Wednesday, October 26, 2016

"Tesla Earnings Smash Expectations After Dramatic Change In Reporting Methodology" (TSLA)

Following up on this morning's "Tesla Motors Plans to Change How it Reports its Earnings (TSLA)", ZeroHedge gets on the "Say, there's something different about these numbers" love train.

The stock is up $8.09 (4%) at $210.33 but considerably off the afterhours top-tick $ 216.48 (16:18:30 PM)

From ZH:
There was a sudden burst of confusion heading into today's Tesla earnings. As Bloomberg reported, a change in the way Tesla Motors Inc. will report quarterly results after today’s market close has created a bit of a last-minute headache for analysts, with earnings estimates varying widely. The electric-car maker is phasing out most of the non-GAAP adjustments it’s traditionally made, including ones for resale value guarantees or vehicles leased through banking partners. Starting today, when the company discusses third-quarter adjusted non-GAAP earnings per share, it plans to exclude only stock-based compensation.
The SEC in recent months has raised concern that public companies may be straying too far too often from Generally Accepted Accounting Principles. Though Tesla has telegraphed its plan for weeks, many analysts are only now revising forecast models and some are sitting out the guessing game entirely this time. That means it may be challenging to draw firm conclusions about whether Tesla missed or beat Wall Street expectations - giving added importance to what Chief Executive Officer Elon Musk says on a follow-up conference call about cash or production plans.
So heading into today's earnings, the average estimate in a Bloomberg survey of analysts stands at an adjusted loss of 54 cents a share, based on seven forecasts that have comparable methodologies that the firms say take the new practice into account. While all seven of those projected a loss, there are others who say the company may post a profit.
Well, those who expected a profit got just that, because momnets ago Tesla not only reported revenue of $2.3 billion, far higher than the $1.9 billion expected, but also reported its first quarterly profit of $74 cents, smashing consensus estimate of a 54 cent loss.
Since there will be much confusion over how these numbers make any sense, here is what the company said:
Starting this quarter, our financial releases no longer include the non-GAAP revenue disclosures that we historically provided. To simplify our financial reporting, we add back non-cash stock-based compensation (SBC) to calculate non-GAAP results. Consistent with previous quarters, non-GAAP automotive gross margin will also exclude ZEV credit sales.

Total Q3 GAAP revenue was $2.30 billion, up 145% from Q3 2015, while total Q3 gross margin was 27.7%, compared to 21.6% in Q2.

Total automotive revenue was $2.15 billion on a GAAP basis, up 152% from Q3 2015. Our final Q3 delivery count was 24,821, over 300 more than the estimated delivery count we shared on October 2nd. Deliveries increased 114% from the third quarter of 2015, and was comprised of 16,047 Model S and 8,774 Model X vehicles. In addition, 5,065 vehicles were in transit to customers at the end of the quarter. These vehicles will be delivered in Q4.

Our Q3 GAAP net income was $22 million, or $0.14 per share on 157 million diluted shares, while our non-GAAP net income was $111 million, or $0.71 per share on a diluted basis, after adding back $90 million of SBC. Both figures include an $0.08 per share loss of other expense, net, primarily related to foreign currency transactions and the conversion of most of our 2018 convertible notes.
Confused? So are we, and sadly charting the results does not help:

And here are the company's GAAP revenues:...
...MORE, including cash flow. 

The Effect Of Airbus' Cash Squeeze On Their Autonomous Flying Taxi Project Is Probably Nil

Following up on this morning's "Planes, Trains and (self-driving) Automobiles"/

Back in August we posted "Airbus Reveals Ambitious Plan for Autonomous Flying Taxis" with the comment:
"Your move, Uber."
Now I'm starting to wish I hadn't pulled Mr. Kalanick's teat quite so hard.

From Bloomberg Gadfly:
Tesla Motors Inc. gets a lot of flak for burning through prodigious amounts of investors' cash. But you don't have to be doing something revolutionary to do that. Look at Airbus.

The plane-maker's net cash fell by almost half to 5.6 billion euros ($6.1 billion) at the end of September from 10 billion euros at the end of 2015. The decline is partly due to production problems ranging from engines not being ready to missing toilets. Airbus's free cash-flow, before M&A and customer financing, was a negative 4.2 billion euros compared with a mere negative 1.6 billion euros a year earlier. Ultimately, a company's ability to generate cash should be a concern, so should we be worried?No, not really. Most of the cash flow shrinkage relates to a big increase in working capital. Inventories jumped to 33.5 billion euros at the end of September from 29 billion euros at the end of 2015.

This Cash is on Fire 
Airbus' net cash pile shrank by more than 40 percent in the first nine months of this year
Launching new aircraft always consumes cash, but at Airbus there are too many nearly-but-not-quite-finished airplanes sitting on the tarmac awaiting engines (A320neos) and cabin equipment (A350s). Airbus won't get the money until they're delivered to customers.

Awaiting Liftoff 
Airbus has a working capital problem due to supply chain troubles

These problems, while vexing, look solvable. Airbus said teething troubles with a Pratt & Whitney engine were "largely over," although it conceded it will get some of that machinery more slowly than it would like....MORE
What kind of analysis is this? They haven't even mentioned the autonomous flying taxis.
I want my autonomous flying taxi.

Here's Airbus' Future of Urban Mobility page:

And here's the latest on the taxis from Autoblog, Oct. 23:

Airbus wants to build a self-flying taxi called Vahana

Apparently, Vahana is a Sanskrit word that "denotes the being, typically an animal or mythical entity, a particular Hindu deity is said to use as a vehicle." Put more simply, Vahana is a vehicle fit for a god. Or, if you're A3 (that's A Cubed), a Silicon Valley-based subsidiary of Airbus, Vahana is the name of a fully electric autonomous vehicle. And not just any autonomous vehicle – this is airborne travel. As you'd expect from Airbus, Vahana travels in the sky, not on roads.

A3 hopes to have a full-size prototype ready to fly by the end of 2017, and an actual demonstrator is scheduled to follow by 2020. "Full automation also enables us to make our aircraft as small and light as possible, and will significantly reduce manufacturing costs," according to company CEO Rodin Lyasoff. To what end? "Beyond developing the vehicle itself, we're seeking to move key technology categories forward, foster development of the regulatory regime for the certification and operation of automated aircraft, and to otherwise nurture an ecosystem that will help enable the vertical cities of the future," says Lyasoff.

