TheChek News Flow

Back in 1888 in Rochester, New York, George Eastman founded Kodak. Four years later, 200 miles down the road in Schenectady, New York, Thomas Edison and some pals founded General Electric. The two 19th-century industrial giants chugged along for more than 100 years, but GE is still rolling along with a market cap of over $250 billion and Kodak is a shadow of its former self with a market cap of $466 million, much of its camera and film business flushed down the disruption pipes of late-20th-century digitization. The question is, how did GE manage to avoid the same fate?

Earlier this month, the company invited me to tour the GE Global Research Center in Niskayuna, New York, just minutes down the road from the plant Mr. Edison built in Schenectady. In fact, it was Edison and his partners who opened the lab in 1900, just eight years after launching the company. Perhaps the company’s founding fathers saw the need to continually reinvent itself, or maybe it was just Edison’s obsession with experimentation.

Whatever the reason, 117 years later the lab is a sprawling campus tucked into the beautiful rolling hills of New York State, packed with 2,000 smart people looking to the future of industrial production, whatever form that will take. While the world goes digital, there are some fundamental things that remain very much in the physical realm — like airplane engines, train locomotives, nuclear power plants and gas turbines.

GE has not watched helplessly as Kodak seemed to do as disruptors slowly (and then very quickly) undercut much of its economic base. The company seems to inherently understand that if it doesn’t continually reexamine itself, it could end up like Kodak. So it looks to the future, where data and the digital world intersect with the huge industrial products it’s been building for the last 125 years.

Shifting to a digital world

The world is in the middle of a massive shift with data at the center. If you doubt this, look at Tesla as a quintessential example of a modern data-driven organization. Tesla is in the car business, but Elon Musk recognized from the beginning that there was an inextricable connection between the data coming from the car and the physical vehicle itself. As Tesla collects that data, it can build a better, smarter, more efficient car — and that just feeds off itself over time in a virtuous cycle.

GE recognizes a similar connection between the data coming from the industrial machines it builds and sells. As sensors get smarter and cheaper, the company can begin to build new business models based on its detailed understanding of these machines, both from an engineering and design perspective, as well as what the data tells them about how that machine is behaving.

To give you a sense of the breadth of GE’s industrial reach, Danielle Merfeld, VP at GE Global Research says, “GE currently has about $2 trillion of assets currently installed around the world across various industries. This gives us tremendous access to system and process know-how that is critical to [our] success.”

Merfeld added that when you combine the digital and physical, powerful things can happen. She says it all starts with the deep understanding the company has about how those physical assets work in the world. “We are not layering digital on top of our physical world, and not replacing our physical world with a digital understanding of it, but actually combining the digital plus the physical to get more than a sum of the parts we could get with background or expertise with either one.”

Taking it to the edge

For GE and the Global Research Centers — there are four sister labs located throughout the world in addition to the one in New York — this manifests itself in the form of bold experimentation. That means looking at the technologies that are just beginning to bubble up on the edges, and working on ways to incorporate that future tech into GE’s industrial products.

Some of the company’s most ambitious projects are taking place in the appropriately named Edge Lab, which opened in January this year, where they are working on a revolving set of experimental technologies. The ones they are currently working on include augmented and virtual reality, robotics and blockchain.

“The purpose of the Edge Lab is to explore technologies at the edge of feasibility to show what’s possible,” says Ben Vershueren, Edge Lab growth leader. He says they take those experiments and combine them with GE’s domain knowledge to figure out how to incorporate them into the company’s product set.

The lab is meant to be a living, breathing entity to the extent that the projects exist for a finite amount of time and the members involved with each project are brought in based on their expertise and only for a limited period — the life of the project. That means the lab staff will be shifting and changing over time as the projects change.

“Once we’ve discovered a mission and decided on its purpose, we grab the right technical experts for that mission, bring them into the lab for a period of time while they go through and deliver what we need for that mission. Then they return back [to their original position in GE] and we move onto other programs,” Vershueren explained.

Bold experiments

During a tour of the Edge Lab, and throughout the day at GE Global Research, I saw some of those experiments.

