year.

"Activists are pushing for strategic review because in a lot of situations, selling the company today at current valuation multiples offers a better risk-adjusted return than waiting for the current strategy to play out," said Waheed Hassan, who helps management teams defend against dissident shareholders as head of activist defense at advisory firm Alliance Advisors.

The M&A push is not without risks.

Powerful index funds such as BlackRock Inc. (BLK.N) and the Vanguard Group, which control a growing share of the stock market, are pressuring managements and other investors to choose long-term strategies over a tempting premium from a suitor.

M&A plays can backfire when a company refuses to heed activists' calls for a sale, or a buyer fails to show up.

Starboard Value LP, for example, suffered a 28 percent loss on its investment in Depomed Inc (DEPO.O) after the U.S. drugmaker explored a sale without success, according to research firm 13D Monitor.

Another concern is that the pace of of U.S. deals slowed down in the first quarter.

A slowdown in M&A would make activists revert to other strategies, such as seeking more operational fixes or share buybacks - though these demands usually yield smaller investment returns.

Voce's Plants said activist hedge funds should avoid an investment strategy based solely on calling for company sales.

"It seems like a lot of funds are doing that now and I think it's very risky," he said. "You need a plan B and C and a long-term plan to own the business."

Article Link To Reuters:

Investors Fool Themselves Into Seeing A Trump Rally

The markets are reaching records for reasons that have little or nothing to do with the president. 

By Barry Ritholtz
The Bloomberg View
July 25, 2017

The internal model of the world generated by the human brain helps us to navigate through three-dimensional space, understand complex ideas and adapt to the world around us.

It also is a self-fabricated fiction, but it allows most of us to get through each day without any sort of existential crisis. This is critical for investors to keep in mind because our internal thought processes are so filled with potential for bias and error that unless we are vigilant, we are easily fooled by our own narratives.

I was reminded of this earlier today when I saw a chart at CNN Money. It may not be fake news, based on the definition used by the president, but it is one of those things that gets passed around despite being deeply flawed. The chart encapsulates the conventional story that markets are rallying on expectations for tax cuts, infrastructure spending and deregulation -- in other words, adoption of the Trump legislative agenda.

It is a tale that doesn't stand up to scrutiny, as we have discussed before. First there is the tendency of markets to ignore the dysfunction in Washington -- as they have for most of the past decade. If markets are really rallying on expectations of good things from the government, then the inability to get anything done in the past few years should have thrown them into reverse.

Folks have difficulty with this. If their internal models tells them the U.S. president is important (he is) to the economy (somewhat less so) and the stock market (even less so), then the goings-on inside the beltway must be significant (they mostly are not).

Special investigations, congressional incompetence and endlessly fevered news cycles simply doesn't add up to record highs for markets. Our mental models struggle to make sense of it, and so we latch onto any explanation that seems even remotely plausible. Hence, the reason that the deregulation/tax cuts/infrastructure spending/repatriation of overseas profits story easily fits so readily into our flawed models.

Too bad it's wrong.

The latest explanation is that the so-called Trump rally doesn’t need Donald Trump to succeed. Some analysts are coming around to recognizing that markets can do well despite an economic recovery, full employment and rising corporate profits. (I am only saying that partly in jest). Even after the Federal Reserve's recent interest-rate increases, borrowing costs are historically low. Emerging markets are doing better as the dollar weakens, and Europe’s corporate earnings are strengthening.

We really shouldn't be so surprised at the disconnect between the tales we tell ourselves about the Trump bump and reality. We saw the same sort of phenomenon during the Obama and Bush presidencies as well. I recall hearing from left-leaning hedge-fund buddies how terrible the Jobs and Growth Tax Relief Reconciliation Act of 2003 (better known as the Bush tax cuts) was going be. Those who embraced that position missed a stock market that almost doubled during the next few years. Chalk up another bad investment decision to political bias. Similar talk was rampant in March 2009, after America elected as president a Kenyan-born, Marxist Muslim bent on destroying capitalism and the U.S. economy. That was almost 300 percent ago for the stock market.

Good memes die hard. It isn't a coincidence that we see the same mistakes made over and over again.

