(Reuters) - Shares of Cisco Systems Inc and other network equipment makers fell on Friday after a report that Amazon.com Inc’s cloud services business was considering selling its own network switches to business customers at much lower prices.
FILE PHOTO: Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City, January 29, 2016. REUTERS/Mike Segar/File Photo
Cisco’s shares were down 5 percent, wiping off nearly $ 11 billion from its market capitalization. Shares of Juniper Networks Inc and Arista Networks Inc fell 4 percent as investors feared that Amazon’s scale and pricing power could disrupt the sector.
The report comes days after Amazon sent shockwaves across the drug retailing sector with its move to buy small online pharmacy PillPack.
The networking devices will consist of open-source software and unbranded hardware known as “white-box” switches and come with built-in connections to AWS cloud services, such as servers and storage, the Information said.
Amazon Web Services could price its white-box switches 70-80 percent less than comparable switches from networking giant Cisco, the report said, citing one of the people with direct knowledge of the unit’s plan.
“If true, we think this would be a notable negative for the networking equipment space going forward,” RBC Capital Markets analyst Mitch Steves wrote in a note.
AWS expects to launch the switches for sale within the next 18 months, according to the report.
Amazon and Juniper did not immediately respond to a request for comment. Cisco and Arista declined to comment.
Reporting by Arjun Panchadar in Bengaluru; Editing by Arun Koyyur and Saumyadeb Chakrabarty
Due to a generous 8.7% discount to its post-buyout price/unit, we just increased our holdings of Southcross Energy Partners (SXE), a smaller midstream LP, which is being bought by American Midstream Partners LP (AMID).
The deal is supposed to close by the end of Q2 2018, and it has already been approved by SXE and AMID unitholders, and has received final state approval.
Deal highlights - Among many other positive attributes, AMID"s mgt. sees this deal as being immediately accretive to its Distributable Cash Flow. This makes sense - SXE used to pay $ .40/unit quarterly, but eliminated its payout in February 2016. However, SXE generated $ 25.36M, and AMID generated $ 89.88M in DCF over the past four quarters.
The new entity will also have a simpler structure, with four segments: Gas G&P, Natgas Transportation, Liquid Pipelines, and Offshore Pipelines, with the offshore segment being its largest, contributing 57% of gross margins:
"In February of this year, the Gulf of Mexico produced 1.7 million barrels per day of crude oil and 2.6 Bcf a day of natural gas. To put this in perspective, the Gulf of Mexico is the second largest crude oil producing base in The United States behind only the Permian Basin. It is producing roughly 30% more oil than either the Bakken or the Eagle Ford basins and 3 times more than the Anadarko basin, home of the SCOOP."
"In Q1 "18, AMID"s Okeanos pipeline had volume increases of over 10% vs. Q1 "17, and were up 6% vs. Q4 "18, due to additional volumes from dedicated wells tied into the system."
AMID"s Delta House asset has been under maintenance, which has reduced its output. On the Q1 call, management pointed out that "current production is just under half of pre-maintained levels or about 55,000 to 60,000 barrels a day equivalent. However, by July, we anticipate the crude oil and natural gas volume should increase from current levels by 64% and 155%, respectively".
In addition, AMID is receiving support from ArcLight Partners" affiliate, Magnolia Infrastructure Holdings, LLC, "to provide additional capital and corporate overhead support to us during the first three quarters of 2018 in connection with temporary curtailment of production flows at Delta House. Pursuant to the agreement, Magnolia has agreed to provide support to us in an amount to be agreed, up to the difference between the actual cash distribution received by us on account of our interest in Delta House and the quarterly cash distribution expected to be received had the production flows to Delta House not been curtailed. Subsequent to the balance sheet date of March 31, 2018, we have received $ 9.4 million for such support". (Source: AMID Q1 "1810-Q)
AMID"s management just announced on 6/18/18 that it has "entered into a definitive agreement for the sale of its marine products terminaling business to institutional investors advised by J.P. Morgan Asset Management, for approximately $ 210 million in cash, subject to working capital adjustments. The transaction is expected to close in the third quarter of 2018." (Source: AMID site)
We assembled this table to get an idea of how the proposed debt leverage is working out. As of 3/31/18, AMID had Net Debt/EBITDA leverage of 6.63X, its leverage was 8.03X, and the combined leverage was 7X.
Deal Execution - There"s always a chance that the buyout won"t go through. However, it has been approved by both boards, by the unitholders of both AMID and SXE, and 4/10/18 they received the final state-level regulatory approval for the merger. On the Q1 "18 call, management said that "at this time, we expect to close this transaction during the second quarter."
