life. money. probability.
PLUS Do Smartphones Make Us Dumber?
SEPTEMBER/OCTOBER 2019
TIME FOR NEW RULES
Facebook, Amazon and Google Are Too Good at Monopoly
F RE E DIGIT AL EDIT IO N
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the control freak's guide to life, money & probability
september/october 2019
Waking Up to the Big Tech Catastrophe 13 The Hard Truth: People are the Product Consumers willingly trade their personal data for personalized interactions with retailers.
16 Facebook Advisor Turns Tech Adversary
Roger McNamee, early Facebook investor and mentor to Mark Zuckerberg, now advocates curbing the internet’s tech giants.
22 Mergers & Accusations
The Facebook, Amazon and Google juggernauts roll on despite roadblocks.
24 Roundtable: Managing the Menace of Internet Powerhouses
Six authorities clash at times but agree that Big Tech poses an existential threat.
34 Amazon’s Fires
A bearish perspective on the online behemoth.
Demonstrators protested in April againt Facebook data abuses (top), marched in February against a proposed Amazon second HQ in Queens (middle), and called attention alleged sexual misconduct at Google in November (bottom).
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PHOTOGRAPHS: (FACEBOOK) REUTERS/LEAH MILLIS; (AMAZON) REUTERS/SHANNON STAPLETON; (GOOGLE) REUTERS/STEPHEN LAM
Activists begin to take a stand against manipulative internet monopolies.
luckbox | september /october 2019
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editor-in-chief ed mckinley managing editor yesenia duran technical editor mike rechenthin features editor tom preston contributing editor vonetta logan
P. 37
trends life, luxury & the pursuit of happiness
LIQUID ASSETS
37 A Glass Act & A Rye You Should Try
trades actionable trading ideas
LIGHT THIS CANDLE 47 Amazon: Prime Sell
ARTS & MEDIA
FINANCIAL FITNESS
THE NORMAL DEVIATE
38 Books, Movies & TV Reviews
THE TECHNICIAN
48 Venomous FAANGs FUTURES
40 Amazon Doesn’t Sell Sculpted Physiques
51 Inversion in Treasuries: Two Ways to Trade
42 Auto Industry Autopsy
MACRO VIEW
54 Risk-Off FAANG Trades
CHERRY PICKS
44 Meet Liz Dierking
55 The VIX Cheat Sheet
CALENDAR
TRADER
45 Negative Energy is Immanent
DO DILIGENCE
56 The S&P Evolves as it Soars
tactics essential trading strategies BASIC
59 Butterfly Spreads (Part 1) INTERMEDIATE
60 The Butterfly Payoff (Part 2) ADVANCED
61 The (Broken Wing) Butterfly Effect (Part 3) 64 luckbox of the month
Winning the lotto once is lucky, but twice?
creative director jacqueline cantu contributing art director cassie scroggins editorial director jeff joseph editorial assistants jessica christoffer, rocio villaseñor submit a story idea tips@luckboxmagazine.com comments & critiques feedback@luckboxmagazine.com request contributor’s guidelines, submit press releases & editorial inquiries editor@luckboxmagazine.com advertising inquiries advertise@luckboxmagazine.com subscriptions & service support@luckboxmagazine.com media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com
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luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. And finally, active investing is not easy, so please be careful out there!
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luckbox | september /october 2019
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PRIVACY PIRACY
thinking inside the luckbox
luckbox is dedicated to helping hard-working, proactive readers achieve results just as positive as the good fortune that befalls talentless, lazy luckboxes whose outlier outcomes outstrip their skills. How? it’s all here in the luckbox manifesto.
I always feel like somebody’s watching me. And I have no privacy. Woh, I always feel like somebody’s watching me. I can’t enjoy my tea. —”Somebody’s Watching Me,” Rockwell, 1984
2 ways to send us your comments, criticisms, feedback & suggestions
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the luckbox soapbox 1 tune out the noise and
false prophets in the investment world
2 probability is the key to
improving outcomes in the markets and in life
The Department of Justice has announced it’s opening a wideranging antitrust review of “market-leading online platforms,” shining a spotlight that may follow Facebook, Amazon and Google’s CEOs the way Duluth Trading Company stalks anyone who’s ever expressed online interest in Buck Naked Briefs. This issue of luckbox offers a comprehensive accounting of (yet another) existential threat to privacy, security, freedom and democracy. Disbelieving “digital natives” be dammed—snap out of it! The more time spent online, the higher the probability of being used by Big Tech’s architects of addiction and barons of monopoly. Wake up to the Big Tech catastrophe. It’s time for some new rules.
3 stock-picking is a low-
probability investment strategy
4 hot investment themes,
sectors and stocks matter only because they tend to produce greater volatility
5 greater volatility =
greater opportunity
6 options are the best
vehicle to manage market risk and exploit market volatility
7 whatever you’re doing
with your money now— you can do better
8 luckbox can help you do
better—much better
9 learn your options—luck
smiles upon the prepared
10 so, get off your ath—
let’s do some math!
Tom Preston features editor
Jeff Joseph editorial director
mail feedback@luckboxmagazine.com E Visit luckboxmagazine.com/survey
luckbox | september /october 2019
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Rockwell would not be enjoying his tea today—it feels like everybody is watching. In the U.S. alone, 446.5 million personal records were exposed last year through more than 1,240 data breaches. Sure, Americans are the victims, but they’re also complicit. A mixture of naivete, ambivalence, conspicuous consumption, fear-of-missing-out, and lazy lust for “convenience” has enabled Big Tech companies like Facebook, Amazon and Google to learn everything about everyone— likes, dislikes, passions, politics, secrets and vulnerabilities—so that marketing messages can manipulate and monetize. Eric Schmidt, former Google CEO and Executive chairman, summed it up this way: “We don’t need you to type at all. We know where you are. We know where you’ve been. We can more or less know what you’re thinking about.” Every month, luckbox surveys its readers, so the editors already know that the issues of data privacy abuse and anti-competitive practices by Big Tech hits home. (See full results on p. 23.) The majority overwhelmingly favors increased regulatory oversight. And why not? While Jeff Bezos parties with Katy Perry and Lil Nas, Big Tech continues its wayward ways—confessing to the latest data breaches, racking up billion-dollar fines and inspiring damaging headlines. But the winds may be shifting.
Open Outcry
THE 5 LARGEST CORPORATE HACKS
The High Anxiety (August 2019) issue of luckbox generated some humor but also some anxiety.
Anxiety is an affliction of the week. —Bill Fox, Mandeville, IN Humans have had high anxiety for 100,000 years. Your articles did nothing to improve the human condition. Better to have printed the 10 Commandments and given everyone a bottle of wine. —Kent Lacey, Olde Lyme, CT For all the fears of privacy and intrusion, it’s not the tech companies that are allowing the theft of millions of identities. It’s the banks and the credit agency racketeers (Equifax, et al.). I’m not sure where to go with real facts and journalistic integrity when reporting on “abuses” allegedly happening inside these tech giants because the facts seem scarce and inconclusive. I’m reminded of the “Russia hacked the elections” hysterical nonsense that someone “believed” happened and was discussed in the media as though it were real despite conclusive investigations showing almost zero activity ($30,000 to perhaps $100,000 in an election where the duopoly spends about $5 Billion). I’m also concerned by Sen. Warren’s tone when she calls for a hysterical, unplanned “break up” of corporations for fear these decadesold monopolies have somehow run amok and the people need to be
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YAHOO 3 billion accounts (2013) names, birth dates, phone numbers and passwords
protected. If we want to “protect” people, start with the daily agony of people paying usury credit card fees and outrageous government “penalties” for being late on paying property taxes or vehicle licenses. These are actual abuses, not just a fear of future risk to personal privacy or Amazon anticipating your next detergent purchase. I’d suggest an accounting of the most damaging personal data breaches—not just the tech companies. —Adam Green, San Francisco Cambridge Analytica’s abuse of Facebook user data wasn’t just “alleged.” Senate testimony on Oct. 31, 2017 chronicled extensive Russian efforts to influence the election in spite of nominal ad spending. So luckbox welcomes Washington’s growing awareness of these abuses. But the editors agree that big banks, retailers, insurers, and purveyors of credit cards have been a gold mine for the dark web. Capital One recently reported a data breach affecting 100 million customers, but these days that didn’t even make the Top 5 list.
YAHOO 500 million accounts (2014) names, email addresses, telephone numbers, birth dates, encrypted passwords and security questions
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MARRIOTT/STARWOOD 500 million guests (2018) names, mailing addresses, phone numbers, email addresses, passport numbers, birth dates, gender, Starwood Preferred Guest loyalty program account information, arrival and departure times, and reservation dates
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FRIEND FINDER NETWORKS 412 million accounts (2016) usernames, email messages and passwords of the “world’s largest sex and swinger community”
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EQUIFAX 146 million accounts (2017) names, birth dates, Social Security numbers, addresses, driver’s license numbers and 209,000 U.S. credit card numbers
Take our latest reader survey. We may publish your comments!
Three Fetes to the Win (A Probability Quiz) In August, luckbox was nominated for three prestigious Folio (editorial and design) Awards in the Best New Magazine category. Such news would send most editors and creative directors scrambling out the door to the nearest pub, but the probability-focused luckbox team wanted to assess the odds of winning, before grinning. It turns out that in each of the three categories only one other magazine was nominated. So, What is the likelihood that luckbox will win one Best New Magazine award? A) 66.6% B) 72.5% C) 87.5% (See p. 9)
september / october 2019 | luckbox
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SHORT INTEREST
“For years, social media companies have told consumers that their products are free to the user, but that’s not true— you are paying with your data instead of your wallet. But the overall lack of transparency and disclosure in this market have made it impossible for users to know what they’re giving up, who else their data is being shared with or what it’s worth to the platform.” Senator Mark Warner (D-Va.) on DASHBOARD Act he is co-sponsoring with Sen. Josh Hawley (R-Mo.)
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“At the epicenter of Google’s bulging portfolio is one master project: The company wants to create machines that replicate the human brain, and then advance beyond. This is the essence of its attempts to build an unabridged database of global knowledge and its efforts to train algorithms to become adept at finding patterns, teaching them to discern images and understand language. Taking on this grandiose assignment, Google stands to transform life on the planet, precisely as it boasted it would. The laws of man are a mere nuisance that can only slow down such work. Institutions and traditions are rusty scrap for the heap. The company rushes forward, with little regard for what it tramples, on its way toward the New Jerusalem.” Franklin Foer, in his book World Without Mind: The Existential Threat of Big Tech
“It looks like the antitrust winter is over.” Tim Wu, Columbia University law professor and author of The Curse of Bigness: Antitrust in the New Gilded Age, reacting to the DASHBOARD Act
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WHAT IS THIS THYNG?
“It’s time to break up Amazon, Google and Facebook.” Elizabeth Warren, senator and Democratic presidential candidate
“Unwarranted, concentrated economic power in the hands of a few is dangerous to democracy— especially when digital platforms control content. The era of self-regulation is over.” Nancy Pelosi, Speaker of the House
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92%
Google’s worldwide search engine market share in July Source: Statcounter
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and growing. Amazon’s market share of e-commerce gross merchandise volume Source: Statista
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Are Smartphones Dumbing Us Down? The desperate are seeking help with their digital addiction By Vonetta Logan
These visitors to NYC’s Times Square prefer their smartphones to real life.
“The research is clear: Americans spend most of their waking hours interacting with screens.” 10
T
he smartphone—that slender slab of glass and metal gently warming your inner thigh through the pocket of your jeans—packs more raw computing power than NASA’s engineers had at their disposal in 1969 to send a man to the moon. To paraphrase the great philosopher Homer Simpson, smartphones are the cause of and solution to all of our problems. But is the world ready for that much tech? Well, nearly anything new meets resistance. In the 19th Century, for example, some feared that reading novels would drive women “incurably insane,” Jason Feifer writes in a Washington Post article entitled “Why Do We Keep Panicking Over Tech?” Still, the behavior of suburban housewives after reading Fifty Shades of Grey supports that old insanity thesis. Anyway, ready or not, the citizenry is imbibing the Big Tech cocktail. “The research is clear: Americans spend most of their waking hours interacting with screens,” according to Doreen Dodgen-Magee in a Washington Post op-ed piece called “Tech Addiction is real.” A Google search for the phrase “tech addiction” yields images that bring to mind a poster from the ’30s cult flick, Reefer Madness. Technology will “Rot Your Brain!” Tech will “Destroy Your Relationships!” Won’t someone “Think of the Children?” These days, parents signal their unhappiness, with the amount of time teens spent online by framing the issue as smartphone addiction But are smartphones the heroin or the needle?
Tech’s effects Smartphones are altering the way people interact. Psychologists have even coined a term for the annoying habit of checking smartphones during a conversation with a real, live person: ”Phubbing.” It’s a portmanteau of “phone” and “snubbing.” Phones have been designed to deliver what psychologists call “intermittent rewards,” an irresistible feeling of gratification that occurs at seemingly random intervals. It’s akin to the excitement of playing a similarly unpredictable slot machine. Yup. A smartphone has basically become a slot machine without the watered-down cocktail and the second-hand smoke. That’s why prolonged consumption of digital data is altering human brains. “When we read digital media, the cluttered landscape of links and ads and the short
PHOTOGRAPH: REUTERS/EDUARDO MUNOZ
FAKE FINANCIAL NEWS
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PHOTOGRAPH: COURTESY OF THE GOLDEN DOOR SPA
bursts of attention that are required by scrolling and swiping and tweeting result in a contradiction in terms: ‘an intensely focused state of distraction,’ ” Catherine Price writes in her book How to Break Up with Your Phone. No wonder so many are seeking refuge. Each week, 52% of Americans, including people of all ages, search for escape from technology, according to a poll in August by SSRS Trends. So, in the interest of science, this reporter asked colleagues about what they do on their phones. Naturally, a specific piece of technology aided in the research of technology in general. With the release of iOS 12, iPhone users can see which apps they spend the most time on, how many notifications they receive, and even how many times an hour they pick up the phone and cradle it to their bosom like a baby. Go to Settings and then “Screen Time” (if enabled), to see the stats. Using those raw numbers, luckbox examined the digital obsessiveness of 25 financial media and trading professionals. They spent an average of 4 hours, 4 minutes, 57 seconds on their phones per day. The high-score “power user” clocked in at a whopping 8 hours, 3 minutes, while the “most Amish” award goes to the employee with a paltry 1 hour, 27 minutes. Aggregated, the 25 employees spent a whopping 3 days 13 hours 44 minutes online, every day. “I spent three hours during the last week playing solitaire?” one employee exclaimed. “Oh man, I need to get a life.” Another said he hadn’t enabled the feature on his phone but did enable it for his 10-year-old son. “Hey dad look at this,” the boy said after using the app to capture his father’s facial scan and disable the child-protection settings. Is the data perfect? No. One employee increased her screen time by allowing the Calm meditation app to run all night as a sleep-aid. Another employee didn’t want anything to do with the Screen Time app, saying, “Why the hell would I enable that? There’s no way I want to know what my numbers are.” Beware the saviors The threat of all-encompassing digital annihilation looms large. But searching for the kernel of verisimilitude about the real dangers of tech addiction, luckbox noted that a lot of the reporters, writers and bloggers were referencing one particular book, often a book they themselves had written. For example, Catherine Price’s
aforementioned book, How to Break Up With Your Phone, was cited repeatedly. It feels strange when the savior is also available for consulting gigs and speaking appearances. Likewise, Doreen Dodgen-Magee, the psychologist who urged compassion for tech addiction, has a book for sale called Deceived! Balancing Life and Technology in a Digital World.
than their parents. It’s easy to placate a fussy toddler with an electronic device. It’s difficult to deprive an anxiety-ridden tween of a socially vital smartphone. No one said coping with tech would be easy, but help’s on the way. There’s an app for that!
