GE, We Bring Bad Things To Life
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This article originally appeared in MarketToday on 7/28/10

by John Dalt

My jeweler Steve asked me “What stock should I buy? How about GE?” He is a wonderful jeweler, a friend for over 30 years. Why do people play poker games where they don’t understand the rules? Steve’s son has been a free subscriber to our MarketToday newsletter almost since we started over two years ago. He has never bought any of our premium services, and that is ok. I still paid him for the battery in my Rolex.

Your editor had to be out of the office this morning to attend to some errands.  One of which was a new battery for my watch.  The beauty of living in the country and 30 miles from the city is quiet days, fresh air and a night sky filled with stars.  The inconvenience is demonstrated when small errands become half day excursions.

I gave Steve my standard answer, “Buy Exxon, the best company in America.”  Then I hurt his feelings, “Sell GE, worst company in America.”  He was surprised and told me how he had bought it over a year ago at a low price and made a lot of money.  He doesn’t understand the stock market, “I own a company and next month it is worth less or more, but they are still the same company and have not done anything different.”

I told Steve some people believe in the “efficient market” theory.  These people believe the participants in the market are constantly judging the value of each company and reflecting that value in the stock price.  Try telling that to owners of Johnson and Johnson (JNJ).  They have taken a 12.6% percent haircut on stock in a world-wide company that dominates in their sector.  There earnings showed growth overall but a dip in domestic sales volume gave traders an excuse to sell the stock.

I told Steve the value of the company doesn’t change, just the price of the stock, which is why he has to understand the value of the company for long term investing.  This brings us back to GE.  We shorted GE in the SwingTrader last spring for some quick profits.  We should have stayed with it, it is a loser.

We wrote about GE’s problems a year ago in California Leavin and then again on Oct. 28, 2009 in Why not Regulate General Electric.  Bottom line, GE couldn’t borrow money except with FDIC backing.  The FDIC is guaranteeing up to $139 billion in bonds for GE Capital until June 30, 2012

If you think GE builds washers, dryers, jet engines, and is a media company you would be right.  If you thought GE was well connected to the White House, you would be right.  If you thought GE was one of the largest contributors to Obama’s run for the White House, you would be right (almost $500,000 bundled).  What you probably don’t know is almost 75% of GE’s total assets are in GE Capital.  How did they get FDIC backing?  They own a little bank.  But their real business isn’t banking.  That just gave them an entry to the FDIC, and the non-affiliated entity program.

In other words, I have a little bank with FDIC insurance that qualifies for FDIC guarantees.  Will the FDIC guarantee my ugly cousin for $139 billion?  The answer was ‘YES’.

So what does GE Capital do?  They loan money on commercial real estate, private label credit cards, and automobiles.  According to Yahoo Finance Net Tangible Assets on March 31, 2010 were a shade under $39 billion dollars.  Let’s see, if had $600 billion dollars in dodgy debt and had 5% write off, that would be $30 billion gone in one year.  Because GE Capital is not a bank, they don’t have to set aside money to cover losses.  If loan losses and write downs run 10% in one year, they are upside down with a negative net worth of $20 billion!

Of course none of this is a problem if they make a lot of money, but they don’t.  In 2009 GE made just a little over $10 billion net.  When they have to start paying market rates on their loans, half of that could disappear.

Our advice to our jeweler Steve and to you, Sell GE if you own it, Short GE on any bounces and let’s all watch it go to zero.  One word of caution, GE pays a dividend and when you short the stock you have to pay the dividend if you hold it over the ex-dividend date.

To the mailbag:
Good article.  How in the hell did you get the gumption to write about Belgium?---paid up subscriber D.J.

John’s reply:  Call ‘em as I see ‘em.  We want to bring you information before it makes headlines.

"Government is not reason, it is not eloquence, it is force: like fire, a troublesome servant and a fearful master.  Never for a moment should it be left to irre s ponsible action" ---- George Washington

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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