How a Turkish Airlines Jet Flew an Extra 800 Miles and Landed On Time

Most of the time, passengers on Turkish Airlines Flight 800, flying from Panama City to Istanbul, can look down on Puerto Rico just after takeoff, then the blue of the Atlantic Ocean for a few hours, then Southern France and Northern Italy before arcing south over Greece and touching down. But those who made the trip on Sunday got a view of a very different set of locales: Cuba, then the eastern coast of the United States and the southern tips of Greenland and Norway, finally reaching the Turkish city by way of Poland and Romania.

Compared to the “great circle distance” between the two airports (meaning the shortest path) of 6,739 miles, Flight 800 traveled 7,553 miles, according to aviation tracking site FlightRadar24. That’s an extra 814 miles. And while it takes two and a half hours to fly the same distance from New York City to Jacksonville, Florida, the Turkish Airlines Airbus A330 took just 27 minutes longer than average, and landed just 11 minutes after its scheduled arrival time, per FlightStats.com. By airline standards, that counts as officially on time.

Bananas, right? Not so much.

As Turkish Airlines Flight 800 caught the jet stream over the Labrador Sea, its speed surged to 600 knots (710 mph), way above the Airbus A330’s cruising altitude. The red dotted line shows the shortest path between Panama City, Panama, and Istanbul. Courtesy of FlightRadar24.

“From an air traffic control perspective, it’s not unusual,” says Sid McGuirk, chair of the Department of Applied Aviation Sciences at Embry-Riddle Aeronautical University. Especially not once you take a look at the weather conditions at the time. When the Airbus A330 jet was getting ready to unglue from the tarmac in Panama, the jet stream over the Labrador Sea was blowing something fierce. As the plane tracked north along the Eastern Seaboard, it was flying around 540 mph, its standard cruising speed. When it caught the wind, however, its speed surged, peaking at 700 mph—without burning any more jet fuel than usual.

This map of wind speeds at the time of the flight (red means fast) seems to explain why the plane went so far out of its way, and how it managed to land on time. Courtesy of FlightRadar24.

FlightRadar24

“Sometimes we go way out of the way, for one reason or another,” says says Doug Moss, a commercial pilot and aviation consultant. Why? Because economics. Airlines operate on thin profit margins, so letting wind do the work usually done by expensive jet fuel is a no-brainer. And wind can do a lot of work: In January, a Norwegian Air 787 set a speed record for non-supersonic commercial aircraft thanks to a 202-mph tailwind, flying from New York’s JFK to London’s Gatwick in 5 hours and 13 minutes. But they also have to consider factors like overflight fees, the tolls set by countries for the right to zip through their airspace (in the US, it’s $60.07).

Of course, saving money on the flight only works if the plane doesn’t land so late, its passengers miss their connections, and the airline has to put everyone up in a hotel for the night. Keep doing it, and the carrier risks driving away future customers with poor on time performance. And while flying slowly saves fuel, it also means putting more time on the aircraft, and shortening the time before it has to be grounded for mandatory maintenance. (Turkish Airlines did not immediately reply to questions about this flight.)

“The computer goes through essentially a Monte Carlo simulation, and it looks at all the possible routes available,” Moss says. “It’ll run probably a thousand different scenarios, and it’ll pick the one that’s the cheapest.”

Such ever-changing conditions are the reason Singapore Airlines Flight 22, from New York to Singapore, can make the trip along one of three general routes: over the Pacific, over the Atlantic, or over the North Pole. And why Air India flies east from Delhi to San Francisco—and east from San Francisco to Delhi.

And while the folks flying on Turkish Airlines Flight 800 may have wondered why they could see Norwegian fjords on their trip from Panama to Istanbul, they probably stopped caring once they touched down, safely and on time.


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Sentiment Speaks: Addressing Gold-Market Fallacies That Can Hamper Your Returns

The general investment public usually applies the same principles when they chose how and when to invest their hard-earned money. (And we wonder why the general public always gets caught holding the bag at the highs and selling at the lows?) And, much of these “principles” are merely phrases which sound reasonable, but when analyzed, one realizes that they are lacking in substance.

One such phrase is that the gold market is driven by supply and demand. It certainly sounds great and has been propagated through the market to make it sacrosanct. But, when you think about it beyond the simple phrase, how does it help you invest? What drives demand? What drives supply?

Well, I think we can all recognize that supply is driven mostly by demand, as the gold mines will ramp production when there is greater demand. While one can always find markets where supply has its own driver, such as the weather in agriculture having an affect upon supply, much of the market is truly focused on the demand for gold. Yet, have you ever heard anyone discuss what drives demand?

In a recent article I read, I think they summed up “demand” quite well (but I will not address the rest of the article which, in my humble opinion, presents old and outdated thinking regarding price drivers):

Demand in economics is the consumer’s desire and ability to purchase a good or service. It’s the underlying force that drives economic growth and expansion. Without demand, no business would ever bother producing anything.

So, many view demand as the basis for driving business and/or the price of any asset. But, again, what drives demand? Is that not the most important question to ask in order to determine at what level an asset should be priced?

Well, this is where I come back to market sentiment. When the market is in the throes of a positive sentiment trend for a particular asset, the price of that asset gets bid up. However, when the positive sentiment wanes, and then market then turns negative, the bid under the asset dries up, and eventually turns in the other direction. This is simply how markets work. In fact, a bull market does not die because of selling. Rather, a bull market dies because of a lack of marginal buyers. When everyone is already bullish, who is left to push the price higher?

Bernard Baruch, an exceptionally successful American financier and stock market speculator who lived from 1870– 1965, identified the following long ago:

All economic movements, by their very nature, are motivated by crowd psychology. Without due recognition of crowd-thinking … our theories of economics leave much to be desired. … It has always seemed to me that the periodic madness which afflicts mankind must reflect some deeply rooted trait in human nature — a trait akin to the force that motivates the migration of birds or the rush of lemmings to the sea … It is a force wholly impalpable … yet, knowledge of it is necessary to right judgments on passing events.

So, while it sounds great to say that the market is driven by supply and demand, until one can learn how to track that from a price perspective in a consistent and accurate manner, all this phrase provides to the average investor is a nicety without much substance. So, the next time someone tells you that the price of gold is driven by the laws of supply and demand, push them a bit harder and ask them what drives demand for gold. I am quite certain it will lead to one of the usual fallacies of what drives gold.

That brings me to my next point.

One of the perspectives I noted in my weekend reading within the gold market was a repetition of the fallacy that the demand for gold rises during a stock market correction, resulting in a price increase or rally for gold. In fact, this is simply based upon the common fallacy that gold is a safe haven for stock market volatility, but presented in a slightly different way. But, yes, they are both fallacies.

I have written many articles on this issue, and here is a link to my most recent missive on the topic.

For those unable to access it, here is the relevant section on the matter:

You see, the metals rallied quite strongly in early 2016, and we did not even have a stock market crash. In fact, as I warned would occur in late 2015, they rallied together. I bet many of you did not even think this is possible. Now, after you pick your chin up off the floor, you should also realize that this is not the first time this has occurred, nor will it be the last.

So, allow me to show you why only expecting an inverse correlation between equities and metals is just outright wrong.

We will begin with the 2007-2009 time frame, which evidenced the most significant period of market volatility since the Great Depression. Let’s see if we can glean anything from the metals action in order to determine whether they are the safe haven everyone is selling you on.

We all know that the S&P 500 topped in October of 2007 and began an estimated 300-point decline into March of 2008, and then we saw a corrective bounce in the equities for a couple of months, before it continued to head down. During that same period of time, even while the markets were heading lower, the metals continued to rally strongly. Here we have “evidence” of precious metals supposedly rising during a period of market volatility.

But, when we then look toward the May 2008-March 2009 decline in the equity market, we have clear evidence that the metals also experienced significant declines within that time period. In fact, gold lost a little more than 30% during that time period. So, here we have a period of time where the metals were moving in the same direction as the equity markets, and clearly not acting like a supposed “safe haven.”

But gold also found a bottom and began to rally four months before the equity markets, after which time, they began to rally together again for two years.

So, when one is presented with these facts, does it make sense that the metals are surely going to rise during periods of market volatility? Are metals really the “safe haven” everyone believes they are during down markets? Are these markets inversely correlated as so many claim?

