Saturday, October 22, 2016

"Suspected $255 Million Old Master Forgery Scandal Continues to Rock the Art World"

Unlike the forgeries that Andy Hall bought, these are starting to add up to real money.
From artnet:

Can we still count on the judgment of experts?

Franz Hals, Portrait of a Man, one of a series of Old Master works sold by a French dealer that authorities now believe may be forgeries.
Franz Hals, Portrait of a Man, one of a series of Old Master works sold by a French dealer that authorities now believe may be forgeries.
More details have come to light regarding a suspected Old Mastery forgery scandal that may encompass some €200 million ($255 million) in fake canvases. It would appear that some of the world’s foremost experts on authentication have been taken in, casting doubt on connoisseurship and forensic analysis alike.

The most recent development has Sotheby’s refunding the buyer from a 2011 sale of a purported Frans Hals portrait. The authenticity of that painting was called into question because it came from the same source as a Lucas Cranach the Elder Venus, after the latter was seized by French authorities earlier this year under suspicion it was fake. Little-known French collector-turned-dealer Giulano Ruffini, who was the original seller of both works, has brought to market a suspiciously high number of previously undocumented works attributed to Old Masters.
Related: String of Suspected Old Master Fakes May Reveal ‘Biggest Art Scandal in a Century’
The Hals refund is all the more concerning given how much press the painting received as a newly discovered treasure in the immediate past. In 2008, the Louvre launched a national campaign to buy the canvas for €5 million from Christie’s Paris, declaring it “un trésor national.” The Parisian museum wasn’t acting lightly: the painting had been authenticated after passing a battery of scientific tests conducted by France’s Center for Research and Restoration. At the time, Burlington Magazine called the work “a very important addition to Hals’s oeuvre.”

Though the Louvre’s efforts to secure the work were stymied by the 2008 financial crisis, the painting eventually passed into the hands of London dealer Mark Weiss for just €3 million. He then arranged for a $10 million private sale through Sotheby’s to an American collector—an almost 150 percent profit, the Art Market Monitor points out.

Nevertheless, it now seems clear the Hals painting’s total lack of provenance should have remained a red flag. This year, concerned by evidence against the Cranach, Sotheby’s turned to Orion Analytical, a Williamstown, Massachusetts-based company which investigates artworks and other cultural property, working with law enforcement to unveil forgeries. New tests found traces of synthetic 20th-century materials during its testing of the painting.

“Orion’s peer-reviewed analyses showed the presence of modern materials used in the painting in a way that meant that it could not have been painted in the 17th century,” said Sotheby’s in a statement....MORE

Apparently Yesterday's IoT Attack on the Internet Was Due To Security Flaws In One Chinese Manufacturer's Products (and the malicious fools who used them in a botnet)

By the journalist/investigator whose site was attacked in what appears to be the first use of the botnet code.
From Krebs on Security, Oct. 21:

Hacked Cameras, DVRs Powered Today’s Massive Internet Outage
A massive and sustained Internet attack that has caused outages and network congestion today for a large number of Web sites was launched with the help of hacked “Internet of Things” (IoT) devices, such as CCTV video cameras and digital video recorders, new data suggests.

Earlier today cyber criminals began training their attack cannons on Dyn, an Internet infrastructure company that provides critical technology services to some of the Internet’s top destinations. The attack began creating problems for Internet users reaching an array of sites, including Twitter, Amazon, Tumblr, Reddit, Spotify and Netflix.
A depiction of the outages caused by today’s attacks on Dyn, an Internet infrastructure company.
 Source: Level3 Communications.
At first, it was unclear who or what was behind the attack on Dyn. But over the past few hours, at least one computer security firm has come out saying the attack involved Mirai, the same malware strain that was used in the record 620 Gpbs attack on my site last month. At the end September 2016, the hacker responsible for creating the Mirai malware released the source code for it, effectively letting anyone build their own attack army using Mirai.

Mirai scours the Web for IoT devices protected by little more than factory-default usernames and passwords, and then enlists the devices in attacks that hurl junk traffic at an online target until it can no longer accommodate legitimate visitors or users.

According to researchers at security firm Flashpoint, today’s attack was launched at least in part by a Mirai-based botnet. Allison Nixon, director of research at Flashpoint, said the botnet used in today’s ongoing attack is built on the backs of hacked IoT devices — mainly compromised digital video recorders (DVRs) and IP cameras made by a Chinese hi-tech company called XiongMai Technologies. The components that XiongMai makes are sold downstream to vendors who then use it in their own products.

“It’s remarkable that virtually an entire company’s product line has just been turned into a botnet that is now attacking the United States,” Nixon said, noting that Flashpoint hasn’t ruled out the possibility of multiple botnets being involved in the attack on Dyn....MORE
See also Krebs Oct. 19: Spreading the DDoS Disease and Selling the Cure

Last month:
Uh Oh: Internet Security Pro Hit By Botnet Made Of Internet-of-Things Connected Cameras
This is very bad.

Friday, October 21, 2016

The Dyn Blog Post On Taking Down The Internet: As With Humor, Timing Is Everything

And this timing is humorous.
Irony, one of the (few) simple pleasures of sometimes having to wear the risk manager hat.

Following the jump from the Dyn piece is the latest from The Register.

From the blog of Dyn, the managed DNS provider that was attacked on October 21, 2016.

Recent IoT-based Attacks: What Is the Impact On Managed DNS Operators?
October 20, 2016
Everyone from the C suite to K Street has seen the news of the most recent rounds of DDoS attacks against the likes of Krebs, OVH and others. Widespread cries for BCP 38 are renewed,  source address validation everywhere (SAVE) is a hot topic, and talks about a solution centered on reputation based peering are bubbling up. But has anything changed for the internet operator community? Or has the social amplification of risk increased awareness of known faults and gaps in internet infrastructure? The focus of this piece is on attack traffic for which BCP 38 / SAVE are not impactful.