One involved using HoloLens, the mixed reality headset from Microsoft, to train people how to use ultrasound machines and locate the correct organ. The thinking is that in rural areas it can be difficult to find trained professionals to run these machines, and augmented reality could act as a teaching device.

For starters, you put on HoloLens and attempt to pick up a virtual ultrasound probe and move it around until you identify the correct organ based on a prompt. For example, it might show you the heart and the liver and you need to select the liver. If you get it wrong, you get feedback through the device that you chose the incorrect one.

Eventually, the team hopes to provide a similar level of feedback working with the actual probe while using the HoloLens to provide a virtual training environment. It’s worth noting that GE sells ultrasound machines, so if they can get them into areas that normally wouldn’t have them and train personnel without a specific medical background to use them, presumably they could sell more of them.

Another idea involves mixing robotics, virtual reality and streaming data. The thinking is they can put a robot in a dangerous place like on an oil rig or wind turbine in the middle of the ocean. Instead of sending a person by boat over rough ocean to do maintenance, a human safely ensconced on shore can control the robot in virtual reality and direct the repairs.

The way it works is you put on an HTC Vive headset with a controller in each hand. As you enter the virtual world, you can see a representation of the robot along with the two controllers. One of the controllers controls the robot’s movement. The other gives you access to a virtual iPad, from which you choose a tool from a menu of selections: “Drive”, “Teleport” and “Arm” modes. Drive lets you control the robot’s movement. Teleport controls your movements inside the virtual world and the arm lets you control the robotic arm to undertake repairs or pick up debris (or whatever needs to be done).

All of the tasks and programs I saw during the tour have a goal of eventually using these advanced technologies to enhance and improve what GE is doing in the physical world with its big machines, or understanding why a particular technology might not work (at least as the experiment presented it).

The company hopes that by continually investigating the latest technologies across their collection of global research centers, it can avoid the fate of its manufacturing cousin down the road in Rochester. One thing is clear, they are not sitting around waiting to be disrupted. They are continuing to look ahead, to assess the newest technologies and to search for the next great ideas, just as Thomas Edison was doing when he started the company 125 years ago.

Snapchat invented its best products by being the anti-Facebook. Its disappearing chats made visual communication quick and casual compared to Facebook’s email-esque text messages. Stories ditched the likes and permanency so you could share your raw moments in the now, instead of just the life highlights that define you forever on your Facebook Timeline.

But now this “opposite of Facebook” orthodoxy is holding Snapchat back. After a brutal year of being copied by the world’s biggest social network, Snapchat might be wise to return the favor.

Twitter and Instagram prove out the algorithm

Twitter was once in Snap’s position. With slowing growth, it needed a big change to reinvigorate its aging app and make it easier for people who browse tweets ten times a day. Twitter had always been the real-time firehose of commentary about what’s going on right now. Yet over the years, as users followed more and more accounts, their best friends and the best tweets were drowned in the rushing river of their purely reverse-chronological feeds.

So Twitter made its most significant product update in years: it switched to algorithmic-sorting of its feed. Suddenly it didn’t matter if you followed a few noisy public figures or annoying oversharers, or if your favorite accounts only posted occasionally. Twitter began sifting out what you cared about most and showing it first.

The result has been Twitter’s first meaningful growth in many quarters, adding 9 million users in Q1 2017. “We further refined the timeline to display a broader set of Tweets from a person’s network and applied deep learning models to show the most relevant Tweets first . . . These changes improved retention across both MAU and DAU” Twitter wrote in the quarter’s letter to investors.

Instagram pulled off a similar product coup this year. Previously it showed you every picture and video posted by people you followed in reverse-chronological order. Since these posts take up much more room in the feed, it was easy for one trigger-happy user on vacation or at an event to suddenly dominate the timeline and suppress everyone else. Meanwhile, it subtly discouraged people from posting multiple times per day for fear of having this spammy impact on their friends’ feeds.