And what about safety? Not to worry. Vahana only has room for a single passenger, and there's an onboard "ballistic parachute that works even at low altitudes." Still, building a self-flying vehicle is bound to be rife with challenges. There are regulatory hurdles galore, not to mention what we're sure is going to be a very high cost of entry. We'll see how it goes....MORE (video)

Planes, Trains and (self-driving) Automobiles

A dive into transportation wonkitude with Ms Iz as our tour guide.
From FT Alphaville:

The autoignition temperature of manual cars is much higher than Fahrenheit 451

According to Bloomberg’s Chris Martin and Joe Ryan
Mass transit, the lifeblood of cities worldwide, is under threat from the biggest innovation in automotive technology since Henry Ford’s assembly line first flooded streets with cars.
They also note:
The self-driving vehicles being pioneered by Tesla Motors Inc., Alphabet Inc.’s Google and others are poised to dramatically lower the cost of taxis, potentially making them cheaper than buses or subways, according to a joint report by Bloomberg New Energy Finance and McKinsey & Co. Having no driver to pay could reduce taxi prices to 67 cents a mile by 2025, less than a quarter of the cost in Manhattan today, the report found.
Which, quite frankly, is amazing stuff from the likes of McKinsey — since at some point in their illustrious history they must have done some public transport consulting work, no?
We’ll spare you the exhaustive repetition of what actual public transport experts have repeatedly told us on that front. Suffice to say they don’t believe SD cars will pose much of a threat to public transport because costs in this space are determined by geometrical constraints, not human labour availability. As to the idea they’ll be cheaper than human-driven cars, we’ve covered the reasons why that might not be the case at all here and here.
What we will note is that the above is typical of the poor quality research coming out in this space — focussed as it is on fanning enthusiasm for the new tech (and related consulting contracts no doubt) rather than alerting investors to the practical realities and challenges.
As a rule, we’ve found most of the reports that grab the headlines are sparse on figures and big on assumptions, while those that cite actual figures and facts get crowded out entirely.
Many of these assumptions ignore basic facts such as that operating a SD network in the near future will clearly demand more labour hours not fewer (not least because autopilot cars will need to be supervised for a long while yet, but also because SD car networks will need a small army of specialist coders, administrators, lawyers and lobbyists, not to mention maintenance and cleaning staff, to be added to the cost structure). Nor do the assumptions appreciate the tragedy of the commons effect in operating unsupervised transport systems. Think of the average cleanliness of a night bus at the end of its cycle, then double the squalor. Without supervisory drivers onboard it is undoubtedly the case that cars will be exposed to everything from small child mess and late-night takeaway cast offs to doggy disasters and all sorts of other disgustingness....

Also at FT Alphaville:

SD cars and productivity

Apple's Earnings Report: Analysts React (AAPL)

From ZeroHedge:

Wall Street Reacts To Apple's Disappointing Earnings
As reported last night, despite a kneejerk spike higher in AAPL shares, the stock ultimately faded the release of its Q4 earnings which had a mix of positive and negative components, however the market ultimately focused on the latest revenue and ASP miss and the projected margin decline and glossed over Tim Cook's exuberant revenue forecast for 2016, pushing the stock lower by nearly 3% this morning. 
So, having had a chance to digest the results, Wall Street's sellside analysts chimed in, and the prevailing sentiment was neutral to negative, with Stifel's Aaron Raker most disappointed, downgrading the stock from Buy to Hold, and lowering his price target to $115.
  • Downgrades to hold from buy, lowers PT to $115 from $130
  • Says Apple stock is likely to remain “range-bound” for next two-three quarters until investors gain greater insight into potential fundamental upside drivers
WELLS FARGO (Maynard Um)
  • Says 1Q gross margin guidance of 38%-38.5% (vs 38% in FQ4) was disappointing; notes FX had a 50bps impact
  • Management commentary aligns w/Wells Fargo view that units per carrier are higher in non-S cycles (this yr) and lower in S-cycles (next yr)
  • May create some headwinds in next year’s cycle, weigh on margins
Rates market perform

  • JPM continues to be cautious on consumer demand into early 2017
  • Expects better trends in H2’17 on increased shareholder returns and stronger replacements
  • Says co. FY1Q rev. view implies 76m iPhone units sold into channel; being driven by Samsung Note 7 problems and extra week in qtr
  • Rates overweight, raises PT to $114 from $107...

Possibly related (your Climateer early warning system):

April 24
"Decline in iPhone Shipments Could Make Apple Worst-Performing Top Five Smartphone Brand of 2016" (AAPL)
Aug. 20, 2015
Peak Smartphone: "Smartphone Sales Declined for the First Time in China"

June 2015 

Chart Porn: How the Financial Times’ Instagram Following has Exploded in a Year

It's a cult.

From Digiday:
The Financial Times has found an unlikely outlet for its charts and graphics: Instagram.
A year ago, it had 40,000 followers to its Instagram account. Now, it’s at 286,000, and it’s adding thousands by the day, according to the publisher.

“It’s important to make sure we’re not just joining in with what other publications are doing, that we have our distinct voice and identity,” said Jake Grovum, social media journalist at the FT, pointing out that many publishers get their images from the same newswire service. “That’s why we post things that are not necessarily Instagram-friendly, like a chart on how U.S. and U.K. bonds have performed.”

Last week, for instance, it posted two charts and one graphic to the platform. One on Microsoft’s share price reaching an all-time high since since its IPO was the most liked Instagram image of that day with 1,400 likes. It also featured a graphic on how debates have historically affected the U.S. presidential campaign and a chart on the space journey of the Schiaparelli probe. These are a mix of charts taken from the paper, or made specifically for social media, which have a different color-scheme and a black background.

The platform has proven versatile: There’s a place for breaking news, like when Michael Bloomberg announced he was running for president, as well as pieces made specifically for Instagram, like this report on the people around the financial district in London: the deli owners, newsagents, teachers and tailor. Grovum and three social media staffers in London together usually post between one and four images a day. Previously, this was much more intermittent. There’s also room for images that typically would do well on Instagram: Each day, it posts something from the FT photo diary, like this image on the Northern Lights, which had over 2,000 likes.

