Can This System of Unlocking Phones Crack the Crypto War?

On December 2, 2015, a man named Syed Rizwan Farook and his wife, Tashfeen Malik, opened fire on employees of the Department of Public Health in San Bernardino, California, killing 14 people and injuring 22 during what was supposed to be a staff meeting and holiday celebration. The shooters were tracked down and killed later in the day, and FBI agents wasted no time trying to understand the motivations of Farook and to get the fullest possible sense of his contacts and his network. But there was a problem: Farook’s iPhone 5c was protected by Apple’s default encryption system. Even when served with a warrant, Apple did not have the ability to extract the information from its own product.

The government filed a court order, demanding, essentially, that Apple create a new version of the operating system that would enable it to unlock that single iPhone. Apple defended itself, with CEO Tim Cook framing the request as a threat to individual liberty.

“We have a responsibility to help you protect your data and protect your privacy,” he said in a press conference. Then-FBI chief James Comey reportedly warned that Cook’s attitude could cost lives. “I just don’t want to get to a day where people look at us with tears in their eyes and say, ‘My daughter is missing and you have her cell phone—what do you mean you can’t tell me who she was ­texting before she disappeared?’ ” The controversy over Farook’s iPhone reignited a debate that was known in the 1990s as the Crypto Wars, when the government feared the world was “going dark” and tried—and ultimately failed—to impede the adoption of technologies that could encode people’s information. Only this time, with super­computers in everybody’s pockets and the endless war on terror, the stakes were higher than ever.

A few months after the San Bernardino shooting, President Obama sat for an interview at the South by Southwest conference and argued that government officials must be given some kind of shortcut—or what’s known as exceptional access—to encrypted content during criminal and antiterrorism investigations. “My conclusion so far is that you cannot take an absolutist view on this,” he said. “If the tech community says, ‘Either we have strong, perfect encryption or else it’s Big Brother and an Orwellian world’—what you’ll find is that after something really bad happens, the politics of this will swing and it will become sloppy and rushed, and it will go through Congress in ways that have not been thought through. And then you really will have dangers to our civil liberties.”

In typical Obama fashion, the president was leaning toward a compromise, a grand bargain between those who insist that the NSA and FBI need all the information they can get to monitor potential terrorists or zero in on child abusers and those who believe building any sort of exceptional access into our phones would be a fast track to a totalitarian surveillance state. And like so many of Obama’s proposed compromises, this one went nowhere. To many cryptographers, there was simply no way that companies like Apple and Google could provide the government with legal access to customer data without compromising personal privacy and even national security. Exceptional access was a form of technology, after all, and any of its inevitable glitches, flaws, or bugs could be exploited to catastrophic ends. To suggest otherwise, they argued, was flat wrong. Flat-Earth wrong. Which was, as any good engineer or designer knows, an open invitation for someone to prove them wrong.

This past January, Ray Ozzie took a train from his home in Massachusetts to New York City for a meeting in a conference room of the Data Science Institute at Columbia University. The 14th-­floor aerie was ringed by wide windows and looked out on a clear but chilly day. About 15 people sat around the conference table, most of them middle-­aged academics—people from the law school, scholars in government policy, and computer scientists, including cryptographers and security specialists—nibbling on a light lunch while waiting for Ozzie’s presentation to begin.

Jeannette Wing—the host of the meeting and a former corporate VP of Microsoft Research who now heads the Data Science Institute—introduced Ozzie to the group. In the invitation to this “private, informal session,” she’d referenced his background, albeit briefly. Ozzie was once chief technical officer at Microsoft as well as its chief software architect, posts he had assumed after leaving IBM, where he’d gone to work after the company had purchased a product he created, Lotus Notes. Packed in that sentence was the stuff of legend: Notes was a groundbreaking product that rocketed businesses into internet-style communications when the internet was barely a thing. The only other person who ever held the chief software architect post at Microsoft was Bill Gates, and Ozzie had also helped create the company’s cloud business.

He had come to Columbia with a proposal to address the impasse over exceptional access, and the host invited the group to “critique it in a constructive way.” Ozzie, trim and vigorous at 62, acknowledged off the bat that he was dealing with a polarizing issue. The cryptographic and civil liberties community argued that solving the problem was virtually impossible, which “kind of bothers me,” he said. “In engineering if you think hard enough, you can come up with a solution.” He believed he had one.

He started his presentation, outlining a scheme that would give law enforcement access to encrypted data without significantly increasing security risks for the billions of people who use encrypted devices. He’d named his idea Clear.

How Clear Works

Step 1

Obtain warrant for locked, encrypted phone that is evidence in a criminal investigation.

Step 2

Access special screen that generates a QR code containing an encrypted PIN.

Step 3

Send picture of QR code to the phone’s manufacturer, which confirms the warrant is legal.

Step 4

Manufacturer transmits decrypted PIN to investigators, who use it to unlock the phone.

It works this way: The vendor—say it’s Apple in this case, but it could be Google or any other tech company—starts by generating a pair of complementary keys. One, called the vendor’s “public key,” is stored in every iPhone and iPad. The other vendor key is its “private key.” That one is stored with Apple, protected with the same maniacal care that Apple uses to protect the secret keys that certify its operating system updates. These safety measures typically involve a tamper-­proof machine (known as an HSM or hardware security module) that lives in a vault in a specially protected building under biometric lock and smartcard key.

That public and private key pair can be used to encrypt and decrypt a secret PIN that each user’s device automatically generates upon activation. Think of it as an extra password to unlock the device. This secret PIN is stored on the device, and it’s protected by encrypting it with the vendor’s public key. Once this is done, no one can decode it and use the PIN to unlock the phone except the vendor, using that highly protected private key.

So, say the FBI needs the contents of an iPhone. First the Feds have to actually get the device and the proper court authorization to access the information it contains—Ozzie’s system does not allow the authorities to remotely snatch information. With the phone in its possession, they could then access, through the lock screen, the encrypted PIN and send it to Apple. Armed with that information, Apple would send highly trusted employees into the vault where they could use the private key to unlock the PIN. Apple could then send that no-longer-secret PIN back to the government, who can use it to unlock the device.

Ozzie designed other features meant to ­reassure skeptics. Clear works on only one device at a time: Obtaining one phone’s PIN would not give the authorities the means to crack anyone else’s phone. Also, when a phone is unlocked with Clear, a special chip inside the phone blows itself up, freezing the contents of the phone thereafter. This prevents any tampering with the contents of the phone. Clear can’t be used for ongoing surveillance, Ozzie told the Columbia group, because once it is employed, the phone would no longer be able to be used.

He waited for the questions, and for the next two hours, there were plenty of them. The word risk came up. The most dramatic comment came from computer science professor and cryptographer Eran Tromer. With the flair of Hercule Poirot revealing the murderer, he announced that he’d discovered a weakness. He spun a wild scenario involving a stolen phone, a second hacked phone, and a bank robbery. Ozzie conceded that Tromer found a flaw, but not one that couldn’t be fixed.

At the end of the meeting, Ozzie felt he’d gotten some good feedback. He might not have changed anyone’s position, but he also knew that unlocking minds can be harder than unlocking an encrypted iPhone. Still, he’d taken another baby step in what is now a two-years-and-counting quest. By focusing on the engineering problem, he’d started to change the debate about how best to balance privacy and law enforcement access. “I do not want us to hide behind a technological smoke screen,” he said that day at Columbia. “Let’s debate it. Don’t hide the fact that it might be possible.”

In his home office outside Boston, Ray Ozzie works on a volunteer project designing and making safety-testing kits for people in nuclear radiation zones.

Cole Wilson

The first, and most famous, exceptional-access scheme was codenamed Nirvana. Its creator was an NSA assistant deputy director named Clinton Brooks, who realized in the late 1980s that newly discovered advances in cryptography could be a disaster for law enforcement and intelligence agencies. After initial despair, Brooks came up with an idea that he envisioned would protect people’s privacy while preserving government’s ability to get vital information. It involved generating a set of encryption keys, unique to each device, that would be held by government in heavily protected escrow. Only with legal warrants could the keys be retrieved and then used to decode encrypted data. Everyone would get what they wanted. Thus … Nirvana.

The plan was spectacularly botched. Brooks’ intent was to slowly cook up an impervious technical framework and carefully introduce it in the context of a broad and serious national discussion about encryption policy, where all stakeholders would hash out the relative trade-offs of law enforcement access to information and privacy. But in 1992, AT&T developed the Telephone Security Device 3600, which could scramble phone conversations. Its strong encryption and relatively low price unleashed a crypto panic in the NSA, the FBI, and even the tech-friendly officials in the new Clinton administration. Then the idea came up of using Brooks’ key escrow technology, which by that time was being implemented with a specialized component called the Clipper Chip, to combat these enhanced encryption systems. After a few weeks, the president himself agreed to the plan, announcing it on April 16, 1993.

All hell broke loose as technologists and civil libertarians warned of an Orwellian future in which the government possessed a backdoor to all our information. Suddenly the obscure field of cryptography became a hot button. (I still have a T-shirt with the rallying cry “Don’t Give Big Brother a Master Key.”) And very good questions were raised: How could tech companies sell their wares overseas if foreign customers knew the US could get into their stuff? Wouldn’t actual criminals use other alternatives to encrypt data? Would Clipper Chip technology, moving at government speed, hobble the fast-moving tech world?

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Ultimately, Clipper’s death came not from policy, but science. A young Bell Labs cryptographer named Matt Blaze discovered a fatal vulnerability, undoubtedly an artifact of the system’s rushed implementation. Blaze’s hack led the front page of The New York Times. The fiasco tainted all subsequent attempts at installing government backdoors, and by 1999, most government efforts to regulate cryptography had been abandoned, with barely a murmur from the FBI or the NSA.

For the next dozen or so years, there seemed to be a Pax Cryptographa. You seldom heard the government complain about not having enough access to people’s personal information. But that was in large part because the government already had a frightening abundance of access, a fact made clear in 2013 by Edward Snowden. When the NSA contractor revealed the extent of his employer’s surveillance capabilities, people were shocked at the breadth of its activities. Massive snooping programs were sweeping up our “metadata”—who we talk to, where we go—while court orders allowed investigators to scour what we stored in the cloud. The revelations were also a visceral blow to the leaders of the big tech companies, who discovered that their customers’ data had essentially been plundered at the source. They vowed to protect that data more assiduously, this time regarding the US government as one of their attackers. Their solution: encryption that even the companies themselves could not decode. The best example was the iPhone, which encrypted users’ data by default with iOS 8 in 2014.

Law enforcement officials, most notably Comey of the FBI, grew alarmed that these heightened encryption schemes would create a safe haven for crooks and terrorists. He directed his staff to look at the potential dangers of increasing encryption and began giving speeches that called for that blast from the past, lingering like a nasty chord from ’90s grunge: exceptional access.

The response from the cryptographic community was swift and simple: Can’t. Be. Done. In a landmark 2015 paper called “Keys Under Doormats,” a group of 15 cryptographers and computer security experts argued that, while law enforcement has reasons to argue for access to encrypted data, “a careful scientific analysis of the likely impact of such demands must distinguish what might be desirable from what is technically possible.” Their analysis claimed that there was no foreseeable way to do this. If the government tried to implement exceptional access, they wrote, it would “open doors through which criminals and malicious nation-states can attack the very individuals law enforcement seeks to defend.”

The 1990s Crypto Wars were back on, and Ray Ozzie didn’t like what he was hearing. The debate was becoming increasingly politicized. Experts in cryptography, he says, “were starting to pat themselves on the back, taking extreme positions about truisms that weren’t so obvious to me.” He knew that great achievements of cryptography had come from brilliant scientists using encryption protocols to perform a kind of magic: sharing secrets between two people who had never met, or creating digital currency that can’t be duplicated for the purposes of fraud. Could a secure system of exceptional access be so much harder? So Ozzie set out to crack the problem. He had the time to do it. He’d recently sold a company he founded in 2012, Talko, to Microsoft. And he was, to quote a friend, “post-economic,” having made enough money to free him from financial concerns. Working out of his home north of Boston, he began to fool around with some ideas. About two weeks later, he came up with Clear.

The strength of Ozzie’s system lies in its simplicity. Unlike Clinton Brooks, who relied on the government to safeguard the Clipper Chip’s encrypted keys, Ozzie is putting his trust in corporations, a decision that came from his experience in working for big companies like Lotus, IBM, and Microsoft. He was intimately familiar with the way that tech giants managed their keys. (You could even argue that he helped invent that structure, since Lotus Notes was the first software product to get a license to export strong encryption overseas and thus was able to build it into its products.) He argues that the security of the entire mobile universe already relies on the protection of keys—those vital keys used to verify operating system updates, whose compromise could put billions of users at risk. (Every time you do an OS update, Apple certifies it by adding a unique ID and “signing” it to let your device know it’s really Apple that is rewriting your iPhone’s code.) Using that same system to provide exceptional access, he says, introduces no new security weaknesses that vendors don’t already deal with.

Ozzie knew that his proposal danced on the third rail of the crypto debate—many before him who had hinted at a technical solution to exceptional access have been greeted with social media pitchforks. So he decided to roll out his proposal quietly, showing Clear to small audiences under an informal nondisclosure agreement. The purpose was to get feedback on his system, and, if he was lucky, to jar some people out of the mindset that regarded exceptional access as a crime against science. His first stop, in September 2016, was in Seattle, where he met with his former colleagues at Microsoft. Bill Gates greeted the idea enthusiastically. Another former colleague, Butler Lampson—a winner of the Turing Award, the Nobel Prize of computer science—calls the approach “completely reasonable … The idea that there’s no way to engineer a secure way of access is ridiculous.” (Microsoft has no formal comment.)

Ozzie went on to show Clear to representatives from several of the biggest tech companies—Apple, Google, Facebook—none of whom had any interest whatsoever in voluntarily implementing any sort of exceptional access. Their focus was to serve their customers, and their customers want security. (Or, as Facebook put it in a statement to WIRED: “We have yet to hear of a technical solution to this challenge that would not risk weakening security for all users.”) At one company, Ozzie squared off against a technical person who found the proposal offensive. “I’ve seen this happen to engineers a million times when they get backed into a corner,” Ozzie says. “I told him ‘I’m not saying you should do this. I’m trying to refute the argument that it can’t be done.’ ”

Unsurprisingly, Ozzie got an enthusiastic reception from the law enforcement and intelligence communities. “It’s not just whether his scheme is workable,” says Rich Littlehale, a special agent in the Tennessee Bureau of Investigation. “It’s the fact that someone with his experience and understanding is presenting it.” In an informal meeting with NSA employees at its Maryland headquarters, Ozzie was startled to hear that the agency had come up with something almost identical at some point. They’d even given it a codename.

During the course of his meetings, Ozzie learned he was not alone in grappling with this issue. The names of three other scientists working on exceptional access popped up—Ernie Brickell, Stefan Savage, and Robert Thibadeau—and he thought it might be a good idea if they all met in private. Last August the four scientists gathered in Meg Whitman’s boardroom at Hewlett Packard Enterprise in Palo Alto. (Ozzie is a board member, and she let him borrow the space.) Though Thibadeau’s work pursued a different course, Ozzie found that the other two were pursuing solutions similar to his. What’s more, Savage has bona fides to rival Ozzie’s. He’s a world-­renowned expert on security research, and he and Ozzie share the same motivations. “We say we are scientists, and we let the data take us where they will, but not on this issue,” Savage says. “People I very much respect are saying this can’t be done. That’s not why I got into this business.”

Ozzie’s efforts come as the government is getting increasingly desperate to gain access to encrypted information. In a speech earlier this year, FBI director Christopher Wray said the agency was locked out of 7,775 devices in 2017. He declared the situation intolerable. “I reject this notion that there could be such a place that no matter what kind of lawful authority you have, it’s utterly beyond reach to protect innocent citizens,” he said.

Deputy attorney general Rod Rosenstein, in a speech at the Naval Academy late last year, was even more strident. “Warrant-proof encryption defeats the constitutional balance by elevating privacy above public safety,” he said. What’s needed, he said, is “responsible encryption … secure encryption that allows access only with judicial authorization.”

A Brief History of the Crypto Wars


Scientists introduce public key cryptography, in which private and public complementary keys are used to encrypt and unlock data.


RSA becomes one of the first companies to market encryption to the business and consumer world.


Lotus Notes becomes the first software to obtain a license to export strong encryption overseas.


The Clinton administration announces a plan to use the so-called Clipper Chip.


A computer scientist finds a critical vulnerability in theClipper Chip. The US abandons the program within two years.


The Clinton administration removes nearly all restrictions on the export of encryption products.


Former NSA contractor Edward Snowden reveals classified information about government surveillance programs.


Apple introduces default encryption in iOS 8.


After a mass shooting in California, the Feds file a court order against Apple to access the contents of a shooter’s phone.

Since Apple, Google, Facebook, and the rest don’t see much upside in changing their systems, only a legislative demand could grant law enforcement exceptional access. But there doesn’t seem to be much appetite in Congress to require tech companies to tailor their software to serve the needs of law enforcement agencies. That might change in the wake of some major incident, especially if it were discovered that advance notice might have been gleaned from an encrypted mobile device.

As an alternative to exceptional access, cryptographers and civil libertarians have begun promoting an approach known as lawful hacking. It turns out that there is a growing industry of private contractors who are skilled in identifying flaws in the systems that lock up information. In the San Bernardino case, the FBI paid a reported $900,000 to an unnamed contractor to help them access the data on Farook’s iPhone. Many had suspected that the mysterious contractor was an Israeli company called Cellebrite, which has a thriving business in extracting data from iPhones for law enforcement agencies. (Cellebrite has refused to confirm or deny its involvement in the case, and its representatives declined to comment for this story.) A report by a think tank called the EastWest Institute concluded that other than exceptional access, lawful hacking is the only workable alternative.

But is it ethical? It seems odd to have security specialists promoting a system that depends on a reliable stream of vulnerabilities for hired hackers to exploit. Think about it: Apple can’t access its customers’ data—but some random company in Israel can fetch it for its paying customers? And with even the NSA unable to protect its own hacking tools, isn’t it inevitable that the break-in secrets of these private companies will eventually fall into the hands of criminals and other bad actors? There is also a danger that forces within the big tech companies could enrich themselves through lawful hacking. As one law enforcement official pointed out to me, lawful hacking creates a marketplace for so-called zero-day flaws—vulnerabilities discovered by outsiders that the manufacturers don’t know about—and thus can be exploited by legal and nonlegal attackers. So we shouldn’t be surprised if malefactors inside tech companies create and bury these trapdoors in products, with hopes of selling them later to the “lawful hackers.”

Lawful hacking is techno-capitalism at its shadiest, and, in terms of security alone, it makes the mechanisms underlying Clear (court orders, tamper­-proof contents) look that much more appealing. No matter where you stand in the crypto debate, it makes sense that a carefully considered means of implementing exceptional access would be far superior to a scheme that’s hastily concocted in the aftermath of a disaster. (See Clipper.) But such an approach goes nowhere unless people believe that it doesn’t violate math, physics, and Tim Cook’s vows to his customers. That is the bar that Ozzie hopes he can clear.

