Startups Race to Create Cancer Screens from DNA

Silicon Valley is out for blood—and not just the rejuvenating blood of the young. Biomedical engineers are enthralled by the promise of liquid biopsies, noninvasive tests that detect and classify cancers by identifying the tiny bits of DNA that tumors shed into the bloodstream. Studies at leading cancer centers have already shown the technology’s effectiveness in personalizing treatments after diagnosis. Now startups are selling VCs a vision of cheap, surgery-free cancer screening even before symptoms appear.

Andreessen Horowitz, Google Ventures, Verily, and others have invested $77 million in Freenome, which uses machine learning to pinpoint immune-system responses that may indicate the presence of cancer. Freenome’s most prominent rival, Grail—which plans to harness next­-generation gene sequencing to directly measure cancerous genomic alterations in the blood—raised $1.2 billion last year from ARCH Venture Partners. Both companies are racing to make the first DNA-detecting blood test to reveal disease in its earliest stages. It’s the holy—well, you know—of cancer care.

If this scientific sprint is giving you Theranos flashbacks, it should. Critics believe that even with the aid of low-cost genetic sequencing and high-powered algorithms, liquid biopsy detection is still years away from being patient-ready. The startups have shared scant data so far. (Grail has begun enrolling 130,000 patients in two huge trials, but it won’t have results for a few years.) Having secured massive infusions of funding, it’s not money holding these blood unicorns back, it’s basic biology.


This article appears in the February issue. Subscribe now.

U.S. enterprise telecoms firm Avaya trades again after bankruptcy

(Reuters) – Avaya Holdings Corp (AVYA.N) shares started trading on Wednesday on the New York Stock Exchange, the first time the enterprise telecommunications provider has been public in more than a decade.

Shares ended down 0.9 percent at $20.80.

Avaya spent the past year sorting its financials in a Chapter 11 bankruptcy process before listing its shares publicly this week. It was acquired in a leveraged buyout in 2007 for $8.2 billion by Silver Lake Partners LP and TPG Capital LP.

When Avaya was under the strain of its former debt pile, “it was like driving a car with the parking break on,” Chief Executive Jim Chirico said.

One new challenge for Avaya, which now has a market capitalization of about $2.2 billion, as well as $2.9 billion in debt, will be attracting a new set of shareholders after being private for so long. It converted its debt to equity in order to list its shares.

“With the debt converting to equity, I would imagine we would transition over the next few months to new value equity shareholders,” Chirico said in an interview.

Chirico, a longtime Avaya executive who was named CEO last October, brought in a new management team, formed a dedicated cloud software unit and increased spending on research and development. The company hired Mercer Rowe, a former IBM executive, as well as a new chief financial officer, Patrick O‘Malley, from Seagate Technology Plc (STX.O) in recent months.

“We are going to have an execution focus that we haven’t had at the company before,” Chirico said.

The Silicon Valley-based company, which was spun off from Lucent Technologies Inc in 2000, is now in better financial health and said it had more than $300 million in annual cash flow.

“What a lot of people don’t know is that we are a very profitable company,” Chirico said. “The competitors took their best shot while we were in Chapter 11, but we added customers and we’re stronger now that we’ve ever been.”

Chirico added that “our eyes are wide open” to do acquisitions as well.

Before Avaya entered its restructuring process, it explored a sale of its unit providing software to call centers for about $4 billion. When asked about whether the company would ever consider a sale of that unit again, Chirico said “it’s all about shareholder value” but added that the company is closely linked to its other main business line that provides telephone and cloud services to companies.

Reporting by Liana B. Baker; Editing by Susan Thomas

21 states sue to keep net neutrality as Senate Democrats reach 50 votes

(Reuters) – A group of 21 U.S. state attorneys general filed suit to challenge the Federal Communications Commission’s decision to do away with net neutrality on Tuesday while Democrats said they needed just one more vote in the Senate to repeal the FCC ruling.

The state attorneys, including those of California, New York and Virginia as well as the District of Columbia, filed a petition to challenge the action, calling it “arbitrary, capricious and an abuse of discretion” and saying that it violated federal laws and regulations.

The petition was filed with a federal appeals court in Washington as Senate Democrats said on Tuesday they had the backing of 50 members of the 100-person chamber for repeal, leaving them just one vote short of a majority.

Even if Democrats could win a majority in the Senate, a repeal would also require winning a vote in the House of Representatives, where Republicans hold a greater majority, and would still be subject to a likely veto by President Donald Trump.

Senator Ed Markey said in a statement that all 49 Democrats in the upper chamber backed the repeal. Earlier this month, Republican Senator Susan Collins said she would back the effort to overturn the FCC’s move. Democrats need 51 votes to win any proposal in the Republican-controlled Senate because Vice President Mike Pence can break any tie.

Trump backed the FCC action, the White House said last month, and overturning a presidential veto requires a two-thirds vote of both chambers.

States said the lawsuit was filed in an abundance of caution because, typically, a petition to challenge would not be filed until the rules legally take effect, which is expected later this year.

Internet advocacy group Free Press, the Open Technology Institute and Mozilla Corp filed similar protective petitions on Tuesday.

The FCC voted in December along party lines to reverse rules introduced in 2015 that barred internet service providers from blocking or throttling traffic or offering paid fast lanes, also known as paid prioritization. The new rules will not take effect for at least three months, the FCC has said.

Senate Democratic Leader Chuck Schumer said the issue would be a major motivating factor for the young voters the party is courting.

A trade group representing major tech companies including Facebook Inc, Alphabet Inc and Amazon.com Inc said it would support legal challenges to the reversal.

The FCC vote in December marked a victory for AT&T Inc, Comcast Corp and Verizon Communications Inc and handed them power over what content consumers can access on the internet. It was the biggest win for FCC Chairman Ajit Pai in his sweeping effort to undo many telecommunications regulations.

While the FCC order grants internet providers sweeping new powers it does require public disclosure of any blocking practices. Internet providers have vowed not to change how consumers obtain online content.

House Energy and Commerce Committee Chairman Greg Walden, a Republican, said in an interview on Tuesday he planned to hold a hearing on paid prioritization. He has urged Democrats to work constructively on a legislative solution to net neutrality “to bring certainty and clarity going forward and ban behaviors like blocking and throttling.”

He said he does not believe a vote to overturn the FCC decision would get a majority in the U.S. House. Representative Mike Doyle, a Democrat, said Tuesday that his bill to reverse the FCC decision had 80 co-sponsors.

Paid prioritization is part of American life, Walden said. “Where do you want to sit on the airplane? Where do you want to sit on Amtrak?” he said.

Reporting by David Shepardson; Editing by Cynthia Osterman and Leslie Adler

Lesson Learned: Don't Short A Blue Chip REIT

There seems to be more articles on Seeking Alpha in which authors recommend shorting Blue Chip REITs. A few days ago there was a short thesis on Tanger Factory Outlet (SKT) and the author explained,

“I have a hard time convincing myself that the good results will continue into the future. I personally am not comfortable with the sales per square foot metrics at these properties… the current stellar portfolio performance may possibly suddenly see itself deteriorate in the next 5 years without warning.”

I have already provided my counter to that article (HERE), and most of my followers know that I’m not a market timer who picks tops or bottoms.

Instead, I am a value investor and I have found that it’s simply better to be in the market invested in stocks that offer the highest potential returns than play the timing game.

Many of you know that I’m generally a buy-and-hold investor and that means that I like to invest in REITs that I can own for the long haul. It’s rare that I bet against securities that will fall in price… that’s like gambling that my plants will die. I prefer to plant my seeds firmly in the ground and wait for my crops to grow.

Occasionally, I run across a few plants (stocks) that seem to be deteriorating and, as a result, I seek to avoid the companies all together. I’m not a proponent of shorting REITs, that’s just RISKY!

Photo Credit

Why Short a REIT?

I find it amazing that some of the wealthiest REIT investors – the hedge funds – claim to have a vast knowledge and understanding as to the nature of their complex strategies, yet the funds’ overall performance often turns into Fool’s Gold.

We all know that hedge funds by nature are opportunistic as they are designed to pool people’s money to invest in a diverse range of assets. Because hedge funds are lightly regulated (and are not sold to retail investors), they typically buy riskier positions and they often employ the use of short selling and leverage.