Summary
We increased our holdings of SXE, based upon the current post-buyout price discount, and the very attractive 18% post-buyout yield. Another plus is that a very supportive, veteran energy investing firm, ArcLight Capital Partners, owns ~27% of AMID"s units.
We scour US and world markets to find solid income opportunities with dividend yields ranging from 5% to 10%-plus, backed by strong earnings.
These stocks are often small cap, low beta equities that offer stronger price protection vs. market volatility.
We publish exclusive articles each week with investing ideas for the HDS+ site that you won"t see anywhere else.
Our strategy is working in 2018 - the HDS+ portfolio is outperforming the market handily, and has an average dividend yield of over 8%.
Disclosure:I am/we are long SXE, DKL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
A month ago I was milling about a hotel room in New Orleans, procrastinating my prep for on-stage sessions at a tech conference, when I received a startling iMessage. “It’s Alan Murray,” the note said, referring to my boss’ boss’ boss.
Not in the habit of having Mr. Murray text my phone, I sat up straighter. “Please post your latest story here,” he wrote, including a link to a site purporting to be related to Microsoft 365, replete with Microsoft’s official corporate logo and everything. In the header of the iMessage thread, Apple’s virtual assistant Siri offered a suggestion: “Maybe: Alan Murray.”
The sight made me stagger, if momentarily. Then I remembered: A week or so earlier I had granted a cybersecurity startup, Wandera, permission to demonstrate a phishing attack on me. They called it, “Call Me Maybe.”
Alan Murray had not messaged me. The culprit was James Mack, a wily sales engineer at Wandera. When Mack rang me from a phone number that Siri presented as “Maybe: Bob Marley,” all doubt subsided. Jig, up.
There are two ways to pull off this social engineering trick, Mack told me. The first involves an attacker sending someone a spoofed email from a fake or impersonated account, like “Acme Financial.” This note must include a phone number; say, in the signature of the email. If the target responds—even with an automatic, out-of-office reply—then that contact should appear as “Maybe: Acme Financial” whenever the fraudster texts or calls next.
The subterfuge is even simpler via text messaging. If an unknown entity identifies itself as Some Proper Noun in an iMessage, then the iPhone’s suggested contacts feature should show the entity as “Maybe: [Whoever].” Attackers can use this disguise to their advantage when phishing for sensitive information. The next step involves either calling a target to supposedly “confirm account details” or sending along a phishing link. If a victim takes the bait, the swindler is in.
The tactic apparently does not work with certain phrases, like “bank” or “credit union.” However, other terms, like “Wells Fargo,” “Acme Financial,” the names of various dead celebrities—or my topmost boss!—have worked in Wandera’s tests, Mack said. Wandera reported the problem as a security issue to Apple on April 25th. Apple sent a preliminary response a week later, and a few days after that said it did not consider the issue to be a “security vulnerability,” and that it had reclassified the bug as a software issue “to help get it resolved.”
What’s alarming about the ploy is how little effort it takes to pull off. “We didn’t do anything crazy here like jailbreak a phone or a Hollywood style attack—we’re not hacking into cell towers,” said Dan Cuddeford, Wandera’s director of engineering. “But it’s something that your layman hacker or social engineer might be able to do.”
To Cuddeford, the research exposes two bigger issues. The first is that Apple doesn’t reveal enough about how its software works. “This is a huge black box system,” he said. “Unless you work for Apple, no one knows how or why Siri does what it does.”
The second concern is more philosophical. “We’re not Elon Musk saying AI is about to take over the world, but it’s one example of how AI itself is not being evil, but can be abused by someone with malicious intent,” Cuddeford said. As we let machines guide our lives, we should be sure we know how they’re making decisions.
This article first appeared in Cyber Saturday, the weekend edition of Fortune’s tech newsletter.Sign up here.
WASHINGTON (Reuters) - U.S. President Donald Trump said in a tweet on Sunday that he has asked the Commerce Department to help Chinese technology company ZTE Corp “get back into business, fast,” a concession to Beijing ahead of high-stakes trade talks that will take place this week.
FILE PHOTO: A ZTE smart phone is pictured in this illustration taken April 17, 2018. REUTERS/Carlo Allegri/Illustration/File Photo
ZTE, one of the world’s largest telecom equipment makers, suspended its main operations after the U.S. Commerce Department banned American supplies to its business.
Trump’s offer to help comes as Chinese and U.S. officials prepare for talks in Washington with China’s top trade official Liu He to resolve an escalating trade dispute between the world’s two largest economies.
Trump’s reversal will likely have a significant impact on ZTE’s U.S. suppliers such as Qualcomm Inc and Intel Corp. U.S. companies are banned from exporting goods to ZTE, making it difficult for the phonemaker to manufacture new products or update older ones.