The “Keys Under Doormats” gang has raised some good criticisms of Clear, and for the record, they resent Ozzie’s implication that their minds are closed. “The answer is always, show me a proposal that doesn’t harm security,” says Dan Boneh, a celebrated cryptographer who teaches at Stanford. “How do we balance that against the legitimate need of security to unlock phones? I wish I could tell you.”

One of the most salient objections goes to the heart of Ozzie’s claim that his system doesn’t really increase risk to a user’s privacy, because manufacturers like Apple already employ intricate protocols to protect the keys that verify its operating system updates. Ozzie’s detractors reject the equivalence. “The exceptional access key is different from the signing key,” says Susan Landau, a computer scientist who was also a ­coauthor of the “Doormat” paper. “A signing key is used rarely, but the exceptional access key will be used a lot.” The implication is that setting up a system to protect the PINs of billions of phones, and process thousands of requests from law enforcement, will inevitably have huge gaps in security. Ozzie says this really isn’t a problem. Invoking his experience as a top executive at major tech firms, he says that they already have frameworks that can securely handle keys at scale. Apple, for example, uses a key system so that thousands of developers can be verified as genuine—the iOS ecosystem couldn’t work otherwise.

Ozzie has fewer answers to address criticisms about how his system—or any that uses exceptional access—would work internationally. Would every country, even those with authoritarian governments, be able to compel Apple or Google to cough up the key to unlock the contents of any device within its jurisdiction? Ozzie concedes that’s a legitimate concern, and it’s part of the larger ongoing debate about how we regulate the flow of information and intellectual property across borders. He is also the first to point out that he doesn’t have all the answers about exceptional access, and he isn’t trying to create a full legal and technological framework. He is merely trying to prove that something could work.

Maybe that’s where Ozzie’s plan plunges into the choppiest waters. Proving something is nigh impossible in the world of crypto and security. Time and again, supposedly impervious systems, created by the most brilliant cryptographers and security specialists, get undermined by clever attackers, and sometimes just idiots who stumble on unforeseen weaknesses. “Security is not perfect,” says Matthew Green, a cryptographer at Johns Hopkins. “We’re really bad at it.”

But as bad as security can be, we rely on it anyway. What’s the alternative? We trust it to protect our phone updates, our personal information, and now even cryptocurrencies. All too often, it fails. What Ozzie is saying is that exceptional access is no different. It isn’t a special case singled out by the math gods. If we agree that a relatively benign scheme is possible, then we can debate whether we should do it on the grounds of policy.

Maybe we’d even decide that we don’t want exceptional access, given all the other tools government has to snoop on us. Ozzie could return to his post-economic retirement, and law enforcement and civil libertarians would return to their respective corners, ready to slug it out another day. Let the Crypto Wars continue.

Steven Levy (@stevenlevy) wrote about the new Apple headquarters in issue 25.06.

This article appears in the May issue. Subscribe now.

More on Encryption

Accelerators Like YC, 500 Startups and SOVB Outperform On This 1 Critical Metric

Accelerators are doing their thing–accelerating new entrepreneurs. Nothing showed that more than a niche–but powerful–report just out from Crunchbase. Gene Teare reported that 70% of the top 10  seed stage investors in women-led companies were accelerators.

Y Combinator led the pack with 28.  They were followed by:

  • SOSV (10);
  • Innovation Works (5),
  • HAX (4) and
  • 500 Startups (3).

The other 3 investors in the top ten have gender-driven investment filters (BBG, XFactor and Brilliant Ventures). 

Knowing how to invest in American women may be the economic power move of the era.

Early stage Silicon Valley VC Aileen Lee recently shared, “Women now receive more than half the engineering bachelor’s degrees at schools like MIT and Dartmouth, and make up 49% of computer science majors at Harvey Mudd College, 48% at CMU and 39% at MIT…”

She’s on to something. The sheer number of women-owned businesses leaped 114% over the last 20 years and soars above the national average business growth rate of 44%. Reported by Amex Open last year, women own/operate 39% of all U.S. businesses, although the revenues of those firms are below average in part because they struggle to raise capital.

The struggle to raise capital

Crunchbase reported that 3% of all venture capital in the first quarter went to women-led firms. Venture capital investments in women-led firms took a nose dive of 30% from the previous quarter. Globally, seed investments in female founders took a 38% hit. In the exact same period when media made #MeToo a rallying call, venture capital firms were saying “can’t touch this.”

So let’s recap. In the U.S., about 39% of all businesses are women-led. Within that, 17% of all tech startups are women-led, according to Crunchbase. So, what percentage of the thousands of annual tech investments, in a normal, rational world, should be made in female founders? Hint: it’s not 3%. But since it is 3%, you have to draw the conclusion that lots of male-led startups are irrationally overfunded.  That over-indexing problem is getting bigger as record levels of capital are spent bailing out those investment decisions with follow-on financings rather than investments in net new innovation. 

First financings: 5 year downward trend

In the first quarter, Pitchbook/NVCA showed that first financings for entrepreneurs continued its 5-year downward slide. Record levels of venture capital were deployed first quarter–but  20-25% of those investments were in the companies that carry a valuation of a billion or more. 60% of the venture capital invested went to one geography–the West coast. Of the IPOs we celebrated first quarter, American companies cornered just 40%. Marketwatch reports 60% were from foreign companies. American women are spotted more often at the offering table–like Lynne Laube of Cardlytics last quarter and Katrina Lake of Stitchfix in fourth quarter–but numbers like these suggest we have a long road to a fully participating, competitive economy.

Bright spots in American entrepreneurship

The bright spots in entrepreneurship are, and always have been, among emerging entrepreneurs. In the U.S., the fastest-growing pockets of innovation are coming from women, minority and immigrant founders, especially in regions like the Southeast, which attracted 7% of VC deals in the first quarter. 

Stepping into the innovation are accelerators like YCombinator, SOSV, HAX, and Innovation Works and funds like BBG, X Factor and Brilliant Ventures. The timing is ripe for more smart money to do the math and join them.

China fund managers slash ZTE valuation after U.S. sanction

SHANGHAI (Reuters) – Chinese funds have slashed valuations of ZTE Corp after the United States banned American companies from selling components to the telecoms equipment maker for seven years, a move ZTE said threatened its very survival.

The logo of China’s ZTE Corp is seen on a building in Nanjing, Jiangsu province, China April 19, 2018. REUTERS/Stringer

The U.S. action last week was sparked by ZTE’s violation of an agreement reached after it was caught illegally shipping U.S. goods to Iran. American companies are estimated to provide 25-30 percent of the components used in ZTE’s equipment.

Chinese mutual fund managers cut the value of the stock in their portfolios by 20-30 percent in a spate of announcements over the weekend, a blow to ZTE that suspended trading in its mainland and Hong Kong shares on April 17.

Around 40 Chinese mutual funds have adjusted the valuation of ZTE in their portfolios since it suspended trading. In the latest batch, five fund managers revalued the stock on Saturday.

Huatai-PineBridege and GTJA Allianz cut their valuation of ZTE’s mainland shares to 25.05 yuan, 20 percent lower than its last trading price. JT Asset Management – the most pessimistic – slashed the valuation to around 30 percent below ZTE’s last close of 31.31 yuan ($4.98).

Several funds with exposure to ZTE’s Hong Kong shares, including HuaAn Fund and Harvest Fund, cut valuations to about 20 percent below the last trading price of HK$25.60 ($3.26).

ZTE, which had a market capitalization of about $20 billion before trading in its shares was suspended, did not respond to a request for comment on Monday.

FILE PHOTO: A ZTE smart phone is pictured in this illustration taken April 17, 2018. REUTERS/Carlo Allegri/Illustration/File Photo

The valuation adjustment by mutual funds could be just preliminary, as the real impact of the U.S. sanctions needs to be assessed continuously as the incident unfolds, said Reagan Li, investment manager at private fund house Shanghai V-Invest.

On Sunday, ZTE said it was “making active communications with relevant parties and seeking a solution to the U.S. export denial order”. Earlier, the U.S. Commerce Department said it would allow ZTE to submit more evidence related to the matter.

The threat to ZTE’s business has triggered a broad sell-off in technology shares as investors fear the sector could suffer from the fallout, or that other firms could be targeted by the United States amid escalating trade tensions.

Shares in display maker BOE Technology slumped as much as 6 percent on Monday, even after the firm said it had not received any official information regarding U.S. sanctions in response to rumors in the market that it would be targeted.

The CSI Information Technology index of Shanghai- and Shenzhen-listed tech firms fell 2 percent.

“Investors are asking: who will be next on the U.S. sanction list?” fund manager Li said.

Reporting by Samuel Shen and Adam Jourdan, additional reporting by Anne Marie Roantree in Hong Kong; Editing by Himani Sarkar

Facebook's hidden data haul troubles German cartel regulator

BONN, Germany (Reuters) – That the personal data of tens of millions of Facebook (FB.O) users fell into the wrong hands is troubling politicians, but Germany’s top competition regulator is questioning the sheer volume of information that the social network harvests.

Andreas Mundt, president of Germany’s Federal Cartel Office, is pictured during an interview with Reuters in Bonn, Germany April 17, 2018. REUTERS/Wolfgang Rattay

Andreas Mundt, president of the Federal Cartel Office, is awaiting Facebook’s response to his findings, published in December, that it abuses its market dominance by gathering data on people without their proper consent.

That includes tracking visitors to websites with an embedded Facebook ‘like’ or share button – and pages where it observes people even though there is no obvious sign the social network is present.

Mundt’s inquiry has gained new relevance since revelations that the data of 87 million Facebook users, gathered via an online personality quiz, was passed to Cambridge Analytica, a consultancy that advised Donald Trump’s presidential campaign.

“For Facebook to collect data when I as a user am on Facebook, that’s clear. The user knows this and has to expect it,” Mundt told Reuters in an interview.

“What is problematic is the collection of data in places and moments where the user can’t realistically expect that data is collected by Facebook.”

Slideshow (11 Images)

CEO Mark Zuckerberg, in testimony before the U.S. Congress, said Facebook tracked people whether they have accounts or not – something the firm said was “fundamental to how the internet works”.

Facebook tracks an estimated 28.6 percent of web traffic across 59.5 percent of internet sites, making it the world’s fifth most prevalent behind several Google (GOOGL.O) properties, according to


Mundt’s case rests on his analysis that Facebook has a market share of social media in Germany of over 90 percent – he sees its only direct competitor as Google+ – making it dominant in anti-trust terms and not, as Facebook argues, merely popular.

“If Facebook has a dominant market position, then the consent that the user gives for his data to be used is no longer voluntary,” said Mundt, 57, a jurist who has headed the cartel office since 2013.

“That’s because he has no alternative – he has to use Facebook if he wants to use a social network.”

Facebook, which has more than 2 billion users worldwide, describes Mundt’s view as “inaccurate” but has said it will cooperate with the investigation, which would not result in fines but could lead to some practices being banned.

It is due to submit its response to Mundt’s findings soon. This will then lead to a dialogue on whether Facebook should change its practices voluntarily or, possibly, be ordered to do so.

Separately, the data protection commissioner for Hamburg, the city-state where Facebook has its German office, has launched a non-compliance procedure after being dissatisfied by the firm’s explanation over the Cambridge Analytica leak.

The scrutiny from German regulators enjoys the backing of lawmakers, reflecting broader hostility toward anything resembling surveillance that goes back to Germany’s history of Nazi and Communist rule in the 20th century.

Mundt pushed back against suggestions that, in taking on the case, he was encroaching on the domain of data protection authorities. He said there was a solid precedent in Germany for inappropriate terms of use to be treated as an anti-trust issue.

“The competitive connection is particularly strong from our point of view, because data are intrinsic to the business model,” he said.

“The entire business model relies ultimately on access to data and the reach of these platforms,” he said. “With the Facebook probe we are doing pioneering work – but in no way is this an experiment.”

Reporting by Douglas Busvine; Editing by Keith Weir

Toshiba eyes cancelling chip unit sale if no China approval by May: media

TOKYO (Reuters) – Japan’s Toshiba Corp has decided it will cancel the planned $18.6 billion sale of its memory chip unit if it does not get approval from China’s anti-monopoly regulator by May, the Mainichi newspaper said on Sunday.

The logo of Toshiba Corp is seen behind cherry blossoms at the company’s headquarters in Tokyo, Japan April 11, 2017. REUTERS/Toru Hanai

A consortium led by U.S. private equity firm Bain Capital last year won a long and highly contentious battle for the unit, which Toshiba put up for sale after billions of dollars in cost overruns at its Westinghouse nuclear unit plunged it into crisis.

But Toshiba was unable to complete the sale by the agreed deadline of March 31 as it was still waiting for approval from China’s antitrust authorities.

Toshiba raised $5.4 billion from a share issue to foreign investors late last year and it had now decided it did not need to go through with the sale, the Mainichi newspaper reported. It did not cite any source.

“Toshiba has come to a decision that there is little necessity for the sale as it is no longer in insolvency,” the newspaper reported, adding that Toshiba would consider listing the unit if the sale did not go ahead.

A Toshiba spokesman said the company was still aiming to complete the sale as soon as possible.

In early April, Toshiba Chief Executive Nobuaki Kurumatani said his company would not use the option of cancelling the sale unless there was any “major material change” in circumstances.

Reporting by Makiko Yamazaki, Kiyoshi Takenaka; Editing by Robert Birsel

How Some New College Graduates Are Pulling Over $1 Million a Year (Courtesy of Elon Musk)

Artificial intelligence experts can command huge salaries and bonuses–even at a nonprofit.

OpenAI, a nonprofit research lab started by Tesla founder and CEO Elon Musk released the salary details of it’s employees–and they are striking. The organization’s top researcher was paid more than $1.9 million in 2016, and another leading researcher who was only recruited in March was paid $800,000 that year, according to a recent article in the New York Times.

Salaries for top A.I. researchers have skyrocketed because there is high demand for the skills–thousands of companies want to work with the technology–and few people have them. So even researchers at a nonprofit can make big money.

It likely has more to do with competition than interest in the field itself, however. The Times points out that both of the researchers employed by OpenAI used to work at Google. At DeepMind, a Google-owned A.I. lab in London, $138 million was spent on the salaries of 400 employees, translating to $345,000 per employee including researchers and other staff, the Times reports. 

OpenAI was started by Musk who recruited several engineers from Google and Facebook, two companies pushing the industry into artificial intelligence. People who work at major companies told the Times that while top names can expect compensation packages in the millions, even A.I. specialists with no industry experience can expect to make between $300,000 and $500,000 in salary and stock as demand for the skills continues to outstrip supply. 

Qualcomm Shares Tank Amid Layoffs

Qualcomm shares were down on Thursday after the semiconductor company began layoffs and is in the middle of a trade dispute between the U.S. and China over a planned acquisition.

Shares of the mobile chip manufacturer were down 4.6% in midday trading to $52.69 on Thursday.

Qualcomm plans to lay off around 1,500 employees in California as part of a broader push to reduce its expenses by $1 billion and improve its earnings, according to a Bloomberg News report on Wednesday, citing unnamed sources.

A Qualcomm spokesperson told Fortune in a statement that both full-time and temporary workers will be affected by the layoffs, without citing the specific number of full-time and contract workers that will be cut.

“We first evaluated non-headcount expense reductions, but we concluded that a workforce reduction is needed to support long-term growth and success, which will ultimately benefit all our stakeholders,” the Qualcomm spokesperson said of the layoffs in a statement.

Qualcomm (qcom) CEO Steve Mollenkopf revealed the company’s $1 billion cost-cutting initiative in January, but didn’t provide specific details. As Fortune’s Aaron Pressman explained, Qualcomm is under pressure to revive its shrinking, but crucial, core mobile business.

One of Qualcomm’s plans to revitalize its overall business includes its $47 billion bid for NXP Semiconductors, which makes computer chips for Internet-connected devices and autonomous vehicles. But that deal has faced a couple of roadblocks.

Qualcomm said on Thursday that it is withdrawing and refilling the acquisition notice related to NXP Semiconductors “at the request of the Ministry of Commerce in China.” By doing so, Qualcomm is pushing its acquisition deadline to July 25 from April 25, so that China could potentially approve the deal.

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The semiconductor giant is essentially caught in the middle of the current trade war between China and the United States, and Chinese regulators told Bloomberg News on Thursday that it is seeking unspecified additional concessions from Qualcomm before it clears the deal.

Meanwhile, Qualcomm is still recovering from a proposed hostile takeover by chipmaker Broadcom that President Donald Trump squashed in March via an executive order that cited unspecified national security concerns. If Broadcom were to have bought Qualcomm for about $117 billion, the deal would have created an enormous mobile computer chip giant worth more than $200 billion.

​Learn to use GitHub with GitHub Learning Lab

Video: GitHub: EU copyright crackdown could hurt open-source development

The most popular open-source development site in the world is GitHub. It’s used by tens of millions of developers to work on over 80 million projects.

It’s not just a site where people use Linus Torvalds’ Git open-source distributed version control system. It’s also an online home for collaboration, a sandbox for testing, a launchpad for deployment, and a platform for learning new skills. The GitHub Training Team has now released an app, GitHub Learning Lab, so you can join the programming party.

GitHub Learning Lab is not a tutorial or webcast. It’s an app that gives you a hands-on learning experience within GitHub. According to GitHub, “Our friendly bot will take you through a series of practical, fun labs that will give you the skills you need in no time–and share helpful feedback along the way.”

With GitHub Learning Lab, you’ll learn through issues opened by a bot in a GitHub repository. As you finish tasks, the bot will comment on your work and review your pull requests like a project collaborator would.

Read also: Google Fuchsia is not Linux: So, what is it and who will use it? | Perfectly legal ways you can still get Windows 7 cheap (or even free) | Google AI can pick out a single speaker in a crowd: Expect to see it in tons of products | Open source’s big German win: 300,000 users shift to Nextcloud for file sharing

If you have questions that come up while you complete a course, you can get answers in the GitHub Learning Lab Community Forum. This is a new way to get support from your fellow students and expert trainers, including members of the GitHub Training Team

The Lab is opening with five courses. These are:

  1. Introduction to GitHub: Get an introduction to the most common, collaborative workflow for developers around the world.
  2. Communicating using Markdown: Learn how to communicate on GitHub and beyond with Markdown’s simple syntax.
  3. GitHub Pages: Host a website or blog directly from your GitHub repository.
  4. Moving your project to GitHub: Get tips for migrating your code and contributors to GitHub.
  5. Managing merge conflict: Learn why merge conflicts happen and how to fix them.

GitHub will also release “Contributing to open source: Make your first open source contribution in a friendly mapping project,” soon.

Afterwards GitHub will add more classes to the app. It will also invite inviting new course authors and add more topics. You can add your own two cents on what should be offered on the Community Forum.

Related stories

Time Warner CEO says AT&T merger needed to compete with internet titans

WASHINGTON (Reuters) – Time Warner (TWX.N) Chief Executive Jeff Bewkes on Wednesday defended his company’s planned merger with telecoms firm AT&T (T.N) as necessary to compete effectively for advertising with internet giants like Google and Facebook.

