Topley’s Top Ten – August 15th, 2019

Author

Matt Topley
August 15, 2019

1.Euro Banks Break Thru 5 Year Lows.

EURO STOXX® Banks

  • The STOXX Sector indices are available for global markets aswell as for Europe, the Eurozone and Eastern Europe. Using the marketstandard ICB Industry Classification Benchmark, companiesare categorised according to their primary source of revenue. Thiscategorisation guarantees a professional and accurate classification ofcompanies in their respective business environments. There are four levels ofclassification ranging from broad to very detailed: 10 industries are brokendown into 19 supersectors, 41 sectors and 114 subsectors.

2.Euro Financials ETF right back to Dec. 2018 Lows.

EUFN Europe Financials ETF

Trading Below 1x price to book.

3.Volatility Index Below 2018 Highs.

Volatility Index.

4.Tech Hot Sub-Sectors

Software ETF-pullback so far barely a blip in long-term chart

Semiconductors barely a blip …not even back to June lows yet

5.Canopy Growth, world’s largest pot company, lost $1 billion in three months

Stock falls 10% in late trading after elimination of C$1.18 billion in warrants related to Constellation Brands investment leads to earnings miss

Bloomberg News/Landov

Analysts surveyed by FactSet had estimated fiscalfirst-quarter adjusted losses of C$0.38 a share on revenue of C$111.9 million

Canopy Growth Corp.reported a C$1.28 billion quarterly loss late Wednesday and missed analystestimates for revenue, sending shares down 10% in after-hours trading.

The world’s largest cannabis company bymarket value, Canopy GrowthCGC, -13.56% WEED, -5.76%  reportedfiscal first-quarter net losses of C$1.28 billion, or C$3.70 a share, comparedwith losses of C$91 million, or 40 cents a share, in the year-ago period. Themore than $1 billion loss was due to the company extinguishing warrants relatedto the Constellation Brands Inc.STZ, -1.61%  investment.

TimeCanopy Growth Corp.Oct 18Dec 18Feb19Apr 19Jun 19Aug 19

US:CGC

$20$30$40$50$60

Canopy Growth fired co-Chief Executive Bruce Linton notlong after its previous earnings report, amid reports of unhappiness atConstellation with continuing large losses. CEO Mark Zekulinhas remained at the helm of the company, but has said he expects to exit once anew leader is found.

Net revenue rose toC$90.5 million from C$25.9 million in the year-ago period, excluding excisetaxes. Of that revenue, Canopy said that C$50.4 million was Canadianrecreational business-to-business, C$10.6 was direct to consumer and C$13.1million was medical cannabis sales. Canopy also brought in $10.5 million ininternational cannabis revenue.

Analysts surveyed byFactSet had estimated fiscal first quarter adjusted losses of C$0.38 a share onrevenue of C$111.9 million. Canopy did not provide any per-shareadjusted-earnings information. 

The company said itsold more than 10 metric tons of pot in the fiscal first quarter, up 13%sequentially. Canopy increased its harvest 183% sequentially to 41 metric tonsfor the quarter.

In a statement, Zekulinsaid that the company has two objectives as it completed the fiscal firstquarter.

“First, the companyremains focused on laying the foundation for dominance in an emerging globalopportunity. This means investments in developing intellectual property,building brands, building international reach, and ensuring scaled productioncapability for current and future products,” the CEO said in a statement.

“Second, we are fixatedon the process of evolving from builders to operators over the remainder ofthis fiscal year, meaning that as our expansion program comes to a close inCanada, and as new value-add products come to market in Canada, we demonstratea sustainable, high margin, profitable Canadian business.”

For the fiscalsecond-quarter, analysts expect losses of C$0.36 cents a share on sales ofC$145.1 million.

U.S.-traded shares of Canopy Growth hasgained 16.2% this year, with the S&P 500 index SPX, -2.93%  rising14.2%.

Big Drop in last few months.

Longer-term chart …stock was 20 points lower in 2018.

6.High Yield Spreads Not Widening Yet.

 HIGH-YIELDSPREADS

Thegap between high-yield and U.S. government bond yields rose ahead of the 2007-2009recession and then widened dramatically.

Creditspreads typically widen when perceived risk of default rises. Spreads havefallen from their January highs.