Although it is difficult to evaluate hedge fund performance compared with other investments (because the risk/return characteristics are unique), I remain baffled as to why so many hedge fund managers cross into my sweet spot – REITs – trying to short a particular stock that is anything but distressed or even showing signs of weakness.

You can see why the $12 billion hedge fund Pershing Square took advantage of the falling value in General Growth Properties (NYSE:GGP) back in 2009. That was a wise bet for William Ackman (who runs Pershing Square) who has a history of investing in distressed real estate. But history has also shown that there is little opportunity for the short sellers who pursue high-quality blue chips.

For example, in 2009, Ackman waged a battle against Realty Income (O) on the thesis that the “monthly dividend company” had poor credit quality. Ackman argued that Realty Income was suffering from mispriced risk since the REIT was paying a dividend of around 7.5% while the private market cap rate values were closer to 10.5% – a 40% premium. Ackman was suggesting that Realty Income’s fundamentals could not support the dividend and that a cut was imminent. Boy was he wrong!

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Think about it like this, the outcome of a short sale is basically the opposite of a regular buy transaction, but the mechanics behind the short sale result in extremely volatile risks.

In fact, it’s somewhat like the law of gravity as the law of investing is inflation (instead of gravity) and that means that betting against the upward momentum is inherently risky. That means that when you bet against the momentum and you keep a short position for a long period of time, your odds get worse.

Also, when you short sell, you don’t enjoy the same infinite returns you get as a long buyer would. A short sale loses when the stock price rises and a stock is (theoretically, at least) not limited in how high it can go.

In other words, you can lose more than you initially invest, but the best you can earn is a 100% gain if a company goes out of business and the stock loses its entire value.

Finally, and the most concerning risk is leverage or margin trading. When short selling, you open a margin account, which allows you to borrow money from the brokerage firm using your investment as security. Just as when you go long on margin, it’s easy for losses to get out of hand because you must meet the minimum maintenance requirement of 25%. If your account slips below this, you’ll be subject to a margin call, and you’ll be forced to put in more cash or liquidate your position.

For all of these reasons, I’m not willing to risk hard earning capital to short a REIT. Plain and simple, it’s just way too risky and I believe that by patiently taking advantage of the margin of safety, my portfolio will hold more winners than losers.

Regardless of my risk tolerance level, the short sellers haven’t stopped betting against REITs and when that feeding frenzy becomes a catalyst, the “squeeze” ensues (as more and more of the short investors buy shares to cover their positions, share prices skyrocket).

This Blue Chip Bet Paid Off Handsomely

In May 2013, Highfields Capital decided to short shares of Digital Realty (DLR) based on the premise that shares were too expensive and should be trading for around $20.00 per share. Jonathon Jacobson stated (at the 18th Ira Sohn Investment Conference last week) that “pricing is going lower, competition is increasing, and the company (Digital) is tapping into capital markets as aggressively as they can.”

At the time, Digital was trading at $65.50 per share with a total capitalization of around $14 billion.

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Highfields claimed at the time that Digital’s fundamentals were deteriorating and that the REIT was a commodity business with no barriers-to-entry. Simply put, Highfields was speculating that the stock would fall, without any true catalyst supporting the short, other than manipulating prices for personal gain.

Simply said, Highfields is shorting Digital because they think they know something others don’t know. They are plain and simple: speculators, obsessed with dangerously manipulating prices and driving down prices for their own personal gain. In an article, I offered my “back up the truck” commentary,

“ …it’s time to jump on this cloud. Digital has a most attractive valuation of 13.6x and I consider the fundamentals sound. Driven by growing world-wide demand and a very high-quality tenant base, Digital has evolved into a best-in-class global data center platform. Digital’s “first mover advantage” has allowed the REIT to build a commanding barrier-to-entry model in which its mere scale provides access to capital and strong expertise in the global cloud supply chain.”

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Over the years, I have continued accumulating shares in Digital Realty as this Blue Chip has been one of the best picks in my Durable Income Portfolio. As evidenced below, Digital has returned an average of 16% annually since I began purchasing shares in May 2013.

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The “D” in DAVOS

Last week I provided a summary of my All-American DAVOS portfolio that consists of Digital Realty, American Tower (AMT), Ventas, Inc. (VTR), Realty Income, and Simon Property (SPG). These 5 REITs returned 9.2% since December 31, 2016, and Digital returned over 23%.

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In Q2-17, Digital announced that it was merging with DuPont Fabros in a transaction consistent with Digital’s strategy of offering a comprehensive set of data center solution from single-cabinet colocation and interconnection, all the way up to multi-megawatt deployments.

At the far end of the spectrum, this combination expands Digital’s hyperscale product offering and enhances the company’s ability to meet the rapidly growing needs of the leading cloud service providers. The DFT merger is also consistent with Digital’s stated investment criteria and mission statement:

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The DuPont transaction expanded Digital’s presence in strategic U.S. data center metros and the two portfolios are highly complementary. The transaction was expected to be roughly 2% accretive to core FFO per share of 2018 and roughly 4% accretive to 2018 AFFO per share. The combination also enhanced the overall strength of the balance sheet. DuPont Fabros portfolio consists of high-quality purpose-built data centers, as you can see below:

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The merger also bolstered Digital’s presence and expanding footprint in its product offering in three top tier metro areas, while DuPont realized significant benefits of diversification from the combination with Digital’s existing footprint in 145 properties across 33 global metropolitan areas.

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Digital closed on the acquisition of DuPont during the third quarter and the integration is well underway… but the blue chip REIT is not slowing down…

In October, Digital announced a 50/50 joint venture with Mitsubishi Corporation to enhance its ability to provide data center solutions in Japan. Digital is contributing a recently completed project in Osaka and Mitsubishi is contributing two existing data centers in Tokyo. Although the venture is non-exclusive, the expectation is that this will be both partners primary data center investment vehicle in Japan.

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According to Digital’s CEO, Bill Stein, “Japan is a highly strategic market (with) tremendous opportunity for growth over the next several years. This joint venture establishes Digital’s presence in Tokyo, which has been a longtime target market.”

In addition, Digital expects this joint venture will significantly enhance the company’s ability to serve its customers data center needs in Japan. In particular, Digital expects that Mitsubishi’s global brand recognition and local enterprise expertise will meaningfully improve the ability to penetrate local demand.

Also, in the US, Digital entered into an agreement to acquire a data center in Chicago from a private REIT for $315 million. This value add-play offers a healthy going in yield along with shell capacity that gives Digital an opportunity to boost the unleveraged return into the high single digits. This investment represents an expansion in Digital’s core market and is occupied by existing customers with whom Digital has been independently working to meet their expansion requirements.

Also, during the third quarter, Digital announced that it was breaking ground on a new 14 megawatt data center in Sydney, Australia, adjacent to an existing facility. Digital also expanded its Silicon Valley Connected Campus with a 6 megawatt facility at 3205 Alfred Street in Santa Clara, California (scheduled for delivery in the first quarter of 2018).

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The Improved Balance Sheet

In order to continue to scale its global footprint, Digital continues to demonstrate a disciplined balance sheet.

In July 2017, Digital issued two tranches of Sterling denominated bonds with a weighted average maturity of 10 years, and a blended coupon of just over 3% raising gross proceeds of approximately $780 million.

In early August, the company pre-funded a portion of the DuPont acquisition with the issuance of $1.35 billion of U.S. dollar bonds with a weighted average maturity of nine years, and a blended coupon of 3.45%. (This was only the sixth time an investment grade U.S. listed REIT has issued a $1 billion or more in a single tranche of bonds).

The transaction was well oversubscribed and priced 10 bps inside of where Digital’s existing bonds were trading on the secondary market prior to the transaction. Digital also raised $200 million of perpetual preferred equity at 5.25%, an all-time low coupon for Digital and the lowest rate ever achieved on a REIT preferred offering with a crossover rating.

In mid-September, Digital closed on the DuPont acquisition and exchanged all the outstanding DFT common shares and units for approximately 43 million shares of DLR common stock and 6 million OP units. Also, in conjunction with the DuPont acquisition, Digital exchanged the DFT 6.625% Series C Preferred for a new Digital Realty Series C Preferred with a liquidation value of $201 million.

The company also tendered for the DFT 5.875% high-yield notes due 2021, settled nearly 80% of the $600 million outstanding at closing in mid-September and redeemed the remainder within a few days post closing. After quarter-end, Digital redeemed all $250 million of the DFT 5.625% high-yield notes due 2023 and a blended 106.3% of par or a total cost of $270.5 million, including accrued interest and the make-whole premium.