Return to sanity? Big Tech provides big opportunities; hence the emergence of the “digital detox” industry. The Golden Door Spa in San Marcos, Calif., The discomfort of introspection for example, offers 600 acres of catnip for Facebook wasn’t invented until 2004 and was available only to college students at first. photo-and-video junkies trying to kick the Instagram habit. A sevenTwitter was invented in day stay includes a private 2006. The iPhone wasn’t suite, healthy meals and commercially available Time spent per activities ranging from until 2007 and at first day with digital media archery to Zumba. on just one carrier. So Teens 9 hours Golden Door 1sojourners the nascent technologies Adults 11 hours generating so much can study acupuncture, Source: Washington Post buzz about mankind’s hypnosis and astrology, but destruction have been all activities must be phonearound only a tiny fraction free. The spa’s artfully of the time society has contended with such designed website is adorned with photos by ills as booze, drugs, automobiles and moving Annie Leibovitz. The site’s narrator, speaking pictures. in a voice so soothing it borders on ASMR Yet the effects of tech seem just as real (autonomous sensory meridian response), and potentially as harmful. Take the case of informs potential clients that can learn to Kevin Roose, a New York Times reporter who “fresh squeeze your creative juices.” wrote a piece called Do Not Disturb: How I Visitors to the Golden Door site who keep Ditched My Phone and Unbroke My Brain scrolling eventually learn that a seven-day about hiring Catherine Price to help solve his stay costs an eye-popping $9,850, before tax phone addiction. and gratuities. But it does include two herbal “Mostly, I became aware of how wraps and a celebratory alfresco group dinner. profoundly uncomfortable I am with Participants “leave here a changed person,” stillness, Roose wrote. “For years, I’ve according to the site, and all profits go to used my phone every time I’ve had a spare charitable causes that “match our mission and moment in an elevator or a boring meeting. objective of seeing lives changed.” It’s an unnerving sensation, being alone with So yeah, with Facebook selling everyone’s your thoughts in the year 2019.” data, Instagram scouting everyone’s location That dependence on tech can begin early. and Amazon enabling wine-drunk, late-night, Think of 7-year-old Shackleford Kolton one-click purchases, most Americans would with a $1,000 phone and 2-year-old Eyelet benefit from unplugging. But while digital Suffrage, who can operate an iPad better dependence has become nearly universal, the ability to afford digital retreats has not. The solution? Manage time online for Golden Door Spa maximum benefit. Use it to master another language, learn the subtleties of investing or negotiate the intricacies of a profitable side hustle. Good luck creating wealth by playing Candy Crush. Free time is still free, so get it while you can. Go outside. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan
september / october 2019 | luckbox
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Each time technology companies go lower into the brainstem, it takes a little more control of society. It starts small. First to get your attention, I add slot machine “pull to refresh” rewards which create little addictions. I remove stopping cues for “infinite scroll” so your mind forgets when to do something else. But then that’s not enough. As attention gets more competitive, we have to crawl deeper down the brainstem to your identity and get you addicted to getting attention from other people. By adding the number of followers and likes, technology hacks our social validation and now people are obsessed with the constant feedback they get from others. This helped fuel a mental health crisis for teenagers. And the next step of the attention economy is to compete on algorithms. Instead of splitting the atom, it splits our nervous system by calculating the perfect thing that will keep us there longer—the perfect YouTube video to autoplay or news feed post to show next. Now technology analyzes everything we’ve done to create an avatar—voodoo doll simulations of us. With more than a billion hours watched daily, it takes control of what we believe, while discriminating against our civility, our shared truth and our calm...[representing] a growing asymmetry between the power of technology and human weaknesses, that’s taking control of more and more of society. —Senate testimony of Tristan Harris, cofounder of the Center for Humane Technology and a former Google design ethicist
WAKING UP TO THE
Big Tech Catastrophe People are the Product
Facebook Advisor Turns Tech Adversary
Big Tech: Mergers & Accusations
Managing the Menace of Internet Powerhouses
p. 13
p. 16
p. 22
p. 24
Amazon's Fires p. 34
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BIG TECH CATASTROPHE
The Hard Truth: People are the Product Consumers willingly trade their personal data for personalized interactions with retailers. BY TI MOTHY C. SUMMERS
U
sing the visual arts and provocative prose to influence human behavior is a long-established technique in business marketing. In an early example of psychological profiling, Madison Avenue ad agencies used alluring imagery and words that inspired feelings of elegance, daintiness and liberation to encourage women to smoke cigarettes. But it didn’t begin there. The Big Five personality traits—openness, conscientiousness, extraversion, agreeableness and neuroticism—date back to research from the days of Hippocrates, who died in about 370 A.D. And it has continued. Substantial research in the 1880s by Sir Francis Galton contributed to an understanding of how humans make decisions. Fairly recently, the arrival of social media, Big Data and artificial intelligence has enabled companies to leverage user-submitted data and AI-integrated analysis to hyper-personalize services for customers. Today’s consumers expect complete personalization, bespoke content and tailormade suggestions. But those services don’t come without a cost. By now, nearly everyone has seen an accurately targeted ad pop onto a computer screen and wondered if a smartphone is listening to supposedly private conversations. It’s all a part of analyzing consumers to predict their behavior with impressive accuracy and then modify that behavior by presenting the right messages. That movement has made data the most valuable resource on the planet. The collection and complex analysis of data is fueling a multi-billion dollar industry. Profits consistently grow for data titans like Google, Amazon and Facebook because they collect, buy and sell personal information. That includes phone numbers, email addresses, Social Security numbers and intelligence on spending habits, social relationships, personal preferences, browsing and search history, financial history, biometric data, call records, and much more.
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How do they have access to that data? Throughout the course of everyday life, devices, service providers, and retailers are tracking consumers’ every move. The truth is becoming undeniable: People are the product, the commodity. The personalization trap The success of any business hinges on the ability to create an emotional effect. Businesses set traps to catch the consumer’s attention, much the way talented painters, poets and musicians set traps to gain the public’s attention. For a long time, companies have paid ad agencies to come up with catchy slogans that can aid in the quest for attention. But today’s consumers expect personalization, and creating that impression has become a priority for nearly all businesses. Some 91% of consumers are more likely to buy products from brands that recognize them, remember their preferences and provide accurate recommendations. Personalization has taken on such importance that consumers are willing to share their personal data in exchange for it, recent studies indicate. Every tech CEO from Jeff Bezos to Mark Zuckerberg has embraced the idea of making the world more open and connected. In pursuit of that goal, their companies have made billions of dollars by exploiting private data. In 2017, Mark Zuckerberg declared a new mission, stating that he wanted to give people the power to build community and bring the world closer together. That represented a slight shift from the old mission of providing people the power to share and make the world more open and connected. Both versions of the goal indicate that sharing personal data makes people more open and connected. That principle has made Facebook one of the world’s largest treasure troves of personal data and one of the most valuable companies that’s ever existed.
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PHOTOGRAPH: SNAP INC/HANDOUT VIA REUTERS
It’s also the reason for massive data breaches and a manipulated presidential election in 2016. Access to Facebook data enabled Cambridge Analytica to obtain 5,000 data points on every American voter. Using Big Data analytics, psychological analysis and targeted ad technology it accurately predicted voter behavior. As described by Christopher Wylie, a Cambridge Analytica whistleblower, personality drives behavior, and behavior influences how one votes. So personalization has arrived with the unimaginably high price of threatening the very existence of democracy. Is it worth it? Personalization turns creepy Every minute, Snapchat users share 527,760 photos, Twitter users send 456,000 tweets and Instagram users post 46,740 photos. That data doesn’t just evaporate. Every digital interaction, credit card purchase, web search, private gift for a spouse— virtually everything that happens online—is captured to construct a steady stream of curated content for every user. Companies are psychologically profiling every single thing about everyone online. Everyone leaves behind digital traces all over the internet. In The Matrix, machines exploited humans as a power source. In reality, humanity has become a data source for the tech monoliths. Yet consumers still prefer personalized experiences. Lack of brand personalization costs businesses $756 billion annually, according to a study by Accenture. Still, 75% of consumers find personalization a bit creepy, another study indicates. Nearly half of the consumers in the latter survey said they wouldn’t do anything about the creepiness and will continue to shop. People have become their own worst enemies. Nearly half of consumers, 49% to be exact, admitted they were creeped out when online ads used details related to something they have done, according to a CEB study. That suggests that many consumers
were unaware that marketers had access to their personal data. They still think their passports, banking information and past addresses are somehow protected. But an abundance of research demonstrates how online activities can be manipulated to reveal sensitive, private information once thought secure. Privacy-personalization paradox Researchers have found that a consumer’s perception of the value of a service depends partly upon perceived risk. For example, personalized services and advertising motivate consumers to engage in online profiling despite potential privacy concerns. As a result, privacy has become an issue of strategic importance for companies operating in a networked world. No one wants to admit to wanting to be sold. Such an admission would require confronting personal shortcomings, admitting to a lack of privacy and submitting to hopeless dependency on technology. Instead, consumers should recognize that they own their data. It’s an asset, like property.
Nearly everyone has seen an accurately targeted ad pop onto a computer screen and wondered if a smartphone is listening to supposedly private conversations. If a company wants to use one’s data, it should request informed consent and provide all of the details on how it will use the data. It’s time for companies like Facebook, Google and Amazon to recognize their responsibility to protect humanity’s data and live up to that responsibility. Timothy Summers, Ph.D., is CEO of Summers & Co., a global strategic advisory firm that provides advice on emerging technology. He’s also executive director of Cloud and Advanced Network Engineering Services for Arizona State University. @howhackersthink
Who's capturing your likeness? Spectacles smartglasses can record video and upload it to Snapchat.
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BIG TECH CATASTROPHE
Facebook Advisor Turns Tech Adversary Seasoned investor Roger McNamee, an early proponent of Facebook and a mentor to Mark Zuckerberg, now advocates curbing the abuses of the internet’s tech giants. BY JEFF JOSEPH
B
y any standard, Roger McNamee’s record as an investor in the private and public markets has been extraordinary. After earning an MBA at Dartmouth College’s Tuck School of Business in 1982, McNamee joined T. Rowe Price as an analyst. He led the firm’s Science & Technology fund to 17% annual returns through private investments in pre-IPO high-flyers Electronic Arts and Sybase, which was later acquired by SAP. In 1991, McNamee co-founded Integral Capital Partners with venture capital heavyweights Kleiner Perkins. He was a founding partner of the leveraged buyout firm Silver Lake Partners in 1999 and co-founded Elevation Partners with U2’s Bono1 in 2004.
Big Tech companies combine the data that users willingly provide to create voodoo dolls they can use to manipulate the populace.
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1.
Elevation invested early in Facebook, and McNamee served as an advisor to co-founder Mark Zuckerberg, famously dissuading the then-22-year-old CEO from accepting a 2006 offer to sell the young company for $1 billion. That same year, McNamee introduced Zuckerberg to Facebook’s eventual COO, Sheryl Sandberg, former vice president of global online sales and operations at Google. McNamee continued to advise, support and advocate for Facebook’s ever-expanding market position and leadership team—until he became increasingly concerned with the frequency and amplification of disinformation emanating from the platform during the 2016 presidential campaign. When the Cambridge Analytica story broke in late October 2017, McNamee described his reaction this way: “Kaboom…that changed everything.” In January, McNamee published the New York Times bestseller, Zucked: Waking Up to the Facebook Catastrophe 2, in hopes of increasing public awareness and spurring legislative action regarding issues that Facebook, Google, Amazon and other tech giants represent. He calls those companies “the greatest threat to the global order in my lifetime.” He takes their actions so seriously that he has abandoned his career in finance to become a full-time activist for privacy reform. In late August, luckbox sat down with McNamee for his take on the continuing saga of Big Tech abuses.
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PHOTOGRAPH: REUTERS/MIKE BLAKE
How would you assess current efforts to regulate anti-competitive and data privacy practices by Google, Amazon and Facebook?
I would describe them as nascent and filled with promise. Beginning in 1981, the United States altered its formula for antitrust regulation according to the principles of the Chicago School, as described by Robert Bork in his seminal antitrust treatise, The Antitrust Paradox3. Those rules essentially eliminated restraint of trade, anti-competitive practices and conflicts of interest as variables to assess in an intervention, replacing them with a single metric of harm to consumer welfare, namely price increases. The internet platforms have, until recently, succeeded in convincing regulators that their products are free. It’s only in the past year that an alternative model has entered the conversation. The business model of internet platforms is a barter of services for data, and in such a transaction, data is the currency. So, if you’re trying to determine consumer harm—to measure whether they are increasing the price—you look at the change in value of the services rendered versus the change in value of the data given up by consumers. The average revenue per user has been rising fairly rapidly for more than a decade. This suggests consumers may well have been harmed. But antitrust covers only one of the three harms from internet platforms: The damage they cause to competition and innovation. The
3.
4.
other harms of internet platforms relate to public health, democracy and privacy. Those are beyond the scope of antitrust regulators and may require new legislation. There’s a growing awareness in both political parties that something needs to be done. This is a massive change from two years ago, and bills in development focus on privacy, which is as good a place to start as any. Has your own perspective evolved since you wrote Zucked?
For me, the biggest change during the last 12 months has
come from reading Professor Shoshana Zuboff’s book, The Age of Surveillance Capitalism (The Fight for a Human Future at the New Frontier of Power)4, which gave me the data for a deep understanding of how the business models of Facebook, Google, Amazon and Microsoft are the root cause of these troubling issues. We need for antitrust to create competitive alternatives. The other path is to use The Clayton Antitrust Act5 and the Federal Trade Commission Act, which could prevent or unwind anticompetitive mergers. You could use
Roger McNamee, a founder of Elevation Partners and author, of Zucked: Waking Up to the Facebook Catastrophe, addresses the Milken Institute’s 22nd annual Global Conference in Beverly Hills in April. He’s now a full-time tech activitst.
5. The Clayton Antitrust Act The Sherman Antitrust Act of 1890, the first Federal legislation outlawing monopolies, cartels and other practices harmful to competition, was strengthened in 1914 with the passage of The Clayton Antitrust Act, which prohibited anti-competitive mergers, predatory and discriminatory pricing, and other forms of unethical corporate behavior. Just as important, The Clayton Antitrust Act prohibited companies that operate marketplaces from using them to favor their own products. Unfortunately, that selfdealing has become standard practice. Facebook, Google, Amazon and Microsoft all operate that way in advertising or product marketplaces.
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it to force Google to divest Waze, Amazon to divest Whole Foods, and Facebook to divest WhatsApp and Instagram. Is the general public sufficiently engaged on this topic?
Using an iPhone says privacy matters. Apple’s not perfect, but they’re a gazillion times better than Android.
People recognize something’s not right here—that they may have been deceived by internet platforms. Some younger people say, “Hey, I’m a digital native. I love these services. I don’t mind trading my private data to get them. And I’ve done nothing wrong, so I have nothing to fear.” My response is that all of those points can be true and not relevant because, increasingly, these platforms harm innocent victims. Think of it this way. As Zuboff says, Google is in the business of selling behavioral predictions with some degree of certainty attached. That’s a new type of ad market and it’s unbelievably valuable. How does the business of behavioral predictions work? It starts with products that are convenient. We trust them and expose our entire life to them. Convenience is like a drug, and we always crave more. Platforms gather all the data we give them and combine it with financial, healthcare and location data they buy from brokers and other corporations to create a data voodoo doll that describes our online lives. Consumers are curious about this issue, but we don’t yet see them rising up. Doubts are creeping in, but they still crave the convenience and utility of internet platforms.
6. Senate Hearings with Tech Execs (10.31.17) Some of the many disclosures about Russian meddling... Russian electoral Russian groups created dueling disinformation reached 126 events that led to a real-life million people on Facebook confrontation, in one case at an and 20 million on Instagram. Islamic center in Houston. 3.3 million Americans directly A ll of the Russian campaign followed one of the Russian ads were paid for in rubles. Facebook pages. Source: The Atlantic
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We are still in the early days. Remember that until Oct. 31, 20176, consumers and politicians believed technology made life better. It had always been that way. And when that stopped, in the early 2000s, it was cleverly disguised, first by Google, then by Facebook, and then by Microsoft and Amazon. So, we didn’t realize there was harm. We fell in love with the products, but now we’re confronted with the truth. Those products are bad for society and in some cases can be life-threatening. Once you reframe the conversation that way, everybody wants to learn more and almost everyone wants to do something about it. We are not quite two years into the process of building awareness. Behavior doesn’t change overnight, so I think it’s going pretty well. The best way to solve the problem is to get rid of microtargeted advertising that’s used for manipulative campaigns that are essentially untraceable unless you’re a member of the group receiving them.
of 29 million identity tokens7, 14 million of which included significant amounts of personal data. Tokens like this would allow the hacker to impersonate people online. Multiple legal cases have been consolidated, so they’re going to move forward. The key element is that Facebook knew about the thefts and protected its own employees, without protecting the people who use the platform. That kind of behavior should not be tolerated. If something goes wrong in the 2020 elections that can be traced to these platforms, a new conversation has to happen. At that point, the argument shifts from whether we regulate them to whether we should allow them to stay in business. The internet platforms are not cooperating in trying to protect democracy. At some point the public is entitled to say, “No more.” Elections should matter more than corporate profits. And it will not be hard to replace the platforms with alternatives that aren’t harmful.
How effective are their lobbyists?
DuckDuckGo, for example?
Internet platforms are powerful, but growing less so every day. They have all the money in the world. They have large and effective political organizations. But they have an indefensible case to make. And hardly a day passes without a revelation of something truly horrific that they have done. Recent news of the lawsuit against Facebook related to a breach that resulted in the theft
DuckDuckGo makes private versions of search and mobile browsing. If Google search and Chrome went away, DuckDuckGo8 would fill the holes overnight. In markets where there’s no competitor, such as against Facebook, it would not be technically difficult to launch one and scale it up. If Facebook were shut down, that process would take weeks or at most a few months.