Why? The way the brain builds its internal models of the world has a lot to do with it. We have come to rely upon these models because they have been so good at keeping us alive. We invest so much biological energy and sense of self in these models that we have difficulty comprehending information that is at odds with them. This is why mere facts alone will never convince people that they are wrong about any deeply held belief, whether it's about religion, partisan affiliation, global warming, vaccinations and so on; facts don’t really matter because if they challenge the mental model, the brain works to downgrade it.

This is a feature, not a bug. It has helped humans survive, create a functional society, adapt and thrive, besting all other hominids for control of the surface of the Earth and beyond.

Novelist and journalist Will Storr, in his book “The Unpersuadables: Adventures with the Enemies of Science,” speaks with what he calls “heretics” -- the alien abductees, homeopaths, young-earth devotees, Holocaust deniers and others who hold fringe beliefs. The results are fascinating.

What is so intriguing about these individuals isn't that they are crazy -- rather, the exact opposite. They are perfectly rational, lucid individuals who happen to hold outlier beliefs at odds with not only accepted wisdom, but demonstrable factual evidence. Somehow, their models of the world are off-kilter. But the rest of their mental faculties are perfectly fine.

Think of this in the context of mental model creation -- the internal depiction of the world around you, and it is easy to see how it could lead to expensive investing mistakes. It is chilling to hear the subjects in Storr's book rationalize their own belief systems, and not recognize our own errors when it comes to markets and investing. Even worse, these decisions are for the most part unconscious, often built upon a flawed foundation we are wholly unaware of.

We may believe we are rational, but the reality is often something terribly different.

Article Link To The Bloomberg View:

Fintech Faithful Put Payments On A Pedestal

By Antony Currie
July 25, 2017

Fintech's faithful are putting payments on a pedestal. Square and PayPal shares are near all-time highs – as are those of venerable outfits like Visa, MasterCard and First Data. They’re each chasing what could be a $2.3 trillion revenue business by 2019, according to McKinsey. But they can’t all be winners.

Privately held Stripe kicked off the frenzy last November when it raised $150 million in its fourth funding round. That doubled to $9.2 billion the valuation of the seven-year-old company, which builds software to allow companies to quickly set up and track digital payments.

Since then, shares in Square, which initially focused on in-store payments, have rocketed 115 percent, valuing the company at $10 billion and an eye-popping 50 times estimated 2020 earnings. PayPal, which reports second-quarter earnings on Wednesday, shot up 45 percent; at $70 billion it’s worth almost twice as much as former parent eBay.

To an extent, investors are more comfortable with strategy and management. After all, Square lost biggest customer Starbucks right before going public in 2015 and shares Chief Executive Jack Dorsey with struggling Twitter.

Old and new players keep teaming up, too. PayPal last week struck alliances with JPMorgan Chase and Citigroup which included allowing the banks' customers to use rewards points to pay for goods over the network run by Daniel Schulman. Stripe’s clients can now accept payments from Alipay and WeChat’s hundreds of millions of customers in China. Most also have deals with Visa and MasterCard.

While this may drive more volume through the various platforms, there are some big wrinkles to the apparent love-fest. First, the likes of PayPal, Square and the banks are as much rivals as they are partners, so the cooperation can only go so far. Second, there are plenty of others battling for market share, many of them with deep pockets like Alphabet, Amazon, Apple and Facebook.

Finally, as competition heats up, fees are likely to drop from what may, at best, be 1 percent of purchasing volume, based on Square data. As income gets squeezed, that’ll put more importance on winning more flow. The bottom line will eventually bear these costs. Despite what shareholders appear currently to expect, not all can come out on top.

Article Link To Reuters:

Organic Ranchers Eye Amazon Distribution Ahead Of Whole Foods Deal

By Rod Nickel
July 25, 2017

Amazon.com Inc (AMZN.O) plans to meet on Wednesday with a dozen U.S. ranchers, seeking to expand distribution of organic and grass-fed meats as it takes over Whole Foods Market Inc (WFM.O), according to the meeting's organizer.

Analysts and investors have speculated that Amazon is aiming to combine its expertise in order fulfillment with the grocer's facilities to build out delivery of fresh food, but the online retailer has not yet detailed its plans.