FILE PHOTO: Time Warner CEO Jeff Bewkes arrives ahead of arguments in the trial to determine if AT&T’s merger with Time Warner is legal under antitrust law at U.S. District Court in Washington, U.S., March 22, 2018. REUTERS/Aaron P. Bernstein

Bewkes told Judge Richard Leon, who will decide if the $84.5 billion deal may go forward, that the U.S. Justice Department was wrong to say that AT&T would be reluctant to license Time Warner’s TV and movie content to rivals, causing blackouts, in order to win over new customers to AT&T subsidiary DirecTV.

“I think it’s ridiculous,” said Bewkes, who has been CEO for more than 10 years. “If our channels are not in distribution we lose lots of money (from lost subscriptions and advertising).”

He said that “one percent, less than one percent, maybe two percent” of subscribers would drop their pay TV subscription because of a blackout, far below the 12 percent estimated by an economist for the government who testified earlier in the trial.

Bewkes argued it was in Time Warner’s best interest financially to license its television channels, which range from movies to CNN to sports, broadly online.

He said Time Warner had been hampered in innovating and advertising because it does not have the granular information about viewers held by pay TV and internet companies.

With digital advertising, Chevrolet, for example, can target car ads at people looking to actually buy a car, he said.

AT&T has said a key benefit of owning Time Warner is that it can take data about its 141 million U.S. wireless subscribers and 25 million video subscribers and marry it with Time Warner’s programming to enable advertisers to target TV ads.

Targeted TV ads, also known as addressable TV, have yet to go mainstream because they involve renegotiating carriage deals with programmers and distributors, said Brian Wieser, an analyst at Pivotal Research.

Targeted TV could represent more than $100 billion in revenue by 2030 for companies that offer it, according to an April Credit Suisse report, which called it “a largely overlooked benefit of the AT&T/Time Warner transaction.” The ads can be sold at triple the price of regular ads.

“The Google/Facebook duopoly has such a strong hold on the market, I think it’s important that there is healthy competition and that we aren’t just forced to invest in two places,” said Tim Villanueva, head of media strategy for Fetch, an ad agency focused on mobile, whose clients include eBay and Lululemon. He said he was interested in using the new platform.

Advertisers’ spending on TV ads in 2018 is expected to be around $70 billion, a 1.45 percent increase from three years ago, according to research firm eMarketer.


In cross examination, Justice Department lawyer Claude Scott pointed to efforts that Time Warner was already making to move into targeted advertising and online distribution, including contracting with tech companies, an apparent attempt to call into question the need for the megamerger.

Scott referred to Bewkes’ compensation package, noting that he would be leaving the company when the deal closed and that he owned more than 2 million Time Warner shares. AT&T’s deal for Time Warner is about a 35 percent premium over the market price.

The trial has seen a parade of witnesses testifying about how the merger would affect them. Executives from smaller pay TV companies talked about how important it was to have access to Time Warner’s movies and television shows.

The trial, which began in mid-March in U.S. District Court in Washington, is expected to wrap up this month.

Reporting by Diane Bartz; Additional reporting by Jessica Toonkel; Editing by Bernadette Baum and Rosalba O’Brien

Cambridge Analytica planned to issue digital currency: sources

NEW YORK (Reuters) – Cambridge Analytica was planning to raise money by issuing a new type of digital currency before it became embroiled in a scandal surrounding the misuse of Facebook Inc (FB.O) personal data, sources familiar with the matter told Reuters on Tuesday.

FILE PHOTO: The nameplate of political consultancy, Cambridge Analytica, is seen in central London, Britain March 21, 2018. REUTERS/Henry Nicholls

The British data analytics consultancy had approached a firm that advises companies on how to structure an initial coin offering, an increasingly popular online fundraising scheme involving the issue of a new digital currency, the sources said.

The firm was looking to raise as much as $30 million, one of the sources said.

It is not known if Cambridge Analytica is still pursuing such plans. A spokesman did not comment on the coin offering, but did say the firm was looking at using blockchain – the technology underlying digital currencies – to help people secure their online data.

“Prior to the Facebook controversy, we were developing a suite of technologies to help individuals reclaim their personal data from corporate entities and to have full transparency and control over how their personal data are used,” a Cambridge Analytica spokesman said in an email to Reuters. “We were exploring multiple options for people to manage and monetise their personal data, including blockchain technology.”

Cambridge Analytica, which did work for U.S. President Donald Trump’s 2016 election campaign, has been under intense scrutiny for the past month after the New York Times and the Observer reported that it improperly gained access to personal data of millions of Facebook users. Facebook said earlier this month that data of more than 87 million users may have been affected.

Cambridge Analytica has said it properly licensed data on far fewer users from a research firm.

A coin offering would have made Cambridge Analytica one of hundreds of firms attempting to raise capital as the value of digital currencies soar.

Companies raised $3.5 billion through such offerings this year, according to research firm Autonomous. They have been popular with investors as they are able to trade the tokens on online exchanges, often for a profit.

Reporting by Anna Irrera; Aditional reporting by Douglas Busvine in Frankfurt; Editing by Bill Rigby

Toyota to launch 'talking' vehicles in United States in 2021

WASHINGTON (Reuters) – Toyota Motor Corp (7203.T) plans to start selling U.S. vehicles that can talk to each other using short-range wireless technology in 2021, the Japanese automaker said on Monday, potentially preventing thousands of accidents annually.

Toyota Motor’s logo is pictured at the 45th Tokyo Motor Show in Tokyo, Japan October 27, 2017. REUTERS/Kim Kyung-Hoon

The U.S. Transportation Department must decide whether to adopt a pending proposal that would require all future vehicles to have the advanced technology.

Toyota hopes to adopt the dedicated short-range communications systems in the United States across most of its lineup by the mid-2020s. Toyota said it hopes that by announcing its plans, other automakers will follow suit.

The Obama administration in December 2016 proposed requiring the technology and giving automakers at least four years to comply. The proposal requires automakers to ensure all vehicles “speak the same language through a standard technology.”

Automakers were granted a block of spectrum in 1999 in the 5.9 GHz band for “vehicle-to-vehicle” and “vehicle to infrastructure” communications and have studied the technology for more than a decade, but it has gone largely unused. Some in Congress and at the Federal Communications Commission think it should be opened to other uses.

In 2017, General Motors Co (GM.N) began offering vehicle-to-vehicle technologies on its Cadillac CTS model, but it is currently the only commercially available vehicle with the system.Talking vehicles, which have been tested in pilot projects and by U.S. carmakers for more than a decade, use dedicated short-range communications to transmit data up to 300 meters, including location, direction and speed, to nearby vehicles.

The data is broadcast up to 10 times per second to nearby vehicles, which can identify risks and provide warnings to avoid imminent crashes, especially at intersections.

Toyota has deployed the technology in Japan to more than 100,000 vehicles since 2015.

The U.S. National Highway Traffic Safety Administration (NHTSA) said last year the regulation could eventually cost between $135 and $300 per new vehicle, or up to $5 billion annually but could prevent up to 600,000 crashes and reduce costs by $71 billion annually when fully deployed.

NHTSA said last year it has “not made any final decision” on requiring the technology, but no decision is expected before December.

Last year, major automakers, state regulators and others urged U.S. Transportation Secretary Elaine Chao to finalize standards for the technology and protect the spectrum that has been reserved, saying there is a need to expand deployment and uses of the traffic safety technology.

Reporting by David Shepardson; Editing by Jeffrey Benkoe

Lawmakers publish evidence that Cambridge Analytica work helped Brexit group

LONDON (Reuters) – British lawmakers on Monday published evidence that Brexit campaign group Leave.EU benefited from work by Cambridge Analytica, a political consultancy at the center of a recent storm over use of Facebook data.

FILE PHOTO: A person is seen inside the building which houses the offices of Cambridge Analytica as investigators from Britain’s Information Commissioners Office entered, following the granting of a search warrant by a High Court judge, in London, Britain March 23, 2018. REUTERS/Henry Nicholls/File Photo

Nigel Oakes, founder of SCL Group, the parent company of Cambridge Analytica, said the consultancy was lined up to do work with Leave.EU in the event that it was designated as the official campaign to leave the European Union, according to transcripts of interviews published by a parliamentary committee.

Oakes said that “there was no contract and no money” but that they did do work to demonstrate their capabilities. A transcript of another interview with Leave.EU official Andy Wigmore says the campaign group copied Cambridge Analytica’s methods.

“Leave.EU benefited from their work with Cambridge Analytica before the decision was made on which Leave campaign would receive the official designation for the referendum,” Damian Collins, chair of the Digital, Culture, Media and Sport Committee, said in a statement.

Cambridge Analytica lies at the center of a storm for using data obtained from millions of Facebook users without their permission after it was hired by Donald Trump for his 2016 U.S. presidential election campaign.

The analytics firm is also under scrutiny over campaigning for the 2016 referendum when Britons voted to leave the European Union, a move seen by critics as a colossal historical mistake but by admirers as a vital reassertion of British sovereignty.

Oakes said Wigmore’s claim to have copied Cambridge Analytica’s techniques raised “more questions about how Leave.EU developed their database to do this, and whether consumer data from other companies they had a relationship was used to support their campaign.”

The interview transcripts were submitted by Emma Briant, an academic who interviewed figures from SCL Group, Cambridge Analytica and Leave.EU.

In the event, “Vote Leave” beat Leave.EU to become the officially designated campaign to leave the EU ahead of Britain’s referendum, though Leave.EU continued to campaign for Brexit.

Leave.EU founder Arron Banks has said that because it did not win the designation and due to concerns about the consultancy, it did no work with Cambridge Analytica, and received no benefit in kind.

Former Cambridge Analytica CEO Alexander Nix told the committee in February that the firm did not work with Leave.EU, but he has been recalled for a new hearing, which will take place on Wednesday.

The lawmakers were also critical of Wigmore and Oakes for speaking in admiring terms about Nazi propaganda techniques, and said there were also questions about Cambridge Analytica’s closeness with Wikileaks founder Julian Assange.

“The propaganda machine of the Nazis, for instance – you take away all the hideous horror and that kind of stuff – it was very clever, the way they managed to do what they did,” Wigmore said, according to one interview transcript.

Collins said that the “extreme messaging” around immigration during the campaign meant “these statements will raise concerns that data analytics was used to target voters who were concerned about this issue, and to frighten them with messaging designed to create ‘an artificial enemy’ for them to act against.”

Reporting by Alistair Smout, Editing by William Maclean

Weekly Commentary: Bizarre And Ominous

Things have gone from surreal to the bizarre. The President points blame directly at Putin for a chemical attack in Syria. Russia threatens to shoot down any missiles fired into Syria. President Trump tweets “Get ready Russia, because [missiles] will be coming, nice and new and ‘smart!'” A presidential tweet the next morning provided an unequivocal update: “Could Take Place Very Soon Or Not So Soon At All.” Russia claims false flag. “U.S. Says Syria Has Used Chemical Weapons at Least 50 Times During War.” Missiles were flying Friday night.

The President’s personal attorney, target of a criminal investigation, had his office and residences raided by the FBI. An enraged President is said to be considering firing the special counsel and/or the Deputy Attorney General. “Trump Sees Inquiry Into Cohen as Greater Threat Than Mueller.” The Speaker of the House announces he’s through with Washington.

The former Director of the FBI will release his memoirs next week, with interviews lined up. It’s not going to be pretty. Leaks began to flow this week. James Comey likens the “unethical” President to a “mob boss.” The President tweeted that Comey is an “untruthful slime ball.”

The Treasury department announced the U.S. budget deficit had reached $600 billion during the first-half of the fiscal year. March’s deficit of $209 billion was 12% above the consensus estimate. Federal spending during the month was up 7% y-o-y, while revenues increased 2.7%. The CBO announced that Trillion dollar annual deficits will commence soon – about two-years sooner than expected only recently.

“President Xi Jinping presided over the Chinese navy’s largest-ever military display on Thursday…, the country’s latest show of force in the disputed South China Sea.” On board a navy destroyer dressed in full military garb, XI announced China would hold live-fire military drills in the Taiwan Strait next week. “…The task of building a strong navy ‘has never been as urgent as present.'”

Russian stocks sank 4.5% this week. Russian bond yields surged 43 bps to 7.49%, and the ruble fell 6.2%. Russia canceled a ruble bond auction, as Russian sovereign CDS posted their biggest jump in five years. “The Russian government on Monday called the latest US sanctions against the country ‘scandalous’ and ‘illegal’ and vowed it would retaliate…” Russia is putting together a list of banned U.S. imports, including rocket engines and titanium. With the lira down another 1.3% to record lows, Turkish President Erdogan warned that those committing “economic terror” would pay a steep price.

“Vitaly Churkin, Russia’s ambassador at the United Nations, said he unfortunately ‘cannot exclude any possibilities’ when asked about the danger of war between the US and Russia.” An ominous Friday evening Bloomberg headline: “Russia, U.S. Near Brink in Syrian Standoff With Nuclear Risks.”

The Hong Kong Monetary Authority intervened three straight sessions to support the Hong Kong dollar peg against the U.S. dollar. It was their first currency intervention since 2005.

Aluminum prices surged 15% this week. Palladium jumped 9.2%, and Nickel increased 3.0%. Crude (WTI) surged 8.6%, trading at a three-year high. “Americans Face Highest Pump Prices in Years.” Gasoline rose 5.7% this week, and heating oil jumped 7.3%. The GSCI Commodities index jumped 5.5% this week to the high since December 2014.

FOMC minutes offered added confirmation that the Powell Fed is not rushing to coddle the markets. Increasingly, they see upside risks to both growth and inflation. Rates remain much too low. “Fed Leans to Faster Pace of Hikes…” “Excluding food and energy, the core consumer-price index rose 2.1% from March 2017, the most in a year…” “U.S. wholesale prices advanced in March by more than forecast, reflecting broad increases in the costs of services and goods…” Even Chicago Fed President Charles Evans is calling for more hikes.

April 11 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials at their meeting last month expressed greater confidence inflation would rise to their 2% target over the coming year, a development that could affect how much they raise interest rates in coming years. They also debated the costs and benefits of allowing the economy to run hot and discussed how they might need to later raise rates to a level that would deliberately slow growth… The minutes highlight just how much Fed officials’ outlook has changed since last fall, when surprisingly slow inflation raised questions about the need for continued rate increases.”

April 10 – Bloomberg (Alexandre Tanzi): “Global debt rose to a record $237 trillion in the fourth quarter of 2017, more than $70 trillion higher from a decade earlier, according to… the Institute of International Finance. Among mature markets, household debt as a percentage of GDP hit all-time highs in Belgium, Canada, France, Luxembourg, Norway, Sweden and Switzerland. That’s a worrying signal, with interest rates beginning to rise globally… Still, the ratio of global debt-to-gross domestic product fell for the fifth consecutive quarter as the world’s economic growth accelerated. The ratio is now around 317.8% of GDP, or 4 percentage points below the high in the third quarter of 2016…”

Failing to make the top 1000 newsworthy items of the week, Chinese Credit data nonetheless continue to fascinate. China’s March growth in total Social Finance was reported much weaker than expect. At $212 billion (1.33 trillion yuan), growth was about 25% below estimates. Bank loan growth ($180bn) slightly missed estimates. The big story is the intensifying slowdown in shadow lending, which posted a net contraction during the month. Total Social Finance has expanded about $1.49 TN over the past six months, down 17% from the comparable year ago period.

The marked slowdown in system lending is leading a deceleration in money supply growth. March saw a notable slowdown. M2 money supply expanded 8.2% y-o-y versus estimates of 8.9%. And at this point it would appear the slowdown in money and Credit has impact general pricing pressures. March CPI was reported up 2.1% y-o-y versus estimates of 2.6%. PPI came in up 3.1% y-o-y against estimates of 3.3%.

Curiously, China also report disappointing March trade data. China posted a trade deficit of $5.8 billion, the first deficit since February 2017. Imports surged a stronger-than-expected 14.4% y-o-y, while imports were down 2.7% (after a huge February). It’s worth noting that China’s first quarter trade surplus with the U.S. was up 19.4% to $58.25bn.

Stocks, well, they enjoyed just a splendid week. The S&P500 rose 2.0%, outdone by the Nasdaq100’s 3.0% jump. The Biotechs surged 8.6%, and the Semiconductors advanced 5.0%. The DJIA was up about 440 points at Monday’s trading highs following Chinese President Xi’s “conciliatory” weekend speech. Not enamored with the interpretation, Chinese officials pushed back: “Beijing says Xi speech wasn’t a concession to US, it’s ready to hit back at any escalation.” With option expiration next Friday, it’s been another month to tease – then torment – put buyers.

Earnings season started off with a bang. “JPMorgan Q1 Earnings Beat on Better Rates and Trading.” “Citi beats, profits jump 13%.” “Wells Fargo beats by $0.05 and beats on revenue.” On Friday’s earnings reports, JPMorgan’s (NYSE:JPM) stock fell 2.7%, Citigroup (NYSE:C) dropped 1.6% and Wells Fargo (NYSE:WFC) sank 3.4%. Mark Zuckerberg travels to the nation’s capital and is grilled for 10 hours. My nine-year-old son asked me why the Democrats were meaner to him than the Republicans. Reasonable question. Facebook (NASDAQ:FB) rallied 4.7% this week.

Treasuries were a little worried that stocks remain oblivious to an extraordinary host of mounting risks. Ten-year Treasury yields added five bps to 2.83%. Two-year yields jumped nine bps to 2.36%, the high since August 2008.

It will be interesting to see how markets respond to the missile strikes on Syria. It appears as many as 100 missiles hit at least three targets, in a more intensive operation than a year ago.

Russia’s ambassador in Washington Anatoly Antonov said in a statement on Friday immediately after the first strikes on Syria. ‘The worst expectations have materialized. Our warnings fell on deaf ears. A pre-planned scenario is being acted on. We are being threatened again. We have warned that such actions will not remain without consequences. All responsibility for them rests upon Washington, London and Paris. Antonov stressed that insulting the Russian president was inadmissible.’

The week was bizarre and ominous. Reports had President Trump livid after Monday’s FBI raid on his personal attorney. I can imagine Putin is absolutely livid in Moscow. For different reasons, I worry increasingly about them both.

For the Week:

The S&P500 jumped 2.0% (down 0.6% y-t-d), and the Dow rose 1.8% (down 1.5%). The Utilities fell 1.4% (down 5.9%). The Banks gained 1.2% (down 0.3%), while the Broker/Dealers rose 1.5% (up 7.2%). The Transports rallied 2.2% (down 2.3%). The S&P 400 Midcaps gained 1.6% (down 0.9%), and the small cap Russell 2000 jumped 2.4% (up 0.9%). The Nasdaq100 recovered 3.0% (up 3.6%). The Semiconductors surged 5.1% (up 6.1%). The Biotechs jumped 8.6% (up 9.5%). With bullion up $12, the HUI gold index advanced 3.3% (down 4.6%).

