Is GE A “Black Swan” In Plain Sight?

GE hit $8 in 2008. If you short the stock with some patience, in my opinion it’s a low-risk bet that it will drop at least 50% over the next 12-18 months. – From the January 29, 2017 Short Seller’s Journal with GE stock at $30

At the end of January, with the stock at $30, I presented GE as a “boring and conservative” short-sell idea. The chart technicals suggested that smart money was dumping their shares. Through today, shorting GE stock when I presented the idea has returned 41.6%. I’m sure Bitcoin bandwagon bubble-chasers would sneer at that “low” ROR but it in the context of the overall stock market, it’s been a significant outperformer.

GE is a GDP company. Its business activity largely “mirrors” overall real economic activity. If GE’s business is eroding, you can be sure that the Government’s GDP calculations are fraudulent. Yet, GE’s GAAP numbers hide the extent of GE’s deteriorating economic and financial fundamentals. GE has always been a bundle of accounting gimmicks and earnings management. Former CEO Jack Welch was practically the inventor or earnings management.

The latest drop in GE’s price is being blamed on GE’s dividend cut. But this is nonsense. GE had literally raised its dividend in December 2016 and that did not cause GE stock to move higher. GE’s business continues to deteriorate. Through the first nine months of 2017, GE’s trailing twelve month net income is down about $1 billion from it run-rate at the end of 2016. The cash GE generates from its continuing operations (cash flow from operating activities) YTD for 2017 is slightly higher than for the same period in 2016, but that’s because GE cut $1 billion from inventories and harvested its account receivables. The latter two attributes reflect declining business activity and a reduced outlook for future business activity.

Despite some glaring GAAP management tricks, GE’s net income (not EPS but “net income”) plunged 9.7% year over year for Q3. Yesterday’s dividend cut, at annualized rate of $4 billion, is one of the biggest dividend cuts in dollar terms in the history of the S&P 500. In addition, GE announced that its corporate headcount will be 25% lower in 2018. And yet, GE continues to buy back shares, burning $2.6 billion in shareholder cash on that endeavor YTD in 2017.

By slashing its dividend, cutting employees and dumping assets, GE appears to be approaching the “furniture burning” stage in order to keep the lights on and the corporate suite compensation flowing freely.  GE’s board, if it were appropriately representing shareholders, would require GE upper management to receive all compensation in stock.

The fate of GE’s business fundamentals also reflects the fate of the U.S. economy.  Both are over-bloated with debt and suffer from deteriorating business conditions.   Most may not realize this, but GE sports a 1.72 debt/equity ratio (i.e. its debt exceeds book value by 72%.  This includes the investment contract (GICs) and insurance annuity benefit liabilities.  I would not want to be a counter-party to those.  Not exactly the profile of a “blue chip” equity, is it?

GE was a no-brainer short at the end of January.  While it’s likely an easy bet that GE will drop down to $8 eventually, the more interesting question is whether or not the SPX will “catch down” to GE:

Having said that, the only ingredient missing that will guarantee that GE’s stock falls to $8 before June is a Jim Cramer table-pounding, back up the dump truck buy recommendation on his CNBC comedy show.

If you want to learn more about the Short Seller’s Journal, which presented OSTK as a short this past Sunday evening, please click here:  Short Seller’s Journal information.

5 thoughts on “Is GE A “Black Swan” In Plain Sight?

  1. “….a 1.72 debt/equity ratio (i.e. its debt exceeds book value by 172%. ”
    I think you mean “by 72%” rather than “by 172%”. Still impressive though.

      1. Remember when GE was a”BELLWEATHER” stock…..still is. Thanks for the dissection.

        Pretty massive action in the Metals again today, pushed 450K contracts. OI still massive and growing. I overstated Harvey and even he is not all in on the EFP category mystery . Can you offer any additional perspective on this? It was a big number again today and seemed to fade the decline in OI.

        Thanks

        Thanks

        1. I haven’t been following the EFP situation. It’s clear a full-court press in on to keep the price of gold capped is on right now. Comex o/i is persistently high combined with a very high Comex bank net short position combined with a record high in BIS gold swaps. BIS gold swaps are, in effect, gold leasing transactions in which the BIS distributes physical gold to member Central Banks who then turn around and lease it out to bullion banks who use the gold to make delivery short-falls into Asia. It is what it is and this soon shall pass…

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