Friday, April 17, 2009

GE and Citi Beat the Street!

GE proudly announced today that earnings per share were down 40% from the year-ago quarter. We are thrilled to recognize that these earnings were a nickel per share above those of the all-seeing, all-knowing analysts.

The loss of GE's AAA rating merited a display on a supplemental slide that it remains well within the top 10-rated Dow 30 stocks, of which only 3 are AAA: XOM, JNJ, and MSFT (and of those, MSFT is only AAA-rated because it recently sold long-term debt for the first time; thus the AAA rating of MSFT is in fact reflective of a downgrade of its financial strength). The saddest thing about the top-10 listing is that T is the 10th highest rated Dow 30 stock with only an A rating.

Perhaps for the first time in modernity, nowhere in GE's press release or either of the additional presentations available on its website is any mention of book value. Econblog Review has therefore gone to Yahoo's Finance section and found GE's tangible book value for the years ending 12/31 2006-8. Here they are:

2006: $25.9 B
2007: $18.3 B
2008: $7.9 B

GE has a market cap of $130 B with a tangible book value of $8 B at the end of last year, and won't even tell investors in writing what that value was at the end of March this year. As a rough estimate, assume that GE's financial services arm accounts for half the company and half the book value. If it is worth even twice book, that leaves the non-financial part of GE selling for about 30X book. GE stock may be greatly overvalued, even at today's shrunken stock price.

In the meantime, we have the charade of financial firms beating analysts' estimates. Citi is the latest. How even an enabler of the financial industry such as Bloomberg has the gall to begin its review of earnings reports from JPM, GS and C with the statement that they beat estimates of the Street when they comprise the Street confounds the mind. Even the fact that C's earnings per common share were negative after payment of preferred stock dividends (in part to you know who) was reported after mentioning allegedly positive operating earnings.

Ignoring GE's and C's "bottom lines", there are many bottom lines for investors. The elephant in the room that is not commented upon much is that by most definitions, the U. S. economy is indeed in a Depression. That this Depression is not the Great Depression is irrelevant to the proper term to use. Retail sales are down an astounding approximate 10% year on year in real and nominal terms. The Fed reports that industrial activity is down low double digits in nominal terms year on year. 20% of the 2000 largest shopping malls have closed recently. Look at the giant companies in or essentially in bankruptcy (or, rescued from such by you and me; don't you feel rich that you could afford to bail these guys out?):

The largest auto company: GM
The two largest mortgage companies: FNM and FRE
The largest insurer: AIG
The largest financial services company, and 2 other giants: C, LEH, BSC
The second largest mall operator: GGP.

There is one defining characteristic of these companies: They were debt-driven companies.

Via the theory of alternation of cycles, these sorts of companies will not be good long-term investments over the next investment/economic cycle. Debt-free companies, and those whose assets are visible, are more likely to provide better risk-rewards. This includes information and medical technology companies, as well as well-positioned natural resource companies with strong financial positions. Not that many such underpriced investment opportunities are available in the public markets. Sometimes the best investment strategy is the best one in life: just sit there, and keep on thinking and learning. A 2% CD or Treasury at a time of falling prices is not disaster.

Copyright (C) Long Lake LLC 2009

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