Three-month Treasury bill rates ended the week at 1.72%. Two-year government yields jumped nine bps to 2.36% (up 47bps y-t-d). Five-year T-note yields gained nine bps to 2.67% (up 47bps). Ten-year Treasury yields rose five bps to 2.83% (up 42bps). Long bond yields added a basis point to 3.03% (up 29bps).

Greek 10-year yields jumped nine bps to 4.07% (unchanged y-t-d). Ten-year Portuguese yields declined four bps to 1.65% (down 29bps). Italian 10-year yields added one basis point to 1.80% (down 22bps). Spain’s 10-year yields increased a basis point to 1.24% (down 33bps). German bund yields gained a basis point to 0.51% (up 8bps). French yields rose one basis point to 0.74% (down 7bps). The French to German 10-year bond spread was unchanged at 23 bps. U.K. 10-year gilt yields rose four bps to 1.44% (up 25bps). U.K.’s FTSE equities index advanced 1.1% (down 5.5%).

Japan’s Nikkei 225 equities index rose 1.0% (down 4.3% y-t-d). Japanese 10-year “JGB” yields were down one basis point to 0.04% (down 1bp). France’s CAC40 gained 1.1% (unchanged). The German DAX equities index rose 1.6% (down 3.7%). Spain’s IBEX 35 equities index increased 0.9% (down 2.8%). Italy’s FTSE MIB index jumped 1.7% (up 6.8%). EM equities were mixed. Brazil’s Bovespa index slipped 0.6% (up 10.4%), while Mexico’s Bolsa rose 1.8% (down 1.2%). South Korea’s Kospi index gained 1.0% (down 0.5%). India’s Sensex equities index advanced 1.7% (up 0.4%). China’s Shanghai Exchange rallied 0.9% (down 4.5%). Turkey’s Borsa Istanbul National 100 index sank 4.5% (down 5.0%). Russia’s MICEX equities was hit 4.6% (up 3.1%).

Investment-grade bond funds saw inflows of $3.346 billion, and junk bond funds posted inflows of $989 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added two bps to 4.42% (up 34bps y-o-y). Fifteen-year rates were unchanged at 3.87% (up 53bps). Five-year hybrid ARM rates slipped a basis point to 3.61% (up 43bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates down one basis point to 4.48% (up 33bps).

Federal Reserve Credit last week declined $9.6bn to $4.342 TN. Over the past year, Fed Credit contracted $92.2bn, or 2.0%. Fed Credit inflated $1.531 TN, or 54%, over the past 284 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $12.4bn last week to $3.450 TN. “Custody holdings” were up $238bn y-o-y, or 7.4%.

M2 (narrow) “money” supply added $4.5bn last week to a record $13.940 TN. “Narrow money” gained $575bn, or 4.3%, over the past year. For the week, Currency increased $0.3bn. Total Checkable Deposits fell $7.9bn, while savings Deposits rose $10.0bn. Small Time Deposits gained $3.6bn. Retail Money Funds dipped $1.5bn.

Total money market fund assets declined $5.3bn to $2.827 TN. Money Funds gained $183bn y-o-y, or 6.9%.

Total Commercial Paper gained $10.0bn to $1.058 TN. CP gained $72.9bn y-o-y, or 7.4%.

Currency Watch:

April 11 – Bloomberg (Justina Lee and Emma Dai): “Hong Kong’s dollar fell to the weak end of its permitted band for the first time since the range was imposed in 2005, a warning sign for a city where easy money has stoked a property boom and underpinned the stock market’s record rally. The spot rate reached HK$7.85 per dollar on Thursday… The Hong Kong Monetary Authority, which is obligated to defend the band, said in a statement that it stands ready to fulfill any requests from banks to support the currency.”

The U.S. dollar index slipped 0.3% to 89.80 (down 2.5% y-t-d). For the week on the upside, the New Zealand dollar increased 1.4%, the Canadian dollar 1.4%, the Mexican peso 1.4%, the Australian dollar 1.0%, the British pound 1.0%, the Norwegian krone 0.7%, the euro 0.4% and the Singapore dollar 0.3%. For the week on the downside, the Brazilian real declined 1.6%, the Swedish krona 1.0%, the Japanese yen 0.4%, the South African rand 0.3%, and the Swiss franc 0.3%. The Chinese renminbi gained 0.45% versus the dollar this week (up 3.69% y-t-d).

Commodities Watch:

April 11 – Bloomberg (Thomas Wilson): “Aluminum approached a six-year high after top exchanges said they’ll stop accepting metal from United Co. Rusal, increasing concerns about how the market will replace supplies from the Russian smelting giant hobbled by U.S. sanctions.”

The Goldman Sachs Commodities Index surged 5.5% (up 5.8% y-t-d). Spot Gold added 0.9% to $1,345 (up 3.3%). Silver gained 1.8% to $16.658 (down 2.8%). Crude jumped $5.33 to $67.39 (up 12%). Gasoline surged 5.7% (up 15%), and Natural Gas gained 1.3% (down 7%). Copper increased 0.4% (down 7%). Wheat jumped 3.6% (up 15%). Corn declined 0.6% (up 13%).

Facebook fuels broad privacy debate by tracking non-users

SAN FRANCISCO (Reuters) – Concern about Facebook Inc’s (FB.O) respect for data privacy is widening to include the information it collects about non-users, after Chief Executive Mark Zuckerberg said the world’s largest social network tracks people whether they have accounts or not.

FILE PHOTO: Facebook CEO Mark Zuckerberg testifies before a joint Senate Judiciary and Commerce Committees hearing regarding the company’s use and protection of user data, on Capitol Hill in Washington, DC, U.S., April 10, 2018. REUTERS/Aaron P. Bernstein/File Photo

Privacy concerns have swamped Facebook since it acknowledged last month that information about millions of users wrongly ended up in the hands of political consultancy Cambridge Analytica, a firm that has counted U.S. President Donald Trump’s 2016 electoral campaign among its clients.

Zuckerberg said on Wednesday under questioning by U.S. Representative Ben Luján that, for security reasons, Facebook also collects “data of people who have not signed up for Facebook.”

Lawmakers and privacy advocates immediately protested the practice, with many saying Facebook needed to develop a way for non-users to find out what the company knows about them.

“We’ve got to fix that,” Representative Luján, a Democrat, told Zuckerberg, calling for such disclosure, a move that would have unclear effects on the company’s ability to target ads. Zuckerberg did not respond. On Friday Facebook said it had no plans to build such a tool.

Critics said that Zuckerberg has not said enough about the extent and use of the data. “It’s not clear what Facebook is doing with that information,” said Chris Calabrese, vice president for policy at the Center for Democracy & Technology, a Washington advocacy group.


Facebook gets some data on non-users from people on its network, such as when a user uploads email addresses of friends. Other information comes from “cookies,” small files stored via a browser and used by Facebook and others to track people on the internet, sometimes to target them with ads.

FILE PHOTO: Facebook CEO Mark Zuckerberg arrives to testify before a Senate Judiciary and Commerce Committees joint hearing regarding the company’s use and protection of user data, on Capitol Hill in Washington, DC, U.S., April 10, 2018. REUTERS/Aaron P. Bernstein/File Photo

“This kind of data collection is fundamental to how the internet works,” Facebook said in a statement to Reuters.

Asked if people could opt out, Facebook added, “There are basic things you can do to limit the use of this information for advertising, like using browser or device settings to delete cookies. This would apply to other services beyond Facebook because, as mentioned, it is standard to how the internet works.”

Facebook often installs cookies on non-users’ browsers if they visit sites with Facebook “like” and “share” buttons, whether or not a person pushes a button. Facebook said it uses browsing data to create analytics reports, including about traffic to a site.

The company said it does not use the data to target ads, except those inviting people to join Facebook.


Advocates and lawmakers say they are singling out Facebook because of its size, rivaled outside China only by Alphabet Inc’s (GOOGL.O) Google, and because they allege Zuckerberg was not forthcoming about the extent and reasons for the tracking.

“He’s either deliberately misunderstanding some of the questions, or he’s not clear about what’s actually happening inside Facebook’s operation,” said Daniel Kahn Gillmor, a senior staff technologist at the American Civil Liberties Union.

Zuckerberg, for instance, said the collection was done for security purposes, without explaining further or saying whether it was also used for measurement or analytics, Gillmor said, adding that Facebook had a business incentive to use the non-user data to target ads.

Facebook declined to comment on why Zuckerberg referred to security only.

Gillmor said Facebook could build databases on non-users by combining web browsing history with uploaded contacts. Facebook said on Friday that it does not do so.

The ACLU is pushing U.S. lawmakers to enact broad privacy legislation including a requirement for consent prior to data collection.

The first regulatory challenge to Facebook’s practices for non-users may come next month when a new European Union law, known as the General Data Protection Regulation (GDPR), takes effect and requires notice and consent prior to data collection.

At a minimum, “Facebook is going to have to think about ways to structure their technology to give that proper notice,” said Woodrow Hartzog, a Northeastern University professor of law and computer science.

Facebook said in its statement on Friday, “Our products and services comply with applicable law and will comply with GDPR.”

The social network would be wise to recognize at least a right to know, said Michael Froomkin, a University of Miami law professor.

“If I’m not a Facebook user, I ought to have a right to know what data Facebook has about me,” Froomkin said.

Reporting by David Ingram; Editing by Peter Henderson and Richard Chang

Real Estate Retreats As Volatility Continues

Real Estate Weekly Review

real estate weekly review

Volatility has been relentless since the start of 2018. In all of 2017, the S&P 500 closed the week with a 1.5%-plus move just two times, a feat that has been accomplished in twelve out of the fifteen weeks in 2018. This week, the S&P 500 (SPY) gained 2.0% as trade talks appear to be progressing with China while negotiations look to be active with NAFTA and the TPP.

Real estate equities have been among the top-performing sectors since the start of March, but the sector took a breather this week. Moderate economic and inflation data, combined with trade and geopolitical tensions, have kept interest rates below the recent high yields in February. The 10-Year yield climbed 5 basis points to 2.83%, still well below the recent highs of 2.94%. REITs (VNQ and IYR) finished the week lower by 0.5% while homebuilders (XHB) fell 2.2%.

real estate weekly performance

(Hoya Capital Real Estate, Performance as of 4pm Friday)

In other areas of the real estate sector, mortgage REITs (REM) finished the week nearly 3% higher while international real estate (VNQI) finished 1% higher. Within the Equity Income categories, we note the performance and current income yield of the Utilities, Telecom, Consumer Staples, Financials, and Energy. Within the Fixed Income categories, we look at Short-, Medium-, and Long-Term Treasuries, as well as Investment Grade and High Yield Corporates, Municipal Bonds, and Global Bonds.

income investing

REITs in The News

Hotel REITs surged more than 3% this week after Pebblebrook (PEB) prematurely released its quarterly earnings. Results appear to be well above expectations as hotel demand remains strong. Host (HST), Park (PK), LaSalle (LHO), Sunstone (SHO), and Summit (INN) were among the best performers of the week.

Cell Tower REITs were among the worst performers after reports that Sprint (S) and T-Mobile (TMUS) are reengaging in merger talks. In previous reports, we discussed the potential impacts of the merger. In our Cell Tower report, we looked at the potential impacts of the proposed merger. American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC) were among the worst-performing sectors.

Also in focus this week was JBG Smith (JBGS) after a Bloomberg report detailing Third Avenue’s bullish thesis on the firm. JBGS is geographically concentrated in the DC and Northern Virginia area, which is among the finalists for Amazon’s (AMZN) H2Q. Third Avenue believes that the share price could rise from roughly $34 to above $40 per share if the region is chosen by Amazon.

Longer-Term Performance

REITs are now lower by 10% YTD, underperforming the 1% dip in the S&P 500. Homebuilders are off by nearly 11%. The 10-Year yield has climbed 42 basis points since the start of the year.

REITs YTD Performance

REITs ended 2017 with a total return of roughly 5%, lower than its 20-year average annual return of 12%. Going forward, absent continued cap-rate compression, it is reasonable to expect REITs to return an average of 6-8% per year with an annual standard deviation averaging 5-15%. This risk/return profile is roughly in line with large-cap US equities.

REIT total returns

Real Estate Economic Data

real estate economic data

(Hoya Capital Real Estate, HousingWire)

Inflation Data Ticks Higher

Since the passage of tax reform in December, inflation has become a central focus for investors. There is mounting concern that we may be entering a new “economic regime” of faster growth and higher inflation, a departure from the “Goldilocks” environment of moderate growth and low inflation that was seen as favorable to asset valuations. The combination of lower tax rates and higher government spending will effectively serve as a fiscal stimulus that comes at a time when labor markets are already “tight” by many traditional metrics. Economic models would suggest that this policy course generally will result in upward inflationary pressure and higher wages. Higher inflation, in turn, would push interest rates higher and put downward pressure on bonds and income-oriented equity sectors including real estate.

For that reason, investors are now keenly focused on inflation data. February inflation data was broadly in line with expectations, but the combination of higher energy prices and base-rate effects in the data have pushed most inflation metrics to the highest levels since 2016. Core CPI rose above the 2% threshold for the first time since late 2016, rising 2.12% YoY. Core PPI rose to 2.69% while Core PCE (the Fed’s “preferred” inflationary gauge) came in at 1.60% last week. Inflation expectations, as measured by the 5-Year, 5-Year Forward Inflation Expectation rate, peaked on February 2 at 2.35% and has retreated back down to 2.16%.

inflation CPI

Shelter accounts for 34% of the CPI weight, and since 2013, it has been significantly above the overall inflation rate. From 2015 through late 2016, shelter inflation was the only component keeping Core CPI out of deflationary territory. Shelter inflation has trended down in recent months, a trend that we expect to continue, but bounced higher in March because of a jump in hotel prices.

CPI ex shelter

Our models suggest that CPI data tends to lag the current market conditions by 12-24 months, a function of the calculation methodology of the data series. As highlighted by the Zillow ZRI data above, private rent inflation data shows that national market rents are rising at a roughly 2% rate, far short of the 3.7% rate in the CPI data. This would suggest that as shelter inflation reverts to current conditions, it will serve as a significant drag on the overall inflation rate.

CPI rent

Surging Oil Prices Adding To Inflationary Pressure

Ultimately, we believe that the path of inflation will largely depend on two critical variables: the price of energy and the trade-weighted value of the US dollar. Even though Core CPI excludes energy, the price of gasoline and utilities typically flow through into Core components. Oil prices are higher by 27% YoY while gasoline prices are up 12%, both of which will contribute to upward inflationary pressure. Natural gas prices, however, have decreased 5% over last year.

oil inflation

So long as REITs are being driven by interest rate movement, commodity prices become an important factor determining weekly price movements in the real estate sectors. REIT investors should be hoping for a moderation in oil and gasoline prices to the “Goldilocks” environment of solid growth and low inflationary pressure.

Bottom Line

On another volatile week in markets, US stocks rallied as trade tensions eased. Trade talks appear to be progressing with China after President Xi projected a conciliatory tone on negotiations. Real estate equities underperformed this week as rates ticked higher, but remain one of the top-performing sectors since the start of March. REITs fell 0.5% while homebuilders dipped 2.5%. Hotel REITs surged more than 3% this week after Pebblebrook prematurely released its quarterly earnings. Results appear to be well above expectations as hotel demand remains strong.

This week, we published Hotel Industry Booming, But REITs Didn’t Get the Memo. Defying the headwinds of supply growth, 2017 was a stellar year for the hotel industry. Revenue per available room rose 3% and annual average occupancy reached a new record high. Hotel ownership, however, remains a tough business. While hotel operators are up 40% over the past year, hotel REITs are flat. As supply growth cools, REITs may finally join the rally. Supply growth continues to hang over the sector and is most acute in the business travel segments and urban markets. REITs hold a disproportionate amount of hotels in this segment.

We also published Shopping Centers: Sell Groceries Or You’re In Trouble. Shopping Center REITs have had a rough couple of years. It’s certainly not the “retail apocalypse,” but there’s no doubt that e-commerce remains an ongoing threat to at-risk retail categories. A sharp bifurcation has emerged within the shopping center sector. High-quality grocery-anchored REITs appear poised for continued growth while lower-quality power center REITs will continue to struggle.

So far, we have updated our REIT Rankings on the Shopping Center, Hotel, Office, Healthcare, Industrial, Single Family Rental, Cell Tower, Apartment, Net Lease, Data Center, Mall, Manufactured Housing, Student Housing, and Storage sectors. We will continue our updates over the next several weeks.

Please add your comments if you have additional insight or opinions. We encourage readers to follow our Seeking Alpha page (click “Follow” at the top) to continue to stay up to date on our REIT rankings, weekly recaps, and analysis on the real estate and income sectors.


I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All of our research is for educational purposes only, always provided free of charge exclusively on Seeking Alpha. Recommendations and commentary are purely theoretical and not intended as investment advice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. For investment advice, consult your financial advisor.

U.S. Stock Market: Happy Days Are Here Again? Not So Fast…

By Pater Tenebrarum

A “Typical” Correction? A Narrative Fail May Be in Store

Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will certainly point those out when we see them. Anyway, something else is evidently happening. Here is a chart of the SPX that shows the important trend line which was so far successfully defended:

According to the “keep it simple” chart, this was just a run-of-the-mill correction, very similar to every other correction seen since the 2009 low. But is that really the case?

The rebound from the trend line is accompanied by an overarching narrative. We are not referring to the news items that are supposedly responsible for jerking the market this way and that on a day-to-day basis (these consist mainly of Trump tweets on trade and military interventions, which he seems to use as part of his negotiating strategy, and the responses of his opponents to the moves he makes in this Twitter war).

These explanations for market moves never make a lick of sense anyway: Donald Trump didn’t just become “unpredictable” this year. The Middle East didn’t turn into a proxy war battlefield brimming with betrayals and disinformation this week. The threat that trade barriers might be erected didn’t just fall unannounced from the sky either. It was a major part of Trump’s policies, frequently stressed during his campaign, reflecting views he has demonstrably held since at least the 1980s, if not longer.

We are actually referring to something else, namely the upcoming earnings season. It is widely held that it will be business as usual, which is to say that nearly every important big cap index constituent will reliably manage to “beat expectations”, which will be followed by the usual gap-up moves into the blue yonder the day after. Hence it will be off to the races for the cap-weighted indexes again. Mind, superficially this isn’t even an unreasonable notion, given that it has worked umpteen times in recent years (i.e., basically every quarter – that’s how one can calculate the precise number represented by the variable “umpteen”).

There may be a problem though this time – in order for expectations to be beat, one first has to have sufficiently low expectations. That becomes increasingly difficult as valuations expand, since the expansion in valuations by itself indicates that expectations are ratcheted up. There is an additional new wrinkle this time around that was apparently introduced by the tax cut. Wall Street earnings estimates have been wildly over-optimistic year after year, but this has now become insanely over-optimistic. Here is a Bloomberg chart illustrating the jump in 2018 estimates. Bloomberg’s chart keepers noticed that analysts upped their estimates sharply just before the beginning of the last bear market:

Wall Street earnings estimates and the SPX – the annotations above are by Bloomberg. We actually wanted to point to a specific aspect of the chart: namely the sheer size of the most recent jump in estimates, which is probably the biggest surge in earnings estimates ever.

