JPMorgan analyst Stephen Tusa warned about the conglomerate’s problems before they were public and ‘broke the mold in analyst optimism’
General Electric Co. insiders were convinced: There must be a mole. How else did Stephen Tusa know?
With the conglomerate in crisis, the JPMorgan Chase & Co. research analyst had an uncanny knack, time and again, for uncovering deep problems before they were public. For years, his research had zeroed in on issues both broad, like management credibility, and detailed, like a flawed fan blade inside GE’s turbines, that kept proving prescient.
His reports, often lengthy and skeptical, warned JPMorgan clients to dump the stock, and seemed to be gaining more influence with each new volume.
Inside GE and its boardroom, as a succession of management teams tried to wrap their arms around problems that kept spooking investors, Mr. Tusa’s calls became a source of speculation.
The board and advisers would scrutinize Mr. Tusa’s reports. GE even launched a hunt for leakers, a board member questioned JPMorgan about the research and the bank conducted an internal review, people familiar with the matter said.
As General Electric ’s profits and stock price shriveled, erasing some $200 billion of market value in 2017 and 2018, Mr. Tusa’s dour attitude won more influence among investors. One former senior GE executive said Mr. Tusa’s reports were painful to read, but were thorough and largely correct. “I tip my hat,” this executive said. “At the end of the day, our problem is not Steve Tusa.”
It seems that every decade Wall Street anoints another star analyst. There was Mary Meeker and her coverage of internet stocks during the 1990s dot-com bubble. More recently, Meredith Whitney gained fame for her warnings on Citigroup and other banks during the 2008 financial crisis. Today, few analysts can claim the name recognition and influence that 44-year-old Mr. Tusa has built around GE.
Wall Street research has long come under fire over perceptions of cozy relationships with companies, especially when it comes to big investment-banking clients like GE. Mr. Tusa has been an outlier—which he’s quick to point out—and moved the stock in the process.
Over the past two years, Mr. Tusa has cut his price target on GE 10 times, to $5 from $27. Each time he’s done so, the stock has underperformed the S&P 500 that day, by an average of more than 3 percentage points. When he upgraded the stock last December to a lukewarm “neutral,” the stock rallied 7%, as people hoped he was calling the bottom.
That hope was short-lived. Before U.S. markets opened April 8, JPMorgan issued an alert that Mr. Tusa was downgrading GE again. The report—over 100 pages—highlighted GE’s challenges and risks but the thrust was that the stock price had gotten ahead of reality. GE’s stock slid 5% as the broader market rose.
With the stock beaten up and Mr. Tusa remaining negative, his opinion remains at odds with new GE leaders who are promising a long turnaround. Some people who credit the analyst for correctly seeing the decline of the company are beginning to question if he’s too committed to his negative view.
The bearish turn on GE was a decade in the making.
As an analyst, Mr. Tusa has followed GE since 2001. A formative event was when another conglomerate, Tyco International Ltd. , collapsed under the weight of an accounting fraud in 2002. The scheme was missed by analysts, and it taught Mr. Tusa to have a healthy skepticism around the companies he covered, according to a person close to the analyst.
In those years, GE struggled to find the regular growth delivered in the decade before. It spent billions of dollars on acquisitions and share repurchases, and continued its reliance on the financial-services business that would almost destroy the entire company in the financial crisis.
In 2008, Mr. Tusa’s downgrade to “neutral” eerily described the internal problems that would contribute to GE’s collapse a decade later. “It would appear as though accountability for hitting targets is the top priority, and some managers might be chasing earnings,” he wrote. “We also think the high bar for success in such a competitive environment could create a scenario in which bad news is not tolerated, making necessary communication with senior level managers a challenge until it’s too late to fix.”
Studies have found analysts to be more positive when they are issuing opinions on larger companies, when they cover many companies, and when the companies generate high-investment banking fees. Mr. Tusa has managed to buck all those trends, said Mark A. Chen, a finance professor at Georgia State University who has studied the investment-research industry.
Mr. Tusa covers 21 industrial companies and JPMorgan has collected an estimated $370 million in banking fees from GE since 2010, according to Dealogic, the most the conglomerate has paid to any investment bank over that period.
Prof. Chen found those biases are so prevalent that investors have baked them into their reactions: A negative call, like Mr. Tusa’s, by an analyst under those circumstances tends to move the stock more. “Clearly this analyst broke the mold in analyst optimism,” Prof. Chen said.
