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When GE brings bad things to the stock market

When one of the biggest blue chips on Wall Street nosedives, is it time to turn out the lights? Not when you look closely, says this advisory.

It was less than five years ago that General Electric (NYSE-GE) finally abandoned its long-familiar slogan “We bring good things to life.” But then things tend to go a long way with G.E., including its recent stock market plunge.

Founded in 1878 by Thomas Alva Edison, it is the last survivor of the 12 companies on the first Dow Jones Industrial Average of 1896 (which also had such staples as American Cotton Oil, Distilling & Cattle Feeding and American Lead).

With its history-book pedigree and worldwide reach as a conglomerate, G.E. can have an outsized affect on the markets, as it did on April 11, when its shares thudded 12.8 per cent in one day.

Sy Harding has a somewhat underwhelmed reaction to this supposedly earth-shattering event in his Street Smart Report. So what, he asks?

As with many such events, the headlines tend to obscure the facts, and momentary panic serves to exaggerate the impact of a single pratfall. For G.E. does not really lead the market, according to Mr. Harding. Its one-day plunge tells us more about the psychology of the market than the actual direction the market is liable to take, he says.

Shocks Market!

The headlines were of the blaring kind that used to come spinning off the printing presses in the old movies. “G.E. Shocks Market!” “G.E. Demonstrates Depth of Economic Problem!”

And here’s what all the fuss was about: G.E.’s first-quarter earnings for fiscal 2008 were down 8 per cent from the first quarter the year before, from 48 cents a share to 44 cents a share.

“And CEO Jeffrey Immelt said that — gasp — G.E.’s earnings will grow only 5% this year, instead of the 10% growth he was predicting a month ago,” says the editor with what we discern to be a touch of sarcasm.

“That was shocking?” he comments. “The economy in the U.S. has slowed all the way into a recession. The International Monetary Fund has just lowered its estimates for global economic growth in 2008.”

And anyway, things aren’t actually that bad at G.E. Revenues were up 8 per cent. And its earnings only declined from $4.93 billion to $4.36 billion (and Mr. Harding underlines the billions). “Yep. Sounds like it’s in big trouble,” he adds, not willing to let up on the sarcasm just yet.

It’s in the bag!

The real problem is not the earnings decline, Mr. Harding reckons, but another problem that bedevils Wall Street quite often — all the smoke and mirrors that came before.

Just as Bear Stearns’ CEO was oozing confidence just days ahead of that firm’s near-collapse, G.E.’s CEO was recently on the talk circuit claiming that 10 per cent earnings growth for 2008 “was in the bag.”

(Indeed, we just published a story about how corporate statements that don’t quite ring true should raise red flags for investors — Daily Buy-Sell Adviser April 21.)

“G.E. has long been famous (notorious?) for being able to manage (manipulate?) its profits to beat Wall Street estimates by a penny or so each quarter,” says Mr. Harding. “One of the numerous maneuvers it utilizes to accomplish that trick it to sell appreciated assets off its book when necessary to boost profits.”

This time Bear Stearns got in the way. The upheaval in the markets following the investment bank’s tumble made it impossible for G.E. to complete its planned sale of assets.

Not the end of the world

Of course G.E.’s earnings decline is not good news, admits Mr. Harding. Nor is the fact that its growth will be half of what was expected in 2008.

“But did that mark the end of the world? Was that news of the same order as the near meltdown of the financial system a month ago, the last time the Dow experienced a triple-digit decline of 200+ points? We don’t think so.”

Did it change the prospects for a possible market rally, as it looks ahead to improving economic conditions this summer in the wake of the Fed’s aggressive rate cuts? The editor doesn’t think so.

“Did it even justify the 12.8% plunge in G.E.’s stock, its worst plunge since the 1987 crash? We don’t think so.”

Nor is G.E. the market bellwether alarmists have been claiming, this editor believes. It will probably go down as just another tale the market focuses on for a few days before moving on to the next juicy economic or earnings report.

Indeed, Mr. Harding’s seasonal timing strategy is in its favourable season right now. Despite the many economic negatives in place, he says, “there are still reasons to believe a sustainable rally may have begun from the early March low.”

He has a very cautious intermediate-term buy signal. He is 60 per cent long in the markets with the Dow Jones Index Fund, through Diamonds Trust, Series I (AMEX-DIA), 10 per cent leveraged against overbought oil and gas stocks, and 30 per cent in cash. His indicators show a sell signal for bonds, and the same for gold.

In the midst of it all, the G.E. story illustrates just how fragile the markets can be at times like these, how promising one thing and delivering another can open the trap door under even the biggest of companies, and how we should mix the many honeyed words said on the Street with more than a few grains of salt.