We are actually not saying that just because something happened last time, it should happen again this time. We are mainly focused on the size of the jump in estimates this year, which is unprecedented as far as we know. In other words, this is an excellent set-up for disappointment, which may well end up derailing the above-mentioned narrative.

Will it happen this quarter already? We cannot be certain, but we certainly do know that the divergent DJIA-NDX peaks in January to March and the accompanying record overbought and bullish sentiment readings would make suitable material for a long-term market peak that will not be seen again for many years.

GBEB Death Watch Continues – Meet the Fear-Stricken Grizzlies

What about the various indicators we focus on? The SPX NH-NL percentage index currently stands at +2, which is no longer a “sell”, but not really an all clear either – at best we would call it neutral. The important thing in this context remains that it never even came close to getting oversold, which it did in every other major correction (particularly in 2011, 2015 and early 2016, which are the only comparable corrections since the 2009 low in terms of speed and size). It is one of the things that makes us think we should not believe in the most recent turnaround just yet.

SPX NH-NL percentage index – it never became oversold

The relative strength of Russell 2000 (a result of intra-market rotation) currently looks medium term market positive, but we are focused on its directional changes in the short term. It gave a short-term positive signal at the end of last week and again on Monday, when the market closed right on the trend line discussed above, but has just issued another short-term negative signal again. It continues to work well as a short-term indicator (positive when it is up on a down day, negative when it is down on an up day).

What continues to strike us as astonishing in light of the sharp increase in day-to-day volatility is the nonchalance of option traders and by now almost comical fear of bears that they will get mauled again. The fifteen remaining bears (we probably know most of them personally) seem to be the only group of traders in this market that is genuinely worried. Mind, we are not talking about people who say they are bearish. We are talking about people who are actually betting on a decline in prices with their money.

Here is an update of the CBOE equity put-call volume ratio. All previous corrections since 2009 – both major and minor ones – generated a modicum of fear, a scrambling for hedges and some downside speculation. In 2018 option traders behaved as though absolutely nothing was happening:

In early February, the ratio came close to “fear territory”, but fell again before actually getting there.

While we see the action in options more as a sign of bullish overconfidence, Rydex asset levels are mainly indicative of bearish fear and complacency. Amazingly, Rydex bear assets simply failed to get off the mat even in the slightest in the recent correction – a sign that many holders used the minor bounce in bearish funds as an opportunity to get out of their positions. They have never been comparably demoralized in the entire history of these funds (note: despite the small amount of AUM, this fund family continues to provide a representative snapshot of overall market sentiment).

The pure Rydex bull-bear ratio remaining at a level of over 26 after the recent shakeout is best adjectivized with “insane”, but we find the level of bear assets even more impressive as signals go. It is not even a hair above the all-time low of late January. Clearly, bears are the only group of traders that is actually scared. We are not sure what to compare this to, it simply has never happened to this extent in comparable situations. If one looks at the 2006-2007 time period, back then they massively reduced their exposure at just the wrong moment after first increasing it at the wrong moment in 2002-2003. When the crash finally arrived in 2008, they had already cut their exposure by more than 60%, so their recent reluctance to push their bets should actually worry bulls greatly.

SentimenTrader publishes a variant of the Rydex ratio that focuses exclusively on SPX and NDX funds. It shows bull fund allocations as a percentage of total bull and bear fund allocations. It is not just in “excessive optimism” territory, but it has in the meantime crossed over into the Negative Zone and is reportedly searching for the recently disappeared Mr. Fantastic. Or if you’re more of a Batman person, it is now in Arkham Asylum to prove to the Joker that there are things out there in this world that are actually crazier than he is.

After initially responding to the sell-off, this SPX-NDX focused Rydex ratio is right back near its all-time high.

Bears in 2018: they’re not what they used to be.

SMI Plunge

Readers are probably aware of the so-called “smart money” index. The theory behind the index holds that the “dumb money” primarily trades early in the trading day, while the “smart money” makes decisions close to the end of the trading day. Rallies early in the day (first half hour) are accordingly given a negative value, and so are late day (last half hour) sell-offs. The opposite actions are given positive values, and at the end of each trading day, they are summed up and the result is charted. Here is what the chart looks like at the moment:

The SMI displays well-developed counter-cyclical behavior. Recently the rise from the August 2015 mini-crash low to the US presidential election and the subsequent – lately accelerating – collapse were quite noteworthy.

We are not really sure whether the theory behind the SMI is really sound, but we cannot deny its pronounced counter-cyclical trends, which suggest that the “buy low-sell high” faction really does dominate trading late in the day. We would note that there has never been a comparably sharp and swift collapse in the SMI than the one that started in late 2017, in parallel with the final blow-off move in the market. It has not reversed on account of the downturn after January 26, which contrasts with what happened in August 2015.


It looks as though it’s not the bears who should be scared.

Charts by: StockCharts, Bloomberg, SentimenTrader

General Electric: The Recent Report (Rumor) Was Music To My Ears

It was recently reported that General Electric’s (NYSE:GE) management team is now considering several options to dispose of major business units, which could include spin-offs and/or “hybrid” deals with other companies. There are also rumors that the Transportation division could soon be spun off into a separately traded public company. All of this news is music to my ears (more on this below), and the only question that I really have now is, “What took so long?” Since the company’s 2018 Investor Outlook meeting, GE stock has been in a free fall and has significantly underperformed the broader market.


GE data by YCharts

I believe that most (if not all) of the downward pressure for the stock was a direct result of the uncertainty related to what this once-great industrial conglomerate may look like in the years ahead, which is the main reason why I am so encouraged about the recent news – remember, where there’s smoke there’s fire. In my mind, the company’s path forward is slowly starting to become a little clearer.

Does this make GE shares a buy? No, not necessarily, but it does somewhat change the narrative – that is, major asset sales/spins should be considered positive developments. Let’s take a moment to consider where this company has come from before we jump into where it is (may be) heading.

Where Did “We” Come From? The Same Old Story

Looking back, General Electric’s downfall was actually well-telegraphed and should have been easy to avoid (this is me kicking myself). GE was known as the master of managing its earnings, as shown by the fact that the company beat estimates in 7 out of 8 quarters from late 2015 to mid-2017.

Source: Fidelity

The writing was, however, on the wall, of course, if you were willing to factor in the company’s poor organic revenue growth (or lack thereof), falling order numbers, and poor cash flow metrics. Now, all of a sudden, the skeletons have started to fall out of the closet, and the company’s operating results fell off a cliff. Lately, this once-market darling cannot seem to get out of its own way.

Additionally, the timing for GE’s real tumble – the stock price falling from the $30 per share range to the mid-teens – just so happened to coincide with the departure of Mr. Jeff Immelt, which has caused many pundits to point their fingers at the previous CEO and his minions. In my opinion, it is somewhat telling that GE only recently discovered the insurance issues that resulted in multiple billion dollar charges and that the company’s aggressive accounting of servicing contracts in the Power unit only recently came to light. What does all of this tell us? I believe that it tells us that GE’s accounting was a major issue under Mr. Immelt. Additionally, I believe that these types of concerns/issues had to be flushed out before the company could really move forward, even though many experts point back to the company’s aggressive accounting under Mr. Jack Welch as the starting point for the accounting trickery.

As a long-term shareholder, I say all of this simply to say that I am encouraged that the bad news is finally starting to come out and that Mr. John Flannery seems ready to usher in a new era. GE is leaving behind a period of time that saw the previous management team make plenty of capital allocation blunders, which lead to them creating a hodgepodge of a conglomerate that appears to be too complex to manage (of course, only in opinion).

Where Are “We” Going? The Story Is Changing

A few months ago, I wrote a piece and described to the Seeking Alpha community what I thought would be the ideal path for GE to take. I have long believed that GE should make major structural changes to its business in a direct attempt to streamline operations and unlock value, and I identified the following “dream” transactions in the article linked above:

  • Sell (or spin off) Transportation and Lighting.
  • Spin off Baker Hughes, a GE Company (NYSE:BHGE).
  • Spin off Healthcare – it pains me to say it, but I believe that this business is more valuable as a standalone company, which is also the reason why I want the unit to be spun off instead of sold.

With the most recent rumors that GE may soon be announcing a broader restructuring plan, I think that Mr. Flannery and team are finally starting to realize that the market will not be happy with a slow recovery that includes only $20 billion in assets. Moreover, I would not discount the pressure that Mr. Flannery and the board are currently under to right the ship, or at least come up with a more impactful restructuring plan.

In my opinion, I do anticipate that GE will break itself up at some point in the next five years, but I see the company doing it in a more orderly fashion. The company has already announced several small asset sales, with the ~$1 billion sale of its healthcare IT business to Veritas Capital being an example, which are indeed steps in the right direction. And I still expect for Baker Hughes, a GE Company, to be a standalone entity within the next 36-48 months and for other smaller transactions to occur over the next 12-18 months, but in my opinion, the Healthcare (or other significant business unit) sale/spin-off will likely not come in the next few years.

So, you may be asking where I see this company heading. Personally, I believe that the recent rumors are pointing to an industrial conglomerate that will look very different by 2020, if not a lot sooner.

What Do I Need to Hear In Late April 2018

Where do I begin? The SEC investigations? The deteriorating Power division results? The growing debt balance? The poor cash flow prospects? Yes to all of the above.

I believe that the SEC investigations (along with other things) will be a major overhang for the stock until the results are released and the fines are imposed. As such, I believe that the stock will not fully begin to recover until these reviews are wrapped up.

On the other hand, shareholders still need to evaluate the company’s operating results and determine if the stock is actually worth holding onto. To this point, GE is expected to report Q1 2018 results on April 20, 2018, and analysts are calling for adjusted EPS of $0.12 on revenue of $27.3 billion. For comparison purposes, the company reported adjusted EPS of $0.21 on revenue of $27.7 billion in the same period of the prior year.

The financial community has already started to bake in expectations for weak operating results from GE’s Power division, so I do not anticipate for the deteriorating fundamentals for this specific operating segment to be a real sticking point for most investors. Yes, management definitely needs to rightsize Power’s expense base and convince the market that the worst is close to being over, but in my opinion, investors should fully expect several quarters of lackluster results from this unit.

For the upcoming quarter, I am most interested in hearing about the company’s capital allocation plans for 2018, which includes what management now considers “core” businesses. During GE’s Annual Outlook meeting, Mr. Flannery provided the following slide related to the company’s capital allocation plans for the current year.

Source: Investor Outlook Meeting

Two words come to mind: things change. As I mentioned earlier, I believe that the company will soon announce a broad-based breakup (or reorganization), which will obviously have an impact on its 2018 capital allocation plans. As of today, there have been several recent developments that will have an impact on GE’s capital allocation plans:

  • The dividend cut will save the company ~$4 billion in 2018.
  • The pension deficit is shrinking, but the company will still need to focus on reducing the asset-liability gap (pre-funding has already been announced).
  • Asset disposals are already having an impact, and this is expected to continue for the foreseeable future.

During the Q1 2018 conference call, I am not expecting management to provide a detailed plan for how 2018/2019 is going to play out for GE, but I do want clarity on how this company plans to approach allocating capital over the next few quarters. At the end of the day, I want to hear (and believe) that this company is allocating its capital in a manner that will contribute to GE eventually becoming a less complex, more streamlined industrial conglomerate. Contending with the short-term earnings pressure now and possibly reducing the dividend again, which will remove some of the uncertainty, may actually be great long-term decisions for this company.

Valuation – The Unsolved Mystery

Let me start by saying that, in my opinion, it is (almost) impossible to truly value GE at this point in time because there are simply too many moving pieces to consider. No one outside of management knows exactly what assets will be disposed of, so it is a little too premature to come up with a valuation for the “new look” GE or to put a dollar figure to the assets that may soon be sold/spun off.

Therefore, looking strictly at forward earnings estimates, which may actually turn out to be too high after factoring in the recent developments, GE shares are trading at 13x 2018E earnings.


GE PE Ratio (Forward) data by YCharts

Is GE attractively valued? I believe that it depends on your time horizon and how much value you place on the struggling (O&G, Power, GE Cap) and promising (Aviation, Healthcare, and Renewables) businesses, but in my opinion, a lot of the bad news is starting to be priced into the stock. However, I think the risk is still currently to the downside.

Bottom Line

The “breakup” rumors are music to my ears, because I believe that is the only way that GE will be able to move beyond its past blunders. The company’s earnings may be negatively impact by the restructuring charges, but if you are willing (and able) to look out a few years, asset sales/spin offs have the potential to create value. Not only will GE warrant a better valuation when the company is easier to understand, but the soon-to-be public stubs may also actually garner a lot of attention in today’s business-friendly environment. To this point, I believe that GE, in its current state, is bringing down the value of most of the businesses that are under its umbrella.

I do not expect much from GE when it reports Q1 2018 operating results, but the company’s capital allocation plans will be key. If Mr. Flannery is going to be successful as CEO of GE, he will have to navigate this company through the noise and make the right capital allocation decisions. Easier said than done. Warren Buffett may not save GE this time around, but it would be nice to see Berkshire (BRK.A, BRK.B) turn out to be one of the companies that enter into one of the hybrid deals that are being floated.

I plan to stay long the stock, but prospective investors would be wise to wait for a pullback before starting a position in GE.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long GE, HON, UTX, BRK.B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Did Kinder Morgan Blink?

The Canadian Trans Mountain Pipeline Expansion project has been put on hold. That was the gleeful projection of the opponents of this project run by the Canadian subsidiary of Kinder Morgan (KMI). Investors hope that this is an effective bargaining ploy that results in a successful conclusion.

Source: Kinder Morgan Investor Presentation At Barclay’s Investment Grade Energy and Pipeline Conference February 28, 2018

The TMP (Trans Mountain Pipeline Expansion Project) is a project undertaken by the Canadian subsidiary. That subsidiary, as shown above is a small part of the Kinder Morgan company. Nonetheless, the completion of TMP would be helpful to company earnings.

About $1 billion or so would be written off should the project be cancelled. This is a non-cash charge that represents costs spent over several years past. Once this decision is made, then the effects of the cancellation are over and done with. Kinder Morgan is large enough that this write-off is not all that damaging. Any financial repairs needed should be accomplished relatively quickly. Then Mr. Market looks forward to the future with a reconstituted backlog.

Up until the current time, the company has been planning and obtaining key permits for this pipeline expansion. The Alberta province would particularly benefit from this pipeline. Alberta has a substantial oil and gas industry that has endorsed this project. But the project is approaching a stage where the permit process should complete and construction should begin.

Management noted that the opposition of the British Columbia government is the cause of this action in the conference call. This government has called for new actions to oppose this pipeline. These proposed actions raise the risk of project completion as well as potential cost increases, and project delays. Kinder Morgan management does not feel comfortable committing more shareholder dollars to the project under the current conditions.

Management noted that a May 31 deadline has been established to finally determine whether the project should be terminated. This is probably good negotiating tactics. Management could use some allies to help resolve the issues facing the company. Canada definitely needs more pipelines. How this is resolved could determine the willingness of investors to build future pipelines in the country. Kinder Morgan management clearly needs clarity and to some extent project certainty. Now it is up to Canada to provide what is needed to make this project viable in the current Canadian political atmosphere.

Prime Minister Trudeau senses the urgency of the situation. He canceled another trip to meet with the prime ministers of the two primary provinces to try to agree to a solution. As Prime Minister Trudeau noted, he would not agree to a project that wrecks prime British Columbia property and scenery. The heart of the dispute is the definition of a reasonable solution. Many times reasonable needs to be defined as profitably achievable with proper safeguards in place. Absolutely 100% certain with no possibility for error cannot be the reasonable solution many times. That may disappoint activists but it is a necessary, if disappointing facts. Many of the most spectacular disasters and spills would not have happened if the regulations in place were followed. Others could have been prevented by reasonable and timely updates. But nothing is ever perfect.

Another very important point concerns Kinder Morgan business strategy. Management cannot allow its projects to be held hostage to political whims. Shareholders expect their money to be spent as judiciously as possible. British Columbia government has clearly raised the stakes to the point where spending more money was not wise. Some activity will continue which is a good faith show on the part of the company. But the amount spent so far on the TMP project will not materially increase without the necessary clarity and permits. The Canadian federal government has clearly supported the project. Now that support needs to translate into action.

Source: Kinder Morgan Investor Presentation At Barclay’s Investment Grade Energy and Pipeline Conference February 28, 2018

Kinder Morgan clearly has other growth projects. If that KM Canada amount is not spent on the TMP, then other projects will take the place of that project both in Canada and elsewhere. Kinder Morgan has noted that they have already (through Kinder Morgan Canada) invested in British Columbia. If TMP is not the right project, then other projects may be acceptable to the British Columbia government.

In the United States, intrastate projects often begin and end in far less time. Management always has proposed projects not in the backlog that can be added any time funds become available if they pass profitability guidelines. Kinder Morgan has access to most major plays in the United States either directly or with a joint venture partner.

Source: Kinder Morgan Investor Presentation At Barclay’s Investment Grade Energy and Pipeline Conference February 28, 2018

Kinder Morgan has decent debt ratings and an adequate credit line. Good solid goals are in place. The TMP project in Canada has stolen the company headlines for some time. But this company will thrive and grow regardless of the outcome of the project. The Canadian subsidiary will also prove to be a viable company without or with the TMP expansion project.

In the meantime, the suspension of non-essential spending was a good move on the part of the company to solidify the prospects of the project. Management needs reasonable certainty to go forward with the project. At the same time British Columbia needs to set reasonable and achievable conditions to ensure safety (or allay safety concerns). Canada needs to figure out how badly the country needs this project and what the federal government is both willing and able to do to aid the completion of the project.

In the meantime, investors should expect a lot of headlines. Those headlines will be followed by a lot of finger pointing. Politics can be very messy. But careful planning should ensure most needs are met while making a reasonable profit. This was not a blink so much as careful planning at its best. Now let us see if reasonable thoughtfulness and “big picture” thinking will prevail.

In the meantime, Kinder Morgan has enough excellent prospects that this stock should more than double over the next 5 years from the current price level. As shown above, debt ratios have clearly declined. The distribution now appears to be on the recovery track. Sooner or later the market will discover that Kinder Morgan is growing again. An occasional accretive acquisition would also fit the history of this company. At these levels, the stock appears to be a clear bargain.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

Disclosure: I am/we are long KMI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Instant Pot Cookbook Review: America's Test Kitchen's Multicooker Perfection Is Sure to Be an Instant Hit

A few years back, in that now-forgotten time before Instant Pots were a thing, I reviewed an electric pressure cooker and struggled mightily with it. It was supposed to be a safe, fast way to speed up cooking and promised to make slow-cooker style dinners appear in a heartbeat. Unfortunately, stovetop pressure cooker cookbooks didn’t really work for their slightly-less-powerful electric counterparts, and this one came with a mini-cookbook with recipes that tended to flop.

Flash forward to last fall when Instant Pot Mania was in full swing and I put the company’s Ultra cooker (a souped up version of their classic Duo) at the top of my Christmas list. Once I popped it out of the box, though, I quickly realized that sub-par manuals and not-so-great included recipes are par for the course.