When the dust settled at the end of Q3-17, Digital’s debt-to-EBITDA stood at 6x and fixed charge coverage was just under 4x, as you can see below:

After adjusting for a full-quarter contribution, the balance sheet actually improves as a result of the DuPont acquisition and debt-to-EBITDA dips down below 5x and fixed charge coverage remains above 4x, as you can see on the right-hand side of the chart.

As you can see from the left side (chart below), Digital has a clear runway with nominal debt maturities before 2020. The balance sheet remains well-positioned for growth consistent with our long-term financing strategy.

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The Fundamentals

Construction activity remains elevated across the primary data center metros, but leasing velocity remains robust and industry participants are mostly adhering to a just in time inventory management approach, helping to keep new supply largely in check.

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Demand is outpacing supply in most major markets. The near-term funnel remains healthy and demand seems to be picking up as we head into the end of the year.

In addition, vacancy rates remain tight across the board prompting Digital to bring on measured amounts of capacity to meet demand in select metro areas like Sydney, Silicon Valley and Chicago. The company has seen a flurry of recent land deals in core markets and the number of new competitors is on the rise, although Digital believes its global platform, scale and operational track record represent key competitive advantages.

As Digital’s CEO, Bill Stein, explains:

“Given the sector’s recent history, any prospect of an uptick in speculative new supply bears watching. However, we remain encouraged by the depth and breadth of demand for our scale, co-location and interconnection solutions. We expect the demand will continue to outstrip supply, while barriers to entry are beginning to grow in select metros, which we believe bodes well for long-term rent growth, as well as the enduring value of infill portfolios such as ours.”

Stein adds:

“…we are well-positioned to connect workloads to data on our global connected campus network and through our Service Exchange offering. Enterprise architectures are going through a transformation and workloads are transitioning from on-premise to a hybrid multi-cloud environment. Our comprehensive product offering is critical to capturing this shift.

Cloud demand continues to grow at a rapid clip, but future growth in the data center sector will come from artificial intelligence. The power, cooling and interconnection requirements for AI applications are drastically different than traditional workloads, and Digital Realty is well-positioned to support the unique requirements and tremendous growth potential of this next-generation technology suite.”

The Latest Results

Digital signed total bookings for the third quarter of $58 million, including an $8 million contribution from interconnection. The company signed new leases for space and power, totaling $50 million during the third quarter, including a $6 million co-location contribution. The weighted average lease term on space and power leases signed during the third quarter was nine years. Digital’s management team explains,

“Our third quarter wins showcase the strengths of our combined organization as the bulk of our activity was concentrated on our collective campuses in Ashburn, which is not only the largest and fastest growing data center market in the world, but also the combined company’s largest metro area in terms of existing capacity and ability to support our customers growth.”

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In Q3-17, Digital’s current backlog of leases signed but not yet commenced stands at $106 million. The step up from $64 million last quarter reflects the $50 million of space and power leases signed, along with the $59 million backlog inherited from the DuPont acquisition offset by $67 million of commencements. The weighted average lag between third-quarter signings and commencements improved to four months.

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Digital retained 86% of third-quarter lease expirations, and signed $66 million of renewals during the third quarter, in addition to new leases signed. The weighted average lease term on renewals was over six years, and cash rents on renewal leases rolled down 3.8%, primarily due to two sizable above market leases that were renewed during the third quarter, one on the East Coast and one in Phoenix. Digital expects cash re-leasing spreads will be positive for the fourth quarter, as well as for the full year 2017.

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As you can see from the bridge chart below, Digital’s primary driver is a full quarter with the higher share count outstanding following the close of the DFT acquisition late in the third quarter. Digital still expects to realize approximately $18 million of annualized overhead synergies and expects the transaction will be roughly 2% accretive to core FFO per share in 2018 and roughly 4% accretive to 2018 AFFO per share.

However, these synergies will not fully be realized until 2018 and the quarterly run rate is expected to spring load in the fourth quarter before bouncing back in 2018.

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As you can see below, Digital’s non-cash straight-line rental revenue has come down from a run rate of $23 million in the fourth quarter of 2013, all the way down to less than $2 million in the third quarter.

Over that same time, quarterly revenue has grown by 60% from $380 million to more than $600 million. This trend reflects several years of consistent improvement in data center market fundamentals, as well as the impact of tighter underwriting discipline, which has driven steady growth in cash flows and sustained improvement in the quality of earnings.

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Buy This Blue Chip?

First off, I am not selling this BLUE CHIP REIT. I am confident with my overweight exposure and I will continue to add more shares in price weakness. Let’s take a look at the dividend yield, compared with the peers below:

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Let’s take a closer look at Digital’s dividend history, and specifically the FFO Payout history…

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As you can see, Digital has continued to widen the margin of safety related to the Payout Ratio (helps me SWAN)…

Now, let’s examine the P/FFO multiple, compared to the peers:

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As you can see, Digital is cheaper (based on P/FFO) than the peers. Let’s examine the FFO/share growth chart below…

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As you can see, Digital is not growing as robustly as the peers; however, the company has continued to generate ~8% FFO/share growth and this powerful pattern of predictability is the primary reason I own shares in this REIT. Take a look at this FFO per share history…

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The average FFO/share growth since 2014 has been around 7.6%… now take a look at the P/AFFO/share chart below…

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This suggests that Digital is easily positioned to continue to grow its dividend by at least 5% annually, possibly a tad better in 2018.

In summary, Digital has been one of my best BLUE CHIP buys since I commenced the Durable Income Portfolio (in 2013). I consider the shares soundly valued today (nibbling); however, I would recommend buying closer to $100/share. As Ben Graham famously explained, “a stock does not become a sound investment merely because it can be bought at close to its asset value.”

Selecting securities with a significant margin of safety remains that value investor’s definitive precautionary measure. I consider Tanger Factory Outlet to be the best BLUE CHIP buy today, as any value investor knows – “it pays to wait patiently for the storm to subside, knowing that a sunnier and more plentiful time is bound, as a law of nature, to resume in due course.”

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Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Other REITs mentioned: (COR), (QTS), (CONE), and (EQIX).

Sources: FAST Graphs and DLR Investor Presentation.

Disclosure: I am/we are long APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DDR, DEA, DLR, DOC, EPR, EXR, FPI, FRT, GEO, GMRE, GPT, HASI, HTA, IRET, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, QTS, REG, RHP, ROIC, SKT, SPG, STAG, STOR, STWD, TCO, UBA, UMH, UNIT, VER, VTR, WPC.

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.

The Top 3 Dividend Growth Stocks For A Weak Dollar

One of the more under-reported pieces of economic news last year was the surprising weakness of the U.S. dollar against the Euro. Despite monetary tightening and interest rate hikes in the U.S., in 2017, the dollar had its worst performance in the past 14 years.

It was a particularly bad year against the Euro. Since reaching a high of 0.953 Euros in 2017, the U.S. dollar is now worth under 0.82 Euros, for a 14% decline. Strength in the Euro came as a surprise, especially since the European Central Bank is still much more accommodating than the U.S. Federal Reserve, and economic growth in the U.S. is heating up.

A weaker dollar isn’t necessarily bad news — in fact, many large U.S. companies would benefit from a falling dollar. This article will discuss three dividend growth stocks that generate a large percentage of revenue from Europe, and would see a boost from a weaker U.S. dollar against the Euro.

Weak Dollar Stock #1: Philip Morris International (PM)

Dividend Yield: 4.1%

First up is tobacco giant Philip Morris International, which generated approximately 30% of its total revenue from Europe over the first three quarters of 2017. PM has an attractive dividend yield slightly above 4%, and has increased its dividend each year since its 2008 spinoff from domestic tobacco giant Altria Group (MO). PM is a Dividend Achiever, a group of stocks with 10+ consecutive dividend increases. You can see the entire list of all 262 Dividend Achievers here.

PM sells tobacco products outside the U.S., with brands including Marlboro, L&M, Chesterfield, Parliament, and more. The company enjoys leading positions across its brand portfolio, particularly in Europe.

Source: Earnings Presentation, page 13

The strong U.S. dollar had been a major source of stress of PM prior to 2017. To that end, the strong U.S. dollar wiped away $1.3 billion from PM’s revenue in 2016. The good news is, the underlying operations of the company continued to perform well in that time — organic revenue excluding excise taxes, and adjusted earnings-per-share, increased 4.4% and 12% in 2016, respectively.