If you need further evidence, consider this additional fact. Back in 2008, the folks at Elliott Wave International published a study that showed that in 10 out of 11 recessionary periods since 1945 gold experienced a negative total return.

For further evidence that one should not assume the two markets move inversely, one simply has to look back to the period of time between 2003-2008. During those 5 years, the metals rallied alongside the equity markets. And, no, this is not a misprint.

So, when one is presented with these facts, can you really believe that metals are the “safe haven” everyone claims they are during down markets? Can one also come to the conclusion that these two markets trade inversely with each other? So, should you be buying metals only because you believe the stock market is going to crash?

The last fallacy I would like to confront is the fallacy that relationship between interest rates and gold. I have heard arguments from both sides on this one, and while there is a large camp that believes rising interest rates is positive for gold, unfortunately, history again will shine the light of truth on this fallacy.

Source: Robert Prechter, The Socionomics Institute.

I don’t think there is much to say after you review this chart.

Isn’t it amazing what one learns when we shine a light of truth and market history on some of the fallacies propagated throughout the media?

As I wrote in my prior article, I want to thank all of you who have trusted me to the point where you have chosen to follow me during the time I have been writing at Seeking Alpha. In fact, I just hit a major milestone of 30,000 followers. For that, I am very grateful, honored and humbled.

During that time, many of you have questioned me as to why I do these types of write-ups in my articles. The answer is quite simple, as I explained to some commenters. I believe in honesty, especially intellectual honesty. And, I get so frustrated by people who do not think for themselves and are brainlessly fed what to think by the news media and analysts. So, my articles are designed to push people to think for themselves in an intellectually honest manner rather than buy into what they are fed in print and on television.

In fact, I take pleasure in being able to open people’s minds to much of the intellectual dishonesty that is presented in the guise of market analysis. And, I find this effort to be extremely rewarding as I have received thousands of notes, posts, emails, private messages and comments over the last seven years telling me how I have changed people’s lives. Isn’t that one of the purposes for which we were put here by our creator?

So, within this current missive, I sincerely hope I have dispelled the notion that metals trade inversely to the stock market and have dispelled the fallacy that they are a safe haven when we are experiencing equity market volatility. History has a way of proving truths and dispelling falsehoods, no matter how commonly adopted. As Elliott eloquently stated:

In the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions.
—R. N. Elliott, Nature’s Law, 1946

Author’s note: Please note that articles are now only being sent out to those who have chosen to “Follow” me. So, if you would like notifications as to when my articles are published, please hit the button at the top to “Follow” me. Thank you.

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

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

This 9-Year-Old Girl Scout Just Displayed Warren Buffett's Best Advice to Entrepreneurs. (It Worked Perfectly)

Keep that start in mind as we share the story of a 9-year-old Canadian Girl Scout (actually, they call them Girl Guides in Canada). Because she managed to sell an entire stock of Girl Scout cookies in 45 minutes recently, in a way that displays Buffett’s key advice to entrepreneurs.

Reporter Emily Fitzpatrick from the CBC found the girl, named Elina Childs, as she towed her wagon full of cookies down a line of people waiting to buy newly legal Canadian marijuana, at a store called Nova Cannabis.

The nine-year-old Girl Guide and her father … sold all 30 boxes in less than 45 minutes, earning $120 for Girl Guides.

“It amazed me how quickly they went,” said her dad, Seann Childs. “Even people in cars driving on the avenue there would stop and roll down their window and ask for cookies.” 

Which brings us back to Buffett. His best advice for entrepreneurs? (It differs from his top advice from investors, of course.)

“If there’s one thing to remember: Delight your customer,” Buffett told interviewer Dina Habib Powell at a Goldman Sachs event in 2016.

Regardless of whether Elina Childs actually knows about Buffett, his advice describes exactly what she did here. She found an audience that would be delighted by her product, rather than trying to force it onto other people.

Consider the more traditional methods lots of parents encourage their daughters to use to sell Girl Scout cookies, and how this compares.

  • Sell them door to door? Super inefficient. Who knows who’s even home? 
  • Stand outside a shopping center? Maybe, if you’re allowed to. But you’re probably trying to sell cookies to people on their way to or from a big store with a much bigger selection. Plus you’re competing with other girl scouts.
  • Bug your parents’ coworkers? This is a common strategy. I’m not sure how much it’s about delighting customers though, as opposed to pressuring them.

Instead, the 9-year-old Childs and her dad took the cookies to an audience that they could be sure would be delighted by the idea of buying cookies. 

(One thing that I haven’t understood, not having a lot of experience with this myself: Don’t you get the munchies after using marijuana, not before?)

Regardless, even if it’s been done before, it’s a smart way to find people who love your product: and a brilliant execution of Warren Buffett’s best advice.

Holiday Shopping 2018 to Hit $134 Billion; Amazon's Conversion Rates 3-5X Higher Than Walmart, Macy's, Target, eBay

Last year Amazon achieved holiday shopping conversion rates of 5.6% on mobile and 17.8% on desktop, massively outperforming rivals such as Walmart, Target, eBay, and others.

This year, the company appears poised to do it again.

The holiday Thanksgiving weekend is one of the biggest shopping events of the year, and Amazon leads all retailers in both mobile and desktop shopping, according to a new report from Lotame and Jumpshot. Retail searches jumped 182% after Halloween, according to the companies, and that led to a 75% increase in traffic to deal sites and other retail outlets.

But conversion is where it’s at, and there Amazon excels, peaking two weeks before Christmas, with these conversion rates on mobile:

  • Black Friday: 5.2%
  • Cyber Monday: 5.6%
  • December 11 week: 6.4%

On desktop, as you’d expect, the rates are significantly higher:

  • Black Friday: 16.1%
  • Cyber Monday: 17.8%
  • December 11 week: 20%

Those rates compare to an average of 1.3% mobile conversion at other e-commerce sites, including Walmart, Target, Macy’s, and eBay, and 7.3% on desktop.

“Shopping is a mobile-first industry,” says Ryan Rolf, VP of Data Solutions at Lotame. “With more and more mobile devices pushing e-commerce visits, retailers that neglect to take a mobile-first approach will lose out in 2018.”

That’s not necessarily entirely true. The conversion rates on desktop, for instance, are multiples of the conversion rates on mobile … so desktop does matter. Where mobile is key is in the discovery phase and the price check phase. Mobile is the “three-foot” device: never more than three feet from your body.

That means it’s usually the first device you turn to. 

Consumers often then turn to a desktop to complete the purchase with a bigger screen and keyboard, something I call “taps, clicks, bricks.” The upshot is then that retailers’ in-store experience, mobile experience, and desktop experience all matter.

Of course, that’s U.S. data.

Chinese or Indian data would show something quite different, since mobile is not just the default but the only computing platform available to the vast majority of people. And that may happen in the North American and European markets over time as well, as mobile continues to grow.

All is not lost for other retailers, however.

“Though consumer data shows Amazon dominates e-commerce, they’re not the only place people buy online, especially during the holiday shopping season,” said Deren Baker, CEO of Jumpshot. “It’s vital that marketers understand how consumer habits shift depending on how and where they discover and buy products.”

Walmart in particular has taken on Amazon’s challenge and invested heavily in e-commerce while also taking advantage of its large physical-store footprint … and working with Google to make all its products shoppable by voice via Google Home and Google Assistant.

It remains to be seen who the long-term winner will be.

Netflix needs lower prices to woo India

BANGALORE (Reuters) – Netflix Inc’s (NFLX.O) Indian operation drew attention in a surge of international subscribers in the third quarter, but it faces fierce competition and a difficult cultural conundrum to make inroads with the country’s more than one billion TV viewers.

FILE PHOTO: Traffic moves on a road past hoardings of Netflix’s new television series “Sacred Games” in Mumbai, India, July 11, 2018. REUTERS/Francis Mascarenhas

In a few short months, the world leader in video streaming has launched a blockbuster Mumbai-based crime thriller, been sued over comments about a former Indian Prime Minister and seen the future of two of its hit shows threatened by the #MeToo movement in India.

Helped by a roster that includes top-grossing movie franchise “Baahubali”, it has won fans among a young, tech savvy middle class and Chief Executive Officer Reed Hastings has said India could deliver the service’s next 100 million subscribers.