Amazon visited Georgia grass-fed meat producer White Oak Pastures in March, 2-1/2 months before announcing the $13.7 billion Whole Foods takeover, to discuss a possible distribution deal, White Oak owner Will Harris told Reuters.

The retailer later asked the farmer to invite other U.S. livestock producers to discuss distribution of organic and grass-fed meat, Harris said.

Amazon declined to comment.

"We are excited about exploring possibilities with them," Harris said. "It suggests that this niche in the market is becoming mainstream enough that they feel their delivery system might have traction with it."

U.S. sales of organic meat and poultry, worth $991 million, climbed 17 percent last year, marking its fastest-ever annual growth, according to the Organic Trade Association (OTA).

White Oak and some of the other meat producers invited to the Atlanta meeting already sell to Whole Foods, Harris said.

The meeting between producers and Amazon was confirmed by Carrie Balkcom, executive director of the American Grassfed Association.

White Oak workers pack frozen beef, duck and lamb into boxes at the Bluffton, Georgia ranch for couriers to pick up twice a day.

"I'm just certain that Amazon is better at it than us," Harris said. "I'm a farmer and they're logistics people."

The ranch sells about $2 million worth of meat online annually, making up its fastest-growing segment and 10 percent of total revenues.

"I sell a very niche product," Harris said. "I think Amazon will add a whole other dimension."

Amazon's expansion in organic products through Whole Foods bodes well for the sector, said Nate Lewis, farm policy director at OTA.

"If Amazon can apply its efficiencies of scale to the Whole Foods Market segment, and pass along those savings (to consumers), I would not be surprised to see more growth in the protein side," Lewis said.

But some organic farmers worry that Whole Foods under Amazon might import meat from lower-cost producers rather than buy U.S. supplies.

“It could be as bad as shutting us out or as good as expanding the market," said Mark Smith, whose Aspen Island Ranch is not involved in the meeting. Smith's ranch is part of a Montana co-operative that sells organic grass-fed beef to Whole Foods through a third party.

Article Link To Reuters:

Elon Musk’s Tunnel Plan Isn’t As Crazy As SpaceX Or Tesla

Verbal approval may not be a thing in the world of infrastructure, but don’t just dismiss this latest wacky pitch.

By Max Chafkin
July 25, 2017

Elon Musk has got to be kidding. That's the consensus, anyway, a few days after the Tesla and SpaceX chief executive officer tweeted that he'd received "verbal" approval to build an ultra-high-speed rail connection capable of sending commuters from New York to Washington, D.C., via Philadelphia, in exactly—and Musk was precise here—29 minutes.

To say that there are a few issues with this plan is probably a kind way to put it. Let's start with the technical ones: That superfast train, known as the hyperloop, exists only as a prototype, and a tunnel from New York to Washington would be more than twice as long as the longest tunnel ever drilled, and more than five times longer than the longest rail tunnel. As far as anyone can tell, all Musk has done on that front is start a tunneling company that owns a used drilling machine. It's called the Boring Company, which is hilarious, but also gives the whole enterprise an unserious air.

Just as crucially: When you’re talking about a project that would cost billions of dollars and span federal, state, and local jurisdictions, verbal approval isn't really a thing. "They have really streamlined the permitting process a lot since I needed to replace the stairs on my deck," Vox’s Matthew Yglesias joked. It turns out Musk hadn’t notified the mayors of the three cities where he said his proposed hyperloop would stop.

Musk later clarified that someone in the federal government had expressed support and admitted that formal approvals had yet to be granted, but it's tough to un-call a shot like that. My colleague Eric Newcomer called Musk’s tweets "preposterous." "Musk is gonna be a brain in a jar when/if this is done," tweeted the Wall Street Journal's Chris Mims. And, for fun, I direct you to Matt Levine’s Friday newsletter, in which he noted similarities between Musk’s tunnel tweets and a prank pulled by Conan O'Brien in the 1980s.

I’m all for a laugh at a billionaire's expense, but at the risk of stepping straight into Musk's reality distortion field, I think his tunneling plan is pretty reasonable. Technically, it’s much more feasible than many are making it out to be. Politically, it’s a no-brainer. And it follows the same playbook Musk used to build support for other wackily ambitious projects.