Instagram is not a traffic play, but the FT regularly updates the bio with links to projects it’s trying to promote. Currently, there’s a link to the Future of Britain, a project on how Britain will look after it leaves the EU. Previously, it has linked to reports on pensions in the U.K. and a poll tracker on the U.S. election....MORE

Tesla Motors Plans to Change How it Reports its Earnings (TSLA)

From Barron's Stocks to Watch:

Tesla Motors: Let Confusion Reign?
Tesla Motors’ (TSLA) plans to change how it reports its earnings, something that has the potential to cause plenty of confusion when it releases its earnings on Oct. 26. Oppenheimer’s Colin Rusch and team try to get in front of the change:
Given the potential confusion around Tesla’s anticipated reporting changes, we are publishing an updated model to help investors navigate these adjustments. The critical change in proforma revenue is the recognition of lease revenue not total vehicle value. Due to high percentage of deferred revenue (~35%), this change also materially changes EPS. We expect cash flow estimates to remain intact. We also believe the new reporting structure highlights the importance of Tesla’s lease partners and risks around Tesla’s used vehicle market whether it is older vehicles cannibalizing new sales or the brisk pace of innovation limiting interest in older vehicles. While used Tesla’s have held value well to date, we view the end of lease vehicle strategy as a critical variable for future cash needs….MORE

Arpa-E's $85 Million Plan to Build a Battery the Size of the Grid (or something)

The Institute of Electrical and Electronics Engineers seem to know some stuff about electricity.
From IEEE Spectrum:
As the electric grid is increasingly powered by renewables, it will need energy storage for when the wind isn’t blowing and the sun isn’t shining. But the three top grid-scale energy storage technologies today—pumped hydropower, lithium-ion batteries and “flow” batteries—arguably, aren’t up to the challenge.

The U.S. Department of Energy’s technology incubator ARPA-E (Advanced Research Projects Agency-Energy) wants to change that. It’s going long on a number of high-risk, high-reward R&D projects that might change the entire grid storage equation. U.S. Energy Secretary Ernest Moniz has said he thinks grid-scale battery storage will be the key innovation that enables the grid to completely decarbonize by midcentury.

“There’s a lot of discussion about what the grid of the future will look like,” says Eric Rohlfing, ARPA-E Deputy Director for Technology. “Of course what we want to do is enable much higher penetration of renewables. So storage is an obvious way to do that… The two key points of grid storage are: it has to be cheap, and it has to be durable—to go through a lot of cycles.”

Here’s the grid-energy storage landscape today: Pumped hydropower, in which excess electric power pumps water uphill and is returned to the grid using water turbines when that water is released back downhill, makes up 95 percent of today’s grid-scale energy storage, according to ARPA-E. In total, it contributes 20.4 gigawatts of generating capacity to the grid. However, pumped hydro requires compliance with land use and environmental regulations, huge supplies of water, and big hills to pump the water up. So, while it’s reliable and cheap, it’s not broadly or universally scalable.

Lithium-ion batteries have powered the consumer electronics revolution of the past 30 years, but they’re also expensive, compared to, say, pumped hydro. And their flammability, as Samsung Galaxy Note 7 customers know, could be more than just an inconvenience if a grid-sized battery farm went full Hindenburg with a flame out. So, at the grid scale, lithium ions could perhaps only be scored partly reliable, affordable, or scalable.

The flow battery, another promising technology, stores its power in vats of electrolyte; it’s scaled up simply by adding more vats. Though flow batteries represent a new frontier of grid-scale reliability, at present they’re also expensive.

According to a recent report, ARPA-E has invested $85 million in energy storage research projects since 2009. The website for ARPA-E chronicles some 73 projects at companies, labs, and universities—among them, MIT, Harvard, Stanford, UCLA, Penn State, Oak Ridge National Laboratory, Lawrence Livermore National Laboratory, Ford, Boeing and General Electric.

Today there are already grid-scale energy storage technologies based on simple scientific principles that everyone learned in high school physics. Lift a mass m to a height h, and its gravitational potential energy is m times h times the acceleration due to gravity (9.8 meters per second squared).
All of which means unused energy on the grid can be readily stored in the form of mass—typically, water or slabs of metal or concrete—that’s been lifted or pumped up a hill. Then when the grid needs that energy, what’s gone up is allowed to come down, and the stored energy is then recaptured via water turbines or regenerative braking devices.

In April, the U.S. Bureau of Land Management granted the California-based company Advanced Rail Energy Storage, or ARES, a right-of-way lease to test out a rocks-on-railcars energy storage idea on a 43-hectare parcel of public land in southern Nevada. The ARES project is expected to store 12.5 megawatt-hours of energy with 50 megawatts of power capacity. And according to the company, its patented technology can be scaled up. As ARES’s CEO James Kelly told the electric utility industry blog Utility Dive in April: “If we had a 500-MW project, we could double the capacity, and it would only increase capital costs by 20 percent.”

On the other hand, says Rohlfing, pumped hydropower is limited in a crucial way:
It can’t be deployed everywhere. Let’s say you want to alleviate the problem of storage in the [U.S.] desert southwest. Where are you going to get the hydro, and where are you going to pump it? There need to be a variety of solutions to address the storage problem. Pumped hydro is demonstrated, it’s successful, and it’s low cost. And, in fact, that was one of the drivers for electrochemical batteries. We wanted to be as cheap as pumped hydro. That’s challenging. That’s very hard.
With that in mind, ARPA-E has set some lofty goals for the electrochemical battery research it supports: a price of $100 per installed kilowatt-hour of grid storage; 5000 charge-discharge cycles (i.e. 10 years of system life); and a roundtrip efficiency of 80 percent or greater per charge-discharge cycle.

Of the 73 energy storage projects listed on ARPA-E’s website, the agency recognizes eight grid-storage technologies that it says are very promising and/or well along the path to wide-scale deployment. (IEEE Spectrum will feature an interview with representatives from two of those eight ARPA-E-highlighted storage projects in future posts.)

In general, says Rohlfing, electrochemical batteries still rank among the most promising energy storage technologies—but not necessarily the lithium-ion kind that Elon Musk touts with his Tesla Powerwall home storage system....MORE

Templeton's Mark Mobius Reveals Strategy For Picking Small-Cap Multibagger Stocks & Also Offers Stock Tip As Diwali Gift

Is gold going out of style for the Holiday?

From the Rakesh Jhunjhunwala fanboi site:
Mark Mobius, the visionary fund manager of Templeton Mutual Fund, is a battle-scarred champion of the stock market with several multibagger stock picks to his credit. Tanvir Gill of ET has charmed him into revealing all top secrets of the techniques he adopts to find the winner stocks and has also got him to recommend a stock as a Diwali gift to us 
Tanvir Gill, the young-faced editor of ET Now, is one of the most pleasant faces on television. Her stylish mannerisms and charming smile mesmerizes the audience and they stay glued to the show, resulting in super-high TRPs for the channel.
However, Tanvir’s USP is not only her effervescent personality and charming smile but that she has also a deep knowledge of stocks and a razor-sharp mind. She is also a master of psychology and knows how to get her guests to reveal secrets that the audience wants to hear.
One can see this play out in Tanvir’s latest interview of Mark Mobius, the legendary fund manager with Templeton, the trillion-dollar global Mutual Fund.
When Mark Mobius started straying from the topic and began dilating on academic global macro-economic issues, Tanvir rightly sensed that the audience would soon lose interest. She tactfully and skilfully brought Mark Mobius back on track and got him to reveal information on specific stocks and strategies.
I know you are not going to talk stocks though I would want you to talk stocks”, Tanvir started off in a firm tone, laying down the terms of engagement.