Local industry players, however, say Netflix’s strategy of pricing close to rates it charges in developed markets will see it struggle against domestic competitors like 21st Century Fox-backed Hotstar and one of the country’s top satellite TV providers, Tata Sky – a joint venture between the Tata Group and 21st Century Fox.

Amazon, with a trove of original Indian content like crime drama “Breathe”, offers movies and shows free to members of its Prime service.

Slideshow (2 Images)

“With the existing model that we have, the prices that we’re at, we’ve got a long runway still ahead of us,” Netflix chief product officer, Greg Peters, said in a video interview after Tuesday’s third-quarter results.

“Now we’ll experiment with other pricing models, not only for India, but around the world that will allow us to broaden access by providing a pricing tier that sits below our current lowest tier. We’ll see how that does in terms of being able to accelerate our growth.”

The streaming giant arrived in India at the beginning of last year. It has a library of local content comparable to rivals and scored a big hit in July with the release of “Sacred Games”, a hard-boiled thriller built around action star Saif Ali Khan.

Like other U.S. entertainment companies, it has identified the need to create local content as important in winning viewers in the big emerging markets likely to dominate growth over the next decade.

But it has run into trouble, however, with the Bollywood studio that produced “Sacred Games” disbanding earlier this month in a cloud of sexual harassment allegations against one of its partners, and the show’s lead writer, Varun Grover.

Grover has publicly denied here these claims and rather than renewing for a second series, Netflix said earlier this week it was evaluating its options on the show.

At a time when India’s average per capita income is one tenth of the United States’, the service’s monthly fees are almost identical – 500 rupees ($6.80) for a basic plan, 650 ($8.85) for a standard plan and 800 rupees ($11) for premium.

Hotstar in comparison offers its premium streaming service, including “Game of Thrones” and English Premier League soccer, at 999 rupees for the whole year.

None of the companies mentioned in this report provide subscriber numbers for the Indian market, but media executives say Netflix’s numbers are probably still less than a million.

One analyst asked Hastings on Tuesday how much will Netflix have to tweak the model to achieve success.

“We’ll go from expanding from English to Hindi to many more languages to more pricing options, more bundling, all of those things are possible,” he said.

“There are over 300 million … households and almost twice that in mobile phone subs. We’ll take it a million at a time and figure out how to expand the market as we grow.”

Reporting by Sonam Rai and Vibhuti Sharma in Bengaluru; Sankalp Phartiyal and Shilpa Jamkhandikar in Mumbai; writing by Patrick Graham; Editing by Bernard Orr

These New Tricks Can Outsmart Deepfake Videos—for Now

For weeks, computer scientist Siwei Lyu had watched his team’s deepfake videos with a gnawing sense of unease. Created by a machine learning algorithm, these falsified films showed celebrities doing things they’d never done. They felt eerie to him, and not just because he knew they’d been ginned up. “They don’t look right,” he recalls thinking, “but it’s very hard to pinpoint where that feeling comes from.”

Finally, one day, a childhood memory bubbled up into his brain. He, like many kids, had held staring contests with his open-eyed peers. “I always lost those games,” he says, “because when I watch their faces and they don’t blink, it makes me very uncomfortable.”

These lab-spun deepfakes, he realized, were needling him with the same discomfort: He was losing the staring contest with these film stars, who didn’t open and close their eyes at the rates typical of actual humans.

To find out why, Lyu, a professor at the University of Albany, and his team dug into every step in the software, called DeepFake, that had created them.

Deepfake programs pull in lots of images of a particular person—you, your ex-girlfriend, Kim Jong-un—to catch them at different angles, with different expressions, saying different words. The algorithms learn what this character looks like, and then synthesize that knowledge into a video showing that person doing something he or she never did. Make porn. Make Stephen Colbert spout words actually uttered by John Oliver. Provide a presidential meta-warning about fake videos.

These fakes, while convincing if you watch a few seconds on a phone screen, aren’t perfect (yet). They contain tells, like creepily ever-open eyes, from flaws in their creation process. In looking into DeepFake’s guts, Lyu realized that the images that the program learned from didn’t include many with closed eyes (after all, you wouldn’t keep a selfie where you were blinking, would you?). “This becomes a bias,” he says. The neural network doesn’t get blinking. Programs also might miss other “physiological signals intrinsic to human beings,” says Lyu’s paper on the phenomenon, such as breathing at a normal rate, or having a pulse. (Autonomic signs of constant existential distress are not listed.) While this research focused specifically on videos created with this particular software, it is a truth universally acknowledged that even a large set of snapshots might not adequately capture the physical human experience, and so any software trained on those images may be found lacking.

Lyu’s blinking revelation revealed a lot of fakes. But a few weeks after his team put a draft of their paper online, they got anonymous emails with links to deeply faked YouTube videos whose stars opened and closed their eyes more normally. The fake content creators had evolved.

Of course they had. As Lyu noted in a piece for The Conversation, “blinking can be added to deepfake videos by including face images with closed eyes or using video sequences for training.” Once you know what your tell is, avoiding it is “just” a technological problem. Which means deepfakes will likely become (or stay) an arms race between the creators and the detectors. But research like Lyu’s can at least make life harder for the fake-makers. “We are trying to raise the bar,” he says. “We want to make the process more difficult, more time-consuming.”

Because right now? It’s pretty easy. You download the software. You Google “Hillary Clinton.” You get tens of thousands of images. You funnel them into the deepfake pipeline. It metabolizes them, learns from them. And while it’s not totally self-sufficient, with a little help, it gestates and gives birth to something new, something sufficiently real.

“It is really blurry,” says Lyu. He doesn’t mean the images. “The line between what is true and what is false,” he clarifies.

That’s as concerning as it is unsurprising to anyone who’s been alive and on the internet lately. But it’s of particular concern to the military and intelligence communities. And that’s part of why Lyu’s research is funded, along with others’ work, by a Darpa program called MediFor—Media Forensics.

MediFor started in 2016 when the agency saw the fakery game leveling up. The project aims to create an automated system that looks at three levels of tells, fuses them, and comes up with an “integrity score” for an image or video. The first level involves searching for dirty digital fingerprints, like noise that’s characteristic of a particular camera model, or compression artifacts. The second level is physical: Maybe the lighting on someone’s face is wrong, or a reflection isn’t the way it should be given where the lamp is. Lastly, they get down to the “semantic level”: comparing the media to things they know are true. So if, say, a video of a soccer game claims to come from Central Park at 2 pm on Tuesday, October 9, 2018, does the state of the sky match the archival weather report? Stack all those levels, and voila: integrity score. By the end of MediFor, Darpa hopes to have prototype systems it can test at scale.

But the clock is ticking (or is that just a repetitive sound generated by an AI trained on timekeeping data?). “What you might see in a few years’ time is things like fabrication of events,” says Darpa program manager Matt Turek. “Not just a single image or video that’s manipulated but a set of images or videos that are trying to convey a consistent message.”

Over at Los Alamos National Lab, cyber scientist Juston Moore’s visions of potential futures are a little more vivid. Like this one: Tell an algorithm you want a picture of Moore robbing a drugstore; implant it in that establishment’s security footage; send him to jail. In other words, he’s worried that if evidentiary standards don’t (or can’t) evolve with the fabricated times, people could easily be framed. And if courts don’t think they can rely on visual data, they might also throw out legitimate evidence.

Taken to its logical conclusion, that could mean our pictures end up worth zero words. “It could be that you don’t trust any photographic evidence anymore,” he says, “which is not a world I want to live in.”

That world isn’t totally implausible. And the problem, says Moore, goes far beyond swapping one visage for another. “The algorithms can create images of faces that don’t belong to real people, and they can translate images in strange ways, such as turning a horse into a zebra,” says Moore. They can “imagine away” parts of pictures, and delete foreground objects from videos.

Maybe we can’t combat fakes as fast as people can make better ones. But maybe we can, and that possibility motivates Moore’s team’s digital forensics research. Los Alamos’s program—which combines expertise from its cyber systems, information systems, and theoretical biology and biophysics departments—is younger than Darpa’s, just about a year old. One approach focuses on “compressibility,” or times when there’s not as as much information in an image as there seems to be. “Basically we start with the idea that all of these AI generators of images have a limited set of things they can generate,” Moore says. “So even if an image looks really complex to you or me just looking at it, there’s some pretty repeatable structure.” When pixels are recycled, it means there’s not as much there there.