Strength in the U.S. dollar continued to weigh on the company to start 2017. Reported revenue increased 3.8% over the first three quarters, while organic revenue increased 6% in that time. As the foreign exchange market has become more favorable to PM, net revenue growth could see a meaningful boost in 2018.

PM has excellent profitability. The tobacco business is highly lucrative due to economies of scale, as well as pricing power from selling an addictive product. PM operates 48 production facilities in 32 different countries. Going forward, PM’s growth will be fueled by its collection of products it refers to as reduced-risk. These are products that do not burn tobacco. According to the company, this results in fewer adverse health effects, and are designed to address changing consumer preferences.

Source: Q2 Earnings Presentation, page 10

The reduced-risk portfolio is steadily becoming more important for the company. The RRP is set to contribute nearly 10% of total revenue, up from just 2% in 2016. PM’s biggest growth opportunity is its line of IQOS products, such as HeatSticks, which are growing rapidly. Heated tobacco shipments reached 10.8 billion units in the first half of 2017.

IQOS is already growing market share. Continued growth of the reduced-risk portfolio will help PM counter the decline in cigarette shipment volumes. Plus, a weaker dollar could also add to growth, and help improve the company’s dividend growth as well.

Weak Dollar Stock #2: McDonald’s (MCD)

Dividend Yield: 2.3%

Next up is McDonald’s, which has an even more impressive track record of dividend growth than PM. McDonald’s is a Dividend Aristocrat, a group of stocks in the S&P 500 Index with 25+ consecutive years of dividend increases. You can see all 51 Dividend Aristocrats here.

McDonald’s is the largest publicly-traded fast food company in the world. It operates over 37,000 locations, in more than 100 countries. The company no longer breaks out revenue according to individual geographic regions. But the last year it reported financial results by specific geographic market, Europe accounted for 40% of total sales. As a result, McDonald’s would see a big windfall from a stronger Euro and a correspondingly weaker dollar.

2016 was a comeback year for McDonald’s. After a difficult turnaround in the preceding few years, McDonald’s global comparable-restaurant sales increased 3.8%. 2017 was another strong year. Revenue declined 6% over the first three quarters, but this was driven mostly by the sale of its businesses in China and Hong Kong, and increased franchising.

However, these initiatives have improved McDonald’s profitability. Adjusted earnings-per-share increased 16% through the first three quarters. McDonald’s has enjoyed a successful turnaround, driven by increased franchising, and new menu initiatives such as all-day breakfast.

Going forward, higher franchising, cost cuts, and new menu items are expected to drive continued growth. McDonald’s will also increasingly utilize digital capabilities and technology, as well as delivery. By 2019, the company expects to cut 5%-10% from its cost structure. From 2019 and onward, McDonald’s expects sales growth of 3% to 5% per year, operating margin to expand from the high-20% range, to the mid-40% range, and high-single digit earnings growth.

McDonald’s isn’t a cheap stock. After its impressive rally in 2017, the stock has a price-to-earnings ratio of approximately 25. Its dividend yield is also relatively low. At 2.3%, McDonald’s dividend yield has fallen significantly from its recent highs above 3%. That said, McDonald’s will continue to increase its dividend each year. According to ValueLine, the company has increased earnings at roughly 7% per year over the past 10 years. With a payout ratio below 60%, there is sufficient room for high single-digit dividend growth each year.

Weak Dollar Stock #3: Walgreens Boots Alliance (WBA)

Dividend Yield: 2.1%

Like McDonald’s, Walgreens is a Dividend Aristocrat, with a long history of dividend growth. Walgreens has increased its dividend for 42 years in a row. It has a current dividend yield of 2.1%, and is one of 350 dividend-paying stocks in the consumer staples sector. You can see the full list of all 350 consumer staples dividend stocks here.

It also has a large presence in Europe, particularly after the 2014 acquisition of Alliance Boots, which made it the largest retail pharmacy in the U.S. and Europe. It operates over 13,000 stores in 11 countries. It also has 390 distribution centers that supply approximately 230,000 pharmacies, doctors, health centers, and hospitals.

Source: 2017 Earnings Presentation, page 21

In addition, Walgreens has a large Pharmaceutical Wholesale division, mainly operating under the Alliance Healthcare brand. This business supplies medicines, other healthcare products, and related services, to more than 110,000 pharmacies, doctors, health centers and hospitals each year. The business operates in 11 countries, primarily in Europe.

As a result, Walgreens would be a major beneficiary of a weaker dollar versus the Euro. The company is already performing well, so a currency tailwind would only add to growth. Walgreens is firing on all cylinders. Last quarter, Walgreens reported adjusted earnings-per-share of $1.28, up 7.2% from the same quarter last year. Quarterly revenue increased 7.9%.

However, Walgreens is still generating strong growth from pharmacy sales, its most important business by far. Last quarter, Walgreens generated comparable sales growth of 7.4% and 8.9% in pharmacy sales and prescriptions, respectively.

Source: Q1 Earnings Presentation, page 6

Its retail business as a whole did not perform well, with total retail sales down 2.8% for the quarter. Poor performance in the retail segment was due to consumables, personal care products, and general merchandise. Walgreens continues to be squeezed in these categories by e-commerce retailers such as Amazon (AMZN).

Along with first-quarter earnings, Walgreens raised guidance for the upcoming year. For fiscal 2018, Walgreens expects adjusted earnings-per-share in a range of $5.45 to $5.70. This would represent an increase of 6.9% to 11.8% for 2018.

Final Thoughts

The weak U.S. dollar caught many by surprise last year, and there are reasons to suspect further weakness could be in store for the U.S. dollar in 2018. According to a recent article on CNBC, reasons for continued weakness could include President Trump’s stated desire for a weaker dollar, and the uncertain fate of NAFTA, which could add to instability of the dollar versus the Euro.

Fortunately, investors can position their portfolio to capitalize on any continued drop in the U.S. dollar against the Euro. Philip Morris International, McDonald’s, and Walgreens Boots Alliance all have huge operations in Europe, and would be among the biggest beneficiaries of a falling dollar and stronger Euro in 2018.

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.

The Bond Bull Market Is Over

The financial media headlines have been dominated over the past week by the latest bold declarations. Treasury yields are on the rise, and “the bond bull market is over!” Except that it’s not over. Not even close to starting to be over as a matter of fact. At least not yet. For despite its extraordinarily advanced age and recent fall coupled with the bold proclamations from some notable bond gurus, the 37-year old bond bull market still remains very much alive today.

Bonds Under Fire

Now it should be noted that the bond market has been very much under pressure as of late. Consider the following chart of the 10-Year U.S. Treasury yield (IEF). At the start of September, 10-Year U.S. Treasury yields have risen from a low of 2.05% to as high as 2.55% on Friday.

Knowing that as bond prices fall, bond yields rise, this chart looks bad, right?

Let’s continue by taking this recent rise in yields and put it in the context of the bond bull market. With the latest pullback in bond prices, 10-Year U.S. Treasury yields have inched above their long-term downward sloping trendline.

It’s official. The bond bull market is over, right!?! This sentiment was confirmed by none other than the Bond King himself just this past week.

“Gross: Bond bear market confirmed today. 25 year long-term trendlines broken in 5yr and 10yr maturity Treasuries.”

–Janus Henderson Advisors, Bill Gross, January 9, 2018

Sure, bonds have had a tough stretch as of late. But the bond bull market is not over. It’s going to take a whole lot more than the recent rise in yields to kill off today’s bond bull market.

Not So Fast

Let’s begin by pulling back and taking a look at the bond bull market through a much wider lense. The bond bull market first began in late 1981. This was the first year of the Reagan administration at a time not long after the first flight of the space shuttle Columbia. It was also a time when the then Cinderella story San Francisco 49ers were gearing up for their first Super Bowl run under then third year coach Bill Walsh and the Motor Trend Car of the Year was the Chrysler K Car (love those white wall tires!).

In short, the bond bull market has been going on for a long time now. So what about this upside break in Treasury yields in this longer term context? Pull out your microscopes and look at the following chart. See it? Right there in the bottom right corner? See it? Yeah, neither can I.