In the trenches
Let’s look at this operationally. An attack happens … now what? You have some logs, network usage metrics and a timeline of alerts from monitoring systems tripped during the attack. As an Authoritative DNS provider, the data we have from an attack often isn’t directly actionable without some cooperation from other recursive resolver operators or amplification honey pots. BCP 38 / SAVE would help remove the need for this step of analysis. These changes are needed because the Internet’s design inherently enables certain kinds of attacks. At the risk of oversimplification, here are some quick characterizations of each kind:

Attacks which focus on web service resource exhaustion can be harder to defend against because the attacker is making requests for resources, often in a manner similar to a normal end user. They connect to your web server and they request the images, html and other resources to render a web page. These attacks are higher risk for the attacking botnet operator as connection to the web server and making resource requests requires a TCP handshake which exposes the IP address of the compromised device. The large population of vulnerable connected devices and ease of exploitation has increased the viability and sustainability of layer 7 HTTP / HTTPS attacks.

More common attacks focus on generating large volumes of data which prevent legitimate data from reaching the targeted end point. These attacks don’t require a large botnet, they only require connectivity to a provider which doesn’t perform source address validation. The lack of source address validation allows  requests to be issued seemingly on the behalf of another system and their response is then directed at the unsuspecting device or service. When issuing such a volumetric attack the operator has their choice of protocol DNS, NTP, SSDP, TFTP, even services as benign as TeamSpeak and Valve Source Engine can be used as their responses are larger than the requests made to them. In these scenarios, finding the reflector or issuer of the larger response feels like a waste of time.  ShadowServer, DShield, The Open Resolver project and others have made reporting on these sources available for years. So the problem is not accessibility of data, availability of reporting, or awareness of the issue (If you own and operate IP space please sign up for ShadowServer reports to make sure you aren’t facilitating these attacks )
The goal of an authoritative DNS exhaustion attack is to remove the protection of the recursive caching layer from the authoritative DNS resolvers. To be effective the attackers wants to have each client request result in an authoritative lookup, ideally placing enough strain on the authoritative resolver that it stops functioning. To do this the client needs to request records which will not appear in the cache of the recursive layer, because if the result isn’t found in the cache the recursive resolver will need to request that value from the authoritative. This cache busting technique is used frequently when collecting DNS real time user measurement (RUM) data. In the case of RUM requests, the goal is to force authoritative resolution to collect timing and performance telemetry. The Mirai botnet, recently in the news for being identified as a source of the attack on Krebs on Security, has an authoritative exhaustion function in its arsenal. This is implemented in Mirai by prepending a pseudorandom 12 character subdomain to the target domain. This leaves the authoritative DNS provider with a fingerprint. At time X machine Y requested a domain with a pseudorandom sub domain. With this information, you can go to the owner/operator of machine Y and inform them that at time X you received a request from machine Y for a domain with a the specified sub domain. They can then tie that request to the machine which asked them about that domain with the sub domain. At that point they know the client IP of the infected system or the outbound IP of a carrier grade NAT.

However, as the above description outlines, it requires an in-depth logging history for a high volume systems with some potential privacy implications....MORE
Yes, their analysis of Distributed Denial of Service attacks using the Internet of Things (the attacks on Krebs) was posted less than 24 hours before they themselves were attacked.
Here's the Register with more, see also the post immediately below if interested.

Today the web was broken by countless hacked devices – your 60-second guide
IoT gadgets behind tens of millions of IP addresses flooded DNS biz Dyn
Updated Today, a huge army of hijacked internet-connected devices – from security cameras to home routers – turned on their owners and broke a big chunk of the internet.
Compromised machines, following orders from as-yet unknown masterminds, threw huge amounts of junk traffic at servers operated by US-based Dyn, which provides DNS services for websites large and small.

We're told gadgets behind tens of millions of IP addresses were press-ganged into shattering the internet – a lot of them running the Mirai malware, the source code to which is now public so anyone can wield it against targets.

The result: big names including GitHub, Twitter, Reddit, Netflix, AirBnb and so on, were among hundreds of websites rendered inaccessible to millions of people around the world for several hours today.

Dyn tells us it has weathered the storm for now, and services are coming back online. Here's what we know:
  • Starting from 1110 UTC, a distributed denial-of-service attack knocked Dyn's DNS nameservers offline. This continued throughout the day in three independent waves as hackers targeted Dyn's data centers one by one, including its US East Coast facility. By 2037 UTC, the situation is said to be under control after mitigations were put in place to block ongoing attacks.
  • Dyn is a crucial component in the internet's infrastructure because when you visit a website that uses Dyn's DNS servers, Dyn is supposed to help your browser or app find the right system to connect to. When Dyn does down, your software can't find the website you want to visit.
  • A spokesperson for US Homeland Security said the agency is "investigating all potential causes" of the mega-outage.
  • Dyn's chief strategy officer Kyle York told The Register by phone that devices behind tens of millions of IP addresses were attacking his company's data centers.
  • A lot of this traffic – but not all – is coming from Internet-of-Things devices compromised by the Mirai botnet malware. This software nasty was used to blast the website of cyber-crime blogger Brian Krebs offline in September, and its source code and blueprints have leaked online. That means anyone can set up their own Mirai botnet and pummel systems with an army of hijacked boxes that flood networks with junk packets, drowning out legit traffic....

"This Is Probably Why Half the Internet Shut Down Today [Update: It’s Happening Again]"

There was a reason we made such a noise about the IoT DDoS attacks three weeks ago:
Details Emerge On The Big Internet-of-Things Hack: This Is Just Sick
Uh Oh: Internet Security Pro Hit By Botnet Made Of Internet-of-Things Connected Cameras
This is very bad.

From Gizmodo:
Twitter, Spotify and Reddit, and a huge swath of other websites were down or screwed up this morning. This was happening as hackers unleashed a large distributed denial of service (DDoS) attack on the servers of Dyn, a major DNS host. It’s probably safe to assume that the two situations are related.