They’re also using sparse coding algorithms to play a kind of matching game. Say you have two collections: a bunch of real pictures, and a bunch of made-up representations from a particular AI. The algorithm pores over them, building up what Moore calls “a dictionary of visual elements,” namely what the fictional pics have in common with each other and what the nonfictional shots uniquely share. If Moore’s friend retweets a picture of Obama, and Moore thinks maybe it’s from that AI, he can run it through the program to see which of the two dictionaries—the real or the fake—best defines it.

Los Alamos, which has one of the world’s most powerful supercomputers, isn’t pouring resources into this program just because someone might want to frame Moore for a robbery. The lab’s mission is “to solve national security challenges through scientific excellence.” And its core focus is nuclear security—making sure bombs don’t explode when they’re not supposed to, and do when they are (please no), and aiding in nonproliferation. That all requires general expertise in machine learning, because it helps with, as Moore says, “making powerful inferences from small datasets.”

But beyond that, places like Los Alamos need to be able to believe—or, to be more realistic, to know when not to believe—their eyes. Because what if you see satellite images of a country mobilizing or testing nuclear weapons? What if someone synthesized sensor measurements?

That’s a scary future, one that work like Moore’s and Lyu’s will ideally circumvent. But in that lost-cause world, seeing is not believing, and seemingly concrete measurements are mere creations. Anything digital is in doubt.

But maybe “in doubt” is the wrong phrase. Many people will take fakes at face value (remember that picture of a shark in Houston?), especially if its content meshes with what they already think. “People will believe whatever they’re inclined to believe,” says Moore.

That’s likely more true in the casual news-consuming public than in the national security sphere. And to help halt the spread of misinformation among us dopes, Darpa is open to future partnerships with social media platforms, to help users determine that that video of Kim Jong-un doing the macarena has low integrity. Social media can also, Turek points out, spread a story debunking a given video as quickly as it spreads the video itself.

Will it, though? Debunking is complicated (though not as ineffective as the lore suggests). And people have to actually engage with the facts before they can change their minds about the fictions.

But even if no one could change the masses’ minds about a video’s veracity, it’s important that the people making political and legal decisions—about who’s moving missiles or murdering someone—try to machine a way to tell the difference between waking reality and an AI dream.


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Exclusive: Russian high tech project flounders after U.S. sanctions

MOSCOW (Reuters) – U.S. sanctions targeting Russia’s nascent high tech industry have caused a Russian microchip company significant financial woes and delayed the launch of an initiative meant to produce substitutes for Western products, the firm’s owner said.

FILE PHOTO: Russian Prime Minister Dmitry Medvedev visits a plant of Russian microchip company Angstrem-T in Zelenograd near Moscow, Russia August 3, 2016. Sputnik/Dmitry Astakhov/Pool via REUTERS

President Vladimir Putin has stressed the need to develop Russia’s domestic tech industry to make it less dependent on Western equipment. But Moscow’s efforts to manufacture Russian microchips and other high tech products have been thwarted by U.S. sanctions against a string of Russian tech companies.

Angstrem-T, which makes semi-conductors, has accumulated significant debts and is set to be taken over by state development bank VEB after failing to reimburse an 815-million-euro ($944.75 million) loan dating back to 2008, said Leonid Reiman, chairman of the company’s board of directors.

Reiman, Russia’s former minister of communications and information technologies, said the company’s inability to reimburse its debt was in part tied to U.S. restrictions on the import of dual-use technologies and its addition to U.S. Treasury sanctions in 2016.

The U.S. moves were prompted by Russia’s annexation of Ukraine’s Crimean peninsula in 2014 and its support for separatist rebels in eastern Ukraine. It has imposed further sanctions against Russia since 2016 over other issues.

Prior to the sanctions Angstrem-T purchased most of its equipment from U.S. multinational firm Advanced Micro Devices and bought a license from IBM to produce chips.

The company is heavily reliant on U.S. products, but the sanctions now bar it from doing business with U.S. firms.

“Although we initially received the (U.S.) State Department’s consent for this project and the delivery of the technology here, the sanctions caused the deadlines for its completion to be drawn out,” Reiman told Reuters.

“The factory is working, the products are being produced, but the question of procurement remains.”

FILE PHOTO: Russian Prime Minister Dmitry Medvedev visits a plant of Russian microchip company Angstrem-T in Zelenograd near Moscow, Russia August 3, 2016. Sputnik/Dmitry Astakhov/Pool via REUTERS

VEB, which Reiman said could become the majority owner of Angstrem-T by the end of the year, declined to comment.

IMPORT SUBSTITUTION

When Angstrem-T began producing its first chips in 2016 after nearly a decade of false starts and delays, Prime Minister Dmitry Medvedev depicted the initiative as a way Russia could surmount already existing U.S. sanctions.

“It’s good that we are starting to produce these ourselves,” Medvedev said at the factory’s opening, a month before Angstrem-T itself was targeted by the U.S. sanctions. “It’s a question of import substitution.”

Reiman would not disclose the magnitude of Angstrem-T’s debt. According to a Russian database that aggregates company data, the firm had 87.4 billion roubles ($1.34 billion) in debt last year. During the same period it recorded revenues of 101 million roubles.

A source in the field of microelectronics in Russia said the sanctions and repeated delays in the project had caused Angstrem-T’s products to become outdated.

The market for the 90 and 130-nanometre microchips it produces has significantly shrunk in recent years, according to the source.

A draft Russian government roadmap for the development of the microchip industry seen by Reuters says that once VEB’s takeover is complete, Angstrem-T should shift its production to the more modern 28-nanometre chips.

Such chips are used in products made by companies like Apple, Samsung and Sony.

The ministry has for several years lobbied for Russia to build a modern microchip plant, but to no avail.

Reporting by Maria Kolomychenko; Writing by Gabrielle Tétrault-Farber; Editing by Gareth Jones

What the Founders of Honest Tea, Houzz, and Drybar Learned From Their Favorite Bosses

Tuesday, October 16 is National Boss’s Day, a custom that leaders should ignore, if not outright discourage. Expecting employees to celebrate the wonder that is you with a supermarket cake or Hallmark moment suggests that what you do–develop, guide, and inspire people–is insufficient reward on its own. Remember who should be grateful to whom in this relationship.

That said, great leadership and management do deserve recognition. Many entrepreneurs borrow practices or philosophies from their former managers, some of who become lifelong mentors. In honor of the day we asked successful founders about the bosses who influenced them and helped make them–and their companies–what they are. Here are their edited responses.

1. Paul English, co-founder of Lola and Kayak

In 1999 I sold an e-commerce company to Intuit and went to work for Scott Cook [Intuit’s co-founder]. I loved meetings with him, the way he always came prepared. I had breakfast with him a month ago–even now we get together when he’s in town. He carried a little notebook in his shirt pocket, and a pen and he took notes during our breakfast. He is always hunting new ideas and taking notes and trying to improve himself and the people around him.

In meetings Scott always asked the “dumb” questions, the ones on people’s minds that they are too shy to ask. Why we are even working on this? Do any of our customers care? I remember once we were talking about opening up QuickBooks’s API so that people could develop apps, and we were making up what kind of apps we thought people would build. Scott sat there with his arms folded, looking at the floor. You could imagine steam coming out of his ears as we were pontificating. And at one point he said, “There’s a phone on the table. Why doesn’t someone just call a customer and ask them what they think?”

He also trained people at Intuit to look for coachable moments. If you see an interaction that is suboptimal, he said, use it as an opportunity to make the person stronger. Say you see something kind of funky in a meeting. Call people on it. Not in front of the whole room. But after the meeting, say, “Hey, let’s talk about this thing and see what happened.”

Sometimes I would wonder if Scott is intimidating to people because he is so quick. But he is actually a nice guy. I wish there were more profiles of people like that, who can be as bright as other genius entrepreneurs but are also wired to be a kind person.

2. Alli Webb, co-founder of Drybar

My parents were my first bosses. They were entrepreneurs who owned their own clothing store. Our parents made my brother [Drybar co-founder Michael Landau] and I sweep the floors and other stuff we didn’t want to do. At my first job, at an Express store in the mall, I worked a lot harder than anybody else because our parents taught us to treat every job like it is your own business.

While I was in beauty school I worked as assistant to a salon owner named John Peters. Today his business is in Delray Beach, Florida, but back then it was in Boca. John molded me into the hairdresser I am and taught me to run a salon. But more important, he taught me the importance of humor.

Any time the stylists had a problem or question they always came to him, and I was a fly on the wall for those conversations. I also watched him with customers, who were mostly older people. He was always humble about his mistakes, but he would also throw things back at people with a little bit of good-natured sarcasm. A client might say, “John, my hair was not as good as last time,” and he would say, “What? No way! Are you crazy?” He made the whole exchange lighthearted. He taught us not to take ourselves too seriously.

I don’t think I’m a funny person by nature. But I learned from John how banter can turn even stressful situations into something fun.

3. Eric Ryan, co-founder of Olly and Method

In the mid-’90s I was a junior planner at Fallon, which was the hot advertising agency at that time. My boss was Rob White, who ultimately fired me. I was very disruptive, always trying to rewrite the rules, and Rob recognized I should be an entrepreneur. When he fired me he said, “I’m pretty sure I could be working for you someday.”

If Rob hadn’t fired me I would never have moved to San Francisco and might have delayed starting something on my own. I’ve told that story to pretty much everyone I’ve let go. Firing people is the hardest thing you have to do as a leader. But I believe it frees them up to find out what they are really great at.

Rob was big into the idea that culture is the glue that holds things together when you’re growing fast. You can see the fingerprints of that all over the companies I’ve started.

He liked to call Fallon “the Harvard of planning” and wanted it to be the hardest place to get into. After I did all these interviews for the job, he gave me several marketing case studies and told me to write essays about my opinions of them. I did it over the Fourth of July weekend, and I hated it. But it was brilliant because it showed him what I knew and how I thought. The homework assignment we assign to applicants at Method and now Olly was inspired by that. If you make someone work hard for a job, then they want it even more.

4. Seth Goldman, co-founder of Honest Tea and executive chairman of Beyond Meat

In 1988 Lloyd Bentsen ran simultaneously for vice president and senator from Texas. I worked on both campaigns and became his deputy press secretary in the Senate. I worked on Capitol Hill and with the Senate Finance Committee. And I went along on his swings through the towns and small cities of Texas.

Lloyd worked on tax, trade, and health care policy. Much of what he did was very technical. But when he talked to constituents he would make these sophisticated, complex ideas relatable. I remember one time he was going to talk to union workers about his effort to extend unemployment benefits. The speechwriter had come at it from a wonky perspective. Lloyd marked the speech up so much that in the end it was just his remarks. Instead of talking about tightening credit, he quoted Harry Truman: “It’s a recession when your neighbor loses his job. It’s a depression when you lose yours.”

At Honest Tea and Beyond Meat the work can also get pretty technical, dealing with fair-trade sourcing or offsetting greenhouse gases. I learned from Lloyd that when it comes time to communicate to the consumer, we have to make it simple, clean, and easy to understand.

Also, I met my wife at an event in Longview, Texas while working on Lloyd’s campaign. So I feel personally grateful for the role he played in my life.

5. Todd Carmichael, co-founder and CEO of La Colombe

Starting at age 14, I worked on a fruit farm outside of Spokane, Washington. My immediate boss was a guy named Mike McGlade. We were both distance runners: running 100 miles a week in the dark. And then just as the sun came up I would be facing a row of strawberries half a mile long. I had to hoe all the weeds around it, all day long in 100-degree heat with no Walkman, no conversation, no relief. Then I’d get up in the dark the next day and start over. Fruit needs care, and it is a brutal kind of care. People would crack. People would leave.

Mike happened to be the son of the guy who owned the farm. He did not need to do much work. He was the boss. But there in the row next to me–maybe 50 yards ahead–was this guy. He worked his brains out with a smile on his face. He showed me that the way up is the hard way.

In 1994 when I was starting a company I applied that same approach. We would work 16 or 17 hours a day. I would sleep next to the green coffee bags. And we would grind it out. Mike taught me about endurance–how to keep going hour after hour and day after day. In my life and in my business I set out to be the last man standing. I got that from him.

6. Alon Cohen, founder and president of Houzz​

My first job was in the army in Israel. Even though I was only 23 my boss, Ofer Dayan, trusted me. After just a few months there I proposed some pretty profound changes to a technology system that would have a large impact on his team and other teams that he supported. He asked me some questions, and then basically said, “Let’s do it.” He gave a kid his full backing, guiding me when necessary but for the most part letting me go on my own. From him I learned it does not matter if someone is super-junior or super-senior, they can have a great plan. And it’s best to let whoever had the idea execute because they are the one with the passion. So at Houzz I let folks on the team do what I was empowered to do when I was young.

Later, Scott Leahy was my first manager at eBay, where I started as a senior manager of engineering. In addition to the basics of how to behave in a U.S. work environment, he taught me what it means to keep a production system up and running 24/7. That included jumping on phone calls in the middle of the night and on weekends. It included going deep into data and dashboards to understand where there are issues. It included improving the system all the time and making sure it is resilient and reliable. From Scott I learned there is a huge difference between 90 percent and 100 percent.

At Houzz I personally review every interface change on the platform, even though we may have reviewed it in meetings. Sometimes people make fun of me because I find something that is one pixel to the right or to the left of what it should be. But it comes of caring that the consumer experience is great.

7. Peter Buchanan-Smith, founder of Best Made Co.

From 2005 to 2010 I was consulting design director for Isaac Mizrahi, working on his packaging, branding–everything except apparel. We also did a book and a magazine together. He was in the tail end of his partnership with Target at the time. The very first project I did with him was packaging for a box of doggy poop bags.

I have never worked for anyone as inspiring as Isaac. He is the definition of a polymath: designer, performer, TV show host, cabaret singer. He is like a creative superhero. Nothing scares him. And he is always the same: in front of the camera, behind the camera, in an office, in front of an audience. He is always himself.

His schedule on any given day would make my head spin. He had his TV show, and the studio was built inside his creative studio, so he could take a break and run behind the scenes to oversee a pattern being made or the layout for a look book. He applied his energy in so many places at once.

If you look at our product assortment, there is a part of Isaac in there. It is eclectic and knows no bounds, which is something I learned from him. He was also design-driven, not trend-driven. And he had a real reverence for the past but was not nostalgic–always looking ahead. What I really loved about him was he was insatiably curious. That spirit of curiosity is alive and well at Best Made.

8. Tina Sharkey, co-founder and CEO of Brandless

In the mid-’90s I was head of programming for Q2, a new shopping channel being launched by QVC. I worked for Barry Diller, who was CEO of QVC at that time. He was incredibly focused, demanding, and strong. Truly an entertainment visionary.

We built this network from scratch, and we had set a date to launch it. It was not just TV; it was very complicated. The selling and the ordering and the computer systems had to be integrated. And it was live. I called Barry and said, “I don’t think we are ready. I think we’re going to delay.” Barry is very succinct. He said, “Anything worth doing is worth doing badly.”

I didn’t get it at first. But his point was that you are never going to know what you have and where you are unless you do it. For all the conference room meetings that we had and all the rehearsals and all the planning and all the opinions – we were basically talking to ourselves. When we went live, all of a sudden we were talking to the country. And they told us what they thought.

At Brandless, I say “Look, every day we are trying something new. And every day we don’t know what we have until we see it perform.” I repeat to my team, “Anything worth doing is worth doing badly.” It’s one of the best pieces of advice I ever got.

9. Scott Harrison, founder of Charity: Water

I’ve only had one boss of note, and I paid to work for him. In 2004 I had been a selfish, hedonistic nightclub promoter for 10 years, and I asked myself what the opposite of my degenerate life would look like. I wanted to explore service to others, so I signed on to Mercy Ships, which sailed hospital ships along the African coast bringing doctors and surgeons to people without medical care. I paid $500 a month to volunteer.

My boss was Gordon Tyler, who was head of communications on the ship. Mercy Ships was a top-down structured environment, but Gordon tailored his management style to what he saw in me. I had signed on as ship photographer and my job was to take photos of patients pre-and post-op. But that wasn’t enough responsibility for me. I wanted my title changed to “photojournalist” so I could also write stories, and he let me.

Then he gave me unbelievable latitude to set my own hours and pursue assignments off-ship. He let me take days off to go sleep in the bush or stay at a leprosy colony to understand the disease. It was on those assignments that I discovered the importance of water. Gordon said this guy will die if he is not given freedom. As a result he got 90-hour weeks out of me. Now, at Charity: Water, I’m a big believer in giving people a lot of rope.

Artificial Intelligence Is the Wave of the Future (And It Always Will Be)

Here’s what I’m reading today:

It’s been a challenging year for Florida: Hurricane Irma in 2017, then red tide and green algae, and now the devastating, still unfolding story of Hurricane Michael.

The human toll and wide-spread damage from Michael are most pressing (18 confirmed dead, and thousands still not accounted for). But, Floridians are growing concerned about a longer-term test  that could affect its crucial tourism industry–a $112 billion a year business, that’s responsible for about 1.4 million jobs.

It’s not just the rebuilding effort in places like the Gulf Coast, or the perception sunbirds might have the Florida isn’t ready for them. It’s also an issue of timing.

“At the right time, we can let the country and the world know they can come back to those areas,” Ken Lawson, CEO of Visit Florida, told USA Today. Translation: soon–but not so soon that visitors will flock to a Florida where they might find “dead fish all over the beach.”

Sears files for bankruptcy

Early this morning, Sears Holding Corp., the current iteration of an iconic retail brand that traces its history back at least 132 years, filed for bankruptcy. Stores will close and people will lose jobs, but it’s a brand that lost so much cachet that you’re forgiven for wondering if people will really notice. (Bill Murphy Jr., Inc.com)

The death of Bill Coors

The heir to the Coors beer company was highly controversial for his politics. But before that, he took his family’s regional beer brand and built it into a national powerhouse. (David Henry, Bloomberg)

Emergency childcare as an employee benefit

In case you missed this one, Starbucks unveiled a new benefit for its 180,000 employees: emergency discount child care that can be used up to 10 days per year. It’s a perk offered at only 4 percent of U.S. companies. (Bill Murphy Jr., Inc.com)

Here’s why you’re suddenly seeing a lot more ads for brand new brands

This year the floodgates are opening, with more small, new brands putting together big, effective ad campaigns ahead of the holidays. Facebook, Instagram, Snap, and even podcasts are making big pushes to bring in smaller brands, and the brands are reacting. (Sara Fischer and Marisa Fernandez, Axios)

Why AI won’t do your hiring for you

The recent revelation that Amazon tried to use artificial intelligence to recruit engineers, only to discover that its machine learning wound up discriminating against women has people wondering whether AI will fulfil its promise in recruiting, or if people will start saying about it what wags say about soccer: “the sport of the future, and it always will be.” (Jena McGregor, The Washington Post)

Under Armour – You Cannot Fool All Of The People All Of The Time

“I never want to be beholden to a vote of some board or politics or anyone else.”- Kevin Plank

Sometime last month, Under Armour (UA, UAA) posted the latest in a long line of restructuring updates (fifth within a year), with the 2018 restructuring program now running at $200m-$220m (from $190m-$210m). That’s another $10m to the growing pile of one-offs, and at some point, some tough questions will have to be asked. In the meantime, here’s UA’s reasoning behind the latest update:

“Following further evaluation, the company has identified approximately $10 million of cash severance charges related to an approximate 3 percent reduction in its global workforce.”

With the latest update on the board, I think it’s an opportune time to shed some light not just on the latest restructuring attempt, but also the various governance deficiencies within UA which have enabled the never-ending restructuring “one-offs”.

Don’t Trust the Restructuring

With the $10m severance one-off firmly in the guidance, here’s how adjusted guidance gets impacted:

FY18 Pre-update

FY18 Post-update

Op Income (Loss)

$(50)-(60)m

$(60)m

Adj Op Income (Loss)

$130-160m

$140-160m

Adj EPS

$0.14-0.19

$0.16-0.19

(Source: Under Armour)

Here’s how the math works – we have a $10m charge which brings guided (actual) operating income down $10m and (adjusted) income up by $10m – but only at the lower end. Somehow, the market was fooled into believing this was positive.

(Source: Yahoo Finance)

It appears UA has yet again, adjusted its earnings to paint a more optimistic picture. Aside from the fact that the $10m adj op income raise at the low end ($0.02 raise at low end adj EPS) from severance is hardly positive, there’s two key takeaways the market seems to have missed – 1) the top end of guidance was not raised and 2) UA did not update revenue and gross margin guidance. The former likely implies that UA was heading for the low end of its initial guidance while the latter indicates little improvement from the demand side.

But that’s not all. Here’s UA’s last word on the updated guide:

“The reduction in workforce…represents the final component and update to the company’s 2018 restructuring plan”

If that sounds familiar, one only has to look back to the 4Q17 call when management made a similar promise:

“Also, important to note that we anticipate the majority of our restructuring to be completed in the first half of 2018”

Immediately after, UA announced a new 2018 restructuring program which has ballooned from $110-130m to $200-220m as of Sept . Here’s a nice compilation by Macquarie:

Notably, that brings total restructuring costs since 2017 to a staggering $350m at the upper end. Here’s the thing though – UA has been using some form of restructuring as a vehicle to adjust earnings for a very long time now. Pre-2017, explanation for the one-offs ranged from the Dickerson era (“product flow” and “improving customer service levels”) to the Molloy-era (everything from “promotions” to “foreign exchange rates”).

Here’s how the rationale behind the elevated inventory was explained while Dickerson was CFO:

Event

Dickerson-era Updates

2015 Investor Day

“First, on the near term — over the course of the rest of this year and through 2016, we are focused on delivering our products to our consumers more timely, specifically on key seasonal floor set dates. This focus specifically in comparison to some prior years’ challenges will result in elevated inventory growth rates over this time frame to flow product earlier

3Q15

“Switching over to inventory, as we outlined in our Investor Day, over the next few quarters we are focused on delivering our products to our consumers more timely, specifically on key seasonal floor set dates. We anticipate this will result in elevated inventory growth rates over this period to flow product earlier.

4Q15

“Finally, inventory. As we previously stated, our focus is on delivering our products to our consumers in a more timely manner and improving our customer service levels. As a result, we continue to expect inventory growth rates to be slightly elevated above the revenue growth rate in the front half of 2016, with growth rates expected to level off and be in line with revenue growth in the back half of 2016.”

(Source: Under Armour)

Chip Molloy was a lot more straightforward as CFO – here’s how his narrative evolved:

Event

Molloy-era Updates

1Q16

“As previously mentioned, the strategy to improve wholesale, customer service levels resulted in elevated inventory investments beginning in the second quarter of last year. We expect the growth in inventory will be more in line with sales as we begin to anniversary the strategy during the second quarter of this year

2Q16

“Inventory for the quarter increased 30% to $1.1 billion, compared to $837 million at June 30, 2015. As we noted last quarter, we are beginning to anniversary the strategic inventory investments that we implemented in the second quarter of last year, and expect the growth in inventory to remain relatively in line with sales throughout the remainder of the year

3Q16

“In the quarter, gross margin declined more than planned, driven predominantly by higher-than-expected promotions, both the volume and rate of liquidations, and foreign exchange rates. Despite liquidations having been a headwind on margin rates for most of this year, we now believe that our inventory position is healthier and liquidation should not have the same negative impact moving forward”

4Q16

“In our efforts to manage the brand appropriately for the marketplace, we are planning for inventory growth to be higher than revenue growth for the first three quarters of 2017 and coming more in line with revenue growth during the fourth quarter.

(Source: Under Armour)

The difference between then and now is that UA’s restructuring has expanded far beyond inventory one-offs – the asset and labor cost base has also been trimmed substantially.

2Q18

Sep-18

Pre-Tax Restructuring & Related Charges

$190-210m

$200-220m

Cash Charges

Up to $155m

Up to $155m

-Facility & Lease Terminations

Up to $75m

Up to $75m

-Contract Termination & Other

Up to $80m

Up to $90m

Non-Cash Charges

Up to $55m

Up to $55m

-Inventory

Up to $20m

Up to $20m

-Asset Impairment

Up to $35m

Up to $35m

(Source: Under Armour, Author)

But it may not be enough. In a follow-up with an analyst, management disclosed the following – 1) “the full fruits of the new Frisk era” are “not expected to hit full stride until FY20”, and 2) “Construction costs for UAA’s NYC Flagship have been pushed back until at least late 2019 (and potentially 2020).” In other words, FY19 is going to be another restructuring year for UA. That makes it the fifth consecutive restructuring year.

With high-flying expectations already embedded in next year’s consensus expectations ($0.31 FY19 EPS; +63% YoY implied), it will be interesting to see how the market reacts when the news finally hits.

Don’t Trust the Disclosures

Unbeknownst to most, the restructuring update actually came on the heels of a curious letter from the SEC. Here’s the two comments the SEC noted in its letter to UA:

Comment 1:

“You state that as of December 31, 2017, no impairment of goodwill was identified and the fair value of each reporting unit substantially exceeded its carrying value. We also note that your Latin American segment has experienced operating losses in the past three years.”

Comment 2:

“You present a full non-GAAP income statement for the quarter ended March 31, 2018 when reconciling non-GAAP measures to the most directly comparable GAAP measures. Please tell us how your presentation complies with the guidance in Question 102.10 of the Non-GAAP Compliance and Disclosure Interpretations”

The letter (dated May 23 2018) required a response within 10 business days, a window which UA was unable to meet.

“The comment letter requires that the Company respond within ten business days or inform the Staff when the Company will respond. As discussed with Ms. Suying Li, we hereby request an extension to respond by no later than June 15, 2018. This additional time will enable the necessary internal review related to the Company’s response to the comment letter

Now, on its own, this wouldn’t be a big deal. But a look into UA’s SEC correspondence history indicates a curious pattern – barring one occasion, UA has never been able to respond within the allotted window. In fact, UA has almost always needed 20-30 day extensions.

Query Year

Request for Extension

May 2011

Aug 2011

Oct 2011

Dec 2011

May 2017

May 2018

(Source: SEC)

Clearly, the SEC is asking some tough questions.

When they did finally answer though, UA’s (delayed) reply to SEC comment 1 provided some insight into how they’ve been accounting for their international units.

Per UA management, despite the LatAm business posting three consecutive years of losses, “the fair value of the reporting unit exceeded its carrying amount by approximately $130.3 million”. If that boggles the imagination, here’s UA on how they arrived at the estimate – 1) using a DCF model, management has assumed long-term profitability, 2) revenue assumed to grow at sub-41%, 3) gross margins also assumed to grow via higher DTC contribution, 4) SG&A assumed to fall as a proportion of revenue.

All these expectations are fine and dandy but here’s the reality of UA’s LatAm unit – it hasn’t just been loss making at the EBIT-level for three years, it’s been negative for four.

(Source: Under Armour)

Meanwhile, LatAm sales growth has been slowing significantly – 2Q only saw a 7% rise YoY with no sign of a turnaround in margins. Yet, UA has somehow been allowed to input aggressive growth and margin assumptions into the model.

The $130m LatAm “headroom” is especially strange. As I’ve highlighted in the past, almost all of UA’s goodwill is tied up in Connected Fitness (MapMyFitness + MyFitnessPal + Endomondo). Because of the way Plank as Chief Operating Decision Maker (“CODM”) has allocated the goodwill, LatAm’s ~$40+m in goodwill is mainly tied up in Connected Fitness (“CF”) with a tiny portion (~$1m) tied to the actual LatAm operations.

So, it makes sense that UA hasn’t written down any LatAm goodwill – virtually all of it is Connected Fitness-related and thus, unrelated to the operating losses. UA’s response detailing the $130m headroom without clarifying the source of LatAm goodwill is interesting.

To the second SEC comment re non-GAAP P&L, UA said –“We respectfully acknowledge the Staff’s comment and undertake that in future filings we will reconcile our non-GAAP measures to the most directly comparable GAAP measures without presenting a full non-GAAP income statement.”

Now, all this raises some interesting questions – 1) why is UA being allowed free rein to input unrealistic assumptions into the LatAm DCF, 2) are they using similar methods to stave off a major CF goodwill impairment, and 3) why was UA not more forthcoming about its goodwill composition with the SEC?

Most importantly, just what is going on with UA’s auditor?

Don’t Trust the Auditor

UA’s auditor PricewaterhouseCoopers (PwC) has been in place for a while now at ~15 years. There are two ways to interpret long tenures – that they’ve been around long enough to know their way around UA’s accounting or that they’ve been around too long and have gotten too cozy with the company.

If PwC’s recent fees are anything to go by, the UA gig isn’t just lucrative, it gets more and more lucrative by the year. Here’s UA’s audit fees trend:

(Source: Under Armour)

Note the sharp rise in FY17 – audit fees rose ~48% in one year. Including everything else (audit-related, taxes and all other fees to the auditor), UA paid its auditor a grand total of $3.8m in FY17, a staggering 56% YoY pay hike. It also represents an eye-popping tripling in fees since FY12.

Now, there’s a few reasons why this might be the case, with the most innocuous explanation being UA’s growth (unlikely when benchmarked vs similar growth cos). The more likely reason in my view, may be that the audit may be getting more extensive e.g. digging into areas where results are uncertain.

Don’t Trust the Board

While the media fixates on the deficiencies of Tesla’s (TSLA) governance, UA’s is just as bad, if not worse. With Kevin Plank wearing the CEO/ Chairman/ Founder/ CODM hats while controlling the shareholder vote, there really isn’t much governance here at all.

I noted some interesting points on UA’s Board breakdown – 1) Seven out of ten Board members are at or past the age of 60, 2) Only one has accounting expertise, and 3) The members hold a large number of management roles and Board positions elsewhere.

Name

Position

Committee

Age

Accounting Expertise?

Kevin Plank

Chairman/ CEO

46

George W. Bodenheimer

Acting Chairman of ESPN, Inc.

Comp

60

Douglas E. Coltharp

Executive Vice President and Chief Financial Officer, Encompass Health Corporation

Audit; Finance (Chair)

56

Jerri L. DeVard

Executive Vice President, Chief Customer Officer of Office Depot, Inc.

Comp

60

Mohamed El-Erian

Former CEO and Co-Chief Investment Officer of PIMCO

60

Karen W. Katz

President and Chief Executive Officer, Neiman Marcus Group LTD LLC

Audit; CG; Finance

61

A.B. (“Buzzy”) Krongard

Former Chief Executive Officer and Chairman, Alex.Brown, Incorporated

Audit (Chair)

82

William R. McDermott

Chief Executive Officer and Executive Board Member, SAP SE

CG (Chair)

57

Eric T. Olson

Admiral, U.S. Navy (Retired) and Former Commander, U.S. Special Operations Command

CG

66

Harvey L. Sanders

Former Chief Executive Officer and Chairman, Nautica Enterprises, Inc.

Comp (Chair)

68

(Source: Under Armour, Author)

Now, UA’s Board also has a bit of an “old boys club” feel and conflicts of interest are rampant. For instance, Olson, who has served with Krongard on the board of Iridium (IRDM), was recommended by Krongard to the UA Board. Meanwhile, Bodenheimer serves with Plank on a separate Board, which may bias his judgment as an independent director.

The low female representation is telling as well.

Besides Plank, Krongard is the key piece – as lead independent director, he acts as the “liaison between the non-management directors of the Board and the Chairman, CEO and President, Kevin Plank and the other members of our management team.” On the UA site, Krongard is listed as the former CEO and chairman of Alex Brown Inc. But his Alex Brown days do not begin to do justice to Krongard’s colorful history.

In fact, Krongard was at some point the executive director at the CIA, following which he held board positions at Blackwater and ArmorGroup. During his tenure at both these companies, he was no stranger to conflicts of interest, for instance, he was brought onto the Blackwater advisory board while his brother (then State Dept inspector general) was tasked with investigations into the firm. Similarly, ArmorGroup faced allegations of counter-intelligence failures and security breaches during his tenure.

A recent lawsuit (see Andersen et al vs Plank et al) highlights, on April 25, 2016, Krongard sold 16,800 personally held shares of Under Armour stock for total proceeds of approximately $762,849.36.

(Source: Andersen et al vs Plank et al)

The timing of this was highly suspicious considering it came right on the heels of the company raising guidance on April 21, 2016. In fact, Krongard seemed to have sold his shares at the same time as fellow Board members Plank and Sanders (ironically the compensation committee chair). From the lawsuit:

“In total, the 933,600 shares sold by Plank, Krongard, and Sanders, and the $39.8 million received from those sales, within mere days after the Company raised guidance on April 21, 2016, represent approximately 19% of the total shares sold and 11.8% of the total proceeds from such sales by all Insider Selling Defendants during the Relevant Period”

Interestingly, the slew of insider sales also came right before UA’s rapid downfall in 2016 and 2017.

(Source: Google Finance)

It isn’t just the audit (Krongard) and compensation (Sanders) chairs that have colorful backgrounds though, finance chair (Coltharp) also has a controversial history. While at Saks, Coltharpwas relieved of responsibilities for accounting and financial reporting matters… in connection with an internal investigation into improper collections of vendor markdown allowances.” He later joined Healthsouth (now Encompass Health), a company plagued by accounting fraud, where he currently serves as CFO.

Meanwhile, McDermott (CG chair) currently runs SAP, where UA is a client. Although UA’s Board claims the relationship is immaterial and has no impact on McDermott’s independence, it seems strange that all four committee chairs either have controversial backgrounds, conflicts of interest or both.

It will be interesting to see how the addition of El-Erian impacts governance. As things stand, I’m not sure he’ll be making much of an impact anytime soon – per the UA site, he isn’t (yet) on any committee:

(Source: Under Armour)

Besides, there’s only so much one man can do. From what I gather, El-Erian holds so many different roles, it seems unlikely that he will be able to devote the time necessary to address UA’s governance deficiencies. Here’s a list of some of his roles:

Institution

Position

Carnegie Endowment for International Peace

Vice chair

National Bureau of Economic Research

Exco member

Capital Campaign for Cambridge University

Co-chair

King Abdullah University of Science and Technology (KAUST)

Board member

The Pegasus School

Board member

Microsoft Investment Advisory Committee

Chair

Council on Foreign Relations

Member

Allianz

International advisory committee

Allianz

International executive committee

Allianz

Chief Economic Advisor

Investcorp

International advisory committee

Under Armour

Board member

(Source: Author, El-Erian Website, Bloomberg)

Contrary to popular perception, I don’t think the addition of El-Erian is in the best interest of shareholders. Seemingly expert board members such as El-Erian add credibility but only possess tangential expertise and thus, cannot sufficiently challenge management. The busy schedule doesn’t help either and it wouldn’t surprise me if El-Erian ends up nothing more than a symbolic figure on the UA Board.

Don’t Trust Plank

UA’s governance issues really stem from Plank’s lack of accountability. UA’s share class structure (approved by the Board without question) – one-vote-per-share Class A, no-vote per share Class C, and ten-votes-per-share Class B stock – is designed to entrench Plank’s control over UA.

That’s a big problem – Plank is widely credited with promoting an overly aggressive culture within UA and since 2015, has been operating with virtually no check and balance. Here’s a particularly interesting excerpt I came across from a the Andersen lawsuit (see Andersen et al vs Plank et al):

“Within Under Armour, instructions for determining growth forecasts were very simple: take what you sold last year and add 20%. The Company’s “top down” aggression came directly from Plank. Plank’s obsession with the 20% growth streak drove the Company’s revenue growth-at-all-costs strategy.”

Along with UA, Plank also has interests in businesses such as a whiskey distillery, horse racing, venture capital and property development among others. The latter was a major source of controversy due to a related party transaction which occurred in 2016 where Plank (via Sagamore) sold a parcel of land to UA for $70.3m (more than twice the initial purchase price two years earlier).

In response to King’s demand letter dated May 25 2017 (see King et al vs Plank et al), UA came up with the following breakdown to justify the inflated price (note the inclusion of a $31m lease buyout).

Value ($)

Cost

35m

+Lease buyout

30.6m

+Development, planning and carrying cost

6.4m

-Loss to Sagamore

1.5m

Total Purchase Price

~70.3m

(Source: UA Review Group)

Meanwhile, a UA rep, Diane Pelkey has been posting the following PR statement in response to media coverage (see comment section here):

“Kevin Plank never made money on the transaction with Under Armour. In fact, he actually sold the land to the company at a loss. Moreover, this purchase is going to enable the company to develop a headquarters campus that can support the company’s long-term growth plans. The company followed a thorough process in reviewing and negotiating the transaction, using independent advisors, including Ernst & Young, with close oversight of the company’s Audit Committee to ensure the transaction was fair to the company and free of any potential conflicts.”

Very noble of Plank to take on losses to fund the latest UA headquarters. In fact, Plank claims UA faced a “pressing need for ~100,00 sq ft of office space with even more thereafter” as justification for the purchase in June 2016.

Yet, barely a year later, UA disclosed that their cost base was far too large and needed to be restructured – so much for the “pressing need”. From the 3Q17 call:

“Walking hand-in-hand with this is the need to address our cost infrastructure, which is built for a much larger company than we currently are”

In fact, Plank’s secretive Port Covington real estate purchases began in 2012 after his plans to expand UA’s Locust Point HQ was scuttled by the Baltimore Museum of Industry. Here’s Plank’s reaction in a later interview:

“Number one, I’ve got the engine in Under Armour. Number two . . . I can afford to make these decisions, so why am I waiting on [the Museum of Industry] board of directors?”

Through Marc Weller, who heads Sagamore Development (Plank’s property development co), Plank began discreetly acquiring land in Port Covington that year. His intention was twofold – to sell some of the land to UA for its future HQ, and to develop a mixed-use neighborhood anchored by UA’s HQ.

Throughout this period, Plank discreetly made Port Covington acquisitions totaling over 160 acres at ~$114 million.

Per a Baltimore Sun piece:

“The use of names and addresses that didn’t tie back to Kevin was all very intentional,” Weller said. “We wanted to be successful in acquiring as much as possible as quickly as possible.”

Companies discreetly owned by Plank purchased his first Port Covington property at a foreclosure auction.

Plank sold well over $300m worth of stock into 2014, with the massive sales continuing into 2016, likely to fund the Port Covington development.

In fact, his total stock sales since listing came in at well over $700m.

(Source: Insider Monitor, Author)

Per news articles cited in the King lawsuit (see King et al vs Plank et al), “Sagamore is expected to make $400 million from land sales during the multidecade project, according to an analysis conducted for the city.”

Here’s where it gets dicey for UA shareholders – assuming Plank has been funding Port Covington via UA share sales, would that not imply that UA shareholders have been subsidizing the project? The strategic use of UA’s HQ as a focal point of the development also likely contributed to the funding etc yet, all the upside accrues to Sagamore/ Plank.

Other notable related party transactions include UA’s lease for jet aircraft and a helicopter as well as industrial space and hotel accommodation (all linked to Plank/ Plank Industries and yes, all okayed by the Board, no questions asked).

You Cannot Fool All of the People All of the Time

With the spotlight shining firmly on Tesla’s governance deficiencies, investors may want to check out Under Armour as well. UA’s constant use of restructuring vehicles and aggressive assumptions to mask its busted growth model can only last so long before the market sees UA for what it truly is.

From a valuation perspective, UA looks extremely lofty – the “hockey stick” needed to hit FY18 is already well-known, but FY19 consensus looks way too high as well. With UA already writing off FY19, it wouldn’t surprise me if we see a big reset and consensus’ $0.31 FY19 EPS (implying ~62x fwd PE) gets cut in half. In fact, I don’t see UA’s earnings power being any higher than high-teens EPS. And that’s being generous on margins – I’ve assumed flat gross margins and SG&A going forward. Tack on a 30-40x multiple and you’d have to stretch far to get much higher than a MSD-HSD PT for the stock. With a bit of patience, there’s significant downside to be realized here.

It’s hard to say when the market will finally (de-)value UA accordingly – I’d like to think value/ patience is its own catalyst. As the saying goes:

“You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time” – Abe Lincoln

Disclosure: I am/we are short UAA.

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

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