7. Last month, a federal appeals court rejected Facebook’s motion to halt a class action lawsuit in which plaintiffs claimed it illegally collected and stored users’ biometric data. Facebook faces potential exposure of billions of dollars in damages.
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Do any public companies pose viable alternatives?
Apple has committed itself to becoming the consumer’s best friend on data privacy. They have a huge advantage over Android and Apple’s new operating system will introduce features that go after the heart of surveillance capitalism. Apple really takes privacy seriously. They made it part of their business model. That’s a huge deal. If you’re using an Android phone, you’re basically saying you want to make your life transparent to Google. That’s because Android is an extraordinarily well-designed surveillance device. If you use an iPhone, you’re saying privacy matters to me. Apple’s not perfect, but they are a gazillion times better than Android.
At some point I hope investors will begin to question the business practices of internet platforms. Both Google and Facebook are moving into businesses that are much more disruptive to the social order. Google has a smart cities project called Sidewalk Labs, and their project in Toronto may replace democracy with algorithms. Google has made it a condition of the deal that they’d be protected from politics, yet at the same time they want to supervise utilities and other city services. Do you expect lawmakers and 2020 candidates to intensify their commitment to these issues?
The thing about 2020 that’s so
fascinating to me is that in a country where political polarization is extreme, the issue of internet platforms is bipartisan. This issue is about right and wrong, not right and left. No matter their political persuasion, people want an opportunity to understand what’s really going on. And once they have facts they realize this is not political. On one side, you have the million people who work at Google, Facebook, Amazon and Microsoft. On the other side, we have the rest of the country, 329 million people. All agree on this issue. But for 2020, not all political candidates are equally savvy on these issues. Not many understand that antitrust law is pro-growth,
Federal Trade Commission chairman Joe Simons announced in a July news conference in Washington that Facebook had agreed to a $5 billion settlement regarding allegations that it mishandled users’ personal data.
PHOTOGRAPH: REUTERS/YURI GRIPAS
Do you see growing investor or shareholder activism?
When you look at the business of internet platforms, you cannot help but be impressed. The original ideas that underlie Google, Facebook and the advertisingbased businesses of Amazon and Microsoft were brilliant. The execution was fantastic. Investors have rewarded these companies to a degree that’s unprecedented, and it’s completely legitimate given the numbers. During the past year, investors saw the approach of regulators but concluded that regulators have no leverage because users will not permit them to shut down the platforms. To date that’s been a good bet.
8. DuckDuckGo DuckDuckGo, founded in 2008, operates on the premise of privacy, assuring users their search data is protected and isn’t collected or distributed. While DuckDuckGo averages 44 million searches per day, compared to Google’s 3.5 billion, their monthly search averages have been on the rise because of their privacy value proposition. “We like to say the Internet shouldn’t feel so creepy, and protecting your information should be as easy as closing the blinds.” —Gabriel Weinberg, CEO
Investors should be cheering for antitrust action.
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Google CEO Sundar Pichai is sworn in before testifying in Decemer on Capital Hill at a House Judiciary Committee hearing on the company’s collection and handing of users’ personal data.
pro-market and pro-competition. If you believe in growth, if you believe in entrepreneurship, antitrust law is a really good thing. In technology, every major cycle was triggered at least in part by an antitrust action. Mainframe computers were made possible by the AT&T consent decree in 1956. Personal computers by the IBM case. Data networking and the internet by Carterphone, which was part of the larger AT&T case. The AT&T breakup accelerated cell phone development and created broadband data communication, which is essentially the internet. And then you created the opportunity for Google with the Microsoft case.
9. The FTC Fines Facebook $5 Billion On July 24, the Federal Trade Commission announced a $5 billion settlement with Facebook over privacy policies—the largest fine in FTC history against a tech giant. Facebook sold the personal data of 87 million of its users to Cambridge Analytica, a shuttered political consulting firm that used the information to manipulate voters. Some viewed the penalty as inadequate.
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Investors should be cheering for antitrust action. Because in a world with only four monster companies, you won’t get much innovation and eventually they’re not going to optimize for growth. And if they do optimize for growth, they will do it by sucking the profit out of the rest of the economy. That’s what the robber barons did at the beginning of the 20th century, and it’s what these guys are already doing. They’ve sucked all the profits out of the news business, out of the music business. They’re working on video now. Google’s got operations in automotive. What about the threat to brick-andmortar retailing?
Amazon is rolling over all of retail, both perishables and nonperishables. They’re doing it in information technology. You have to wonder how long it will be before these guys come after the financial services industry. Investors should be trying to stop these guys just as a matter of self-preservation. Wall Street has all these great mathematicians, but these guys have great mathematicians and all the data, right? Wall Street is playing chicken with these guys right now. And I don’t want to pretend to know when the bit will slip. But eventually everybody’s going to wake up and realize, “Wait a minute. It’s not in our interest to let these guys dominate forever.” It’s been really convenient for marketers, right? Marketers love perfect information. The problem is these tech guys are a little bit like banks in 2008. They have perfect information but their customers get spoon-fed the answers these guys want them to have. That’s not capitalism. It’s incredibly destructive. Investors act in their own selfinterest, so I get why they still love these stocks. The time is coming when the right strategy will be to get off the internet platform train and onto a different one. I can’t predict when that’s going to be, but it’s coming. I think everyone needs to pay attention. Consider the case against Facebook over the identity tokens. How are they going to win that? How is YouTube going to win
PHOTOGRAPH: REUTERS/JIM YOUNG
BIG TECH CATASTROPHE
“I dissent from the Federal Trade Commission’s proposed settlement…The settlement’s $5 billion penalty makes for a good headline, but the terms and conditions, including blanket immunity for Facebook executives and no real restraints on Facebook’s business model, do not fix the core problems that led to these violations … The case against Facebook is about more than just privacy—it is also about the power to control and manipulate.” —Dissenting statement of FTC Commissioner Rohit Chopra
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any case involving children? How is Google Chromebook going to win any case involving children? What they have done is demonstrably harmful. Because they just don’t care. And they keep doing it. The court system is going to be a really active place for this industry over the next few years. Investors should not count on regulators to be as ineffective as they’ve been to this point. In Europe, they are really unhappy about this. When I go to Washington, there are people in both parties who are getting very angry at the way these companies are behaving. Imagine how the Federal Trade Commission feels. Because Facebook is off the hook for only $5 billion?
They impose a record fine, and Wall Street treats it as “chump change.” They give a blanket immunity and catch a ton of grief for it. It’s 27 days of revenue for Facebook.
$5 billion9 is a number they will not miss. That’s a problem. These guys are so powerful that you can impose a penalty that’s a large multiple of the all-time previous high and they don’t care. It doesn’t matter because 90 days from now they’ll have earned it back. And the value of the blanket immunity was the better part of a trillion dollars. And from a regulatory point of view, the good news is there’s way more that Facebook has done wrong than just privacy. So there’s a lot of work left to be done. Hopefully, some aspects of privacy are not covered by the
blanket immunity. And people are just starting to look at Google and just starting to look at Amazon. Would boycotts have any impact?
Boycotts10 aren’t the most effective way to solve the problem. The most effective path is the 2020 election. Everybody will have an opportunity to engage with politicians. And they should get in their faces and ask, “Why is it legal for companies like Google and Microsoft to scan my email, read my documents and search my messages for data that’s valuable to them?” Why is that legal for tech companies? Why is it that HIPAA, the Health Insurance Portability and Accountability Act, has so many loopholes that much of our private medical information is available for purchase? Why is it legal for cellular carriers to sell our location? Why can banks, credit card processors and credit rating agencies sell our most intimate financial data? Why is it legal for anyone to track us online? Why is it legal for anyone to gather and hold data about minors? At the postal service or a telephone company that would be a felony. These are all real issues and they represent loopholes that these companies have exploited. Too many of us sit there and go, “Well I don’t mind.” Well, hang on just a sec. They have a data voodoo doll, but it’s not because of data you’re putting into their products. The data you put into Facebook, the data you put into Google, that may be one tenth of 1% of what they
Investors act in their own self-interest, so they still love the Big Tech stocks. But the time is coming when the right strategy will call for abandoning the internet behemoths. have about you. The data voodoo dolls consist of all the data they get from tracking you, all the data they get from spying on your email and perusing your documents, all the data they acquire from banks and healthcare companies, and cellular companies and other applications. All the data they get from surveillance products like Alexa, Google Assistant, Pokemon Go and Sidewalk Labs. That’s where the data comes from. And you have no control over that third-party data. They use that data voodoo doll for more than targeting ads; they also influence what you see in your news feed, what you get in your search results and the route they choose for you on Google Maps and Waze. Your choices are being influenced, if not made by algorithms. You don’t realize it because you trust these products to be honest brokers when they’re not.
Visit luckboxmagazine.com for the full interview with Roger McNamee.
Disclosure: Roger McNamee holds positions in Facebook, Amazon and Apple.
10. Why don’t users abandon the [Facebook] platform in protest? I cannot explain the behavior of employees, but I understand users. They crave convenience and utility. They struggle to imagine that they would ever be victims of manipulation, data security breaches or election interference, much less what those things would mean to them. They don’t want to believe that the screens they give their children might be causing permanent psychological harm. Elected officials like the campaign technology and contributions they get from Silicon Valley. They like that tech is popular with voters. Confident that they would never need it, policy makers have not developed the expertise necessary to regulate technology. Intelligence agencies do not appear to have anticipated the possibility that the country’s enemies might weaponize internet platforms to harm the United States. As a result, no one was prepared for election interference, hate speech and the consequences of addiction. —Roger McNamee, Zucked: Waking Up to the Facebook Catastrophe
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KEY
Google Amazon Facebook
2005
2006
Data scientist experiments on 500,000 unknowing users
Street View photographs faces and car license plates without permission
Acquired by Amazon, Zappos maintains its own brand, leadership team and unique character
Amazon bills parents for millions of dollars in children’s in-app charges
MAY
AUGUST
JULY
2007
2008
2009
2010
2011
2012
2013
2014
MAY
MARCH
MAY
FEBRUARY
JUNE
MAY
Google Analytics tracks users across the web
Revealed that Google links data search histories to specific computers
Discovered that Street View cars capture open wifi data
Google settles with FTC for $22.5 million after violating privacy agreement
Bug releases six million users’ private emails and phone numbers
Court rules users can have hyperlinks removed from Google’s index
Alphabet Inc. (GOOGL)
Amazon (AMZN)
CEO Sundar Pichai IPO August 2004 Revenue 2018 $136.22 billion Taxes Paid 2018 $2.1 billion Employees 98,771
CEO Jeff Bezos IPO May 1997 Revenue 2018 $232.89 billion Taxes Paid 2018 $0 Employees 647,500
ACQUIS ITIONS 1
Motorola Mobility
August 2011 • $12.5 billion Technology and telecom hardware company 2
Nest
January 2014 • $3.2 billion Home automation company 3
DoubleClick
April 2007 • $3.1 billion Ad management and ad serving service company 4
YouTube October 2006 • $1.65 billion Video-sharing platform
5
Waze
June 2013 • $1.3 billion GPS navigation software app
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A C Q U I S I TI O N S 1
Whole Foods Market August 2017 • $13.7 billion Organic grocery chain
2
Zappos July 2009 • $1.2 billion Online shoe retailer
3
Twitch Interactive September 2014 • $1 billion Video game streaming site
4
Kiva Systems
March 2012 • $775 million Robotics technology company 5
Souq.com March 2017 • $580 Million Retail marketplace
2015
PHOTOGRAPHS: (PICHAI) GOOGLE; (BEZOS) AMAZON; (ZUCKERBERG) FACEBOOK
Mergers & Accusations
F
acebook, Amazon and Google (Alphabet) have orchestrated explosive organic growth and expanded even further through acquisitions. These juggernauts continue nearly unabated despite massive security breaches, hostile congressional hearings, embarrassing DOJ investigations and staggering 10-figure fines.
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Are Big Tech companies like Facebook and Amazon monopolies that should be broken up?
Should Facebook, Google and Amazon face increased antitrust and regulatory scrutiny with respect to user data and privacy issues?
25% NO
75% YES
Source: Rolling Stone reader’s poll, August 2019
6%
S TR O N G LY DISAGREE
21% A G RE E
4%
22%
DISAGREE
N E UT RA L
47%
ST RO N GL Y A GRE E
Source: luckbox reader’s poll, June 2019
Hackers obtain access to private info of 30 million users
2016
Stock goes up after recordbreaking but still paltry $5 billion FTC fine
Amazon expanded online ordering into Whole Foods stores, cut prices on select items and offered Prime discounts
Alexa eavesdrops on a private conversation; sends recording to a random contact
Google ties searches to personal phone numbers, enabling China to track activities
Amazon provides unfiltered, 24-7 access to users of Ring security cameras
Report alleges Google home security camera spies on users in their own homes.
AUGUST
MAY
SEPTEMBER
JANUARY
JUNE
2017
2018
2019
MAY
FEBRUARY
AUGUST
DECEMBER
APRIL
Found that in 2012, three London hospitals gave Google DeepMind 1.6 million patient records
Facebook guilty of violating German and Belgiun privacy laws
Google sued for tracking movements of millions of iPhone and Android phone users, even when they use a privacy setting
Bug exposes photos of 6.8 million users
Bloomberg discloses thousands of Amazon employees are listening in on Echo users
APRIL
Facebook (FB) CEO Mark Zuckerberg IPO May 2012 Revenue 2018 $55.8 billion Taxes Paid 2018 N/A Employees 35,587
ACQUIS ITION S 1
WhatsApp February 2014 • $19 billion Mobile instant messaging
2
Oculus VR March 2014 • $2.3 billion Virtual reality technology
3
Instagram August 2012 • $1 billion Photo sharing
4
LiveRail August 2014 • $500 million Video advertising platform
5
FriendFeed
August 2009 • $47.5 million Social networking aggregator
Cambridge Analytica bases 87 million political profiles on Facebook data
OCTOBER
Revealed that Amazon’s been selling facial recognition tech to police Bug exposes extensive private information of up to 500,000 Google users
Researchers find dozens of cybercrime gangs operating openly on Facebook JULY
Justice Department announced an antitrust investigation into Big Tech’s market power and competitive practices. Similar inquiries are underway in Congress, in various states and at the Federal Trade Commission, which shares antitrust oversight
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Managing the Menace of Internet Powerhouses A diverse panel plumbs the excesses of Google, Amazon and Facebook
T
he ravenous rulers of the internet aren’t satiated by the tasty data that innocent users willingly feed them. They augment that information with the voluminous intelligence bought and sold by financial institutions, healthcare providers, location trackers and just about any other imaginable entity that operates online. Eventually, the internet platforms know people better than people know themselves. They can reliably predict behavior and manipulate it for profit. They’re using data to invade privacy, seize monopolistic control, purvey false narratives and threaten the very existence of democracy in America. In this roundtable, six tech experts bring to bear their talents as authors, attorneys, investors, activists, thinkers and administrators in response to 10 questions from luckbox. The panelists clashed on details and even on fundamentals, but all agreed on the desperate need for action. —Ed McKinley
Big-Tech Roundtable Jeremy Carl
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Cindy Cohn
Daniel Crane
Chris Lewis
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luckbox: How well are regulators overseeing privacy and user data practices at Google, Amazon and Facebook? Jonathan Taplin: Two years ago,
nobody on the policy side was even looking at these issues from a regulatory standpoint. That’s changed a lot, with the FTC [Federal Trade Commission] fining Facebook $5 billion and with the European Regulatory Commission fining Google $3 billion. I don’t necessarily think they’re going in all the right directions, but at least it’s a start.
Jeremy Carl: I’d give them D or
D minus. I’m not giving it an F because regulators finally seem to be waking up. But the privacy violations by Google and Facebook are mostly being greeted by a slap on the wrist. Chris Lewis: Washington gets a
D+ for its efforts over the past few years. We have no privacy rules in the United States that govern consumer privacy protection online. Instead, we have a regime close to industry self-regulation.
PHOTOGRAPHS: COURTESY OF PANELISTS
Matt Stoller: Big tech platforms regulate our democracies right now, not the other way around. The efforts of policymakers and enforcers are largely pathetic and embarrassing—or downright corrupt.
Matt Stoller
Daniel Crane: I’d disagree. The Federal Trade Commission has made efforts to enforce user privacy and data standards and is to be commended for not trying to roll out anything as heavy-handed as the European Commission’s General Data Protection Regulation, which creates a monstrously complex regulatory scheme that makes it difficult for small- and mediumsized companies and individual proprietors to maintain business databases. Cindy Cohn: Dan’s partly right.
In general, oversight by the FTC has been a good effort, given how their hands are tied. But the current limits of their power and budget, along with the FTC’s fear of Congress stepping in and cutting them back, leaves much to be desired. The public deserves more. The oversight that the FTC can give is not keeping up with the privacy needs of the public. We need all three branches of government working to protect our privacy.