She then coaxed him to give three ground rules that have never failed while picking up a multibagger idea within the small cap universe.

Three-fold strategy to finding multibagger small-cap stocks

Mark Mobius cautioned that small-cap and midcap stocks represent risky businesses with unpredictable business cycles. He warned that the companies are owned by the promoter-families and that there are doubts about the integrity of the management.

However, he assured that if investors follow his three-fold strategy, they could avoid the deadly stocks and at the same time home in on winning stocks that can become multibaggers:
(i) Ensure that the Company has very good management. The management must be people with integrity. They must also be people with good management know-how and with a deep understanding of the market. They must also know how to relate to investors. The corporate governance of the Company must be impeccable.

Mobius emphasized that quality of management is “very, very important”. He added that his fund does a lot of intensive research into the people behind the companies before investing any funds in it....MORE, including the Diwali gift.
HT: Alpha Ideas

Tuesday, October 25, 2016

Funds In The Agricultural Commodities

Symbol        Last      Chg
Corn           349-6   +1-4
Soybeans    993-2 +1-2
Wheat        404-4 +2-0

From Agrimoney:

AM markets: soybean, vegoil futures take turn under pressure
Fund watching in ags is sometimes a bit like a playground game.

As soon as they are spotted, funds seem to have a habit of freezing.

As in the last session, when just as all eyes had focused on the twin boost to grain prices of short-covering and (unconfirmed, but suspected) cash inflows, the support stopped, sending prices sharply lower.

"Wheat does the Icarus," ie the mythological figure that burned then crashed, was how Tobin Gorey at Commonwealth Bank of Australia described the session.

'Concern about production'On Tuesday, it was the turn of parts (but not all) of the oilseed sector to raise questions of whether it had been flying a bit close to the sun. 
Kuala Lumpur palm oil futures for January - which in the last session touched 2,828 ringgit a tonne, the highest for a benchmark contract since March 2014, and indeed have been a flagship for the oilseeds rally – turned tail and shed 1.8% to 2,772 ringgit a tonne as of 09:45 UK time (03:45 Chicago time).

Worries remain over Malaysian palm oil production, with trees still suffering a hangover from El Nino-inspired drought a few months ago

"There is concern about palm oil production in Malaysia coupled with hopes of increasing demand into China that is fuelling the rally," said Joe Lardy at broker CHS Hedging.

That said, the market may need proof of output decline, potentially from official Malaysian Palm Oil Board data early next month, to continue the rally, besides ideas of decent export demand.

Latest statistics from both cargo surveyors SGS and ITS showed Malaysian exports running 10.9% lower in the first 25 days of October than in the same period of last month.

Prices dipWith palm oil lower, Chicago-traded soyoil dropped too, by 0.6% to 35.77 cents a pound for December delivery.

And that undermined soybeans themselves, which dropped by 0.4% to $9.88 a bushel for November delivery, and by 0.4% to $9.98 ¼ a bushel for January.

US Department of Agriculture data overnight on US crop progress offered little help, in showing the US harvest bang in line with the five-year average, at 76% complete as of Sunday.

'Turnaround Tuesday'And the weather outlook for South America - where farmers are planting soybean crops, and so which could be a potential source of risk premium – was not so helpful either.

"Forecasters say South America will receive regular rounds of showers over the next fortnight to keep soils favourable for planting and establishment," said CBA's Tobin Gorey.

In fact, Terry Reilly said that price volatility is "considered low for this time of year for traders looking for an eventual South American weather play later this year".

Meanwhile, Benson Quinn Commodities flagged negative technical signals, saying that soybeans are "well overbought and due for technical correction so look for 'turnaround Tuesday' selling to develop overnight and Tuesday".

Turnaround Tuesday-ishTurnaround Tuesday is the idea among (mainly Chicago) grain traders that strong price trends on the first day of the week are reversed a bit in the second session.

But, while working for soybeans and soyoil, the adage had lost its edge when it came to grain markets.

Corn futures for December were higher, but only by 0.25 cents a bushel at $3.48 ½ a bushel, still 4 cents down for the week.

Again, the USDA crop progress data were not much help, showing the US harvest 61% complete, only 1 point behind the five-year average despite some wet Midwest weather....

DARPA’s Autonomous Ship Is Patrolling the Seas with a Parasailing Radar

From MIT's Technology Review:

Forget self-driving cars—this is the robotic technology that the military wants to use.
California may be the home of Google’s robotic cars, but just off the coast, DARPA is testing technology that puts the search giant’s trundling little autonomous marshmallows to shame.
The defense agency’s robotic ship—the Continuous Trail Unmanned Vessel, to those in the know—has been running sea trials on its new radar system. But the technology doesn’t sit aboard the ship: instead, it’s slung behind it on a parasail in order to reach heights of between 500 and 1,500 feet.
Tests show that the extra altitude boosts the radar’s effectiveness, vastly extending its range beyond what's possible when it’s simply fixed to a ship’s mast. DARPA believes this is what the future of naval warfare looks like: drone boats out patrolling in potentially hostile waters, while manned boats remain out of harm’s way for as long as possible....MORE

Yes, Yes NVIDIA Set New All-Time Highs Yesterday and Today, However... (NVDA)

$71.56 up 85 cents after hitting $71.66.

Last week when Tesla formalized their relationship with NVIDIA, something we had already assumed into NVDA's stock price when TSLA parted ways with MobilEye, there was happiness among the longs that we didn't join.

Some analysts were forecasting as much as a billion bucks of revenue to NVDA but we have to caution: until Tesla proves it will be able to raise the cash they need, by actually, well, raising the cash, there is a greater than trivial chance that the illiquidy forces Musk's baby into a reorg.

And then this week we got the gaming news with Nintendo's Switch which may set up a 5% bump in revenues going forward but doesn't address the key market opportunity driving the stock: Artificial Intelligence.
And we won't know how that's going until next week.
In the meantime here are the stories of the past few days.

From Investopedia, Oct. 20:

Nvidia Could Make $1B From Tesla's Self-Driving Decree: Analyst (TSLA, NVDA)
NVIDIA Corp. (NVDA) is the unlikely winner of Tesla Motors Corp.’s (TSLA) decision to equip all cars in production with hardware required for self-driving. (See also: Tesla Announces Self-Driving Hardware For All Cars In Production).

According to Mizuho Securities analyst Vijay Rakesh, Tesla’s decision could translate into an additional $25 million to $1 billion per year in revenue for the chip company, based on Tesla’s current production estimates and the type of chipsets it uses. The Drive PX chipsets made by Tesla retail for between $250 to $300. Assuming a production estimate of 90,000 cars, this could mean $25 million for Nvidia.