Sometime in the coming months, SpaceX will launch the Falcon Heavy, the largest American rocket in almost 50 years, and one designed to land vertically after delivering a payload into orbit. That’s something no rocket company had been able to do reliably before Musk came along. Given these accomplishments, it’s easy to forget that the Musk who first spoke about going into space sounded at least as crazy as the one looking to dig the world’s largest tunnel. I refer you to this 2015 Ashlee Vance story:

"In late October 2001, Elon Musk went to Moscow to buy an intercontinental ballistic missile. He brought along Jim Cantrell, a kind of international aerospace supplies fixer, and Adeo Ressi, his best friend from Penn. Although Musk had tens of millions in the bank, he was trying to get a rocket on the cheap. They flew coach, and they were planning to buy a refurbished missile, not a new one. Musk figured it would be a good vehicle for sending a plant or some mice to Mars."

A nutty idea, some used industrial equipment, and a stunt that is meant to evolve into something more serious—sound familiar?Musk never stopped talking about colonizing Mars, which he's made clear remains his life's work, but he has sought out incremental goals, launching satellites and winning NASA contracts. While SpaceX has a long way to go, Musk in the meantime has built a pretty nice business launching rockets for less than the big aerospace companies.

Musk followed the same basic formula with Tesla, picking a goal that many saw as impossible—a mass-market electric car—and using that goal as a way to build enthusiasm, both among investors and consumers, for a series of incremental products. At the end of this month, Tesla will deliver the first production models of that mass-market car, the Model 3. The company, which struggled for survival more than once in years past, is now worth more than General Motors.

None of this makes the East Coast tunnel a sure thing, but digging sure sounds easier than building a rocket that lands vertically. When I was writing about Musk's plans for the Boring Company, I asked Bent Flyvbjerg, an expert in so-called “mega-projects,” whether there was any reason to think that Musk would have more luck that the developers of such famously quixotic projects as the Second Avenue Subway and Boston’s Big Dig. His answer, surprisingly, was yes.

Though Flyvbjerg argued that tunneling is hard, largely because you never know what you're digging into, he noted that part of what makes it so astronomically expensive is that the industry hasn't had much competition. Boring machines are essentially one-off items custom-built for a particular project, and the companies that dig the holes often have local monopolies. If Musk could translate underground the approach he brought to reusable rockets, Flyvberg said, he could drastically reduce the price of a given dig.

When it comes to the political challenges, again, I think pundits are overlooking some advantages. Infrastructure projects, unlike Obamacare repeal or a Mexican border wall, are broadly popular among both Democrats and Republicans. According to my colleague Joshua Green’s new book, Democrats were terrified in the early days of the Trump presidency that he would propose a big public-works plan, co-opting one of their stated priorities. Trump went in another direction, but his administration is only six months old. On Thursday, while much of Twitter was making fun of Musk, a White House spokesman told Bloomberg the administration had engaged in "promising conversations to date" with the would-be borer.

Of course, federal approval, still a big if, would help Musk only so much with state and local officials along his proposed route, many of whom will likely be inclined to oppose anything Trump supports. But there, too, Musk has cards to play. In New York City, for instance, any solution that might help with the Summer of Hell would be tough to reject. Elsewhere, prominent Democrats, including Los Angeles Mayor Eric Garcetti and Chicago Mayor Rahm Emanuel, have expressed interest in Musk's tunnels. “I think that it would be a tremendous investment and job creator, an economic engine for the city that will pay dividends for decades ahead," Emanuel told reporters last month, discussing a possible Boring-built subway between downtown Chicago and O'Hare International Airport.

At the moment, all these possibilities seem pretty remote. But it makes sense to regard Musk’s tunnel proposal as an opening bid, the equivalent of the Martian mouse colony, rather than mocking it as if it were a fully fleshed-out plan. Like another guy known for grandiose proclamations, the tunnel plan is worth taking seriously, not literally.

Article Link To Bloomberg:

Traffic Costs Jam Up Google

Cost of getting users to click ads outpaces revenue growth, pressuring bottom line.

By Dan Gallagher
The Wall Street Journal
July 25, 2017

Google generates a lot of clicks. But they aren’t free—nor always cheap.