Should lawmakers revisit the “safe harbor” offered internet platforms under Section 230 of the Communications Decency Act? (See “26 Words,” p. 39.) Taplin: The safe harbor regulations
should be revisited. Essentially, companies like Facebook, Google and YouTube have no liability. It
Jonathan Taplin
lets these people be totally reckless. They want more posts and more content because that gives them more users. If they had actual liability for what happens on their servers, then they’d be a lot more careful about allowing people to post mass-shooting videos, ISIS beheadings or any of the other horrible things that have been on YouTube or Facebook. Carl: Safe harbor absolutely has
to be on the table. It’s the one true piece of leverage we have over Big
Washington gets a D+ for its efforts over the past few years. We have no privacy rules in the United States that govern consumer privacy protection online. Instead, we have a regime close to industry self-regulation. —Chris Lewis
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Tech. It’s the one thing they really fear. During the original debates over Section 230 in the 1990s, the tech companies promised they would offer “dumb platforms.” In exchange, they were granted special liability protections far in excess of what was offered to offline companies. They built multi-billion dollar businesses off of those special protections and then turned around and started making politically biased editorial decisions on what was allowed on their platforms—in direct violation of their original promises. It’s unconscionable. Lewis: On the contrary, Section
230 is a foundational law for the internet, and we need it. Its liability protection makes it possible to have user-generated content without significant content moderation. Without
its basic protections, liability risk could lead to either extreme moderation that limits user speech, or virtually no moderation, resulting in online communities most users wouldn’t want to visit and would likely silence marginalized voices. But it’s not the final word in internet policy. Policymakers can address concerns about online harms with targeted laws that set expectations for digital platforms with respect to user-generated content that do not detract from Section 230’s core purpose of facilitating speech and permitting different platforms to adopt diverse moderation policies. Stoller: That safe harbor was
largely designed for neutral communications networks, to allow companies to have forums where they enabled the speech of others without having to take responsibility for what those speakers said. Advertising is the distortion of the flow of information. Facebook sold roughly $50 billion in ads last year, which means it made large amounts of money by distorting what its users see and read. If the company is going to curate and edit content so it can make ad money, it shouldn’t be legally immune from passing along content that is harmful or illegal.
Crane: Maintaining some version
Jonathan Taplin, author, movie producer and director emeritus of the University of Southern California Annenberg Innovation Lab, wrote Move Fast and Break Things: How Facebook, Google and Amazon Have Cornered Culture and Undermined Democracy. @jonathantaplin
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of the safe harbor is essential lest a “heckler’s veto” jeopardize freedom on the internet. If internet providers become liable for all of the abuses committed by users on their platforms, they will respond by censoring large swaths of user content based on overbroadly keyword searches or similar technologies. In such a system, a few maliciously intentioned people could spoil internet freedom for everyone else—the heckler’s veto.
Cohn: First of all, Section 230
is not a “safe harbor,” so I’m
worried that the premise of this question is not correct. This isn’t just semantics. A safe harbor is something conditional that you get only if you do certain things. Section 230 simply says that if you aren’t the speaker, you cannot be held liable as if you are. There has been a concerted effort—some of it honest and some of it dishonest—to convince lawmakers and the public that Section 230 is the answer to the problems with Big Tech. I think this is deeply misguided. Worse, I think that it will backfire and further harm already marginalized speakers. Are you concerned that curbing Big Tech may limit free speech? Carl: I’m more concerned about
exactly the opposite—Big Tech running amok is what is damaging free speech. Viewpoints that are not popular with tech overlords—and the young 20 and 30 something “woke” programmers who work for them—are being arbitrarily and capriciously barred from these platforms. Similarly, their decisions about what is and isn’t “fake news” are similarly politically biased.
Stoller: The threat to free speech
is coming from tech platforms that have centralized global communications in a way that is unimaginably powerful. There are ways to make the problem worse, but without action we are in deep trouble.
Crane: That depends on what
kind of curbs we’re talking about. There is no “curbing Big Tech” without “using bigger government.” An expansive regulatory system ostensibly designed to “protect the internet” would end up imposing the views of government bureaucrats on everyone else. A system dominated by a few Big Tech companies isn’t perfect, but it’s better than a system dominated by one big government.
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Cohn: There are many non-
censorship paths to curbing Big Tech, including creating real competition through both law and policy, as well as through technical means, like encouraging adversarial interoperability. Curbing big tech without limiting the free speech of the rest of us is both possible as well as critically important right now.
The FTC’s recent $5 billion settlement with Facebook over the Cambridge Analytica privacy abuses is the largest in history but also the equivalent of one month of revenue for the company. A good start, or a lost opportunity? Stoller: It’s a corrupt joke.
Facebook offered a $5 billion payment on the condition that the FTC not finish the investigation. The agency did not interview Mark Zuckerberg, nor did it get access to his files. This was a bribe to a regulator looking for a good headline.
PHOTOGRAPH: REUTERS/LUCY NICHOLSON
Crane: To the contrary, it was
a good start. The $5 billion fine may not have been a damaging blow to Facebook, but it’s still a lot of money. And the bigger repercussion to Facebook was reputational. But, look, if people don’t want to use Facebook, they don’t have to. I don’t. If people think Facebook is doing a terrible job protecting their data, they can walk away. There are a lot of other ways to reach people on the internet. If people choose to stay, even in light of scandals like Cambridge Analytica, they are
Elizabeth Warren “Has a Plan” for Big Tech Presidential candidate Sen. Elizabeth Warren (D-Mass.) warns that companies like Amazon, Facebook and Google have “bulldozed competition, used our private information for profit and tilted the playing field against everyone else.” That’s why she wants to break up Big Tech. The first part of her two-part proposal calls for viewing large tech companies as “platform utilities.” Legislation would prohibit them from sharing data with third parties. Violators would be subject to a fine of 5% of their annual revenue and victims would have the right to sue the platform utility. Part two outlines steps regulators would take to break up companies by negating recent mergers that Warren views as anticompetitive. In two possible examples, regulators might compel Facebook to divest itself of Instagram or require Amazon to sell off Whole Foods.
Sen. Elizabeth Warren, an advocate of curbing Big Tech, addressed suporters at a rally last month in Los Angeles,
If the internet platforms had liability for what happens on their servers, then they’d be a lot more careful about allowing users to post mass-shooting videos, ISIS beheadings or any of the other horrible things that have been on YouTube or Facebook. —Jonathan Taplin
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doing so with their eyes open. You may feel differently about your data and Facebook’s promises, so act on your own feelings. It’s a free country! Cohn: It’s a lost opportunity but
not really the FTC’s fault. The FTC has limited power and doesn’t want Congress to intervene.
Jeremy Carl, founder and managing partner of Peregrine Strategic Advisors, a political and policy consultancy, has been a research fellow at the Hoover Institution at Stanford University. His work focuses on politics, Big Tech and immigration policy. @jeremycarl4
Big Tech running amok is damaging free speech. Viewpoints that are not popular with tech overlords—and the young 20 and 30 something “woke” programmers who work for them—are being arbitrarily and capriciously barred from these platforms. —Jeremy Carl
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need to be regulated accordingly. And if you look at the innovation that occurred in the telecom marketplace after the breakup of Ma Bell, it’s hard to argue that a breakup would be inherently destructive. Stoller: Sen. Warren’s proposals
are quite moderate. We have a long history of breaking up companies in the United States, and it pretty much always delivers positive benefits to everyone.
Sen. Elizabeth Warren wants to categorize large tech companies as “platform utilities” and regulate them that way. She also wants to break them apart by rolling back what she views as recent “anti-competitive tech mergers.” Feasible?
Is there bipartisan political will to address the anti-competitive practices of Google, Amazon and Facebook?
Crane: In American history, only
Taplin: That’s not the problem
two companies—Standard Oil and AT&T—have been broken up on antitrust grounds. It’s not something the courts have generally been willing to do, and mostly for good reasons. Apart from recent mergers, where divestitures of recently acquired assets are a viable remedy, ripping apart long-standing companies is generally bad for consumers, shareholders, employees and society at large. As for making the big tech companies “platform utilities,” that style of commandand-control regulation by public utility commissions has been tried and long since abandoned. Competition is a much better driver of outcomes than heavy-handed regulations.
Carl: I don’t agree with Sen.
Warren on many things, but I think they are viable proposals and need to be on the table. In particular, Facebook’s acquisitions of Instagram and WhatsApp need far more scrutiny. I’m not at the point that I’d say breakup is my preferred remedy, but if we can’t solve their monopolistic abuses any other way then it’s something we’d need to look at. These big tech companies are in fact platform utilities and
anymore. The astonishing thing is that it’s not a left-right issue anymore. If senators Ted Cruz (R-Texas) and Elizabeth Warren can agree that these companies have gotten too big and are exercising too much power, then it’s not a political discussion.
Carl: There’s an opportunity for
unusual left-right cooperation because there’s bipartisan voter concern about the abuses of monopoly power by Google, Facebook and Twitter. Politicians on the right from President Trump to Sen. Ted Cruz to Sen. Josh Hawley (R-Mo.) have shown significant concern. Politicians on the left, including presidential candidates from Sen. Elizabeth Warren to Rep. Tulsi Gabbard (D-Hawaii), want to take on big tech’s power. My concern is that some of those on the left would prefer solutions that involve even more censorship of Americans’ views online—often in the name of curbing “hate speech.” Any solution to Big Tech problems has to protect First Amendment freedoms.
Lewis: The will for bipartisan action is not quite there yet. Unfortunately, there is more heat
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than light around the facts of the digital platform market. Unproven claims of ideological bias distract from the need for bipartisan action to promote content moderation and pro-competition rules for dominant platforms. Stoller: But, increasingly, the will
is coalescing.
Crane: There is certainly a level of
political interest in antitrust that there hasn’t been since the 1950s. And, yes, it’s coming from both sides of the political aisle. The heightened political pressure in Washington has already changed the practical reality for these companies. Acquiring nascent competitors is already much more challenging. But will there be political consensus in Washington to pass a big new antitrust statute? We haven’t done that since 1950, and I doubt it’s in the cards today.
Cohn: I don’t think the bipartisan
will is there. A lot of people hate these companies on both sides of the aisle. But the reasons they hate Big Tech are so different and contradictory that it’s hard to see a shared coherent policy response aimed at creating competition coming out of the current debate.
Why aren’t Big Tech data privacy issues resonating with the general public? Taplin: The problem is these
platforms have become so much a part of life. How could you operate without Google? It’s the old T-IN-A—there is no alternative. That’s exactly what the word “monopoly” means. Google is critical to most people’s work existence and probably to their social existence. And Amazon has become that for a lot of people.
awareness and concern. With each scandal, voters are showing more concern. Unfortunately, we also have a lot of politicians on both sides of the aisle who have frankly been bought and paid for by Big Tech. Google is the top corporate spender on lobbying in the country—so much for “don’t be evil”—and Facebook and Amazon aren’t far behind. They’ve done an equally good job of paying off significant think tanks and media. And a lot of my colleagues on the right have fallen into this sort of naïve “free market” defense of Big Tech that ignores the issue of monopoly power. In reality, there’s nothing “free market” about granting special legal privileges to monopolies and then letting them run amok. Lewis: The public isn’t ambivalent, it simply isn’t empowered or informed about solutions. This is why careful analysis by policymakers like the House Judiciary Committee’s hearing series on the digital marketplace, is important in making the public aware of the facts and possible solutions. These services are popular with the public and so their concerns must be matched
Google’s Arrogant Innocence “This naïveté, this barely disguised will to power, this dialectic—Google will do whatever it wants without asking permission, and the results will be so awesome that no one will complain— stands at the heart of the company’s success.” —Excerpted from Move Fast and Break Things: How Facebook, Google, and Amazon Cornered Culture and Undermined Democracy, by Jonathan Taplin
An expansive regulatory system ostensibly designed to “protect the internet” would end up imposing the views of government bureaucrats on everyone else. —Daniel Crane Daniel Crane, the Frederick Paul Furth Sr. Professor of Law at the University of Michigan, serves as editorin-chief of the Journal of Law and Mobility. He’s author or editor of seven books on antitrust law. @danieldancrane
Carl: First of all, we’re in a much
better position than we were a few years ago in terms of public
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Tech Lobby Bull Market $21.2 million A government worker sets out copies of the ruling on the 1999 Microsoft anti-trust case. A federal judge ruled that Microsoft’s actions had done consumers harm and the company had used its power to punish competing firms, a major setback for the world’s largest software company in one of the biggest antitrust cases of the century.
Google’s 2018 lobbying budget, +18% from 2017
$14.2 million
Amazon’s 2018 lobbying budget, +10.5% from 2017
$12.6 million
Facebook’s 2018 lobbying budget, +9.6% from 2017 Source: Vox
by careful policymaking that rebalances the power of dominant platforms without destroying the benefits the public loves. Stoller: They are resonating. More
than 70% of the public wants to see antitrust investigations of Big Tech.
Crane: The American people have
always felt deeply ambivalent about what former Supreme Court Justice Louis Brandeis called “the curse of bigness.” On the one hand, there’s a Jeffersonian strand in the American consciousness that’s deeply concerned about large scale organizations—whether in business, government, religion or anywhere else. On the other hand, there’s also a Hamiltonian strand that covets the efficiency that comes with certain kinds of largescale organizations. So even while we complain about the growing shadow of Big Tech, we love our
“free” searches with Google, social networking with Facebook and two-day Amazon Prime deliveries. Cohn: I don’t think people are
ambivalent. If you look at the issues dominating the media right now, you’ll see just how much people care about the role these companies play in their lives. However, people are not seeing any viable way out of the current situation. We’ve long seen this in privacy issues—people want to protect their privacy when they are asked, but as a practical matter many have just given up. That means that folks who want a change must first convince ordinary people that it’s actually possible. It’s difficult given the lack of serious investigation and leadership in Congress and elsewhere.
How powerful and influential is the Big Tech lobby?
much money they spend. Google is the largest spender in terms of lobbying of any Fortune 500 corporation. And they don’t really rely on the government to fund them the way Boeing or General Dynamics does. But I would argue that things are changing. The very fact that the Federal Trade Commission levied a $5 billion fine on Facebook is a big change. Makan Delrahim, the assistant attorney general for antitrust, has opened an antitrust examination of both Google and Amazon, which says to me that something big has switched.
Carl: Yes, they’re very powerful
and influential. They’re insidious because they tend to do a lot of their work in secret.
Lewis: All big companies have influential lobbyists, but an informed public can always balance that through grassroots action, by contacting Congress, by voting and
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PHOTOGRAPH: REUTERS FILE PHOTO/ MIKE THEILER
Taplin: Well, it’s astonishing how
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by engaging agencies like the FTC and FCC. We’ve seen it work from one industry to the next. Stoller: But the tech lobbyists
are the biggest spenders in D.C., and they finance a large section of the academic world that studies privacy.
Crane: I think it’s a mistake to
think about a powerful, unified “Big Tech lobby.” Google, Amazon and Facebook have some interests that are aligned, but many that are in conflict. Also, many other big players out there have their own lobbying agendas that are dead set against Big Tech—on net neutrality, for example, and many other issues. Also, Big Tech faced an unusual set of ideological currents—they have to contend both with anti-corporate progressives and forces on the right that see Big Tech as leftleaning and discriminatory toward conservatives. Yes, Big Tech companies have lots of political muscle, but there are many complex countervailing forces as well.
The DOJ recently announced an antitrust review of Big Tech companies. How hard will it be for the government to win cases based on rising prices, particularly in light of Google and Facebook ostensibly providing their major services for free? Carl: People in the scholarly,
regulatory and political communities have urged us to take a broader view of monopoly power. There is plenty of intellectual precedent for not just looking at prices to determine consumer harm. Especially given the aggressive barriers they have put up to competitors who have wanted to enter the market. The privacy issue is also a major point of entry. Frankly, If you don’t
Matt Stoller, fellow at the Open Markets Institute, wrote Goliath: The 100 Year War Between Monopoly Power and Democracy. Previously, he was a senior policy advisor and budget analyst to the Senate Budget Committee. @matthewstoller
think that the monopoly power of Google, Facebook, etc., is harming consumers, you’re not really paying attention. Lewis: Antitrust analysis has become too focused on consumer prices. This is too narrow a view for our current digital marketplace. Big data collection, powerful network effects and the cost of exclusion from a digital platform create market power regardless of an exchange of dollars. We need to improve antitrust law and increase enforcement under current law, but it will be a slow and uncertain process. Instead, new procompetition regulations should be our first step toward addressing dominant tech platforms.