If Tesla decides to go with the more expensive Titan GPU (which retails for $1200 per chip), then the same figure bumps up to a billion dollars. However, Rakesh states that addition of 2-4 Titan GPUs per Model 3, which is expected to cost $35,000, might prove to be “price exorbitant” for Tesla.
Tesla announced the addition of self-driving hardware equipment for all cars in production during a conference call yesterday. The Palo Alto-based car company also said that the eventual goal was to make a road trip from New York City to Los Angeles using self-driving car technology.

Tesla’s decision to go with Nvidia technology follows its rift with previous supplier Mobileye NV (MBLY). (See also: Tesla Fires Back At Mobileye Accusations). According to a report in online publication Electrek, the company has been experimenting with Nvidia’s parallel computing platform to develop Tesla vision, an end-to-end computer vision framework that enables detection, processing, and learning from raw images in surroundings....MORE
And from Barron's Tech Trader Daily:

Nvidia Surges: Jefferies Sees $320M Per Year in Nintendo’s ‘Switch’
Following word last week that chip maker Nvidia (NVDA) will sell parts that power Nintendo‘s (NTDOY) new “Switch” video game system, Jefferies & Co.’s Mark Lipacis today pounded the table for shares of Nvidia, reiterating his Buy rating, and his $80 price target, after concluding the new machine is worth as much as $320 million a year for Nvidia.

To put that in perspective, Nvidia is projected to make total revenue of $6 billion this fiscal year ending in January.

Nvidia shares today closed up $3.17, or almost 5%, at $70.71.
“We estimate this to be a $200-$320m annual opportunity for NVDA near term,” writes Lipacis of the Switch.

“While the incremental dollars would likely be margin dilutive, we view upside potential to our sales and EPS estimates of $0.11-0.16 in 2017.”

Lipacis gives the rundown of Nvidia’s work on Switch:
It appears that the Switch will be powered by an NVDA Tegra processor. NVDA created new gaming APIs to take full advantage of the custom software on the device. NVDA stated that gameplay is further enhanced by hardware-accelerated video playback and custom software for audio effects and rendering. We suspect the processing performance will be lower than the Sony PlayStation or the Microsoft Xbox. NVDA’s expertise in providing high-performance graphics should help boost gameplay as well as demand for the hybrid console.

This is an outgrowth of Nvidia’s “Shield” game console, which had mixed success: “NVDA’s history in a mobile gaming form factor dates back to its SHIELD product, originally launched in 2013....MORE
The market is looking for record earnings to go with the record stock price and any perception of failure to meet expectations, whether justified or not, could set up a tumble.

We continue to bet on one of the class acts of Silicon valley but investors have to know what  they have here and unless they are willing to ride a 20% down move to get to greater glory profits they should maybe go buy some T-bills.

NVDA NVIDIA Corporation daily Stock Chart

That Time the FT's Kaminska Beat the Telegraph's Evans-Pritchard To the Big Macro Story

Not that they are in direct competition but they do have similar ambits.

Last Friday we saw something increasingly rare at the perch of Alphaville's benevolent dictator, Paul Murphy; Izabella stopped by the Markets Live post:
PM So, what else
IK Hi there
PM Izzy was threatening to join us
PM Ah there you are Izzy!
IK Just wanted to come in to spare Paul from talking to himself
PM I thought you’d wondered off
PM What’s on your mind?
IK Inflation
IK It’s back
IK In case you haven’t noticed
PM Emoticon
PM I had noticed, from a personal perspective
PM But didnt think it was actually showing thru in official figures as yet
IK But I don’t think it’s just a British thing. Huge pick up in my inbox of thought pieces focused on the return of inflation in 2017 (potentially in a big way)
PM But go on
IK And it’s not just me who thinks it may be a thing
IK (not to go all zerohegde on this)
IK From my inbox today
PM (No, don’t go ZH on us)
The death of deflation?
Dear Izabella,
Please join Dario Perkins for a conference call at 15:00 (UK time) on Wednesday 26th October where he will answer questions on major macro drivers such as :
· Will inflation taken over from deflation in 2017?
· Could we see another taper tantrum in bond markets, or worse a repeat of 1994?
· Can central banks do anything to manage these risks (e.g. Japanese-style yield targeting)
· How vulnerable are asset prices to rising yields?
IK But i’m more interested in the anecdotal stuff.
PM hmm
PM Go on
IK (I’m not saying it’s a bad thing guys!)
IK I think the really interesting stuff is happening on the freemium model side of things
PM In what sense?
IK We heard marc andreessen calling for start-ups to start raising prices earlier this year. And then there’s all sorts of anecdotal stuff like Spotify looking to charge
IK Or rather to windup some of the freemium stuff
IK And just personally. All the stuff i used to be able to get for free on the internet (like picture editing websites), all suddenly behind paywalls
IK Is it just me? Maybe....

She followed up on her guest appearance with "Have we crossed the inflation Rubicon?"
(I know the timestamps say otherwise, I'm going by the order the posts hit the feedreaders)

On Saturday the estimable International Business Editor of the Telegraph, AEP, posted "Inflation: next year's ticking time bomb" which focused on the British angle, what with the declining price of the £ when purchased in other currencies.

This all ties into something we have observed that, while not inflation per se, points in that direction.
Take a look at some of the commodities tracked by FinViz (on blogroll at right).
It's certainly not, by any stretch, all of them but enough to signal something may be afoot:

Although strangely the precious metals seem to have given up the ghost (we are still thinking $875 gold, which would imply nasty stagflation).

That's some of the stuff we're looking at these last few days.

EIA: "Short positions in U.S. crude oil futures held by producers, merchants at nine-year high"

Brent $51.30 down 0.16
WTI  $50.47 down 0.05

From the Energy Information Administration's Today in Energy blog, Oct. 24:
Short positions in West Texas Intermediate (WTI) crude oil futures contracts held by producers or merchants totaled more than 540,000 contracts as of October 11, 2016, the most since 2007, according to data from the U.S. Commodity Futures Trading Commission (CFTC). Banks have tightened lending standards for some energy companies as crude oil prices declined throughout 2014 and 2015, and some banks require producers to hedge against future price risk as a condition for lending. 
graph of producer and merchant positions on WTI futures, as explained in the article text
Initiating a short position, or selling a futures contract, allows the holder to lock in a future price for a commodity today, which oil producers and end users can use as a way to hedge or mitigate price risk. Increased short positions may indicate that current futures prices are seen as sufficient to generate positive returns from drilling projects.