Predicting the next U.S. recession

7.GE shares drop after Madoff whistleblower Harry Markopolos calls it a ‘bigger fraud than Enron’

KEY POINTS

  • GeneralElectric shares fell after Madoff whistleblower Harry Markopolos targets theconglomerate in a new report, calling it “a bigger fraud than Enron.”

  • The175-page report claims GE was hiding the depths of its financial problems andwould need to significantly raise its insurance reserves.

  • “Myteam has spent the past 7 months analyzing GE’s accounting and we believe the$38 Billion in fraud we’ve come across is merely the tip of the iceberg,” Markopolossays in the report. 

HarryMarkopolos, an independent financial fraud investigator and former moneymanager, stands for a portrait in New York, U.S., on Monday, March 1, 2010.

Bloomberg| Bloomberg | Getty Images

General Electric shares fell Thursdayafter Madoff whistleblower Harry Markopolos targeted the conglomerate in a newreport, saying it has allegedly been hiding the extent of its financialproblems in fraudulent financial statements. 

A website has been set up todisseminate the report, www.GEfraud.com, where Markopolos calls it “abigger fraud than Enron.” The financial investigator writes that after morethan a year of research he has discovered “an Enronesque business approach thathas left GE on the verge of insolvency.”

“My team has spent the past 7 monthsanalyzing GE’s accounting and we believe the $38 Billion in fraud we’ve comeacross is merely the tip of the iceberg,” Markopolos said in the 175-pagereport. 

Markopolos’s case centers around GE’slong-term care insurance unit, which the company had to boost reserves for by$15 billion last year . By examining the filings of GE’s counterparties in thisbusiness, he alleges that GE is hiding massive losses that will only increaseas policy-holders grow older. He claims that GE has filed false statements toregulators on the unit, or eight other insurance regulators have done so.

GE confirmedthe existence of the report in a statement to CNBC, but said it has not seenit. A more detailed report will be posted later Thursday. The website asks forusers to submit a name and email to receive the report.

“We have never met, spoken to or hadcontact with this person. While we can’t comment on the detailed content of areport that we haven’t seen, the allegations we have heard are entirely falseand misleading,” the statement said.

The Wall Street Journal firstreported on the missive and said that it has viewed it, sending GE shareslower. The stock was down by 5.9% in premarket trading Thursday.

Markopolos is a Boston-basedaccounting expert who gained notoriety after pointing out irregularities withMadoff’s investment strategy, and how it was impossible to generate the returnsthe fraudster claimed years before the Ponzi scheme was exposed. He was largelyignored at the time. More recently, Markopolos helped uncover a foreigncurrency trading scandal at a group of banks. 

The Markopolos group looking into GEincludes forensic accounting veteran John McPherson, co-founder of MMSAdvisors, which specializes in the insurance industry.

“GE has been running a decades longaccounting fraud by only providing top line revenue and bottom line profits forits business units and getting away with leaving out cost of goods sold, SG&A,R&D and corporate overhead allocations,” the report said. 

8.Women Earn 57% of U.S. Bachelor’s Degrees—For 18th Straight Year

By Terence P. Jeffrey | June 8, 2018 | 5:15PM EDT

(Screen Capture)

(CNSNews.com)– Women earned approximately 57 percent of the bachelor’s degrees awarded byU.S. institutions of higher education in the 2016-2017 academic year, according todata released this week by the National Center for Education Statistics,which is part of the U.S. Department of Education.

That, according toNCES data, makes 2016-2017 the eighteenth straight academic year inwhich women have earned approximately 57 percent of the bachelor’s degreesawarded by U.S. colleges and universities.

The NCESthis week released a “first look” report—“PostsecondaryInstitutions and Cost of Attendance 2017-18; Degrees and Other AwardsConferred, 2016-2017; and 12-Month Enrollment, 2016-2017″—thatlisted the number of bachelor’s degrees awarded in the 2016-2017 academic yearby U.S. institutions that participate in Title IV federal student financialassistance programs (plus the U.S. military academies).

9.Why Are So Many Investment Decisions Based on Biased and Contrived Stories?