It’s a corrupt joke. Facebook offered a $5 billion payment on the condition that the FTC not finish the investigation … This was a bribe to a regulator looking for a good headline. —Matt Stoller
Stoller: It depends on the judge,
but generally speaking it won’t
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be as hard as they think. Judges will be in the spotlight, and that is meaningful. Enforcers just have to bring cases, a lot of them. Crane: There’s a popular
Cindy Cohn, executive director of the Electronic Frontier Foundation, became involved with EFF in 1993 when she served as the foundation’s lead attorney in a successful First Amendment challenge to U.S. export restrictions on cryptography. @eff
I don’t think the bipartisan will is there. A lot of people hate these companies on both sides of the aisle. But the reasons they hate Big Tech are so different and contradictory. —Cindy Cohn
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misconception that the consumer welfare standard that governs antitrust today requires proof of rising prices to consumers. The Justice Department largely won its case against Microsoft in 2001 with evidence that—even though Microsoft was doing things like giving away its Internet Explorer browser “for free”—it was entrenching its monopoly position in the Windows operating system and chilling innovation. The Microsoft case is the blueprint for any antitrust enforcement agency or private plaintiff wanting to sue Big Tech today. It’s not an impossible road. But don’t expect a court to break up the company even if it does find liability under the antitrust laws.
Cohn: This is definitely a big
hurdle, and it’s why some folks are looking for other solutions to Big Tech in addition to this government antitrust review strategy. But it’s important and useful even though it will be difficult. We need to ensure that antitrust gets updated for our time. That includes recognizing that there are issues other than the price of a good or service that can be a measure of harm.
What do you expect to happen before the 2020 elections? Taplin: Don’t expect the government to dismantle these companies before then. But if they were forced to break up, the investors might make more money. I mean if you broke out the value of Instagram from Facebook or the value of WhatsApp from Facebook, the sum of the parts may be worth more than the companies as a whole.
Carl: Well, this antitrust
investigation is long overdue, but we will see if it leads to anything substantive. Some critics think DOJ is not really serious here, but I hope they’re wrong. I have friends in senior positions in DOJ who definitely recognize the scope of the problem here. Certainly, the way these companies have abused their monopoly power has been not just deleterious to consumers, but to this particular administration. The president largely says the right things in terms of big picture understanding, but we’ve got to go beyond words and Tweets.
Crane: Antitrust reform, not just
focused on Big Tech but on other industries as well—including banks, airlines and beer—will probably be a second-tier talking point in the 2020 election cycle. Second-tier because it would take a truly extraordinary turn of events to make antitrust enforcement break into the top tier with gun violence, health care, economic growth, immigration policy, and the other most salient political issues. Whether antitrust even makes it into the second tier depends in large part on who wins the Democratic nomination. If it’s a candidate like Elizabeth Warren who has made antitrust one of her signature issues, antitrust will likely be on the table. If the nominee is Joe Biden, expect antitrust to recede as a campaign issue. After all, it would be awkward for Biden to run on a plank of “Oh my gosh, Big Tech is out of control due to lax antitrust enforcement” when he helped preside over an eight-year period when Big Tech became Big Tech. On the Republican side, look for Donald Trump to make an issue of antitrust occasionally and opportunistically, as he did with respect to AT&T/Time Warner. Fun times ahead!
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Cohn: I think we will continue
to see misguided attempts to undermine Section 230. When bad things happen in the world, it’s understandable to want to hold someone or something responsible. After all, we all want to be safe in our homes and in public places, and recent violence has shaken us all to the core. But it’s important to note that going after Section 230 is not directly aimed at the perpetrators of violence. It will reinforce the power of Big Tech, instead of protecting the powerless.
Chris Lewis, president and CEO of Public Knowledge, an organization that works to promote an open internet and shape policy on copyright, telecommunications and internet law, has 17 years of experience in policymaking and political activism. @chrisjlewis
A longer version of this roundtable discussion is available at luckboxmagazine.com.
PHOTOGRAPH: REUTERS/AARON P. BERNSTEIN
Facebook CEO Mark Zuckerberg testified in April during a joint hearing convened by the Senate Judiciary and Commerce Committees on the company’s use customer data.
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Amazon’s Fires The tech behemoth is taking a lot of heat. Here’s a contrarian analyst’s perspective.
A
mazon (AMZN) has had a tumultuous year. The stock traded as low as $1,500 the first week of January before breaking the $2,000 level in July and settling back into the $1,700s. The company’s top managers, like many other Americans, are fretting about tariffs, and like their counterparts at other tech giants, Amazon execs are feeling uncomfortable about the looming specter of greater regulatory oversight. Meanwhile, Amazon’s top treasurer is heading for the door after 15 years with the company. At the same time, the Whole Foods subsidiary, long known by the derisive sobriquet of “Whole Paycheck,” is cutting prices (again). Federal agencies are declaring 4,000 products on Amazon sites unsafe, including 2,000 toys. Some claim that selling the products without warning labels constitutes mass deception. At any moment, President Trump could renew his call for higher U.S. Postal Service shipping rates, which would damage Amazon’s business. The Department of Justice has announced its Antitrust Division will review “whether and how market-leading online platforms have achieved market power and are engaging in practices that have reduced competition, stifled innovation or otherwise harmed consumers.” Amazon seems vulner-
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able because the DOJ will examine concerns about the company’s dominant market position and alleged monopolies in its online retail platform and cloud-computing business. Do those travails simply amount to the daily quota of misery for such a large, powerful internet company? Some Wall Street analysts seem to think so. According to Nasdaq.com, the stock has 25 “Strong Buy” recommendations, two “Buys,” one “Hold,” and no “Underperform” or “Sell” ratings. But New Constructs, an independent equity research firm powered by machine-learning, is advising investors to avoid Amazon and gives it an “Unattractive” rating—citing more downside risk than upside potential. Despite Amazon’s attractive return on invested capital of 13% for the trailing 12 months and attractive price-to-economic book value, New Construct’s David Trainer and Sam McBride explain that they base their “Unattractive” rating for Amazon on the significant disconnect between the expected forward financial performance implied by its market price and the company’s historical performance. For more on Amazon’s situation and prospects, see AMZN’s Valuation Implies Unrealistic Revenue Growth versus WMT and AMZN’s Valuation Implies Unrealistic NOPAT Growth versus WMT, p. 35). —Ed McKinley
Amazon rated “unattractive” Amazon isn’t a bad company, but its stock poses a big risk because the firm’s valuation in the $1,700’s range assumes absolutely staggering forward growth in profits. Specifically, Amazon’s valuation implies it will improve its net operating profit after tax (NOPAT) margin to 7% (versus 5%, which was highest in company history) and grow revenue by 23% a year for 10 years. That margin improvement and revenue growth would result in NOPAT growth of 29% compounded annually. In this scenario, Amazon earns over $1.8 trillion in revenue in Year 10, which is over three times the 2018 revenue of Walmart (WMT). To own the stock at these levels means an investor would have to think that the company’s future cash flow growth will be significantly greater than the performance already baked into the stock price. For context, compare Amazon’s valuation to Walmart’s current NOPAT and valuation. At approximately $12/share, the WMT price implies the firm will maintain its fiscal 2019 NOPAT margin (3%) and revenue and NOPAT will grow by just 3% compounded annually for 10 years. —David Trainer & Sam McBride
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AMZN’s Valuation Implies Unrealistic Revenue Growth vs. WMT Amazon is a risky stock: The valuation of Amazon in the $1,700’s range assumes absolutely staggering forward growth in profits.
AMZN Revenue WMT Revenue
AMZN’s Valuation Implies Unrealistic NOPAT Growth vs. WMT Amazon’s current valuation implies the firm will improve its net operating profit after tax margin to 7% and grow revenue by 23% a year for 10 years.
AMZN NOPAT WMT NOPAT
LUCKBOX LOOKBACK
Glu Mobile: Bust
In July’s Electronic Gaming & Esports issue of luckbox, two analysts rated Glu Mobile (GLUU) as a stock to “Sell,” even though it had been steadily climbing in price that month. In an article entitled Glu Mobile: Boom and Bust Cycle Continues, New Construct’s David Trainer and Sam McBride cited a litany of problems with the company, including a questionable business model, shareholder dilution and competitive weaknesses. They noted strong selling by insiders and advised following their lead. It didn’t take long for events to prove Trainer and McBride correct. Despite announcing record bookings and a 6% increase in secondquarter revenue on Aug. 2, Glu Mobile’s stock plunged more than 36% on the game maker’s reduction in 2019 guidance. The stock has been trading in the low $4’s, ever since.
Three ways to get short Amazon
The implied volatility (IV) of Amazon (AMZN) is approximately 29%. That means the stock is expected to increase or decrease in price by 29% during the next 52 weeks. In comparison to other Nasdaq stocks, this stock has a lower than-average volatility—29% versus 34% in the Nasdaq Index. In fact, the market is expeting Amazon to move less than two-thirds of the other 99 stocks in the Nasdaq 100. Several methods will achieve short exposure. Below, analysts at tastytrade provide some lower-risk alternatives to “naked” shorting the stock. Short Stock
Long Put
Long Put Spread
Probability of success
Roughly 50%.
Considerably less than 50% when purchasing out-of-the-money options. The probabilities can be close to 50% if purchasing deep-inthe-money puts. This is due to less extrinsic value being paid for the option.
Can be as high as 90%, but generally around 50% if the strike bought is higher than the current price and the strike sold is less than the stock price.
Capital required to initiate the strategy (in a margin account)
To sell short a stock generally requires 50% of the price of the stock in a margin account.
Far out-of-the-money options can be cheap to purchase, but the odds of success are often small. The costs of capital required for in-the-money puts is 5% to 20% of the stock’s price.
The price paid for the put spread. A spread placed at the current price is roughly 50% of the width.
Risk
The risk is theoretically unlimited to the upside.
The risk of loss is limited to the amount paid.
Limited to the amount paid for the spread.
Analysis
The risk and cost associated with this strategy make it difficult to obtain profitability. If you are bearish, instead of a short stock position, strongly consider using a long put spread to limit risk.
Avoid this lower-probability trade because it is theoretically impossible to increase the odds of success to above 50%. Additionally, the high volatility makes put options particularly expensive to purchase.
The limited profit and risk make this a suitable strategy to speculate on the direction of the stock.
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trends life, luxury & the pursuit of happiness
LIQUID ASSETS
Glass Act
PHOTOGRAPH: (GLASSWARE) GARRETT ROODBERGEN
Whiskey is in a golden era. The brown-booze bull market is propelled by trends that show little sign of abating. Unique barrel finishes are flourishing, High-Ryes are happening and wheated bourbons are bigger than ever. Nearly every month a distiller releases something worthy of your whiskey radar. But with glassware, nothing noteworthy had happened since the tapered mouth of the now ubiquitous Glencairn Crystal was introduced in 2001. That was until a 2015 Kickstarter campaign launched the Norlan Glass. More than 11,000 backers raised $800,000—well over the $75,000—and whiskey drinkers took notice. The glassware is scientifically designed to enhance the nose of fine whiskeys—and, they are stunning. The Norlan Whisky double-walled glass is designed for neat (no ice) pours, and the Rauk Heavy crystal tumbler for chilled spirits. You want these. norlanglass.com Rauk Heavy Tumbler
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For whiskey explorers, discovery is the easy part. There is always something that you haven’t tried, but the results are often disappointing. Happening upon Pinhook Rye (Lot 001) was a great find. Inexplicably labelled “Bourbon N Rye” this 93.5 proof, two-year-old has a 95% rye, and 5% malted barley mash bill. Its sweetness pleasantly offsets its youthful verve. At two years, the color is not surprisingly light and translucent. The nose is soft citrus and toasted oak, and the flavors follow those aromas. The finish lingers in solid cherry with the light spice of a maduro cigar. The Pinhook name is derived from the rural regional term “pinhooker”— a small time trader in farm products. A more contemporary use of “pinhook” refers to a speculator on racing horses—a special meaning for grain traders and racing fans. Be prepared to speculate on price, too. A bottle ranges from $29 in a downtown Memphis liquor store to $48 in Chicago big box stores. But lately, the biggest challenge is finding lot #001. If you do, we recommend that you pony up for it.
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trends
ARTS & MEDIA
THE GREAT HACK
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David Carroll, a professor at Parsons School of Design, struggles for justice in The Great Hack.
Jehane Noujaim chronicle what they view as Cambridge Analytica’s theft of personal data. The directors tell that part of the story by following the effort of David Carroll, an American professor, to use British law to gain access to the personal data he felt was stolen. They also show Carroll trying to convince his Parsons School of Design students who were born in the internet era that something’s amiss with the abuse of data. Simultaneously, Amer and Noujaim explore the political side of the saga through the eyes of Brittany Kaiser, a young Chicago native who got a taste of the power of the technology while working for the internetsavvy Barack Obama campaign. Kaiser then changed sides and rose to prominence as a political manipulator working for Republican clients at Cambridge Analytica. Now, she’s flipped again to become an advocate for owning one’s own data. Inviting the movie’s interviewees to watch videos of hearings and speeches, the directors show their subjects’ reactions to what they purport are misleading statements or even outright lies by Facebook CEO Mark Zuckerberg and Cambridge Analytica CEO Alexander Nix.
Along the way, the THE GREAT HACK filmmakers keep the visuals 5 out of 5 interesting by interviewing How your data became a commodity that their subjects upended democracy in the places they inhabit or visit. Backdrops range from the driver’s seat of a car crossing the Brooklyn Bridge on a daily commute to a swim in an infinity pool “somewhere in Thailand” to the plush back seat of a limo negotiating the streets of London. The story also unfolds in classrooms, conference rooms, hearing rooms, apartments, boats, hotels and the stage of a TED Talk. Occasional montages of sound and visuals juxtapose events in ways that demonstrate the connections among farflung events and pronouncements. Through it all, The Great Hack does an admirable job of unraveling the tangle of one of the most important issues of the 21st century. Anyone who believes that democracy requires an informed citizenry shouldn’t miss this film. —Ed McKinley
PHOTOGRAPHS COURTESY OF NETFLIX
Technology’s shocking invasion of privacy gained momentum in the early 1970s when supermarkets began installing closed circuit television cameras to monitor the aisles for shoplifting. Not many customers complained, and management seemed indifferent to the philosophical implications. So from there, tech’s invasive powers continued to grow. By the mid-1980s, supermarket chains were compiling vast stores of information on customers through surveys and cash register receipts. C-level execs and their IT experts felt confident that someday they’d figure out what to do with the data they were amassing. By 2016, data scientists and political operatives knew exactly how to use their everexpanding mountains of intelligence. In one tragic example, the now-shuttered Britishbased company Cambridge Analytica—partly owned by American Republican donor Robert Mercer—had captured 5,000 data points on every American and was more than willing to sell the information. After boosting the Ted Cruz candidacy from obscurity to near-success, Cambridge Analytica succeeded in landing the buyer it really wanted—Donald Trump’s campaign. First, the company and the candidate’s staff teamed up to identify Americans they called “persuadables,” the undecided voters most susceptible to baseless conspiracy theories and false, demeaning sloganeering. Then, they targeted that audience with millions of scurrilous internet ads. By creating and placing those messages, Cambridge Analytica and the Trump campaign imperiled democracy today and in the future through manipulation, deception and polarization, according to most but not all of more than a dozen interviewees in The Great Hack, a new Netflix original documentary. In Hack, directors Karim Amer and
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PATRIOT ACT WITH HASSAN MINHAJ When Jon Stewart took the reins of Comedy Central’s The Daily Show from Craig Kilborn in 1999, the program began outperforming Saturday Night Live as an incubator for rising comedy talent. The cavalcade of stars who have come to prominence on TDS has included Stephen Colbert, Steve Carell, Olivia Munn, Ed Helms, John Oliver, Trevor Noah and Samantha Bee. The latest addition to the list is former TDS correspondent Hassan Minhaj, co-creator, co-producer and host of Patriot Act, which began airing on Netflix and YouTube late last year. Minhaj, a wide-eyed, eager and approachable comic, blends Seinfeld-style “observation” stand-up with the voluminous and startling information overload of a TED Talk. He backs his presentations with giant screens that flash charts, statistics and videos. He sets out to provoke the woke and does it masterfully. Like each issue of luckbox, every Patriot Act episode takes on a timely topic. In the third installment of the show, Minhaj
exposed the evils of Amazon. Explaining Amazon’s predatory pricing business model, he urged viewers to ”picture a mom and pop store and imagine Amazon as the Menendez brothers.” The must-see Amazon episode includes video of a goofy ad from 2001 that stars Jeff Bezos as a Taco Bell pitchman. There’s also painfully awkward footage of Bill Gates and Steve Ballmer recreating a disco-infused scene from the film A Night at the Roxbury. But the best moment comes when Minhaj truly unleashes on Amazon Web Services, the company’s cloud computing business: “AWS is the internet’s largest landlord, and it seems like every major player is their tenant. Between retail and AWS, Amazon has control over the most important 21st century commodity...data...how you spend your money, and what parts of the internet you are using. Unlike Facebook and Google, who need your customer data to sell ads to businesses, Amazon is a one-stop shop. They know who you are and what you buy. I am not the only one that is hooked...