Update 12:28 PM EST: Dyn says it is investigating yet another attack, causing the same massive outages experienced this morning. Based on emails from Gizmodo readers, this new wave of attacks seems to be affecting the West Coast of the United States and Europe. It’s so far unclear how the two attacks are related, but the outages are very similar.

In order to understand how one DDoS attack could take out so many websites, you have to understand how Domain Name Servers (DNS) work. Basically, they act as the Internet’s phone book and facilitate your request to go to a certain webpage and make sure you are taken to the right place. If the DNS provider that handles requests for Twitter is down, well, good luck getting to Twitter. Some websites are coming back for some users, but it doesn’t look like the problem is fully resolved.

Dyn posted this update on its website: “Starting at 11:10 UTC on October 21th-Friday 2016 we began monitoring and mitigating a DDoS attack against our Dyn Managed DNS infrastructure. Some customers may experience increased DNS query latency and delayed zone propagation during this time. Updates will be posted as information becomes available.”

Here’s a list of websites that readers have told us they are having trouble accessing:

Big cartel
Business Insider
HBO Now (iHeartRadio)
Playstation Network
Squarespace Customer Sites
Starbucks rewards/gift cards
The Verge
Twitter (lol)
Wix Customer Sites
Zoho CRM
Credit Karma
Fox News
New York Times
Elder Scrolls Online
Eve Online
Speed Test
Blue Host

See also Gizmodo's "Today's Brutal DDoS Attack Is the Beginning of a Bleak Future"

On the other hand, and on another subject, different from the DNS servers, our little site is hosted on Google's servers which would probably register a 2 million bot DDoS attack as "Say, we've got a 5% blip in traffic" (the goog gets a lot of traffic) and which allows us to take a more sanguine view of things:


Elbonians Will Rue The Day - Dilbert by Scott Adams

See also: "Cloud Computing: One 'hiccup' and 'boom' - Amazon Web Services is 'gone'--Cisco President (AMZN)" and Econophysics: Or Why, When it Comes to Economics, We All Behave like Particles"
Where synchronization is going to get very interesting is when some critical mass of businesses migrate to cloud computing, say Amazon's Amazon Web Service, and someone takes down AWS.  
Unlike the good old days where a computer problem put one company at risk you'll have dozens, hundreds or thousands of companies frozen, all their economic activity halted at the same time. 
That's synchronization baby!

Analysts Weigh In On Stocks and the Dollar

From Barron's Stocks to Watch:

Enjoy the Ride: Dow Drops 100 Points as Soaring Dollar Sinks Stocks

Stocks are heading lower this morning as the strong dollar threatens to upend the market.
The S&P 500 has fallen 0.4% to 2,133.85 at 10:28 a.m. today, while the Dow Jones Industrial Average has dropped 108.55 points, or 0.6%, to 18,053.80. The Nasdaq Composite has dipped 0.1% to 5,239.32. The U.S. Dollar index has gained 0.4% today.
Evercore ISI’s Dennis DeBusschereexplains why the dollar is rising:
US dollar gains, which accelerated after the ECB yesterday, has been a headwind for U.S. stocks…The U.S. dollar index is up +3.2% since the start of the month, which has also coincided with a -1% decline in the S&P. Fed officials have expressed discomfort with USD strength over the past year, but with inflation expectations increasing and credit spreads near their 2016 low, the pace of USD gains is not having much of an impact on December rate hike odds, which are still above 65%. The decline in the Euro helps support the Stoxx at the expense of the S&P near term. Promises from Fed officials to raise rates at a very gradual pace and expectations that economic growth will remain stable are helping keep credit spreads tight. Credit spreads typically move in the opposite direction of economic activity, so if one thinks the global economy is going to improve then spreads could tighten further.
Rhino Trading’s Michael Block explains why the rising dollar is such a problem for U.S. stocks:...MORE

"The $108 Billion Man Who Has Beaten the Market"

Jason Zweig at MoneyBeat's Intelligent Investor:
Even in the era of index funds, humans have fundamental investing advantages that no machine will ever replace. So says Will Danoff, manager of Fidelity Investments’ $108 billion Contrafund, the biggest actively managed stock or bond mutual fund run by one person.

Since he took over on Sept. 17, 1990, Contrafund has averaged a 12.7% return annually, according to Morningstar, outperforming the S&P 500 index by 2.9 percentage points a year. If you’d invested $10,000 in the fund then, you’d have had $231,207 at the end of last month; the same amount in the S&P 500 would have grown to $118,184.

In that way, Mr. Danoff stands out — the rare big-company fund manager to best the indexes.

Yet, recently, Contrafund has been struggling. For the past five years, the fund has trailed the market by ​just over half a percentage point ​annually on average, although it outperformed in 2015 by more than five points.

“For the average active manager, the index has been tough to beat in the last five or six years as central bankers have moved interest rates to extraordinarily low levels,” says Mr. Danoff. “I have managed through these cycles before and believe that experienced active managers will make up a lot of ground quickly when the pendulum swings.”

Mr. Danoff still practices investing largely as an artisanal task. He shows up to a recent interview at Fidelity’s Boston lugging an old notebook that looks as if it has been run through a clothes dryer a few times. In this and other battered notebooks, he has logged ticker symbols and other details from every company he has met with over the past quarter-century — ​almost 35,000, he reckons. A rumpled page shorn from a legal pad pokes out of his shirt pocket.
Mr. Danoff, 56, was trained by the formidable Peter Lynch, who managed Fidelity’s Magellan fund until 1990. “Peter believed in turning over more rocks than anybody else,” Mr. Danoff says. “The more companies you see, the more opportunities you will find.”

In September, Mr. Danoff says, he spoke with managers from roughly 100 companies, mostly face-to-face. This past week, he says, he met with three billionaire chief executives (no, he won’t name them). “I learn from shrewd executives about their businesses every day,” he says, “and this knowledge will help us make the right long-term investments for our shareholders.”

In his four or five daily meetings with managers, he sponges up insights about their companies and their suppliers, competitors and customers, as well as coming technological changes that could hurt or help a business.