Short positions of WTI futures increased at a faster pace than futures contracts of Brent (an international crude oil benchmark) since summer 2016, suggesting U.S. producers are able to drill for oil profitably in the $50 per barrel range. In the Crude Oil Markets Review section of the October Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) discusses an increase in U.S. onshore producers’ capital expenditures that is contributing to rising drilling activity, which EIA projects will lead to an increase in U.S. onshore production by the second quarter of 2017....
graph of producer and merchant short positions on WTI and Brent, as explained in the article text

Monday, October 24, 2016

Dietrich Vollrath: "Is there evidence of balanced growth?"

This is so regular and persistent it's just weird;
From his Growth Economics blog, Sept. 6:
I had the pleasure of attending the DEGIT conference in Nottingham, UK last week. One of the plenary speakers was Gene Grossman, who talked about a paper he is working on with Elhanan Helpman, Ezra Oberfield, and Thomas Sampson. The paper is about “balanced growth”. I spent a good portion of the flight home thinking about the questions they posed, and ended up generating what will probably be two long posts on the subject. This first one was drafted in large part on that flight, having not slept the night before, so bear with me if I ramble a little.

Perhaps the main organizing principle in growth economics over the last sixty years has been the “balanced growth path”, or BGP. BGP is really just a name for a set of conditions related to several major pieces of economic data:
  1. The growth rate of output per worker is constant over time
  2. The rate of return on capital is constant over time
  3. The share of output paid to capital is constant over time
These three conditions are part of the the “Kaldor Facts” established in by Nicolas Kaldor in 1957. There are really six stylized facts in his article, but you can kind of boil them down to these three easily. These facts were supported by relatively sparse information gleaned from the period running from the late 19th century up to the 1920’s, and for most of them Kaldor ignored major changes that occurred in the Great Depression. For example, the fact regarding the rate of return is based largely on the 44 years from 1870 to 1914 in the UK. Saying that output per worker was rising steadily was inferred from several (uncited by Kaldor) sources in 1957, when the concept of national income accounting was only about two decades old. This was not a robust empirical exercise, is what I’m trying to say.

Regardless, the question for growth economists became: how must the economy work such that these three are all true in the long run? Subsequently, essentially every model of growth that has been written down has constricted itself to matching these facts. The term BGP is thus something of shorthand notation for saying that a model fits the Kaldor Facts, at least in the long run.

But does it make sense to constrict ourselves in this way in thinking about how economies grow? What I want to consider over this post and a planned follow-up is the answer to that question. Here, let me focus on the empirical side of things. The follow-up is going to deal with the theoretical side.
If you take the Kaldor facts as given, then sure, you should write down models that can reproduce them. But should we take the Kaldor facts as given? Like I mentioned above, these are facts gleaned almost exclusively from a period running from the late 19th century into the 1920’s, if that. It seems well worth asking if they continue to be true. If they are not true, or might not be true, then constricting our theories of growth to those having BGP’s is unnecessarily limiting.

As I go through this, I’m trying to take the most skeptical viewpoint I can on balanced growth paths. And this is precisely because I think the BGP is a good way to mentally frame our thinking about growth. The worry is that I (and maybe most growth economists?) are too stuck on the BGP as our organizing principle.

Is growth of output per worker constant over time?
Maybe the most prevalent figure in growth economics plots log GDP per worker in the US over time, usually from 1870 to until roughly 1990-2015, depending on the vintage of the paper you’re talking about. I probably have six or seven versions of it on my laptop in various folders, and one is included below.
US GDP per capita
The remarkable thing about this figure is how consistent the slope is, and the slope (given that this graphs the log of GDP per capita against time) is just the growth rate. That is the first Kaldor fact, presented visually. Even after the disruption of the Great Depression and WWII, the US returned right back to the same trend line (the “linear prediction” dashed line) from before. So for the US, it seems there is very powerful evidence for the first Kaldor fact.

But, as is the case with far too many stylized facts, this is just the US. Not every country has such a consistent trend line. The figure below shows four major economies including the US, and you can see that Japan and Germany do not have this same consistent trend (while the UK does). Now, while this makes the first Kaldor fact strictly untrue, this doesn’t necessarily spell the end of the idea of a BGP. As I implied above, a BGP is really a statement about what happens in the long run. Like Germany or Japan after World War II, you could be off of the BGP, but as you can see with both countries they eventually settle into a situation of constant growth rates.
Other Countries
France is a further departure, because it displays not only a shift in the level of the BGP, like Japan, but also a change in the slope. After World War II France move up to a higher level of output per capita (the intercept of the dashed line rose) but also a higher slope, meaning the growth rate was permanently higher. Now, one can still argue that the two separate dashed lines represent BGP’s, but what France demonstrates is that the growth rate itself along a BGP could change. And if it can change for one country, why can’t it change for others?
Two colleagues of mine, David Papell and Ruxandra Prodan, wrote a paper recently that looked at the presence of BGP’s more formally. For 26 countries they look at whether their path of GDP per capita follows a strict BGP, meaning that over the 139 years of data there is no shift in the level or growth rate of GDP per capita. In essence, they are asking if those 26 countries have graphs that look like the one for the US.

For the US and Canada, the answer is yes, they have a strict BGP. But for the rest of the OECD and the other Asian countries they look at, the answer is no. Each of those countries has a distinct change in the level of GDP per capita (i.e. the intercept of their trend line shifts up or down) or a distinct change in the growth rate of GDP per capita (i.e. the slope of the trend line changes). Some, like France, exhibit changes in both.

The counter-argument to these figures is that yes, occassionally there are breaks in the level or growth rate, but in between these breaks economies appear to be on what looks like BGP’s. So it still is worth thinking about models that have BGP’s, because those will be useful in describing lots of the observed behavior in economies. And, models that have BGP’s also describe what sets the level and growth rate of GDP per capita, so we can use those same models to understand what could cause these distinct breaks we see at times in the data.

So let’s call this a qualified “Yes”, with some significant caveats, to the question of whether GDP per capita growth is constant over time.

Is the rate of return to capital constant over time?
The second Kaldor fact was a constant rate of return on capital. This was based on information from the UK and US. For the US, Kaldor relied on Kuznets who gave evidence that the return on capital was roughly 3 percent a year between 1919 and 1948....MORE
HT: Slate Star Codex

Of course the trend is your friend (until the bend at the end), past performance does not guarantee future results, your mileage may vary, close cover before striking, etc.

Indian Wedding Invitation: Dad's A Billionaire Style

(see below)

From TheNewsMinute:

This Karnataka billionaire wedding invite has stunned us into silence
Karnataka mining baron’s daughter’s invite has stunned us into silence
For mining baron Gali Janardhan Reddy’s family, wedding invites with written words are passe. Instead, the former BJP leader’s daughter’s ‘boxed’ wedding invite comes with an LCD screen playing a video.