Second-quarter results from parent company Alphabet Inc.GOOGL 0.45% were a good reminder of both. Google showed an unprecedented ability to generate economic activity out of its massive internet search engine. Paid clicks, which measure the frequency that Google users click on advertisements, surged 52% year over year. That is the biggest jump in at least seven years—notable considering the company’s advertising revenue base has grown nearly fourfold in that time.

But that growth comes with a cost—$5.1 billion in this case. That is what Google expended for the quarter in traffic acquisition costs, which was also a record high. More important, traffic acquisition costs, which rose 28% in the second quarter compared with last year, outpaced revenue growth for the first time in five years.

Traffic acquisition costs are what Google pays to drive people to its ads. For example, Google pays Apple when iPhone users search with Google. These costs have been rising as more of the company’s traffic comes from mobile devices.

Operating income would have hit a record $6.9 billion if not for the record-setting $2.7 billion fine from the European Union. But that represents growth of only 15% year over year—the company’s slowest in two years.

Alphabet’s shares slipped 3% Monday following the results, reflecting both the earnings deceleration and the stock’s 26% run so far this year. Investors shouldn’t panic, as Google is still an unmatched profit machine relative to most of its internet peers. But it is worth remembering that growth has its price.

Article Link To The WSJ:

Alphabet Adds To Cash Pile Despite Higher Costs, Antitrust Fine

By David Ingram and Rishika Sadam
July 25, 2017

Alphabet Inc reported a 21 percent jump in quarterly revenue on Monday, maintaining a growth rate that is rarely seen among companies its size and suggesting the big sales gains enjoyed recently by the other Internet firms are not done yet.

Alphabet, the owner of Google and YouTube, said it made $3.5 billion in net income on sales of $26 billion. The profit would have been much larger but for a record $2.7 billion European Union antitrust fine.

Still, the company noted that costs were rising faster than sales and warned that expenses would remain high as more searches shift to mobile devices.

The squeeze on expected future profit appeared to weigh on Alphabet's share price, which fell about 3 percent to $967 after the bell. Shares had closed up in regular trading and have gained 26 percent for the year.

Alphabet's cost of revenue, a measure of how much money the company must spend to keep its platforms running before added costs such as research, rose 28 percent, well above the growth in revenue itself.

The rising costs, including what Google pays to drive traffic to its search engine, hurt operating margins more than most people had expected, said Doug Kass, president of Seabreeze Partners Management.

"This could be problematic going forward," Kass said.

Alphabet Chief Financial Officer Ruth Porat, asked about margins during a conference call with analysts, said the company was focused on getting bigger.

"As we've often said, we're focused on revenue and operating income dollar growth and not on operating margins," she said.

Increasing costs, Porat added, are a result of more money going into high-growth products that she said would create value for shareholders.

With its latest profits, Alphabet reported $15.7 billion in cash and cash equivalents, and another $79 billion in marketable securities.

Alphabet and social media rival Facebook Inc, which together dominate the online ad market, compete for advertising dollars.

This year, Google is expected to have $73.75 billion in net digital ad revenue worldwide while Facebook is expected to take in $36.29 billion, according to research firm eMarketer. Together they will have about 49 percent of the market, eMarketer said.

Facebook is due to report earnings on Wednesday.

The technology sector has led a big rally in U.S. stocks. The S&P 500 information technology index is up 23.1 percent this year, compared with a 10.4 percent rise in the S&P 500.

Antitrust risk has shadowed Google for years, and antitrust enforcers in the European Union last month fined Google 2.42 billion euro ($2.7 billion) for favoring its own shopping service.

The fine came in the first of three EU probes of Google's dominance in searches and smartphone operating systems, and analysts are going to monitor the downside closely, said Josh Olson, an analyst with Edward Jones.

"It is not so much the money or the fine itself," Olson said, but "questions linger about what impact that could have on Google's Europe business, and they did not really comment on that."

U.S. antitrust enforcers thus far have chosen not to follow Europe's lead.

If not for the fine, Alphabet said that earnings per share would have been $8.90 in the second quarter, compared with $7 a year earlier. With the fine, Alphabet reported earnings per share of $5.01, beating an average estimate of $4.49.