TWENTY-SIX WORDS … In his latest book, The TwentySix Words that Created the Internet, Jeff Kosseff, a professor of cybersecurity law in the U.S. Naval Academy’s Cyber Science Department, examines the implications of Section 230 of the Communications Decency Act, the succinct law that has governed the dissemination of information, and disinformation, on the internet since 1996. It becomes apparent early on that Kosseff has practiced cybersecurity, privacy and First Amendment law. Admittedly, 26 Words is a wonky read, but it provides an essential
history of free speech on the internet. Kosseff acknowledges the unintended consequences of providing internet platforms with legal cover from liability for fake news, harmful advertising and hate speech, but he reluctantly concurs with the implicit publisher’s exemption in Section 230 … Is it better for online speech to be determined by these new [Big Tech companies] or by courts and legislators? Neither is perfect, as it concentrates power in the hands of someone other than the speaker. On balance, however, platforms—
advertisers are hooked PATRIOT ACT— on Amazon’s AMAZON data, vendors (S1/#3) are hooked on its customers, 4 out of 5 politicians are hooked on Multi-media, standup comedy on timely its jobs and topics companies are hooked on its servers, and Wall Street is hooked on its stock price.” —Jeff Joseph
THE TWENTY-SIX WORDS THAT CREATED THE INTERNET
and not the government— 3.5 out of 5 are better The delicate balance of suited free speech, freedom to be the of the press and a safer and saner society gatekeepers of online speech. Moderation by platforms is more targeted and does not have the same society-wide chilling effect as government regulation. The 26 words? Read the book. —Jeff Joseph
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FINANCIAL FITNESS
Amazon Doesn’t Sell Sculpted Physiques
Staying fit requires discipline and committment; the same can be said for profits in trading
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nstant gratification and immediate satisfaction. If the explosion of Facebook (FB), Amazon (AMZN), and Netflix (NFLX) onto the content consumption scene has shown the world anything, it’s this: People want their stuff and they want it NOW. Bingeworthy content is always available and doesn’t even require tapping a keyboard or touching a screen. This is today’s societal landscape. Wait a week for a new episode of Stranger Things? Not a chance. It’s consumed in its entirety—today. The problem (not to suggest there’s only one) is that nothing important comes this easily— not in life in general and definitely not when it comes to radical physique transformation. Maintaining your body takes time...a long time. Even with hard training, it takes a while to oxidize fatty acids. Caloric deficits don’t immediately shrink fat cells. And building new muscle requires sustained effort. Heavy gym sessions don’t tax and repair the necessary fibers overnight, and caloric surpluses need time to add mass to the body. In other words, dramatic change to a physique doesn’t come in minutes, hours or days. It’s a matter of weeks, months and years. But therein lies the problem. Nobody wants to wait six months for a diced up core. They want it now. Nobody cares about a six-pack next summer. They want it today. Regularly, laboriously shaped washboard abs? Nope, not inter-
A white van doesn’t double park outside your home and drop off a lean, healthy, muscular physique. 40
ested. Amazon’s next-day abs, please. A white van doesn’t double park outside your home and drop off a lean, healthy, muscular physique. Binging won’t bring a sculpted midsection, not literally nor figuratively. It’s earned over time. It’s achieved through sacrifice. Real progress requires patience. Which is similar to what every trader knows about a portfolio’s profit and loss (P/L). Investors make money in the derivatives market in only three ways: the right directional bias, the right change in volatility or the passage of time. That’s it. The profit or loss generated over a month, quarter or year is a function of those three components. The reliability of each of those metrics increases when investors examine a longer window of time. If an investor’s long the market, the market will eventually grind higher, providing an opportunity to benefit. If an investor’s short the market, the negative skew, positive kurtosis and sheer downside velocity in prices provide chances to benefit. If volatility contracts, which it normally does, premium sellers can capitalize. Even if volatility expands, premium buyers can benefit. And with the passage of time, the long side of the option contract pays the short side of the option contract an amount equivalent to the daily theta decay for the right to make potentially large profits in the position, should the stock move significantly in the desired direction. All of the above, each of the three factors influencing a portfolio’s performance, is exponentially more reliable and powerful over longer windows of time. Market movements change from totally random to slowly higher. With time, changes in volatility shift from completely unpredictable to discernibly tradable. And theta decay moves from a small daily pittance to a
sizable cycle’s ransom. So strap in and get comfortable. Train daily. Trade daily. Consistent results in training and nutrition require time. Predictable outcomes with trades and investments take a while, too. Just ask the thousands of committed traders who watch the tastytrade network online each day. Just because Netflix sets Episode 2 to start automatically in eleven seconds doesn’t mean anything else will materialize that easily. Jim Schultz, Ph.D., a derivatives trader, fitness expert, owner of livefcubed.com and the daily host of From Theory to Practice on the tastytrade network, was named North American Natural Bodybuilding Federation’s 2017 Novice Bodybuilding Champion. @jschultzf3
PHOTOGRAPH: DOYLA LACRUA
By Jim Schultz
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THE NORMAL DEVIATE
Auto Industry Autopsy
If the average age of a car on the road increases 15% every 10 years, half a century from now the average car would be 23 years old and might have more than 300,000 miles on the odometer—if any cars are still left By Tom Preston
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n the ’60s and ’70s, motorists could only dream of a car reaching 100,000 miles before it was replaced or needed to spend two expensive weeks in a repair shop. Back then, the relatively primitive state of automotive technology produced cars that just didn’t last that long. Now, it’s new world. If a Toyota has 170K on the odometer, it will likely do another 30K. Shopping for a vehicle for their kids, parents see cars with 120K on the clock that still look good and seem mechanically solid. While 100K used to represent a major milestone for a car, 200K seems like a reasonable expectation now. But what’s the probability of a car reaching that mark? Unfortunately, the markets don’t offer options on cars that would
enable investors to derive actual probabilities like the ones that exist for stocks and market indices. But the U.S. Department of Transportation does have some historical data for the average age of cars on the road. Back in 1970, the average age of a car was 5.6 years. In 1980, it was 6.6 years. In 1990, it was 7.6 years. In 2000, it was 9 years. In 2010, it was 10.8 years, and in 2018 it was more than 11. That means the average car today could have about 155K miles on it, assuming 13.5K miles per year. With some regular maintenance, 200K seems like a 50/50 bet. To quantify that, the average age increased 17.8% from 1970 to 1980, 15.2% from 1980 to 1990, 18.4% from 1990 to 2000, 20% from 2000 to 2010, and 3.7% from
2010 to 2018. Has the growth in car longevity slowed down? Maybe, but if every 10 years the average age of a car increases 15%, in 50 years a car could be 23 years old with more than 300,000 miles on it. That’s a lot of time to accumulate stains from fast food wrappers and spilled sodas. Better load up on the Scotchgard. Cars are indeed built better than they were 50 years ago, and motorists who buy used vehicles should get their money’s worth if they drive until the wheels pop off. Isn’t that what Warren Buffett does? But with better cars lasting longer, it’s no wonder that Americans are buying fewer of them and car dealers are sitting on inventory. And millennials, who take email, ATMs and smart phones for granted, may take Uber or Lyft for
Irving Gordon set a Guinness World Record for the highest vehicle mileage on a personal car by driving his 1966 Volvo 1800S more than 3 million miles. Fun facts: The odometer hit 2 million in 2002 and then 3 million while he was driving through Alaska in 2013. Gordon has taken the car to all 49 of the continental United States and across Europe but hasn’t made it to Hawaii.
AUTOCORRELATIONS Car ownership among 18- to 34-year-olds has dropped 30% in the past five years because of the rising price of automobiles and opportunities with ridesharing services. —Forbes
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Consumers over the age of 40 accounts for
75% of all new car sales. —Nielsen
Realize that you’re trading two things when you buy a new car. You’re trading all of your life that you spent making the money to buy it, and, you’ve lost the opportunity for that money to grow over time. Buying a $40,000 car would require a year’s worth of work if you’re earning $20 per hour after taxes and working 200 hours annually. If you had invested that money instead, it would be worth more than $240,000 after 30 years with a 6% rate of return, or more than $440,000 with an 8% rate of return. The second you drive that car off the lot, it depreciates, 10%, 20%. Let somebody else get that depreciation. —Grant Sabatier, founder of Millennial Money
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PHOTOGRAPHS: (GORDON) FACEBOOK; (FORD) COURTESY OF FORD; (TOYOTA) COURTESY OF TOYOTA
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the rest of their lives and let someone else buy the cars. What, then, will become of the automotive industry? Of the major car stocks, Toyota (TM) has the largest market cap at $184 billion. The others, like Ford (F), General Motors (GM) and Tesla (TSLA), have market caps from $35 billion to $52 billion— which pale in comparison to stock market leaders with market caps nudging the trillion dollar mark. The days when car manufacturers dominated U.S. business are over. Even electric cars are really an energy thing, not a car thing. Millennials won’t need to buy electric cars, either. So is it time to become a permabear on car stocks? Investors can attach a probability to that. The probability that any of them will be 15%
higher at the end of the year is lower than the probability that they’ll be 15% lower. At the time of this writing, the probabilities of being 15% higher or 15% lower respectively are 13% and 23% for General Motors, 10% and 25% for Ford, 28% and 38% for Tesla, and 7% and 13% for Toyota. That’s a fairly significant bias. So, even investors who don’t want to short car stocks should be cautious buying them. Regardless of what they may think of their prospects, the market is seeing more risk to the downside. Car bulls, buckle up. Tom Preston, luckbox features editor, is the purveyor of all things probability-based and the poster boy for a standard normal deviate.
TOP 10 SELLING CARS & TRUCKS IN AMERICA 2018 data. The percentages refer to the increase or decrease of unit sales from 2017. 1
F ord F-Series: 451,138 units. +4.9%
2
C hevrolet Silverado: 291,074. +10.7%
3
R am Pickup: 233,539. -6.7%
4
N issan Rogue: 215,202. +10.0%
5
T oyota RAV4: 198,390. +7.4%
6
H onda CR-V: 179,580. -4.1%
7
T oyota Camry: 178,795. +1.1%
8
H onda Civic: 176,242. +0.3%
9
C hevrolet Equinox: 156,365. +17.2%
10
T oyota Corolla: 149,805. -9.5%
Source: BusinessInsider
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7
38% of Americans are unwilling to pay extra for vehicles equipped with a self-driving feature. 33% of are unwilling to pay extra for electric vehicles. —Deloitte
58%
of drivers expect to use their current vehicle until its very last mile before purchasing another. —Oppmax
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TRADER Trading Mobile 1. tastyworks trading platform with a chart of BIDU 2. Cell phone with current trading positions 3. Car screen airing the tastytrade network
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4. Annabelle & JD 5. Rescue dog Sully Smalls Dierking
3 2 5
LIZ DIERKING Age 42 Home Lemont, Ill. Office Most of the time, my car. I am always on the go. I trade everywhere. With two kids who are growing up too fast, I try to not miss a moment of their lives and have really fit trading into my lifestyle. I love that my kids see me trading and talking about the markets on a daily basis. One of my proudest mom moments is when the kids get into the car after school and ask me where the SPUs are. Years trading 23 (since I was 19!) Origin story as a trader When I was a girl my dad and I used to talk about the stock market. He was the person who got me heading down this route. We used to read the ticker symbols in the paper. I was a finance major and
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had a summer internship with Bear Stearns as a runner in the bond pit the summer of my junior year. The second I set foot on that floor I knew that was what I wanted to do. My dad always used to tell me that I found my people. I have always talked fast and I found the place where fast talking and thinking ruled. Flash forward to the current-day scenario, and the quick decision making is still with me and I am still working on slowing my speech. Favorite trading strategy My favorite, far and away, are the lizard strategies, which are premium selling, high-probability trades that eliminate risk to one side. These suit my style well because as much as I try not to have an opinion, this allows me not to lose if I am wrong. Average number of trades per day Ten to 15. I am in and out quickly and like to redeploy capital. A very smart person once told me that a trade is
luckbox | september /october 2019
FAVORITE BOOK
not a win until you close it. The percentage of your outcomes you attribute to luck All of them. I am lucky to have found this skillset and to have found an amazing network of people who share the same passion for this business. Favorite trading moment When things are firing on all cylinders and the market is giving me two-way action and GTC orders ore coming off fast. My biggest wins have been luck, not skill, because as a trader I take my profits quickly.
OPTION VOLATILITY AND PRICING By Sheldon Natenburg $64.65, 592 pages
Worst trade After Facebook’s IPO I bought the stock instead of waiting for the options to come out and the stock plummeted. I just remember thinking, “What are you doing? You are an options trader.” I like high probability trades versus the 50/50 shot. I like to be in control of my risk and my reward scenarios, and option trading allows me to do just that.
Liz Dierking: From the floor to the screen
PHOTOGRAPH: GARRETT ROODBERGEN
Co-Host Of The LIZ & JNY Show on the tastytrade network
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CALENDAR
NEGATIVE ENERGY
S E PT E M B E R 20–22 Bourbon & Beyond Festival Louisville
Quadruple witching day is upon us.
20–21 MoneyShow* Toronto
Larkin Poe at Bourbon & Beyond Festival 2018
22 71st Primetime Emmy Awards Los Angeles 23 Gann Day (Fall equinox) Change in trend
PHOTOGRAPHS: (BOURBON) STEVE THRASHER; (EMMYS) REUTERS/MIKE BLAKE; (COMIC CON) REUTERS/SHANNON STAPLETON
26–28 MoneyShow* Philadelphia
OCTOBER 3–6 Comic Con New York City Emmy Awards
13–14 Moneyshow* Dallas 19 He Said She Said* New York City 20 He Said She Said* Washington 27–30 Money 20/20 Las Vegas *For more information visit tastytrade.com (events)
2018 New York Comic Con
Bourbon & Beyond, reputedly the world’s largest bourbon festival, will return to Louisville, Ky., on Sept . 20-22, with an all-star musical lineup, culinary events and samples from some of America’s best bourbon distilleries at the new Highland Festival Grounds at KY Expo Center. This year’s mix of rock, roots, bluegrass and folk acts is headlined by Foo Fighters and Robert Plant and The Sensational Space Shifters, and includes the Zac Brown Band, John Fogerty, Daryl Hall & John Oates, ZZ Top, The Flaming Lips, Alison Krauss, and Joan Jett and The Blackhearts. The festival’s Big Bourbon Bar will feature more than two dozen bourbons and specialty cocktails from 1792, Angel’s Envy, Buffalo Trace, Coopers’ Craft, Elijah Craig, Four Roses, Kentucky Peerless, Michter’s, Old Forester, Wild Turkey and others. Single-day admission tickets start at $89.50.
September suggests a tipping point. The S&P 500 looks friendly, with potential highs based on positive astrological connections on Sept. 6, Sept. 13 and quadruple witching day on Friday, Sept. 20. But, the energy turns negative after the fall equinox on Sept. 23. Then, the energy shifts just like the wind direction does as a storm front moves through. The last 10 days of September appear much rougher as the pivot point is the fall equinox, when the sun enters the sign of Libra, on Monday, Sept. 23. That also is a “Gann Day,” which could mean a change in trend. Susan Abbott Gidel, author of Trading In Sync With Commodities— Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter.
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(We’ll put up $5,000 to see.)
ENTER NOW AT tastyworks.com/challenge Full terms and conditions at tastyworks.com/challenge. tastyworks, Inc. (“tastyworks�) is a registered broker-dealer and member of FINRA, NFA, and SIPC. Trading Challenge accounts are not actual brokerage accounts. Trading Challenge trades are conducted in a simulated environment. tastyworks does not guarantee against losses for real trades placed in an actual tastyworks brokerage account. Allowable products and strategies available to Trading Challenge participants may not be suitable for all investors. Please consider your own risk profile and trading needs before trading in a real brokerage account. tastyworks does not make trade re recommendations, and the ability to trade certain products during the Trading Challenge does not constitute a recommendation or endorsement of any kind. Must be 18 years or older to participate.
trades actionable trading ideas
LIGHT THIS CANDLE
CA N D L EST I CK C HART ANALYS IS FO R INT ER M EDIAT E-T ER M T RADI N G
AMZN: Prime Sell By Doug Busch
s the third-largest Nasdaq and S&P 500 component, Amazon (AMZN) has a significantly large influence over market direction. At 22%, it is the top holding in The Consumer Discretionary Select Sector SPDR Fund (XLY)—nearly double that of Home Depot (HD), the second largest name. Amazon charted a bullish Harami candle late last month. The Harami is a Japanese candlestick pattern that indicates either a potential reversal, or, a continuation in the market. A break below the bear flag that began around the 2,000 mark suggests a potential measured move to 1,500. The 50-day simple moving average is beginning to slope lower. The flag carries extra weight with the possible implications of a break below its 200-day simple moving average.