Multicooker Perfection: Cook It Fast or Cook It Slow—You Decide by America’s Test Kitchen is out on April 17.

America’s Test Kitchen

Turns out that Instant Pot is notorious for this, so much so that it’s rumored to be reworking its manuals. The Instant Pot Community group on Facebook is too much of a jungle for beginners, and while my friend Lylah secured an invitation for me to Facebook’s secret Instant Pot for Indian Cooking group, it was clearly over my head.

While there is a mushrooming number of electric pressure cooker cookbooks out there (many with those awful, mansplainy covers), it’s hard to know which one will allow you to kick the tires and give you the foundation you need to bring this new tool into heavy rotation in your kitchen while making tested, tasty recipes.

Yet here we are with our own electric pressure cookers, or, more precisely, “multicookers” (they also do things like sauté and slow cook), and our excitement to make everything we can in them, and I was still missing the manual I needed.

All that to say that I was excited to see America’s Test Kitchen had a new book in the works.

I am a full-on cookbook devotee and faithful to my favorites: Simon Hopkinson’s Roast Chicken and Other Stories, Cook’s Illustrated’s Best Recipe, and almost any cookbook with Naomi Duguid’s or Julia Child’s name on it. If I were looking for common threads running between them, they would be trusted palates and fail-proof recipes. They may be simple or complicated, but follow them to the letter and you’re guaranteed success.

My short-term goals with the America’s Test Kitchen book were to find similar success making chicken stock, cooking a pot roast at warp speed, whipping up risotto for lunch, and understanding how to quick-cook dried chickpeas, beans, and lentils. From there, I hoped I’d have the hang of it well enough to wing it and pressure cook something adapted from Hugh Acheson’s The Chef and The Slow Cooker.

No Pressure

America’s Test Kitchen’s new Multicooker Perfection spends the first 15 pages of the book both educating users and setting expectations. It should also be pointed out straight off that the Instant Pot Duo is not ATK’s favorite. The fact that it’s “recommended with reservations” is a mighty blow to the hallowed brand. Instead, among the six multicookers reviewed, it’s in fourth place, behind two Fagor models and one by GoWISE USA.

One of the recipes in Multicooker Perfection is for rustic Italian braised short ribs.

America’s Test Kitchen

Everybody breathe. ATK’s big beef with the Duo is that it slow-cooks poorly. In short, the testers found that Instant Pot’s slow cooking temperature is so low that slow cooking becomes extra-slow cooking. In fact, ATK both customizes recipes for the Duo or it just says, “Do not use Instant Pot to slow cook this recipe.” Ouch!

It’s not the main reason you buy a pressure cooker, but slow cooking with a multicooker can be useful as it’s occasionally more practical to let something bubble away all day than to have to be around at the end of a short cook to let off the pressure.

Knowing this, I read all of those 15 first pages in Multicooker, picked out a few tasty-sounding recipes and started making tortilla soup. I sautéed tomatoes, onions, and garlic, added broth, whole chicken thighs, sealed the lid and set the pressure cooker function for five minutes.

Wait, what? Five minutes from onions to almost-done soup? Holy cow! All is forgiven!

It’s not quite that quick—multicooker users know that the countdown doesn’t begin until the unit is pressurized, which can be a couple minutes for meals without much liquid in there, or a while longer if you’re waiting for six cups of broth to heat up enough to build the pressure.

No matter. After those five minutes were up, I let the pressure out, shredded the thigh meat and put it back in the pot, sprinkling Cotija cheese and cilantro over my bowl, then adding a dollop of sour cream and a squeeze of lime. Along with some toasted tortillas, it made for a fantastic dinner.

I switched gears for the next meal, this time opting to understand the fuss around pressure cooker mac and cheese. The key here is that it’s not a quantum leap forward in macaroni technology, but it’s a dinner that allows you to dump uncooked pasta in cold water with some mustard powder and cayenne and hit start. After five minutes under pressure you stir in evaporated milk, cheddar, and Monterey Jack cheese, make sure the pasta is al dente, and Bob’s your uncle.

The more I cooked, the more I learned. Two keys I figured out were to get all the prep done ahead of time, and read the recipe all the way through before you do anything. Yes, you should do both of these anyway, but they’re more urgent with the pressure cooker. Things often move quickly from one step to the next in pressure cooker recipes, so it was particularly necessary to have everything ready for something like the Thai-braised eggplant, where you sauté several ingredients then add 1/2 cup of broth, which halts the browning and provides the liquid to make the steam and build pressure. If that half-cup isn’t measured out, you could end up with a scorching problem.

Cooking through these recipes also taught me what to watch out for and the limitations of multicookers. I learned to make extra sure to scrape all of the flavorful fond of of the bottom of the pot after sautéing or browning food, especially if it was a dish with a thicker sauce, otherwise I’d get an unwanted “burn” message on the Ultra’s screen during the pressure cycle.

Speaking of searing, temper your expectations. My Ultra, which has the same searing capability as the Duo, left me wanting more. It could capably sauté onions but browning something like chicken legs was slow enough that I asked the manufacturer to ship me another Ultra just to make sure it wasn’t just mine. Unfortunately, it wasn’t.

This isn’t just an Instant Pot problem. America’s Test Kitchen points out that some cookers have low, medium, and high sauté functions, while others have a “brown” option, and that you should use the hottest one. Regardless, an ATK spokesperson told me that “once you take that into account, the models all perform about the same.”

Now I know two things: it’s not my fault—yay!—and for a nice sear without a lot of waiting, I’ll use a skillet on my stove and transfer the browned food to the pot when it’s done.

I plowed on, picking up the pace, gaining confidence, and even riffing a bit. I made a pot roast from ATK’s 2013 Pressure Cooker Perfection, which hit the market before stovetop pressure cookers had been overtaken by the electric models. Since stovetop pressure cookers can build up a bit more pressure, they cook faster, so I cross-referenced what I was doing with Multicooker Perfection and it worked out very well. I also made Multicooker‘s chicken broth recipe, a classic of the pressure cooker genre, as it’s fast, flavorful and done in an hour. One very nice touch? After browning chicken wings and onions, the 12 cups of water that the recipe called for brought it right up to my six-quart pot’s fill line for pressure cooking.

Risotto was next, another pressure cooker classic since there’s no need for constant stirring. In fact, it goes so quickly that you can have the whole yummy shebang on the table in half an hour.

Instant Hit

My only quibble with Pressure Cooker Perfection is the curious omission of short sections for rice and grains, beans, and cuts of meat or vegetables cooked on their own. These were right up front in Pressure Cooker Perfection, and having that reference is a invaluable, especially for weeknight dinners.

Still, I’d run through enough recipes in the book that I felt comfortable enough to start spreading my wings. I had other recipes and cookbooks I wanted to explore, like the tamarind baby back ribs in Melissa Clark’s Dinner in an Instant. I also wanted to cross reference recipes in The Chef and The Slow Cooker, using the timing for similar food done in Multicooker.

You might find another book that does a great job getting you up to speed. For me, after making a host of recipes in ATK’s new book, the wilds of pressure cooking didn’t seem so wild anymore. I’d built the foundation I needed and was ready for more. So ready, in fact, that I logged into the secret Instant Pot for Indian Cooking group and looked up a recipe for dal makhani.

Food writer Joe Ray (@joe_diner) is a Lowell Thomas Travel Journalist of The Year, a restaurant critic, and author of “Sea and Smoke” with chef Blaine Wetzel.

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Luminar's New Lidar Could Dominate the Self-Driving Car Market

Self-driving cars are nearly ready for primetime, and so are the laser sensors that help them see the world. Lidar, which builds a 3-D map of a car’s surroundings by firing millions of laser points a second and measuring how long they take to bounce back, has been in development since 2005, when a guy named Dave Hall made one for the Darpa Grand Challenge, an autonomous vehicle contest. In the decade-plus since then, if you wanted a lidar for your self-driving car, Velodyne was your only choice.

Yet Velodyne’s one-time monopoly has eroded in recent years, as dozens of lidar startups came to life, and robocar makers found their own way. Google’s sister company Waymo put years and millions of dollars into developing a proprietary system. General Motors bought a lidar startup called Strobe. Argo AI, which is making a robo-driving system for Ford, acquired one called Princeton Lightwave.

The latest challenger is Luminar, the Silicon Valley-based startup that already has a deal with Toyota, plus three more manufacturers it declines to name. Today, Luminar is announcing the introduction of its newest lidar unit, with a 120-degree field of view (that’s enough to see what’s ahead of the car, but you’d need a couple to get a 360-degree view). And after a first production run of just 100 units, it’s ready to start cranking them out by the thousand—more than enough to meet today’s demand. And maybe, enough to make self-driving cars cheaper for everybody.

“By the end of this year, we’ll have enough capacity to equip pretty much every autonomous test and development vehicle on the road, globally,” says CEO Austin Russell, who dropped out of Stanford in 2012 when he was 17 years old to make Luminar his full-time gig. “This is no longer being built by optics PhDs in a handcrafted process. This is a proper automotive serial product.”

In its 136,000 square foot facility in Orlando (an optics industry hub), the company has dropped the build time for a single unit from about a day, to eight minutes. In the past year, it has doubled its staff, to about 350. It hired Motorola product guru Jason Wojack to head its hardware team. Alejandro Garcia came over from major auto industry supplier Harman to run manufacturing.

Luminar is playing catch up here. Last year, Velodyne opened a “megafactory” to ramp up production and built 10,000 laser sensors. President Marta Hall says it could build a million a year if it wanted to. But the ability to build lots of lidars isn’t enough to win here.

Lidar is a fantastic sensor—it’s more precise than radar and works in more conditions than cameras do—but it’s way too expensive. Velodyne’s top shelf unit, which sees in 360 degrees with a 300-meter range, costs about $75,000 a piece. Buying in bulk will drop that cost, but that’s still a hard price tag to bear, even on a fleet vehicle that can amortize costs over years of service.

At its Orlando production facility, Luminar can now make a lidar unit in about eight minutes—it used to take a day.


Luminar made the cost question harder by making its lidar’s receiver (the that acts like your eye’s retina) out of indium gallium arsenide (InGaAs) instead of silicon. Why is this important? Well, to make your lidar “see” farther, you have to fire more powerful pulses of light. They have to be powerful so they have the strength to hit faraway objects and make it all the way back. Most lidars use lasers at the 905 nanometer wavelength. That’s invisible to humans. But if it hits an actual eyeball, like yours, with enough power, it can damage the retina. If you want to fire more powerful pulses (and have your lidar “see” farther) without blinding actual people, you can use the 1550 nanometer wavelength, which is further into the infrared part of the spectrum, and thus can’t penetrate a human eyeball.

Which brings us back to silicon. Receivers made of silicon, which is cheap, can’t detect light at the 1550 wavelength. InGaAs can, but it’s far more expensive. So the industry standard is to use silicon, run at 905 nanometers, and accept you just can’t send your lasers all that far.

But Russell insisted on the extra power, which meant 1550 nanometers, which meant using a receiver made of InGaAs. As a result, he can fire pulses 40 times more powerful than what his competitors shoot, so his lidar can see objects extremely dark objects—like, the kind that can absorb 95 percent of light—even from 250 meters away. He says no one’s lidar can see so well at such distance.

But seriously, InGaAs, as the French say, coute la peus des fesses*. A receiver array about the size of a big potato chip can cost tens of thousands of dollars, Russell says. So Luminar built its own. The result, now in its seventh iteration, is about the size of a strawberry seed. (The entire unit, including the laser and accompanying electronics, is about half a foot square and three inches deep.) That includes the chip that calculates, down to the second, how long the photon has been out in the world. It costs a piddling $3, obliterating Luminar’s cost concerns while allowing for that extra range and resolution. Russell wouldn’t reveal an exact price for the lidar as a whole, but says his customers are quite pleased. And when they’re finally ready to start offering you rides in their robo-taxis, maybe they won’t have to charge you as much for that trip home from the bar.

Luminar’s R&D team also managed to increase the “dynamic range” of the receiver. Just like how your pupils dilate based on light conditions, lidar receivers are tuned to pick up pulses of a certain strength (the farther a photon goes before bouncing back, the weaker it becomes). If you set it to look for faint signals and it gets hit by a much stronger pulse, you can fry the receiver. “We have countless blown-up detectors,” Russell says. The current unit can handle a much greater range of pulse strengths, without even a wisp of smoke.

Meanwhile, Luminar’s already working on the next generation sensor. That one, Russell says, will be affordable enough to put in consumer cars—making the gift of sight little more than a commodity.

Rolling Toward Ready

Mozilla's Internet Health Report Diagnoses Life Online

The relationship between platforms and their users has never been more fraught. To see the evidence, look no further than Congress today, where Facebook CEO Mark Zuckerberg will testify about how his company reportedly mishandled data belonging to up to 87 million people by allowing it to get into the hands of the Trump-affiliated data firm Cambridge Analytica. The hearings follow follow a tumultuous two years not only for for Facebook, but also for the rest of the world’s dominant internet platforms, which face a blowback after years spent growing rich by monetizing your personal data. What better time, then, to examine whether the internet makes our lives better or worse, and in what way. In a sweeping report released today, the Mozilla Foundation asks that very question.

In its first full “Internet Health Report,” the nonprofit combines research and stories to examine five main issues: privacy and security, openness, digital inclusion, web literacy, and decentralization. “It’s really a look at human life on the internet,” says Mark Surman, the executive director of the Mozilla Foundation.

Mozilla notes that the state of the internet isn’t all bad; more people are connecting to it than ever, it’s becoming cheaper for them to do so, and their data is more likely to be encrypted. In other areas though, things are getting worse. State-sanctioned internet censorship has become more widespread, online harassment has grown more severe, and the companies that control the internet largely don’t reflect the diversity of their users.

Beyond these problems, Mozilla specifically calls attention to three issues: securing the internet of things, so-called fake news, and the monopolization of the internet by companies like Amazon, Facebook, Apple, and Google. (Mozilla funds Firefox, a browser that competes directly with Apple’s Safari and Google’s Chrome.)

Mozilla also highlights what it calls the “core business models” of the internet, which rely on collecting as much data about users as possible, and then selling that information to advertisers. This is how Facebook and Google have made the bulk of their profits. Mozilla argues these business models carry a constant risk that information will be leaked or misused, resulting in incidents like Facebook’s Cambridge Analytica fiasco. Surman argues, though, that internet businesses don’t necessarily have to continue to rely on invasive data collecting to be profitable.

“We’re in this kind of fat data economy, where we collect as much as we can and let it interconnect, and then we end up with these toxic data spills,” he says. “It’s a human decision to have the advertising system work the way that it does. We could have a much leaner, more ethical set of data-driven advertising practices if we actually set our mind to it. We do know how to turn things around and it’s a human system, it’s not so mysterious.”

Part of the reason data collection has become so expansive is that many users aren’t aware of the extent to which it happens. As Mozilla’s report points out, those coming onto the internet today face hidden risks like deceptive advertisements, phishing scams, and misleading news and information. While today’s smartphones can often be used without so much as an instruction manual, digital literacy has yet to become part of most education systems. Just look at the world’s most-used passwords; they all remain woefully insecure. Internet platforms have historically been incentivized to ensure people spend lots of time on them, without much care given to ensuring people do so safely.

What Mozilla left out of the report says almost as much as what it chose to include. There isn’t extensive mention of artificial intelligence, there’s nothing on smart cities, and no look at the coming quantum computing crisis. While these issues are important, they haven’t come to the forefront over the last year in the same way that, say, fake news has.

The report also highlights the work of a number of people trying to make the web a better place, like Santhosh Thottingal, who is working to a create a truly multilingual internet, as well as Holly Jacobs, who founded the Cyber Civil Rights Initiative, which offers support to thousands of victims of revenge porn. But overall, Surman says, the report isn’t heavy on the positive. That might be in part a reflection of the current collective sentiment toward the companies that largely control the internet—never has the public been so dissatisfied with them. But that pessimism sometimes serves to obscure the people and organizations trying to improve the web.

“There are so many people who are actually trying to built a better internet, but trying to tell that in a way that’s actually going to get people’s attention and actually dedicating resources to it is hard,” says Surman. “I would love for us to be able to do a better job of telling the story of who’s building stuff that’s good.”

Luckily, the Mozilla Foundation offers a number of ways to get involved directly. The Internet Health Report is itself an open source publication, and Mozilla is soliciting feedback on it. The nonprofit also sponsors paid fellows, who are tasked with studying everything from online propaganda to the internet of things. “We just need a bigger brain trust of people who are going to spend their careers thinking about this stuff,” says Surman.

Mozilla has also worked to to provide a counterpoint to the internet’s woes. In the wake of the Cambridge Analytica scandal, for example, Firefox released a browser extension that blocks Facebook from tracking you when you’re not using the social network. The non-profit also stopped advertising on Facebook, and released a petition calling for it to amend its privacy practices. Mozilla also already invests in Cliqz GmbH, a company that develops a privacy-oriented browser.

While regulators mull over whether to pass laws reining in Facebook, Mozilla has taken stock of the internet that the social network helped to conceive—and is pushing back against it. User backlash has already forced Facebook to change its practices in a number of significant ways. That proves something can be done to make the internet healthier, even if it’s for now largely controlled by a narrow group of corporations. “My bet is there is enough emerging concern among users and companies that we might get there faster than regulators,” says Surman. “Users need to be more demanding about what they want.”

The Internet We Have Now

Mark Zuckerberg Answers to Congress For Facebook's Troubles

Last fall, when Congress called on Facebook to answer for its failures during the 2016 election—including selling ads to Russian propagandists and allowing fake news to flourish on the platform—the social networking giant sent its general counsel, Colin Stretch, leaving lawmakers wanting for face time with the company’s founder. Now, they’ll get just that: Facebook CEO Mark Zuckerberg takes his seat before a joint hearing of the Senate Committee on the Judiciary and the Senate Commerce, Science, and Transportation Committee on Tuesday. He’ll follow that with a Wednesday appearance before the House Energy and Commerce Committee.

Facebook’s fortunes have changed radically since Stretch’s testimony just five months ago, showcasing the fragility of Facebook’s standing in both the markets and public perception. The mere fact that Zuckerberg isn’t sending one of his deputies is proof positive of how quickly things have escalated since November. As has his tone of remorse.

“It was my mistake, and I’m sorry. I started Facebook, I run it, and I’m responsible for what happens here,” Zuckerberg wrote in prepared remarks shared by the House Committee on Energy and Commerce. “So now we have to go through every part of our relationship with people and make sure we’re taking a broad enough view of our responsibility.”

Zuckerberg’s opening remarks walk through the company’s marquee mistakes, including both enabling Russian interference in the 2016 election and leaching as many as 87 million users’ personal data to the shady political firm Cambridge Analytica. He also comes prepared with a raft of recent improvements Facebook is making to protect user data, make ads more transparent in the future, and prevent bad actors from building huge audiences on the platform so easily.