I recently read WillStorr’s excellent book ‘The Science of Storytelling’[i];which is an exploration of how our brains process stories and why they are sucha fundamental component of human experience.  Whilst it is primarilydesigned as an aid for writers seeking to better craft their narratives; forme, it also served to underscore the underappreciated but essential role thatstories play in financial markets.

Linkingstorytelling and investments is not a revelatory observation – investors areoften lured into a poor decision by a compelling story and no financial bubblein history has been absent some beguiling narrative – however, their importanceis hugely understated.  Rather than a susceptibility to stories being abehavioural quirk; the human brain’s reliance on narratives to make sense ofthe world means that they define much of our investment behaviour.  Thenoisy, chaotic and unpredictable nature of financial markets is anathema to ourmind’s desire for order and clarity; stories reduce our discomfort and allow usto navigate the ever-capricious waters. It seemingly matters not that most ofthe yarns we spin are works of fiction.

Storytellingin financial markets is always driven by cause and effect.  There are twoforms of this – either we predict a cause and effect before the event, or welook to rationalise an effect by defining a particular cause subsequent to theoccurrence.  Although we might not always consider them as such both ofthese scenarios are about creating narratives – Y will happen because of X, orY has happened because of X.  Investors do this for every conceivablesituation – from justifying the hourly change of a stock price to the impact ofa fifty-year demographic shift on asset class returns.  Everything musthave a cause and effect underpinning the narrative.

Inmany other circumstances a straight and true line can be drawn between causeand effect – even if something might not be forecastable, it can be understoodafter the event. We might not be able to foresee a plane crash; but in mostcases we have sufficient information to gauge its cause after the incident.Unfortunately, in the random and reflexive world of investment, accuratelydefining these aspects in either predictions or during a post-mortem is hugelyproblematic.  We know only too well about the hopelessness of forecastingand observe on a daily basis the myriad competing explanations for even themost irrelevant market or economic change.

Ifgleaning cause and effect in financial markets is so difficult, why do we spendmost of our time talking about it?  As Storr succinctly notes: “Cause andeffect is the natural language of the brain. It understands and explains theworld.”  The alternative would be to exist in a financial environmentdefined by randomness and chaos – whilst this may be closer to the reality, itwould not make for a comfortable existence.

Inaddition to the importance of cause and effect for our narrative-driven brains;Storr also highlights how the types of stories we tell are dependent on themental models that we develop and then seek to defend. This has unquestionablerelevance for investors – we all utilise models for interpreting the financialworld; these can be structural (I might be a Keynesian economist) or temporary(I might be bullish on equity markets over the next six months). The beliefsets that we maintain mean that when we create our stories we do so in aprejudiced fashion; as Storr explains: “Our storytelling brains transformreality’s chaos into a simple narrative of cause and effect that reassures usthat our biased models…are virtuous and right”.

Theimportance of these models to our sense of identity means that much of our taletelling is in the defence of those models. Financial market participants arenot coolly and impartially attempting to identify cause and effect; rather weare creating stories that corroborate our views and our beliefs, and often railagainst those with conflicting perspectives or opinions. We see this constantlyin the varied and often entirely contradictory interpretation of the latestrelease of economic data. If you understand an individual’s angle, mental modelor incentive, then you are likely to have a good idea of the story that theymay tell.

Doesthe importance of narratives in how our brain interprets the world mean thatinvestors are condemned to exist in an environment of incessant, oftenmeaningless and always biased storytelling?  To an extent, but it dependson how much we choose to engage. Financial markets provide an unrelentingtorrent of outcomes which we can seek to forecast or explain via stories – indeed,much of the industry is fuelled by these precise activities – and whilst thenotion of storytelling seems harmless, for investors it is likely to meanover-trading, over-confidence, stress and partiality.  Investors need tobe comfortable stepping away (it doesn’t matter what the market did yesterdayor why), be willing to say they have no idea what will happen or why ithappened; and focus on some robust, evidence based, principles – all supportedby a good story, of course.