Sundar Pichai, chief executive officer of Google, said in response to an analyst question during Monday's call that Google would fight to continue bundling its Android operating system with popular smartphone apps such as Google Maps -- a practice the EU antitrust officials are investigating.

"It's a very open market, open ecosystem, and it works well for everyone, and I expect that to continue," Pichai said, adding that billions of people use Google products.

Pichai was also appointed to the Alphabet board of directors on Monday.

Google's ad revenue rose 18.4 percent to $22.67 billion.

Revenue from other Google products, a category that includes the Pixel smartphone, the Play Store and Google's cloud business, rose 42.3 percent to $3.09 billion. Alphabet competes heavily in the fast-growing cloud business with tech companies Amazon.com Inc and Microsoft Corp.

Losses from other Alphabet units - an array of businesses known as "other bets" that includes the Waymo self-driving car company, thermostat-maker Nest and the life sciences firm Verily - narrowed to $772 million from $855 million a year earlier.

Article Link To Reuters:

Amazon Juggernaut Sets Its Sights On Its Next Victim: The Middleman

-- The growth of Amazon has the potential to disrupt "middlemen," particularly in the industrial space.
-- Amazon Business now has 300,000 registered corporate buyers and recently surpassed $1 billion in sales.
-- Stocks like W.W. Grainger and Fastenal could come under pressure from Amazon, analysts say.

By Bob Pisani 
July 25, 2017

Before it was Amazon killing the retailers. Last week it was Amazon disrupting appliances. Now there's a broader concern: Amazon has the potential to disrupt the middleman in general, particularly those that work in the $7 trillion business-to-business (B2B) space.

Here's the issue: If you don't make the object you are selling, or don't have some sort of intellectual property, or solve a pain point for a customer, then you're just a middleman, and you are increasingly more vulnerable. The concern is that these middlemen will start losing volume because sales in general are going to the internet and because it's increasingly difficult to get pricing.

In 2005, Amazon bought a business called SmallParts.com. No one paid much attention to it, not even after 2012 when Amazon renamed it Amazon Supply with the idea of supplying industrial and commercial customers.

That started to change in 2015, when it was rebranded Amazon Business. The much larger goal: to be a supplier to the entire B2B community, a business that encompasses much more than just the industrial space.

Amazon Business now has 300,000 registered corporate buyers, according to Crain's, and recently surpassed $1 billion in sales, according to Reuters.

How serious is this as an issue? It's already affecting a specific class of middlemen: Industrial distributors who sell screws, pumps, fasteners and other parts for industrial America, companies like W.W. Grainger and Fastenal who have been profitable for many years serving the B2B industrial community.

But that is now changing. Last week, Goldman Sachs put out a note to clients entitled "Distributors Disrupted" where it claimed that "the value proposition of the industrial distributor is not keeping pace as new entrants like Amazon are disrupting traditional models. As a result, we see $130bn of industrial distributor TAM [total addressable market] on the line."

It has a sell rating on Grainger (GWW), which sells industrial and security supplies like lighting and electrical products and power and hand tools, as well as Genuine Parts Co. (GPC), a distributor of automotive replacement parts, because of their susceptibility to price competition and lower margins.

Grainger is already familiar with the Amazon effect. Its earnings declined in the first quarter because it has had to make price cuts to compete with cheaper competitors on the internet, mainly Amazon.

But the rapid growth of Amazon Business is now attracting significant attention. After volumes were shakier than expected in the second quarter, Susquehanna lowered its price target for Grainger $20 to $181 last week, citing "heightened anxiety about the potential negative impacts of rising online competition from Amazon and other players."

That competition could significantly affect prices and margins. Goldman found that Amazon and Grainger both carried 98 of 100 products that Goldman sampled. Of that, Grainger's prices were at a 55 percent premium to Amazon. It also found that Fastenal was at a significant premium of 49 percent.

Could Amazon get even more aggressive and start buying in the B2B space? It's certainly not out of the question. Here's Gabelli & Co. analyst Justin Bergner last week: "We would not rule out an acquisition of Grainger by Amazon if such a deal were embraced by both parties. It would be a good way for Grainger to leverage its e-commerce capabilities and scale within Amazon's platform, while retaining leadership."