Then Instagram switched to a relevancy-sorted algorithmic feed. It’s growth rate spiked, sharing per user increased, and Instagram has added 200 million monthly active users since to reach 700 million.

In both cases, going algorithmic seemed antithetical to the core identity of the services, and long-time users vocally griped that their apps were ruined…but they weren’t. Twitter wants you to know what’s going on in the world. Instagram wants you to see what’s going on with your friends and interests. Both missions are better accomplished when you see the most relevant content first, no matter how often or little you open the apps.

Snapsort

Now it’s Snapchat that needs an algorithmic boost. On May 10th it will have its first earnings call, and all eyes will be on its daily active user count. Snap Inc will try to trumpet every other possible statistic: minutes spent in app per user per day, percentage of users who post each day, video views, revenue per user. But Wall Street wants scale, not just depth of engagement, and there’s a proven way to get it.

Algorithmic sorting of Stories has propelled Snap copycat Instagram Stories to 200 million daily active users in 10 months — more than Snapchat’s whole app. Above the Instagram feed, you see the Stories of friends — not ranked by who posted most recently, but by who you care about most. That way it doesn’t matter if your best friends only post once per day, you only check once per day, and some “social media influencers” or professional photographers you follow add to their Stories non-stop. You always see what’s most likely to entertain you.

This sorting also enables Instagram Stories to employ auto-advance, showing one friend’s photos and videos after another in a constant stream. You can watch in descending order of relevance until you get bored, and be confident the Stories you didn’t get to are from people you care about less. If you only follow a small number of friends, your besties come first. If you follow a ton of celebrities or interest accounts, your favorites won’t get lost.

Compare that with the experience on Snapchat, and the fact that its growth rate declined by 82% to a trickle after Instagram Stories launched makes sense. Snapchat shows you the big list of Stories from people you follow in reverse-chronological order. Users who post most often dominate the top slots and your attention, regardless of whether you ever actually open and watch their Stories.

There might have been more benefit to the unsorted strategy when Snapchat was a smaller network. Reverse-chrono ranking makes it easy to see if any friends are doing something fun right this minute that you might want to join. And when Snapchat was still just for hip early-adopter teens, you might not have followed anyone you didn’t want to watch. But as Snapchat became the defacto teen messaging app and everyone that everyone knew signed up, courtesy and social contract obliged people to follow even their more boring acquaintainces. The network dilluted, and your favorite people started getting overshadowed by the rest.

Without algorithmic sorting, auto-advance meant you’d basically be haphazardly watching in order of whoever posted most recently, bouncing from distant acquaintances to celebrities to friends. So last year, Snapchat dropped auto-advance. That made the experience even worse, and much more laborious. Now you have to watch one person’s story at a time and then bounce back to the list to find more, or manually cobble together an adhoc Story Playlist that plays in sequence. You can’t just open Snapchat, tap the first story, and sit back and watch.

It’s time for Snapchat to start caring less about time, and more about our relationships. Algorithmically sorting the feed based on whose Stories you typically watch and who you chat with could make it much easier to drop into Snapchat and immediately get the most delight per minute.

If Snap doesn’t want to suddenly throw away the old feed, it could leave a reverse-chrono list below the new algorithmic one. Or it could just create a “Best Friends” or “Favorites” or “Recently Watched” section above your Stories list that groups together what the algorithm would have shown first. That section could potentially auto-advance too.

While Snap is known to favor CEO Evan Spiegel’s instincts over data, the app should at least run some sizable tests to see how people react. Digiday reports that it spent 2016 talking to publishers about potentially ranking them with a curation algorithm.

But at that time, pre-Instagram Stories, Snapchat was flying high and didn’t need to fix what wasn’t broken. The game has changed since. Snapchat users might have asked for faster horses, but Instagram gave them the automobile. Snap needs to modernize. It can still be about living in the now even if that’s not what it shows first

Google could have a harder time catching up to Amazon

Google’s parent company now breaks out revenue by geography.

Alphabet reported revenue for specific world regions for the first time in its earnings Thursday.