A prime example: In 2015, as JPMorgan’s bankers advised the conglomerate on selling much of its financial-services business, Mr. Tusa had to halt publishing but he continued to do research. Upon returning in May 2016, he surprised investors with an “underweight” rating, JPMorgan’s version of a “sell” rating.
At the time, GE’s problems hadn’t yet emerged and the stock was trading close to $30. In the two years that followed, GE slashed its dividend twice, changed its CEO twice and decided to break itself apart, selling off major units. Shares trade around $10 today.
Despite the success of his “underweight” call, Mr. Tusa was constantly questioning the rating in the first year when the stock stayed near $30, said people close to the analyst.
“He had a lot of nervousness around that,” said Paul DeGaetano, CEO of a cosmetics company, who has known Mr. Tusa since they played ice hockey three decades ago. Friends and acquaintances in the finance industry criticized his aggressive stance in that first year. “It doesn’t surprise me that he would be the ringleader of this sort of thing,” he said.
Charles Stephen Tusa Jr. grew up in Greenwich, Conn., one of the country’s wealthiest towns, home to hedge-fund managers and private-equity partners. As a child, he used to ride bikes with Ian and Shep Murray, who went on to found preppy clothier Vineyard Vines. He attended the elite Brunswick School, following the footsteps of his father Charlie, a founding partner of a prominent law firm in town.
A political science major at Dickinson College in Pennsylvania, Mr. Tusa has said he learned finance on the job after joining JPMorgan in 1998. It wasn’t his first career choice. His dream was to play center for the New York Rangers and Wall Street hasn’t tamed his devotion to ice hockey. In 2014, as the Rangers were making a run in the playoffs, Mr. Tusa grew a mullet. He still laces up his skates regularly with multiple leagues, getting in more than 20 games over the winter. On days when GE is dropping major news, he has worked from the bench.
At GE, there has long been a suspicion that Mr. Tusa had a network of contacts inside the company that fed him information, according to former executives and people familiar with the board. The detailed knowledge of the company in his research notes was seen by some as being suspiciously accurate.
GE conducted a search for leaks and Ed Garden, a GE director and co-founder of activist investor Trian Fund Management, discussed the issue with JPMorgan, according to people familiar with the matter. JPMorgan executives reviewed Mr. Tusa’s work and found nothing the bank was concerned about, the people said.
In looking for leaks, no one was above suspicion, even board members were commanded to keep their mouths shut, the people said, and GE took extra steps to keep any developments under wraps.
Malcolm Gladwell: Podcasting has no Critical Infrastructure
What is the art of podcasting?
It is new and has no critical infrastructure.
There is no expectation of what a podcast should be.
Gladwell is reacting to a literary world that is comitting suicide by has building a critical infrastructure that tells people not to read.
The World Bank Is Remaking Itself as a Creature of Wall Street
Jim Yong Kim, the World Bank’s president, is
trying to revitalize a hidebound institution.
But his embrace of Wall Street is controversial... provides cash to companies in exchange for equity stakes, the World Bank currently drums up more than $7 billion a year from the private sector to invest in ventures in the developing world. Mr. Kim wants that figure to increase eventually to $30 billion... The World Bank promised to protect investors against some losses... those benefiting from the World Bank’s lending practices were “the people who fly in on a first-class ticket to give advice to governments.”.. The argument was that growing investment flows into developing countries rendered World Bank lending mostly superfluous... Last year, the World Bank dispensed $61 billion in loans and investments. By contrast, investors now inject more than $1 trillion a year into emerging markets
.. In effect, he was pitching the bank’s services as a middleman, ready to back projects with guarantees and other incentives. No longer could the World Bank be the sole provider of loans, which, he said, are “crowding out” the private sector.
.. the World Bank economists whose pay is tied to how many loans they churn out
.. “One of the most difficult things to do in a large bureaucracy is to change incentives,
.. “And if you have a large bureaucracy full of economists it is especially hard, because it turns out that economists really hate it when you change the incentives.”
.. On Wednesday, the bank’s top economist, Paul Romer, abruptly resigned.
.. His end came after he claimed, in an interview with The Wall Street Journal, that the World Bank’s closely-watched report on business conditions in different countries had been altered for political reasons.
.. the bank tends to see private sector solutions — those involving the profit motive — as morally questionable.
