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Hatch Weekly: Bigger than Enron (GE we’re looking at you)

GE Fraud?

The name Harry Markopolos might not mean much to you, but he’s the guy who first raised the alarm over Bernie Madoff’s Ponzi scheme in 2008. A self-confessed maths geek, he sent Wall Street's biggest conman to the slammer. Well, Mr Markopolos has a new target in his forensic accountant sights: GE (GE). He recently published a report claiming that GE’s accounting fraud is “bigger than Enron and WorldCom combined”. Um, that’s pretty big.

When it doubt, cover it up

The 170-page report alleges that GE’s accounts conceal roughly $38 billion in losses, which is the equivalent of roughly 50% of the company’s market capitalisation. The report claims GE is hiding costs from its financial statements and suggests that the company doesn't have the funds to cover policies in its insurance business. Mr Markopolos says the company is a bankruptcy waiting to happen and submitted his report to the SEC and the Department of Justice.

Guilty? Deny it

GE is denying the claims, and are counter-accusing Mr Markopolos of market manipulation. Yes, the markets moved: GE’s shares plummeted last Thursday 11%, its biggest single-day loss in a decade. Some people reacted by buying more GE stock, as opportunity is in the eye of the investor. Luckily shares rebounded Friday by almost 10% on news that GE CEO Larry Culp went out and bought himself $2 million worth of GE shares after the sell-off. Brave! But here’s the clincher: GE is already under investigation by the SEC and the Justice Department for potential accounting problems in its insurance holdings and power division. They’ve denied accounting tricks in this case too.

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Recession aggression

The market is on edge, and so are investors. Yes, it’s true, shares had in one of their worst days of the year last Thursday as investors’ fears mounted over signals of a US recession. Boo.

The sky is falling?

Yield curve stress, it’s a thing. When investors worry about the economy, they tend to load up on Treasury bonds seeking safety from riskier assets like shares. This pushes down yields (returns) and in turn, pushes up their prices. Last week, the yield on the US Treasury 10-year note fell below that of the 2-year for the first time since 2007. We all know what happened in 2008. Let’s list a few concerning variables. Germany is on the brink of a recession, and that has genuine consequences for the rest of Europe. Let’s not underestimate the effect of Brexit uncertainty could have on Britain’s economy. Hong Kong’s political crisis may turn into an economic one, and continued US and China trade tensions have us on the edge of our seats.

What’s an investor to do in a recession?

Financial experts say not to panic, but to be prepared for a market downturn. Easier said than done! The chances are that if you’re investing in the markets you’ve already got the risk tolerance to ride out short term volatility. And you know that trying to time the market is not an ideal strategy. For the opportunists out there, some say there’s no better time to buy than when we’re in a recession. Warren Buffett once said that the market might go up, the market may go down, the economy may fluctuate, but there will always be intelligent things to do.

Gaming still has game

Investors are popping bubbly over Nividia’s (NVDA) second-quarter earnings that topped Wall Street expectations, and shares popped by 7.3% too! Let’s raise a toast to the graphics chip maker with the most!

It’s on like Donkey Kong

In 2019, Nvidia stock has returned 19.8%. Why the rebound? Nvidia appears to be coming off the back of a ‘crypto hangover’ when last year, crypto miners abruptly stopped buying equipment, leaving them with too much inventory. Gaming is also looking up as the company launched its GeForce RTX Super GPU lineup for desktop gamers and its RTX studio laptops for creators. But the brightest spot for Nvidia’s report might have been the automotive business, which reported record quarterly revenue of more than $200 million.

Level up! With an acquisition that is

Word on the street is that Nvidia is about to buy Mellanox (MLNX). The $6.9 billion deal is supposed to close by the end of the year. Based in Israel and Silicon Valley, Mellanox makes chips used to speed the flow of information between computer servers. Interesting choice? It’s a strategic move for Nvidia as Mellanox’s equipment is used in half of the top 500 most powerful supercomputers. The real story, as we know, is that Nvidia is gathering Artificial Intelligence (AI) capabilities. And why wouldn’t they? It’s a market that’s estimated to be worth trillions in the next decade.

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