“By casting a wide net, and being flexible and willing to admit and learn from mistakes,” Mr. Danoff says, “active managers at big firms can beat the index over time.” It’s big firms, because not all fund managers command the heft to get such access to top executives.

Andrew Clarke, chief financial officer of C.H. Robinson Worldwide, a transportation and logistics company based in Eden Prairie, Minn., met with Mr. Danoff in January and was “amazed” when he pulled out notes, handwritten on yellow legal pad, from a meeting with Robinson’s management team in 1997, when the company first sold its stock to the public.

“He can see the entire arc of our growth story,” says Mr. Clarke, “because he’s able to go back and see exactly how it’s unfolded.”...MORE

"Earnings Jolt Stocks Like Never Before as ETFs, Algos Get Blame" (NVDA; FSLR)

Yes, I am thinking about NVIDIA'a upcoming numbers* and I still get butterflies riding an extended stock that is priced with zero-tolerance for disappointment.

We went through the same thing with First Solar, out in public here on the blog, every three months, pretty much from the $20 IPO in November 2006 to the $317 top-tick in less than 18 months and then down to $11.43 over the next four years.
On some report days the options would move through five or six strike prices.

It got so rollery-coastery we'd do stroke symptom identification drills using the American Stroke Association's F.A.S.T. protocol:
Face drooping:  -no, that's just a hang-dog expression
Arm weakness:  -no, she just through a monitor across the room
Slurred speech: -no, that's the director of customer relations/client retention just returned  from a three grand lunch.
Time to call an ambulance: no, time for some rapid-pulse chair aerobics as the algos move faster than even seems possible.
Hmmm....this intro seems to be going to a dark place.
On a lighter note, here's the headline story from Bloomberg:
  • Instances rise of big price swings after results are announced
  • Researchers see link to ascent of ETFs and passive investing
Just because U.S. corporate profit growth has ground to a halt doesn’t mean the impact of earnings announcements in the stock market has diminished. In fact, it’s never been bigger.

Swings such as Alcoa Inc.’s 11 percent plunge last week have become increasingly common since the financial crisis, according to a study by Leuthold Group that looked at how shares reacted in 193,000 instances going back to 1996. The Minneapolis-based fund manager found that earnings-day stock moves exceeding 5 percent doubled in seven years, even as the accuracy of analyst forecasts deteriorated only slightly and market volatility stayed the same.

Some investors pin the trend on the rise of computerized market makers whose hair-trigger algorithms have supplanted the deliberation of their human predecessors. To others, the swings are evidence not of a faster market, but a slower one. They say the likely culprit is the meteoric rise of passive index funds, which fail to appreciate differences among companies and their shares, throwing the process of price discovery out of whack.

“When earnings come out, it’s becoming a rockier road,” said Bill Schultz, who oversees $1.2 billion as chief investment officer of McQueen, Ball & Associates Inc. in Bethlehem, Pennsylvania. “You’re seeing more index-dominated movement and less retail participation in stocks than you have in the past.”
In an earnings season less than a week old, a handful of U.S. companies beyond Alcoa have already seen outsized price swings relative to recent history. On Oct. 13, First Republic Bank slipped 4.1 percent, the biggest post-earnings move since 2014 and almost double the historical average. Hasbro Inc. climbed 8.1 percent on Monday following its report, three percentage points more than the average throughout the bull market.

Index investments like exchange-traded funds have become an easy target for anyone trying to diagnose market anomalies if for no other reason than their rapid growth. More than $5 trillion is invested in passive strategies tracking stocks today, more than double the $2 trillion of five years ago, data from Morningstar Inc. show.

“With all the money flowing in, people are quick to point the finger at ETFs,” said Eric Balchunas, an ETF analyst with Bloomberg Intelligence. “It’s a relatively new variable on the scene and it gets tagged with a lot of problems. There are a couple of suspects, and maybe ETFs are one of them, but they’re not the only issue.”

While lots of things could contribute to bigger share reactions in the hours after a company discloses results, Leuthold found incomplete evidence in the accuracy of analyst forecasts or overall market volatility. Reported earnings differed from the consensus estimate by 11.3 percent between 2010 and 2016 compared with 9.7 percent from 2004 to 2007, it found, while instances of big moves on non-earnings days were the same....MORE
*November 3rd.

Before we go any further, our NVIDIA boilerplate: 
We make very few calls on individual names on the blog but this one is special. 

They are positioned to be the brains in autonomous vehicles, they will drive virtual reality should it ever catch on, the current businesses include gaming graphics, deep learning/artificial intelligence, and supercharging the world's fastest supercomputers including what will be the world's fastest at Oak Ridge next year.
Not just another pretty face.
Or food delivery app.
That's me, quoting myself (NVIDIA Sets New All Time High On Pretty Good Numbers, "Sweeping Artificial Intelligence Adoption" (NVDA))

As noted prior to last quarter's release, Aug. 11
NVIDIA: Ahead Of Today's Earnings Report (NVDA)
We don't do public estimates of sales, earnings and guidance, or guesses at market reaction to same, much less on the day of the report.  
I'll say this though, even after going through this routine for a lot of years on a lot of names it's still a bit nerve wracking. 
The stock is priced for perfection, and has delivered the last three quarters, but personally I'd actually like to see a 20% after-hours whack.
We'll be back after the release. $59.70 up $1.19...
Here's how that worked out: 

NVDA NVIDIA Corporation daily Stock Chart

And the quarter before that:

May 12 close  $35.57 Thu
May 13 close  $40.98 Fri
May 16 close  $42.19 Mon

Sunday, May 15, 2016
NVIDIA: A $2 Billion Chip to Accelerate Artificial Intelligence (NVDA)
First a heads-up. The technical trading gurus at Investor's Business Daily are saying take profits after Friday's big move, now 20% above their buy point. I don't think so but it all depends on your time frame.