“Too many jobs in China lost. Commerce Department has been instructed to get it done!” Trump wrote on Twitter, saying he is working with Chinese President Xi Jinping on a solution.
The ban is the result of ZTE’s failure to comply with an agreement with the U.S. government after it pleaded guilty last year to conspiring to violate U.S. sanctions by illegally shipping U.S. goods and technology to Iran, the Commerce Department said.
American companies are estimated to provide 25 percent to 30 percent of the components used in ZTE’s equipment, which includes smartphones and gear to build telecommunications networks.
The Commerce Department did not immediately respond to a request for comment on Sunday.
Reporting by Valerie Volcovici and Chris Sanders, additional reporting by Karen Freifield; Editing by Lisa Shumaker
Please Note: This article was first published for Income Idea subscribers on Thursday along with additional analysis and implementation ideas. All data in this article is as of 5/2/2018.
Another fund that fits this bill and sponsored by one of my favorite managers is the Guggenheim Strategic Opportunities Fund (GOF). While I have looked at it a number of times for myself, I have never written about it or invested in it myself for the simple reason that I do not buy CEFs at a premium.
I did have a number of readers ask me about the fund and that is why we are taking a deep dive into the fund today, particularly as it may be just the recipe for the uncertain fixed income markets of tomorrow.
The fund uses two primary methods for obtaining leverage.
First, the fund uses reverse repurchase agreements whereby it pledges its investments through transactions creating leverage.
As of November 2017, the fund had $ 58 million in reverse repurchase agreements with its syndicate of banks on which it paid an average weighted interest rate of 1.85%. These costs would be higher today.
Source: GOF Semi-Annual Report
The second source of leverage is a traditional credit facility with a lender.
GOF has an $ 80 million credit facility on which it pays a borrowing rate of .85% over 3 month LIBOR. On this line as of the end of November the fund had just $ 2 million outstanding as it had paid down the majority of the credit facility.
Source: GOF Semi-Annual Report
What is important to note here is that most of the CEF leverage which we have looked at is typically a spread of .7% to 1.2% over 1 Month LIBOR. In the case of GOF it is 3 month LIBOR which is a higher rate.
While generally this was a small spread, the gap is now close to .5%! As such, the fund"s current borrowing costs on this credit facility would be over 3%!
Fortunately it seems that Guggenheim is employing some smart people to run the fund, namely Scott Minerd who has been quite critical of the markets. As such, the fund has been deleveraging as of late.
Source: GOF Semi-Annual Report
The Numbers
The fund is currently distributing a market price distribution yield of 10.44% and is trading at a PREMIUM of 8.78% to its NAV, or net asset value.
Source: CEF Connect
Over the previous year the fund has continued to trade at premiums although it did come very close to parity earlier this year.
Generally speaking, the Net Asset Value has failed to grow beyond its initial IPO even though there is a growth component. THIS IS QUITE CONSISTENT with the findings of the distribution analysis. A few good years bail out many bad years however there has not been meaningful growth.
Looking back over the fund"s lifetime, we can see the fund has generally traded at a premium over the previous 7 years or so however did trade at a discount in 2015/2016 and during the financial crisis when it was trading at close to 30% discounts to NAV. This is once again consistent with "junk bonds."
Performance wise, year to date the fund has been sold off with most other CEFs. The fund is up a mere .21% on a total return basis accounting for the distribution. The price per share is down 3.27% while the NAV is down 3.04%.
Do note at the price vs NAV action early this year when the fund was thrown out and decreased 9%. This is a risk to buying a fund which is trading at a premium as any sustained sell off turns premiums into discounts, adding more misery to the underlying losses.
Over the previous year the fund did give investors a 10.28% total return. This came strictly from the distribution. The underlying price per share is down .6% while the net asset value fell 2.89%. Over distributed? AHA!
Over the last 3 years the story remains the same. The fund presented investors with a 36.17% total return while the price fell 2.9%. The underlying NAV declined 2.5%. A good 2016 bailed out the fund"s track record during this time.
Over the previous 5 years we have precisely the same story. The total return was all about the distribution. The underlying price per share declined 9.28% while the NAV declined 8.99%.
Going back 10 years would have you purchase the fund near the lows of the financial crisis. AS such, the fund has achieved phenomenal results. The fund would have a 270.8% total return (if reinvested). The price per share increased 24.11% while the NAV grew just 8.5%.
Since inception the numbers are not as good. The total return declines to 233.8% with a 4.38% price per share gain and an essentially flat NAV.