And this is not just any video. Running for longer than a minute, the video features Reddy, his wife, daughter Brahmani, his son and even the groom Rajeev Reddy. And, Janardhan Reddy and his wife are lip-synching to a Kannada song that seems straight out of a film. The song was specially composed for the wedding.

Invoking auspicious blessings, the song calls relatives, friends and loved ones to come and share in the joyous occasion. Announcing the happy couple's names, the video also features elaborate introductions for them, with the groom walking on to a background of galloping horses.

For the record, there is a regular printed invite inside the box with all the necessary details. But even before you can get to it, the LCD screen in the lid autoplays the video....MORE 
HT: Alpha Ideas' Mega Weekend Linkfest

Score! From a June post:
So there I was, regaling long-suffering reader with one of my Bollywood stories (yes, they are multiple):
*As I've mentioned elsewhere, I know a Pakistani guy who is addicted to Bollywood dance scenes.
Any time I visit, before we can talk business or anything else, we have to have tea while watching his latest favorite find. 
A regular source of said dance scenes would do as much for my income as a new secret factor to add to Fama-French.
Maybe more....
Trigger warning, click here only if you waive any potential liability claim, PTSD risk.

"Hurricane Matthew insured loss up to $5bn U.S., $3bn Caribbean..."

From Artemis:
The insurance and reinsurance industry could face losses from hurricane Matthew of up to $5 billion for damage in the U.S. and up to $3 billion for damage across the Caribbean, according to risk modelling firm RMS.

RMS is the latest to provide an official estimate of insured losses due to recent hurricane Matthew and the figures are roughly in-line with the consensus, although U.S. figures are towards the lower end of estimates which will be encouraging for the re/insurance industry.
RMS hurricane Matthew trackRMS told clients yesterday and reported today that the firm estimates that U.S. insurance losses from Hurricane Matthew will be in a range from $1.5 to $5 billion, while insured losses in the Caribbean will be between $1 and $3 billion, with the majority coming from The Bahamas.

The company expects that around 70% of the estimated U.S. loss is to residential insurance lines, while coastal flooding due to storm surge is likely to contribute around 30% of the all-lines loss. This includes an expectation of coverage leakage and an escalation in claims severity for wind-only policies in situations where RMS says wind and water hazards both feature in residential lines of business.

Interestingly, RMS said that just one of the ten event reconstructions the firm modelled resulted in a U.S. insured loss of over $4 billion, perhaps suggesting that the insurance and reinsurance industry faces a slightly lower bill than had been anticipated.

But RMS warns that there is still a small possibility that U.S. losses from hurricane Matthew affecting the insurance and reinsurance industry could reach as high as $5 billion.

Both of the insured loss estimates, for the U.S. and Caribbean, include property damage and business interruption, caused by wind and coastal flooding upon residential, commercial, and industrial lines of business. For the U.S, auto lines of business are also included. The firms estimate does not include losses to the National Flood Insurance Program (NFIP) or to public buildings and infrastructure....MORE

Well This is Troubling: ''Mosul and Aleppo Belong to the Turkish People''--Erdoğan

The guy really thinks he's the sultan, or caliph or something.
Both the sources we found for the quote are not BFFs with the Turks but the video is what it is,

First up al-Masdar News:

Erdogan proclaims Mosul and Aleppo belong to Turkey
ANKARA, TURKEY (1:20 P.M.) - Speaking during an opening ceremony for an educational institution in Bursa on Saturday, Turkish President Recep Tayyip Erdogan compared the way that Syrians and Iraqis have been driven away from homes because of the self-proclaimed Islamic State (IS; ISIS/ISIL), to how Turkish people were once forced out from the same cities.

Erdogan added that the cities of Mosul and Aleppo belong to the Turkish people.

Video footage of this speech was broadcasted by Ruptly on Sunday morning:...

This is not the first time that Erdogan has said something this controversial; just last week, the Turkish President told Iraqi Prime Minister, Haider Al-'Abadi, he should know his place and that they are not equals.
And from armedia (Armenia):

Erdogan: ''Mosul and Aleppo Belong to the Turkish People''
The cities of Mosul and Aleppo belong to the Turkish people, Turkish President Recep Tayyip Erdogan announced speaking during an opening ceremony for an educational institution in Bursa on Saturday, AMN reports.

During his speech Turkish President also compared the way that Syrians and Iraqis have been driven away from homes because of the self-proclaimed Islamic State to how Turkish people were once forced out from the same cities.
Probably related, from Debka:

Ash Carter fails to sell Turkish role in Mosul operation to Iraq, Kurds

DEBKAfile October 23, 2016, 8:33 PM (IDT)
US Secretary of Defense Ashton Carter was unable to persuade either the Iraqi government or Kurdish leaders to allow the Turkish army a role in the Mosul operation, as vociferously demanded by President Tayyip Erdogan. In the last 48 hours, Carter met their leaders in Baghdad and the Kurdish regional capital of Irbil. DEBKAfile’s military sources report that a Turkish expeditionary force of around 1,000 men has crossed into Iraq and is standing by near Bashiqua, north of Mosul. The force consists of elite troops, assault helicopters and artillery. Carter tried explaining, to no avail, that cutting Turkish troops into the battle for Mosul would open the way for their participation in an offensive against ISIS’ Syrian base at Raqqa, which he is seeking to launch alongside the Mosul operation.
The Kurd's recalcitrance may have something to do with the fact Turkey is attacking them in Syria:
Turkey bombs Syrian Kurdish militia allied to U.S.-backed force

I'm In the Wrong Business Part 291: Luxury Potato Chips Edition

From Marginal Revolution:
...In an attempt to create a special snack to go with their high quality beer, Sweetish [?] brewery St. Erik’s has created the world’s most expensive potato chips.

Apparently, St. Erik’s didn’t think Lays or Pringles chips were good enough to pair with their ale, so they decided to create their own exclusive snack and price it accordingly. “St. Erik’s Brewery is one of Sweden’s leading microbreweries and we’re passionate about the craftsmanship that goes into our beer. At the same time, we felt that we were missing a snack of the same status to serve with it,” brand manager Marcus Friari said in a statement. “A first-­class beer deserves a first-­class snack, and this is why we made a major effort to produce the world’s most exclusive potato chips. We’re incredibly proud to be able to present such a crispy outcome.”

The luxurious black box designed by St. Erik’s contains just five individual potato chips, each made by hand by a chef, using five special Nordic ingredients – Matsutake mushroom picked from pine forests in northern Sweden, truffle seaweed from the waters around the Faroe Islands, Crown Dill hand-picked on the Bjäre Peninsula, Leksand Onion grown on the outskirt of the small Swedish town of  Leksand and India Pale Ale Wort, the same kind used to make St. Erik’s Pale Ale beer....