And whether you have the discipline to buy back in should the stock not pull back.
(see links below for some of the things driving the stock)

On the other hand it's not like the stock is unknown and there are hordes of naïfs who have yet to discover it. NVDA was the fourth-best performer on NASDAQ in 2015 and through Friday is up 95% in 52 weeks and 60% since the overall market bottomed on Feb. 11....
Monday, May 16, 2016
Analysts React To NVIDIA's First Quarter Report (NVDA)
Nvidia Surges 14% to All-Time High: Street Dazzled by ‘Secular’ Opportunities
I'll leave it to the reader to identify the gaps in the chart.
In the words of coffee analyst Rachel Green:
"That's a risky little game".

-Friends, Season 8 episode 3
airdate 27 September 2001, 

dedicated to The People of New York City 

Private Equity Has An Alpha Problem

From DealBreaker:
For decades, private equity has been one of the most enduring and popular alternative asset classes.
Part of this popularity is surely driven by a perception of high returns and significant alpha across the PE space. That excitement about PE returns was once justified, but a careful look at returns data over the last 10 years suggests that, on average across all funds, PE alpha has largely disappeared. For investors, this leads to two important questions; where did all the alpha go, and do some funds still deliver the goods?

The questions are becoming even more important as the PE space is becoming more democratized. The largest PE funds are now publicly traded, and even the rarified world of venture capital is now open to the mass affluent through new vehicles like the ones offered by SeekingAlpha.

While exact data is hard to get in the PE world, there are a number of studies that have looked at the issue. Yale did a study of buyout PE returns between 1987 and 1998 and found returns of 36% annually versus 17% for the S&P 500. To generate that level of returns, PE funds had to take on significant leverage, but that performance is still impressive. On a beta-adjusted basis, economists have found that PE generated alpha of about 5.5% between 1980 and 2006, based on buyout firm investments having a beta of around 2 and VC fund betas of around 3.

All of the alpha disappeared after 2006. While PE funds have outperformed the market as a whole by roughly 3% over a 30 year period, that superior performance is entirely driven by the early part of the sample. Since 2006, PE returns have been roughly on par with those of the S&P – all without the liquidity, transparency, or low fees of public equity markets. The chart below illustrates this.
Screen Shot 2016-10-19 at 2.58.20 PM
David Swensen, chief investment officer of the Yale Endowment perhaps best summed up the challenge concluding “Investors in buyout partnerships received miserable risk-adjusted returns over the past two decades....MORE
HT: Alpha Ideas

U.S. Navy to Deploy A Squadron of Attorneys In Support Of British Aircraft Carrier Operations

The new ships will be impressive bits of machinery. As Wikipedia notes:
The Queen Elizabeth class carriers will be closer in size to a Nimitz-class carrier (left) than the Invincible-class ships they replace (right)

From The Register:
...“Our American partners lead the world in carrier strike group operations. So we are delighted to be working with the US Navy judge advocate general to help maximise our legal readiness in support of our nation’s return to carrier strike,” said Commodore Andrew Jameson, chief lawyer of the RN, in a canned quote from the MoD....
And here come the attorneys, declining a helicopter ride or even a breeches buoy, knowing the sharks will extend professional courtesy:

Thursday, October 20, 2016

Is Snap Inc. Building a Wearable Face Recognition Device for the National Security Agency?

For folks too busy having a real-world life to keep up with this stuff, Snap is the recently created parent company of double-decacorn Snapchat (think Google/Alphabet) which, deciding it would be more than just the app, rolled out video recording "Spectacles" to do image capture and upload:

They would now like you to think of them as a "digital lifestyle" platform, thank you very much.
They've also hired bookrunners for a potentially blockbuster IPO early next year.

From Hackernoon, Oct. 3:

Could Spectacles be an elaborate distraction?
Last week, Evan Spiegel of Snap Inc. unveiled his first hardware product Spectacles to a few journalists. Wall Street Journal author Seth Stevenson recalls how Spiegel invited him into “a small conference room” where he “draped a towel over a mysterious object sitting on a table” calling Spiegel “eager to the point of jitters”.

Perhaps “eager” isn’t the right adjective.

So a white-hot, consumer-focused company with a $20-Billion valuation reveals its first-ever spiffy gadget via a cramped conference room… with a towel.

What a complete and utter lack of fanfare.

What changed in Silicon Valley?

Were all the stages and conference halls booked in Palo Alto that day?

This is the flagship hardware launch of one of the hottest entities in the valley. Surely they want a buzz around their new device.

Yet… no spotlights or smoke machines? No music? No crowd? Not even a black turtleneck?
None in sight.

Additionally, the product which Spiegel refers to as a “toy” doesn’t seem meaningfully distinguishable from Epiphany Eyewear — video-recording glasses developed by Vergence Labs whom Snapchat acquired in 2014.

Tech journalists know that Snap Inc. has been working on a secret project for months, possibly years, all-the-while hiring up all the best electronics and robotics talent in the industry. This massive effort finally culminated to build… a toy?

Could the recent press release about Spectacles be an elaborate distraction to take attention off of a more unsavory product?

Acquisitions, Hires & a Patent
Snapchat may have indicated in a July patent published at the United States Patent and Trademark Office that they have developed facial-recognition device which displays personal information within seconds of a facial scan. The patent details a means of “executing a facial recognition technique against an individual face within the image to obtain a recognized face”.

This patent comes after their recent acquisition of Vergence Labs, known for developing Epiphany Eyewear — a product similar to Google Glass, as well as a string of high-profile hires in the consumer electronics industry. These newly-hired hardware specialists reportedly joined a secret research and development lab according to a March article by CNET. Their previous work ranges from wireless-video doorbells, security cameras, robotic Star Wars toys, Google Glass, GoPro, and the Oculus VR headset according to a recent Financial Times article.

Also, they reported Snap Inc. was “looking at pretty much every AR startup with computer vision skills” as a target for a possible acquisition.

Up until last Saturday, Snapchat still had not publicly announced any plans to develop hardware. It wasn’t teased at all until rumors started circulating. The conclusion was pretty much a slam dunk when Financial Times journalists discovered Snap Inc.’s move to pay and join the Bluetooth consortium which they called a “clear signal of intent” to develop hardware.