But what I can see is a number of other instances over the past 37 years where 10-Year U.S. Treasury yields moved more measurably above this downward sloping trendline in yields including late 1999 into early 2000 as well as all of 2006 into most of 2007. Yet despite these supposed trendline breaks, the bond bull market remains still alive today.

So what is the first key takeaway? That breaking a downward sloping trend line for a few minutes one trading day or for several months for that matter is simply not enough to declare a bull market in anything dead, particularly when it has lasted as long as the bond bull market. It takes a whole lot more.

But what about the proclamations of the Bond King? Shouldn’t he know what he is talking about? Don’t get me wrong. I have a ton of respect for Bill Gross and has listened to what he has to say for decades now. But as demonstrated by the tweet below from a few years back now, even the best of ‘em can miss the mark with their bold proclamations.

“Gross: The secular 30-yr bull market in bonds likely ended 4/29/2013.”

–PIMCO, Bill Gross, May 10, 2013

The same can be said of similar proclamations from other respected bond gurus, some of which were out in force in late 2016 declaring that 10-Year Treasury yields could top 6% in the next few years. Indeed, this outcome may very well come to pass, but A LOT of things need to happen between now and then to lead to this end result. And to date, many of these things remain decidedly elusive. Moreover, it is important to note that many of these very same bond gurus making bold calls such as declaring the bond bull market being over in 2012 also understandably maintain openness in their predictions. This includes suggesting that bond yields could fast track their way lower to 1% back at the start of 2015, only to see them turn and steadily rise throughout the rest of the calendar year.

As a result, while they remain worth respecting and listening to closely, remember that the bold prognostications by market gurus of any ilk are nothing more than pieces of worthwhile information that should be considered in a broader context when continuing to map out one’s own investment journey that takes place step-by-step over long-term periods of time.

Bond Bull Market – Alive And Well

When it comes to today’s bond bull market, sure it has struggled recently, but it remains very much alive and well today.

Bull markets do not die all of the sudden. Instead, they die a slow death over time. And the longer they have been in place, the longer it takes to kill them off. When it comes to bull market durations, 37-years is definitely on the very long side of the historical spectrum. As a result, the bond bull market is not going to simply end overnight. Instead, it is going to be a process that will take months if not years to fully play itself out.

In order to officially declare the bond bull market dead and the arrival of a new bond bear market to take its place, we are going to need to see A LOT of accompanying events take place along with it. And virtually none of these things exist today.

Let’s begin with the trendline break itself. Yes, we inched across the downward sloping trendline for the 10-Year U.S. Treasury yield. But we are not even close to seeing a confirmation in this trendline break for the 30-Year U.S. Treasury yield. In fact, this remains locked in the very middle of its long-term range. Bond bull market very much alive and well here.

With this point in mind, it is worthwhile to compare the path of the 10-Year and 30-Year bond yields (TLT) since early September. While the 10-Year yield has steadily risen, the 30-Year yields remains well below its highs from late October. This implies not that something is going on with the bond market more broadly, but instead that something may be taking place more specifically with 10-Year Treasury bonds.

Now consider the same 10-Year Treasury yields against their shorter dated brethren in 2-Year Treasury yields. Here we see 2-Year yields are rising even faster than 10-Year yields.

This, my friends, is further evidence of the yield curve flattening that we have been hearing so much about. This is shown differently in the chart below as the spread between the 10-Year U.S. Treasury yield and the 2-Year U.S. Treasury yield (the 2/10 spread), which has been falling like a rock since late October to new post crisis lows.

While the 2/10 spread increased marginally in recent days, the trend remains definitively lower. And most other spread readings across the yield curve including the 5/30 spread have not even moved marginally higher but instead have fallen to fresh new lows in recent days.

Why do these spreads matter? Because in order for the bond (AGG) bull market to end, we almost certainly need to see steadily rising inflation along with sustained economic growth. And the leading signal from the bond (BND) market that inflation is steadily on the rise and stronger economic growth is on its way is a steepening yield curve. Put more simply, we would expect to see 30-year yields rising faster than 10-year yields and 10-year yields rising faster than 2-year yields. But instead, we are continuing to see the exact opposite. The yield curve is flattening. And 2-year yields (SHY) are rising faster than 10-year yields, which are rising faster than 30-year yields. If anything this suggests signals of disinflation and a weaker economy, which is supportive of a bond bull market picking up steam in the next few years instead of coming to its demise today.

OK. So the trends in the bond market itself do not suggest the bull market is actually ending. But let’s take this a few steps further.

Let’s suppose the bond bull market was indeed ending and 10-Year U.S. Treasury yields were set to fast track their way to 6% in the next two years as some experts are suggesting. Now before going any further it should be noted that a move in 10-Year U.S. Treasury yields from today’s levels at 2.55% to 6% in two years means that we are going from current levels that are still roughly -1 standard deviations below the long-term historical average to +1 standard deviations above the long-term historical average. In other words, this suggests that something radical is about to happen in the U.S. economy in order to realize this outcome – either that economic growth is going to run so hot that it’s going to bring rapidly escalating inflation along with it, which is likely to cause the U.S. Federal Reserve to start slamming on the monetary policy breaks, or that we have a bond market riot that comes without U.S. economic growth. Either way, the outcome would be decidedly negative for capital markets in general across the board. So if this was indeed the case that such an outcome was nigh, we would expect to see commensurate ripple effects across the capital market landscape.

With this in mind, let’s consider high yield bonds (JNK). This is an asset class that has seen its absolute yields under 6% fall to their lowest levels on record and its yield spreads relative to comparably dated U.S. Treasuries at just over 3% also approaching their tightest levels in history last seen in 2007. Put more simply, high yield bonds are priced at a considerable premium today. Now recognizing the fact that investors are not likely to wish to receive a negative premium for the considerably greater default and liquidity risks that come with owning high yield bonds versus a comparably dated U.S. Treasuries (put more simply, investors are not going to own a high yield bond yielding 5.7% if they can get U.S. Treasuries with the same time to maturity yielding 6%), we should expect high yield bond prices to also be moving sharply lower in anticipation of this bond bull market coming to an end. But how have high yield bonds been doing lately amid these calls that the bond bull market is now over? Just fine as a matter of fact.

Either high yield bond (HYG) investors are absolutely oblivious, or something else is going on in the bond market other than a bull meeting its imminent demise. Even during the immediate aftermath of the U.S. Election, which was the last time that the bond gurus were out on the streets in force declaring the end of the bond bull market, we saw a reflexive action in high yield bonds to the downside that ultimately proved to be unfounded. And this same lack of response same thing can be said today for investment grade corporate bonds (LQD), emerging market debt (EMB), senior loans (BKLN), convertible bonds (CWB), or any other spread product whose valuation is directly or primarily reliant on U.S. Treasury yields including – wait for it – U.S. stocks (SPY). If the bond bull market has officially come to an end, apparently the rest of capital markets has not gotten the memo as of yet.

Now have we seen a rise in inflation expectations as of late? Sure, as the 5-year breakeven rate, which is a measure of expected inflation over the next five years derive by 5-year Treasuries (IEI) versus 5-year inflation indexed Treasuries (NYSEARCA:TIP), has risen from around 1.56% at the start of September to 1.89% as of Friday. This is notable and is a development worth monitoring in the days, weeks, and months ahead. But this same reading remains below the late January 2017 highs of 1.96% and is still well below the expectations toward 2.4% throughout much of the post crisis period up until a few years ago when the realization started to set in that the sustainably higher inflation anticipated from extraordinarily aggressive monetary policy might never actually materialize.

So while we do have some evidence of increased inflation expectations lately, they should still be considered marginal at best to date.

Let us take another step and consider U.S. Treasury (TLH) yields relative to their global counterparts. Much has been made about the corresponding rise in government bond yields from comparable global safe havens such as Japan (NYSEARCA:EWJ) and Germany (EWG) and how they are also supporting this end of bond bull market days theme. Yes, 10-Year government bond yields in Japan recently to as high as 0.09%, but this is still notably low and we have seen this script a few times before over the past year.

Same with German Bunds. We have seen 10-Year yields rise to 0.58% on Friday at a time when the European (VGK) economy is supposedly continuing to improve and the ECB is taking their foot away from the monetary policy accelerator. Yet we even higher yields touched back in July 2017 only to see them fall back again in the second half of last year.

And even with the recent rise in yields across the safe haven bond world, it is still important to note that the premium that global bond investors are getting paid to put their money in U.S. Treasuries remains about as attractive as it has been in recent history.