Here’s the breakdown of how sales in the first quarter of 2017 compared to sales the same time last year:

* U.S. revenue increased 25 percent from last year to $11.8 billion.

* Sales from the Asia-Pacific region rose 29 percent to $3.6 billion.

* Revenue from Europe, the Middle East and Africa was up 13 percent to $8.1 billion.

* U.K. revenue was part of the latter, and increased only 5 percent year over year, to $2 billion. The U.K. breakout is notable since that’s where advertisers recently pulled its business because of Google’s YouTube controversy.

* Canadian and Latin American revenues rose 34 percent to $1.3 billion.

“These groupings align more closely with how we manage our businesses and also with the major currencies that affect our results,” Alphabet chief financial officer Ruth Porat said on the call Thursday.

UK fund manager’s setbacks fuel questions ability to pick winning stocks

Neil Woodford, one of the UK’s most highly regarded fund managers, is rarely in the spotlight for the wrong reasons — but the past month has been different.

Last week brought disappointing news from two key funds. The investor’s £900m listed trust shifted its investment strategy following underwhelming performance in 2016. Meanwhile Mr Woodford’s new UK equity income fund — the second of its type to launch since he left a career at Invesco Perpetual to start his own business — had attracted only a third of the funding of the first.

Mr Woodford’s funds have suffered some high-profile setbacks, with companies including UK intellectual property company Allied Minds and pharmaceuticals group Circassia suffering sharp share price falls in recent weeks.

The stumbles have raised doubts among brokers over Mr Woodford’s ability to go on picking winners, forcing some to stop recommending his funds to clients.

“Our analysis showed his alpha capability had peaked,” says Michelle McGrade, chief investment officer at TD Direct, a broker that removed the equity fund from its recommended buy list “some time ago”.

When Mr Woodford left Invesco Perpetual in 2014, he was riding high on a reputation for taking large, sweeping bets for or against entire sectors — and winning. The result was that over 25 years of managing funds, he would have turned a £1,000 investment to £23,000.

That performance has not been replicated at his new company, Woodford Investment Management.

Mr Woodford’s listed trust, Woodford Patient Capital, is down 3.1 per cent on a total return basis since its launch in April 2015, compared with a rise of 10.7 per cent for the FTSE All-Share index, and has failed to meet the provider’s own performance targets.

His flagship £10bn equity income fund is also beginning to struggle. It has underperformed the FTSE All Share over the past year, returning 12.6 per cent to the FTSE All Share’s 22 per cent. It has, however, outperformed the index by 10 per cent since launch in 2014.

He’s a true contrarian — he’s willing to keep going even when people are saying he’s lost the plot

Laith Khalaf at Hargreaves Lansdown

Retail investors pulled £50m of cash from the equity fund in January and February in its first ever two-month run of redemptions. Two brokers — Fidelity Personal Investing and Barclays — say it has never made the list they suggest to clients.

Analysts point out that some of the recent downturn in Mr Woodford’s performance is linked to a shift in investment strategy since he left Invesco, where he managed £33bn.

There his funds were filled with big, defensive blue-chip stocks — tobacco and pharmaceuticals were a particular favourite.

The newer funds have relatively large positions in small unquoted, early stage companies, usually — but not exclusively — in the healthcare sector.

“Dealing with unlisted companies is different,” says Rory Maguire, an analyst at rating agency Fund House. “There is no sell side coverage to help you.”

Allied Minds, the UK intellectual property company that is 30 per cent owned by Mr Woodford, suffered a 37 per cent share price fall in just two days this month after it wrote down the value of seven of its investments by $146.6m.

Circassia, a pharmaceuticals company that floated in 2014 in the UK’s largest life sciences public offering for decades, has been another setback. This month it revealed larger than expected losses for 2016, after the failure of key drug trials.

Meanwhile a further holding — Northwest Biotherapeutics, a US biotech company — filed a note with the US regulator warning there was “substantial doubt” about its ability to continue operating.

Fans of Mr Woodford say he has always dabbled with unlisted investments, even during his time at Invesco. “It’s something he’s been doing for a long time alongside all the large-cap stuff,” says Laith Khalaf, analyst at broker Hargreaves Lansdown.