So, if press about their secret operation was the catalyst for them to pass off Spectacles’ 2-year-old product as something new, what is it that they’re really working on?

Gathering Facial Profiles With “Lenses” Feature?
In order to use the silly-cartoon-face-making “Lenses” feature on Snapchat, the interface instructs the user to tap on their face which initiates a facial scan. This captures the user’s face for a seemingly-temporary period so they can apply silly dog ears and rainbow barf to their heart’s content and send it to their friends.
How “Lenses” Could Train a System to Recognize a Face
Adam Geitgey’s Medium article Modern Face Recognition with Deep Learning explains how accurate facial recognition relies on a system’s ability to “pick out unique features of the face that you can use to tell it apart from other people — like how big the eyes are, how long the face is, etc”. And the system must also be able to “compare the unique features of that face to all the people you already know to determine the person’s name.”

One method of face recognition is to program a system to compare measurements of obvious facial landmarks like the outside edges of eyes or top-of-the-chin to mouth etc. but the most accurate way for a system to reliably recognize a face is to let it decide which measurements matter most by feeding it millions of faces.

Determining these mysterious measurements is resource-intensive but highly accurate. Luckily, services like OpenFace have processed the millions of face images necessary to discover the 128 unique measurements that make for an accurate result. Using a service like this, any 10 different pictures of the same person should give roughly the same measurements.

In Machine Learning, capturing these vital 128 facial measurements is called “embedding”. These measurements are unique to almost every human being.

To capture a person’s facial signature, an algorithm must first encode their facial features using a method called HOG (Histogram of Oriented Gradients) which outputs a simplified image that is basically a flattened-and-centered set of the subject’s primary facial features. That output is then passed through a neural network that knows which 128 measurements to make and saves them.

With our face captured, all the system has to do to identify someone is compare the measurements to those of all the facial measurements captured for other people and figure out which person’s measurements are the closest to find a match....MORE

Calories In, Kilowatts Out: Apparently Sweating Is Important

The author of the first piece, Vaclav Smil, is one of the gurus in the Thinking About Energy biz.
Two from IEEE Spectrum:

The Energy Balance of Running
Human beings are great at running because they are stupendous at sweating
During the two years of its monthly appearance, this column has looked at many objects—cars, turbines, airplanes, windows, mobile phones, and nuclear reactors—made by humans. Today’s focus is on the human body, specifically the way it keeps itself cool.

Before the development of long-range projectile weaponry some tens of thousands of years ago, in Africa, our ancestors had only two ways to secure meat: by scavenging the leftovers of mightier beasts or by running down their own prey. Humans were able to occupy the second of those ecological niches thanks, in part, to two great advantages of bipedalism.

The first advantage is in how we breathe. A quadruped can take only a single breath per locomotive cycle because its thorax must absorb the impact on the front limbs. We, however, can choose other ratios, and that lets us use energy more flexibly. The second, and greater, advantage is in our extraordinary ability to regulate our body temperature, which allows us to do what lions cannot: to run long and hard in the noonday sun.

It all comes down to sweating. The two large animals we have mainly used for transport perspire profusely, compared to other quadrupeds: In one hour a horse can lose about 100 grams of water per square meter of skin, and a camel can lose up to 250 g/m2. However, a human being can easily shed 500 g/m2, enough to remove 550 to 600 watts’ worth of heat. Peak hourly sweating rates can surpass 2 kilograms per square meter, and the highest reported short-term sweating rate is twice that high.
We are the superstars of sweating, and we need to be. An amateur running the marathon at a slow pace will burn 700 to 800 W, and an experienced marathoner who covers the 42.2 kilometers in 2.5 hours will burn about 1,300 W.

And we have another advantage when we lose water: We don’t have to make up the deficit instantly. Humans can tolerate considerable temporary dehydration providing that they make up the deficit within a day or so. In fact, the best marathon runners drink only about 200 milliliters per hour during the race.

Together these advantages allowed our ancestors to become the unrivaled diurnal, high-temperature predator. They could not outsprint an antelope, of course, but during a hot day they could dog its heels until it finally collapsed, exhausted....MORE

This Robot Can Do More Push-Ups Because It Sweats

Kengoro humanoid robot that sweats and does push-ups


How Can You Not Love A Post Headline Containing "...Regulatory Filings As Performance Art"

From FT Alphaville:

The emerging genre of regulatory filings as performance art
This is a marvelously weird apparent prank.

There seems to be an actual entity — it’s registered in Wisconsin — called YNOFACE Holdings Inc, which said in a SEC filing Wednesday that it had acquired more than 4.2 bn shares of Bank of America on September 22, and nearly 800 million shares on August 15 with an exchange of shares.
That’s a lot of shares, and pretty clearly a hoax — though, oddly, the Form 4 filing is still up there. (The purchase of 4.2 billion shares would have cost $66bn. Bank of America’s entire market cap is $171bn.)

As Reuters first reported, the company is run by one Antonio L Lee, who is described on his website as an “American entrepreneur, world renowned artist, and YouTube celebrity specializing in acrylic painting” who is “well known for his work in the field of Scientific and Performance Art”.
Reuters compares the filing to other SEC-filing scams like the fake Avon Products takeover bid, but we think it fits into a colourful trend of oddball regulatory filings meant to make a statement, not a profit.

So far, most of the other such statements have been lobbying efforts under (probable) pen names:
  1. RT Leuchtkafer, a regular commentator on high-frequency trading who says he’s based in New York. Dark Pools postulates that Leuchtkafer is a nom de plume, since it means “lightning bug” in German. (Get it? Lighting-fast traders? Bugging them?)
  2. Danny Mulson, who claimed to be an eighth-grader in the nonexistent town of Wetlawn, Oregon.
  3. Jane Carson, an “80 year old individual investor” based in New York with a uncannily strong grasp of market structure. We were able to find one Jane Carson in the New York area, with an address the Bronx and a disconnected number.
But this statement from YNoFace is a bit more inscrutable and strange than most.