This relatively attractive valuation for U.S. Treasuries relative to their global safe haven counterparts suggests that a source of demand should remain to stem the onset of any bear market tide and hold the bull market in place at least for the time being.

But what about the blow out in the deficit and the increased U.S. Treasury issuance expected to result from recently passed tax legislation? The world has shown repeatedly in recent years including Japan over longer-term periods of time that governments can borrow like drunken sailors and still maintain historically low interest rates. This is an important issue worth monitoring, but we need to see evidence of such pressures actually showing up in bond prices and yields first before actually taking action on such expectations.

What about the fact that the Fed is set to increasingly shrink their balance sheet going forward as part of quantitative tightening, or QT? It is important to remember two things. First, the Fed to this point is shrinking its balance sheet by allowing some of its existing maturities to roll off without reinvesting the proceeds. Put simply, they are not selling, instead they are no longer repurchasing as much as they were before. This is an important difference. Moreover, even when they finally do start selling outright at some point in the future, it is critical to remember that they are only one participant in a large and vast global marketplace for U.S. Treasuries. And they will be one seller in a market that could be filled with many buyers along the way, particularly if the global economy is not doing so hot in the future. This helps explain why U.S. Treasury yields consistently rose throughout much of QE1, QE2 and QE3 despite the fact the Fed was buying massive sums of U.S. Treasuries all along the way.

Lastly, let’s come full circle and consider the technical aspect once again. In order for a bull market in anything to be over, we need to see a successive series of lower lows and lower highs. In the case of U.S. Treasury yields, this would be higher highs and higher lows. But when looking at 10-Year U.S. Treasury yields, we don’t even have the first higher high as of yet, as the 10-Year Treasury yield at 2.55% remains below the high of 2.62% from early 2017. We would need to see multiple higher highs and higher lows over the course of a year or more before we can even begin to conclude anything about a 37-year bull market in bonds being over.

And when considering the same chart for 30-Year U.S. Treasury yields, we don’t even have any signs of a reversal in trend, much less anything even resembling a higher high of which to speak.

I’m Still Alive

Putting all of this together, the recent talk of the bond bull market being over is grossly overblown. Could this be the very beginning of the end for the bond bull market? Sure, anything is possible. But we are going to need to see A LOT, and I mean A LOT, of confirmation not only from 10-Year U.S. Treasuries, not only from the U.S. Treasury market in general, not only from the broader bond market, but also from the capital markets and economic data spectrum as a whole before we can even begin to consider that the bond bull market that is running at 37-years and counting is even close to being over. If anything, it is the latest attractive buying opportunity in a long series of buying opportunities that have presented itself in the bond market over the past four decades.

What then explains the recent selling in the belly of the U.S. Treasury curve and the corresponding rise in yields? I will be interested as I have been in past years to take a look at the Treasury data on major foreign holders of Treasury securities when it is officially released in a few months, as I suspect we will be able to find our answers in this data has we have so many times in the past when the mainstream financial media is still talking about things like “taper tantrums”.

Of Stocks And Bonds And Bulls

Before closing, I am compelled to raise a related point. Just as I am writing in defense of the bond bull market still being alive today, I would almost certainly be writing something very similar about the U.S. stock market that closed on Friday at yet another new all-time high at 2786 on the S&P 500 Index (SPY) if it ended up falling sharply below 2200 in the coming months. And this comes from someone in myself that has been a proclaimed long-term stock market bear for many years now (just because I think something will ultimately end badly does not mean that this bad ending will arrive tomorrow and be fully felt overnight).

Some would be out proclaiming the start of a new bear market in stocks as supported by the fact that the S&P 500 Index (IVV) had fallen by more than -20% from its peaks. But just as long lived bond bull markets do not suddenly die with a simple short-term break in trend, long lived stock (NYSEARCA:VOO) bull markets such as our second longest in history today to date will not simply die with one sharp pullback to the downside even if it ends up being a fleeting drop of more than -20% from its all-time highs.

The bull market topping process in any asset class, whether it is stocks (DIA), bonds, or anything else, is something that takes place over extended periods of time and is filled with various escape routes along the way for those that need them. The key in navigating any such transitions is to be prepared and stand at the ready to take not only gradually evasive but potentially even countercyclical action when the time comes. And while their time will eventually come, when considering both the 37-year bond bull market and the 9-year stock bull market, we have yet to arrive today at such a junction for either asset class. At least not yet.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I am/we are long RSP,TLT,TIP.

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.

Virgin Hyperloop One Is Bringing Elon Musk's Dream to Life

When the hyperloop first sparked a frenzy in 2013, it was just an Elon Musk Big Idea—very exciting, maybe possible, definitely hard to believe. Now, five years on, a version of the futuristic, tube-based transportation system is taking shape in the Nevada desert. Some 35 miles north of Las Vegas, the terrain is all sand, rock, and spiky shrubbery, leading up to stunning reddish mountains on the horizon. It’s a world just isolated enough for Virgin Hyperloop One to build a giant white tube and not attract too much attention, apart from the few local tortoises that the secluded engineers have adopted.

“We did this whole construction in around 10 months,” says Kevin Mock, senior test engineer. This is the first time the LA-based company has let any media in to see its test site, and as we walk around one end of the tube, I get the full impression of its length for the first time. One third of a mile long and nearly 11 feet in diameter, and reflecting the orange of the setting sun, it’s just painted steel, wrapped with a few strengthening loops. “It’s similar to a water pipe, but it was made to our specific specifications,” Mock says.

The Big Idea reached the world when Elon Musk published a 57-page white paper outlining his thinking for firing levitating pods, carrying passengers or cargo through nearly airless tubes, at speeds up to 700 mph. Busy running both Tesla and SpaceX, Musk invited anyone interested to make it a reality. Virgin Hyperloop One (originally known as Hyperloop Technologies, then Hyperloop One, until Richard Branson came aboard as chairman in December) is one of the companies that materialized to give it a shot.

The hyperloop bears the Muskian hallmarks of radical futurism, but its brilliance is in the fact that it won’t take a revolution to build one. It’s really just a collection of existing transportation and industrial technologies. It’s a chimera, part elevated structure, metal tube, bullet train, pressure vessel, and vacuum system, all smooshed together. The challenge is integrating them without smooshing paying passengers—or profit margins. Hyperloop One think it can launch a commercial system in 2021, which is why it’s out here in the desert, with its test tube, aka DevLoop. This is where the company is working out the myriad engineering challenges, trying to make a system it can deploy commercially.

The company plans to run these tubes along pylons, which should be easy enough, and lets it avoid some of the engineering work that comes with laying heavy rail tracks along the ground.

Kyle Cothern/Virgin Hyperloop One

To suck the air out of the DevLoop, Hyperloop One used a row of small pumps, housed in a metal building to one side. These are off the shelf components, typically used in steel factories or meat processing plants (it’s probably better not to ask for details). They can drop the pressure inside the tube to under 1/1000th of atmospheric conditions at sea level, the equivalent of what you get at 200,000 feet. By that point, the few air molecules left are not going to get in the way of a speeding vehicle. At the right hand end of the tube, one section of pipe, about 100 feet long, operates as an airlock. A 12-foot steel disc slides across to separate that chunk from the longer tube, so that pods or other vehicles can be loaded in and out without having to pump the whole tube down to vacuum, which takes about four hours.

The company plans to run these tubes along pylons, which should be easy enough, and lets it avoid some of the engineering work that comes with laying heavy rail tracks along the ground. This short tube isn’t quite level, sloping down with the contour of the land, which a production system could do, gently, too. “That allows us to minimize the cost of the civil structures while keeping our elevations in check,” says Mock.

Where the tube meets each T-shaped pillar of concrete holding up the 2.2 million pound structure, sits a sliding bracket. Any civil engineer has wrestled with metal’s habit of expanding and contracting as temperatures change, and the Hyperloop crew in the desert is no exception. Even this relatively short section of steel changes length by several feet. “It moves a lot, and we had to account for that in the design,” says Mock. A full sized Hyperloop, running, say, 350 miles from LA to San Francisco, would need some sort of sliding expansion joints, which the company says its design will accommodate.

Since introducing its prototype pod to the tube last summer, Hyperloop One has completed some 200 test runs at varying speeds, collecting data on every variable it can track. In December, it went for pure speed, sending the pod to 240 mph in just a few seconds—a new hyperloop record. (Expect to see a lot of those in the next few years.)