This time around, Zuckerberg will have to do more than apologize away each screw-up. This time, he’ll have to answer for how 14 years of uninhibited growth have enabled Facebook to play an unprecedented, even dangerous role in democracy—a role Zuckerberg seems only on the cusp of understanding. And those answers may play a crucial role in shaping the laws that regulators at home and abroad place on the embattled tech company and its contemporaries.

Russian Revelations

Last October, the fact that Facebook sold ads to Russia’s Internet Research Agency felt like the climax, the culmination of two years in which Facebook both aggressively insinuated itself into the American election and remained willfully blind to the negative consequences. In retrospect, that initial revelation about the IRA feels like just the beginning.

It seemed easy enough at the time for Facebook to minimize the size and scope of the mess it made. The company first downplayed the problem by focusing on the $100,000 of ads the IRA purchased from Facebook, a nominal amount compared to the nearly $13 billion in ad revenue Facebook made in the fourth quarter of 2017 alone. But the numbers only grew from there. In his testimony, Stretch revealed that 126 million people had been exposed to Russian propaganda on Facebook. Asked about how many people were reached on Instagram, Stretch ratcheted the figure up another 20 million. As recently as March, the company had still not yet calculated how many people followed Russian trolls on Instagram. And just last week, it announced that it had found and suspended another nearly 300 accounts and pages linked to the IRA across Facebook and Instagram.

Facebook’s public shaming continued shortly after the hearings, when the House Intelligence Committee published some of the ads and other content the Russian trolls shared on both Facebook and Twitter. For most people, it was the first concrete look at both the divisiveness and ugliness of the content that rocked the election.

The hits kept coming. By January, WIRED reported that special counsel Robert Mueller interviewed at least one Facebook employee as part of his ongoing inquiry into Russian interference in the 2016 election. Just a month later, Mueller published a 37-page indictment of 13 individuals associated with the IRA, which laid out exactly how they “conducted operations on social media platforms such as YouTube, Facebook, Instagram, and Twitter.” Not only did they create phony Facebook Pages like Blacktivist and Heart of Texas, but they also sent Facebook messages to then-candidate Donald Trump’s Florida staff, asking for help organizing pro-Trump flash mobs throughout the swing state.

As the news broke, Facebook announced a spate of changes to its political advertising policies, including plans to label political ads as such and create an archive where people can see the ads, who paid for them, and information about how much they cost and who they reached. In early March, at least, it seemed Facebook had the public relations crisis under control.

The Cambridge Analytica Mess

Over St. Patrick’s Day weekend, The New York Times, alongside The Guardian and The Observer, published simultaneous stories reporting that Cambridge Analytica and its British counterpart SCL had accessed 50 million Facebook users’ data without their knowledge or permission. What’s more, Facebook acknowledged that it had known about the violation since 2015. The company tried to preempt the story by suspending both companies, as well as a former SCL employee-turned-whistleblower named Christopher Wylie, and a researcher named Aleksandr Kogan, who gave Cambridge and SCL the data to begin with.

By that Monday, the company’s stock price began to free fall. Suddenly, Facebook was forced to answer not just for its political advertising policies from 2016, but its entire history of data privacy policies, focusing especially on its Social Graph API, which allowed developers to build apps on top of Facebook—and scrape up reams of users’ unwitting friend data while they were at it. Facebook phased those capabilities out in 2015, but the Cambridge Analytica scandal revealed that the company had no mechanism in place to ensure developers weren’t sharing and misusing that data.

Right on cue, lawmakers began calling Facebook back to Congress. This time, they wanted Zuckerberg. And yet, for five days after the story broke, the camera-shy billionaire was remarkably silent. In the mean time, more dirt about Cambridge Analytica rose to the surface, thanks to an undercover video from the UK’s Channel 4 that showed Cambridge Analytica’s CEO Alexander Nix discussing the use of extortion and bribery on behalf of clients. Facebook hadn’t just leaked user data to any old data miners; it had leaked it to apparently ignoble ones.

Finally, Zuckerberg spoke out, first in a Facebook post and then in a series of interviews with WIRED and other outlets. He took responsibility for what he called a “breach of trust,” and signaled a new openness to proposed regulations like the Honest Ads Act, which would more tightly regulate digital political ads. And yet, he was still resistant to the idea of testifying before Congress. “If it is ever the case that I am the most informed person at Facebook in the best position to testify, I will happily do that,” he told WIRED. “But the reason why we haven’t done that so far is because there are people at the company whose full jobs are to deal with legal compliance or some of these different things, and they’re just fundamentally more in the details on those things.”

But then came the revelation that, in fact, as many as 87 million users’ data may have been accessed by Cambridge Analytica, and an admission that most of Facebook’s 2.2 billion users have probably had their public profiles scraped thanks to a feature that allowed people to search for Facebook users with their phone numbers and email addresses.

This is the tornado of scandals Zuckerberg will try to address before Congress today. When he takes his seat, he will be answering for a wildly different set of issues than Stretch did in fall—not just an isolated incident, but a pervasive problem affecting billions of people. It took 14 years for Facebook culture to allow these issues to foment. Over the last five months, the world finally started to care.

Facebook Follies

Xiaomi pushes for smartphone component suppliers to invest in India

MUMBAI (Reuters) – China’s Xiaomi said it wants its global smartphone component makers to set up base in India, in what is likely to bring as much as $2.5 billion of investment to the South Asian nation while also creating up to 50,000 jobs.

The logo of Xiaomi is seen inside the company’s office in Bengaluru, India, January 18, 2018. REUTERS/Abhishek N. Chinnappa

Xiaomi’s push could boost Prime Minister’s Narendra Modi’s flagship ‘Make in India’ drive that is aimed at adding tens of millions of new jobs and turning Asia’s No.3 economy into a global manufacturing hub.

Xiaomi, which looks headed for a big initial public offering later this year, currently has six smartphone manufacturing plants in India. It hosted more than 50 of its global suppliers in New Delhi at an investment summit on Monday that was also attended by key government officials.

If the suppliers at the summit were to set up shop in India, a top market for Xiaomi, it would bring in $2.5 billion in investment and create as many as 50,000 jobs, the company said.

The Chinese firm has unseated Korean rival Samsung Electronics to take the pole position in India’s smartphone market – the world’s second biggest.

Xiaomi, which began assembling smartphones through Foxconn in southern India in 2015, will now assemble parts like memory and processors on printed circuit boards locally, said Manu Jain, managing director of Xiaomi’s India operations.

“Today we are deepening this commitment with three more smartphone factories and our first surface-mount technology (SMT) plant dedicated towards local manufacturing,” Jain said in a statement.

SMT is a method by which components are embedded onto printed circuit boards (PCBs). Once populated with components, PCBs that house memory, chips and other components, typically account for about half the cost of a smartphone.

This announcement comes a week after New Delhi levied a 10 percent import duty on some key smartphone components, including populated PCBs. The South Asian nation is Xiaomi’s second-largest market after China.

Xiaomi’s SMT plant will be run by Taiwan’s Foxconn, the world’s largest contract electronics manufacturer and a key Apple supplier.

However, Xiaomi’s push to get suppliers to India could spark job loss concerns in neighboring China that is currently among the top electronics manufacturers in the world.

“India’s cheap labor offers more competitiveness to manufacturers, demand is vast and in India opportunity is also huge because the market is much less saturated compared to China,” said Jaipal Singh, a senior market analyst for client devices at tech research firm International Data Corporation.

Reporting by Sankalp Phartiyal; Editing by Himani Sarkar

China's SenseTime valued at $4.5 billion after Alibaba-led funding: sources

HONG KONG (Reuters) – Chinese facial recognition technology developer SenseTime Group Ltd has tripled its worth in less than a year after a funding round, led by Alibaba Group Holding Ltd, valued it at about $4.5 billion, people with knowledge of the matter said.

FILE PHOTO: SenseTime surveillance software identifying details about people and vehicles runs as a demonstration at the company’s office in Beijing, China, October 11, 2017. REUTERS/Thomas Peter/File Photo

The fundraising comes during a government push to make China an international leader in artificial intelligence (AI) by 2025, by which time it aims to grow core AI industries’ value to 400 billion yuan ($63.33 billion).

SenseTime raised $600 million in its series-C funding round having attracted investors including Chinese e-commerce company Suning.Com Co Ltd and Singapore state fund Temasek Holdings (Private) Ltd [TEM.UL], it said in a statement on Monday.

The company did not disclose its valuation, but said it is now the world’s most valuable AI platform. It also said it set a world record for the amount raised in a single funding round by an AI firm.

SenseTime was valued at $1.5 billion in July after it raised $410 million in its series-B funding round, led by China’s CDH Investments and state-backed fund Sailing Capital.

The two people who disclosed the current valuation declined to be identified as the matter was private. A SenseTime spokeswoman declined to comment on the valuation as the firm has moved into the series-C+ round of fundraising.

Dual-based in Beijing and Hong Kong, SenseTime develops applications for facial recognition, video analysis and other areas including autonomous driving. Existing investors include U.S. chipmaker Qualcomm Inc.

It is enjoying fast growth as both the private and public sectors upgrade to advanced technologies. It is engaged in as many as 14 sectors, and lists various police departments across China as major clients.

Alibaba Executive Vice Chairman Joe Tsai said in the statement, “We are especially impressed by their R&D capabilities in deep learning and visual computing. Our business at Alibaba is already seeing tangible benefits from our investments in AI and we are committed to further investment.”

Reporting by Sijia Jiang and Julie ZhuEditing by Christopher Cushing

Weighing The Week Ahead: Has The Trump Trade Reached The Tipping Point?

The economic calendar is normal, with an emphasis on inflation data and the Fed. The increased intra-day volatility, often driven by overnight comments in China news or a Presidential tweet, has everyone’s attention. Even Fed punditry will take a back seat. With an increased sense of urgency, many will be wondering:

Has the Trump Trade reached the tipping point?

Last Week Recap

In my last edition of WTWA I asked whether stock prices had veered from the fundamentals. That was a good guess, since the topic was popular in discussions all week.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I always start my personal review of the week by looking at a great chart. I especially like the version updated each week by Jill Mislinski. She includes a lot of valuable information in a single visual. The full post has even more charts and analysis, so check it out.

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The loss this week was only 1.4%, but the dramatic daily moves made it seem like more. The trading range was 4.8% including 3% in a single day. I summarize actual and implied volatility each week in the Indicator Snapshot.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

Feel free to add items that I have missed. Please keep in mind that we are looking for current news, especially from the last week or so. WTWA is not about long-term concerns like debt. These are important, of course, but not our weekly subject unless there has been some major change.

The Good

  • High-frequency indicators, although softening a bit, remain solidly strong. Check out New Deal Democrat’s valuable weekly report.
  • March Auto sales were strong, especially at GM. (Automobilemag).
  • Earnings guidance has been strong, especially in tech. (FactSet).

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  • ADP private payrolls gained 241K, about the same as last month, but beating expectations of 203K.
  • February Factory orders rebounded to a gain of 1.2% from January’s 1.4% decline. This was still a little below expectations.
  • Rail traffic is up 5% year-over-year. (Steven Hansen, GEI). Truck shipments are also improving on a year-over-year basis.
  • Sentiment remains bearish, a contrarian indicator. Bespoke.

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The Bad

  • ISM index for March registered 59.3 declining from the prior 60.8 and missing expectations of 60.0. Scott Grannis takes a deeper look and sees strong numbers.
  • ISM services for March registered 58.8 narrowly missing expectations of 59.
  • Construction spending for February gained only 0.1% v expectations of 0.5%.
  • Initial jobless claims spiked to 242K from last week’s 218K.
  • Nonfarm payroll employment increased by only 102K net jobs, missing expectations of 175K. The prior two months were revised lower by 50K. The Household survey was also weaker than expected, although other metrics were unchanged. James Picerno combines the headline data in this chart:

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The Ugly

An unwanted Korean war? Foreign Affairs explains how it could happen. Secret direct talks suggest that there is some progress in mitigating this threat. The planned summit between President Donald Trump and North Korea leader Kim Jong Un should be watched closely. Stratfor (via GEI) has a deeper look about why the current

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

We have a normal economic calendar, featuring inflation data and the FOMC minutes. The JOLTs report will also contribute to the normal tendency for a focus on the Fed. has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

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Next Week’s Theme

The economic calendar includes the FOMC minutes, inflation data, and the JOLTs report. All of these are of interest to Fed-watchers. Normally that would be our theme for the week.

Instead, there is a sense of unease among many. Those closely following stocks are observing wild daily swings – as much as 1000 Dow points in slightly over one trading day. The trading swings are not driven by “real” news about earnings or the economy. Instead we get a statement from China affecting futures trading while US markets are closed. Then there are surprise tweets and announcements during the trading day.

When a surprise hits the wire, algorithms apply recent computer learning, human traders react, support and resistance levels are hit, and moves can become larger. My younger blogging colleagues would say, “What the heck (TM OldProf euphemism) is going on?”

For the punditry, the volatility combined with the loss of the early gains for the year has them wondering. I expect many to be asking:

Is this the tipping point for the Trump Trade?

Usually I offer a range of viewpoints in this section. There are certainly many who expect an imminent market decline, and some expect a large one. Others question the underpinnings of the “Trump Trade.”

You can find such viewpoints easily enough. In doing my research this week I was struck by how many colleagues whom I respect shared my current attitude: Solid fundamentals for stocks, but continuing, unsettling threats. Here is a review of some experts and thought leaders.

I can list a number of additional potential negative issues with any single one being a headwind for the equity market: rising interest rates and consequent flattening yield curve, growth in deficit spending out of Washington and more. All but the interest rate factor are mainly political events and I would say business fundamentals and economic fundamentals remain more important variables for the market right now. Given some of the negative factors cited, just maybe the market will climb the proverbial wall of worry.

  • Urban Camel, The Fat Pitch, does a comprehensive summary of indicators, concluding as follows:

In summary, the major macro data so far suggest positive but modest growth. This is consistent with corporate sales growth. SPX sales growth in 2018 is expected to only be about 6-7% (nominal).

Valuations are back their 25 year average. The consensus expects earnings to grow about 18% in 2018 and 10% in 2019. Equity appreciation can therefore be driven by both corporate growth as well as valuation expansion (chart from JPM).

FANG issues are responsible for most of the current correction. Investors typically sell other issues a little lower as well. Seeking Alpha published a note on new FANG futures last fall. The chart of this group is below.

Economic activity continues to be strong. Once the FANG correction is over, I expect markets to rise to new highs.

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  • Eddy Elfenbein notes the decline below the 200-day moving average of the S&P 500. He uses the ratio of the equal-weighted S&P 500 to the cap weighted version as a measure of the opportunity for stock picking. Read the entire post for his typically clear explanation of how the rotation from high-fliers provides opportunity.

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  • Dr. Ed Yardeni sees no slowdown in global economic stats. Check out his thorough review.

As usual, I’ll save my own conclusions for today’s Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

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Short-term trading conditions worsened this week. In mildly bearish conditions our trading approaches can still be profitable, but that might not be true for everyone. We continue to monitor the technical health measures on a daily basis. If this indicator goes to fullish bearish, we liquidate trading (not investment) positions. We are not quite at that point, but I have rounded the result to “5.” This is not a forecast that the market will decline. It indicates increased difficulty in trading profitably.

The long-term fundamentals and outlook are little changed. Based upon historical data for this indicator, I have increased the 9-month recession probability to the 18% range. I am monitoring, but not yet especially worried. The long-term technical health is 1.5, but I rounded it up to reflect the change.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession.

Doug Short: Regular updating of an array of indicators. Great charts and analysis.

Insight for Traders

Our discussion of trading ideas has moved to the weekly Stock Exchange post. The coverage is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. Each week we explore a topic of current interest, drawing upon trading experts. This week we asked, “Are you a contrarian trend follower?” As usual, we discussed some stock ideas and updated the ratings lists for Felix and Oscar, this week featuring midcap stocks. Blue Harbinger has taken the lead role on this post, using information both from me and from the models. He is doing a great job, presenting a wealth of new ideas and information each week.

While my intent is to focus on traders, long-term investors may also benefit. That was especially true in this week’s post.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility! I remind investors of this each week, but now is the time to pay attention.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Scott Grannis’s review of Fed policy, the QE effects, and where things stand now. This misunderstood topic serves to prevent many financial analysts from a clear view of the fundamentals. The charts and explanations can help you avoid this trap.

To this day there are still legions of observers who argue that what the Fed did starting in late 2008 was simply a massive amount of money-printing, a desperate monetary stimulus that was necessary to avoid a depression, and the economy has been running on fumes ever since.

Others, myself included, believe that what the Fed did was not monetary stimulus at all. It was simply a rational response to an unprecedented increase in the public’s demand for money and money equivalents, which in turn was the result of the near-collapse of the global financial system and the worst global recession in modern memory. The world was running very scared, so the demand for safe monetary assets was nearly insatiable. Unfortunately, there were not enough T-bills (the classic monetary safe haven) to go around. By deciding to pay interest on bank reserves, the Fed effectively made bank reserves equivalent to T-bills, and that was exactly what the world wanted: trillions more of safe, default-free, interest-bearing assets, and the Fed had the ability to create bank reserves with abandon if need be.

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Stock Ideas

Chuck Carnevale combines the key elements of interest for many investors: Dividend growth and reasonable valuations. He has 50 (count ‘em) ideas! As usual, the candidates come with a video lesson. You can learn while you earn.

General Motors (NYSE:GM)? Valentum highlights the attractions.

Artificial intelligence stocks? Barron’s has a cover story on this theme.

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich is taking some well-deserved time off, as is Abnormal Returns. Tadas invited a group of financial bloggers to comment on a series of interesting questions. This sparked everyone, including me, to consider some topics we might not have mentioned otherwise. I especially liked the post on what we have learned in the last ten years, but the whole series is valuable.

Final Thoughts

When confronted with an economic threat, it is always wise to consider the worst-case possibility. You can then modify the possible outcomes a bit, changing with the evidence. I have reached the following conclusions:

  • Expected earnings are at attractive levels and growing quickly.
  • The near-term recession odds are very low.
  • The investing alternatives remain relatively unattractive.
  • Market volatility has increased, back to normal historic levels or even a little above.
  • The volatility centers on the every-changing trade war story.

What is the worst case from a trade war? Estimates suggest it would lower world GDP growth from about 3.5% to 2.5% in China and the US – a reasonable level, but not the fuel for a big rally in stocks.

Since none of the US or China proposals will take effect for two months, there is plenty of time to negotiate and modify positions. On the US side there is evidence that this is already happening with close allies.

But there is a reason for additional worry – the loss of business confidence. And also, the question about how much earnings growth is already anticipated. (Brian Gilmartin).

One can be more philosophical about the worst case when it is happening to someone else!

The loss of confidence for expansion and investment could be more of a tipping point than the trade war itself. This earnings season is important beyond the numbers. What will companies say about trade effects on their future plans?

I’m more worried about:

  • Escalating trade rhetoric. This issue rises and falls on the worry list with greater and greater frequency.
  • Trader frustration. It is not so much the higher volatility, but the causes. Market participants always have surprises from Washington, but usually it is possible to follow the issues. That reduces the chance of being caught “offsides.”