.. World Bank staffers are used to talking to governments, and now they have to leverage the private sector? It is a different skill set, and flexibility is not the hallmark of development institutions.”
.. “He had to work against his own incentives,” Mr. Kim said, referring to the bank’s practice of rewarding staff for loans. “And that is part of the institutional problem here.”
.. “He has pursued a strategy of making himself popular in Davos by attacking the organization and its staff,” said Lant Pritchett, a retired World Bank executive. “It is this idea that his hand has been hampered by bureaucratic machinations. That may be accepted in Davos — but it’s completely false.”
.. His biggest coup was working with Ivanka Trump
.. They eventually settled in Muscatine, Iowa, where Mr. Kim was a high school quarterback before going on to Brown and securing advanced medical and anthropology degrees from Harvard.
‘The Russians Have Succeeded Beyond Their Wildest Expectations’
Former intelligence chief James Clapper says President Trump is dead wrong about Russian interference in America’s elections. And they’re going to get away with it again, he warns.
.. “I mean, the Russians succeeded, I believe, beyond their wildest expectations. Their first objective in the election was to sow discontent, discord and disruption in our political life, and they have succeeded to a fare-thee-well. They have accelerated, amplified the polarization and the divisiveness in this country, and they’ve undermined our democratic system. They wanted to create doubt in the minds of the public about our government and about our system, and they succeeded to a fare-thee-well.”
“They’ve been emboldened,” he added, “and they will continue to do this.”
.. Trump’s rhetoric is “downright scary and disturbing,” Clapper agonized in an extraordinary monologue on live TV in August, amid Trump’s “fire and fury” threats toward North Korea. He questioned Trump’s “fitness for office” and openly worried about his control over the nuclear launch codes. In our conversation, Clapper didn’t back off one word of it, slamming Trump’s lies, “distortions and untruths.”
.. And he is certainly no liberal partisan: just ask Democrats like Oregon Senator Ron Wyden, who excoriated Clapper for what appeared to be misleading a Senate committee about the intelligence community’s surveillance of private U.S. citizens, information later revealed by Edward Snowden’s disclosures. (His testimony was “a big mistake,” Clapper now says, but not “a lie.”
.. a tough-minded former Air Force lieutenant general who once said, “I never met a collection capability I didn’t like.”
.. “It’s a very painful thing for me to be seen as a critic of this president,” he told me, “but I have those concerns.”
.. what he did when then-President-elect Trump first started attacking the intelligence community’s Russia findings. He didn’t publicly blast Trump—he called him on the phone.
.. more significant Russian arms-control violations of the Intermediate Nuclear Forces Treaty. “If you look at what Russia is trying to do to undermine us, and the modernization of their strategic nuclear forces—and they only have one adversary in mind when they do that
.. appearing to lecture Americans on why only that small percentage of citizens who have served in the military could understand the nature of their sacrifice.
.. He took particular issue with White House spokeswoman Sarah Huckabee Sanders’ comment that Kelly’s word about the congresswoman should not be second-guessed because he had been a four-star general, a remark Clapper called “absurd.”
.. worried about the Trump era as the new age of militarized government, not only with Kelly as chief of staff but also a sitting lieutenant general, H.R. McMaster, as national security adviser, and a former general, James Mattis, as defense secretary. Clapper said that while he has “a visceral aversion” to generals “filling these political, civilian positions,” he’s nonetheless “glad they’re there.”
.. he fears that “some of this intemperate, bellicose rhetoric” between Trump and North Korean leader Kim Jong Un could lead to a “cataclysmic” war.
The risk, he said, came primarily from Kim miscalculating as a result of Trump’s heated words.
.. “Kim Jong Un doesn’t have any advisers that are going to give him objective counsel. He’s surrounded by medal-bedecked sycophants, who dutifully follow him around like puppy dogs with their notebooks open, ascribing his every utterance, and pushing back against the great leader is not a way to get ahead,” Clapper said. “And so I do wonder what Kim Jong Un’s ignition point is, when some insult that’s been hurled at him by the president will just ignite him.”
.. The 25th Amendment that people bring up is a very, very high bar for removal, and appropriately so. And if that were to happen—and let’s just say for the sake of discussion there were an impeachment, even less likely a conviction—all that would serve to do is heighten the polarization and the divisiveness, because the base will never accept that, and that would just feed the conspiracy theories.”