“We plan to have a single type of pod that can do both cargo and people,” says Anita Sengupta, who’s in charge of systems engineering. Moving inanimate cargo is a logical starting point, since you can’t kill it if something goes wrong, and Hyperloop One has a few use cases in mind, like moving containers from the Port of LA to an inland depot, so polluting trucks don’t have to crowd through congested urban areas.

The company has plenty of competition in the race to realize Elon Musk’s dream. Arrivo, founded by Hyperloop One co-founder and former top engineer Brogan BamBrogan, plans to build a “hyperloop inspired system” in Denver. Student teams around the world compete in a SpaceX-sponsored challenge, using a short tube Musk built in Los Angeles. And the Big Idea Man himself seems to be back in the game, saying he’d like to pop a hyperloop or two into the tunnels he’s digging around the country.

Of course, solving these engineering riddles only gets you part of the way there—then come the fights over land rights, the environmental impact studies, the political wrangling. and the funding questions that make infrastructure one of the toughest businesses around. But if Hyperloop One can cut through it all, this patch of desert will likely see a lot more visitors who aren’t there to see the tortoises.


Loop There It Is

Meltdown, Spectre, Malicious Apps, and More of This Week's Security News

The fallout of the widespread Meltdown and Spectre processor vulnerabilities continued this week. WIRED took an in-depth look at the parallel sagas that caused four research teams to independently discover the bugs within months of each other. Dozens of patches are now floating around to try to defend devices against attacks that might exploit the vulnerabilities, but a significant amount of time and resources has gone into vetting and installing the patches, because they slow processors down and generally take a toll on systems in some situations.

On Thursday, Congress re-authorized warrantless surveillance initiatives under Section 702 of the 2008 FISA Amendments Act, rejecting reform proposals and instead expanding the scope of the dragnet for six years. In other secret surveillance news, a report by Human Rights Watch details legal techniques law enforcement officials use to avoid revealing some of their sketchier investigative tools.

Skype is going to start offering end-to-end encryption as an opt-in feature, which will bring the protection to the service’s 300 million users (though the security industry likely won’t be able to vet whether Skype’s encryption implementation is actually robust). But researchers found a flaw in WhatsApp, which is end-to-end encrypted by default, that would allow an attacker to join a private group chat and manipulate the notifications about their entrance so group members aren’t necessarily aware that they are an interloper.

Protests in Iran continue to be forcibly opposed by the government on numerous fronts, including through initiatives to disrupt Iranians’ internet connections and access to communication platforms like Instagram and Telegram. Researchers have developed a technique for catching spy drones in the act by analyzing their radio signals, and mobile pop-up ads are on the rise. Oh, and the Russian hacking group Fancy Bear is apparently gearing up to target the 2018 Winter Olympics, so there’s that.

And also there’s more. As always, we’ve rounded up all the news we didn’t break or cover in depth this week. Click on the headlines to read the full stories. And stay safe out there.

###Google Removes 60 Malicious Apps Downloaded Millions of Times from the Official Play StoreGoogle removed 60 supposed gaming apps from the Google Play Store on Friday after new research revealed that the apps were laced with malware designed to show pornographic ads and get users to make bogus in-app purchases. The findings from the security firm Check Point indicate that users downloaded the tainted apps three to seven million times. The malware is known as “AdultSwine,” and also has a mechanism to try to trick users into downloading phony security apps so attackers can gain even deeper access to victims’ devices and data.

The malware campaign is problematic in general, but is particularly noteworthy because it targets apps that might appeal to children, like one called “Paw Puppy Run Subway Surf.” The situation fits into a larger pattern of malicious apps sneaking into the official Google Play Store. Google has been working for years on tactics to try to catch and screen out bad apps.

FBI Reinforces Anti-Encryption Stance

FBI Director Christopher Wray renewed controversy about encryption on Tuesday when he said at a New York cybersecurity conference that the data protection protocols are an “urgent public safety issue.” Wray noted that the FBI failed to crack 7,800 devices last year that would have aided investigations. Wray said that encryption bars the FBI from extracting data in more than half the devices it tries to access. Digital data protections, namely encryption, have caused longstanding controversy about the balance between the public safety necessity of law enforcement and the separate safety issues that emerge when an encryption protocol is undermined by a government backdoor or other workaround. Echoing Wray’s remarks, FBI forensic expert Stephen Flatley said at a different New York cybersecurity event on Wednesday that people at Apple are “jerks,” and “evil geniuses” for adding strong data protection mechanisms to their products.

###Apple Patches a Small, But Glaring Bug in macOSA new bug discovered in macOS High Sierra would allow an attacker to change your App Store system preferences without knowing your account password. That doesn’t get an attacker…all that much, and the bug only exists when a device is logged into the administrator account, but it’s another misstep on the ever-growing list of security gaffes in Apple’s most recent operating system release. A fix for the bug is coming in the next High Sierra release.

###US Customs and Boarder Patrol Updates Its Electronic Device Search Policy

The United States Customs and Border Protection agency updated 2009 guidelines last week to include new protocols for searching electronic devices at the border. CBP says it searched 19,051 devices in 2016 and 30,200 devices in 2017. The new documents lay out the difference between a Basic Search, in which agents can ask anyone to submit a device for local inspection (data stored in the operating system and local apps), and an Advanced Search, in which border agents can connect a device to a special CBP analysis system that scans it and can copy data off of it. The guidelines stipulate that agents can only do Advanced Searches when they have reasonable suspicion that an individual has participated in criminal activity or is a threat to national security in some way. CBP agents are limited to devices and can’t search an individual’s cloud data. Despite these and other limitations outlined in the procedures, privacy advocates note that these CBP assessments are still warrantless searches, and the new guidelines more specifically and extensively outline what agents can do in addition to describing boundaries.

South Korea plans to ban cryptocurrency trading, rattles market

SEOUL (Reuters) – The South Korean government on Thursday said it plans to ban cryptocurrency trading, sending bitcoin prices plummeting and throwing the virtual coin market into turmoil as the nation’s police and tax authorities raided local exchanges on alleged tax evasion.

The clampdown in South Korea, a crucial source of global demand for cryptocurrency, came as policymaker around the world struggled to regulate an asset whose value has skyrocketed over the last year.

Justice minister Park Sang-ki said the government is preparing a bill to ban trading of the virtual currency on domestic exchanges.

“There are great concerns regarding virtual currencies and justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges,” said Park at a press conference, according to the ministry’s press office.

A press official said the proposed ban on cryptocurrency trading was announced after “enough discussion” with other government agencies including the nation’s finance ministry and financial regulators.

Once a bill is drafted, legislation for an outright ban of virtual coin trading will require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.

The government’s tough stance triggered a selloff of the cyrptocurrency on both local and offshore exchanges.

The local price of bitcoin plunged as much as 21 percent in midday trade to 18.3 million won ($17,064.53) after the minister’s comments. It still trades at around a 30 percent premium compared to other countries.

Bitcoin was down more than 10 percent on the Luxembourg-based Bitstamp at $13,199, after earlier dropping as low as $13,120, its weakest since Jan. 2.

South Korea’s cryptocurrency-related shares were also hammered. Vidente and Omnitel, which are stakeholders of Bithumb, skidded by the daily trading limit of 30 percent each.

Park Nok-sun, a cryptocurrency analyst at NH Investment & Securities, said the herd behaviour in South Korea’s virtual coin market has raised concerns.

Indeed, bitcoin’s 1,500 percent surge last year has stoked huge demand for cryptocurency in South Korea, drawing college students to housewives and sparking worries of a gambling addiction.

“Virtual coins trade at a hefty premium in South Korea, and that is herd behaviour showing how strong demand is here,” Park said. “Some officials are pushing for stronger and stronger regulations because they only see more (investors) jumping in, not out.”

RAIDS

There are more than a dozen cryptocurrency exchanges in South Korea, according to Korea Blockchain Industry Association.

The proliferation of the virtual currency and the accompanying trading frenzy have raised eyebrows among regulators globally, though many central banks have refrained from supervising cryptocurrencies themselves.

The news on South Korea’s proposed ban came as authorities tightened their grip on some of the cryptocurrency exchanges.