According to figures from Morningstar, the data provider, about 5 per cent of his Invesco Perpetual Income fund portfolio was unlisted when he left the company in 2013.

For his current equity income fund, that figure has almost doubled to 9 per cent — close to its maximum quota of 10 per cent. That proportion has unnerved some fund analysts, who have questioned whether it is “safe” to have large positions in unlisted stocks in an income fund — an almost unheard of situation.

“Someone with such a large potential universe and who owns a small subset of these companies in such large amounts, over long periods . . . there is no questioning his confidence,” Mr Maguire adds.

A spokesman for Woodford Investment Management says: “Neil continues to adopt the same philosophy that has underpinned his investment strategies over his 30-year career. Since he launched the CF Woodford Equity Income fund in June 2014, the fund’s exposure to FTSE 250 stocks, Aim-listed companies and unquoted opportunities has slowly increased as the opportunity set . . . has evolved.

“His investment approach always represents a pursuit of long-term valuation anomalies.”

Simon Elliott, head of research at broker Winterflood, says the kind of strategy used by Mr Woodford will see a “significant number of failures”. The bet is that the winners will win more than the losers lose.

Mr Woodford has had some successes. Biotech companies Oxford Nanopore, Oxford Sciences Innovation and Proton Partners International increased in value in 2016.

Among the high-performing listed portion of his early stage holdings are Theravance Biopharma, the share price of which more than doubled over 2016, and online UK estate agent Purplebricks.

Some commentators say it is difficult to get a sense of Mr Woodford’s performance record when it comes to unlisted companies. “It’s hard to get visibility on how successful his investments in that end of the market have been because they’ve been buried in a big blue-chip fund,” says Jason Hollands, a wealth manager.

Still, backers tend not to be deterred. “What you’re looking for with Woodford is for him to do his stuff,” says Mr Khalaf at Hargreaves. “He’s a true contrarian — he’s willing to keep going even when people are saying he’s lost the plot.”

Wall Street Pros Are Bullish on 2017 But See Recession Late Next Year

Money managers eye 2.5% GDP growth, higher interest rates, and tax cuts, according to our Big Money poll.

Most VIX Analysis Is Outright Nonsense

Avoid portfolio hedging. It is too hard trying to catch volatility spikes or perfectly time stock swoons.

Last Monday the CBOE Volatility Index, or VIX, declined 25% in reaction to the French presidential election. The move was dramatic—and it generated a nauseating amount of meaningless commentary.

If more people realized the VIX is basically designed to move in the opposite direction of the Standard & Poor’s 500 index, the cottage industry that breathlessly comments on the fear gauge would implode under the weight of its own nonsense.

Instead, investor knowledge is lessened by scores of meticulously researched, data-centric commentaries that are often filled with so many charts and dates and inferences about the future and past that necromancers and tarot card readers likely study them for tips.

This column will annoy many, and anger a few, but all sophisticated investors know it is true. Unless you are one of them, you should probably avoid portfolio hedging. It is too hard trying to catch volatility spikes or perfectly time stock swoons.

This hasn’t always been true, and it will change as the postcrisis market regime evolves, but it is a good rule, especially for anyone who cannot pass our basic VIX test.

Can you trade the fear gauge that everyone quotes? If you answered yes, study the VIX and come back next year. If you know the fear gauge is a tracking index, onward to the next level. How are VIX options priced? If you answered VIX futures, you know more about the VIX than most. Still, if you cannot see the VIX futures curve in your head, burning $100 bills is probably more profitable than trading them.

Regardless of your answers, a healthy skepticism toward much of the VIX commentary is needed. It will save you money and lessen your anxiety. (If you want to get smarter, Bill Luby’s VIX and More blog is an excellent place to start.)

Still, it is important to note VIX trading volumes and trends. The recent purchase of some 300,000 May $30 VIX call options, spread against the same number of May $35 VIX calls, has attracted much attention. The trades, like others of the ilk, are usually described as crash protection bought by major institutional investors, as the stock market would indeed have to crash for the calls to truly increase in value.