The moral of the story, the fund did a PHOENOMINAL job coming out of the financial crisis but it was quite volatile and since 2011 or so, has not grown its NAV in the greatest bull market yet.
Should have? Want signs of over distribution? Plain vanilla (AGG) and (MUB) grew their NAVs during this time.
To put the fund into perspective, we will take a look at the fund against a number of competing products, both levered and unlevered.
As far as "go anywhere" type funds, there are a number of competing closed end funds such as the BlackRock Multi-Sector Income (BIT), the PIMCO Dynamic Credit Income (PCI), and the DoubleLine Income Solutions (DSL) funds. PCI is managed by the PIMCO team and the DoubleLine fund is a representation of the famed Jeffrey Gundlach"s ideas.
I also wanted to take a look at how it does against a covered call fund such as the BlackRock Enhanced Global Dividend fund (BOE).
Lastly we can take a look at two unlevered open end funds, the Fidelity Strategic Income (FSTAX) and the PIMCO Total Return (PTTAX) funds.
Year to date on a total return basis we can see that generally speaking, GOF has lagged for most of the year and was actually the most impacted during the sell off in February. It has since rebounded and comes in the middle of the pack. For the year however (PCI) and (DSL) have been the best performers.
If we look over the last year we can see (GOF) has beat most of its peers coming in behind PCI. Interestingly (BIT) lead the way until the sell off this year. Also of note, even though also PIMCO managed, the open end Total Return Fund was the worst performer.
Over the last three years we have a similar story. PCI lead the way followed by GOF, DSL and BIT.
The equity focused BOE lags and is followed by the two open end funds which were quite stable. In either case, the Fidelity fund handily outperformed the PIMCO Total Return fund.
Looking back 5 years we essentially have PCI and GOF leading the way, followed by (BIT). The high performing DoubleLine fund however comes in at the bottom of the CEF pack simply due to its horrible performance in 2015.
Once again it shows the importance of risk management. It is not as import as to how much you make, and it is more important to focus on how much you DON"T LOSE!
This is ever so important for buy and hold investors.
To get a 10 year number we only have the (GOF) and (BOE) closed end funds along with our two open end funds. This is critical but we do not have any idea how (PCI), (BIT) and (DSL) would perform during a financial crisis.
As we can see, the two closed end funds were decimated during the crisis. While GOF recovered, BOE never did. In fact, the plain vanilla open end Fidelity income fund would provide better total returns than an equity CEF fund.
Overall, GOF has been a good fund especially if we consider that it has been generally less levered than its peers. More importantly from the risk management perspective the fund is leading the way in delevering while its peers are increasing their leverage to maintain the distribution level.
Bottom Line
Guggenheim is an experienced manager and if you want to capitalize on and follow Scott Minerd, (GOF) is a way to do so. Here is a good article on Scott Minerd"s recent thoughts.
From the pricing side, it is very tough for most closed end fund investors I know of to justify purchasing it today, or even keeping it if you already own it.
Over the previous year the fund traded at a premium to NAV of as low as .62% to as high as 11.33%.
Source: CEF Connect
As we can see, the current 8.78% premium to NAV is quite expensive over EVERY measured time period and the Z-Score solidifies that. The right time to buy it would have been earlier this year when it was trading at near parity.
Source: CEF Connect
Overall it is certainly a peculiar time for funds like GOF, PCI and DSL.
I think a great way of thinking about them is like dating a super model. Yes, they look really pretty and you have a great time dating and you get lots of envious looks. But are they the people you believe would end up being terrific soul mates to live together and raise a family?
GOF, PCI, DSL and other high yield junk bond funds have certainly become the "popular guy/gal" and people are paying premiums for them. At the same time, high quality funds and munis have been left at the alter.
Yes, they have performed exceptionally well in a terrific bull market for both fixed income and equities, but so did the housing market in the early 2000s.
The "crazy" part comes in where on one hand we see premium prices for those funds, yet the underlying fundamentals are either turning or completely falling apart such as the distribution coverage with GOF and others.
Of course, I once again have to remind, a distribution is not a dividend and you have to take an underlying look at how the fund is doing.
Bottom line, this is certainly a fund worth owning, but perhaps when the prices are quite a bit better and we have another opportunity to buy in ONCE the tornado comes through.
In the mean time, the BlackRock Multi-Sector Income Fund (BIT) will let you play in the same space at a far lower cost, a 10% discount versus an 8.78% premium and while I have not looked at it yet, the underlying distribution coverage can"t be as bad as (GOF)?
For more information on the fund, please visit the fund"s website at Guggenheim - GOF.
For more reading on the mentioned funds, please take a look at:
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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.