(Amazon declined to comment and Grainger did not immediately respond to a request for comment.)

Still, the Amazon juggernaut is not unstoppable.

Small companies may use Amazon more because price is the most important factor for them. But larger companies will still want relationships with companies like Grainger because the larger customers place a higher value on receiving expertise and customer service.

That was the point Morningstar made last week, when it said there was "too much pessimism" around Grainger's loss of pricing power, noting the company "is entrenched within many of its larger customers' operations, and the firm's ability to manage large, complex accounts and provide inventory management services support some degree of pricing power."

That added value isn't going to go away anytime soon, and until Amazon finds a way to duplicate that hands-on service, some of this business will be beyond its reach.

Article Link To CNBC:

Proof Americans Need Major Therapy Over Their Facebook And Twitter Issues

Status: We’re not all that satisfied with social media, yet we use it more than ever.

By Catey Hill
July 25, 2017

This is one post you’re not going to like.

Many Americans say they give social media a thumbs down, ranking the likes of Twitter and Facebook low on the list of industries they’re satisfied with, according to data released Tuesday by the American Customer Satisfaction Index, which surveyed nearly 5,000 people.

Indeed, they give social media companies a score of 73 out of 100 in terms of overall satisfaction, which puts the social networks in the bottom 1/4 of all the 40-plus industries ACSI ranks. (Breweries, soft drinks and TV and video players are among the most beloved industries; utilities and health insurance companies rank even lower than social media companies.) Popular sites like Facebook and Twitter score even lower than average for social media companies (68 and 70 out of 100, respectively), while Google+ and Pinterest score higher on the list.

So what’s with all the dislike for companies like Facebook and Twitter? Among the biggest complaints: The number of ads on the sites, privacy issues and the speed and reliability of video clips, the report shows.

All this whining about social media is a pretty strange reaction considering we’re now voluntarily using more than ever. Facebook announced last year that users spend an average of 50 minutes a day on its Instagram, Messenger and Facebook platforms – in 2014, we were spending just 40 minutes on the platforms.

What’s more, the number of people using social media is way up. Facebook hit a new record in June with 2 billion users. Instagram now has a record 700 million users and Twitter upwards of 300 million.

So why do we keep using something we say bothers us? One reason: “Pervasive FOMO,” says Elizabeth Lombardo, Ph.D., Author of Better Than Perfect: 7 Strategies to Crush Your Inner Critic and Create a Life You Love. Because almost all of our friends and family are on social networks, we feel we have to do it too, to keep up. And, once we are on there, we often get sucked in, says psychologist Jude Miller Burke, author of the new book, The Adversity Advantage: Turn Your Childhood Hardship into Career and Life Success: “While we are using social media to see pictures of our sister’s kids, we receive ‘pop ups’ on the latest flood, drought, police brutality, or act of terrorism. We are then pulled into social media further to learn details.”

Whatever the reasons, one thing is clear: It’s not necessarily good for our well-being. The more time people spend on social media, the more likely it is they feel socially isolated — with people who spend more than two hours swiping through Facebook, Instagram and the link nearly doubling their risk of feeling social isolated. It also can be bad for your finances with many millennials saying social media contributes to them feeling a need to keep up with friend’s spending.

Article Link To Moneyish:

Obamacare's Big Win: It Helps Some People Be A Little Less Poor

The U.S. spends $100 billion on this program, so Medicaid recipients can save $5.5 billion.

By Megan McArdle
The Bloomberg View
July 25, 2017

There are some eternal debates that may never be settled. If there is a God, why does God allow evil in the world? Great taste, or less filling? And of course, does Medicaid make people healthier?

I’m not going to rehash that last debate here, which I have covered manytimes. Suffice it to say that while liberals insist that the evidence is clear that health insurance expansions improve physical health, at least modestly, I do not see that the evidence warrants the confidence they exude. The intuitive sense that this ought to be correct seems to me to be doing a lot of heavy lifting in these evaluations. In health care, our intuitions are often wrong.

We’ll probably find it easier to settle a related debate, which is often mistaken for the same debate: Does Medicaid make people better off?