The nation’s largest cryptocurrency exchanges like Coinone and Bithumb were raided by police and tax agencies this week for alleged tax evasion. The raids follow moves by the finance ministry to identify ways to tax the market that has become as big as the nation’s small-cap Kosdaq index in terms of daily trading volume.

Some investors appeared to have taken preemptive action.

”I have already cashed most of mine (virtual coins) as I was aware that something was coming up in a couple of days,” said Eoh Kyung-hoon, a 23-year old investor.

Bitcoin sank on Monday after website CoinMarketCap removed prices from South Korean exchanges, because coins were trading at a premium of about 30 percent in Asia’s fourth largest economy. That created confusion and triggered a broad selloff among investors.

An official at Coinone told Reuters that a few officials from the National Tax Service raided the company’s office this week.

“Local police also have been investigating our company since last year, they think what we do is gambling,” the official, who spoke on condition of anonymity, said and added that Coinone was cooperating with the investigation.

Bithumb, the second largest virtual currency operator in South Korea, was also raided by the tax authorities on Wednesday.

“We were asked by the tax officials to disclose paperwork and things yesterday,” an official at Bithumb said, requesting anonymity due to the sensitivity of the issue.

The nation’s tax office and police declined to confirm whether they raided the local exchanges.

South Korean financial authorities had previously said they are inspecting six local banks that offer virtual currency accounts to institutions, amid concerns the increasing use of such assets could lead to a surge in crime.

($1 = 1,069.9600 won)

Reporting by Dahee Kim & Cynthia Kim; Editing by Shri Navaratnam

How the Government Hides Secret Surveillance Programs

In 2013, 18-year-old Tadrae McKenzie robbed a marijuana dealer for $130 worth of pot at a local Taco Bell in Tallahassee, Florida. He and two friends had used BB guns to carry out the crime, which under Florida law constituted robbery with a deadly weapon. McKenzie braced himself to serve the minimum four years in prison.

But in the end, a state judge offered McKenzie a startlingly lenient plea deal: He was ordered to serve only six months’ probation, after pleading guilty to a second-degree misdemeanor. The remarkable deal was related to evidence McKenzie’s defense team uncovered before the trial: Law enforcement had used a secret surveillance tool often called Stingray to investigate his case.

Stingrays are devices that behave like fake cellphone towers, tricking phones into believing they’re pinging genuine towers nearby. By using the device, cops can determine a suspect’s precise location, outgoing and incoming calls, and even listen-in on a call or see the content of a text message.

McKenzie’s lawyers suspected cops had used a Stingray because they knew exactly where his house was, and knew he left his home at 6 a.m. the day he was arrested. The cops had obtained a court order from a judge to authorize Verizon to hand over data about the location of Mckenzie’s phone. But cell tower data isn’t precise enough to place a device at a specific house.

The cops also said they used a database that lets law enforcement agencies locate individuals by linking them with their phone numbers. But the phone McKenzie was using was a burner, and not associated with his name. Law enforcement couldn’t adequately explain their extraordinary knowledge of his whereabouts.

The state judge in the case ordered police to show the Stingray and its data to McKenzie’s attorneys. They refused, because of a non-disclosure agreement with the FBI. The state then offered McKenzie, as well as the two other defendants, plea deals designed to make the case go away.

The cops in McKenzie’s case had ultimately failed to successfully carry out a troubling technique called “parallel construction.”

First described in government documents obtained by Reuters in 2013, parallel construction is when law enforcement originally obtains evidence through a secret surveillance program, then tries to seek it out again, via normal procedure. In essence, law enforcement creates a parallel, alternative story for how it found information. That way, it can hide surveillance techniques from public scrutiny and would-be criminals.

A new report released by Human Rights Watch Tuesday, based in part on 95 relevant cases, indicates that law enforcement is using parallel construction regularly, though it’s impossible to calculate exactly how often. It’s extremely difficult for defendants to discern when evidence has been obtained via the practice, according to the report.

“When attorneys try to find out if there’s some kind of undisclosed method that’s been used, the prosecution will basically stonewall and try not to provide a definitive yes or no answer,” says Sarah St. Vincent, the author of the report and a national security and surveillance researcher at Human Rights Watch.

In investigation reports, law enforcement will describe evidence obtained via secret surveillance programs in inscrutable terms. “We’ve seen plenty of examples where the police officers in those reports write ‘we located the suspect based on information from a confidential source;’ they use intentionally vague language,” says Nathan Freed Wessler, a staff attorney at the ACLU’s Speech, Privacy, and Technology project. “It sounds like a human informant or something else, not like a sophisticated surveillance device.”

Sometimes, when a savvy defense attorney pushes, an unbelievable plea deal is offered, or the the case is dropped entirely. If a powerful, secret surveillance program is at stake, a single case is often deemed unimportant to the government.

“Parallel construction means you never know that a case could actually be the result of some constitutionally problematic practice,” says St. Vincent. For example, the constitutionality of using a Stingray device without a warrant is still up for debate, according to the Human Rights Watch report. Some courts have ruled that the devices do violate the Fourth Amendment.

Hemisphere, a massive telephone-call gathering operation revealed by The New York Times in 2013, is one of the most well-documented surveillance programs that government officials attempt to hide when they use parallel construction. The largely secret program provides police with access to a vast database containing call records going back to 1987. Billions of calls are added daily.

In order to create the program, the government forged a lucrative partnership with AT&T, which owns three-quarters of the US’s landline switches and much of its wireless infrastructure. Even if you change your number, Hemisphere’s sophisticated algorithms can connect you to your new line by examining calling patterns. The program also allows law enforcement to have temporary access to the location where you placed or received a call.

The Justice Department billed Hemisphere as a counter-narcotics tool, but the program has been used for everything from Medicaid fraud to murder investigations, according to documentation obtained in 2016 by The Daily Beast.

“What Hemisphere’s capabilities allow it to do is to identify relationships and associations, and to build people’s social webs,” says Aaron Mackey, staff attorney at the Electronic Frontier Foundation (EFF). “It’s highly likely that innocent people who are doing completely innocent things are getting swept up into this database.”

The EFF filed Freedom of Information Act and Public Records Act requests in 2014 seeking info about Hemisphere, but the government only provided heavily redacted files. So the EFF filed a lawsuit in 2015. It’s currently waiting for a California judge to decide whether more information can be made public without impeding law enforcement’s work.

“[The government] is obscuring what we believe to be warrantless or otherwise unconstitutional surveillance techniques, and they’re also jeopardizing a defendant’s ability to obtain all the evidence that’s relevant,” says Mackey.

Parallel construction can also involve a simple event like a traffic stop. In these instances, local law enforcement follows a suspect and then pulls them over for a mundane reason, like failing to use a turn signal. While the stop is meant to look random, cops are often working on a tip they received from a federal agency like the DEA.

“Sometimes when tips come through, the federal authorities don’t even tell the local authorities what they’re looking for,” says St. Vincent. The tip could be as simple as to watch out for a car at a specific place and time.

These stops are referred to as “wall off” or “whisper” stops, according to the Human Rights Watch report. In these instances, local law enforcement has to find probable cause for pulling the suspect over to avoid disclosing the tip. The tip is then never mentioned in court, and instead the beginning of the investigation is said to be the “random” stop.

The Human Rights Watch report concludes that Congress should pass legislation forbidding the use of parallel construction because it impedes on the right to a fair trial. Some representatives, like Republican Senator Rand Paul, have also called for banning the practice.

Opponents of parallel construction believe it should be outlawed because it prevents judges from doing their jobs. “It really gives a lot of power to the executive branch,” says St. Vincent. “It cuts judges out of the role of deciding whether something was legally obtained.”

One of the most concerning aspects of the practice is it shields government surveillance technology from public scrutiny. Stingrays, the cellphone-tracking device used in the Florida robbery case, have existed for years, but they’ve only recently been disclosed to the public. Lawyers and legal scholars haven’t yet conclusively decided whether their use without a warrant violates the Fourth Amendment, in part because so little is known about them. That means many people may have been convicted using techniques that violated their rights.

In the future, if the government hides new surveillance technology like facial recognition, the public will be unable to discern if it’s biased or faulty. Unless judges and citizens understand how surveillance techniques are used, we also can’t evaluate their constitutionality.

The public needs to determine if hiding surveillance programs is something it’s comfortable with at all. On one hand, keeping certain techniques secret likely helps authorities apprehend criminals. But if we don’t know how at least the basic contours of how a program works, it’s hard to have any discussion at all.