We sent Lee a Facebook message, and got no response. We also called the phone number listed on the company’s Form D filing twice, but couldn’t leave a message because it doesn’t have a voice mailbox. We also left a comment on Lee’s website. We really want to talk to this guy.

Here’s one of the more safe-for-work paintings we found on YNoFace’s Facebook page. It appears to be a dancer and a squirrel, and three children. (Are the children riding the squirrel, or standing behind it? Who can know?)...
There are some paintings about finance as well, as you’d expect:...
...MORE, so much more

Hey, the figures have no faces!

Theranos: The Silicon Valley Case The SEC Has Been Waiting For

From TechCrunch:

The SEC gets the case it’s been waiting for in Silicon Valley
Not so long ago, Theranos was flying high, its claims that it was upending the medical diagnostics business largely accepted by the public. Behind the scenes, however, some employees were growing wary of those claims, with at least one eventually reaching out to regulators to report the company’s failure to report its questionable test results.

A stinging series of articles by the Wall Street Journal soon followed, and in recent months, the government agency that oversees U.S. labs has banned founder and CEO Elizabeth Holmes from operating a blood-testing laboratory for two years, and Theranos has shuttered its clinical labs and wellness centers. To make matters worse, the company was last week slapped with a lawsuit by one of its biggest investors, which claims that Theranos knowingly lied to it.

It’s a nearly ideal scenario for the SEC, which is investigating Theranos and widely expected to use a case against it to expand its mandate into Silicon Valley’s startup ecosystem. The truth is while the SEC has long been viewed as a force in the public markets, it also has the authority to chase after private companies that engage in any “act or omission resulting in fraud or deceit in connection with the purchase or sale of any security.” And lately, Wall Street’s top cop is finding Silicon Valley too high-profile a target to resist.

“If you’re only raising couple million bucks, everyone expects your huffing and puffing,” says one San Francisco-based securities attorney. “But if you’re raising hundreds of millions to billions of dollars, why would the SEC ignore that when they’re auditing the financials of some piddly company that’s raising $50 million in an IPO?”

In many ways, the startup world has been working toward this moment since 2002, with the passage of Sarbanes-Oxley, a law that established new accounting standards for publicly traded companies. SarBox was designed to safeguard public market investors from the likes of Enron, an energy-trading company that perpetrated one of the biggest accounting frauds in history.

VCs grumbled over the additional expense the new regulation created, calling it a deterrent to going public. Whether or not their claims were valid, the rise of Facebook soon after marked an undeniable shift toward staying private longer. Startup founders admired and looked to emulate Facebook cofounder and CEO Mark Zuckerberg, a then twentysomething who wasn’t answering to anyone, yet growing his company at a nearly unprecedented clip.

Facebook’s private shares similarly seduced accredited investors everywhere. Because of secondary marketplaces that mushroomed around the growing social media giant – the platforms enabled many far-flung participants to trade Facebook’s then-private shares – many who were new to startups were rewarded, and they looked to repeat the scenario.

Facebook wasn’t alone in its early ascendance in the Boston area. A year after it was founded in 2004 in Mark Zuckerberg’s Harvard dorm room, a nearby outfit called Y Combinator was being created by entrepreneur Paul Graham and his wife, Jessica Livingston.

It was unlike anything Graham had ever done — and by design. When earlier in his career, Graham cofounded a software company called ViaWeb, few doubted his engineering prowess. But Graham was much weaker when it came to fundraising. In fact, though Yahoo wound up purchasing ViaWeb for $49 million in stock in 1998, it was after being encouraged by a third party to kick the tires a second time.

Y Combinator alums would be different. From nearly the outset, participants in the now-famous accelerator program learned to frame their growth metrics as compellingly as possible. Their pitches proved so irresistible to VCs over time that the mantra of “ramen profitable” gave way to “growth hacking,” which involved burning cash to expand — and figuring out profitability later.

Against the backdrop of these shifts, the SEC’s interest in Silicon Valley was growing. One early, motivating factor was a report in the WSJ in 2006 that questioned whether executives at a variety of healthcare and software companies were manipulating options pricing. Investigations were launched, including into Apple; the SEC even set up a related “Stock Options Task Force” and filed charges against two former Apple execs for their alleged roles in backdating Apple options — both of whom settled without admitting wrongdoing. But the investigations came to be viewed as much ado about nothing, with disagreement even among the government’s experts about how stock options should be issued....MUCH MORE
HT: Matt levine@BloombergView

Chanos On Tesla: Not Impressed (TSLA; SCTY)

The stock is down $4.68 (2.30%) at $198.88.
From Yahoo Finance:

Why Jim Chanos is thoroughly unimpressed by Tesla
Influential short-seller Jim Chanos, who runs hedge fund Kynikos Associates, has been betting against two companies founded by billionaire serial entrepreneur Elon Musk — Tesla Motors (TSLA) and SolarCity (SCTY).

Chanos, famous for nailing the collapse of Enron, said that shareholders view Musk as a “messianic leader.” In other words, he can do no wrong. While Chanos has no doubt about Musk’s intelligence, he does see serious problems with his companies, which he described as a “melange of publicly-traded and privately-traded science projects sort of gone awry.”

“The fact of the matter is this is a company — in Tesla’s case — that’s now really going to need to step up the production. It’s going to be competing against Mercedes, Audi, VW, finally, who are bringing product lines as an OEM [original equipment manufacturer],”  Chanos said at the Vanity Fair New Establishment Summit in San Francisco on Wednesday.

According to Chanos, Tesla has been “leapfrogged” by most the other OEMs, making Tesla’s massive  gigafactory it’s currently building in the Nevada desert “somewhat of a giant white elephant.”

“This is a car company,” Chanos said.

“This is not a high-technology company in that people forget that battery technology has been around a long time,” he continued. “It’s not subject to Moore’s Law. It’s basic chemical reactions.”
Furthermore, he added that the battery technology Tesla uses is not proprietary, but rather belongs to Panasonic (PCRFY).

