Friday, January 23, 2009

GE Channels Sartre's No Exit; and the End of an Era

Do you want to own a stock whose CEO wears this expression?

Or a stock with a long-term chart that has broken down as this one has?

Or that has terrible earnings momentum, poor earnings quality, a shaky dividend and a likely downgrading of its credit rating?

Well, neither do I, but listen to a money manager:

"'People are going back to scratching their heads and thinking, 'How are these guys going to do it?'" said Peter Sorrentino, senior portfolio manager of Huntington Asset Advisors, which holds 4.8 million GE shares in its funds." (From AP, "GE profit drops 46 pct as finance unit struggles")

What a great quote. Think he's thrilled about his ownership of almost 5 million shares of what turned out to be a dog?

The chart is a year or so out of phase, but it is not much different from the chart of Fannie and Freddie, that of AIG, that of Citigroup, that of BofA, etc. etc. General Electric has lost its way. There is no business exit for it. All of its business lines except medical are in sharp down-phases, and medical is not so hot either due to constrained hospital budgets. This is at least a Great Recession and it is bringing back to earth every stock I know of that has been fundamentally overvalued, including truly great companies both large and not-so-large that really make products that power the global economy, such as Microsoft, Intel, and Intuitive Surgical. There is so little legitimate buying power on Wall Street and Main Street that high-grade muni bonds continue to trade at ridiculous yields relative to Treasuries. Who needs stocks with lots of air left in their valuations? And who needs stocks such as Alcoa with no air in their valuations but no profits either?

Every single shareholder in it who bought GE in the last thirteen years has an unrealized loss on it.

This is a sad state of affairs.

It did not develop in secret. In 1990, Ed Hyman, then the leading Wall Street economist, predicted in an interview that because going back to the 1940s, every decade had had good to very good stock returns except the 1970s, the 1990s were due, by regression to the mean, to have subpar stock returns.

What actually happened in the 1990s was the greatest stock bubble in many, many, many years, exceeding the valuations of 1929 by far. Now we are engaged in a Great Recession (or worse, heavens forfend), and it is simply bringing stock valuations back to earth in an economy that leaves "creative" companies such as GE no place to jump, no new story to try to sell investors, and most importantly no persuasive pitchman, because their enablers on Wall Street are going, going, gone.

The likely end result will be a saner, plainer economy and a saner, plainer stock market that has sufficient undervaluation that conventional valuations can be used by conservative people to say that yes, this company actually has a lot of cash, it has a lot of physical assets, and it not only has profits but it also has unused potential earnings power that can be realized if the economy just ambles along at a slow pace, and it pays a safe dividend that allows you to sit while these corporate assets get turned into increased earnings and free cash flow.

As this blog has demonstrated recently, one stock market titan after another has been failing that valuation test. The stock bubble of the 1990s, combined with an abortive recession 7-8 years ago, combined with a credit bubble and the general over-financialization of America and many other countries, have simply led to an economy and common stocks each of which have no exit to the sunlight except by going down the stairs to the basement from which some companies never escape.

If we and our Government do not panic, this cycle will turn up one of these days. I for one am going to enjoy the Florida and California sunshine as the seasons allow and not lose sleep over an economy that I can't control. And while I will root for GE to get back where it once belonged, I wouldn't want to own its stock at least till the sun shines brightly on the economy.

Copyright (C) Long Lake LLC 2009

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