Paranoids do, in fact, have enemies, but sometimes big trades—especially VIX trades—are part of multidimensional strategies executed by investors who see the markets as mathematical models beyond most people’s comprehension. What is ominous in one market may ultimately be smoothed away by exposures in another, but that spin rarely fits the prevailing narrative used to sell stocks and hedges.

FOR MOST INVESTORS, it’s best to keep an eye on volatility, of which VIX is one part, and to develop a plan to buy stocks—or an index like the S&P 500—if their prices decline by, say, 5%, 10%, or 15%.

Selling puts on quality stocks in the midst of a maelstrom, preferably selecting one-month expirations, positions investors to profit from fear. When a stock is down smartly, you essentially become the dealer, selling puts to frightened investors who are hedging stocks you want to buy.

Consider Goldman Sachs Group (ticker: GS). Its stock recently dropped about 5% on mixed earnings. In this case, the sell-puts-buy-stock strategy was common sense. Goldman is a great bank, and a bad quarter is just a bad quarter. The stock has since bounced from $215 to about $226.

At the risk of repetition, the practical meaning of a low VIX is that options on S&P 500 stocks are usually inexpensive. When stock prices are high and options volatility is low, calls are attractive stock surrogates—a fact worth considering.

Yes, our recommended approaches are boring in every way but this: They will almost certainly lead more investors to profits than all the palaver about VIX.

A Comeback for Coach

Retail-accessory stocks have taken investors to hell in a handbag in recent years. Coach, however, might be ready to reverse course.

Retail-accessory stocks like Michael Kors Holdings (KORS), Coach (COH), and Kate Spade (KATE) have taken investors to hell in a handbag in recent years. Coach, however, might be ready to reverse course.

Consider: During the past three years, Coach has lost 22%, while Kate Spade has dropped 48%, and Michael Kors has tumbled 57%. Those drops were well deserved. Sales have slumped and margins have been pressured, as fickle consumers turned to the internet for their shopping.

Yet we can’t help but feel optimistic about Coach’s prospects. While Kate Spade is busy trying to sell itself, and Kors is struggling to right its business, Coach has already started to make the changes that could give it a boost when it reports earnings on Tuesday.

For starters, Wolfe Research analyst Adrienne Yih notes, Coach is doing a good job of getting high prices for its bags. Yes, even in this terrible, horrible, no-good retail environment. After conducting a survey of March online handbag sales, she found that Coach’s average unit retail price has been rising, even as rivals like Kate Spade and Kors see theirs fall. That’s a sign Coach has a strong brand and enough interesting products to retain pricing power, Yih explains. “This continues to be a rarity in retail,” she observes.

At the same time, Coach’s large presence in the outlet stores might stop being a liability. UBS analyst Michael Binetti notes that store renovations have probably given same-store sales at the outlets a boost, as will Coach’s focus on what he calls “exclusive products.” If outlet sales do pick up, Coach “could be poised for more material earnings-per-share upside ahead,” he explains. At the same time, the fact that Kors is planning to reduce promotions, while Kate Spade struggles, could mean Coach is picking up market share.

Coach, of course, has reportedly been kicking the tires on Kate Spade, but investors got some good news on that front last week, when JAB Holding put shoemaker Jimmy Choo (CHOO.UK) up for sale. Why does that benefit Coach? Jimmy Choo would be an attractive target for Coach, as well. Having it on the market reduces the chance that Coach overpays for Kate Spade, writes Cowen’s Oliver Chen. “Jimmy Choo being put up for sale adds another attractive and synergistic target for Coach to pursue,” he says.

Sure, Coach isn’t exactly cheap: It trades at 17.7 times 12-month earnings forecasts, above its five-year average of 16.6 times. But that’s just in line with the S&P 500’s 17.6; historically, Coach has fetched a 10% premium. Throw in its 3.4% dividend yield, and Coach doesn’t look like a bad place to be—even if it’s not a stairway to heaven.

- White House says the President has been briefed