"They cost $11 a piece and come in boxes of 5..."

M.R.'s further information links are pretty funny: 
"All the crisps are handmade, and chef Pi Le said: 
'All of the ingredients are of a stature that not many will have tried before'"
Ya think?

Irving Wladawsky-Berger On Artificial Intelligence

We haven't visited Irving in a while, here's his latest:

After many years of promise and hype, AI seems to be finally reaching a tipping point of market acceptance.  “Artificial intelligence is suddenly everywhere… it is proliferating like mad.”  So starts a Vanity Fair article published around two years ago by author and radio host Kurt Andersen.  And, this past June, a panel of global experts convened by the World Economic Forum (WEF) named Artificial Intelligence, - Open AI Ecosystems in particular - as one of its Top Ten Emerging Technologies for 2016 because of its potential to fundamentally change the way markets, business and governments work.  

AI is now being applied to activities that not long ago were viewed as the exclusive domain of humans.  “We’re now accustomed to having conversations with computers: to refill a prescription, make a cable-TV-service appointment, cancel an airline reservation - or, when driving, to silently obey the instructions of the voice from the G.P.S,” wrote Andersen.  The WEF report noted that “over the past several years, several pieces of emerging technology have linked together in ways that make it easier to build far more powerful, human-like digital assistants.”

What will life be like in such an AI-based society?  What impact is it likely to have on jobs, companies and industries?  How might it change our everyday lives?

These questions were addressed in Artificial Intelligence and Life in 2030, a report that was recently published by Stanford University’s One Hundred Year Study of AI (AI100).  AI100 was launched in December, 2014 “to study and anticipate how the effects of artificial intelligence will ripple through every aspect of how people work, live and play.”  The core activity of AI100 is to convene a Study Panel every five years to assess the then current state of the field, review AI’s progress in the years preceding the report, and explore the potential advances that lie ahead as well the technical and societal challenges and opportunities these advances might raise.

The first such Study Panel, launched a year ago, was comprised of AI experts from academia, corporate laboratories and industry as well as AI-savvy scholars in law, political science, policy, and economics.  The study’s overriding theme was the likely impact of AI on a typical North American city by the year 2030.  The panel examined key AI research trends, AI’s impact on various sectors of the economy, and major issues concerning AI public policy.  The report’s Executive Summary succinctly summarized its key finding:

“Contrary to the more fantastic predictions for AI in the popular press, the Study Panel found no cause for concern that AI is an imminent threat to humankind.  No machines with self-sustaining long-term goals and intent have been developed, nor are they likely to be developed in the near future.  Instead, increasingly useful applications of AI, with potentially profound positive impacts on our society and economy are likely to emerge between now and 2030, the period this report considers.  At the same time, many of these developments will spur disruptions in how human labor is augmented or replaced by AI, creating new challenges for the economy and society more broadly.”
The report’s first section addresses a very important question: How do researchers and practitioners define Artificial Intelligence?  

From its inception about sixty years ago, there has never been a precisely, universally accepted definition of AI.  Rather, the field has been guided by a rough sense of direction, such as this one by Stanford professor Nils Nilsson in The Quest for Artificial Intelligence: “Artificial intelligence is that activity devoted to making machines intelligent, and intelligence is that quality that enables an entity to function appropriately and with foresight in its environment.

Such a characterization of AI depends of what we mean for a machine to function appropriately and with foresight.  It spans a very wide spectrum, - as it should.  Is a simple calculator intelligent because it does math much faster than the human brain?  Where in the spectrum do we place thermostats, cruise-control in cars, navigation applications that give us detail directions, speech recognition, and chess and Go-playing apps?

Over the past six decades, the frontier of what we’re willing to call AI has kept moving forward.  AI suffers from what’s become known as the AI effect: AI is whatever hasn’t been done yet, and as soon as an AI problem is successfully solved, the problem is no longer considered part of AI.  “The same pattern will continue in the future,” notes the report. “ AI does not deliver a life-changing product as a bolt from the blue.  Rather, AI technologies continue to get better in a continual, incremental way.”
One of the key ways of assessing progress in AI is to compare it to human intelligence.  Any activity that computers are now able to perform that was once the exclusive domain of humans could be counted as an AI advance.  And, one of the best ways of comparing AI to humans is to pit them against each other in a competitive game.

Chess was one of the earliest AI challenges.  Many AI leaders were then convinced that it was just a matter of time before AI would consistently beat humans at chess.  They were trying to do so by somehow programming the machines to play chess, even though to this day we don’t really understand how chess champions think, let alone how to translate their thought patterns into a set of instructions that would enable a machine to play expert chess.  All these ambitious AI approaches met with disappointment and were abandoned in the 1980s, when after years of unfulfilled promises a so called AI winter of reduced interest and funding set in that nearly killed the field.

AI was reborn in the 1990s.  Instead of trying to program computers to act intelligently, the field embraced a statistical, brute force approach based on analyzing vast amounts of information with powerful computers and sophisticated algorithms.   AI researchers discovered that such an information-based approach produced something akin to intelligence or knowledge.  Moreover, unlike the earlier programming-based projects, the statistical approaches scaled very nicely.  The more information you had, the more powerful the supercomputers, the more sophisticated the algorithms, the better the results.

Deep Blue, IBM’s chess playing supercomputer, demonstrated the power of such a statistical, brute force approach by defeating then reigning chess champion Gary Kasparov in a celebrated match in May, 1997.  “Curiously, no sooner had AI caught up with its elusive target than Deep Blue was portrayed as a collection of brute force methods that wasn’t real intelligence… Was Deep Blue intelligent or not?  Once again, the frontier had moved.”  Now, the best chess programs consistently beat the strongest human players, and even smartphone-based apps play a strong game of chess.

As human-computer chess matches no longer attract much interest, the AI frontier has moved to games considerably more complex than chess.  In 2011, Watson, - IBM’s question-answering system, - won the Jeopardy! Challenge against the two best human Jeopardy! players, demonstrating that computers could now extract meaning from the unstructured knowledge embodied in books, articles, newspapers, web sites, social media, and anything written in natural language.  And earlier this year, Google’s AlphaGo claimed victory against Lee Sedol, - one of the world’s top Go players, - in a best-of-five match, winning four games and losing only one.  In the game of Go, there are more possible board positions than there are particles in the universe.  A Go-playing system cannot simply rely on computational brute force.  AlphaGo relies instead on deep learning algorithms, modeled partly on the way the human brain works.

Given the broad, changing scope of the field, what then is Artificial Intelligence?  The AI100 Study Panel offers a circular, operational answer: AI is defined by what AI researchers do.  The report then lists the key AI research trends, that is, the  hot areas AI researchers are pursuing.  These include:...