A
Douglas Busch, CMT, trades U.S. equities using technical analysis with an emphasis on Japanese candlesticks. @chartsmarter
AMZN
SELL AMZN BUY STOP $1825
Source: ChartSmarter
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THE TECHNICIAN
A V E T E RA N T RA D ER TAC K LES T EC HNICALS
Venomous FAANGs By Tim Knight
or decades, conservative politicians have courted votes by promising to reduce federal regulation. After all, many of their constituents are convinced that removing red tape and curbing nettlesome bureaucrats can nurture capitalism. So government intervention has, on the surface at least, been in retreat. Until the 1970s, for example, the federal government tightly controlled commercial airlines. Many of today’s travelers may find it difficult to believe that in those days every ticket from point A to point B was identical in price (for the same cabin class, at least). So airlines had to compete on service, cleanliness, safety and other non-financial characteristics. But the feds have unchained airlines, banking and a host of other industries from some aspects of government oversight and allowed them to compete on whatever terms they choose. Today’s high-tech companies, particularly the megacaps colloquially known as the FAANGs, didn’t exist during those days of tighter regulation. The FAANGs—comprised of Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google, otherwise known as Alphabet (GOOGL)—were all born in the current relatively laissez-faire period with its comparatively low taxes and somewhat relaxed bureaucratic oversight. However, the political environment is changing and could bring an end to the lessstrict circumstances that helped the FAANGs thrive. Europe seems eager to tax the largest digital corporations. In the United States, concerns about privacy, monopolization and transparency may foster a new era of regulation, complete with rules targeting the specific companies in question. A comparison chart shows some basic facts about the FAANGs. Apple, the first FAANG to operate as a public company, dates back to December 1980. For a valid comparison, however, the graph begins when Facebook went public about seven years ago. The stocks more or less move in the same direction over
F
Make the comparison A comparison chart shows some basic facts about the FAANGs. Apple, the first FAANG to operate as a public company, dates back to December 1980.
FB AMZN 48
the long run, with Netflix having the most substantial gain at about 3500% and Apple having the least at about one-tenth that amount. (See “Make the comparison,” above.) Off the hook The five companies, all of them large technology enterprises, vary in reputation, products and services, and government scrutiny. In the present political climate, which some would describe as unusual, some of the companies get more of President Trump’s attention than others. Netflix, for example, isn’t a target in Washington. Its stock performance has been extraordinary. The company’s dizzying rise seems to have cooled recently, but it hasn’t been battered by fears of special taxes or restrictive rules and laws. It’s learned to stop committing internal fumbles and transform itself into a moneymaking machine for itself
Today’s high-tech companies— particularly the megacaps known as FAANGs — didn’t exist during the days of tighter regulation.
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and its shareholders. Facebook presents a different story, but at least some of its foibles have been shortlived. The company endured an embarrassing privacy scandal that landed Mark Zuckerberg, its co-founder, chairman and CEO, in front of a sometimes hostile joint session of Senate committees and shrank its public equity by nearly half. It has since recovered most of those losses, and it hasn’t been a target of the current administration. Instead, it seems to have been beleaguered by a “one-off” incident that temporarily seemed devastating to shareholders but looks less relevant after some time to heal. (See “Off the hook,” right.) Apple, too, has been spared the administration’s attention. In fact, President Trump erroneously addressed its CEO, in person, as “Tim Apple.” How’s that for lack of attention? Most of the company’s spectacular rise in price occurred from about 2000 through 2012. Although the stock has climbed higher now, in percentage terms, its move has been more placid. Recent ups and downs have had more to do with projections about iPhone sales than about meddling from D.C. After removing three of the five FAANG companies from this examination, let’s take a look at the remaining two.
Cooling off? Facebook’s dizzying rise seems to have cooled recently, but it hasn’t been battered by fears of special taxes or restrictive rules and laws.
Spectacular rise Most of Apple’s spectacular rise in price occurred from 2000 through 2012.
Target acquired At Amazon, the world’s largest online retailer, founder Jeff Bezos serves as chairman, CEO and president, and he’s also the largest shareholder. But Bezos also happens to own the Washington Post, a newspaper often harshly critical of Trump and his administration. The situation has led Trump to threaten Amazon, particularly with respect to substantially increasing shipping costs, which would harm the company’s bottom line. Amazon’s share price hasn’t suffered unduly from those threats, which seem more bluster than reality. Indeed, as of this writing, the share price is close to its October 2018 peak. Its only recent weakness came in the last quarter of 2018, which was a three-month period of extraordinary weakness for almost all equities—particularly richly valued tech sector stocks. That weakness, which the stocks have since shaken off, seems unrelated to political machinations. (See “Target acquired,” p. 50.) The final company among the FAANGs, Alphabet (aka Google), appears most prone to diminished value because of the attentions
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Facebook endured an embarrassing privacy scandal that shrank its public equity by nearly half, but has since recovered most of those losses. of the government. This seems paradoxical because the giant search engine hasn’t been involved in the political firestorms surrounding companies like Twitter (TWTR) or the election-interference accusations aimed at Facebook. Instead, Google’s vulnerability seems to lie in its sheer size and its dominance in internet search and advertising sales. And there are rumblings about antitrust action related to Google’s important YouTube subsidiary. Enforcement action, both real and prospective, seem to weigh on the stock price. The price peaked in April, and the price chart in “Google it,” right, is augmented with Fibonacci fanlines denoting key support and resistance levels. From 2008 through 2018, Google’s price steadily climbed above the fanline shown. Starting late last year, however, and continuing this year, prices began to fall beneath the surface of that important level. As of this writing, the stock has the same price it had 18 months before. The failure of the fanline could represent just the beginning. Should the stock break below approximately $975, that would suggest the slip under the fanline was not an aberration and Google could be ripe for a new era of diminishing price or at least stagnation. Washington is eying Google more closely than its FAANG brethren, and the equity price will reflect that — particularly between now and the 2020 election.
No damage, so far If Trump’s threats against Amazon become reality—particularly with respect to substantially increasing shipping costs—it would harm the company’s bottom line.
Google it Google’s vulnerability seems to lie in its sheer size and its dominance in internet search and ad sales.
TWTR GOOGL Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.
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FUTURES
A SAV V Y F U T U R ES T RADER’S TAK E O N T HE M AR K ETS
Inversion in Treasuries: Two Ways to Trade By Pete Mulmat
ip van Winkle slept for 20 years, but that was 200 years ago. Today, van Winkle’s smart phone would probably disturb his slumber after a mere 12 years. So suppose the Washington Irving character nodded off back in 2007 and awoke last month. He would have been greeted with the same news upon awakening that was roiling the markets when he went to sleep: Yield curve inversion. On Wednesday, Aug. 14, an uncommon event shook the bond market. Longer-term interest rates fell below shorter-term interest rates, causing a tizzy in the financial markets. “Tizzy” isn’t listed among the 2,500 words in the Dictionary of Economics, but it’s probably what old Rip would have called the state of mind that gripped the investment community. More than a few investors found themselves in a tizzy simply because they didn’t understand yield curve inversions. But they shouldn’t feel bad. Most economists can’t explain the phenomenon, even though they chatter incessantly about it. Still, it’s really not that complicated. Subtract the yield of the 2-year Treasury note from the the yield of the 10-year Treasury note. Inversion happens when the 2-year yield is higher than the 10-year yield and the calculation results in a negative number. (See “What is it?” above, right.) In other words, longer-term interest rates fall below shorter-term interest rates. The problem is that this situation typically means that a recession could be on the way. The yield curve is the yield of Treasury bills, notes and bonds plotted against their maturity. Normally, short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality. That gives the yield curve an upward slope that’s
R
What is it? This shows a yield curve inversion of the 10-year and the 2-year rates in the bond markets.
10
2-year
7.5
10-year
5
2.5
0 1990
1995
2000
called a positive yield curve. That’s how the curve usually looks, so a yield curve inversion attracts plenty of attention. Interest rates are closely connected to the rate of economic growth and inflation. In boom times, lots of people want to borrow money to expand their businesses or buy houses. And the Federal Reserve raises the interest rate to prevent the economy from overheating and causing inflation. When a slowdown comes, the process works in reverse. Take a look at “The treasury yield curve inversion” (p. 52). What does a yield curve inversion mean for the market or for the economy? Note the following two factors: • Inversion usually arrives on the back of an increase in short yields, which comes from
2005
2010
2015
Most economists can’t explain the inverted yield curve, even though they chatter incessantly about it.
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Fed activity, and stagnant long yields; and • Inversion tends not to last long, and it tends to be followed by lower yields across the curve. What do yield curve inversions mean for stocks? 1) Stock prices aren’t immediately influenced; 2) Discouraging economic data usually comes to light during or after an inversion; and 3) Large downturns in stocks and economic recessions have followed yield curve inversions with a lagged effect. The chart “A look at these inversions,” (below right), shows the 10-year minus the 2-yr, and on another axis, the S&P 500. The chart shows how long it took for the market to sell off and begin rallying again. It also shows how long it took for the S&P 500 to correct. Another chart, “Statistical history,” p. 53, quantifies the relationship between yield curve inversion and how long it took for the S&P 500 to correct. Note that the lag time is inconsistent, ranging from two months to 23 months, and that the yield curve has seldom inverted in the last 50 years. While recessions have occurred after recent yield curve inversions, they have not happened immediately, and the lead time has been inconsistent. Historically, a recession can come from one to two years after the curve flips upside-down, and the stock market usually continues to gain from the day of the inversion until its cycle peak. Also, five points aren’t enough for a reliable data set. So, it’s hard to predict what might happen to the market or the economy. There are a couple trading takeaways, though. Investors who think the inversion won’t last long and that the 10-year yield will soon climb back above the two-year yield could consider a short 10-year note future (/ ZN) versus a long two-year future (/ZT). The trick is to get the ratios right. Investors who think short-term rates might stay high (and that longer-term rates will go higher to get the yield curve back to normal), could put a damper on share buy backs that have become popular in some of the bigger stocks. That could, in turn, put downward pressure on the S&P 500. So, investors may want to fade market rallies with bearish strategies. Now shrug off the yield inversion tizzy and get back to trading.
The Treasury Yield Curve inversion
U.S. Treasury Rates
Let’s take a look at the 10-year minus the 2-year.
1 Year
1.72%
2 Year
1.48%
5 Year
1.42%
10 Year
1.52%
20 Year
2.21%
30 Year
2.44%
3
2.25
1.5
.75
10-year – 2-year
0
-.75
1990
1995
2000
2005
2010
2015
A look at these inversions Inversion usually arrives on the back of an increase in short yields, which comes from Fed activity, and stagnant long yields; and inversion tends not to last long, and it tends to
be followed by lower yields across the curve. 3
4000
SPX 10-year – 2-year
2.25
3000 1.5 2000 .75 1000 0
-.75
0 1990
1995
2000
2005
2010
2015
Pete Mulmat, chief futures strategist at tastytrade, serves as host for a number of daily futures segments on the tastytrade network under the flagship programming slot called Splash Into Futures.
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Statistical history The table below quantifies the relationship between yield curve inversion and how long it took for the S&P 500 to correct. Year of Inversion
Lag between Inversion and Correction
S&P 500 Return
1978
19 months
-17%
1980
3 months
-27%
1988
20 months
-20%
2000
2 months
-49%
2005
23 months
-57%
Source: Bloomberg Opinion: “Yield Curve Inversions and Stocks Are a Toxic Mix”
Getting Right with Your Futures A recent luckbox survey of “active” traders (61% trading daily and 32% trading weekly) indicates respondents have twice as much confidence in their knowledge of options trading (covered options and spreads) as in their knowledge of futures trading. That means lost opportunities. The solution? Watch Splash into Futures daily on the tastytrade network.
A yield curve inversion occurs when longerterm rates fall below shorter-term rates in the bond markets.
trades
MACRO VIEW
O PPO RT U N I T I ES I N G LO BAL M AR K ET DIR ECT IO NAL T R ENDS
Risk-Off FAANG Trades By Amelia Bourdeau
AANG, an acronym for a collection of tech and communication companies that have changed the way most people live, is comprised of Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL). These companies, with the exception of Netflix, rank among the Top 10 most-valuable publicly traded companies in the world. As of July, their combined market capitalization was $3.4 trillion, representing approximately 11% of the S&P 500. To see the impact of those stocks on selected assets, refer to the revised FAANG Index weighting each company by its market capitalization. In the chart “USD/JPY follows FAANG Index lower,” (below right), t the (cap-weighted) FAANG Index (white line) is plotted against U.S. dollar/Japanese yen (USD/JPY) currency pair (orange line). The yellow vertical lines mark the days since July 2018, that had the largest declines in the FAANG Index. The chart indicates that when the FAANG Index declines, the USD/ JPY broadly follows it lower. However, take a closer look at the reaction function of some assets on the days with the largest FAANG Index declines. The table shows the largest down days in the FAANG Index over roughly the past year and also what happened to the S&P 500, USD/JPY and gold on those days. The S&P 500 was chosen because each of the FAANG stocks is included in it—so it indicates the broader equity index reaction. USD/JPY and gold were included to show the reactions of safe haven assets. As seen in the “Reactions to FAANG Index declines,” above, right, large FAANG Index declines resulted mostly in large down days for the S&P 500 as well. That means, large declines in the FAANG Index set a risk-off tone in the market. Risk-off days are generally good for safe-haven assets, and the table shows that USD/JPY declined on all of the days that had a large decline in the FAANG Index. So, safe-haven JPY strengthened versus USD on those days. Safe-haven gold
F
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also strengthened as well, with the exception of one date. The table above also acts as a quick reference guide for any future down days in FAANG stocks that lead to broader equity market losses—so keep it handy. Trade Idea: Boris Johnson has been named prime minister of the United Kingdom, and BREXIT remains unresolved. Talks with the European Union are stalled, and the possibility of a no-deal Oct. 31 exit has risen. This is a dominant theme in macro markets. Short the British pound (GBP) versus USD: Buy a three-month 1.1000 GBP/USD put. Amelia Bourdeau is CEO at marketcompassllc.com, an advisory firm that provides global macro education and trading strategy to investors at every level. @ameliabourdeau
Reactions to FAANG Index declines Large FAANG Index declines resulted mostly in large down days for the S&P 500, which set a risk-off tone in the market. Largest FAANG Index Declines
1-day % change FAANG Index
S&P 500
USDJPY
GOLD
-3.3
-0.6
0.4
10/10/18
-5.3
10/24/18
-5.0
-3.1
-0.2
0.3
12/4/18
-4.7
-3.2
-0.2
0.6
12/21/18
-4.6
-2.1
-0.1
-0.2
11/19/18
-4.6
-1.7
-0.2
0.1
1/3/19
-4.5
-2.5
-1.1
0.8
6/3/19
-4.4
-0.3
-0.2
1.5
5/13/19
-4.0
-2.4
-0.6
1.1
Source: Bloomberg, Market Compass LLC
USD/JPY follows FAANG Index lower The yellow vertical lines mark the days since July 2018 that had the largest declines in the FAANG Index, indicating that when it declines, USD/JPY broadly follows it lower.
Source: Bloomberg LLP
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CHERRY PICKS
R I PE & J U I CY T RA D E I DEAS
The VIX Cheat Sheet By Michael Rechenthin, Ph.D.
nterested in knowing how much the S&P 500 is expected to move? This cheat sheet will help! But first, get the last sale of VIX or type “VIX” into your search engine. Then, look up the corresponding VIX level and the outlook for the desired theoretical expected range. For example, in late August, the price of VIX was 20. The table to the right shows the one-week outlook at ±1.4%, one-month outlook at ±5.8%, and the three-month outlook at ±10.0%. This is where prices are expected to range, plus or minus. The greater the outlook with respect to time and the greater the VIX levels, the greater the expected price ranges. Additionally, all expected ranges are plus or minus (±) and based on where prices are expected to range with a 68% probability at the end of one month or three months. The 68% probability, by the way, is based on a one-standard deviation. To find where prices are expected to be with a 95% probability, double the numbers from the charts. For example, with a 95% probability and a VIX of 20, the S&P 500 is expected to fall within 5.8% x 2 = ± 11.6% within one month. For weekly VIX updates, sign up for the Cherry Picks newsletter at tastytrade.
