The cloud is an enormous security risk

The cloud is so massively insecure (by design) that a massive data breach will happen. From a technological perspective, the host (or cloud provider) can read the memory and disk space of every guest (client). Therefore no form of encryption or data protection is actually secure.

With that in mind, all PII, financial and other data stored in the cloud will be breached eventually, if it has not been already. It’s just a matter of a malicious hacker or devious employee at a big cloud company gaining host-level access.

Be careful both trusting your information to the cloud (where you have a choice) as well as investing in companies that are completely cloud-driven. We may see an unexpected upset when the realization that virtualization isn’t nearly as secure as once thought hits.

Is digital marketing delivering its promise of value to clients?

Google’s earnings revealed that their advertising is worth less (per bid vs Q1), while Facebook also simultaneously said their ad bids are going up. Frankly I’m not so sure that indicates market share / value transfer or more funny accounting.

But I will say this: the world of digital marketing needs an enormous reboot of transparency and quality. Right now if I am advertising on a website and someone clicks my ad, but immediately leaves before seeing any content (less a pixel or two) that counts. That allows automated click farms to partially load content (to save bandwidth) and rapidly click on a multitude of ads around the web to generate revenue for content generators (websites that advertise with Google, Facebook, etc).

That wouldn’t seem like much of a problem, except that 60% of clicks behave that way. That doesn’t even account for what is described as detected click fraud. That’s about 20% of the digital ad spend. So, according to those metrics, about of remaining clicks 20% on ads are viewed by humans and of them perhaps 1%-2% lead to sales.

Now the math gets interesting. Recent studies claim at least $16.4B is lost to click fraud (probably an extremely low ball figure, but let’s roll with it). The smoothed P/E of techs in digital marketing (like Google) is about 33. Google has an average profit margin of about 20%. So $16.4B * 33 = $541.2 billion. 20% of that is $108.24 billion.

That means at least $108.24 billion of market capitalization in this concentrated tech sector is at risk if just click fraud is exposed and eliminated. That doesn’t address the other 60% of ad clicks that are effectively meaningless. That would add another $324 billion of market capitalization at risk. And again, I feel these are low ball figures.

The biggest advertising companies these days are Google, Facebook, Microsoft and Verizon. So I would be most concerned about their long term performance.

Full disclosure: I have a short position against the NASDAQ 100 at the time of writing this article.

Verizon beats earnings on account of unlimited data plans

Yes, when you give people what they want, they will buy your service. This is not really news, as much as observational humor. Verizon removed these unlimited data plans because they were eager to capitalize on metered plans (whereas heavy users pay a lot more money than they would on an unlimited plan).

I applaud Verizon for listening to their customers and bringing the unlimited data plans back. I’m also happy to see them bringing gigabit (or near gigabit) FiOS to many metropolitan customers on the Atlantic coast.

Full disclosure: No position long or short on Verizon shares, preferred shares or corporate bonds.

Karl Denninger at Market Ticker claims Facebook funny business


Now tell me what you believe the probability is that 83% of every possible person over the age of 15, which I remind you includes a lot of people who have no high-speed Internet connectivity at all, a fair number of people who are effectively incapacitated due to age and more — in other words everyone over the age of 15 that is not in prison — is on Facebook monthly.


Art Cashin of UBS says markets are driven by buybacks

SPX is up about +271% since its low in March 2009, so that’s pretty good correlation with the growth in earnings. But the trouble with earnings is that the growth has been mainly accomplished through the use of smoke and mirrors. Sales for these same companies have increased only +32%. Either companies have been extremely efficient in cutting costs (since prices haven’t increased much) or else they’ve done some financial engineering to accomplish earnings growth that is nearly 9 times sales growth.

The smoke and mirrors is of course stock buybacks, which reduces the number of shares outstanding and that in turn drives EPS higher, even if in fact earnings did not improve. With the use of nearly zero- cost borrowing companies have been the primary driver behind the buying of their own stock and hence higher prices. One could argue whether or not it’s smart for companies to be paying top dollar for their stock right now.

A stronger dollar means a weaker everything else

As the dollar surges past 97, toward 100, the rest of the market seems to be catching on that this is a risk off signal. Just about every asset class is selling off today as a result. There’s no single catalyst for the stronger dollar. More a myriad of micro-catalysts:

  • The assumption that the EU, UK, Japan and others will continue QE and ZIRP/NIRP as the US Fed raises rates.
  • The notion that the US Fed will raise rates at a faster pace (than they have in the last 3 years of jawboning about it).
  • The structural economic problems in other economies (making ours seem like the least bad of the bunch).
  • Weakness in demand for assets in Japan and Europe.
  • Brexit and the follow-on economic impact on UK.

With all of that in mind, I believe that the current leg of the US dollar rally is becoming problematic for the goals of the US Federal Reserve. Indeed, a strengthening dollar on top of rising US Treasury yields is in a way a de facto tightening. Liquidity tightens and lending/margin speculation decreases.

Should the rally strengthen I believe it will create a significant downside catalyst for a multitude of other asset classes. And there is some small chance that it could spiral in to a deflationary headwind should the situation grow out of the control. My opinion is that the dollar strength could be utilized as an entry point in to beaten up asset classes, especially commodities and emerging markets.

Let’s watch carefully and see where the market takes us from here.