—

[i] The Science of Storytelling by Will Storr

Why Are So Many Investment Decisions Based on Biased and Contrived Stories?

https://behaviouralinvestment.com/2019/08/13/why-are-so-many-investment-decisions-based-on-biased-and-contrived-stories/

10.3 Simple, Regular Practices That Will Help You Come Up With New Ideas

Brainstorm,brainstorm, brainstorm, stall. In a culture that demands constantinnovation and disruption, it can feel like our imaginations become worn downthrough constant calls for the new. To fight such burnout, how can we refreshour eyes? How can we see things in new and inspiring ways? One possibility isto turn to the metaphor of the trees and the bee, whose relationship givesfruit as the result of cross pollination. In our work, coming into contact withthe ideas of another “tree” can be similarly productive.

Inagriculture, cross pollination is an important staunch against theenvironmental risks of monoculture, in which we rely too much on one planttype; it “freshens” plant reproduction with pollen from outside. In a businessor creative setting, monoculture has its own risks, as we habitually turn tothe same sources, people and habits for new ideas. Over time, these ideas cantake on a same-y predictable taste. Or, worse still, the turn to theold-and-reliable can mean disaster if something comes in and disrupts yourenvironment.

Luckily,there are good models of creative thinkers who have behaved like the bee,moving from disciplinary tree to disciplinary tree, spreading the pollen ofideas from one to another:

  • Leonardo da Vinci is perhaps the most famous example of therichness offered by gaining knowledge and experience from markedly differentfields. In addition to being a master painter, he was also a deeply engagedscientific thinker, and the interaction between the fields is clearly ondisplay in his paintings that capture the human form with a level of detail andrealism unusual for the time.

  • Equally beloved, but working on a smaller scale, Beatrix Potterwas a naturalist, whose closely-observed drawings of mushrooms, birds andother life can be felt in the Peter Rabbit stories, which share the feeling ofsmall wildlife carefully rendered.

  • The flow isn’t only from the sciences to the arts, either.Already, descriptions of code as “elegant” suggest that judgments of beautycirculate in the tech world, too. Steve Jobs, for one, radicalized personalcomputing in part because of his belief that the computer might aspire tothe level of art.

Even ifyou’re not so ambitious in your pursuit of exotic new trees as a da Vinci oreven a Potter, you can build the cross pollination habit through simple,regular practices.

1.Make a date with yourself.

In The Artist’s Way, Julia Cameron suggests a weeklypractice she calls the “artist’s date.” Importantly, the artist’s date is not adate to work on your own regular creative work. Instead, it’s a date to feedyour inspiration by looking at something artistically nourishing andstimulating.

So, ifyou are someone who writes computer code for a living, you might go to an artexhibition one week or browse your independent bookstore for a new novel thenext. If you are a writer, you might go for a walk in an arboretum on Mondaymornings or take a cooking class on a Friday each month. It may be that incontemplation of a painting of a seashell, you are inspired to solve animmediate problem, but the purpose of the artist date is less directive.Instead, the idea is to enrich you, to fill you with wide-ranging, stimulatingand nourishing material for a creative living.

2.Read about creative lives.

Start building alibrary of others who have lived inspirationally full and productive lives,whatever their background. Biographies and how-to guides from other fields canbe wonderful sources of inspiration that also open you up to the way a day anda life might be structured: What might you gain from working as Stephen Kingsuggests in On Writing, or reading about and emulating themorning routine of a favorite athlete?

In Deep Work, for example,computer scientist Cal Newport describes the inspiring life of psychoanalystCarl Jung, who worked in tower in the forest to develop theories away from thedistractions of his day. Although there’s a wide chasm between contemporarycomputer science and Jung’s somewhat idiosyncratic psychology, Newport drawsinspiration from his work habits to explain why he avoids the social mediachatter of our own moment.

3.Get in touch with your “beginner’s mind.”

It can be refreshing toone’s self as a knowledge-seeking being to be very bad at something, to getviscerally in touch with what it means to learn as a process, full of curiosity and uncertainty. In disciplines withwhich we are familiar, we tend to comet to problems and projects with a senseof our approach already established. But how do you approach fly fishing?Crochet? Trapeze flying? Extremely novel experiences require close attentionand intensely focused thought of a kind we may have lost in relation to ourmost frequent and yet most important work.

Toexperience the new and learn more about the world makes life richer and moremeaningful, a gift in itself. But at a more practical level, it gives us notjust material, but different ways of thinking that allow us to innovate andexplore our work in exciting new ways.

Happyexploring!