“A lot of people are continually stunned to find that out.”...MORE
Chanos is being coy about the reasons for his shorts on SCTY and TSLA. 
It comes down to fairly sophisticated cash flow and balance sheet analysis combined with an educated guess as to Tesla's ability to raise quite a bit of cash over the next six to eighteen months.

When he starts talking about the technology, he's mainly correct, but it's just the magician's misdirection to get the competition looking somewhere else rather than at the crux of the matter.
He's been doing this schtick for a while and he's a master of both the analysis and the 'hey look, shiny' explanation.

Here he is at CNBC yesterday addressing a slightly more knowledgeable audience:
Jim Chanos, Kynikos Associates Founder


If You've Noticed A Perma-Bid In Commodities, You're Not Imagining It

The buying has been relentless. Not aggressive but each day taking what hits the bid and then upping the bid.
And it's not just agricultural commods. Except for copper.*
(and cattle, and hogs)

From Agrimoney:

AM markets: grains extend headway, amid talk of fund buying
The idea that funds are getting back into grain markets, as flagged last week, is beginning to find a bit more of an echo.
In fact, it is not just grains that appear to be getting more attractive to investors, but commodities as a whole.
Benson Quinn Commodities, for instance, saying that gains in soybean prices "seemed to be more macro in nature", flagged signs of "funds coming to the commodity sector as signs of rising US inflation along with China hitting its growth target in third quarter reporting GDP of 6.7%".
The CRB commodities index closed the last session above 190 points for the first time in more than three months.
Open interest clue
Meanwhile, there is circumstantial evidence too that there is more than short covering in the rally in corn and wheat derivatives in Chicago, the benchmark market.
If the rise in prices was just down to funds closing the substantial short bets that funds held in futures and options (a level which hit a record two weeks ago), that would be reflected in a drop in open interest, ie the number of live contracts.
But in wheat, while open interest in futures has fallen a bit, the decline is of a modest 5,000 lots or so over the week to last night's close, while for wheat options, opening interest has seen a gain of more than 20,000 contracts.
For corn, open interest in futures has risen by some 7,000 lots over the week, with that in options soaring by more than 70,000 contracts.
In soybeans, for the record, in which hedge funds already had a substantial net long position, open interest in futures is up some 25,000 contracts, and in options by a little over 5,000 lots.
'Buying agenda of funds'
And this despite the ideas of ample world supplies of wheat, and of record US corn and soybean harvests, with the latter proving particularly impressive.
"Harvest reports continue to talk of huge soybean yields," said Joe Lardy at CHS Hedging, adding that "records are being broken across the country".
However, futures in soybeans and grains have continued to recover.
The reason? "Hedge funds remain good buyers," persuaded to buy in part by technical factors.
"Over the past week, soybean futures have traded through the 10-, 20-, 50-, and 200-day moving averages, helping to support the buying agenda of the funds."
'Snap up as much as they can'
In early deals on Thursday, corn futures boosted their own technical credentials by - in rising 0.2% to $3.58 ¼ a bushel for December delivery, as of 09:30 UK time (03:30 Chicago time) - trading above their 100-day moving average for the first time in more than three months....MORE
 *Copper via FinViz:


"Who’s Powering the War on Cash?" (AAPL)

From Wolf Street:
On Monday, during a trip to Japan, Apple CEO Tim Cook vented his spleen once more against physical currency, telling the Nikkei that “we don’t think the consumer particularly likes cash.”

It’s a bizarre conclusion to reach, especially in Japan where cash is still the undisputed king. At ¥90 trillion ($885 billion), or about a fifth of gross domestic product, the value of banknotes in circulation is the highest in the world as a proportion of the economy. Many small businesses, including many restaurants, don’t even take plastic. Yet, the country was also the first to popularize mobile wallets and smartphones.

“We would like to be a catalyst for taking cash out of the system,” Cook said, his mind fixed on Apple Pay, which takes a cut on every transaction it processes.

Yet Apple Pay isn’t generating substantial revenue for the company, as Fortune points out. The service — as with just about everything Apple ever produced — is only compatible with Apple’s own products, leaving the more than a billion people worldwide who use Android-based smartphones out of the loop. Not to mention the billions more who don’t use a smart phone at all.

But cash’s days are numbered, as technological advances and changes in generational priorities dampen its allure. The world is brimming with individuals and institutions determined to put it out of its misery.

The Usual Suspects
Top of the list are the world’s central banks, which have the perfect motive for whacking cash: i.e. to make negative interest rates an eternal — or at least, more enduring — reality. And the only way to do that is to stop depositors from cashing out, as the Bank of England chief economist Andrew Hadlaine all but admitted in 2014.

Japan and Europe are already deep into negative territory, and Fed Chair Janet Yellen has already said that the U.S. should be prepared for the same outcome. But as long as cash exists, there’s no way of preventing depositors from doing the logical thing – i.e. taking their money out of the bank and parking it where the erosive effects of NIRP can’t reach it.

Central banks are not the only ones who dream of a cash-free world. For credit card companies, cash is the ultimate rival. As such, it’s no surprise that the likes of Visa and MasterCard are among those pushing the hardest for a cashless economy. For banks, the benefits are no less obvious, including cost cuts, greater control over the flow of customer funds, and larger fees.

As for politicians, Eurocrats and global plutocrats, including the senior servants of the IMF, World Bank and United Nations, they will enjoy even greater access to and dominion over the people’s funds. What better way of controlling the people than by controlling their access to the money they need to survive? It would amount to what Martin Armstrong calls “totalitarian control over the economy.” 

The Alliance
These powerful agents have already created a perfect platform for achieving their dream: The Better Than Cash Alliance (BTCA), a UN-hosted partnership of governments, companies and international organizations. Its purpose, in its own words, is “to accelerate the transition from cash to digital payments globally through excellence in advocacy, knowledge and services to members.”...MUCH MORE