I’m less worried about:

  • North Korea. There are signs of some real progress.
  • The Fed. There is no reason to expect accelerated action that would worry markets.

[Do the economic challenges seem complicated and threatening? You might find help in my paper on getting back in the market, the top investor pitfalls, or my suggestions about managing risk. Just write for our free information on these topics. While they describe what I am doing, the do-it-yourself investor can apply the same principles. These are available for free from main at newarc dot com].

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Facebook suspends Canadian firm AggregateIQ over data scandal

(Reuters) – Facebook Inc (FB.O) said on Friday that it had suspended Canadian political consultancy AggregateIQ from its platform after reports that the data firm may have improperly had access to the personal data of Facebook users.

FILE PHOTO – Silhouettes of laptop users are seen next to a screen projection of Facebook logo in this picture illustration taken March 28, 2018. REUTERS/Dado Ruvic/Illustration

Facebook is under intense pressure after the data of millions of its users ended up in the hands of political consultancy Cambridge Analytica. Christopher Wylie, a whistleblower who once worked at Cambridge Analytica, has said that it worked with Canadian company AggregateIQ.

“In light of recent reports that AggregateIQ may be affiliated with SCL and may, as a result, have improperly received FB user data, we have added them to the list of entities we have suspended from our platform while we investigate,” Facebook said in a statement.

“Our internal review continues, and we will cooperate fully with any investigations by regulatory authorities.”

Strategic Communication Laboratories (SCL) is a government and military contractor that is the parent of Cambridge Analytica.

Wylie has said that AggregateIQ received payment from a pro-Brexit campaign group before the 2016 referendum when Britain voted to quit the European Union.

The Canadian federal agency charged with protecting privacy rights of individuals said on Thursday that the agency, along with its counterpart in British Columbia, would jointly investigate Facebook and AggregateIQ over the ongoing data scandal.

British Columbia’s privacy commissioner was separately investigating AggregateIQ over whether the Victoria-based company had broken provincial personal privacy rules for its role in the Brexit campaign.

Facebook Canada said on Wednesday that more than 600,000 Canadians had their data “improperly shared” with Cambridge Analytica.

AggregateIQ was not immediately available for a comment.

Cambridge Analytica tweeted on Wednesday, “When Facebook contacted us to let us know the data had been improperly obtained, we immediately deleted the raw data from our file server, and began the process of searching for and removing any of its derivatives in our system.”

Facebook said on Wednesday that the personal information of up to 87 million users, mostly in the United States, may have been improperly shared with political consultancy Cambridge Analytica, up from a previous news media estimate of more than 50 million.

Facebook first acknowledged last month that personal information about millions of users wrongly ended up in the hands of Cambridge Analytica.

London-based Cambridge Analytica, which has counted U.S. President Donald Trump’s 2016 campaign among its clients, said on Wednesday on Twitter that it had received no more than 30 million records from a researcher it hired to collect data about people on Facebook.

Reporting by Rama Venkat Raman in Bengalur and David Ingram in San Francisco; Editing by Toni Reinhold

Feds Seize, Site Linked to Sex Trafficking

Federal and state authorities Friday seized, an online classifieds site frequently accused of facilitating sex trafficking, and reportedly indicted seven people. A notice on Backpage’s website said the site had been seized by the FBI and other agencies.

Nicole Navas Oxman, a spokesperson for the Department of Justice, said Friday afternoon that the agency would issue a press release after charges are unsealed, but things did not go as expected. “The Court has ruled that the case remains sealed and we have nothing to report today,” she wrote in an email Friday evening.

The banner states that the enforcement action was a collaborative effort between the FBI, US Postal Inspection Service, the criminal division of the IRS, the Department of Justice’s child exploitation and obscenity division, as well as attorneys general from Arizona, California, and Texas.

CBS News reported that an indictment had been unsealed against seven people allegedly involved in running Backpage, containing 93 criminal counts including money laundering and running a website to facilitate prostitution. The indictment, which was filed in Arizona where Backpage is maintained, names 17 victims, both adults and children, who were allegedly trafficked, according to CBS News.

On Friday morning, the FBI raided the home of Backpage cofounder Michael Lacey, and there was some activity at the home of cofounder Jim Larkin as well, according to the The Republic, a newspaper in Arizona. A year ago, the paper reported that a federal grand jury had been convened in Arizona to hear evidence against Backpage.

The move against Backpage came just days before President Trump is expected to sign a new anti-sex-trafficking bill that passed both houses of Congress with overwhelming support. The bill initially was controversial because it alters a key internet law that protects tech companies from liability for user-generated content on their platforms.

Previous criminal and civil charges against Backpage had mostly been derailed by that law, the Communications Decency Act. The bill Trump is expected to sign creates an exception for sites that “knowingly” facilitate or support online sex trafficking and explicitly grants states and victims the right to bring criminal and civil action against websites like Backpage. The bill faced opposition from tech companies, free speech advocates, and sex workers, and has already prompted online forums like Craigslist’s personal section and Reddit sections like Escorts and Sugar Daddies to shut down, rather than risk liability. Advocates for sex workers say the closures will endanger those workers, who relied on the sites to share bad date lists and verify clients.

It’s unclear why the federal agencies acted now. The Communications Decency Act did not apply to federal law enforcement agencies, said Eric Goldman, a law professor at Santa Clara University who testified against the recently passed bill. “The question is why today and why not two weeks ago before the Senate voted?” Goldman said. “The DOJ can’t turn on or off a federal prosecution on a dime, so that seems unlikely, but still the timing is so perplexing.” On Twitter, Goldman said, “It’s almost as if the government is trying to prove that all the anti-Backpage rhetoric fueling #SESTA & #FOSTA was just political theater.” (SESTA and FOSTA are acronyms for versions of the anti-sex-trafficking bill.)

Senator Richard Blumenthal (D-Conn.), who cosponsored the bill, called the DOJ’s action to shut down Backpage “long overdue.”

A January 2017 Senate report accused Backpage of facilitating online sex trafficking by stripping words like “lolita,” “little girl,” and “amber alert” from ads in order to hide illegal activity before publishing the ad, as well as coaching customers on how to post “clean” ads for illegal transactions. Judges in California and Massachusetts previously cited Section 230 in dismissing cases against Backpage.

Still, some sex workers said the seizure could endanger them. “If the people who run Backpage have knowingly harmed people, they deserve to be held accountable, but the most immediate impact of the seizure of an entire website will be felt by independent consensual sex workers,” Liara Roux, a sex worker, political organizer, and adult-media producer and director, wrote to WIRED. “Without safe online advertising, which studies seem to show reduced female homicide rates nationally by 17 percent, sex workers are unable to screen clients based on emails and decide who is safe to see.”

Backpage was invoked frequently in the debate around SESTA and FOSTA. Members of the Senate were particularly moved by testimony from Yvonne Ambrose, whose 16-year-old daughter, Desiree Robinson, was killed after she was repeatedly advertised for sex on Backpage. Last year, Ambrose sued Backpage for facilitating child sex trafficking. The documentary “I Am Jane Doe,” followed families in their quest to hold Backpage accountable.

Berin Szóka, president of TechFreedom, a nonprofit that has received funding from Google, says, the timing of the enforcement shows that the vetting process for the bill was rushed. “The argument for SESTA was a sham all along.”

Free Speech or Human Trafficking?

  • Within days of the bill’s passage, Craigslist, Reddit, and others shut personals forums, as sex workers had feared.
  • The bill could have encourage tech companies to either stop moderating or censor content, opening the door to further attacks on Section 230.
  • The backlash against big tech played a role in the passage of the bill.

Japan's cryptocurrency exchanges face shortage of engineers

TOKYO (Reuters) – When cryptocurrency exchange Coincheck Inc explained how hackers made off with $530 million in digital money, it said part of the problem was beyond its control: Japan’s lack of software engineers.

Ryo Fukuda, a software engineer at Next Currency Inc, a company seeking to launch a cryptocurrency exchange, poses for a photo after an interview with Reuters at the company’s headquarters in Tokyo, Japan, March 30, 2018. REUTERS/Toru Hanai

Coincheck said that no matter how hard it tried, it simply couldn’t hire workers with the skills to seal gaps in security.

“We were aware we didn’t have enough people working on internal checks, management and system risk,” chief executive Koichiro Wada told reporters last month. “We strived to expand using headhunters and agencies, but ended up in this situation.”

Coincheck isn’t alone. Companies across Japan’s booming cryptocurrency industry are scrambling to hire engineers, including cybersecurity experts and specialists in blockchain, the computer code that underpins bitcoin.

Financial regulators are pressing exchanges to tighten security after the Coincheck heist even as a host of companies try to enter the booming market.

The resulting shortage risks blunting Japanese exchanges’ competitive edge as the country’s cryptocurrency industry matures, experts say. And it could leave the industry exposed to more thefts.

“It could put the brakes on everything,” said Alexander Jenner, a headhunter at Computer Futures in Tokyo. “The sector’s growing so quickly, and the better exchanges are surviving. But many of them will fail.”


There are 32 exchanges operating in Japan. About 100 other companies have approached the watchdog that oversees the sector about applying for a license, a senior Financial Services Agency official told Reuters.

Demand is particularly high for engineers with skills that could help growth, from designing user-friendly interfaces to writing code that helps withdrawals of digital coins, as well as the security expertise needed to better protect consumers.

A man stands near an advertisement of a cryptocurrency exchange in Tokyo, Japan March 30, 2018. REUTERS/Toru Hanai

“The FSA is breathing down necks on security, compliance and risk,” said Mike Kayamori, chief executive of cryptocurrency exchange Quoine. “And if you don’t hire, you won’t be able to survive.”

Japan doesn’t compile data on blockchain or software engineers. In 2016, though, there was a shortfall of more than 15,000 workers in big data and artificial intelligence, which rely on software engineers, according to the Ministry of Economy, Trade and Industry. That number will rise to 50,000 by 2020, the ministry projects.

Headhunters specializing in cryptocurrency and blockchain say the supply of labor can’t keep up with demand. Hiring in the sector accounted for nearly six in ten placements at information technology recruiter Descartes Search in the year to March, company director Pascal Hideki Hamonic said, up from 15 percent a year earlier.

And exchanges are prepared to pay. Many are ramping up salaries and offering guaranteed bonuses to poach engineers from other businesses, two recruiters said. Base pay is up 20 to 30 percent from last year, they said, pushing salaries for engineers with five years’ experience to 11 million yen ($102,720).

“Exchanges are looking for people who can do the creative, thinking work – to create the architecture, not just do basic tasks,” said Mark Pink, founder of


One such engineer is Ryo Fukuda. A 21-year-old who taught himself how to code via YouTube, Fukuda in July joined Next Currency, a unit of online content and financial firm that is seeking a cryptocurrency exchange license.

“I’d been doing nothing but crypto and my own projects, so I had the experience other engineers and companies couldn’t get,” he told Reuters. “Now the market has really taken off and there’s a shortage of engineers. That was when my value to the market soared.”

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Fukuda said he got “many, many offers” before opting for Next Currency, where he develops web applications.

To be sure, Japan isn’t alone in lacking workers like Fukuda. Demand is high across the world, industry insiders say, as exchanges slug it out with financial firms to recruit skilled engineers.

In Hong Kong, for example, a spate of banks and insurance companies are looking at how to put blockchain to use in their own businesses, said Lawrence Ma, president of the Hong Kong Blockchain Society.

But structural factors elsewhere have helped exchanges secure the talent they need.

In Britain, cryptocurrency-related companies said a strong research sector produces enough specialists in fields central to blockchain like cryptography, while an ample supply of international workers also helps.

“The UK has quite a good environment for research, so we were able to pull people from universities,” said Nick Gregory, chief executive of London-based blockchain firm Commerceblock.

Other major cryptocurrency centers like San Francisco and New York have been able to hire from major concentrations of engineers well-versed in blockchain, said Jonathan Underwood of Tokyo cryptocurrency exchange Bitbank Inc.

Complicating matters in Japan is a culturally rigid labor market, where mid-career moves are rare, recruiters and exchanges said.

“The majority of Japanese that do understand blockchain and cryptocurrency already work for companies as lifetime employment, and have never considered the thought of changing jobs,” said Underwood, who is also head dean of Blockchain Daigakko, a firm that trains engineers.

Until that changes, the skills crunch will most likely deepen, recruiters say.

“It’s going to get worse before it gets better,” said Jenner of Computer Futures. “It’s a land grab – whoever comes out ascendant in the next year will win the market.”

Reporting by Thomas Wilson; Additional reporting by Taiga Uranaka in Tokyo and Fanny Potkin in London; Editing by Gerry Doyle

Australia begins privacy investigation into Facebook

SYDNEY (Reuters) – Australia on Thursday said it had begun an investigation to decide whether social media giant Facebook Inc breached its privacy laws, after the company confirmed data from 300,000 Australian users may have been used without authorization.

A 3D-printed Facebook logo is seen in front of displayed stock graph in this illustration photo, March 20, 2018. Picture taken March 20. REUTERS/Dado Ruvic

Personal information of up to 87 million users, mostly in the United States, may have been improperly shared with political consultancy Cambridge Analytica, Facebook said on Wednesday, exceeding a media estimate of more than 50 million.

In a statement, Australia’s privacy commissioner, Angelene Falk, said her office would “confer with regulatory authorities internationally”, given the global nature of the matter.

A Facebook spokeswoman in Australia said the company would be “fully responsive” to the investigation and had recently updated some privacy settings.

Facebook’s chief executive, Mark Zuckerberg, told reporters during a conference call that he accepted blame for the data leak.

Zuckerberg is due to testify about the matter next week during two U.S. congressional hearings, and the data breach has drawn criticism from lawmakers and regulators around the world.

London-based Cambridge Analytica, which has counted U.S. President Donald Trump’s 2016 campaign among its clients, disputed Facebook’s estimate of affected users.

It said in a tweet on Wednesday that it received no more than 30 million records from a researcher it hired to collect data about people on Facebook.

Australia’s investigation follows comments by New Zealand’s privacy commissioner last week that Facebook had broken laws in that country, a charge the company called disappointing.

Australia’s competition regulator is already investigating whether Facebook and Alphabet Inc’s Google had disrupted the news media to the detriment of publishers and consumers.

Reporting by Tom Westbrook; Editing by Michael Perry and Clarence Fernandez

Spotify Subscriptions Helped The Streaming Company Win Listeners

In 2011, when Spotify launched its streaming music service in the U.S., the future of digital media lay squarely in the realm of advertising. Sure, everyone knew ad-based models—sometimes called “the Internet’s original sin”—had flaws. But companies like Google, Yahoo, and Facebook were able to grow very large, very quickly by attracting big audiences to their free services and selling ads. Spotify aimed to emulate that success, but with a different model that also included an odd consumer option: a subscription.

At the time, Pandora, the market leader in music streaming, had already positioned itself as the future of radio, going after the industry’s $17 billion advertising market. Spotify executives took aim for that same pool of money, calling advertising “a huge part of the company strategy.” Both companies offered a paid subscription option. Spotify’s main difference was the ability to play any music on-demand, where Pandora only offered radio-style playlists with limited options to skip songs.

No one could have foreseen the digital media world’s recent shift toward paid subscriptions, driven, in part, by the success of Netflix and newspapers like the New York Times. Consumers have grown increasingly comfortable with the idea of paying to access digital media that they once got for free. Venture capitalists are now more excited to invest in tools and platforms that enable subscriptions.

Likewise, no one foresaw the rise in anti-advertising sentiment. Ad blocker use continues to grow and advertising boycotts are now a frequently-deployed culture war tool. Ad fraud remains a problem. Even Facebook and Google, the successful digital advertising duopoly, now look like sinister privacy invaders due to their data-collecting sales operations. Rival tech executives, like Apple CEO Tim Cook, are weaponizing this anti advertising sentiment to slam competitors with advertising-based business models.

Lucky for Spotify, the company’s paid tier of subscriptions put it in a strong position to ride that shift. Of Spotify’s 157 million users, 71 million pay a monthly fee to subscribe. Only around 10 percent of the company’s revenue comes from ads. On Tuesday the company went public. Investors valued the company at more than $26 billion at market close.

The focus on subscriptions, combined with its hard-won relationships with the record labels, has saved Spotify from the fate of its many failed streaming music peers. That includes MOG,, Muxtape, Imeem,, Myxer, Mixwit, Seeqpod, Grooveshark, and Skeemr. Pandora, which bought Rdio in 2015 in a distressed sale, endured takeover speculation for the last year, culminating with a bail-out investment from SiriusXM.

Spotify has long argued its service fights the music industry’s piracy problem by offering a convenient alternative. By doing so, it proved it was possible to convince a generation of users who grew up with Napster and Kazaa to pay for music for the first time. That shift is notable: Spotify subscribers who pay $10 a month, or $120 a year, to access the service are spending more on music than the average U.S. consumer did at the peak of the CD boom. (Detractors would argue that that money now gets spread across a lot more songs, therefore shorting artists.)

Spotify CEO Daniel Ek’s promise has been that Spotify can help return the music industry to growth. He’s delivered on that. Last year the industry experienced its first double-digit revenue growth since 1998.

But new challenges loom for the company. Spotify is not profitable. Plenty of artists and record labels that the company relies on continue to criticize its business model. And the company’s success has attracted competition. Apple, Google and Amazon all have competing subscription services which threaten Spotify’s leadership position. In that sense, Spotify will do well to remember the fate of Pandora—success is precarious.

Spotify’s Sleeper Power Grab

  • Spotify eschewed the bankers and went public without a bells-and-whistles IPO.
  • With its recommendation algorithms, Spotify doesn’t just influence what you listen to; it can make a hit.
    -There’s a better way to listen. Here’s how to join the ranks of Spotify’s power users.

Smart cities need the cloud—and vice versa

“Smart city” priorities and use cases are all over the place. Nonethless, IDC expects spending to accelerate over the 2016-2021 forecast period, reaching $45.3 billion in 2021.

So, what is a smart city and what does it have to do with cloud computing?  Everything.

Smart cities are cities that have embraced both the internet of things and the cloud technology to do what cities should do better. This includes intelligent traffic and transit management, surveillance such as body cams and GPS locators for police, intelligent water and power usage, and anything else that is automated and uses cloud-based procedural computing, cognitive computing, data retention, and analysis.

The real advantage of using mostly public clouds to create and run smart cities is not the capabilities of the various clouds to host basic compute and storage in support of city automation. It’s the ability to reuse common smart city services across cities, services that will be sold and managed by the public cloud providers.

The fundamental larger role of public cloud providers is to create sets of cloud services that will deliver best practices via services to all cities that want to become smart cities. The public cloud providers will essentially be the vehicle for sharing this technology. And they need cities to help define those services.

The larger piece of the puzzle is cost reduction. There is no real reason to become a smart city unless it’s going to reduce city operations costs, as well as deliver citizen services better than you did before. In other words, it’s not enough to become “smart”; you need to spend tax dollars in more effective ways.

Some cities are now successfully evolving into smart cities, paving the way for other city governments to follow. Of course, this is going to be an evolutionary process, with aspects of automation showing up at different times. After all not much happens fast with city governments.

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