After all, it’s possible that Medicaid does nothing for your objective physical health, but makes you better off simply because you are under the impression that you are now at less risk of disease or dying. Peace of mind is valuable. (Just ask an insurance company how much we’re willing to pay for it.) And as you can readily see from any pharmaceutical clinical trial, the placebo effect is quite real, and often quite significant; the people who experience it are still better off, even if the abatement of their symptoms begins in their minds.

And of course, Medicaid may also make people financially better off. It is possible that most people manage to get medical care somehow, when they really need it (and are willing to comply with often onerous regimens). But those people will be left with debts, or have to cheat other priorities in order to ensure that the doctor gets paid. For the poor and near-poor, especially, this is a heavy burden: They have fewer resources to pay the bills, and for a variety of reasons, 1 are more likely to be sick in the first place.

And here, we have considerably better evidence for a benefit. A randomized controlled study of Medicaid access in Oregon, which ultimately failed to find any statistically significant improvement in objective health markers, unequivocally found that the people who got Medicaid experienced less financial distress than those who didn’t. Over at Mother Jones, Kevin Drum points to another recent study showing the same result, from the Consumer Financial Protection Bureau. It suggests that in the states that accepted Obamacare's Medicaid expansion, medical debt dropped dramatically compared to the states that declined the expansion. “So: Does Medicaid work?” writes Drum. “Yes indeed. It has moderate but positive effects on health, and very large effects on medical debt.”

It is customary at this juncture for me to offer the caveat that this is only one study, and no one study is definitive. I therefore offer it. Nonetheless. I would be very surprised if we later discover that no one got a financial benefit from the Medicaid expansion.

And yet, there is something surprising in this study: how modest the effect is. While the CFPB does show that states that expanded Medicaid saw significant declines in the overall level of medical debt, it also shows that there’s basically no decline in bankruptcies. One would have expected at least a small noticeable effect on the rate of bankruptcy.

What’s going on here? A few explanations spring readily to mind. First of all, the period of the study is short. It covers only two years of the Medicaid expansion. It can take quite a while before insolvent people finally admit that there’s no help for it, and actually file for bankruptcy, so the study may simply not have been long enough to detect an effect (though the fact that it was included in the CFPB’s presentation suggests that the agency expected to find one).

It is also possible, of course, that the “classic medical bankruptcy” is more often found in the imagination than in reality. That’s not to say that sickness doesn’t drive people into bankruptcy, because it’s quite clear that it does. But it’s less clear how often medical bills play the driving role in those bankruptcies. Many people pay doctors with credit cards, so researchers can’t even reliably determine what percentage of consumer debt is medical. And families with catastrophic illnesses often also experience significant income loss, making all their other debts impossible to pay: even in Canada, which has a single-payer system, a significant number of people cite illness as the primary reason for their bankruptcy.

It may be that over time, as we have more years of data to look at, it will become clear that the Medicaid expansion has prevented many bankruptcies, fulfilling the implicit promise made by Obamacare’s architects and supporters. But it may be that the difference between expansion and non-expansion states will stay stubbornly minimal, which brings us to Drum’s rhetorical question about whether Obamacare “worked.”

When Obamacare was passing, its supporters were pretty clear about what the program was supposed to do: save thousands of lives every year, reduce health-care costs, lower premiums, and save thousands of families from the trauma, and stigma, of bankruptcy.

Have mortality rates dropped? No, they rose. Are premiums lower? No. Have bankruptcies dropped? Yes, but only dubiously related to Obamacare. The only outcome for which we have really strong evidence is a modest reduction in the financial stress of illness. According to the CFPB, we have reduced medical debt by about $5.5 billion, or roughly $10 per consumer.

Now, that debt is not equally distributed, so some people got a substantial benefit and are breathing easier without having to worry about their medical bills. That’s a definite good, and we should all be glad to know that fewer people are waking up in the middle of the night, wondering where they’re going to be able to pay for their medical care.

But we’re spending more than $100 billion a year on Obamacare. That is a lousy way to save people $5.5 billion in medical debt. It will be troubling if we continue to find good evidence of small effects like these, and less compelling evidence of the substantial benefits we were promised in return for all that money.

Article Link To The Bloomberg View: