Investment

GE still $15 billion in negative equity

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While GE might have rallied back above $10 on the back of its 1Q results released overnight, the company’s goodwill shrunk $5.5bn but the company remains deeply in negative equity to the tune of $14.7bn. Why do analysts perpetually focus on the revenue and profit, rather than look at the elephant in the room? Especially as we are at the top of an industrial cycle with warning signs that global growth is already slowing faster than originally anticipated. GE is heavily indebted.

Of the $53.2bn in goodwill and $ $17.1bn in intangible assets, GE shareholder’s equity (including non-controlling interests) is at $55.6bn. The gap is c. $14.7bn.

One of the interesting notes in the 10Q regarding the goodwill Oil & Gas accounts for 42% of the total. GE noted in point 8.

While the goodwill in our Grid reporting unit, Hydro reporting unit, and Oil & Gas reporting units is not currently impaired, the power and oil and gas markets continue to be challenging and there can be no assurances that goodwill will not be impaired in future periods as a result of sustained declines in BHGE share price or any future declines in macroeconomic or business conditions affecting these reporting units.

We can celebrate the short term but when an industrial stock, one which was the largest company by market capitalisation almost 20 years ago, has such an awful balance sheet (354% debt: equity) and blew $45bn in buybacks in recent years, one has to wonder how investors can look at GE as a paragon of value? Reminiscing on the halcyon days of a stock is not a method of sensible investing when staring at reality.

Panasonic pulls the plug on further Tesla capex

What a surprise? Panasonic is the main supplier of Tesla batteries. The Japanese tech giant is pulling the plug on further investment as it cites “financial problems” according to the Nikkei.

Panasonic had planned to ramp up production to 54GW by 2020 but it seems likely to stick to 35GW.

CM made the stance clear in the 30 reasons why Tesla will be a bug on a windshield report with respect to growth being at the mercy of suppliers willingness to co-invest.

Japanese suppliers are among some of the most tolerant around. For them to get pangs of concern should speak volumes about the real underlying conditions at Tesla. So much for a vote of confidence.

Flannery departs GE. Market rewards +14% in pre-market

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General Electric (GE) shares have been a dreadful investment. The company, which trades in negative equity is indicated c.14% higher in trade after CEO John Flannery stepped down inside one year on the job. Lawrence Culp replaces him as Chairman & CEO.

Losing Flannery will look to add about $14bn to GE’s value. Keeping Musk will look to add $7.1bn to Tesla’s value today. A tale of two CEOs. The power or losing one to that of keeping one.

Will financial planners bring out a Naomi Osaka ETF?

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Japanese investors can get star-struck with investments. In 2015, popular pop-idol band AKB-48 saw the stocks of companies it was sponsored by surge 136% relative to the market. Aggregate sales of those companies surged 46% and 30% over the following two years. Such is the ‘hayari‘ (boom) culture in Japan. Corporates know this.

Since the US Open win by tennis star Naomi Osaka, sponsors are lining up to sign her. Prior to the win, Nissin Foods, WOWOW & Yonex were already sponsors. Nissan has just signed her. Since the win, the Topix has risen a tad over 6% while Nissan, Nissan & WOWOW have risen 7.5% in aggregate. Yonex has jumped 12.2% Early days to be sure, but the likelihood is that if she is sponsored by some smaller less liquid stock names these stocks could well fly.

Forget fancy models and esoteric investment strategies. Find whatever Osaka will be sponsored by in Japan and outperform through popularity over underlying earnings performance.

Any financial firm that launched a Naomi Osaka basket would likely see massive inflows and be able to charge higher fees on the back of it. Will the marketing departments wake up?

Do as I say not as I do

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Tesla’s senior VP of engineering Doug Field has been selling down his stake in the company despite suggesting he’s  insulted by those shorting the stock. Field has sold over $6.5mn in stock since Sep 2015, selling $500k worth in recent months according to filings. Surely any company that has signed off on an incentive package triggered at a $650bn market cap (12x today) would be nuts to sell any of the stock now. Will Musk’s April Fool’s joke about Tesla’s bankruptcy actually become a self fulfilling prophecy? Be careful why you wish for!

The beauty of honesty

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The above quote is from quirky fund manager Dr Michael Burry MD towards the end of the movie, The Big Short. It says so much of today. One mate who is a very decent asset manager in Australia wrote to his clients, “I realise such may fly in the face of typical adviser recommendations (show me how someone is paid and I’ll show you how they will behave) however, I would rather lose a client than lose a client’s capital.

We share similar views on the state of the global capital markets. We joked about his long message to his investors sounding like Jerry Maguire burning the midnight oil writing the “fewer clients, less money” manifesto which got him sacked.

Now that our world is moving further and further toward automated everything including pre-emptive responses (which I scoffed out the other day about LinkedIn) it is truly refreshing to see this authentic honesty. The irony is that as much as machines are pushing us into ever tighter time windows, humans instinctively carry long term memory whether trauma or positive life events.

May your honesty be paid back in spades when those you saved a bundle recall your genuine gesture.

Shift your investment from corporates that stick to IR to those that self promote through PR

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Fund managers will find it tougher in the new post MiFID2 world to discover new companies in Japan. The sell-side research houses are likely to focus less and less on the one part of the market that clients are likely to be interested in – smaller medium sized enterprises which have unique business models exploiting the slow to change direction super tanker large caps. As a result many corporations will stick to traditional investor relations (IR) behaviour. Producing quarterly results and annual reports will not be enough. As stockbrokers become disincentivized to promote the same corporations they used to go out of their way to support by hosting IR roadshows, the companies will have to take it upon themselves to fill the gap. To that end IR will become PR.

Instead of buy-side analysts running complex forecasting tools, perhaps they would be better off covering off which corporations are actively promoting themselves relative to others. Surely those companies proactively contacting investors and providing them with up to date and relative updates will gain much more mind-share than those that don’t. Do not think for one second that time poor investors and fund managers won’t make time for those companies that make time for them. It is tough enough trying to fight off the onslaught of ETFs internally so wherever a corporate makes decision making simpler and time efficient it is not unbelievable to think that those stocks (provided they follow through with the earnings) won’t trade at a relative premium to those that stay behind the comfort of their own desks, despite in their eyes providing the minimum requirement of information.

Meeting one successful internet database company in Japan recently, I questioned why a company that had seen its revenues grow 70% in 3 years had seen a share price drift 40% lower. The IR team were worried why they had seen such a drop off in client contact.  It wasn’t that it had poor results. It was that it was sticking to a stale script and a liquidity drifted below crucial levels, the stock was being dumped on that alone. The irony was that the smallest division that was growing the fastest was on the back page even though it was growing 5x faster than any other division and at twice group margins. For a simple tweak in its PR material, the stock would light up. Still the company intends to stick to convention (for now).