I
VIX
Follow the range Here are theoretical expected ranges of the S&P 500 based on different VIX levels and different outlook timespans. VIX Level
Outlook Weekly
1-month
3-months
10
±1.4%
± 2.9%
±5.0%
11
±1.5%
±3.2%
±5.5%
12
±1.7%
±3.5%
±6.0%
13
±1.8%
±3.8%
±6.5%
14
±2.0%
±4.0%
±7.0%
15
±2.1%
±4.3%
±7.5%
16
±2.3%
±4.6%
±8.0%
17
±2.4%
±4.9%
±8.5%
18
±2.5%
±5.2%
±9.0%
19
±2.7%
±5.5%
±9.5%
20
±2.8%
±5.8%
±10.0%
21
±3.0%
±6.1%
±10.5%
22
±3.1%
±6.4%
±11.0%
23
±3.2%
±6.6%
±11.5%
24
±3.4%
±6.9%
±12.0%
25
±3.5%
±7.2%
±12.5%
26
±3.7%
±7.5%
±13.0%
27
±3.8%
±7.8%
±13.5%
28
±3.9%
±8.1%
±14.0%
29
±4.1%
±8.4%
±14.5%
30
±4.2%
±8.7%
±15.0%
To find where prices are expected to be with a 95% probability, double the numbers from the charts. Sign up for free cherry picks and market insights at info.tastytrade.com/cherry-picks
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DO DILIGENCE
QU I E T FOU N DAT I O N H E L PS P ROACT IV E INV ESTO RS U NDERSTAND T HEIR P ORTFOLI OS
S&P Changes as it Soars By James Blakeway
he S&P 500 Index surpassed 3,000 for the first time on July 10, giving bullish investors across the nation cause to rejoice. The bears, on the other hand, cringed and licked their wounds, which never seem to heal this year. But regardless of whether they felt elation or despair, investors marveled at the breakthrough into the 3,000 range. That level marks a 350% rally in the index since the lows of the recession a decade ago. Still, the meteoric rise in the index has not been without its share of changes. Let’s rewind further to demonstrate how the top components of the S&P 500 have evolved over the last 30 years. The table shows how the S&P 500 Top 10 components have shifted each decade. In 1989, four of the top 10 companies were oil giants, with Exxon (XOM) holding the top spot. Meanwhile, General Electric (GE)
T
held second place and did so again in 1999, which seems hard to believe today because GE currently ranks 68th in the index. By 1999, Microsoft (MSFT) had cemented its place at Number 1, the same spot it holds today. America Online—now a division of Verizon (VZ)—crept into the Top 10 in 1999 before merging with Time Warner in 2000. By 2009, Google, a.k.a. Alphabet (GOOGL) and Apple (AAPL) had mounted the stage. Apple successfully launched the iPhone in 2007 and made the Top 10 two years later. By this year, tech companies dominated the Top 10. In previous decades, the Top 10 had come from a mixed bag of sectors. This summer, the Top Five companies (actually the Top Six stocks because of Alphabet’s two share classes) now represent more than $5 trillion of the S&P’s Index value. But does all this matter? After all, the S&P represents 500 companies in an intelligent,
market-cap weighted index. Well, consider the following: The Dow Jones Industrial Average will always have a special place in investors’ hearts; it was the barometer of the U.S. stock market for decades. However, it’s now often ignored because of its archaic price-weighted calculation. A price-weighted index assigns higher weightings based on a company’s stock price, instead of the value of the company. For example, safety concerns and negative headlines aside, Boeing’s stock price remains above $360. That makes it the largest component of the Dow Jones because it’s the most expensive stock. Boeing now represents 9% of the index value. In reality, Boeing is the 20th largest company (by market capitalization) of the 30 companies in the Dow. With the S&P 500, a capitalization-weighted index, the companies with the greatest value are the highest-weighted, and
Corporate horse race Here’s how the S&P 500 Top 10 components have shifted each decade. Weighting in S&P 500
1989
1999
2009
1
Exxon
Microsoft
2
General Electric
3
IBM
4 5
2019 (as of July 23, 2019) Company
Symbol
Market Cap ($Billions)
ExxonMobil
Microsoft
MSFT
1,060
General Electric
Microsoft
Amazon
AMZN
977
Cisco
Walmart
Apple
AAPL
957
AT&T
Walmart
Alphabet Inc.
GOOGL
791
Royal Dutch Shell
ExxonMobil
Apple
Alphabet Inc.
GOOG
790
6
Philip Morris
Intel
Johnson & Johnson
FB
578
7
Merck
Lucent Technologies
Proctor & Gamble
Berkshire Hathaway
BRK/B
504
8
Bristol-Meyers Squibb
IBM
IBM
Visa
V
395
9
DuPont
Citigroup
AT&T
JPMorgan Chase
JPM
371
10
Amoco
America Online
JPMorgan
Johnson & Johnson
JNJ
341
Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.
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their price movement has the most impact on the index. With the five Tech giants holding the top spots, large moves in those stocks have a huge impact on the index. Microsoft, Amazon (AMZN), Apple, Alphabet and Facebook (FB) represent 18.8% of the entire S&P 500’s value. This tech-heavy concentration has far-reaching effects because of the numerous ways countless investors and traders have exposure to the S&P 500, including ETFs, options, futures and mutual funds. Regardless of preferred asset type, all who invest in the S&P have a roughly 18.8% exposure to these stocks. Some investors may feel comfortable with that exposure and are willing to ride out a pullback in the market that could lead to a shift in the weightings. Others may feel more defensive. One way to minimize exposure would be to invest in sectors like energy and utilities, which respectively constitute only 4.9% and 3.3% of the S&P. Quiet Foundation’s free portfolio analysis tools indicate that the Top Five tech stocks underperformed the S&P 500 Index
as a whole over the last three months, +2.2% versus +2.7%. Advanced traders may be looking to reduce or eliminate the exposure of these stocks in their index holdings. They could potentially achieve that by selling defined, lower-risk call spreads in the individual stocks, relative to the size of the index exposure. The hypothetical scenario of removing these stocks from the index holdings, again run through Quiet Foundation’s system, does lower the internal portfolio correlation of the index holdings. Thus, the overall risk of loss in a market downturn could theoretically be lower. When the S&P 500 hit 3,000 for the first time, it served as a reminder to check under the hood to see what the index is comprised of this year. Whether bullish or bearish, investing or trading, investors should remain cognizant of the underlying buildup of their chosen assets and, as always, do their due diligence. James Blakeway serves as CEO of Quiet Foundation, a data science-driven tastytrade subsidiary that provides fee-free investment analysis services for self-directed investors.
The Top Five tech stocks underperformed the S&P 500 Index over the last three months.
Look under the hood with QF
12:39 PM
tactics essential trading strategies
SPECIAL SECTION luckbox is devoting this month’s tactics section to a special three-part series on Butterfly Spreads, courtesy of the Learn Center @tastytrade
BASIC
Butterfly Spreads
The good news is that investors can slightly tweak many option strategies, including the butterfly, to gain maximum control over the risk and reward
By Michael Rechenthin
T
he butterfly option strategy owes its popularity to its high reward-to-risk ratio, which might range from 4 to 1 to even 10 to 1. That’s risking $1 to make $4. The relatively low risk and high profit potential for the butterfly make it tempting. Who wouldn’t want to make $400 while only risking $100? The drawback is that low risk/high reward strategies generally have low probabilities of success. (See “Low, high,” right.) Take for example the butterfly trade, a trade with a low probability of success but a high theoretical return on investment. Perhaps an investor has a hunch that Schlumberger (SLB) will be at 35 by the end of the next expiration. As of mid-August, the 32.5/35/37.5 Schlumberger butterfly in October had a $50 cost and a $200 maximum profit potential. In other words, it risks $50 for a profit potential of $200. (See “Trading the butterfly,” right.) But the theoretical probability of success on the trade is slightly under 30%. Not so great. This trade has such a low probability of success because the butterfly requires that the stock remain in a relatively narrow range between its break even points, or even “pin” the short middle strike at expiration to reach its max profit. The stock has to be between $33 and $37 to make even a penny of profit; it would need to land at $35 exactly for maximum profit. Investors can slightly tweak many option strategies, including the butterfly, to gain maximum control over the risk and reward and therefore the (Continued on p. 62)
Low, high The relatively low risk and high profit potential for the butterfly makes it tempting. Who wouldn’t want to make $400 while only risking $100?
LOW PROBABILITY Reward is greater than the risk
HIGH PROBABILITY Risk is greater than the reward
Trading the butterfly The theoretical probability of success on this trade is slightly under 30%. Not so great.
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INTERMEDIATE
The Butterfly Payoff What’s the right environment for the butterfly spread? By Anton Kulikov
W
hile short straddles and strangles are great trades when investors want to speculate that a stock will not move much, the risk can seem too great. The long butterfly provides a potential alternative. A butterfly spread has low probability and low risk. That means there’s a low probability of profit but also a low probability of large losses. For that reason, traders can use the strategy when they’re feeling speculative. Even when the butterfly loses money, it typically doesn’t lose big. Because losses will be minimized, it will be cheaper to execute. But exactly how does this strategy work? And what’s the right environment for the butterfly spread? An investor who speculates that a stock won’t move very much from its current price can create a butterfly spread by buying one in-the-money option (ITM), selling two at-themoney options (ATM) and buying one out-ofthe-money option (OTM). This leads to paying a debit when opening the trade, which will affect max profit. Overall, the strategy has a neutral assumption, meaning the investor expects the price of the underlying stock to remain fairly close to its current price. Also, investors typically use butterfly spreads in high implied-volatility environments, which makes butterflies cheaper. Keep the trade as cheap as possible to avoid tying up too much capital and to minimize potential losses. Next, look at the math behind the risk and reward of the strategy. (See “Payoff diagram,” right.) In the payoff diagram, a butterfly is long one 45 call, short two 50 calls and long one 55 call. It’s a $5 wide butterfly strategy, meaning that the long ITM and OTM strikes are $5 away from the two short ATM options. Say an investor pays a $0.50 debit for this 45/50/500 call butterfly, and assume the stock is at $50. This butterfly has its max profit of $450 when the stock is trading at $50 at expiration and a $50 max loss if the stock is either below $45
60
or above $55 at expiration. Breakevens for this strategy Payoff diagram are $45.50 on the downside A quick way to calculate max profit is to take the width of the and $54.50 on the upside. A butterfly ($5) and subtract the debit paid/max loss of the quick way to calculate max spread ($0.50). profit is to take the width of the butterfly ($5) and subtract the debit paid/max loss of the spread ($0.50). In the case of butterflies, the amount an investor pays for it always equals its max potential loss. This butterfly profits when the underlying price remains between the $45.50 and $54.50 breakeven points, so an investor would want the underlying price to remain fairly close to its current $50 price. Yet even value of the long options, thus resulting in a if the underlying price moves outside the net gain for the overall position. breakeven points, it only tests one side, so the So, if the implied volatility is high and an maximum loss is that initial debit paid. investor doesn’t expect the stock price to move Finally, the reason investors want to place much, this strategy could be in the toolbox. this spread in high implied-volatility envi- But investors should make sure to consider ronments is that the debit paid and max loss their motives, the current environment and the will be minimized and max potential profit risk/reward associated with each trade when maximized. Ideally, investors use this strategy choosing a strategy. when they do not have a directional assumpAnton Kulikov is a trader, data scientist and research tion about the underlying. Because this strat- analyst at tastytrade. egy has positive theta, the ideal scenario is for the stock to stay as close to the ATM short strikes as possible. If that happens, investors realize full max potential profit at expiration. Additionally, profits throughout the trade can accelerate if the implied volatility environment of the underlying drops. That causes the value of the short options to go down more than the
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ADVANCED
The (Broken Wing) Butterfly Effect Trading a BWB at price extremes affords the trader room for the trend to continue and zero risk, if the trend reverses By Michael Gough
W
hen markets reach price extremes, either higher or lower, what’s the best move— trade the trend or risk the reversal? If markets are truly memoryless, then either choice may be a 50-50 shot. But using options can improve those odds and reduce the emphasis on having the right directional opinion. The question is really which strategy should a trader choose: strangles, credit spreads or naked? But that’s an incomplete list. For a high-probability trade for a market extreme, there’s also the brokenwing butterfly (BWB). Before trading a BWB, traders should familiarize themselves with the structure of a traditional butterfly spread. (For a primer, see this series’ Intermediate article, p. 60.) Like the traditional butterfly, BWBs are comprised of either all calls or all puts. But the difference is a BWB has a “broken” wing. For example, a traditional butterfly has equal width wings (e.g., 95-100-105 strikes), while a BWB has unequal width wings (e.g., 95-100-107 strikes). Breaking the wing can turn the trade from a debit spread to a credit spread. BWBs should always be traded for a credit. This slight alteration drastically improves both the probability of profit and potential max profit of the trade. To place a BWB, look for an
underlying with high implied volatility at a recent price extreme. At the time of this writing, one such underlying is gold. Recent fears of economic uncertainty sent investors flocking to buy gold, which drove up both the price and implied volatility. Prices in this example are for gold futures (commonly denoted “/GC” on brokerage platforms), but a similar trade can be placed on the GLD ETF (An exchange-traded fund for gold) for lower capital requirements. Traders who are bullish on gold and think the upward trend will continue may consider a call BWB (a contrarian who’s bearish could trade a put BWB). With the underlying at $1,423, a bullish BWB could be the 1445-1455-1475. That’s buying one 1445 call, selling two 1455 calls, and buying one 1475 call for a $1.60 credit. The trade has a max profit of $10.95 and, according to the Tastyworks platform, a 74% probability of making a profit! Because the trade is placed for a credit, the investor takes zero risk to the downside. If gold sits at $1,455 on expiration day the trade will make the max profit of $10.95. If gold reverses direction, the trade still makes $1.60! Compare that to a traditional butterfly. The 1445-1455-1465 traditional butterfly requires a $0.40 debit to trade and has a max profit of only $9.60 with a 15% probability of making a profit. Breaking the wing drastically alters the perfor-
mance characteristics of the trade. The differences in potential profits and losses between these two butterfly spreads is depicted in “Broken wing” right. Note, however, that the increased potential max profit and probability of profit aren’t free; trading is all about risk and return. With its improved risk/return profile, the BWB also has greater risk. The potential max loss of the BWB is
Learn more about Broken Wing Butterflies
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$8.40 (width of the wider spread minus the credit received) while the potential max loss of the traditional butterfly is only $0.40 (debit paid to enter the trade). Trading a BWB at price extremes affords the trader room for the trend to continue and zero risk, if the trend reverses. In this example, if gold continues its rally to the body of the butterfly (short options), the trader would collect max profit. On the other hand, if gold reverses its direction the trader simply keeps the credit received to place the trade. Both butterflies would lose money if gold continues to rally beyond the further out-of-the-money call. As a way to trade the trend or fade a move, consider the broken wing butterfly. Michael Gough, a self-taught coder who became an options trader, is on the futures product development team at The Small Exchange.
Broken wing The differences in potential profits and losses between these two butterfly spreads are depicted here. The green shows the traditional butterfly and the purple shows a broken-wing butterfly.
Breaking the wing drastically alters the performance characteristics of the trade.
BASIC
(Continued from p. 59) probability of success. Depending upon the objective, one trade might be ideal for the particular circumstance. For the butterfly to have a considerably higher probability of success, investors can unbalance it. (See the Advanced article in this series, p. 61.) That makes the “profit zone” much higher. Instead of pinpointing a strike, the butterfly can be modified to make it profitable at “any price above X or price below X.” Going back to the Schlumberger example, the strikes can be modified to create the 30/35/37.5 unbalanced butterfly with considerably greater risk (in the example here it is $230) but with a considerably greater probability of success— roughly 60%. Here, instead of a relatively small “profit zone” and a 4-to-1 reward-to-risk ratio, the “profit zone” is much wider, and the rewardto-risk is a more modest 1-to-1. Which is better: “regular” butterfly or unbalanced? In practice, neither. It’s all about using either to find one’s preferred balance between risk, reward and probability of success. Michael Rechenthin, Ph.D., (aka “Dr. Data”) is head of research and data science at tastytrade.
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luckbox | september /october 2019
Unbalanced butterfly Instead of pinpointing a strike, the butterfly can be modified to make it profitable at any price above X or price below X.
Who wouldn’t want to make $400 while only risking $100?
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LOTTERY WINS BECOME HABITFORMING
Money doesn’t buy happiness —43% of lottery winners say 64
luckbox | september /october 2019
THE LOTTO
68
%
Lotteries with the worst odds
A newsstand vendor accepts a customer’s cash for lottery tickets in New York City.
1. USA Megabucks Tri-State 2. USA Powerball 3. USA Mega Millions
of lottery winners try for a second win
U.S. households spend an average of $162 annually on lottery tickets. Families making less than $10,000 average $597
$800 million in winnings are left on the table every year
48%
of lottery winners keep their jobs
Looking to win? Stick with pick-3 or pick-4 games that are offered only to in-state residents
Play the scratch cards—they have a 60% or higher chance to make back the cost of the ticket
Indiana is the luckiest place to buy lottery tickets—their 39 jackpots include a $435 million solo Powerball winner in 2017
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PHOTOGRAPH: REUTERS/MIKE SEGAR
R
emember the 69 million-to-one odds that octogenarian golfer Chuck Miller defied by sinking two holes in one within one hour? That earned him the August luckbox of month title. Well this month luckbox raises the stakes. Bruce Rosa, a Stamford, Conn., resident, hit the lottery twice in just over a year and the probabilities are staggering. The odds of winning a five-number lottery once—and that means picking all the correct numbers—is roughly one in 13,983,816, according to a Harvard statistics instructor quoted on a CNBC website. “To do it twice in just a 15-month span, the odds would be roughly one in 1,473,489,000,000,” said Dr. Mark Glickman. His probabilistic pronouncement came a few days too late to feed Rosa’s enthusiasm for collecting $100,000 from the CT Lottery for the second time. “Oh, baby, I can’t believe I did it again,” the winner exclaimed upon receiving the check. luckbox-defining serendipity.
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